ITEM 1 - BUSINESS
NORTHERN TRUST CORPORATION
Northern Trust Corporation (Corporation) is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended. The Corporation was organized in Delaware in 1971 and on December 1 of that year became the owner of all of the outstanding capital stock, except directors' qualifying shares, of The Northern Trust Company (Bank), an Illinois banking corporation located in the Chicago financial district. The Corporation also owns three other banks in the Chicago metropolitan area, a bank in each of Florida, Arizona, California and Texas, and various other nonbank subsidiaries, including a securities brokerage firm and a futures commission merchant. The Corporation expects that although the operations of other subsidiaries will be of increasing significance, the Bank will in the foreseeable future continue to be the major source of the Corporation's assets, revenues and net income. Except where the context otherwise requires, the term "Northern Trust" refers to Northern Trust Corporation and its consolidated subsidiaries.
At December 31, 1994, Northern Trust had consolidated total assets of approximately $18.6 billion and stockholders' equity of $1.3 billion. At June 30, 1994 Northern Trust was the third largest bank holding company headquartered in Illinois and the 37th largest in the United States, based on consolidated total assets of approximately $18.4 billion on that date.
THE NORTHERN TRUST COMPANY
The Bank was founded by Byron L. Smith in 1889 to provide banking and trust services to the public. Currently in its one hundred and sixth year, the Bank's growth has come from internal sources rather than through merger or acquisition. At December 31, 1994, the Bank had consolidated assets of approximately $14.7 billion. At June 30, 1994, the Bank was the third largest bank in Illinois and the 38th largest in the United States, based on consolidated total assets of approximately $14.9 billion on that date.
The Bank currently has six active wholly owned subsidiaries: The Northern Trust International Banking Corporation, NorLease, Inc., MFC Company, Inc., Nortrust Nominees Ltd., The Northern Trust Company U.K. Pension Plan Limited and The Northern Trust Company, Canada. The Northern Trust International Banking Corporation, located in New York, was organized under the Edge Act for the purpose of conducting international business. NorLease, Inc. was established by the Bank to enable it to broaden its leasing and leasing-related lending activities. MFC Company, Inc. holds properties that are received from the Bank in connection with certain problem loans. Nortrust Nominees Ltd., located in London, is a U.K. trust corporation organized to hold U.K. real estate for fiduciary accounts. The Northern Trust Company U.K. Pension Plan Limited was established in connection with the pension plan for the Bank's London branch. The Northern Trust Company, Canada was established to offer institutional trust products and services to Canadian entities.
In early 1995, Northern Global Financial Services Ltd. was incorporated in Hong Kong and, upon receipt of regulatory approval will enhance securities lending and relationship servicing capabilities for large asset custody clients in Asia and the Pacific Rim.
OTHER NORTHERN TRUST CORPORATION SUBSIDIARIES
The Corporation has three banking subsidiaries in the Chicago metropolitan area: Northern Trust Bank/O'Hare N.A., Northern Trust Bank/DuPage, and Northern Trust Bank/Lake Forest N.A. At December 31, 1994, these three Illinois banking subsidiaries had nine office locations with combined total assets of approximately $1.5 billion. The Corporation expects to seek regulatory approval to merge these three Illinois banking subsidiaries into the Bank during 1995. The Corporation's Florida banking subsidiary, Northern Trust Bank of Florida N.A., is headquartered in Miami and at December 31, 1994, had sixteen offices located throughout Florida, with total assets of approximately $1.4 billion. The Corporation's Arizona banking subsidiary, Northern Trust Bank of Arizona N.A., is headquartered in Phoenix and at December 31,1994 had total assets of approximately $270 million and serviced clients from five office locations. The Corporation has a Texas banking subsidiary, Northern Trust Bank of Texas N.A., headquartered in Dallas. It had four office locations and total assets of approximately $190 million at December 31, 1994. The Corporation's California banking subsidiary, Northern Trust Bank of California N.A., is headquartered in Santa Barbara. At December 31,1994, it had six office locations and total assets of approximately $250 million.
The Corporation has several nonbank subsidiaries. Among them are Northern Trust Securities, Inc. which provides full brokerage services to clients of the Bank and the Corporation's other banking and trust subsidiaries and selectively underwrites general obligation tax-exempt securities. Northern Futures Corporation is a futures commission merchant. Northern Investment Corporation holds certain investments, including a loan made to a developer of a property in which the Bank is the principal tenant. Berry, Hartell, Evers & Osborne, Inc. is an investment management firm in San Francisco. The Northern Trust Company of New York provides security clearance services for all nondepository eligible securities held by
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================================================================================ trust, agency, and fiduciary accounts administered by the Corporation's subsidiaries. Northern Trust Cayman International, Ltd. provides fiduciary services to clients residing outside of the U.S. Hazlehurst & Associates, Inc. is a retirement benefit plan services company in Atlanta, Georgia. Northern Trust Services, Inc. provides management consulting services to nonaffiliated financial institutions.
CORPORATION'S INTERNAL ORGANIZATION
Northern Trust's business is organized broadly into two principal business units: Corporate and Institutional Services, and Personal Financial Services, both of which report to President and Chief Operating Officer William A. Osborn. In addition, the Worldwide Operations Unit encompasses all trust and banking operations and systems activities, and the Risk Management Unit focuses on financial and risk management. The following is a brief summary of each unit's business activities.
CORPORATE AND INSTITUTIONAL SERVICES (CIS)
During late 1994, client corporate and institutional markets were brought together by merging Corporate Financial Services, Commercial Banking and Treasury Management Services into a single business unit. The commercial banking and corporate trust relationship teams were brought together under Sheila A. Penrose, Executive Vice President of the Corporation and the Bank. This realignment focuses Northern Trust's knowledge of the client's needs and provides more seamless service across product lines, thereby increasing client satisfaction opportunities, and strengthens relationships.
Trust activities encompass custody related services for securities in the United States and foreign markets, as well as securities lending, asset management, and related cash management services. Master Trust and Master Custody are the principal products. Custody of securities traded in markets foreign to the client, has been provided primarily through the Bank's London Branch. Related foreign exchange services are also conducted at the London Branch as well as in Chicago.
As measured by number of clients, Northern Trust is a leading provider of Master Trust and Master Custody services in various market segments. At December 31,1994, total assets under administration were $447.2 billion. The major market segments served are corporate pension, profit sharing and savings plans; state and municipal retirement funds; taxable asset portfolios (foundations, endowments and insurance companies); international asset portfolios (international assets of domestic and foreign institutions); and a correspondent trust market segment which provides custody, systems and investment services to smaller bank trust departments. The Northern Trust Company of New York, The Northern Trust Company, Canada, NorLease, Inc., The Northern Trust International Banking Corporation and Hazlehurst & Associates, Inc. are also included in CIS.
A full range of commercial banking services through the Bank which places special emphasis on developing institutional relationships in three target markets: middle market companies in the Chicago and Midwest area, large domestic corporations, and financial institutions (both domestic and international). Credit services are administered in three groups: a Large Corporations Group, a Mid-sized Corporations Group, and a Financial Institutions Group.
Treasury Management Services serves the treasury needs of major corporations and financial institutions by providing products and services to accelerate cash collections, control disbursement outflows, and generate information to manage their cash positions. Treasury management products and services, including lockbox collection, controlled disbursement products and electronic banking, are developed and marketed in this group.
PERSONAL FINANCIAL SERVICES (PFS)
Services to individuals is another major dimension of the trust business. Barry G. Hastings, Vice Chairman of the Corporation and the Bank, is head of Personal Financial Services (PFS) which encompasses personal trust, investment management services, estate administration, personal banking and mortgage lending. A key element of the personal trust strategy combines private banking and trust services to targeted high net worth individuals in rapidly growing areas of wealth concentration. These services are delivered through the Bank and a network of banking subsidiaries located in Florida, Arizona, California, Texas and suburban Chicago. PFS is one of the largest bank managers of personal trust assets in the United States, with total assets under administration of $51.4 billion at December 31, 1994.
Northern Trust Securities, Inc. and Berry, Hartell, Evers & Osborne, Inc. are also part of PFS.
In December 1993, Northern Trust Corporation entered into a definitive agreement to acquire Beach One Financial Services, Inc., parent company of The Beach Bank of Vero Beach (Florida). Beach One's assets totaled $198.6 million at December 31, 1994 and net income totaled $2.9 million in 1994. The acquisition agreement calls for Beach One shareholders to receive Northern Trust Corporation Common Stock aggregating $56.2 million with the exchange ratio set on the basis of the average last-sale prices for Northern Common Stock on the NASDAQ National Market System over a 20-day trading period ending just prior to closing. The maximum number of shares Northern is required to issue without further approval of
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================================================================================ directors is 1,701,515, equivalent to a formula price of $33 per share. The minimum number of shares Beach One holders are required to accept is 1,169,791, equivalent to a formula price of $48 per share. The acquisition was approved by Beach One shareholders on February 23, 1995 and by the Federal Reserve Bank on March 1, 1995, and, is expected to close on March 31, 1995. This transaction is expected to be accounted for as a pooling-of-interests.
In February, 1995, the Corporation entered into a definitive agreement to acquire Tanglewood Bancshares, Inc., parent company of Tanglewood Bank N.A. Houston for $33.0 million in cash. Tanglewood's assets totaled $229.9 million at December 31, 1994 and net income totaled $2.6 million in 1994. The agreement is subject to the approval of Tanglewood shareholders, to final due diligence and to various regulatory approvals and is expected to close in the second half of 1995.
WORLDWIDE OPERATIONS UNIT
Supporting all of Northern Trust's business activities is the Worldwide Operations Unit. During the fourth quarter of 1994 Trust and Banking operations and system activities were merged to insure that both day-to-day and strategic linkage between the new operations unit and all the areas it supports are maintained and strengthened. This combined unit will leverage experience in quality and productivity improvements, develop a shared technology strategy, and draw on a large pool of talent to address product and delivery complexities.
James J. Mitchell, Executive Vice President of the Corporation and the Bank, heads the Worldwide Operations Unit. This Unit focuses on supporting sales, relationship management and product management activities for Corporate and Institutional Services and Personal Financial Services.
RISK MANAGEMENT UNIT
The Risk Management Unit, headed by Senior Executive Vice President and Chief Financial Officer Perry R. Pero, includes the Credit Policy function and the Bank's Treasury Department. The Credit Policy function is described fully on page 16 of this report. The Treasury Department is responsible for managing the Bank's wholesale funding and interest rate risk, as well as the portfolio of interest rate risk management instruments under the direction of the Corporate Asset and Liability Policy Committee. It is also responsible for the investment portfolios of the Corporation and the Bank and provides investment advice and management services to the subsidiary banks.
The Risk Management Unit also includes the Corporate Controller, Corporate Treasurer, Investor Relations and Economic Research functions.
GOVERNMENT POLICIES
The earnings of Northern Trust are affected by numerous external influences, principally general economic conditions, both domestic and international, and actions that the United States and foreign governments and their central banks take in managing their economies. These general conditions affect all of the Northern Trust's businesses, as well as the quality and volume of the loan and investment portfolios.
An important regulator of domestic economic conditions is the Board of Governors of the Federal Reserve System, which has the general objective of promoting orderly economic growth in the United States. Implementation of this objective is accomplished by its open market operations in United States Government securities, the discount rate at which member banks may borrow from Federal Reserve Banks and changes in the reserve requirements for deposits. The policies adopted by the Federal Reserve may strongly influence interest rates and hence what banks earn on their loans and investments and what they pay on their savings and time deposits and other purchased funds. Fiscal policies in the United States and abroad also affect the composition and use of the Northern Trust's resources.
COMPETITION
Northern Trust's principal business strategy is to provide quality financial services to targeted market segments in which it believes it has a competitive advantage and favorable growth prospects. As part of this strategy, Northern Trust seeks to deliver a level of service to its clients that distinguishes it from its competitors. In addition, Northern Trust emphasizes the development and growth of recurring sources of fee-based income and is one of only six major bank holding companies in the United States that generates more revenues from fee-based services than from net interest income. Northern Trust seeks to develop and expand its recurring fee-based revenue by identifying selected market niches and providing a high level of individualized service to its clients in such markets. Northern Trust also seeks to preserve its asset quality through established credit review procedures and to maintain a conservative balance sheet. Finally, Northern Trust seeks to maintain a strong management team with senior officers having broad experience and long tenure.
Active competition exists in all principal areas in which the subsidiaries are presently engaged. CIS and PFS compete with domestic and foreign financial institutions, trust companies, financial companies, personal loan companies, mutual funds and investment advisers. Northern Trust is a leading provider of Master Trust and Master Custody services and has the leading market share in the Chicago area personal trust market.
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================================================================================ Commercial Banking and Treasury Management Services compete with domestic and foreign financial institutions, finance companies and leasing companies. Its products also face increased competition due to the general trend among corporations and other institutions to rely more upon direct access to the credit and capital markets (such as through the direct issuance of commercial paper) and less upon commercial banks and other traditional financial intermediaries.
The chief local competitors of the Bank for trust and banking business are Bank of America Illinois N.A., The First National Bank of Chicago and its affiliate American National Bank and Trust Company of Chicago, Harris Trust and Savings Bank, and LaSalle National Bank. The chief national competitors of the Bank for Master Trust/Master Custody services are Mellon Bank Corporation, State Street Boston Corporation, Bankers Trust New York Corporation, Chase Manhattan Corporation and Bank of New York Company, Inc.
REGULATION AND SUPERVISION
The Corporation is a bank holding company subject to the Bank Holding Company Act of 1956, as amended (Act), and to regulation by the Board of Governors of the Federal Reserve System. The Act limits the activities which may be engaged in by the Corporation and its nonbanking subsidiaries to those so closely related to banking or managing or controlling banks as to be a proper incident thereto. Also, under section 106 of the 1970 amendments to the Act and the Federal Reserve Board's regulations, a bank holding company, as well as certain of its subsidiaries, is prohibited from engaging in certain tie-in arrangements in connection with any extension of credit or provision of any property or services.
The Act also prohibits bank holding companies from acquiring substantially all the assets of or owning more than 5% of the voting shares of any bank or nonbanking company which is not already majority owned without prior approval of the Board of Governors. No application to acquire shares or assets of a bank located outside the state in which the operations of a bank holding company's banking subsidiaries are principally conducted may be approved by the Federal Reserve Board unless such acquisition is specifically authorized by a statute of the state in which the bank to be acquired is located.
Illinois law permits bank holding companies located in any state of the United States to acquire banks or bank holding companies located in Illinois subject to regulatory determinations that the laws of the other state permit Illinois bank holding companies to acquire banks and bank holding companies within that state on qualifications and conditions not unduly restrictive compared to those imposed by Illinois law. Subject to these regulatory determinations, the Corporation may acquire banks and bank holding companies in such states, and bank holding companies in those states may acquire banks and bank holding companies in Illinois.
Applicable laws also permit the Corporation to acquire banks or bank holding companies in Arizona, California, Texas, Florida and certain other states.
Illinois law permits an Illinois bank holding company to acquire banks anywhere in the state. Illinois legislation also now allows Illinois banks to open branches anywhere within Illinois.
Beginning September 29, 1995 the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (Interstate Act) permits an adequately capitalized and adequately managed bank holding company to acquire, with Federal Reserve Board approval, a bank located in a state other than the bank company's home state, without regard to whether the transaction is permitted under any state law, except that a host state may establish by statute the minimum age of its banks (up to a maximum of 5 years) subject to acquisition by out-of-state bank holding companies. The Federal Reserve Board may not approve the acquisition if the applicant bank holding company, upon consummation, would control more than 10% of total U.S. insured depository institution deposits or more than 30% of the host state's total insured depository institutions deposits. Effective as of September 29, 1994, the Interstate Act permits a bank, with the approval of the appropriate Federal bank regulatory agency, to establish a de novo branch in a state, other than the bank's home state, in which the bank does not presently maintain a branch if the host state has enacted a law that applies equally to all banks and expressly permits all out-of-state banks to branch de novo into the host state. Commencing June 1, 1997, banks having different home states may, with approval of the appropriate Federal bank regulatory agency, merge across state lines, unless the home state of a participating bank has opted-out. The Interstate Act permits as of September 29, 1995 any bank subsidiary of a bank holding company to receive deposits, renew time deposits, close loans, service loans and receive payments on loans and other obligations as agent for a bank or thrift affiliate, whether such affiliate is located in a different state or in the same state.
The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) amended the Act to authorize the Federal Reserve Board to allow bank holding companies to acquire any savings association (whether healthy, failed or failing) and removed "tandem operations" restrictions, which previously prohibited savings associations from being operated in tandem with a bank holding company's other subsidiaries. As a result, bank holding companies now have expanded opportunities to acquire savings associations.
Under FIRREA, an insured depository institution which is commonly controlled with another insured depository institution shall generally be liable for any loss incurred, or reasonably anticipated to be incurred, by the Federal Deposit Insurance Corporation (FDIC) in connection with the default of such commonly controlled institution, or for any assistance
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================================================================================ provided by the FDIC to such commonly controlled institution, which is in danger of default. The term "default" is defined to mean the appointment of a conservator or receiver for such institution. Thus, any of the Corporation's banking subsidiaries could incur liability to the FDIC pursuant to this statutory provision in the event of a loss suffered by the FDIC in connection with any of the Corporation's other banking subsidiaries (whether due to a default or the provision of FDIC assistance). Although neither the Corporation nor any of its nonbanking subsidiaries may be assessed for such loss under FIRREA, the Corporation has agreed to indemnify each of its banking subsidiaries, other than the Bank, for any payments a banking subsidiary may be liable to pay to the FDIC pursuant to the provisions of FIRREA.
The Bank is a member of the Federal Reserve System, its deposits are insured by the FDIC and it is subject to regulation by both these entities, as well as by the Illinois Commissioner of Banks and Trust Companies. The Bank is also a member of and subject to the rules of the Chicago Clearinghouse Association, and is registered as a government securities dealer in accordance with the Government Securities Act of 1986. As a government securities dealer its activities are subject to the rules and regulations of the Department of the Treasury. The Bank is registered as a transfer agent with the Federal Reserve and is therefore subject to the rules and regulations of the Federal Reserve.
The national bank subsidiaries are members of the Federal Reserve System and the FDIC and are subject to regulation by the Comptroller of the Currency. Northern Trust Bank/DuPage, a state chartered institution that is not a member of the Federal Reserve System, is regulated by the FDIC and the Illinois Commissioner of Banks and Trust Companies.
The Corporation's nonbanking affiliates are all subject to examination by the Federal Reserve. In addition, The Northern Trust Company of New York is subject to regulation by the Banking Department of the State of New York. Northern Futures Corporation is registered as a futures commission merchant with the Commodity Futures Trading Commission, is a member of the National Futures Association, the Chicago Board of Trade and the Board of Trade Clearing Corporation, and is a clearing member of the Chicago Mercantile Exchange. Northern Trust Securities, Inc. is registered with the Securities and Exchange Commission and is a member of the National Association of Securities Dealers, Inc., and, as such, is subject to the rules and regulations of both these bodies. Berry, Hartell, Evers & Osborne, Inc. is registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940 and is subject to that Act and the rules and regulations of the Commission promulgated thereunder. Two families of mutual funds for which the Bank acts as investment adviser are also subject to regulation by the Securities and Exchange Commission under the Investment Company Act. Various other subsidiaries and branches conduct business in other states and foreign countries and, therefore, may be subject to their regulations and restrictions.
The Corporation and its subsidiaries are affiliates within the meaning of the Federal Reserve Act so that the banking subsidiaries are subject to certain restrictions with respect to loans to the Corporation or its nonbanking subsidiaries and certain other transactions with them or involving their securities.
Information regarding dividend restrictions on banking subsidiaries is incorporated herein by reference to Note 12 titled Restrictions on Subsidiary Dividends and Loans or Advances on page 59 of the Corporation's Annual Report to Stockholders for the year ended December 31, 1994.
Under the FDIC's risk-based insurance assessment system, each insured bank is placed in one of nine risk categories based on its level of capital and other relevant information. Each insured bank's insurance assessment rate is then determined by the risk category in which it has been classified by the FDIC. There is an eight basis point spread between the highest and lowest assessment rates, so that banks classified as strongest by the FDIC are subject to a rate of .23%, and banks classified as weakest by the FDIC are subject to a rate of .31%. The FDIC is prohibited from lowering the average assessment rate below .23% until the Bank Insurance Fund (Fund) has reached a reserve ratio of 1.25%. The FDIC currently estimates the Fund will achieve the designated reserve ratio in 1995 and has proposed significant reductions in assessment rates.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) substantially revised the bank regulatory and funding provisions of the Federal Deposit Insurance Act and made revisions to several other federal banking statutes. In general, FDICIA subjects banks to significantly increased regulation and supervision. Among other things, FDICIA requires federal bank regulatory authorities to take "prompt corrective action" with respect to banks that do not meet minimum capital requirements, and imposes certain restrictions upon banks which meet minimum capital requirements but are not "well capitalized" for purposes of FDICIA. FDICIA and the regulations adopted under it establish five capital categories as follows, with the category for any institution determined by the lowest of any of these ratios:
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================================================================================ Tier 1 Tier 1 Total Leverage Ratio Risk-Based Ratio Risk-Based Ratio -------------- ---------------- ---------------- Well Capitalized 5% or above 6% or above 10% or above
Adequately Capitalized 4% or above* 4% or above 8% or above
Undercapitalized Less than 4% Less than 4% Less than 8%
Significantly Undercapitalized Less than 3% Less than 3% Less than 6%
Critically Undercapitalized - - 2% or below
*3% for banks with the highest CAMEL (supervisory) rating.
An insured depository institution may be deemed to be in a capital category that is lower than is indicated by the capital position reflected on its balance sheet if it receives an unsatisfactory rating by its examiners with respect to its assets, management, earnings or liquidity. Although a bank's capital categorization thus depends upon factors in addition to the balance sheet ratios in the table above, the Corporation has set capital goals for each of its subsidiary banks that would allow each bank to meet the minimum ratios that are one of the conditions for it to be considered to be well capitalized. At December 31, 1994, the Bank and each of the other subsidiary banks met or exceeded these goals. The capital ratios are disclosed and discussed on page 44 of the Corporation's Annual Report to Stockholders for the year ended December 31, 1994.
Under FDICIA, a bank that is not well capitalized is generally prohibited from accepting or renewing brokered deposits and offering interest rates on deposits significantly higher than the prevailing rate in its normal market area or nationally (depending upon where the deposits are solicited); in addition, "pass through" insurance coverage may not be available for certain employee benefit accounts.
FDICIA generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. Undercapitalized banks are subject to limitations on growth and are required to submit a capital restoration plan, which must be guaranteed by the institution's parent company. Institutions that fail to submit an acceptable plan, or that are significantly undercapitalized, are subject to a host of more drastic regulatory restrictions and measures.
FDICIA directs that each federal banking agency prescribe standards for depository institutions or depository institutions' holding companies relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, a maximum ratio of classified assets to capital, minimum earnings sufficient to absorb losses and other standards as they deem appropriate. Many regulations implementing these directives have been proposed and adopted by the agencies.
FDICIA also contains a variety of other provisions that may affect the operations of a bank, including new reporting requirements, regulatory standards for real estate lending, "truth in savings" provisions and a requirement that a depository institution give 90 days' prior notice to customers and regulatory authorities before closing any branch.
STAFF
Northern Trust employed 6,608 full-time equivalent officers and staff members as of December 31, 1994, approximately 4,800 of whom were employed by the Bank.
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STATISTICAL DISCLOSURES
The following statistical disclosures, included in the Corporation's Annual Report to Stockholders for the year ended December 31, 1994, are incorporated herein by reference.
ANNUAL REPORT SCHEDULE PAGE(S) ___________________________________________________ _____________ Foreign Outstandings.............................. ......... 37
Nonperforming Assets and 90 Day Past Due Loans.... ......... 37
Analysis of Reserve for Credit Losses............. ......... 38
Average Balance Sheet............................. ......... 72
Ratios............................................ ......... 72
Analysis of Net Interest Income................... .... 74 & 75 ___________________________________________________ _____________ Additional statistical information on a consolidated basis is set forth below.
REMAINING MATURITY AND AVERAGE YIELD OF SECURITIES HELD TO MATURITY AND AVAILABLE FOR SALE (Yield on a taxable equivalent basis giving effect of the federal and state tax rates)
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*Prior to 1994, securities shown as Available for Sale were classified as Held for Sale and carried at the lower of cost or fair value.
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AVERAGE DEPOSITS BY TYPE
AVERAGE RATES PAID ON TIME DEPOSITS BY TYPE
REMAINING MATURITY OF TIME DEPOSITS $100,000 AND MORE
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PERCENT OF INTERNATIONAL RELATED AVERAGE ASSETS AND LIABILITIES TO TOTAL CONSOLIDATED AVERAGE ASSETS
RESERVE FOR CREDIT LOSSES RELATING TO INTERNATIONAL OPERATIONS
The Securities and Exchange Commission requires the disclosure of the reserve for credit losses that is applicable to international operations. The above table has been prepared in compliance with this disclosure requirement and is used in determining international operating performance. In 1990 the remaining $13.1 million of the reserve designated for loans to less developed countries was transferred to the general unallocated portion of the reserve for credit losses. The amounts shown in the table should not be construed as being the only amounts that are available for international loan charge-offs, since the entire reserve for credit losses is available to absorb losses on both domestic and international loans. In addition, these amounts are not intended to be indicative of future charge-off trends. ================================================================================
DISTRIBUTION OF INTERNATIONAL LOANS AND DEPOSITS BY TYPE
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CREDIT RISK MANAGEMENT
Overview
The Credit Policy function reports to the Chief Financial Officer. Credit Policy provides a system of checks and balances for Northern Trust's diverse credit-related activities by establishing and monitoring all credit- related policies and practices and ensuring their uniform application. These activities are designed to ensure that credit exposure is diversified on an industry and client basis, thus lessening the overall credit risk.
Individual credit authority for commercial loans and within Personal Financial Services is limited to specified amounts and maturities. Credit decisions involving commitment exposure in excess of the specified individual limits are submitted to the appropriate Group Credit Approval Committee (Committee). Each Committee is chaired by the executive in charge of the area and has a Credit Policy officer as a voting participant. Each Committee's credit approval authority is specified, based on commitment levels, credit ratings and maturities. Credits involving commitment exposure in excess of these group credit limits require, dependent upon the internal credit rating, the approval of the Credit Policy Credit Approval Committee, the head of Credit Policy, or the business unit head.
Credit Policy established the Counterparty Risk Management Committee in order to manage counterparty risk more effectively. This committee has sole credit authority for exposure to all foreign banks, certain domestic banks which Credit Policy deems to be counterparties and which do not have commercial credit relationships within the Corporation, and other organizations which Credit Policy deems to be counterparties.
Under the auspices of Credit Policy, country exposure limits are reviewed and approved on a country-by-country basis.
As part of the Corporation's ongoing credit granting process, internal credit ratings are assigned to each client and credit before credit is extended, based on creditworthiness. Credit Policy performs at least annually a review of selected significant credit exposures to identify at the earliest possible stages clients who might be facing financial difficulties. Internal credit ratings are also reviewed during this process. Above average risk loans, which will vary from time to time, receive special attention by both lending officers and Credit Policy. This approach allows management to take remedial action in an effort to deal with potential problems.
An integral part of the Credit Policy function is a monthly formal review of all past due and potential problem loans to determine which credits, if any, need to be placed on nonaccrual status or charged off. The provision is reviewed quarterly to determine the amount necessary to maintain an adequate reserve for credit losses.
Management of credit risk is reviewed by various bank regulatory agencies. Independent auditors also perform a review of credit-related procedures, the loan portfolio and other extensions of credit, and the reserve for credit losses as part of their audit of the consolidated financial statements.
Allocation of the Reserve for Credit Losses
The reserve for credit losses is established and maintained on an overall basis and in practice is not specifically allocated to specific loans or segments of the portfolio. Thus, the reserve is available to absorb credit losses from all loans, leases and credit related exposures. Bank disclosure guidelines issued by the Securities and Exchange Commission request management to furnish a breakdown of the reserve for credit losses by loan category and provide the percentage of loans in each category to total loans.
In prior years, the allocation of the reserve represented an estimate of the amount that was necessary to provide for potential losses related to specific nonperforming loans only. Beginning in 1994, the methodology was revised to allocate the reserve for credit losses associated with all loans, leases and commitments based on historical loss experience, internal credit ratings and specific amounts designated for certain above average risk loans. This allocation method should not be interpreted as an indication of expected losses within the next year or any specified time period.
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As required by the Securities and Exchange Commission, the following tables break down the reserve for credit losses at December 31, 1990 through 1994:
Reserve for Credit Losses
Reserve for Credit Losses
Loan and lease categories as a percent of total loans and leases as of December 31, 1990 through 1994, are presented below.
Loan and Lease Category to Total Loans and Leases
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The information presented in the "Credit Risk Management" section should be read in conjunction with the following information that is incorporated herein by reference to the Corporation's Annual Report to Stockholders for the year ended December 31, 1994:
Annual Report Notes to Consolidated Financial Statements Page(s) ---------------------------------------------------------------- ------------- 1. Accounting Policies D. Interest Risk Management Instruments..................... ...........50 E. Loans and Leases......................................... ......50 & 51 F. Reserve for Credit Losses................................ ...........51 I. Other Real Estate Owned.................................. ...........51 4. Loans and Leases............................................ ...........54 5. Reserve for Credit Losses................................... ...........55 15. Contingent Liabilities...................................... ...........61 17. Off-Balance Sheet Financial Instruments..................... ........63-66 ---------------------------------------------------------------- Management's Discussion and Analysis of Financial Condition and Results of Operations ---------------------------------------------------------------- Asset Quality and Credit Risk................................... ........34-39 ---------------------------------------------------------------- -------------
In addition, the following schedules on page 15 of this Form 10-K should be read in conjunction with the "Credit Risk Management" section:
Reserve for Credit Losses Relating to International Operations
Distribution of International Loans and Deposits by Type
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INTEREST RATE SENSITIVITY ANALYSIS
For the discussion of interest rate sensitivity, see the section entitled "Asset and Liability Management" on page 41 of Management's Discussion and Analysis of Financial Condition and Results of Operations of the Corporation's Annual Report to Stockholders, which is incorporated herein by reference.
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The following unaudited Consolidated Balance Sheet and Consolidated Statement of Income for The Northern Trust Company were prepared in accordance with generally accepted accounting principles and are provided here for informational purposes. These consolidated financial statements should be read in conjunction with the footnotes accompanying the consolidated financial statements, included in the Corporation's Annual Report to Stockholders for the year ended December 31, 1994, and incorporated herein by reference on page 24 of this report.
The Northern Trust Company Consolidated Balance Sheet (unaudited)
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THE NORTHERN TRUST COMPANY CONSOLIDATED STATEMENT OF INCOME (unaudited)
SUPPLEMENTAL ITEM--EXECUTIVE OFFICERS OF THE REGISTRANT
DAVID W. FOX
Mr. Fox was elected Chairman of the Board of the Corporation and the Bank in April 1990, and Chief Executive Officer of the Corporation and the Bank on December 1989. He held the title of President of the Corporation and the Bank from 1987 through 1993. Mr. Fox, 63, joined the Bank in 1955.
WILLIAM A. OSBORN
Mr. Osborn was elected President and Chief Operating Officer of the Corporation and the Bank effective January 1994. He was a Senior Executive Vice President of the Corporation and the Bank from 1992 through 1993 and prior to that time had served as an Executive Vice President of the Bank since 1987, and of the Corporation since 1989. Mr. Osborn, 47, began his career with the Bank in 1970.
BARRY G. HASTINGS
Mr. Hastings was elected Vice Chairman of the Corporation and the Bank effective January 1994, and is currently head of Personal Financial Services. He was a Senior Executive Vice President of the Corporation and the Bank from 1992 through 1993 and prior to that time had served as an Executive Vice President of the Bank since 1987, and of the Corporation since 1990. Mr. Hastings, 47, began his career with the Corporation in 1974.
J. DAVID BROCK
Mr. Brock became an Executive Vice President of the Corporation and the Bank in April 1990. Currently, he is responsible for Institutional Financial Services in the Corporate and Institutional Services Business Unit. From 1990 to 1994, he was head of Corporate Management Services and the Commercial Banking Services Group. Mr. Brock, 50, joined the Bank in 1966.
DAVID L. EDDY
Mr. Eddy became a Senior Vice President of the Corporation and the Bank and Treasurer of the Corporation in 1986. Mr. Eddy, 58, joined the Bank in 1960.
JOHN V. N. McCLURE
Mr. McClure was appointed an Executive Vice President of the Corporation and the Bank in February 1994, and is currently responsible for strategic expense management. Previously, he was responsible for Strategic Planning and Marketing. He served as head of the Private Banking Division of Personal Financial Services from 1989 to 1991. He had been a Senior Vice President of the Bank since 1986 and of the Corporation since 1991. Mr. McClure, 43, joined the Bank in 1973.
JAMES J. MITCHELL
Mr. Mitchell was appointed an Executive Vice President of the Bank in December 1987 and of the Corporation in October 1994, and is currently head of the Worldwide Operations Unit. Mr. Mitchell, 52, joined the Bank in 1964.
SHEILA A. PENROSE
Ms. Penrose is an Executive Vice President of the Corporation and the Bank, and Head of the Corporate and Institutional Services Business Unit. She became an Executive Vice President of the Corporation in November 1994 and of the Bank in November 1993, and prior to that time had been Senior Vice President of the Bank since 1986. Ms. Penrose, 49, began her career with the Bank in 1977.
PERRY R. PERO
Mr. Pero is Chief Financial Officer of the Corporation and the Bank and Cashier of the Bank. Mr. Pero is also head of the Risk Management Unit and Chairman of the Corporate Asset and Liability Policy Committee. He became a Senior Executive Vice President of the Corporation and the Bank in 1992 after serving as an Executive Vice President of the Corporation and the Bank since 1987. Mr. Pero, 55, joined the Bank in 1964.
PETER L. ROSSITER
Mr. Rossiter was appointed General Counsel of the Corporation and the Bank in April 1993. He joined the Corporation and the Bank in 1992 as an Executive Vice President and Associate General Counsel. Mr. Rossiter, 46, had been a partner in the law firm of Schiff Hardin & Waite from 1979 to 1992.
HARRY W. SHORT
Mr. Short was appointed Senior Vice President and Controller of the Corporation and the Bank in October 1994. He joined the Corporation and the Bank in January 1990 and served as Senior Vice President and General Auditor. Mr. Short, 46, had been a partner in the accounting firm of KPMG Peat Marwick from 1982 to 1990.
WILLIAM S. TRUKENBROD
Mr. Trukenbrod was appointed an Executive Vice President of the Corporation and the Bank in February 1994, and is currently Chairman of the Credit Policy Committee. Previously, he served as head of the U.S. Corporate Group of Commercial Banking from 1987 to 1992. He had been a Senior Vice President of the Bank since 1980 and of the Corporation since 1992. Mr. Trukenbrod, 55, joined the Bank in 1962.
There is no family relationship between any of the above executive officers and directors.
The positions of Chairman of the Board and Chief Executive Officer, President and Vice Chairman are elected annually by the Board of Directors at the first meeting of the Board of Directors held after each annual meeting of stockholders. The other officers are appointed annually by the Board. Officers continue to hold office until their successors are duly elected or unless removed by the Board.
Mr. Fox has announced his intention to retire on October 3, 1995. The Board of Directors of the Corporation has approved a succession plan under which Mr. Osborn will become Chief Executive Officer on June 30, 1995, and Mr. Hastings will become Chief Operating Officer on that date. Mr. Fox will remain Chairman until his retirement, whereupon Mr. Osborn will become Chairman as well as Chief Executive Officer and Mr. Hastings will become President as well as Chief Operating Officer.
ITEM 2

ITEM 2 - -PROPERTIES
The executive offices of the Corporation and the Bank are located at 50 South LaSalle Street in the financial district of Chicago. This Bank-owned building is occupied by various divisions of Northern Trust's business units. Financial services are provided by the Bank at this location. Adjacent to this building are two office buildings in which the Bank leases approximately 316,000 square feet of space for staff divisions of the business units. The Bank also leases approximately 112,000 square feet of a building at 125 South Wacker Drive in Chicago for computer facilities, banking operations and personal banking services. Financial services are also provided by the Bank at five other Chicago area locations, two of which are owned and three of which are leased. The Bank's trust and banking operations are located in a 465,000 square foot facility at 801 South Canal Street in Chicago. The building is owned by a developer and leased by the Corporation. Space for the Bank's London branch, Edge Act subsidiary and The Northern Company, Canada are leased.
The Corporation's other subsidiaries operate from 45 locations, 10 of which are owned and 35 of which are leased. Detailed information regarding the addresses of all Northern Trust's locations can be found on pages 80 and 81 in the Corporation's Annual Report to Stockholders for the year ended December 31, 1994, which is incorporated herein by reference.
The facilities which are owned or leased are suitable and adequate for business needs. For additional information relating to properties and lease commitments, refer to Note 6 titled Buildings and Equipment and Note 7 titled Lease Commitments on pages 55 and 56 of the Corporation's Annual Report to Stockholders for the year ended December 31, 1994, which information is incorporated herein by reference.
ITEM 3

ITEM 3 - -LEGAL PROCEEDINGS
The information called for by this item is incorporated herein by reference to Note 15 titled Contingent Liabilities on page 61 of the Corporation's Annual Report to Stockholders for the year ended December 31, 1994.
In late November, 1993, the U.S. Department of Justice informed the Corporation that the Department is investigating the mortgage lending practices of the Bank and the Corporation's three other Illinois banking subsidiaries, as part of its responsibility to investigate possible discrimination on the basis of race or national origin under the Equal Credit Opportunity Act and the Fair Housing Act. The Corporation believes it has cooperated fully with the Department of Justice in the investigation, which is still pending.
ITEM 4

ITEM 5 - -MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information called for by this item is incorporated herein by reference to the section of the Consolidated Financial Statistics titled "Common Stock Dividend and Market Price" on pages 76 and 77 of the Corporation's Annual Report to Stockholders for the year ended December 31, 1994.
Information regarding dividend restrictions of the Corporation's banking subsidiaries is incorporated herein by reference to Note 12 titled "Restrictions on Subsidiary Dividends and Loans or Advances" on page 59 of the Corporation's Annual Report to Stockholders for the year ended December 31, 1994.
ITEM 6

ITEM 6 - -SELECTED FINANCIAL DATA
The information called for by this item is incorporated herein by reference to the table titled "Summary of Selected Consolidated Financial Data" on page 26 of the Corporation's Annual Report to Stockholders for the year ended December 31, 1994.
ITEM 7

ITEM 7 - -MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information called for by this item is incorporated herein by reference to Management's Discussion and Analysis of Financial Condition and Results of Operations on pages 26 through 45 of the Corporation's Annual Report to Stockholders for the year ended December 31, 1994.
ITEM 8

ITEM 8 - -FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements of the Corporation and its subsidiaries included in the Corporation's Annual Report to Stockholders for the year ended December 31, 1994, are incorporated herein by reference.
The section titled "Quarterly Financial Data" on pages 76 and 77 of the Corporation's Annual Report to Stockholders for the year ended December 31, 1994, is incorporated herein by reference.
ITEM 9

ITEM 10 - -DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by Item 10, relating to Directors and Nominees for election to the Board of Directors, is incorporated herein by reference to pages 2 through 5 of the Corporation's definitive 1995 Notice and Proxy Statement filed in connection with the solicitation of proxies for the Annual Meeting of Stockholders to be held April 18, 1995. The information called for by Item 10 relating to Executive Officers is set forth in Part I of this Annual Report on Form 10-K.
ITEM 11

ITEM 11 - -EXECUTIVE COMPENSATION
The information called for by this item is incorporated herein by reference to pages 8 and 9 and pages 10 through 17 of the Corporation's definitive 1995 Notice and Proxy Statement filed in connection with the solicitation of proxies for the Annual Meeting of Stockholders to be held April 18, 1995.
ITEM 12

ITEM 12 - -SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by this item is incorporated herein by reference to pages 6 and 7 of the Corporation's definitive 1995 Notice and Proxy Statement filed in connection with the solicitation of proxies for the Annual Meeting of Stockholders to be held April 18, 1995.
ITEM 13

ITEM 13 - -CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by this item is incorporated herein by reference to page 9 of the Corporation's definitive 1995 Notice and Proxy Statement filed in connection with the solicitation of proxies for the Annual Meeting of Stockholders to be held April 18, 1995.
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PART IV
ITEM 14

ITEM 14 - -EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
ITEM 14(A)(1) AND (2)-- NORTHERN TRUST CORPORATION AND SUBSIDIARIES LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following financial information is set forth in Item 1 for informational purposes only:
Financial Information of The Northern Trust Company (Bank Only):
Unaudited Consolidated Balance Sheet--December 31, 1994 and 1993.
Unaudited Consolidated Statement of Income--Years Ended December 31, 1994, 1993 and 1992.
The following consolidated financial statements of the Corporation and its subsidiaries are incorporated by reference into Item 8 from the Corporation's Annual Report to Stockholders for the year ended December 31, 1994:
Consolidated Financial Statements of Northern Trust Corporation and Subsidiaries:
Consolidated Balance Sheet--December 31, 1994 and 1993.
Consolidated Statement of Income--Years Ended December 31, 1994, 1993 and 1992.
Consolidated Statement of Changes in Stockholders' Equity--Years Ended December 31, 1994, 1993 and 1992.
Consolidated Statement of Cash Flows--Years Ended December 31, 1994, 1993 and 1992.
The following financial information is incorporated by reference into Item 8 from the Corporation's Annual Report to Stockholders for the year ended December 31, 1994:
Financial Statements of Northern Trust Corporation (Corporation):
Condensed Balance Sheet--December 31, 1994 and 1993.
Condensed Statement of Income--Years Ended December 31, 1994, 1993 and 1992.
Consolidated Statement of Changes in Stockholders' Equity--Years Ended December 31, 1994, 1993 and 1992.
Condensed Statement of Cash Flows--Years Ended December 31, 1994, 1993 and 1992.
The Notes to Consolidated Financial Statements as of December 31, 1994, incorporated by reference into Item 8 from the Corporation's Annual Report to Stockholders for the year ended December 31, 1994, pertain to the Bank only information, consolidated financial statements and Corporation only information listed above.
The Report of Independent Public Accountants incorporated by reference into Item 8 from the Corporation's Annual Report to Stockholders for the year ended December 31, 1994 pertains to the consolidated financial statements and Corporation only information listed above.
Financial statement schedules have been omitted for the reason that they are not required or are not applicable.
ITEM 14(A)3--EXHIBITS
The exhibits listed on the Exhibit Index beginning on page 28 of this Form 10-K are filed herewith or are incorporated herein by reference to other filings.
ITEM 14(B)--REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Corporation during the quarter ended December 31, 1994.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Form 10-K Report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 14, 1995 Northern Trust Corporation (Registrant)
By: David W. Fox ---------------------------------- David W. Fox Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Form 10-K Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
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The following Exhibits are filed herewith or are incorporated herein by reference.
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* Prior Filings (File No. 0-5965, except as noted) -----------------------------------------------
(1) Annual Report on Form 10-K for the year ended December 31, 1992
(2) Registration Statement on Form S-4 dated February 10, 1994 (Reg. No. 33-52219)
(3) Quarterly Report on Form 10-Q for the quarter ended March 31, 1993
(4) Quarterly Report on Form 10-Q for the quarter ended September 30, 1986
(5) Annual Report on Form 10-K for the year ended December 31, 1986
(6) Annual Report on Form 10-K for the year ended December 31, 1988
(7) Form 8-K dated January 26, 1989
(8) Annual Report on Form 10-K for the year ended December 31, 1989
(9) Form 8-A dated October 30, 1989
(10) Annual Report on Form 10-K for the year ended December 31, 1990
(11) Annual Report on Form 10-K for the year ended December 31, 1991
(12) Quarterly Report on Form 10-Q for the quarter ended March 31, 1992
(13) Form 8-K dated February 20, 1991
(14) Annual Report on Form 10-K for the year ended December 31, 1993
** Denotes management contract or compensatory plan or arrangement ---------------------------------------------------------------
Upon written request to Peter L. Rossiter, Secretary, Northern Trust Corporation, 50 South LaSalle Street, Chicago, Illinois 60675, copies of exhibits listed above are available to Northern Trust Corporation stockholders by specifically identifying each exhibit desired in the request.
Pursuant to Item 601(b)(4)(iii) of Regulation S-K, the Corporation hereby agrees to furnish the Commission, upon request, any instrument defining the rights of holders of long-term debt of the Corporation not filed as an exhibit herein. No such instrument authorizes long-term debt securities in excess of 10% of the total assets of the Corporation and its subsidiaries on a consolidated basis. ==============================================================================