================================================================================ 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 September 30, 1997 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF [_] THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from_____________to_______ Commission File Number 0-5965 NORTHERN TRUST CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 36-2723087 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 50 SOUTH LA SALLE STREET CHICAGO, ILLINOIS 60675 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (312)630-6000 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 [_] 111,550,097 Shares - $1.66 2/3 Par Value (Shares of Common Stock Outstanding on September 30, 1997) ================================================================================
<TABLE> <CAPTION> PART I - FINANCIAL INFORMATION Item 1. Financial Statements CONSOLIDATED BALANCE SHEET NORTHERN TRUST CORPORATION September 30 December 31 September 30 ------------ ----------- ------------ ($ In Millions) 1997 1996 1996 - ------------------------------------------------------------------------ ------------ ----------- ------------ <S> <C> <C> <C> Assets Cash and Due from Banks $ 2,293.6 $ 1,292.5 $ 1,068.6 Federal Funds Sold and Securities Purchased under Agreements to Resell 2,762.4 1,022.6 1,026.8 Time Deposits with Banks 2,256.8 2,060.0 1,312.3 Other Interest-Bearing 45.5 114.3 39.3 Securities Available for Sale 5,438.0 4,311.7 5,318.2 Held to Maturity (Fair value - $493.1 at September 1997, $518.9 at December 1996, $520.0 at September 1996) 475.8 498.4 500.6 Trading Account 10.9 4.8 9.0 - ------------------------------------------------------------------------ ------------ ----------- ------------ Total Securities 5,924.7 4,814.9 5,827.8 - ------------------------------------------------------------------------ ------------ ----------- ------------ Loans and Leases Commercial and Other 7,235.9 6,379.9 6,454.9 Residential Mortgages 4,987.8 4,557.5 4,454.3 - ------------------------------------------------------------------------ ------------ ----------- ------------ Total Loans and Leases (Net of unearned income - $146.0 at September 1997, $109.1 at December 1996, $111.6 at September 1996) 12,223.7 10,937.4 10,909.2 - ------------------------------------------------------------------------ ------------ ----------- ------------ Reserve for Credit Losses (148.0) (148.3) (147.4) Buildings and Equipment 312.4 291.5 288.8 Customers' Acceptance Liability 47.0 44.7 38.5 Trust Security Settlement Receivables 302.4 362.3 236.4 Other Assets 898.7 816.4 759.8 - ------------------------------------------------------------------------ ------------ ----------- ------------ Total Assets $26,919.2 $21,608.3 $21,360.1 - ------------------------------------------------------------------------ ------------ ----------- ------------ Liabilities Deposits Demand and Other Noninterest-Bearing $ 3,189.7 $ 3,476.7 $ 3,266.6 Savings and Money Market Deposits 3,712.3 3,880.1 3,711.0 Savings Certificates 2,039.7 2,056.3 2,035.7 Other Time 743.9 462.7 511.6 Foreign Offices - Demand 526.2 410.7 276.9 - Time 5,631.6 3,509.7 3,636.8 - ------------------------------------------------------------------------ ------------ ----------- ------------ Total Deposits 15,843.4 13,796.2 13,438.6 Federal Funds Purchased 817.9 653.0 430.1 Securities Sold Under Agreements to Repurchase 834.6 966.1 738.2 Commercial Paper 137.9 149.0 153.0 Other Borrowings 5,299.4 3,142.1 3,976.6 Senior Notes 885.0 305.0 205.0 Long-Term Debt (Qualifying as risk-based capital - $315.0 at September 1997, $334.6 at December and September 1996) 443.7 427.8 432.0 Floating Rate Capital Securities (Qualifies as risk-based capital) 267.4 - - Liability on Acceptances 47.0 44.7 38.5 Other Liabilities 645.4 580.3 431.3 - ------------------------------------------------------------------------ ------------ ----------- ------------ Total Liabilities 25,221.7 20,064.2 19,843.3 - ------------------------------------------------------------------------ ------------ ----------- ------------ Stockholders' Equity Preferred Stock 120.0 120.0 120.0 Common Stock, $1.66 2/3 Par Value; Authorized 280,000,000 shares at September 1997, and 140,000,000 shares at December 1996 and September 1996; Outstanding 111,550,097 at September 1997, 111,247,732 at December 1996 and 55,905,987 at September 1996 189.9 189.9 95.0 Capital Surplus 225.3 231.7 327.8 Retained Earnings 1,274.3 1,110.2 1,064.1 Net Unrealized Gain (Loss) on Securities Available for Sale 2.1 1.6 (.2) Common Stock Issuable - Performance Plan 11.7 10.4 10.4 Deferred Compensation - ESOP and Other (37.5) (35.5) (37.1) Treasury Stock - (at cost, 2,410,665 shares at September 1997, 2,712,780 shares at December 1996, and 1,073,701 shares at September 1996) (88.3) (84.2) (63.2) - ------------------------------------------------------------------------ ------------ ----------- ------------ Total Stockholders' Equity 1,697.5 1,544.1 1,516.8 - ------------------------------------------------------------------------ ------------ ----------- ------------ Total Liabilities and Stockholders' Equity $26,919.2 $21,608.3 $21,360.1 - ------------------------------------------------------------------------ ------------ ----------- ------------ </TABLE> 2
<TABLE> <CAPTION> CONSOLIDATED STATEMENT OF INCOME NORTHERN TRUST CORPORATION Third Quarter Nine Months Ended September 30 Ended September 30 ------------------------- ------------------------- ($ In Millions Except Per Share Information) 1997 1996 1997 1996 - -------------------------------------------------------------------------- ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> Interest Income Loans and Leases $203.3 $176.9 $582.8 $510.1 Securities Available For Sale 80.4 79.2 236.1 247.7 Held to Maturity 7.6 8.0 23.3 24.5 Trading Account .1 .1 .4 .4 - -------------------------------------------------------------------------- ----------- ----------- ----------- ----------- Total Securities 88.1 87.3 259.8 272.6 - -------------------------------------------------------------------------- ----------- ----------- ----------- ----------- Time Deposits with Banks 34.0 20.0 92.7 63.7 Federal Funds Sold and Securities Purchased under Agreements to Resell and Other Interest-Bearing 13.8 5.7 35.7 14.5 - -------------------------------------------------------------------------- ----------- ----------- ----------- ----------- Total Interest Income 339.2 289.9 971.0 860.9 - -------------------------------------------------------------------------- ----------- ----------- ----------- ----------- Interest Expense Deposits 136.4 112.7 375.0 333.8 Federal Funds Purchased 19.5 22.5 58.1 73.7 Securities Sold under Agreements to Repurchase 21.5 25.8 60.8 79.9 Commercial Paper 2.0 1.9 5.8 5.8 Other Borrowings 25.4 18.9 92.6 50.4 Senior Notes 12.2 2.8 19.4 10.3 Long-Term Debt 8.2 6.5 24.2 19.3 Floating Rate Capital Securities 4.4 - 10.2 - - -------------------------------------------------------------------------- ----------- ----------- ----------- ----------- Total Interest Expense 229.6 191.1 646.1 573.2 - -------------------------------------------------------------------------- ----------- ----------- ----------- ----------- Net Interest Income 109.6 98.8 324.9 287.7 Provision for Credit Losses 5.0 2.5 6.0 11.5 - -------------------------------------------------------------------------- ----------- ----------- ----------- ----------- Net Interest Income after Provision for Credit Losses 104.6 96.3 318.9 276.2 - -------------------------------------------------------------------------- ----------- ----------- ----------- ----------- Noninterest Income Trust Fees 177.4 148.2 504.0 441.8 Treasury Management Fees 14.8 13.9 44.4 41.4 Foreign Exchange Trading Profits 33.5 15.1 77.8 42.7 Security Commissions and Trading Income 6.9 5.0 19.4 17.7 Other Operating Income 22.0 12.7 40.9 34.8 Investment Security Gains (Losses) .1 (.1) .7 .3 - -------------------------------------------------------------------------- ----------- ----------- ----------- ----------- Total Noninterest Income 254.7 194.8 687.2 578.7 - -------------------------------------------------------------------------- ----------- ----------- ----------- ----------- Income before Noninterest Expenses 359.3 291.1 1,006.1 854.9 - -------------------------------------------------------------------------- ----------- ----------- ----------- ----------- Noninterest Expenses Salaries 116.4 92.4 325.4 270.1 Pension and Other Employee Benefits 20.1 18.5 61.7 57.3 Occupancy Expense 17.7 15.5 50.2 45.5 Equipment Expense 17.6 14.2 47.4 42.3 Other Operating Expenses 62.9 51.2 173.5 153.2 - -------------------------------------------------------------------------- ----------- ----------- ----------- ----------- Total Noninterest Expenses 234.7 191.8 658.2 568.4 - -------------------------------------------------------------------------- ----------- ----------- ----------- ----------- Income before Income Taxes 124.6 99.3 347.9 286.5 Provision for Income Taxes 43.6 32.8 119.8 95.1 - -------------------------------------------------------------------------- ----------- ----------- ----------- ----------- Net Income $ 81.0 $ 66.5 $228.1 $191.4 - -------------------------------------------------------------------------- ----------- ----------- ----------- ----------- Net Income Applicable to Common Stock $ 79.7 $ 65.3 $224.4 $187.7 - -------------------------------------------------------------------------- ----------- ----------- ----------- ----------- Net Income Per Common Share - Primary $ .70 $ .57 $ 1.96 $ 1.63 - Fully Diluted .69 .57 1.95 1.62 - -------------------------------------------------------------------------- ----------- ----------- ----------- ----------- Average Number of Common Shares Outstanding - Primary 114,719,797 114,537,180 114,618,221 114,801,078 - Fully Diluted 115,132,817 114,842,294 115,196,488 115,594,068 - -------------------------------------------------------------------------- ----------- ----------- ----------- ----------- </TABLE> 3
<TABLE> <CAPTION> CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY NORTHERN TRUST CORPORATION Nine Months Ended September 30 ---------------------------- (In Millions) 1997 1996 - ------------------------------------------------------------------------------------ -------------- ----------- <S> <C> <C> Preferred Stock Balance at January 1 $ 120.0 $ 170.0 Conversion of Preferred Stock, Series E - (50.0) - ------------------------------------------------------------------------------------ -------------- ----------- Balance at September 30 120.0 120.0 - ------------------------------------------------------------------------------------ -------------- ----------- Common Stock Balance at January 1 189.9 93.6 Conversion of Preferred Stock, Series E - 1.4 - ------------------------------------------------------------------------------------ -------------- ----------- Balance at September 30 189.9 95.0 - ------------------------------------------------------------------------------------ -------------- ----------- Capital Surplus Balance at January 1 231.7 306.1 Stock Issued - Incentive Plan and Awards (6.4) (7.5) Conversion of Preferred Stock, Series E - 29.2 - ------------------------------------------------------------------------------------ -------------- ----------- Balance at September 30 225.3 327.8 - ------------------------------------------------------------------------------------ -------------- ----------- Retained Earnings Balance at January 1 1,110.2 928.8 Net Income 228.1 191.4 Dividends Declared on Common Stock (60.3) (52.5) Dividends Declared on Preferred Stock (3.7) (3.6) - ------------------------------------------------------------------------------------ ------------- ----------- Balance at September 30 1,274.3 1,064.1 - ------------------------------------------------------------------------------------ -------------- ----------- Net Unrealized Gain (Loss) on Securities Available for Sale Balance at January 1 1.6 2.6 Unrealized Gain (Loss), net .5 (2.8) - ------------------------------------------------------------------------------------ -------------- ----------- Balance at September 30 2.1 (.2) - ------------------------------------------------------------------------------------ -------------- ----------- Common Stock Issuable - Performance Plan Balance at January 1 10.4 14.7 Stock Issuable, net of Stock Issued 1.3 (4.3) - ------------------------------------------------------------------------------------ -------------- ----------- Balance at September 30 11.7 10.4 - ------------------------------------------------------------------------------------ -------------- ----------- Deferred Compensation - ESOP and Other Balance at January 1 (35.5) (39.4) Compensation Deferred (7.8) (2.3) Compensation Amortized 5.8 4.6 - ------------------------------------------------------------------------------------ -------------- ----------- Balance at September 30 (37.5) (37.1) - ------------------------------------------------------------------------------------ -------------- ----------- Treasury Stock Balance at January 1 (84.2) (23.8) Stock Options and Awards 44.5 36.3 Stock Purchased (48.6) (94.9) Conversion of Preferred Stock, Series E - 19.2 - ------------------------------------------------------------------------------------ -------------- ----------- Balance at September 30 (88.3) (63.2) - ------------------------------------------------------------------------------------ -------------- ----------- Total Stockholders' Equity at September 30 $1,697.5 $1,516.8 - ------------------------------------------------------------------------------------ -------------- ----------- </TABLE> 4
CONSOLIDATED STATEMENT OF CASH FLOWS NORTHERN TRUST CORPORATION <TABLE> <CAPTION> Nine Months Ended September 30 ---------------------------- (In Millions) 1997 1996 - ------------------------------------------------------------------------------------------- -------------- ------------ <S> <C> <C> Cash Flows From Operating Activities: Net Income $ 228.1 $ 191.4 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Provision for Credit Losses 6.0 11.5 Depreciation on Buildings and Equipment 37.5 35.7 (Increase) Decrease in Interest Receivable (13.0) 12.7 Increase in Interest Payable 25.0 8.1 Amortization and Accretion of Securities and Unearned Income (129.7) (76.0) Amortization of Software, Goodwill and Other Intangibles 39.3 32.8 Net (Increase) Decrease in Trading Account Securities (6.1) 79.9 Other Noncash, net (46.6) (89.0) - ------------------------------------------------------------------------------------------- -------------- ------------ Net Cash Provided by Operating Activities 140.5 207.1 - ------------------------------------------------------------------------------------------- -------------- ------------ Cash Flows From Investing Activities: Net Increase in Federal Funds Sold and Securities Purchased under Agreements to Resell (1,739.8) (864.7) Net (Increase) Decrease in Time Deposits with Banks (196.8) 255.3 Net Decrease in Other Interest-Bearing Assets 68.8 15.2 Purchases of Securities-Held to Maturity (120.2) (742.0) Proceeds from Maturity and Redemption of Securities-Held to Maturity 145.3 782.5 Purchases of Securities-Available for Sale (52,648.3) (27,751.7) Proceeds from Sale, Maturity and Redemption of Securities-Available for Sale 51,688.5 27,645.3 Net Increase in Loans and Leases (1,332.2) (1,037.8) Purchases of Buildings and Equipment (38.4) (43.0) Net Decrease in Trust Security Settlement Receivables 59.9 90.7 Other, net (1.2) (15.8) - ------------------------------------------------------------------------------------------- -------------- ------------ Net Cash Used in Investing Activities (4,114.4) (1,666.0) - ------------------------------------------------------------------------------------------- -------------- ------------ Cash Flows From Financing Activities: Net Increase in Deposits 2,047.2 950.4 Net Increase (Decrease) in Federal Funds Purchased 164.9 (1,870.0) Net Decrease in Securities Sold under Agreements to Repurchase (131.5) (1,120.5) Net Increase (Decrease) in Commercial Paper (11.1) 6.3 Net Increase in Short-Term Other Borrowings 2,259.6 3,163.1 Proceeds from Term Federal Funds Purchased 1,156.8 1,611.6 Repayments of Term Federal Funds Purchased (1,259.1) (1,674.0) Proceeds from Senior Notes & Long-Term Debt 803.1 801.5 Repayments of Senior Notes & Long-Term Debt (227.2) (516.1) Proceeds from Floating Rate Capital Securities 267.3 - Treasury Stock Purchased (44.8) (90.5) Net Proceeds from Stock Options 10.5 8.4 Cash Dividends Paid on Common and Preferred Stock (63.9) (56.0) Other, net 3.2 4.4 - ------------------------------------------------------------------------------------------- -------------- ------------ Net Cash Provided by Financing Activities 4,975.0 1,218.6 - ------------------------------------------------------------------------------------------- -------------- ------------ Increase (Decrease) in Cash and Due from Banks 1,001.1 (240.3) Cash and Due from Banks at Beginning of Year 1,292.5 1,308.9 - ------------------------------------------------------------------------------------------- -------------- ------------ Cash and Due from Banks at September 30 $ 2,293.6 $ 1,068.6 - ------------------------------------------------------------------------------------------- -------------- ------------ Schedule of Noncash Investing and Financing Activities: Conversion of Preferred Stock, Series E to Common Stock - $ 49.7 Building and Capital lease Obligation $ 20.0 - Supplemental Disclosures of Cash Flow Information: Interest Paid on Deposits and Short- and Long-Term Borrowings $ 621.2 $ 565.1 Income Taxes Paid 65.4 58.4 - ------------------------------------------------------------------------------------------- -------------- ------------ </TABLE> 5
Notes to Consolidated Financial Statements 1. Basis of Presentation - The consolidated financial statements include the accounts of Northern Trust Corporation and its subsidiaries ("Northern Trust"), all of which are wholly owned. Significant intercompany balances and transactions have been eliminated. The consolidated financial statements as of September 30, 1997 and 1996 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 the Notes to Consolidated Financial Statements in the 1996 Annual Report to Stockholders. Per share data and average shares outstanding for 1996 have been restated to give effect to the two-for-one stock split effected by means of a 100% stock distribution on December 9, 1996. 2. Securities - The following table summarizes the book and fair values of securities: <TABLE> <CAPTION> September 30, 1997 December 31, 1996 September 30, 1996 ----------------------------------------------------------------------------------- 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 $ 81.0 $ 81.0 $ 73.4 $ 73.5 $ 121.9 $ 121.9 Obligations of States Political Subdivisions 285.7 304.0 315.9 336.3 330.1 349.5 Federal Agency 14.2 14.3 18.2 18.2 18.2 18.2 Other 94.9 93.8 90.9 90.9 30.4 30.4 - --------------------------------------------------------------------------------------------------------------- Subtotal 475.8 493.1 498.4 518.9 500.6 520.0 - --------------------------------------------------------------------------------------------------------------- Available for Sale U.S. Government 698.7 698.7 906.7 906.7 1,146.7 1,146.7 Obligations of States and Political Subdivisions 119.7 119.7 117.0 117.0 80.2 80.2 Federal Agency 4,496.3 4,496.3 3,096.9 3,096.9 3,945.5 3,945.5 Preferred Stock 91.5 91.5 139.4 139.4 89.7 89.7 Other 31.8 31.8 51.7 51.7 56.1 56.1 - --------------------------------------------------------------------------------------------------------------- Subtotal 5,438.0 5,438.0 4,311.7 4,311.7 5,318.2 5,318.2 - --------------------------------------------------------------------------------------------------------------- Trading Account 10.9 10.9 4.8 4.8 9.0 9.0 - --------------------------------------------------------------------------------------------------------------- Total Securities $5,924.7 $5,942.0 $4,814.9 $4,835.4 $5,827.8 $5,847.2 - --------------------------------------------------------------------------------------------------------------- </TABLE> 6
<TABLE> <CAPTION> Reconciliation of Book Values to Fair Values of Securities Held to Maturity September 30, 1997 - ---------------------------------------------------------------------------------------------------------------- Gross Unrealized Book ----------------------- Fair (In Millions) Value Gains Losses Value - ---------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> U.S. Government $ 81.0 $ - $ - $ 81.0 Obligations of States and Political Subdivisions 285.7 18.4 .1 304.0 Federal Agency 14.2 .1 - 14.3 Other 94.9 - 1.1 93.8 - ---------------------------------------------------------------------------------------------------------------- Total $ 475.8 $ 18.5 $ 1.2 $ 493.1 - ---------------------------------------------------------------------------------------------------------------- </TABLE> <TABLE> <CAPTION> Reconciliation of Amortized Cost to Fair Values of Securities Available for Sale September 30, 1997 - ---------------------------------------------------------------------------------------------------------------- Gross Unrealized Amortized ------------------------ Fair (In Millions) Cost Gains Losses Value - ---------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> U.S. Government $ 697.6 $ 1.3 $ .2 $ 698.7 Obligations of States and Political Subdivisions 114.5 5.2 - 119.7 Federal Agency 4,496.2 2.0 1.9 4,496.3 Preferred Stock 91.6 - .1 91.5 Other 32.4 - .6 31.8 - ---------------------------------------------------------------------------------------------------------------- Total $5,432.3 $ 8.5 $ 2.8 $5,438.0 - ---------------------------------------------------------------------------------------------------------------- </TABLE> Unrealized gains and losses on off-balance sheet financial instruments used to hedge available for sale securities totaled $1.0 million and $3.3 million, respectively, as of September 30, 1997. At September 30, 1997, stockholders' equity included a credit of $2.1 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 $8.5 billion on September 30, 1997, $5.5 billion on December 31, 1996 and $6.4 billion on September 30, 1996. 4. Contingent Liabilities - Standby letters of credit outstanding were $1.5 billion on September 30, 1997, $1.3 billion on December 31, 1996 and $1.4 billion on September 30, 1996. 7
5. Loans and Leases - The following table summarizes amounts outstanding in selected loan categories: <TABLE> <CAPTION> (In Millions) September 30, 1997 December 31, 1996 September 30, 1996 - ---------------------------------------------------------------------------------------------------------------- Domestic <S> <C> <C> <C> Residential Real Estate $ 4,987.8 $ 4,557.5 $ 4,454.3 Commercial and Industrial 3,848.2 3,161.4 3,391.0 Broker 171.5 389.1 276.9 Commercial Real Estate 617.1 557.7 597.7 Consumer 1,141.9 989.8 859.6 Other 615.5 632.1 539.6 Lease Financing 311.8 267.8 243.3 - ---------------------------------------------------------------------------------------------------------------- Total Domestic 11,693.8 10,555.4 10,362.4 International 529.9 382.0 546.8 - ---------------------------------------------------------------------------------------------------------------- Total Loans and Leases $12,223.7 $10,937.4 $10,909.2 - ---------------------------------------------------------------------------------------------------------------- </TABLE> At September 30, 1997, other domestic and international loans included $752.5 million of overnight trust-related advances primarily in connection with next day security settlements, compared with $765.3 million at December 31, 1996 and $688.3 million at September 30, 1996. At September 30, 1997, nonperforming loans totaled $46.3 million. Included in this amount were loans with a recorded investment of $43.3 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 $10.0 million had no portion of the reserve for credit losses allocated to them, while $33.3 million had an allocated reserve of $5.8 million. For the third quarter of 1997, the total recorded investment in impaired loans averaged $49.3 million. Total interest income recorded on impaired loans for the quarter ended September 30, 1997 was $43 thousand. At September 30, 1996, nonperforming loans totaled $33.3 million and included $29.7 million of impaired loans. Of these impaired loans, $22.5 million had no reserve allocation while $7.2 million had an allocated reserve of $.6 million. Impaired loans for the third quarter of 1996 averaged $32.6 million with $28 thousand of interest income recognized. 8
6. Reserve for Credit Losses - Changes in the reserve for credit losses were as follows: <TABLE> <CAPTION> Nine Months Ended September 30 ------------------ (In Millions) 1997 1996 - -------------------------------------------------------------------------------------------- <S> <C> <C> Balance at Beginning of Period $148.3 $147.1 Charge-Offs Commercial Real Estate (.6) (6.2) Other (8.4) (6.2) International -- (.2) - -------------------------------------------------------------------------------------------- Total Charge-Offs (9.0) (12.6) - -------------------------------------------------------------------------------------------- Recoveries 2.7 1.4 - -------------------------------------------------------------------------------------------- Net Charge-Offs (6.3) (11.2) Provision for Credit Losses 6.0 11.5 - -------------------------------------------------------------------------------------------- Balance at End of Period $148.0 $147.4 - -------------------------------------------------------------------------------------------- </TABLE> 7. Floating Rate Capital Securities - The following table summarizes Floating Rate Capital Securities outstanding: <TABLE> <CAPTION> (In Millions) Book Value - ---------------------------------------------------------------------------------------------------------------- September 30 December 31 September 30 1997 1996 1996 ------------ ----------- ------------ <S> <C> <C> <C> $150 Million Series A Floating Rate Capital Securities due January 15, 2027 $148.6 -- -- $120 Million Series B Floating Rate Capital Securities due April 15, 2027 118.8 -- -- ------------ ----------- ------------ $267.4 -- -- ============ =========== ============ </TABLE> The Floating Rate Capital Securities were issued through wholly-owned statutory business trusts. The sole asset of the trusts are Subordinated Debentures of Northern Trust Corporation which have the same interest rates and maturity dates as the corresponding distribution rates and redemption dates of the Floating Rate Capital Securities. The Series A Securities were issued at a discount to yield 60.5 basis points above the three-month London Interbank Offered Rate (LIBOR), while the Series B Securities were issued at a discount to yield 67.9 basis points above the three-month LIBOR. Both Series A and B Securities qualify as Tier 1 capital for regulatory purposes. 8. Earnings Per Share - In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (SFAS) No. 128, "Earnings Per Share". This new statement establishes standards for computing and presenting earnings per share (EPS) and applies to entities with publicly held common stock or potential common stock. SFAS No. 128 replaces the presentation of primary EPS with a presentation of basic EPS. Basic EPS is 9
computed by dividing income available to common stockholders by the weighted- average number of common shares outstanding for the period. This approach differs from the current methodology for calculating primary net income per share which also considers common stock equivalents, such as stock options and stock awards. SFAS No. 128 also requires the presentation of diluted EPS, which is computed similarly to fully diluted EPS pursuant to Accounting Principles Board Opinion No. 15. SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods. It requires the restatement of all prior period EPS data presented. The following data, which is presented for comparative purposes only, shows the pro forma effect on EPS of adopting SFAS No. 128: <TABLE> <CAPTION> Third Quarter Ended Nine Months Ended September 30 September 30 ----------------------------------------- 1997 1996 1997 1996 - --------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Earnings Per Share (as reported) Primary $.70 $.57 $1.96 $1.63 Fully Diluted .69 .57 1.95 1.62 - --------------------------------------------------------------------------------------------- Pro Forma Earnings Per Share (computed according to SFAS No. 128) Basic $.72 $.58 $2.02 $1.67 Diluted .70 .57 1.96 1.63 - --------------------------------------------------------------------------------------------- </TABLE> 9. Other Operating Income - Other operating income in the third quarter of 1997 included $10.0 million resulting from a settlement reached with Illinois banking regulators concerning the disposition of certain unclaimed balances accumulated over a number of years. 10. Acquisition - In October 1997, Northern Trust entered into an agreement to acquire ANB Investment Management and Trust Company (ANBIMC) from First Chicago NBD Corporation for approximately $50 million. ANBIMC is a leading manager of index funds with approximately $28 billion of assets under management at June 30, 1997. The transaction will be accounted for under the purchase method of accounting and is expected to close in the fourth quarter of 1997. 10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THIRD QUARTER EARNINGS HIGHLIGHTS Net income per common share on a fully diluted basis increased 21% to a record $.69 for the third quarter, up from $.57 earned a year ago. Net income increased 22% to a record $81.0 million from the $66.5 million earned in the third quarter of last year. This earnings performance produced an annualized return on average common equity (ROE) of 20.68% versus 18.93% reported last year, and an annualized return on average assets (ROA) of 1.33% versus 1.26% in 1996. Total recurring revenues stated on a fully taxable equivalent basis increased 20% in the quarter driven by record trust fees and foreign exchange trading profits while noninterest expenses, excluding certain special charges, increased 18%. The 21% earnings per share growth and 20.68% ROE exceeded Northern Trust's strategic financial targets. The productivity ratio, which is derived by dividing total taxable equivalent revenue by noninterest expenses, was 159% compared to Northern Trust's recently increased target of 160%. Noninterest Income Noninterest income increased 31% and totaled $254.7 million for the quarter, accounting for 68% of total taxable equivalent revenue. Trust fees of $177.4 million increased 20% or $29.2 million over the like period of 1996, and represented 70% of noninterest income and 48% of total taxable equivalent revenue. This fee growth was driven by new business, increased transaction volumes and higher market values of trust assets administered. Trust assets under administration exceeded $1 trillion for the first time at September 30, 1997 increasing 40% or $289.4 billion from $722.7 billion a year ago. At June 30, 1997 trust assets under administration totaled $898.4 billion. Trust fees are based on the market value of assets managed and administered, the volume of transactions, securities lending volume and spreads, and fees for other services rendered. Asset-based fees are typically determined on a sliding scale so that as the value of a client portfolio grows in size Northern Trust receives a smaller percentage of the increasing value as fee income. Therefore, market value or other changes in a portfolio's size do not typically have a proportionate impact on the level of trust fees. In addition, Corporate and Institutional Services (C&IS) trust relationships are increasingly priced to reflect earnings from activities such as custody-related deposits and foreign exchange trading which are not included in trust fees. 11
Noninterest Income (continued) Trust fees from Personal Financial Services (PFS) increased 19% from the prior year level of $73.6 million and totaled $87.5 million for the third quarter, reflecting strong growth in new business throughout Northern Trust's five-state network of PFS offices and favorable equity markets. The PFS Wealth Management Group, which administers significant family-asset pools nationwide, continued to achieve excellent performance, with trust fees increasing 32% to $7.9 million, and now administers $27.8 billion of trust assets. Total personal trust assets under administration increased $20.2 billion from the prior year and $5.3 billion since June 30, 1997, and totaled $101.0 billion at September 30, 1997, exceeding $100 billion for the first time. Of this amount, $59.0 billion was under management compared to $47.2 billion one year ago and $56.4 billion at June 30, 1997. During the third quarter, Northern Trust expanded its Arizona presence by opening a northwest Tucson office, the seventh location in that state. With the addition of this new office, Northern Trust's national network of Personal Financial Services offices includes 62 locations in Illinois, Florida, California, Arizona and Texas. Trust fees from C&IS increased 21% to $89.9 million from $74.6 million in the year-ago quarter. These fees are derived from a full range of custody, investment and advisory services rendered to retirement and other asset pools of corporate and institutional clients worldwide, and all of these services contributed to the third quarter fee growth. Securities lending continued to achieve outstanding results, with fees increasing 47% from the prior year quarter to $18.0 million. Fees from investment management services, including the activities of Northern Trust Global Advisors, Inc., were also strong, increasing 22% from last year's third quarter. C&IS trust assets under administration grew $269.2 billion or 42% over last year and $108.4 billion since June 30, 1997, and now total $911.1 billion. Of this amount, $105.5 billion is managed by Northern Trust, compared to $77.1 billion one year ago and $102.0 billion at June 30, 1997. Trust assets under administration included approximately $126 billion of global custody assets. In early October, Northern Trust announced an agreement to acquire ANB Investment Management and Trust Company, a leading manager of index funds, from First Chicago NBD Corporation for approximately $50 million. This firm had assets under management of approximately $28 billion at June 30, 1997 and will complement Northern Trust's well-established and growing investment management business. Foreign exchange trading profits set another record, increasing 122% to $33.5 million from $15.1 million in the same quarter last year. The record profits reflect both increased cross-border trading volumes as Northern Trust's global custody assets continue to grow and volatility in the currency markets, particularly in the southeastern Asia region. 12
Noninterest Income (continued) Fees generated from treasury management services were $14.8 million, up from $13.9 million in the comparable quarter last year. Total treasury management revenues from both fees and the computed value of compensating deposit balances increased 4% from the third quarter of 1996 to $22.7 million, reflecting the continued growth in new business from both new and existing clients. Security commissions and trading income totaled $6.9 million compared with $5.0 million reported in the third quarter of 1996. The increase primarily reflects strong growth in security brokerage activities. Other operating income totaled $22.0 million for the quarter compared with $12.7 million reported in the third quarter of 1996. Included in this total was $10.0 million resulting from a settlement reached with Illinois banking regulators concerning the disposition of certain unclaimed balances accumulated over a number of years. Other operating income, excluding this nonrecurring item, consisted primarily of loan, letter of credit and deposit-related service fees, and totaled $12.0 million for the quarter, 6% lower than the prior year. This decline was due primarily to nonrecurring items recorded in last year's third quarter which included fees from the renegotiation of a treasury management services contract and gains recorded from the disposition of securities received in a prior year loan restructuring. Net Interest Income Net interest income for the quarter totaled $109.6 million, 11% higher than the $98.8 million reported in the third quarter of 1996. 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 third quarter was $117.6 million, up 10% from the $107.2 million reported in 1996. The increase in net interest income reflects growth in earning assets and higher levels of noninterest-related funds, driven by increases in both demand deposits and common equity. The net interest margin declined to 2.14% from 2.26% reported in the year-ago quarter. The decrease in the net interest margin is attributable to a higher proportion of low-spread money market assets and narrowing spreads earned on federal agency securities due to the flattening of the yield curve. Earning assets for the third quarter averaged $21.8 billion, up 15% from the $18.9 billion average for the same quarter of 1996. The $2.9 billion growth in average earning assets was concentrated in the loan portfolio, which increased 14% to average $12.0 billion, and in money market assets, which increased $1.5 billion on average from the prior year level. 13
Net Interest Income (continued) The loan growth was concentrated predominantly in the domestic portfolio. Residential mortgage loans continued to account for the largest portion of the domestic growth, increasing 12% to average $4.9 billion, comprising 41% of the total loan portfolio. Commercial and industrial loans averaged $3.6 billion during the third quarter compared to $3.4 billion in the prior year quarter. Money market assets increased from $2.1 billion in last year's third quarter to average $3.6 billion in the current quarter, principally driven by a higher level of foreign office time deposits resulting from growth in global custody activities, and the more active short-term investment of noninterest-bearing balances previously held with global subcustodians. The securities portfolio remained virtually unchanged at $6.2 billion on average for the quarter. Funding for the growth in earning assets came from several sources. Total interest-bearing deposits averaged $11.9 billion, up 17% or $1.7 billion from the third quarter of 1996. This growth came principally from foreign office time deposits (up $1.2 billion), savings and money market deposits (up $262 million), and other time deposits (up $248 million). The increase in foreign office time deposits resulted primarily from growth in global custody activity. Other interest-related funds grew 11% resulting from the issuance of senior medium-term notes and $270 million of Floating Rate Capital Securities. Noninterest-related funds increased 19% to average $3.4 billion, due to strong demand deposit growth and a $160 million increase in common stockholders' equity resulting from retained earnings. Provision for Credit Losses The provision for credit losses of $5.0 million increased from $2.5 million reported in the third quarter of 1996. For a discussion of the provision and reserve for credit losses, refer to the Asset Quality section. Noninterest Expenses Noninterest expenses totaled $234.7 million for the quarter and included $8.9 million of technology-related special charges. Of these charges, $5.4 million were for Year 2000-related costs, including the purchase of software programming tools and the effect of replacing certain software that is not Year 2000 compliant. Another $3.5 million in charges were incurred for the planned relocation of the computer data facility to Northern Trust's new technology center located near its Chicago operations building. These costs are primarily reflected in other operating and equipment expenses. Excluding these charges, expenses increased $34.0 million or 18% from the year- ago quarter. The expense growth resulted primarily from higher costs for performance-based compensation and staff growth. In addition, the noninterest expense increase in the third quarter reflected a number of new initiatives over the past twelve months, including seven additional private banking and trust offices, the opening of the Singapore office, the expansion of the global custody network and operating costs associated with the growth in trust assets under administration. 14
Noninterest Expenses (continued) Salaries and benefits, which represent 58% of total noninterest expenses, increased to $136.5 million from $110.9 million in the year-ago quarter. The increase was primarily attributable to higher performance-based compensation and staff growth. Excellent new business results, record foreign exchange profits, strong corporate earnings and the price increase in Northern Trust Corporation stock increased performance-based compensation expenses by $12.0 million. The increase in compensation expense also resulted from merit increases and a 9% increase in staff levels from one year ago required to support growth initiatives and strong new business generated by both PFS and C&IS. Staff on a full-time equivalent basis at September 30, 1997 totaled 7,337, up 6% from 6,933 at the end of 1996 and 9% higher than the 6,754 at September 30, 1996. Net occupancy expense totaled $17.7 million, up 14% from $15.5 million in the third quarter of 1996, due in large part to the opening of seven additional private banking and trust offices over the past twelve months, as well as the opening of the Singapore office in the second half of 1996. The principal components of the increase were higher net rental costs, real estate taxes and utilities expense. Equipment expense, comprised of depreciation, rental and maintenance costs, totaled $17.6 million, up $3.4 million or 24% from the third quarter of 1996. Included in equipment expense for the quarter were $2.6 million of technology- related special charges. The remainder of the increase resulted from higher levels of depreciation and maintenance for computer hardware, personal computers and equipment. Other operating expenses in the quarter totaled $62.9 million compared to $51.2 million last year. Technology-related special charges accounted for $4.8 million of the increase, while the remainder resulted primarily from continued investment in technology, expansion of the personal trust and banking office network, and the higher operating expenses necessary to support business growth. The expense categories affected were computer software amortization, technical and consulting services, employee hiring and relocation costs, business promotional expenses, and costs associated with processing errors, partially offset by lower costs associated with legal claims. The components of other operating expenses were as follows: <TABLE> <CAPTION> Third Quarter Ended September 30 -------------------------- (In Millions) 1997 1996 - ------------------------------------------------------------------------------------------ <S> <C> <C> Business Development $ 6.6 $ 5.7 Purchased Professional Services 20.9 20.4 Telecommunications 3.6 2.8 Postage and Supplies 5.5 5.0 Software Amortization 13.4 8.5 Goodwill and Other Intangibles Amortization 2.5 2.4 Other Expense 10.4 6.4 - ------------------------------------------------------------------------------------------ Total Other Operating Expenses $62.9 $51.2 - ------------------------------------------------------------------------------------------ </TABLE> 15
Noninterest Expenses (continued) Utilizing a dedicated project team for mainframe systems and individual specialty teams for desktop and other noncentrally controlled systems, Northern Trust continued its Year 2000 renovation process. During the quarter Northern Trust updated its analysis of the costs to be incurred beginning in 1997 to successfully complete this project. Revised expense estimates, which now include the costs associated with desktop and other noncentrally controlled systems and the effect of replacing certain software that is not Year 2000 compliant, range from $20-$25 million. This estimate does not include the time that internal staff in user departments will devote to testing programming changes. This testing is not expected to add significant incremental costs to Northern Trust. For the nine months ending September 30, 1997, $8.2 million of the project costs have been incurred. The majority of the remaining costs are expected to be incurred over the next eighteen months. Northern Trust is also conducting a systematic program to review and monitor various vendor and credit client Year 2000 compliance efforts. This program will involve some additional expense that is not expected to be material. Provision for Income taxes The provision for income taxes was $43.6 million for the third quarter compared with $32.8 million in the year-ago quarter. The higher tax provision in 1997 resulted primarily from the growth in taxable earnings for both federal and state income tax purposes. The effective tax rate was 35% for 1997 versus 33% in 1996. NINE MONTH EARNINGS HIGHLIGHTS Net income per common share on a fully diluted basis was $1.95 compared to $1.62 last year, an increase of 20%. Net income increased 19% to $228.1 million, up from $191.4 million in the same period of 1996. The ROE for the nine month period was 20.21% versus 18.59% one year ago, while the ROA improved to 1.30% from 1.22% in the same period last year. Total revenues stated on a FTE basis increased 16% from 1996 levels. Trust fees totaled $504.0 million, up 14% from $441.8 million last year. Foreign exchange trading profits totaled $77.8 million, up 82% from the prior year's performance. The fee portion of treasury management revenues totaled $44.4 million, up 7% from the $41.4 million reported in 1996. Total treasury management revenues, which in addition to fees, include the computed value of compensating deposit balances, increased 6% to $68.1 million. These compensating deposit balances contributed to the improvement in net interest income. Security commissions and trading income totaled $19.4 million, up 9% from the prior year. Other operating income totaled $40.9 million for the period compared with $34.8 million in 1996. Excluding the $10.0 million nonrecurring item, the decline from the prior year was due primarily to lower balances held at banks serving as global subcustodians resulting in a reduction in compensation received and nonrecurring items recorded in the prior year's third quarter. The lower balances held 16
NINE MONTH EARNINGS HIGHLIGHTS (continued) at banks reflect a more aggressive approach to investing these otherwise idle funds in money market assets with the related benefit recognized in net interest income. In addition, the elimination of float-related compensation resulting from the Depository Trust Company's first quarter 1996 conversion to a same-day settlement basis for security transactions also reduced other operating income. Net interest income stated on a FTE basis totaled $349.4 million, up 11% from the $313.5 million in the same period of 1996. The provision for credit losses decreased $5.5 million to $6.0 million in 1997. Net loan charge-offs decreased to $6.3 million from $11.2 million in the prior year. Noninterest expenses were up 16% and totaled $658.2 million compared to $568.4 million a year ago. BALANCE SHEET Total assets at September 30, 1997 were $26.9 billion and averaged $24.2 billion for the third quarter, up 15% from last year's average of $21.0 billion. Due to continued strong demand for credit, loans and leases grew to $12.2 billion at September 30, 1997, and averaged $12.0 billion for the quarter. This compares with $10.9 billion in total loans and leases at September 30, 1996 and $10.5 billion on average for the third quarter of last year. Driven by continued strong earnings growth, offset in part by Northern Trust's stock buyback program, common stockholders' equity increased to $1.6 billion at September 30, 1997 and averaged $1.5 billion for the quarter, up 12% from the $1.4 billion average in last year's third quarter. Total stockholders' equity averaged $1.6 billion for the third quarter compared with $1.5 billion in 1996. During the quarter, Northern Trust Corporation acquired a total of 307,681 of its own common shares at a cost of $16.6 million pursuant to the stock buyback program authorized by the Board of Directors. An additional 3.6 million shares may be purchased after September 30, 1997 under the buyback program. Northern trust's risk-based capital ratios remained strong at 9.9% for tier 1 capital and 13.2% for total capital at September 30, 1997. These capital ratios are well above the minimum regulatory requirements of 4% for tier 1 and 8% for total risk-based capital ratios. The leverage ratio (tier 1 capital to third quarter average assets) of 7.3% at September 30, 1997, also exceeded the minimum regulatory requirement of 3%. In addition, each of Northern Trust's subsidiary banks had a ratio above 8.2% for tier 1 capital, 11.0% for total risk-based capital, and 6.1% for the leverage ratio. ASSET QUALITY Nonperforming assets consist of nonaccrual loans, restructured loans and other real estate owned (OREO). Nonperforming assets of $50.4 million at quarter-end 17
ASSET QUALITY (continued) decreased from $58.5 million at June 30, 1997 and was up from $37.7 million at September 30, 1996. Domestic nonaccrual loans and leases, consisting primarily of commercial loans, totaled $43.8 million, or .37% of total domestic loans and leases at September 30, 1997. At December 31, 1996 and September 30, 1996, domestic nonaccrual loans and leases totaled $16.9 million and $30.7 million, respectively. The following Nonperforming Asset 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> September 30 June 30 December 31 September 30 ---------------------------------------------------------------- (In Millions) 1997 1997 1996 1996 - ------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Nonaccrual Loans and Leases Domestic Residential Real Estate $ 4.1 $ 5.1 $ 3.2 $ 1.7 Commercial and Industrial 32.9 40.5 2.2 3.1 Commercial Real Estate 6.2 6.6 11.3 25.8 Consumer .6 .5 .2 .1 - ------------------------------------------------------------------------------------------------------- Total Domestic 43.8 52.7 16.9 30.7 International - - - - - ------------------------------------------------------------------------------------------------------- Total Nonaccrual Loans and Leases 43.8 52.7 16.9 30.7 Restructured Loans 2.5 2.6 2.6 2.6 Other Real Estate Owned 4.1 3.2 1.9 4.4 - ------------------------------------------------------------------------------------------------------- Total Nonperforming Assets $50.4 $58.5 $21.4 $37.7 - ------------------------------------------------------------------------------------------------------- Total 90 Day Past Due Loans (still accruing) $20.7 $28.8 $15.2 $21.1 - ------------------------------------------------------------------------------------------------------- </TABLE> Provision and Reserve for Credit Losses The provision for credit losses is the charge against current earnings that is determined by management through a disciplined credit review process, as the amount needed to maintain a reserve that is sufficient to absorb credit losses inherent in Northern Trust's loan and lease portfolios and other credit undertakings. While the largest portion of this reserve is intended to cover loan and lease losses, it is considered a general reserve that is available to cover all credit-related exposures. The 1997 third quarter provision for credit losses was $5.0 million, compared with $2.5 million in the third quarter of 1996. Net charge-offs totaled $5.4 million in the third quarter of 1997, versus $2.5 million last year. The increase in the provision for credit losses essentially maintained the reserve for credit losses at the prior quarter level. It is not expected that the provision for credit losses in the fourth quarter will return to the unusually low levels of the first half of 1997. 18
Provision and Reserve for Credit Losses (continued) The reserve for credit losses was $148.0 million or 1.21% of outstanding loans at September 30, 1997. This compares with $148.3 million or 1.36% of outstanding loans at December 31, 1996 and $147.4 million or 1.35% of outstanding loans at September 30, 1996. The lower reserve to outstanding loans ratio at September 30, 1997 is attributable to loan growth, a significant portion of which is in low-risk residential mortgage lending. The overall quality of the loan portfolio remains strong. Management continues to monitor closely the financial condition of borrowers currently experiencing financial difficulty. Worsening operating results of these borrowers and other economic conditions could unfavorably impact the level of future charge-offs and the related provision for credit losses. FORWARD-LOOKING INFORMATION This report contains statements that may be considered forward-looking, such as the discussion of Northern Trust's financial goals, business prospects, pricing trends, credit quality and outlook, and anticipated expenses for Year 2000 systems renovation. These statements speak of Northern Trust's plans, goals or expectations, refer to estimates, or use similar terms. Actual results could differ materially from the results indicated by these statements because the realization of those results is subject to many uncertainties including: . The future health of the U.S. and international economies and other economic factors that affect wealth creation, investment and savings patterns, and Northern Trust's interest rate risk exposure and credit risk. . Changes in U.S. and worldwide securities markets, with respect to the market values of financial assets and the level of volatility in certain markets such as foreign exchange. . Regulatory developments in the U.S. and other countries where Northern Trust has significant business. . Changes in the nature of Northern Trust's competition resulting from industry consolidation, regulatory change and other factors, as well as actions taken by particular competitors. . Northern Trust's success in identifying and penetrating targeted markets and generating a profit in those markets in a reasonable time. . Northern Trust's ability to continue to fund and accomplish technological innovation, improve processes and controls and attract and retain capable staff in order to deal with increasing volume and complexity in many of its businesses and technology challenges, such as Year 2000 renovation. 19
FORWARD-LOOKING INFORMATION (continued) . The ability of various vendors and clients to complete Year 2000 systems renovation efforts on a timely basis and in a manner that allows them to continue normal business operations and furnish products, services or data to Northern Trust without disruption. . 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 1996 Annual Report to Stockholders (pp. 27-34) and in the sections of "Item 1 - Business" of the 1996 Annual Report on Form 10-K captioned "Government Policies", "Competition" and "Regulation and Supervision" (pp. 6-9). All forward-looking statements included in this document are based upon information presently available, and Northern Trust assumes no obligation to update any forward-looking statement. 20
The following schedule should be read in conjunction with the Net Interest Income section of Management's Discussion and Analysis of Financial Condition and Results of Operations. CONSOLIDATED ANALYSIS OF NET INTEREST INCOME <TABLE> <CAPTION> Third Quarter ----------------------------------------------------------- 1997 1996 (Interest and rate on a taxable equivalent basis) ---------------------------- ---------------------------- ($ 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 $ 12.8 $ 887.4 5.68% $ 5.0 $ 356.6 5.49% Time Deposits with Banks 34.0 2,593.3 5.20 20.0 1,676.6 4.75 Other Interest-Bearing 1.0 72.4 5.71 .7 49.4 6.07 - -------------------------------------------------------------------- ------ --------- ---- ------ --------- ---- Total Money Market Assets 47.8 3,553.1 5.33 25.7 2,082.6 4.91 - -------------------------------------------------------------------- ------ --------- ---- ------ --------- ---- Securities U.S. Government 11.8 787.4 5.96 22.3 1,525.0 5.83 Obligations of States and Political Subdivisions 9.1 401.3 9.05 10.1 409.8 9.84 Federal Agency 69.8 4,797.0 5.77 58.9 4,118.4 5.69 Other 3.6 238.0 6.01 3.0 198.6 6.00 Trading Account .2 8.4 7.19 .1 5.3 7.14 - -------------------------------------------------------------------- ------ --------- ---- ------ --------- ---- Total Securities 94.5 6,232.1 6.02 94.4 6,257.1 6.00 - -------------------------------------------------------------------- ------ --------- ---- ------ --------- ---- Loans and Leases 204.9 12,001.2 6.77 178.2 10,533.9 6.73 - -------------------------------------------------------------------- ------ --------- ---- ------ --------- ---- Total Earning Assets $347.2 $21,786.4 6.32% $298.3 $18,873.6 6.29% - -------------------------------------------------------------------- ------ --------- ---- ------ --------- ---- Average Source of Funds Deposits Savings and Money Market Deposits $ 31.6 $ 3,810.5 3.29% $ 28.1 $ 3,548.8 3.15% Savings Certificates 29.5 2,030.1 5.77 29.5 2,047.6 5.73 Other Time 10.8 771.0 5.54 7.2 523.0 5.43 Foreign Offices Time 64.5 5,261.0 4.86 47.9 4,040.6 4.71 - -------------------------------------------------------------------- ------ --------- ---- ------ --------- ---- Total Deposits 136.4 11,872.6 4.56 112.7 10,160.0 4.41 Federal Funds Purchased 19.5 1,391.9 5.56 22.5 1,695.9 5.28 Repurchase Agreements 21.5 1,559.8 5.45 25.8 1,972.7 5.20 Commercial Paper 2.0 143.3 5.59 1.9 145.0 5.38 Other Borrowings 25.4 1,866.0 5.41 18.9 1,503.4 5.01 Senior Notes 12.2 844.0 5.77 2.8 205.0 5.48 Long-Term Debt 8.2 443.6 7.46 6.5 339.7 7.58 Floating Rate Capital Securities 4.4 267.3 6.41 - - - - -------------------------------------------------------------------- ------ --------- ---- ------ --------- ---- Total Interest-Related Funds 229.6 18,388.5 4.96 191.1 16,021.7 4.75 - -------------------------------------------------------------------- ------ --------- ---- ------ --------- ---- Interest Rate Spread - - 1.36% - - 1.54% - -------------------------------------------------------------------- ------ --------- ---- ------ --------- ---- Noninterest-Related Funds - 3,397.9 - - 2,851.9 - - -------------------------------------------------------------------- ------ --------- ---- ------ --------- ---- Total Source of Funds $229.6 $21,786.4 4.18% $191.1 $18,873.6 4.03% - -------------------------------------------------------------------- ------ --------- ---- ------ --------- ---- Net Interest Income/Margin $117.6 - 2.14% $107.2 - 2.26% - -------------------------------------------------------------------- ------ --------- ---- ------ --------- ---- </TABLE> ANALYSIS OF NET INTEREST INCOME CHANGES DUE TO VOLUME AND RATE <TABLE> <CAPTION> Third Quarter 1997/96 Nine Months 1997/96 ------------------------- -------------------------- Change Due To Change Due To --------------- --------------- (In Millions) Volume Rate Total Volume Rate Total - -------------------------------------------------------------------- ------ ----- ----- ------ ---- ------ <S> <C> <C> <C> <C> <C> <C> Earning Assets $43.2 $ 5.7 $48.9 $101.4 $7.4 $108.8 Interest-Related Funds 30.9 7.6 38.5 68.1 4.8 72.9 - -------------------------------------------------------------------- ----- ----- ----- ------ ---- ------ Net Interest Income $12.3 $(1.9) $10.4 $ 33.3 $2.6 $ 35.9 - -------------------------------------------------------------------- ----- ----- ----- ------ ---- ------ </TABLE> 21
<TABLE> <CAPTION> NORTHERN TRUST CORPORATION Nine Months - --------------------------------------------------------------------- 1997 1996 - -------------------------------- -------------------------------- Interest Volume Rate Interest Volume Rate - -------- --------- ---- -------- --------- ---- <S> <C> <C> <C> <C> <C> $ 33.3 $ 794.4 5.60% $ 12.2 $ 293.0 5.55% 92.7 2,424.5 5.11 63.7 1,699.9 5.01 2.4 56.5 5.75 2.3 52.5 5.97 ------ --------- ---- ------ --------- ---- 128.4 3,275.4 5.24 78.2 2,045.4 5.11 ------ --------- ---- ------ --------- ---- 38.4 870.2 5.91 81.7 1,909.7 5.71 29.0 412.5 9.37 31.0 417.1 9.90 200.9 4,670.3 5.75 171.6 4,017.1 5.71 11.1 242.7 6.14 10.3 229.4 5.99 .5 8.3 7.47 .4 8.0 7.36 ------ --------- ---- ------ --------- ---- 279.9 6,204.0 6.03 295.0 6,581.3 5.99 ------ --------- ---- ------ --------- ---- 587.2 11,580.6 6.78 513.5 10,164.0 6.75 ------ --------- ---- ------ --------- ---- $995.5 $21,060.0 6.32% $886.7 $18,790.7 6.30% ------ --------- ---- ------ --------- ---- $ 93.7 $ 3,887.4 3.22% $ 84.8 $ 3,595.2 3.15% 86.8 2,022.9 5.74 89.7 2,070.4 5.79 29.6 720.0 5.49 21.8 532.3 5.46 164.9 4,619.7 4.77 137.5 3,809.2 4.82 ------ --------- ---- ------ --------- ---- 375.0 11,250.0 4.46 333.8 10,007.1 4.46 58.1 1,431.5 5.43 73.7 1,851.8 5.32 60.8 1,521.1 5.34 79.9 2,034.1 5.24 5.8 142.1 5.51 5.8 143.9 5.40 92.6 2,320.0 5.34 50.4 1,333.2 5.05 19.4 453.5 5.72 10.3 257.8 5.31 24.2 433.1 7.49 19.3 336.8 7.63 10.2 209.6 6.38 - - - ------ --------- ---- ------ --------- ---- 646.1 17,760.9 4.86 573.2 15,964.7 4.80 ------ --------- ---- ------ --------- ---- - - 1.46% - - 1.50% ------ --------- ---- ------ --------- ---- - 3,299.1 - - 2,826.0 - ------ --------- ---- ------ --------- ---- $646.1 $21,060.0 4.10% $573.2 $18,790.7 4.07% ------ --------- ---- ------ --------- ---- $349.4 - 2.22% $313.5 - 2.23% ------ --------- ---- ------ --------- ---- </TABLE> 22
PART II - OTHER INFORMATION <TABLE> <CAPTION> Item 6. Exhibits and Reports on Form 8-K (a.) Exhibits -------- <S> <C> <C> Exhibit (4) Instruments Defining the Rights of Security Holders, Including Indentures: (i) Form of The Northern Trust Company's Global Senior Bank Note (Floating Rate) (supersedes Exhibit (4)(ii) filed with the Quarterly Report on Form 10-Q for the quarter ended September 30, 1995). (ii) Form of The Northern Trust Company's Global Subordinated Medium-Term Bank Note (Floating Rate) (supersedes Exhibit (4)(iv) filed with the Quarterly Report on Form 10-Q for the quarter ended September 30, 1995). Exhibit (10) Material Contracts: (i) First Amendment, dated as of September 17, 1997, to Rights Agreement, dated as of October 17, 1989, between Northern Trust Corporation and Harris Trust and Savings Bank. Exhibit (11) Computation of Per Share Earnings. Exhibit (27) Financial Data Schedule. (b.) Reports on Form 8-K ------------------- In a report on Form 8-K the Corporation incorporated in Item 5 its July 15, 1997 press release, reporting its earnings for the second quarter and six months of 1997. The press release, with summary financial information, was filed pursuant to Item 7. </TABLE> 23
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: November 13, 1997 By: Perry R. Pero ------------- Perry R. Pero Senior Executive Vice President and Chief Financial Officer Date: November 13, 1997 By: Harry W. Short -------------- Harry W. Short Senior Vice President and Controller (Chief Accounting Officer) 24
EXHIBIT INDEX The following exhibits have been filed herewith: Exhibit Number Description - ------ ----------- (4) Instruments Defining the Rights of Security Holders, Including Indentures: (i) Form of The Northern Trust Company's Global Senior Bank Note (Floating Rate) (supersedes Exhibit (4)(ii) filed with the Quarterly Report on Form 10-Q for the quarter ended September 30, 1995). (ii) Form of The Northern Trust Company's Global Subordinated Medium- Term Bank Note (Floating Rate) (supersedes Exhibit (4)(iv) filed with the Quarterly Report on Form 10-Q for the quarter ended September 30, 1995). (10) Material Contracts: (i) First Amendment, dated as of September 17, 1997, to Rights Agreement, dated as of October 17, 1989, between Northern Trust Corporation and Harris Trust and Savings Bank. (11) Computation of Per Share Earnings. (27) Financial Data Schedule. 25