EXHIBIT 13
Management's Discussion and Analysis
of Financial Condition and Results of Operations
---------------- ----------------
Summary of Selected Consolidated Financial Data
- -------------------------------------------------------------------------------
($ In Millions Except Per
Share Information) 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------
Noninterest Income
Trust Fees $ 974.2 $ 816.3 $ 689.2 $ 594.4 $ 505.3
Foreign Exchange Trading
Profits 107.7 103.5 104.8 58.8 55.3
Treasury Management Fees 67.9 69.9 60.2 55.3 49.6
Security Commissions and
Trading Income 30.2 28.0 26.1 23.9 21.7
Other Noninterest Income 55.2 53.9 54.2 47.6 46.5
- ------------------------------------------------------------------------------------------------
Total Noninterest Income 1,235.2 1,071.6 934.5 780.0 678.4
- ------------------------------------------------------------------------------------------------
Net Interest Income 518.8 477.2 438.2 388.3 357.6
Provision for Credit
Losses 12.5 9.0 9.0 12.0 6.0
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Income before Noninterest
Expenses 1,741.5 1,539.8 1,363.7 1,156.3 1,030.0
- ------------------------------------------------------------------------------------------------
Noninterest Expenses
Compensation 582.6 518.1 448.3 368.8 337.6
Employee Benefits 98.5 91.3 79.0 72.5 81.5
Occupancy Expense 74.3 67.9 66.7 60.7 57.9
Equipment Expense 63.6 62.2 62.2 56.0 50.0
Other Operating Expenses 306.0 257.6 235.6 210.9 182.5
- ------------------------------------------------------------------------------------------------
Total Noninterest
Expenses 1,125.0 997.1 891.8 768.9 709.5
- ------------------------------------------------------------------------------------------------
Income before Income
Taxes 616.5 542.7 471.9 387.4 320.5
Provision for Income
Taxes 211.5 188.8 162.5 128.6 100.5
- ------------------------------------------------------------------------------------------------
Net Income $ 405.0 $ 353.9 $ 309.4 $ 258.8 $ 220.0
- ------------------------------------------------------------------------------------------------
Net Income Applicable to
Common Stock $ 400.2 $ 349.0 $ 304.4 $ 253.9 $ 211.5
- ------------------------------------------------------------------------------------------------
Per Common Share
Net Income
Basic $ 1.81 $ 1.58 $ 1.37 $ 1.13 $ .95
Diluted 1.74 1.52 1.33 1.11 .93
Dividends Declared .495 .435 .375 .325 .275
Book Value--End of Period
(EOP) 9.25 8.19 7.27 6.40 5.76
Market Price--EOP 53.00 43.66 34.88 18.13 14.00
- ------------------------------------------------------------------------------------------------
Average Total Assets $ 30,177 $ 27,191 $ 24,052 $ 20,964 $ 19,409
Senior Notes--EOP 500 700 785 305 17
Long-Term Debt--EOP 659 458 440 428 335
Debt-Floating Rate
Capital Securities--EOP 268 267 267 -- --
- ------------------------------------------------------------------------------------------------
Ratios
Dividend Payout Ratio 27.6% 27.7% 27.5% 28.5% 28.6%
Return on Average Assets 1.34 1.30 1.29 1.23 1.13
Return on Average Common
Equity 20.67 20.47 20.17 18.64 17.58
Tier 1 Capital to Risk-
Weighted Assets--EOP 9.91 9.78 9.61 8.19 8.82
Total Capital to Risk-
Weighted Assets--EOP 13.66 13.06 12.78 11.87 12.49
Leverage Ratio 7.14 6.90 6.87 6.42 6.19
Average Stockholders'
Equity to Average Assets 6.81 6.71 6.78 7.09 7.07
Average Loans and Leases
Times Average
Stockholders' Equity 7.1x 7.3x 7.2x 7.0x 6.7x
- ------------------------------------------------------------------------------------------------
Stockholders--EOP 3,251 3,373 3,380 3,335 3,331
Staff--EOP (Full-time
equivalent) 8,583 8,156 7,553 6,933 6,531
Northern Trust Corporation (Corporation) is a bank holding company organized
in 1971 to hold all of the outstanding capital stock of The Northern Trust
Company (Bank), an Illinois banking corporation with its headquarters located
in the Chicago financial district. The Corporation also owns banks with
offices in Florida, Arizona, California, Texas, Colorado, Michigan and Wash-
ington and various other nonbank subsidiaries, including a securities broker-
age firm, an international investment consulting firm and a retirement
services company. The Bank has global custody operations in London, branches
in the Chicago metropolitan area, a trust office in Ohio and various subsidi-
aries including a leasing company, a Canadian trust company and a New York
Edge Act company. Although the operations of other subsidiaries will be of
increasing significance, it is
23
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Northern Trust Corporation
Management's Discussion and Analysis
of Financial Condition and Results of Operations
---------------- ----------------
expected that the Bank will continue to be the major source of the consoli-
dated assets, revenues and net income in the foreseeable future.
All references to "Northern Trust" refer to Northern Trust Corporation and
its subsidiaries on a consolidated basis.
The Management's Discussion and Analysis of Financial Condition and Results
of Operations should be read in conjunction with Northern Trust's Consolidated
Financial Statements and Consolidated Financial Statistics included herein.
Results of Operations
- -------------------------------------------------------------------------------
Overview. Net income for 1999 totaled a record $405.0 million, a 14.4%
increase from the $353.9 million earned in 1998 which in turn was 14.4%
greater than the $309.4 million earned in 1997. Fully diluted net income per
common share, reflecting a two-for-one stock split in December 1999, increased
14% to $1.74 from $1.52 in 1998, which was also up 14% from $1.33 in 1997. The
record net income performance produced a return on average common stockhold-
ers' equity of 20.67% compared with 20.47% in 1998 and 20.17% in 1997. The
return on average assets was 1.34% in 1999 compared with 1.30% in 1998 and
1.29% in 1997.
1999 marks the twelfth consecutive year of record earnings. Trust fees, net
interest income and foreign exchange trading profits were all at record lev-
els, while trust assets under administration reached $1.54 trillion at Decem-
ber 31, 1999, up $278.2 billion from a year ago. Strength in all of Northern
Trust's diversified revenue sources produced a 13% increase in revenues while
operating expenses also increased by 13%, resulting in a productivity ratio of
159%.
Stockholders' equity grew to $2.17 billion, as compared to $1.94 billion at
December 31, 1998 and $1.74 billion at December 31, 1997, primarily through
the retention of earnings, offset in part by the repurchase of common stock
pursuant to the Corporation's share buyback program.
The Board of Directors increased the quarterly dividend per common share
12.5% in November 1999, to $.135 from $.12, for a new annual rate of $.54.
This is the thirteenth consecutive year in which the dividend rate has been
increased. The Board's action reflects a policy of increasing the dividend
rate with increased profitability while retaining sufficient earnings to allow
for strategic expansion and the maintenance of a strong balance sheet and cap-
ital ratios.
Northern Trust's strategy will continue to focus on growing its two sharply
defined businesses: Corporate and Institutional Services (C&IS) and Personal
Financial Services (PFS). C&IS administers and manages domestic and global
investment pools for corporate and institutional clients worldwide. PFS pro-
vides financial services to individuals and closely held businesses through a
unique nine-state personal financial services franchise. An important element
in this strategy is increasing the penetration of the C&IS and PFS target mar-
kets with investment products and services provided by a third business unit,
Northern Trust Global Investments (NTGI). In executing this strategy, Northern
Trust emphasizes service quality through a high level of personal service com-
plemented by the effective use of technology. Operating support for these
business units is provided through the Worldwide Operations and Technology
business unit (WWOT). Expense growth and capital expenditures are closely
monitored to ensure that short- and long-term business strategies and perfor-
mance objectives are effectively balanced.
Noninterest Income. Noninterest income represented 69% of total taxable equiv-
alent revenue in 1999, compared with 68% one year ago. Noninterest income
totaled $1.24 billion in 1999, $1.07 billion in 1998, and $934.5 million in
1997.
Trust Fees. Trust fees accounted for 79% of total noninterest income and 54%
of total taxable equivalent revenue in 1999. Trust fees for 1999 increased 19%
to $974.2 million from $816.3 million in 1998, which was up 18% from $689.2
million in 1997. Trust fees have increased at a compound growth rate of 16.5%
for the past five years. Total trust assets under administration at December
31, 1999 were $1.54 trillion compared to $1.26 trillion a year ago, an
increase of 22%. Trust assets under management, included in the above,
increased 27% to $299.1 billion, up from $236.0 billion at the end of 1998.
Trust fees are based on the market value of assets managed and administered,
the volume of transactions, securities lending volume and spreads, and fees
for other services rendered. Asset-based fees are typically determined on a
sliding scale so that as the value of a client portfolio grows in size, North-
ern Trust receives a smaller percentage of the increasing value as fee income.
Therefore, market value or other changes in a portfolio's size do not typi-
cally have a proportionate impact on the level of trust fees. Certain invest-
ment management fee arrangements also may provide for performance fees which
are based on client portfolio returns exceeding predetermined levels. In addi-
tion, 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. Custody-related deposits maintained with
bank subsidiaries and foreign branches are primarily interest-bearing and
averaged $7.0 billion in 1999 and $6.0 billion in 1998.
24
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Northern Trust Corporation
Management's Discussion and Analysis
of Financial Condition and Results of Operations
---------------- ----------------
Northern Trust's fiduciary business encompasses Master Trust, Master Custody,
investment management and retirement services for corporate and institutional
asset pools, as well as a complete range of estate planning, fiduciary and
asset management services for individuals. Fees from these services are fairly
evenly distributed between C&IS and PFS. A discussion of each of these busi-
ness units and NTGI follows.
Corporate and Institutional Services. Trust fees in C&IS increased 14% in
1999 to $484.6 million from $423.7 million in 1998, which was up 16% from
$364.8 million in 1997. These fees are derived from the full set of Master
Trust and Master Custody services that Northern Trust provides to retirement
plans and institutional clients worldwide. Northern Trust's products include
worldwide custody, settlement, reporting and investment management. Investment
services include cash management, securities lending, performance analysis,
risk management and a broad range of active and passive investment products
provided through NTGI. In addition to these services, Northern Trust offers
its clients a comprehensive array of retirement consulting and recordkeeping
services.
All services provided by C&IS contributed to the $60.9 million increase in
trust fees. Fees from custody services increased 5% as a result of new busi-
ness and accounted for $8.2 million or 13% of the growth in C&IS trust fees.
Domestic and international securities lending fees were strong, combining to
increase $12.4 million or 15% to $97.6 million, resulting predominantly from
higher volumes. New business drove an $11.1 million or 31% increase in retire-
ment services recordkeeping and consulting fees.
C&IS trust fees also benefited from new asset management business, demon-
strating continued success in its offerings of both passive and actively man-
aged investment products to trust and banking clients. Excellent new business,
together with strong investment results, drove a $26.0 million or 21% increase
in fees from other investment products. These higher fees include $5.4 million
of revenue earned for co-administration services rendered to Northern Institu-
tional Funds beginning in May 1999.
Total C&IS trust assets under administration increased 22% from December 31,
1998 to $1.39 trillion at December 31, 1999. Of the C&IS trust assets under
administration, $207.5 billion is managed by Northern Trust, up 28% from
December 31, 1998. Trust assets under administration included approximately
$278 billion of global custody assets. The cash and other assets that have
been deposited by investment firms as collateral for securities they have bor-
rowed from trust clients are invested by Northern Trust and are included in
trust assets under administration as managed assets. The collateral totaled
$80.7 billion and $65.2 billion at December 31, 1999 and 1998, respectively.
Net new C&IS business sold and transitioned in 1999 was approximately $95
million in annualized trust fees, up 36% from 1998. Although most clients
avoided year-end transitions, Northern Trust did not experience the slowing of
transitions in the fourth quarter it had thought possible as a result of Year
2000-related precautions. Approximately 65% of the new business sold came from
existing clients and 35% from new relationships.
Personal Financial Services. Northern Trust has positioned itself in markets
having significant concentrations of wealth and growth potential. With the
establishment of new offices in Cleveland, Ohio and Seattle, Washington, and
the addition of six other new offices in 1999, Northern Trust's unique network
of Personal Financial Services offices includes 74 locations in nine states.
PFS also includes the Wealth Management Group, which provides customized prod-
ucts and services to meet the complex financial needs of families in the
United States and throughout the world with assets typically exceeding $100
million. At December 31, 1999 trust assets under administration in PFS totaled
$152.0
Consolidated Trust Assets Under Administration
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Five-
Year
Compound
Percent Growth
December 31 Change Rate
- ----------------------------------------------------------------------------------
($ In Billions) 1999 1998 1997 1996 1995 1999/98
- ----------------------------------------------------------------------------------
Corporate &
Institutional $ 207.5 $ 162.6 $ 138.1 $ 83.7 $ 67.2 28% 32%
Personal 91.6 73.4 58.5 46.6 38.3 25 24
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Total Managed Trust
Assets 299.1 236.0 196.6 130.3 105.5 27 29
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Corporate &
Institutional 1,178.4 975.9 845.3 618.2 483.4 21 24
Personal 60.4 47.8 37.4 30.4 25.0 26 24
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Total Non-Managed Trust
Assets 1,238.8 1,023.7 882.7 648.6 508.4 21 24
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Consolidated Trust
Assets Under
Administration $1,537.9 $1,259.7 $1,079.3 $778.9 $613.9 22% 25%
25
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Northern Trust Corporation
Management's Discussion and Analysis
of Financial Condition and Results of Operations
---------------- ----------------
billion, an increase of 25% from $121.2 billion at December 31, 1998, reflect-
ing record new business development in all states and strong growth in the
market value of securities. Of the personal trust assets under administration,
$91.6 billion was managed by Northern Trust at December 31, 1999 as compared
to $73.4 billion at December 31, 1998.
PFS trust fees also reached record levels, increasing 25% to $489.6 million
for the year compared to $392.6 million in 1998 and $324.4 million in 1997.
Every state recorded trust fee increases of 18% or more, with Florida, Arizona
and Texas particularly strong. The Wealth Management Group also had excellent
performance, with trust fees increasing 27%, and at year-end administered
$52.3 billion for significant family asset pools nationwide, up 36% from last
year. Another significant factor impacting fee growth was strong investment
performance in several Northern Trust Global Advisors (NTGA) "manager of man-
agers" funds for PFS clients resulting in $9.6 million of additional fees.
These additional fees were largely offset by increased performance-based
incentive payments to subadvisors that are reflected in other operating
expenses.
Net recurring new business sold and transitioned in 1999 totaled $73 million
in annualized trust fees, up 80% from 1998.
Northern Trust Global Investments. Northern Trust formalized and strengthened
the focus on its investment management business in 1998 by bringing together
the investment activities of the C&IS and PFS businesses in a newly created
business unit, Northern Trust Global Investments. The revenues associated with
this business unit are fully allocated to C&IS and PFS. NTGI brings together
Northern Trust's registered and bank investment advisers to integrate portfo-
lio management, research and trading with client servicing, institutional
sales, marketing and product management, while continuing to emphasize North-
ern Trust's overall relationship orientation.
NTGI's strategic focus on investment management, branding, product manage-
ment, distribution and client servicing supported Northern Trust's strong
growth in assets under management during 1999. Northern Trust continued to
achieve solid investment results across asset classes. For example, 10 of 38
capital market mutual funds advised by Northern Trust earned high ("A" or "B")
one-year rankings by Lipper Analytical Services, a respected mutual fund rat-
ing agency. Also, 15 of these 38 funds earned "A" or "B" three-year rankings
by Lipper. Many of Northern Trust's other investment products also demon-
strated strong performance during the year.
New capabilities were added to Northern Trust's array of investment products
in 1999. The active equity and fixed income product lines were strategically
expanded with the addition of several new funds, complementing the well-estab-
lished core capabilities in both asset classes. To support the expanding prod-
uct line, Northern Trust continued to add experienced investment personnel.
Northern Trust's institutional and retail mutual funds continued to enjoy sig-
nificant growth, reaching $32.9 billion in assets by year-end.
Northern Trust's competitive investment results, combined with new product
offerings, improvements in sales and client servicing and increases in market
values, provided the foundation for another year of strong growth in assets
under management. By year-end, Northern Trust managed $299.1 billion for per-
sonal and institutional clients, up from $236.0 billion at year-end 1998.
Foreign Exchange Trading Profits. Foreign ex-change trading profits totaled a
record $107.7 million, up 4% from $103.5 million in 1998 and $104.8 million in
1997. As custodian, Northern Trust provides foreign exchange services in the
normal course of business. Active management of currency positions, within
conservative limits, also contributes to trading profits. Foreign exchange
profits continued to result from transactions associated with the growing
global custody business. The increase in profits primarily reflects strong
results of active management offset by a decline in client activity resulting
from the conversion to the euro.
Treasury Management Fees. The fee portion of treasury management revenues
totaled $67.9 million in 1999, a 3% decrease from the $69.9 million reported
in 1998 compared with $60.2 million in 1997. Total treasury management reve-
nues, which, in addition to fees, include the computed value of compensating
deposit balances, increased 2% to $99.3 million from $97.0 million in 1998
compared to $91.6 million in 1997, reflecting the continued growth of new
business in both paper- and electronic-based products. The lower level of the
fee portion of treasury management revenues in 1999 can be attributed to a
higher percentage of clients choosing to pay for services through compensating
deposit balances versus fees, and certain accounting changes made for fee
accruals in 1998.
Security Commissions and Trading Income. Security commissions and trading
income totaled $30.2 million in 1999, compared with $28.0 million in 1998 and
$26.1 million in 1997. This income is primarily generated from securities bro-
kerage services provided by Northern Trust Securities, Inc. (NTSI). Additional
revenue is provided from underwriting selected general obligation tax-exempt
securities and interest risk management activities with clients. The 1999
results reflect continued strong growth in securities brokerage
26
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Northern Trust Corporation
Management's Discussion and Analysis
of Financial Condition and Results of Operations
---------------- ----------------
Analysis of Net Interest Income (FTE)
- -------------------------------------------------------------------------------
Percent Change
- -----------------------------------------------------------------------------
($ In Millions) 1999 1998 1997 1999/98 1998/97
- -----------------------------------------------------------------------------
Interest Income $ 1,568.6 $ 1,503.1 $ 1,332.8 4.4% 12.8%
FTE Adjustment 38.6 35.9 32.7 7.5 9.8
- -----------------------------------------------------------------------------
Interest Income-FTE 1,607.2 1,539.0 1,365.5 4.4 12.7
Interest Expense 1,049.8 1,025.9 894.6 2.3 14.7
- -----------------------------------------------------------------------------
Net Interest Income-FTE $ 557.4 $ 513.1 $ 470.9 8.6% 9.0%
- -----------------------------------------------------------------------------
Average Volume
Earning Assets $27,241.5 $24,624.5 $21,629.7 10.6% 13.8%
Interest-Related Funds 23,170.1 20,940.7 18,292.6 10.6 14.5
Noninterest-Related Funds 4,071.4 3,683.8 3,337.1 10.5 10.4
- -----------------------------------------------------------------------------
Change in
Percentage
- -----------------------------------------------------------------------------
Average Rate
Earning Assets 5.90% 6.25% 6.32% (.35) (.07)
Interest-Related Funds 4.53 4.90 4.89 (.37) .01
Interest Rate Spread 1.37 1.35 1.43 .02 (.08)
Total Source of Funds 3.85 4.17 4.14 (.32) .03
- -----------------------------------------------------------------------------
Net Interest Margin 2.05% 2.08% 2.18% (.03) (.10)
Refer to pages 76 and 77 for a detailed analysis of net interest income.
activities, up 15%, offset in part by a decline in futures commissions result-
ing from Northern Trust's exit from the futures business during 1998.
Other Operating Income. Other operating income includes loan, letter of
credit and deposit-related service fees and other miscellaneous income from
asset sales. Other operating income in 1999 totaled $54.5 million compared
with $52.6 million in 1998 and $53.5 million in 1997. Nonrecurring gains in
1999 totaled $4.0 million resulting from the sale of Northern Trust's Harlem
Avenue Branch on the northwest side of Chicago, and the sale of mortgage ser-
vicing rights on certain loans that had previously been sold. Nonrecurring
gains in 1998 totaled $3.8 million and included sales of exchange membership
seats owned by Northern Futures Corporation, a sale of mortgage loans and the
sale of Northern Trust's small California investment management subsidiary,
Berry, Hartell, Evers & Osborne, Inc. Included in the 1997 results was $11.1
million resulting from settlements reached with Illinois banking regulators
concerning the disposition of certain unclaimed balances accumulated over a
number of years. Excluding nonrecurring items, the increase in other operating
income in 1999 is primarily attributable to higher loan service and banking-
related fees.
Investment Security Gains. Net security gains totaling $.7 million were real-
ized in 1999. This compares with net gains of $1.3 million in 1998 and $.7
million in 1997.
Net Interest Income. Net interest income is defined as the total of interest
income and amortized fees on earning assets, less interest expense on deposits
and borrowed funds, adjusted for the impact of off-balance sheet hedging
activity. Earning assets, which consist of securities, loans and money market
assets, are financed by a large base of interest-bearing funds, including
retail deposits, wholesale deposits, short-term borrowings, senior notes and
long-term debt. Earning assets are also funded by net noninterest-related
funds. Net noninterest-related funds consist of demand deposits, the reserve
for credit losses and stockholders' equity, reduced by nonearning assets
including cash and due from banks, items in process of collection, buildings
and equipment and other nonearning assets. Variations in the level and mix of
earning assets, interest-bearing funds and net noninterest-related funds, and
their relative sensitivity to interest rate movements, are the dominant fac-
tors affecting net interest income. In addition, net interest income is
impacted by the level of nonperforming assets and client use of compensating
deposit balances to pay for services.
Net interest income for 1999 was a record $518.8 million, up 9% from $477.2
million in 1998, which was up 9% from $438.2 million in 1997. When adjusted to
a fully taxable equivalent (FTE) basis, yields on taxable, nontaxable and par-
tially 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 1999 was a
record $557.4 million, an increase of $44.3 million or 9% from $513.1 million
in 1998 which in turn was up 9% from $470.9 million in 1997. Through steady
asset growth and conservative interest rate risk management, Northern Trust
has been successful in generating year over year improvement in net interest
income as evidenced by the fact that 1999 represents the
27
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Northern Trust Corporation
Management's Discussion and Analysis
of Financial Condition and Results of Operations
---------------- ----------------
sixteenth consecutive year of record performance. The increase in FTE net
interest income in 1999 was driven primarily by an 11% increase in both aver-
age earning assets and noninterest-related funds.
The net interest margin declined to 2.05% from 2.08% last year. The decline
in the margin is attributable to the growth in low-spread money market assets
and federal agency securities. Earning assets averaged $27.2 billion, up 11%
from the $24.6 billion reported in 1998, which was up from $21.6 billion in
1997. The $2.6 billion growth in average earning assets reflects a 9% or $1.2
billion increase in loans, a 7% or $486 million increase in securities, and a
23% or $899 million increase in money market assets. For a complete analysis
of volume and interest rate changes affecting net interest income refer to the
Average Statement of Condition with Analysis of Net Interest Income on pages
76 and 77.
Loan volume for the year averaged $14.5 billion with all of the growth
reflected in the domestic portfolio as international loans decreased $118 mil-
lion on average. The domestic growth came principally from residential mort-
gage activities, up $561 million, and commercial and industrial loans, up $303
million. The loan portfolio includes noninterest-bearing domestic and interna-
tional overnight advances related to processing certain trust client invest-
ments, which averaged $694 million in 1999, down from $767 million a year ago.
Securities averaged $8.0 billion in 1999, up 7% from $7.5 billion a year ago
resulting primarily from higher levels of federal agency securities. Money
market assets averaged $4.7 billion in 1999 versus $3.8 billion in 1998.
The increase in average earning assets of $2.6 billion was funded through
growth in interest-bearing deposits, other interest-related funding sources,
and noninterest-related funds. The deposit growth was concentrated primarily
in foreign office time deposits, up $810 million resulting from increased
global custody activity, and higher levels of savings and money market depos-
its, up $582 million. Other interest-related funds averaged $8.9 billion, up
$712 million, principally from federal funds purchased, up $606 million and
securities sold under agreements to repurchase, up $448 million, offset in
part by a reduction of $363 million in other borrowings. Average net noninter-
est-related funds increased $388 million, mainly due to higher demand deposits
and stockholders' equity. Stockholders' equity for the year averaged $2.1 bil-
lion, an increase of $231 million or 13% from 1998, principally due to the
strong earnings performance, offset in part by the repurchase of common stock
pursuant to the Corporation's share buyback program.
Provision for Credit Losses. The provision for credit losses of $12.5 million
was $3.5 million higher than the $9.0 million required in each of the two pre-
ceding years. The overall quality of the loan portfolio remains strong. For a
discussion of the reserve for credit losses, refer to pages 38 through 40.
Noninterest Expenses. Noninterest expenses for 1999 totaled $1.1 billion, up
$127.9 million or 13% from $997.1 million in 1998, which was up 12% from
$891.8 million in 1997. Included in the 1999 results were $6.8 million of
project expenses related to Year 2000 initiatives. Expense increases during
1999 reflect a variety of growth initiatives, including staff additions and
higher operating expenses necessary to support record levels of new business
and growing transaction volumes, investments in technology and PFS office
expansion, business promotion and the expenses of co-administration services
now being provided to the two mutual fund families. Performance-based compen-
sation increased 28%, resulting from exceptional new business results, out-
standing client investment portfolio performance and record net income.
Noninterest expenses for 1998 increased $105.3 million or 12% over 1997.
Expenses in 1998 reflect $16.0 million of incremental expenses related to
acquisitions and $11.5 million of project costs related to Year 2000
initiatives. Total expenses for 1997 included $10.1 million in charges relat-
ing to Year 2000 initiatives and $3.5 million in costs associated with the
planned relocation of Northern Trust's computer data facility. The remainder
of the expense increase in 1998 reflects a variety of growth initiatives,
including staff additions and higher operating expenses necessary to support
new business and growing transaction volumes, investments in technology and
PFS office expansion. Performance-based compensation also increased, resulting
from excellent new business results, improved client investment portfolio per-
formance, strong corporate earnings and the price increase in Northern Trust
Corporation common stock.
The productivity ratio, defined as total revenue on a taxable equivalent
basis divided by noninterest expenses, was 159% for 1999, unchanged from last
year and up slightly from 158% in 1997.
Compensation and Benefits. Compensation and benefits, which represent 61% of
total noninterest expenses, increased 12% to $681.1 million in 1999 from
$609.4 million in 1998, which was up 16% from $527.3 million in 1997. Compen-
sation costs, the largest component of noninterest expenses, totaled $582.6
million, up $64.5 million or 12% from $518.1 million a year ago. The increase
in 1999 was primarily attributable to staff additions, higher performance-
based compensation and salary increases. Performance-based compensation
28
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Northern Trust Corporation
Management's Discussion and Analysis
of Financial Condition and Results of Operations
---------------- ----------------
expense was up from the prior year by $32.8 million in 1999 and $23.6 million
in 1998, reflecting the impact of excellent new business results, outstanding
client investment portfolio performance, record corporate earnings and the price
increase in Northern Trust Corporation common stock. As a result of adopting
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" in 1999, Northern Trust capitalized
salary and benefit costs totaling $13.5 million as software.
Staff on a full-time equivalent basis averaged 8,200 in 1999, up 5% compared
with 7,844 in 1998, which was up 9% from 7,198 in 1997. Average staff levels
in 1999 would have been approximately 8% higher than a year ago and compensa-
tion expense would have increased more, had Northern Trust not outsourced
Illinois check processing at the end of 1998. These expenses are now included
in outside services purchased and reflected in other operating expenses. The
increase in staff levels during 1999 was required to support growth
initiatives and strong new business in both C&IS and PFS. Staff on a full-time
equivalent basis totaled 8,583 at December 31, 1999, an increase of 5% from
8,156 at the end of last year. Staff levels at year-end would have been
approximately 9% higher than a year ago had Illinois check processing not been
outsourced.
Employee benefit costs for 1999 totaled $98.5 million, up $7.2 million or 8%
from $91.3 million in 1998 which was 16% higher than the $79.0 million in
1997. The increase in employee benefits in each of the past two years primar-
ily reflects higher payroll taxes, medical and dental plan costs, and retire-
ment plan benefits resulting predominantly from staff growth.
Occupancy Expense. Net occupancy expense totaled $74.3 million, up 9% or $6.4
million from $67.9 million in 1998, which was up 2% from $66.7 million in
1997. The principal components of the 1999 increase were higher rental costs,
real estate taxes, and depreciation and maintenance of buildings. The increase
in 1998 resulted from higher building operating and maintenance costs, par-
tially offset by lower real estate taxes.
Equipment Expense. Equipment expense, which includes depreciation, rental,
and maintenance costs, totaled $63.6 million in 1999, 2% higher than the $62.2
million in 1998 and 1997. The 1999 results reflect higher levels of computer
hardware depreciation expense, offset by lower rental and maintenance costs of
computers and equipment. The 1998 results reflect higher levels of hardware
depreciation expense, computer and equipment maintenance charges and leasing
of data lines, offset by lower rental costs of computers and equipment.
Other Operating Expenses. Other operating expenses for 1999 totaled $306.0
million, up 19% from $257.6 million in 1998, which was up 9% from $235.6 mil-
lion in 1997. The increase in the 1999 expense level was principally the
result of continued investment in technology, expansion of the personal trust
and banking office network, and higher operating expenses necessary to support
business growth. These initiatives resulted in increases in technical and con-
sulting service fees, data processing costs, business development efforts,
telecommunications and amortization of software. Partially offsetting these
increases were lower costs associated with legal claims and processing errors.
Included in other operating expenses are technical and consulting services,
which increased $26.9 million primarily as a result of performance-based fees
paid to investment management subadvisers, and $17.5 million of 1999 expenses
related to the outsourcing arrangement for the Illinois check processing func-
tion that commenced at the end of 1998.
Investments in technology are designed principally to support and enhance the
transaction processing, investment management and securities handling capabil-
ity of the trust and banking businesses, as well as relationship management
and client interaction. Additional capital expenditures planned for systems
technology will result in future expenses for the depreciation of hardware and
amortization of software. Depreciation and software amortization are charged
to equipment and other operating expenses, respectively.
Provision for Income Taxes. The provision for income taxes was $211.5 million
in 1999 compared with $188.8 million in 1998 and $162.5 million in 1997. The
increase reflects the continued growth in income from federally taxable
sources while tax-exempt municipal interest has remained relatively stable.
The effective tax rate was 34% for 1999 compared with 35% for 1998 and 34% for
1997.
Business Segments
- -------------------------------------------------------------------------------
Northern Trust Corporation, under Chairman and Chief Executive Officer William
A. Osborn, organizes client services around two principal business units, C&IS
and PFS. Investment products are provided to the clients of these business
units by NTGI. Operating and systems support is provided to each of the busi-
ness units by WWOT. Each of these four business units has a president who
reports to President and Chief Operating Officer Barry G. Hastings. For man-
agement reporting purposes, the operations of NTGI and WWOT are allocated to
the other business units. The Risk Management Unit includes the Treasury
Department and reports directly to Mr. Osborn. Mr. Osborn has been identified
as the chief operating decision maker because he has final authority over
resource allocation decisions and performance assessment.
29
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Northern Trust Corporation
Management's Discussion and Analysis
of Financial Condition and Results of Operations
---------------- ----------------
The results of the major business units are presented in order to promote a
greater understanding of their financial performance. The information, pre-
sented on an internal management reporting basis, is derived from internal
accounting systems that support the strategic objectives and management struc-
ture. Management has developed accounting systems to allocate revenue and
expenses related to each segment, as well as certain corporate support servic-
es, worldwide operations and systems development expenses. The management
reporting systems also incorporate processes for allocating assets, liabilities
and the applicable interest income and expense. Tier 1 and tier 2 capital is
allocated based on the federal risk-based capital guidelines at a level that is
consistent with Northern Trust's consolidated capital ratios, coupled with man-
agement's judgment of the operational risks inherent in the business. Alloca-
tions of capital and certain corporate expenses may not be representative of
levels that would be required if the segments were independent entities. The
accounting policies used for management reporting are the same as those
described in "Accounting Policies," in the Notes to Consolidated Financial
Statements. Transfers of income and expense items are recorded at cost; there
is no intercompany profit or loss on sales or transfers between business units.
Northern Trust's presentations are not necessarily consistent with similar
information for other financial institutions. For management reporting purpos-
es, certain corporate income and expense items are not allocated to the busi-
ness units and are presented as part of "Treasury and Other." These items
include the impact of long-term debt, preferred equity, holding company invest-
ments, and certain corporate operating expenses.
The following tables reflect the earnings contribution of Northern Trust's
business segments for the years ended December 31, 1999, 1998 and 1997 on the
basis described above.
Corporate and
Institutional Services
- --------------------------------------------------------------
($ In Millions) 1999 1998 1997
- --------------------------------------------------------------
Noninterest Income
Trust Fees $ 484.6 $ 423.7 $ 364.8
Other 200.1 197.2 183.2
Net Interest Income after
Provision for Credit Losses* 174.5 151.4 126.9
Noninterest Expenses 536.1 505.1 435.6
- --------------------------------------------------------------
Income before Income Taxes* 323.1 267.2 239.3
Provision for Income Taxes* 125.9 104.6 94.3
- --------------------------------------------------------------
Net Income $ 197.2 $ 162.6 $ 145.0
- --------------------------------------------------------------
Percentage Net Income
Contribution 49% 46% 47%
- --------------------------------------------------------------
Average Assets $13,627.9 $11,827.1 $10,246.3
Personal
Financial Services
- --------------------------------------------------------------------------
($ In Millions) 1999 1998 1997
- --------------------------------------------------------------------------
Noninterest Income
Trust Fees $ 489.6 $ 392.6 $ 324.4
Other 59.2 52.0 45.4
Net Interest Income after Provision for
Credit Losses* 370.0 331.9 316.0
Noninterest Expenses 548.9 458.6 410.6
- --------------------------------------------------------------------------
Income before Income Taxes* 369.9 317.9 275.2
Provision for Income Taxes* 144.9 126.1 109.5
- --------------------------------------------------------------------------
Net Income $ 225.0 $ 191.8 $ 165.7
- --------------------------------------------------------------------------
Percentage Net Income
Contribution 56% 54% 53%
- --------------------------------------------------------------------------
Average Assets $11,494.4 $10,124.5 $ 8,931.9
Treasury and Other
- --------------------------------------------------------------------------
($ In Millions) 1999 1998 1997
- --------------------------------------------------------------------------
Noninterest Income
Trust Fees $ -- $ -- $ --
Other 1.7 6.1 16.7
Net Interest Income after Provision for
Credit Losses* .4 20.8 19.0
Noninterest Expenses 40.0 33.4 45.6
- --------------------------------------------------------------------------
Loss before Income Taxes* (37.9) (6.5) (9.9)
Benefit for Income Taxes* 20.7 6.0 8.6
- --------------------------------------------------------------------------
Net Income $ (17.2) $ (.5) $ (1.3)
- --------------------------------------------------------------------------
Percentage Net Income
Contribution (5)% --% --%
- --------------------------------------------------------------------------
Average Assets $ 5,054.7 $ 5,239.1 $ 4,873.5
Consolidated
- --------------------------------------------------------------------------
($ In Millions) 1999 1998 1997
- --------------------------------------------------------------------------
Noninterest Income
Trust Fees $ 974.2 $ 816.3 $ 689.2
Other 261.0 255.3 245.3
Net Interest Income after Provision for
Credit Losses* 544.9 504.1 461.9
Noninterest Expenses 1,125.0 997.1 891.8
- --------------------------------------------------------------------------
Income before Income Taxes* 655.1 578.6 504.6
Provision for Income Taxes* 250.1 224.7 195.2
- --------------------------------------------------------------------------
Net Income $ 405.0 $ 353.9 $ 309.4
- --------------------------------------------------------------------------
Percentage Net Income Contribution 100% 100% 100%
- --------------------------------------------------------------------------
Average Assets $30,177.0 $27,190.7 $24,051.7
*Stated on a fully taxable equivalent basis (FTE). The consolidated figures
include $38.6 million, $35.9 million and $32.7 million of FTE adjustment for
1999, 1998 and 1997, respectively.
Note: Certain reclassifications have been made to 1998 and 1997 financial
information to conform to the current year's presentation.
30
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Northern Trust Corporation
Management's Discussion and Analysis
of Financial Condition and Results of Operations
---------------- ----------------
Corporate and Institutional Services. Headed by Sheila A. Penrose, President--
C&IS, this business unit provides trust, commercial banking and treasury man-
agement services to corporate and institutional clients. Trust activities
encompass custody services for securities in the United States and foreign mar-
kets, as well as securities lending, asset management and actuarial and record-
keeping services for retirement plans. Foreign exchange services, which
primarily relate to global custody activities, are also part of C&IS, as is a
full range of commercial banking services. Treasury management services are
provided to corporations and financial institutions and include a variety of
products and services to accelerate cash collections, control disbursement out-
flows and generate information to manage cash products.
Net income for C&IS increased 21% in 1999 and totaled $197.2 million compared
to $162.6 million in 1998 which was up 12% from the $145.0 million in 1997. The
growth in net income was primarily driven by 14% growth in trust fees, which
represent 56% of C&IS revenues in 1999.
Northern Trust, through C&IS, is a leading provider of Master Trust and Master
Custody services to three targeted markets: retirement plans, institutional
clients, and international clients. Retirement plans include the large corpo-
rate market, middle market and public and union retirement funds. The institu-
tional market includes insurance companies, foundations and endowments and
trust services for domestic correspondent banks. International clients include
asset pools domiciled outside the U.S. and group trusts. A summary of C&IS
trust fees and trust assets for each market follows.
Corporate and Institutional Services
Summary of Trust Fees
- --------------------------------------------------------------------------------
(In Millions) 1999 1998 1997
- --------------------------------------------------
Domestic
Retirement Plans $ 304.3 $ 273.5 $243.9
Institutional 85.0 74.5 59.7
International 95.3 75.7 61.2
- --------------------------------------------------
Total Trust Fees $ 484.6 $ 423.7 $364.8
Corporate and Institutional Services
Summary of Trust Assets Under Administration
- --------------------------------------------------
December 31
- --------------------------------------------------
(In Billions) 1999 1998 1997
- --------------------------------------------------
Domestic
Retirement Plans $ 800.4 $ 662.3 $563.9
Institutional 250.1 229.4 204.5
International 253.6 180.9 156.8
Securities Lending/Other 81.8 65.9 58.2
- --------------------------------------------------
Total Trust Assets $1,385.9 $1,138.5 $983.4
The modest growth in other noninterest income in 1999 resulted from a 4%
increase in foreign exchange trading profits, partially offset by a reduction
in treasury management fees. Total treasury management revenues, which, in
addition to fees, include the computed value of compensating deposit balances,
increased 2% in 1999. The decrease in treasury management fees reflects a
higher percentage of clients choosing to pay for services through compensating
deposit balances, and certain accounting changes made to fee accruals in 1998.
Net interest income after provision for credit losses on a FTE basis increased
15% in 1999 and 19% in 1998. The increase in 1999 was driven by a 15% increase
in earning assets, with loans increasing 5% and money market assets increasing
10%. Earning assets in 1998 were up 17% from 1997 primarily the result of 11%
loan growth and a 16% increase in money market assets.
Total expenses of C&IS, which include both the direct expenses of the business
unit and indirect expense allocations from NTGI and WWOT for product and oper-
ating support, increased 6% in 1999 and 16% in 1998. The growth in expenses is
attributable to increases in compensation and employee benefits and higher
operating costs to support business growth.
Personal Financial Services. Headed by Mark Stevens, President--PFS, this busi-
ness unit encompasses personal trust and investment management services, estate
administration, banking and residential mortgage lending offered through the
Bank in Illinois and Ohio and affiliates in seven other states. The personal
financial services strategy includes focusing on high net worth individuals in
each banking subsidiary's target market and through its Wealth Management Group
internationally. NTSI is also part of PFS.
PFS net income totaled $225.0 million in 1999, an increase of 17% from 1998
which in turn was 16% above the net income achieved in 1997. Growth in trust
activities continued to be the driver of the record performance for the busi-
ness unit with trust fees increasing 25% as a result of record new business
throughout Northern Trust's PFS network and favorable securities markets. Trust
fees allocated to Illinois in 1999 included $9.6 million of performance-based
fees earned by NTGA as a result of strong investment performance in several
funds managed for PFS clients. A summary of trust fees and trust assets broken
down by state and Wealth Management follows.
31
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Northern Trust Corporation
Management's Discussion and Analysis
of Financial Condition and Results of Operations
---------------- ----------------
Personal Financial Services
Summary of Trust Fees
- --------------------------------------------------------------------------------
(In Millions) 1999 1998 1997
- --------------------------------------------
Illinois $181.8 $148.2 $126.5
Florida 146.9 116.8 93.2
California 59.5 50.3 43.6
Arizona 29.2 23.4 18.8
Texas 17.9 13.8 10.4
Wealth Management 51.0 40.0 31.9
Other States 3.3 .1 --
- --------------------------------------------
Total Trust Fees $489.6 $392.6 $324.4
Personal Financial Services
Summary of Trust Assets Under Administration
- --------------------------------------------
December 31
- --------------------------------------------
(In Billions) 1999 1998 1997
- --------------------------------------------
Illinois $ 41.9 $ 36.9 $ 32.6
Florida 30.5 24.5 18.4
California 12.2 11.4 9.6
Arizona 5.9 4.6 3.9
Texas 4.3 3.6 2.9
Wealth Management 52.3 38.4 27.6
Other States 4.9 1.8 .9
- --------------------------------------------
Total Trust Assets $152.0 $121.2 $ 95.9
A significant portion of PFS growth has been driven by increasing market share
in established locations. This growth has been supplemented by expansion within
existing and new markets. From its 74 office network, Northern Trust reaches
approximately 26% of the nation's high net worth households, defined as those
with at least $1 million of investable assets. Over the next four years, North-
ern Trust plans to continue this expansion to additional markets with promising
demographics. The goal is to build the PFS national network to approximately
100 offices within as many as fifteen states in targeted markets where approxi-
mately 40% of all U.S. high net worth households are located.
The growth in other noninterest revenues in 1999 reflects strong growth in
brokerage commissions at NTSI, in addition to nonrecurring gains of $4.0 mil-
lion resulting from the sale of the Harlem Avenue Branch and the sale of mort-
gage servicing rights on certain loans that had previously been sold.
Nonrecurring gains in 1998 totaled $2.2 million and included the sale of mort-
gage loans and the sale of Northern Trust's small California investment manage-
ment subsidiary. Driven by growth in residential mortgage loans, net interest
income after provision for credit losses increased 11% in 1999 and totaled
$370.0 million. In 1998, net interest income totaled $331.9 million and
increased 5% over 1997.
PFS noninterest expenses, which include both the direct expenses of the busi-
ness unit and indirect expense allocations from NTGI and WWOT for product and
operating support, increased 20% in 1999 and 12% in 1998. The increase in 1999
primarily reflects merit increases and staff growth to support record new busi-
ness, performance-based compensation, and higher operating costs to support
business growth. Reflecting successful new business development and portfolio
management results, performance-based compensation for PFS was up 45% and busi-
ness promotion costs rose 17%.
Treasury and Other. The Risk Management Unit, headed by Perry R. Pero, Vice
Chairman and Chief Financial Officer, includes the treasury function. The Trea-
sury Department is responsible for managing the Bank's wholesale funding, capi-
tal position and interest rate risk, as well as the portfolio of interest rate
risk management instruments. It is also responsible for the investment portfo-
lios of the Corporation and the Bank and provides investment advice and manage-
ment services to the subsidiary banks. "Other" corporate income and expenses
represent items that are not allocated to the business units and generally rep-
resent certain nonrecurring items and certain executive level compensation.
One-time gains in 1998 included $1.6 million realized on the sale of exchange
membership seats owned by Northern Futures Corporation. Other operating income
in 1997 included $11.1 million resulting from settlements reached with Illinois
banking regulators concerning the disposition of certain unclaimed balances.
Net interest income was down significantly from $20.8 million in 1998 reflect-
ing a reduction in the rate used to allocate tier 2 capital to the business
units and the impact of rising interest rates in 1999. The rate change for
allocating capital reduced Treasury and Other net interest income by $14.4 mil-
lion and increased C&IS and PFS net interest income by $9.0 million and $5.4
million, respectively.
Northern Trust Global Investments. Headed by Stephen B. Timbers, President--
NTGI, this business unit provides investment products and services to clients
of C&IS and PFS through registered and bank investment managers. NTGI activi-
ties include equity and fixed income research and portfolio management servic-
es. NTGI also acts as the investment adviser and, beginning in 1999, co-
administrator to the Corporation's two families of proprietary mutual funds,
Northern Funds and Northern Institutional Funds. NTGA and NTQA are also
included in NTGI, although for management reporting purposes, the majority of
these subsidiaries' activities are included in C&IS. The other revenues and
expenses of this business unit are fully allocated to C&IS and PFS.
32
- --------------------------------------------------------------------------------
Northern Trust Corporation
Management's Discussion and Analysis
of Financial Condition and Results of Operations
---------------- ----------------
Worldwide Operations and Technology. Headed by James J. Mitchell, President--
WWOT, this business unit supports sales, relationship management, transaction
processing and product management activities for C&IS, PFS and NTGI. The
expenses of this business unit are fully allocated to other business units.
Subsequent Implementation of Accounting Standards
- --------------------------------------------------------------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument (including cer-
tain derivative instruments embedded in other contracts) be recorded on the
balance sheet as either an asset or liability measured at its fair value. SFAS
No. 133 requires that changes in the derivative's fair value be recognized cur-
rently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to off-
set related results on the hedged item in the income statement, and requires
that a company formally document, designate, and assess the effectiveness of
transactions that receive hedge accounting.
In July 1999, FASB issued SFAS No. 137 which amended SFAS No. 133 by deferring
the effective date by one year to January 1, 2001 from January 1, 2000.
Although early adoption is permitted, Northern Trust plans to adopt the new
statement on January 1, 2001.
The accounting requirements of this statement are complex and the Financial
Accounting Standards Board is in the process of responding to several signifi-
cant interpretation requests. Northern Trust has concluded that certain of its
present hedge strategies, including those used to manage fixed interest rate
risk in its loan portfolio, are not likely to qualify for the special account-
ing treatment contemplated by SFAS No. 133. Accordingly, management is evaluat-
ing various alternatives for managing interest rate risk which may include
adjustments to hedge strategies, termination of certain swap contracts, sale of
fixed rate assets and issuance of longer-term fixed rate liabilities. Manage-
ment would expect to implement one or more of these alternatives prior to, or
in connection with, the adoption of SFAS No. 133. Until the interpretative
issues referred to above are addressed and these alternatives fully evaluated
by management, it is not possible to quantify the actual impact that this
statement will have on the earnings and financial position of Northern Trust.
Management does expect that a reduction in the use of interest rate swaps to
manage interest rate risk could reduce net interest income by up to $1.0 mil-
lion on an annualized basis.
Capital Expenditures
- --------------------------------------------------------------------------------
Northern Trust's Management Committee reviews and approves proposed capital
expenditures that exceed $500,000. This process is designed to assure that the
major projects to which Northern Trust commits its resources produce benefits
compatible with corporate strategic goals.
Capital expenditures in the current year included ongoing enhancements to
Northern Trust's hardware and software capabilities, leasehold improvements and
furnishings associated with the opening of new offices in Illinois, California,
Michigan, Florida, Washington and Ohio as well as expansion or remodeling in
several existing offices. Capital expenditures for 1999 totaled $196.1 million,
of which $33.5 million was for building and leasehold improvements, $20.6 mil-
lion for furnishings, $45.7 million for computer hardware and machinery and
$96.3 million for software. In January 1999 Northern Trust adopted Statement of
Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use," which requires the capitalization of certain exter-
nal and internal costs of computer software developed or obtained for internal
use. As a result of this accounting change, Northern Trust capitalized salary
and related internal costs totaling $13.5 million in 1999.
The unamortized capitalized cost of corporate-wide software development pro-
jects as of December 31, 1999 was $219.0 million, of which $31.3 million repre-
sented the book value of the trust management system.
Year 2000 Project. Northern Trust has successfully managed the transition from
one century to the next. Although some internal systems and third parties expe-
rienced minor problems, these were quickly resolved and had no significant
effect on Northern Trust's clients, businesses or results of operations. The
following information is provided in order to update prior disclosures with
respect to this matter.
Remediation. Early in 1999, Northern Trust completed Year 2000 renovation and
validation for all mission critical information technology systems, including
those provided by third parties. During 1999 Northern Trust had also completed
for all of these systems, the implementation stage, in which systems or appli-
cations were returned to production after the review of test results, and com-
pleted integration testing designed to verify that logically related systems
worked with each other while running on renovated versions of hardware and
operating system software. Also, Northern Trust had substantially completed
Year 2000 work through the implementation stage for non-mission critical appli-
cations. Northern Trust also completed during 1999, the necessary remediation
of other infrastructure items,
33
- --------------------------------------------------------------------------------
Northern Trust Corporation
Management's Discussion and Analysis
of Financial Condition and Results of Operations
---------------- ----------------
such as building equipment, or developed contingency plans to allow critical
functions to continue in the event of infrastructure problems.
Credit and Other Year 2000 Readiness Reviews. As part of its credit analysis
process, Northern Trust completed its project plan for assessing the Year 2000
readiness of its significant credit clients. Neither the reviews nor reports
from clients since year-end 1999 have identified any situations where manage-
ment believes it probable that a loss has been incurred because of Year 2000
issues.
In addition, as part of its fiduciary activities, Northern Trust implemented
a plan for taking the Year 2000 issue into consideration in evaluating invest-
ment portfolios, and a plan to evaluate and deal with the Year 2000 issues
presented by other types of property held in trust. Northern Trust also con-
tacted fiduciary and other clients to explain its Year 2000 Program.
Suppliers and Other Third-Party Reviews. Northern Trust's Business Issues
Task Force monitored programs to contact important vendors and suppliers to
assess their Year 2000 readiness. Neither this work nor events since year-end
1999 have shown any of these suppliers or vendors to have Year 2000-related
problems that had or are expected to have a significant effect on Northern
Trust. Northern Trust's due diligence visits with its subcustodians, testing
conducted by Northern Trust or available to it through industry groups, and
events since year-end 1999 have not revealed any issues expected to have a
significant effect on Northern Trust's operations. Prior testing and experi-
ence since year-end also indicated that the same is true of other entities,
such as the Federal Reserve System, Depository Trust Company, Participants
Trust Company, Society for Worldwide Interbank Financial Telecommunications
(SWIFT), and the Clearing House Interbank Payments System (CHIPS), on which
Northern Trust relies in its securities processing and banking businesses.
Clients. Northern Trust completed substantially all planned client testing
prior to year-end. Although Northern Trust experienced minor Year 2000-related
problems in interaction with clients for a variety of reasons, these appear to
have been resolved without any significant effect on Northern Trust or the
clients involved.
Contingency Planning. Northern Trust's contingency planning process focused
on Northern Trust's critical functions. In each area the process identified
various Year 2000 failure scenarios that could threaten these functions,
including power and telecommunications failures, and then identified, where
practicable, alternative methods to perform the function or other strategies
to mitigate the effect of the failure. These critical function contingency
plans were also used to prepare contingency plans for particular Northern
Trust subsidiaries or locations, and by various business units to revise their
business continuity plans for the Year 2000 event.
As a result of this process, Northern Trust took a number of mitigating
actions including generating some extra liquidity on its balance sheet, pre-
paring to meet potential client demands for increased currency at year-end and
taking additional measures to prevent Year 2000-related frauds and address
other security issues. Northern Trust's contingency plans also outlined a
range of other mitigating actions to be taken should various Year 2000-related
problems develop. Northern Trust did not find it necessary to take any of
these actions.
In order to provide as stable an environment as possible going into the new
year, Northern Trust imposed a systems moratorium toward the end of the third
quarter. The moratorium was ended January 14, 2000.
Cost. The estimated total cost for Northern Trust's Year 2000 project is
$35.9 million. This estimate includes the cost of purchasing licenses for
software programming tools, the cost of the time of internal staff in World-
wide Technology, the cost of consultants and $6.5 million of accelerated pur-
chases of equipment necessary to support contingency plans and Year 2000
testing. The estimate does not include the time that internal staff in user
departments devoted to testing programming changes and developing contingency
plans, although these efforts are not believed to have added significant
incremental costs. In addition, Northern Trust decided to replace the life-
safety generator in its main Chicago banking premises, which was scheduled for
replacement in 1999, with larger capacity generators that would also provide
power for certain critical functions for business continuity purposes at year-
end and beyond. The cost of these generators was approximately $2.9 million in
excess of what would have been required simply to replace the life safety gen-
erator and perform related maintenance and renewal.
These Year 2000 costs have been and are expected to be expensed as incurred,
except that the cost for equipment supporting contingency plans and testing is
being amortized over its useful life in accordance with Northern Trust's
accounting policies. As of December 31, 1999, $35.4 million of the estimated
$35.9 million of project costs have been incurred, of which $7.0 million
related to capitalized equipment purchases. The remaining costs are expected
to be incurred in the first quarter of 2000. Of the total Worldwide Technology
Group expenses (excluding depreciation and amortization) for 1997, 1998 and
1999, it is estimated that 12% to 14% were for Year 2000 renovation expenses,
or less than 1.5% of Northern Trust's anticipated aggregate noninterest
expenses for those years. Although the priority
34
- --------------------------------------------------------------------------------
Northern Trust Corporation
Management's Discussion and Analysis
of Financial Condition and Results of Operations
---------------- ----------------
given to Year 2000 work has resulted in extending the time for completing some
other technology projects, these delays are not expected to have a material
effect on Northern Trust's business.
Potential Risks. Although no problems that have had or are expected to have a
material effect on Northern Trust have become apparent, Northern Trust contin-
ues to monitor its own systems and those of third parties as they perform
required functions for the first time in the Year 2000. It is also possible
that as yet undetected Year 2000 problems with the systems of important ven-
dors, suppliers and clients may emerge as the year progresses, and Northern
Trust continues to monitor for issues of this type as well.
Risk Management
- -------------------------------------------------------------------------------
Asset Quality and Credit Risk Management
Securities. A high quality securities portfolio is maintained with 86% of the
total portfolio composed of U.S. Treasury or federal agency securities. The
remainder of the portfolio consists of obligations of states and political
subdivisions, preferred stock and other securities. At December 31, 1999, 68%
of these securities were rated triple-A or double-A, 15% were rated single-A
and 17% were below A or not rated by Standard and Poor's and/or Moody's
Investors Service. Other securities include Federal Home Loan Bank stock and
Federal Reserve Bank stock.
Northern Trust is an active participant in the repurchase agreement market.
This market provides a relatively low cost alternative for short-term funding.
Securities sold under agreements to repurchase are held by the counterparty
until the repurchase transaction matures. Increases in the fair value of these
securities in excess of the repurchase liability could subject Northern Trust
to credit risk in the event of default by the counterparty. To minimize this
risk, collateral values are continuously monitored and Northern Trust sets
limits on exposure with counterparties and regularly assesses their financial
condition.
Loans and Other Extensions of Credit. A certain degree of credit risk is
inherent in Northern Trust's various lending activities. Credit risk is man-
aged through the Credit Policy function, which is designed to ensure adherence
to a high level of credit standards. The Credit Policy function reports to the
Corporation's Chief Financial Officer. Credit Policy provides a system of
checks and balances for Northern Trust's diverse credit-related activities by
establishing and monitoring all credit-related policies and practices through-
out Northern Trust and ensuring their uniform application. These activities
are designed to ensure that credit exposure is diversified on an industry and
client basis, thus lessening overall credit risk. These credit management
activities also apply to Northern Trust's use of derivative financial instru-
ments, including foreign exchange contracts and interest risk management
instruments.
Individual credit authority for commercial and other loans is limited to
specified amounts and maturities. Credit decisions involving commitment expo-
sure in excess of the specified individual limits are submitted to the appro-
priate Credit Approval Committee (Committee). Each Committee is chaired by the
executive in charge of the area and has a Credit Policy officer as a voting
participant. Each Committee's credit approval authority is specified, based on
commitment levels, credit ratings and maturities. Credits involving commitment
exposure in excess of these group credit limits require the approval of the
Senior Credit Committee.
The Counterparty Risk Management Committee established by Credit Policy man-
ages counterparty risk. This committee has sole credit authority for exposure
to all foreign banks, certain domestic banks which Credit Policy deems to be
counterparties and which do not have commercial credit relationships within
the Corporation, and certain other exposures.
Under the auspices of Credit Policy, country exposure limits are reviewed and
approved on a country-by-country basis.
As part of Northern Trust's ongoing credit granting process, internal credit
ratings are assigned to each client and credit before credit is extended,
based on creditworthiness. Credit Policy performs at least annually a review
of selected significant credit exposures to identify at the earliest possible
stages clients who might be facing financial difficulties. Internal credit
ratings are also reviewed during this process. Above average risk loans, which
will vary from time to time, receive special attention by both lending offi-
cers and Credit Policy. This approach allows management to take remedial
action in an effort to deal with potential problems.
An integral part of the Credit Policy function is a formal review of all past
due and potential problem loans to determine which credits, if any, need to be
placed on nonaccrual status or charged off. As more fully described on pages
38 through 40, the provision for credit losses is reviewed quarterly to deter-
mine the amount necessary to maintain an adequate reserve for credit losses.
Management of credit risk is reviewed by various bank regulatory agencies.
Independent auditors also perform a review of credit-related procedures, the
loan portfolio and other extensions of credit, and the reserve for credit
losses as part of their examination of the consolidated financial statements.
A further way in which credit risk is managed is by requiring collateral.
Management's assessment of the borrower's creditworthiness determines whether
collat-
35
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Northern Trust Corporation
Management's Discussion and Analysis
of Financial Condition and Results of Operations
---------------- ----------------
eral is obtained. The amount and type of collateral held varies but may
include deposits held in financial institutions, U.S. Treasury securities,
other marketable securities, income-producing commercial properties, accounts
receivable, property, plant and equipment, and inventory. Collateral values
are monitored on a regular basis to ensure that they are maintained at an
appropriate level.
The largest component of credit risk relates to the loan portfolio. Although
credit exposure is well-diversified, there are certain groups of loans that
meet the accounting definition under SFAS No. 105 of credit risk concentra-
tions. According to this statement, group concentrations of credit risk exist
if a number of borrowers or other counterparties are engaged in similar activ-
ities and have similar economic characteristics that would cause their ability
to meet contractual obligations to be similarly affected by changes in eco-
nomic or other conditions. The fact that an extension of credit falls into one
of these groups does not indicate that the credit has a higher than normal
degree of credit risk. These groups are: residential real estate, middle mar-
ket companies and small businesses, banks and bank holding companies and com-
mercial real estate.
Residential Real Estate. The residential real estate loan portfolio totaled
$6.3 billion or 42% of total domestic loans at December 31, 1999, compared
with $5.9 billion or 45% at December 31, 1998. Residential real estate loans
consist of conventional home mortgages and equity credit lines, which gener-
ally require a loan to collateral value of no more than 75% to 80% at incep-
tion.
Of the total $6.3 billion in residential real estate loans, $3.1 billion were
in the greater Chicago area with the remainder distributed throughout the
other geographic regions served by Northern Trust. Legally binding commitments
to extend credit, which are primarily equity credit lines, totaled $506.2 mil-
lion and $657.1 million as of December 31, 1999 and 1998, respectively.
Middle Market Companies and Small Busi-
nesses. Credit exposure to middle market companies and small businesses is
primarily in the form of commercial loans, which totaled $2.0 billion at
December 31, 1999 and $1.8 billion as of December 31, 1998. These loans are to
a diversified group of borrowers that are predominantly in the manufacturing,
wholesaling, distribution and services industries, most of which have total
annual sales of less than $500 million. The largest component of this group of
borrowers is located in the midwestern areas served by the Bank. Middle market
and small businesses have been an important focus of business development, and
it is part of the strategic plan to continue to selectively grow the portfolio
with such entities. The credit risk associated with middle market and small
business lending is principally influenced by general economic conditions and
the resulting impact on the borrower's operations.
Off-balance sheet credit exposure to middle market companies and small busi-
nesses in the form of legally binding commitments to extend credit, standby
letters of credit, and commercial letters of credit totaled $2.4 billion, $1.1
billion, and $25.5 million, respectively, as of December 31, 1999, and $1.9
billion, $981.0 million, and $12.6 million, respectively, as of December 31,
1998.
Banks and Bank Holding Companies. On-balance sheet credit risk to banks and
bank holding companies, both domestic and international, totaled $4.7 billion
and $5.8 billion at December 31, 1999 and 1998, respectively. The majority of
this exposure consisted of short-term money market assets, which totaled $3.4
billion at December 31, 1999 and $4.0 billion at December 31, 1998, and nonin-
terest-bearing demand balances maintained at correspondent banks which totaled
$947 million as of December 31, 1999, compared to $1.4 billion at year-end
1998. Commercial loans to banks totaled $232 million and $320 million, respec-
tively, as of December 31, 1999 and 1998. The majority of these loans were to
U.S. bank holding companies, primarily in the seventh Federal Reserve Dis-
trict, for their acquisition purposes. Such lending activity is limited to
entities which have a substantial business relationship with Northern Trust.
Legally binding commitments to extend credit to banks and bank holding compa-
nies totaled $165 million and $158 million as of December 31, 1999 and 1998,
respectively.
Commercial Real Estate. In managing its credit exposure, management has
defined a commercial real estate loan as one where: (1) the borrower's princi-
pal business activity is the acquisition or the development of real estate for
commercial purposes; (2) the principal collateral is real estate held for com-
mercial purposes and loan repayment is expected to flow from the operation of
the property; or (3) the loan repayment is expected to flow from the sale or
refinance of real estate as a normal and ongoing part of the business.
Unsecured lines of credit to firms or individuals engaged in commercial real
estate endeavors are included without regard to the use of loan proceeds. The
commercial real estate portfolio consists of interim loans and commercial
mortgages.
Short-term interim loans provide financing for the initial phases of the
acquisition or development of commercial real estate, with the intent that the
borrower will refinance the loan through another financial institution or sell
the project upon its completion. The interim loans are primarily in the Chi-
cago market where Northern Trust has a strong presence and a thorough knowl-
edge of the local economy. The interim loans, which totaled $313.7 million and
$318.8 million as of Decem-
36
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Northern Trust Corporation
Management's Discussion and Analysis
of Financial Condition and Results of Operations
---------------- ----------------
ber 31, 1999 and 1998, respectively, are composed primarily of loans to devel-
opers that are highly experienced and well-known to Northern Trust.
Commercial mortgage financing, which totaled $466.7 million and $358.3 mil-
lion as of December 31, 1999 and 1998, respectively, is provided for the
acquisition of income producing properties. Cash flows from the properties
generally are sufficient to amortize the loan. These loans average less than
$500,000 each and are primarily located in the suburban Chicago and Florida
markets.
At December 31, 1999, off-balance sheet credit exposure to commercial real
estate developers in the form of legally binding commitments to extend credit
and standby letters of credit totaled $72.7 million and $21.0 million, respec-
tively. At December 31, 1998, legally binding commitments were $77.1 million
and standby letters of credit were $28.4 million.
Foreign Outstandings. Short-term interbank time deposits with foreign banks
represent the largest category of foreign outstandings. The Chicago head
office and the London Branch actively participate in the interbank market with
U.S. and foreign banks. In recent years, international commercial lending
activities have been focused on import and export financing for U.S.-based
clients.
As used in this discussion, foreign outstandings are cross-border
outstandings as defined by the Securities and Exchange Commission. They con-
sist of loans, acceptances, interest-bearing deposits with financial institu-
tions, accrued interest and other monetary assets. Not included are letters of
credit, loan commitments, and foreign office local currency claims on resi-
dents funded by local currency liabilities. Foreign outstandings related to a
specific country are net of guarantees given by third parties resident outside
the country and the value of tangible, liquid collateral held outside the
country. However, transactions with branches of foreign banks are included in
these outstandings and are classified according to the country location of the
foreign banks' head office.
Risk related to foreign outstandings is continually monitored and internal
limits are imposed on foreign exposure. The following table provides informa-
tion on foreign outstandings by country that exceed 1.00% of Northern Trust's
assets.
Foreign Outstandings
- -------------------------------------------------------------------------------
Commercial
(In Millions) Banks and Other Total
- ----------------------------------------------
At December 31, 1999
Germany $ 359 $ -- $ 359
- ----------------------------------------------
At December 31, 1998
Germany $1,007 $ -- $1,007
Italy 396 -- 396
United Kingdom 316 61 377
France 312 -- 312
Belgium 289 -- 289
- ----------------------------------------------
At December 31, 1997
Germany $ 502 $ -- $ 502
Japan 394 -- 394
United Kingdom 251 71 322
Aggregate foreign outstandings by country falling between .75% and 1.00% of
total assets at December 31, 1999 totaled $217 million to France. This
compares to $266 million to the Netherlands at December 31, 1998 and $192
million to France at December 31, 1997.
Nonperforming Assets and 90 Day Past Due Loans
- -------------------------------------------------------------------------------
December 31
- ---------------------------------------------------------------------------
(In Millions) 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------
Nonaccrual Loans
Domestic
Residential Real Estate $ 6.4 $ 5.2 $ 5.3 $ 3.2 $22.4
Commercial 50.3 21.8 26.3 2.2 17.5
Commercial Real Estate 1.9 2.9 7.1 11.3 9.0
Personal .7 .6 .2 .2 .1
Other -- -- -- -- --
Lease Financing -- -- -- -- --
- ---------------------------------------------------------------------------
Total Domestic 59.3 30.5 38.9 16.9 29.0
International -- -- -- -- .2
- ---------------------------------------------------------------------------
Total Nonaccrual Loans 59.3 30.5 38.9 16.9 29.2
- ---------------------------------------------------------------------------
Restructured Loans -- 2.4 2.5 2.6 2.7
Other Real Estate Owned 1.3 2.3 1.9 1.9 1.8
- ---------------------------------------------------------------------------
Total Nonperforming Assets $60.6 $35.2 $43.3 $21.4 $33.7
- ---------------------------------------------------------------------------
Total 90 Day Past Due Loans (Still accruing) $15.4 $30.0 $13.9 $15.2 $22.0
37
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Northern Trust Corporation
Management's Discussion and Analysis
of Financial Condition and Results of Operations
---------------- ----------------
Nonperforming Assets and 90 Day Past Due Loans. Nonperforming assets consist
of nonaccrual loans, restructured loans and Other Real Estate Owned (OREO).
OREO is comprised of commercial and residential properties acquired in partial
or total satisfaction of problem loans. Past due loans are loans that are
delinquent 90 days or more and still accruing interest. The balance in this
category at any reporting period can fluctuate widely based on the timing of
cash collections, renegotiations and renewals.
Maintaining a low level of nonperforming assets is important to the ongoing
success of a financial institution. In addition to the negative impact on both
net interest income and credit losses, nonperforming assets also increase
operating costs due to the expense associated with collection efforts. North-
ern Trust's comprehensive credit review and approval process is critical to
the ability to minimize nonperforming assets on a long-term basis.
The table on the preceding page presents the nonperforming assets and past
due loans for the current year and the prior years. Of the total loan portfo-
lio of $15.4 billion at December 31, 1999, $59.3 million or 0.39% was
nonaccrual, an increase of $26.4 million from year-end 1998. This increase is
discussed more fully in the following Provision and Reserve for Credit Losses
section.
Included in the portfolio of nonaccrual loans are those which meet the crite-
ria as being "impaired" under the definition in SFAS No. 114. A loan is
impaired when, based on current information and events, it is probable that a
creditor will be unable to collect all amounts due according to the contrac-
tual terms of the loan agreement. As of December 31, 1999, impaired loans,
which also have been classified as nonaccrual, totaled $56.3 million, with
$15.0 million of the reserve for credit losses allocated to these loans.
Provision and Reserve for Credit Losses. The provision for credit losses is
the charge against current earnings that is determined by management, through
a disciplined credit review process, as the amount needed to maintain a
reserve that is sufficient to absorb credit losses inherent in Northern
Trust's loan and lease portfolios and other credit undertakings. The reserve
provides for probable losses that have been identified with specific borrower
relationships (specific loss component) and for probable losses that are
believed to be inherent in the loan and lease portfolios and other credit
undertakings but that have not yet been specifically identified (inherent loss
component). The table presented in Note 6 to Consolidated Financial Statements
on page 54 analyzes the reserve for credit losses at December 31, 1999 and
identifies the charge-offs and recoveries and the provision for credit losses
during the year ended December 31, 1999. The table on page 39 shows (i) the
specific portion of the reserve, (ii) the allocated portion of the inherent
reserve and its components by loan category and (iii) the unallocated portion of
the reserve at December 31, 1999 and each of the prior four year-ends.
Specific Component of the Reserve. The specific component of the reserve is
determined on a loan-by-loan basis as part of the regular review of classified
and nonperforming loans and potential charge-offs. The specific reserve is
based on a loan's current book value compared to the present value of its pro-
jected future cash flows, collateral value or market value, as is relevant for
the particular loan.
At December 31, 1999, the specific reserve component amounted to $15.0 mil-
lion compared to $5.9 million at the end of 1998, a $9.1 million net increase.
The increase primarily relates to two commercial credits to companies that
filed for Chapter 11 reorganization during the year and reflects the estimated
losses on those loans. The increase in specific reserves was partially offset
by charge-offs on loans with specific reserves allocated to them in prior
years. Approximately two-thirds of the $9.8 million in charge-offs related to
a single commercial loan borrower that emerged from Chapter 11 reorganization
proceedings during the year. The approval and implementation of the bankruptcy
reorganization plan resulted in the receipt of a partial payment and confirmed
the amount of the remaining loss with respect to this credit. The decrease in
the specific loss component of the reserve in 1998 was principally due to a
charge-off on one larger nonperforming loan. Management did not view the
developments in either year as evidence of significant change in credit qual-
ity trends.
Allocated Inherent Component of the Reserve. The allocated portion of the
inherent reserve is based on management's review of historical charge-off
experience as well as management's judgment for loans in each credit rating
category over a period of time which management determines is adequate to
reflect longer-term economic trends. One building block in reaching the appro-
priate allocated inherent reserve is an analysis of loans by credit rating
categories. Credit ratings are determined by members of the Credit Policy
Group at the time each loan is approved. These credit ratings are subject to
periodic reviews of the loan portfolio in which the Credit Policy Group, which
is independent of line management, makes the final determination of ratings
for each loan in the portfolio. Credit ratings range from "1" for the strong-
est credits to "9" for the weakest credit rating; a "9" rated loan would nor-
mally represent a complete loss.
For loans with credit ratings "1" through "4," the loss ratio for each past
year was calculated by expressing the
38
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Northern Trust Corporation
Management's Discussion and Analysis
of Financial Condition and Results of Operations
---------------- ----------------
loan charge-offs in each rating category as a percentage of previous year-end
outstanding loans in that rating category. These yearly loss ratios for each
credit rating category were then averaged over the prior five years to develop
the historical loss ratio. The historic loss ratios are reviewed by management
to determine if they need to be adjusted based on current facts and circum-
stances. Prior to 1998, this historical loss ratio methodology was also fol-
lowed for higher risk loans rated "5" through "8." In 1998, the loss factors
on these higher-risk loans were refined by considering both historical loss
ratios and regulatory guidelines to provide a more consistent and reliable
method for taking account of credit trends in measuring loss exposure.
Beginning in 1997, management decided to use for the commercial and commer-
cial real estate segments of the portfolio, an "industry base" reserve in
order to measure the loss estimated to be inherent in these riskier segments.
Because commercial and commercial real estate loans had in Northern Trust's
experience produced significant losses in brief periods at particular points
in economic cycles, management believed it appropriate to use a reserve higher
than recent charge-off experience would suggest. This decision was supported
by what management perceived to be industry practice for minimum reserve lev-
els, and is intended to prevent an understatement of reserves based upon over-
reliance on recent, favorable economic conditions. At December 31, 1998, after
evaluating the current level of uncertainty in international markets and its
effect on borrowers, management decided to extend the base reserve methodology
to international exposure. The industry base reserve level was set at 1% at
the end of each of the last three years based on management's evaluation of
national and international economic conditions. In 1998, management also
increased the portion of the reserve allocated to residential real estate
loans, in light of the increasing size of the mortgage portfolio as a percent-
age of all lending.
The allocated inherent component of the reserve also covers the credit expo-
sure associated with undrawn loan commitments and standby letters of credit.
To determine the exposure on these instruments, management uses the factors
applied in risk-based capital calculations to determine the balance sheet
equivalent amount and assigned a reserve of .25%. This reserve level reflects
management's assessment of the credit risk associated with these instruments
in 1999 and 1998, which is down from the loss factor of 1% used in 1997.
The $3.3 million decrease in the allocated portion of the inherent reserve
during 1999 to $106.6 million at December 31, 1999, reflects the net effect of
several factors. The principal amount of residential real estate and commer-
cial real estate loans outstanding at the time near year-end when reserves
were determined had increased, resulting in a slight increase in the allocated
inherent portion of the reserve for these loans. Offsetting this growth was
the impact of the migration of certain commercial loans to impaired loan sta-
tus where specific reserves are established. In addition, during the second
quarter management refined its methodology for determining the allocated
inherent portion of the reserve with respect to loans within the higher risk
credit rating categories. This reduced the allocated inherent portion of the
reserve for residential real estate, commercial and commercial real estate
loans.
Allocation of the Reserve for Credit Losses
- -------------------------------------------------------------------------------
December 31
- ------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
Reserve to Total Reserve to Total Reserve to Total Reserve to Total Reserve to Total
($ in Millions) Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
- ------------------------------------------------------------------------------------------------------------------
Specific Reserve $ 15.0 --% $ 5.9 --% $ 10.7 --% $ .8 --% $ 1.3 --%
- ------------------------------------------------------------------------------------------------------------------
Inherent Reserve
Residential Real Estate 11.5 41 11.0 43 3.7 41 7.1 42 5.4 39
Commercial 73.2 31 77.4 29 87.1 30 71.2 29 84.4 32
Commercial Real Estate 12.2 5 11.8 5 6.4 5 5.1 5 6.8 5
Personal 3.3 11 3.2 11 .6 10 6.2 9 8.4 8
Other -- 4 -- 5 -- 7 -- 9 -- 10
Lease Financing 2.9 4 2.9 4 2.9 3 2.9 2 2.9 2
International 3.5 4 3.6 3 -- 4 2.3 4 2.6 4
Unallocated 29.3 -- 31.0 -- 36.2 -- 52.7 -- 35.3 --
- ------------------------------------------------------------------------------------------------------------------
Total Inherent Reserve $135.9 100% $140.9 100% $136.9 100% $147.5 100% $145.8 100%
- ------------------------------------------------------------------------------------------------------------------
Total Reserve $150.9 100% $146.8 100% $147.6 100% $148.3 100% $147.1 100%
This allocation method should not be interpreted as an indication of expected
losses within the next year or any specified time period.
39
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Northern Trust Corporation
Management's Discussion and Analysis
of Financial Condition and Results of Operations
---------------- ----------------
Unallocated Inherent Component of the Reserve. The unallocated portion of the
inherent loss reserve is based on management's review of other factors affect-
ing the determination of probable losses inherent in the portfolio, which are
not necessarily captured by the application of historical loss ratios. This
portion of the reserve analysis involves the exercise of judgment and reflects
considerations, such as management's view that the reserve should have a margin
that recognizes the imprecision inherent in the process of estimating expected
credit losses.
Although the loan portfolio continued to grow in 1999 as it had done through-
out the period 1994-98, management concluded that the credit risk associated
with the growth was appropriately reflected in the factors affecting the allo-
cated portion of the inherent reserve. The decrease in the unallocated portion
of the reserve from $31.0 million to $29.3 million primarily reflects manage-
ment's evaluation of the overall portfolio in light of strong credit quality,
little change in that quality over the past year and the endurance of the cur-
rent economic expansion.
Other Factors. During 1999, there were no significant changes in concentration
of credits that impacted asset quality. The total amount of highest risk loans,
those rated "6" to "8," used in the determination of the reserve level at the
end of 1999 was approximately $130.9 million of which $56.3 million was classi-
fied as impaired. The increase from the December 31, 1998 balance of $99 mil-
lion, when $32.0 million was classified as impaired, primarily reflects the
addition of two large commercial credits whose financial condition deteriorated
during the year, offset by the charge-off and partial repayment of another com-
mercial loan, and in management's view was not the result of a change in the
overall quality of the portfolio. There were no "9" rated loans reported at any
time during these periods because loans are charged-off when they are so rated.
Overall Reserve. Management's evaluation of the factors above resulted in a
reserve for credit losses of $150.9 million at December 31, 1999 compared to
$146.8 million at the end of 1998. The reserve as a percentage of total loans
declined to .98% at December 31, 1999 from 1.08% at year-end 1998. This decline
recognizes the fact that a significant part of the growth in Northern Trust's
loan portfolio continues to be in lower risk residential mortgage loans and
Northern Trust's underwriting standards have maintained strong credit quality
as evidenced by favorable charge-off experience in recent years.
Provision. The resulting provision for credit losses was $12.5 million for the
year, while net charge-offs totaled $8.4 million.
Market Risk Management
Overview. The Board of Directors has overall responsibility for Northern
Trust's interest rate and foreign exchange risk management policies. To ensure
adherence to these policies, the Corporate Asset and Liability Policy Committee
(ALCO) establishes and monitors guidelines to control the sensitivity of earn-
ings to changes in interest rates. The guidelines apply to both on- and off-
balance sheet positions. ALCO also establishes and monitors limits for foreign
exchange risk. The goal of the ALCO process is to maximize earnings while main-
taining a high quality balance sheet and carefully controlling interest rate
and foreign exchange risk.
Asset/Liability Management. Asset/liability management activities include lend-
ing, accepting and placing deposits, investing in securities, issuing debt, and
hedging interest rate risk with off-balance sheet instruments. The primary mar-
ket risk associated with asset/liability management activities is interest rate
risk. Sensitivity of earnings to interest rate changes arises when yields on
assets change in a different time period or in a different amount from that of
interest costs on liabilities. To mitigate interest rate risk, the structure of
the balance sheet is managed so that movements of interest rates on assets and
liabilities (adjusted for off-balance sheet hedges) are highly correlated and
contribute to earnings even in periods of volatile interest rates.
Northern Trust utilizes the following measurement techniques in the management
of interest rate risk: simulation of earnings; simulation of the economic value
of equity; and gap analysis. These three techniques are complementary and are
used in concert to provide a comprehensive picture of interest rate risk man-
agement capability.
Simulation of earnings is the primary tool used to measure the sensitivity of
earnings to interest rate changes. Using computer modeling techniques, Northern
Trust is able to measure the potential impact of different interest rate
assumptions on pre-tax earnings. All on-balance sheet positions, as well as
derivative financial instruments (principally interest rate swaps) that are
used to manage interest rate risk, are included in the model simulation.
Northern Trust used model simulations to measure its earnings sensitivity rel-
ative to management's most likely interest rate scenario as of December 31,
1999. This interest rate scenario assumed a moderately rising interest rate
environment during the first half of 2000, with stable interest rates for the
remainder of the year. The interest sensitivity was tested by running alterna-
tive scenarios above and below the most likely interest rate outcome. The fol-
lowing table shows the effect on 2000 pre-tax earnings of 100 and 200 basis
point upward
40
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Northern Trust Corporation
Management's Discussion and Analysis
of Financial Condition and Results of Operations
---------------- ----------------
and downward movements in interest rates relative to management's interest
rate assumptions. Each of the movements in interest rates was assumed to have
occurred gradually over a one year period. The 100 basis point increase, for
example, consisted of twelve consecutive monthly increases of 8.3 basis
points. The following assumptions were also incorporated into the model simu-
lations:
. the balance sheet size was assumed to remain constant over the one year
simulation horizon;
. maturing assets and liabilities were invested or deposited into identical
items with the same term;
. prepayments on mortgage loans were projected under each rate scenario using
a mortgage analytics system that incorporated market prepayment assump-
tions; and
. changes in the spreads between retail deposit rates and asset yields were
estimated based on historical patterns and current competitive trends.
Interest Rate Risk Simulation of Pre-Tax Income as of
December 31, 1999
- -------------------------------------------------------------------------------
Estimated Impact
On 2000 Pre-tax
Income
(In Millions) Increase/(Decrease)
- ---------------------------------------------------------
Increase in Interest Rates Above
Management's Interest Rate Forecast
100 Basis Points $(10.6)
200 Basis Points (21.7)
Decrease in Interest Rates Below
Management's Interest Rate Forecast
100 Basis Points $ 8.8
200 Basis Points 17.4
The simulations of earnings do not incorporate any management actions which
might moderate the negative consequences of interest rate deviations. For that
reason and others, they do not reflect likely actual results but serve as con-
servative estimates of interest rate risk.
A second technique used to measure interest rate risk is simulation of the
economic value of equity, which provides estimates of the potential future
impact on equity of various changes in interest rates. The potential effect of
interest rate changes on equity is derived from the impact of such changes on
the market values of assets, liabilities and off-balance sheet instruments.
Northern Trust limits aggregate market risk, as measured in this fashion, to
an acceptable level within the context of risk-return trade-offs.
The third technique that is used to measure interest rate risk is gap analy-
sis. The calculation of the interest sensitivity gap measures the timing mis-
matches between assets and liabilities. This interest sensitivity gap is
determined by subtracting the amount of liabilities from the volume of assets
that reprice in a particular time interval. A liability sensitive position
results when more liabilities than assets reprice or mature within a given
period. Under this scenario, as interest rates decline, increased net interest
revenue will be generated. Conversely, an asset sensitive position results
when more assets than liabilities reprice within a given period; in this
instance, net interest revenue would benefit from an increasing interest rate
environment. The economic impact of creating a liability or asset sensitive
position depends on the magnitude of actual changes in interest rates relative
to the current expectations of market participants.
A variety of actions are used to implement interest risk management strate-
gies, including:
. purchases of securities;
. sales of securities that are classified as available for sale;
. sales of held for sale residential real estate loans;
. issuance of senior notes;
. collateralized borrowings from The Federal Home Loan Bank;
. placing and taking Eurodollar time deposits; and
. hedging with various types of derivative financial instruments.
Northern Trust strives to use the most effective instruments for implementing
its interest risk management strategies, considering the costs, liquidity,
collateral and capital requirements of the various alternatives. For more
detail regarding how derivative financial instruments are used to implement
interest risk management strategies, refer to Note 21 on page 63.
Foreign Exchange Trading. Foreign exchange trading activities consist princi-
pally of providing foreign exchange services to clients. Most of these serv-
ices are provided in connection with Northern Trust's growing global custody
business. However, in the normal course of business, Northern Trust also
engages in proprietary trading of foreign currencies. The primary market risk
associated with these activities is foreign exchange risk.
Foreign currency positions exist when aggregate obligations to purchase and
sell a currency other than the U.S. dollar do not offset each other, or offset
each other in different time periods. Northern Trust mitigates the risk
related to its foreign currency positions by establishing limits on the
amounts of, and durations of its positions. The limits on overnight inventory
positions are generally lower than the limits established for intra-day trad-
ing activity. All overnight positions are monitored by a risk management func-
tion, which is separate from the trading function, to ensure that the limits
are not exceeded. Although position limits are important in
41
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Northern Trust Corporation
Management's Discussion and Analysis
of Financial Condition and Results of Operations
---------------- ----------------
controlling foreign exchange risk, they are not a substitute for the experi-
ence or judgment of Northern Trust's senior management and its foreign cur-
rency traders, who have extensive knowledge of the foreign currency markets.
Foreign currency positions and strategies are adjusted as needed in response
to changing market conditions.
As part of its risk management activities, Northern Trust regularly measures
the risk of loss associated with foreign currency positions using a value at
risk model. This statistical model provides an estimate, based on a 95% confi-
dence level, of the potential loss in earnings that may be incurred if an
adverse one-day shift in foreign currency exchange rates were to occur. The
model, which is based on a variance/co-variance methodology, incorporates his-
torical currency price data and historical correlations in price movement
among the currencies. All foreign currency positions, including foreign denom-
inated assets and liabilities that were not converted to U.S. dollars through
the use of hedge contracts, are included in the model.
Northern Trust's value at risk based on foreign currency positions totaled
$52 thousand and $98 thousand as of December 31, 1999 and 1998, respectively.
Value at risk totals representing the average, high and low for 1999 were $209
thousand, $421 thousand and $52 thousand, respectively, with the average, high
and low for 1998 being $285 thousand, $472 thousand and $98 thousand, respec-
tively. These totals indicate the degree of risk inherent in foreign currency
positions as of year-end and during the year. However, it is not a prediction
of an expected loss. Actual future gains and losses will vary depending on
market conditions and the size and duration of future foreign currency posi-
tions.
Other Trading Activities. Market risk associated with other trading activities
is negligible. Northern Trust is a party to various interest risk management
instruments, most of which consist of interest rate swaps entered into to meet
clients' interest risk management needs. When Northern Trust enters into such
swaps, its policy is to mitigate the resulting interest rate risk with an off-
setting swap or with futures contracts. Northern Trust carries in its trading
portfolio a small inventory of securities that are held for sale to its cli-
ents. The interest rate risk associated with these securities is insignifi-
cant.
Liquidity Risk Management
The objectives of liquidity risk management are to ensure that Northern Trust
can meet its cash flow requirements and to capitalize on business opportuni-
ties on a timely and cost effective basis. Management monitors the liquidity
position on a daily basis to make funds available at a minimum cost to meet
loan and deposit cash flows. The liquidity profile is also structured so that
the capital needs of the Corporation and its banking subsidiaries are met.
Management maintains a detailed liquidity contingency plan designed to ade-
quately respond to dramatic changes in market conditions.
Liquidity is secured by managing the mix of items on the balance sheet and
expanding potential sources of liquidity. The balance sheet sources of liquid-
ity include the short-term money market portfolio, unpledged available for
sale securities, maturing loans and the ability to securitize a portion of the
loan portfolio. Further, liquidity arises from the diverse funding base and
the fact that a significant portion of funding comes from clients that have
other relationships with Northern Trust.
A significant source of liquidity is the ability to draw funding from both
domestic and international markets. The Bank's senior long-term debt is rated
AA- by Standard & Poor's, Aa3 by Moody's Investors Service, AA+ by Thomson
Financial BankWatch, and AA by Fitch IBCA. These ratings put The Northern
Trust Company in the top tier of United States banks and allow it to access
capital markets on favorable terms.
Northern Trust maintains a liquid balance sheet with loans representing only
54% of total assets. Further, at December 31, 1999, it had a significant
liquidity reserve on its balance sheet in the form of cash and due from banks,
securities available for sale, and money market assets, which in aggregate
totaled $10.9 billion or 38% of total assets.
The Corporation's uses of cash consist mainly of dividend payments to the
Corporation's common and preferred stockholders, the payment of principal and
interest to note holders, purchases of its common stock and acquisitions.
These requirements are met largely by dividend payments from its subsidiaries,
and by interest and dividends earned on investment securities and money market
assets. Bank subsidiary dividends are subject to certain restrictions that are
explained in Note 15 on page 59. Bank subsidiaries have the ability to pay
dividends during 2000 equal to their 2000 eligible net profits plus $498.4
million. The Corporation's liquidity, defined as the amount of marketable
assets in excess of commercial paper, was strong at $104.4 million at year-end
1999. The cash flows of the Corporation are shown in Note 30 on page 73. The
Corporation also has a $50 million back-up line of credit for its commercial
paper issuance.
Capital Management
One of management's primary objectives is to maintain a strong capital posi-
tion to merit the confidence of clients, the investing public, bank regulators
and stockholders. A strong capital position helps Northern Trust
42
- -------------------------------------------------------------------------------
Northern Trust Corporation
Management's Discussion and Analysis
of Financial Condition and Results of Operations
---------------- ----------------
take advantage of profitable investment opportunities when they arise and would
help withstand unforeseen adverse developments. In 1999, average common equity
increased 14% or $231 million reaching a record $2.05 billion at year-end,
while total risk-weighted assets rose 11%. Total equity as of December 31, 1999
was $2.2 billion, including $120 million of auction rate preferred stock. The
average dividend rate declared on the $120 million of auction rate preferred
stock was 4.02% during 1999. During 1999 the Corporation purchased 3,133,866 of
its own shares as part of its buyback program. In May, the Board of Directors
authorized an increase in the Corporation's buyback program so that the Corpo-
ration may purchase, after December 31, 1999, up to 9.9 million additional
shares.
Capital Adequacy
- --------------------------------------------------------------------------------
December 31
- -------------------------------------------------------------
($ In Millions) 1999 1998
- -------------------------------------------------------------
Tier 1 Capital
Common Stockholders' Equity $ 2,055 $ 1,820
Debt-Floating Rate Capital Securities 267 267
Goodwill and Other Intangible Assets (112) (124)
Net Unrealized Loss on Securities 2 1
- -------------------------------------------------------------
Total Tier 1 Capital 2,212 1,964
- -------------------------------------------------------------
Tier 2 Capital
Auction Rate Preferred Stock 120 120
Reserve for Credit Losses 151 147
Long-Term Debt* 565 390
- -------------------------------------------------------------
Total Tier 2 Capital 836 657
- -------------------------------------------------------------
Total Risk-Based Capital 3,048 2,621
- -------------------------------------------------------------
Risk-Weighted Assets** $22,321 $20,074
- -------------------------------------------------------------
Total Assets-End of Period (EOP) $28,708 $27,870
Average Fourth Quarter Assets** 30,968 28,467
Total Loans-EOP 15,374 13,647
- -------------------------------------------------------------
Ratios
Risk-Based Capital to Risk-Weighted Assets
Tier 1 9.9% 9.8%
Total (Tier 1 and Tier 2) 13.7 13.1
Leverage 7.1 6.9
- -------------------------------------------------------------
Common Stockholders' Equity to
Total Loans EOP 13.4% 13.3%
Total Assets EOP 7.2 6.5
Stockholders' Equity to
Total Loans EOP 14.1 14.2
Total Assets EOP 7.6 7.0
Notes:
*Long-Term Debt that qualifies for risk-based capital amortizes for the purpose
of inclusion in tier 2 capital during the five years before maturity.
**Assets have been adjusted for goodwill and other intangible assets, net
unrealized gain (loss) on securities and excess reserve for credit losses that
have been excluded from tier 1 and tier 2 capital, if any.
The Board of Directors increased the quarterly dividend by 12.5% to $.135 per
common share in November 1999. Over the last five years the common dividend has
increased 108%.
The higher capital levels and resulting increase in risk-based capital ratios
in 1999 was the result of Northern Trust's ongoing policy of retaining a suffi-
cient percentage of earnings in the Corporation to allow for strategic expan-
sion while maintaining a strong balance sheet. All of Northern Trust's capital
ratios were well above the ratios that are a requirement for regulatory treat-
ment as "well capitalized." At December 31, 1999, tier 1 capital was 9.9% and
total capital was 13.7% of risk-weighted assets. These risk-based capital
ratios are well above the minimum requirements of 4.0% for tier 1 and 8.0% for
total risk-based capital ratios. Northern Trust's leverage ratio (tier 1 capi-
tal to fourth quarter average assets) of 7.1% is also well above the regulatory
requirement of 3.0%. In addition, each of the subsidiary banks had a ratio of
at least 8.9% for tier 1 capital, 11.0% for total risk-based capital, and 6.3%
for the leverage ratio.
Operational and Fiduciary Risk Management
In providing banking and trust services, Northern Trust, in addition to safe-
keeping and managing trust and corporate assets, processes cash and securities
transactions exceeding $165 billion on average each business day. These activi-
ties expose Northern Trust to operational and fiduciary risk. Controls over
such processing activities are closely monitored to safeguard the assets of
Northern Trust and its clients. However, from time to time Northern Trust has
incurred losses related to these risks and there can be no assurance that such
losses will not occur in the future.
Operational risk is the risk of unexpected losses attributable to human error,
systems failures, fraud, or inadequate internal controls and procedures. This
risk is mitigated through a system of internal controls that are designed to
keep operating risk at appropriate levels in view of Northern Trust's corporate
standards and the risks inherent in the markets in which Northern Trust oper-
ates. The system of internal controls includes policies and procedures that
require the proper authorization, approval, documentation and monitoring of
transactions. Each business unit is responsible for complying with corporate
policies and external regulations applicable to the unit, and is responsible
for establishing specific procedures to do so. Northern Trust's internal audi-
tors monitor the overall effectiveness of the system of internal controls on an
ongoing basis.
Fiduciary risk is the risk of loss that may occur as a result of breaching a
fiduciary duty to a client. To limit this risk, the Trust Investment Committee
establishes
43
- --------------------------------------------------------------------------------
Northern Trust Corporation
Management's Discussion and Analysis
of Financial Condition and Results of Operations
--------------- ---------------
corporate policies and procedures to ensure that obligations to clients are
discharged faithfully and in compliance with applicable legal and regulatory
requirements. These policies and procedures provide guidance and establish
standards related to the creation, sale, and management of investment prod-
ucts, trade execution, and counterparty selection. Business units have the
primary responsibility for adhering to the policies and procedures applicable
to their businesses.
Factors Affecting Future Results
- -------------------------------------------------------------------------------
This annual report contains statements that may be considered forward-looking,
such as the discussion of Northern Trust's financial goals, dividend policy,
expansion and business development plans, business prospects and positioning
with respect to market and pricing trends, new business results and outlook,
credit quality, planned capital expenditures and technology spending, and the
effect of various matters (including Year 2000 issues and changes in account-
ing standards) on Northern Trust's business and results. These statements
speak of Northern Trust's plans, goals, beliefs or expectations, refer to
estimates or use similar terms. Those relating to Year 2000 matters also con-
stitute Year 2000 readiness disclosures. Actual results could differ materi-
ally 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 eco-
nomic 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 mar-
ket values of financial assets, the stability of particular securities mar-
kets and the level of volatility in certain markets such as foreign
exchange.
. Regulatory developments and changes in accounting requirements or interpre-
tations in the U.S. and other countries where Northern Trust has signifi-
cant business.
. Changes in the nature of Northern Trust's competition resulting from indus-
try consolidation, changes in the regulatory framework for financial serv-
ices resulting from enactment of the Gramm-Leach-Bliley Act of 1999 and
other regulatory changes and other factors, as well as actions taken by
particular competitors.
. Northern Trust's success in continuing to generate new business in its
existing markets, as well as its success in identifying and penetrating
targeted markets, through acquisition or otherwise, and generating a profit
in those markets in a reasonable time.
. Northern Trust's ability to continue to generate superior investment
results for clients and continue to develop its array of investment prod-
ucts, internally or through acquisition, in a manner that meets client
needs.
. Northern Trust's success in further developing and executing on initiatives
that integrate the internet into its methods of product distribution, new
business development and client service.
. 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 technology challenges and increasing volume and
complexity in many of its businesses.
. The impact of any unexpected Year 2000 problems with the systems of impor-
tant vendors, suppliers and clients.
. The ability of each of Northern Trust's principal businesses to maintain a
product mix that achieves satisfactory margins.
. Changes in tax laws or other legislation that could affect Northern Trust's
personal and institutional asset administration businesses.
Some of these uncertainties that may affect future results are discussed in
more detail in the sections of "Item 1--Business" of the 1999 Annual Report on
Form 10-K captioned "Government Policies," "Competition" and "Regulation and
Supervision." All forward-looking statements included in this document are
based upon information presently available, and Northern Trust assumes no
obligation to update any forward-looking statement.
44
- -------------------------------------------------------------------------------
Northern Trust Corporation
Consolidated Balance Sheet
---------------- ----------------
December 31
- -------------------------------------------------------------------------------
($ In Millions) 1999 1998
- -------------------------------------------------------------------------------
Assets
Cash and Due from Banks $ 1,977.9 $ 2,366.0
Federal Funds Sold and Securities Purchased under
Agreements to Resell (Note 4) 1,083.8 1,164.4
Time Deposits with Banks 2,292.2 3,264.7
Other Interest-Bearing 63.2 21.8
Securities (Note 3)
Available for Sale 5,480.0 5,375.2
Held to Maturity (Fair value-$740.4 in 1999 and
$485.7 in 1998) 752.7 472.5
Trading Account 11.0 9.1
- -------------------------------------------------------------------------------
Total Securities 6,243.7 5,856.8
- -------------------------------------------------------------------------------
Loans and Leases (Note 5)
Commercial and Other 9,116.8 7,761.7
Residential Mortgages 6,257.7 5,885.2
- -------------------------------------------------------------------------------
Total Loans and Leases (Net of unearned income-$321.3
in 1999 and $224.3 in 1998) 15,374.5 13,646.9
- -------------------------------------------------------------------------------
Reserve for Credit Losses (Note 6) (150.9) (146.8)
Buildings and Equipment (Notes 8 and 9) 380.4 340.2
Customers' Acceptance Liability 34.7 33.3
Trust Security Settlement Receivables 323.1 336.7
Other Assets (Note 18) 1,085.6 986.0
- -------------------------------------------------------------------------------
Total Assets $28,708.2 $27,870.0
- -------------------------------------------------------------------------------
Liabilities
Deposits
Demand and Other Noninterest-Bearing $ 4,476.0 $ 3,927.5
Savings and Money Market 5,299.7 4,614.7
Savings Certificates 2,338.6 2,175.0
Other Time 913.0 540.2
Foreign Offices-Demand 468.8 413.4
-Time 7,874.9 6,531.9
- -------------------------------------------------------------------------------
Total Deposits 21,371.0 18,202.7
Federal Funds Purchased 370.2 2,025.1
Securities Sold under Agreements to Repurchase (Note
4) 997.8 2,114.9
Commercial Paper 145.1 148.1
Other Borrowings 1,155.3 1,099.2
Senior Notes (Note 10) 500.0 700.0
Long-Term Debt (Note 10) 659.4 458.2
Debt-Floating Rate Capital Securities (Note 11) 267.5 267.4
Liability on Acceptances 34.7 33.3
Other Liabilities 1,032.5 880.8
- -------------------------------------------------------------------------------
Total Liabilities 26,533.5 25,929.7
- -------------------------------------------------------------------------------
Stockholders' Equity
Preferred Stock (Note 12) 120.0 120.0
Common Stock, $1.66 2/3 Par Value; Authorized
280,000,000 shares in 1999 and 1998; Outstanding
222,161,934 shares and 111,214,740 shares in 1999 and
1998, respectively (Notes 12 and 14) 379.8 189.9
Capital Surplus -- 212.9
Retained Earnings 1,870.7 1,582.9
Net Unrealized Loss on Securities Available for Sale
(Note 3) (2.4) (.6)
Common Stock Issuable-Performance Plan (Note 25) 55.0 30.4
Deferred Compensation-ESOP and Other (44.2) (44.3)
Treasury Stock (at cost-5,759,590 shares in 1999 and
2,746,022 shares in 1998) (204.2) (150.9)
- -------------------------------------------------------------------------------
Total Stockholders' Equity 2,174.7 1,940.3
- -------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $28,708.2 $27,870.0
See accompanying notes to consolidated financial statements on pages 49-73.
45
- --------------------------------------------------------------------------------
Northern Trust Corporation
Consolidated Statement of Income
---------------- ----------------
For the Year Ended December 31
- --------------------------------------------------------------------------------
($ In Millions Except Per Share
Information) 1999 1998 1997
- --------------------------------------------------------------------------------
Noninterest Income
Trust Fees $ 974.2 $ 816.3 $ 689.2
Foreign Exchange Trading Profits 107.7 103.5 104.8
Treasury Management Fees 67.9 69.9 60.2
Security Commissions and Trading Income 30.2 28.0 26.1
Other Operating Income (Note 16) 54.5 52.6 53.5
Investment Security Gains (Note 3) .7 1.3 .7
- --------------------------------------------------------------------------------
Total Noninterest Income 1,235.2 1,071.6 934.5
- --------------------------------------------------------------------------------
Net Interest Income (Note 17)
Interest Income 1,568.6 1,503.1 1,332.8
Interest Expense 1,049.8 1,025.9 894.6
- --------------------------------------------------------------------------------
Net Interest Income 518.8 477.2 438.2
Provision for Credit Losses (Note 6) 12.5 9.0 9.0
- --------------------------------------------------------------------------------
Net Interest Income after Provision for
Credit Losses 506.3 468.2 429.2
- --------------------------------------------------------------------------------
Noninterest Expenses
Compensation (Notes 25 and 26) 582.6 518.1 448.3
Employee Benefits (Note 19) 98.5 91.3 79.0
Occupancy Expense (Notes 8 and 9) 74.3 67.9 66.7
Equipment Expense (Note 8) 63.6 62.2 62.2
Other Operating Expenses (Note 18) 306.0 257.6 235.6
- --------------------------------------------------------------------------------
Total Noninterest Expenses 1,125.0 997.1 891.8
- --------------------------------------------------------------------------------
Income before Income Taxes 616.5 542.7 471.9
Provision for Income Taxes (Note 13) 211.5 188.8 162.5
- --------------------------------------------------------------------------------
Net Income $ 405.0 $ 353.9 $ 309.4
- --------------------------------------------------------------------------------
Net Income Applicable to Common Stock $ 400.2 $ 349.0 $ 304.4
- --------------------------------------------------------------------------------
Net Income Per Common Share (Note 14)-
Basic $ 1.81 $ 1.58 $ 1.37
- -Diluted 1.74 1.52 1.33
- --------------------------------------------------------------------------------
Average Number of Common Shares
Outstanding-Basic 221,673,316 221,366,976 221,955,290
- -Diluted 229,874,028 229,734,116 229,322,312
Consolidated Statement of Comprehensive Income
For the Year Ended
December 31
- -------------------------------------------------------------------------------
(In Millions) 1999 1998 1997
- -------------------------------------------------------------------------------
Net Income $ 405.0 $ 353.9 $ 309.4
Other Comprehensive Income (net of tax)
Net Unrealized Gains (Losses) on Securities
Available for Sale
Unrealized Holding Gains (Losses) Arising
During Period
(Net of tax (provision) benefit of $.5 in
1999, $1.2 in 1998 and $(.5) in 1997) (1.4) (2.0) .8
Less: Reclassification Adjustments for Gains
Included in Net Income
(Net of tax provision of $.3 in 1999, $.3 in
1998 and $.2 in 1997) (.4) (.7) (.3)
Minimum Pension Liability Adjustment
(Net of tax benefit of $2.3 in 1999, $2.2 in
1998 and $1.4 in 1997) (3.9) (3.5) (2.4)
- -------------------------------------------------------------------------------
Other Comprehensive Income (5.7) (6.2) (1.9)
- -------------------------------------------------------------------------------
Comprehensive Income $ 399.3 $ 347.7 $ 307.5
See accompanying notes to consolidated financial statements on pages 49-73.
46
- --------------------------------------------------------------------------------
Northern Trust Corporation
Consolidated Statement of Changes in Stockholders' Equity
---------------- ----------------
For the Year Ended December 31
- -------------------------------------------------------------------------------
(In Millions) 1999 1998 1997
- -------------------------------------------------------------------------------
Preferred Stock
Balance at January 1 $ 120.0 $ 120.0 $ 120.0
- -------------------------------------------------------------------------------
Balance at December 31 120.0 120.0 120.0
- -------------------------------------------------------------------------------
Common Stock
Balance at January 1 189.9 189.9 189.9
Transfer from Capital Surplus-Two-for-
One Stock Split 189.9 -- --
- -------------------------------------------------------------------------------
Balance at December 31 379.8 189.9 189.9
- -------------------------------------------------------------------------------
Capital Surplus
Balance at January 1 212.9 225.5 231.7
Transfer to Common Stock-Two-for-One
Stock Split (189.9) -- --
Stock Issued-Incentive Plan and Awards (23.0) (12.6) (6.2)
- -------------------------------------------------------------------------------
Balance at December 31 -- 212.9 225.5
- -------------------------------------------------------------------------------
Retained Earnings
Balance at January 1 1,582.9 1,330.8 1,110.2
Net Income 405.0 353.9 309.4
Dividends Declared-Common Stock (110.3) (96.9) (83.8)
Dividends Declared-Preferred Stock (4.8) (4.9) (5.0)
Stock Issued-Incentive Plan and Awards (2.1) -- --
- -------------------------------------------------------------------------------
Balance at December 31 1,870.7 1,582.9 1,330.8
- -------------------------------------------------------------------------------
Net Unrealized Gain (Loss) on
Securities Available for Sale
Balance at January 1 (.6) 2.1 1.6
Unrealized Gain (Loss), net (1.8) (2.7) .5
- -------------------------------------------------------------------------------
Balance at December 31 (2.4) (.6) 2.1
- -------------------------------------------------------------------------------
Common Stock Issuable-Performance Plan
Balance at January 1 30.4 11.7 10.4
Stock Issuable, net of Stock Issued 24.6 18.7 1.3
- -------------------------------------------------------------------------------
Balance at December 31 55.0 30.4 11.7
- -------------------------------------------------------------------------------
Deferred Compensation-ESOP and Other
Balance at January 1 (44.3) (37.5) (35.5)
Compensation Deferred (13.3) (18.3) (8.9)
Compensation Amortized 17.3 15.0 9.3
Unfunded Pension Liability, net (3.9) (3.5) (2.4)
- -------------------------------------------------------------------------------
Balance at December 31 (44.2) (44.3) (37.5)
- -------------------------------------------------------------------------------
Treasury Stock
Balance at January 1 (150.9) (103.5) (84.2)
Stock Options and Awards 87.0 69.9 51.0
Stock Purchased (140.3) (117.3) (70.3)
- -------------------------------------------------------------------------------
Balance at December 31 (204.2) (150.9) (103.5)
- -------------------------------------------------------------------------------
Total Stockholders' Equity at December
31 $2,174.7 $1,940.3 $1,739.0
See accompanying notes to consolidated financial statements on pages 49-73.
47
- --------------------------------------------------------------------------------
Northern Trust Corporation
Consolidated Statement of Cash Flows
---------------- ----------------
For the Year Ended December 31
- -------------------------------------------------------------------------------
(In Millions) 1999 1998 1997
- -------------------------------------------------------------------------------
Cash Flows From Operating Activities:
Net Income $ 405.0 $ 353.9 $ 309.4
Adjustments to Reconcile Net Income to
Net Cash Provided
by Operating Activities:
Provision for Credit Losses 12.5 9.0 9.0
Depreciation on Buildings and Equipment 58.2 52.4 49.3
Increase in Interest Receivable (9.2) (23.0) (4.7)
Increase (Decrease) in Interest Payable 17.5 (10.7) 20.6
Amortization and Accretion of Securities
and Unearned Income (86.2) (214.9) (190.0)
Amortization of Software, Goodwill and
Other Intangibles 62.3 54.1 51.0
Deferred Income Tax 95.3 57.0 38.0
Net Increase in Trading Account
Securities (1.9) (.3) (4.0)
Other, net (43.0) 153.4 (77.5)
- -------------------------------------------------------------------------------
Net Cash Provided by Operating
Activities 510.5 430.9 201.1
- -------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Net (Increase) Decrease in Federal Funds
Sold and Securities Purchased under
Agreements to Resell 80.6 1,827.3 (1,969.1)
Net (Increase) Decrease in Time Deposits
with Banks 972.5 (981.5) (223.2)
Net (Increase) Decrease in Other
Interest-Bearing Assets (41.4) 12.7 79.8
Purchases of Securities-Held to Maturity (201.2) (233.4) (162.6)
Proceeds from Maturity and Redemption of
Securities-Held to Maturity 160.2 218.9 207.2
Purchases of Securities-Available for
Sale (45,965.0) (110,806.2) (75,308.5)
Proceeds from Sale, Maturity and
Redemption of Securities-Available for
Sale 45,777.4 109,456.3 76,121.5
Net Increase in Loans and Leases (1,834.3) (1,147.7) (1,708.0)
Purchases of Buildings and Equipment (99.9) (84.5) (57.5)
Proceeds from Sale of Buildings and
Equipment 1.5 8.3 3.3
Net (Increase) Decrease in Trust
Security Settlement Receivables 13.6 (45.3) 70.9
Decrease in Cash Due to Acquisitions -- (15.0) (53.0)
Other, net 2.7 (1.7) (1.2)
- -------------------------------------------------------------------------------
Net Cash Used in Investing Activities (1,133.3) (1,791.8) (3,000.4)
- -------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Net Increase in Deposits 3,168.3 1,842.7 2,563.8
Net Increase (Decrease) in Federal Funds
Purchased (1,654.9) 1,203.9 168.2
Net Increase (Decrease) in Securities
Sold under Agreements to Repurchase (1,117.1) 975.2 173.6
Net Increase (Decrease) in Commercial
Paper (3.0) 1.3 (2.2)
Net Decrease in Short-Term Other
Borrowings (556.1) (1,770.8) (157.0)
Proceeds from Term Federal Funds
Purchased 7,516.8 1,730.8 1,612.4
Repayments of Term Federal Funds
Purchased (6,904.6) (1,737.4) (1,720.9)
Proceeds from Senior Notes & Long-Term
Debt 701.4 801.4 803.4
Repayments on Senior Notes & Long-Term
Debt (700.2) (867.7) (331.7)
Proceeds from Debt-Floating Rate Capital
Securities -- -- 267.4
Treasury Stock Purchased (139.7) (116.5) (66.2)
Net Proceeds from Stock Options 24.1 19.5 13.0
Cash Dividends Paid on Common and
Preferred Stock (111.4) (98.5) (85.3)
Other, net 11.1 4.1 7.2
- -------------------------------------------------------------------------------
Net Cash Provided by Financing
Activities 234.7 1,988.0 3,245.7
- -------------------------------------------------------------------------------
Increase (Decrease) in Cash and Due from
Banks (388.1) 627.1 446.4
Cash and Due from Banks at Beginning of
Year 2,366.0 1,738.9 1,292.5
- -------------------------------------------------------------------------------
Cash and Due From Banks at End of Year $ 1,977.9 $ 2,366.0 $ 1,738.9
- -------------------------------------------------------------------------------
Schedule of Noncash Investing Activities:
Transfer of Securities from Available
for Sale to Held to Maturity $ 239.8 $ -- $ --
Building Purchase Obligation -- -- 20.0
Supplemental Disclosures of Cash Flow
Information:
Interest Paid $ 1,032.4 $ 1,036.6 $ 874.1
Income Taxes Paid 69.7 128.0 102.5
See accompanying notes to consolidated financial statements on pages 49-73.
48
- --------------------------------------------------------------------------------
Northern Trust Corporation
Notes to Consolidated Financial Statements
---------------- ----------------
1. Accounting Policies--The consolidated financial statements have been pre-
pared in conformity with generally accepted accounting principles and report-
ing practices prescribed for the banking industry. A description of the
significant accounting policies follows:
A. Basis of Presentation. The consolidated financial statements include the
accounts of Northern Trust Corporation (Corporation) and its wholly-owned sub-
sidiary The Northern Trust Company (Bank) and their wholly-owned subsidiaries.
Throughout the notes, the term "Northern Trust" refers to Northern Trust Cor-
poration and subsidiaries. Significant intercompany balances and transactions
have been eliminated in consolidation. The consolidated statement of income
includes results of acquired and pooled subsidiaries from the dates of acqui-
sition.
B. Nature of Operations. The Corporation is a bank holding company whose
principal subsidiary is the Chicago-based Bank. The Corporation also owns
banks in Florida, Arizona, California, Texas and Colorado, a federal savings
bank with offices in Michigan and Washington, and various other nonbank sub-
sidiaries, including a securities brokerage firm, registered investment advis-
ers NTGA and NTQA and a retirement services company. The Bank also has global
custody operations in London, a trust office in Ohio, and various subsidiar-
ies, including a leasing company, a Canadian trust company and a New York Edge
Act company. Northern Trust generates the majority of its revenues from its
two primary business units, Corporate and Institutional Services (C&IS) and
Personal Financial Services (PFS). Investment products and services are pro-
vided to C&IS and PFS through a third business unit, Northern Trust Global
Investments (NTGI).
The C&IS business unit provides trust and custody-related services in the
United States and foreign markets to corporations and institutions; investment
management services; a full range of commercial banking services to large
domestic corporations and financial institutions; treasury management services
to meet the needs of major corporations and financial institutions; and for-
eign exchange services for global custody clients and Northern Trust's own
account.
The PFS business unit provides personal trust, investment management, estate
administration, personal banking and mortgage lending services, and also pro-
vides commercial banking services to middle market companies. These services
are delivered through the Bank in Illinois and Ohio and the network of subsid-
iaries in Florida, Arizona, California, Texas, Colorado, Michigan, and Wash-
ington.
C. Use of Estimates in the Preparation of Financial Statements. The prepara-
tion of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
D. Foreign Currency Translation. Foreign currency asset and liability
accounts of overseas branches and subsidiaries are translated at current rates
of exchange, except for buildings and equipment which are translated at rates
in effect at the date of acquisition. Income and expense accounts are trans-
lated at month-end rates of exchange.
Foreign exchange trading positions are valued daily at prevailing market
rates. Gains and losses on trading positions and on positions entered into to
hedge foreign denominated investments are recognized currently in other oper-
ating income. Unrealized gains on trading positions are reported as other
assets and unrealized losses are reported as other liabilities in the consoli-
dated balance sheet. Gains and losses on foreign currency positions that were
entered into to hedge specific, firm foreign currency obligations are deferred
and recognized in income over the life of the underlying asset or liability or
as the underlying expense or commitment is incurred.
E. Securities. Securities Available for Sale consist of debt and equity secu-
rities that are not intended to be held to maturity and are not held for trad-
ing. Securities available for sale are reported at fair value, with unrealized
gains and losses credited or charged, net of the tax effect, directly to
stockholders' equity. Realized gains and losses on securities available for
sale are determined on a specific identification basis and are reported in the
consolidated statement of income as investment security gains and losses.
Securities Held to Maturity consist of debt securities that management
intends to, and Northern Trust has the ability to, hold until maturity. Such
securities are reported at cost, adjusted for amortization of premium and
accretion of discount.
Securities Held for Trading are stated at fair value. Realized and unrealized
gains and losses on securities held for trading are reported in the consoli-
dated statement of income under security commissions and trading income.
F. Interest Risk Management Instruments. Interest risk management instruments
include interest rate swap contracts, futures contracts, options and similar
contracts. Northern Trust is a party to various interest risk management
instruments as part of its asset/ liability management activities, to meet the
interest risk management needs of its clients and as part of its trading
activity for its own account. Unrealized gains and
49
- --------------------------------------------------------------------------------
Northern Trust Corporation
Notes to Consolidated Financial Statements
---------------- ----------------
receivables on interest risk management instruments are reported as other
assets and unrealized losses and payables are reported as other liabilities in
the consolidated balance sheet.
Asset/Liability Management Instruments. Interest rate swaps are the primary
interest risk management instrument used for asset/liability management
purposes. Futures contracts, options, and similar contracts are also used for
asset/liability management, but these contracts do not have a material impact
on Northern Trust's financial condition or net income. Accrued interest income
or expense on asset/liability management swaps is recognized as a component of
the interest income or expense of the hedged items. Unrealized gains and
losses on such swaps are recognized consistent with the method of accounting
for the hedged items. For example, there is no recognition of unrealized gains
and losses on swaps used to hedge items that are carried at their amortized
cost. Unrealized gains and losses on interest rate swaps used to hedge avail-
able for sale securities are reported in stockholders' equity, net of applica-
ble taxes.
A swap that is classified in the asset/liability management category must be
assigned to hedge a specific asset or liability and must reduce Northern
Trust's interest rate risk. It must also achieve its intended objective of
converting the yield on the hedged asset or liability to the desired rate.
This criteria is assumed to have been met if the interest rate on the hedged
asset or liability is identical to the offsetting interest rate on the swap.
If the two rates are not identical, the correlation between the levels of the
two rates since the inception of the swap must be measured to ensure that the
swap is meeting its intended objective. In addition, the notional amount of
the swap must be less than or equal to the par amount of the item being
hedged. If a forward swap is entered into to hedge an anticipated transaction,
the significant terms (e.g., the expected date, type of instrument, quantity,
and maturity date) of the anticipated transaction must be identified, and it
must be probable that the anticipated transaction will occur.
If an asset/liability management swap is terminated or ceases to meet the
criteria described above, any realized or unrealized gain or loss at the time
is deferred and amortized over the remainder of the original hedge period. Any
subsequent realized or unrealized gains or losses are reported as security
commissions and trading income in the consolidated statement of income. If the
item being hedged is sold, any deferred or unrealized gain or loss on the swap
at the time of the transaction is considered in the calculation of the gain or
loss on the sale. If the swap is not terminated, it must be marked to market
on a prospective basis, with realized and unrealized gains and losses included
in security commissions and trading income in the consolidated statement of
income.
Client-Related and Trading Instruments. Interest risk management instruments
entered into to meet clients' interest risk management needs or for trading
purposes are carried at fair value, with realized and unrealized gains and
losses included in security commissions and trading income.
G. Loans and Leases. Loans that are held to maturity are reported at the
principal amount outstanding, net of unearned income. Residential real estate
loans classified as held for sale are reported at the lower of aggregate cost
or market value. Interest income on loans is recorded on an accrual basis
until, in the opinion of management, there is a question as to the ability of
the debtor to meet the terms of the contract, or when interest or principal is
more than 90 days past due and the loan is not well-secured and in the process
of collection. At the time a loan is placed on nonaccrual status, interest
accrued but not collected is reversed against interest income of the current
period. Loans are returned to accrual status when factors indicating doubtful
collectibility no longer exist. Interest collected on nonaccrual loans is
applied to principal unless, in the opinion of management, collectibility of
principal is not in doubt.
Premiums and discounts on loans are recognized as an adjustment of yield
using the interest method based on the contractual terms of the loan. Commit-
ment fees that are considered to be an adjustment to the loan yield, loan
origination fees and certain direct costs are deferred and accounted for as an
adjustment to the yield.
Unearned lease income from direct financing and leveraged leases is recog-
nized using the interest method. This method provides a constant rate of
return on the unrecovered investment over the life of the lease.
H. Reserve for Credit Losses. The reserve for credit losses represents man-
agement's estimate of probable inherent losses which have occurred as of the
date of the financial statements. The loan and lease portfolio and other
credit exposures are regularly reviewed to evaluate the adequacy of the
reserve for credit losses. In determining the level of the reserve, Northern
Trust evaluates the reserve necessary for specific nonperforming loans and
also estimates losses inherent in other credit exposures.
The result is a reserve with these components:
Specific Reserve. The amount of specific reserves is determined through a
loan-by-loan analysis of nonperforming loans that considers expected future
cash flows, the value of collateral and other factors that may impact the bor-
rower's ability to pay.
50
- -------------------------------------------------------------------------------
Northern Trust Corporation
Notes to Consolidated Financial Statements
---------------- ----------------
Allocated Inherent Reserve. The amount of the allocated portion of the inher-
ent loss reserve is based on loss factors assigned to Northern Trust's credit
exposures based on internal credit ratings. These loss factors are primarily
based on management's judgment concerning the effect of the business cycle on
the creditworthiness of Northern Trust's borrowers, as well as historical
charge-off experience.
Unallocated Inherent Reserve. Management determines the unallocated portion
of the inherent loss reserve based on factors that cannot be associated with a
specific credit or loan categories. These factors include management's subjec-
tive evaluation of local and national economic and business conditions, port-
folio concentration and changes in the character and size of the loan
portfolio. The unallocated portion of the inherent loss reserve reflects man-
agement's attempt to ensure that the overall reserve appropriately reflects a
margin for the imprecision necessarily inherent in estimates of expected
credit losses.
The continuous control process maintained by the Credit Policy Group and the
lending staff and the quarterly analysis of specific and inherent loss compo-
nents are the principal methods relied upon by management to ensure that
changes in estimated credit loss levels are adjusted on a timely basis. Man-
agement also considers the experience of peer institutions and regulatory
guidance in addition to Northern Trust's own experience.
Loans, leases and other extensions of credit deemed uncollectible are charged
to the reserve. Subsequent recoveries, if any, are credited to the reserve.
Actual losses may vary from current estimates and the amount of the provision
may be either greater than or less than actual net charge-offs. The related
provision for credit losses, which is charged to income, is the amount neces-
sary to adjust the reserve to the level determined through the above process.
I. Mortgage Servicing Rights. Mortgage servicing rights are capitalized as a
separate asset when purchased or when acquired through the origination of
mortgage loans that are subsequently sold with the servicing rights retained.
The servicing rights are included in other assets and are amortized as an off-
set to other operating income over their estimated life. Servicing rights are
evaluated for impairment based on their fair value. For purposes of measuring
impairment, Northern Trust stratifies its servicing rights by loan type and
interest rate. Fair value is determined considering market prices for similar
assets.
J. Fees on Standby Letters of Credit and Participations in Bankers Accept-
ances. Fees on standby letters of credit are recognized in other operating
income on the straight-line method over the lives of the underlying agree-
ments. Commissions on bankers acceptances are recognized in other operating
income when received.
K. Buildings and Equipment. Buildings and equipment owned are carried at
original cost less accumulated depreciation. The charge for depreciation is
computed on the straight-line method based on the following range of lives:
buildings--10 to 30 years; equipment--4 to 10 years; and leasehold improve-
ments--lease term to 15 years. Leased properties meeting certain criteria are
capitalized and amortized using the straight-line method over the lease peri-
od.
L. Other Real Estate Owned (OREO). OREO is comprised of commercial and resi-
dential real estate properties acquired in partial or total satisfaction of
problem loans. OREO assets are carried at the lower of cost or fair value.
Losses identified at the time of acquisition of such properties are charged
against the reserve for credit losses. Subsequent write-downs that may be
required to the carrying value of these assets and losses realized from asset
sales are charged to other operating expenses.
M. Intangible Assets. Goodwill, arising from the excess of purchase price
over the fair value of net assets of acquired businesses, is being amortized
using the straight-line method primarily over fifteen years.
Other purchased intangible assets arising from acquisitions are amortized
using various methods over the estimated lives of the assets. Software is
being amortized using the straight-line method over the estimated useful life
of the asset, ranging from 5 to 7 years.
N. Trust Assets and Fees. Assets held in fiduciary or agency capacities are
not included in the consolidated balance sheet, since such items are not
assets of Northern Trust. Fees from trust activities are recorded on the
accrual basis.
O. Trust Security Settlement Receivables. These receivables represent other
items in the process of collection presented on behalf of trust clients.
P. Income Taxes. In accordance with SFAS No. 109, "Accounting for Income Tax-
es," an asset and liability approach to accounting for income taxes is fol-
lowed. The objective is to recognize the amount of taxes payable or refundable
for the current year, and to recognize deferred tax assets and liabilities
resulting from temporary differences between the amounts reported in the
financial statements and the tax bases of assets and liabilities. The measure-
ment of tax assets and liabilities is based on enacted tax laws and applicable
tax rates.
Q. Cash Flow Statements. Cash and cash equivalents have been defined as "Cash
and Due from Banks."
2. Reclassifications--Certain reclassifications have been made to prior peri-
ods' consolidated financial statements to place them on a basis comparable
with the current period's consolidated financial statements.
51
- --------------------------------------------------------------------------------
Northern Trust Corporation
Notes to Consolidated Financial Statements
---------------- ----------------
3. Securities--Securities Available For Sale. The following tables summarize
the amortized cost, fair values and remaining maturities of securities avail-
able for sale.
Reconciliation of Amortized Cost to Fair Values of Securities Available for
Sale
- --------------------------------------------------------------------------------
December 31, 1999
- -----------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(In Millions) Cost Gains Losses Value
- -----------------------------------------------------------------------------
U.S. Government $ 192.4 $ -- $ .4 $ 192.0
Obligations of States and Political
Subdivisions 16.8 -- 1.5 15.3
Federal Agency 5,109.7 .7 4.8 5,105.6
Preferred Stock 101.6 -- .3 101.3
Other 66.1 -- .3 65.8
- -----------------------------------------------------------------------------
Total $5,486.6 $ .7 $7.3 $5,480.0
Unrealized gains and losses on off-balance sheet financial instruments used to
hedge available for sale securities totaled $3.5 million and none, respective-
ly, as of December 31, 1999. Unrealized gains on these hedges are reported as
other assets in the consolidated balance sheet; unrealized losses are reported
as other liabilities. As of December 31, 1999, stockholders' equity included a
charge of $2.4 million, net of the related tax benefit, to recognize the depre-
ciation on securities available for sale, net of the related hedges.
December 31, 1998
- -----------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(In Millions) Cost Gains Losses Value
- -----------------------------------------------------------------------------
U.S. Government $ 259.0 $ 1.0 $ -- $ 260.0
Obligations of States and Political
Subdivisions 256.2 9.9 -- 266.1
Federal Agency 4,697.5 1.0 3.1 4,695.4
Preferred Stock 135.0 .4 -- 135.4
Other 19.3 -- 1.0 18.3
- -----------------------------------------------------------------------------
Total $5,367.0 $12.3 $4.1 $5,375.2
Unrealized gains and losses on off-balance sheet financial instruments used to
hedge available for sale securities totaled $2.3 million and $11.5 million,
respectively, as of December 31, 1998. Unrealized gains on these hedges are
reported as other assets in the consolidated balance sheet; unrealized losses
are reported as other liabilities. As of December 31, 1998, stockholders'
equity included a charge of $.6 million, net of the related tax benefit, to
recognize the depreciation on securities available for sale, net of the related
hedges.
Remaining Maturity of Securities Available for Sale
- --------------------------------------------------------------------------------
December 31, 1999
- ----------------------------------------------------------
Amortized Fair
(In Millions) Cost Value
- ----------------------------------------------------------
Due in One Year or Less $5,172.2 $5,169.0
Due After One Year Through Five Years 192.9 191.7
Due After Five Years Through Ten Years 11.8 11.5
Due After Ten Years 109.7 107.8
- ----------------------------------------------------------
Total $5,486.6 $5,480.0
Mortgage-backed securities were included in the above table taking into account
anticipated future prepayments.
Securities Held to Maturity. The following tables summarize the book values,
fair values and remaining maturities of securities held to maturity.
Reconciliation of Book Values to Fair Values of Securities Held to Maturity
- --------------------------------------------------------------------------------
December 31, 1999
- ------------------------------------------------------------------------
Gross Gross
Book Unrealized Unrealized Fair
(In Millions) Value Gains Losses Value
- ------------------------------------------------------------------------
U.S. Government $ 55.1 $ -- $ .1 $ 55.0
Obligations of States and Political
Subdivisions 476.0 3.2 12.6 466.6
Federal Agency .9 -- .2 .7
Other 220.7 -- 2.6 218.1
- ------------------------------------------------------------------------
Total $752.7 $ 3.2 $15.5 $740.4
December 31, 1998
- ------------------------------------------------------------------------
Gross Gross
Book Unrealized Unrealized Fair
(In Millions) Value Gains Losses Value
- ------------------------------------------------------------------------
U.S. Government $ 55.3 $ .1 $ -- $ 55.4
Obligations of States and Political
Subdivisions 261.8 15.5 .1 277.2
Federal Agency 3.0 -- -- 3.0
Other 152.4 -- 2.3 150.1
- ------------------------------------------------------------------------
Total $472.5 $15.6 $ 2.4 $485.7
Remaining Maturity of Securities Held to Maturity
- --------------------------------------------------------------------------------
December 31, 1999
- ---------------------------------------------------------
Book Fair
(In Millions) Value Value
- ---------------------------------------------------------
Due in One Year or Less $ 108.7 $ 109.3
Due After One Year Through Five Years 112.6 115.9
Due After Five Years Through Ten Years 139.7 139.4
Due After Ten Years 391.7 375.8
- ---------------------------------------------------------
Total $ 752.7 $ 740.4
Mortgage-backed securities were included in the above table taking into account
anticipated future prepayments.
52
- --------------------------------------------------------------------------------
Northern Trust Corporation
Notes to Consolidated Financial Statements
---------------- ----------------
Refer to Note 21 for additional detail related to interest risk management
instruments used to hedge securities.
Investment Security Gains and Losses. Realized gross security gains and losses,
which were included in the consolidated statement of income, totaled $.7 mil-
lion and none, respectively in 1999. Realized gross security gains totaled $1.3
million in 1998. Realized gross security gains and losses totaled $1.2 million
and $.5 million, respectively, in 1997.
4. Securities Purchased Under Agreements to Resell and Securities Sold Under
Agreements to Repurchase--Securities purchased under agreements to resell and
securities sold under agreements to repurchase are recorded at the amounts at
which the securities were acquired or sold plus accrued interest. To minimize
any potential credit risk associated with these transactions, the fair value of
the securities purchased or sold is continuously monitored, limits are set on
exposure with counterparties, and the financial condition of counterparties is
regularly assessed. It is Northern Trust's policy to take possession of securi-
ties purchased under agreements to resell.
The following tables summarize information related to securities purchased
under agreements to resell and securities sold under agreements to repurchase.
Securities Purchased Under Agreements to Resell
- --------------------------------------------------------------------------------
December 31
- -----------------------------------------------------------------
($ In Millions) 1999 1998
- -----------------------------------------------------------------
Average Balance During the Year $ 749.8 $ 681.5
Average Interest Rate Earned During the Year 5.03% 5.43%
Maximum Month-End Balance
During the Year 913.6 2,278.9
Securities Sold Under Agreements to Repurchase
- --------------------------------------------------------------------------------
December 31
- ---------------------------------------------------------------
($ In Millions) 1999 1998
- ---------------------------------------------------------------
Average Balance During the Year $1,954.5 $1,506.0
Average Interest Rate Paid During the Year 4.90% 5.33%
Maximum Month-End Balance
During the Year 3,573.2 4,136.0
5. Loans and Leases--Amounts outstanding in selected loan categories are shown
below.
December 31
- --------------------------------------------
(In Millions) 1999 1998
- --------------------------------------------
Domestic
Residential Real Estate $ 6,257.7 $ 5,885.2
Commercial 4,704.1 3,937.9
Broker 88.8 147.6
Commercial Real Estate 780.4 677.1
Personal 1,659.9 1,463.4
Other 566.5 509.6
Lease Financing 691.5 528.3
- --------------------------------------------
Total Domestic 14,748.9 13,149.1
International 625.6 497.8
- --------------------------------------------
Total Loans and Leases $15,374.5 $13,646.9
Other domestic and international loans include $701.8 million at December 31,
1999, and $592.6 million at December 31, 1998 of overnight trust-related
advances in connection with next day security settlements. Lease financing
includes leveraged leases of $399.3 million at December 31, 1999, and $308.4
million at December 31, 1998.
Residential real estate loans held for sale totaled $14.8 million and $51.4
million at December 31, 1999 and 1998, respectively.
Refer to Note 21 for detail related to interest risk management instruments
used to hedge loans.
Nonperforming Assets. Presented below are outstanding amounts of nonaccrual
loans, restructured loans and OREO.
December 31
- --------------------------------------------
(In Millions) 1999 1998
- --------------------------------------------
Nonaccrual Loans
Domestic-Commercial Real Estate $ 1.9 $ 2.9
-Other 57.4 27.6
International -- --
- --------------------------------------------
Total Nonaccrual Loans 59.3 30.5
Restructured Loans -- 2.4
Other Real Estate Owned 1.3 2.3
- --------------------------------------------
Total Nonperforming Assets $60.6 $35.2
Included in nonperforming assets were loans with a recorded investment at
December 31, 1999 and December 31, 1998 of $56.3 million and $32.0 million,
respectively, which were also classified as impaired. At December 31, 1999 and
December 31, 1998, impaired loans totaling $7.9 million and $8.5 million,
respectively, had no portion of the reserve for credit losses specifi-
53
- --------------------------------------------------------------------------------
Northern Trust Corporation
Notes to Consolidated Financial Statements
---------------- ----------------
cally allocated to them, while $48.4 million at December 31, 1999 had a spe-
cific allocated reserve of $15.0 million and $23.5 million at December 31, 1998
had a specific allocated reserve of $5.9 million. Total recorded investment in
impaired loans averaged $33.5 million in 1999 and $29.9 million in 1998. Total
interest income recognized on impaired loans was $235 thousand and $120 thou-
sand in 1999 and 1998, respectively.
There were $7.1 million of unfunded loan commitments and standby letters of
credit issued to borrowers whose loans were classified as nonaccrual at Decem-
ber 31, 1999, while there were $4.4 million at December 31, 1998.
Interest income that would have been recorded on domestic nonaccrual loans in
accordance with their original terms amounted to $3.2 million in both 1999 and
1998 and $3.6 million in 1997, compared with amounts that were actually
recorded of $.2 million, $.3 million and $.8 million, respectively.
Write-downs and realized losses on OREO of $.3 million in 1999, $52 thousand
in 1998 and $.4 million in 1997 were charged to other operating expenses.
6. Reserve for Credit Losses--Changes in the reserve for credit losses were as
follows:
(In Millions) 1999 1998 1997
- --------------------------------------------------------
Balance at Beginning of Year $146.8 $147.6 $148.3
- --------------------------------------------------------
Charge-Offs
Domestic
Commercial Real Estate (.3) (.3) (.7)
Other (9.5) (11.5) (13.7)
International -- -- --
- --------------------------------------------------------
Total Charge-Offs (9.8) (11.8) (14.4)
Recoveries 1.4 1.8 4.7
- --------------------------------------------------------
Net Charge-Offs (8.4) (10.0) (9.7)
Provision for Credit Losses 12.5 9.0 9.0
Reserve Related to Acquisitions -- .2 --
- --------------------------------------------------------
Balance at End of Year $150.9 $146.8 $147.6
7. Mortgage Servicing Rights--Servicing rights capitalized as a result of orig-
inating mortgage loans and selling the loans with the servicing rights retained
totaled $141 thousand and $2.2 million during 1999 and 1998, respectively. Dur-
ing 1999, mortgage servicing rights with a book value of $1.5 million were sold
resulting in a $1.2 million gain. Amortization of the servicing rights totaled
$691 thousand during 1999 and $1.0 million during 1998, resulting in carrying
values of $382 thousand and $2.1 million as of December 31, 1999 and 1998,
respectively. There were no valuation allowances established to record impair-
ment of mortgage servicing rights during 1999 or 1998.
8. Buildings and Equipment--Summary of buildings and equipment is presented
below.
December 31, 1999
- -----------------------------------------------------------
Net
Original Accumulated Book
(In Millions) Cost Depreciation Value
- -----------------------------------------------------------
Land $ 37.9 $ -- $ 37.9
Buildings 111.8 40.5 71.3
Equipment 290.8 129.7 161.1
Leasehold Improvements 70.0 28.1 41.9
Buildings Leased under
Capital Leases (Note 9) 86.6 18.4 68.2
- -----------------------------------------------------------
Total Buildings and Equipment $597.1 $216.7 $380.4
December 31, 1998
- -----------------------------------------------------------
Net
Original Accumulated Book
(In Millions) Cost Depreciation Value
- -----------------------------------------------------------
Land $ 37.9 $ -- $ 37.9
Buildings 100.3 37.2 63.1
Equipment 257.7 119.2 138.5
Leasehold Improvements 55.7 25.5 30.2
Buildings Leased under
Capital Leases (Note 9) 86.6 16.1 70.5
- -----------------------------------------------------------
Total Buildings and Equipment $538.2 $198.0 $340.2
The charge for depreciation, which includes amortization of assets recorded
under capital leases, amounted to $58.2 million in 1999, $52.4 million in 1998
and $49.3 million in 1997.
9. Lease Commitments--At December 31, 1999, Northern Trust was obligated under
a number of non-cancelable operating leases for premises and equipment. Certain
leases contain rent escalation clauses, based on market indices or increases in
real estate taxes and other operating expenses and renewal option clauses call-
ing for increased rentals. There are no restrictions imposed by any lease
agreement regarding the payment of dividends, debt financing or Northern Trust
entering into further lease agreements. Minimum annual lease commitments as of
December 31, 1999 for all non-cancelable operating leases are as follows:
Future Minimum
(In Millions) Lease Payments
- --------------------------------------------
2000 $ 34.8
2001 33.1
2002 30.0
2003 26.3
2004 23.7
Later Years 146.0
- --------------------------------------------
Total Minimum Lease Payments $293.9
54
- --------------------------------------------------------------------------------
Northern Trust Corporation
Notes to Consolidated Financial Statements
---------------- ----------------
Net rental expense for all operating leases is included in occupancy expense
and amounted to $31.5 million in 1999, $27.8 million in 1998 and $27.4 million
in 1997.
The building and land utilized at the Chicago operations center has been
leased under an agreement that qualifies as a capital lease. The long-term
financing for the property was provided by the Corporation and the Bank. In the
event of sale or refinancing, the Bank will receive all proceeds except for 58%
of any proceeds in excess of the original project costs which will be paid to
the lessor.
In January 2000, the Bank closed on an agreement to purchase a building and
adjacent land located across the street from the Chicago operations center for
$23.5 million. The building contains approximately 340,000 square feet of rent-
able office space. Prior to the purchase date, the Bank leased under the agree-
ment, in phases which began in 1997, approximately 130,000 square feet of this
building. At dates prior to the purchase, the present value of the land and
building is reported in buildings and equipment, and the related purchase obli-
gation appears in long-term debt in the consolidated balance sheet.
The table below reflects the future minimum lease payments required under cap-
ital leases, net of any payments received on the long-term financing, and
the present value of net capital lease obligations at December 31, 1999.
Future Minimum
(In Millions) Lease Payments, Net
- -------------------------------------------------------
2000 $ 1.4
2001 1.6
2002 1.6
2003 1.7
2004 1.7
Later Years 9.7
- -------------------------------------------------------
Total Minimum Lease Payments, net 17.7
Less: Amount Representing Interest 6.7
- -------------------------------------------------------
Net Present Value under Capital Lease Obligations $11.0
10. Senior Notes, Long-Term Debt and Lines of Credit--Senior Notes. A summary
of Bank senior notes outstanding at December 31 is presented below.
($ In Millions) Rate 1999 1998
- --------------------------------------------------
Bank-Senior Notes (a) (b)
Fixed Rate Due 1999 5.81 $ -- $100.0
Floating Rate Due 1999 5.20-5.45 -- 600.0
Fixed Rate Due 2000 5.10 100.0 --
Fixed Rate Due 2001 6.30 50.0 --
Fixed Rate Due 2003 6.625 200.0 --
Fixed Rate Due 2004 6.65 150.0 --
- --------------------------------------------------
Total Bank Senior Notes $500.0 $700.0
Refer to bottom of next table for applicable notes.
Long-Term Debt. Summary of long-term debt outstanding at December 31 is pre-
sented below.
($ In Millions) 1999 1998
- -------------------------------------------------
Corporation-Subordinated Debt
9.20% Notes due May 2001 (a) $ 25.0 $ 25.0
Bank-Subordinated Debt
6.50% Notes due May 2003 (a) 100.0 100.0
6.70% Notes due Sept. 2005 (a) (b) 100.0 100.0
7.30% Notes due Sept. 2006 (a) (b) 100.0 100.0
6.25% Notes due June 2008 (a) (b) 100.0 100.0
7.10% Notes due Aug. 2009 (a) (b) 200.0 --
- -------------------------------------------------
Subordinated Long-Term Debt $625.0 $425.0
- -------------------------------------------------
Capital Lease Obligations (c) 11.0 11.2
Building Purchase Obligation (c) 23.4 22.0
- -------------------------------------------------
Other Long-Term Debt $ 34.4 $ 33.2
- -------------------------------------------------
Total Long-Term Debt $659.4 $458.2
- -------------------------------------------------
Long-Term Debt Qualifying
as Risk-Based Capital $565.0 $390.0
(a) Not redeemable prior to maturity.
(b) Under the terms of its current Offering Circular, the Bank has the ability
to offer from time to time its senior bank notes in an aggregate principal
amount of up to $3.7 billion at any one time outstanding and up to an
additional $300 million of subordinated notes. Each senior note will mature
from 30 days to fifteen years and each subordinated note will mature from
five years to fifteen years, following its date of original issuance. Each
note will mature on such date as selected by the initial purchaser and
agreed to by the Bank.
(c) Refer to Note 9.
Refer to Note 21 for detail related to interest risk management instruments
used to hedge notes.
Lines of Credit. The Corporation currently maintains a commercial paper back-up
line of credit with three banks totaling $50 million. The termination date is
November 2001. The commitment fee is determined by a pricing matrix that is
based on the long-term senior debt ratings of the Corporation. Currently, the
annual fee is one-tenth of 1% of the commitment. There were no borrowings under
commercial paper back-up facilities during 1999 or 1998.
55
- --------------------------------------------------------------------------------
Northern Trust Corporation
Notes to Consolidated Financial Statements
---------------- ----------------
11. Debt--Floating Rate Capital Securities. The following table summarizes the
book value of Floating Rate Capital Securities outstanding:
December 31
- ----------------------------------------------------------
(In Millions) 1999 1998
- ----------------------------------------------------------
$150 Million Series A due January 15, 2027 $148.6 $148.6
$120 Million Series B due April 15, 2027 118.9 118.8
- ----------------------------------------------------------
Total Debt-Floating Rate Capital Securities $267.5 $267.4
In January 1997, the Corporation issued $150 million of Floating Rate Capital
Securities, Series A, through a statutory business trust wholly-owned by the
Corporation ("NTC Capital I"). In April 1997, the Corporation also issued,
through a separate wholly-owned statutory business trust ("NTC Capital II"),
$120 million of Floating Rate Capital Securities, Series B. The sole assets of
the trusts are Subordinated Debentures of Northern Trust Corporation which
have the same interest rates and maturity dates as the corresponding distribu-
tion rates and redemption dates of the Floating Rate Capital Securities. The
outstanding principal amounts of the Subordinated Debentures held by NTC Capi-
tal I and NTC Capital II are $154.6 million and $123.7 million, respectively.
The Series A Securities were issued at a discount to yield 60.5 basis points
above the three-month London Interbank Offered Rate (LIBOR), while the Series
B Securities were issued at a discount to yield 67.9 basis points above the
three-month LIBOR. Both Series A and B Securities qualify as tier 1 capital
for regulatory purposes.
The Corporation has fully, irrevocably and unconditionally guaranteed all
payments due on such Capital Securities. The holders of the Capital Securities
are entitled to receive preferential cumulative cash distributions quarterly
in arrears (based on the liquidation amount of $1,000 per Capital Security) at
an interest rate equal to the rate on the corresponding Subordinated Deben-
tures. The interest rate on the Series A and Series B securities is equal to
three-month LIBOR plus 0.52% and 0.59%, respectively. Subject to certain
exceptions, the Corporation has the right to defer payment of interest on the
Subordinated Debentures at any time or from time to time for a period not
exceeding 20 consecutive quarterly periods provided that no extension period
may extend beyond the stated maturity date. If interest is deferred on the
Subordinated Debentures, distributions on the Capital Securities will also be
deferred and the Corporation will not be permitted, subject to certain excep-
tions, to pay or declare any cash distributions with respect to the Corpora-
tion's capital stock or debt securities that rank the same as or junior to the
Subordinated Debentures, until all past due distributions are paid. The Subor-
dinated Debentures are unsecured and subordinated to substantially all of the
Corporation's existing indebtedness.
The Corporation has the right to redeem the Series A Subordinated Debentures
on or after January 15, 2007 and the Series B Subordinated Debentures on or
after April 15, 2007, in each case in whole or in part. In addition, the Cor-
poration has the right to redeem the Subordinated Debentures held by either
trust in whole but not in part at any time within 90 days following certain
defined tax or regulatory capital treatment changes, at a price equal to the
principal amount plus accrued and unpaid interest.
12. Stockholders' Equity--Preferred Stock. The Corporation is authorized to
issue 10,000,000 shares of preferred stock without par value. The Board of
Directors of the Corporation is authorized to fix the particular preferences,
rights, qualifications and restrictions for each series of preferred stock
issued. A summary of preferred stock outstanding is presented below.
December 31
- ----------------------------------------------------
(In Millions) 1999 1998
- ----------------------------------------------------
Auction Rate Preferred Stock Series C
600 shares @ $100,000 per share $ 60.0 $ 60.0
Flexible Auction Rate Cumulative
Preferred Stock Series D
600 shares @ $100,000 per share 60.0 60.0
- ----------------------------------------------------
Total Preferred Stock $120.0 $120.0
Series C--In 1987, 600 shares of Auction Rate Preferred Stock Series C (APS)
were issued, with a $100,000 per share stated value. Dividends on the shares
of APS are cumulative. Rates are determined every 49 days by Dutch auction
unless the Corporation fails to pay a dividend or redeem any shares for which
it has given notice of redemption, in which case the dividend rate will be set
at 175% of the 60-day "AA" Composite Commercial Paper Rate. The dividend rate
in any auction will not exceed a percentage determined by the prevailing
credit rating of the APS. The current maximum dividend rate is 120% of the 60-
day "AA" Composite Commercial Paper Rate. No dividends other than dividends
payable in junior stock, such as common stock, may be paid on common stock
until full cumulative dividends on the APS have been paid. The average rate
for this issue as declared during 1999 was 4.01%. The shares of APS are
redeemable at the option of the Corporation, in whole or in part, on any Divi-
dend Payment Date at $100,000 per share, plus accrued and unpaid dividends.
56
- -------------------------------------------------------------------------------
Northern Trust Corporation
Notes to Consolidated Financial Statements
---------------- ----------------
Series D--In 1990, 600 shares of Flexible Auction Rate Cumulative Preferred
Stock Series D (FAPS) were issued with a $100,000 per share stated value. Each
dividend period contains 49 days (the "Short-Term Dividend Period") or a num-
ber of days greater than 49 days (as selected by the Term Selection Agent)
which is divisible by seven (the "Long-Term Dividend Period"). Rates for each
dividend period are determined by Dutch auction unless the Corporation fails
to pay the full amount of any dividend or redemption. The dividend rate in any
auction will not exceed a percentage (currently 125%), determined by the pre-
vailing credit rating of the FAPS, of the 60-day "AA" Composite Commercial
Paper Rate or the Reference Rate, which rate is the Composite Commercial Paper
Rate or the Treasury Rate, as appropriate for the length of each Short-Term or
Long-Term Dividend Period, respectively. If the Corporation fails to pay the
full amount of any dividend or redemption, each dividend period thereafter
(until auctions are resumed) will be a Short-Term Dividend Period and the div-
idend rate will be 250% of the 60-day "AA" Composite Commercial Paper Rate;
additional dividends will accrue for the balance of any Long-Term Dividend
Period in which such a failure to pay occurs. No dividends other than divi-
dends payable in junior stock, such as common stock, may be paid on common
stock until full cumulative dividends on the FAPS have been paid. The average
rate for this issue as declared during 1999 was 4.04%. The shares of FAPS are
redeemable at the option of the Corporation, in whole or in part, at $100,000
per share plus accrued and unpaid dividends.
Preferred Stock Purchase Rights--On July 21, 1998 the Board of Directors of
the Corporation declared a dividend distribution of one Preferred Stock Pur-
chase Right for each outstanding share of the Corporation's common stock issu-
able to stockholders of record at the close of business on October 31, 1999
(the expiration date of a prior 1989 Rights Agreement). As a result of anti-
dilution provisions, each share of common stock now has one-half of one Right
associated with it. Each Right is exercisable for one one-hundredth of a share
of Series A Junior Participating Preferred Stock at an exercise price of
$330.00, subject to adjustment. The Rights will be evidenced by the common
stock certificates and will not be exercisable or transferable apart from the
common stock until twenty days after a person or group acquires 15 percent or
more of the shares of common stock then outstanding or announces a tender or
exchange offer which if consummated would result in ownership of 15 percent or
more of the outstanding common stock.
In the event that any person or group acquires 15 percent or more of the out-
standing shares of common stock, each Right entitles the holder, other than
such person or group, to purchase that number of shares of common stock of the
Corporation having a market value of twice the exercise price of the Right. At
any time thereafter if the Corporation consummates a business combination
transaction or sells substantially all of its assets, each Right entitles the
holder, other than the person or group acquiring 15 percent or more of the
outstanding shares of common stock, to purchase that number of shares of sur-
viving company stock which at the time of the transaction would have a market
value of twice the exercise price of the Right.
The Rights do not have voting rights and are redeemable at the option of the
Corporation at a price of one-half of one cent per Right at any time prior to
the close of business on the twentieth day following announcement by the Cor-
poration of the acquisition of 15 percent or more of the outstanding common
stock by a person or group. Unless earlier redeemed, the Rights will expire on
October 31, 2009.
Common Stock. In November 1999, the Corporation declared a two-for-one split
of its common stock to be effected by means of a 100% stock distribution. One
share for each share held by shareholders of record on November 29, 1999 was
distributed on December 9, 1999. In May 1999, the Corporation announced that
it increased its common stock buyback authorization by approximately 10.0 mil-
lion (split-adjusted) shares, thus allowing the purchase after December 31,
1999 of up to an aggregate of 9.9 million shares of the Corporation's common
stock. These shares may be repurchased from time to time in open market pur-
chases, and the shares would be used primarily for management incentive plans
and other corporate purposes.
An analysis of changes in the number of shares of common stock outstanding
follows:
1999 1998 1997
- -------------------------------------------------------------------------------
Balance at January 1 111,214,740 111,367,436 111,247,732
Distribution of Two-for-One Stock Split 111,214,740 -- --
Employee Benefit Plans:
Incentive Plan and Awards 347,518 302,677 315,147
Stock Options Exercised 2,518,802 1,170,840 1,214,310
Treasury Stock Purchased (3,133,866) (1,626,213) (1,409,753)
- -------------------------------------------------------------------------------
Balance at December 31 222,161,934 111,214,740 111,367,436
Note: 1999 share activity reflects the December 1999 two-for-one stock split
effected by means of a 100% stock distribution.
57
- --------------------------------------------------------------------------------
Northern Trust Corporation
Notes to Consolidated Financial Statements
---------------- ----------------
13. Income Taxes--The table below reconciles the total provision for income
taxes recorded in the consolidated statement of income with the amounts com-
puted at the statutory federal tax rate of 35%.
(In Millions) 1999 1998 1997
- ---------------------------------------------------
Tax at Statutory Rate $215.8 $189.9 $165.2
Tax Exempt Income (10.5) (10.6) (10.7)
State Taxes, net 7.5 8.9 8.5
Other (1.3) .6 (.5)
- ---------------------------------------------------
Provision for Income Taxes $211.5 $188.8 $162.5
The components of the consolidated provision for income taxes for each of the
three years ended December 31, are as follows:
(In Millions) 1999 1998 1997
- ------------------------------------------------
Current Tax Provision:
Federal $ 92.9 $113.1 $102.4
State 8.4 7.6 6.8
Foreign 14.9 11.1 15.3
- ------------------------------------------------
Total 116.2 131.8 124.5
- ------------------------------------------------
Deferred Tax Provision:
Federal 92.2 51.0 31.7
State 3.1 6.0 6.3
- ------------------------------------------------
Total 95.3 57.0 38.0
- ------------------------------------------------
Provision for Income Taxes $211.5 $188.8 $162.5
In addition to the amounts shown in the above tables, tax liabilities or (ben-
efits) have been recorded directly to stockholders' equity for the following
items:
(In Millions) 1999 1998
- --------------------------------------------------------------------------
Current Tax Benefit for Employee
Stock Options and Other Employee Benefit Plans $(30.4) $(22.8)
Deferred Tax Effect of Unrealized Security Gains (Losses) (.8) (1.5)
Deferred Tax Effect of Minimum
Pension Liabilities (2.3) (2.2)
Deferred taxes result from temporary differences between the amounts reported
in the consolidated financial statements and the tax bases of assets and lia-
bilities. Deferred tax liabilities and assets have been computed as follows:
December 31
- ---------------------------------------------
(In Millions) 1999 1998
- ---------------------------------------------
Deferred Tax Liabilities:
Lease Financing $264.3 $173.9
Software Development 57.4 48.4
Accumulated Depreciation 14.2 8.2
State Taxes, net 20.5 14.1
Other Liabilities 10.6 12.2
- ---------------------------------------------
Gross Deferred Tax Liabilities 367.0 256.8
- ---------------------------------------------
Deferred Tax Assets:
Reserve for Credit Losses 52.8 51.1
Compensation and Benefits 26.0 12.5
Other Assets 17.3 14.4
- ---------------------------------------------
Gross Deferred Tax Assets 96.1 78.0
Valuation Reserve -- --
- ---------------------------------------------
Deferred Tax Assets, net of
Valuation Reserve 96.1 78.0
- ---------------------------------------------
Net Deferred Tax Liabilities $270.9 $178.8
At December 31, 1999, Northern Trust had a federal net operating loss
carryforward of $1.2 million resulting from the acquisition of businesses that
had existing net operating loss carryforwards. These carryforwards are avail-
able to reduce future tax return liabilities. In addition, Northern Trust had
state net operating loss and tax credit carryforwards of $170.9 million and
$1.0 million, respectively. The carryforwards are subject to various limita-
tions imposed by tax law.
58
- --------------------------------------------------------------------------------
Northern Trust Corporation
Notes to Consolidated Financial Statements
---------------- ----------------
14. Net Income Per Common Share Computations--The computation of net income
per common share is presented below.
($ In Millions Except Per Share
Information) 1999 1998 1997
- -------------------------------------------------------------------------------
Basic Net Income Per Common Share
Net Income $405.0 $353.9 $309.4
Less: Dividends on Preferred
Stock (4.8) (4.9) (5.0)
- -------------------------------------------------------------------------------
Net Income Applicable to Common
Stock $400.2 $349.0 $304.4
Average Number of Common Shares
Outstanding 221,673,316 221,366,976 221,955,290
Basic Net Income Per Common Share $ 1.81 $ 1.58 $ 1.37
- -------------------------------------------------------------------------------
Diluted Net Income Per Common
Share
Net Income Applicable to Common
Stock $400.2 $349.0 $304.4
Average Number of Common Shares
Outstanding 221,673,316 221,366,976 221,955,290
Plus: Dilutive Potential Common
Shares
Stock Options 6,021,348 6,464,554 5,693,984
Performance Shares 1,457,993 1,229,968 1,159,474
Other 721,371 672,618 513,564
- -------------------------------------------------------------------------------
Average Common and Potential
Common Shares 229,874,028 229,734,116 229,322,312
- -------------------------------------------------------------------------------
Diluted Net Income Per Common
Share $ 1.74 $ 1.52 $ 1.33
Note: Per share data and average number of shares of common stock outstanding
have been restated to give effect to the two-for-one common stock split
effected by means of a 100% stock distribution on December 9, 1999.
15. Restrictions on Subsidiary Dividends and Loans or Advances--Provisions of
state and federal banking laws restrict the amount of dividends that can be
paid to the Corporation by its banking subsidiaries. Under applicable state
and federal laws, no dividends may be paid in an amount greater than the net
profits then on hand, subject to other applicable provisions of law. In addi-
tion, prior approval from the relevant federal banking regulator is required
if dividends declared by any of the Corporation's banking subsidiaries in any
calendar year will exceed its net profits (as defined) for that year, combined
with its retained net profits for the preceding two years. Based on these reg-
ulations, the Corporation's banking subsidiaries, without regulatory approval,
could declare dividends during 2000 equal to their 2000 eligible net profits
(as defined) plus $498.4 million. The ability of each banking subsidiary to
pay dividends to the Corporation may be further restricted as a result of reg-
ulatory policies and guidelines relating to dividend payments and capital ade-
quacy.
State and federal laws limit the transfer of funds by a banking subsidiary to
the Corporation and certain of its affiliates in the form of loans or exten-
sions of credit, investments or purchases of assets. Transfers of this kind to
the Corporation or a nonbanking subsidiary by a banking subsidiary are each
limited to 10% of the banking subsidiary's capital and surplus with respect to
each affiliate and to 20% in the aggregate, and are also subject to certain
collateral requirements. These transactions, as well as other transactions
between a banking subsidiary and the Corporation or its affiliates, must also
be on terms substantially the same as, or at least as favorable as, those pre-
vailing at the time for comparable transactions with non-affiliated companies
or, in the absence of comparable transactions, on terms, or under circumstanc-
es, including credit standards, that would be offered to, or would apply to,
non-affiliated companies.
16. Other Operating Income--In 1999 and 1998, nonrecurring gains totaled $4.0
million and $3.8 million, respectively. Included in the 1997 results is $11.1
million resulting from settlements reached with Illinois banking regulators
concerning the disposition of certain unclaimed balances accumulated over a
number of years.
59
- --------------------------------------------------------------------------------
Northern Trust Corporation
Notes to Consolidated Financial Statements
---------------- ----------------
17. Net Interest Income--The components of net interest income were as follows:
(In Millions) 1999 1998 1997
- -------------------------------------------------------------------------------
Interest Income
Loans and Leases $ 938.6 $ 884.4 $ 793.1
Securities-Taxable 379.4 383.1 332.0
-Non-Taxable 26.3 24.9 25.3
Time Deposits with Banks 164.3 155.0 133.5
Federal Funds Sold and Securities
Purchased under Agreements
to Resell and Other 60.0 55.7 48.9
- -------------------------------------------------------------------------------
Total Interest Income 1,568.6 1,503.1 1,332.8
- -------------------------------------------------------------------------------
Interest Expense
Deposits 591.9 580.4 522.2
Federal Funds Purchased 161.0 139.8 92.4
Securities Sold under Agreements to
Repurchase 95.8 80.2 81.7
Commercial Paper 7.3 8.0 7.9
Other Borrowings 109.2 132.3 112.4
Senior Notes 30.6 36.5 30.9
Long-Term Debt 37.9 31.8 32.6
Debt-Floating Rate Capital
Securities 16.1 16.9 14.5
- -------------------------------------------------------------------------------
Total Interest Expense 1,049.8 1,025.9 894.6
- -------------------------------------------------------------------------------
Net Interest Income $ 518.8 $ 477.2 $ 438.2
18. Other Operating Expenses--The components of other operating expenses were
as follows:
(In Millions) 1999 1998 1997
- -----------------------------------------------------------------
Business Promotion $ 42.2 $ 36.4 $ 32.0
Outside Services Purchased 118.8 86.1 81.0
Telecommunications 17.8 15.4 13.2
Postage and Supplies 26.8 23.3 22.0
Software Amortization 48.1 40.0 41.1
Goodwill and Other Intangibles Amortization 14.2 14.1 9.9
Other Expense 38.1 42.3 36.4
- -----------------------------------------------------------------
Total Other Operating Expenses $306.0 $257.6 $235.6
Software, goodwill and other intangible assets are included in other assets in
the consolidated balance sheet. Software totaled $219.0 million at December 31,
1999 and $172.8 million at December 31, 1998. Goodwill totaled $89.1 million at
December 31, 1999 and $98.1 million at December 31, 1998. Other intangibles
totaled $39.1 million at December 31, 1999 and $44.7 million at December 31,
1998.
19. Employee Benefits--Pension. A noncontributory qualified pension plan covers
substantially all employees. Assets held by the plan consist primarily of
listed stocks and corporate bonds.
Northern Trust also maintains a noncontributory nonqualified pension plan for
participants whose retirement benefit payments under the qualified plan are
expected to exceed the limits imposed by federal tax law. Northern Trust has a
nonqualified trust, referred to as a "Rabbi" Trust, to fund benefits in excess
of those permitted in certain of its qualified plans. The primary purpose of
the trust is to fund nonqualified retirement benefits. This arrangement offers
participants a degree of assurance for payment of benefits in excess of those
permitted in the related qualified plans. The assets remain subject to the
claims of creditors and are not the property of the employees. Therefore, they
are accounted for as corporate assets and are included in other assets in the
consolidated balance sheet.
60
- --------------------------------------------------------------------------------
Northern Trust Corporation
Notes to Consolidated Financial Statements
---------------- ----------------
The following tables set forth the status and the net periodic pension cost of
the domestic qualified and nonqualified pension benefit plans for 1999 and
1998. Prior service costs and unrecognized net assets established at January 1,
1986 are being amortized on a straight-line basis over 13.2 years.
Plan Status
- -------------------------------------------------------------------------------
Qualified Nonqualified
Plan Plan
- -------------------------------------------------------------------------------
September 30
- -------------------------------------------------------------------------------
($ In Millions) 1999 1998 1999 1998
- -------------------------------------------------------------------------------
Accumulated Benefit Obligation $161.9 $189.5 $ 30.4 $ 23.8
- -------------------------------------------------------------------------------
Projected Benefit 200.4 231.2 40.7 30.4
Plan Assets at Fair Value 305.3 284.0 -- --
- -------------------------------------------------------------------------------
Plan Assets In Excess of (Less Than)
Projected Benefit Obligations 104.9 52.8 (40.7) (30.4)
Unrecognized Net Liability (Asset) .4 (.9) -- --
Unrecognized Net Loss (Gain) (40.3) 25.0 32.6 18.7
Unrecognized Prior Service Cost (Benefit) (1.7) (6.7) (3.7) 1.6
Valuation Adjustment (.2) (.2) -- --
- -------------------------------------------------------------------------------
Prepaid (Accrued) Pension Cost at September
30 63.1 70.0 (11.8) (10.1)
Net Funding October to December 6.6 (1.7) (1.2) (1.0)
Additional Minimum Liability at December 31 -- -- (17.2) (12.6)
- -------------------------------------------------------------------------------
Prepaid (Accrued) Pension Cost at December 31 $ 69.7 $ 68.3 $(30.2) $(23.7)
- -------------------------------------------------------------------------------
Assumptions:
Discount Rates 7.75% 7.00% 6.00% 6.00%
Rate of Increase in Compensation Level 5.40 5.40 5.40 5.40
Expected Long-Term Rate of Return on Assets 9.00 9.00 N/A N/A
Net Periodic Pension Cost
- -------------------------------------------------------------------------------
Qualified Nonqualified
Plan Plan
- -------------------------------------------------------------------------------
(In Millions) 1999 1998 1999 1998
- -------------------------------------------------------------------------------
Service Cost $ 13.2 $ 12.7 $ 1.7 $ 1.3
Interest Cost 16.4 16.2 1.9 1.6
Expected Return on Plan Assets (22.6) (22.8) N/A N/A
Amortization:
Net Loss 1.8 2.6 1.5 1.0
Transition Asset (1.4) (1.4) -- --
Prior Service Cost (Benefit) (.5) (.6) .3 .4
- -------------------------------------------------------------------------------
Net Periodic Pension Cost $ 6.9 $ 6.7 $ 5.4 $ 4.3
Change in Benefit Obligation
- --------------------------------------------------------------------------------
Nonqualified
Qualified Plan Plan
- -------------------------------------------------------------------
(In Millions) 1999 1998 1999 1998
- -------------------------------------------------------------------
Beginning Balance $ 231.2 $219.2 $ 30.4 $ 23.8
Service Cost 13.2 12.7 1.7 1.3
Interest Cost 16.4 16.2 1.9 1.6
Actuarial (Gain) Loss (33.2) 2.6 15.2 6.9
Benefits Paid (31.6) (19.5) (3.5) (3.2)
Plan Change 4.4 -- (5.0) --
- -------------------------------------------------------------------
Ending Balance $ 200.4 $231.2 $ 40.7 $ 30.4
Change in Qualified Plan Assets
- -------------------------------------------------------------------
(In Millions) 1999 1998
- -------------------------------------------------------------------
Fair Value of Assets at Beginning of Plan
Year $284.0 $288.2
Actual Return on Assets 52.9 15.2
Employer Contribution -- .1
Benefits Paid (31.6) (19.5)
- -------------------------------------------------------------------
Fair Value of Assets at End of Plan Year $305.3 $284.0
Pension expense for 1997 was $7.4 million and $3.4 million for the qualified
and nonqualified plans, respectively.
Total assets in the "Rabbi" Trust related to the nonqualified pension plan at
December 31, 1999 and 1998 amounted to $19.8 million and $16.2 million, respec-
tively.
A pension plan is also maintained for the London Branch employees. At December
31, 1999, the fair value of assets and the projected benefit obligation totaled
approximately $14.6 million and $13.2 million, respectively. At December 31,
1998, the fair value of assets and the projected benefit obligation were $13.7
million and $15.2 million, respectively. Pension expense for 1999 and 1998 was
$2.1 million and $1.9 million, respectively.
Thrift Incentive Plan. The Corporation and its subsidiaries have a defined con-
tribution Thrift Incentive Plan covering substantially all employees. The cor-
porate contribution is contingent upon the level of employee contribution and
meeting a predefined earnings target for the year. The maximum corporate con-
tribution was equal to 4% of an employee's salary. The estimated contribution
to this plan is charged to employee benefits and totaled $10.7 million in 1999,
$10.4 million in 1998 and $9.1 million in 1997.
61
- --------------------------------------------------------------------------------
Northern Trust Corporation
Notes to Consolidated Financial Statements
---------------- ----------------
Employee Stock Ownership Plan (ESOP). A leveraged ESOP in which substantially
all employees of Northern Trust are eligible to participate was established in
1989. Of the original 18 million shares in the ESOP Trust, 16.2 million shares
have been allocated as of December 31, 1999. The remaining ESOP shares are
being allocated over the two-year period ending December 31, 2001. The Corpora-
tion has committed to make an additional contribution of $5.4 million in cash
or shares of common stock in each of the years 2002 and 2003.
Dividends paid on unallocated shares held in the ESOP Trust are used for debt
service on the ESOP notes. Although the original debt used to purchase the ESOP
shares has been repaid, a loan provided by the Corporation in 1996 to refinance
a portion of the original debt will continue to be repaid through 2001. Compen-
sation expense is accounted for based primarily on the amount of cash paid by
Northern Trust to the ESOP for principal payments on the ESOP notes. The ESOP
shares not yet allocated to individual accounts are treated as deferred compen-
sation and accounted for as a reduction of stockholders' equity.
The following table presents information related to the ESOP.
(In Millions) 1999 1998
- --------------------------------------------------------------------------
Total ESOP Compensation Expense $4.3 $3.4
Interest Incurred on ESOP-Related Debt -- .6
Amount Contributed to ESOP-Related Debt -- 3.1
Dividends and Interest on Unallocated ESOP Shares Used for Debt
Service 1.5 1.7
Other Postretirement Benefits. Northern Trust maintains an unfunded
postretirement health care plan. Employees retiring under the provisions of The
Northern Trust Pension Plan who have attained 15 years of service are eligible
for postretirement health care coverage. These benefits are provided either
through an indemnity plan, subject to deductibles, co-payment provisions and
other limitations or through health maintenance organizations. The provisions
may be changed at the discretion of Northern Trust, which also reserves the
right to terminate these benefits at any time.
The following tables set forth the plan status at December 31 and the net
periodic postretirement benefit cost of the domestic postretirement health care
plan for 1999 and 1998. The transition obligation at January 1, 1993 is being
amortized to expense over a twenty year period.
Plan Status
- --------------------------------------------------------------------------------
(In Millions) 1999 1998
- ----------------------------------------------------------------------------
Accumulated Postretirement Benefit Obligation (APBO) Measured
at September 30:
Retirees and Dependents $16.1 $15.7
Actives Eligible for Benefits 3.4 5.6
Actives Not Yet Eligible 9.9 10.2
- ----------------------------------------------------------------------------
Total APBO 29.4 31.5
Unamortized Transition Obligation (7.5) (8.1)
Unrecognized Net Loss (.7) (4.4)
Prior Service Cost (.4) --
- ----------------------------------------------------------------------------
Net Postretirement Benefit Liability $20.8 $19.0
Net Periodic Postretirement Benefit Cost
- ----------------------------------------------------------------------------
(In Millions) 1999 1998
- ----------------------------------------------------------------------------
Service Cost $ 1.0 $ .9
Interest Cost 2.1 2.1
Amortization--Transition Obligation .6 .6
- ----------------------------------------------------------------------------
Net Periodic Postretirement Benefit Cost $ 3.7 $ 3.6
Change in Postretirement Benefit Obligation
- ----------------------------------------------------------------------------
(In Millions) 1999 1998
- ----------------------------------------------------------------------------
Beginning Balance $31.5 $28.4
Service Cost 1.0 .9
Interest Cost 2.1 2.1
Actuarial (Gain) Loss (3.7) 1.2
Benefits Paid (1.9) (1.1)
Plan Change .4 --
- ----------------------------------------------------------------------------
Ending Balance $29.4 $31.5
Postretirement health care expense for 1997 was $3.5 million.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.75% at December 31, 1999 and 7.00% at
December 31, 1998. For measurement purposes, a 7.6% annual increase in the cost
of covered health care benefits was assumed for 2000. This rate is assumed to
decrease gradually to 5.5% in 2003 and remain at that level thereafter. The
health care cost trend rate assumption has a significant effect on the amounts
reported. For example, increasing or decreasing the assumed health care trend
rate by one percentage point in each year would have the following effect.
1--Percentage 1--Percentage
Point Increase Point Decrease
- ---------------------------------------------------------------------------
Effect on Total Service and Interest Cost
Components $ .1 $ (.1)
Effect on Postretirement Benefit Obligation 1.1 (1.0)
62
- --------------------------------------------------------------------------------
Northern Trust Corporation
Notes to Consolidated Financial Statements
---------------- ----------------
20. Contingent Liabilities--Because of the nature of its activities, Northern
Trust is subject to pending and threatened legal actions that arise in the nor-
mal course of business. In the judgment of management, after consultation with
legal counsel, none of the litigation to which the Corporation or any of its
subsidiaries is a party will have a material effect, either individually or in
the aggregate, on the consolidated financial position or results of operations.
21. Off-Balance Sheet Financial Instruments--Commitments and Letters of Credit.
Northern Trust, in the normal course of business, enters into various types of
commitments and issues letters of credit to meet the liquidity and credit
enhancement needs of its clients. Credit risk is the principal risk associated
with these instruments. The contractual amounts of these instruments represent
the credit risk should the instrument be fully drawn upon and the client
default. To control the credit risk associated with entering into commitments
and issuing letters of credit, Northern Trust subjects such activities to the
same credit quality and monitoring controls as its lending activities.
Commitments and letters of credit consist of the following:
Legally Binding Commitments to Extend Credit generally have fixed expiration
dates or other termination clauses. Since a significant portion of the commit-
ments are expected to expire without being drawn upon, the total commitment
amount does not necessarily represent future loans or liquidity requirements.
Participations in Bankers Acceptances obligate Northern Trust, in the event of
default by the counterparty, to reimburse the holder of the acceptance an
amount equal to its participation in the acceptance.
Commercial Letters of Credit are instruments issued by Northern Trust on
behalf of its clients that authorize a third party (the beneficiary) to draw
drafts up to a stipulated amount under the specified terms and conditions of
the agreement. Commercial letters of credit are issued primarily to facilitate
international trade.
Standby Letters of Credit obligate Northern Trust to meet certain financial
obligations of its clients, if, under the contractual terms of the agreement,
the clients are unable to do so. These instruments are primarily issued to sup-
port public and private financial commitments, including commercial paper, bond
financing, initial margin requirements on futures exchanges and similar trans-
actions.
The following table shows the contractual amounts of commitments and letters
of credit.
Commitments and Letters of Credit
- --------------------------------------------------------------------------------
December 31
- ------------------------------------------------------------------
(In Millions) 1999 1998
- ------------------------------------------------------------------
Legally Binding Commitments to Extend Credit* $15,704.1 $13,409.1
Commercial Letters of Credit 143.9 94.2
Standby Letters of Credit:
Corporate 424.9 359.8
Industrial Revenue 1,000.2 893.4
Other 531.9 380.3
- ------------------------------------------------------------------
Total Standby Letters of Credit** $ 1,957.0 $ 1,633.5
*These amounts exclude $407.9 million and $571.8 million of commitments
participated to others at December 31, 1999 and 1998, respectively.
**These amounts include $173.7 million and $156.6 million of standby letters of
credit secured by cash deposits or participated to others as of December 31,
1999 and 1998, respectively. The weighted average maturity of standby letters
of credit was 22 months at December 31, 1999 and 21 months at December 31,
1998.
Risk Management Instruments. These instruments include foreign exchange con-
tracts, foreign currency and interest rate futures contracts, and various
interest risk management instruments.
Northern Trust is a party to various risk management instruments that are used
in the normal course of business to meet the risk management needs of its cli-
ents; as part of its trading activity for its own account; and as part of its
asset/liability management activities. The major risk associated with these
instruments is that interest or foreign exchange rates could change in an unan-
ticipated manner, resulting in higher interest costs or a loss in the under-
lying value of the instrument. These risks are mitigated by establishing limits
for risk management positions, monitoring the level of actual positions taken
against such established limits, monitoring the level of any interest rate sen-
sitivity gaps created by such positions, and by using hedging techniques. When
establishing position limits, market liquidity and volatility, as well as expe-
rience in each market, are all taken into account.
The estimated credit risk associated with these instruments relates to the
failure of the counterparty to pay based on the contractual terms of the agree-
ment, and is generally limited to the gross unrealized market value gains on
these instruments. The amount of credit risk will increase or decrease during
the lives of the instruments as interest or foreign exchange rates fluctuate.
This risk is controlled by limiting such activity to an approved list of
counterparties and by subjecting such activity to the same credit and quality
controls as are followed in lending and investment activities.
63
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Northern Trust Corporation
Notes to Consolidated Financial Statements
---------------- ----------------
Risk management instruments include:
Foreign Exchange Contracts are agreements to exchange specific amounts of cur-
rencies at a future date, at a specified rate of exchange. Foreign exchange
contracts are entered into primarily to meet the foreign exchange risk manage-
ment needs of clients. Foreign exchange contracts are also used for trading
purposes and asset/liability management.
Foreign Currency and Interest Rate Futures Contracts are agreements for
delayed delivery of foreign currency, securities or money market instruments in
which the buyer agrees to take delivery at a specified future date of a speci-
fied currency, security, or instrument, at a specified price or yield. All of
Northern Trust's futures contracts are traded on organized exchanges that
require the daily settlement of changes in the value of the contracts. Futures
contracts are utilized in trading activities and asset/liability management to
limit Northern Trust's exposure to unfavorable fluctuations in foreign exchange
rates or interest rates.
Interest Rate Protection Contracts are agreements that enable clients to
transfer, modify or reduce their interest rate risk. As a seller of interest
rate protection, Northern Trust receives a fee at the outset of the agreement
and then assumes the risk of an unfavorable change in interest rates. Northern
Trust also purchases interest rate protection contracts for asset/liability
management.
Interest Rate Swap Contracts involve the exchange of fixed and floating rate
interest payment obligations without the exchange of the underlying principal
amounts; these types of transactions constitute the majority of the interest
rate swap portfolio.
Forward Sale Contracts represent commitments to sell a specified amount of
securities at an agreed upon date and price. Northern Trust utilizes forward
sale contracts principally in connection with its sale of mortgage loans.
Exchange-Traded Option Contracts grant the buyer the right, but not the obli-
gation, to purchase or sell at a specified price, a stated number of units of
an underlying financial instrument, at a future date.
The following table shows the contractual/notional amounts of risk management
instruments. The notional amounts of risk management instruments do not repre-
sent credit risk, and are not recorded in the consolidated balance sheet. They
are used merely to express the volume of this activity.
Risk Management Instruments
- --------------------------------------------------------------------------------
Contractual/
Notional Amounts
December 31
- --------------------------------------------------------------
(In Millions) 1999 1998
- --------------------------------------------------------------
Asset/Liability Management:
Foreign Exchange Contracts $ 130.3 $ 139.7
Foreign Currency Futures Contracts -- --
Interest Rate Futures Contracts Sold -- 1.0
Interest Rate Protection Contracts
-Purchased 130.0 130.0
Interest Rate Swap Contracts 2,043.6 2,274.1
Forward Sale Contracts 14.9 96.7
Client-Related and Trading:
Foreign Exchange Contracts 14,922.4 13,958.9
Interest Rate Futures Contracts Purchased -- 100.0
Interest Rate Futures Contracts Sold 1.0 100.0
Interest Rate Protection Contracts
-Purchased 7.8 36.0
-Sold 10.8 42.6
Interest Rate Swap Contracts 20.0 40.1
Risk Management Instruments Used for Asset/ Liability Management. Northern
Trust utilizes various types of risk management instruments, primarily interest
rate swaps, as tools for managing interest rate and option risk related to its
own balance sheet. The following table summarizes the expected maturities and
weighted average interest rates to be paid and received on the asset/liability
management swap portfolio at December 31, 1999. A key assumption in the prepa-
ration of the table is that floating rates remain constant at December 31, 1999
levels.
64
- --------------------------------------------------------------------------------
Northern Trust Corporation
Notes to Consolidated Financial Statements
---------------- ----------------
Remaining Maturity of Asset/Liability Management Interest Rate Swaps
- --------------------------------------------------------------------------------
($ In Millions) 2000 2001 2002 2003 2004 2005-2009 Total
- ----------------------------------------------------------------------------
Pay Fixed
Notional Amount $448.6 155.0 208.8 160.0 95.0 161.2 $1,228.6
Average Pay Rate 5.34% 6.78 5.37 6.82 6.58 6.35 5.95%
Average Receive Rate 6.00 5.98 4.64 6.03 6.08 6.09 5.79
- ----------------------------------------------------------------------------
Receive Fixed
Notional Amount $115.0 -- -- -- -- -- $ 115.0
Average Pay Rate 5.99% -- -- -- -- -- 5.99%
Average Receive Rate 5.22 -- -- -- -- -- 5.22
- ----------------------------------------------------------------------------
Pay and Receive Variable
(Basis Swaps)
Notional Amount $700.0 -- -- -- -- -- $ 700.0
Average Pay Rate 6.31% -- -- -- -- -- 6.31%
Average Receive Rate 5.34 -- -- -- -- -- 5.34
Some of the principal uses of risk management instruments, together with the
notional amounts outstanding, are described as follows:
Convert Yields on Securities to an Effective LIBOR or Federal Funds Rate. At
December 31, 1999, interest rate swaps with a notional amount of $933.4 million
were used to convert fixed and floating rate interest payments on securities
(classified as available for sale) to floating rate payments indexed to LIBOR
or federal funds.
Reduce Interest Rate Risk From Fixed Rate Loans Funded with Variable Rate Lia-
bilities. Northern Trust paid a fixed rate and received a floating rate on
interest rate swaps with a notional amount of $1.0 billion at December 31, 1999
to hedge the interest rate risk from fixed rate loans. For accounting purposes
these swaps were designated to either convert the fixed rate on the loan to an
effective floating rate or to convert floating rate funding to a fixed rate.
Interest rate floors with a notional amount of $130.0 million at December 31,
1999 were used to hedge mortgage loan prepayment risk.
Swaps Combined with Liabilities to Obtain Favorable Funding Costs. Interest
rate swaps with a notional amount of $100.0 million at December 31, 1999 were
used in conjunction with the issuance of senior notes to obtain desired funding
characteristics. These swaps, converted fixed rate notes to floating rate fund-
ing indexed to LIBOR. The use of swaps in combination with notes permitted
Northern Trust to issue notes with rate and maturity features that were most
desired by investors while converting the rate characteristics to meet its
needs.
Hedging Foreign Currency Risk. Forward foreign exchange contracts and foreign
currency futures contracts were used to reduce exposure to fluctuations in the
dollar value of capital investments in foreign subsidiaries and from foreign
currency assets and obligations. The notional amounts of these contracts at
year-end 1999 were $130.3 million of forward foreign exchange contracts.
Hedging Mortgages Held for Sale. Northern Trust hedges the market risk of its
portfolio of fixed rate commitments and mortgages held for sale with a combina-
tion of derivative financial instruments. At December 31, 1999 the portfolio
was hedged with $14.9 million of forward sales of mortgage-backed securities.
Deferred gains and losses related to interest risk management instruments used
for various asset/liability management purposes and included in the consoli-
dated balance sheet at year-end 1999 totaled $11.6 million and $8.2 million,
respectively. Deferred gains at year-end 1998 totaled $.6 million.
Client and Trading-Related Interest Risk Management Instruments. Net revenue
associated with client and trading-related interest risk management activities
totaled $.2 million, $.2 million, and $.3 million during 1999, 1998, and 1997,
respectively. The majority of these revenues are related to interest rate
swaps, futures contracts, and interest rate protection agreements, and are
reported as trading income in the consolidated statement of income.
Other Off-Balance Sheet Financial Instruments. As part of securities custody
activities and at the direction of trust clients, Northern Trust lends securi-
ties owned by clients to borrowers who are reviewed by the Credit Policy Credit
Approval Committee. In connection with these activities, Northern Trust has
issued certain indemnifications against loss resulting from the bankruptcy of
the borrower of securities. The borrowing party is required to fully
collateralize securities received with cash, marketable securities, or irrevo-
cable standby letters of credit. As securities are loaned, collateral is main-
tained at a minimum of 100 percent of the fair value of the securities plus
accrued interest, with revaluation of the collateral on a daily basis. The
amount of securities loaned as of December 31, 1999 and 1998 subject to indem-
nification was $35.9 billion and $28.5 bil-
65
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Northern Trust Corporation
Notes to Consolidated Financial Statements
---------------- ----------------
lion, respectively. Because of the requirement to fully collateralize securi-
ties borrowed, management believes that the exposure to credit loss from this
activity is remote.
The Bank is a participating member of various cash and securities clearing
organizations such as The Depository Trust Company in New York. It participates
in these organizations on behalf of its clients and on behalf of itself as a
result of its own investment and trading activities. A wide variety of securi-
ties transactions are settled through these organizations, including those
involving obligations of states and political subdivisions, asset-backed secu-
rities, commercial paper, Eurodollars and securities issued by the Government
National Mortgage Association.
As a result of its participation in cash and securities clearing organiza-
tions, the Bank could be responsible for a pro rata share of certain credit-
related losses arising out of the clearing activities. The method in which such
losses would be shared by the clearing members is stipulated in each clearing
organization's membership agreement. Credit exposure related to these agree-
ments varies from day to day, primarily as a result of fluctuations in the vol-
ume of transactions cleared through the organizations. The estimated credit
exposure at December 31, 1999 and 1998 was $71 million and $72 million, respec-
tively, based on the clearing volume for those days. Controls related to these
clearing transactions are closely monitored to protect the assets of Northern
Trust.
22. Fair Value of Financial Instruments--SFAS No. 107, "Disclosures About Fair
Value of Financial Instruments," requires disclosure of the estimated fair
value of certain financial instruments. Considerable judgment is required to
interpret market data when computing estimates of fair value. Accordingly, the
estimates presented are not necessarily indicative of the amounts Northern
Trust could have realized in a market exchange.
The information provided below should not be interpreted as an estimate of the
fair value of Northern Trust since the disclosures, in accordance with SFAS No.
107, exclude the values of nonfinancial assets and liabilities, as well as a
wide range of franchise, relationship, and intangible values, which are inte-
gral to a full assessment of the consolidated financial position.
The use of different assumptions and/or estimation methods may have a material
effect on the computation of estimated fair values. Therefore, comparisons
between Northern Trust's disclosures and those of other financial institutions
may not be meaningful.
The following methods and assumptions were used in estimating the fair values
of the financial instruments:
Securities. Fair values of securities were based on quoted market values, when
available. If quoted market values were not available, fair values were based
on quoted market values for comparable instruments.
Loans (not including lease financing receivables). The fair values of one-to-
four family residential mortgages were based on quoted market prices of similar
loans sold in conjunction with securitization transactions, adjusted for dif-
ferences in loan characteristics. The fair values of the remainder of the loan
portfolio were estimated using a discounted cash flow method in which the dis-
count rate used was the rate at which Northern Trust would have originated the
loan had it been originated as of the financial statement date, giving effect
to current economic conditions on loan collectibility.
Savings Certificates, Other Time and Foreign Offices Time Deposits. The fair
values of these instruments were estimated using a discounted cash flow method
that incorporated market interest rates.
Senior Notes, Long-Term Debt, and Floating Rate Capital Securities. Fair val-
ues were based on quoted market prices, when available. If quoted market prices
were not available, fair values were based on quoted market prices for compara-
ble instruments.
Off-Balance Sheet Financial Instruments. The fair values of commitments and
letters of credit represent the amount of unamortized fees on these instru-
ments. The fair values of all other off-balance sheet financial instruments
were estimated using market prices, pricing models, or quoted market prices of
financial instruments with similar characteristics.
Financial Instruments Valued at Carrying Value. Due to their short maturity,
the respective carrying values of certain on-balance sheet financial instru-
ments approximated their fair values. These financial instruments include cash
and due from banks; money market assets; customers' acceptance liability; trust
security settlement receivables; federal funds purchased; securities sold under
agreements to repurchase; commercial paper; other borrowings; and liability on
acceptances.
The fair values required to be disclosed for demand, savings, and money market
deposits pursuant to SFAS No. 107 must equal the amounts disclosed in the con-
solidated balance sheet, even though such deposits are typically priced at a
premium in banking industry consolidations.
66
- --------------------------------------------------------------------------------
Northern Trust Corporation
Notes to Consolidated Financial Statements
---------------- ----------------
Fair Values of On-Balance Sheet Financial Instruments. The following table
summarizes the fair values of on-balance sheet financial instruments.
December 31
- ------------------------------------------------------------------------------
1999 1988
- ------------------------------------------------------------------------------
Book Fair Book Fair
(In Millions) Value Value Value Value
- ------------------------------------------------------------------------------
Assets
Cash and Due From Banks $ 1,977.9 $ 1,977.9 $ 2,366.0 $ 2,366.0
Money Market Assets 3,439.2 3,439.2 4,450.9 4,450.9
Securities:
Available for Sale 5,480.0 5,480.0 5,375.2 5,375.2
Held to Maturity 752.7 740.4 472.5 485.7
Trading Account 11.0 11.0 9.1 9.1
Loans (excluding leases),
Net of Credit Loss Reserve:
Held to Maturity 14,517.3 14,302.1 12,920.4 13,072.5
Held for Sale 14.8 14.8 51.4 51.6
Acceptance Liability 34.7 34.7 33.3 33.3
Trust Security Settlement Receivables 323.1 323.1 336.7 336.7
Liabilities
Deposits:
Demand, Savings and Money Market 10,244.5 10,244.5 8,955.6 8,955.6
Savings Certificates, Other Time and
Foreign Offices Time 11,126.5 11,097.4 9,247.1 9,267.7
Federal Funds Purchased 370.2 370.2 2,025.1 2,025.1
Repurchase Agreements 997.8 997.8 2,114.9 2,114.9
Commercial Paper 145.1 145.1 148.1 148.1
Other Borrowings 1,155.3 1,155.3 1,099.2 1,099.2
Senior Notes 500.0 493.0 700.0 699.8
Long-Term Debt 659.4 631.5 458.2 482.3
Debt-Floating Rate
Capital Securities 267.5 254.5 267.4 295.2
Liability on Acceptances 34.7 34.7 33.3 33.3
Fair Values of Off-Balance Sheet Financial Instruments. The following tables
summarize the fair values of off-balance sheet financial instruments.
December 31
- -------------------------------------------------------------
1999 1998
- -------------------------------------------------------------
Book Fair Book Fair
(In Millions) Value Value Value Value
- -------------------------------------------------------------
Commitments and Letters of Credit:
Loan Commitments $ -- $ -- $ .5 $ .5
Letters of Credit 1.8 1.8 1.3 1.3
Asset/Liability Management:
Foreign Exchange Contracts
Assets .6 .6 1.2 1.2
Liabilities 1.5 1.5 .5 .5
Interest Rate Swap Contracts
Assets 8.2 17.6 6.5 10.2
Liabilities 1.2 3.2 14.5 72.7
Other Financial Instruments
Assets .3 .1 .4 1.3
Liabilities -- -- -- --
Fair Value
- -------------------------------------------
(In Millions) 1999 1998
- -------------------------------------------
Client-Related and Trading:*
Foreign Exchange Contracts
Assets $188.6 $179.2
Liabilities 181.0 175.0
Interest Rate Swap Contracts
Assets -- .9
Liabilities -- .8
*Assets and liabilities associated with foreign exchange contracts averaged
$233.8 million and $231.2 million, respectively, during 1999. Assets and
liabilities associated with other client-related and trading account
instruments averaged $1.6 million and $1.2 million, respectively, during 1999.
23. Concentrations of Credit Risk--The information in the section titled Loans
and Other Extensions of Credit found on pages 35 through 37 is incorporated by
reference.
24. Pledged and Restricted Assets--Certain of Northern Trust's subsidiaries, as
required or permitted by law, pledge assets to secure public and trust depos-
its, repurchase agreements and for other purposes. On December 31, 1999, secu-
rities and loans totaling $4.9 billion ($4.0 billion of U.S. Government and
agency securities, $463 million of obligations of states and political subdivi-
sions and $419 million of loans and other securities), were pledged. Collateral
required for
67
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Northern Trust Corporation
Notes to Consolidated Financial Statements
---------------- ----------------
these purposes totaled $2.7 billion. Deposits maintained at the Federal
Reserve Bank to meet reserve requirements averaged $315.1 million in 1999 and
$276.3 million in 1998.
25. Stock-Based Compensation Plans--Statement of Financial Accounting Stan-
dards No. 123, "Accounting for Stock-Based Compensation," establishes finan-
cial accounting and reporting standards for stock-based compensation plans.
SFAS No. 123 allows two alternative accounting methods: (1) a fair-value-
based method, or (2) an intrinsic-value-based method which is prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25) and related interpretations. Northern Trust has elected to
account for its stock-based incentive plans and awards under APB 25, and has
adopted the disclosure requirements of SFAS No. 123.
A description of Northern Trust's stock-based compensation is presented
below.
Amended Incentive Stock Plan--Amended 1992 Incentive Stock Plan (Plans). The
Amended Incentive Stock Plan was superseded by the Amended 1992 Incentive
Stock Plan and terminated on December 31, 1994. Outstanding grants and awards
under the Amended Incentive Stock Plan will remain in effect in accordance
with their terms, but no further grants or awards will be made.
The Amended 1992 Incentive Stock Plan (Plan) was adopted in 1992 and has been
amended on several occasions. The Plan is administered by the Compensation and
Benefits Committee (Committee) of the Board of Directors. Directors and key
officers of the Corporation or its subsidiaries are eligible to receive awards
under the Plan. Awards under the Plan may be granted in any one or a combina-
tion of (a) incentive stock options and nonqualified stock options, (b) stock
appreciation rights, (c) stock awards, (d) performance shares, and (e) stock
equivalents.
The total number of shares of the Corporation's common stock authorized for
distribution under the Plan is 32,000,000. As of December 31, 1999, shares
available for future grants under the Plan totaled 7,591,366.
Stock Options. Stock options consist of options to purchase common stock at
purchase prices not less than 100% of the fair market value thereof on the
date the option is granted. Options have a maximum ten year life and will vest
and become exercisable in six months to three years after the date of grant.
In addition, the Plan provides that all options may become exercisable upon a
change of control as defined in the Plan. All options terminate at such time
as determined by the Committee and as provided in the terms and conditions of
the respective option grants.
A summary of the status of stock options under the Plans at December 31,
1999, 1998 and 1997 and changes during the years then ended is presented in
the table below.
1999 1998 1997
- ------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- ------------------------------------------------------------------------------------
Options Outstanding,
January 1 15,148,424 $17.83 14,888,804 $13.36 14,989,224 $ 9.98
Granted ($45.16 to
$52.27 per share in
1999) 3,441,700 45.19 2,672,300 34.72 2,357,000 28.32
Exercised ($4.21 to
$34.59 per share in
1999) (2,518,802) 9.83 (2,341,680) 8.59 (2,428,620) 7.00
Cancelled (79,000) 33.95 (71,000) 21.76 (28,800) 13.84
- ------------------------------------------------------------------------------------
Options Outstanding
December 31
($4.21 to $52.27 per
share) 15,992,322 $24.96 15,148,424 $17.83 14,888,804 $13.36
- ------------------------------------------------------------------------------------
Options Exercisable,
December 31 9,963,322 $15.46 10,205,124 $11.12 9,916,404 $ 8.96
The following is a summary of outstanding and exercisable options under the
Plans at December 31, 1999.
Options Outstanding
- -------------------------------------------------------------------------------
Weighted
Average Weighted
Remaining Average
Number Contractual Exercise
Outstanding Exercisable Life Price
- -------------------------------------------------------------------------------
$4.21 to $9.94 per share 3,928,226 3,928,226 3.1 years $ 8.88
$10.41 to $29.97 per
share 5,979,096 5,979,096 6.7 years 19.56
$34.59 to $52.27 per
share 6,085,000 56,000 9.1 years 40.63
68
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Northern Trust Corporation
Notes to Consolidated Financial Statements
---------------- ----------------
Stock and Stock Equivalent Awards. Under the Plan, stock or stock equivalent
awards can be granted by the Committee to participants which entitle them to
receive a payment in cash or Northern Trust Corporation common stock under the
terms of the Plan and such other terms and conditions as the Committee deems
appropriate.
Total expense applicable to stock and stock equivalent awards was $4.0 mil-
lion in 1999, $2.1 million in 1998 and $.9 million in 1997. In 1999, 1998 and
1997, 378,000 stock equivalents (designated as stock units), 130,000 shares
and 99,500 shares, respectively, were granted with a weighted average grant-
date fair value of $45.16, $36.61 and $28.32, respectively. As of December 31,
1999, restricted stock awards outstanding totaled 697,750 shares. These shares
vest, subject to continuing employment, over a period of three to nine years.
Performance Shares. Under the performance share provisions of the Plans, par-
ticipants are entitled to have each award credited to an account maintained
for them if established performance goals are achieved with distribution after
vesting. The value of shares earned but not yet distributed under the Plan is
credited to performance share accounts and is shown in stockholders' equity as
Common Stock Issuable-Performance Plan.
Total salary expense for performance shares was $23.4 million in 1999, $23.6
million in 1998 and $20.5 million in 1997. In 1998 and 1997, 639,000 shares
and 624,000 shares, respectively, were granted with a weighted average grant-
date fair value of $36.00 and $22.13, respectively. As of December 31, 1999,
1,781,000 shares of stock had been credited to performance share accounts sub-
ject to meeting vesting conditions and 1,187,000 shares had been granted, sub-
ject to meeting established performance goals and vesting conditions, for
three-year performance periods ending in 1999 and 2000.
Director Stock Plan. Each non-employee director of the Corporation received a
grant of 1,000 shares of common stock on the date of each annual meeting of
stockholders in the years 1997, 1998 and 1999 under the Northern Trust Corpo-
ration 1997 Stock Plan for Non-Employee Directors. Under the terms of the
plan, directors may elect to defer the payment of their annual stock grant or
cash-based compensation until termination of services as director. Amounts
deferred are converted into stock units representing shares of common stock of
the Corporation. Distributions of stock grants will be distributed in stock.
Distributions of the stock unit account that relates to cash-based compensa-
tion will be made in cash based on the fair value of the stock units. In Janu-
ary 2000, each non-employee director received a grant of 2,400 stock units
under the Amended 1992 Incentive Stock Plan, with 800 stock units to vest upon
reelection as a director of the Corporation in each of the years 2000, 2001
and 2002.
Other Stock-Based Compensation Arrangements. The Corporation, in conjunction
with an acquisition, awarded 864,560 restricted shares of the Corporation's
common stock with a grant-date fair value of $11.88 to certain subsidiary
employee participants contingent upon continued employment and non-competition
agreements and, in certain periods, meeting predetermined performance goals.
Total salary expense related to this arrangement was $2.1 million in 1999,
$3.2 million in 1998 and $2.9 million in 1997. As of December 31, 1999,
restricted stock outstanding totaled 794,844 shares.
Pro Forma Information. Pro forma information regarding net income and earnings
per share is required by SFAS No. 123, and has been determined as if the Cor-
poration had accounted for its stock-based compensation under SFAS No. 123.
For purposes of estimating the fair value of the Corporation's employee stock
options at the grant-date, a Black-Scholes option pricing model was used with
the following weighted average assumptions for 1999, 1998 and 1997, respec-
tively: risk-free interest rates of 6.60%, 5.68% and 6.10%; dividend yields of
1.20%, 1.21% and 1.30%; volatility factors of the expected market price of the
Corporation's common stock of 26.5%, 24.4% and 20.9%; and a weighted average
expected life of the option of 5.3 years, 7.6 years and 6.0 years.
The weighted average fair value of options granted in 1999, 1998 and 1997 was
$15.13, $12.58 and $8.60, respectively. For purposes of pro forma disclosures,
the estimated fair value of the options is amortized to expense over the
options' six months to three year vesting period. Under SFAS No. 123, options
and awards granted prior to 1995 are not required to be included in
69
- --------------------------------------------------------------------------------
Northern Trust Corporation
Notes to Consolidated Financial Statements
---------------- ----------------
the pro forma information. Because the SFAS No. 123 method of accounting has
not been applied to options and other stock-based compensation granted prior to
January 1, 1995, the resulting pro forma compensation cost may not be represen-
tative of that to be expected in future years. The Corporation's pro forma
information follows:
(In Millions Except
Per Share Information) 1999 1998 1997
- --------------------------------------------------------
Net Income as Reported $405.0 $353.9 $309.4
Pro Forma Adjustments Increase
(Decrease) Due To:
Stock Options (28.5) (14.7) (9.2)
Performance Shares and Other
Arrangements 9.7 8.2 8.1
- --------------------------------------------------------
Pro Forma Net Income $386.2 $347.4 $308.3
- --------------------------------------------------------
Earnings Per Share as Reported:
Basic $ 1.81 $ 1.58 $ 1.37
Diluted 1.74 1.52 1.33
Pro Forma Earnings Per Share:
Basic $ 1.72 $ 1.55 $ 1.37
Diluted 1.66 1.49 1.32
26. Cash-Based Compensation Plans--Various incentive plans provide for cash
incentives and bonuses to selected employees based upon accomplishment of cor-
porate net income objectives, business unit goals and individual performance.
The plans provide for acceleration of benefits in certain circumstances includ-
ing a change in control. The estimated contributions to these plans are charged
to salary expense and totaled $116.1 million in 1999, $86.0 million in 1998 and
$68.0 million in 1997.
27. Business Segments and Related Information--Information describing the Cor-
poration's major business segments is contained in the section titled Business
Segments, found on pages 29 through 33, and is incorporated by reference.
The operations of Northern Trust are managed on a business unit basis and
include components of both domestic and foreign source income and assets. For-
eign source income and assets are not separately identified in its internal
management reporting system. However, in order to comply with the financial
reporting requirements of the Securities and Exchange Commission, Northern
Trust is required to disclose foreign activities based on the domicile of the
customer. Due to the complex and integrated nature of its foreign and domestic
activities it is impossible to segregate with precision revenues, expenses and
assets between its U.S. and foreign domiciled customers. Therefore, certain
subjective estimates and assumptions have been made to allocate revenues,
expenses and assets between domestic and international operations as described
below.
Northern Trust's international activities are centered in the commercial bank-
ing, treasury activities, foreign exchange and global custody businesses of the
Bank, three overseas branches, one Edge Act subsidiary, the Hong Kong subsidi-
aries, NTGA, and Northern Trust of Florida. Net income from international oper-
ations includes the direct net income contributions of foreign branches,
foreign subsidiaries and the Edge Act subsidiary. The Bank and Northern Trust
of Florida international profit contributions reflect direct salary and other
expenses of the business units, plus expense allocations for interest, occupan-
cy, overhead and the provision for credit losses. For purposes of this disclo-
sure, all foreign exchange profits have been allocated to international
operations. The interest expense is allocated to international operations based
on specifically matched or pooled funding. Allocations of indirect noninterest
expenses related to international activities are not significant but, when
made, are based on various methods such as time, space and number of employees.
The table below summarizes international performance based on the domicile of
the primary obligor without regard to guarantors or the location of collateral.
Distribution of Total Assets and Operating Performance
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
Income Income Income
Total Operating before Net Total Operating before Net Total Operating before Net
(In Millions) Assets Income* Taxes Income Assets Income* Taxes Income Assets Income* Taxes Income
- --------------------------------------------------------------------------------------------------------------------
International $ 3,244.6 $ 256.9 $126.3 $ 78.8 $ 4,371.8 $ 220.5 $119.5 $ 74.5 $ 3,260.2 $ 203.2 $112.5 $ 70.1
Domestic 25,463.6 1,497.1 490.2 326.2 23,498.2 1,328.3 423.2 279.4 22,055.2 1,169.5 359.4 239.3
- --------------------------------------------------------------------------------------------------------------------
Total $28,708.2 $1,754.0 $616.5 $405.0 $27,870.0 $1,548.8 $542.7 $353.9 $25,315.4 $1,372.7 $471.9 $309.4
* Operating Income is comprised of net interest income and noninterest income.
70
- --------------------------------------------------------------------------------
Northern Trust Corporation
Notes to Consolidated Financial Statements
---------------- ----------------
28. Acquisitions--On December 31, 1997, the Corporation completed the acquisi-
tion of ANB Investment Management and Trust Company (ANB IMC) from First Chi-
cago NBD Corporation for $53 million in cash. The transaction was recorded
under the purchase method of accounting. Included in the acquisition cost were
$36.0 million of goodwill and $10.0 million of other intangibles which will be
amortized over fifteen and ten years, respectively. Subsequent to the acquisi-
tion, ANB IMC's name was changed to Northern Trust Quantitative Advisors, Inc.
On May 15, 1998, the Corporation completed the acquisition of Trustbank
Financial Corp., parent of Trust Bank of Colorado, for $15 million in cash.
The transaction was recorded under the purchase method of accounting. Included
in the acquisition cost was $10.4 million of goodwill which is being amortized
over fifteen years.
29. Regulatory Capital Requirements--Northern Trust and its subsidiary banks
are subject to various regulatory capital requirements administered by the
federal bank regulatory authorities. Under these requirements, banks must
maintain specific ratios of total and tier 1 capital to risk-weighted assets
and of tier 1 capital to average assets in order to be classified as "well
capitalized." The regulatory capital requirements impose certain restrictions
upon banks that meet minimum capital requirements but are not "well capital-
ized" and obligate the federal bank regulatory authorities to take "prompt
corrective action" with respect to banks that do not maintain such minimum
ratios. Such prompt corrective action could have a direct material effect on a
bank's financial statements.
As of December 31, 1999, each of Northern's subsidiary banks had capital
ratios above the level required for classification as a "well capitalized"
institution and had not received any regulatory notification of a lower clas-
sification. There are no conditions or events since that date that management
believes have adversely affected the capital categorization of any subsidiary
bank for these purposes. The table below summarizes the risk-based capital
amounts and ratios for Northern Trust and for each of its subsidiary banks
whose net income for 1999 exceeded 10% of the consolidated total.
Minimum to
Qualify as
Well
Actual Capitalized
- -------------------------------------------------------------------------------
($ In Millions) Amount Ratio Amount Ratio
- -------------------------------------------------------------------------------
As of December 31, 1999:
Total Capital to Risk-Weighted Assets
Consolidated $3,048 13.7% $2,232 10.0%
The Northern Trust Company 2,326 12.5 1,855 10.0
Northern Trust Bank of Florida N.A. 275 12.1 228 10.0
Tier 1 Capital to Risk-Weighted Assets
Consolidated 2,212 9.9 1,339 6.0
The Northern Trust Company 1,650 8.9 1,113 6.0
Northern Trust Bank of Florida N.A. 256 11.2 137 6.0
Tier 1 Capital (to Fourth Quarter Average Assets)
Consolidated 2,212 7.1 1,548 5.0
The Northern Trust Company 1,650 6.3 1,302 5.0
Northern Trust Bank of Florida N.A. 256 7.8 164 5.0
As of December 31, 1998:
Total Capital to Risk-Weighted Assets
Consolidated $2,621 13.1% $2,007 10.0%
The Northern Trust Company 1,934 11.5 1,676 10.0
Northern Trust Bank of Florida N.A. 224 10.9 206 10.0
Tier 1 Capital to Risk-Weighted Assets
Consolidated 1,964 9.8 1,204 6.0
The Northern Trust Company 1,443 8.6 1,006 6.0
Northern Trust Bank of Florida N.A. 204 9.9 123 6.0
Tier 1 Capital (to Fourth Quarter Average Assets)
Consolidated 1,964 6.9 1,423 5.0
The Northern Trust Company 1,443 6.0 1,209 5.0
Northern Trust Bank of Florida N.A. 204 7.4 138 5.0
71
- --------------------------------------------------------------------------------
Northern Trust Corporation
Notes to Consolidated Financial Statements
---------------- ----------------
30. Northern Trust Corporation (Corporation only) Condensed financial informa-
tion is presented below. Investments in wholly-owned subsidiaries are carried
on the equity method of accounting.
Condensed Balance Sheet
- --------------------------------------------------------------------------------
December 31
- -------------------------------------------------------------
(In Millions) 1999 1998
- -------------------------------------------------------------
Assets
Cash on Deposit with Subsidiary Bank $ .1 $ .4
Time Deposits with Banks 139.6 123.5
Securities 109.9 154.9
Investments in Wholly-Owned
Subsidiaries-Bank 2,146.3 1,874.5
-Nonbank 112.4 102.6
Loans-Nonbank Subsidiaries 8.3 7.6
-Other 3.5 1.3
Buildings and Equipment 7.2 7.2
Other Assets 216.8 191.0
- -------------------------------------------------------------
Total Assets $2,744.1 $2,463.0
- -------------------------------------------------------------
Liabilities
Commercial Paper $ 145.1 $ 148.1
Long-Term Debt 301.0 301.0
Other Liabilities 123.3 73.6
- -------------------------------------------------------------
Total Liabilities 569.4 522.7
Stockholders' Equity 2,174.7 1,940.3
- -------------------------------------------------------------
Total Liabilities and Stockholders' Equity $2,744.1 $2,463.0
Condensed Statement of Income
- --------------------------------------------------------------------------------
For the Year Ended
December 31
- -------------------------------------------------------------------
(In Millions) 1999 1998 1997
- -------------------------------------------------------------------
Operating Income
Dividends-Bank Subsidiaries $112.0 $113.5 $ 85.5
- -Nonbank Subsidiaries 19.3 21.9 5.6
Intercompany Interest and Other Charges 7.2 11.2 20.0
Interest and Other Income 6.1 5.2 7.2
- -------------------------------------------------------------------
Total Operating Income 144.6 151.8 118.3
- -------------------------------------------------------------------
Operating Expenses
Interest Expense 26.2 30.5 33.3
Other Operating Expenses 13.2 13.6 13.1
- -------------------------------------------------------------------
Total Operating Expenses 39.4 44.1 46.4
- -------------------------------------------------------------------
Income before Income Taxes and
Equity in Undistributed Net Income
of Subsidiaries 105.2 107.7 71.9
Benefit for Income Taxes 15.1 13.8 10.3
- -------------------------------------------------------------------
Income before Equity in Undistributed
Net Income of Subsidiaries 120.3 121.5 82.2
Equity in Undistributed Net Income (Loss) of
Subsidiaries-Bank 274.9 232.8 219.9
- -Nonbank 9.8 (.4) 7.3
- -------------------------------------------------------------------
Net Income $405.0 $353.9 $309.4
- -------------------------------------------------------------------
Net Income Applicable to
Common Stock $400.2 $349.0 $304.4
72
- --------------------------------------------------------------------------------
Northern Trust Corporation
Notes to Consolidated Financial Statements
---------------- ----------------
Condensed Statement of Cash Flows
- --------------------------------------------------------------------------------
For the Year Ended
December 31
- -------------------------------------------------------------------------------
(In Millions) 1999 1998 1997
- -------------------------------------------------------------------------------
Operating Activities:
Net Income $ 405.0 $ 353.9 $ 309.4
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Equity in Undistributed Net Income of Subsidiaries (284.7) (232.4) (227.2)
(Increase) Decrease in Accrued Income (.1) 2.1 (1.2)
(Increase) Decrease in Prepaid Expenses 1.7 (.3) (3.0)
Other, net 65.4 27.6 8.7
- -------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 187.3 150.9 86.7
- -------------------------------------------------------------------------------
Investing Activities:
Net (Increase) Decrease in Time Deposits with
Banks (16.1) 155.9 (178.4)
Purchases of Securities (134.6) (303.7) (392.1)
Sales of Securities 166.8 290.9 369.6
Proceeds from Maturity and Redemption of
Securities 10.0 2.0 32.8
Net (Increase) Decrease in Capital Investments in
Subsidiaries 8.8 (26.3) (61.2)
Net (Increase) Decrease in Loans to Subsidiaries (.7) .7 7.9
Net (Increase) Decrease in Other Loans (2.2) .1 .2
Other, net (.3) (1.9) (.2)
- -------------------------------------------------------------------------------
Net Cash Provided by (Used in) Investing
Activities 31.7 117.7 (221.4)
- -------------------------------------------------------------------------------
Financing Activities:
Net Increase (Decrease) in Commercial Paper (3.0) 1.3 (2.2)
Repayment of Long-Term Debt -- (82.5) (8.8)
Proceeds from Long-Term Debt Issued to
Subsidiaries -- -- 275.6
Repayment of Long-Term Debt Issued to Subsidiaries -- (.1) --
Treasury Stock Purchased (139.7) (116.5) (66.2)
Cash Dividends Paid on Common and Preferred Stock (111.4) (98.5) (85.3)
Net Proceeds from Stock Options 24.1 19.5 13.0
Other, net 10.7 8.0 9.2
- -------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing
Activities (219.3) (268.8) 135.3
- -------------------------------------------------------------------------------
Net Change in Cash on Deposit with Subsidiary Bank (.3) (.2) .6
Cash on Deposit with Subsidiary Bank at Beginning
of Year .4 .6 --
- -------------------------------------------------------------------------------
Cash on Deposit with Subsidiary Bank at End of Year $ .1 $ .4 $ .6
73
- --------------------------------------------------------------------------------
Northern Trust Corporation
Report of Independent Public Accountants
---------------- ----------------
To the Stockholders and Board of Directors of Northern Trust Corporation:
- --------------------------------------------------------------------------------
We have audited the accompanying consolidated balance sheet of Northern Trust
Corporation (a Delaware Corporation) and subsidiaries as of December 31, 1999
and 1998, and the related consolidated statements of income, comprehensive
income, changes in stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1999. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of mate-
rial misstatement. An audit includes examining, on a test basis, evidence sup-
porting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement pre-
sentation. We believe that our audits provide a reasonable basis for our opin-
ion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Northern Trust Corporation and
subsidiaries as of December 31, 1999 and 1998, and the results of their opera-
tions and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Chicago, Illinois,
January 18, 2000
74
- --------------------------------------------------------------------------------
Northern Trust Corporation
Consolidated Financial Statistics
---------------- ----------------
Quarterly Financial Data
- --------------------------------------------------------------------------------
Statement of Income 1999 1998
- -----------------------------------------------------------------------------------------------------------
($ In Millions Except Fourth Third Second First Fourth Third Second First
Per Share Information) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------------------
Trust Fees $ 271.1 242.4 236.2 224.5 $ 216.7 203.6 202.3 193.7
Other Noninterest Income 69.3 64.0 66.1 61.6 67.9 61.1 63.4 62.9
Net Interest Income
Interest Income 424.1 404.3 370.0 370.2 382.6 392.9 370.3 357.3
Interest Expense 285.8 276.0 243.4 244.6 256.2 274.9 251.1 243.7
- -----------------------------------------------------------------------------------------------------------
Net Interest Income 138.3 128.3 126.6 125.6 126.4 118.0 119.2 113.6
Provision for Credit
Losses 6.5 .5 5.0 .5 1.0 1.0 3.0 4.0
Noninterest Expenses 310.8 276.1 271.7 266.4 269.4 243.8 247.7 236.2
Provision for Income
Taxes 55.4 53.9 52.5 49.7 49.0 47.7 47.0 45.1
- -----------------------------------------------------------------------------------------------------------
Net Income $ 106.0 104.2 99.7 95.1 $ 91.6 90.2 87.2 84.9
- -----------------------------------------------------------------------------------------------------------
Net Income Applicable to
Common Stock $ 104.7 102.9 98.6 94.0 $ 90.4 89.0 86.0 83.6
- -----------------------------------------------------------------------------------------------------------
Per Common Share
Net Income-Basic $ .47 .46 .44 .42 $ .41 .40 .39 .38
- -Diluted .46 .45 .43 .41 .39 .39 .37 .36
- -----------------------------------------------------------------------------------------------------------
Average Balance Sheet
Assets
Cash and Due from Banks $ 1,358.5 1,386.6 1,256.9 1.470.9 $ 1,319.2 1,116.3 1,163.0 1,224.5
Money Market Assets 5,656.0 4,649.4 3,896.9 4,737.8 5,067.2 3,388.0 3,381.0 3,506.4
Securities 7,288.8 8,907.5 8,136.4 7,484.8 6,736.5 8,393.3 7,570.5 7,177.5
Loans and Leases 15,207.0 14,620.5 14,271.2 14,079.2 13,981.0 13,428.4 13,100.7 12,735.0
Reserve for Credit
Losses (147.9) (148.4) (149.6) (147.1) (146.7) (146.6) (147.2) (147.7)
Other Assets 1,717.5 1,679.2 1,712.5 1,754.7 1,634.0 1,381.8 1,504.1 1,510.2
- -----------------------------------------------------------------------------------------------------------
Total Assets $31,079.9 31,094.8 29,124.3 29,380.3 $28,591.2 27,561.2 26,572.1 26,005.9
- -----------------------------------------------------------------------------------------------------------
Liabilities and
Stockholders' Equity
Deposits
Demand and Other
Noninterest-Bearing $ 3,895.9 3,530.6 3,566.5 3,627.2 $ 3,394.4 3,131.2 3,223.0 3,161.6
Savings and Other
Interest-Bearing 7,375.1 7,029.4 6,921.1 6,813.5 6,537.1 6,381.9 6,429.5 6,280.1
Other Time 757.5 566.5 716.4 560.4 564.6 678.1 517.4 525.6
Foreign Offices 8,142.3 7,290.0 6,309.4 6,326.2 6,907.4 6,381.5 5,711.5 6,132.2
- -----------------------------------------------------------------------------------------------------------
Total Deposits 20,170.8 18,416.5 17,513.4 17,327.3 17,403.5 16,572.7 15,881.4 16,099.5
Purchased Funds 6,499.9 8,357.9 7,376.7 7,765.7 7,017.4 7,434.8 6,739.4 6,042.4
Senior Notes 436.4 498.4 640.6 746.6 700.0 366.0 800.9 750.0
Long-Term Debt 659.2 602.3 458.6 458.3 462.8 462.5 422.9 434.5
Debt-Floating Rate
Capital Securities 267.5 267.5 267.5 267.5 267.4 267.4 267.4 267.4
Other Liabilities 908.1 873.4 832.3 846.1 842.9 619.6 654.7 656.1
Stockholders' Equity 2,138.0 2,078.8 2,035.2 1,968.8 1,897.2 1,838.2 1,805.4 1,756.0
- -----------------------------------------------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity $31,079.9 31,094.8 29,124.3 29,380.3 $28,591.2 27,561.2 26,572.1 26,005.9
- -----------------------------------------------------------------------------------------------------------
Analysis of Net Interest
Income
Earning Assets $28,151.8 28,177.4 26,304.5 26,301.8 $25,784.7 25,209.7 24,052.2 23,418.9
Interest-Related Funds 23,650.6 24,170.9 22,250.6 22,585.6 21,999.8 21,518.6 20,361.2 19,853.1
Noninterest-Related
Funds 4,501.2 4,006.5 4,053.9 3,716.2 3,784.9 3,691.1 3,691.0 3,565.8
Net Interest Income
(Taxable equivalent) 148.2 138.9 135.8 134.5 135.2 127.7 128.2 122.0
Net Interest Margin
(Taxable equivalent) 2.09% 1.95 2.07 2.07 2.08% 2.01 2.14 2.11
- -----------------------------------------------------------------------------------------------------------
Common Stock Dividend
and Market Price
Dividends $ .135 .12 .12 .12 $ .12 .105 .105 .105
Market Price Range-High 54.63 49.81 50.00 47.38 44.94 41.63 39.69 39.07
- -Low 41.28 40.16 42.94 40.31 29.41 27.88 33.72 30.19
- -----------------------------------------------------------------------------------------------------------
Note: The common stock of Northern Trust Corporation is traded on the Nasdaq
National Market under the symbol NTRS.
75
- --------------------------------------------------------------------------------
Northern Trust Corporation
Consolidated Financial Statistics
---------------- ----------------
Average Statement of Condition with Analysis of Net Interest Income
- --------------------------------------------------------------------------------
(Interest and Rate on a
Taxable Equivalent Basis) 1999 1998
- ---------------------------------------------------------------------------------------------------
($ In Millions) Interest Volume Rate Interest Volume Rate
- ---------------------------------------------------------------------------------------------------
Average Earning Assets
Money Market Assets
Federal Funds Sold and
Resell Agreements $ 55.8 $ 1,095.7 5.09% $ 53.0 $ 967.5 5.48%
Time Deposits with Banks 164.3 3,562.0 4.61 155.0 2,827.1 5.48
Other 4.2 79.6 5.36 2.7 44.1 6.14
- ---------------------------------------------------------------------------------------------------
Total Money Market Assets 224.3 4,737.3 4.74 210.7 3,838.7 5.49
- ---------------------------------------------------------------------------------------------------
Securities
U.S. Government 15.5 285.3 5.43 22.4 374.2 5.99
Obligations of States
and Political
Subdivisions 40.5 497.4 8.15 38.2 434.0 8.81
Federal Agency 363.6 6,838.5 5.32 362.1 6,385.0 5.67
Other 21.7 322.7 6.72 18.3 265.8 6.87
Trading Account .8 12.5 6.58 .8 11.8 6.53
- ---------------------------------------------------------------------------------------------------
Total Securities 442.1 7,956.4 5.56 441.8 7,470.8 5.91
- ---------------------------------------------------------------------------------------------------
Loans and Leases 940.8 14,547.8 6.47 886.5 13,315.0 6.66
- ---------------------------------------------------------------------------------------------------
Total Earning Assets $1,607.2 27,241.5 5.90% $1,539.0 24,624.5 6.25%
- ---------------------------------------------------------------------------------------------------
Reserve for Credit Losses -- (148.4) -- -- (147.1) --
Cash and Due from Banks -- 1,368.0 -- -- 1,205.7 --
Other Assets -- 1,715.9 -- -- 1,507.6 --
- ---------------------------------------------------------------------------------------------------
Total Assets -- $30,177.0 -- -- $27,190.7 --
- ---------------------------------------------------------------------------------------------------
Average Source of Funds
Deposits
Savings and Money Market $ 155.6 $ 4,845.3 3.21% $ 141.3 $ 4,263.3 3.31%
Savings Certificates 117.3 2,191.0 5.35 122.1 2,144.5 5.69
Other Time 32.7 650.5 5.03 30.6 571.8 5.35
Foreign Offices Time 286.3 6,592.1 4.34 286.4 5,781.7 4.95
- ---------------------------------------------------------------------------------------------------
Total Deposits 591.9 14,278.9 4.15 580.4 12,761.3 4.55
Federal Funds Purchased 161.0 3,226.1 4.99 139.8 2,620.6 5.34
Securities Sold under
Agreements to Repurchase 95.8 1,954.5 4.90 80.2 1,506.0 5.33
Commercial Paper 7.3 141.0 5.15 8.0 145.9 5.51
Other Borrowings 109.2 2,177.3 5.02 132.3 2,540.4 5.21
Senior Notes 30.6 579.5 5.28 36.5 653.3 5.58
Long-Term Debt 37.9 545.3 6.96 31.8 445.8 7.14
Debt-Floating Rate
Capital Securities 16.1 267.5 6.02 16.9 267.4 6.32
- ---------------------------------------------------------------------------------------------------
Total Interest-Related
Funds 1,049.8 23,170.1 4.53 1,025.9 20,940.7 4.90
- ---------------------------------------------------------------------------------------------------
Interest Rate Spread -- -- 1.37 -- -- 1.35
Noninterest-Related
Deposits -- 4,086.0 -- -- 3,731.8 --
Other Liabilities -- 865.2 -- -- 693.6 --
Stockholders' Equity -- 2,055.7 -- -- 1,824.6 --
- ---------------------------------------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity -- $30,177.0 -- -- $27,190.7 --
- ---------------------------------------------------------------------------------------------------
Net Interest
Income/Margin $ 557.4 -- 2.05% $ 513.1 -- 2.08%
- ---------------------------------------------------------------------------------------------------
Net Interest
Income/Margin Components
Domestic $ 545.7 $23,131.3 2.36% $ 502.7 $21,118.7 2.38%
International 11.7 4,110.2 .30 10.4 3,505.8 .30
- ---------------------------------------------------------------------------------------------------
Consolidated $ 557.4 $27,241.5 2.05% $ 513.1 $24,624.5 2.08%
- ---------------------------------------------------------------------------------------------------
Notes-Average volume includes nonaccrual loans.
-Total interest income includes adjustments on loans and securities to a
taxable equivalent basis. Such adjustments are based on the U.S. federal
income tax rate (35%) and State of Illinois income tax rate (7.18%). Lease
financing receivable balances are reduced by deferred income. Total taxable
equivalent interest adjustments amounted to $38.6 million in 1999, $35.9
million in 1998, $32.7 million in 1997, $33.6 million in 1996 and $37.6
million in 1995.
-Interest on loans and money market assets includes fees of $3.4 million in
1999, $4.3 million in 1998, $3.9 million in 1997, $4.3 million in 1996, and
$5.1 million in 1995.
76
- --------------------------------------------------------------------------------
Northern Trust Corporation
---------------- ----------------
- --------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------
Interest Volume Rate Interest Volume Rate Interest Volume Rate
- -------------------------------------------------------------------------------
$ 45.9 $ 815.3 5.63% $ 18.3 $ 333.3 5.49% $ 12.3 $ 204.2 6.02%
133.5 2,574.7 5.18 84.9 1,699.5 5.00 92.1 1,643.9 5.60
3.0 52.6 5.68 3.0 50.7 5.91 1.1 16.6 6.88
- -------------------------------------------------------------------------------
182.4 3,442.6 5.30 106.2 2,083.5 5.10 105.5 1,864.7 5.66
- -------------------------------------------------------------------------------
48.8 822.9 5.94 97.6 1,702.0 5.73 70.4 1,225.7 5.74
38.1 408.8 9.32 40.8 414.1 9.86 46.8 434.7 10.75
281.9 4,890.1 5.77 228.4 4,010.7 5.69 258.8 4,124.8 6.28
14.9 243.4 6.11 13.7 228.2 6.00 22.0 353.4 6.21
.7 9.0 7.33 .6 8.8 7.09 3.8 54.4 7.04
- -------------------------------------------------------------------------------
384.4 6,374.2 6.03 381.1 6,363.8 5.99 401.8 6,193.0 6.49
- -------------------------------------------------------------------------------
798.7 11,812.9 6.76 697.8 10,332.1 6.75 634.3 9,136.0 6.94
- -------------------------------------------------------------------------------
$1,365.5 21,629.7 6.32% $1,185.1 18,779.4 6.31% $1,141.6 17,193.7 6.64%
- -------------------------------------------------------------------------------
-- (148.1) -- -- (147.5) -- -- (146.2) --
-- 1,095.4 -- -- 1,072.9 -- -- 1,178.7 --
-- 1,474.7 -- -- 1,259.5 -- -- 1,183.3 --
- -------------------------------------------------------------------------------
-- $24,051.7 -- -- $20,964.3 -- -- $19,409.5 --
- -------------------------------------------------------------------------------
$ 125.8 $ 3,895.4 3.23% $ 114.3 $ 3,620.7 3.16% $ 109.1 $ 3,312.4 3.29%
117.2 2,035.8 5.76 119.1 2,062.4 5.78 120.6 2,000.3 6.03
39.4 717.3 5.50 29.9 549.2 5.44 31.5 542.7 5.81
239.8 4,971.2 4.82 184.5 3,826.2 4.82 182.1 3,493.4 5.21
- -------------------------------------------------------------------------------
522.2 11,619.7 4.49 447.8 10,058.5 4.45 443.3 9,348.8 4.74
92.4 1,690.2 5.47 97.9 1,842.2 5.31 91.2 1,564.0 5.83
81.7 1,519.9 5.38 103.4 1,973.3 5.24 102.6 1,769.7 5.80
7.9 142.7 5.54 7.8 143.7 5.40 8.6 146.0 5.87
112.4 2,120.9 5.30 64.5 1,274.1 5.07 55.6 1,034.5 5.38
30.9 539.3 5.75 14.4 267.5 5.37 23.7 394.0 6.00
32.6 435.8 7.48 27.4 360.7 7.59 21.4 271.3 7.88
14.5 224.1 6.49 -- -- -- -- -- --
- -------------------------------------------------------------------------------
894.6 18,292.6 4.89 763.2 15,920.0 4.79 746.4 14,528.3 5.14
- -------------------------------------------------------------------------------
-- -- 1.43 -- -- 1.52 -- -- 1.50
-- 3,450.3 -- -- 3,080.7 -- -- 3,046.4 --
-- 679.3 -- -- 477.9 -- -- 462.1 --
-- 1,629.5 -- -- 1,485.7 -- -- 1,372.7 --
- -------------------------------------------------------------------------------
-- $24,051.7 -- -- $20,964.3 -- -- $19,409.5 --
- -------------------------------------------------------------------------------
$ 470.9 -- 2.18% $ 421.9 -- 2.25% $ 395.2 -- 2.30%
- -------------------------------------------------------------------------------
$ 466.0 $18,492.2 2.52% $ 420.6 $16,678.5 2.52% $ 392.6 $15,193.7 2.58%
4.9 3,137.5 .16 1.3 2,100.9 .06 2.6 2,000.0 .13
- -------------------------------------------------------------------------------
$ 470.9 $21,629.7 2.18% $ 421.9 $18,779.4 2.25% $ 395.2 $17,193.7 2.30%
- -------------------------------------------------------------------------------
77
- --------------------------------------------------------------------------------
Northern Trust Corporation
Corporate Structure
---------------- ----------------
NORTHERN TRUST CORPORATION
50 South La Salle Street, Chicago, Illinois 60675
(312) 630-6000
PRINCIPAL SUBSIDIARY
The Northern Trust Company
50 South La Salle Street, Chicago, Illinois 60675
120 East Oak Street, Chicago, Illinois 60611
201 East Huron, Chicago, Illinois 60611
125 South Wacker Drive, Chicago, Illinois 60675
2814 West Fullerton, Chicago, Illinois 60647
7801 South State Street, Chicago, Illinois 60619
8501 West Higgins Road, Chicago, Illinois 60631
826 S. Northwest Highway, Barrington, Illinois 60010
2550 Waukegan Road, Glenview, Illinois 60025
579 Central Avenue, Highland Park, Illinois 60035
4 North Washington Street, Hinsdale, Illinois 60521
120 East Scranton Avenue, Lake Bluff, Illinois 60044
265 Deerpath Road, Lake Forest, Illinois 60045
959 South Waukegan Road, Lake Forest, Illinois 60045
701 South McKinley Road, Lake Forest, Illinois 60045
400 East Diehl Road, Naperville, Illinois 60563
One Oakbrook Terrace, Oakbrook Terrace, Illinois 60181
1501 Woodfield Road, Schaumburg, Illinois 60173
62 Green Bay Road, Winnetka, Illinois 60093
Cleveland Branch
127 Public Square, Suite 5150, Cleveland, Ohio 44114
London Branch
155 Bishopsgate, London EC2M 3XS, United Kingdom
Cayman Islands Branch
P.O. Box 501, Georgetown, Cayman Islands,
British West Indies
Singapore Branch
80 Raffles Place #46-02, UOB Plaza 1,
Singapore 048624
SUBSIDIARIES OF THE NORTHERN
TRUST COMPANY
The Northern Trust
International Banking Corporation
One World Trade Center, Suite 3941,
New York, New York 10048
The Northern Trust Company
of Hong Kong Limited
Suite 703-4 One Pacific Place
88 Queensway, Hong Kong
Northern Trust Trade Services Limited
7/F CITIC Tower, 1 Tim Mei Avenue,
Central, Hong Kong
Northern Trust Fund Managers (Ireland) Limited
Connaught House
30 Herbert Street
Dublin 2, Ireland
NorLease, Inc.
50 South La Salle Street, Chicago, Illinois 60675
The Northern Trust Company, Canada
161 Bay Street, Suite 4540, B.C.E. Place
Toronto, Ontario, Canada M5J 2S1
NTG Services LLC
155 Bishopsgate, London
EC2M 3XS, United Kingdom
NT Mortgage Holdings LLC
50 South La Salle Street
Chicago, Illinois 60675
OTHER SUBSIDIARIES OF
THE CORPORATION
Northern Trust Bank of Florida N.A.
700 Brickell Avenue, Miami, Florida 33131
595 Biltmore Way, Coral Gables, Florida 33134
328 Crandon Boulevard, Suite 101,
Key Biscayne, Florida 33149
3001 Aventura Boulevard, Aventura, Florida 33180
8600 NW 17th Street, Suite 120, Miami, Florida 33126
1100 East Las Olas Boulevard,
Fort Lauderdale, Florida 33301
2601 East Oakland Park Boulevard,
Fort Lauderdale, Florida 33306
301 Yamato Road, Boca Raton, Florida 33431
770 East Atlantic Avenue, Delray Beach, Florida 33483
440 Royal Palm Way, Palm Beach, Florida 33480
11780 U.S. Highway 1, Suite 100,
North Palm Beach, Florida 33408
2201 S.E. Kingswood Terrace, Monterey Commons,
Stuart, Florida 34996
755 Beachland Boulevard, Vero Beach, Florida 32963
1440 South A1A, Vero Beach, Florida 32963
4001 Tamiami Trail North, Naples, Florida 34103
375 Fifth Avenue South, Naples, Florida 34102
26790 South Tamiami Trail,
Bonita Springs, Florida 34134
8060 College Parkway S.W., Fort Myers, Florida 33919
1515 Ringling Boulevard, Sarasota, Florida 34236
901 Venetia Bay Boulevard, Suite 100,
Venice, Florida 34292
540 Bay Isles Road, Longboat Key, Florida 34228
233 15th Street West, Bradenton, Florida 34205
6320 Venture Drive, Suite 100, Bradenton, Florida 34202
100 Second Avenue South, St. Petersburg, Florida 33701
425 North Florida Avenue, Tampa, Florida 33602
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Northern Trust Corporation
Corporate Structure
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Northern Trust Cayman International, Ltd.
P.O. Box 1586, Georgetown, Grand Cayman,
Cayman Islands, British West Indies
Northern Trust Bank of Arizona N.A.
2398 East Camelback Road, Phoenix, Arizona 85016
6373 East Tanque Verde Road, Tucson, Arizona 85715
3450 East Sunrise Drive, Tucson, Arizona 85718
10220 West Bell Road, Sun City, Arizona 85351
10015 West Royal Oak Road, Sun City, Arizona 85351
7600 E. Doubletree Ranch Road, Scottsdale, Arizona 85258
7501 East Thompson Peak Parkway,
Scottsdale, Arizona 85255
19432 R. H. Johnson Boulevard,
Sun City West, Arizona 85375
1525 South Greenfield Road, Mesa, Arizona 85206
Northern Trust Bank of California N.A.
355 South Grand Avenue, Suite 2600,
Los Angeles, California 90071
620 Newport Center Drive, Suite 200,
Newport Beach, California 92660
4370 LaJolla Village Drive, Suite 1000,
San Diego, California 92122
1125 Wall Street, LaJolla, California 92037
206 East Anapamu Street,
Santa Barbara, California 93101
1485 East Valley Road, (Montecito),
Santa Barbara, California 93108
580 California Street, Suite 1800,
San Francisco, California 94104
575 Redwood Highway, Suite 100
Mill Valley, California 94941
10877 Wilshire Boulevard (Westwood), Suite 100,
Los Angeles, California 90024
74-900 Highway 111, Suite 121,
Indian Wells, California 92210
421 North Rodeo Drive, Penthouse,
Beverly Hills, California 90210
Northern Trust Bank of Texas N.A.
2020 Ross Avenue, Dallas, Texas 75201
5540 Preston Road, Dallas, Texas 75205
16475 Dallas Parkway, Addison, Texas 75001
2701 Kirby Drive, Houston, Texas 77098
600 Bering Drive, Houston, Texas 77057
10000 Memorial Drive, Houston, Texas 77024
700 Rusk Street, Houston, Texas 77002
Northern Trust Bank, FSB
Michigan
1701 North Woodward Avenue, Suite 110,
Bloomfield Hills, Michigan 48304
161 Ottawa, Northwest, Suites 111 and 114,
Grand Rapids, Michigan 49503
Washington
1414 Fourth Avenue, Seattle, Washington 98101
Northern Trust Bank of Colorado
1200 17th Street, 24th Floor,
Denver, Colorado 80202
Northern Trust Global Advisors, Inc.
300 Atlantic Street, Suite 400,
Stamford, Connecticut 06901
The Northern Trust Company of Connecticut
300 Atlantic Street, Suite 400,
Stamford, Connecticut 06901
NT Global Advisors, Inc.
161 Bay Street, Suite 4540, B.C.E. Place,
Toronto, Ontario, Canada M5J 2S1
NT Fund Advisors of Quebec, Inc.
770 Sherbrooke Street West, Suite 1420,
Montreal, Quebec, Canada H3A 1G1
Northern Trust Global Advisors, Limited
155 Bishopsgate, London EC2M 3XS, United Kingdom
Northern Trust Quantitative Advisors, Inc.
50 South LaSalle Street, Chicago, Illinois 60675
The Northern Trust Company of New York
40 Broad Street, New York, New York 10004
Northern Trust Securities, Inc.
50 South LaSalle Street, Chicago, Illinois 60675
Northern Trust Retirement Consulting, L.L.C.
400 Perimeter Center Terrace, Suite 850,
Atlanta, Georgia 30346
20020 120th Avenue Northeast, Suite 200,
Bothell, Washington 98011
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Northern Trust Corporation