<PAGE>
- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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)
Registrant's telephone number, including area code: (312)630-6000
----------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.66 2/3 Par Value
----------------
Preferred Stock Purchase Rights
----------------
Floating Rate Capital Securities, Series A of NTC Capital I,
and Series B of NTC Capital II
Fully and Unconditionally Guaranteed by the Registrant
----------------
Floating Rate Junior Subordinated Debentures,
Series A and Series B of the Registrant
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
At February 10, 1999, 111,366,724 shares of Common Stock, $1.66-2/3 par
value, were outstanding, and the aggregate market value of the Common Stock
(based upon the last sale price of the common stock at February 10, 1999, as
reported by The Nasdaq Stock Market) held by non-affiliates was approximately
$8,315,111,639. Determination of stock ownership by non-affiliates was made
solely for the purpose of responding to this requirement and the registrant is
not bound by this determination for any other purpose.
Portions of the following documents are incorporated by reference:
Annual Report to Stockholders for the Fiscal Year Ended
December 31, 1998 - Part I and Part II
1999 Notice and Proxy Statement for the Annual Meeting of
Stockholders to be held on April 20, 1999 - Part III
- --------------------------------------------------------------------------------
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
Northern Trust Corporation
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
PART I
Item 1 Business ............................................................... 4
Supplemental Item-Executive Officers of the Registrant ................. 22
Item 2 Properties ............................................................. 23
Item 3 Legal Proceedings ...................................................... 24
Item 4 Submission of Matters to a Vote of Security Holders .................... 24
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters .. 25
Item 6 Selected Financial Data ................................................ 25
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations .................................................. 25
Item 7A Quantitative and Qualitative Disclosures About Market Risk ............. 25
Item 8 Financial Statements and Supplementary Data ............................ 25
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ................................................... 25
PART III
Item 10 Directors and Executive Officers of the Registrant ..................... 26
Item 11 Executive Compensation ................................................. 26
Item 12 Security Ownership of Certain Beneficial Owners and Management ......... 26
Item 13 Certain Relationships and Related Transactions ......................... 26
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K ....... 27
Signatures ....................................................................... 29
Exhibit Index .................................................................... 30
</TABLE>
3
<PAGE>
PART I
Item 1--Business
NORTHERN TRUST CORPORATION
Northern Trust Corporation (Corporation) was organized in Delaware in 1971
and that year became the owner of all of the outstanding capital stock, except
directors' qualifying shares, of The Northern Trust Company (Bank), an Illinois
banking corporation headquartered in the Chicago financial district and the
Corporation's principal subsidiary. The Corporation also owns banking
subsidiaries in Arizona, California, Colorado, Florida and Texas, a Federal
Savings Bank in Michigan, trust companies in Connecticut and New York and
various other nonbank subsidiaries, including a securities brokerage firm, a
registered investment adviser and a retirement services company. The Corporation
expects that, although the operations of other subsidiaries will be of
increasing significance, the Bank will in the foreseeable future continue to be
the major source of the Corporation's assets, revenues and net income. Except
where the context otherwise requires, the term "Northern Trust" refers to
Northern Trust Corporation and its consolidated subsidiaries.
At December 31, 1998, Northern Trust had consolidated total assets of
approximately $27.9 billion and stockholders' equity of approximately $1.9
billion, and was the second largest bank holding company headquartered in
Illinois and the 32nd largest in the United States.
THE NORTHERN TRUST COMPANY
The Bank was founded by Byron L. Smith in 1889 to provide banking and trust
services to the public. Currently in its 110th year, the Bank's growth has come
primarily from internal sources rather than through merger or acquisition. At
December 31, 1998, the Bank had consolidated assets of approximately $23.3
billion and common equity capital of approximately $1.5 billion. At September
30, 1998, the Bank was the 2nd largest bank in Illinois and the 36th largest in
the United States, based on consolidated total assets of approximately $23.9
billion on that date.
The Bank currently has eighteen banking offices in the Chicago area and
nine active wholly owned subsidiaries. The Northern Trust International Banking
Corporation, located in New York, was organized under the Edge Act for the
purpose of conducting international business. NorLease, Inc. conducts leasing
and leasing-related lending activities. MFC Company, Inc. holds properties that
are received from the Bank in connection with certain problem loans. Nortrust
Nominees Ltd., located in London, is a U.K. trust corporation organized to hold
U.K. real estate for fiduciary accounts. The Northern Trust Company U.K. Pension
Plan Limited, located in London, was established in connection with the pension
plan for the Bank's London Branch. The Northern Trust Company, Canada, located
in Toronto, offers institutional trust products and services to Canadian
entities. Northern Global Financial Services Limited, located in Hong Kong,
provides securities lending and relationship servicing for large asset custody
clients in Asia and the Pacific Rim. Northern Trust Trade Services Limited
facilitates the issuance and processing of commercial letters of credit in Hong
Kong. Northern Trust Fund Managers (Ireland) Limited was established to
facilitate the offering of off-shore collective investment products to
institutional clients.
OTHER NORTHERN TRUST CORPORATION SUBSIDIARIES
The Corporation's Florida banking subsidiary, Northern Trust Bank of
Florida N.A., headquartered in Miami, at December 31, 1998 had twenty-four
offices located throughout Florida and total assets of approximately $3.1
billion. The Corporation's Arizona banking subsidiary, Northern Trust Bank of
Arizona N.A., is headquartered in Phoenix and at December 31, 1998 had total
assets of approximately $587 million and served clients from seven office
locations in Arizona. The Corporation's Texas banking subsidiary, Northern Trust
Bank of Texas N.A., headquartered in Dallas, had seven office locations and
total assets of approximately $587 million at December 31, 1998. The
Corporation's California banking subsidiary, Northern Trust Bank of California
N.A., is headquartered in Santa Barbara. At December 31, 1998, it had nine
office locations and total assets of approximately $807 million. The
Corporation's Colorado banking subsidiary, Northern Trust Bank of Colorado, was
acquired in 1998. Its one location is in Denver and, at December 31, 1998, it
had total assets of approximately $48 million. The Corporation's Federal Savings
Bank subsidiary, Northern Trust Bank, FSB, commenced operations in Bloomfield
Hills, Michigan in 1998. At December 31, 1998, it had total assets of
approximately $14 million.
4
<PAGE>
The Corporation has several nonbank subsidiaries. Among them is Northern
Trust Securities, Inc. which provides full brokerage services to clients of the
Bank and the Corporation's other banking and trust subsidiaries and selectively
underwrites general obligation tax-exempt securities. Northern Trust Retirement
Consulting, L.L.C. is a retirement benefit plan services company in Atlanta,
Georgia. Northern Trust Global Advisors, Inc. in Stamford, Connecticut is an
international provider of institutional investment management services, and the
parent of The Northern Trust Company of Connecticut, and Northern Trust
Quantitative Advisors, Inc. is a manager of index funds and quantitative
investment products. Northern Investment Corporation holds certain investments,
including a loan made to a developer of a property in which the Bank is the
principal tenant. The Northern Trust Company of New York provides security
clearance services for all nondepository eligible securities held by trust,
agency, and fiduciary accounts administered by the Corporation's subsidiaries.
Northern Trust Cayman International, Ltd. provides fiduciary services to clients
residing outside of the United States. In 1998, Northern Trust exited from the
futures brokerage business previously conducted by Northern Futures Corporation
and sold all the assets of Berry, Hartell, Evers & Osborne, Inc., its San
Francisco investment management firm.
INTERNAL ORGANIZATION
Northern Trust, under Chairman and Chief Executive Officer William A.
Osborn, organizes client services around two principal business units: Corporate
and Institutional Services and Personal Financial Services. Investment products
are provided to the clients of those business units by Northern Trust Global
Investments. Each of these three business units has a president who reports to
President and Chief Operating Officer Barry G. Hastings. The Worldwide
Operations and Technology business unit, which provides trust and banking
operations and systems activities, also reports to Mr. Hastings. A Risk
Management unit, which focuses on financial and risk management, reports
directly to Mr. Osborn.
The following is a brief summary of each unit's business activities.
Corporate and Institutional Services (C&IS)
Headed by Sheila A. Penrose, President - Corporate and Institutional
Services, C&IS provides trust, commercial banking and treasury management
services to corporate and institutional clients. Trust activities encompass
custody services for owners of securities in the United States and foreign
markets, as well as securities lending and asset management services. Services
with respect to securities traded in foreign markets are provided primarily
through the Bank's London Branch. Related foreign exchange services are rendered
at the London and Singapore Branches as well as in Chicago. As measured by
assets administered and by number of clients, Northern Trust is a leading
provider of Master Trust and Master Custody services to three defined market
segments: retirement plans, institutional clients and international clients.
Master Trust and Custody includes a full range of state-of-the-art capabilities
including: worldwide custody settlement and reporting, cash management, a wide
range of investment products, securities lending, and performance analysis
services. In addition to Master Trust and Master Custody, C&IS offers a
comprehensive array of retirement consulting and recordkeeping services through
Northern Trust Retirement Consulting, L.L.C. At December 31, 1998, total assets
under administration, excluding personal trust assets, were $1.14 trillion. The
Northern Trust Company of New York, The Northern Trust Company, Canada,
Norlease, Inc., and The Northern Trust International Banking Corporation are
also included in C&IS.
C&IS offers a full range of commercial banking services through the Bank,
placing special emphasis on developing institutional relationships in two target
markets: large domestic corporations and financial institutions (both domestic
and international). Treasury management services are provided to corporations
and financial institutions and include a variety of other products and services
to accelerate cash collections, control disbursement outflows and generate
information to manage cash positions.
Personal Financial Services (PFS)
Services to individuals is another major dimension of the trust business.
Headed by Mark Stevens, President - Personal Financial Services, PFS encompasses
personal trust and investment management services, estate administration,
banking and residential real estate mortgage lending. The Bank's personal
financial services strategy includes targeting high net worth individuals in the
metropolitan Chicago market and, through its Wealth Management Group,
nationally. The Bank is one of the largest bank managers of personal trust
assets in the United States, with $40.5 billion in assets under management and
$77.0 billion in assets under administration at December 31, 1998.
5
<PAGE>
PFS services are also delivered through a network of banking subsidiaries
located in Arizona, California, Colorado, Florida and Texas, and a Federal
Savings Bank subsidiary in Michigan. PFS is one of the largest bank managers of
personal trust assets in the United States, with $73.4 billion in assets under
management and $121.2 billion in assets under administration at December 31,
1998.
Northern Trust Securities, Inc. is also part of PFS.
Northern Trust Global Investments (NTGI)
Headed by Stephen B. Timbers, President - Northern Trust Global
Investments, NTGI, through various subsidiaries of the Corporation, provides
investment products and services to clients of C&IS and PFS. NTGI activities
include equity and fixed income research and portfolio management services.
NTGI, through the Bank and Northern Trust Quantitative Advisors, Inc., provides
investment advisory and related services to two families of proprietary mutual
funds: the Northern Institutional Funds (formerly The Benchmark Funds), which
are directed at corporate and institutional investors, and the Northern Funds,
which are directed at individual and personal trust investors. Northern Trust
Global Advisors, Inc. is also included in NTGI.
Worldwide Operations and Technology
Supporting all of Northern Trust's business activities is the Worldwide
Operations and Technology Unit. Headed by Executive Vice President James J.
Mitchell, this unit focuses on supporting sales, relationship management,
transaction processing and product management activities for C&IS and PFS. These
activities are conducted principally in the operations and technology centers in
Chicago, Illinois and the Bank's London Branch. The Northern Trust Company of
New York is also part of this unit.
Risk Management
The Risk Management Unit, headed by Senior Executive Vice President and
Chief Financial Officer Perry R. Pero, includes the Credit Policy and Treasury
functions. The Credit Policy function is described in the sections of this
report referenced on page 18. The Treasury Department is responsible for
managing the Bank's wholesale funding, capital position and interest rate risk,
as well as the portfolio of interest rate risk management instruments under the
direction of the Corporate Asset and Liability Policy Committee. It is also
responsible for the investment portfolios of the Corporation and the Bank and
provides investment advice and management services to the subsidiary banks.
The Risk Management Unit also includes the Corporate Controller, Corporate
Treasurer, Investor Relations and Economic Research functions.
GOVERNMENT POLICIES
The earnings of Northern Trust are affected by numerous external
influences. Chief among these are general economic conditions, both domestic and
international, and actions that the United States and foreign governments and
their central banks take in managing their economies. These general conditions
affect all of the Northern Trust's businesses, as well as the quality, value and
profitability of their loan and investment portfolios.
The Board of Governors of the Federal Reserve System is an important
regulator of domestic economic conditions and has the general objective of
promoting orderly economic growth in the United States. Implementation of this
objective is accomplished by its open market operations in United States
Government securities, its setting of the discount rate at which member banks
may borrow from Federal Reserve Banks and its changes in the reserve
requirements for deposits. The policies adopted by the Federal Reserve Board may
strongly influence interest rates and hence what banks earn on their loans and
investments and what they pay on their savings and time deposits and other
purchased funds. Fiscal policies in the United States and abroad also affect the
composition and use of Northern Trust's resources.
COMPETITION
Northern Trust's principal business strategy is to provide quality
financial services to targeted market segments in which it believes it has a
competitive advantage and favorable growth prospects. As part of this strategy,
Northern Trust seeks to deliver a level of service to its clients that
distinguishes it from its competitors. In addition, Northern Trust emphasizes
the development and growth of recurring sources of fee-based income and
6
<PAGE>
is one of a small group of major bank holding companies in the United States
that generates more revenues from fee-based services than from net interest
income. Northern Trust seeks to develop and expand its recurring fee-based
revenue by identifying selected market niches and providing a high level of
individualized service to its clients in those markets. Northern Trust also
seeks to preserve its asset quality through established credit review procedures
and by maintaining a conservative balance sheet. Finally, Northern Trust seeks
to maintain a strong management team that includes senior officers having broad
experience and long tenure.
Active competition exists in all principal areas in which Northern Trust
presently engages in business. C&IS and PFS compete with domestic and foreign
financial institutions, trust companies, personal loan companies, mutual funds
and investment advisers, brokerage firms and other financial services companies.
Northern Trust is a leading provider of Master Trust and Master Custody services
and has the leading market share in the Chicago area personal trust market and
the second largest market share in the Florida personal trust market.
Commercial banking and treasury management services compete with domestic
and foreign financial institutions, finance companies and leasing companies.
These products also face increased competition due to the general trend among
corporations and other institutions to rely more upon direct access to the
credit and capital markets (such as through the direct issuance of commercial
paper) and less upon commercial banks and other traditional financial
intermediaries.
The chief local competitors of the Bank for trust and banking business are
Bank of America, First National Bank of Chicago, Harris Trust and Savings Bank,
and LaSalle National Bank. Competitive pressures within the custody market have
resulted in consolidation in the industry, and the chief national competitors of
the Bank for Master Trust/Master Custody services are now Mellon Bank
Corporation, State Street Corporation, Bankers Trust New York Corporation, Chase
Manhattan Corporation and The Bank of New York Company, Inc.
REGULATION AND SUPERVISION
The Corporation is a bank holding company subject to the Bank Holding
Company Act of 1956, as amended (Act), and to regulation by the Board of
Governors of the Federal Reserve System. The Act limits the activities which may
be engaged in by the Corporation and its nonbanking subsidiaries to those so
closely related to banking or managing or controlling banks as to be a proper
incident thereto. Also, under section 106 of the 1970 amendments to the Act and
subject to certain exceptions, subsidiary banks are prohibited from engaging in
certain tie-in arrangements with nonbanking affiliates in connection with any
extension of credit or provision of any property or services.
The Act also prohibits bank holding companies from acquiring substantially
all the assets of or owning more than 5% of the voting shares of any bank or
nonbanking company which is not already majority owned without prior approval of
the Board of Governors.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(Interstate Act) permits an adequately capitalized and adequately managed bank
holding company to acquire, with Federal Reserve Board approval, a bank located
in a state other than the bank holding company's home state, without regard to
whether the transaction is permitted under any state law, except that a host
state may establish by statute the minimum age of its banks (up to a maximum of
5 years) subject to acquisition by out-of-state bank holding companies. The
Federal Reserve Board may not approve the acquisition if the applicant bank
holding company, upon consummation, would control more than 10% of total U.S.
insured depository institution deposits or more than 30% of the host state's
total insured depository institution deposits except in certain cases. The
Interstate Act also permits a bank, with the approval of the appropriate federal
bank regulatory agency, to establish a de novo branch in a state, other than the
bank's home state, in which the bank does not presently maintain a branch if the
host state has enacted a law that applies equally to all banks and expressly
permits all out-of-state banks to branch de novo into the host state. Banks
having different home states may, with approval of the appropriate federal bank
regulatory agency, merge across state lines, unless the home state of a
participating bank opted-out of the Interstate Act prior to June 1, 1997. Two
states opted out prior to that date: Montana and Texas. In addition, the
Interstate Act permits any bank subsidiary of a bank holding company to receive
deposits, renew time deposits, close loans, service loans and receive payments
on loans and other obligations as agent for a bank or certain grandfathered
thrift affiliates, whether such banks and thrifts are located in a different
state or in the same state.
7
<PAGE>
Under the Federal Deposit Insurance Act (FDIA), an insured depository
institution which is commonly controlled with another insured depository
institution shall generally be liable for any loss incurred, or reasonably
anticipated to be incurred, by the Federal Deposit Insurance Corporation (FDIC)
in connection with the default of such commonly controlled institution, or for
any assistance provided by the FDIC to such commonly controlled institution,
which is in danger of default. The term "default" is defined to mean the
appointment of a conservator or receiver for such institution. Thus, any of the
Corporation's banking subsidiaries could incur liability to the FDIC pursuant to
this statutory provision in the event of a loss suffered by the FDIC in
connection with any of the Corporation's other banking subsidiaries (whether due
to a default or the provision of FDIC assistance). Such liability is
subordinated in right of payment to deposit liabilities, secured obligations,
any other general or senior liability and any obligation subordinated to
depositors or other general creditors, other than obligations owed to any
affiliate of the depository institution (with certain exceptions) and any
obligations to shareholders in such capacity. Although neither the Corporation
nor any of its nonbanking subsidiaries may be assessed for such loss under the
FDIA, the Corporation has agreed to indemnify each of its banking subsidiaries,
other than the Bank, for any payments a banking subsidiary may be liable to pay
to the FDIC pursuant to these provisions of the FDIA.
The Bank is a member of the Federal Reserve System, its deposits are
insured by the FDIC, and it is subject to regulation by both these entities, as
well as by the Illinois Office of Banks and Real Estate. The Bank is also a
member of and subject to the rules of the Chicago Clearinghouse Association, and
is registered as a government securities dealer in accordance with the
Government Securities Act of 1986. As a government securities dealer its
activities are subject to the rules and regulations of the Department of the
Treasury. The Bank is registered as a transfer agent with the Federal Reserve
and is therefore subject to the rules and regulations of the Federal Reserve in
this area. State laws governing the Corporation's banking subsidiaries generally
allow each bank to establish branches anywhere in its state.
The national bank subsidiaries are members of the Federal Reserve System
and the FDIC and are subject to regulation by the Comptroller of the Currency.
Northern Trust Bank, FSB is a Federal Savings Bank which is not a member of the
Federal Reserve System and is subject to regulation by the Office of Thrift
Supervision and the FDIC. Northern Trust Bank of Colorado, a state chartered
institution that also is not a member of the Federal Reserve System, is
regulated by the FDIC and the Colorado Division of Banking.
The Corporation's nonbanking affiliates are all subject to examination by
the Federal Reserve. In addition, The Northern Trust Company of New York is
subject to regulation by the Banking Department of the State of New York.
Northern Trust Securities, Inc. is registered as a broker-dealer with the
Securities and Exchange Commission and is a member of the National Association
of Securities Dealers, Inc., and, as such, is subject to the rules and
regulations of both these bodies. Northern Trust Retirement Consulting, L.L.C.,
Northern Trust Global Advisors, Inc., Northern Trust Quantitative Advisors,
Inc., and Northern Trust Bank, FSB are each registered with the Securities and
Exchange Commission under the Investment Advisers Act of 1940 and are subject to
that Act and the rules and regulations of the Commission promulgated thereunder.
In addition, Northern Trust Quantitative Advisors, Inc. is subject to regulation
by the Illinois Office of Banks and Real Estate, and Northern Trust Retirement
Consulting, L.L.C. is registered as a transfer agent with the Securities and
Exchange Commission under the Securities Exchange Act of 1934 and is subject to
that Act and the rules and regulations of the Commission promulgated thereunder.
The Northern Trust Company of Connecticut is subject to regulation by the
Connecticut Department of Banking. Two families of mutual funds for which the
Bank acts as investment adviser are subject to regulation by the Securities and
Exchange Commission under the Investment Company Act. The Bank also acts as
investment adviser of an investment company which is subject to regulation by
the Central Bank of Ireland under the Companies Act, 1990. Various other
subsidiaries and branches conduct business in other states and foreign countries
and are subject to their regulations and restrictions.
The Corporation and its subsidiaries are affiliates within the meaning of
the Federal Reserve Act so that the banking subsidiaries are subject to certain
restrictions with respect to loans to the Corporation or its nonbanking
subsidiaries and certain other transactions with them or involving their
securities. Information regarding these restrictions, and dividend restrictions
on banking subsidiaries, is incorporated herein by reference to Note 15 titled
"Restrictions on Subsidiary Dividends and Loans or Advances" on page 60 of the
Corporation's Annual Report to Stockholders for the year ended December 31,
1998.
8
<PAGE>
Under the FDIC's risk-based insurance assessment system, each insured bank
is placed in one of nine risk categories based on its level of capital and other
relevant information. Each insured bank's insurance assessment rate is then
determined by the risk category in which it has been classified by the FDIC.
There is currently a twenty-seven basis point spread between the highest and
lowest assessment rates, so that banks classified as strongest by the FDIC are
subject in 1999 to no insurance assessment, and banks classified as weakest by
the FDIC are subject to an assessment rate of .27%. In addition to its insurance
assessment, each insured bank is subject in 1999 to a debt service assessment of
.0122%.
The Federal bank regulators have adopted risk-based capital guidelines for
bank holding companies and banks. The minimum ratio of qualifying total capital
to risk-weighted assets, including certain off-balance sheet items (Total
Capital Ratio), is 8%, and the minimum ratio of that portion of total capital
that is comprised of common stock, related surplus, retained earnings,
noncumulative perpetual preferred stock, minority interests and, for bank
holding companies, a limited amount of qualifying cumulative perpetual preferred
stock, less certain intangibles including goodwill (Tier 1 capital), to risk-
weighted assets is 4%. The balance of total capital may consist of other
preferred stock, certain other instruments, and limited amounts of subordinated
debt and the loan and lease loss allowance.
The Federal Reserve Board risk-based capital standards contemplate that
evaluation of capital adequacy will take account of a wide range of other
factors, including overall interest rate exposure; liquidity, funding and market
risks; the quality and level of earnings; investment, loan portfolio, and other
concentrations of credit; certain risks arising from nontraditional activities;
the quality of loans and investments; the effectiveness of loan and investment
policies; and management's overall ability to monitor and control financial and
operating risks including the risks presented by concentrations of credit and
nontraditional activities.
In addition, the Federal Reserve has established minimum Leverage Ratio
(Tier 1 capital to quarterly average total assets) guidelines for bank holding
companies and banks. These guidelines provide for a minimum Leverage Ratio of 3%
for bank holding companies and banks that meet certain specified criteria,
including having the highest regulatory rating. All other banking organizations
are required to maintain a Leverage Ratio of at least 3% plus an additional
cushion of 100 to 200 basis points. The guidelines also provide that banking
organizations experiencing internal growth or making acquisitions will be
expected to maintain strong capital positions substantially above the minimum
supervisory levels without significant reliance on intangible assets.
Furthermore, the guidelines indicate that the Federal Reserve Board will
continue to consider a "Tangible Tier 1 Leverage Ratio" in evaluating proposals
for expansion or new activities. The Tangible Tier 1 Leverage Ratio is the ratio
of Tier 1 capital, less intangibles not deducted from Tier 1 capital, to
quarterly average total assets. As of December 31, 1998, the Federal Reserve had
not advised the Corporation of any specific minimum Tangible Tier 1 Leverage
Ratio applicable to it. At December 31, 1998, the Corporation had a Tangible
Tier 1 Leverage Ratio of 6.9%.
In addition to the effects of the provisions described above, the Federal
Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) substantially
revised the depository institution regulatory and funding provisions of the FDI
Act and made revisions to several other federal banking statutes.
Among other things, FDICIA requires the federal banking regulators to take
prompt corrective action in respect to FDIC-insured depository institutions that
do not meet minimum capital requirements. FDICIA establishes five capital tiers:
"well capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized." A depository institution's
capital tier will depend upon how its capital levels compare to various relevant
capital measures and certain other factors, as established by regulation. Under
applicable regulations, an FDIC-insured bank is defined to be well capitalized
if it maintains a Leverage Ratio (Tier 1 capital to quarterly average total
assets) of at least 5%, a Total Capital Ratio (qualifying total capital to risk-
weighted assets, including certain off-balance sheet items) of at least 10% and
a Tier 1 Capital Ratio (Tier 1 capital to risk-weighted assets) of at least 6%
and is not otherwise in a "troubled condition" as specified by its appropriate
federal regulatory agency. A bank is generally considered to be adequately
capitalized if it is not defined to be well capitalized but meets all of its
minimum capital requirements, i.e., if it has a Leverage Ratio of 4% or greater
(or a Leverage Ratio of 3% or greater if the institution is rated composite 1 in
its most recent report of examination, subject to appropriate federal banking
agency guidelines), a Total Capital Ratio of 8% or greater and a Tier 1 Capital
Ratio of 4% or greater. A bank will be considered undercapitalized if it fails
to meet any minimum required measure, significantly undercapitalized if it is
significantly below such
9
<PAGE>
measure and critically undercapitalized if it maintains a level of tangible
equity capital equal to or less than 2% of total assets. A bank may be
reclassified to be in a capitalization category that is next below that
indicated by its actual capital position if it receives a less than satisfactory
examination rating by its examiners with respect to its assets, management,
earnings or liquidity that has not been corrected, or it is determined that the
bank is in an unsafe or unsound condition or engaged in an unsafe or unsound
practice.
At December 31, 1998, the Bank and each of the Corporation's other
subsidiary banks met or exceeded the minimum regulatory ratios that are one of
the conditions for them to be considered to be well capitalized. For further
discussion of regulatory capital requirements and information about the capital
position of the Corporation and the Bank, see pages 43 and 44 of "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Note 29, titled "Regulatory Capital Requirements" on page 71 of the
Corporation's Annual Report to Shareholders for the year ended December 31,
1998.
FDICIA generally prohibits a depository institution from making any capital
distribution (including payment of dividends) or paying any management fee to
its holding company if the depository institution would thereafter be
undercapitalized. Undercapitalized depository institutions are subject to growth
limitations and are required to submit a capital restoration plan. If a
depository institution fails to submit an acceptable plan, it is treated as if
it is significantly undercapitalized.
Under FDICIA, a bank that is not well capitalized is generally prohibited
from accepting or renewing brokered deposits and offering interest rates on
deposits significantly higher than the prevailing rate in its normal market area
or nationally (depending upon where the deposits are solicited); in addition,
"pass-through" insurance coverage may not be available for certain employee
benefit accounts.
Significantly undercapitalized depository institutions may be subject to a
number of requirements and restrictions, including orders to sell sufficient
voting stock to become adequately capitalized, requirements to reduce total
assets and cessation of receipt of deposits from correspondent banks. Critically
undercapitalized depository institutions may be restricted from making payments
of principal and interest on subordinated debt and are subject to appointment of
a receiver or conservator.
FDICIA also contains a variety of other provisions that affect the
operations of a bank, including reporting requirements, regulatory standards for
real estate lending, "truth in savings" provisions and a requirement that a
depository institution give 90 days' prior notice to customers and regulatory
authorities before closing any branch.
STAFF
Northern Trust employed 8,156 full-time equivalent officers and staff
members as of December 31, 1998, approximately 6,033 of whom were employed by
the Bank.
10
<PAGE>
STATISTICAL DISCLOSURES
The following statistical disclosures, included in the Corporation's Annual
Report to Stockholders for the year ended December 31, 1998, are incorporated
herein by reference.
<TABLE>
<CAPTION>
1998
Annual Report
Schedule Page
- ------------------------------------------------------------ -------------
<S> <C>
Foreign Outstandings....................................... 37
Nonperforming Assets and 90 Day Past Due Loans............. 37
Analysis of Reserve for Credit Losses...................... 38
Average Balance Sheet...................................... 76
Ratios..................................................... 76
Analysis of Net Interest Income............................ 78
- ------------------------------------------------------------ -------------
</TABLE>
- --------------------------------------------------------------------------------
Additional statistical information on a consolidated basis is set forth
below.
Remaining Maturity and Average Yield of Securities Held to Maturity and
Available for Sale
(Yield on a taxable equivalent basis giving effect of the federal and state tax
rates)
<TABLE>
<CAPTION>
December 31, 1998
--------------------------------------------------------------------------------------------
One Year or Less One to Five Years Five to Ten Years Over Ten Years
----------------- ----------------- ------------------ ----------------- Average
($ in Millions) Book Yield Book Yield Book Yield Book Yield Maturity
- ---------------------------------- --------- ----- -------- ----- -------- ----- -------- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities Held to Maturity
U.S. Government $ 55.3 6.42% $ - - % $ - - % $ - - % 6 mos.
Obligations of States and
Political Subdivisions 48.0 11.13 83.8 10.85 79.4 9.42 50.6 7.65 69 mos.
Federal Agency 3.0 6.47 - - - - - - 7 mos.
Other--Fixed 9.3 6.92 23.4 9.17 19.2 8.57 20.8 5.89 70 mos.
--Floating .3 8.00 .8 7.06 1.5 6.07 77.1 6.63 118 mos.
- ----------------------------------- -------- ----- -------- ------ -------- ----- -------- ----- --------
Total Securities Held to Maturity $ 115.9 8.42% $ 108.0 10.46% $ 100.1 9.21% $ 148.5 6.87% 70 mos.
- ----------------------------------- -------- ----- -------- ------ -------- ----- -------- ----- --------
Securities Available for Sale
U.S. Government $ 224.5 6.13% $ 35.5 5.85% $ - - % $ - - % 5 mos.
Obligations of States and
Political Subdivisions - - 3.7 9.82 30.9 8.95 231.5 7.02 149 mos.
Federal Agency 4,422.2 5.35 272.4 5.56 .6 5.60 .2 6.73 6 mos.
Other--Fixed .6 8.38 - - - - .1 - 33 mos.
--Floating .4 5.54 12.0 6.78 1.2 5.52 139.4 6.07 105 mos.
- ----------------------------------- -------- ----- -------- ----- ------- ---- -------- ----- --------
Total Securities Available for Sale $4,647.7 5.39% $ 323.6 5.69% $ 32.7 8.76% $ 371.2 6.66% 15 mos.
- ----------------------------------- -------- ----- -------- ----- ------- ---- -------- ----- --------
December 31, 1997
--------------------------------------------------------------------------------------------
One Year or Less One to Five Years Five to Ten Years Over Ten Years
---------------- ----------------- ------------------ ----------------- Average
($ in Millions) Book Yield Book Yield Book Yield Book Yield Maturity
- ---------------------------------- -------- ------ -------- ----- -------- ----- -------- ----- --------
Securities Held to Maturity
U.S. Government $ 72.0 6.72% $ - - % $ - - % $ - - % 5 mos.
Obligations of States and
Political Subdivisions 38.9 10.99 113.8 11.02 93.6 10.07 30.4 8.50 59 mos.
Federal Agency 8.3 6.00 6.0 7.12 - - - - 12 mos.
Other--Fixed 4.5 4.19 7.2 5.40 2.9 2.76 19.9 6.00 86 mos.
--Floating .2 8.00 .8 7.67 1.5 6.30 56.1 6.75 117 mos.
- ---------------------------------- -------- ----- -------- ----- ------- ----- --------- ----- --------
Total Securities Held to Maturity $ 123.9 7.92% $ 127.8 10.49% $ 98.0 9.79% $ 106.4 7.11% 58 mos.
- ---------------------------------- -------- ----- -------- ----- ------- ----- --------- ----- --------
Securities Available for Sale
U.S. Government $ 207.6 6.15% $ 262.4 6.15% $ - - % $ - - % 11 mos.
Obligations of States and
Political Subdivisions - - .6 9.88 15.8 9.58 113.8 8.22 141 mos.
Federal Agency 2,756.7 5.90 195.9 6.57 14.5 6.65 2.7 6.87 5 mos.
Other--Fixed 13.4 5.66 - - - - - - 5 mos.
--Floating 12.4 6.33 12.5 7.43 .8 6.22 124.2 6.00 105 mos.
- ---------------------------------- -------- ----- -------- ----- ------- ----- --------- ----- --------
Total Securities Available for Sale $2,990.1 5.92% $ 471.4 6.36% $ 31.1 8.13% $ 240.7 7.06% 14 mos.
- ---------------------------------- -------- ----- -------- ----- ------- ----- --------- ----- --------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Securities Held to Maturity and Available for Sale
December 31
------------------------------------------------------------
(In Millions) 1998 1997 1996 1995 1994
- ------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Securities Held to Maturity
U.S. Government $ 55.3 $ 72.0 $ 73.4 $ 116.1 $ 137.2
Obligations of States and Political Subdivisions 261.8 276.7 315.9 366.9 474.5
Federal Agency 3.0 14.3 18.2 22.2 --
Other 152.4 93.1 90.9 29.9 29.6
- ------------------------------------------------- --------- --------- --------- --------- ---------
Total Securities Held to Maturity $ 472.5 $ 456.1 $ 498.4 $ 535.1 $ 641.3
- ------------------------------------------------- --------- --------- --------- --------- ---------
Securities Available for Sale
U.S. Government $ 260.0 $ 470.0 $ 906.7 $ 1,667.7 $ 801.3
Obligations of States and Political Subdivisions 266.1 130.2 117.0 70.2 --
Federal Agency 4,695.4 2,969.8 3,096.9 3,152.8 3,251.5
Other 153.7 163.3 191.1 245.6 355.0
- ------------------------------------------------- --------- --------- --------- --------- ---------
Total Securities Available for Sale $ 5,375.2 $ 3,733.3 $ 4,311.7 $ 5,136.3 $ 4,407.8
- ------------------------------------------------- --------- --------- --------- --------- ---------
Average Total Securities $ 7,470.8 $ 6,374.2 $ 6,363.8 $ 6,193.0 $ 5,000.9
- ------------------------------------------------- --------- --------- --------- --------- ---------
Total Securities at Year-End $ 5,856.8 $ 4,198.2 $ 4,814.9 $ 5,760.3 $ 5,053.1
- ------------------------------------------------- --------- --------- --------- --------- ---------
==================================================================================================================
Loans and Leases by Type
December 31
------------------------------------------------------------
(In Millions) 1998 1997 1996 1995 1994
- ------------------------------------------------- --------- --------- --------- --------- ---------
Domestic
Residential Real Estate $ 5,885.2 $ 5,186.7 $ 4,557.5 $ 3,896.4 $3,299.1
Commercial 3,937.9 3,734.8 3,161.4 3,202.1 2,672.0
Broker 147.6 170.1 389.1 304.0 274.6
Commercial Real Estate 677.1 582.1 557.7 512.6 494.1
Personal 1,463.4 1,207.2 989.8 758.9 662.1
Other 509.6 890.1 632.1 625.5 642.1
Lease Financing 528.3 347.0 267.8 202.3 159.9
- ------------------------------------------------- --------- --------- --------- --------- ---------
Total Domestic 13,149.1 12,118.0 10,555.4 9,501.8 8,203.9
International 497.8 470.2 382.0 404.2 386.7
- ------------------------------------------------- --------- --------- --------- --------- ---------
Total Loans and Leases $13,646.9 $12,588.2 $10,937.4 $9,906.0 $8,590.6
- ------------------------------------------------- --------- --------- --------- --------- ---------
Average Loans and Leases $13,315.0 $11,812.9 $10,332.1 $9,136.0 $8,316.1
- ------------------------------------------------- --------- --------- --------- --------- ---------
==================================================================================================================
Remaining Maturity of Selected Loans and Leases
December 31, 1998
--------------------------------------------------------------------
One Year One to Over Five
(In Millions) Total or Less Five Years Years
- --------------------------------------------- -------- -------- ---------- ----------
Domestic (Excluding Residential
Real Estate and Personal Loans)
Commercial $3,937.9 2,942.1 740.9 254.9
Commercial Real Estate 677.1 211.7 289.6 175.8
Other 657.2 641.2 11.4 4.6
Lease Financing 528.3 45.5 77.5 405.3
- --------------------------------------------- -------- -------- ---------- ----------
Total Domestic 5,800.5 3,840.5 1,119.4 840.6
International 497.8 257.3 161.9 78.6
- --------------------------------------------- -------- -------- ---------- ----------
Total Selected Loans and Leases $6,298.3 4,097.8 1,281.3 919.2
- --------------------------------------------- -------- -------- ---------- ----------
Interest Rate Sensitivity of Loans and Leases
Fixed Rate $4,648.0 2,831.0 1,010.8 806.2
Variable Rate 1,650.3 1,266.8 270.5 113.0
- --------------------------------------------- -------- -------- ---------- ----------
Total $6,298.3 4,097.8 1,281.3 919.2
- --------------------------------------------- -------- -------- ---------- ----------
==================================================================================================================
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Average Deposits by Type
(In Millions) 1998 1997 1996 1995 1994
- ------------------------------------------------------ --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Domestic Offices
Demand and Noninterest-Bearing
Individuals, Partnerships and Corporations $ 1,765.6 $ 1,754.6 $ 1,801.8 $ 1,651.1 $ 1,540.4
Correspondent Banks 87.2 92.8 115.2 129.8 192.2
Other 1,375.2 1,116.5 815.9 966.4 859.9
- ------------------------------------------------------ --------- --------- --------- --------- ---------
Total $ 3,228.0 $ 2,963.9 $ 2,732.9 $ 2,747.3 $ 2,592.5
- ------------------------------------------------------ --------- --------- --------- --------- ---------
Time
Savings and Money Market $ 4,263.3 $ 3,895.4 $ 3,620.7 $ 3,312.4 $ 3,385.7
Savings Certificates less than $100,000 1,085.0 1,076.5 1,169.6 1,160.8 699.9
Savings Certificates $100,000 and more 1,059.5 959.3 892.8 839.5 529.7
Other Time 571.8 717.3 549.2 542.7 412.8
- ------------------------------------------------------ --------- --------- --------- --------- ---------
Total $ 6,979.6 $ 6,648.5 $ 6,232.3 $ 5,855.4 $ 5,028.1
- ------------------------------------------------------ --------- --------- --------- --------- ---------
Total Domestic Offices $10,207.6 $ 9,612.4 $ 8,965.2 $ 8,602.7 $ 7,620.6
- ------------------------------------------------------ --------- --------- --------- --------- ---------
Foreign Offices
Demand $ 503.8 $ 486.4 $ 347.8 $ 299.1 $ 361.7
Time 5,781.7 4,971.2 3,826.2 3,493.4 3,284.8
- ------------------------------------------------------ --------- --------- --------- --------- ---------
Total Foreign Offices $ 6,285.5 $ 5,457.6 $ 4,174.0 $ 3,792.5 $ 3,646.5
- ------------------------------------------------------ --------- --------- --------- --------- ---------
Total Deposits $16,493.1 $15,070.0 $13,139.2 $12,395.2 $11,267.1
- ------------------------------------------------------ --------- --------- --------- --------- ---------
=======================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Average Rates Paid on Time Deposits by Type
1998 1997 1996 1995 1994
- ------------------------------------------------------ -------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Time Deposits - Domestic Offices
Savings and Money Market 3.31% 3.23% 3.16% 3.29% 2.52%
Savings Certificates less than $100,000 5.79 5.86 5.85 6.08 4.77
Savings Certificates $100,000 and more 5.60 5.63 5.67 5.95 4.45
Other Time 5.35 5.50 5.44 5.81 4.50
- ------------------------------------------------------ -------- ---------- --------- --------- ---------
Total Domestic Offices 4.21 4.25 4.23 4.46 3.20
- ------------------------------------------------------ -------- ---------- --------- --------- ---------
Total Foreign Offices Time 4.95 4.82 4.82 5.21 4.18
- ------------------------------------------------------ -------- ---------- --------- --------- ---------
Total Time Deposits 4.55% 4.49% 4.45% 4.74% 3.58%
- ------------------------------------------------------ -------- ---------- --------- --------- ---------
=======================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Remaining Maturity of Time Deposits $100,000 and more
December 31, 1998 December 31, 1997
--------------------------------- ---------------------------------
Domestic Offices Domestic Offices
--------------------- ---------------------
Certificates Other Foreign Certificates Other Foreign
(In Millions) of Deposit Time Offices of Deposit Time Offices
- --------------------------------------------- ------------ ----- -------- ------------ ----- --------
<S> <C> <C> <C> <C> <C> <C>
3 Months or Less $ 872.7 $ .6 $6,464.3 $ 898.0 $ 2.0 $5,395.5
Over 3 through 6 Months 365.6 .7 45.5 265.9 3.2 50.0
Over 6 through 12 Months 265.4 5.0 11.1 239.5 5.4 5.6
Over 12 Months 261.9 7.0 11.0 234.0 2.4 4.3
- --------------------------------------------- ------------ ----- -------- ------------ ----- --------
Total $ 1,765.6 $13.3 $6,531.9 $ 1,637.4 $13.0 $5,455.4
- --------------------------------------------- ------------ ----- -------- ------------ ----- --------
</TABLE>
13
<PAGE>
Purchased Funds
<TABLE>
<CAPTION>
Federal Funds Purchased
(Overnight Borrowings)
($ in Millions) 1998 1997 1996
- ------------------------------------------------- --------- --------- --------
<S> <C> <C>
Balance on December 31 $ 2,025.1 $ 821.2 $ 653.0
Highest Month-End Balance 3,505.3 2,765.9 2,715.2
Year-Average Balance 2,620.6 1,690.2 1,842.2
-Average Rate 5.34% 5.47% 5.31%
Average Rate at Year-End 4.43 5.64 6.03
- ------------------------------------------------- --------- -------- --------
Securities Sold under Agreements to Repurchase
($ in Millions) 1998 1997 1996
- ------------------------------------------------- --------- -------- --------
Balance on December 31 $ 2,114.9 $1,139.7 $ 966.1
Highest Month-End Balance 4,136.0 3,708.9 2,922.2
Year-Average Balance 1,506.0 1,519.9 1,973.3
-Average Rate 5.33% 5.38% 5.24%
Average Rate at Year-End 4.59 5.43 5.69
- ------------------------------------------------- --------- -------- --------
Other Borrowings
(Includes Treasury Tax and Loan Demand Notes and Term Federal Funds Purchased)
($ in Millions) 1998 1997 1996
- ------------------------------------------------- --------- -------- --------
Balance on December 31 $ 1,099.2 $2,876.6 $3,142.1
Highest Month-End Balance 7,122.8 5,528.4 4,953.6
Year-Average Balance 2,540.4 2,120.9 1,274.1
-Average Rate 5.21% 5.30% 5.07%
Average Rate at Year-End 3.88 5.01 5.82
- ------------------------------------------------- --------- -------- --------
Total Purchased Funds
($ in Millions) 1998 1997 1996
- ------------------------------------------------- --------- -------- --------
Balance on December 31 $ 5,239.2 $4,837.5 $4,761.2
Year-Average Balance 6,667.0 5,331.0 5,089.6
-Average Rate 5.29% 5.38% 5.22%
- ------------------------------------------------- --------- -------- --------
============================================================================================
Commercial Paper
($ in Millions) 1998 1997 1996
- ------------------------------------------------- --------- -------- --------
Balance on December 31 $ 148.1 $ 146.8 $ 149.0
Highest Month-End Balance 149.6 149.9 153.0
Year-Average Balance 145.9 142.7 143.7
-Average Rate 5.51% 5.54% 5.40%
Average Rate at Year-End 5.40 5.81 5.65
- ------------------------------------------------- --------- -------- --------
</TABLE>
14
<PAGE>
Changes in Net Interest Income
<TABLE>
<CAPTION>
1998/97 1997/96
------------------------ -----------------------
Change Due To Change Due To
(Interest on a taxable equivalent basis) --------------- --------------
(In Millions) Volume Rate Total Volume Rate Total
- ---------------------------------------------------- ------ ------ ------ ------ ----- ------
<S> <C> <C> <C> <C> <C> <C>
Increase (Decrease) In Interest Income
Money Market Assets
Federal Funds Sold and Resell Agreements $ 8.3 $ (1.2) $ 7.1 $ 27.1 $ 0.5 $ 27.6
Time Deposits with Banks 13.8 7.7 21.5 45.4 3.2 48.6
Other (.5) .2 (.3) .1 (.1) -
Securities
U.S. Government (26.9) .5 (26.4) (52.2) 3.4 (48.8)
Obligations of States and Political Subdivisions 2.2 (2.1) .1 (.5) (2.2) (2.7)
Federal Agency 84.8 (4.6) 80.2 50.7 2.8 53.5
Other 1.5 1.9 3.4 .9 .3 1.2
Trading Account .2 (.1) .1 .1 - .1
Loans and Leases 100.1 (12.3) 87.8 100.1 .8 100.9
- ---------------------------------------------------- ------ ------ ------ ------ ----- ------
Total $183.5 $(10.0) $173.5 $171.7 $ 8.7 $180.4
- ---------------------------------------------------- ------ ------ ------ ------ ----- ------
Increase (Decrease) In Interest Expense
Deposits
Savings and Money Market $ 12.3 $ 3.2 $ 15.5 $ 8.9 $ 2.6 $ 11.5
Savings Certificates 6.1 (1.2) 4.9 (1.5) (.4) (1.9)
Other Time (7.8) (1.0) (8.8) 9.2 .3 9.5
Foreign Offices Time 40.1 6.5 46.6 55.2 .1 55.3
Federal Funds Purchased 49.6 (2.2) 47.4 (8.3) 2.8 (5.5)
Repurchase Agreements (.7) (.8) (1.5) (24.4) 2.7 (21.7)
Commercial Paper .2 (.1) .1 (.1) .2 .1
Other Borrowings 21.8 (1.9) 19.9 44.9 3.0 47.9
Senior Notes 6.4 (.8) 5.6 15.6 .9 16.5
Long-term Debt .7 (1.5) (.8) 5.6 (.4) 5.2
Debt-Floating Rate Capital Securities 2.6 (.2) 2.4 14.5 - 14.5
- ---------------------------------------------------- ------ ------ ------ ------ ----- ------
Total $131.3 $ - $131.3 $119.6 $11.8 $131.4
- ---------------------------------------------------- ------ ------ ------ ------ ----- ------
Increase (Decrease) In Net Interest Income $ 52.2 $(10.0) $ 42.2 $ 52.1 $(3.1) $ 49.0
- ---------------------------------------------------- ------ ------ ------ ------ ----- ------
</TABLE>
Note: Changes not due only to volume changes or rate changes are included in
the change due to rate column.
15
<PAGE>
Analysis of Reserve for Credit Losses
<TABLE>
<CAPTION>
(In Millions) 1998 1997 1996 1995 1994
- ---------------------------------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Balance at Beginning of Year $147.6 $148.3 $147.1 $144.8 $145.5
- ---------------------------------- ------ ------ ------ ------ ------
Charge-Offs
Residential Real Estate .8 .8 .2 .6 .1
Commercial 9.6 11.4 6.2 5.5 5.3
Commercial Real Estate .3 .7 7.4 3.6 4.1
Personal .8 1.3 1.5 1.2 1.2
Other .3 .2 .1 .2 -
Lease Financing - - - - -
International - - .2 .6 -
- ---------------------------------- ------ ------ ------ ------ ------
Total Charge-Offs 11.8 14.4 15.6 11.7 10.7
- ---------------------------------- ------ ------ ------ ------ ------
Recoveries
Residential Real Estate .2 .1 .2 - -
Commercial .6 2.3 .5 2.1 1.0
Commercial Real Estate .7 1.6 1.9 2.3 1.1
Personal .3 .6 .6 .5 1.2
Other - .1 .1 .2 .2
Lease Financing - - - - .5
International - - .5 .7 -
- ---------------------------------- ------ ------ ------ ------ ------
Total Recoveries 1.8 4.7 3.8 5.8 4.0
- ---------------------------------- ------ ------ ------ ------ ------
Net Charge-Offs 10.0 9.7 11.8 5.9 6.7
Provision for Credit Losses 9.0 9.0 12.0 6.0 6.0
Reserve Related to Acquisitions .2 - 1.0 2.2 -
- ---------------------------------- ------ ------ ------ ------ ------
Net Change in Reserve (.8) (.7) 1.2 2.3 (.7)
- ---------------------------------- ------ ------ ------ ------ ------
Balance at End of Year $146.8 $147.6 $148.3 $147.1 $144.8
- ---------------------------------- ------ ------ ------ ------ ------
- -------------------------------------------------------------------------------
</TABLE>
International Operations (Based on Obligor's Domicile)
See also Note 27 titled "Business Segments and Related Information" on
page 70 of the Corporation's Annual Report to Stockholders for the year ended
December 31, 1998, which is incorporated herein by reference.
Selected Average Assets and Liabilities Attributable to International Operations
<TABLE>
<CAPTION>
(In Millions) 1998 1997 1996 1995 1994
- ----------------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Total Assets $3,883.9 $3,507.7 $2,365.5 $2,282.0 $2,820.5
- ----------------------------------- -------- -------- -------- -------- --------
Time Deposits with Banks 2,827.0 2,574.5 1,699.3 1,643.7 2,063.1
Other Money Market Assets - .1 .1 .1 .4
Loans 651.5 537.9 380.5 344.3 445.5
Customers' Acceptance Liability .7 .5 1.1 1.9 3.0
Foreign Investments 27.4 22.2 23.4 14.3 21.6
- ----------------------------------- -------- -------- -------- -------- --------
Total Liabilities $6,815.5 $5,960.7 $4,551.2 $4,163.5 $4,089.4
- ----------------------------------- -------- -------- -------- -------- --------
Deposits 6,640.9 5,747.2 4,435.7 3,992.2 4,010.6
Liability on Acceptances .7 .5 1.1 1.9 3.0
- ----------------------------------- -------- -------- -------- -------- --------
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Percent of International Related Average Assets and Liabilities to Total Consolidated
Average Assets
1998 1997 1996 1995 1994
- --------------------------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Assets 14% 15% 11% 12% 16%
- --------------------------------------- ---- ---- ---- ---- ----
Liabilities 25 25 22 21 23
- --------------------------------------- ---- ---- ---- ---- ----
==============================================================================================
Reserve for Credit Losses Relating to International Operations
(In Millions) 1998 1997 1996 1995 1994
- --------------------------------------- ---- ---- ---- ---- ----
Balance at Beginning of Year $5.0 $3.6 $3.5 $4.7 $6.8
Charge-Offs - - (.2) (.6) -
Recoveries - - .5 .7 -
Provision for Credit Losses (1.4) 1.4 (.2) (1.3) (2.1)
- --------------------------------------- ---- ---- ---- ---- ----
Balance at End of Year $3.6 $5.0 $3.6 $3.5 $4.7
- --------------------------------------- ---- ---- ---- ---- ----
The Securities and Exchange Commission requires the disclosure of the reserve
for credit losses that is applicable to international operations. The above
table has been prepared in compliance with this disclosure requirement and
is used in determining international operating performance. The amounts shown
in the table should not be construed as being the only amounts that are available
for international loan charge-offs, since the entire reserve for credit losses
is available to absorb losses on both domestic and international loans. In
addition, these amounts are not intended to be indicative of future charge-off
trends.
==============================================================================================
Distribution of International Loans and Deposits by Type
December 31
----------------------------------------------------
Loans 1998 1997 1996 1995 1994
- -------------------------------------- ------ ------ ------ ------ ------
Commercial $298.3 $240.1 $226.6 $259.9 $233.8
Foreign Governments and Official
Institutions 84.0 115.2 118.3 103.7 72.8
Banks 99.3 51.2 22.8 37.3 77.0
Other 16.2 63.7 14.3 3.3 3.1
- -------------------------------------- ------ ------ ------ ------ ------
Total $497.8 $470.2 $382.0 $404.2 $386.7
- -------------------------------------- ------ ------ ------ ------ ------
December 31
----------------------------------------------------
Deposits 1998 1997 1996
- -------------------------------------- -------- -------- --------
Commercial $5,261.0 $4,473.3 $2,855.4
Foreign Governments and Official
Institutions 1,098.8 782.1 708.6
Banks 481.1 443.4 350.7
Other Time 512.3 490.6 276.2
Other Demand 16.4 11.8 10.7
- -------------------------------------- -------- -------- --------
Total $7,369.6 $6,201.2 $4,201.6
- -------------------------------------- -------- -------- --------
</TABLE>
17
<PAGE>
CREDIT RISK MANAGEMENT
For the discussion of Credit Risk Management, see the following
information that is incorporated herein by reference to the Corporation's Annual
Report to Stockholders for the year ended December 31, 1998:
<TABLE>
<CAPTION>
1998
Annual Report
Notes to Consolidated Financial Statements Page(s)
- ---------------------------------------------------------------- -------------
<S> <C>
1. Accounting Policies
F. Interest Risk Management Instruments............................. 50
G. Loans and Leases................................................. 51
H. Reserve for Credit Losses........................................ 51
L. Other Real Estate Owned.......................................... 52
5. Loans and Leases.................................................... 54
6. Reserve for Credit Losses........................................... 55
20. Contingent Liabilities.............................................. 63
21. Off-Balance Sheet Financial Instruments............................. 64-66
- ----------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition
and Results of Operations
- ----------------------------------------------------------------
Asset Quality and Credit Risk Management.................................... 35-40
- ---------------------------------------------------------------- -------------
</TABLE>
In addition, the following schedules on pages 16 and 17 of this Form
10-K should be read in conjunction with the "Credit Risk Management" section:
Analysis of Reserve for Credit Losses
Reserve for Credit Losses Relating to International Operations
Distribution of International Loans and Deposits by Type
18
<PAGE>
INTEREST RATE SENSITIVITY ANALYSIS
For the discussion of interest rate sensitivity, see the section entitled
"Market Risk Management" on pages 40 to 43 of Management's Discussion and
Analysis of Financial Condition and Results of Operations of the Corporation's
Annual Report to Stockholders for the year ended December 31, 1998, which is
incorporated herein by reference.
19
<PAGE>
The following unaudited Consolidated Balance Sheet and Consolidated
Statement of Income for The Northern Trust Company were prepared in accordance
with generally accepted accounting principles and are provided here for
informational purposes. These consolidated financial statements should be read
in conjunction with the footnotes accompanying the consolidated financial
statements, included in the Corporation's Annual Report to Stockholders for the
year ended December 31, 1998, and incorporated herein by reference on page 25 of
this Form 10-K.
The Northern Trust Company
Consolidated Balance Sheet (unaudited)
<TABLE>
<CAPTION>
December 31
--------------------
(In Millions) 1998 1997
- ---------------------------------------------------------- --------- ---------
<S> <C> <C>
Assets
Cash and Due from Banks $ 2,184.2 $ 1,568.8
Federal Funds Sold and Securities Purchased under
Agreements to Resell 1,545.4 3,228.7
Time Deposits with Banks 3,264.2 2,282.4
Other Interest-Bearing 184.4 104.8
Securities
Available for Sale 5,078.7 3,407.2
Held to Maturity (Fair Value - $438.2 in 1998
and $401.2 in 1997) 426.6 385.5
- ---------------------------------------------------------- --------- ---------
Total Securities 5,505.3 3,792.7
- ---------------------------------------------------------- --------- ---------
Loans
Commercial and Other 6,389.2 6,224.8
Residential Mortgages 2,968.5 2,810.9
- ---------------------------------------------------------- --------- ---------
Total Loans and Leases (Net of unearned income - $222.1 in
1998 and $149.8 in 1997) 9,357.7 9,035.7
- ---------------------------------------------------------- --------- ---------
Reserve for Credit Losses (111.7) (118.2)
Buildings and Equipment 260.3 235.0
Customers' Acceptance Liability 31.4 29.6
Trust Security Settlement Receivables 336.7 291.4
Other Assets 746.3 734.1
- ---------------------------------------------------------- --------- ---------
Total Assets $23,304.2 $21,185.0
- ---------------------------------------------------------- --------- ---------
Liabilities
Deposits
Demand and Other Noninterest-Bearing $ 3,281.8 $ 2,935.4
Savings and Money Market Deposits 2,524.2 2,672.1
Savings Certificates 1,281.7 1,276.7
Other Time 350.0 399.6
Foreign Offices--Demand 413.5 451.1
--Time 6,496.2 5,619.5
- ---------------------------------------------------------- --------- ---------
Total Deposits 14,347.4 13,354.4
- ---------------------------------------------------------- --------- ---------
Federal Funds Purchased 2,312.0 929.1
Securities Sold under Agreements to Repurchase 2,072.6 1,057.2
Other Borrowings 1,091.4 2,745.0
Senior Notes 700.0 785.0
Long-Term Debt 455.0 354.2
Liability on Acceptances 31.4 29.6
Other Liabilities 839.7 648.1
- ---------------------------------------------------------- --------- ---------
Total Liabilities 21,849.5 19,902.6
- ---------------------------------------------------------- --------- ---------
Stockholder's Equity
Capital Stock--Par Value $60 213.8 213.8
Surplus 245.3 245.3
Undivided Profits 996.8 821.8
Net Unrealized Gain (Loss) on Securities Available for Sale (1.2) 1.5
- ---------------------------------------------------------- --------- ---------
Total Stockholder's Equity 1,454.7 1,282.4
- ---------------------------------------------------------- --------- ---------
Total Liabilities and Stockholder's Equity $23,304.2 $21,185.0
- ---------------------------------------------------------- --------- ---------
</TABLE>
20
<PAGE>
The Northern Trust Company
Consolidated Statement of Income (unaudited)
<TABLE>
<CAPTION>
For the Year Ended
December 31
--------------------------------
(In Millions) 1998 1997 1996
- ------------------------------------------------------------------------------------ -------- -------- ------
<S> <C> <C> <C>
Noninterest Income
Trust Fees $ 522.9 $ 456.9 $397.8
Foreign Exchange Trading Profits 103.5 104.7 58.7
Treasury Management Fees 68.9 59.2 54.2
Security Commissions and Trading Income .6 .9 .9
Other Operating Income 39.6 42.0 36.8
Investment Security Gains 1.0 .7 .4
- ------------------------------------------------------------------------------------ -------- -------- ------
Total Noninterest Income 736.5 664.4 548.8
- ------------------------------------------------------------------------------------ -------- -------- ------
Interest Income
Loans and Leases 597.9 548.6 489.3
Securities
- Available for Sale 364.5 310.0 303.7
- Held to Maturity 24.8 26.5 26.1
- Trading Account - - .1
- ------------------------------------------------------------------------------------ -------- -------- ------
Total Securities 389.3 336.5 329.9
- ------------------------------------------------------------------------------------ -------- -------- ------
Time Deposits with Banks 155.0 133.5 84.8
Federal Funds Sold and Securities Purchased under Agreements to Resell and Other 83.3 71.9 36.7
- ------------------------------------------------------------------------------------ -------- -------- ------
Total Interest Income 1,225.5 1,090.5 940.7
- ------------------------------------------------------------------------------------ -------- -------- ------
Interest Expense
Deposits 471.0 445.3 373.6
Federal Funds Purchased 141.0 93.3 99.0
Securities Sold under Agreements to Repurchase 76.8 77.4 99.1
Other Borrowings 130.2 107.8 60.9
Senior Notes 36.5 30.9 14.4
Long-Term Debt 29.0 24.4 19.5
- ------------------------------------------------------------------------------------ -------- -------- ------
Total Interest Expense 884.5 779.1 666.5
- ------------------------------------------------------------------------------------ -------- -------- ------
Net Interest Income 341.0 311.4 274.2
Provision for Credit Losses 3.0 5.6 7.4
- ------------------------------------------------------------------------------------ -------- -------- ------
Net Interest Income after Provision for Credit Losses 338.0 305.8 266.8
- ------------------------------------------------------------------------------------ -------- -------- ------
Income before Noninterest Expenses 1,074.5 970.2 815.6
- ------------------------------------------------------------------------------------ -------- -------- ------
Noninterest Expenses
Compensation 370.4 322.7 258.3
Employee Benefits 68.3 58.0 52.3
Occupancy Expense 46.7 45.8 45.9
Equipment Expense 50.5 51.3 45.3
Other Operating Expenses 154.4 143.4 131.3
- ------------------------------------------------------------------------------------ -------- -------- ------
Total Noninterest Expenses 690.3 621.2 533.1
- ------------------------------------------------------------------------------------ -------- -------- ------
Income before Income Taxes 384.2 349.0 282.5
Provision for Income Taxes 130.6 117.4 90.5
- ------------------------------------------------------------------------------------ -------- -------- ------
Net Income $ 253.6 $ 231.6 $192.0
- ------------------------------------------------------------------------------------ -------- -------- ------
Dividends Paid to the Corporation $ 75.0 $ 50.0 $ 80.0
- ------------------------------------------------------------------------------------ -------- -------- ------
</TABLE>
21
<PAGE>
Supplemental Item--Executive Officers of the Registrant
WILLIAM A. OSBORN
Mr. Osborn became Chairman of the Board of the Corporation and the Bank in
October 1995, and Chief Executive Officer of the Corporation and the Bank in
June 1995. He held the title of President of the Corporation and the Bank from
January 1994 to October 1995 and Chief Operating Officer from January 1994
through June 1995. Mr. Osborn, 51, began his career with the Bank in 1970.
BARRY G. HASTINGS
Mr. Hastings became President of the Corporation and the Bank in October
1995, and Chief Operating Officer of the Corporation and the Bank in June 1995.
He held the title of Vice Chairman of the Corporation and the Bank from January
1994 through June 1995. Mr. Hastings, 51, began his career with the Corporation
in 1974.
DAVID L. EDDY
Mr. Eddy became a Senior Vice President of the Corporation and the Bank and
Treasurer of the Corporation in 1986. Mr. Eddy, 62, joined the Bank in 1960.
JAMES J. MITCHELL
Mr. Mitchell was appointed an Executive Vice President of the Bank in
December 1987 and of the Corporation in October 1994, and is currently head of
the Worldwide Operations and Technology business unit. Mr. Mitchell, 56, joined
the Bank in 1964.
SHEILA A. PENROSE
Ms. Penrose became President - C&IS of the Corporation and of the Bank in
January 1998, and has served as an Executive Vice President of the Bank since
November 1993 and of the Corporation since November 1994. Ms. Penrose, 53, began
her career with the Corporation in 1977.
PERRY R. PERO
Mr. Pero is Chief Financial Officer of the Corporation and the Bank and
Cashier of the Bank. Mr. Pero is also head of the Risk Management Unit and
Chairman of the Corporate Asset and Liability Policy Committee. He became a
Senior Executive Vice President of the Corporation and the Bank in 1992. Mr.
Pero, 59, joined the Bank in 1964.
PETER L. ROSSITER
Mr. Rossiter has served as Executive Vice President and General Counsel of
the Corporation and the Bank since 1993. He also held the title of Secretary of
the Corporation and the Bank from April 1993 through November 1997 and has
served as an Assistant Secretary since then. Mr. Rossiter, 50, joined the
Corporation in 1992, prior to which he was a partner in the law firm of Schiff
Hardin & Waite.
HARRY W. SHORT
Mr. Short was appointed Senior Vice President and Controller of the
Corporation and the Bank in October 1994. He joined the Corporation and the Bank
in January 1990 and served as Senior Vice President and General Auditor. Mr.
Short, 51, had been a partner in the accounting firm of KPMG Peat Marwick.
JAMES M. SNYDER
Mr. Snyder was appointed Executive Vice President of the Corporation and
the Bank in November 1996 and is currently the Chief Investment Officer. He had
been a Senior Vice President of the Bank from 1991 to 1996. Mr. Snyder, 52,
joined the Bank in 1969.
22
<PAGE>
MARK STEVENS
Mr. Stevens became President - PFS of the Corporation and the Bank in
January 1998, and has served as an Executive Vice President of the Corporation
and the Bank since February 1996. He served as Chief Executive Officer of
Northern Trust Bank of Florida N.A., from 1987 to 1996. Mr. Stevens, 51, joined
the Corporation in 1979.
STEPHEN B. TIMBERS
Mr. Timbers joined Northern Trust in February 1998, when he was named
President - NTGI and an Executive Vice President of the Corporation and the
Bank. From January 1996 to December 1997, Mr.Timbers, 54, was President, Chief
Executive Officer and Chief Investment Officer of Zurich Kemper Investments,
Inc. (formerly Kemper Financial Services, Inc.), the investment adviser to the
Kemper Funds and the parent organization of Zurich Investment Management, Inc.
From January 1992 until January 1996, he served as President and Chief Operating
Officer of Kemper Corporation.
WILLIAM S. TRUKENBROD
Mr. Trukenbrod was appointed an Executive Vice President of the Corporation
and the Bank in February 1994, and is currently Chairman of the Credit Policy
Committee. He had been a Senior Vice President of the Bank since 1980 and of the
Corporation since 1992. Mr. Trukenbrod, 59, joined the Bank in 1962.
The positions of Chairman of the Board, Chief Executive Officer, President
and Vice Chairman are elected annually by the Board of Directors at the first
meeting of the Board of Directors held after each annual meeting of
stockholders. The other officers are appointed annually by the Board. Officers
continue to hold office until their successors are duly elected or until their
death, resignation or removal by the Board.
Item 2--Properties
The executive offices of the Corporation and the Bank are located at 50
South LaSalle Street in the financial district of Chicago. This Bank-owned
building is occupied by various divisions of Northern Trust's business units.
Financial services are provided by the Bank at this location. Adjacent to this
building are two office buildings in which the Bank leases approximately 370,000
square feet of space principally for staff divisions of the business units. The
Bank also leases approximately 40,000 square feet of a building at 125 South
Wacker Drive in Chicago for banking operations and personal banking services.
Financial services are also provided by the Bank at sixteen other Chicago
metropolitan area locations, five of which are owned and eleven of which are
leased. The Bank's trust and banking operations are located in a 465,000 square
foot facility at 801 South Canal Street in Chicago. The building is leased by
the Corporation under terms that qualify as a capital lease. In June 1997, the
Bank entered into an agreement to purchase a building and adjacent land located
across the street from the Chicago operations center in January 2000. The
building, which is located at 840 South Canal Street and contains approximately
340,000 square feet of office space, houses the computer data center and will be
used for future expansion. Prior to the purchase date, the Bank is leasing, in
phases that began in November 1997, approximately two floors of this six-story
building. Space for the Bank's London and Singapore Branches, Edge Act
subsidiary and The Northern Trust Company, Canada are leased.
The Corporation's other subsidiaries operate from sixty-five locations,
fourteen of which are owned and fifty-one of which are leased. Detailed
information regarding the addresses of all Northern Trust's locations can be
found on pages 84 and 85 in the Corporation's Annual Report to Stockholders for
the year ended December 31, 1998, which is incorporated herein by reference.
The facilities which are owned or leased are suitable and adequate for
business needs. For additional information relating to properties and lease
commitments, refer to Note 8 titled "Buildings and Equipment" and Note 9 titled
"Lease Commitments" on page 55 of the Corporation's Annual Report to
Stockholders for the year ended December 31, 1998, which information is
incorporated herein by reference.
23
<PAGE>
Item 3--Legal Proceedings
The information called for by this item is incorporated herein by reference
to Note 20 titled "Contingent Liabilities" on page 63 of the Corporation's
Annual Report to Stockholders for the year ended December 31, 1998.
Item 4--Submission of Matters to a Vote of Security Holders
None.
24
<PAGE>
PART II
Item 5--Market for Registrant's Common Equity and Related Stockholder Matters
The information called for by this item is incorporated herein by reference
to the section of the Consolidated Financial Statistics titled "Common Stock
Dividend and Market Price" on pages 80 and 81 of the Corporation's Annual Report
to Stockholders for the year ended December 31, 1998.
Information regarding dividend restrictions of the Corporation's banking
subsidiaries is incorporated herein by reference to Note 15 titled "Restrictions
on Subsidiary Dividends and Loans or Advances" on page 60 of the Corporation's
Annual Report to Stockholders for the year ended December 31, 1998.
Item 6--Selected Financial Data
The information called for by this item is incorporated herein by reference
to the table titled "Summary of Selected Consolidated Financial Data" on page 22
of the Corporation's Annual Report to Stockholders for the year ended December
31, 1998.
Item 7--Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information called for by this item is incorporated herein by reference
to "Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 22 through 45 of the Corporation's Annual Report to
Stockholders for the year ended December 31, 1998.
Item 7A--Quantitative and Qualitative Disclosures About Market Risk
The information called for by this item is incorporated herein by reference
to "Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 40 through 43 of the Corporation's Annual Report to
Stockholders for the year ended December 31, 1998.
Item 8--Financial Statements and Supplementary Data
The following financial statements of the Corporation and its subsidiaries
included in the Corporation's Annual Report to Stockholders for the year ended
December 31, 1998, are incorporated herein by reference.
<TABLE>
<CAPTION>
1998
Annual Report
For Northern Trust Corporation and Subsidiaries: Page(s)
- ------------------------------------------------------------------------------------------------------------- -------------
<S> <C>
Consolidated Balance Sheet--December 31, 1998 and 1997....................................................... 46
Consolidated Statement of Income--Years Ended December 31, 1998, 1997 and 1996............................... 47
Consolidated Statement of Changes in Stockholders' Equity--Years Ended December 31, 1998, 1997 and 1996...... 48
Consolidated Statement of Cash Flows--Years Ended December 31, 1998, 1997 and 1996........................... 49
- ------------------------------------------------------------------------------------------------------------- -------------
For Northern Trust Corporation (Corporation Only)
- ------------------------------------------------------------------------------------------------------------- -------------
Condensed Balance Sheet--December 31, 1998 and 1997.......................................................... 72
Condensed Statement of Income--Years Ended December 31, 1998, 1997 and 1996.................................. 72
Consolidated Statement of Changes in Stockholders' Equity--Years Ended December 31, 1998, 1997 and 1996...... 48
Condensed Statement of Cash Flows--Years Ended December 31, 1998, 1997 and 1996.............................. 73
- ------------------------------------------------------------------------------------------------------------- -------------
Notes to Consolidated Financial Statements................................................................... 50-73
- ------------------------------------------------------------------------------------------------------------- -------------
Report of Independent Public Accountants..................................................................... 74
- ------------------------------------------------------------------------------------------------------------- -------------
</TABLE>
The section titled "Quarterly Financial Data" on pages 80 and 81 of the
Corporation's Annual Report to Stockholders for the year ended December 31,
1998, is incorporated herein by reference.
Item 9--Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
25
<PAGE>
PART III
Item 10--Directors and Executive Officers of the Registrant
The information called for by Item 10 relating to Directors and Nominees
for election to the Board of Directors is incorporated herein by reference to
pages 2 through 6 of the Corporation's definitive 1999 Notice and Proxy
Statement filed on March 15, 1999 in connection with the solicitation of proxies
for the Annual Meeting of Stockholders to be held April 20, 1999. The
information called for by Item 10 relating to Executive Officers is set forth in
Part I of this Annual Report on Form 10-K. The information called for by Item 10
relating to Item 405 disclosure of delinquent Form 3, 4 or 5 filers is
incorporated by reference to page 9 of the Corporation's definitive 1999 Notice
and Proxy Statement filed on March 15, 1999 in connection with the solicitation
of proxies for the Annual Meeting of Stockholders to be held April 20, 1999.
Item 11--Executive Compensation
The information called for by this item is incorporated herein by reference
to pages 8 and 9 and pages 12 through 23 of the Corporation's definitive 1999
Notice and Proxy Statement filed in connection with the solicitation of proxies
for the Annual Meeting of Stockholders to be held April 20, 1999.
Item 12--Security Ownership of Certain Beneficial Owners and Management
The information called for by this item is incorporated herein by reference
to pages 10 and 11 of the Corporation's definitive 1999 Notice and Proxy
Statement filed in connection with the solicitation of proxies for the Annual
Meeting of Stockholders to be held April 20, 1999.
Item 13--Certain Relationships and Related Transactions
The information called for by this item is incorporated herein by reference
to pages 8 and 9 of the Corporation's definitive 1999 Notice and Proxy Statement
filed in connection with the solicitation of proxies for the Annual Meeting of
Stockholders to be held April 20, 1999.
26
<PAGE>
PART IV
Item 14-Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Item 14(a)(1) and (2)-Northern Trust Corporation and Subsidiaries List of
Financial Statement and Fincancial Statement Schedules
The following financial information is set forth in Item 1 for
informational purposes only:
Financial Information of The Northern Trust Company (Bank Only):
Unaudited Consolidated Balance Sheet-December 31, 1998 and 1997.
Unaudited Consolidated Statement of Income-Years Ended December 31, 1998,
1997 and 1996.
The following consolidated financial statements of the Corporation and its
subsidiaries are incorporated by references into Item 8 from the Corporation's
Annual Report to Stockholders for the year ended December 31, 1998:
Consolidated Financial Statements of Northern Trust Corporation and
Subsidiaries:
Consolidated Balance Sheet-December 31, 1998 and 1997.
Consolidated Statement of Income-Years Ended December 31, 1998, 1997
and 1996.
Consolidated Statement of Changes in Stockholders' Equity-Years Ended
December 31, 1998, 1997 and 1996.
Consolidated Statement of Cash Flows-Years Ended December 31, 1998,
1997 and 1996.
The following financial information is incorporated by reference into
Item 8 from the Corporation's Annual Report to Stockholders for the year ended
December 31, 1998:
Financial Statements of Northern Trust Corporation (Corporation):
Condensed Balance Sheet-December 31, 1998 and 1997.
Condensed Statement of Income-Years Ended December 31, 1998, 1997
and 1996.
Consolidated Statement of Changes in Stockholders' Equity-Years
Ended December 31, 1998, 1997 and 1996.
Condensed Statement of Cash Flows-Years Ended December 31, 1998,
1997 and 1996.
The Notes to Consolidated Financial Statements as of December 31, 1998,
incorporated by reference into Item 8 from the Corporation's Annual Report
to Stockholders for the year ended December 31, 1998, pertain to the Bank only
information, consolidated financial statements and Corporation only information
listed above.
The Report of Independent Public Accountants incorporated by reference
into Item 8 from the Corporation's Annual Report to Stockholders for the year
ended December 31, 1998 pertains to the consolidated financial statements and
Corporation only information listed above.
Financial statement schedules have been omitted for the reason that
they are not required or are not applicable.
27
<PAGE>
Item 14(a)3-Exhibits
The exhibits listed on the Exhibit Index beginning on page 30 of this Form
10-K are filed herewith or are incorporated herein by reference to other
filings.
Item 14(b)-Reports on Form 8-K
In a report on Form 8-K dated October 20, 1998, Northern Trust incorporated
by reference in Item 5 its October 19, 1998 press release, reporting on its
earnings for the third quarter and nine months of 1998. The press release, with
summary financial information, was filed as an exhibit pursuant to Item 7 of the
Form 8-K. In a report on Form 8-K dated November 20, 1998, Northern Trust
Corporation incorporated by reference in Item 7 an amendment of its
1989 Stockholder Rights Plan and an amendment of its 1998 Stockholder Rights
Plan.
28
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Form
10-K Annual Report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Date: March 16, 1999 Northern Trust Corporation
(Registrant)
BY:/s/ William A. Osborn
----------------------
William A. Osborn
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, this Form 10-K Annual Report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the date
indicated.
Signature Title
--------- -----
/s/William A. Osborn Chairman of the Board,
- ------------------------
William A. Osborn Chief Executive Officer and Director
/s/ Perry R. Pero Senior Executive Vice President
- ---------------------
Perry R. Pero and Chief Financial Officer
/s/ Harry W. Short Senior Vice President and Controller
- ---------------------
Harry W. Short (Chief Accounting Officer)
Duane L. Burnham Director
Dolores E. Cross Director
Robert S. Hamada Director
Barry G. Hastings Director
Robert A. Helman Director BY: /s/ Peter L. Rossiter
Arthur L. Kelly Director ---------------------
Frederick A. Krehbiel Director Peter L. Rossiter
William G. Mitchell Director Attorney-in-Fact
Edward J. Mooney Director
Harold B. Smith Director
William D. Smithburg Director
Bide L. Thomas Director
Date: March 16, 1999
29
<PAGE>
EXHIBIT INDEX
The following Exhibits are filed herewith or are incorporated herein
by reference.
<TABLE>
<CAPTION>
Exhibit Incorporated
By Reference to
Exhibit of Same Name
Exhibit in Prior Filing*
Number Description or Filed Herewith
- ----------- ----------------------------------- ----------------------
<S> <C> <C>
(3) Articles of Incorporation and By-laws
(i) Restated Certificate of Incorporation of Northern Trust
Corporation as amended to date .......................... (12)
(ii) By-laws as amended to date............................... (16)
(4) Instruments Defining the Rights of Security Holders
(i) Form of The Northern Trust Company's Global Senior
Bank Note (Fixed Rate)................................... (19)
(ii) Form of The Northern Trust Company's Global Senior
Bank Note (Floating Rate)................................ (19)
(iii) Form of The Northern Trust Company's Global
Subordinated Bank Note (Fixed Rate)...................... (19)
(iv) Form of The Northern Trust Company's Global
Subordinated Bank Note (Floating Rate)................... (19)
(v) Junior Subordinated Indenture, dated as of January 1,
1997, between Northern Trust Corporation and The
First National Bank of Chicago, as Debenture
Trustee.................................................. (10)
(10) Material Contracts
(i) Northern Trust Corporation Amended Incentive Stock Plan,
as amended May 20, 1986 **............................... (2)
(1) Amendment dated November 1, 1996 .................... (9)
(ii) Lease dated July 1, 1988 between American National Bank
& Trust Company of Chicago as Trustee under Trust
Agreement dated February 12, 1986 and known as
Trust No. 66603 (Landlord) and Nortrust Realty
Management, Inc. (Tenant)................................ (3)
(iii) Restated Northern Trust Employee Stock Ownership Plan,
dated January 1, 1989, as amended November 21, 1995
and April 26, 1996 ..................................... (9)
(1) Amendments effective January 1, 1996 to the
Northern Trust Employee Stock Plan for former
employees of Tanglewood Bank, N.A................ (12)
(2) Amendment effective September 30, 1996 to the
Northern Trust Employee Stock Ownership Plan
for certain former employees of First Chicago
NBD Corporation.................................. (12)
(3) Amendments effective January 1, 1997 to the
Northern Trust Employee Stock Ownership Plan
for former employees of Bent Tree National
Bank ............................................ (12)
(4) Amendment dated March 25, 1998 to the Northern
Trust Employee Stock Ownership Plan ............. (15)
(5) Amendment effective May 14, 1998 to the Northern
Trust Employee Stock Ownership Plan ............. (18)
(6) Amendment effective August 1, 1998 to the
Northern Trust Employee Stock Ownership
Plan ............................................ (18)
(7) Amendment effective December 31, 1998 to the
Northern Trust Employee Stock Ownership
Plan ............................................ Filed Herewith
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
(iv) Trust Agreement between The Northern Trust Company and Citizens and
Southern Trust Company (Georgia), N.A., (predecessor of NationsBank
which, effective January 1, 1998, was succeeded by U.S. Trust Company,
N.A.) dated January 26, 1989........................................................ (4)
(1) Amendment dated February 21, 1995.............................................. (14)
(2) Amendment dated January 2, 1998................................................ (15)
(v) Form of Note Agreement dated January 26, 1989 between ESOP Trust and
each of the institutional lenders, with respect to the 8.23% Notes of
the ESOP Trust...................................................................... (4)
(vi) Implementation Agreement dated June 26, 1996 between the Registrant,
The Northern Trust Company, the ESOP Trust and NationsBank
(South) N.A. as Trustee (effective January 1, 1998, U.S. Trust Company,
N.A. as successor Trustee).......................................................... (8)
(vii) Term Loan Agreement between the ESOP Trust and the Registrant dated
June 28, 1996....................................................................... (8)
(viii) Restated Trust Agreement dated June 18, 1996, between The Northern Trust
Company and Harris Trust and Savings Bank regarding the Supplemental
Employee Stock Ownership Plan for Employees of The Northern Trust
Company, the Supplemental Thrift-Incentive Plan for Employees of The
Northern Trust Company and the Supplemental Pension Plan for Employees
of The Northern Trust Company**..................................................... (9)
(ix) Supplemental Employee Stock Ownership Plan for Employees of The Northern
Trust Company as amended and restated as of April 30, 1996**........................ (9)
(x) Supplemental Thrift-Incentive Plan for Employees of The Northern Trust
Company as amended and restated as of April 30, 1996**.............................. (9)
(xi) Supplemental Pension Plan for Employees of The Northern Trust Company
as amended and restated as of April 30, 1996**...................................... (9)
(1) Amendment effective May 1, 1998................................................ (19)
(xii) Rights Agreement, dated as of October 17, 1989, between Northern Trust
Corporation and Harris Trust and Savings Bank (as succeeded by Norwest
Bank Minnesota, N.A. as Rights Agent effective November 10, 1997)................... (5)
(1) First Amendment to Rights Agreement dated as of September 17, 1997............. (13)
(2) Second Amendment to Rights Agreement dated as of November 18, 1997............. (14)
(3) Third Amendment to Rights Agreement dated as of July 21, 1998.................. (16)
(4) Fourth Amendment to Rights Agreement dated as of November 18, 1998............. (20)
(5) Fifth Amendment to Rights Agreement dated as of February 16, 1999.............. (21)
(xiii) Rights Agreement, dated as of July 21, 1998, between Northern Trust
Corporation and Norwest Bank Minnesota, N.A......................................... (17)
(1) Amendment No. 1 to Rights Agreement dated as of November 18, 1998.............. (20)
(2) Amendment No. 2 to Rights Agreement dated as of February 16, 1999.............. (21)
(xiv) Lease dated August 27, 1985 between American National Bank & Trust
Company of Chicago as Trustee under Trust Agreement dated April 5, 1990
and known as Trust No. 110513-07 (Landlord) and The Northern Trust
Company (Tenant), as amended........................................................ (6)
(1) First Amendment to Agreement of Lease dated August 15, 1986.................... (7)
(2) Second Amendment to Agreement of Lease dated August 6, 1987.................... (7)
(3) Third Amendment to Agreement of Lease dated May 20, 1988....................... (7)
(4) Fourth Amendment to Agreement of Lease dated May 1, 1990....................... (7)
(5) Fifth Amendment to Agreement of Lease dated January 12, 1995................... (7)
(6) Sixth Amendment to Agreement of Lease dated November 30, 1995.................. (7)
(7) Seventh Amendment to Agreement of Lease dated February 24, 1998................ (15)
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
(xv) Lease dated July 8, 1987 between American National Bank & Trust
Company of Chicago as Trustee under Trust Agreement dated July 12, 1984
and known as Trust No. 61523 (Landlord) and The Northern Trust Company
(Tenant), as amended.............................................................. (6)
(1) First Amendment to Office Lease dated October 20, 1987....................... (11)
(2) Second Amendment to Office Lease dated January 16, 1998...................... (15)
(3) Third Amendment to Office Lease dated May 27, 1998........................... (19)
(xvi) Amended 1992 Incentive Stock Plan**............................................... (12)
(xvii) Northern Trust Corporation (1998) Management Performance Plan**................... (18)
(xviii) Northern Trust Corporation (1998) Annual Performance Plan**....................... (15)
(xix) Northern Trust Corporation 1997 Stock Plan for Non-Employee
Directors**....................................................................... Filed Herewith
(xx) Northern Trust Corporation 1997 Deferred Compensation Plan
for Non-Employee Directors As Amended**........................................... Filed Herewith
(xxi) Form of Employment Security Agreement dated March 1, 1996 (and in
one case February 23, 1998) entered into between Northern Trust
Corporation and each of 8 executive officers - as amended**....................... (8)
(xxii) Form of Employment Security Agreement dated May 21, 1996 entered
into between Northern Trust Corporation and each of 28 officers**................. (8)
(xxiii) Form of Employment Security Agreement dated May 21, 1996 entered
into between Northern Trust Corporation and each of 11 officers**................. (8)
(xxiv) Amended and Restated Trust Agreement of NTC Capital I,
dated as of January 16, 1997, among Northern Trust Corporation,
as Depositor, The First National Bank of Chicago, as Property Trustee,
First Chicago Delaware, Inc., as Delaware Trustee, and the
Administrative Trustees named therein............................................. (10)
(xxv) Guarantee Agreement, dated as of January 16, 1997, relating to
NTC Capital I, by and between Northern Trust Corporation, as Guarantor,
and The First National Bank of Chicago, as Guarantee Trustee...................... (10)
(xxvi) Amended and Restated Trust Agreement of NTC Capital II,
dated as of April 25, 1997, among Northern Trust Corporation,
as Depositor, The First National Bank of Chicago, as Property Trustee,
First Chicago Delaware, Inc., as Delaware Trustee, and the
Administrative Trustees named therein............................................. (12)
(xxvii) Guarantee Agreement, dated as of April 25, 1997, relating to
NTC Capital II, by and between Northern Trust Corporation, as Guarantor,
and The First National Bank of Chicago, as Guarantee Trustee...................... (12)
(xxviii) Northern Trust Corporation Deferred Compensation Plan dated
as of May 1, 1998**............................................................... (18)
(xxix) Deferred Compensation Plans Trust Agreement dated as of May 11, 1998
between Northern Trust Corporation and Harris Trust and Savings Bank
as Trustee........................................................................ (18)
(xxx) Agreement between Fiserv Solutions, Inc. and The Northern Trust
Company dated as of October 20, 1998.............................................. Filed Herewith
(13) 1998 Annual Report to Stockholders......................................................... Filed Herewith
(21) Subsidiaries of the Registrant............................................................. Filed Herewith
(23) Consent of Independent Public Accountants.................................................. Filed Herewith
(24) Powers of Attorney......................................................................... Filed Herewith
(27) Financial Data Schedule.................................................................... Filed Herewith
(99) Description of Common Stock (filed for the purpose of updating
the description of Common Stock contained in the registration
statement for such securities)............................................................. Filed Herewith
</TABLE>
32
<PAGE>
* Prior Filings (File No. 0-5965, except as noted)
(1) Quarterly Report on Form 10-Q for the quarter ended September 30, 1995
(2) Quarterly Report on Form 10-Q for the quarter ended September 30, 1986
(3) Annual Report on Form 10-K for the year ended December 31, 1988
(4) Form 8-K dated January 26, 1989
(5) Form 8-A dated October 27, 1989
(6) Annual Report on Form 10-K for the year ended December 31, 1990
(7) Annual Report on Form 10-K for the year ended December 31, 1995
(8) Quarterly Report on Form 10-Q for the quarter ended June 30, 1996
(9) Quarterly Report on Form 10-Q for the quarter ended September 30, 1996
(10) Form 8-K dated January 22, 1997
(11) Annual Report on Form 10-K for the year ended December 31, 1996
(12) Quarterly Report on Form 10-Q for the quarter ended March 31, 1997
(13) Quarterly Report on Form 10-Q for the quarter ended September 30, 1997
(14) Annual Report on Form 10-K for the year ended December 31, 1997
(15) Quarterly Report on Form 10-Q for the quarter ended March 31, 1998
(16) Form 8-K dated July 24, 1998
(17) Form 8-A dated July 24, 1998
(18) Quarterly Report on Form 10-Q for the quarter ended June 30, 1998
(19) Quarterly Report on Form 10-Q for the quarter ended September 30, 1998
(20) Form 8-K dated November 20, 1998
(21) Form 8-K dated February 19, 1999
** Denotes management contract or compensatory plan or arrangement
Upon written request to Rose A. Ellis, Secretary, Northern Trust
Corporation, 50 South LaSalle Street, Chicago, Illinois 60675, copies of
exhibits listed above are available to Northern Trust Corporation stockholders
by specifically identifying each exhibit desired in the request.
Pursuant to Item 601(b)(4)(iii) of Regulation S-K, the Corporation hereby
agrees to furnish the Commission, upon request, any instrument defining the
rights of holders of long-term debt of the Corporation not filed as an exhibit
herein. No such instrument authorizes long-term debt securities in excess of 10%
of the total assets of the Corporation and its subsidiaries on a consolidated
basis.
33
<PAGE>
Exhibit Number (10)(iii)(7)
To 1998 Form 10-K
AMENDMENT NUMBER SEVEN
TO
NORTHERN TRUST
EMPLOYEE STOCK OWNERSHIP PLAN
WHEREAS, The Northern Trust Company (the "Company") maintains the Northern
Trust Employee Stock Ownership Plan, as amended and restated effective January
1, 1989 (the "Plan");
WHEREAS, by virtue and in exercise of the amending power reserved to the
Company under Section 13.1 of the Plan, the Board of Directors authorized
amendments to the Plan by resolutions dated dated February 18, 1997 and November
18, 1998;
NOW THEREFORE, pursuant to the authority delegated by the Board of
Directors to the undersigned officer by such resolutions, the Plan is hereby
amended in the following particulars, effective December 31, 1998:
1. Section 2.1(vv) is modified by amended by adding the following sentence
after the vesting schedule that appears therein:
"Notwithstanding the foregoing, any Member identified in Exhibits 16.1 and
16.2 of the Payment System Services Agreement dated October 20, 1998,
between The Company and Fiserv Solutions, Inc. who is employed by the
Company on December 31, 1998, shall become fully vested in his or her
Account as of such date."
2. Section 9.7(d)(3) of the Plan is amended in its entirety to read as
follows:
"(3) For purposes of subsection (d)(1), the Required Distribution Date
means April 1 of the calendar year in which occurs the later of (A) the
Member's attainment of age seventy and one-half (70-1/2), or (B) the
Member's retirement (within the meaning of Code section 401(a)(9)), unless
the Member is a Five Percent Owner (as defined in Section 416(i) of the
Code) with respect to the Plan Year during which the Member attains age
70-1/2, in which case clause (B) shall not apply. Any Participant who
attained age 70-1/2 on or before December 31, 1998 shall continue to
receive distributions under the terms of the Plan as in effect on December
30, 1998."
IN WITNESS WHEREOF, the Company has caused this amendment to be executed on its
behalf by the undersigned officer this 30th day of December, 1998.
/s/ Martin J. Joyce, Jr.
- ------------------------------
Martin J. Joyce, Jr.
Senior Vice President
<PAGE>
Exhibit Number (10)(xix)
To 1998 Form 10-K
NORTHERN TRUST CORPORATION
1997 STOCK PLAN FOR NON-EMPLOYEE DIRECTORS
------------------------------------------
1. Purpose. The purpose of the Northern Trust Corporation 1997 Stock Plan for
Non-Employee Directors ("the Plan") is to attract and retain well-qualified
persons to serve as directors of Northern Trust Corporation (the
"Corporation") and to provide incentive to such directors to work for the
long-term best interests of the Corporation and its stockholders.
2. Eligibility. Participation in this Plan is limited to persons who serve as
directors of the Corporation and who are not employees of the Corporation
or any subsidiary of the Corporation ("Non-Employee Directors").
3. Shares Subject to the Plan. Shares of Common Stock, $1.66 2/3 par value per
share ("Common Stock") subject to the Plan shall be either authorized but
unissued shares or treasury shares of the Corporation. The Corporation
shall reserve such number of shares of Common Stock as may be issuable
under the Plan.
4. Grants of Stock. On the date of each annual stockholder meeting of the
Corporation to be held in 1997, 1998 and 1999, and without any further
action of the Board of Directors, there shall be granted to each Non-
Employee Director of the Corporation who is elected as a director by the
stockholders of the Corporation at such meeting 500 shares of Common Stock
of the Corporation.
Subject to the provisions of The Northern Trust Corporation 1997 Deferred
Compensation Plan for Non-Employee Directors, shares granted hereunder
shall be registered in the name of the Non-Employee Director and
certificates representing such shares shall be distributed promptly to each
Non-Employee Director.
5. Adjustment Provisions. In the event of any change in the number or nature
of outstanding shares of Common Stock of the Corporation by reason of a
recapitalization, merger, consolidation, dividend, split, combination of
shares or any other change in the corporate structure or shares of Common
Stock of the Corporation, the Board of Directors of the Corporation will
make appropriate adjustments in the number of shares available for
distribution pursuant to the provisions of this Plan and the number of
shares that may be awarded to each participant under the Plan.
6. No Obligation to Reelect. Nothing in this Plan shall be deemed to create an
obligation on the part of the Board of Directors to nominate any director
for reelection by the Corporation's stockholders or to fill a vacancy upon
action of the Board of Directors.
7. Administration of the Plan. This Plan shall be administered by the
Secretary of the Corporation.
<PAGE>
8. Amendment or Termination of the Plan. The Corporation reserves the right to
amend, modify or terminate this Plan by action of its Board of Directors,
provided that no such amendment or modification shall be effected more
often than once every six months, other than to comport with changes in the
Internal Revenue Code, the Employee Retirement Income Security Act, or the
rules thereunder, and provided further that no such amendment,
modification, or termination shall adversely affect any rights of Non-
Employee Directors with respect to grants of Common Stock made pursuant to
this Plan prior to such action.
9. Taxes. A Non-Employee Director may pay any applicable taxes due with
respect to any shares awarded under this Plan in cash or in stock, either
by having the Corporation withhold a portion of the shares otherwise
distributable or by delivering to the Corporation shares otherwise owned by
the Non-Employee Director.
10. Applicable Law. All questions pertaining to the validity, construction and
administration of the Plan and the shares of Common Stock granted hereunder
shall be determined in conformity with the laws of the State of Delaware.
<PAGE>
Exhibit Number (10)(xx)
To 1998 Form 10-K
NORTHERN TRUST CORPORATION
1997 DEFERRED COMPENSATION PLAN FOR
NON-EMPLOYEE DIRECTORS AS AMENDED
1. Name. This Plan shall be known as the "Northern Trust Corporation 1997
Deferred Compensation Plan for Non-Employee Directors As Amended" (the "Plan").
2. Definitions. The following definitions shall apply in interpreting the
Plan:
(a) The term "Beneficiary" shall mean such individual, trustee, trust or
other entity designated by a Non-Employee Director pursuant to Section 5(e).
(b) The term "Board" shall mean the Board of Directors of the Corporation.
(c) The term "Cash Account"shall have the meaning set forth in Section
4(b).
(d) The term "Committee" shall mean the Compensation and Benefits
Committee of the Board of Directors.
(e) The term "Common Stock" shall mean the common stock, $1.66-2/3 par
value per share, of the Corporation.
(f) The term "Corporation" shall mean Northern Trust Corporation, a
Delaware corporation.
(g) The term "Election Form" shall have the meaning set forth in Section
3(b).
(h) The term "Non-Employee Director" shall mean a person who is serving as
a member of the Board and is not an employee of the Corporation or any
subsidiary of the Corporation.
(i) The term "Stock Unit Account" shall have the meaning set forth in
Section 4(a).
3. Participation.
(a) A Non-Employee Director may elect to defer receipt of the payment of
all or any portion of: (i) the annual retainer fee payable for services as a
Director, (ii) any cash fees payable for attendance at a Board committee meeting
or for any other service provided to the Corporation, or (iii) the annual stock
grant under the Northern Trust Corporation 1997 Stock Plan for Non-Employee
Directors, in each case until the date on which the Non-Employee Director's
service on the Board terminates for any reason.
(b) Each election for a calendar year shall be set forth on an election
form ("Election Form") provided by the Corporation. An Election Form effective
for a calendar year shall be delivered to the Corporation prior to the first day
of such calendar year. An Election Form shall
<PAGE>
remain in effect for subsequent calendar years until a written notice to revise
the Election Form is delivered to the Corporation on or before the first day of
the calendar year in which the revision is to become effective. Except as
provided in Section 3(c) below, an initial Election Form or a revised Election
Form shall only apply to compensation otherwise payable to a Non-Employee
Director after the end of the calendar year in which such initial or revised
Election Form is delivered to the Corporation. Any Election Form delivered by a
Non-Employee Director shall be irrevocable with respect to any compensation
covered by the election set forth therein.
(c) Notwithstanding Section 3(b) above, (i) an election by a Non-Employee
Director with respect to compensation payable on or after March 31, 1997 may be
made pursuant to an Election Form delivered to the Corporation prior to March
31, 1997, and (ii) an election made by a Non-Employee Director in the calendar
year in which the Non-Employee Director first becomes eligible to participate in
the Plan may be made pursuant to an Election Form delivered to the Corporation
within 30 days after the date on which the Non-Employee Director initially
becomes eligible to participate, and such Election Form shall be effective with
respect to compensation earned from and after the date such Election Form is
delivered to the Corporation.
4. Deferral Accounts.
(a) All cash compensation deferred by a Non-Employee Director pursuant to
Section 3 shall be credited to a stock unit account ("Stock Unit Account")
maintained by the Corporation on its books in the name of the participating Non-
Employee Director and converted into stock units equivalent to full shares of
the Corporation's Common Stock as of the last trading day of the calendar
quarter for which the cash compensation would have been paid. The conversion
shall be determined by dividing the dollar amount of the cash compensation as of
such quarterly date by the mean of the high and low sale prices of the
Corporation's Common Stock as reported by The Nasdaq Stock Market on such
quarterly date. Any cash balance remaining after any such conversion shall be
credited to the Cash Account of a Non-Employee Director as provided in Section
4(b) below. The shares of Common Stock representing a stock grant under the
Northern Trust Corporation 1997 Stock Plan for Non-Employee Directors which are
deferred by a Non-Employee Director pursuant to Section 3 shall be credited to a
Stock Unit Account and converted into stock units as of the date of the annual
meeting of stockholders on which the stock was granted.
(b) The Corporation also shall maintain a cash account ("Cash Account") on
its books in the name of each participating Non-Employee Director. Credits shall
be made to a participating Non-Employee Director's Cash Account in dollar
amounts equal to (i) the cash balance remaining after any conversion pursuant to
Section 4(a) above, and (ii) the cash dividends (or the fair market value of
dividends paid in property other than Common Stock) that the Non-Employee
Director would have received had the Non-Employee Director been the owner on
each record date of the number of shares of Common Stock equal to the number of
stock units in such Non-Employee Director's Stock Unit Account on such date.
Until the entire balance of a Cash Account has been paid to a Non-Employee
Director, or to the Beneficiaries of a deceased Non-Employee Director, such
balance shall
2
<PAGE>
be increased on the last day of each calendar quarter to reflect accrued
interest on such balance based on the rate of interest determined from time to
time by the Committee.
(c) In the case of a dividend in Common Stock or a Common Stock split,
additional credits will be made to a Non-Employee Director's Stock Unit Account
of a number of stock units equal to the number of full shares of Common Stock
that the Non-Employee Director would have received had the Non-Employee Director
been the owner on each record date of the number of shares of Common Stock equal
to the number of stock units in such Non-Employee Director's Stock Unit Account
on such date.
(d) Amounts previously deferred by a participating Non-Employee Director
under any prior deferred compensation plan maintained by the Corporation or any
of its subsidiaries shall be transferred effective March 31, 1997 into the Stock
Unit Account or the Cash Account as designated by the Non-Employee Director.
(e) Each Stock Unit Account and each Cash Account shall be maintained on
the books of the Corporation until full payment of the balance thereof has been
made to the applicable Non-Employee Director or to the Beneficiaries of a
deceased Non-Employee Director. No funds shall be set aside or earmarked for any
Account, which shall be purely a bookkeeping device.
5. Distribution of Accounts.
(a) The entire balance of a Non-Employee Director's Stock Unit Account and
Cash Account shall be paid to such Non-Employee Director or to the Beneficiaries
of a deceased Non-Employee Director (i) in a single lump sum as of a date
selected by the Corporation not more than 90 days following the date the Non-
Employee Director's service on the Board terminates for any reason, or (ii) in
up to 10 annual installments beginning on a date selected by the Corporation not
more than 90 days following the date the Non-Employee Director's service on the
Board terminates for any reason, as designated by the Non-Employee Director or
the Beneficiaries of a deceased Non-Employee Director. In the absence of a
designation by a Non-Employee Director, the entire balance of the Non-Employee
Director's Stock Unit Account and Cash Account shall be paid in a single lump
sum.
(b) Except as provided in Section 5(c) below, the balance of a Non-
Employee Director's Stock Unit Account shall be distributed in cash. In the
event of a single lump sum distribution in cash, the Non-Employee Director or
the Beneficiaries of a deceased Non-Employee Director shall receive an amount in
cash equal to the number of stock units in the Stock Unit Account multiplied by
the mean of the high and low sales prices of the Common Stock as reported by the
Nasdaq Stock Market on the fifth trading day prior to the distribution date. In
the event of a distribution in cash in up to 10 annual installments, the cash
amount determined in the manner provided in the immediately preceding sentence
shall continue to accrue interest and shall be distributed to the Non-Employee
Director or the Beneficiaries of a deceased Non-Employee Director on the
distribution date in each year of the installment period in an amount equal to
the then current cash balance in the Stock Unit
3
<PAGE>
Account multiplied by a fraction, the numerator of which shall be one, and the
denominator of which shall be the number of years remaining in the installment
period.
(c) Stock units in the Stock Unit Account representing the deferral of
shares of Common Stock under the Northern Trust Corporation 1997 Stock Plan for
Non-Employee Directors shall be distributed only in shares of Common Stock. In
the event of a single lump sum distribution in Common Stock, a certificate
representing the number of full shares of Common Stock equal to the number of
such stock units in the Non-Employee Director's Stock Unit Account representing
the deferral of shares of Common Stock under the Northern Trust Corporation 1997
Stock Plan for Non-Employee Directors, registered in the name of the Non-
Employee Director or the Beneficiaries of a deceased Non-Employee Director,
shall be distributed to the Non-Employee Director or the Beneficiaries of a
deceased Non-Employee Director on the distribution date referred to in Section
5(a) above. In the event of a distribution in Common Stock in up to 10 annual
installments, a certificate representing the number of full shares of Common
Stock equal to a fraction (the numerator of which shall be the number of stock
units in the Non-Employee Director's Stock Unit Account representing the
deferral of shares of Common Stock under the Northern Trust Corporation 1997
Stock Plan for Non-Employee Directors, and the denominator of which shall be the
number of annual installments designated by the Non-Employee Director),
registered in the name of the Non-Employee Director or the Beneficiaries of a
deceased Non-Employee Director, shall be distributed to the Non-Employee
Director or the Beneficiary of a deceased Non-Employee Director on the
distribution date in each year of the installment period, provided that the
number of shares in each of the installments may be rounded to avoid fractional
shares.
(d) The balance of a Non-Employee Director's Cash Account shall be
distributed in cash. In the event of a single lump sum distribution in cash, the
entire balance of the Non-Employee Director's Cash Account shall be distributed
to the Non-Employee Director or the Beneficiaries of a deceased Non-Employee
Director on the distribution date described in Section 5(a) above. In the event
of a distribution in cash in up to 10 annual installments, the balance of the
Cash Account shall continue to accrue interest and shall be distributed to the
Non-Employee Director or the Beneficiaries of a deceased Non-Employee Director
on the distribution date in each year of the installment period in an amount
equal to the then current balance in the Cash Account multiplied by a fraction,
the numerator of which shall be one, and the denominator of which shall be the
number of years remaining in the installment period.
(e) If a Non-Employee Director's service on the Board shall terminate by
reason of death, or if a Non-Employee Director shall die after becoming
entitled to distribution hereunder, but prior to receipt of the entire
distribution, all cash or Common Stock then distributable hereunder with respect
to such Non-Employee Director shall be distributed to such Beneficiaries as such
Non-Employee Director shall have designated by an instrument in writing last
filed with the Corporation prior to death, or in the absence of such designation
or of any living Beneficiary, to his or her spouse, or if not then living, to
his or her then-living descendants, per stirpes, or if none is then living, to
the personal representative of the Non-Employee Director's estate, in the same
manner as would have been distributed had the Non-Employee Director continued to
live.
4
<PAGE>
6. Amendment or Termination.
------------------------
(a) The Corporation intends the Plan to be permanent but reserves the right
to amend or terminate the Plan when, in the sole opinion of the Corporation,
such amendment or termination is advisable. Any such amendment or termination
shall be made pursuant to a resolution of the Board and shall be effective as of
the date of such resolution or such later date as the resolution may expressly
state.
(b) No amendment or termination of the Plan shall (i) directly or
indirectly deprive any current or former Non-Employee Director or any
Beneficiaries, of all or any portion of such Non-Employee Director's Stock Unit
Account or Cash Account as determined as of the effective date of such amendment
or termination, or (ii) directly or indirectly reduce the balance of any such
Accounts held hereunder as of the effective date of such amendment or
termination. Upon termination of the Plan, distribution of balances in all
Accounts shall be made to the Non-Employee Directors or their Beneficiaries in
the manner and at the time described in Section 5 as if each Non-Employee
Director's service on the Board had then terminated. No additional deferrals
shall be credited to the Accounts of Non-Employee Directors after termination of
the Plan, but the Corporation shall continue to credit earnings, gains and
losses to Accounts pursuant to Section 4 until the balances of such Accounts
have been fully distributed to Non-Employee Directors or their Beneficiaries.
7. General Provisions.
------------------
(a) The Plan at all times shall be entirely unfunded and no provision shall
at any time be made with respect to segregating any assets of the Corporation
for payment of any benefits hereunder. The right of a Non-Employee Director or
the Beneficiaries of a deceased Non-Employee Director to receive a benefit
hereunder shall be an unsecured claim against the general assets of the
Corporation, and neither the Non-Employee Director nor such Beneficiaries shall
have any rights in or against any specific assets of the Corporation. All
amounts credited to Accounts shall constitute general assets of the Company.
(b) Shares of Common Stock distributed under the Plan may be authorized but
unissued shares or treasury shares of the Corporation. The Corporation shall
reserve such number of shares of Common Stock as may be issuable under the Plan.
(c) Nothing contained in the Plan shall constitute a guaranty by the
Corporation, the Committee, or any other person or entity, that the assets of
the Corporation will be sufficient to pay any benefit hereunder. No Non-Employee
Director or the Beneficiaries of a deceased Non-Employee Director shall have any
right to receive a distribution under the Plan except in accordance with the
terms of the Plan.
(d) Establishment of the Plan shall not be construed to give any Non-
Employee Director the right to be retained as a member of the Board.
5
<PAGE>
(e) No interest of any person or entity in, or right to receive a
distribution under, the Plan, shall be subject in any manner to sale, transfer,
assignment, pledge, attachment, garnishment, or other alienation or encumbrance
of any kind; nor may such interest or right to receive a distribution be taken,
either voluntarily or involuntarily, for the satisfaction of the debts of, or
other obligations or claims against, such person or entity, including claims for
alimony, support, separate maintenance and claims in bankruptcy proceedings.
(f) The Plan shall be administered by the Secretary of the Corporation.
(g) A Non-Employee Director may pay any applicable taxes due with respect
to any shares distributed under the Plan in cash or in stock, either by having
the Corporation withhold a portion of the shares otherwise distributable or by
delivering to the Corporation shares otherwise owned by the Non-Employee
Director.
(h) The Plan shall be construed and administered under the laws of the
State of Delaware except to the extent preempted by federal law.
6
<PAGE>
Exhibit Number (10)(xxx)
To 1998 form 10-K
AGREEMENT
between
FISERV SOLUTIONS, INC.
255 Fiserv Drive
Brookfield, WI 53045-5815
and
THE NORTHERN TRUST COMPANY
50 South LaSalle Street
Chicago, IL 60675-0002
Date:
PAYMENTS SYSTEM SERVICES AGREEMENT ("Agreement") dated as of October [20],
1998 ("Agreement Date"), by and between THE NORTHERN TRUST COMPANY ("Northern
Trust"), an Illinois banking corporation, and FISERV SOLUTIONS, INC. ("Fiserv"),
a Wisconsin corporation.
W I T N E S S E T H:
WHEREAS, based on the proposal presented by Fiserv to Northern Trust on
September 25, 1998, Northern Trust and Fiserv have engaged in extensive
negotiations, discussions and due diligence culminating in the relationship
described in this Agreement;
WHEREAS, based on such proposal, Northern Trust desires to outsource its
payments processing business to Fiserv pursuant to the terms hereof;
WHEREAS, in connection with the foregoing transaction, Northern Trust
desires to transfer to Fiserv certain assets used or useful in the conduct of
the payments processing business in exchange for cash pursuant to the terms
hereof; and
WHEREAS, Fiserv intends to perform the services described in this Agreement
reflecting appropriate new technologies for providing such services.
NOW, THEREFORE, Fiserv and Northern Trust agree as follows:
ARTICLE 1. DEFINITIONS.
1
<PAGE>
The following defined terms have the meanings specified in the Agreement
portion indicated below:
TERM DEFINED IN
Agreement Heading
Agreement Date Heading
Assets Section 13.1
Change Control Procedures Section 4.3
Change(s) Section 4.1
Completion Data Section 3.3
Conclusion Date Section 27.1
Contract Year Section 2.2
Conversion Section 3.3
Conversion Period Section 3.3
Credits Section 31.4
Critical Services Section 18.1
Data Tapes Section 17.6
Designated Fees Section 19.1
Designated Services Section 3.1
Designated Service Levels Section 5.1
Developed Software Section 11.2
Disaster Section 18.1
Disaster Recovery Plan Section 18.1
Discloser Section 22.2
Effective Date Section 2.1
Estimated Additional Fees Section 19.1
Estimated Designated Fees Section 19.1
Estimated Fees Section 19.1
Estimated Out-of-Pocket Expenses Section 19.1
Fees Section 19.4
Fiserv Heading
Fiserv 401(k) Savings Plan Section 16.7
Fiserv Acquired Services Article 14
Fiserv Agent(s) Section 9.3
Fiserv Benefits Plans Section 16.6
Fiserv Credits Section 31.3
Fiserv Health Benefits Plan Section 16.8
Fiserv Information Section 22.1
Fiserv Project Manager Section 9.1
Fiserv Proprietary Software Section 11.3
Fiserv Software Section 11.3
Fiserv Systems Section 7.1
2
<PAGE>
Fiserv Third Party Software Section 11.3
Force Majeure Event Section 18.2
General Assignment Section 13.1
Hearing Section 29.3
Implementation Consents Section 12.1
Improved Technology Section 3.4
Indemnifying Party Section 30.3
Indemnitee Section 30.3
Information Section 22.1
Initial Term Section 2.1
Insured Dependent(s) Section 16.8
Losses Section 30.1
Management Committee Section 10.2
Minimum Employment Period Section 16.5
New Service(s) Section 4.1
New Service Fees Section 19.4
New Service Levels Section 5.2
New Services Schedule Section 4.1
Northern Trust Heading
Northern Trust Benefit Plans Section 16.6
Northern Trust Credits Section 31.4
Northern Trust Data Section 17.3
Northern Trust Health Benefits Plan Section 16.8
Northern Trust Information Section 22.1
Northern Trust Project Manager Section 9.2
Northern Trust Proprietary Software Section 11.1
Northern Trust Retained Agreements Section 3.2
Northern Trust Retained Responsibilities Section 3.2
Northern Trust Software Section 11.1
Northern Trust Systems Section 7.2
Northern Trust Third Party Software Section 11.1
Problem Section 10.5
Project Managers Section 9.2
Proposal Section 4.1
Recipient Section 22.1
Reconstruction Costs Section 32.17
Renewal Term(s) Section 2.2
Report(s) Section 17.1
Required Change Section 21.1
Required Consents Section 12.3
Residuals Section 22.3
Retained Responsibilities Service Levels Article 14
Securities Section 32.17
3
<PAGE>
Service Levels Section 5.2
Service Location(s) Section 6.1
Services Section 4.1
Software Section 11.3
Start Date Section 16.3
Systems Section 7.2
Taxes Article 20
Term Section 2.2
Termination Assistance Period Section 27.1
Termination Assistance Services Section 27.1
Termination Consents Section 12.2
Termination for Convenience Section 25.1
Termination Losses Section 26.3
Termination Reasons Section 16.5
Third Party Resources Section 15.2
Third Party Resources Agreements Section 15.2
Third Party Resources Invoice(s) Section 15.4
Transitioned Employee(s) Section 16.2
Transition Period Section 16.1
Yearly Damage Cap Section 31.1
ARTICLE 2. TERM
2.1 Initial Term. The initial term of this Agreement shall commence on
November 1, 1998 ("Effective Date") and shall continue until midnight Central
Time on the last business day of October, 2008 ("Initial Term"), unless
terminated earlier pursuant hereto.
2.2 Renewal Term. Upon Initial Term expiration, this Agreement shall
automatically renew for three successive three-year terms (collectively,
"Renewal Terms"; each, a "Renewal Term") unless terminated (1) earlier pursuant
to Article 25; or (2) by either party upon at least 365 days' written notice to
the other prior to Initial Term expiration or any Renewal Term expiration.
(Initial Term and Renewal Terms collectively, "Term,") (each 12-month period
commencing on the Effective Date during the Term, a "Contract Year".)
ARTICLE 3. DESIGNATED SERVICES.
3.1 Designated Services. Fiserv shall provide Northern Trust and its
designated affiliates the payments system processing services, including
encoding, check
4
<PAGE>
processing, controlled disbursement processing and advising, account
reconcilement, statement rendition, totaling, verification, and sorting
services, return item processing, investigations, hardware, software, software
maintenance, software development, and related services performed in the
ordinary course by Northern Trust prior to the Effective Date (a) listed in
Exhibit 3.1; and (b) otherwise identified in this Agreement as being part of the
designated services (collectively, "Designated Services"). Except for Northern
Trust Retained Responsibilities, Fiserv shall assume full responsibility,
including financial responsibility, for managing, administering, operating, and
maintaining Northern Trust Service Locations, Northern Trust Systems, Northern
Trust Software, and such other resources mutually agreed by the parties. Except
as otherwise provided herein, Fiserv shall be the exclusive provider for
Northern Trust with respect to accounts held by Northern Trust, its successors,
and assigns of (i) Designated Services as such Designated Services were
performed by Northern Trust immediately prior to the Effective Date; and (ii)
any increases in volume of such Designated Services resulting from acquisition
or otherwise with respect to accounts held by Northern Trust. Affiliates of
Northern Trust may at their option and upon 60 days' notice to Fiserv during the
term hereof, elect to use Fiserv for the provision of payments processing
services on the same term and conditions as described herein, taking account of
the fact that differing Services may need to be provided to such affiliates,
upon such terms as may be mutually agreeable to the parties at such time. In
such case, such affiliate will become an additional signatory to this Agreement.
3.2 Northern Trust Retained Services. Northern Trust shall have
responsibility for (1) services described in Article 14 and such ancillary
services in support of Designated Services as were performed by Northern Trust
as of the Effective Date (respectively, "Northern Trust Retained
Responsibilities" and "Fiserv Acquired Services"); and (2) pursuant to Article
15, agreements identified in Exhibit 15.2 ("Northern Trust Retained
Agreements").
3.3 Conversion. Commencing on the Effective Date and continuing until the
date specified in Exhibit 3.3A ("Completion Date"), Fiserv shall convert the
systems and data described in Exhibit 3.3A in accordance with the conversion
plan set forth in Exhibit 3.3A ("Conversion;" the period commencing on the
Effective Date until the Completion Date, "Conversion Period"). During the
Conversion Period, (1) Fiserv shall provide Northern Trust with monthly reports
on its progress in the format indicated in Exhibit 3.3B, and (2) Fiserv shall
provide the Management Committee with regular reports of its progress.
3.4 Improved Technology. Fiserv shall use reasonable efforts to provide
Northern Trust access to, for Northern Trust's evaluation and testing, new
information technology developments relating to the financial and information
services industries, relating to Designated Services ("Improved Technology"),
providing such access is not
5
<PAGE>
inconsistent with Fiserv's obligations of confidentiality to any unaffiliated
third party. All fees and expenses associated with such evaluation and testing
shall be borne by the parties as mutually agreed by the parties. Fiserv shall
use reasonable efforts to adopt and implement at its cost any Improved
Technology that becomes the industry standard for leading technology banking
service institutions serving the large corporate market; provided however, that
nothing herein shall be understood to mean that any Improved Technology proposed
or implemented by Fiserv may not be a New Service hereunder, which New Service
is governed by the provisions of Section 4.1 hereof. In addition, to the extent
not inconsistent with Fiserv's obligations of confidentiality to any
unaffiliated third party, Fiserv shall meet with Northern Trust at least once
during every 180 day period to inform Northern Trust of any Improved Technology
related to any item or information processing or imaging technology Fiserv is
developing, or is considering developing, or is otherwise aware of, that relates
to either the financial or information services industries. In general Fiserv
covenants and agrees to use reasonable efforts to remain current with respect to
new information technology developments relating to the Designated Services,
such as investing in new hardware for image based item processing.
Notwithstanding the foregoing but in furtherance thereof, the Management
Committee shall adopt a plan each year for implementing Improved Technology.
Compliance with the plan shall create a strong presumption that Fiserv's
agreements with respect to Improved Technology contained in this Section 3.4
have been fully carried out.
3.5 Financial Reports and Other Information. Fiserv shall provide
Northern Trust within (1) 90 days after Fiserv, Inc.'s fiscal year end, copies
of Fiserv Inc.'s audited balance sheet and related audited statements of income,
shareholders' equity, and cash flow, together with the notes, if any, relating
thereto; and (2) 45 days after each of Fiserv Inc.'s quarter ends, copies of
Fiserv, Inc.'s unaudited quarterly financial statements. The foregoing shall be
prepared in accordance with generally accepted accounting principles.
3.6 Joint Verification. During the 180-day period after the Effective
Date, Northern Trust and Fiserv each reserve the right to validate costs (as
measured, calculated, and defined by Northern Trust during 1998), volume,
composition, and service levels of Designated Services against the information
set forth in Exhibit 3.1, Exhibit 5.1 and Exhibits 14A and 14B hereof. If any
such information is inaccurate or incomplete, unless the parties otherwise
agree, an equitable adjustment to the terms of this Agreement shall occur, as
mutually agreed by the parties; provided, however, that no such adjustment shall
be required with respect to inaccurate or incomplete information that has a de
minimis financial effect.
3.7 Fiserv Proposals. Fiserv may from time to time propose that Fiserv
perform services outside the scope of Services. At Fiserv's expense, any such
proposal shall be submitted by Fiserv to Northern Trust for consideration and
shall include the applicable terms, conditions, and fees, with an explanation of
Fiserv's actual business case and a proposed business case justification on
behalf of Northern Trust in respect of
6
<PAGE>
such proposal.
ARTICLE 4. REQUIRED SERVICES AND CHANGES
4.1 Required Services. Northern Trust may from time to time request that
Fiserv perform services related to payments system processing (1) either in
addition to or outside the scope of Designated Services; and (2) that require
resources other than those required for performance of Designated Services or
require additional start-up expenses not otherwise required for the performance
of Designated Services, including (a) certain Software modifications; and (b)
additions to a Designated Service ("New Services"), (New Services and Designated
Services collectively, "Services")or (3) that materially change the (a) Systems;
(b) the manner in which the Services are provided, delivered, or measured; (c)
Services composition; or (d) Software ("Changes"). Fiserv agrees to provide
10,500 hours of maintenance, programming and consulting services per Contract
Year with respect to New Services and/or Changes ("Required Services"), pursuant
to the Management Committee's Required Services annual budget required by
Section 10.2 hereof. Each annual budget for Required Services shall also include
quarterly budgeting of the projects and hours to be spent upon such projects for
each such quarter. The parties shall use their reasonable efforts to assure that
all projects involving Required Services are completed without material
variation from the time budgeted for such projects in the annual and quarterly
budgets. At the end of every quarter, any amount of hours budgeted for Required
Services for such quarter, other than immaterial amounts, shall not be carried
over to the budget for Required Services for any subsequent quarter. If any
proposed New Service is not a Required Service, which budget shall be in the
form contained in Exhibit 4.1A hereto, Fiserv shall prepare and provide the
Management Committee with a proposal in respect of such proposed New Service
requested containing, at a minimum, (i) the time frame for delivery or
performance of such New Service; (ii) if applicable, a description of such New
Service's scope and functionality; (iii) fees to be paid with respect to such
New Service ; and (iv) to the extent applicable, an estimate of the resource
requirements necessary to develop and implement such New Service (each, a
Proposal"). If (i) Northern Trust elects to have Fiserv perform such New Service
not as a Required Service or (ii) both parties agree to a New Service after all
the hours for Required Services for the Contract Year have been budgeted,
Northern Trust and Fiserv shall execute an amendment to this Agreement in
substantially the form set forth in Exhibit 4.1B for a New Service (a "New
Services Schedule"). Northern Trust and Fiserv shall each respectively perform
its responsibilities as required in the applicable New Services Schedule related
to any New Service. Fiserv shall perform all Required Services without fees or
other compensation in addition to the basic fees hereunder for performing
Designated Services.
4.2 Changes. Subject to Section 4.1 hereof, Fiserv may propose to
Northern Trust changes to any Services. A proposal shall contain, at a minimum,
(i) the time
7
<PAGE>
frame for delivery or performance of the Change; (ii) if applicable, a
description of the Change's scope and functionality; (iii) fees to be paid with
respect to the Change; and (iv) to the extent applicable, an estimate of the
resource requirements necessary to develop and implement the Change. If Northern
Trust agrees to the proposed Change, both parties shall execute an amendment to
this Agreement in substantially the form set forth in Exhibit 4.1B.
4.3 Change Control Procedures. The parties shall agree on Change Control
Procedures within 90 days of the date hereof, in written form ("Change Control
Procedures"). Fiserv shall (1) schedule all projects and Changes so as not to
unreasonably interrupt Northern Trust's business operations; (2) provide
Northern Trust a monthly schedule for ongoing and planned Changes for the next
60 day period; (3) monitor and report the status of Changes against the
applicable schedule; and (4) document and provide Northern Trust notice of all
material Changes performed on a temporary basis to maintain Services continuity.
Any changes to Change Control Procedures must contain the approval of each of
Northern Trust and Fiserv.
4.4 Fiserv shall provide Northern Trust with monthly reports of the status
of its progress in implementing Required Services and Changes.
ARTICLE 5. SERVICE LEVELS.
5.1 Designated Service Levels. As of the Effective Date, Fiserv shall
provide Designated Services at or better than the levels of service set forth in
Exhibit 5.1, which Northern Trust represents and warrants are the corresponding
levels of service as of the Effective Date (collectively, "Designated Service
Levels"). Exhibit 5.1 shall designate the service levels which have client
impact. Failure to meet those service levels will result in Fiserv paying
Northern Trust in the form of Fiserv Credits, in the case of Designated Services
performed by Fiserv hereunder, or Northern Trust will pay Fiserv in the form of
Northern Trust Credits, in the case of Fiserv Acquired Services, all as
described in Sections 31.3 and 31.4 hereof.
5.2 New Service Levels. Fiserv shall provide New Services at levels equal
to or better than the levels of service (1) specified in the New Services
Schedule; or (2) otherwise mutually established by Northern Trust and Fiserv
(collectively, "New Service Levels;" Designated Service Levels and New Service
Levels collectively, "Service Levels").
5.3 Service Levels Adjustment. Every six months, the Management Committee
shall review Service Levels for the preceding 6-month period. In respect of any
Service Levels that require periodic adjustment or that are no longer
appropriate because of a Change or technology that has been implemented to
change or enhance Services, the Management Committee may recommend that such
Service Levels be
8
<PAGE>
adjusted for the subsequent Contract Year, and, upon mutual agreement of the
parties hereto, such Service Levels shall be adjusted with expenses related
thereto paid as mutually agreed. In addition, either Northern Trust or Fiserv
may, at any time upon notice to the other party, initiate negotiations to review
and adjust any Service Levels that such party in good faith believes are
inappropriate at the time.
5.4 Service Reports. Fiserv shall provide Northern Trust with monthly
reports in respect of Service Levels set forth in Exhibit 5.1, and any New
Service Levels described in Section 5.2.
5.5 Float Policy. The Float Policy Fiserv shall observe in performing the
Designated Services shall be as set forth in Exhibit 5.5.
ARTICLE 6. SERVICE LOCATIONS AND RELATED PROCEDURES.
6.1 Service Locations. Fiserv and Northern Trust covenant and agree that
they shall use reasonable efforts to relocate the main unit for provision of the
Services out of the Northern Trust's Operations Center at 801 South Canal Street
as promptly as practicable, to another location in the downtown Chicago area.
Fiserv shall continue to lease space at 801 South Canal Street until such
relocation has occurred. The terms and conditions, including fees, applicable to
Fiserv's lease shall be specified in Exhibit 6.1A. Fiserv shall have the right
to replace a Northern Trust Service Location with another service location
selected by Fiserv, provided such new Service Location shall be operationally
suitable to provision of Designated Services and is consented to in writing by
Northern Trust. Northern Trust shall be permitted access to any locations used
by Fiserv to perform the Services ("Service Locations") at all times and subject
to any reasonable notice, security and confidentiality procedures in effect at
such Service Location. Such access shall be for the purpose of auditing and
verifying that the facility is in first-class operating condition and that work
rules (including reasonable dress codes and satisfactory security procedures)
are being enforced by on-site management. Fiserv specifically covenants and
agrees that all such facilities will be maintained appropriately during normal
business hours for tours by clients and prospective clients. Full access will
also be provided so that banking regulators shall be allowed to examine all
aspects of applicable laws and regulations, including, without limitation,
Fiserv's data and system security.
6.2 Facilities Security Procedures. Fiserv shall implement, maintain, and
enforce reasonable environmental and physical security standards and procedures
at each Service Location.
6.3 Data and Systems Security. Fiserv shall (1) implement, maintain, and
enforce data and systems security in respect of Fiserv Systems; and (2) maintain
and enforce in respect of (a) Northern Trust Systems that Fiserv is responsible
for as part of
9
<PAGE>
Designated Services; and (b) Northern Trust Data, in each case
on-line security standards and procedures at least as rigorous as those in
effect at Northern Trust Service locations as of the Effective Date.
6.4 Lockbox Operation. The parties hereto shall facilitate the
relocation, at Northern Trust's option and, if Northern Trust elects to pursue
such relocation, at Northern Trust's expense, of Northern Trust's lockbox
operations out of the Canal Center and to the main site for Fiserv's check
processing operations for Northern Trust pursuant to this Agreement, at such
time as Fiserv moves the payments processing unit out of such facility. Fiserv
shall provide such space at cost in the new facility. The lockbox operation,
which is under Northern Trust's ownership and control, may be moved to
facilitate its continued functioning. Northern Trust shall notify Fiserv of its
election concerning relocation of the lockbox operation prior to Fiserv
finalizing arrangements for its new facility. Fiserv shall notify Northern Trust
just prior to its finalizing such arrangements so that Northern Trust may make
the foregoing election.
ARTICLE 7. SYSTEMS.
7.1 Fiserv Systems. Except as provided in Article 11, any systems and
related documentation and procedures and any modifications or enhancements to
such systems or related documentation or procedures designed, developed, owned,
acquired, or licensed by Fiserv or any of its affiliates related to Services
("Fiserv Systems") shall be the exclusive property of Fiserv or its third party
licensor or lessor, as the case may be. Fiserv shall maintain Fiserv Systems in
good working order, to the reasonable satisfaction of Northern Trust. Fiserv
shall also maintain in good working order the interfaces the Fiserv Systems have
with any systems, software or devices of Northern Trust. Fiserv will also
cooperate with establishing and maintaining any interfaces it might have with
third parties in providing the Services. Except as otherwise provided hereto,
Northern Trust shall have no rights to or interests in Fiserv Systems.
7.2 Northern Trust Systems. Except as provided in Article 11, any systems
and related documentation or procedures and any modifications or enhancements to
such systems or related documentation or procedures designed, developed, owned,
acquired, or licensed by Northern Trust or any of its affiliates related to
Services ("Northern Trust Systems") shall be the exclusive property of Northern
Trust or its third party licensor or lessor. Fiserv shall have no rights to or
interests in Northern Trust Systems. (Fiserv Systems and Northern Trust Systems
collectively, "Systems".) Fiserv shall maintain in good working order and shall
not injure or compromise in any material way the portion of Northern Trust
Systems that Fiserv uses or with which Fiserv interfaces in order to provide
Services.
10
<PAGE>
ARTICLE 8. OMITTED INTENTIONALLY
ARTICLE 9. PROJECT TEAM.
9.1 Fiserv Project Manager. Fiserv shall appoint an individual who shall
be in charge of implementing Services at Service Locations ("Fiserv Project
Manager"). The initial Fiserv Project Manager shall be Mr. Kenneth P. True.
9.2 Northern Trust Project Manager. Northern Trust shall appoint an
individual who shall be in charge of working with the Fiserv Project Manager
related to Fiserv's implementing Services at Service Locations ("Northern Trust
Project Manager"). The initial Northern Trust Project Manager shall be Mr. John
Van Pelt. (The Fiserv Project Manager and Northern Trust Project Manager
collectively, "Project Managers").
9.3 Conduct of Fiserv Employees and Agents. While at Northern Trust
Service Locations, Fiserv's employees, agents, contractors, and subcontractors
(collectively, "Fiserv Agents") shall (1) comply with reasonable Northern Trust
requests, rules, and regulations regarding personal and professional conduct
(including the wearing of a particular uniform or business attire,
identification badge or adhering to general security procedures) generally
applicable to such Northern Trust Service Locations; (2) adhere to Northern
Trust security procedures; and (3) otherwise conduct themselves in a
businesslike manner.
9.4 Fiserv Employment Policies. Fiserv shall exercise due care and
diligence in the selection and training of Fiserv Agents and shall take
reasonable steps to assure that Services are provided only by persons who have
not been convicted of a job-related criminal offense involving violence,
dishonesty or any breach of trust. Fiserv shall include language on its
employment application or in its subcontracts requiring prospective Fiserv
Agents to attest to not having been so convicted. Each Fiserv Agent involved in
providing Services shall be bondable and covered by the insurance required under
Section 32.17. Fiserv will not discriminate against any of its employees or
applicants for employment because of age, race, color, religion, sex, national
origin, ancestry, disability, handicap, or veteran status or any other basis
prohibited by applicable federal, state or local law, and will comply with all
applicable requirements of the equal opportunity and affirmative action clauses
set forth in Executive Order 11246 (applicable to subcontractors), as amended,
in the regulations of the Department of Labor implementing the Vietnam Era
Veterans Readjustment Act of 1974, and in the Rehabilitation Act of 1973, as
amended, which, together with the implementing rules and regulations prescribed
by the Secretary of Labor, are incorporated in this Agreement by reference.
11
<PAGE>
ARTICLE 10. MANAGEMENT AND CONTROL.
10.1 Management Meetings. Monthly meetings of the Management Committee
shall be held at a designated site or by conference call or video conference, as
may be agreed by the members of the Management Committee to (a) review Fiserv's
performance of Services; (b) resolve disputes arising pursuant to this
Agreement; (c) track progress of special projects; and (d) coordinate and plan
for any new hardware or software acquisitions, or the provision of New Services
or Changes.
10.2 Management Committee. Within 10 days of the Effective Date, Northern
Trust shall appoint 3 members of its management staff, and Fiserv shall appoint
3 members of its management staff to serve on a management committee
("Management Committee"). Once every Contract Year, the Management Committee
shall designate one of its members to act as chairman. The first Contract Year,
the chairman shall be one of the Northern Trust members; the second Contract
Year, a Fiserv member; and shall continue to alternate each Contract Year. The
Management Committee shall be authorized and responsible for (1) generally
overseeing the performance hereof; (2) making recommendations relating to the
achievement of Northern Trust strategic and tactical objectives in respect of
the establishment, budgeting, and implementation of Northern Trust's priorities
and plans for payments system processing and communications relating thereto;
(3) monitoring and resolving disagreements regarding the provision of Services
and Service Levels; and (4) approving an annual budget for the Required Services
described in Section 4.1 hereof, and monitoring performance thereunder. Progress
with respect to such Required Services budget shall be followed in a report not
less than monthly which shall be one of the reports listed on Exhibit 17.1
hereof. The Management Committee shall identify major enhancements annually and
determine which of those will be part of the Required Services for the year.
10.3 Management Committee Direction. Each party shall abide by the
directions and plans of the Management Committee. The management process agreed
to by the parties hereto shall be as described in Exhibit 10.3 hereto.
10.4 Other Fiserv Projects. Any Fiserv contract or project proposed to be
entered into after the Effective Date with a party other than Northern Trust or
its affiliates that anticipates using the Transferred Assets or the former
Northern Trust employees working in the payment processing unit in connection
with such contract or project shall be pre-approved by a majority of the
Management Committee.
10.5 Problem Notification. In the event Fiserv becomes aware (either
through notification by Northern Trust or otherwise) of a Systems, software, or
Services event, occurrence, error, defect, or malfunction that Fiserv reasonably
believes would materially
12
<PAGE>
affect any of the Designated Services (each, a "Problem"), Fiserv shall promptly
notify the Northern Trust Project Manager or designated alternate of such
Problem. Fiserv shall treat such Problem as a priority and work diligently to
avert any adverse effect such Problem may have on the Services. If the Problem
is not corrected within 24 hours, Fiserv shall devote sufficient increased
resources to either treat the Problem or provide a work around acceptable to
Northern Trust. If the Problem has not been treated within two days, Fiserv
shall pay damages to Northern Trust as determined by the Management Committee,
with such damages to be governed pursuant to the provisions of this Agreement.
If more than one Problem arises or occurs at one time, the Northern Trust
Project Manager shall determine and inform Fiserv promptly as to the order of
priority in which such Problems shall be addressed and resolved.
10.6 Infiteq Alliance. Fiserv shall fund Northern Trust's membership in
this program.
ARTICLE 11. SOFTWARE.
11.1 Northern Trust Software.
(1) Subject to Article 12 hereof, Northern Trust hereby grants Fiserv
during the term hereof, a non-exclusive, non-transferable right to have access
to and to (a) operate and use as required to provide Services (i) Northern Trust
proprietary software operated and used by Transition Employees or other Northern
Trust employees prior to the Effective Date related to Designated Services,
including the proprietary software listed in Exhibit 11; and (ii) to the extent
mutually agreed, any Northern Trust proprietary software acquired by Northern
Trust after the Effective Date for use related to Services (collectively,
"Northern Trust Proprietary Software"); (b) operate and use as required to
provide Services (i) the software licensed or leased by Northern Trust from a
third party operational prior to the Effective Date related to Designated
Services, including the licensed or leased software listed in Exhibit 11; and
(ii) to the extent agreed upon by the parties, any software licensed or leased
by Northern Trust from a third party after the Effective Date for use related to
Services (collectively, "Northern Trust Third Party Software"); and (c) use any
documentation related to Northern Trust Proprietary Software or Northern Trust
Third Party Software in Northern Trust's possession on or after the Effective
Date ((a), (b) and (c) collectively, "Northern Trust Software"). Northern Trust
Software shall be the exclusive property of Northern Trust or its third-party
licensor, and Fiserv shall have no rights to or interests in Northern Trust
Software, except as described in this Section 11.1. Subject to Section 10.4,
Fiserv may use the Northern Trust Software to provide services for any entity
during the term of this Agreement. Nothing herein shall in any way affect
Northern Trust's rights to the Northern Trust Software, which except as
specifically described herein, remains absolute. Upon expiration or termination
of this Agreement and upon payment by Fiserv to Northern Trust of the then
current licensing
13
<PAGE>
fee, if any (so long as the licensing fee is no higher than the amount charged
to any other non-affiliated third party), Northern Trust shall deliver to Fiserv
a copy of, and hereby grants, or shall cause to be granted to Fiserv, for so
long as Fiserv is obligated to provide services to third parties under existing
agreements, a non-exclusive, non-transferable license to use and operate, and to
sublicense to a third party to have access to, operate, and use Northern Trust
Software and Developed Software. Upon the expiration or termination of (i) this
Agreement; and (ii) the license granted in the preceding sentence, the rights
granted to Fiserv in this Section 11.1 shall immediately revert to Northern
Trust.
(2) Fiserv may sublicense to Fiserv Agents (each of whom must be
specifically approved by Northern Trust) the right to have access to, operate,
and use Northern Trust Software to the extent set forth in Section 11.1(1) and
as may otherwise be mutually agreed.
(3) Upon expiration or termination of this Agreement for any reason, Fiserv
shall provide Northern Trust with all extant copies in its possession of
Northern Trust Software.
(4) Fiserv shall not reverse engineer or decompile Northern Trust Software.
11.2 Developed Software. Except as otherwise provided as part of a New
Services Schedule in accordance with Article 4, (1) any enhancements or
modifications to the Northern Trust Software shall be and shall remain the
exclusive property of Northern Trust or the applicable third party licensor
("Developed Software"). Fiserv shall provide Northern Trust with documentation
and source code for all Developed Software at the time the Developed Software
goes into use. (2) In consideration of the payments made by Northern Trust,
Fiserv hereby assigns to Northern Trust all right, title, and interest in
Developed Software. (3) Northern Trust hereby grants to Fiserv during the term
hereof, or until earlier termination, a non-exclusive, non-transferable right to
have access to, operate, and use Developed Software. (4) Fiserv may sublicense
to Fiserv Agents (each of whom shall be specifically approved by Northern Trust)
the right to have access to, operate, and use Developed Software during the term
of this Agreement and for so long thereafter as Fiserv is obligated to furnish
services to third parties under existing agreements. (5) Upon expiration or
termination of this Agreement for any reason, Fiserv shall deliver to Northern
Trust all extant copies in its possession of Developed Software.
11.3 Fiserv Software. (1) All software and related documentation (a) (i)
owned by Fiserv prior to the Effective Date or that Fiserv acquires ownership
after the Effective Date, which is used related to Services, including software
listed in Exhibit 13A; or (ii) developed by Fiserv after the Effective Date that
is not Developed Software (collectively, "Fiserv Proprietary Software"); or (b)
licensed or leased from a third party by Fiserv prior to or after the Effective
Date that is used related to Services, including software listed in
14
<PAGE>
Exhibit 13A ("Fiserv Third Party Software") ((a) and (b) collectively, "Fiserv
Software") shall be the exclusive property of Fiserv or its third-party
licensor, and Northern Trust shall have no rights to or interests in Fiserv
Software except as described in this Section 11.3. (2) Fiserv shall operate and
use Fiserv Software related to Services to provide the Designated Services at no
additional cost to Northern Trust other than as expressly provided in this
Agreement. (3) Northern Trust may sublicense to Northern Trust Agents (each of
whom shall be specifically approved by Fiserv) the right to have access to,
operate and use Fiserv Software. Upon expiration or termination of this
Agreement and upon payment by Northern Trust to Fiserv of the then current
licensing fee, if any (so long as the licensing fee is no higher than the amount
charged to any other non-affiliated third party), Fiserv shall deliver to
Northern Trust a copy of, and hereby grants, or shall cause to be granted to
Northern Trust, a non-exclusive, non-transferable license to use and operate,
and to sublicense to a third party to have access to, operate, and use Fiserv
Software. Upon the expiration or termination of (i) this Agreement; and (ii) the
license granted in the preceding sentence, the rights granted to Northern Trust
in this Section 11.3 shall immediately revert to Fiserv. (Northern Trust
Software, Developed Software, and Fiserv Software collectively, "Software.")
ARTICLE 12. REQUIRED CONSENTS.
12.1 Implementation Consents. Northern Trust shall use its commercially
reasonable efforts to obtain all consents, approvals, authorizations, notices,
requests, and acknowledgments necessary to allow Fiserv and Fiserv Agents to use
Northern Trust Software and Northern Trust Systems in order to provide Services
to Northern Trust ("Implementation Consents").
12.2 Termination Consents. Fiserv shall use its commercially reasonable
efforts to obtain all consents, approvals, authorizations, notices, and
acknowledgments necessary to allow Northern Trust and Northern Trust Agents to
continue to use Fiserv Software and Fiserv Systems, and to allow Fiserv to
assign or transfer third party agreements to Northern Trust pursuant to Article
28(4), upon expiration or termination of this Agreement for any reason
("Termination Consents"). The costs of obtaining the Termination Consents shall
be the responsibility of the party or parties as set forth below:
(1) in the event of a termination of this Agreement pursuant to Section
25.1, the costs of obtaining the Termination Consents shall be paid by Northern
Trust; and
(2) in the event of a termination of this Agreement pursuant to Section
25.2, the costs of obtaining the Termination Consents shall be paid by the
defaulting party.
12.3 General Obligations. Each party shall cooperate with and, at the
other's request, assist it in obtaining Implementation Consents and Termination
Consents (collectively, "Required Consents"). Fiserv and Northern Trust shall
each use
15
<PAGE>
commercially reasonable efforts to mitigate the expense of obtaining
Required Consents. In the event a party is unable to obtain any Required
Consents, the parties shall cooperate with each other in implementing a
reasonable work around.
ARTICLE 13. ASSETS TRANSFERRED.
13.1 Assets Transferred. On the Closing Date (as hereinafter defined),
Fiserv shall purchase from Northern Trust the assets specified in Exhibit 13A
("Assets"). The purchase price of each of the Assets shall be the net book value
of the Asset, as reflected on the books of Northern Trust. In addition, Fiserv
shall be responsible for and shall pay all sales, use, and other similar taxes
related to such transfer. On or before December 31, 1998 or such other date as
the parties may mutually agree (the "Closing Date"), Northern Trust shall assign
and transfer to Fiserv good title to Assets free and clear of all liens by
delivery of (1) a General Assignment and Bill of Sale in the form of Exhibit 13B
("General Assignment"), duly executed by each of Northern Trust and Fiserv; and
(2) such other good and sufficient instruments of conveyance, assignment, and
transfer to be prepared by Fiserv, in form and substance reasonably acceptable
to Northern Trust, as shall be effective to vest good and marketable title to
Assets in Fiserv. From and after the Effective Date, until the Closing Date,
Fiserv shall lease from Northern Trust the Assets, for a rental payment equal to
the book value depreciation of such Assets from and after the Effective Date to
and including the Closing Date.
13.2 Joint Verification. During the six-month period following the
Effective Date, Northern Trust and Fiserv each reserve the right to inventory
and validate the information set forth in Exhibit 13A. If any such information
should prove to be inaccurate or incomplete, an equitable adjustment to the
terms of this Agreement shall occur, as mutually agreed by the parties;
provided, however, that no such adjustment shall be required with respect to
inaccurate or incomplete information that has a de minimis financial effect.
ARTICLE 14. NORTHERN TRUST RETAINED RESPONSIBILITIES AND ACQUIRED SERVICES.
Unless provided by Fiserv as a New Service, Northern Trust shall be
responsible for the services set forth in Exhibit 14A, which shall be performed
at the respective service levels set forth in Exhibit 5.1 ("Retained
Responsibilities Service Levels"). Fiserv shall acquire the services and at the
cost listed on Exhibit 14B from Northern Trust ("Fiserv Acquired Services"). The
Parties by mutual agreement may also add to the list of Fiserv Acquired
Services, and designate associated costs of such services, on Exhibit 14B
hereafter.
16
<PAGE>
ARTICLE 15. THIRD PARTY CONTRACTS
15.1 Transferred Contracts. On the Effective Date, Northern Trust shall
transfer or assign Fiserv the agreements, including all rights and
responsibilities thereunder, for assets and facilities leased or licensed by
Northern Trust or an affiliate and third party services identified in Exhibit
15.1. During the six-month period following the Effective Date, Northern Trust
and Fiserv each reserve the right to inventory and validate the information set
forth in Exhibit 15.1. If such information should prove to be inaccurate or
incomplete, an equitable adjustment to the terms of this Agreement shall occur,
as mutually agreed by the parties; provided, however, that no such adjustment
shall be required with respect to inaccurate or incomplete information that has
a de minimis effect.
15.2 Fiserv Administration. Except as provided in Section 15.6, Fiserv
shall be responsible, as of the Effective Date, for managing (including paying
any fees or expenses due under such agreements to Northern Trust or the
applicable third party vendor, as the case may be), administering, and
maintaining agreements for assets and facilities leased or licensed by Northern
Trust or an affiliate and third party services that Northern Trust has not
assigned to Fiserv pursuant to Section 15.1 and that are (1) identified in
Exhibit 15.2; (2) reasonably necessary to provide Designated Services to
Northern Trust; and (3) retained by Northern Trust or an affiliate in Northern
Trust's or such affiliate's name ("Third Party Resources"). Fiserv shall
provide Northern Trust with updates to Exhibit 15.2 periodically during the
Term. Fiserv shall provide Northern Trust with reasonable notice of any
renewal, termination, or cancellation dates and fees in respect of Third Party
Resources. Fiserv may, to the extent permitted by the agreements in respect of
Third Party Resources ("Third Party Resources Agreements"), modify, terminate,
or cancel any such Third Party Resources Agreements. Any modification,
termination, or cancellation fees or charges imposed upon Northern Trust related
to any such modification, termination, or cancellation shall be paid by Fiserv.
15.3 Performance Under Third Party Resources Agreements. Northern Trust
and Fiserv shall each promptly inform the other of any breach, misuse, or fraud
related to any Third Party Resources Agreements of which it becomes aware and
shall cooperate with the other party to prevent or stay any such breach, misuse,
or fraud. Each party shall pay all amounts due for any penalties or charges
(including amounts due to a third party as a result of such party's failure to
promptly notify the other party pursuant to the preceding sentence, legal
expenses, and other incidental expenses) incurred by such party as a result of
such party's performance or nonperformance of its obligations with respect to
Third Party Resources Agreements.
15.4 Third Party Invoices. Except as otherwise directed by Northern
Trust,
17
<PAGE>
Fiserv shall (1) receive all invoices submitted by third parties related to
Third Party Resources ("Third Party Resources Invoices"); (2) review and correct
any errors in Third Party Resources Invoices in a timely manner; and (3) pay
Third Party Resources Invoices prior to the due date. Fiserv shall be
responsible for any late fees in respect of Third Party Resources Invoices.
15.5 Appointment as Agent. To the extent permitted by Third Party
Resources Agreements, Northern Trust hereby appoints Fiserv as its sole, limited
purpose agent for all matters pertaining to such Third Party Resources
Agreements.
15.6 Northern Trust Retained Responsibilities. Northern Trust shall
retain all rights and responsibilities in and to those agreements for assets and
facilities leased or licensed by Northern Trust or an affiliate and third party
services identified in Exhibit 15.6. Upon Northern Trust's request, and at
Northern Trust's expense with Northern Trust's prior approval and solely to the
extent such information and cooperation requires resources other than those
provided related to Services, Fiserv shall (1) provide Northern Trust with
information relating to the agreements identified in Exhibit 15.6; and (2)
cooperate as reasonably required by Northern Trust or its affiliates in order
for Northern Trust or its affiliates or Northern Trust's or its affiliates'
customers to conduct business in the ordinary course.
ARTICLE 16. HUMAN RESOURCES.
16.1 Transition Period. Commencing on the Effective Date and continuing
through December 31, 1998, ("Transition Period"), Northern Trust shall be
responsible for all costs and expenses relating to Transitioned Employees, who
are listed on Exhibit 16.1, incurred or accrued prior to the Effective Date.
Fiserv shall be responsible for all costs and expenses related to Transitioned
Employees incurred or accrued from and after the Effective Date, as described in
Section 16.4 hereof. From the Agreement Date until the Effective Date, Northern
Trust shall not, without Fiserv's prior written consent, enter into any new
written or oral employment agreement with any Transitioned Employee. Fiserv and
Northern Trust shall cooperate during the Transition Period to facilitate salary
reviews and appropriate increases for non-officer employees.
16.2 Transitioned Employees. Fiserv shall take over the employment
relationship with respect to those individuals listed in (1) Exhibit 16.1 who
are active employees of Northern Trust or its affiliates as of January 1, 1999;
and (2) Exhibit 16.2 who are on a granted leave (paid or unpaid) from active
employment with Northern Trust (which entailed performing services that are
Designated Services hereunder) for reasons (e.g., leave of absence or
disability) other than layoff ("Transitioned Employees"), as of the Start Date
(as defined in Section 16.3 hereof) for each such Transitioned Employee. Fiserv
shall offer each Transitioned Employee for the period on and after the Start
Date a
18
<PAGE>
comparable position (a) requiring comparable skills and job responsibilities;
(b) with substantially equivalent hours and shifts; and (c) with a title
comparable to that held by such Transitioned Employees as of the Effective Date.
Such offer shall be for employment at will. Each employment offer shall include
(i) an initial base salary equal to the salary paid to such Transitioned
Employee by Northern Trust as of the Effective Date, with such salary to be
increased as of the Start Date to compensate for any premium increase such
Transitioned Employees may incur when electing comparable medical and/or dental
coverage under the 1999 Fiserv plans as compared to the 1999 Northern Trust
plans, (ii) additional compensation under rate structures for overtime and shift
differential equivalent to Northern Trust rates as of the Effective Date, if
any; (iii) an employment designation for such Transitioned Employee to either
(x) the Northern Trust Service Location where the Transitioned Employee
performed services as of the Effective Date; or (y) a Service Location within
the downtown Chicago area; and (iv) with respect to Transitioned Employees, the
benefits package described in Section 16.6 applicable to such Transitioned
Employees. Northern Trust shall provide Fiserv with the 1998 salary plan and
performance review dates, if any, after the Effective Date for each Transitioned
Employee.
16.3 Hiring Requirements. Fiserv shall hire on the terms and conditions
contained in this Article 16 (1) those Transitioned Employees listed in Exhibit
16.1 who transition to Fiserv as of January 1, 1999 and (2) those Transitioned
Employees listed in Exhibit 16.2 who accept an offer no later than 30 days after
the date they would otherwise be reinstated by Northern Trust in the absence of
this Agreement. Transitioned Employees who accept an employment offer with
Fiserv shall become Fiserv employees on the Start Date, which shall mean either
(a)January 1, 1999; or (b) with respect to any Transitioned Employee listed in
Exhibit 16.2 who returns to active status with Northern Trust and accepts the
Fiserv offer, the later of (i)January 1, 1999; (ii) the Fiserv offer acceptance
date; or (iii) the return date to active status. Notwithstanding anything else
contained herein, Fiserv shall not have to offer employment to any employee who
is not able to start employment with Fiserv by July 1, 1999. Except as provided
in Section 16.4, Fiserv shall have no responsibilities with respect to
Transitioned Employees who decline employment with Fiserv.
16.4 Transition Period Responsibilities. During the Transition Period,
Transitioned Employees shall perform their duties related to this Agreement
under Northern Trust's direction. Fiserv shall reimburse Northern Trust, by
applying credits against Designated Fees pursuant to Section 19.9 for an amount
equal to 124% of the applicable salary expenses incurred by Northern Trust,
together with reimbursing Northern Trust for all shift differentials, overtime,
and all associated accrued bonus expense incurred by Northern Trust for
Transitioned Employees after the Effective Date.
16.5 Minimum Employment Period. Those Transitioned Employees who accept
an employment offer from Fiserv (1) shall not be terminated by Fiserv prior to
19
<PAGE>
January 1, 1999 ("Minimum Employment Period"); provided, however, that nothing
herein shall limit Fiserv's right to modify pay, benefit and terms and
conditions of employment, or to terminate a Transitioned Employee's employment
for reasons based on cause or unsatisfactory performance or conduct
("Termination Reasons"), to be determined in Fiserv's reasonable discretion; and
(2) may be reassigned during the Conversion Period to a Service Location or any
other location in the downtown Chicago area. Notwithstanding the foregoing, if
an employee is terminated by Fiserv (other than for Termination Reasons) during
the Minimum Employment Period, Fiserv shall pay such employee severance in an
amount equal to the greater of (i) the severance benefits payable under any
Fiserv severance plan or arrangement applicable to the employee at such time and
(ii) the severance benefits payable to such employee under the applicable
Northern Trust severance guidelines as of the Effective Date.
16.6 Benefits Generally. As of the Start Date for each Transitioned
Employee, Fiserv shall provide such Transitioned Employee with coverage under
benefit plans, programs, policies, and arrangements maintained by Fiserv for its
employees generally ("Fiserv Benefits Plans"), including those set forth in
Exhibit 16.6. Fiserv reserves the right to implement changes in Fiserv Benefit
Plans. As of the Start Date for each Transitioned Employee, Fiserv shall provide
credit for each Transitioned Employee's service with Northern Trust as such
actual service may be recognized for such Transitioned Employee under the
benefit plans, programs, policies, and arrangements maintained by Northern Trust
for its employees ("Northern Trust Benefits Plans") immediately prior to their
Start Date for purposes of eligibility, participation, vesting of, and
qualification for benefits under Fiserv Benefits Plans; provided, however, that
with respect to Fiserv's sabbatical plan each Transitioned Employee shall be
credited with 25% of such Transitioned Employee's actual service with Northern
Trust, up to a limit of five years of total credit toward the Fiserv sabbatical
plan. In addition, Fiserv shall make available to Transitioned Employees
immediate coverage under Fiserv's life insurance and disability plans as of the
Transitioned Employee's Start Date, without any waiting period, and Fiserv shall
waive application of any preexisting conditions provisions under said plans.
Fiserv shall be required to waive such preexisting conditions provisions only
for the level of coverage elected at Northern Trust immediately prior to the
Transitioned Employee's Start Date, subject to the maximum level of coverage
under Fiserv Benefits Plan.
16.7 401(k) Plan. Each offer to Transitioned Employees shall include
participation in the Fiserv 401(k) Savings Plan, subject to Fiserv's 401(k)
Savings Plan's eligibility criteria identified in Exhibit 16.6 ("Fiserv 401(k)
Savings Plan"); provided, however, that Transitioned Employees' service with
Northern Trust set forth in Exhibit 16.1 shall be added to such employees'
length-of-service with Fiserv when calculating eligibility and vesting for such
Transitioned Employees under the Fiserv 401(k) Savings Plan. Fiserv shall cause
the Fiserv 401(k) Savings Plan to accept a direct rollover of cash or the
equivalent of the vested account balance under The Northern Trust
20
<PAGE>
Company Thrift-Incentive Plan (other than Northern Trust Corporation Common
Stock and after-tax contributions made by a Transitioned Employee) and vested
accrued benefit under The Northern Trust Company Pension Plan of each
Transitioned Employee wishing to make such a rollover, to the extent permissible
under applicable law. Fiserv will provide a one-time 401(k) loan rollover
opportunity when distributions from The Northern Trust Company's TIP plan are no
longer limited by the "same desk" rule. Northern shall assist Fiserv in the
transition of such loans by combining the employee rollover requests for a
single submission of all such requests to the administrator of the Fiserv 401(k)
Savings Plan at the agreed upon time. Fiserv shall provide Northern Trust with
any information that Northern Trust reasonably requests (such as a Transitional
Employee's date of termination of employment with Fiserv) to enable Northern to
administer The Northern Trust Company Thrift-Incentive Plan in compliance with
the requirements applicable to section 401(k) plans under the Internal Revenue
Code.
16.8 Health Benefits. Each offer to Transitioned Employees shall include
for such Transitioned Employee and any insured dependents participating in
Northern Trust health benefits plan ("Northern Trust Health Benefits Plan"), the
ability to participate in the health, dental, and vision benefits package
identified in Exhibit 16.6 ("Fiserv Health Benefits Plan") immediately as of the
Start Date, without any waiting period. Fiserv shall waive application of any
preexisting conditions provision under Fiserv Health Benefits Plan to any
Transitioned Employee or covered dependents under such plans ("Insured
Dependents") as of the Start Date for each Transitioned Employee provided such
Transitioned Employee, or Insured Dependents, are participating in the Northern
Trust Health Benefit Plan. Northern Trust shall retain all liability under the
Northern Trust Health Benefits Plan with respect to claims incurred by each
Transitioned Employee or Insured Dependents prior to the Start Date for such
Transitioned Employee. For this purpose, a claim is deemed to have been incurred
when the medical or other service giving rise to the claim is performed. In the
event any Transitioned Employee or Insured Dependent is hospitalized on or prior
to the Start Date for such Transitioned Employee, then to the extent Northern
Trust Health Benefits Plan would otherwise have covered hospital-related claims
through the date of such individual's discharge, Northern Trust shall be
responsible for such claims and Fiserv shall have no liability with respect
thereto.
16.9 Vacation. Fiserv shall provide each Transitioned Employee annual
vacation days at the greater of (1) the number of days such Transitioned
Employee would be eligible for under Fiserv's vacation policy determined by
using aggregate service of such Transitioned Employee at Northern Trust and
Fiserv; and (2) the annual vacation allotment that each such Transitioned
Employee would have been entitled to receive under the Northern Trust vacation
plan as of the Start Date for each Transitioned Employee. Notwithstanding the
foregoing, no Transitioned Employee shall receive more than four weeks of annual
vacation from Fiserv from and after such time as such employee becomes eligible
for a sabbatical under the Fiserv sabbatical plan.
21
<PAGE>
16.10 Tuition. As of the Start Date, Fiserv shall reimburse Transitioned
Employees who meet requirements for reimbursement under Northern Trust's tuition
plan for all course work of a Transitioned Employee approved by Northern Trust
prior to the Effective Date (1) then in progress; or (2) paid for by the
Transitioned Employee, but not yet commenced. The amount of such reimbursement
shall be reduced by the amount of any outstanding tuition advance made by
Northern Trust to such Transitioned Employee. The amount so reimbursed to a
Transitioned Employee by Fiserv shall be repaid to Fiserv by Northern Trust. For
each Transitioned Employee who, for any course work approved by Northern Trust
prior to the Effective Date, has not submitted completed course work
documentation to Northern Trust as of the Start Date, Northern Trust will
furnish Fiserv with the approved education memorandum and the amount of all
tuition advanced outstanding with respect to such course work. For courses that
were approved by Northern Trust prior to the Effective Date, Fiserv shall (a)
provide to Northern Trust copies of all required documentation provided by
Transitioned Employees of grades received and the bursar's receipt; and (b)
promptly notify Northern Trust of any Transitioned Employee who (i) has a
tuition advance and leaves employment with Fiserv; or (ii) notifies Fiserv that
he or she has not met the requirements for reimbursement. Commencing on the
Effective Date and subject to the Transitioned Employee accepting Fiserv's
employment offer, Fiserv shall be responsible for (x) approving all courses
subject to tuition reimbursement; and (y) with respect to any courses so
approved by Fiserv, paying any tuition reimbursement requests in accordance with
Fiserv's tuition plan.
16.11 Human Resource Information. Fiserv and Northern Trust shall provide
the other, on a continuing basis without charge, such information regarding
Transitioned Employees as reasonably requested in order to permit proper
administration of various benefit plans applicable to Transitioned Employees.
Northern Trust shall provide Fiserv with the salary, last salary increase date,
and amount, shift, shift differentials, job function, date of performance
evaluations, health insurance coverage, numbers of supplemental life insurance
levels elected under Northern Trust plans (if any), corporate title (if any),
and Northern Trust (equated) hire date for each Transitioned Employee who
accepts an employment offer with Fiserv pursuant to Section 16.3. The parties
hereto acknowledge and agree that all personnel files, with the exception of
current discipline documentation and the employee's latest performance appraisal
for each of the Transitioned Employees representing their period of employment
with Northern Trust are and remain the property of Northern Trust. On or prior
to the Start Date, Northern Trust will take possession of such files, and Fiserv
specifically covenants and agrees to cooperate in such project.
16.12 No Hiring. Except as otherwise provided under this Agreement,
neither Northern Trust nor Fiserv shall, without the other party's consent, for
a period of 24 months after the Effective Date, solicit or hire then-current
employees of the other party that (1) performed services under or participated
in the negotiations with respect to this
22
<PAGE>
Agreement; and (2) had significant direct contact with the soliciting or hiring
party while performing such Services. This restriction shall not apply to any
employees who are given employment termination notices by the other party or to
persons responding to general, published solicitations of employment.
ARTICLE 17. REPORTS AND DATA.
17.1 Reports. Fiserv shall provide Northern Trust those reports (1)
prepared by Northern Trust as of the Effective Date; and (2) described in
Exhibit 17.1 (collectively, "Reports"). Reports shall be prepared by Fiserv and
provided to Northern Trust according to the schedules set forth in Exhibit 17.1
and in substantially the same form as in effect as of the Effective Date unless
otherwise mutually agreed.
17.2 Inspection of Reports. Northern Trust shall (1) inspect and review
Reports; and (2) provide Fiserv with a notice of any errors or inaccuracies in
(a) daily and weekly Reports within 5 days of receipt; and (b) in monthly or
other Reports within 10 days of receipt.
17.3 Northern Trust Data Ownership. All data and information, including
checks, drafts, check issuance files, stop payment instructions, and other
instruments and items, submitted to Fiserv by Northern Trust or Northern Trust
customers in connection with Services ("Northern Trust Data") is and shall
remain Northern Trust's or its affiliates' property or property of their
respective customers, as applicable. Northern Trust Data shall not be (1) used
by Fiserv and Fiserv Agents other than in connection with providing Services;
(2) sold, assigned, or leased to third parties by Fiserv and Fiserv Agents; or
(3) commercially exploited by or on Fiserv's or Fiserv Agents' behalf.
17.4 Errors Correction. Fiserv shall promptly correct at its expense any
errors or inaccuracies in Northern Trust Data and Reports caused by Fiserv or
Fiserv Agents. At Northern Trust's expense, Fiserv shall promptly correct (a)
any other errors or inaccuracies in Northern Trust Data and Reports; and (b) any
errors or inaccuracies identified by Northern Trust after the applicable review
period expiration described in Section 17.2. Northern Trust is responsible for
(i) Northern Trust Data accuracy and completeness; and (ii) any errors or
inaccuracies in and with respect to data obtained from Fiserv or Fiserv Agents
because of any inaccurate or incomplete Northern Trust Data. Fiserv is
responsible for all of the completeness of the Reports and any errors or
inaccuracies in its data or Reports.
17.5 Return of Data. Except to the extent that Northern Trust's request
requires resources other than those provided related to Designated Services, in
which case the time and material charges set forth in Exhibit 19.1 shall apply,
Fiserv shall on (1) Northern Trust's request at any time; and (2) upon
Termination Assistance Services cessation, (a) promptly return to Northern
Trust, in the format and on the media mutually
23
<PAGE>
agreed, all or part of Northern Trust Data; and (b) erase or destroy all or part
of Northern Trust Data in Fiserv's possession prior to Termination Assistance
Services cessation after successfully returning Northern Trust Data pursuant to
this Section 17.5. Archival tapes containing any Northern Trust Data shall be
used solely for back-up purposes. Fiserv shall be relieved of its obligations to
provide Services (except for any Termination Assistance Services to the extent
such Termination Assistance Services can be provided without such Northern Trust
Data) should Northern Trust require Fiserv to erase or destroy all Northern
Trust Data in its possession prior to cessation of all Termination Assistance
Services.
17.6 Data Retention. Fiserv and Northern Trust shall each make and
maintain tapes or other medium containing copies of any Northern Trust Data then
residing on Systems ("Data Tapes") in accordance with the Data Retention
Schedule set forth in Exhibit 17.6. On request, authorized Fiserv and Northern
Trust personnel shall be permitted access at any time to any facilities used to
store Data Tapes during normal business hours and subject to any reasonable
security and confidentiality procedures or other restrictions in effect at such
facilities. Fiserv and Northern Trust shall each maintain Data Tapes copies for
at least the period specified in Exhibit 17.6 from the date each such Data Tape
was made. Fiserv shall maintain its Data Tape copies at locations other than the
Service Locations.
ARTICLE 18. CONTINUED PROVISION OF SERVICES.
18.1 Disaster Recovery Plan. Fiserv shall (1) maintain during the
applicable Site Conversion Period and, in the event of a disaster, implement the
on-site and off-site disaster recovery procedures in effect at each Northern
Trust Service Location as of the Effective Date; (2) implement disaster recovery
procedures in respect of Fiserv Service Locations; and (3) implement disaster
recovery procedures in respect of the Northern Trust Service Locations after the
Conversion Period (collectively, "Disaster Recovery Plan"); (4) periodically
update and test twice a year, with Northern Trust's participation, Disaster
Recovery Plan operability; (5) provide Northern Trust with a current Disaster
Recovery Plan copy; (6) certify the Disaster Recovery Plan is fully operational
at least once every Contract Year; (7) implement the Disaster Recovery Plan upon
the occurrence of a disaster (a) at any Service Location; or (b) otherwise
affecting Services provision or receipt (a "Disaster"); (8) consult with
Northern Trust regarding Services priority during pendency of a Disaster ; and
(9) gain Northern Trust's written approval to the Disaster Recovery Plan not
less often than every six months during the Term of the Agreement. In the event
of a Disaster and as part of the Disaster Recovery Plan, Fiserv shall restore
those services designated in the Disaster Recovery Plan as critical services
("Critical Services") in accordance with the Disaster Recovery Plan. After the
Effective Date, Fiserv may, upon approval of Northern Trust, modify or change
the Disaster Recovery Plan at any time; provided, however, that such change or
modification shall not adversely
24
<PAGE>
affect Fiserv's obligation to restore Services in accordance with this Section
18.1, Article 4, and Section 18.2. The Northern Trust Disaster Recovery Plan is
set forth in Exhibit 18.1.
18.2 Force Majeure. Neither Northern Trust nor Fiserv shall be liable for
a failure or delay in the performance of its obligations pursuant to this
Agreement, including in the event of failure or delay in respect of providing
Services, (1) provided that such failure or delay (a) could not have been
prevented by reasonable precautions; and (b) cannot reasonably be circumvented
by the non-performing party through the use of alternate sources, work around
plans, or other means; and (2) if such failure or delay is caused, directly or
indirectly, by fire, flood, earthquake, elements of nature or acts of God, acts
of war, terrorism, riots, civil disorders, rebellions or revolutions in the
United States, strikes, lockouts or labor difficulties, or any other similar
causes beyond the reasonable control of such party ("Force Majeure Event"). Upon
the occurrence of a Force Majeure Event, the non-performing party shall be
excused from any further performance of those of its obligations pursuant to
this Agreement affected by the Force Majeure Event for as long as (i) such Force
Majeure Event continues; and (ii) such party continues to use commercially
reasonable efforts to recommence performance. The party delayed by a Force
Majeure Event shall (x) promptly notify the other party by telephone (to be
confirmed in writing within 5 days of the inception of such delay) of the
occurrence of a Force Majeure Event; and (y) describe in reasonable detail the
circumstances causing the Force Majeure Event.
ARTICLE 19. PAYMENTS TO FISERV.
19.1 Designated Fees. In consideration of Fiserv providing Designated
Services, Northern Trust shall pay Fiserv the fees based on unit prices and
volume of each item processing Service as set forth in Exhibit 19.1 ("Designated
Fees"). The fee for Services in any month Services are performed shall be the
product of volume of items processed in that month multiplied by the applicable
unit price set forth in Exhibit 19.1 (as such unit prices may be amended from
time to time pursuant to this Agreement). Fiserv shall submit to Northern Trust
monthly invoices on the 15th day of each month for the following month in
respect of each Service containing (a) estimated Designated Fees applicable to
such Service ("Estimated Designated Fees"); (b) estimated postage for the
following month and other estimated direct, out-of-pocket disbursements for such
following month that are payable by Fiserv for Northern Trust's account pursuant
to this Agreement ("Estimated Out-of-Pocket Expenses"), and, if applicable, any
estimated New Service Fees and Development Fees, as defined in Exhibit 19.1,
(collectively, "Estimated Additional Fees"). (Estimated Designated Fees,
Estimated Out-of-Pocket Expenses, and Estimated Additional Fees collectively,
"Estimated Fees".) During the first quarter of the first Contract Year,
Estimated Designated Fees per month shall be $2,046,083 and Estimated Out-of-
Pocket Expenses per month shall be $76,000. (3) (a) Estimated
25
<PAGE>
Designated Fees and Estimated Out-of-Pocket Expenses for every other month
during the Term; and (b) all Estimated Additional Fees shall be agreed upon by
Northern Trust and Fiserv annually and shall be based on the actual volume of
Additional Fees during the preceding 6-month period (adjusted appropriately to
reflect known or anticipated changes in such volumes). Unless Northern Trust
disputes in good faith Estimated Fees within 30 days of receipt of the
applicable invoice, Northern Trust shall pay the invoice provided to Northern
Trust pursuant to this Section 19.1 by direct deposit to an account designated
by Fiserv on the later of (i) 30 days from Northern Trust's receipt of such
invoice; or (ii) the 15th day of the month for which such estimate is provided.
Within 30 days after the end of the applicable month, Fiserv shall reconcile
Estimated Fees paid by Northern Trust for Services provided by Fiserv for the
month and Fees actually due to Fiserv based on Northern Trust's actual Services
volume for such month and adjust the next invoice by such amount by either
application of a credit or addition of Fees. Northern Trust shall notify Fiserv
within 10 days of Northern Trust's receipt of the next invoice and accompanying
Fee Reconciliation Statement as to whether Northern Trust approves or
disapproves of the credit or additional Fees and other amounts owed or credited
set forth in such next invoice. In the event Northern Trust disapproves of any
such amount or additional Fees or other amounts owed or credited set forth in a
subsequent invoices, Northern Trust shall provide Fiserv with a list of any such
amount or additional Fees of which Northern Trust disapproves within 20 days of
Northern Trust's receipt of such invoice, together with Northern Trust's reason
for such disapproval, and shall pay to Fiserv within 30 days of Northern Trust's
receipt of such subsequent invoice any undisputed amounts. Fiserv shall adjust
the next invoice to reflect the changes agreed on by Northern Trust and Fiserv.
At the end of every 6-month period of the Term, Northern Trust and Fiserv shall
review the volume of the Services during the preceding 6 months to determine
whether a sufficient change in volume has occurred to warrant an adjustment to
the Estimated Fees. If an adjustment is warranted, Northern Trust and Fiserv
shall adjust the Estimated Fees.
19.2 Fee Schedules During the Initial Term. The fee schedules as set
forth in Exhibit 19.1 shall remain fixed for the first three Contract Years.
Thereafter, the Fees shall be adjusted no more often than annually as follows.
First, such Fees shall be subject to adjustment only for such Contract Years
that occur after a preceding calendar year (or years, as the case may be) with
respect to which the increase in the Consumer Price Index for Urban Consumers,
published monthly by the U.S. Department of Labor, or any successor index, was
greater than 1%. Second, such Fees shall be adjusted only in accordance with the
following formula: 77%, such percent determined in Exhibit 19.2, multiplied by
the applicable annual increase in the CPI less 1% per annum. Any such adjustment
in the Fees shall be for the following period, until the next adjustment, if
any.
19.3 Fee Schedules During Renewal Term. Prior to any Renewal Term, the
parties shall negotiate in good faith to adjust the fee schedules which will
apply to the Renewal Term. If the parties cannot agree to these adjusted Fees
prior to the beginning
26
<PAGE>
of such Renewal Term, this Agreement will remain in effect, with fee schedules
unchanged, for an additional Contract Year; and at the end of such Contract
Year, this Agreement will terminate without payment of any termination fees or
Termination Losses.
19.4 New Service Fees. In consideration of Fiserv providing any New
Service, Northern Trust shall pay Fiserv fees in the amount and manner mutually
agreed in accordance with Article 4 ("New Service Fees"). (Designated Fees and
New Service Fees collectively, "Fees".)
19.5 Most Favored Customer. Fiserv's charges to Northern Trust for the
Services shall be at least as low as Fiserv's lowest charges for such services
to any of Fiserv's other customers for (1) similar volumes and (2) similar scope
of service and (3) similar performance standards, in each case subject to
appropriate adjustments (a) to reflect the geographic area in which services are
delivered and (b) to reflect any tradeoffs made between profit sharing, base
prices, subsidies and assumption of existing operations. Upon request, Fiserv
shall provide to Northern Trust a written certificate, signed by an officer of
Fiserv, certifying that this Section 19.5 has not been contradicted by any
transaction entered into, including any renewal or amendment of an existing
agreement, by Fiserv since the later of (i) the Effective Date or (ii) the date
of the most recent certification provided by Fiserv pursuant to this Section
19.5. If Fiserv is unable to provide such certificate because of any such
transaction entered into by Fiserv contradicting this Section 19.5, Fiserv shall
offer to Northern Trust an adjustment to the financial and other terms of this
Agreement, including, if appropriate, the lowest total charges included in any
such transaction.
19.6 Detailed Invoices. On Northern Trust's request, Fiserv shall provide
mutually agreeable invoices with varying degree of detail (e.g., per unit,
department, project).
19.7 Time of Payment. Any sum due Fiserv or Northern Trust pursuant to
this Agreement that is not being disputed in good faith by the other party and
for which payment is not otherwise specified shall be due and payable 30 days
after receipt by either party of an invoice or demand for payment. If either
party does not make payment when due for items not in dispute, the other party
may assess a late fee of 1 1/2% per month on the outstanding balance.
19.8 Payment of Termination Fees. Upon receipt by Fiserv of a termination
notice pursuant to Section 25.1, Fiserv shall calculate and notify Northern
Trust of the fixed termination fee amount payable to Fiserv pursuant to Section
26.1 as a result of the termination. This amount shall be payable to Fiserv on
the date Fiserv ceases providing the Services. The termination fee portions
covering documented losses related to closing down Service Locations shall be
payable by Northern Trust on the date the Service
27
<PAGE>
Location is shut down. Northern Trust may conduct or, at its option and expense,
engage a certified public accounting firm to conduct, within 60 days, an
examination of the termination fee payable pursuant to Section 26.1, including
the portion relating to Fiserv's documented losses from closing down Service
Locations in order to determine the accuracy of such termination fee (or portion
thereof). In the event that such audit reveals an error (other than a de minimis
error) in such termination fee amount payable pursuant to Article 26, including
the portion covering documented Losses, Fiserv shall pay the cost of such audit
or shall reimburse Northern Trust for the amount previously paid for such audit
unless contested by Fiserv pursuant to Article 29.
19.9 Set-Off Rights. (1) With respect to any amount payable to Northern
Trust by Fiserv pursuant to this Agreement, including any occupancy-related
charges owed to Northern Trust by Fiserv, in the event that earlier payment
dates are not specified for such amounts, or Fiserv has not paid such amounts
when due, Fiserv shall credit such amounts against Estimated Fees and Fees in
the month for which such amounts owed to Northern Trust were incurred by Fiserv
or as soon thereafter as such amounts are known. (2) With respect to any amount
not credited to Northern Trust pursuant to Section 19.9(1) that (a) was not
accounted for in an invoice; and (b) Northern Trust in good faith determines
should be reimbursed or is owed to Northern Trust, Northern Trust may, upon
notice to Fiserv, deduct the entire amount owed against Fees otherwise payable
to Fiserv under this Agreement until such time as the entire amount owed to
Northern Trust is paid.
19.10 Unused Credits. Any unused credits or charges against payments or
credits or charges owed to Northern Trust by Fiserv pursuant to this Agreement
that were not credited to Northern Trust pursuant to Section 19.9 or accounted
for in an invoice shall be paid to Northern Trust by Fiserv within 30 days of
the expiration or termination hereof for any reason.
19.11 Services Provided to Third Parties. Other than with respect to
clients of Fiserv that are such clients on the date hereof, if Fiserv provides
services to third parties at any Service Location, any volume for such services
shall be added to Northern Trust volumes for purposes of determining applicable
unit prices charged to Northern Trust. If after the Effective Date, any new
client relationship results in added volume for Fiserv at its Service Locations,
and if the efforts of Northern Trust have been material to gaining such new
relationship, Fiserv shall pay to Northern Trust an amount based upon the
profitability to Fiserv of such new relationship, as the parties shall hereafter
agree upon.
ARTICLE 20. TAXES.
(1) Northern Trust shall pay or reimburse and indemnify Fiserv, for any
sales, use or excise taxes imposed in connection with Fiserv's provision of
Services hereunder. (2)
28
<PAGE>
Northern Trust and Fiserv shall cooperate to segregate Fees into the following
separate payment streams: (a) those for taxable Services; (b) those for
nontaxable Services; (c) those for which a sales, use, or similar Tax has
already been paid by Fiserv; and (d) those for which Fiserv functions merely as
a Northern Trust paying agent in receiving goods, supplies, or services
(including leasing and licensing arrangements) that otherwise are nontaxable or
were previously subject to tax. (3) Fiserv and Northern Trust also agree that in
the event any Fees for Services that were nontaxable become taxable, or are
asserted to be taxable by any taxing authority, Fiserv will take all
commercially reasonably possible steps to restructure provision of those
Services in a manner reasonably acceptable to Northern Trust that would cause
those Services not to be taxable, or subject to any taxing authority's assertion
that those Services are taxable. (4) For purposes of this Article 20, "Taxes"
shall mean all sales, use, transfer, ad valorem, gross receipts, or excise taxes
and any other similar taxes, fees, duties, or imposts, plus any interest and
penalties imposed thereon, and all expenses incurred by Northern Trust related
to payment or settlement of or defense against any claim for such taxes.
ARTICLE 21. AUDITS AND REGULATORY EXAMINATIONS.
21.1 Processing. On notice from Northern Trust, Fiserv shall provide such
internal auditors, external auditors, and inspectors as Northern Trust or any
regulatory authority may designate, with reasonable access to Service Locations
to perform audits or inspections of Northern Trust's business (including
Fiserv's provision of Services). Fiserv shall provide such auditors and
inspectors any assistance that they may reasonably require. If any audit by an
auditor designated by Northern Trust or a regulatory authority having
jurisdiction over Northern Trust or Fiserv results in Fiserv being notified that
it is not in compliance with banking laws, regulations, policies, or
interpretations thereof promulgated by any regulatory authority, any generally
accepted accounting principles, or other audit requirements relating to
Services, Fiserv shall, within a reasonable period of time comply with such
audit or regulatory authority, with Northern Trust's approval and at Northern
Trust's expense; provided, however, that Fiserv shall bear such expense if it
fails to comply with procedures existing prior to the Effective Date, fails to
follow any relevant laws, regulations, or generally accepted accounting
principles, or fails to follow procedures in accordance with Designated
Services. If Fiserv is required to make changes or take corrective action as a
result of such audit or regulatory examination, (1) Northern Trust will invite
Fiserv to participate in the Northern Trust response team discussions (without
such auditor or regulator); and (2) Northern Trust will invite Fiserv to offer
alternative solutions to such auditor or regulatory authority or participate in
discussions with such auditor or regulatory authority. If a change is required
by banking laws, regulations, policies, or interpretations thereof promulgated
by any regulatory authority (a "Required Change"), such change that is a New
Service shall be at Northern Trust's expense and a Change that is a modification
to a Designated Service shall be at Fiserv's expense.. In the event that either
Northern Trust or Fiserv is audited and a
29
<PAGE>
regulatory change is required, both parties shall engage in cooperative behavior
in order to implement such change.
21.2 Federal Reserve Examinations. The performance of some or all
Services is subject to regulation and examination by the Federal Reserve. Fiserv
shall submit to regulations and examinations by the Federal Reserve to the same
extent Northern Trust would submit to regulations and examinations by the
Federal Reserve if such regulations and examinations were performed by the
Federal Reserve on Northern Trust premises.
ARTICLE 22. CONFIDENTIALITY.
22.1 Definition.
(1) Northern Trust Information. "Northern Trust Information" means: (a)
confidential plans, customer lists, information, and other Northern Trust
proprietary material and (b) any information and data concerning the business
and financial records of Northern Trust's customers.
(2) Fiserv Information. "Fiserv Information" means: (a) confidential
plans, information, research, development, trade secrets, business affairs
(including that of any Fiserv customer, supplier, or affiliate), and other
Fiserv proprietary material; and (b) Fiserv's proprietary computer programs,
including custom software modifications, software documentation and training
aids, and all data, code, techniques, algorithms, methods, logic, architecture,
and designs embodied or incorporated therein (whether or not any such
information is marked with a restrictive legend).
(3) Information. "Information" means Northern Trust Information and
Fiserv Information. No obligation of confidentiality applies to any Information
that the receiving party ("Recipient") (a) already possesses without obligation
of confidentiality; (b) develops independently; or (c) rightfully receives
without obligation of confidentiality from a third party. No obligation of
confidentiality applies to any Information that is, or becomes, publicly
available without breach of this Agreement.
22.2 Obligations. Recipient agrees to hold as confidential all
Information it receives from the disclosing party ("Discloser"). All Information
shall remain the property of Discloser or its suppliers and licensors.
Information will be returned to Discloser at the termination or expiration of
this Agreement. Recipient will use the same care and discretion to avoid
disclosure of Information as it uses with its own similar information that it
does not wish disclosed, but in no event less than a reasonable standard of
care. However, Northern Trust's customer information shall be kept confidential
as provided by 205 ILCS 5/48.1. Recipient may use Information for any purpose
that does not violate such obligation of confidentiality. Recipient may disclose
30
<PAGE>
Information to (a) employees and employees of affiliates who have a need to
know; and (b) any other party with Discloser's written consent. Before
disclosure to any of the above parties, Recipient will have a written agreement
with such party sufficient to require that party to treat Information in
accordance with this Agreement. Recipient may disclose Information to the extent
required by law. However, Recipient agrees to give Discloser prompt notice so
that it may seek a protective order. The provisions of this Section 22.2 survive
any termination or expiration of this Agreement.
22.3 Residuals. Nothing contained in this Agreement shall restrict
Recipient from the use of any ideas, concepts, know-how, or techniques contained
in Information that are related to Recipient's business activities
("Residuals"), provided that in so doing, Recipient does not breach its
obligations under this Article 22. However, this does not give Recipient the
right to disclose the Residuals except as set forth elsewhere in this Agreement.
22.4 Systems. Each party's Systems contain information and computer
software that are proprietary and confidential information of, its suppliers,
and licensors. Each party agrees not to attempt to circumvent the devices
employed by the other to prevent unauthorized access to a system, including, but
not limited to, alterations, decompiling, disassembling, modifications, and
reverse engineering thereof.
22.5 Confidentiality of this Agreement. Fiserv and Northern Trust agree
to keep confidential the prices, terms and conditions of this Agreement, without
disclosure to third parties (except upon the request of bank regulators and as
required by law).
22.6 Injunctive Relief. Recipient recognizes that disclosure of
Information in respect of Discloser may give rise to irreparable injury to the
other party and acknowledges that remedies other than injunctive relief may not
be adequate. Accordingly, Discloser has the right to seek equitable and
injunctive relief without implementing dispute resolution procedures described
in Article 29 to prevent unauthorized possession, use, disclosure, or knowledge
of any Information, as well as to such damages or other relief as is occasioned
by such unauthorized possession, use, disclosure, or knowledge.
22.7 Legal Action. Recipient shall not commence any legal action or
proceeding in respect of any unauthorized possession, use, or knowledge, or
attempt thereof, of Discloser's Information by any person or entity, which
action or proceeding directly or indirectly identifies Discloser or its
Information without Discloser's prior written consent.
ARTICLE 23. REPRESENTATIONS AND WARRANTIES.
31
<PAGE>
23.1 By Northern Trust. Northern Trust represents and warrants that: (1)
it is an Illinois state bank; (2) it has all requisite power and authority to
execute, deliver, and perform its obligations hereunder; (3) the execution,
delivery, and performance of this Agreement are duly authorized; (4) any
approval, authorization, or consent of any government or regulatory agency, or
notice or filing required to be obtained or made by it in order for it to enter
into and perform its obligations under this Agreement shall be obtained or filed
prior to the Effective Date, or immediately upon notice that such approval,
authorization, consent, notice, or filing is required; (5) it shall comply with
all applicable Federal, state, and local laws and regulations, and shall obtain
all applicable permits and licenses in connection with its obligations under
this Agreement; (6) as of the Effective Date, it has not disclosed any Fiserv
Information; (7) as of Conversion, Designated Services shall not, and Northern
Trust Proprietary Software does not, infringe any third party proprietary
rights; (8) no outstanding litigation, arbitration, or other dispute to which
Northern Trust is a party exists that, if decided unfavorably to Northern Trust,
would have a material adverse effect on Northern Trust's ability to fulfill its
obligations under this Agreement; (9) it shall not incorporate into any Northern
Trust Software or Developed Software any (a) automatic shut-off devices or "time
bombs"; or (b) computer viruses or coding intended to corrupt, delete, or
otherwise render Fiserv Systems inaccessible; (10) to the knowledge of Northern
Trust, no circumstances of non-compliance by Northern Trust with any external
audit or regulatory authority exist as of the Effective Date; (11) Northern
Trust will not incur any additional costs or expenses in connection with its
performance of Designated Services from the Agreement Date to the Effective
Date, except (a) in the ordinary course of business consistent with past
practice; or (b) as otherwise provided under this Agreement; and (12) contracts
and agreements listed in Exhibit 15.1, Exhibit 15.2, and Exhibit 15.6 represent
all of the contractual arrangements used by Northern Trust as of the Effective
Date in order to perform services that are Designated Services under this
Agreement, other than contractual arrangements that (a) involve the payment by
Northern Trust of less than $10,000 annually; (b) can be terminated within 30
days after giving notice of termination, without resulting in any material cost
to Fiserv; (c) are specifically identified as not being assigned to Fiserv; or
(d) are incidental to occupancy of Northern Trust Service Locations; (13) the
assets transferred to Fiserv hereunder are substantially all the assets used by
Northern Trust in rendering the Designated Services as of the Effective Date;
(14) the personnel information concerning Transitioned Employees provided to
Fiserv hereunder is true and accurate in all material respects; and (15) the
services performed by Northern Trust prior to the date hereof corresponding to
the Services hereunder conform in all material respects to the descriptions of
such Services set forth in Exhibit 3.1.
23.2 By Fiserv. Fiserv represents and warrants that: (1) it is a
Wisconsin corporation, duly organized, validly existing, and in good standing
under the laws of Wisconsin; (2) it has all requisite power and authority to
execute, deliver, and perform its obligations hereunder; (3) the execution,
delivery, and performance of this Agreement are duly authorized; (4) it shall
comply with all applicable Federal, state, and local laws and
32
<PAGE>
regulations, and shall obtain all applicable permits and licenses, in connection
with its obligations under this Agreement; (5) as of the Effective Date it has
not disclosed any Northern Trust Information; (6) New Services, Fiserv Systems,
and Developed Software shall not, and Fiserv Software does not and shall not,
infringe any third party proprietary rights; (7) it shall not incorporate into
any Developed Software any (a) automatic shut-off devices or "time bombs"; or
(b) computer viruses or coding intended to corrupt, delete, or otherwise render
inaccessible Northern Trust Data or Northern Trust Systems; (8) Services shall
conform in all material respects to the descriptions set forth in Exhibit 3.1,
as may be amended from time to time; (9) any approval, authorization, or consent
of any government or regulatory agency, or notice or filing required to be
obtained or made by it in order for it to enter into and perform its obligations
under this Agreement shall be obtained prior to the Effective Date, or
immediately upon notice that such approval, authorization, consent, filing, or
notice is required; (10) the knowledge of Fiserv, no circumstances of material
non-compliance by Fiserv with any external audit or regulatory authority exists
as of the Effective Date; and (11) no outstanding litigation, arbitration, or
other dispute to which Fiserv is a party that, if decided unfavorably to Fiserv,
would have a material adverse effect on Fiserv's ability to fulfill its
obligations under this Agreement.
23.3 Year 2000. Fiserv represents and warrants that the Services, the
Fiserv Systems, the Fiserv Software and any software interfaces developed by
Fiserv is or shall be Millennium Compliant. Northern Trust represents and
warrants that the Northern Trust Systems, Northern Trust Software and any
software interfaces developed by or on behalf of (other than by Fiserv) Northern
Trust is or shall be Millennium Compliant by the Effective Date, except for the
Pegasus System. Each party covenants and agrees with the other that it shall
not cause any such Systems, Software or software interfaces received from the
other to fail to be Millennium Compliant. Millennium Compliant means that they
shall consistently function in the same manner after December 31, 1999 as they
were warranted to work before such date and shall correctly process dates
falling after December 31, 1999. Any modifications of Northern Trust Software
made to become Millennium Compliant shall be made by Fiserv as part of the
Required Services. Northern Trust shall have the right to review Fiserv's plan
and progress towards Millennium Compliance. In addition, upon reasonable
request by Northern Trust, Fiserv shall cooperate with Northern Trust in testing
(including integration testing with Northern Trust and Federal Reserve Testing)
to verify that it is Millennium Compliant as part of the Required Services.
Fiserv agrees to abide by the guidelines established by the Federal Financial
Institutions Examination Counsel (FFIEC) issued in connection with Year 2000.
ARTICLE 24. DISCLAIMER OF WARRANTIES.
EXCEPT AS SPECIFIED IN THIS AGREEMENT, NEITHER FISERV NOR NORTHERN TRUST
MAKES ANY OTHER WARRANTIES IN RESPECT OF
33
<PAGE>
SERVICES, SYSTEMS OR SOFTWARE, AND EACH EXPLICITLY DISCLAIMS ALL WARRANTIES,
EXPRESS OR IMPLIED, INCLUDING IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS
FOR A SPECIFIC PURPOSE.
ARTICLE 25. TERMINATION.
25.1 Termination for Convenience. Northern Trust may in its sole
discretion terminate this Agreement, in whole or in part, at any time with
respect to any period after the third Contract Year, without cause, upon at
least one year's notice to Fiserv (a "Termination for Convenience").
25.2 Termination for Cause. (1) If either party (a) fails to perform any
of its material obligations; or (b) breaches any of its material representations
under this Agreement and any such failure or breach is not cured within 30 days
after notice is given to the breaching party specifying the nature of the breach
(unless the defaulting party has demonstrated to the satisfaction of the other
party, acting reasonably, that it is proceeding with all due diligence to cure
or cause to be cured such breach), the non-breaching party may, upon further
notice given within 6 months after the end of the 30 day period to the breaching
party terminate this Agreement, in whole or in part, as of the date specified in
such notice of termination. (2) If (a) either party repeatedly fails to perform
any of its obligations or repeatedly breaches any of its representations under
this Agreement; and (b) such repeated failures or breaches taken together are
material in the aggregate as of the date of the most recent such failure or
breach even though cured, then (c) the non-breaching party may, upon notice
given within 6 months terminate this Agreement, in whole or in part, as of the
date specified in such notice of termination. (3) In the event of a termination
pursuant to Section 25.2(2), Northern Trust or Fiserv, as the case may be, may
only terminate (i) those parts of the Agreement that relate to such failures or
breaches; and (ii) such other parts of the Agreement that are affected adversely
or have become less effective or more costly, whether taken alone or together
with the terminated portions, and, therefore, would be rendered ineffective or
unpracticable as a result of terminating only those parts of the Agreement that
relate to such failures or breaches.
25.3 Early Termination. If the Agreement is terminated for cause under
Section 25.2 hereof at a time when the Designated Services are still being
performed predominantly at Northern Trust's existing location at the Canal
Center, 801 South Canal Street, Chicago, Illinois, then Northern Trust, at its
option exercised in writing at the time of such for cause termination, may treat
such termination as an early termination (the "Early Termination"), with the
consequences described herein. An Early Termination shall entail the re-
transfer of the check processing business back to Northern Trust. All employees
of the business will be transferred back to Northern Trust, and all assets used
or useful in the business will be transferred back from Fiserv to Northern Trust
at the
34
<PAGE>
price Fiserv paid for such assets, deducting any interim depreciation. Early
Termination shall not foreclose either party from seeking any other remedies
available to such party for breach of this Agreement or otherwise with respect
to the subject transaction. The parties shall cooperate with each other in case
of an Early Termination, using reasonable efforts to transfer the check
processing business back to Northern Trust as expeditiously and smoothly as
possible.
ARTICLE 26. TERMINATION FEES.
26.1 Termination for Convenience in Whole. In the event of a termination
of this Agreement in whole pursuant to Section 25.1, Northern Trust shall pay to
Fiserv a termination fee in an amount equal to applicable fees set forth in
Exhibit 26.1 for Termination for Convenience; and (2) Termination Losses, as
defined in Section 26.3 hereof.
26.2 Termination for Convenience in Part. In the event Northern Trust
terminates this Agreement in part pursuant to Section 25.1, Northern Trust shall
pay to Fiserv a termination fee in an amount equal to applicable fees set forth
in Exhibit 26.1 multiplied by a percentage equal to the percent by which
Designated Fees will be reduced as a result of such partial termination and
partial Termination Losses applicable thereto.
26.3 No Additional Fees. In the event of a termination of this Agreement
(except pursuant to Section 25.2 as a result of a breach by Northern Trust),
Northern Trust shall not pay to Fiserv any fees or charges other than the
applicable termination fees set forth in Section 26.1, Section 26.2, or Section
27.1. In the event of a termination other than pursuant to Section 25.1 or
Section 25.2 as a result of a breach by Northern Trust, Fiserv shall be
responsible for Termination Losses. "Termination Losses" shall mean any
documented losses directly incurred in connection with closing down Service
Locations as a result of such termination, including the unamortized portion of
any equipment and start-up costs incurred by Fiserv, severance with respect to
Fiserv Agents employed as of the date of notice of such termination, lease buy-
outs contained in contracts in effect as of the date of notice of such
termination for equipment, and documented losses directly incurred on leases or
sublets in effect as of the date of notice of such termination or required to be
renewed or entered into to provide services through the date of termination;
provided, however, (i) Fiserv uses its commercially reasonable efforts to
mitigate, and permits Northern Trust to mitigate, any Termination Losses payable
by Northern Trust pursuant to Section 26.1(2); (ii) Fiserv appoints Northern
Trust as its agent under any contracts pursuant to which Termination Losses are
incurred under Section 26.1(2) to mitigate any such Termination Losses; (iii)
leases entered into after the Effective Date for any affected Service Location
include customary sublet provisions; and (iv) prior to incurring any such
losses, the parties execute a written Termination Plan, that seeks to organize
the process of termination and, to the extent
35
<PAGE>
possible, minimize the losses resulting from such termination.
ARTICLE 27. TERMINATION ASSISTANCE.
27.1 Termination Assistance Services. On notice from Northern Trust to
Fiserv after a determination that an expiration or termination of this Agreement
will occur, Fiserv shall (1) on request by Northern Trust, cooperate with
Northern Trust in effecting the orderly Services transfer to a third party or
Services resumption by Northern Trust; (2) continue to perform those Designated
Services until the effective date of expiration or termination of this Agreement
("Conclusion Date"); (3) continue to perform those Designated Services requested
by Northern Trust after the Conclusion Date; and (4) perform such New Services
as may be requested by Northern Trust pursuant to Article 4 ("Termination
Assistance Services"). As specified and requested by Northern Trust on notice
to Fiserv, in the event of expiration or termination of this Agreement, subject
to price adjustments based on reductions in volumes, Fiserv shall continue to
provide Services, and Northern Trust shall pay applicable Fees for provision of
Termination Assistance Services (a) for up to one year after the Conclusion Date
("Termination Assistance Period") at the rates set forth in Exhibit 19.1; and
(b) for up to one year from Termination Assistance Period expiration at 150
percent of rates set forth in Exhibit 19.1.
27.2 Facilities, Assets, and Personnel. In the event of termination of
this Agreement pursuant to Article 25, other than pursuant to Section 25.1 or
Section 25.2 as a result of a breach by Northern Trust, Northern Trust shall
have the right to (1) at any or all Service Locations, acquire the assets
required to provide Services at such Service Locations, including facilities and
equipment, at the then-current asset book value, unless otherwise agreed upon by
the parties at the time of such termination; (2) subject to the provisions of
Article 11 hereof, use the Fiserv Software; and (3) offer employment to any
Fiserv staff working on Northern Trust's behalf. In the event a facility is
being used by Fiserv for the provision of services to customers in addition to
Northern Trust, Northern Trust and Fiserv shall cooperate to provide ongoing
services to Fiserv customers serviced at Service Locations for a reasonable
period of time, and in accordance with the terms of such customers' agreements
and pricing arrangement. Northern Trust and Fiserv shall cooperate to ensure a
smooth transition for the relevant workforce.
ARTICLE 28. EXIT PLAN.
Upon the expiration of this Agreement or termination of this Agreement:
(1) Fiserv shall provide Termination Assistance Services in accordance with
Section 27.1;
36
<PAGE>
(2) Northern Trust shall have the rights set forth in Section 27.2;
(3) each party shall have the rights specified in Article 11 in respect of
Software;
(4) on Northern Trust's request with respect to any contracts applicable
solely to services being provided to Northern Trust for maintenance, disaster
recovery services, and other necessary third party services (other than
subcontractor services) being used by Fiserv to perform Services as of the
expiration or termination, Fiserv shall transfer or assign such agreements to
Northern Trust or its designee, on terms and conditions acceptable to both
parties; and
(5) the parties shall pay the costs of obtaining Termination Consents as
set forth in Article 12.
ARTICLE 29. DISPUTE RESOLUTION.
29.1 Project Managers. All disputes shall initially be referred to the
Project Managers. If the Project Managers are unable to resolve the dispute
within 4 business days after referral to them, the parties shall submit the
dispute to the Management Committee.
29.2 Management Committee. The Management Committee shall meet at least
once every 30 days (or at such other time as either party may designate in a
notice to the other party) in person, by conference call, or video conference
for the purpose of resolving disputes that may arise under this Agreement. The
Management Committee shall consider disputes in the order such disputes are
brought before it. In the event the Management Committee is unable to resolve a
dispute within 5 business days of the meeting date during which such dispute was
considered, the Management Committee shall notify senior management of each
party pursuant to Section 29.3.
29.3 Senior Management. Either party may, upon notice and within 15 days
of receipt of a notice from the Management Committee pursuant to Section 29.2,
elect to utilize a non-binding resolution procedure whereby each presents its
case at a hearing ("Hearing") before a panel consisting of 2 senior executives
of each party and, if such executives can agree upon such an individual, a
mutually acceptable neutral advisor. If either party elects to use the
procedure set forth in this Section 29.3, the other party shall participate.
The Hearing will occur no more than ten days after a party serves notice to use
the procedure set forth in this Section 29.3. Each party may be represented at
the Hearing by lawyers. If the matter cannot be resolved at such Hearing by
such senior executives, the neutral advisor, if one has been agreed upon, may be
asked to assist such senior executives in evaluating the strengths and
weaknesses of each party's position on the dispute merits. Thereafter, such
senior executives shall meet and try again to resolve
37
<PAGE>
the matter. If the matter cannot be resolved at such meeting, such senior
executives shall inform their respective senior management and each party may,
but shall not be obligated to, submit to binding arbitration as provided for in
Section 29.4; the proceedings occurring pursuant to this Section 29.3 will be
without prejudice to either party's legal position. Except as set forth in
Section 29.4, no arbitration or litigation may commence concerning the dispute
until 10 business days have elapsed from the last day of the Hearing. The
parties shall each bear their respective costs incurred in connection with the
procedure set forth in this Section 29.3, except that they shall share equally
the fees and expenses of the neutral advisor, if any, and the Hearing facility
cost.
29.4 Arbitration. If a dispute is not resolved pursuant to Section 29.3, the
parties may agree, but shall not be obligated, within 60 business days after the
completion of the procedures set forth in Section 29.1, Section 29.2, and
Section 29.3, as appropriate, upon notice, to submit the dispute to formal
binding arbitration in accordance with this Section 29.4. If a party commences
litigation regarding such dispute, no arbitration may be commenced by the other
party regarding such dispute. If the parties agree to formal binding
arbitration, the following procedures shall apply:
(1) The arbitration shall be held in Chicago, Illinois before a panel of 3
arbitrators. Either Northern Trust or Fiserv may, by notice to the other party,
demand arbitration by serving on the other party a statement of dispute,
controversy, or claim and the facts relating or giving rise thereto, in
reasonable detail, and the name of the arbitrator selected by it.
(2) Within 30 days after receipt of such notice, the other party shall (a)
deny the request for arbitration or; (b) name its arbitrator. The two
arbitrators named by the parties shall, within 10 days after the date of such
notice, select the third arbitrator.
(3) The arbitration shall be governed by the Commercial Arbitration Rules of
the American Arbitration Association, as may be amended from time to time,
except as expressly provided in this Section 29.4; provided, however, that the
arbitration shall be administered by any organization agreed upon by the
parties. The arbitrators may not amend or disregard any provision of this
Section 29.4.
(4) The arbitrators shall allow such discovery as is appropriate for the
purposes of arbitration in accomplishing fair, speedy, and cost-effective
resolution of disputes. The arbitrators shall reference the rules of evidence of
the Federal Rules of Civil Procedure then in effect in setting the scope and
direction of such discovery. The arbitrators shall not be required to make
findings of fact or render opinions of law.
(5) The decision of and award rendered by the arbitrators shall be final and
binding on the parties. Judgment on the award may be entered and enforced by any
court of competent jurisdiction. The arbitrators shall have no authority to
award damages in
38
<PAGE>
excess of or in contravention of Article 31.
Except (a) for an action to seek injunctive relief to prevent a stay or
breach of Article 11, Article 22, or Section 29.6; or (b) any action necessary
to enforce the arbitrators' award, if submitted to arbitration, the provisions
of this Section 29.4 are a complete defense to any suit, action, or other
proceeding instituted in any court or before any administrative tribunal with
respect to any dispute, controversy, or claim related to this Agreement or the
creation, validity, interpretation, breach, or termination of this Agreement.
29.5 Critical Disputes. In the event either party determines that the
resolution of a dispute is critical to its business, such party may at any time
proceed directly to the stage described in Section 29.3 prior to the
commencement of an arbitration or litigation in respect of such dispute.
29.6 Continuity of Services. Northern Trust and Fiserv each acknowledges
that the provision of Services is critical to their respective business and
operations. Accordingly, in the event of a dispute between Northern Trust and
Fiserv pursuant to which Northern Trust believes in good faith it is entitled to
withhold payment and during the pendency of an arbitration pursuant to Section
29.4 or litigation, Fiserv shall continue to provide Services, and Northern
Trust shall continue to pay any undisputed amounts to Fiserv, in accordance with
Section 19.1, except that termination fees pursuant to Article 25 shall not be
covered by the foregoing ability to withhold payment. Northern Trust hereby
authorizes Fiserv to withhold all Termination Assistance and to retain all
Northern Trust property pending payment in full of termination fees payable
under Article 25.
ARTICLE 30. INDEMNIFICATION.
30.1 By Northern Trust. Northern Trust shall indemnify Fiserv, Fiserv
Agents, and Fiserv's officers, employees and directors from, and defend Fiserv,
Fiserv Agents, and Fiserv's officers, employees and directors against, any
losses, liabilities, and damages (including taxes and related penalties) and all
related costs and expenses, including, reasonable attorneys' fees and expenses
and costs of litigation, settlement, judgment, appeal, interest, and penalties
as relates to either party ("Losses") arising out of or relating to (1) any
claim by a third party that Northern Trust Proprietary Software, Developed
Software developed by Northern Trust or Northern Trust Agents, or Northern Trust
Systems infringe on any third party's proprietary rights (except as may have
been caused by a modification by Fiserv or Fiserv Agents); (2) any claim by a
third party in respect of services or systems provided by Northern Trust to such
third party; (3) any claim based on a Northern Trust act or omission in its
capacity as an employer and arising out of or relating to (a) Federal, state, or
other laws or regulations for the
39
<PAGE>
protection of persons or members of a protected class or category of persons;
(b) sexual discrimination or harassment; (c) work-related injury or death; (d)
accrued employee benefits, including (i) income, disability, withholding, and
other employment taxes; and (ii) medical benefit premiums, vacation pay, sick
pay, or other fringe benefits not expressly assumed by Fiserv; and (e) any other
employment relationship aspect between Northern Trust and such employee, or the
termination of such employment relationship (including claims for breach of an
express or implied contract employment) that, in all such cases, are
attributable to the period when the person asserting the claim was a Northern
Trust employee; (4) any claim based on the personal injury (including death) or
damage to property received or sustained (a) by reason of any act or omission,
whether negligent or otherwise, to the extent caused by Northern Trust or
Northern Trust Agents; and (b) at any Northern Trust locations, including
premises owned or leased by Northern Trust, or other Northern Trust property to
the extent not licensed or sublet to Fiserv or otherwise used by Fiserv; (5)
except as may arise pursuant to Section 30.2(1), any claim against Fiserv by a
third party arising out of Northern Trust's or Northern Trust Agents' use of any
Northern Trust Third Party Software; (6) any costs incurred by Fiserv resulting
from a breach of a Northern Trust representation or warranty in this Agreement;
and (7) fees and expenses incurred in enforcement of this indemnity by Fiserv.
30.2 By Fiserv. Fiserv shall indemnify Northern Trust, Northern Trust
Agents, and Northern Trust's officers, employees and directors from, and defend
Northern Trust, Northern Trust Agents, and Northern Trust's officers, employees
and directors against, any Losses arising out of or relating to (1) any claim by
a third party that Services, Developed Software developed by Fiserv or Fiserv
Agents, Fiserv Software, or Systems infringe on any third party's proprietary
rights (except as may have been caused by modification by Northern Trust or
Northern Trust Agents); (2) any claim by a third party in respect of services or
systems provided by Fiserv to such third party; (3) any claim based on a Fiserv
act or omission in its capacity as an employer and arising out of or relating to
(a) Federal, state, or other laws or regulations for the protection of persons
or members of a protected class or category of persons; (b) sexual
discrimination or harassment; (c) work-related injury or death; (d) accrued
employee benefits, including (i) income, disability, withholding, and other
employment taxes; and (ii) medical benefit premiums, vacation pay, sick pay, or
other fringe benefits not retained by Northern Trust; and (e) any other
employment relationship aspect between Fiserv and such employee (including
Fiserv's hiring procedures from and after the Effective Date in respect of
Transitioned Employees), or the termination of such employment relationship
(including claims for breach of an express or implied contract of employment)
that, in all such cases, are attributable to the period when the person
asserting the claim (i) was a Fiserv employee; and (ii) the claim arose on or
after the Effective Date; (4) any claim by a Northern Trust Agent based on a
Fiserv act or omission during the Transition Period arising out of or relating
to (a) Federal, state, or other laws or regulations for the protection of
persons or members of a protected class or category of persons; (b) sexual
discrimination or harassment; and (c) work-related injury or death; (5) any
claim by a
40
<PAGE>
Transitioned Employee based on a violation or alleged violation by Fiserv or a
Fiserv Agent during the Transition Period of a Northern Trust employment
practice, policy, or procedure contained in Northern Trust's manual for
employees, as set forth in Exhibit 30.2; (6) any claim based on the personal
injury (including death) or damage to property received or sustained (a) by
reason of any act or omission, whether negligent or otherwise, to the extent
caused by Fiserv or Fiserv Agents; and (b) at any Fiserv locations including
premises owned, leased, licensed, subleased, or sublicensed by Fiserv, or other
Fiserv property; (7) except as may arise pursuant to Section 30.1(1), any claim
against Northern Trust by a third party arising out of the use by Northern
Trust, Northern Trust Agents, Fiserv, or Fiserv Agents of any Fiserv Third Party
Software (except as may be caused by Northern Trust's or Northern Trust Agents'
use of Fiserv Third Party Software in violation of Fiserv Third Party Software
licenses); (8) any costs incurred by Northern Trust resulting from a Fiserv
breach of a representation or warranty in this Agreement; (9) any claim based on
the disclosure by Northern Trust to Fiserv, and the use by Fiserv, of any
personnel information with respect to Transitioned Employees including, without
limitation, any information with respect to employee demographics, job
performance, compensation, or benefits; and (10) fees and expenses incurred in
enforcement of this indemnity by Northern Trust.
30.3 Indemnification Procedures. If any third party makes a claim covered
by Section 30.1 or Section 30.2 against any indemnitee (an "Indemnitee") with
respect to which such Indemnitee intends to seek indemnification under Section
30.1 or Section 30.2, such Indemnitee shall give notice of such claim to the
indemnifying party (under Section 30.1 or Section 30.2) ("Indemnifying Party")
including a brief description of the amount and basis therefore, if known. Upon
giving such notice, the Indemnifying Party shall be obligated to defend such
Indemnitee against such claim, and shall be entitled to assume control of claim
defense with counsel chosen by the Indemnifying Party. The Indemnitee shall
cooperate fully with, and assist, the Indemnifying Party in its defense against
such claim. The Indemnifying Party shall keep the Indemnitee fully apprised at
all times as to status of the defense. Notwithstanding the foregoing, the
Indemnitee shall have the right to employ its own separate counsel in any such
action, but the fees and expenses of such counsel shall be at such Indemnitee's
expense; provided, however, (1) if the parties agree that it is advantageous to
the defense for the Indemnitee to employ its own counsel; or (2) in the
reasonable judgment of the Indemnitee, based upon an opinion of counsel that
shall be provided to the Indemnifying Party, a conflict of interest exists with
respect to such claim, then reasonable fees and expenses of the Indemnitee's
counsel shall be at the Indemnifying Party's expense as the Indemnitee accrues
such fees and expenses, provided that the Indemnifying Party approves such
counsel. Neither the Indemnifying Party nor any Indemnitee shall be liable for
or bound by any settlement of any action or claim effected without its consent.
Notwithstanding the foregoing, the Indemnitee shall retain, assume, or
resume sole control over any and all expenses relating to every aspect of
defense that it believes
41
<PAGE>
is not the subject of the indemnification provided for in Section 30.1 or
Section 30.2.
Until both (1) the Indemnitee receives notice from the Indemnifying Party
that it will defend; and (2) the Indemnifying Party assumes such defense, the
Indemnitee may, at any time after 10 days from the date notice of claim is given
to the Indemnifying Party by the Indemnitee, resist or otherwise defend the
claim or, after consultation with and consent of the Indemnifying Party, settle
or otherwise compromise or pay the claim. The Indemnifying Party shall pay all
Indemnitee costs related to that defense and any such settlement, compromise, or
payment. The Indemnitee shall keep the Indemnifying Party fully apprised at all
times as to status of the defense.
Following indemnification as provided in Section 30.1 or Section 30.2, the
Indemnifying Party shall be subrogated to all rights, subject to Section 30.4,
of the Indemnitee with respect to the matters for which indemnification has been
made.
30.4 Contribution. Notwithstanding anything to the contrary contained in
this Agreement, Northern Trust and Fiserv shall contribute to amounts paid or
payable as a result of any Losses referred to in Section 30.1(2) or Section
30.2(2) in such proportion as is appropriate to reflect the relative fault of
Northern Trust, on the one hand, and Fiserv, on the other hand, in connection
with actions or omissions that resulted in such Losses, as well as any other
relevant equitable considerations. Northern Trust and Fiserv agree that it would
not be just and equitable if contributions pursuant to this Section 30.4 were to
be determined by any method of allocation that does not take account of the
equitable considerations referred to in the first sentence of this Section 30.4.
30.5 18 Month Limitation on Certain Claims. Notwithstanding anything else
contained herein, any claim for indemnification hereunder relating to
representations or warranties must be made within 18 months of the date hereof.
ARTICLE 31. DAMAGES AND LIMITATION OF LIABILITY.
31.1 Direct Damages. Northern Trust and Fiserv each shall be liable to the
other party for any direct damages relating to its performance or breach of any
of its representations or warranties under this Agreement; provided, however,
that the liability of each party relating to all claims for damages pursuant to
this Section 31.1 arising in a particular Contract Year shall not exceed
$4,000,000 ("Yearly Damage Cap"), so long as Fiserv shall keep in full force and
effect commercial insurance insuring against damages greater than $4 million in
any Contract Year suffered by anyone from errors and omissions of its employees.
The premium for such insurance shall be divided equally by the parties hereto.
(1) The following shall be considered Northern Trust direct damages, and
Fiserv shall not assert that they are indirect, incidental, special, or
consequential damages or lost
42
<PAGE>
profits or otherwise not recoverable pursuant to Section 31.2 to the extent they
result from Fiserv's failure to provide Services in accordance with this
Agreement:
(a) costs of recreating or restoring any Northern Trust Data or information
lost or damaged;
(b) costs of implementing a work around in respect of a failure to provide
all or a portion of Services;
(c) costs of replacing lost or damaged Northern Trust Systems, Northern
Trust Software, Developed Software, and materials;
(d) costs incurred by Northern Trust to procure Services from an alternate
source, to the extent that such costs exceed the amount that would have been
owed or paid, as may be applicable, by Northern Trust to Fiserv for such
services;
(e) fines or penalties imposed on Northern Trust by any government or
regulatory agency as a result of such failure to the extent that such fine or
penalty is not a result of Services performed in a manner (i) required by
Northern Trust; or (ii) consistent with the procedures and practices in place as
of the Effective Date;
(f) costs of remedying processing errors and processing delays, including
costs of reconstructing lost, damaged, or destroyed cash letters and other
items;
(g) liability to bank customers or other financial institutions under the
Uniform Commercial Code or the Electronic Funds Transfer Act or under any other
regulation or statute for any errors in providing the Services, including
without limitation liability for the loss of use of any funds incurred by reason
of any error or omission calculated at the applicable Federal Funds rate at the
time of such error or omission; and
(h) straight time, overtime, or related expenses incurred by Northern
Trust, including wages and salaries of additional employees, travel expenses,
overtime expenses, telecommunication charges, and similar charges, due to
Fiserv's failure to provide all or a portion of Services or incurred in
connection with (a) through (g) above.
(2) The following shall be considered Fiserv direct damages, and Northern
Trust shall not assert that they are indirect, incidental, special, or
consequential damages or lost profits or otherwise not recoverable pursuant to
Section 31.2 to the extent that they result from Northern Trust's failure to
provide Northern Trust Retained Services in accordance with this Agreement:
(a) costs of recreating or restoring any Fiserv data or information lost or
damaged;
43
<PAGE>
(b) costs of implementing a work around in respect of a failure to provide
all or a portion of Northern Trust Retained Services;
(c) costs of replacing lost or damaged Fiserv equipment, Fiserv Systems,
Fiserv Software, Developed Software, and materials;
(d) costs and expenses incurred by Fiserv to procure from an alternate
source the services provided by Northern Trust as part of Northern Trust
Retained Responsibilities and services provided under Northern Trust Retained
Agreements, to the extent such services are necessary to provide Services;
(e) costs of remedying processing errors and processing delays, including
cost of reconstructing lost, damaged, or destroyed documents and other items;
and
(f) straight time, overtime, or related expenses incurred by Fiserv,
including wages and salaries of additional employees, travel expenses, overtime
expenses, telecommunication charges, and similar charges, due to Northern
Trust's failure to provide all or a portion of services provided by Northern
Trust as part of Northern Trust Retained Responsibilities and services provided
under Northern Trust Retained Agreements or incurred in connection with (a)
through (f) above.
(3) Intentionally Omitted
(4) If, at any time, either Northern Trust or Fiserv has received damages
from the other party pursuant to this Section 31.1, and recovers funds,
payments, and costs from a third party relating to damages for which the other
party is liable, the amounts so recovered (less the costs of recovery and
amounts paid to the other party) shall be remitted to the other party. A party
liable pursuant to this Section 31.1 shall seek recovery in respect of any
insured liability from its insurance carrier to the greatest extent pursuant to
this Agreement and as promptly as possible. The proceeds of such insurance
shall be used to reimburse the other party for any damages sustained by the
other party in excess of those reimbursed pursuant to the first paragraph of
Section 31.1. When insurance proceeds are received, the party who has sustained
damages shall be paid in addition to any amount previously paid with respect to
such damages no more than the amount of insurance proceeds paid covering such
damages.
(5) For purposes of Section 31.1(1) and Section 31.1(2), actions taken
during a given month or on or prior to a particular date shall mean actions
taken with respect to items processed or Services rendered by Fiserv or Northern
Trust during such month or on or prior to such date, as the case may be,
regardless of when resolved or written off. Actions shall include any acts or
omissions of Fiserv or Fiserv Agents or Northern Trust or Northern Trust Agents
in performing Services.
44
<PAGE>
31.2 Consequential Damages. Neither Fiserv nor Northern Trust shall be
liable for any indirect, incidental, special, or consequential damages or lost
profits of the other party relating to either party's performance under this
Agreement.
31.3 Fiserv Credits. In the event Fiserv fails to provide Services in
accordance with Service Levels (as defined in Exhibit 5.1), the Management
Committee will determine the amount of charges to be incurred by Fiserv ("Fiserv
Credits") against Estimated Fees and Fees owed to Fiserv in the month in which
such Fiserv Credits were incurred. In determining such Fiserv Credits,
consideration must be given to the impact on Northern Trust and its customers of
such failure, the severity of such failure (including the dollar value, volume
effect, duration, and number of customers affected by such failure), and such
other measures as may be relevant under the circumstances. The amount of such
Credits should be a percentage of Estimated Fees and Fees paid for the
particular Service that was not performed as required pursuant to this
Agreement. Such Credits will be in addition to any Damages for which Fiserv may
be liable to Northern Trust pursuant to Section 31.1.
31.4 Northern Trust Credits. In the event Northern Trust provides the
Northern Trust Retained Services in such a way that it adversely affects
Fiserv's ability to perform the Services, fails to provide Northern Trust
Retained Services at Retained Responsibilities Service Levels or fails to
provide Fiserv Acquired Services at Acquired Services Service Levels, the
Management Committee will determine the amount of charges to be incurred by
Northern Trust and payable to Fiserv as additional Fees ("Northern Trust
Credits") in the month in which such Northern Trust Credits were incurred.
(Fiserv Credits and Northern Trust Credits collectively, "Credits"). In
determining such Northern Trust Credits, consideration must be given to the
impact on Fiserv of such failure, the severity of such failure (including the
dollar value, volume effect, duration, and number of customers affected by such
failure), and such other measures as may be relevant under the circumstances.
The amount of such Credits shall be a percentage of Fiserv's incremental costs
(other than those paid as damages pursuant to Section 31.1) as a result of
Northern Trust not performing the particular Northern Trust Retained Service as
required pursuant to this Agreement. Such Credits will be in addition to any
damages for which Northern Trust may be liable to Fiserv pursuant to Section
31.1.
31.5 Exclusions. The limitations or exculpations of liability set forth in
Section 31.1 and Section 31.2 are not applicable to (1) the failure of either
party to make payments or issue Credits; (2) a breach of Article 22; or (3)
liability resulting from a party's bad faith, gross negligence, or willful
misconduct.
31.6 Acknowledgment. Fiserv acknowledges that Fiserv Credits, and Northern
Trust acknowledges that termination fees set forth in Article 26 and Northern
Trust Credits, are each liquidated damages for loss of the bargain, are not a
penalty, and are a
45
<PAGE>
reasonable approximation of Northern Trust's and Fiserv's liquidated damages
under the circumstances as can best be determined as of the Effective Date.
Northern Trust and Fiserv each acknowledge that the limitations and exclusions
contained in this Article 31 are the subject of active and complete negotiation
between the parties and represent the parties' agreement based upon the level of
risk to Northern Trust and Fiserv associated with their respective obligations
under the Agreement.
ARTICLE 32. MISCELLANEOUS.
32.1 Assignment and Subcontractors. Fiserv shall not, without Northern
Trust's consent, assign this Agreement or any amounts payable pursuant to this
Agreement. Northern Trust agrees that Fiserv may subcontract any Services to be
performed hereunder. Any such subcontractors shall be required to comply with
all applicable terms and conditions. Northern Trust's consent to any assignment
or subcontracting shall not relieve Fiserv of any of its obligations whatsoever
under this Agreement. This Agreement shall be binding on the parties and their
respective successors and permitted assigns. Any assignment in contravention of
this Section 32.1 shall be void.
32.2 Notices. All notices, requests, approvals, consents, and other
communications required or permitted under this Agreement shall be in writing
and shall be sent by telecopy to the telecopy number specified below and the
party sending such notice shall telephone to confirm receipt. A copy of any
such notice shall also be sent by registered express mail or courier with
capacity to verify receipt of delivery on the date such notice is transmitted by
telecopy to the address specified below:
In the case of Fiserv:
Mr. Kenneth R. Jensen
Chief Financial Officer
Fiserv Solutions, Inc.
255 Fiserv Drive
Brookfield, WI 53045
Telecopy No.: 414-879-5245
With a copy to:
Charles W. Sprague, Esq.
General Counsel
Fiserv, Inc.
255 Fiserv Drive
Brookfield, WI 53045
Telecopy No.: 414-879-5532
46
<PAGE>
In the case of Northern Trust:
John Van Pelt
Vice President
The Northern Trust Company
50 South LaSalle Street
Chicago, Illinois 60675
Telecopy No.: (312)
With a copy to:
James I. Kaplan, Esq.
Associate General Counsel
The Northern Trust Company
50 South LaSalle Street, M-9
Chicago, Illinois 60675
Telecopy No.: (312) 444-4134
Telecopy No.:
Either party may change its address or telecopy number for notification purposes
by giving the other party notice of the new address or telecopy number and the
date upon which it will become effective.
32.3 Counterparts. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one single agreement
between the parties.
32.4 Headings. The Article and Section headings and the table of contents
are for reference and convenience only and shall not be considered in the
interpretation of this Agreement.
32.5 Relationship. Except as otherwise provided in this Agreement,
Fiserv's performance of its duties and obligations under this Agreement shall be
that of an independent contractor. Nothing contained in this Agreement shall
create or imply an agency relationship between Fiserv and Northern Trust, nor
shall this Agreement be deemed to constitute a joint venture or partnership
between the parties. The parties agree that they will file all Federal, state,
and local income tax returns in a manner consistent with the fact the parties
are not partners in a partnership for income tax purposes.
32.6 Consents, Approval, and Requests. Except as specifically set forth in
this Agreement, all consents, approvals, acceptance, or similar actions to be
given by either party under this Agreement shall not be unreasonably withheld or
delayed and each party
47
<PAGE>
shall make only reasonable requests under this Agreement.
32.7 Severability. If any provision of this Agreement is held to be
unenforceable or invalid, the other provisions shall continue in full force and
effect.
32.8 Waiver. Either party's failure to insist on strict performance of any
of the provisions hereunder shall not be construed as the waiver of any
subsequent default of a similar nature.
32.9 Publicity. Each party shall submit to the other all advertising,
written sales promotion, press releases, and other publicity matters relating to
this Agreement in which the other party's name or mark is mentioned or language
from which the connection of said name or mark may be inferred or implied, and
shall not publish or use such advertising, sales promotion, press releases, or
publicity matter without the other party's approval. Whenever required by
reason of legal, accounting, or regulatory requirements, a party may disclose
all or any part of this Agreement following reasonable notice to the other
party, and after satisfying all reasonable means for masking, deleting, or
otherwise protecting all or portions of this Agreement. Notwithstanding the
foregoing, each party may disclose the existence and general relationship by
this Agreement but not the terms and conditions of this Agreement.
32.10 Entire Agreement. This Agreement, including its Exhibits, which are
expressly incorporated herein by reference, constitutes the complete and
exclusive statement of the agreement between the parties as to the subject
matter hereof and supersedes all previous agreements with respect thereto. No
amendment to, or change, waiver, or discharge of, any provision of this
Agreement shall be valid unless in writing and signed by an authorized party
representative against which such amendment, change, waiver, or discharge is
sought to be enforced. Each party hereby acknowledges that it has not entered
into this Agreement in reliance upon any representation made by the other party
not embodied herein.
32.11 Interpretation of Documents. In the event of a conflict between
this Agreement and any New Services schedule, the terms of such New Services
Schedule shall prevail.
32.12 Governing Law. This Agreement shall be governed by the substantive
laws of the State of Illinois, without reference to provisions relating to
conflict of laws.
32.13 Survival. All rights and obligations of the parties under this
Agreement that, by their nature, do not terminate with the expiration or
termination of this Agreement shall survive the expiration or termination of
this Agreement.
32.14 Third Party Beneficiaries. Each party intends that this Agreement
shall
48
<PAGE>
not benefit or create any right or cause of action in or on behalf of any
person or entity other than Northern Trust and Fiserv.
32.15 Covenant of Further Assurances. Northern Trust and Fiserv each
agree that, subsequent to the execution and delivery of this Agreement and
without any additional consideration, Northern Trust and Fiserv each shall
execute and deliver any further legal instruments and perform any acts that are
or may become necessary to effectuate the purposes of this Agreement and to
establish or confirm Northern Trust's or Fiserv's ownership of Developed
Software.
32.16 Interpretation of Certain Terms. All usage of the word "including"
or the phrase "e.g.," in this Agreement shall mean "including, without
limitation," throughout this Agreement.
32.17 Insurance. During the Term, Fiserv shall maintain at its sole
expense the following insurance with financially sound and reputable insurers.
Within a reasonable period of time after the Conversion Period, and annually
thereafter, Northern Trust and Fiserv shall review the amounts of insurance
coverage required pursuant to this Agreement. Consideration shall be given to
Fiserv's performance and changes of volume, dollar value, mix of Services, and
processing risks (based on the use of such technology), in determining whether
recalibration of coverage is required.
(1) Insurance covering all risks of loss or damage to any checks and other
items and data (including Reconstruction Costs) from any cause while in Fiserv's
or Fiserv Agents' possession in an amount not less than $5 million per
occurrence. For the purposes hereof, "Reconstruction Costs" includes actual
market value of lost, damaged, or destroyed Securities at the close of business
on the business day immediately preceding the day on which the loss is
discovered, or for more than the actual cost of replacing Securities, whichever
is less, plus the cost to post any required Lost Instrument Bonds. Such costs
shall be paid by Fiserv's insurance carrier. Valuation shall also include the
cost of blank books, pages, tapes, or other blank materials to replace lost or
damaged books of account or other records; the actual cash value at time of loss
of other lost, damaged, or destroyed property or for more than the actual cost
of repairing or replacing the property with property of similar quality and
value, whichever is less. For purposes hereof, "Securities" means all
negotiable and non-negotiable instruments or contracts representing either money
or other property, including Northern Trust Data, revenue, and other stamps in
current use, tokens and tickets, but not including money.
(2) Worker's Compensation Insurance as mandated or allowed by the laws of
the state in which the services are being performed, including at least
$500,000 coverage for Employer's Liability.
(3) Commercial General Liability Insurance in an amount not less than $1
million
49
<PAGE>
per occurrence for claims arising out of bodily injury and property damage,
personal injury, and Broad Form Contractual Liability Insurance to insure
against any liability arising out of this Agreement.
(4) Automobile Liability and Property Damage insurance on vehicles, if any,
used to transport Northern Trust Data or other items in an amount not less than
$1 million per occurrence for bodily injury and property damage, including
vehicles for hire coverage.
(5) Commercial Crime Insurance, including fidelity, transit, and premises,
in an amount not less than $5 million per occurrence, which shall respond to any
loss involving Northern Trust Data under Fiserv's care, custody, and control.
(6) Errors and Omissions/Professional Liability Insurance in an amount not
less than $5 million per occurrence, which shall include coverage for claims for
loss or liability to third parties (including customers of Northern Trust)
arising out of Fiserv's performance of, or failure to perform, its obligation to
Northern Trust under this Agreement.
Simultaneously with Fiserv's execution of this Agreement and annually
thereafter Fiserv shall deliver to Northern Trust original certificates issued
by the insurers evidencing the coverage required by this Section 32.17. Each
certificate must unequivocally specify that at least 60 days' notice shall be
given to Northern Trust in the event of any material change or cancellation of
coverage for any reason.
32.18 Marketing Assistance. Fiserv shall assist Northern Trust in
marketing the Services to potential clients. Northern Trust will contact the
Fiserv Project Manager to assist Northern Trust in retaining existing clients
and assisting in new business development, including working with designated
Northern Trust employees to respond to Request for Proposals, develop marketing
materials and standard proposal documentation. Fiserv will respond to all
client or prospect proposals within 5 business days of a Northern Trust request,
with either the requested materials or a plan to provide such materials within a
reasonable time period. Fiserv, at the request of Northern Trust, will attend
client and prospect meetings to make presentations on Fiserv capabilities.
Northern Trust will contact the Fiserv Project Manager to make available Fiserv
conducted tours of its facilities during normal business hours.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their duly authorized representatives as of the date indicated below.
For Northern Trust: For Fiserv:
THE NORTHERN TRUST COMPANY FISERV SOLUTIONS, INC.
50
<PAGE>
By: By:
------------------------------ ----------------------------
Name: James J. Mitchell Name: Leslie M. Muma
Title: Executive Vice President Title: President
Date: October 20, 1998 Date: October 20, 1998
51
<PAGE>
EXHIBIT NUMBER (13)
TO 1998 FORM 10-K
NORTHERN TRUST CORPORATION
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Northern Trust Corporation (Corporation) is a bank holding company
organized in 1971 to hold all of the outstanding capital stock of The Northern
Trust Company (Bank), an Illinois banking corporation with its headquarters
located in the Chicago financial district. The Corporation also owns banks in
Florida, Arizona, California, Texas, Colorado and Michigan and various other
nonbank subsidiaries, including a securities brokerage firm, an international
investment consulting firm and a retirement services company. Although the
operations of other subsidiaries will be of increasing significance, it is
expected that the Bank will continue to be the major source of the consolidated
assets, revenues and net income in the foreseeable future.
All references to "Northern Trust" refer to Northern Trust Corporation and
its subsidiaries on a consolidated basis.
The Management's Discussion and Analysis of Financial Condition and Results
of Operations should be read in conjunction with Northern Trust's Consolidated
Financial Statements and Consolidated Financial Statistics included herein.
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
OVERVIEW. Net income for 1998 totaled a record $353.9 million, a 14.4%
increase from the $309.4 million earned in 1997 which in turn was 19.5% greater
than the $258.8 million earned in 1996. The record 1998 net income performance
produced a return on average common stockholders' equity of 20.5% compared with
20.2% in 1997 and 18.6% in 1996. The return on average assets was 1.30% in 1998
compared with 1.29% in 1997 and 1.23% in 1996.
1998 marks the eleventh consecutive year of record earnings. Trust fees,
net interest income and treasury management fees were all at record levels,
while trust assets under administration reached $1.26 trillion at December 31,
1998, up $180.4 billion from a year ago. Strength in all of Northern Trust's
diversified revenue sources produced a 13% increase in revenues while operating
expenses increased by 12%, resulting in a record productivity ratio of 159%.
Stockholders' equity grew to $1.94 billion, as compared to $1.74 billion at
December 31, 1997 and $1.54 billion at December 31, 1996, primarily through the
retention of earnings, offset in part by the repurchase of common stock
pursuant to the Corporation's share buyback program.
The Board of Directors increased the quarterly dividend per common share
14.3% in November 1998, to $.24 from $.21, for a new annual rate of $.96. This
is the twelfth consecutive year in which the dividend rate has been increased.
The Board's action reflects a policy of increasing the dividend rate with
increased profitability while retaining sufficient earnings to allow for
strategic expansion and the maintenance of a strong balance sheet and capital
ratios.
Northern Trust's strategy will continue to focus on growing its two sharply
defined businesses: Corporate and Institutional Services (C&IS) and Personal
Financial Services (PFS). C&IS focuses on administering and managing domestic
and global investment pools for corporate and institutional clients worldwide.
PFS provides financial services to individuals and closely held businesses
through a unique seven-state personal financial services franchise. An
important element in this strategy is increasing the penetration of the C&IS
and PFS target markets with investment products and services provided by a
third business unit, Northern Trust Global Investments (NTGI). In executing
this strategy,
<TABLE>
<CAPTION>
SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA
- ------------------------------------------------------------------------------
(In Millions Except Per Share
Information) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Noninterest Income
Trust Fees $ 816.3 $ 689.2 $ 594.4 $ 505.3 $ 453.4
Other Noninterest Income 255.3 245.3 185.6 173.1 180.0
Net Interest Income 477.2 438.2 388.3 357.6 334.6
Provision for Credit Losses 9.0 9.0 12.0 6.0 6.0
Noninterest Expenses 997.1 891.8 768.9 709.5 700.5
Provision for Income Taxes 188.8 162.5 128.6 100.5 79.3
- ------------------------------------------------------------------------------
Net Income $ 353.9 $ 309.4 $ 258.8 $ 220.0 $ 182.2
- ------------------------------------------------------------------------------
Net Income Applicable to Common Stock $ 349.0 $ 304.4 $ 253.9 $ 211.5 $ 174.9
- ------------------------------------------------------------------------------
Per Common Share
Net Income
Basic $ 3.15 $ 2.74 $ 2.27 $ 1.91 $ 1.62
Diluted 3.04 2.66 2.21 1.86 1.58
Dividends Declared .87 .75 .65 .55 .46
- ------------------------------------------------------------------------------
Average Total Assets $27,191 $24,052 $20,964 $19,409 $17,886
Senior Notes at Year-End 700 785 305 17 547
Long-Term Debt at Year-End 458 440 428 335 245
Debt-Floating Rate Capital Securities
at Year-End 267 267 -- -- --
</TABLE>
22
<PAGE>
NORTHERN TRUST CORPORATION
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Northern Trust emphasizes service quality through a high level of personal
service complemented by the effective use of technology. Operating support for
these business units is provided through the Worldwide Operations and
Technology business unit (WWOT). Expense growth and capital expenditures are
closely monitored to ensure that short- and long-term business strategies and
performance objectives are effectively balanced.
NONINTEREST INCOME. Noninterest income represented 68% of total taxable
equivalent revenue in 1998, compared with 66% one year ago. Noninterest income
totaled $1.1 billion in 1998, $934.5 million in 1997, and $780.0 million in
1996.
TRUST FEES. Trust fees accounted for 76% of total noninterest income and
52% of total taxable equivalent revenue in 1998. Trust fees for 1998 increased
18% to $816.3 million from $689.2 million in 1997 which was up 16% from $594.4
million in 1996. Trust fees have increased at a compound growth rate of 15% for
the past five years. Total trust assets under administration at December 31,
1998 were $1.26 trillion compared to $1.08 trillion a year ago, an increase of
17%. Trust assets under management, included in the above, increased 20% to
$236.0 billion, from $196.6 billion at the end of 1997.
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, North-
ern 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 typi-
cally have a proportionate impact on the level of trust fees. In addition,
C&IS trust relationships are increasingly priced to reflect earnings from ac-
tivities such as custody-related deposits and foreign exchange trading which
are not included in trust fees. Custody-related deposits maintained with bank
subsidiaries and foreign branches are primarily interest-bearing and aver-
aged $6.0 billion in 1998 and $5.4 billion in 1997.
Northern Trust's fiduciary business encompasses Master Trust, Master
Custody, investment management and retirement services for corporate and
institutional asset pools, as well as a complete range of estate planning,
fiduciary and asset management services for individuals. Fees from these
services are fairly evenly distributed between Northern Trust's two principal
business units, C&IS and PFS. A discussion of each of these business units and
NTGI follows.
Corporate and Institutional Services. Trust fees in C&IS increased 17% in
1998 to $426.0 million from $364.8 million in 1997 which was up 16% from
$314.8 million in 1996. These fees are derived from the full range of Master
Trust and Master Custody services that Northern Trust provides to retirement
plans and institutional clients worldwide. Northern Trust's products include
worldwide custody, settlement, reporting and investment management. Investment
services includes cash management, securities lending, performance analysis,
risk management and a full range of active and passive investment products
provided through NTGI. In addition to these services, Northern Trust offers
its clients a comprehensive array of retirement consulting and recordkeeping
services.
All services provided by C&IS contributed to the $61.2 million increase in
fees. Fees from custody services increased 9% as a result of new business and
accounted for 20% of the growth in C&IS trust fees. Domestic and international
securities lending fees were strong, increasing $16.4 million or 24% to $85.4
million as a result of both higher volumes and spreads earned on the investment
of collateral. The cash and other assets that have been deposited by investment
firms as collateral for securities they have borrowed from trust clients are
invested by Northern Trust and are included in trust assets under administration
as managed assets. The collateral totaled $65.2 billion and $57.9 billion at
December 31, 1998 and 1997, respectively. New business drove a 21% increase in
retirement services and recordkeeping and consulting fees.
C&IS trust fees also benefited from new asset management business,
demonstrating continued success in introducing both passive and actively managed
investment products to trust and banking clients. Northern Trust Quantitative
Advisors, Inc. (NTQA) contributed $14.1 million in fees during the year,
reflecting the successful integration and strong momentum of this December 31,
1997 acquisition. Excellent new business, together with strong investment
results, drove a 15% increase in fees from other investment products. Total C&IS
trust assets under administration increased 16% from December 31, 1997 to $1.14
trillion at December 31, 1998. Of the C&IS trust assets under administration,
$162.6 billion is managed by Northern Trust, up 18% from December 31, 1997.
Trust assets under administration included approximately $200 billion of global
custody assets.
Net new C&IS business sold and transitioned in 1998 was approximately $70
million in annualized trust fees, up 10% from 1997. Approximately 40% of the
new business sold came from existing clients and 60% from new relationships.
Personal Financial Services. Northern Trust has positioned itself in
markets having significant concentrations of wealth and growth potential. With
the establishment or acquisition of new offices in Michigan and Colorado and the
addition of three other new offices in 1998, Northern Trust's unique network
of Personal Financial Services offices includes 67 locations in
23
<PAGE>
NORTHERN TRUST CORPORATION
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONSOLIDATED TRUST ASSETS UNDER ADMINISTRATION
- --------------------------------------------------------------------------------
Five-Year
Compound
Percent Growth
December 31 Change Rate
- --------------------------------------------------------------------------------
($ In Billions) 1998 1997 1996 1995 1994 1998/97
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Corporate &
Institutional $ 162.6 $ 138.1 $ 83.7 $ 67.2 $ 51.5 18% 28%
Personal 73.4 58.5 46.6 38.3 30.8 25 19
- --------------------------------------------------------------------------------
Total Managed Trust
Assets 236.0 196.6 130.3 105.5 82.3 20 25
- --------------------------------------------------------------------------------
Corporate & Institutional 975.9 845.3 618.2 483.4 395.7 15 21
Personal 47.8 37.4 30.4 25.0 20.6 28 20
- --------------------------------------------------------------------------------
Total Non-Managed Trust
Assets 1,023.7 882.7 648.6 508.4 416.3 16 21
- --------------------------------------------------------------------------------
Consolidated Trust
Assets Under
Administration $1,259.7 $1,079.3 $778.9 $613.9 $498.6 17% 21%
</TABLE>
Illinois, Florida, Arizona, California, Texas, Colorado and Michigan. PFS also
includes the Wealth Management Group, which provides customized products and
services to meet the complex financial needs of families throughout the country
with assets typically exceeding $100 million. At December 31, 1998 trust assets
under administration in PFS totaled $121.2 billion, an increase of 26% from
$95.9 billion at December 31, 1997, reflecting record new business development
in all states and strong growth in securities markets. Of the personal trust
assets under administration, $73.4 billion was managed by Northern Trust at
December 31, 1998 as compared to $58.5 billion at December 31, 1997.
PFS trust fees also reached record levels, increasing 20% to $390.3 million
for the year compared to $324.4 million in 1997 and $279.6 million in 1996.
Every state recorded trust fee increases of 15% or more, with Florida, Arizona
and Texas particularly strong. The Wealth Management Group also had solid
performance with trust fees increasing 18% and now administers $38.4 billion
for significant family asset pools nationwide, up 39% from last year.
Net recurring new business sold and transitioned in 1998 totaled $40
million in annualized trust fees, up 27% from 1997.
Northern Trust Global Investments. Northern Trust formalized and
strengthened the focus on its investment management business in 1998 by
bringing together the investment activities of the C&IS and PFS businesses in
a newly created business unit, Northern Trust Global Investments. NTGI brings
together Northern Trust's registered and bank investment advisers to integrate
portfolio management, research and trading with client servicing, sales,
marketing and product management, while continuing to emphasize Northern
Trust's overall relationship orientation.
NTGI's strategic focus on investment management, branding, product
management, distribution and client servicing supported Northern Trust's
strong growth in assets under management during 1998. Despite the year's
turbulent financial markets, Northern Trust achieved strong investment results
across asset classes. As of year-end, 22 of 27 capital market mutual funds
advised by Northern Trust earned top one-year rankings ("A" or "B") by Lipper
Analytical Services, a respected mutual fund rating agency. The PFS Investment
group's equity performance placed Northern Trust among the leading
professional active managers, demonstrating the consistency of NTGI's
investment process. On the institutional side, Northern Trust's leading equity
products also demonstrated strong performance during this volatile market
period. Northern Trust's core growth composite exceeded the S&P 500, and
placed Northern Trust among the leading institutional active equity managers.
New capabilities were added to Northern Trust's core array of short
duration, fixed income, index, domestic growth equity and international
products in 1998. The scale and breadth of passive management services, was
significantly expanded and now more than 80 different equity and fixed income
index products across the capital market spectrum are being offered. Northern
Trust's institutional and retail mutual funds continued to enjoy significant
growth, reaching $21 billion in assets by year-end.
Northern Trust's competitive investment results, combined with new product
offerings and improvements to investment sales and client servicing, provided
the foundation for another year of strong growth in assets under management.
By year-end, Northern Trust managed $236.0 billion for personal and
institutional clients, up from $196.6 billion at year-end 1997.
FOREIGN EXCHANGE TRADING PROFITS. Foreign exchange trading profits totaled
$103.5 million, compared to last year's record performance of $104.8 million
which was up 78% from $58.8 million in 1996. The profits reflect increased
volatility in certain currency markets offset by decreased volatility in the
European Monetary Union currencies and lower client portfolio holdings in
emerging markets. A substantial component of foreign exchange profits
continued to result from
24
<PAGE>
NORTHERN TRUST CORPORATION
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
transactions associated with the growing global custody business. As custodian,
Northern Trust provides foreign exchange services in the normal course of
business. Active management of currency positions, within conservative limits,
also contributes to trading profits.
TREASURY MANAGEMENT FEES. The fee portion of treasury management revenues
totaled $69.9 million in 1998, a 16% increase from the $60.2 million reported
in 1997 compared with $55.3 million in 1996. Total treasury management
revenues, which, in addition to fees, include the computed value of compensating
deposit balances, increased 6% to $97.0 million from $91.6 million in 1997
compared to $86.0 million in 1996, reflecting the continued growth of new
business in both paper- and electronic-based products. The fee portion of
treasury management revenues also benefited in 1998 by a higher percentage of
clients choosing to pay for services through fees versus compensating balances
and certain accounting changes made for fee accruals.
SECURITY COMMISSIONS AND TRADING INCOME. Security commissions and trading
income totaled $28.0 million in 1998, compared with $26.1 million in 1997 and
$23.9 million in 1996. This income is primarily generated from securities
brokerage services provided by Northern Trust Securities, Inc. (NTSI).
Additional revenue is provided from underwriting selected general obligation
tax-exempt securities and interest risk management activities with clients. The
1998 results reflect strong growth in securities brokerage activities, up 22%,
offset in part by a decline in futures commissions resulting from Northern
Trust's exit from the futures business in the second quarter of the year.
OTHER OPERATING INCOME. Other operating income includes loan, letter of
credit and deposit-related service fees and other miscellaneous income from
asset sales. Other operating income in 1998 totaled $52.6 million compared with
$53.5 million in 1997 and $47.2 million in 1996. Included in the 1997 results
was $11.1 million resulting from settlements reached with Illinois banking
regulators concerning the disposition of certain unclaimed balances accumulated
over a number of years. Nonrecurring gains in 1998 totaled $3.8 million and
included sales of exchange membership seats owned by Northern Futures
Corporation, a sale of mortgage loans and the sale of Northern Trust's small
California investment management subsidiary, Berry, Hartell, Evers & Osborne,
Inc. Other operating income in 1996 reflects a $4.0 million gain from the sale
of the Bank's merchant charge card business. Excluding nonrecurring items, the
increase in other operating income in 1998 is primarily attributable to higher
fees from trust deposit activities and banking services.
INVESTMENT SECURITY GAINS AND LOSSES. Net security gains totaling $1.3
million were realized in 1998. This compares with net gains of $.7 million in
1997 and $.4 million in 1996.
NET INTEREST INCOME. Net interest income is defined as the total of interest
income and amortized fees on earning assets less interest expense on deposits
and borrowed funds, adjusted for the impact of off-balance sheet hedging
activity. Earning assets, which consist of securities, loans and money market
assets, are financed by a large base of interest-bearing funds, including
retail deposits, wholesale deposits, short-term borrowings, senior notes and
long-term debt. Earning assets are also funded by net noninterest-related
funds. Net noninterest-related funds consist of demand deposits, the reserve
for credit losses and stockholders' equity, reduced by nonearning assets
including cash and due from banks, items in process of collection, buildings
and equipment and other nonearning assets. Variations in the level and mix of
earning assets, interest-bearing funds and net noninterest-related funds, and
their relative sensitivity to interest rate movements, are the dominant factors
affecting net interest income. In addition, net interest income is impacted by
the level of nonperforming assets and client use of compensating deposit
balances to pay for services.
Net interest income for 1998 was a record $477.2 million, up 9% from $438.2
million in 1997, which was up 13% from $388.3 million in 1996. When 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 1998 was a
record $513.1 million, an increase of $42.2 million or 9% from $470.9 million
in 1997 which in turn was up 12% from $421.9 million in 1996. Through steady
asset growth and conservative interest rate risk management, Northern Trust has
been successful in generating year over year improvement in net interest income
as evidenced by the fact that 1998 represents the fifteenth consecutive year of
record performance. The increase in FTE net interest income in 1998 was driven
by higher levels of loans, money market assets and short-term federal agency
securities and a 10% increase in noninterest-related funding sources.
The net interest margin declined to 2.08% from 2.18% last year. The decline
in the margin is attributable to the growth in low-spread money market assets
and federal agency securities.
Earning assets averaged $24.6 billion, up 14% from the $21.6 billion
reported in 1997, which was up from $18.8 billion in 1996. The $3.0 billion
growth in average earning assets reflects a 13% or $1.5 billion increase in
loans, a 17% or $1.1 billion increase in securities, and a 12% or $396 million
increase in money market assets.
25
<PAGE>
NORTHERN TRUST CORPORATION
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ANALYSIS OF NET INTEREST INCOME (FTE)
- -----------------------------------------------------------------------------
Percent Change
- -----------------------------------------------------------------------------
($ In Millions) 1998 1997 1996 1998/97 1997/96
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest Income $ 1,503.1 $ 1,332.8 $ 1,151.5 12.8% 15.7%
FTE Adjustment 35.9 32.7 33.6 9.8 (2.7)
- -----------------------------------------------------------------------------
Interest Income-FTE 1,539.0 1,365.5 1,185.1 12.7 15.2
Interest Expense 1,025.9 894.6 763.2 14.7 17.2
- -----------------------------------------------------------------------------
Net Interest Income-FTE $ 513.1 $ 470.9 $ 421.9 9.0% 11.6%
- -----------------------------------------------------------------------------
Average Volume
Earning Assets $24,624.5 $21,629.7 $18,779.4 13.8% 15.2%
Interest-Related Funds 20,940.7 18,292.6 15,920.0 14.5 14.9
Noninterest-Related Funds 3,683.8 3,337.1 2,859.4 10.4 16.7
- -----------------------------------------------------------------------------
Change in
Percentage
- -----------------------------------------------------------------------------
Average Rate
Earning Assets 6.25% 6.32% 6.31% (.07) .01
Interest-Related Funds 4.90 4.89 4.79 .01 .10
Interest Rate Spread 1.35 1.43 1.52 (.08) (.09)
Total Source of Funds 4.17 4.14 4.06 .03 .08
- -----------------------------------------------------------------------------
Net Interest Margin 2.08% 2.18% 2.25% (.10) (.07)
</TABLE>
Refer to page 78 for detailed analysis of net interest income.
Loan volume for the year averaged $13.3 billion with the majority of the growth
reflected in the domestic portfolio while international loans increased $114
million on average. The domestic growth came principally from residential
mortgage activities, up $672 million, and commercial and industrial loans, up
$512 million. Reflected in the total loan growth are noninterest bearing
domestic and international overnight advances related to processing certain
trust client investments, which averaged $767 million in 1998, up from $708
million a year ago. Securities averaged $7.5 billion in 1998, up 17% from $6.4
billion a year ago resulting primarily from higher levels of federal agency
securities. Money market assets averaged $3.8 billion in 1998 versus $3.4
billion in 1997. The increase was principally driven by a higher level of
foreign office time deposits resulting from growth in global custody activities,
and more active short-term investment of noninterest-bearing balances previously
held with global subcustodians.
The increase in average earning assets of $3.0 billion was funded through
growth in interest-bearing deposits, other interest-related funding sources,
and noninterest-related funds. The deposit growth was concentrated primarily
in foreign office time deposits, up $811 million resulting from increased
global custody activity, and higher levels of savings and money market
deposits. Other interest-related funds averaged $8.2 billion, up $1.5 billion,
principally from federal funds purchased (up $930 million) and other
borrowings (up $420 million). Average net noninterest-related funds increased
$347 million, mainly due to higher demand deposits, noninterest-bearing time
deposits, and stockholders' equity. Stockholders' equity for the year averaged
$1.8 billion, an increase of $195 million or 12% from 1997, principally due to
the strong earnings performance, offset in part by the repurchase of common
stock pursuant to the Corporation's share buyback program.
PROVISION FOR CREDIT LOSSES. Asset quality remained strong as reflected by the
low level of nonperforming assets which totaled $35.2 million at year-end. The
provision for credit losses was $9.0 million in 1998, unchanged from 1997 which
was down from $12.0 million in 1996. For a discussion of the reserve for credit
losses, refer to pages 38 through 40.
NONINTEREST EXPENSES. Noninterest expenses for 1998 totaled $997.1 million, up
$105.3 million or 12% from $891.8 million in 1997, which was up 16% from $768.9
million in 1996. Included in the 1998 results were $16.0 million of incremental
expenses related to acquisitions and $11.5 million of project costs related to
Year 2000 initiatives. Total expenses for 1997 included $10.1 million in charges
relating to Year 2000 initiatives and $3.5 million in costs associated with the
planned relocation of Northern Trust's computer data facility. Expense increases
during 1998 reflect a variety of growth initiatives, including staff additions
and higher operating expenses necessary to support new business and growing
transaction volumes, investments in technology and PFS office expansion.
Performance-based compensation also increased, resulting from excellent new
business results, improved client investment portfolio performance, strong
corporate earnings and the price increase in Northern Trust Corporation common
stock.
26
<PAGE>
NORTHERN TRUST CORPORATION
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AVERAGE EARNING ASSETS AND SOURCE OF FUNDS
- -------------------------------------------------------------------------------------------------
Percent Change
- -------------------------------------------------------------------------------------------------
($ In Millions) 1998 1997 1996 1998/97 1997/96
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average Earning Assets
Money Market Assets $ 3,838.7 $ 3,442.6 $ 2,083.5 11.5% 65.2%
Securities
U.S. Government 374.2 822.9 1,702.0 (54.5) (51.7)
Obligations of States
and Political Subdivisions 434.0 408.8 414.1 6.2 (1.3)
Federal Agency 6,385.0 4,890.1 4,010.7 30.6 21.9
Other 265.8 243.4 228.2 9.2 6.7
Trading Account 11.8 9.0 8.8 31.1 1.5
- -------------------------------------------------------------------------------------------------
Total Securities 7,470.8 6,374.2 6,363.8 17.2 .2
- -------------------------------------------------------------------------------------------------
Loans and Leases-Domestic 12,663.6 11,275.1 9,951.6 12.3 13.3
-International 651.4 537.8 380.5 21.1 41.4
- -------------------------------------------------------------------------------------------------
Total Loans and Leases 13,315.0 11,812.9 10,332.1 12.7 14.3
- -------------------------------------------------------------------------------------------------
Total Earning Assets $24,624.5 $21,629.7 $18,779.4 13.8% 15.2%
- -------------------------------------------------------------------------------------------------
Average Source of Funds
Deposits-Savings and
Money Market $ 4,263.3 $ 3,895.4 $ 3,620.7 9.4% 7.6%
-Savings Certificates 2,144.5 2,035.8 2,062.4 5.3 (1.3)
-Other Time 571.8 717.3 549.2 (20.3) 30.6
-Foreign Offices Time 5,781.7 4,971.2 3,826.2 16.3 29.9
- -------------------------------------------------------------------------------------------------
Total Deposits 12,761.3 11,619.7 10,058.5 9.8 15.5
Federal Funds Purchased 2,620.6 1,690.2 1,842.2 55.0 (8.3)
Securities Sold under
Agreements to Repurchase 1,506.0 1,519.9 1,973.3 (.9) (23.0)
Commercial Paper 145.9 142.7 143.7 2.2 (.7)
Other Borrowings 2,540.4 2,120.9 1,274.1 19.8 66.5
Senior Notes 653.3 539.3 267.5 21.1 101.6
Long-Term Debt 445.8 435.8 360.7 2.3 20.8
Debt-Floating Rate
Capital Securities 267.4 224.1 -- 19.3 --
- -------------------------------------------------------------------------------------------------
Total Interest-Related Funds 20,940.7 18,292.6 15,920.0 14.5 14.9
Noninterest-Related Funds,
net 3,683.8 3,337.1 2,859.4 10.4 16.7
- -------------------------------------------------------------------------------------------------
Total Source of Funds $24,624.5 $21,629.7 $18,779.4 13.8% 15.2%
</TABLE>
The increase in 1997 noninterest expenses from 1996 reflects the impact of
the nonrecurring charges described above, incremental expenses resulting from
acquisitions, investments in technology, PFS office expansion, the opening of
a Singapore office, higher performance-based compensation, and staff additions
and related costs necessary to support new business and transaction volumes.
The productivity ratio, defined as total revenue on a taxable equivalent
basis divided by noninterest expenses, reached an all-time high of 159% for
1998 compared with 158% in 1997 and 156% in 1996. The improvement in the
productivity ratio over the past two years reflects Northern Trust's success
in growing revenues while at the same time controlling expenses.
COMPENSATION AND BENEFITS. Compensation and benefits, which represent 61%
of total noninterest expenses, increased 16% to $609.4 million in 1998 from
$527.3 million in 1997, which was up 19% from $441.3 million in 1996.
Compensation costs, the largest component of noninterest expenses, totaled
$518.1 million, up $69.8 million or 16% from $448.3 million a year ago. The
increase in 1998 was primarily attributable to staff additions, higher
performance-based compensation and salary increases. Performance-based
compensation expense was up $23.6 million in 1998 and $35.5 million in 1997
reflecting the impact of record corporate earnings, excellent new business
results, client investment portfolio performance and the price increase in
Northern Trust Corporation common stock.
Staff on a full-time equivalent basis averaged 7,844 in 1998 compared with
7,198 in 1997 and 6,665 in 1996. The increase in staff levels during 1998 was
required to support growth initiatives and strong new business in both C&IS
and PFS. Staff on a full-time equivalent basis at December 31, 1998, totaled
8,156, an increase of 8% from 7,553 at the end of last year.
Employee benefit costs for 1998 totaled $91.3 million, up $12.3 million or
16% from $79.0 million in 1997 which was 9% higher than the $72.5 million in
1996. The increase in employee benefits primarily reflects higher payroll
taxes, medical and dental plan costs, and retirement plan benefits resulting
from staff growth. The
27
<PAGE>
NORTHERN TRUST CORPORATION
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
increase in 1997 employee benefit costs resulted from higher payroll taxes and
retirement plan benefits, partially offset by favorable medical plan experience
as more employees elected coverage through managed care plans.
OCCUPANCY EXPENSE. Net occupancy expense totaled $67.9 million, up 2% or
$1.2 million from $66.7 million in 1997, which was up 10% from $60.7 million in
1996. The principal components of the 1998 increase were higher building
operating and maintenance costs, partially offset by lower real estate taxes.
The increase in 1997 resulted from higher rental costs, real estate taxes and
building depreciation expense.
EQUIPMENT EXPENSE. Equipment expense, which includes depreciation, rental,
and maintenance costs, totaled $62.2 million in 1998, unchanged from the prior
year, which was up 11% from $56.0 million in 1996. The 1998 results reflect
higher levels of hardware depreciation expense, computer and equipment
maintenance charges and leasing of data lines, offset by lower rental costs of
computers and equipment. Included in the 1997 results were $2.6 million of
technology-related special charges. The remainder of the increase in 1997
resulted from planned increases in equipment and computer depreciation and
related costs to support trust and banking business expansion.
OTHER OPERATING EXPENSES. Other operating expenses for 1998 totaled $257.6
million, up 9% from $235.6 million in 1997, which was up 12% from $210.9
million in 1996. The increase in the 1998 expense level was principally 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. These initiatives resulted in increases in technical and
consulting service fees, business development efforts, telecommunications,
amortization of goodwill and other intangible assets and higher costs
associated with legal claims and processing errors.
Investments in technology are designed principally to support and enhance
the transaction processing and securities handling capability of the trust and
banking businesses. Additional capital expenditures planned for systems
technology will result in future expenses for the depreciation of hardware and
amortization of software. Depreciation and software amortization are charged to
equipment and other operating expenses, respectively.
PROVISION FOR INCOME TAXES. The provision for income taxes was $188.8 million
in 1998 compared with $162.5 million in 1997 and $128.6 million in 1996. The
effective tax rate was 35% for 1998 compared with 34% for 1997 and 33% for
1996. The increase reflects the continued growth in income from taxable sources
while tax-exempt municipal interest has remained relatively stable.
BUSINESS SEGMENTS
- --------------------------------------------------------------------------------
Northern Trust Corporation, under Chairman and Chief Executive Officer William
A. Osborn, organizes client services around two principal business units, C&IS
and PFS. Investment products are provided to the clients of these business units
by NTGI. Each of these three business units has a president who reports to
President and Chief Operating Officer Barry G. Hastings. Also reporting to Mr.
Hastings is the WWOT business unit. For management reporting purposes, the
operations of NTGI and WWOT are allocated to the other business units. The Risk
Management Unit includes the Treasury Department and reports directly to Mr.
Osborn. Mr. Osborn has been identified as the chief operating decision maker
because he has final authority over resource allocation decisions and
performance assessment.
The results of the major business units are presented in order to promote a
greater understanding of their financial performance. The information,
presented on an internal management reporting basis, is derived from internal
accounting systems that support the strategic objectives and management
structure. Management has developed accounting systems to allocate revenue and
expenses related to each segment, as well as certain corporate support
services, worldwide operations and system development expenses. The management
reporting systems also incorporate processes for allocating assets, liabilities
and the applicable interest income and expense. Tier 1 and tier 2 capital is
allocated based on the federal risk-based capital guidelines at a level that is
consistent with Northern Trust's consolidated capital ratios, coupled with
management's judgment of the operational risks inherent in the business.
Allocations of capital and certain corporate expenses may not be representative
of levels that would be required if the segments were independent entities. The
accounting policies used for management reporting are the same as those
described in "Accounting Policies," in the Notes to Consolidated Financial
Statements. Transfers of income and expense items are recorded at cost; there is
no intercompany profit or loss on sales or transfers between business units.
Northern Trust's presentations are not necessarily consistent with similar
information of other financial institutions. For management reporting purposes,
certain corporate income and expense items are not allocated to the business
units and are presented as part of "Treasury and Other." These items include the
impact of long-term debt, preferred equity, holding company investments, and
corporate operating expenses.
The following tables reflect the earnings contribution of Northern Trust's
business segments for the years ended December 31, 1998, 1997 and 1996 on the
basis described above.
28
<PAGE>
NORTHERN TRUST CORPORATION
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Corporate and Institutional
Services
- -------------------------------------------------------------------------------
($ In Millions) 1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Noninterest Income
Trust Fees $ 426.0 $ 364.8 $ 314.8
Other 197.2 183.2 130.5
Net Interest Income after Provision for Credit
Losses* 151.4 126.9 114.2
Noninterest Expenses 507.3 435.6 376.3
- -------------------------------------------------------------------------------
Income before Income Taxes* 267.3 239.3 183.2
Provision for Income Taxes* 105.2 94.3 72.4
- -------------------------------------------------------------------------------
Net Income $ 162.1 $ 145.0 $ 110.8
- -------------------------------------------------------------------------------
Percentage Net Income Contribution 46% 47% 43%
- -------------------------------------------------------------------------------
Average Assets $11,841.5 $10,246.3 $7,905.9
<CAPTION>
Personal
Financial Services
- -------------------------------------------------------------------------------
($ In Millions) 1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Noninterest Income
Trust Fees $ 390.3 $ 324.4 $ 279.6
Other 52.0 45.4 43.1
Net Interest Income after Provision for Credit
Losses* 332.1 316.0 270.7
Noninterest Expenses 456.4 410.6 372.5
- -------------------------------------------------------------------------------
Income before Income Taxes* 318.0 275.2 220.9
Provision for Income Taxes* 126.2 109.5 88.1
- -------------------------------------------------------------------------------
Net Income $ 191.8 $ 165.7 $ 132.8
- -------------------------------------------------------------------------------
Percentage Net Income Contribution 54% 53% 51%
- -------------------------------------------------------------------------------
Average Assets $10,124.5 $ 8,931.9 $7,858.0
<CAPTION>
Treasury and Other
- -------------------------------------------------------------------------------
($ In Millions) 1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Noninterest Income
Trust Fees $ -- $ -- $ --
Other 6.1 16.7 12.0
Net Interest Income after Provision for Credit
Losses* 20.6 19.0 25.0
Noninterest Expenses 33.4 45.6 20.1
- -------------------------------------------------------------------------------
Income before Income Taxes* (6.7) (9.9) 16.9
Provision for Income Taxes* (6.7) (8.6) 1.7
- -------------------------------------------------------------------------------
Net Income $ -- $ (1.3) $ 15.2
- -------------------------------------------------------------------------------
Percentage Net Income Contribution --% --% 6%
- -------------------------------------------------------------------------------
Average Assets $ 5,224.7 $ 4,873.5 $5,200.4
</TABLE>
<TABLE>
<CAPTION>
Consolidated
- --------------------------------------------------------------------------
($ In Millions) 1998 1997 1996
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Noninterest Income
Trust Fees $ 816.3 $ 689.2 $ 594.4
Other 255.3 245.3 185.6
Net Interest Income after Provision for
Credit Losses* 504.1 461.9 409.9
Noninterest Expenses 997.1 891.8 768.9
- --------------------------------------------------------------------------
Income before Income Taxes* 578.6 504.6 421.0
Provision for Income Taxes* 224.7 195.2 162.2
- --------------------------------------------------------------------------
Net Income $ 353.9 $ 309.4 $ 258.8
- --------------------------------------------------------------------------
Percentage Net Income Contribution 100% 100% 100%
- --------------------------------------------------------------------------
Average Assets $27,190.7 $24,051.7 $20,964.3
</TABLE>
*Stated on a fully taxable equivalent basis (FTE). Total includes $35.9
million, $32.7 million and $33.6 million of FTE adjustment for 1998, 1997 and
1996, respectively.
Note: Certain reclassifications have been made to 1997 and 1996 financial
information to conform to the current year's presentation.
CORPORATE AND INSTITUTIONAL SERVICES. C&IS, headed by Sheila A. Penrose,
President, provides trust, commercial banking and treasury management services
to corporate and institutional clients. Trust activities encompass custody
services for securities in the United States and foreign markets, as well
as securities lending and asset management. Foreign exchange services, which
primarily relate to global custody activities, are also part of C&IS. A full
range of commercial banking services is also offered by C&IS. Treasury
management services are provided to corporations and financial institutions and
include a variety of products and services to accelerate cash collections,
control disbursement outflows and generate information to manage cash products.
Net income for C&IS increased 12% in 1998 and totaled $162.1 million compared
to $145.0 million in 1997 which was up 31% from the $110.8 million in 1996. The
growth in net income was primarily driven by 17% growth in trust fees, which
represent 55% of C&IS's revenues in 1998.
Northern Trust, through C&IS, is a leading provider of Master Trust and
Master Custody services to three targeted markets: retirement plans,
institutional clients, and international clients. Retirement plans include the
large corporate market, middle market and public and union retirement funds.
Institutional clients include insurance companies, foundations and endowments
and correspondent trust services. International clients include asset pools
domiciled outside the U.S. and group trusts. For management reporting purposes
the activities of Northern Trust Global Advisors (NTGA), an international
provider of institutional asset management services, and NTQA, a manager of
index funds and
29
<PAGE>
NORTHERN TRUST CORPORATION
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
quantitative investment products, are included in C&IS. A summary of C&IS trust
fees and trust assets for each market together with the revenues and trust
assets from NTGA and NTQA follows:
CORPORATE AND INSTITUTIONAL SERVICES
SUMMARY OF TRUST FEES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(In Millions) 1998 1997 1996
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic
Retirement Plans $ 248.8 $222.7 $190.8
Institutional 65.1 59.7 53.2
International 62.3 50.2 43.0
NTGA* 35.7 32.2 27.8
NTQA 14.1 -- --
- ---------------------------------------------------------------------------
Total Trust Fees $ 426.0 $364.8 $314.8
*Investment management expenses paid to sub-advisers totaled $17.5 million,
$16.1 million and $13.3 million in 1998, 1997 and 1996, respectively.
CORPORATE AND INSTITUTIONAL SERVICES
SUMMARY OF TRUST ASSETS UNDER ADMINISTRATION
- ---------------------------------------------------------------------------
<CAPTION>
December 31
- ---------------------------------------------------------------------------
(In Billions) 1998 1997 1996
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic
Retirement Plans $ 634.0 $535.6 $383.2
Institutional 227.0 202.0 164.2
International 170.7 150.2 105.4
NTGA 10.2 6.6 5.7
NTQA 30.9 30.8 --
Securities Lending/Other 65.7 58.2 43.4
- ---------------------------------------------------------------------------
Total Trust Assets $1,138.5 $983.4 $701.9
</TABLE>
The growth in other noninterest income resulted from a 23% increase in
treasury management fees reflecting a higher percentage of clients choosing to
pay for services through fees, continued growth in new business from both new
and existing clients and certain accounting changes made to fee accruals. Total
treasury management revenues, which, in addition to fees, include the computed
value of compensating deposit balances, increased 6% in 1998. Foreign exchange
profits, also included in other noninterest income, were essentially unchanged
in 1998 but were up $45.9 million or 79% in 1997 when compared to 1996. Net
interest income after provision for credit losses on a FTE basis increased 19%
in 1998 and 11% in 1997. The increase in 1998 was driven by a 17% increase in
earning assets, with loans increasing 11% and money market assets increasing
16%. Earning assets in 1997 were up 32% from 1996 primarily the result of a 45%
increase in money market assets. The increase in money market assets was driven
by the investment of deposit funds obtained through the rapid growth in global
custody activities.
Total expenses of C&IS, which include both the direct expenses of the
business unit and indirect expense allocations from NTGI and WWOT for product
and operating support, increased 16% in both 1998 and 1997. The growth in
expenses is attributable to increases in compensation and employee benefits and
higher operating costs to support business growth.
PERSONAL FINANCIAL SERVICES. PFS, headed by Mark Stevens, President, encompasses
personal trust and investment management services, estate administration,
banking and residential real estate mortgage lending offered through the Bank in
Illinois and affiliates in six other states. The personal financial services
strategy includes targeting high net worth individuals in each banking
subsidiary's target market and through its Wealth Management Group nationally.
NTSI is also part of PFS.
PFS net income totaled $191.8 million in 1998, an increase of 16% from 1997
which in turn was 25% above the net income achieved in 1996. Growth in trust
activities continued to be the driver of the record performance for the
business unit with trust fees increasing 20% as a result of record new business
throughout Northern Trust's PFS network and favorable securities markets. A
summary of trust fees and trust assets broken down by state and Wealth
Management follows:
PERSONAL FINANCIAL SERVICES
SUMMARY OF TRUST FEES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(In Millions) 1998 1997 1996
- --------------------------------------------
<S> <C> <C> <C>
Illinois $148.2 $126.5 $115.9
Florida 116.8 93.2 77.3
California 50.3 43.6 39.5
Arizona 23.4 18.8 15.4
Texas 13.8 10.4 8.6
Wealth Management 37.7 31.9 22.9
Other .1 -- --
- --------------------------------------------
Total Trust Fees $390.3 $324.4 $279.6
PERSONAL FINANCIAL SERVICES
SUMMARY OF TRUST ASSETS UNDER ADMINISTRATION
- --------------------------------------------
<CAPTION>
December 31
- --------------------------------------------
(In Billions) 1998 1997 1996
- --------------------------------------------
<S> <C> <C> <C>
Illinois $ 36.9 $ 32.6 $ 26.4
Florida 24.5 18.4 15.3
California 11.4 9.6 7.3
Arizona 4.6 3.9 2.6
Texas 3.6 2.9 2.3
Wealth Management 38.4 27.6 22.6
Other 1.8 .9 .5
- --------------------------------------------
Total Trust Assets $121.2 $ 95.9 $ 77.0
</TABLE>
A significant portion of PFS growth has come from expansion into attractive
markets within its seven-state network. These markets include approximately 20%
of
30
<PAGE>
NORTHERN TRUST CORPORATION
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
the nation's high net worth households, defined as those with at least $1
million of investable assets. Over the next five years, Northern Trust will
seek to continue this expansion and also to expand into markets with promising
demographics in other states. The goal is to build the PFS national network to
approximately 100 offices within as many as fifteen states in targeted markets
where approximately 40% of all U.S. high net worth households are located.
The growth in other noninterest revenues in both 1998 and 1997 reflects
strong growth in brokerage commissions at NTSI. Driven by growth in residential
mortgage loans, net interest income after provision for credit losses increased
5% in 1998 and totaled $332.1 million. In 1997, net interest income totaled
$316.0 million and increased 17% over 1996.
PFS noninterest expenses, which include both the direct expenses of the
business unit and indirect expense allocations from NTGI and WWOT for product
and operating support, increased 11% in 1998 and 10% in 1997. The increase in
1998 primarily reflects merit increases and staff growth to support record new
business. Reflecting successful new business development and portfolio
management results, performance-based compensation for PFS was up 39% and
business promotion costs rose 20%.
TREASURY AND OTHER. The Risk Management Unit, headed by Perry R. Pero, Senior
Executive Vice President and Chief Financial Officer, includes the treasury
function. The Treasury Department is responsible for managing the Bank's
wholesale funding, capital position and interest rate risk, as well as the
portfolio of interest rate risk management instruments. It is also responsible
for the investment portfolios of the Corporation and the Bank and provides
investment advice and management services to the subsidiary banks. "Other"
corporate income and expenses represent items that are not allocated to the
business units and generally represent certain nonrecurring items and certain
executive level compensation.
Other operating income in 1997 included $11.1 million resulting from settle-
ments reached with Illinois banking regulators concerning the disposition of
certain unclaimed balances. One-time gains in 1998 included $1.6 million
realized on the sale of exchange membership seats owned by Northern Futures
Corporation. The slight growth in net interest income reflects a $6.3 million
increase relating to the management of the Bank's investment and money market
asset portfolios offset by higher levels of unallocated corporate level funding
costs.
The higher level of operating expenses in 1997 is largely attributable to
special technology-related charges associated with the Year 2000 project and
costs associated with the relocation of Northern Trust's computer data facility.
NORTHERN TRUST GLOBAL INVESTMENTS. NTGI, headed by Stephen B. Timbers,
President, provides investment products and services to clients of C&IS and PFS
through registered and bank investment managers. NTGI activities include equity
and fixed income research and portfolio management services. NTGI also acts as
the investment adviser to the Corporation's two families of proprietary mutual
funds, Northern Funds and Northern Institutional Funds. NTGA and NTQA are also
included in NTGI, although for management reporting purposes, these subsidiaries
are included in C&IS. The other revenues and expenses of this business unit are
fully allocated to C&IS and PFS.
WORLDWIDE OPERATIONS AND TECHNOLOGY. Worldwide Operations and Technology,
headed by James J. Mitchell, Executive Vice President, supports sales,
relationship management, transaction processing and product management
activities for C&IS and PFS. The expenses of this business unit are fully
allocated to other business units.
SUBSEQUENT IMPLEMENTATION OF ACCOUNTING STANDARDS
- --------------------------------------------------------------------------------
In March 1998, the Accounting Standards Executive Committee (AcSEC) 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 Northern Trust in 1999.
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 $11 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 AcSEC issued SOP 98-5, "Reporting on the Costs of Start-
Up Activities." 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.
Northern Trust adopted SOP 98-5 on 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 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards
31
<PAGE>
NORTHERN TRUST CORPORATION
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(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,
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 Statement No.
133 on its financial statements and has not determined the timing or method of
its adoption.
CAPITAL EXPENDITURES
- -------------------------------------------------------------------------------
Northern Trust's Management Committee reviews and approves proposed capital
expenditures which exceed $500,000. This process assures that the major
projects to which Northern Trust commits its resources produce benefits
compatible with corporate strategic goals.
The Northern Trust continued to enhance its hardware and software
capabilities during 1998. Significant improved capabilities were added to trust
systems both from a client access and operational efficiency basis. Continued
expansion of the state of the art and highly flexible trust platform provided
new product capabilities to clients in risk and performance measurement and in
other investment services. Major improvements to Northern Trust's suite of
retirement services products were implemented during the year including a Web-
based participant servicing system. In addition, development was completed to
provide full euro capability in all applicable product lines. Work focused on
operational improvements has increased the breadth and depth of the data
available regarding assets held for clients and has enabled Northern Trust to
take advantage of efficiencies of straight-through processing wherever
available. A major initiative to consolidate banking systems on one platform was
completed in the fourth quarter. This has positioned Northern Trust well to
continue to move into additional markets and further enhance our offering of
banking services for both personal and corporate clients. Another Web-based
product, a positive pay capability, was introduced and increases the controls
over checking account disbursements for corporate banking clients. To support
the growing computing needs of clients and employees in a cost effective manner
and enhance disaster recovery capabilities, Northern Trust moved into a new data
center in the first half of 1998.
The unamortized capitalized cost of corporate-wide software development
projects as of December 31, 1998 was $172.8 million, of which $48.2 million
represented the book value of the trust management system. During 1999,
Northern Trust will continue to invest in computer hardware and software to
remain in the forefront in the markets in which it competes. Improvements in
the range and functionality of product offerings to both personal and
commercial clients are planned with continued emphasis on the use of Web
delivery where appropriate. Continued expansion of the reliability and
efficiency of worldwide delivery of products and services will remain a
priority. The technology initiatives in future periods will also include the
capitalization of internal costs of computer software development in
accordance with new accounting requirements.
Capital expenditures in 1998 also included the leasehold improvements and
furnishings associated with the opening of new offices in Illinois, California
and Michigan, as well as expansion or remodeling in several existing offices.
Capital expenditures for 1998 totaled $147.0 million of which $17.6 million
was for building and leasehold improvements, $8.3 million for furnishings,
$52.3 million for computer hardware and machinery and $68.8 million for
software. During 1999, in addition to its technology initiatives, Northern
Trust will continue to invest in the expansion of the seven-state network of
Personal Financial Services offices.
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
32
<PAGE>
NORTHERN TRUST CORPORATION
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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.
The information technology portion of Northern Trust's Year 2000 Project is
proceeding in phases, although the phases overlap in some cases. In the
awareness and assessment phases, which are now completed, 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.
The other phases of the Year 2000 Project include:
. Renovation, which involves reviewing programming code and altering it where
necessary to deal appropriately with years after 1999.
. Validation, in which systems and software are tested. Both renovated sys-
tems and systems that do not require renovation undergo Year 2000 testing,
to verify that accurate results are produced using key dates (including the
leap year date) 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 up-
graded or replaced.
. Implementation, in which test results are reviewed by user groups and docu-
mented and systems or applications returned to production, follows valida-
tion.
Renovation has been completed for all mission critical information
technology systems, including those provided by third parties. Validation has
been completed for all internally developed mission critical information
technology systems, with implementation to be completed by the end of the
first quarter of 1999. Validation and implementation of mission critical
systems provided by third parties were substantially completed by year-end,
with validation and implementation of the only two systems not yet completed
expected to be completed by the end of the first quarter of 1999. Northern
Trust has also commenced integration testing, which will continue through
1999. This testing is designed to assure that logically related systems work
with each other and that each system can run on compliant versions of hardware
and operating system software. 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 again reviewed the Year 2000 preparedness of its subcustodians,
and completed on-site due diligence visits with subcustodians who account for
most of Northern Trust's global securities processing--approximately 95% as
measured by market value of holdings and 86% as measured by number of transac-
tions. The great majority of these subcustodians appear to be making adequate
progress, although Northern Trust has determined to transition its business to
another subcustodian in one market. On-site visits to additional subcustodians
will take place in the first half of 1999, along with follow-up work with
those already visited. Northern Trust will continue to monitor subcustodians'
Year 2000 work throughout the year and develop contingency plans where neces-
sary and feasible.
Northern Trust also relies on entities such as the Federal Reserve System,
Depository Trust Company, Participants Trust Company, Society for Worldwide
Interbank Financial Telecommunications (SWIFT), and the Clearing House
Interbank Payment Systems (CHIPS) in its securities processing and banking
businesses, as do other financial services providers in similar businesses.
Testing with these organizations is underway and is expected to be completed
by March 31, 1999.
33
<PAGE>
NORTHERN TRUST CORPORATION
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Northern Trust also plans to test for certain 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.
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. 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, refined and validated.
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
virtually all of these customers. The assessment has identified only $12.0
million in exposure to clients identified as having more than moderate Year
2000 risk. Northern Trust will continue to monitor the progress of these and
other credit customers, taking action (which may include additional credit
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 total expense for Northern Trust's Year 2000 renovation
project is $35 million. This estimate includes the cost of purchasing licenses
for software programming tools, the cost of the time of internal staff in
Worldwide Technology and the cost of consultants. The estimate does not
include the time that internal staff in 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 December 31, 1998,
$21.6 million of the estimated $35 million of project costs have been
incurred. $11.5 million of these costs were incurred in 1998. The remaining
costs are expected to be incurred fairly evenly through the first quarter of
2000. Of the total Worldwide Technology Group expenses (excluding depreciation
and amortization) for 1997, 1998 and 1999, it is estimated that 12% to 14%
will be for Year 2000 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 "legacy" currencies of eleven of the
fifteen members of the European Union became convertible at fixed rates into the
euro, which became the common legal currency of the participating members. 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.
At the end of the year Northern Trust successfully added euro capability to
its global custody, foreign exchange, securities lending and related businesses.
Extensive preparations and planning allowed Northern Trust to complete this
significant conversion in a manner that was transparent to clients and involved
no interruption of services.
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 had already decreased considerably by
year-end 1998, as had volumes; after January 1, 1999 these transactions are no
longer being conducted. Northern Trust currently estimates that foreign ex-
change profits have been or will be reduced by approximately 10% in the
aggregate as a result of these developments. Although a new market has developed
for transactions involving the euro and the U.S. 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 U.S. 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,
34
<PAGE>
NORTHERN TRUST CORPORATION
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
but its impact on trading strategies, which have an effect on Northern Trust's
global securities lending business, remains unclear. Northern Trust will lend
for clients securities denominated in euro, and has also created 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.
RISK MANAGEMENT
- -------------------------------------------------------------------------------
Asset Quality and Credit Risk Management
SECURITIES. A high quality securities portfolio is maintained with 86% of the
total portfolio comprised of U.S. Treasury or federal agency securities. The
remainder of the portfolio is comprised of obligations of states and political
subdivisions, preferred stock and other securities. At December 31, 1998, 74%
of these securities were rated triple-A or double-A, 13% were rated single-A and
13% were below A or not rated by Standard and Poor's and/or Moody's Investors
Service. Other securities consist primarily of Federal Home Loan Bank stock.
Northern Trust is an active participant in the repurchase agreement market.
This market provides a relatively low cost alternative for short-term funding.
Se-curities sold under agreements to repurchase are held by the counterparty
until the repurchase transaction matures. Increases in the fair value of these
securities in excess of the repurchase liability could subject Northern Trust to
credit risk in the event of default by the counterparty. To minimize this risk,
collateral values are continuously monitored and Northern Trust sets limits on
exposure with counterparties and regularly assesses their financial condition.
LOANS AND OTHER EXTENSIONS OF CREDIT. A certain degree of credit risk is
inherent in Northern Trust's various lending activities. Credit risk is managed
through the Credit Policy function, which is designed to ensure adherence to a
high level of credit standards. The Credit Policy function reports to the
Corporation's Chief Financial Officer. Credit Policy provides a system of checks
and balances for Northern Trust's diverse credit-related activities by
establishing and monitoring all credit-related policies and practices throughout
Northern Trust and ensuring their uniform application. These activities are
designed to ensure that credit exposure is diversified on an industry and client
basis, thus lessening overall credit risk. These credit management activities
also apply to Northern Trust's use of derivative financial instruments,
including foreign exchange contracts and interest risk management instruments.
Individual credit authority for commercial loans and within Personal
Financial Services is limited to specified amounts and maturities. Credit
decisions involving commitment exposure in excess of the specified individual
limits are submitted to the appropriate Credit Approval Committee (Committee).
Each Committee is chaired by the executive in charge of the area and has a
Credit Policy officer as a voting participant. Each Committee's credit approval
authority is specified, based on commitment levels, credit ratings and
maturities. Credits involving commitment exposure in excess of these group
credit limits require the approval of the Senior Credit Committee.
Credit Policy established the Counterparty Risk Management Committee in order
to manage counterparty risk more effectively. This committee has sole credit
authority for exposure to all foreign banks, certain domestic banks which
Credit Policy deems to be counterparties and which do not have commercial credit
relationships within the Corporation, and certain other exposures.
Under the auspices of Credit Policy, country exposure limits are reviewed and
approved on a country-by-country basis.
As part of Northern Trust's ongoing credit granting process, internal credit
ratings are assigned to each client and credit before credit is extended, based
on creditworthiness. Credit Policy performs at least annually a review of
selected significant credit exposures to identify at the earliest possible
stages clients who might be facing financial difficulties. Internal credit
ratings are also reviewed during this process. Above average risk loans, which
will vary from time to time, receive special attention by both lending officers
and Credit Policy. This approach allows management to take remedial action in an
effort to deal with potential problems.
An integral part of the Credit Policy function is a formal review of all past
due and potential problem loans to determine which credits, if any, need to be
placed on nonaccrual status or charged off. As more fully described on pages 38
through 40, the provision for credit losses is reviewed quarterly to determine
the amount necessary to maintain an adequate reserve for credit losses.
Management of credit risk is reviewed by various bank regulatory agencies.
Independent auditors also perform a review of credit-related procedures, the
loan portfolio and other extensions of credit, and the reserve for credit losses
as part of their examination of the consolidated financial statements.
A further way in which credit risk is managed is by requiring collateral.
Management's assessment of the borrower's creditworthiness determines whether
collateral is obtained. The amount and type of collateral held varies but may
include deposits held in financial institutions, U.S. Treasury securities, other
marketable securities, income-producing commercial properties, accounts
receivable, property, plant and equipment, and
35
<PAGE>
NORTHERN TRUST CORPORATION
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
inventory. Collateral values are monitored on a regular basis to ensure that
they are maintained at an appropriate level.
The largest component of credit risk relates to the loan portfolio. Although
credit exposure is well-diversified, there are certain groups that meet the
accounting definition under SFAS No. 105 of credit risk concentrations.
According to this statement, group concentrations of credit risk exist if a
number of borrowers or other counterparties are engaged in similar activities
and have similar economic characteristics that would cause their ability to meet
contractual obligations to be similarly affected by changes in economic or other
conditions. The fact that an extension of credit falls into one of these groups
does not indicate that the credit has a higher than normal degree of credit
risk. These groups are: residential real estate, middle market companies and
small businesses, banks and bank holding companies and commercial real estate.
RESIDENTIAL REAL ESTATE. The residential real estate loan portfolio totaled
$5.9 billion or 45% of total domestic loans at December 31, 1998, compared with
$5.2 billion or 43% at December 31, 1997. Residential real estate loans consist
of conventional home mortgages and equity credit lines, which generally require
a loan to collateral value of no more than 75% to 80% at inception. Of the total
$5.9 billion in residential real estate loans, $3.0 billion were in the greater
Chicago area with the remainder distributed throughout the other geographic
regions served by Northern Trust. Legally binding commitments to extend credit,
which are primarily equity credit lines, totaled $657.1 million and $455.9
million as of December 31, 1998 and 1997, respectively.
MIDDLE MARKET COMPANIES AND SMALL BUSINESSES. Credit exposure to middle
market companies and small businesses is primarily in the form of commercial
loans, which totaled $1.8 billion at December 31, 1998 and $1.6 billion as of
December 31, 1997. These loans are to a diversified group of borrowers that are
predominantly in the manufacturing, wholesaling, distribution and services
industries, most of which have total annual sales of less than $500 million. The
largest component of this group of borrowers is located in the midwestern areas
served by the Bank. Middle market and small businesses have been an important
focus of business development, and it is part of the strategic plan to continue
to selectively grow the portfolio with such entities. The credit risk associated
with middle market and small business lending is principally influenced by
general economic conditions and the resulting impact on the borrower's
operations.
Off-balance sheet credit exposure to middle market companies and small
businesses in the form of legally binding commitments to extend credit, standby
letters of credit, and commercial letters of credit totaled $1.9 billion, $981.0
million, and $12.6 million, respectively, as of December 31, 1998, and $1.9
billion, $830.1 million, and $22.7 million, respectively, as of December 31,
1997.
BANKS AND BANK HOLDING COMPANIES. On-balance sheet credit risk to banks and
bank holding companies, both domestic and international, totaled $5.8 billion
and $5.5 billion at December 31, 1998 and 1997, respectively. The majority of
this exposure consisted of short-term money market assets, which totaled $4.0
billion at both December 31, 1998 and 1997, and noninterest-bearing demand
balances maintained at correspondent banks which totaled $1.4 billion as of
December 31, 1998, compared to $1.1 billion at year-end 1997. Commercial loans
to banks totaled $320 million and $232 million, respectively, as of December 31,
1998 and 1997. The majority of these loans were to U.S. bank holding companies,
primarily in the seventh Federal Reserve District, for their acquisition
purposes. Such lending activity is limited to entities which have a substantial
business relationship with Northern Trust. Legally binding commitments to extend
credit to banks and bank holding companies totaled $158 million and $222 million
as of December 31, 1998 and 1997, respectively.
COMMERCIAL REAL ESTATE. In managing its credit exposure, management has
defined a commercial real estate loan as one where: (1) the borrower's principal
business activity is the acquisition or the development of real estate for
commercial purposes; (2) the principal collateral is real estate held for
commercial purposes and loan repayment is expected to flow from the operation of
the property; or (3) the loan repayment is expected to flow from the sale or
refinance of real estate as a normal and ongoing part of the business. Unsecured
lines of credit to firms or individuals engaged in commercial real estate
endeavors are included without regard to the use of loan proceeds. The
commercial real estate portfolio consists of interim loans and commercial
mortgages.
The interim loans, which totaled $318.8 million and $235.0 million as of
December 31, 1998 and 1997, respectively, are composed primarily of loans to
developers that are highly experienced and well-known to Northern Trust. Short-
term interim loans provide financing for the initial phases of the acquisition
or development of commercial real estate, with the intent that the borrower will
refinance the loan through another financial institution or sell the project
upon its completion. The interim loans are primarily in the Chicago market in
which Northern Trust has a strong presence and a thorough knowledge of the local
economy.
36
<PAGE>
NORTHERN TRUST CORPORATION
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NONPERFORMING ASSETS AND 90 DAY PAST DUE LOANS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
December 31
- ---------------------------------------------------------------------------
(In Millions) 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual Loans
Domestic
Residential Real Estate $ 5.2 $ 5.3 $ 3.2 $ 2.4 $ 1.3
Commercial 21.8 26.3 2.2 17.5 15.7
Commercial Real Estate 2.9 7.1 11.3 9.0 9.1
Personal .6 .2 .2 .1 .3
Other -- -- -- -- --
Lease Financing -- -- -- -- .1
- ---------------------------------------------------------------------------
Total Domestic 30.5 38.9 16.9 29.0 26.5
International -- -- -- .2 1.3
- ---------------------------------------------------------------------------
Total Nonaccrual Loans 30.5 38.9 16.9 29.2 27.8
- ---------------------------------------------------------------------------
Restructured Loans 2.4 2.5 2.6 2.7 --
Other Real Estate Owned 2.3 1.9 1.9 1.8 2.2
- ---------------------------------------------------------------------------
Total Nonperforming Assets $35.2 $43.3 $21.4 $33.7 $30.0
- ---------------------------------------------------------------------------
Total 90 Day Past Due Loans (Still accruing) $30.0 $13.9 $15.2 $22.0 $17.3
</TABLE>
Commercial mortgage financing, which totaled $358.3 million and $347.1 mil-
lion as of December 31, 1998 and 1997, respectively, is provided for the ac-
quisition of income producing properties. Cash flows from the properties gen-
erally are sufficient to amortize the loan. These loans average less than
$500,000 each and are primarily located in the suburban Chicago and Florida
markets.
At December 31, 1998, off-balance sheet credit exposure to commercial real
estate developers in the form of legally binding commitments to extend credit
and standby letters of credit totaled $77.1 million and $28.4 million,
respectively. At December 31, 1997, legally binding commitments were $73.7
million and standby letters of credit were $36.0 million.
FOREIGN OUTSTANDINGS. Short-term interbank time deposits with foreign banks
represent the largest category of foreign outstandings. The Chicago head office
and the London Branch actively participate in the interbank market with U.S. and
foreign banks. In recent years, international commercial lending activities have
been focused on import and export financing for U.S.-based clients.
As used in this discussion, foreign outstandings are cross-border outstandings
as defined by the Securities and Exchange Commission. They consist of loans,
acceptances, interest-bearing deposits with financial institutions, accrued
interest and other monetary assets. Not included are letters of credit, loan
commitments, and foreign office local currency claims on residents funded by
local currency liabilities. Foreign outstandings related to a specific country
are net of guarantees given by third parties resident outside the country and
the value of tangible, liquid collateral held outside the country. However,
transactions with branches of foreign banks are included in these outstandings
and are classified according to the country location of the foreign banks' head
office.
Risk related to foreign outstandings is continually monitored and internal
limits are imposed on foreign exposure. The following table provides information
on foreign outstandings by country that exceed 1.00% of Northern Trust's assets.
FOREIGN OUTSTANDINGS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Commercial
(In Millions) Banks and Other Total
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
At December 31, 1998
Germany $1,007 $ -- $1,007
Italy 396 -- 396
United Kingdom 316 61 377
France 312 -- 312
Belgium 289 -- 289
- --------------------------------------------------------------------------------
At December 31, 1997
Germany $ 502 $ -- $ 502
Japan 394 -- 394
United Kingdom 251 71 322
- --------------------------------------------------------------------------------
At December 31, 1996
Japan $ 993 $ -- $ 993
</TABLE>
Aggregate foreign outstandings by country falling between 0.75% and 1.00% of
total assets at December 31, 1998 totaled $266 million to the Netherlands. This
compares with $192 million to France at December 31, 1997 and none at December
31, 1996.
NONPERFORMING ASSETS AND 90 DAY PAST DUE LOANS. Nonperforming assets consist of
nonaccrual loans, restructured loans and Other Real Estate Owned (OREO). OREO is
comprised of commercial and residential properties acquired in partial or total
satisfaction of problem loans. Past due loans are loans that are delinquent 90
days or more and still accruing interest. The balance in this category at any
reporting period can
37
<PAGE>
NORTHERN TRUST CORPORATION
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ANALYSIS OF RESERVE FOR CREDIT LOSSES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
($ In Millions) 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at Beginning of Year $ 147.6 $ 148.3 $ 147.1 $ 144.8 $ 145.5
- ---------------------------------------------------------------------------------------------------------------------
Charge-Offs
Residential Real Estate .8 .8 .2 .6 .1
Commercial 9.6 11.4 6.2 5.5 5.3
Commercial Real Estate .3 .7 7.4 3.6 4.1
Personal .8 1.3 1.5 1.2 1.2
Other .3 .2 .3 .8 --
- ---------------------------------------------------------------------------------------------------------------------
Total Charge-Offs 11.8 14.4 15.6 11.7 10.7
- ---------------------------------------------------------------------------------------------------------------------
Total Recoveries 1.8 4.7 3.8 5.8 4.0
- ---------------------------------------------------------------------------------------------------------------------
Net Charge-Offs 10.0 9.7 11.8 5.9 6.7
Provision for Credit Losses 9.0 9.0 12.0 6.0 6.0
Reserve Related to Acquisitions .2 -- 1.0 2.2 --
- ---------------------------------------------------------------------------------------------------------------------
Balance at End of Year $ 146.8 $ 147.6 $ 148.3 $ 147.1 $ 144.8
- ---------------------------------------------------------------------------------------------------------------------
Loans and Leases at Year-End $13,646.9 $12,588.2 $10,937.4 $9,906.0 $8,590.6
- ---------------------------------------------------------------------------------------------------------------------
Average Total Loans and Leases $13,315.0 $11,812.9 $10,332.1 $9,136.0 $8,316.1
- ---------------------------------------------------------------------------------------------------------------------
As a Percent of Year-End Loans and Leases
Net Loan Charge-Offs .07% .08% .11% .06% .08%
Provision for Credit Losses .07 .07 .11 .06 .07
Reserve Balance at Year-End 1.08 1.17 1.36 1.49 1.69
- ---------------------------------------------------------------------------------------------------------------------
As a Percent of Average Loans and Leases
Net Loan Charge-Offs .07% .08% .11% .06% .08%
Reserve Balance at Year-End 1.10 1.25 1.44 1.61 1.74
</TABLE>
fluctuate widely based on the timing of cash collections, renegotiations and
renewals.
Maintaining a low level of nonperforming assets is important to the ongoing
success of a financial institution. Northern Trust's comprehensive credit re-
view and approval process is critical to the ability to minimize nonperforming
assets on a long-term basis. In addition to the negative impact on both net in-
terest income and credit losses, nonperforming assets also increase operating
costs due to the expense associated with collection efforts.
The table on the preceding page presents the nonperforming assets and past due
loans for the current year and the prior years. Of the total loan portfolio of
$13.6 billion at December 31, 1998, $32.9 million or 0.24% was nonperforming, a
decrease of $8.5 million from year-end 1997 .
Included in the portfolio of nonaccrual loans are those which meet the
criteria as being "impaired" under the definition in SFAS No. 114. 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. As of December 31, 1998, impaired loans, which also
have been classified as nonperforming, totaled $32.0 million, with $5.9 million
of the reserve for credit losses allocated to these loans.
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).
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 nonperforming loans and potential charge-offs. The specific reserve is based
on a loan's current book value compared to the present value of its projected
future cash flows, collateral value or market value, as is relevant for the
particular loan.
At December 31, 1998, the specific reserve component amounted to $5.9 million
compared to $10.7 million at the end of 1997. During 1998, and as part of the
regular review of classified and nonperforming loans and potential charge-offs,
management determined that certain loans with specific reserves allo-
38
<PAGE>
NORTHERN TRUST CORPORATION
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
cated to them in 1997 had deteriorated and needed to be charged-off. Although
most of the $11.8 million in charge-offs during the year 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 $4.8
million decrease in the specific loss component of the reserve in 1998. The
increase in the specific loss component of the reserve in 1997 was principally
due to one larger nonperforming loan. Management did not view the developments
in either year as evidence of any changing trend in credit quality.
Allocated Inherent Component of the Reserve. The allocated portion of the
inherent reserve is based on management's review of historical charge-off
experience as well as management's judgment for loans in each credit rating
category over a period of time which management determines is adequate to
reflect longer term economic trends. 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 December 31, 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.
In 1997, management changed the measurement period for calculating the
historical loss ratio to use only the most recent five years, in order to more
closely align the ratios to the economic factors currently affecting the
portfolio. Previously, the cumulative average historical charge-off ratios
represented experience beginning in 1987, with subsequent years added to the
base. Management also decided in 1997 to use for the commercial and commercial
real estate segments of the portfolio an "industry base" reserve of 1% in order
to measure the loss estimated to be inherent in these riskier segments. Because
commercial and commercial real estate loans had in Northern Trust's experience
produced significant losses in brief periods at particular points in economic
cycles, management believed it appropriate to use a reserve higher than recent
charge-off experience would suggest. This decision was supported by what
management perceived to be industry practice for minimum reserve levels, and is
intended to prevent an understatement of reserves based upon over-reliance on
recent, favorable economic conditions. At December 31, 1998, after evaluating
the current level of uncertainty in international markets and its effect on
borrowers, management concluded it was appropriate to set this base
ALLOCATION OF THE RESERVE FOR CREDIT LOSSES
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31
- ----------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
Percent of Percent of Percent of Percent of Percent of
Loans to Loans to Loans to Loans to Loans to
Reserve Total Reserve Total Reserve Total Reserve Total Reserve Total
($ in Millions) Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Specific Reserve $ 5.9 --% $ 10.7 --% $ .8 --% $ 1.3 --% $ .3 --%
- ----------------------------------------------------------------------------------------------------------------------------
Inherent Reserve
Residential Real Estate 11.0 43 3.7 41 7.1 42 5.4 39 5.2 38
Commercial 77.4 29 87.1 30 71.2 29 84.4 32 85.9 31
Commercial Real Estate 11.8 5 6.4 5 5.1 5 6.8 5 12.3 6
Personal 3.2 11 .6 10 6.2 9 8.4 8 5.5 8
Other -- 5 -- 7 -- 9 -- 10 -- 11
Lease Financing 2.9 4 2.9 3 2.9 2 2.9 2 2.9 2
International 3.6 3 -- 4 2.3 4 2.6 4 2.9 4
Unallocated 31.0 -- 36.2 -- 52.7 -- 35.3 -- 29.8 --
- ----------------------------------------------------------------------------------------------------------------------------
Total Inherent Reserve $140.9 100% $136.9 100% $147.5 100% $145.8 100% $144.5 100%
- ----------------------------------------------------------------------------------------------------------------------------
Total Reserve $146.8 100% $147.6 100% $148.3 100% $147.1 100% $144.8 100%
</TABLE>
This allocation method should not be interpreted as an indication of expected
losses within the next year or any specified time period.
39
<PAGE>
NORTHERN TRUST CORPORATION
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
reserve at 1%. During 1998 management also decided to extend the base reserve
methodology to international exposure. In the current year, 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.
Management in 1997 reduced the amounts of credit exposure assigned to undrawn
loan commitments and standby letters of credit, to reflect this exposure by
using the factors applied in risk-based capital calculations. In 1996 the full
notional amount of the off-balance sheet exposures had been used for purposes of
this calculation. In 1998 management further refined its methodology by reducing
the loss factor assigned to undrawn loan commitments and standby letters of
credit from the 1% used in 1997 to .25% in order to reflect the nature and
extent of the credit exposure on these instruments as currently perceived.
The $9.2 million increase in the allocated portion of the inherent reserve
during 1998 to $109.9 million at December 31, 1998, 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.
An important consideration in establishing the level of the unallocated
portion of the reserve was the fact that the loan portfolio, and in particular
commercial loans, continued to grow in 1998 at a significant rate, as they had
done throughout the period 1994-97. The overall decrease in this portion of the
reserve from $36.2 million to $31.0 million primarily reflects the reassignment
of part of this reserve to the allocated inherent reserve through application of
the "industry base" reserve to international exposure, as described above.
Management viewed this as a more clear identification of some of the risk
previously dealt with by the unallocated inherent reserve. The decrease in the
unallocated inherent portion of the reserve also reflects management's judgment
that credit quality in other respects continues to be strong.
Other Factors. During 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", that was used in the determination
of the reserve level at the end of 1998 was estimated to be approximately $99
million. The decline from the actual December 31, 1997 balance for these loans
of $118 million primarily reflects 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.
Nonperforming loans fell from $41.4 million at December 31, 1997 to $32.9
million at December 31, 1998, reflecting principally charge-offs on one
commercial loan. This change was deemed relatively minor in a loan portfolio
that exceeded $13.3 billion on average throughout the period.
Overall Reserve. Management's evaluation of the factors above resulted in a
reserve for credit losses of $146.8 million at December 31, 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 absolute
level of the reserve should not decline appreciably given the continuing growth
in the portfolio. However, the reserve as a percentage of total loans declined
to 1.08% at December 31, 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 $9.0 million for
the year, while net charge-offs totaled $10.0 million.
Market Risk Management
OVERVIEW. The Board of Directors has overall responsibility for Northern Trust's
interest rate and foreign exchange risk management policies. To ensure adherence
to these policies, the Corporate Asset and Liability Policy Committee (ALCO)
establishes and monitors guidelines to control the sensitivity of earnings to
changes in interest rates. The guidelines apply to both on- and off-balance
sheet positions. ALCO also establishes and monitors limits for foreign exchange
risk. The goal of the ALCO process is to maximize earnings while maintaining a
high quality balance sheet and carefully controlling interest rate and foreign
exchange risk.
ASSET/LIABILITY MANAGEMENT. Asset/liability management activities include
lending, accepting and
40
<PAGE>
NORTHERN TRUST CORPORATION
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
INTEREST RATE SENSITIVITY ANALYSIS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1998
- ------------------------------------------------------------------------------------------------
1-3 4-12 1-2 3-5 Over 5
(In Millions) Months Months Years Years Years Total
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earning Assets
Money Market Assets $ 4,290.5 $ 139.8 $ -- $ -- $ 20.6 $ 4,450.9
Securities-Available for Sale 4,942.9 247.0 38.7 5.1 141.5 5,375.2
-Held to Maturity 115.3 81.6 33.7 61.2 180.7 472.5
-Trading Account 9.1 -- -- -- -- 9.1
Loans and Leases 4,288.7 1,501.9 1,105.3 2,873.0 3,878.0 13,646.9
- ------------------------------------------------------------------------------------------------
Total Earning Assets $13,646.5 $1,970.3 $1,177.7 $2,939.3 $ 4,220.8 $23,954.6
- ------------------------------------------------------------------------------------------------
Source of Funds
Savings and NOW Accounts $ 3,408.1 $ -- $ -- $ -- $ 597.6 $ 4,005.7
Money Market Deposit Accounts
and Savings Certificates 3,407.2 1,090.5 326.7 112.7 391.0 5,328.1
Other Time 4,146.5 228.4 69.7 82.5 .9 4,528.0
Senior Notes and Long-Term Debt .1 700.4 22.5 128.4 306.8 1,158.2
Debt-Floating Rate Capital
Securities 267.4 -- -- -- -- 267.4
Other Borrowings 5,157.5 1.4 -- 175.0 53.4 5,387.3
Noninterest-Related Funds, net (898.7) 90.0 -- -- 4,088.6 3,279.9
- ------------------------------------------------------------------------------------------------
Total Source of Funds $15,488.1 $2,110.7 $ 418.9 $ 498.6 $ 5,438.3 $23,954.6
- ------------------------------------------------------------------------------------------------
Interest Sensitive Gap $(1,841.6) $ (140.4) $ 758.8 $2,440.7 $(1,217.5) $ --
Off-Balance Sheet Hedges 1,092.7 284.0 (215.0) (661.1) (500.6) --
- ------------------------------------------------------------------------------------------------
Adjusted Interest Sensitive Gap $ (748.9) $ 143.6 $ 543.8 $1,779.6 $(1,718.1) $ --
- ------------------------------------------------------------------------------------------------
Cumulative Interest Sensitive Gap $ (748.9) $ (605.3) $ (61.5) $1,718.1 $ -- $ --
</TABLE>
- --Assets and liabilities whose rates are variable are reported based on their
repricing dates. Those with fixed rates are reported based on their scheduled
contractual repayment dates, except for certain investment securities and
loans secured by 1-4 family residential properties that are based on
anticipated prepayments.
- --The interest rate sensitivity assumptions presented for demand deposits,
noninterest-bearing time deposits, savings accounts and NOW accounts are based
on historical and current experiences regarding product portfolio retention
and interest rate repricing behavior. The portion of these deposits which are
considered long-term and stable have been classified in the Over 5 Years
category.
placing deposits, investing in securities, issuing debt, and hedging
interest rate risk with off-balance sheet instruments. The primary market risk
associated with asset/liability management activities is interest rate risk.
Sensitivity of earnings to interest rate changes arises when yields on assets
change in a different time period or in a different amount from that of
interest costs on liabilities. To mitigate interest rate risk, the structure
of the balance sheet is managed so that movements of interest rates on assets
and liabilities (adjusted for off-balance sheet hedges) are highly correlated
and contribute to earnings even in periods of volatile interest rates.
Northern Trust utilizes the following measurement techniques in the
management of interest rate risk: simulation of earnings; simulation of the
economic value of equity; and gap analysis. These three techniques are
complementary and are used in concert to provide a comprehensive picture of
interest rate risk management capability.
Simulation of earnings is the primary tool used to measure the sensitivity
of earnings to interest rate changes. Using computer modeling techniques,
Northern Trust is able to measure the potential impact of different interest
rate assumptions on pre-tax earnings. All on-balance sheet positions, as well
as derivative financial instruments (principally interest rate swaps) that are
used to manage interest rate risk, are included in the model simulation.
Northern Trust used model simulations to measure its earnings sensitivity
relative to management's most likely interest rate scenario as of December 31,
1998. This interest rate scenario assumed a steady interest rate environment
during 1999. The interest sensitivity was tested by running alternative
scenarios above and below the most likely interest rate outcome. The table on
the following page shows the effect on 1999 pre-tax earnings of 100 and 200
basis point upward and downward movements in interest rates relative to
management's interest rate assumptions. Each of the movements in interest
rates was assumed to have occurred gradually over a one year period. The 100
basis point increase, for example, consisted of twelve consecutive monthly
increases of 8.3 basis points. The following assumptions were also
incorporated into the model simulations:
. the balance sheet size was assumed to remain constant over the one year
simulation horizon.
41
<PAGE>
NORTHERN TRUST CORPORATION
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
. maturing assets and liabilities were invested or deposited into identical
items with the same maturity.
. prepayments on mortgage loans were projected under each rate scenario using a
mortgage analytics system that incorporated market prepayment assumptions.
. changes in the spreads between retail deposit rates and asset yields were
estimated based on historical patterns and current competitive trends.
INTEREST RATE RISK SIMULATION OF PRE-TAX INCOME AS OF DECEMBER 31, 1998
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Estimated Impact on
1999 Pre-tax Income
(In Millions) Increase/(Decrease)
- ---------------------------------------------------------
<S> <C>
Increase in Interest Rates Above
Management's Interest Rate Forecast
100 Basis Points $ (9.0)
200 Basis Points (16.8)
Decrease in Interest Rates Below
Management's Interest Rate Forecast
100 Basis Points 6.9
200 Basis Points 11.7
</TABLE>
The simulations of earnings do not incorporate any management actions which
might moderate the negative consequences of interest rate deviations. For that
reason and others, they do not reflect likely actual results but serve as
conservative estimates of interest rate risk.
A second technique used to measure interest rate risk is simulation of the
economic value of equity, which provides estimates of the potential future
impact on equity of various changes in interest rates. The potential effect of
interest rate changes on equity is derived from the impact of such changes on
the market values of assets, liabilities and off-balance sheet instruments.
Northern Trust limits aggregate market risk, as measured in this fashion, to
an acceptable level within the context of risk-return trade-offs.
The third technique that is used to measure interest rate risk is gap
analysis. The calculation of the interest sensitivity gap which is shown in
the table on the preceding page, measures the timing mismatches between assets
and liabilities. This interest sensitivity gap is determined by subtracting
the amount of liabilities from the volume of assets that reprice in a
particular time interval. A liability sensitive position results when more
liabilities than assets reprice or mature within a given period. Under this
scenario, as interest rates decline, increased net interest revenue will be
generated. Conversely, an asset sensitive position results when more assets
than liabilities reprice within a given period; in this instance, net interest
revenue would benefit from an increasing interest rate environment. The
economic impact of creating a liability or asset sensitive position depends on
the magnitude of actual changes in interest rates relative to the current
expectations of market participants.
A variety of actions are used to implement interest risk management
strategies, including:
. purchases of securities;
. sales of securities that are classified as available for sale;
. sales of held for sale residential real estate loans;
. issuance of senior notes;
. placing and taking Eurodollar time deposits; and
. hedging with various types of derivative financial instruments.
Northern Trust strives to use the most effective instruments for
implementing its interest risk management strategies, considering the costs,
liquidity and capital requirements of the various alternatives. For more
detail regarding how derivative financial instruments are used to implement
interest risk management strategies, refer to Note 21 on page 64.
FOREIGN EXCHANGE TRADING. Foreign exchange trading activities consist
principally of providing foreign exchange services to clients. Most of these
services are provided in connection with Northern Trust's growing global
custody business. However, in the normal course of business Northern Trust
also engages in proprietary trading of foreign currencies. The primary market
risk associated with these activities is foreign exchange risk.
Foreign currency positions exist when aggregate obligations to purchase and
sell a currency other than the U.S. dollar do not offset each other, or offset
each other in different time periods. Northern Trust mitigates the risk
related to its foreign currency positions by establishing limits on the
amounts of and durations of its positions. The limits on overnight inventory
positions are generally lower than the limits established for intra-day
trading activity. All overnight positions are monitored by a risk management
function, which is separate from the trading function, to ensure that the
limits are not exceeded. Although position limits are important in controlling
foreign exchange risk, they are not a substitute for the experience or
judgment of Northern Trust's senior management and its foreign currency
traders, who have extensive knowledge of the foreign currency markets. Foreign
currency positions and strategies are adjusted as needed in response to
changing market conditions.
As part of its risk management activities, Northern Trust regularly
measures the risk of loss associated with foreign currency positions using a
value at risk model. This statistical model provides an estimate, based on a
95% confidence interval, of the potential loss in earn-
42
<PAGE>
NORTHERN TRUST CORPORATION
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ings that may be incurred if an adverse one-day shift in foreign currency
exchange rates were to occur. The model, which is based on a variance/co-
variance methodology, incorporates historical currency price data and historical
correlations in price movement among the currencies. All foreign currency
positions, including foreign denominated assets and liabilities that were not
converted to U.S. dollars through the use of hedge contracts, are included in
the model.
Northern Trust's value at risk, based on foreign currency positions
totaled $98 thousand and $91 thousand as of December 31, 1998 and 1997,
respectively. Value at risk totals representing the average, high and low for
1998 were $285 thousand, $472 thousand and $98 thousand, respectively. These
totals indicate the degree of risk inherent in foreign currency positions as of
year-end and during the year. However, it is not a prediction of an expected
loss. Actual future gains and losses will vary depending on market conditions
and the size and duration of future foreign currency positions.
OTHER TRADING ACTIVITIES. Market risk associated with other trading
activities is negligible. Northern Trust is a party to various interest risk
management instruments, most of which consist of interest rate swaps entered
into to meet clients' interest risk management needs. When Northern Trust
enters into such swaps, its policy is to mitigate the resulting interest rate
risk with an offsetting swap or with futures contracts. Northern Trust carries
in its trading portfolio a small inventory of securities that are held for sale
to its clients. The interest rate risk associated with these securities is
insignificant.
Liquidity Risk Management
The objective of liquidity risk management is to ensure that Northern Trust
can meet its cash flow requirements and to capitalize on business opportunities
on a timely and cost effective basis. Management monitors the liquidity
position on a daily basis to ensure that funds are available at a minimum cost
to meet loan and deposit cash flows. The liquidity profile is also structured
to ensure that the capital needs of the Corporation and its banking
subsidiaries are met. Management maintains a detailed liquidity contingency
plan designed to adequately respond to dramatic changes in market conditions.
Liquidity is secured by managing the mix of items on the balance sheet and
expanding potential sources of liquidity. The balance sheet sources of
liquidity include the short-term money market portfolio, unpledged available
for sale securities, maturing loans, and the ability to securitize a portion of
the loan portfolio. Further, liquidity arises from the diverse funding base and
the fact that a significant portion of funding comes from clients that have
other relationships with Northern Trust.
A significant source of liquidity is the ability to draw funding from both
domestic and international markets. The Bank's senior long-term debt is rated
AA- by Standard & Poor's, Aa3 by Moody's Investors Service, AA+ by Thomson
BankWatch, and AA by Fitch IBCA. These ratings put The Northern Trust Company
in the top tier of United States banks.
Northern Trust maintains a liquid balance sheet with loans representing only
49% of total assets. Further, at December 31, 1998, it had a significant
liquidity reserve on its balance sheet in the form of cash and due from banks,
securities available for sale, and money market assets, which in aggregate
totaled $12.2 billion or 44% of total assets.
The Corporation's uses of cash consist mainly of dividend payments to the
Corporation's common and preferred stockholders, the payment of principal and
interest to note holders, purchases of its common stock and acquisitions. These
requirements are met largely by dividend payments from its subsidiaries, and by
interest and dividends earned on investment securities and money market assets.
Bank subsidiaries have the ability to pay dividends during 1999 equal to their
1999 eligible net profits plus $432.8 million. Bank subsidiary dividends are
subject to certain restrictions that are explained in Note 15 on page 60. The
Corporation's liquidity, defined as the amount of marketable assets in excess of
commercial paper, was strong at $130.3 million at year-end 1998. The cash flows
of the Corporation are shown in Note 30 on page 73. The Corporation also has a
$50 million back-up line of credit for its commercial paper issuance. The
Corporation's strong credit ratings allow it to access credit markets on
favorable terms.
Capital Management
One of management's primary objectives is to maintain a strong capital
position to merit the confidence of clients, the investing public, bank
regulators and stockholders. A strong capital position helps Northern Trust
take advantage of profitable investment opportunities when they arise and would
help withstand unforeseen adverse developments. In 1998, average common equity
increased 13% or $195 million reaching a record $1.8 billion at year-end, while
total risk-weighted assets rose 9%. Total equity as of December 31, 1998 was
$1.9 billion including $120 million of auction rate preferred stock. The
average dividend rate declared on the $120 million of auction rate preferred
stock was 4.12% during 1998. During 1998 the Corporation purchased 1,626,213 of
its own shares as part of the buyback program authorized in 1996. The
Corporation may purchase, after December 31, 1998, up to 1.6 million additional
shares under the current buyback program.
43
<PAGE>
NORTHERN TRUST CORPORATION
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CAPITAL ADEQUACY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31
- --------------------------------------------------------------------
($ In Millions) 1998 1997
- --------------------------------------------------------------------
<S> <C> <C>
Tier 1 Capital
Common Stockholders' Equity $ 1,820 $ 1,619
Debt-Floating Rate Capital Securities 267 267
Goodwill and Other Intangible Assets (124) (122)
Net Unrealized (Gain) Loss on Securities 1 (2)
- --------------------------------------------------------------------
Total Tier 1 Capital 1,964 1,762
- --------------------------------------------------------------------
Tier 2 Capital
Auction Rate Preferred Stock 120 120
Reserve for Credit Losses 147 148
Long-Term Debt * 390 315
- --------------------------------------------------------------------
Total Tier 2 Capital 657 583
- --------------------------------------------------------------------
Total Risk-Based Capital 2,621 2,345
- --------------------------------------------------------------------
Risk-Weighted Assets** $20,074 $18,342
- --------------------------------------------------------------------
Total Assets End of Period (EOP) $27,870 $25,315
Average Fourth Quarter Assets** 28,467 25,646
Total Loans--EOP 13,647 12,588
Ratios
Risk-Based Capital to Risk-Weighted Assets
Tier 1 9.8% 9.6%
Total (Tier 1 and Tier 2) 13.1 12.8
Leverage 6.9 6.9
- --------------------------------------------------------------------
Common Stockholders' Equity to
Total Loans EOP 13.3% 12.9%
Total Assets EOP 6.5 6.4
Stockholders' Equity to
Total Loans EOP 14.2 13.8
Total Assets EOP 7.0 6.9
</TABLE>
Notes:
*Long-Term Debt that qualifies for risk-based capital amortizes for the purpose
of inclusion in tier 2 capital during the five years before maturity.
**Assets have been adjusted for goodwill and other intangible assets, net
unrealized gain (loss) on securities and excess reserve for credit losses that
have been excluded from tier 1 and tier 2 capital, if any.
The Board of Directors increased the quarterly dividend by 14% to $.24 per
common share in November 1998. Over the last five years the common dividend has
increased 118%.
The higher capital levels and resulting increase in risk-based capital ratios
in 1998 was the result of Northern Trust's ongoing policy of retaining a
sufficient percentage of earnings in the Corporation to allow for strategic
expansion while maintaining a strong balance sheet. Northern Trust Corporation's
risk-based capital ratios were strengthened in 1997 by the issuance in January
1997 of $150 million Floating Rate Capital Securities, Series A and by the
issuance in April 1997 of $120 million Floating Rate Capital Securities, Series
B, both of which qualify as tier 1 capital. Both series of the Floating Rate
Capital Securities have a 30 year fixed maturity. All of Northern Trust's
capital ratios were well above the ratios that are a requirement for regulatory
treatment as "well capitalized."
At December 31, 1998, tier 1 capital was 9.8% and total capital was 13.1% of
risk-weighted assets. These risk-based capital ratios are well above the
minimum requirements of 4.0% for tier 1 and 8.0% for total risk-based capital
ratios. Northern Trust's leverage ratio (tier 1 capital to fourth quarter
average assets) of 6.9% is also well above the regulatory requirement of 3.0%.
In addition, each of the subsidiary banks had a ratio of at least 8.6% for tier
1 capital, 10.9% for total risk-based capital, and 6.0% for the leverage ratio.
Operational and Fiduciary Risk Management
In providing banking and trust services, Northern Trust, in addition to
safekeeping and managing trust and corporate assets, processes cash and
securities transactions exceeding $150 billion on average each business day.
These activities expose Northern Trust to operational and fiduciary risk.
Controls over such processing activities are closely monitored to safeguard the
assets of Northern Trust and its clients. However, from time to time Northern
Trust has incurred losses related to these risks and there can be no assurance
that such losses will not occur in the future.
Operational risk is the risk of unexpected losses attributable to human
error, systems failures, fraud, or inadequate internal controls and procedures.
This risk is mitigated through a system of internal controls that are designed
to keep operating risk at appropriate levels in view of Northern Trust's
corporate standards and the risks inherent in the markets in which Northern
Trust operates. The system of internal controls includes policies and procedures
that require the proper authorization, approval, documentation and monitoring of
transactions. Each business unit is responsible for complying with corporate
policies and external regulations applicable to the unit, and is responsible for
establishing specific procedures to do so. Northern Trust's internal auditors
monitor the overall effectiveness of the system of internal controls on an
ongoing basis.
Fiduciary risk is the risk of loss that may occur as a result of breaching a
fiduciary duty to a client. To limit this risk, the Trust Investment Committee
establishes corporate policies and procedures to ensure that obligations to
clients are discharged faithfully and in compliance with applicable legal and
regulatory requirements. These policies and procedures provide guidance and
establish standards related to the creation, sale, and management of investment
products, trade execution, and counterparty selection. Business units have the
primary responsibility for adhering to the policies and procedures applicable to
their businesses
44
<PAGE>
NORTHERN TRUST CORPORATION
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FORWARD-LOOKING INFORMATION
- --------------------------------------------------------------------------------
This annual report contains statements that may be considered forward-looking,
such as the discussion of Northern Trust's financial goals, expansion and
business development plans, business prospects and positioning with respect to
market, demographic and pricing trends, new business results, credit quality,
outlook and reserves, planned capital expenditures and technology spending,
planned schedules or expected completion dates for Year 2000 work, and the
effect of various matters (including Year 2000 issues and the introduction of
the euro) on Northern Trust's business. These statements speak of Northern
Trust's plans, goals, beliefs or expectations, refer to estimates or use similar
terms. Those relating to Year 2000 matters also constitute Year 2000 readiness
disclosures. Actual results could differ materially from the results indicated
by these statements because the realization of those results is subject to many
uncertainties including:
. The future health of the U.S. and international economies and other
economic factors that affect wealth creation, investment and savings
patterns, and Northern Trust's interest rate risk exposure and credit risk.
. Changes in U.S. and worldwide securities markets, with respect to the
market values of financial assets and the level of volatility in certain
markets such as foreign exchange.
. Regulatory developments and changes in accounting requirements or
interpretations in the U.S. and other countries where Northern Trust has
significant business.
. Changes in the nature of Northern Trust's competition resulting from
industry consolidation, regulatory change and other factors, as well as
actions taken by particular competitors.
. Northern Trust's success in continuing to generate significant levels of
new business in its existing markets, as well as its success in identifying
and penetrating targeted markets, through acquisition or otherwise, and
generating a profit in those markets in a reasonable time.
. Northern Trust's ability to continue to fund and accomplish technological
innovation, improve processes and controls and attract and retain capable
staff in order to deal with increasing volume and complexity in many of its
businesses and technology challenges, such as Year 2000 systems renovation.
. The ability of various vendors, clients, counterparties and governmental or
private entities on which Northern Trust's business depends, or in which
Northern Trust invests for itself or its clients to complete Year 2000
systems renovation efforts on a timely basis and in a manner that allows
them to continue normal business operations or furnish products, services
or data to Northern Trust without disruption, as well as Northern Trust's
ability to accurately evaluate their readiness in this regard and, where
necessary, develop and implement effective contingency plans.
. The accuracy and effectiveness of Northern Trust's assessment of and work
on issues such as those described under the caption "Year 2000 Project."
. The impact of the euro on Northern Trust's global custody business and
foreign exchange trading results.
. The ability of each of Northern Trust's principal businesses to maintain a
product mix that achieves satisfactory margins.
. Changes in tax laws or other legislation that could affect Northern Trust's
personal and institutional asset administration businesses.
Some of these uncertainties that may affect future results are discussed in
more detail in the sections of "Item 1-- Business" of the 1998 Annual Report on
Form 10-K captioned "Government Policies," "Competition" and "Regulation and
Supervision." 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.
45
<PAGE>
NORTHERN TRUST CORPORATION
CONSOLIDATED BALANCE SHEET
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31
- --------------------------------------------------------------------------------
($ In Millions) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and Due from Banks $ 2,366.0 $ 1,738.9
Federal Funds Sold and Securities Purchased under
Agreements to Resell (Note 4) 1,164.4 2,991.7
Time Deposits with Banks 3,264.7 2,283.2
Other Interest-Bearing 21.8 34.5
Securities (Note 3)
Available for Sale 5,375.2 3,733.3
Held to Maturity (Fair value-$485.7 in 1998 and $473.4
in 1997) 472.5 456.1
Trading Account 9.1 8.8
- --------------------------------------------------------------------------------
Total Securities 5,856.8 4,198.2
- --------------------------------------------------------------------------------
Loans and Leases (Note 5)
Commercial and Other 7,761.7 7,401.5
Residential Mortgages 5,885.2 5,186.7
- --------------------------------------------------------------------------------
Total Loans and Leases (Net of unearned income-$224.3
in 1998 and $151.9 in 1997) 13,646.9 12,588.2
- --------------------------------------------------------------------------------
Reserve for Credit Losses (Note 6) (146.8) (147.6)
Buildings and Equipment (Notes 8 and 9) 340.2 316.4
Customers' Acceptance Liability 33.3 31.4
Trust Security Settlement Receivables 336.7 291.4
Other Assets (Note 18) 986.0 989.1
- --------------------------------------------------------------------------------
Total Assets $27,870.0 $25,315.4
- --------------------------------------------------------------------------------
Liabilities
Deposits
Demand and Other Noninterest-Bearing $ 3,927.5 $ 3,510.1
Savings and Money Market 4,614.7 4,278.9
Savings Certificates 2,175.0 2,092.6
Other Time 540.2 572.0
Foreign Offices-Demand 413.4 451.0
-Time 6,531.9 5,455.4
- --------------------------------------------------------------------------------
Total Deposits 18,202.7 16,360.0
Federal Funds Purchased 2,025.1 821.2
Securities Sold under Agreements to Repurchase (Note 4) 2,114.9 1,139.7
Commercial Paper 148.1 146.8
Other Borrowings 1,099.2 2,876.6
Senior Notes (Note 10) 700.0 785.0
Long-Term Debt (Note 10) 458.2 439.5
Debt-Floating Rate Capital Securities (Note 11) 267.4 267.4
Liability on Acceptances 33.3 31.4
Other Liabilities 880.8 708.8
- --------------------------------------------------------------------------------
Total Liabilities 25,929.7 23,576.4
- --------------------------------------------------------------------------------
Stockholders' Equity
Preferred Stock (Note 12) 120.0 120.0
Common Stock, $1.66 2/3 Par Value; Authorized
280,000,000 shares in 1998 and 1997; Outstanding
111,214,740 shares and 111,367,436 shares in 1998 and
1997, respectively (Notes 12 and 14) 189.9 189.9
Capital Surplus 212.9 225.5
Retained Earnings 1,582.9 1,330.8
Net Unrealized Gain (Loss) on Securities Available for
Sale (Note 3) (.6) 2.1
Common Stock Issuable-Performance Plan (Note 25) 30.4 11.7
Deferred Compensation-ESOP and Other (44.3) (37.5)
Treasury Stock (at cost-2,746,022 shares in 1998 and
2,593,326 shares in 1997) (150.9) (103.5)
- --------------------------------------------------------------------------------
Total Stockholders' Equity 1,940.3 1,739.0
- --------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $27,870.0 $25,315.4
- --------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements on pages 50-73.
46
<PAGE>
NORTHERN TRUST CORPORATION
CONSOLIDATED STATEMENT OF INCOME
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Year Ended December 31
- --------------------------------------------------------------------------------
($ In Millions Except Per Share
Information) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Noninterest Income
Trust Fees $ 816.3 $ 689.2 $ 594.4
Foreign Exchange Trading Profits 103.5 104.8 58.8
Treasury Management Fees 69.9 60.2 55.3
Security Commissions and Trading Income 28.0 26.1 23.9
Other Operating Income (Note 16) 52.6 53.5 47.2
Investment Security Gains (Note 3) 1.3 .7 .4
- --------------------------------------------------------------------------------
Total Noninterest Income 1,071.6 934.5 780.0
- --------------------------------------------------------------------------------
Net Interest Income (Note 17)
Interest Income 1,503.1 1,332.8 1,151.5
Interest Expense 1,025.9 894.6 763.2
- --------------------------------------------------------------------------------
Net Interest Income 477.2 438.2 388.3
Provision for Credit Losses (Note 6) 9.0 9.0 12.0
- --------------------------------------------------------------------------------
Net Interest Income after Provision for
Credit Losses 468.2 429.2 376.3
- --------------------------------------------------------------------------------
Noninterest Expenses
Compensation (Notes 25 and 26) 518.1 448.3 368.8
Employee Benefits (Note 19) 91.3 79.0 72.5
Occupancy Expense (Notes 8 and 9) 67.9 66.7 60.7
Equipment Expense (Note 8) 62.2 62.2 56.0
Other Operating Expenses (Note 18) 257.6 235.6 210.9
- --------------------------------------------------------------------------------
Total Noninterest Expenses 997.1 891.8 768.9
- --------------------------------------------------------------------------------
Income before Income Taxes 542.7 471.9 387.4
Provision for Income Taxes (Note 13) 188.8 162.5 128.6
- --------------------------------------------------------------------------------
Net Income $ 353.9 $ 309.4 $ 258.8
- --------------------------------------------------------------------------------
Net Income Applicable to Common Stock $ 349.0 $ 304.4 $ 253.9
- --------------------------------------------------------------------------------
Net Income Per Common Share (Note 14)
-Basic $ 3.15 $ 2.74 $ 2.27
-Diluted 3.04 2.66 2.21
- --------------------------------------------------------------------------------
Average Number of Common Shares
Outstanding
-Basic 110,683,488 110,977,645 111,933,829
-Diluted 114,867,058 114,661,156 114,839,118
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements on pages 50-73.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
<CAPTION>
For the Year Ended December 31
- --------------------------------------------------------------------------------
(In Millions) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income $ 353.9 $ 309.4 $ 258.8
Other Comprehensive Income (before tax)
Unrealized Gains (Losses) on Securities
Available for Sale
Unrealized Holding Gains (Losses)
Arising during the Period (3.2) 1.3 (1.6)
Less: Reclassification Adjustments for
Gains Included in Net Income (1.0) (.5) (.1)
Minimum Pension Liability Adjustment (5.7) (3.8) (1.4)
Income Tax Benefit Related to Items of
Other Comprehensive Income 3.7 1.1 1.2
- --------------------------------------------------------------------------------
Other Comprehensive Income (6.2) (1.9) (1.9)
- --------------------------------------------------------------------------------
Comprehensive Income $ 347.7 $ 307.5 $ 256.9
- --------------------------------------------------------------------------------
</TABLE>
This statement was adopted in 1998 in accordance with SFAS No. 130 "Reporting
Comprehensive Income."
47
<PAGE>
NORTHERN TRUST CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Year Ended
December 31
- -------------------------------------------------------------------------------
(In Millions) 1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Preferred Stock
Balance at January 1 $ 120.0 $ 120.0 $ 170.0
Conversion of Preferred Stock, Series E -- -- (50.0)
- -------------------------------------------------------------------------------
Balance at December 31 120.0 120.0 120.0
- -------------------------------------------------------------------------------
Common Stock
Balance at January 1 189.9 189.9 93.6
Conversion of Preferred Stock, Series E -- -- 1.3
Transfer from Capital Surplus-Two-for-One Stock
Split -- -- 95.0
- -------------------------------------------------------------------------------
Balance at December 31 189.9 189.9 189.9
- -------------------------------------------------------------------------------
Capital Surplus
Balance at January 1 225.5 231.7 306.1
Stock Issued-Incentive Plan and Awards (12.6) (6.2) (8.6)
Conversion of Preferred Stock, Series E -- -- 29.2
Transfer to Common Stock-Two-for-One Stock Split -- -- (95.0)
- -------------------------------------------------------------------------------
Balance at December 31 212.9 225.5 231.7
- -------------------------------------------------------------------------------
Retained Earnings
Balance at January 1 1,330.8 1,110.2 928.8
Net Income 353.9 309.4 258.8
Dividends Declared-Common Stock (96.9) (83.8) (72.5)
Dividends Declared-Preferred Stock (4.9) (5.0) (4.9)
- -------------------------------------------------------------------------------
Balance at December 31 1,582.9 1,330.8 1,110.2
- -------------------------------------------------------------------------------
Net Unrealized Gain (Loss) on Securities
Available for Sale
Balance at January 1 2.1 1.6 2.6
Unrealized Gain (Loss), net (2.7) .5 (1.0)
- -------------------------------------------------------------------------------
Balance at December 31 (.6) 2.1 1.6
- -------------------------------------------------------------------------------
Common Stock Issuable-Performance Plan
Balance at January 1 11.7 10.4 14.7
Stock Issuable, net of Stock Issued 18.7 1.3 (4.3)
- -------------------------------------------------------------------------------
Balance at December 31 30.4 11.7 10.4
- -------------------------------------------------------------------------------
Deferred Compensation-ESOP and Other
Balance at January 1 (37.5) (35.5) (39.4)
Compensation Deferred (18.3) (8.9) (2.7)
Compensation Amortized 15.0 9.3 7.5
Unfunded Pension Liability, net (3.5) (2.4) (.9)
- -------------------------------------------------------------------------------
Balance at December 31 (44.3) (37.5) (35.5)
- -------------------------------------------------------------------------------
Treasury Stock
Balance at January 1 (103.5) (84.2) (23.8)
Stock Options and Awards 69.9 51.0 42.9
Stock Purchased (117.3) (70.3) (122.5)
Conversion of Preferred Stock, Series E -- -- 19.2
- -------------------------------------------------------------------------------
Balance at December 31 (150.9) (103.5) (84.2)
- -------------------------------------------------------------------------------
Total Stockholders' Equity at December 31 $1,940.3 $1,739.0 $1,544.1
- -------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements on pages 50-73.
48
<PAGE>
NORTHERN TRUST CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Year Ended December 31
- --------------------------------------------------------------------------------
(In Millions) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net Income $ 353.9 $ 309.4 $ 258.8
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Provision for Credit Losses 9.0 9.0 12.0
Depreciation on Buildings and Equipment 52.4 49.3 46.8
(Increase) Decrease in Interest Receivable (23.0) (4.7) 17.7
Increase (Decrease) in Interest Payable (10.7) 20.6 9.4
Amortization and Accretion of Securities
and Unearned Income (214.9) (190.0) (120.2)
Amortization of Software, Goodwill and
Other Intangibles 54.1 51.0 42.3
Deferred Income Tax 57.0 38.0 29.5
Net (Increase) Decrease in Trading Account
Securities (.3) (4.0) 84.1
Other, net 153.4 (77.5) (32.4)
- --------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 430.9 201.1 348.0
- --------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Net (Increase) Decrease in Federal Funds
Sold and Securities Purchased under
Agreements to Resell 1,827.3 (1,969.1) (860.5)
Net Increase in Time Deposits with Banks (981.5) (223.2) (492.4)
Net (Increase) Decrease in Other Interest-
Bearing Assets 12.7 79.8 (59.8)
Purchases of Securities--Held to Maturity (233.4) (162.6) (2,068.7)
Proceeds from Maturity and Redemption of
Securities--Held to Maturity 218.9 207.2 2,112.9
Purchases of Securities--Available for Sale (110,806.2) (75,308.5) (31,666.5)
Proceeds from Sale, Maturity and Redemption
of Securities--Available for Sale 109,456.3 76,121.5 32,611.3
Net Increase in Loans and Leases (1,147.7) (1,708.0) (1,066.5)
Purchases of Buildings and Equipment (84.5) (57.5) (56.8)
Proceeds from Sale of Buildings and
Equipment 8.3 3.3 --
Net (Increase) Decrease in Trust Security
Settlement Receivables (45.3) 70.9 (35.2)
Decrease in Cash Due to Acquisitions (15.0) (53.0) (14.6)
Other, net (1.7) (1.2) (10.6)
- --------------------------------------------------------------------------------
Net Cash Used in Investing Activities (1,791.8) (3,000.4) (1,607.4)
- --------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Net Increase in Deposits 1,842.7 2,563.8 1,308.0
Net Increase (Decrease) in Federal Funds
Purchased 1,203.9 168.2 (1,647.1)
Net Increase (Decrease) in Securities Sold
under Agreements to Repurchase 975.2 173.6 (892.6)
Net Increase (Decrease) in Commercial Paper 1.3 (2.2) 2.3
Net Increase (Decrease) in Short-Term Other
Borrowings (1,770.8) (157.0) 2,273.2
Proceeds from Term Federal Funds Purchased 1,730.8 1,612.4 2,630.2
Repayments of Term Federal Funds Purchased (1,737.4) (1,720.9) (2,637.2)
Proceeds from Senior Notes & Long-Term Debt 801.4 803.4 901.5
Repayments on Senior Notes & Long-Term Debt (867.7) (331.7) (520.3)
Proceeds from Debt-Floating Rate Capital
Securities -- 267.4 --
Treasury Stock Purchased (116.5) (66.2) (118.2)
Net Proceeds from Stock Options 19.5 13.0 12.1
Cash Dividends Paid on Common and Preferred
Stock (98.5) (85.3) (74.7)
Other, net 4.1 7.2 5.8
- --------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 1,988.0 3,245.7 1,243.0
- --------------------------------------------------------------------------------
Increase (Decrease) in Cash and Due from
Banks 627.1 446.4 (16.4)
Cash and Due from Banks at Beginning of
Year 1,738.9 1,292.5 1,308.9
- --------------------------------------------------------------------------------
Cash and Due From Banks at End of Year $ 2,366.0 $ 1,738.9 $ 1,292.5
- --------------------------------------------------------------------------------
Schedule of Noncash Investing and Financing
Activities:
Building Purchase Obligation $ -- $ 20.0 $ --
Conversion of Preferred Stock, Series E to
Common Stock -- -- 49.7
Supplemental Disclosures of Cash Flow
Information:
Interest Paid $ 1,036.6 $ 874.1 $ 753.8
Income Taxes Paid 128.0 102.5 82.7
- --------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements on pages 50-73.
49
<PAGE>
NORTHERN TRUST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1. ACCOUNTING POLICIES--The consolidated financial statements have been prepared
in conformity with generally accepted accounting principles and reporting
practices prescribed for the banking industry. A description of the significant
accounting policies follows:
A. BASIS OF PRESENTATION. The consolidated financial statements include the
accounts of Northern Trust Corporation (Corporation) and its wholly-owned
subsidiary The Northern Trust Company (Bank) and their wholly-owned
subsidiaries. Throughout the notes, the term "Northern Trust" refers to
Northern Trust Corporation and subsidiaries. Significant intercompany balances
and transactions have been eliminated in consolidation. The consolidated
statement of income includes results of acquired and pooled subsidiaries from
the dates of acquisition.
B. NATURE OF OPERATIONS. The Corporation is a bank holding company whose
principal subsidiary is the Chicago-based Bank. The Corporation also owns banks
in Florida, Arizona, California, Texas and Colorado, a federal savings bank in
Michigan, and various other nonbank subsidiaries, including a securities
brokerage firm, registered investment advisers NTGA and NTQA and a retirement
services company. Northern Trust generates the majority of its revenues from
its two primary business units, Corporate and Institutional Services (C&IS) and
Personal Financial Services (PFS). Investment products and services are
provided to clients in C&IS and PFS through a third business unit, Northern
Trust Global Investments (NTGI).
The C&IS unit provides trust and custody-related services in the United
States and foreign markets to corporations and institutions; investment
management services; a full range of commercial banking services to large
domestic corporations and financial institutions; treasury management services
to meet the needs of major corporations and financial institutions; and foreign
exchange services for global custody clients and Northern Trust's own account.
The PFS unit provides personal trust, investment management, estate
administration, personal banking and mortgage lending services, and also
provides commercial banking services to middle market companies. These services
are delivered through the Bank and the network of subsidiaries in Florida,
Arizona, California, Texas, Colorado and Michigan.
C. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
D. FOREIGN CURRENCY TRANSLATION. Foreign currency asset and liability
accounts of overseas branches and subsidiaries are translated at current rates
of exchange, except for buildings and equipment which are translated at rates
in effect at the date of acquisition. Income and expense accounts are
translated at month-end rates of exchange.
Foreign exchange trading positions are valued daily at prevailing market
rates. Gains and losses on trading positions and on positions entered into to
hedge foreign denominated investments are recognized currently in other
operating income. Unrealized gains on trading positions are reported as other
assets and unrealized losses are reported as other liabilities in the
consolidated balance sheet. Gains and losses on foreign currency positions that
were entered into to hedge specific, firm foreign currency obligations are
deferred and recognized in income over the life of the underlying asset or
liability or as the underlying expense or commitment is incurred.
E. SECURITIES. Securities Available for Sale consist of debt and equity
securities that are not intended to be held to maturity and are not held for
trading. Securities available for sale are reported at fair value, with
unrealized gains and losses credited or charged, net of the tax effect,
directly to stockholders' equity. Realized gains and losses on securities
available for sale are determined on a specific identification basis and are
reported in the consolidated statement of income as investment security gains
and losses.
Securities Held to Maturity consist of debt securities that management
intends to, and Northern Trust has the ability to, hold until maturity. Such
securities are reported at cost, adjusted for amortization of premium and
accretion of discount.
Securities Held for Trading are stated at fair value. Realized and
unrealized gains and losses on securities held for trading are reported in the
consolidated statement of income under security commissions and trading income.
F. INTEREST RISK MANAGEMENT INSTRUMENTS. Interest risk management instruments
include interest rate swap contracts, futures contracts, options and similar
contracts. Northern Trust is a party to various interest risk management
instruments as part of its asset/liability management activities, to meet the
interest risk management needs of its clients and as part of its trading
activity for its own account. Unrealized gains and receivables on interest risk
management instruments are reported as other assets and unrealized losses and
payables are reported as other liabilities in the consolidated balance sheet.
Asset/Liability Management Instruments. Interest rate swaps are the primary
interest risk management instrument used for asset/liability management purposes
50
<PAGE>
NORTHERN TRUST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Futures contracts, options, and similar contracts are also used for
asset/liability management, but these contracts do not have a material impact on
Northern Trust's financial condition or net income. Accrued interest income or
expense on asset/liability management swaps is recognized as a component of the
interest income or expense of the hedged items. Unrealized gains and losses on
such swaps are recognized consistent with the method of accounting for the
hedged items. For example, there is no recognition of unrealized gains and
losses on swaps used to hedge items that are carried at their amortized cost.
Unrealized gains and losses on interest rate swaps used to hedge available for
sale securities are reported in stockholders' equity, net of applicable taxes.
A swap that is classified in the asset/liability management category must be
assigned to hedge a specific asset or liability and must reduce Northern Trust's
interest rate risk. It must also achieve its intended objective of converting
the yield on the hedged asset or liability to the desired rate. This criteria is
assumed to have been met if the interest rate on the hedged asset or liability
is identical to the offsetting interest rate on the swap. If the two rates are
not identical, the correlation between the levels of the two rates since the
inception of the swap must be measured to ensure that the swap is meeting its
intended objective. In addition, the notional amount of the swap must be less
than or equal to the par amount of the item being hedged. If a forward swap is
entered into to hedge an anticipated transaction, the significant terms (e.g.,
the expected date, type of instrument, quantity, and maturity date) of the
anticipated transaction must be identified, and it must be probable that the
anticipated transaction will occur.
If an asset/liability management swap is terminated or ceases to meet the
criteria described above, any realized or unrealized gain or loss at the time is
deferred and amortized over the remainder of the original hedge period. Any
subsequent realized or unrealized gains or losses are reported as security
commissions and trading income in the consolidated statement of income. If the
item being hedged is sold, any deferred or unrealized gain or loss on the swap
at the time of the transaction is considered in the calculation of the gain or
loss on the sale. If the swap is not terminated, it must be marked to market on
a prospective basis, with realized and unrealized gains and losses included in
security commissions and trading income in the consolidated statement of income.
Client-Related and Trading Instruments. Interest risk management instruments
entered into to meet clients' interest risk management needs or for trading
purposes are carried at fair value, with realized and unrealized gains and
losses included in security commissions and trading income.
G. LOANS AND LEASES. Loans that are held to maturity are reported at the
principal amount outstanding, net of unearned income. Residential real estate
loans classified as held for sale are reported at the lower of aggregate cost
or market value. Interest income on loans is recorded on an accrual basis
until, in the opinion of management, there is a question as to the ability of
the debtor to meet the terms of the contract, or when interest or principal is
more than 90 days past due and the loan is not well-secured and in the process
of collection. At the time a loan is placed on nonaccrual status, interest
accrued but not collected is reversed against interest income of the current
period. Loans are returned to accrual status when factors indicating doubtful
collectibility no longer exist. Interest collected on non-accrual loans is
applied to principal unless, in the opinion of management, collectibility of
principal is not in doubt.
Premiums and discounts on loans are recognized as an adjustment of yield by
the interest method based on the contractual terms of the loan. Commitment fees
that are considered to be an adjustment to the loan yield, loan origination
fees and certain direct costs are deferred and accounted for as an adjustment
to the yield.
Unearned lease income from direct financing and leveraged leases is
recognized using the interest method. This method provides a constant rate of
return on the unrecovered investment over the life of the lease.
H. RESERVE FOR CREDIT LOSSES. The reserve for credit losses represents manage-
ment's estimate of probable inherent losses which have occurred as of the date
of the financial statements. The loan and lease portfolio and other credit ex-
posures are regularly reviewed to evaluate the adequacy of the reserve for
credit losses. In determining the level of the reserve, Northern Trust evalu-
ates the reserve necessary for specific nonperforming loans and also estimates
losses inherent in other credit exposures.
The result is a reserve with these components:
Specific Reserve. The amount of specific reserves is determined through a
loan-by-loan analysis of nonperforming loans that considers expected future
cash flows, the value of collateral and other factors that may impact the
borrower's ability to pay.
Allocated Inherent Reserve. The amount of the allocated portion of the
inherent loss reserve is based on loss factors assigned to Northern Trust's
credit exposures based on internal credit ratings. These loss factors are
primarily based on management's judgment concerning the effect of the business
cycle on the creditworthiness of Northern Trust's borrowers, as well as
historical charge-off experience.
Unallocated Inherent Reserve. Management determines the unallocated portion
of the inherent loss reserve based on factors that cannot be associated with
51
<PAGE>
NORTHERN TRUST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 provison may
be either greater than or less than actual net charge-offs. The related provison
for credit losses, which is charged to income, is the amount necessary to adjust
the reserve to the level determined through the above process.
I. MORTGAGE SERVICING RIGHTS. Mortgage servicing rights are capitalized as a
separate asset when purchased or when acquired through the origination of
mortgage loans that are subsequently sold with the servicing rights retained.
The servicing rights are included in other assets and are amortized as an offset
to other operating income over their estimated life. Servicing rights are
evaluated for impairment based on their fair value. For purposes of measuring
impairment, Northern Trust stratifies its servicing rights by loan type and
interest rate. Fair value is determined considering market prices for similar
assets.
J. FEES ON STANDBY LETTERS OF CREDIT AND PARTICIPATIONS IN BANKERS
ACCEPTANCES. Fees on standby letters of credit are recognized in other operating
income on the straight-line method over the lives of the underlying agreements.
Commissions on bankers acceptances are recognized in other operating income when
received.
K. BUILDINGS AND EQUIPMENT. Buildings and equipment owned are carried at
original cost less accumulated depreciation. The charge for depreciation is
computed on the straight-line method based on the following range of lives:
buildings--10 to 30 years; equipment--4 to 10 years; and leasehold improve-
ments--lease term to 15 years. Leased properties meeting certain criteria
are capitalized and amortized using the straight-line method over the lease
period.
L. OTHER REAL ESTATE OWNED (OREO). OREO is comprised of commercial and
residential real estate properties acquired in partial or total satisfaction of
problem loans. OREO assets are carried at the lower of cost or fair value.
Losses identified at the time of acquisition of such properties are charged
against the reserve for credit losses. Subsequent write-downs that may be
required to the carrying value of these assets and losses realized from asset
sales are charged to other operating expenses.
M. INTANGIBLE ASSETS. Goodwill, arising from the excess of purchase price
over the fair value of net assets of acquired businesses, is being amortized
using the straight-line method primarily over fifteen years.
Other purchased intangible assets arising from acquisitions are amortized
using various methods over the estimated lives of the assets. Software is being
amortized using the straight-line method over the estimated useful life of the
asset, ranging from 5 to 7 years.
N. TRUST ASSETS AND FEES. Assets held in fiduciary or agency capacities are
not included in the consolidated balance sheet, since such items are not assets
of Northern Trust. Income from trust activities is recorded on the accrual
basis.
O. TRUST SECURITY SETTLEMENT RECEIVABLES. These receivables represent other
items in the process of collection presented on behalf of trust clients.
P. INCOME TAXES. In accordance with SFAS No. 109, "Accounting for Income
Taxes," an asset and liability approach to accounting for income taxes is
followed. The objective is to recognize the amount of taxes payable or
refundable for the current year, and to recognize deferred tax assets and
liabilities resulting from temporary differences between the amounts reported in
the financial statements and the tax bases of assets and liabilities. The
measurement of tax assets and liabilities is based on enacted tax laws and
applicable tax rates.
Q. CASH FLOW STATEMENTS. Cash and cash equivalents have been defined as "Cash
and Due from Banks."
2. RECLASSIFICATIONS--Certain reclassifications have been made to prior
periods' consolidated financial statements to place them on a basis comparable
with the current period's consolidated financial statements.
3. SECURITIES--SECURITIES AVAILABLE FOR SALE. The following tables summarize
the amortized cost, fair values and remaining maturities of securities available
for sale.
52
<PAGE>
NORTHERN TRUST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
RECONCILIATION OF AMORTIZED COST TO FAIR VALUES OF SECURITIES AVAILABLE FOR
SALE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1998
- -----------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(In Millions) Cost Gains Losses Value
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government $ 259.0 $ 1.0 $ -- $ 260.0
Obligations of States and Political
Subdivisions 256.2 9.9 -- 266.1
Federal Agency 4,697.5 1.0 3.1 4,695.4
Preferred Stock 135.0 .4 -- 135.4
Other 19.3 -- 1.0 18.3
- -----------------------------------------------------------------------------
Total $5,367.0 $12.3 $4.1 $5,375.2
</TABLE>
Unrealized gains and losses on off-balance sheet financial instruments used
to hedge available for sale securities totaled $2.3 million and $11.5 million,
respectively, as of December 31, 1998. Unrealized gains on these hedges are
reported as other assets in the consolidated balance sheet; unrealized losses
are reported as other liabilities. As of December 31, 1998, stockholders'
equity included a charge of $.6 million, net of the related tax benefit, to
recognize the depreciation on securities available for sale, net of the related
hedges.
<TABLE>
<CAPTION>
December 31, 1997
- -----------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(In Millions) Cost Gains Losses Value
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government $ 469.3 $ .9 $ .2 $ 470.0
Obligations of States and Political
Subdivisions 123.5 6.7 -- 130.2
Federal Agency 2,969.0 1.7 .9 2,969.8
Preferred Stock 128.5 .4 .1 128.8
Other 35.2 -- .7 34.5
- -----------------------------------------------------------------------------
Total $3,725.5 $ 9.7 $1.9 $3,733.3
</TABLE>
Unrealized gains and losses on off-balance sheet financial instruments used
to hedge available for sale securities totaled $.1 million and $4.6 million,
respectively, as of December 31, 1997. Unrealized gains on these hedges are
reported as other assets in the consolidated balance sheet; unrealized losses
are reported as other liabilities. As of December 31, 1997, stockholders'
equity included a credit of $2.1 million, net of tax, to recognize the
appreciation on securities available for sale, net of the related hedges.
REMAINING MATURITY OF SECURITIES AVAILABLE FOR SALE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1998
- --------------------------------------------------------------------------------
Amortized Fair
(In Millions) Cost Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Due in One Year or Less $4,647.2 $4,647.7
Due After One Year Through Five Years 324.3 323.6
Due After Five Years Through Ten Years 30.2 32.7
Due After Ten Years 365.3 371.2
- --------------------------------------------------------------------------------
Total $5,367.0 $5,375.2
</TABLE>
Asset-backed and mortgage-backed securities were included in the above table
taking into account anticipated future prepayments.
SECURITIES HELD TO MATURITY. The following tables summarize the book values,
fair values and remaining maturities of securities held to maturity.
RECONCILIATION OF BOOK VALUES TO FAIR VALUES OF SECURITIES HELD TO MATURITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1998
- ------------------------------------------------------------------------
Gross Gross
Book Unrealized Unrealized Fair
(In Millions) Value Gains Losses Value
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government $ 55.3 $ .1 $ -- $ 55.4
Obligations of States and Political
Subdivisions 261.8 15.5 .1 277.2
Federal Agency 3.0 -- -- 3.0
Other 152.4 -- 2.3 150.1
- ------------------------------------------------------------------------
Total $472.5 $15.6 $2.4 $485.7
<CAPTION>
December 31, 1997
- ------------------------------------------------------------------------
Gross Gross
Book Unrealized Unrealized Fair
(In Millions) Value Gains Losses Value
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government $ 72.0 $ -- $ -- $ 72.0
Obligations of States and Political
Subdivisions 276.7 18.4 -- 295.1
Federal Agency 14.3 -- -- 14.3
Other 93.1 -- 1.1 92.0
- ------------------------------------------------------------------------
Total $456.1 $18.4 $1.1 $473.4
</TABLE>
REMAINING MATURITY OF SECURITIES HELD TO MATURITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1998
- -------------------------------------------------------------------------------
Book Fair
(In Millions) Value Value
- -------------------------------------------------------------------------------
<S> <C> <C>
Due in One Year or Less $115.9 $117.4
Due After One Year Through Five Years 108.0 113.8
Due After Five Years Through Ten Years 100.1 104.4
Due After Ten Years 148.5 150.1
- -------------------------------------------------------------------------------
Total $472.5 $485.7
</TABLE>
Mortgage-backed securities were included in the above table taking into account
anticipated future prepayments.
53
<PAGE>
NORTHERN TRUST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Refer to Note 21 for additional detail related to in terest risk management
instruments used to hedge securities.
INVESTMENT SECURITY GAINS AND LOSSES. Realized gross security gains, which were
included in the consolidated statement of income, totaled $1.3 million in 1998.
Of the $1.3 million of gains in 1998, $.3 million resulted when held to maturity
and available for sale securities were called at a premium while $1.0 million
resulted from the sale of securities classified as avail-able for sale. Realized
gross security gains and losses totaled $1.2 million and $.5 million,
respectively, in 1997. The $1.2 million in gains in 1997 resulted when held to
maturity and available for sale securities were called at a premium. Realized
gross security losses in 1997 resulted entirely from the sale of securities
classified as available for sale. Realized gross security gains and losses in
1996 totaled $1.5 million and $1.1 million, respectively.
4. SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND SECURITIES SOLD UNDER
AGREEMENTS TO REPURCHASE--Securities purchased under agreements to resell and
securities sold under agreements to repurchase are recorded at the amounts at
which the securities were acquired or sold plus accrued interest. To minimize
any potential credit risk associated with these transactions, the fair value of
the securities purchased or sold is continuously monitored, limits are set on
exposure with counterparties, and the financial condition of counterparties is
regularly assessed. It is Northern Trust's policy to take possession of
securities purchased under agreements to resell.
The following tables summarize information related to securities purchased
under agreements to resell and securities sold under agreements to repurchase.
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31
- --------------------------------------------------------------------------------
($ In Millions) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Average Balance During the Year $ 681.5 $ 356.3
Average Interest Rate Earned During the Year 5.43% 5.56%
Maximum Month-End Balance
During the Year 2,278.9 2,435.5
</TABLE>
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31
- --------------------------------------------------------------------------------
($ In Millions) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Average Balance During the Year $1,506.0 $1,519.9
Average Interest Rate Paid During the Year 5.33% 5.38%
Maximum Month-End Balance
During the Year 4,136.0 3,708.9
</TABLE>
5. LOANS AND LEASES--Amounts outstanding in selected loan categories are
shown below.
<TABLE>
<CAPTION>
December 31
- -------------------------------------------------------------------------------
(In Millions) 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Domestic
Residential Real Estate $ 5,885.2 $ 5,186.7
Commercial 3,937.9 3,734.8
Broker 147.6 170.1
Commercial Real Estate 677.1 582.1
Personal 1,463.4 1,207.2
Other 509.6 890.1
Lease Financing 528.3 347.0
- -------------------------------------------------------------------------------
Total Domestic 13,149.1 12,118.0
International 497.8 470.2
- -------------------------------------------------------------------------------
Total Loans and Leases $13,646.9 $12,588.2
</TABLE>
Other domestic and international loans include $592.6 million at December
31, 1998, and $924.5 million at December 31, 1997 of overnight trust-related
advances in connection with next day security settlements. Lease financing
includes leveraged leases of $308.4 million at December 31, 1998, and $179.6
million at December 31, 1997.
Residential real estate loans held for sale totaled $51.4 million and $39.7
million at December 31, 1998 and 1997, respectively.
Refer to Note 21 for detail related to interest risk management instruments
used to hedge loans.
NONPERFORMING ASSETS. Presented below are outstanding amounts of nonaccrual
loans, restructured loans and OREO.
<TABLE>
<CAPTION>
December 31
- -------------------------------------------------------------------------------
(In Millions) 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Nonaccrual Loans
Domestic-Commercial Real Estate $ 2.9 $ 7.1
-Other 27.6 31.8
International -- --
- -------------------------------------------------------------------------------
Total Nonaccrual Loans 30.5 38.9
Restructured Loans 2.4 2.5
Other Real Estate Owned 2.3 1.9
- -------------------------------------------------------------------------------
Total Nonperforming Assets $35.2 $43.3
</TABLE>
Included in nonperforming assets were loans with a recorded investment at
December 31, 1998 and December 31, 1997 of $32.0 million and $38.3 million,
respectively, which were also classified as impaired. At December 31, 1998 and
December 31, 1997 impaired loans totaling $8.5 million and $7.9 million,
respectively, had no portion of the reserve for credit losses specifically
allocated to them, while $23.5 million at
54
<PAGE>
NORTHERN TRUST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
December 31, 1998 had a specific allocated reserve of $5.9 million and $30.4
million at December 31, 1997 had a specific allocated reserve of $4.7 million.
Total recorded investment in impaired loans averaged $29.9 million in 1998 and
$34.4 million in 1997. Total interest income recognized on impaired loans was
$120 thousand and $191 thousand in 1998 and 1997, respectively.
There were $4.4 million of unfunded loan commitments and standby letters of
credit issued to borrowers whose loans were classified as nonaccrual at December
31, 1998, while there were none at December 31, 1997.
Interest income that would have been recorded on domestic nonaccrual loans in
accordance with their original terms amounted to $3.2 million in 1998, $3.6
million in 1997 and $3.1 million in 1996, compared with amounts that were
actually recorded of $.3 million, $.8 million and $.9 million, respectively.
Write-downs and realized losses on OREO of $52 thousand in 1998 and $.4
million in each of the prior two years presented were charged to other
operating expenses.
6. RESERVE FOR CREDIT LOSSES--Changes in the reserve for credit losses were
as follows:
<TABLE>
<CAPTION>
(In Millions) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at Beginning of Year $147.6 $148.3 $147.1
- --------------------------------------------------------------------------------
Charge-Offs
Domestic
Commercial Real Estate (.3) (.7) (7.4)
Other (11.5) (13.7) (8.0)
International -- -- (.2)
- --------------------------------------------------------------------------------
Total Charge-Offs (11.8) (14.4) (15.6)
Recoveries 1.8 4.7 3.8
- --------------------------------------------------------------------------------
Net Charge-Offs (10.0) (9.7) (11.8)
Provision for Credit Losses 9.0 9.0 12.0
Reserve Related to Acquisitions .2 -- 1.0
- --------------------------------------------------------------------------------
Balance at End of Year $146.8 $147.6 $148.3
</TABLE>
7. MORTGAGE SERVICING RIGHTS--Servicing rights capitalized as a result of
originating mortgage loans and selling the loans with the servicing rights
retained totaled $2.2 million and $.7 million during 1998 and 1997,
respectively. Amortization of the servicing rights totaled $1.0 million during
1998 and $94 thousand during 1997, resulting in carrying values of $2.1 million
and $914 thousand as of December 31, 1998 and 1997, respectively. There were no
valuation allowances established to record impairment of mortgage servicing
rights during 1998 or 1997.
8. BUILDINGS AND EQUIPMENT--Summary of buildings and equipment is presented
below.
<TABLE>
<CAPTION>
December 31, 1998
- -------------------------------------------------------------------------------
Net
Original Accumulated Book
(In Millions) Cost Depreciation Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Land $ 37.9 $ -- $ 37.9
Buildings 100.3 37.2 63.1
Equipment 257.7 119.2 138.5
Leasehold Improvements 55.7 25.5 30.2
Buildings Leased under
Capital Leases (Note 9) 86.6 16.1 70.5
- --------------------------------------------------------------------------------
Total Buildings and Equipment $538.2 $198.0 $340.2
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
- --------------------------------------------------------------------------------
Net
Original Accumulated Book
(In Millions) Cost Depreciation Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Land $ 39.1 $ -- $ 39.1
Buildings 102.2 35.8 66.4
Equipment 231.1 113.0 118.1
Leasehold Improvements 65.4 32.9 32.5
Buildings Leased under
Capital Leases (Note 9) 74.1 13.8 60.3
- --------------------------------------------------------------------------------
Total Buildings and Equipment $511.9 $195.5 $316.4
</TABLE>
The charge for depreciation amounted to $52.4 million in 1998, $49.3 million
in 1997 and $46.8 million in 1996.
9. LEASE COMMITMENTS--At December 31, 1998, Northern Trust was obligated
under a number of noncancellable operating leases for premises and equipment.
Certain leases contain rent escalation clauses, based on market indices or
increases in real estate taxes and other operating expenses and renewal option
clauses calling for increased rentals. There are no restrictions imposed by any
lease agreement regarding the payment of dividends, debt financing or Northern
Trust entering into further lease agreements. Minimum annual lease commitments
as of December 31, 1998, for all noncancellable operating leases are as
follows:
<TABLE>
<CAPTION>
Future Minimum
(In Millions) Lease Payments
- --------------------------------------------------------------------------------
<S> <C>
1999 $ 31.9
2000 31.2
2001 27.4
2002 24.4
2003 20.4
Later Years 108.8
- --------------------------------------------------------------------------------
Total Minimum Lease Payments $244.1
</TABLE>
55
<PAGE>
NORTHERN TRUST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Net rental expense for all operating leases is included in occupancy expense
and amounted to $27.8 million in 1998, $27.4 million in 1997 and $24.0 million
in 1996.
The building and land utilized at the Chicago operations center has been
leased under an agreement which qualifies as a capital lease. The long-term
financing for the property was provided by the Corporation and the Bank. In the
event of sale or refinancing, the Bank will receive all proceeds except for 58%
of any proceeds in excess of the original project costs which will be paid to
the lessor.
In June 1997, the Bank entered into an agreement to purchase a building and
adjacent land located across the street from the Chicago operations center for
$23.5 million in January 2000. The building contains approximately 340,000
square feet of rentable office space. Prior to the purchase date, the Bank is
leasing, in phases which began in 1997, approximately two floors of this six-
story building. The present value of the land and building is reported in
buildings and equipment, and the related purchase obligation appears in long-
term debt in the consolidated balance sheet.
The table below reflects the future minimum lease payments required under
capital leases, net of any payments received on the long-term financing, and
the present value of net capital lease obligations at December 31, 1998.
<TABLE>
<CAPTION>
Future Minimum
(In Millions) Lease Payments, Net
- --------------------------------------------------------------------------------
<S> <C>
1999 $ 1.3
2000 1.4
2001 1.6
2002 1.6
2003 1.7
Later Years 11.4
- --------------------------------------------------------------------------------
Total Minimum Lease Payments, net 19.0
Less: Amount Representing Interest 7.8
- --------------------------------------------------------------------------------
Net Present Value under Capital
Lease Obligations $11.2
</TABLE>
10. SENIOR NOTES, LONG-TERM DEBT AND LINES OF CREDIT--SENIOR NOTES. Summary
of Bank senior notes outstanding at December 31 is presented below.
<TABLE>
<CAPTION>
($ In Millions) Rate 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Due 1998 (a) (b)
Fixed 5.75-6.29% $ -- $405.0
Floating 5.60-5.85 -- 380.0
Due 1999 (a) (b)
Fixed 5.81 100.0 --
Floating 5.20-5.45 600.0 --
- --------------------------------------------------------------------------------
Total Bank Senior Notes $700.0 $785.0
</TABLE>
Refer to bottom of next table for applicable notes.
LONG-TERM DEBT. Summary of long-term debt outstanding at December 31 is
presented below.
<TABLE>
<CAPTION>
($ In Millions) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Corporation-Subordinated Debt
9.15% Notes due March 1998 (a) $ -- $ 10.0
9.20% Notes due March 1998 (a) -- 13.0
9.00% Notes due May 1998 (a) -- 50.0
9.20% Notes due May 2001 (a) 25.0 25.0
Bank-Subordinated Debt
6.50% Notes due May 2003 (a) 100.0 100.0
6.70% Notes due Sept. 2005 (a) (b) 100.0 100.0
7.30% Notes due Sept. 2006 (a) (b) 100.0 100.0
6.25% Notes due June 2008 (a) (b) 100.0 --
- --------------------------------------------------------------------------------
Subordinated Long-Term Debt $425.0 $398.0
- --------------------------------------------------------------------------------
Corporation-Other Long-Term Debt
8.23% ESOP Installment Notes with Final Payment due December
1998 (c) $ -- $ 9.5
Capital Lease Obligations (d) 11.2 11.4
Building Purchase Obligation (d) 22.0 20.6
- --------------------------------------------------------------------------------
Other Long-Term Debt $ 33.2 $ 41.5
- --------------------------------------------------------------------------------
Total Long-Term Debt $458.2 $439.5
- --------------------------------------------------------------------------------
Long-Term Debt Qualifying as
Risk-Based Capital $390.0 $315.0
</TABLE>
(a) Not redeemable prior to maturity.
(b) Under the terms of its current Offering Circular, the Bank has the ability
to offer from time to time its senior bank notes in an aggregate principal
amount of up to $1.7 billion at any one time outstanding and up to an
additional $300 million of subordinated notes. Each senior note will mature
from 30 days to fifteen years and each subordinated note will mature from
five years to fifteen years, following its date of original issuance. Each
note will mature on such date as selected by the initial purchaser and
agreed to by the Bank.
(c) Notes were issued directly by the ESOP trust to finance the purchase of
8,640,000 common shares. The Corporation unconditionally guarantees the
payment of principal, premium, if any, and interest. The interest rate is
subject to adjustment in the event of certain tax law changes affecting
ESOP plans. Refer to Note 19.
(d) Refer to Note 9.
Refer to Note 21 for detail related to interest risk management instruments
used to hedge notes.
LINES OF CREDIT. The Corporation currently maintains commercial paper back-up
facility lines of credit with three banks totaling $50 million. The termination
date is November 2001. The commitment fee is determined by a pricing matrix
that is based on the long-term senior debt ratings of the Corporation.
Currently, the annual fee is one-tenth of 1% of the commitment. There were no
borrowings under commercial paper back-up facilities during 1998 or 1997.
56
<PAGE>
NORTHERN TRUST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
11. DEBT--FLOATING RATE CAPITAL SECURITIES. The following table summarizes
the book value of Floating Rate Capital Securities outstanding:
<TABLE>
<CAPTION>
December 31
- ----------------------------------------------------------
(In Millions) 1998 1997
- ----------------------------------------------------------
<S> <C> <C>
$150 Million Series A due January 15, 2027 $148.6 $148.6
$120 Million Series B due April 15, 2027 118.8 118.8
- ----------------------------------------------------------
Total Debt-Floating Rate Capital Securities $267.4 $267.4
</TABLE>
On January 16, 1997, the Corporation issued $150 million of Floating Rate Cap-
ital Securities, Series A, through a statutory business trust wholly-owned by
the Corporation ("NTC Capital I"). On April 25, 1997, the Corporation also is-
sued, through a separate wholly-owned statutory business trust ("NTC Capital
II"), $120 million of Floating Rate Capital Securities, Series B. The sole as-
sets of the trusts are Subordinated Debentures of Northern Trust Corporation
which have the same interest rates and maturity dates as the corresponding dis-
tribution rates and redemption dates of the Floating Rate Capital Securities.
The outstanding principal amounts of the Subordinated Debentures held by NTC
Capital I and NTC Capital II are $154.6 million and $123.7 million, respective-
ly. The Series A Securities were issued at a discount to yield 60.5 basis
points above the three-month London Interbank Offered Rate (LIBOR), while the
Series B Securities were issued at a discount to yield 67.9 basis points above
the three-month LIBOR. Both Series A and B Securities qualify as tier 1 capital
for regulatory purposes.
The Corporation has fully, irrevocably and unconditionally guaranteed all
payments due on such Capital Securities. The holders of the Capital Securities
are entitled to receive preferential cumulative cash distributions quarterly in
arrears (based on the liquidation amount of $1,000 per Capital Security) at an
interest rate equal to the rate on the corresponding Subordinated Debentures.
The interest rate on the Series A and Series B securities is equal to three-
month LIBOR plus 0.52% and 0.59%, respectively. Subject to certain exceptions,
the Corporation has the right to defer payment of interest on the Subordinated
Debentures at any time or from time to time for a period not exceeding 20
consecutive quarterly periods provided that no extension period may extend
beyond the stated maturity date. If interest is deferred on the Subordinated
Debentures, distributions on the Capital Securities will also be deferred and
the Corporation will not be permitted, subject to certain exceptions, to pay or
declare any cash distributions with respect to the Corporation's capital stock
or debt securities that rank the same as or junior to the Subordinated
Debentures, until all past due distributions are paid. The Subordinated
Debentures are unsecured and subordinated to substantially all of the
Corporation's existing indebtedness.
The Corporation has the right to redeem the Series A Subordinated Debentures
on or after January 15, 2007 and the Series B Subordinated Debentures on or
after April 15, 2007, in each case in whole or in part. In addition, the
Corporation has the right to redeem the Subordinated Debentures held by either
trust in whole but not in part at any time within 90 days following certain
defined tax or regulatory capital treatment changes, at a price equal to the
principal amount plus accrued and unpaid interest.
12. STOCKHOLDERS' EQUITY--PREFERRED STOCK. The Corporation is authorized to
issue 10,000,000 shares of preferred stock without par value. The Board of
Directors of the Corporation is authorized to fix the particular preferences,
rights, qualifications and restrictions for each series of preferred stock
issued. Summary of preferred stock outstanding is presented below.
<TABLE>
<CAPTION>
December 31
- ----------------------------------------------------
(In Millions) 1998 1997
- ----------------------------------------------------
<S> <C> <C>
Auction Rate Preferred Stock Series C
600 shares @ $100,000 per share $ 60.0 $ 60.0
Flexible Auction Rate Cumulative
Preferred Stock Series D
600 shares @ $100,000 per share 60.0 60.0
- ----------------------------------------------------
Total Preferred Stock $120.0 $120.0
</TABLE>
SERIES C--In 1987, 600 shares of Auction Rate Preferred Stock Series C (APS)
were issued, with a $100,000 per share stated value. Dividends on the shares of
APS are cumulative. Rates are determined every 49 days by Dutch auction unless
the Corporation fails to pay a dividend or redeem any shares for which it has
given notice of redemption, in which case the dividend rate will be set at 175%
of the 60-day "AA" Composite Commercial Paper Rate. The dividend rate in any
auction will not exceed a percentage determined by the prevailing credit rating
of the APS. The current maximum dividend rate is 120% of the 60-day "AA"
Composite Commercial Paper Rate. No dividends other than dividends payable in
junior stock, such as common stock, may be paid on common stock until full
cumulative dividends on the APS have been paid. The average rate for this issue
as declared during 1998 was 4.11%. The shares of APS are redeemable at the
option of the Corporation, in whole or in part, on any Dividend Payment Date at
$100,000 per share, plus accrued and unpaid dividends.
SERIES D--In 1990, 600 shares of Flexible Auction Rate Cumulative Preferred
Stock Series D (FAPS) were issued with a $100,000 per share stated value. Each
dividend period contains 49 days (the "Short-Term Dividend Period") or a number
of days greater than 49 days (as selected by the Term Selection Agent) which is
divisible
57
<PAGE>
NORTHERN TRUST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
by seven (the "Long-Term Dividend Period"). Rates for each dividend period are
determined by Dutch auction unless the Corporation fails to pay the full amount
of any dividend or redemption. The dividend rate in any auction will not exceed
a percentage (currently 125%), determined by the prevailing credit rating of
the FAPS, of the 60-day "AA" Composite Commercial Paper Rate or the Reference
Rate, which rate is the Composite Commercial Paper Rate or the Treasury Rate,
as appropriate for the length of each Short-Term or Long-Term Dividend Period,
respectively. If the Corporation fails to pay the full amount of any dividend
or redemption, each dividend period thereafter (until auctions are resumed)
will be a Short-Term Dividend Period and the dividend rate will be 250% of the
60-day "AA" Composite Commercial Paper Rate; additional dividends will accrue
for the balance of any Long-Term Dividend Period in which such a failure to pay
occurs. No dividends other than dividends payable in junior stock, such as com-
mon stock, may be paid on common stock until full cumulative dividends on the
FAPS have been paid. The average rate for this issue as declared during 1998
was 4.13%. The shares of FAPS are redeemable at the option of the Corporation,
in whole or in part, at $100,000 per share plus accrued and unpaid dividends.
PREFERRED STOCK PURCHASE RIGHTS. In 1989, the Board of Directors of the
Corporation declared a dividend distribution of one Preferred Stock Purchase
Right on each outstanding share of the Corporation's common stock to the
stockholders of record on October 31, 1989. The Rights are subject to anti-
dilution provisions, and each Right is now exercisable for one-sixth of one-
hundredth of a share of Series A Junior Participating Preferred Stock at an
exercise price of $41.67 for each such fractional share. The Rights are
evidenced by the common stock certificates and are not exercisable or
transferable apart from the common stock until twenty days after a person or
group acquires 15 percent or more of the Corporation's voting power or
announces a tender or exchange offer which could result in ownership of 25
percent or more of the voting power. Shares of the Participating Preferred
Stock purchasable upon exercise of the Rights will not be redeemable.
In the event that a person or group acquires 25 percent or more of the
Corporation voting power or if the Corporation merges or engages in certain
self-dealing transactions with a 15 percent or more stockholder, each Right
will entitle the holder, other than such person or group in certain
circumstances, to purchase that number of shares of common stock of the
Corporation or then shares of surviving company which at the time of the
transaction would have a market value of twice the exercise price of the Right.
The Rights do not have voting rights and are redeemable at the option of the
Corporation at a price of one-sixth of one cent per Right either at the option
of the Corporation at any time prior to the close of business on the 20th day
following publication of the acquisition of 15 percent or more of the voting
power by a person or group or automatically upon the occurence of any of
certain events. Unless earlier redeemed, the Rights will expire on October 31,
1999.
On July 21, 1998 the Board of Directors of the Corporation declared a
dividend distribution of one new Preferred Stock Purchase Right for each
outstanding share of the Corporation's common stock issuable to stockholders of
record at the close of business on the earlier of October 31, 1999 or the date
on which the rights issued under the 1989 Rights Agreement are exchanged or
redeemed in accordance with the provisions of the 1989 Rights Agreement. Each
new Right will be exercisable for one one-hundredth of a share of Series A
Junior Participating Preferred Stock at an exercise price of $330.00, subject
to adjustment. When issued, the new Rights will be evidenced by the common
stock certificates and will not be exercisable or transferable apart from the
common stock until twenty days after a person or group acquires 15 percent or
more of the shares of common stock then outstanding or announces a tender or
exchange offer which if consummated would result in ownership of 15 percent or
more of the outstanding common stock.
In the event that any person or group acquires 15 percent or more of the
outstanding shares of common stock, each new Right will entitle the holder,
other than such person or group, to purchase that number of shares of common
stock of the Corporation having a market value of twice the exercise price of
the new Right. At any time thereafter if the Corporation consummates a business
combination transaction or sells substantially all of its assets, each new
Right will entitle the holder, other than the person or group acquiring 15
percent or more of the outstanding shares of common stock, to purchase that
number of shares of surviving company stock which at the time of the
transaction would have a market value of twice the exercise price of the new
Right.
The new Rights will not have voting rights and will be redeemable at the
option of the Corporation at a price of one cent per Right at any time prior to
the close of business on the twentieth day following announcement by the
Corporation of the acquisition of 15 percent or more of the outstanding common
stock by a person or group. Unless earlier redeemed, the new Rights will expire
on October 31, 2009.
COMMON STOCK. Under the Corporation's current common stock buyback program,
an additional 1.6 million shares may be purchased after December 31, 1998.
58
<PAGE>
NORTHERN TRUST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
These shares may be repurchased from time to time in open market purchases,
and the shares would be used primarily for management incentive plans and other
corporate purposes.
An analysis of changes in the number of shares of common stock outstanding
follows:
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------
<S> <C> <C> <C>
Balance at January 1 111,367,436 111,247,732 55,664,412
Distribution of Two-for-
One Stock Split -- -- 55,664,412
Conversion of Preferred
Stock, Series E -- -- 2,396,744
Employee Benefit Plans:
Incentive Plan and
Awards 302,677 315,147 377,086
Stock Options Exercised 1,170,840 1,214,310 1,242,034
Treasury Stock Purchases (1,626,213) (1,409,753) (4,096,956)
- -----------------------------------------------------------------
Balance at December 31 111,214,740 111,367,436 111,247,732
</TABLE>
Note: 1996 share activity reflects the December 1996 two-for-one stock split.
13. INCOME TAXES--The table below reconciles the total provision for income
taxes recorded in the consolidated statement of income with the amounts
computed at the statutory federal tax rate of 35%.
<TABLE>
<CAPTION>
(In Millions) 1998 1997 1996
- ---------------------------------------------------
<S> <C> <C> <C>
Tax at Statutory Rate $189.9 $165.2 $135.6
Tax-Exempt Income (10.6) (10.7) (11.6)
State Taxes, net 8.9 8.5 4.8
Other .6 (.5) (.2)
- ---------------------------------------------------
Provision for Income Taxes $188.8 $162.5 $128.6
</TABLE>
The components of the consolidated provision for income taxes for each of
the three years ended December 31, are as follows:
<TABLE>
<CAPTION>
(In Millions) 1998 1997 1996
- -------------------------------------------------
<S> <C> <C> <C>
Current Tax Provision:
Federal $113.1 $102.4 $ 91.4
State 7.6 6.8 3.8
Foreign 11.1 15.3 3.9
- -------------------------------------------------
Total 131.8 124.5 99.1
- -------------------------------------------------
Deferred Tax Provision:
Federal 51.0 31.7 26.0
State 6.0 6.3 3.5
- -------------------------------------------------
Total 57.0 38.0 29.5
- -------------------------------------------------
Provision for Income Taxes $188.8 $162.5 $128.6
</TABLE>
In addition to the amounts shown in the above tables, tax liabilities or
(benefits) have been recorded directly to stockholders' equity for the
following items:
<TABLE>
<CAPTION>
(In Millions) 1998 1997
- --------------------------------------------------------------------
<S> <C> <C>
Current Tax Benefit for Employee
Stock Options and Other Employee Benefit Plans $(22.8) $(15.6)
Deferred Tax Effect of Unrealized
Security Gains (Losses) (1.6) .3
Deferred Tax Effect of Minimum Pension Liabilities (2.1) (1.4)
</TABLE>
Deferred taxes result from temporary differences between the amounts reported
in the consolidated financial statements and the tax bases of assets and
liabilities. Deferred tax liabilities and assets have been computed as follows:
<TABLE>
<CAPTION>
December 31
- ------------------------------------------------------------
(In Millions) 1998 1997
- ------------------------------------------------------------
<S> <C> <C>
Deferred Tax Liabilities:
Lease Financing $173.9 $122.4
Software Development 48.4 39.3
Accumulated Depreciation 8.2 9.2
State Taxes, net 14.1 9.2
Other Liabilities 12.2 12.8
- ------------------------------------------------------------
Gross Deferred Tax Liabilities 256.8 192.9
- ------------------------------------------------------------
Deferred Tax Assets:
Reserve for Credit Losses 51.1 51.2
Other Assets 26.9 16.3
- ------------------------------------------------------------
Gross Deferred Tax Assets 78.0 67.5
Valuation Reserve -- --
- ------------------------------------------------------------
Deferred Tax Assets, net of Valuation Reserve 78.0 67.5
- ------------------------------------------------------------
Net Deferred Tax Liabilities $178.8 $125.4
</TABLE>
At December 31, 1998, Northern Trust had a federal net operating loss
carryforward of $4.3 million resulting from business acquisitions, which is
available to reduce future tax return liabilities. In addition, Northern Trust
had state net operating loss and tax credit carryforwards of $19.8 million and
$1.5 million, respectively. The carryforwards are subject to various limitations
imposed by tax law.
59
<PAGE>
NORTHERN TRUST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
14. NET INCOME PER COMMON SHARE COMPUTATIONS--The computation of net income
per common share is presented below.
<TABLE>
<CAPTION>
($ In Millions Except Per Share
Information) 1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic Net Income Per Common Share
Net Income $353.9 $309.4 $258.8
Less: Dividends on Preferred Stock (4.9) (5.0) (4.9)
- ------------------------------------------------------------------------------
Net Income Applicable to Common Stock $349.0 $304.4 $253.9
Average Number of Common Shares
Outstanding 110,683,488 110,977,645 111,933,829
Basic Net Income Per Common Share $ 3.15 $ 2.74 $ 2.27
Diluted Net Income Per Common Share
Net Income Applicable to Common Stock $349.0 $304.4 $253.9
- ------------------------------------------------------------------------------
Average Number of Common Shares
Outstanding 110,683,488 110,977,645 111,933,829
Plus: Dilutive Potential Common Shares
Stock Options 3,232,277 2,846,992 1,968,038
Performance Shares 614,984 579,737 611,072
Series E Convertible Preferred Stock -- -- 190,928
Other 336,309 256,782 135,251
- ------------------------------------------------------------------------------
Average Common and Potential Common
Shares 114,867,058 114,661,156 114,839,118
- ------------------------------------------------------------------------------
Diluted Net Income Per Common Share $ 3.04 $ 2.66 $ 2.21
</TABLE>
15. RESTRICTIONS ON SUBSIDIARY DIVIDENDS AND LOANS OR ADVANCES--Provisions of
state and federal banking laws restrict the amount of dividends that can be paid
to the Corporation by its banking subsidiaries. Under applicable state and
federal laws, no dividends may be paid in an amount greater than the net profits
then on hand, subject to other applicable provisions of law. In addition, prior
approval from the relevant federal banking regulator is required if dividends
declared by any of the Corporation's banking subsidiaries in any calendar year
will exceed its net profits (as defined) for that year, combined with its
retained net profits for the preceding two years. Based on these regulations,
the Corporation's banking subsidiaries, without regulatory approval, could
declare dividends during 1999 equal to their 1999 eligible net profits (as
defined) plus $432.8 million. The ability of each banking subsidiary to pay
dividends to the Corporation may be further restricted as a result of regulatory
policies and guidelines relating to dividend payments and capital adequacy.
State and federal laws limit the transfer of funds by a banking subsidiary to
the Corporation and certain of its affiliates in the form of loans or extensions
of credit, investments or purchases of assets. Transfers of this kind to the
Corporation or a nonbanking subsidiary by a banking subsidiary are each limited
to 10% of the banking subsidiary's capital and surplus with respect to each
affiliate and to 20% in the aggregate, and are also subject to certain
collateral requirements. These transactions, as well as other transactions
between a banking subsidiary and the Corporation or its affiliates, must also be
on terms substantially the same as, or at least as favorable as, those
prevailing at the time for comparable transactions with non-affiliated companies
or, in the absence of comparable transactions, on terms, or under circumstances,
including credit standards, that would be offered to, or would apply to, non-
affiliated companies.
16. OTHER OPERATING INCOME--Included in the 1997 results is $11.1 million
resulting from settlements reached with Illinois banking regulators concerning
the disposition of certain unclaimed balances accumulated over a number of
years. In 1998, nonrecurring gains totaled $3.8 million.
60
<PAGE>
NORTHERN TRUST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
17. NET INTEREST INCOME--The components of net interest income were as
follows:
<TABLE>
<CAPTION>
(In Millions) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income
Loans and Leases $ 884.4 $ 793.1 $ 693.4
Securities--Taxable 383.1 332.0 325.1
--Non-Taxable 24.9 25.3 26.8
Time Deposits with Banks 155.0 133.5 84.9
Federal Funds Sold and Securities Purchased under
Agreements to Resell and Other 55.7 48.9 21.3
- --------------------------------------------------------------------------------
Total Interest Income 1,503.1 1,332.8 1,151.5
- --------------------------------------------------------------------------------
Interest Expense
Deposits 580.4 522.2 447.8
Federal Funds Purchased 139.8 92.4 97.9
Securities Sold under Agreements
to Repurchase 80.2 81.7 103.4
Commercial Paper 8.0 7.9 7.8
Other Borrowings 132.3 112.4 64.5
Senior Notes 36.5 30.9 14.4
Long-Term Debt 31.8 32.6 27.4
Debt-Floating Rate Capital Securities 16.9 14.5 --
- --------------------------------------------------------------------------------
Total Interest Expense 1,025.9 894.6 763.2
- --------------------------------------------------------------------------------
Net Interest Income $ 477.2 $ 438.2 $ 388.3
</TABLE>
18. OTHER OPERATING EXPENSES--The components of other operating expenses were
as follows:
<TABLE>
<CAPTION>
(In Millions) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Business Promotion $ 36.4 $ 32.0 $ 26.9
Outside Services Purchased 86.1 81.0 76.7
Telecommunications 15.4 13.2 11.4
Postage and Supplies 23.3 22.0 21.9
Software Amortization 40.0 41.1 32.6
Goodwill and Other Intangibles Amortization 14.1 9.9 9.7
Other Expense 42.3 36.4 31.7
- --------------------------------------------------------------------------------
Total Other Operating Expenses $257.6 $235.6 $210.9
</TABLE>
Software, goodwill and other intangible assets are included in other assets
in the consolidated balance sheet. Software totaled $172.8 million at December
31, 1998 and $145.1 million at December 31, 1997. Goodwill totaled $98.1
million at December 31, 1998 and $96.0 million at December 31, 1997. Other
intangibles totaled $44.7 million at December 31, 1998 and $48.3 million at
December 31, 1997.
19. EMPLOYEE BENEFITS--PENSION. A noncontributory qualified pension plan
covers substantially all employees. Assets held by the plan consist primarily
of listed stocks and corporate bonds.
Northern Trust also maintains a noncontributory nonqualified pension plan
for participants whose retirement benefit payments under the qualified plan are
expected to exceed the limits imposed by federal tax law. Northern Trust has a
nonqualified trust, referred to as a "Rabbi" Trust, to fund benefits in excess
of those permitted in certain of its qualified plans. The primary purpose of
the trust is to fund nonqualified retirement benefits. This arrangement offers
certain officers a degree of assurance for payment of benefits in excess of
those permitted in the related qualified plans. The assets remain subject to
the claims of creditors and are not the property of the employees. Therefore,
they are accounted for as corporate assets and are included in other assets in
the consolidated balance sheet.
61
<PAGE>
NORTHERN TRUST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The following tables set forth the status and the net periodic pension cost
of the domestic qualified and nonqualified pension benefit plans for 1998 and
1997. Prior service costs and unrecognized net assets established at January 1,
1986 are being amortized on the straight-line basis over 13.2 years.
PLAN STATUS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Nonqualified
Qualified Plan Plan
- -------------------------------------------------------------------------------
September 30
- -------------------------------------------------------------------------------
($ In Millions) 1998 1997 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Accumulated Benefit Obligation $189.5 $167.5 $ 23.8 $ 17.4
- -------------------------------------------------------------------------------
Projected Benefit 231.2 219.2 30.4 23.8
Plan Assets at Fair Value 284.0 288.2 -- --
- -------------------------------------------------------------------------------
Plan Assets In Excess of
(Less Than) Projected
Benefit Obligation 52.8 69.0 (30.4) (23.8)
Unrecognized Net Asset (.9) (2.2) -- (.1)
Unrecognized Net Loss 25.0 17.6 18.7 12.7
Unrecognized Prior Service Cost
(Benefit) (6.7) (7.3) 1.6 2.0
Valuation Adjustment (.2) (.3) -- --
- -------------------------------------------------------------------------------
Prepaid (Accrued) Pension Cost
at September 30 70.0 76.8 (10.1) (9.2)
Net Expense October to December (1.7) (1.9) (1.0) (.2)
Additional Minimum Liability
at December 31 -- -- (12.6) (7.3)
- -------------------------------------------------------------------------------
Prepaid (Accrued) Pension Cost
at December 31 $ 68.3 $ 74.9 $(23.7) $(16.7)
- -------------------------------------------------------------------------------
Assumptions:
Discount Rates 7.00% 7.25% 6.00% 6.75%
Rate of Increase in
Compensation Level 5.40 5.90 5.40 5.90
Expected Long-Term Rate of Return on Assets 9.00 9.00 N/A N/A
</TABLE>
NET PERIODIC PENSION COST
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nonqualified
Qualified Plan Plan
- -------------------------------------------------------------------------------
(In Millions) 1998 1997 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service Cost $ 12.7 $ 10.6 $ 1.3 $ 1.1
Interest Cost 16.2 15.9 1.6 1.4
Expected Return on Plan Assets (22.8) (20.1) -- --
Amortization:
Net Loss 2.6 3.0 1.0 .6
Transition Asset (1.4) (1.4) -- --
Prior Service Cost (Benefit) (.6) (.6) .4 .3
- -------------------------------------------------------------------------------
Net Periodic Pension Cost $ 6.7 $ 7.4 $ 4.3 $ 3.4
</TABLE>
CHANGE IN BENEFIT OBLIGATION
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Nonqualified
Qualified Plan Plan
- --------------------------------------------------------------------------------
(In Millions) 1998 1997 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Beginning Balance $ 219.2 $ 206.1 $ 23.8 $ 19.4
Service Cost 12.7 10.6 1.3 1.1
Interest Cost 16.2 15.9 1.6 1.4
Actuarial Loss 2.6 3.8 6.9 4.7
Benefits Paid (19.5) (17.2) (3.2) (2.8)
- --------------------------------------------------------------------------------
Ending Balance $ 231.2 $ 219.2 $ 30.4 $ 23.8
</TABLE>
CHANGE IN QUALIFIED PLAN ASSETS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(In Millions) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Fair Value of Assets at Beginning of Plan Year $288.2 $229.0
Actual Return on Assets 15.2 56.9
Employer Contribution .1 19.5
Benefits Paid (19.5) (17.2)
- --------------------------------------------------------------------------------
Fair Value of Assets at End of Plan Year $284.0 $288.2
</TABLE>
Pension expense for 1996 was $7.4 million and $3.5 million for the qualified
and nonqualified plans, respectively.
Total assets in the "Rabbi" Trust related to the nonqualified pension plan at
December 31, 1998 and 1997 amounted to $16.2 million and $14.3 million,
respectively.
A pension plan is also maintained for the London Branch employees. At December
31, 1998, the fair value of assets and the projected benefit obligation totaled
approximately $13.7 million and $15.2 million, respectively. At December 31,
1997, the fair value of assets and the projected benefit obligation were $13.0
million and $11.0 million, respectively. Pension expense for 1998 and 1997 was
$1.9 million and $1.4 million, respectively.
THRIFT INCENTIVE PLAN. The Corporation and its subsidiaries have a defined
contribution Thrift Incentive Plan covering substantially all employees. The
corporate contribution is contingent upon the level of employee contribution and
meeting a predefined earnings target for the year. The maximum corporate
contribution was equal to 4% of an employee's salary. The estimated contribution
to this plan is charged to employee benefits and totaled $10.4 million in 1998,
$9.1 million in 1997 and $8.0 million in 1996.
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP). A leveraged ESOP in which substantially
all employees of Northern Trust are eligible to participate was established in
1989. Of the original 9 million shares in the ESOP Trust, 7.6 million shares
have been allocated as of December 31, 1998. The remaining ESOP shares are
62
<PAGE>
NORTHERN TRUST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
being allocated over the three-year period ending December 31, 2001. The
Corporation will make an additional contribution of $5.4 million in cash or
shares of common stock in each of the years 2002 and 2003.
Dividends paid on unallocated shares held in the ESOP Trust are used for debt
service on the ESOP notes. Although the original debt used to purchase the ESOP
shares has been repaid, a loan provided by the Corporation in 1996 to refinance
a portion of the original debt will continue to be repaid through 2001.
Compensation expense is accounted for based primarily on the amount of cash paid
by Northern Trust to the ESOP for principal payments on the ESOP notes. The ESOP
shares not yet allocated to individual accounts are treated as deferred
compensation and accounted for as a reduction of stockholders' equity.
The following table presents information related to the ESOP.
<TABLE>
<CAPTION>
(In Millions) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Total ESOP Compensation Expense $3.4 $2.6
Interest Incurred on ESOP-Related Debt .6 1.3
Amount Contributed to ESOP-Related Debt 3.1 3.4
Dividends and Interest on Unallocated
ESOP Shares Used for Debt Service 1.7 1.8
</TABLE>
OTHER POSTRETIREMENT BENEFITS. Northern Trust maintains an unfunded
postretirement health care plan. Employees retiring under the provisions of The
Northern Trust Pension Plan who have attained 15 years of service are eligible
for postretirement health care coverage. These benefits are provided either
through an indemnity plan, subject to deductibles, co-payment provisions and
other limitations or through health maintenance organizations. The provisions
may be changed at the discretion of Northern Trust, which also reserves the
right to terminate these benefits at any time.
The following tables set forth the plan status at December 31 and the net
periodic postretirement benefit cost of the domestic postretirement health care
plan for 1998 and 1997. The transition obligation at January 1, 1993 is being
amortized to expense over a twenty year period.
PLAN STATUS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(In Millions) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Accumulated Postretirement Benefit Obligation
(APBO) Measured at September 30:
Retirees and Dependents $15.7 $15.0
Actives Eligible for Benefits 5.6 4.7
Actives Not Yet Eligible 10.2 8.7
- --------------------------------------------------------------------------------
Total APBO 31.5 28.4
Unamortized Transition Obligation (8.1) (8.7)
Unrecognized Net Loss (4.4) (3.2)
- --------------------------------------------------------------------------------
Net Postretirement Benefit Liability $19.0 $16.5
</TABLE>
NET PERIODIC POSTRETIREMENT
BENEFIT COST
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(In Millions) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Service Cost $ .9 $ .9
Interest Cost 2.1 2.0
Amortization--Transition Obligation .6 .5
--Actuarial Loss -- .1
- --------------------------------------------------------------------------------
Net Periodic Postretirement Benefit Cost $ 3.6 $ 3.5
</TABLE>
CHANGE IN POSTRETIREMENT BENEFIT
OBLIGATION
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(In Millions) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Beginning Balance $28.4 $33.3
Service Cost .9 .9
Interest Cost 2.1 2.0
Actuarial (Gain) Loss 1.2 (4.8)
Benefits Paid (1.1) (.9)
Plan Change -- (2.1)
- --------------------------------------------------------------------------------
Ending Balance $31.5 $28.4
</TABLE>
Postretirement health care expense for 1996 was $5.1 million.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.00% at December 31, 1998 and 7.25% at
December 31, 1997. For measurement purposes, an 8.3% annual increase in the cost
of covered health care benefits was assumed for 1999. This rate is assumed to
decrease gradually to 5.5% in 2002 and remain at that level thereafter. The
health care cost trend rate assumption has a significant effect on the amounts
reported. For example, increasing or decreasing the assumed health care trend
rate by one percentage point in each year would have the following effect.
<TABLE>
<CAPTION>
1--Percentage 1--Percentage
Point Increase Point Decrease
- --------------------------------------------------------------------------------
<S> <C> <C>
Effect on Total Service and Interest
Cost Components $ .1 $ (.1)
Effect on Postretirement Benefit
Obligation 1.7 (1.5)
</TABLE>
20. CONTINGENT LIABILITIES--Because of the nature of its activities, Northern
Trust is subject to pending and threatened legal actions that arise in the
normal course of business. In the judgment of management, after consultation
with legal counsel, none of the litigation to which the Corporation or any of
its subsidiaries is a party will have a material effect, either individually or
in the aggregate, on the consolidated financial position or results of
operations.
63
<PAGE>
NORTHERN TRUST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
21. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS--COMMITMENTS AND LETTERS OF CREDIT.
Northern Trust, in the normal course of business, enters into various types of
commitments and issues letters of credit to meet the liquidity and credit
enhancement needs of its clients. Credit risk is the principal risk associated
with these instruments. The contractual amounts of these instruments represent
the credit risk should the instrument be fully drawn upon and the client
default. To control the credit risk associated with entering into commitments
and issuing letters of credit, Northern Trust subjects such activities to the
same credit quality and monitoring controls as its lending activities.
Commitments and letters of credit consist of the following:
Legally Binding Commitments to Extend Credit generally have fixed expiration
dates or other termination clauses. Since a significant portion of the
commitments are expected to expire without being drawn upon, the total
commitment amount does not necessarily represent future loans or liquidity
requirements.
Participations in Bankers Acceptances obligate Northern Trust, in the event
of default by the counterparty, to reimburse the holder of the acceptance an
amount equal to its participation in the acceptance.
Commercial Letters of Credit are instruments issued by Northern Trust on
behalf of its clients that authorize a third party (the beneficiary) to draw
drafts up to a stipulated amount under the specified terms and conditions of the
agreement. Commercial letters of credit are issued primarily to facilitate
international trade.
Standby Letters of Credit obligate Northern Trust to meet certain financial
obligations of its clients, if, under the contractual terms of the agreement,
the clients are unable to do so. These instruments are primarily issued to
support public and private financial commitments, including commercial paper,
bond financing, initial margin requirements on futures exchanges and similar
transactions.
The following table shows the contractual amounts of commitments and letters
of credit.
COMMITMENTS AND LETTERS OF CREDIT
- --------------------------------------------------------------------------------
December 31
- --------------------------------------------------------------------------------
(In Millions) 1998 1997
- --------------------------------------------------------------------------------
Legally Binding Commitments to Extend Credit $13,409.1 $11,946.6
Participations in Bankers Acceptances -- 7.8
Commercial Letters of Credit 94.2 98.6
Standby Letters of Credit:
Corporate 359.8 401.9
Industrial Revenue 893.4 843.0
Other 380.3 298.3
- --------------------------------------------------------------------------------
Total Standby Letters of Credit* $ 1,633.5 $ 1,543.2
*These amounts include $156.6 million and $199.1 million of standby letters of
credit secured by cash deposits or participated to others as of December 31,
1998 and 1997, respectively. The weighted average maturity of standby letters of
credit was 21 months at December 31, 1998 and 24 months at December 31, 1997.
RISK MANAGEMENT INSTRUMENTS. These instruments include foreign exchange
contracts, foreign currency futures contracts, and various interest risk
management instruments.
Northern Trust is a party to various risk management instruments that are
used in the normal course of business to meet the risk management needs of its
clients; as part of its trading activity for its own account; and as part of its
asset/liability management activities. The major risk associated with these
instruments is that interest or foreign exchange rates could change in an
unanticipated manner, resulting in higher interest costs or a loss in the
underlying value of the instrument. These risks are mitigated by establishing
limits for risk management positions, monitoring the level of actual positions
taken against such established limits, monitoring the level of any interest rate
sensitivity gaps created by such positions, and by using hedging techniques.
When establishing position limits, market liquidity and volatility, as well as
experience in each market, are all taken into account.
The estimated credit risk associated with these instruments relates to the
failure of the counterparty to pay based on the contractual terms of the
agreement, and is generally limited to the gross unrealized market value gains
on these instruments. The amount of credit risk will increase or decrease during
the lives of the instruments as interest and foreign exchange rates fluctuate.
This risk is controlled by limiting such activity to an approved list of
counterparties and by subjecting such activity to the same credit and quality
controls as are followed in lending and investment activities.
64
<PAGE>
NORTHERN TRUST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Risk management instruments include:
Foreign Exchange Contracts are agreements to exchange specific amounts of
currencies at a future date, at a specified rate of exchange. Foreign exchange
contracts are entered into primarily to meet the foreign exchange risk
management needs of clients. Foreign exchange contracts are also used for
trading purposes and asset/liability management.
Foreign Currency and Interest Rate Futures Contracts are agreements for
delayed delivery of foreign currency, securities or money market instruments in
which the buyer agrees to take delivery at a specified future date of a
specified currency, security, or instrument, at a specified price or yield. All
of Northern Trust's futures contracts are traded on organized exchanges that
require the daily settlement of changes in the value of the contracts. Futures
contracts are utilized in trading activities and asset/liability management to
limit Northern Trust's exposure to unfavorable fluctuations in foreign exchange
rates or interest rates.
Interest Rate Protection Contracts are agreements which enable clients to
transfer, modify or reduce their interest rate risk. As a seller of interest
rate protection, Northern Trust receives a fee at the outset of the agreement
and then assumes the risk of an unfavorable change in interest rates. Northern
Trust also purchases interest rate protection contracts for asset/liability
management.
Interest Rate Swap Contracts involve the exchange of fixed and floating rate
interest payment obligations without the exchange of the underlying principal
amounts; these types of transactions constitute the majority of the interest
rate swap portfolio.
Forward Sale Contracts represent commitments to sell a specified amount of
securities at an agreed upon date and price. Northern Trust utilizes forward
sale contracts principally in connection with its sale of mortgage loans.
Exchange-Traded Option Contracts grant the buyer the right, but not the
obligation, to purchase or sell at a specified price, a stated number of units
of an underlying financial instrument, at a future date.
The following table shows the contractual/notional amounts of risk
management instruments. The notional amounts of risk management instruments do
not represent credit risk, and are not recorded in the consolidated balance
sheet. They are used merely to express the volume of this activity.
RISK MANAGEMENT INSTRUMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Contractual/Notional
Amounts
December 31
- ---------------------------------------------------------------------
(In Millions) 1998 1997
- ---------------------------------------------------------------------
<S> <C> <C>
Asset/Liability Management:
Foreign Exchange Contracts $ 139.7 $ 155.8
Foreign Currency Futures Contracts -- 4.0
Interest Rate Futures Contracts Sold 1.0 --
Interest Rate Protection Contracts Purchased 130.0 85.0
Interest Rate Swap Contracts 2,274.1 2,812.7
Forward Sale Contracts 96.7 50.9
Client-Related and Trading:
Foreign Exchange Contracts 13,958.9 16,193.1
Interest Rate Futures Contracts Purchased 100.0 --
Interest Rate Futures Contracts Sold 100.0 10.0
Interest Rate Protection
Contracts-Purchased 36.0 13.8
-Sold 42.6 24.9
Interest Rate Swap Contracts 40.1 63.5
</TABLE>
RISK MANAGEMENT INSTRUMENTS USED FOR ASSET/LIABILITY MANAGEMENT. Northern
Trust utilizes various types of risk management instruments, primarily interest
rate swaps, as tools for managing interest rate and option risk related to its
own balance sheet. The following table summarizes the expected maturities and
weighted average interest rates to be paid and received on the asset/liability
management swap portfolio at December 31, 1998. A key assumption in the
preparation of the table is that floating rates remain constant at December 31,
1998 levels.
REMAINING MATURITY OF ASSET/LIABILITY MANAGEMENT INTEREST RATE SWAPS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
($ In Millions) 1999 2000 2001 2002 2003 2004-2008 Total
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Pay Fixed
Notional Amount $186.5 439.1 206.7 259.2 349.4 518.2 $1,959.1
Average Pay Rate 6.56% 5.46 6.89 5.67 6.83 6.35 6.22%
Average Receive Rate 5.42 5.34 5.38 4.50 5.40 5.31 5.24
- -----------------------------------------------------------------------------
Receive Fixed
Notional Amount $100.0 15.0 -- -- 100.0 -- $ 215.0
Average Pay Rate 5.07% 5.34 -- -- 5.27 -- 5.18%
Average Receive Rate 5.81 5.99 -- -- 6.31 -- 6.06
- -----------------------------------------------------------------------------
Pay and Receive Variable
(Basis Swaps)
Notional Amount $100.0 -- -- -- -- -- $ 100.0
Average Pay Rate 5.22% -- -- -- -- -- 5.22%
Average Receive Rate 4.96 -- -- -- -- -- 4.96
</TABLE>
65
<PAGE>
NORTHERN TRUST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Some of the principal uses of risk management instruments, together with the
notional amounts outstanding, are described as follows:
Convert Yields on Securities to an Effective LIBOR Rate. At December 31,
1998, interest rate swaps with a notional amount of $459 million were used to
convert fixed and floating rate interest payments on securities (classified as
available for sale) to floating rate payments indexed to LIBOR.
Reduce Interest Rate Risk From Fixed Rate Loans Funded with Variable Rate
Liabilities. Northern Trust paid a fixed rate and received a floating rate on
interest rate swaps with a notional amount of $1.4 billion at December 31, 1998
to hedge the interest rate risk from fixed rate loans. For accounting purposes
these swaps were designated to either convert the fixed rate on the loan to an
effective floating rate or to convert floating rate funding to a fixed rate.
Interest rate floors with a notional amount of $130 million at December 31,
1998 were used to hedge mortgage loan prepayment risk.
Swaps Combined with Liabilities to Obtain Favorable Funding Costs. Interest
rate swaps with a notional amount of $400 million at December 31, 1998 were
used in conjunction with the issuance of senior notes and subordinated notes to
obtain desired funding characteristics. Of these swaps, $200 million converted
fixed rate notes to floating rate funding indexed to LIBOR, $100 million
converted floating rate notes to a different floating rate index, and $100
million converted a floating rate note to a fixed rate. The use of swaps in
combination with notes permitted Northern Trust to issue notes with rate and
maturity features that were most desired by investors while converting the rate
characteristics to meet its needs.
Hedging Foreign Currency Risk. Forward foreign exchange contracts and
foreign currency futures contracts were used to reduce exposure to fluctuations
in the dollar value of capital investments in foreign subsidiaries and from
foreign currency assets and obligations. The notional amounts of these
contracts at year-end 1998 were $139.7 million of forward foreign exchange
contracts.
Hedging Mortgages Held for Sale. Northern Trust hedges the market risk of
its portfolio of fixed rate commitments and mortgages held for sale with a
combination of derivative financial instruments. At December 31, 1998 the
portfolio was hedged with $96.7 million of forward sales of mortgage-backed
securities.
Deferred gains related to interest risk management instruments used for
asset/liability management and included in the consolidated balance sheet at
year-end 1998 totaled $.6 million. There were no deferred gains or losses at
year-end 1997.
CLIENT AND TRADING-RELATED INTEREST RISK MANAGEMENT INSTRUMENTS. Net revenue
associated with client and trading-related interest risk management activities
totaled $.2 million, $.3 million, and $.3 million during 1998, 1997, and 1996,
respectively. The majority of these revenues are related to interest rate
swaps, futures contracts, and interest rate protection agreements, and are
reported as trading income in the consolidated statement of income.
OTHER OFF-BALANCE SHEET FINANCIAL INSTRUMENTS. As part of securities custody
activities and at the direction of trust clients, Northern Trust lends
securities owned by clients to borrowers who are reviewed by the Credit Policy
Credit Approval Committee. In connection with these activities, Northern Trust
has issued certain indemnifications against loss resulting from the bankruptcy
of the borrower of securities. The borrowing party is required to fully
collateralize securities received with cash, marketable securities, or
irrevocable standby letters of credit. As securities are loaned, collateral is
maintained at a minimum of 100 percent of the fair value of the securities plus
accrued interest, with revaluation of the collateral on a daily basis. The
amount of securities loaned as of December 31, 1998 and 1997 subject to
indemnification was $28.5 billion and $29.5 billion, respectively. Because of
the requirement to fully collateralize securities borrowed, management believes
that the exposure to credit loss from this activity is remote.
The Bank is a participating member of various cash and securities clearing
organizations such as The Depository Trust Company in New York. It participates
in these organizations on behalf of its clients and on behalf of itself as a
result of its own investment and trading activities. A wide variety of
securities transactions are settled through these organizations, including
those involving obligations of states and political subdivisions, asset-backed
securities, commercial paper, Eurodollars and securities issued by the
Government National Mortgage Association.
As a result of its participation in cash and securities clearing
organizations, the Bank could be responsible for a pro rata share of certain
credit-related losses arising out of the clearing activities. The method in
which such losses would be shared by the clearing members is stipulated in each
clearing organization's membership agreement. Credit exposure related to these
agreements varies from day to day, primarily as a result of fluctuations in the
volume of transactions cleared through the organizations. The estimated credit
exposure at December 31, 1998 and 1997 was $72 million and $73 million,
respectively, based on the clearing volume for those days. Controls related to
these clearing transactions are closely monitored to protect the assets of
Northern Trust.
66
<PAGE>
NORTHERN TRUST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
22. FAIR VALUE OF FINANCIAL INSTRUMENTS--SFAS No. 107, "Disclosures About
Fair Value of Financial Instruments," requires disclosure of the estimated fair
value of certain financial instruments. Considerable judgment is required to
interpret market data when computing estimates of fair value. Accordingly, the
estimates presented are not necessarily indicative of the amounts Northern
Trust could have realized in a market exchange.
The information provided below should not be interpreted as an estimate of
the fair value of Northern Trust since the disclosures, in accordance with SFAS
No. 107, exclude the values of nonfinancial assets and liabilities, as well as
a wide range of franchise, relationship, and intangible values, which are
integral to a full assessment of the consolidated financial position.
The use of different assumptions and/or estimation methods may have a
material effect on the computation of estimated fair values. Therefore,
comparisons between Northern Trust's disclosures and those of other financial
institutions may not be meaningful.
The following methods and assumptions were used in estimating the fair
values of the financial instruments:
Securities. Fair values of securities were based on quoted market values,
when available. If quoted market values were not available, fair values were
based on quoted market values for comparable instruments.
Loans (not including lease financing receivables). The fair values of one-
to-four family residential mortgages were based on quoted market prices of
similar loans sold in conjunction with securitization transactions, adjusted
for differences in loan characteristics. The fair values of the remainder of
the loan portfolio were estimated using a discounted cash flow method in which
the discount rate used was the rate at which Northern Trust would have
originated the loan had it been originated as of the financial statement date,
giving effect to current economic conditions on loan collectibility.
Savings Certificates, Other Time and Foreign Offices Time Deposits. The fair
values of these instruments were estimated using a discounted cash flow method
that incorporated market interest rates.
Senior Notes, Long-Term Debt, and Floating Rate Capital Securities. Fair
values were based on quoted market prices, when available. If quoted market
prices were not available, fair values were based on quoted market prices for
comparable instruments.
Off-Balance Sheet Financial Instruments. The fair values of commitments and
letters of credit represent the amount of unamortized fees on these instruments.
The fair values of all other off-balance sheet financial instruments were
estimated using market prices, pricing models, or quoted market prices of
financial instruments with similar characteristics.
Financial Instruments Valued at Carrying Value. Due to their short maturity,
the respective carrying values of certain on-balance sheet financial instru-
ments approximated their fair values. These financial instruments include cash
and due from banks; money market assets; customers' acceptance liability; trust
security settlement receivables; federal funds purchased; securities sold under
agreements to repurchase; commercial paper; other borrowings; and liability on
acceptances.
The fair values required to be disclosed for demand, savings, and money
market deposits pursuant to SFAS No. 107 must equal the amounts disclosed in
the consolidated balance sheet.
Fair Values of On-Balance Sheet Financial Instruments. The following table
summarizes the fair values of on-balance sheet financial instruments.
<TABLE>
<CAPTION>
December 31
- ------------------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------------------
Book Fair Book Fair
(In Millions) Value Value Value Value
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Cash and Due From Banks $2,366.0 $2,366.0 $ 1,738.9 $ 1,738.9
Money Market Assets 4,450.9 4,450.9 5,309.4 5,309.4
Securities:
Available for Sale 5,375.2 5,375.2 3,733.3 3,733.3
Held to Maturity 472.5 485.7 456.1 473.4
Trading Account 9.1 9.1 8.8 8.8
Loans (excluding leases), net of credit
loss reserve:
Held to Maturity 12,920.4 13,072.5 12,053.9 12,114.9
Held for Sale 51.4 51.6 39.7 40.0
Acceptance Liability 33.3 33.3 31.4 31.4
Trust Security Settlement Receivables 336.7 336.7 291.4 291.4
Liabilities
Deposits:
Demand, Savings and Money Market 8,955.6 8,955.6 8,240.0 8,240.0
Savings Certificates, Other Time and
Foreign Offices Time 9,247.1 9,267.7 8,120.0 8,138.1
Federal Funds Purchased 2,025.1 2,025.1 821.2 821.2
Repurchase Agreements 2,114.9 2,114.9 1,139.7 1,139.7
Commercial Paper 148.1 148.1 146.8 146.8
Other Borrowings 1,099.2 1,099.2 2,876.6 2,876.6
Senior Notes 700.0 699.8 785.0 784.9
Long-Term Debt 458.2 482.3 439.5 450.4
Debt-Floating Rate Capital Securities 267.4 295.2 267.4 267.7
Liability on Acceptances 33.3 33.3 31.4 31.4
</TABLE>
67
<PAGE>
NORTHERN TRUST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Fair Values of Off-Balance Sheet Financial Instruments. The following tables
summarize the fair values of off-balance sheet financial instruments.
<TABLE>
<CAPTION>
December 31
- -------------------------------------------------------------
1998 1997
- -------------------------------------------------------------
Book Fair Book Fair
(In Millions) Value Value Value Value
- -------------------------------------------------------------
<S> <C> <C> <C> <C>
Commitments and Letters of Credit:
Loan Commitments $ .5 $ .5 $ 2.1 $ 2.1
Letters of Credit 1.3 1.3 1.0 1.0
Asset/Liability Management:
Foreign Exchange Contracts
Assets 1.2 1.2 1.9 1.9
Liabilities .5 .5 1.7 1.7
Interest Rate Swap Contracts
Assets 6.5 10.2 13.1 15.1
Liabilities 14.5 72.7 8.2 39.9
Other Financial Instruments
Assets .4 1.3 .3 .4
Liabilities -- -- .4 .4
</TABLE>
<TABLE>
<CAPTION>
Fair Value
- -------------------------------------------------------------
(In Millions) 1998 1997
- -------------------------------------------------------------
<S> <C> <C>
Client-Related and Trading:*
Foreign Exchange Contracts
Assets $179.2 $215.9
Liabilities 175.0 214.7
Interest Rate Swap Contracts
Assets .9 .7
Liabilities .8 .6
</TABLE>
*Assets and liabilities associated with foreign exchange contracts averaged
$191.0 million and $157.0 million, respectively, during 1998. Assets and
liabilities associated with other client-related and trading account
instruments averaged $1.5 million and $.6 million, respectively, during 1998.
23. CONCENTRATIONS OF CREDIT RISK--The information in the section titled Loans
and Other Extensions of Credit found on pages 35 through 37 is incorporated by
reference.
24. PLEDGED AND RESTRICTED ASSETS--Certain of Northern Trust's subsidiaries, as
required or permitted by law, pledge assets to secure public and trust depos-
its, repurchase agreements and for other purposes. On December 31, 1998, secu-
rities and loans totaling $5.6 billion ($4.6 billion of U.S. Government and
agency securities, $484 million of obligations of states and political subdivi-
sions and $479 million of loans and other securities), were pledged. Collateral
required for these purposes totaled $4.2 billion. Deposits maintained at the
Federal Reserve Bank to meet reserve requirements averaged $276.3 million in
1998 and $258.9 million in 1997.
25. STOCK-BASED COMPENSATION PLANS--Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation," establishes
financial accounting and reporting standards for stock-based compensation
plans.
SFAS No. 123 allows two alternative accounting methods: (1) a fair-value-
based method, or (2) an intrinsic-value-based method which is prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25) and related interpretations. Northern Trust has elected to
account for its stock-based incentive plans and awards under APB 25, and has
adopted the disclosure requirements of SFAS No. 123.
A description of Northern Trust's stock-based compensation is presented
below.
AMENDED INCENTIVE STOCK PLAN--AMENDED 1992 INCENTIVE STOCK PLAN (PLANS). The
Amended Incentive Stock Plan was superseded by the Amended 1992 Incentive Stock
Plan and terminated on December 31, 1994. Outstanding grants and awards under
the Amended Incentive Stock Plan will remain in effect in accordance with their
terms, but no further grants or awards will be made.
The Amended 1992 Incentive Stock Plan (Plan) was adopted in 1992 and has
been amended on several occasions. The Plan is administered by the Compensation
and Benefits Committee (Committee) of the Board of Directors. Directors and key
officers of the Corporation or its subsidiaries are eligible to receive awards
under the Plan. Awards under the Plan may be granted in any one or a
combination of (a) incentive stock options and non-qualified stock options, (b)
stock appreciation rights, (c) stock awards, (d) performance shares, and (e)
stock equivalents.
The total number of shares of the Corporation's common stock authorized for
distribution under the Plan is 16,000,000. As of December 31, 1998, shares
available for future grants under the Plan totaled 5,666,033.
Stock Options. Stock options consist of options to purchase common stock at
purchase prices not less than 100% of the fair market value thereof on the date
the option is granted. Options have a maximum ten year life and will vest and
become exercisable in six months to two years after the date of grant. In
addition, the Plan provides that all options may become exercisable upon a
change of control as defined in the Plan. All options terminate at such time as
determined by the Committee and as provided in the terms and conditions of the
respective option grants.
68
<PAGE>
NORTHERN TRUST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
A summary of the status of stock options under the Plans at December 31,
1998, 1997 and 1996 and changes during the years then ended is presented in
the table below.
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options Outstanding,
January 1 7,444,402 $26.72 7,494,612 $19.96 7,468,946 $16.52
Granted ($64.50 to
$80.19 per share in
1998) 1,336,150 69.44 1,178,500 56.63 1,315,700 33.16
Exercised ($6.96 to
$56.63 per share in
1998) (1,170,840) 17.18 (1,214,310) 14.00 (1,242,034) 13.18
Cancelled (35,500) 43.51 (14,400) 27.67 (48,000) 21.77
- ------------------------------------------------------------------------------------
Options Outstanding
December 31
($8.42 to $80.19 per
share) 7,574,212 $35.66 7,444,402 $26.72 7,494,612 $19.96
- ------------------------------------------------------------------------------------
Options Exercisable,
December 31 5,102,562 $22.23 4,958,202 $17.92 4,961,312 $15.62
</TABLE>
The following is a summary of outstanding and exercisable options under the
Plans at December 31, 1998.
<TABLE>
<CAPTION>
Options Outstanding
- ---------------------------------------------------------------------------
Weighted
Average Weighted
Remaining Average
Number Contractual Exercise
Outstanding Exercisable Life Price
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$8.42 to $15.50 per
share 1,021,100 1,021,100 1.8 Years $12.00
$18.63 to $33.50 per
share 4,056,462 4,056,462 6.0 Years 24.49
$56.63 to $80.19 per
share 2,496,650 25,000 9.2 Years 63.49
</TABLE>
Stock Awards. Under the Plans, stock awards or equivalents can be awarded
by the Committee to participants which entitle them to receive a payment in
cash or Northern Trust Corporation common stock based on such terms and
conditions as the Committee deems appropriate.
Total expense applicable to stock awards was $2.1 million in 1998, $.9
million in 1997 and $.5 million in 1996. In 1998, 1997 and 1996, 65,000
shares, 49,750 shares and 12,000 shares, respectively, of restricted stock
were awarded with a weighted average grant-date fair value of $73.21, $56.63
and $26.78, respectively. As of December 31, 1998, restricted stock awards
outstanding totaled 208,250 shares. These shares vest, subject to continuing
employment, over a period of five to nine years.
Performance Shares. Under the performance share provisions of the Plans,
participants will be entitled to have each award credited to an account
maintained for them if established performance goals are achieved with
distribution after vesting. The value of shares earned but not yet distributed
under the Plan is credited to performance share accounts and is shown in
stockholders' equity as Common Stock Issuable-Performance Plan.
Total salary expense for performance shares was $23.6 million in 1998,
$20.5 million in 1997 and $9.7 million in 1996. In 1998, 1997 and 1996,
319,500 shares, 312,000 shares and 331,000 shares, respectively, were granted
with a weighted average grant-date fair value of $72.00, $44.25 and $26.88,
respectively. As of December 31, 1998, 574,143 shares of stock had been
credited to performance share accounts subject to meeting vesting conditions
and 953,866 shares had been granted, subject to meeting established
performance goals and vesting conditions, for three-year performance periods
ending in 1998 through 2000.
DIRECTOR STOCK PLAN. Each non-employee director of the Corporation received or
will receive a grant of 500 shares of common stock on the date of each annual
meeting of stockholders in the years 1997, 1998 and 1999 under the Northern
Trust Corporation 1997 Stock Plan for Non-Employee Directors adopted in February
1997. Under the terms of the plan, directors may elect to defer the payment of
their annual stock grant or cash-based compensation until termination of
services as director. Amounts deferred are converted into stock units
representing shares of common stock of the Corporation. Distributions of stock
grants will be distributed in stock. Distributions of the stock unit account
that relates to cash-based compensation will be made in cash based on the fair
value of the stock units.
OTHER STOCK-BASED COMPENSATION ARRANGEMENTS. The Corporation, in conjunction
with an acquisition, awarded 432,280 restricted shares of the Corporation's
common stock with a grant-date fair value of $23.75 to certain subsidiary
employee participants contingent upon continued employment, non-competition
agreements and, in some cases, meeting predetermined performance goals.
69
<PAGE>
NORTHERN TRUST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Total salary expense related to this arrangement totaled $3.2 million in
1998, $2.9 million in 1997 and $1.8 million in 1996.
PRO FORMA INFORMATION. Pro forma information regarding net income and earnings
per share is required by SFAS No. 123, and has been determined as if the
Corporation had accounted for its stock-based compensation under SFAS No. 123.
For purposes of estimating the fair value of the Corporation's employee stock
options at the grant-date, a Black-Scholes option pricing model was used with
the following weighted average assumptions for 1998, 1997 and 1996,
respectively: risk-free interest rates of 5.68%, 6.10% and 6.64%; dividend
yields of 1.21%, 1.30% and 1.92%; volatility factors of the expected market
price of the Corporation's common stock of 24.4%, 20.9% and 22.4%; and a
weighted average expected life of the option of 7.6 years, 6.0 years and 5.8
years.
The weighted average fair value of options granted in 1998, 1997 and 1996
was $25.16, $17.20 and $9.11, respectively. For purposes of pro forma
disclosures, the estimated fair value of the options is amortized to expense
over the options' six months to two year vesting period. Under SFAS No. 123,
options and awards granted prior to 1995 are not required to be included in the
pro forma information. Because the SFAS No. 123 method of accounting has not
been applied to options and other stock-based compensation granted prior to
January 1, 1995, the resulting pro forma compensation cost may not be
representative of that to be expected in future years. The Corporation's pro
forma information follows:
<TABLE>
<CAPTION>
(In Millions Except
Per Share Information) 1998 1997 1996
- --------------------------------------------------------------------
<S> <C> <C> <C>
Net Income as Reported $353.9 $309.4 $258.8
Pro Forma Adjustments Increase
(Decrease) Due To:
Stock Options (14.7) (9.2) (4.8)
Performance Shares and Other Arrangements 8.2 8.1 1.4
- --------------------------------------------------------------------
Pro Forma Net Income $347.4 $308.3 $255.4
- --------------------------------------------------------------------
Earnings Per Share as Reported:
Basic $ 3.15 $ 2.74 $ 2.27
Diluted 3.04 2.66 2.21
Pro Forma Earnings Per Share:
Basic $ 3.09 $ 2.73 $ 2.24
Diluted 2.98 2.64 2.18
</TABLE>
26. CASH-BASED COMPENSATION PLANS--Various incentive plans provide for cash
incentives and bonuses to selected employees based upon accomplishment of
corporate net income objectives, business unit goals and individual
performance. The plans provide for acceleration of benefits in certain
circumstances including a change in control. The estimated contributions to
these plans are charged to salary expense and totaled $86.0 million in 1998,
$68.0 million in 1997 and $45.3 million in 1996.
27. BUSINESS SEGMENTS AND RELATED INFORMATION--Information describing the
Corporation's major business segments is contained in the section titled
Business Segments, found on pages 28 through 31, and is incorporated by
reference.
The operations of the Northern Trust are managed on a business unit basis
and include components of both domestic and foreign source income and assets.
Foreign source income and assets are not separately identified in its internal
management reporting system. However, in order to comply with the financial
reporting requirements of the Securities and Exchange Commission, Northern
Trust is required to disclose foreign activities based on the domicile of the
customer. Due to the complex and integrated nature of its foreign and domestic
activities it is impossible to segregate with precision revenues, expenses and
assets between its U.S. and foreign domiciled customers. Therefore, certain
subjective estimates and assumptions have been made to allocate revenues,
expenses and assets between domestic and international operations as described
below.
Northern Trust's international activities are centered in the commercial
banking, treasury activities, foreign exchange and global custody businesses of
the Bank, three overseas branches, one Edge Act subsidiary, the Hong Kong
subsidiaries, NTGA, and Northern Trust of Florida.
Net income from international operations includes the direct net income
contributions of foreign branches, foreign subsidiaries and the Edge Act
subsidiary. The Bank and Northern Trust of Florida international profit
contributions reflect direct salary and other expenses of the business units,
plus expense allocations for interest, occupancy, overhead and the provision
for credit losses. For purposes of this disclosure, all foreign exchange
profits have been allocated to international operations. The interest expense
is allocated to international operations based on specifically matched or
pooled funding. Alloca-
70
<PAGE>
NORTHERN TRUST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DISTRIBUTION OF TOTAL ASSETS AND OPERATING PERFORMANCE
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Income Income Income
Total Operating before Net Total Operating before Net Total Operating before Net
(In Millions) Assets Income (a) Taxes Income Assets Income (a) Taxes Income Assets Income (a) Taxes Income
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
International $ 4,371.8 $ 220.5 $119.5 $ 74.5 $ 3,260.2 $ 203.2 $112.5 $ 70.1 $ 2,805.0 $ 128.6 $ 65.3 $ 40.6
Domestic 23,498.2 1,328.3 423.2 279.4 22,055.2 1,169.5 359.4 239.3 18,803.3 1,039.7 322.1 218.2
- -----------------------------------------------------------------------------------------------------------------------------------
Total $27,870.0 $1,548.8 $542.7 $353.9 $25,315.4 $1,372.7 $471.9 $309.4 $21,608.3 $1,168.3 $387.4 $258.8
</TABLE>
The table summarizes international performance based on the domicile of the
primary obligor without regard to guarantors or the location of collateral.
(a) Operating Income is comprised of net interest income and noninterest income.
tions of indirect noninterest expenses related to international activities are
not significant but, when made, are based on various methods such as time, space
and number of employees.
Prior year information has been restated to place it on a basis consistent
with the current period's presentation and allocation methodology.
28. ACQUISITIONS--On November 15, 1996, the Corporation completed the
acquisition of Metroplex Bancshares, Inc., parent company of Bent Tree National
Bank (Bent Tree) in Dallas, Texas for $14.6 million in cash. The transaction was
recorded under the purchase method of accounting. Included in the acquisition
cost were $6.0 million of goodwill and $2.1 million of other intangibles, which
are being amortized over fifteen and ten years, respectively. Bent Tree was
merged into Northern Trust Bank of Texas N.A. during the first quarter of 1997.
On December 31, 1997, the Corporation completed the acquisition of ANB
Investment Management and Trust Company (ANB IMC) from First Chicago NBD
Corporation for $53 million in cash. The transaction was recorded under the
purchase method of accounting. Included in the acquisition cost were $36.0
million of goodwill and $10.0 million of other intangibles which will be
amortized over fifteen and ten years, respectively. Subsequent to the
acquisition, ANB IMC's name was changed to Northern Trust Quantitative Advisors,
Inc.
On May 15, 1998, the Corporation completed the acquisition of Trustbank
Financial Corp., parent of Trust Bank of Colorado, for $15 million in cash. The
transaction was recorded under the purchase method of accounting. Included in
the acquisition cost was $10.4 million of goodwill which is being amortized over
fifteen years.
29. REGULATORY CAPITAL REQUIREMENTS--Northern Trust and its subsidiary banks are
subject to various regulatory capital requirements administered by the federal
bank regulatory authorities. Under these requirements, banks must maintain
specific ratios of total and tier 1 capital to risk-weighted assets and of tier
1 capital to average assets in order to be classified as "well capitalized." The
regulatory capital requirements impose certain restrictions upon banks that meet
minimum capital requirements but are not "well capitalized" and obligate the
federal bank regulatory authorities to take "prompt corrective action" with
respect to banks that do not maintain such minimum ratios. Such prompt
corrective action could have a direct material effect on a bank's financial
statements.
As of December 31, 1998, each of Northern's subsidiary banks had capital
ratios above the level required for classification as a "well capitalized"
institution and had not received any regulatory notification of a lower
classification. There are no conditions or events since that date that
management believes have adversely affected the capital categorization of any
subsidiary bank for these purposes. The table on the following page summarizes
the risk-based capital amounts and ratios for Northern Trust and for each of its
subsidiary banks whose net income for 1998 exceeded 10% of the consolidated
total.
71
<PAGE>
NORTHERN TRUST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Minimum to Qualify
Actual as Well Capitalized
- ---------------------------------------------------------------------------------------------------------
($ In Millions) Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
As of December 31, 1998:
Total Capital to Risk-Weighted Assets
Consolidated $2,621 13.1% $2,007 10.0%
The Northern Trust Company 1,934 11.5 1,676 10.0
Northern Trust Bank of Florida N.A. 224 10.9 206 10.0
Tier 1 Capital to Risk-Weighted Assets
Consolidated 1,964 9.8 1,204 6.0
The Northern Trust Company 1,443 8.6 1,006 6.0
Northern Trust Bank of Florida N.A. 204 9.9 123 6.0
Tier 1 Capital (to Fourth Quarter Average Assets)
Consolidated 1,964 6.9 1,423 5.0
The Northern Trust Company 1,443 6.0 1,209 5.0
Northern Trust Bank of Florida N.A. 204 7.4 138 5.0
As of December 31, 1997:
Total Capital to Risk-Weighted Assets
Consolidated $2,345 12.8% $1,834 10.0%
The Northern Trust Company 1,687 10.9 1,549 10.0
Northern Trust Bank of Florida N.A. 191 11.1 173 10.0
Tier 1 Capital to Risk-Weighted Assets
Consolidated 1,762 9.6 1,101 6.0
The Northern Trust Company 1,269 8.2 929 6.0
Northern Trust Bank of Florida N.A. 174 10.1 104 6.0
Tier 1 Capital (to Fourth Quarter Average Assets)
Consolidated 1,762 6.9 1,282 5.0
The Northern Trust Company 1,269 5.7 1,104 5.0
Northern Trust Bank of Florida N.A. 174 7.3 119 5.0
</TABLE>
30. NORTHERN TRUST CORPORATION (Corporation only)--Condensed financial
information is presented below. Investments in wholly-owned subsidiaries are
carried on the equity method of accounting.
CONDENSED BALANCE SHEET
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
December 31
- --------------------------------------------------------------------------------
(In Millions) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash on Deposit with Subsidiary Bank $ .4 $ .6
Time Deposits with Banks 123.5 279.4
Securities 154.9 139.8
Investments in Wholly-Owned
Subsidiaries--Bank Subsidiaries 1,874.5 1,633.1
--Nonbank Subsidiaries 102.6 92.4
Loans--Nonbank Subsidiaries 7.6 8.3
--Other 1.3 1.4
Buildings and Equipment 7.2 7.6
Other Assets 191.0 180.1
- --------------------------------------------------------------------------------
Total Assets $2,463.0 $2,342.7
- --------------------------------------------------------------------------------
Liabilities
Commercial Paper $ 148.1 $ 146.8
Long-Term Debt 301.0 383.5
Other Liabilities 73.6 73.4
- --------------------------------------------------------------------------------
Total Liabilities 522.7 603.7
Stockholders' Equity 1,940.3 1,739.0
- --------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $2,463.0 $2,342.7
</TABLE>
CONDENSED STATEMENT OF INCOME
- --------------------------------------------------------------------------------
For the Year Ended
December 31
- --------------------------------------------------------------------------------
(In Millions) 1998 1997 1996
- --------------------------------------------------------------------------------
Operating Income
Dividends--Bank Subsidiaries $113.5 $ 85.5 $113.9
--Nonbank Subsidiaries 21.9 5.6 1.6
Intercompany Interest and
Other Charges 11.2 20.0 10.2
Interest and Other Income 5.2 7.2 8.0
- --------------------------------------------------------------------------------
Total Operating Income 151.8 118.3 133.7
- --------------------------------------------------------------------------------
Operating Expenses
Interest Expense 30.5 33.3 18.9
Other Operating Expenses 13.6 13.1 6.9
- --------------------------------------------------------------------------------
Total Operating Expenses 44.1 46.4 25.8
- --------------------------------------------------------------------------------
Income before Income Taxes and
Equity in Undistributed Net Income
of Subsidiaries 107.7 71.9 107.9
Benefit for Income Taxes (13.8) (10.3) (5.1)
- --------------------------------------------------------------------------------
Income before Equity in Undistributed
Net Income of Subsidiaries 121.5 82.2 113.0
Equity in Undistributed Net Income of
Subsidiaries--Bank Subsidiaries 232.8 219.9 137.9
--Nonbank Subsidiaries (.4) 7.3 7.9
- --------------------------------------------------------------------------------
Net Income $353.9 $309.4 $258.8
- --------------------------------------------------------------------------------
Net Income Applicable to
Common Stock $349.0 $304.4 $253.9
72
<PAGE>
NORTHERN TRUST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
CONDENSED STATEMENT OF CASH FLOWS
- -------------------------------------------------------------------------------
For the Year Ended December 31
- -------------------------------------------------------------------------------
(In Millions) 1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities:
Net Income $ 353.9 $ 309.4 $ 258.8
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating
Activities:
Equity in Undistributed Net Income of
Subsidiaries (232.4) (227.2) (145.8)
(Increase) Decrease in Accrued Income 2.1 (1.2) .9
Increase in Prepaid Expenses (.3) (3.0) (.3)
Other, net 27.6 8.7 11.0
- -------------------------------------------------------------------------------
Net Cash Provided by Operating
Activities 150.9 86.7 124.6
- -------------------------------------------------------------------------------
Investing Activities:
Net (Increase) Decrease in Time
Deposits with Banks 155.9 (178.4) (5.4)
Purchases of Securities (303.7) (392.1) (354.4)
Sales of Securities 290.9 369.6 361.3
Proceeds from Maturity and Redemption
of Securities 2.0 32.8 19.2
Capital Investments in Subsidiaries (26.3) (61.2) (14.6)
Net Decrease in Loans to Subsidiaries .7 7.9 47.2
Net Decrease in Other Loans .1 .2 .2
Other, net (1.9) (.2) (.5)
- -------------------------------------------------------------------------------
Net Cash Provided by (Used in)
Investing Activities 117.7 (221.4) 53.0
- -------------------------------------------------------------------------------
Financing Activities:
Net Increase (Decrease) in Commercial
Paper 1.3 (2.2) 2.3
Repayment of Long-Term Debt (82.5) (8.8) (10.2)
Proceeds from Long-Term Debt Issued to
Subsidiaries -- 275.6 --
Repayment of Long-Term Debt Issued to
Subsidiaries (.1) -- --
Treasury Stock Purchased (116.5) (66.2) (118.2)
Cash Dividends Paid on Common and
Preferred Stock (98.5) (85.3) (74.7)
Net Proceeds from Stock Options 19.5 13.0 12.1
Other, net 8.0 9.2 10.9
- -------------------------------------------------------------------------------
Net Cash Provided by (Used in)
Financing Activities (268.8) 135.3 (177.8)
- -------------------------------------------------------------------------------
Net Change in Cash on Deposit with
Subsidiary Bank (.2) .6 (.2)
Cash on Deposit with Subsidiary Bank at
Beginning of Year .6 -- .2
- -------------------------------------------------------------------------------
Cash on Deposit with Subsidiary Bank at
End of Year $ .4 $ .6 $ --
</TABLE>
73
<PAGE>
NORTHERN TRUST CORPORATION
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF NORTHERN TRUST CORPORATION:
- --------------------------------------------------------------------------------
We have audited the accompanying consolidated balance sheet of Northern Trust
Corporation (a Delaware Corporation) and subsidiaries as of December 31, 1998
and 1997, and the related consolidated statements of income, comprehensive
income, changes in stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1998. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Northern Trust Corporation and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Chicago, Illinois,
January 19, 1999
74
<PAGE>
NORTHERN TRUST CORPORATION
CONSOLIDATED FINANCIAL STATISTICS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
AVERAGE BALANCE SHEET
- ------------------------------------------------------------------------------
($ In Millions) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets
Cash and Due from Banks $ 1,205.7 $ 1,095.4 $ 1,072.9 $ 1,178.7 $ 1,206.6
Federal Funds Sold and
Securities Purchased
under Agreements to
Resell 967.5 815.3 333.3 204.2 237.0
Time Deposits with
Banks 2,827.1 2,574.7 1,699.5 1,643.9 2,063.3
Other Interest-Bearing 44.1 52.6 50.7 16.6 119.9
Securities
U.S. Government and
Other 7,025.0 5,956.4 5,940.9 5,703.9 4,482.0
Obligations of States
and Political
Subdivisions 434.0 408.8 414.1 434.7 465.1
Trading Account 11.8 9.0 8.8 54.4 53.8
- ------------------------------------------------------------------------------
Total Securities 7,470.8 6,374.2 6,363.8 6,193.0 5,000.9
- ------------------------------------------------------------------------------
Loans and Leases
Commercial and Other 7,798.2 6,967.7 6,084.0 5,556.3 5,183.1
Residential Mortgages 5,516.8 4,845.2 4,248.1 3,579.7 3,133.0
- ------------------------------------------------------------------------------
Total Loans and Leases 13,315.0 11,812.9 10,332.1 9,136.0 8,316.1
- ------------------------------------------------------------------------------
Reserve for Credit
Losses (147.1) (148.1) (147.5) (146.2) (145.2)
Other Assets 1,507.6 1,474.7 1,259.5 1,183.3 1,087.2
- ------------------------------------------------------------------------------
Total Assets $27,190.7 $24,051.7 $20,964.3 $19,409.5 $17,885.8
- ------------------------------------------------------------------------------
Liabilities
Deposits
Demand and Other
Noninterest-Bearing $ 3,228.0 $ 2,963.9 $ 2,732.9 $ 2,747.3 $ 2,592.5
Savings and Money
Market 4,263.3 3,895.4 3,620.7 3,312.4 3,385.7
Savings Certificates 2,144.5 2,035.8 2,062.4 2,000.3 1,229.6
Other Time 571.8 717.3 549.2 542.7 412.8
Foreign Offices-Demand 503.8 486.4 347.8 299.1 361.7
-Time 5,781.7 4,971.2 3,826.2 3,493.4 3,284.8
- ------------------------------------------------------------------------------
Total Deposits 16,493.1 15,070.0 13,139.2 12,395.2 11,267.1
- ------------------------------------------------------------------------------
Federal Funds Purchased 2,620.6 1,690.2 1,842.2 1,564.0 1,350.7
Securities Sold under
Agreements to
Repurchase 1,506.0 1,519.9 1,973.3 1,769.7 1,444.3
Commercial Paper 145.9 142.7 143.7 146.0 138.1
Other Borrowings 2,540.4 2,120.9 1,274.1 1,034.5 1,007.5
Senior Notes 653.3 539.3 267.5 394.0 781.8
Long-Term Debt 445.8 435.8 360.7 271.3 293.6
Debt-Floating Rate
Capital Securities 267.4 224.1 -- -- --
Other Liabilities 693.6 679.3 477.9 462.1 377.2
- ------------------------------------------------------------------------------
Total Liabilities 25,366.1 22,422.2 19,478.6 18,036.8 16,660.3
- ------------------------------------------------------------------------------
Stockholders' Equity 1,824.6 1,629.5 1,485.7 1,372.7 1,225.5
- ------------------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity $27,190.7 $24,051.7 $20,964.3 $19,409.5 $17,885.8
- ------------------------------------------------------------------------------
Ratios
Dividend Payout Ratio 27.7% 27.5% 28.5% 28.6% 28.4%
Return on Average
Assets 1.30 1.29 1.23 1.13 1.02
Return on Average
Common Equity 20.47 20.17 18.64 17.58 16.57
Tier 1 Capital to Risk-
Weighted Assets-End of
Period 9.78 9.61 8.19 8.82 8.95
Total Capital to Risk-
Weighted Assets-End of
Period 13.06 12.78 11.87 12.49 12.36
Leverage Ratio 6.90 6.87 6.42 6.19 6.22
Average Stockholders'
Equity to Average
Assets 6.71 6.78 7.09 7.07 6.85
Average Loans and
Leases Times Average
Stockholders' Equity 7.3x 7.2x 7.0x 6.7x 6.8x
- ------------------------------------------------------------------------------
Stockholders-End of
Period 3,373 3,380 3,335 3,331 2,962
Staff-End of Period
(Full-time equivalent) 8,156 7,553 6,933 6,531 6,608
- ------------------------------------------------------------------------------
</TABLE>
76
<PAGE>
NORTHERN TRUST CORPORATION
CONSOLIDATED FINANCIAL STATISTICS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ANALYSIS OF NET INTEREST INCOME
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
(Interest and Rate on a Taxable Equivalent Basis) 1998 1997
- ------------------------------------------------------------------------------------------------------------
($ 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 $ 53.0 $ 967.5 5.48% $ 45.9 $ 815.3 5.63%
Time Deposits with Banks 155.0 2,827.1 5.48 133.5 2,574.7 5.18
Other 2.7 44.1 6.14 3.0 52.6 5.68
- ------------------------------------------------------------------------------------------------------------
Total Money Market Assets 210.7 3,838.7 5.49 182.4 3,442.6 5.30
- ------------------------------------------------------------------------------------------------------------
Securities
U.S. Government 22.4 374.2 5.99 48.8 822.9 5.94
Obligations of States and Political Subdivisions 38.2 434.0 8.81 38.1 408.8 9.32
Federal Agency 362.1 6,385.0 5.67 281.9 4,890.1 5.77
Other 18.3 265.8 6.87 14.9 243.4 6.11
Trading Account .8 11.8 6.53 .7 9.0 7.33
- ------------------------------------------------------------------------------------------------------------
Total Securities 441.8 7,470.8 5.91 384.4 6,374.2 6.03
- ------------------------------------------------------------------------------------------------------------
Loans and Leases 886.5 13,315.0 6.66 798.7 11,812.9 6.76
- ------------------------------------------------------------------------------------------------------------
Total Earning Assets $1,539.0 $24,624.5 6.25% $1,365.5 $21,629.7 6.32%
- ------------------------------------------------------------------------------------------------------------
Average Source of Funds
Deposits
Savings and Money Market $ 141.3 $ 4,263.3 3.31% $ 125.8 $ 3,895.4 3.23%
Savings Certificates 122.1 2,144.5 5.69 117.2 2,035.8 5.76
Other Time 30.6 571.8 5.35 39.4 717.3 5.50
Foreign Offices Time 286.4 5,781.7 4.95 239.8 4,971.2 4.82
- ------------------------------------------------------------------------------------------------------------
Total Deposits 580.4 12,761.3 4.55 522.2 11,619.7 4.49
Federal Funds Purchased 139.8 2,620.6 5.34 92.4 1,690.2 5.47
Securities Sold under
Agreements to Repurchase 80.2 1,506.0 5.33 81.7 1,519.9 5.38
Commercial Paper 8.0 145.9 5.51 7.9 142.7 5.54
Other Borrowings 132.3 2,540.4 5.21 112.4 2,120.9 5.30
Senior Notes 36.5 653.3 5.58 30.9 539.3 5.75
Long-Term Debt 31.8 445.8 7.14 32.6 435.8 7.48
Debt-Floating Rate Capital Securities 16.9 267.4 6.32 14.5 224.1 6.49
- ------------------------------------------------------------------------------------------------------------
Total Interest-Related Funds 1,025.9 20,940.7 4.90 894.6 18,292.6 4.89
- ------------------------------------------------------------------------------------------------------------
Interest Rate Spread -- -- 1.35% -- -- 1.43%
- ------------------------------------------------------------------------------------------------------------
Noninterest-Related Funds -- 3,683.8 -- -- 3,337.1 --
- ------------------------------------------------------------------------------------------------------------
Total Source of Funds $1,025.9 $24,624.5 4.17% $ 894.6 $21,629.7 4.14%
- ------------------------------------------------------------------------------------------------------------
Net Interest Income/Margin $ 513.1 -- 2.08% $ 470.9 -- 2.18%
- ------------------------------------------------------------------------------------------------------------
Net Interest Income/Margin Components
Domestic $ 502.7 $21,118.7 2.38% $ 466.0 $18,492.2 2.52%
International 10.4 3,505.8 .30 4.9 3,137.5 .16
- ------------------------------------------------------------------------------------------------------------
Consolidated $ 513.1 $24,624.5 2.08% $ 470.9 $21,629.7 2.18%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Notes--Average volume includes nonaccrual loans.
--Interest on loans and money market assets includes fees of $4.3 million
in 1998, $3.9 million in 1997, $4.3 million in 1996, $5.1 million in 1995
and $6.8 million in 1994.
--Total interest income includes adjustments on loans and securities
(primarily obligations of states and political subdivisions) to a taxable
equivalent basis. Such adjustments are based on the U.S. federal income
tax rate (35%) and State of Illinois income tax rate (7.18%) before
giving effect to the deductibility of state taxes for federal income tax
purposes. Lease financing receivable balances are reduced by deferred
income. Total taxable equivalent interest adjustments amounted to $35.9
million in 1998, $32.7 million in 1997, $33.6 million in 1996, $37.6
million in 1995 and $33.4 million in 1994.
--Yields on the portion of the securities portfolio classified as available
for sale are based on amortized cost.
78
<PAGE>
NORTHERN TRUST CORPORATION
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
- --------------------------------------------------------------------------------------------
Interest Volume Rate Interest Volume Rate Interest Volume Rate
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 18.3 $ 333.3 5.49% $ 12.3 $ 204.2 6.02% $ 10.9 $ 237.0 4.59%
84.9 1,699.5 5.00 92.1 1,643.9 5.60 97.8 2,063.3 4.74
3.0 50.7 5.91 1.1 16.6 6.88 5.2 119.9 4.31
- --------------------------------------------------------------------------------------------
106.2 2,083.5 5.10 105.5 1,864.7 5.66 113.9 2,420.2 4.71
- --------------------------------------------------------------------------------------------
97.6 1,702.0 5.73 70.4 1,225.7 5.74 73.8 1,779.6 4.15
40.8 414.1 9.86 46.8 434.7 10.75 52.8 465.1 11.35
228.4 4,010.7 5.69 258.8 4,124.8 6.28 114.2 2,333.6 4.90
13.7 228.2 6.00 22.0 353.4 6.21 19.6 368.8 5.31
.6 8.8 7.09 3.8 54.4 7.04 4.3 53.8 7.91
- --------------------------------------------------------------------------------------------
381.1 6,363.8 5.99 401.8 6,193.0 6.49 264.7 5,000.9 5.29
- --------------------------------------------------------------------------------------------
697.8 10,332.1 6.75 634.3 9,136.0 6.94 503.5 8,316.1 6.05
- --------------------------------------------------------------------------------------------
$1,185.1 $18,779.4 6.31% $1,141.6 $17,193.7 6.64% $882.1 $15,737.2 5.61%
- --------------------------------------------------------------------------------------------
$ 114.3 $ 3,620.7 3.16% $ 109.1 $ 3,312.4 3.29% $ 85.3 $ 3,385.7 2.52%
119.1 2,062.4 5.78 120.6 2,000.3 6.03 56.9 1,229.6 4.63
29.9 549.2 5.44 31.5 542.7 5.81 18.6 412.8 4.50
184.5 3,826.2 4.82 182.1 3,493.4 5.21 137.2 3,284.8 4.18
- --------------------------------------------------------------------------------------------
447.8 10,058.5 4.45 443.3 9,348.8 4.74 298.0 8,312.9 3.58
97.9 1,842.2 5.31 91.2 1,564.0 5.83 55.5 1,350.7 4.11
103.4 1,973.3 5.24 102.6 1,769.7 5.80 61.9 1,444.3 4.28
7.8 143.7 5.40 8.6 146.0 5.87 5.9 138.1 4.31
64.5 1,274.1 5.07 55.6 1,034.5 5.38 36.0 1,007.5 3.57
14.4 267.5 5.37 23.7 394.0 6.00 33.8 781.8 4.32
27.4 360.7 7.59 21.4 271.3 7.88 23.0 293.6 7.84
-- -- -- -- -- -- -- -- --
- --------------------------------------------------------------------------------------------
763.2 15,920.0 4.79 746.4 14,528.3 5.14 514.1 13,328.9 3.86
- --------------------------------------------------------------------------------------------
-- -- 1.52% -- -- 1.50% -- -- 1.75%
- --------------------------------------------------------------------------------------------
-- 2,859.4 -- -- 2,665.4 -- -- 2,408.3 --
- --------------------------------------------------------------------------------------------
$ 763.2 $18,779.4 4.06% $ 746.4 $17,193.7 4.34% $514.1 $15,737.2 3.27%
- --------------------------------------------------------------------------------------------
$ 421.9 -- 2.25% $ 395.2 -- 2.30% $368.0 -- 2.34%
- --------------------------------------------------------------------------------------------
$ 420.6 $16,678.5 2.52% $ 392.6 $15,193.7 2.58% $357.3 $12,890.4 2.77%
1.3 2,100.9 .06 2.6 2,000.0 .13 10.7 2,846.8 .38
- --------------------------------------------------------------------------------------------
$ 421.9 $18,779.4 2.25% $ 395.2 $17,193.7 2.30% $368.0 $15,737.2 2.34%
- --------------------------------------------------------------------------------------------
</TABLE>
79
<PAGE>
NORTHERN TRUST CORPORATION
CONSOLIDATED FINANCIAL STATISTICS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
QUARTERLY FINANCIAL DATA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
STATEMENT OF INCOME 1998
- --------------------------------------------------------------------------------------------------------------
Entire Fourth Third Second First
($ In Millions Except Per Share Information) Year Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Trust Fees $ 816.3 216.7 203.6 202.3 193.7
Other Noninterest Income 255.3 67.9 61.1 63.4 62.9
Net Interest Income
Interest Income 1,503.1 382.6 392.9 370.3 357.3
Interest Expense 1,025.9 256.2 274.9 251.1 243.7
- --------------------------------------------------------------------------------------------------------------
Net Interest Income 477.2 126.4 118.0 119.2 113.6
Provision for Credit Losses 9.0 1.0 1.0 3.0 4.0
Noninterest Expenses 997.1 269.4 243.8 247.7 236.2
Provision for Income Taxes 188.8 49.0 47.7 47.0 45.1
- --------------------------------------------------------------------------------------------------------------
Net Income $ 353.9 91.6 90.2 87.2 84.9
- --------------------------------------------------------------------------------------------------------------
Net Income Applicable to Common Stock $ 349.0 90.4 89.0 86.0 83.6
- --------------------------------------------------------------------------------------------------------------
Per Common Share
Net Income-Basic $ 3.15 .82 .81 .78 .75
-Diluted 3.04 .79 .78 .75 .73
- --------------------------------------------------------------------------------------------------------------
AVERAGE BALANCE SHEET
Assets
Cash and Due from Banks $ 1,205.7 1,319.2 1,116.3 1,163.0 1,224.5
Money Market Assets 3,838.7 5,067.2 3,388.0 3,381.0 3,506.4
Securities 7,470.8 6,736.5 8,393.3 7,570.5 7,177.5
Loans and Leases 13,315.0 13,981.0 13,428.4 13,100.7 12,735.0
Reserve for Credit Losses (147.1) (146.7) (146.6) (147.2) (147.7)
Other Assets 1,507.6 1,634.0 1,381.8 1,504.1 1,510.2
- --------------------------------------------------------------------------------------------------------------
Total Assets $27,190.7 28,591.2 27,561.2 26,572.1 26,005.9
- --------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Deposits
Demand and Other Noninterest-Bearing $ 3,228.0 3,394.4 3,131.2 3,223.0 3,161.6
Savings and Other Interest-Bearing 6,407.8 6,537.1 6,381.9 6,429.5 6,280.1
Other Time 571.8 564.6 678.1 517.4 525.6
Foreign Offices 6,285.5 6,907.4 6,381.5 5,711.5 6,132.2
- --------------------------------------------------------------------------------------------------------------
Total Deposits 16,493.1 17,403.5 16,572.7 15,881.4 16,099.5
Purchased Funds 6,812.9 7,017.4 7,434.8 6,739.4 6,042.4
Senior Notes 653.3 700.0 366.0 800.9 750.0
Long-Term Debt 445.8 462.8 462.5 422.9 434.5
Debt-Floating Rate Capital Securities 267.4 267.4 267.4 267.4 267.4
Other Liabilities 693.6 842.9 619.6 654.7 656.1
Stockholders' Equity 1,824.6 1,897.2 1,838.2 1,805.4 1,756.0
- --------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $27,190.7 28,591.2 27,561.2 26,572.1 26,005.9
- --------------------------------------------------------------------------------------------------------------
ANALYSIS OF NET INTEREST INCOME
Earning Assets $24,624.5 25,784.7 25,209.7 24,052.2 23,418.9
Interest-Related Funds 20,940.7 21,999.8 21,518.6 20,361.2 19,853.1
Noninterest-Related Funds 3,683.8 3,784.9 3,691.1 3,691.0 3,565.8
Net Interest Income (Taxable equivalent) 513.1 135.2 127.7 128.2 122.0
Net Interest Margin (Taxable equivalent) 2.08% 2.08 2.01 2.14 2.11
- --------------------------------------------------------------------------------------------------------------
COMMON STOCK DIVIDEND AND MARKET PRICE
Dividends $ .87 .24 .21 .21 .21
Market Price Range-High 89.88 89.88 83.25 79.38 78.13
-Low 55.75 58.81 55.75 67.44 60.38
- --------------------------------------------------------------------------------------------------------------
</TABLE>
Note: The common stock of Northern Trust Corporation is traded on the Nasdaq
National Market under the symbol NTRS.
80
<PAGE>
<TABLE>
<CAPTION>
NORTHERN TRUST CORPORATION
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
1997
- --------------------------------------------------------------------------------------------
Entire Fourth Third Second First
Year Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 689.2 185.2 177.4 168.3 158.3
245.3 62.1 77.3 54.9 51.0
1,332.8 361.8 339.2 331.8 300.0
894.6 248.5 229.6 222.6 193.9
- --------------------------------------------------------------------------------------------
438.2 113.3 109.6 109.2 106.1
9.0 3.0 5.0 .5 .5
891.8 233.6 234.7 217.0 206.5
162.5 42.7 43.6 39.5 36.7
- --------------------------------------------------------------------------------------------
$ 309.4 81.3 81.0 75.4 71.7
- --------------------------------------------------------------------------------------------
$ 304.4 80.0 79.7 74.2 70.5
- --------------------------------------------------------------------------------------------
$ 2.74 .72 .72 .67 .64
2.66 .70 .70 .65 .62
- --------------------------------------------------------------------------------------------
$ 1,095.4 1,094.5 1,056.2 1,073.9 1,158.0
3,442.6 3,938.4 3,553.1 3,371.1 2,895.1
6,374.2 6,879.2 6,232.1 6,514.5 5,861.1
11,812.9 12,502.5 12,001.2 11,610.4 11,120.5
(148.1) (147.8) (148.2) (148.4) (148.3)
1,474.7 1,501.7 1,469.0 1,438.2 1,490.5
- --------------------------------------------------------------------------------------------
$24,051.7 25,768.5 24,163.4 23,859.7 22,376.9
- --------------------------------------------------------------------------------------------
$ 2,963.9 3,003.7 2,934.0 2,880.7 3,037.8
5,931.2 5,993.2 5,840.6 5,918.7 5,973.2
717.3 709.4 771.0 772.6 614.6
5,457.6 6,526.4 5,749.8 4,993.4 4,535.5
- --------------------------------------------------------------------------------------------
15,070.0 16,232.7 15,295.4 14,565.4 14,161.1
5,473.7 5,648.5 4,961.0 6,132.0 5,153.3
539.3 793.7 844.0 245.1 265.0
435.8 443.7 443.6 427.9 427.8
224.1 267.4 267.3 236.0 123.8
679.3 679.1 702.1 647.6 688.6
1,629.5 1,703.4 1,650.0 1,605.7 1,557.3
- --------------------------------------------------------------------------------------------
$24,051.7 25,768.5 24,163.4 23,859.7 22,376.9
- --------------------------------------------------------------------------------------------
$21,629.7 23,320.1 21,786.4 21,496.0 19,876.7
18,292.6 19,870.2 18,388.5 18,235.5 16,639.6
3,337.1 3,449.9 3,397.9 3,260.5 3,237.1
470.9 121.5 117.6 117.7 114.1
2.18% 2.07 2.14 2.20 2.33
- --------------------------------------------------------------------------------------------
$ .75 .21 .18 .18 .18
71.50 71.50 59.50 51.88 45.25
34.00 54.63 47.25 35.88 34.00
- --------------------------------------------------------------------------------------------
</TABLE>
81
<PAGE>
NORTHERN TRUST CORPORATION
CORPORATE STRUCTURE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NORTHERN TRUST CORPORATION
50 South LaSalle Street, Chicago, Illinois 60675
(312) 630-6000
PRINCIPAL SUBSIDIARY
The Northern Trust Company
50 South LaSalle Street, Chicago, Illinois 60675
120 East Oak Street, Chicago, Illinois 60611
125 South Wacker Drive, Chicago, Illinois 60675
2814 North Fullerton, Chicago, Illinois 60647
7801 South State Street, Chicago, Illinois 60619
8501 West Higgins Road, Chicago, Illinois 60631
6401 North Harlem Avenue, Chicago, Illinois 60631
826 S. Northwest Highway, Barrington, Illinois 60010
2550 Waukegan Road, Glenview, Illinois 60025
579 Central Avenue, Highland Park, Illinois 60035
4 North Washington, Hinsdale, Illinois 60521
120 East Scranton Avenue, Lake Bluff, Illinois 60044
265 Deerpath Road, Lake Forest, Illinois 60045
959 South Waukegan Road, Lake Forest, Illinois 60045
701 South McKinley Road, Lake Forest, Illinois 60045
400 East Diehl Road, Naperville, Illinois 60563
One Oakbrook Terrace, Oakbrook Terrace, Illinois 60181
1501 Woodfield Road, Schaumburg, Illinois 60173
62 Green Bay Road, Winnetka, Illinois 60093
London Branch
155 Bishopsgate, London EC2M 3XS, United Kingdom
Cayman Islands Branch
P.O. Box 501, Georgetown, Cayman Islands,
British West Indies
Singapore Branch
80 Raffles Place #46-02, UOB Plaza 1,
Singapore 048624
SUBSIDIARIES OF THE NORTHERN
TRUST COMPANY
The Northern Trust
International Banking Corporation
One World Trade Center, Suite 3941,
New York, New York 10048
The Northern Trust Company
of Hong Kong Limited
Suite 703-4 One Pacific Place
88 Queensway, Hong Kong
Northern Trust Trade Services Limited
Asia Pacific Tower, 17th Floor,
3 Garden Road, Central, Hong Kong
Northern Trust Fund Managers (Ireland) Limited
Connaught House
30 Herbert Street
Dublin 2, Ireland
NorLease, Inc.
50 South LaSalle Street, Chicago, Illinois 60675
The Northern Trust Company, Canada
161 Bay Street, Suite 4540, B.C.E. Place
Toronto, Ontario, Canada M5J 2S1
NTG Services LLC
155 Bishopsgate, London
EC2M 3XS, United Kingdom
NT Mortgage Holdings LLC
50 South LaSalle Street
Chicago, Illinois 60675
INTERNATIONAL AFFILIATE
Transatlantic Trust Corporation
75 Rochford Street, P.O. Box 429
Charlottetown, Prince Edward Island,
Canada C1A 7K7
OTHER SUBSIDIARIES OF
THE CORPORATION
Northern Trust Bank of Florida N.A.
700 Brickell Avenue, Miami, Florida 33131
595 Biltmore Way, Coral Gables, florida 33134
328 Crandon Boulevard, Suite 101,
Key Biscayne, Florida 33149
3001 Aventura Boulevard, Aventura, Florida 33180
8600 NW 17th Street, Suite 120, Miami, Florida 33126
1100 East Las Olas Boulevard,
Fort Lauderdale, Florida 33301
2601 East Oakland Park Boulevard,
Fort Lauderdale, Florida 33306
301 Yamato Road, Boca Raton, Florida 33431
770 East Atlantic Avenue, Delray Beach, Florida 33483
440 Royal Palm Way, Palm Beach, Florida 33480
11780 U.S. Highway 1, Suite 100,
North Palm Beach, Florida 33408
2201 S.E. Kingswood Terrace, Monterey Commons,
Stuart, Florida 34996
755 Beachland Boulevard, Vero Beach, Florida 32963
1440 South A1A, Vero Beach, Florida 32963
84
<PAGE>
NORTHERN TRUST CORPORATION
CORPORATE STRUCTURE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
OTHER SUBSIDIARIES OF THE CORPORATION continued
4001 Tamiami Trail North, Naples, Florida 34103
375 Fifth Avenue South, Naples, Florida 34102
26790 South Tamiami Trail, Bonita Springs, Florida 34134
8060 College Parkway S.W., Fort Myers, Florida 33919
1515 Ringling Boulevard, Sarasota, Florida 34236
901 Venetia Bay Boulevard, Suite 100, Venice, Florida 34292
540 Bay Isles Road, Longboat Key, Florida 34228
233 15th Street West, Bradenton, Florida 34205
6320 Venture Drive, Suite 100, Bradenton, Florida 34202
100 Second Avenue South, St. Petersburg, Florida 33701
425 North Florida Avenue, Tampa, Florida 33602
Northern Trust Bank of Arizona N.A.
2398 East Camelback Road, Phoenix, Arizona 85016
6373 East Tanque Verde Road, Tucson, Arizona 85715
10220 West Bell Road, Sun City, Arizona 85351
10015 West Royal Oak Road, Sun City, Arizona 85351
7600 E. Doubletree Ranch Road, Scottsdale, Arizona 85258
19432 R. H. Johnson Boulevard, Sun City West, Arizona 85375
1525 South Greenfield Road, Mesa, Arizona 85206
3450 East Sunrise Drive, Tucson, Arizona 85718
Northern Trust Bank of California N.A.
355 South Grand Avenue, Suite 2600, Los Angeles, California 90071
620 Newport Center Drive, Suite 200, Newport Beach, California 92660
4370 LaJolla Village Drive, Suite 1000, San Diego, California 92122
1125 Wall Street, La Jolla, California 92037
206 East Anapamu Street, Santa Barbara, California 93101
1485 East Valley Road, (Montecito), Santa Barbara, California 93108
580 California Street, Suite 1800, San Francisco, California 94104
575 Redwood Highway, Mill Valley, California 94941 (opening spring 1999)
10877 Wilshire Boulevard (Westwood), Suite 100, Los Angeles, California 90024
74-900 Highway 111, Suite 121, Indian Wells, California 92210
421 North Rodeo Drive, Penthouse, Beverly Hills, California 90210
Northern Trust Bank of Texas N.A.
2020 Ross Avenue, Dallas, Texas 75201
5540 Preston Road, Dallas, Texas 75205
16475 Dallas Parkway, Addison, Texas 75001
2701 Kirby Drive, Houston, Texas 77098
600 Bering Drive, Houston, Texas 77057
10000 Memorial Drive, Houston, Texas 77024
700 Rusk Street, Houston, Texas 77002
Northern Trust Bank, FSB
1701 North Woodward Avenue, Suite 110, Bloomfield Hills, Michigan 48304
Northern Trust Bank of Colorado
1200 17th Street, 24th Floor, Denver, Colorado 80202
Northern Trust Global Advisors, Inc.
300 Atlantic Street, Suite 400, Stamford, Connecticut 06901
The Northern Trust Company of Connecticut
300 Atlantic Street, Suite 400, Stamford, Connecticut 06901
NT Global Advisors, Inc.
161 Bay Street, Suite 4540, B.C.E. Place, Toronto, Ontario, Canada M5J 2S1
NT Fund Advisors of Quebec, Inc.
770 Sherbrooke Street West, Suite 1420, Montreal, Quebec, Canada H3A 1G1
Northern Trust Global Advisors, Limited
155 Bishopsgate, London EC2M 3XS, United Kingdom
Northern Trust Quantitative Advisors, Inc.
50 South LaSalle Street, Chicago, Illinois 60675
The Northern Trust Company of New York
40 Broad Street, New York, New York 10004
Northern Trust Cayman International, Ltd.
P.O. Box 1586, Grand Cayman, Cayman Islands, British West Indies
Northern Trust Securities, Inc.
50 South LaSalle Street, Chicago, Illinois 60675
Northern Trust Retirement Consulting, L.L.C.
400 Perimeter Center Terrace, Suite 850, Atlanta, Georgia 30346
19119 North Creek Parkway, Suite 200, Bothell, Washington 98011
85
<PAGE>
EXHIBIT NUMBER (21)
TO 1998 FORM 10-K
NORTHERN TRUST CORPORATION SUBSIDIARIES
AS OF MARCH 1, 1999
<TABLE>
<CAPTION>
Percent Jurisdiction of
Owned Incorporation
------- --------------
<S> <C> <C>
The Northern Trust Company 100% Illinois
NorLease, Inc. 100% Delaware
MFC Company, Inc. 100% Delaware
The Northern Trust Company, Canada 100% Ontario, Canada
Nortrust Nominees Ltd. 100% London
The Northern Trust Company U.K. Pension Plan Limited 100% London
The Northern Trust International Banking Corporation 100% Edge Act
The Northern Trust Company of Hong Kong Limited 100% Hong Kong
Northern Trust Trade Services Limited 100% Hong Kong
Northern Trust Fund Managers (Ireland) Limited 100% Ireland
NTG Services, LLC 100% Delaware LLC
NT Mortgage Holdings, LLC 99.6% Delaware LLC
Northern Trust of Florida Corporation 100% Florida
Northern Trust Cayman International, Ltd. 100% Cayman Islands,
BWI
Northern Trust Bank of Florida N.A. 100% National Bank
Realnor Properties, Inc. 100% Florida
Realnor Special Properties, Inc. 100% Florida
Realnor 1177, Inc. 100% Florida
Realnor Hallandale, Inc. 100% Florida
Nortrust of Arizona Holding Corporation 100% Arizona
Northern Trust Bank of Arizona N.A. 100% National Bank
Northern Trust of California Corporation 100% Delaware
Northern Trust Bank of California N.A. 100% National Bank
Berry, Hartell, Evers & Osborne, Inc. 100% Delaware,
(INACTIVE)
Metroplex Bancshares, Inc. 100% Texas
Metroplex Delaware Financial Corporation 100% Delaware
Northern Trust Bank of Texas N.A. 75.5% National Bank
Fiduciary Services Inc. 100% Texas
Tanglewood Bancshares, Inc. 100% Texas
Northern Trust Bank of Texas N.A. 24.5% National Bank
</TABLE>
<PAGE>
NORTHERN TRUST CORPORATION SUBSIDIARIES
AS OF MARCH 1, 1999
(continued)
<TABLE>
<CAPTION>
<S> <C> <C>
Percent State of
Owned Incorporation
------- ---------------
Northern Futures Corporation 100% Delaware,
(INACTIVE)
Northern Trust of Colorado Corporation 100% Delaware
Northern Trust Bank of Colorado 100% Colorado
Northern Trust Bank, FSB - Michigan 100% Federal Thrift
Northern Trust Holdings L.L.C. 100% Delaware
Northern Investment Corporation 100% Delaware
Northern Investment Management Company 100% Delaware
Northern Trust Securities, Inc. 100% Delaware
Northern Trust Services, Inc. 100% Illinois
Nortrust Realty Management, Inc. 100% Illinois
The Northern Trust Company of New York 100% New York
Northern Trust Retirement Consulting, L.L.C. 100% Delaware
Northern Trust Global Advisors, Inc. 100% Delaware
NT Global Advisors, Inc. 100% Ontario, Canada
Northern Trust Global Advisors Limited 100% England
The Northern Trust Company of Connecticut 100% Connecticut
NT Fund Advisors of Quebec, Inc. 100% Quebec, Canada
Northern Trust Quantitative Advisors, Inc. 100% Illinois
NTC Capital I 100% Delaware
NTC Capital II 100% Delaware
</TABLE>
<PAGE>
EXHIBIT NUMBER (23)
TO 1998 FORM 10-K
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report dated January 19, 1999, incorporated by reference in the Northern
Trust Corporation's Annual Report on Form 10-K for the year end December 31,
1998, into the Corporation's previously filed Form S-8 Registration Statements
File Nos. 33-22546, 33-47597, 33-63843, 333-00809, 333-25135, 333-25283, 333-
35685, 333-52623, 333-53259; and the Corporation's previously filed Form S-3
Nos. 333-18951, 333-25649 and 333-45203.
ARTHUR ANDERSEN LLP
Chicago, Illinois
March 12, 1999
<PAGE>
EXHIBIT NUMBER (24)
TO 1998 FORM 10-K
POWER OF ATTORNEY
- -----------------
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned officers and directors of Northern Trust Corporation
hereby severally constitute and appoint William A. Osborn, Perry R. Pero and
Peter L. Rossiter, and each of them singly, our true and lawful attorneys and
agents with full power to them and each of them singly, to sign for us in our
names, in the capacities indicated below, Form 10-K, annual report pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934, for the fiscal year
ended December 31, 1998, and to file such Form, with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby granting to such attorneys and agents, and each of them, full
power of substitution and revocation in the premises, and generally to do all
such things in our name and behalf in our capacities as officers and directors
to enable Northern Trust Corporation to comply with the provisions of the
Securities Exchange Act of 1934, as amended, and all regulations of the
Securities and Exchange Commission thereunder, hereby ratifying and confirming
our signatures as they may be signed by our attorneys, or any one of them, to
such Form, and all that our attorneys and agents, or any of them, may do or
cause to be done by virtue of these presents.
IN WITNESS WHEREOF, the undersigned have hereunto executed this Power of
Attorney this 16th day of February, 1999.
------
William A. Osborn Barry G. Hastings
- -------------------------------- --------------------------------
William A. Osborn Barry G. Hastings
Chairman of the Board, Chief President, Chief Operating
Executive Officer and Director Officer and Director
Perry R. Pero Harry W. Short
- -------------------------------- --------------------------------
Perry R. Pero Harry W. Short
Senior Executive Vice President Senior Vice President and Controller
and Chief Financial Officer (Chief Accounting Officer)
Duane L. Burnham Delores E. Cross
- -------------------------------- --------------------------------
Duane L. Burnham Delores E. Cross
Director Director
Robert S. Hamada
--------------------------------
Robert S. Hamada
Director
<PAGE>
Robert A. Helman Arthur L. Kelly
- -------------------------------- --------------------------------
Robert A. Helman Arthur L. Kelly
Director Director
Frederick A. Krehbiel William G. Mitchell
- -------------------------------- --------------------------------
Frederick A. Krehbiel William G. Mitchell
Director Director
Edward J. Mooney Harold B. Smith
- -------------------------------- --------------------------------
Edward J. Mooney Harold B. Smith
Director Director
William D. Smithburg Bide L. Thomas
- -------------------------------- --------------------------------
William D. Smithburg Bide L. Thomas
Director Director
STATE OF ILLINOIS )
) SS
COUNTY OF COOK )
I, Victoria Antoni , a Notary Public, DO HEREBY CERTIFY that the
---------------------
above named directors and officers of Northern Trust Corporation, personally
known to me to be the same persons whose names are subscribed to the foregoing
instrument, appeared before me this day in person, and severally acknowledged
that they signed and delivered the instrument as their free and voluntary act,
for the uses and purposes therein set forth.
GIVEN under my hand and notarial seal this 16th day of February, 1999.
------
Victoria Antoni
-------------------------
Notary Public
My Commission Expires:
7/25/99
- ----------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND> This schedule contains summary financial information extracted from
the Consolidated Balance Sheet and the Consolidated Statement of Income and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,365,973
<INT-BEARING-DEPOSITS> 3,264,686
<FED-FUNDS-SOLD> 1,164,363
<TRADING-ASSETS> 9,067
<INVESTMENTS-HELD-FOR-SALE> 5,375,194
<INVESTMENTS-CARRYING> 472,536
<INVESTMENTS-MARKET> 485,706
<LOANS> 13,646,905
<ALLOWANCE> 146,839
<TOTAL-ASSETS> 27,870,026
<DEPOSITS> 18,202,700
<SHORT-TERM> 5,883,394
<LIABILITIES-OTHER> 914,095
<LONG-TERM> 929,503
<COMMON> 189,935
0
120,000
<OTHER-SE> 1,630,399
<TOTAL-LIABILITIES-AND-EQUITY> 27,870,026
<INTEREST-LOAN> 884,429
<INTEREST-INVEST> 407,273
<INTEREST-OTHER> 211,435
<INTEREST-TOTAL> 1,503,137
<INTEREST-DEPOSIT> 580,390
<INTEREST-EXPENSE> 1,025,917
<INTEREST-INCOME-NET> 477,220
<LOAN-LOSSES> 9,000
<SECURITIES-GAINS> 1,346
<EXPENSE-OTHER> 997,126
<INCOME-PRETAX> 542,679
<INCOME-PRE-EXTRAORDINARY> 353,915
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 353,915
<EPS-PRIMARY> 3.15
<EPS-DILUTED> 3.04
<YIELD-ACTUAL> 2.08
<LOANS-NON> 30,529
<LOANS-PAST> 29,962
<LOANS-TROUBLED> 2,386
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 147,638
<CHARGE-OFFS> 11,800
<RECOVERIES> 1,862
<ALLOWANCE-CLOSE> 146,849
<ALLOWANCE-DOMESTIC> 112,225
<ALLOWANCE-FOREIGN> 3,561
<ALLOWANCE-UNALLOCATED> 31,063
</TABLE>
<PAGE>
EXHIBIT NUMBER (99)
TO 1998 FORM 10-K
DESCRIPTION OF COMMON STOCK
(Filed for the Purpose of Updating the Description of
Common Stock of Northern Trust Corporation Previously
Registered under the Securities Exchange Act of 1934)
GENERAL
Northern Trust Corporation (the "Corporation") is authorized to issue
280,000,000 shares of Common Stock with a par value of $1.66-2/3 per share
("Common Stock"). As of March 1, 1999, there were 111,403,286 shares of Common
Stock outstanding. Holders of Common Stock have no preemptive rights to
subscribe for additional shares .
The rights of the holders of the Corporation's Common Stock are
qualified by the rights of the holders of the Corporation's preferred stock (the
"Preferred Stock"). The Corporation is authorized to issue 10,000,000 shares of
Preferred Stock without par value. The Board of Directors of the Corporation is
authorized to fix the particular preferences, rights, qualifications and
restrictions for each series of Preferred Stock issued. As of March 1, 1999, 600
shares of Auction Rate Preferred Stock Series C, with a $100,000 per share
stated value, and 600 shares of Flexible Auction Rate Cumulative Preferred Stock
Series D, with a $100,000 per share stated value, were outstanding.
Subject to the preferential rights of the holders of the Corporation's
Preferred Stock outstanding at any time, holders of Common Stock are entitled to
receive, out of the funds legally available therefor, such dividends as may be
declared from time to time by the Board of Directors. In the event of the
liquidation, dissolution, distribution of assets or winding up of the
Corporation, after distribution in full of the preferential amounts, if any, to
be distributed to the holders of shares of Preferred Stock, holders of Common
Stock are entitled to receive all the remaining assets of the Corporation,
divided ratably in proportion to the number of shares held by each.
The holders of Common Stock have one vote for each share held by them
and are entitled to cumulative voting in the election of directors. The voting
rights of the holders of Common Stock are qualified, however, by the voting
rights of the holders of the Corporation's Preferred Stock in the following
circumstances:
(i) the holders of 66 2/3% of the Preferred Stock must approve as a class
any amendment to the Corporation's Certificate of Incorporation that
would adversely affect the powers, preferences, rights or privileges
of
<PAGE>
the Preferred Stock (provided that, if such an amendment would
adversely affect only one or more, but not all, series of Preferred
Stock, then only the series so affected would be entitled to the
above-described vote);
(ii) the holders of 66 2/3% of the Preferred Stock must approve as a
class the creation, authorization, or issuance of any shares of
stock of the Corporation (or obligation or security convertible into
or evidencing the right to purchase such shares) ranking prior to
the Preferred Stock as to dividends or upon liquidation, or any
reclassification of authorized stock into such prior shares;
(iii) in the event at the time of any annual meeting of stockholders for
the election of directors there shall exist a default in payment of
a specified number of dividends (generally six quarterly dividends
or dividends payable over at least 540 days), the number of
directors on the Corporation's Board of Directors shall be increased
by two (2), and the holders of Preferred Stock, voting as a class
and to the exclusion of the holders of Common Stock, shall have the
right to elect two directors to fill such vacancies to serve full
terms, and such voting rights shall continue until there are no
dividends in arrears upon the Preferred Stock.
Shares of Common Stock are not subject to redemption. The
outstanding shares of Common Stock are fully paid and nonassessable.
Norwest Bank Minnesota, N.A. is the transfer agent, registrar and
dividend disbursing agent for the Common Stock.
1989 PREFERRED STOCK PURCHASE RIGHTS
On October 17, 1989 the Board of Directors of the Corporation
declared a dividend distribution of one right (each a "Right") for each
outstanding share of Common Stock of the Corporation. The distribution was
payable on October 31, 1989 to stockholders of record on that date.
Each Right initially entitled the holder, following a distribution
of the Rights as described below, to buy one one-hundredth of a share of a new
series of Preferred Stock of the Corporation, denominated "Series A Junior
Participating Preferred Stock" (the "Junior Participating Preferred Stock") at a
price of $250 per one one-hundredth of a share, subject to adjustment (as a
result of anti-dilution adjustments to date, each Right, if distributed, would
be exercisable for one-sixth of one one-hundredth of a share of Junior
Participating Preferred Stock at an exercise price of $41.67 for each such
fractional share). The Rights are represented by and
2
<PAGE>
traded with the Common Stock certificates and will not be exercisable or
transferable apart from the Common Stock until the earlier of (i) twenty days
after a public announcement that a person or group has acquired beneficial
ownership of 15% or more of the Voting Power (such person or group being called
an "Acquiring Person" and such date of first public announcement being called
the "Stock Acquisition Date") or (ii) twenty days after a person or group
commences, or announces it intends to commence, a tender or exchange offer, the
consummation of which would give such person or group 25% or more of the Voting
Power (the earlier of such days being called the "Distribution Date").
Descendants of company-founder Byron L. Smith and certain related trusts and
other entities (or a group comprised solely of such persons) will not be deemed
to be an Acquiring Person as long as all such persons beneficially own Common
Stock or other securities of the Corporation representing less than 23% of the
Voting Power. Voting Power means the voting power of all securities of the
Corporation then outstanding generally entitled to vote for the election of
directors of the Corporation. Separate certificates for the Rights will be
mailed to holders of Common Stock as of the Distribution Date, and thereafter
the separate Right certificates alone will evidence the Rights.
If, after October 17, 1989, any person becomes the beneficial owner of
25% or more of the Voting Power, the Rights will adjust so that, assuming the
Rights are then exercisable, each Right (other than Rights held by an Acquiring
Person which will become void) will entitle its holder to purchase, at the then
current exercise price of the Right, that number of shares of Common Stock of
the Corporation having, at the time of such transaction, a market value of two
times the exercise price of the Right.
If the Corporation is the surviving corporation in a merger involving
an Acquiring Person and the Common Stock is not changed or exchanged, or if an
Acquiring Person engages in certain types of self-dealing transactions, each
Right (other than Rights owned by the Acquiring Person which will become void),
assuming it is then exercisable, will entitle its holder to purchase at the then
current exercise price of the Right, that number of shares of Common Stock of
the Corporation having, at the time of such transaction, a market value of two
times the exercise price of the Right.
If, on or after the Stock Acquisition Date, the Corporation is
acquired in a merger or other business combination or 50% or more of its assets
or earning power is sold, each Right, assuming it is then exercisable, will
entitle its holder to purchase, at the then current exercise price of the Right,
that number of shares of Common Stock of the surviving company having, at the
time of such transaction, a market value of two times the exercise price of the
Right.
At any time after the Rights become exercisable for Common Stock, the
Board of Directors of the Corporation may exchange the unexercised Rights
3
<PAGE>
(other than Rights owned by any Acquiring Person which have become void), in
whole or in part, at an exchange ratio (as adjusted, the "Exchange Ratio") of
one share of Common Stock, or one one-hundredth of a share of Junior
Participating Preferred Stock (or of a share of a class or series of the
Corporation's Preferred Stock having equivalent rights, preferences and
privileges), per Right, subject to adjustment (as a result of anti-dilution
adjustments to date, the Exchange Ratio currently is one-sixth of one share of
Common Stock per Right). Notwithstanding the foregoing, no such exchange of the
Rights may be authorized by the Board of Directors during the Special Period (as
defined below) or at any time when the Rights are not redeemable.
At any time prior to the earlier of (i) the date on which an Automatic
Redemption Event (as defined below) occurs, (ii) the close of business on the
twentieth day following the Stock Acquisition Date, or (iii) the Final
Expiration Date, the Corporation may redeem the Rights at a price of $.01 per
Right (as adjusted, the "Redemption Price"; as a result of anti-dilution
adjustments to date, the Redemption Price is currently $.00167). Immediately
upon the occurrence of an Automatic Redemption Event or upon the authorization
of the redemption of the Rights by the Board of Directors of the Corporation,
the Rights will terminate and the only right of the holders of Rights will be to
receive the Redemption Price. "Automatic Redemption Event" means (i) any
person becomes the beneficial owner of securities of the Corporation which in
the aggregate represent 14% or more of the Voting Power, (ii) any person
commences, or publicly announces its intent to commence, a tender or exchange
offer if upon consummation thereof such person, together with all affiliates and
associates of such person, would be the beneficial owner of securities of the
Corporation which in the aggregate represent 15% or more of the Voting Power,
(iii) any person makes by public announcement or by written communication that
is or becomes the subject of a public announcement, or publicly announces its
intent to make, a proposal to the Corporation or its stockholders for (1) a
merger, consolidation or similar transaction involving the Corporation or any of
its subsidiaries, (2) a purchase or other acquisition of all or a substantial
portion of the assets or deposits of the Corporation and its subsidiaries or (3)
a purchase or other acquisition of securities representing 15% or more of the
Voting Power (any transaction of the type described in clauses (1), (2) and (3)
above, an "Acquisition Transaction"), or (iv) any person files an application
or notice with the Board of Governors of the Federal Reserve System, or any
other federal or state banking regulatory authority, which application or notice
seeks approval to engage in any transaction constituting an Acquisition
Transaction.
Notwithstanding the foregoing, in the event that within 270 days of a
public announcement by a third party of an intent or proposal to engage (without
the current and continuing concurrence of the Board of Directors) in a
transaction involving an acquisition of or business combination with the
Corporation or otherwise to become an Acquiring Person, there is an election of
directors (whether at one
4
<PAGE>
or more stockholder meetings and/or pursuant to written stockholder consents)
resulting in a majority of the Board of Directors being comprised of persons who
were not nominated by the Board of Directors in office immediately prior to such
election, then following such election and for a period of 180 days (the
"Special Period"), the Rights, if otherwise then redeemable, will only be
redeemable by the Board of Directors either (1) if they have followed certain
prescribed procedures or (2) in any other case, provided that, if in any such
other case their decision regarding redemption and any acquisition or business
combination is challenged as a breach of fiduciary duty of care or loyalty, the
directors can establish the entire fairness of such decision without the benefit
of any business judgement rule or other presumption. The procedures required
under clause (1) include: (a) the retention of an independent financial advisor,
and the receipt by the Board of Directors of (i) the views of such advisor
regarding whether redemption of the Rights will serve the best interests of the
Corporation and its stockholders, or (ii) such advisor's statement that it is
unable to express such a view, setting forth the reasons therefor; and (b) with
respect to any pending acquisition or business combination proposal (i) the
implementation by the Board of Directors, with the advice of its independent
financial advisor, of a process and procedures which the Board of Directors and
such advisor conclude would be most likely to result in the best value
reasonably available to stockholders, (ii) receipt of a fairness opinion from
such advisor, and the Board of Directors determining, and such advisor
confirming, that it has no reason to believe that a superior transaction is
reasonably available, and (iii) execution of a definitive transaction agreement.
The Rights will expire on October 31, 1999 (the "Final Expiration
Date"), unless earlier exchanged or redeemed by the Corporation as described
above. Until a Right is exercised, the holder thereof will have no rights as a
stockholder of the Corporation, including without limitation, the right to vote
or receive dividends. The original Rights Agent was Harris Trust and Savings
Bank ("Harris Trust"). Effective as of November 10, 1997, Harris Trust was
removed as Rights Agent under the Rights Agreement and Norwest Bank Minnesota,
N.A. was appointed to serve as successor Rights Agent thereunder.
So long as the Rights are attached to the Common Stock, the
Corporation will issue one Right with each new share of Common Stock issued so
that all such shares will have attached Rights. No fractional shares will be
issued, other than fractional shares of Junior Participating Preferred Stock of
the Corporation that are integral multiples of one one-hundredth of a share, and
a cash payment will be made in lieu thereof based on the market price of the
Junior Participating Preferred or Common Stock on the last trading day prior to
the date of exercise.
Prior to the Distribution Date, the Rights Agreement may be amended
without the approval of any holders of the Rights at the direction of the
Corporation for any purpose, except as described below. After the Distribution
Date, however, the
5
<PAGE>
Board of Directors of the Corporation may amend the Rights Agreement only to
cure any ambiguity, to cure any defective or inconsistent provisions, to make
changes which do not adversely affect the interest of the holders of the Rights
(other than an Acquiring Person or an affiliate or associate of an Acquiring
Person) or to shorten or lengthen any time period under the Rights Agreement;
provided that no amendment to adjust the time period governing redemption may be
made at any time when the Rights are not redeemable. Notwithstanding the
foregoing, (1) no supplement or amendment may be made to the Rights Agreement
which changes the Redemption Price, the Final Expiration Date, the purchase
price or the number of one one-hundredths of a share of Junior Participating
Preferred Stock for which a Right is exercisable, unless such supplement or
amendment does not adversely affect the interests of the holders of Rights
certificates (other than an Acquiring Person or an affiliate or associate of an
Acquiring Person) and (2) no supplement or amendment may be made to the Rights
Agreement during the Special Period or at a time when the Rights are not
redeemable, other than to cure any ambiguity or to cure any defective or
inconsistent provisions.
The Rights may have certain anti-takeover effects. The Rights will
cause substantial dilution to a person or group that attempts to acquire the
Corporation unless the acquisition is conditioned on a substantial number of
Rights being acquired. The Rights should not interfere with any merger or other
business combination properly approved by the Board of Directors.
1998 PREFERRED STOCK PURCHASE RIGHTS
On July 21, 1998, the Board of Directors of the Corporation declared a
dividend distribution of one right (each a "New Right") for each outstanding
share of the Common Stock of the Corporation to stockholders of record at the
close of business on the earlier of October 31, 1999, the date on which the
Rights Agreement expires, or the date on which the Rights issued under the
Rights Agreement are exchanged or redeemed in accordance with the provisions of
the Rights Agreement (such date being referred to as the "Record Date"). Each
New Right will entitle the registered holder to purchase from the Corporation
one one-hundredth of a share of Junior Participating Preferred Stock, no par
value, of the Corporation at an exercise price of $330.00, subject to adjustment
(as adjusted from time to time, the "Purchase Price"). The description and
terms of the New Rights are set forth in a Rights Agreement, dated as of July
21, 1998, between the Corporation and the Rights Agent, as amended by Amendment
No. 1 thereto, dated as of November 18, 1998 and Amendment No. 2 thereto, dated
as of February 16, 1999 (as so amended, the "New Rights Agreement").
The New Rights Agreement was adopted by the Board of Directors to
replace the Rights Agreement upon the expiration or redemption of the Rights,
which
6
<PAGE>
will occur no later than October 31, 1999. In no event will both the Rights and
the New Rights be exercisable.
Initially following the Record Date, the New Rights will be attached
to all certificates representing shares of Common Stock then outstanding, and
no separate Rights Certificates will be distributed. Unless earlier redeemed by
the Board of Directors in accordance with the New Rights Agreement, the New
Rights will separate from the Common Stock and a "New Distribution Date" will
occur upon the earlier of (i) 20 days following the New Stock Acquisition Date
(as defined below) or (ii) 20 days (or such later date as the Board of Directors
shall determine, provided that no deferral of such date may be made by the Board
of Directors at any time during the New Special Period (as defined below)) after
the date a tender or exchange offer that would result in a person or group
beneficially owning 15% or more of the outstanding shares of Common Stock is
first published, sent or given to the Corporation's stockholders. The "New
Special Period" is defined as the 180-day period following the effectiveness of
any election of directors, occurring within 270 days of a public announcement by
a third party of an intent or proposal to engage (without the current and
continuing concurrence of the Board of Directors) in a transaction involving an
acquisition of or business combination with the Corporation or otherwise to
become a New Acquiring Person (as defined below), which election results in a
majority of the Board of Directors being comprised of persons who were not
nominated by the Board of Directors in office immediately prior to such
election.
The "New Stock Acquisition Date" is defined as the earlier of (x) the
first date of public announcement by the Corporation that any person or group
(other than certain exempt persons or groups) has acquired, or obtained the
right to acquire, beneficial ownership of 15% or more of the shares of Common
Stock then outstanding or (y) the date that any person enters into an agreement
or arrangement with the Corporation or any of its subsidiaries providing for an
Acquisition Transaction (as defined below) (any person described in clause (x)
or clause (y) above is referred to as a "New Acquiring Person"). Descendants of
Corporation founder Byron L. Smith and certain related trusts and other entities
(or a group comprised solely of such persons) will not be deemed to be a New
Acquiring Person for purposes of clause (x) above as long as all such persons
beneficially own less than 23% of the outstanding shares of Common Stock. A
"New Acquisition Transaction" is defined as (a) a merger, consolidation or
similar transaction as a result of which stockholders of the Corporation will
own less than 60% of the outstanding shares of Common Stock or the common stock
of a publicly-traded entity which controls the Corporation or into which the
Corporation has been merged or otherwise combined (based solely on the shares of
Common Stock received by such stockholders, in their capacity as stockholders of
the Corporation, pursuant to such transactions), (b) a purchase of all or a
substantial portion of assets of the Corporation and its subsidiaries, or (c) a
purchase
7
<PAGE>
or other acquisition of securities representing 15% or more of the shares of
Common Stock then outstanding.
Following the Record Date and until the New Distribution Date, (i) the
New Rights will be evidenced by the Common Stock certificates and will be
transferred with and only with such Common Stock certificates, (ii) new Common
Stock certificates issued after the Record Date will contain a notation
incorporating the New Rights Agreement by reference and (iii) the surrender for
transfer of any certificate for Common Stock outstanding will also constitute
the transfer of the New Rights associated with the Common Stock represented by
such certificate.
The New Rights will not be exercisable until the New Distribution
Date and will expire at the close of business on October 31, 2009 (subject to
extension), unless earlier redeemed by the Corporation as described below.
As soon as practicable after the New Distribution Date, Rights
Certificates will be mailed to holders of record of the Common Stock as of the
close of business on the New Distribution Date and, thereafter, the separate
Rights Certificates alone will represent the New Rights. Except as otherwise
determined by the Board of Directors, only shares of Common Stock issued prior
to the New Distribution Date will be issued with New Rights.
In the event (a "Flip-in Event") that any person, at any time after
the date of the New Rights Agreement, becomes a New Acquiring Person, each
holder of a New Right thereafter will have the right to receive, upon exercise
thereof, Common Stock (or, in certain circumstances, cash, property or other
securities of the Corporation) having a value equal to two times the Purchase
Price. Notwithstanding any of the foregoing, following the occurrence of a
Flip-in Event, all New Rights that are, or (under certain circumstances
specified in the New Rights Agreement) were, beneficially owned by a New
Acquiring Person, any of its associates or affiliates, and certain of its
transferees, will be null and void. Moreover, the New Rights will not be
exercisable following the first occurrence of a Flip-in Event until such time as
the New Rights are no longer redeemable by the Corporation as described below.
In the event that, at any time following the New Stock Acquisition
Date, (i) the Corporation is acquired in a merger or other business combination
transaction or (ii) 50% or more of the Corporation's assets or earning power is
sold or transferred (each, a "Flip-over Event"), each holder of a New Right
(except New Rights which previously have been voided as described above) shall
thereafter have the right to receive, upon exercise thereof, common stock or
other securities of the acquiring company having a value equal to two times the
Purchase Price.
8
<PAGE>
The Purchase Price payable, and the number of shares of Junior
Participating Preferred Stock or other securities or property issuable, upon
exercise of the New Rights are subject to adjustment from time to time in
accordance with customary antidilution provisions. Following the occurrence of
a Flip-in Event or a Flip-over Event, the antidilution provisions will apply to
the Common Stock or other securities for which the New Rights are then
exercisable.
With certain exceptions, no adjustment to the Purchase Price will be
required until cumulative adjustments amount to at least 1% of the Purchase
Price. No fractional shares will be issued, other than fractional shares of
Junior Participating Preferred Stock that are integral multiples of one one-
hundredth of a share, and a cash payment will be made in lieu thereof based on
the market price of the Junior Participating Preferred or Common Stock on the
last trading day prior to the date of exercise.
At any time after the New Rights become exercisable for Common Stock,
the Board of Directors may exchange the unexercised New Rights (other than New
Rights owned by any New Acquiring Person which have become void), in whole or in
part, at an exchange ratio of one share of Common Stock, or one one-hundredth of
a share of Junior Participating Preferred Stock (or of a share of a class or
series of the Corporation's Preferred Stock having equivalent rights,
preferences and privileges), per New Right (subject to adjustment).
Notwithstanding the foregoing, no such exchange of the New Rights may be
authorized by the Board of Directors during the New Special Period or at any
time when the New Rights are not redeemable.
The Board of Directors is empowered to redeem the New Rights in whole,
but not in part, at the Redemption Price at any time before the earlier of (i)
the close of business on the 20th day following the New Stock Acquisition Date
or (ii) the final expiration date of the New Rights. Immediately upon the
action of the Board of Directors ordering redemption of the New Rights, the New
Rights will terminate and the only right of the holders of New Rights will be to
receive the Redemption Price.
Notwithstanding the foregoing, in the event that within 270 days of a
public announcement by a third party of an intent or proposal to engage (without
the current and continuing concurrence of the Board of Directors) in a
transaction involving an acquisition of or business combination with the
Corporation or otherwise to become a New Acquiring Person, there is an election
of directors (whether at one or more stockholder meetings and/or pursuant to
written stockholder consents) resulting in a majority of the Board of Directors
being comprised of persons who were not nominated by the Board of Directors in
office immediately prior to such election, then following such election and for
a period of 180 days (the "New Special Period"), the New Rights, if otherwise
then redeemable, will only be redeemable by the Board of Directors either (1) if
they have followed certain prescribed procedures
9
<PAGE>
or (2) in any other case, provided that, if in any such other case their
decision regarding redemption and any acquisition or business combination is
challenged as a breach of fiduciary duty of care or loyalty, the directors can
establish the entire fairness of such decision without the benefit of any
business judgement rule or other presumption. The procedures required under
clause (1) include: (a) the retention of an independent financial advisor, and
the receipt by the Board of Directors of (i) the views of such advisor regarding
whether redemption of the New Rights will serve the best interests of the
Corporation and its stockholders, or (ii) such advisor's statement that it is
unable to express such a view, setting forth the reasons therefor; and (b) with
respect to any pending acquisition or business combination proposal (i) the
implementation by the Board of Directors, with the advice of its independent
financial advisor, of a process and procedures which the Board of Directors and
such advisor conclude would be most likely to result in the best value
reasonably available to stockholders, (ii) receipt of a fairness opinion from
such advisor, and the Board of Directors determining, and such advisor
confirming, that it has no reason to believe that a superior transaction is
reasonably available, and (iii) execution of a definitive transaction agreement.
Until a New Right is exercised, the holder thereof, as such, will have
no rights as a stockholder of the Corporation, including, without limitation,
the right to vote or to receive dividends. While the distribution of the New
Rights will not be taxable to stockholders or to the Corporation, stockholders
may, depending upon the circumstances, recognize taxable income in the event
that the New Rights become exercisable for Common Stock (or other consideration)
or for common stock of an acquiring company as set forth above.
The New Rights Agreement may be amended by the Board of Directors
without the approval of any holders of the New Rights (a) prior to the New
Distribution Date, in any manner and (b) after the New Distribution Date, in
order to (i) cure any ambiguity, (ii) correct or supplement provisions which may
be defective or inconsistent, (iii) make changes which do not adversely affect
the interests of holders of New Rights (other than those held by a New Acquiring
Person or certain related persons) or (iv) shorten or lengthen any time period
under the New Rights Agreement (including the time period governing redemption),
provided that no supplement or amendment to the New Rights Agreement may be made
during the New Special Period or at any time when the New Rights are
nonredeemable other than supplements or amendments of the type contemplated by
clause (i) or (ii) above.
The New Rights may have certain anti-takeover effects. The New Rights
will cause substantial dilution to a person or group that attempts to acquire
the Corporation unless the acquisition is conditioned on a substantial number of
New
10
<PAGE>
Rights being acquired. The New Rights should not interfere with any merger or
other business combination properly approved by the Board of Directors.
11
