10-K405 1 FORM 10-K405 =============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) FOR THE TRANSITION PERIOD FROM ________ TO ________ COMMISSION FILE NUMBER 0-5965 NORTHERN TRUST CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 36-2723087 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 50 SOUTH LA SALLE STREET CHICAGO, ILLINOIS 60675 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (312)630-6000 ---------------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $1.66 2/3 PAR VALUE ------- PREFERRED STOCK PURCHASE RIGHTS ------- DEPOSITARY SHARES, EACH REPRESENTING ONE-TWENTIETH OF A SHARE OF THE 6.25% CUMULATIVE CONVERTIBLE PREFERRED STOCK, SERIES E OF THE REGISTRANT (TITLE OF CLASS) INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO[_] INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [X] AT FEBRUARY 6, 1995, 54,194,369 SHARES OF COMMON STOCK, $1.66 2/3 PAR VALUE, WERE OUTSTANDING, AND THE AGGREGATE MARKET VALUE OF THE COMMON STOCK (BASED UPON THE LAST SALE PRICE OF THE COMMON STOCK AT FEBRUARY 6, 1995, AS REPORTED BY THE NASDAQ STOCK MARKET) HELD BY NON-AFFILIATES WAS APPROXIMATELY $1,677,571,999. DETERMINATION OF STOCK OWNERSHIP BY NON-AFFILIATES WAS MADE SOLELY FOR THE PURPOSE OF RESPONDING TO THIS REQUIREMENT AND THE REGISTRANT IS NOT BOUND BY THIS DETERMINATION FOR ANY OTHER PURPOSE. PORTIONS OF THE FOLLOWING DOCUMENTS ARE INCORPORATED BY REFERENCE: ANNUAL REPORT TO STOCKHOLDERS FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994 - PART I AND PART II 1995 NOTICE AND PROXY STATEMENT FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON APRIL 18, 1995 - PART III ================================================================================ 1 ================================================================================ [THIS PAGE INTENTIONALLY LEFT BLANK] ================================================================================ 2 ================================================================================ NORTHERN TRUST CORPORATION FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 INDEX
Page PART I Item 1 Business...................................................................................4 Supplemental Item-Executive Officers of the Registrant....................................22 Item 2 Properties................................................................................23 Item 3 Legal Proceedings.........................................................................23 Item 4 Submission of Matters to a Vote of Security Holders.......................................23 PART II Item 5 Market for Registrant's Common Equity and Related Stockholder Matters.....................24 Item 6 Selected Financial Data...................................................................24 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations.....24 Item 8 Financial Statements and Supplementary Data...............................................24 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......24 PART III Item 10 Directors and Executive Officers of the Registrant........................................25 Item 11 Executive Compensation....................................................................25 Item 12 Security Ownership of Certain Beneficial Owners and Management............................25 Item 13 Certain Relationships and Related Transactions............................................25 PART IV Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K..........................26 SIGNATURES.........................................................................................27 EXHIBIT INDEX......................................................................................28
================================================================================ 3 ================================================================================ PART I ITEM 1-BUSINESS NORTHERN TRUST CORPORATION Northern Trust Corporation (Corporation) is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended. The Corporation was organized in Delaware in 1971 and on December 1 of that year became the owner of all of the outstanding capital stock, except directors' qualifying shares, of The Northern Trust Company (Bank), an Illinois banking corporation located in the Chicago financial district. The Corporation also owns three other banks in the Chicago metropolitan area, a bank in each of Florida, Arizona, California and Texas, and various other nonbank subsidiaries, including a securities brokerage firm and a futures commission merchant. The Corporation expects that although the operations of other subsidiaries will be of increasing significance, the Bank will in the foreseeable future continue to be the major source of the Corporation's assets, revenues and net income. Except where the context otherwise requires, the term "Northern Trust" refers to Northern Trust Corporation and its consolidated subsidiaries. At December 31, 1994, Northern Trust had consolidated total assets of approximately $18.6 billion and stockholders' equity of $1.3 billion. At June 30, 1994 Northern Trust was the third largest bank holding company headquartered in Illinois and the 37th largest in the United States, based on consolidated total assets of approximately $18.4 billion on that date. THE NORTHERN TRUST COMPANY The Bank was founded by Byron L. Smith in 1889 to provide banking and trust services to the public. Currently in its one hundred and sixth year, the Bank's growth has come from internal sources rather than through merger or acquisition. At December 31, 1994, the Bank had consolidated assets of approximately $14.7 billion. At June 30, 1994, the Bank was the third largest bank in Illinois and the 38th largest in the United States, based on consolidated total assets of approximately $14.9 billion on that date. The Bank currently has six active wholly owned subsidiaries: The Northern Trust International Banking Corporation, NorLease, Inc., MFC Company, Inc., Nortrust Nominees Ltd., The Northern Trust Company U.K. Pension Plan Limited and The Northern Trust Company, Canada. The Northern Trust International Banking Corporation, located in New York, was organized under the Edge Act for the purpose of conducting international business. NorLease, Inc. was established by the Bank to enable it to broaden its leasing and leasing-related lending activities. MFC Company, Inc. holds properties that are received from the Bank in connection with certain problem loans. Nortrust Nominees Ltd., located in London, is a U.K. trust corporation organized to hold U.K. real estate for fiduciary accounts. The Northern Trust Company U.K. Pension Plan Limited was established in connection with the pension plan for the Bank's London branch. The Northern Trust Company, Canada was established to offer institutional trust products and services to Canadian entities. In early 1995, Northern Global Financial Services Ltd. was incorporated in Hong Kong and, upon receipt of regulatory approval will enhance securities lending and relationship servicing capabilities for large asset custody clients in Asia and the Pacific Rim. OTHER NORTHERN TRUST CORPORATION SUBSIDIARIES The Corporation has three banking subsidiaries in the Chicago metropolitan area: Northern Trust Bank/O'Hare N.A., Northern Trust Bank/DuPage, and Northern Trust Bank/Lake Forest N.A. At December 31, 1994, these three Illinois banking subsidiaries had nine office locations with combined total assets of approximately $1.5 billion. The Corporation expects to seek regulatory approval to merge these three Illinois banking subsidiaries into the Bank during 1995. The Corporation's Florida banking subsidiary, Northern Trust Bank of Florida N.A., is headquartered in Miami and at December 31, 1994, had sixteen offices located throughout Florida, with total assets of approximately $1.4 billion. The Corporation's Arizona banking subsidiary, Northern Trust Bank of Arizona N.A., is headquartered in Phoenix and at December 31,1994 had total assets of approximately $270 million and serviced clients from five office locations. The Corporation has a Texas banking subsidiary, Northern Trust Bank of Texas N.A., headquartered in Dallas. It had four office locations and total assets of approximately $190 million at December 31, 1994. The Corporation's California banking subsidiary, Northern Trust Bank of California N.A., is headquartered in Santa Barbara. At December 31,1994, it had six office locations and total assets of approximately $250 million. The Corporation has several nonbank subsidiaries. Among them are Northern Trust Securities, Inc. which provides full brokerage services to clients of the Bank and the Corporation's other banking and trust subsidiaries and selectively underwrites general obligation tax-exempt securities. Northern Futures Corporation is a futures commission merchant. Northern Investment Corporation holds certain investments, including a loan made to a developer of a property in which the Bank is the principal tenant. Berry, Hartell, Evers & Osborne, Inc. is an investment management firm in San Francisco. The Northern Trust Company of New York provides security clearance services for all nondepository eligible securities held by ================================================================================ 4 ================================================================================ trust, agency, and fiduciary accounts administered by the Corporation's subsidiaries. Northern Trust Cayman International, Ltd. provides fiduciary services to clients residing outside of the U.S. Hazlehurst & Associates, Inc. is a retirement benefit plan services company in Atlanta, Georgia. Northern Trust Services, Inc. provides management consulting services to nonaffiliated financial institutions. CORPORATION'S INTERNAL ORGANIZATION Northern Trust's business is organized broadly into two principal business units: Corporate and Institutional Services, and Personal Financial Services, both of which report to President and Chief Operating Officer William A. Osborn. In addition, the Worldwide Operations Unit encompasses all trust and banking operations and systems activities, and the Risk Management Unit focuses on financial and risk management. The following is a brief summary of each unit's business activities. CORPORATE AND INSTITUTIONAL SERVICES (CIS) During late 1994, client corporate and institutional markets were brought together by merging Corporate Financial Services, Commercial Banking and Treasury Management Services into a single business unit. The commercial banking and corporate trust relationship teams were brought together under Sheila A. Penrose, Executive Vice President of the Corporation and the Bank. This realignment focuses Northern Trust's knowledge of the client's needs and provides more seamless service across product lines, thereby increasing client satisfaction opportunities, and strengthens relationships. Trust activities encompass custody related services for securities in the United States and foreign markets, as well as securities lending, asset management, and related cash management services. Master Trust and Master Custody are the principal products. Custody of securities traded in markets foreign to the client, has been provided primarily through the Bank's London Branch. Related foreign exchange services are also conducted at the London Branch as well as in Chicago. As measured by number of clients, Northern Trust is a leading provider of Master Trust and Master Custody services in various market segments. At December 31,1994, total assets under administration were $447.2 billion. The major market segments served are corporate pension, profit sharing and savings plans; state and municipal retirement funds; taxable asset portfolios (foundations, endowments and insurance companies); international asset portfolios (international assets of domestic and foreign institutions); and a correspondent trust market segment which provides custody, systems and investment services to smaller bank trust departments. The Northern Trust Company of New York, The Northern Trust Company, Canada, NorLease, Inc., The Northern Trust International Banking Corporation and Hazlehurst & Associates, Inc. are also included in CIS. A full range of commercial banking services through the Bank which places special emphasis on developing institutional relationships in three target markets: middle market companies in the Chicago and Midwest area, large domestic corporations, and financial institutions (both domestic and international). Credit services are administered in three groups: a Large Corporations Group, a Mid-sized Corporations Group, and a Financial Institutions Group. Treasury Management Services serves the treasury needs of major corporations and financial institutions by providing products and services to accelerate cash collections, control disbursement outflows, and generate information to manage their cash positions. Treasury management products and services, including lockbox collection, controlled disbursement products and electronic banking, are developed and marketed in this group. PERSONAL FINANCIAL SERVICES (PFS) Services to individuals is another major dimension of the trust business. Barry G. Hastings, Vice Chairman of the Corporation and the Bank, is head of Personal Financial Services (PFS) which encompasses personal trust, investment management services, estate administration, personal banking and mortgage lending. A key element of the personal trust strategy combines private banking and trust services to targeted high net worth individuals in rapidly growing areas of wealth concentration. These services are delivered through the Bank and a network of banking subsidiaries located in Florida, Arizona, California, Texas and suburban Chicago. PFS is one of the largest bank managers of personal trust assets in the United States, with total assets under administration of $51.4 billion at December 31, 1994. Northern Trust Securities, Inc. and Berry, Hartell, Evers & Osborne, Inc. are also part of PFS. In December 1993, Northern Trust Corporation entered into a definitive agreement to acquire Beach One Financial Services, Inc., parent company of The Beach Bank of Vero Beach (Florida). Beach One's assets totaled $198.6 million at December 31, 1994 and net income totaled $2.9 million in 1994. The acquisition agreement calls for Beach One shareholders to receive Northern Trust Corporation Common Stock aggregating $56.2 million with the exchange ratio set on the basis of the average last-sale prices for Northern Common Stock on the NASDAQ National Market System over a 20-day trading period ending just prior to closing. The maximum number of shares Northern is required to issue without further approval of ================================================================================ 5 ================================================================================ directors is 1,701,515, equivalent to a formula price of $33 per share. The minimum number of shares Beach One holders are required to accept is 1,169,791, equivalent to a formula price of $48 per share. The acquisition was approved by Beach One shareholders on February 23, 1995 and by the Federal Reserve Bank on March 1, 1995, and, is expected to close on March 31, 1995. This transaction is expected to be accounted for as a pooling-of-interests. In February, 1995, the Corporation entered into a definitive agreement to acquire Tanglewood Bancshares, Inc., parent company of Tanglewood Bank N.A. Houston for $33.0 million in cash. Tanglewood's assets totaled $229.9 million at December 31, 1994 and net income totaled $2.6 million in 1994. The agreement is subject to the approval of Tanglewood shareholders, to final due diligence and to various regulatory approvals and is expected to close in the second half of 1995. WORLDWIDE OPERATIONS UNIT Supporting all of Northern Trust's business activities is the Worldwide Operations Unit. During the fourth quarter of 1994 Trust and Banking operations and system activities were merged to insure that both day-to-day and strategic linkage between the new operations unit and all the areas it supports are maintained and strengthened. This combined unit will leverage experience in quality and productivity improvements, develop a shared technology strategy, and draw on a large pool of talent to address product and delivery complexities. James J. Mitchell, Executive Vice President of the Corporation and the Bank, heads the Worldwide Operations Unit. This Unit focuses on supporting sales, relationship management and product management activities for Corporate and Institutional Services and Personal Financial Services. RISK MANAGEMENT UNIT The Risk Management Unit, headed by Senior Executive Vice President and Chief Financial Officer Perry R. Pero, includes the Credit Policy function and the Bank's Treasury Department. The Credit Policy function is described fully on page 16 of this report. The Treasury Department is responsible for managing the Bank's wholesale funding and interest rate risk, as well as the portfolio of interest rate risk management instruments under the direction of the Corporate Asset and Liability Policy Committee. It is also responsible for the investment portfolios of the Corporation and the Bank and provides investment advice and management services to the subsidiary banks. The Risk Management Unit also includes the Corporate Controller, Corporate Treasurer, Investor Relations and Economic Research functions. GOVERNMENT POLICIES The earnings of Northern Trust are affected by numerous external influences, principally general economic conditions, both domestic and international, and actions that the United States and foreign governments and their central banks take in managing their economies. These general conditions affect all of the Northern Trust's businesses, as well as the quality and volume of the loan and investment portfolios. An important regulator of domestic economic conditions is the Board of Governors of the Federal Reserve System, which has the general objective of promoting orderly economic growth in the United States. Implementation of this objective is accomplished by its open market operations in United States Government securities, the discount rate at which member banks may borrow from Federal Reserve Banks and changes in the reserve requirements for deposits. The policies adopted by the Federal Reserve may strongly influence interest rates and hence what banks earn on their loans and investments and what they pay on their savings and time deposits and other purchased funds. Fiscal policies in the United States and abroad also affect the composition and use of the Northern Trust's resources. COMPETITION Northern Trust's principal business strategy is to provide quality financial services to targeted market segments in which it believes it has a competitive advantage and favorable growth prospects. As part of this strategy, Northern Trust seeks to deliver a level of service to its clients that distinguishes it from its competitors. In addition, Northern Trust emphasizes the development and growth of recurring sources of fee-based income and is one of only six major bank holding companies in the United States that generates more revenues from fee-based services than from net interest income. Northern Trust seeks to develop and expand its recurring fee-based revenue by identifying selected market niches and providing a high level of individualized service to its clients in such markets. Northern Trust also seeks to preserve its asset quality through established credit review procedures and to maintain a conservative balance sheet. Finally, Northern Trust seeks to maintain a strong management team with senior officers having broad experience and long tenure. Active competition exists in all principal areas in which the subsidiaries are presently engaged. CIS and PFS compete with domestic and foreign financial institutions, trust companies, financial companies, personal loan companies, mutual funds and investment advisers. Northern Trust is a leading provider of Master Trust and Master Custody services and has the leading market share in the Chicago area personal trust market. ================================================================================ 6 ================================================================================ Commercial Banking and Treasury Management Services compete with domestic and foreign financial institutions, finance companies and leasing companies. Its products also face increased competition due to the general trend among corporations and other institutions to rely more upon direct access to the credit and capital markets (such as through the direct issuance of commercial paper) and less upon commercial banks and other traditional financial intermediaries. The chief local competitors of the Bank for trust and banking business are Bank of America Illinois N.A., The First National Bank of Chicago and its affiliate American National Bank and Trust Company of Chicago, Harris Trust and Savings Bank, and LaSalle National Bank. The chief national competitors of the Bank for Master Trust/Master Custody services are Mellon Bank Corporation, State Street Boston Corporation, Bankers Trust New York Corporation, Chase Manhattan Corporation and Bank of New York Company, Inc. REGULATION AND SUPERVISION The Corporation is a bank holding company subject to the Bank Holding Company Act of 1956, as amended (Act), and to regulation by the Board of Governors of the Federal Reserve System. The Act limits the activities which may be engaged in by the Corporation and its nonbanking subsidiaries to those so closely related to banking or managing or controlling banks as to be a proper incident thereto. Also, under section 106 of the 1970 amendments to the Act and the Federal Reserve Board's regulations, a bank holding company, as well as certain of its subsidiaries, is prohibited from engaging in certain tie-in arrangements in connection with any extension of credit or provision of any property or services. The Act also prohibits bank holding companies from acquiring substantially all the assets of or owning more than 5% of the voting shares of any bank or nonbanking company which is not already majority owned without prior approval of the Board of Governors. No application to acquire shares or assets of a bank located outside the state in which the operations of a bank holding company's banking subsidiaries are principally conducted may be approved by the Federal Reserve Board unless such acquisition is specifically authorized by a statute of the state in which the bank to be acquired is located. Illinois law permits bank holding companies located in any state of the United States to acquire banks or bank holding companies located in Illinois subject to regulatory determinations that the laws of the other state permit Illinois bank holding companies to acquire banks and bank holding companies within that state on qualifications and conditions not unduly restrictive compared to those imposed by Illinois law. Subject to these regulatory determinations, the Corporation may acquire banks and bank holding companies in such states, and bank holding companies in those states may acquire banks and bank holding companies in Illinois. Applicable laws also permit the Corporation to acquire banks or bank holding companies in Arizona, California, Texas, Florida and certain other states. Illinois law permits an Illinois bank holding company to acquire banks anywhere in the state. Illinois legislation also now allows Illinois banks to open branches anywhere within Illinois. Beginning September 29, 1995 the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (Interstate Act) permits an adequately capitalized and adequately managed bank holding company to acquire, with Federal Reserve Board approval, a bank located in a state other than the bank company's home state, without regard to whether the transaction is permitted under any state law, except that a host state may establish by statute the minimum age of its banks (up to a maximum of 5 years) subject to acquisition by out-of-state bank holding companies. The Federal Reserve Board may not approve the acquisition if the applicant bank holding company, upon consummation, would control more than 10% of total U.S. insured depository institution deposits or more than 30% of the host state's total insured depository institutions deposits. Effective as of September 29, 1994, the Interstate Act permits a bank, with the approval of the appropriate Federal bank regulatory agency, to establish a de novo branch in a state, other than the bank's home state, in which the bank does not presently maintain a branch if the host state has enacted a law that applies equally to all banks and expressly permits all out-of-state banks to branch de novo into the host state. Commencing June 1, 1997, banks having different home states may, with approval of the appropriate Federal bank regulatory agency, merge across state lines, unless the home state of a participating bank has opted-out. The Interstate Act permits as of September 29, 1995 any bank subsidiary of a bank holding company to receive deposits, renew time deposits, close loans, service loans and receive payments on loans and other obligations as agent for a bank or thrift affiliate, whether such affiliate is located in a different state or in the same state. The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) amended the Act to authorize the Federal Reserve Board to allow bank holding companies to acquire any savings association (whether healthy, failed or failing) and removed "tandem operations" restrictions, which previously prohibited savings associations from being operated in tandem with a bank holding company's other subsidiaries. As a result, bank holding companies now have expanded opportunities to acquire savings associations. Under FIRREA, an insured depository institution which is commonly controlled with another insured depository institution shall generally be liable for any loss incurred, or reasonably anticipated to be incurred, by the Federal Deposit Insurance Corporation (FDIC) in connection with the default of such commonly controlled institution, or for any assistance ================================================================================ 7 ================================================================================ provided by the FDIC to such commonly controlled institution, which is in danger of default. The term "default" is defined to mean the appointment of a conservator or receiver for such institution. Thus, any of the Corporation's banking subsidiaries could incur liability to the FDIC pursuant to this statutory provision in the event of a loss suffered by the FDIC in connection with any of the Corporation's other banking subsidiaries (whether due to a default or the provision of FDIC assistance). Although neither the Corporation nor any of its nonbanking subsidiaries may be assessed for such loss under FIRREA, the Corporation has agreed to indemnify each of its banking subsidiaries, other than the Bank, for any payments a banking subsidiary may be liable to pay to the FDIC pursuant to the provisions of FIRREA. The Bank is a member of the Federal Reserve System, its deposits are insured by the FDIC and it is subject to regulation by both these entities, as well as by the Illinois Commissioner of Banks and Trust Companies. The Bank is also a member of and subject to the rules of the Chicago Clearinghouse Association, and is registered as a government securities dealer in accordance with the Government Securities Act of 1986. As a government securities dealer its activities are subject to the rules and regulations of the Department of the Treasury. The Bank is registered as a transfer agent with the Federal Reserve and is therefore subject to the rules and regulations of the Federal Reserve. The national bank subsidiaries are members of the Federal Reserve System and the FDIC and are subject to regulation by the Comptroller of the Currency. Northern Trust Bank/DuPage, a state chartered institution that is not a member of the Federal Reserve System, is regulated by the FDIC and the Illinois Commissioner of Banks and Trust Companies. The Corporation's nonbanking affiliates are all subject to examination by the Federal Reserve. In addition, The Northern Trust Company of New York is subject to regulation by the Banking Department of the State of New York. Northern Futures Corporation is registered as a futures commission merchant with the Commodity Futures Trading Commission, is a member of the National Futures Association, the Chicago Board of Trade and the Board of Trade Clearing Corporation, and is a clearing member of the Chicago Mercantile Exchange. Northern Trust Securities, Inc. is registered with the Securities and Exchange Commission and is a member of the National Association of Securities Dealers, Inc., and, as such, is subject to the rules and regulations of both these bodies. Berry, Hartell, Evers & Osborne, Inc. is registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940 and is subject to that Act and the rules and regulations of the Commission promulgated thereunder. Two families of mutual funds for which the Bank acts as investment adviser are also subject to regulation by the Securities and Exchange Commission under the Investment Company Act. Various other subsidiaries and branches conduct business in other states and foreign countries and, therefore, may be subject to their regulations and restrictions. The Corporation and its subsidiaries are affiliates within the meaning of the Federal Reserve Act so that the banking subsidiaries are subject to certain restrictions with respect to loans to the Corporation or its nonbanking subsidiaries and certain other transactions with them or involving their securities. Information regarding dividend restrictions on banking subsidiaries is incorporated herein by reference to Note 12 titled Restrictions on Subsidiary Dividends and Loans or Advances on page 59 of the Corporation's Annual Report to Stockholders for the year ended December 31, 1994. Under the FDIC's risk-based insurance assessment system, each insured bank is placed in one of nine risk categories based on its level of capital and other relevant information. Each insured bank's insurance assessment rate is then determined by the risk category in which it has been classified by the FDIC. There is an eight basis point spread between the highest and lowest assessment rates, so that banks classified as strongest by the FDIC are subject to a rate of .23%, and banks classified as weakest by the FDIC are subject to a rate of .31%. The FDIC is prohibited from lowering the average assessment rate below .23% until the Bank Insurance Fund (Fund) has reached a reserve ratio of 1.25%. The FDIC currently estimates the Fund will achieve the designated reserve ratio in 1995 and has proposed significant reductions in assessment rates. The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) substantially revised the bank regulatory and funding provisions of the Federal Deposit Insurance Act and made revisions to several other federal banking statutes. In general, FDICIA subjects banks to significantly increased regulation and supervision. Among other things, FDICIA requires federal bank regulatory authorities to take "prompt corrective action" with respect to banks that do not meet minimum capital requirements, and imposes certain restrictions upon banks which meet minimum capital requirements but are not "well capitalized" for purposes of FDICIA. FDICIA and the regulations adopted under it establish five capital categories as follows, with the category for any institution determined by the lowest of any of these ratios: ================================================================================ 8 ================================================================================ Tier 1 Tier 1 Total Leverage Ratio Risk-Based Ratio Risk-Based Ratio -------------- ---------------- ---------------- Well Capitalized 5% or above 6% or above 10% or above Adequately Capitalized 4% or above* 4% or above 8% or above Undercapitalized Less than 4% Less than 4% Less than 8% Significantly Undercapitalized Less than 3% Less than 3% Less than 6% Critically Undercapitalized - - 2% or below *3% for banks with the highest CAMEL (supervisory) rating. An insured depository institution may be deemed to be in a capital category that is lower than is indicated by the capital position reflected on its balance sheet if it receives an unsatisfactory rating by its examiners with respect to its assets, management, earnings or liquidity. Although a bank's capital categorization thus depends upon factors in addition to the balance sheet ratios in the table above, the Corporation has set capital goals for each of its subsidiary banks that would allow each bank to meet the minimum ratios that are one of the conditions for it to be considered to be well capitalized. At December 31, 1994, the Bank and each of the other subsidiary banks met or exceeded these goals. The capital ratios are disclosed and discussed on page 44 of the Corporation's Annual Report to Stockholders for the year ended December 31, 1994. Under FDICIA, a bank that is not well capitalized is generally prohibited from accepting or renewing brokered deposits and offering interest rates on deposits significantly higher than the prevailing rate in its normal market area or nationally (depending upon where the deposits are solicited); in addition, "pass through" insurance coverage may not be available for certain employee benefit accounts. FDICIA generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. Undercapitalized banks are subject to limitations on growth and are required to submit a capital restoration plan, which must be guaranteed by the institution's parent company. Institutions that fail to submit an acceptable plan, or that are significantly undercapitalized, are subject to a host of more drastic regulatory restrictions and measures. FDICIA directs that each federal banking agency prescribe standards for depository institutions or depository institutions' holding companies relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, a maximum ratio of classified assets to capital, minimum earnings sufficient to absorb losses and other standards as they deem appropriate. Many regulations implementing these directives have been proposed and adopted by the agencies. FDICIA also contains a variety of other provisions that may affect the operations of a bank, including new reporting requirements, regulatory standards for real estate lending, "truth in savings" provisions and a requirement that a depository institution give 90 days' prior notice to customers and regulatory authorities before closing any branch. STAFF Northern Trust employed 6,608 full-time equivalent officers and staff members as of December 31, 1994, approximately 4,800 of whom were employed by the Bank. ================================================================================ 9 ================================================================================ STATISTICAL DISCLOSURES The following statistical disclosures, included in the Corporation's Annual Report to Stockholders for the year ended December 31, 1994, are incorporated herein by reference. 1994 ANNUAL REPORT SCHEDULE PAGE(S) ___________________________________________________ _____________ Foreign Outstandings.............................. ......... 37 Nonperforming Assets and 90 Day Past Due Loans.... ......... 37 Analysis of Reserve for Credit Losses............. ......... 38 Average Balance Sheet............................. ......... 72 Ratios............................................ ......... 72 Analysis of Net Interest Income................... .... 74 & 75 ___________________________________________________ _____________ Additional statistical information on a consolidated basis is set forth below. REMAINING MATURITY AND AVERAGE YIELD OF SECURITIES HELD TO MATURITY AND AVAILABLE FOR SALE (Yield on a taxable equivalent basis giving effect of the federal and state tax rates)
December 31, 1994 ------------------------------------------------------------------------------------------ One Year or Less One to Five Years Five to Ten Years Over Ten Years ---------------- ----------------- ----------------- --------------- Average ($ in Millions) Book Yield Book Yield Book Yield Book Yield Maturity ------------------------------------ -------- ----- -------- ------ -------- ----- -------- ----- --------- Securities Held to Maturity U.S. Government $ 137.2 5.79% $ -- --% $ -- --% $ -- --% 3 mos. Obligations of States and Political Subdivisions 103.7 12.87 155.4 11.79 137.1 10.93 78.3 9.56 64 mos. Other--Fixed 7.7 8.64 2.7 9.69 .2 10.52 16.6 6.05 79 mos. --Floating .2 8.00 2.0 8.00 .2 8.00 -- -- 36 mos. ------------------------------------ -------- ----- ------ ----- ------ ----- ------ ----- -------- Total Securities Held to Maturity $ 248.8 8.83% $160.1 11.70% $137.5 10.92% $ 94.9 8.95% 52 mos. ------------------------------------ -------- ----- ------ ----- ------ ----- ------ ----- -------- Securities Available for Sale U.S. Government $ 459.1 4.89% $342.2 5.08% $ -- --% $ -- --% 12 mos. Federal Agency 2,861.7 6.30 304.6 6.21 83.0 6.14 2.2 6.14 6 mos. Other--Fixed 54.7 4.99 67.5 5.28 -- -- -- -- 15 mos. --Floating 30.6 6.73 11.1 6.25 6.4 6.18 184.7 6.79 114 mos. ------------------------------------ -------- ----- ------ ----- ------ ----- ------ ----- -------- Total Securities Available for Sale $3,406.1 6.09% $725.4 5.58% $ 89.4 6.14% $186.9 6.78% 13 mos. ------------------------------------ -------- ----- ------ ----- ------ ----- ------ ----- -------- December 31, 1993 ------------------------------------------------------------------------------------------ One Year or Less One to Five Years Five to Ten Years Over Ten Years ---------------- ----------------- ----------------- --------------- Average ($ in Millions) Book Yield Book Yield Book Yield Book Yield Maturity ------------------------------------ -------- ----- -------- ------ -------- ----- -------- ----- --------- Securities Held to Maturity U.S. Government $1,934.4 3.61% $364.7 4.37% $ 44.6 5.60% $ -- --% 8 mos. Obligations of States and Political Subdivisions 42.9 12.03 204.9 12.44 144.3 11.21 101.4 10.19 68 mos. Federal Agency 405.6 3.59 388.0 3.91 38.2 3.76 1.3 3.76 19 mos. Other--Fixed 21.5 6.64 12.3 4.60 .2 10.40 16.6 6.05 50 mos. --Floating 27.2 4.15 28.0 4.12 4.4 4.08 10.3 8.72 43 mos. ------------------------------------ -------- ----- ------ ----- ------ ----- ------ ----- -------- Total Securities Held to Maturity $2,431.6 3.78% $997.9 5.84% $231.7 8.76% $129.6 9.48% 19 mos. ------------------------------------ -------- ----- ------ ----- ------ ----- ------ ----- -------- Total Securities Available for Sale* $ 11.2 7.24% $ 25.5 6.73% $ 18.5 6.68% $156.4 4.56% 111 mos. ------------------------------------ -------- ----- ------ ----- ------ ----- ------ ----- --------
================================================================================ *Prior to 1994, securities shown as Available for Sale were classified as Held for Sale and carried at the lower of cost or fair value. ================================================================================ 10 ================================================================================
SECURITIES HELD TO MATURITY AND AVAILABLE FOR SALE December 31 --------------------------------------------------------- (In Millions) 1994 1993 1992 1991 1990 --------------------------------------------------------------- --------- -------- -------- -------- -------- Securities Held to Maturity U.S. Government $ 137.2 $2,343.7 $1,522.8 $1,822.2 $ 295.0 Obligations of States and Political Subdivisions 474.5 493.5 508.5 526.1 535.5 Federal Agency -- 833.1 559.2 293.1 563.5 Other 29.6 120.5 189.0 473.3 800.4 --------------------------------------------------------------- -------- -------- -------- -------- -------- Total Securities Held to Maturity $ 641.3 $3,790.8 $2,779.5 $3,114.7 $2,194.4 --------------------------------------------------------------- -------- -------- -------- -------- -------- Securities Available for Sale U.S. Government $ 801.3 $ -- $ 227.6 $ -- $ -- Federal Agency 3,251.5 40.9 46.1 -- -- Other 355.0 170.7 126.4 -- -- --------------------------------------------------------------- -------- -------- -------- -------- -------- Total Securities Available for Sale $4.407.8 $ 211.6 $ 400.1 $ -- $ -- --------------------------------------------------------------- -------- -------- -------- -------- -------- Average Total Securities $5,000.9 $4,232.0 $3,190.3 $2,499.8 $2,396.6 --------------------------------------------------------------- -------- -------- -------- -------- -------- Total Securities at Year-End $5,053.1 $4,038.7 $3,181.2 $3,174.9 $2,229.6 --------------------------------------------------------------- -------- -------- -------- -------- -------- ============================================================================================================================== LOANS AND LEASES BY TYPE December 31 --------------------------------------------------------- (In Millions) 1994 1993 1992 1991 1990 --------------------------------------------------------------- --------- -------- -------- -------- -------- Domestic Commercial $2,672.0 $2,421.1 $2,409.0 $2,719.4 $2,596.0 Broker 274.6 249.4 336.3 336.0 83.2 Residential Real Estate 3,299.1 2,883.3 2,372.8 1,793.6 1,472.1 Commercial Real Estate 494.1 506.5 511.2 515.0 608.0 Consumer 662.1 617.5 505.9 449.7 334.3 Other 642.1 453.5 392.0 37.2 92.4 Lease Financing 159.9 138.4 135.2 120.7 97.4 --------------------------------------------------------------- -------- -------- -------- -------- -------- Total Domestic 8,203.9 7,269.7 6,662.4 5,971.6 5,283.4 International 386.7 353.3 273.5 308.1 252.9 --------------------------------------------------------------- -------- -------- -------- -------- -------- Total Loans and Leases $8,590.6 $7,623.0 $6,935.9 $6,279.7 $5,536.3 --------------------------------------------------------------- -------- -------- -------- -------- -------- Average Loans and Leases $8,316.1 $7,297.1 $6,452.9 $6,199.4 $5,847.7 --------------------------------------------------------------- -------- -------- -------- -------- -------- ============================================================================================================================== REMAINING MATURITY OF SELECTED LOANS AND LEASES December 31, 1994 --------------------------------------------------- One Year One to Over Five (In Millions) Total or Less Five Years Years --------------------------------------------------------------- -------- --------- ---------- --------- Domestic (Excluding Residential Real Estate and Consumer Loans) Commercial $2,672.0 $1,911.0 $614.5 $146.5 Commercial Real Estate 494.1 187.1 238.8 68.2 Other 916.7 903.4 11.2 2.1 Lease Financing 159.9 27.7 78.2 54.0 --------------------------------------------------------------- -------- -------- ------ ------ Total Domestic 4,242.7 3,029.2 942.7 270.8 International 386.7 345.6 36.4 4.7 --------------------------------------------------------------- -------- -------- ------ ------ Total Selected Loans and Leases $4,629.4 $3,374.8 $979.1 $275.5 --------------------------------------------------------------- -------- -------- ------ ------ Interest Rate Sensitivity of Loans and Leases Fixed Rate $3,451.5 $2,588.9 $647.0 $215.6 Variable Rate 1,177.9 785.9 332.1 59.9 --------------------------------------------------------------- -------- -------- ------ ------ Total $4,629.4 $3,374.8 $979.1 $275.5 --------------------------------------------------------------- -------- -------- ------ ------ ========================================================================================================================= =========================================================================================================================
11 =============================================================================== AVERAGE DEPOSITS BY TYPE
(In Millions) 1994 1993 1992 1991 1990 ---------------------------------------------- ---------- ---------- --------- --------- --------- Domestic Offices Demand and Noninterest-Bearing Individuals, Partnerships and Corporations $ 1,540.4 $ 1,487.5 $1,354.1 $1,191.8 $1,126.4 Correspondent Banks 192.2 201.1 199.6 182.9 188.6 Other 859.9 866.3 322.3 261.1 282.2 ---------------------------------------------- ---------- ---------- --------- --------- --------- Total $ 2,592.5 $ 2,554.9 $1,876.0 $1,635.8 $1,597.2 ---------------------------------------------- ---------- ---------- --------- --------- --------- Time Savings and Money Market Deposits $ 3,385.7 $ 3,432.1 $3,372.2 $3,208.1 $2,975.9 Savings Certificates less than $100,000 699.9 668.6 732.6 835.7 790.0 Savings Certificates $100,000 and more 529.7 504.3 638.2 734.0 666.9 Other Certificates 412.8 404.7 493.9 533.1 520.8 ---------------------------------------------- ---------- ---------- --------- --------- --------- Total $ 5,028.1 $ 5,009.7 $5,236.9 $5,310.9 $4,953.6 ---------------------------------------------- ---------- ---------- --------- --------- --------- Total Domestic Offices $ 7,620.6 $ 7,564.6 $7,112.9 $6,946.7 $6,550.8 ---------------------------------------------- ---------- ---------- --------- --------- --------- Foreign Offices Demand $ 361.7 $ 65.3 $ 56.2 $ 41.8 $ 81.8 Time 3,284.8 2,436.4 1,815.6 1,100.6 1,105.6 ---------------------------------------------- ---------- ---------- --------- --------- --------- Total Foreign Offices $ 3,646.5 $ 2,501.7 $1,871.8 $1,142.4 $1,187.4 ---------------------------------------------- ---------- ---------- --------- --------- --------- Total Deposits $11,267.1 $10,066.3 $8,984.7 $8,089.1 $7,738.2 ---------------------------------------------- ---------- ---------- --------- --------- --------- ====================================================================================================================
AVERAGE RATES PAID ON TIME DEPOSITS BY TYPE
1994 1993 1992 1991 1990 ---------------------------------------------- ---------- ---------- --------- --------- --------- Time Deposits Savings and Money Market Deposits 2.52% 2.30% 2.94% 4.96% 6.54% Savings Certificates less than $100,000 4.77 4.61 5.46 6.47 7.76 Savings Certificates $100,000 and more 4.45 3.91 4.68 6.85 8.05 Other Certificates 4.50 3.88 5.15 7.19 8.18 ---------------------------------------------- ---------- ---------- --------- --------- --------- Total Domestic Offices 3.20 2.89 3.71 5.68 7.11 ---------------------------------------------- ---------- ---------- --------- --------- --------- Total Foreign Offices Time 4.18 3.71 5.27 8.05 9.90 ---------------------------------------------- ---------- ---------- --------- --------- --------- Total Time Deposits 3.58% 3.16% 4.11% 6.09% 7.62% ---------------------------------------------- ---------- ---------- --------- --------- --------- ====================================================================================================================
REMAINING MATURITY OF TIME DEPOSITS $100,000 AND MORE
DECEMBER 31, 1994 December 31, 1993 ------------------------------------ ----------------------------------- DOMESTIC OFFICES Domestic Offices ----------------------- ----------------------- CERTIFICATES OTHER FOREIGN Certificates Other Foreign (In Millions) OF DEPOSIT TIME OFFICES of Deposit Time Offices --------------------------------- ------------- ------ -------- ------------- ------ --------- 3 Months or Less $ 515.2 $ 2.0 $3,806.1 $399.1 $ 1.0 $2,716.6 Over 3 through 6 Months 162.4 1.5 40.7 163.1 2.2 18.2 Over 6 through 12 Months 137.9 4.0 7.7 95.9 2.0 4.4 Over 12 Months 172.8 7.6 3.6 140.2 5.3 -- --------------------------------- ------------- ------ -------- ------------- ------ --------- Total $ 988.3 $15.1 $3,858.1 $798.3 $10.5 $2,739.2 --------------------------------- ============= ====== ======== ------------- ------ --------- ======================================================================================================================
12 ================================================================================
PURCHASED FUNDS Federal Funds Purchased (Overnight Borrowings) ($ in Millions) 1994 1993 1992 ---------------------------------------------- -------- -------- -------- Balance on December 31 $ 972.0 $1,215.8 $2,034.2 Highest Month-End Balance 1,595.9 2,311.5 2,034.2 Year--Average Balance 1,350.7 1,692.5 1,540.2 --Average Rate 4.11% 3.02% 3.47% Average Rate at Year-End 4.26 2.82 3.12 ---------------------------------------------- -------- -------- -------- Securities Sold under Agreements to Repurchase ($ in Millions) 1994 1993 1992 ---------------------------------------------- -------- -------- -------- Balance on December 31 $2,216.9 $ 602.2 $ 282.3 Highest Month-End Balance 2,777.1 1,571.2 1,052.2 Year--Average Balance 1,444.3 664.4 542.9 --Average Rate 4.28% 3.00% 3.65% Average Rate at Year-End 5.08 2.81 3.18 ---------------------------------------------- -------- -------- -------- Other Borrowings (Includes Treasury Tax and Loan Demand Notes and Term Federal Funds Purchased) ($ in Millions) 1994 1993 1992 ---------------------------------------------- -------- -------- -------- Balance on December 31 $ 833.6 $2,001.2 $ 672.8 Highest Month-End Balance 2,982.2 2,620.7 1,782.8 Year--Average Balance 864.5 868.9 526.6 --Average Rate 3.75% 2.83% 3.45% Average Rate at Year-End 4.83 2.85 2.61 ---------------------------------------------- -------- -------- -------- Total Purchased Funds ($ in Millions) 1994 1993 1992 ---------------------------------------------- -------- -------- -------- Balance on December 31 $4,022.5 $3,819.2 $2,989.3 Year--Average Balance 3,659.5 3,225.8 2,609.7 --Average Rate 4.09% 2.96% 3.50% ---------------------------------------------- -------- -------- -------- ================================================================================ Commercial Paper ($ in Millions) 1994 1993 1992 ---------------------------------------------- -------- -------- -------- Balance on December 31 $123.8 $124.1 $127.0 Highest Month-End Balance 172.3 167.6 163.1 Year--Average Balance 138.1 131.5 132.9 --Average Rate 4.31% 3.23% 3.88% Average Rate at Year-End 5.73 3.19 3.62 ---------------------------------------------- -------- -------- -------- ================================================================================
================================================================================ 13
==================================================================================================================================== CHANGES IN NET INTEREST INCOME 1994/93 1993/92 ------------------------------ ------------------------------ Change Due To Change Due To (Interest on a taxable equivalent basis) ------------------- ------------------- (In Millions) Volume Rate Total Volume Rate Total ----------------------------------------------------------------- -------- -------- -------- -------- -------- -------- Increase (Decrease) In Interest Income Money Market Assets Federal Funds Sold and Repurchase Agreements $ 3.0 $ 2.4 $ 5.4 $ (2.2) $ (1.1) $ (3.3) Time Deposits with Banks 5.0 6.3 11.3 14.9 (24.0) (9.1) Other 2.0 .6 2.6 (1.1) (.9) (2.0) Securities U.S. Government (35.9) 7.2 (28.7) 34.6 (22.4) 12.2 Obligations of States and Political Subdivisions (4.2) (1.6) (5.8) (1.6) 1.0 (.6) Federal Agency 76.3 8.2 84.5 9.7 (3.9) 5.8 Other 4.8 1.2 6.0 (4.8) (4.5) (9.3) Trading Account 2.0 .1 2.1 1.0 .2 1.2 Loans and Leases 61.7 2.5 64.2 51.2 (60.0) (8.8) ----------------------------------------------------------------- -------- -------- -------- -------- -------- -------- Total $114.7 $26.9 $141.6 $101.7 $(115.6) $(13.9) ----------------------------------------------------------------- -------- -------- -------- -------- -------- -------- Increase (Decrease) In Interest Expense Deposits Savings and Money Market Deposits $ (1.2) $ 7.7 $ 6.5 $ 1.4 $(21.7) $(20.3) Savings Certificates 2.6 3.8 6.4 (8.5) (10.9) (19.4) Other Time .4 2.5 2.9 (3.4) (6.3) (9.7) Foreign Offices Time 35.5 11.3 46.8 23.0 (28.3) (5.3) Federal Funds Purchased (14.0) 18.4 4.4 4.6 (7.0) (2.4) Repurchase Agreements 33.4 8.5 41.9 3.7 (3.5) .2 Commercial Paper .2 1.4 1.6 (.1) (.8) (.9) Other Borrowings (.2) 8.0 7.8 9.7 (3.2) 6.5 Senior Medium-Term Notes 9.9 5.5 15.4 15.5 (.1) 15.4 Notes Payable (.3) -- (.3) 3.0 (.7) 2.3 ----------------------------------------------------------------- -------- -------- -------- -------- -------- -------- Total 66.3 67.1 133.4 48.9 (82.5) (33.6) ----------------------------------------------------------------- -------- -------- -------- -------- -------- -------- Increase (Decrease) In Net Interest Income $ 48.4 $(40.2) $ 8.2 $52.8 $(33.1) $ 19.7 ----------------------------------------------------------------- -------- -------- -------- -------- -------- -------- Note: Changes not due only to volume changes or rate changes are included in the change due to volume column. ====================================================================================================================================
INTERNATIONAL OPERATIONS (BASED ON OBLIGOR'S DOMICILE) See also Note 21 titled International Operations on pages 66 and 67 of the Corporation's Annual Report to Stockholders for the year ended December 31, 1994, which is incorporated herein by reference. Selected Average Assets and Liabilities Attributable to International Operations (In Millions) 1994 1993 1992 1991 1990 1989 ----------------------------------------------------------------- -------- -------- -------- -------- -------- -------- Total Assets $2,820.5 $2,328.8 $2,033.0 $1,709.2 $1,297.5 $1,007.4 ----------------------------------------------------------------- -------- -------- -------- -------- -------- -------- Time Deposits with Banks 2,063.1 1,956.7 1,618.6 1,323.4 889.1 582.1 Other Money Market Assets .4 .9 38.8 3.2 2.7 7.8 Loans 445.5 279.9 287.6 299.4 310.0 327.4 Customers' Acceptance Liability 3.0 4.8 3.8 10.2 11.2 18.3 Foreign Investments 21.6 29.8 31.4 30.3 30.8 26.2 ----------------------------------------------------------------- -------- -------- -------- -------- -------- -------- Total Liabilities $4,089.4 $2,715.0 $2,125.3 $1,278.2 $1,364.0 $1,133.9 ----------------------------------------------------------------- -------- -------- -------- -------- -------- -------- Deposits 4,010.6 2,706.2 2,099.0 1,214.7 1,287.5 1,032.0 Liability on Acceptances 3.0 4.8 3.8 10.3 11.2 18.3 ----------------------------------------------------------------- -------- -------- -------- -------- -------- -------- ==================================================================================================================================== ====================================================================================================================================
14 ================================================================================ PERCENT OF INTERNATIONAL RELATED AVERAGE ASSETS AND LIABILITIES TO TOTAL CONSOLIDATED AVERAGE ASSETS
1994 1993 1992 1991 1990 ----------------------------- -------- -------- -------- -------- -------- Assets 16% 15% 15% 14% 11% ----------------------------- -------- -------- -------- -------- -------- Liabilities 23 17 16 11 12 ----------------------------- -------- -------- -------- -------- -------- ================================================================================
RESERVE FOR CREDIT LOSSES RELATING TO INTERNATIONAL OPERATIONS
(In Millions) 1994 1993 1992 1991 1990 ----------------------------- -------- -------- -------- -------- -------- Balance at Beginning of Year $ 6.7 $5.3 $ 6.9 $7.0 $ 21.3 Charge-Offs -- (.6) (6.0) -- (1.1) Recoveries -- .1 .4 .1 2.2 Provision for Credit Losses (2.1) 1.9 4.0 (.2) (15.4) ----------------------------- -------- -------- -------- -------- -------- Balance at End of Year $ 4.6 $6.7 $ 5.3 $6.9 $ 7.0 ----------------------------- -------- -------- -------- -------- --------
The Securities and Exchange Commission requires the disclosure of the reserve for credit losses that is applicable to international operations. The above table has been prepared in compliance with this disclosure requirement and is used in determining international operating performance. In 1990 the remaining $13.1 million of the reserve designated for loans to less developed countries was transferred to the general unallocated portion of the reserve for credit losses. The amounts shown in the table should not be construed as being the only amounts that are available for international loan charge-offs, since the entire reserve for credit losses is available to absorb losses on both domestic and international loans. In addition, these amounts are not intended to be indicative of future charge-off trends. ================================================================================ DISTRIBUTION OF INTERNATIONAL LOANS AND DEPOSITS BY TYPE
December 31 ------------------------------------------------ Loans 1994 1993 1992 1991 1990 ----------------------------- -------- -------- -------- -------- -------- Commercial $ 233.8 $157.9 $122.3 $166.9 $146.0 Foreign Governments and Official Institutions 72.8 47.1 26.4 27.3 10.7 Banks 77.0 145.9 121.9 113.8 95.9 Other 3.1 2.4 2.9 .1 .3 ----------------------------- -------- -------- -------- -------- -------- Total $ 386.7 $353.3 $273.5 $308.1 $252.9 ----------------------------- -------- -------- -------- -------- -------- December 31 ------------------------------------------------ Deposits 1994 1993 1992 ----------------------------- -------- -------- -------- Commercial $2,817.2 $2,378.0 $1,195.1 Foreign Governments and Official Institutions 803.8 263.2 353.6 Banks 485.2 410.8 367.8 Other Time 182.4 200.4 159.2 Other Demand 8.4 6.6 80.3 ----------------------------- -------- -------- -------- Total $4,297.0 $3,259.0 $2,156.0 ----------------------------- -------- -------- -------- ================================================================================
================================================================================ 15 ================================================================================ CREDIT RISK MANAGEMENT Overview The Credit Policy function reports to the 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 and ensuring their uniform application. These activities are designed to ensure that credit exposure is diversified on an industry and client basis, thus lessening the overall credit risk. Individual credit authority for commercial loans and within Personal Financial Services is limited to specified amounts and maturities. Credit decisions involving commitment exposure in excess of the specified individual limits are submitted to the appropriate Group 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, dependent upon the internal credit rating, the approval of the Credit Policy Credit Approval Committee, the head of Credit Policy, or the business unit head. Credit Policy established the Counterparty Risk Management Committee in order to manage counterparty risk more effectively. This committee has sole credit authority for exposure to all foreign banks, certain domestic banks which Credit Policy deems to be counterparties and which do not have commercial credit relationships within the Corporation, and other organizations which Credit Policy deems to be counterparties. Under the auspices of Credit Policy, country exposure limits are reviewed and approved on a country-by-country basis. As part of the Corporation's ongoing credit granting process, internal credit ratings are assigned to each client and credit before credit is extended, based on creditworthiness. Credit Policy performs at least annually a review of selected significant credit exposures to identify at the earliest possible stages clients who might be facing financial difficulties. Internal credit ratings are also reviewed during this process. Above average risk loans, which will vary from time to time, receive special attention by both lending officers and Credit Policy. This approach allows management to take remedial action in an effort to deal with potential problems. An integral part of the Credit Policy function is a monthly 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. The provision is reviewed quarterly to determine the amount necessary to maintain an adequate reserve for credit losses. Management of credit risk is reviewed by various bank regulatory agencies. Independent auditors also perform a review of credit-related procedures, the loan portfolio and other extensions of credit, and the reserve for credit losses as part of their audit of the consolidated financial statements. Allocation of the Reserve for Credit Losses The reserve for credit losses is established and maintained on an overall basis and in practice is not specifically allocated to specific loans or segments of the portfolio. Thus, the reserve is available to absorb credit losses from all loans, leases and credit related exposures. Bank disclosure guidelines issued by the Securities and Exchange Commission request management to furnish a breakdown of the reserve for credit losses by loan category and provide the percentage of loans in each category to total loans. In prior years, the allocation of the reserve represented an estimate of the amount that was necessary to provide for potential losses related to specific nonperforming loans only. Beginning in 1994, the methodology was revised to allocate the reserve for credit losses associated with all loans, leases and commitments based on historical loss experience, internal credit ratings and specific amounts designated for certain above average risk loans. This allocation method should not be interpreted as an indication of expected losses within the next year or any specified time period. ================================================================================ 16 ================================================================================ As required by the Securities and Exchange Commission, the following tables break down the reserve for credit losses at December 31, 1990 through 1994: Reserve for Credit Losses
(In Millions) 1994 --------------------------------------- ------ Allocated Reserve Commercial $ 86.0 Residential Real Estate 5.0 Commercial Real Estate 12.0 Consumer 6.0 International 3.0 Unallocated Reserve 32.8 --------------------------------------- ------ Total Reserve $144.8 --------------------------------------- ------ ================================================================================
Reserve for Credit Losses
(In Millions) 1993 1992 1991 1990 ---------------------------------------- ------ ------ ------ ------ Allocated Reserve on Nonperforming Loans $ .2 $ 11.0 $ 5.3 $ 8.7 Unallocated Reserve 145.3 134.5 140.4 139.3 ---------------------------------------- ------ ------ ------ ------ Total Reserve $145.5 $145.5 $145.7 $148.0 --------------------------------------- ------ ------ ------ ------ ================================================================================
Loan and lease categories as a percent of total loans and leases as of December 31, 1990 through 1994, are presented below. Loan and Lease Category to Total Loans and Leases
1994 1993 1992 1991 1990 --------------------------------------- ------ ------ ------ ------ ------ Loan and Lease Category Commercial 32% 33% 37% 45% 49% Residential Real Estate 38 38 34 29 27 Commercial Real Estate 6 7 7 8 11 Consumer 8 8 7 7 6 Other 11 9 11 6 3 International 5 5 4 5 4 --------------------------------------- ------ ------ ------ ------ ------ Total 100% 100% 100% 100% 100% --------------------------------------- ------ ------ ------ ------ ------ ================================================================================
================================================================================ 17 ================================================================================ The information presented in the "Credit Risk Management" section should be read in conjunction with the following information that is incorporated herein by reference to the Corporation's Annual Report to Stockholders for the year ended December 31, 1994: 1994 Annual Report Notes to Consolidated Financial Statements Page(s) ---------------------------------------------------------------- ------------- 1. Accounting Policies D. Interest Risk Management Instruments..................... ...........50 E. Loans and Leases......................................... ......50 & 51 F. Reserve for Credit Losses................................ ...........51 I. Other Real Estate Owned.................................. ...........51 4. Loans and Leases............................................ ...........54 5. Reserve for Credit Losses................................... ...........55 15. Contingent Liabilities...................................... ...........61 17. Off-Balance Sheet Financial Instruments..................... ........63-66 ---------------------------------------------------------------- Management's Discussion and Analysis of Financial Condition and Results of Operations ---------------------------------------------------------------- Asset Quality and Credit Risk................................... ........34-39 ---------------------------------------------------------------- ------------- In addition, the following schedules on page 15 of this Form 10-K should be read in conjunction with the "Credit Risk Management" section: Reserve for Credit Losses Relating to International Operations Distribution of International Loans and Deposits by Type ================================================================================ 18 ================================================================================ INTEREST RATE SENSITIVITY ANALYSIS For the discussion of interest rate sensitivity, see the section entitled "Asset and Liability Management" on page 41 of Management's Discussion and Analysis of Financial Condition and Results of Operations of the Corporation's Annual Report to Stockholders, which is incorporated herein by reference. ================================================================================ 19 ================================================================================ The following unaudited Consolidated Balance Sheet and Consolidated Statement of Income for The Northern Trust Company were prepared in accordance with generally accepted accounting principles and are provided here for informational purposes. These consolidated financial statements should be read in conjunction with the footnotes accompanying the consolidated financial statements, included in the Corporation's Annual Report to Stockholders for the year ended December 31, 1994, and incorporated herein by reference on page 24 of this report. The Northern Trust Company Consolidated Balance Sheet (unaudited)
December 31 --------------------- (In Millions) 1994 1993 ------------------------------------------------------- --------- --------- Assets Cash and Due from Banks $ 1,013.8 $ 1,386.6 Money Market Assets Federal Funds Sold and Securities Purchased under Agreements to Resell 783.6 551.3 Time Deposits with Banks 1,864.4 2,090.2 Other 45.8 70.7 ------------------------------------------------------- --------- --------- Total 2,693.8 2,712.2 ------------------------------------------------------- --------- --------- Securities (Fair Value $4,161.9 in 1994 and $3,285.7 in 1993) 4,149.2 3,247.6 Loans and Leases 6,030.5 5,408.3 ------------------------------------------------------- --------- --------- Reserve for Credit Losses (113.7) (114.9) Buildings and Equipment 200.7 220.0 Customers' Acceptance Liability 53.5 53.1 Trust Security Settlement Receivables 305.7 293.1 Other Assets 402.0 332.1 ------------------------------------------------------- --------- --------- Total Assets $14,735.5 $13,538.1 ------------------------------------------------------- --------- --------- Liabilities Deposits Demand and Other Noninterest-Bearing $ 2,183.8 $ 2,039.0 Savings and Money Market Deposits 1,807.3 1,874.6 Savings Certificates 624.1 521.8 Other Time 151.3 159.0 Foreign Offices --Demand 225.4 297.2 --Time 3,856.4 2,877.8 ------------------------------------------------------- --------- --------- Total Deposits 8,848.3 7,769.4 Federal Funds Purchased 1,046.0 1,300.0 Securities Sold under Agreements to Repurchase 2,075.2 482.7 Other Borrowings 893.3 2,021.2 Senior Medium-Term Notes 545.0 815.0 Notes Payable 209.6 210.0 Liability on Acceptances 53.5 53.1 Other Liabilities 273.9 162.9 ------------------------------------------------------- --------- --------- Total Liabilities 13,944.8 12,814.3 ------------------------------------------------------- --------- --------- Stockholder's Equity Capital Stock--Par Value $60 198.0 198.0 Surplus 198.0 198.0 Undivided Profits 408.5 327.2 Net Unrealized Loss on Securities (13.8) -- Translation Adjustment -- .6 ------------------------------------------------------- --------- --------- Total Stockholder's Equity 790.7 723.8 ------------------------------------------------------- --------- --------- Total Liabilities and Stockholder's Equity $14,735.5 $13,538.1 ------------------------------------------------------- --------- ---------
================================================================================ 20 THE NORTHERN TRUST COMPANY CONSOLIDATED STATEMENT OF INCOME (unaudited)
FOR THE YEAR ENDED DECEMBER 31 ------------------------------ (In Millions) 1994 1993 1992 ------------------------------------------------------------------------------ ------ ------ ------ Interest Income Money Market Assets Federal Funds Sold and Securities Purchased under Agreements to Resell $ 11.4 $ 5.6 $ 8.7 Time Deposits with Banks 97.8 86.4 95.4 Other 6.8 2.9 4.5 ------------------------------------------------------------------------------ ------ ------ ------ Total 116.0 94.9 108.6 ------------------------------------------------------------------------------ ------ ------ ------ Securities 197.1 140.0 123.8 Loans and Leases 328.4 285.0 301.2 ------------------------------------------------------------------------------ ------ ------ ------ Total Interest Income 641.5 519.9 533.6 ------------------------------------------------------------------------------ ------ ------ ------ Interest Expense Deposits--Savings and Money Market Deposits 49.8 44.4 58.9 --Savings Certificates 24.4 23.2 34.1 --Other Time 11.2 7.7 14.4 --Foreign Offices 140.1 92.4 97.2 Federal Funds Purchased 57.4 53.1 55.8 Securities Sold under Agreements to Repurchase 57.2 16.6 15.1 Other Borrowings 33.9 27.2 28.1 Senior Medium-Term Notes 33.6 18.3 2.8 Notes Payable 15.6 17.9 12.7 ------------------------------------------------------------------------------ ------ ------ ------ Total Interest Expense 423.2 300.8 319.1 ------------------------------------------------------------------------------ ------ ------ ------ Net Interest Income 218.3 219.1 214.5 Provision for Credit Losses 4.9 17.4 20.8 ------------------------------------------------------------------------------ ------ ------ ------ Net Interest Income after Provision for Credit Losses 213.4 201.7 193.7 ------------------------------------------------------------------------------ ------ ------ ------ Noninterest Income Trust Fees 326.7 297.9 273.3 Security Commissions and Trading Income (.4) (.5) .8 Other Operating Income 143.7 113.2 109.7 Investment Security Gains (Losses) (.1) 1.7 3.4 ------------------------------------------------------------------------------ ------ ------ ------ Total Noninterest Income 469.9 412.3 387.2 ------------------------------------------------------------------------------ ------ ------ ------ Income before Noninterest Expenses 683.3 614.0 580.9 ------------------------------------------------------------------------------ ------ ------ ------ Noninterest Expenses Salaries 229.1 216.6 198.2 Pension and Other Employee Benefits 55.7 51.5 45.0 Occupancy Expense 39.2 38.8 37.8 Equipment Expense 48.6 33.9 29.6 Other Operating Expenses 124.1 105.7 116.4 ------------------------------------------------------------------------------ ------ ------ ------ Total Noninterest Expenses 496.7 446.5 427.0 ------------------------------------------------------------------------------ ------ ------ ------ Income before Income Taxes 186.6 167.5 153.9 Provision for Income Taxes (Includes related investment security transactions tax provision of none in 1994, $.7 in 1993 and $1.3 in 1992) 56.5 46.4 42.4 ------------------------------------------------------------------------------ ------ ------ ------ NET INCOME $130.1 $121.1 $111.5 ------------------------------------------------------------------------------ ------ ------ ------ Dividends Paid to the Corporation 48.0 44.0 40.0 ------------------------------------------------------------------------------ ------ ------ ------
21 SUPPLEMENTAL ITEM--EXECUTIVE OFFICERS OF THE REGISTRANT DAVID W. FOX Mr. Fox was elected Chairman of the Board of the Corporation and the Bank in April 1990, and Chief Executive Officer of the Corporation and the Bank on December 1989. He held the title of President of the Corporation and the Bank from 1987 through 1993. Mr. Fox, 63, joined the Bank in 1955. WILLIAM A. OSBORN Mr. Osborn was elected President and Chief Operating Officer of the Corporation and the Bank effective January 1994. He was a Senior Executive Vice President of the Corporation and the Bank from 1992 through 1993 and prior to that time had served as an Executive Vice President of the Bank since 1987, and of the Corporation since 1989. Mr. Osborn, 47, began his career with the Bank in 1970. BARRY G. HASTINGS Mr. Hastings was elected Vice Chairman of the Corporation and the Bank effective January 1994, and is currently head of Personal Financial Services. He was a Senior Executive Vice President of the Corporation and the Bank from 1992 through 1993 and prior to that time had served as an Executive Vice President of the Bank since 1987, and of the Corporation since 1990. Mr. Hastings, 47, began his career with the Corporation in 1974. J. DAVID BROCK Mr. Brock became an Executive Vice President of the Corporation and the Bank in April 1990. Currently, he is responsible for Institutional Financial Services in the Corporate and Institutional Services Business Unit. From 1990 to 1994, he was head of Corporate Management Services and the Commercial Banking Services Group. Mr. Brock, 50, joined the Bank in 1966. DAVID L. EDDY Mr. Eddy became a Senior Vice President of the Corporation and the Bank and Treasurer of the Corporation in 1986. Mr. Eddy, 58, joined the Bank in 1960. JOHN V. N. McCLURE Mr. McClure was appointed an Executive Vice President of the Corporation and the Bank in February 1994, and is currently responsible for strategic expense management. Previously, he was responsible for Strategic Planning and Marketing. He served as head of the Private Banking Division of Personal Financial Services from 1989 to 1991. He had been a Senior Vice President of the Bank since 1986 and of the Corporation since 1991. Mr. McClure, 43, joined the Bank in 1973. JAMES J. MITCHELL Mr. Mitchell was appointed an Executive Vice President of the Bank in December 1987 and of the Corporation in October 1994, and is currently head of the Worldwide Operations Unit. Mr. Mitchell, 52, joined the Bank in 1964. SHEILA A. PENROSE Ms. Penrose is an Executive Vice President of the Corporation and the Bank, and Head of the Corporate and Institutional Services Business Unit. She became an Executive Vice President of the Corporation in November 1994 and of the Bank in November 1993, and prior to that time had been Senior Vice President of the Bank since 1986. Ms. Penrose, 49, began her career with the Bank in 1977. PERRY R. PERO Mr. Pero is Chief Financial Officer of the Corporation and the Bank and Cashier of the Bank. Mr. Pero is also head of the Risk Management Unit and Chairman of the Corporate Asset and Liability Policy Committee. He became a Senior Executive Vice President of the Corporation and the Bank in 1992 after serving as an Executive Vice President of the Corporation and the Bank since 1987. Mr. Pero, 55, joined the Bank in 1964. PETER L. ROSSITER Mr. Rossiter was appointed General Counsel of the Corporation and the Bank in April 1993. He joined the Corporation and the Bank in 1992 as an Executive Vice President and Associate General Counsel. Mr. Rossiter, 46, had been a partner in the law firm of Schiff Hardin & Waite from 1979 to 1992. 22 HARRY W. SHORT Mr. Short was appointed Senior Vice President and Controller of the Corporation and the Bank in October 1994. He joined the Corporation and the Bank in January 1990 and served as Senior Vice President and General Auditor. Mr. Short, 46, had been a partner in the accounting firm of KPMG Peat Marwick from 1982 to 1990. WILLIAM S. TRUKENBROD Mr. Trukenbrod was appointed an Executive Vice President of the Corporation and the Bank in February 1994, and is currently Chairman of the Credit Policy Committee. Previously, he served as head of the U.S. Corporate Group of Commercial Banking from 1987 to 1992. He had been a Senior Vice President of the Bank since 1980 and of the Corporation since 1992. Mr. Trukenbrod, 55, joined the Bank in 1962. There is no family relationship between any of the above executive officers and directors. The positions of Chairman of the Board and Chief Executive Officer, President and Vice Chairman are elected annually by the Board of Directors at the first meeting of the Board of Directors held after each annual meeting of stockholders. The other officers are appointed annually by the Board. Officers continue to hold office until their successors are duly elected or unless removed by the Board. Mr. Fox has announced his intention to retire on October 3, 1995. The Board of Directors of the Corporation has approved a succession plan under which Mr. Osborn will become Chief Executive Officer on June 30, 1995, and Mr. Hastings will become Chief Operating Officer on that date. Mr. Fox will remain Chairman until his retirement, whereupon Mr. Osborn will become Chairman as well as Chief Executive Officer and Mr. Hastings will become President as well as Chief Operating Officer. ITEM 2--PROPERTIES The executive offices of the Corporation and the Bank are located at 50 South LaSalle Street in the financial district of Chicago. This Bank-owned building is occupied by various divisions of Northern Trust's business units. Financial services are provided by the Bank at this location. Adjacent to this building are two office buildings in which the Bank leases approximately 316,000 square feet of space for staff divisions of the business units. The Bank also leases approximately 112,000 square feet of a building at 125 South Wacker Drive in Chicago for computer facilities, banking operations and personal banking services. Financial services are also provided by the Bank at five other Chicago area locations, two of which are owned and three of which are leased. The Bank's trust and banking operations are located in a 465,000 square foot facility at 801 South Canal Street in Chicago. The building is owned by a developer and leased by the Corporation. Space for the Bank's London branch, Edge Act subsidiary and The Northern Company, Canada are leased. The Corporation's other subsidiaries operate from 45 locations, 10 of which are owned and 35 of which are leased. Detailed information regarding the addresses of all Northern Trust's locations can be found on pages 80 and 81 in the Corporation's Annual Report to Stockholders for the year ended December 31, 1994, which is incorporated herein by reference. The facilities which are owned or leased are suitable and adequate for business needs. For additional information relating to properties and lease commitments, refer to Note 6 titled Buildings and Equipment and Note 7 titled Lease Commitments on pages 55 and 56 of the Corporation's Annual Report to Stockholders for the year ended December 31, 1994, which information is incorporated herein by reference. ITEM 3--LEGAL PROCEEDINGS The information called for by this item is incorporated herein by reference to Note 15 titled Contingent Liabilities on page 61 of the Corporation's Annual Report to Stockholders for the year ended December 31, 1994. In late November, 1993, the U.S. Department of Justice informed the Corporation that the Department is investigating the mortgage lending practices of the Bank and the Corporation's three other Illinois banking subsidiaries, as part of its responsibility to investigate possible discrimination on the basis of race or national origin under the Equal Credit Opportunity Act and the Fair Housing Act. The Corporation believes it has cooperated fully with the Department of Justice in the investigation, which is still pending. ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 23 =============================================================================== PART II ITEM 5--MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information called for by this item is incorporated herein by reference to the section of the Consolidated Financial Statistics titled "Common Stock Dividend and Market Price" on pages 76 and 77 of the Corporation's Annual Report to Stockholders for the year ended December 31, 1994. Information regarding dividend restrictions of the Corporation's banking subsidiaries is incorporated herein by reference to Note 12 titled "Restrictions on Subsidiary Dividends and Loans or Advances" on page 59 of the Corporation's Annual Report to Stockholders for the year ended December 31, 1994. ITEM 6--SELECTED FINANCIAL DATA The information called for by this item is incorporated herein by reference to the table titled "Summary of Selected Consolidated Financial Data" on page 26 of the Corporation's Annual Report to Stockholders for the year ended December 31, 1994. ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information called for by this item is incorporated herein by reference to Management's Discussion and Analysis of Financial Condition and Results of Operations on pages 26 through 45 of the Corporation's Annual Report to Stockholders for the year ended December 31, 1994. ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following financial statements of the Corporation and its subsidiaries included in the Corporation's Annual Report to Stockholders for the year ended December 31, 1994, are incorporated herein by reference.
1994 ANNUAL REPORT FOR NORTHERN TRUST CORPORATION AND SUBSIDIARIES: PAGE(S) -------------------------------------------------------------------------------------------------------- ------------- Consolidated Balance Sheet--December 31, 1994 and 1993.................................................. ...........46 Consolidated Statement of Income--Years Ended December 31, 1994, 1993 and 1992.......................... ...........47 Consolidated Statement of Changes in Stockholders' Equity--Years Ended December 31, 1994, 1993 and 1992. ...........48 Consolidated Statement of Cash Flows--Years Ended December 31, 1994, 1993 and 1992...................... ...........49 -------------------------------------------------------------------------------------------------------- ------------- FOR NORTHERN TRUST CORPORATION (Corporation Only) -------------------------------------------------------------------------------------------------------- ------------- Condensed Balance Sheet--December 31, 1994 and 1993..................................................... ...........68 Condensed Statement of Income--Years Ended December 31, 1994, 1993 and 1992............................. ...........68 Consolidated Statement of Changes in Stockholders' Equity--Years Ended December 31, 1994, 1993 and 1992. ...........48 Condensed Statement of Cash Flows--Years Ended December 31, 1994, 1993 and 1992......................... ...........69 -------------------------------------------------------------------------------------------------------- ------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.............................................................. ........50-69 -------------------------------------------------------------------------------------------------------- ------------- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS................................................................ ...........70 -------------------------------------------------------------------------------------------------------- -------------
The section titled "Quarterly Financial Data" on pages 76 and 77 of the Corporation's Annual Report to Stockholders for the year ended December 31, 1994, is incorporated herein by reference. ITEM 9--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None =============================================================================== 24 =============================================================================== PART III ITEM 10--DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information called for by Item 10, relating to Directors and Nominees for election to the Board of Directors, is incorporated herein by reference to pages 2 through 5 of the Corporation's definitive 1995 Notice and Proxy Statement filed in connection with the solicitation of proxies for the Annual Meeting of Stockholders to be held April 18, 1995. The information called for by Item 10 relating to Executive Officers is set forth in Part I of this Annual Report on Form 10-K. ITEM 11--EXECUTIVE COMPENSATION The information called for by this item is incorporated herein by reference to pages 8 and 9 and pages 10 through 17 of the Corporation's definitive 1995 Notice and Proxy Statement filed in connection with the solicitation of proxies for the Annual Meeting of Stockholders to be held April 18, 1995. ITEM 12--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information called for by this item is incorporated herein by reference to pages 6 and 7 of the Corporation's definitive 1995 Notice and Proxy Statement filed in connection with the solicitation of proxies for the Annual Meeting of Stockholders to be held April 18, 1995. ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information called for by this item is incorporated herein by reference to page 9 of the Corporation's definitive 1995 Notice and Proxy Statement filed in connection with the solicitation of proxies for the Annual Meeting of Stockholders to be held April 18, 1995. =============================================================================== 25 =============================================================================== PART IV ITEM 14--EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K ITEM 14(A)(1) AND (2)-- NORTHERN TRUST CORPORATION AND SUBSIDIARIES LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES The following financial information is set forth in Item 1 for informational purposes only: Financial Information of The Northern Trust Company (Bank Only): Unaudited Consolidated Balance Sheet--December 31, 1994 and 1993. Unaudited Consolidated Statement of Income--Years Ended December 31, 1994, 1993 and 1992. The following consolidated financial statements of the Corporation and its subsidiaries are incorporated by reference into Item 8 from the Corporation's Annual Report to Stockholders for the year ended December 31, 1994: Consolidated Financial Statements of Northern Trust Corporation and Subsidiaries: Consolidated Balance Sheet--December 31, 1994 and 1993. Consolidated Statement of Income--Years Ended December 31, 1994, 1993 and 1992. Consolidated Statement of Changes in Stockholders' Equity--Years Ended December 31, 1994, 1993 and 1992. Consolidated Statement of Cash Flows--Years Ended December 31, 1994, 1993 and 1992. The following financial information is incorporated by reference into Item 8 from the Corporation's Annual Report to Stockholders for the year ended December 31, 1994: Financial Statements of Northern Trust Corporation (Corporation): Condensed Balance Sheet--December 31, 1994 and 1993. Condensed Statement of Income--Years Ended December 31, 1994, 1993 and 1992. Consolidated Statement of Changes in Stockholders' Equity--Years Ended December 31, 1994, 1993 and 1992. Condensed Statement of Cash Flows--Years Ended December 31, 1994, 1993 and 1992. The Notes to Consolidated Financial Statements as of December 31, 1994, incorporated by reference into Item 8 from the Corporation's Annual Report to Stockholders for the year ended December 31, 1994, pertain to the Bank only information, consolidated financial statements and Corporation only information listed above. The Report of Independent Public Accountants incorporated by reference into Item 8 from the Corporation's Annual Report to Stockholders for the year ended December 31, 1994 pertains to the consolidated financial statements and Corporation only information listed above. Financial statement schedules have been omitted for the reason that they are not required or are not applicable. ITEM 14(A)3--EXHIBITS The exhibits listed on the Exhibit Index beginning on page 28 of this Form 10-K are filed herewith or are incorporated herein by reference to other filings. ITEM 14(B)--REPORTS ON FORM 8-K No reports on Form 8-K were filed by the Corporation during the quarter ended December 31, 1994. =============================================================================== 26 =============================================================================== SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Form 10-K Report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 14, 1995 Northern Trust Corporation (Registrant) By: David W. Fox ---------------------------------- David W. Fox Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Form 10-K Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
Signature Title --------- ----- David W. Fox Chairman of the Board, ----------------------------- Chief Executive Officer and Director David W. Fox Perry R. Pero Senior Executive Vice President ----------------------------- and Chief Financial Officer Perry R. Pero Harry W. Short Senior Vice President and Controller ----------------------------- (Chief Accounting Officer) Harry W. Short Worley H. Clark Director Dolores E. Cross Director Robert S. Hamada Director Barry G. Hastings Director Arthur L. Kelly Director By: Peter L. Rossiter Robert D. Krebs Director ------------------------ Peter L. Rossiter William G. Mitchell Director Attorney-in-Fact William A. Osborn Director Harold B. Smith Director William D. Smithburg Director Bide L. Thomas Director Date: March 14, 1995
=============================================================================== 27 ============================================================================== EXHIBIT INDEX The following Exhibits are filed herewith or are incorporated herein by reference.
Exhibit Incorporated By Reference to Exhibit of Same Name in Exhibit Prior Filing* Number Description or Filed Herewith -------- ---------------------------------------------------------------------------- -------------------- (3) Articles of Incorporation and By-laws (i) Restated Certificate of Incorporation of Northern Trust Corporation as amended to date. ................................................ (3) (ii) By-laws of the Corporation. ........................................ (2) (4) Instruments Defining the Rights of Security Holders (i) Deposit Agreement, dated as of February 5, 1992 among Northern Trust Corporation, Harris Trust & Savings Bank, As Depositary, and the holders from time to time of the depositary receipts described therein ............................................................ (1) (ii) Form of The Northern Trust Company's Senior Medium-Term Bank Note (Fixed Rate) ................................. (3) (iii) Form of The Northern Trust Company's Senior Medium-Term Bank Note (Floating Rate)............................... (3) (iv) Form of The Northern Trust Company's Subordinated Medium-Term Bank Note (Fixed Rate)..................... (3) (v) Form of The Northern Trust Company's Subordinated Medium-Term Bank Note (Floating Rate).................. (3) (10) Material Contracts (i) Trust System Implementation Agreement between The Northern Trust Company and Andersen Consulting dated as of September 30, 1991...... (1) (ii) Northern Trust Corporation Amended Incentive Stock Plan, as amended May 20, 1986**........................................... (4) (iii) Employment Agreement dated May 21, 1986, between Northern Trust Corporation and David W. Fox**...................................... (4) (iv) Form of Employment Security Agreement dated May 23, 1986, between Northern Trust Corporation and each of 62 officers**........ (4) (1) Amendment dated December 19, 1986, to Form of Employment Security Agreement**............................. (5) (v) Long-Term Performance Stock Plan of Northern Trust Corporation, as amended April 19, 1988**......................................... (6) (vi) Lease dated July 1, 1988 between American National Bank & Trust Company of Chicago as Trustee under Trust Agreement dated February 12, 1986 and known as Trust No. 66603 (Landlord) and Nortrust Realty Management, Inc. (Tenant)........................................... (6) (vii) Restated Northern Trust Employee Stock Ownership Plan, dated January 26, 1989 as amended to date......................................... Filed Herewith (viii) Trust Agreement between The Northern Trust Company and Citizens and Southern Trust Company (Georgia), N.A., (predecessor of NationsBank) dated January 26, 1989.............................................. (7) (ix) Form of Note Agreement dated January 26, 1989 between ESOP Trust and each of the institutional lenders, with respect to the 8.23% Notes of the ESOP Trust............................................. (7) (x) Guaranty Agreement of Registrant with respect to the 8.23% Notes of the ESOP Trust, dated January 26, 1989........................... (7)
=============================================================================== 28 ==============================================================================
Exhibit Incorporated By Reference to Exhibit of Same Name in Exhibit Prior Filing* Number Description or Filed Herewith -------- ----------------------------------------------------------------------------- ---------------------- (xi) Share Acquisition Agreement between Registrant and the ESOP Trust, dated January 26, 1989.............................................. (7) (xii) Trust Agreement, dated September 14, 1989, between The Northern Trust Company and Harris Trust & Savings Bank regarding the Supplemental Employee Stock Ownership Plan for Employees of The Northern Trust Company, the Supplemental Thrift-Incentive Plan for Employees of The Northern Trust Company and the Supplemental Pension Plan for Employees of The Northern Trust Company**..................................................... (8) (xiii) Supplemental Employee Stock Ownership Plan for Employees of The Northern Trust Company**..................................... (8) (xiv) Supplemental Thrift-Incentive Plan for Employees of The Northern Trust Company as amended and restated**............................. (8) (xv) Supplemental Pension Plan for Employees of The Northern Trust Company as amended and restated**................................... (8) (xvi) Rights Agreement, dated as of October 17, 1989, between Northern Trust Corporation and Harris Trust & Savings Bank................... (9) (xvii) Stock Ownership Program for Non-Employee Directors of the Corporation, adopted January 15, 1991**............................. (10) (1) Amendment dated August 20, 1991, to Stock Ownership Program for Non-Employee Directors of the Corporation**................. (11) (xviii) Lease dated August 27, 1985 between American National Bank & Trust Company of Chicago as Trustee under Trust Agreement dated April 5, 1990 and known as Trust No. 110513-07 (Landlord) and The Northern Trust Company (Tenant), as amended.................................. (10) (xix) Lease dated July 8, 1987 between American National Bank & Trust Company of Chicago as Trustee under Trust Agreement dated July 12, 1984 and known as Trust No. 61523 (Landlord) and The Northern Trust Company (Tenant), as amended.................................. (10) (xx) 1992 Incentive Stock Plan**......................................... (12) (1) Amendment dated February 21, 1995, to 1992 Incentive Stock Plan**.................................................... Filed Herewith (xxi) Amendments, dated December 21, 1993, to The Northern Trust Company Employee Stock Ownership Plan, Supplemental Pension Plan for Employees of The Northern Trust Company, and Supplemental Thrift-Incentive Plan for Employees of the Northern Trust Company... (14) (xxii) Life Insurance Agreement dated January 5, 1995, between Northern Trust Corporation and David W. Fox**................................ Filed Herewith (xxiii) Northern Trust Corporation Management Performance Plan**............ Filed Herewith (11) Computation of Per Share Earnings........................................... Filed Herewith (13) 1994 Annual Report to Stockholders.......................................... Filed Herewith (21) Subsidiaries of the Registrant.............................................. Filed Herewith (23) Consent of Independent Public Accountants................................... Filed Herewith (24) Powers of Attorney.......................................................... Filed Herewith (27) Financial Data Schedule..................................................... Filed Herewith
=============================================================================== 29 ============================================================================== * Prior Filings (File No. 0-5965, except as noted) ----------------------------------------------- (1) Annual Report on Form 10-K for the year ended December 31, 1992 (2) Registration Statement on Form S-4 dated February 10, 1994 (Reg. No. 33-52219) (3) Quarterly Report on Form 10-Q for the quarter ended March 31, 1993 (4) Quarterly Report on Form 10-Q for the quarter ended September 30, 1986 (5) Annual Report on Form 10-K for the year ended December 31, 1986 (6) Annual Report on Form 10-K for the year ended December 31, 1988 (7) Form 8-K dated January 26, 1989 (8) Annual Report on Form 10-K for the year ended December 31, 1989 (9) Form 8-A dated October 30, 1989 (10) Annual Report on Form 10-K for the year ended December 31, 1990 (11) Annual Report on Form 10-K for the year ended December 31, 1991 (12) Quarterly Report on Form 10-Q for the quarter ended March 31, 1992 (13) Form 8-K dated February 20, 1991 (14) Annual Report on Form 10-K for the year ended December 31, 1993 ** Denotes management contract or compensatory plan or arrangement --------------------------------------------------------------- Upon written request to Peter L. Rossiter, Secretary, Northern Trust Corporation, 50 South LaSalle Street, Chicago, Illinois 60675, copies of exhibits listed above are available to Northern Trust Corporation stockholders by specifically identifying each exhibit desired in the request. Pursuant to Item 601(b)(4)(iii) of Regulation S-K, the Corporation hereby agrees to furnish the Commission, upon request, any instrument defining the rights of holders of long-term debt of the Corporation not filed as an exhibit herein. No such instrument authorizes long-term debt securities in excess of 10% of the total assets of the Corporation and its subsidiaries on a consolidated basis. ============================================================================== 30 EX-10.VII 2 STOCK OWNERSHIP PLAN EXHIBIT NUMBER (10)(vii) TO 1994 FORM 10-K Northern Trust Employee Stock Ownership Plan (As Initially Adopted and Subsequently Amended and Restated Effective January 1, 1989) Northern Trust Employee Stock Ownership Plan (As Initially Adopted and Subsequently Amended and Restated Effective January 1, 1989) Contents ---------------------------------------------------------------------- Section Page Article I. Nature of the Plan 1.1 Establishment and Amendment of the Plan 1 1.2 Purpose of the Plan 1 1.3 Legal Qualification 1 Article II. Definitions 2.1 Definitions 2 Article III. Participation and Service 3.1 Participation 11 3.2 Duration of Participation 11 3.3 Transferred or Rehired Employees 11 3.4 Vesting 12 3.5 Break in Service 14 3.6 One-Year Break in Service 15 Article IV. Employer Contributions 4.1 Contributions 16 4.2 Medium of Payment 16 4.3 Allocation of Employer Contributions 16 4.4 No Participant Contributions 17 4.5 Uniformed Services Employment and Reemployment Rights Act 17 Article V. Investment of Trust Assets 5.1 Investments 18 5.2 Valuation of Company Stock 18 5.3 Crediting of Stock 18 5.4 Sales and Resales of Company Stock 18 i Northern Trust Employee Stock Ownership Plan (As Initially Adopted and Subsequently Amended and Restated Effective January 1, 1989) Contents ---------------------------------------------------------------------- Section Page Article VI. Exempt Loans 6.1 Requirements 20 6.2 Payments on Loans 21 6.3 Crediting of Released Stock 21 6.4 Payments of Principal and Interest 21 6.5 Puts, Calls, and Other Options 22 Article VII. Allocations to Participants' Accounts 7.1 Participants Entitled to Allocations 23 7.2 Allocations to Company Stock Accounts 23 7.3 Allocations to Other Investment Accounts 23 7.4 Allocations of Employer Contributions, Company Stock Acquired With a Loan and Forfeitures 24 7.5 Maximum Allocation 26 7.6 Vesting 30 7.7 Net Income or Loss of the Trust 30 7.8 Accounting for Allocations 31 7.9 Diversification of Investments 32 Article VIII. Voting and Tender of Company Stock 8.1 Procedures for Voting 34 8.2 Tender Offer 34 ii Northern Trust Employee Stock Ownership Plan (As Initially Adopted and Subsequently Amended and Restated Effective January 1, 1989) Contents ----------------------------------------------------------------------- Section Page Article IX. Benefits 9.1 Payments on Retirement 36 9.2 Payments on Death 36 9.3 Payments on Permanent Disability 38 9.4 Payments on Termination for Other Reasons 38 9.5 Deemed Cashout 39 9.6 Property Distributed 39 9.7 Methods of Payment 40 9.8 Direct Rollover of Eligible Rollover Distributions 43 Article X. Rights and Options on Distributed Shares of Company Stock 10.1 Right of First Refusal 45 10.2 Put Option 45 Article XI. Pretermination Distributions and Dividends 11.1 Pretermination Distributions 47 11.2 Dividends 47 Article XII. Plan Administration 12.1 Powers 48 12.2 Directions to Trustee 48 12.3 Uniform Rules 49 12.4 Reports 49 12.5 Compensation 49 12.6 Claims Procedure 49 12.7 Indemnity for Liability 50 iii Northern Trust Employee Stock Ownership Plan (As Initially Adopted and Subsequently Amended and Restated Effective January 1, 1989) Contents ----------------------------------------------------------------------- Section Page Article XIII. Amendment and Termination 13.1 Amendment 51 13.2 Termination 51 13.3 Merger, Sale 51 13.4 Distribution Upon Termination 52 Article XIV. Extension of Plan to Affiliates 14.1 Participation in the Plan 53 14.2 Withdrawal from the Plan 53 Article XV. Top-Heavy Provisions 55 Article XVI. Miscellaneous Provisions 16.1 Spendthrift Provisions 56 16.2 Incompetency 56 16.3 Unclaimed Funds 57 16.4 Rights Against the Company 57 16.5 Illegality of Particular Provision 58 16.6 Effect of Mistake 58 16.7 Compliance with Federal and State Securities Laws 58 16.8 No Discrimination 58 16.9 Exclusive Benefit of Employees 58 16.10 Governing Law 60 16.11 Change-in-Control 60 iv Article I. Nature of the Plan 1.1 Establishment and Amendment of the Plan Effective January 1, 1989, The Northern Trust Company (the "Company") established the Northern Trust Employee Stock Ownership Plan (the "Plan"). The Plan is hereby amended and restated effective January 1, 1989, in order to incorporate the requirements of the Tax Reform Act of 1986 and subsequent legislation. 1.2 Purpose of the Plan The purpose of the Plan is to enable Members and their Beneficiaries to share in the growth and prosperity of the Company and its Affiliates, to provide Members with an opportunity to accumulate capital for their future economic security, and to furnish additional security to Members who become permanently disabled. The primary purpose of the Plan is to enable Members to acquire ownership interests in Company Stock. Consequently, the Plan will be invested primarily in Company Stock. 1.3 Legal Qualification The Plan is an employee stock ownership plan under section 4975(e)(7) of the Code and section 407(d)(6) of ERISA. It is a stock bonus plan qualified under section 401(a) of the Code. 1 Article II. Definitions 2.1 Definitions The following capitalized terms shall have the meanings stated below wherever they appear in the text unless the context otherwise requires. (a) "ACCOUNT" means one of several accounts maintained to record the interest of a Member in the Plan. (b) "AFFILIATE" means any corporation which is a member of the same controlled group of corporations (within the meaning of Code Section 414(b)) as the Company, or an unincorporated trade or business which is under common control with the Company (within the meaning of Code Section 414(c)), any organization which is a member of an affiliated service group (within the meaning of Code Section 414(m)) of which the Company is also a member, and any other entity required to be aggregated under Code Section 414(o). For purposes of section 2.1(mm), this section 2.1(b) shall be as modified as provided in section 415(h) of the Code. (c) "ANNIVERSARY DATE" means January 31, 1989, and December 31 of each Plan Year. (d) "ANNUAL ADDITIONS" means the total of: (1) Company or Participating Employer contributions allocated to a Participant's Accounts under this Plan and any Related Plan during any Limitation Year; (2) the amount of Employee contributions made by the Participant under any Related Plan; and (3) Forfeitures allocated to a Participant's Accounts under this Plan and any Related Plan. (e) "BENEFICIARY" means the person or persons designated as such by the Participant on a form supplied by the Committee, provided that, a married Participant may designate a Beneficiary other than the Participant's Spouse only if the requirements of section 9.2(c) are met. Upon the death of a Participant, if there is no designated Beneficiary then living, or if the designation is for any reason ineffective, as determined by the Committee, the Participant's Beneficiary shall be the Participant's Spouse, or if none, as directed in the Participant's will admitted to probate, or if there is no will, to the Participant's estate to be distributed as provided by the laws of descent of the state of Illinois in effect at the time of the Participant's death. 2 (f) "BOARD OF DIRECTORS" OR "BOARD" means the Board of Directors of the Company. (g) "BREAK IN SERVICE" means the event described in section 3.5. (h) "CODE" means the Internal Revenue Code of 1986, as amended. (i) "COMMITTEE" means the Employee Benefits Administrative Committee of the Company, as constituted from time to time, which has the responsibility for administering the Plan and which shall be deemed to be the Plan Administrator and the Named Fiduciary for the purposes of ERISA. (j) "COMPANY" means The Northern Trust Company, an Illinois state bank, and its successors and assigns. (k) "COMPANY STOCK" means any qualifying employer security within the meaning of section 4975(e)(8) of the Code and 407(d)(1) of ERISA and regulations thereunder. (l) "COMPANY STOCK ACCOUNT" means an account of a Member that is credited with the Member's allocable share of Company Stock purchased and paid for by the Trust or contributed to the Trust. (m) "COMPENSATION" means the base salary paid by the Company to a Participant, including amounts which the Participant elects to have contributed to the Participant's before-tax deposit account under The Northern Trust Company Thrift-Incentive Plan and any amounts contributed by or on behalf of the Participant to a plan designed to comply with section 125 of the Code, plus any amounts paid as shift differential, but exclusive of severance pay or any other types of compensation. Notwithstanding the preceding provisions of this section, for purposes of sections 2.1(u) and 7.5 and Article XV, "Compensation" shall have the meaning set forth in section 7.5(h)(4). Notwithstanding any provision of this Plan to the contrary, a Participant's Compensation for any calendar year prior to January 1, 1994, shall not exceed $200,000 (or such other amount as established by the Secretary of the Treasury pursuant to section 401(a)(17) of the Code). In addition to other applicable limitations set forth in the Plan, and notwithstanding any other provision of the Plan to the contrary, effective January 1, 1994, the Compensation of each Participant taken into account 3 under the Plan shall not exceed the annual compensation limit under section 401(a)(17) of the Code. Effective January 1, 1994, the annual compensation limit under section 401(a)(17) is $150,000, as adjusted by the Commissioner of the Internal Revenue Service for increases in the cost of living in accordance with Code section 401(a)(17)(B). The cost-of-living adjustment in effect for a calendar year applies to any period, not exceeding 12 months, over which Compensation is determined (the "determination period") beginning in that calendar year. If a determination period consists of fewer than 12 months, the annual compensation limit will be multiplied by a fraction, the numerator of which is the number of months in the determination period, and the denominator of which is 12. In determining the Compensation of a Participant for purposes of this limitation, the rules of Code section 414(q)(6) shall apply, except that, in applying such rules, the term "family" shall include only the Spouse of the Participant and any lineal descendants of the Participant who have not attained age 19 before the close of the Plan Year. If, as a result of the application of these rules, the adjusted dollar limitation of Code section 401(a)(17) applicable to family members is exceeded, then the dollar limitation shall be prorated among the affected individuals in proportion to each such individual's Compensation as determined under this section 2.1(m) before applying the limitation. (n) "EFFECTIVE DATE" means January 1, 1989. (o) "ELIGIBLE EMPLOYEE" means any Employee of the Company or a Participating Employer other than (1) an Employee employed by any office or branch of the Company located in a foreign country who, as to the United States, is a nonresident alien, and (2) an Employee who (A) as to the United States, is a foreign national, (B) is working for the Company or a Participating Employer at a location located in the United States, and (C) is covered by a retirement plan sponsored by a non-U.S. Affiliate in the country in which an Affiliate is located. (p) "EMPLOYEE" shall mean an individual employed by the Company or an Affiliate. A person who is considered a "leased employee" (as defined below) of the Company or an Affiliate shall not be considered an Employee for purposes of the Plan. If such a person subsequently becomes an Employee, and thereafter participates in the Plan, that person shall receive Vesting Service for employment as a leased employee except to the extent that the requirements of Section 414(n)(5) of the Code were satisfied with 4 respect to such Employee while he or she was a leased employee. For purposes of the Plan a leased employee is a person who is not employed by the Company or an Affiliate but who performs services for the Company or an Affiliate pursuant to an agreement between the Company or Affiliate and a leasing organization, other than a person described in Code section 414(n)(5), if such person performed the services for a year and the services are of a type historically performed by employees. (q) "EMPLOYER CONTRIBUTIONS" means payments made to the Trust by the Company or a Participating Employer. (r) "ENTRY DATE" shall mean each January 1, April 1, July 1, and October 1 of each Plan Year on and after the Effective Date of this Plan. (s) "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. (t) "FORFEITURE" means the nonvested portion of a Participant's Accounts that becomes forfeited pursuant to section 9.4. (u) "HIGHLY COMPENSATED PARTICIPANT" means a Participant who, during the current Plan Year or the preceding Plan Year (1) was at any time a 5- percent owner of the Company, (2) received Compensation from the Company in excess of $75,000 (or such adjusted amount provided under section 414(q)(1) of the Code), (3) received Compensation from the Company in excess of $50,000 (or such adjusted amount provided under section 414(q)(1) of the Code) and was in the top-paid group of Employees for such year, or (4) was at any time an officer of the Company and received Compensation from the Company in excess of 50 percent of the amount in effect under section 415(b)(1)(A) of the Code for such Plan Year. The provisions of section 414(q) of the Code shall apply in determining whether a Participant is a Highly Compensated Participant. Highly Compensated Participants shall be identified based upon only the current Plan Year to the extent permitted by Section 414(q) of the Code and regulations issued thereunder. (v) "HOUR OF SERVICE" means each hour for which an Employee is paid or entitled to payment for the performance of duties for the Company or an Affiliate. 5 (w) "INACTIVE PARTICIPANT" means a person who was a Participant who is transferred to and is in a position of employment either-- (1) as an Employee where he or she is not an Eligible Employee; or (2) as an Employee of an Affiliate which has not adopted this Plan. (x) "LIMITATION YEAR" means the 12-consecutive-month period to be used in determining the Plan's compliance with section 415 of the Code and the regulations thereunder. The Limitation Year shall be the calendar year unless the Company elects to use another 12-month period. (y) "LOAN" means any loan to the Trustee made or guaranteed by a disqualified person (within the meaning of section 4975(e)(2) of the Code) including, but not limited to, a direct loan of cash, a purchase money transaction, an assumption of an obligation of the Trustee, an unsecured guarantee, or the use of assets of a disqualified person (within the meaning of section 4975(e)(2) of the Code) as collateral for a loan. (z) "MEMBER" means either a Participant, Inactive Participant, or a former Participant. (aa) "NORMAL RETIREMENT DATE" means (1) in the case of a Participant who attained age 65 before the Effective Date, the Participant's 65th birthday or (2) in the case of any other Participant, the later of (A) the date on which a Participant attains 65 years of age, or (B) the fifth anniversary of the date the Participant commenced participation in the Plan. (bb) "ONE-YEAR BREAK IN SERVICE" means a period of time described in section 3.6. (cc) "OTHER INVESTMENTS ACCOUNT" means an Account of a Participant that is credited with the Participant's share of the net income or loss of the Trust and Employer Contributions and Forfeitures in other than Company Stock, and that is debited with payments made to pay for Company Stock. (dd) "PARENTAL LEAVE" shall mean an absence from employment with the Company or an Affiliate because of (1) the Employee's pregnancy, (2) the birth of the Employee's child, (3) the placement of a child with the Employee in connection with the Employee's adoption of the child, or (4) caring for such child immediately following such birth or placement, 6 provided that, the Employee furnishes to the Company or Affiliate such timely information that the Company or Affiliate may reasonably require to establish (A) that the absence from work is for one of the reasons specified and (B) the number of days for which there was such an absence. (ee) "PARTICIPANT" means an Eligible Employee who meets the requirements of Section 3.1 and who is participating in the Plan. (ff) "PARTICIPATING EMPLOYER" means any Affiliate which has adopted the Plan in accordance with Article XIV. (gg) "PENSION PLAN" means The Northern Trust Company Pension Plan. (hh) "PERMANENT DISABILITY" means any physical or mental injury, illness or incapacity which, in the sole judgment of the Committee based on the medical reports of a physician selected by the Committee and other evidence satisfactory to the Committee, currently and permanently prevents an Employee from satisfactorily performing the Employee's usual duties for the Company or an Affiliate or the duties of such other position or job which the Company or an Affiliate makes available to him or her and for which such Employee is qualified by reason of training, education or experience. To the extent that a disability case manager determines whether an Employee is permanently disabled under the Company's short or long-term disability plan, such determination shall be binding with respect to the question of whether the Employee has incurred a Permanent Disability hereunder. (ii) "PLAN" means the Northern Trust Employee Stock Ownership Plan, as amended. (jj) "PLAN YEAR" means the calendar year. (kk) "QUALIFIED ELECTION PERIOD" means-- (1) prior to the date that section 2.1(ll)(2) becomes operative, the period beginning with the Plan Year in which the Participant first has attained age 55 and is 100 percent vested under section 7.6 and ending with the earlier of (A) the fourth succeeding Plan Year thereafter; (B) the Plan Year preceding the Plan Year during which the Participant ceases being an Employee; or (C) the Plan Year preceding the Plan Year 7 during which the Participant becomes a Qualified Participant under section 2.1(ll)(2), or (2) on and after January 1, 1999 or such earlier date that any Participant satisfies the requirements of section 401(a)(28)(B)(iii) of the Code, the six-Plan Year period beginning with the Plan Year in which the Participant first becomes a Qualified Participant under section 2.1(ll)(1) or (2), provided that, the Qualified Election Period of a Participant who would have been a Qualified Participant in any year prior to 1989 shall begin January 1, 1989. (ll) "QUALIFIED PARTICIPANT" means-- (1) prior to the date that paragraph (2) below becomes operative, any Participant who is age 55 or older and is 100 percent vested under section 7.6; and (2) on and after January 1, 1999 or such earlier date that any Participant satisfies the requirements of section 401(a)(28)(B)(iii) of the Code, any Participant who has attained age 55 and has been a Participant in the Plan for at least ten years, or has otherwise satisfied such requirements. (mm) "RELATED PLAN" means any other defined contribution plan (as defined in section 415(k) of the Code) maintained by the Company or an Affiliate. (nn) "SEVERANCE ELIGIBLE PARTICIPANT" means, effective July 1, 1995, a Participant whose employment has terminated in a manner entitling such Participant to severance pay under any formal severance plan, program or arrangement maintained by The Northern Trust Company providing severance benefits to certain employees as a result of job elimination or termination of employment due to the acquisition or disposition of a business entity. (oo) "SPOUSE" means the person to whom an Employee is married or, in the case of a deceased Employee, the person to whom an Employee was married on the date of such Employee's death. 8 (pp) "SUSPENSE ACCOUNT" means an account to which securities purchased with any Loans are allocated pending their release and allocation to Accounts as the Loan is repaid. (qq) "TRUST" means all money, securities, and other property held under the Trust Agreement for purposes of the Plan. (rr) "TRUST AGREEMENT" means the agreement between the Company and the Trustee (or any successor Trustee) establishing the Trust and specifying the duties of the Trustee. (ss) "TRUST ASSETS" means the assets held in the Trust for the exclusive benefit of Participants, Beneficiaries, and Spouses. (tt) "TRUSTEE" means The Northern Trust Company as Trustee of the Trust. (uu) "VALUATION DATE" means each March 31, June 30, September 30, and December 31 of the Plan Year; provided, however, that, effective July 1, 1993, "Valuation Date" means the last business day of each calendar month. (vv) "VESTED PORTION" means that percentage of a Participant's Account constituting the Participant's irrevocable right to such Account, as indicated in the following vesting schedule: ===================================== PARTICIPANT'S YEARS OF VESTING SERVICE VESTED WITH THE COMPANY PERCENTAGE ------------------------------------- Less than 2 years 0% 2 years but less than 3 20% 3 years but less than 4 40% 4 years but less than 5 60% 5 years but less than 6 80% 6 or more years 100% UNVESTED PORTION means the remaining Account balance after subtracting the Vested Portion. (ww) "VESTING SERVICE" means the period of employment credited under section 3.4. 9 Article III. Participation and Service 3.1 Participation Each Eligible Employee shall become a Participant on the Entry Date on or next following the later of the date the Eligible Employee completes one year of Vesting Service and the date the Eligible Employee attains age 21, provided that he or she is an Eligible Employee on such date. 3.2 Duration of Participation An Eligible Employee who becomes a Participant shall continue to be a Participant or Inactive Participant until he or she incurs a Break in Service, and also shall continue to be a Member thereafter for as long as he or she is entitled to receive any benefits hereunder. After receiving all benefits to which he or she is entitled hereunder, he or she shall cease to be a Member unless and until he or she thereafter becomes eligible to again become a Participant. 3.3 Transferred or Rehired Employees The following rules shall be applicable to Employees who (a) become Participants because of transfer to a status qualifying for coverage under the Plan, (b) become Inactive Participants, (c) transfer to a status not qualifying for coverage after meeting the requirements of section 3.1 but before becoming Participants, or (d) are rehired by the Company: (a) An Employee who shall be transferred into employment where he or she becomes an Eligible Employee hereunder shall be credited with Vesting Service computed for all his or her employment with the Company and any Affiliate, before and after such transfer. (b) Any Participant who shall be transferred into employment as an Employee where he or she becomes an Inactive Participant shall continue to receive credit for Vesting Service under this Plan during the period he or she is an Inactive Participant. (c) Any Eligible Employee who shall meet the requirements of section 3.1 but shall be transferred into employment as an Employee but not as an Eligible Employee, before becoming a Participant, shall no longer be eligible to elect to have contributions made on his or her behalf hereunder. Any such Employee shall continue to accrue Vesting Service during the period 10 computed for all of the Employee's employment with the Company and any Affiliate. (d) An Employee who has a Break in Service and is subsequently reemployed by the Company or an Affiliate shall be considered a new Employee for purposes of section 3.1, unless he or she was credited with at least one year of Vesting Service prior to his or her Break in Service. In such case, the Employee shall become eligible to have contributions hereunder made on his or her behalf (i) before January 1, 1995, on the first day of the first Valuation Period in which such person is so reemployed, and (ii) from and after January 1, 1995, on the first day of the first payroll period following such reemployment. (1) By written notice to the Committee after his or her reemployment, an Employee who has not had five consecutive One-Year Breaks in Service may deposit with the Trustee an amount which shall be equal to the aggregate value of the distributions from his or her Account at the time of his or her previous Break in Service. All deposits must be made in cash and in a single lump sum. The deposits must be made within five years after the Employee is reemployed. (2) In the case of a reemployed Employee who does not have five consecutive One-Year Breaks in Service, the Company shall contribute to the Account of such Employee the amount, if any, forfeited at the time of the Employee's termination of service, if and only if the Employee makes the deposits permitted under paragraph (1) above or the Employee did not receive a distribution at or after the time of his or her previous termination of service. The Company's contribution shall be made concurrently with the Employee's repayment if applicable, otherwise upon the date of his or her reemployment. For each other reemployed Employee, his or her beginning balance in each of his or her Accounts shall be zero, and his or her previous Forfeiture, if any, shall not be restored. 3.4 Vesting An Employee shall receive credit for Vesting Service for the period commencing with the Employee's date of hire with the Company or an Affiliate and ending on the date the Employee incurs a Break in Service. Vesting Service shall be calculated in accordance with reasonable and uniform standards and policies 11 adopted by the Company from time to time, which standards and policies shall be consistently observed subject, however, to the following: (a) Vesting Service shall be computed on the following basis: (i) prior to July 1, 1993, an Employee shall receive credit for each calendar quarter during which the Employee earned at least one (1) Hour of Service or otherwise would receive credit for Vesting Service pursuant to subsection (a) next above; and (ii) from and after July 1, 1993, an Employee shall receive credit for each calendar month during which the Employee earned at least one (1) Hour of Service or otherwise would receive credit for Vesting Service pursuant to subsection (b) below. (b) An Employee shall earn Vesting Service for all periods of active employment with the Company or an Affiliate, and for the following periods that are not active employment but that precede a Break in Service: (i) an approved unpaid leave of absence from the Company or an Affiliate that is granted according to uniform and nondiscriminatory standards, but only if the Employee returns to work with the Company or an Affiliate upon the termination of such leave of absence; (ii) effective August 5, 1993, an absence from work with the Company or an Affiliate under the Family and Medical Leave Act of 1993, but only if the Employee returns to work with the Company or an Affiliate upon the termination of such period of absence; (iii) a period of up to one (1) year during which an Employee is on a Parental Leave; (iv) an absence from work with the Company or an Affiliate on account of military service with the armed forces of the United States, but only if the Employee reports for work within the period required under law pertaining to veteran's reemployment rights (c) If an Employee incurs a Break in Service, but returns to employment with the Company or an Affiliate prior to incurring a One-Year Break in Service (as defined in Section 3.6), the period commencing on the date the Break 12 in Service began and ending on the date such Employee is reemployed shall be counted as Vesting Service. Notwithstanding the preceding sentence, if the Break in Service occurs during a period of absence from active employment, the Employee shall not receive Vesting Service under the preceding sentence unless such Employee returns to employment before the first (1st) anniversary of the first day of such absence. If an Employee suffers a One-Year Break in Service and the Employee is thereafter reemployed by the Company or an Affiliate, such Employee's Vesting Service before such One-Year Break in Service shall be added to the Employee's Vesting Service after reemployment. (d) A Participant's Vesting Service shall not include periods of service with an entity prior to the date it became an Affiliate, except as provided in Schedule A hereto. (e) A Severance Eligible Participant shall receive credit for one (1) year of Vesting Service beyond that earned pursuant to the foregoing. (f) All periods of Vesting Service shall be aggregated; provided, however, that a Participant shall not receive multiple credit for Vesting Service with respect to any single period. 3.5 Break in Service (a) A "Break in Service" shall occur on earliest of: (i) the date the Employee quits, is discharged, retires, or dies; or (ii) the first anniversary of the date the Employee separates from service with the Company or an Affiliate for any reason other than the reasons set forth in paragraph (i) above, such as vacation, holiday, sickness, disability, leave of absence or layoff. (b) The fact that an Employee separates from service with the Company or an Affiliate on account of military service with the armed forces of the United States shall not constitute a Break in Service unless the Employee fails to report to work within the period required under law pertaining to veteran's reemployment rights, in which case the Break in Service shall occur on the earlier of (i) the expiration of the period by which such Employee was required by law to report back to work or (ii) the first anniversary of the date the Employee separated from service. 13 (c) A Break in Service shall end on the date on which an Employee again performs an Hour of Service for the Company or an Affiliate. (d) The fact that an Employee who is a Participant becomes an Inactive Participant shall not constitute a Break in Service, but the foregoing rules shall continue to apply to such an Employee during the period he or she is an Inactive Participant. (e) Effective August 5, 1993, the fact that an Employee is absent from work under the Family and Medical Leave Act of 1993 shall not constitute a Break in Service if the Employee returns to work with the Company or an Affiliate after such period of absence. 3.6 One-Year Break in Service (a) The term "One-Year Break in Service" means each 12-consecutive-month period beginning on the date an Employee incurs a Break in Service under Section 3.5 and ending on each anniversary of such date, provided that such Employee does not perform an Hour of Service for the Company or any Affiliate during such period. (b) Solely for purposes of determining whether a One-Year Break in Service has occurred, but not for purposes of determining Vesting Service or Credited Service, in the case of an Employee who is on Parental Leave, the Employee's Break In Service shall be deemed to occur on the second (2nd) anniversary of the first day of such absence, provided the Employee does not perform an Hour of Service for the Company or any Affiliate during such period of absence. The period of time between the first (1st) and second (2nd) anniversaries of a Parental Leave shall not be counted as a Break in Service, Vesting Service or Credited Service. 14 Article IV. Employer Contributions 4.1 Contributions Subject to section 4.2, for each Plan Year, Employer Contributions under the Plan may be paid to the Trust in such amounts or under such a formula and at such times as the Board may determine. Notwithstanding any provision in the Plan or any law to the contrary, the Company shall also make Employer Contributions to the extent necessary to satisfy the provisions of Section 4.5. Employer Contributions for a Plan Year may be paid during the Plan Year and must be paid no later than the due date for filing the Company's federal income tax return for that year, including any extensions of the due date. Employer Contributions for any Plan Year shall not be paid to the Trust in amounts that would exceed the limitations of section 404 of the Code. Notwithstanding the provisions of this section, no Employer Contributions in any Limitation Year shall be in an amount that would cause (a) the Annual Additions to the Accounts of any Participant to exceed the Maximum Permissible Amount (as defined in section 7.5) for such Participant for that Year or (b) the sum of the defined benefit plan fraction (as defined in section 7.5) and the defined contribution plan fraction (as defined in section 7.5) to exceed one for such Participant for such Limitation Year. 4.2 Medium of Payment Employer Contributions may be paid to the Trust in cash or in shares of Company Stock, as determined by the Board. Employer Contributions, however, shall be paid in cash in such amounts (subject to the limitations described in section 7.5), and at such times as needed to provide the Trust with funds sufficient to pay in full when due any principal and interest payments required by a Loan incurred, pursuant to Committee direction, by the Trustee to finance acquisitions of Company Stock, except to the extent such principal and interest payments have been satisfied by the Trustee from cash dividends paid to it with respect to Company Stock. 4.3 Allocation of Employer Contributions All Employer Contributions for a Plan Year shall be allocated to Participants' Accounts as provided in Article VII. 15 4.4 No Participant Contributions No Participant shall be required or permitted to make contributions to the Plan or Trust. 4.5 Uniformed Services Employment and Reemployment Rights Act Effective December 12, 1994, the Plan shall be administered consistent with the provisions of Uniformed Services Employment and Reemployment Rights Act of 1994, P.L. 103-353 ("USERRA"). As such, the Company and any Participating Employer shall make special Employer Contributions as necessary to comply with USERRA and other applicable laws. 16 Article V. Investment of Trust Assets 5.1 Investments Trust Assets under the Plan will be invested primarily in Company Stock. Employer Contributions and other Trust assets may be used to acquire shares of Company Stock from the stockholders (including former Participants) or issuer thereof. The Trustee also may hold Trust assets in cash or invest them in savings accounts, certificates of deposit, high grade short-term securities, any kind of investment fund (open-end or otherwise), a common trust fund for the investment of qualified employee benefit trusts, including any such fund maintained by the Trustee, or in other investments desirable for the Trust. 5.2 Valuation of Company Stock All purchases of Company Stock will be made at a price, or at prices, that do not exceed the fair market value of such Company Stock. Except as otherwise determined by the Trustee in accordance with ERISA, the fair market value of Company Stock as of a given date shall be the closing price as of such date on the NASDAQ Stock Market; provided, however, that before January 1, 1995, the fair market value as of a given date shall be the median of the high and low sale prices of Company Stock on the preceding trading day. If Company Stock is not readily tradable on an established securities market, the determination of the fair market value of Company Stock for all purposes of the Plan shall in all cases be made by an independent appraiser appointed by the Committee. Any independent appraiser appointed pursuant to this section shall meet the requirements of section 401(a)(28)(C) of the Code. 5.3 Crediting of Stock Company Stock purchased with the proceeds of a Loan shall be held in the Suspense Account pending release and allocation to the Accounts of Participants as the Loan is paid pursuant to Section 7.4. Company Stock purchased with amounts allocated to Participants' Other Investment Accounts shall immediately upon purchase be credited pro rata to the corresponding Company Stock Accounts. Company Stock contributed to the Plan pursuant to Article IV shall be allocated to the Company Stock Accounts of Participants pursuant to section 7.4. 5.4 Sales and Resales of Company Stock The Committee may direct the Trustee to sell or resell shares of Company Stock to any person. All such sales to any disqualified person must be made at no less than the fair market value and no commission may be charged. Such sales shall 17 comply with section 408(e) of ERISA. All sales of Company Stock (except Company Stock held in a Suspense Account) by the Trustee will be charged pro rata to the Company Stock Accounts of Participants. Sales of Company Stock pursuant to this section 5.4 may only be made to the extent not inconsistent with section 1.3 of the Plan. 18 Article VI. Exempt Loans 6.1 Requirements (a) The Committee may direct the Trustee to obtain Loans. Any such Loan will meet all requirements necessary to constitute an exempt loan within the meaning of section 4975(d)(3) of the Code and Treasury regulations section 54.4975-7(b)(1)(iii) and shall be used primarily for the benefit of Participants, Beneficiaries, and Spouses. The proceeds of any such Loan shall be used, within a reasonable time after the Loan is obtained, only to purchase Company Stock, repay the Loan, or repay any prior Loan. Any such Loan shall provide for no more than a reasonable rate of interest (as determined under Treasury regulations section 54.4975-7(b)(7)) and must be without recourse against the Plan. The number of years to maturity under the Loan must be definitely ascertainable at all times. The only assets of the Plan that may be given as collateral on a Loan are shares of Company Stock acquired with the proceeds of the Loan and shares of Company Stock that were used as collateral on a prior Loan repaid with the proceeds of the current Loan. No person entitled to payment under a Loan shall have recourse against Trust Assets other than such collateral, Employer Contributions (other than contributions of Company Stock) that are available under the Plan to meet obligations under the Loan, and earnings attributable to such collateral and the investment of such Employer Contributions. (b) All Employer Contributions paid during the Plan Year in which a Loan is made (whether before or after the date the proceeds of the Loan are received), all Employer Contributions paid thereafter until the Loan has been repaid in full, and all earnings from investment of such Employer Contributions, shall be used to meet obligations under the Loan as such obligations accrue, or before such obligations accrue, unless otherwise designated by the Committee at the time any such Employer Contribution is made. (c) Any Company Stock acquired with the proceeds of a Loan shall be placed in a Suspense Account. The Company Stock in the Suspense Account must be released from the Suspense Account upon the payment of any portion of the Loan. The number of shares to be released from the Suspense Account for each Plan Year during the duration of the Loan shall equal the number of encumbered securities held immediately before release for the current Plan Year multiplied by a fraction. The numerator of the fraction is the 19 sum of principal and interest paid in such Plan Year. The denominator of the fraction is the sum of the numerator and the principal and interest to be paid for all future years. Such years will be determined without taking into account any possible extension of renewal periods. (d) If the collateral in the Suspense Account includes more than one class of Company Stock, the number of shares of each class to be released from the Suspense Account for a Plan Year must be determined by applying the same fraction to each class. If interest on any Loan is variable, the interest to be paid in future years under the Loan shall be computed by using the interest rate applicable as of the end of the current Plan Year. 6.2 Payments on Loans Payments of principal and interest on any Loan during a Plan Year shall be made by the Trustee (as directed by the Committee) only from (a) Employer Contributions to the Trust made to meet the Plan's obligation under a Loan and from any earnings (including dividends) attributable to such Contributions or to Company Stock held as collateral for a Loan (received either during or prior to the Plan Year), less payment from such contributions and earnings in prior Years; (b) the proceeds of a subsequent Loan made to repay a prior Loan; and (c) the proceeds of the sale of any Company Stock held as collateral for a Loan. Such Contributions and earnings must be accounted for separately by the Plan until the Loan is repaid. 6.3 Crediting of Released Stock Company Stock released by reason of the payment of principal or interest on a Loan from Employer Contributions shall, on the Anniversary Date, be allocated to Participants as set forth in section 7.4. 6.4 Payments of Principal and Interest (a) The Company shall contribute to the Trust sufficient amounts to enable the Trust to pay principal and interest on any Loans as they are due. If the limitations of section 7.5 would result in Employer Contributions in an amount insufficient to enable the Trust to pay principal and interest on such Loan as it is due, then the Company may-- (1) make a Loan to the Trust (as described in Treasury regulation section 54.4975-7(b)(4)(iii)), in sufficient amounts to meet such principal and interest payments. A new Loan must also meet all requirements of an 20 exempt loan within the meaning of Treasury regulation section 54.4975-7(b)(1)(iii) and shall be subordinated to the prior Loan. Company Stock released from the pledge of the prior Loan shall be pledged as collateral to secure the new Loan. Such Company Stock will be released from this new pledge and allocated to the Accounts of the Participants in accordance with applicable provisions of the Plan; (2) purchase any Company Stock pledged as collateral in an amount necessary to provide the Trustee with sufficient funds to meet the principal and interest repayments. Any such sale by the Plan shall meet the requirements of section 408(e) of ERISA; or (3) any combination of paragraphs (1) and (2). (b) Neither the Company nor any Affiliate, pursuant to this section, shall do, fail to do, or cause to be done any act that would result in a disqualification of the Plan as an employee stock ownership plan under the Code or ERISA. 6.5 Puts, Calls, and Other Options Except as provided in Article X and notwithstanding any amendment to or termination of the Plan that causes it to cease to qualify as an employee stock ownership plan within the meaning of section 4975(e)(7) of the Code, no shares of Company Stock acquired with the proceeds of a Loan obtained by the Trust to purchase Company Stock may be subject to a put, call, or other option, or buy- sell or similar arrangement while such shares are held by and when distributed from the Plan. 21 Article VII. Allocations to Participants' Accounts 7.1 Participants Entitled to Allocations As of each Anniversary Date, a Participant is entitled to the allocations provided in this Article VII. A Participant must be an active Eligible Employee on the Anniversary Date in order to share in the allocations relating to that Anniversary Date; provided that, each Participant who is on an authorized leave of absence or whose employment terminates by reason of early or normal retirement under the terms of the Pension Plan, or by reason of Permanent Disability or death, or whose employment terminated in circumstances under which he or she is a Severance Eligible Participant, will share in allocations of Employer Contributions which have not been used to make payments on a Loan, Company Stock released from the Suspense Account according to section 6.1(c), and Forfeitures, for any Anniversary Date other than January 31, 1989 occurring with respect to the Plan Year in which the leave of absence begins or employment terminates. 7.2 Allocations to Company Stock Accounts A separate Company Stock Account will be established for each Participant. The Company Stock Account will be credited with (a) the Participant's allocable share (determined under section 7.4) of Company Stock (including fractional shares) purchased and paid for by the Trust or contributed in kind to the Trust, (b) Forfeitures of Company Stock, and (c) any stock dividends on Company Stock allocated to the Participant's Company Stock Accounts as of the record date therefor. Company Stock acquired by the Trust with the proceeds of a Loan obtained pursuant to Article VI shall be allocated to the Company Stock Accounts of Participants according to the method set forth in section 7.4 at the time the Company Stock is released from Suspense Accounts as provided in section 6.1(c). 7.3 Allocations to Other Investment Accounts A separate Other Investment Account will be established for each Participant. The Other Investments Account will be credited or debited with (a) the Participant's allocable share (as determined under section 7.7) of the net income or loss of the Trust, (b) Employer Contributions that have not been used to make principal and interest payments on a Loan or to purchase Company Stock, and (c) Forfeitures in other than Company Stock. Each Other Investment Account will be debited for its share of any cash payments for the acquisition of Company Stock for the benefit of Company Stock Accounts. 22 7.4 Allocations of Employer Contributions, Company Stock Acquired With a Loan and Forfeitures Subject to subsection (d) of this section and to section 7.5, Employer Contributions which have not been used to make payments on a Loan, Company Stock released from the Suspense Account according to section 6.1(c), and Forfeitures incurred since the prior Anniversary Date shall be allocated among Participants entitled to allocations under section 7.1 as follows: (a) For the Anniversary Date on January 31, 1989, with respect to Employer Contributions which have been made pursuant to a loan described in section 133(b)(1)(B) of the Code (as in effect on such date), in the proportion that each such Participant's Compensation for January 1989 bears to the total of such Compensation of all such Participants (considering in both cases, with respect to each Participant, only Compensation not in excess of $16,666.66); (b) For the Anniversary Date on December 31, 1989, with respect to Employer Contributions which have not been made to make payments on a Loan, Company Stock released from the Suspense Account according to section 6.1(c), and Forfeitures incurred on or before December 31, 1989, in accordance with the following procedure: (1) the number of shares released from the Suspense Account for the Plan Year shall be added to the number of shares allocated on the January 31, 1989 Anniversary Date; and (2) to preliminarily determine the number of shares to be allocated to each Participant entitled to share in allocations under section 3.4, the number determined under paragraph (1) above shall be multiplied by a fraction, the numerator of which is the Participant's Compensation for the 1989 Plan Year, and the denominator of which is the aggregate Compensation for the 1989 Plan Year of all Participants entitled to share in the allocation. The product so determined for each such Participant shall be decreased by the number of shares of Company Stock allocated to the Participant on the January 31, 1989 Anniversary Date; provided that, for any Participant with respect to whom the product of subsection (b)(2) is less than the number of shares allocated on the January 31, 1989 Anniversary Date, no shares allocated on such Anniversary Date shall be subtracted from the 23 Participant's Account. To accomplish the foregoing, (A) the Participants described in the foregoing proviso (the "Deficit Participants") will receive no allocation for the December 31, 1989 Anniversary Date and (B) for all other Participants entitled to share in such allocation, the preliminary determination described in subsection (b)(2) shall be adjusted by subtracting from the shares otherwise allocable to them a number of shares equal to the shares that would have been subtracted from the Accounts of the Deficit Participants if the foregoing proviso had not applied. Such adjustment shall be accomplished pro rata based on the relative Compensation of affected Participants as described in subsection (b)(2), except that, if such adjustment would result in the subtraction of shares allocated to any Participant on the January 31, 1989 Anniversary Date, then to the extent such subtraction would occur, the adjustment will not be made to such Participant's allocation and any additional adjustment shall be made pro rata (on the same basis) among the other affected Participants; and (c) For each Anniversary Date after December 31, 1989, with respect to Employer Contributions which have not been made to make payments on a Loan, Company Stock released from the Suspense Account according to section 6.1(c), and Forfeitures incurred since the prior Anniversary Date, in the proportion that each such Participant's Compensation for the Plan Year bears to the total Compensation of all such Participants; provided, however, that a special allocation may be made pursuant to section 4.5. (d) Effective December 12, 1994, the Company and any Participating Employer shall make special allocations as necessary to comply with USERRA and other applicable laws. (e) Notwithstanding subsections (b) and (c), if for any Limitation Year more than one-third of the Employer Contributions that are deductible as principal or interest payments on a Loan pursuant to the provisions of section 404(a)(9) of the Code would, but for the provisions of this subsection (e), be allocated to Highly Compensated Participants, then such Employer Contributions otherwise allocable to such Participants shall be reduced. The reduction shall be made among all Highly Compensated Participants in the same proportion as the amounts of such Contributions otherwise allocable to them and shall be made only to the minimum extent necessary so that no further reduction would be required to satisfy the conditions of section 415(c)(6) of the Code. 24 The allocations made pursuant to subsections (b), (c), and (d) shall be consistent with the provisions of sections 9.1, 9.2, 9.3, and 9.4. Notwithstanding the preceding provisions of this section, and subject to section 7.4(d), no allocation shall be made to the Accounts of any Participant in any Limitation Year that would cause (A) the Annual Additions of the Participant to exceed the Maximum Permissible Amount (as defined under section 7.5) for that year (except as permitted in section 7.5) or (B) the sum of the defined benefit plan fraction (as defined in section 7.5) and the defined contribution plan fraction (as defined in section 7.5) to exceed one for that Participant for that Limitation Year. 7.5 Maximum Allocation (a) Notwithstanding anything to the contrary contained elsewhere in the Plan, but subject to section 7.4(d), for each Limitation Year, the allocations to the Accounts of any Participant shall be limited so that the Participant's Annual Additions for such Year do not exceed the Maximum Permissible Amount (as defined in subsection (h)(3) below). (b) If the foregoing limitation on allocations would be exceeded in any Limitation Year for any Participant as a result of the allocation of Forfeitures, reasonable error in estimating a Participant's Compensation, or under such other limited facts and circumstances as the Commissioner of Internal Revenue, pursuant to Treasury regulation section 1.415-6(b)(6), finds justify the availability of this subsection (b), the excess amount shall be placed, unallocated to any Participant, in a Limitation Account. If a Limitation Account is in existence at any time during a particular Limitation Year, other than the Limitation Year described in the preceding sentence, all amounts in the Limitation Account must be allocated to Participants' Accounts (subject to the limits of this section 7.5) before any contributions that would constitute Annual Additions may be made to the Plan for that Limitation Year. The excess amounts allocated pursuant to this subsection (c) shall be used to reduce Employer Contributions for the next Limitation Year (and succeeding Limitation Years, as necessary) for all of the Participants in the Plan. Excess amounts held in a Limitation Account pursuant to this section 7.5 may not be distributed to Participants or former Participants. The Limitation Account will not share in the valuation of Participants' Accounts and the allocation of earnings set forth in section 7.7 of the Plan, and the change in fair market value and allocation of earnings attributable to the Limitation Account shall be allocated to the remaining accounts hereunder as set forth in this section 7.5. 25 (c) Upon termination of the Plan, any amounts in a Limitation Account at the time of such termination shall revert to the Company or Participating Employer that employs the Employees to whom such amounts are attributable. (d) If any Participant under the Plan is also a Participant in a defined benefit plan (as defined in section 415(k) of the Code) maintained by the Company or an Affiliate, the sum of the defined benefit plan fraction (as defined below) and the defined contribution plan fraction (as defined below) for any Limitation Year with respect to such Participant shall not exceed one. If a Participant is otherwise entitled to receive an allocation under this Plan and accrue a benefit under a defined benefit plan maintained by the Company or an Affiliate, and the combination thereof would cause the limitations of this section to be exceeded, the allocation under this Plan will only be reduced if the accrual under such defined benefit plan is not decreased as necessary to cause such limitations not to be exceeded. (e) If a Participant is entitled to receive an allocation under this Plan and any Related Plan and, in the absence of the limitations contained in this section, the Company would contribute or allocate to the Accounts of that Participant an amount for a Limitation Year that would cause the Annual Additions to the Accounts of the Participant to exceed the annual Maximum Permissible Amount for such Year, then the contributions and allocations made with respect to the Participant under this Plan will only be reduced if the contributions or allocations to the Participant's accounts under the Related Plan are not decreased to the extent necessary so that the Participant's Annual Additions do not exceed the Maximum Permissible Amount. (f) Any reduction in the contributions and allocations under this Plan made with respect to a Participant's Accounts required pursuant to this section and section 415 of the Code shall be effected, to the minimum extent necessary, by reducing the Employer Contributions that would have been made by the Company for the applicable Plan Year with respect to such Participant. (g) The provisions of this section shall be interpreted by the Committee, in the administration of the Plan, to reduce contributions and allocations (as required by this section) only to the minimum extent necessary to reflect the requirements of section 415 of the Code, as amended and in force from 26 time to time, and Treasury regulations promulgated pursuant to that section, which are incorporated by reference herein. (h) For purposes of this section 7.5-- (1) The "defined benefit plan fraction" for any Limitation Year for a Participant means a fraction, the numerator of which is the projected annual benefit of the Participant under all defined benefit plans maintained by the Company or an Affiliate, determined as of the close of the Limitation Year, and the denominator of which is the lesser of (A) the product of 1.25, and the dollar limitation in effect under section 415(b)(1)(A) of the Code for such year or (B) the product of 1.4 and the amount which may be taken into account under section 415(b)(1)(B) of the Code with respect to such Participant for such Year. (2) The "defined contribution plan fraction" for any Limitation Year for any Participant means a fraction, the numerator of which is the sum of the Annual Additions to the Participant's Account under the Plan and to the Participant's accounts under all defined contribution plans maintained by the Company or an Affiliate as of the close of the Limitation Year, and the denominator of which is the sum of the lesser of the following amounts determined for such Year and for each prior year of Vesting Service with the Company or an Affiliate (A) the product of 1.25 and the dollar limitation in effect under section 415(c)(1)(A) of the Code for such Year (determined without regard to section 415(c)(6) of the Code) and (B) the product of 1.4 and the amount which may be taken into account under section 415(c)(1)(B) of the Code with respect to such Participant for such Year. (3) "Maximum Permissible Amount" shall mean: (A) the lesser of-- (i) $30,000 (or, if greater, one-fourth of the dollar limitation in effect pursuant to section 415(b)(1)(A) of the Code); or (ii) 25 percent of a Participant's Compensation (as defined in paragraph (4) hereof). 27 (B) Notwithstanding the provisions of paragraph (A), if no more than one-third of the Employer Contributions for the Limitation Year ending December 31, 1989 are allocated to Highly Compensated Participants, then the Maximum Permissible Amount for that Limitation Year shall mean the lesser of-- (i) 25 percent of a Participant's Compensation; or (ii) the sum of (a) $30,000 (or, if greater, one-fourth of the dollar limitation in effect under section 415(b)(1)(A) of the Code) and (b) the lesser of the amount determined under clause (a) above or the amount of employer securities (as defined in sections 4975(e)(8) and 409(1) of the Code) contributed to the Plan or purchased with cash contributions to the Plan. (C) If no more than one-third of the Employer Contributions for a Limitation Year that are deductible as principal or interest payments on a Loan pursuant to the provisions of section 404(a)(9) of the Code are allocated to Highly Compensated Participants, then the limitations imposed by paragraph (A) or (B), whichever is applicable, shall not apply to-- (i) Forfeitures of Company Stock if the Company Stock was acquired with the proceeds of a Loan; or (ii) Employer Contributions that are deductible as interest payments on a Loan under section 404(a)(9)(B) of the Code and charged against a Participant's Account. (4) For purposes of this section and sections 2.1(u) and Article XV, "Compensation" shall mean wages, salaries, fees for professional services, and other amounts received for personal services actually rendered in the course of employment with the Company or an Affiliate (including, but not limited to, commissions paid salesmen, compensation for services on the basis of a percentage of profits, tips, and bonuses); shall include all compensation actually paid or made available to a Participant for an entire Limitation Year; and shall not include any other items or amounts paid to or for the benefit of a Participant. 28 (i) To the extent permitted, the limitations set forth in this section 7.5 shall be adjusted in connection with contributions made pursuant to section 7.4(d). 7.6 Vesting (a) Each Participant shall have a vested interest in the adjusted balance of his or her Company Stock and Other Investments Accounts in accordance with the vesting schedule set forth in 2.1(vv). (b) On reaching the Normal Retirement Date, a Participant shall be 100 percent vested in the adjusted balance of his or her Company Stock and Other Investments Accounts if such Participant is an Employee on his or her Normal Retirement Date. (c) In the event a Participant dies or incurs a Permanent Disability within the meaning of section 9.3, the Participant shall be 100 percent vested in the adjusted balance of the Company Stock and Other Investments Accounts as of the date of the Participant's death or Permanent Disability if such Participant is an Employee on the date he or she dies or becomes disabled. (d) In the event the Plan is terminated or upon the complete discontinuance of Employer Contributions to the Plan, each Participant shall be 100 percent vested in the adjusted balance of his or her Company Stock and Other Investments Accounts. 7.7 Net Income or Loss of the Trust (a) DIVIDENDS ON COMPANY STOCK. Any stock dividends received in respect of Company Stock allocated to a Participant's Company Stock Account as of the record date therefor shall be credited to the Participant's Company Stock Account on the Valuation Date coincident with or succeeding the Trustee's receipt of such dividends. Any stock dividends received in respect of Company Stock held in the Suspense Account as of the record date shall be allocated to such Account and released pursuant to Section 6.1(c). Any cash dividends received on Company Stock held in the Suspense Account pursuant to section 6.1(c), or any cash or stock dividends received on Company Stock that has been forfeited pursuant to section 9.4(b) but not yet reallocated pursuant to section 7.4(c), as of the record date, may be used to meet obligations under the Loan, the proceeds of which were used to acquire such Company Stock. Any dividends described in the preceding sentence shall, to the extent such amounts are 29 not used to pay principal or interest on a Loan, be considered net income for the Trust for the Plan Year. (b) OTHER INCOME OR LOSS. The net income or loss of the Trust shall be determined as of each Valuation Date. Each Participant's share of the net income or loss will be allocated to the Participant's Other Investments Accounts in the ratio that the balance of all his or her Accounts on the last Valuation Date, based on the fair market value thereof (reduced by the amount of any distribution from such Accounts, including a distribution or transfer pursuant to section 7.9, other than a distribution made in the calendar quarter that the Participant ceases being an Employee), bears to the sum of such balances for all Participants as of that date. The net income or loss of the Trust includes the increase or decrease in the fair market value of Trust Assets (other than Company Stock), interest income, dividends, and other income or loss attributable to Trust Assets (other than Company Stock, except as provided in subsection (a) above) since the last Valuation Date. Net income or loss shall not include Employer Contributions or Forfeitures. Any proceeds of sales of unallocated Company Stock shall, to the extent such amounts are not used to pay principal or interest on a Loan, be considered net income for the Trust. Net income or loss attributable to any Limitation Account established under section 7.5 shall be allocated to the Other Investments Accounts of Participants in accordance with the ratio described in the second sentence of this subsection (b), and the Limitation Account shall not share in the allocation of net income or loss of the Trust under this section. 7.8 Accounting for Allocations The Committee shall adopt accounting procedures for the purpose of making the allocations, valuations, and adjustments to Participants' Accounts provided for in this section. Except as provided in Treasury regulation section 54.4975-11, Company Stock acquired by the Plan shall be accounted for as provided under Treasury regulation section 1.402(a)-l(b)(2)(ii); allocations of Company Stock shall be made separately for each class of stock; and the Committee shall maintain adequate records of the cost basis of all shares of Company Stock allocated to each Participant's Company Stock Accounts. From time to time, the Committee may modify the accounting procedures for the purpose of achieving equitable and nondiscriminatory allocations among the Accounts of Participants in accordance with the general concepts of the Plan and the provisions of this section. Annual valuations of Trust Assets shall be made at fair market value. 30 7.9 Diversification of Investments (a) Prior to the date that section 2.1(ll)(2) becomes operative, a Participant who is a Qualified Participant pursuant to section 2.1(ll)(1) may elect, on or before the March 15 next succeeding the end of each Plan Year in the Qualified Election Period described in section 2.1(kk)(1) to have the Trustee dispose of a specified whole number of shares of Company Stock not in excess of the Participant's "Applicable Amount" and transfer the proceeds thereof to the Northern Trust Company Thrift Incentive Plan. Participant elections shall be in such written, electronic, or other form as the Committee shall determine. A Qualified Participant's Applicable Amount for a Plan Year in the Qualified Election Period shall equal 25 percent of (1) the total number of shares of Company Stock ever acquired by or contributed to the Plan and allocated to the Participant's Accounts in the Plan as of the end of such Plan Year less (2) the number of shares to which a prior election under this subsection applied; provided that, if with respect to a Qualified Participant, such difference is not a whole number of shares of Company Stock, it shall be rounded to the nearest whole number of shares. In the case of the last year of a Qualified Election Period, the preceding sentence shall be applied by substituting "50 percent" for "25 percent." (b) On and after the date that section 2.1(ll)(2) becomes operative, a Participant who is a Qualified Participant pursuant to section 2.1(ll)(2) may elect, within 90 days after the close of each Plan Year in the Qualified Election Period described in section 2.1(kk)(2) to receive a distribution of the Applicable Amount (calculated in the manner described in subsection (a) but considering only elections, if any, made during such Qualified Election Period). Participant elections shall be in such written, electronic, or other form as the Committee shall determine. The Committee shall direct the Trustee to distribute the portion of the Participant's Accounts that is covered by the election described in this subsection (b) within 90 days after the last day of the period during which the election can be made. Such a distribution shall not be subject to the requirements of section 10.2 of the Plan. (c) The provisions of this section shall apply notwithstanding any other provisions of the Plan. (d) If the Committee receives a Qualified Participant's election pursuant to subsection (a) or (b), it shall direct the Trustee (1) to sell the required 31 number of shares of Company Stock (and, if the Committee desires, the manner in which such sale should be accomplished) as of the March 31 next succeeding the end of the Plan Year with respect to which the election is made and (2) to transfer to the Northern Trust Company Thrift Incentive Plan or distribute to the Qualified Participant, as the case may be, an amount of cash equal to the proceeds of the sale of the subject shares. Any such transfer shall be made as of the next succeeding April 1, and any such distribution shall be made within 90 days after the last day of the period during which the election can be made. Notwithstanding any provision of the Plan to the contrary, if the Trustee is unable to sell the required shares as aforesaid in a timely manner, the Company shall buy such shares. If such shares are sold to the Company or an Affiliate, the price paid therefor shall be the greater of the fair market value of such shares as of March 31 or the fair market value of such shares on the date the sale actually occurs; provided that, any amount the Plan receives in excess of the fair market value as of March 31 shall be considered earnings of the Plan and shall be allocated as provided in section 7.7(b). (e) Notwithstanding the foregoing, a Qualified Participant shall not be entitled to make an election hereunder for a Plan Year within a Qualified Election Period if the fair market value of the total number of shares of Company Stock ever acquired by or contributed to the Plan and allocated to the Participant's Accounts in the Plan as of the last day of such Plan Year is less than $500. 32 Article VIII. Voting and Tender of Company Stock 8.1 Procedures for Voting Each Member (or, in the event of the Member's death, the Member's Beneficiary) shall have the right to direct the Trustee as to the manner in which whole and partial shares of Company Stock allocated to the Member's Account as of the record date are to be voted on each matter brought before an annual or special stockholders' meeting. Before each such meeting of stockholders, the Trustee shall furnish to each Member (or Beneficiary) a copy of the proxy solicitation material, together with a form requesting directions on how such shares of Company Stock allocated to such Member's Account shall be voted on each such matter. Upon timely receipt of such directions, the Trustee shall on each such matter vote as directed the number of shares (including fractional shares) of Company Stock allocated to such Member's Account, and the Trustee shall have no discretion in such matter. The directions received by the Trustee from Members shall be held by the Trustee in confidence and shall not be divulged or released to any person, including officers or employees of the Company or any Affiliate. The Trustee shall vote allocated shares for which it has not received direction and unallocated shares of Company Stock in the same proportion as directed shares are voted, and shall have no discretion in such matter except as otherwise provided in accordance with ERISA. 8.2 Tender Offer If a tender or exchange offer is commenced for Company Stock-- (a) The Trustee shall distribute in a timely manner to each Member (or Beneficiary) such information as is distributed to holders of the Company Stock in connection with the tender or exchange offer. (b) All Company Stock held by the Trustee in Accounts shall be tendered or not tendered by the Trustee in accordance with directions it receives from Members (or Beneficiaries). Each Member (or Beneficiary) shall be entitled to direct the Trustee with respect to the tender of such Company Stock allocated to the Member's Account. The instructions received by the Trustee from Members (or Beneficiaries) shall be held by the Trustee in confidence and shall not be divulged or released to any person, including officers or employees of the Company or any Affiliate. 33 (c) The Trustee shall not tender Company Stock allocated to Accounts with respect to which directions by Members (or Beneficiaries) are not received or Company Stock held by the Trustee that is not allocated to Accounts except as otherwise provided in accordance with ERISA. 34 Article IX. Benefits 9.1 Payments on Retirement A Member who attains his or her Normal Retirement Date and continues to be an Employee shall continue to share in the allocation of Employer Contributions and Forfeitures under the Plan. Upon the retirement of a Member on or after his or her Normal Retirement Date, the Committee shall notify the Trustee in writing of the Member's retirement and shall direct the Trustee to make payment of the adjusted balance of the Member's Accounts as of the Valuation Date coinciding with or immediately preceding the date a distribution is made to the Member, unless the Member agrees to a later date in a method provided in the Plan. Notwithstanding the foregoing, if any such Member retires after December 31, 1989 and receives a distribution of the Member's Accounts before the Anniversary Date next following his or her retirement, he or she shall be entitled to share in the allocation of Employer Contributions which have not been used to make payments on a Loan, Company Stock released from the Suspense Account according to section 6.1(c), and Forfeitures, occurring on such Anniversary Date. 9.2 Payments on Death (a) Upon the death of a Member, the Committee shall promptly notify the Trustee in writing of the Member's death and the name of the Member's Beneficiary (or Spouse if subsection (c) is applicable) and shall direct the Trustee to make payment of the adjusted balances of the Member's Accounts (or the Vested Portion thereof if section 7.6(c) is not applicable) as of the Valuation Date coinciding with or immediately preceding the date a distribution is made to the Member's Beneficiary, in a method provided in the Plan. Notwithstanding the foregoing, if such Member dies after December 31, 1989 and the distribution of the Accounts of such Member is made before the Anniversary Date next following his or her death, his or her Beneficiary or Spouse, as the case may be, shall be entitled to share in the allocation of Employer Contributions which have not been used to make payments on a Loan, Company Stock released from the Suspense Account according to section 6.1(c), and Forfeitures, occurring on such Anniversary Date. (b) Each unmarried Member and each married Member whose surviving Spouse has consented to an alternate Beneficiary or an alternate method of payment as provided in subsection (c) shall have the right to designate, by giving a written designation to the Committee, a person or entity as Beneficiary to receive the death benefit provided under this section. 35 Successive designations may be made, and the last designation received by the Committee prior to the death of the Member shall be effective and shall revoke all prior designations. If a designated Beneficiary shall die before the Member, his or her interest shall terminate, and, unless otherwise provided in the Member's designation, if the designation included more than one Beneficiary, such interest shall be paid in equal shares to those Beneficiaries, if any, who survive the Member. A Member to whom this subsection applies shall have the right to designate different Beneficiaries to receive the adjusted balance in the Member's various Accounts under the Plan. (c) The Beneficiary of each Member who is married shall be the surviving Spouse of such Member and the death benefits of any Member who is married shall be paid in full to his or her surviving Spouse in a single payment. Notwithstanding the preceding sentence, the death benefits provided pursuant to subsection (a) shall be distributed to any other Beneficiary designated by a married Member as provided in subsection (b) of this section if the Member's surviving Spouse consented to such designation, prior to the date of the Member's death, in writing. Such a consent must acknowledge the effect of the election and designation and the identity of any nonsurviving Spouse Beneficiary, including any class of Beneficiaries or contingent Beneficiaries, and must be witnessed by a representative of the Plan or a notary public. Consent of a Member's surviving Spouse shall not be required if the Member establishes to the satisfaction of the Committee that consent may not be obtained because there is no surviving Spouse or the surviving Spouse cannot be located, or because of such other circumstances as the Secretary of the Treasury may prescribe by regulations. The Member may not subsequently change the designation of the Beneficiary unless his or her surviving Spouse consents to the new designation in accordance with the requirements set forth in the preceding sentence, or unless the surviving Spouse's consent permits the Member to change the designation of his or her Beneficiary without the Spouse's further consent. A surviving Spouse's consent shall be irrevocable. Any consent by a surviving Spouse, or establishment that the consent of the surviving Spouse may not be obtained, shall be effective only with respect to that surviving Spouse. 9.3 Payments on Permanent Disability 36 Upon the termination of a Member's employment with the Company by reason of a Permanent Disability, the Committee shall notify the Trustee in writing of the Member's Permanent Disability termination and shall direct the Trustee to make payment of the adjusted balances of the Member's Accounts as of the Valuation Date coinciding with or immediately preceding the date a distribution is made to the Member. Notwithstanding the foregoing, if such termination occurs after December 31, 1989 and such Member receives a distribution of the Member's Accounts before the Anniversary Date next following the Member's termination, he or she shall be entitled to share in the allocation of Employer Contributions which have not been used to make payments on a Loan, Company Stock released from the Suspense Account according to section 6.1(c), and Forfeitures, occurring on such Anniversary Date. 9.4 Payments on Termination for Other Reasons (a) GENERAL. Upon the termination of a Member's employment with the Company for any reason other than retirement on or after the Member's Normal Retirement Date, death, or Permanent Disability, the Committee shall notify the Trustee in writing of the termination and shall direct the Trustee to make payment of the Vested Portion of the adjusted balances of the Member's Accounts as of the Valuation Date coinciding with or next preceding the date a distribution is made to the Member. Notwithstanding the foregoing, if such termination occurs after December 31, 1989 and under circumstances entitling the Member to early retirement benefits under the Pension Plan and he or she receives a distribution of the Member's Accounts before the Anniversary Date following the Member's termination, he or she shall be entitled to share in the allocation of Employer Contributions which have not been used to make payments on a Loan, Company Stock released from the Suspense Account according to section 6.1(c), and Forfeitures, occurring on such Anniversary Date. The Vested Portion of a Member's Accounts shall be determined in accordance with section 7.6 of the Plan. (b) FORFEITURE. The Unvested Portion of the adjusted balance of the Accounts of a Member who terminates employment with the Company under this section shall be forfeited as of the first Valuation Date following the date the Member terminates employment with the Company and all Affiliates. The amount forfeited shall be the entire Unvested Portion. If a Member's Company Stock Account includes more than one class of Company Stock, the Forfeiture will consist of the same proportion of each class of stock. 37 (c) REINSTATEMENT. If a Member is reemployed by the Company or a Participating Employer after incurring a Forfeiture, the Member shall be entitled to make repayment to the Plan of the aggregate amount distributed to him, at any time before the earlier of (1) five years after the Member is reemployed and (2) the end of a Break in Service of five consecutive years incurred by the Member. Upon making repayment in a single cash sum of the fair market value (at the time of distribution) of the aggregate amount distributed to him, the amount repaid shall be credited to the Member's Account and invested by the Trustee in a cash equivalent short term investment fund. The amount which was forfeited (also based on the fair market value at the time of distribution) shall be reinstated to the Member's Account. The amount required to restore such Member's Account shall be made up from Forfeitures and, to the extent necessary, Employer Contributions prior to their allocation pursuant to section 7.4. 9.5 Deemed Cashout If a Member has no vested interest in his Account balance when his or her employment with the Company and all Affiliates terminates, such Member will be treated as having received a Deemed Cashout of the Member's Account balance as of the last day of the Plan Year in which the Member's employment terminated and the Member's Account balance will be treated as a Forfeiture on such date. "Deemed Cashout" means a distribution of zero dollars representing the Member's entire Account balance. If the Member is reemployed with the Company or any Affiliate before such Member has incurred five (5) consecutive One-Year Breaks in Service, the amount of the prior Forfeiture will be restored as the Member's Account balance. 9.6 Property Distributed Any distribution pursuant to section 9.1, 9.2, 9.3, or 9.4, from a Member's Company Stock Account, shall be made in whole shares of Company Stock, and the value of partial shares of Company Stock shall be paid in cash. Distribution from a Member's Other Investments Account shall be made in cash unless the Member requests a distribution in stock of the whole shares purchasable with such balance and the balance attributable to fractional shares in the Member's Company Stock Account, in which case the Trustee shall acquire the necessary shares for distribution. If cash is to be distributed in connection with fractional shares, the Trustee shall sell such shares as of the Valuation Date with respect to which the distribution is being made and distribute the proceeds of sale to the affected 38 Member. Any such sale shall be subject to the last two sentences of section 7.9(d). 9.7 Methods of Payment (a) Whenever the Committee shall direct the Trustee to make payment to a Member upon termination of a Member's employment on or after the Member's Normal Retirement Date, the Committee shall direct the Trustee to pay the adjusted balances of the Member's Accounts to or for the benefit of the Member in a single sum distribution. Whenever the Committee shall direct the Trustee to make payment to a Member, the Member's Spouse, or other Beneficiary upon termination of a Member's employment for any other reason, the Committee shall direct the Trustee to pay the Vested Portion of the adjusted balances of the Member's Accounts, if any, to or for the benefit of the Member, the Member's Spouse, or the Member's Beneficiary, in a single payment distribution. (b) Payment under this section shall be made no more than 60 days after the Valuation Date coincident with or following the date the Member ceases being an Employee provided that (1) for purposes of the foregoing, any Valuation Date occurring before December 31, 1989 shall be treated as occurring on December 31, 1989, (2) any Member or Beneficiary or Spouse described in section 9.1, 9.2, or 9.3, or who would be entitled to an allocation at the next Anniversary Date under section 9.4, may elect to defer distribution to such Anniversary Date, and (3) if the Member's Accounts exceed $3,500, distribution shall not be made to the Member at any time prior to the Member's Normal Retirement Date or death without the Member's written consent. A Member described in paragraph (3) may elect to receive distribution of the Member's Accounts as of any Valuation Date following the Valuation Date next succeeding the Member's termination by filing prescribed materials with the Trustee on or before such reasonable deadline as established by the Trustee. If a distribution is one to which sections 401(a)(11) and 417 of the Code do not apply, such distribution may commence less than thirty (30) days after the notice required under section 1.411(a)-11(c) of the Income Tax Regulations is given, provided that: (i) the Committee clearly informs the Member that the Member has a right to a period of at least thirty (30) days after receiving the notice to consider the decision of whether to elect a distribution, and 39 (ii) the Member, after receiving the notice, affirmatively elects a distribution. (c) Notwithstanding the provisions of subsection (b) above, distribution of each Member's Accounts must commence not later than 60 days after the last day of the Plan Year in which the last of the following events occurs: (1) the date on which the Member reaches his or her Normal Retirement Date; (2) the tenth anniversary of the date on which the Member commenced participation in the Plan; or (3) the date on which the Member's employment with the Company and all Affiliates terminates. (d) Notwithstanding anything to the contrary contained elsewhere in the Plan-- (1) A Member's benefits under the Plan will-- (A) be distributed to him or her not later than the Required Distribution Date (as defined in paragraph (3)), or (B) be distributed commencing not later than the Required Distribution Date in accordance with regulations prescribed by the Secretary of the Treasury over a period not extending beyond the life expectancy of the Member or the life expectancy of the Member and the Member's Beneficiary. (2) Payments on death-- (A) If the Member dies after distribution has commenced pursuant to paragraph (1)(B) but before the Member's entire interest in the Plan has been distributed to him, then the remaining portion of that interest will be distributed at least as rapidly as under the method of distribution being used under paragraph (1)(B) at the date of the Member's death. (B) If the Member dies before distribution has commenced pursuant to paragraph (1)(B), then, except as provided in paragraphs (2)(C) 40 and (2)(D), the Member's entire interest in the Plan will be distributed within five years after the Member's death. (C) Notwithstanding the provisions of paragraph (2)(B), if the Member dies before distribution has commenced pursuant to paragraph (1)(B) and if any portion of the Member's interest in the Plan is payable (i) to or for the benefit of a Beneficiary, (ii) in accordance with regulations prescribed by the Secretary of the Treasury over a period not extending beyond the life expectancy of the Beneficiary, and (iii) beginning not later than one year after the date of the Member's death or such later date as the Secretary of the Treasury may prescribe by regulations, then the portion referred to in this paragraph (2)(C) shall be treated as distributed on the date on which such distribution begins. (D) Notwithstanding the provisions of paragraphs (2)(B) and (2)(C), if the Beneficiary referred to in paragraph (2)(C) is the Spouse of the Member, then-- (i) the date on which the distributions are required to begin under paragraph (2)(C)(iii) of this section shall not be earlier than the date on which the Member would have attained age 70-1/2, and (ii) if the Spouse dies before the distributions to that Spouse begin, then this paragraph (2)(D) shall be applied as if the surviving Spouse were the Member. (3) For purposes of subsection (d)(1), the Required Distribution Date means April 1 of the calendar year following the calendar year in which the Member attains age 70-1/2; provided, however, that in the case of a Member who attained age 70-1/2 before January 1, 1988 such Member's Required Distribution Date shall be April 1 following the calendar year in which occurs the later of (A) the Member's attainment of age seventy and one-half (70-1/2), or (B) the Member's termination of employment, unless such Member is a Five-Percent Owner (as defined in Section 416(i) of the Code) of the Company at any time during the Plan Year ending with or within the calendar year in which such owner attains age sixty-six and one-half (66-1/2) or any subsequent year, in which case clause (B) shall not apply. 41 (4) For purposes of subsection (d), once distribution has commenced hereunder, the life expectancy of a Member and the Member's Spouse may not be redetermined. (5) A Member may not elect a form of distribution pursuant to paragraph (1) providing payments to a Beneficiary who is other than the Member's Spouse unless the actuarial value of the payments expected to be paid to the Member is more than 50 percent of the actuarial value of the total payments expected to be paid under such form of distribution. 9.8 Direct Rollover of Eligible Rollover Distributions (a) This section 9.8 applies to distributions made on or after January 1, 1993. Notwithstanding any provision of the Plan to the contrary that would otherwise limit a distributee's election under this section, a distributee may elect, at the time and in the manner prescribed by the Committee, to have any portion of an eligible rollover distribution paid directly to an eligible retirement plan specified by the distributee in a direct rollover. Any portion of an eligible rollover distribution that is not paid directly to an eligible retirement plan in a direct rollover may be subject to 20% Federal income tax withholding. (b) DEFINITIONS. (1) ELIGIBLE ROLLOVER DISTRIBUTION. An eligible rollover distribution is any distribution of all or any portion of the balance to the credit of the distributee, except that an eligible rollover distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of the distributee and the distributee's designated Beneficiary, or for a specified period of ten years or more; any distribution to the extent such distribution is required under section 401(a)(9) of the Code; and the portion of any distribution that is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities). (2) ELIGIBLE RETIREMENT PLAN. An eligible retirement plan is an individual retirement account described in section 408(a) of the Code, an individual retirement annuity described in section 408(b) of the Code, 42 an annuity plan described in section 403(a) of the Code, or a qualified trust described in section 401(a) of the Code, that accepts the distributee's rollover distribution. However, in the case of an eligible rollover distribution to the surviving Spouse, an eligible retirement plan is an individual retirement account or individual retirement annuity. (3) DISTRIBUTEE. A distributee includes a Participant or former Participant. In addition, the Participant's or former Participant's surviving Spouse and the Participant's or former Participant's Spouse or former Spouse who is the alternate payee under a qualified domestic relations order, as defined in section 414(p) of the Code, are distributees with regard to the interest of the Spouse or former Spouse. (4) DIRECT ROLLOVER. A direct rollover is a payment by the Plan to the eligible retirement plan specified by the distributee. 43 Article X. Rights and Options on Distributed Shares of Company Stock 10.1 Right of First Refusal (a) Shares of Company Stock distributed by the Trustee may be subject to a right of first refusal. Such a right shall provide that prior to any subsequent transfer, the shares must first be offered in writing to the Trust and then, if refused by the Trust, to the Company at a price equal to the greater of (1) the then fair market value of such shares of Company Stock as determined in good faith by the Committee, in accordance with Treasury regulation section 54.4975-11(d)(5) or (2) the purchase price offered by a buyer, other than the Company or Trustee, making an offer in good faith (as determined by the Committee) to purchase such shares of Company Stock. (b) The Trust or the Company, as the case may be, may accept the offer as to part or all of the Company Stock at any time during a period not exceeding 14 days after the Trust receives the offer, on terms and conditions no less favorable to the Trust than those offered by the independent third-party buyer. Any installment purchase shall be made pursuant to a note secured by the shares purchased and shall bear a reasonable rate of interest as determined by the Committee. (c) If the offer is not accepted by the Trust, the Company, or both, then the proposed transfer may be completed within a reasonable period following the end of the 14-day period but only upon terms and conditions no less favorable to the shareholder than the terms and conditions of the third- party buyer's prior offer. (d) Shares of Company Stock that are publicly traded within the meaning of Treasury regulation section 54.4975-7(b)(1)(iv) at the time such right may otherwise be exercised shall not be subject to this right of first refusal. 10.2 Put Option (a) Shares of Company Stock acquired by the Trust shall be subject to a put option at the time of distribution if at such time the shares are not readily tradable on an established market within the meaning of section 409(h)(1)(B) of the Code. The put option shall be exercisable by the Member, Beneficiary, Spouse, their donees, or by a person (including an estate or its distributee) to whom the Company Stock passes by reason of the death of the Member, Beneficiary, or Spouse. The put option shall 44 provide that for a period of at least 60 days following the date of distribution of the Company Stock, the holder of the option shall have the right to cause the Company, by notifying it in writing, to purchase such shares at their fair market value, as determined pursuant to section 5.2. If the put option is not exercised within such 60-day period, the option shall be exercisable for an additional period of 60 days in the following Plan Year. The Committee may give the Trustee the option to assume the rights and obligations of the Company at the time the put option is exercised, insofar as the repurchase of Company Stock is concerned. (b) If the entire adjusted balance of a Member's Accounts is distributed to the Member within one taxable year, payment of the price of the Company Stock purchased pursuant to an exercised put option shall be made in no more than five substantially equal annual payments, and the first installment shall be paid not later than 30 days after the Member exercises the put option. The Plan shall provide adequate security and pay a reasonable rate of interest on amounts not paid after 30 days. If the entire adjusted balance of a Member's Accounts is not distributed to him or her within one taxable year, payment of the price of the Company Stock purchased pursuant to an exercised put option shall be made in a single sum not later than 30 days after the Member exercises the put option. 45 Article XI. Pretermination Distributions and Dividends 11.1 Pretermination Distributions Except as provided in sections 11.2 and 7.9, a Member is not entitled to any payment, withdrawal, or distribution under the Plan while he or she is a Participant. 11.2 Dividends Any cash dividend received by the Trustee on Company Stock allocated to the Accounts of a Member, Beneficiary, or Spouse as of the record date for such dividend shall be paid to such Member, Beneficiary, or Spouses. Any such payment in cash must be made no later than 90 days after the end of the Plan Year in which the dividend is received by the Trustee. Any such payment of cash dividends on shares of Company Stock shall be accounted for as if the Member, Beneficiary, or Spouse receiving such dividends were the direct owner of such shares of Company Stock and such payment shall not be treated as a distribution for purposes of Article X. 46 Article XII. Plan Administration 12.1 Powers The Committee shall have all powers necessary to discharge its duties in administering the Plan including, but not by way of limitation, discretionary authority with respect to the following powers: (a) to construe and interpret the Plan; (b) to determine all questions regarding the status and rights of Members and Beneficiaries, including questions relating to age, Vesting Service, eligibility, or Compensation; (c) to make and enforce such rules and regulations as it shall deem necessary or proper for efficient administration of the Plan; and (d) to retain counsel, employ agents, and actuaries and provide for such clerical, medical, accounting, auditing, and other services as it may require in carrying out the provisions of the Plan; provided, however, that no member of the Committee shall participate in any action on any matter involving solely his or her own rights or benefits or those of his or her Spouse or children, and such matters shall be determined by the other members of the Committee. The Committee may delegate any or all of its powers under this Article XII to an agent designated under section 12.1(d). Any such designation shall be in writing, signed by the Secretary of the Committee. 12.2 Directions to Trustee The Committee shall direct the Trustee concerning all payments which shall be made out of the Trust pursuant to the provisions of the Plan. Any direction to the Trustee, including but not limited to a direction concerning payments, shall be in writing, signed by the Secretary of the Committee or any member thereof, or any agent to whom authority has been delegated. The Trustee shall act in a manner consistent with any such direction that is proper, made in accordance with the Plan, and not contrary to ERISA. 47 12.3 Uniform Rules All rules adopted and all actions taken by the Committee shall be uniform in nature as applied to all persons similarly situated and shall not discriminate in favor of Employees who are officers, shareholders, or highly compensated employees. 12.4 Reports The Committee shall keep on file, in such form as it shall deem convenient and proper, all reports of the Trust received from the Trustee. The Committee shall give to each Member a written report of the amount of his or her Accounts at annual or more frequent intervals. Additional reports may be given to a Member by telephone. 12.5 Compensation Members of the Committee shall not receive compensation for their services in connection with the Plan, but the Company shall reimburse them for any necessary expenses incurred in the discharge of their duties. 12.6 Claims Procedure (a) Claims for benefits under the Plan shall be made in writing to the Committee. If the Committee wholly or partially denies a claim for benefits, the Committee shall, within a reasonable period of time, but no later than 90 days after receipt of the claim, notify the claimant in writing of the denial of the claim. Notice of a denial of a claim shall be written in a manner calculated to be understood by the claimant and shall contain (1) the specific reason or reasons for denial of the claim, (2) a specific reference to the pertinent Plan provisions upon which the denial is based, (3) a description of any additional material or information necessary for the claimant to perfect the claim, together with an explanation of why such material or information is necessary, and (4) an explanation of the Plan's review procedure. If notice of the denial of a claim is not furnished in accordance with this subsection (a) within 90 days after the Committee receives it, the claim shall be deemed denied and the claimant shall be permitted to proceed to the review stage described in subparagraph (b) below. (b) Within 60 days after the claimant receives the written notice of denial of the claim, or the date the claim is deemed denied pursuant to subsection (a) above, or such later time as shall be deemed reasonable taking into account 48 the nature of the benefit subject to the claim and other attendant circumstances, or within 60 days after the claim is deemed denied as set forth above, if applicable, the claimant may file a written request with the Committee that it conduct a full and fair review of the denial of the claimant's claim for benefits, including the holding of a hearing, if deemed necessary by the Committee. In connection with the claimant's appeal of the denial of the claimant's benefit, the claimant may review pertinent documents and may submit issues and comments in writing. The Committee shall render a decision on the appeal promptly, but not later than 60 days after the receipt of the claimant's request for review, unless special circumstances (such as the need to hold a hearing, if necessary) require an extension of time for processing, in which case the 60-day period may be extended to 120 days. The Committee shall notify the claimant in writing of any such extension. Such decision shall (1) include specific reasons for the decision, (2) be written in a manner calculated to be understood by the claimant, and (3) contain specific references to the pertinent Plan provisions upon which the decision is based. 12.7 Indemnity for Liability The Company shall indemnify the Committee and each other fiduciary who is an Employee of the Company, against any and all claims, losses, damages, expenses, including counsel fees, incurred by said fiduciaries, and any liability, including any amounts paid in settlement with such a fiduciary's approval, arising from the fiduciary's action or failure to act, except when the same is judicially determined to be attributable to the gross negligence or willful misconduct of such fiduciary. 49 Article XIII. Amendment and Termination 13.1 Amendment The Company reserves the right at any time and from time to time to amend the Plan in whole or in part either retroactively or prospectively by action of the Board or action of the Executive Committee of the Board, but no such amendment shall authorize or permit any part of the corpus or income of the Trust to be used for or diverted to purposes other than for the exclusive benefit of Members or their Beneficiaries, or to deprive any of them of any funds then held for his or her Account. 13.2 Termination It is the intention of the Company to continue the Plan and to make contributions thereto, but the Company reserves the right to terminate the Plan in whole or in part as of any Valuation Date by action of the Board or action of the Executive Committee of the Board and for any reason satisfactory to the Board. The Company, however, shall not terminate the Plan while any Loan remains outstanding and unpaid in whole or in part, without the prior written consent to any such termination by all holders and guarantors, if any, of the Plan's obligations under such Loan. Where any holder or guarantor has a representative on the Committee, prior written consent will not be required if such representative approves the amendment. Upon partial or full termination, all affected Participants shall become fully vested, and upon permanent discontinuance of contributions by the Company, all Participants shall become fully vested. After termination of the Plan, the Committee and the Trust will continue until the Accounts of each Participant have been distributed in accordance with the terms of the Plan. 13.3 Merger, Sale In the event of any merger or consolidation of the Plan with, or transfer in whole or in part of the assets and liabilities of the Trust to another trust fund held under any other plan of deferred compensation maintained or to be established for the benefit of all or some of the Participants, the Plan shall be so merged or consolidated, or the assets of the Trust applicable to such Participants shall be so transferred, only if-- (a) each Member would (if either the Plan or the other plan then terminated) receive a benefit immediately after the merger, consolidation, or transfer which is equal to or greater than the benefit he or she would have been 50 entitled to receive immediately before the merger, consolidation, or transfer (if the Plan had then terminated); (b) resolutions of the Board of Directors or of any new or successor employer of the affected Members, shall authorize such transfer of assets; and, in the case of the new or successor employer of the affected Members, its resolutions shall include an assumption of liabilities with respect to such Members' inclusion in the new employer's plan; and (c) such other plan and trust are qualified under section 401(a) and exempt under section 501(a) of the Code. In the event a portion of the business of the Company is sold or discontinued, the Board of Directors in its discretion may direct that all Members who are employed by the new owner of that portion of the business shall become fully vested. 13.4 Distribution Upon Termination In the event of the termination of the Plan, there shall be distributed to each Member, or to his or her Beneficiary in the case of a deceased Member, a benefit equal to the sum of the value of the Member's Account as of the Valuation Date on which termination occurs. If such benefits shall not exhaust the assets of the Trust, any remaining assets shall be allocated to the Accounts of the Members as though they were additional Employer Contributions, and in no event shall any such assets revert to the Company or any Participating Employer. 51 Article XIV. Extension of Plan to Affiliates 14.1 Participation in the Plan Any Affiliate which desires to become a Participating Employer under the Plan may elect, with the consent of the Board of Directors, to become a party to the Plan and the related Trust by adopting the Plan for the benefit of its Eligible Employees, effective as of the date specified in such adoption. The adoption resolution or decision may contain such specific changes and variations in Plan or Trust Agreement terms and provisions applicable to such Participating Employer and its Employees as may be acceptable to the Board and the Trustee. However, the sole, exclusive right of any other amendment of whatever kind or extent to the Plan is reserved to the Board of Directors. The Board of Directors may amend specific changes and variations in the Plan or Trust terms and provisions as adopted by the Participating Employer in its adoption resolution without the consent of such Participating Employer. The adoption resolution or decision shall become, as to such adopting organization and its employees, a part of this Plan as then amended or thereafter amended and the related Pension Trust. It shall not be necessary for the adopting organization to sign or execute the original or then amended Plan and Trust. The coverage date of the Plan for any such adopting organization shall be that stated in the resolution or decision of adoption, and from and after such effective date, such adopting organization shall assume all the rights, obligations, and liabilities of an individual employer entity hereunder and under the Trust. The administrative powers and control of the Company, as provided in the Plan and Trust Agreement shall not be diminished by reason of the participation of any such adopting organization in the Plan and Trust Agreement. 14.2 Withdrawal from the Plan Any Participating Employer may withdraw from the Plan and Trust after giving notice to the Board of Directors, provided the Board consents to such withdrawal. In the event of such withdrawal, the Committee shall cause a valuation of the Trust Fund to be made to ascertain the value of assets which are attributable to Members who are Employees of the terminating Participating Employer or their Beneficiaries in the case of deceased Members and shall direct the Trustee to segregate assets which are deemed to be so attributable to such Members from the Trust, and to make distribution to the Members or their Beneficiaries as if the Plan had terminated with respect to the Members or their Beneficiaries of such Participating Employer. In the event such withdrawal constitutes a partial termination of this Plan, only the affected Participants shall have fully vested and nonforfeitable rights in the 52 benefits to be provided by the allocations (unless they were already fully vested prior to the partial termination). Distribution may be implemented through continuation of the Trust, or transfer to another trust fund exempt from tax under section 501 of the Code, or to a group annuity contract qualified under Code section 401, or distribution may be made as an immediate cash payment; provided, however, that no such action shall divert any part of such fund to any purpose other than the exclusive benefit of the Employees of such Participating Employer. 53 Article XV. Top-Heavy Provisions The following provisions shall become effective in any Plan Year in which the Plan is determined to be a top-heavy plan. (a) DETERMINATION OF TOP-HEAVY. The Plan will be considered a top-heavy plan for the Plan Year if as of the last day of the preceding Plan Year (1) the account balances of Participants who are key employees (as defined in section 416(i) of the Code) exceeds 60 percent of the account balances of all Participants (the "60 Percent Test") or (2) the Plan is part of a required aggregation group and the required aggregation group is top-heavy. However, and notwithstanding the results of the 60 Percent Test, the Plan shall not be considered a top-heavy plan for any plan year in which the Plan is a part of a required or permissive aggregation group which is not top-heavy. The top-heavy ratio shall be computed pursuant to section 416(g) of the Code and the regulations issued thereunder. A "required aggregation group" is each plan of the Company in which a key employee is a participant and each other plan of the Company, if any, which enables such plan to meet the requirements of Code section 401(a)(4) or 410. The Company may treat any plan not required to be included in an aggregation group as being part of a "permissive aggregation group" if such group would continue to meet the requirements of Code sections 401(a)(4) and 410 with such plan being taken into account. (b) MINIMUM BENEFIT. The Company's contribution to a Participant's Matching Contribution Account under section 5.1 shall be 3 percent of the Participant's Compensation, except that this subsection (b) shall not apply if-- (1) the Participant is also a participant in the Pension Plan, (2) the Pension Plan is a top-heavy plan, and (3) the Participant receives from the Pension Plan the defined benefit minimum required under section 416(c)(1) of the Code. 54 XVI. Miscellaneous Provisions 16.1 Spendthrift Provisions The interests of Employees and their Beneficiaries in the Plan shall not be subject to the claims of any creditor, any Spouse for alimony or support, or others, or to legal process, and may not be voluntarily or involuntarily alienated or encumbered. Notwithstanding the foregoing, the Plan shall make all payments required by a qualified domestic relations order within the meaning of Code section 414(p). The Committee shall establish a procedure to determine the qualified status of a domestic relations order and to administer distributions under a qualified order. In no event shall a domestic relations order be determined to be a qualified domestic relations order if it requires the Plan to make distributions to an alternate payee prior to the date that a Member attains "earliest retirement age." Notwithstanding the foregoing, the Plan may make a distribution to an alternate payee prior to the date that a Member attains "earliest retirement age" if the qualified domestic relations order provides that the Plan and the alternate payee may agree in writing to the earlier distribution and the distribution is made pursuant to such a written agreement. For purposes of a qualified domestic relations order, "earliest retirement age" means the date on which the earliest to occur of-- (a) the date the Member is entitled to a distribution under this Plan, or terminates from employment, (b) the later of (i) the date the Member attains age 50, or (ii) the earliest date on which the Member could begin receiving benefits under this Plan if the Member separated from service. 16.2 Incompetency Every person receiving or claiming benefits under the Plan shall be presumed to be mentally competent and of age until the Committee receives a written notice, in a form and manner acceptable to it, that such person is incompetent or a minor, and that a guardian, conservator, or other person legally vested with the care of his estate has been appointed. In the event that the Committee finds that any person to whom a benefit is payable under the Plan is unable to properly care for his or her affairs, or is a minor, then any payment due (unless a prior claim therefor shall have been made by a duly appointed legal representative) may be paid to the Spouse, a child, a parent, or a brother or sister, or to any person 55 deemed by the Committee to be authorized to care for such person otherwise entitled to payment. In the event a guardian, executor, administrator, or conservator of the estate of any person receiving or claiming benefits under the Plan shall be appointed by a court of competent jurisdiction, payments shall be made to such guardian, executor, administrator, or conservator provided that proper proof of appointment is furnished in a form and manner suitable to the Committee. Any payment made under the provisions of this section 16.2 shall be a complete discharge of any liability therefor under the Plan. 16.3 Unclaimed Funds Each Member shall keep the Committee informed of the Member's current address and the current address of the Member's Spouse and Beneficiaries. Neither the Company or any Affiliate, the Committee, nor the Trustee shall be obligated to search for the whereabouts of any such person. If the then current location of a Member is not made known to the Committee within three years after the date on which the Committee directs the distribution to the Member of the Member's Accounts, distribution may be made as though the Member had died at the end of the three-year period. If, within one additional year after such three-year period has elapsed, or within three years after the actual death of a Member, the Committee is unable to locate any individual who would receive a distribution upon the death of the Member pursuant to Article IX, the Member's Accounts shall be deemed a Forfeiture; provided, however, that if the Member, Beneficiary, or Spouse makes a claim for any amount that has been so forfeited, the forfeited benefits shall be reinstated. The amount required to restore such benefits shall be made up from Forfeitures and, to the extent necessary, Employer Contributions prior to their allocation pursuant to section 7.4. 16.4 Rights Against the Company Neither the establishment of the Plan, nor of the Trust, nor any modification thereof, nor any distributions hereunder shall be construed as giving to any person whomsoever any legal or equitable rights against the Committee, the Company, or the officers, directors, or shareholders as such of the Company, or as giving any Employee or Member the right to be retained in the employ of the Company. All benefits payable under the Plan shall be paid or provided for solely from the Trust, and the Company shall have no liability or responsibility for benefit distributions other than to make contributions to the Trust as herein provided. 16.5 Illegality of Particular Provision 56 The illegality of any particular provision of this Plan shall not affect the other provisions thereof, but the Plan shall be construed in all respects as if such invalid provision were omitted. 16.6 Effect of Mistake In the event of a mistake or misstatement as to the age, eligibility, compensation, service or participation of a Member or the amount of distributions made or to be made to a Member or other person, the Committee shall, to the extent it deems possible, cause to be withheld or accelerated, or otherwise make adjustment of, such amounts as will in its judgment accord to such Member or other person, or distribution to which he or she is properly entitled under the Plan. 16.7 Compliance with Federal and State Securities Laws (a) The Company will take all necessary steps to comply with any applicable registration or other requirements of federal or state securities laws from which no exemption is available. (b) Stock certificates distributed to Members, Beneficiaries, or Spouses may bear such legends concerning restrictions imposed by federal or state securities laws, and concerning other restrictions and rights under the Plan, as the Committee in its discretion may determine. 16.8 No Discrimination Whenever in the administration of the Plan action by the Committee is required with respect to eligibility or classification of Employees, contributions, or benefits, such action shall be uniform in nature as applied to all persons similarly situated, and no such action shall discriminate in favor of Employees who are Highly Compensated Employees. 16.9 Exclusive Benefit of Employees (a) All Employer Contributions made pursuant to the Plan shall be held by the Trustee in accordance with the terms of the Trust Agreement for the exclusive benefit of those Employees who are Members under the Plan, including former Employees, Beneficiaries, and Spouses, and shall be applied to provide benefits under the Plan and to pay expenses of administration of the Plan and the Trust to the extent that such expenses are not otherwise paid. At no time prior to the satisfaction of all liabilities with respect to such Members, their Beneficiaries and Spouses shall any part of the Trust Fund (other than such part as may be required to pay 57 administration expenses) be used for, or diverted to, purposes other than the exclusive benefit of such Members, their Beneficiaries and Spouses. (b) Notwithstanding section 16.8(a)-- (1) if an Employer Contribution under the Plan is conditioned on initial qualification of the Plan under section 401(a) of the Code, and the Plan receives an adverse determination with respect to its initial qualification, the Trustee shall, upon written request of the Company, or Participating Employer making the contribution, return to the Company or Participating Employer the amount of the contribution (increased by earnings attributable thereto and reduced by losses attributable thereto) within one calendar year after the date that qualification of the Plan is denied, provided that the application for the determination is made by the time prescribed by law for filing the employer's return for the taxable year in which the Plan is adopted, or such later date as the Secretary of the Treasury may prescribe; (2) if an Employer Contribution is conditioned upon the deductibility of such contribution under section 404 of the Code, then, to the extent the deduction is disallowed, the Trustee shall, upon written request of the Company or Participating Employer making the contribution, return the contribution to the extent disallowed to the Company or Participating Employer within one year after the date the deduction is disallowed; (3) if an Employer Contribution or any portion thereof is made by the Company or a Participating Employer by a mistake of fact, the Trustee shall, upon written request of the Company or Participating Employer, return the contribution or the portion to the Company or Participating Employer within one year after the date of payment to the Trustee; and (4) earnings attributable to amounts to be returned to the Company ro Participating Employer pursuant to paragraph (2) or (3) shall not be returned to the Company or Participating Employer, and losses attributable to amounts to be returned pursuant to paragraph (2) or (3) shall reduce the amount to be so returned. 16.10 Governing Law 58 The provisions of the Plan shall be construed, administered, and enforced in accordance with the laws of Illinois, to the extent such laws are not superseded by laws of the United States. All Employer Contributions to the Trust shall be deemed to be made in Illinois. 16.11 Change-in-Control Notwithstanding any provision of the Plan to the contrary, if a Change-in- Control (as defined below) occurs-- (a) each Participant who is an Employee on the date the Change-in-Control occurs shall be 100 percent vested in the adjusted balance of the Participant's Company Stock and Other Investments Accounts; (b) no merger, transfer of assets, or other similar transactions involving the Plan shall be permitted until all Loans outstanding at the time of the Change-in-Control have been repaid and all shares of Company Stock held in a Suspense Account in respect thereof have been released and allocated to Participants' Company Stock Account of Participants employed as of the Change-in-Control date; (c) no other action may be taken pursuant to Article XIII that would have the affect of diverting such shares to the Company Stock Accounts of Participants who are not employees of the Company or a Participating Employer as of the Change-in-Control date; or (d) if, in connection with the Change-in-Control, Company Stock held by the Plan has been sold for consideration other than securities constituting Company Stock, then the date that the Change-in-Control occurs shall be a special Valuation Date and each Participant with an Account under the Plan as of the date the Change-in-Control occurs shall be entitled to share in the proceeds of such sale in the manner described in section 7.7(b). For purposes of this section, a "Change-in-Control" shall be deemed to occur on the earliest of-- (1) the receipt by Northern Trust Corporation (the "Corporation") of a Schedule 13D or other statement filed under section 13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), indicating that any entity, person, or group has acquired beneficial ownership, as that term is defined in Rule 13d-3 under the Exchange Act, of more than 30 59 percent of the outstanding capital stock of the Corporation entitled to vote for the election of directors ("voting stock"); (2) the commencement by any entity, person, or group (other than the Corporation or a subsidiary of the Corporation) of a tender offer or an exchange offer for more than 20 percent of the outstanding voting stock of the Corporation; (3) the effective time of (A) a merger or consolidation of the Corporation with one or more other corporations as a result of which the holders of the outstanding voting stock of the Corporation immediately prior to such merger or consolidation hold less than 80 percent of the voting stock of the surviving or resulting corporation or (B) a transfer of substantially all of the property of the Corporation other than to an entity of which the Corporation owns at least 80 percent of the voting stock; or (4) the election to the Board, without the recommendation or approval of the incumbent Board, of the lesser of (A) three directors or (B) directors constituting a majority of the number of Board members then in office. * * * * * * * * * * In Witness Whereof, the Company has caused this Plan to be executed on its behalf by its duly authorized officer this _________ day of _____________________ , 1995. THE NORTHERN TRUST COMPANY ATTEST: By __________________________________ By ________________________________ 60 EX-10.XXI 3 INCENTIVE STOCK PLAN EXHIBIT NUMBER (10)(XX)(1) TO 1994 FORM 10-K FIRST ----- AMENDMENT --------- OF -- THE NORTHERN TRUST CORPORATION 1992 INCENTIVE STOCK PLAN -------------------------------------------------------- The Northern Trust Corporation 1992 Incentive Stock Plan (the "Plan") is hereby amended, effective as of the date hereof, as follows: 1. By changing the name of the Plan in Section 1 to the "Northern Trust Corporation Amended 1992 Incentive Stock Plan." 2. By substituting the following sentence in place of the third sentence of Section 2 of the Plan: "Notwithstanding anything to the contrary contained herein, membership of the Committee shall be limited to Board members who meet the "disinterested person" definition in Rule 16b-3 under Section 16 of the Securities Exchange Act of 1934 and the "outside director" definition under Section 162(m) of the Internal Revenue Code and the regulations thereunder." 3. By substituting the following sentence in place of the first sentence of Section 5 of the Plan: "There is hereby reserved for issuance under the Plan an aggregate of 3,750,000 (reflecting an adjustment for the November, 1992 three-for-two stock split) shares of Common Stock, $1.66 2/3 par value, which may be authorized but unissued or treasury shares." 4. By substituting the following for Section 12 of the Plan: "12. NONTRANSFERABILITY. Except as provided below, each Award granted under the Plan to an employee shall not be transferable by him other than by will or the laws of descent and distribution and shall be exercisable, during his lifetime, only by him. In the event of the death of a participant during employment or prior to the termination, expiration, cancellation or forfeiture of any Award held by him hereunder, each Award theretofore granted to him shall be exercisable or payable to the extent provided therein but no later than five years after his death and then only: (a) by or to the executor or administrator of the estate of the deceased participant or the person or persons to whom the deceased participant's rights under the Award shall pass by will or the laws of descent and distribution; and (b) to the extent set forth in the benefit. Notwithstanding the foregoing, a Stock Option Agreement for an Award of Stock Options that are not Incentive Stock Options (including a Stock Option Agreement for an Award made prior to the January 1, 1995 effective date of the amendment to this Section 12), may permit the participant who received the Award, at any time prior to his death, to assign all or any portion of the Stock Option granted to him to: (i) his spouse or lineal descendants; (ii) the trustee of a trust for the primary benefit of his spouse or lineal descendants; or (iii) a partnership of which his spouse and lineal descendants are the only partners. In such event, the spouse, lineal descendant, trustee or partnership will be entitled to all of the rights of the participant with respect to the assigned portion of such Stock Option, and such portion of the Stock Option will continue to be subject to all of the terms, conditions and restrictions applicable to the Award, as set forth herein and in the related Stock Option Agreement immediately prior to the effective date of the assignment. Any such assignment will be permitted only if: (i) the participant does not receive any consideration therefore; and (ii) the assignment is expressly permitted by the applicable Stock Option Agreement (as such Stock Option Agreement may be amended) as approved by the Committee. Any such assignment shall be evidenced by an appropriate written document executed by the participant, and a copy thereof shall be delivered to the Committee on or prior to the effective date of the assignment." 5. By substituting the following in place of (ii) in the last sentence of Section 14: "(ii) if the election is made by a participant who is subject to the restrictions of Section 16 of the Securities Exchange Act of 1934, then the election must be made in accordance with such restrictions and the restrictions of Rule 16b-3." EX-10.XXII 4 LIFE INSURANCE AGREEMENT EXHIBIT NUMBER (10)(xxii) TO 1994 FORM 10-K NORTHERN TRUST CORPORATION DAVID W. FOX LIFE INSURANCE AGREEMENT AGREEMENT is made this 5th day of January, 1995, between David W. Fox (hereinafter referred to as the "Employee") and Northern Trust Corporation, a Delaware corporation having its principal office at 50 South LaSalle Street, Chicago, Illinois 60675 (hereinafter referred to as the "Corporation"): WHEREAS, the Employee has rendered valuable services to the Corporation in the past; and WHEREAS, the Employee wishes to be assured that his family will be entitled to a certain amount of additional compensation after his death; and WHEREAS, the Corporation wishes to induce the Employee to remain employed although he is now eligible to retire; NOW, THEREFORE, in the consideration of these premises and the covenants and agreements herein set forth, the parties hereto covenant and agree as follows: DEATH BENEFIT ------------- FIRST: The Corporation agrees that in the event of the Employee's death prior to making an effective election to retire under the Corporation's Pension Plan, the Corporation shall pay to the employee's designated beneficiary a lump sum of $4,300,000 no later than 60 days following the death of the Employee. The Employee hereby designates the Employee's wife, Mary Ann Evans Fox, or, if she is not living at this death, divide and allocate per stirpes among his descendants living at his death, and the amount allocated to each descendant shall be paid to The Northern Trust Company, as trustee of the David Wayne Fox Insurance Trust Dated November 24, 1965, to be added to the primary trust named for such descendant under paragraph 5 of that trust. FORFEITURE PROVISION -------------------- SECOND: In the event the Employee has submitted an effective election to retire under the Corporation's Pension Plan prior to his death, the Corporation shall be under no obligation to the Employee or his beneficiaries regarding the benefits provided by Paragraph FIRST hereof. UNFUNDED AGREEMENT ------------------ THIRD: This agreement is unfunded. The Corporation may, at its discretion, purchase insurance on the life of the Employee in an amount equal to some or all of the death benefit provided for in this agreement. ASSIGNABILITY PROHIBITED ------------------------ FOURTH: None of the Employee, the Employee's wife, or any other beneficiary under this agreement shall have any power or right to transfer, assign, anticipate, hypothecate or otherwise encumber any part of all of the amounts payable hereunder, and such amounts shall not be subject to seizure by any creditor of any such beneficiary, by a proceeding at law or in equity, and no such benefit shall be transferable by operation of law in the event of bankruptcy, insolvency or death of the Employee, his wife, or any other beneficiary hereunder. AGREEMENT TO SURVIVE MERGER, CONSOLIDATION, ETC. ------------------------------------------------ FIFTH: The Corporation agrees that it will not merge or consolidate with any other organization or permit its business activities to be taken over by any other organization unless and until such succeeding or continuing organization shall expressly assume the duties of the Corporation set forth in this agreement. GOVERNING LAW ------------- SIXTH: This agreement shall be governed by the laws of the state of Illinois. SEVERABILITY ------------ SEVENTH: In the event that any term or condition contained in the agreement shall, for any reason, be held by a court of competent jurisdiction to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other term or condition of this agreement, but this agreement shall be construed as if such invalid or illegal or unenforceable term or condition had never been contained herein. BINDING AGREEMENT ----------------- EIGHTH: This agreement shall be binding upon the beneficiaries, heirs, executors and administrators of the Employee and upon the successors and assigns of the Corporation. -2- ATTORNEY'S FEES AND COSTS ------------------------- NINTH: If any action at law or in equity, or any arbitration proceeding, is brought to enforce or interpret the terms of this agreement, the prevailing party shall be entitled to reasonable attorney's fees, costs and necessary disbursements in addition to any other relief to which he may be entitled. IN WITNESS WHEREOF, signed and sealed on the date first above written. WITNESS: CORPORATE SEAL NORTHERN TRUST CORPORATION BY /s/ William N. Setterstrom /s/ Peter L. Rossiter ---------------------------- --------------------- William N. Setterstrom Peter L. Rossiter TITLE: Executive Vice President WITNESS: /s/ Annelies Hunt /s/ David W. Fox -------------------------- --------------------- Annelies Hunt David W. Fox EMPLOYEE - 3 - EX-10.XXIII 5 MANAGEMENT PERF PLAN EXHIBIT NUMBER(10)(xxiii) To 1994 FORM 10-K NORTHERN TRUST CORPORATION MANAGEMENT PERFORMANCE PLAN I. PURPOSE OF PLAN The purpose of the Management Performance Plan (the "Plan") is to promote the achievement of superior Corporate financial and operating performance of the Northern Trust Corporation (hereinafter referred to as the "Corporation") and further the objective of delivering unrivaled service quality to its clients and partners through the awarding of cash incentive payments to selected officers. II. PLAN YEAR The Plan is effective from January 1, 1994 to December 31, 1994. III. ELIGIBILITY AND PARTICIPATION Eligibility to participate in the Plan is restricted to selected executive officers and subject to approval by the Compensation and Benefits Committee of the Board of Directors (the "Committee"). IV. PARTICIPANT TARGET AWARDS At the beginning of the Plan year, the Committee shall determine individual target awards. The target award will be described as a percent of the annual base salary earned during the Plan year. V. AWARD DETERMINATION Participant awards are based on the Corporation's financial achievement versus the Plan's Corporate Earnings Target, which is established by the Committee at the beginning of the Plan year. The participant's target award will be the amount which is awarded if the Corporation's financial achievement is equal to the Plan's Corporate Earnings Target. The amount of the award will either increase or decrease as calculated by the formula detailed on Attachment I. Attachment II provides an example of a participant's award calculation. VI. PAYMENT OF AWARDS Awards will be paid in cash as soon as practicable following the completion of the Plan year. Any award amount that, with all other compensation paid or to be paid for that year to the participant, exceeds the level of tax deductible compensation to the Corporation, as determined by the Internal Revenue Service Section 162(m), will be deferred and paid in the year following the participant's retirement. Deferred award balances will be adjusted with an interest factor as shall be determined at the time of the deferral by the Committee. Notwithstanding the foregoing, awards payable because of a Change in Control of the Corporation pursuant to Paragraph VIII shall be paid in cash as soon as practicable following such Change in Control. VII. PLAN ADMINISTRATION AND TERMINATION The Plan is administered by the Compensation and Benefits Committee. Subject to the provisions of the Plan, the Committee shall be authorized to interpret the Plan, to establish, amend and rescind any rules and regulations relating to the Plan, and to make all other determinations necessary or advisable for the administration of the Plan. The determinations of the Committee in the effective administration of the Plan, as described herein, shall be final and conclusive. The Board of Directors may amend, suspend, or terminate any or all provisions of the Plan at any time. VIII. MISCELLANEOUS PROVISIONS The following miscellaneous provisions are applicable to this Plan: (a) In the event of a participant's death, disability, or retirement, awards shall be prorated to the date of the event, and paid as described in Section VI. (b) Termination of employment by a participant during the Plan year, for reasons other than death, disability, or retirement shall result in immediate exclusion from the Plan unless the Compensation and Benefits Committee decides otherwise in its sole discretion. (c) Except in the event of the death of a participant, the rights and interests of a participant under the Plan shall not be assigned, encumbered, or transferred. (d) No employee or other person shall have any claim or right to be granted an award under the Plan. Neither the Plan, nor any action taken thereunder, shall be construed as giving any employee or other person any right to be retained in the employ of the Corporation. (e) The Corporation shall have the right to deduct from all payments made under the Plan any taxes required by law to be withheld with respect to such payments. (f) All questions pertaining to the validity, construction and administration of the Plan and any award hereunder shall be determined in conformity with the laws of the State of Illinois. (g) Each participant shall designate a beneficiary (the "Designated Beneficiary") to receive payments due hereunder in the event of such participant's death. If no Designated Beneficiary survives the participant, it shall be the surviving spouse of the participant or, if there is no surviving spouse, it shall be the participant's estate. (h) Notwithstanding any other terms contained herein, in event of a Change in Control of the Corporation, the participant's target award shall be paid in accordance with the last sentence of Section VI of this Plan. For purposes of this paragraph, a "Change in Control" of the Corporation shall be deemed to occur on the earliest of: (i) The receipt by the Corporation of a Schedule 13D or other statement filed under Section 13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), indicating that any entity, person, or group has acquired beneficial ownership, as that term is defined in Rule 13d-3 under the Exchange Act, or more than 30% of the outstanding stock of the Corporation entitled to vote for the election of directors ("voting stock"); (ii) The commencement by any entity, person, or group (other than the Corporation or a subsidiary of the Corporation) of a tender offer or an exchange offer for more than 20% of the outstanding voting stock of the Corporation; (iii) The effective time of (A) a merger or consolidation of the Corporation with one or more other corporations as a result of which the holders of the outstanding voting stock of the Corporation immediately prior to such merger or consolidation hold less than 80% of the voting stock of the surviving or resulting corporation, or (B) a transfer of substantially all of the property of the Corporation other than to an entity of which the Corporation owns at least 80% of the voting stock; or (iv) The election of the Board of Directors of the Corporation, without the recommendation or approval of the incumbent Board of Directors of the Corporation, or the lesser of (A) three directors or (B) directors constituting a majority of the number of directors of the Corporation then in office. ATTACHMENT I MANAGEMENT PERFORMANCE PLAN CORPORATE EARNINGS TARGET AND AWARD SCHEDULE 1994 CORPORATE EARNINGS TARGET ------------------------------ The 1994 Management Performance Plan Corporate Earnings Target is $195 million. Actual earnings after the accrual for payments made under the Plan and after any adjustments for unusual and/or extraordinary items will be compared against the Corporate Earnings Target. TARGET AWARD SCHEDULE --------------------- The percentage of the target award that will be payable will be determined in accordance with the following formula: For each percent change in net income above/below the $195 million earnings target, the percent of the award shall be by: 1% for each percent between 0-5%, 2% for each percent between 5.1-10%, 3% for each percent between 10.1-15%, and 4% for each percent 15.1-20%.
% of Net Income Target % of Target Award Payable ---------------------- ------------------------- 120 150 115 130 110 115 107 109 105 105 103 103 100 100 97 97 95 95 93 91 90 85 85 70 80 50
ATTACHMENT II MANAGEMENT PERFORMANCE PLAN 1994 AWARD CALCULATION EXAMPLES Assumptions ----------- . Participant Target Award - 20% . Annual Salary Earned - $100,000 Target Award - 20% or $20,000 at achievement ------------ of the Corporate Earnings Target Award levels at various levels of Corporate achievement versus the Corporate Earnings Target: Percentage of Corporate Earnings Amount of Target Achieved Award ------------------ --------- 110% $23,000 105% $21,000 103% $20,600 Corporate Earnings Target- 100% $20,000 97% $19,400 95% $19,000 90% $17,000 EX-11 6 COMP OF PER SHARE EARN EXHIBIT NUMBER (11) TO 1994 FORM 10-K NORTHERN TRUST CORPORATION COMPUTATION OF PER SHARE EARNINGS For the Year Ended December 31, -------------------------------------- 1994 1993 1992 ------------ ------------ ------------ Computations Required by Regulation S-K Primary Earnings Per Share -------------------------- Net Income Applicable to Common Shares $174,917,377 $161,572,474 $142,730,771 ------------ ------------ ------------ Weighted Average Number of Common and Common Equivalent Shares Outstanding Common Shares 53,866,513 53,019,436 52,199,933 Diluted Effect of Common Equivalent Shares (A) Stock Options 863,506 1,177,972 1,436,772 Long Term Performance Stock Plan 405,626 391,025 395,224 Other 8,569 1,500 1,301 ---------- ---------- ---------- 55,144,214 54,589,933 54,033,230 ========== ========== ========== Net Income Per Common and Common Equivalent Share $3.17 $2.96 $2.64 ----- ----- ----- (A) Determined by application of the treasury stock method. NORTHERN TRUST CORPORATION COMPUTATION OF PER SHARE EARNINGS
For the Year Ended December 31, -------------------------------------- 1994 1993 1992 ------------ ------------ ------------ Computations Required by Regulation S-K Fully Diluted Earnings Per Share -------------------------------- Net Income Applicable to Common Shares $174,917,377 $161,572,474 $142,730,771 Add Back: Dividend on Series E Convertible Preferred Stock 3,125,000 3,129,199 2,764,710 ------------ ------------ ------------ $178,042,377 $164,701,673 $145,495,481 ============ ============ ============ Weighted Average Number of Common and Common Equivalent Shares Outstanding Common Shares 53,866,513 53,019,436 52,199,933 Diluted Effect of Common Equivalent Shares (A) Stock Options 866,356 1,223,468 1,538,697 Long Term Performance Stock Plan 406,022 399,331 403,679 Other 8,664 1,754 1,580 Other Potentially Dilutive Securities Equivalent Shares Assuming Conversion of Series E Convertible Preferred Stock 1,204,820 1,204,820 1,066,562 ------------ ------------ ------------ 56,352,375 55,848,809 55,210,451 ============ ============ ============ Net Income Per Common and Common Equivalent Share $3.16 $2.95 $2.64 ----- ----- -----
(A) Determined by application of the treasury stock method. EX-13 7 ANNUAL REPORT EXHIBIT NUMBER (13) TO 1994 FORM 10-K Management's Discussion and Analysis of Financial Condition and Results of Operations Northern Trust Corporation (Corporation) is a bank holding company organized in 1971 to hold all of the outstanding capital stock of The Northern Trust Company (Bank), an Illinois banking corporation located in the Chicago financial district. Northern Trust Corporation also owns three other banks in the Chicago metropolitan area, a bank in each of Florida, Arizona, California and Texas, and various other nonbank subsidiaries, including a securities brokerage firm, a futures commission merchant and a retirement benefit plan services company. Although the operations of other subsidiaries will be of increasing significance, it is expected that the Bank will continue to be the major source of the consolidated assets, revenues and net income in the foreseeable future. All references to Northern Trust refer to Northern Trust Corporation and its subsidiaries on a consolidated basis. The following provides an understanding of the consolidated financial statements and other statistical data presented in this report. RESULTS OF OPERATIONS OVERVIEW. Net income for 1994 totaled a record $182.2 million, an 8.5% increase from the $167.9 million earned in 1993 which in turn was 12% greater than the $149.5 million earned in 1992. On a fully diluted basis, net income per common share increased 7% to $3.16 in 1994, compared with net income per common share of $2.95 in 1993 and $2.64 in 1992. The record 1994 net income performance, together with strong growth in equity, produced a return on average common stockholders' equity of 16.6% compared with 17.9% in 1993 and 18.7% in 1992. The return on average assets was 1.02% in 1994 compared with 1.07% in 1993 and 1.11% in 1992. 1994 marks the seventh consecutive year of record earnings. Trust fees reached a new high surpassing $450 million, while trust assets under administration reached $499 billion at December 31, 1994, up $22 billion from 1993. Record net interest income, strong foreign exchange trading profits, a lower provision for credit losses and the gain on the sale of the 21% interest in Banque Scandinave en Suisse (BSS) also contributed to the year's performance. Partially offsetting these positive factors was the impact of several nonrecurring expenses. This revenue growth combined with controlled increases in noninterest expenses resulted in record profits. Primarily through the retention of earnings, stockholders' equity grew to $1.3 billion versus $1.2 billion at December 31, 1993 and $1.0 billion at December 31, 1992. The Board of Directors increased the quarterly dividend per common share 18.2% in November 1994, to $.26 from $.22, for a new annual rate of $1.04. This is the eighth consecutive year in which the dividend rate has been increased, and 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. Northern Trust's strategy will focus on those businesses with the greatest growth and profitability potential while continuing to emphasize cost containment, quality, and the maximization of the benefits derived from our technological investments. Expense growth and capital expenditures will also be closely monitored to ensure that short- and long- term business strategies are effectively supported. Although noninterest expenses are expected to grow in total to support these strategies, Northern Trust has set the goal of taking out approximately $15 million from base expenses in each of the next three years. SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA
(In Millions Except Per Share Amounts) 1994 1993 1992 1991 1990 --------------------------------------------------------------------------------- Net Interest Income $ 338.2 $ 329.3 $ 311.2 $ 281.9 $ 249.3 Provision for Credit Losses 6.0 19.5 29.5 31.0 14.0 Noninterest Income 629.8 552.4 509.4 412.8 369.3 Noninterest Expenses 700.5 628.2 584.6 500.1 464.9 Provision for Income Taxes 79.3 66.1 57.0 36.2 24.3 --------------------------------------------------------------------------------- NET INCOME $ 182.2 $ 167.9 $ 149.5 $ 127.4 $ 115.4 --------------------------------------------------------------------------------- Net Income Applicable to Common Stock $ 174.9 $ 161.6 $ 142.7 $ 121.4 $ 109.2 --------------------------------------------------------------------------------- PER COMMON SHARE Net Income-Primary $ 3.17 $ 2.96 $ 2.64 $ 2.29 $ 2.06 -Fully Diluted 3.16 2.95 2.64 2.27 2.05 Dividends Declared .92 .77 1/2 .66 1/2 .58 .52 --------------------------------------------------------------------------------- Average Total Assets $17,885.8 $15,700.2 $13,418.0 $12,182.5 $11,682.1 Senior Medium-Term Notes at Year-End 547.0 817.0 312.0 2.0 -- Notes Payable at Year- End 244.8 326.8 233.2 264.1 171.6 ---------------------------------------------------------------------------------
26 NORTHERN TRUST CORPORATION NONINTEREST INCOME. The success of Northern Trust's strategy of maintaining a diverse revenue base is evidenced by the fact that noninterest income, exclusive of a $28.5 million net gain on the BSS sale, represents 62% of its total taxable equivalent revenue, compared with 60% one year ago. Noninterest income totaled $629.8 million in 1994, $552.4 million in 1993 and $509.4 million in 1992. TRUST FEES. Excluding the gain on the sale of BSS, trust fees accounted for 75% of total noninterest income and 47% of total taxable equivalent revenue in 1994. Trust fees for 1994 increased 12% to $453.4 million from $404.8 million in 1993 which was up 10% from $368.4 million in 1992. Trust fees have increased at a compound growth rate of 14% for the last five years. The April 1994 acquisition of Hazlehurst & Associates, Inc., a privately-held retirement benefit plan services company, contributed approximately $10.6 million in trust fees in 1994. The increase in 1994 trust fees is principally the result of growth in business from new and existing clients, particularly for investment management, global custody and security lending services. Contributing to the 1993 fee growth were new business results coupled with higher stock and bond market levels. Fees are based on the market value of assets managed and administered, transaction fees and other services rendered. Asset-based fees are typically determined on a sliding scale so that as the value of a client portfolio grows in size, Northern Trust receives a smaller percentage of the increasing value as fee income. Therefore, market value or other incremental changes in a portfolio's size do not typically have a proportionate impact on the level of trust fees. In addition to fees, certain trust-related activities result in deposits, primarily interest-bearing, which are maintained with the bank subsidiaries and foreign branches. These deposits averaged $3.9 billion in 1994 and $2.8 billion in 1993. Northern Trust's trust 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 highly focused services are fairly evenly distributed between Northern Trust's two business units, Corporate and Institutional Services (CIS) and Personal Financial Services (PFS). A discussion of the trust activities of each of these business units follows. CORPORATE AND INSTITUTIONAL SERVICES. At December 31, 1994 trust assets under administration for CIS totaled $447.2 billion, an increase of 5% from $426.5 billion a year ago. Trust fees for CIS increased 18% in 1994 to $230.1 million from $195.0 million in 1993 which was up 12% from $173.8 million in 1992. Northern Trust continues to be a leading provider of Master Trust and Master Custody services in various market segments. These market segments are principally large U.S. corporate, public funds, taxable and international asset pools. The major products offered include custody, investment management and securities lending services. CIS also includes a correspondent trust market segment which provides custody, systems and investment services to smaller bank trust departments. Large U.S. Corporate. Trust fees from the large U.S. corporate market segment totaled $122.0 million in 1994. Trust fees for this segment in 1993 and 1992 totaled $104.0 million and $93.6 million, respectively. Assets under administration totaled $181.8 billion at December 31, 1994 compared with $179.6 billion a year ago. Much of the new growth in retirement assets is expected to be from defined contribution plans of U.S. corporations. Northern Trust believes that it is well positioned to benefit from this trend given its long-term relationships with corporate sponsors and its family of institutional mutual funds. To broaden its array of services and more effectively address the needs of this segment of the retirement services market, Hazlehurst & Associates, Inc. was acquired in April 1994. With offices in Atlanta and Seattle, Hazlehurst has well established capabilities in retirement plan design, participant recordkeeping, and actuarial and consulting services that complement the existing custody, fiduciary and investment management capabilities in the strategically important retirement services market. Public Funds. Growth in the public funds market segment has been driven by increased funding of plans by state and local public entities and the use of outside service providers as reporting requirements have become more complex. Although this market segment tends to be the most price sensitive, investments in technology have allowed Northern Trust to compete effectively on the basis of both cost and quality of service to the client. In 1994 this market segment contributed $31.6 million in trust fees, compared with $28.9 million in 1993 and $25.9 million in 1992. At December 31, 1994, $72.0 billion of assets were under administration versus $77.3 billion at December 31, 1993. 27 NORTHERN TRUST CORPORATION Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Taxable. This market segment, which includes insurance companies, foundations and endowments, provides attractive growth opportunities for trust and banking services. The insurance industry continues to consolidate its relationships with providers who can meet their full range of banking and custody needs. Northern Trust seeks to maintain an array of products and services, a strong capital position and systems capabilities that position it to increase its share of this market. It is a leading provider of custody services to foundations and endowments. Five of the largest ten foundations are clients as are many of the largest endowment funds in the United States. Trust fees from this market segment in 1994, 1993 and 1992 totaled $32.9 million, $29.8 million and $26.1 million, respectively. Assets under administration at December 31, 1994 increased to $81.2 billion from $80.2 billion at December 31, 1993. International. This market segment handles the custody needs of non-U.S. clients domiciled in nineteen countries, and has had the highest rate of growth for the last three years when measured in terms of assets under administration and trust fees. At December 31, 1994 assets under administration totaled $48.1 billion, up 51% from $31.9 billion at year-end 1993, which in turn was up 37% over the previous year-end. Trust fees for 1994 increased 56% to $28.8 million. This compares with $18.4 million in 1993 which was up 24% from $14.8 million in 1992. Northern Trust maintains the required system capabilities and sub-custodial network necessary to capitalize on the growth opportunities presented by the development of worldwide financial markets. In terms of assets under administration, global custody is one of the fastest growing products within CIS. This product provides the necessary services for the growing volume of foreign assets that are held by U.S. and non-U.S. domiciled clients. Through its worldwide network of subcustodians in 56 countries, Northern Trust has global assets of $65.5 billion under administration at December 31, 1994 which is 29% greater than last year. In addition to the increase in the volume of cross-border investing, global custody fees were favorably impacted by the successful transition of global assets from BSS to the Chicago head office and the London Branch of The Northern Trust Company during the second half of 1994. With the development of tax lot accounting within the trust systems, global custody clients are now directly provided with this cost effective service. The absence of the fee sharing arrangement with BSS will result in an increase in global custody fees which will be partially offset by an increase in noninterest expenses as a result of the London Branch assuming this business. In addition, The Northern Trust Company, Canada was granted full trust powers in November 1994, making it the first non-Canadian financial institution to have the right to operate in Canada as a trust company. The attainment of trust powers will facilitate expansion of the global custody business within Canada. Correspondent Trust. Servicing this market segment is also an element of trust strategy. As technology has become more sophisticated and banks are forced to become more cost conscious, Northern Trust has been able to leverage its investment in technology by making its trust processing services available to smaller banks. Trust fees from this market totaled $14.8 million in 1994, $13.9 million in 1993 and $13.4 million in 1992. Assets under administration at December 31, 1994 and 1993 totaled $37.7 billion and $36.1 billion, respectively. Securities Lending. Clients who utilize trust services may elect to have their securities lent to generate revenues to improve their portfolio's total return. The cash that has been deposited by investment firms as collateral for securities they have borrowed from trust clients under the securities lending program is managed by Northern Trust CONSOLIDATED TRUST ASSETS UNDER ADMINISTRATION
Five- Percent Year December 31 Change Compound ------------------------------------------ Growth ($ In Billions) 1994 1993 1992 1991 1990 1994/93 Rate ------------------------------------------------------------------------------- Corporate $ 51.5 $ 46.6 $ 41.7 $ 36.0 $ 38.7 11% 14% Personal 30.8 30.5 27.9 22.7 19.2 1 11 ------------------------------------------------------------------------------- TOTAL MANAGED TRUST ASSETS $ 82.3 $ 77.1 $ 69.6 $ 58.7 $ 57.9 7% 13% ------------------------------------------------------------------------------- Corporate $395.7 $379.9 $323.2 $287.8 $206.1 4% 15% Personal 20.6 19.5 18.9 14.8 12.7 5 12 ------------------------------------------------------------------------------- TOTAL NON-MANAGED TRUST ASSETS $416.3 $399.4 $342.1 $302.6 $218.8 4% 15% ------------------------------------------------------------------------------- CONSOLIDATED TRUST ASSETS UNDER ADMINISTRATION $498.6 $476.5 $411.7 $361.3 $276.7 5% 15% -------------------------------------------------------------------------------
28 NORTHERN TRUST CORPORATION and included in trust assets under administration. Income from this activity is, likewise, included in the fees of each market segment. Domestic and international lending fees, up 31% over 1993, reflect a higher spread earned on the cash collateral along with an 18% increase in the volume of securities loaned. The increase in the spread is attributable to the short-term nature of the cash collateral pools which has allowed for favorable fund management during a period of rising interest rates. The cash collateral totaled $26.4 billion and $21.4 billion at December 31, 1994 and 1993, respectively. During the first quarter of 1995, Northern Trust expects to commence operations in a new Hong Kong subsidiary to better facilitate the lending of securities from its clients' global portfolios. Also in 1995, additional investment options will be available to those clients participating in the securities lending program thereby allowing clients to have more control over the degree of investment risk which they assume. Custody Services. With respect to basic custody services, price competition has remained intense in all segments of the corporate trust business. Northern Trust believes that it is positioned to deal with these pressures and maintain acceptable profitability because of its focus on providing unrivaled service quality, developing deeper client relationships that include services other than simple custody, economies of scale and technological innovation. Increased volumes from the growth in cross-border investing placed pressure during 1994 on the ability to maintain the high level of global custody service quality. Additional resources have been dedicated to this area of operations to ensure that Northern Trust continues to meet its strategic objective of providing services that exceed client expectations. PERSONAL FINANCIAL SERVICES. At December 31, 1994 trust assets under administration for PFS totaled $51.4 billion, an increase of 3% from $50.0 billion at December 31, 1993. Trust fees increased 7% in 1994 to $223.3 million while 1993 trust fees totaled $209.8 million, an increase of 8% from $194.6 million in 1992. Although all geographic markets contributed to the 1994 increase, the strongest fee growth occurred in the Wealth Management Group and the Florida, Arizona, Texas and suburban Chicago markets. Northern Trust has positioned itself in those states having significant concentrations of wealth and growth potential. Currently there is a national network of 45 office locations in Arizona, California, Florida, Illinois and Texas. With an established presence in these growing markets, Northern Trust believes that it has the momentum to continue to grow personal trust fees. Illinois. Personal trust fees in Illinois increased 5% to $114.7 million in 1994 from $109.8 million in 1993 which was up 5% from $105.0 million in 1992. The moderate rate of growth in trust fees is attributable, in part, to the maturity of the trust business within the lead bank in Chicago. As assets are distributed or liquidated from older trust accounts, revenues from the existing book of business decline and partially offset the effect of new business. Other factors impacting the 1994 trust fee performance were a decline in nonrecurring fees, including probate fees, lower market values and the temporary absorption of certain costs of the Northern Funds, a series of sixteen no-load proprietary mutual funds introduced to the Illinois market in April 1994. In 1994, Northern Trust's presence was expanded within Illinois with the opening of a full service trust and banking office in the suburb of Highland Park and the opening of the Chicago South Financial Center to facilitate banking by clients located on Chicago's south side and in the southern suburbs. Northern Trust has the leading market share in the Chicago area personal trust market with $32.8 billion of assets under administration at December 31, 1994 compared with $31.6 billion a year ago. Over the years clients have been attracted by both the quality of trust services and the profile of financial strength and stability which has consistently been achieved. These qualities, combined with credit ratings that are top tier, have allowed Northern Trust to enhance the growth of its personal trust business. It is expected that the Chicago area market will continue to be a significant contributor to personal trust revenues. Florida. The personal trust business in Florida continues to be a significant contributor to the growth in personal trust fees. Trust fees for 1994 totaled $57.2 million, up 9% from $52.2 million in 1993 which was up 14% from $46.0 million in 1992. Trust assets under administration were $10.3 billion at December 31, 1994, and $10.1 billion at year-end 1993. The five-year compound growth rates for trust fees and trust assets have been 15% and 11%, respectively. With new offices in Fort Lauderdale and Venice, there are now sixteen offices in the South and West Florida markets. It is believed that there remains significant opportunity for growth in the markets currently served in Florida. In December 1993, the Corporation entered into a definitive agreement to acquire Beach One Financial Services, Inc., parent of The Beach Bank of Vero Beach, Florida, for $56.2 million in Northern Trust common stock. The agreement is subject to the approval of Beach One's shareholders and to various regulatory approvals and other legal requirements. Northern Trust expects that a decision by the Federal Reserve Board on its application to acquire Beach One, which was deferred pending, among 29 NORTHERN TRUST CORPORATION Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) other matters, completion of the Bank's Community Reinvestment Act examination, will be made soon. The examination was completed in November 1994 and the Bank was assigned a "satisfactory" rating. California. Northern Trust of California was established in 1988 as a de novo subsidiary to reach the California trust market. The 1992 acquisition of $4 billion of trust assets under administration from Trust Services of America (TSA) has successfully increased the penetration of the California market. A new Westwood office was opened during the year in West Los Angeles. Trust fees for 1994 increased 5% to $34.0 million. Reflecting a full year's contribution from the TSA business, 1993 trust fees were up 9% to $32.3 million from $29.7 million in 1992. During 1994, the impact from new business and a fee increase was partially offset by the run-off of existing business. Trust assets under administration totaled $5.3 billion at December 31, 1994 and $5.5 billion at December 31, 1993. Arizona. Northern Trust Bank of Arizona N.A. is one of the largest providers of personal trust services in the state. As in other markets, the strategy in Arizona combines private banking and trust services to targeted high net worth individuals. Trust fees from this market were $12.8 million in 1994, $11.9 million in 1993 and $10.7 million in 1992. Assets under administration at December 31, 1994 and 1993 totaled $1.7 billion and $1.8 billion, respectively. Texas. Northern Trust's presence in Texas is modest but growing. With offices in Dallas and Houston, Northern Trust Bank of Texas N.A. is located in the two most important metropolitan markets in the state and has expanded from one office to four offices since its entry into the Texas market in 1989. Trust fees for 1994, 1993 and 1992 were $4.6 million, $3.6 million and $3.2 million, respectively. Trust assets under administration were $1.3 billion at December 31, 1994 and $1.0 billion at December 31, 1993. In February 1995, the Corporation entered into a definitive agreement to acquire Tanglewood Bancshares, Inc. parent company of Tanglewood Bank N.A., Houston, for $33.0 million in cash. Tanglewood's assets totaled $229.9 million at December 31, 1994 and net income totaled $2.6 million in 1994. The agreement is subject to the approval of Tanglewood shareholders, to final due diligence and to various regulatory approvals and is expected to close in the second half of 1995. Investment Management. Northern Trust believes that its expertise in investment management provides a competitive advantage in executing its personal trust strategy. For example, investment management performance for stock and bond accounts for institutional clients ranks in the top quartile for the five and ten year performance periods ended December 31, 1994, as measured by SEI, a nationally recognized performance measurement tracking service. The same methodology used to achieve this top-ranked institutional performance is also used in the management of individual accounts. Northern's investment management performance for international equities ranks in the top quartile for the five and ten year performance periods ended December 31, 1994, as measured by InterSec Research Corporation. In 1994, Northern Trust leveraged its investment expertise with the establishment of a second mutual fund family, the Northern Funds. Assets in this family of funds reached $2.3 billion at year-end. This mutual fund family serves the investment needs of personal clients while the Benchmark family of mutual funds continues to serve the needs of institutional clients. The national personal trust strategy will focus primarily on increasing market share in present geographic locations and the development of other selected upscale personal markets. In Florida, expansion into five additional counties is planned over the next three-to-five years. The expansion will be achieved primarily de novo, but may include selective acquisitions. The goal of this expansion is to continue to grow Florida's net income and trust assets significantly. In the newer growth areas around Phoenix and Tucson, Arizona, there are plans to open new offices during the course of the next several years. In Illinois, certain suburban communities have been identified for new offices and an additional inner city location is also contemplated. SECURITY COMMISSIONS AND TRADING INCOME. Security commissions and trading income totaled $18.4 million in 1994, compared with $19.9 million in 1993 and 1992. The decrease in 1994 reflected lower bond trading activities. This income is primarily generated from securities brokerage and futures contract services. Additional revenue is provided from underwriting selected general obligation tax-exempt securities, security trades and interest risk management activities with clients. OTHER OPERATING INCOME. Other operating income in 1994 totaled $158.1 million compared with $125.9 million in 1993 and $117.8 million in 1992. The increase resulted primarily from a $28.5 million pretax gain on the second quarter sale of BSS, which was net of approximately $6.0 million in ancillary and other sale- related transition costs associated with the transfer of custody accounts from BSS to the London Branch. Other operating income in 1994 included gains of $.1 million from the sale of mortgage loans, compared with $3.9 million in 1993 and $1.2 million in 1992. Foreign exchange trading profits totaled a record $35.9 million, up 11% from 30 NORTHERN TRUST CORPORATION the $32.4 million reported a year ago, which was up from $21.9 million in 1992. A substantial component of foreign exchange profit stems from transactions associated with the growing global custody business. As custodian, Northern Trust provides foreign exchange services in the normal course of business. Currency positions, while permitted in selected situations, constitute an ancillary component of aggregate trading activity. The fee portion of treasury management revenues totaled $46.3 million in 1994, a 5% decline from the $49.0 million reported in 1993, as more clients tended to pay for services with deposit balances. Treasury management fees in 1992 totaled $49.7 million. Total treasury management revenues, which, in addition to fees, include the value of compensating deposit balances, increased slightly to $73.4 million from $71.1 million in 1993 and $72.1 million in 1992. Other operating income in 1994 also benefited from higher fees on trust-related overnight advances and revenues from operating other real estate owned assets. A significant portion of noninterest income is generated through trust, treasury management, brokerage, check processing, payment and security clearing, and other banking-related services. In providing these services, which are principally paid for in fees rather than compensating balances, Northern Trust, in addition to safekeeping and managing trust and corporate assets, processed cash and security transactions exceeding $100 billion on average each business day. Controls over such activities are closely monitored to safeguard the assets of Northern Trust and its clients. INVESTMENT SECURITY GAINS AND LOSSES. Net security losses totaling $.1 million were realized in 1994 from the sale of securities classified as "available for sale" offset in part from securities that were called at a premium. This compares with gains of $1.8 million realized in 1993 and $3.3 million in 1992. Effective January 1, 1994, Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities," was adopted. Under SFAS No. 115 held to maturity investment securities are accounted for at cost, adjusted for amortization of premium and accretion of discount. Available for sale investment securities are accounted for at fair value, with both unrealized gains and losses credited or charged, net of the related tax effect, directly to stockholders' equity. This accounting method adds potential volatility to stockholders' equity, but net income is not impacted unless the securities are sold. At year-end, Northern Trust's held to maturity security portfolio had a fair value of $657.9 million which exceeded the book value of the portfolio by $16.6 million. The available for sale security portfolio had a fair value of $4.4 billion. Net depreciation on this portfolio including the value of related hedge contracts totaled $25.6 million, which resulted in a $15.8 million, net of tax, reduction in stockholders' equity. 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 medium- term 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 noninterest-bearing assets including cash and due from banks, items in process of collection, buildings and equipment and other net nonearning assets. Variations in the level and mix of earning assets, interest-bearing funds and net noninterest-related funds, and their relative sensitivity to interest rate movements, are the dominant factors affecting net interest income. In addition, net interest income is impacted by the level of nonperforming loans and OREO and client use of compensating balances to pay for services. Net interest income for 1994 was a record $338.2 million, up 3% from $329.3 million in 1993, which was up 6% from $311.2 million in 1992. When adjusted to a fully taxable equivalent (FTE) basis, yields on taxable, nontaxable and partially taxable assets are comparable, although the adjustment to a FTE basis has no impact on net income. Net interest income on a FTE basis for 1994 was a record $371.6 million, an increase of $8.2 million or 2% from $363.4 million in 1993 which in turn was up 6% from $343.7 million in 1992. The growth in FTE net interest income was essentially attributable to the growth in average earning assets partially offset by a decline in the net interest margin to 2.36% from 2.65% last year and 2.96% in 1992. 31 NORTHERN TRUST CORPORATION Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) ANALYSIS OF NET INTEREST INCOME (FTE)
Percent Change ---------------- ($ In Millions) 1994 1993 1992 1994/93 1993/92 ------------------------------------------------------------------------------- Interest Income $ 848.7 $ 706.4 $ 721.9 20.2% (2.1)% Fully Taxable Equivalent Ad- justment 33.4 34.1 32.5 (2.3) 5.1 ------------------------------------------------------------------------------- Total Interest Income--FTE 882.1 740.5 754.4 19.1 (1.8) Total Interest Expense 510.5 377.1 410.7 35.4 (8.2) ------------------------------------------------------------------------------- NET INTEREST INCOME--FTE 371.6 363.4 343.7 2.2 5.7 ------------------------------------------------------------------------------- AVERAGE VOLUME Earning Assets 15,737.2 13,730.7 11,605.9 14.6 18.3 Interest-Related Funds 13,185.9 11,655.4 10,139.1 13.1 15.0 Noninterest-Related Funds 2,551.3 2,075.3 1,466.8 22.9 41.5 ------------------------------------------------------------------------------- Change in Percentage ---------------- AVERAGE RATE Earning Assets 5.61% 5.39% 6.50% 0.22 (1.11) Interest-Related Funds 3.87 3.23 4.05 0.64 (0.82) Interest Rate Spread 1.74 2.16 2.45 (0.42) (0.29) Total Source of Funds 3.25 2.74 3.54 0.51 (0.80) ------------------------------------------------------------------------------- NET INTEREST MARGIN 2.36 2.65 2.96 (0.29) (0.31) -------------------------------------------------------------------------------
Refer to page 74 for detailed analysis of net interest income. Earning assets averaged $15.7 billion, up 15% or $2.0 billion from the $13.7 billion reported in 1993 which was up from $11.6 billion in 1992. The growth in average earning assets reflects a 14% or $1.0 billion increase in loans, an 18% or $769 million increase in securities and a 10% or $219 million increase in money market assets. Loan volume for the year averaged $8.3 billion reflecting an $853 million or 12% increase in domestic lending while international loans increased $166 million. The domestic growth came principally from residential mortgage activities, up $541 million. Reflected in the total loan growth are non-interest bearing domestic and international overnight advances, related to processing certain trust client investments, which averaged $568 million in 1994, up $199 million from a year ago, primarily from international activity. Securities averaged $5.0 billion in 1994 versus $4.2 billion in 1993, due primarily to a $1.6 billion increase in short-term federal agency and other marketable securities, offset in part by an $867 million reduction in U.S. Government securities. Money market assets averaged $2.4 billion in 1994 versus $2.2 billion in 1993, reflecting an increase in international deposit placement activity. The increase in average earning assets of $2.0 billion was funded primarily by growth in interest-bearing time deposits, other interest-related funds and noninterest- related funds. Interest-bearing deposits averaged $8.3 billion, up $867 million. This growth is principally from global custody deposit activity in London, up $447 million, and an increase of $401 million in other foreign time deposits. Other interest-related funds averaged $4.9 billion, up $664 million, principally from securities sold under agreements to repurchase (up $780 million) and senior medium-term notes (up $228 million), and offset by federal funds purchased and other borrowings which were down $344 million. Average net noninterest-related funds increased $476 million, mainly due to higher demand deposits and stockholders' equity. The increase in average demand deposits reflects higher levels of trust-related deposits mainly from global custody activity. Stockholders' equity for the year averaged $1.2 billion, an increase of $152 million or 14% from 1993, principally due to strong earnings performance. The net interest margin declined to 2.36% from 2.65% last year due primarily to lower spreads on the higher volume of short-term liquid U.S. federal agency securities and money market assets, coupled with lower loan-related fees resulting from a reduced volume of residential mortgage refinancing activity. Also contributing to the decline in the interest margin was the increase in the level of nonearning trust-related overnight advances. 32 NORTHERN TRUST CORPORATION PROVISION FOR CREDIT LOSSES. Significant improvement in asset quality resulted in the provision for credit losses declining to $6.0 million, from $19.5 million in 1993 and $29.5 million in 1992. For a discussion of the reserve for credit losses, refer to pages 38 and 39. NONINTEREST EXPENSES. Noninterest expenses for 1994 totaled $700.5 million, up $72.3 million or 12% from $628.2 million in 1993, which was up 7% from $584.6 million in 1992. Total expenses included several nonrecurring items: a $9.6 million non-cash, pension charge; $13.6 million in charges resulting from technology- related decisions, including the trade-in and the sale and leaseback of mainframe computer equipment and a write- down of older trust-related software; $4.2 million of overtime back pay obligations; and a $3.5 million charge related to the cost of an agreement between the Corporation and The Benchmark Funds, for which the Bank is the investment adviser. Excluding these items, as well as $9.2 million of expenses of Hazlehurst & Associates, Inc., which was acquired during 1994, noninterest expenses increased 5% over the prior year. The majority of this increase was the result of continued investment in technology, expansion of the personal trust office network and global custody business and other expenditures. The productivity ratio, defined as noninterest income plus net interest income on a taxable equivalent basis before the provision for credit losses, divided by noninterest expenses was 143% for 1994 compared with 146% in both 1993 and 1992. SALARIES AND BENEFITS. Salaries and benefits, which represent 56% of total noninterest expenses, increased 8% to $391.4 million in 1994 from $361.5 million in 1993, which was up 10% from $328.5 million in 1992. Salary costs, the largest component of noninterest expenses, totaled $316.6 million, up $23.2 million or 8% from $293.4 million a year ago. Merit increases and the effect of the Hazlehurst & Associates, Inc. acquisition were the principal components of the increase. In addition, a review of Northern Trust's overtime pay policy resulted in a $4.2 million addition to salary expense for back pay obligations. Staff on a full-time equivalent basis averaged 6,420 compared with 6,318 in 1993 and 6,102 in 1992. Employee benefit costs for 1994 totaled $74.8 million, up $6.7 million or 10% from $68.1 million in 1993 which was up 17% from $58.4 million in 1992. The majority of the 1994 increase in benefit costs was attributable to higher payroll taxes, the Thrift Incentive and Employee Stock Ownership Plans and pension benefits. In 1994, Northern Trust adopted SFAS No. 112, "Employers' Accounting for Postemployment Benefits." This statement requires employers to adopt accrual accounting for workers compensation, disability, severance and other benefits provided after employment but before retirement. The requirements of this statement are essentially the same as Northern Trust's previous policies, and, therefore, this change had little impact on annual postemployment expenses. OCCUPANCY EXPENSE. Net occupancy expense totaled $57.4 million, up 4% or $2.1 million from $55.3 million in 1993, which was up 3% from $53.8 million in 1992. The principal components of the 1994 increase were higher building and leasehold improvement amortization expenses, rental and operating costs primarily associated with business expansion in Florida, Texas and Illinois. EQUIPMENT EXPENSE. Equipment expense, which includes depreciation, rental, and maintenance costs, totaled $56.4 million in 1994, up 37% or $15.3 million from $41.1 million in 1993, which was 14% higher than the $36.2 million in 1992. Included in the 1994 expense is $11.2 million of nonrecurring expense resulting from the trade-in and the sale and leaseback of mainframe computer equipment. These technology-related decisions, which will reduce depreciation expenses over the next few years, are designed to eliminate future residual value risk regarding these assets and are expected to improve system flexibility and efficiency and decrease ongoing maintenance costs, with increased productivity as the end result. Excluding these items, the expense levels in each of the three years primarily reflect planned increases in equipment and computer depreciation and related costs to support trust business expansion. OTHER OPERATING EXPENSES. Other operating expenses for 1994 totaled $195.3 million, up 15% from $170.3 million in 1993, which was up 3% from $166.1 million in 1992. Other operating expenses in 1994 included the $9.6 million non-cash pension charge to recognize an unusually large number of pension eligible retiring employees who elected to receive lump-sum distributions and a $3.5 million expense relating to an agreement between the Corporation and The Benchmark Funds for which the Bank is investment adviser. Under the agreement, the funds may sell to the Corporation in June 1995, at the higher of cost or market value, certain floating rate U.S. Government agency securities whose returns have lagged the sharp increase in short-term interest rates. The agreement increases the net asset values of certain portfolios of The Benchmark Funds and so preserves the investment 33 NORTHERN TRUST CORPORATION Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) flexibility necessary to maintain competitive yields in the portfolios, which are used for cash management and investment by the Bank's institutional clients. Also included in other operating expenses is a $2.4 million write-down of older trust-related software. Factors contributing to the remaining expense increase, principally related to growth in trust business activities, were computer software amortization, transaction-based depository fees, technical and consulting services, telephone and postage. These expenses were partially offset by lower legal services. Investments in technology are designed to support and enhance the transaction processing and securities handling capability of the trust and banking businesses. Higher levels of capital expenditures for systems technology will result in increasingly greater amounts of expense from future depreciation of hardware and amortization of software which are charged to equipment and other operating expenses, respectively. PROVISION FOR INCOME TAXES. The provision for income taxes was $79.3 million in 1994 compared with $66.1 million in 1993 and $57.0 million in 1992. The effective tax rate was 30% for 1994 compared with 28% for both 1993 and 1992. The higher tax provision in 1994 resulted from the growth in taxable earnings for both federal and state income tax purposes while tax-exempt income declined slightly. The impact of the tax rate increase in 1993 mandated by the Revenue Reconciliation Act was partially offset by a new provision in the Act which permits a deduction for the amortization of certain intangible assets. SFAS No. 109, "Accounting for Income Taxes" was adopted on a prospective basis in 1993. Income tax accounting under this new statement is not significantly different than the accounting for income taxes under the previous method, and therefore, did not have a material impact on the 1993 tax provisions. CAPITAL EXPENDITURES Northern Trust's Capital Expenditure Committee reviews proposed capital expenditures which exceed $500,000 and makes recommendations on the appropriateness of the expenditures. This review assures that the major projects to which Northern Trust commits its resources produce benefits compatible with the strategic corporate goals. During 1994, hardware and software capabilities continued to improve, especially relating to trust activities. Such improvements assure state-of-the-art technology which enables clients to be provided with the highest level of quality service while also maintaining a competitive cost structure, a characteristic which helps distinguish Northern Trust from its competitors. In this regard, through the efforts of internal staff and outside consultants, development of the new trust management system continued. The new system is being implemented in several phases, and although systems enhancements will continue to be an ongoing process, all significant phases of this major project are expected to be completed during 1995. The unamortized capitalized cost of this project at December 31, 1994 was $79 million. Capital expenditures in 1994 also included the leasehold improvements and furnishings associated with the opening of two new offices in Florida, and two new offices in Illinois, one of which is a temporary facility on Chicago's south side, as well as expansion of the London Branch operations. Capital expenditures for 1994 totaled $90 million of which $9 million was for building and leasehold improvements, $4 million for furnishings, $31 million for hardware and machinery and $46 million for software. During 1995 Northern Trust will continue to invest in key technology initiatives and in the expansion of the five-state network of Personal Financial Service Offices. ASSET QUALITY AND CREDIT RISK SECURITIES. A high quality securities portfolio is maintained as evidenced by the Standard and Poor's and/or Moody's Investors Service ratings on obligations of states and political subdivisions, preferred stock and other securities in the portfolio. At December 31, 1994, 71% of these securities were rated triple-A or double-A, 24% were rated single-A and 5% were below A or not rated. Other securities consist primarily of privately issued collateralized mortgage obligations, backed by federal agency securities, and asset-backed securities, collateralized by automobile loans and credit card receivables. 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 repurchase agreements 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 various lending activities. Credit risk is managed through the Credit Policy function, which is designed to ensure adherence to a high level of credit standards. Credit Policy provides a system of 34 NORTHERN TRUST CORPORATION checks and balances for Northern Trust's diverse credit- related activities by establishing and monitoring all credit- related policies and practices throughout Northern Trust and ensuring their uniform application. These activities are designed to ensure that credit exposure is diversified on an industry and client basis, thus lessening the overall credit risk. A further way in which credit risk is managed is by requiring collateral. Management's assessment of the borrower's creditworthiness determines whether collateral is obtained. The amount and type of collateral held varies but may include deposits held in financial institutions, U.S. Treasury securities, other marketable securities, income- producing commercial properties, accounts receivable, property, plant and equipment, and inventory. Collateral values aremonitored 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 the credit exposure is well diversified, there are certain significant groups which meet the accounting definition under SFAS No. 105 of credit risk concentrations. According to this statement, group concentrations of credit risk exist if a number of borrowers or other counterparties are engaged in similar activities and have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. The fact that an extension of credit falls into one of these groups does not indicate that the credit has a higher than normal degree of credit risk. These groups are: middle market companies and small businesses, broker-dealers of securities, banks and bank holding companies, commercial real estate, and residential real estate. MIDDLE MARKET COMPANIES AND SMALL BUSINESSES. Credit exposure to middle market companies and small businesses is primarily in the form of commercial loans. These loans are to a diversified group of borrowers that are predominantly in the manufacturing, wholesaling, distribution and services industries, with total sales of less than $500 million. The largest component of this group of borrowers is located in the greater Chicago area. 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. Middle market and small business loans totaled approximately $945.5 million at December 31, 1994 and $1.0 billion at December 31, 1993. Nonperforming middle market loans totaled $7.8 million and $8.8 million at December 31, 1994 and 1993, respectively. Credit exposure related to customer acceptance liabilities with middle market companies and small businesses totaled $20.3 million and $21.4 million as of December 31, 1994 and 1993, respectively. Off-balance sheet items related to these entities in the form of legally binding commitments to extend credit, standby letters of credit, and commercial letters of credit totaled $917.8 million, $378.7 million, and $17.8 million, respectively, as of December 31, 1994, and $836.7 million, $313.0 million, and $18.4 million, respectively, as of December 31, 1993. BROKER-DEALERS OF SECURITIES. Broker loans consist primarily of overnight funds loaned to broker- dealers in the securities industry on both a secured and unsecured basis. Broker loans averaged $355.7 million during 1994 and $335.5 million during 1993, and totaled $274.6 million at December 31, 1994 and $249.4 million at December 31, 1993. There were no securities purchased under agreements to resell at year-end compared with $380.8 million at December 31, 1993. Standby letters of credit issued on behalf of broker-dealers and legally binding commitments to extend credit totaled $51.2 million and $161.7 million, respectively, as of December 31, 1994, and $141.1 million and $130.0 million, respectively, as of December 31, 1993. Northern Trust may also have a limited amount of potential credit exposure to brokers and dealers in connection with securities lending activities. BANKS AND BANK HOLDING COMPANIES. The following table shows the credit exposure to banks and bank holding companies at December 31, 1994 and December 31, 1993. Exposure to such entities is well diversified geographically. A significant portion of credit exposure to banks is in the form of liquid, short-term money market assets. To minimize the credit risk related to these transactions, the Credit Policy Committee sets limits on the amount of credit exposure with counterparties and regularly assesses their financial condition. In connection with securities purchased under agreements to resell, the value of collateral held is continually monitored. Most of the domestic commercial loans shown in the following table consisted of loans to U.S. bank holding companies, primarily in the seventh Federal Reserve District, for their acquisition purposes. Such lending activity is limited to entities which have a substantial business relationship with Northern Trust. The international loan exposure represents transactions with major international banks arising from trade finance and dollar clearing activities. 35 NORTHERN TRUST CORPORATION Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) CREDIT EXPOSURE TO BANKS AND BANK HOLDING COMPANIES
December 31 ------------------ (In Millions) 1994 1993 -------------------------------------------------------------------- BALANCE SHEET AMOUNTS Due From Banks $ 743.1 $ 762.9 Money Market Assets Federal Funds Sold 687.0 63.0 Securities Purchased under Agreements to Resell 90.0 134.0 Time Deposits with Banks -Domestic .2 .2 -International 1,864.5 2,090.2 Other 8.8 71.9 Commercial Loans-Domestic 136.1 108.5 -International 77.0 160.1 Securities (primarily preferred stock) 34.9 34.9 Customers' Acceptance Liability 34.0 32.9 Foreign Exchange* 37.6 46.4 Interest Rate Management Instruments* 4.8 9.1 Other Assets 6.7 12.8 OFF-BALANCE SHEET AMOUNTS Contract or Notional Amounts of: Legally Binding Commitments to Extend Credit 134.7 99.9 Standby Letters of Credit 32.9 45.6 Commercial Letters of Credit 14.2 17.5 -------------------------------------------------------------------- *Represents the amount of credit risk recorded in the consolidated balance sheet associated with the potential failure of the counterparty to pay under the instrument.
COMMERCIAL REAL ESTATE. In managing its credit exposure, management has defined a commercial real estate loan as one where: (1) the borrower's principal business activity is the acquisition of or the development of real estate for commercial purposes; (2) the principal collateral is real estate held for commercial purposes and loan repayment is expected to flow from the operation of the property; or (3) the loan repayment is expected to flow from the sale or refinance of real estate as a normal and ongoing part of business. Unsecured lines of credit to firms or individuals engaged in commercial real estate endeavors are included without regard to the use of loan proceeds. The commercial real estate portfolio consists of interim loans and commercial mortgages. The interim loans are composed primarily of loans to developers that are highly experienced and well-known to Northern Trust. Short-term interim loans provide financing for the initial phases of the acquisition or development of commercial real estate, with the intent that the borrower would refinance the loan through another financial institution or sell the project upon its completion. The interim loans included in the portfolio are primarily in the Chicago market in which Northern Trust has a strong presence and a thorough knowledge of the local economy. Commercial mortgage financing is also 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 market areas served by the subsidiary banks in suburban Chicago and Florida. Commercial real estate loans outstanding at December 31, 1994, are detailed in the next table. COMMERCIAL REAL ESTATE LOANS
Commercial (In Millions) Interim Loans Mortgages Total -------------------------------------------------------- Apartments $ 11.3 $ 60.6 $ 71.9 Industrial 22.6 37.9 60.5 Office 69.1 60.0 129.1 Shopping Center/Retail 39.7 47.2 86.9 Land 9.4 16.4 25.8 Other 66.3 53.6 119.9 -------------------------------------------------------- Total $218.4 $275.7 $494.1 --------------------------------------------------------
In comparison, commercial real estate loans at December 31, 1993 totaled $506.5 million. Nonperforming commercial real estate loans totaled $9.1 million in 1994 and $4.8 million in 1993. At December 31, 1994 commercial real estate loans 90 days past due and still accruing interest totaled $5.7 million. Not included in the table above was OREO which totaled $2.2 million and $9.7 million at December 31, 1994 and 1993, respectively. At December 31, 1994, 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 $25.5 million and $47.2 million, respectively. At December 31, 1993, legally binding commitments were $30.1 million and standby letters of credit were $40.2 million. RESIDENTIAL REAL ESTATE. Residential real estate loans totaled $3.3 billion or 40% of total domestic loans at December 31, 1994, compared with $2.9 billion or 40% at December 31, 1993. Residential real estate loans consist of conventional home mortgages, which generally require a loan to collateral value of 75% to 80%, and equity credit lines, which generally limit the loan to collateral value to no more than 70% to 75%. Of the total $3.3 billion in residential real estate loans, $2.2 billion were in the greater Chicago area and the remainder almost entirely in the areas served by the Florida, Arizona and Texas banking subsidiaries. Legally binding commitments to extend credit, which are primarily equity credit lines, totaled $377.0 million and $391.5 million as of December 31, 1994 and 1993, respectively. 36 NORTHERN TRUST CORPORATION FOREIGN OUTSTANDINGS. In recent years international banking activities have been focused on financing U.S. trade transactions and correspondent banking. Northern Trust has extensive treasury activities involving short-term credit- related business with foreign financial institutions. 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. Growth in foreign outstandings during 1994 primarily reflects increases in interest-bearing deposit placements with banks as a result of growth in deposits from Global Custody clients at the London Branch. As used in this discussion, foreign outstandings are cross- border outstandings as defined by the Securities and Exchange Commission. They consist of loans, acceptances, interest-bearing deposits with financial institutions, accrued interest and other monetary assets. Not included are letters of credit, loan commitments, and foreign office local currency claims on residents funded by local currency liabilities. Foreign outstandings related to a specific country are net of guarantees given by third parties resident outside the country and the value of tangible, liquid collateral held outside the country. However, transactions with branches of foreign banks are included in these outstandings and are classified according to the country location of the foreign bank's head office. Risk related to foreign outstandings is continually monitored and internal limits are imposed on foreign exposure. The table below provides information on foreign outstandings by country that exceed 1.00% of Northern Trust's total assets. FOREIGN OUTSTANDINGS
Commercial (In Millions) Banks and Other Total -------------------------------------------- AT DECEMBER 31, 1994 Japan $551 $-- $551 United Kingdom 183 43 226 Canada 175 18 193 -------------------------------------------- At December 31, 1993 Japan $544 $-- $544 United Kingdom 230 35 265 France 173 -- 173 -------------------------------------------- At December 31, 1992 Japan $294 $-- $294 Germany 175 -- 175 United Kingdom 141 27 168 France 158 -- 158 Switzerland 157 -- 157 --------------------------------------------
Aggregate foreign outstandings by country falling between 0.75% and 1.00% of total assets at December 31, 1994 totaled $154 million to Germany. This compares with $153 million to Canada in 1993 and $362 million to Italy, Netherlands and Canada in 1992. NONPERFORMING ASSETS AND 90 DAY PAST DUE LOANS
December 31 ----------------------------- (In Millions) 1994 1993 1992 1991 1990 ---------------------------------------------------------------------------------------------- Nonaccrual Loans Domestic $26.5 $26.0 $66.4 $53.8 $54.5 International 1.3 1.3 1.9 -- .1 ---------------------------------------------------------------------------------------------- Total 27.8 27.3 68.3 53.8 54.6 Other Real Estate Owned (Net of reserve) 2.2 9.7 22.9 40.4 19.1 ---------------------------------------------------------------------------------------------- TOTAL NONPERFORMING ASSETS $30.0 $37.0 $91.2 $94.2 $73.7 ---------------------------------------------------------------------------------------------- TOTAL DOMESTIC 90 DAY PAST DUE LOANS (Still accruing) $17.3 $22.8 $42.9 $23.6 $12.0 ----------------------------------------------------------------------------------------------
NONPERFORMING ASSETS AND 90 DAY PAST DUE LOANS. Nonperforming assets consist of nonaccrual loans and 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 reversals. Maintaining a low level of nonperforming assets is important to the ongoing success of a financial institution. Northern Trust's comprehensive credit review and approval process is critical to the ability to minimize nonperforming assets on a long-term basis. In addition to the negative impact on both net interest income and credit losses, nonperforming assets also increase operating costs due to intense collection efforts. The table above presents the nonperforming assets and past due loans for the current year and the prior years. Of the total loan portfolio of $8.6 billion at December 31, 1994, $27.8 million or .32% was nonperforming, an increase of $.5 million from year-end 1993. Nonperforming 37 NORTHERN TRUST CORPORATION Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) loans at December 31, 1994 consisted principally of commercial loans, including $9.1 million of commercial real estate loans and $7.8 million to middle market and small business companies. The net decrease of $7.0 million in nonperforming assets resulted from additions during 1994 of $44.6 million in new nonaccrual loans partially offset by total gross charge-offs of $10.7 million, payments and loan sales of $34.9 million, property sales with a basis of $5.0 million and $.3 million in write-downs of OREO assets. While the carrying value of its OREO portfolio is realizable, it is not possible to predict whether such properties will continue to experience further declines in value, especially in light of the continuation of depressed conditions in the commercial real estate market. Statements of Financial Accounting Standards (SFAS) No. 114 and No. 118, "Accounting by Creditors for Impairment of a Loan," were adopted effective January 1, 1995. These new statements require that an impaired loan that is within the scope of this statement be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or at the loan's observable market price or, if the loan is collateral dependent, based on the fair value of the collateral. A loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. As of January 1, 1995, impaired loans totaled $25.2 million. No portion of the reserve for credit losses was allocated to these impaired loans due to prior charge-offs and interest collections which have been applied to principal. Management believes that these standards will not have a material effect on the consolidated financial position or results of operations. RESERVE FOR CREDIT LOSSES. In evaluating the adequacy of the reserve for credit losses, management relies predominantly on a disciplined credit review and approval process which is applicable to the full range of the credit exposures. The review process, directed by Credit Policy, is intended to identify as early as possible clients who might be facing financial difficulties. Once identified, the extent of the client's financial difficulty is carefully monitored by Credit Policy, which recommends to management the portion of any credits that need a specific reserve allocation or should be charged-off. Other factors considered by management in evaluating the adequacy of the reserve include: the relative size of the subsidiary banks' single loan lending limits; loan volume; historical net loan loss experience; the level and composition of nonaccrual, past due and restructured loans; other extensions of credit; the condition of industries in geographic areas experiencing or expected to experience particular economic adversities; international developments; current and anticipated economic conditions; credit evaluations; and the liquidity and volatility of the markets. From time to time specific amounts of the reserve are designated for certain loans in connection with management's analysis of the adequacy of the reserve for credit losses. While the largest portion of this reserve is typically intended to cover loan and lease losses, it is considered a general reserve that is available for all credit-related purposes. The reserve balance is not a precise amount, but is derived from judgements based on the above factors. It represents management's best estimate of the reserve for credit losses necessary to adequately cover probable losses from current credit exposures. The provision for credit losses is the charge against current earnings that is determined by management as the amount needed to maintain an adequate reserve. The overall credit quality of the domestic portfolio has remained good as evidenced by the relatively low level of nonperforming loans and net charge-offs. Although the U.S. economy is expanding, there continue to be significant uncertainties in commercial real estate and certain other industries. In addition, management's assessment of the financial condition of specific clients facing financial difficulties and portfolio growth were other primary factors impacting management's decision to maintain the reserve for credit losses at $144.8 million at December 31, 1994, compared with $145.5 million last year. The slight decline in the year-end reserve for credit losses as a percentage of outstanding loans and leases from 1.91% to 1.69% at year- end 1994 is primarily attributable to loan growth in low- risk residential lending. The following table summarizes the changes in the reserve for credit losses for the current year and the prior years. Northern Trust continues to monitor closely several credits, but the overall quality of its loan portfolio remains sound and the reserve for credit losses is adequate to cover credit-related uncertainties as they exist today. Established credit review procedures ensure that close attention is given to commercial real estate-related loans and other commercial loans, as well as other credit exposures that 38 NORTHERN TRUST CORPORATION ANALYSIS OF RESERVE FOR CREDIT LOSSES
($ In Millions) 1994 1993 1992 1991 1990 --------------------------------------------------------------------------------------------------------------------- Balance at Beginning of Year $ 145.5 $ 145.5 $ 145.7 $ 148.0 $ 150.1 --------------------------------------------------------------------------------------------------------------------- Charge-offs Commercial 9.4 19.5 21.2 34.1 17.9 Consumer 1.1 2.1 3.7 2.8 3.9 Other .2 1.2 1.5 1.6 .8 International -- .6 6.0 -- 1.1 --------------------------------------------------------------------------------------------------------------------- Total Charge-Offs 10.7 23.4 32.4 38.5 23.7 --------------------------------------------------------------------------------------------------------------------- Recoveries Commercial 2.6 2.3 1.4 4.2 5.9 Consumer 1.3 .9 .8 .8 .3 Other .1 .5 .1 .1 .1 International -- .2 .4 .1 1.3 --------------------------------------------------------------------------------------------------------------------- Total Recoveries 4.0 3.9 2.7 5.2 7.6 --------------------------------------------------------------------------------------------------------------------- Net Charge-Offs 6.7 19.5 29.7 33.3 16.1 Provision for Credit Losses 6.0 19.5 29.5 31.0 14.0 --------------------------------------------------------------------------------------------------------------------- Net Change in Reserve (.7) -- (.2) (2.3) (2.1) --------------------------------------------------------------------------------------------------------------------- BALANCE AT END OF YEAR $ 144.8 $ 145.5 $ 145.5 $ 145.7 $ 148.0 --------------------------------------------------------------------------------------------------------------------- Total Loans and Leases at Year-End $8,590.6 $7,623.0 $6,935.9 $6,279.7 $5,536.3 --------------------------------------------------------------------------------------------------------------------- Average Total Loans and Leases $8,316.1 $7,297.1 $6,452.9 $6,199.4 $5,847.7 --------------------------------------------------------------------------------------------------------------------- As a Percent of Year-End Loans and Leases Net Loan Charge-Offs .08% .26% .43% .53% .29% Provision for Credit Losses .07 .26 .43 .49 .25 Reserve Balance at Year-End 1.69 1.91 2.10 2.32 2.67 --------------------------------------------------------------------------------------------------------------------- As a Percent of Average Loans and Leases Net Loan Charge-Offs .08% .27% .46% .54% .27% Reserve Balance at Year-End 1.74 1.99 2.25 2.35 2.53 ---------------------------------------------------------------------------------------------------------------------
might be adversely affected by significant increases in interest rates or unexpected downturns in segments of the economies of the United States or other countries. FINANCIAL CONDITION Average earning assets in 1994 increased 15% to $15.7 billion due principally to increases in short-term U.S. federal agency securities and residential mortgage loans. A high quality and liquid balance sheet is maintained with investment securities and money market assets averaging $7.4 billion or 47% of total earning assets. The management strategy for the investment securities account is to maintain a very high quality portfolio with generally short-term maturities. To maximize after-tax income, investments in tax-exempt municipal securities are utilized but with somewhat longer maturities. The average balance of the securities portfolio, which includes both securities held to maturity and available for sale, increased 18% from last year to $5.0 billion. U.S. Government securities averaged $1.8 billion in 1994, down 33% from 1993 levels. U.S. Government securities had an average maturity of ten months at December 31, 1994, compared with eight months at the prior year-end. Average municipal securities declined $37 million to $465 million and provided a fully taxable equivalent yield of 11.35%. The average maturity of municipal securities was 64 months, down from 68 months a year ago. Federal agency securities averaged $2.3 billion in 1994, up $1.6 billion from 1993. Federal agencies had an average maturity at December 31, 1994 and 1993 of six months and 26 months, respectively. Other securities, consisting primarily of preferred stock, privately issued collateralized mortgage obligations and asset-backed securities averaged $369 million, $89 million higher than last year. Included in other securities were $81 million of triple-A rated collateralized mortgage obligations (CMOs), $25 million of which were collateralized by federal agency securities. Other asset-backed securities were $65 million versus $30 million last year; these securities had an average maturity of eleven months, unchanged from a year ago. Approximately $738 million of federal agency, asset-backed and other securities have variable rates that are reset at least every six months to reflect the level of short- term interest rates. At year-end 1994, the fair value of the securities portfolio of $5.1 billion exceeded the book value of these securities by $16.6 million. 39 NORTHERN TRUST CORPORATION Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) AVERAGE EARNING ASSETS AND SOURCE OF FUNDS
Percent Change ----------------- ($ In Millions) 1994 1993 1992 1994/93 1993/92 ------------------------------------------------------------------------------------------------------------------- AVERAGE EARNING ASSETS Money Market Assets $ 2,420.2 $ 2,201.6 $ 1,962.7 9.9% 12.2% Securities U.S. Government 1,779.6 2,646.6 1,759.7 (32.8) 50.4 Obligations of States and Political Subdivisions 465.1 502.3 516.0 (7.4) (2.6) Federal Agency 2,333.6 773.9 521.6 201.5 48.4 Other 368.8 279.7 376.8 31.9 (25.8) Trading Account 53.8 29.5 16.2 82.2 83.0 ------------------------------------------------------------------------------------------------------------------- Total Securities 5,000.9 4,232.0 3,190.3 18.2 32.7 ------------------------------------------------------------------------------------------------------------------- Loans and Leases -- Domestic 7,870.6 7,017.2 6,165.3 12.2 13.8 -- International 445.5 279.9 287.6 59.2 (2.7) ------------------------------------------------------------------------------------------------------------------- Total Loans and Leases 8,316.1 7,297.1 6,452.9 14.0 13.1 ------------------------------------------------------------------------------------------------------------------- Total Earning Assets $15,737.2 $13,730.7 $11,605.9 14.6% 18.3% ------------------------------------------------------------------------------------------------------------------- AVERAGE SOURCE OF FUNDS Deposits-Savings and Money Market Deposits $ 3,385.7 $ 3,432.1 $ 3,372.2 (1.3)% 1.8% -Savings Certificates 1,229.6 1,172.9 1,370.8 4.8 (14.4) -Other Time 412.8 404.7 493.9 2.0 (18.1) -Foreign Offices Time 3,284.8 2,436.4 1,815.6 34.8 34.2 ------------------------------------------------------------------------------------------------------------------- Total Deposits 8,312.9 7,446.1 7,052.5 11.6 5.6 Federal Funds Purchased 1,350.7 1,692.5 1,540.2 (20.2) 9.9 Securities Sold under Agreements to Repurchase 1,444.3 664.4 542.9 117.4 22.4 Commercial Paper 138.1 131.5 132.9 5.0 (1.0) Other Borrowings 864.5 868.9 526.6 (.5) 65.0 Senior Medium-Term Notes 781.8 554.1 85.2 41.1 N/M Notes Payable 293.6 297.9 258.8 (1.5) 15.1 ------------------------------------------------------------------------------------------------------------------- Total Interest-Related Funds 13,185.9 11,655.4 10,139.1 13.1 15.0 Noninterest-Related Funds, net 2,551.3 2,075.3 1,466.8 22.9 41.5 ------------------------------------------------------------------------------------------------------------------- Total Source of Funds $15,737.2 $13,730.7 $11,605.9 14.6% 18.3% -------------------------------------------------------------------------------------------------------------------
N/M Not meaningful On January 1, 1994, in connection with the adoption of SFAS No. 115, securities not intended to be held to maturity and not held for trading were classified as "available for sale." Loans averaged $8.3 billion in 1994 and increased 14% from the prior year. Average domestic loans increased 12% to $7.9 billion for the year while the international portfolio increased to $446 million from $280 million in 1993. The increase in the average domestic loan portfolio reflects substantial growth in residential mortgages which, net of $97.7 million in loan sales, increased nearly $541 million on average to total $3.3 billion at year-end. The growth in residential mortgage loans was the result of increased lending opportunities related to the banking strategy. During the year commercial real estate loans declined slightly and at December 31, 1994, were $494 million or 6% of domestic loans. The growth in the international portfolio was primarily attributable to increased levels of trust client overnight advances. Money market assets averaged $2.4 billion, up 10% or $219 million from last year. Total interest-related funds averaged $13.2 billion in 1994, up $1.5 billion or 13% from 1993. Savings certificates of deposit increased slightly to $1.2 billion, offset in part by a $46 million decline in average savings and money market deposits. Total federal funds purchased decreased $342 million or 20% to $1.4 billion. Securities sold under agreements to repurchase increased $780 million on average to $1.4 billion. Foreign office time deposits increased a significant $848 million or 35%, resulting primarily from greater global custody activity. Deposits related to trust activities in the domestic banking subsidiaries, coupled with the rapid growth of the global custody business, had a significant impact on the balance sheet as these deposits in 1994 averaged $3.9 billion or 35% of total deposits. Senior medium-term bank notes averaged $782 million, up $228 million or 41% from last year. 40 NORTHERN TRUST CORPORATION FAIR VALUE DISCLOSURES SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," requires disclosure of the estimated fair value of certain financial instruments. These disclosures are presented in Note 16 on page 61. The fair value disclosures should not be interpreted as an estimate of the fair value of Northern Trust since the disclosures, in accordance with SFAS No. 107, exclude the values of nonfinancial assets and liabilities, as well as a wide range of franchise,relationship, and intangible values, which are integral to a full assessment of Northern Trust's financial position. In addition, it is important to realize that SFAS No. 107 requires the fair value of the demand, savings and money market deposits to be recorded at their book value. Due to the interest rate characteristics of these accounts--zero rate of interest or a relatively low interest rate--the true values of these accounts to Northern Trust are not accurately reflected in the fair value disclosures. Additionally, the true values of these accounts increase as the general level of interest rates increases. In fact, over the past year as interest rates rose, the increase in the true values of these accounts has mitigated the fair value reduction in the fixed rate loans. Considerable judgment is required to interpret the market data when computing estimates of fair value. Accordingly, the estimates presented in Note 16 are not necessarily indicative of the amounts that could have been realized in a market exchange. 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 disclosure and those of other banks may not be meaningful. ASSET AND LIABILITY MANAGEMENT The policies and guidelines for the management of Northern Trust's balance sheet assets and liabilities are established by the Corporate Asset and Liability Policy Committee (ALCO). ALCO monitors and establishes limits on the sensitivity of net interest income to changes in interest rates caused by on-and-off balance sheet positions. The goal of the ALCO process is to manage the balance sheet to provide the maximum level of net interest income while maintaining a high quality balance sheet, and acceptable levels of interest rate sensitivity and liquidity risk. INTEREST RATE RISK. Sensitivity of net interest income to interest rate changes arises when yields on assets change in a different time period or in a different proportion from that of interest costs on liabilities. To mitigate this 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 produce a reasonable level of net interest income even in periods of volatile interest rates. In the management of interest rate sensitivity, Northern Trust utilizes the following measurement techniques: gap reporting, model simulation, and duration analysis. These three techniques are complementary and are used in concert to provide a more complete picture of interest rate risk. The calculation of the interest sensitivity gap is shown in the following table, which measures the timing mismatch 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. Model simulation is another important tool used to measure the sensitivity of net interest income to interest rate changes. Using computer modeling techniques, Northern Trust is able to measure the potential impact on net interest income, assuming the continuation of current balance sheet trends, different patterns of rate movements, and specific changes in the relationships between various instruments on and off the balance sheet. Northern Trust uses model simulation to measure its net interest income sensitivity relative to management's most likely interest rate scenario. At December 31, 1994, this scenario assumes a gradual increase in interest rates during 1995. The interest sensitivity is then tested by running alternative scenarios above and below the most likely interest rate outcome. In 1994, this sensitivity calculation was always below 4% of the annual net interest income, using alternative scenarios based on a one percentage point deviation from the rates 41 NORTHERN TRUST CORPORATION Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) INTEREST RATE SENSITIVITY ANALYSIS
Year Ended December 31, 1994 ------------------------------------------------------------ 1-3 4-12 1-2 3-5 Over 5 (In Millions) months months years years years Total -------------------------------------------------------------------------------------- EARNING ASSETS Money Market Assets $ 2,640.9 $ 10.3 $ -- $ -- $ -- $ 2,651.2 Securities -- Held to Maturity 156.4 106.2 42.3 109.8 226.6 641.3 -- Available for Sale 3,533.6 421.1 377.6 75.5 -- 4,407.8 -- Trading Account 4.0 -- -- -- -- 4.0 Loans and Leases 3,772.0 952.0 635.8 1,339.8 1,891.0 8,590.6 -------------------------------------------------------------------------------------- Total Earning Assets $10,106.9 $1,489.6 $1,055.7 $1,525.1 $ 2,117.6 $16,294.9 -------------------------------------------------------------------------------------- SOURCE OF FUNDS Savings and NOW Accounts $ 327.2 $ -- $ -- $ -- $ 914.7 $ 1,241.9 Money Market Deposit Ac- counts and Savings Certificates 2,396.3 891.4 200.4 301.5 11.5 3,801.1 Other Time 3,833.0 17.1 -- 4.5 6.7 3,861.3 Senior Medium-Term Notes and Notes Payable 155.1 385.4 20.4 97.6 133.3 791.8 Other Borrowings 4,033.3 50.4 45.9 6.7 10.0 4,146.3 Noninterest-Related Funds, net 160.8 -- -- -- 2,291.7 2,452.5 -------------------------------------------------------------------------------------- Total Source of Funds $10,905.7 $1,344.3 $ 266.7 $ 410.3 $ 3,367.9 $16,294.9 -------------------------------------------------------------------------------------- Interest Sensitive Gap $ (798.8) $ 145.3 $ 789.0 $1,114.8 $(1,250.3) $ -- Off-Balance Sheet Hedges 235.4 547.2 (183.2) (302.1) (297.3) -- -------------------------------------------------------------------------------------- Adjusted Interest Sensi- tive Gap $ (563.4) $ 692.5 $ 605.8 $ 812.7 $(1,547.6) $ -- -------------------------------------------------------------------------------------- Cumulative Interest Sensitive Gap $ (563.4) $ 129.1 $ 734.9 $1,547.6 $ -- $ -- --------------------------------------------------------------------------------------
--Assets and liabilities whose rates are variable are reported based on their repricing dates. Those with fixed rates are reported based on their scheduled contractual maturity dates, except for certain investment securities and loans secured by 1-4 family residential properties that are based on anticipated prepayments. --The interest rate sensitivity assumptions presented for demand deposits, noninterest-bearing time deposits, savings accounts and NOW accounts are based on historical and current experiences regarding product portfolio retention and interest rate repricing behavior. The portion of these deposits which are considered long-term and stable have been classified in the over 5 years category; the remainder are classified in the 1-3 months category. assumed over a one year horizon. The simulations do not anticipate management's actions to moderate the negative consequences of interest rate deviations. Therefore, the simulations serve as conservative estimates of interest rate risks. The third technique that is used to measure interest rate sensitivity is duration analysis. Duration analysis is a form of average life calculation used to estimate the market risk inherent in financial instruments. Market risk is the risk that the value of on- and off-balance sheet positions will be adversely affected by rate movements. Northern Trust strives to limit aggregate market risk to an acceptable level in the context of both risk-return and cost-benefit trade-offs. A variety of actions are used to implement interest risk management strategies, including: . purchases of securities; . sales of securities that are classified as Available for Sale; . issuance of medium-term notes; . placing and taking Eurodollar time deposits; and . hedging with various types of derivative financial instruments. Northern Trust strives to use the most effective instrument for implementing its interest risk management strategies, considering the costs, liquidity and capital requirements of the various alternatives. DERIVATIVE FINANCIAL INSTRUMENTS USED FOR ASSET AND LIABILITY MANAGEMENT. A derivative financial instrument is a contract or agreement whose value is linked to or derived from changes in the value of an underlying asset or underlying reference rate or index. Various types of derivative financial instruments are used as tools for managing the interest rate risk and option risk of Northern Trust. Some of the principal uses of derivative financial instruments together with the notional amounts outstanding, are described as follows: Reduce Interest Rate Risk From Fixed Rate Assets Funded with Variable Rate Liabilities. Northern Trust pays a fixed rate and receives a floating rate on interest rate swaps with a notional amount of $835 million at December 31, 1994 to hedge the interest rate risk from fixed rate assets. For accounting purposes these swaps are designated to either convert the fixed rate on the asset to an effective floating rate or to convert floating rate funding to a fixed rate. 42 NORTHERN TRUST CORPORATION Swaps Combined with Note Issuance to Obtain Favorable Funding Costs. Interest rate swaps with a notional amount of $455 million at December 31, 1994, are used in conjunction with the issuance of medium-term notes and subordinated notes to obtain desired funding characteristics. The use of swaps in combination with notes permits Northern Trust to issue notes with rate and maturity features that are most desired by investors while using swaps to convert the rate characteristics to meet its needs. Hedging Non-standard Risk in Securities. At December 31, 1994, interest rate swaps with a notional amount of $91 million, along with $95 million of forward foreign exchange contracts, are used to convert $91 million of structured agency notes (classified as available for sale securities) from non-standard principal and interest payments to U.S. dollar denominated floating rate payments indexed to London Interbank Offered Rates (LIBOR). The swaps and foreign exchange contracts were executed simultaneously with the purchase of the notes. Hedging Mortgages Held for Sale. Northern Trust hedges the market risk of its portfolio of fixed rate commitments and mortgages held for sale with a combination of derivative financial instruments. At December 31, 1994 the portfolio was hedged with $4.9 million of forward sales of mortgage- backed securities, $1.2 million of short sales of Treasury Note futures, and $.5 million of purchases of put options on Treasury Note futures. Hedging Foreign Currency Risk. Forward foreign exchange contracts are used to reduce exposure to fluctuations in the dollar value of capital investments in foreign subsidiaries and from foreign currency obligations. The notional amount of these contracts was $34.6 million at year-end 1994. COLLATERALIZED MORTGAGE OBLIGATIONS. Northern Trust invests in collateralized mortgage obligations (CMOs), which are structured obligations that are derived from a pool of mortgage loans or agency mortgage-backed securities. CMOs have widely varying degrees of risk, which derives from the prepayment risk on the underlying mortgage loans, but Northern Trust invests only in CMOs that have lesser degrees of prepayment risk. CMOs are classified as available for sale securities, and are used as part of normal securities portfolio activities. Investments in LIBOR-indexed floating rate CMOs had an amortized cost of $439.2 million and a fair value of $436.4 million as of December 31, 1994, compared with an amortized cost of $486.2 million and a fair value of $484.5 million as of December 31, 1993. The average life of these CMOs was 38 months based on an average of dealer estimates of prepayment rates. Floating rate CMOs are purchased to provide an attractive spread over short-term funding costs. The primary risk with floating rate CMOs comes from caps on the floating rate. Northern Trust's CMOs have rate caps which range from 9% to 14%, with a weighted average of approximately 10%. These caps will affect the interest margin only if short-term LIBOR rates rise by more than 250 basis points above the year-end 1994 levels. Early payments of principal have little effect on the earnings risk of floating rate CMOs, but slower than expected prepayment rates would extend the exposure to the interest rate caps. A 300 basis point rise in mortgage rates beyond those prevailing on December 31, 1994 would cause an estimated increase in the average life of Northern Trust's floating rate CMOs from 38 months to 45 months. As of December 31, 1994 Northern Trust owned fixed rate CMOs with an amortized cost of $68.7 million and a fair value of $65.6 million, compared with an amortized cost of $17.6 million and a fair value of $17.6 million as of December 31, 1993. The average life of the fixed rate CMOs was estimated to be 19 months as of December 31, 1994. A 300 basis point rise in rates is estimated to cause the average life of the fixed rate CMOs to extend to approximately 23 months. LIQUIDITY RISK. The objective of liquidity management is to ensure that Northern Trust can meet its cash flow requirements and to capitalize on business opportunities on a timely and cost-effective basis. Management monitors the liquidity position on a daily basis to ensure that funds are available at a minimum cost to meet loan and deposit cash flows. The liquidity profile is also structured to ensure that the capital needs of the Corporation and its banking subsidiaries are met. Management maintains a detailed liquidity contingency plan designed to adequately respond to dramatic changes in market conditions. Liquidity is secured by managing the mix of items on the balance sheet and expanding potential sources of liquidity. The balance sheet sources of liquidity include the short- term money market portfolio, unpledged available for sale securities, maturing loans, and the ability to securitize a portion of the loan portfolio. Further, liquidity arises from the diverse funding base and the fact that a significant portion of funding comes from clients that have other relationships with Northern Trust. A significant source of liquidity is the ability to draw funding from both domestic and international markets. The Bank's senior long-term debt is rated AA- by Standard & Poor's, Aa3 by Moody's Investor Services, and AA+ by Thomson BankWatch. These ratings put The Northern Trust Company in the top tier of United States banks. 43 NORTHERN TRUST CORPORATION Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Northern Trust maintains a liquid balance sheet with loans representing less than 50% of total assets. Further, at December 31, 1994, 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 $8.3 billion or 44% of total assets. CAPITAL One of management's primary objectives is to maintain a strong capital position to merit the confidence of clients, the investing public, bank regulators and stockholders. A strong capital position should help Northern Trust withstand unforeseen adverse developments and take advantage of profitable investment opportunities when they arise. In 1994, common equity increased 13% or $129 million reaching a record $1.1 billion at year end, while total risk-adjusted assets rose 19%. Total equity as of December 31, 1994 was $1.3 billion including $50 million of convertible preferred stock and $120 million of auction rate preferred stock. In February 1994, the Board of Directors increased the Corporation's common stock buy-back authorization by approximately 1.3 million shares, thus allowing the purchase after that date, of up to an aggregate of 4 million shares of the Corporation's common stock. During 1994 the Corporation purchased 244,085 of its own shares as part of the buy-back program and to facilitate the exercise of stock options. No significant additional purchases are anticipated until mid-1995. The Board of Directors increased the quarterly dividend by 18.2% to $.26 per common share in November 1994. Over the last five years the common dividend has grown 105%. At December 31, 1994, tier 1 capital was 9.0% and total capital was 12.4% of risk-adjusted assets. These risk-based capital ratios are well above the minimum requirements of 4% for tier 1 and 8% for total risk-based capital ratios. Northern Trust's leverage ratio (tier 1 capital to fourth quarter average assets) of 6.2% is also well above the regulatory requirement of 3.0%. In addition, each of the subsidiary banks had a ratio above 9.0% for tier 1 capital, 10.0% for total risk-based capital, and 5.9% for the leverage ratio. The $120 million of auction rate preferred stock was affected by the increase in interest rates during 1994. The average preferred rate declared during 1994 was 3.45% versus 2.67% in 1993. In December, 1993 a definitive agreement was reached to acquire Beach One Financial Services, Inc., parent company of The Beach Bank of Vero Beach, Florida, for $56.2 million in Corporation common stock up to a maximum of 1,701,515 shares. The Corporation expects to account for this transaction as pooling-of-interests. CAPITAL ADEQUACY
December 31 --------------- ($ In Millions) 1994 1993 ------------------------------------------------------------------- TIER 1 CAPITAL Common Stockholders' Equity $ 1,111 $ 982 Convertible Preferred Stock 50 50 Goodwill (36) (39) Net Unrealized Loss on Securities 15 -- ------------------------------------------------------------------- Total Tier 1 Capital 1,140 993 ------------------------------------------------------------------- TIER 2 CAPITAL Auction Rate Preferred Stock 120 120 Reserve for Credit Losses* 145 134 Notes Payable** 169 183 ------------------------------------------------------------------- Total Tier 2 Capital 434 437 ------------------------------------------------------------------- TOTAL RISK-BASED CAPITAL 1,574 1,430 ------------------------------------------------------------------- Risk-Weighted Assets*** 12,736 10,659 ------------------------------------------------------------------- Total Assets - End of Period (EOP) 18,562 16,903 - Average Fourth Quarter 18,377 15,954 Total Loans - End of Period 8,591 7,623 ------------------------------------------------------------------- RATIOS Risk-Based Capital to Risk-Weighted Assets - Tier 1 9.0% 9.3% - Total (Tier 1 and 2) 12.4 13.4 Leverage (Tier 1 to Fourth Quarter Average Assets) 6.2 6.2 ------------------------------------------------------------------- Common Stockholders' Equity to - Total Loans EOP 12.9% 12.9% - Total Assets EOP 6.0 5.8 Stockholders' Equity to - Total Loans EOP 14.9 15.1 - Total Assets EOP 6.9 6.8 -------------------------------------------------------------------
Notes: * The reserve for credit losses is restricted to 1.25% of risk-weighted assets for the purpose of this calculation. ** Notes payable that qualify for risk-based capital amortize for the purpose of inclusion in tier 2 capital during the five years before maturity. *** Risk-weighted assets have been adjusted for goodwill, net unrealized loss on securities and excess reserve for credit losses that have been excluded from tier 1 and tier 2 capital. 44 NORTHERN TRUST CORPORATION LINES OF BUSINESS The estimated results for the major business units are presented in order to promote a greater understanding of their financial performance and strategic direction. The information, presented on an internal management reporting basis, is derived from internal accounting systems that support the strategic objectives and management structure. Consequently, the results are not necessarily comparable with similar information for other financial institutions. Management has developed accounting systems to allocate revenue and expenses related to each line of business, as well as certain corporate support services, worldwide operations and systems development expenses. The systems also incorporate processes for allocating assets, liabilities and the applicable interest income and expense. Equity is primarily allocated using the federal regulatory risk-based capital guidelines, coupled with management's judgment of the operational risks inherent in the business. Allocations of capital and certain corporate expenses may not be representative of the levels that would be required if the businesses were independent entities. CORPORATE AND INSTITUTIONAL SERVICES. Corporate and Institutional Services includes corporate trust, commercial banking and treasury management services. PERSONAL FINANCIAL SERVICES. Personal Financial Services encompasses personal trust and investment management services, estate administration, personal banking and mortgage and other personal lending. CORPORATE AND OTHER. Corporate and Other includes the Bank's Treasury Department, Chicago based foreign exchange activities, Northern Futures Corporation and other corporate items, including the impact of long- term debt, common and preferred equity, holding company investments, operating expenses and other corporate items. Noninterest income for 1994 includes a net gain of $28.5 million from the sale of the interest in Banque Scandinave en Suisse. 1994 noninterest expenses include non-recurring charges totaling $23.2 million. Of the $23.2 million, approximately $13.6 million resulted from the trade-in and the sale and leaseback of mainframe computer equipment and the write-down of older trust-related software, and $9.6 million from a non-cash accounting charge to recognize the expense of an unusually large number of pension eligible retiring employees.
The following table reflects the earnings contribution of Northern Trust's lines of business for the years ended December 31, 1994 and 1993 on the basis described above. Corporate and Personal Institutional Financial Corporate Services Services and Other Total -------------------------------------------------------------------- ($ In Millions) 1994 1993 1994 1993 1994 1993 1994 1993 -------------------------------------------------------------------------------------------------------- Net Interest Income(1) $140.4 $125.7 $210.2 $204.3 $21.0 $33.4 $371.6 $363.4 Provision for Credit Losses 6.7 17.2 .5 3.3 (1.2) (1.0) 6.0 19.5 Noninterest Income: Trust Fees 230.1 195.0 223.3 209.8 -- -- 453.4 404.8 Other 89.2 89.0 29.0 33.6 58.2 25.0 176.4 147.6 Noninterest Expenses 325.0 288.0 327.3 314.5 48.2 25.7 700.5 628.2 -------------------------------------------------------------------------------------------------------- Income before Taxes(1) 128.0 104.5 134.7 129.9 32.2 33.7 294.9 268.1 Provision for Income Taxes(1) 48.5 39.7 53.4 50.3 10.8 10.2 112.7 100.2 -------------------------------------------------------------------------------------------------------- NET INCOME $ 79.5 $ 64.8 $ 81.3 $ 79.6 $21.4 $23.5 $182.2 $167.9 -------------------------------------------------------------------------------------------------------- Percentage Contribution 44% 39% 44% 47% 12% 14% 100% 100% -------------------------------------------------------------------------------------------------------- (1) On a fully taxable equivalent basis (FTE). Total includes $33.4 million and $34.1 million of FTE adjustment for 1994 and 1993, respectively.
45 NORTHERN TRUST CORPORATION Consolidated Balance Sheet
December 31 -------------------- ($ In Millions) 1994 1993 ------------------------------------------------------------------------------ ASSETS Cash and Due from Banks $ 1,192.5 $ 1,519.7 Money Market Assets Federal Funds Sold and Securities Purchased under Agreements to Resell 777.0 577.8 Time Deposits with Banks 1,864.7 2,090.4 Other 9.5 72.3 ------------------------------------------------------------------------------ Total 2,651.2 2,740.5 ------------------------------------------------------------------------------ Securities (Note 3) (Fair value $5,069.7 in 1994 and $4,093.5 in 1993) 5,053.1 4,038.7 Loans and Leases (Note 4) (Net of unearned income $70.4 in 1994 and $69.4 in 1993) 8,590.6 7,623.0 Reserve for Credit Losses (Note 5) (144.8) (145.5) Buildings and Equipment (Notes 6 and 7) 274.7 291.9 Customers' Acceptance Liability 56.3 56.9 Trust Security Settlement Receivables 305.7 293.1 Other Assets 582.3 484.3 ------------------------------------------------------------------------------ Total Assets $18,561.6 $16,902.6 ------------------------------------------------------------------------------ LIABILITIES Deposits Demand and Other Noninterest-Bearing $ 2,604.7 $ 2,464.7 Savings and Money Market Deposits 3,176.3 3,387.6 Savings Certificates 1,524.5 1,111.3 Other Time 342.2 333.4 Foreign Offices - Demand 225.4 297.1 - Time 3,861.3 2,739.3 ------------------------------------------------------------------------------ Total Deposits 11,734.4 10,333.4 Federal Funds Purchased 972.0 1,215.8 Securities Sold under Agreements to Repurchase 2,216.9 602.2 Commercial Paper 123.8 124.1 Other Borrowings 833.6 2,001.2 Senior Medium-Term Notes (Note 8) 547.0 817.0 Notes Payable (Note 8) 244.8 326.8 Liability on Acceptances 56.3 56.9 Other Liabilities 552.1 273.5 ------------------------------------------------------------------------------ Total Liabilities 17,280.9 15,750.9 ------------------------------------------------------------------------------ STOCKHOLDERS' EQUITY Preferred Stock (Note 9) 170.0 170.0 Common Stock (Notes 9 and 11) - $1.66 2/3 Par Value 90.6 89.7
1994 1993 ------------------------------------------- Shares authorized 140,000,000 140,000,000 Shares issued 54,360,374 53,826,261 Shares outstanding 54,089,259 53,292,967
Capital Surplus 302.2 303.0 Retained Earnings 762.7 631.9 Net Unrealized Loss on Securities (Note 3) (15.8) (.4) Translation Adjustments -- .6 Common Stock Issuable - Performance Plan (Note 20) 17.9 11.8 Deferred Compensation - ESOP and Other (38.8) (43.5) Treasury Stock - (at cost, 271,115 shares in 1994 and 533,294 shares in 1993) (8.1) (11.4) ------------------------------------------------------------------------------ Total Stockholders' Equity 1,280.7 1,151.7 ------------------------------------------------------------------------------ Total Liabilities and Stockholders' Equity $18,561.6 $16,902.6 ------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements on pages 50-69. 46 NORTHERN TRUST CORPORATION Consolidated Statement of Income
For the Year Ended December 31 --------------------------------- ($ In Millions Except Per Share Information) 1994 1993 1992 -------------------------------------------------------------------------------- Interest Income Money Market Assets Federal Funds Sold and Securities Purchased under Agreements to Resell $ 10.9 $ 5.5 $ 8.8 Time Deposits with Banks 97.8 86.5 95.6 Other 5.2 2.6 4.6 -------------------------------------------------------------------------------- Total 113.9 94.6 109.0 -------------------------------------------------------------------------------- Securities (Note 3) 235.2 176.3 169.2 Loans and Leases (Note 4) 499.6 435.5 443.7 -------------------------------------------------------------------------------- Total Interest Income 848.7 706.4 721.9 -------------------------------------------------------------------------------- Interest Expense Deposits - Savings and Money Market Deposits 85.3 78.8 99.1 - Savings Certificates 56.9 50.5 69.9 - Other Time 18.6 15.7 25.4 - Foreign Offices 137.2 90.4 95.7 Federal Funds Purchased 55.5 51.1 53.5 Securities Sold under Agreements to Repurchase 61.9 20.0 19.8 Commercial Paper 5.9 4.3 5.2 Other Borrowings 32.4 24.6 18.1 Senior Medium-Term Notes (Note 8) 33.8 18.4 3.0 Notes Payable (Note 8) 23.0 23.3 21.0 -------------------------------------------------------------------------------- Total Interest Expense 510.5 377.1 410.7 -------------------------------------------------------------------------------- Net Interest Income 338.2 329.3 311.2 Provision for Credit Losses (Note 5) 6.0 19.5 29.5 -------------------------------------------------------------------------------- Net Interest Income after Provision for Credit Losses 332.2 309.8 281.7 -------------------------------------------------------------------------------- Noninterest Income Trust Fees 453.4 404.8 368.4 Security Commissions and Trading Income 18.4 19.9 19.9 Other Operating Income (Note 13) 158.1 125.9 117.8 Investment Security Gains (Losses) (Note 3) (.1) 1.8 3.3 -------------------------------------------------------------------------------- Total Noninterest Income 629.8 552.4 509.4 -------------------------------------------------------------------------------- Income before Noninterest Expenses 962.0 862.2 791.1 -------------------------------------------------------------------------------- Noninterest Expenses Salaries 316.6 293.4 270.1 Pension and Other Employee Benefits (Notes 14 and 20) 74.8 68.1 58.4 Occupancy Expense (Notes 6 and 7) 57.4 55.3 53.8 Equipment Expense (Note 6) 56.4 41.1 36.2 Other Operating Expenses 195.3 170.3 166.1 -------------------------------------------------------------------------------- Total Noninterest Expenses 700.5 628.2 584.6 -------------------------------------------------------------------------------- Income before Income Taxes 261.5 234.0 206.5 Provision for Income Taxes (Note 10) (Includes related investment security transactions tax provision of none in 1994, $.7 in 1993 and $1.1 in 1992) 79.3 66.1 57.0 -------------------------------------------------------------------------------- NET INCOME $182.2 $167.9 $149.5 -------------------------------------------------------------------------------- Net Income Applicable to Common Stock $174.9 $161.6 $142.7 -------------------------------------------------------------------------------- NET INCOME PER COMMON SHARE (Note 11) - PRIMARY $ 3.17 $ 2.96 $ 2.64 - FULLY DILUTED 3.16 2.95 2.64 -------------------------------------------------------------------------------- Average Number of Common Shares Outstanding - Primary 55,144,214 54,589,933 54,033,230 - Fully Diluted 56,352,375 55,848,809 55,210,451 --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements on pages 50-69. 47 NORTHERN TRUST CORPORATION Consolidated Statement of Changes in Stockholders' Equity
For the Year Ended December 31 ---------------------------- (In Millions) 1994 1993 1992 ------------------------------------------------------------------------------------------------------------- PREFERRED STOCK Balance at January 1 $ 170.0 $ 170.0 $ 120.0 Preferred Stock Issuance, Series E -- -- 50.0 ------------------------------------------------------------------------------------------------------------- Balance at December 31 170.0 170.0 170.0 ------------------------------------------------------------------------------------------------------------- COMMON STOCK Balance at January 1 89.7 89.7 59.8 Transfer from Capital Surplus - Three-for-Two Stock Split -- -- 29.9 Pooled Affiliate - Stock Issued .9 -- -- ------------------------------------------------------------------------------------------------------------- Balance at December 31 90.6 89.7 89.7 ------------------------------------------------------------------------------------------------------------- CAPITAL SURPLUS Balance at January 1 303.0 300.0 326.4 Stock Issued - Incentive Plan and Awards (.4) 3.0 5.0 Pooled Affiliate (.4) -- -- Preferred Stock Issuance Cost -- -- (1.5) Transfer to Common Stock - Three-for-Two Stock Split -- -- (29.9) ------------------------------------------------------------------------------------------------------------- Balance at December 31 302.2 303.0 300.0 ------------------------------------------------------------------------------------------------------------- RETAINED EARNINGS Balance at January 1 631.9 511.7 403.0 Net Income 182.2 167.9 149.5 Dividends Declared on Common Stock (49.6) (41.1) (34.8) Dividends Declared on Preferred Stock (7.2) (6.6) (6.0) Pooled Affiliate 5.4 -- -- ------------------------------------------------------------------------------------------------------------- Balance at December 31 762.7 631.9 511.7 ------------------------------------------------------------------------------------------------------------- NET UNREALIZED LOSS ON SECURITIES Balance at January 1 (.4) (1.3) (4.4) Unrealized Gain (Loss), net (15.4) .9 3.1 ------------------------------------------------------------------------------------------------------------- Balance at December 31 (15.8) (.4) (1.3) ------------------------------------------------------------------------------------------------------------- TRANSLATION ADJUSTMENTS Balance at January 1 .6 .6 .6 Sale of Foreign Investment (.6) -- -- ------------------------------------------------------------------------------------------------------------- Balance at December 31 -- .6 .6 ------------------------------------------------------------------------------------------------------------- COMMON STOCK ISSUABLE - PERFORMANCE PLAN Balance at January 1 11.8 8.1 4.6 Stock Issuable, net of Stock Issued 6.1 3.7 3.5 ------------------------------------------------------------------------------------------------------------- Balance at December 31 17.9 11.8 8.1 ------------------------------------------------------------------------------------------------------------- DEFERRED COMPENSATION - ESOP AND OTHER Balance at January 1 (43.5) (49.5) (54.1) Compensation Deferred (4.5) (3.1) (2.2) Compensation Amortized 10.1 8.6 7.1 Unfunded Pension Liability, net (.9) .5 (.3) ------------------------------------------------------------------------------------------------------------- Balance at December 31 (38.8) (43.5) (49.5) ------------------------------------------------------------------------------------------------------------- TREASURY STOCK Balance at January 1 (11.4) (18.8) (35.2) Stock Options and Awards 12.0 10.6 21.5 Stock Purchased (8.7) (3.2) (5.1) ------------------------------------------------------------------------------------------------------------- Balance at December 31 (8.1) (11.4) (18.8) ------------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY AT DECEMBER 31 $1,280.7 $1,151.7 $1,010.5 -------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements on pages 50-69. 48 NORTHERN TRUST CORPORATION Consolidated Statement of Cash Flows
For the Year Ended December 31 ------------------------------- (In Millions) 1994 1993 1992 -------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 182.2 $ 167.9 $ 149.5 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Provision for Credit Losses 6.0 19.5 29.5 Depreciation and Amortization 41.4 39.3 34.0 (Increase) Decrease in Interest Receivable 22.9 (3.3) 20.2 Increase (Decrease) in Interest Payable 5.2 (9.8) (4.2) Amortization and Accretion of Securities and Unearned Income (27.7) 79.8 84.2 Deferred Income Tax 22.7 21.4 13.6 Gain on Sale of Foreign Investment (34.5) -- -- Net (Increase) Decrease in Trading Account Se- curities 32.3 (34.7) 58.6 Other Noncash, net 137.2 34.8 (35.4) -------------------------------------------------------------------------------- Net Cash Flows from Operating Activities 387.7 314.9 350.0 -------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Net Increase in Federal Funds Sold and Securi- ties Purchased under Agreements to Resell (199.2) (121.3) (64.8) Net (Increase) Decrease in Time Deposits with Banks 225.7 (230.9) (601.3) Net Decrease in Other Money Market Assets 66.5 10.0 53.2 Purchases of Securities--Held to Maturity (544.1) (277.7) (2,831.5) Proceeds from Maturity and Redemption of Secu- rities--Held to Maturity 515.8 297.5 2,324.9 Purchase of Securities--Available for Sale (12,838.3) (4,089.8) -- Proceeds from Sale of Securities--Available for Sale 420.8 148.6 373.6 Proceeds from Maturity and Redemption of Secu- rities--Available for Sale 11,402.4 3,023.3 -- Net Increase in Loans and Leases (979.2) (711.7) (696.8) Purchase of Buildings and Equipment (44.8) (48.9) (56.5) Proceeds from Sale of Buildings and Equipment 10.8 .9 1.7 Sale of Foreign Investment 58.1 -- -- Net (Increase) Decrease in Trust Security Settlement Receivables (12.6) 269.0 (474.2) Cash Used in Acquisitions -- -- (47.5) Other, net 6.9 13.8 18.9 -------------------------------------------------------------------------------- Net Cash Flows from Investing Activities (1,911.2) (1,717.2) (2,000.3) -------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net Increase in Demand and Other Noninterest- Bearing Deposits 68.3 49.6 888.7 Net Increase (Decrease) in Savings and Money Market Deposits (211.3) (223.9) 247.9 Net Increase in Certificates of Deposit and Other Interest-Bearing Deposits 1,544.0 636.9 173.9 Net Increase (Decrease) in Federal Funds Pur- chased and Short-Term Other Borrowings (30.9) 956.1 (71.9) Proceeds from Other Borrowed Funds 3,918.4 1,663.8 1,638.7 Repayments of Other Borrowed Funds (3,684.2) (1,789.8) (1,547.1) Net Decrease in Commercial Paper (.3) (2.9) (2.4) Proceeds from Senior Medium-Term Notes and Notes Payable 430.0 805.0 310.2 Repayments on Senior Medium-Term Notes and Notes Payable (782.0) (206.4) (31.1) Proceeds from Preferred Stock Issued -- -- 48.5 Treasury Stock Purchased (6.9) (2.2) (2.5) Net Proceeds from Stock Options 4.5 4.0 11.7 Cash Dividends Paid on Common and Preferred Stock (54.1) (45.8) (39.5) Other, net .8 5.8 3.8 -------------------------------------------------------------------------------- Net Cash Flows from Financing Activities 1,196.3 1,850.2 1,628.9 -------------------------------------------------------------------------------- Increase (Decrease) in Cash and Due from Banks (327.2) 447.9 (21.4) Cash and Due from Banks at Beginning of Year 1,519.7 1,071.8 1,093.2 -------------------------------------------------------------------------------- CASH AND DUE FROM BANKS AT END OF YEAR $1,192.5 $1,519.7 $1,071.8 -------------------------------------------------------------------------------- SCHEDULE OF NONCASH INVESTING AND FINANCING AC- TIVITIES: Acquisition of Affiliate for Stock, net $ 6.4 $ -- $ -- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest Paid on Deposits and Short- and Long- Term Borrowings $ 505.3 $ 386.9 $ 414.9 Income Taxes Paid 52.5 41.5 33.1 --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements on pages 50-69. 49 NORTHERN TRUST CORPORATION Notes To Consolidated Financial Statements 1. ACCOUNTING POLICIES--The consolidated financial statements have been prepared in conformity with generally accepted accounting principles and reporting practices prescribed for the banking industry. A description of the significant accounting policies follows. A. BASIS OF PRESENTATION. The consolidated financial statements include the accounts of Northern Trust Corporation (Corporation) and its wholly owned subsidiary The Northern Trust Company (Bank) and their wholly owned subsidiaries. Throughout the notes, the term "Northern Trust" refers to Northern Trust Corporation and subsidiaries. Significant intercompany balances and transactions have been eliminated in consolidation. The consolidated statement of income includes results of acquired subsidiaries from the dates of acquisition. B. FOREIGN CURRENCY TRANSLATION. Foreign currency asset and liability accounts of overseas branches are translated at current rates of exchange, except for buildings and equipment which are translated at rates in effect at the date of acquisition. Income and expense accounts are translated at month-end rates of exchange. Foreign exchange trading positions are valued daily at prevailing market rates. Gains and losses on trading positions and on positions entered into in order to hedge foreign denominated investments are recognized currently in other operating income. Consistent with industry practice, prior to 1994, unrealized gains and losses on trading positions were recorded in the consolidated balance sheet on a net basis. Effective January 1, 1994, Northern Trust adopted FASB Interpretation No. 39, "Offsetting of Amounts Related to Certain Contracts," and began recording these unrealized gains as other assets and unrealized losses as other liabilities. Gains and losses on foreign currency positions that were entered into in order 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. C. SECURITIES. 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 stated at cost, adjusted for amortization of premium and accretion of discount. Securities Available for Sale consist of debt and equity securities that are not intended to be held to maturity and are not held for trading. Securities available for sale are reported at fair value, with unrealized gains and losses credited or charged, net of the tax effect, directly to stockholders' equity. Realized gains and losses on securities available for sale are determined on a specific identification basis and are reported in the consolidated statement of income as investment security gains and losses. Securities Held for Trading are stated at fair value. Realized and unrealized gains and losses on securities held for trading are reported in the consolidated statement of income under security commissions and trading income. Effective January 1, 1994, Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities" was adopted. Prior to the adoption of SFAS No. 115, securities available for sale were classified as held for sale and carried at the lower of cost or fair value. D. 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 to meet the interest risk management needs of its clients, as part of its trading activity for its own account and as part of its asset/liability management activities. Consistent with industry practice, prior to 1994 the carrying amounts related to interest risk management instruments were reported in the consolidated balance sheet on a net basis. Effective January 1, 1994, Northern Trust adopted FASB Interpretation No. 39, "Offsetting of Amounts Related to Certain Contracts," and began reporting unrealized gains and receivables as other assets and unrealized losses and payables as other liabilities in the consolidated balance sheet. 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. Interest risk management instruments are also entered into to hedge specifically identified existing assets and liabilities or anticipated transactions. If specific criteria are met, any gains or losses are deferred and recognized as an adjustment to interest income or expense over the life of the designated asset, liability, or anticipated transaction. Interest accruals on interest rate swaps that are used as hedges are recognized as adjustments to the interest income or expense of the hedged item over the life of the swap. E. 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 a nonaccrual status, interest 50 NORTHERN TRUST CORPORATION accrued but not collected is reversed against interest income of the current period. Loans are returned to an accrual status when factors indicating doubtful collectibility no longer exist. Premiums and discounts on loans are recognized as an adjustment of yield by the interest method based on the contractual terms of the loan. Commitment fees that are considered to be an adjustment to the loan yield, loan origination fees and certain direct costs are deferred and accounted for as an adjustment of the yield. Unearned lease income from direct financing and leveraged leases is recognized using the interest method. This method provides a constant rate of return on the unrecovered investment over the life of the lease. F. RESERVE FOR CREDIT LOSSES. The reserve for credit losses is established through provisions for credit losses charged to income. Loans and other extensions of credit deemed uncollectible are charged to the reserve. Subsequent recoveries, if any, are credited to the reserve. The loan portfolio and other extensions of credit are regularly reviewed to evaluate the adequacy of the reserve for credit losses. The impact of economic conditions on the creditworthiness of borrowers is given major consideration in determining the adequacy of the reserve. Credit loss experience, changes in the character and size of the loan portfolio and management's judgement are other factors used in assessing the overall adequacy of the reserve for credit losses and the resulting provision for credit losses. 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. While the largest portion of this reserve is intended to cover loan and lease losses, it is considered a general reserve available for all credit-related purposes. G. FEES ON STANDBY LETTERS OF CREDIT AND PARTICIPATIONS IN BANKERS ACCEPTANCES. Fees on standby letters of credit are generally recognized in other operating income on the straight-line method over the lives of the underlying agreements. Commissions on bankers acceptances are recognized in other operating income when received. H. BUILDINGS AND EQUIPMENT. Buildings and equipment owned are carried at original cost less accumulated depreciation. The charge for depreciation is computed primarily on the straight-line method. Leased properties meeting certain criteria are capitalized and amortized using the straight-line method over the lease period. I. OTHER REAL ESTATE OWNED (OREO). OREO is comprised of commercial and residential real estate properties acquired in partial or total satisfaction of problem loans. OREO assets are carried at the lower of cost or fair value. Losses identified at the time of acquisition of such properties are charged against the reserve for credit losses. Subsequent write-downs that may be required to the carrying value of these assets and losses realized from asset sales are charged to other operating expenses. Gains realized from the sale of OREO are included in other operating income. J. INTANGIBLE ASSETS. Goodwill, arising from the excess of purchase price over the fair value of net assets of acquired subsidiaries, is being amortized using the straight- line method over periods benefiting, ranging primarily from fifteen to twenty-five years. Goodwill of approximately $36.2 million and $39.4 million at December 31, 1994 and 1993, respectively, is included in other assets in the consolidated balance sheet. At December 31, 1994, the average remaining life of unamortized goodwill was twelve years. Other intangible assets are amortized using various methods over the estimated life of the assets. At December 31, 1994 and 1993 other intangible assets totaled $31.2 million and $35.0 million, respectively. K. TRUST ASSETS AND FEES. Assets held in fiduciary or agency capacities are not included in the consolidated balance sheet, since such items are not assets of Northern Trust. Income from trust activities is reported on an accrual basis. L. TRUST SECURITY SETTLEMENT RECEIVABLES. These receivables represent other items in the process of collection presented on behalf of trust clients. M. PENSION BENEFITS. A noncontributory qualified pension plan covers substantially all employees. The plan provides benefits for normal and early retirement, deferred benefits for vested employees and, under certain circumstances, survivor benefits in the event of death. Benefits are based on the employees' years of service and their five highest consecutive years of compensation. The proportion of average compensation paid as a pension benefit is determined by length of service. Contributions to the plan satisfy or exceed the minimum funding requirements of ERISA. Certain retiree death benefits are funded through the Pension Plan and the related cost is included as pension expense. 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 51 NORTHERN TRUST CORPORATION Notes to Consolidated Financial Statements (continued) in certain of its qualified plans. The primary purpose of the trust is to fund nonqualified pension benefits. This arrangement offers certain officers a degree of assurance for payment of benefits in excess of those permitted in the related qualified plans. The assets remain subject to the claims of creditors and are not the property of the employees. Therefore, they are accounted for as corporate assets and are included in other assets in the consolidated balance sheet. N. EMPLOYEE STOCK OWNERSHIP PLAN (ESOP). A leveraged Employee Stock Ownership Plan (ESOP) in which substantially all employees of Northern Trust are eligible to participate was established in 1989. The ESOP shares not yet allocated to individual accounts are treated as deferred compensation and accounted for as a reduction of stockholders' equity. The original 4.5 million shares in the ESOP Trust are being allocated to eligible employees over a ten-year period. Dividends paid on unallocated shares held in the ESOP Trust are used for debt service on the ESOP notes. Compensation expense is accounted for based primarily on the amount of cash paid by Northern Trust to the ESOP for principal payments on the ESOP notes. O. THRIFT INCENTIVE PLAN. The Corporation and its subsidiaries have a defined contribution Thrift Incentive Plan covering substantially all employees. The corporate contribution is contingent upon the level of employee contribution and meeting a predefined earnings target for the year. The estimated contribution to this plan is charged to pension and other employee benefit expenses. P. INCENTIVE PLANS. 1992 INCENTIVE STOCK PLAN. The 1992 Incentive Stock Plan (Plan) provides for the granting of both nonqualified and incentive stock options. Stock appreciation rights may also be granted in conjunction with stock options. The Plan also permits stock awards and stock equivalents to be granted. Key employees of the Corporation and its subsidiaries are eligible to participate in the Plan. The Plan is administered by the Compensation and Benefits Committee (Committee) of the Board of Directors. The total number of shares of the Corporation's common stock authorized for distribution under the Plan is 3,750,000. 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 are exercisable not later than ten years after the date of grant. In addition, the Plan provides that all options will 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 option, but not later than three years after termination of employment for any reason other than death. Under the Plan, stock awards or equivalents can be awarded by the Committee to participants which entitle them to receive a payment in cash or Northern Trust Corporation common stock based on such terms and conditions as the Committee deems appropriate including achievement of performance goals. AMENDED INCENTIVE STOCK PLAN. The Amended Incentive Stock Plan, adopted in 1986, was superseded by the 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. LONG-TERM INCENTIVE PLAN. Performance shares have been granted to executive officers under the provisions of the 1992 and the Amended Incentive Stock Plans whereby the executives will be entitled to have each award credited to an account maintained for them if established performance goals are achieved with distribution after vesting. The value of shares earned but not yet distributed under the plans is credited to performance share accounts and is shown in stockholders' equity as common stock issuable-performance plan. OTHER INCENTIVE PLANS. Various incentive plans provide for bonuses to selected employees based upon the accomplishment of various corporate net income objectives, business unit goals and individual performance. The above incentive plans provide for acceleration of benefits in certain circumstances including a change of control. Q. OTHER POSTRETIREMENT BENEFITS. Northern Trust maintains an unfunded postretirement health care plan. Employees retiring under the provisions of The Northern Trust Pension Plan may be eligible for postretirement health care coverage. These benefits may be subject to deductibles, co-payment provisions and other limitations. The provisions may be changed at the discretion of Northern Trust, which also reserves the right to terminate these benefits at any time. Effective January 1, 1993, SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," was adopted. The statement requires that the expected cost of providing postretirement benefits be recognized in financial statements during the employees' active service period. The previous practice was to expense these benefits when paid. R. INCOME TAXES. On January 1, 1993, SFAS No. 109, "Accounting for Income Taxes," was adopted on a prospective basis. Based on Northern Trust's existing tax position, income tax accounting under this new statement is 52 NORTHERN TRUST CORPORATION not significantly different than the accounting required under the prior method (SFAS No. 96). An asset and liability approach to accounting for income taxes is followed. The objective is to recognize the amount of taxes payable or refundable for the current year, and to recognize deferred tax assets and liabilities resulting from temporary differences between the amounts reported in the financial statements and the tax bases of assets and liabilities. The measurement of tax assets and liabilities is based on enacted tax laws and applicable tax rates. S. CASH FLOW STATEMENTS. Cash and cash equivalents has been defined as those amounts included in the consolidated balance sheet as "Cash and Due from Banks." 2. RECLASSIFICATIONS--Certain reclassifications have been made to prior periods' consolidated financial statements to place them on a basis comparable with the current periods' consolidated financial statements. 3. SECURITIES--The following tables summarize the book and fair values of securities.
December 31, 1994 ----------------- Book Fair (In Millions) Value Value ------------------------------------------ Held to Maturity $ 641.3 $ 657.9 Available for Sale 4,407.8 4,407.8 Trading Account 4.0 4.0 ------------------------------------------ Total $5,053.1 $5,069.7 ------------------------------------------ December 31, 1993 ----------------- Book Fair (In Millions) Value Value ------------------------------------------ Held to Maturity $3,790.8 $3,845.0 Available for Sale* 211.6 212.2 Trading Account 36.3 36.3 ------------------------------------------ Total $4,038.7 $4,093.5 ------------------------------------------
*Prior to 1994, securities shown as available for sale were classified as held for sale and carried at the lower of cost or fair value. Income on obligations of states and political subdivisions totaled $34.6 million, $38.3 million and $39.3 million in 1994, 1993 and 1992, respectively. Dividends on preferred stock totaled $6.4 million, $3.8 million and $5.6 million for 1994, 1993 and 1992, respectively. 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, 1994 --------------------------------------- Gross Gross Book Unrealized Unrealized Fair (In Millions) Value Gains Losses Value ------------------------------------------------------------------ U.S. Government $ 137.2 $ -- $ .2 $ 137.0 Obligations of States and Political Subdivisions 474.5 19.5 2.7 491.3 Other 29.6 -- -- 29.6 ------------------------------------------------------------------ Total $ 641.3 $19.5 $2.9 $ 657.9 ------------------------------------------------------------------ December 31, 1993 --------------------------------------- Gross Gross Book Unrealized Unrealized Fair (In Millions) Value Gains Losses Value ------------------------------------------------------------------ U.S. Government $2,343.7 $ 2.1 $ .2 $2,345.6 Obligations of States and Political Subdivisions 493.5 53.5 .1 546.9 Federal Agency 833.1 .5 1.8 831.8 Other 120.5 .3 .1 120.7 ------------------------------------------------------------------ Total $3,790.8 $56.4 $2.2 $3,845.0 ------------------------------------------------------------------
REMAINING MATURITY OF SECURITIES HELD TO MATURITY
December 31, 1994 ------------------- Book Fair (In Millions) Value Value ------------------------------------------------------------------ Due in One Year or Less $248.8 $250.9 Due After One Year Through Five Years 160.1 168.5 Due After Five Years Through Ten Years 137.5 145.0 Due After Ten Years 94.9 93.5 ------------------------------------------------------------------ Total $641.3 $657.9 ------------------------------------------------------------------
Asset-backed and mortgage-backed securities were included in the above table taking into account anticipated future prepayments. SECURITIES AVAILABLE FOR SALE. Realized gross security gains and losses on securities available for sale, which were included in the consolidated statement of income, totaled $.2 million and $.3 million, respectively, in 1994. Realized gross security gains in 1993 totaled $1.8 million, including $1.6 million related to securities held for sale. There were no realized gross security losses in 1993. In 1992, realized gross gains and gross losses totaled $4.0 million and $.7 million, respectively. 53 NORTHERN TRUST CORPORATION Notes to Consolidated Financial Statements (continued) The following tables summarize the amortized cost, fair values and remaining maturities of securities available for sale. RECONCILIATION OF AMORTIZED COST TO FAIR VALUES OF SECURITIES AVAILABLE FOR SALE
December 31, 1994 ---------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair (In Millions) Cost Gains Losses Value --------------------------------------------------------- U.S. Government $ 819.4 $ -- $18.1 $ 801.3 Federal Agency 3,263.6 1.4 13.5 3,251.5 Preferred Stock 197.2 -- .6 196.6 Other 163.0 .9 5.5 158.4 --------------------------------------------------------- Total $4,443.2 $2.3 $37.7 $4,407.8 ---------------------------------------------------------
Unrealized gains on off-balance sheet financial instruments used to hedge available for sale securities totaled $9.8 million as of December 31, 1994 and are reported as other assets in the consolidated balance sheet. As of December 31, 1994, stockholders' equity included a charge of $15.8 million, net of tax, to recognize the depreciation on securities available for sale and the related hedges. REMAINING MATURITY OF SECURITIES AVAILABLE FOR SALE
December 31, 1994 ------------------ Amortized Fair (In Millions) Cost Value ---------------------------------------------- Due in One Year or Less $3,420.5 $3,406.1 Due After One Year Through Five Years 745.7 725.4 Due After Five Years Through Ten Years 89.9 89.4 Due After Ten Years 187.1 186.9 ---------------------------------------------- Total $4,443.2 $4,407.8 ----------------------------------------------
Asset-backed and mortgage-backed securities were included in the above table taking into account anticipated future prepayments. SECURITIES HELD FOR SALE. The following table summarizes the amortized cost/book and fair values of securities held for sale. RECONCILIATION OF BOOK VALUES TO FAIR VALUES OF SECURITIES HELD FOR SALE
December 31, 1993 -------------------------------------- Amortized Gross Gross Cost/Book Unrealized Unrealized Fair (In Millions) Value Gains Losses Value ------------------------------------------------------- Federal Agency $ 77.7 $.7 $.2 $ 78.2 Preferred Stock 129.2 -- -- 129.2 Other 4.7 .1 -- 4.8 ------------------------------------------------------- Total $211.6 $.8 $.2 $212.2 -------------------------------------------------------
4. LOANS AND LEASES--Amounts outstanding in selected loan categories are shown below.
December 31 ----------------- (In Millions) 1994 1993 ------------------------------------------ Domestic Commercial $2,672.0 $2,421.1 Broker 274.6 249.4 Residential Real Estate 3,299.1 2,883.3 Commercial Real Estate 494.1 506.5 Consumer 662.1 617.5 Other 642.1 453.5 Lease Financing 159.9 138.4 ------------------------------------------ Total Domestic 8,203.9 7,269.7 International 386.7 353.3 ------------------------------------------ Total Loans and Leases $8,590.6 $7,623.0 ------------------------------------------
Residential real estate loans held for sale totaled $4.4 million and $19.3 million at December 31, 1994 and 1993, respectively. Other domestic and international loans include $716.5 million at December 31, 1994, and $465.5 million at December 31, 1993 of overnight trust-related advances in connection with next day security settlements. Lease financing includes leveraged leases of $59.8 million at December 31, 1994, and $48.3 million at December 31, 1993. NONPERFORMING ASSETS. Presented below are outstanding amounts of nonaccrual loans and OREO.
December 31 ----------- (In Millions) 1994 1993 ---------------------------------------------- Nonaccrual Loans Domestic -- Commercial Real Estate $ 9.1 $ 4.8 -- Other 17.4 21.2 International 1.3 1.3 ---------------------------------------------- Total Nonaccrual Loans 27.8 27.3 Other Real Estate Owned, net of reserve 2.2 9.7 ---------------------------------------------- Total Nonperforming Assets $30.0 $37.0 ----------------------------------------------
Unfunded loan commitments and standby letters of credit issued to borrowers whose loans were classified as nonaccrual totaled $.1 million at December 31, 1994, and $1.0 million at December 31, 1993. Interest income that would have been recorded on domestic nonaccrual loans in accordance with their original terms amounted to $3.1 million in 1994, $3.5 million in 1993 and $5.4 million in 1992, compared with amounts that were actually recorded of $.2 million, $1.6 million and zero, respectively. Interest income that would have been recorded on international nonaccrual loans in accordance with their original terms amounted to $.1 million in 1994, 1993 and 1992, compared with amounts that were actually recorded at zero in all three years. 54 NORTHERN TRUST CORPORATION Writedowns and realized losses on OREO of $.3 million in 1994, $2.1 million in 1993 and $14.3 million in 1992 were charged to other operating expenses. Statements of Financial Accounting Standards (SFAS) No. 114 and No. 118, "Accounting by Creditors for Impairment of a Loan," were adopted effective January 1, 1995. A loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. These new statements require that an impaired loan that is within the scope of the statements be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, or at the loan's observable market price, or, if the loan is collateral dependent, based on the fair value of the collateral. At January 1, 1995, impaired loans totaled $25.2 million, and the portion of the reserve for credit losses allocated to these impaired loans was zero, due to prior charge-offs and interest collections which have been applied to principal. Management believes this new standard will not have a material effect on the consolidated financial position and results of operations. 5. RESERVE FOR CREDIT LOSSES--Changes in the reserve for credit losses were as follows.
(In Millions) 1994 1993 1992 ----------------------------------------------------- Balance at Beginning of Year $145.5 $145.5 $145.7 ----------------------------------------------------- Charge-offs Domestic Commercial Real Estate (4.0) (7.8) (4.6) Other (6.7) (15.0) (21.8) International -- (.6) (6.0) ----------------------------------------------------- Total Charge-offs (10.7) (23.4) (32.4) Recoveries 4.0 3.9 2.7 ----------------------------------------------------- Net Charge-offs (6.7) (19.5) (29.7) Provision for Credit Losses 6.0 19.5 29.5 ----------------------------------------------------- Balance at End of Year $144.8 $145.5 $145.5 -----------------------------------------------------
6. BUILDINGS AND EQUIPMENT--Summary of buildings and equipment is presented below.
December 31, 1994 ------------------------------------- Accumulated Net (In Millions) Original Cost Depreciation Book Value -------------------------------------------------------------------- Land $ 23.0 $ -- $ 23.0 Buildings 77.3 35.8 41.5 Equipment 198.6 88.9 109.7 Leasehold Improvements 56.3 20.3 36.0 Building Leased under Capital Lease (Note 7) 72.6 8.1 64.5 -------------------------------------------------------------------- Total Buildings and Equipment $427.8 $153.1 $274.7 -------------------------------------------------------------------- December 31, 1993 ------------------------------------- Accumulated Net (In Millions) Original Cost Depreciation Book Value -------------------------------------------------------------------- Land $ 23.4 $ -- $ 23.4 Buildings 79.0 35.5 43.5 Equipment 215.3 91.2 124.1 Leasehold Improvements 51.0 16.3 34.7 Building Leased under Capital Lease (Note 7) 72.6 6.4 66.2 -------------------------------------------------------------------- Total Buildings and Equipment $441.3 $149.4 $291.9 --------------------------------------------------------------------
The charge for depreciation amounted to $41.4 million in 1994, $39.3 million in 1993 and $34.0 million in 1992. Occupancy expense has been reduced by $2.0 million in 1994, $1.7 million in 1993 and $1.0 million in 1992 for rental income from leased premises. 7. LEASE COMMITMENTS--At December 31, 1994, Northern Trust was obligated under a number of noncancellable operating leases for premises and equipment. Certain leases contain rent escalation clauses for real estate taxes and other operating expenses and renewal option clauses calling for increased rentals. There are no restrictions imposed by any lease agreement regarding the payment of dividends, debt financing or Northern Trust entering into further lease agreements. Minimum annual lease commitments as of December 31, 1994, for all noncancellable operating leases are as follows.
Future Minimum (In Millions) Lease Payments -------------------------------------------- 1995 $ 28.2 1996 27.3 1997 26.4 1998 23.2 1999 18.7 Later Years 123.3 -------------------------------------------- Total Minimum Lease Payments $247.1 --------------------------------------------
55 NORTHERN TRUST CORPORATION Notes to Consolidated Financial Statements (continued) Rental expense for all operating leases is included in occupancy expense and amounted to $24.5 million in 1994, $23.5 million in 1993 and $22.8 million in 1992. The building and land utilized at the Chicago operations center has been leased under an agreement which qualifies as a capital lease. The long-term financing for the property was provided by the Corporation and the Bank. In the event of sale or refinancing, the Bank will receive all proceeds except for 58% of any proceeds in excess of the original project costs which will be paid to the lessor. The table below reflects the future minimum lease payments required under this lease, net of payments received on the long-term financing, and the present value of the net capital lease obligation at December 31, 1994 (refer to Note 8).
Future Minimum (In Millions) Lease Payments, net ----------------------------------------------- 1995 $ 1.1 1996 1.1 1997 1.1 1998 1.1 1999 1.3 Later Years 15.7 ----------------------------------------------- Total Minimum Lease Pay- ments, net 21.4 Less: Amount Representing Interest 11.0 ----------------------------------------------- Net Present Value under Capital Lease Obligation $10.4 -----------------------------------------------
8. SENIOR MEDIUM-TERM NOTES, NOTES PAYABLE AND LINES OF CREDIT-- SENIOR MEDIUM-TERM NOTES. Summary of senior medium-term notes outstanding at December 31 is presented below.
($ In Millions) Rate 1994 1993 -------------------------------------------------------- Corporation Due 1996 (a) 8.65% $ 2.0 $ 2.0 Bank Due 1994 (a) (b) 3.40-4.51 -- 700.0 Due 1995 (a) (b) Fixed 4.95-6.60 375.0 100.0 Floating 155.0 -- Due 1996 (a) (b) 4.63-5.38 10.0 10.0 Due 1998 (a) (b) 6.29 5.0 5.0 -------------------------------------------------------- Total Senior Medium-Term Notes $547.0 $817.0 --------------------------------------------------------
Refer to bottom of next table for applicable notes. NOTES PAYABLE. Summary of notes payable outstanding at December 31 is presented below.
($ In Millions) 1994 1993 ---------------------------------------------- Corporation--Subordinated Notes 9.15% Notes due March 1998 (a) $ 10.0 $ 10.0 9.20% Notes due March 1998 (a) 13.0 13.0 9.00% Notes due May 1998 (a) 50.0 50.0 9.20% Notes due May 2001 (a) 25.0 25.0 Bank--Subordinated Notes 6.50% Notes due May 2003 (a) (b) 100.0 100.0 ---------------------------------------------- Subordinated Notes Payable $198.0 $198.0 ---------------------------------------------- Corporation--Notes Payable 9 1/8% Notes due August 1994 (a) $ -- $ 75.0 8.25% ESOP Notes due December 1995 (a) (c) 2.7 2.7 8.23% ESOP Installment Notes with Final Payment due December 1998 (d) 33.7 40.6 Bank--Capital Lease Obliga- tion (e) 10.4 10.5 ---------------------------------------------- Notes Payable $ 46.8 $128.8 ---------------------------------------------- Total Notes Payable $244.8 $326.8 ---------------------------------------------- Notes Payable Qualifying as Risk-Based Capital $168.8 $183.4 ----------------------------------------------
(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 medium-term bank notes in an aggregate principal amount of up to $1.5 billion at any one time outstanding. Each senior note will mature from nine months to fifteen years, following its date of original issuance, as selected by the initial purchaser and agreed to by the Bank. (c) Notes are related to the contribution of 180,000 common shares to the ESOP trust. (d) Notes were issued directly by the ESOP trust in order to finance the purchase of 4,320,000 common shares. The Corporation unconditionally guarantees the payment of principal, premium, if any, and interest. The interest rate is subject to adjustment in the event of certain tax law changes affecting ESOP plans. (e) Refer to Note 7. LINES OF CREDIT. The Corporation currently maintains commercial paper back-up facility lines of credit with four unaffiliated banks totaling $50 million. The facility is renewable every six months and requires the payment of an annual commitment fee equal to 1/8 of 1% of the commitment. There were no borrowings under commercial paper back-up facilities during 1994 or 1993. 56 NORTHERN TRUST CORPORATION 9. STOCKHOLDERS' EQUITY-- PREFERRED STOCK. The Corporation is authorized to issue 10,000,000 shares of preferred stock without par value. The Board of Directors of the Corporation is authorized to fix the particular preferences, rights, qualifications and restrictions for each series of preferred stock issued. Summary of preferred stock outstanding is presented below.
December 31 ------------- (In Millions) 1994 1993 ----------------------------------------------- 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 6.25% Cumulative Convertible Preferred Stock Series E 50,000 shares @ $1,000 per share 50.0 50.0 ----------------------------------------------- Total Preferred Stock $170.0 $170.0 -----------------------------------------------
SERIES C--In 1987, 600 shares of Auction Rate Preferred Stock (APS) Series C 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. The average rate for this issue as declared during 1994 was 3.43%. The shares of APS are redeemable at the option of the Corporation, in whole or in part, on any Dividend Payment Date at $100,000 per share, plus accrued and unpaid dividends. SERIES D--In 1990, 600 shares of Flexible Auction Rate Cumulative Preferred Stock, Series D (FAPS) were issued with a $100,000 per share stated value. Each dividend period shall contain 49 days (the "Short-Term Dividend Period") or a number of days greater than 49 days (as selected by the Term Selection Agent) which is divisible by seven (the "Long-Term Dividend Period"). Rates for each dividend period are determined by Dutch auction unless the Corporation fails to pay the full amount of any dividend or redemption. The dividend rate in any auction will not exceed a percentage (currently 125%), determined by the prevailing credit rating of the FAPS, of the 60-day "AA" Composite Commercial Paper Rate or the Reference Rate, which rate is the Composite Commercial Paper Rate or the Treasury Rate, as appropriate for the length of each short-term or long-term dividend period, respectively. If the Corporation fails to pay the full amount of any dividend or redemption, each dividend period thereafter (until auctions are resumed) will be a Short-Term Dividend Period and the dividend rate will be 250% of the 60-day "AA" Composite Commercial Paper Rate; additional dividends will accrue for the balance of any Long-Term Dividend Period in which such a failure to pay occurs. No dividends other than dividends payable in junior stock, such as 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 1994 was 3.47%. The shares of FAPS are redeemable at the option of Northern Trust, in whole or in part, at $100,000 per share plus accrued and unpaid dividends. SERIES E--$50 million of 6.25% Cumulative Convertible Preferred Stock, Series E was issued, sold to the public in the form of 1,000,000 Depositary Shares, each representing one-twentieth of a share of the Series E Preferred Stock (equal to 50,000 preferred shares). The stated value of the Preferred Stock is $1,000 per share and the proportionate liquidation preference of each Depositary Share is $50. The Preferred Stock has no preemptive rights; is not subject to any sinking fund or other obligation of the Corporation to repurchase or retire the Stock; and except in certain specified cases has no voting rights. The Preferred Stock has priority over common stock as to dividends and liquidation rights. The preferred stock is convertible at any time into shares of common at a conversion price of $41.50 (equivalent to approximately 1.2048 shares of common stock per Depositary Share), subject to adjustment in certain events. The Preferred Stock is not redeemable prior to February 15, 1995. Thereafter, the Preferred Stock may be redeemed, subject to the approval of the Federal Reserve Board, at specified redemption prices beginning with $52.1875 on February 15, 1995 and decreasing on a pro rata basis each February 15 to $50.00 per Depositary Share on or after February 15, 2002, plus accrued and unpaid dividends. PREFERRED STOCK PURCHASE RIGHTS. In 1989, the Board of Directors of the Corporation declared a dividend distribution of one Preferred Stock Purchase Right on each outstanding share of the Corporation's common stock to the stockholders of record on October 31, 1989. The Rights are subject to anti- dilution provisions, and each Right is now exercisable for one-third of one-hundredth of a share of Series A Junior Participating Preferred Stock at an exercise price of $83.33 for each such fractional share. The Rights are evidenced by the common stock certificates and 57 NORTHERN TRUST CORPORATION Notes to Consolidated Financial Statements (continued) are not exercisable or transferable apart from the common stock until twenty days after a person or group acquires 15 percent or more of the Corporation's voting power or announces a tender or exchange offer which could result in ownership of 25 percent or more of the voting power. Shares of the Participating Preferred Stock purchasable upon exercise of the Rights will not be redeemable. In the event that a person or group acquires 25 percent or more of the Corporation voting power or if the Corporation merges or engages in certain self-dealing transactions with a 15 percent or more stockholder, each Right will entitle the holder, other than such person or group in certain circumstances, to purchase that number of shares of surviving company common 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 cent per Right at any time prior to the close of business on the 20th day following publication of the acquisition of 15 percent or more of the voting power by a person or group. Unless earlier redeemed, the Rights will expire on October 31, 1999. COMMON STOCK. In November 1992 a three-for-two split of the common stock was declared to be effected by means of a 50% stock distribution. One share for each two shares held by shareholders of record on November 30, 1992, was distributed on December 9, 1992. In February 1994, the Corporation's common stock buy- back authorization was increased by approximately 1.3 million shares, thus allowing the purchase after that date up to an aggregate of 4 million shares of the common stock. The Corporation may repurchase the shares from time to time via open market purchases, and the shares would be used for general corporate purposes. Analysis of changes in the number of shares of common stock outstanding follows. COMMON STOCK OUTSTANDING
1994 1993 1992 ------------------------------------------------------------ Balance at January 1 53,292,967 52,831,844 34,497,869 Distribution of Three-for-Two Stock Split -- -- 17,248,935 Employee Benefit Plans: Incentive Plan and Awards 44,525 149,300 133,350 Stock Options Exercised 461,739 388,298 1,092,964 Pooled Affiliate 534,113 -- -- Treasury Stock Purchases (244,085) (76,475) (141,274) ------------------------------------------------------------ Balance at December 31 54,089,259 53,292,967 52,831,844 ------------------------------------------------------------
10. INCOME TAXES--The table below reconciles the total provision for income taxes recorded in the consolidated statement of income with the amount computed at the statutory federal tax rates of 35% in 1994 and 1993, and 34% in 1992.
Income Tax Provision ---------------------- (In Millions) 1994 1993 1992 ------------------------------------------------ Tax at Statutory Rate $ 91.5 $ 81.9 $ 70.2 Tax-Exempt Income (15.2) (15.8) (16.4) State Taxes, net 4.2 1.1 3.7 Other (1.2) (1.1) (.5) ------------------------------------------------ Provision for Income Taxes $ 79.3 $ 66.1 $ 57.0 ------------------------------------------------
The components of the consolidated provision for income taxes for each of the three years ended December 31, are as follows.
(In Millions) 1994 1993 1992 -------------------------------------------- Current Tax Provision (Benefit) Federal $47.4 $42.4 $38.8 State 3.6 (.6) 4.2 Foreign 5.6 2.9 .4 -------------------------------------------- Total 56.6 44.7 43.4 -------------------------------------------- Deferred Tax Provision Federal 19.8 19.2 12.2 State 2.9 2.2 1.4 -------------------------------------------- Total 22.7 21.4 13.6 -------------------------------------------- Provision for Income Taxes $79.3 $66.1 $57.0 --------------------------------------------
Not included in the above tables, but charged or (credited) directly to stockholders' equity are the tax effects of the following transactions.
(In Millions) 1994 1993 ----------------------------------------------------------- Current Tax Benefit for Employee Stock Options and Other Employee Benefit Plans $(3.7) $(4.5) Deferred Tax Liability (Benefit) Related to: Unrealized Loss on Securities (9.5) .5 Other (.1) -- -----------------------------------------------------------
58 NORTHERN TRUST CORPORATION Deferred taxes result from temporary differences between the amounts reported in the consolidated financial statements and the tax bases of assets and liabilities. Deferred tax liabilities and assets have been computed based on the statutory federal tax rates of 35% at December 31, 1994 and 1993, as follows.
December 31 --------------- (In Millions) 1994 1993 --------------------------------------------- Deferred Tax Liabilities Lease Financing $48.8 $39.2 Software Development 37.8 27.6 Accumulated Depreciation 1.0 8.3 Other Liabilities 8.4 7.3 --------------------------------------------- Gross Deferred Tax Liabilities $96.0 $82.4 --------------------------------------------- Deferred Tax Assets Reserve for Credit Losses $50.7 $50.9 Loan Fees 3.2 5.5 Leased Facilities 6.7 6.3 Other Assets 6.4 3.8 --------------------------------------------- Gross Deferred Tax Assets $67.0 $66.5 Valuation Reserve -- -- --------------------------------------------- Deferred Tax Assets, net of Valuation Reserve $67.0 $66.5 --------------------------------------------- Net Deferred Tax Liabilities $29.0 $15.9 ---------------------------------------------
11. NET INCOME PER COMMON SHARE COMPUTATIONS--Primary net income per common share is computed by dividing net income, after deduction of the preferred stock dividends, by the daily average number of common and common equivalent shares outstanding. Common equivalent shares are based on outstanding stock options and common stock awards under the 1992 and the Amended Incentive Stock Plans. Fully diluted net income per common share assumes, in addition to the above, the conversion of the Series E Cumulative Convertible Preferred Stock. 12. 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, reduced by certain loan losses (as defined in the applicable statute). In addition, for each of the Corporation's Federal Reserve member banking subsidiaries, prior approval of federal banking authorities is required if dividends declared by a subsidiary bank in any calendar year will exceed its net profits (as defined) for that year, combined with its retained profits for the preceding two years. Based on these regulations, the Corporation's banking subsidiaries, without regulatory approval, could declare dividends during 1995 equal to their 1995 eligible net profits (as defined) plus $190.1 million. The ability of each banking subsidiary to pay dividends to the Corporation may be further restricted as a result of regulatory policies and guidelines relating to dividend payments and capital adequacy. State and federal laws limit the transfer of funds by a banking subsidiary to the Corporation and certain of its affiliates in the form of loans or extensions of credit, investments or purchases of assets. Transfers of this kind to the Corporation or a nonbanking subsidiary by a banking subsidiary are each limited to 10% of the banking subsidiary's capital and surplus with respect to each affiliate and to 20% in the aggregate, and are also subject to certain collateral requirements. These transactions, as well as other transactions between a banking subsidiary and the Corporation or its affiliates, must also be on terms substantially the same as, or at least as favorable as, those prevailing at the time for comparable transactions with non- affiliated companies or, in the absence of comparable transactions, on terms, or under circumstances, including credit standards, that would be offered to, or would apply to, non-affiliated companies. 13. OTHER OPERATING INCOME--Included in 1994 is a $28.5 million pretax gain on the sale of an investment in Banque Scandinave en Suisse (BSS), net of approximately $6.0 million in ancillary and other sale-related transition costs associated with the transfer of custody accounts from BSS to the Bank's London Branch. The fee portion of treasury management revenues totaled $46.3 million in 1994, $49.0 million in 1993 and $49.7 million in 1992. Net foreign exchange revenues including trading, hedge and translation gains or losses were $36.0 million in 1994, $32.1 million in 1993 and $21.8 million in 1992, and included foreign exchange trading profits of $35.9 million, $32.4 million and $21.9 million in 1994, 1993 and 1992, respectively. 59 NORTHERN TRUST CORPORATION Notes to Consolidated Financial Statements (continued) 14. PENSION AND OTHER EMPLOYEE BENEFITS-- PENSION. The following tables set forth the status and the net periodic pension cost of the domestic qualified and nonqualified pension benefit plans for 1994 and 1993. Prior service costs and unrecognized net assets established at January 1, 1986 are being amortized on a straight-line basis over 13.2 years. PLAN STATUS
Qualified Plan Nonqualified Plan ------------------------------------ September 30 ------------------------------------ ($ In Millions) 1994 1993 1994 1993 ----------------------------------------------------------------------- Actuarial Present Value of Benefit Obligation: Vested Benefit Obligation $104.2 $108.7 $ 14.5 $ 11.7 ----------------------------------------------------------------------- Accumulated Benefit Obligation $124.7 $127.3 $ 15.7 $ 13.3 ----------------------------------------------------------------------- Projected Benefit Obligation for Service Rendered to Date $175.7 $168.9 $ 23.5 $ 20.1 Plan Assets at Fair Value 178.4 168.3 -- -- ----------------------------------------------------------------------- Plan Assets In Excess of (Less Than) Projected Benefit Obligation 2.7 (.6) (23.5) (20.1) Unrecognized Net Asset (Effective January 1, 1986) (7.6) (9.3) (.3) (.4) Unrecognized Net Loss 46.2 34.8 10.3 7.4 Unrecognized Prior Service Cost 1.2 1.4 4.5 5.0 Valuation Adjustment (.4) (.5) -- -- ----------------------------------------------------------------------- Prepaid (Accrued) Pension Cost at September 30 42.1 25.8 (9.0) (8.1) ----------------------------------------------------------------------- Net (Expense) Funding October to December (7.8) 2.6 2.5 .7 Additional Minimum Liability at December 31 -- -- (5.9) (4.5) ----------------------------------------------------------------------- Prepaid (Accrued) Pension Cost at December 31 $ 34.3 $ 28.4 $ (12.4) $(11.9) ----------------------------------------------------------------------- Assumptions: Discount Rates 7.50% 7.00% 7.25% 6.75% Rate of Increase in Compensation Level 5.00 5.00 5.00 5.00 Expected Long- Term Rate of Return on Assets 9.00 9.50 N/A N/A -----------------------------------------------------------------------
NET PERIODIC PENSION COST
Qualified Plan Nonqualified Plan ---------------------------------- (In Millions) 1994 1993 1994 1993 ---------------------------------------------------- Service Cost $11.1 $10.2 $ .9 $1.0 Interest Cost 11.5 11.0 1.3 1.1 Actual Return on Plan Assets (15.7) (20.4) -- -- Net Amortization .8 6.4 .9 .6 ---------------------------------------------------- Net Periodic Pension Cost $ 7.7 $ 7.2 $3.1 $2.7 ----------------------------------------------------
Pension expense for 1992 was $6.4 million and $2.7 million for the qualified and nonqualified plans, respectively. Due to the large number of retirements in 1994 a substantial number of lump-sum payments were made from both the qualified and nonqualified plans which resulted in a total settlement loss of $9.6 million. In 1993 a settlement loss of $1.7 million was recognized due to payments from the Nonqualified Plan. Settlement losses are included in other operating expenses in the consolidated statement of income. Total assets in the "Rabbi" Trust primarily related to the nonqualified pension plan at December 31, 1994, 1993 and 1992, amounted to $9.3 million, $9.4 million and $12.8 million, respectively. A pension plan is also maintained for the London Branch employees. At December 31, 1994, the fair value of assets and the projected benefit obligation totaled approximately $6.0 million and $6.0 million, respectively. At December 31, 1993, the fair value of assets and the projected benefit obligation were $5.5 million and $6.0 million, respectively. Pension expense for 1994 and 1993 was $.7 million and $.7 million, respectively. THRIFT INCENTIVE PLAN. Total expenses associated with the Thrift Incentive Plan amounted to $10.6 million in 1994, $9.9 million in 1993 and $8.7 million in 1992. ESOP. The following table presents information related to the ESOP.
(In Millions) 1994 1993 ------------------------------------------------- Total ESOP Compensation Expense $5.1 $4.3 Interest Incurred on ESOP-Related Debt 3.4 3.9 Amount Contributed to ESOP-Related Debt 8.2 8.2 Dividends and Interest on Unallo- cated ESOP Shares Used for Debt Service 2.1 2.1 -------------------------------------------------
60 NORTHERN TRUST CORPORATION OTHER POSTRETIREMENT BENEFITS. The following tables set forth the funded status at December 31 and the net periodic postretirement benefit cost of the postretirement health care plan for 1994 and 1993. The transition obligation at January 1, 1993 will be amortized to expense over a twenty year period. PLAN STATUS
(In Millions) 1994 1993 ----------------------------------------------- Accumulated Postretirement Benefit Obligation (APBO) Measured at September 30 Retirees and Dependents $(16.7) $(15.3) Actives Eligible for Benefits (5.0) (4.5) Actives Not Yet Eligible (17.1) (15.1) ----------------------------------------------- Total APBO (38.8) (34.9) Unamortized Transition Obli- gation 25.2 26.6 Unrecognized Net Loss 10.1 5.1 Unrecognized Prior Service Costs (2.8) -- ----------------------------------------------- Net Postretirement Benefit Li- ability $ (6.3) $ (3.2) -----------------------------------------------
NET PERIODIC POSTRETIREMENT BENEFIT COST
(In Millions) 1994 1993 ----------------------------------------------- Service Cost $1.4 $1.2 Interest Cost 2.3 2.2 Amortization of Transition Ob- ligation 1.4 1.4 ----------------------------------------------- Net Periodic Postretirement Benefit Cost $5.1 $4.8 -----------------------------------------------
Postretirement health care expense for 1992 under the previous method of accounting was $2.0 million. For measurement purposes, a 10.4 percent annual increase in the cost of covered health care benefits was assumed for 1995. This rate is assumed to decrease gradually to 5.6 percent in 2021 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. For example, increasing the assumed health care trend rate by one percentage point in each year would increase the accumulated postretirement benefit obligation for the postretirement health care plan as of December 31, 1994 by approximately $5.1 million, and the aggregate of the service and interest cost components of the 1994 net periodic postretirement benefit cost by $.7 million. The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 7.75 percent at December 31, 1994 and 7.25 percent at December 31, 1993. POSTEMPLOYMENT BENEFITS. In 1994, SFAS No. 112, "Employers' Accounting for Postemployment Benefits" was adopted. The statement requires employers to adopt accrual accounting for workers compensation, disability, severance and other benefits provided after employment but before retirement. The accounting under the new statement is essentially the same as Northern Trust's previous policy. 15. CONTINGENT LIABILITIES--Because of the nature of its activities, Northern Trust is subject to pending and threatened legal actions that arise in the normal course of business. In the judgment of management, after consultation with 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. 16. FAIR VALUE OF FINANCIAL INSTRUMENTS-- SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," requires disclosure of the estimated fair value of certain financial instruments. Considerable judgment is required to interpret market data when computing estimates of fair value. Accordingly, the estimates presented are not necessarily indicative of the amounts Northern Trust could have realized in a market exchange. The information provided below should not be interpreted as an estimate of the fair value of Northern Trust since the disclosures, in accordance with SFAS No. 107, exclude the values of nonfinancial assets and liabilities, as well as a wide range of franchise, relationship, and intangible values, which are integral to a full assessment of the consolidated financial position. The use of different assumptions and/or estimation methods may have a material effect on the computation of estimated fair values. Therefore, comparisons between Northern Trust's disclosures and those of other financial institutions may not be meaningful. The following methods and assumptions were used in estimating the fair values of the financial instruments: Securities. Fair values of securities were based on quoted market values, when available. If quoted market values were not available, fair values were based on quoted market values for comparable instruments. Loans (not including lease financing receivables). The fair values of one-to-four family residential mortgages were based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. The fair values of the remainder of the loan portfolio were estimated using a discounted cash flow method in which the discount rate used was the rate at which Northern Trust would have originated the loan had it been originated as of the financial statement date, giving effect to current economic conditions on loan collectibility. Savings Certificates, Other Time and Foreign Offices Time Deposits, and Senior Medium-Term Notes. The fair values of these instruments were estimated using a discounted cash flow method that incorporated market interest rates. 61 NORTHERN TRUST CORPORATION Notes to Consolidated Financial Statements (continued) Notes Payable. Fair values were based on quoted market prices, when available. If quoted market prices were not available, fair values were based on quoted market prices for comparable instruments. Off-Balance Sheet Financial Instruments. The fair values of commitments and letters of credit represent the amount of unamortized fees on these instruments. The fair values of all other off-balance sheet financial instruments were estimated using market prices, pricing models, or quoted market prices of financial instruments with similar characteristics. Financial Instruments Valued at Carrying Value. Due to their short maturity, the respective carrying values of certain on-balance-sheet financial instruments approximated their fair values. These financial instruments include cash and due from banks; money market assets; customers' acceptance liability; trust security settlement receivables; federal funds purchased; securities sold under agreements to repurchase; commercial paper; other borrowings; and liability on acceptances. The fair values required to be disclosed for demand, savings, and money market deposits pursuant to SFAS No. 107 must equal the amounts disclosed in the consolidated balance sheet. Fair Values of On-Balance Sheet Financial Instruments. The following table summarizes the fair values of on-balance sheet financial instruments.
December 31 ----------------------------------- 1994 1993 ----------------------------------- Book Fair Book Fair (In Millions) Value Value Value Value ------------------------------------------------------------------------- ASSETS Cash and Due from Banks $1,192.5 $1,192.5 $1,519.7 $1,519.7 Money Market Assets 2,651.2 2,651.2 2,740.5 2,740.5 Securities: Held to Maturity 641.3 657.9 3,790.8 3,845.0 Available for Sale 4,407.8 4,407.8 211.6 212.2 Trading Account 4.0 4.0 36.3 36.3 Loans (excluding leases), net of credit loss reserve: Held to Maturity 8,281.5 7,993.2 7,319.8 7,337.0 Held for Sale 4.4 4.4 19.3 19.3 Acceptance Liability 56.3 56.3 56.9 56.9 Trust Security Settle- ment Receivables 305.7 305.7 293.1 293.1 LIABILITIES Deposits: Demand, Savings and Money Market 6,006.4 6,006.4 6,149.4 6,149.4 Savings Certifi- cates, Other Time and Foreign Offices Time 5,728.0 5,716.0 4,184.0 4,196.0 Federal Funds Purchased 972.0 972.0 1,215.8 1,215.8 Repurchase Agreements 2,216.9 2,216.9 602.2 602.2 Commercial Paper 123.8 123.8 124.1 124.1 Other Borrowings 833.6 833.6 2,001.2 2,001.2 Senior Medium-Term Notes 547.0 544.2 817.0 818.1 Notes Payable 244.8 236.1 326.8 349.8 Liability on Acceptances 56.3 56.3 56.9 56.9 -------------------------------------------------------------------------
62 NORTHERN TRUST CORPORATION Fair Values of Off-Balance Sheet Financial Instruments. The following tables summarize the fair values of off-balance sheet financial instruments at December 31.
1994 1993 ------------------------ Book Fair Book Fair (In Millions) Value Value Value Value -------------------------------------------------- Commitments and Let- ters of Credit Loan Commitments $ 2.2 $ 2.2 $ 2.6 $ 2.6 Letters of Credit .7 .7 .2 .2 Asset/Liability Man- agement Foreign Exchange Contracts Assets 4.3 4.8 7.3 7.3 Liabilities -- .4 .1 .4 Interest Rate Swap Contracts Assets 11.7 58.8 10.9 15.3 Liabilities 6.6 16.3 32.3 44.9 --------------------------------------------------
Fair Value ----------- (In Millions) 1994 1993 -------------------------------------------------- Client-Related and Trading* Foreign Exchange Contracts Assets $78.1 $89.3 Liabilities 78.7 90.4 Interest Rate Swap Contracts Assets 3.0 9.1 Liabilities 3.8 9.7 Interest Rate Protection Contracts Assets .5 .4 Liabilities .6 .4 Option Contract with Benchmark Funds 3.5 N/A --------------------------------------------------
*Assets and liabilities associated with foreign exchange contracts averaged $101.7 million and $96.5 million, respectively, during 1994. Assets and liabilities associated with other client-related and trading account instruments averaged $6.1 million and $9.0 million, respectively, during 1994. 17. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS-- A. COMMITMENTS AND LETTERS OF CREDIT. Northern Trust, in the normal course of business, enters into various types of commitments and issues letters of credit in order 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. In order to control the credit risk associated with entering into commitments and issuing letters of credit, Northern Trust subjects such activity to the same credit quality and monitoring controls as its lending activities. Commitments and letters of credit consist of the following: Legally Binding Commitments to Extend Credit generally have fixed expiration dates or other termination clauses. Since a significant portion of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future loans or liquidity requirements. Participations in Bankers Acceptances obligate Northern Trust, in the event of default by the counterparty, to reimburse the holder of the acceptance an amount equal to its participation in the acceptance. Commercial Letters of Credit are instruments issued by Northern Trust on behalf of its clients that authorize a third party (the beneficiary) to draw drafts up to a stipulated amount under the specified terms and conditions of the agreement. Commercial letters of credit are issued primarily to facilitate international trade. Standby Letters of Credit obligate Northern Trust to meet certain financial obligations of its clients, if, under the contractual terms of the agreement, the clients are unable to do so. These instruments are primarily issued to support public and private financial commitments, including commercial paper, bond financing, initial margin requirements on futures exchanges and similar transactions. 63 NORTHERN TRUST CORPORATION Notes To Consolidated Financial Statements (continued) The following table shows the contractual amounts of commitments and letters of credit. COMMITMENTS AND LETTERS OF CREDIT
December 31 ----------------- (In Millions) 1994 1993 ------------------------------------------------------------------------- Legally Binding Commitments to Extend Credit $7,397.7 $6,184.8 Participations in Bankers Acceptances 6.3 7.5 Commercial Letters of Credit 227.2 205.3 Standby Letters of Credit: Corporate $ 372.6 $ 376.0 Industrial Revenue 318.7 239.6 Other 128.6 211.8 ------------------------------------------------------------------------- Total Standby Letters of Credit* $ 819.9 $ 827.4 -------------------------------------------------------------------------
*These amounts include $75.8 million and $85.4 million of standby letters of credit secured by cash deposits or participated to others as of December 31, 1994 and 1993, respectively. The weighted average maturity of standby letters of credit was 19 months at December 31, 1994 and 16 months at December 31, 1993. B. RISK MANAGEMENT INSTRUMENTS. These instruments include foreign exchange contracts and various interest risk management instruments. Northern Trust is a party to various risk management instruments that are used in the normal course of business to meet the risk management needs of its clients; as part of its trading activity for its own account; and as part of its asset/liability management activities. The major risk associated with these instruments is that interest or foreign exchange rates could change in an unanticipated manner, resulting in higher interest costs or a loss in the underlying value of the instrument. These risks are mitigated by establishing limits for risk management positions, monitoring the level of actual positions taken against such established limits, monitoring the level of any interest rate sensitivity gaps created by such positions, and by using hedging techniques. When establishing position limits, market liquidity and volatility, as well as experience in each market are all taken into account. The estimated credit risk associated with these instruments relates to the failure of the counterparty to pay based on the contractual terms of the agreement, and is generally limited to the gross unrealized market value gains on these instruments. The amount of credit risk will increase or decrease during the life of the instruments as interest and foreign exchange rates fluctuate. This risk is controlled by limiting such activity to an approved list of counterparties and by subjecting such activity to the same credit and quality controls as are followed in lending and investment activities. Risk management instruments include: Foreign Exchange Contracts are agreements to exchange specific amounts of currencies at a future date, at a specified rate of exchange. Foreign exchange contracts are entered into primarily to meet the foreign exchange risk management needs of clients. Foreign exchange contracts are also used for trading purposes and asset and liability management. Interest Rate Futures Contracts are agreements for delayed delivery of securities or money market instruments in which the buyer agrees to take delivery at a specified future date of a specified instrument, at a specified price or yield. All of Northern Trust's interest rate futures contracts are traded on organized exchanges that require the daily settlement of margin payments. Interest rate futures contracts are utilized in trading activities and asset/liability management to protect Northern Trust's exposure to unfavorable fluctuations in interest rates. Interest Rate Protection Contracts are agreements which enable clients to transfer, modify or reduce their interest rate risk. As a seller of interest rate protection, Northern Trust receives a fee at the outset of the agreement and then assumes the risk of an unfavorable change in interest rates. 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. Northern Trust has also entered into a limited number of more complex interest rate swap transactions that were executed concurrently with the purchase of $91 million of structured agency notes. The structured notes are included in the available for sale portion of the security portfolio. The interest rate swap contracts are used to hedge the nonstandard features of the structured notes thereby converting them to U.S. dollar denominated floating rate notes indexed to LIBOR. Exchange-Traded Option Contracts grant the buyer the right, but not the obligation, to purchase or sell at a specified price, a stated number of units of an underlying financial instrument, at a future date. 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. 64 NORTHERN TRUST CORPORATION The following table shows the contractual/notional amounts of risk management instruments. The notional amounts of risk management instruments do not represent credit risk, and are not recorded in the consolidated balance sheet. They are used merely to express the volume of this activity. RISK MANAGEMENT INSTRUMENTS
Contractual/Notional Amounts December 31 ----------------------------- (In Millions) 1994 1993 --------------------------------------------------------------------- Asset/Liability Management: Foreign Exchange Contracts $ 129.7 $ 157.3 Interest Rate Futures Contracts Sold 1.2 -- Interest Rate Swap Contracts 1,381.2 1,352.3 Forward Sale Contracts 4.9 -- Exchange - Traded Option Contracts Purchased .5 -- Client-Related and Trading: Foreign Exchange Contracts 9,398.4 10,033.2 Interest Rate Futures Contracts Purchased -- 3.0 Sold 16.0 312.0 Interest Rate Protection Contracts Purchased 87.5 51.2 Sold 85.9 51.8 Interest Rate Swap Contracts 308.8 357.8 ---------------------------------------------------------------------
Information about Northern Trust's strategies and objectives related to derivative financial instruments used for asset and liability management can be found on pages 42 and 43 and is incorporated by reference. No deferred gains or losses related to derivative financial instruments used for asset and liability management were included in the consolidated balance sheet at year-end 1994 or 1993. Net revenue associated with client-related and trading interest risk management activities totaled $2.4 million, $1.0 million, and $.9 million during 1994, 1993, and 1992, respectively. The majority of these revenues are related to interest rate swaps, futures contracts, and rate protection agreements, and are reported as trading income in the consolidated statement of income. However, these amounts also include interest income earned on U.S. Government securities that were classified as trading account securities and hedged with futures contracts. C. OTHER OFF-BALANCE SHEET FINANCIAL INSTRUMENTS. As part of securities custody activities and at the direction of trust clients, Northern Trust lends securities owned by clients to borrowers who are reviewed by the Credit Policy Credit Approval Committee. In connection with these activities, Northern Trust has issued certain indemnifications against loss resulting from the bankruptcy of the borrower of securities. The borrowing party is required to fully collateralize securities received with cash, U.S. Government and government agency securities, or irrevocable standby letters of credit. As securities are loaned, collateral is maintained at a minimum of 100 percent of the fair value of the securities plus accrued interest, with revaluation of the collateral on a daily basis. The amount of securities loaned as of December 31, 1994 and 1993 subject to indemnification was $5.0 billion and $4.7 billion, respectively. All securities borrowed were collateralized in excess of 100 percent of their current fair value as of December 31, 1994 and 1993. Because of the requirement to fully collateralize securities borrowed, management believes that the exposure to credit loss from this activity is remote. The Bank is a participating member of various cash and securities clearing organizations. It participates in these organizations on behalf of its clients and on behalf of itself as a result of its own investment and trading activities. A wide variety of securities transactions are settled through these organizations, including those involving obligations of states and political subdivisions, asset-backed securities, commercial paper, Eurodollars and securities issued by the Government National Mortgage Association. As a result of its participation in cash and securities clearing organizations, the Bank could be responsible for a pro rata share of certain credit-related losses arising out of the clearing activities. The method in which such losses would be shared by the clearing members is stipulated in each clearing organization's membership agreement. Credit exposure related to these agreements varies from day to day, primarily as a result of fluctuations in the volume of transactions cleared through the organizations. The estimated credit exposure at December 31, 1994 and 1993 was $65 million and $66 million, respectively, based on the clearing volume for those days. Controls related to these clearing transactions are closely monitored, however, to protect the assets of Northern Trust. During the second quarter of 1994, the Corporation entered into an agreement with The Benchmark Funds, for which the Bank is investment adviser. Under the agreement, which is essentially a written option contract, The Benchmark Funds may sell to the Corporation in June 1995, at the higher of cost or market value, up to $111 million par value of certain floating rate federal agency securities whose returns have lagged the sharp increase in short-term interest rates. The agreement increases net asset values and so preserves the investment flexibility necessary to maintain competitive yields in certain money market portfolios of The Benchmark Funds, which are used for cash management and investment by the Bank's institutional clients. The fair value of the agreement, which was recorded in other liabilities, was $3.5 million as of 65 NORTHERN TRUST CORPORATION Notes To Consolidated Financial Statements (continued) December 31, 1994. Changes in the fair value of the agreement are recorded in other operating expenses. 18. CONCENTRATIONS OF CREDIT RISK--The information in the section titled Loans and Other Extensions of Credit found on pages 34 through 36 is incorporated by reference. 19. PLEDGED AND RESTRICTED ASSETS--Certain of Northern Trust's subsidiaries, as required or permitted by law, pledge assets to secure public and trust deposits, repurchase agreements and for other purposes. On December 31, 1994, securities and loans totaling $3.7 billion ($2.8 billion of U.S. Government and agency securities, $290.3 million of obligations of states and political subdivisions and $560.8 million of loans and other securities), were pledged. Collateral required for these purposes totaled $3.0 billion. Deposits to be maintained at the Federal Reserve Bank to meet reserve requirements averaged $307.7 million in 1994 and $306.0 million in 1993. Liabilities associated with U.S. Government and federal agency securities sold under repurchase agreements totaled $2.2 billion as of December 31, 1994. Of this amount, 65% was related to overnight agreements; 24% was related to term agreements with maturities of 30 days or less; 9% was related to term agreements with maturities of 31 to 90 days; and 2% was related to term agreements with maturities greater than 90 days. 20. INCENTIVE PLANS AND AWARDS-- 1992 INCENTIVE STOCK PLAN AND AMENDED INCENTIVE STOCK PLAN (PLANS). As of December 31, 1994, shares available for future grants under the Plans totaled 1,598,510. Stock options granted under the Plans during 1994 and 1993 are summarized below.
Outstanding Options -------------------------- Shares Option Price ------------------------------------------------------------------------- Outstanding at December 31, 1992 3,482,139 $ 6.74 to 39.25 ------------------------------------------------------------------------- Cancelled during 1993 (8,250) $39.25 Exercised during 1993 (388,298) 6.74 to 39.25 Granted during 1993 551,700 39.75 to 41.63 ------------------------------------------------------------------------- Outstanding at December 31, 1993 3,637,291 $ 6.74 to 41.63 ------------------------------------------------------------------------- Cancelled during 1994 (21,150) $37.69 to 39.75 Exercised during 1994 (461,739) 6.74 to 39.25 Granted during 1994 633,000 37.25 to 42.00 ------------------------------------------------------------------------- OUTSTANDING AT DECEMBER 31, 1994 3,787,402 $ 7.64 TO 42.00 ------------------------------------------------------------------------- Exercisable at December 31, 1993 3,085,591 $ 6.74 to 39.25 ------------------------------------------------------------------------- EXERCISABLE AT DECEMBER 31, 1994 3,155,902 $ 7.64 TO 41.63 -------------------------------------------------------------------------
As of December 31, 1994, 396,000 shares of stock have been credited to performance share accounts associated with the stock awards under the Plans. At December 31, 1994, 397,486 shares had been awarded, subject to meeting established performance goals and vesting conditions, for three-year performance periods ending in 1994 through 1996. Total salary expense applicable to the stock awards was $5.2 million in 1994, $6.3 million in 1993 and $6.0 million in 1992. As of December 31, 1994 restricted stock awards outstanding to management totaled 52,500 shares. These shares vest, subject to continuing employment, over a period of five-to-seven years. Total expense applicable to these awards was $.4 million in 1994. OTHER INCENTIVE PLANS. Expense related to other incentive plans is included in salary expense and totaled $28.4 million in 1994, $29.3 million in 1993 and $27.1 million in 1992. 21. INTERNATIONAL OPERATIONS (BASED ON OBLIGOR'S DOMICILE)--Northern Trust's international activities are centered in the commercial banking, capital markets and global custody businesses of The Northern Trust Company, Chicago, two overseas branches, one Edge Act subsidiary and Northern Trust of Florida. Total assets employed in international operations were $2.8 billion on December 31, 1994, $2.7 billion on December 31, 1993 and $2.2 billion on December 31, 1992. Of these assets, $1.5 billion on December 31, 1994, 1993 and 1992, were employed in Europe. Net income from international operations includes the direct net income contributions of foreign branches and the Edge Act subsidiary. The Northern Trust Company, Chicago and Northern Trust of Florida international profit contributions include direct salary and other expenses of the business units plus expense allocations for interest, occupancy, overhead and the provision for credit losses. 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 pretax gain of $28.5 million ($17.7 million after- tax) on the sale of Banque Scandinave en Suisse was not included in the Geographic Distribution of Operating Performance. 66 NORTHERN TRUST CORPORATION The tables below summarize international performance based on the domicile of the primary obligor without regard to guarantors or the location of collateral. GEOGRAPHIC DISTRIBUTION OF SELECTED ASSETS
December 31, 1994 December 31, 1993 December 31, 1992 -------------------------------------------------------------------------------------------------- Time Other Time Other Time Other Deposits Money Customers' Deposits Money Customers' Deposits Money Customers' with Market Acceptance with Market Acceptance with Market Acceptance (In Millions) Banks Assets Loans Liability Banks Assets Loans Liability Banks Assets Loans Liability ----------------------------------------------------------------------------------------------------------------------- Europe $1,257.8 $ -- $ 93.4 $ .9 $1,129.2 $ -- $184.7 $ .1 $1,333.4 $15.0 $124.6 $ .1 North America 651.7 -- 141.9 -- 557.5 -- 44.7 -- 295.2 -- 28.6 -- Latin America 64.1 -- 135.0* .6 177.3 .7 116.1* 3.9 112.0 1.1 110.2* 3.6 Asia-Pacific 194.4 -- 16.4 -- 226.2 -- 7.8 .3 118.8 2.0 10.1 .2 ----------------------------------------------------------------------------------------------------------------------- Total $2,168.0 $ -- $386.7 $1.5 $2,090.2 $ .7 $353.3 $4.3 $1,859.4 $18.1 $273.5 $3.9 -----------------------------------------------------------------------------------------------------------------------
*Includes loans guaranteed by the Export Import Bank of $95.2 million in 1994, $85.8 million in 1993 and $57.6 million in 1992. The majority of the remaining loans are trade-related. GEOGRAPHIC DISTRIBUTION OF OPERATING PERFORMANCE
1994 1993 1992 --------------------------------------------------------------------- Gross Income Gross Income Gross Income Operating before Net Operating before Net Operating before Net (In Millions) Income Taxes Income Income Taxes Income Income Taxes Income -------------------------------------------------------------------------------------- Europe $137.9 $19.1 $11.8 $105.7 $11.2 $ 7.1 $106.6 $ 7.9 $5.0 North America 133.9 9.1 5.6 68.2 4.7 2.9 58.5 2.8 1.9 Latin America 68.4 12.0 7.4 46.8 4.8 3.0 34.5 4.1 2.5 Asia-Pacific 42.4 7.7 4.8 20.9 3.1 1.9 7.9 .5 .3 -------------------------------------------------------------------------------------- Total $382.6 $47.9 $29.6 $241.6 $23.8 $14.9 $207.5 $15.3 $9.7 --------------------------------------------------------------------------------------
22. ACQUISITIONS--On January 31, 1992, Northern Trust Corporation and its subsidiary Northern Trust Bank of California N.A. completed the acquisition of a portion of the trust business assets (approximately $4 billion of assets under administration) of Trust Services of America, Inc., for a purchase price of $47.5 million. The transaction was recorded under the purchase method of accounting and resulted in goodwill of $21.1 million to be amortized on a straight-line basis over fifteen years. On April 15, 1994, Northern Trust completed the acquisition of Hazlehurst & Associates, Inc., a privately held retirement benefit plan services company. Hazlehurst shareholders received 534,113 shares of Corporation Common Stock (and cash for fractional shares) totaling $22.5 million. The transaction was accounted for as a pooling-of-interests. Prior period consolidated financial statements were not restated due to the immateriality of the transaction. In December 1993, the Corporation entered into a definitive agreement to acquire Beach One Financial Services, Inc., parent company of The Beach Bank of Vero Beach (Florida). Beach One's assets totaled $198.6 million at December 31, 1994 and net income totaled $2.9 million in 1994. The acquisition agreement calls for Beach One shareholders to receive Corporation Common Stock aggregating $56.2 million with the exchange ratio set on the basis of the average last-sale prices for the Corporation Common Stock on the NASDAQ National Market System over a 20-day trading period ending just prior to closing. The maximum number of shares the Corporation is required to issue without further approval of directors is 1,701,515, equivalent to a formula price of $33 per share. The minimum number of shares Beach One holders are required to accept is 1,169,791, equivalent to a formula price of $48 per share. The agreement is subject to the approval of Beach One shareholders and to various regulatory approvals and other legal requirements. This transaction is expected to be accounted for as a pooling-of- interests. In February 1995, the Corporation entered into a definitive agreement to acquire Tanglewood Bancshares, Inc. parent company of Tanglewood Bank N.A., Houston for $33.0 million in cash. Tanglewood's assets totaled $229.9 million at December 31, 1994 and net income totaled $2.6 million in 1994. The agreement is subject to the approval of Tanglewood shareholders, to final due diligence and to various regulatory approvals and is expected to close in the second half of 1995. 67 NORTHERN TRUST CORPORATION Notes To Consolidated Financial Statements (continued) 23. NORTHERN TRUST CORPORATION (CORPORATION ONLY)--Condensed financial information is presented below. Investments in wholly owned subsidiaries are carried on the equity method of accounting. CONDENSED BALANCE SHEET
December 31 ----------------- (In Millions) 1994 1993 ------------------------------------------------------------- ASSETS Cash on Deposit with Subsidiary Bank $ 2.3 $ .1 Time Deposits with Banks-International 42.0 158.7 Securities 207.2 144.7 Investments in Wholly Owned Subsidiaries Bank Subsidiaries 1,109.3 1,021.4 Nonbank Subsidiaries 27.1 22.0 Loans--Bank Subsidiaries 75.0 75.0 --Nonbank Subsidiaries 13.4 10.9 --Other 28.1 26.9 Buildings and Equipment 7.5 6.2 Other Assets 57.3 51.5 ------------------------------------------------------------- Total Assets $1,569.2 $1,517.4 ------------------------------------------------------------- LIABILITIES Commercial Paper $ 123.8 $ 124.1 Notes Payable 136.4 218.3 Other Liabilities 28.3 23.3 ------------------------------------------------------------- Total Liabilities 288.5 365.7 Stockholders' Equity 1,280.7 1,151.7 ------------------------------------------------------------- Total Liabilities and Stockholders' Equity $1,569.2 $1,517.4 -------------------------------------------------------------
CONDENSED STATEMENT OF INCOME
For the Year Ended December 31 -------------------------- (In Millions) 1994 1993 1992 ----------------------------------------------------------- OPERATING INCOME Dividends--Bank Subsidiaries $ 82.1 $ 86.7 $ 68.3 --Nonbank Subsidiaries 6.6 .6 .5 Intercompany Interest and Other Charges 12.1 15.2 14.6 Interest and Other Income 9.6 6.9 8.5 ----------------------------------------------------------- Total Operating Income 110.4 109.4 91.9 ----------------------------------------------------------- Operating Expenses Interest Expense 21.5 22.1 25.0 Other Operating Expenses 17.1 12.2 5.0 ----------------------------------------------------------- Total Operating Expenses 38.6 34.3 30.0 ----------------------------------------------------------- Income before Income Taxes and Equity in Undistributed Net Income of Subsidiaries 71.8 75.1 61.9 Benefit for Income Taxes (9.6) (6.8) (5.4) ----------------------------------------------------------- Income before Equity in Undistributed Net Income of Subsidiaries 81.4 81.9 67.3 Equity in Undistributed Net Income (Loss) of Subsidiaries Bank Subsidiaries 101.7 83.0 79.2 Nonbank Subsidiaries (.9) 3.0 3.0 ----------------------------------------------------------- NET INCOME $182.2 $167.9 $149.5 ----------------------------------------------------------- Net Income Applicable to Common Stock $174.9 $161.6 $142.7 -----------------------------------------------------------
68 NORTHERN TRUST CORPORATION CONDENSED STATEMENT OF CASH FLOWS
For the Year Ended December 31 ---------------------- (In Millions) 1994 1993 1992 ------------------------------------------------------------ OPERATING ACTIVITIES: Net Income $182.2 $167.9 $149.5 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Equity in Undistributed Net Income of Subsidiaries (100.8) (86.0) (82.2) (Increase) Decrease in Accrued Income (.9) .3 .4 Decrease in Prepaid Expenses .6 .2 .6 Other Noncash, net 4.3 (1.6) 2.3 ------------------------------------------------------------ Net Cash Flows from Operating Activities 85.4 80.8 70.6 ------------------------------------------------------------ INVESTING ACTIVITIES: Net (Increase) Decrease in Time Deposits with Banks 116.7 (129.7) 78.9 Purchases of Securities (227.1) (106.1) (197.7) Sales of Securities 157.1 62.3 163.8 Proceeds from Maturity and Redemption of Securities 8.6 18.4 72.1 Capital Investments in Subsidiaries (3.0) (4.0) (52.5) Net (Increase) Decrease in Loans to Subsidiaries (2.5) 122.1 (125.7) Net (Increase) Decrease in Other Loans (1.2) .2 .2 Other, net (1.9) (2.0) (.9) ------------------------------------------------------------ Net Cash Flows from Investing Activities 46.7 (38.8) (61.8) ------------------------------------------------------------ FINANCING ACTIVITIES: Net Decrease in Commercial Paper (.3) (2.9) (2.4) Repayment of Notes Payable (81.9) (6.3) (30.9) Treasury Stock Purchased (6.9) (2.2) (2.5) Cash Dividends Paid on Common and Preferred Stock (54.1) (45.8) (39.5) Proceeds from Preferred Stock Issued -- -- 48.5 Net Proceeds from Stock Options 4.5 4.0 11.7 Other, net 8.8 11.0 6.4 ------------------------------------------------------------ Net Cash Flows from Financing Activities (129.9) (42.2) (8.7) ------------------------------------------------------------ Net Change in Cash on Deposit with Subsidiary Bank 2.2 (.2) .1 Cash on Deposit with Subsidiary Bank at Beginning of Year .1 .3 .2 ------------------------------------------------------------ CASH ON DEPOSIT WITH SUBSIDIARY BANK AT END OF YEAR $ 2.3 $ .1 $ .3 ------------------------------------------------------------
69 NORTHERN TRUST CORPORATION Report of Independent Public Accountants TO THE STOCKHOLDERS AND BOARD OF DIRECTORS, NORTHERN TRUST CORPORATION: We have audited the accompanying consolidated balance sheet of Northern Trust Corporation (a Delaware Corporation) and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Northern Trust Corporation and subsidiaries as of December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994 in conformity with generally accepted accounting principles. Arthur Andersen LLP Chicago, Illinois, January 17, 1995. 70 NORTHERN TRUST CORPORATION Consolidated Financial Statistics AVERAGE BALANCE SHEET
($ In Millions) 1994 1993 1992 1991 1990 ------------------------------------------------------------------------------------------------------ ASSETS Cash and Due from Banks $ 1,206.6 $ 1,025.3 $ 937.8 $ 839.9 $ 815.9 Money Market Assets Federal Funds Sold and Repurchase Agreements 237.0 171.3 237.8 304.8 285.6 Time Deposits with Banks 2,063.3 1,956.8 1,620.5 1,331.3 912.5 Other 119.9 73.5 104.4 274.4 833.9 ------------------------------------------------------------------------------------------------------ Total Money Market Assets 2,420.2 2,201.6 1,962.7 1,910.5 2,032.0 ------------------------------------------------------------------------------------------------------ Securities U.S. Government and Other 4,482.0 3,700.2 2,658.1 1,933.9 1,829.0 Obligations of States and Political Subdivisions 465.1 502.3 516.0 533.8 510.6 Trading Account 53.8 29.5 16.2 32.1 57.0 ------------------------------------------------------------------------------------------------------ Total Securities 5,000.9 4,232.0 3,190.3 2,499.8 2,396.6 ------------------------------------------------------------------------------------------------------ Loans and Leases 8,316.1 7,297.1 6,452.9 6,199.4 5,847.7 Reserve for Credit Losses (145.2) (145.5) (145.6) (146.6) (149.3) Other Assets 1,087.2 1,089.7 1,019.9 879.5 739.2 ------------------------------------------------------------------------------------------------------ Total Assets $17,885.8 $15,700.2 $13,418.0 $12,182.5 $11,682.1 ------------------------------------------------------------------------------------------------------ LIABILITIES Deposits Demand and Other Noninterest-Bearing $ 2,592.5 $ 2,554.9 $ 1,876.0 $ 1,635.8 $ 1,597.2 Savings and Money Market Deposits 3,385.7 3,432.1 3,372.2 3,208.1 2,975.9 Savings Certificates 1,229.6 1,172.9 1,370.8 1,569.7 1,456.9 Other Time 412.8 404.7 493.9 533.1 520.8 Foreign Offices - Demand 361.7 65.3 56.2 41.8 81.8 - Time 3,284.8 2,436.4 1,815.6 1,100.6 1,105.6 ------------------------------------------------------------------------------------------------------ Total Deposits 11,267.1 10,066.3 8,984.7 8,089.1 7,738.2 Federal Funds Purchased 1,350.7 1,692.5 1,540.2 1,412.8 1,463.6 Securities Sold under Agreements to Repurchase 1,444.3 664.4 542.9 463.8 700.3 Commercial Paper 138.1 131.5 132.9 129.3 129.0 Other Borrowings 864.5 868.9 526.6 703.3 483.8 Senior Medium-Term Notes 781.8 554.1 85.2 1.6 -- Notes Payable 293.6 297.9 258.8 245.2 204.9 Other Liabilities 520.2 351.5 419.6 378.9 319.7 ------------------------------------------------------------------------------------------------------ Total Liabilities 16,660.3 14,627.1 12,490.9 11,424.0 11,039.5 ------------------------------------------------------------------------------------------------------ STOCKHOLDERS' EQUITY 1,225.5 1,073.1 927.1 758.5 642.6 ------------------------------------------------------------------------------------------------------ Total Liabilities and Stockholders' Equity $17,885.8 $15,700.2 $13,418.0 $12,182.5 $11,682.1 ------------------------------------------------------------------------------------------------------ RATIOS Dividend Payout Ratio 28.4% 25.6% 24.4% 24.6% 24.5% Return on Average Assets 1.02 1.07 1.11 1.05 .99 Return on Average Common Equity 16.57 17.89 18.71 19.01 19.78 Tier 1 Capital to Risk-Adjusted Assets - End of Period 8.95 9.31 8.08 6.74 5.76 Total Capital to Risk-Adjusted Assets - End of Period 12.36 13.41 11.56 10.68 8.97 Leverage 6.22 6.24 6.06 5.38 4.57 Average Stockholders' Equity to Average Assets 6.85 6.83 6.91 6.23 5.50 Average Loans and Leases Times Average Stockholders' Equity 6.8X 6.8x 7.0x 8.2x 9.1x ------------------------------------------------------------------------------------------------------ Stockholders - End of Period 2,962 2,922 2,893 2,840 2,725 Staff - End of Period (Full-time equivalent) 6,608 6,259 6,249 5,798 5,784 ------------------------------------------------------------------------------------------------------
72 NORTHERN TRUST CORPORATION CONSOLIDATED FINANCIAL STATISTICS ANALYSIS OF NET INTEREST INCOME
(Interest and rate on a taxable equivalent basis) 1994 1993 -------------------------------------------------- ($ In Millions) Interest Volume Rate Interest Volume Rate ------------------------------------------------------------------------------- AVERAGE EARNING ASSETS Money Market Assets Federal Funds Sold and Re- purchase Agreements $ 10.9 $ 237.0 4.59% $ 5.5 $ 171.3 3.24% Time Deposits with Banks 97.8 2,063.3 4.74 86.5 1,956.8 4.42 Other 5.2 119.9 4.31 2.6 73.5 3.53 ------------------------------------------------------------------------------- Total Money Market Assets 113.9 2,420.2 4.71 94.6 2,201.6 4.30 ------------------------------------------------------------------------------- Securities U.S. Government 73.8 1,779.6 4.15 102.5 2,646.6 3.87 Obligations of States and Political Subdivisions 52.8 465.1 11.35 58.6 502.3 11.66 Federal Agency 114.2 2,333.6 4.90 29.7 773.9 3.84 Other 19.6 368.8 5.31 13.6 279.7 4.88 Trading Account 4.3 53.8 7.91 2.2 29.5 7.52 ------------------------------------------------------------------------------- Total Securities 264.7 5,000.9 5.29 206.6 4,232.0 4.88 ------------------------------------------------------------------------------- Loans and Leases 503.5 8,316.1 6.05 439.3 7,297.1 6.02 ------------------------------------------------------------------------------- Total Earning Assets $882.1 $15,737.2 5.61% $740.5 $13,730.7 5.39% ------------------------------------------------------------------------------- AVERAGE SOURCE OF FUNDS Deposits Savings and Money Market Deposits $ 85.3 $ 3,385.7 2.52% $ 78.8 $ 3,432.1 2.30% Savings Certificates 56.9 1,229.6 4.63 50.5 1,172.9 4.31 Other Time 18.6 412.8 4.50 15.7 404.7 3.88 Foreign Offices Time 137.2 3,284.8 4.18 90.4 2,436.4 3.71 ------------------------------------------------------------------------------- Total Deposits 298.0 8,312.9 3.58 235.4 7,446.1 3.16 Federal Funds Purchased 55.5 1,350.7 4.11 51.1 1,692.5 3.02 Repurchase Agreements 61.9 1,444.3 4.28 20.0 664.4 3.00 Commercial Paper 5.9 138.1 4.31 4.3 131.5 3.23 Other Borrowings 32.4 864.5 3.75 24.6 868.9 2.83 Senior Medium-Term Notes 33.8 781.8 4.32 18.4 554.1 3.33 Notes Payable 23.0 293.6 7.84 23.3 297.9 7.84 ------------------------------------------------------------------------------- Total Interest-Related Funds 510.5 13,185.9 3.87 377.1 11,655.4 3.23 ------------------------------------------------------------------------------- Interest Rate Spread -- -- 1.74% -- -- 2.16% ------------------------------------------------------------------------------- Noninterest-Related Funds -- 2,551.3 -- -- 2,075.3 -- ------------------------------------------------------------------------------- Total Source of Funds $510.5 $15,737.2 3.25% $377.1 $13,730.7 2.74% ------------------------------------------------------------------------------- Net Interest Income/Margin $371.6 -- 2.36% $363.4 -- 2.65% ------------------------------------------------------------------------------- NET INTEREST INCOME/MARGIN COMPONENTS Domestic $360.9 $12,890.4 2.80% $345.6 $11,491.0 3.01% International 10.7 2,846.8 .38 17.8 2,239.7 .79 ------------------------------------------------------------------------------- Consolidated $371.6 $15,737.2 2.36% $363.4 $13,730.7 2.65% -------------------------------------------------------------------------------
Notes: -- Average volume includes nonaccrual loans. -- Interest on loans and money market assets includes fees of $6.8 million in 1994, $13.9 million in 1993, $11.7 million in 1992, $5.1 million in 1991 and $5.6 million in 1990. -- Total interest income includes adjustments on loans and securities (primarily obligations of states and political subdivisions) to a taxable equivalent basis. Such adjustments are based on the U.S. federal income tax rate (35% for 1994-1993 and 34% for 1992-1990) and State of Illinois income tax rate (7.18%) before giving effect to the deductibility of state taxes for federal income tax purposes. Lease financing receivable balances are reduced by deferred income. Total taxable equivalent interest adjustments amounted to $33.4 million in 1994, $34.1 million in 1993, $32.5 million in 1992, $36.0 million in 1991 and $38.1 million in 1990. -- Yields on the portion of the securities portfolio classified as available for sale are based on amortized cost. 74 NORTHERN TRUST CORPORATION
1992 1991 1990 ------------------------------------------------------------------------------ Interest Volume Rate Interest Volume Rate Interest Volume Rate ------------------------------------------------------------------------------ $ 8.8 $ 237.8 3.70% $ 17.8 $ 304.8 5.83% $ 23.3 $ 285.6 8.16% 95.6 1,620.5 5.90 108.1 1,331.3 8.12 93.5 912.5 10.25 4.6 104.4 4.46 20.7 274.4 7.54 70.6 833.9 8.47 ------------------------------------------------------------------------------ 109.0 1,962.7 5.55 146.6 1,910.5 7.68 187.4 2,032.0 9.22 ------------------------------------------------------------------------------ 90.3 1,759.7 5.13 65.0 943.4 6.89 59.5 659.9 9.03 59.2 516.0 11.46 61.4 533.8 11.51 58.8 510.6 11.52 23.9 521.6 4.59 25.3 346.5 7.29 40.9 458.3 8.92 22.9 376.8 6.07 52.3 644.0 8.12 64.1 710.8 9.01 1.0 16.2 6.01 2.5 32.1 7.92 5.0 57.0 8.88 ------------------------------------------------------------------------------ 197.3 3,190.3 6.18 206.5 2,499.8 8.26 228.3 2,396.6 9.53 ------------------------------------------------------------------------------ 448.1 6,452.9 6.94 530.3 6,199.4 8.55 576.0 5,847.7 9.85 ------------------------------------------------------------------------------ $754.4 $11,605.9 6.50% $883.4 $10,609.7 8.33% $991.7 $10,276.3 9.65% ------------------------------------------------------------------------------ $ 99.1 $ 3,372.2 2.94% $159.2 $ 3,208.1 4.96% $194.7 $ 2,975.9 6.54% 69.9 1,370.8 5.10 104.3 1,569.7 6.64 115.0 1,456.9 7.89 25.4 493.9 5.15 38.3 533.1 7.19 42.6 520.8 8.18 95.7 1,815.6 5.27 88.6 1,100.6 8.05 109.4 1,105.6 9.90 ------------------------------------------------------------------------------ 290.1 7,052.5 4.11 390.4 6,411.5 6.09 461.7 6,059.2 7.62 53.5 1,540.2 3.47 78.7 1,412.8 5.57 117.9 1,463.6 8.05 19.8 542.9 3.65 26.2 463.8 5.65 55.9 700.3 7.98 5.2 132.9 3.88 8.0 129.3 6.19 10.6 129.0 8.19 18.1 526.6 3.45 40.7 703.3 5.78 38.5 483.8 7.96 3.0 85.2 3.49 .1 1.6 8.68 -- -- -- 21.0 258.8 8.11 21.4 245.2 8.71 19.7 204.9 9.61 ------------------------------------------------------------------------------ 410.7 10,139.1 4.05 565.5 9,367.5 6.04 704.3 9,040.8 7.79 ------------------------------------------------------------------------------ -- -- 2.45% -- -- 2.29% -- -- 1.86% ------------------------------------------------------------------------------ -- 1,466.8 -- -- 1,242.2 -- -- 1,235.5 -- ------------------------------------------------------------------------------ $410.7 $11,605.9 3.54% $565.5 $10,609.7 5.33% $704.3 $10,276.3 6.85% ------------------------------------------------------------------------------ $343.7 -- 2.96% $317.9 -- 3.00% $287.4 -- 2.80% ------------------------------------------------------------------------------ $325.7 $ 9,659.9 3.37% $300.8 $ 8,981.9 3.39% $274.0 $ 9,072.7 3.02% 18.0 1,946.0 .93 17.1 1,627.8 1.05 13.4 1,203.6 1.11 ------------------------------------------------------------------------------ $343.7 $11,605.9 2.96% $317.9 $10,609.7 3.00% $287.4 $10,276.3 2.80% ------------------------------------------------------------------------------
75 NORTHERN TRUST CORPORATION Consolidated Financial Statistics QUARTERLY FINANCIAL DATA STATEMENT OF INCOME
1994 ------------------------------------------------- ($ In Millions Except Per Entire Fourth Third Second First Share Information) Year Quarter Quarter Quarter Quarter ------------------------------------------------------------------------------- Interest Income $ 848.7 243.0 221.5 200.0 184.2 Interest Expense 510.5 154.3 135.8 118.1 102.3 ------------------------------------------------------------------------------- Net Interest Income 338.2 88.7 85.7 81.9 81.9 Provision for Credit Losses 6.0 1.0 1.0 1.0 3.0 Noninterest Income 629.9 150.5 152.1 178.3 149.0 Investment Security Gains (Losses) (.1) -- (.2) (.1) .2 Noninterest Expenses 700.5 184.9 166.2 187.5 161.9 Provision for Income Taxes 79.3 13.2 22.4 22.9 20.8 ------------------------------------------------------------------------------- NET INCOME 182.2 40.1 48.0 48.7 45.4 ------------------------------------------------------------------------------- Net Income Applicable to Common Stock 174.9 38.0 46.2 46.9 43.8 ------------------------------------------------------------------------------- PER COMMON SHARE Net Income - Primary $ 3.17 .69 .83 .85 .80 - Fully Diluted 3.16 .69 .83 .85 .80 ------------------------------------------------------------------------------- AVERAGE BALANCE SHEET (In Millions) ------------------------------------------------------------------------------- ASSETS Cash and Due from Banks $ 1,206.6 1,176.3 1,151.3 1,244.0 1,256.3 Money Market Assets 2,420.2 2,206.2 2,425.0 2,610.1 2,441.8 Securities 5,000.9 5,500.4 5,140.7 4,591.4 4,761.3 Loans and Leases 8,316.1 8,618.7 8,434.9 8,271.6 7,930.4 Reserve for Credit Losses (145.2) (144.9) (144.9) (145.3) (145.6) Other Assets 1,087.2 1,020.1 1,059.9 1,191.2 1,078.7 ------------------------------------------------------------------------------- Total Assets 17,885.8 18,376.8 18,066.9 17,763.0 17,322.9 ------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLD- ERS' EQUITY Deposits Demand and Other Noninter- est-Bearing $ 2,592.5 2,625.0 2,522.3 2,595.7 2,627.7 Savings and Others 4,615.3 4,664.9 4,623.6 4,608.1 4,563.6 Other Time 412.8 451.4 469.5 416.8 311.2 Foreign Offices 3,646.5 4,147.6 3,936.8 3,491.4 2,994.3 ------------------------------------------------------------------------------- Total Deposits 11,267.1 11,888.9 11,552.2 11,112.0 10,496.8 Purchased Funds 3,797.6 3,567.8 3,633.0 3,791.2 4,207.3 Senior Medium-Term Notes 781.8 770.5 801.6 803.4 751.5 Notes Payable 293.6 248.3 273.6 326.7 326.8 Other Liabilities 520.2 623.1 561.1 516.6 376.9 Stockholders' Equity 1,225.5 1,278.2 1,245.4 1,213.1 1,163.6 ------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity 17,885.8 18,376.8 18,066.9 17,763.0 17,322.9 ------------------------------------------------------------------------------- ANALYSIS OF NET INTEREST INCOME ($ In Millions) ------------------------------------------------------------------------------- Earning Assets $15,737.2 16,325.3 16,000.6 15,473.1 15,133.5 Interest-Related Funds 13,185.9 13,520.2 13,378.2 13,011.4 12,824.2 Noninterest-Related Funds 2,551.3 2,805.1 2,622.4 2,461.7 2,309.3 Net Interest Income (Tax- able equivalent) 371.6 97.8 93.9 90.1 89.8 Net Interest Margin (Tax- able equivalent) 2.36% 2.38 2.33 2.33 2.41 ------------------------------------------------------------------------------- COMMON STOCK DIVIDEND AND MARKET PRICE ------------------------------------------------------------------------------- Dividends $ .92 .26 .22 .22 .22 Market Price Range - High 43.25 38.25 41.75 43.25 43.00 - Low 32.25 32.25 35.75 40.25 39.50 -------------------------------------------------------------------------------
The common stock of Northern Trust Corporation is traded in the over-the- counter market under the symbol NTRS. The above quotations are from the NASDAQ system. The number of stockholders of record at December 31, 1994, was 2,962. 76 NORTHERN TRUST CORPORATION Corporate Structure NORTHERN TRUST CORPORATION 50 South LaSalle Street, Chicago, Illinois 60675 (312) 630-6000 PRINCIPAL SUBSIDIARY THE NORTHERN TRUST COMPANY 50 South LaSalle Street, Chicago, Illinois 60675 Wacker Drive Financial Center 125 South Wacker Drive, Chicago, Illinois 60675 Oak Street Financial Center 120 East Oak Street, Chicago, Illinois 60611 Highland Park Financial Center 579 Central Avenue Highland Park, Illinois 60035 Winnetka Financial Center 62 Green Bay Road, Winnetka, Illinois 60093 Chicago South Financial Center 7801 South State Street Chicago, Illinois 60619 London Branch 155 Bishopsgate, London EC2M 3XS, England Cayman Islands Branch P.O. Box 501, Georgetown, Cayman Islands, British West Indies SUBSIDIARIES OF THE NORTHERN TRUST COMPANY The Northern Trust International Banking Corporation One World Trade Center, New York, New York 10048 Northern Global Financial Services Limited 18 Harbour Road, Wanchai Hong Kong NorLease, Inc. 50 South LaSalle Street, Chicago, Illinois 60675 The Northern Trust Company, Canada 161 Bay Street, Suite 4540, B.C.E. Place Toronto, Canada M5J 2S1 INTERNATIONAL AFFILIATES Banque Rivaud 13 rue Notre-Dames des Victoires, 75082 Paris Cedex 02, France Transatlantic Trust Corporation 75 Rochford Street P.O. Box 429 Charlottetown, Prince Edward Island, Canada C1A 7K7 80 THE NORTHERN TRUST CORPORATION OTHER SUBSIDIARIES OF THE CORPORATION NORTHERN TRUST BANK/LAKE FOREST N.A. 265 Deerpath Road, Lake Forest, Illinois 60045 959 South Waukegan Road, Lake Forest, Illinois 60045 120 East Scranton Avenue, Lake Bluff, Illinois 60044 NORTHERN TRUST BANK/O'HARE N.A. 8501 West Higgins Road, Chicago, Illinois 60631 6401 North Harlem Avenue, Chicago, Illinois 60631 1501 Woodfield Road, Schaumburg, Illinois 60173 NORTHERN TRUST BANK/DUPAGE One Oakbrook Terrace, Oakbrook Terrace, Illinois 60181 400 East Diehl Road, Naperville, Illinois 60563 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 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 440 Royal Palm Way, Palm Beach, Florida 33480 11780 U.S. Highway 1, Building 3, Suite 100, North Palm Beach, Florida 33408 4001 Tamiami Trail North, Naples, Florida 33940 530 Fifth Avenue South, Naples, Florida 33940 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 100 Second Avenue South, St. Petersburg, Florida 33701 NORTHERN TRUST BANK OF ARIZONA N.A. 2398 East Camelback Road, Phoenix, Arizona 85016 6373 East Tanque Verde Road, Tucson, Arizona 85715 10220 West Bell Road, Sun City, Arizona 85351 10015 Royal Oak Road, Sun City, Arizona 85351 7001 North Scottsdale Road, Scottsdale, Arizona 85253 NORTHERN TRUST BANK OF CALIFORNIA N.A. 355 South Grand Avenue, Suite 2600, Los Angeles, California 90071 10877 Wilshire Boulevard (Westwood), Suite 100, Los Angeles, California 90024 620 Newport Center Drive, Suite 200, Newport Beach, California 92660 4370 LaJolla Village Drive, Suite 1000, San Diego, California 92122 206 East Anapamu Street, Santa Barbara, California 93101 580 California Street, Suite 1800, San Francisco, California 94104 NORTHERN TRUST BANK OF TEXAS N.A. 2020 Ross Avenue, Dallas, Texas 75201 5540 Preston Road, Dallas, Texas 75205 2701 Kirby Drive, Houston, Texas 77098 700 Rusk Street, Houston, Texas 77002 THE NORTHERN TRUST COMPANY OF NEW YORK 80 Broad Street, New York, New York 10004 NORTHERN TRUST CAYMAN INTERNATIONAL, LTD. P.O. Box 1586, Grand Cayman, Cayman Islands, British West Indies NORTHERN TRUST SECURITIES, INC. 50 South LaSalle Street, Chicago, Illinois 60675 BERRY, HARTELL, EVERS & OSBORNE, INC. 580 California Street, San Francisco, California 94104 HAZLEHURST & ASSOCIATES, INC. 400 Perimeter Center Terrace, Suite 850, Atlanta, Georgia 30346 19119 North Creek Parkway, Suite 200, Bothell, Washington 98011 NORTHERN FUTURES CORPORATION 50 South LaSalle Street, Chicago, Illinois 60675 NORTHERN TRUST SERVICES, INC. 50 South LaSalle Street, Chicago, Illinois 60675 81 NORTHERN TRUST CORPORATION EX-21 8 SUBSIDIARIES EXHIBIT NUMBER (21) TO 1994 FORM 10-K NORTHERN TRUST CORPORATION SUBSIDIARIES AS OF MARCH 1, 1995
Percent State of Owned Incorporation ------- ------------- The Northern Trust Company 100% Illinois NorLease, Inc. 100% Delaware MFC Company, Inc. 100% Delaware NTB Merchant Services, Inc. 100% Illinois The Northern Trust Company, Canada 100% Ontario, Canada Nortrust Nominees Ltd. 100% London The Northern Trust Company U.K. Pension Plan Limited 100% London The Northern Trust International Banking Corporation 100% Edge Act Northern International Finance (Hong Kong) Ltd. 100% Hong Kong Northern Global Financial Services Ltd. 100% Hong Kong Norsub Corporation 100% Delaware Northern Trust Bank/O'Hare N.A. 100% National Bank Northern Trust Bank/DuPage 100% Illinois First Lake Forest Corporation 100% Delaware Northern Trust Bank/Lake Forest N.A. 100% National Bank Northern Trust of Florida Corporation 100% Florida Northern Trust Cayman International, Ltd. 100% Cayman Islands, BWI Northern Trust Bank of Florida N.A. 100% National Bank Realnor Properties, Inc. 100% Florida Realnor Special Properties, Inc. 100% Florida Realnor 1177, Inc. 100% Florida Realnor Hallandale, Inc. 100% Florida Northern of Arizona Holding Corporation 100% Arizona Northern Trust Bank of Arizona N.A. 100% National Bank Northern Trust of California Corporation 100% Delaware Northern Trust Bank of California N.A. 100% National Bank Berry, Hartell, Evers & Osborne, Inc. 100% Delaware Northern Trust Bank of Texas N.A. 100% National Bank Fiduciary Services Inc. 100% Texas Northern Futures Corporation 100% Delaware
NORTHERN TRUST CORPORATION SUBSIDIARIES AS OF MARCH 1, 1995 (continued) Percent State of Owned Incorporation ------- ------------- Northern Investment Corporation 100% Delaware Northern Investment Management Company 100% Delaware Northern Trust Securities, Inc. 100% Delaware Northern Trust Services, Inc. 100% Illinois Nortrust Realty Management, Inc. 100% Illinois The Northern Trust Company of New York 100% New York Hazlehurst & Associates, Inc. 100% Delaware EX-23 9 CONSENT OF ARTHUR ANDERSEN EXHIBIT NUMBER (23) TO 1994 FORM 10-K CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated January 17, 1995, incorporated by reference in the Northern Trust Corporation's Annual Report on Form 10-K for the year end December 31, 1994, into the Corporation's previously filed Form S-8 Registration Statements File Nos. 33-22546, 33-41501, 33-47597 and 33-51971, and Form S-4 Registration Statements File Nos. 33-52219 and 33-54773. ARTHUR ANDERSEN LLP Chicago, Illinois March 13, 1995 EX-24 10 POWER OF ATTORNEY EXHIBIT NUMBER (24) TO 1994 FORM 10-K POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS: That the undersigned officers and directors of Northern Trust Corporation hereby severally constitute and appoint David W. Fox, Perry R. Pero and Peter L. Rossiter, and each of them singly, our true and lawful attorneys and agents with full power to them and each of them singly, to sign for us in our names, in the capacities indicated below, Form 10-K, annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, for the fiscal year ended December 31, 1994, and to file such Form, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys and agents, and each of them, full power of substitution and revocation in the premises, and generally to do all such things in our name and behalf in our capacities as officers and directors to enable Northern Trust Corporation to comply with the provisions of the Securities Exchange Act of 1934, as amended, and all regulations of the Securities and Exchange Commission thereunder, hereby ratifying and confirming our signatures as they may be signed by our attorneys, or any one of them, to such Form, and all that our attorneys and agents, or any of them, may do or cause to be done by virtue of these presents. IN WITNESS WHEREOF, the undersigned have hereunto executed this Power of Attorney this 21st day of February, 1995. David W. Fox William A. Osborn -------------------------------- -------------------------------- David W. Fox William A. Osborn Chairman of the Board, Chief President, Chief Operating Executive Officer and Director Officer and Director Barry G. Hastings Perry R. Pero -------------------------------- -------------------------------- Barry G. Hastings Perry R. Pero Vice Chairman Senior Executive Vice President and Director and Chief Financial Officer Harry W. Short Worley H. Clark -------------------------------- -------------------------------- Harry W. Short Worley H. Clark Senior Vice President and Controller Director (Chief Accounting Officer) Dolores E. Cross Robert S. Hamada -------------------------------- -------------------------------- Dolores E. Cross Robert S. Hamada Director Director Arthur L. Kelly Harold B. Smith -------------------------------- -------------------------------- Arthur L. Kelly Harold B. Smith Director Director Robert D. Krebs William D. Smithburg -------------------------------- -------------------------------- Robert D. Krebs William D. Smithburg Director Director William G. Mitchell Bide L. Thomas -------------------------------- -------------------------------- William G. Mitchell Bide L. Thomas Director Director STATE OF ILLINOIS ) ) SS COUNTY OF COOK ) I, Victoria Antoni, a Notary Public, DO HEREBY CERTIFY that the above named directors and officers of Northern Trust Corporation, personally known to me to be the same persons whose names are subscribed to the foregoing instrument, appeared before me this day in person, and severally acknowledged that they signed and delivered the instrument as their free and voluntary act, for the uses and purposes therein set forth. GIVEN under my hand and notarial seal this 21st day of February, 1995. Victoria Antoni --------------------- Notary Public My Commission Expires: 7/25/95 ------------------------- EX-27 11 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1994 JAN-01-1994 DEC-31-1994 1,192,503 1,864,651 777,001 3,963 4,407,852 641,303 657,877 8,590,649 144,838 18,561,621 11,734,369 4,576,295 608,404 361,818 90,601 0 170,000 1,020,134 18,561,621 499,619 233,602 115,528 848,749 298,015 510,534 338,215 6,000 (107) 700,524 261,513 182,177 0 0 182,177 3.17 3.16 2.08 27,809 17,272 0 0 145,538 10,672 3,972 144,838 109,242 2,922 32,674