================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------------- FORM 10-Q [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 1998 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission File Number 0-5965 NORTHERN TRUST CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 36-2723087 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 50 SOUTH LA SALLE STREET CHICAGO, ILLINOIS 60675 (Address of principal (Zip Code) executive offices) 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 [_] 111,518,993 Shares - $1.66 2/3 Par Value (Shares of Common Stock Outstanding on March 31, 1998) ================================================================================
PART I - FINANCIAL INFORMATION Item 1. Financial Statements CONSOLIDATED BALANCE SHEET NORTHERN TRUST CORPORATION <TABLE> <CAPTION> March 31 December 31 March 31 --------- ----------- --------- ($ In Millions) 1998 1997 1997 - ------------------------------------------ --------- ----------- --------- <S> <C> <C> <C> Assets Cash and Due from Banks $ 1,124.0 $ 1,738.9 $ 948.6 Federal Funds Sold and Securities Purchased under Agreements to Resell 1,622.1 2,991.7 1,219.5 Time Deposits with Banks 1,844.3 2,283.2 2,354.9 Other Interest-Bearing 67.6 34.5 41.0 Securities Available for Sale 4,652.0 3,733.3 5,328.8 Held to Maturity (Fair value - $500.0 at March 1998, $473.4 at December 1997, $499.3 at March 1997) 485.3 456.1 481.7 Trading Account 14.2 8.8 13.7 - ------------------------------------------ --------- --------- --------- Total Securities 5,151.5 4,198.2 5,824.2 - ------------------------------------------ --------- --------- --------- Loans and Leases Commercial and Other 7,554.5 7,401.5 6,750.9 Residential Mortgages 5,397.7 5,186.7 4,666.4 - ------------------------------------------ --------- --------- --------- Total Loans and Leases (Net of unearned income - $147.1 at March 1998, $151.9 at December 1997, $113.4 at March 1997) 12,952.2 12,588.2 11,417.3 - ------------------------------------------ --------- --------- --------- Reserve for Credit Losses (147.7) (147.6) (148.3) Buildings and Equipment 327.8 316.4 291.7 Customers' Acceptance Liability 25.4 31.4 45.7 Trust Security Settlement Receivables 357.3 291.4 323.0 Other Assets 927.3 989.1 914.2 - ------------------------------------------ --------- --------- --------- Total Assets $24,251.8 $25,315.4 $23,231.8 - ------------------------------------------ --------- --------- --------- Liabilities Deposits Demand and Other Noninterest-Bearing $ 3,626.9 $ 3,510.1 $ 3,951.8 Savings and Money Market 4,305.2 4,278.9 3,597.9 Savings Certificates 2,125.9 2,092.6 2,003.8 Other Time 470.5 572.0 683.9 Foreign Offices - Demand 445.1 451.0 415.6 - Time 5,192.6 5,455.4 4,560.9 - ------------------------------------------ --------- --------- --------- Total Deposits 16,166.2 16,360.0 15,213.9 Federal Funds Purchased 1,312.1 821.2 1,197.7 Securities Sold Under Agreements to Repurchase 875.8 1,139.7 1,685.4 Commercial Paper 128.8 146.8 145.2 Other Borrowings 1,909.3 2,876.6 1,943.1 Senior Notes 680.0 785.0 205.0 Long-Term Debt 416.8 439.5 427.8 Floating Rate Capital Securities 267.4 267.4 148.5 Liability on Acceptances 25.4 31.4 45.7 Other Liabilities 669.5 708.8 626.3 - ------------------------------------------ --------- --------- --------- Total Liabilities 22,451.3 23,576.4 21,638.6 - ------------------------------------------ --------- --------- --------- Stockholders' Equity Preferred Stock 120.0 120.0 120.0 Common Stock, $1.66 2/3 Par Value; Authorized 280,000,000 shares at March 1998 and December 1997 and 140,000,000 shares at March 1997; Outstanding 111,518,993 at March 1998, 111,367,436 at December 1997 and 111,496,349 at March 1997 189.9 189.9 189.9 Capital Surplus 225.9 225.5 228.3 Retained Earnings 1,391.2 1,330.8 1,160.6 Net Unrealized Gain on Securities Available for Sale 1.9 2.1 .2 Common Stock Issuable - Performance Plan 31.5 11.7 12.8 Deferred Compensation - ESOP and Other (50.8) (37.5) (38.3) Treasury Stock - (at cost, 2,441,769 shares at March 1998, 2,593,326 shares at December 1997, and 2,464,413 shares at March 1997) (109.1) (103.5) (80.3) - ------------------------------------------ --------- --------- --------- Total Stockholders' Equity 1,800.5 1,739.0 1,593.2 - ------------------------------------------ --------- --------- --------- Total Liabilities and Stockholders' Equity $24,251.8 $25,315.4 $23,231.8 - ------------------------------------------ --------- --------- --------- </TABLE>
<TABLE> <CAPTION> CONSOLIDATED STATEMENT OF INCOME NORTHERN TRUST CORPORATION First Quarter Ended March 31 ------------------------ ($ In Millions Except Per Share Information) 1998 1997 - ----------------------------------------------------- ----------- ----------- <S> <C> <C> Interest Income Loans and Leases $211.0 $183.6 Securities Available For Sale 91.5 72.1 Held to Maturity 7.2 7.9 Trading Account .2 .1 - ----------------------------------------------------- ----------- ----------- Total Securities 98.9 80.1 - ----------------------------------------------------- ----------- ----------- Time Deposits with Banks 34.1 27.2 Federal Funds Sold and Securities Purchased under Agreements to Resell and Other 13.3 9.1 - ----------------------------------------------------- ----------- ----------- Total Interest Income 357.3 300.0 - ----------------------------------------------------- ----------- ----------- Interest Expense Deposits 139.8 114.2 Federal Funds Purchased 36.3 19.6 Securities Sold under Agreements to Repurchase 20.9 21.7 Commercial Paper 2.0 1.9 Other Borrowings 21.8 22.9 Senior Notes 10.6 3.7 Long-Term Debt 8.1 8.0 Floating Rate Capital Securities 4.2 1.9 - ----------------------------------------------------- ----------- ----------- Total Interest Expense 243.7 193.9 - ----------------------------------------------------- ----------- ----------- Net Interest Income 113.6 106.1 Provision for Credit Losses 4.0 .5 - ----------------------------------------------------- ----------- ----------- Net Interest Income after Provision for Credit Losses 109.6 105.6 - ----------------------------------------------------- ----------- ----------- Noninterest Income Trust Fees 193.7 158.3 Treasury Management Fees 15.9 14.6 Foreign Exchange Trading Profits 28.1 20.4 Security Commissions and Trading Income 7.2 5.9 Other Operating Income 11.0 9.5 Investment Security Gains .7 .6 - ----------------------------------------------------- ----------- ----------- Total Noninterest Income 256.6 209.3 - ----------------------------------------------------- ----------- ----------- Income before Noninterest Expenses 366.2 314.9 - ----------------------------------------------------- ----------- ----------- Noninterest Expenses Salaries 121.7 101.4 Pension and Other Employee Benefits 23.5 21.1 Occupancy Expense 16.9 16.1 Equipment Expense 16.5 14.9 Other Operating Expenses 57.6 53.0 - ----------------------------------------------------- ----------- ----------- Total Noninterest Expenses 236.2 206.5 - ----------------------------------------------------- ----------- ----------- Income before Income Taxes 130.0 108.4 Provision for Income Taxes 45.1 36.7 - ----------------------------------------------------- ----------- ----------- Net Income $ 84.9 $ 71.7 - ----------------------------------------------------- ----------- ----------- Net Income Applicable to Common Stock $ 83.6 $ 70.5 - ----------------------------------------------------- ----------- ----------- Net Income Per Common Share - Basic $ .75 $ .64 - Diluted .73 .62 - ----------------------------------------------------- ----------- ----------- Average Number of Common Shares Outstanding - Basic 110,902,111 110,929,710 - Diluted 115,055,796 114,649,493 - ----------------------------------------------------- ----------- ----------- </TABLE> 3
<TABLE> <CAPTION> CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME NORTHERN TRUST CORPORATION First Quarter Ended March 31 ------------------------ ($ In Millions) 1998 1997 - ----------------------------------------------------- ----------- ----------- <S> <C> <C> Net Income $ 84.9 $ 71.7 Other Comprehensive Income (net of tax) Unrealized Gains (Losses) on Securities Available for Sale Unrealized Holding Gains (Losses) Arising During Period (Net of tax (provision) benefit - $(.1) million in 1998 and $.6 million in 1997) .2 (1.0) Less: Reclassification Adjustments for Gains Included in Net Income (Net of tax - $.2 million in 1998 and $.2 million in 1997) (.4) (.4) - ----------------------------------------------------- ----------- ----------- Other Comprehensive Income (.2) (1.4) - ----------------------------------------------------- ----------- ----------- Comprehensive Income $ 84.7 $ 70.3 - ----------------------------------------------------- ----------- ----------- </TABLE> 4
<TABLE> <CAPTION> CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY NORTHERN TRUST CORPORATION First Quarter Ended March 31 --------------------- <S> <C> <C> (In Millions) 1998 1997 - ----------------------------------------------------------------- --------------------- Preferred Stock Balance at January 1 and March 31 $ 120.0 $ 120.0 - ----------------------------------------------------------------- --------------------- Common Stock Balance at January 1 and March 31 189.9 189.9 - ----------------------------------------------------------------- --------------------- Capital Surplus Balance at January 1 225.5 231.7 Stock Issued - Incentive Plan and Awards .4 (3.4) - ----------------------------------------------------------------- --------------------- Balance at March 31 225.9 228.3 - ----------------------------------------------------------------- --------------------- Retained Earnings Balance at January 1 1,330.8 1,110.2 Net Income 84.9 71.7 Dividend Declared - Common Stock (23.4) (20.1) Dividends Declared - Preferred Stock (1.1) (1.2) - ----------------------------------------------------------------- --------------------- Balance at March 31 1,391.2 1,160.6 - ----------------------------------------------------------------- --------------------- Net Unrealized Gain on Securities Available for Sale Balance at January 1 2.1 1.6 Unrealized Loss, net (.2) (1.4) - ----------------------------------------------------------------- --------------------- Balance at March 31 1.9 .2 - ----------------------------------------------------------------- --------------------- Common Stock Issuable - Performance Plan Balance at January 1 11.7 10.4 Stock Issuable, net of Stock Issued 19.8 2.4 - ----------------------------------------------------------------- --------------------- Balance at March 31 31.5 12.8 - ----------------------------------------------------------------- --------------------- Deferred Compensation - ESOP and Other Balance at January 1 (37.5) (35.5) Compensation Deferred (15.4) (3.9) Compensation Amortized 2.1 1.1 - ----------------------------------------------------------------- --------------------- Balance at March 31 (50.8) (38.3) - ----------------------------------------------------------------- --------------------- Treasury Stock Balance at January 1 (103.5) (84.2) Stock Options and Awards 22.7 21.8 Stock Purchased (28.3) (17.9) - ----------------------------------------------------------------- --------------------- Balance at March 31 (109.1) (80.3) - ----------------------------------------------------------------- --------------------- Total Stockholders' Equity at March 31 $1,800.5 $1,593.2 - ----------------------------------------------------------------- --------------------- </TABLE> 5
<TABLE> <CAPTION> CONSOLIDATED STATEMENT OF CASH FLOWS NORTHERN TRUST CORPORATION First Quarter Ended March 31 ------------- ----------- (In Millions) 1998 1997 - --------------------------------------------------------------------------------------------------- ------------- ----------- <S> <C> <C> Cash Flows from Operating Activities: Net Income $ 84.9 $ 71.7 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Provision for Credit Losses 4.0 .5 Depreciation on Buildings and Equipment 13.3 12.3 Decrease in Interest Receivable 8.9 6.7 Decrease in Interest Payable (4.9) (1.7) Amortization and Accretion of Securities and Unearned Income (75.8) (38.6) Amortization of Software, Goodwill and Other Intangibles 13.3 11.7 Net Increase in Trading Account Securities (5.4) (8.9) Other Noncash, net 23.9 (51.9) - --------------------------------------------------------------------------------------------------- ------------- ----------- Net Cash Provided by Operating Activities 62.2 1.8 - --------------------------------------------------------------------------------------------------- ------------- ----------- Cash Flows from Investing Activities: Net (Increase) Decrease in Federal Funds Sold and Securities Purchased under Agreements to Resell 1,369.6 (196.9) Net (Increase) Decrease in Time Deposits with Banks 438.9 (294.9) Net (Increase) Decrease in Other Interest-Bearing Assets (33.1) 73.3 Purchases of Securities-Held to Maturity (106.0) (46.2) Proceeds from Maturity and Redemption of Securities-Held to Maturity 82.7 64.6 Purchases of Securities-Available for Sale (22,089.6) (10,567.5) Proceeds from Sale, Maturity and Redemption of Securities-Available for Sale 21,242.3 9,586.1 Net Increase in Loans and Leases (363.9) (486.3) Purchases of Buildings and Equipment (24.7) (12.5) Net (Increase) Decrease in Trust Security Settlement Receivables (65.9) 39.3 Other, net (2.4) (2.0) - --------------------------------------------------------------------------------------------------- ------------- ----------- Net Cash (Used in) Provided by Investing Activities 447.9 (1,843.0) - --------------------------------------------------------------------------------------------------- ------------- ----------- Cash Flows from Financing Activities: Net Increase (Decrease) in Deposits (193.8) 1,417.7 Net Increase in Federal Funds Purchased 490.9 544.7 Net Increase (Decrease) in Securities Sold under Agreements to Repurchase (263.9) 719.3 Net Decrease in Commercial Paper (18.0) (3.8) Net Decrease in Short-Term Other Borrowings (939.4) (1,203.3) Proceeds from Term Federal Funds Purchased 184.0 254.2 Repayments of Term Federal Funds Purchased (211.9) (249.9) Proceeds from Senior Notes & Long-Term Debt - 250.0 Repayments on Senior Notes & Long-Term Debt (128.0) (201.5) Treasury Stock Purchased (28.3) (15.0) Net Proceeds from Stock Options 4.9 3.5 Cash Dividends Paid on Common and Preferred Stock (24.4) (21.3) Other, net 2.9 2.7 - --------------------------------------------------------------------------------------------------- ------------- ----------- Net Cash Provided by (Used in) Financing Activities (1,125.0) 1,497.3 - --------------------------------------------------------------------------------------------------- ------------- ----------- Decrease in Cash and Due from Banks (614.9) (343.9) Cash and Due from Banks at Beginning of Year 1,738.9 1,292.5 - --------------------------------------------------------------------------------------------------- ------------- ----------- Cash and Due from Banks at March 31 $ 1,124.0 $ 948.6 - --------------------------------------------------------------------------------------------------- ------------- ----------- Supplemental Disclosures of Cash Flow Information: Interest Paid $ 248.6 $ 195.6 Income Taxes Received (3.1) (3.1) - --------------------------------------------------------------------------------------------------- ------------- ----------- </TABLE> 6
Notes to Consolidated Financial Statements 1. Basis of Presentation - The consolidated financial statements include the accounts of Northern Trust Corporation and its subsidiaries ("Northern Trust"), all of which are wholly-owned. Significant intercompany balances and transactions have been eliminated. The consolidated financial statements as of March 31, 1998 and 1997 have not been audited by independent public accountants. In the opinion of management, all adjustments necessary for a fair presentation of the financial position and the results of operations for the interim periods have been made. All such adjustments are of a normal recurring nature. Certain reclassifications have been made to prior periods' consolidated financial statements to place them on a basis comparable with the current period's consolidated financial statements. For a description of Northern Trust's significant accounting policies, refer to the Notes to Consolidated Financial Statements in the 1997 Annual Report to Stockholders. 2. Securities - The following table summarizes the book and fair values of securities: <TABLE> <CAPTION> March 31, 1998 December 31, 1997 March 31, 1997 ------------------------------------------------------------------------------------ Book Fair Book Fair Book Fair (In Millions) Value Value Value Value Value Value - ---------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Held to Maturity U.S. Government $ 83.1 $ 83.1 $ 72.0 $ 72.0 $ 68.2 $ 68.1 Obligations of States and Political Subdivisions 263.9 280.5 276.7 295.1 303.6 321.3 Federal Agency 8.0 8.0 14.3 14.3 18.2 18.2 Other 130.3 128.4 93.1 92.0 91.7 91.7 - ---------------------------------------------------------------------------------------------------------------- Subtotal 485.3 500.0 456.1 473.4 481.7 499.3 - ---------------------------------------------------------------------------------------------------------------- Available for Sale U.S. Government 312.6 312.6 470.0 470.0 841.0 841.0 Obligations of States and Political Subdivisions 169.7 169.7 130.2 130.2 115.9 115.9 Federal Agency 4,027.3 4,027.3 2,969.8 2,969.8 4,255.8 4,255.8 Preferred Stock 112.5 112.5 128.8 128.8 74.8 74.8 Other 29.9 29.9 34.5 34.5 41.3 41.3 - ---------------------------------------------------------------------------------------------------------------- Subtotal 4,652.0 4,652.0 3,733.3 3,733.3 5,328.8 5,328.8 - ---------------------------------------------------------------------------------------------------------------- Trading Account 14.2 14.2 8.8 8.8 13.7 13.7 - ---------------------------------------------------------------------------------------------------------------- Total Securities $5,151.5 $5,166.2 $4,198.2 $4,215.5 $5,824.2 $5,841.8 - ---------------------------------------------------------------------------------------------------------------- </TABLE> 7
<TABLE> <CAPTION> Reconciliation of Book Values to Fair Values of Securities Held to Maturity March 31, 1998 - ---------------------------------------------------------------------------------------------------------------- Gross Unrealized Book ------------------------- Fair (In Millions) Value Gains Losses Value - ---------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> U.S. Government $ 83.1 $ -- $ -- $ 83.1 Obligations of States and Political Subdivisions 263.9 16.7 .1 280.5 Federal Agency 8.0 -- -- 8.0 Other 130.3 -- 1.9 128.4 - ---------------------------------------------------------------------------------------------------------------- Total $485.3 $16.7 $2.0 $500.0 - ---------------------------------------------------------------------------------------------------------------- </TABLE> <TABLE> <CAPTION> Reconciliation of Amortized Cost to Fair Values of Securities Available for Sale March 31, 1998 - ---------------------------------------------------------------------------------------------------------------- Gross Unrealized Amortized ------------------------ Fair (In Millions) Cost Gains Losses Value - -------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> U.S. Government $ 311.8 $ .9 $.1 $ 312.6 Obligations of States and Political Subdivisions 163.9 5.8 -- 169.7 Federal Agency 4,026.3 1.3 .3 4,027.3 Preferred Stock 112.1 .4 -- 112.5 Other 30.4 -- .5 29.9 - -------------------------------------------------------------------------------------------------------------- Total $4,644.5 $8.4 $.9 $4,652.0 - -------------------------------------------------------------------------------------------------------------- </TABLE> Unrealized gains and losses on off-balance sheet financial instruments used to hedge available for sale securities totaled $.2 million and $4.7 million, respectively, as of March 31, 1998. At March 31, 1998, stockholders' equity included a credit of $1.9 million, net of tax, to recognize the appreciation on securities available for sale and the related hedges. 3. Pledged Assets - Securities and loans pledged to secure public and trust deposits, repurchase agreements and for other purposes as required or permitted by law were $5.2 billion on March 31, 1998, $6.2 billion on December 31, 1997 and $5.3 billion on March 31, 1997. 4. Contingent Liabilities - Standby letters of credit outstanding were $1.6 billion on March 31, 1998, $1.5 billion on December 31, 1997 and $1.3 billion on March 31, 1997. 8
5. Loans and Leases - Amounts outstanding in selected loan categories are shown below: <TABLE> <CAPTION> (In Millions) March 31, 1998 December 31, 1997 March 31, 1997 - ------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Domestic Residential Real Estate $ 5,397.7 $ 5,186.7 $ 4,666.4 Commercial 3,750.7 3,734.8 3,335.3 Broker 238.2 170.1 395.0 Commercial Real Estate 588.1 582.1 592.9 Personal 1,183.5 1,207.2 972.5 Other 802.7 890.1 744.0 Lease Financing 342.5 347.0 267.6 - ------------------------------------------------------------------------------------------------- Total Domestic 12,303.4 12,118.0 10,973.7 International 648.8 470.2 443.6 - ------------------------------------------------------------------------------------------------- Total Loans and Leases $12,952.2 $12,588.2 $11,417.3 - ------------------------------------------------------------------------------------------------- </TABLE> At March 31, 1998, other domestic and international loans included $946.8 million of overnight trust-related advances primarily in connection with next day security settlements, compared with $924.5 million at December 31, 1997 and $883.4 million at March 31, 1997. At March 31, 1998, nonperforming loans totaled $36.2 million. Included in this amount were loans with a recorded investment of $32.7 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 $6.5 million had no portion of the reserve for credit losses allocated to them, while $26.2 million had an allocated reserve of $4.4 million. For the first quarter of 1998, the total recorded investment in impaired loans averaged $36.9 million. Total interest income recorded on impaired loans for the quarter ended March 31, 1998 was $25 thousand. At March 31, 1997, nonperforming loans totaled $21.7 million and included $19.8 million of impaired loans. Of these impaired loans, $16.9 million had no reserve allocation while $2.9 million had an allocated reserve of $.2 million. Impaired loans for the first quarter of 1997 averaged $19.7 million with $96 thousand of interest income recognized. 9
6. Reserve for Credit Losses - Changes in the reserve for credit losses were as follows: <TABLE> <CAPTION> Three Months Ended March 31 ------------------------------------- (In Millions) 1998 1997 - ------------------------------------------------------------------------------------------------------- <S> <C> <C> Balance at Beginning of Period $147.6 $148.3 Charge-Offs Commercial Real Estate (.2) Other (4.5) (2.2) International - ------------------------------------------------------------------------------------------------------- Total Charge-Offs (4.7) (2.2) - ------------------------------------------------------------------------------------------------------- Recoveries .8 1.7 - ------------------------------------------------------------------------------------------------------- Net Charge-Offs (3.9) ( .5) Provision for Credit Losses 4.0 .5 - ------------------------------------------------------------------------------------------------------- Balance at End of Period $147.7 $148.3 - ------------------------------------------------------------------------------------------------------- </TABLE> 7. Floating Rate Capital Securities - The following table summarizes the book value of Floating Rate Capital Securities outstanding: <TABLE> <CAPTION> March 31 December 31 March 31 ------------------------------------------------------------ (In Millions) 1998 1997 1997 - ---------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> $150 Million Series A due January 15, 2027 $148.6 $148.6 $148.5 $120 Million Series B due April 15, 2027 118.8 118.8 -- - ---------------------------------------------------------------------------------------------------------- Total $267.4 $267.4 $148.5 - ---------------------------------------------------------------------------------------------------------- </TABLE> The Floating Rate Capital Securities were issued through wholly-owned statutory business trusts. The sole asset of the trusts are Subordinated Debentures of Northern Trust Corporation which have the same interest rates and maturity dates as the corresponding distribution rates and redemption dates of the Floating Rate Capital Securities. The Series A Securities were issued at a discount to yield 60.5 basis points above the three-month London Interbank Offered Rate (LIBOR), while the Series B Securities were issued at a discount to yield 67.9 basis points above the three-month LIBOR. Both Series A and B Securities qualify as tier 1 capital for regulatory purposes. 10
8. Net Income Per Common Share Computations - The computation of net income per common share is presented in the following table: <TABLE> <CAPTION> First Quarter Ended March 31 -------------------------------------------------- ($ In Millions Except Per Share Information) 1998 1997 - ------------------------------------------------------------------------------------------------------------ <S> <C> <C> Basic Net Income Per Common Share: Net Income $ 84.9 $ 71.7 Less Dividends on Preferred Stock (1.3) (1.2) - ------------------------------------------------------------------------------------------------------------ Net Income Applicable to Common Stock $ 83.6 $ 70.5 Average Number of Common Shares Outstanding 110,902,111 110,929,710 Basic Net Income Per Common Share $ 0.75 $ 0.64 Diluted Net Income Per Common Share: Net Income Applicable to Common Stock $ 83.6 $ 70.5 Average Number of Common Shares Outstanding 110,902,111 110,929,710 Plus Dilutive Potential Common Shares: Stock Options 3,305,992 2,851,558 Performance Shares 537,505 622,522 Other 310,188 245,703 - ------------------------------------------------------------------------------------------------------------ Average Common and Potential Common Shares 115,055,796 114,649,493 Diluted Net Income Per Common Share $ 0.73 $ 0.62 - ------------------------------------------------------------------------------------------------------------ </TABLE> 9. Accounting Standards Pronouncements - Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income," was implemented as of January 1, 1998. SFAS No. 130 established the requirements for reporting comprehensive income in the financial statements. Because it imposes only additional reporting requirements, SFAS No. 130 did not affect Northern Trust's financial condition or net income. Comprehensive income includes net income plus "other comprehensive income", which in the first quarter consists of after-tax unrealized gains and losses on available for sale securities. Northern Trust's consolidated statement of comprehensive income is included on page 4 of this report. In March, 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" (SOP 98-1). SOP 98-1 requires the capitalization of certain external and internal costs of computer software developed or obtained for internal use. SOP 98-1 is effective for financial statements for fiscal years beginning after December 15, 1998, with early adoption permitted. 11
Northern Trust's current accounting policy is to expense internal costs of computer software developed for internal use as incurred. Northern Trust is in the process of identifying the amount of salary and related costs which would be eligible for capitalization in 1998 based on SOP 98-1, however, it is not expected that the amount would be material to Northern Trust's results of operations. In April, 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" (SOP 98-5). SOP 98-5 requires all nongovernmental entities to expense costs of start-up activities as those costs are incurred. The term "start-up" is broadly defined and includes pre- operating, pre-opening and organization activities. SOP 98-5 is effective for financial statements for fiscal years beginning after December 15, 1998, with early adoption permitted. Northern Trust will adopt SOP 98-5 effective January 1, 1999. Northern Trust has typically expensed such costs as incurred and, therefore, adoption of this SOP is not expected to have a material effect on Northern Trust's results of operations. 10. Acquisition - In February, 1998, Northern Trust entered into an agreement to acquire Trustbank Financial Corp., parent company of Trust Bank of Colorado, for approximately $15 million in cash. Trust Bank of Colorado, located in Denver, reported $37 million in assets at year-end 1997 and stockholders' equity of $5.2 million. The transaction will be accounted for as a purchase and is expected to close in the second quarter of 1998. 12
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FIRST QUARTER EARNINGS HIGHLIGHTS Net income per common share on a diluted basis increased 18% to a record $.73 for the first quarter, up from $.62 earned a year ago. Net income also increased 18% to a record $84.9 million from the $71.7 million earned in the first quarter of last year. This earnings performance produced an annualized return on average common equity (ROE) of 20.73% versus 19.91% reported last year, and an annualized return on average assets (ROA) of 1.32% versus 1.30% in 1997. Total revenues stated on a fully taxable equivalent basis increased 17% in the quarter, driven by record corporate trust fees, personal trust fees, and net interest income, along with continued strong results from foreign exchange. The quarter also highlighted Northern Trust's continued success in generating positive operating leverage as the 17% growth in revenues was well above the 14% increase in noninterest expenses. The 18% earnings per share growth for the quarter, a 20.73% ROE and a productivity ratio of 160% met or exceeded each of Northern Trust's strategic financial targets. Noninterest Income Noninterest income increased 23% and totaled $256.6 million for the quarter, accounting for 68% of total taxable equivalent revenue. Trust fees of $193.7 million increased 22% or $35.4 million over the like period of 1997, and represented 75% of noninterest income and 51% of total taxable equivalent revenue. This fee growth was driven by new business, increased transaction volumes and higher market values of trust assets administered. Trust assets under administration increased 41% or $339.0 billion from a year ago and totaled $1.16 trillion at March 31, 1998. Trust assets under the management of Northern Trust grew 51% to $216.5 billion from March 31, 1997. At December 31, 1997, trust assets under administration totaled $1.08 trillion with $196.6 billion under management. Trust fees are based on the market value of assets managed and administered, the volume of transactions, securities lending volume and spreads, and fees for other services rendered. Asset-based fees are typically determined on a sliding scale so that as the value of a client portfolio grows in size, Northern Trust receives a smaller percentage of the increasing value as fee income. Therefore, market value or other changes in a portfolio's size do not typically have a proportionate impact on the level of trust fees. In addition, Corporate and Institutional Services (C&IS) trust relationships are increasingly priced to reflect earnings from activities such as custody-related deposits and foreign exchange trading which are not included in trust fees. 13
Noninterest Income (continued) Effective January 1, 1998, the trust activities for Middle Market clients transferred to C&IS from Personal Financial Services business unit (PFS). Trust assets and fees for all periods presented have been restated. Trust fees from PFS increased 22% from the prior year level of $75.5 million and totaled $91.8 million for the first quarter, reflecting strong growth in new business throughout Northern Trust's five-state network of PFS offices and favorable equity markets. Trust fees in each state increased 15% or more with growth especially strong in Florida, Arizona and Texas. The PFS Wealth Management Group, which administers significant family-asset pools nationwide, continued to achieve excellent performance, with trust fees increasing 22% to $8.5 million. The Group now administers $31.1 billion of trust assets. Total personal trust assets under administration increased $26.1 billion from the prior year and $9.6 billion since December 31, 1997, and totaled $105.5 billion at March 31, 1998. Of this amount, $64.9 billion was under management compared to $48.8 billion one year ago and $58.5 billion at December 31, 1997. Net recurring new business sold for the quarter was $9.8 million in annualized fees, up 31% from the first quarter of 1997. Northern Trust expects to close the acquisition of Trust Bank of Colorado for $15.0 million in cash during the second quarter. With the addition of this new office, which marks Northern Trust's entry into Colorado, Northern Trust's national network of Personal Financial Services offices will include 63 locations in six states. Trust fees from C&IS increased 23% to $101.9 million from $82.8 million in the year-ago quarter, reflecting strong new business. Excluding $3.5 million in fees generated by Northern Trust Quantitative Advisors, Inc. (NTQA), a December, 1997 acquisition, C&IS trust fees increased 19% from the prior year. 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 first quarter fee growth. Securities lending continued to achieve excellent results, with fees increasing 24% or $3.5 million from the prior year quarter to $17.9 million. Investment management revenues were very strong and contributed approximately 40% of the growth in C&IS trust fees, excluding the fees generated by NTQA. C&IS trust assets under administration increased 42% or $312.9 billion from the prior year and now total $1.06 trillion, of which $151.6 billion is managed by Northern Trust. Trust assets under administration included approximately $173 billion of global custody assets. For the quarter, net new annualized fees sold were $9.4 million, a 7% increase over the same period last year. Foreign exchange trading profits continued to be outstanding, increasing 37% to $28.1 million from $20.4 million in the same quarter last year. The strong performance compared to last year reflects both increased trade volumes as global custody assets continue to grow and volatility in the currency markets, especially early in the quarter. 14
Noninterest Income (continued) Foreign exchange trading profits for the first quarter were second only to the record $33.5 million in the third quarter of 1997, when volatility in the southeastern Asia currency markets and transaction levels involving those currencies were particularly high. Total treasury management revenues from both fees and the computed value of compensating deposit balances increased 5% from the first quarter of 1997 to $23.5 million, reflecting the continued growth in business from both new and existing clients. The fee portion of these revenues accrued in the quarter was $15.9 million, up from $14.6 million in the comparable quarter last year. Security commissions and trading income totaled $7.2 million compared with $5.9 million reported in the first quarter of 1997. The increase primarily reflects growth in security brokerage activities resulting from the continued strength in the equity markets. Other operating income primarily includes loan, letter of credit and deposit- related service fees, and totaled $11.0 million for the quarter compared with $9.5 million reported in the first quarter of 1997. The increase over last year was primarily the result of higher banking and trust deposit-related fees. Net Interest Income Net interest income for the quarter totaled $113.6 million, 7% higher than the $106.1 million reported in the first quarter of 1997. Net interest income is defined as the total of interest income and amortized fees on earning assets, less interest expense on deposits and borrowed funds, adjusted for the impact of off-balance sheet hedging activity. When net interest income is adjusted to a fully taxable equivalent (FTE) basis, yields on taxable, nontaxable and partially taxable assets are comparable, although the adjustment to a FTE basis has no impact on net income. Net interest income on a FTE basis for the quarter was $122.0 million, up 7% from the $114.1 million reported in 1997. The increase in net interest income reflects growth in earning assets and higher levels of noninterest-related funds, driven by increases in both demand and noninterest- bearing deposits and common equity. The net interest margin declined to 2.11% from 2.33% reported in the year-ago quarter. The decline in the net interest margin is attributable to the flattening yield curve which has compressed interest rate spreads and a higher proportion of lower spread short-term securities and money market assets. Earning assets for the first quarter averaged $23.4 billion, up 18% from the $19.9 billion average for the same quarter of 1997. The $3.5 billion growth in average earning assets was concentrated in the loan portfolio which increased 15% to average $12.7 billion, in securities which increased 22% to $7.2 billion, and in money market assets which increased 21% to $3.5 billion on average from the prior year level. 15
Net Interest Income (continued) The loan growth was concentrated predominantly in the domestic portfolio which increased $1.4 billion to average $12.1 billion. Residential mortgage loans accounted for nearly one-half of the domestic growth, increasing 14% to average $5.3 billion for the quarter, comprising 41% of the total loan portfolio. Commercial and industrial loans averaged $3.9 billion during the first quarter compared to $3.3 billion in the prior year quarter. The securities portfolio increased $1.3 billion or 22% reflecting a higher level of investments in short- term U.S. agency securities. The increase in money market assets of 21% to $3.5 billion on average was principally the result of growth in global custody activities and the more active short-term investment of noninterest-bearing balances previously held with global subcustodians. Funding for the growth in earning assets came from several sources. Total interest-bearing deposits averaged $12.4 billion, up 16% or $1.7 billion from the first quarter of 1997. This growth came principally from foreign office time deposits (up $1.5 billion), and savings and money market deposits (up $307 million). The increase in foreign office time deposits resulted primarily from growth in global custody activity. Other interest-related funds grew 26% or $1.5 billion resulting from higher levels of federal funds purchased, the issuance of senior bank notes and $120 million of Floating Rate Capital Securities. Noninterest-related funds increased 10% to average $3.6 billion, due to strong demand and noninterest-bearing deposit growth and a $199 million increase in common stockholders' equity resulting from retained earnings. Provision for Credit Losses The provision for credit losses of $4.0 million increased $3.5 million from the first quarter of 1997 and essentially maintained the reserve for credit losses at the year-end 1997 level. For a discussion of the provision and reserve for credit losses, refer to the Asset Quality section. Noninterest Expenses Noninterest expenses totaled $236.2 million for the quarter, an increase of 14% or $29.7 million from the $206.5 million in the year-ago quarter. Approximately 75% of this increase is related to salaries and employee benefits resulting from staff growth, merit increases and higher performance-based compensation. In addition, the noninterest expense increase in the first quarter reflects $3.1 million of incremental expenses resulting from the NTQA acquisition, new private banking and trust offices, and continuing investments in technology. 16
Noninterest Expenses (continued) Salaries and benefits, which represent 61% of total noninterest expenses, increased to $145.2 million from $122.5 million in the year-ago quarter. The increase was primarily attributable to staff growth, merit increases and higher performance-based compensation. Staff levels increased from one year ago to support new business in both PFS and C&IS. Staff on a full-time equivalent basis at March 31, 1998 totaled 7,672, up 8% from 7,081 at March 31, 1997. Excellent new business results, higher foreign exchange profits, strong corporate earnings and the price increase in Northern Trust Corporation stock increased performance-based compensation expenses by $8.8 million from the first quarter of last year. Net occupancy expense totaled $16.9 million, up 4% from $16.1 million in the first quarter of 1997, due in large part to the opening of additional private banking and trust offices over the past twelve months, as well as additional space leased to support business growth. The principal components of the increase were higher net rental costs and lease operating expenses, building maintenance and depreciation. Equipment expense, comprised of depreciation, rental and maintenance costs, totaled $16.5 million, up $1.6 million or 11% from the first quarter of 1997. The principal components of the increase were higher levels of depreciation and maintenance for computer hardware, personal computers and equipment. Other operating expenses in the quarter totaled $57.6 million compared to $53.0 million last year. The increase in the 1998 expense level was primarily the result of continued investment in technology, expansion of the personal trust and banking office network, and the higher operating expenses necessary to support business growth. The expense categories most affected were computer software amortization, technical and consulting services, and business promotional expenses, partially offset by lower costs associated with processing errors and legal claims. The components of other operating expenses were as follows: <TABLE> <CAPTION> First Quarter Ended March 31 -------------- (In Millions) 1998 1997 - ------------------------------------------------------------------------------- <S> <C> <C> Business Development $ 8.1 $ 7.0 Purchased Professional Services 20.2 18.2 Telecommunications 3.4 3.0 Postage and Supplies 6.1 5.7 Software Amortization 10.0 9.3 Goodwill and Other Intangibles Amortization 3.3 2.4 Other Expense 6.5 7.4 - ------------------------------------------------------------------------------- Total Other Operating Expenses $57.6 $53.0 - ------------------------------------------------------------------------------- </TABLE> 17
Noninterest Expenses (continued) During the quarter Northern Trust made a strategic decision to exit the futures brokerage business by June 30, 1998 with the transfer of the business of Northern Futures Corporation (NFC) to Spear, Leeds & Kellogg. This decision will allow Northern Trust to focus on its core businesses of trust, investments and banking for individuals, corporations and institutions. It is expected that most NFC employees will join Spear, Leeds and Kellogg or find other positions within Northern Trust. Severance costs of $.2 million associated with this decision were recorded in the quarter. The transfer of this business will not have a material effect on Northern Trust's operating results. Year 2000 Projects Northern Trust's Year 2000 renovation and risk mitigation program which is fully described in the Capital Expenditures section of the Management's Discussion and Analysis included in the 1997 Annual Report to Shareholders, has proceeded on schedule during the first quarter of 1998. During the quarter, Northern Trust expensed $3.2 million in costs associated with this project. To date, $13.3 million of the $25 million estimated project costs have been incurred. This estimate includes the costs of purchasing licenses for software programming tools and the costs of the time of internal staff in Worldwide Technology and outside consultants. This estimate does not include the time that internal staff in user departments will devote to testing programming changes, although this testing is not expected to add significant incremental costs. Northern Trust's 1997 Annual Report also describes the Year 2000 Business Issues task force, part of whose work includes monitoring programs to contact vendors, suppliers, utilities, federal and state agencies and others with which Northern Trust's systems interact in areas important to its businesses to determine their Year 2000 readiness. This program will involve some additional expense that is not reflected in the above estimate but is not expected to be material. Provision for Income taxes The provision for income taxes was $45.1 million for the first quarter compared with $36.7 million in the year-ago quarter. The higher tax provision in 1998 resulted primarily from the growth in taxable earnings for both federal and state income tax purposes. The effective tax rate was 35% for 1998 versus 34% in 1997. BALANCE SHEET Total assets at March 31, 1998 were $24.3 billion and averaged $26.0 billion for the first quarter, up 16% from last year's average of $22.4 billion. Due to continued strong demand for credit, loans and leases grew to $13.0 billion at March 31, 1998, and averaged $12.7 billion for the quarter. This compares with $11.4 billion in total loans and leases at March 31, 1997 and $11.1 billion on average for the first quarter of last year. 18
BALANCE SHEET (continued) Driven by continued strong earnings growth, offset in part by Northern Trust's stock buyback program, common stockholders' equity increased to $1.7 billion at March 31, 1998 and averaged $1.6 billion for the quarter, up 14% from the $1.4 billion average in last year's first quarter. Total stockholders' equity averaged $1.8 billion for the first quarter compared with $1.6 billion in 1997. During the quarter, Northern Trust acquired a total of 397,888 of its common shares at a cost of $28.3 million pursuant to the stock buyback program authorized by the Board of Directors. An additional 2.8 million shares may be purchased after March 31, 1998 under the buyback program. Northern Trust's risk-based capital ratios remained strong at 9.8% for tier 1 capital and 13.0% for total capital at March 31, 1998. These capital ratios are well above the minimum regulatory requirements of 4% for tier 1 and 8% for total risk-based capital ratios. The leverage ratio (tier 1 capital to first quarter average assets) of 7.0% at March 31, 1998, also exceeded the minimum regulatory requirement of 3%. In addition, each of Northern Trust's subsidiary banks had a ratio above 8.4% for tier 1 capital, 11.1% for total risk-based capital, and 6.0% for the leverage ratio. ASSET QUALITY Nonperforming assets consist of nonaccrual loans, restructured loans and other real estate owned (OREO). Nonperforming assets at March 31, 1998 totaled $39.2 million, compared with $43.3 million at December 31, 1997 and $23.9 million at March 31, 1997. Domestic nonaccrual loans and leases, consisting primarily of commercial loans, totaled $33.7 million, or .27% of total domestic loans and leases at March 31, 1998. At December 31, 1997 and March 31, 1997, domestic nonaccrual loans and leases totaled $38.9 million and $19.1 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. 19
ASSET QUALITY (continued) <TABLE> <CAPTION> March 31 December 31 March 31 --------------------------------------------------- (In Millions) 1998 1997 1997 - ------------------------------------------------------------------------------------------------ <S> <C> <C> <C> Nonaccrual Loans Domestic Residential Real Estate $ 4.1 $ 5.3 $ 5.3 Commercial 22.4 26.3 6.0 Commercial Real Estate 6.8 7.1 7.6 Personal .4 .2 .2 - ------------------------------------------------------------------------------------------------ Total Domestic 33.7 38.9 19.1 International - - - - ------------------------------------------------------------------------------------------------ Total Nonaccrual Loans 33.7 38.9 19.1 Restructured Loans 2.5 2.5 2.6 Other Real Estate Owned 3.0 1.9 2.2 - ------------------------------------------------------------------------------------------------ Total Nonperforming Assets $39.2 $43.3 $23.9 - ------------------------------------------------------------------------------------------------ Total 90 Day Past Due Loans (still accruing) $16.1 $13.9 $28.1 - ------------------------------------------------------------------------------------------------ </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 1998 first quarter provision for credit losses was $4.0 million, compared with $.5 million in the first quarter of 1997. Net charge-offs totaled $3.9 million in the first quarter of 1998, versus $.5 million last year. The reserve for credit losses was $147.7 million or 1.14% of outstanding loans at March 31, 1998. This compares with $147.6 million or 1.17% of outstanding loans at December 31, 1997 and $148.3 million or 1.30% of outstanding loans at March 31, 1997. The lower reserve to outstanding loans ratio at March 31, 1998 is attributable to loan growth, a significant portion of which was 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. 20
MARKET RISK MANAGEMENT As described in the 1997 Annual Report to Shareholders, Northern 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 Corporation's interest rate risk position and the value-at-risk associated with the foreign exchange trading portfolio have not changed significantly since December 31, 1997. FORWARD-LOOKING INFORMATION This report contains statements that may be considered forward-looking, such as the discussion of Northern Trust's pricing trends, credit quality and outlook, new business results, expansion plans and anticipated expenses for Year 2000 systems renovation and readiness evaluations. 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, through acquisitions or otherwise, and generating a profit in those markets in a reasonable time. . Northern Trust's ability to continue to fund and accomplish technological innovation, improve processes and controls and attract and retain capable staff in order to deal with increasing volume and complexity in many of its businesses and technology challenges, such as Year 2000 renovation and the introduction of the Euro. 21
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, as well as Northern Trust's ability to accurately evaluate their readiness in this regard. . 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 1997 Annual Report to Stockholders (pp. 32-39) and in the sections of "Item 1 - Business" of the 1997 Annual Report on Form 10-K captioned "Government Policies", "Competition" and "Regulation and Supervision" (pp. 6-9). All forward-looking statements included in this document are based upon information presently available, and Northern Trust assumes no obligation to update any forward-looking statement. 22
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. <TABLE> <CAPTION> CONSOLIDATED ANALYSIS OF NET INTEREST INCOME NORTHERN TRUST CORPORATION First Quarter ---------------------------------------------------------------------------- (Interest and rate on a taxable equivalent basis) 1998 1997 -------------------------------------- ----------------------------------- ($ in Millions) Interest Volume Rate Interest Volume Rate - ------------------------------------------------------- ---------- ----------- ----------- ---------- ---------- --------- <S> <C> <C> <C> <C> <C> <C> Average Earning Assets Money Market Assets Federal Funds Sold and Resell Agreements $ 12.5 $ 897.9 5.66% $ 8.5 $ 639.6 5.41% Time Deposits with Banks 34.1 2,562.9 5.40 27.2 2,215.5 4.99 Other Interest-Bearing .8 45.6 6.81 .6 40.0 5.67 - ------------------------------------------------------- ---------- ----------- ----------- ----------- ------------ -------- Total Money Market Assets 47.4 3,506.4 5.49 36.3 2,895.1 5.09 - ------------------------------------------------------- ---------- ----------- ----------- ----------- ------------ -------- Securities U.S. Government 7.0 465.3 6.06 13.3 931.1 5.80 Obligations of States and Political Subdivisions 9.0 398.2 9.04 10.0 420.7 9.52 Federal Agency 86.5 6,081.7 5.77 59.6 4,260.5 5.67 Other 3.2 223.4 5.87 3.7 241.7 6.19 Trading Account .2 8.9 7.17 .1 7.1 7.29 - ------------------------------------------------------- ---------- ----------- ----------- ----------- ------------ -------- Total Securities 105.9 7,177.5 5.98 86.7 5,861.1 5.99 - ------------------------------------------------------- ---------- ----------- ----------- ----------- ------------ -------- Loans and Leases 212.4 12,735.0 6.76 185.0 11,120.5 6.75 - ------------------------------------------------------- ---------- ----------- ----------- ----------- ------------ -------- Total Earning Assets $365.7 $23,418.9 6.33% $308.0 $19,876.7 6.28% - ------------------------------------------------------- ---------- ----------- ----------- ----------- ------------ -------- Average Source of Funds Deposits Savings and Money Market $ 33.7 $ 4,155.7 3.29% $ 30.7 $ 3,951.4 3.15% Savings Certificates 30.3 2,124.4 5.79 28.4 2,021.8 5.70 Other Time 7.1 525.6 5.47 8.1 614.6 5.35 Foreign Offices Time 68.7 5,553.1 5.02 47.0 4,081.9 4.67 - ------------------------------------------------------- ---------- ----------- ----------- ----------- ------------ -------- Total Deposits 139.8 12,358.8 4.59 114.2 10,669.7 4.34 Federal Funds Purchased 36.3 2,673.6 5.50 19.6 1,517.4 5.24 Repurchase Agreements 20.9 1,538.9 5.51 21.7 1,681.5 5.24 Commercial Paper 2.0 144.9 5.64 1.9 145.7 5.40 Other Borrowings 21.8 1,685.0 5.25 22.9 1,808.7 5.13 Senior Notes 10.6 750.0 5.68 3.7 265.0 5.54 Long-Term Debt 8.1 434.5 7.44 8.0 427.8 7.47 Floating Rate Capital Securities 4.2 267.4 6.26 1.9 123.8 6.21 - ------------------------------------------------------- ---------- ----------- ----------- ----------- ------------ -------- Total Interest-Related Funds 243.7 19,853.1 4.97 193.9 16,639.6 4.72 - ------------------------------------------------------- ---------- ----------- ----------- ----------- ------------ -------- Interest Rate Spread - - 1.36% - - 1.56% - ------------------------------------------------------- ---------- ----------- ----------- ----------- ------------ -------- Noninterest-Related Funds - 3,565.8 - - 3,237.1 - - ------------------------------------------------------- ---------- ----------- ----------- ----------- ------------ -------- Total Source of Funds $243.7 $23,418.9 4.22% $193.9 $19,876.7 3.95% - ------------------------------------------------------- ---------- ----------- ----------- ----------- ------------ -------- Net Interest Income/Margin $122.0 - 2.11% $114.1 - 2.33% - ------------------------------------------------------- ---------- ----------- ----------- ----------- ------------ -------- ANALYSIS OF NET INTEREST INCOME CHANGES DUE TO VOLUME AND RATE First Quarter 1998/97 ------------------------------------- Change Due To -------------------------- (In Millions) Volume Rate Total - ---------------------------------------------------------------------------------------------- ----------- ------------ --------- Earning Assets $52.5 $ 5.2 $57.7 Interest-Related Funds 41.5 8.3 49.8 - ---------------------------------------------------------------------------------------------- ----------- ------------ --------- Net Interest Income $11.0 $ (3.1) $ 7.9 - ---------------------------------------------------------------------------------------------- ----------- ------------ --------- </TABLE> 23
PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Securities Holders The annual meeting of the stockholders of Northern Trust Corporation was held on April 21, 1998 for the purpose of electing fourteen Directors to hold office until the next annual meeting of stockholders. Proxies for the meeting were solicited pursuant to Section 14(a) of the Securities Exchange Act of 1934 and there was no solicitation in opposition to management's nominees. All of the management's nominees for Directors as listed in the proxy statement were elected by the following votes set forth below. There were no broker non-votes for any candidates. <TABLE> <CAPTION> Candidates "FOR" "WITHHELD" ---------- ---------- ---------- <S> <C> <C> Duane L. Burnham 96,829,717 445,613 Dolores E. Cross 97,051,259 445,613 Susan Crown 96,973,189 445,613 Robert S. Hamada 97,115,219 445,613 Barry G. Hastings 97,100,087 445,613 Robert A. Helman 97,067,323 445,613 Arthur L. Kelly 97,104,857 445,613 Frederick A. Krehbiel 96,288,198 445,613 William G. Mitchell 97,012,653 445,613 Edward J. Mooney 97,109,439 445,613 William A. Osborn 97,141,525 445,613 Harold B. Smith 97,127,401 445,613 William D. Smithburg 96,777,949 445,613 Bide L. Thomas 97,030,907 445,613 </TABLE> 24
Item 6. Exhibits and Reports on Form 8-K (a.) Exhibits -------- Exhibit (10) Material Contracts: (i) Northern Trust Corporation (1998) Annual Performance Plan. (ii) Amendment dated January 2, 1998 to Trust Agreement between The Northern Trust Company and Citizens and Southern Trust Company (Georgia), N.A., (predecessor of NationsBank which, effective January 1, 1998, was succeeded as trustee by U.S. Trust Company of California, N.A.) dated January 26, 1989, as amended. (iii) Amendment dated March 25, 1998 to the Northern Trust Employee Stock Ownership Plan (Section 5 of the Amendment supersedes Exhibit (10)(v) filed with the Quarterly Report on Form 10-Q for the quarter ended March 31, 1997). (iv) Seventh Amendment dated February 24, 1998 to Lease dated August 27, 1985 between American National Bank & Trust Company of Chicago as Trustee under Trust Agreement dated April 5, 1990 and known as Trust No. 110513-07 (Landlord) and The Northern Trust Company (Tenant), as amended. (v) Second Amendment dated January 16, 1998 to Lease dated July 8, 1987 between American National Bank & Trust Company of Chicago as Trustee under Trust Agreement dated July 12, 1984 and known as Trust No. 61523 (Landlord) and The Northern Trust Company (Tenant), as amended. Exhibit (27) Financial Data Schedule. Exhibit (99) Edited version of remarks delivered by Mr. William A. Osborn at the Annual Meeting of Stockholders of Northern Trust Corporation held on April 21, 1998. (b.) Reports on Form 8-K ------------------- In a report on Form 8-K, Northern Trust Corporation incorporated in Item 5 its January 20, 1998 press release, reporting on its earnings for the fourth quarter of 1997 and for its 1997 fiscal year. The press release, with summary financial information, was filed pursuant to Item 7. 25
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NORTHERN TRUST CORPORATION -------------------------- (Registrant) Date: May 14, 1998 By: Perry R. Pero ------------- Perry R. Pero Senior Executive Vice President and Chief Financial Officer Date: May 14, 1998 By: Harry W. Short -------------- Harry W. Short Senior Vice President and Controller (Chief Accounting Officer) 26
EXHIBIT INDEX The following exhibits have been filed herewith. Exhibit Number Description - ------ ----------- (10) Material Contracts: (i) Northern Trust Corporation (1998) Annual Performance Plan. (ii) Amendment dated January 2, 1998 to Trust Agreement between The Northern Trust Company and Citizens and Southern Trust Company (Georgia), N.A., (predecessor of NationsBank which, effective January 1, 1998, was succeeded as trustee by U.S. Trust Company of California, N.A.) dated January 26, 1989, as amended. (iii) Amendment dated March 25, 1998 to the Northern Trust Employee Stock Ownership Plan (Section 5 of the Amendment supersedes Exhibit (10)(v) filed with the Quarterly Report on Form 10-Q for the quarter ended March 31, 1997). (iv) Seventh Amendment dated February 24, 1998 to Lease dated August 27, 1985 between American National Bank & Trust Company of Chicago as Trustee under Trust Agreement dated April 5, 1990 and known as Trust No. 110513-07 (Landlord) and The Northern Trust Company (Tenant), as amended. (v) Second Amendment dated January 16, 1998 to Lease dated July 8, 1987 between American National Bank & Trust Company of Chicago as Trustee under Trust Agreement dated July 12, 1984 and known as Trust No. 61523 (Landlord) and The Northern Trust Company (Tenant), as amended. (27) Financial Data Schedule (99) Edited version of remarks delivered by Mr. William A. Osborn at the Annual Meeting of Stockholders of Northern Trust Corporation held on April 21, 1998. 27