-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EBrkxi0U3M+YdTlVRk0cjNlHbSbfc1I6LUbMiVKPGsXjpj4wBEX3u5/cmr2cwdsR RSeontDM0x11hvb/HRqTNg== 0000950131-96-001047.txt : 19960314 0000950131-96-001047.hdr.sgml : 19960314 ACCESSION NUMBER: 0000950131-96-001047 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 20 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960312 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORTHERN TRUST CORP CENTRAL INDEX KEY: 0000073124 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 362723087 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-05965 FILM NUMBER: 96533836 BUSINESS ADDRESS: STREET 1: 50 S LA SALLE ST CITY: CHICAGO STATE: IL ZIP: 60675 BUSINESS PHONE: 3126306000 FORMER COMPANY: FORMER CONFORMED NAME: NORTRUST CORP DATE OF NAME CHANGE: 19780525 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, 1995 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 5, 1996, 56,965,427 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 5, 1996, as reported by the NASDAQ Stock Market) held by non-affiliates was approximately $2,711,905,940. 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, 1995 - Part I and Part II 1996 Notice and Proxy Statement for the Annual Meeting of Stockholders to be held on April 16, 1996 - Part III =============================================================================== 1 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 headquartered in the Chicago financial district. The Corporation also owns two banks in Florida, one bank in each of Arizona, California and Texas, Connecticut and New York trust companies and various other nonbank subsidiaries, including a securities brokerage firm, a retirement services company 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, 1995, Northern Trust had consolidated total assets of approximately $19.9 billion and stockholders' equity of $1.5 billion. At June 30, 1995 Northern Trust was the third largest bank holding company headquartered in Illinois and the 38th largest in the United States, based on consolidated total assets of approximately $19.3 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 seventh year, the Bank's growth has come primarily from internal sources rather than through merger or acquisition. At December 31, 1995, the Bank had consolidated assets of approximately $15.2 billion. At June 30, 1995, the Bank was the third largest bank in Illinois and the 41st largest in the United States, based on consolidated total assets of approximately $15.1 billion on that date. The Bank currently has eight 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, The Northern Trust Company, Canada, Northern Global Financial Services Limited and Northern Trust Trade Services, Limited. 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, located in London, was established in connection with the pension plan for the Bank's London Branch. The Northern Trust Company, Canada, located in Toronto, was established to offer institutional trust products and services to Canadian entities. Northern Global Financial Services Ltd., located in Hong Kong, provides securities lending and relationship services for large asset custody clients in Asia and the Pacific Rim. Northern Trust Trade Services, Limited provides trade finance services. OTHER NORTHERN TRUST CORPORATION SUBSIDIARIES On February 29, 1996, three Illinois banking subsidiaries of the Corporation merged into the Bank: Northern Trust Bank/O'Hare N.A., Northern Trust Bank/DuPage, and Northern Trust Bank/Lake Forest N.A. As a result, the Bank now operates fourteen offices in the Chicago metropolitan area. The Corporation's Florida banking subsidiaries, Northern Trust Bank of Florida N.A., headquartered in Miami, and the Northern Trust Bank of Vero Beach, at December 31, 1995, had twenty-two offices located throughout Florida, with total assets of approximately $1.8 billion. The Corporation's Arizona banking subsidiary, Northern Trust Bank of Arizona N.A., is headquartered in Phoenix and at December 31, 1995 had total assets of approximately $315 million and served clients from five office locations. The Corporation has a Texas banking subsidiary, Northern Trust Bank of Texas N.A., headquartered in Dallas. It had six office locations and total assets of approximately $456 million at December 31, 1995. The Corporation's California banking subsidiary, Northern Trust Bank of California N.A., is headquartered in Santa Barbara. At December 31, 1995, it had six office locations and total assets of approximately $288 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, California. The Northern Trust Company of New York provides security clearance services for all nondepository eligible 4 securities held by 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 United States. Hazlehurst & Associates, Inc. is a retirement benefit plan services company in Atlanta, Georgia. RCB International, Inc. in Stamford, Connecticut is an international provider of institutional investment management services, and the parent of RCB Trust Company. INTERNAL ORGANIZATION Northern Trust, under Chairman and Chief Executive Officer William A. Osborn, organizes client services into two principal business units: Corporate and Institutional Services and Personal Financial Services. In addition, the Worldwide Operations and Technology business unit encompasses all trust and banking operations and systems activities. These three business units, along with Investment Services, Corporate Compliance and Corporate Support Services, report to President and Chief Operating Officer Barry G. Hastings. Also, a 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 (C&IS) Corporate and Institutional Services (C&IS), headed by Sheila A. Penrose, Executive Vice President of the Corporation and of the Bank, provides trust, commercial banking and treasury management services to corporate and institutional clients. Trust activities encompass services for owners of 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. Services with respect to securities traded in markets foreign to the client is provided primarily through the Bank's London Branch. Related foreign exchange services are also rendered 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, 1995, total assets under administration were $550.5 billion. The major market segments served are large U.S. corporate, middle market, institutional (insurance companies, foundations and endowments, and correspondent trust services), and international clients, and public and union retirement funds. The Northern Trust Company of New York, The Northern Trust Company, Canada, NorLease, Inc., The Northern Trust International Banking Corporation, Northern Futures Corporation, Hazlehurst & Associates, Inc., and RCB International, Inc. are also included in C&IS. A full range of commercial banking services is offered through the Bank which places special emphasis on developing institutional relationships in two target markets: large domestic corporations and financial institutions (both domestic and international). Credit services are administered in two groups: a Large Corporations Group and a Financial Institutions Group. Treasury management services are provided to corporations and financial institutions and include products and services, including lockbox collection, controlled disbursement products and electronic banking, to accelerate cash collections, control disbursement outflows, and generate information to manage cash positions. Personal Financial Services (PFS) Services to individuals is another major dimension of the trust business. Headed by Mark Stevens, Executive Vice President of the Corporation and the Bank, Personal Financial Services (PFS) encompasses personal trust, estate administration, personal banking, mortgage lending and trust and banking services to middle market companies. A key element of the personal trust business is to provide private banking and trust services to targeted high net worth individuals in rapidly growing areas of wealth concentration. PFS services are delivered through the Bank and a network of banking subsidiaries located in Florida, Arizona, California and Texas. PFS is one of the largest bank managers of personal trust assets in the United States, with total assets under administration of $63.4 billion at December 31, 1995. Northern Trust Securities, Inc. and Berry, Hartell, Evers & Osborne, Inc. are also part of PFS. Worldwide Operations and Technology Supporting all of Northern Trust's business activities is the Worldwide Operations and Technology Unit. Headed by James J. Mitchell, Executive Vice President of the Corporation and the Bank, this unit focuses on supporting sales, relationship management, transaction processing and product management activities for C&IS and PFS. 5 Risk Management The Risk Management Unit, headed by Senior Executive Vice President and Chief Financial Officer Perry R. Pero, includes the Credit Policy and Treasury functions. 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 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. The Board of Governors of the Federal Reserve System is an important regulator of domestic economic conditions and 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, its setting of the discount rate at which member banks may borrow from Federal Reserve Banks and its changes in the reserve requirements for deposits. The policies adopted by the Federal Reserve Board 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 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 five 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 by maintaining 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. C&IS 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. 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., 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. Competitive pressures within the custody market have resulted in consolidation in the industry, and the chief national competitors of the Bank for Master Trust/Master Custody services are now 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, are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit or provision of any property or services. 6 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. 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 holding 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 institution 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. State laws governing the Corporation's banking subsidiaries allow each bank to establish branches anywhere in its 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 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). Such liability is subordinated in right of payment to deposit liabilities, secured obligations, any other general or senior liability and any obligation subordinated to depositors and or other general creditors, other than obligations owed to any affiliate of the depository institution (with certain exceptions) and any obligations to shareholders in such capacity. 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 in this area. 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. 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, which 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 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. RCB International, Inc. is subject to regulation by the Securities and Exchange Commission and the Illinois Securities Department. Its subsidiary RCB Trust Company is subject to 7 regulation by the Connecticut Department of Banking. 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 are 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 46 of the Corporation's Annual Report to Stockholders for the year ended December 31, 1995. 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 currently a twenty-seven basis point spread between the highest and lowest assessment rates, so that banks classified as strongest by the FDIC are subject in 1996 to no assessment, and banks classified as weakest by the FDIC are subject to an assessment rate of .27%. 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:
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 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, 1995, the Bank and each of the other subsidiary banks met or exceeded these goals. The capital ratios are disclosed and discussed on page 30 of the Corporation's Annual Report to Stockholders for the year ended December 31, 1995. 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 adopted by the agencies. 8 FDICIA also contains a variety of other provisions that affect the operations of a bank, including 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 6,531 full-time equivalent officers and staff members as of December 31, 1995, approximately 4,563 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, 1995, are incorporated herein by reference. 1995 Annual Report Schedule Page - ------------------------------------------------------------------------------------------------------------------- -------------- Foreign Outstandings............................................................................................... 23 Nonperforming Assets and 90 Day Past Due Loans..................................................................... 23 Analysis of Reserve for Credit Losses.............................................................................. 24 Average Balance Sheet.............................................................................................. 58 Ratios............................................................................................................. 58 Analysis of Net Interest Income.................................................................................... 60 - ------------------------------------------------------------------------------------------------------------------- -------------- - ------------------------------------------------------------------------------------------------------------------------------------ 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, 1996 -------------------------------------------------------------------------------------------- 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 $ 108.5 6.61% $ 7.6 5.58% $ -- --% $ -- --% 5 mos. Obligations of States and Political Subdivisions 48.1 11.44 149.1 11.10 127.3 10.72 42.4 8.72 63 mos. Federal Agency -- -- 22.2 5.96 -- -- -- -- 36 mos. Other--Fixed 8.1 6.98 1.5 9.70 .1 10.49 17.6 6.03 81 mos. --Floating .3 8.00 2.0 8.00 .3 7.08 -- -- 34 mos. - ----------------------------------- -------- ----- -------- ----- ------ ----- ------ ---- -------- Total Securities Held to Maturity $ 165.0 8.04% $ 182.4 10.20% $127.7 10.71% $ 60.0 7.93% 50 mos. - ----------------------------------- -------- ----- -------- ----- ------ ----- ------ ---- -------- Securities Available for Sale U.S. Government $ 829.7 5.80% $ 838.0 5.98% $ -- --% $ -- --% 12 mos. Obligations of States and Political Subdivisions -- -- -- -- 4.9 9.59 65.3 8.68 155 mos. Federal Agency 2,236.0 6.04 883.2 6.30 27.4 6.42 6.2 6.57 9 mos. Other--Fixed 46.3 5.63 26.3 6.24 -- -- -- -- 12 mos. --Floating 7.7 6.51 7.8 6.51 .6 6.51 156.9 6.62 112 mos. - ----------------------------------- -------- ----- -------- ----- ------ ----- ------ ---- -------- Total Securities Available for Sale $3,119.7 5.97% $1,755.3 6.14% $ 32.9 6.89% $228.4 7.21% 15 mos. - ----------------------------------- -------- ----- -------- ----- ------ ----- ------ ---- -------- December 31, 1994 -------------------------------------------------------------------------------------------- One Year or Less One to Five Years Five to Ten Years Over Ten Years ---------------- ----------------- ----------------- -------------- Average ($ 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. - ----------------------------------- -------- ----- ------ ----- ------ ----- ------ ---- --------
10 SECURITIES HELD TO MATURITY AND AVAILABLE FOR SALE December 31 ---------------------------------------------------- (In Millions) 1995 1994 1993 1992 1991 - ----------------------------------------------------------------- -------- -------- -------- -------- -------- Securities Held to Maturity U.S. Government $ 116.1 $ 137.2 $2,343.7 $1,522.8 $1,822.2 Obligations of States and Political Subdivisions 366.9 474.5 493.5 508.5 526.1 Federal Agency 22.2 - 833.1 559.2 293.1 Other 29.9 29.6 120.5 189.0 473.3 - ----------------------------------------------------------------- -------- -------- -------- -------- -------- Total Securities Held to Maturity $ 535.1 $ 641.3 $3,790.8 $2,779.5 $3,114.7 - ----------------------------------------------------------------- -------- -------- -------- -------- -------- Securities Available for Sale U.S. Government $1,667.7 $ 801.3 $ - $ 227.6 $ - Obligations of States and Political Subdivisions 70.2 - - - - Federal Agency 3,152.8 3,251.5 40.9 46.1 - Other 245.6 355.0 170.7 126.4 - - ----------------------------------------------------------------- -------- -------- -------- -------- -------- Total Securities Available for Sale $5,136.3 $4,407.8 $ 211.6 $ 400.1 $ - - ----------------------------------------------------------------- -------- -------- -------- -------- -------- Average Total Securities $6,193.0 $5,000.9 $4,232.0 $3,190.3 $2,499.8 - ----------------------------------------------------------------- -------- -------- -------- -------- -------- Total Securities at Year-End $5,760.3 $5,053.1 $4,038.7 $3,181.2 $3,174.9 - ----------------------------------------------------------------- -------- -------- -------- -------- -------- LOANS AND LEASES BY TYPE December 31 ---------------------------------------------------- (In Millions) 1995 1994 1993 1992 1991 - ----------------------------------------------------------------- -------- -------- -------- -------- -------- Domestic Commercial $3,202.1 $2,672.0 $2,421.1 $2,409.0 $2,719.4 Broker 304.0 274.6 249.4 336.3 336.0 Residential Real Estate 3,896.4 3,299.1 2,883.3 2,372.8 1,793.6 Commercial Real Estate 512.6 494.1 506.5 511.2 515.0 Consumer 758.9 662.1 617.5 505.9 449.7 Other 625.5 642.1 453.5 392.0 37.2 Lease Financing 202.3 159.9 138.4 135.2 120.7 - ----------------------------------------------------------------- -------- -------- -------- -------- -------- Total Domestic 9,501.8 8,203.9 7,269.7 6,662.4 5,971.6 International 404.2 386.7 353.3 273.5 308.1 - ----------------------------------------------------------------- -------- -------- -------- -------- -------- Total Loans and Leases $9,906.0 $8,590.6 $7,623.0 $6,935.9 $6,279.7 - ----------------------------------------------------------------- -------- -------- -------- -------- -------- Average Loans and Leases $9,136.0 $8,316.1 $7,297.1 $6,452.9 $6,199.4 - ----------------------------------------------------------------- -------- -------- -------- -------- --------
REMAINING MATURITY OF SELECTED LOANS AND LEASES
December 31, 1995 --------------------------------------------------- One Year One to Over Five (In Millions) Total or Less Five Years Years - --------------------------------------------------------------- -------- -------- ---------- --------- Domestic (Excluding Residential Real Estate and Consumer Loans) Commercial $3,202.1 $2,484.6 $582.9 $134.6 Commercial Real Estate 512.6 177.5 273.6 61.5 Other 929.5 915.1 12.9 1.5 Lease Financing 202.3 23.0 67.7 111.6 - --------------------------------------------------------------- -------- -------- ------ ------ Total Domestic 4,846.5 3,600.2 937.1 309.2 International 404.2 329.0 59.3 15.9 - --------------------------------------------------------------- -------- -------- ------ ------ Total Selected Loans and Leases $5,250.7 $3,929.2 $996.4 $325.1 - --------------------------------------------------------------- -------- -------- ------ ------ Interest Rate Sensitivity of Loans and Leases Fixed Rate $4,024.3 $3,089.5 $670.2 $264.6 Variable Rate 1,226.4 839.7 326.2 60.5 - --------------------------------------------------------------- -------- -------- ------ ------ Total $5,250.7 $3,929.2 $996.4 $325.1
11
Average Deposits by Type (In Millions) 1995 1994 1993 1992 1991 - --------------------------------------------------------- --------- --------- --------- --------- --------- Domestic Offices Demand and Noninterest-Bearing Individuals, Partnerships and Corporations $ 1.651.1 $ 1,540.4 $ 1,487.5 $ 1,354.1 $ 1,191.8 Correspondent Banks 129.8 192.2 201.1 199.6 182.9 Other 966.4 859.9 866.3 322.3 261.1 - --------------------------------------------------------- --------- --------- --------- --------- --------- Total $ 2,747.3 $ 2,592.5 $ 2,554.9 $ 1,876.0 $ 1,635.8 - --------------------------------------------------------- --------- --------- --------- --------- --------- Time Savings and Money Market Deposits $ 3,312.4 $ 3,385.7 $ 3,432.1 $ 3,372.2 $ 3,208.1 Savings Certificates less than $100,000 1,160.8 699.9 668.6 732.6 835.7 Savings Certificates $100,000 and more 839.5 529.7 504.3 638.2 734.0 Other Certificates 542.7 412.8 404.7 493.9 533.1 - --------------------------------------------------------- --------- --------- --------- --------- --------- Total $ 5,855.4 $ 5,028.1 $ 5,009.7 $ 5,236.9 $ 5,310.9 - --------------------------------------------------------- --------- --------- --------- --------- --------- Total Domestic Offices $ 8,602.7 $ 7,620.6 $ 7,564.6 $ 7,112.9 $ 6,946.7 - --------------------------------------------------------- --------- --------- --------- --------- --------- Foreign Offices Demand $ 299.1 $ 361.7 $ 65.3 $ 56.2 $ 41.8 Time 3,493.4 3,284.8 2,436.4 1,815.6 1,100.6 - --------------------------------------------------------- --------- --------- --------- --------- --------- Total Foreign Offices $ 3,792.5 $ 3,646.5 $ 2,501.7 $ 1,871.8 $ 1,142.4 - --------------------------------------------------------- --------- --------- --------- --------- --------- Total Deposits $12,395.2 $11,267.1 $10,066.3 $ 8,984.7 $ 8,089.1 - --------------------------------------------------------- --------- --------- --------- --------- --------- Average Rates Paid on Time Deposits by Type 1995 1994 1993 1992 1991 - --------------------------------------------------------- --------- --------- --------- --------- --------- Time Deposits Savings and Money Market Deposits 3.29% 2.52% 2.30% 2.94% 4.96% Savings Certificates less than $100,000 6.08 4.77 4.61 5.46 6.47 Savings Certificates $100,000 and more 5.95 4.45 3.91 4.68 6.85 Other Certificates 5.81 4.50 3.88 5.15 7.19 - --------------------------------------------------------- --------- --------- --------- --------- --------- Total Domestic Offices 4.46 3.20 2.89 3.71 5.68 - --------------------------------------------------------- --------- --------- --------- --------- --------- Total Foreign Offices Time 5.21 4.18 3.71 5.27 8.05 - --------------------------------------------------------- --------- --------- --------- --------- --------- Total Time Deposits 4.74% 3.58% 3.16% 4.11% 6.09% - --------------------------------------------------------- --------- --------- --------- --------- --------- Remaining Maturity of Time Deposits $100,000 and more December 31, 1995 December 31, 1994 --------------------------------------------- ---------------------------------------------- Domestic Offices Domestic Offices --------------------------------------------- ---------------------------------------------- Certificates Other Foreign Certificates Other Foreign (In Millions) of Deposit Time Offices of Deposit Time Offices - ------------------------- ------------ --------- ---------- ------------- -------- -------- 3 Months or Less $ 612.1 $ 3.4 $3,193.3 $515.2 $ 2.0 $3,806.1 Over 3 through 6 Months 233.8 1.6 23.8 162.4 1.5 40.7 Over 6 through 12 Months 152.2 5.0 13.0 137.9 4.0 7.7 Over 12 Months 268.5 5.9 1.9 172.8 7.6 3.6 - ------------------------- ------------ --------- ---------- ------------- -------- -------- Total $1,266.6 $15.9 $3,232.0 $988.3 $15.1 $3,858.1 - ------------------------- ------------ --------- ---------- ------------- -------- --------
12 PURCHASED FUNDS FEDERAL FUNDS PURCHASED (Overnight Borrowings) ($ in Millions) 1995 1994 1993 - ------------------------------ -------- -------- -------- Balance on December 31 $2,300.1 $ 972.0 $1,215.8 Highest Month-End Balance 3,620.1 1,595.9 2,311.5 Year--Average Balance 1,564.0 1,350.7 1,692.5 --Average Rate 5.83% 4.11% 3.02% Average Rate at Year-End 5.17 4.26 2.82 - ------------------------------ -------- -------- -------- SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE ($ in Millions) 1995 1994 1993 - ------------------------------ -------- -------- -------- Balance on December 31 $1,858.7 $2,216.9 $ 602.2 Highest Month-End Balance 2,283.0 2,777.1 1,571.2 Year--Average Balance 1,769.7 1,444.3 664.4 --Average Rate 5.80% 4.28% 3.00% Average Rate at Year-End 5.41 5.08 2.81 - ------------------------------ -------- -------- -------- OTHER BORROWINGS (Includes Treasury Tax and Loan Demand Notes and Term Federal Funds Purchased) ($ in Millions) 1995 1994 1993 - ------------------------------ -------- -------- -------- Balance on December 31 $ 875.9 $1,077.9 $2,100.8 Highest Month-End Balance 3,415.9 3,116.1 2,698.6 Year--Average Balance 1,034.5 1,007.5 940.8 --Average Rate 5.38% 3.57% 2.76% Average Rate at Year-End 3.61 4.71 2.79 - ------------------------------ -------- -------- -------- TOTAL PURCHASED FUNDS ($ in Millions) 1995 1994 1993 - ------------------------------ -------- -------- -------- Balance on December 31 $5,034.7 $4,266.8 $3,918.8 Year--Average Balance 4,368.2 3,802.5 3,297.7 --Average Rate 5.71% 4.03% 2.94% - ------------------------------ -------- -------- -------- COMMERCIAL PAPER ($ in Millions) 1995 1994 1993 - ------------------------------ -------- -------- -------- Balance on December 31 $ 146.7 $ 123.8 $ 124.1 Highest Month-End Balance 154.4 172.3 167.6 Year -Average Balance 146.0 138.1 131.5 -Average Rate 5.87% 4.31% 3.23% Average Rate at Year-End 5.80 5.73 3.19 - ------------------------------ -------- -------- --------
13 Changes in Net Interest Income
1994/95 1994/93 -------------------------- -------------------------- 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 $ (2.0) $ 3.4 $ 1.4 $ 3.0 $ 2.4 $ 5.4 Time Deposits with Banks (23.5) 17.8 (5.7) 5.0 6.3 11.3 Other (7.1) 3.0 (4.1) 2.0 .6 2.6 Securities U.S. Government (31.8) 28.4 (3.4) (35.9) 7.2 (28.7) Obligations of States and Political Subdivisions (3.3) (2.7) (6.0) (4.2) (1.6) (5.8) Federal Agency 112.4 32.2 144.6 76.3 8.2 84.5 Other (.9) 3.3 2.4 4.8 1.2 6.0 Trading Account - (.5) (.5) 2.0 .1 2.1 Loans and Leases 56.9 73.9 130.8 61.7 2.5 64.2 - ----------------------------------------- ------- ------ ------ ------ ------ ------ Total $ 100.7 $158.8 $259.5 $114.7 $ 26.9 $141.6 - ----------------------------------------- ------- ------ ------ ------ ------ ------ Increase (Decrease) In Interest Expense Deposits Savings and Money Market Deposits $ (2.4) $ 26.2 $ 23.8 $ (1.2) $ 7.7 $ 6.5 Savings Certificates 46.5 17.2 63.7 2.6 3.8 6.4 Other Time 7.5 5.4 12.9 .4 2.5 2.9 Foreign Offices Time 10.8 34.1 44.9 35.5 11.3 46.8 Federal Funds Purchased 12.4 23.3 35.7 (14.0) 18.4 4.4 Repurchase Agreements 18.9 21.8 40.7 33.4 8.5 41.9 Commercial Paper .5 2.2 2.7 .2 1.4 1.6 Other Borrowings 1.4 18.2 19.6 2.4 7.6 10.0 Senior Notes (23.3) 13.2 (10.1) 9.9 5.5 15.4 Notes Payable (1.7) .1 (1.6) (.3) - (.3) - ----------------------------------------- ------- ------ ------ ------ ------ ------ Total 70.6 161.7 232.3 68.9 66.7 135.6 - ----------------------------------------- ------- ------ ------ ------ ------ ------ Increase (Decrease) In Net Interest Income $ 30.1 $ (2.9) $ 27.2 $ 45.8 $(39.8) $ 6.0 - ----------------------------------------- ------- ------ ------ ------ ------ ------ 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 22 titled International Operations on pages 53 and 54 of the Corporation's Annual Report to Stockholders for the year ended December 31, 1995, which is incorporated herein by reference. Selected Average Assets and Liabilities Attributable to International Operations
(In Millions) 1995 1994 1993 1992 1991 1990 - ----------------------------------------- -------- -------- -------- -------- -------- -------- Total Assets $2,282.0 $2,820.5 $2,328.8 $2,033.0 $1,709.2 $1,297.5 - ----------------------------------------- -------- -------- -------- -------- -------- -------- Time Deposits with Banks 1,643.7 2,063.1 1,956.7 1,618.6 1,323.4 889.1 Other Money Market Assets .1 .4 .9 38.8 3.2 2.7 Loans 344.3 445.5 279.9 287.6 299.4 310.0 Customers' Acceptance Liability 1.9 3.0 4.8 3.8 10.2 11.2 Foreign Investments 14.3 21.6 29.8 31.4 30.3 30.8 - ----------------------------------------- -------- -------- -------- -------- -------- -------- Total Liabilities $4,163.5 $4,089.4 $2,715.0 $2,125.3 $1,278.2 $1,364.0 - ----------------------------------------- -------- -------- -------- -------- -------- -------- Deposits 3,992.2 4,010.6 2,706.2 2,099.0 1,214.7 1,287.5 Liability on Acceptances 1.9 3.0 4.8 3.8 10.3 11.2 - ----------------------------------------- -------- -------- -------- -------- -------- -------- ===============================================================================================================
14 PERCENT OF INTERNATIONAL RELATED AVERAGE ASSETS AND LIABILITIES TO TOTAL CONSOLIDATED AVERAGE ASSETS
1995 1994 1993 1992 1991 - ------------ ---- ---- ---- ---- ---- Assets 12% 16% 15% 15% 14% - ------------ ---- ---- ---- ---- ---- Liabilities 21 23 17 16 11 - ------------ ---- ---- ---- ---- ---- - -----------------------------------------------------------
RESERVE FOR CREDIT LOSSES RELATING TO INTERNATIONAL OPERATIONS
(In Millions) 1995 1994 1993 1992 1991 - ---------------------------- ---- ---- ---- ---- ---- Balance at Beginning of Year $ 4.6 $ 6.7 $5.3 $ 6.9 $ 7.0 Charge-Offs (.7) - (.6) (6.0) - Recoveries .5 - .1 .4 .1 Provision for Credit Losses (1.3) (2.1) 1.9 4.0 (.2) - ---------------------------- ----- ----- ---- ----- ----- Balance at End of Year $ 3.1 $ 4.6 $6.7 $ 5.3 $ 6.9 - ---------------------------- ----- ----- ---- ----- -----
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. 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 1995 1994 1993 1992 1991 - -------------------------------------------- ------ ------ ------ ------ ------ Commercial $259.9 $233.8 $157.9 $122.3 $166.9 Foreign Governments and Official Institutions 103.7 72.8 47.1 26.4 27.3 Banks 37.3 77.0 145.9 121.9 113.8 Other 3.3 3.1 2.4 2.9 .1 - -------------------------------------------- ------ ------ ------ ------ ------ Total $404.2 $386.7 $353.3 $273.5 $308.1 - -------------------------------------------- ------ ------ ------ ------ ------
December 31 --------------------------------------- Deposits 1995 1994 1993 - --------------------------------------------- -------- -------- -------- Commercial $2,557.2 $2,817.2 $2,378.0 Foreign Governments and Official Institutions 749.5 803.8 263.2 Banks 415.7 485.2 410.8 Other Time 224.7 182.4 200.4 Other Demand 7.8 8.4 6.6 - --------------------------------------------- -------- -------- -------- Total $3,954.9 $4,297.0 $3,259.0 - --------------------------------------------- -------- -------- --------
- ------------------------------------------------------------------------------- 15 CREDIT RISK MANAGEMENT Overview The Credit Policy function reports to the Corporation's Chief Financial Officer. Credit Policy provides a system of checks and balances for Northern Trust's diverse credit-related activities by establishing and monitoring all credit-related policies and practices 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 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 Northern Trust's ongoing credit granting process, internal credit ratings are assigned to each client and credit before credit is extended, based on creditworthiness. Credit Policy performs at least annually a review of selected significant credit exposures to identify at the earliest possible stages clients who might be facing financial difficulties. Internal credit ratings are also reviewed during this process. Above average risk loans, which will vary from time to time, receive special attention by both lending 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 examination 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: Reserve for Credit Losses
(In Millions) 1995 1994 - ------------------------------ ------ ------ Allocated Reserve Commercial $ 85.0 $ 86.0 Residential Real Estate 6.0 5.0 Commercial Real Estate 7.0 12.0 Consumer 8.0 6.0 International 3.0 3.0 Unallocated Reserve 38.1 32.8 - ------------------------------ ------ ------ Total Reserve $147.1 $144.8 - ------------------------------ ------ ------
- -------------------------------------------------------------------------------- Reserve for Credit Losses
(In Millions) 1993 1992 1991 - ---------------------------------------- ------ ------ ------ Allocated Reserve on Nonperforming Loans $ .2 $ 11.0 $ 5.3 Unallocated Reserve 145.3 134.5 140.4 - ---------------------------------------- ------ ------ ------ Total Reserve $145.5 $145.5 $145.7 - ---------------------------------------- ------ ------ ------
- -------------------------------------------------------------------------------- Loan and lease categories as a percent of total loans and leases as of December 31, 1991 through 1995, are presented below. Loan and Lease Category to Total Loans and Leases
1995 1994 1993 1992 1991 - ------------------------ ---- ---- ---- ---- ---- Loan and Lease Category Commercial 33% 32% 33% 37% 45% Residential Real Estate 39 38 38 34 29 Commercial Real Estate 5 6 7 7 8 Consumer 8 8 8 7 7 Other 11 11 9 11 6 International 4 5 5 4 5 - ------------------------ ---- ---- ---- ---- ---- 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, 1995: 1995 Annual Report Notes to Consolidated Financial Statements Page(s) - --------------------------------------------------------------- ------------- 1. Accounting Policies F. Interest Risk Management Instruments.................... 36 G. Loans and Leases........................................ 37 H. Reserve for Credit Losses............................... 37 K. Other Real Estate Owned................................. 37 4. Loans and Leases........................................... 41 5. Reserve for Credit Losses.................................. 42 16. Contingent Liabilities..................................... 48 18. Off-Balance Sheet Financial Instruments.................... 50-52 - --------------------------------------------------------------- Management's Discussion and Analysis of Financial Condition and Results of Operations........................................ - --------------------------------------------------------------- Asset Quality and Credit Risk.................................. 20-24 - --------------------------------------------------------------- ------------- 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 26 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, 1995, and incorporated herein by reference on page 24 of this report. The Northern Trust Company Consolidated Balance Sheet (unaudited)
December 31 --------------------- (In Millions) 1995 1994 - ------------------------------------------------------- --------- --------- Assets Cash and Due from Banks $ 1,139.3 $ 1,013.8 Money Market Assets Federal Funds Sold and Securities Purchased under Agreements to Resell 168.2 783.6 Time Deposits with Banks 1,567.4 1,864.4 Other 131.4 45.8 - ------------------------------------------------------- --------- --------- Total 1,867.0 2,693.8 - ------------------------------------------------------- --------- --------- Securities (Fair Value in 1995 $4,607.9 and $4,161.9 in 1994) 4,672.1 4,149.2 Loans and Leases 6,660.5 6,030.5 - ------------------------------------------------------- --------- --------- Reserve for Credit Losses (114.1) (113.7) Buildings and Equipment 197.1 200.7 Customers' Acceptance Liability 32.8 53.5 Trust Security Settlement Receivables 327.1 305.7 Other Assets 448.7 402.0 - ------------------------------------------------------- --------- --------- Total Assets $15,230.5 $14,735.5 - ------------------------------------------------------- --------- --------- Liabilities Deposits Demand and Other Noninterest-Bearing $ 2,320.5 $ 2,183.8 Savings and Money Market Deposits 1,852.0 1,807.3 Savings Certificates 805.3 624.1 Other Time 135.4 151.3 Foreign Offices -Demand 459.8 225.4 -Time 3,268.3 3,856.4 - ------------------------------------------------------- --------- --------- Total Deposits 8,841.3 8,848.3 Federal Funds Purchased 2,314.7 1,046.0 Securities Sold under Agreements to Repurchase 1,680.7 2,075.2 Other Borrowings 808.9 893.3 Senior Notes 15.0 545.0 Notes Payable 284.3 209.6 Liability on Acceptances 32.8 53.5 Other Liabilities 387.8 273.9 - ------------------------------------------------------- --------- --------- Total Liabilities 14,365.5 13,944.8 - ------------------------------------------------------- --------- --------- Stockholder's Equity Capital Stock-Par Value $60 198.0 198.0 Surplus 198.0 198.0 Undivided Profits 468.2 408.5 Net Unrealized Gain (Loss) on Securities 0.8 (13.8) Translation Adjustment - - - ------------------------------------------------------- --------- --------- Total Stockholder's Equity 865.0 790.7 - ------------------------------------------------------- --------- --------- Total Liabilities and Stockholder's Equity $15,230.5 $14,735.5 - ------------------------------------------------------- --------- ---------
20 The Northern Trust Company Consolidated Statement of Income (unaudited)
For the Year Ended December 31 ------------------------ (In Millions) 1995 1994 1993 - --------------------------------------------------------------------------------------- ------ ------ ------ Interest Income Money Market Assets Federal Funds Sold and Securities Purchased under Agreements to Resell $ 12.9 $ 11.4 $ 5.6 Time Deposits with Banks 92.1 97.8 86.4 Other 4.5 6.8 2.9 - --------------------------------------------------------------------------------------- ------ ------ ------ Total 109.5 116.0 94.9 - --------------------------------------------------------------------------------------- ------ ------ ------ Securities 305.2 197.1 140.0 Loans and Leases 406.6 328.4 285.0 - --------------------------------------------------------------------------------------- ------ ------ ------ Total Interest Income 821.3 641.5 519.9 - --------------------------------------------------------------------------------------- ------ ------ ------ Interest Expense Deposits--Savings and Money Market Deposits 68.8 49.8 44.4 --Savings Certificates 48.2 24.4 23.2 --Other Time 18.4 11.2 7.7 --Foreign Offices 181.6 140.1 92.4 Federal Funds Purchased 94.9 57.4 53.1 Securities Sold under Agreements to Repurchase 94.4 57.2 16.6 Other Borrowings 51.7 33.9 27.2 Senior Notes 23.5 33.6 18.3 Notes Payable 17.0 15.6 17.9 - --------------------------------------------------------------------------------------- ------ ------ ------ Total Interest Expense 598.5 423.2 300.8 - --------------------------------------------------------------------------------------- ------ ------ ------ Net Interest Income 222.8 218.3 219.1 Provision for Credit Losses 4.8 4.9 17.4 - --------------------------------------------------------------------------------------- ------ ------ ------ Net Interest Income after Provision for Credit Losses 218.0 213.4 201.7 - --------------------------------------------------------------------------------------- ------ ------ ------ Noninterest Income Trust Fees 348.3 326.7 297.9 Security Commissions and Trading Income .1 (.4) (.5) Other Operating Income 136.7 143.7 113.2 Investment Security Gains (Losses) .6 (.1) 1.7 - --------------------------------------------------------------------------------------- ------ ------ ------ Total Noninterest Income 485.7 469.9 412.3 - --------------------------------------------------------------------------------------- ------ ------ ------ Income before Noninterest Expenses 703.7 683.3 614.0 - --------------------------------------------------------------------------------------- ------ ------ ------ Noninterest Expenses Salaries 240.7 229.1 216.6 Pension and Other Employee Benefits 58.6 55.7 51.5 Occupancy Expense 40.2 39.2 38.8 Equipment Expense 39.7 48.6 33.9 Other Operating Expenses 108.9 124.1 105.7 - --------------------------------------------------------------------------------------- ------ ------ ------ Total Noninterest Expenses 488.1 496.7 446.5 - --------------------------------------------------------------------------------------- ------ ------ ------ Income before Income Taxes 215.6 186.6 167.5 Provision for Income Taxes (Includes related investment security transactions tax provision of $.2 in 1995, none in 1994 and $.7 in 1993) 67.7 56.5 46.4 - --------------------------------------------------------------------------------------- ------ ------ ------ Net Income $147.9 $130.1 $121.1 - --------------------------------------------------------------------------------------- ------ ------ ------ Dividends Paid to the Corporation 89.0 48.0 44.0 - --------------------------------------------------------------------------------------- ------ ------ ------
21 Supplemental Item--Executive Officers of the Registrant WILLIAM A. OSBORN Mr. Osborn became Chairman of the Board of the Corporation and the Bank in October 1995, and Chief Executive Officer of the Corporation and the Bank in June 1995. He held the title of President of the Corporation and the Bank from January 1994 through September 1995 and Chief Operating Officer from January 1994 through June 1995. He was a Senior Executive Vice President of the Corporation and the Bank from November 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, 48, began his career with the Bank in 1970. BARRY G. HASTINGS Mr. Hastings became President of the Corporation and the Bank in October 1995, and Chief Operating Officer of the Corporation and the Bank in June 1995. He held the title of Vice Chairman of the Corporation and the Bank from January 1994 through June 1995. He was a Senior Executive Vice President of the Corporation and the Bank from November 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, 48, began his career with the Corporation in 1974. 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, 59, 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 Personal Financial Services--Chicago. He was responsible for strategic expense management from 1995 to 1996 and strategic planning and marketing from 1991 to 1995. 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, 44, 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 and Technology business unit. Mr. Mitchell, 53, joined the Bank in 1964. SHEILA A. PENROSE Ms. Penrose became an Executive Vice President of the Corporation in November 1994 and of the Bank in November 1993, and is currently head of the Corporate & Institutional Services business unit. From 1986 until 1993, she had been Senior Vice President of the Bank. Ms. Penrose, 50, 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, 56, joined the Bank in 1964. PETER L. ROSSITER Mr. Rossiter was appointed General Counsel and Secretary 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, 47, 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, 47, had been a partner in the accounting firm of KPMG Peat Marwick from 1982 to 1990. MARK STEVENS Mr. Stevens was appointed an Executive Vice President of the Corporation and the Bank effective February 1, 1996, and at that time became head of the Personal Financial Services business unit. Mr. Stevens continues to serve as Chief Executive Officer of Northern Trust Bank of Florida N.A., a position he has held since 1987. Mr. Stevens, 48, joined the Corporation in 1979. 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, 56, 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, 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. 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 332,000 square feet of space principally 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 thirteen other Chicago Metropolitan area locations, five of which are owned and eight 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 47 locations, 9 of which are owned and 38 of which are leased. Detailed information regarding the addresses of all Northern Trust's locations can be found on pages 66 and 67 in the Corporation's Annual Report to Stockholders for the year ended December 31, 1995, 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 page 42 of the Corporation's Annual Report to Stockholders for the year ended December 31, 1995, 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 16 titled Contingent Liabilities on page 48 of the Corporation's Annual Report to Stockholders for the year ended December 31, 1995. 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 62 and 63 of the Corporation's Annual Report to Stockholders for the year ended December 31, 1995. 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 46 of the Corporation's Annual Report to Stockholders for the year ended December 31, 1995. 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 12 of the Corporation's Annual Report to Stockholders for the year ended December 31, 1995. 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 12 through 31 of the Corporation's Annual Report to Stockholders for the year ended December 31, 1995. 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, 1995, are incorporated herein by reference.
1995 Annual Report For Northern Trust Corporation and Subsidiaries: Page(s) - --------------------------------------------------------------------------------------------------------------- ------------- Consolidated Balance Sheet--December 31, 1995 and 1994......................................................... 32 Consolidated Statement of Income--Years Ended December 31, 1995, 1994 and 1993................................. 33 Consolidated Statement of Changes in Stockholders' Equity--Years Ended December 31, 1995, 1994 and 1993........ 34 Consolidated Statement of Cash Flows--Years Ended December 31, 1995, 1994 and 1993............................. 35 - --------------------------------------------------------------------------------------------------------------- ------------- For Northern Trust Corporation (Corporation Only) - --------------------------------------------------------------------------------------------------------------- ------------- Condensed Balance Sheet--December 31, 1995 and 1994............................................................ 55 Condensed Statement of Income--Years Ended December 31, 1995, 1994 and 1993.................................... 55 Consolidated Statement of Changes in Stockholders' Equity--Years Ended December 31, 1995, 1994 and 1993........ 34 Condensed Statement of Cash Flows--Years Ended December 31, 1995, 1994 and 1993................................ 55 - --------------------------------------------------------------------------------------------------------------- ------------- Notes to Consolidated Financial Statements..................................................................... 36-55 - --------------------------------------------------------------------------------------------------------------- ------------- Report of Independent Public Accountants....................................................................... 56 - --------------------------------------------------------------------------------------------------------------- -------------
The section titled "Quarterly Financial Data" on pages 62 and 63 of the Corporation's Annual Report to Stockholders for the year ended December 31, 1995, 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 1996 Notice and Proxy Statement filed on March 11, 1996 in connection with the solicitation of proxies for the Annual Meeting of Stockholders to be held April 16, 1996. 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 18 of the Corporation's definitive 1996 Notice and Proxy Statement filed in connection with the solicitation of proxies for the Annual Meeting of Stockholders to be held April 16, 1996. 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 1996 Notice and Proxy Statement filed in connection with the solicitation of proxies for the Annual Meeting of Stockholders to be held April 16, 1996. 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 1996 Notice and Proxy Statement filed in connection with the solicitation of proxies for the Annual Meeting of Stockholders to be held April 16, 1996. 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, 1995 and 1994. Unaudited Consolidated Statement of Income--Years Ended December 31, 1995, 1994 and 1993. 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, 1995: Consolidated Financial Statements of Northern Trust Corporation and Subsidiaries: Consolidated Balance Sheet--December 31, 1995 and 1994. Consolidated Statement of Income--Years Ended December 31, 1995, 1994 and 1993. Consolidated Statement of Changes in Stockholders' Equity--Years Ended December 31, 1995, 1994 and 1993. Consolidated Statement of Cash Flows--Years Ended December 31, 1995, 1994 and 1993. 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, 1995: Financial Statements of Northern Trust Corporation (Corporation): Condensed Balance Sheet--December 31, 1995 and 1994. Condensed Statement of Income--Years Ended December 31, 1995, 1994 and 1993. Consolidated Statement of Changes in Stockholders' Equity--Years Ended December 31, 1995, 1994 and 1993. Condensed Statement of Cash Flows--Years Ended December 31, 1995, 1994 and 1993. The Notes to Consolidated Financial Statements as of December 31, 1995, incorporated by reference into Item 8 from the Corporation's Annual Report to Stockholders for the year ended December 31, 1995, 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, 1995 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, 1995. 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 12, 1996 Northern Trust Corporation (Registrant) By: William A. Osborn ------------------------- William A. Osborn 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 --------- ----- William A. Osborn Chairman of the Board, - ------------------------- Chief Executive Officer William A. Osborn and Director Perry R. Pero Senior Executive Vice - ------------------------- President and Chief Perry R. Pero Financial Officer Harry W. Short Senior Vice President and - ------------------------- Controller (Chief Harry W. Short Accounting Officer) Dolores E. Cross Director ) ) Robert S. Hamada Director ) ) Barry G. Hastings Director ) ) Robert A. Helman Director ) ) Arthur L. Kelly Director ) ) Ardis Krainik Director )----- By: Peter L. Rossiter ) ------------------------- Frederick A. Krehbiel Director ) Peter L. Rossiter ) Attorney-in-Fact William G. Mitchell Director ) ) Harold B. Smith Director ) ) William D. Smithburg Director ) ) Bide L. Thomas Director ) Date: March 12, 1996 27 EXHIBIT INDEX The following Exhibits are filed herewith or are incorporated herein by reference. Exhibit Incorporated By Reference to Exhibit of Same Name Exhibit in 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 ....... (2) (ii) Form of The Northern Trust Company's Global Senior Bank Note (Fixed Rate) .................................. (2) (iii) Form of The Northern Trust Company's Global Senior Bank Note (Floating Rate) ............................... (2) (iv) Form of The Northern Trust Company's Global Subordinated Medium-Term Bank Note (Fixed Rate) ......... (2) (v) Form of The Northern Trust Company's Global 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) (1) Extension of Implementation Agreement dated January 4, 1996 ................................... Filed Herewith (ii) Northern Trust Corporation Amended Incentive Stock Plan, as amended May 20, 1986.** ........................ (4) (iii) Form of Employment Security Agreement dated May 23, 1986, between Northern Trust Corporation and each of 47 officers** ........................................... (4) (1) Form of Agreement dated December 17, 1986, to Form of Employment Security Agreement** ................ (5) (iv) Long-Term Performance Stock Plan of Northern Trust Corporation, as amended April 19, 1988.** ............... (6) (v) 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) (vi) Restated Northern Trust Employee Stock Ownership Plan, dated January 1, 1989 as amended to date ................ (15) (vii) Trust Agreement between The Northern Trust Company and Citizens and Southern Trust Company (Georgia), N.A., (predecessor of NationsBank) dated January 26, 1989 ..... (7) (viii) 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) (ix) Guaranty Agreement of Registrant with respect to the 8.23% Notes of the ESOP Trust, dated January 26, 1989 ... (7) (x) Share Acquisition Agreement between Registrant and the ESOP Trust, dated January 26, 1989 ...................... (7)
28
Exhibit Incorporated By Reference to Exhibit of Same Name Exhibit in Prior Filing* Number Description or Filed Herewith - ------- ----------------------------------------------------------------- -------------------- (xi) 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) (xii) Supplemental Employee Stock Ownership Plan for Employees of The Northern Trust Company as amended and restated.**.............................................. Filed Herewith (xiii) Supplemental Thrift-Incentive Plan for Employees of The Northern Trust Company as amended and restated.**.... Filed Herewith (xiv) Supplemental Pension Plan for Employees of The Northern Trust Company as amended and restated.**.... Filed Herewith (xv) Rights Agreement, dated as of October 17, 1989, between Northern Trust Corporation and Harris Trust & Savings Bank. ......................................... (9) (xvi) 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) (1) First Amendment to Agreement of Lease dated August 15, 1986.................................... Filed Herewith (2) Second Amendment to Agreement of Lease dated August 6, 1987..................................... Filed Herewith (3) Third Amendment to Agreement of Lease dated May 20, 1988....................................... Filed Herewith (4) Fourth Amendment to Agreement of Lease dated May 1, 1990........................................ Filed Herewith (5) Fifth Amendment to Agreement of Lease dated January 12, 1995................................... Filed Herewith (6) Sixth Amendment to Agreement of Lease dated November 30, 1995.................................. Filed Herewith (xvii) 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) (xviii) Amended 1992 Incentive Stock Plan**...................... (16) (xix) 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) (xx) Life Insurance Agreement dated January 5, 1995, between Northern Trust Corporation and David W. Fox**.... (15) (xxi) Northern Trust Corporation (1995) Management Performance Plan**....................................... (17) (xxii) Consulting Agreement dated October 1, 1995 between Northern Trust Corporation and David W. Fox**............ Filed Herewith (xxiii) Northern Trust Corporation Annual Performance Plan 1995.**.................................................. Filed Herewith (xxiv) Form of Employment Security Agreement dated March 1, 1996 between Northern Trust Corporation and each of 7 Executive Officers.**.................................... Filed Herewith (11) Computation of Per Share Earnings................................... Filed Herewith (13) 1995 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) Quarterly Report on Form 10-Q for the quarter ended September 30, 1995 (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 (15) Annual Report on Form 10-K for the year ended December 31, 1994 (16) Quarterly Report on Form 10-Q for the quarter ended March 31, 1995 (17) Quarterly Report on Form 10-Q for the quarter ended June 30, 1995 ** 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.I.1 2 IMPLEMENTATION AGREEMENT EXHIBIT NUMBER (10)(i)(1) TO 1995 FORM 10-K [LETTERHEAD OF ANDERSEN CONSULTING LLP] January 4, 1996 Ms. Eli S. Barkhausen Senior Vice President The Northern Trust Company 50 South LaSalle Street CB-3N Chicago, IL 60675 Dear Ms. Barkhausen: As you know the Implementation Agreement between Andersen Consulting LLP and The Northern Trust dated September 30, 1991 expired on December 31, 1995. The purpose of this letter is to document our mutual consent to extend that Implementation Agreement for 90 days, through March 31, 1996, in order to allow us ample time to develop a mutually agreeable Agreement for our work going forward. Thank you for the continued opportunity to assist The Northern Trust with this important project. If you have any questions about this letter please do not hesitate to contact me at (312) 630-0519. Sincerely, Jill B. Smart Partner Andersen Consulting LLP Accepted by: Accepted by: The Northern Trust Andersen Consulting LLP By: /s/ Eli S. Barkhausen By: /s/ Jill B. Smart ----------------------- ----------------------- Title: Senior Vice President Title: Partner ----------------------- ----------------------- Date: 1/4/96 Date: January 4, 1996 ----------------------- ----------------------- EX-10.XII 3 RESTATED SUPPLEMENTAL STOCK OWNERSHIP PLAN EXHIBIT NUMBER (10)(xii) TO 1995 FORM 10-K RESTATED SUPPLEMENTAL EMPLOYEE STOCK OWNERSHIP PLAN FOR EMPLOYEES OF THE NORTHERN TRUST COMPANY The Supplemental Employee Stock Ownership Plan for Employees of The Northern Trust Company ( the "Plan"), was initially adopted effective September l, l989, restated effective September l, l989, and again restated effective February l9, l99l (the "Restated Supplemental ESOP") and amended from time to time thereafter. The Northern Trust Company desires to further amend and restate the Restated Supplemental ESOP, which has been established and is maintained by The Northern Trust Company soley for the purpose of permitting certain employees of the Company who participate in the Northern Trust Stock Ownership Plan to receive allocations of amounts in excess of certain limitations on contributions imposed by Section 40l(a)(17) and Section 415 of the Code. Accordingly, effective January l, l996, The Northern Trust Company hereby further amends and restates the Restated Supplemental ESOP pursuant to the terms and provisions set forth below: ARTICLE I DEFINITIONS Wherever used herein the following terms shall have the meanings hereinafter set forth: 1.1 "Beneficiary" means any person eligible to receive a death benefit under the Plan as designated by the Participant, in the event of death of the Participant. 1.2 "Board" means the Board of Directors of The Northern Trust Company. 1.3 "Change-in-Control" means the earliest to occur of: (a) The receipt by Northern Trust Corporation (the "Corporation") of a Schedule 13D or other statement filed under Section l3(d) of the Securities Exchange Act of l934, as amended (the "Exchange Act"), indicating that any entity, person, or group has acquired beneficial ownership, as that term is defined in Rule l3d-3 under the Exchange Act, of more than 30% of the outstanding capital stock of the Corporation entitled to vote for the election of directors ("voting stock"); (b) 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; (c) The effective time of (i) 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 (ii) 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 (d) The election to the Board of Directors of the Corporation, without the recommendation or approval of the incumbent Board of Directors of the Corporation, of the lesser of (i) three directors or (ii) directors constituting a majority of the number of directors of the Corporation then in office. 1.4 "Code" means the Internal Revenue Code of 1986, as amended from time to time, and any regulations promulgated thereunder. 1.5 "Committee" means the Employee Benefit Administrative Committee of The Northern Trust Company, as constituted from time to time, which has the responsibility for administering the Qualified Plan. 1.6 "Company" means The Northern Trust Company, an Illinois banking corporation, and such of its subsidiaries and affiliates as shall, with the consent of the Board, adopt the Plan, and, to the extent provided in Section 8.8 below, any successor corporation or other entity resulting from a merger or consolidation into or with the Company or a transfer or sale of substantially all of the assets of the Company. 1.7 "Company Stock" means any qualifying employer security within the meaning of Section 4975(e)(8) of the Code and Section 407(d)(1) of the Employee Retirement Income Security Act of 1974 and regulations thereunder. 1.8 "Participant" means any employee of the Company who is a participant under the Qualified Plan as described in Section 2.1 of the Plan and with respect to whom contributions may be made under the Plan. 1.9 "Plan" means the Restated Supplemental Employee Stock Ownership Plan, for employees of The Northern Trust Company, as amended and restated effective January l, l996. 1.10 "Plan Year" means the calendar year or any other twelve consecutive month period that may be designated by the Company as the fiscal year of the Qualified Plan; provided, however, that the first Plan Year shall be the four consecutive month period commencing on September l, l989 and ending on December 31, l989. 1.11 "Qualified Plan" means the Northern Trust Employee Stock Ownership Plan, as amended and restated effective January l, l989, and as further amended from time to each, and each predecessor, successor or replacement employee stock ownership plan. 1.12 "Qualified Plan Company Stock Account" means the account established for a Participant under the Qualified Plan and known as the Company Stock Acount. 1.13 "Qualified Thrift-Incentive Plan" means The Northern Trust Company Thrift-Incentive Plan as amended and restated effective January l, l989, and each predecessor, successor or replacement employees' cash or deferred arrangement. 1.14 "Section 415 Limits" means the limit imposed by Section 415 of the Code, or any successor section, on aggregate annual additions in any Plan Year to the accounts of a Participant under the Qualified Plan and The Northern Trust Company Thrift-Incentive Plan, and the limits imposed by Section 415(c)(6) of the Code, or any successor section, on the Plan. 1.15 "Supplemental ESOP Account" means the account maintained by the Company under the Plan for each Participant who receives Supplemental ESOP Allocations under the Plan. 1.16 "Supplemental ESOP Allocation" means the amount allocated for the benefit of a Participant under and in accordance with the terms of Section 3.1 of the Plan in any Plan Year. 1.17 "Supplemental Matching Contribution Account" means the account maintained by the Company under the Supplemental Thrift-Incentive Plan for a Participant that is credited with Supplemental Matching Contributions contributed under such plan. 1.18 Except as otherwise expressly provided herein, all words and phrases in the Qualified Plan shall have the same meaning in the Plan. ARTICLE II ELIGIBILITY 2.1 Participant. An employee of the Company who is eligible in any Plan Year to receive an allocation of Company Stock to his Company Stock Account under the Qualified Plan, the total amount of which is reduced by reason of the application of the limitation on contributions imposed by Section 40l(a)(17), or Section 415 of the Code, as in effect on any date for allocation of such shares, or as in effect at any time thereafter, on the Qualified Plan, shall be a Participant in the Plan for such Plan Year. ARTICLE III SUPPLEMENTAL ALLOCATIONS 3.1 Supplemental ESOP Allocations. The Supplemental ESOP Allocation to be made for the benefit of a Participant for any Plan Year shall be an amount equal to (i) the closing price of a share of Company Stock on the NASDAQ Stock Market on the last trading day of such Plan Year, times, (ii) the difference between (a) and (b) below: (a) The number of shares of Company Stock that would have been allocated to the Qualified Plan Company Stock Account of the Participant for the Plan Year, without giving effect to the Section 415 Limits or to the limitations imposed by Section 40l(a)(17) of the Code on the Qualified Plan; LESS (b) The number of shares of Company Stock actually allocated to the Qualified Plan Company Stock Account of the Participant for the Plan Year. Supplemental ESOP Allocations made for the benefit of a Participant for any Plan Year shall be allocated to a Supplemental ESOP Account maintained under the Plan in the name of such Participant as of the last day of such Plan Year. 3.2 Vesting. Each Participant shall vest in the balance of his Supplemental ESOP Account in accordance with the vesting schedule set forth in the Qualified Plan applicable to the undistributed balance of his Qualified Plan Company Stock Account. Notwithstanding the preceding sentence or any other provision of the Plan, each Participant shall immediately become fully vested in the undistributed balance of his Supplemental ESOP Account in the event of a Change- in-Control. ARTICLE IV INVESTMENT OF SUPPLEMENTAL ALLOCATIONS 4.1 Investments. The Company may contribute amounts allocated hereunder to the Supplemental ESOP Accounts of Participants to a trust ("Trust") established under the trust agreement between the Company and Harris Trust & Savings Bank, a bank organized and existing under the laws of the State of Illinois, as trustee ("Trust Agreement"). Amounts allocated hereunder to the Supplemental ESOP Account of a Participant and contributed to the Trust, shall be invested in one or more of the investment funds from time to time offered by the trustee of the Trust Agreement as set forth on Schedule A attached hereto and shall be subject to the same administrative procedures and Participant investment elections that apply to his Supplemental Matching Contribution Account. A Participant shall be entitled to change investment elections applicable to his Supplemental ESOP Account, or to direct transfers of amounts in his Supplemental ESOP Account among the investment funds set forth on Schedule A, provided that such directions shall also apply to his Supplemental Matching Contribution Account. Such changes can be made monthly by written request. 4.2 Company Securities. Notwithstanding anything to the contrary contained herein, in no event shall amounts allocated to the Supplemental ESOP Account of a Participant be invested in any fund that provides for investment in stock or other securities of the Company; provided, however, that nothing contained herein shall prohibit investment of amounts allocated to the Supplemental ESOP of any Participant in a common or collective trust fund of the trustee of the Trust Agreement in which no more than five percent of the total fair market value of the assets of such common or collective trust fund are invested in stock or other securities of the Company. ARTICLE V DISTRIBUTIONS 5.1 Distribution. (a) In the event that the Participant's employment with the Company terminates for any reason, the Participant shall receive on the last day of the calendar month following the month in which such termination occurs, a lump sum distribution, in cash, equal to the vested adjusted balance of the Participant's Supplemental ESOP Account, including gains or losses attributable to investments made pursuant to Section 4.1, determined as of the last day of the calendar month in which such termination occurs. Notwithstanding the foregoing, if a Participant is entitled to receive a Supplemental ESOP Allocation for the Plan Year in which he terminated employment, such Supplemental ESOP Allocation and any gains or losses attributable thereto shall be distributed to or with respect to the Participant upon completion of the first valuation following the posting of such Supplemental ESOP Allocation to his Supplemental ESOP Account. Any nonvested portion of a Participant's Supplemental ESOP Account shall be forfeited and retained by the Company. (b) The amount to be paid from the Supplemental ESOP in the year of the Participant's termination shall be limited to an amount which will not cause the total amount of compensation received from the Company, to exceed the maximum amount deductible by the Company under Code section 162(m). Amounts not paid as a result of the above limitation shall be paid in subsequent years, to the extent permissible under the above limitation. (c) If a Participant dies before a complete distribution of his Supplemental ESOP Account has been made to him, the vested adjusted balance of such Participant's Supplemental ESOP Account, including gains or losses attributable to investments made pursuant to Section 4.1, determined as of the last day of the calendar month in which the Participant's employment with the Company terminated, shall be distributed in one lump sum, in cash, to the Beneficiary last designated by the Participant in a writing delivered to the Committee prior to his death. If a Participant has not designated a Beneficiary, or if no designated Beneficiary is living on the date of distribution, the vested adjusted balance of such Participant's Supplemental ESOP Account, shall be distributed in one lump sum, in cash, to those persons entitled to receive distributions of the Participant's accounts under the Qualified Plan. ARTICLE VI ADMINISTRATION OF THE PLAN 6.1 Administration by the Committee. The Committee shall be responsible for the general operation and administration of the Plan and for carrying out the provisions thereof. The Committee shall have discretion to interpret and construe the provisions of the Plan. 6.2 General Powers of Administration. All provisions set forth in the Qualified Plan with respect to the administrative powers and duties of the Committee, expenses of administration, and procedures for filing claims shall also be applicable with respect to the Plan. The Committee shall be entitled to rely conclusively upon all tables, valuations, certificates, opinions and reports furnished by any actuary, accountant, controller, counsel or other person employed or engaged by the Committee with respect to the Plan. ARTICLE VII AMENDMENT OR TERMINATION 7.1 Amendment or Termination. The Company intends the Plan to be permanent but reserves the right to amend or terminate the Plan when, in the sole discretion of the Company, such amendment or termination is advisable. Any such amendment or termination shall be made pursuant to a resolution of the Board and shall be effective as of the date set forth in such resolution. 7.2 Effect of Amendment or Termination. No amendment or termination of the Plan shall directly or indirectly reduce the balance of any Supplemental ESOP Account held hereunder as of the effective date of such amendment or termination. Upon termination of the Plan, disribution of amounts in a Participant's Supplemental ESOP Account shall be made to him or his Beneficiary in the manner and at the time described in Section 5.1 of the Plan. No additional Supplemental ESOP Allocations shall be made to the Supplemental ESOP Account of any Participant after termination of the Plan. ARTICLE VIII GENERAL PROVISIONS 8.1 Participant's Rights Unsecured. The Plan at all times shall be entirely unfunded and no provision shall at any time be made with respect to segregating any assets of the Company for payment of any benefits hereunder. No Participant, beneficiary or any other person shall have any interest in any particular assets of the Company by reason of the right to receive a benefit under the Plan and any such Participant, Beneficiary or other person shall have only the rights of a general unsecured creditor of the Company with respect to any rights under the Plan. 8.2 General Conditions. Except as otherwise expressly provided herein, all terms and conditions of the Qualified Plan applicable to allocations of Company Stock under the Qualified Plan shall also be applicable to a Supplemental ESOP Allocation made hereunder. Any allocation of Company Stock or dividends to be made under the Qualified Plan shall be made solely in accordance with the terms and conditions of the Qualified Plan and nothing in this Plan shall operate or be construed in any way to modify, amend or affect the terms and provisions of the Qualified Plan. 8.3 No Guaranty of Benefits. Nothing contained in the Plan shall constitute a guaranty by the Company or any other person or entity that the assets of the Company will be sufficient to pay any benefit hereunder. 8.4 No Enlargement of Employee Rights. No Participant shall have any right to receive a distribution under the Plan except in accordance with the terms of the Plan. Establishment of the Plan shall not be construed to give any Participant the right to be retained in the service of the Company. 8.5 Spendthrift Provision. No interest of any person or entity in, or right to receive a distribution under, the Plan shall be subject in any manner to sale, transfer, assignment, pledge, attachment, garnishment, or other alienation or encumbrance of any kind; nor may such interest or right to receive a distribution be taken, either voluntarily or involuntarily, for the satisfaction of the debts of, or other obligations or claims against, such person or entity, including claims for alimony, support, separate maintenance and claims in bankruptcy proceedings. 8.6 Applicable Law. The Plan shall be construed and administered under the laws of the State of Illinois to the extent not inconsistent with the Employee Retirement Income Security Act of 1974. 8.7 Incapacity of Recipient. If any benefit under the Plan shall be payable to a minor or a person not adjudicated incompetent but who, by reason of illness or mental or physical disability, is, in the opinion of the Committee, unable to properly manage his affairs, such benefit shall be paid in such of the following ways as the Committee deems best: (a) to the person directly; (b) in the case of a minor, to a custodian under any Uniform Gift to Minors Act for the person; or (c) to the person's spouse, adult child or blood relative. Any benefit so paid shall be a complete discharge of any liability of the Company and Plan therefor. 8.8 Successors. The Plan shall not be automatically terminated by a transfer or sale of assets of the Company or by the merger or consolidation of the Company into or with any other corporation or other entity, but the Plan shall be continued after such sale, merger or consolidation only if and to the extent that the transferee, purchaser or successor entity agrees to continue the Plan. In the event that the Plan is not continued by the transferee, purchaser or successor entity, then the Plan shall terminate subject to the provisions of Section 7.2. 8.9 Unclaimed Benefit. Each Participant shall keep the Committee informed of his current address and the current address of his designated Beneficiary. Neither the Company nor the Committee shall be obligated to search for the whereabouts of any person. If the location of a Participant is not made known to the Committee within three (3) years after the date on which distribution of the Participant's Supplemental ESOP Account may first be made, distribution may be made as though the Participant 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 Participant, neither the Company nor the Committee is able to locate any designated Beneficiary of the Participant, then the Company shall have no further obligation to pay any benefit hereunder to such Participant or designated Beneficiary and such benefit shall be irrevocably forfeited; provided, however, that if the Participant or designated Beneficiary makes a valid claim for any benefit that has been so forfeited, the forfeited benefit shall be reinstated. 8.10 Limitations on Liability. Notwithstanding any of the preceding provisions of the Plan, neither the Company, any member of the Committee, nor any individual acting as an employee or agent of the Company or Committee shall be liable to any Participant, former Participant, Beneficiary or any other person for any claim, loss, liability or expense incurred in connection with the Plan. 8.11 Gender; Headings. Words in the masculine gender shall include the feminine and the singular shall include the plural, and vice versa, unless qualified by the context. Any headings used herein are included for ease of reference only, and are not to be construed so as to alter the terms hereof. IN WITNESS WHEREOF, The Northern Trust Company has caused this Plan to be signed by its duly authorized officer as of the 31st day of December, l995. THE NORTHERN TRUST COMPANY BY_______________________ SCHEDULE A SUPPLEMENTAL EMPLOYEE STOCK OWNERSHIP PLAN & SUPPLEMENTAL THRIFT-INCENTIVE PLAN INVESTMENT FUND OPTIONS 1. Insight Money Market Fund 2. Intermediate Bond Fund 3. Equity Fund EX-10.XIII 4 RESTATED SUPPLEMENTAL THRIFT-INCENTIVE PLAN EXHIBIT NUMBER (10)(xiii) TO 1995 FORM 10-K RESTATED SUPPLEMENTAL THRIFT-INCENTIVE PLAN FOR EMPLOYEES OF THE NORTHERN TRUST COMPANY The Northern Trust Company Supplemental Plan was adopted on September l6, l975 and amended through December 16, l986. The portions of that plan that pertained to The Northern Trust Company Thrift-Incentive Plan were amended and restated by the Restated Supplemental Thrift-Incentive Plan for Employees of The Northern Trust Company, initially adopted effective September l, l989, restated effective September l, l989 and amended from time to time thereafter (the "Restated Supplemental Thrift-Incentive Plan"). The Northern Trust Company desires to further amend and restate the Restated Supplemental Thrift-Incentive Plan, which has been established and is maintained by The Northern Trust Company solely for the purpose of permitting certain of the employees of the Company who participate in The Northern Trust Company Thrift-Incentive Plan to receive contributions in excess of certain limitations imposed by Section 401(a)(17) of the Code. Accordingly, effective January 1, 1996, The Northern Trust Company hereby further amends and restates the Restated Supplemental Thrift-Incentive Plan pursuant to the terms and conditions set forth below: ARTICLE I DEFINITIONS Wherever used herein the following terms shall have the meanings hereinafter set forth: 1.1 "Beneficiary" means any person eligible to receive a death benefit under the Plan as designated by the Participant, in the event of death of the Participant. 1.2 "Board" means the Board of Directors of The Northern Trust Company. 1.3 "Change-in-Control" means the earliest to occur of: (a) The receipt by Northern Trust Corporation (the "Corporation") of a Schedule 13D or other statement filed under Section l3(d) of the Securities Exchange Act of l934, as amended (the "Exchange Act"), indicating that any entity, person, or group has acquired beneficial ownership, as that term is defined in Rule l3d-3 under the Exchange Act, of more than 30% of the outstanding capital stock of the Corporation entitled to vote for the election of directors ("voting stock"); (b) 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; (c) The effective time of (i) 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 (ii) 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 (d) The election to the Board of Directors of the Corporation, without the recommendation or approval of the incumbent Board of Directors of the Corporation, of the lesser of (i) three directors or (ii) directors constituting a majority of the number of directors of the Corporation then in office. 1.4 "Code" means the Internal Revenue Code of l986, as amended from time to time, and any regulations promulgated thereunder. 1.5 "Committee" means the Employee Benefit Administrative Committee of The Northern Trust Company, as constituted from time to time, which has the responsibility for administering the Qualified Plan. 1.6 "Company" means The Northern Trust Company, an Illinois banking corporation, and such of its subsidiaries and affiliates as shall, with the consent of the Board, adopt the Plan, and, to the extent provided in Section 8.8 below, any successor corporation or other entity resulting from a merger or consolidation into or with the Company or a transfer or sale of substantially all of the assets of the Company. 1.7 "Deferral Distribution Date" means the date for distribution of a Participant's Supplemental Before-Tax Deposits as irrevocably set forth in each of his Supplemental Before-Tax Deposit Agreements. 1.8 "Participant" means an employee of the Company who is a participant under the Qualified Plan as described in Section 2.l of the Plan and by whom or with respect to whom contributions may be made under the Plan. 1.9 "Plan" means the Restated Supplemental Thrift-Incentive Plan for Employees of The Northern Trust Company, as amended from time to time. 1.10 "Plan Year" means the calendar year or other twelve-consecutive- month period that may be designated by the Company as the fiscal year of the Qualified Plan, provided, however, that the first Plan Year shall be the four-consecutive-month period commencing on September l, l989 and ending on December 31, l989. 1.11 "Qualified Plan" means The Northern Trust Company Thrift-Incentive Plan as amended and restated effective January l, l989, and as further amended from time to time, and each predecessor, successor or replacement employees' cash or deferred arrangement. 1.12 "Qualified Plan Matching Contribution" means the total of all matching contributions made by the Company for the benefit of a Participant under and in accordance with the terms of the Qualified Plan in any Plan Year. 1.13 "Qualified Plan Matching Contribution Account" means the account established for a Participant under the Qualified Plan and known as the Matching Contribution Account. 1.14 "Qualified Plan Before-Tax Deposit" means the total of all salary reduction contributions made by the Company as authorized by a Participant under and in accordance with the terms of the Qualified Plan in any Plan Year. 1.15 "Qualified Plan Before-Tax Deposit Account" means the account established for the Participant under the Qualified Plan and known as the Before-Tax Deposit Account. 1.16 "Supplemental Account" means either or both of the Supplemental Before-Tax Deposit Account and the Supplemental Matching Contribution Account. 1.17 "Supplemental ESOP Allocation" means the amount allocated for the benefit of a Participant under and in accordance with the terms of Section 3.1 of the Supplemental ESOP Plan in any Plan year. 1.18 "Supplemental Matching Contribution" means the matching contribution made by the Company for the benefit of a Participant under and in accordance with the terms of the Plan in any Plan Year. 1.19 "Supplemental Matching Contribution Account" means the account maintained by the Company under the Plan for a Participant that is credited with Supplemental Matching Contributions contributed under the Plan. 1.20 "Supplemental Before-Tax Deposit" means the salary reduction contribution made by the Company as authorized by a Participant under and in accordance with the terms of the Plan in any Plan Year. 1.21 "Supplemental Before-Tax Deposit Account" means the account maintained by the Company under the Plan for a Participant that is credited with Supplemental Before-Tax Deposits contributed under the Plan. 1.22 Except as otherwise expressly provided herein, all words and phrases in the Qualified Plan shall have the same meaning in the Plan. ARTICLE II ELIGIBILITY 2.1 (a) Conditions for Participation. An employee of the Company: (i) who is eligible to participate in the Qualified Plan on the first day of a Plan Year and (ii) whose Salary (as defined in the Qualified Plan), determined as of November 30 of the prior plan year, exceeds the compensation limitation under Section 40l(a)(17) of the Code for such prior Plan Year, shall be eligible to make salary deferrals under the Plan for such Plan Year as soon as he has reached the Code Section 40l(a)(17) limitation. However, if the compensation limit for the Plan Year for which participation is being determined is known by November 30 of such prior Plan Year, participation will be based upon such limit. In the event an employee of the Company who is ineligible to participate in the Plan on the first day of a Plan Year either because he was not eligible for the Qualified Plan on the first day of the Plan Year or because his Salary does not exceed the Code Section 40l(a)(17) limitation for the prior Plan Year subsequently becomes eligible for the Qualified Plan or has his Salary increased and becomes ineligible to make contributions to the Qualified Plan because his Salary exceeds the compensation limit set forth in Code Section 40l(a)(17), such employee shall become eligible to participate in the Plan for purposes of Supplemental Matching Contributions only as of the date he is no longer eligible to make contributions to the Qualified Plan as a result of the above limitation. Such Supplemental Matching Contributions shall be based on the employee's rate of contribution to the Qualified Plan at the time his contributions ceased. (b) Participant Elections. An employee who meets the eligibility requirements on November 30 for Plan participation in the following Plan Year will be allowed to elect (i) to decline participation in the Plan, or (ii) to begin contributions to the Plan once he is no longer able to contribute to the Qualified Plan because he has reached the limitations of Section 40l(a)(17). ARTICLE III SUPPLEMENTAL CONTRIBUTIONS 3.1 Supplemental Before-Tax Deposit. The Supplemental Before-Tax Deposit authorized by a Participant for any Plan Year shall be applied only to salary in excess of Section 40l(a)(17) limitations, in any amount equal to at least one percent (1%), but not to exceed twelve percent (12%). The Supplemental Before-Tax Deposit made for the benefit of a Participant for any Plan Year shall be allocated to a Supplemental Before-Tax Deposit Account maintained under the Plan in the name of such Participant on or before the last day of such Plan Year. 3.2 Supplemental Before-Tax Deposit Agreement. As a condition to the Company's obligation to make a Supplemental Before-Tax Deposit for the benefit of a Participant pursuant to Section 3.1 for any Plan Year, the Participant must execute a Supplemental Before-Tax Deposit Agreement, in such form as the Committee in its discretion shall determine, on which the Participant shall elect to have his Salary for such Plan Year reduced, and a Supplemental Before- Tax Deposit made on his behalf, on salary in excess of Section 40l(a)(17) limitations, in any amount equal to at least one percent (l%) of his Salary, or any multiple thereof, but not to exceed twelve percent (12%). An Agreement that is effective for any Plan Year shall be executed and delivered to the Committee by the specified date before the beginning of that Year and shall be irrevocable for that year and for subsequent Years unless and until revoked or revised by a Participant by written instrument delivered to the Committee prior to the beginning of the Plan Year in which such revocation or revision is to be effective. 3.3 Supplemental Matching Contributions. The Supplemental Matching Contribution to be made by the Company on behalf of a Participant for any Plan Year who (i) is a Participant at the beginning of a Plan Year eligible to make salary deferrals after reaching the Section 40l(a)(17) limitations, who actually makes salary deferrals or (ii) during the Plan Year becomes a Participant eligible to participate for purposes of Supplemental Matching Contributions only, shall be made in accordance with the matching contribution formula and provisions set forth in the Qualified Plan. Supplemental Matching Contributions made for the benefit of a Participant for any Plan Year shall be allocated to a Supplemental Matching Contribution Account maintained under the Plan in the name of such Participant as of the last day of such Plan Year. 3.4 Vesting of Benefits. Each Participant shall at all times be fully vested in the adjusted balance of his Supplemental Before-Tax Deposit Account. Each Participant shall vest in the adjusted balance of his Supplemental Matching Contribution Account in accordance with the vesting schedule applicable to his Qualified Plan Matching Contribution Account set forth in the Qualified Plan. Notwithstanding the preceding sentence or any other provision of the Plan, each Participant shall become fully vested in the adjusted balance of his Supplemental Matching Contribution Account on the effective date of a Change-in- Control. ARTICLE IV INVESTMENT OF SUPPLEMENTAL CONTRIBUTIONS 4.1 Investments. The Company may contribute amounts allocated hereunder to the Supplemental Accounts of Participants to a trust ("Trust") established under the trust agreement between the Company and Harris Trust & Savings Bank, a bank organized and existing under the laws of the State of Illinois, as trustee ("Trust Agreement"). Amounts allocated hereunder to the Supplemental Account of a Participant shall be subject to such administrative procedures relating to investment elections as the Committee may from time to time establish. When amounts are allocated to the Supplemental Account of a Participant and are contributed to the Trust, they shall be invested in one or more of the investment funds from time to time offered by the trustee of the Trust Agreement, as set forth on Schedule A attached hereto. A Participant shall be entitled to change investment elections applicable to his Supplemental Account, or to direct transfers of amounts in his Supplemental Account among the investment funds set forth on Schedule A, provided that such directions shall also apply to his Supplemental ESOP Allocation. Such changes can be made monthly by written request. 4.2 Company Securities. Notwithstanding anything to the contrary contained herein, in no event shall amounts allocated to the Supplemental Account of a Participant be invested in any fund that provides for investment in stock or other securities of the Company; provided, however, that nothing contained herein shall prohibit investment of amounts allocated to the Supplemental Account of any Participant in a common or collective trust fund of the trustee of the Trust Agreement in which no more than five percent of the total fair market value of the assets of such common or collective trust fund are invested in stock or other securities of the Company. ARTICLE V DISTRIBUTIONS 5.1 Distribution. (a) Subject to Section 8.2, all amounts allocated to a Participant's Supplemental Before-Tax Deposit Account, including gains and losses attributable to investments made pursuant to Section 4.1, shall be distributed to or with respect to the Participant in one lump sum as of the first to occur of (a) the Deferral Distribution Date irrevocably set forth in the related Supplemental Before-Tax Deposit Agreement or (b) the last day of the calendar month following the month in which the Participant's employment with the Company terminates for any reason, including death. The vested adjusted balance of a Participant's Supplemental Matching Contribution Account, including gains and losses attributable to investments made pursuant to Section 4.1, shall be distributed to or with respect to a Participant as of the last day of the calendar month following the month in which the Participant's employment with the Company and all affiliates terminates for any reason, including death. Notwithstanding the foregoing, if a Participant is entitled to receive a Supplemental Matching Contribution for the Plan Year in which he terminated employment, such Supplemental Matching Contribution and any gains or losses attributable thereto shall be distributed to or with respect to the Participant upon completion of the first valuation following the posting of such Supplemental Matching Contribution to the Supplemental Matching Contribution Account. Any unvested amounts credited to a Participant's Supplemental Matching Contribution Account shall be forfeited and retained by the Company. (b) The annual amount to be paid from the Supplemental TIP shall be limited to an amount which will not cause the total amount of compensation received from The Northern Trust to exceed the maximum amount deductible by The Northern Trust under Code section 162(m). Amounts not paid as a result of the above limitation shall be paid in subsequent years, to the extent permissible under the above limitation. (c) If a Participant dies before a complete distribution of his Supplemental Before Tax Deposit Account or his Supplemental Matching Contribution Account has been made to him, such amounts shall be distributed to the Beneficiary designated by the Participant in a writing last delivered to the Committee prior to his death. If a Participant has not designated a Beneficiary, or if no designated Beneficiary is living on the date of distribution, such amounts shall be distributed to those persons entitled to receive distributions of the Participant's accounts under the Qualified Plan. ARTICLE VI ADMINISTRATION OF THE PLAN 6.1 Administration by the Committee. The Committee shall be responsible for the general operation and administration of the Plan and for carrying out the provisions thereof. The Committee shall have discretion to interpret and construe the provisions of the Plan. 6.2 General Powers of Administration. All provisions set forth in the Qualified Plan with respect to the administrative powers and duties of the Committee, expenses of administration, and procedures for filing claims shall also be applicable with respect to the Plan. The Committee shall be entitled to rely conclusively upon all tables, valuations, certificates, opinions and reports furnished by any actuary, accountant, controller, counsel or other person employed or engaged by the Committee with respect to the Plan. ARTICLE VII AMENDMENT OR TERMINATION 7.1 Amendment or Termination. The Company intends the Plan to be permanent but reserves the right to amend or terminate the Plan when, in the sole discretion of the Company, such amendment or termination is advisable. Any such amendment or termination shall be made pursuant to a resolution of the Board and shall be effective as of the date set forth in such resolution. 7.2 Effect of Amendment or Termination. No amendment or termination of the Plan shall directly or indirectly reduce the balance of any Supplemental Account held hereunder as of the effective date of such amendment or termination. Upon termination of the Plan, disribution of amounts in a Participant's Supplemental Account shall be made to him or his Beneficiary in the manner and at the time described in Section 5.1 of the Plan. No additional credits of Supplemental Before-Tax Deposits or Supplemental Matching Contributions shall be made to the Supplemental Account of a Participant after termination of the Plan, but the Company shall continue to credit gains and losses attributable to investments made pursuant to Section 4.1 to such Supplemental Account until the balance of such Account has been fully distributed to the Participant or his Beneficiary. ARTICLE VIII GENERAL PROVISIONS 8.l Participant's Rights Unsecured. If and to the extent amounts allocated hereunder to the Supplemental Accounts of Participants are contributed by the Company to the Trust described in Section 4.1, benefits under the Plan shall be payable pursuant to the Trust Agreement. Pursuant to the Trust Agreement, all assets held thereunder shall remain subject to the general creditor of the Company. The Plan at all times shall be entirely unfunded and no provision shall at any time be made with respect to segregating any assets of the Company for payment of any benefits hereunder. No Participant, Beneficiary or any other person shall have any interest in any particular assets of the Company by reason of the right to receive a benefit under the Plan and Trust Agreement and any such Participant, Beneficiary or other person shall have only the rights of a general unsecured creditor of the Company with respect to any rights under the Plan and Trust Agreement. 8.2 General Conditions. Except as otherwise expressly provided herein, all terms and conditions of the Qualified Plan applicable to a Qualified Plan Before-Tax Deposit or a Qualified Plan Matching Contribution shall also be applicable to a Supplemental Before-Tax Deposit or a Supplemental Matching Contribution to be made hereunder. Any Qualified Plan Before-Tax Deposit or Qualified Plan Matching Contribution, or any other contributions to be made under the Qualified Plan, shall be made solely in accordance with the terms and conditions of the Qualified Plan and nothing in this Plan shall operate or be construed in any way to modify, amend or affect the terms and provisions of the Qualified Plan. 8.3 No Guaranty of Benefits. Nothing contained in the Plan shall constitute a guaranty by the Company or any other person or entity that the assets of the Company will be sufficient to pay any benefit hereunder. 8.4 No Enlargement of Employee Rights. No Participant shall have any right to receive a distribution of contributions made under the Plan except in accordance with the terms of the Plan. Establishment of the Plan shall not be construed to give any Participant the right to be retained in the service of the Company. 8.5 Spendthrift Provision. No interest of any person or entity in, or right to receive a distribution under, the Plan shall be subject in any manner to sale, transfer, assignment, pledge, attachment, garnishment, or other alienation or encumbrance of any kind; nor may such interest or right to receive a distribution be taken, either voluntarily or involuntarily, for the satisfaction of the debts of, or other obligations or claims against, such person or entity, including claims for alimoney, support, separate maintenance and claims in bankruptcy proceedings. 8.6 Applicable Law. The Plan shall be construed and administered under the laws of the State of Illinois to the extent not inconsistent with the Employee Retirement Income Security Act of l974. 8.7 Incapacity of Recipient. If any benefit under the Plan shall be payable to a minor or a person not adjudicated incompetent but who, by reason of illness or mental or physical disability, is, in the opinion of the Committee, unable to properly manage his affairs, such benefit shall be paid in such of the following ways as the Committee deems best: (a) to the person directly; (b) in the case of a minor, to a custodian under any Uniform Gift to Minors Act for the person; or (c) to the person's spouse, adult child or blood relative. Any benefit so paid shall be a complete discharge of any liability of the Company and the Plan therefor. 8.8 Successors. The Plan shall not be automatically terminated by a transfer or sale of assets of the Company or by the merger or consolidation of the Company into or with any other corporation or other entity, but the Plan shall be continued after such sale, merger or consolidation only if and to the extent that the transferee, purchaser or successor entity agrees to continue the Plan. In the event that the Plan is not continued by the transferee, purchaser or successor entity, then the Plan shall terminate subject to the provisions of Section 7.2. 8.9 Unclaimed Benefit. Each Participant shall keep the Committee informed of his current address and the current address of his designated Beneficiary. Neither the Company nor the Committee shall be obligated to search for the whereabouts of any person. If within three years after any benefit becomes due under the Plan to or with respect to any Participant, the Committee is unable to make payment because the identity or whereabouts of such person cannot be ascertained notwithstanding the mailing of notice to any last known address or addresses, the Committee shall make payment of such benefit as though the Participant had died three years after the date such benefit became due. In the event payment cannot be made at that time, the Participant's Supplemental Before-Tax Deposit Account and Supplemental Contribution Account shall be closed out and disposed of in the same manner as forfeitures, but the amount thereof shall be a continuing liability of the Plan. In the event it shall become possible to make payment of the liability at a later date, the amount of the liability shall be paid in accordance with the provisions of the Plan. 8.10 Limitations on Liability. Notwithstanding any of the preceding provisions of the Plan, neither the Company, any member of the Committee nor any individual acting as an employee or agent of the Company or Committee shall be liable to any Participant, former Participant, Beneficiary or any other person for any claim, loss, liability or expense incurred in connection with the Plan. 8.11 Gender; Headings. Words in the masculine gender shall include the feminine and the singular shall include the plural, and vice versa, unless qualified by the context. Any headings used herein are included for ease of reference only, and are not to be construed so as to alter the terms hereof. IN WITNESS WHEREOF, The Northern Trust Company has caused this Plan to be signed by its duly authorized officer as of the 31st day of December, 1995. THE NORTHERN TRUST COMPANY BY_______________________ SCHEDULE A SUPPLEMENTAL THRIFT-INCENTIVE PLAN & SUPPLEMENTAL EMPLOYEE STOCK OWNERSHIP PLAN INVESTMENT FUND OPTIONS l. Insight Money Market Fund 2. Intermediate Bond Fund 3. Equity Fund EX-10.XIV 5 RESTATED SUPPLEMENTAL PENSION PLAN EXHIBIT NUMBER (10)(xiv) TO 1995 FORM 10-K RESTATED SUPPLEMENTAL PENSION PLAN FOR EMPLOYEES OF THE NORTHERN TRUST COMPANY The Northern Trust Company Supplemental Plan was adopted on September l6, l975 and amended through December l6, l986. The portions of that plan that pertained to The Northern Trust Company Pension Plan were amended and restated by The Restated Supplemental Pension Plan for Employees of The Northern Trust Company, initially adopted effective September l, l989, restated effective September l, l989 and amended effective December 2l, l993 and from time to time thereafter ("the Restated Supplemental Pension Plan"). The Northern Trust Company desires to further amend and restate The Restated Supplemental Pension Plan, which has been established and is maintained by The Northern Trust Company solely for the purpose of providing benefits for certain employees of the Company who participate in The Northern Trust Company Pension Plan and whose benefits under such plan are limited by the restrictions on benefits imposed by Section 40l(a)(17) and Section 415 of the Code. Accordingly, effective January l, l996, The Northern Trust Company hereby further amends and restates The Restated Supplemental Pension Plan pursuant to the terms and provisions set forth below. ARTICLE I DEFINITIONS Wherever used herein the following terms shall have the meanings hereinafter set forth: 1.1 "Beneficiary" means (i) Spouse or, (ii) if the Participant had fifteen or more years of credited service under the Qualified Plan and dies without a Spouse but with Eligible Child(ren) as defined in the Qualified Plan, such Participant's Eligible Child(ren). 1.2 "Board" means the Board of Directors of The Northern Trust Company. 1.3 "Code" means the Internal Revenue Code of l986, as amended from time to time, and any regulations promulgated thereunder. 1.4 "Change-in-Control" means the earliest to occur of: (a) The receipt by Northern Trust Corporation (the "Corporation") of a Schedule 13D or other statement filed under Section l3(d) of the Securities Exchange Act of l934, as amended (the "Exchange Act"), indicating that any entity, person, or group has acquired beneficial ownership, as that term is defined in Rule l3d-3 under the Exchange Act, of more than 30% of the outstanding capital stock of the Corporation entitled to vote for the election of directors ("voting stock"); (b) 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; (c) The effective time of (i) 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 (ii) 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 (d) The election to the Board of Directors of the Corporation, without the recommendation or approval of the incumbent Board of Directors of the Corporation, of the lesser of (i) three directors or (ii) directors constituting a majority of the number of directors of the Corporation then in office. 1.5 "Committee" means the Employee Benefit Administrative Committee of The Northern Trust Company, as constituted from time to time, which has the responsibility for administering the Qualified Plan. 1.6 "Company" means The Northern Trust Company, an Illinois banking corporation, and such of its subsidiaries and affiliates as shall, with the consent of the Board, adopt the Plan, and, to the extent provided in Section 8.8 below, any successor corporation or other entity resulting from a merger or consolidation into or with the Company or a transfer or sale of substantially all of the assets of the Company. 1.7 "Participant" means any employee of the Company who is a participant under the Qualified Plan as described in Section 2.l of the Plan and to whom or with respect to whom a benefit is payable under the Plan. 1.8 "Payment Entitlement Date" means either (i) the first of the month following termination in the case of a Participant eligible for a benefit under Section 5.4 of the Qualified Plan or, (ii) the day following termination in the case of a Participant eligible for a benefit under Sections 5.1, 5.2, or 5.3 of the Qualified Plan. 1.9 "Payment Date" means, with respect to a Participant who is retirement eligible under the Qualified Plan, the last business day of the month next following the month in which the Participant's employment with the Company terminates. With respect to a Vested Terminated Participant as defined in the Qualified Plan, "Payment Date" means the last day of the third calendar month following the calendar month in which the Participant terminates employment. 1.10 "Plan" means the Restated Supplemental Pension Plan for employees of The Northern Trust Company as further amended and restated effective January l, l996. 1.11 "Qualified Plan" means The Northern Trust Company Pension Plan as amended and restated effective January l, l989, and as further amended from time to time, and each predecessor, successor or replacement employees' pension plan. 1.12 "Qualified Plan Pension Benefit" means the aggregate pension benefit payable to a Participant pursuant to the Qualified Plan, and all annuities purchased for the Participant under the Qualified Plan (whether or not terminated) by reason of his termination of employment with the Company and all affiliates. 1.13 "Qualified Plan Survivor Benefit" means the aggregate survivor benefit payable to a Beneficiary of a Participant pursuant to Section Section 6.1 of the Qualified Plan, or any successor section, and all annuities purchased under such section of the Qualified Plan (whether or not terminated) in the event of death of the Participant at any time prior to the Participant's Payment Entitlement Date under the Qualified Plan. 1.14 "Spouse" means the person to whom the Participant was married on the date of his death. 1.15 "Supplemental Pension Benefit" means the lump sum benefit payable to a Participant pursuant to the Plan by reason of his termination of employment with the Company and all affiliates for any reason. 1.16 "Supplemental Survivor Benefit" means the lump sum benefit payable to the Beneficiary of a Participant pursuant to the Plan. 1.17 Except as otherwise expressly provided herein, all words and phrases in the Qualified Plan shall have the same meaning in the Plan. ARTICLE II ELIGIBILITY 2.1 Participant. An employee of the Company who is eligible in any Plan Year to receive a Qualified Plan Pension Benefit, the amount of which is reduced by reason of the application of the limitations on benefits imposed by either or both of Section 40l(a)(17) and Section 415 of the Code on the Qualified Plan, shall be a Participant and shall be eligible to receive a Supplemental Pension Benefit for such Plan Year. ARTICLE III SUPPLEMENTAL PENSION BENEFIT 3.1 Amount. The Supplemental Pension Benefit payable to an eligible Participant shall be the difference between (a) the lump sum value of the Participant's Qualified Plan Pension Benefit based on a straight life annuity over the lifetime of the Participant only (i) after considering Code Section 401(a)(17) and Section 415 restrictions, and (ii) compensation for any period of time considered in computing such Benefit is determined including amounts of base salary and bonus earned with respect to such period of time and deferred because of Internal Revenue Code Section 162(m) limitations under the Northern Trust Corporation Annual Performance Plan, and (b) the lump sum value of the Participant's Qualified Plan Pension Benefit, based on the Participant's qualified joint and survivor lump sum benefit (without consideration of such statutory restrictions). (a) If a Participant dies following his termination of employment with the Company but prior to his Payment Entitlement Date the following rules apply: (i) if he is survived by a Beneficiary who is living on his Payment Entitlement Date, fifty percent (50%) of the amount that would have been paid to the Participant on his Payment Date shall be paid in a single lump sum on such Payment Date to his surviving Beneficiary, and no other benefit shall be payable hereunder with respect to such Participant, or (ii) if he is not survived by a Beneficiary who is living on his Payment Entitlement Date, no benefit shall be payable hereunder with respect to such Participant. (b) If a Participant dies following his termination of employment with the Company but after his Payment Entitlement Date the following rules apply: (i) if he is survived by a Beneficiary who is living on the Payment Date, l00% of the amount that would have been paid to the Participant on his Payment Date shall be paid in a single lump sum on such Payment Date to his Beneficiary, and no other benefit shall be payable hereunder with respect to such Participant, or (ii) if he is not survived by a Beneficiary who is living on his Payment Date, the full benefit shall be payable to his estate. (c) In the event that a Participant's entire Qualified Plan Pension Benefit has been distributed due to the payment of a qualified domestic relations order (QDRO), the Participant will be entitled to the Supplemental Pension Benefit to which he or she would have been entitled, calculated without regard to the QDRO. The Participant's Supplemental Pension Benefit will not replace any amount actually paid to an alternative payee pursuant to the QDRO. (d) Notwithstanding anything to the contrary contained herein, the annual amount to be paid from the Plan in the year of a Participant's termination shall be limited to an amount which will not cause the total amount of compensation received from the Company and the amount paid from the Plan to exceed the maximum amount deductible by the Company under Code Section 162(m). Any amount which is not paid as the result of this limitation shall be transferred to the Supplemental Thrift-Incentive Plan for Employees of The Northern Trust Company as of the end of the month next following the month in which such amount would have been paid, but for such limitation. Amounts so transferred shall be paid in subsequent years, to the extent permissible under this limitation, to the Participant, or in the event of the Participant's death, to the Participant's Beneficiary, if he or she survives the Participant, and if not, to the Participant's estate. 3.2 Vesting of Benefit. Each Participant shall vest in his Supplemental Pension Benefit in accordance with the vesting schedule applicable to his Qualified Plan Pension Benefit set forth in the Qualified Plan. Notwithstanding the preceding sentence or any other provision of the Plan, each Participant shall become fully vested in his Supplemental Pension Benefit on the effective date of a Change-in-Control. 3.3 Form of Benefit. The Supplemental Pension Benefit of a Participant whose employment with the Company terminates for any reason shall be paid in a single lump sum, which shall be equal to the amount calculated pursuant to Section 3.1 above, as determined by the same actuarial adjustments as those specified in the Qualified Plan with respect to determination of the amount of the Qualified Plan Pension Benefit or Qualified Plan Survivor Benefit. 3.4 Commencement of Benefit. Payment to a Participant of his Supplemental Pension Benefit shall be made on his Payment Date. If such Benefit is paid prior to the Participant's Normal Retirement Date, it shall be adjusted to reflect such early payment as determined by the same early retirement adjustment factors as are specified in the Qualified Plan with respect to the adjustment of the Qualified Plan Pension Benefit for early commencement. 3.5 Grandfather Provision. Notwithstanding anything to the contrary contained herein, any Participant who commenced receiving payment of a Supplemental Pension Benefit hereunder in the form of an annuity prior to September l, l989, pursuant to the terms of the Plan on the date payment of such Benefit commenced, shall continue to receive such payments from and after September l, l989 in the form of such annuity. Notwithstanding anything to the contrary contained herein, any Beneficiary who commenced receiving payment of a Supplemental Survivor Benefit hereunder in the form of an annuity prior to January 1, 1995, pursuant to the terms of the Plan on the date payment of such Benefit commenced, shall continue to receive such payments from and after January l, l995 in the form of such annuity. ARTICLE IV SUPPLEMENTAL SURVIVOR BENEFIT 4.1 Amount. If a Participant dies prior to termination of employment under circumstances in which a Qualified Plan Survivor Benefit is payable to his Beneficiary, then a Supplemental Survivor Benefit is payable to his Beneficiary as hereinafter provided. The amount of the Supplemental Survivor Benefit payable to a Participant's Beneficiary shall be equal to the difference between (a) and (b) below: (a) the lump sum value of the Qualified Plan Survivor Benefit to which the Beneficiary would have been entitled under the Qualified Plan if (i) such Benefit were computed without giving effect to the limitations on benefits imposed by Sections 401(a)(17) and 415 of the Code, and (ii) Compensation for any period of time considered in computing such Benefit was determined including amounts of base salary and bonus which are eligible for computing such benefit under the Qualified Plan; (b) the lump sum value of the Qualified Plan Survivor Benefit actually payable to the Beneficiary under the Qualified Plan. 4.2 Form and Commencement of Benefit. If a Supplemental Survivor Benefit shall be payable hereunder, such Benefit shall be payable in one lump sum payment, to be made according to the schedule for payment of a Qualified Plan Survivor Benefit as though it had commenced immediately. ARTICLE V ADMINISTRATION OF THE PLAN 5.1 Administration by the Committee. The Committee shall be responsible for the general operation and administration of the Plan and for carrying out the provisions thereof. The Committe shall have discretion to interpret and construe the provisions of the Plan. 5.2 General Powers of Administration. All provisions set forth in the Qualified Plan with respect to the administrative powers and duties of the Committee, expenses of administration, and procedures for filing claims shall also be applicable with respect to the Plan. The Committee shall be entitled to rely conclusively upon all tables, valuations, certificates, opinions and reports furnished by any actuary, accountant, controller, counsel or other person employed or engaged by the Committee with respect to the Plan. ARTICLE VI AMENDMENT OR TERMINATION 6.1 Amendment or Termination. The Company intends the Plan to be permanent but reserves the right to amend or terminate the Plan when, in the sole discretion of the Company, such amendment or termination is advisable. Any such amendment or termination shall be made pursuant to a resolution of the Board and shall be effective as of the date set forth in such resolution. 6.2 Effect of Amendment or Termination. No amendment or termination of the Plan shall directly or indirectly deprive any current or former Participant or Beneficiary of all or any portion of any Supplemental Pension Benefit or Supplemental Survivor Benefit, payment of which has commenced prior to the effective date of such amendment or termination, or that would be payable if the Participant terminated employment for any reason, including death on such effective date. ARTICLE VII GENERAL PROVISIONS 7.1 Funding. The Company may contribute amounts to fund the benefits under the Plan to a trust ("Trust") established pursuant to a trust agreement between the Company and Harris Trust & Savings Bank, a bank organized and existing under the laws of the State of Illinois, as trustee ("Trust Agreement"). If and to the extent amounts are contributed hereunder by the Company to the Trust, benefits under the Plan shall be payable pursuant to the Trust Agreement. Pursuant to the Trust Agreement, all assets held thereunder shall remain subject to the general creditors of the Company. The Plan at all times shall be entirely unfunded and no provision shall at any time be made with respect to segregating any assets of the Company for payment of any benefits hereunder. No Participant, Beneficiary or any other person shall have any interest in any particular assets of the Company by reason of right to receive a benefit under the Plan and Trust Agreement and any such Participant, Beneficiary or other person shall have only the rights of a general unsecured creditor of the Company with respect to any rights under the Plan and Trust Agreement. 7.2 General Conditions. Except as otherwise expressly provided herein, all terms and conditions of the Qualified Plan applicable to a Qualified Plan Pension Benefit or a Qualified Plan Survivor Benefit shall also be applicable to a Supplemental Pension Benefit or a Supplemental Survivor Benefit payable hereunder. Any Qualified Plan Pension Benefit or Qualified Plan Survivor benefit, or any other benefit payable under the Qualified Plan, shall be paid solely in accordance with the terms and conditions of the Qualified Plan and nothing in the Plan shall operate or be construed in any way to modify, amend or affect the terms and provisions of the Qualified Plan. 7.3 No Guaranty of Benefits. Nothing contained in the Plan shall constitute a guaranty by the Company or any other entity or person that the assets of the Company will be sufficient to pay any benefit hereunder. 7.4 No Enlargement of Employee Rights. No Participant or Beneficiary shall have any right to a benefit under the Plan except in accordance with the terms of the Plan. Establishment of the Plan shall not be construed to give any Participant the right to be retained in the service of the Company. 7.5 Spendthrift Provision. No interest of any person or entity in, or right to receive a distribution under, the Plan shall be subject in any manner to sale, transfer, assignment, pledge, attachment, garnishment, or other alienation or encumbrance of any kind; nor may such interest or right to receive a distribution be taken, either voluntarily or involuntarily, for the satisfaction of the debts of, or other obligations or claims against, such person or entity, including claims for alimoney, support, separate maintenance and claims in bankruptcy proceedings. 7.6 Applicable Law. The Plan shall be construed and administered under the laws of the State of Illinois to the extent not inconsistent with the Employee Retirement Income Security Act of l974. 7.7 Incapacity of Recipient. If any benefit under the Plan shall be payable to a minor or a person not adjudicated incompetent but who, by reason of illness or mental or physical disability, is, in the opinion of the Committee, unable to properly manage his affairs, such benefit shall be paid in such of the following ways as the Committee deems best: (a) to the person directly; (b) in the case of a minor, to a custodian under any Uniform Gift to Minors Act for the person; or (c) to the person's spouse, adult child or blood relative. Any benefit so paid shall be a complete discharge of any liability of the Company and Plan therefor. 7.8 Successors. The Plan shall not be automatically terminated by a transfer or sale of assets of the Company or by the merger or consolidation of the Company into or with any other corporation or other entity, but the Plan shall be continued after such sale, merger or consolidation only if and to the extent that the transferee, purchaser or successor entity agrees to continue the Plan. In the event that the Plan is not continued by the transferee, purchaser or successor entity, then the Plan shall terminate subject to the provisions of Section 6.2. 7.9 Unclaimed Benefit. Each Participant shall keep the Committee informed of his current address and the current address of his Beneficiary. Neither the Company nor the Committee shall be obligated to search for the whereabouts of any person. If the location of a Participant is not made known to the Committee within three (3) years after the date on which payment of the Participant's Supplemental Pension Benefit may first be made, payment may be made as though the Participant 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 Participant, neither the Company nor the Committee is able to locate any Beneficiary of the Participant, then the Company shall have no further obligation to pay any benefit hereunder to such Participant or Beneficiary and such benefit shall be irrevocably forfeited; provided, however, that if the Participant or Beneficiary makes a valid claim for any benefit that has been so forfeited, the forfeited benefit shall be reinstated. 7.10 Limitations on Liability. Notwithstanding any of the preceding provisions of the Plan, neither the Company, any member of the Committee, nor any individual acting as an employee or agent of the Company or Committee shall be liable to any Participant, former Participant, Beneficiary or any other person for any claim, loss, liability or expense incurred in connection with the Plan. 7.11 Gender; Headings. Words in the masculine gender shall include the feminine and the singular shall include the plural, and vice versa, unless qualified by the context. Any headings used herein are included for ease of reference only, and are not to be construed so as to alter the terms hereof. IN WITNESS WHEREOF, The Northern Trust Company has caused this Plan to be signed by its duly authorized officer as of the 31st day of December, 1995. THE NORTHERN TRUST COMPANY BY_______________________ EX-10.XVI.1 6 FIRST AMENDMENT TO AGREEMENT OF LEASE EXHIBIT NUMBER (10)(xvi)(1) TO 1995 FORM 10-K FIRST AMENDMENT TO AGREEMENT OF LEASE ------------------------------------- THIS AMENDMENT, made and entered into as of August 15, 1986, by and between American National Bank and Trust Company of Chicago, as Trustee under Trust Agreement dated August 21, 1986 and known as Trust No. 65287 ("Landlord") and The Northern Trust Company, an Illinois banking corporation ("Tenant"), WITNESSETH: THAT WHEREAS, Landlord and Tenant are parties to a certain Agreement of Lease dated as of August 27, 1985 (the "Lease"); and WHEREAS, Landlord and Tenant desire to amend the Lease as hereinafter set forth; NOW, THEREFORE, in consideration of the foregoing, and other good and valuable considerations, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Amendment of Lease. Paragraph 5(B)(i) of the Lease is hereby deleted, and the following inserted in lieu thereof: "(i) For the Base Year (and first full Lease Year if the Base Year commences subsequent to July 1 of such year), an amount equal to the lesser of (a) the product of thirty percent (30%) of the Base Rent paid during the Base Year multiplied by the percentage change (positive or negative) of the CPI for the month in which the Term of this Lease commences over the CPI for the month in which this Lease was executed, and (b) $1.00 per RSF; and" 2. Legal Effect. As amended herein, the Lease shall remain in full force and effect and, except as expressly amended herein, shall be unaffected hereby. 3. Exculpatory Clause. This Lease is executed by American National Bank and Trust Company, not personally, but in the exercise of the power and authority conferred upon and vested in it as Trustee. It is expressly understood and agreed that nothing herein shall be construed as creating any liability whatsoever against Trustee personally; and in particular, without limiting the generality of the foregoing, there shall be no personal liability to pay any indebtedness accruing hereunder or to perform any covenant, either express or implied, herein contained, or to keep, preserve, or sequester any property and all personal liability of every sort, if any, is hereby expressly waived by said Tenant, and by every person now or hereafter claiming any right or security hereunder; and that, so far as the Trustee is concerned, the owner of any indebtedness or liability accuring hereunder shall look solely to the assets of said property and the proceeds thereof for the payment thereof. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the day and year first above written. LANDLORD: AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO, not individually, but solely as Trustee under Trust Agreement dated August 21, 1985 and known as Trust No. 65287 By: /s/ ------------------------------------------ Assistant Vice President Attest: /s/ J. Michael Whelan -------------------------------------- Assistant Secretary TENANT: THE NORTHERN TRUST COMPANY By: /s/ John B. Snyder ------------------------------------------ Its: Executive Vice President, General Counsel and Secretary ----------------------------------------- CONSENT TO AMENDMENT -------------------- The undersigned, Madison Plaza II Partnership, the sole beneficiary of Landlord and a joint obligor with Landlord with respect to certain covenants imposed upon Landlord pursuant to Lease, and Mellon Bank, N.A., the collateral assignee of the Lease, hereby consent to the foregoing Amendment. MADISON PLAZA II PARTNERSHIP, an Illinois general partnership By: /s/ Lee A. Miglin ---------------------------------------- Lee A. Miglin, general partner By: /s/ J. Paul Beitler ---------------------------------------- J. Paul Beitler, general partner MELLON BANK, N.A. By: /s/ Paul J. Brown ---------------------------------------- Paul J. Brown Its: SVP --------------------------------------- EX-10.XVI.2 7 SECOND AMENDMENT TO AGREEMENT OF LEASE Exhibit Number (10)(xvi)(2) to 1995 Form 10-K C:ACK:6710N:0021 11/6/87-1 SECOND AMENDMENT TO AGREEMENT OF LEASE -------------------------------------- THIS AMENDMENT, made and entered into as of August 6, 1987 by and between American National Bank and Trust Company of Chicago, as Trustee under Trust Agreement dated August 21, 1986 and known as Trust 65287 ("Landlord") and The Northern Trust Company, an Illinois banking corporation ("Tenant"). WITNESSETH: THAT WHEREAS, Landlord and Tenant are parties to a certain Agreement of Lease dated as of August 27, 1985; and WHEREAS, the Agreement of Lease was amended by that certain First Amendment to Agreement of Lease dated as of August 15, 1986 (as so amended, the "Lease"); and WHEREAS, Landlord and Tenant desire to further amend the Lease as hereinafter set forth; NOW, THEREFORE, in consideration of the foregoing, and other good and valuable considerations, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Paragraph 1A of the Lease is hereby deleted, and the following inserted in lieu thereof: "A. The Premises shall be ten (10) contiguous floors in the Building located in the Low-rise Section of the Building (as defined in Paragraph 1F hereof) and shall in the aggregate contain approximately 200,000 RSF (as defined in Paragraph 1D hereof). The lower five (5) floors of the Premises (floors 3 through 7 of the Building), containing in the aggregate approximately 100,000 RSF, are sometimes referred to herein as the "Original Premises". The upper five (5) floors of the Premises (floors 8 through 12 of the Building), containing in the aggregate approximately 100,000 RSF, are sometimes referred to herein as the "Additional Premises". The "Original Premises" and the "Additional Premises" shall, in the aggregate, comprise the Premises." 2. Paragraph 1F of the Lease is hereby deleted, and the following inserted in lieu thereof: "F. "Low-Rise Section" shall mean the floors of the Building beginning with the second floor through and including the fourteenth floor, all of which shall be accessible by the same bank of elevators." 3. The following is hereby inserted into the Lease as Paragraph 1G: "G. "Lower Mid-Rise Section" shall mean the floors of the Building beginning with the fifteenth floor through and including the twenty-fifth floor, all of which shall be accessible by the same bank of elevators." 4. Paragraph 2B of the Lease is hereby deleted, and the following inserted in lieu thereof: "B. Additional Work. Landlord will perform, at Tenant's request, and upon submission by Tenant of the necessary plans and specifications in accordance with Paragraph 2C hereof, any additional work in the Premises over and above that specified in Paragraph 2A above, subject to the terms and conditions of this Paragraph 2B. If included in Tenant's plans and specifications, Landlord will supply and install the items described on Exhibit C attached hereto and made a part hereof (the "Building Standard Work") in the Premises in Landlord's standard manner. Landlord shall deliver to Tenant on or before the earlier of (i) October 1, 1988, and (ii) three (3) months before the anticipated Building Construction Commencement Date a list of final unit prices, for all items of Building Standard Work showing the cost per unit for such items. Landlord agrees that the unit prices for the standard quantities of Building Standard Work shall not exceed, in the aggregate, Fifteen ($15.00) Dollars per RSF. All work done pursuant to Paragraph 2B shall be at Landlord's cost to the extent of the sum of (i) $581,700 plus (ii) Twenty-five ($25.00) Dollars per RSF for the Premises (the sum of (i) and (ii) is hereinafter referred to as "Allowance"), and at Tenant's sole cost and expense to the extent of the cost of such work exceeds the Allowance; the aggregate investment tax credit, if any, attributable to all such work shall be divided between Landlord and Tenant in the proportion in which each bears the cost of all such work. All such cost calculations shall be based on the RSF actually included in the Premises on the Commencement Date (as hereinafter defined). Any portion of the Allowance not applied to defray the cost of such additional work shall, at Tenant's option, either (i) be applied in payment of the first Rent payable hereunder, or (ii) paid to Tenant in cash on the Possession Date (as defined in Paragraph 3A hereof.) 5. Paragraph 4A of the Lease is hereby deleted, and the following inserted in lieu thereof: -2- "A. "Base Rent" (i) "Original Base Rent". For the Original Premises, the sum equal to the number of RSF within the Original Premises times $21.00 per RSF for each twelve month period during the Term of this Lease ("Original Annual Base Rent"). Such original Annual Base Rent shall be paid in monthly installments of one-twelfth (1/12) of the then-current original Annual Base Rent in advance on or before the first day of each and every month during the Term ("Original Monthly Base Rent"), as the Original Annual Base Rent or Original Monthly Base Rent may be adjusted pursuant to Paragraph 5 of this Lease. (ii) "Additional Base Rent". For the Additional Premises, the sum equal to the number of RSF within the Additional Premises times (A) $18.50 per RSF for the first (1st) through the fifth (5th) Lease Years (as defined in Section 5A) during the Term, (B) $22.50 per RSF for the sixth (6th) through tenth (10th) Lease Years during the Term, and (C) $25.50 per RSF for the eleventh (11th) through fifteenth (15th) Lease Years during the Term ("Additional Annual Base Rent"). Such additional Annual Base Rent shall be paid in monthly installments of one-twelfth (1/12) of the then current Additional Annual Base Rent in advance on or before the first day of each and every month during the Term ("Additional Monthly Base Rent"), as the Additional Annual Base Rent or Additional Monthly Base Rent or may be adjusted pursuant to Paragraph 5 of this Lease; (iii) Original Annual Base Rent and Additional Annual Base Rent are sometimes collectively referred to herein as "Annual Base Rent"; Original Monthly Base Rent and Additional Monthly Base Rent are sometimes collectively referred to herein as "Monthly Base Rent"." 6. Paragraph 5B of the Lease is hereby deleted and the following inserted in lieu thereof: "B. Rent Adjustments. The Annual Base Rent for each and every Lease Year during the term of this Lease (the "Subject Lease Year") shall be adjusted (subject to the limitations hereinafter set forth) by an amount equal to the following (the "Rent Adjustment"): (i) For the Base Year (and first full Lease Year if the Base Year commences subsequent to July 1 of such year), an amount equal to the lesser of (a) the product of thirty percent (30%) of the Base Rent paid during the Base Year multiplied by the percentage change (positive or negative) of the CPI for the month in which the Term of this lease -3- commences over the CPI for the month in which this Lease was executed, and (b) $1.00 per RSF; and (ii) For each Lease Year thereafter, an amount equal to the product of thirty percent (30%) of the Annual Base Rent plus the sum determined by subparagraph B(i) above multiplied by the percentage change (positive or negative) of the CPI for January of the Subject Lease Year over the CPI for the first full month of the Base Year; provided, however, that for any Lease Year the amount of the annual Rent Adjustment made by reason of changes in the CPI shall not exceed three percent (3%) of the adjusted Annual Base Rent for the immediately preceding Lease Year. The limitation set forth in the immediately preceding sentence shall not affect adjustments to Rent attributable to causes other than changes in the CPI." 7. Paragraph 16 of the Lease is hereby deleted, and the following inserted in lieu thereof: "16. ASSIGNMENT AND SUBLETTING. Tenant may assign or transfer this Lease or any interest under it, and may sublet the Premises or any part thereof to (i) an entity controlling, controlled by or under common control with Tenant or to any successor to Tenant by merger or acquisition (any such entity or successor being sometimes hereafter referred to as an "affiliate" of Tenant); or (ii) any financially responsible party approved by Landlord, (which approval shall not be unreasonably withheld, denied or delayed) whose stated use of the Premises will not result in a breach of an exclusive use provision for space in the Building theretofore granted by Landlord (subject to Landlord's written right to recapture as hereafter set forth). Not less than thirty (30) days prior to the proposed commencement of such assignment or sublease to a party other than an affiliate of Tenant, Tenant shall give Landlord written notice of the proposed assignment or sublease which notice shall contain the name of the proposed assignee or sublessee and proposed principal terms thereof and shall be accompanied by the last available financial statement of such proposed assignee of sublessee. Within ten (10) days of Landlord's receipt of such written notice and financial statement Landlord shall approve or disapprove of the proposed assignee or sublessee, or if such proposed transfer is (i) a sublease to other than an affiliate (A) for more than three (3) floors of the Premises, and (B) for longer than either five (5) years or seventy-five (75%) percent of the remainder of the Term, whichever is less, or during the first three (3) years of the Term, or (ii) an assignment to other than an affiliate, Landlord may terminate this Lease as to such proposed subleased space in the case of a proposed sublease, or all of the Premises in -4- the case of a proposed assignment. If Landlord does not terminate as aforesaid, Landlord may withhold its consent to such proposed assignee or sublessee only for reasonable reasons related to the financial responsibility of the proposed party but such disapproval may not be given because (a) vacant space exists in the Building, (b) such proposed assignee or sublessee is a tenant in the Building or has discussed tenancy in the Building or any other building with the Landlord, or (c) the price or rental rate of the proposed assignment or sublease. Failure of Landlord to respond within such ten (10) day period shall constitute Landlord's approval of such proposed assignee or sublessee. Upon the assignment of all of Tenant's interest in this Lease to an assignee wherein the Rent to be paid by the assignee equals, or exceeds the Rent payable under this Lease, which assignment is approved by Landlord as aforesaid (including an assignment to an affiliate, if such an affiliate is approved by Landlord, although Tenant is not required to obtain approval of an assignment to an affiliate [but if Tenant elects not to, it shall not be relieved of its obligations under this Lease]), and delivery of a written assumption of this Lease and the obligations hereunder by such assignee, Tenant shall be relieved of all further obligations under this Lease except the obligation to pay to the Landlord excess rent as provided in the next paragraph. If Tenant shall assign or transfer its interest in this Lease or sublet the Premises pursuant to this Section 16, then Tenant shall pay to Landlord as additional rent immediately upon receipt under any such assignment or in the case of a sublease on the first day of each month during the term of any such sublease, one-half (1/2) of the excess of all rent over the sum of (x) Base Rent plus Rent Adjustment then payable to Landlord under this Lease for said month (or if only a portion of the Premises is being sublet, the portion of the Base Rent plus Rent Adjustment then payable to Landlord under this Lease for said month which is allocable on a square foot basis to the space sublet) plus (y) an amount equal to the quotient of "Tenant's Costs" as hereinafter defined incurred by Tenant in connection with said sublease divided by the number of months in the term of such sublease. As used in the preceding sentence, Tenant's Costs for such assignment or sublease shall include the unamortized amount of improvements made at Tenant's expense, alterations to the Premises in connection with such assignment or sublease made at Tenant's expense, and leasing commissions, rent concessions, advertising cost, and legal expenses in connection with such assignment or sublease." 8. Paragraph 27 is hereby deleted and the following inserted in lieu thereof: -5- "27. PARKING. Landlord represents to Tenant that the Building will include approximately 56 parking spaces located in the Building's underground garage. Tenant shall have the right to lease for the full term Tenant's Proportionate Share of such parking spaces (which share shall be not less than 12 spaces), at regular annual Building rates therefor, and in locations designated by Landlord, such right to remain exercisable until the Commencement Date, and to include the right to sublease to any sublessee of space in the Premises or to employees or partners of such sublessees or of Tenant. In addition, Tenant shall be entitled, at regular annual Building rates therefor, to any parking spaces which were rented by the immediately preceding tenants in space added to the Premises after the Commencement Date. Tenant may give up such parking spaces, or any thereof, so leased at any time(s) on not less than sixty (60) days' notice and shall not have any rights for the number of spaces so given up at any time thereafter. Notwithstanding the immediately preceding sentence, Tenant shall have the right to sublease any parking spaces leased hereunder to parties (including, but not limited to, car rental entities) selected by Tenant, provided that (i) the rent charged for any parking spaces so subleased is less than or equal to the rent charged Tenant by Landlord therefor, and (ii) the use of the subleased parking spaces by the sublessees thereof does not interfere with Landlord's operation of the garage or use of the garage by other parking lessees." 9. Paragraphs 30A and 30B of the Lease are hereby deleted and the following inserted in lieu thereof: "A. Landlord hereby grants to Tenant the option to lease three additional floors contiguous to the Premises designated by Landlord and located in the Low-rise Section or Lower Mid-rise Section of the Building (as defined in Sections 1F and 1G of this Lease) (the "6th Year Option Floors"). Tenant may lease any or all of the 6th Year Option Floors commencing at some point during the 6th Lease Year as determined by Landlord. B. Landlord hereby grants to Tenant the further option to lease an additional three floors contiguous to the Premises designated by Landlord and located in the Low-rise Section or Lower Mid-rise Section of the Building (as defined in Sections 1F and 1G of this Lease) ("11th Year Option Floors"), which Option may be exercised whether or not Tenant has taken any, all or none of the 6th Year Option Floors. Tenant may lease any or all of the 11th Year Option Floors commencing at some point during the 11th Lease Year as determined by Landlord." -6- 10. The first sentence of Paragraph 30F of the Lease is hereby deleted and the following inserted in lieu thereof: "F. The Annual Base Rent for any Option Floor shall be ninety-five (95%) of the "Market Rent" for such Option Floor as of the Option Commencement Date for such Option Floor, determined by Landlord in accordance with subparagraph G of this Paragraph 30." 11. Paragraph 31A of the Lease is hereby deleted and the following inserted in lieu thereof: "A. Landlord hereby grants to Tenant the first right of refusal during the term of this Lease to lease any vacant or vacated rentable space in the low-rise Section of the Building (as defined in Section 1F hereof), or the Lower Mid-rise Section of the Building (as defined in Section 1G hereof). Landlord shall include in any Lease of space in the Low-rise Section of the Building or the Lower Mid-rise Section of the Building (other than a Lease to American International Group or any affiliate thereof or entity related thereto) a provision to the effect that in the event the tenant thereunder attempts to assign such Lease, or attempts to sublease substantially all of the space demised thereby for a term of either five (5) years or seventy- five (75%) percent of the remaining term of such lease, whichever is less, Landlord may terminate such lease and recapture the space demised thereby. Any space so recaptured by Landlord shall be subject to the provisions of this Paragraph 31, and prior to declining to recapture such space, Landlord will offer such space to Tenant in accordance with the provisions of this Paragraph 31." 12. The first sentence of Paragraph 33C of the Lease is hereby deleted and the following inserted in lieu thereof: "C. The Annual Base Rent during each such extended term shall be 95% of the "Market Rent" for such Option Floor as of the commencement of such extended Term, determined by Landlord in accordance with subparagraph D of this Paragraph 33. 13. Paragraph 38 of the Lease is hereby deleted and the following inserted in lieu thereof: "38. TENANT'S RIGHT TO CONSTRUCT BRIDGES. Landlord in constructing the Building and Premises pursuant to Paragraph 2A of this Lease shall insure that at least one floor of the Premises will be capable of being connected to roughly the equivalent floor of Tenant's own building commonly known at 50 South LaSalle Street ("50 S. LaSalle") by an enclosed -7- pedestrian bridge whose slant and floor pitch will meet commonly accepted standards for pedestrian traffic. Provided that (i) Tenant complies with the provisions of Paragraph 8B of the Lease (except for Landlord's consent to construction of a bridge, which consent is hereby given provided Tenant complies with the provisions of this Paragraph 38, (ii) the design of each such bridge is formulated in consultation with the Building engineer and the Building architect, (iii) the structural integrity of each such bridge is approved by the Building engineer (which approval shall not be reasonably withheld), and (iv) the aesthetics of each such bridge are approved by the Building architect (which approval shall not be unreasonably withheld), who may not specify glass as being aesthetically required, Tenant shall have the right to construct at its cost one or more fully enclosed pedestrian bridges between a floor in the Premises and an equivalent floor at 50 S. LaSalle. Tenant shall be responsible for installing all necessary Building systems in the bridges and for heating, cooling, insuring and maintaining the bridges and providing all necessary security. Landlord shall cooperate with Tenant in obtaining the necessary municipal and governmental permits, licenses and consents that may be required in connection with construction of said bridges. The bridge space shall not be included in Rentable Area for any purpose under the Lease. At the end of the Lease term by lapse of time or otherwise, Tenant shall at its sole expense remove each bridge in its entirety and repair the floor in the Premises to which it was connected so that it is fully enclosed in like manner to the other floors. In addition to the construction allowance granted to Tenant pursuant to Paragraph 2C hereof, Landlord shall provide Tenant an additional construction allowance of $125,000 to be applied in reduction of the cost to Tenant of constructing one or more bridges pursuant to this Section 38." 14. The following paragraph is hereby inserted in the Lease as Section 40: "40. ADDITIONAL WORK TO BE PERFORMED BY LANDLORD. A. Cafeteria. Landlord and Tenant acknowledge that Tenant may elect to construct a cafeteria in the Premises for use by Tenant's employees and invitees. Notwithstanding the provisions of Section 9M hereof, Landlord shall not grant to any other lessee of space in the Building, or enter into any other contract granting, an exclusive right to dispense food or provide food service to the Building which limits or impairs in any way the right of Tenant to operate a cafeteria or similar food service facilities for its employees and invitees. Not less than four (4) months prior to the Construction Commencement Date, Tenant shall -8- designate one floor of the Premises which Tenant is considering using as a cafeteria by written notice to Landlord, and shall specify in such notice (i) the proposed size of the cafeteria, and (ii) the maximum number of persons who will be permitted to occupy the cafeteria at any time. Landlord and Tenant acknowledge that as a result of Tenant's election to construct a cafeteria, Landlord may have to make certain modifications to its Base Building plans and specifications to accommodate Tenant's cafeteria use of a portion of the Premises, including provision for such items as one or more additional exit stairways down from the floor on which the cafeteria is located. The area of any floor space (whether within or outside of the Premises) within the Building which is rendered unusable by reason of the use of a portion of the Premises as a cafeteria, including the floor area occupied by any additional exit stairways required to be constructed in connection with such cafeteria, shall be included in the RSF of the Premises. Landlord shall, at its expense, install a black iron duct with dimensions of not less than two (2) feet by four (4) feet serving the floor designated by Tenant, which Tenant shall be permitted to use in connection with the operation of a cafeteria in the Premises. Except as expressly provided in the immediately preceding sentence, any and all costs and expenses associated with the installation of a cafeteria in the Premises, including without limitation (i) changes or modifications to plans for the Building previously prepared for Landlord, or (ii) increases in the cost of constructing the Building occasioned by the use of a portion of the Premises as a cafeteria (whether or not included in the direct cost of the installation of the cafeteria), shall be deducted from the Allowance granted Tenant pursuant to Section 2B hereof or paid by Tenant as provided in Section 2E hereof." B. Humidification. Landlord shall install a humidification system in the Building serving the Premises (including, without limiting the generality of the foregoing, the 6th year option floors, the 11th year option floors and the right of first refusal floors described in Paragraph 31 hereof) capable of maintaining a relative humidity level in the Premises of thirty percent (30%). The cost of installing such a humidification system for the Premises (or, if Landlord elects to install such a system serving the entire Building, the pro rata share of the cost of such a system allocable to the Premises) shall be deducted from the Allowance granted Tenant pursuant to Section 2B hereof or paid by Tenant as provided in Section 2E hereof. C. Sprinkler Heads. Sprinkler heads, in the quantity provided for in the description of Building Standard Work -9- attached hereto as Exhibit C, shall be positioned within the Premises as provided in the Plans as part of the Building Standard Work; provided, however, that the cost of any additional sprinkler heads required by the Plans or by applicable law in excess of the building standard quantity shall be deducted from the Allowance granted Tenant pursuant to Section 2B hereof or paid by Tenant as provided in Section 2E hereof. D. Underfloor Duct System. Landlord shall install an underfloor duct system (the "Duct System") throughout the Premises, including, without limiting the generality of the foregoing, the 6th year option floors, the 11th year option floors and the right of first refusal floors described in Paragraph 31 hereof. The design of the Duct System and the plans and specifications therefor shall be submitted to Tenant for its approval in accordance with the Schedule. Tenant shall have the right to approve the subcontractors for, and to require competitive bids for, the installation of the Duct System in accordance with the provisions of Section 2F hereof. The first Two Hundred Fifty Thousand Dollars ($250,000) of costs and expenses associated with the design and installation of the Duct System, including without limitation (i) the cost of preparing additional plans or making changes or modifications to plans for the Building previously prepared for Landlord required for the Duct System, or (ii) increases in the cost of constructing the Building occasioned by the installation of the Duct System but not included in the bids for the installation of the Duct System such as structural changes or additional fireproofing work, shall be borne and paid by Landlord; the balance of such costs and expenses associated with the design and installation of the Duct System shall be deducted from the Allowance granted Tenant pursuant to Section 2B hereof or paid by Tenant as provided in Section 2E hereof. In the event this Lease is terminated pursuant to Section 17 hereof, that portion of the cost of the Duct System so deducted from the Allowance or paid by Tenant shall be included in the Tenant Casualty Amount. Alterations to that portion of the interior electrical system for the Premises installed in the Duct System which do not affect the ceilings, the HVAC system, or any other system servicing the Premises or any other portion of the Building, shall not require the consent of Landlord hereunder. The wiring installed in the Duct System shall, for purposes of Section 15C of the Lease, be deemed to be equipment of Tenant that Landlord and Tenant have agreed may be removed from the Premises by Tenant upon the termination of this Lease. E. Secured Vertical Shaft. Landlord will install, for the exclusive use of Tenant, a secured vertical shaft with dimensions of not less than eighteen (18) inches by twenty- -10- four (24) inches accessible from each floor in the Low-Rise Section and the Lower Mid-Rise Section of the Building. The location of such vertical shaft shall be agreed upon by Landlord and Tenant as provided in the Schedule. The area of any floor space (whether within or outside of the Premises) within the Building which is rendered unusable by reason of the installation of such vertical shaft shall be included in the RSF of the Premises. All costs and expenses associated with the design and installation of such vertical shaft, including without limitation (i) changes or modifications to plans for the Building previously prepared for Landlord, or (ii) increases in the cost of constructing the Building occasioned by the installation of the vertical shaft but not included in the direct cost of the installation of the vertical shaft, shall be deducted from the Allowance granted Tenant pursuant to Section 2B hereof or paid by Tenant as provided in Section 2E hereof." 15. The following paragraph is hereby inserted in the Lease as Section 41: "41. TENANT CONCESSION ACCOUNT. Upon the opening of the construction loan for the Building, Landlord shall establish a non-interest bearing account with The Northern Trust Company, or such other bank as may be designated by Tenant, and shall deposit the sum of Three Million Dollars ($3,000,000) therein. The funds held in such account shall be used to pay any and all expenses and obligations of Tenant (including without limitation rent payments) under that certain Lease dated November 27, 1987 by and between Harris Trust and Savings Bank Trust No. 40649, as Landlord, and Tenant, as tenant. Landlord shall cause any such expenses to be promptly paid from such account upon the submission to Landlord by Tenant of a statement, invoice or other written request of Tenant that such payment be made; provided, however, that nothing in this Paragraph 41 shall be deemed or construed as the assumption by Landlord of the obligations of Tenant as tenant under the Lease described in this Section 41." 16. The following paragraph is hereby inserted in the Lease as Section 42: "42. CONSTRUCTION SUPERVISION SERVICES. A. Landlord and Tenant acknowledge that prior to and during the construction of the Premises, Landlord will provide Tenant with certain construction supervision services including review and approval of the Plans and supervision of the construction of the Premises and the installation of the tenant improvements for the Premises; in the event that, after completion of the Premises, Tenant -11- determines to make alterations or additions to the Premises as provided in Section 8B hereof, Landlord shall also provide construction supervision services in connection with such alterations or additions. B. Prior to the issuance of the building permit for the construction of the Premises, such construction supervision services shall be performed by Landlord and its employees and representatives at no cost to Tenant. After the issuance of the building permit for the Premises, Landlord shall charge Tenant a reasonable fee for such construction supervision services; provided, however, that the total fees payable to Landlord by Tenant for such construction supervision services shall not exceed one and one-half percent (1 1/2%) of the cost of construction of the Premises and the installation of the tenant improvements therein. In the event that an affiliate of Landlord shall act as the general contractor for the construction of the Premises, the fee for construction supervision services payable pursuant to this Section 42B shall be in addition to, and not in lieu of, the fee payable to such general contractor. C. In the event that, after the completion of the Premises, Tenant determines to make alterations or additions to the Premises as provided in Section 8B, Landlord shall charge Tenant a reasonable fee for construction supervision services associated with such alterations or additions; provided, however, that the total fees payable to Landlord by Tenant for such construction supervision services shall not exceed fifteen percent (15%) of the cost of construction of such alterations or additions. In the event that an affiliate of Landlord shall act as the general contractor for such alterations or additions, the fee for construction supervision services payable pursuant to this Section 42C shall be in addition to, and not in lieu of, the fee payable to such general contractor. In addition, if at any time Tenant requests additional or special services such as cleaning, after hours air conditioning, or the like, Landlord's fee for furnishing these services shall not exceed 15% of the cost of furnishing such services." 17. The following paragraph is hereby inserted in the Lease as Paragraph 43: "43. RIGHT OF FIRST OFFER UPON SALE OF THE BUILDING. A. Unsolicited Offer from Third Party. (i) In the event Landlord shall receive (other than pursuant to Subparagraph 43C) an offer from a third party to purchase the Building and Land (hereinafter in this Paragraph 43 jointly referred to as "Real Estate") which -12- Landlord desires to accept ("Third Party Offer"), Landlord shall by written notice to Tenant (accompanied by a true, correct and complete copy of the Third Party Offer) offer the same Real Estate for sale to Tenant ("Tenant Offer") for the same price, on the same terms and subject to the same conditions as is set forth in the third Party Offer. (ii) Tenant shall have a period of fifteen (15) days after delivery of the Tenant Offer in which to deliver to Landlord a written notice of Tenant's election to purchase the Real Estate for the purchase price, on the terms and subject to the conditions set forth in the Tenant Offer; provided, however, if within said 15-day period, Tenant delivers to Landlord written approval by Tenant's management committee, subject to appraisal and board approval, that Tenant will elect to purchase the Real Estate for the purchase price and on the terms and conditions set forth in the Tenant Offer, such 15-day period shall be extended by an additional period of fifteen (15) days. During said 15-day or 30-day period, as the case may be, Landlord shall not accept the Third Party Offer unless its acceptance shall be expressly subject to the rights of Tenant under this Paragraph 43A. If Tenant elects to accept the Tenant Offer, it shall submit to Landlord within said 15-day or 30-day period, as the case may be, a purchase and sale agreement executed by Tenant pursuant to which Tenant shall agree to purchase the Real Estate for the price, upon the terms and subject to the conditions provided in the Tenant Offer, which purchase and sale agreement shall be accompanied by an earnest money deposit if and to the extent so provided in the Third Party Offer, whereupon Landlord shall promptly execute and return to Tenant a counterpart of said purchase and sale agreement. (iii) If Tenant fails to deliver such notice of acceptance, executed purchase agreement and earnest money within said 15-day or 30-day period, as the case may be, then, in such event, Tenant's rights under Subparagraphs 43A and 43B shall terminate and be of no further force and effect, and Landlord may sell the Real Estate in accordance with the Third Party Offer and consummate a sale in accordance with the Third Party Offer free of any rights of Tenant under this Paragraph 43; provided, however, if Landlord fails to consummate a sale of the Real Estate before the later of (a) the date set for closing in the Tenant Offer, or (b) six months after the expiration and termination of Tenant's rights under this Subparagraph 43A, then, unless Landlord shall have complied with the procedure set forth in Paragraph 43B, in which event each of Landlord and Tenant shall have only the rights set forth in said Paragraph 43B, Tenant's rights under this Subparagraph 43A shall be reinvested. -13- B. Offering of the Real Estate for Sale. (i) In the event that, at any time during the term of this Lease, Landlord intends to sell the Real Estate, Landlord shall deliver written notice of its intention ("Notice of Intent") to Tenant in advance of any such offering. Tenant shall have a period of thirty (30) days following delivery of the Notice of Intent to Tenant within which to advise Landlord by written notice ("Notice of Interest") that Tenant is interesting in negotiating with Landlord for the purchase the Real Estate, and up to 60 days following delivery of the Notice of Intent within which to execute a real estate purchase contract for the Real Estate with Purchaser, and during said 60-day period: (a) Landlord shall refrain from actively marketing the Real Estate for sale to a third party; (b) Landlord shall furnish to Tenant such information as Tenant may reasonably request relative to the Real Estate, including the status of title and a then current operating statement and rent roll, copies of all tenant leases and a preliminary title report for the Real Estate; and (c) Landlord and Tenant shall attempt in good faith to agree upon terms and conditions upon which Landlord shall sell and Tenant shall purchase the Real Estate, and to memorialize such agreement in a real estate sale contract for the Real Estate. (ii) If (a) Tenant fails to deliver the Notice of Interest within thirty (30) days following delivery of the Notice of Intent, or (b) Landlord and Tenant are unable to agree for any reason upon the terms upon which Landlord shall sell and Tenant shall purchase the Real Estate within sixty (60) days following delivery of the Notice of Intent, or (c) Landlord and Tenant are unable to agree for any reason upon the terms of a real estate sale contract for the Real Estate within sixty (60) days following delivery of the Notice of Intent, or (d) Tenant fails to execute and deliver the negotiated real estate sale contract for the Real Estate, together with the earnest money required thereunder, within sixty (60) days following delivery of the Notice of Intent, Landlord may within one hundred eighty (180) days thereafter offer the Real Estate for sale in accordance with subparagraph (iii) below. If Landlord fails to offer the Real Estate for sale in accordance with subparagraph 3 below within such 180-day period then, subject to Paragraph 43A, Tenant's rights under this Paragraph 43B shall be reinstated. (iii) Prior to offering to sell the Real Estate to a third party, Landlord shall advise Tenant of the price and the other terms and conditions upon which Landlord intends to offer the Real Estate for sale ("Offered Terms") by -14- delivery to Tenant of a real estate sale contract for the Real Estate setting forth Offered Terms, whereupon Tenant may elect, within three (3) days after receipt of such notice from Landlord, to purchase the Building upon the Offered Terms by executing and delivering to Landlord such real estate sale contract containing the Offered Terms, together with the earnest money required thereunder. If Tenant shall fail to timely elect to purchase the Building on the Offered Terms aforesaid, Tenant's rights under Subparagraph 43A and Subparagraph 43B shall terminate and be of no further force and effect and Landlord may offer the Real Estate for sale and contract for and consummate a sale of the Real Estate (whether upon the Offered Terms or otherwise) free of any rights of Tenant under this Paragraph 43; provided, however, if Landlord fails to consummate a sale of the Real Estate within twenty-four (24) months after the expiration and termination of Tenant's rights under this Subparagraph 43B, then, subject to Subparagraph 43A, Tenant's rights under this Subparagraph 43B shall be reinstated. C. The restrictions set forth in this Paragraph 43 shall not apply to a proposed sale of the Real Estate to American International Group, or any other joint venture partner in the ownership of the Building, or mortgage of the Real Estate having a participating mortgage or similar right to share in profits derived from the sale or refinancing of the Real Estate (each such party being hereinafter referred to as a "Participant"), or any entity controlled by, controlling or under common control with any Participant, or to any sale or transfer between any of any Participant, Lee Miglin and J. Paul Beitler or any affiliates thereof." 18. The following paragraph is hereby inserted in the Lease as Section 44: "44. LEASING COMMISSIONS. Landlord and Tenant acknowledge that Scribcor, Inc. ("Scribcor") has acted as an intermediary in connection with this Lease and the lease of space in the Building from Landlord to Tenant hereunder. Any and all leasing commissions payable to Scribcor on account of the lease of the Original Premises from Landlord to Tenant shall be paid by Landlord. The leasing commissions payable to Scribcor in connection with the lease by Tenant of the Additional Premises total $581,700, as set forth in a letter dated April 21, 1987, a copy of which is attached hereto as Exhibit 1; Tenant hereby assumes any and all liability for the leasing commissions payable to Scribcor on account of Tenant's lease of the Additional Premises, and agrees to indemnify Landlord and hold Landlord -15- harmless from and against any and all liability which may be asserted or recovered against landlord by Scribcor for leasing commissions arising out of Tenant's lease of the Additional Premises, including reasonable attorneys fees." 19. Neither Tenant, nor Landlord and its beneficiaries shall issue any press release or make any other public disclosure or announcement of the transactions which are the subject of this Amendment without the prior written consent of the other party hereto, which consent shall not be unreasonably withheld or delayed; provided, however, that the foregoing shall not be construed to limit or impair the rights of Landlord or its beneficiary to disclose the transactions which are the subject of this Amendment to prospective lenders, attorneys, accountants and other parties consulted or retained by Landlord in connection with the development of the Building. 20. As amended herein, the Lease shall remain in full force and effect and, except as expressly amended herein, shall be unaffected hereby. In the event of any conflict between the provisions of this Amendment and the provisions of the Lease, the provisions of this Amendment shall control. 21. This Second Amendment to Agreement of Lease is executed by American National Bank and Trust Company, not personally, but in the exercise of the power and authority conferred upon and vested in it as Trustee. It is expressly understood and agreed that nothing herein shall be construed as creating any liability whatsoever against Trustee personally; and in particular, without limiting the generality of the foregoing, there shall be no personal liability to pay any indebtedness accruing hereunder or to perform any covenant, either express or implied, herein contained, or to keep, preserve, or sequester any property and all personal liability of every sort, if any, is hereby expressly waived by said Tenant, and by every person now or hereafter claiming any right or security hereunder; and that, so far as the Trustee is concerned, the owner of any indebtedness or liability accruing hereunder shall look solely to the assets of said property and the proceeds thereof for the payment thereof. -16- IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the day and year first above written. LANDLORD: AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO, not individ- ually, but solely as Trustee under Trust Agreement dated August 21, 1985 and known as Trust No. 65287 By: /s/ J. MICHAEL WHELAN ------------------------------ Title: Vice President Attest: /s/ -------------------------- Assistant Secretary TENANT: THE NORTHERN TRUST COMPANY By: /s/ STEPHEN KARDEL ------------------------------ Title: Vice President -17- CONSENT TO AMENDMENT The undersigned, Madison Plaza II Partnership, the sole beneficiary of Landlord and a joint obligor with Landlord with respect to certain covenants imposed upon Landlord pursuant to the Lease, and Mellon Bank, N.A., the collateral assignee of the Lease, hereby consent to the foregoing Amendment. MADISON PLAZA II PARTNERSHIP, an Illinois general partnership By: /s/ LEE A. MIGLIN ------------------------------ Lee A. Miglin, general partner By: /s/ J. PAUL BEITLER ------------------------------ J. Paul Beitler, general partner MELLON BANK, N.A. By: /s/ MARTHA LIA FROST ------------------------------- Title: Assistant Vice President EXHIBIT 1 Madison Plaza 200 West Madison Street Chicago, Illinois 60606 312-726-1700 REGISTRATION AND COMMISSION AGREEMENT April 21, 1987 Mr. Richard Ross, Jr. Vice President Scribcor, Inc. 120 W. Madison St. Suite 1200 Chicago, IL 60602 Dear Dick: The following is our Registration and Commission Agreement with regard to the Madison Plaza Three Building, Chicago, Illinois. If your prospective tenant, The Northern Trust Co., registered by Scribcor, Inc. consummates a lease for space in the Madison Plaza Three Building, through your efforts, Madison Plaza Corporation will pay or cause the owner to pay a brokerage commission at a rate of seven percent (7%) of the first year's rent and two percent (2%) of the aggregate rent for the remainder of the lease term. For purposes of this Agreement, the first year's rent shall be deemed to be the average annual base rent payable over the entire term of the lease after deductions of rent abatement if any, and any further concessions granted to the tenant, and without regard to rental adjustment or rental escalation payments for increases in operating expenses or real estate taxes. One half of the commission shall be payable within 30 days from execution of the lease document and start of building construction and the remainder payable 30 days after occupancy by the tenant. This Agreement will be null and void and of no further force or effect in the event any of the following does not occur: 1. The prospect is brought to the property or sales office for a personal inspection by the registrant in the presence of the building leasing agent. 2. That active and meaningful negotiations take place culminating in the consummation of the lease. April 21, 1987 Page Two 3. That the registrant is the procurring cause for said lease. 4. That the prospect agrees to recognize the registrant by indemnifying Madison Plaza Corporation and the owner against any future commission, claims or litigation as a result of the lease transaction. 5. Notwithstanding the above, if another licensed broker or duly authorized individual is properly designated by the prospect to represent them, and said party claims or is entitled to a commission, Madison Plaza Corporation will recognize only that licensed broker or duly authorized individual having a letter or authorization signed by the prospect. If for any reason that tenant fails to occupy the premises, you agree to return all commission monies paid at the time of lease execution. No commission will be paid on options for additional space, unless said space is taken prior to initial occupancy by the tenant, nor will commissions be paid on lease renewals. No commission will be paid on charges factored into the rent, i.e. electricity, periods of free rent, or any above building standard allowances or concessions amortized over the term of the lease to accommodate the tenant. Commissions will only be paid for the initial term of the lease, and in no event for a period longer than fifteen (15) years. In the event the tenant has an option to terminate the lease, commissions will only be paid to the termination date. The commission which will become due and payable under this agreement covers space to be leased by Northern Trust in addition to the space provided for in the lease agreement dated August 21, 1985. Your further act in submitting your prospect will acknowledge your acceptance of our commission policy. Sincerely MIGLIN-BEITLER DEVELOPMENTS /s/ J. PAUL BEITLER J. Paul Beitler President JPB:pam cc: Lee Miglin EX-10.XVI.3 8 THIRD AMENDMENT TO AGREEMENT OF LEASE EXHIBIT NUMBER (10)(xvi)(3) TO 1995 FORM 10-K GG8224A-348/mbr 5/11/88 THIRD AMENDMENT TO AGREEMENT OF LEASE ------------------------------------- THIS AMENDMENT, made and entered into as of May 20, 1988 by and between American National Bank and Trust Company of Chicago, as Trustee under Trust Agreement, dated August 21, 1985 and known as Trust 65287 ("Landlord") and The Northern Trust Company, an Illinois banking corporation ("Tenant"). WITNESSETH: THAT WHEREAS, Landlord and Tenant are parties to a certain Agreement of Lease dated as of August 27, 1985; and WHEREAS, the Agreement of Lease was amended by that certain First Amendment to Agreement of Lease dated as of August 15, 1986 and by that certain Second Amendment to Agreement of Lease dated as of August 6, 1987 (as so amended, the "Lease"); and WHEREAS, Landlord and Tenant desire to further amend the Lease as hereinafter set forth; NOW, THEREFORE, in consideration of the foregoing, and other good and valuable considerations, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. The following is inserted at the end of, and as part of, the last full paragraph of Paragraph 2C of the Lease: "Notwithstanding Tenant's right to exclude certain portions of the Premises from the Plans for improvement at a future date (the "Excluded Space"), the Term (as defined in Paragraph 3 hereof) of this Lease shall be deemed to have commenced as to the Excluded Space on the earlier to occur of (a) the date Tenant has received the certificate of the Architect that the Building has been substantially completed and Tenant has received the certificate of the Architect and Tenant's Space Planner that the Premises other than the Excluded Space have been substantially completed pursuant to the Plans; or (b) the date Tenant takes occupancy of the Excluded Space." 2. The last three lines of Paragraph 6 of the Lease are hereby deleted, and the following inserted in lieu thereof: "and, provided further, Tenant has delivered to Landlord certificates evidencing insurance (which insurance shall in all respects and at all times comply with the provisions of Paragraph 17C hereof) against any liability of Landlord arising from serving of alcoholic beverages in the Premises." 3. Paragraph 21 of the Lease is hereby deleted, and the following inserted in lieu thereof: "21. Subordination. This Lease shall be prior to any mortgage or ground or underlying lease, provided, however, Tenant agrees to subordinate its rights hereunder at all times to (i) the lien of any mortgage or mortgages designated by Landlord and all advances made or thereafter made upon the security thereof, and (ii) to all future ground or underlying leases of the Land and the Building designated by the Landlord and to execute any such agreements evidencing such subordination as may be required by the mortgagee or ground or underlying lessor, as the case may be, and to attorn to and to recognize, as Landlord, the purchaser at a foreclosure sale or the mortgagee or its nominee in the event the mortgagee or such nominee accepts a deed in lieu of foreclosure, or the ground or underlying lessor in the event of termination of such underlying or ground lease in return for and upon delivery to Tenant by such purchaser or such mortgagee or its nominee or the ground or underlying lessor, as the case may be, of an agreement providing that in the event of a foreclosure of such mortgage or the giving of the deed in lieu of foreclosure or a termination of such ground or underlying lease, this Lease shall not be terminated and Tenant may remain in possession of the Premises pursuant to the terms of this Lease and retain all the rights, options and privileges granted to it hereunder as long as Tenant is not in default hereunder and continues to perform its obligations hereunder and further providing that the purchaser at a foreclosure sale or transferee in the case of a deed given in lieu of foreclosure or ground or underlying lessor, as the case may be, will assume all of the obligations of the Landlord in such case; provided, however, that in no event shall the mortgagee, said purchaser at a foreclosure sale, said transferee in the case of a deed given in lieu of foreclosure or ground or -2- underlying lessor, as the case may be, have any personal liability whatsoever hereunder for its own acts or omissions or obligations; and further provided that the mortgagee, said purchaser at a foreclosure sale or said transferee in the case of a deed given in lieu of foreclosure or ground or underlying lessor, as the case may be, shall also have no personal liability for the acts or omissions or obligations of Landlord arising or to be performed prior to any such sale or transfer of the Land or Building to such party including, without limitation, any liability for any deposits made by the Tenant hereunder, unless such deposits have been transferred to such party; and provided, further, that the mortgagee, said purchaser at a foreclosure sale, said transferee in the case of a deed given in lieu of foreclosure or ground or underlying lessor, as the case may be, shall be subject to any offsets or defenses which Tenant might have against any prior Landlord pursuant to Tenant's rights as set forth in Paragraph 35 hereof. Such agreement may, among other things, require the Tenant to notify the mortgagee or the ground or underlying lessor of any default by the Landlord and afford such a mortgagee a reasonable opportunity to cure such default prior to any termination of this Lease by Tenant provided that the Premises are reasonably usable by Tenant for its normal business activities. Tenant further agrees that, except as to secondary mortgage financing expressly permitted in such mortgage or ground or underlying lease, it will not, without the consent of the mortgagee or ground or underlying lessor, as the case may be, voluntarily subordinate this Lease to any lien or encumbrance without the consent of said mortgagee or ground or underlying lessor, as the case may be. To fulfill Tenant's obligations under the provisions of this Paragraph 21, Tenant agrees that it will execute a Subordination, Non-Disturbance and Attornment Agreement in the form attached to this Lease as Exhibit G." 4. The second full paragraph of Paragraph 25 of the Lease is hereby deleted, and the following inserted in lieu thereof: "The term "Landlord" as used in this Lease means only the owner or the mortgagee in possession (including anyone claiming any title or any interest in the Land or the Building by, through or under said mortgagee) for the time being of the Land and the Building (or the owner of a lease of -3- the Building or of the Land and the Building) of which the Premises form a part, so that in the event of any sale or sales (including a sale or transfer arising by virtue of a foreclosure of any mortgage of the Land or the Building or any deed given in lieu of foreclosure thereof) of the Land and the Building or of said lease, or in the event of a lease of the Building, or the Land and the Building, except for the obligations set forth in Paragraph 36, Landlord shall be and hereby is entirely free and relieved of all covenants and obligations of Landlord thereafter to be performed hereunder, provided any purchaser, transferee or lessee of the Building, or of the Building and the Land has, subject to the provisions of Paragraph 21 hereof, assumed and agreed to carry out any and all covenants and obligations of Landlord hereunder thereafter to be performed." 5. The following sentence is hereby added at the end of and as a part of Paragraph 36B of the Lease: "Notwithstanding the foregoing provisions of this paragraph, Tenant shall have no right to terminate this Lease as aforesaid provided in the event Landlord's interest in the Land or Building or this Lease, or all of the aforesaid, is transferred and Landlord or its affiliate does not remain the developer and manager of the Building, all as a result of a mortgage foreclosure sale of any mortgage of the Land or the Building or a deed given in lieu of foreclosure thereof during the period commencing on the date of execution of this Lease and expiring one (1) year after the Commencement Date of this Lease." 6. The following sentence is inserted at the end of and as part of Paragraph 43C of the Lease: "Further, the rights of Tenant and restrictions set forth in this Paragraph 43 shall also not apply to any sale or transfer of the Land or Building pursuant to a mortgage foreclosure sale of any mortgage of the Land or Building or any deed given in lieu of foreclosure thereof but shall thereafter apply to any transfer by the purchaser who took title at said mortgage foreclosure sale including the holder of said mortgage or its nominee who took title by virtue of said mortgage foreclosure sale or deed in lieu of foreclosure thereof." -4- 7. As amended herein, the Lease shall remain in full force and effect and, except as expressly amended herein, shall be unaffected hereby. In the event of any conflict between the provisions of this Amendment and the provisions of the Lease, the provisions of this Amendment shall control. 8. This Third Amendment to Agreement of Lease is executed by American National Bank and Trust Company, not personally, but in the exercise of the power and authority conferred upon and vested in it as Trustee. It is expressly understood and agreed that nothing herein shall be construed as creating any liability whatsoever against Trustee personally; and in particular, without limiting the generality of the foregoing, there shall be no personal liability to pay any indebtedness accruing hereunder or to perform any covenant, either express or implied, herein contained, or to keep, preserve, or sequester any property and all personal liability of every sort, if any, is hereby expressly waived by said Tenant, and by every person now or hereafter claiming any right or security hereunder; and that, so far as the Trustee is concerned, the owner of any indebtedness or liability accruing hereunder shall look solely to the assets of said property and the proceeds thereof for the payment thereof. -5- IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the day and year first above written. LANDLORD: AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO, not individ- ually, but solely as Trustee under Trust Agreement dated August 21, 1985 and known as Trust No. 65287 By: /s/ J. MICHAEL WHELAN ------------------------------ Title: Vice President ----------------------- Attest: /s/ RICHARD ANDERSON - ----------------------------------- Asst. Secretary TENANT: THE NORTHERN TRUST COMPANY By: /s/ STEPHEN KARDEL ------------------------------ Title: Vice President Attest: /s/ JOHN B. SNYDER - ----------------------------------- Secretary -6- (TRUSTEE ACKNOWLEDGMENT) STATE OF ) ) SS COUNTY OF ) I, KULA DAVIDSON, a Notary Public in and for said County in the State aforesaid, DO HEREBY CERTIFY THAT J. MICHAEL WHELAN and RICHARD ANDERSON personally known to me and known by me to be the Vice President and Assistant Secretary, respectively, of American National Bank and Trust Company, in whose name, as Trustee, the above and foregoing instrument is executed, appeared before me this day in person and acknowledged that they signed and delivered the said instrument as their free and voluntary act and as the free and voluntary act of said American National Bank and Trust Company, as Trustee as aforesaid, for the uses and purposes therein set forth, and the said Vice President and Assistant Secretary then and there acknowledged that they, as custodian of the corporate seal of said American National Bank and Trust Company did affix the said corporate seal to said instrument as their free and voluntary act and as the free and voluntary act of said American National Bank and Trust Company, as Trustee as aforesaid, for the uses and purposes therein set forth. GIVEN under my hand and Notarial Seal this seventh day of July, 1988. /s/ KULA DAVIDSON --------------------------------- Notary Public My Commission Expires: - ---------------------------------- ____________________________________ | "OFFICIAL SEAL" | | Kula Davidson | | Notary Pubic, State of Illinois | | My Commission Expires 12/26/90 | |__________________________________| -7- (DOMESTIC CORPORATION ACKNOWLEDGEMENT) STATE OF ILLINOIS ) ) SS COUNTY OF COOK ) I, VICTORIA ANTONI, a Notary Public in and for said County, in the State aforesaid, DO HEREBY CERTIFY THAT STEPHEN KARDEL and JOHN B. SNYDER personally known to me to be the Vice President and Secretary, respectively, of The Northern Trust Company, an Illinois banking corporation, and 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 said instrument as Vice President and Secretary of said corporation, and caused the corporate seal of said corporation to be affixed thereto, pursuant to the authority given by the Board of Directors of said corporation, as their free and voluntary act and as the free and voluntary act and deed of said corporation, for the uses and purposes therein set forth. GIVEN under my hand and Notarial Seal this 20th day of May, 1988. /s/ Victoria Antoni --------------------------------- Notary Public My Commission Expires: 7-25-91 - ---------------------------------- ________________________________________ | "OFFICIAL SEAL" | | Victoria Antoni | | Notary Public, Cook County, Illinois | | My Commission Expires July 25, 1991 | |_______________________________________| -8- CONSENT TO AMENDMENT The undersigned, Madison Plaza II Partnership, the sole beneficiary of Landlord and a joint obligor with Landlord with respect to certain covenants imposed upon Landlord pursuant to the Lease, and Mellon Bank, N.A., a national banking association, the collateral assignee of the Lease, hereby consent to the foregoing Amendment. MADISON PLAZA II PARTNERSHIP, an Illinois general partnership By: /s/ Lee A. Miglin ----------------------------------- Lee A. Miglin, general partner By: /s/ J. Paul Beitler ----------------------------------- J. Paul Beitler, general partner MELLON BANK, N.A., a national banking association By: /s/ Carol A. Bertocchi ------------------------------------ Title: Officer Attest: /s/ Bruce A. Ostrom - ---------------------------------- Assistant Vice President -9- (DOMESTIC CORPORATION ACKNOWLEDGEMENT) COMMONWEALTH OF PENNSYLVANIA ) ) SS. OF ALLEGHENY ) I, , a Notary Public in and for said County, in the State aforesaid, DO HEREBY CERTIFY THAT CAROL A. BERTOCCHI and BRUCE A. OSTROM personally known to me to be the Officer and Asst. Vice President, respectively, of Mellon Bank, N.A., a national banking association, and 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 said instrument as Officer and Asst. Vice President of said association, and caused the corporate seal of said association to be affixed thereto, pursuant to authority given by the Board of Directors of said association as their free and voluntary act and as the free and voluntary act and deed of said association for the uses and purposes therein set forth. Given under my hand and Notarial Seal this 24th day of June, 1988. /s/ Doris Jean Black ---------------------------------- Notary Public My Commission Expires: DORIS JEAN BLACK, NOTARY PUBLIC PITTSBURGH, ALLEGHENY COUNTY MY COMMISSION EXPIRES APRIL 9, 1990 Member, Pennsylvania Association of Notaries -10- GG8228A-348/mbr 5/11/88 EXHIBIT G SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT THIS AGREEMENT, made this day of , 19 between The Northern Trust Company, an Illinois banking corporation with offices at (hereinafter called "Tenant"), CIGNA Investments, Inc., a Connecticut corporation having its principal office and place of business at 900 Cottage Grove Road, Bloomfield, Connecticut or its nominee (hereinafter called "Lender"), and American National Bank and Trust Company of Chicago, not personally, but as Trustee under Trust Agreement dated August 21, 1985 and known as Trust No. 65287 (hereinafter referred to as "Landlord"). WITNESSETH: ---------- WHEREAS, the Tenant has entered into a certain lease (the "Lease") dated , with Landlord covering premises within a certain building known as (the "Premises"); and more particularly described in Exhibit "A" attached hereto and incorporated herein; and WHEREAS, the Lender has agreed to make a loan secured by a mortgaged (the "Mortgage") to the Landlord, (is currently the holder of a mortgage covering the Premises pursuant to a Mortgage Deed dated , and recorded in Mortgage Book , Page in (the "Mortgage") securing a loan to the Landlord); and WHEREAS, it is to the mutual benefit of the parties hereto that Lender make such loan to Landlord; and WHEREAS, it is a condition precedent to obtaining said loan or was a condition of said loan, that said Mortgage securing said loan be a lien or charge upon the Premises unconditionally prior and superior to the Lease and leasehold interest of Tenant; and WHEREAS, Tenant acknowledges when it is recorded that said Mortgage constitutes, or will constitute, a lien or charge upon the Premises which is, or should be, unconditionally prior and superior to the Lease and leasehold interest of Tenant; and WHEREAS, Lender has been requested by Tenant and by Landlord to enter into a non-disturbance agreement with Tenant; NOW, THEREFORE, in consideration of the premises and mutual covenants hereinafter contained, the parties hereto mutually covenant and agree as follows: 1. The Lease and any extensions, renewals, replacements or modifications thereof, and all of the right, title and interest of the Tenant in and to said Premises are and shall be subject and subordinate to the Mortgage and to all of the terms and conditions contained herein, and to any renewals, modifications, replacements, consolidations and extensions thereof; and, pursuant to Paragraph 43C of the Lease, Lender may exercise its right to purchase the Premises pursuant to the Mortgage before Tenant may exercise its right to purchase the Premises pursuant to Paragraph 43 of the Lease. In the event that Lender shall not elect to exercise its prior right to purchase the Premises pursuant to the Mortgage, and Tenant thereafter does elect to purchase the Premises pursuant to Paragraph 43 of the Lease, then such exercise by Tenant of its right to purchase the Premises pursuant to Paragraph 43 of the Lease shall in all events be subject and subordinate to the terms and conditions of the Mortgage. Tenant agrees that Tenant's right to purchase the Premises set forth in Paragraph 43 of the Lease shall not apply to any transfer of the Premises pursuant to a mortgage foreclosure sale or deed given in lieu of foreclosure thereof. Lender agrees that Tenant's right to purchase the Premises as set forth in Paragraph 43 of the Lease shall apply to (a) any subsequent transfer by Lender of the Premises in the event Lender has acquired title to the Premises pursuant to Lender's right to purchase the Premises as set forth in the Mortgage (and in the event Tenant does so then exercise its right to purchase the Premises, such exercise shall in all events be subject and subordinate to the Mortgage if said Mortgage is then in effect); and (b) any subsequent transfer by the purchaser who took title to the Premises at said mortgage foreclosure sale including the holder of the Mortgage or its nominee who took title by virtue of said mortgage foreclosure sale or deed in lieu of foreclosure thereof (and in the event Tenant does so then exercise its right to purchase the Premises, such exercise shall in all events be subject and subordinate to the Mortgage if said Mortgage is then in effect). 2. Lender consents to the Lease and, in the event of foreclosure of said Mortgage, or in the event Lender comes into possession or acquires title to the Premises as a result of the enforcement of foreclosure of the Mortgage or the note secured thereby, or as a result of any other means, Lender agrees to recognize Tenant and -2- further agrees that it will not terminate the Lease nor disturb Tenant's possession of the Premises so long as Tenant is not in default under any of the terms, covenants or conditions of the Lease. 3. Tenant agrees with Lender that if the interests of Landlord in the Premises shall be transferred to and owned by Lender by reason of foreclosure or other proceedings brought by it, or any other manner, or shall be conveyed thereafter by Lender or shall be conveyed pursuant to a foreclosure sale of the Premises (and for purposes of this paragraph, the term "Lender" shall be deemed to include any grantee of the lender or purchaser at foreclosure sale), Tenant shall be bound to Lender under all of the terms, covenants and conditions of the Lease for the balance of the term thereof remaining and any extensions or renewals thereof which may be effected in accordance with any option therefor in the Lease, with the same force and effect as if Lender were the Landlord under the Lease, and Tenant does hereby attorn to Lender as its Landlord, said attornment to be effective and self-operative without the execution of any further instruments on the part of any of the parties hereto immediately upon Lender succeeding to the interest of the landlord in the Premises. Tenant agrees, however, upon the election of and written demand by Lender within twenty (20) days after Lender receives title to the Premises, to execute an instrument reasonably satisfactory in form and substance to Tenant, in confirmation of the foregoing provisions, in which Tenant shall acknowledge such attornment and shall set forth the terms and conditions of its tenancy. 4. Tenant and Lender agree that if Lender shall succeed to the interest of Landlord under the Lease, Lender shall assume all of the obligations of the Landlord under the Lease which arise and are to be performed by the landlord prior to and during the period Lender is the Landlord under the Lease; provided, however, that in no event shall the Lender (a) have any personal liability whatsoever under the Lease for the performance of the Landlord's obligations thereunder (whether such performance or failure of performance shall be that of Lender or any prior Landlord), or (b) bound by an security deposit which Tenant may have paid to any prior landlord, unless such deposit is in an escrow fund available to Lender, or (c) be bound by any amendment or modification of the Lease made without Lender's consent. Tenant further agrees with Lender that except as to secondary mortgage financing expressly permitted in the Mortgage, Tenant will not voluntarily subordinate the Lease to any lien or encumbrance without Lender's consent, and in no event shall Tenant voluntarily subordinate the Lease to any lien or encumbrance unless Lender shall have first approved the form and substance of the instrument by which such -3- subordination is accomplished, which approval Lender agrees not to withhold unreasonably. 5. In the event that the landlord shall default in the performance or observance of any of the terms, conditions or agreements in the Lease, Tenant shall give written notice thereof to the Lender and the Lender shall have the right (but not the obligation) to cure such default. Tenant shall not take any action with respect to such default under the Lease including without limitation any action in order to terminate, rescind or void the Lease (provided the Premises are reasonably usable by Tenant for its normal business activities) or to withhold any rental thereunder, for a period of 10 days after receipt of such written notice thereof by the Lender with respect to any such default capable of being cured by the payment of money and for a period of 30 days after receipt of such written notice thereof by the Lender with respect to any other such default (provided, that in the case of any default which cannot be cured by the payment of money and cannot with diligence be cured within such 30-day period because of the nature of such default or because Lender requires time to obtain possession of the Premises in order to cure the default, if the Lender shall proceed promptly to attempt to obtain possession of the Premises, where possession is required, and to cure the same and thereafter shall prosecute the curing of such default with diligence and continuity, then the time within which such default may be cured shall be extended for such period as may be necessary to complete the curing of the same with diligence and continuity). 6. This Agreement shall bind and inure to the benefit of the parties hereto, their successors and assigns. As used herein the term "Tenant" shall include the Tenant, its successors and assigns; the words "foreclosure" and "foreclosure sale" as used herein shall be deemed to include the acquisition of Landlord's estate in the Premises by voluntary deed (or assignment) in lieu of foreclosure, and the word "Lender" shall include the Lender herein specifically named and any of its successors and assigns, including anyone who shall have succeeded to Landlord's interest in the Premises by, through or under foreclosure of the Mortgage. 7. This Agreement shall be the whole and only agreement between the parties hereto with regard to the subordination of the Lease and leasehold interest of Tenant to the lien or charge of the Mortgage in favor of Lender, and shall supersede and cancel any prior agreements as to such, or any, subordination, including, but not limited to, those provisions, if any, contained in the Lease, which provide for the subordination of the Lease and leasehold interest of Tenant to a deed or deeds of trust or to a mortgage or mortgages to be thereafter executed, and shall -4- not be modified or amended except in writing signed by all parties hereto. 8. The use of the neuter gender in this Agreement shall be deemed to include any other gender, and words in the singular number shall be held to include the plural, when the sense requires. IN WITNESS WHEREOF, the parties hereto have placed their hands and seals the day and year first above written. Signed and acknowledged in TENANT: the presence of us: THE NORTHERN TRUST COMPANY By - ------------------------------------ ------------------------------------ Typed Name: Typed Name: Title: Attest: - ------------------------------------ ------------------------------- Typed Name: Typed Name: Title: LENDER: CIGNA Investments, Inc. By - ------------------------------------ ------------------------------------ Typed Name: Typed Name: Title: Attest: - ------------------------------------ ------------------------------- Typed Name: Typed Name: Title: LANDLORD: AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO, as Trustee aforesaid By - ------------------------------------ ------------------------------------ Typed Name: Typed Name: Title: Attest: - ------------------------------------ ------------------------------- Typed Name: Typed Name: Title: -5- Exhibit A (SNDA-MTG) Description of Premises ----------------------- Beneficiary's Initials: ----- Lender's Initials: ----- -6- EX-10.XVI.4 9 FOURTH AMENDMENT TO AGREEMENT OF LEASE EXHIBIT NUMBER (10)(xvi)(4) To 1995 Form 10-K FOURTH AMENDMENT TO AGREEMENT OF LEASE -------------------------------------- THIS FOURTH AMENDMENT TO AGREEMENT OF LEASE (this "Amendment"), made and entered into as of May 1, 1990 by and between American National Bank and Trust Company of Chicago, as Trustee under Trust Agreement dated April 5, 1990 and known as Trust 110513-07 ("Landlord") and The Northern Trust Company, an Illinois banking corporation ("Tenant"), WITNESSETH: THAT WHEREAS, American National Bank and Trust Company of Chicago Trust No. 65287 and Tenant are parties to a certain Agreement of Lease dated as of August 27, 1985; and WHEREAS, the Agreement of Lease was amended by (i) that certain First Amendment to Agreement of Lease dated as of August 15, 1986, (ii) that certain Second Amendment to Agreement of Lease dated as of August 6, 1987, and (iii) that certain Third Amendment to Agreement of Lease dated as of May 20, 1988 (as so amended, the "Lease"); and WHEREAS, the Lease was assigned by American National Bank and Trust Company of Chicago Trust No. 65287 to Landlord by Assignment dated April 6, 1990; and WHEREAS, Landlord and Tenant desire to further amend the Lease as hereinafter set forth; NOW, THEREFORE, in consideration of the foregoing, and other good and valuable considerations, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Paragraph 1A of the Lease is hereby deleted, and the following inserted in lieu thereof: "A. The Premises shall be all of the 5th through 14th floors of the Building and a portion of each of the 15th and 16th floors of the Building, and shall in the aggregate contain approximately 215,952 RSF (as defined in Paragraph 1D hereof). The portion of the Premises located on floors 5 through 9 of the Building, containing in the aggregate approximately 100,000 RSF, is sometimes referred to herein as the "Original Premises". The portion of the Premises located on floors 10 through 15 of the Building, containing in the aggregate approximately 100,000 RSF, is sometimes referred to herein as the "Additional Premises". The portion of the Premises located on the 16th floor of the Building, containing approximately 15,952 RSF, is sometimes referred to herein as the "16th Floor Premises". The "Original Premises", the "Additional Premises" and the "16th Floor Premises" shall, in the aggregate, comprise the Premises." 2. The following is hereby inserted into the Lease as Paragraph 2BB, immediately following Paragraph 2B and preceding Paragraph 2C: "BB. 16th Floor Additional Work. Landlord will perform, at Tenant's request, and upon submission by Tenant of the necessary plans and specifications in accordance with the terms hereof, any additional work in the 16th Floor Premises over and above that specified in Paragraph 2A above, subject to the terms and conditions of this Paragraph 2BB. If included in Tenant's plans and specifications, Landlord will supply and install the Building Standard Work in the Premises in Landlord's standard manner; provided, however, that regardless of whether Tenant elects to have Landlord supply and install the Building Standard Work, all materials specified for use in the additional work requested by Tenant for the 16th Floor Premises shall be of quality at least equal to the materials specified by Landlord for the Building Standard Work. All work done pursuant to this Paragraph 2BB shall be at Landlord's cost to the extent of the sum of Thirty-one and 35/100 ($31.35) Dollars per RSF for the 16th Floor Premises (hereinafter referred to as the "16th Floor Allowance"), and at Tenant's sole cost and expense to the extent the cost of such work exceeds the 16th Floor Allowance; the aggregate investment tax credit, if any, attributable to all such work shall be divided between Landlord and Tenant in the proportion which each bears to the cost of all such work. All such cost calculations shall be based on the RSF actually included in the 16th Floor Premises on the 16th Floor Premises Commencement Date (as hereinafter defined). Any portion of the 16th Floor Allowance not applied to defray the cost of such additional work shall, at Tenant's option, either (i) be applied in payment of the first Rent payable hereunder, or (ii) be paid to Tenant in cash on the 16th Floor Premises Commencement Date (as defined in Paragraph 3A hereof.) 3. The following is hereby inserted into the Lease as Paragraph 3I: -2- "I. Notwithstanding the foregoing provisions of this Paragraph 3, the "Commencement Date" with respect to the 16th Floor Premises (sometimes referred to herein as the "16th Floor Premises Commencement Date") shall be the later of (i) August 1, 1990 or (ii) the date the work to be performed by Landlord for the 16th Floor Premises pursuant to Paragraph 2BB is substantially complete (excluding any delay in substantial completion caused by Tenant Delay). Tenant's obligations to pay Rent and Operating Expenses allocable to the 16th Floor Premises shall commence as of the 16th Floor Premises Commencement Date. In the event that the 16th Floor Premises shall be ready for occupancy by Tenant prior to the 16th Floor Premises Commencement Date, Tenant shall be entitled to occupy the 16th Floor Premises until the 16th Floor Premises Commencement Date without payment of Base Rent or Operating Expenses allocable thereto. 4. Paragraph 4A of the Lease is hereby deleted, and the following inserted in lieu thereof: "A. "Base Rent" (i) "Original Base Rent". For the Original Premises, the sum equal to the number of RSF within the Original Premises times $21.00 per RSF for each twelve month period during the Term of this Lease ("Original Annual Base Rent"). Such Original Annual Base Rent shall be paid in monthly installments of one-twelfth (1/12) of the then-current Original Annual Base Rent in advance on or before the first day of each and every month during the Term ("Original Monthly Base Rent"), as the Original Annual Base Rent or Original Monthly Base Rent may be adjusted pursuant to Paragraph 5 of this Lease. (ii) "Additional Base Rent". For the Additional Premises, the sum equal to the number of RSF within the Additional Premises times (A) $18.50 per RSF for the first (1st) through the fifth (5th) Lease Years (as defined in Section 5A) during the Term, (B) $22.50 per RSF for the sixth (6th) through tenth (10th) Lease Years during the Term, and (C) $25.50 per RSF for the eleventh (11th) through fifteenth (15th) Lease Years during the Term ("Additional Annual Base Rent"). Such Additional Annual Base Rent shall be paid in monthly installments of one-twelfth (1/12) of the then current Additional Annual Base Rent in advance on or before the first day of each and every month during the Term ("Additional -3- Monthly Base Rent"), as the Additional Annual Base Rent or Additional Monthly Base Rent may be adjusted pursuant to Paragraph 5 of this Lease; (iii) "16th Floor Base Rent". For the 16th Floor Premises, annual Base Rent ("16th Floor Annual Base Rent") shall be payable at the rate of (A) $29.00 per RSF for the first sixty-six (66) months following the 16th Floor Premises Commencement Date, and (B) $29.89 per RSF for the remainder of the initial Term. Such additional 16th Floor Annual Base Rent shall be paid in monthly installments of one-twelfth (1/12) of the then current 16th Floor Annual Base Rent in advance on or before the first day of each and every month during the Term ("16th Floor Monthly Base Rent"), as the 16th Floor Annual Base Rent or 16th Floor Monthly Base Rent may be adjusted pursuant to Paragraph 5BB of this Lease; (iv) Original Annual Base Rent, Additional Annual Base Rent and 16th Floor Annual Base Rent are sometimes collectively referred to herein as "Annual Base Rent"; Original Monthly Base Rent, Additional Monthly Base Rent and 16th Floor Monthly Base Rent are sometimes collectively referred to herein as "Monthly Base Rent"." 5. Paragraph 5A(iv) of the Lease is hereby amended by deleting the phrase "prior to the end of the third full Lease Year means the sum of $9.00 per rentable square foot of the Building per annum and thereafter" which appears in the first through the third lines of Paragraph 5A(iv). 6. Paragraph 5B of the Lease is hereby deleted and the following inserted in lieu thereof: "B. Rent Adjustments. The Annual Base Rent (excluding the 16th Floor Annual Base Rent) for each and every Lease Year during the term of this Lease (the "Subject Lease Year") shall be adjusted (subject to the limitations hereinafter set forth) by an amount equal to the following (the "Rent Adjustment"): (i) For the Base Year (and first full Lease Year if the Base Year commences subsequent to July 1 of such year), an amount equal to the lesser of (a) the product -4- of thirty percent (30%) of the Base Rent (excluding the 16th Floor Annual Base Rent) paid during the Base Year multiplied by the percentage change (positive or negative) of the CPI for the month in which the Term of this lease commences over the CPI for the month in which this Lease was executed, and (b) $1.00 per RSF; and (ii) For each Lease Year thereafter, an amount equal to the product of thirty percent (30%) of the Annual Base Rent (excluding the 16th Floor Annual Base Rent) plus the sum determined by subparagraph B(i) above multiplied by the percentage change (positive or negative) of the CPI for January of the Subject Lease Year over the CPI for the first full month of the Base Year; provided, however, that for any Lease Year the amount of the annual Rent Adjustment made by reason of change in the CPI shall not exceed three percent (3%) of the adjusted Annual Base Rent (excluding the 16th Floor Annual Base Rent) for the immediately preceding Lease Year. The limitation set forth in the immediately preceding sentence shall not affect adjustments to Rent attributable to causes other than changes in the CPI." "BB. 16th Floor Rent Adjustments. The 16th Floor Annual Base Rent shall be adjusted by an amount equal to the following (the "16th Floor Rent Adjustment"): For each Lease Year commencing with the Lease Year beginning January 1, 1997, an amount equal to the product of $29.89 per RSF, multiplied by 35% of the percentage increase (if any) of the CPI for January of the Subject Lease Year over the CPI for the 66th month following the 16th Floor Premises Commencement Date." 7. Paragraph 5C of the Lease is hereby deleted, and the following inserted in lieu thereof: "C. Partial Rent Abatement. Notwithstanding anything in this Lease to the contrary, Annual Base Rent and any Rent Adjustment (excluding 16th Floor Annual Base Rent and the 16th Floor Rent Adjustment) shall be abated by one-half (50%) until the beginning of the forty-ninth (49th) month of the Term. 16th Floor Annual Base Rent and the 16th Floor Rent Adjustment shall not be abated as provided in this Paragraph 5C." 8. The following is hereby inserted at the end of, and as part of, Paragraph 5D of the Lease: -5- "Notwithstanding the foregoing, Operating Expenses payable hereunder shall be limited as follows: (x) Operating Expenses payable with respect to the Original Premises and the Additional Premises shall be fixed at $9.00 per RSF per year through the end of the third (3rd) full Lease Year (regardless of the actual Operating Expenses for such period). (y) Operating Expenses payable with respect to the 16th Floor Premises (i) shall be abated entirely during the first 12-month period following the 16th Floor Premises Commencement Date, (ii) shall not exceed $10.50 per RSF per annum for the second 12-month period (i.e. the 13th through 24th months) following the 16th Floor Premises Commencement Date, and (iii) shall not exceed $13.00 per RSF per annum for the third 12-month period (i.e. the 25th through 36th months) following the 16th Floor Premises Commencement Date. 9. Paragraph 27 is hereby deleted and the following inserted in lieu thereof: "27. PARKING. Landlord represents to Tenant that the Building will include approximately 56 parking spaces located in the Building's underground garage. Tenant shall have the right to lease for the full term Tenant's Proportionate Share of such parking spaces (which share shall be not less than 13 spaces), at regular annual Building rates therefor, and in locations designated by Landlord, such right to remain exercisable for 12 spaces until the Commencement Date, and for one space until the 16th Floor Commencement Date, and to include the right to sublease to any sublessee of space in the Premises or to employees or partners of such sublessees or of Tenant. In addition, Tenant shall be entitled, at regular annual Building rates therefor, to any parking spaces which were rented by the immediately preceding tenants in space added to the Premises after the Commencement Date. Tenant may give up such parking spaces, or any thereof, so leased at any time(s) on not less than sixty (60) days' notice and shall not have any rights for the number of spaces so given up at any time thereafter. Notwithstanding the immediately preceding sentence, Tenant shall have the right to sublease any parking spaces leased hereunder to parties (including, but not limited to, car rental entities) selected by Tenant, provided that (i) the rent charged for any parking spaces -6- so subleased is less than or equal to the rent charged Tenant by Landlord therefor, and (ii) the use of the subleased parking spaces by the sublessees thereof does not interfere with Landlord's operation of the garage or use of the garage by other parking lessees." 10. Paragraphs 30A and 30B of the Lease are hereby deleted and the following inserted in lieu thereof: "A. Landlord hereby grants to Tenant the option to lease the entire fourth (4th) floor of the Building, the balance of the fifteenth (15th) and sixteenth (16th) floors of the Building, and the entire seventeenth (17th) floor of the Building (the "6th Year Option Floors"). Tenant may lease any or all of the 6th Year Option Floors contiguous to the Premises, as designated by Landlord, commencing at some point during the 6th Lease Year as determined by Landlord. B. Landlord hereby grants to Tenant the further option to lease three (3) additional floors contiguous to the Premises (subject to the last sentence of this Paragraph 30B) designated by Landlord ("11th Year Option Floors"), which Option may be exercised whether or not Tenant has taken any, all or none of the 6th Year Option Floors. Tenant may lease any or all of the 11th Year Option Floors commencing at some point during the 11th Lease Year as determined by Landlord. 11. The following is hereby inserted in the Lease as Paragraph 45: "45. ASSUMPTION OF CERTAIN FINANCIAL OBLIGATIONS OF TENANT. In consideration of Tenant's Lease of the 16th Floor Premises, Landlord hereby agrees to assume (i) from and after April 1, 1990, all of the financial obligations and financial liabilities of Tenant, as the tenant, arising after April 1, 1990 under the First, Second and Third Expansion Amendments to that certain Lease dated November 27, 1985, demising approximately 13,000 RSF on the 5th Floor of Madison Plaza, and (ii) from and after September 1, 1990, one-half (1/2) of the financial obligations and financial liabilities of The Griffin Group (now known as The Northern Investment Management Co.), an affiliate of Tenant, as the tenant, arising after September 1, 1990 under that certain Lease dated May 1, 1984 (as amended by the Expansion Amendment thereto) demising approximately 10,300 RSF on the 27th -7- floor of Madison Plaza (collectively the "200 Madison Leases"). The aforesaid assumption by Landlord relates only to the financial obligations and financial liabilities of Tenant as the tenant under the 200 Madison Leases; nothing herein shall be deemed or construed to be an assumption by Landlord of any other obligations of Tenant under the 200 Madison Leases, and in no event shall Landlord be obligated to perform any act or do any thing other than the payment of money required of Tenant as the tenant under the 200 Madison Leases. Tenant warrants and represents to Landlord that it has delivered to Landlord true and correct copies of the 200 Madison Leases, and there are no additional agreements between the landlord thereunder and Tenant, whether written or oral, pertaining to the 200 Madison Leases, or the subject matter or terms thereof. Tenant covenants and agrees (i) to permit Landlord to assign, or to sublease all or any portion of the premises demised by, the 200 Madison Leases, upon such terms and conditions as are acceptable to Landlord in its sole and uncontrolled discretion, and (ii) to cooperate in all respects with Landlord in Landlord's efforts to assign, or sublease the premises demised by, the 200 Madison Leases, including without limitation the execution of any required documents of assignment or sublease (provided such documents are in form reasonably acceptable to Tenant.) All rent or other consideration received for or on account of the 200 Madison Leases or the premises demised thereby from and after April 1, 1990 shall be the sole property of Landlord (regardless of whether such amounts exceed the financial obligations assumed by Landlord with respect to the 200 Madison Leases), and Tenant shall in no event be entitled to share therein. 12. As amended herein, the Lease shall remain in full force and effect and, except as expressly amended herein, shall be unaffected hereby. In the event of any conflict between the provisions of this Amendment and the provisions of the Lease, the provisions of this Amendment shall control. 13. This Fourth Amendment to Agreement of Lease is executed by American National Bank and Trust Company, not personally, but in the exercise of the power and authority conferred upon and vested in it as Trustee. It is expressly understood and agreed that nothing herein shall be construed as creating any liability whatsoever against Trustee personally; and in particular, without limiting the generality of the foregoing, there shall be no personal liability to pay any indebtedness accruing hereunder or -8- to perform any covenant, either express or implied, herein contained, or to keep, preserve, or sequester any property and all personal liability of every sort, if any, is hereby expressly waived by said Tenant, and by every person now or hereafter claiming any right or security hereunder; and that, so far as the Trustee is concerned, the owner of any indebtedness or liability accruing hereunder shall look solely to the assets of said property and the proceeds thereof for the payment thereof. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the day and year first above written. LANDLORD: AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO, not individually, but solely as Trustee under Trust Agreement dated April 5, 1990 and known as Trust No. 110513-07 By: /s/ J. Michael Whelan ---------------------------------------- Title: Vice President ---------------------------------- Attest: /s/ ------------------------------------ Assistant Secretary ------------------------------------ TENANT: THE NORTHERN TRUST COMPANY By: /s/ Roy Bronson ---------------------------------------- Title: Senior Vice President ---------------------------------- -9- EX-10.XVI.5 10 FIFTH AMENDMENT TO AGREEMENT OF LEASE EXHIBIT NUMBER (10)(xvi)(5) TO 1995 FORM 10-K FIFTH AMENDMENT TO AGREEMENT OF LEASE ------------------------------------- THIS FIFTH AMENDMENT TO AGREEMENT OF LEASE (this "AMENDMENT"), made and entered into as of January 12, 1995, by and between AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO, not individually, but solely and only as Trustee under a certain Trust Agreement dated the 5th day of April, 1990 and known as Trust No. 110513-07 ("LANDLORD") and The Northern Trust Company, an Illinois banking corporation ("TENANT"), WITNESSETH: THAT ---------------- WHEREAS, American National Bank and Trust Company of Chicago Trust No. 65287 and Tenant are parties to a certain Agreement of Lease dated as of August 27, 1985; and WHEREAS, the Agreement of Lease was amended by (i) that certain First Amendment to Agreement of Lease dated as of August 15, 1986, (ii) that certain Second Amendment to Agreement Lease dated as of August 6, 1987, (iii) that certain Third Amendment to Agreement of Lease dated as of May 20, 1988, and (iv) that certain Fourth Amendment to Agreement of Lease dated as of May 1, 1990 (as amended, the "LEASE"); and WHEREAS, the Lease was assigned by American National Bank and Trust Company of Chicago Trust No. 65287 to Landlord by Assignment dated April 6, 1990; and WHEREAS, Landlord and Tenant desire to further amend the Lease as hereinafter set forth; NOW, THEREFORE, in consideration of the foregoing, and other good and valuable considerations, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Paragraph 1A of the Lease is hereby deleted, and the following inserted in lieu thereof: "A. The Premises shall be all of the 4th through 14th floors of the Building and a portion of each of the 15th and 16th floors of the Building, and shall in the aggregate contain approximately 232,443 RSF (as defined in Paragraph 1D hereof). The portion of the Premises located on floors 5 through 9 of the Building, containing in the aggregate approximately 102,110 RSF, is sometimes referred to herein as the "ORIGINAL PREMISES". The portion of the Premises located on floors 10 through 15 of the Building, containing in the aggregate approximately 97,890 RSF, is sometimes referred to herein as the "ADDITIONAL PREMISES". The portion of the Premises located on the 16th floor of the Building, containing approximately 15,952 RSF, is sometimes referred to herein as the "16TH FLOOR PREMISES". The portion of the Premises located on the 4th Floor of the Building containing approximately 16,491 RSF, is sometimes referred to herein as the "4TH FLOOR PREMISES". The "Original Premises", the "Additional Premises" and the "16th Floor Premises" and the 4th Floor Premises shall, in the aggregate, comprise the Premises." 2. The following is hereby inserted into the Lease as subsection 2.01, immediately following Paragraph 2H and preceding Section 3: "2.01 Construction of the 4th Floor Premises. A. Tenant's Plans. The Tenant shall, at Tenant's sole cost and expense (subject to the credit hereinafter granted), cause to be prepared and submitted to the Landlord at such time as Tenant desires plans and specifications (the "Tenant's Plans"), including, but not limited to, all space plans, working drawings, mechanical and engineering drawings for Landlord's prior approval, disclosing all construction to be performed to build out the entire 4th Floor Premises. The Landlord agrees to review and either approve or disapprove (and noting with such disapproval the specific items not approved) Tenant's Plans within ten (10) business days of Landlord's receipt of a complete set of Tenant's Plans. In the event Tenant's Plans are disapproved, Tenant shall revise and resubmit Tenant's Plans expeditiously and Landlord shall review the same and notify the Tenant of its approval or disapproval within five (5) business days thereafter in the same manner as required for the initial submittal. Landlord's approval shall not be unreasonably withheld or delayed. B. General Contractor. The Tenant is hereby granted the right to utilize contractors of Tenant's own choice to build out the 4th Floor Premises, subject to Landlord's reasonable approval as to the qualifications of such contractor. Only qualified contractors shall be permitted to bid on the Work. The contractor chosen by the Tenant as the successful bidder is hereinafter referred to as "Tenant's Contractor". The Tenant, before commencing any work on or to the 4th Floor Premises, shall submit Tenant's Plans and written contracts for such work by Tenant's Contractor to Landlord for approval. The Landlord may impose such reasonable conditions as Landlord, in its reasonable judgment, deems appropriate, including, without limitation, conditions which will assure Landlord that all work will be performed lien-free (including performance and payment bonds) and with proper insurance coverage. All installations, alterations and additions shall be constructed in a good and workmanlike manner and only new and good grades of material shall be used. Such work performed by Tenant's Contractor shall comply with all insurance requirements and all other ordinances and regulations of the City of Chicago or any department or agency thereof and with the requirements of all statutes and regulations of the State of Illinois or any department or agency thereof. Tenant shall permit Landlord (or an architect designated by Landlord) to supervise all construction operations within the 4th Floor Premises performed by Tenant's Contractor. Tenant shall pay to the Landlord the cost of any materials purchased from Landlord at Landlord's actual invoice cost for said items, the reasonable and actual cost incurred by Landlord in supervising the construction (which shall not exceed an amount equal to one and one-half (1 1/2%) percent of the cost of construction) 2 and all hoisting charges (the "Reimbursables"). Such supervision by the Landlord of the Tenant's Contractor shall be solely and only for the benefit of the Landlord. No silence or statement by the Landlord's supervisor shall be deemed or construed as an assumption by said supervisor or Landlord of any responsibility for or in relation to the construction of the 4th Floor Premises or any guarantee that the work completed within the 4th Floor Premises complies with Laws, complies with Tenant's Plans, or is suitable or acceptable to the Tenant for Tenant's intended business purposes. If the Tenant elects to build out the 4th Floor Premises with Tenant's Contractor, Tenant shall furnish to Landlord prior to commencement thereof building permits and certificates of appropriate insurance and bonds and upon completion of any installations, alterations or additions, contractor's affidavits and full and final waivers of lien covering all labor and material expended and used in constructing the 4th Floor Premises. Tenant shall hold Landlord harmless and indemnify Landlord from all claims and costs, damages, liens and expenses which may arise out of or are connected in any way with said construction by Tenant's Contractor. C. Construction Credit. The cost of all work (the "Work") necessary to build out all of the 4th Floor Premises (including, but not limited to, all labor, material, permits and working drawings, design costs and Reimbursables) shall, subject to the credit granted herein, be the responsibility of Tenant. The Landlord does hereby grant to the Tenant a credit (the "Construction Credit") equal to Eight Hundred Forty-Two Thousand Seven Hundred Twenty-Five and 56/100 ($842,725.56) Dollars. The Construction Credit shall be paid in installments by Landlord to the Tenant as the Work progresses within thirty (30) days of Tenant's request indicating the dollar amount of the draw Tenant desires; provided that the Tenant, together with such request, presents to Landlord, reasonable documentation evidencing (i) the amounts of payments previously made by Tenant, in relation to the Work, to the general contractor and any subcontractors and materialmen, including, but not limited to, general contractor's statement and partial and final lien waivers, as the case may be, covering all Work (including design costs and Reimbursables) for which Tenant is requesting payment; and (ii) the percentage of the Work completed. Tenant shall be responsible for obtaining and submitting to Landlord all documentation reasonably required by the Landlord in relation to Construction Credit draw requests made by Tenant. Construction Credit draw amounts shall never exceed, in the aggregate, the lesser of: (i) the remaining unpaid amount of the Construction Credit, minus any then unpaid Reimbursables, or (ii) that amount equal to the cost of all Work completed in accordance with the Tenant's Plans and paid for by Tenant, as evidenced by the documentation furnished with such request (including lien waivers). Any unused portion of the Construction Credit shall be credited by the Landlord against Monthly Base Rent next due under the Lease, until exhausted. Notwithstanding anything to the contrary expressed in, or implied by this Fifth Amendment to Agreement of Lease, Tenant, at its sole election, may choose not to build out the 4th Floor Premises for and as office space but instead, may choose to utilize the 4th Floor Premises as office storage space and consequently, the work may consist only of labor, materials, permits, and working drawings necessary to prepare and equip the 4th Floor Premises for such use. Any such change in the Work and/or Tenant's use of the 4th Floor Premises shall in no way affect (i) Tenant's right to the receipt of the Construction Credit provided for herein, (ii) Tenant's obligations regarding the Work set forth in paragraph 2.01 of this Amendment, and (iii) Landlord's rights set forth in paragraph 2.01 of this Amendment including, but not limited to, approval of contractor qualifications, approval of Tenant's Plans, and the right to supervise all construction operations on the 4th Floor Premises. D. Construction Status and Confirmation. The Landlord reserves the right from time to time, but not more often than monthly, to require Tenant to furnish partial or final lien waivers (as applicable) and sworn contractors' 3 statements and all other reasonable information Landlord may request, in writing, so as to enable Landlord to determine the status of (i) the preparation or modification of Tenant's Plans; (ii) all contracts let or to be let in relation to the Work; (iii) the cost of all Work, including the cost of any extras or modifications requested by Tenant after Landlord's approval of Tenant's Plans; (iv) the status of completion of the Work; (v) the status of payment to all contractors, subcontractors and materialmen in relation to the Work; (vi) the status of Tenant's obligations to obtain partial and final lien waivers, as the situation may require, from all contractors, subcontractors and materialmen in relation to the Work; and (vii) the status of any adverse claims or disputes with contractors, subcontractors or materialmen in relation to the Work. The Tenant shall furnish such information as Landlord may reasonably require to evidence the foregoing no later than fifteen (15) days subsequent to the date the Landlord requests the same, in writing. E. Non-Applicable Provisions. The provisions of subparagraphs 2A through 2H of the Lease shall not be applicable to the construction of the 4th Floor Premises." 3. The following is hereby inserted into the Lease as Paragraph 3J and 3K: "J. Notwithstanding the foregoing provisions of this Paragraph 3, the "Commencement Date" with respect to the 4th Floor Premises (sometimes referred to herein as the "4th Floor Premises Commencement Date") shall be January 12, 1995. Tenant's obligation to pay Rent and Operating Expenses allocable to the 4th Floor Premises shall commence as of the 4th Floor Premises Commencement Date. K. The Term, which is currently scheduled to expire on March 31, 2005, shall be coterminous with respect to the entire Premises." 4. Paragraph 4A of the Lease is hereby deleted, and the following inserted in lieu thereof: "A. "Base Rent" (i) "Original Base Rent". For the Original Premises, the sum equal to the number of RSF within the Original Premises times $21.00 per RSF for each twelve month period during the Term of this Lease ("Original Annual Base Rent"). Such Original Annual Base Rent shall be paid in monthly installments of one-twelfth (1/12) of the then-current Original Annual Base Rent in advance on or before the first day of each and every month during the Term ("Original Monthly Base Rent"), as the Original Annual Base Rent or Original Monthly Base Rent may be adjusted pursuant to Paragraph 5 of this Lease. (ii) "Additional Base Rent". For the Additional Premises, the sum equal to the number of RSF within the Additional Premises (A) $18.50 per 4 RSF for the first (1st) through the fifth (5th) Lease Years (as defined in Section 5A) during the Term (B) $22.50 per RSF for the sixth (6th) through tenth (10th) Lease Years during the Term and (C) $25.50 per RSF for the eleventh (11th) through fifteenth (15th) Lease Years during the Term ("Additional Annual Base Rent"). Such Additional Annual Base Rent shall be paid in monthly installments of one-twelfth (1/12) of the then current Additional Annual Base Rent in advance on or before the first day of each and every month during the Term ("Additional Monthly Base Rent"), as the Additional Annual Base Rent or Additional Monthly Base Rent may be adjusted pursuant to Paragraph 5 of this Lease; (iii) "16th Floor Base Rent". For the 16th Floor Premises (15,952 RSF), Annual Base Rent ("16th Floor Annual Base Rent") shall be payable at the rate of (A) $29.00 per RSF for the first sixty-six (66) months following the 16th Floor Premises Commencement Date, and (B) $29.89 per RSF for the remainder of the initial Term. Such 16th Floor Annual Base Rent shall be paid in monthly installments of one-twelfth (1/12) of the then current 16th Floor Annual Base Rent in advance on or before the first day of each and every month during the Term ("16th Floor Monthly Base Rent"), as the 16th Floor Annual Base Rent or 16th Floor Monthly Base Rent may be adjusted pursuant to Paragraph 5BB of this Lease; (iv) "4th Floor Base Rent". For the 4th Floor Premises (16,491 RSF), Annual Base Rent ("4th Floor Annual Base Rent") shall be payable at the rate of $10.38 per RSF for the period commencing January 12, 1995, throughout the remainder of the Term. Such 4th Floor Annual Base Rent shall be paid in monthly installments of one-twelfth (1/12) of the 4th Floor Annual Base Rent in advance, on or before, the first day of each and every month during the Term (the "4th Floor Monthly Base Rent"). (v) Original Annual Base Rent, Additional Annual Base Rent, 16th Floor Annual Base Rent and 4th Floor Annual Base Rent are sometimes collectively referred to herein as "Annual Base Rent"; Original Monthly Base Rent, Additional Monthly Base Rent, 16th Floor Monthly Base Rent and 4th Floor Monthly Base Rent are sometimes collectively referred to herein as "Monthly Base Rent"." 5. Paragraph 5B of the Lease is hereby deleted and the following inserted in lieu thereof: "B. Rent Adjustments. The Annual Base Rent (excluding the 16th Floor Annual Base Rent and the 4th Floor Annual Base Rent) for each and every Lease Year during the term of this Lease (the "Subject Lease Year") shall be adjusted (subject to the limitations hereinafter set forth) by an amount equal to the following (the "Rent Adjustment"): (i) For the Base Year (and first full Lease Year if the Base Year commences subsequent to July 1 of such year), an amount equal to the lesser of 5 (a) the product of thirty percent (30%) of the Base Rent (excluding the 16th Floor Annual Base Rent and the 4th Floor Annual Base Rent) paid during the Base Year multiplied by the percentage change (positive or negative) of the CPI for the month in which the Term of this Lease commences over the CPI for the month in which this Lease was executed, and (b) $1.00 per RSF; and (ii) For each Lease Year thereafter, an amount equal to the product of thirty percent (30%) of the Annual Base Rent (excluding the 16th Floor Annual Base Rent and the 4th Floor Annual Base Rent) plus the sum determined by subparagraph B(i) above multiplied by the percentage change (positive or negative) of the CPI for January of the Subject Lease Year over the CPI for the first full month of the Base Year; provided, however, that for any Lease Year the amount of the annual Rent Adjustment made by reason of changes in the CPI shall not exceed three percent (3%) of the adjusted Annual Base Rent (excluding the 16th Floor Annual Base Rent and the 4th Floor Annual Base Rent) for the immediately preceding Lease Year. The limitation set forth in the immediately preceding sentence shall not affect adjustments to Rent attributable to causes other than changes in the CPI. BB. 16th Floor Rent Adjustments. The 16th Floor Annual Base Rent shall be adjusted by an amount equal to the following (the "16th Floor Rent Adjustment"): For each Lease Year commencing with the Lease Year beginning January 1, 1997, an amount equal to the product of $29.89 per RSF, multiplied by 35% of the percentage increase (if any) of the CPI for January of the Subject Lease Year over the CPI for the 66th month following the 16th Floor Premises Commencement Date. BBB. 4th Floor Rent Adjustments. The 4th Floor Annual Base Rent shall not be subject to Rent Adjustment." 6. As amended herein, the Lease shall remain in full force and effect and, except as expressly amended herein, shall be unaffected hereby. In the event of any conflict between the provisions of this Amendment and the provisions of the Lease, the provisions of this Amendment shall control. 7. This Fifth Amendment to Agreement of Lease is executed by American National Bank and Trust Company, not personally, but in the exercise of the power and authority conferred upon and vested in it as Trustee. It is expressly understood and agreed that nothing herein shall be construed as creating any liability whatsoever against Trustee personally; and in particular, without limiting the generality of the foregoing, there shall be no personal liability to pay any indebtedness accruing hereunder or to perform any covenant, either express or implied, herein contained, or to keep, preserve, or sequester any property and all personal liability of every sort, if any, is hereby expressly waived by said Tenant, and by every person now or hereafter claiming any right or security hereunder; and that, so far as the Trustee is 6 concerned, the owner of any indebtedness or liability accruing hereunder shall look solely to the assets of said property and the proceeds thereof for the payment thereof. 8. BROKERS. Tenant represents that except for MIGLIN-BEITLER MANAGEMENT CORPORATION, it has not dealt with any real estate brokers in connection with this Fifth Amendment and, to its knowledge, no broker other than MIGLIN-BEITLER MANAGEMENT CORPORATION initiated or participated in the negotiation of this Fifth Amendment, submitted or showed the Fifth Expansion Space or any other space in the Building to Tenant or is entitled to any commission or fee in connection with this Fifth Amendment. Tenant hereby agrees to indemnify, defend, and hold Landlord harmless from and against any and all claims of any other real estate brokers for commissions or fees in connection with this Fifth Amendment who claim to have dealt with the Tenant. Landlord represents and warrants to Tenant that Landlord is not obligated to pay a real estate broker's fee or commission to anyone which could cause the rent hereunder or any rental rate applicable to the Premises to increase. 9. MERGER. All negotiations, considerations, representations and understandings between Landlord and Tenant relating to this Fifth Amendment are incorporated herein and may be modified or altered only by agreement, in writing, between Landlord and Tenant. No modification, termination, or surrender of the Lease, as modified by this Fifth Amendment, or surrender of the Premises (including the 4th Floor Premises) or any part thereof or of any interest therein by Tenant shall be valid or effective unless agreed to and accepted, in writing, by the Landlord and no act by any representative or agent of the Landlord other than delivery of such a written agreement and acceptance by the Landlord shall constitute agreement to and acceptance thereof. Any prior negotiations or intentions of the parties relating to this Fifth Amendment, whether oral or evidenced by written documentation dated prior to the date of this Fifth Amendment, are null and void, unless specifically incorporated herein by reference. 10. LANDLORD'S EXONERATION. Landlord's exoneration clause, as set forth in Section 39 of the Lease, is hereby incorporated herein by reference, as if fully set forth. 7 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the day and year first above written. LANDLORD: AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO, not individually, but solely as Trustee under Trust Agreement dated April 5, 1990 and known as Trust No. 110513-07 By: /s/ J. Michael Whelan _____________________________ Title: VP _______________________ Attest: /s/ _________________________ Asst. Secretary _______________ TENANT: THE NORTHERN TRUST COMPANY By: /s/ Joseph M. Jarosz _____________________________ Title: Sr. Vice President _______________________ 8 EX-10.XVI.6 11 SIXTH AMENDMENT TO AGREEMENT OF LEASE EXHIBIT NUMBER (10)(xvi)(6) TO 1995 FORM 10-K SIXTH AMENDMENT TO AGREEMENT OF LEASE This Sixth Amendment to Agreement of Lease (the "Amendment") is entered into by and between American National Bank and Trust Company of Chicago, not individually, but solely as Trustee under Trust Agreement dated April 5, 1990 and known as Trust No. 110513-07 ("Landlord") and The Northern Trust Company, an Illinois banking corporation ("Tenant") as of this 30th day of November, 1995. WITNESSETH: THAT WHEREAS, American National Bank and Trust Company of Chicago, Trust No. 65287 and Tenant are parties to a certain Agreement of Lease dated August 27, 1985; and WHEREAS, the Agreement of Lease was amended by (i) that certain First Amendment to Agreement of Lease dated as of August 15, 1986, (ii) that certain Second Amendment to Agreement of Lease dated as of August 6, 1987, (iii) that certain Third Amendment to Agreement of Lease dated as of May 20, 1988, (iv) that certain Fourth Amendment to Agreement of Lease dated as of May 1, 1990, and (v) that certain Fifth Amendment to Agreement of Lease dated as of January 12, 1995 (as amended, the "Lease"); and WHEREAS, the Lease was assigned by American National Bank and Trust Company of Chicago, Trust No. 65287 to Landlord by assignment dated April 6, 1990; and WHEREAS, a dispute has arisen between Tenant and Landlord concerning the proper interpretation of the Rent Adjustment provisions in paragraph 5B of the Lease; and WHEREAS, Landlord and Tenant desire to further amend the Lease as hereinafter set forth to clarify paragraph 5B and to resolve their disputes with respect thereto. NOW, THEREFORE, in consideration of the foregoing and other good and valuable considerations, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Paragraph 5A of the Lease is hereby amended to add the following subparagraphs 5A(x) and 5A(xi): (x) "Adjusted Annual Base Rent" means Annual Base Rent as adjusted by the Rent Adjustment made pursuant to paragraph 5 of the Lease. (xi) "Incremental Rent Adjustment" means the portion of the Rent Adjustment for the Subject Lease Year which is in excess of the Rent Adjustment that was added to Annual Base Rent the preceding Lease Year. 2. Paragraph 5B of the Lease is hereby deleted and the following inserted in lieu thereof: B. Rent Adjustments. The Annual Base Rent (excluding the 16th floor Annual Base Rent and the 4th floor Annual Base Rent) for each and every Lease Year during the term of this Lease (the "Subject Lease Year") shall be adjusted (subject to the limitations herein set forth ) as follows (the "Rent Adjustment"): (i) For the Base Year, an amount equal to an increase of $1.00 per RSF, which is a one time adjustment that shall be added to Annual Base Rent in the Base Year only; and (ii) For each Lease Year thereafter, an amount equal to $.90 per RSF plus thirty percent (30%) of the product of (a) the Annual Base Rent (excluding the 16th floor Annual Base Rent and the 4th floor Annual Base Rent) plus $.90 per RSF, multiplied by (b) the percentage change (positive or negative) of the CPI for January of the Subject Lease Year over the CPI for the first full month of the Base Year; provided, however, that for any Lease Year the Incremental Rent Adjustment shall not exceed three percent (3%) of the Adjusted Annual Base Rent (excluding the 16th floor Annual Base Rent and the 4th floor Annual Base Rent) for the immediately preceding Lease Year. Any abatement in Annual Base Rent or Rent Adjustments provided by this Lease -2- shall be applied to reduce the amount due and owing by Tenant after the amount of the Rent Adjustment for the Subject Year has been determined without regard to any past or present abatements. Neither the calculation of the amount of any Rent Adjustment nor the calculation of any limit on the amount of the Rent Adjustment provided in this paragraph shall include consideration of abatements in any component of the calculation. 3. As an aid to the interpretation of paragraph 5B of the Lease, attached as Exhibit A to this Amendment are sample calculations of the CPI adjustment. 4. As amended herein, the Lease shall remain in full force and effect and, except as expressly amended herein, shall be unaffected hereby. In the event of any conflict between the provisions of this Amendment and the provisions of the Lease, the provisions of this Amendment shall control. 5. This Sixth Amendment to Agreement of Lease is executed by American National Bank and Trust Company of Chicago, not personally, but in the exercise of the power and authority conferred upon and vested in it as Trustee of Trust No. 110513-07. It is expressly understood and agreed that nothing herein shall be construed as creating any liability whatsoever against Trustee, personally; and in particularly, without limiting the generality of the foregoing, there shall be no personal liability to pay any indebtedness accruing hereunder or to perform any covenant, either express or implied, herein contained, or to keep, preserve, or sequester any property and all personal liability of every sort, if any, is hereby expressly waived by said Tenant and by every person now or hereafter claiming any right or security hereunder; and that, so far as the Trustee is concerned, the owner of any indebtedness or liability accruing hereunder shall look solely to the assets of said Property and the proceeds thereof for the payment thereof. -3- IN WITNESS WHEREOF, the parties hereto have caused this Amendment to executed as of the day and year first above written. LANDLORD: TENANT: AMERICAN NATIONAL BANK AND THE NORTHERN TRUST COMPANY TRUST COMPANY OF CHICAGO, not individually, but solely as Trustee under Trust Agreement dated April 5, 1990 and known as Trust No. 110513-07 By: /s/ Wayne LaChance -------------------------- By: Title: Vice President ----------------------------- ----------------------- Title: ------------------------- Attest: ------------------------ Secretary -------------- -4- Exhibit A to Sixth Amendment to Agreement of Lease Sample CPI Rent Adjustment Calculation for Paragraph 5 of the Lease, as amended
Year Year Year Year 1 2 3 4 ------------------------------------------------------- A. Annual Base Rent 4,000,000.00 4,000,000.00 4,000,000.00 4,000,000.00 B. Para 5Bi Annual Rent Adjustment 200,000.00 180,000.00 180,000.00 180,000.00 Para 5Bii Annual Rent Adjustment C. Annual Base Rent + 5Bi Annual Rent ------------------------------------------------------- Adjustment A+B 4,200,000.00 4,180,000.00 4,180,000.00 4,180,000.00 D. Base Year CPI 126.50 126.50 126.50 126.50 E. Current Year CPI NA 135.00 150.00 160.00 ------------------------------------------------------- F. Change in CPI for Subject Lease Year over Base Year (E-D)/D NA 0.067 0.186 0.265 G. Rent Adjustment (Base Year to Subject Year) 30% x C x F 84,018.00 233,244.00 332,310.00 Para 5Bii Annual Rent Adjustment Calc: H. Incremental Rent Adjustment Subject Year G - Prev Year J 84,018.00 149,228.00 120,371.46 I. Annual Cap Amount (3% of Prev. Year Adj. Annual Base Rent) 3% x Prev Year K 126,000.00 127,920.54 131,758.16 Cap Application If H > I Cap Applies Cap Not Appl Cap Applies Cap Not Appl ------------------------------------------------------- J. Subject Lease Year Rent Adjustment If Cap Not Appl: G 84,018.00 211,938.54 332,310.00 If Cap Applies: I + Prev. Year J ------------------------------------------------------- K. Adjusted Annual Base Rent A+B+J 4,200,000.00 4,264,018.00 4,391,938.64 4,512,310.00 =======================================================
EX-10.XXII 12 CONSULTING AGREEMENT EXHIBIT NUMBER (10)(xxii) TO 1995 FORM 10-K CONSULTING AGREEMENT This Consulting Agreement ("Agreement") is entered into as of this 1st day of October, 1995 between Northern Trust Corporation, a Delaware corporation having its principal place of business in Chicago, Illinois ("Corporation"), and David W. Fox ("Consultant"). WHEREAS, Consultant has served the Corporation as its Chief Executive Officer and Chairman of its Board of Directors, and the Corporation wishes to enter into a consulting relationship with Consultant upon his retirement from service to the Corporation; and WHEREAS, Consultant agrees to make himself available to provide consulting services to the Corporation, and Consultant desires to enter into a consulting relationship with the Corporation upon the terms and conditions hereinafter contained; NOW THEREFORE, in consideration of the covenants and agreements herein set forth and of the mutual benefits accruing to the Corporation and to Consultant from the consulting relationship to be established between the parties by the terms of this Agreement, the Corporation and Consultant agree as follows: 1. Consulting Relationship. Following Consultant's retirement and commencing on October 1, 1995, the Corporation hereby retains Consultant, and Consultant hereby agrees to be retained by the Corporation, as an independent consultant and not as an employee. 2. Consulting Services. Consultant agrees that during the term of this Agreement: A. He will devote his best efforts to his position as an independent consultant to the Corporation and will perform such duties and execute the policies of the Corporation as determined by its Chief Executive Officer; provided that such duties and policies will not be inconsistent with the nature of the duties performed by Consultant during his active service with the Corporation as an officer and employee thereof; B. Consultant shall exercise a reasonable degree of skill and care in performing the services referred to in paragraph A above; C. Consultant shall be available to render services to the Corporation under this Agreement but shall not be obligated to render in excess of 30 days of service per year during the term of this Agreement. Consultant shall not be obligated to render any services under this Agreement when he is unable to do so due to illness, disability or injury; and D. Consultant shall be available for service hereunder upon receipt of five days' written notice from the Corporation. E. Consultant will be paid at a rate of $1,000 for each day of service rendered to the Corporation during the term of this Agreement. 3. Other Conditions. The Corporation shall, at its expense, provide Consultant with appropriate and sufficient office space and secretarial help in order to allow Consultant to perform his duties hereunder. Consultant shall have no authority over any employee or officer of the Corporation, except as may be necessary in the routine performance of his duties hereunder, nor shall the Corporation be required in any manner to implement any plans or suggestions Consultant may provide. Consultant shall also be entitled to reimbursement for reasonable out of pocket expenses incurred by Consultant in the performance of his duties hereunder. 4. Term. The term of this Agreement shall begin on October 1, 1995, and shall terminate on October 1, 2000; provided that in the event of Consultant's death or total disability this Agreement shall terminate as of the date of death or disability. 5. Renewal. This Agreement may be renewed for an additional term by the mutual written agreement of the parties. 6. Noncompete. During the term of this Agreement, Consultant shall not be associated, directly or indirectly as employee, proprietor, partner, agent, representative, officer, or otherwise, with the operation of any business that is competitive with the financial services industry or any other business of the Corporation or its affiliates in the State of Illinois or any state contiguous with the State of Illinois. Notwithstanding the foregoing, Consultant may participate in the affairs of any governmental, educational or other charitable institution, may continue to serve as a director or 2 officer of all organizations which he served in any of those capacities at the time of his retirement, may engage in professional speaking and writing activities and may serve as a member of the board of directors of publicly held corporations as long as the Chief Executive Officer of the Corporation, in good faith, does not determine that such activities unreasonably interfere with the business of the Corporation or diminish Consultant's duties and obligations to the Corporation, and Consultant shall be entitled to retain all fees, royalties and other compensation derived from such activities; and provided further, that this Agreement shall not be construed to prevent Consultant from investing his personal funds in any form or manner he may choose that will not require any services on his part in the operation of or the affairs of the companies in which such investments are made which are competitive with the financial service industry or any other business of the Corporation or its affiliates in the State of Illinois or any state contiguous with the State of Illinois. 7. Confidentiality. Consultant acknowledged that, following his retirement from the Corporation, he continues to be bound by the terms of the "Northern Trust Corporation Statement of Policies and Procedures Regarding Confidential Information, Securities Trading by Employees and Related Matters" (the "Confidential Information Policy") and the "Northern Trust Corporation Information Asset Security Policy" (the "Information Asset Security Policy") and agrees that these policies will also apply to any information learned by him in connection with the performance of his duties under this Agreement. Consultant will not disclose to or discuss with any person not employed by the Corporation or its affiliates any information of a type described as "confidential information" in the Confidential Information Policy or as "information assets" in the Information Asset Security Policy. This restriction will cease to apply to information that has become generally known or is already known to the person or persons with whom it is to be discussed, other than through a breach of the Confidentiality Information Policy or the Information Asset Security Policy. 8. Relief. In the event of a breach or a threatened or intended breach of Section 5 or Section 6 of this Agreement by Consultant, the Corporation shall be entitled, in addition to remedies otherwise available to the Corporation at law or in equity, to injunctions, both preliminary and permanent, enjoining such breach or threatened or intended breach, and Consultant hereby consents to the issuance thereof forthwith in any court of competent jurisdiction. In addition, Consultant agrees to pay to the Corporation any costs and attorneys' fees reasonably incurred by the Corporation in connection therewith. The taking of any action by the Corporation or the forbearance of the Corporation to take any action shall not constitute a waiver by the Corporation of any of its rights to remedies or relief under this Agreement or under law or equity. 3 9. Complete Agreement. This Agreement represents the complete Agreement between the Corporation and Consultant concerning the subject matter hereof and supersedes all prior agreements or understandings, written or oral. No attempted modification or waiver of any of the provisions hereof shall be binding on either party unless in writing and signed by both Consultant and the Corporation. 10. Notices. Any notice required or permitted to be given hereunder shall be in writing and shall be effective three business days after it is properly sent by registered or certified mail, if to the Corporation to its Secretary at the principal place of business of the Corporation, or if to Consultant to the address set forth beneath his signature to this Agreement, or to such other address as either party may from time to time designate by notice. 11. Assignability. This Agreement may not be assigned by either party without the prior written consent of the other party, except that no consent is necessary for the Corporation to assign this Agreement to a corporation succeeding to substantially all the assets or business of the Corporation, whether by merger, consolidation, acquisition or otherwise. This Agreement shall be binding upon Consultant, his heirs and permitted assigns and the Corporation, its successors and permitted assigns. 12. Severability. Each of the sections contained in this Agreement shall be enforceable independently of every other section in this Agreement, and the invalidity or nonenforceability of any section shall not invalidate or render nonenforceable any other section contained herein. If any section or provision in a section is found invalid or unenforceable, it is the intent of the parties that a court of competent jurisdiction shall reform the section or provision to produce its nearest enforceable economic equivalent. 13. Applicable Law. It is the intention of the parties hereto that all questions with respect to the construction and performance of this Agreement and the rights and liabilities of the parties hereto shall be determined in accordance with the laws of the State of Illinois. The parties hereto submit to the jurisdiction of the courts of Illinois in respect of any matter or thing arising out of this Agreement or pursuant thereto. 4 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and the year first above written. Northern Trust Corporation By: /s/ Peter L. Rossiter ___________________________ Executive Vice President /s/ David W. Fox _________________________ Consultant Address of Consultant: 1201 Burr Ridge Club Drive Burr Ridge, Illinois 60521 -5- EX-10.XXIII 13 ANNUAL PERFORMANCE PLAN EXHIBIT NUMBER (10)(xxiii) TO 1995 FORM 10-K NORTHERN TRUST CORPORATION ANNUAL PERFORMANCE PLAN 1995 I. Purpose of Plan The purpose of the Annual Performance Plan (the "Plan") is to promote the achievement of superior financial and operating performance of the Northern Trust Corporation and its subsidiaries (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, 1995 to December 31, 1995. III. Eligibility and Participation Eligibility to participate in the Plan is restricted to officers with the title of Vice President and above and who are not eligible for participation in a Specialized Incentive Plan. Plan participation is reviewed each year, and participation in one year does not automatically indicate participation in subsequent Plan years. Participation in the Plan is based upon recommendation from the respective Business Unit Head. IV. Award Funding and Determination At the beginning of each Plan year, the Compensation and Benefits Committee of the Board of Directors of the Corporation will determine a Corporate Earnings Target and profit plan funding for awards under the Annual Performance Plan. The allocation of the Plan award funding to each respective Business Unit will be based on the salaries of eligible officers with the Business Unit. Within each Business Unit, one-half of the available funding for awards under the Plan will be based on the Corporation's financial achievement versus the Corporate Earnings Target. The other half of the award funding is based on the financial achievement of the Business Unit versus the Business Unit's earnings target. For staff support personnel, the available funding for awards will be based entirely on the financial achievement of the Corporation versus the Corporate Earnings Target. The formula determining the pool level funding based on Corporate and Business Unit performance is described in Attachment I. V. Individual Award Determination Individual participant awards will be discretionary. They will be determined by Business Unit Management based on an assessment of individual performance, relative to performance expectations, contribution, competitive level of total compensation, and available award pool funding. VI. Payment of Awards Awards will be paid in cash as soon as practicable following the completion of the Plan year. Awards payable because of a Change in Control of the Corporation pursuant to Paragraph VIII (h) shall be paid in cash as soon as practicable following such Change in Control. VII. Administration The Plan shall be administered by the Management Committee of the Corporation (the "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 of the Corporation, by written resolution, may amend, suspend, or terminate any or all provisions of the Plan at any time. VIII. Other Provisions The following miscellaneous provisions are applicable to the Plan: (a) Awards paid under the provisions of the Plan are considered pensionable earnings when paid. (b) Termination of employment by a participant during the Plan year, either voluntary or involuntary with cause, and for reasons other than death, disability, or retirement shall result in immediate exclusion from the Plan. (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 payment. (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. 2 (g) Each participant shall designate a beneficiary (the "Designated Beneficiary") to receive the award, if any, allocated to a participant, 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 the event of a Change in Control of the Corporation, discretionary awards shall be paid in accordance with the last sentence of Section V of this Plan and as if the Corporation and Business Units had achieved the respective earnings targets, as described in Section IV. 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 capital 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 to 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. 3 EX-10.XXIV 14 EMPLOYMENT SECURITY AGREEMENT EXHIBIT NUMBER (10)(xxiv) To 1995 FORM 10-K EMPLOYMENT SECURITY AGREEMENT ----------------------------- THIS EMPLOYMENT SECURITY AGREEMENT is entered into this ____________ day of __________________, 1996, between NORTHERN TRUST CORPORATION, a Delaware corporation (the "Company"), and ____________________________________________________ (the "Executive"). WITNESSETH THAT: --------------- WHEREAS, Executive is employed by the Company or one of its wholly-owned subsidiaries (referred to collectively as the "Company") and the Company desires to provide certain security to Executive in connection with any potential change in control of the Company; and WHEREAS, the Company and the Executive entered into an Employment Security Agreement dated as of ________________, 19__ with respect to the Executive's employment following a change in control of the Company (which agreement, as it has been amended from time to time and supplemented by subsequent letter agreements, is referred to in this Agreement as the "Prior Agreement"); and WHEREAS, the Executive and the Company wish to supersede the Prior Agreement with this Agreement; NOW, THEREFORE, it is hereby agreed by and between the parties, for good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, as follows: 1. Payments and Benefits Upon a Change in Control. If within two (2) years after a Change in Control (as defined below) or during the Period Pending a Change in Control (as defined below), (i) the Company shall terminate Executive's employment with the Company without Good Cause (as defined below), or (ii) Executive shall voluntarily terminate such employment with Good Reason (as defined below), the Company shall, within 30 days of Executive's Employment Termination (as defined below), make the payments and provide the benefits described below. (a) Cash Payment. The Company shall make a lump sum cash payment to Executive equal to three times the Executive's Annual Compensation (as defined below). (b) Short-Year Bonus. The Company shall make a lump sum cash payment to Executive equal to a pro rata portion (based on the date on which Executive's Employment Termination occurs) of the average of the annual amounts paid to Executive under the Management Performance Plan or any successor plan (the "MPP"), the Annual Performance Plan or any successor plan (the "APP"), the Specialized Incentive Plans or any successor plans (the "SIP") and any other cash-based incentive or bonus plans, with respect to the last three full fiscal years of Executive's participation in such plans prior to Employment Termination or, if higher, prior to the Change in Control. For purposes of the preceding sentence, if Executive's number of full fiscal years of participation in the MPP, APP, SIP, and other cash- based plan prior to the Change in Control is less than three, the average amount shall be calculated as the average of the annual amounts paid to Executive over the number of full fiscal years of Executive's participation in the MPP, APP, SIP, and other plans prior to the -1- Change in Control, or the number of full fiscal years of Executive's participation in the MPP, APP, SIP, and other plans prior to Employment Termination, whichever produces a higher average annual amount. (c) Welfare Benefit Plans. With respect to each Welfare Benefit Plan (as defined below), for the period beginning on Executive's Employment Termination and ending on the earlier of (i) three years following Executive's Employment Termination, or (ii) the date Executive becomes covered by a welfare benefit plan or program maintained by an entity other than the Company which provides coverage or benefits at least equal, in all respects, to such Welfare Benefit Plan, Executive shall continue to participate in such Welfare Benefit Plan on the same basis and at the same cost to Executive as was the case immediately prior to the Change in Control (or, if more favorable to Executive, as was the case at any time hereafter), or, if any benefit or coverage cannot be provided under a Welfare Benefit Plan because of applicable law or contractual provisions, Executive shall be provided with substantially similar benefits and coverage for such period. Immediately following the expiration of the continuation period required by the preceding sentence, Executive shall be entitled to continued group health benefit plan coverage (so-called "COBRA coverage") in accordance with Section 4980B of the Internal Revenue Code of 1986, as amended (the "Code"), it being intended that COBRA coverage shall be consecutive to the benefits and coverage provided for in the preceding sentence. Executive's eligibility for, and premium contribution level under, The Northern Trust Retiree Medical Care Plan and The Northern Trust Medicare Supplemental Plan and any similar or successor plans or programs maintained or contributed to by the Company, shall be determined by adding three years to Executive's age and years of service at Executive's Employment Termination. (d) Supplemental Retirement Plans. All amounts accrued or accumulated on behalf of Executive under the Supplemental Pension Plan for Employees of The Northern Trust Company (the "SERP"), the Supplemental Thrift- Incentive Plan for Employees of The Northern Trust Company (the "Supplemental TIP") and the Supplemental Employee Stock Ownership Plan for Employees of The Northern Trust Company (the "Supplemental ESOP") will immediately be fully vested upon the Change in Control, and the Company shall promptly pay or distribute all such amounts to Executive in accordance with the terms of such plans as in effect on the date of this Agreement (or as of Executive's Employment Termination, if more favorable to Executive). (e) Stock Incentive Plans. All stock options granted under the Northern Trust Corporation Amended 1985 Incentive Stock Plan (the "1985 ISP"), the Northern Trust Corporation 1992 Incentive Stock Plan (the "1992 ISP"), the Northern Trust Corporation Amended 1992 Incentive Stock Plan (the "1995 ISP") and any other stock plan or program (collectively referred to as the "ISPs"), will immediately become fully vested and exercisable upon the Change in Control. All restricted stock granted under the ISPs will immediately be fully vested and distributed to Executive upon the Change in Control. With respect to performance shares granted under the ISPs pursuant to the Northern Trust Corporation Long Term Incentive Plan ("LTIP") or otherwise, upon the Change in Control: (i) all performance shares -2- credited to Executive's performance share account will be immediately distributed to Executive (together with any other amounts then credited to Executive's performance share account); (ii) a pro rata portion of all performance shares awarded to Executive but not then credited to Executive's performance share account will be immediately distributed to Executive; and (iii) Executive will remain eligible for crediting to Executive's performance share account as of the end of the performance period, in accordance with the provisions of the LTIP in effect as of the Change in Control, any remaining performance shares awarded to Executive but not distributed in accordance with this paragraph. (f) Salary to Date of Employment Termination. The Company shall pay to Executive any unpaid salary or other compensation of any kind earned with respect to any period prior to Executive's Employment Termination and a lump sum cash payment for accumulated but unused vacation earned through such Employment Termination. 2. Definitions. For purposes of this Agreement: (a) "Good Cause" shall mean: (i) Executive's conviction of any criminal violation involving dishonesty, fraud, or breach of trust; (ii) Executive's willful engagement in any misconduct in the performance of Executive's duty that materially injures the Company; (iii) Executive's performance of any act which, if known to the customers, clients, stockholders or regulators of the Company or any of its subsidiaries, would materially and adversely impact on the business of the Company or any of its subsidiaries; (iv) any act or omission by Executive that causes a regulatory body with jurisdiction over the Company or any of its subsidiaries, to demand, request, or recommend that Executive be suspended or removed from any position in which Executive serves with the Company or any of its subsidiaries; or (v) Executive's willful and substantial nonperformance of assigned duties, provided that such nonperformance has continued more than ten days after the Company has given written notice of such nonperformance and of its intention to terminate Executive's employment because of such nonperformance. (b) "Good Reason" shall exist if, without Executive's express written consent: (i) The Company shall materially reduce the nature, scope, level or extent of Executive's responsibilities from the nature, scope, level or extent of such responsibilities prior to the Change in Control, or shall fail to provide Executive with adequate office facilities and support services to perform such responsibilities; (ii) The Company shall reduce Executive's salary below that in effect as of the date of this Agreement (or as of the Change in Control, if greater); (iii) The Company shall require Executive to relocate Executive's principal business office or his principal place of residence outside the ______________, ______________ Standard Metropolitan Statistical Area (the "Geographical Employment Area"), or assign to Executive duties that would reasonably require such relocation; -3- (iv) The Company shall require Executive, or assign duties to Executive which would reasonably require Executive, to spend more than fifty normal working days away from the Geographical Employment Area during any consecutive twelve-month period; or (v) The Company shall fail to continue in effect any cash or stock- based incentive or bonus plan, retirement plan, welfare benefit plan, or other benefit plan, program or arrangement, unless the aggregate value (as computed by an independent employee benefits consultant selected by the Company) of all such compensation, retirement and benefit plans, programs and arrangements provided to Executive is not materially less than their aggregate value as of the date of this Agreement (or as of the Change in Control, if greater). (c) "Change in Control" shall be deemed to occur on the earliest of: (i) The receipt by the Company 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% of the outstanding capital stock of the Company entitled to vote for the election of directors ("voting stock"); (ii) The commencement by an entity, person, or group (other than the Company or a subsidiary of the Company) of a tender offer or an exchange offer for more than 20% of the outstanding voting stock of the Company; (iii) The effective time of (A) a merger or consolidation of the Company with one or more other corporations as a result of which the holders of the outstanding voting stock of the Company immediately prior to such merger or consolidation hold less than 60% of the voting stock of the surviving or resulting corporation, or (B) a transfer of substantially all of the property of the Company other than to an entity of which the Company owns at least 80% of the voting stock; or (iv) The election to the Board of Directors of the Company, without the recommendation or approval of the incumbent Board of Directors of the Company, of the lesser of: (A) three directors; or (B) directors constituting a majority of the number of directors of the Company then in office. (d) "Annual Compensation" shall mean the sum of: (i) Executive's salary at the greater of (A) Executive's salary rate in effect on the date of the Change in Control, or (B) Executive's salary rate in effect on Executive's Employment Termination; and (ii) the Amounts Payable Under Any Cash Bonus Plans (as defined below) in which Executive participates. (e) "Employment Termination" shall mean the effective date of: (i) Executive's voluntary termination of employment with the Company with Good Reason; or (ii) the termination of Executive's employment by the Company without Good Cause. -4- (f) "Welfare Benefit Plan" shall mean each welfare benefit plan maintained or contributed to by the Company, including, but not limited to a plan that provides health (including medical and dental), life, accident or disability benefits or insurance, or similar coverage, in which Executive was participating at the time of the Change in Control. (g) "Amounts Payable Under Any Cash Bonus Plans" shall mean the sum of whichever of the following are applicable to Executive: (i) the amount that would be awarded to Executive under the MPP, assuming the target award percentage was applicable and Executive was employed for the full fiscal year in which Executive's Employment Termination occurs; (ii) the average of the annual amounts paid to Executive under the APP with respect to the last three full fiscal years of Executive's participation in the APP prior to Employment Termination or, if higher, prior to the Change in Control; (iii) the average of the annual amounts paid to Executive under the SIPs with respect to the last three full fiscal years of Executive's participation in the SIPs prior to Employment Termination or, if higher, prior to the Change in Control; and (iv) the average of the annual amounts paid to Executive under any other cash-based incentive or bonus plans in which Executive participates after the date of this Agreement with respect to the last three full fiscal years of Executive's participation in such plans prior to Employment Termination or, if higher, prior to the Change in Control. For purposes of the preceding sentence, if Executive's number of full fiscal years of participation in the APP, SIP, or other cash-based plan prior to the Change in Control is less than three, the amount under clause (ii), (iii) or (iv) of this paragraph shall be calculated as the average of the annual amounts paid to Executive over the number of full fiscal years of Executive's participation in the APP, SIP, or other plans prior to the Change in Control, or the number of full fiscal years of Executive's participation in the APP, SIP, or other plans prior to Employment Termination, whichever produces a higher average annual amount. (h) "Period Pending a Change in Control" shall mean the period after the approval by the Company's stockholders and prior to the effective time of (A) a merger or consolidation of the Company with one or more other corporations as a result of which the holders of the outstanding voting stock of the Company immediately prior to such merger or consolidation hold less than 60% of the voting stock of the surviving or resulting corporation, or (B) a transfer of substantially all of the property of the Company other than to an entity of which the Company owns at least 80% of the voting stock. 3. Certain Additional Payments by the Company. (a) Gross-Up. Anything in this Agreement to the contrary notwithstanding, in the event that any payment or distribution by or on behalf of the Company to or for the benefit of Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 3) (the "Payments") is determined to be an "excess parachute payment" pursuant to Code Section 280G or any successor or substitute provision of the Code, with the effect that Executive is liable for the payment of the excise tax described in Code Section 4999 or any successor or substitute provision of the Code, or any interest or penalties are -5- incurred by Executive with respect to such Payments (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then Executive shall be entitled to receive an additional payment (the "Gross-Up Payment") in an amount such that after payment by Executive of all taxes imposed upon the Gross-Up Payment, including, without limitation, federal, state, local or other income taxes, FICA taxes, and additional Excise Tax (and any interest and penalties imposed with respect to such taxes), Executive retains a portion of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (b) Determination of Gross-Up. Subject to the provisions of Section 3(c), all determinations required to be made under this Section 3, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by the public accounting firm that serves as the Company's auditors (the "Accounting Firm"), which shall provide detailed supporting calculations both to the Company and Executive within 15 business days of the receipt of notice from the Company or Executive that there have been Payments, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change in Control, Executive shall designate another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 3, shall be paid by the Company to Executive within five days after the receipt by the Company and Executive of the Accounting firm's determination. If the Accounting Firm determines that no Excise Tax is payable by Executive, it shall furnish Executive with a written opinion that failure to report the Excise Tax on Executive's applicable federal income tax return would not result in the imposition of a negligence or similar penalty. Any determination by the Accounting Firm shall be binding upon the Company and Executive, except as provided in paragraph (c) below. (c) IRS Claims. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that the Internal Revenue Service or other agency will claim that a greater Excise Tax is due, and thus a greater amount of Gross-Up Payment should have been made by the Company than that determined pursuant to paragraph (b) above (an "Underpayment"). In the event that Executive is required to make a payment of any such Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred, if any, and such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. Executive shall notify the Company in writing of any claim by the Internal Revenue Service or other agency that, if successful, would require the payment by the Company of the Gross-Up Payment or an Underpayment. 4. Mitigation and Set-Off. Executive shall not be required to mitigate Executive's damages by seeking other employment or otherwise. The Company's obligations under this Agreement shall not be reduced in any way by reason of any compensation or benefits received (or foregone) by Executive from sources other than the Company after Executive's Employment -6- Termination, or any amounts that might have been received by Executive in other employment had Executive sought such other employment. Executive's entitlement to benefits and coverage under this Agreement shall continue after, and shall not be affected by, Executive's obtaining other employment after his Employment Termination, provided that any such benefit or coverage shall not be furnished if Executive expressly waives the specific benefit or coverage by giving written notice of waiver to the Company. 5. Litigation Expenses. The Company shall pay to Executive all out-of-pocket expenses, including attorneys' fees, incurred by Executive in the event Executive successfully enforces any provision of this Agreement in any action, arbitration or lawsuit. 6. Assignment; Successors. This Agreement may not be assigned by the Company without the written consent of Executive but the obligations of the Company under this Agreement shall be the binding legal obligations of any successor to the Company by merger, consolidation or otherwise, and in the event of any business combination or transaction that results in the transfer of substantially all of the assets or business of the Company, the Company will cause the transferee to assume the obligations of the Company under this Agreement. This Agreement may not be assigned by Executive during Executive's life, and upon Executive's death will inure to the benefit of Executive's heirs, legatees and legal representatives of Executive's estate. 7. Interpretation. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Illinois, without regard to the conflict of law principles thereof. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. 8. Withholding. The Company may withhold from any payment that it is required to make under this Agreement amounts sufficient to satisfy applicable withholding requirements under any federal, state or local law. 9. Amendment or Termination. This Agreement may be amended at any time by written agreement between the Company and Executive. The Company may terminate this Agreement by written notice given to Executive at least two years prior to the effective date of such termination, provided that, if a Change in Control occurs prior to the effective date such termination, the termination of this Agreement shall not be effective and Executive shall be entitled to the full benefits of this Agreement. Any such amendment or termination shall be made pursuant to a resolution of the Board. 10. Financing. Cash and benefit payments under this Agreement shall constitute general obligations of the Company. Executive shall have only an unsecured right to payment thereof out of the general assets of the Company. Notwithstanding the foregoing, the Company may, by agreement with one or more trustees to be selected by the Company, create a trust on such terms as the Company shall determine to make payments to Executive in accordance with the terms of this Agreement. 11. Severability. In the event that any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect. -7- 12. Other Agreements. This Agreement supersedes and cancels the Prior Agreement, and all prior written or oral agreements and understandings relating to the terms of this Agreement or the Prior Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day and year first written above. NORTHERN TRUST CORPORATION By:_________________________ ______________________________ Its:_______________________ Executive -8- EX-11 15 COMPUTATION OF PER SHARE EARNINGS EXHIBIT NUMBER (11) TO 1995 FORM 10-K NORTHERN TRUST CORPORATION COMPUTATION OF PER SHARE EARNINGS
For the Year Ended December 31, -------------------------------------------------------- 1995 1994 1993 -------------- ------------- ------------- Computations Required by Regulation S-K - --------------------------------------- Primary Earnings Per Share - -------------------------- Net Income Applicable to Common Shares $211,461,135 $174,917,377 $161,572,474 ------------ ------------ ------------ Weighted Average Number of Common and Common Equivalent Shares Outstanding Common Shares 55,368,671 53,866,513 53,019,436 Diluted Effect of Common Equivalent Shares (A) Stock Options 609,254 863,506 1,177,972 Long Term Performance Stock Plan 345,251 405,626 391,025 Other 14,741 8,569 1,500 ------------ ------------ ------------ 56,337,917 55,144,214 54,589,933 ============ ============ ============ Net Income Per Common and Common Equivalent Share $3.75 $3.17 $2.96 ----- ----- -----
(A) Determined by application of the treasury stock method. 1 NORTHERN TRUST CORPORATION COMPUTATION OF PER SHARE EARNINGS
For the Year Ended December 31, -------------------------------------------------------- 1995 1994 1993 -------------- ------------- ------------- Computations Required by Regulation S-K - --------------------------------------- Fully Diluted Earnings Per Share - -------------------------------- Net Income Applicable to Common Shares $211,461,135 $174,917,377 $161,572,474 Add Back: Dividend on Series E Convertible Preferred Stock 3,125,000 3,125,000 3,129,199 ------------ ------------ ------------ $214,586,135 $178,042,377 $164,701,673 ============ ============ ============ Weighted Average Number of Common and Common Equivalent Shares Outstanding Common Shares 55,368,671 53,866,513 53,019,436 Diluted Effect of Common Equivalent Shares (A) Stock Options 1,109,533 866,356 1,223,468 Long Term Performance Stock Plan 365,635 406,022 399,331 Other 20,124 8,664 1,754 Other Potentially Dilutive Securities Equivalent Shares Assuming Conversion of Series E Convertible Preferred Stock 1,204,820 1,204,820 1,204,820 ------------ ------------ ------------ 58,068,783 56,352,375 55,848,809 ============ ============ ============ Net Income Per Common and Common Equivalent Share $3.70 $3.16 $2.95 ----- ----- -----
(A) Determined by application of the treasury stock method. 2 EX-13 16 ANNUAL REPORT EXHIBIT NUMBER (13) TO 1995 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 with its headquarters located in the Chicago financial district. The Corporation also owns banks in each of the states of Arizona, California, Florida and Texas, and various other nonbank subsidiaries, including a securities brokerage firm, a futures commission merchant, an international investment consulting firm and a retirement benefit plan services company. The Corporation's three other Illinois banks were merged into the Bank on February 29, 1996. 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 Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with Northern Trust's Consolidated Fi- nancial Statements and Consolidated Financial Statistics included herein. RESULTS OF OPERATIONS OVERVIEW. Net income for 1995 totaled a record $220.0 million, a 20.8% increase from the $182.2 million earned in 1994 which in turn was 8.5% greater than the $167.9 million earned in 1993. On a fully diluted basis, net income per common share increased 17% to $3.70 in 1995, compared with net income per common share of $3.16 in 1994 and $2.95 in 1993. The record 1995 net income performance, together with strong growth in equity, produced a return on average common stockholders' equity of 17.6% compared with 16.6% in 1994 and 17.9% in 1993. The return on average assets was 1.13% in 1995 compared with 1.02% in 1994 and 1.07% in 1993. 1995 marks the eighth consecutive year of record earnings. Trust fees reached a new high, surpassing $500 million, while trust assets under administration reached $614 billion at December 31, 1995, up $115 billion from 1994. The record earnings resulted from excellent growth in all of Northern Trust's diversified revenue sources combined with strong expense control. Primarily through the retention of earnings, stockholders' equity grew to $1.5 billion as compared to $1.3 billion at December 31, 1994 and $1.2 billion at December 31, 1993. The Board of Directors increased the quarterly dividend per common share 19.2% in November 1995, to $.31 from $.26, for a new annual rate of $1.24. This is the ninth 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 service quality, cost containment and the maximization of the benefits derived from its investments in technology. Expense growth and capital expenditures are also closely monitored to ensure that short- and long-term business strategies are effectively supported. In early 1995, Northern Trust committed to control its expense growth rate by taking approximately $50 million out of base expenses over the next three years. Northern Trust met its goal for 1995 and now expects to meet the balance of the three-year goal during 1996. SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA
(In Millions Except Per Share Amounts) 1995 1994 1993 1992 1991 - ----------------------------------------------------------------------------- Net Interest Income $ 357.6 $ 334.6 $ 327.9 $ 310.3 $ 281.1 Provision for Credit Losses 6.0 6.0 19.5 29.5 31.0 Noninterest Income Trust Fees 505.0 453.4 404.8 368.4 303.1 Other Noninterest Income 173.1 180.0 149.0 141.9 110.5 Noninterest Expenses 709.2 700.5 628.2 584.6 500.1 Provision for Income Taxes 100.5 79.3 66.1 57.0 36.2 - ----------------------------------------------------------------------------- NET INCOME $ 220.0 $ 182.2 $ 167.9 $ 149.5 $ 127.4 - ----------------------------------------------------------------------------- Net Income Applicable to Common Stock $ 211.5 $ 174.9 $ 161.6 $ 142.7 $ 121.4 - ----------------------------------------------------------------------------- PER COMMON SHARE Net Income-Primary $ 3.75 $ 3.17 $ 2.96 $ 2.64 $ 2.29 - -Fully Diluted 3.70 3.16 2.95 2.64 2.27 Dividends Declared 1.09 .92 .775 .665 .58 - ----------------------------------------------------------------------------- Average Total Assets $19,409.5 $17,885.8 $15,700.2 $13,418.0 $12,182.5 Senior Notes at Year-End 17.0 547.0 817.0 312.0 2.0 Notes Payable at Year-End 334.6 244.8 326.8 233.2 264.1
12 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 represents 63% of its total taxable equivalent revenue, compared with 62% one year ago, exclusive of the $28.5 million 1994 pretax gain on the sale of the Corporation's 21% interest in Banque Scandinave en Suisse (BSS). Noninterest income totaled $678.1 million in 1995, $633.4 million in 1994 and $553.8 million in 1993. TRUST FEES. Trust fees accounted for nearly 75% of total noninterest income and 47% of total taxable equivalent revenue in 1995. Trust fees for 1995 increased 11% to $505.0 million from $453.4 million in 1994 which was up 12% from $404.8 million in 1993. Trust fees have increased at a compound growth rate of 13% for the last five years. The increase in 1995 trust fees is principally the result of growth in business from new and existing clients, particularly for investment management, custody, retirement services and securities lending services coupled with growth in stock and bond market values. The March 31, 1995 acquisition of The Beach Bank of Vero Beach, Florida (Beach Bank) and the October 31, 1995 acquisition of RCB International, Inc. (RCB), an international provider of institutional investment management services, contributed approximately $6.1 million in trust fees in 1995. Contributing to the 1994 fee growth were new business results in addition to the incremental impact of fees contributed by Hazlehurst & Associates, Inc. (Hazlehurst), an April 1994 acquisition. 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 $4.6 billion in 1995 and $3.9 billion in 1994. Northern Trust's fiduciary business encompasses Master Trust, Master Custody, investment management and retirement services for corporate and institutional asset pools, as well as a complete range of estate planning, fiduciary, and asset management services for individuals. Fees from these highly focused services are fairly evenly distributed between Northern Trust's two business units, Corporate and Institutional Services (C&IS) and Personal Financial Services (PFS). The discussion of trust activities in each of these business units follows. CORPORATE AND INSTITUTIONAL SERVICES. At December 31, 1995 trust assets under administration in C&IS totaled $550.5 billion, an increase of 23% from $447.2 billion a year ago. Trust fees in C&IS increased 12% in 1995 to $257.5 million from $230.1 million in 1994 which was up 18% from $195.0 million in 1993. Northern Trust is a leading provider of Master Trust and Master Custody services to large U.S. corporate, middle market, institutional and international clients, and public and union retirement funds. In addition to Master Trust and Master Custody, C&IS offers a comprehensive array of retirement service and investment service products. Large U.S. Corporate. Trust fees from the large U.S. corporate market segment totaled $86.1 million in 1995. Trust fees for this segment in 1994 and 1993 totaled $81.4 million and $77.3 million, respectively. Assets under administration totaled $186.5 billion at December 31, 1995 compared with $152.9 billion a year ago. Much of the anticipated 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, its family of institutional funds, and the services offered through Hazlehurst. Middle Market. Trust fees from the middle market segment totaled $25.3 million in 1995. Trust fees for this segment in 1994 and 1993 totaled $25.1 million and $22.4 million, respectively. Assets under administration totaled $19.0 billion at December 31, 1995 compared with $17.1 billion a year ago. New business has primarily been attributable to the sale of investment service products. Effective January 1, 1996, the trust and banking activities of the middle market segment transferred to the PFS business unit. Institutional. This market segment, which includes insurance companies, foundations and endowments, and correspondent trust services, 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. Three of the ten largest foundations are clients as are many of the largest endowment funds in the United States. Northern Trust leverages its investment in technology by providing smaller bank trust departments with custody, systems, and investment services through its correspondent trust services offerings. Trust fees from the institutional market segment in 1995, 1994 and 1993 totaled $50.1 million, $48.0 million Northern Trust Corporation 13 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) and $43.4 million, respectively. Assets under administration at December 31, 1995 increased to $141.6 billion from $118.9 billion at December 31, 1994. International. This segment is composed of non-U.S. clients from eighteen countries and has had the highest compound growth rate for the last three years when measured in terms of assets under administration and trust fees. At December 31, 1995 assets under administration totaled $67.3 billion, up 40% from $48.1 billion at year-end 1994, which in turn was up 51% over the previous year-end. Trust fees for 1995 increased 18% to $33.9 million. This compares with $28.8 million in 1994 which was up 56% from $18.4 million in 1993. Northern Trust continues to invest in the required systems capabilities and sub-custodial network necessary to capitalize on the growth opportunities presented by the development of worldwide financial markets. Retirement Services. Public and union retirement funds and the operations of Hazlehurst are included in retirement services. In 1995 these activities contributed $58.3 million in trust fees, compared with $46.8 million in 1994 and $33.5 million in 1993. At December 31, 1995, $104.7 billion of assets were under administration versus $83.8 billion at December 31, 1994. Growth in this area 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 the public and union retirement funds market segment tends to be 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. The services offered through Hazlehurst include retirement plan design, participant recordkeeping, and actuarial and consulting services that complement Northern Trust's custody, fiduciary and investment management capabilities in the strategically important retirement services market. Investment Services. Investment management activities, securities lending, and the operations of RCB are included in investment services. This group is responsible for the managed portion of trust assets under administration that are shown within the various market segments. Fees associated with these activities, with the exception of RCB-related fees, are also shown within the market segments. Total assets under management grew from $51.5 billion at year- end 1994 to $67.2 billion at year-end 1995; $35.8 billion was direct asset management while the remaining $31.4 billion was securities lending collateral. Northern Trust accelerated in 1995 its positioning as a global, multi-asset class manager with an expanded array of investment service and product capabilities. Advisory services assist clients in defining and evaluating their investment strategy. Investment products, developed by Northern Trust and selected partners, help clients implement their investment strategies. Information products, delivered through Passport, provide assistance in monitoring conformance with investment policy guidelines. Northern Trust continues to be ranked by Pensions and Investments magazine as one of the largest institutional money managers in the U.S. On October 31, 1995, Northern Trust completed its acquisition of RCB International, Inc., which had $5.0 billion in assets under management at year- end 1995 and provided $3.8 million in trust fees in 1995. RCB provides value- added U.S. and international multiple manager programs to complement the capabilities of Northern Trust in the fixed income, equity and short-term markets. Clients who utilize trust services may elect to have their securities lent to generate revenues, thereby improving 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 and included in trust assets under management. The growth in domestic and international lending fees, up 19% over 1994, reflects an increase in the volume of securities loaned. The cash collateral totaled $31.4 billion and $26.4 billion at December 31, 1995 and 1994, respectively. During the first quarter of 1995, Northern Trust commenced operations in its new Hong Kong subsidiary to better facilitate the lending of securities from its clients' global portfolios. Also in 1995, additional investment options were made 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 the basic custody service product, 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 basic custody, economies of scale and technological innovation. In terms of assets under administration, global custody is one of the fastest growing products within C&IS. This product provides the necessary service capabilities 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 66 countries, Northern Trust had global assets of approximately $85 billion under administration at December 31, 1995 which is 30% greater than last year. 14 Northern Trust Corporation CONSOLIDATED TRUST ASSETS UNDER ADMINISTRATION
Percent Five-Year December 31 Change Compound ---------------------------------- ------- Growth ($ In Billions) 1995 1994 1993 1992 1991 1995/94 Rate - ------------------------------------------------------------------------------- Corporate $ 67.2 $ 51.5 $ 46.6 $ 41.7 $ 36.0 30% 12% Personal 38.3 30.8 30.5 27.9 22.7 24 15 - ------------------------------------------------------------------------------- TOTAL MANAGED TRUST ASSETS $105.5 $ 82.3 $ 77.1 $ 69.6 $ 58.7 28% 13% - ------------------------------------------------------------------------------- Corporate $483.3 $395.7 $379.9 $323.2 $287.8 22% 19% Personal 25.1 20.6 19.5 18.9 14.8 22 15 - ------------------------------------------------------------------------------- TOTAL NON-MANAGED TRUST ASSETS $508.4 $416.3 $399.4 $342.1 $302.6 22% 18% - ------------------------------------------------------------------------------- CONSOLIDATED TRUST ASSETS UNDER ADMINISTRATION $613.9 $498.6 $476.5 $411.7 $361.3 23% 17%
PERSONAL FINANCIAL SERVICES. At December 31, 1995 trust assets under administration in PFS totaled $63.4 billion, an increase of 23% from $51.4 billion at December 31, 1994. Trust fees increased 11% in 1995 to $247.5 million while 1994 trust fees totaled $223.3 million, an increase of 7% from $209.8 million in 1993. Although all geographic markets contributed to the 1995 increase, the strongest fee growth occurred in the Wealth Management Group and the Florida and Texas markets. Northern Trust has positioned itself in states having significant concentrations of wealth and growth potential, with a network of 52 locations in Illinois, Florida, California, Arizona, and Texas as of February 1996. 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 8% to $124.0 million in 1995 from $114.7 million in 1994, which was up 5% from $109.8 million in 1993. Over 40% of the increase in Illinois-based PFS fees is attributable to the rapid growth in services provided by the Wealth Management Group. Northern Trust's Wealth Management Group provides customized products and services to meet the complex financial needs of families throughout the country with assets typically exceeding $100 million. The moderate rate of growth in other trust fees in Illinois 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. Northern Trust has the leading market share in the Chicago area personal trust market. Including the Wealth Management Group, total trust assets under administration totaled $40.1 billion at December 31, 1995 compared with $32.8 billion a year ago. Over the years clients have been attracted by both the quality of trust services and the financial strength and stability which Northern Trust has consistently 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 1995 totaled $65.9 million, up 15% from $57.2 million in 1994 which was up 9% from $52.2 million in 1993. Included in the 1995 results is $2.3 million of fees contributed by Beach Bank, a March 31, 1995 acquisition. Trust assets under administration were $13.2 billion at December 31, 1995, and $10.3 billion at year-end 1994. The five-year compound growth rates for trust fees and trust assets have been 13% and 15%, respectively. With two new offices in Vero Beach and one each in Bradenton, Bonita Springs and Delray Beach, Northern Trust now has twenty-one offices located in coastal communities encompassing the southern half of the state. Management believes there remains significant opportunity for growth in the markets currently served in Florida. California. Northern Trust's California subsidiary has six offices strategically located throughout the state to reach the California trust market. Trust fees for 1995 increased 9% to $37.0 million from $34.0 million in 1994 which was up 5% from $32.3 million in 1993. Trust assets under administration totaled $6.1 billion at December 31, 1995 and $5.3 billion at December 31, 1994. 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 includes providing private banking and trust services to targeted high net worth individuals. Trust fees from this market were $13.7 million in 1995, $12.8 million in 1994 and $11.9 million in 1993. Assets under administration at December 31, 1995 and 1994 totaled $2.1 billion and $1.7 billion, respectively. Northern Trust Corporation 15 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Texas. Northern Trust expanded its presence in Texas during 1995 with the acquisition of Tanglewood Bancshares, Inc., parent company of Tanglewood Bank N.A. of Houston, in the third quarter. The two banking locations acquired now provide trust services and complement Northern Trust's existing facilities, positioning Northern Trust as a premier provider of personal trust and financial services in this attractive market. 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 six offices since its entry into the Texas market in 1989. Trust fees for 1995, 1994 and 1993 were $6.9 million, $4.6 million and $3.6 million, respectively. Trust assets under administration were $1.9 billion at December 31, 1995 and $1.3 billion at December 31, 1994. 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 bond accounts remains in the top quartile for every cumulative performance period from one through nine years ended December 31, 1995, as measured by SEI, a nationally recognized plan sponsor consultant. Investment management performance for equity accounts was solidly above the median for every cumulative performance period from six through ten years ended December 31, 1995, as measured by SEI. Northern Trust leveraged its investment expertise with the establishment in 1994 of a second mutual fund family, the Northern Funds. Assets in this family of funds reached $3.6 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 other selected upscale personal markets. In Florida, expansion into additional counties is planned over the next three to five years. This expansion will be achieved primarily de novo, but may include selective acquisitions. 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 $21.7 million in 1995, compared with $22.0 million in 1994 and $21.3 million in 1993. 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. The 1995 results reflect modest growth in security brokerage activities offset by a decline in the clearing volume of futures contracts. OTHER OPERATING INCOME. Other operating income in 1995 totaled $150.4 million compared with $158.1 million in 1994 and $125.9 million in 1993. The 1994 results included a $28.5 million pretax gain on the 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 Bank's London branch. The principal items included in other operating income are foreign exchange trading profits and treasury management fees. Foreign exchange trading profits totaled a record $55.3 million, up 54% from the $35.9 million reported a year ago, which was up from $32.4 million in 1993. A substantial component of foreign exchange profits resulted from transactions associated with the growing global custody business. As custodian, Northern Trust provides foreign exchange services in the normal course of business. Active management of currency positions, within established limits, produced an ancillary component of aggregate trading profits. The fee portion of treasury management revenues totaled $49.6 million in 1995, a 7% increase from the $46.3 million reported in 1994 compared with $49.0 million in 1993. Total treasury management revenues, which, in addition to fees, include the value of compensating deposit balances, increased 6% to $77.5 million from $73.0 million in 1994 and $72.4 million in 1993. Other operating income in 1995 reflected losses of $.5 million from the sale of mortgage loans, compared with gains of $.1 million in 1994 and $3.9 million in 1993. Other operating income in 1995 also benefited from higher fees on trust-related overnight advances offset by lower revenues from operating other real estate owned (OREO) 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 $90 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 gains totaling $1.0 million were realized in 1995 primarily from held to maturity securities that were called at a premium, in addition to $.1 million in gains from the sale of securities classified as available for sale. This compares with net losses of $.1 million in 1994 and $1.8 million in net gains in 1993. 16 Northern Trust Corporation ANALYSIS OF NET INTEREST INCOME (FTE)
Percent Change --------------- ($ In Millions) 1995 1994 1993 1995/94 1994/93 - --------------------------------------------------------------------------- Interest Income $ 1,104.0 $ 848.7 $ 706.4 30.1% 20.2% Fully Taxable Equivalent Adjustment 37.6 33.4 34.1 12.6 (2.3) - --------------------------------------------------------------------------- Total Interest Income-FTE 1,141.6 882.1 740.5 29.4 19.1 Total Interest Expense 746.4 514.1 378.5 45.2 35.8 - --------------------------------------------------------------------------- NET INTEREST INCOME--FTE 395.2 368.0 362.0 7.4 1.6 - --------------------------------------------------------------------------- AVERAGE VOLUME Earning Assets 17,193.7 15,737.2 13,730.7 9.3 14.6 Interest-Related Funds 14,528.3 13,328.9 11,727.3 9.0 13.7 Noninterest-Related Funds 2,665.4 2,408.3 2,003.4 10.7 20.2 - --------------------------------------------------------------------------- Change in Percentage AVERAGE RATE --------------- Earning Assets 6.64% 5.61% 5.39% 1.03 0.22 Interest-Related Funds 5.14 3.86 3.22 1.28 0.64 Interest Rate Spread 1.50 1.75 2.17 (.25) (0.42) Total Source of Funds 4.34 3.27 2.75 1.07 0.52 - --------------------------------------------------------------------------- NET INTEREST MARGIN 2.30 2.34 2.64 (.04) (0.30)
Refer to page 60 for detailed analysis of net interest income. NET INTEREST INCOME. Net interest income is defined as the total of interest income and amortized fees on earning assets less interest expense on deposits and borrowed funds adjusted for the impact of off-balance sheet hedging activity. Earning assets, which consist of securities, loans and money market assets, are financed by a large base of interest-bearing funds, including retail deposits, wholesale deposits, short-term borrowings, senior notes and long-term debt. Earning assets are also funded by net noninterest-related funds. Net noninterest-related funds consist of demand deposits, the reserve for credit losses and stockholders' equity, reduced by 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 1995 was a record $357.6 million, up 7% from $334.6 million in 1994, which was up 2% from $327.9 million in 1993. 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 1995 was a record $395.2 million, an increase of $27.2 million or 7% from $368.0 million in 1994 which in turn was up 2% from $362.0 million in 1993. The growth in FTE net interest income was essentially attributable to growth in average earning assets, due in part to acquisitions, and was partially offset by a decline in the net interest margin to 2.30% from 2.34% last year and 2.64% in 1993. Earning assets averaged $17.2 billion, up 9% or $1.5 billion from the $15.7 billion reported in 1994, which was up from $13.7 billion in 1993. Approximately 15% of the growth in earning assets resulted from the Beach Bank and Tanglewood Bank acquisitions. Inclusive of these acquisitions, the growth in average earning assets reflects a 10% or $820 million increase in loans, a 24% or $1.2 billion increase in securities and a 23% or $555 million decline in money market assets. Loan volume for the year averaged $9.1 billion reflecting a $921 million or 12% increase in domestic lending while international loans decreased $101 million. The domestic growth came principally from residential mortgage activities, up $446 million, and commercial and industrial loans, up $365 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 $663 million in 1995, up 17% from a year ago, resulting from domestic activity. Securities averaged $6.2 billion in 1995 versus $5.0 billion in 1994, due primarily to a $1.8 billion increase in short-term federal agency and other marketable securities, offset in part by a $554 million reduction in U.S. Government securities. Money market assets averaged $1.9 billion in 1995 versus $2.4 billion in 1994, reflecting a decrease in international deposit placement activity. Northern Trust Corporation 17 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) The increase in average earning assets of $1.5 billion was funded primarily by growth in interest-bearing time deposits, which averaged $9.3 billion, up $1.0 billion. This growth was principally from savings certificates, up $771 million due in large part to certificate of deposit marketing campaigns. Global custody deposit activity in the London branch was up $103 million, while other foreign time deposits increased $106 million. Other interest-related funds averaged $5.2 billion, up $163 million, principally from securities sold under agreements to repurchase (up $325 million) and federal funds purchased (up $213 million), and offset by a $375 million decline in senior notes and all other borrowings. Average net noninterest-related funds increased $257 million, mainly due to higher stockholders' equity and demand deposits. Stockholders' equity for the year averaged $1.4 billion, an increase of $147 million or 12% from 1994, principally due to strong earnings performance. The increase in average demand deposits reflects higher levels of trust-related deposits and balances resulting from acquisitions. The net interest margin declined to 2.30% from 2.34% last year due primarily to lower spreads on the higher volume of short-term liquid assets funded by short- term liabilities, 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. PROVISION FOR CREDIT LOSSES. Asset quality remained strong which resulted in the provision for credit losses being unchanged from the prior year at $6.0 million, down from $19.5 million in 1993. For a discussion of the reserve for credit losses, refer to pages 23 and 24. NONINTEREST EXPENSES. Noninterest expenses for 1995 totaled $709.2 million, up $8.7 million or 1% from $700.5 million in 1994, which was up 12% from $628.2 million in 1993. Total expenses included $10.3 million of incremental expenses resulting from 1995 acquisitions. As a result of a reduction in premium rates, FDIC insurance expense in 1995 declined by $7.7 million compared to last year. Also included in the 1995 results is a $4.1 million pension settlement charge. Noninterest expenses in 1994 included $30.9 million of nonrecurring charges. Exclusive of all of these items for both years, 1995 noninterest expenses increased 5% over last year. The majority of this increase was the result of continued investment in technology and expansion of the personal trust and banking office network. 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 151% for 1995 compared with 143% in 1994 and 146% in 1993. SALARIES AND BENEFITS. Salaries and benefits, which represent 59% of total noninterest expenses, increased 7% to $419.1 million in 1995 from $391.4 million in 1994, which was up 8% from $361.5 million in 1993. Salary costs, the largest component of noninterest expenses, totaled $337.6 million, up $21.0 million or 7% from $316.6 million a year ago. Included in the 1994 results was a $4.2 million addition to salary expense relating to overtime back pay obligations. The principal items contributing to the change in 1995 were merit increases, incentive compensation, and staff additions from the Beach Bank, Tanglewood Bank and RCB acquisitions, and to support Northern Trust's growing global custody and retirement services activities. The record earnings performance, together with the price increase in Northern Trust Corporation stock, increased incentive-based compensation to $43.9 million, a 23% increase from a year ago. Also contributing to the increase was $3.3 million in severance costs associated with staff reductions. Staff on a full-time equivalent (FTE) basis averaged 6,548 compared with 6,420 in 1994 and 6,318 in 1993. The growth in average staff during 1995 is a result of acquisitions and staff additions in the last half of 1994 to support Northern Trust's growing global custody, retirement services and mutual fund activities. These additions were partially offset by staff reductions in other areas of Northern Trust. As of December 31, 1995 staff levels on a FTE basis totaled 6,531 compared to 6,608 at the end of last year. Adjusted for 179 posts added through acquisitions, staff levels declined by approximately 4% during the year. Employee benefit costs for 1995 totaled $81.5 million, up $6.7 million or 9% from $74.8 million in 1994 which was up 10% from $68.1 million in 1993. The majority of the 1995 increase in benefit costs was attributable to higher medical expenses, retirement benefit expenses and payroll taxes. In conjunction with Northern Trust's commitment to control expense growth, a complete review of all the employee benefit plans was conducted at the end of 1995. As a result of this review, changes, effective January 1, 1996, were made to the pension, medical and Thrift Incentive plans. The Corporation will also, subject to an Internal Revenue Service ruling and trustee approval, amend the Employee Stock Ownership Plan. Although difficult to predict, with these changes 1996 benefit expenses are expected to decline by approximately 5% from the 1995 level. OCCUPANCY EXPENSE. Net occupancy expense totaled $60.2 million, up 5% or $2.8 million from $57.4 million in 1994, which was up 4% from $55.3 million in 1993. The principal components of the 1995 increase were higher building and leasehold improvement amortization expenses, rental and operating costs primarily associated with business expansion in Florida, Texas and Illinois. 18 Northern Trust Corporation EQUIPMENT EXPENSE. Equipment expense, which includes depreciation, rental, and maintenance costs, totaled $48.6 million in 1995, down 14% or $7.8 million from $56.4 million in 1994, which was 37% higher than the $41.1 million in 1993. Included in the 1994 expense is $11.2 million of nonrecurring expenses resulting from the trade-in and the sale and leaseback of mainframe computer equipment. 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 and banking business expansion. OTHER OPERATING EXPENSES. Other operating expenses for 1995 totaled $181.3 million, down 7% from $195.3 million in 1994, which was up 15% from $170.3 million in 1993. Included in the 1995 results are a $4.1 million pension settlement charge and a $.7 million expense for compensation payments pursuant to a consent decree resolving the investigation by the Department of Justice into the fair lending practices of Northern Trust's Illinois banking subsidiaries. Other operating expenses in 1994 included a $9.6 million pension settlement charge, a $3.5 million expense relating to an agreement between the Corporation and The Benchmark Funds, and a $2.4 million write-down of older trust-related software. Excluding all of these items for both years, other operating expenses decreased slightly from last year. Increases in computer software amortization, transaction-based depository fees, technical and consulting services, charitable contributions and postage were offset by lower levels of FDIC deposit insurance premiums, lower costs associated with operating other real estate owned assets, and a decline in costs incurred from processing errors. 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. The depreciation and software amortization are charged to equipment and other operating expenses, respectively. PROVISION FOR INCOME TAXES. The provision for income taxes was $100.5 million in 1995 compared with $79.3 million in 1994 and $66.1 million in 1993. The effective tax rate was 31% for 1995 compared with 30% for 1994 and 28% for 1993. The higher tax provision in 1995 resulted from the growth in earnings for federal income tax purposes while federally tax-exempt income declined slightly. Partially offsetting this increase was a decline in the state provision for income taxes resulting from a higher level of state tax-exempt income. SUBSEQUENT IMPLEMENTATION OF STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS. Two recently issued Statements of Financial Accounting Standards (SFAS) were implemented as of January 1, 1996. The new statements are as follows: SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long- Lived Assets to Be Disposed Of," establishes accounting standards for the impairment of such assets, certain identifiable intangibles, and goodwill related to those assets to be held and used and for similar assets and certain identifiable intangibles to be disposed of. This statement requires that those assets held and used be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable; and, that those to be disposed of be reported at the lower of carrying amount or fair value less cost to sell, with certain exceptions. No adjustments to the carrying value of long-lived assets were required as a result of adopting this statement. SFAS No. 122, "Accounting for Mortgage Servicing Rights," applies to entities that either purchase mortgage servicing rights or originate mortgage loans and subsequently sell the mortgage loans with servicing rights retained. In either case, the servicing rights must be capitalized as a separate asset and must be evaluated for impairment based on their fair value. Since Northern Trust's held for sale mortgage portfolio totaled $7.6 million as of January 1, 1996, the impact of adopting this statement was immaterial. Under SFAS No. 123, "Accounting for Stock-Based Compensation," the accounting method for stock-based compensation, in particular for stock options, differs from APB Opinion No. 25, under which most of the accounting requirements for stock-based compensation were previously contained. The measurement and recognition provisions of the statement are elective. An entity that continues to apply Opinion No. 25 will be required to provide pro forma net income and earnings per share, as if the accounting method in SFAS No. 123 had been used for stock-based compensation costs. Northern Trust is currently in the process of developing a stock option model to be used in calculating the pro forma information required by SFAS No. 123. In 1996 Northern Trust will continue to account for stock-based compensation in accordance with Opinion No. 25 and will provide the pro forma information required by SFAS No. 123 for the year ended December 31, 1995 and 1996 in the 1996 Annual Report. CAPITAL EXPENDITURES A committee of Northern Trust's senior officers reviews and approves proposed capital expenditures which exceed $500,000. This process assures that the major projects to Northern Trust Corporation 19 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) which Northern Trust commits its resources produce benefits compatible with corporate strategic goals. During 1995, Northern Trust continued to improve its hardware and software capabilities, especially relating to trust activities. Such improvements help assure that Northern Trust offers state-of-the-art technology which enables clients to obtain the highest level of quality service within 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, Northern Trust completed installation of several significant phases of its new trust management system, including key improvements in securities processing operations and the creation of new client statements. The unamortized, capitalized cost of this project at December 31, 1995 was $93 million. In addition, major systems development efforts in 1995 focused on Passport and retirement services products. Passport is Northern Trust's next generation of on-line desktop delivery services first offered to clients in 1995. Retirement services bring together a comprehensive array of Master Trust, participant recordkeeping, retirement plan design and actuarial services. Northern Trust's 1996 technology initiatives will include installation of the final phases of the trust management system, and the continued development of Passport and retirement services products. Capital expenditures in 1995 also included the leasehold improvements and furnishings associated with the opening of new offices in Florida and the construction costs for the Chicago South Financial Center and the new Winnetka, Illinois office, both scheduled to open by mid-year 1996, as well as expansion in several existing offices. Capital expenditures for 1995 totaled $86 million of which $10 million was for building and leasehold improvements, $3 million for furnishings, $26 million for hardware and machinery and $47 million for software. During 1996, in addition to its technology initiatives, Northern Trust will continue to invest in the expansion of the five-state network of Personal Financial Services offices. ASSET QUALITY AND CREDIT RISK SECURITIES. A high quality securities portfolio is maintained with 87% of the total portfolio comprised of U.S. Treasury or federal agency securities. The remainder of the portfolio is comprised of obligations of states and political subdivisions, preferred stock and other securities. At December 31, 1995, 73% of these securities were rated triple-A or double-A, 24% were rated single-A and 3% were below A or not rated by Standard and Poor's and/or Moody's Investors Service. Other securities consist primarily of privately issued collateralized mortgage obligations, backed by federal agency securities or mortgage loans, 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 Northern Trust's 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 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 overall credit risk. These credit management activities also apply to Northern Trust's use of derivative financial instruments, including foreign exchange contracts and interest risk management instruments. 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 are monitored on a regular basis to ensure that they are maintained at an appropriate level. The largest component of credit risk relates to the loan portfolio. Although 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 20 Northern Trust Corporation 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 $1.2 billion at December 31, 1995 and $945.5 million at December 31, 1994. Nonperforming middle market loans totaled $1.3 million and $7.8 million at December 31, 1995 and 1994, respectively. Credit exposure related to customer acceptance liabilities with middle market companies and small businesses totaled $24.4 million and $20.3 million as of December 31, 1995 and 1994, 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 $1.2 billion, $405.6 million, and $12.5 million, respectively, as of December 31, 1995, and $917.8 million, $378.7 million, and $17.8 million, respectively, as of December 31, 1994. BROKER-DEALERS OF SECURITIES. Broker loans consist primarily of overnight funds loaned to broker-dealers in the securities industry on both a secured and an unsecured basis. Broker loans averaged $269.0 million during 1995 and $355.7 million during 1994, and totaled $304.0 million at December 31, 1995 and $274.6 million at December 31, 1994. Securities purchased under agreements to resell with broker-dealers at year-end totaled $30.0 million at December 31, 1995 compared with zero at December 31, 1994. Standby letters of credit issued on behalf of broker-dealers and legally binding commitments to extend credit totaled $148.4 million and $185.5 million, respectively, as of December 31, 1995, and $51.2 million and $161.7 million, respectively, as of December 31, 1994. 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, 1995 and December 31, 1994. 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. CREDIT EXPOSURE TO BANKS AND BANK HOLDING COMPANIES
December 31 ----------------- (In Millions) 1995 1994 - ------------------------------------------------------------------- BALANCE SHEET AMOUNTS Due From Banks $ 950.7 $ 743.1 Money Market Assets Federal Funds Sold 53.8 687.0 Securities Purchased under Agreements to Resell 78.3 90.0 Time Deposits with Banks -Domestic .2 .2 -International 1,567.4 1,864.5 Other 44.6 8.8 Commercial Loans-Domestic 158.0 136.1 -International 37.3 77.0 Securities (primarily preferred stock) 27.9 34.9 Customers' Acceptance Liability 7.7 34.0 Foreign Exchange* 75.8 37.6 Interest Risk Management Instruments* 6.3 4.8 Other Assets 7.4 6.7 OFF-BALANCE SHEET AMOUNTS Contract or Notional Amounts of: Legally Binding Commitments to Extend Credit 155.0 134.7 Standby Letters of Credit 18.6 32.9 Commercial Letters of Credit 26.0 14.2
*Represents the amount of credit risk recorded in the consolidated balance sheet associated with the potential failure of the counterparty to pay according to the terms of the instrument. Northern Trust Corporation 21 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) 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 the business. Unsecured lines of credit to firms or individuals engaged in commercial real estate endeavors are included without regard to the use of loan proceeds. The commercial real estate portfolio consists of interim loans and commercial mortgages. 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 will 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, 1995, are detailed in the next table. COMMERCIAL REAL ESTATE LOANS
Interim Commercial (In Millions) Loans Mortgages Total - ------------------------------------------------- Apartments $ 14.4 $ 71.0 $ 85.4 Industrial 23.9 44.2 68.1 Office 71.3 66.3 137.6 Shopping Center/Retail 47.0 53.4 100.4 Land 7.4 14.3 21.7 Other 20.5 78.9 99.4 - ------------------------------------------------- Total $184.5 $328.1 $512.6
In comparison, commercial real estate loans at December 31, 1994 totaled $494.1 million. Nonperforming commercial real estate loans totaled $9.0 million in 1995 and $9.1 million in 1994. At December 31, 1995 commercial real estate loans 90 days past due and still accruing interest totaled $12.1 million. Not included in the table above was OREO which totaled $1.8 million and $2.2 million at December 31, 1995 and 1994, respectively. At December 31, 1995, 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 $21.7 million and $16.5 million, respectively. At December 31, 1994, legally binding commitments were $25.5 million and standby letters of credit were $47.2 million. RESIDENTIAL REAL ESTATE. Residential real estate loans totaled $3.9 billion or 41% of total domestic loans at December 31, 1995, compared with $3.3 billion or 40% at December 31, 1994. 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 $3.9 billion in residential real estate loans, $2.4 billion were in the greater Chicago area with the remainder distributed throughout the other geographic regions served by Northern Trust. Legally binding commitments to extend credit, which are primarily equity credit lines, totaled $372.2 million and $377.0 million as of December 31, 1995 and 1994, respectively. FOREIGN OUTSTANDINGS. In recent years international banking activities have been focused on import and export financing for U.S. based clients and on 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. 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 and corporations are included in these outstandings and are classified according to the country location of the foreign entities' head office. Risk related to foreign outstandings is continually monitored and internal limits are imposed on foreign exposure. The following table provides information on foreign outstandings by country that exceed 1.00% of Northern Trust's consolidated assets. 22 Northern Trust Corporation FOREIGN OUTSTANDINGS
Commercial (In Millions) Banks and Other Total - -------------------------------------------- AT DECEMBER 31, 1995 Japan $259 $-- $259 - -------------------------------------------- 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
There were no aggregate foreign outstandings by country falling between 0.75% and 1.00% of total assets at December 31, 1995. This compares with $154 million to Germany in 1994 and $153 million to Canada in 1993. NONPERFORMING ASSETS AND 90 DAY PAST DUE LOANS. Nonperforming assets consist of nonaccrual loans, restructured 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 renewals. 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 the expense associated with collection efforts. The table below presents the nonperforming assets and past due loans for the current year and the prior years. Of the total loan portfolio of $9.9 billion at December 31, 1995, $31.9 million or .32% was nonperforming, an increase of $4.1 million from year-end 1994. Nonperforming loans at December 31, 1995 consisted principally of commercial loans, including $9.0 million of commercial real estate loans and $1.3 million to middle market and small business companies. The net increase of $3.7 million in nonperforming assets resulted from additions during 1995 of $31.1 million in new nonaccrual loans partially offset by total gross charge-offs of $10.2 million, payments and loan sales of $19.5 million, property sales with a basis of $2.9 million and $.4 million in write-downs and realized losses on OREO assets. While the estimated carrying value of the OREO portfolio is believed to be realizable, it is not possible to predict whether such properties could continue to experience further declines in value. SFAS Nos. 114 and 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 December 31, 1995, impaired loans, which also have been classified as nonperforming, totaled $27.6 million, with $1.0 million of the reserve for credit losses allocated to these loans. 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 NONPERFORMING ASSETS AND 90 DAY PAST DUE LOANS
December 31 ----------------------------- (In Millions) 1995 1994 1993 1992 1991 - -------------------------------------------------------------------------- Nonaccrual Loans Domestic $29.0 $26.5 $26.0 $66.4 $53.8 International .2 1.3 1.3 1.9 -- - -------------------------------------------------------------------------- Total Nonaccrual Loans 29.2 27.8 27.3 68.3 53.8 - -------------------------------------------------------------------------- Restructured Loans 2.7 -- -- -- -- Other Real Estate Owned 1.8 2.2 9.7 22.9 40.4 - -------------------------------------------------------------------------- TOTAL NONPERFORMING ASSETS $33.7 $30.0 $37.0 $91.2 $94.2 - -------------------------------------------------------------------------- TOTAL DOMESTIC 90 DAY PAST DUE LOANS (Still accruing) $22.0 $17.3 $22.8 $42.9 $23.6
Northern Trust Corporation 23 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) volume; historical net loan loss experience; the level and composition of nonaccrual, past due and restructured loans; other extensions of credit; the condition of industries and geographic areas experiencing or expected to experience particular economic adversities; international developments; current and anticipated economic conditions; credit evaluations; and the liquidity and volatility of the markets. From time to time specific amounts of the reserve are designated for certain loans in connection with management's analysis of the adequacy of the reserve for credit losses, as well as its evaluation of impaired loans. While the largest portion of this reserve is typically intended to cover loan and lease losses, it is considered a general reserve that is available for all credit-related purposes. The reserve balance is not a precise amount, but is derived from judgments based on the above factors. It represents management's best estimate of the reserve for credit losses necessary to adequately cover probable losses from current credit exposures. The provision for credit losses is the charge against current earnings that is determined by management as the amount needed to maintain an adequate reserve. ANALYSIS OF RESERVE FOR CREDIT LOSSES
($ In Millions) 1995 1994 1993 1992 1991 - ------------------------------------------------------------------------------- Balance at Beginning of Year $ 144.8 $ 145.5 $ 145.5 $ 145.7 $ 148.0 - ------------------------------------------------------------------------------- Charge-offs Commercial 8.8 9.4 19.5 21.2 34.1 Consumer 1.3 1.1 2.1 3.7 2.8 Other 1.0 .2 1.2 1.5 1.6 International .6 -- .6 6.0 -- - ------------------------------------------------------------------------------- Total Charge-Offs 11.7 10.7 23.4 32.4 38.5 - ------------------------------------------------------------------------------- Recoveries Commercial 4.3 2.6 2.3 1.4 4.2 Consumer .5 1.3 .9 .8 .8 Other .3 .1 .5 .1 .1 International .7 -- .2 .4 .1 - ------------------------------------------------------------------------------- Total Recoveries 5.8 4.0 3.9 2.7 5.2 - ------------------------------------------------------------------------------- Net Charge-Offs 5.9 6.7 19.5 29.7 33.3 Provision for Credit Losses 6.0 6.0 19.5 29.5 31.0 Reserve Related to Acquisitions 2.2 -- -- -- -- - ------------------------------------------------------------------------------- Net Change in Reserve 2.3 (.7) -- (.2) (2.3) - ------------------------------------------------------------------------------- BALANCE AT END OF YEAR $ 147.1 $ 144.8 $ 145.5 $ 145.5 $ 145.7 - ------------------------------------------------------------------------------- Total Loans and Leases at Year-End $9,906.0 $8,590.6 $7,623.0 $6,935.9 $6,279.7 - ------------------------------------------------------------------------------- Average Total Loans and Leases $9,136.0 $8,316.1 $7,297.1 $6,452.9 $6,199.4 - ------------------------------------------------------------------------------- As a Percent of Year-End Loans and Leases Net Loan Charge-Offs .06% .08% .26% .43% .53% Provision for Credit Losses .06 .07 .26 .43 .49 Reserve Balance at Year-End 1.49 1.69 1.91 2.10 2.32 - ------------------------------------------------------------------------------- As a Percent of Average Loans and Leases Net Loan Charge-Offs .06% .08% .27% .46% .54% Reserve Balance at Year-End 1.61 1.74 1.99 2.25 2.35
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 still expanding, there continue to be uncertainties in several industries. In addition, management's assessment of the financial condition of specific clients facing financial difficulties, and portfolio growth relating to low-risk residential lending and bank acquisitions, were other factors impacting management's analysis of the adequacy of the reserve. The combination of these factors resulted in a reserve for credit losses of $147.1 million at December 31, 1995, compared with $144.8 million last year. The decline in the year-end reserve for credit losses as a percentage of outstanding loans and leases from 1.69% to 1.49% at year-end 1995 is primarily attributable to loan growth in low-risk residential lending and overnight trust advances. The table above summarizes the changes in the reserve for credit losses for the current year and the prior years. 24 Northern Trust Corporation FINANCIAL CONDITION Average earning assets in 1995 increased 9% to $17.2 billion. Approximately 15% of the growth in earning assets resulted from the Beach Bank and Tanglewood Bank acquisitions. The growth, including acquisitions, was concentrated primarily in short-term U.S. federal agency securities, residential mortgages and commercial and industrial loans. A high quality and liquid balance sheet is maintained with securities and money market assets averaging $8.1 billion or 47% of total earning assets. The management strategy for investment securities 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 securities held to maturity and available for sale, increased 24% from last year to $6.2 billion. U.S. Government securities averaged $1.2 billion in 1995, down 31% from 1994 levels. U.S. Government securities had an average maturity of eleven months at December 31, 1995, compared with ten months at the prior year-end. Average municipal securities declined $30 million to $435 million and provided a fully taxable equivalent yield of 10.75%. The average maturity of municipal securities was 78 months, up from 64 months a year ago. Federal agency securities averaged $4.1 billion in 1995, up $1.8 billion from 1994 and had an average maturity at December 31, 1995 and 1994 of nine months and six months, respectively. Other securities, consisting primarily of preferred stock, privately issued collateralized mortgage obligations and asset-backed securities, averaged $353 million, $15 million lower than last year. Included in other securities were $62 million of triple-A rated collateralized mortgage obligations, $16 million of which were collateralized by federal agency securities. Other asset-backed securities were $26 million versus $65 million last year; these securities had an average maturity of three months, versus eleven months a year ago. Approximately $1.3 billion 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 1995, the fair value of the securities portfolio of $5.8 billion exceeded the book value of these securities by $27.5 million. Loans averaged $9.1 billion in 1995 and increased 10% from the prior year. Average domestic loans increased 12% to $8.8 billion for the year while the average international portfolio decreased to $344 million from $446 million in 1994. The increase in the average domestic loan portfolio reflects substantial growth in residential mortgages which, net of $15.2 million in loan sales, increased nearly $446 million on average to total $3.9 billion at year-end. Commercial and industrial loans also contributed to the growth in the domestic portfolio, increasing 14% on average to total $3.2 billion at year-end. During the year commercial real estate loans increased slightly due primarily to acquisitions, and at December 31, 1995, totaled $513 million or 5% of domestic loans. The decrease in the international portfolio is partially attributable to lower levels of trust client overnight advances. Money market assets averaged $1.9 billion, down 23% or $555 million from last year. Total interest-related funds averaged $14.5 billion in 1995, up $1.2 billion or 9% from 1994. As a result of marketing campaigns, savings certificates of deposit increased $771 million or 63% to $2.0 billion, partially offset by a $73 million decline in average savings and money market deposits. Total federal funds purchased increased $213 million or 16% to $1.6 billion. Securities sold under agreements to repurchase increased $325 million on average to $1.8 billion. Foreign office time deposits increased $209 million or 6%, resulting primarily from greater global custody activity. Deposits related to trust activities in the domestic banking subsidiaries, coupled with growth of the global custody business, had a significant impact on the balance sheet as these deposits in 1995 averaged $4.6 billion or 37% of total deposits. Senior notes averaged $394 million, down $388 million or 50% from last year. During September 1995, The Northern Trust Company issued $100 million of 6.70% Subordinated Notes due 2005. The notes were issued under the terms of a September 6, 1995 Offering Circular allowing The Northern Trust Company to offer from time to time up to $300 million aggregate principal amount of its subordinated bank notes with maturities ranging from 5 years to 15 years and up to $1.7 billion aggregate principal amount at any time outstanding of its senior bank notes (less certain senior bank notes issued prior to April 1993 and still outstanding), with maturities ranging from 30 days to 15 years. The senior notes are issued periodically and provide an additional funding source for the Bank. Northern Trust Corporation 25 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) AVERAGE EARNING ASSETS AND SOURCE OF FUNDS
Percent Change ---------------- ($ In Millions) 1995 1994 1993 1995/94 1994/93 - ------------------------------------------------------------------------------- AVERAGE EARNING ASSETS Money Market Assets $ 1,864.7 $ 2,420.2 $ 2,201.6 (23.0)% 9.9% Securities U.S. Government 1,225.7 1,779.6 2,646.6 (31.1) (32.8) Obligations of States and Political Subdivisions 434.7 465.1 502.3 (6.5) (7.4) Federal Agency 4,124.8 2,333.6 773.9 76.8 201.5 Other 353.4 368.8 279.7 (4.2) 31.9 Trading Account 54.4 53.8 29.5 1.3 82.2 - ------------------------------------------------------------------------------- Total Securities 6,193.0 5,000.9 4,232.0 23.8 18.2 - ------------------------------------------------------------------------------- Loans and Leases-Domestic 8,791.8 7,870.6 7,017.2 11.7 12.2 -International 344.2 445.5 279.9 (22.7) 59.2 - ------------------------------------------------------------------------------- Total Loans and Leases 9,136.0 8,316.1 7,297.1 9.9 14.0 - ------------------------------------------------------------------------------- Total Earning Assets $17,193.7 $15,737.2 $13,730.7 9.3% 14.6% - ------------------------------------------------------------------------------- AVERAGE SOURCE OF FUNDS Deposits-Savings and Money Market Deposits $ 3,312.4 $ 3,385.7 $ 3,432.1 (2.2)% (1.3)% -Savings Certificates 2,000.3 1,229.6 1,172.9 62.7 4.8 -Other Time 542.7 412.8 404.7 31.5 2.0 -Foreign Offices Time 3,493.4 3,284.8 2,436.4 6.4 34.8 - ------------------------------------------------------------------------------- Total Deposits 9,348.8 8,312.9 7,446.1 12.5 11.6 Federal Funds Purchased 1,564.0 1,350.7 1,692.5 15.8 (20.2) Securities Sold under Agreements to Repurchase 1,769.7 1,444.3 664.4 22.5 117.4 Commercial Paper 146.0 138.1 131.5 5.7 5.0 Other Borrowings 1,034.5 1,007.5 940.8 2.7 7.1 Senior Notes 394.0 781.8 554.1 (49.6) 41.1 Notes Payable 271.3 293.6 297.9 (7.6) (1.5) - ------------------------------------------------------------------------------- Total Interest-Related Funds 14,528.3 13,328.9 11,727.3 9.0 13.7 Noninterest-Related Funds, net 2,665.4 2,408.3 2,003.4 10.7 20.2 - ------------------------------------------------------------------------------- Total Source of Funds $17,193.7 $15,737.2 $13,730.7 9.3% 14.6%
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 17 on page 48. 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 change in response to changes in the level of interest rates and are not accurately reflected in the fair value disclosures. Considerable judgment is required to interpret the market data when computing estimates of fair value. Accordingly, the estimates presented in Note 17 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. 26 Northern Trust Corporation INTEREST RATE RISK MANAGEMENT. 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. INTEREST RATE SENSITIVITY ANALYSIS
Year Ended December 31, 1995 ------------------------------------------------------------- 1-3 4-12 1-2 3-5 Over 5 (In Millions) months months years years years Total - --------------------------------------------------------------------------------------- EARNING ASSETS Money Market Assets $ 1,783.6 $ .6 $ -- $ -- $ -- $ 1,784.2 Securities-Held to Maturity 117.8 72.3 46.6 124.2 174.2 535.1 -Available for Sale 3,077.3 821.9 943.2 202.5 91.4 5,136.3 -Trading Account 88.9 -- -- -- -- 88.9 Loans and Leases 4,530.6 1,288.1 715.8 1,630.8 1,740.7 9,906.0 - --------------------------------------------------------------------------------------- Total Earning Assets $ 9,598.2 $2,182.9 $1,705.6 $1,957.5 $ 2,006.3 $17,450.5 - --------------------------------------------------------------------------------------- SOURCE OF FUNDS Savings and NOW Accounts $ 394.8 $ -- $ -- $ -- $ 1,056.2 $ 1,451.0 Money Market Deposit Accounts and Savings Certificates 2,629.0 1,095.8 348.8 380.1 23.7 4,477.4 Other Time 3,213.8 20.7 1.0 7.0 4.4 3,246.9 Senior Notes and Notes Payable 12.6 2.0 4.1 93.7 239.2 351.6 Other Borrowings 5,045.0 48.9 21.5 2.2 63.8 5,181.4 Noninterest-Related Funds, net 485.6 -- -- -- 2,256.6 2,742.2 - --------------------------------------------------------------------------------------- Total Source of Funds $11,780.8 $1,167.4 $ 375.4 $ 483.0 $ 3,643.9 $17,450.5 - --------------------------------------------------------------------------------------- Interest Sensitive Gap $(2,182.6) $1,015.5 $1,330.2 $1,474.5 $(1,637.6) $ -- Off-Balance Sheet Hedges 1,413.3 (166.5) (598.6) (390.0) (258.2) -- - --------------------------------------------------------------------------------------- Adjusted Interest Sensitive Gap $ (769.3) $ 849.0 $ 731.6 $1,084.5 $(1,895.8) $ -- - --------------------------------------------------------------------------------------- Cumulative Interest Sensitive Gap $ (769.3) $ 79.7 $ 811.3 $1,895.8 $ -- $ --
- -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. 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, 1995, this scenario assumed a gradual decrease in interest rates during 1996. The interest sensitivity is then tested by running alternative scenarios above and below the most likely interest rate outcome. In 1995, this sensitivity Northern Trust Corporation 27 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) calculation was always less than 2.5% of the annual net interest income, using alternative scenarios based on a one percentage point deviation from the rates 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 risk. 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 senior 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. Northern Trust utilizes various types of derivative financial instruments, primarily interest rate swaps, as tools for managing interest rate and option risk. The following table summarizes the expected maturities and weighted average interest rates to be paid and received on the asset/liability management swap portfolio at December 31, 1995. A key assumption in the preparation of the table is that floating rates remain constant at December 31, 1995 levels. Some of the principal uses of derivative financial instruments, together with the notional amounts outstanding, are described as follows: CONVERT YIELDS ON GOVERNMENT AND AGENCY SECURITIES TO AN EFFECTIVE LIBOR RATE. At December 31, 1995, interest rate swaps with a notional amount of $1.35 billion and purchased interest rate protection contracts with a notional amount of $25 million were used to convert fixed and floating rate interest payments on Government and agency securities (classified as Available for Sale) to floating rate payments indexed to London Interbank Offered Rates (LIBOR). Swaps with a notional amount of $930 million were combined with fixed rate securities, $85 million were combined with floating rate securities indexed to Treasury Bill rates, and $336 million were combined with structured notes, whose non-standard features were hedged. The swaps were executed simultaneously with the purchase of the notes. The securities were converted to an effective LIBOR rate to match LIBOR-based funding costs. REDUCE INTEREST RATE RISK FROM FIXED RATE ASSETS FUNDED WITH VARIABLE RATE LIABILITIES. Northern Trust paid a fixed rate and received a floating rate on interest rate swaps with a notional amount of $949 million at December 31, 1995 to hedge the interest rate risk from fixed rate assets. For accounting purposes these swaps were 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. SWAPS COMBINED WITH NOTE ISSUANCE TO OBTAIN FAVORABLE FUNDING COSTS. Interest rate swaps with a notional amount of $300 million at December 31, 1995 were used in REMAINING MATURITY OF ASSET/LIABILITY MANAGEMENT INTEREST RATE SWAPS
2001- ($ Amounts in Millions) 1996 1997 1998 1999 2000 2005 Total - ----------------------------------------------------------------------------- PAY FIXED Notional Amount $531.3 $575.0 $346.2 $58.5 $125.0 $368.3 $2,004.3 Average Pay Rate 6.19% 5.86 6.33 6.73 6.22 6.96 6.28% Average Receive Rate 5.78 5.83 5.83 5.87 5.83 5.82 5.82 - ----------------------------------------------------------------------------- RECEIVE FIXED Notional Amount $ -- $ -- $100.0 $ -- $ -- $100.0 $ 200.0 Average Pay Rate -- -- 5.88 -- -- 5.91 5.89% Average Receive Rate -- -- 5.98 -- -- 6.31 6.15 - ----------------------------------------------------------------------------- PAY AND RECEIVE VARIABLE (BASIS SWAPS) Notional Amount $ 13.2 $358.7 $ 24.5 $ -- $ -- $ -- $ 396.4 Average Pay Rate 4.61% 5.38 4.67 -- -- -- 5.31% Average Receive Rate 5.95 5.37 5.89 -- -- -- 5.43
28 Northern Trust Corporation conjunction with the issuance of senior notes and subordinated notes to obtain desired funding characteristics. The use of swaps in combination with notes permitted Northern Trust to issue notes with rate and maturity features that were most desired by investors while using swaps to convert the rate characteristics to meet its needs. HEDGING FOREIGN CURRENCY RISK. Forward foreign exchange contracts and foreign currency futures contracts were used to reduce exposure to fluctuations in the dollar value of capital investments in foreign subsidiaries and from foreign currency obligations. The notional amounts of these contracts at year-end 1995 were $30.4 million of forward foreign exchange contracts and $1.8 million of short sales of foreign currency futures contracts. HEDGING MORTGAGES HELD FOR SALE. Northern Trust hedged 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, 1995 the portfolio was hedged with $11.1 million of forward sales of mortgage-backed securities, $.7 million of short sales of Treasury Note futures, and $2.0 million of purchases of put options on Treasury Note futures. 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 in general 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 $370.6 million and a fair value of $371.6 million as of December 31, 1995, compared with an amortized cost of $439.2 million and a fair value of $436.4 million as of December 31, 1994. The average life of these CMOs was 23 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 13%, with a weighted average of approximately 10%. These caps will affect the interest margin only if short-term LIBOR rates rise by more than 350 basis points above the year-end 1995 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, 1995 would cause an estimated increase in the average life of Northern Trust's floating rate CMOs from 23 months to 41 months. As of December 31, 1995 Northern Trust owned fixed rate CMOs with an amortized cost of $60.9 million and a fair value of $60.1 million, compared with an amortized cost of $68.7 million and a fair value of $65.6 million as of December 31, 1994. The average life of the fixed rate CMOs was estimated to be 18 months as of December 31, 1995. A 300 basis point rise in rates is estimated to cause the average life of the fixed rate CMOs to extend to approximately 22 months. LIQUIDITY RISK MANAGEMENT. The objective of liquidity risk 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 Investors Service, and AA+ by Thomson BankWatch. These ratings put The Northern Trust Company in the top tier of United States banks. Northern Trust maintains a liquid balance sheet with loans representing 50% of total assets. Further, at December 31, 1995, 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 $8.2 billion or 41% of total assets. The Corporation's uses of cash consist mainly of dividend payments to the Corporation's common and preferred stockholders, the payment of principal and interest to note holders, and purchases of its common stock. These requirements are met largely by dividend payments from its subsidiaries, and by interest and dividends earned on investment securities and money market assets. Bank subsidiaries have the ability to pay dividends during 1996 Northern Trust Corporation 29 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) equal to their 1996 eligible net profits plus $181 million. Bank subsidiary dividends are subject to certain restrictions that are explained in Note 12 on page 46. In September 1995, the Bank used a portion of the proceeds of a $100 million subordinated debt issue to repay $25 million of debt to the Corporation and intends to repay the remaining $50 million of debt to the Corporation in 1996. The Corporation's liquidity, defined as the amount of marketable assets in excess of commercial paper, was strong at $117 million at year-end 1995. The cash flows of the Corporation are shown in Note 24 on page 55. The Corporation also has a $50 million back-up line of credit for its commercial paper issuance. The Corporation's strong credit ratings allow it to access credit markets on favorable terms. 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 1995, common equity increased 15% or $172 million reaching a record $1.3 billion at year end, while total risk-adjusted assets rose 11%. Total equity as of December 31, 1995 was $1.5 billion including $50 million of convertible preferred stock and $120 million of auction rate preferred stock. In January 1996, the Corporation announced the call for redemption of its $50 million Series E convertible preferred stock. Virtually all of the holders elected to convert rather than redeem their preferred stock, and in January the Corporation issued 1,198,372 shares of common stock in connection with the conversion. The shares issued upon conversion have been reflected in the Corporation's fully diluted shares, so that conversion has no impact on fully diluted net income per common share. In February 1994, the Board of Directors increased the Corporation's common stock buyback 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 1995 the Corporation purchased 1,486,159 of its own shares as part of the buyback program, some of which were reissued in connection with the RCB acquisition and the exercise of stock options. At December 31, 1995, 2,269,756 additional shares may be purchased pursuant to this program. The Board of Directors increased the quarterly dividend by 19.2% to $.31 per common share in November 1995. Over the last five years the common dividend has increased 121%. At December 31, 1995, tier 1 capital was 8.8% and total capital was 12.5% of risk-adjusted assets. These risk-based capital ratios are well above the minimum requirements of 4.0% for tier 1 and 8.0% for total risk-based capital ratios. Northern Trust's leverage ratio (tier 1 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 5.6% for the leverage ratio. The average rate declared on the $120 million of auction rate preferred stock was 4.51% during 1995 versus 3.45% in 1994. CAPITAL ADEQUACY
December 31 ---------------- ($ In Millions) 1995 1994 - --------------------------------------------------------------------- TIER 1 CAPITAL Common Stockholders' Equity $ 1,283 $ 1,111 Convertible Preferred Stock 50 50 Goodwill and Other Intangible Assets (79) (36) Net Unrealized (Gain) Loss on Securities (3) 15 - --------------------------------------------------------------------- Total Tier 1 Capital 1,251 1,140 - --------------------------------------------------------------------- TIER 2 CAPITAL Auction Rate Preferred Stock 120 120 Reserve for Credit Losses* 147 145 Notes Payable** 254 169 - --------------------------------------------------------------------- Total Tier 2 Capital 521 434 - --------------------------------------------------------------------- TOTAL RISK-BASED CAPITAL 1,772 1,574 - --------------------------------------------------------------------- Risk-Weighted Assets*** 14,187 12,736 - --------------------------------------------------------------------- Total Assets -End of Period (EOP) 19,934 18,562 -Average Fourth Quarter 20,287 18,377 Total Loans-End of Period 9,906 8,591 - --------------------------------------------------------------------- RATIOS Risk-Based Capital to Risk-Weighted Assets -Tier 1 8.8% 9.0% -Total (Tier 1 and 2) 12.5 12.4 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 6.4 6.0 Stockholders' Equity to -Total Loans EOP 14.7 14.9 -Total Assets EOP 7.3 6.9
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 and other intangible assets, net unrealized (gain) loss on securities and excess reserve for credit losses that have been excluded from tier 1 and tier 2 capital. 30 Northern Trust Corporation LINES OF BUSINESS The 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, investment management and securities lending services, commercial banking activities of the Bank, treasury management services, foreign exchange activities, the London Branch and Northern Futures Corporation. PERSONAL FINANCIAL SERVICES. Personal Financial Services encompasses personal trust and investment management services, estate administration, personal banking and mortgage and other personal lending. This business unit also includes the commercial banking activities of the affiliate banks and the activities of Northern Trust Securities, Inc. CORPORATE AND OTHER. Corporate and Other includes the Bank's Treasury Department and other corporate items, including the impact of long-term debt, common and preferred equity, holding company investments, and corporate operating expenses. Noninterest income for 1994 included the net gain of $28.5 million from the sale of the interest in BSS. Noninterest expenses in 1995 include a $4.1 million pension settlement charge. 1994 noninterest expenses included non-recurring charges totaling $23.2 million. Of the $23.2 million, $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 $9.6 million from a pension settlement charge. The following table reflects the earnings contribution of Northern Trust's lines of business for the years ended December 31, 1995 and 1994 on the basis described above.
Corporate and Personal Institutional Financial Corporate Services Services and Other Total -------------- -------------- ------------ -------------- ($ in Millions) 1995 1994 1995 1994 1995 1994 1995 1994 - -------------------------------------------------------------------------------------- Net Interest Income(1) $145.2 $131.0 $229.3 $209.8 $20.7 $27.2 $395.2 $368.0 Provision for Credit Losses 4.3 6.7 1.6 .5 .1 (1.2) 6.0 6.0 Noninterest Income: Trust Fees 257.5 230.1 247.5 223.3 -- -- 505.0 453.4 Other 142.1 118.8 30.6 29.4 .4 31.8 173.1 180.0 Noninterest Expenses 344.4 327.9 340.9 327.3 23.9 45.3 709.2 700.5 - -------------------------------------------------------------------------------------- Income before Taxes(1) 196.1 145.3 164.9 134.7 (2.9) 14.9 358.1 294.9 Provision for Income Taxes(1) 76.9 55.4 65.7 53.4 (4.5) 3.9 138.1 112.7 - -------------------------------------------------------------------------------------- NET INCOME $119.2 $ 89.9 $ 99.2 $ 81.3 $ 1.6 $11.0 $220.0 $182.2 - -------------------------------------------------------------------------------------- Percentage Contribution 54% 49% 45% 45% 1% 6% 100% 100%
(1) On a fully taxable equivalent basis (FTE). Total includes $37.6 million and $33.4 million of FTE adjustment for 1995 and 1994, respectively. NOTE: Certain reclassifications have been made to prior year information to place it on a basis comparable to the current year. Northern Trust Corporation 31 Consolidated Balance Sheet
December 31 -------------------- ($ In Millions) 1995 1994 - ---------------------------------------------------------------------------- ASSETS Cash and Due from Banks $ 1,308.9 $ 1,192.5 Money Market Assets Federal Funds Sold and Securities Purchased under Agreements to Resell 162.1 777.0 Time Deposits with Banks 1,567.6 1,864.7 Other 54.5 9.5 - ---------------------------------------------------------------------------- Total 1,784.2 2,651.2 - ---------------------------------------------------------------------------- Securities (Note 3) (Fair value $5,787.8 in 1995 and $5,069.7 in 1994) 5,760.3 5,053.1 Loans and Leases (Note 4) (Net of unearned income $89.6 in 1995 and $70.4 in 1994) 9,906.0 8,590.6 Reserve for Credit Losses (Note 5) (147.1) (144.8) Buildings and Equipment (Notes 6 and 7) 281.5 274.7 Customers' Acceptance Liability 35.8 56.3 Trust Security Settlement Receivables 327.1 305.7 Other Assets (Note 14) 676.8 582.3 - ---------------------------------------------------------------------------- Total Assets $19,933.5 $18,561.6 - ---------------------------------------------------------------------------- LIABILITIES Deposits Demand and Other Noninterest-Bearing $ 2,853.1 $ 2,604.7 Savings and Money Market Deposits 3,385.3 3,176.3 Savings Certificates 2,158.8 1,524.5 Other Time 384.3 342.2 Foreign Offices-Demand 459.8 225.4 -Time 3,246.9 3,861.3 - ---------------------------------------------------------------------------- Total Deposits 12,488.2 11,734.4 Federal Funds Purchased 2,300.1 972.0 Securities Sold under Agreements to Repurchase 1,858.7 2,216.9 Commercial Paper 146.7 123.8 Other Borrowings 875.9 1,077.9 Senior Notes (Note 8) 17.0 547.0 Notes Payable (Note 8) 334.6 244.8 Liability on Acceptances 35.8 56.3 Other Liabilities 423.9 307.8 - ---------------------------------------------------------------------------- Total Liabilities 18,480.9 17,280.9 - ---------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Preferred Stock (Note 9) 170.0 170.0 Common Stock (Notes 9 and 11)-$1.66 2/3 Par Value 93.6 90.6
1995 1994 ---------------------------------------------- Shares authorized 140,000,000 140,000,000 Shares issued 56,158,064 54,360,374 Shares outstanding 55,664,412 54,089,259
Capital Surplus 306.1 302.2 Retained Earnings 928.8 762.7 Net Unrealized Gain (Loss) on Securities (Note 3) 2.6 (15.8) Translation Adjustments -- -- Common Stock Issuable-Performance Plan (Note 21) 14.7 17.9 Deferred Compensation-ESOP and Other (39.4) (38.8) Treasury Stock-(at cost, 493,652 shares in 1995 and 271,115 shares in 1994) (23.8) (8.1) - -------------------------------------------------------------------------- Total Stockholders' Equity 1,452.6 1,280.7 - -------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $19,933.5 $18,561.6
See accompanying notes to consolidated financial statements on pages 36-55. 32 Northern Trust Corporation Consolidated Statement of Income
For the Year Ended December 31 --------------------------------- ($ In Millions Except Per Share Information) 1995 1994 1993 - -------------------------------------------------------------------------------- Interest Income Money Market Assets Federal Funds Sold and Securities Purchased under Agreements to Resell $ 12.3 $ 10.9 $ 5.5 Time Deposits with Banks 92.1 97.8 86.5 Other 1.1 5.2 2.6 - -------------------------------------------------------------------------------- Total 105.5 113.9 94.6 - -------------------------------------------------------------------------------- Securities (Note 3) 367.6 235.2 176.3 Loans and Leases (Note 4) 630.9 499.6 435.5 - -------------------------------------------------------------------------------- Total Interest Income 1,104.0 848.7 706.4 - -------------------------------------------------------------------------------- Interest Expense Deposits-Savings and Money Market Deposits 109.1 85.3 78.8 -Savings Certificates 120.6 56.9 50.5 -Other Time 31.5 18.6 15.7 -Foreign Offices 182.1 137.2 90.4 Federal Funds Purchased 91.2 55.5 51.1 Securities Sold under Agreements to Repur- chase 102.6 61.9 20.0 Commercial Paper 8.6 5.9 4.3 Other Borrowings 55.6 36.0 26.0 Senior Notes (Note 8) 23.7 33.8 18.4 Notes Payable (Note 8) 21.4 23.0 23.3 - -------------------------------------------------------------------------------- Total Interest Expense 746.4 514.1 378.5 - -------------------------------------------------------------------------------- Net Interest Income 357.6 334.6 327.9 Provision for Credit Losses (Note 5) 6.0 6.0 19.5 - -------------------------------------------------------------------------------- Net Interest Income after Provision for Credit Losses 351.6 328.6 308.4 - -------------------------------------------------------------------------------- Noninterest Income Trust Fees 505.0 453.4 404.8 Security Commissions and Trading Income 21.7 22.0 21.3 Other Operating Income (Note 13) 150.4 158.1 125.9 Investment Security Gains (Losses) (Note 3) 1.0 (.1) 1.8 - -------------------------------------------------------------------------------- Total Noninterest Income 678.1 633.4 553.8 - -------------------------------------------------------------------------------- Income before Noninterest Expenses 1,029.7 962.0 862.2 - -------------------------------------------------------------------------------- Noninterest Expenses Salaries 337.6 316.6 293.4 Pension and Other Employee Benefits (Notes 15 and 21) 81.5 74.8 68.1 Occupancy Expense (Notes 6 and 7) 60.2 57.4 55.3 Equipment Expense (Note 6) 48.6 56.4 41.1 Other Operating Expenses (Note 14) 181.3 195.3 170.3 - -------------------------------------------------------------------------------- Total Noninterest Expenses 709.2 700.5 628.2 - -------------------------------------------------------------------------------- Income before Income Taxes 320.5 261.5 234.0 Provision for Income Taxes (Note 10) (In- cludes related investment security transac- tions tax provision of $.4 in 1995, none in 1994 and $.7 in 1993) 100.5 79.3 66.1 - -------------------------------------------------------------------------------- NET INCOME $ 220.0 $182.2 $167.9 - -------------------------------------------------------------------------------- Net Income Applicable to Common Stock $ 211.5 $174.9 $161.6 - -------------------------------------------------------------------------------- NET INCOME PER COMMON SHARE (Note 11)-PRIMARY $ 3.75 $ 3.17 $ 2.96 - -FULLY DILUTED 3.70 3.16 2.95 - -------------------------------------------------------------------------------- Average Number of Common Shares Outstanding- Primary 56,337,917 55,144,214 54,589,933 - -Fully Diluted 58,068,783 56,352,375 55,848,809
See accompanying notes to consolidated financial statements on pages 36-55. Northern Trust Corporation 33 Consolidated Statement of Changes in Stockholders' Equity
For the Year Ended December 31 ---------------------------- (In Millions) 1995 1994 1993 - ------------------------------------------------------------------------ PREFERRED STOCK Balance at January 1 $ 170.0 $ 170.0 $ 170.0 - ------------------------------------------------------------------------ Balance at December 31 170.0 170.0 170.0 - ------------------------------------------------------------------------ COMMON STOCK Balance at January 1 90.6 89.7 89.7 Stock Issued-Incentive Plan and Awards .3 -- -- Stock Issued in Acquisitions 2.7 .9 -- - ------------------------------------------------------------------------ Balance at December 31 93.6 90.6 89.7 - ------------------------------------------------------------------------ CAPITAL SURPLUS Balance at January 1 302.2 303.0 300.0 Stock Issued-Incentive Plan and Awards (.2) (.4) 3.0 Stock Issued in Acquisitions 4.1 (.4) -- - ------------------------------------------------------------------------ Balance at December 31 306.1 302.2 303.0 - ------------------------------------------------------------------------ RETAINED EARNINGS Balance at January 1 762.7 631.9 511.7 Net Income 220.0 182.2 167.9 Dividends Declared on Common Stock (60.4) (49.6) (41.1) Dividends Declared on Preferred Stock (8.6) (7.2) (6.6) Pooled Affiliates 15.1 5.4 -- - ------------------------------------------------------------------------ Balance at December 31 928.8 762.7 631.9 - ------------------------------------------------------------------------ NET UNREALIZED GAIN (LOSS) ON SECURITIES Balance at January 1 (15.8) (.4) (1.3) Unrealized Gain (Loss), net 18.4 (15.4) .9 - ------------------------------------------------------------------------ Balance at December 31 2.6 (15.8) (.4) - ------------------------------------------------------------------------ TRANSLATION ADJUSTMENTS Balance at January 1 -- .6 .6 Sale of Foreign Investment -- (.6) -- - ------------------------------------------------------------------------ Balance at December 31 -- -- .6 - ------------------------------------------------------------------------ COMMON STOCK ISSUABLE--PERFORMANCE PLAN Balance at January 1 17.9 11.8 8.1 Stock Issuable, net of Stock Issued (3.2) 6.1 3.7 - ------------------------------------------------------------------------ Balance at December 31 14.7 17.9 11.8 - ------------------------------------------------------------------------ DEFERRED COMPENSATION--ESOP AND OTHER Balance at January 1 (38.8) (43.5) (49.5) Compensation Deferred (11.8) (4.5) (3.1) Compensation Amortized 10.3 10.1 8.6 Unfunded Pension Liability, net .9 (.9) .5 - ------------------------------------------------------------------------ Balance at December 31 (39.4) (38.8) (43.5) - ------------------------------------------------------------------------ TREASURY STOCK Balance at January 1 (8.1) (11.4) (18.8) Stock Options and Awards 28.8 12.0 10.6 Stock Purchased (65.5) (8.7) (3.2) Stock Issued in Acquisitions 21.0 -- -- - ------------------------------------------------------------------------ Balance at December 31 (23.8) (8.1) (11.4) - ------------------------------------------------------------------------ TOTAL STOCKHOLDERS' EQUITY AT DECEMBER 31 $1,452.6 $1,280.7 $1,151.7
See accompanying notes to consolidated financial statements on pages 36-55. 34 Northern Trust Corporation Consolidated Statement of Cash Flows
For the Year Ended December 31 --------------------------------- (In Millions) 1995 1994 1993 - -------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 220.0 $ 182.2 $ 167.9 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Provision for Credit Losses 6.0 6.0 19.5 Depreciation on Buildings and Equipment 42.2 41.4 39.3 (Increase) Decrease in Interest Receivable (32.8) 22.9 (3.3) Increase (Decrease) in Interest Payable .3 5.2 (9.8) Amortization and Accretion of Securities and Unearned Income (153.5) (27.7) 79.8 Amortization of Software, Goodwill and Other Intangibles 35.8 28.3 21.8 Deferred Income Tax 17.7 22.7 21.4 Gain on Sale of Foreign Investment -- (34.5) -- Net (Increase) Decrease in Trading Account Securities (84.9) 32.3 (34.7) Other Noncash, net 91.0 108.9 13.0 - -------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 141.8 387.7 314.9 - -------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Net (Increase) Decrease in Federal Funds Sold and Securities Purchased under Agreements to Resell 638.9 (199.2) (121.3) Net (Increase) Decrease in Time Deposits with Banks 297.3 225.7 (230.9) Net (Increase) Decrease in Other Money Market Assets (45.0) 66.5 10.0 Purchases of Securities-Held to Maturity (662.3) (544.1) (277.7) Proceeds from Maturity and Redemption of Securities-Held to Maturity 819.6 515.8 297.5 Purchase of Securities-Available for Sale (31,206.1) (12,838.3) (4,089.8) Proceeds from Sale, Maturity and Redemption of Securities-Available for Sale 30,828.7 11,823.2 3,171.9 Net Increase in Loans and Leases (1,155.3) (979.2) (711.7) Purchases of Buildings and Equipment (41.8) (44.8) (48.9) Proceeds from Sale of Buildings and Equipment 4.5 10.8 .9 Sale of Foreign Investment -- 58.1 -- Net (Increase) Decrease in Trust Security Settlement Receivables (21.4) (12.6) 269.0 Decrease in Cash Due to Acquisitions (43.5) -- -- Other, net 2.3 6.9 13.8 - -------------------------------------------------------------------------------- Net Cash Used in Investing Activities (584.1) (1,911.2) (1,717.2) - -------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net Increase in Deposits 378.7 1,401.0 462.6 Net Increase (Decrease) in Federal Funds Purchased 1,328.1 (243.9) (818.4) Net Increase (Decrease) in Securities Sold under Agreement to Repurchase (374.0) 1,614.7 320.0 Net Increase (Decrease) in Commercial Paper 22.9 (.3) (2.9) Net Increase (Decrease) in Short-Term Other Borrowings (56.1) (1,401.7) 1,454.5 Proceeds from Term Federal Funds Purchased 4,132.7 3,918.4 1,663.8 Repayments of Term Federal Funds Purchased (4,280.1) (3,684.2) (1,789.8) Proceeds from Senior Notes 1,160.0 430.0 805.0 Repayments on Senior Notes (1,690.0) (700.0) (100.0) Proceeds from Notes Payable 100.0 -- -- Repayment of Notes Payable (10.2) (81.9) (106.4) Treasury Stock Purchased (63.7) (6.9) (2.2) Net Proceeds from Stock Options 9.0 4.5 4.0 Cash Dividends Paid on Common and Preferred Stock (65.8) (54.1) (45.8) Other, net (32.8) .7 5.8 - -------------------------------------------------------------------------------- Net Cash Provided by Financing Activities 558.7 1,196.3 1,850.2 - -------------------------------------------------------------------------------- Increase (Decrease) in Cash and Due from Banks 116.4 (327.2) 447.9 Cash and Due from Banks at Beginning of Year 1,192.5 1,519.7 1,071.8 - -------------------------------------------------------------------------------- CASH AND DUE FROM BANKS AT END OF YEAR $ 1,308.9 $ 1,192.5 $ 1,519.7 - -------------------------------------------------------------------------------- SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Acquisition of Affiliate for Stock, net $ 41.3 $ 6.4 $ -- Transfer of Securities from Held to Matu- rity to Available for Sale 68.5 -- -- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFOR- MATION: Interest Paid on Deposits and Short- and Long-Term Borrowings $ 745.0 $ 505.3 $ 386.9 Income Taxes Paid 76.4 52.5 41.5
See accompanying notes to consolidated financial statements on pages 36-55. Northern Trust Corporation 35 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 and pooled subsidiaries from the dates of acquisition. B. NATURE OF OPERATIONS. The Corporation is a bank holding company whose principal subsidiary is the Bank. The Corporation also owns banks in each of the states of Arizona, California, Florida and Texas, and various other nonbank subsidiaries, including a brokerage firm and a futures commission merchant. The other Chicago area banks were merged into the Bank on February 29, 1996. Northern Trust generates the majority of its revenues from its two primary business units, Corporate and Institutional Services (C&IS) and Personal Financial Services (PFS). The C&IS unit provides trust and custody-related services in the United States and foreign markets to corporations and institutions; a full range of commercial banking services offered to middle market companies in Chicago and the Midwest area, large domestic corporations, and financial institutions; treasury management services to meet the needs of major corporations and financial institutions; and foreign exchange services for global custody clients and Northern Trust's own account. The PFS unit provides personal trust, investment management, estate administration, personal banking and mortgage lending services. These services are delivered through the Bank and the network of subsidiaries in Florida, Arizona, California, Texas and suburban Chicago. Effective January 1, 1996, trust and banking services to middle market companies were transferred to the PFS unit. C. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. D. FOREIGN CURRENCY TRANSLATION. Foreign currency asset and liability accounts of overseas branches 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 to hedge foreign denominated investments are recognized currently in other operating income. Unrealized gains on trading positions are reported as other assets and unrealized losses are reported as other liabilities in the consolidated balance sheet. Gains and losses on foreign currency positions that were entered into to hedge specific, firm foreign currency obligations are deferred and recognized in income over the life of the underlying asset or liability or as the underlying expense or commitment is incurred. E. SECURITIES. Securities Held to Maturity consist of debt securities that management intends to, and Northern Trust has the ability to, hold until maturity. Such securities are reported at cost, adjusted for amortization of premium and accretion of discount. Securities 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. F. INTEREST RISK MANAGEMENT INSTRUMENTS. Interest risk management instruments include interest rate swap contracts, futures contracts, options and similar contracts. Northern Trust is a party to various interest risk management instruments 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. Unrealized gains and receivables on interest risk management instruments are reported as other assets and unrealized losses and payables are reported as other liabilities in the consolidated balance sheet. 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 36 Northern Trust Corporation 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. G. LOANS AND LEASES. Loans that are held to maturity are reported at the principal amount outstanding, net of unearned income. Residential real estate loans classified as held for sale are reported at the lower of aggregate cost or market value. Interest income on loans is recorded on an accrual basis until, in the opinion of management, there is a question as to the ability of the debtor to meet the terms of the contract, or when interest or principal is more than 90 days past due and the loan is not well-secured and in the process of collection. At the time a loan is placed on nonaccrual status, interest accrued but not collected is reversed against interest income of the current period. Loans are returned to accrual status when factors indicating doubtful collectibility no longer exist. Interest collected on nonaccrual loans is applied to principal unless, in the opinion of management, collectibility of principal is not in doubt. Premiums and discounts on loans are recognized as an adjustment of yield 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. H. 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, the estimated value of impaired loans compared to their recorded investment, and management's judgment 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. I. 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. J. 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 based on the following range of lives: buildings--10 to 30 years; equipment--5 to 10 years; and leasehold improvements--1 to 15 years. Leased properties meeting certain criteria are capitalized and amortized using the straight-line method over the lease period. K. 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. L. 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 years. Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of," establishes accounting standards for the impairment of such assets, certain identifiable intangibles, and goodwill related to those assets to be held and used and for similar assets and certain identifiable intangibles to be disposed of. This statement requires that those assets held and used be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable; and that those to be disposed of be reported at the lower of carrying amount or fair value less cost to sell, with certain exceptions. This statement, which is effective in 1996, was adopted January 1, 1996. No adjustments to the carrying value of Northern Trust Corporation 37 Notes to Consolidated Financial Statements (continued) long-lived assets were required as a result of adopting this statement. Other purchased intangible assets arising from acquisitions are amortized using various methods over the estimated lives of the assets. Software is being amortized using the straight-line method over the estimated useful life of the asset, ranging from three to seven years. M. 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. N. TRUST SECURITY SETTLEMENT RECEIVABLES. These receivables represent other items in the process of collection presented on behalf of trust clients. O. 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 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. P. EMPLOYEE STOCK OWNERSHIP PLAN (ESOP). A leveraged ESOP in which substantially all employees of Northern Trust are eligible to participate was established in 1989. 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. Of the original 4.5 million shares in the ESOP Trust, 3.15 million have been allocated as of December 31, 1995. The ESOP shares not yet allocated to individual accounts are treated as deferred compensation and accounted for as a reduction of stockholders' equity. Under the original terms of the ESOP, the shares were to be allocated over ten years. In 1996, subject to Trustee approval and receipt of a ruling from the Internal Revenue Service, the terms of the ESOP are expected to be amended. Under the revised terms, the original maturity of the ESOP-related debt will be effectively extended by an additional three years through a series of new loans and the remaining unallocated shares originally scheduled to be allocated over the next three years will be allocated over the six year period ending December 31, 2001. The Corporation also expects to make an additional contribution of cash or shares of common stock to the ESOP in 2002. Q. 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. R. INCENTIVE PLANS. AMENDED 1992 INCENTIVE STOCK PLAN. The 1992 Incentive Stock Plan (Plan), adopted in 1992 and amended in 1995, 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 Northern Trust 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. 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. 38 Northern Trust Corporation 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 Amended 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 stock and cash incentives, and 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. S. 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. T. INCOME TAXES. In accordance with SFAS No. 109, "Accounting for Income Taxes," 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. U. CASH FLOW STATEMENTS. Cash and cash equivalents have 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, 1995 ----------------- Book Fair (In Millions) Value Value - ------------------------------------- Held to Maturity $ 535.1 $ 562.6 Available for Sale 5,136.3 5,136.3 Trading Account 88.9 88.9 - ------------------------------------- Total $5,760.3 $5,787.8
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
On December 31, 1995 securities with an amortized cost of $68.5 million were transferred from the held to maturity to the available for sale category. The net unrealized gain on these securities was $1.7 million, which was included as a credit of $1.1 million, net of taxes, in stockholders' equity as of December 31, 1995. The securities were transferred in conjunction with the transition provisions of accounting guidance recently issued by the Financial Accounting Standards Board that addresses implementation issues related to SFAS No. 115. The reclassification will increase slightly Northern Trust's flexibility in regard to selling securities, but will not have a material impact on asset/liability management strategy. Income on obligations of states and political subdivisions totaled $30.7 million, $34.6 million and $38.3 million in 1995, 1994 and 1993, respectively. Dividends received on preferred stock totaled $8.0 million, $6.4 million and $3.8 million for 1995, 1994 and 1993, respectively. Northern Trust Corporation 39 Notes to Consolidated Financial Statements (continued) 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, 1995 ----------------------------------- Gross Gross Book Unrealized Unrealized Fair (In Millions) Value Gains Losses Value - ------------------------------------------------------------------------ U.S. Government $116.1 $ .2 $-- $116.3 Obligations of States and Political Subdivisions 366.9 27.1 -- 394.0 Federal Agency 22.2 .3 .1 22.4 Other 29.9 -- -- 29.9 - ------------------------------------------------------------------------ Total $535.1 $27.6 $.1 $562.6
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
REMAINING MATURITY OF SECURITIES HELD TO MATURITY
December 31, 1995 ------------- Book Fair (In Millions) Value Value - ----------------------------------------------------- Due in One Year or Less $165.0 $166.3 Due After One Year Through Five Years 182.4 194.7 Due After Five Years Through Ten Years 127.7 140.2 Due After Ten Years 60.0 61.4 - ----------------------------------------------------- Total $535.1 $562.6
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, which were included in the consolidated statement of income, totaled $1.0 million and none, respectively, in 1995. Of the $1.0 million in gains, $.1 million was related to the sale of securities classified as available for sale. The remaining $.9 million resulted when held to maturity securities were called at a premium. Realized gross security gains and losses in 1994 totaled $.2 million and $.3 million, respectively, all of which were related to securities available for sale. 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. 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, 1995 ---------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair (In Millions) Cost Gains Losses Value - ------------------------------------------------------------------------------- U.S. Government $1,661.1 $ 7.3 $ .7 $1,667.7 Obligations of States and Political Subdivisions 68.5 2.5 .8 70.2 Federal Agency 3,142.9 10.8 .9 3,152.8 Preferred Stock 148.1 -- .3 147.8 Other 99.3 .5 2.0 97.8 - ------------------------------------------------------------------------------- Total $5,119.9 $21.1 $ 4.7 $5,136.3 Unrealized losses on off-balance sheet financial instruments used to hedge available for sale securities totaled $12.2 million as of December 31, 1995 and are reported as other liabilities in the consolidated balance sheet. As of December 31, 1995, stockholders' equity included a credit of $2.6 million, net of tax, to recognize the appreciation on securities available for sale, net of the related hedges. 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, net of the related hedges. REMAINING MATURITY OF SECURITIES AVAILABLE FOR SALE
December 31, 1995 ------------------ Amortized Fair (In Millions) Cost Value - ---------------------------------------------------------- Due in One Year or Less $3,118.2 $3,119.7 Due After One Year Through Five Years 1,741.6 1,755.3 Due After Five Years Through Ten Years 32.4 32.9 Due After Ten Years 227.7 228.4 - ---------------------------------------------------------- Total $5,119.9 $5,136.3
Asset-backed and mortgage-backed securities were included in the above table taking into account anticipated future prepayments. 40 Northern Trust Corporation 4. LOANS AND LEASES--Amounts outstanding in selected loan categories are shown below.
December 31 ----------------- (In Millions) 1995 1994 - ------------------------------------------ Domestic Commercial $3,202.1 $2,672.0 Broker 304.0 274.6 Residential Real Estate 3,896.4 3,299.1 Commercial Real Estate 512.6 494.1 Consumer 758.9 662.1 Other 625.5 642.1 Lease Financing 202.3 159.9 - ------------------------------------------ Total Domestic 9,501.8 8,203.9 International 404.2 386.7 - ------------------------------------------ Total Loans and Leases $9,906.0 $8,590.6
Other domestic and international loans include $810.4 million at December 31, 1995, and $716.6 million at December 31, 1994 of overnight trust-related advances in connection with next day security settlements. Lease financing includes leveraged leases of $85.5 million at December 31, 1995, and $59.8 million at December 31, 1994. Residential real estate loans held for sale totaled $7.6 million and $4.4 million at December 31, 1995 and 1994, respectively. In May 1995, SFAS No. 122, "Accounting for Mortgage Servicing Rights," was issued. This statement applies to entities that either purchase mortgage servicing rights or originate mortgage loans and subsequently sell the mortgage loans with servicing rights retained. In either case, the servicing rights must be capitalized as a separate asset and must be evaluated for impairment based on their fair value. The disclosure requirements of the statement are effective for financial statements for fiscal years beginning after December 15, 1995. Since Northern Trust's held for sale mortgage portfolio totaled $7.6 million as of January 1, 1996, the impact of adopting this statement was immaterial. NONPERFORMING ASSETS. Presented below are outstanding amounts of nonaccrual loans, restructured loans and OREO.
December 31 ----------- (In Millions) 1995 1994 - -------------------------------------------- Nonaccrual Loans Domestic-Commercial Real Estate $ 9.0 $ 9.1 - -Other 20.0 17.4 International .2 1.3 - -------------------------------------------- Total Nonaccrual Loans 29.2 27.8 Restructured Loans 2.7 -- Other Real Estate Owned 1.8 2.2 - -------------------------------------------- Total Nonperforming Assets $33.7 $30.0
There were no unfunded loan commitments and standby letters of credit issued to borrowers whose loans were classified as nonaccrual at December 31, 1995, versus $.1 million at December 31, 1994. Interest income that would have been recorded on domestic nonaccrual loans in accordance with their original terms amounted to $2.9 million in 1995, $3.1 million in 1994 and $3.5 million in 1993, compared with amounts that were actually recorded of $.7 million, $.2 million and $1.6 million, respectively. Interest income that would have been recorded on international nonaccrual loans in accordance with their original terms amounted to $.1 million in 1995, 1994 and 1993, compared with amounts that were actually recorded at zero in all three years. Writedowns and realized losses on OREO of $.4 million in 1995, $.3 million in 1994 and $2.1 million in 1993 were charged to other operating expenses. Northern Trust adopted SFAS Nos. 114 and 118, "Accounting by Creditors for Impairment of a Loan," effective January 1, 1995. These statements provide guidance as to when loans should be classified and reported as impaired and address how the reserve for credit losses related to these loans should be determined. Any shortfall in the estimated value of an impaired loan compared with the recorded investment of the loan is identified as an allocated portion of the reserve for credit losses and is one of the factors considered by management in their overall assessment of reserve adequacy. No changes were required to Northern Trust's accounting policies for loans, charge-offs and interest income as a result of adopting these statements. At December 31, 1995, nonperforming assets totaled $33.7 million. Included in this amount were loans with a recorded investment of $27.6 million which were also classified as impaired. Impaired loans totaling $9.2 million had no portion of the reserve for credit losses allocated to them, while $18.4 million had an allocated reserve of $1.0 million. For the year 1995, the total recorded investment in impaired loans averaged $26.4 million. Total interest income recognized on impaired loans for the year ended December 31, 1995 was $.7 million, most of which was recognized using the cash-basis method of accounting. Northern Trust Corporation 41 Notes to Consolidated Financial Statements (continued) 5. RESERVE FOR CREDIT LOSSES--Changes in the reserve for credit losses were as follows.
(In Millions) 1995 1994 1993 - -------------------------------------------------------- Balance at Beginning of Year $144.8 $145.5 $145.5 - -------------------------------------------------------- Charge-Offs Domestic Commercial Real Estate (3.4) (4.0) (7.8) Other (7.7) (6.7) (15.0) International (.6) -- (.6) - -------------------------------------------------------- Total Charge-Offs (11.7) (10.7) (23.4) Recoveries 5.8 4.0 3.9 - -------------------------------------------------------- Net Charge-Offs (5.9) (6.7) (19.5) Provision for Credit Losses 6.0 6.0 19.5 Reserve Related to Acquisitions 2.2 -- -- - -------------------------------------------------------- Balance at End of Year $147.1 $144.8 $145.5
6. BUILDINGS AND EQUIPMENT--Summary of buildings and equipment is presented below.
December 31, 1995 ------------------------------ Original Accumulated Net Book (In Millions) Cost Depreciation Value - ------------------------------------------------------- Land $ 28.4 $ -- $ 28.4 Buildings 76.3 29.8 46.5 Equipment 211.4 102.1 109.3 Leasehold Improvements 60.6 26.0 34.6 Building Leased Under Capital Lease (Note 7) 72.6 9.9 62.7 - ------------------------------------------------------- Total Buildings and Equipment $449.3 $167.8 $281.5
December 31, 1994 ------------------------------ Original Accumulated Net Book (In Millions) Cost Depreciation 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
The charge for depreciation amounted to $42.2 million in 1995, $41.4 million in 1994 and $39.3 million in 1993. Occupancy expense has been reduced by $2.1 million in 1995, $2.0 million in 1994 and $1.7 million in 1993 from rental income on leased premises. 7. LEASE COMMITMENTS--At December 31, 1995, Northern Trust was obligated under a number of noncancellable operating leases for premises and equipment. Certain leases contain rent escalation clauses, based on market indices or increases in real estate taxes and other operating expenses and renewal option clauses 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, 1995, for all noncancellable operating leases are as follows.
Future Minimum (In Millions) Lease Payments - ------------------------------------------------------------------------------- 1996 $ 29.9 1997 29.3 1998 26.3 1999 21.2 2000 19.9 Later Years 111.2 - ------------------------------------------------------------------------------- Total Minimum Lease Payments $237.8 Rental expense for all operating leases is included in occupancy expense and amounted to $25.0 million in 1995, $24.5 million in 1994 and $23.5 million in 1993. 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, 1995 (refer to Note 8). Future Minimum (In Millions) Lease Payments, net - ------------------------------------------------------------------------------- 1996 $ 1.1 1997 1.1 1998 1.1 1999 1.3 2000 1.3 Later Years 14.4 - ------------------------------------------------------------------------------- Total Minimum Lease Payments, net 20.3 Less: Amount Representing Interest 10.0 - ------------------------------------------------------------------------------- Net Present Value under Capital Lease Obligation $ 10.3
42 Northern Trust Corporation 8. SENIOR NOTES, NOTES PAYABLE AND LINES OF CREDIT--SENIOR NOTES. Summary of senior notes outstanding at December 31 is presented below.
($ In Millions) Rate 1995 1994 - ------------------------------------------- Corporation Due 1996 (a) 8.65% $ 2.0 $ 2.0 Bank Due 1995 (a) (b) Fixed 4.95-6.60 -- 375.0 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 Notes $17.0 $547.0 - -------------------------------------------
Refer to bottom of next table for applicable notes. NOTES PAYABLE. Summary of notes payable outstanding at December 31 is presented below.
($ In Millions) 1995 1994 - --------------------------------------------------------------------------- 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) 100.0 100.0 6.70% Notes due Sept. 2005 (a) (b) 100.0 -- - --------------------------------------------------------------------------- Subordinated Notes Payable $298.0 $198.0 - --------------------------------------------------------------------------- Corporation-Notes Payable 8.25% ESOP Notes due December 1995 (a) (c) $ -- $ 2.7 8.23% ESOP Installment Notes with Final Payment due December 1998 (d) 26.3 33.7 Bank-Capital Lease Obligation (e) 10.3 10.4 - --------------------------------------------------------------------------- Notes Payable $ 36.6 $ 46.8 - --------------------------------------------------------------------------- Total Notes Payable $334.6 $244.8 - --------------------------------------------------------------------------- Notes Payable Qualifying as Risk-Based Capital $254.2 $168.8
(a) Not redeemable prior to maturity. (b) Under the terms of its current offering circular, the Bank has the ability to offer from time to time its senior bank notes in an aggregate principal amount of up to $1.7 billion at any one time outstanding and up to an additional $200 million of subordinated notes. Each senior note will mature from 30 days to fifteen years and each subordinated note will mature from five years to fifteen years, following its date of original issuance. Each note will mature on such date as selected by the initial purchaser and agreed to by the Bank. (c) Notes are related to the contribution of 180,000 common shares to the ESOP trust. (d) Notes were issued directly by the ESOP trust 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. Refer to Note 1P. (e) Refer to Note 7. LINES OF CREDIT. The Corporation currently maintains commercial paper back-up facility lines of credit with four banks totaling $50 million. The facility was amended in 1995 which extended the termination date to November 1999, with two optional one-year extensions beyond that. The commitment fee is determined by a pricing matrix that is based on the long-term senior debt ratings of the Corporation. Currently, the annual fee is 1/10 of 1% of the commitment. There were no borrowings under commercial paper back-up facilities during 1995 or 1994. 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) 1995 1994 - ---------------------------------------------------- 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. No dividends other than dividends payable in junior stock, such as Common Stock, may be paid on Common Stock until full cumulative dividends on the APS have been paid. The average rate for this issue as declared during 1995 was 4.52%. 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. Northern Trust Corporation 43 Notes to Consolidated Financial Statements (continued) 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 1995 was 4.49%. 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--On January 5, 1996, the Corporation called for redemption its outstanding 6.25% Cumulative Convertible Preferred Stock Series E. The Series E was sold to the public in the 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). Subsequently, 994,737 of the total 1,000,000 Depositary Shares were converted at the option of the holder at a conversion price of $41.50 into 1,198,372 shares of the Corporation's common stock. The conversion resulted in fractions of shares for which the Corporation paid cash. The remaining 5,263 Depositary Shares were redeemed on January 26, 1996, for cash at a redemption price of $52.8038 per Depositary Share. 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 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 February 1994, the Corporation's common stock buyback 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
1995 1994 1993 - -------------------------------------------------------------- Balance at January 1 54,089,259 53,292,967 52,831,844 Employee Benefit Plans: Incentive Plan and Awards 406,084 44,525 149,300 Stock Options Exercised 640,229 461,739 388,298 Issued for Acquisitions 2,014,999 534,113 -- Treasury Stock Purchases (1,486,159) (244,085) (76,475) - -------------------------------------------------------------- Balance at December 31 55,664,412 54,089,259 53,292,967
44 Northern Trust Corporation 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 rate of 35%.
Income Tax Provision ---------------------- (In Millions) 1995 1994 1993 - --------------------------------------------------- Tax at Statutory Rate $112.2 $ 91.5 $ 81.9 Tax-Exempt Income (13.9) (15.2) (15.8) State Taxes, net 2.4 4.2 1.1 Other (.2) (1.2) (1.1) - --------------------------------------------------- Provision for Income Taxes $100.5 $ 79.3 $ 66.1
The components of the consolidated provision for income taxes for each of the three years ended December 31, are as follows.
(In Millions) 1995 1994 1993 - ------------------------------------------------------ Current Tax Provision (Benefit) Federal $ 75.7 $ 47.4 $ 42.4 State 2.9 3.6 (.6) Foreign 4.2 5.6 2.9 - ------------------------------------------------------ Total 82.8 56.6 44.7 - ------------------------------------------------------ Deferred Tax Provision Federal 16.9 19.8 19.2 State .8 2.9 2.2 - ------------------------------------------------------ Total 17.7 22.7 21.4 - ------------------------------------------------------ Provision for Income Taxes $100.5 $ 79.3 $ 66.1
In addition to the amounts shown in the above tables, tax liabilities or (benefits) have been recorded for the following items:
(In Millions) 1995 1994 - -------------------------------------------------------------------------------- Charged (Credited) to Stockholders' Equity: Current Tax Benefit for Employee Stock Options and Other Employee Benefit Plans $(5.1) $(3.7) Deferred Tax Effect of Unrealized Security Gains (Losses) 11.3 (9.5) Deferred Tax Effect of Unfunded Pension Liabilities 0.5 (0.5) Deferred Tax Liabilities Assumed in Connection with Business Combinations 4.0 0.4
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 rate of 35%, as follows.
December 31 ------------ (In Millions) 1995 1994 - ----------------------------------------------------------- deferred Tax Liabilities Lease Financing $ 58.0 $48.8 Software Development 39.1 37.8 Accumulated Depreciation 8.0 1.0 Acquired Intangible Assets 7.0 2.3 Other Liabilities 15.6 6.1 - ----------------------------------------------------------- Gross Deferred Tax Liabilities 127.7 96.0 - ----------------------------------------------------------- Deferred Tax Assets Reserve for Credit Losses 51.0 50.7 Loan Fees 1.6 3.2 Leased Facilities 7.5 6.7 Other Assets 5.2 6.4 - ----------------------------------------------------------- Gross Deferred Tax Assets 65.3 67.0 Valuation Reserve -- -- - ----------------------------------------------------------- Deferred Tax Assets, net of Valuation Reserve 65.3 67.0 - ----------------------------------------------------------- Net Deferred Tax Liabilities $ 62.4 $29.0
Northern Trust has state carryforwards which are available to offset future state tax return liabilities. As of December 31, 1995, there were state net operating loss and tax credit carryforwards of $15.4 million and $1.7 million, respectively. The carryforwards are subject to various limitations imposed by tax law. 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 Amended 1992 and the Amended Incentive Stock Plans and other stock-based plans associated with acquisitions. Fully diluted net income per common share assumes, in addition to the above, the conversion of the Cumulative Convertible Preferred Stock Series E. Northern Trust Corporation 45 Notes to Consolidated Financial Statements (continued) 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 net profits for the preceding two years. Based on these regulations, the Corporation's banking subsidiaries, without regulatory approval, could declare dividends during 1996 equal to their 1996 eligible net profits (as defined) plus $181.1 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--The fee portion of treasury management revenues totaled $49.6 million in 1995, $46.3 million in 1994 and $49.0 million in 1993. Net foreign exchange revenues including trading, hedge and translation gains or losses were $55.3 million in 1995, $36.0 million in 1994 and $32.1 million in 1993, and included foreign exchange trading profits of $55.4 million, $35.9 million and $32.4 million in 1995, 1994 and 1993, respectively. Included in the 1994 results 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. 14. OTHER OPERATING EXPENSES--The components of other operating expenses were as follows:
(In Millions) 1995 1994 1993 - ----------------------------------------------------------------- Business Development $ 23.0 $ 22.8 $ 22.7 Purchased Professional Services 57.3 54.1 49.7 Telecommunications 10.8 10.4 8.9 Postage and Supplies 20.7 19.1 17.8 FDIC Premium 8.5 16.2 15.6 Software Amortization 28.3 21.4 14.6 Goodwill and Other Intangibles Amortization 7.5 6.9 7.2 Pension Settlement Charge 4.1 9.6 1.7 Other Expense 21.1 34.8 32.1 - ----------------------------------------------------------------- Total Other Operating Expenses $181.3 $195.3 $170.3
Software, goodwill and other intangible assets are included in other assets in the consolidated balance sheet. Software totaled $129.8 million at December 31, 1995 and $111.5 million at December 31, 1994. Goodwill totaled $65.5 million at December 31, 1995 and $36.2 million at December 31, 1994. Other intangibles totaled $41.3 million at December 31, 1995 and $31.2 million at December 31, 1994. 46 Northern Trust Corporation 15. PENSION AND OTHER EMPLOYEE BENEFITS-- PENSION. The following tables set forth the status and the net periodic pension cost of the domestic qualified and nonqualified pension benefit plans for 1995 and 1994. Prior service costs and unrecognized net assets established at January 1, 1986 are being amortized on a straight-line basis over 13.2 years. PLAN STATUS
Qualified Nonqualified Plan Plan -------------- -------------- September 30 ------------------------------ ($ In Millions) 1995 1994 1995 1994 - ---------------------------------------------------------------------------- Actuarial Present Value of Benefit Obligation: Vested Benefit Obligation $125.7 $104.2 $ 9.9 $ 14.5 - ---------------------------------------------------------------------------- Accumulated Benefit Obligation 136.4 124.7 10.7 15.7 - ---------------------------------------------------------------------------- Projected Benefit Obligation for Service Rendered to Date 185.1 175.7 19.4 23.5 Plan Assets at Fair Value 200.1 178.4 -- -- - ---------------------------------------------------------------------------- Plan Assets In Excess of (Less Than) Projected Benefit Obligation 15.0 2.7 (19.4) (23.5) Unrecognized Net Asset (Effective January 1, 1986) (4.9) (7.6) (.1) (.3) Unrecognized Net Loss 41.4 46.2 9.6 10.3 Unrecognized Prior Service Cost 1.0 1.2 3.9 4.5 Valuation Adjustment (.4) (.4) -- -- - ---------------------------------------------------------------------------- Prepaid (Accrued) Pension Cost at September 30 52.1 42.1 (6.0) (9.0) - ---------------------------------------------------------------------------- Net (Expense) Funding October to December (2.1) (7.8) (.7) 2.5 Additional Minimum Liability at December 31 -- -- (3.8) (5.9) - ---------------------------------------------------------------------------- Prepaid (Accrued) Pension Cost at December 31 $ 50.0 $ 34.3 $(10.5) $(12.4) - ---------------------------------------------------------------------------- Assumptions: Discount Rates 7.50% 7.50% 7.00% 7.25% Rate of Increase in Compensation Level 5.00 5.00 5.00 5.00 Expected Long-Term Rate of Return on Assets 9.00 9.00 N/A N/A
NET PERIODIC PENSION COST
Qualified Nonqualified Plan Plan -------------- ------------- (In Millions) 1995 1994 1995 1994 - ----------------------------------------------------------- Service Cost $ 11.3 $ 11.1 $ 1.1 $ .9 Interest Cost 12.3 11.5 1.6 1.3 Actual Return on Plan Assets (26.6) (15.7) -- -- Net Amortization 11.3 .8 1.1 .9 - ----------------------------------------------------------- Net Periodic Pension Cost $ 8.3 $ 7.7 $ 3.8 $ 3.1
Pension expense for 1993 was $7.2 million and $2.7 million for the qualified and nonqualified plans, respectively. Due to retirements in 1994 and 1995 a substantial number of lump-sum payments were made from both the qualified and nonqualified plans which resulted in settlement charges of $4.1 million in 1995 and $9.6 million in 1994. During 1993 a settlement charge of $1.7 million was recognized due to payments from the nonqualified plan. Settlement charges 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, 1995, 1994 and 1993, amounted to $8.7 million, $9.3 million and $9.4 million, respectively. A pension plan is also maintained for the London Branch employees. At December 31, 1995, the fair value of assets and the projected benefit obligation totaled approximately $7.1 million and $8.1 million, respectively. At December 31, 1994, the fair value of assets and the projected benefit obligation were $6.0 million and $6.0 million, respectively. Pension expense for 1995 and 1994 was $.6 million and $.7 million, respectively. THRIFT INCENTIVE PLAN. Total expenses associated with the Thrift Incentive Plan amounted to $11.3 million in 1995, $10.6 million in 1994 and $9.9 million in 1993. ESOP. The following table presents information related to the ESOP.
(In Millions) 1995 1994 - -------------------------------------------------------------------------- Total ESOP Compensation Expense $5.8 $5.1 Interest Incurred on ESOP-Related Debt 2.8 3.4 Amount Contributed to ESOP-Related Debt 8.2 8.2 Dividends and Interest on Unallocated ESOP Shares Used for Debt Service 2.0 2.1
Northern Trust Corporation 47 Notes to Consolidated Financial Statements (continued) OTHER POSTRETIREMENT BENEFITS. The following tables set forth the funded status at December 31 and the net periodic postretirement benefit cost of the domestic postretirement health care plan for 1995 and 1994. The transition obligation at January 1, 1993 is being amortized to expense over a twenty year period. PLAN STATUS
(In Millions) 1995 1994 - ------------------------------------------------------------------------------ Accumulated Postretirement Benefit Obligation (APBO) Measured at September 30 Retirees and Dependents $ 16.9 $ 16.7 Actives Eligible for Benefits 5.6 5.0 Actives Not Yet Eligible 18.1 17.1 - ------------------------------------------------------------------------------ Total APBO 40.6 38.8 Unamortized Transition Obligation (23.8) (25.2) Unrecognized Net Loss (8.5) (10.1) Unrecognized Prior Service Costs 2.6 2.8 - ------------------------------------------------------------------------------ Net Postretirement Benefit Liability $ 10.9 $ 6.3 NET PERIODIC POSTRETIREMENT BENEFIT COST (In Millions) 1995 1994 - ------------------------------------------------------------------------------ Service Cost $ 1.7 $ 1.4 Interest Cost 2.9 2.3 Net Amortization 1.6 1.4 - ------------------------------------------------------------------------------ Net Periodic Postretirement Benefit Cost $ 6.2 $ 5.1
Postretirement health care expense for 1993 was $4.8 million. For measurement purposes, a 10.8 percent annual increase in the cost of covered health care benefits was assumed for 1996. 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, 1995 by approximately $7.3 million, and the aggregate of the service and interest cost components of the 1995 net periodic postretirement benefit cost by $.8 million. The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 7.50 percent at December 31, 1995 and 7.75 percent at December 31, 1994. As permitted by the provisions of SFAS No. 106, the London Branch began accruing for postretirement health care benefits effective January 1, 1995. The transition obligation of $.4 million established at January 1, 1995 is being amortized over a twenty year period. Postretirement benefit expense for 1995 was $.1 million and the total Accumulated Postretirement Benefit Obligation at December 31, 1995 was $.4 million. 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. 16. 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. 17. 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. 48 Northern Trust Corporation 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 NOTES. The fair values of these instruments were estimated using a discounted cash flow method that incorporated market interest rates. 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 ----------------------------------- 1995 1994 ----------------- ----------------- Book Fair Book Fair (In Millions) Value Value Value Value - ---------------------------------------------------------------------------- ASSETS Cash and Due From Banks $1,308.9 $1,308.9 $1,192.5 $1,192.5 Money Market Assets 1,784.2 1,784.2 2,651.2 2,651.2 Securities: Held to Maturity 535.1 562.6 641.3 657.9 Available for Sale 5,136.3 5,136.3 4,407.8 4,407.8 Trading Account 88.9 88.9 4.0 4.0 Loans (excluding leases), net of credit loss reserve: Held to Maturity 9,549.0 9,595.8 8,281.5 7,993.2 Held for Sale 7.6 7.6 4.4 4.4 Acceptance Liability 35.8 35.8 56.3 56.3 Trust Security Settlement Receivables 327.1 327.1 305.7 305.7 LIABILITIES Deposits: Demand, Savings and Money Market 6,698.2 6,698.2 6,006.4 6,006.4 Savings Certificates, Other Time and Foreign Offices Time 5,790.0 5,821.8 5,728.0 5,716.0 Federal Funds Purchased 2,300.1 2,300.1 972.0 972.0 Repurchase Agreements 1,858.7 1,858.7 2,216.9 2,216.9 Commercial Paper 146.7 146.7 123.8 123.8 Other Borrowings 875.9 875.9 1,077.9 1,077.9 Senior Notes 17.0 17.1 547.0 544.2 Notes Payable 334.6 351.9 244.8 236.1 Liability on Acceptances 35.8 35.8 56.3 56.3
Northern Trust Corporation 49 Notes to Consolidated Financial Statements (continued) FAIR VALUES OF OFF-BALANCE SHEET FINANCIAL INSTRUMENTS. The following tables summarize the fair values of off-balance sheet financial instruments at December 31.
1995 1994 ----------- ----------- Book Fair Book Fair (In Millions) Value Value Value Value - ---------------------------------------------------------- Commitments and Letters of Credit Loan Commitments $ 1.9 $ 1.9 $ 2.2 $ 2.2 Letters of Credit .8 .8 .7 .7 Asset/Liability Management Foreign Exchange Contracts Assets -- .4 4.3 4.8 Liabilities .1 .1 -- .4 Interest Rate Swap Contracts Assets 4.9 7.5 11.7 58.8 Liabilities 22.2 45.2 6.6 16.3 Interest Rate Protection Contracts--Assets .2 .3 -- --
Fair Value ------------- (In Millions) 1995 1994 - --------------------------------------------------- Client-Related and Trading* Foreign Exchange Contracts Assets $118.0 $78.1 Liabilities 107.5 78.7 Interest Rate Swap Contracts Assets 4.2 3.0 Liabilities 4.2 3.8 Interest Rate Protection Contracts Assets .1 .5 Liabilities .1 .6 Option Contract with Benchmark Funds -- 3.5
*Assets and liabilities associated with foreign exchange contracts averaged $183.0 million and $180.5 million, respectively, during 1995. Assets and liabilities associated with other client-related and trading account instruments averaged $2.2 million and $4.3 million, respectively, during 1995. 18. 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 to meet the liquidity and credit enhancement needs of its clients. Credit risk is the principal risk associated with these instruments. The contractual amounts of these instruments represent the credit risk should the instrument be fully drawn upon and the client default. To control the credit risk associated with entering into commitments and issuing letters of credit, Northern Trust subjects such activities to the same credit quality and monitoring controls as its lending activities. Commitments and letters of credit consist of the following: LEGALLY BINDING COMMITMENTS TO EXTEND CREDIT generally have fixed expiration dates or other termination clauses. Since a significant portion of the 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. The following table shows the contractual amounts of commitments and letters of credit. COMMITMENTS AND LETTERS OF CREDIT
December 31 ----------------- (In Millions) 1995 1994 - --------------------------------------------------------------- Legally Binding Commitments to Extend Credit $8,906.0 $7,397.7 Participations in Bankers Acceptances 1.5 6.3 Commercial Letters of Credit 167.7 227.2 Standby Letters of Credit: Corporate $ 448.4 $ 372.6 Industrial Revenue 379.9 318.7 Other 194.5 128.6 - --------------------------------------------------------------- Total Standby Letters of Credit* $1,022.8 $ 819.9
*These amounts include $96.2 million and $75.8 million of standby letters of credit secured by cash deposits or participated to others as of December 31, 1995 and 1994, respectively. The weighted average maturity of standby letters of credit was 19 months at December 31, 1995 and 1994. B. RISK MANAGEMENT INSTRUMENTS. These instruments include foreign exchange contracts, foreign currency futures contracts, and various interest risk management instruments. Northern Trust is a party to various risk management instruments that are used in the normal course of business to meet the risk management needs of its 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 50 Northern Trust Corporation 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 lives 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. FOREIGN CURRENCY AND INTEREST RATE FUTURES CONTRACTS are agreements for delayed delivery of foreign currency, securities or money market instruments in which the buyer agrees to take delivery at a specified future date of a specified currency, security, or instrument, at a specified price or yield. All of Northern Trust's futures contracts are traded on organized exchanges that require the daily settlement of changes in the value of the contracts. Futures contracts are utilized in trading activities and asset/liability management to protect Northern Trust's exposure to unfavorable fluctuations in foreign exchange rates or 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. Northern Trust also purchases interest rate protection contracts for asset and liability management. INTEREST RATE SWAP CONTRACTS involve the exchange of fixed and floating rate interest payment obligations without the exchange of the underlying principal amounts; these types of transactions constitute the majority of the interest rate swap portfolio. Northern Trust has also entered into a limited number of more complex interest rate swap transactions that were executed concurrently with the purchase of $336 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. FORWARD SALE CONTRACTS represent commitments to sell a specified amount of securities at an agreed upon date and price. Northern Trust utilizes forward sale contracts principally in connection with its sale of mortgage loans. EXCHANGE-TRADED OPTION CONTRACTS grant the buyer the right, but not the obligation, to purchase or sell at a specified price, a stated number of units of an underlying financial instrument, at a future date. The following table shows the contractual/notional amounts of risk management instruments. The notional amounts of risk management instruments do not 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) 1995 1994 - ------------------------------------------------------------------ Asset/Liability Management: Foreign Exchange Contracts $ 30.4 $ 131.4 Foreign Currency Futures Contracts 1.8 -- Interest Rate Futures Contracts Sold .7 1.2 Interest Rate Protection Contracts Purchased 25.0 -- Interest Rate Swap Contracts 2,600.7 1,381.2 Forward Sale Contracts 11.1 4.9 Exchange-Traded Option Contracts Purchased 2.0 .5 Client-Related and Trading: Foreign Exchange Contracts 11,838.8 9,396.7 Interest Rate Futures Contracts Purchased 106.0 -- Sold 289.0 16.0 Interest Rate Protection Contracts Purchased 77.0 87.5 Sold 78.9 85.9 Interest Rate Swap Contracts 181.5 308.8
Information about Northern Trust's strategies and objectives related to derivative financial instruments used for asset and liability management can be found on pages 28 and 29 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 1995 or 1994. Net revenue associated with client-related and trading interest risk management activities totaled $2.8 million, $2.4 million, and $1.0 million during 1995, 1994, and 1993, respectively. The majority of these revenues are related to Northern Trust Corporation 51 Notes to Consolidated Financial Statements (continued) 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, 1995 and 1994 subject to indemnification was $8.2 billion and $5.0 billion, respectively. All securities borrowed were collateralized in excess of 100 percent of their current fair value as of December 31, 1995 and 1994. 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, 1995 and 1994 was $71 million and $65 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 was essentially a written option contract, The Benchmark Funds had the option of selling 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 lagged the sharp increase in short-term interest rates that occurred at the time the agreement was reached. The agreement also gave the Corporation the option of purchasing the securities from The Benchmark Funds at the higher of cost or market value. The agreement increased net asset values and so preserved 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 Corporation exercised its option to purchase the securities in June 1995 at an aggregate price of $110.6 million, equal to the Funds' amortized cost basis in the securities. The securities, which mature in February 1997, were recorded by the Corporation at their fair value of $107.7 million. The fair value of the agreement recorded in other liabilities when the Corporation entered into the 1994 agreement, was $3.5 million. This reserve exceeded the loss realized in 1995 by $.6 million. 19. CONCENTRATIONS OF CREDIT RISK--The information in the section titled Loans and Other Extensions of Credit found on pages 20 through 22 is incorporated by reference. 20. 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, 1995, securities and loans totaling $3.9 billion ($3.1 billion of U.S. Government and agency securities, $216.8 million of obligations of states and political subdivisions and $622.6 million of loans and other securities), were pledged. Collateral required for these purposes totaled $2.6 billion. Deposits maintained at the Federal Reserve Bank to meet reserve requirements averaged $278.1 million in 1995 and $307.7 million in 1994. 21. INCENTIVE PLANS AND AWARDS--AMENDED 1992 INCENTIVE STOCK PLAN AND AMENDED INCENTIVE STOCK PLAN (PLANS). In October 1995, SFAS No. 123, "Accounting for Stock-Based Compensation," was issued. The accounting method for stock-based compensation provided in the statement, in particular for stock options, differs from APB Opinion No. 25, in which most of the accounting requirements for stock-based compensation were previously contained. The measurement and recognition provisions of the statement are 52 Northern Trust Corporation elective and disclosure requirements of the statement are effective in 1996. An entity that continues to apply Opinion No. 25 will be required to provide pro forma net income and earnings per share as if the method in SFAS No. 123 had been used to account for stock-based compensation costs. Northern Trust is currently in the process of developing a stock option model to be used in calculating the pro forma information required by SFAS No. 123. In 1996, Northern Trust will continue to account for stock-based compensation in accordance with Opinion No. 25 and will provide the pro forma information required by Statement No. 123. As of December 31, 1995, shares available for future grants under the Plans totaled 847,047. Stock options granted under the Plans during 1995 and 1994 are summarized below.
Outstanding Options --------------------------- SHARES Option Price - ------------------------------------------------------------- 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 - ------------------------------------------------------------- Cancelled during 1995 (42,500) $ 37.69 to 47.00 Exercised during 1995 (640,229) 7.64 to 39.75 Granted during 1995 629,800 38.13 to 47.00 - ------------------------------------------------------------- OUTSTANDING AT DECEMBER 31, 1995 3,734,473 $ 13.00 TO 47.00 - ------------------------------------------------------------- Exercisable at December 31, 1994 3,155,902 $ 7.64 to 41.63 - ------------------------------------------------------------- EXERCISABLE AT DECEMBER 31, 1995 2,560,173 $ 13.00 TO 42.00
As of December 31, 1995, 311,000 shares of stock have been credited to performance share accounts associated with the stock awards under the Plans. At December 31, 1995, 422,778 shares had been awarded, subject to meeting established performance goals and vesting conditions, for three-year performance periods ending in 1995 through 1997. Total salary expense applicable to the stock awards was $4.4 million in 1995, $5.2 million in 1994 and $6.3 million in 1993. As of December 31, 1995 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 1995. OTHER INCENTIVE PLANS. At December 31, 1995, in conjunction with various acquisitions, shares of the Corporation's common stock have been awarded to certain subsidiary participants contingent upon continued employment, non- competition agreements and, in some cases, meeting predetermined performance goals. Total salary expense related to these awards was $2.0 million in 1995 and $.3 million in 1994. Expense related to other cash incentive plans is included in salary expense and totaled $35.7 million in 1995, $28.4 million in 1994, and $29.3 million in 1993. 22. 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 Bank, two overseas branches, one Edge Act subsidiary, the Hong Kong subsidiary, RCB, and Northern Trust of Florida. Total assets employed in international operations were $2.3 billion on December 31, 1995, $2.8 billion on December 31, 1994 and $2.7 billion on December 31, 1993. Of these assets, $1.1 billion on December 31, 1995 and $1.5 billion on December 31, 1994 and 1993 were employed in Europe. Net income from international operations includes the direct net income contributions of foreign branches, foreign subsidiaries and the Edge Act subsidiary. The Bank and Northern Trust of Florida international profit contributions include direct salary and other expenses of the business units plus expense allocations for interest, occupancy, overhead and GEOGRAPHIC DISTRIBUTION OF SELECTED ASSETS
December 31, 1995 December 31, 1994 December 31, 1993 -------------------------------------------------------------------------------------------------------- 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 $ 849.6 $-- $ 70.0 $ -- $1,257.8 $-- $ 93.4 $ .9 $1,129.2 $-- $184.7 $ .1 North America 323.6 -- 123.4 -- 651.7 -- 141.9 -- 557.5 -- 44.7 -- Latin America 236.1 .1 170.7* 1.8 64.1 -- 135.0* .6 177.3 .7 116.1* 3.9 Asia-Pacific 158.1 -- 40.1 .6 194.4 -- 16.4 -- 226.2 -- 7.8 .3 - ----------------------------------------------------------------------------------------------------------------------- Total $1,567.4 $.1 $404.2 $2.4 $2,168.0 $-- $386.7 $1.5 $2,090.2 $.7 $353.3 $4.3
*Includes loans guaranteed by the Export Import Bank of $116.5 million in 1995, $95.2 million in 1994 and $85.8 million in 1993. The majority of the remaining loans are trade-related. Northern Trust Corporation 53 Notes to Consolidated Financial Statements (continued) GEOGRAPHIC DISTRIBUTION OF OPERATING PERFORMANCE
1995 1994 1993 ----- ----- ----- 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 $ 67.0 $14.9 $ 9.2 $137.9 $19.1 $11.8 $105.7 $11.2 $ 7.1 North America 113.8 15.4 9.5 133.9 9.1 5.6 68.2 4.7 2.9 Latin America 39.9 5.1 3.2 68.4 12.0 7.4 46.8 4.8 3.0 Asia-Pacific 105.8 20.3 12.6 42.4 7.7 4.8 20.9 3.1 1.9 - -------------------------------------------------------------------------------------- Total $326.5 $55.7 $34.5 $382.6 $47.9 $29.6 $241.6 $23.8 $14.9
The table summarizes international performance based on the domicile of the primary obligor without regard to guarantors or the location of collateral. The 1994 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. 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. 23. ACQUISITIONS--On April 15, 1994, the Corporation 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 pooling-of-interests. Prior period consolidated financial statements were not restated due to the immateriality of the transaction. On March 31, 1995, the Corporation completed the acquisition of Beach One Financial Services, Inc., parent company of The Beach Bank of Vero Beach, Florida. The acquisition was effected through a merger in which the Corporation issued 1,622,568 shares of its common stock totaling $56.2 million. The Corporation has accounted for the transaction as pooling-of-interests. Prior period consolidated financial statements were not restated due to the immateriality of the transaction. On July 31, 1995, the Corporation completed the acquisition of Tanglewood Bancshares, Inc., parent company of Tanglewood Bank N.A. of Houston, Texas for $32.5 million in cash. The transaction was recorded under the purchase method of accounting. Included in the acquisition cost were $14.4 million of goodwill and $5.8 million of other intangibles, which are being amortized over fifteen and ten years, respectively. On October 31, 1995, the Corporation completed the acquisition of RCB International, Inc. (RCB), an international provider of institutional investment management services. RCB shareholders received at closing $11.0 million in cash, $.6 million in notes and 392,431 shares of Corporation common stock. The transaction was recorded under the purchase method of accounting. In addition, 216,140 shares of Corporation common stock and $2.6 million in cash were allocated for various deferred compensation plans and other deferred payment arrangements. Shares and cash available under these deferred payment arrangements are payable over one to seven years and are contingent upon continued employment, non-competition agreements and, in some cases, meeting predetermined performance goals. Included in the acquisition cost of RCB were $18.8 million of goodwill and $8.0 million of other intangibles, both of which are being amortized over a fifteen year period. 54 Northern Trust Corporation 24. 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) 1995 1994 - ----------------------------------------------------------------------------- ASSETS Cash on Deposit with Subsidiary Bank $ .2 $ 2.3 Time Deposits with Banks-International 95.6 42.0 Securities 168.3 207.2 Investments in Wholly Owned Subsidiaries -Bank Subsidiaries 1,261.6 1,109.3 -Nonbank Subsidiaries 36.2 27.1 Loans-Bank Subsidiaries 50.0 75.0 -Nonbank Subsidiaries 13.4 13.4 -Other 27.8 28.1 Buildings and Equipment 7.3 7.5 Other Assets 94.6 57.3 - ----------------------------------------------------------------------------- Total Assets 1,755.0 1,569.2 - ----------------------------------------------------------------------------- LIABILITIES Commercial Paper 146.7 123.8 Notes Payable 126.8 136.4 Other Liabilities 28.9 28.3 - ----------------------------------------------------------------------------- Total Liabilities 302.4 288.5 Stockholders' Equity 1,452.6 1,280.7 - ----------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $1,755.0 $1,569.2
CONDENSED STATEMENT OF INCOME
For the Year Ended December 31 ---------------------- (In Millions) 1995 1994 1993 - --------------------------------------------------------------------------- OPERATING INCOME Dividends-Bank Subsidiaries $134.3 $ 82.1 $ 86.7 -Nonbank Subsidiaries 1.6 6.6 .6 Intercompany Interest and Other Charges 11.4 12.1 15.2 Interest and Other Income 11.3 9.6 6.9 - --------------------------------------------------------------------------- Total Operating Income 158.6 110.4 109.4 - --------------------------------------------------------------------------- Operating Expenses Interest Expense 20.6 21.5 22.1 Other Operating Expenses 7.2 17.1 12.2 - --------------------------------------------------------------------------- Total Operating Expenses 27.8 38.6 34.3 - --------------------------------------------------------------------------- Income before Income Taxes and Equity in Undistributed Net Income of Subsidiaries 130.8 71.8 75.1 Benefit for Income Taxes (6.1) (9.6) (6.8) - --------------------------------------------------------------------------- Income before Equity in Undistributed Net Income of Subsidiaries 136.9 81.4 81.9 Equity in Undistributed Net Income (Loss) of Subsidiaries: Bank Subsidiaries 76.1 101.7 83.0 Nonbank Subsidiaries 7.0 (.9) 3.0 - --------------------------------------------------------------------------- NET INCOME $220.0 $182.2 $167.9 - --------------------------------------------------------------------------- Net Income Applicable to Common Stock $211.5 $174.9 $161.6
CONDENSED STATEMENT OF CASH FLOWS
For the Year Ended December 31 ---------------------- (In Millions) 1995 1994 1993 - ----------------------------------------------------------------------------- OPERATING ACTIVITIES: Net Income $220.0 $182.2 $167.9 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Equity in Undistributed Net Income of Subsidiaries (83.1) (100.8) (86.0) (Increase) Decrease in Accrued Income .6 (.9) .3 (Increase) Decrease in Prepaid Expenses (.1) .6 .2 Other Noncash, net (6.8) 4.3 (1.6) - ----------------------------------------------------------------------------- Net Cash Provided by Operating Activities 130.6 85.4 80.8 - ----------------------------------------------------------------------------- INVESTING ACTIVITIES: Net (Increase) Decrease in Time Deposits with Banks (53.6) 116.7 (129.7) Purchases of Securities (279.4) (227.1) (106.1) Sales of Securities 173.7 157.1 62.3 Proceeds from Maturity and Redemption of Securities 142.0 8.6 18.4 Capital Investments in Subsidiaries (43.5) (3.0) (4.0) Net (Increase) Decrease in Loans to Subsidiaries 25.0 (2.5) 122.1 Net (Increase) Decrease in Other Loans .3 (1.2) .2 Other, net (2.6) (1.9) (2.0) - ----------------------------------------------------------------------------- Net Cash Provided by (Used in) Investing Activities (38.1) 46.7 (38.8) - ----------------------------------------------------------------------------- FINANCING ACTIVITIES: Net Increase (Decrease) in Commercial Paper 22.9 (.3) (2.9) Repayment of Notes Payable (10.2) (81.9) (6.3) Treasury Stock Purchased (63.7) (6.9) (2.2) Cash Dividends Paid on Common and Preferred Stock (65.8) (54.1) (45.8) Net Proceeds from Stock Options 9.0 4.5 4.0 Other, net 13.2 8.8 11.0 - ----------------------------------------------------------------------------- Net Cash Used in Financing Activities (94.6) (129.9) (42.2) - ----------------------------------------------------------------------------- Net Change in Cash on Deposit with Subsidiary Bank (2.1) 2.2 (.2) Cash on Deposit with Subsidiary Bank at Beginning of Year 2.3 .1 .3 - ----------------------------------------------------------------------------- CASH ON DEPOSIT WITH SUBSIDIARY BANK AT END OF YEAR $ .2 $ 2.3 $ .1
Northern Trust Corporation 55 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, 1995 and 1994, 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, 1995. 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, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. Arthur Andersen LLP Chicago, Illinois, January 16, 1996 56 Northern Trust Corporation Consolidated Financial Statistics AVERAGE BALANCE SHEET
($ In Millions) 1995 1994 1993 1992 1991 - ------------------------------------------------------------------------------------------------------ ASSETS Cash and Due from Banks $ 1,178.7 $ 1,206.6 $ 1,025.3 $ 937.8 $ 839.9 Money Market Assets Federal Funds Sold and Repurchase Agreements 204.2 237.0 171.3 237.8 304.8 Time Deposits with Banks 1,643.9 2,063.3 1,956.8 1,620.5 1,331.3 Other 16.6 119.9 73.5 104.4 274.4 - ------------------------------------------------------------------------------------------------------ Total Money Market Assets 1,864.7 2,420.2 2,201.6 1,962.7 1,910.5 - ------------------------------------------------------------------------------------------------------ Securities U.S. Government and Other 5,703.9 4,482.0 3,700.2 2,658.1 1,933.9 Obligations of States and Political Subdivisions 434.7 465.1 502.3 516.0 533.8 Trading Account 54.4 53.8 29.5 16.2 32.1 - ------------------------------------------------------------------------------------------------------ Total Securities 6,193.0 5,000.9 4,232.0 3,190.3 2,499.8 - ------------------------------------------------------------------------------------------------------ Loans and Leases 9,136.0 8,316.1 7,297.1 6,452.9 6,199.4 Reserve for Credit Losses (146.2) (145.2) (145.5) (145.6) (146.6) Other Assets 1,183.3 1,087.2 1,089.7 1,019.9 879.5 - ------------------------------------------------------------------------------------------------------ Total Assets $19,409.5 $17,885.8 $15,700.2 $13,418.0 $12,182.5 - ------------------------------------------------------------------------------------------------------ LIABILITIES Deposits Demand and Other Noninterest-Bearing $ 2,747.3 $ 2,592.5 $ 2,554.9 $ 1,876.0 $ 1,635.8 Savings and Money Market Deposits 3,312.4 3,385.7 3,432.1 3,372.2 3,208.1 Savings Certificates 2,000.3 1,229.6 1,172.9 1,370.8 1,569.7 Other Time 542.7 412.8 404.7 493.9 533.1 Foreign Offices-Demand 299.1 361.7 65.3 56.2 41.8 -Time 3,493.4 3,284.8 2,436.4 1,815.6 1,100.6 - ------------------------------------------------------------------------------------------------------ Total Deposits 12,395.2 11,267.1 10,066.3 8,984.7 8,089.1 Federal Funds Purchased 1,564.0 1,350.7 1,692.5 1,540.2 1,412.8 Securities Sold under Agreements to Repurchase 1,769.7 1,444.3 664.4 542.9 463.8 Commercial Paper 146.0 138.1 131.5 132.9 129.3 Other Borrowings 1,034.5 1,007.5 940.8 561.0 724.5 Senior Notes 394.0 781.8 554.1 85.2 1.6 Notes Payable 271.3 293.6 297.9 258.8 245.2 Other Liabilities 462.1 377.2 279.6 385.2 357.7 - ------------------------------------------------------------------------------------------------------ Total Liabilities 18,036.8 16,660.3 14,627.1 12,490.9 11,424.0 - ------------------------------------------------------------------------------------------------------ STOCKHOLDERS' EQUITY 1,372.7 1,225.5 1,073.1 927.1 758.5 - ------------------------------------------------------------------------------------------------------ Total Liabilities and Stockholders' Equity $19,409.5 $17,885.8 $15,700.2 $13,418.0 $12,182.5 - ------------------------------------------------------------------------------------------------------ RATIOS Dividend Payout Ratio 28.6% 28.4% 25.6% 24.4% 24.6% Return on Average Assets 1.13 1.02 1.07 1.11 1.05 Return on Average Common Equity 17.58 16.57 17.89 18.71 19.01 Tier 1 Capital to Risk-Adjusted Assets-End of Period 8.82 8.95 9.31 8.08 6.74 Total Capital to Risk-Adjusted Assets-End of Period 12.49 12.36 13.41 11.56 10.68 Leverage 6.19 6.22 6.24 6.06 5.38 Average Stockholders' Equity to Average Assets 7.07 6.85 6.83 6.91 6.23 Average Loans and Leases Times Average Stockholders' Equity 6.7X 6.8x 6.8x 7.0x 8.2x - ------------------------------------------------------------------------------------------------------ Stockholders-End of Period 3,331 2,962 2,922 2,893 2,840 Staff-End of Period (Full-time equivalent) 6,531 6,608 6,259 6,249 5,798
58 Northern Trust Corporation Consolidated Financial Statistics ANALYSIS OF NET INTEREST INCOME
(Interest and rate on a taxable equivalent basis) 1995 1994 - ------------------------------------------------------------------------------- ($ In Millions) Interest Volume Rate Interest Volume Rate - ------------------------------------------------------------------------------- AVERAGE EARNING ASSETS Money Market Assets Federal Funds Sold and Repurchase Agreements $ 12.3 $ 204.2 6.02% $ 10.9 $ 237.0 4.59% Time Deposits with Banks 92.1 1,643.9 5.60 97.8 2,063.3 4.74 Other 1.1 16.6 6.88 5.2 119.9 4.31 - ------------------------------------------------------------------------------- Total Money Market Assets 105.5 1,864.7 5.66 113.9 2,420.2 4.71 - ------------------------------------------------------------------------------- Securities U.S. Government 70.4 1,225.7 5.74 73.8 1,779.6 4.15 Obligations of States and Political Subdivisions 46.8 434.7 10.75 52.8 465.1 11.35 Federal Agency 258.8 4,124.8 6.28 114.2 2,333.6 4.90 Other 22.0 353.4 6.21 19.6 368.8 5.31 Trading Account 3.8 54.4 7.04 4.3 53.8 7.91 - ------------------------------------------------------------------------------- Total Securities 401.8 6,193.0 6.49 264.7 5,000.9 5.29 - ------------------------------------------------------------------------------- Loans and Leases 634.3 9,136.0 6.94 503.5 8,316.1 6.05 - ------------------------------------------------------------------------------- Total Earning Assets $1,141.6 $17,193.7 6.64% $882.1 $15,737.2 5.61% - ------------------------------------------------------------------------------- AVERAGE SOURCE OF FUNDS Deposits Savings and Money Market Deposits $ 109.1 $ 3,312.4 3.29% $ 85.3 $ 3,385.7 2.52% Savings Certificates 120.6 2,000.3 6.03 56.9 1,229.6 4.63 Other Time 31.5 542.7 5.81 18.6 412.8 4.50 Foreign Offices Time 182.1 3,493.4 5.21 137.2 3,284.8 4.18 - ------------------------------------------------------------------------------- Total Deposits 443.3 9,348.8 4.74 298.0 8,312.9 3.58 Federal Funds Purchased 91.2 1,564.0 5.83 55.5 1,350.7 4.11 Repurchase Agreements 102.6 1,769.7 5.80 61.9 1,444.3 4.28 Commercial Paper 8.6 146.0 5.87 5.9 138.1 4.31 Other Borrowings 55.6 1,034.5 5.38 36.0 1,007.5 3.57 Senior Notes 23.7 394.0 6.00 33.8 781.8 4.32 Notes Payable 21.4 271.3 7.88 23.0 293.6 7.84 - ------------------------------------------------------------------------------- Total Interest-Related Funds 746.4 14,528.3 5.14 514.1 13,328.9 3.86 - ------------------------------------------------------------------------------- Interest Rate Spread -- -- 1.50% -- -- 1.75% - ------------------------------------------------------------------------------- Noninterest-Related Funds -- 2,665.4 -- -- 2,408.3 -- - ------------------------------------------------------------------------------- Total Source of Funds $ 746.4 $17,193.7 4.34% $514.1 $15,737.2 3.27% - ------------------------------------------------------------------------------- Net Interest Income/Margin $ 395.2 -- 2.30% $368.0 -- 2.34% - ------------------------------------------------------------------------------- NET INTEREST INCOME/MARGIN COMPONENTS Domestic $ 392.6 $15,193.7 2.58% $357.3 $12,890.4 2.77% International 2.6 2,000.0 .13 10.7 2,846.8 .38 - ------------------------------------------------------------------------------- Consolidated $ 395.2 $17,193.7 2.30% $368.0 $15,737.2 2.34%
Notes:-Average volume includes nonaccrual loans. -Interest on loans and money market assets includes fees of $5.1 million in 1995, $6.8 million in 1994, $13.9 million in 1993, $11.7 million in 1992 and $5.1 million in 1991. -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 1995-1993 and 34% for 1992-1991) 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 $37.6 million in 1995, $33.4 million in 1994, $34.1 million in 1993, $32.5 million in 1992 and $36.0 million in 1991. -Yields on the portion of the securities portfolio classified as available for sale are based on amortized cost. 60 Northern Trust Corporation
1993 1992 1991 - ------------------------------------------------------------------------------ Interest Volume Rate Interest Volume Rate Interest Volume Rate - ------------------------------------------------------------------------------ $ 5.5 $ 171.3 3.24% $ 8.8 $ 237.8 3.70% $ 17.8 $ 304.8 5.83% 86.5 1,956.8 4.42 95.6 1,620.5 5.90 108.1 1,331.3 8.12 2.6 73.5 3.53 4.6 104.4 4.46 20.7 274.4 7.54 - ------------------------------------------------------------------------------ 94.6 2,201.6 4.30 109.0 1,962.7 5.55 146.6 1,910.5 7.68 - ------------------------------------------------------------------------------ 102.5 2,646.6 3.87 90.3 1,759.7 5.13 65.0 943.4 6.89 58.6 502.3 11.66 59.2 516.0 11.46 61.4 533.8 11.51 29.7 773.9 3.84 23.9 521.6 4.59 25.3 346.5 7.29 13.6 279.7 4.88 22.9 376.8 6.07 52.3 644.0 8.12 2.2 29.5 7.52 1.0 16.2 6.01 2.5 32.1 7.92 - ------------------------------------------------------------------------------ 206.6 4,232.0 4.88 197.3 3,190.3 6.18 206.5 2,499.8 8.26 - ------------------------------------------------------------------------------ 439.3 7,297.1 6.02 448.1 6,452.9 6.94 530.3 6,199.4 8.55 - ------------------------------------------------------------------------------ $740.5 $13,730.7 5.39% $754.4 $11,605.9 6.50% $883.4 $10,609.7 8.33% - ------------------------------------------------------------------------------ $ 78.8 $ 3,432.1 2.30% $ 99.1 $ 3,372.2 2.94% $159.2 $ 3,208.1 4.96% 50.5 1,172.9 4.31 69.9 1,370.8 5.10 104.3 1,569.7 6.64 15.7 404.7 3.88 25.4 493.9 5.15 38.3 533.1 7.19 90.4 2,436.4 3.71 95.7 1,815.6 5.27 88.6 1,100.6 8.05 - ------------------------------------------------------------------------------ 235.4 7,446.1 3.16 290.1 7,052.5 4.11 390.4 6,411.5 6.09 51.1 1,692.5 3.02 53.5 1,540.2 3.47 78.7 1,412.8 5.57 20.0 664.4 3.00 19.8 542.9 3.65 26.2 463.8 5.65 4.3 131.5 3.23 5.2 132.9 3.88 8.0 129.3 6.19 26.0 940.8 2.76 19.0 561.0 3.39 41.5 724.5 5.73 18.4 554.1 3.33 3.0 85.2 3.49 .1 1.6 8.68 23.3 297.9 7.84 21.0 258.8 8.11 21.4 245.2 8.71 - ------------------------------------------------------------------------------ 378.5 11,727.3 3.22 411.6 10,173.5 4.04 566.3 9,388.7 6.03 - ------------------------------------------------------------------------------ -- -- 2.17% -- -- 2.46% -- -- 2.30% - ------------------------------------------------------------------------------ -- 2,003.4 -- -- 1,432.4 -- -- 1,221.0 -- - ------------------------------------------------------------------------------ $378.5 $13,730.7 2.75% $411.6 $11,605.9 3.55% $566.3 $10,609.7 5.34% - ------------------------------------------------------------------------------ $362.0 -- 2.64% $342.8 -- 2.95% $317.1 -- 2.99% - ------------------------------------------------------------------------------ $344.2 $11,491.0 3.00% $324.8 $ 9,659.9 3.36% $300.0 $ 8,981.9 3.34% 17.8 2,239.7 .79 18.0 1,946.0 .93 17.1 1,627.8 1.05 - ------------------------------------------------------------------------------ $362.0 $13,730.7 2.64% $342.8 $11,605.9 2.95% $317.1 $10,609.7 2.99%
Northern Trust Corporation 61 Consolidated Financial Statistics QUARTERLY FINANCIAL DATA STATEMENT OF INCOME
1995 ------------------------------------------------- Entire Fourth Third Second First ($ In Millions Except Per Share Information) Year Quarter Quarter Quarter Quarter - -------------------------------------------------------------------------------- Interest Income $ 1,104.0 285.9 285.8 271.1 261.2 Interest Expense 746.4 194.2 196.4 183.1 172.7 - -------------------------------------------------------------------------------- Net Interest Income 357.6 91.7 89.4 88.0 88.5 Provision for Credit Losses 6.0 1.0 2.0 1.5 1.5 Noninterest Income 677.1 174.1 173.1 168.4 161.5 Investment Security Gains (Losses) 1.0 .5 .3 .1 .1 Noninterest Expenses 709.2 178.5 175.5 177.9 177.3 Provision for Income Taxes 100.5 27.3 27.2 24.0 22.0 - -------------------------------------------------------------------------------- NET INCOME 220.0 59.5 58.1 53.1 49.3 - -------------------------------------------------------------------------------- Net Income Applicable to Common Stock 211.5 57.4 56.0 50.9 47.2 - -------------------------------------------------------------------------------- PER COMMON SHARE Net Income-Primary $ 3.75 1.01 .99 .90 .86 -Fully Diluted 3.70 1.00 .98 .89 .85 - -------------------------------------------------------------------------------- AVERAGE BALANCE SHEET (In Millions) - -------------------------------------------------------------------------------- ASSETS Cash and Due from Banks $ 1,178.7 1,248.1 1,253.3 1,124.5 1,086.3 Money Market Assets 1,864.7 1,863.0 1,739.8 1,755.9 2,104.1 Securities 6,193.0 6,443.5 6,677.3 5,905.7 5,732.3 Loans and Leases 9,136.0 9,662.9 9,356.9 8,973.7 8,535.9 Reserve for Credit Losses (146.2) (147.2) (146.6) (145.9) (145.3) Other Assets 1,183.3 1,216.9 1,250.4 1,208.2 1,055.2 - -------------------------------------------------------------------------------- Total Assets $19,409.5 20,287.2 20,131.1 18,822.1 18,368.5 - -------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Demand and Other Noninterest-Bearing $ 2,747.3 2,942.5 2,790.8 2,635.2 2,616.3 Savings and Other Interest- Bearing 5,312.7 5,521.3 5,451.7 5,289.9 4,980.6 Other Time 542.7 587.8 584.8 539.5 456.6 Foreign Offices 3,792.5 3,531.0 3,642.0 3,855.2 4,150.5 - -------------------------------------------------------------------------------- Total Deposits 12,395.2 12,582.6 12,469.3 12,319.8 12,204.0 Purchased Funds 4,514.2 4,903.5 5,317.2 4,043.5 3,771.2 Senior Notes 394.0 553.5 174.6 379.7 469.6 Notes Payable 271.3 340.9 254.1 244.7 244.8 Other Liabilities 462.1 484.6 520.5 468.6 372.9 Stockholders' Equity 1,372.7 1,422.1 1,395.4 1,365.8 1,306.0 - -------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $19,409.5 20,287.2 20,131.1 18,822.1 18,368.5 - -------------------------------------------------------------------------------- ANALYSIS OF NET INTEREST INCOME ($ In Millions) - -------------------------------------------------------------------------------- Earning Assets $17,193.7 17,969.4 17,774.0 16,635.3 16,372.3 Interest-Related Funds 14,528.3 15,061.5 15,120.8 14,076.3 13,834.7 Noninterest-Related Funds 2,665.4 2,907.9 2,653.2 2,559.0 2,537.6 Net Interest Income (Taxable equivalent) 395.2 100.7 98.9 97.5 98.1 Net Interest Margin (Taxable equivalent) 2.30% 2.22 2.21 2.35 2.43 - -------------------------------------------------------------------------------- COMMON STOCK DIVIDEND AND MARKET PRICE - -------------------------------------------------------------------------------- Dividends $ 1.09 .31 .26 .26 .26 Market Price Range-High 56.00 56.00 47.625 41.25 37.50 -Low 31.75 43.75 39.00 35.00 31.75
The common stock of Northern Trust Corporation is traded on the Nasdaq National Market under the symbol NTRS. The number of stockholders of record at December 31, 1995 was 3,331. 62 Northern Trust Corporation
1994 - ------------------------------------------------------------------------------------------- Entire Fourth Third Second First Year Quarter Quarter Quarter Quarter - ------------------------------------------------------------------------------------------- $ 848.7 243.0 221.5 200.0 184.2 514.1 156.2 136.5 118.7 102.7 - ------------------------------------------------------------------------------------------- 334.6 86.8 85.0 81.3 81.5 6.0 1.0 1.0 1.0 3.0 633.5 152.4 152.8 178.9 149.4 (.1) -- (.2) (.1) .2 700.5 184.9 166.2 187.5 161.9 79.3 13.2 22.4 22.9 20.8 - ------------------------------------------------------------------------------------------- 182.2 40.1 48.0 48.7 45.4 - ------------------------------------------------------------------------------------------- 174.9 38.0 46.2 46.9 43.8 - ------------------------------------------------------------------------------------------- $ 3.17 .69 .83 .85 .80 3.16 .69 .83 .85 .80 - ------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------- $ 1,206.6 1,176.3 1,151.3 1,244.0 1,256.3 2,420.2 2,206.2 2,425.0 2,610.1 2,441.8 5,000.9 5,500.4 5,140.7 4,591.4 4,761.3 8,316.1 8,618.7 8,434.9 8,271.6 7,930.4 (145.2) (144.9) (144.9) (145.3) (145.6) 1,087.2 1,020.1 1,059.9 1,191.2 1,078.7 - ------------------------------------------------------------------------------------------- $17,885.8 18,376.8 18,066.9 17,763.0 17,322.9 - ------------------------------------------------------------------------------------------- $ 2,592.5 2,625.0 2,522.3 2,595.7 2,627.7 4,615.3 4,664.9 4,623.6 4,608.1 4,563.6 412.8 451.4 469.5 416.8 311.2 3,646.5 4,147.6 3,936.8 3,491.4 2,994.3 - ------------------------------------------------------------------------------------------- 11,267.1 11,888.9 11,552.2 11,112.0 10,496.8 3,940.6 3,777.9 3,765.5 3,920.3 4,306.4 781.8 770.5 801.6 803.4 751.5 293.6 248.3 273.6 326.7 326.8 377.2 413.0 428.6 387.5 277.8 1,225.5 1,278.2 1,245.4 1,213.1 1,163.6 - ------------------------------------------------------------------------------------------- $17,885.8 18,376.8 18,066.9 17,763.0 17,322.9 - ------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------- $15,737.2 16,325.3 16,000.6 15,473.1 15,133.5 13,328.9 13,730.5 13,510.7 13,140.5 12,923.3 2,408.3 2,594.8 2,489.9 2,332.6 2,210.2 368.0 95.9 93.2 89.5 89.4 2.34% 2.33 2.31 2.32 2.40 - ------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------- $ .92 .26 .22 .22 .22 43.25 38.25 41.75 43.25 43.00 32.25 32.25 35.75 40.25 39.50
Northern Trust Corporation 63 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 120 East Oak Street, Chicago, Illinois 60611 125 South Wacker Drive, Chicago, Illinois 60675 7801 South State Street, Chicago, Illinois 60619 8501 West Higgins Road, Chicago, Illinois 60631 6401 North Harlem Avenue, Chicago, Illinois 60631 579 Central Avenue, Highland Park, Illinois 60035 120 East Scranton Avenue, Lake Bluff, Illinois 60044 265 Deerpath Road, Lake Forest, Illinois 60045 959 South Waukegan Road, Lake Forest, Illinois 60045 701 South McKinley Road, Lake Forest, Illinois 60045 400 East Diehl Road, Naperville, Illinois 60563 One Oakbrook Terrace,Oakbrook Terrace, Illinois 60181 1501 Woodfield Road, Schaumburg, Illinois 60173 62 Green Bay Road, Winnetka, Illinois 60093 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 Northern Trust Trade Services Limited Asia Pacific Tower, 17th Floor, 3 Garden Road, Central, 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 66 Northern Trust Corporation OTHER SUBSIDIARIES OF THE CORPORATION NORTHERN TRUST BANK OF FLORIDA N.A. 700 Brickell Avenue, Miami, Florida 33131 595 Biltmore Way, Coral Gables, Florida 33134 328 Crandon Boulevard, Suite 101,Key Biscayne, Florida 33149 3001 Aventura Boulevard, Aventura, Florida 33180 1100 East Las Olas Boulevard,Fort Lauderdale, Florida 33301 2601 East Oakland Park Boulevard,Fort Lauderdale, Florida 33306 301 Yamato Road, Boca Raton, Florida 33431 770 East Atlantic Avenue, Delray Beach, Florida 33483 440 Royal Palm Way, Palm Beach, Florida 33480 11780 U.S. Highway 1, Building 3, Suite 100,North Palm Beach, Florida 33408 2201 S.E. Kingswood Terrace, Monterey Commons,Stuart, Florida 34994 (opening Spring 1996) 755 Beachland Boulevard, Vero Beach, Florida 32963 1440 South A1A, Vero Beach, Florida 32963 4001 Tamiami Trail North, Naples, Florida 33940 530 Fifth Avenue South, Naples, Florida 33940 26790 South Tamiami Trail, Bonita Springs, Florida 33923 8060 College Parkway S.W., Fort Myers, Florida 33919 1515 Ringling Boulevard, Sarasota, Florida 34236 901 Venetia Bay Boulevard, Suite 100, Venice, Florida 34292 540 Bay Isles Road, Longboat Key, Florida 34228 233 15th Street West, Bradenton, Florida 34205 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 La Jolla 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 600 Bering Drive, Houston, Texas 77057 10000 Memorial Drive, Houston, Texas 77024 700 Rusk Street, Houston, Texas 77002 RCB INTERNATIONAL INC. 29 Federal Street, Stamford, Connecticut 06901 RCB TRUST COMPANY 29 Federal Street, Stamford, Connecticut 06901 DIVERSIFIED FUND MANAGEMENT INC. 20 Toronto Street, Suite 440, Toronto, Canada M5C 2B8 RCB INTERNATIONAL LIMITED One Gloster Court, Segensworth West, Fareham, Hampshire PO15 5SH, England 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, Suite 1900,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 Corporation 67 EX-21 17 SUBSIDIARIES EXHIBIT NUMBER (21) TO 1995 FORM 10-K NORTHERN TRUST CORPORATION SUBSIDIARIES AS OF MARCH 1, 1996
Percent Jurisdiction 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 Nortrust International Finance (Hong Kong) Ltd. 100% Hong Kong Northern Global Financial Services Ltd. 100% Hong Kong Northern Trust Trade Services Limited 100% Hong Kong Northern Trust Fund Managers (Ireland) Limited 100% Ireland 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 Trust Bank of Vero Beach 100% Florida Nortrust 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 Tanglewood Bancshares, Inc. 100% Texas Northern Futures Corporation 100% Delaware
NORTHERN TRUST CORPORATION SUBSIDIARIES AS OF MARCH 1, 1996 (continued)
Percent State of Owned Incorporation ------- ------------- Norsub Corporation 100% Delaware First Lake Forest Corporation 100% Delaware 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 RCB International, Inc. 100% Delaware Diversified Fund Management, Inc. 100% Ontario, Canada RCB International Limited 100% England RCB Trust Company 100% Connecticut
EX-23 18 CONSENT OF ARTHUR ANDERSEN EXHIBIT NUMBER (23) TO 1995 FORM 10-K CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated January 16, 1996, incorporated by reference in Northern Trust Corporation's Annual Report on Form 10-K for the year ended December 31, 1995, into the Corporation's previously filed Form S-8 Registration Statements File Nos. 33-22546, 33-47597, 33-51971, 33-63843 and 333-00809. ARTHUR ANDERSEN LLP Chicago, Illinois March 11, 1996 EX-24 19 POWER OF ATTORNEY EXHIBIT NUMBER (24) TO 1995 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 William A. Osborn, 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, 1995, 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 20th day of February, 1996. William A. Osborn Barry G. Hastings - ----------------- ----------------- William A. Osborn Barry G. Hastings Chairman of the Board, Chief President, Chief Operating Executive Officer and Director Officer and Director Perry R. Pero Harry W. Short - -------------- -------------- Perry R. Pero Harry W. Short Senior Executive Vice President Senior Vice President and Controller and Chief Financial Officer (Chief Accounting Officer) Dolores E. Cross Robert S. Hamada - ---------------- ---------------- Dolores E. Cross Robert S. Hamada Director Director Robert A. Helman Arthur L. Kelly - ---------------- --------------- Robert A. Helman Arthur L. Kelly Director Director Ardis Krainik Frederick A. Krehbiel - ------------- --------------------- Ardis Krainik Frederick A. Krehbiel Director Director William G. Mitchell Harold B. Smith - ------------------- --------------- William G. Mitchell Harold B. Smith Director Director William D. Smithburg Bide L. Thomas - -------------------- -------------- William D. Smithburg 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 20th day of February, 1996. Victoria Antoni ---------------------- Notary Public My Commission Expires: 7/25/99 ------------- EX-27 20 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-31-1995 JAN-01-1995 DEC-31-1995 1,308,931 1,567,632 162,063 88,891 5,136,281 535,083 562,611 9,905,988 147,131 19,933,518 12,488,205 5,181,395 459,715 351,577 93,597 0 170,000 1,189,029 19,933,518 630,854 364,055 109,119 1,104,028 443,348 746,437 357,591 6,000 1,039 709,208 320,502 320,502 0 0 219,995 3.75 3.70 2.30 29,188 21,978 2,749 0 144,838 11,757 5,832 147,131 106,183 2,746 38,202
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