<PAGE>
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from_____________to_____________
Commission File Number 0-5965
NORTHERN TRUST CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 36-2723087
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identificatication No.)
50 SOUTH LA SALLE STREET
CHICAGO, ILLINOIS 60675 60675
(Address of principal offices) (Zip Code)
Registrant's telephone number, including area code: (312)630-6000
-----------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
111,473,056 Shares - $1.66 2/3 Par Value
(Shares of Common Stock Outstanding on June 30, 1999)
===============================================================================
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEET NORTHERN TRUST CORPORATION
<TABLE>
<CAPTION>
June 30 December 31 June 30
--------- ----------- ---------
($ In Millions) 1999 1998 1998
- ------------------------------------------------------------------------------------------ --------- ----------- ---------
<S> <C> <C> <C>
Assets
Cash and Due from Banks $ 1,274.3 $ 2,366.0 $ 1,389.4
Federal Funds Sold and Securities Purchased under Agreements to Resell 704.0 1,164.4 3,430.8
Time Deposits with Banks 2,734.9 3,264.7 1,790.8
Other Interest-Bearing 22.9 21.8 13.1
Securities
Available for Sale 8,300.2 5,375.2 7,676.0
Held to Maturity (Fair value - $506.0 at June 1999, $485.7 at December 1998, $484.0 at
June 1998) 501.2 472.5 471.0
Trading Account 9.1 9.1 11.6
- ------------------------------------------------------------------------------------------ --------- ----------- ---------
Total Securities 8,810.5 5,856.8 8,158.6
- ------------------------------------------------------------------------------------------ --------- ----------- ---------
Loans and Leases
Commercial and Other 8,897.4 7,761.7 8,149.8
Residential Mortgages 6,108.6 5,885.2 5,467.9
- ------------------------------------------------------------------------------------------ --------- ----------- ---------
Total Loans and Leases (Net of unearned income - $149.6 at June 1999, $224.3 at
December 1998, $147.6 at June 1998) 15,006.0 13,646.9 13,617.7
- ------------------------------------------------------------------------------------------ --------- ----------- ---------
Reserve for Credit Losses (151.9) (146.8) (146.7)
Buildings and Equipment 350.0 340.2 329.5
Customers' Acceptance Liability 30.4 33.3 25.2
Trust Security Settlement Receivables 392.6 336.7 346.0
Other Assets 1,017.1 986.0 822.6
- ------------------------------------------------------------------------------------------ --------- ----------- ---------
Total Assets $30,190.8 $27,870.0 $29,777.0
- ------------------------------------------------------------------------------------------ --------- ----------- ---------
Liabilities
Deposits
Demand and Other Noninterest-Bearing $ 4,433.2 $ 3,927.5 $ 3,453.7
Savings and Money Market 4,626.3 4,614.7 4,379.9
Savings Certificates 2,140.6 2,175.0 2,126.4
Other Time 731.0 540.2 483.7
Foreign Offices - Demand 478.1 413.4 472.4
- Time 5,871.1 6,531.9 6,208.2
- ------------------------------------------------------------------------------------------ --------- ----------- ---------
Total Deposits 18,280.3 18,202.7 17,124.3
Federal Funds Purchased 712.6 2,025.1 980.8
Securities Sold Under Agreements to Repurchase 1,311.3 2,114.9 876.0
Commercial Paper 129.0 148.1 134.1
Other Borrowings 5,497.8 1,099.2 6,829.6
Senior Notes 600.0 700.0 580.0
Long-Term Debt 458.8 458.2 462.4
Debt - Floating Rate Capital Securities 267.5 267.4 267.4
Liability on Acceptances 30.4 33.3 25.2
Other Liabilities 826.7 880.8 656.1
- ------------------------------------------------------------------------------------------ --------- ----------- ---------
Total Liabilities 28,114.4 25,929.7 27,935.9
- ------------------------------------------------------------------------------------------ --------- ----------- ---------
Stockholders' Equity
Preferred Stock 120.0 120.0 120.0
Common Stock, $1.66 2/3 Par Value; Authorized 280,000,000 shares at June 1999,
December 1998 and June 1998; Outstanding 111,473,056 at June 1999,
111,214,740 at December 1998 and 111,306,530 at June 1998 189.9 189.9 189.9
Capital Surplus 197.2 212.9 223.1
Retained Earnings 1,721.8 1,582.9 1,453.8
Net Unrealized Gain (Loss) on Securities Available for Sale 1.5 (.6) .3
Common Stock Issuable - Performance Plan 56.7 30.4 30.4
Deferred Compensation - ESOP and Other (52.7) (44.3) (46.2)
Treasury Stock - (at cost, 2,487,706 shares at June 1999, 2,746,022 shares at
December 1998, and 2,654,232 shares at June 1998) (158.0) (150.9) (130.2)
- ------------------------------------------------------------------------------------------ --------- ----------- ---------
Total Stockholders' Equity 2,076.4 1,940.3 1,841.1
- ------------------------------------------------------------------------------------------ --------- ----------- ---------
Total Liabilities and Stockholders' Equity $30,190.8 $27,870.0 $29,777.0
- ------------------------------------------------------------------------------------------ --------- ----------- ---------
</TABLE>
2
<PAGE>
CONSOLIDATED STATEMENT OF INCOME NORTHERN TRUST CORPORATION
<TABLE>
<CAPTION>
Second Quarter Six Months
Ended June 30 Ended June 30
----------------------------- ------------------------------
($ In Millions Except Per Share Information) 1999 1998 1999 1998
- ------------------------------------------------------------------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Noninterest Income
Trust Fees $ 236.2 $ 202.3 $ 460.7 $ 396.0
Foreign Exchange Trading Profits 28.9 23.1 54.5 51.2
Treasury Management Fees 17.3 17.4 35.4 33.3
Security Commissions and Trading Income 7.7 7.2 15.2 14.4
Other Operating Income 12.1 15.2 22.5 26.2
Investment Security Gains .1 .5 .1 1.2
- -----------------------------------------------------------------------------------------------------------------------------------
Total Noninterest Income 302.3 265.7 588.4 522.3
- -----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income
Interest Income 370.0 370.3 740.2 727.6
Interest Expense 243.4 251.1 488.0 494.8
- -----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income 126.6 119.2 252.2 232.8
Provision for Credit Losses 5.0 3.0 5.5 7.0
- -----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income after Provision for Credit Losses 121.6 116.2 246.7 225.8
- -----------------------------------------------------------------------------------------------------------------------------------
Noninterest Expenses
Compensation 139.9 125.2 275.6 246.9
Employee Benefits 24.6 22.8 50.6 46.3
Occupancy Expense 18.1 17.3 35.8 34.2
Equipment Expense 15.6 14.9 31.2 31.4
Other Operating Expenses 73.5 67.5 144.9 125.1
- -----------------------------------------------------------------------------------------------------------------------------------
Total Noninterest Expenses 271.7 247.7 538.1 483.9
- -----------------------------------------------------------------------------------------------------------------------------------
Income before Income Taxes 152.2 134.2 297.0 264.2
Provision for Income Taxes 52.5 47.0 102.2 92.1
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income $ 99.7 $ 87.2 $ 194.8 $ 172.1
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income Applicable to Common Stock $ 98.6 $ 86.0 $ 192.6 $ 169.6
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income Per Common Share - Basic $ .89 $ .78 $ 1.74 $ 1.53
- Diluted .86 .75 1.67 1.48
- -----------------------------------------------------------------------------------------------------------------------------------
Average Number of Common Shares Outstanding - Basic 110,974,586 110,808,676 110,898,488 110,855,135
- Diluted 115,147,101 115,006,566 115,109,165 115,030,924
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Second Quarter Six Months
Ended June 30 Ended June 30
----------------------------- ------------------------------
(In Millions) 1999 1998 1999 1998
- ------------------------------------------------------------------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Net Income $ 99.7 $ 87.2 $ 194.8 $ 172.1
Other Comprehensive Income (before tax)
Unrealized Gains (Losses) on Securities Available for Sale
Unrealized Holding Gains (Losses) Arising during the Period (3.7) (2.1) 3.5 (1.8)
Less: Reclassification Adjustments for Gains Included
in Net Income (.1) (.5) (.1) (1.1)
Income Tax (Provision) Benefit Related to Items of Other
Comprehensive Income 1.4 1.0 (1.3) 1.1
- -----------------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income (2.4) (1.6) 2.1 (1.8)
- -----------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income $ 97.3 $ 85.6 $ 196.9 $ 170.3
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
NORTHERN TRUST CORPORATION
<TABLE>
<CAPTION>
Six Months
Ended June 30
-------------------------
(In Millions) 1999 1998
- ------------------------------------------------------------------ -------------------------
<S> <C> <C>
Preferred Stock
Balance at January 1 and June 30 $ 120.0 $ 120.0
- ------------------------------------------------------------------ -------------------------
Common Stock
Balance at January 1 and June 30 189.9 189.9
- ------------------------------------------------------------------ -------------------------
Capital Surplus
Balance at January 1 212.9 225.5
Stock Issued - Incentive Plan and Awards (15.7) (2.4)
- ------------------------------------------------------------------ -------------------------
Balance at June 30 197.2 223.1
- ------------------------------------------------------------------ -------------------------
Retained Earnings
Balance at January 1 1,582.9 1,330.8
Net Income 194.8 172.1
Dividends Declared - Common Stock (53.5) (46.8)
Dividends Declared - Preferred Stock (2.4) (2.3)
- ------------------------------------------------------------------ -------------------------
Balance at June 30 1,721.8 1,453.8
- ------------------------------------------------------------------ -------------------------
Net Unrealized Gain (Loss) on Securities Available for Sale
Balance at January 1 (.6) 2.1
Unrealized Gain (Loss), net 2.1 (1.8)
- ------------------------------------------------------------------ -------------------------
Balance at June 30 1.5 .3
- ------------------------------------------------------------------ -------------------------
Common Stock Issuable - Performance Plan
Balance at January 1 30.4 11.7
Stock Issuable, net of Stock Issued 26.3 18.7
- ------------------------------------------------------------------ -------------------------
Balance at June 30 56.7 30.4
- ------------------------------------------------------------------ -------------------------
Deferred Compensation - ESOP and Other
Balance at January 1 (44.3) (37.5)
Compensation Deferred (15.3) (15.5)
Compensation Amortized 6.9 6.8
- ------------------------------------------------------------------ -------------------------
Balance at June 30 (52.7) (46.2)
- ------------------------------------------------------------------ -------------------------
Treasury Stock
Balance at January 1 (150.9) (103.5)
Stock Options and Awards 55.5 34.5
Stock Purchased (62.6) (61.2)
- ------------------------------------------------------------------ -------------------------
Balance at June 30 (158.0) (130.2)
- ------------------------------------------------------------------ -------------------------
Total Stockholders' Equity at June 30 $2,076.4 $1,841.1
- ------------------------------------------------------------------ -------------------------
</TABLE>
4
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
NORTHERN TRUST CORPORATION
<TABLE>
<CAPTION>
Six Months
Ended June 30
--------------------------
(In Millions) 1999 1998
- ------------------------------------------------------------------------------------ ----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 194.8 $ 172.1
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Provision for Credit Losses 5.5 7.0
Depreciation on Buildings and Equipment 28.8 26.4
Decrease in Interest Receivable 2.3 8.2
Decrease in Interest Payable (11.7) (12.4)
Amortization and Accretion of Securities and Unearned Income (173.2) (153.5)
Amortization of Software, Goodwill and Other Intangibles 31.0 26.8
Net Increase in Trading Account Securities - (2.8)
Other Noncash, net (56.4) 134.7
- ------------------------------------------------------------------------------------ ----------- -----------
Net Cash (Used in) Provided by Operating Activities 21.1 206.5
- ------------------------------------------------------------------------------------ ----------- -----------
Cash Flows from Investing Activities:
Net (Increase) Decrease in Federal Funds Sold and Securities Purchased under
Agreements to Resell 460.4 (439.1)
Net Decrease in Time Deposits with Banks 529.8 492.4
Net (Increase) Decrease in Other Interest-Bearing Assets (1.1) 21.4
Purchases of Securities-Held to Maturity (108.5) (158.9)
Proceeds from Maturity and Redemption of Securities-Held to Maturity 80.5 145.5
Purchases of Securities-Available for Sale (20,284.5) (55,974.6)
Proceeds from Sale, Maturity and Redemption of Securities-Available for Sale 17,443.4 52,179.7
Net Increase in Loans and Leases (1,285.7) (1,034.5)
Purchases of Buildings and Equipment (38.5) (39.5)
Net Increase in Trust Security Settlement Receivables (55.9) (54.6)
Decrease in Cash Due to Acquisitions - (15.0)
Other, net 2.0 (1.7)
- ------------------------------------------------------------------------------------ ----------- -----------
Net Cash Used in Investing Activities (3,258.1) (4,878.9)
- ------------------------------------------------------------------------------------ ----------- -----------
Cash Flows from Financing Activities:
Net Increase in Deposits 77.6 764.3
Net Increase (Decrease) in Federal Funds Purchased (1,312.5) 159.6
Net Decrease in Securities Sold under Agreements to Repurchase (803.6) (263.7)
Net Decrease in Commercial Paper (19.1) (12.7)
Net Increase in Short-Term Other Borrowings 4,419.9 3,936.2
Proceeds from Term Federal Funds Purchased 3,958.3 433.3
Repayments of Term Federal Funds Purchased (3,979.6) (416.5)
Proceeds from Senior Notes & Long-Term Debt 100.7 300.6
Repayments on Senior Notes & Long-Term Debt (200.1) (483.0)
Treasury Stock Purchased (62.4) (61.0)
Net Proceeds from Stock Options 14.1 8.7
Cash Dividends Paid on Common and Preferred Stock (55.9) (49.2)
Other, net 7.9 6.3
- ------------------------------------------------------------------------------------ ----------- -----------
Net Cash Provided by Financing Activities 2,145.3 4,322.9
- ------------------------------------------------------------------------------------ ----------- -----------
Decrease in Cash and Due from Banks (1,091.7) (349.5)
Cash and Due from Banks at Beginning of Year 2,366.0 1,738.9
- ------------------------------------------------------------------------------------ ----------- -----------
Cash and Due from Banks at June 30 $ 1,274.3 $ 1,389.4
- ------------------------------------------------------------------------------------ ----------- -----------
Supplemental Disclosures of Cash Flow Information:
Interest Paid $ 499.7 $ 507.2
Income Taxes Received (Paid) (.2) 64.9
- ------------------------------------------------------------------------------------ ----------- -----------
</TABLE>
5
<PAGE>
Notes to Consolidated Financial Statements
1. Basis of Presentation - The consolidated financial statements include the
accounts of Northern Trust Corporation and its subsidiaries (Northern Trust),
all of which are wholly-owned. Significant intercompany balances and
transactions have been eliminated. The consolidated financial statements as
of June 30, 1999 and 1998 have not been audited by independent public
accountants. In the opinion of management, all adjustments necessary for a
fair presentation of the financial position and the results of operations for
the interim periods have been made. All such adjustments are of a normal
recurring nature. Certain reclassifications have been made to prior periods'
consolidated financial statements to place them on a basis comparable with
the current period's consolidated financial statements. For a description of
Northern Trust's significant accounting policies, refer to Note 1 of the
Notes to Consolidated Financial Statements in the 1998 Annual Report to
Shareholders.
2. Securities - The following table summarizes the book and fair values of
securities.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
June 30, 1999 December 31, 1998 June 30, 1998
-----------------------------------------------------------------------
Book Fair Book Fair Book Fair
(In Millions) Value Value Value Value Value Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Held to Maturity
U.S. Government $ 55.4 $ 55.3 $ 55.3 $ 55.4 $ 58.2 $ 58.2
Obligations of States and
Political Subdivisions 238.9 246.4 261.8 277.2 266.5 282.0
Federal Agency 2.5 2.4 3.0 3.0 6.0 6.0
Other 204.4 201.9 152.4 150.1 140.3 137.8
- ---------------------------------------------------------------------------------------------------------
Subtotal 501.2 506.0 472.5 485.7 471.0 484.0
- ---------------------------------------------------------------------------------------------------------
Available for Sale
U.S. Government 228.0 228.0 260.0 260.0 286.4 286.4
Obligations of States and
Political Subdivisions 254.6 254.6 266.1 266.1 183.3 183.3
Federal Agency 7,697.4 7,697.4 4,695.4 4,695.4 7,084.6 7,084.6
Preferred Stock 103.3 103.3 135.4 135.4 98.3 98.3
Other 16.9 16.9 18.3 18.3 23.4 23.4
- ---------------------------------------------------------------------------------------------------------
Subtotal 8,300.2 8,300.2 5,375.2 5,375.2 7,676.0 7,676.0
- ---------------------------------------------------------------------------------------------------------
Trading Account 9.1 9.1 9.1 9.1 11.6 11.6
- ---------------------------------------------------------------------------------------------------------
Total Securities $8,810.5 $8,815.3 $5,856.8 $5,870.0 $8,158.6 $8,171.6
- ---------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Reconciliation of Book Values to Fair Values of
Securities Held to Maturity June 30, 1999
- -----------------------------------------------------------------------------------------------
Gross Unrealized
Book ---------------- Fair
(In Millions) Value Gains Losses Value
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government $ 55.4 $ -- $ .1 $ 55.3
Obligations of States and Political Subdivisions 238.9 9.3 1.8 246.4
Federal Agency 2.5 -- .1 2.4
Other 204.4 -- 2.5 201.9
- -----------------------------------------------------------------------------------------------
Total $501.2 $9.3 $4.5 $506.0
- -----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Reconciliation of Amortized Cost to Fair Values of
Securities Available for Sale June 30, 1999
- -----------------------------------------------------------------------------------------------
Gross Unrealized
Amortized ---------------- Fair
(In Millions) Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government $ 228.0 $ .1 $ .1 $ 228.0
Obligations of States and Political Subdivisions 256.2 -- 1.6 254.6
Federal Agency 7,701.0 1.4 5.0 7,697.4
Preferred Stock 103.2 .2 .1 103.3
Other 17.6 -- .7 16.9
- -----------------------------------------------------------------------------------------------
Total $8,306.0 $1.7 $7.5 $8,300.2
- -----------------------------------------------------------------------------------------------
</TABLE>
Unrealized gains and losses on off-balance sheet financial instruments used to
hedge securities available for sale totaled $10.5 million and $2.3 million
respectively, as of June 30, 1999. At June 30, 1999, stockholders' equity
included a credit of $1.5 million, net of tax, to recognize the appreciation on
securities available for sale and the related hedges.
3. Pledged Assets - Securities and loans pledged to secure public and trust
deposits, repurchase agreements and for other purposes as required or permitted
by law were $11.6 billion on June 30, 1999, $5.6 billion on December 31, 1998
and $9.9 billion on June 30, 1998.
4. Contingent Liabilities - Standby letters of credit outstanding were $1.8
billion on June 30, 1999, $1.6 billion on December 31, 1998 and $1.7 billion on
June 30, 1998.
7
<PAGE>
5. Loans and Leases - Amounts outstanding in selected loan categories are shown
below.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(In Millions) June 30, 1999 December 31, 1998 June 30, 1998
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic
Residential Real Estate $ 6,108.6 $ 5,885.2 $ 5,467.9
Commercial 4,348.5 3,937.9 3,977.1
Broker 85.9 147.6 211.4
Commercial Real Estate 742.0 677.1 608.6
Personal 1,364.0 1,463.4 1,275.7
Other 847.2 509.6 954.3
Lease Financing 570.9 528.3 390.7
- --------------------------------------------------------------------------------
Total Domestic 14,067.1 13,149.1 12,885.7
International 938.9 497.8 732.0
- --------------------------------------------------------------------------------
Total Loans and Leases $15,006.0 $13,646.9 $13,617.7
- --------------------------------------------------------------------------------
</TABLE>
At June 30, 1999, other domestic and international loans included $1.1 billion
of overnight trust-related advances primarily in connection with next day
security settlements, compared with $592.6 million at December 31, 1998 and $1.2
billion at June 30, 1998.
At June 30, 1999, nonperforming loans totaled $44.1 million. Included in this
amount were loans with a recorded investment of $41.5 million which were also
classified as impaired. A loan is impaired when, based on current information
and events, it is probable that a creditor will be unable to collect all amounts
due according to the contractual terms of the loan agreement. Impaired loans
totaling $6.3 million had no portion of the reserve for credit losses allocated
to them, while impaired loans totaling $35.2 million had an allocated reserve of
$17.3 million. For the second quarter of 1999, the total recorded investment in
impaired loans averaged $31.8 million. Total interest income recorded on
impaired loans for the quarter ended June 30, 1999 was $77 thousand.
At June 30, 1998, nonperforming loans totaled $27.0 million and included $24.7
million of impaired loans. Of these impaired loans, $2.1 million had no reserve
allocation while $22.6 million had an allocated reserve of $1.8 million.
Impaired loans for the second quarter of 1998 averaged $29.1 million with $25
thousand of interest income recognized.
8
<PAGE>
6. Reserve for Credit Losses - Changes in the reserve for credit losses were as
follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Six Months
Ended June 30
-------------------------------------
(In Millions) 1999 1998
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at Beginning of Period $146.8 $147.6
Charge-Offs
Commercial Real Estate (.1) (.2)
Other (1.2) (9.1)
International - -
- -------------------------------------------------------------------------------------------------------
Total Charge-Offs (1.3) (9.3)
- -------------------------------------------------------------------------------------------------------
Recoveries .9 1.2
- -------------------------------------------------------------------------------------------------------
Net Charge-Offs (.4) (8.1)
Provision for Credit Losses 5.5 7.0
Reserve Related to Acquisitions - .2
- -------------------------------------------------------------------------------------------------------
Balance at End of Period $151.9 $146.7
- -------------------------------------------------------------------------------------------------------
</TABLE>
The reserve for credit losses represents management's estimate of probable
inherent losses which have occurred as of the date of the financial statements.
The loan and lease portfolio and other credit exposures are regularly reviewed
to evaluate the adequacy of the reserve for credit losses. In determining the
level of the reserve, Northern Trust evaluates the reserve necessary for
specific nonperforming loans and also estimates losses inherent in other credit
exposures.
The result is a reserve with the following components:
Specific Reserve. The amount of specific reserves is determined through a loan-
by-loan analysis of nonperforming loans that considers expected future cash
flows, the value of collateral and other factors that may impact the borrower's
ability to pay.
Allocated Inherent Reserve. The amount of the allocated portion of the inherent
loss reserve is based on loss factors assigned to Northern Trust's credit
exposures based on internal credit ratings. These loss factors are primarily
based on management's judgment concerning the effect of the business cycle on
the creditworthiness of Northern Trust's borrowers, as well as historical
charge-off experience.
Unallocated Inherent Reserve. Management determines the unallocated portion of
the inherent loss reserve based on factors that cannot be associated with a
specific credit or loan categories. These factors include management's
subjective evaluation of local and national economic and business conditions,
portfolio concentration and changes in the character and size of the loan
portfolio. The unallocated portion of the inherent loss reserve reflects
management's attempt to ensure that the overall reserve appropriately reflects a
margin for the imprecision necessarily inherent in estimates of expected credit
losses.
9
<PAGE>
7. Net Income Per Common Share Computations - The computation of net income per
common share is presented in the following table.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Second Quarter Six Months
Ended June 30 Ended June 30
-----------------------------------------------------------
($ In Millions Except Per Share Information) 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic Net Income Per Common Share:
Net Income $ 99.7 $ 87.2 $ 194.8 $ 172.1
Less: Dividends on Preferred Stock (1.1) (1.2) (2.2) (2.5)
- -----------------------------------------------------------------------------------------------------------------
Net Income Applicable to Common Stock $ 98.6 $ 86.0 $ 192.6 $ 169.6
Average Number of Common Shares Outstanding 110,974,586 110,808,676 110,898,488 110,855,135
Basic Net Income Per Common Share $ .89 $ .78 $ 1.74 $ 1.53
Diluted Net Income Per Common Share:
Net Income Applicable to Common Stock $ 98.6 $ 86.0 $ 192.6 $ 169.6
- -----------------------------------------------------------------------------------------------------------------
Average Number of Common Shares Outstanding 110,974,586 110,808,676 110,898,488 110,855,135
Plus Dilutive Potential Common Shares:
Stock Options 3,096,316 3,270,630 3,162,628 3,288,311
Performance Shares 710,220 589,546 695,336 563,526
Other 365,979 337,714 352,713 323,952
- -----------------------------------------------------------------------------------------------------------------
Average Common and Potential Common Shares 115,147,101 115,006,566 115,109,165 115,030,924
Diluted Net Income Per Common Share $ .86 $ .75 $ 1.67 $ 1.48
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
8. Accounting Standards Pronouncements - On January 1, 1999, Northern Trust
adopted Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" (SOP 98-1). SOP 98-1 requires
the capitalization of certain external and internal costs of computer software
developed or obtained for internal use. Salary and benefit costs totaling $3.7
million and $6.5 million, were capitalized in the second quarter and six months
ended June 30, 1999, respectively, as a result of adopting SOP 98-1.
In June, 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded on the
balance sheet as either an asset or liability measured at its fair value. SFAS
No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company formally document, designate, and assess the effectiveness of
transactions that receive hedge accounting.
In July 1999, FASB issued SFAS No. 137 which amended SFAS No. 133 by deferring
the effective date by one year. Although early adoption is permitted, Northern
Trust plans to adopt the new statement on January 1, 2001.
10
<PAGE>
The accounting requirements of this statement are complex and the Financial
Accounting Standards Board is in the process of responding to several
significant interpretation requests. Northern Trust has concluded that certain
of its present hedge strategies, including those used to manage fixed interest
rate risk in its loan portfolio, are not likely to qualify for the special
accounting treatment contemplated by SFAS No. 133. Accordingly, management is
evaluating various alternatives for managing interest rate risk which may
include adjustments to hedge strategies, termination of certain swap contracts,
sale of fixed rate assets and issuance of longer-term fixed rate liabilities,
and would expect to implement one or more of these alternatives prior to or in
connection with the adoption of SFAS No. 133. Until the interpretive issues
referred to above are addressed and these alternatives fully evaluated by
management, it is not possible to quantify the actual impact that this statement
will have on the earnings and financial position of Northern Trust.
9. Subsequent Event - Bank Subordinated Notes - On July 27, 1999, The Northern
Trust Company (Bank) issued $200 million of 7.10% fixed-rate subordinated notes
due August 1, 2009 at a discount to yield 7.109%. Under the terms of the current
offering circular, the Bank has the ability to offer up to an additional $100
million of subordinated notes.
10. Acquisition - On May 15, 1998, Northern Trust Corporation completed the
acquisition of Trustbank Financial Corp., parent company of Trust Bank of
Colorado, for approximately $15 million in cash. The transaction was recorded
under the purchase method of accounting. Included in the acquisition cost was
$10.4 million of goodwill which is being amortized over fifteen years.
11. Business Segments
The tables on page 17 reflecting the earnings contribution of Northern Trust's
business segments for the second quarter and six months ended June 30, 1999 and
1998 are incorporated by reference.
11
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SECOND QUARTER EARNINGS HIGHLIGHTS
Net income increased 14% to a record $99.7 million from the $87.2 million earned
in the second quarter of last year. Net income per common share on a diluted
basis increased 15% to a record $.86 for the second quarter, up from $.75 earned
a year ago. This earnings performance produced an annualized return on average
common equity (ROE) of 20.65% versus 20.48% reported last year, and an
annualized return on average assets (ROA) of 1.37% versus 1.32% in 1998. Trust
fees grew by 17% contributing significantly to the 11% increase in total
revenues. Positive operating leverage resulted from the strong revenue growth
combined with effective expense management.
The 15% earnings per share growth was well above Northern Trust's minimum goal
of 10%, the return on average common equity of 20.65% exceeded the 18-20% target
range for the ninth consecutive quarter, and the productivity ratio of 161%
exceeded the 160% target for this key measure.
Noninterest Income
Noninterest income increased 14% and totaled $302.3 million for the quarter,
accounting for 69% of total taxable equivalent revenue. Trust fees of $236.2
million increased 17% or $33.9 million over the like period of 1998, and
represented 78% of noninterest income and 54% of total taxable equivalent
revenue. This fee growth was driven by strong new business and higher market
values of trust assets administered. Trust assets under administration increased
11% from a year ago and totaled $1.34 trillion at June 30, 1999. Trust assets
under the management of Northern Trust grew 13% from the prior year and totaled
$258.6 billion at June 30, 1999. At December 31, 1998, trust assets under
administration totaled $1.26 trillion with $236.0 billion under management.
Trust fees are based on the market value of assets managed and administered, the
volume of transactions, securities lending volume and spreads, and fees for
other services rendered. Asset-based trust fees are typically determined on a
sliding scale so that as the value of a client portfolio grows in size, Northern
Trust receives a smaller percentage of the increasing value as trust fee income.
Therefore, market value or other changes in a portfolio's size do not typically
have a proportionate impact on the level of trust fees. In addition, Corporate
and Institutional Services (C&IS) trust relationships are increasingly priced to
reflect earnings from activities such as custody-related deposits and foreign
exchange trading which are not included in trust fees.
12
<PAGE>
Noninterest Income (continued)
Trust fees from Personal Financial Services (PFS) increased 21% from the prior
year level of $96.8 million and totaled $116.8 million for the second quarter,
reflecting strong new business throughout Northern Trust's national PFS network
and favorable equity markets. All states in the PFS network recorded double-
digit increases in trust fees over the prior year's quarter, with Florida,
Arizona and Texas each up 20% or more. The Wealth Management Group also had
excellent performance, with trust fees increasing 19%. Wealth Management now
administers $40.7 billion for significant family asset pools nationwide, up 25%
from last year. Total personal trust assets under administration increased $20.8
billion from the prior year and $9.8 billion since December 31, 1998, and
totaled $131.0 billion at June 30, 1999. Of the personal trust assets under
administration, $79.6 billion is managed by Northern Trust compared to $66.8
billion one year ago and $73.4 billion at December 31, 1998. Net recurring PFS
new business transitioned or expected to transition during 1999 was $33 million
in annualized trust fees at June 30, 1999. In comparison, net recurring new
business transitioned in 1998 was $40 million.
With the opening of three new offices during the second quarter - in Hinsdale,
Illinois, Marin County, California and Lakewood Ranch, Florida - Northern
Trust's network of Personal Financial Services offices now includes 72 locations
in seven states. Several additional offices are expected to open during the
remainder of 1999.
Trust fees from Corporate & Institutional Services (C&IS) in the quarter
increased 13% and totaled $119.4 million compared to $105.5 million in the
year-ago quarter, reflecting strong new business. C&IS trust fees are derived
from a full range of custody, investment and advisory services rendered to
retirement and other asset pools of corporate and institutional clients
worldwide, and all of these services contributed to the second quarter fee
growth. Fees from asset management increased 19% to $35.9 million. Excellent new
business results drove fees generated by Northern Trust Retirement Consulting,
L.L.C. up 34% to $11.4 million from last year's second quarter. Securities
lending fees increased 6% to $24.0 million, while custody fees increased to
$39.2 million or 5% from the year-ago period.
Total C&IS trust assets under administration increased to $1.21 trillion at June
30, 1999, up 11% from June 30, 1998 and 6% from December 31, 1998. Of the C&IS
trust assets under administration, $179.0 billion is managed by Northern Trust,
up 11% from June 30, 1998. Trust assets under administration included
approximately $217 billion of global custody assets.
Net new C&IS business transitioned or expected to transition during 1999 was
$45.5 million in annualized trust fees at June 30, 1999. In comparison, net new
business transitioned in 1998 was $70 million. Year 2000 readiness planning by
prospective clients and Northern Trust may moderate new business sales during
the second half of 1999, as some clients may choose to defer until next year
transitions between custodians. The business that is being sold now for
transition in 2000 is not included in 1999 new business figures, but rather will
be reported in next year's numbers.
13
<PAGE>
Noninterest Income (continued)
Foreign exchange trading profits were $28.9 million compared to $23.1 million in
the second quarter of the prior year, benefiting from the weakness in the euro
and increased client trading volume. More stable global equity markets resulted
in increased cross-border trading in both Asia and Europe, which led to a higher
level of foreign exchange transactions.
Total treasury management revenues from both fees and the computed value of
compensating deposit balances increased 2% from the second quarter of 1998 to
$24.5 million. The fee portion of these revenues accrued in the quarter was
$17.3 million, virtually unchanged from the comparable quarter last year.
Security commissions and trading income of $7.7 million were up 7% from a year
ago. This reflects a 14% increase in brokerage commissions at Northern Trust
Securities, Inc. offset in part by the absence of futures commissions resulting
from Northern Trust's exit from the futures business during the second quarter
of last year. Other operating income was $12.1 million for the second quarter
compared with $15.2 million in the same period of last year. The decline from
the prior year is due primarily to the sale of mortgage loans and gains from the
sale of futures exchange memberships reflected in last year's second quarter.
Net Interest Income
Net interest income for the quarter totaled $126.6 million, 6% higher than the
$119.2 million reported in the second quarter of 1998. Net interest income is
defined as the total of interest income and amortized fees on earning assets,
less interest expense on deposits and borrowed funds, adjusted for the impact of
off-balance sheet hedging activity. When net interest income is adjusted to a
fully taxable equivalent (FTE) basis, yields on taxable, nontaxable and
partially taxable assets are comparable, although the adjustment to a FTE basis
has no impact on net income. Net interest income on a FTE basis for the quarter
was $135.8 million, up 6% from the $128.2 million reported in 1998. The increase
in net interest income reflects 9% growth in average earning asset levels and
higher levels of noninterest-related funds. The net interest margin was 2.07%,
unchanged from the first quarter, versus 2.14% reported in the year-ago quarter.
The decline in the margin from a year ago is largely attributable to the growth
in low risk, short-term securities and money market assets and lower returns on
the investment of foreign denominated noninterest-related funds due to the
decline in interest rates in Europe.
Earning assets for the second quarter averaged $26.3 billion, up 9% from the
$24.1 billion average for the same quarter of 1998. The $2.2 billion growth in
average earning assets was comprised of a $1.2 billion or 9% increase in loans
and leases, a $566 million or 7% increase in securities and a $516 million or
15% increase in money market assets.
14
<PAGE>
Net Interest Income (continued)
The loan growth was concentrated within the domestic portfolio which increased
$1.3 billion to average $13.8 billion, while international loans decreased 17%.
Residential mortgage loans accounted for 44% of the domestic growth, increasing
10% to average $6.0 billion for the quarter and comprising 42% of the total loan
portfolio. Commercial and industrial loans averaged $4.4 billion during the
second quarter compared to $4.0 billion in the prior year quarter.
Funding for the growth in earning assets came from several sources. Total
interest-bearing deposits averaged $13.5 billion, up 11% or $1.4 billion from
the second quarter of 1998. This growth came principally from savings and money
market deposits (up $457 million) and foreign office time deposits (up $686
million). The increase in foreign office time deposits resulted primarily from
continued growth in global custody activity. Other interest-related funds grew
6%, or $513 million, resulting predominantly from higher levels of federal funds
purchased and securities sold under agreements to repurchase, offset in part by
lower levels of Treasury, tax and loan balances. Noninterest-related funds
increased 10% to average $4.1 billion, due to growth in common stockholders'
equity resulting from retained earnings and higher levels of demand deposits.
Provision for Credit Losses
The provision for credit losses of $5.0 million in the second quarter was $2.0
million higher than the comparable quarter in 1998. For a discussion of the
provision and reserve for credit losses, refer to the Asset Quality section
starting on page 25.
Noninterest Expenses
Noninterest expenses totaled $271.7 million for the quarter, an increase of 10%
or $24.0 million from the $247.7 million in the year-ago quarter. Approximately
two-thirds of the increase in noninterest expenses related to salaries,
incentives and employee benefits. The remaining expense growth reflects costs
associated with technology investments, business promotion, and expansion of the
PFS office network.
Compensation and employee benefits, which represent 61% of total noninterest
expenses, increased to $164.5 million from $148.0 million in the year-ago
quarter. The increase was primarily attributable to staff growth, merit
increases and higher performance-based incentives. These increases were
partially offset by some staff reductions resulting from the outsourcing of
Northern Trust's Illinois check processing activities at year-end 1998 and
Northern Trust's exit from the futures business in the second quarter of 1998,
as well as by the capitalization of salary costs associated with the development
of software in accordance with SOP 98-1 (as described in Note 8). Staff levels
on a net basis increased from one year ago to support growth initiatives and
strong new business in both PFS and C&IS. Staff on a full-time equivalent basis
at June 30, 1999 totaled 8,253, up 5% from 7,883 at June 30 of
15
<PAGE>
Noninterest Expenses (continued)
last year. Staff levels would have been approximately 8% higher than a year ago
had the Corporation not outsourced the Illinois check processing function at
year-end. Higher performance-based compensation is principally attributable to
increased costs for incentive plans as a result of strong performance and the
impact of a higher stock price on stock-based compensation plans.
Net occupancy expense totaled $18.1 million, up 4% from $17.3 million in the
second quarter of 1998, due primarily to the opening of additional PFS offices
over the past twelve months and additional space leased to support business
growth. The principal components of the increase were higher net rental costs
and building depreciation expense.
Equipment expense, comprised of depreciation, rental and maintenance costs,
totaled $15.6 million, up 4% from the $14.9 million reported in the second
quarter of 1998. The increase from the previous year resulted primarily from
higher levels of depreciation of computer hardware, personal computers and
office furniture. Partially offsetting these increases was a reduction in
equipment rental costs and related maintenance brought about by the termination
of certain leases associated with the relocation of the computer data facility
during the second quarter of 1998.
Other operating expenses in the quarter totaled $73.5 million compared to $67.5
million last year. Professional services associated with the outsourcing of
check processing increased other operating expenses by $4.1 million. Higher 1999
expense levels also reflect continued investment in technology, expansion of the
PFS network, and higher operating expenses necessary to support business growth.
The expense categories most affected by these factors were business development,
purchased professional services, telecommunications charges and software
amortization. Partially offsetting these increases, and reflected in other
expenses, was a reduction in costs from processing errors incurred in servicing
and managing financial assets and performing banking activities.
The components of other operating expenses were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Second Quarter
Ended June 30
------------------------
(In Millions) 1999 1998
- -------------------------------------------------------------------------------
<S> <C> <C>
Business Development $10.7 $ 9.4
Purchased Professional Services 26.7 20.3
Telecommunications 4.3 3.7
Postage and Supplies 6.4 5.8
Software Amortization 11.9 10.0
Goodwill and Other Intangibles Amortization 3.5 3.5
Other Expenses 10.0 14.8
- -------------------------------------------------------------------------------
Total Other Operating Expenses $73.5 $67.5
- -------------------------------------------------------------------------------
</TABLE>
16
<PAGE>
Provision for Income Taxes
The provision for income taxes was $52.5 million for the second quarter compared
with $47.0 million in the year-ago quarter. The higher tax provision in 1999
resulted primarily from the growth in taxable earnings for federal income tax
purposes. The effective tax rate was 34.5% for 1999 and 35.0% for 1998.
BUSINESS SEGMENTS
The following table reflects the earnings contribution of Northern Trust's
business segments for the second quarter ended June 30, 1999 and 1998.
<TABLE>
<CAPTION>
Corporate and Personal
Institutional Financial Treasury and
Services Services Other Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
($ in Millions) 1999 1998 1999 1998 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest Income
Trust Fees $ 119.4 $ 105.5 $ 116.8 $ 96.8 $ - $ $ 236.2 $ 202.3
Other 51.2 47.2 14.4 13.1 .5 3.1 66.1 63.4
Net Interest Income after
Provision for Credit Losses* 37.7 36.3 92.1 83.1 1.0 5.8 130.8 125.2
Noninterest Expenses 132.1 126.5 131.0 110.3 8.6 10.9 271.7 247.7
- ----------------------------------------------------------------------------------------------------------------------------
Income before Income Taxes* 76.2 62.5 92.3 82.7 (7.1) (2.0) 161.4 143.2
Provision for Income Taxes* 30.0 24.7 36.7 32.8 (5.0) (1.5) 61.7 56.0
- ----------------------------------------------------------------------------------------------------------------------------
Net Income $ 46.2 $ 37.8 $ 55.6 $ 49.9 $ (2.1) $ (.5) $ 99.7 $ 87.2
- -----------------------------------------------------------------------------------------------------------------------------
Percentage Net Income
Contribution 46% 43% 56% 57% (2)% - % 100% 100%
- -----------------------------------------------------------------------------------------------------------------------------
Average Assets $12,461.9 $11,185.1 $11,439.5 $10,013.2 $5,222.9 $5,373.8 $29,124.3 $26,572.1
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Stated on a fully taxable equivalent basis (FTE). Total includes FTE
adjustments of $9.2 million for 1999 and $9.0 million for 1998.
The following table reflects the earnings contribution of Northern Trust's
business segments for the six months ended June 30, 1999 and 1998.
<TABLE>
<CAPTION>
Corporate and Personal
Institutional Financial Treasury and
Services Services Other Consolidated
- ---------------------------------------------------------------------------------------------------------------------------
($ in Millions) 1999 1998 1999 1998 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest Income
Trust Fees $ 233.3 $ 207.4 $ 227.4 $ 188.6 $ - $ - $ 460.7 $ 396.0
Other 99.8 95.8 27.0 25.9 .9 4.6 127.7 126.3
Net Interest Income after
Provision for Credit Losses* 80.3 68.6 179.4 164.0 5.1 10.6 264.8 243.2
Noninterest Expenses 259.0 244.9 258.8 217.6 20.3 21.4 538.1 483.9
- ----------------------------------------------------------------------------------------------------------------------------
Income before Income Taxes* 154.4 126.9 175.0 160.9 (14.3) (6.2) 315.1 281.6
Provision for Income Taxes* 60.7 50.0 69.6 63.8 (10.0) (4.3) 120.3 109.5
- ----------------------------------------------------------------------------------------------------------------------------
Net Income $ 93.7 $ 76.9 $ 105.4 $ 97.1 $ (4.3) $ (1.9) $ 194.8 $ 172.1
- ----------------------------------------------------------------------------------------------------------------------------
Percentage Net Income
Contribution 48% 45% 54% 56% (2)% (1)% 100% 100%
- ----------------------------------------------------------------------------------------------------------------------------
Average Assets $12,550.5 $11,179.0 $11,204.8 $9,789.5 $5,496.3 $5,322.1 $29,251.6 $26,290.6
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Stated on a fully taxable equivalent basis (FTE). Total includes FTE
adjustments of $18.1 million for 1999 and $17.4 million for 1998.
17
<PAGE>
Corporate and Institutional Services
C&IS net income totaled $46.2 million, a 22% increase from the second quarter of
1998. Noninterest Income increased 12% to $170.6 million in the second quarter
of 1999 from $152.7 million in last year's second quarter. Trust fees reflecting
strong new business growth increased 13% to $119.4 million in the current
quarter compared to $105.5 million in last year's second quarter. Other income
increased 8% to $51.2 million due primarily to a 26% increase in foreign
exchange trading profits in the current quarter.
Net interest income after provision for credit losses increased 4% to $37.7
million in the current quarter from $36.3 million in last year's second quarter.
Contributing to the improvement was a 12% increase in average earning assets,
offset in part by a higher provision for credit losses and a reduction in the
net interest margin from 1.63% in last year's second quarter to 1.61% in the
current quarter.
Noninterest expenses were up 4% to $132.1 million in the current quarter due
primarily to staff growth and increased expense allocations for product and
operations support.
Personal Financial Services
PFS net income for the quarter increased 11% to $55.6 million. Noninterest
income increased 19% to $131.2 million in the current quarter from $109.9
million in last year's second quarter. The increase was due primarily to a 21%
increase in trust fees which totaled $116.8 million in the current quarter
resulting from strong new business growth and favorable equity markets. Other
income increased 10% from $13.1 million in last year's second quarter to $14.4
million in the current quarter, due principally to a 14% increase in brokerage
commissions at Northern Trust Securities, Inc.
Net interest income after provision for credit losses increased 11% to $92.1
million in the current quarter due to a $1.2 billion increase in average loan
volume and an 11% increase in deposits, partially offset by a reduction in the
net interest margin from 3.53% last year to 3.36% in the current quarter.
Noninterest expenses increased 19% to $131.0 million in the current quarter from
$110.3 million in last year's second quarter. Approximately one-half of the
increase related to salaries, incentives and employee benefits, driven by staff
growth and performance-based incentive plans, and approximately one-third of the
increase resulted from higher expense allocations for product and operations
support. In addition, business promotion costs increased 20% as PFS expanded its
advertising and special client programs during the quarter.
Treasury and Other
The Treasury Department is responsible for managing the Bank's wholesale
funding, capital position and interest rate risk, as well as the portfolio of
interest rate risk management instruments. It is also responsible for the
investment portfolios of the Corporation and the Bank. "Other" corporate income
and expenses represent items that are not allocated to the business units and
generally represent certain nonrecurring items and certain executive level
18
<PAGE>
Treasury and Other (continued)
compensation. The second quarter results of Treasury and Other reflect a higher
level of net interest income generated by the Treasury Department which was more
than offset by increased corporate level interest expense and compensation
costs. In addition, the results for the second quarter of last year include
nonrecurring income related to gains recognized on the sale of futures exchange
memberships and securities transactions.
YEAR 2000 PROJECT
Remediation Status. As of June 30, 1999, Northern Trust had completed Year 2000
renovation and validation for all mission critical information technology
systems, including those provided by third parties. Northern Trust has used an
inclusive definition of "mission critical" items, with approximately 90% of
Northern Trust's core applications included in this category. Northern Trust has
also completed the implementation stage, in which systems or applications are
returned to production after the review of test results, for all of these
systems except one internal financial reporting system that is scheduled for
implementation in August 1999. Also, Northern Trust has substantially completed
Year 2000 renovation and validation for non-mission critical applications,
including non-critical desktop software.
Northern Trust has made substantial progress in integration testing, which will
continue through 1999. This testing is designed to assure that logically related
systems work with each other while running on compliant versions of hardware and
operating system software. During this period, Northern Trust is also using
recently-developed, automated verification tools to determine whether any
additional changes to already-renovated code are needed.
In addition to its Year 2000 work on systems and applications, Northern Trust
through its Business Issues Task Force has coordinated a review of various
infrastructure issues, such as checking elevators and heating, ventilation and
air-conditioning equipment, some of which include embedded systems, to verify
that the equipment will function in the Year 2000 or determine that remediation
or alternate plans will be needed. The assessment phase of this task has been
completed, and renovation, validation and implementation have been completed for
almost all of the mission critical equipment identified as needing renovation.
Employee access systems in Northern Trust's Chicago complex and New York offices
are scheduled to be replaced with Year 2000 ready systems by the end of the
third quarter. Contingency plans are also being developed for Northern Trust's
important locations, to allow critical functions to continue in the event of
infrastructure problems.
Credit and Other Year 2000 Readiness Reviews. As part of its credit analysis
process, Northern Trust has developed and implemented a project plan for
assessing the Year 2000 readiness of its significant credit clients. Northern
Trust completed its initial assessment of Year 2000 readiness for these clients
in 1998 and completed a second assessment in July 1999. Northern Trust's Year
2000 readiness review process is intended to identify clients with more than
moderate Year 2000 risk so that these clients can be reviewed more closely and
their progress more frequently monitored. The responses received from clients as
of July 31, 1999, together with publicly-available information evaluated, has
led Northern Trust to assign
19
<PAGE>
YEAR 2000 PROJECT (continued)
more than moderate Year 2000 risk ratings to credit clients with approximately
$116 million in outstanding loans. The ratings reflect some postponements since
December 31, 1998 in clients' announced Year 2000 remediation deadlines, which
can result in a higher risk rating, as well as other issues identified in the
readiness review, including issues relating to credit clients' progress in
contingency planning and use of third-party reviews.
Problems encountered by a borrower in developing or executing a Year 2000
strategy are considered as part of the overall credit risk assessment and affect
the internal credit ratings assigned to various credit exposures. Year 2000-
related credit concerns can affect the continuing assessment of clients' overall
risk profiles in a manner that may result in additional credit loss provisions,
if appropriate under generally accepted accounting principles.
In addition, as part of its fiduciary activities, Northern Trust has developed
and is implementing a plan for taking the Year 2000 issue into consideration in
evaluating investment portfolios, and a plan to evaluate and deal with the Year
2000 issues presented by other types of property held in trust. Northern Trust
has also contacted fiduciary and other clients to explain its Year 2000 Program
and will continue these communications throughout the year.
Suppliers and other Third-Party Reviews. The Business Issues Task Force is
monitoring programs to contact important vendors and suppliers to verify their
Year 2000 readiness. Northern Trust has evaluated the risk posed by each
supplier based on its criticality, its responses to inquiries about Year 2000
readiness and, where applicable, test results furnished. This evaluation is
being used in the contingency planning process described later.
During 1998, Northern Trust completed on-site, Year 2000 due diligence visits
with subcustodians who account for most of Northern Trust's global securities
processing approximately 95% as measured by market value of holdings and 88% as
measured by current transaction volume. Northern Trust has conducted additional
reviews by teleconference, and some of the on-site reviews in effect covered
more than the location visited because the subcustodian reviewed acts for
Northern Trust in several markets. Reviews conducted by at least one of these
methods have covered approximately 99.9% of both transaction volume and market
value of holdings. Second on-site visits to certain subcustodians are presently
under way.
The great majority of these subcustodians appear to be making adequate progress,
although Northern Trust has transitioned its business to another subcustodian in
one market as a result of concerns that included Year 2000 issues. Northern
Trust is a member of the Steering Committee of Custody 2000, a working group
within the Global 2000 Coordinating Group of financial institutions around the
world which is facilitating Year 2000 testing between global custodians and
their subcustodians. Through its own efforts and through its participation in
Custody 2000, Northern Trust has been able to test with, or expects to obtain
proxy testing information for, the subcustodians in its network other than those
where the volume of transactions is so minimal manual processing would be
practical. Northern Trust will continue to monitor subcustodians' Year 2000 work
throughout the year and develop contingency plans, which will include moving to
another subcustodian where necessary and feasible.
20
<PAGE>
YEAR 2000 PROJECT (continued)
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.
Testing with these organizations has been completed. Northern Trust has also
participated in the securities industry-wide testing sponsored by the Securities
Industry Association Asset Managers Forum and in other industry-sponsored tests
focussed on securities lending and pricing.
Northern Trust also plans to test for certain key dates in the new century with
other critical third party service providers, although it may be necessary to
rely on proxy testing in some cases. The majority of this work is now expected
to be completed by the end of the third quarter of 1999.
Client Testing. Northern Trust has furnished a Client Testing Catalog to its
corporate and institutional clients, describing plans for client testing, and
has made available testing documentation, including test results, to clients.
Northern Trust expects that most clients will be able to conduct an adequate
review of Northern Trust's Year 2000 readiness efforts by reviewing the test
documentation provided. Northern Trust has scheduled point-to-point testing for
some of its products and services with clients during the third quarter.
Contingency Planning. Although Northern Trust is attempting to monitor and
validate the efforts of other parties, it cannot control the success of those
efforts. It is also possible that there will be unanticipated problems with
systems Northern Trust has renovated and tested. Northern Trust has not tried to
predict the severity of the various malfunctions that may occur, alone or in
combination with other external or internal problems. Instead, Northern Trust
has developed contingency plans, where practical, to provide alternatives to
deal with a variety of "threat scenarios". These scenarios involve possible
situations where an entity furnishing a critical product or service, or with
which Northern Trust has another business relationship critical to its
operations, experiences significant Year 2000 difficulties that will affect
Northern Trust or where internal problems develop.
Contingency planning is now a principal focus of Northern Trust's Year 2000
work. The contingency planning process has focused on Northern Trust's critical
functions, such as securities processing, investment and trading, wire transfer
and automated clearing house operations, credit, cash services, fund accounting
and servicing, mutual funds, investor services, check processing, financial
reporting and balance sheet and liquidity management. In each area the process
identified various Year 2000 failure scenarios that could threaten these
functions, including power and telecommunications failures, and then identified
where practicable alternative methods to perform the function or other
strategies to mitigate the effect of the failure.
21
<PAGE>
YEAR 2000 PROJECT (continued)
The basic Year 2000 contingency plans for these critical functions have been
completed and reviewed. Testing and refinement of the plans are expected to
continue into the third and fourth quarters. These critical function contingency
plans are also being used by Northern Trust's various business units as they
revise their business continuity plans with the Year 2000 event in prospect.
Each critical function contingency plan is quite specific in its identification
of particular threats and steps to mitigate those threats should they
materialize. Common mitigating actions include advancing the processing of
certain transactions where feasible so it is completed prior to year-end; making
copies of key reports, year-end balances and data files to assure the
availability of a reference point; developing alternative methods for
communicating with clients, vendors and other Northern Trust offices in the
event of telecommunications or other communications systems failure; close
monitoring of processes and client behavior as year-end approaches to spot
unusual developments and react to them early; developing alternative sources of
information where feasible for key processes that depend upon pricing or other
external data; developing manual work-around solutions where practical; and
increasing hours or adding staff from other areas if certain areas experience
unusually high demands. The plans also contemplate preparing to generate extra
liquidity in various investment portfolios should that prove necessary;
preparing to meet potential client demands for increased currency at year-end;
and developing additional measures to prevent Year 2000-related frauds and
address other security issues.
The Year 2000 contingency planning effort also builds on Northern Trust's
existing business continuity plans and recovery capabilities. These include or
are expected to include the use of standby power generators for the Chicago data
center and some other key locations; synchronous mirroring of data processed at
the main data center in Chicago at a nearby back-up site, as well as a contract
for remote hotsite recovery in the event of a regional problem; an alternative
work site for certain critical functions should the Chicago operations center be
unable to function; a redundant, alternate-site backup for wire transfer
functions; and independent linkages with major securities depositories. In
developing Year 2000 contingency plans for managing balance sheet and liquidity
risk, Northern Trust is likewise building on existing plans for dealing with
market or other developments that could create funding and liquidity issues. The
Year 2000 contingency plans call for restructuring the shorter-term portion of
the balance sheet to increase liquidity as year-end approaches; developing
alternate sources of funding to meet unusual needs should they occur; and
positioning Northern Trust's banking subsidiaries to be able to respond to
unusual client demands near and over the year-end. In July, Northern Trust
implemented one part of the contingency plan by issuing $200 million in
subordinated debt of The Northern Trust Company to bolster its capital prior to
year-end.
In order to provide as stable an environment as possible going into the new
year, Northern Trust has imposed a systems moratorium commencing September 20,
1999, after which no programming changes may be made without the specific
approval of the head of Worldwide Technology and the Year 2000 Project Manager.
Northern Trust is also developing event management plans for the period from
late December 1999 through early January 2000,
22
<PAGE>
YEAR 2000 PROJECT (continued)
refining existing models for managing information flow, communication processes
and decision-making. A Steering Committee consisting of the Corporation's
Management Committee and key Year 2000 Project Team members will be available to
provide on-site strategic decisions and direction, and key staff members will be
in critical offices over the Year 2000 weekend to monitor the rollover. Systems
analysts and operations personnel will also be conducting systems and data
validation throughout the Year 2000 weekend, and backup personnel in all key
areas will be on standby in the event they are needed.
Expenses. The estimated total expense for Northern Trust's Year 2000 renovation
project is $35 million. This estimate includes the cost of purchasing licenses
for software programming tools, the cost of the time of internal staff in
Worldwide Technology, the cost of consultants and $6.0 million of accelerated
purchases of equipment necessary to support contingency plans and Year 2000
testing. The estimate does not include the time that internal staff in user
departments are devoting to testing programming changes and developing
contingency plans, although these efforts are not believed to have added or
expected to add significant incremental costs.
These Year 2000 costs have been and are expected to be expensed as incurred,
except that the costs for equipment supporting contingency plans and testing is
being amortized over its useful life in accordance with Northern Trust's
accounting policies. As of June 30, 1999, $29.0 million of the estimated $35
million of project costs have been incurred of which $3.1 million related to
capitalized equipment purchases. $2.6 million of costs were incurred in the
second quarter of 1999, of which $225 thousand related to capitalized equipment
purchases. The remaining costs are expected to be incurred fairly evenly through
the first quarter of 2000. Of the total Worldwide Technology Group expenses
(excluding depreciation and amortization) for 1997, 1998 and 1999, it is
estimated that 12% to 14% will be for Year 2000 renovation costs, or less than
1.5% of Northern Trust's anticipated aggregate noninterest expenses for those
years. Although the priority given to Year 2000 work may result in extending the
time for completing some other technology projects, these delays are not
expected to have a material effect on Northern Trust's business.
Potential Risks. Northern Trust recognizes the importance of successfully
completing all aspects of the Year 2000 Project. Northern Trust data processing
software and hardware provide essential support to virtually all of its
businesses. Failure to complete Year 2000 renovation of the critical systems
used by Northern Trust thoroughly and on a timely basis could have a materially
adverse effect on its operations and financial performance, as could Year 2000
problems experienced by others on whom Northern Trust relies or with whom it
otherwise does business. Because of the range of possible issues and the large
number of variables involved, it is impossible to quantify the potential cost of
problems should Northern Trust's remediation efforts or the efforts of those
with whom it does business not be successful and Northern Trust's contingency
plans fail to avoid or mitigate the resulting problems. The issue is of such
magnitude, however, that these costs could be quite material. Failure to make
satisfactory progress toward Year 2000 readiness or to take other agency-
mandated steps could also result in action by state or federal regulators that
could adversely affect Northern Trust's business.
23
<PAGE>
SIX MONTHS EARNINGS HIGHLIGHTS
Net income per common share increased 13% to $1.67 for the six-month period
ended June 30, 1999, up from $1.48 last year. Net income also increased 13% to
$194.8 million from $172.1 million in the year-ago period. The ROE increased
slightly to 20.63% from 20.60% last year, while the ROA improved to 1.34% from
1.32% in the same period last year.
Total revenues, stated on a FTE basis, increased 11% from 1998 levels. Trust
fees totaled $460.7 million, up 16% from $396.0 million last year. Foreign
exchange trading profits totaled $54.5 million, up 7% from last year's
performance. Treasury management revenues from both fees and the computed value
of compensating deposit balances increased 4% to $49.4 million. The fee portion
of these revenues accrued in the period totaled $35.4 million, up from $33.3
million in 1998. Security commissions and trading income totaled $15.2 million,
up 6% from $14.4 million reported last year. Other operating income totaled
$22.5 million in the period compared with $26.2 million in 1998. The decline
from the prior year was due primarily to nonrecurring income in 1998 from second
quarter gains on the sale of mortgage loans and the sale of futures exchange
memberships, in addition to lower levels of trust deposit-related fees.
Net interest income, stated on a FTE basis, totaled $270.3 million, up 8% from
$250.2 million reported last year. The $5.5 million provision for credit losses
was $1.5 million below the $7.0 million required in the first half of 1998. Net
loan charge-offs totaled $.4 million versus $8.1 million in the same period of
last year. Noninterest expenses were up 11% and totaled $538.1 million compared
to $483.9 million a year ago.
BALANCE SHEET
Total assets at June 30, 1999 were $30.2 billion and averaged $29.1 billion for
the second quarter, up 10% from last year's average of $26.6 billion. Due to
continued strong credit demand, loans and leases grew to $15.0 billion at June
30, 1999, and averaged $14.3 billion for the quarter. This compares with $13.6
billion in total loans and leases at June 30, 1998 and $13.1 billion on average
for the second quarter of last year. Securities totaled $8.8 billion at June 30,
1999 and averaged $8.1 billion for the second quarter compared to an average of
$7.6 billion in the second quarter of 1998. The increase was primarily in short-
term federal agency securities.
Driven by continued strong earnings growth, offset in part by stock repurchases
under Northern Trust's ongoing stock buyback program, common stockholders'
equity increased to $1.96 billion at June 30, 1999 and averaged $1.92 billion
for the quarter, up 14% from the $1.69 billion average in last year's second
quarter. Total stockholders' equity averaged $2.04 billion for the second
quarter compared with $1.80 billion in 1998.
24
<PAGE>
BALANCE SHEET (continued)
On May 18, 1999, the Board of Directors increased the Corporation's stock
buyback authorization by approximately 4.9 million shares. As a result, an
additional 5.8 million shares may be purchased after June 30, 1999 under the
current share buyback program. During the quarter, the Corporation acquired a
total of 412,908 shares at a cost of $37.1 million.
Northern Trust Corporation's risk-based capital ratios remained strong at 9.6%
for tier 1 capital and 12.5% for total capital at June 30, 1999. These capital
ratios are well above the minimum regulatory requirements of 4% for tier 1 and
8% for total risk-based capital ratios. The leverage ratio (tier 1 capital to
second quarter average assets) of 7.3% at June 30, 1999, also exceeded the
minimum regulatory requirement of 3%. Each of Northern Trust's subsidiary banks
had a ratio above 8.4% for tier 1 capital, 11.0% for total risk-based capital,
and 6.3% for the leverage ratio.
ASSET QUALITY
Nonperforming assets consist of nonaccrual loans, restructured loans and other
real estate owned (OREO). Nonperforming assets at June 30, 1999 totaled $45.2
million, compared with $35.2 million at December 31, 1998 and $29.0 million at
June 30, 1998. Domestic nonaccrual loans and leases, consisting primarily of
commercial loans, totaled $44.1 million, or .31% of total domestic loans and
leases at June 30, 1999. At December 31, 1998 and June 30, 1998, domestic
nonaccrual loans and leases totaled $30.5 million and $24.5 million,
respectively.
The following table presents the outstanding amounts of nonaccrual loans and
leases, restructured loans and OREO. Also shown are loans that have interest or
principal payments that are delinquent 90 days or more and are still accruing
interest. The balance in this category at any quarter end can fluctuate widely
based on the timing of cash collections, renegotiations and renewals.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
June 30 March 31 December 31 June 30
------------------------------------------------
(In Millions) 1999 1999 1998 1998
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Nonaccrual Loans
Domestic
Residential Real Estate $ 5.7 $ 5.3 $ 5.2 $ 3.7
Commercial 35.3 21.7 21.8 18.0
Commercial Real Estate 2.2 2.8 2.9 2.6
Personal .9 .4 .6 .2
- ----------------------------------------------------------------------------------------------
Total Domestic 44.1 30.2 30.5 24.5
International - - - -
- ----------------------------------------------------------------------------------------------
Total Nonaccrual Loans 44.1 30.2 30.5 24.5
Restructured Loans - - 2.4 2.5
Other Real Estate Owned 1.1 2.1 2.3 2.0
- ----------------------------------------------------------------------------------------------
Total Nonperforming Assets $45.2 $32.3 $35.2 $29.0
- ----------------------------------------------------------------------------------------------
Total 90 Day Past Due Loans (still accruing) $19.6 $14.3 $30.0 $24.4
- ----------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
Provision and Reserve for Credit Losses
The provision for credit losses is the charge against current earnings that is
determined by management, through a disciplined credit review process, as the
amount needed to maintain a reserve that is sufficient to absorb credit losses
inherent in Northern Trust's loan and lease portfolios and other credit
undertakings. The reserve provides for probable losses that have been identified
with specific borrower relationships (specific loss component) and for probable
losses that are believed to be inherent in the loan and lease portfolios and
other credit undertakings but that have not yet been specifically identified
(inherent loss component).
Footnote 6 to the Consolidated Financial Statements includes a table that
analyzes the reserve for credit losses at June 30, 1999 and identifies the
charge-offs and recoveries and the provisions for credit losses during the six-
month period ended June 30, 1999. The table below shows (i) the specific portion
of the reserve, (ii) the allocated portion of the inherent reserve and its
components by loan category and (iii) the unallocated portion of the reserve at
June 30, 1999, March 31, 1999, December 31, 1998, and June 30, 1998.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
ALLOCATION OF THE RESERVE FOR CREDIT LOSSES
- ----------------------------------------------------------------------------------------------------------------------------
June 30, 1999 March 31, 1999 December 31, 1998 June 30, 1998
--------------------- --------------------- --------------------- ---------------------
Percent of Percent of Percent of Percent of
Reserve Loans to Reserve Loans to Reserve Loans to Reserve Loans to
($ in millions) Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Specific Reserves $ 17.3 -% $ 11.7 -% $ 5.9 -% $ 1.8 -%
- ----------------------------------------------------------------------------------------------------------------------------
Inherent Reserves
Residential Real Estate 12.6 41 11.1 43 11.0 43 10.0 40
Commercial 65.8 30 73.0 32 77.4 29 78.3 31
Commercial Real Estate 13.4 5 12.4 5 11.8 5 12.1 5
Personal 3.2 9 3.1 9 3.2 11 3.6 9
Other - 5 - 4 - 5 - 7
Lease Financing 2.9 4 2.9 4 2.9 4 2.9 3
International 3.7 6 3.4 3 3.6 3 4.5 5
Unallocated 33.0 - 29.6 - 31.0 - 33.5 -
- ----------------------------------------------------------------------------------------------------------------------------
Total Inherent Reserve $134.6 100% $135.5 100% $140.9 100% $144.9 100%
- ----------------------------------------------------------------------------------------------------------------------------
Total Reserve $151.9 100% $147.2 100% $146.8 100% $146.7 100%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Specific Component of the Reserve. At June 30, 1999, the specific component of
the reserve stood at $17.3 million, compared to $5.9 million at December 31,
1998 and $11.7 million at March 31, 1999. The increase from March 31 relates
primarily to a single commercial loan to a borrower that filed for Chapter 11
reorganization during the quarter.
Allocated Inherent Component of the Reserve. The $4.3 million decrease in the
allocated inherent portion of the reserve between March 31 and June 30, 1999
reflects the net effect of several factors. The principal amount of residential
real estate loans with lower internal credit ratings increased somewhat, and
commercial real estate loans outstanding also increased; both of these factors
had the effect of increasing the allocated inherent portion of the reserve.
Offsetting these factors were a slight decline during the quarter in commercial
loans and a
26
<PAGE>
Provision and Reserve for Credit Losses (continued)
decline in the principal amount of commercial loans in the lower rating
categories. In addition, management refined its methodology for determining the
allocated inherent portion of the reserve with respect to loans within the
lowest internal credit rating categories. This reduced the allocated inherent
portion of the reserve for residential real estate, commercial and commercial
real estate loans.
Unallocated Inherent Component of the Reserve. The unallocated portion of the
inherent loss reserve is based on management's review of overall factors
affecting the determination of probable losses inherent in the portfolio, which
may not be captured, or captured completely, by the mechanical application of
historical loss ratios and other factors used in determining the allocated
inherent reserve. 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. The unallocated
inherent portion of the reserve was $33.0 million, an increase of $3.4 million
from March 31, 1999, reflecting management's judgement that the unallocated
inherent component of the reserve should increase in light of the overall
increase in the size of the portfolio, the increase in loans in certain segments
with higher risk and the increasing maturity of the current economic expansion.
Other Factors. During the six months ended June 30, 1999, there were no
significant changes in concentration of credits that impacted asset quality. The
total amount of the highest risk loans, those rated "6" to "8" (based on
Northern's internal rating scale which closely parallels that of the banking
regulators), was $105 million at June 30, 1999 and $97 million at March 31,
1999, reflecting the addition of one significant commercial loan, which was
partially offset by improvement in other high-risk categories.
Overall Reserve. Management's evaluation of the factors above resulted in a
reserve for credit losses of $151.9 million at June 30, 1999 compared to $147.2
million at March 31, 1999. The increase reflects deterioration in one commercial
loan, which required an increase in the specific component of the reserve. The
inherent portion of the reserve declined only slightly since March 31, 1999,
consistent with management's assessment that there has been little change in the
level of risk in Northern Trust's credit exposures outside of loans for which
specific allocations were made. The reserve as a percentage of total loans
declined to 1.01% at June 30, 1999 from 1.05% at March 31, 1999.
Provision. The resulting provision for credit losses was $5.0 million during the
second quarter of 1999. Net charge-offs were $345 thousand for the period.
27
<PAGE>
MARKET RISK MANAGEMENT
As described in the 1998 Annual Report to Shareholders, Northern Trust manages
its interest rate risk through measurement techniques which include simulation
of earnings, simulation of the economic value of equity, and gap analysis. Also,
as part of its risk management activities, it regularly measures the risk of
loss associated with foreign currency positions using a value at risk model.
Based on this continuing evaluation process, the Northern Trust's interest rate
risk position and the value at risk associated with the foreign exchange trading
portfolio have not changed significantly since December 31, 1998.
FORWARD-LOOKING INFORMATION
This report contains statements that may be considered forward-looking, such as
the discussion of Northern Trust's financial goals, expansion and business
development plans, business prospects and positioning with respect to market and
pricing trends, new business results and outlook, credit quality, planned
capital expenditures and technology spending, the completion and effectiveness
of Year 2000 work, and the effect of various matters (including Year 2000
issues) on Northern Trust's business. These statements speak of Northern Trust's
plans, goals, beliefs or expectations, refer to estimates or use similar terms.
Those relating to Year 2000 matters also constitute Year 2000 readiness
disclosures. Actual results could differ materially from the results indicated
by these statements because the realization of those results is subject to many
uncertainties including:
. The future health of the U.S. and international economies and other economic
factors that affect wealth creation, investment and savings patterns, and
Northern Trust's interest rate risk exposure and credit risk.
. Changes in U.S. and worldwide securities markets, with respect to the market
values of financial assets, the stability of particular securities markets
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 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.
28
<PAGE>
. 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.
. 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",
including its own systems remediation, its readiness review of its borrowers,
and its identification of and planning for various "threat scenarios" in Year
2000 contingency planning.
. The potential impact on Northern Trust of changes in clients' behavior as a
result of clients' own Year 2000 contingency planning or otherwise.
. The impact of the euro on Northern Trust's global custody business and
foreign exchange trading results.
. The ability of each of Northern Trust's principal businesses to maintain a
product mix that achieves satisfactory margins.
. Changes in tax laws or other legislation that could affect Northern Trust's
personal and institutional asset administration businesses.
Some of these uncertainties that may affect future results are discussed in more
detail in the section of "Management's Discussion and Analysis of Financial
Condition and Results of Operations" captioned "Risk Management" in the 1998
Annual Report to Stockholders (pp. 35-44) and in the sections of "Item 1 -
Business" of the 1998 Annual Report on Form 10-K captioned "Government
Policies", "Competition" and "Regulation and Supervision" (pp. 6-10). All
forward-looking statements included in this document are based upon information
presently available, and Northern Trust assumes no obligation to update any
forward-looking statement.
29
<PAGE>
The following schedule should be read in conjunction with the Net Interest
Income section of Management's Discussion and Analysis of Financial Condition
and Results of Operations.
CONSOLIDATED ANALYSIS OF NET INTEREST INCOME
<TABLE>
<CAPTION>
Second Quarter
--------------------------------------------------------------------------
(Interest and rate on a taxable equivalent basis) 1999 1998
---------------------------------- ----------------------------------
($ in Millions) Interest Volume Rate Interest Volume Rate
- ------------------------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Average Earning Assets
Money Market Assets
Federal Funds Sold and Resell Agreements $ 11.4 $ 934.6 4.88% $ 14.3 $ 1,025.2 5.61%
Time Deposits with Banks 33.2 2,902.8 4.59 31.1 2,304.0 5.41
Other Interest-Bearing .7 59.5 5.01 .9 51.8 7.13
- ------------------------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
Total Money Market Assets 45.3 3,896.9 4.67 46.3 3,381.0 5.49
- ------------------------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
Securities
U.S. Government 4.0 306.7 5.23 5.4 369.0 5.99
Obligations of States and Political Subdivisions 9.9 502.8 7.87 9.5 432.1 8.83
Federal Agency 88.2 7,022.9 5.04 92.9 6,485.3 5.74
Other 4.6 289.7 6.33 3.9 272.0 5.65
Trading Account .2 14.3 6.85 .1 12.1 6.65
- ------------------------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
Total Securities 106.9 8,136.4 5.27 111.8 7,570.5 5.93
- ------------------------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
Loans and Leases 227.0 14,271.2 6.38 221.2 13,100.7 6.77
- ------------------------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
Total Earning Assets $379.2 $26,304.5 5.78% $379.3 $24,052.2 6.33%
- ------------------------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
Average Source of Funds
Deposits
Savings and Money Market $ 36.4 $ 4,759.9 3.07% $ 35.9 $ 4,303.0 3.35%
Savings Certificates 28.5 2,161.2 5.28 30.4 2,126.5 5.73
Other Time 8.6 716.4 4.85 6.9 517.4 5.38
Foreign Offices Time 61.2 5,869.7 4.18 64.1 5,183.7 4.96
- ------------------------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
Total Deposits 134.7 13,507.2 4.00 137.3 12,130.6 4.54
Federal Funds Purchased 38.5 3,237.0 4.77 30.2 2,202.5 5.51
Repurchase Agreements 21.5 1,832.9 4.71 13.1 967.2 5.44
Commercial Paper 1.7 139.8 4.86 2.1 148.3 5.57
Other Borrowings 27.4 2,167.0 5.07 45.4 3,421.4 5.32
Senior Notes 7.8 640.6 4.88 11.2 800.9 5.61
Long-Term Debt 8.0 458.6 6.93 7.6 422.9 7.20
Debt-Floating Rate Capital Securities 3.8 267.5 5.64 4.2 267.4 6.29
- ------------------------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
Total Interest-Related Funds 243.4 22,250.6 4.39 251.1 20,361.2 4.95
- ------------------------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
Interest Rate Spread - - 1.39% - - 1.38%
- ------------------------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
Noninterest-Related Funds - 4,053.9 - - 3,691.0 -
- ------------------------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
Total Source of Funds $243.4 $26,304.5 3.71% $251.1 $24,052.2 4.19%
- ------------------------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
Net Interest Income/Margin $135.8 - 2.07% $128.2 - 2.14%
- ------------------------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
ANALYSIS OF NET INTEREST INCOME CHANGES
DUE TO VOLUME AND RATE
<TABLE>
<CAPTION>
Second Quarter 1999/98 Six Months 1999/98
---------------------------------- ----------------------------------
Change Due To Change Due To
---------------------- ----------------------
(In Millions) Volume Rate Total Volume Rate Total
- ------------------------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Earning Assets $33.0 $(33.1) $ (.1) $74.1 $(60.8) $13.3
Interest-Related Funds 19.9 (27.6) (7.7) 49.6 (56.4) (6.8)
- ------------------------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
Net Interest Income $13.1 $ (5.5) $ 7.6 $24.5 $ (4.4) $20.1
- ------------------------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
30
<PAGE>
NORTHERN TRUST CORPORATION
<TABLE>
<CAPTION>
Six Months
- --------------------------------------------------------------
1999 1998
- ----------------------------- -----------------------------
Interest Volume Rate Interest Volume Rate
- -------- --------- ---- -------- --------- ----
<S> <C> <C> <C> <C> <C>
$ 25.5 $ 1,054.2 4.87% $ 26.8 $ 961.9 5.63%
73.7 3,189.3 4.66 65.2 2,432.7 5.40
1.7 71.5 4.92 1.7 48.7 6.98
- -------- --------- ---- -------- --------- ----
100.9 4,315.0 4.72 93.7 3,443.3 5.49
- -------- --------- ---- -------- --------- ----
8.5 309.4 5.51 12.4 416.9 6.03
20.0 507.0 7.92 18.5 415.3 8.93
168.5 6,697.0 5.07 179.4 6,284.6 5.76
9.3 285.7 6.56 7.1 247.8 5.75
.4 13.4 6.91 .3 10.5 6.87
- -------- --------- ---- -------- --------- ----
206.7 7,812.5 5.33 217.7 7,375.1 5.95
- -------- --------- ---- -------- --------- ----
450.7 14,175.7 6.41 433.6 12,918.9 6.77
- -------- --------- ---- -------- --------- ----
$758.3 $26,303.2 5.81% $745.0 $23,737.3 6.33%
- -------- --------- ---- -------- --------- ----
$ 71.7 $ 4,692.7 3.08% $ 69.6 $ 4,229.7 3.32%
57.7 2,174.9 5.35 60.7 2,125.5 5.76
15.4 638.8 4.87 14.0 521.5 5.43
124.3 5,921.3 4.23 132.8 5,367.4 4.99
- -------- --------- ---- -------- --------- ----
269.1 13,427.7 4.04 277.1 12,244.1 4.56
80.1 3,385.3 4.77 66.5 2,436.7 5.50
47.1 2,014.9 4.72 34.0 1,251.5 5.48
3.4 139.1 4.91 4.1 146.6 5.61
47.8 2,030.9 4.74 67.2 2,558.0 5.29
17.0 693.4 4.91 21.8 775.6 5.64
15.9 458.4 6.93 15.7 428.6 7.32
7.6 267.5 5.68 8.4 267.4 6.28
- -------- --------- ---- -------- --------- ----
488.0 22,417.2 4.39 494.8 20,108.5 4.96
- -------- --------- ---- -------- --------- ----
- - 1.42% - - 1.37%
- -------- --------- ---- -------- --------- ----
- 3,886.0 - - 3,628.8 -
- -------- --------- ---- -------- --------- ----
$488.0 $26,303.2 3.74% $494.8 $23,737.3 4.20%
- -------- --------- ---- -------- --------- ----
$270.3 - 2.07% $250.2 - 2.13%
- -------- --------- ---- -------- --------- ----
</TABLE>
31
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
The information called for by this item is incorporated herein by
reference to "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Market Risk Management" on page 28
of this document.
32
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
Exhibit (10) Material Contracts:
(i) Amendment of the Northern Trust Corporation Amended 1992
Incentive Stock Plan Dated January 20, 1998.
(ii) Amendment of the Northern Trust Corporation Amended 1992
Incentive Stock Plan Dated September 15, 1998.
(iii) Amendment of the Northern Trust Corporation Amended 1992
Incentive Stock Plan Dated May 18, 1999.
(iv) Amendments effective January 1, 1999 to the Northern Trust
Employee Stock Ownership Plan Extending Participation in the
Plan to Certain Employees in the United Kingdom.
Exhibit (27) Financial Data Schedule.
Exhibit (99) Additional Exhibits:
(i) Corporate Governance Guidelines Adopted May 18, 1999.
(b) Reports on Form 8-K
-------------------
In a report on Form 8-K, Northern Trust incorporated in Item 5 its
April 19, 1999 press release, reporting on its earnings for the first
quarter of 1999. The press release, with summary financial
information, was filed pursuant to Item 7.
In a report on Form 8-K dated May 18, 1999 Northern Trust Corporation
incorporated in Item 5 its May 18, 1999 press release, reporting the
declaration of a quarterly cash dividend on shares of its common
stock in the amount of 24 cents per share. The press release also
reported that the Board of Directors increased the Corporation's
common stock buy-back authorization by approximately 4.9 million
shares, thus allowing the purchase in the future of up to an
aggregate of 6.0 million shares of the Corporation's common stock.
The press release exhibit was filed pursuant to Item 7 of the Form 8-
K.
33
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORTHERN TRUST CORPORATION
--------------------------
(Registrant)
Date: August 12, 1999 By: Perry R. Pero
-------------
Perry R. Pero
Senior Executive Vice President
and Chief Financial Officer
Date: August 12, 1999 By: Harry W. Short
--------------
Harry W. Short
Senior Vice President and
Controller (Chief Accounting
Officer)
34
<PAGE>
EXHIBIT INDEX
The following exhibits have been filed herewith:
Exhibit
Number Description
- ------ -----------
(10) Material Contracts:
(i) Amendment of the Northern Trust
Corporation Amended 1992 Incentive
Stock Plan Dated January 20, 1998.
(ii) Amendment of the Northern Trust
Corporation Amended 1992 Incentive
Stock Plan Dated September 15, 1998.
(iii) Amendment of the Northern Trust
Corporation Amended 1992 Incentive
Stock Plan Dated May 18, 1999.
(iv) Amendments effective January 1, 1999
to the Northern Trust Employee Stock
Ownership Plan Extending
Participation in the Plan to Certain
Employees in the United Kingdom.
(27) Financial Data Schedule.
(99) Additional Exhibits:
(i) Corporate Governance Guidelines
Adopted May 18, 1999.
35
<PAGE>
Exhibit 10 (i)
AMENDMENT OF
THE NORTHERN TRUST CORPORATION
AMENDED 1992 INCENTIVE STOCK PLAN DATED JANUARY 20, 1998
--------------------------------------------------------
The Northern Trust Corporation Amended 1992 Incentive Stock Plan (the "1992
Plan") is hereby amended, effective as of the date hereof, as follows:
1. By substituting the following sentence in place of the first sentence
of Section 6(f):
"Stock Options may provide that they may be exercised by payment of
the purchase price (i) in cash, (ii) by the Corporation's withholding
a portion of the shares of Common Stock otherwise distributable to the
participant, and/or (iii) by the participant's delivering to the
Corporation shares of Common Stock that are acceptable to the
Committee."
2. By substituting the following sentence in place of the second sentence
of Section 14:
"In connection with an Award under the Plan in the form of shares of
Common Stock, and in lieu of requiring a participant to make a cash
payment to the Corporation in an amount related to the tax resulting
from such benefit, the Committee may, in its discretion, provide that,
at the participant's election, the tax withholding obligation in
connection with such benefit shall be satisfied (i) by the
Corporation's withholding a portion of the shares of Common Stock
otherwise distributable to the participant, and/or (ii) by the
participant's delivering to the Corporation shares of Common Stock
that are acceptable to the Committee, such shares being valued in
either event at their fair market value as of the date of such
withholding or delivery, as the case may be."
<PAGE>
Exhibit 10 (ii)
AMENDMENT TO
NORTHERN TRUST CORPORATION
AMENDED 1992 INCENTIVE STOCK PLAN
DATED SEPTEMBER 15, 1998
The Northern Trust Corporation Amended 1992 Incentive Stock Plan is
hereby amended, effective as of the date hereof, by adding a new subsection (i)
under Section 9, "Stock Awards," as follows:
"(i) Notwithstanding the provisions of subsections (b) and (g) above,
the Corporation, in lieu of issuing stock certificates, may reflect the
issuance of shares of Common Stock to a participant on a non-
certificated basis, with the ownership of such shares by the
participant evidenced solely by book entry in the records of the
Corporation's transfer agent; provided, however that following the
lapse of all restrictions with respect to the shares granted or sold to
a participant, the Corporation, upon the written request of the
participant, shall issue, in the name of the participant, stock
certificates representing such shares."
<PAGE>
Exhibit 10 (iii)
AMENDMENT OF
THE NORTHERN TRUST CORPORATION
AMENDED 1992 INCENTIVE STOCK PLAN DATED MAY 18, 1999
- ----------------------------------------------------
The Northern Trust Corporation Amended 1992 Incentive Stock Plan (the
"1992 Plan") is hereby amended, effective as of the date hereof, as follows:
1. By revising Section 10 (c) to read in its entirety as follows:
"The dates or dates for determining fair market value or book
value, or for payment, or the period of time over which the
appreciation in fair market value or book value shall be
measured, as the case may be, shall be established by the
Committee and shall be specified in the applicable Stock
Equivalent Agreement."
2. By revising Section 19 to read in its entirety as follows:
"All questions pertaining to the validity, construction and
administration of the Plan and all Awards hereunder shall be
determined in conformity with the laws of the State of Illinois,
without regard to the conflict of law provisions of any state,
and, in the case of Incentive Stock Options, Section 422 of the
Code and regulations issued thereunder."
<PAGE>
Exhibit 10 (iv)
AMENDMENT NUMBER EIGHT
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"); and
WHEREAS, amendment of the Plan is now considered desirable;
NOW, THEREFORE, by virtue and in exercise of the amending power reserved to the
Company under Section 13.1 of the Plan, and pursuant to the authority delegated
to the undersigned officer by resolution of the Board of Directors dated May 18,
1999, the Plan is hereby amended, effective as of January 1, 1999, in the
following particulars:
1. By substituting the following for Section 2.1(o) of the Plan:
"(o) `ELIGIBLE EMPLOYEE' means any Employee of the Company or a
Participating Employer, except that the following groups of Employees
shall not be eligible to participate in this Plan (unless
specifically provided to the contrary in a supplement to the Plan):
(1) An Employee employed by any office or branch of the Company
located in a foreign country who, as to the United States,
is a nonresident alien; and
(2) An Employee who: (A) as to the United States, is a foreign
national, (B) is working for the Company or a Participating
Employer at a location in the United States, and (C) is
covered by a retirement plan sponsored by a non-U.S.
Affiliate in the county in which an Affiliate is located."
2. By adding the following new Supplement 1 at the end of the Plan:
<PAGE>
SUPPLEMENT #1
Extension of Plan to U.K. Employees
This Supplement #1 to the Northern Trust Employee Stock Ownership
Plan, as amended and restated effective January 1, 1989 (the `Plan'), is made a
part of the Plan and supersedes any provisions thereof to the extent that they
are not consistent with this Supplement. Unless the context clearly implies or
indicates to the contrary, a word, term or phrase used or defined in the Plan is
similarly used or defined for purposes of this Supplement #1.
1. Purpose and Effect. Effective as of January 1, 1999 (the `U.K.
------------------
Effective Date'), employees of the Company who are residents of the United
Kingdom (`U.K.') or who are employed under U.K. permanent contracts of
employment shall be eligible to participate in the Plan, subject to the
terms of the Plan as modified by this Supplement. Such employees are
referred to herein as `U.K. Employees', and each U.K. Employee who becomes
a Participant in the Plan pursuant to this Supplement is referred to herein
as a `U.K. Participant.'
2. Service, Participation, and Compensation for U.K. Employees. U.K.
-----------------------------------------------------------
Employees' service with the Company prior to the U.K. Effective Date may be
credited as Vesting Service pursuant to the provisions of section 3.4.
U.K. Employees who had completed one year of Vesting Service as of the
U.K. Effective Date shall become U.K. Participants in the Plan retroactive
to the U.K. Effective Date (and Compensation (as defined below) paid to
such participants during 1999 shall be recognized for purposes of making
the allocations required under section 7.4(c)). In order to become a U.K.
Participant, each U.K. Employee must authorize the Company (in writing) to
deduct any income, employment and similar taxes and fees payable by the
employee with respect to contributions to the Plan made by the Company from
other compensation paid to such U.K. Employee by the Company. For a U.K.
Participant, `Compensation' shall mean the base salary, statutory sick pay,
statutory maternity pay (higher and lower rate) and shift allowance paid to
a U.K. Participant.
3. Code Limitations. The following special rules shall apply for
----------------
U.K. Participants:
(a) U.K. Participants' compensation (as defined in paragraph (c)
below) shall be recognized for purposes of section 4.1 of the
Plan regarding the limit on the maximum deductible contribution
under section 404 of the Code.
(b) U.K. Participants shall be included with all other Participants
when determining the limit on allocations pursuant to section
7.4(e) of the Plan. If reductions in the allocations to Highly
Compensated Participants are necessary to comply with such limit,
then the allocations to U.K. Participants who are Highly
Compensated Participants shall be reduced in the same manner as
all other Highly Compensated Participants.
(c) Pursuant to regulation section 1.415-2(d)(11)(ii), wages and all
other payments of compensation (within the meaning of section
3401(a) of the Code, but determined without regard to the
location of the employment) received by U.K. Participants shall
be recognized for all purposes of section 7.5(h)(4) of the Plan
(i.e., sections 414(q), 415, and 416 of the Code).
4. Cash Dividends Payable to U.K. Participants. Notwithstanding
-------------------------------------------
section 11.2 of the Plan, cash dividends payable on the Company Stock
allocated to a U.K. Participant's Company Stock Account initially shall be
credited to his Other Investments Account. Thereafter, the amounts
allocated to a U.K. Participant's Other Investment Account shall be used to
purchase Company Stock pursuant to section 5.3 of the Plan.
<PAGE>
5. Diversification of Investments. Sections 2.1(kk)(1) and
------------------------------
2.1(ll)(1) shall not apply to U.K. Participants. As a result, any
diversification elections for U.K. Participants shall be effected pursuant
to section 7.9(b) and no elections may be made pursuant to section 7.9(a),
regardless of the effective dates in such sections.
6. Payment of Benefits. Pursuant to section 9.6 of the Plan, all
-------------------
payments of benefits under the Plan to or for the benefit of a U.K.
Participant shall be made in stock, and the value of any partial shares
shall be made in pounds sterling.
7. Rollovers. Notwithstanding section 9.8 of the Plan:
---------
(a) U.K. Participants (and their Beneficiaries) who performed all of
their service outside of the U.S. will not be eligible to make a
direct rollover to an eligible retirement plan.
(b) U.K. Participants (and their Beneficiaries) who performed some
service in the U.S. will be eligible to make a direct rollover to
an Eligible Retirement Plan of only that portion of a
distribution which would be included in the U.K. Participant's
U.S. gross income.
8. Satisfaction of U.K. Income and Employment Tax Liabilities. If a
----------------------------------------------------------
U.K. Participant receives a distribution from the Plan that, pursuant to
U.K. law, subjects the Company to an obligation to withhold income,
employment or similar taxes or fees from the amount of the distribution,
the Committee shall direct the Trustee to withhold from such distribution
an amount sufficient to comply with such withholding obligations. If a
U.K. Participant receives his distribution in the form of both cash and
Company Stock and the amount of cash distributed is not sufficient to allow
the Trustee to withhold the amount sufficient to comply with such
withholding obligations, the Trustee shall liquidate all or a portion of
the Company Stock distributed as is necessary to satisfy such withholding
obligations.
9. Conversion U.S. Dollars into U.K. Pounds Sterling. From time to
-------------------------------------------------
time, it will be necessary to convert U.S. dollars into U.K. pounds
sterling or vice-versa to make allocations to U.K. Participants' Accounts,
to make distributions from such Accounts, to apply certain Code limitations
and to implement various other Plan provisions to U.K. Participants. Such
conversions shall take place at the time specified in the Plan for the
relevant purpose, using the conversion rate specified for such date in the
Wall Street Journal.
IN WITNESS WHEREOF, the Company has caused this amendment to be executed on its
behalf by the undersigned officer this 18th day of May, 1999.
/s/ Martin J. Joyce, Jr.
______________________________
Martin J. Joyce, Jr.
Senior Vice President
<PAGE>
AMENDMENT NUMBER NINE
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"); and
WHEREAS, amendment of the Plan is now considered desirable;
NOW, THEREFORE, by virtue and in exercise of the amending power reserved to the
Company under Section 13.1 of the Plan, and pursuant to the authority delegated
to the undersigned officer by resolution of the Board of Directors dated May 18,
1999, Supplement #1 of the Plan is hereby amended, effective as of January 1,
1999, in the following particulars:
1. Paragraph 2 of Supplement #1 is amended by deleting the third sentence
thereof in its entirety.
2. The following new paragraph 3 is added to Supplement #1, and the current
paragraphs 3 through 9 are renumbered accordingly:
"3. Allocation in Year of Retirement. In addition to the
--------------------------------
circumstances described in Section 7.1 of the Plan, a U.K. Participant
whose employment terminates after attainment of age 50 with at least two
years of Vesting Service and who is entitled to a benefit from one of the
Company's U.K. tax-approved retirement schemes will share in the
allocations described in section 7.1 for the Anniversary Date occurring
with respect to the Plan Year in which employment terminates."
3. Paragraph 9 of Supplement #1 (previously paragraph 8) is amended to read as
follows:
"9. Satisfaction of U.K. Income and Employment Tax Liabilities. If a
----------------------------------------------------------
U.K. Participant receives a distribution from the Plan that, pursuant to
U.K. law, subjects the Company to an obligation to account for tax under
the U.K Pay As You Earn ("PAYE") system, or to withhold or account for
similar income, employment or other taxes or fees relating to the
distribution, the Committee shall direct the Trustee to withhold from such
distribution an amount sufficient to comply with such obligations. If a
U.K. Participant receives his distribution in the form of both cash and
Company Stock and the amount of cash distributed is not sufficient to allow
the Trustee to withhold the amount sufficient to comply with such
withholding obligations, the Trustee shall liquidate all or a portion of
the Company Stock distributed as is necessary to satisfy such withholding
obligations. To the extent the Committee deems it necessary or appropriate
under U.K. law, it may require a U.K participant to consent to such
withholding or liquidation of Company Stock prior to receiving a
distribution, provided that it does so on a uniform and consistent basis."
IN WITNESS WHEREOF, the Company has caused this amendment to be executed on its
behalf by the undersigned officer this 18th day of May, 1999.
/s/ Martin J. Joyce, Jr.
________________________
Martin J. Joyce, Jr.
Senior Vice President
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,274,277
<INT-BEARING-DEPOSITS> 2,757,856
<FED-FUNDS-SOLD> 704,017
<TRADING-ASSETS> 9,101
<INVESTMENTS-HELD-FOR-SALE> 8,300,223
<INVESTMENTS-CARRYING> 501,140
<INVESTMENTS-MARKET> 506,008
<LOANS> 15,005,977
<ALLOWANCE> 151,920
<TOTAL-ASSETS> 30,190,752
<DEPOSITS> 18,280,263
<SHORT-TERM> 7,800,570
<LIABILITIES-OTHER> 857,045
<LONG-TERM> 1,176,440
0
120,000
<COMMON> 189,935
<OTHER-SE> 1,766,499
<TOTAL-LIABILITIES-AND-EQUITY> 30,190,752
<INTEREST-LOAN> 449,881
<INTEREST-INVEST> 189,009
<INTEREST-OTHER> 101,363
<INTEREST-TOTAL> 740,253
<INTEREST-DEPOSIT> 269,062
<INTEREST-EXPENSE> 488,008
<INTEREST-INCOME-NET> 252,245
<LOAN-LOSSES> 5,500
<SECURITIES-GAINS> 118
<EXPENSE-OTHER> 538,149
<INCOME-PRETAX> 296,998
<INCOME-PRE-EXTRAORDINARY> 194,844
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 194,844
<EPS-BASIC> 1.74
<EPS-DILUTED> 1.67
<YIELD-ACTUAL> 2.07
<LOANS-NON> 44,078
<LOANS-PAST> 19,627
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 146,839
<CHARGE-OFFS> 1,289
<RECOVERIES> 869
<ALLOWANCE-CLOSE> 151,920
<ALLOWANCE-DOMESTIC> 151,250
<ALLOWANCE-FOREIGN> 3,662
<ALLOWANCE-UNALLOCATED> 33,008
</TABLE>
<PAGE>
Exhibit 99 (i)
Northern Trust Corporation
Corporate Governance Guidelines
Adopted by the Board of Directors May 18, 1999
A. Composition of the Board of Directors
-------------------------------------
1. Size. In recent years, the Board has had between 12 and 16 members.
----
A size in this range makes the Board large enough to allow for a diversity of
perspectives and backgrounds without being so large as to impede effective
discussion. The quality of the individuals serving and the overall balance of
the Board is more important than the precise number of members, and these
considerations could lead from time to time to a Board outside this range.
2. Independence. A substantial majority of the Board should consist of
------------
directors who are not employed by the Corporation and whose other relationships
with the Corporation are not such that, in the Board's judgment, their
effectiveness as directors would be impaired. The Board would not expect to
have more than one or two employee directors except in unusual circumstances,
such as during a transition in leadership.
3. Retirement. No director may stand for election to the Board after his
----------
or her 70th birthday. It is also expected that employee directors will resign
from the Board at the time they resign or retire from the Corporation.
4. Candidates. The Board as a whole is responsible for selecting
----------
candidates for director. The Corporate Governance Committee, with the active
involvement of the Chief Executive Officer, is responsible for screening and
recommending candidates. In discharging this responsibility, the Committee
periodically evaluates the Board's effectiveness and composition, including
matters such as the business and professional backgrounds, age, current
employment, community service and other board service of members as well as
racial, ethnic and gender diversity. Although the Committee will consider
length of service in
<PAGE>
recommending candidates for re-election, the Board does not believe that
adopting a set term limit for directors serves the interests of the Corporation.
5. Leadership. The Board should remain free to configure leadership of
----------
the Board and the Corporation in the way that best serves the Corporation's
interests at the time and, accordingly, has no fixed policy with respect to
combining or separating the offices of Chairman and CEO.
6. Compensation. Director compensation should be set by the Board. The
------------
Compensation and Benefits Committee, with the assistance of the Corporation's
staff, reviews the amount and composition of director compensation from time to
time and makes recommendations to the Board when it concludes changes are
needed.
B. Meeting Preparation and Procedures.
----------------------------------
1. Agendas. The Chairman of the Board is responsible for setting and
-------
circulating in advance an agenda for each meeting. Any director may suggest
items for inclusion on the agenda. The Board expects that meeting agendas will
include on a regular basis a review of financial performance and a review of the
Corporation's business strategies and practices.
2. Meeting Materials. Materials with respect to matters on which action
-----------------
is expected to be taken are circulated to the Board at least several days in
advance of the meeting whenever possible. Financial reports, certain Committee
minutes and other background materials are also circulated in advance of the
meeting and during months when the Board is not scheduled to meet.
3. Access to Employees. The Board expects that senior officers of the
-------------------
Corporation will regularly attend Board and Committee meetings, present
proposals and otherwise assist in the work of the Board. Members of the Board
have direct access to any of the Corporation's employees.
C. Committees of the Board
-----------------------
1. Numbers and Composition of Committees. The Corporation currently has
-------------------------------------
six standing committees: Audit, Business Risk, Business Strategy,
<PAGE>
Compensation and Benefits, Corporate Governance, and Executive. Employees of the
Corporation do not serve on any Committee other than the Executive Committee,
although the staff work needed for each Committee is coordinated by a designated
officer. The responsibilities of each Committee and any membership requirements
are contained in the Corporation's by-laws. The Corporation complies with all
Nasdaq Stock Market and regulatory requirements concerning the membership of
certain Committees, including those with respect to independence. The Corporate
Governance Committee reviews the committee structure of the Board and the
membership of the various committees at least annually and makes recommendations
for any changes to the Board.
2. Committee Meeting Procedures. In consultation with the Chairman of
----------------------------
the Board and the executive officer responsible for supporting each Committee,
the Committee Chairman determines the frequency of meetings and the agenda for
each meeting. The agenda and any background materials are circulated in advance
whenever practical. The Committee Chairmen report to the full Board after each
meeting, and minutes of the Audit, Business Risk, Business Strategy and
Corporate Governance Committees are circulated to the full Board.
D. Role with Respect to Management
-------------------------------
1. Evaluation of Senior Officers. A key responsibility of the Board is
-----------------------------
to monitor the performance of the CEO and, in consultation with the CEO, the
performance of other senior officers. The Compensation and Benefits Committee
conducts a formal review annually and reports to the Board.
2. Succession Planning. The CEO discusses succession planning annually
-------------------
with the Compensation and Benefits Committee and, together with the Chairman of
that Committee, reviews the discussion with the Board.
3. Communication. Management speaks for the Corporation. Inquiries from
-------------
institutional investors, the press and others should be referred to the CEO or
other appropriate officers. Individual directors may from time to time meet
with various constituencies of the Corporation, but the Board expects that this
would be done only with its concurrence or that of management.
