-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, WRsHtpKGbOIBTLiduYtRCnPqaS0rwTpzCr7wTHBpI/PUfQbTHx4IMi9HXwvyCBop Bt/zb5IvqSdA2PxAYiDk9Q== 0000950131-94-000324.txt : 19940316 0000950131-94-000324.hdr.sgml : 19940316 ACCESSION NUMBER: 0000950131-94-000324 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19931231 FILED AS OF DATE: 19940315 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORTHERN TRUST CORP CENTRAL INDEX KEY: 0000073124 STANDARD INDUSTRIAL CLASSIFICATION: 6022 IRS NUMBER: 362723087 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 34 SEC FILE NUMBER: 000-05965 FILM NUMBER: 94516059 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-K 1 FORM 10-K - -------------------------------------------------------------------------------- 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, 1993 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. [X] YES [_] 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 7, 1994, 53,311,961 shares of Common Stock, $1.66 2/3 Par Value, were outstanding, and the aggregate market value of the common stock (based upon the closing representative bid price of the common stock on February 7, 1994, as reported by NASDAQ) held by nonaffiliates was approximately $1,918,831,652. Determination of stock ownership by nonaffiliates 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, 1993 - Part I and Part II 1994 Notice and Proxy Statement for the Annual Meeting of Stockholders to be held on April 19, 1994 - 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 is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended. The Corporation was organized in Delaware in 1971 and on December 1 of that year became the owner of all of the outstanding capital stock, except directors' qualifying shares, of The Northern Trust Company (Bank), an Illinois banking corporation located in the Chicago financial district. The Corporation also owns three other banks in the Chicago metropolitan area, a bank in each of Florida, Arizona, California and Texas, and various other nonbank subsidiaries, including a securities brokerage firm and a futures commission merchant. The Corporation expects that although the operations of other subsidiaries will be of increasing significance, the Bank will in the foreseeable future continue to be the major source of the Corporation's assets, revenues and net income. Except where the context otherwise requires, the term "Corporation" refers to Northern Trust Corporation and its consolidated subsidiaries. At December 31, 1993, the Corporation had consolidated total assets of approximately $16.9 billion and stockholders' equity of $1.2 billion. At June 30, 1993 the Corporation was the third largest bank holding company headquartered in Illinois and the 40th largest in the United States, based on consolidated total assets of approximately $16.3 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 fifth year, the Bank's growth has come from internal sources rather than through merger or acquisition. At December 31, 1993, the Bank had consolidated assets of approximately $13.5 billion. At June 30, 1993, the Bank was the third largest bank in Illinois and the 38th largest in the United States, based on consolidated total assets of approximately $13.1 billion on that date. At December 31,1993 the Bank had seven active wholly owned subsidiaries: The Northern Trust International Banking Corporation, NorLease, Inc., The Northern Trust Safe Deposit Company, MFC Company, Inc., Nortrust Nominees Ltd., The Northern Trust Company U.K. Pension Plan Limited and The Northern Trust Company, Canada. The Northern Trust International Banking Corporation, located in New York, was organized under the Edge Act for the purpose of conducting international business. NorLease, Inc. was established by the Bank to enable it to broaden its leasing and leasing-related lending activities. The Northern Trust Safe Deposit Company was established in order to offer safe deposit facilities to the public. MFC Company, Inc. holds properties that are received from the Bank in connection with certain problem loans. Nortrust Nominees Ltd., located in London, is a U.K. trust corporation organized to hold U.K. real estate for fiduciary accounts. The Northern Trust Company U.K. Pension Plan Limited was established in connection with the pension plan for the Bank's London branch. The Northern Trust Company, Canada was established to offer institutional trust products and services to Canadian entities. OTHER NORTHERN TRUST CORPORATION SUBSIDIARIES The Corporation has three banking subsidiaries in the Chicago metropolitan area: Northern Trust Bank/O'Hare N.A., Northern Trust Bank/DuPage, and Northern Trust Bank/Lake Forest N.A. At December 31, 1993, the three Illinois banking subsidiaries had nine office locations with combined total assets of approximately $1.5 billion. The Corporation's Florida banking subsidiary, Northern Trust Bank of Florida N.A., is headquartered in Miami and at December 31, 1993, had fifteen offices located throughout Florida, with total assets of approximately $1.3 billion. The Corporation's Arizona banking subsidiary, Northern Trust Bank of Arizona N.A., is headquartered in Phoenix and at December 31, 1993 had total assets of approximately $214 million and serviced clients from four office locations. The Corporation has a Texas banking subsidiary, Northern Trust Bank of Texas N.A., headquartered in Dallas. It had four office locations and total assets of $152 million at December 31, 1993. The Corporation has one banking subsidiary in California, Northern Trust Bank of California N.A., headquartered in Santa Barbara. At December 31, 1993, it had six office locations and total assets of $141 million. The Corporation has several nonbank subsidiaries. Among them are Northern Trust Services, Inc., which provides management consulting services to nonaffiliated financial institutions. Northern Trust Securities, Inc. 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 - -------------------------------------------------------------------------------- 4 - -------------------------------------------------------------------------------- the Bank is the principal tenant. The Northern Trust Company of New York provides security clearance services for all nondepository eligible securities held by trust, agency, and fiduciary accounts administered by the Corporation's subsidiaries. Berry, Hartell, Evers & Osborne, Inc. is an investment management firm in San Francisco. Northern Trust Cayman International, Ltd. provides fiduciary services to clients residing outside of the U.S. CORPORATION'S INTERNAL ORGANIZATION The Corporation is organized into three principal business units: Corporate Financial Services and Personal Financial Services report to President and Chief Operating Officer William A. Osborn, who also heads the Commercial Banking and Corporate Management Services unit. In addition, the Corporation's Risk Management Unit focuses on financial and risk management. The following is a brief summary of the Corporation's business activities. CORPORATE FINANCIAL SERVICES John S. Sutfin, Vice Chairman of the Corporation, is head of Corporate Financial Services (CFS) which encompasses domestic and global custody trust- related services for securities traded in the United States and foreign markets, as well as securities lending, asset management, and cash management services. Master Trust/Master Custody is the principal product of CFS in the United States. Global Custody, the extension of domestic Master Custody to securities traded in markets foreign to the client, has been provided primarily through the Bank's London branch and Banque Scandinave en Suisse (BSS), in which the Bank has an investment of approximately 21%. The Corporation expects to transition most accounts custodied at BSS to the London branch during 1994. Related foreign exchange activities are conducted at the London branch. As measured by number of clients, the Corporation is a leading provider of Master Trust/Master Custody services in various market segments. At December 31, 1993 total assets under administration were $426.5 billion. The major market segments served are Corporate ERISA (pension and profit sharing funds subject to regulation under the Employment Retirement Income Security Act of 1974); public funds; taxable asset portfolios (foundations, endowments and insurance companies); and international asset portfolios (global assets of domestic and foreign institutions). To broaden the services provided to the defined contribution market, the Corporation signed a definitive agreement in December 1993 to acquire Hazlehurst & Associates, Inc., a privately-held retirement benefit plan services company based in Atlanta, Georgia. Hazlehurst's well established capabilities in retirement plan design, participant record keeping, and actuarial and consulting services will complement the Corporation's custody, fiduciary and investment management capabilities. The agreement is expected to close in the second quarter of 1994 subject to the approval of Hazlehurst shareholders and to regulatory approval. CFS also includes a correspondent trust market segment which provides custody, systems and investment services to smaller bank trust departments. Trust operations, The Northern Trust Company of New York and The Northern Trust Company, Canada are also included in CFS. PERSONAL FINANCIAL SERVICES Services to individuals is another major dimension of the Corporation's trust business. Barry G. Hastings, Vice Chairman of the Corporation, is head of Personal Financial Services (PFS) which encompasses personal trust and investment management services, estate administration, personal banking and mortgage lending. The Corporation's personal trust strategy combines private banking and trust services to targeted high net worth individuals in rapidly growing areas of wealth concentration. PFS is one of the largest bank managers of personal trust assets in the United States, with total assets under administration of $50.0 billion at December 31, 1993. The Corporation has created a broad national presence in the delivery of specialized private banking and personal trust services through the Bank and a network of banking subsidiaries located in Florida, Arizona, California, Texas and suburban Chicago. These full service banking subsidiaries are predominantly private banking and personal trust oriented and are included in PFS. In December 1993 the Corporation entered into a definitive agreement to acquire Beach One Financial Services, Inc., parent of The Beach Bank of Vero Beach in Florida. The agreement is expected to close in the third quarter of 1994 subject to the approval of Beach One shareholders and to regulatory approval. The Northern Trust Safe Deposit Company, Berry, Hartell, Evers & Osborne, Inc., and Northern Trust Securities, Inc. are also part of PFS. - -------------------------------------------------------------------------------- 5 - -------------------------------------------------------------------------------- COMMERCIAL BANKING AND CORPORATE MANAGEMENT SERVICES Commercial Banking is headed by Gregg D. Behrens, Executive Vice President of the Bank. Commercial Banking offers a full range of banking services through the Bank and places special emphasis on developing institutional relationships in three target markets: middle market and small business companies in the Chicago and Midwest area, large domestic corporations, and financial institutions (both domestic and international). Credit services are administered in three groups: a Metropolitan Group, a Special Industries Group, and a Corporate and Correspondent Group. NorLease, Inc. and The Northern Trust International Banking Corporation are also part of Commercial Banking. Corporate Management Services (CMS), headed by J. David Brock, Executive Vice President of the Corporation, encompasses the treasury management products and services offered by the Corporation. This business serves the treasury needs of major corporations and financial institutions by providing products and services to accelerate cash collections, control disbursement outflows, and generate information to manage their cash positions. Treasury management products and services, including lockbox collection, controlled disbursement products and electronic banking, are developed and marketed in the Banking Services Group within CMS. CMS also includes banking operations and building management. RISK MANAGEMENT UNIT The Risk Management Unit, headed by Senior Executive Vice President and Chief Financial Officer Perry R. Pero, includes the Credit Policy function and the Bank's Treasury Department. The Credit Policy function is described fully on pages 16 to 17 of this report. The Treasury Department is responsible for managing the Bank's wholesale funding and interest rate risk, as well as the portfolio of interest rate risk management instruments under the direction of the Corporate Asset and Liability Policy Committee. It is also responsible for the investment portfolios of the Corporation and the Bank and provides investment advice and management services to the subsidiary banks. The Risk Management Unit also includes the Corporate Controller, Corporate Treasurer and Economic Research functions. GOVERNMENT POLICIES The earnings of the Bank, other banking subsidiaries, and the Corporation 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 Corporation's businesses, as well as the quality and volume of the loan and investment portfolios. An important regulator of domestic economic conditions is the Board of Governors of the Federal Reserve System, which has the general objective of promoting orderly economic growth in the United States. Implementation of this objective is accomplished by its open market operations in United States government securities, the discount rate at which member banks may borrow from Federal Reserve Banks and changes in the reserve requirements for deposits. The policies adopted by the Federal Reserve may strongly influence interest rates and hence what banks earn on their loans and investments and what they pay on their savings and time deposits and other purchased funds. Fiscal policies in the United States and abroad also affect the composition and use of the Corporation's resources. COMPETITION The Corporation'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, the Corporation seeks to deliver a level of service to its clients that distinguishes it from its competitors. The Corporation emphasizes the development and growth of recurring sources of fee-based income and is one of only eight major bank holding companies in the United States that generates more revenues from fee-based services than from net interest income. The Corporation 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. The Corporation also seeks to preserve its asset quality through established credit review procedures and to maintain a conservative balance sheet. Finally, the Corporation seeks to maintain a strong management team with senior officers having broad experience and long tenure with the Corporation. Active competition exists in all principal areas in which the subsidiaries of the Corporation are presently engaged. The Corporate and Personal Financial Services business units compete with domestic and foreign financial institutions, trust companies, financial companies, personal loan companies, mutual funds and investment advisors. The Corporation is a leading provider of Master Trust/Master Custody services and has the leading market share in the Chicago area personal trust market. - -------------------------------------------------------------------------------- 6 - -------------------------------------------------------------------------------- The Commercial Banking and Corporate Management Services business unit competes 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 Continental Bank N.A., The First National Bank of Chicago and its affiliate American National Bank and Trust Company of Chicago, Harris Trust and Savings Bank, and LaSalle National Bank. The chief national competitors of the Bank for Master Trust/Master Custody services are Mellon Bank Corporation, State Street Boston Corporation, Bankers Trust New York Corporation, Chase Manhattan Corporation and Bank of New York Company, Inc. REGULATION AND SUPERVISION The Corporation is a bank holding company subject to the Bank Holding Company Act of 1956, as amended (Act), and to regulation by the Board of Governors of the Federal Reserve System. The Act limits the activities which may be engaged in by the Corporation and its nonbanking subsidiaries to those so closely related to banking or managing or controlling banks as to be a proper incident thereto. Also, under section 106 of the 1970 amendments to the Act and the Federal Reserve Board's regulations, a bank holding company, as well as certain of its subsidiaries, is prohibited from engaging in certain tie-in arrangements in connection with any extension of credit or provision of any property or services. The Act also prohibits bank holding companies from acquiring substantially all the assets of or owning more than 5% of the voting shares of any bank or nonbanking company which is not already majority owned without prior approval of the Board of Governors. No application to acquire shares or assets of a bank located outside the state in which the operations of a bank holding company's banking subsidiaries are principally conducted may be approved by the Federal Reserve Board unless such acquisition is specifically authorized by a statute of the state in which the bank to be acquired is located. Illinois law permits bank holding companies located in any state of the United States to acquire banks or bank holding companies located in Illinois subject to regulatory determinations that the laws of the other state permit Illinois bank holding companies to acquire banks and bank holding companies within that state on qualifications and conditions not unduly restrictive compared to those imposed by Illinois law. Subject to these regulatory determinations, the Corporation may acquire banks and bank holding companies in such states, and bank holding companies in those states may acquire banks and bank holding companies in Illinois. Applicable laws also permit the Corporation to acquire banks or bank holding companies in Arizona, California, Texas, Florida and certain other states. Illinois law permits an Illinois bank holding company to acquire banks anywhere in the state. Illinois legislation also now allows Illinois banks to open branches anywhere within Illinois. 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, including the Corporation, now have expanded opportunities to acquire thrift institutions. 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). 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. - -------------------------------------------------------------------------------- 7 - -------------------------------------------------------------------------------- The Bank is a member of the Federal Reserve System, its deposits are insured by the FDIC and it is subject to regulation by both these entities, as well as by the Illinois Commissioner of Banks and Trust Companies. The Bank is also a member of and subject to the rules of the Chicago Clearinghouse Association, and is registered as a government securities dealer in accordance with the Government Securities Act of 1986. As a government securities dealer its activities are subject to the rules and regulations of the Department of the Treasury. The Bank is registered as a transfer agent with the Federal Reserve and is therefore subject to the rules and regulations of the Federal Reserve. The Corporation's national bank subsidiaries are members of the Federal Reserve System and the FDIC and are subject to regulation by the Comptroller of the Currency. Northern Trust Bank/DuPage, a state chartered institution that is not a member of the Federal Reserve System, is regulated by the FDIC and the Illinois Commissioner of Banks and Trust Companies. The Corporation's nonbanking affiliates are all subject to examination by the Federal Reserve. In addition, The Northern Trust Company of New York is subject to regulation by the Banking Department of the State of New York. Northern Futures Corporation is registered as a futures commission merchant with the Commodity Futures Trading Commission, is a member of the National Futures Association, the Chicago Board of Trade and the Board of Trade Clearing Corporation, and is a clearing member of the Chicago Mercantile Exchange. Northern Trust Securities, Inc. is registered with the Securities and Exchange Commission and is a member of the National Association of Securities Dealers, Inc., and, as such, is subject to the rules and regulations of both these bodies. Berry, Hartell, Evers & Osborne, Inc. is registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940 and is subject to that Act and the rules and regulations of the Commission promulgated thereunder. Various other subsidiaries and branches conduct business in other states and foreign countries and, therefore, may be subject to their regulations and restrictions. The Corporation and its subsidiaries are affiliates within the meaning of the Federal Reserve Act so that the banking subsidiaries are subject to certain restrictions with respect to loans to the Corporation or its nonbanking subsidiaries and certain other transactions with them or involving their securities. Information regarding dividend restrictions on the Corporation's banking subsidiaries is incorporated herein by reference to Note 12 titled Restrictions on Subsidiary Dividends and Loans or Advances on page 53 of the Corporation's Annual Report to Stockholders for the year ended December 31, 1993. Under the FDIC's risk-based insurance assessment system, each insured bank is placed in one of nine risk categories based on its level of capital and other relevant information. Each insured bank's insurance assessment rate is then determined by the risk category in which it has been classified by the FDIC. There is an eight basis point spread between the highest and lowest assessment rates, so that banks classified as strongest by the FDIC are subject to a rate of .23%, and banks classified as weakest by the FDIC are subject to a rate of .31%. The FDIC is prohibited from lowering the average assessment rate below .23% until the Bank Insurance Fund (Fund) has reached a reserve ratio of 1.25%. The FDIC currently estimates the Fund will achieve the designated reserve ratio in the first half of 2002. 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. - -------------------------------------------------------------------------------- 8 - -------------------------------------------------------------------------------- An insured depository institution may be deemed to be in a capitalization category that is lower than is indicated by the capital position reflected on its statement of condition 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 other than the statement of condition ratios in the table above, the Corporation has set capital goals for each of its subsidiary banks that would allow each bank to meet the minimum ratios that are one of the conditions for it to be considered to be well capitalized. At December 31, 1993, the Bank and each of the Corporation's other subsidiary banks met or exceeded these goals. The Corporation's capital ratios are disclosed and discussed on page 39 of the Corporation's Annual Report to Stockholders for the year ended December 31, 1993. Under FDICIA, a bank that is not well capitalized is generally prohibited from accepting or renewing brokered deposits and offering interest rates on deposits significantly higher than the prevailing rate in its normal market area or nationally (depending upon where the deposits are solicited); in addition, "pass-through" insurance coverage may not be available for certain employee benefit accounts. FDICIA generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. Undercapitalized banks are subject to limitations on growth and are required to submit a capital restoration plan, which must be guaranteed by the institution's parent company. Institutions that fail to submit an acceptable plan, or that are significantly undercapitalized, are subject to a host of more drastic regulatory restrictions and measures. FDICIA directs that each federal banking agency prescribe standards for depository institutions or depository institutions' holding companies relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, a maximum ratio of classified assets to capital, minimum earnings sufficient to absorb losses and other standards as they deem appropriate. Many regulations implementing these directives have been proposed and adopted by the agencies. FDICIA also contains a variety of other provisions that may affect the operations of a bank, including new reporting requirements, regulatory standards for real estate lending, "truth in savings" provisions and a requirement that a depository institution give 90 days' prior notice to customers and regulatory authorities before closing any branch. STAFF The Corporation and its subsidiaries employed 6,259 full-time equivalent officers and staff members as of December 31, 1993, approximately 4,600 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, 1993, are incorporated herein by reference.
1993 ANNUAL REPORT SCHEDULE PAGE(S) - ----------------------------------------------------------------- ------------- Foreign Outstandings............................................. .......... 33 Nonperforming Assets and 90 Day Past Due Loans................... .......... 34 Analysis of Reserve Credit Losses................................ .......... 35 Average Statement of Condition................................... .......... 62 Ratios........................................................... .......... 62 Analysis of Net Interest Income.................................. ..... 64 & 65 - ----------------------------------------------------------------- -------------
- -------------------------------------------------------------------------------- Additional statistical information as to the Corporation on a consolidated basis is set forth below. INVESTMENT SECURITIES
DECEMBER 31 ---------------------------------------------------------- (In Millions) 1993 1992 1991 1990 1989 1988 - ---------------------------------------------------- -------- -------- -------- -------- -------- -------- Securities Held for Investment U.S. Government $2,343.7 $1,522.8 $1,822.2 $ 295.0 $ 822.9 $ 784.9 Obligations of States and Political Subdivisions 493.5 508.5 526.1 535.5 486.2 380.1 Federal Agency 833.1 559.2 293.1 563.5 297.8 257.0 Preferred Stock 15.5 15.4 152.3 146.5 134.6 82.1 Other 105.0 173.6 321.0 653.9 485.0 680.8 - -------------------------------------------------- -------- -------- -------- -------- -------- -------- Total Securities Held for Investment $3,790.8 $2,779.5 $3,114.7 $2,194.4 $2,226.5 $2,184.9 - -------------------------------------------------- -------- -------- -------- -------- -------- -------- Total Securities Held for Sale $ 211.6 $ 400.1 $ -- $ -- $ -- $ -- - -------------------------------------------------- -------- -------- -------- -------- -------- -------- Average Investment Securities $4,202.5 $3,174.1 $2,467.7 $2,339.6 $2,692.4 $1,962.8 - ----------------------------------------------------------------------------------------------------------------
REMAINING MATURITY AND AVERAGE YIELD OF INVESTMENT SECURITIES (Yield on a taxable equivalent basis giving effect of the federal and state tax rates)
DECEMBER 31, 1993 ---------------------------------------------------------------------------------- ONE YEAR OR LESS ONE TO FIVE YEARS FIVE TO TEN YEARS OVER TEN YEARS ---------------- ----------------- ----------------- -------------- AVERAGE (Amounts in Millions) BOOK YIELD BOOK YIELD BOOK YIELD BOOK YIELD MATURITY - ------------------------------------ -------- ----- ------ ------ ------ ----- ------ ----- -------- Securities Held for Investment U.S. Government $1,934.4 3.61% $364.7 4.37% $ 44.6 5.60% $ -- --% 8 mos. Obligations of States and Political Subdivisions 42.9 12.03 204.9 12.44 144.3 11.21 101.4 10.19 68 mos. Federal Agency 405.6 3.59 388.0 3.91 38.2 3.76 1.3 3.76 19 mos. Other--Fixed 21.5 6.64 12.3 4.60 .2 10.40 16.6 6.05 50 mos. --Floating 27.2 4.15 28.0 4.12 4.4 4.08 10.3 8.72 43 mos. - ------------------------------------ -------- ----- ------ ------ ------ ----- ------ ----- -------- Total Securities Held for Investment $2,431.6 3.78% $997.9 5.84% $231.7 8.76% $129.6 9.48% 19 mos. - ------------------------------------ -------- ----- ------ ------ ------ ----- ------ ----- -------- Total Securities Held for Sale $ 11.2 7.24% $ 25.5 6.73% $ 18.5 6.68% $156.4 4.56% 111 mos. - ------------------------------------ -------- ----- ------ ------ ------ ----- ------ ----- --------
December 31, 1992 ---------------------------------------------------------------------------------- One Year or Less One to Five Years Five to Ten Years Over Ten Years ---------------- ----------------- ----------------- -------------- Average (Amounts in Millions) Book Yield Book Yield Book Yield Book Yield Maturity - ------------------------------------ -------- ----- ------ ------ ------ ----- ------ ----- -------- Securities Held for Investment U.S. Government $1,231.4 3.66% $291.4 4.60% $ -- --% $ -- --% 8 mos. Obligations of States and Political Subdivisions 32.1 11.49 163.5 12.15 152.5 11.22 160.4 11.13 80 mos. Federal Agency 295.3 4.03 260.9 4.26 3.0 5.71 -- -- 21 mos. Other--Fixed 13.6 9.03 38.1 5.54 .2 10.40 14.6 6.82 41 mos. --Floating 32.4 4.08 79.3 4.21 .6 5.66 10.2 10.36 35 mos. - ------------------------------------ -------- ----- ------ ------ ------ ----- ------ ----- -------- Total Securities Held for Investment $1,604.8 3.94% $833.2 5.98% $156.3 11.09% $185.2 10.74% 26 mos. - ------------------------------------ -------- ----- ------ ------ ------ ----- ------ ----- -------- Total Securities Held for Sale $ 245.1 5.90% $ 56.8 6.28% $ -- --% $ 98.2 4.72% 35 mos. - ------------------------------------ -------- ----- ------ ------ ------ ----- ------ ----- -------- - --------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 10 - -------------------------------------------------------------------------------- LOANS AND LEASES BY TYPE
DECEMBER 31 --------------------------------------------------------------- (In Millions) 1993 1992 1991 1990 1989 1988 - ------------------------------------------------------- -------- -------- -------- -------- -------- -------- Domestic Commercial $2,421.1 $2,409.0 $2,719.4 $2,596.0 $2,698.4 $2,280.2 Broker 249.4 336.3 336.0 83.2 348.8 313.5 Residential Real Estate 2,883.3 2,372.8 1,793.6 1,472.1 1,156.0 919.3 Commercial Real Estate 506.5 511.2 515.0 608.0 595.4 419.7 Consumer 617.5 505.9 449.7 334.3 276.4 218.7 Other 453.5 392.0 37.2 92.4 163.0 171.1 Lease Financing 138.4 135.2 120.7 97.4 77.1 66.5 - ------------------------------------------------------- -------- -------- -------- -------- -------- -------- Total Domestic 7,269.7 6,662.4 5,971.6 5,283.4 5,315.1 4,389.0 International 353.3 273.5 308.1 252.9 345.0 276.7 - ------------------------------------------------------- -------- -------- -------- -------- -------- -------- Total Loans and Leases $7,623.0 $6,935.9 $6,279.7 $5,536.3 $5,660.1 $4,665.7 - ------------------------------------------------------- -------- -------- -------- -------- -------- -------- Average Loans and Leases $7,297.1 $6,452.9 $6,199.4 $5,847.7 $5,020.9 $4,276.4 - ------------------------------------------------------- -------- -------- -------- -------- -------- --------
Loans were classified based on credit risk exposure for 1993, 1992, 1991 and 1990. Loan breakdowns prior to 1990 were based on industry classifications defined by the Federal Reserve. - -------------------------------------------------------------------------------- REMAINING MATURITY OF SELECTED LOANS AND LEASES
DECEMBER 31, 1993 -------------------------------------------- ONE YEAR ONE TO OVER FIVE (In Millions) TOTAL OR LESS FIVE YEARS YEARS - ------------------------------------------------------------------- -------- -------- ---------- --------- Domestic (Excluding Residential Real Estate and Consumer Loans) Commercial $2,421.1 $1,742.5 $560.0 $118.6 Commercial Real Estate 506.5 224.7 234.9 46.9 Other 702.9 687.3 7.0 8.6 Lease Financing 138.4 20.4 65.3 52.7 - ------------------------------------------------------------------- -------- -------- ---------- --------- Total Domestic 3,768.9 2,674.9 867.2 226.8 International 353.3 282.7 59.9 10.7 - ------------------------------------------------------------------- -------- -------- ---------- --------- Total Selected Loans and Leases $4,122.2 $2,957.6 $927.1 $237.5 - ------------------------------------------------------------------- -------- -------- ---------- --------- Interest Rate Sensitivity of Loans and Leases Fixed Rate $2,895.3 $2,101.6 $606.3 $187.4 Variable Rate 1,226.9 856.0 320.8 50.1 - ------------------------------------------------------------------- -------- -------- ---------- --------- Total $4,122.2 $2,957.6 $927.1 $237.5 - ------------------------------------------------------------------- -------- -------- ---------- ---------
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 11 - -------------------------------------------------------------------------------- AVERAGE DEPOSITS BY TYPE
(In Millions) 1993 1992 1991 1990 1989 1988 - ----------------------------------------------- --------- -------- -------- -------- -------- -------- Domestic Offices Demand and Noninterest-Bearing Individuals, Partnerships and Corporations $ 1,487.5 $1,354.1 $1,191.8 $1,126.4 $1,113.2 $1,151.0 Correspondent Banks 201.1 199.6 182.9 188.6 237.2 254.8 Other 866.3 322.3 261.1 282.2 219.7 194.2 - ----------------------------------------------- --------- -------- -------- -------- -------- -------- Total 2,554.9 1,876.0 1,635.8 1,597.2 1,570.1 1,600.0 - ----------------------------------------------- --------- -------- -------- -------- -------- -------- Time Savings and Money Market Deposits 3,432.1 3,372.2 3,208.1 2,975.9 2,382.4 2,364.1 Savings Certificates less than $100,000 668.6 732.6 835.7 790.0 685.9 591.5 Savings Certificates $100,000 and more 504.3 638.2 734.0 666.9 581.6 384.6 Other Certificates 404.7 493.9 533.1 520.8 392.4 442.1 - ----------------------------------------------- --------- -------- -------- -------- -------- -------- Total 5,009.7 5,236.9 5,310.9 4,953.6 4,042.3 3,782.3 - ----------------------------------------------- --------- -------- -------- -------- -------- -------- Total Domestic Offices 7,564.6 7,112.9 6,946.7 6,550.8 5,612.4 5,382.3 - ----------------------------------------------- --------- -------- -------- -------- -------- -------- Foreign Offices Demand 65.3 56.2 41.8 81.8 99.2 93.7 Time 2,436.4 1,815.6 1,100.6 1,105.6 844.4 835.0 - ----------------------------------------------- --------- -------- -------- -------- -------- -------- Total Foreign Offices 2,501.7 1,871.8 1,142.4 1,187.4 943.6 928.7 - ----------------------------------------------- --------- -------- -------- -------- -------- -------- Total Deposits $10,066.3 $8,984.7 $8,089.1 $7,738.2 $6,556.0 $6,311.0 - ----------------------------------------------- --------- -------- -------- -------- -------- --------
- -------------------------------------------------------------------------------- AVERAGE RATES PAID ON TIME DEPOSITS BY TYPE
1993 1992 1991 1990 1989 1988 - ----------------------------------------------- --------- -------- -------- -------- -------- -------- Time Deposits Savings and Money Market Deposits 2.30% 2.94% 4.96% 6.54% 6.75% 5.67% Savings Certificates less than $100,000 4.61 5.46 6.47 7.76 7.94 6.95 Savings Certificates $100,000 and more 3.91 4.68 6.85 8.05 8.77 7.42 Other Certificates 3.88 5.15 7.19 8.18 8.64 7.42 - ----------------------------------------------- --------- -------- -------- -------- -------- -------- Total Domestic Offices 2.89 3.71 5.68 7.11 7.43 6.25 - ----------------------------------------------- --------- -------- -------- -------- -------- -------- Total Foreign Offices Time 3.71 5.27 8.05 9.90 8.91 7.13 ----------------------------------------------- --------- -------- -------- -------- -------- -------- Total Time Deposits 3.16% 4.11% 6.09% 7.62% 7.69% 6.41% - ----------------------------------------------- --------- -------- -------- -------- -------- --------
- ------------------------------------------------------------------------------- REMAINING MATURITY OF TIME DEPOSITS $100,000 AND MORE
DECEMBER 31, 1993 December 31, 1992 ------------------------------- ------------------------------- DOMESTIC OFFICES Domestic Offices -------------------- -------------------- CERTIFICATES OTHER FOREIGN Certificates Other Foreign (In Millions) OF DEPOSIT TIME OFFICES of Deposit Time Offices - --------------------------------- ------------ ----- -------- ------------ ----- -------- 3 Months or Less $399.1 $ 1.0 $2,716.6 $501.9 $ 1.5 $1,809.0 Over 3 through 6 Months 163.1 2.2 18.2 189.5 .7 31.2 Over 6 through 12 Months 95.9 2.0 4.4 132.9 2.8 3.1 Over 12 Months 140.2 5.3 -- 159.7 7.2 6.7 - --------------------------------- ------------ ----- -------- ------------ ----- -------- Total $798.3 $10.5 $2,739.2 $984.0 $12.2 $1,850.0 - --------------------------------- ------------ ----- -------- ------------ ----- --------
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 12 - ------------------------------------------------------------------------------- PURCHASED FUNDS
FEDERAL FUNDS PURCHASED (Overnight Borrowings) (Amounts in Millions) 1993 1992 1991 - ------------------------------------------------- -------- -------- -------- Balance on December 31 $1,215.8 $2,034.2 $1,580.3 Highest Month-End Balance 2,311.5 2,034.2 2,108.5 Year--Average Balance 1,692.5 1,540.2 1,412.8 --Average Rate 3.02% 3.47% 5.57% Average Rate at Year-End 2.82 3.12 3.44 - ------------------------------------------------- -------- -------- -------- SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE (Amounts in Millions) 1993 1992 1991 - ------------------------------------------------- -------- -------- -------- Balance on December 31 $ 602.2 $ 282.3 $ 432.6 Highest Month-End Balance 1,571.2 1,052.2 662.4 Year--Average Balance 664.4 542.9 463.8 --Average Rate 3.00% 3.65% 5.65% Average Rate at Year-End 2.81 3.18 4.44 - ------------------------------------------------- -------- -------- -------- OTHER BORROWINGS (Includes Treasury Tax and Loan Demand Notes and Term Federal Funds Purchased) (Amounts in Millions) 1993 1992 1991 - ------------------------------------------------- -------- -------- -------- Balance on December 31 $2,001.2 $ 672.8 $ 956.7 Highest Month-End Balance 2,620.7 1,782.8 1,634.5 Year--Average Balance 868.9 526.6 703.3 --Average Rate 2.83% 3.45% 5.78% Average Rate at Year-End 2.85 2.61 3.87 - ------------------------------------------------- -------- -------- -------- TOTAL PURCHASED FUNDS (Amounts in Millions) 1993 1992 1991 - ------------------------------------------------- -------- -------- -------- Balance on December 31 $3,819.2 $2,989.3 $2,969.6 Year--Average Balance 3,225.8 2,609.7 2,579.9 --Average Rate 2.96% 3.50% 5.64% - ------------------------------------------------- -------- -------- -------- - ------------------------------------------------------------------------------- COMMERCIAL PAPER (Amounts in Millions) 1993 1992 1991 - ------------------------------------------------- -------- -------- -------- Balance on December 31 $ 124.1 $ 127.0 $ 129.4 Highest Month-End Balance 167.6 163.1 161.1 Year--Average Balance 131.5 132.9 129.3 --Average Rate 3.23% 3.88% 6.19% Average Rate at Year-End 3.19 3.62 4.73 - ------------------------------------------------- -------- -------- -------- - -------------------------------------------------------------------------------
- ------------------------------------------------------------------------------- 13 - -------------------------------------------------------------------------------- CHANGES IN NET INTEREST INCOME
1993/92 1992/91 -------------------------- --------------------------- 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 Loans and Leases--Domestic $ 51.6 $ (56.4) $ (4.8) $ 18.5 $ (93.3) $ (74.8) --International (.4) (3.6) (4.0) (.8) (6.6) (7.4) Money Market Assets Federal Funds Sold and Repurchase Agreements (2.2) (1.1) (3.3) (2.5) (6.5) (9.0) Time Deposits with Banks--Domestic - (.1) (.1) (.6) .2 (.4) --International 14.9 (23.9) (9.0) 17.4 (29.5) (12.1) Other (1.1) (.9) (2.0) (7.5) (8.6) (16.1) Investment Securities--Held for Investment U.S. Government 31.1 (23.7) 7.4 41.9 (16.6) 25.3 Obligations of States and Political Subdivisions (1.6) 1.0 (.6) (2.0) (.2) (2.2) Federal Agency 9.3 (3.9) 5.4 8.0 (9.4) (1.4) Other (11.8) (3.2) (15.0) (16.2) (13.2) (29.4) Investment Securities--Held for Sale 10.9 - 10.9 - - - Securities Held for Trading 1.0 .2 1.2 (1.0) (.5) (1.5) - ------------------------------------------------------------------ ------ ------- ------ ------ ------- ------- Total $101.7 $(115.6) $(13.9) $ 55.2 $(184.2) $(129.0) - ------------------------------------------------------------------ ------ ------- ------ ------ ------- ------- INCREASE (DECREASE) IN INTEREST EXPENSE Deposits Savings and Money Market Deposits $ 1.4 $ (21.7) $ (20.3) $ 4.8 $ (64.9) $ (60.1) Savings Certificates (8.5) (10.9) (19.4) (10.1) (24.3) (34.4) Other Time (3.4) (6.3) (9.7) (2.0) (10.9) (12.9) Foreign Offices Time 23.0 (28.3) (5.3) 37.7 (30.6) 7.1 Federal Funds Purchased 4.6 (7.0) (2.4) 4.4 (29.6) (25.2) Securities Sold under Agreements to Repurchase 3.7 (3.5) .2 2.9 (9.3) (6.4) Commercial Paper (.1) (.8) (.9) .1 (2.9) (2.8) Other Borrowings 9.7 (3.2) 6.5 (6.1) (16.5) (22.6) Senior Medium-Term Notes 15.5 (.1) 15.4 2.8 .1 2.9 Notes Payable 3.0 (.7) 2.3 1.1 (1.5) (.4) - ------------------------------------------------------------------ ------ ------- ------- ------ ------- ------- Total 48.9 (82.5) (33.6) 35.6 (190.4) (154.8) - ------------------------------------------------------------------ ------ ------- ------- ------ ------- ------- INCREASE (DECREASE) IN NET INTEREST INCOME $ 52.8 $ (33.1) $ 19.7 $ 19.6 $ 6.2 $ 25.8 - ------------------------------------------------------------------ ------ ------- ------- ------ ------- -------
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 20 titled International Operations on pages 57 and 58 of the Corporation's Annual Report to Stockholders for the year ended December 31, 1993, which is incorporated herein by reference. SELECTED AVERAGE ASSETS AND LIABILITIES ATTRIBUTABLE TO INTERNATIONAL OPERATIONS
(In Millions) 1993 1992 1991 1990 1989 1988 - ----------------------------------------------------------------- -------- -------- -------- -------- -------- -------- Total Assets $2,328.8 $2,033.0 $1,709.2 $1,297.5 $1,007.4 $1,295.3 - ----------------------------------------------------------------- -------- -------- -------- -------- -------- -------- Time Deposits with Banks 1,956.7 1,618.6 1,323.4 889.1 582.1 840.5 Other Money Market Assets .9 38.8 3.2 2.7 7.8 14.9 Loans 279.9 287.6 299.4 310.0 327.4 418.1 Customers' Acceptance Liability 4.8 3.8 10.2 11.2 18.3 32.8 Foreign Investments 29.8 31.4 30.3 30.8 26.2 28.6 - ----------------------------------------------------------------- -------- -------- -------- -------- -------- -------- Total Liabilities $2,715.0 $2,125.3 $1,278.2 $1,364.0 $1,133.9 $1,159.4 - ----------------------------------------------------------------- -------- -------- -------- -------- -------- -------- Deposits 2,706.2 2,099.0 1,214.7 1,287.5 1,032.0 1,057.0 Liability on Acceptances 4.8 3.8 10.3 11.2 18.3 32.8 - ----------------------------------------------------------------- -------- -------- -------- -------- -------- -------- - -----------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 14 - -------------------------------------------------------------------------------- PERCENT OF INTERNATIONAL RELATED AVERAGE ASSETS AND LIABILITIES TO TOTAL CONSOLIDATED AVERAGE ASSETS
1993 1992 1991 1990 1989 1988 - ------------------------------------- ---- ---- ---- ---- ---- ---- Assets 15% 15% 14% 11% 10% 14% - ------------------------------------- ---- ---- ---- ---- ---- ---- Liabilities 17 16 11 12 11 13 - ------------------------------------- ---- ---- ---- ---- ---- ----
- -------------------------------------------------------------------------------- RESERVE FOR CREDIT LOSSES RELATING TO INTERNATIONAL OPERATIONS
(In Millions) 1993 1992 1991 1990 1989 1988 - ------------------------------- ---- ---- ---- ------ ------ ------ Balance at Beginning of Year $5.3 $6.9 $7.0 $ 21.3 $ 79.4 $176.8 Losses Charged to Reserve (.6) (6.0) -- (1.1) (16.3) (99.8) Recoveries Credited to Reserve .1 .4 .1 2.2 2.4 4.1 Provision for Credit Losses 1.9 4.0 (.2) (15.4) (44.2) (1.7) - ------------------------------- ---- ---- ---- ------ ------ ------ Balance at End of Year $6.7 $5.3 $6.9 $ 7.0 $ 21.3 $ 79.4 - ------------------------------- ---- ---- ---- ------ ------ ------
The Securities and Exchange Commission requires the Corporation to disclose a reserve for credit losses that is applicable to international operations. The above table has been prepared in compliance with this disclosure requirement and is used in determining international operating performance. In 1989, $51.5 million and in 1990 the remaining $13.1 million of the reserve designated for loans to less developed countries was transferred to the general unallocated portion of the reserve for credit losses. The amounts shown in the table should not be construed as being the only amounts that are available for international loan charge-offs, since the entire reserve for credit losses is available to absorb losses on both domestic and international loans. In addition, these amounts are not intended to be indicative of future charge-off trends. - -------------------------------------------------------------------------------- DISTRIBUTION OF INTERNATIONAL LOANS AND DEPOSITS BY TYPE
DECEMBER 31 --------------------------------------------- Loans 1993 1992 1991 1990 1989 - ------------------------------ ------ ------ ------ ------ ------ Commercial $157.9 $122.3 $166.9 $146.0 $214.4 Foreign Governments and Official Institutions 47.1 26.4 27.3 10.7 19.3 Banks 145.9 121.9 113.8 95.9 105.3 Other 2.4 2.9 .1 .3 6.0 - ------------------------------ ------ ------ ------ ------ ------ Total $353.3 $273.5 $308.1 $252.9 $345.0 - ------------------------------ ------ ------ ------ ------ ------
DECEMBER 31 ---------------------------------------------- Deposits 1993 1992 1991 - ------------------------------ -------- -------- -------- Commercial $2,378.0 $1,195.1 $1,098.6 Foreign Governments and Official Institutions 263.2 353.6 13.9 Banks 410.8 367.8 83.9 Other Time 200.4 159.2 348.0 Other Demand 6.6 80.3 21.9 - ------------------------------ -------- -------- -------- Total $3,259.0 $2,156.0 $1,566.3 - ------------------------------ -------- -------- --------
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 15 - -------------------------------------------------------------------------------- CREDIT RISK MANAGEMENT OVERVIEW The Credit Policy function reports to the Chief Financial Officer. Credit Policy provides a system of checks and balances for the Corporation's diverse credit-related activities by establishing and monitoring all credit-related policies and practices throughout the Corporation 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 to the Corporation. Individual credit authority within the Commercial Banking and Personal Financial Services business units is limited to specified amounts and maturities. Credit decisions involving commitment exposure in excess of the specified individual limits are submitted to the appropriate Group Credit Approval Committee (Committee). Each Committee is chaired by the executive in charge of the area and has a Credit Policy officer as a voting participant. Each Committee's credit approval authority is specified, based on commitment levels, credit ratings and maturities. Credits involving commitment exposure in excess of these group credit limits require, dependent upon the internal credit rating, the approval of the Credit Policy Credit Approval Committee, the head of Credit Policy, or the business unit head. Credit Policy established the Counterparty Risk Management Committee in order to manage the Corporation's counterparty risk more effectively. This committee has sole credit authority for exposure to all foreign banks, certain domestic banks which Credit Policy deems to be counterparties and which do not have commercial credit relationships within the Corporation, and other organizations which Credit Policy deems to be counterparties. Under the auspices of Credit Policy, country exposure limits are reviewed and approved on a country-by-country basis. As part of the Corporation's ongoing credit granting process, internal credit ratings are assigned to each client and credit before credit is extended, based on creditworthiness. Credit Policy performs a semi-annual review of selected significant credit exposures which is designed 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. The Corporation's management of credit risk is reviewed by various bank regulatory agencies. The Corporation's independent auditors also perform a review of credit-related procedures, the loan portfolio and other extensions of credit, and the reserve for credit losses as part of their audit of the Corporation's annual financial statements. ALLOCATION OF THE RESERVE FOR CREDIT LOSSES The reserve for credit losses is established and maintained on an overall portfolio basis. However, 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. Thus, in accordance with these disclosure guidelines, breakdowns are provided for the major domestic and foreign loan categories as follows: Allocated Reserve. Credit Policy estimates the amount that is necessary to provide for potential losses relating to specific nonperforming loans. The allocated portion of the reserve totaled $0.2 million at December 31, 1993, which related entirely to specific nonperforming loans. Total nonperforming loans were $27.3 million at December 31, 1993. Unallocated Reserve. The unallocated portion of the reserve is available for unknown losses that are inherent not only in the loan portfolio, but also in other extensions of credit. While the unallocated portion serves to cover specific groups of loans and other extensions of credit that entail higher than average risk, it is considered a general reserve available to absorb all credit- related losses. The unallocated portion of the reserve totaled $145.3 million at December 31, 1993 compared with $134.5 million at December 31, 1992. - -------------------------------------------------------------------------------- 16 - -------------------------------------------------------------------------------- In connection with management's assessment of the unallocated portion of the reserve for credit losses at December 31, 1993, the following groups of loans with specific risk elements were considered: . Management's ongoing review process identified loans with above average credit risk, including nonperforming loans with no specific reserve allocation, which totaled $336.3 million at December 31, 1993. Management assigns risk factors of either 5% to 10% or 5% to 20% to loan categories in this group and ascribed $16.8 million to $49.7 million of the unallocated reserve to this group. . Another risk group identified is composed of commercial real estate loans. Management believes that this group, which totaled $369.4 million at December 31, 1993 (not including $137.1 million of loans with above average credit risk just described), represented a general risk factor of 5% to 10% at year-end and accordingly $18.5 million to $36.9 million of the unallocated reserve was ascribed to this group of loans. . Another risk group identified is composed of highly leveraged credit transactions (HLTs). At December 31, 1993, HLTs, as defined by bank regulatory agencies and not included in the groups of loans discussed above, totaled $42.0 million. Management assigned a general risk factor of 3% to 5% and ascribed $1.3 million to $2.1 million of the unallocated reserve to HLTs. Based on this analysis, $36.6 million to $88.7 million of the unallocated portion of the reserve for credit losses at December 31, 1993 has been ascribed to the above three groups of loans. Management believes the amount of the remaining reserve is adequate to cover both the remaining loan portfolio and other credit-related activities. As required by the Securities and Exchange Commission, the breakdown of the reserve for credit losses at December 31, 1989 through 1993 is presented below. RESERVE FOR CREDIT LOSSES
DECEMBER 31 ------------------------------------------ (In Millions) 1993 1992 1991 1990 1989 - --------------------------------- ------ ------ ------ ------ ------ Allocated Reserve Commercial $ -- $ 8.5 $ -- $ 3.3 $ .1 Commercial Real Estate -- 1.1 2.3 4.1 .3 Consumer .2 1.4 3.0 1.3 .9 International -- -- -- -- 14.0 ------ ------ ------ ------ ------ Total Allocated Reserve .2 11.0 5.3 8.7 15.3 Unallocated Reserve 145.3 134.5 140.4 139.3 134.8 - --------------------------------- ------ ------ ------ ------ ------ Total Reserve $145.5 $145.5 $145.7 $148.0 $150.1 - --------------------------------- ------ ------ ------ ------ ------
- -------------------------------------------------------------------------------- Loan categories as a percent of total loans as of December 31, 1989 through 1993, are presented below. LOAN CATEGORY TO TOTAL LOANS
DECEMBER 31 -------------------------------- 1993 1992 1991 1990 1989 - ---------------------------------------- ---- ---- ---- ---- ---- Loan Category Commercial 33% 37% 45% 49% 49% Residential Real Estate 38 34 29 27 20 Commercial Real Estate 7 7 8 11 11 Consumer 8 7 7 6 5 Other 9 11 6 3 9 International 5 4 5 4 6 - ---------------------------------------- ---- ---- ---- ---- ---- Total 100% 100% 100% 100% 100% - ---------------------------------------- ---- ---- ---- ---- ----
Loans were classified based on credit risk exposure for 1993, 1992, 1991 and 1990. Loan breakdowns for 1989 were based on industry classifications defined by the Federal Reserve. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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, 1993:
1993 ANNUAL REPORT NOTES TO FINANCIAL STATEMENTS PAGE(S) - -------------------------------------------------------------- ------------- 1. Accounting Policies E. Interest Risk Management Instruments................... .......... 44 F. Loans and Leases....................................... .......... 44 G. Reserve for Credit Losses.............................. .......... 44 J. Other Real Estate Owned................................ .......... 45 4. Loans and Leases.......................................... .......... 49 5. Reserve for Credit Losses................................. .......... 49 15. Contingent Liabilities.................................... .......... 55 16. Off-Balance Sheet Financial Instruments................... .......... 55 - -------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------- Asset Quality and Credit Risk................................. ....... 31-35 Outlook....................................................... .......... 35 - -------------------------------------------------------------- -------------
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 As described in the Management's Discussion and Analysis of Financial Condition and Results of Operations, in the section titled Liquidity and Rate Sensitivity on pages 37 through 39 of the Corporation's Annual Report to Stockholders for the year ended December 31, 1993, rate sensitivity arises when interest rates on assets change in a different time period or in a different proportion from that of interest rates on liabilities. The objective of interest rate sensitivity management is to prudently structure the balance sheet so that movements of interest rates on assets and liabilities (adjusted for off-balance sheet hedges) are highly correlated and produce a reasonable net interest margin even in periods of volatile interest rates. Proactive rate sensitivity management for the Corporation is presently focused on the Bank. Other subsidiary banks and foreign offices of the Bank operate under policies that limit the risk of a significant mismatch in their interest sensitivity gap. The Corporate Asset and Liability Policy Committee meets at least monthly to review and determine these rate sensitivity policies. Rate sensitivity management procedures consist of performing net interest income simulations as well as monitoring assets and liabilities that are rate-sensitive within 90 days, 182 days and one year. As a matter of policy, a reasonable balance of rate-sensitive assets and liabilities on a cumulative one year basis is maintained, thus minimizing the risk related to a sustained change in interest rates. Because of daily volatility in our balance sheet items, day-to-day interest sensitivity gaps are not necessarily indicative of the desired position at a specific time or the average experience in the surrounding time period. A negative rate sensitivity gap generally indicates a timing mismatch in that more liabilities than earning assets will be repriced within the period. The economic impact of creating a negative rate sensitivity position depends on the magnitude of actual changes in interest rates relative to the anticipated interest rates. If mismatches are created in a market that anticipates rising interest rates, but the actual increase in rates is lower than expected, net interest income is enhanced by taking the negative rate sensitivity gap. As a result of positions taken as of December 31, 1993, the Corporation's net interest income would be enhanced by not only a decline in interest rates but also by a modest increase. The table below reflects the Corporation's consolidated rate sensitivity position at December 31, 1993. INTEREST RATE SENSITIVITY ANALYSIS
RATE SENSITIVE WITHIN ONE YEAR NOT RATE ------------------------------- SENSITIVE 91 DAYS 92 TO 365 WITHIN (In Millions) OR LESS DAYS SUB-TOTAL ONE YEAR TOTAL - ---------------------------------------------- ------- --------- --------- --------- ------- EARNING ASSETS Investment Securities--Held For Investment $ 1,776 $1,100 $ 2,876 $ 915 $ 3,791 --Held For Sale 130 4 134 78 212 Securities Held For Trading 36 -- 36 -- 36 Money Market Assets 2,720 20 2,740 -- 2,740 Loans and Leases 4,049 899 4,948 2,675 7,623 - ---------------------------------------------- ------- --------- --------- --------- ------- Total $ 8,711 $2,023 $10,734 $3,668 $14,402 - ---------------------------------------------- ------- --------- --------- --------- ------- SOURCE OF FUNDS Savings and NOW Accounts $ 423 $ -- $ 423 $ 870 $ 1,293 Money Market Deposits and Savings Certificates 2,307 778 3,085 364 3,449 Other Time 2,766 41 2,807 23 2,830 Purchased Funds and Commercial Paper 3,866 35 3,901 42 3,943 Senior Medium-Term Notes and Notes Payable 166 617 783 361 1,144 Noninterest-Related Funds, net 300 -- 300 1,443 1,743 - ---------------------------------------------- ------- --------- --------- --------- ------- Total $ 9,828 $1,471 $11,299 $3,103 $14,402 - ---------------------------------------------- ------- --------- --------- --------- ------- Interest Sensitivity Gap (1,117) 552 (565) 565 Interest Sensitive Hedges (424) 662 238 (238) - ---------------------------------------------- ------- --------- --------- --------- Adjusted Sensitivity Gap $(1,541) $1,214 $ (327) $ 327 - ---------------------------------------------- ------- --------- --------- ---------
- -------------------------------------------------------------------------------- Allocations were made to specific interest sensitivity periods based primarily on the earlier of the repricing or maturity date, with the exception of the net noninterest-related funds component. In this case, the temporary difference between the actual volume at December 31, 1993 and the trend volume was allocated to the "91 Days or Less" interest sensitivity period. The trend volume of net noninterest-related funds was allocated to the "Not Rate Sensitive Within One Year" category. - -------------------------------------------------------------------------------- 19 - -------------------------------------------------------------------------------- The following unaudited Consolidated Statement of Condition 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 financial statements should be read in conjunction with the footnotes accompanying the consolidated financial statements of the Corporation, included in the Corporation's Annual Report to Stockholders for the year ended December 31, 1993, and incorporated herein by reference on page 24 of this report. THE NORTHERN TRUST COMPANY CONSOLIDATED STATEMENT OF CONDITION
DECEMBER 31 --------------------- (In Millions) 1993 1992 - ------------------------------------------------------ --------- --------- ASSETS Cash and Due from Banks $ 1,386.6 $ 924.2 Investment Securities--Held for Investment (Fair Value $3,209.4 in 1993 and $2,094.9 in 1992) 3,171.4 2,063.8 --Held for Sale (Fair Value $41.6 in 1993 and $305.3 in 1992) 41.5 301.9 Securities Held for Trading 34.7 .1 Money Market Assets Federal Funds Sold and Securities Purchased under Agreements to Resell 551.3 441.2 Time Deposits with Banks--International 2,090.2 1,859.4 Other 70.7 80.8 - ------------------------------------------------------ --------- --------- Total 2,712.2 2,381.4 - ------------------------------------------------------ --------- --------- Loans and Leases--Domestic 5,055.5 4,789.0 --International 352.8 272.4 - ------------------------------------------------------ --------- --------- Total 5,408.3 5,061.4 - ------------------------------------------------------ --------- --------- Reserve for Credit Losses (114.9) (114.8) Buildings and Equipment 220.0 218.3 Customers' Acceptance Liability 53.1 204.0 Trust Security Settlement Receivables 293.1 562.1 Other Assets 332.1 305.0 - ------------------------------------------------------ --------- --------- Total Assets $13,538.1 $11,907.4 - ------------------------------------------------------ --------- --------- LIABILITIES Deposits Demand and Other Noninterest-Bearing $ 2,039.0 $ 2,281.8 Savings and Money Market Deposits 1,874.6 2,187.8 Savings Certificates 521.8 624.4 Other Time 159.0 206.9 Foreign Offices--Demand 297.2 38.1 --Time 2,877.8 1,856.8 - ------------------------------------------------------ --------- --------- Total Deposits 7,769.4 7,195.8 Federal Funds Purchased 1,300.0 2,181.9 Securities Sold under Agreements to Repurchase 482.7 174.5 Other Borrowings 2,021.2 815.5 Senior Medium-Term Notes 815.0 310.0 Notes Payable 210.0 235.2 Liability on Acceptances 53.1 204.0 Other Liabilities 162.9 145.2 - ------------------------------------------------------ --------- --------- Total Liabilities 12,814.3 11,262.1 - ------------------------------------------------------ --------- --------- STOCKHOLDER'S EQUITY Capital Stock--Par Value $60 in 1993 and $40 in 1992 198.0 132.0 Surplus 198.0 132.0 Undivided Profits 327.2 380.7 Translation Adjustment .6 .6 - ------------------------------------------------------ --------- --------- Total Stockholder's Equity 723.8 645.3 - ------------------------------------------------------ --------- --------- Total Liabilities and Stockholder's Equity $13,538.1 $11,907.4 - ------------------------------------------------------ --------- ---------
- -------------------------------------------------------------------------------- 20 - -------------------------------------------------------------------------------- THE NORTHERN TRUST COMPANY CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31 - ------------------------------------------------------------------------------------- ----------------------- (In Millions) 1993 1992 1991 - ------------------------------------------------------------------------------------- ------ ------- ------ Interest Income Loans and Leases --Domestic $270.6 $282.9 $357.3 --International 14.4 18.3 25.8 - ------------------------------------------------------------------------------------- ------ ------- ------ Total 285.0 301.2 383.1 - ------------------------------------------------------------------------------------- ------ ------- ------ Money Market Assets Federal Funds Sold and Securities Purchased under Agreements to Resell 5.6 8.7 17.4 Time Deposits with Banks--International 86.4 95.4 107.5 Other 2.9 4.5 20.5 - ------------------------------------------------------------------------------------- ------ ------- ------ Total 94.9 108.6 145.4 - ------------------------------------------------------------------------------------- ------ ------- ------ Investment Securities --Held for Investment 132.0 123.2 119.1 --Held for Sale 6.2 -- -- Securities Held for Trading 1.8 .6 2.3 - ------------------------------------------------------------------------------------- ------ ------- ------ Total Interest Income 519.9 533.6 649.9 - ------------------------------------------------------------------------------------- ------ ------- ------ Interest Expense Deposits --Savings and Money Market Deposits 44.4 58.9 104.6 --Savings Certificates 23.2 34.1 55.1 --Other Time 7.7 14.4 23.6 --Foreign Offices 92.4 97.2 90.0 Federal Funds Purchased 53.1 55.8 83.7 Securities Sold under Agreements to Repurchase 16.6 15.1 19.0 Other Borrowings 27.2 28.1 64.5 Senior Medium--Term Notes 18.3 2.8 -- Notes Payable 17.9 12.7 9.0 - ------------------------------------------------------------------------------------- ------ ------- ------ Total Interest Expense 300.8 319.1 449.5 - ------------------------------------------------------------------------------------- ------ ------- ------ Net Interest Income 219.1 214.5 200.4 Provision for Credit Losses 17.4 20.8 22.3 - ------------------------------------------------------------------------------------- ------ ------- ------ Net Interest Income after Provision for Credit Losses 201.7 193.7 178.1 - ------------------------------------------------------------------------------------- ------ ------- ------ Noninterest Income Trust Fees 297.9 273.3 240.2 Security Commissions and Trading Income (.5) .8 .7 Other Operating Income 113.2 109.7 84.6 Investment Security Gains 1.7 3.4 2.0 - ------------------------------------------------------------------------------------- ------ ------- ------ Total Noninterest Income 412.3 387.2 327.5 - ------------------------------------------------------------------------------------- ------ ------- ------ Income before Noninterest Expenses 614.0 580.9 505.6 - ------------------------------------------------------------------------------------- ------ ------- ------ Noninterest Expenses Salaries 216.6 198.2 184.1 Pension and Other Employee Benefits 51.5 45.0 40.9 Occupancy Expense 38.8 37.8 37.1 Equipment Expense 33.9 29.6 27.2 Other Operating Expenses 105.7 116.4 87.6 - ------------------------------------------------------------------------------------- ------ ------- ------ Total Noninterest Expenses 446.5 427.0 376.9 - ------------------------------------------------------------------------------------- ------ ------- ------ Income before Income Taxes 167.5 153.9 128.7 Provision for Income Taxes (Includes related investment security transactions tax provision of $.7 in 1993, $1.3 in 1992 and $.7 in 1991) 46.4 42.4 29.3 - ------------------------------------------------------------------------------------- ------ ------- ------ NET INCOME $121.1 $111.5 $ 99.4 - ------------------------------------------------------------------------------------- ------ ------- ------ Dividends Paid to Parent Company 44.0 40.0 34.0 - ------------------------------------------------------------------------------------- ------ ------- ------
- -------------------------------------------------------------------------------- 21 - -------------------------------------------------------------------------------- SUPPLEMENTAL ITEM--EXECUTIVE OFFICERS OF THE REGISTRANT DAVID W. FOX Mr. Fox was elected Chairman of the Board of the Corporation and the Bank on April 17, 1990, and Chief Executive Officer of the Corporation and the Bank on December 19, 1989. He held the title of President of the Corporation and the Bank from 1987 through 1993. Mr. Fox, 62, joined the Bank in 1955. J. DAVID BROCK Mr. Brock became an Executive Vice President of the Corporation and the Bank in April 1990. He was Deputy Head of the Subsidiary Banks Group from 1987 to 1989. Currently he is head of Corporate Management Services. Mr. Brock, 49, joined the Bank in 1966. ROBERT G. DEDERICK Mr. Dederick returned to the Corporation and the Bank as an Executive Vice President and Chief Economist in October 1983, after serving as Undersecretary of Commerce for Economic Affairs at the Department of Commerce from 1981 to 1983. Mr. Dederick, 64, first joined the Bank in 1964. 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, 57, joined the Bank in 1960. BARRY G. HASTINGS Mr. Hastings was elected Vice Chairman of the Corporation and the Bank effective January 1, 1994, and is currently head of Personal Financial Services. He was a Senior Executive Vice President of the Corporation and the Bank from 1992 through 1993 and prior to that time had served as an Executive Vice President of the Bank since 1987, and of the Corporation since 1990. Mr. Hastings, 46, began his career with the Corporation in 1974. JOHN V. N. MCCLURE Mr. McClure was appointed an Executive Vice President of the Corporation and the Bank effective February 15, 1994, and is currently responsible for Strategic Planning and Marketing. Previously, 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, 42, joined the Bank in 1973. WILLIAM A. OSBORN Mr. Osborn was elected President and Chief Operating Officer of the Corporation and the Bank effective January 1, 1994. He was a Senior Executive Vice President of the Corporation and the Bank from 1992 through 1993 and prior to that time had served as an Executive Vice President of the Bank since 1987, and of the Corporation since 1989. Mr. Osborn, 46, began his career with the Bank in 1970. 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. He was Chairman of the Credit Policy Committee from 1984 to 1988. Mr. Pero, 54, joined the Bank in 1964. JOHN H. ROBINSON Mr. Robinson was appointed Controller of the Bank in 1981 and of the Corporation in 1985. He has been a Senior Vice President of the Bank since 1984 and of the Corporation since 1985. Mr. Robinson, 59, joined the Bank in 1960. PETER L. ROSSITER Mr. Rossiter was appointed General Counsel of the Corporation and the Bank in April 1993. He joined the Corporation and the Bank in 1992 as an Executive Vice President and Associate General Counsel. Mr. Rossiter, 45, had been a partner in the law firm of Schiff Hardin & Waite from 1979 to 1992. - -------------------------------------------------------------------------------- 22 - -------------------------------------------------------------------------------- JOHN S. SUTFIN Mr. Sutfin was elected Vice Chairman of the Corporation and the Bank effective January 1, 1994, and is currently head of Corporate Financial Services. He was a Senior Executive Vice President of the Corporation and the Bank from 1992 through 1993. He was Chief Financial Officer of the Corporation and the Bank in 1987 and 1988. He became an Executive Vice President of the Corporation and the Bank in 1982. Mr. Sutfin, 54, joined the Bank in 1961. WILLIAM S. TRUKENBROD Mr. Trukenbrod was appointed an Executive Vice President of the Corporation and the Bank effective February 15, 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, 54, joined the Bank in 1962. There is no family relationship between any of the above executive officers and directors. The positions of Chairman of the Board and Chief Executive Officer, President and Vice Chairman are elected annually by the Board of Directors at the first meeting of the Board of Directors held after each annual meeting of stockholders. The other officers are appointed annually. 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 the Corporation's business units and the Bank's safe deposit and leasing companies. Financial services are provided by the Bank at this location. Adjacent to this building are two office buildings in which the Bank leases approximately 316,000 square feet of space for staff divisions of the business units. The Bank also leases approximately 112,000 square feet of a building at 125 South Wacker Drive in Chicago for computer facilities, banking operations and personal banking services. Financial services are also provided by the Bank at two other Chicago area locations, one of which is owned and one of which is leased. In April 1994, the Bank is planning to open a branch office in a leased facility in Highland Park, Illinois. 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 forty locations in Florida, Illinois, Arizona, California, New York and Texas. Of these locations, nine are owned and thirty-one are leased. Detailed information regarding the addresses of these locations can be found on pages 70 and 71 in the Corporation's Annual Report to Stockholders for the year ended December 31, 1993, which is incorporated herein by reference. The Corporation believes that the facilities which are owned or leased are suitable and adequate for its business needs. For additional information relating to the Corporation's properties and lease commitments, refer to Note 6 titled Buildings and Equipment and Note 7 titled Lease Commitments on page 50 of the Corporation's Annual Report to Stockholders for the year ended December 31, 1993, which is incorporated herein by reference. ITEM 3--LEGAL PROCEEDINGS The information called for by this item is incorporated herein by reference to Note 15 titled Contingent Liabilities on page 55 of the Corporation's Annual Report to Stockholders for the year ended December 31, 1993. In late November, 1993, the U.S. Department of Justice informed the Corporation that the Department is investigating the mortgage lending practices of the Bank and the Corporation's three other Illinois banking subsidiaries, as part of its responsibility to investigate possible discrimination on the basis of race or national origin under the Equal Credit Opportunity Act and the Fair Housing Act. The Corporation intends to cooperate fully in the investigation and has so informed the Department of Justice. 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 66 and 67 of the Corporation's Annual Report to Stockholders for the year ended December 31, 1993. 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 53 of the Corporation's Annual Report to Stockholders for the year ended December 31, 1993. ITEM 6--SELECTED FINANCIAL DATA The information called for by this item is incorporated herein by reference to the table titled Summary of Selected Financial Data on page 24 of the Corporation's Annual Report to Stockholders for the year ended December 31, 1993. 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 24 through 39 of the Corporation's Annual Report to Stockholders for the year ended December 31, 1993. 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, 1993, are incorporated herein by reference.
1993 ANNUAL REPORT FOR NORTHERN TRUST CORPORATION AND SUBSIDIARIES: PAGE(S) ---------------------------------------------------------------- ------------- Consolidated Statement of Condition--December 31, 1993 and 1992 .......... 40 Consolidated Statement of Income--Years Ended December 31, 1993, 1992 and 1991........................................... .......... 41 Statement of Changes in Stockholders' Equity--Years Ended December 31, 1993, 1992 and 1991.............................. .......... 42 Consolidated Statement of Cash Flows--Years Ended December 31, 1993, 1992 and 1991........................................... .......... 43 ---------------------------------------------------------------- ------------- FOR NORTHERN TRUST CORPORATION (Parent Company Only) ---------------------------------------------------------------- ------------- Statement of Condition--December 31, 1993 and 1992.............. .......... 59 Statement of Income--Years Ended December 31, 1993, 1992 and 1991...................................................... .......... 59 Statement of Changes in Stockholders' Equity--Years Ended December 31, 1993, 1992 and 1991.............................. .......... 42 Statement of Cash Flows--Years Ended December 31, 1993, 1992 and 1991...................................................... .......... 59 ---------------------------------------------------------------- ------------- NOTES TO FINANCIAL STATEMENTS................................... ....... 44-59 ---------------------------------------------------------------- ------------- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS........................ .......... 60 ---------------------------------------------------------------- -------------
The section titled Quarterly Financial Data on pages 66 and 67 of the Corporation's Annual Report to Stockholders for the year ended December 31, 1993, 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 Proxy Statement and Notice of Meeting filed in connection with the solicitation of proxies for the Annual Meeting of Stockholders to be held April 19, 1994. The information called for by Item 10 relating to Executive Officers is set forth in Part I of this Annual Report on Form 10K. 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 16 of the Corporation's definitive Proxy Statement and Notice of Meeting filed in connection with the solicitation of proxies for the Annual Meeting of Stockholders to be held April 19, 1994. 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 through 8 of the Corporation's definitive Proxy Statement and Notice of Meeting filed in connection with the solicitation of proxies for the Annual Meeting of Stockholders to be held April 19, 1994. 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 Proxy Statement and Notice of Meeting filed in connection with the solicitation of proxies for the Annual Meeting of Stockholders to be held April 19, 1994. - -------------------------------------------------------------------------------- 25 - -------------------------------------------------------------------------------- PART IV Item 14--Exhibits, Financial Statement Schedules, and Reports on Form 8K Item 14(a)(1) and (2)--Northern Trust Corporation and Subsidiaries List of Financial Statements and Financial Statement Schedules The following financial information is submitted in Item 1 for informational purposes only: Financial Information of The Northern Trust Company (Bank Only): Unaudited Consolidated Statement of Condition--December 31, 1993 and 1992. Unaudited Consolidated Statement of Income--Years Ended December 31, 1993, 1992 and 1991. The following consolidated financial statements of the Corporation and its subsidiaries are submitted in Item 8: Consolidated Financial Statements of Northern Trust Corporation and Subsidiaries: Consolidated Statement of Condition--December 31, 1993 and 1992. Consolidated Statement of Income--Years Ended December 31, 1993, 1992 and 1991. Statement of Changes in Stockholders' Equity--Years Ended December 31, 1993, 1992 and 1991. Consolidated Statement of Cash Flows--Years Ended December 31, 1993, 1992 and 1991. The following financial information is submitted in Item 8: Financial Statements of Northern Trust Corporation (Parent Company Only): Statement of Condition--December 31, 1993 and 1992. Statement of Income--Years Ended December 31, 1993, 1992 and 1991. Statement of Changes in Stockholders' Equity--Years Ended December 31, 1993, 1992 and 1991. Statement of Cash Flows--Years Ended December 31, 1993, 1992 and 1991. The Notes to Financial Statements as of December 31, 1993, submitted in Item 8, pertain to the Bank only information, consolidated financial statements and parent company only information listed above. The Report of Independent Public Accountants submitted in Item 8 pertains to the consolidated financial statements and parent company 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 10K are filed herewith or are incorporated herein by reference to other filings. ITEM 14(b)--REPORTS ON FORM 8K No reports on Form 8-K were filed by the Corporation during the quarter ended December 31, 1993. - -------------------------------------------------------------------------------- 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 15,1994 Northern Trust Corporation (Registrant) By: David W. Fox ----------------------------------- DAVID W. FOX Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Form 10-K Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. Signature Title --------- ----- David W. Fox Chairman of the Board, --------------------------- David W. Fox Chief Executive Officer and Director Perry R. Pero Senior Executive Vice President --------------------------- Perry R. Pero and Chief Financial Officer John H. Robinson Senior Vice President and Controller --------------------------- John H. Robinson (Chief Accounting Officer) -------- Worley H. Clark Director Robert S. Hamada Director Barry G. Hastings Director Robert A. Helman Director Arthur L. Kelly Director Ardis Krainik Director Robert D. Krebs Director Frederick A. Krehbiel Director ---- By: Peter L. Rossiter ------------------------- William G. Mitchell Director Peter L. Rossiter Attorney-in-Fact William A. Osborn Director William A. Pogue Director Harold B. Smith Director William D. Smithburg Director John S. Sutfin Director Bide L. Thomas Director --------- Date: March 15,1994 - -------------------------------------------------------------------------------- 27 - -------------------------------------------------------------------------------- EXHIBIT INDEX The following Exhibits are filed herewith or are incorporated herein by reference.
Exhibit Incorporated By Reference to Exhibit Prior Filing* Number Description or Filed Herewith - -------- ---------------------------------------------------------------------------------------- -------------------- (3) ARTICLES OF INCORPORATION AND BYLAWS (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 herein......................................... (1) (ii) Form of The Northern Trust Company's Senior Medium-Term Bank Note (Fixed Rate)............................................... (3) (iii) Form of The Northern Trust Company's Senior Medium-Term Bank Note (Floating Rate)............................................ (3) (iv) Form of The Northern Trust Company's Subordinated Medium-Term Bank Note (Fixed Rate).................................. (3) (v) Form of The Northern Trust Company's Subordinated Medium-Term Bank Note (Floating Rate)............................... (3) (10) MATERIAL CONTRACTS (i) Trust System Implementation Agreement between The Northern Trust Company and Andersen Consulting dated as of September 30, 1991........................... (1) (ii) Northern Trust Corporation Amended Incentive Stock Plan, as amended May 20, 1986.......................................................... (4) (iii) Employment Agreement dated May 21, 1986, between Northern Trust Corporation and David W. Fox................................................................. (4) (iv) Form of Employment Security Agreement dated May 23, 1986, between Northern Trust Corporation and each of 62 officers....................... (4) (1) Amendment dated December 19, 1986, to Form of Employment Security Agreement............................................. (5) (v) Long-Term Performance Stock Plan of Northern Trust Corporation, as amended April 19, 1988........................................................ (6) (vi) Lease dated July 1, 1988 between American National Bank & Trust Company of Chicago as Trustee under Trust Agreement dated February 12, 1986 and known as Trust No. 66603 (Landlord) and Nortrust Realty Management, Inc. (Tenant)...... (6) (vii) Northern Trust Employee Stock Ownership Plan, dated January 26, 1989............. (7) (viii) Trust Agreement between The Northern Trust Company and Citizens and Southern Trust Company (Georgia), N.A., (predecessor of NationsBank) dated January 26, 1989........................................................... (7) (ix) Form of Note Agreement dated January 26, 1989 between ESOP Trust and each of the institutional lenders, with respect to the 8.23% Notes of the ESOP Trust.......................................................... (7) (x) Guaranty Agreement of Registrant with respect to the 8.23% Notes of the ESOP Trust, dated January 26, 1989........................................ (7)
- -------------------------------------------------------------------------------- 28
Exhibit Incorporated By Reference to Exhibit Prior Filing* Number Description or Filed Herewith - -------------------------------------------------------------------------------- (xi) Share Acquisition Agreement between Registrant and the ESOP Trust, dated January 26, 1989........................... (7) (xii) Trust Agreement, dated September 14, 1989, between The Northern Trust Company and Harris Trust & Savings Bank regarding the Supplemental Employee Stock Ownership Plan for Employees of The Northern Trust Company, the Supplemental Thrift-Incentive Plan for Employees of The Northern Trust Company and the Supplemental Pension Plan for Employees of The Northern Trust Company.................................... (8) (xiii) Supplemental Employee Stock Ownership Plan for Employees of The Northern Trust Company.................................... (8) (xiv) Supplemental Thrift-Incentive Plan for Employees of The Northern Trust Company as amended and restated.................... (8) (xv) Supplemental Pension Plan for Employees of The Northern Trust Company as amended and restated................................... (8) (xvi) Rights Agreement, dated as of October 17, 1989, between Northern Trust Corporation and Harris Trust & Savings Bank....................................... (9) (xvii) Stock Ownership Program for Non-Employee Directors of the Corporation, adopted January 15, 1991........................... (10) (1) Amendment dated August 20, 1991, to Stock Ownership Program for Non- Employee Directors of the Corporation. (11) (xviii) Lease dated August 27, 1985 between American National Bank & Trust Company of Chicago as Trustee under Trust Agreement dated April 5, 1990 and known as Trust No. 110513-07 (Landlord) and The Northern Trust Company (Tenant), as amended......... (10) (xix) Lease dated July 8, 1987 between American National Bank & Trust Company of Chicago as Trustee under Trust Agreement dated July 12, 1984 and known as Trust No. 61523 (Landlord) and The Northern Trust Company (Tenant), as amended.................................... (10) (xx) 1992 Incentive Stock Plan.................. (12) (xxi) Amendments, dated December 21, 1993, to The Northern Trust Company Employee Stock Ownership Plan, Supplemental Pension Plan for Employees of The Northern Trust Company, and Supplemental Thrift-Incentive Plan for Employees of the Northern Trust Company.... Filed Herewith (11) Computation of Per Share Earnings.................. Filed Herewith (13) 1993 Annual Report to Stockholders................. Filed Herewith (18) Letter re Change in Accounting Principles.......... (13) (21) Subsidiaries of the Registrant..................... Filed Herewith (23) Consent of Independent Public Accountants.......... Filed Herewith (24) Powers of Attorney................................. Filed Herewith (99) Description of Common Stock (filed for the purpose of updating the description of Common Stock contained in the registration statement for such securities)........................................ Filed Herewith
- -------------------------------------------------------------------------------- 29 - -------------------------------------------------------------------------------- *Prior Filings (File No. 0-5965, except as noted) ------------------------------------------------ (1) Annual Report on Form 10-K for the year ended December 31, 1992 (2) Registration Statement on Form S-4 dated February 10, 1994 (Reg. No. 33-52219) (3) Quarterly Report on Form 10-Q for the quarter ended March 31, 1993 (4) Quarterly Report on Form 10-Q for the quarter ended September 30, 1986 (5) Annual Report on Form 10-K for the year ended December 31, 1986 (6) Annual Report on Form 10-K for the year ended December 31, 1988 (7) Form 8-K dated January 26, 1989 (8) Annual Report on Form 10-K for the year ended December 31, 1989 (9) Form 8-A dated October 30, 1989 (10) Annual Report on Form 10-K for the year ended December 31, 1990 (11) Annual Report on Form 10-K for the year ended December 31, 1991 (12) Quarterly Report on Form 10-Q for the quarter ended March 31,1992 (13) Form 8-K dated February 20, 1991 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-10.21 2 GENERAL AMENDMENTS EXHIBIT NUMBER (10)(xxi) TO 1993 FORM 10-K BOARD OF DIRECTORS RESOLUTION 12/21/93 - ------------------------------------------------------------------------------ NORTHERN TRUST COMPANY GENERAL AMENDMENTS TO - --------------------- THE NORTHERN TRUST COMPANY PENSION PLAN, THE NORTHERN TRUST COMPANY THRIFT- - -------------------------------------------------------------------------- INCENTIVE PLAN, 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 - ------------------------------------------------------------------------------ RESOLVED, that the above referenced employee benefit plans of The Northern Trust Company will be amended in accordance with a letter dated December 10, 1993 to the Compensation and Benefits Committee of the Board of Directors from William Setterstrom, which letter shall be filed in the Secretary's file, such amendments to be effective as of January 1, 1994 except as otherwise specified in that letter, and such amendments are hereby authorized and approved. FURTHER RESOLVED, that the Plans be administered in accordance with this resolution and that the Chairman, the President, any Vice Chairman, any Senior Executive Vice President, any Executive Vice President, or any Senior Vice President of The Northern Trust Company, or his or her delegate, is authorized to execute amendments to the Plans and take any other actions which are necessary or advisable to implement this resolution. Date: December 10, 1993 To: Compensation and Benefits Committee of the Board of Directors From: William Setterstrom Re: Plan Amendments Amendments shall be made to the following retirement plans: . The Northern Trust Company Pension Plan . The Northern Trust Company Thrift-Incentive Plan . The Northern Trust Company Employee Stock Ownership Plan . Supplemental Pension Plan for Employees of the Northern Trust Company . Supplemental Thrift-Incentive Plan for Employees of the Northern Trust Company Amendments to The Northern Trust Company Employee Stock Ownership Plan . Seasonal and temporary employees will not be eligible for participation in the ESOP (to be effective as soon as administratively practicable). . Effective August 5, 1993, the service crediting rules under the ESOP shall be amended to comply with the requirements of the Family and Medical Leave Act of 1993. . Foreign nationals on temporary assignment who continue participation in the pension plan of the foreign affiliate from which they were transferred will be excluded from participation in the ESOP. . Foreign nationals who do not continue participation in the pension plan of the foreign affiliate from which they were transferred will participate in the ESOP. Service with the foreign affiliate will be counted for vesting but not credited service. . Employees who are awarded severance pay at termination of employment shall receive "imputed" service credit equal to the maximum salary continuation period permitted under The Northern Trust Severance Pay Plan. This amendment is to be effective as soon as administratively possible. Amendments to the Supplemental Pension Plan for Employees of The Northern Trust Company (the "Supplemental Pension Plan") . The benefit formula will be amended to provide that a participant's benefit will be calculated by subtracting the lump sum value of a participant's benefit under the Pension Plan based upon his or her single life annuity benefit (after considering Code section 401(a)(17) and 415 restrictions) from the lump sum value of a participant's benefit under the Pension Plan, based upon the participant's qualified joint and lump sum benefit, without consideration of such statutory restrictions. . If a participant's entire benefit under the Pension Plan has been distributed due to the payment of a QDRO, the participant will still be entitled to a benefit under the Supplemental Pension Plan, based upon the benefit to which he would have been entitled, if not for the QDRO. However, the participant's benefit under the Supplemental Plan will not replace any amount actually paid to such alternate payee. . Payments from the Supplemental Pension Plan to a nonretirement eligible employee shall be made on the last day of the third calendar month following the calendar month in which the employee terminates employment. The above amendments shall be applicable to "covered employees" (as defined under Code section 162(m)(3)) only to the extent permitted to allow payments to be covered under Code section 162(m)(4)(D). Amendments to the Supplemental Thrift-Incentive Plan for Employees of The Northern Trust Company (the "Supplemental TIP") . An employee is eligible to make salary deferrals if his or her base rate of compensation as of November 30 of the prior plan year exceeds the 401(a)(17) compensation limit of such prior plan year and such employee meets the plan's eligibility requirement as of January 1. 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. Employees who are not eligible under the above criteria, but whose employer or employee contributions to TIP are limited because their base compensation exceeds the Code section 401(a)(17) compensation limit or the contribution limit set forth in Code section 415(c)(1)(A), will be eligible to participate for purposes of employer matching contributions only, as of the date they are no longer eligible to make contributions to TIP. . Only employees eligible to make salary deferrals who actually make salary deferrals will receive employer matching contributions. . Employees who are not eligible to make salary deferrals (i.e., employees who did not meet the eligibility requirements to make salary deferral elections on January 1, but who cannot make further contributions to TIP because base compensation exceeds the compensation limits or the contribution limits of Code section 415(c)(1)(A)) will receive employer matching contributions based upon their rate of contribution to TIP at the time their contributions ceased due to the compensation limit. . Employees who meet the eligibility requirements for plan participation will be allowed to elect (1) to decline participation in the plan, (2) to make contributions to the plan during the entire plan year (TIP contribution must be at least 4 percent), or (3) to begin contributing to the plan after they are no longer able to contribute to TIP. . The maximum salary before-tax deposit to the plan cannot be greater than 12 percent less the employee's contributions to TIP (changed from 13 percent). The above amendments shall be applicable to "covered employees" (as defined under Code section 162(m)(3)) only to the extent permitted to allow payments to be covered under Code section 162(m)(4)(D). . Employees who are awarded severance pay at termination of employment shall receive "imputed" service credit equal to the maximum salary continuation period permitted under The Northern Trust Severance Pay Plan. This amendment is to be effective as soon as administratively possible. Amendments to the Supplemental Pension Plan for Employees of The Northern Trust Company (the "Supplemental Pension Plan") . The benefit formula will be amended to provide that a participant's benefit will be calculated by subtracting the lump sum value of a participant's benefit under the Pension Plan based upon his or her single life annuity benefit (after considering Code section 401(a)(17) and 415 restrictions) from the lump sum value of a participant's benefit under the Pension Plan, based upon the participant's qualified joint and lump sum benefit, without consideration of such statutory restrictions. . If a participant's entire benefit under the Pension Plan has been distributed due to the payment of a QDRO, the participant will still be entitled to a benefit under the Supplemental Pension Plan, based upon the benefit to which he would have been entitled, if not for the QDRO. However, the participant's benefit under the Supplemental Plan will not replace any amount actually paid to such alternate payee. . Payments from the Supplemental Pension Plan to a nonretirement eligible employee shall be made on the last day of the third calendar month following the calendar month in which the employee terminates employment. The above amendments shall be applicable to "covered employees" (as defined under Code section 162(m)(3)) only to the extent permitted to allow payments to be covered under Code section 162(m)(4)(D). EX-11 3 PER SHARE EARNINGS EXHIBIT NUMBER (11) TO 1993 FORM 10-K NORTHERN TRUST CORPORATION COMPUTATION OF PER SHARE EARNINGS
Year Ended December 31, ------------------------------------------- 1993 1992 1991 ------------ ------------ ------------ Computations Required by - ------------------------ Regulation S-K - -------------- Primary Earnings Per Share - -------------------------- Net Income Applicable to Common Shares $161,572,474 $142,730,771 $121,373,982 ------------ ------------ ------------ Weighted Average Number of Common and Common Equivalent Shares Outstanding Common Shares 53,019,436 52,199,933 51,336,338 Diluted Effect of Common Equivalent Shares (A) Stock Options 1,177,972 1,436,772 1,442,340 Long Term Performance Stock Plan 391,025 395,224 333,277 Other 1,500 1,301 29 ---------- ---------- ---------- 54,589,933 54,033,230 53,111,984 ========== ========== ========== Net Income Per Common and Common Equivalent Share $2.96 $2.64 $2.29 ----- ----- -----
(A) Determined by application of the treasury stock method. NORTHERN TRUST CORPORATION COMPUTATION OF PER SHARE EARNINGS
Year Ended December 31, ---------------------------------------- 1993 1992 1991 ------------ ------------ ------------ Computations Required by - -------------------------------------- Regulation S-K - -------------------------------------- Fully Diluted Earnings Per Share - -------------------------------------- Net Income Applicable to Common Shares $161,572,474 $142,730,771 $121,373,982 Add Back: Dividend on Series E Convertible Preferred Stock 3,129,199 2,764,710 - ------------ ------------ ------------ $164,701,673 $145,495,481 $121,373,982 ============ ============ ============ Weighted Average Number of Common and Common Equivalent Shares Outstanding Common Shares 53,019,436 52,199,933 51,336,338 Diluted Effect of Common Equivalent Shares (A) Stock Options 1,223,468 1,538,697 1,699,712 Long Term Performance Stock Plan 399,331 403,679 360,130 Other 1,754 1,580 35 Other Potentially Dilutive Securities Equivalent Shares Assuming Conversion of Series E Convertible Preferred Stock 1,204,820 1,066,562 - ------------ ------------ ------------ 55,848,809 55,210,451 53,396,215 ============ ============ ============ Net Income Per Common and Common Equivalent Share $2.95 $2.64 $2.27 ----- ----- -----
(A) Determined by application of the treasury stock method. EX-13 4 NORTHERN'S SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations Northern Trust Corporation is a bank holding company organized in 1971 to acquire all of the outstanding stock of The Northern Trust Company (Bank), an Illinois banking corporation located in the Chicago financial district. Northern Trust Corporation also owns three other banks in the Chicago metropolitan area, a bank each in Florida, Arizona, California and Texas, and various other nonbank subsidiaries, including a securities brokerage firm and a futures commission merchant. Although the operations of other subsidiaries will be of increasing significance, the Corporation expects that the Bank will continue to be the major source of the Corporation's assets, revenues and net income in the foreseeable future. All references to the Corporation refer to Northern Trust Corporation and its subsidiaries on a consolidated basis unless indicated otherwise. The following discussion is presented here in order to provide an understanding of the financial statements and other statistical data presented in this report. Results of Operations Net income for 1993 totaled a record $167.9 million, a 12% increase from the $149.5 million earned in 1992 which in turn was 17% greater than the $127.4 million earned in 1991. On a fully diluted basis, net income per common share was also up 12% to $2.95 in 1993. This compares with net income per common share of $2.64 in 1992 and $2.27 for 1991. The record 1993 net income performance produced a return on average common stockholders' equity of 17.9% compared with 18.7% in 1992 and 19.0% in 1991. The return on average assets was 1.07% in 1993 compared with 1.11% in 1992 and 1.05% in 1991. 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, remained unchanged at 146% in 1993, 1992 and 1991. 1993 marks the sixth consecutive year of record earnings. Trust fees reached a new high surpassing the $400 million mark for the first time, while trust assets under administration once again reflected good growth and reached $477 billion at December 31, 1993, up 16% from 1992. Record net interest income, strong foreign exchange trading profits and a lower provision for credit losses also contributed to the year's performance. This revenue growth combined with controlled increases in noninterest expenses resulted in record profits. The Corporation's planning process continues to emphasize quality, productivity, effective resource allocation and reduction or elimination of marginal nonstrategic activities. With these objectives in mind, expense growth and capital expenditures are closely monitored to ensure that the Corporation's short- and long-term business strategies are effectively supported. Primarily through the retention of earnings, total stockholders' equity grew to $1.2 billion versus $1.0 billion at December 31, 1992 and $820.7 million at December 31, 1991. The Board of Directors increased the quarterly dividend per common share 18.9% in November 1993, to $.22 from $.185, for a new annual rate of $.88. This is the seventh consecutive year in which the dividend rate has been increased, and reflects the Corporation's 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. summary of selected financial data
( In Millions Except per Share Amounts ) 1993 1992 1991 1990 1989 1988 - ------------------------------------------------------------------------------------------------ Net Interest Income $ 329.3 $ 311.2 $ 281.9 $ 249.3 $ 237.4 $ 232.3 Provision for Credit Losses 19.5 29.5 31.0 14.0 16.0 20.0 Noninterest Income 552.4 509.4 412.8 369.3 332.1 308.4 Noninterest Expenses 628.2 584.6 500.1 464.9 428.6 389.3 Provision for Income Taxes 66.1 57.0 36.2 24.3 11.7 22.1 - ------------------------------------------------------------------------------------------------ net income $ 167.9 $ 149.5 $ 127.4 $ 115.4 $ 113.2 $ 109.3 - ------------------------------------------------------------------------------------------------ Net Income Applicable to Common Stock $ 161.6 $ 142.7 $ 121.4 $ 109.2 $ 105.8 $ 102.1 - ------------------------------------------------------------------------------------------------ per common share Net Income - Primary $ 2.96 $ 2.64 $ 2.29 $ 2.06 $ 2.08 $ 2.21 - - Fully Diluted 2.95 2.64 2.27 2.05 2.01 2.13 Dividends Declared 0.77 1/2 0.66 1/2 0.58 0.52 0.43 2/3 0.35 1/3 - ------------------------------------------------------------------------------------------------ Average Total Assets $15,700.2 $13,418.0 $12,182.5 $11,682.1 $10,521.9 $9,133.0 Senior Medium-Term Notes at Year-End 817.0 312.0 2.0 -- -- -- Notes Payable at Year- End 326.8 233.2 264.1 171.6 240.8 175.0 - ------------------------------------------------------------------------------------------------
24 northern trust corporation noninterest income. The success of the Corporation's strategy of maintaining a diverse revenue base is evidenced by the fact that noninterest income represents 60% of its total taxable equivalent revenue. Noninterest income totaled $552.4 million in 1993, $509.4 million in 1992 and $412.8 million in 1991. trust fees. Trust fees, representing 73% of total noninterest income and 44% of total taxable equivalent revenue in 1993, increased 10% to $404.8 million from $368.4 million in 1992 which was up 22% from $303.1 million in 1991. Trust fees have increased at a compound growth rate of 14% for the last five years. The January 1992 acquisition of trust assets from Trust Services of America, Inc. (TSA) increased 1992 trust fees by approximately $20.5 million. Excluding the effect of the acquisition, 1992 trust fees increased 15% over 1991. Fees are based on the market value of assets administered, portfolio purchases and sales, income collection transactions 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, the Corporation 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 necessarily 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 Corporation's bank subsidiaries and foreign branches. These deposits averaged $2.8 billion in 1993 and $2.1 billion in 1992. The Corporation's trust business encompasses Master Trust/Master Custody and investment management 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 the Corporation's two trust business units, Corporate Financial Services (CFS) and Personal Financial Services (PFS). A discussion of the activities of each of these business units follows. Corporate Financial Services. At December 31, 1993 trust assets under administration for CFS totaled $426.5 billion, an increase of 17% from $364.9 billion a year ago. Trust fees for CFS increased 12% in 1993 to $195.0 million from $173.8 million in 1992 which was up 14% from $152.7 million in 1991. This increase, principally in Master Trust/Master Custody services, primarily reflects growth in business from new and existing clients. The Corporation continues to be a leading provider of Master Trust/Master Custody services in various market segments. These market segments are principally large U.S. corporate, public funds, taxable and international asset pools. The major products offered include custody, investment manage- ment and information delivery services. CFS also includes a correspondent trust market segment which provides custody, systems and investment services to smaller bank trust departments. Assets under administration in the large U.S. corporate market segment totaled $179.6 billion at December 31, 1993 compared with $154.7 billion a year ago. The majority of these assets are held by defined benefit plans. Although there is a growing trend by corporations toward establishing defined contribution plans, defined benefit plans continue to represent a significant portion of U.S. pension assets. Much of the new growth in retirement assets is expected to be from defined contribution plans of U.S. corporations. The Corporation believes that it is positioned to benefit from this trend given its long-term relationships with corporate sponsors and its family of institutional mutual funds. To broaden the services provided and to more effectively address the needs of the defined contribution market, the Corporation signed a definitive agreement in December 1993 to acquire Hazlehurst & Associates, Inc., a privately-held retirement benefit plan services company for $22.5 million in Northern Trust common stock. The company is based in Atlanta, Georgia, with an office in Seattle. Hazlehurst's well established capabilities in retirement plan design, participant record keeping, actuarial and consulting services will complement the Corporation's custody, fiduciary and investment management capabilities in this strategically important market. The agreement is subject to the approval of Hazlehurst shareholders and to regulatory approval and is expected to close in the second quarter of 1994. consolidated trust assets under administration
Percent Five-Year December 31 Change Compound ----------------------------------------------------------- --------- Growth Rate ( Amounts in Billions ) 1993 1992 1991 1990 1989 1988 1993/92 - --------------------------------------------------------------------------------------------------------------- Corporate $ 46.6 $ 41.7 $ 36.0 $ 38.7* $ 27.0 $ 17.6 12% 21% Personal 30.5 27.9 22.7 19.2 18.2 15.4 9 15 - --------------------------------------------------------------------------------------------------------------- total managed trust assets $ 77.1 $ 69.6 $ 58.7 $ 57.9 $ 45.2 $ 33.0 11% 19% - --------------------------------------------------------------------------------------------------------------- Corporate $379.9 $323.2 $287.8* $206.1 $194.0 $139.4 18% 22% Personal 19.5 18.9 14.8 12.7 11.9 10.4 3 13 - --------------------------------------------------------------------------------------------------------------- total non-managed trust assets $399.4 $342.1 $302.6 $218.8 $205.9 $149.8 17% 22% - --------------------------------------------------------------------------------------------------------------- total trust assets under administration $476.5 $411.7 $361.3 $276.7 $251.1 $182.8 16% 21% - ---------------------------------------------------------------------------------------------------------------
* Includes a temporary placement of $7.5 billion of managed assets over year- end 1990; converted to non-managed in 1991. northern trust corporation 25 Management's Discussion and Analysis of Financial Condition and Results of Operations ( continued ) Growth in the public funds market segment has been driven by increased funding of plans by state and local public entities and the use of specialized service providers as reporting requirements and investment strategies have become more complex. Although this market segment tends to be the most price sensitive, the Corporation's investments in technology have allowed it to compete effectively on the basis of both cost and quality of service to the client. At December 31, 1993, $77.3 billion of assets were under administration, an increase of 24% from $62.1 billion at December 31, 1992. The taxable market segment, which includes insurance companies, foundations and endowments, provides attractive growth opportunities for the Corporation's 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. The Corporation 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. The Corporation is a leading provider of custody services to foundations and endowments. Five of the largest ten foundations are clients as are many of the largest endowment funds in the country. Assets under administration at December 31, 1993 increased 15% to $80.2 billion from $70.0 billion at December 31, 1992. The international market segment, which handles the custody needs of clients domiciled outside of the U.S., has had the highest rate of growth for the last two years when measured in terms of assets under administration. At December 31, 1993 assets under administration totaled $31.9 billion, up 37% from $23.3 billion at year-end 1992, which in turn was up 25% over the previous year-end. The Corporation maintains the required systems capabilities and sub-custodial network necessary to capitalize on the growth opportunities presented by the development of worldwide financial markets. The Corporation has consistently been recognized as one of the industry's highest quality providers in this area. In four of the last six annual worldwide surveys of investment managers on global custodial performance by Global Investor Magazine, the Corporation has been ranked first among approximately 15 firms that were rated each year. Servicing the correspondent trust market segment is an important element of the Corporation's trust strategy. As technology has become more sophisticated and banks are forced to become more cost conscious, the Corporation has been able to leverage its investment in technology by making its trust processing services available to smaller banks. Assets under administration in this area at December 31, 1993 and 1992 totaled $36.1 billion and $35.1 billion, respectively. Cash that has been deposited by investment firms as collateral for securities they have borrowed from the Corporation's clients under the securities lending program is also managed by the Corporation and included in trust assets. This collateral totaled $21.4 billion and $19.7 billion at December 31, 1993 and 1992, respectively. Revenues generated from security lending activities are included in CFS related trust fees. With respect to basic custody services, price competition has become more intense in certain segments of the Corporation's corporate trust business. The Corporation believes that it is positioned to withstand these pressures because of its focus on providing unrivaled quality service, economy of scale, its approach to developing deeper client relationships and commitment to technological innovation. Personal Financial Services. At December 31, 1993 trust assets under administration for Personal Financial Services totaled $50.0 billion, an increase of 7% from $46.8 billion at December 31, 1992. With significant growth in fiduciary and asset management services, trust fees for PFS increased 8% to $209.8 million from $194.6 million in 1992. The 1993 performance reflects strong new business results and higher stock and bond market levels. In 1992 trust fees were up 29% from $150.4 million in 1991. This increase reflects the impact of business growth, the effect of the acquisition of trust assets from TSA and a fee increase in the second half of 1991. The Corporation has positioned itself in states having significant concentrations of wealth and growth potential. The Corporation currently has domestic offices in 42 locations in Illinois, Florida, California, Arizona and Texas. With an established presence in these growing markets, the Corporation believes that it has the potential to continue to grow personal trust fees. Personal trust fees in Illinois increased 5% to $109.8 million from $105.0 million in 1992 which was up 14% from $92.5 million in 1991. The 1993 fee growth reflects the growing contribution of the Wealth Management Group which provides very wealthy families with highly sophisticated security custody and reporting, asset management and banking services on a nationwide basis. The growth in 1992 fees reflects new business and the effect of a fee increase in the second half of 1991. The Corporation has the leading market share in the Chicago area personal trust market with $31.6 billion of assets under administration at December 31, 1993 compared with $29.1 billion a year ago. Over the years clients have been attracted by both the quality of trust services and the profile of financial strength and stability which the Corporation has consistently achieved. This reputation combined with credit ratings that are top tier has allowed the Corporation to enhance the growth of its personal trust business. The Corporation expects that the Chicago market will continue to be a significant contributor to personal trust revenues. The Corporation's personal trust business in Florida continues to be a significant contributor to the growth in personal trust fees. Trust fees for 1993 totaled $52.2 million, up 14% from $46.0 million in 1992 which was up 17% from $39.3 million in 1991. Trust assets under administration were $10.1 billion at December 31, 1993, an increase of 7% from $9.4 billion at year-end 1992. The five year compound growth rate for trust fees and trust assets has been 17% and 14%, 26 northern trust corporation respectively. With new offices in Fort Myers, St. Petersburg and North Miami, the Corporation now has 15 offices in the South and Central Florida markets. The Corporation believes that there remains significant opportunity for growth in the Florida markets that the Corporation currently serves. In December 1993, the Corporation entered into a definitive agreement to acquire Beach One Financial Services, Inc., parent company of The Beach Bank of Vero Beach, Florida, for $56.2 million in Northern Trust common stock. Beach Bank is the largest independent bank and manager of personal trust assets in Indian River County. The agreement is expected to close in the third quarter of 1994 subject to the approval of Beach One shareholders and to regulatory approvals. Northern Trust Bank of California N.A. was established in 1988 as a de novo trust subsidiary to reach the California trust market, and in 1991 added banking powers through an acquisition. The 1992 acquisition of $4 billion of trust assets under administration from TSA has successfully increased the Corporation's penetration into the California market. 1993 trust fees reflect a full year's contribution from the TSA business. Trust fees for 1993, 1992 and 1991 were $32.3 million, $29.7 million and $7.0 million, respectively. Having spent much of 1993 transitioning the TSA business, the Corporation is now positioned to focus on new business development. Trust assets totaled $5.5 billion at December 31, 1993. In Arizona, the Northern Trust Bank of Arizona N.A. is one of the largest providers of personal trust services. As in the Corporation's other markets, the strategy in Arizona combines banking and trust services to targeted high net worth individuals. Trust fees from this market were $11.9 million in 1993, $10.7 million in 1992 and $9.4 million in 1991. Assets under administration at December 31, 1993 and 1992 totaled $1.8 billion and $1.7 billion, respectively. As a recent entrant in the Texas market, the Corporation's presence is modest but growing. With offices in Dallas and Houston, Northern Trust Bank of Texas N.A. is located in the two most important metropolitan markets in the state. In 1993, the Corporation continued to expand into compatible communities within these two cities with the opening of an office in the River Oaks area of Houston. The Corporation has expanded from one office in this state to four offices since its entry into Texas in 1989. Trust fees for 1993, 1992 and 1991 were $3.6 million, $3.2 million and $2.2 million, respectively. Trust assets under administration were $1.05 billion at December 31, 1993, $922 million at December 31, 1992 and $693 million in 1991. The Corporation believes that its expertise in investment management provides a competitive advantage in executing its personal and corporate trust strategy. For example, the Corporation's investment management performance for stock, bond and balanced accounts for institutional clients ranks in the top quartile for the three, five and seven year performance periods ended December 31, 1993, as measured by SEI, a nationally recognized performance measurement tracking service. In 1993, the Benchmark funds, which are made available to institutional clients, registered new stock and bond portfolios, and, in 1994, the Corporation will register a second family of mutual funds that will be made available to its personal clients. During the 1990s, the Corporation's national personal trust strategy will focus primarily on increasing market share in present geographic locations and the development of other selected upscale personal markets. security commissions and trading income. Security commissions and trading income totaled $19.9 million in 1993 and 1992, compared with $15.1 million in 1991. This income is primarily generated from securities brokerage and futures contract services. Additional revenue is provided from underwriting selected general obligation tax-exempt securities, occasional security trades, and interest risk management activities with clients. other operating income. Other operating income in 1993 totaled $125.9 million compared with $117.8 million in 1992 and $91.1 million in 1991. Other operating income in 1993 included gains of $3.9 million from the sale of mortgage loans, compared with $1.2 million in 1992. Also affecting the year-to-year comparison are $6.2 million of fees realized in 1992 that were related to prepayments of fixed-rate commercial loans. Foreign exchange trading profits, the principal component of the increase in other operating income, totaled a record $32.4 million, up 48% from the $21.9 million reported a year ago. A significant portion of the foreign exchange profits stems from trading activity associated with the Corporation's growing global custody business. The fee portion of treasury management revenues totaled $49.0 million in 1993, a slight decline from the $49.7 million reported in 1992. Total treasury management revenues, which, in addition to fees, include interest earned on compensating deposit balances, also decreased slightly to $71.1 million from $72.1 million in 1992. Treasury management revenues in 1993 were affected by more competitive market conditions. New business awarded in the second half of 1993, however, was significant. A significant portion of the Corporation's 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, the Corporation, in addition to safekeeping and managing trust and corporate assets, processed cash and security transactions exceeding $80 billion on average each business day. Controls over such activities are closely monitored to safeguard the assets of the Corporation and its clients. northern trust corporation 27 Management's Discussion and Analysis of Financial Condition and Results of Operations ( continued ) investment security gains. Net security gains totaling $1.8 million were realized in 1993 from the sale of securities classified as "held for sale" and from securities that were called at a premium. This compares with gains of $3.3 million realized in 1992 and $3.5 million in 1991. In 1993, securities classified as held for sale with a book value of $142.4 million were sold. This activity included $62.3 million of auction rate preferred stock, which was surrendered and not repurchased at auction pricing reset dates due to credit and/or yield considerations. In addition, $80.1 million of U.S. Government securities held for sale were sold. The 1993 sales are not expected to cause a material change in future income or investment yields. At year-end, the Corporation's investment and held for sale security portfolios had a fair value of $4.1 billion which exceeded the book value of the portfolio by $54.8 million. This net appreciation consisted of $57.2 million of gross unrealized gains and $2.4 million of gross unrealized losses. The Corporation will adopt Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities," effective January 1, 1994, which will change the way the Corporation accounts for investment securities. Under SFAS No. 115, debt and equity securities not intended to be held to maturity and not held for trading will be classified as "available for sale." Such securities will be reported at fair value with both unrealized gains and losses, which primarily result from period-to-period interest rate changes, credited or charged, net of the related tax effect, directly to stockholders' equity. This accounting method will add volatility to the Corporation's capital, but net income will not be impacted unless the securities are sold. In connection with the adoption of this new statement, on January 1, 1994, the Corporation restructured its investment portfolio and reclassified as available for sale all of the held for sale portfolio and a significant portion of its held for investment portfolio. As of January 1, 1994, the fair value of the available for sale portfolio totaled $3.4 billion, and equity capital increased by $202,000 to recognize the appreciation, net of taxes, on these securities. net interest income. Net interest income is defined as the total of interest income and amortized fees on earning assets less interest expense on deposits and borrowed funds adjusted for the impact of off-balance sheet hedging activity. Earning assets, which consist of securities, loans and money market assets, are financed by a large base of interest-bearing funds, including retail deposits, wholesale deposits, short-term borrowings, senior medium-term notes and long-term debt. Earning assets are also funded by net noninterest- related funds. Net noninterest-related funds consist of demand deposits, the reserve for credit losses and stockholders' equity, reduced by noninterest- bearing assets including cash and due from banks, items in process of collection, buildings and equipment and other net nonearning assets. Variations in the level and mix of earning assets, interest-bearing funds and net noninterest-related funds, and their relative sensitivity to interest rate movements, are the dominant factors affecting net interest income. In addition, net interest income is impacted by the level of nonperforming loans and OREO and client use of compensating balances to pay for services. Net interest income for 1993 was a record $329.3 million, up 6% from $311.2 million in 1992, which was up 10% from $281.9 million in 1991. 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 1993 was a record $363.4 million, analysis of net interest income ( Taxable equivalent )
Percent Change --------------------------- ( Amounts in Millions ) 1993 1992 1991 1993/92 1992/91 - ------------------------------------------------------------------------------------- Interest Income $ 706.4 $ 721.9 $ 847.4 (2.1)% (14.8)% Taxable Equivalent Ad- justment 34.1 32.5 36.0 5.1 (9.8) - ------------------------------------------------------------------------------------- Interest Income 740.5 754.4 883.4 (1.8) (14.6) Interest Expense 377.1 410.7 565.5 (8.2) (27.4) - ------------------------------------------------------------------------------------- net interest income 363.4 343.7 317.9 5.7 8.1 - ------------------------------------------------------------------------------------- average volume Earning Assets 13,730.7 11,605.9 10,609.7 18.3 9.4 Interest-Related Funds 11,655.4 10,139.1 9,367.5 15.0 8.2 Noninterest-Related Funds 2,075.3 1,466.8 1,242.2 41.5 18.1 - ------------------------------------------------------------------------------------- Change in Percentage average rate --------------------------- Earning Assets 5.39% 6.50% 8.33% (1.11) (1.83) Interest-Related Funds 3.23 4.05 6.04 (0.82) (1.99) Interest Rate Spread 2.16 2.45 2.29 (0.29) 0.16 Total Source of Funds 2.74 3.54 5.33 (0.80) (1.79) - ------------------------------------------------------------------------------------- net interest margin 2.65 2.96 3.00 (0.31) (0.04) - -------------------------------------------------------------------------------------
Note: see page 64 for detailed analysis of net interest income. 28 northern trust corporation an increase of $19.7 million or 6% from $343.7 million in 1992 which in turn was up 8% from $317.9 million in 1991. The growth in FTE net interest income was essentially attributable to the growth in average earning assets, the increase in intermediate-term assets funded with shorter-term liabilities to take advantage of declining interest rates, and a $3.2 million increase in fees recognized on residential mortgage refinancings. Earning assets averaged $13.7 billion, up 18% or $2.1 billion from the $11.6 billion reported in 1992. The growth in average earning assets reflects a 32% or $1.0 billion increase in investment securities, a 13% or $844 million increase in loans and a 12% or $239 million increase in money market assets. Securities held for investment and held for sale averaged $4.2 billion versus $3.2 billion in 1992 mainly due to a $1.0 billion increase in short-term U.S. Government securities. Loan volume for the year averaged $7.3 billion reflecting an $852 million or 14% increase in domestic lending while international loans declined $8 million. The growth in domestic loans was principally from residential mortgage activities, up $572 million. In late 1992 the Corporation changed the method of classifying and processing certain trust client investments in and redemptions from various funds. Primarily as a result of this change, overnight advances increased by an average of $339 million in 1993, which is reflected in the total loan growth. Money market assets averaged $2.2 billion in 1993 versus $2.0 billion in 1992, reflecting an increase in international deposit placement activity. The growth in average earning assets of $2.1 billion was funded primarily by a net increase of $1.1 billion in average senior medium-term bank notes, federal funds purchased, treasury tax and loan demand notes and securities sold under agreements to repurchase. In addition, average time deposits were up $394 million principally due to a $621 million increase in average foreign office time deposits, mainly from global custody deposit activity, offset by a decrease in domestic savings certificates and other time deposit activity due to the continued decline in interest rates during 1993. Average net noninterest-related funds increased $609 million, mainly due to higher demand deposits and stockholders' equity. The increase in average demand deposits reflects the change in the method of classifying and processing certain trust client transactions. Total stockholders' equity for the year averaged $1.1 billion, an increase of $146 million or 16% from 1992 principally due to the Corporation's strong earnings performance. The interest rate spread declined to 2.16% from 2.45% last year due to the substantial increase in the level of short-term U.S. Government securities, the reinvestment of proceeds from security and loan maturities and sales into lower yielding assets, and the increased level of nonearning trust-related overnight advances, offset in part by higher levels of fees recognized on residential mortgage refinancings. These factors, combined with lower yields obtained from the investment of noninterest-related funds due to the drop in interest rates in 1993, resulted in a decline in the net interest margin to 2.65% from last year's 2.96%. provision for credit losses. Significant improvement in asset quality resulted in the provision for credit losses declining to $19.5 million, from $29.5 million in 1992 and $31.0 million in 1991. For a discussion of the reserve and provision for credit losses, refer to pages 34 and 35. noninterest expenses. Noninterest expenses for 1993 totaled $628.2 million, up $43.6 million or 7% from $584.6 million in 1992 which was up 17% from $500.1 million in 1991. The rate of expense growth was affected by a $12.8 million reduction in OREO write-downs. Planned increases in salaries and benefits, which included costs associated with business expansion and the impact of adopting SFAS No. 106 on postretirement health care, accounted for much of the year-to-year increase. In addition, increases in capital expenditures associated with the ongoing systems development efforts as well as litigation- related costs contributed to the expense growth. salaries and benefits. Salaries and benefits, which represent 58% of total noninterest expenses, increased 10% to $361.5 million in 1993 from $328.5 million in 1992. Salary costs, the largest component of noninterest expenses, totaled $293.4 million, up $23.3 million or 9% from $270.1 million a year ago. Merit increases, higher incentive compensation and a 3.5% growth in staff were the principal components underlying this increase. Staff on a full-time equivalent basis averaged 6,318 compared with 6,102 in 1992. The staff increase was attributable to growth in the trust and subsidiary bank activities, partially offset by a decrease in commercial banking-related staff. Employee benefit costs for 1993 totaled $68.1 million, up $9.7 million or 17% from $58.4 million in 1992. Approximately $3.2 million or 33% of the total increase was the result of the adoption of SFAS No. 106 for postretirement health care in January 1993. The remainder of the increase in benefit costs was attributable to pension benefits, the Thrift Incentive Plan and payroll taxes. In November 1992, SFAS No. 112 on accounting for postemployment benefits was issued. The new statement requires employers to adopt accrual accounting for workers compensation, disability, severance and other benefits provided after employment but before retirement. The statement takes effect January 1, 1994 and requires employers to immediately recognize their liability for postemployment benefits as of that date. The Corporation's current accounting policies have essentially been in compliance with the requirements of SFAS No. 112, and, therefore, management expects that the annual postemployment expense will not differ significantly from the expense recorded under the current accounting method. northern trust corporation 29 Management's Discussion and Analysis of Financial Condition and Results of Operations ( continued ) occupancy expense. Net occupancy expense totaled $55.3 million, up 3% or $1.5 million from $53.8 million in 1992 which was up 6% from $50.6 million in 1991. The principal components of the increase were higher building and leasehold improvement amortization expenses, real estate taxes, and operating costs primarily associated with business expansion in Florida, California and Texas. equipment expense. Equipment expense, which includes depreciation, rental, and maintenance costs, totaled $41.1 million in 1993, up 14% or $4.9 million from $36.2 million in 1992 which was 10% higher than the $33.0 million in 1991. The expense levels in each of the three years primarily reflect planned increases in equipment and computer depreciation and related costs mainly to support trust business expansion. other operating expenses. Other operating expenses for 1993 totaled $170.3 million, up 3% from $166.1 million in 1992 which was up 34% from $124.0 million in 1991. Other operating expenses in 1993 included $1.5 million of write-downs in the carrying values of OREO assets versus $14.3 million in 1992. Factors contributing to the expense increase, principally related to growth in trust and subsidiary banking business activities, were computer software amortization, transaction-based depository fees and other processing costs, consulting and legal services, settlement losses on nonqualified pension payments and business promotion expenses. Investments in technology are designed to support and enhance the transaction processing and securities handling capability of the Corporation's trust and banking businesses. Higher levels of capital expenditures for systems technology, discussed later in capital expenditures, will result in increasingly greater amounts of expense from future depreciation of hardware and amortization of software which are charged to equipment and other operating expenses, respectively. provision for income taxes. The income tax provision totaled $66.1 million in 1993 compared with $57.0 million in 1992 and $36.2 million in 1991. The higher tax provision in 1993 resulted from the growth in taxable earnings for federal tax purposes and higher tax rates mandated by the Revenue Reconciliation Act (Act) of 1993. The impact of the tax rate increase was partially offset by a new provision in the Act which permits a deduction for the amortization of certain intangible assets. State taxes declined in 1993 as a result of a higher level of investments in state tax-exempt securities. As a result, the effective tax rate was unchanged for 1993 and 1992 at 28% versus 22% in 1991. SFAS No. 109, "Accounting for Income Taxes" was adopted in 1993. Income tax accounting under this new statement is not significantly different than the accounting for income taxes under the Corporation's previous method, and therefore, did not have a material impact on the Corporation's 1993 tax provisions. Capital Expenditures The Corporation's Capital Expenditure Committee reviews proposed capital expenditures which exceed $500,000 and makes recommendations on the appropriateness of the expenditures. This review assures that the major projects to which the Corporation commits its resources produce benefits compatible with the strategic goals of the Corporation. During 1993, the Corporation continued to improve its hardware and software capabilities, especially relating to trust activities. Such improvements assure state-of-the-art technology which enables the Corporation to provide its clients with the highest level of quality service while also maintaining a competitive cost structure, a characteristic which helps distinguish the Corporation from its competitors. In this regard, the Corporation, through the efforts of internal staff and outside consultants, continued development of a new trust system which began in 1989. The Corporation has been implementing the new system in several phases. Although systems enhancements will continue to be an ongoing process, all significant phases of this major project are expected to be completed by 1995. The unamortized cost of this project through 1993 was $56 million. Capital expenditures in 1993 also included the construction of a new banking facility in River Oaks, Texas, and leasehold improvements and furnishings associated with the opening of three new offices in Florida, and one new office in California. Capital expenditures for 1993 totaled $92 million of which $14 million was for building and leasehold improvements, $7 million for furnishings, $28 million for hardware and machinery and $43 million for software. It is estimated that capital expenditures for 1994 will total approximately $88 million of which $10 million is planned for buildings and leasehold improvements, $4 million for furnishings, $33 million for hardware and machinery and $41 million for software. 30 northern trust corporation Asset Quality and Credit Risk investment securities. The Corporation continues to maintain a high quality investment portfolio as evidenced by the Standard and Poor's and/or Moody's Investors Service ratings on obligations of states and political subdivisions, preferred stock and other securities in the investment portfolio. At December 31, 1993, 71% of these securities are rated triple-A or double-A, 24% are rated single-A and 5% are below A or not rated. Other securities consist of privately issued collateralized mortgage obligations, backed by federal agency securities, and asset-backed securities, collateralized by automobile loans and credit card receivables. The Corporation is an active participant in the repurchase agreement market. This market provides the Corporation with a relatively low cost alternative for short-term funding. Investment 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 the Corporation to credit risk in the event of default by the counterparty. To minimize this risk, collateral values are continuously monitored and the Corporation 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 the Corporation's various lending activities. Credit risk is managed through the Corporation's Credit Policy function, which is designed to ensure that the high level of credit standards set by the Corporation is adhered to. Credit Policy provides a system of checks and balances for the Corporation's diverse credit-related activities by establishing and monitoring all credit-related policies and practices throughout the Corporation 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 to the Corporation. A further way in which the Corporation manages credit risk 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 the Corporation's credit risk relates to the loan portfolio. Although the Corporation believes that its credit exposure is well diversified, it has identified certain significant groups which meet the accounting definition under SFAS No. 105 of credit risk concentrations. According to this statement, group concentrations of credit risk exist if a number of borrowers or other counterparties are engaged in similar activities and have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. The fact that an extension of credit falls into one of these groups does not indicate that the credit has a higher than normal degree of credit risk. These groups are: middle market companies and small businesses, broker-dealers of securities, banks and bank holding companies, commercial real estate, and residential real estate. middle market companies and small businesses. Credit exposure to middle market companies and small businesses is primarily in the form of commercial loans. These loans are to a diversified group of borrowers that are predominantly in the manufacturing, wholesaling, distribution and services industries, with total sales of less than $250 million. The largest component of this group of borrowers is located in the greater Chicago area. Middle market and small businesses have been the focus of business development since 1982, and it is part of the Corporation's strategic plan to continue to selectively grow its 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 $1.0 billion at both December 31, 1993 and December 31, 1992. Nonperforming middle market loans totaled $8.8 million and $19.8 million at December 31, 1993 and 1992, respectively. Credit exposure related to customer acceptance liabilities with middle market companies and small businesses totaled $21.4 million and $33.4 million as of December 31, 1993 and 1992, 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 $836.7 million, $313.0 million, and $18.4 million, respectively, as of December 31, 1993, and $678.1 million, $364.2 million, and $11.1 million, respectively, at December 31, 1992. broker-dealers of securities. Broker loans consist primarily of overnight funds loaned to broker-dealers in the securities industry on both a secured and unsecured basis. Broker loans averaged $335.5 million during 1993 and $321.6 million during 1992, and totaled $249.4 million at December 31, 1993 and $336.3 million at December 31, 1992. Securities purchased under agreements to resell totaled $380.8 million at year-end versus $407.7 million at December 31, 1992. Standby letters of credit issued on behalf of broker-dealers and legally binding commitments to extend credit totaled $141.1 million and $130.0 million, respectively, as of December 31, 1993, and $91.4 million and $110.4 million, respectively, as of December 31, 1992. The Corporation may from time to time also have a limited amount of potential credit exposure to brokers and dealers in connection with securities lending activities, as described in section C. of Note 16 on page 56. northern trust corporation 31 Management's Discussion and Analysis of Financial Condition and Results of Operations ( continued ) banks and bank holding companies. The following table shows the Corporation's credit exposure to banks and bank holding companies at December 31, 1993 and December 31, 1992. The Corporation's exposure to such entities is well diversified geographically. A significant portion of the Corporation's 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 Corporation's 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 Corporation also continually monitors the value of collateral that it holds. 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 acquisition purposes. The Corporation limits such lending activity to entities with which it has a substantial business relationship. The international loan exposure represents transactions with major international banks arising from the Corporation's trade finance and dollar clearing activities. credit exposure to banks and bank holding companies
December 31 ----------------- ( In Millions ) 1993 1992 - -------------------------------------------------------------------- balance sheet amounts Due From Banks $ 762.9 $ 810.8 Money Market Assets Federal Funds Sold 63.0 27.7 Securities Purchased under Agreements to Resell 134.0 21.1 Time Deposits with Banks - Domestic .2 .1 - International 2,090.2 1,859.4 Other 71.9 81.8 Commercial Loans - Domestic 108.5 73.8 - International 160.1 121.9 Investment Securities (primarily preferred stock) 34.9 37.4 Customers' Acceptance Liability 32.9 126.9 Foreign Exchange* 46.4 95.6 Interest Rate Management Instruments* 9.1 9.7 Other Assets 12.8 16.1 off-balance sheet amounts Contract or Notional Amounts of: Commitments to Place Money Market Assets 308.4 300.1 Legally Binding Commitments to Extend Credit 99.9 114.8 Standby Letters of Credit 45.6 46.8 Commercial Letters of Credit 17.5 17.0 - --------------------------------------------------------------------
* Represents the amount of credit risk recorded in the consolidated statement of condition associated with the potential failure of the counterparty to pay under the instrument. commercial real estate. In managing its credit exposure, management has defined a commercial real estate loan as one where: (1) the borrower's principal business activity is the acquisition of or the development of real estate for commercial purposes; (2) the principal collateral is real estate held for commercial purposes and loan repayment is expected to flow from the operation of the property; or (3) the loan repayment is expected to flow from the sale or refinance of real estate as a normal and ongoing part of business. Unsecured lines of credit to firms or individuals engaged in commercial real estate endeavors are included without regard to the use of loan proceeds. The commercial real estate portfolio consists of interim loans and commercial mortgages. The interim loans are composed primarily of loans to developers that are highly experienced and well-known to the Corporation. The Corporation has engaged primarily in short-term interim loans that provided financing for the initial phases of the acquisition or development of commercial real estate, with the intent that the borrower would refinance the loan through another financial institution or sell the project upon its completion. Because of the severe economic decline in the commercial real estate market, the borrowers' ability to refinance loans or sell projects upon their completion has diminished significantly. As a result, the length of time over which the average interim loan remained outstanding has often been longer than originally anticipated. The interim loans included in the portfolio are primarily in the Chicago market in which the Corporation has a strong presence and a thorough knowledge of the local economy. The Corporation has also provided commercial mortgage financing 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. Notwithstanding recent signs of improved liquidity and market conditions, the current state of the commercial real estate market continues to affect borrowers' ability to meet the Corporation's underwriting criteria for new loans. As a result, management does not expect the commercial real estate portfolio to increase measurably in the near future. Commercial real estate loans outstanding at December 31, 1993, are detailed in the next table. 32 northern trust corporation commercial real estate loans
Interim Commercial ( In Millions ) Loans Mortgages Total - ------------------------------------------------- Apartments $ 12.6 $ 48.4 $ 61.0 Industrial 39.1 44.0 83.1 Office 82.8 50.2 133.0 Shopping Center/Retail 42.1 40.0 82.1 Land 19.2 15.5 34.7 Other 62.9 49.7 112.6 - ------------------------------------------------- Total $258.7 $247.8 $506.5 - -------------------------------------------------
In comparison, commercial real estate loans at December 31, 1992 totaled $511.2 million. Nonperforming commercial real estate loans totaled $4.8 million in 1993 and $13.1 million in 1992. At December 31, 1993, commercial real estate loans 90 days past due and still accruing interest totaled $18.1 million. Not included in the table above was OREO which totaled $9.7 million and $22.9 million at December 31, 1993 and 1992, respectively. At December 31, 1993, 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 $30.1 million and $40.2 million, respectively. At December 31, 1992, legally binding commitments were $38.9 million and standby letters of credit were $21.9 million. residential real estate. Residential real estate loans totaled $2.9 billion or 40% of total domestic loans at December 31, 1993, compared with $2.4 billion or 36% at December 31, 1992. 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 $2.9 billion in residential real estate loans, $2.0 billion were in the greater Chicago area and the remainder almost entirely in the areas served by the Corporation's Florida and Arizona banking subsidiaries. Legally binding commitments to extend credit, which are primarily equity credit lines, totaled $391.5 million and $308.9 million as of December 31, 1993 and 1992, respectively. foreign outstandings. In recent years the Corporation's international banking activities have been focused on financing U.S. trade transactions and correspondent banking. The Corporation 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 Corporation's head office in Chicago and London branch actively participate in the interbank market with U.S. and foreign banks. Growth in foreign outstandings during 1993 primarily reflects increases in interest-bearing deposit placements with banks as a result of growth in deposits from Global Custody clients at the London branch of The Northern Trust Company. As used in this discussion, foreign outstandings are cross-border outstandings as defined by the Securities and Exchange Commission. They consist of loans, acceptances, interest-bearing deposits with financial institutions, accrued interest and other monetary assets. Not included are letters of credit, loan commitments, and foreign office local currency claims on residents funded by local currency liabilities. Foreign outstandings related to a specific country are net of guarantees given by third parties resident outside the country and the value of tangible, liquid collateral held outside the country. However, transactions with branches of foreign banks are included in these outstandings and are classified according to the country location of the foreign bank's head office. The Corporation continually monitors its risk related to foreign outstandings and imposes internal limits on its foreign exposure. The table below provides information on foreign outstandings by country that exceed 1.00% of the Corporation's total assets. foreign outstandings
Commercial ( In Millions ) Banks and Other Total - -------------------------------------------- at december 31, 1993 Japan $544 $ -- $544 United Kingdom 230 35 265 France 173 -- 173 - -------------------------------------------- At December 31, 1992 Japan $294 $ -- $294 Germany 175 -- 175 United Kingdom 141 27 168 France 158 -- 158 Switzerland 157 -- 157 - -------------------------------------------- At December 31, 1991 Japan $690 $ -- $690 Italy 145 -- 145 United Kingdom 101 63 164 - --------------------------------------------
Aggregate foreign outstandings by country falling between 0.75% and 1.00% of total assets at December 31, 1993 totaled $153 million to Canada. This compares with $362 million to Italy, Netherlands and Canada in 1992 and none in 1991. northern trust corporation 33 Management's Discussion and Analysis of Financial Condition and Results of Operations ( continued ) 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 reversals. Maintaining a low level of nonperforming assets is important to the ongoing success of a financial institution. The Corporation's comprehensive credit review and approval process is critical to the Corporation's ability to minimize nonperforming assets on a long-term basis. In addition to the negative impact on both net interest income and credit losses, nonperforming assets also increase operating costs due to intense collection efforts. The table below presents the Corporation's nonperforming assets and past due loans for the current year and the prior five years. Of the total loan portfolio of $7.6 billion at December 31, 1993, $27.3 million or .36% was nonperforming, a decrease of $41.0 million from year-end 1992. Nonperforming loans at December 31, 1993 consisted principally of commercial loans including $4.8 million of commercial real estate loans, $6.6 million in the highly leveraged credit transaction category and $8.8 million to middle market and small business companies. The net decrease of $41.0 million in nonaccrual loans resulted from additions during 1993 of $24.4 million in new nonaccrual loans offset by gross charge-offs of $22.2 million, payments and loan sales of $35.2 million and transfers to OREO of $8.0 million. During 1993, the Corporation incurred $1.5 million in write-downs of OREO assets, and sold property with a basis of $18.8 million. While the Corporation believes that the carrying value of its OREO portfolio is realizable, it is not possible to predict whether such properties will continue to experience further declines in value, especially in light of the continuation of depressed conditions in the commercial real estate market. nonperforming assets and 90 day past due loans
December 31 ----------------------------------- ( In Millions ) 1993 1992 1991 1990 1989 1988 - ----------------------------------------------------------------------------- Nonaccrual Loans Domestic $26.0 $66.4 $53.8 $54.5 $36.3 $16.7 International 1.3 1.9 -- .1 4.9 7.6 - ----------------------------------------------------------------------------- Total 27.3 68.3 53.8 54.6 41.2 24.3 - ----------------------------------------------------------------------------- Other Real Estate Owned (Net of reserve) 9.7 22.9 40.4 19.1 2.3 2.8 - ----------------------------------------------------------------------------- total nonperforming assets $37.0 $91.2 $94.2 $73.7 $43.5 $27.1 - ----------------------------------------------------------------------------- 90 Day Past Due Loans (Still accruing) Domestic $22.8 $42.9 $23.6 $12.0 $ 9.8 $13.2 International ---- -- -- -- -- .1 - ----------------------------------------------------------------------------- total 90 day past due loans $22.8 $42.9 $23.6 $12.0 $ 9.8 $13.3 - -----------------------------------------------------------------------------
In May 1993, the Financial Accounting Standards Board (FASB) issued SFAS No. 114, "Accounting by Creditors for Impairment of a Loan." This new statement requires 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. This statement takes effect January 1, 1995, and at this time management does not expect to apply this statement earlier. Although the expected financial impact of adopting this statement has not yet been quantified, management believes that the new accounting standard will not have a material effect on the Corporation's financial position and results of operations. reserve and provision 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 Corporation's credit exposures. The review process, directed by Credit Policy, is intended to identify as early as possible clients who might be facing financial difficulties. Once identified, the extent of the client's financial difficulty is carefully monitored by Credit Policy, which recommends to management the portion of any credits that need a specific reserve allocation or should be charged-off. Other factors considered by management in evaluating the adequacy of the reserve include: the relative size of the subsidiary banks' single loan lending limits; loan volume; historical net loan loss experience; the level and composition of nonaccrual, past due and restructured loans; other extensions of credit; the condition of industries in geographic areas experiencing or expected to experience particular economic adversities; international developments; current and anticipated economic conditions; credit evaluations; and the liquidity and volatility of the markets in which the Corporation does business. 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. 34 northern trust corporation While the largest portion of this reserve is typically intended to cover loan and lease losses, it is considered a general reserve that is available for all credit-related purposes. The reserve balance is not a precise amount, but is derived from judgements based on the above factors. It represents management's best estimate of the reserve for credit losses necessary to adequately cover probable losses from current credit exposures. The provision for credit losses is the charge against current earnings that is determined by management as the amount needed to maintain an adequate reserve. The overall credit quality of the domestic portfolio has remained good as evidenced by the Corporation's relatively low level of nonperforming loans and net charge-offs. Although a number of economic statistics indicate that the U.S. economy is again expanding, there continue to be significant uncertainties in commercial real estate and certain other industries. In addition, management's assessment of the financial condition of specific clients facing financial difficulties and portfolio growth were other primary factors impacting management's decision to maintain the reserve for credit losses at $145.5 million at December 31, 1993, unchanged from last year. The decline in the year-end reserve for credit losses as a percentage of outstanding loans and leases from 2.10% to 1.91% at year-end 1993 is primarily attributable to loan growth in low-risk residential lending. The table below summarizes the changes in the reserve for credit losses for the current year and the prior five years. analysis of reserve for credit losses
( Amounts in Millions ) 1993 1992 1991 1990 1989 1988 - ------------------------------------------------------------------------------------ Balance at Beginning of Year $ 145.5 $ 145.7 $ 148.0 $ 150.1 $ 151.1 $ 233.4 - ------------------------------------------------------------------------------------ Losses Charged Commercial 19.5 21.2 34.1 17.9 12.3 7.2 Consumer 2.1 3.7 2.8 3.9 .6 .5 Other 1.2 1.5 1.6 .8 2.6 2.7 International .6 6.0 -- 1.1 16.3 99.8 - ------------------------------------------------------------------------------------ Total Charge-Offs 23.4 32.4 38.5 23.7 31.8 110.2 - ------------------------------------------------------------------------------------ Recoveries Credited Commercial 2.3 1.4 4.2 5.9 8.8 3.5 Consumer .9 .8 .8 .3 .4 .3 Other .5 .1 .1 .1 1.6 -- International .2 .4 .1 1.3 2.4 4.1 - ------------------------------------------------------------------------------------ Total Recoveries 3.9 2.7 5.2 7.6 13.2 7.9 - ------------------------------------------------------------------------------------ Net Charged-Off Loans 19.5 29.7 33.3 16.1 18.6 102.3 Provision for Credit Losses 19.5 29.5 31.0 14.0 16.0 20.0 Addition Due to Acqui- sition ---- -- -- -- 1.6 -- - ------------------------------------------------------------------------------------ Net Change in Reserve ---- (.2) (2.3) (2.1) (1.0) (82.3) - ------------------------------------------------------------------------------------ balance at end of year $ 145.5 $ 145.5 $ 145.7 $ 148.0 $ 150.1 $ 151.1 - ------------------------------------------------------------------------------------ Total Loans and Leases at End of Year $7,623.0 $6,935.9 $6,279.7 $5,536.3 $5,660.1 $4,665.7 - ------------------------------------------------------------------------------------ Average Total Loans and Leases $7,297.1 $6,452.9 $6,199.4 $5,847.7 $5,020.9 $4,276.4 - ------------------------------------------------------------------------------------ As a Percent of Year- End Loans and Leases Net Loan Charge-Offs .26% .43% .53% .29% .33% 2.19% Provision for Credit Losses .26 .43 .49 .25 .28 .43 Reserve Balance at Year-End 1.91 2.10 2.32 2.67 2.65 3.24 - ------------------------------------------------------------------------------------ As a Percent of Average Loans and Leases Net Loan Charge-Offs .27% .46% .54% .27% .37% 2.39% Reserve Balance at Year-End 1.99 2.25 2.35 2.53 2.99 3.53 - ------------------------------------------------------------------------------------
Outlook The Corporation believes that the current economic expansion of the domestic economy is likely to continue in 1994, although not all segments of the economy will participate equally in the expansion. The quality of its loan portfolio remains sound and the reserve for credit losses is adequate to cover credit- related uncertainties as they exist today. Established credit review procedures ensure that close attention is given to commercial real estate-related loans and other commercial loans, as well as other credit exposures that might be adversely affected by significant increases in interest rates or an unexpected downturn in segments of the economies of the United States or other countries. northern trust corporation 35 Management's Discussion and Analysis of Financial Condition and Results of Operations ( continued ) Financial Condition Average earning assets in 1993 increased 18% to $13.7 billion due principally to increases in short-term U.S. Government securities and residential mortgage loans. The Corporation maintains a high quality and liquid balance sheet with investment securities and money market assets averaging $6.4 billion or 47% of total earning assets. The Corporation's management strategy for the investment securities account is to maintain a very high quality portfolio with generally short-term maturities. To maximize after-tax income, investments in tax-exempt municipal securities are utilized but with somewhat longer maturities. The average balance of the investment portfolio, which includes both securities held for investment and for sale, increased 32% from last year to $4.2 billion. This increase was attributable to U.S. Government securities, which increased on average $822 million and totaled $2.6 billion during 1993. U.S. Government securities had an average maturity of eight months at December 31, 1993, unchanged from a year ago. Average municipal securities declined slightly to $502 million and provided a fully taxable equivalent yield of 11.66%. The average maturity of municipal securities was 68 months, down from 80 months a year ago. Federal agency, asset- backed and other securities averaged $1.1 billion in 1993, up $155 million or 17% from 1992. Federal agencies had an average maturity at December 31, 1993 and 1992 of 26 months and 19 months, respectively. Included in asset-backed and other securities were $50 million of triple-A rated collateralized mortgage obligations (CMOs), for which the collateral is federal agency securities. Other asset-backed securities were $30 million versus $86 million last year; these securities had an average maturity of 11 months down from 13 months a year ago. Approximately $607 million of federal agency, asset-backed and other securities have variable rates that are reset at least every six months to reflect the level of short-term interest rates. At year-end 1993, the fair value of investment securities of $4.1 billion exceeded the book value of these securities by $54.8 million. Included in this amount was $211.6 million of securities held for sale with a fair value of $212.2 million. On January 1, 1994, in connection with the adoption of SFAS No. 115, the Corporation restructured its investment portfolio and reclassified as available for sale all of the held for sale portfolio and a significant portion of its held for investment portfolio. On this date, the fair value of the available for sale portfolio totaled $3.4 billion and equity capital increased $202,000 to recognize the appreciation, net of taxes, on these securities. average earning assets and source of funds
Percent Change ----------------------------- ( Amounts in Millions ) 1993 1992 1991 1993/92 1992/91 - -------------------------------------------------------------------------------- average earning assets Loans and Leases - Domestic $ 7,017.2 $ 6,165.3 $ 5,900.0 13.8% 4.5% - International 279.9 287.6 299.4 (2.7) (3.9) - -------------------------------------------------------------------------------- Total Loans and Leases 7,297.1 6,452.9 6,199.4 13.1 4.1 - -------------------------------------------------------------------------------- Money Market Assets 2,201.6 1,962.7 1,910.5 12.2 2.7 - -------------------------------------------------------------------------------- Investment Securities - Held for Investment U.S. Government 2,581.4 1,759.7 943.4 46.7 86.5 Obligations of States and Polit- ical Subdivisions 502.3 516.0 533.8 (2.6) (3.3) Federal Agency, Asset-Backed and Other 917.5 898.4 990.5 2.1 (9.3) - -------------------------------------------------------------------------------- Total Investment Securities - Held for Investment 4,001.2 3,174.1 2,467.7 26.1 28.6 - -------------------------------------------------------------------------------- Investment Securities - Held for Sale 201.3 -- -- N/M -- - -------------------------------------------------------------------------------- Securities Held for Trading 29.5 16.2 32.1 83.0 (49.7) - -------------------------------------------------------------------------------- Total Earning Assets $13,730.7 $11,605.9 $10,609.7 18.3% 9.4% - -------------------------------------------------------------------------------- average source of funds Deposits - Savings and Money Mar- ket Deposits $ 3,432.1 $ 3,372.2 $ 3,208.1 1.8% 5.1% - - Savings Certificates 1,172.9 1,370.8 1,569.7 (14.4) (12.7) - - Other Time 404.7 493.9 533.1 (18.1) (7.4) - - Foreign Offices Time 2,436.4 1,815.6 1,100.6 34.2 65.0 - -------------------------------------------------------------------------------- Total Deposits 7,446.1 7,052.5 6,411.5 5.6 10.0 Federal Funds Purchased 1,692.5 1,540.2 1,412.8 9.9 9.0 Securities Sold under Agreements to Repurchase 664.4 542.9 463.8 22.4 17.1 Commercial Paper 131.5 132.9 129.3 (1.0) 2.8 Other Borrowings 868.9 526.6 703.3 65.0 (25.1) Senior Medium-Term Notes 554.1 85.2 1.6 N/M N/M Notes Payable 297.9 258.8 245.2 15.1 5.5 - -------------------------------------------------------------------------------- Total Interest-Related Funds 11,655.4 10,139.1 9,367.5 15.0 8.2 Noninterest-Related Funds, net 2,075.3 1,466.8 1,242.2 41.5 18.1 - -------------------------------------------------------------------------------- Total Source of Funds $13,730.7 $11,605.9 $10,609.7 18.3% 9.4% - --------------------------------------------------------------------------------
N/M Not meaningful 36 northern trust corporation Loans averaged $7.3 billion in 1993 and increased 13% over the prior year. Average domestic loans increased 14% to $7.0 billion for the year while the international portfolio decreased 3% to $280 million. The increase in the average domestic loan portfolio reflects substantial growth in residential mortgages which, net of $109.5 million in loan sales, increased nearly $600 million to $2.6 billion. The growth in residential mortgage loans was the result of increased lending opportunities related to the Corporation's banking strategy. During the year commercial real estate loans declined slightly and at December 31, 1993, were $507 million or 7% of domestic loans. Money market assets averaged $2.2 billion, up 12% or $239 million from last year. These assets were generally funded with short-term foreign office deposits. Total interest-related funds averaged $11.7 billion in 1993, up $1.5 billion or 15% from 1992. Savings and money market deposits increased $60 million or 2% to $3.4 billion, offset by a $198 million decline in savings certificates of deposit to $1.2 billion. Total federal funds purchased increased $152 million or 10% to $1.7 billion. Foreign office time deposits increased a significant $621 million or 34%, resulting from greater global custody activity. Deposits related to trust activities in the domestic banking subsidiaries, coupled with the rapid growth of the global custody business, had a significant impact on the balance sheet as these deposits in 1993 averaged $2.8 billion or 28% of total deposits. Senior medium-term bank notes were used to fund much of the earning asset growth as these funds averaged $554 million, up $469 million from last year. In late 1992, enhancements to the Corporation's trust system permitted changes in the method of classifying and processing certain trust client investments in and redemptions from various funds. In 1993 trust security settlement receivables averaged $203 million, an increase of $134 million from 1992, and the level of overnight trust-related advances included in loans increased by $339 million, to an average of $366 million, both of which, likewise, increased the level of demand deposits by $473 million. Fair Value Disclosures In 1992, SFAS No. 107, Disclosures About Fair Value of Financial Instruments, became effective. This statement requires the disclosure of the fair value of a broad range of both on and off-balance sheet financial instruments. The data should only be used as a supplement to financial data and analysis provided elsewhere in this report. The reader should use this data judiciously for the following reasons. First, the determination of fair value for financial instruments that are not actively traded is extremely subjective, significantly reducing the reliability and comparability of this information. Second, the fair value of financial instruments as of a specific date has little significance since the financial position of the Corporation, whose business centers around financial instruments, is closely monitored through the ongoing management of its interest rate sensitivity, credit risk and liquidity. Moreover, the major reason for changes in the fair values of financial instruments from one date to another relates to interest rate movements. Financial institutions, particularly banks, manage interest rate risk by maintaining a prudent relationship between rate sensitive assets and liabilities as discussed in the following Liquidity and Rate Sensitivity section of this report. The effectiveness of interest rate management is not proven by a point-in-time subjective attempt to measure the fair value of financial instruments. Third, the vast majority of assets, liabilities, and off-balance sheet financial instruments are not held for sale. Therefore, unrealized appreciation and depreciation on these instruments are not an effective barometer of the Corporation's future earnings or financial condition. In addition, not all assets and liabilities of the Corporation are encompassed in the required disclosure. Thus, it is important that this information is not interpreted to represent the Corporation's stock market capitalization which incorporates other tangible and intangible assets and liabilities. For additional information on fair value disclosures refer to section U. of Note 1 on pages 46 and 47. Liquidity and Rate Sensitivity The principal functions of asset and liability management are to provide for adequate liquidity, to manage interest rate exposure by maintaining a prudent relationship between rate sensitive assets and liabilities, and to manage the size and composition of the balance sheet so as to maximize net interest income. Liquidity is the ability to provide funds at minimal cost to meet fluctuating deposit withdrawals or loan demand. These demands are met by maturing assets and the capacity to raise funds when required from external sources. Although not utilized in managing daily liquidity needs, the sale of marketable assets provides a secondary source of liquidity. The management of liquidity is driven by the availability and price of funds in both the domestic and international markets. External sources of short-term funds that are highly sensitive to interest rates and the Corporation's creditworthiness are considered "managed liabilities." These include foreign office Eurodollar time deposits, other domestic time certificates of deposit of $100,000 and more, federal funds purchased, securities sold under agreements to repurchase, treasury tax and loan demand notes and commercial paper. Total managed liabilities averaged $6.6 billion in 1993, an increase of $1.6 billion from the prior year, while liquid assets averaged $5.7 billion, an increase of $1.3 billion in 1993. The increase in managed liabilities exceeded the growth of liquid assets with a resulting decrease in the liquidity of the Corporation. However, the Corporation's liquidity position remains strong with a ratio of net managed liabilities to average assets of 5.6%. The Corporation's increase in loans of $844 million was funded by increases in net noninterest- related funds of $609 million and senior medium-term notes. Fluctuating interest rates, increased competition and changes in the regulatory environment continue to increase the northern trust corporation 37 Management's Discussion and Analysis of Financial Condition and Results of Operations ( continued ) average net managed liabilities
Amount Change ---------------- ( Amounts in Millions ) 1993 1992 1991 1993/92 1992/91 - ------------------------------------------------------------------------------- Foreign Offices Time Deposits $ 2,436 $ 1,816 $ 1,101 $ 620 $ 715 Other Time Deposits 386 461 469 (75) (8) Federal Funds Purchased, Senior Medium-Term Notes and Other Borrowings 3,121 2,200 2,245 921 (45) Securities Sold under Agreements to Repurchase 664 543 464 121 79 - ------------------------------------------------------------------------------- Total Managed Liabilities 6,607 5,020 4,279 1,587 741 - ------------------------------------------------------------------------------- Less: Money Market Assets 2,202 1,963 1,911 239 52 Securities Held for Trading 30 16 32 14 (16) U.S. Government Securities 2,647 1,760 943 887 817 Asset-Backed and Other Securities 849 644 424 205 220 - ------------------------------------------------------------------------------- Total Liquid Assets 5,728 4,383 3,310 1,345 1,073 - ------------------------------------------------------------------------------- net managed liabilities $ 879 $ 637 $ 969 $ 242 $ (332) - ------------------------------------------------------------------------------- Net Managed Liabilities to Average Assets 5.6% 4.7% 8.0% Net Managed Liabilities Times Av- erage Equity Capital .8X .7x 1.3x - ------------------------------------------------------------------------------- Average Assets $15,700 $13,418 $12,183 Average Equity Capital 1,073 927 759 - -------------------------------------------------------------------------------
importance of interest rate sensitivity management. Rate sensitivity arises when interest rates on assets change in a different time period or in a different proportion from that of interest rates on liabilities. The primary objective of interest rate sensitivity management is to structure the balance sheet prudently so that movements of interest rates on assets and liabilities (adjusted for off-balance sheet hedges) are highly correlated and produce a reasonable net interest margin even in periods of volatile interest rates. The Corporation utilized various off-balance sheet financial instruments, primarily interest rate swaps, as part of its asset/liability management activities. Interest rate swaps on which the Corporation paid a fixed rate totaled $693.3 million as of December 31, 1993. Most of these swaps were done to accommodate client demand for longer-term fixed rate loans without increasing interest rate risk to the Corporation. Fixed rate payments on swaps were matched to the fixed rate payments received on loans to maintain a balance between the interest rate sensitivity of assets and liabilities. Without these swaps, the Corporation would have an unacceptably high level of interest rate risk. Interest rate swaps on which the Corporation received a fixed rate totaled $659.0 million as of December 31, 1993. Most of these swaps were used to convert fixed rate senior medium-term notes issued by the Corporation to LIBOR-based rates, and they are used to provide a favorable source of rate sensitive funding relative to alternative wholesale funding sources. The table below summarizes the expected maturities and weighted average interest rates to be paid and received on the asset/liability management swap portfolio at December 31, 1993. A key assumption in the preparation of the table is that floating rates remain constant at December 31, 1993 levels. Continual monitoring of assets and liabilities that are rate sensitive within 28 days, 90 days, 182 days and one year is an integral part of the Corporation's rate sensitivity management process. The Corporation continued its policy of maintaining a reasonable relationship between rate sensitive assets and liabilities on a cumulative one year basis, thus minimizing net interest income exposure to changes in interest rates. As part of the Corporation's rate sensitivity management process, simulation techniques play a significant role in quantifying the behavior of the Corporation's net interest income under various rate environments. The simulations indicate whether the Corporation's interest rate sensitivity gap exposure is reasonable and within management guidelines. The Corporation's rate sensitivity is positioned in anticipation of stable or slightly rising interest rates. The parent company's cash requirements consist mainly of dividend payments to the Corporation's common and preferred stockholders, the payment of interest to note holders and remaining maturity of asset/liability management interest rate swaps
( Amounts in Millions ) 1994 1995 1996 1997 1998 1999-2003 Total - ---------------------------------------------------------------------- pay fixed Notional Amount $ 67.0 93.2 148.1 10.0 130.0 245.0 $693.3 Average Pay Rate 8.80% 9.73 6.94 5.95 5.35 6.47 7.02% Average Receive Rate 3.46 3.53 3.49 3.41 3.65 3.54 3.54 receive fixed Notional Amount $459.0 100.0 -- -- -- 100.0 $659.0 Average Pay Rate 3.35% 3.35 -- -- -- 3.50 3.37% Average Receive Rate 4.30 4.95 -- -- -- 6.31 4.70 - ----------------------------------------------------------------------
38 northern trust corporation investments in subsidiaries. These requirements are met largely by dividend and interest payments from its subsidiaries, and by interest and dividends earned on investment securities and money market assets. In April 1993, the Bank issued $100 million of ten year subordinated debt at a fixed rate of 6.50%. The parent company received the proceeds of this Bank subordinated debt issue. This payment reduced the Bank's debt to the parent company from $175 million to $75 million. The parent company liquidity is strong with short-term assets exceeding commercial paper by $179 million. 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 the Corporation withstand unforeseen adverse developments and take advantage of profitable investment opportunities when they arise. The Corporation's common equity continues to increase at a rate far exceeding the growth in risk-adjusted assets. In 1993 common equity increased 17% while risk-adjusted assets rose only 2%. Total common equity increased $142 million reaching a record $982 million at year end. Total equity as of December 31, 1993 was $1.2 billion including $50 million of convertible preferred stock and $120 million of auction rate preferred stock. During 1993 the Corporation purchased 76,475 of its own shares to facilitate the exercise of stock options. The Board of Directors has authorized the purchase of an additional 4 million shares, including purchases in open market transactions, although no significant purchases are anticipated until late in 1994. The Board of Directors increased the quarterly dividend by 18.9% to $.22 per common share in November 1993. Since the third quarter of 1988 the common dividend has grown 164%. At December 31, 1993, the Corporation's tier 1 capital was 9.3% and the total capital was 13.4% of risk-adjusted assets. These risk-based capital ratios are well above the minimum requirements of 4% for tier 1 and 8% for total risk- based capital ratios. The Corporation'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, all of the Corporation's subsidiary banks have a ratio above 7% for tier 1 capital, 11% for total risk-based capital, and 5.5% for the leverage ratio. The Corporation's $120 million of auction rate preferred stock has benefited from lower interest rates and strong investor confidence with the average preferred rate declared during 1993 being 2.67% versus 3.33% in 1992. In December a definitive agreement was reached to acquire Beach One Financial Services, Inc., parent company of The Beach Bank of Vero Beach, Florida, for $56.2 million in Northern Trust common stock. Also in December a definitive agreement was signed to acquire Hazlehurst & Associates, Inc. for $22.5 million in Northern Trust common stock. The Corporation expects to account for these transactions as pooling-of-interests. In March 1994, the Corporation entered into an agreement with Skandanaviska Enskilda Banken (SEB), Stockholm, Sweden, majority owner of Banque Scandinave en Suisse, Geneva, Switzerland that provides for the purchase of the Corporation's 21% interest in Banque Scandinave by SEB. The transaction is expected to be completed in the second quarter of 1994. The agreed-upon price would result in a pretax gain to the Corporation, net of ancillary adjustments, of approximately $33 million, subject to adjustment for any future dividend to which the Corporation may be entitled. capital adequacy
December 31 ----------------- ( Amounts in Millions ) 1993 1992 - --------------------------------------------------------------------- tier 1 capital Common Stockholders' Equity $ 982 $ 840 Convertible Preferred Stock 50 50 Goodwill (39) (42) - --------------------------------------------------------------------- Total Tier 1 Capital 993 848 - --------------------------------------------------------------------- tier 2 capital Auction Preferred Stock 120 120 Reserve for Credit Losses* 134 131 Notes Payable** 183 113 - --------------------------------------------------------------------- Total Tier 2 Capital 437 364 - --------------------------------------------------------------------- total risk-based capital 1,430 1,212 - --------------------------------------------------------------------- Risk-Weighted Assets*** 10,659 10,494 - --------------------------------------------------------------------- Total Assets - End of Period (EOP) 16,903 14,960 - Average Fourth Quarter 15,954 14,034 Total Loans - End of Period 7,623 6,936 - --------------------------------------------------------------------- ratios Risk-Based Capital to Risk-Weighted Assets - Tier 1 9.3% 8.1% - Total (Tier 1 and 2) 13.4 11.6 Leverage (Tier 1 to Fourth Quarter Average Assets) 6.2 6.1 - --------------------------------------------------------------------- Common Stockholders' Equity to - Total EOP Loans 12.9% 12.1% - Total EOP Assets 5.8 5.6 Stockholders' Equity to - Total EOP Loans 15.1 14.6 - Total EOP Assets 6.8 6.8 - ---------------------------------------------------------------------
Notes: * The reserve for credit losses is restricted to 1.25% of risk-weighted assets for the purpose of this calculation. ** Notes payable that qualify for risk-based capital amortize for the purpose of inclusion in tier 2 capital during the five years before maturity. *** Risk-weighted assets have been reduced for goodwill and excess reserve for credit losses that have been excluded from tier 1 and tier 2 capital. northern trust corporation 39 Consolidated Statement of Condition
December 31 -------------------- ( In Millions ) 1993 1992 - -------------------------------------------------------------------------------- assets Cash and Due from Banks $ 1,519.7 $ 1,071.8 Investment Securities ( Note 3 ) - Held for Investment ( Fair value $3,845.0 in 1993 and $2,822.2 in 1992 ) 3,790.8 2,779.5 - - Held for Sale ( Fair value $212.2 in 1993 and $403.5 in 1992 ) 211.6 400.1 Securities Held for Trading 36.3 1.6 Money Market Assets Federal Funds Sold and Securities Purchased under Agree- ments to Resell 577.8 456.5 Time Deposits with Banks - Domestic .2 .1 - International 2,090.2 1,859.4 Other 72.3 82.3 - -------------------------------------------------------------------------------- Total 2,740.5 2,398.3 - -------------------------------------------------------------------------------- Loans and Leases ( Note 4 ) - Domestic 7,269.7 6,662.4 - International 353.3 273.5 - -------------------------------------------------------------------------------- Total ( Net of unearned income $69.4 in 1993 and $68.2 in 1992 ) 7,623.0 6,935.9 - -------------------------------------------------------------------------------- Reserve for Credit Losses ( Note 5 ) (145.5) (145.5) Buildings and Equipment ( Notes 6 and 7 ) 291.9 282.6 Customers' Acceptance Liability 56.9 207.6 Trust Security Settlement Receivables 293.1 562.1 Other Assets 484.3 465.6 - -------------------------------------------------------------------------------- Total Assets $16,902.6 $14,959.6 - -------------------------------------------------------------------------------- liabilities Deposits Demand and Other Noninterest-Bearing $ 2,464.7 $ 2,674.6 Savings and Money Market Deposits 3,387.6 3,611.5 Savings Certificates 1,111.3 1,248.4 Other Time 333.4 434.7 Foreign Offices - Demand 297.1 37.6 - Time 2,739.3 1,864.0 - -------------------------------------------------------------------------------- Total Deposits 10,333.4 9,870.8 Federal Funds Purchased 1,215.8 2,034.2 Securities Sold under Agreements to Repurchase 602.2 282.3 Commercial Paper 124.1 127.0 Other Borrowings 2,001.2 672.8 Senior Medium-Term Notes ( Note 8 ) 817.0 312.0 Notes Payable ( Note 8 ) ( Qualifying for risk-based cap- ital, $183.4 in 1993 and $113.0 in 1992 ) 326.8 233.2 Liability on Acceptances 56.9 207.6 Other Liabilities 273.5 209.2 - -------------------------------------------------------------------------------- Total Liabilities 15,750.9 13,949.1 - -------------------------------------------------------------------------------- stockholders' equity Preferred Stock ( Note 9 ) 170.0 170.0 Common Stock ( Notes 9 and 11 ) - $1.66 2/3 Par Value 89.7 89.7
1993 1992 ------------------------------------------- Shares authorized 140,000,000 70,000,000 Shares issued 53,826,261 53,826,261 Shares outstanding 53,292,967 52,831,844
Capital Surplus 303.0 300.0 Retained Earnings 631.9 511.7 Unrealized Loss on Marketable Equity Securities ( Note 3 ) (.4) (1.3) Translation Adjustments .6 .6 Common Stock Issuable - Performance Plan ( Note 19 ) 11.8 8.1 Deferred Compensation - ESOP and Other (43.5) (49.5) Treasury Stock - at cost, 533,294 shares in 1993 and 994,417 shares in 1992 (11.4) (18.8) - ----------------------------------------------------------------------------- Total Stockholders' Equity 1,151.7 1,010.5 - ----------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $16,902.6 $14,959.6 - -----------------------------------------------------------------------------
See accompanying notes to financial statements on pages 44-59. 40 northern trust corporation Consolidated Statement of Income
For the Year Ended December 31 -------------------------------- ( In Millions ) 1993 1992 1991 - ------------------------------------------------------------------------------- Interest Income Loans and Leases ( Note 4 ) - Domestic $421.1 $425.4 $498.8 - International 14.4 18.3 25.8 - ------------------------------------------------------------------------------- Total 435.5 443.7 524.6 - ------------------------------------------------------------------------------- Money Market Assets Federal Funds Sold and Securities Purchased under Agreements to Resell 5.5 8.8 17.8 Time Deposits with Banks - Domestic .1 .2 .6 - International 86.4 95.4 107.5 Other 2.6 4.6 20.7 - ------------------------------------------------------------------------------- Total 94.6 109.0 146.6 - ------------------------------------------------------------------------------- Investment Securities ( Note 3 ) - Held for Investment 164.8 168.3 173.8 - Held for Sale 9.4 -- -- Securities Held for Trading 2.1 .9 2.4 - ------------------------------------------------------------------------------- Total Interest Income 706.4 721.9 847.4 - ------------------------------------------------------------------------------- Interest Expense Deposits - Savings and Money Market Deposits 78.8 99.1 159.2 - Savings Certificates 50.5 69.9 104.3 - Other Time 15.7 25.4 38.3 - Foreign Offices 90.4 95.7 88.6 Federal Funds Purchased 51.1 53.5 78.7 Securities Sold under Agreements to Repur- chase 20.0 19.8 26.2 Commercial Paper 4.3 5.2 8.0 Other Borrowings 24.6 18.1 40.7 Senior Medium-Term Notes ( Note 8 ) 18.4 3.0 .1 Notes Payable ( Note 8 ) 23.3 21.0 21.4 - ------------------------------------------------------------------------------- Total Interest Expense 377.1 410.7 565.5 - ------------------------------------------------------------------------------- Net Interest Income 329.3 311.2 281.9 Provision for Credit Losses ( Note 5 ) 19.5 29.5 31.0 - ------------------------------------------------------------------------------- Net Interest Income after Provision for Credit Losses 309.8 281.7 250.9 - ------------------------------------------------------------------------------- Noninterest Income Trust Fees 404.8 368.4 303.1 Security Commissions and Trading Income 19.9 19.9 15.1 Other Operating Income ( Note 13 ) 125.9 117.8 91.1 Investment Security Gains ( Note 3 ) 1.8 3.3 3.5 - ------------------------------------------------------------------------------- Total Noninterest Income 552.4 509.4 412.8 - ------------------------------------------------------------------------------- Income before Noninterest Expenses 862.2 791.1 663.7 - ------------------------------------------------------------------------------- Noninterest Expenses Salaries 293.4 270.1 241.9 Pension and Other Employee Benefits ( Notes 14 and 19 ) 68.1 58.4 50.6 Occupancy Expense ( Notes 6 and 7 ) 55.3 53.8 50.6 Equipment Expense ( Note 6 ) 41.1 36.2 33.0 Other Operating Expenses 170.3 166.1 124.0 - ------------------------------------------------------------------------------- Total Noninterest Expenses 628.2 584.6 500.1 - ------------------------------------------------------------------------------- Income before Income Taxes 234.0 206.5 163.6 Provision for Income Taxes ( Includes related investment security transactions tax provi- sion of $.7 in 1993, $1.1 in 1992 and $1.3 in 1991 ) ( Note 10 ) 66.1 57.0 36.2 - ------------------------------------------------------------------------------- net income $167.9 $149.5 $127.4 - ------------------------------------------------------------------------------- Net Income Applicable to Common Stock $161.6 $142.7 $121.4 - ------------------------------------------------------------------------------- net income per common share ( Note 11 ) - - primary $ 2.96 $ 2.64 $ 2.29 - - fully diluted 2.95 2.64 2.27 - ------------------------------------------------------------------------------- Average Number of Common Shares Outstanding - - Primary 54,589,933 54,033,230 53,111,984 - - Fully Diluted 55,848,809 55,210,451 53,396,215 - -------------------------------------------------------------------------------
See accompanying notes to financial statements on pages 44-59. northern trust corporation 41 Consolidated Statement of Changes in Stockholders' Equity
For the Year Ended December 31 --------------------------- ( In Millions ) 1993 1992 1991 - ---------------------------------------------------------------------------- preferred stock Balance at January 1 $ 170.0 $ 120.0 $120.0 Preferred Stock Issuance, Series E ---- 50.0 -- - ---------------------------------------------------------------------------- Balance at December 31 170.0 170.0 120.0 - ---------------------------------------------------------------------------- common stock Balance at January 1 89.7 59.8 59.8 Transfer from Capital Surplus - Three-for-Two Stock Split ---- 29.9 -- - ---------------------------------------------------------------------------- Balance at December 31 89.7 89.7 59.8 - ---------------------------------------------------------------------------- capital surplus Balance at January 1 300.0 326.4 327.1 Stock Issued - Incentive Plan and Awards 3.0 5.0 (.7) Preferred Stock Issuance Cost ---- (1.5) -- Transfer to Common Stock - Three-for-Two Stock Split ---- (29.9) -- - ---------------------------------------------------------------------------- Balance at December 31 303.0 300.0 326.4 - ---------------------------------------------------------------------------- retained earnings Balance at January 1 511.7 403.0 311.7 Net Income 167.9 149.5 127.4 Dividends Declared on Common Stock (41.1) (34.8) (29.8) Dividends Declared on Preferred Stock (6.6) (6.0) (6.3) - ---------------------------------------------------------------------------- Balance at December 31 631.9 511.7 403.0 - ---------------------------------------------------------------------------- unrealized loss on marketable equity securities Balance at January 1 (1.3) (4.4) (5.9) Unrealized Gain, net .9 3.1 1.5 - ---------------------------------------------------------------------------- Balance at December 31 (.4) (1.3) (4.4) - ---------------------------------------------------------------------------- translation adjustments Balance at January 1 and December 31 .6 .6 .6 - ---------------------------------------------------------------------------- common stock issuable - performance plan Balance at January 1 8.1 4.6 2.4 Stock Issuable, net of Stock Issued 3.7 3.5 2.2 - ---------------------------------------------------------------------------- Balance at December 31 11.8 8.1 4.6 - ---------------------------------------------------------------------------- deferred compensation - esop and other Balance at January 1 (49.5) (54.1) (58.7) Compensation Deferred (3.1) (2.2) (1.3) Compensation Amortized 8.6 7.1 6.1 Unfunded Pension Liability, net .5 (.3) (.2) - ---------------------------------------------------------------------------- Balance at December 31 (43.5) (49.5) (54.1) - ---------------------------------------------------------------------------- treasury stock Balance at January 1 (18.8) (35.2) (48.5) Stock Options and Awards 10.6 21.5 15.5 Stock Purchased (3.2) (5.1) (2.2) - ---------------------------------------------------------------------------- Balance at December 31 (11.4) (18.8) (35.2) - ---------------------------------------------------------------------------- total stockholders' equity at december 31 $1,151.7 $1,010.5 $820.7 - ----------------------------------------------------------------------------
See accompanying notes to financial statements on pages 44-59. 42 northern trust corporation Consolidated Statement of Cash Flows
For the Year Ended December 31 ----------------------------- ( In Millions ) 1993 1992 1991 - ------------------------------------------------------------------------------- cash flows from operating activities: Net Income $ 167.9 $ 149.5 $ 127.4 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Provision for Credit Losses 19.5 29.5 31.0 Depreciation and Amortization 39.3 34.0 30.6 (Increase) Decrease in Interest Receivable (3.3) 20.2 (4.7) Decrease in Interest Payable (9.8) (4.2) (17.9) Amortization and Accretion of Securities and Un- earned Income 79.8 84.2 30.1 Deferred Income Tax 21.4 13.6 6.7 Net (Increase) Decrease in Securities Held for Trading (34.7) 58.6 (25.0) Other Noncash, net 34.8 (35.4) 61.4 - ------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 314.9 350.0 239.6 - ------------------------------------------------------------------------------- cash flows from investing activities: Purchases of Investment Securities (4,367.5) (2,831.5) (3,289.6) Proceeds from Sale of Investment Securities 148.6 373.6 372.8 Proceeds from Maturity and Redemption of Invest- ment Securities 3,320.8 2,324.9 1,983.6 Net Increase in Federal Funds Sold and Securi- ties Purchased under Agreements to Resell (121.3) (64.8) (145.0) Net Increase in Time Deposits with Banks (230.9) (601.3) (142.8) Net Decrease in Other Money Market Assets 10.0 53.2 807.5 Net Increase in Loans and Leases (711.7) (696.8) (785.2) Purchase of Buildings and Equipment (48.9) (56.5) (35.7) Proceeds from Sale of Buildings and Equipment .9 1.7 .3 Net (Increase) Decrease in Trust Security Set- tlement Receivables 269.0 (474.2) (18.2) Cash Used in Acquisitions -- (47.5) (4.1) -- Other, net 13.8 18.9 (19.9) - ------------------------------------------------------------------------------- Net Cash Used in Investing Activities (1,717.2) (2,000.3) (1,276.3) - ------------------------------------------------------------------------------- cash flows from financing activities: Net Increase (Decrease) in Demand and Other Non- interest-Bearing Deposits 49.6 888.7 (197.3) Net Increase (Decrease) in Savings and Money Market Deposits (223.9) 247.9 724.3 Net Increase (Decrease) in Certificates of De- posit and Other Interest-Bearing Deposits 636.9 173.9 (75.8) Net Increase (Decrease) in Federal Funds Pur- chased and Short-Term Other Borrowings 956.1 (71.9) 896.4 Proceeds from Other Borrowed Funds 1,663.8 1,638.7 2,343.0 Repayments of Other Borrowed Funds (1,789.8) (1,547.1) (2,583.8) Net Decrease in Commercial Paper (2.9) (2.4) (14.3) Proceeds from Senior Medium-Term Notes and Notes Payable 805.0 310.2 100.0 Repayments on Senior Medium-Term Notes and Notes Payable (206.4) (31.1) (5.5) Proceeds from Preferred Stock Issued -- 48.5 -- Treasury Stock Purchased (2.2) (2.5) (.2) Net Proceeds from Stock Options 4.0 11.7 7.5 Cash Dividends Paid on Common and Preferred Stock (45.8) (39.5) (35.4) Other, net 5.8 3.8 4.9 - ------------------------------------------------------------------------------- Net Cash Provided by Financing Activities 1,850.2 1,628.9 1,163.8 - ------------------------------------------------------------------------------- Increase (Decrease) in Cash and Due from Banks 447.9 (21.4) 127.1 Cash and Due from Banks at Beginning of Year 1,071.8 1,093.2 966.1 - ------------------------------------------------------------------------------- cash and due from banks at end of year $1,519.7 $1,071.8 $1,093.2 - ------------------------------------------------------------------------------- supplemental disclosures of cash flow informa- tion: Interest Paid on Deposits and Short- and Long- Term Borrowings $ 386.9 $ 414.9 $ 583.4 Income Taxes Paid 41.5 33.1 35.2 - -------------------------------------------------------------------------------
See accompanying notes to financial statements on pages 44-59. northern trust corporation 43 Notes To Financial Statements 1. Accounting Policies--The 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 (Parent Company) and its wholly owned subsidiaries (Corporation). Significant intercompany balances and transactions have been eliminated in consolidation. Results of operations of entities purchased are included from the dates of acquisition. b. foreign currency translation. Foreign currency asset and liability accounts of overseas branches are translated at current rates of exchange, except for buildings and equipment which are translated at rates in effect at the date of acquisition. Income and expense accounts are translated at month- end rates of exchange. Foreign exchange trading positions are valued monthly at prevailing market rates. Gains and losses on trading positions and on positions entered into in order to hedge foreign denominated investments are recognized currently in other operating income. Gains and losses on foreign currency positions that were entered into in order to hedge specific, firm foreign currency obligations are deferred and recognized in income over the life of the underlying asset or liability or as the underlying expense or commitment is incurred. c. investment securities. Securities Held for Investment consist of those securities that management intends to, and the Corporation has the ability to, hold until maturity or, in the case of marketable equity securities, on a long-term basis. Debt securities are stated at cost, adjusted for the amortization of premiums and the accretion of discounts. Marketable equity securities are carried at the lower of aggregate cost or fair value. Unrealized losses on equity securities are reported in the consolidated statement of condition as a reduction to the equity securities' carrying value and as a reduction, net of taxes, in stockholders' equity. Securities Held for Sale may be sold prior to maturity in response to changes in market interest rates, prepayment risk, or other factors. Securities held for sale are stated at the lower of aggregate cost or fair value. Unrealized losses on securities held for sale are included in the income statement as investment security losses. Realized gains and losses on securities held for sale are determined on a specific identification basis and are reported in the consolidated statement of income as investment security gains and losses. The Corporation adopted Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities," effective January 1, 1994. Under SFAS No. 115, debt and equity securities not intended to be held to maturity and not held for trading will be classified as "available for sale." Such securities will be reported at fair value with both unrealized gains and losses credited or charged, net of the tax effect, directly to stockholders' equity. d. securities held for trading. Securities held for trading are stated at fair value. The realized and unrealized gains and losses are reported in the income statement under security commissions and trading income. In addition, this income statement category includes brokerage and futures commissions. e. interest risk management instruments. Interest risk management instruments include interest rate swap contracts, futures contracts, options and similar contracts. The Corporation 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. 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. If interest risk management instruments are used by the Corporation to hedge existing assets and liabilities or anticipated transactions, and 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 related 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. f. loans and leases. Loans are reported at the principal amount outstanding, net of unearned income. Interest income on loans is recorded on an accrual basis until, in the opinion of management, there is a question as to the ability of the debtor to meet the terms of the contract, or when interest or principal is more than 90 days past due and the loan is not well secured and in the process of collection. At the time a loan is placed on a nonaccrual status, interest accrued but not collected is reversed against interest income of the current period. Loans are returned to an accrual status when factors indicating doubtful collectibility no longer exist. Interest income on restructured loans is recognized in accordance with the new terms. 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 contractual life of the lease. g. 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 domestic 44 northern trust corporation and international economic conditions on the creditworthiness of borrowers is given major consideration in determining the adequacy of the reserve. Credit loss experience, changes in the character and size of the loan portfolio and management's judgement are other factors used in assessing the overall adequacy of the reserve for credit losses and the resulting provision for credit losses. Actual losses may vary from current estimates and the amount of the provision may be either greater than or less than actual net charge-offs. While the largest portion of this reserve is intended to cover loan and lease losses, it is considered a general reserve available for all credit-related purposes. h. 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. i. buildings and equipment. Buildings and equipment owned are carried at original cost less accumulated depreciation. The charge for depreciation is computed primarily on the straight-line method. Leased properties meeting certain criteria are capitalized and amortized using the straight-line method over the lease period. j. 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 the reserve for OREO. The OREO reserve is established to reduce OREO to a realizable value through a charge to other operating expenses. Gains realized from the sale of OREO are included in other operating income. OREO is reported net of the related reserve and is included in other assets in the consolidated statementof condition. k. 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 not exceeding thirty years. Goodwill of approximately $39.4 million and $42.3 million at December 31, 1993 and 1992, respectively, is included in other assets in the consolidated statement of condition. At December 31, 1993, the average remaining life of unamortized goodwill was thirteen years. Other intangible assets are amortized using various methods over the estimated life of the assets. At December 31, 1993 other intangible assets totaled $35.0 million versus $39.0 million last year. l. trust assets and fees. Assets held in fiduciary or agency capacities are not included in the consolidated statement of condition, since such items are not assets of the Corporation. Income from trust activities is reported on an accrual basis. m. trust security settlement receivables. These receivables represent other items in the process of collection presented on behalf of trust clients. n. 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 a component of annual pension expense. Assets held by the plan consist primarily of listed stocks and corporate bonds. The Corporation 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. The Corporation has a nonqualified trust, referred to as a "Rabbi" trust, to fund benefits in excess of those permitted in certain of the Corporation's qualified plans. The primary purpose of the trust is to fund nonqualified pension benefits. This arrangement offers certain officers of the Corporation 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 of the Corporation 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 statement of condition. o. employee stock ownership plan (esop). A leveraged Employee Stock Ownership Plan (ESOP) in which substantially all employees of the Corporation are eligible to participate was established in 1989. The ESOP shares not yet allocated to individual accounts are treated as deferred compensation and accounted for as a reduction of stockholders' equity. The original 4.5 million shares in the ESOP Trust are being allocated to eligible employees over a ten- year period. Dividends paid on unallocated shares held in the ESOP Trust are used for debt service on the ESOP notes. Compensation expense is accounted for based primarily on the amount of cash paid by the Corporation to the ESOP for principal payments on the ESOP notes. p. 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 objective for the year. The estimated contribution to this plan is accrued during the year and charged to pension and other employee benefit expenses. northern trust corporation 45 Notes To Financial Statements ( continued ) q. incentive plans. 1992 incentive stock plan. The 1992 Incentive Stock Plan (Plan) provides for the granting of both nonqualified and incentive stock options. Stock appreciation rights may also be granted in conjunction with stock options. The Plan also permits stock awards and stock equivalents to be granted. Key officers of the Corporation and its subsidiaries are eligible to participate in the Plan. The Plan is administered by the Compensation and Benefits Committee (Committee) of the Board of Directors. The total number of shares of common stock of the Corporation available for distribution under the Plan is 3,750,000. The accounting entries made to the appropriate capital or expense accounts of the Corporation are based upon the terms and conditions of each award. 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. All options are exercisable not earlier than six months nor 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 of the Corporation as defined in the Plan. All options terminate at such time as determined by the Committee and as provided in the option, but not later than three years after termination of employment for any reason other than death. Under the Plan, stock awards or equivalents can be awarded by the Committee to participants which entitle them to receive a payment in cash or common stock of the Corporation based on such terms and conditions as the Committee deems appropriate including achievement of performance goals. amended incentive stock plan. The Amended Incentive Stock Plan was superseded by the 1992 Incentive Stock Plan and will terminate by its terms 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 the Corporation's executive officers under the provisions of the 1992 and the Amended Incentive Stock Plans whereby the executives will be entitled to have each award credited to an account maintained for them if established performance goals are achieved with distribution after vesting. The value of shares earned but not yet distributed under the plan is credited to performance share accounts and is shown in stockholders' equity as common stock issuable- performance plan. performance incentive plans. Various incentive plans provide for bonuses to selected employees based upon the accomplishment of various corporate objectives. Bonuses are accrued during the year to salary expense based on attainment of designated objectives. The above plans provide for acceleration of benefits in certain circumstances including a change of control. r. other postretirement benefits. The Corporation 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 also be changed at the discretion of the Corporation. Further, the Corporation reserves the right to terminate these benefits at any time. The Corporation adopted, effective January 1, 1993, SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." The statement requires that the expected cost of providing postretirement benefits be recognized in financial statements during the employees' active service period. The Corporation's previous practice was to expense these benefits when paid. s. income taxes. On January 1, 1993, the Corporation adopted on a prospective basis SFAS No. 109, "Accounting for Income Taxes." Based on the Corporation's existing tax position, income tax accounting under this new statement is not significantly different than the accounting required under the Corporation's prior method (SFAS No. 96). The change, therefore, did not have a material effect on the Corporation's 1993 tax provisions or reserves. SFAS No. 109 requires an asset and liability approach to accounting for income taxes. Its 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. t. cash flow statements. The Corporation has defined cash and cash equivalents as those amounts included in the consolidated statement of condition as "Cash and Due from Banks." u. fair values of financial instruments. SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," requires disclosure of the fair value of certain of the Corporation's 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 the Corporation could have 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. The following methods and assumptions were used in estimating the fair values of the Corporation's financial instruments: Short-Term Financial Assets. Due to the short maturity of these instruments, the amounts reported in the statement of condition approximate fair value. Short-term financial assets include cash and due from banks; federal funds sold and securities purchased under agreements to resell; trust security settlement receivables; and customers' acceptance liabilities. 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 46 northern trust corporation comparable instruments. The fair values pertaining to securities are shown in Note 3. Time Deposits with Banks and Other Money Market Assets. Fair values were estimated using a discounted cash flow method. The discount rate used was the current market rate for instruments with similar terms and credit risk. The amounts reported in the consolidated statement of condition for time deposits with banks and other money market assets approximate their fair values. 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 the Corporation would have originated the loan had it been originated as of the financial statement date, giving effect to current economic conditions on loan collectibility. The estimated fair value of the entire loan portfolio, not including lease financing receivables, was $7.36 billion and $6.69 billion as of December 31, 1993 and 1992, respectively. The corresponding book values of these loans, net of the entire reserve for credit losses, were $7.34 billion as of December 31, 1993 and $6.66 billion as of December 31, 1992. Short-Term Financial Liabilities. Due to the short maturity of these instruments, the amounts reported in the consolidated statement of condition approximate fair value. Short-term financial liabilities include federal funds purchased, liabilities on acceptances and commercial paper. Demand, Savings, and Money Market Deposits. The fair values required to be disclosed for these deposits pursuant to SFAS No. 107 must equal the amounts disclosed in the consolidated statement of condition. Savings Certificates, Other Time and Foreign Offices Time Deposits, Securities Sold under Agreements to Repurchase, Senior Medium-Term Notes, and Other Borrowings. The fair values of these instruments were estimated using a discounted cash flow method that incorporated market interest rates. The fair values of savings certificates, other time and foreign offices time deposits were $4.20 billion and $3.57 billion as of December 31, 1993 and 1992, respectively. The corresponding book values of these deposits were $4.18 billion and $3.55 billion. The fair values of senior medium-term notes were $818.1 million and $311.1 million as of December 31, 1993 and 1992. The corresponding book values were $817.0 million and $312.0 million. The amounts reported in the consolidated statement of condition for securities sold under agreements to repurchase and other borrowings approximate their fair values. 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. The estimated fair values of the Corporation's notes payable as of December 31, 1993 and 1992 were $349.8 million and $254.2 million, respectively. The corresponding book values of these notes were $326.8 million and $233.2 million. Off-Balance Sheet Financial Instruments. The fair values of commitments and letters of credit, which represent the amount of unamortized fees on these instruments, are recorded in the consolidated statement of condition and totaled $2.8 million as of December 31, 1993 and $2.4 million as of December 31, 1992. The fair values of all other off-balance sheet financial instruments, as shown in section B. of Note 16, were based on quoted market prices, when available. If quoted market prices were not available, fair values were estimated using pricing models. 2. Reclassifications--Certain reclassifications have been made to prior periods' financial statements to place them on a basis comparable with the current period's financial statements. 3. Investment Securities--At December 31, 1993, obligations of states and political subdivisions, preferred stock and other securities had the following ratings according to Standard and Poor's and/or Moody's Investors Service: 71% are triple-A or double-A; 24% are single-A and 5% are below A or not rated. Realized gross security gains included in the consolidated statement of income in 1993 totaled $1.8 million, including $1.6 million related to securities held for sale. There were no realized gross security losses in 1993. In 1992, realized gross gains and gross losses totaled $4.0 million and $.7 million, respectively. In 1991, realized gross gains and gross losses totaled $4.3 million and $.8 million, respectively. Income on obligations of states and political subdivisions totaled $38.3 million, $39.3 million and $41.1 million in 1993, 1992 and 1991, respectively. Dividends on preferred stock totaled $3.8 million, $5.6 million and $8.6 million for 1993, 1992 and 1991, respectively. Effective January 1, 1994, the Corporation adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." In conjunction with adopting SFAS No. 115, the Corporation restructured its investment portfolio. All of the Corporation's investments in obligations of states and political subdivisions, as well as U.S. Government securities with a book value of $82.7 million and preferred stock and other securities with a book value of $28.1 million, were classified as "held to maturity." The net appreciation on the held to maturity portfolio, all of which was related to the obligations of states and political subdivisions, was $53.4 million as of January 1, 1994. Securities classified as held to maturity will be accounted for at cost, adjusted for the amortization of premiums and the accretion of discounts. northern trust corporation 47 Notes To Financial Statements ( continued ) The remainder of the investment portfolio was classified as "available for sale." Available for sale securities will be accounted for at fair value, with both unrealized gains and losses credited or charged, net of the tax effect, to stockholders' equity. As of January 1, 1994, the fair value of the available for sale portfolio totaled $3.4 billion, and stockholders' equity increased by $202,000, to recognize the appreciation on these securities. securities held for investment. The following tables summarize the book values, fair values and maturities of investment securities. reconciliation of book values to fair values of securities held for investment
December 31, 1993 --------------------------------------- Gross Gross Book Unrealized Unrealized Fair ( In Millions ) Value Gains Losses Value - -------------------------------------------------------- U.S. Government $2,343.7 $ 2.1 $ .2 $2,345.6 Obligations of States and Po- litical Subdi- visions 493.5 53.5 .1 546.9 Federal Agency 833.1 .5 1.8 831.8 Preferred Stock 15.5 -- -- 15.5 Other 105.0 .3 .1 105.2 - -------------------------------------------------------- Total $3,790.8 $56.4 $2.2 $3,845.0 - --------------------------------------------------------
December 31, 1992 --------------------------------------- Gross Gross Book Unrealized Unrealized Fair ( In Millions ) Value Gains Losses Value - -------------------------------------------------------- U.S. Government $1,522.8 $ 1.8 $2.8 $1,521.8 Obligations of States and Po- litical Subdi- visions 508.5 42.6 -- 551.1 Federal Agency 559.2 1.0 .1 560.1 Preferred Stock 15.4 -- -- 15.4 Other 173.6 .6 .4 173.8 - -------------------------------------------------------- Total $2,779.5 $46.0 $3.3 $2,822.2 - --------------------------------------------------------
Included in preferred stock were securities accounted for as marketable equity securities with a cost basis of $14.5 million and $14.8 million at December 31, 1993 and 1992, respectively. These securities are recorded net of unrealized losses of $.5 million and $2.0 million at December 31, 1993 and 1992, respectively. book and fair values of securities held for investment by maturity
December 31, 1993 ----------------- Book Fair ( In Millions ) Value Value - -------------------------------------------------- Due in One Year or Less $2,431.6 $2,433.4 Due After One Year Through Five Years 997.9 1,017.3 Due After Five Years Through Ten Years 231.7 253.4 Due After Ten Years 129.6 140.9 - -------------------------------------------------- Total $3,790.8 $3,845.0 - --------------------------------------------------
Asset-backed and mortgage-backed securities were included in the above table taking into account anticipated future prepayments. securities held for sale. The following tables summarize the book values, fair values and maturities of securities held for sale. reconciliation of book values to fair values of securities held for sale
December 31, 1993 ----------------------------------- Gross Gross Book Unrealized Unrealized Fair ( In Millions ) Value Gains Losses Value - ---------------------------------------------------- U.S. Government $ -- $ -- $ -- $ -- Federal Agency 77.7 .7 .2 78.2 Preferred Stock 129.2 -- -- 129.2 Other 4.7 .1 -- 4.8 - ---------------------------------------------------- Total $211.6 $ .8 $ .2 $212.2 - ----------------------------------------------------
December 31, 1992 ----------------------------------- Gross Gross Book Unrealized Unrealized Fair ( In Millions ) Value Gains Losses Value - ---------------------------------------------------- U.S. Government $227.6 $2.9 $-- $230.5 Federal Agency 46.1 -- -- 46.1 Preferred Stock 98.2 -- -- 98.2 Other 28.2 .5 -- 28.7 - ---------------------------------------------------- Total $400.1 $3.4 $-- $403.5 - ----------------------------------------------------
book and fair values of securities held for sale by maturity
December 31, 1993 ------------- Book Fair ( In Millions ) Value Value - ------------------------------------------------- Due in One Year or Less $ 11.2 $ 11.3 Due After One Year Through Five Years 25.5 25.7 Due After Five Years Through Ten Years 18.5 18.6 Due After Ten Years 156.4 156.6 - ------------------------------------------------- Total $211.6 $212.2 - -------------------------------------------------
Asset-backed and mortgage-backed securities were included in the above table taking into account anticipated future prepayments. 48 northern trust corporation 4. Loans and Leases--Amounts outstanding in selected loan categories are shown below.
December 31 ----------------- ( In Millions ) 1993 1992 - ------------------------------------------ Domestic Commercial $2,421.1 $2,409.0 Broker 249.4 336.3 Commercial Real Estate 506.5 511.2 Residential Real Estate 2,883.3 2,372.8 Consumer 617.5 505.9 Other 453.5 392.0 Lease Financing 138.4 135.2 - ------------------------------------------ Total Domestic 7,269.7 6,662.4 International 353.3 273.5 - ------------------------------------------ Total $7,623.0 $6,935.9 - ------------------------------------------
Other domestic loans includes $375.6 million at December 31, 1993, and $349.0 million at December 31, 1992 of overnight trust-related advances in connection with next day security settlements. Lease financing includes leveraged leases of $48.3 million at December 31, 1993, and $38.4 million at December 31, 1992. nonperforming assets. Presented below are outstanding amounts of nonaccrual loans and OREO. OREO is presented net of the related reserve.
December 31 ----------- ( In Millions ) 1993 1992 - ----------------------------------------------- Nonaccrual Loans Domestic -- Commercial Real Estate $ 4.8 $13.1 -- Other 21.2 53.3 International 1.3 1.9 - ----------------------------------------------- Total Nonaccrual Loans 27.3 68.3 Other Real Estate Owned, net 9.7 22.9 - ----------------------------------------------- Total Nonperforming Assets $37.0 $91.2 - -----------------------------------------------
Unfunded loan commitments and standby letters of credit issued to borrowers whose loans were classified as nonaccrual totaled $1.0 million at December 31, 1993, and $9.5 million at December 31, 1992. Interest income that would have been recorded on domestic nonaccrual loans in accordance with their original terms amounted to $3.5 million in 1993, $5.4 million in 1992 and $7.4 million in 1991, compared with amounts that were actually recorded of $1.6 million, zero and $.4 million, respectively. Interest income that would have been recorded on international nonaccrual loans in accordance with their original terms amounted to $.1 million in 1993 and 1992, and zero in 1991, compared with amounts that were actually recorded at zero in all three years. Provisions credited to the reserve for OREO were $1.5 million in 1993, $14.3 million in 1992 and $1.2 million in 1991. Losses of $2.1 million in 1993, $14.3 million in 1992 and $1.6 million in 1991 were charged to the reserve. The reserve totaled $.1 million, $.7 million and $.7 million at December 31, 1993, 1992 and 1991, respectively. In May 1993, the Financial Accounting Standards Board issued SFAS No. 114, "Accounting by Creditors for Impairment of a Loan." This new statement requires 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. This statement takes effect January 1, 1995. At this time management does not expect to apply this statement earlier. Although the expected financial impact of adopting this statement has not yet been quantified, management believes that the new accounting standard will not have a material effect on the Corporation's financial position and results of operations. 5. Reserve for Credit Losses--Changes in the reserve for credit losses were as follows.
( In Millions ) 1993 1992 1991 - ---------------------------------------------------- Balance at Beginning of Year $145.5 $145.7 $148.0 - ---------------------------------------------------- Losses Charged to Reserve: Domestic Commercial Real Estate (7.8) (4.6) (14.5) Other (15.0) (21.8) (24.0) International (.6) (6.0) -- - ---------------------------------------------------- Total Losses Charged to Re- serve (23.4) (32.4) (38.5) Recoveries Credited to Re- serve 3.9 2.7 5.2 - ---------------------------------------------------- Net Losses Charged to Re- serve (19.5) (29.7) (33.3) Provision for Credit Losses 19.5 29.5 31.0 - ---------------------------------------------------- Net Change in Reserve ---- (.2) (2.3) - ---------------------------------------------------- Balance at End of Year $145.5 $145.5 $145.7 - ----------------------------------------------------
The quality of the Corporation's loan portfolios remains sound and the reserve for credit losses is adequate to cover credit-related uncertainties as they exist today. Established credit review procedures ensure that close attention is given to commercial real estate-related loans and other commercial loans, as well as other credit exposures that might be adversely affected by significant increases in interest rates or an unexpected downturn in segments of the economies of the United States or other countries. northern trust corporation 49 Notes To Financial Statements ( continued ) 6. Buildings and Equipment--A summary of the Corporation's buildings and equipment is presented below.
December 31, 1993 ------------------------------ Original Accumulated Net Book ( In Millions ) Cost Depreciation Value - ------------------------------------------------ Land $ 23.4 $ -- $ 23.4 Buildings 79.0 35.5 43.5 Equipment 215.3 91.2 124.1 Leasehold Im- provements 51.0 16.3 34.7 Building Leased under Capital Lease (Note 7) 72.6 6.4 66.2 - ------------------------------------------------ Total $441.3 $149.4 $291.9 - ------------------------------------------------
December 31, 1992 ------------------------------ Original Accumulated Net Book ( In Millions ) Cost Depreciation Value - ------------------------------------------------ Land $ 23.4 $ -- $ 23.4 Buildings 74.5 32.9 41.6 Equipment 191.1 73.0 118.1 Leasehold Im- provements 44.9 13.5 31.4 Building Leased under Capital Lease (Note 7) 72.6 4.5 68.1 - ------------------------------------------------ Total $406.5 $123.9 $282.6 - ------------------------------------------------
The charge for depreciation amounted to $39.3 million in 1993, $34.0 million in 1992 and $30.6 million in 1991. Occupancy expense has been reduced by $1.7 million in 1993, $1.0 million in 1992 and $1.0 million in 1991 for rental income from leased premises. 7. Lease Commitments--At December 31, 1993, the Corporation was obligated under a number of noncancelable operating leases for premises and equipment used primarily for banking purposes. Certain leases contain rent escalation clauses for real estate taxes and other operating expenses and renewal option clauses calling for increased rentals. There are no restrictions imposed by any lease agreement regarding the payment of dividends, debt financing or the Corporation entering into further lease agreements. Minimum rental commitments as of December 31, 1993, for all noncancelable operating leases are as follows.
Future Minimum ( In Millions ) Lease Payments - -------------------------------------------- 1994 $ 22.7 1995 23.1 1996 21.8 1997 21.0 1998 19.8 Later Years 125.1 - -------------------------------------------- Total Minimum Lease Payments $233.5 - --------------------------------------------
Rental expense for all operating leases is included in occupancy expense and amounted to $23.5 million in 1993, $22.8 million in 1992, and $22.1 million in 1991. The Corporation leases the building and land utilized as its Chicago operations center under an agreement which qualifies as a capital lease. The long-term financing for the property was provided by the Corporation. In the event of sale or refinancing, the Corporation 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, 1993 (see Note 8).
Future Minimum Lease Payments, ( In Millions ) net - --------------------------------------------------- 1994 $ 1.1 1995 1.1 1996 1.1 1997 1.1 1998 1.1 Later Years 17.0 - --------------------------------------------------- Total Minimum Lease Payments, net 22.5 Less: Amount Representing Interest 12.0 - --------------------------------------------------- Net Present Value under Capital Lease Obligation $10.5 - ---------------------------------------------------
8. Senior Medium-Term Notes, Notes Payable and Lines of Credit-- senior medium-term notes. A summary of the Corporation's senior medium-term notes outstanding at December 31 is presented below.
( In Millions ) Rate 1993 1992 - ------------------------------------------------- Parent Company Due 1996 (a) (b) 8.65% $ 2.0 $ 2.0 The Northern Trust Com- pany Due 1993 (a) (c) 3.10-3.65 -- 200.0 Due 1994 (a) (c) 3.40-4.51 700.0 10.0 Due 1995 (a) (c) 4.95 100.0 100.0 Due 1996 (a) (c) 4.63-5.38 10.0 -- Due 1998 (a) (c) 6.29 5.0 -- - ------------------------------------------------- Total Senior Medium-Term Notes $817.0 $312.0 - -------------------------------------------------
See bottom of next table for applicable notes. 50 northern trust corporation notes payable. A summary of the Corporation's notes payable outstanding at December 31 is presented below.
(In Millions) 1993 1992 - --------------------------------------------------------- Subordinated Notes -- Parent Company 9.15% Notes due March 1998 (a) (b) $ 10.0 $ 10.0 9.20% Notes due March 1998 (a) (b) 13.0 13.0 9.00% Notes due May 1998 (a) (b) 50.0 50.0 9.00% Notes due May 2001 (a) (b) 25.0 25.0 Subordinated Notes -- The Northern Trust Company 6.50% Notes due May 2003 (a) (c) 100.0 -- - --------------------------------------------------------- Subordinated Notes Payable $198.0 $ 98.0 - --------------------------------------------------------- Other Notes Payable 9 1/8% Notes due August 1994 (a) $ 75.0 $ 75.0 8.25% ESOP Notes due December 1995 (a) (d) 2.7 2.7 8.23% ESOP Installment Notes with Final Payment due December 1998 (e) 40.6 46.9 Bank Capital Lease Obligation (f) 10.5 10.6 - --------------------------------------------------------- Other Notes Payable $128.8 $135.2 - --------------------------------------------------------- Total Notes Payable $326.8 $233.2 - --------------------------------------------------------- Notes Payable Qualifying as Risk-Based Capital $183.4 $113.0 - ---------------------------------------------------------
(a) Not redeemable prior to maturity. (b) In September 1990, the Corporation filed a shelf registration statement on Form S-3 with the SEC which permitted the Corporation to offer from time to time up to $200 million of senior and subordinated debt securities. In March 1991, the Corporation issued a total of $100 million senior and subordinated fixed rate medium-term notes under the shelf registration. In November 1993, the Corporation filed a post-effective amendment to the shelf registration to deregister the remaining $100 million notes. (c) In June 1992, The Northern Trust Company (the Bank) issued an offering circular which detailed the Bank's capability to offer from time to time unsecured and unsubordinated medium-term bank notes in an aggregate principal amount of up to $500 million. The term of each note could range from nine months to fifteen years as selected by the initial purchaser and agreed to by the Bank. In April 1993, this program was replaced by a new program whose offering circular detailed the Bank's capability to offer from time to time its senior medium-term bank notes in an aggregate principal amount of up to $1.5 billion at any one time outstanding and its subordinated medium-term bank notes in an aggregate principal amount not to exceed $100 million. Each senior note will mature from nine months to fifteen years, and each subordinated note will mature from five years to fifteen years, following its date of original issuance, as selected by the initial purchaser and agreed to by the Bank. (d) Notes are related to the contribution of 180,000 common shares to the ESOP trust. (e) Notes were issued directly by the ESOP trust in order to finance the purchase of 4,320,000 common shares. The Corporation unconditionally guarantees the payment of principal, premium, if any, and interest. The interest rate is subject to adjustment in the event of certain tax law changes affecting ESOP plans. (f) Refer to Note 7. lines of credit. The Corporation currently maintains commercial paper back-up facility lines of credit with four unaffiliated banks totaling $50 million. The facility is renewable every six months and requires the payment of an annual commitment fee equal to 1/8 of 1% of the commitment. There were no borrowings under commercial paper back-up facilities during 1993 or 1992. 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 is authorized to fix the particular preferences, rights, qualifications and restrictions for each series of preferred stock issued. series c--In 1987, the Corporation issued 600 shares of Auction Rate Preferred Stock (APS) Series C, with a $100,000 per share stated value. Dividends on the shares of APS are cumulative. Rates are determined every 49 days by Dutch auction unless the Corporation fails to pay a dividend or redeem any shares for which it has given notice of redemption, in which case the dividend rate will be set at 175% of the 60-day "AA" Composite Commercial Paper Rate. The dividend rate in any auction will not exceed a percentage determined by the prevailing credit rating of the APS. The current maximum dividend rate is 120% of the 60-day "AA" Composite Commercial Paper Rate. The average rate for this issue as declared during 1993 was 2.68%. The shares of APS are redeemable at the option of the Corporation, in whole or in part, on any Dividend Payment Date at $100,000 per share, plus accrued and unpaid dividends. series d--In 1990, the Corporation issued 600 shares of Flexible Auction Rate Cumulative Preferred Stock, Series D (FAPS) 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 1993 was 2.65%. The shares of FAPS are redeemable at the option of the Corporation, in whole or in part, at $100,000 per share plus accrued and unpaid dividends. series e--In February 1992, the Corporation issued $50 million of 6.25% Cumulative Convertible Preferred Stock, Series E, sold to the public in the form of 1,000,000 Depositary Shares, each representing one-twentieth of a share of the Series E Preferred Stock. The stated value of the Preferred Stock is $1,000 per share and the proportionate liquidation preference of each Depositary Share is $50. The Preferred Stock has no preemptive rights, is not subject to any sinking fund or other obligation of the Corporation to repurchase or retire the Stock, and except in certain specified cases has no voting rights. The Preferred Stock has priority over common stock as to dividends and liquidation rights. northern trust corporation 51 Notes To Financial Statements ( continued ) The preferred stock is convertible at any time into shares of common at a conversion price of $41.50 (equivalent to approximately 1.2048 shares of common stock per Depositary Share), subject to adjustment in certain events. The Preferred Stock is not redeemable prior to February 15, 1995. Thereafter, the Preferred Stock may be redeemed, subject to the approval of the Federal Reserve Board, at specified redemption prices beginning with $52.1875 on February 15, 1995 and decreasing on a pro rata basis each February 15 to $50.00 per Depositary Share on or after February 15, 2002, plus accrued and unpaid dividends. preferred stock purchase rights. In 1989, the Board of Directors of the Corporation declared a dividend distribution of one Preferred Stock Purchase Right on each outstanding share of the Corporation's common stock to the stockholders of record on October 31, 1989. The Rights are subject to anti- dilution provisions, and each Right is now exercisable for one-third of one- hundredth of a share of Series A Junior Participating Preferred Stock at an exercise price of $83.33 for each such fractional share. The Rights are evidenced by the common stock certificates and 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 Corporation's 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's 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 common stock of the surviving company 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 Corporation's voting power by a person or group. Unless earlier redeemed, the Rights will expire on October 31, 1999. common stock. In November 1992 the Corporation declared a three-for-two split of the common stock of the Corporation, to be effected by means of a 50% stock distribution. One share for each two shares held by shareholders of record on November 30, 1992, was distributed on December 9, 1992. An analysis of changes in the number of shares of common stock outstanding follows. common stock outstanding
1993 1992 1991 - --------------------------------------------------------------- Balance at January 1 52,831,844 34,497,869 33,935,732 Distribution of Three-for- Two Stock Split -- 17,248,935 -- Employee Benefit Plans: Incentive Plan and Awards 149,300 133,350 28,667 Stock Options Exercised 388,298 1,092,964 583,214 Other -- -- 6,000 Purchases of Treasury Stock (76,475) (141,274) (55,744) - --------------------------------------------------------------- Balance at December 31 53,292,967 52,831,844 34,497,869 - ---------------------------------------------------------------
10. Income Taxes--The table below reconciles the total income tax provision recorded in the consolidated financial statements with the amount computed at the applicable statutory federal tax rates of 35% in 1993 and 34% in 1992 and 1991.
Income Tax Provision ---------------------- ( In Millions ) 1993 1992 1991 - --------------------------------------------------- Tax at Statutory Rate $ 81.9 $ 70.2 $ 55.6 Tax-Exempt Income (15.8) (16.4) (17.9) Other, net -- 3.2 (1.5) - --------------------------------------------------- Provision for Income Taxes $ 66.1 $ 57.0 $ 36.2 - ---------------------------------------------------
The components of the consolidated income tax provision for each of the three years ended December 31, are as follows.
( In Millions ) 1993 1992 1991 - ------------------------------------------------- Current Tax Provision (Bene- fit) Federal $42.4 $38.8 $25.6 State (.6) 4.2 2.3 Foreign 2.9 .4 1.6 - ------------------------------------------------- Total 44.7 43.4 29.5 - ------------------------------------------------- Deferred Tax Provision Federal 19.2 12.2 6.0 State 2.2 1.4 .7 - ------------------------------------------------- Total 21.4 13.6 6.7 - ------------------------------------------------- Provision for Income Taxes $66.1 $57.0 $36.2 - -------------------------------------------------
Not included in the above table, but charged or (credited) directly to stockholders' equity, or goodwill in connection with the adoption of SFAS No. 109, are the tax effects of the following transactions.
( In Millions ) 1993 1992 1991 - ----------------------------------------------------------------- Current Tax Benefit for Stock Incentive Plans, Awards and Other Employee Benefits $(4.5) $(9.0) $(3.9) Deferred Tax Liability (Benefit) Related to: Reserve for Marketable Equity Securities .5 1.6 .8 Unfunded Pension Liability .3 (.2) (.1) Reduction of Purchased Goodwill (.3) -- -- - ----------------------------------------------------------------- Total $(4.0) $(7.6) $(3.2) - -----------------------------------------------------------------
52 northern trust corporation Deferred taxes result from temporary differences between the amounts reported in the financial statements and the tax bases of assets and liabilities. Deferred tax liabilities and assets have been computed based on the applicable statutory federal tax rates of 35% at December 31, 1993 and 34% at December 31, 1992, as follows.
December 31 ----------- ( In Millions ) 1993 1992 - ------------------------------------------- Deferred Tax Liabilities Lease Financing $39.2 $32.9 Software Development 27.6 17.1 Accumulated Depreciation 8.3 6.7 Foreign Equity Investments 1.0 4.3 Other Liabilities 6.3 5.5 - ------------------------------------------- Gross Deferred Tax Liabilities $82.4 $66.5 - ------------------------------------------- Deferred Tax Assets Reserve for Credit Losses 50.9 49.4 Loan Fees 5.5 5.7 Leased Facilities 6.3 5.2 AMT Credit Carryforward -- 5.4 Other Assets 3.8 6.8 - ------------------------------------------- Gross Deferred Tax Assets $66.5 $72.5 Valuation Reserve -- -- - ------------------------------------------- Deferred Tax Assets, net of Valuation Reserve $66.5 $72.5 - ------------------------------------------- Net Deferred Tax Liabilities (Assets) $15.9 $(6.0) - -------------------------------------------
11. Earnings Per Common Share Computations--Primary earnings per common share is computed by dividing net income, after deduction of the preferred stock dividends, by the daily average number of common and common equivalent shares outstanding. Common equivalent shares are based on outstanding stock options and common stock awards under the 1992 and the Amended Incentive Stock Plans. Fully diluted earnings per common share in 1993 and 1992 assume, in addition to the above, the conversion of the Series E Cumulative Convertible Preferred Stock. 12. Restrictions on Subsidiary Dividends and Loans or Advances--Provisions of state and federal banking laws restrict the amount of dividends that can be paid to the Corporation by its banking subsidiaries. Under applicable state and federal laws, no dividends may be paid in an amount greater than the net profits then on hand, reduced by certain loan losses (as defined in the applicable statute). In addition, for each of the Corporation's Federal Reserve member banking subsidiaries, prior approval of federal banking authorities is required if dividends declared by a subsidiary bank in any calendar year will exceed its net profits (as defined) for that year, combined with its retained profits for the preceding two years. Based on these regulations, the Corporation's banking subsidiaries, without regulatory approval, could declare dividends during 1994 equal to their 1994 eligible net profits (as defined) plus $170.6 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 $49.0 million in 1993, $49.7 million in 1992 and $40.4 million in 1991. Net foreign exchange revenues including trading, hedge and translation gains or losses were $32.1 million in 1993, $21.8 million in 1992 and $16.1 million in 1991, and included foreign exchange trading profits of $32.4 million, $21.9 million and $16.3 million in 1993, 1992 and 1991, respectively. northern trust corporation 53 Notes To Financial Statements ( continued ) 14. Pension and Other Employee Benefits-- pension. The following tables set forth the status and the net periodic pension cost of the Corporation's domestic qualified and nonqualified pension benefit plans for 1993 and 1992. 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
Nonqualified Qualified Plan Plan ---------------- -------------- September 30 -------------------------------- ( Amounts in Millions ) 1993 1992 1993 1992 - --------------------------------------------------- Actuarial Present Value of Benefit Obligation: Vested Benefit Obligation $ 108.7 $ 86.9 $11.7 $ 9.9 - --------------------------------------------------- Accumulated Benefit Obligation $ 127.3 $102.0 $13.3 $10.4 - --------------------------------------------------- Projected Benefit Obligation for Service Rendered to Date $ 168.9 $155.5 $20.1 $17.2 Plan Assets at Fair Value 168.3 148.0 -- -- - --------------------------------------------------- Plan Assets Less Than Projected Benefit Obligation (.6) (7.5) (20.1) (17.2) Unrecognized Net Asset (Established January 1, 1986) (9.3) (10.9) (.4) (.5) Unrecognized Net Loss 34.8 35.8 7.4 8.8 Unrecognized Prior Service Cost 1.4 6.1 5.0 .7 Valuation Adjustment (.5) (.5) -- -- - --------------------------------------------------- Prepaid (Accrued) Pension Cost at September 30 25.8 23.0 (8.1) (8.2) - --------------------------------------------------- Net (Expense) Funding October to December 2.6 (1.6) .7 1.4 Additional Minimum Liability at December 31 -- -- (4.5) (1.5) - --------------------------------------------------- Prepaid (Accrued) Pension Cost at December 31 $ 28.4 $ 21.4 $(11.9) $ (8.3) - --------------------------------------------------- Assumptions: Discount Rates 7.00% 7.25% 6.75% 6.75% Rate of Increase in Compensation Level 5.00 5.50 5.00 5.50 Expected Long- Term Rate of Return on Assets 9.50 10.00 N/A N/A - ---------------------------------------------------
net periodic pension cost
Nonqualified Qualified Plan Plan ---------------- ------------- ( In Millions ) 1993 1992 1993 1992 - -------------------------------------------------- Net Pension Cost Included the Following Components: Service Cost Benefits Earned During the Period $ 10.2 $ 8.6 $1.0 $1.2 Interest Cost on Projected Benefit Obligation 11.0 9.7 1.1 1.0 Actual Return on Plan Assets (20.4) (10.6) -- -- Net Amortization and Deferral 6.4 (1.3) .6 .5 - -------------------------------------------------- Net Periodic Pension Cost $ 7.2 $ 6.4 $2.7 $2.7 - --------------------------------------------------
Pension expense for 1991 was $5.1 million and $2.2 million for the qualified and nonqualified plans, respectively. In 1993 a settlement loss of $1.7 million was recognized due to payments from the Nonqualified Plan, and is included in other operating expenses in the statement of income. The Corporation also maintains pension plans for its London Branch employees. At December 31, 1993, the fair value of assets and the projected benefit obligation totaled approximately $5.5 million and $6.0 million, respectively. At December 31, 1992, the fair value of assets and the projected benefit obligation were $5.4 million and $5.5 million, respectively. Pension expense for 1993 and 1992 was $.7 million in both years. thrift incentive plan. Total expenses associated with the Thrift Incentive Plan amounted to $9.9 million in 1993, $8.7 million in 1992 and $8.1 million in 1991. "rabbi" trust. Total assets in the Corporation's "Rabbi" Trust related to the nonqualified pension plan at December 31, 1993, December 31, 1992 and December 31, 1991 amounted to $9.4 million, $12.8 million and $11.1 million, respectively. esop. The following table presents information related to the Employee Stock Ownership Plan (ESOP).
(In Millions) 1993 1992 - -------------------------------------------------- Total ESOP Compensation Expense $4.3 $3.8 Interest Incurred on ESOP-Related Debt 3.9 4.4 Amount Contributed to ESOP-Related Debt 8.2 8.2 Dividends and Interest on Unallocated ESOP Shares Used for Debt Service 2.1 2.1 - --------------------------------------------------
other postretirement benefits. The following tables set forth the status and the net periodic postretirement benefit cost of the Corporation's postretirement health care plan for 1993. The transition obligation at January 1, 1993 will be amortized to expense over a twenty year period. plan status
Health ( In Millions ) Plan - ------------------------------------------------------------ Accumulated Postretirement Benefit Obligation (APBO) Measured at September 30, 1993 Retirees and dependents $15.3 Actives eligible for benefits 4.5 Actives not yet eligible 15.1 - ------------------------------------------------------------ Total APBO 34.9 Less: Unamortized Transition Obligation 26.6 Less: Unrecognized Net Loss 5.1 - ------------------------------------------------------------ Net Postretirement Benefit Liability $ 3.2 - ------------------------------------------------------------
net periodic postretirement benefit cost
( In Millions ) 1993 - ---------------------------------------------- Service Cost $1.2 Interest Cost 2.2 Amortization of Transition Obligation 1.4 - ---------------------------------------------- Net Periodic Postretirement Benefit Cost $4.8 - ----------------------------------------------
Payments for postretirement health care totaled $1.6 million in 1993. Postretirement health care expense for 1992 and 1991 54 northern trust corporation under the previous method of accounting was $2.0 million and $1.6 million, respectively. For measurement purposes, an 11.2 percent annual increase in the cost of covered health care benefits was assumed for 1994. 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, 1993 by approximately $4.9 million, and the aggregate of the service and interest cost components of the 1993 net periodic postretirement benefit cost by $.6 million. The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 7.25 percent at December 31, 1993. postemployment benefits. In November 1992, the FASB issued SFAS No. 112, "Employers' Accounting for Postemployment Benefits." The new statement requires employers to adopt accrual accounting for workers compensation, disability, severance and other benefits provided after employment but before retirement. The statement takes effect January 1, 1994 and requires employers to immediately recognize their liability for postemployment benefits as of that date. Since the Corporation's current accounting policies are essentially in compliance with the requirements of this statement, the adoption of SFAS No. 112 will not have a material impact on the results of operations. 15. Contingent Liabilities--Because of the nature of its activities, the Corporation is subject to pending and threatened legal actions that arise in the normal course of business. In the judgment of management, after consultation with Corporation's counsel, none of the litigation to which the parent company or any of its subsidiaries is a party will have a material effect, either individually or in the aggregate, on the financial position or results of operations of the Corporation. 16. Off-Balance Sheet Financial Instruments-- a. commitments and letters of credit. The Corporation, in the normal course of business, enters into various types of commitments and issues letters of credit in order to meet the liquidity and credit enhancement needs of its clients. Credit risk is the principal risk associated with these instruments. The contractual amounts of these instruments represent the credit risk should the instrument be fully drawn upon and the client default. In order to control the credit risk associated with entering into commitments and issuing letters of credit, the Corporation subjects such activity to the same credit quality and monitoring controls as its lending activities. Commitments and letters of credit consist of the following: Legally Binding Commitments to Extend Credit generally have fixed expiration dates or other termination clauses. Since a significant portion of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future loans or liquidity requirements. Commitments to Place Money Market Assets are unsettled placements of Eurodollar deposits. Such placements generally take two business days to settle. Participations in Bankers Acceptances obligate the Corporation, in the event of default by the counterparty, to reimburse the holder of the acceptance an amount equal to the Corporation's participation in the acceptance. Commercial Letters of Credit are instruments issued by the Corporation 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 the Corporation 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 the Corporation's commitments and letters of credit. commitments and letters of credit
December 31 ----------------- ( In Millions ) 1993 1992 - -------------------------------------------------- Legally Binding Commitments to Extend Credit $6,184.8 $5,842.0 Commitments to Place Money Mar- ket Assets 308.4 300.1 Participations in Bankers Ac- ceptances 7.5 15.8 Commercial Letters of Credit 205.3 122.7 Standby Letters of Credit: Corporate $ 376.0 $ 362.0 Industrial Revenue 239.6 288.9 Other 211.8 102.3 - -------------------------------------------------- Total Standby Letters of Cred- it* $ 827.4 $ 753.2 - --------------------------------------------------
*These amounts include $85.4 million and $92.0 million of standby letters of credit secured by cash deposits or participated to others as of December 31, 1993 and 1992, respectively. The weighted average maturity of standby letters of credit was 16 months at December 31, 1993 and 17 months at December 31, 1992. b. risk management instruments. These instruments include foreign exchange contracts and various interest risk management instruments. The Corporation 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. northern trust corporation 55 Notes To Financial Statements ( continued ) The Corporation mitigates this risk by establishing limits for risk management positions, monitoring the level of actual positions taken against such established limits, monitoring the level of any interest rate sensitivity gaps created by such positions, and by using hedging techniques. When establishing position limits, the Corporation takes into account market liquidity and volatility, as well as its experience in each market. The estimated credit risk associated with these instruments relates to the failure of the counterparty to pay based on the contractual terms of the agreement, and is generally limited to the gross unrealized market value gains on these instruments. The amount of credit risk will increase or decrease during the life of the instruments as interest and foreign exchange rates fluctuate. This risk is controlled by limiting such activity to an approved list of counterparties and by subjecting such activity to the same credit and quality controls as are followed in lending and investment activities. Risk management instruments include: Foreign Exchange Contracts are agreements to exchange specific amounts of currencies at a future date, at a specified rate of exchange. The Corporation enters into foreign exchange contracts primarily to meet the foreign exchange risk management needs of clients. Foreign exchange contracts are also used for trading purposes and to decrease the Corporation's exposure to fluctuations in the dollar value of foreign currencies. Interest Rate Futures Contracts are contracts for delayed delivery of securities or money market instruments in which the buyer agrees to take delivery at a specified future date of a specified instrument, at a specified price or yield. All of the Corporation's interest rate futures contracts are traded on organized exchanges that require the daily settlement of margin payments. Interest rate futures contracts are utilized in trading activities and asset/liability management to manage the Corporation's exposure to fluctuating interest rates. Interest Rate Protection products are sold by the Corporation to enable clients to transfer, modify or reduce their interest rate risk. As a seller of interest rate protection, the Corporation receives a fee at the outset of the agreement and then assumes the risk of an unfavorable change in interest rates. Interest Rate Swap Transactions involve the exchange of fixed and floating rate interest payment obligations without the exchange of the underlying principal amounts. Commitments to Accept Money Market Deposits represent a promise to pay a specified fixed rate on funds that will be deposited at some point in the future. The following table shows the contractual/notional amounts of risk management instruments. risk management instruments
Contractual/Notional Amounts* December 31 ------------------------------ ( In Millions ) 1993 1992 - -------------------------------------------------- Foreign Exchange Contracts $10,190.5 $6,425.0 Interest Rate Futures Contracts Purchased 3.0 6.0 Sold 312.0 138.0 Interest Rate Pro- tection Contracts Purchased 51.2 64.0 Sold 51.8 57.6 Interest Rate Swaps Asset/Liability Management 1,352.3 790.2 Client-Related and Other 357.8 595.0 Commitments to Ac- cept Money Market Deposits 209.1 78.1 - --------------------------------------------------
*The notional amounts of risk management instruments do not represent credit risk, and are not recorded in the consolidated statement of condition. They are used merely to express the volume of this activity. Gross unrealized gains and losses on open risk management instruments used for trading purposes are generally recorded on a net basis in the consolidated statement of condition. These amounts represent the estimated fair values of these instruments.
December 31 ------------ ( In Millions ) 1993 1992 - -------------------------------------------------- Gross Unrealized Gains Interest Risk Management Instruments $ 9.5 $ 15.1 Foreign Exchange Contracts 89.3 115.2 Gross Unrealized Losses Interest Risk Management Instruments 10.1 16.4 Foreign Exchange Contracts 90.4 122.9 - --------------------------------------------------
The credit risk on interest risk management instruments used for hedging purposes, which represents the accrued receivable included in the statement of condition, totaled $5.7 million and $2.4 million as of December 31, 1993 and 1992, respectively. Consistent with banking industry practice, the Corporation currently records recognized gains and losses on foreign exchange contracts, interest rate swaps, and interest rate protection contracts in the statement of condition on a net basis. As a result of FASB Interpretation No. 39, "Offsetting of Amounts Related to Certain Contracts," which was issued in March 1992, beginning in 1994 the Corporation will be required to record these recognized gains as assets and recognized losses as liabilities. Unrealized gains and losses on multiple contracts may continue to be shown on a net basis only when the contracts are executed with the same counterparty and a legally enforceable master netting agreement is in place. c. other off-balance sheet financial instruments. As part of the Corporation's securities custody activities and at the direction of trust clients the Corporation lends securities owned by clients to borrowers who are reviewed by the Corporation's Credit Policy Credit Approval Committee. In connection with these activities, the Corporation 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 56 northern trust corporation 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, 1993 and 1992 subject to indemnification was $4.7 billion and $3.5 billion, respectively. The estimated credit risk associated with this activity was zero, as all securities borrowed were collateralized in excess of 100 percent of their current fair value as of December 31, 1993 and 1992. 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. The Bank 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 organiza- tions, the Bank could be responsible for a pro rata share of certain credit-re- lated 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. The Bank's 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, 1993 and 1992 was $66 million and $93 million, respectively, based on the clearing volume for those days. Controls related to these clearing transactions are closely monitored, however, to protect the as- sets of the Bank. 17. Concentrations of Credit Risk--The information in the section titled Loans and Other Extensions of Credit found on pages 31 through 33 is incorporatedby reference. 18. Pledged and Restricted Assets--Certain of the Corporation's subsidiaries are required to pledge assets to secure public and trust deposits and for other purposes as required or permitted by law. On December 31, 1993, securities and loans totaling $3.6 billion ($2.1 billion of U.S. Government and agency securities, $284.1 million of obligations of states and political subdivisions and $1.2 billion of loans and other securities), were pledged. Collateral required for these purposes totaled $2.8 billion. Deposits required to be maintained at the Federal Reserve Bank averaged $306.0 million in 1993 and $208.0 million in 1992. 19. Incentive Plans and Awards-- 1992 incentive stock plan and amended incentive stock plan (plans). As of December 31, 1993, shares available for future grants under the Plans totaled 2,453,300. Stock options granted under the Plans during 1993 and 1992 are summarized below.
Outstanding Options --------------------------- Shares Option Price - ------------------------------------------------------------- Outstanding at December 31, 1991 3,987,854 $ 6.74 to 31.00 - ------------------------------------------------------------- Cancelled during 1992 (6,000) $31.00 Exercised during 1992 (1,092,965) 6.74 to 31.00 Granted during 1992 593,250 37.83 to 39.25 - ------------------------------------------------------------- Outstanding at December 31, 1992 3,482,139 $ 6.74 to 39.25 - ------------------------------------------------------------- Cancelled during 1993 (8,250) $39.25 Exercised during 1993 (388,298) 6.74 to 39.25 Granted during 1993 551,700 39.75 to 41.63 - ------------------------------------------------------------- outstanding at december 31, 1993 3,637,291 $ 6.74 TO 41.63 - ------------------------------------------------------------- Exercisable at December 31, 1992 2,888,889 $ 6.74 to 31.00 - ------------------------------------------------------------- exercisable at december 31, 1993 3,085,591 $ 6.74 TO 39.25 - -------------------------------------------------------------
As of December 31, 1993, 294,000 shares of stock have been credited to performance share accounts associated with the stock awards under the Plans. At December 31, 1993, 382,668 shares had been awarded, subject to vesting conditions, for three year performance periods ending in 1993 through 1995. Total salary expense applicable to the stock awards was $6.3 million in 1993 and $6.0 million in 1992 and 1991. performance incentive plans. Expense related to performance incentive plans is included in salary expense and totaled $29.3 million in 1993, $27.1 million in 1992 and $21.4 million in 1991. 20. International Operations (based on obligor's domicile)--The Corporation's international activities are centered in the commercial banking, capital markets and global custody businesses of The Northern Trust Company, Chicago, two overseas branches, one Edge Act subsidiary and the International Department of the Northern Trust Bank of Florida N.A. (Miami bank). Total assets employed in international operations were $2.7 billion on December 31, 1993, $2.2 billion on December 31, 1992 and $1.7 billion on December 31, 1991. Of these assets, $1.5 billion on both December 31, 1993 and December 31, 1992, and $924.3 million on December 31, 1991, were employed in Europe. Net income from international operations includes the direct net income contributions of foreign branches and the Edge Act subsidiary. The Northern Trust Company, Chicago, and Miami bank international profit contributions include direct salary and other expenses of the business units plus expense allocations for interest, occupancy, overhead and the provision for credit losses. The interest expense is allocated to international operations based on specifically matched or pooled funding. Allocations of indirect noninterest expenses related to international activities are not significant but, when made, are based on various methods such as time, space and number of employees. northern trust corporation 57 Notes To Financial Statements ( continued ) The tables below summarize international performance based on the domicile of the primary obligor without regard to guarantors or the location of collateral. geographic distribution of selected assets
December 31, 1993 December 31, 1992 December 31, 1991 ---------------------------------- ---------------------------------- ---------------------------------- Time Other Time Other Time Other Deposits Money Customers' Deposits Money Customers' Deposits Money Customers' ( In with Market Acceptance with Market Acceptance with Market Acceptance Millions ) Banks Assets Loans Liability Banks Assets Loans Liability Banks Assets Loans Liability - ----------------------------------------------------------------------------------------------------------------------- Europe $1,129.2 $ -- $184.7 $ .1 $1,333.4 $15.0 $124.6 $ .1 $ 678.6 $2.8 $182.5 $ .2 North America 557.5 -- 44.7 -- 295.2 -- 28.6 -- 287.0 -- 6.2 -- Latin America 177.3 .7 116.1* 3.9 112.0 1.1 110.2* 3.6 10.0 -- 103.3* 2.5 Asia-Pacific 226.2 -- 7.8 .3 118.8 2.0 10.1 .2 280.0 -- 16.1 .1 - ----------------------------------------------------------------------------------------------------------------------- Total $2,090.2 $ .7 $353.3 $4.3 $1,859.4 $18.1 $273.5 $3.9 $1,255.6 $2.8 $308.1 $2.8 - -----------------------------------------------------------------------------------------------------------------------
* Includes loans guaranteed by the Export Import Bank of $85.8 million in 1993, $57.6 million in 1992 and $54.9 million in 1991. The majority of the remaining loans are trade-related. geographic distribution of operating performance
1993 1992 1991 ----------------------- ----------------------- ----------------------- Gross Income Gross Income Gross Income ( In Operating before Net Operating before Net Operating before Net Millions ) Income Taxes Income Income Taxes Income Income Taxes Income - -------------------------------------------------------------------------------------- Europe $105.7 $11.2 $ 7.1 $106.6 $ 7.9 $5.0 $ 84.1 $ 7.5 $ 4.3 North America 68.2 4.7 2.9 58.5 2.8 1.9 36.4 5.9 3.2 Latin America 46.8 4.8 3.0 34.5 4.1 2.5 17.2 2.5 2.7 Asia-Pacific 20.9 3.1 1.9 7.9 .5 .3 31.4 3.8 2.3 - -------------------------------------------------------------------------------------- Total $241.6 $23.8 $14.9 $207.5 $15.3 $9.7 $169.1 $19.7 $12.5 - --------------------------------------------------------------------------------------
21. Acquisitions--On January 31, 1992, Northern Trust Corporation and its subsidiary Northern Trust Bank of California N.A. completed the acquisition of a portion of the trust business assets (approximately $4 billion of assets under administration) of Trust Services of America, Inc., for a purchase price of $47.5 million. The transaction resulted in goodwill of $21.1 million to be amortized on a straight-line basis over fifteen years. In June 1991, the Corporation acquired Tri-Valley National Bank in Dublin, California for $4.1 million. The acquisition was accounted for under the purchase method and resulted in goodwill of $.8 million to be amortized on a straight-line basis over fifteen years. Upon completion of the acquisition, the bank was merged with Northern Trust Bank of California N.A. In December 1993, the Corporation announced a definitive agreement to acquire Beach One Financial Services, Inc., parent company of The Beach Bank of Vero Beach (Florida). Beach One's assets totaled $218.2 million at December 31, 1993 and net income totaled $2.9 million in 1993. The acquisition agreement calls for Beach One shareholders to receive Northern Trust Corporation Common Stock aggregating $56.2 million with the exchange ratio set on the basis of the average last-sale prices for Northern Common Stock on the NASDAQ National Market System over a 20-day trading period ending just prior to closing. The maximum number of shares Northern is required to issue without further approval of directors is 1,701,515, equivalent to a formula price of $33 per share. The minimum number of shares Beach One holders are required to accept is 1,169,791, equivalent to a formula price of $48 per share. The agreement is subject to the approval of Beach One shareholders and to various regulatory approvals and other legal requirements. The acquisition is expected to close in the third quarter of 1994. The Corporation expects to account for this transaction as a pooling-of-interests. In December 1993, the Corporation signed a definitive agreement to acquire Hazlehurst & Associates, Inc., a privately-held retirement benefit plan services company. As of December 31, 1993, Hazlehurst had total assets of $9.5 million and pretax net income in 1993 of $1.5 million. The acquisition agreement calls for Hazlehurst shareholders to receive Northern Trust Corporation Common Stock aggregating $22.5 million with the exchange ratio set on the basis of the average last-sale prices for Northern Common Stock on the NASDAQ National Market System over a 20-day trading period ending just prior to closing. Under the terms of the agreement, Northern will issue a maximum of 681,818 shares, equivalent to a formula price of $33 per share. The minimum number of shares Hazlehurst holders are required to accept is 468,750, equivalent to a formula price of $48 per share. The agreement is subject to the approval of Hazlehurst shareholders, to regulatory approval and other legal requirements. The acquisition is expected to close in the second quarter of 1994. The Corporation expects to account for this transaction as a pooling-of- interests. 58 northern trust corporation 22. Parent Company--Condensed financial information of Northern Trust Corporation, the Parent Company, is presented below. Investments in wholly- owned subsidiaries are carried on the equity method of accounting. statement of condition
December 31 ----------------- ( In Millions ) 1993 1992 - -------------------------------------------------- assets Cash on Deposit with Subsidiary Bank $ .1 $ .3 Investment Securities - Held for Investment 15.5 19.8 - - Held for Sale 129.2 98.2 Time Deposits with Banks-Inter- national 158.7 29.0 Investments in Wholly-Owned Subsidiaries Bank Subsidiaries 1,021.4 933.1 Nonbank Subsidiaries 22.0 19.8 Loans Bank Subsidiaries 75.0 200.0 Nonbank Subsidiaries 10.9 8.0 Other 26.9 27.0 Buildings and Equipment 6.2 6.0 Other Assets 51.5 46.0 - -------------------------------------------------- Total Assets $1,517.4 $1,387.2 - -------------------------------------------------- liabilities Notes Payable $ 218.3 $ 224.6 Commercial Paper 124.1 127.0 Other Liabilities 23.3 25.1 - -------------------------------------------------- Total Liabilities 365.7 376.7 Stockholders' Equity 1,151.7 1,010.5 - -------------------------------------------------- Total Liabilities and Stock- holders' Equity $1,517.4 $1,387.2 - --------------------------------------------------
statement of income
For the Year Ended December 31 ---------------------- ( In Millions ) 1993 1992 1991 - ---------------------------------------------------- operating income Dividends Bank Subsidiaries $ 86.7 $ 68.3 $ 52.5 Nonbank Subsidiaries .6 .5 5.5 Intercompany Interest and Other Charges 15.2 14.6 10.8 Interest and Other Income 6.9 8.5 15.0 - ---------------------------------------------------- Total Operating Income 109.4 91.9 83.8 - ---------------------------------------------------- Operating Expenses Interest Expense 22.1 25.0 27.5 Other Operating Expenses 12.2 5.0 2.5 - ---------------------------------------------------- Total Operating Expenses 34.3 30.0 30.0 - ---------------------------------------------------- Income before Income Taxes and Equity in Undistributed Net Income of Subsidiaries 75.1 61.9 53.8 Benefit for Income Taxes (6.8) (5.4) (5.1) - ---------------------------------------------------- Income before Equity in Un- distributed Net Income of Subsidiaries 81.9 67.3 58.9 Equity in Undistributed Net Income (Loss) of Subsidi- aries Bank Subsidiaries 83.0 79.2 72.0 Nonbank Subsidiaries 3.0 3.0 (3.5) - ---------------------------------------------------- net income $167.9 $149.5 $127.4 - ---------------------------------------------------- Net Income Applicable to Common Stock $161.6 $142.7 $121.4 - ----------------------------------------------------
statement of cash flows
For the Year Ended December 31 ------------------------- ( In Millions ) 1993 1992 1991 - --------------------------------------------------- operating activities: Net Income $ 167.9 $ 149.5 $ 127.4 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Equity in Undistributed Net Income of Subsidiaries (86.0) (82.2) (68.5) Decrease in Accrued Income .3 .4 .6 (Increase) Decrease in Prepaid Expenses .2 .6 (.8) Other Noncash, net (1.6) 2.3 (6.4) - --------------------------------------------------- Net Cash Provided by Operating Activities 80.8 70.6 52.3 - --------------------------------------------------- investing activities: Purchases of Investment Securities (106.1) (197.7) (149.5) Sales of Investment Securities 62.3 163.8 144.2 Proceeds from Maturity and Redemption of Investment Securities 18.4 72.1 38.5 Net (Increase) Decrease in Time Deposits with Banks (129.7) 78.9 (106.1) Capital Investments in Subsidiaries (4.0) (52.5) (10.0) Net (Increase) Decrease in Loans to Subsidiaries 122.1 (125.7) (24.9) Net (Increase) Decrease in Other Loans .2 .2 (2.2) Other, net (2.0) (.9) (.1) - --------------------------------------------------- Net Cash Used in Investing Activities (38.8) (61.8) (110.1) - --------------------------------------------------- financing activities: Net Decrease in Commercial Paper (2.9) (2.4) (14.3) Proceeds from Notes Payable -- -- 100.0 Repayment of Notes Payable (6.3) (30.9) (5.3) Treasury Stock Purchased (2.2) (2.5) (.2) Cash Dividends Paid on Common and Preferred Stock (45.8) (39.5) (35.4) Proceeds from Preferred Stock Issued -- 48.5 -- Net Proceeds from Stock Options 4.0 11.7 7.5 Other, net 11.0 6.4 5.5 - --------------------------------------------------- Net Cash Provided by (Used in) Financing Activities (42.2) (8.7) 57.8 - --------------------------------------------------- Net Change in Cash on Deposit with Subsidiary Bank (.2) .1 -- Cash on Deposit with Subsidiary Bank at Beginning of Year .3 .2 .2 - --------------------------------------------------- cash on deposit with subsidiary bank at end of year $ .1 $ .3 $ .2 - ---------------------------------------------------
23. Potential Sale of Investment--For information regarding the potential sale of the Corporation's 21% investment in Banque Scandinave en Suisse, refer to the last paragraph in the section titled Capital found on page 39 which is incorporated herein by reference. northern trust corporation 59 Report of Independent Public Accountants to the stockholders and board of directors, northern trust corporation: We have audited the accompanying consolidated statement of condition of Northern Trust Corporation (a Delaware Corporation) and subsidiaries as of December 31, 1993 and 1992, 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, 1993. 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, 1993 and 1992, and the results of their operations and their cash flows for the three years in the period ended December 31, 1993 in conformity with generally accepted accounting principles. Arthur Andersen & Co. Chicago, Illinois, January 18, 1994. 60 northern trust corporation consolidated financial statistics Average Statement of Condition
( Amounts in Millions ) 1993 1992 1991 1990 1989 1988 - ------------------------------------------------------------------------------------------------------------------- assets Cash and Due from Banks $ 1,025.3 $ 937.8 $ 839.9 $ 815.9 $ 805.9 $ 811.6 Investment Securities - Held for Investment U.S. Government and Other 3,498.9 2,658.1 1,933.9 1,829.0 2,259.6 1,601.4 Obligations of States and Political Subdivisions 502.3 516.0 533.8 510.6 432.8 361.4 - ------------------------------------------------------------------------------------------------------------------- Total Investment Securities - Held for Invest- ment 4,001.2 3,174.1 2,467.7 2,339.6 2,692.4 1,962.8 - ------------------------------------------------------------------------------------------------------------------- Investment Securities - Held for Sale 201.3 -- -- -- -- -- Securities Held for Trading 29.5 16.2 32.1 57.0 145.2 164.4 Money Market Assets Federal Funds Sold and Repurchase Agreements 171.3 237.8 304.8 285.6 280.0 379.5 Time Deposits with Banks - Domestic .1 1.9 7.9 23.4 48.4 88.5 - International 1,956.7 1,618.6 1,323.4 889.1 582.1 840.5 Other 73.5 104.4 274.4 833.9 510.9 301.4 - ------------------------------------------------------------------------------------------------------------------- Total Money Market Assets 2,201.6 1,962.7 1,910.5 2,032.0 1,421.4 1,609.9 - ------------------------------------------------------------------------------------------------------------------- Loans and Leases - Domestic 7,017.2 6,165.3 5,900.0 5,537.7 4,693.5 3,858.3 - International 279.9 287.6 299.4 310.0 327.4 418.1 - ------------------------------------------------------------------------------------------------------------------- Total Loans and Leases 7,297.1 6,452.9 6,199.4 5,847.7 5,020.9 4,276.4 - ------------------------------------------------------------------------------------------------------------------- Reserve for Credit Losses (145.5) (145.6) (146.6) (149.3) (151.0) (198.2) Other Assets 1,089.7 1,019.9 879.5 739.2 587.1 506.1 - ------------------------------------------------------------------------------------------------------------------- Total Assets $15,700.2 $13,418.0 $12,182.5 $11,682.1 $10,521.9 $ 9,133.0 - ------------------------------------------------------------------------------------------------------------------- liabilities Deposits Demand and Other Noninterest-Bearing $ 2,554.9 $ 1,876.0 $ 1,635.8 $ 1,597.2 $ 1,570.1 $ 1,600.0 Savings and Money Market Deposits 3,432.1 3,372.2 3,208.1 2,975.9 2,382.4 2,364.1 Savings Certificates 1,172.9 1,370.8 1,569.7 1,456.9 1,267.5 976.1 Other Time 404.7 493.9 533.1 520.8 392.4 442.1 Foreign Offices - Demand 65.3 56.2 41.8 81.8 99.2 93.7 - Time 2,436.4 1,815.6 1,100.6 1,105.6 844.4 835.0 - ------------------------------------------------------------------------------------------------------------------- Total Deposits 10,066.3 8,984.7 8,089.1 7,738.2 6,556.0 6,311.0 Federal Funds Purchased 1,692.5 1,540.2 1,412.8 1,463.6 1,132.4 939.7 Securities Sold under Agreements to Repurchase 664.4 542.9 463.8 700.3 1,378.4 710.2 Commercial Paper 131.5 132.9 129.3 129.0 61.3 56.2 Other Borrowings 868.9 526.6 703.3 483.8 327.5 285.0 Senior Medium-Term Notes 554.1 85.2 1.6 -- -- -- Notes Payable 297.9 258.8 245.2 204.9 237.0 175.0 Other Liabilities 351.5 419.6 378.9 319.7 279.3 189.7 - ------------------------------------------------------------------------------------------------------------------- Total Liabilities 14,627.1 12,490.9 11,424.0 11,039.5 9,971.9 8,666.8 - ------------------------------------------------------------------------------------------------------------------- stockholders' equity 1,073.1 927.1 758.5 642.6 550.0 466.2 - ------------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $15,700.2 $13,418.0 $12,182.5 $11,682.1 $10,521.9 $ 9,133.0 - ------------------------------------------------------------------------------------------------------------------- ratios Dividend Payout Ratio 25.6% 24.4% 24.6% 24.5% 20.7% 15.7% Return on Average Assets 1.07 1.11 1.05 .99 1.08 1.20 Return on Average Common Equity 17.89 18.71 19.01 19.78 23.94 28.87 Tier 1 Capital to Risk-Adjusted Assets 9.31 8.08 6.74 5.76 5.34 Total Capital to Risk-Adjusted Assets 13.41 11.56 10.68 8.97 8.61 Leverage 6.24 6.06 5.38 4.57 4.69 Average Stockholders' Equity to Average Assets 6.83 6.91 6.23 5.50 5.23 5.10 Average Loans and Leases Times Average Stockholders' Equity 6.8X 7.0x 8.2x 9.1x 9.1x 9.2x - ------------------------------------------------------------------------------------------------------------------- Stockholders - End of Period 2,922 2,893 2,840 2,725 2,685 2,304 Staff - End of Period (Full-time equivalent) 6,259 6,249 5,798 5,784 5,632 5,387 - -------------------------------------------------------------------------------------------------------------------
62 northern trust corporation consolidated financial statistics Analysis of Net Interest Income
( Interest and rate on a 1993 1992 taxable equivalent basis ) ------------------------ ------------------------- ( Amounts in Millions ) Interest Volume Rate Interest Volume Rate - ------------------------------------------------------------------------------- average earning assets Loans and Leases - - Domestic $425.0 $ 7,017.2 6.06% $429.8 $ 6,165.3 6.97% - - International 14.3 279.9 5.13 18.3 287.6 6.36 - ------------------------------------------------------------------------------- Total Loans and Leases 439.3 7,297.1 6.02 448.1 6,452.9 6.94 - ------------------------------------------------------------------------------- Money Market Assets Federal Funds Sold and Repurchase Agreements 5.5 171.3 3.24 8.8 237.8 3.70 Time Deposits with Banks - Domestic .1 .1 2.94 .2 1.9 8.30 - International 86.4 1,956.7 4.42 95.4 1,618.6 5.89 Other 2.6 73.5 3.53 4.6 104.4 4.46 - ------------------------------------------------------------------------------- Total Money Market Assets 94.6 2,201.6 4.30 109.0 1,962.7 5.55 - ------------------------------------------------------------------------------- Investment Securities - Held for Investment U.S. Government 97.7 2,581.4 3.78 90.3 1,759.7 5.13 Obligations of States and Political Subdivisions 58.6 502.3 11.66 59.2 516.0 11.46 Federal Agency 29.3 765.7 3.82 23.9 521.6 4.59 Other 7.9 151.8 5.25 22.9 376.8 6.07 - ------------------------------------------------------------------------------- Total Investment Securities - - Held for Investment 193.5 4,001.2 4.84 196.3 3,174.1 6.18 - ------------------------------------------------------------------------------- Investment Securities - Held for Sale 10.9 201.3 5.42 -- -- -- - ------------------------------------------------------------------------------- Securities Held for Trading 2.2 29.5 7.52 1.0 16.2 6.01 - ------------------------------------------------------------------------------- Total Earning Assets $740.5 $13,730.7 5.39% $754.4 $11,605.9 6.50% - ------------------------------------------------------------------------------- average source of funds Deposits Savings and Money Market Deposits $ 78.8 $ 3,432.1 2.30% $ 99.1 $ 3,372.2 2.94% Savings Certificates 50.5 1,172.9 4.31 69.9 1,370.8 5.10 Other Time 15.7 404.7 3.88 25.4 493.9 5.15 Foreign Offices Time 90.4 2,436.4 3.71 95.7 1,815.6 5.27 - ------------------------------------------------------------------------------- Total Deposits 235.4 7,446.1 3.16 290.1 7,052.5 4.11 Federal Funds Purchased 51.1 1,692.5 3.02 53.5 1,540.2 3.47 Securities Sold under Agreements to Repurchase 20.0 664.4 3.00 19.8 542.9 3.65 Commercial Paper 4.3 131.5 3.23 5.2 132.9 3.88 Other Borrowings 24.6 868.9 2.83 18.1 526.6 3.45 Senior Medium-Term Notes 18.4 554.1 3.33 3.0 85.2 3.49 Notes Payable 23.3 297.9 7.84 21.0 258.8 8.11 - ------------------------------------------------------------------------------- Total Interest-Related Funds 377.1 11,655.4 3.23 410.7 10,139.1 4.05 - ------------------------------------------------------------------------------- Interest Rate Spread -- -- 2.16% -- -- 2.45% - ------------------------------------------------------------------------------- Noninterest-Related Funds -- 2,075.3 -- -- 1,466.8 -- - ------------------------------------------------------------------------------- Total Source of Funds $377.1 $13,730.7 2.74% $410.7 $11,605.9 3.54% - ------------------------------------------------------------------------------- Net Interest Income/Margin $363.4 -- 2.65% $343.7 -- 2.96% - ------------------------------------------------------------------------------- net interest income/margin components Domestic $345.6 $11,491.0 3.01% $325.7 $ 9,659.9 3.37% International 17.8 2,239.7 .79 18.0 1,946.0 .93 - ------------------------------------------------------------------------------- Consolidated $363.4 $13,730.7 2.65% $343.7 $11,605.9 2.96% - -------------------------------------------------------------------------------
Notes: - Average volume includes nonaccrual loans. - Interest on loans and money market assets includes fees of $13.9 million in 1993, $11.7 million in 1992, $5.1 million in 1991, $5.6 million in 1990, $8.1 million in 1989 and $6.1 million in 1988. - Total interest income includes adjustments on loans and investment and trading account securities (primarily obligations of states and political subdivisions) to a taxable equivalent basis. An adjustment has been made in 1988 to reflect the additional federal tax caused by changes in the tax law that require the disallowance of a deduction for a certain portion of the Corporation's interest expense as it relates to the level of tax-exempt assets. Such adjustments are based on the U.S. federal income tax rate (35% for 1993 and 34% for 1992-1988) and State of Illinois income tax rate (7.18% for 1993-1990, 6.79% for 1989 and 6.40% for 1988) 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 $34.1 million in 1993, $32.5 million in 1992, $36.0 million in 1991, $38.1 million in 1990, $36.0 million in 1989 and $23.8 million in 1988. 64 northern trust corporation
1991 1990 1989 1988 --------------------------- ------------------------ ----------------------- ----------------------- Interest Volume Rate Interest Volume Rate Interest Volume Rate Interest Volume Rate - -------------------------------------------------------------------------------------------------------- $504.6 $ 5,900.0 8.55% $544.6 $ 5,537.7 9.83% $496.9 $4,693.5 10.59% $364.6 $3,858.3 9.45% 25.7 299.4 8.57 31.4 310.0 10.12 33.6 327.4 10.27 40.6 418.1 9.72 - -------------------------------------------------------------------------------------------------------- 530.3 6,199.4 8.55 576.0 5,847.7 9.85 530.5 5,020.9 10.57 405.2 4,276.4 9.48 - -------------------------------------------------------------------------------------------------------- 17.8 304.8 5.83 23.3 285.6 8.16 25.9 280.0 9.23 28.6 379.5 7.53 .6 7.9 8.08 2.1 23.4 9.10 4.0 48.4 8.25 6.6 88.5 7.49 107.5 1,323.4 8.13 91.4 889.1 10.28 55.0 582.1 9.46 66.2 840.5 7.88 20.7 274.4 7.54 70.6 833.9 8.47 48.6 510.9 9.51 23.6 301.4 7.81 - -------------------------------------------------------------------------------------------------------- 146.6 1,910.5 7.68 187.4 2,032.0 9.22 133.5 1,421.4 9.39 125.0 1,609.9 7.76 - -------------------------------------------------------------------------------------------------------- 65.0 943.4 6.89 59.5 659.9 9.03 112.5 1,254.1 8.97 48.5 625.6 7.76 61.4 533.8 11.51 58.8 510.6 11.52 50.9 432.8 11.76 43.7 361.4 12.09 25.3 346.5 7.29 40.9 458.3 8.92 31.7 330.1 9.60 10.9 127.0 8.62 52.3 644.0 8.12 64.1 710.8 9.01 63.4 675.4 9.39 72.4 848.8 8.53 - -------------------------------------------------------------------------------------------------------- 204.0 2,467.7 8.26 223.3 2,339.6 9.55 258.5 2,692.4 9.60 175.5 1,962.8 8.94 - -------------------------------------------------------------------------------------------------------- -- -- -- -- -- -- -- -- -- -- -- -- - -------------------------------------------------------------------------------------------------------- 2.5 32.1 7.92 5.0 57.0 8.88 13.2 145.2 9.06 13.8 164.4 8.38 - -------------------------------------------------------------------------------------------------------- $883.4 $10,609.7 8.33% $991.7 $10,276.3 9.65% $935.7 $9,279.9 10.08% $719.5 $8,013.5 8.98% - -------------------------------------------------------------------------------------------------------- $159.2 $ 3,208.1 4.96% $194.7 $ 2,975.9 6.54% $160.9 $2,382.4 6.75% $134.0 $2,364.1 5.67% 104.3 1,569.7 6.64 115.0 1,456.9 7.89 105.5 1,267.5 8.32 69.7 976.1 7.14 38.3 533.1 7.19 42.6 520.8 8.18 33.9 392.4 8.64 32.8 442.1 7.42 88.6 1,100.6 8.05 109.4 1,105.6 9.90 75.3 844.4 8.91 59.5 835.0 7.13 - -------------------------------------------------------------------------------------------------------- 390.4 6,411.5 6.09 461.7 6,059.2 7.62 375.6 4,886.7 7.69 296.0 4,617.3 6.41 78.7 1,412.8 5.57 117.9 1,463.6 8.05 104.6 1,132.4 9.24 71.4 939.7 7.60 26.2 463.8 5.65 55.9 700.3 7.98 122.7 1,378.4 8.90 52.5 710.2 7.40 8.0 129.3 6.19 10.6 129.0 8.19 5.6 61.3 9.11 4.1 56.2 7.26 40.7 703.3 5.78 38.5 483.8 7.96 29.9 327.5 9.14 21.4 285.0 7.50 .1 1.6 8.68 -- -- -- -- -- -- -- -- -- 21.4 245.2 8.71 19.7 204.9 9.61 23.9 237.0 10.09 18.0 175.0 10.30 - -------------------------------------------------------------------------------------------------------- 565.5 9,367.5 6.04 704.3 9,040.8 7.79 662.3 8,023.3 8.25 463.4 6,783.4 6.83 - -------------------------------------------------------------------------------------------------------- -- -- 2.29% -- -- 1.86% -- -- 1.83% -- -- 2.15% - -------------------------------------------------------------------------------------------------------- -- 1,242.2 -- -- 1,235.5 -- -- 1,256.6 -- -- 1,230.1 -- - -------------------------------------------------------------------------------------------------------- $565.5 $10,609.7 5.33% $704.3 $10,276.3 6.85% $662.3 $9,279.9 7.13% $463.4 $8,013.5 5.78% - -------------------------------------------------------------------------------------------------------- $317.9 -- 3.00% $287.4 -- 2.80% $273.4 -- 2.95% $256.1 -- 3.20% - -------------------------------------------------------------------------------------------------------- $300.8 $ 8,981.9 3.39% $274.0 $ 9,072.7 3.02% $261.1 $8,361.1 3.12% $225.8 $6,738.9 3.35% 17.1 1,627.8 1.05 13.4 1,203.6 1.11 12.3 918.8 1.34 30.3 1,274.6 2.37 - -------------------------------------------------------------------------------------------------------- $317.9 $10,609.7 3.00% $287.4 $10,276.3 2.80% $273.4 $9,279.9 2.95% $256.1 $8,013.5 3.20% - --------------------------------------------------------------------------------------------------------
northern trust corporation 65 consolidated financial statistics Quarterly Financial Data statement of income
1993 -------------------------------------------------- Entire Fourth Third Second First ( In Millions ) Year Quarter Quarter Quarter Quarter - -------------------------------------------------------------------------------- Interest Income $ 706.4 176.9 181.0 177.8 170.7 Interest Expense 377.1 92.9 97.8 95.3 91.1 - -------------------------------------------------------------------------------- Net Interest Income 329.3 84.0 83.2 82.5 79.6 Provision for Credit Losses 19.5 2.5 5.0 6.0 6.0 Noninterest Income 550.6 140.6 139.2 134.8 136.0 Investment Security Gains (Losses) 1.8 .1 -- .1 1.6 Noninterest Expenses 628.2 161.6 157.7 154.9 154.0 Provision for Income Taxes 66.1 17.3 16.9 14.9 17.0 - -------------------------------------------------------------------------------- net income 167.9 43.3 42.8 41.6 40.2 - -------------------------------------------------------------------------------- Net Income Applicable to Common Stock 161.6 41.7 41.2 40.1 38.6 - -------------------------------------------------------------------------------- per common share Net Income - Primary $ 2.96 .76 .75 .73 .71 - Fully Diluted 2.95 .76 .75 .73 .71 - -------------------------------------------------------------------------------- average statement of condition ( In Millions ) - -------------------------------------------------------------------------------- assets Cash and Due from Banks $ 1,025.3 1,051.7 970.1 1,040.0 1,040.0 Investment Securities 4,202.5 4,279.4 4,120.2 4,437.3 3,970.8 Securities Held for Trading 29.5 32.9 32.2 30.8 22.0 Money Market Assets 2,201.6 2,161.0 2,589.9 2,149.3 1,898.8 Loans and Leases 7,297.1 7,593.9 7,474.5 7,151.8 6,959.3 Reserve for Credit Losses (145.5) (145.5) (145.5) (145.5) (145.5) Other Assets 1,089.7 980.5 1,081.5 1,139.7 1,159.0 - -------------------------------------------------------------------------------- Total Assets 15,700.2 15,953.9 16,122.9 15,803.4 14,904.4 - -------------------------------------------------------------------------------- liabilities and stockhold- ers' equity Deposits Demand and Other Noninter- est-Bearing $ 2,554.9 2,634.8 2,474.0 2,514.7 2,596.7 Savings and Others 4,605.0 4,551.1 4,550.5 4,595.1 4,725.8 Other Time 404.7 352.8 388.3 492.9 385.3 Foreign Offices 2,501.7 2,842.8 2,623.9 2,340.5 2,191.2 - -------------------------------------------------------------------------------- Total Deposits 10,066.3 10,381.5 10,036.7 9,943.2 9,899.0 Purchased Funds 3,357.3 3,172.3 3,667.9 3,660.1 2,923.1 Senior Medium-Term Notes 554.1 589.8 650.7 507.9 465.4 Notes Payable 297.9 330.0 330.1 296.9 233.2 Other Liabilities 351.5 356.8 345.9 339.7 363.4 Stockholders' Equity 1,073.1 1,123.5 1,091.6 1,055.6 1,020.3 - -------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity 15,700.2 15,953.9 16,122.9 15,803.4 14,904.4 - -------------------------------------------------------------------------------- analysis of net interest income ( Amounts in Millions ) - -------------------------------------------------------------------------------- Earning Assets $13,730.7 14,067.2 14,216.8 13,769.2 12,850.9 Interest-Related Funds 11,655.4 11,755.0 12,149.0 11,818.2 10,884.4 Noninterest-Related Funds 2,075.3 2,312.2 2,067.8 1,951.0 1,966.5 Net Interest Income (Tax- able equivalent) 363.4 92.6 91.8 91.4 87.6 Net Interest Margin (Tax- able equivalent) 2.65% 2.61 2.56 2.66 2.76 - -------------------------------------------------------------------------------- common stock dividend and market price - -------------------------------------------------------------------------------- Dividends $0.77 1/2 0.22 0.18 1/ 2 0.18 1/2 0.18 1/2 Market Price Range - High 50.50 43.75 44.50 50.50 49.875 - Low 37.00 37.00 39.50 39.75 40.00 - --------------------------------------------------------------------------------
The common stock of Northern Trust Corporation is traded in the over-the- counter market under the symbol NTRS. The above quotations are from the NASDAQ system. The number of stockholders of record at December 31, 1993, was 2,922. 66 northern trust corporation
1992 - ------------------------------------------------------------------------------------------- Entire Fourth Third Second First Year Quarter Quarter Quarter Quarter - -------------------------------------------------------------------------------------------- $ 721.9 172.3 176.9 184.6 188.1 410.7 91.6 98.9 109.3 110.9 - -------------------------------------------------------------------------------------------- 311.2 80.7 78.0 75.3 77.2 29.5 6.5 7.0 9.0 7.0 506.1 131.0 126.6 127.7 120.8 3.3 2.4 .2 (.6) 1.3 584.6 154.0 144.7 142.4 143.5 57.0 15.1 15.0 13.9 13.0 - -------------------------------------------------------------------------------------------- 149.5 38.5 38.1 37.1 35.8 - -------------------------------------------------------------------------------------------- 142.7 36.8 36.4 35.3 34.2 - -------------------------------------------------------------------------------------------- $ 2.64 .68 .67 .65 .64 2.64 .68 .67 .65 .64 - -------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------- $ 937.8 1,038.7 940.6 903.4 867.2 3,174.1 3,262.5 3,083.8 3,153.7 3,196.5 16.2 10.0 7.9 11.6 35.1 1,962.7 2,217.8 2,063.2 1,986.2 1,579.8 6,452.9 6,591.1 6,441.3 6,475.1 6,302.8 (145.6) (145.5) (145.5) (145.7) (145.8) 1,019.9 1,059.4 999.0 1,034.2 987.0 - -------------------------------------------------------------------------------------------- 13,418.0 14,034.0 13,390.3 13,418.5 12,822.6 - -------------------------------------------------------------------------------------------- $ 1,876.0 2,130.7 1,850.9 1,781.3 1,738.7 4,743.0 4,639.1 4,664.6 4,788.2 4,882.1 493.9 474.9 510.0 525.4 465.2 1,871.8 2,250.4 1,939.7 1,780.1 1,512.0 - -------------------------------------------------------------------------------------------- 8,984.7 9,495.1 8,965.2 8,875.0 8,598.0 2,742.6 2,598.7 2,730.7 2,949.5 2,693.1 85.2 271.1 64.0 2.0 2.0 258.8 245.7 261.2 264.1 264.1 419.6 440.4 419.5 411.7 406.7 927.1 983.0 949.7 916.2 858.7 - -------------------------------------------------------------------------------------------- 13,418.0 14,034.0 13,390.3 13,418.5 12,822.6 - -------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------- $11,605.9 12,081.4 11,596.2 11,626.6 11,114.2 10,139.1 10,418.8 10,117.2 10,248.9 9,768.4 1,466.8 1,662.6 1,479.0 1,377.7 1,345.8 343.7 88.5 86.0 83.4 85.8 2.96% 2.91 2.95 2.89 3.10 - -------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------- $0.66 1/2 0.18 1/2 0.16 0.16 0.16 43.17 43.17 40.00 40.17 35.67 32.67 37.17 37.67 33.50 32.67 - --------------------------------------------------------------------------------------------
northern trust corporation 67 Corporate Structure Northern Trust Corporation 50 South LaSalle Street, Chicago, Illinois 60675 (312) 630-6000 Principal Subsidiary THE NORTHERN TRUST COMPANY 50 South LaSalle Street, Chicago, Illinois 60675 Wacker Drive Financial Center 125 South Wacker Drive, Chicago, Illinois 60675 Oak Street Financial Center 120 East Oak Street, Chicago, Illinois 60611 Winnetka Financial Center 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 The Northern Trust Safe Deposit Company 50 South LaSalle Street, Chicago, Illinois 60675 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 Scandinave en Suisse 11 Cours de Rive, 1211 Geneva 3, Switzerland 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 70 northern trust corporation Other Subsidiaries of the Corporation NORTHERN TRUST BANK/LAKE FOREST N.A. 265 Deerpath Road, Lake Forest, Illinois 60045 959 South Waukegan Road, Lake Forest, Illinois 60045 120 East Scranton Avenue, Lake Bluff, Illinois 60044 NORTHERN TRUST BANK/O'HARE N.A. 8501 West Higgins Road, Chicago, Illinois 60631 6401 North Harlem Avenue, Chicago, Illinois 60631 1501 Woodfield Road, Schaumburg, Illinois 60173 NORTHERN TRUST BANK/DUPAGE One Oakbrook Terrace, Oakbrook Terrace, Illinois 60181 400 East Diehl Road, Naperville, Illinois 60563 NORTHERN TRUST BANK OF FLORIDA N.A. 700 Brickell Avenue, Miami, Florida 33131 595 Biltmore Way, Coral Gables, Florida 33134 328 Crandon Boulevard, Suite 101, Key Biscayne, Florida 33149 3001 Aventura Boulevard, Aventura, Florida 33180 1100 E. Las Olas Boulevard, Fort Lauderdale, Florida 33301 301 Yamato Road, Boca Raton, Florida 33431 440 Royal Palm Way, Palm Beach, Florida 33480 11780 U.S. Highway 1, Building 3, Suite 100, North Palm Beach, Florida 33408 4001 Tamiami Trail North, Naples, Florida 33940 530 Fifth Avenue South, Naples, Florida 33940 8060 College Parkway S.W., Fort Myers, Florida 33919 1515 Ringling Boulevard, Sarasota, Florida 34236 1100 South Tamiami Trail, Venice, Florida 34285 540 Bay Isles Road, Longboat Key, Florida 34228 100 Second Avenue, 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 7001 North Scottsdale Road, Scottsdale, Arizona 85253 NORTHERN TRUST BANK OF CALIFORNIA N.A. 355 South Grand Avenue, Suite 2600, Los Angeles, California 90071 10877 Wilshire Boulevard (Westwood), Suite 100, Los Angeles, California 90024 620 Newport Center Drive, Suite 200, Newport Beach, California 92660 4370 LaJolla Village Drive, Suite 1000, San Diego, California 92122 206 East Anapamu Street, Santa Barbara, California 93101 580 California Street, Suite 1800, San Francisco, California 94104 NORTHERN TRUST BANK OF TEXAS N.A. 2020 Ross Avenue, Dallas, Texas 75201 5540 Preston Road, Dallas, Texas 75205 2701 Kirby Drive, Houston, Texas 77098 700 Rusk Street, Houston, Texas 77002 THE NORTHERN TRUST COMPANY OF NEW YORK 80 Broad Street, New York, New York 10004 NORTHERN TRUST CAYMAN INTERNATIONAL, LTD. P.O. Box 1586, Grand Cayman, Cayman Islands, British West Indies NORTHERN TRUST SECURITIES, INC. 50 South LaSalle Street, Chicago, Illinois 60675 BARRY, HARTELL, EVERS & OSBORNE, INC. 580 California Street, San Francisco, California 94104 NORTHERN FUTURES CORPORATION 50 South LaSalle Street, Chicago, Illinois 60675 NORTHERN TRUST SERVICES, INC. 50 South LaSalle Street, Chicago, Illinois 60675 northern trust corporation 71 EX-21 5 SUBSIDIARIES EXHIBIT NUMBER (21) TO 1993 FORM 10-K NORTHERN TRUST CORPORATION SUBSIDIARIES AS OF MARCH 1, 1994
Percent State of Owned Incorporation -------- ------------------- The Northern Trust Company 100% Illinois NorLease, Inc. 100% Delaware The Northern Trust Safe Deposit Company 100% Illinois 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 Norsub Corporation 100% Delaware Northern Trust Bank/O'Hare N.A. 100% National Bank Northern Trust Bank/DuPage 100% Illinois First Lake Forest Corporation 100% Delaware Northern Trust Bank/Lake Forest N.A. 100% National Bank Northern Trust of Florida Corporation 100% Florida Northern Trust Cayman International, Ltd. 100% Cayman Islands, BWI Northern Trust Bank of Florida N.A. 100% National Bank Realnor Properties, Inc. 100% Florida Realnor Special Properties, Inc. 100% Florida Realnor 1177, Inc. 100% Florida Realnor Hallandale, Inc. 100% Florida 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 Northern Futures Corporation 100% Delaware
NORTHERN TRUST CORPORATION SUBSIDIARIES AS OF MARCH 1, 1994 (continued)
Percent State of Owned Incorporation -------- ------------- Northern Investment Corporation 100% Delaware Northern Investment Management Company 100% Delaware Northern Trust Securities, Inc. 100% Delaware Northern Trust Services, Inc. 100% Illinois Nortrust Realty Management, Inc. 100% Illinois The Northern Trust Company of New York 100% New York Hazlehurst Merger Corporation 100% Delaware
EX-23 6 CONSENT EXHIBIT NUMBER (23) TO 1993 FORM 10-K CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated January 18, 1994, incorporated by reference in the Northern Trust Corporation's Annual Report on Form 10-K for the year ended December 31, 1993, into the Corporation's previously filed Form S-8 Registration Statements File Nos. 33-22546, 33-41501, 33-47597, and 33-51971, and Form S-4 Registration Statement File No. 33-52219. ARTHUR ANDERSEN & CO. Chicago, Illinois March 11, 1994 EX-24 7 POWER OF ATTORNEY EXHIBIT NUMBER (24) TO 1993 FORM 10-K POWER OF ATTORNEY - ----------------- KNOW ALL MEN BY THESE PRESENTS: That the undersigned officers and directors of Northern Trust Corporation hereby severally constitute and appoint David W. Fox, Perry R. Pero and Peter L. Rossiter, and each of them singly, our true and lawful attorneys and agents with full power to them and each of them singly, to sign for us in our names, in the capacities indicated below, Form 10-K, annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, for the fiscal year ended December 31, 1993, 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 15th day of February, 1994. ------ /s/ David W. Fox /s/ William A. Osborn ----------------------------- ------------------------------ David W. Fox William A. Osborn Chairman of the Board, Chief President, Chief Operating Executive Officer and Director Officer and Director /s/ Barry G. Hastings /s/ John S. Sutfin ----------------------------- ------------------------------ Barry G. Hastings John S. Sutfin Vice Chairman and Director Vice Chairman and Director /s/ Perry R. Pero /s/ John H. Robinson ----------------------------- ------------------------------ Perry R. Pero John H. Robinson Senior Executive Vice President Senior Vice President and Chief Financial Officer and Controller /s/ Worley H. Clark /s/ Robert S. Hamada ----------------------------- ------------------------------ Worley H. Clark Robert S. Hamada Director Director /s/ Robert A. Helman /s/ Arthur L. Kelly ----------------------------- ------------------------------ Robert A. Helman Arthur L. Kelly Director Director /s/ Ardis Krainik /s/ Robert D. Krebs ----------------------------- ------------------------------ Ardis Krainik Robert D. Krebs Director Director /s/ Frederick A. Krehbiel /s/ William G. Mitchell ------------------------------ ------------------------------ Frederick A. Krehbiel William G. Mitchell Director Director /s/ William A. Pogue /s/ Harold B. Smith ------------------------------ ------------------------------ William A. Pogue Harold B. Smith Director Director /s/ William D. Smithburg /s/ 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 15th day of February, 1994. ------ /s/ Victoria Antoni ------------------------------ Notary Public My Commission Expires: July 25, 1995 ----------------------- EX-99 8 DESCRIPTION OF COM STOCK EXHIBIT (99) TO 1993 FORM 10-K DESCRIPTION OF COMMON STOCK (Filed for the Purpose of Updating the Description of Common Stock of Northern Trust Corporation Previously Registered under the Securities Exchange Act of 1934) GENERAL Northern Trust Corporation (the "Corporation") is authorized to issue 140,000,000 shares of Common Stock with a par value of $1.66-2/3 per share ("Common Stock"). As of February 28, 1994, there were 53,337,983 shares of Common Stock outstanding. Holders of Common Stock have no preemptive rights to subscribe for additional shares. Subject to the preferential rights of the holders of the Corporation's preferred stock, holders of Common Stock are entitled to receive, out of the funds legally available therefor, such dividends as may be declared from time to time by the Board of Directors. In the event of the liquidation, dissolution, distribution of assets or winding up of the Corporation, after distribution in full of the preferential amounts, if any, to be distributed to the holders of shares of preferred stock, holders of Common Stock are entitled to receive all the remaining assets of the Corporation, divided ratably in proportion to the number of shares held by each. The holders of Common Stock have one vote for each share held by them and are entitled to cumulative voting in the election of directors. The voting rights of the holders of Common Stock are qualified, however, by the voting rights of the holders of the Corporation's preferred stock, in the following circumstances: (i) the holders of 66 2/3% of the preferred stock must approve as a class any amendment to the Corporation's Certificate of Incorporation that would adversely affect the powers, preferences, rights or privileges of the preferred stock (provided that, if such an amendment would adversely affect only one or more, but not all, series of preferred stock, then only the series so affected would be entitled to the above-described vote); (ii) the holders of 66 2/3% of the preferred stock must approve as a class the creation, authorization, or issuance of any shares of stock of the Corporation (or obligation or security convertible into or evidencing the right to purchase such shares) ranking prior to the preferred stock as to dividends or upon liquidation, or any reclassification of authorized stock into such prior shares; (iii) in the event that at the time of any annual meeting of stockholders for the election of directors there shall exist a default in payment of a specified number of dividends (generally six quarterly dividends or dividends payable over at least 540 days), the number of directors on the Corporation's Board of Directors shall be increased by two (2), and the holders of preferred stock, voting as a class and to the exclusion of the holders of Common Stock, shall have the right to elect two directors to fill such vacancies to serve full terms, and such voting rights shall continue until there are no dividends in arrears upon the preferred stock. Shares of Common Stock are not subject to redemption. The oustanding shares of Common Stock are fully paid and nonassessable. Harris Trust and Savings Bank, Chicago, Illinois is the transfer agent, registrar and dividend disbursing agent for the Common Stock. PREFERRED STOCK PURCHASE RIGHTS. In 1989, the Board of Directors of the Corporation declared a dividend distribution of one Preferred Stock Purchase Right (a "Right") on each outstanding share of Common Stock to the stockholders of record on October 31, 1989. Initially, each Right entitled stockholders to purchase from the Corporation one one-hundredth of a share of a newly authorized Junior Preferred Stock at an exercise price of $250, subject to adjustment. As a result of the two-for-one stock split on May 1, 1990 and a three-for-two stock split on December 9, 1992, each Right will be exercisable for one-third of one-hundredth of a share (a "Unit") of Junior Preferred Stock at an exercise price of $83.33 per Unit. The description and terms of the Rights are set forth in a Rights Agreement, dated as of October 17, 1989, between the Corporation and Harris Trust and Savings Bank, as Rights Agent (the "Rights Agreement"), which was filed as Exhibit 1 to the Corporation's Report on Form 8-A dated October 30, 1989, and is hereby incorporated by reference. The following summary of the Rights Agreement is subject to, and qualified in its entirety by, the Rights Agreement. The Rights currently attach to all Common Stock certificates representing shares outstanding, and no separate Rights certificates have been distributed. The Rights will separate from the Common Stock and a "Distribution Date" will occur upon the earlier of (i) 20 days following a public announcement that a person or group of affiliated or associated persons (an "Acquiring Person") has acquired, or obtained the right to acquire, beneficial ownership of 15% or more of the outstanding shares of Common Stock (the "Stock Acquisition Date"), or (ii) 20 days following the commencement of, or first public announcement of the intent of any person to commence, a tender offer or exchange offer that would result in a person or group beneficially owning 25% or more of such outstanding shares of Common Stock. Until the Distribution Date, (i) the Rights will be evidenced by the Common Stock certificates (including Common Stock certificates issued upon conversion of certain Preferred Stock of the Corporation (the "Convertible Preferred Stock") into Common Stock) and will be transferred with and only with such Common Stock certificates, (ii) new Common Stock certificates (including Common Stock certificates issued upon conversion of the Convertible Preferred Stock) will contain a notation incorporating the Rights Agreement by reference and (iii) the surrender for transfer of any certificates for Common Stock outstanding will also constitute the transfer of the Rights associated with the Common Stock represented by such certificate. The Rights are not exercisable until after the Distribution Date and will expire at the close of business on October 31, 1999, unless earlier redeemed. As soon as practicable after the Distribution Date, rights certificates will be mailed to holders of record of the Common Stock as of the close of business on the Distribution Date and, thereafter, the separate Rights certificates alone will represent the Rights. All shares of Common Stock issued prior to the Distribution Date (including shares of Common Stock issued upon conversion of Convertible Preferred Stock) will be issued with Rights. In the event that (i) an Acquiring Person shall merge into or otherwise combine with the Corporation, the Corporation shall be the continuing or surviving corporation, and the Common Stock shall remain outstanding and shall not be changed or exchanged, (ii) an Acquiring Person shall engage in certain self-dealing transactions with the Corporation, (iii) any reclassification, recapitalization, merger or consolidation of the Corporation with any of its subsidiaries, or any other transaction or series of transactions with the Corporation or its subsidiaries occurs that would have the effect of increasing by more than 1% the proportionate share of the outstanding securities of the Corporation or any of its subsidiaries owned by the Acquiring Person or it affiliates or associates, or (iv) a person becomes the beneficial owner of 25% or more of the then outstanding shares of Common Stock (except pursuant to an offer for all outstanding shares of Common Stock which at least a majority of the members of the Board of Directors who are not officers of the Corporation and who are not representatives, nominees, affiliates or associates of an Acquiring Person determines to be fair to and otherwise in the best interests of the Corporation and its stockholders), then each holder of a Right will thereafter have the right to receive, upon exercise, Common Stock (or, in certain circumstances, cash, property or other securities of the Corporation) having a current market value equal to two times the exercise price of the Right. Notwithstanding any of the foregoing, following the occurrence of any of the events set forth in this paragraph, all Rights that are, or (under certain circumstances specified in the Rights Agreement) were, beneficially owned by any Acquiring Person will be null and void. However, the Rights are not -2- exercisable following the occurrence of any of the events set forth above until such time as the Rights are no longer redeemable by the Corporation as set forth below. In the event that, at any time following the Stock Acquisition Date, (i) the Corporation is acquired in a merger or other business combination transaction in which the Corporation is not the surviving corporation (other than a merger which follows an offer described in subparagraph (iv) of the preceding paragraph), (ii) any person shall consolidate with, or merge with or into, the Corporation, and the Corporation shall be the surviving corporation (other than a merger which follows an offer described in subparagraph (iv) of the preceding paragraph) and, in connection therewith, all or part of the outstanding shares of Common Stock shall be changed into or exchanged for stock or other securities of any other person or cash or any other property, or (iii) more than 50% of the Corporation's assets or earning power is sold or transferred, each holder of a Right (except Rights which previously have been voided as set forth above) shall thereafter have the right to receive, upon exercise, common stock of the acquiring company having a current market value equal to two times the exercise price of the Right. The events set forth in this paragraph and in the preceding paragraph are referred to as the "Triggering Events." The purchase price payable, and the number of Units of the Junior Preferred Stock or other securities or property issuable, upon exercise of the Rights are subject to adjustment from time to time to prevent dilution in the event of (i) a stock dividend on, or a subdivision, combination or consolidation of, the Junior Preferred Stock or the Common Stock, or (ii) a reclassification or recapitalization of the Junior Preferred Stock or the Common Stock into another class of capital stock (including any such reclassification or recapitalization in connection with a consolidation or merger in which the Corporation is the continuing or surviving corporation). No adjustment in the purchase price will be required until cumulative adjustments amount to at least 1% of the purchase price. No fractional Units will be issued and, in lieu thereof, an adjustment in cash will be made based on the market price of the Junior Preferred Stock on the last trading date prior to the date of exercise. In general, at any time until 20 days following the Stock Acquisition Date, the Corporation may redeem the Rights in whole, but not in part, at a price of $.01 per Right. After the redemption period has expired, the Corporation's right of redemption may be reinstated if an Acquiring Person reduces his or her beneficial ownership to 10% or less of the outstanding shares of Common Stock in a transaction or series of transactions not involving the Corporation. Immediately upon the action of the Board of Directors ordering redemption of the Rights, the Rights will terminate and the only right of the holders of Rights will be to receive the $.01 redemption price. Until a Right is exercised, the holder thereof, as such, will have no rights as a stockholder of the Corporation, including, without limitation, the right to vote or to receive dividends. Except as provided below, any of the provisions of the Rights Agreement may be amended by the Board of Directors of the Corporation prior to the Distribution Date. After the Distribution Date, the provisions of the Rights Agreement may be amended by the Board in order to cure any ambiguity, to make changes which do not adversely affect the interests of holders of Rights or to shorten or lengthen any time period under the Rights Agreement; provided, however, that no amendment to adjust the time period governing redemption shall be made at such time as the Rights are not redeemable. Either before or after the Distribution Date, the provisions of the -3- Agreement relating to the principal economic terms of the Rights may only be amended in certain limited circumstances. In connection with the Rights Agreement, 350,000 shares of Junior Preferred Stock have been authorized and reserved. No shares of the Junior Preferred Stock are outstanding. The Junior Preferred Stock ranks senior to the Common Stock and is junior to any other series of the Corporation's preferred stock with respect to payment of dividends and distributions of assets upon liquidation. The Rights have certain anti-takeover effects. The Rights will cause substantial dilution to a person or group that attempts to acquire the Corporation in a manner defined as a Triggering Event unless the offer is conditioned on a substantial number of Rights being acquired. The Rights, however, should not affect any prospective offeror willing to make an offer for all outstanding shares of Common Stock and other voting securities at a fair price and otherwise in the best interests of the Corporation and its stockholders as determined by the Board of Directors or affect any prospective offeror willing to negotiate with the Board of Directors. The Rights should not interfere with any merger or other business combination approved by the Board of Directors since the Board of Directors may, at its option, at any time prior to the close of business on the twentieth day after the Stock Acquisition Date, redeem all, but not less than all, of the then outstanding Rights at a redemption price of $.01 per Right. C:\TEXT\JGK\NORTHERN\AMEND1\EXHIBIT.99 -4- -----END PRIVACY-ENHANCED MESSAGE-----