EXHIBIT NUMBER (13)
TO 1996 FORM 10-K
1996 ANNUAL REPORT TO SHAREHOLDERS
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Northern Trust Corporation (Corporation) is a bank holding company organized in
1971 to hold all of the outstanding capital stock of The Northern Trust Company
(Bank), an Illinois banking corporation with its headquarters located in the
Chicago financial district. The Corporation also owns banks in Arizona,
California, Florida and Texas, and various other nonbank subsidiaries,
including a securities brokerage firm, a futures commission merchant, an
international investment consulting firm and a retirement services company. The
Corporation also owned three other Illinois banks which were merged into the
Bank on February 29, 1996. Although the operations of other subsidiaries will
be of increasing significance, it is expected that the Bank will continue to be
the major source of the consolidated assets, revenues and net income in the
foreseeable future.
All references to Northern Trust refer to Northern Trust Corporation and its
subsidiaries on a consolidated basis.
The Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with Northern Trust's Consolidated
Financial Statements and Consolidated Financial Statistics included herein.
RESULTS OF OPERATIONS
OVERVIEW. Net income for 1996 totaled a record $258.8 million, a 17.6% increase
from the $220.0 million earned in 1995 which in turn was 20.8% greater than the
$182.2 million earned in 1994. Fully diluted net income per common share,
reflecting the two-for-one stock split in December, 1996, increased 19% to
$2.20 in 1996, compared with net income per common share of $1.85 in 1995 and
$1.58 in 1994. Over the past five years the compound growth rate in earnings
per share has been 14%.
The record 1996 net income performance, together with strong growth in equity,
produced a return on average common stockholders' equity of 18.6% compared with
17.6% in 1995 and 16.6% in 1994. The return on average assets was 1.23% in 1996
compared with 1.13% in 1995 and 1.02% in 1994.
1996 marks the ninth consecutive year of record earnings. Trust fees, net
interest income, foreign exchange profits and treasury management fees were all
at record levels, while trust assets under administration reached $778.9
billion at December 31, 1996, up $165.0 billion from a year ago. Excellent
growth in all of Northern Trust's diversified revenue sources produced a 12%
increase in revenues while operating expenses increased by 8%.
Primarily through the retention of earnings, offset in part by the repurchase
of common stock pursuant to the Corporation's share buyback program,
stockholders' equity grew to $1.54 billion, as compared to $1.45 billion at
December 31, 1995 and $1.28 billion at December 31, 1994.
The Board of Directors increased the quarterly dividend per common share 16.1%
in November 1996, to $.18 from $.16, for a new annual rate of $.72. This is the
tenth consecutive year in which the dividend rate has been increased. The
Board's action reflects a policy of increasing the dividend rate with increased
profitability while retaining sufficient earnings to allow for strategic
expansion and the maintenance of a strong balance sheet.
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SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA
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(In Millions Except Per
Share Amounts) 1996 1995 1994 1993 1992
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Net Interest Income $ 388.3 $ 357.6 $ 334.6 $ 327.9 $ 310.3
Provision for Credit
Losses 12.0 6.0 6.0 19.5 29.5
Noninterest Income
Trust Fees 592.3 505.0 453.4 404.8 368.4
Other Noninterest Income 185.6 173.1 180.0 149.0 141.9
Noninterest Expenses 766.8 709.2 700.5 628.2 584.6
Provision for Income
Taxes 128.6 100.5 79.3 66.1 57.0
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NET INCOME $ 258.8 $ 220.0 $ 182.2 $ 167.9 $ 149.5
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Net Income Applicable to
Common Stock $ 253.9 $ 211.5 $ 174.9 $ 161.6 $ 142.7
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PER COMMON SHARE
Net Income
-- Primary $ 2.21 $ 1.88 $ 1.59 $ 1.48 $ 1.32
-- Fully Diluted 2.20 1.85 1.58 1.48 1.32
Dividends Declared .65 .55 .46 .39 .33
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Average Total Assets $20,964.3 $19,409.5 $17,885.8 $15,700.2 $13,418.0
Senior Notes at Year-End 305.0 17.0 547.0 817.0 312.0
Notes Payable at Year-End 427.8 334.6 244.8 326.8 233.2
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Note: Per common share data reflects the two-for-one stock split effected
through a 100% stock distribution on December 9, 1996.
18
Northern Trust Corporation
Northern Trust's strategy will continue to focus on growing its two sharply
defined businesses: Corporate and Institutional Services (C&IS) and Personal
Financial Services (PFS). C&IS focuses on administering and managing domestic
and global investment pools for corporate and institutional clients worldwide.
PFS provides financial services to individuals and closely held businesses
through a unique five-state personal financial services franchise. In executing
this strategy, Northern Trust emphasizes service quality through a high level
of personal service and maximization of benefits derived from technology
investments. Expense growth and capital expenditures are closely monitored to
ensure that short- and long-term business strategies and performance objectives
are effectively balanced.
NONINTEREST INCOME. The success of Northern Trust's strategy of maintaining a
diverse, fee-oriented revenue base is evidenced by the fact that noninterest
income represented 65% of its total taxable equivalent revenue in 1996,
compared with 63% one year ago. Noninterest income totaled $777.9 million in
1996, $678.1 million in 1995 and $633.4 million in 1994 which included the
$28.5 million pretax gain on the sale of the Corporation's 21% interest in
Banque Scandinave en Suisse (BSS).
TRUST FEES. Trust fees accounted for 76% of total noninterest income and 49%
of total taxable equivalent revenue in 1996. Trust fees for 1996 increased 17%
to $592.3 million from $505.0 million in 1995 which was up 11% from $453.4
million in 1994. Trust fees have increased at a compound growth rate of 14% for
the last five years. The increase in 1996 trust fees is principally the result
of growth in business from new and existing clients, coupled with strong growth
in stock and bond markets. Fees generated by Northern Trust Global Advisors,
Inc. (NTGA), formerly RCB International Inc., an asset management subsidiary
acquired on October 31, 1995, and The Beach Bank of Vero Beach, Florida (Beach
Bank), a March 31, 1995 acquisition, contributed approximately $22.4 million of
the trust fee growth in 1996. Contributing to the 1995 fee growth were new
business results and higher stock and bond market values, as well as the
incremental impact of fees contributed by NTGA, Beach Bank and Hazlehurst &
Associates (acquired April 1994 and renamed Northern Trust Retirement
Consulting, Inc.). Total trust assets under administration at December 31, 1996
were $778.9 billion compared to $613.9 billion a year ago, an increase of 27%.
Trust assets under management, included in the above, increased 23% to $130.3
billion, from $105.5 billion at the end of 1995.
Fees are based on the market value of assets managed and administered, the
volume of transactions and securities lending activity, and fees for other
services rendered. Asset-based fees are typically determined on a sliding scale
so that as the value of a client portfolio grows in size, Northern Trust
receives a smaller percentage of the increasing value as fee income. Therefore,
market value or other incremental changes in a portfolio's size do not
typically have a proportionate impact on the level of trust fees. In addition
to fees, certain trust-related activities result in deposits, primarily
interest-bearing, which are maintained with the bank subsidiaries and foreign
branches. These deposits averaged $4.3 billion in 1996 and $4.2 billion in
1995.
Northern Trust's fiduciary business encompasses Master Trust, Master Custody,
investment management and retirement services for corporate and institutional
asset pools, as well as a complete range of estate planning, fiduciary, and
asset management services for individuals. Fees from these highly focused
services are fairly evenly distributed between Northern Trust's two business
units, C&IS and PFS. The discussion of trust activities in each of these
business units follows.
CORPORATE AND INSTITUTIONAL SERVICES. Northern Trust is a leading provider of
Master Trust and Master Custody services to retirement plans and institutional
and international clients. In addition to Master Trust and Master Custody, C&IS
offers a comprehensive array of retirement consulting and recordkeeping
services and investment products. At December 31, 1996 trust assets under
administration in C&IS totaled $693.7 billion, an increase of 27% from $544.3
billion a year ago. Trust fees in C&IS increased 22% in 1996 to $298.3 million
from $244.2 million in 1995 which was up 13% from $216.7 million in 1994.
Excluding the incremental fee growth resulting from the NTGA acquisition, C&IS
trust fees in 1996 increased 13% from the prior year. The increase in C&IS
trust fees reflects record net new business and strong securities lending
revenue, moderated by the effect of changing pricing structures for client
relationships which focus on total client revenues. These client relationships
increasingly involve services such as foreign exchange which generate revenues
not reflected in trust fees.
Retirement Plans. Trust fees from the retirement plans market segment, which
includes the large U.S. corporate market and public and union retirement funds,
totaled $176.4 million in 1996. Trust fees for this segment in 1995 and 1994
totaled $156.4 million and $139.9 million, respectively. Assets under
administration totaled $375.2 billion at December 31, 1996 compared with $304.0
billion a year ago. Growth in this area has been driven by record new business
from both new and existing clients. U.S. demographic trends are expected to
advance the growth of retirement services in future years. Much of the
anticipated growth in retirement assets is expected to come from defined
contribution plans of U.S. corporations. Northern believes that it is well-
positioned to benefit from this trend given its long-term relationships with
corporate sponsors, its family of institutional mutual funds, and recordkeeping
services offered through Northern Trust Retirement Consulting, Inc. (NTRC). The
services offered through
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Northern Trust Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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NTRC include retirement plan design, participant recordkeeping, and actuarial
and consulting services that complement Northern Trust's custody, fiduciary and
investment management capabilities in the strategically important retirement
services market.
Institutional. This market segment, which includes insurance companies,
foundations and endowments, and correspondent trust services, provides
attractive growth opportunities for trust and banking services. The insurance
industry continues to consolidate its relationships with providers who can meet
its full range of banking and custody needs. Northern Trust seeks to maintain
an array of products and services, a strong capital position and systems
capabilities that position it to increase its share of this market. Northern
Trust leverages its investment in technology by providing smaller bank trust
departments with custody, systems, and investment services through its
correspondent trust services offerings. Trust fees from the institutional
market segment in 1996, 1995 and 1994 totaled $53.2 million, $50.1 million and
$48.0 million, respectively. Assets under administration at December 31, 1996
increased to $164.2 billion from $141.6 billion at December 31, 1995.
International. This segment is composed of non-U.S. clients and group trusts.
When compared to the other C&IS market segments, International has had the
highest compound growth rate for the last four years measured in terms of
assets under administration and trust fees. At December 31, 1996 assets under
administration totaled $111.1 billion, up 65% from $67.3 billion at year-end
1995, which in turn was up 40% over the previous year-end. Trust fees for 1996
increased 27% to $43.0 million. This compares with $33.9 million in 1995 which
was up 18% from $28.8 million in 1994. In October, 1996, Northern Trust
expanded on its global presence by opening a full service office in Singapore.
This office complements Northern Trust's securities lending and investment
management services in Hong Kong, broadening its regional capabilities.
Global Investment Services. Investment management, securities lending, and
risk and performance analysis services are offered to C&IS clients. Fees
associated with these activities, with the exception of NTGA-related fees, are
included within the market segments above. Total assets under management grew
from $64.4 billion at year-end 1995 to $80.4 billion at year-end 1996; $37.2
billion was associated with direct asset management, including sweep and custom
cash funds, while the remaining $43.2 billion represented securities lending
collateral. In 1996 Northern Trust accelerated its positioning as a global,
multi-asset class manager with an expanded array of investment service and
product capabilities. For example, Northern Trust has expanded its investment
advisory service offerings to offshore clients through a new Dublin subsidiary,
Northern Trust Fund Managers (Ireland) Limited.
Northern Trust completed its acquisition of NTGA in the fourth quarter of
1995. NTGA provides specialized U.S. and international multiple manager
programs to complement the capabilities of Northern Trust in the fixed income,
equity and short-term markets. Total assets under management at NTGA at
December 31, 1996 were $5.7 billion versus $5.0 billion at year-end 1995. NTGA
earned $25.7 million in trust fees in 1996.
Clients who utilize trust services may elect to have their securities lent to
generate revenues, thereby improving their portfolio's total return. The cash
that has been deposited by investment firms as collateral for securities they
have borrowed from trust clients under the lending program is managed by
Northern Trust and included in trust assets under management. The growth in
domestic and international securities lending fees, up 49% over 1995, which in
turn was up 19% over 1994, was due primarily to an increase in the volume of
securities loaned. The cash collateral totaled $43.2 billion and $31.4 billion
at December 31, 1996 and 1995, respectively. During the first quarter of 1995,
Northern Trust commenced operations at its new Hong Kong subsidiary to better
facilitate the lending of securities from its clients' global portfolios.
Global Custody. In terms of assets under administration, global custody is one
of the fastest growing products within C&IS. This product provides the
necessary service capabilities for the growing volume of foreign assets that
are held by U.S. and non-U.S. domiciled clients. Northern Trust continues to
strengthen global securities processing and invest in the required systems
capabilities and sub-custodial network in order to capitalize on the growth
opportunities presented by the development of worldwide financial markets.
Through its worldwide network of subcustodians in 70 countries, Northern Trust
had global assets of approximately $108 billion under administration at
December 31, 1996 which is 27% greater than last year.
Competition. Competition in the corporate and institutional business has been
impacted by recent financial services mergers and acquisitions and further
consolidation in the industry as other providers exit the business. In the
third quarter of 1996, Northern Trust was named preferred provider of master
trust and domestic institutional custody services for clients of First Chicago
NBD as it exits that business. Through January 1997, clients with approximately
$29.0 billion in trust assets and annualized fee revenues of approximately $8.3
million have selected Northern Trust. The transition of these clients is
expected to be completed during the first half of 1997. Targeted marketing
efforts continue.
Competition has remained intense in the master trust/master custody business
affecting the pricing of associated products and services. Northern Trust
believes that it is positioned to deal with these pressures and maintain
profitability because of its focus on individual client service, developing
deeper client relationships that include a range of services, economies of
scale and technological innovation.
20
Northern Trust Corporation
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CONSOLIDATED TRUST ASSETS UNDER ADMINISTRATION
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Percent Five-Year
December 31 Change Compound
---------------------------------- ------- Growth
($ In Billions) 1996 1995 1994 1993 1992 1996/95 Rate
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Corporate $ 80.4 $ 64.4 $ 48.5 $ 43.4 $ 39.1 25% 19%
Personal 49.9 41.1 33.8 33.7 30.5 21 14
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TOTAL MANAGED TRUST AS-
SETS $130.3 $105.5 $ 82.3 $ 77.1 $ 69.6 23% 17%
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Corporate $613.3 $479.9 $393.2 $377.7 $320.9 28% 17%
Personal 35.3 28.5 23.1 21.7 21.2 24 9
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TOTAL NON-MANAGED TRUST
ASSETS $648.6 $508.4 $416.3 $399.4 $342.1 28% 16%
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CONSOLIDATED TRUST
ASSETS UNDER
ADMINISTRATION $778.9 $613.9 $498.6 $476.5 $411.7 27% 17%
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Note: Certain reclassifications have been made to prior years' financial
information to conform to the current year presentation.
PERSONAL FINANCIAL SERVICES. Northern Trust has positioned itself in states
having significant concentrations of wealth and growth potential. With the
addition of seven new offices in 1996 and three offices in early 1997, Northern
Trust's unique national network of Personal Financial Services offices includes
60 locations in Illinois, Florida, California, Arizona, and Texas. PFS also
includes the Wealth Management Group which provides customized products and
services to meet the complex financial needs of families throughout the country
with assets typically exceeding $100 million. At December 31, 1996 trust assets
under administration in PFS totaled $85.2 billion, an increase of 22% from
$69.6 billion at December 31, 1995. Trust fees increased 13% in 1996 to $294.0
million while 1995 trust fees totaled $260.8 million, an increase of 10% from
$236.7 million in 1994. Although all geographic markets contributed to the 1996
increase, the strongest fee growth occurred in the Wealth Management Group and
the Chicago, Florida and Texas markets. With an established presence and
expanding network in growing markets, Northern Trust believes that it has the
momentum to continue to grow personal trust fees.
Illinois. Personal trust fees in Illinois increased 10% to $130.2 million in
1996 from $118.5 million in 1995, which was up 5% from $113.3 million in 1994.
Trust assets under administration totaled $35.1 billion at December 31, 1996
compared with $30.4 billion a year ago. Over the years clients have been
attracted by both the quality of trust services and the financial strength and
stability which Northern Trust has consistently achieved. These qualities,
combined with credit ratings that are top tier, have allowed Northern Trust to
enhance the growth of its personal trust business. It is expected that the
Chicago area market will continue to be a significant contributor to personal
trust revenues.
Florida. Northern Trust continues to strengthen its position in the Florida
marketplace. Trust fees for 1996 totaled $77.3 million, up 17% from $65.9
million in 1995 which was up 15% from $57.2 million in 1994. Trust assets under
administration were $15.3 billion at December 31, 1996, and $13.2 billion at
year-end 1995, making Northern Trust the second largest provider of personal
trust services in Florida. The five-year compound growth rates for trust fees
and trust assets have been 14% and 13%, respectively. With new offices opened
in Bonita Springs, Delray Beach and Stuart during 1996 and Tampa in 1997,
Northern Trust now has twenty-three offices located in coastal communities
encompassing the southern half of the state. Management believes there remains
significant opportunity for growth in and around the markets currently served
in Florida.
California. With the opening of offices in La Jolla and Montecito in early
1997, Northern Trust's California subsidiary has eight offices strategically
located throughout the state to reach the California trust market. Trust fees
for 1996 increased 7% to $39.5 million from $37.0 million in 1995 which was up
9% from $34.0 million in 1994. Trust assets under administration totaled $7.3
billion at December 31, 1996 and $6.1 billion at December 31, 1995.
Arizona. Northern Trust Bank of Arizona N.A. is one of the largest providers
of personal trust services in the state. As in other markets, the strategy in
Arizona includes providing private banking and trust services to targeted high
net worth individuals. New offices were established during 1996 in Sun City
West and Mesa, bringing to six the total number of offices in this growing
market. Trust fees from this market were $15.4 million in 1996, $13.7 million
in 1995 and $12.8 million in 1994. Assets under administration at December 31,
1996 and 1995 totaled $2.6 billion and $2.1 billion, respectively.
Texas. Northern Trust expanded its growing presence in Texas during 1996 with
the acquisition of Metroplex Bancshares, Inc., parent company of Bent Tree
National Bank (Bent Tree) in Dallas, Texas. The acquisition added a north
Dallas location to Northern Trust's six
21
Northern Trust Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
existing facilities in Dallas and Houston, the two most important metropolitan
markets in the state. Northern Trust has expanded from one office to seven
offices since its entry into the Texas market in 1989. The Texas facilities
have experienced the highest percentage growth rate for the past two years for
both trust fees and assets under administration of any of the states served by
Northern Trust. Trust fees for 1996, 1995 and 1994 were $8.6 million, $6.9
million and $4.6 million, respectively. Trust assets under administration were
$2.3 billion at December 31, 1996 and $1.9 billion at December 31, 1995.
Wealth Management. Trust fees in the rapidly growing national Wealth
Management Group grew 22% to $23.0 million in 1996 from $18.8 million in 1995,
which was up 27% from $14.8 million in 1994. This group had $22.6 billion of
trust assets under administration, a 42% increase from a year ago. The 140
families serviced by this group benefit from Northern Trust's sophisticated
master trust and global custody services and the reporting capabilities of the
Passport electronic delivery system.
Expansion. The national personal trust strategy focuses primarily on
increasing market share in present geographic locations and other selected
upscale personal markets. In Florida, Northern Trust plans to expand into
additional counties over the next three to five years. Selective acquisitions
may be made where they can accelerate the pace of expansion. Northern Trust
also plans to establish offices in the newer growth areas around Phoenix and
Tucson, Arizona during the next several years. In Illinois, Northern Trust
expects to establish new offices in several Chicago suburban communities, and
an additional inner city location is also contemplated.
INVESTMENT MANAGEMENT. Northern Trust's investment management business
benefited significantly in 1996 from strong equity markets around the world, as
well as from broader industry trends, including the increasing preference of
investors to concentrate assets with fewer managers, the globalization of the
financial markets and a greater focus on risk evaluation and management.
Northern's competitive investment results, successful expansion of client
relationships and new product offerings contributed to continued growth in
assets under management. Today, Northern Trust manages $130.3 billion for
personal and institutional clients, up 23% from year-end 1995, placing Northern
Trust among the largest, and fastest growing, investment managers worldwide.
Investment management performance for bond accounts has been consistently in
the top quartile over the past ten years, as measured by SEI Investment
Management Consulting, a nationally recognized plan sponsor consultant.
Investment management performance for equity accounts was solidly above the
median for the one, seven and ten year cumulative performance periods ended
December 31, 1996, as measured by SEI. Northern Trust leveraged its investment
expertise with the establishment in 1994 of a second mutual fund family, the
Northern Funds. Assets in this family of 19 no-load funds have grown to $4.3
billion at year-end 1996. This mutual fund family serves the investment needs
of personal clients, while the $8.3 billion Benchmark family of mutual funds
continues to serve the needs of institutional clients.
FOREIGN EXCHANGE TRADING PROFITS. Foreign exchange trading profits totaled a
record $58.8 million, up 6% from $55.3 million reported a year ago, which was
up from $35.9 million in 1994. A substantial component of foreign exchange
profits continued to result from transactions associated with the growing
global custody business. As custodian, Northern Trust provides foreign exchange
services in the normal course of business. Active management of currency
positions, within conservative limits, produced an ancillary component of
aggregate trading profits. The opening of Northern's Singapore Branch in
October, 1996 established round-the-clock foreign exchange capabilities to
better serve global custody clients in the Asian region.
TREASURY MANAGEMENT FEES. The fee portion of treasury management revenues
totaled $55.3 million in 1996, an 11% increase from the $49.6 million reported
in 1995 compared with $46.3 million in 1994. Total treasury management
revenues, which, in addition to fees, include the computed value of
compensating deposit balances, increased 11% to $86.0 million from $77.5
million in 1995 compared to $73.0 million in 1994, reflecting the continued
growth in new business in both paper- and electronic-based products.
SECURITY COMMISSIONS AND TRADING INCOME. Security commissions and trading
income totaled $23.9 million in 1996, compared with $21.7 million in 1995 and
$22.0 million in 1994. This income is primarily generated from securities
brokerage and futures contract services. Additional revenue is provided from
underwriting selected general obligation tax-exempt securities and interest
risk management activities with clients. The 1996 results reflect strong growth
in security brokerage activities offset by a decline in the clearing volume of
futures contracts.
OTHER OPERATING INCOME. Other operating income includes loan, letter of credit
and deposit-related service fees and other miscellaneous income from asset
sales. Other operating income in 1996 totaled $47.2 million compared with $45.5
million in 1995 and $75.9 million in 1994. The 1994 results included a $28.5
million pretax gain on the sale of Northern's investment in BSS, which was net
of approximately $6.0 million in ancillary and other sale-related transition
costs associated with the transfer of custody accounts from BSS to the Bank's
London Branch. The slight increase in other operating income in 1996 reflects a
gain from the sale of the Bank's merchant charge card business which was
partially offset by a decrease in gains realized from the sale of lease
residuals.
INVESTMENT SECURITY GAINS AND LOSSES. Net security gains totaling $.4 million
were realized in 1996. Of
22
Northern Trust Corporation
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ANALYSIS OF NET INTEREST INCOME (FTE)
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Percent Change
---------------------------------------------------
($ In Millions) 1996 1995 1994 1996/95 1995/94
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Interest Income $ 1,151.5 $ 1,104.0 $ 848.7 4.3% 30.1%
Fully Taxable Equivalent
Adjustment 33.6 37.6 33.4 (10.8) 12.6
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Interest Income-FTE 1,185.1 1,141.6 882.1 3.8 29.4
Interest Expense 763.2 746.4 514.1 2.2 45.2
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NET INTEREST INCOME-FTE 421.9 395.2 368.0 6.8 7.4
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AVERAGE VOLUME
Earning Assets 18,779.4 17,193.7 15,737.2 9.2 9.3
Interest-Related Funds 15,920.0 14,528.3 13,328.9 9.6 9.0
Noninterest-Related Funds 2,859.4 2,665.4 2,408.3 7.3 10.7
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Change in
Percentage
-----------------------------
AVERAGE RATE
Earning Assets 6.31% 6.64% 5.61% (.33) 1.03
Interest-Related Funds 4.79 5.14 3.86 (.35) 1.28
Interest Rate Spread 1.52 1.50 1.75 .02 (.25)
Total Source of Funds 4.06 4.34 3.27 (.28) 1.07
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NET INTEREST MARGIN 2.25% 2.30% 2.34% (.05) (.04)
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Refer to page 68 for detailed analysis of net interest income.
this total, $.5 million resulted from held to maturity securities that were
called at a premium, offset in part by $.1 million of net losses from the sale
of securities classified as available for sale. This compares with net gains of
$1.0 million in 1995 and $.1 million of net losses in 1994.
NET INTEREST INCOME. Net interest income is defined as the total of interest
income and amortized fees on earning assets less interest expense on deposits
and borrowed funds, adjusted for the impact of off-balance sheet hedging
activity. Earning assets, which consist of securities, loans and money market
assets, are financed by a large base of interest-bearing funds, including
retail deposits, wholesale deposits, short-term borrowings, senior notes and
long-term debt. Earning assets are also funded by net noninterest-related
funds. Net noninterest-related funds consist of demand deposits, the reserve
for credit losses and stockholders' equity, reduced by nonearning assets
including cash and due from banks, items in process of collection, buildings
and equipment and other 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 assets and client use of compensating
balances to pay for services.
Net interest income for 1996 was a record $388.3 million, up 9% from $357.6
million in 1995, which was up 7% from $334.6 million in 1994. 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 1996 was a
record $421.9 million, an increase of $26.7 million or 7% from $395.2 million
in 1995 which in turn was up 7% from $368.0 million in 1994. Through steady
asset growth and conservative interest rate risk management, Northern Trust has
been successful in generating year over year improvement in net interest income
as evidenced by the fact that 1996 represents the thirteenth consecutive year
of record performance. The increase in FTE net interest income in 1996 was
essentially attributable to growth in average earning assets, which was
partially offset by a decline in the net interest margin to 2.25% from 2.30%
last year and 2.34% in 1994.
Earning assets averaged $18.8 billion, up 9% or $1.6 billion from the $17.2
billion reported in 1995, which was up from $15.7 billion in 1994. The growth
in average earning assets reflects a 13% or $1.2 billion increase in loans, a
3% or $171 million increase in securities and a 12% or $219 million increase in
money market assets. Loan volume for the year averaged $10.3 billion with
virtually all of the growth reflected in the domestic portfolio while
international loans increased $36 million. The domestic growth came principally
from residential mortgage activities, up $501 million, and commercial and
industrial loans, up $229 million. Reflected in the total loan growth are non-
interest bearing domestic and international overnight advances related to
processing certain trust client investments, which averaged $596 million in
1996, down 10% from a year ago. Securities averaged $6.4 billion
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Northern Trust Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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in 1996 versus $6.2 billion in 1995, due primarily to a $476 million increase
in short-term U.S. Government securities, offset in part by a decline in other
securities. Money market assets averaged $2.1 billion in 1996 versus $1.9
billion in 1995.
The increase in average earning assets of $1.6 billion was funded through
growth in interest-bearing deposits, other interest-related funding sources,
and noninterest-related funds. The deposit growth was concentrated primarily in
savings and money market deposits (up $308 million) and global custody deposit
activity in the Cayman Islands Branch (up $446 million), offset in part by a
reduction in the London Branch of $162 million. Other interest-related funds
averaged $5.9 billion, up $682 million, principally from federal funds
purchased (up $278 million), securities sold under agreements to repurchase (up
$203 million) and other borrowings (up $240 million). Average net noninterest-
related funds increased $194 million, mainly due to higher stockholders' equity
and noninterest-bearing time and savings deposits. Stockholders' equity for the
year averaged $1.5 billion, an increase of $113 million or 8% from 1995,
principally due to the strong earnings performance, offset in part by the
repurchase of common stock pursuant to the Corporation's share buyback program.
The net interest margin declined to 2.25% from 2.30% last year due primarily
to lower spreads on the higher volume of short-term liquid assets funded by
short-term liabilities, coupled with lower loan-related fees. The margin was
also impacted by a slightly higher reliance on interest-related funding sources
to fund asset growth.
PROVISION FOR CREDIT LOSSES. Asset quality remained exceptionally strong as
nonperforming assets declined to $21.4 million, their lowest level in over
fifteen years. The provision for credit losses increased to $12.0 million in
1996, up from $6.0 million in each of the last two years. For a discussion of
the reserve for credit losses, refer to pages 30 and 31.
NONINTEREST EXPENSES. Noninterest expenses for 1996 totaled $766.8 million, up
$57.6 million or 8% from $709.2 million in 1995, which was up 1% from $700.5
million in 1994. Total expenses for 1996 included $25.3 million of incremental
expenses resulting from acquisitions. As a result of a reduction in premium
rates, FDIC insurance expense declined by $8.5 million compared to last year.
Exclusive of these items for both years, 1996 noninterest expenses increased 6%
over last year. In addition to acquisitions, expense increases during 1996
reflect a variety of growth initiatives, including investments in technology,
PFS office expansion, the opening of a Singapore office, and staff additions
and higher operating expenses necessary to support new business and growing
transaction volumes. Incentive compensation also increased, reflecting client
investment portfolio performance, excellent new business development results,
record earnings and the impact of the Corporation's higher stock price on
stock-based performance plans. These increases were partially offset by cost
savings from changes in several benefit plans effective January 1, 1996 and
favorable medical plan claim experience.
The modest increase in 1995 noninterest expenses from 1994 results reflects
the impact of $30.9 million of nonrecurring charges in 1994. Adjusting for
these items, noninterest expenses grew 6% from 1994 to 1995 primarily as a
result of salary adjustments, higher incentive compensation and incremental
expenses from 1995 acquisitions.
The productivity ratio, defined as noninterest income plus net interest income
on a taxable equivalent basis before the provision for credit losses, divided
by noninterest expenses, was 156% for 1996 compared with 151% in 1995 and 143%
in 1994.
SALARIES AND BENEFITS. Salaries and benefits, which represent 58% of total
noninterest expenses, increased 5% to $441.3 million in 1996 from $419.1
million in 1995, which was up 7% from $391.4 million in 1994. Salary costs, the
largest component of noninterest expenses, totaled $368.8 million, up $31.2
million or 9% from $337.6 million a year ago. The principal items contributing
to the change in 1996 were salary adjustments, incentive compensation, and
staff additions resulting from acquisitions and to support Northern Trust's
growing trust activities and office expansion. The incentive-based compensation
expense increase reflects the impact of client investment portfolio performance
and record new business development results, as well as the 1996 record
earnings performance and the price increase in Northern Trust Corporation
common stock. Included in the 1995 results was $3.3 million in severance costs
associated with staff reductions, while the 1994 results included a $4.2
million addition to salary expense relating to overtime back pay obligations.
Staff on a full-time equivalent (FTE) basis averaged 6,665 compared with 6,548
in 1995 and 6,420 in 1994. The growth in staff during 1996 is the result of
acquisitions and other staff additions primarily in the last half of the year.
As of December 31, 1996, staff levels on a FTE basis totaled 6,933, an increase
of 6% from 6,531 at the end of last year.
As part of Northern Trust's ongoing program to control expense growth, a
complete review of all employee benefit plans was conducted at the end of last
year. As a result of this review, changes, effective January 1, 1996, were made
to the pension, medical, Thrift Incentive and ESOP plans. Employee benefit
costs for 1996 totaled $72.5 million, down $9.0 million or 11% from $81.5
million in 1995 which was up 9% from $74.8 million in 1994. The majority of the
1995 increase in benefit costs was attributable to higher medical and
retirement benefit expenses and payroll taxes.
OCCUPANCY EXPENSE. Net occupancy expense totaled $63.8 million, up 6% or $3.6
million from $60.2
24
Northern Trust Corporation
million in 1995, which was up 5% from $57.4 million in 1994. The principal
components of the 1996 increase were higher building and leasehold improvement
amortization expenses and rental and operating costs primarily associated with
business expansion.
EQUIPMENT EXPENSE. Equipment expense, which includes depreciation, rental, and
maintenance costs, totaled $54.6 million in 1996, 12% or $6.0 million higher
than the $48.6 million in 1995, which was down 14% from the $56.4 million in
1994. Included in the 1994 expense is $11.2 million of nonrecurring expenses
resulting from the trade-in and the sale and leaseback of mainframe computer
equipment. Excluding these items, the expense levels in each of the three years
primarily reflect planned increases in equipment and computer depreciation and
related costs to support trust and banking business expansion.
OTHER OPERATING EXPENSES. Other operating expenses for 1996 totaled $207.1
million, up 14% from $181.3 million in 1995, which was down 7% from $195.3
million in 1994. The increase in the 1996 expense level was primarily the
result of acquisitions, continued investment in technology, expansion of the
personal trust and banking office network, and higher operating expenses
necessary to support business growth. These initiatives resulted in increases
in computer software amortization, transaction-based depository fees, technical
and consulting service fees and amortization of intangible assets. These
increases, along with higher costs incurred from processing errors, were
partially offset by lower levels of FDIC deposit insurance premiums. Included
in the 1995 results are $4.1 million of pension settlement charges. Other
operating expenses in 1994 included $9.6 million in pension settlement charges,
a $3.5 million expense relating to an agreement between the Corporation and The
Benchmark Funds, and a $2.4 million write-down of older trust-related software.
Investments in technology are designed to support and enhance the transaction
processing and securities handling capability of the trust and banking
businesses. Additional capital expenditures planned for systems technology will
result in future expenses for the depreciation of hardware and amortization of
software. Depreciation and software amortization are charged to equipment and
other operating expenses, respectively.
PROVISION FOR INCOME TAXES. The provision for income taxes was $128.6 million
in 1996 compared with $100.5 million in 1995 and $79.3 million in 1994. The
effective tax rate was 33% for 1996 compared with 31% for 1995 and 30% for
1994. The higher tax provision in 1996 resulted from the growth in earnings for
both federal and state income tax purposes while federally tax-exempt income
declined.
SUBSEQUENT IMPLEMENTATION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS.
Statement of Financial Accounting Standards (SFAS) No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," provides accounting and reporting standards for a variety of
transactions, including loan participations, sales of assets where servicing of
the assets is retained, repurchase agreements and securities lending
transactions. The portions of SFAS No. 125 that address accounting for loan
participations and sales of assets where servicing of the assets is retained
were implemented, as required, on January 1, 1997 and did not have a material
impact on Northern Trust's consolidated financial statements. The remainder of
SFAS No. 125 is expected to be implemented effective January 1, 1998 and is not
expected to materially impact the consolidated financial statements.
FINANCIAL CONDITION
Average earning assets in 1996 increased 9% to $18.8 billion. Approximately 11%
of the growth in average earning assets resulted from the full year impact of
prior year acquisitions, as well as the fourth quarter 1996 addition of Bent
Tree National Bank. The growth, including acquisitions, was concentrated
primarily in residential mortgages, commercial and industrial loans, and short-
term U.S. Government securities and money market assets. A high quality and
liquid balance sheet is maintained with securities and money market assets
averaging $8.4 billion or 45% of total earning assets.
The management strategy for investment securities is to maintain a very high
quality portfolio with generally short-term maturities. To maximize after-tax
income, investments in tax-exempt municipal securities are utilized but with
somewhat longer maturities. The average balance of the securities portfolio,
which includes securities held to maturity and available for sale, increased 3%
from last year to $6.4 billion. U.S. Government securities averaged $1.7
billion in 1996, up $476 million from 1995 levels. U.S. Government securities
had an average maturity of seven months at December 31, 1996, compared with
eleven months at the prior year-end. Average municipal securities declined $21
million to average $414 million and provided a fully taxable equivalent yield
of 9.86%. The average maturity of municipal securities was 82 months, up from
78 months a year ago. Federal agency securities averaged $4.0 billion in 1996,
down slightly from 1995, and had an average maturity at December 31, 1996 and
1995 of six months and nine months, respectively. Other securities, consisting
primarily of preferred stock and privately issued collateralized mortgage
obligations, averaged $228 million, down from $353 million last year.
Included in federal agency securities were $376 million of agency issued
collateralized mortgage obligations (CMO's). Included in other securities were
$41 million of privately issued CMO's, all of which are rated triple-A and $12
million of which are collateralized by federal agency securities. CMO's in
general have widely varying degrees of risk, which derives from the prepayment
risk on the
25
Northern Trust Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AVERAGE EARNING ASSETS AND SOURCE OF FUNDS
- --------------------------------------------------------------------------------
Percent Change
---------------------------------------------------
($ In Millions) 1996 1995 1994 1996/95 1995/94
- ------------------------------------------------------------------------------
AVERAGE EARNING ASSETS
Money Market Assets $ 2,083.5 $ 1,864.7 $ 2,420.2 11.7% (23.0)%
Securities
U.S. Government 1,702.0 1,225.7 1,779.6 38.9 (31.1)
Obligations of States and
Political Subdivisions 414.1 434.7 465.1 (4.7) (6.5)
Federal Agency 4,010.7 4,124.8 2,333.6 (2.8) 76.8
Other 228.2 353.4 368.8 (35.4) (4.2)
Trading Account 8.8 54.4 53.8 (83.7) 1.3
- ------------------------------------------------------------------------------
Total Securities 6,363.8 6,193.0 5,000.9 2.8 23.8
- ------------------------------------------------------------------------------
Loans and Leases-Domestic 9,951.6 8,791.8 7,870.6 13.2 11.7
-International 380.5 344.2 445.5 10.5 (22.7)
- ------------------------------------------------------------------------------
Total Loans and Leases 10,332.1 9,136.0 8,316.1 13.1 9.9
- ------------------------------------------------------------------------------
Total Earning Assets $18,779.4 $17,193.7 $15,737.2 9.2% 9.3%
- ------------------------------------------------------------------------------
AVERAGE SOURCE OF FUNDS
Deposits-Savings and Money
Market Deposits $ 3,620.7 $ 3,312.4 $ 3,385.7 9.3% (2.2)%
-Savings Certificates 2,062.4 2,000.3 1,229.6 3.1 62.7
-Other Time 549.2 542.7 412.8 1.2 31.5
-Foreign Offices Time 3,826.2 3,493.4 3,284.8 9.5 6.4
- ------------------------------------------------------------------------------
Total Deposits 10,058.5 9,348.8 8,312.9 7.6 12.5
Federal Funds Purchased 1,842.2 1,564.0 1,350.7 17.8 15.8
Securities Sold under Agree-
ments to Repurchase 1,973.3 1,769.7 1,444.3 11.5 22.5
Commercial Paper 143.7 146.0 138.1 (1.6) 5.7
Other Borrowings 1,274.1 1,034.5 1,007.5 23.2 2.7
Senior Notes 267.5 394.0 781.8 (32.1) (49.6)
Notes Payable 360.7 271.3 293.6 32.9 (7.6)
- ------------------------------------------------------------------------------
Total Interest-Related Funds 15,920.0 14,528.3 13,328.9 9.6 9.0
Noninterest-Related Funds,
net 2,859.4 2,665.4 2,408.3 7.3 10.7
- ------------------------------------------------------------------------------
Total Source of Funds $18,779.4 $17,193.7 $15,737.2 9.2% 9.3%
- --------------------------------------------------------------------------------
underlying mortgage loans. Northern Trust invests only in CMO's that have
lesser degrees of prepayment risk. Of all CMO's held during 1996, $51 million
paid a fixed rate of interest and $342 million paid a floating rate indexed to
LIBOR. The fixed rate CMO's had an average life of 13 months at year-end 1996,
based on an average of dealer prepayment estimates. As a result of the short
average life, the prepayment risk of the fixed rate CMO's was immaterial. The
floating rate CMO's had an average life of 32 months at year-end 1996, and have
rate caps ranging from 9% to 14%, with an average cap of 10%.
Approximately $1.0 billion of federal agency 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 1996, the fair value of the securities
portfolio of $4.8 billion exceeded the book value of these securities by $20.5
million.
Loans averaged $10.3 billion in 1996 and increased 13% from the prior year.
Average domestic loans increased 13% to $9.9 billion for the year while the
average international portfolio increased to $380 million from $344 million in
1995. The increase in the average domestic loan portfolio reflects substantial
growth in residential mortgages which increased 14% on average and totaled $4.6
billion at year-end. Commercial and industrial loans also contributed to the
growth in the domestic portfolio, increasing 8% to average $3.3 billion for the
year. During the year, commercial real estate loans increased $45 million due
in part to acquisitions, and at December 31, 1996, totaled $558 million
representing 5% of domestic loans.
Money market assets averaged $2.1 billion, up 12% or $219 million from last
year.
Total interest-related funds averaged $15.9 billion in 1996, up $1.4 billion
or 10% from 1995. Savings and money
26
Northern Trust Corporation
market deposits increased 9% and averaged $3.6 billion while foreign office
time deposits increased $333 million or 10%. The increase in foreign time
deposits resulted primarily from greater global custody activity, particularly
in the Cayman Islands Branch. Federal funds purchased, securities sold under
agreements to repurchase, and other borrowings collectively increased $721
million on average compared to the prior year. The balances within these
classifications vary based upon funding requirements, interest rate levels, and
the availability of collateral used to secure these borrowings. Balances in
other borrowings primarily represent treasury, tax and loan note option
balances which provide a funding source at an attractive rate relative to
federal funds. Deposits related to trust activities in the domestic banking
subsidiaries, coupled with growth of the global custody business, continued to
have a significant impact on the balance sheet as these deposits in 1996
averaged $4.3 billion representing 33% of total deposits. Senior notes averaged
$267 million, down $127 million from last year.
In September, The Northern Trust Company issued $100 million of 7.30%
Subordinated Notes due 2006. The notes were issued under the terms of an
Offering Circular allowing The Northern Trust Company to offer subordinated
bank notes and up to $1.7 billion aggregate principal amount at any time
outstanding of its senior bank notes (less certain senior bank notes issued
prior to April 1993 and still outstanding), with maturities ranging from 30
days to 15 years. The senior notes are issued periodically and provide an
additional funding source for the Bank. At December 31, 1996, an additional
$100 million of subordinated bank notes with maturities ranging from 5 years to
15 years can be issued under the terms of the Offering Circular.
On January 16, 1997, the Corporation issued $150 million of Floating Rate
Capital Securities through a wholly owned statutory business trust. The
securities, which qualify as Tier 1 capital for regulatory purposes, were
issued at a discount to yield 60.5 basis points above the three-month London
Interbank Offered Rate.
CAPITAL EXPENDITURES
Northern Trust's Management Committee reviews and approves proposed capital
expenditures which exceed $500,000. This process assures that the major
projects to which Northern Trust commits its resources produce benefits
compatible with corporate strategic goals.
During 1996, Northern Trust continued to improve its hardware and software
capabilities, especially related to trust activities. Such improvements help
assure that Northern Trust offers state-of-the-art technology which enables
clients to obtain the highest level of quality service within a competitive
cost structure, a characteristic which helps distinguish Northern Trust from
its competitors. In this regard, through the efforts of internal staff and
outside consultants, Northern Trust completed installation of several
significant phases of its new trust management system, including the creation
of new personal client statements and enhancements to the accounting systems.
In addition, major systems development efforts in 1996 focused on Passport and
retirement services products. Passport is Northern Trust's next generation of
on-line desktop delivery services first offered to clients in 1995. Retirement
services bring together a comprehensive array of Master Trust, participant
recordkeeping, retirement plan design and actuarial services. The unamortized
capitalized cost of corporate-wide software development projects at December
31, 1996 was $133.8 million, of which $82.8 million represented the book value
of the trust management system. Northern Trust's 1997 technology initiatives
will include the continued development of Passport and retirement services
products and enhancements to multicurrency operating and accounting systems.
Capital expenditures in 1996 also included the leasehold improvements and
furnishings associated with the opening of new offices in Florida and Arizona
and the construction costs for the Chicago South Financial Center and the new
Winnetka, Illinois office, both of which opened in the third quarter, as well
as expansion in several existing offices.
Capital expenditures for 1996 totaled $93.7 million of which $17.1 million was
for building and leasehold improvements, $5.4 million for furnishings, $33.5
million for hardware and machinery and $37.7 million for software. During 1997,
in addition to its technology initiatives, Northern Trust will continue to
invest in the expansion of the five-state network of Personal Financial
Services offices.
RISK MANAGEMENT
ASSET QUALITY AND CREDIT RISK MANAGEMENT.
SECURITIES. A high quality securities portfolio is maintained with 85% of the
total portfolio comprised of U.S. Treasury or federal agency securities. The
remainder of the portfolio is comprised of obligations of states and political
subdivisions, preferred stock and other securities. At December 31, 1996, 75% of
these securities were rated triple-A or double-A, 22% were rated single-A and 3%
were below A or not rated by Standard and Poor's and/or Moody's Investors
Service. Other securities consist primarily of privately issued collateralized
mortgage obligations, backed by federal agency securities or mortgage loans.
Northern Trust is an active participant in the repurchase agreement market.
This market provides a relatively low cost alternative for short-term funding.
Securities sold under repurchase agreements are held by the counterparty until
the repurchase transaction matures. Increases in the fair value of these
securities in excess of the repurchase liability could subject Northern Trust
to credit risk in the event of default by the counterparty. To minimize this
risk, collateral values are continuously monitored and Northern Trust sets
limits on exposure with counterparties and regularly assesses their financial
condition.
27
Northern Trust Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
LOANS AND OTHER EXTENSIONS OF CREDIT. A certain degree of credit risk is
inherent in Northern Trust's various lending activities. Credit risk is managed
through the Credit Policy function, which is designed to ensure adherence to a
high level of credit standards. Credit Policy provides a system of checks and
balances for Northern Trust's diverse credit-related activities by establishing
and monitoring all credit-related policies and practices throughout Northern
Trust and ensuring their uniform application. These activities are designed to
ensure that credit exposure is diversified on an industry and client basis,
thus lessening overall credit risk. These credit management activities also
apply to Northern Trust's use of derivative financial instruments, including
foreign exchange contracts and interest risk management instruments.
A further way in which credit risk is managed is by requiring collateral.
Management's assessment of the borrower's creditworthiness determines whether
collateral is obtained. The amount and type of collateral held varies but may
include deposits held in financial institutions, U.S. Treasury securities,
other marketable securities, income-producing commercial properties, accounts
receivable, property, plant and equipment, and inventory. Collateral values are
monitored on a regular basis to ensure that they are maintained at an
appropriate level.
The largest component of credit risk relates to the loan portfolio. Although
credit exposure is well-diversified, there are certain groups that 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: residential real estate, middle market companies
and small businesses, banks and bank holding companies and commercial real
estate.
RESIDENTIAL REAL ESTATE. The residential real estate loan portfolio totaled
$4.6 billion or 43% of total domestic loans at December 31, 1996, compared with
$3.9 billion or 41% at December 31, 1995. Residential real estate loans consist
of conventional home mortgages and equity credit lines, which generally require
a loan to collateral value of 75% to 80%. Of the total $4.6 billion in
residential real estate loans, $2.6 billion were in the greater Chicago area
with the remainder distributed throughout the other geographic regions served
by Northern Trust. Legally binding commitments to extend credit, which are
primarily equity credit lines, totaled $405.8 million and $372.2 million as of
December 31, 1996 and 1995, respectively.
MIDDLE MARKET COMPANIES AND SMALL BUSINESSES. Credit exposure to middle market
companies and small businesses is primarily in the form of commercial loans,
which totaled $1.4 billion at December 31, 1996 and $1.2 billion as of December
31, 1995. These loans are to a diversified group of borrowers that are
predominantly in the manufacturing, wholesaling, distribution and services
industries, with total sales of less than $500 million. The largest component
of this group of borrowers is located in the greater Chicago area. Middle
market and small businesses have been an important focus of business
development, and it is part of the strategic plan to continue to selectively
grow the portfolio with such entities. The credit risk associated with middle
market and small business lending is principally influenced by general economic
conditions and the resulting impact on the borrower's operations.
Off-balance sheet credit exposure to middle market companies and small
businesses in the form of legally binding commitments to extend credit, standby
letters of credit, and commercial letters of credit totaled $1.5 billion,
$748.7 million, and $18.1 million, respectively, as of December 31, 1996, and
$1.2 billion, $405.6 million, and $12.5 million, respectively, as of December
31, 1995.
BANKS AND BANK HOLDING COMPANIES. On-balance sheet credit risk to banks and
bank holding companies, both domestic and international, totaled $4.4 billion
and $3.0 billion at December 31, 1996 and 1995, respectively. The majority of
this exposure consisted of short-term money market assets, which totaled $3.1
billion and $1.7 billion as of December 31, 1996 and 1995, respectively, and
noninterest-bearing demand balances maintained at correspondent banks which
totaled $896 million as of December 31, 1996, compared to $1.0 billion at year-
end 1995. Commercial loans to banks totaled $247 million and $195 million,
respectively, as of December 31, 1996 and 1995. The majority of these loans
were to U.S. bank holding companies, primarily in the seventh Federal Reserve
District, for their acquisition purposes. Such lending activity is limited to
entities which have a substantial business relationship with Northern Trust.
Legally binding commitments to extend credit to banks and bank holding
companies totaled $178 million and $155 million as of December 31, 1996 and
1995, respectively.
COMMERCIAL REAL ESTATE. In managing its credit exposure, management has
defined a commercial real estate loan as one where: (1) the borrower's
principal business activity is the acquisition of or the development of real
estate for commercial purposes; (2) the principal collateral is real estate
held for commercial purposes and loan repayment is expected to flow from the
operation of the property; or (3) the loan repayment is expected to flow from
the sale or refinance of real estate as a normal and ongoing part of the
business. Unsecured lines of credit to firms or individuals engaged in
commercial real estate endeavors are included without regard to the use of loan
proceeds. The
28
Northern Trust Corporation
commercial real estate portfolio consists of interim loans and commercial
mortgages.
The interim loans, which totaled $236.3 million and $184.5 million as of
December 31, 1996 and 1995, respectively, are composed primarily of loans to
developers that are highly experienced and well-known to Northern Trust. Short-
term interim loans provide financing for the initial phases of the acquisition
or development of commercial real estate, with the intent that the borrower
will refinance the loan through another financial institution or sell the
project upon its completion. The interim loans are primarily in the Chicago
market in which Northern Trust has a strong presence and a thorough knowledge
of the local economy.
Commercial mortgage financing, which totaled $321.4 million and $328.1 million
as of December 31, 1996 and 1995, respectively, is provided for the acquisition
of income producing properties. Cash flows from the properties generally are
sufficient to amortize the loan. These loans average less than $500,000 each
and are primarily located in the suburban Chicago and Florida markets.
At December 31, 1996, 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 $61.5 million and $22.5 million,
respectively. At December 31, 1995, legally binding commitments were $21.7
million and standby letters of credit were $16.5 million.
FOREIGN OUTSTANDINGS. In recent years international banking activities have
been focused on import and export financing for U.S. based clients and on
correspondent banking. Northern Trust has extensive treasury activities
involving short-term, credit-related business with foreign financial
institutions. Interbank time deposits with foreign banks represent the largest
category of foreign outstandings. The Chicago head office and the London Branch
actively participate in the interbank market with U.S. and foreign banks.
As used in this discussion, foreign outstandings are cross-border outstandings
as defined by the Securities and Exchange Commission. They consist of loans,
acceptances, interest-bearing deposits with financial institutions, accrued
interest and other monetary assets. Not included are letters of credit, loan
commitments, and foreign office local currency claims on residents funded by
local currency liabilities. Foreign outstandings related to a specific country
are net of guarantees given by third parties resident outside the country and
the value of tangible, liquid collateral held outside the country. However,
transactions with branches of foreign banks and corporations are included in
these outstandings and are classified according to the country location of the
foreign entities' head office.
Risk related to foreign outstandings is continually monitored and internal
limits are imposed on foreign exposure. The following table provides
information on foreign outstandings by country that exceed 1.00% of Northern
Trust's consolidated assets.
- ----------------------------------------------
FOREIGN OUTSTANDINGS
- ----------------------------------------------
Commercial
(In Millions) Banks and Other Total
- ----------------------------------------------
AT DECEMBER 31, 1996
Japan $993 $ -- $993
- ----------------------------------------------
At December 31, 1995
Japan $259 $ -- $259
- ----------------------------------------------
At December 31, 1994
Japan $551 $ -- $551
United Kingdom 183 43 226
Canada 175 18 193
- ---------------------------------------------
There were no aggregate foreign outstandings by country falling between 0.75%
and 1.00% of total assets at December 31, 1996 and 1995. This compares with
$154 million to Germany in 1994.
NONPERFORMING ASSETS AND 90 DAY PAST DUE LOANS. Nonperforming assets consist of
nonaccrual loans, restructured loans and Other Real Estate Owned (OREO). OREO
is comprised of commercial and residential properties acquired in partial or
total satisfaction of problem loans. Past due loans are loans that are
delinquent 90 days or more and still accruing interest. The balance in this
category at any reporting period can fluctuate widely based on the timing of
cash collections, renegotiations and renewals.
Maintaining a low level of nonperforming assets is important to the ongoing
success of a financial institution. Northern Trust's comprehensive credit
review and approval process is critical to the ability to minimize
nonperforming assets on a long-term basis. In addition to the negative impact
on both net interest income and credit losses, nonperforming assets also
increase operating costs due to the expense associated with collection efforts.
The table on the following page presents the nonperforming assets and past due
loans for the current year and the prior years. Of the total loan portfolio of
$10.9 billion at December 31, 1996, $19.5 million or .18% was nonperforming, a
decrease of $12.4 million from year-end 1995.
Included in the portfolio of nonaccrual loans are those which meet the
criteria as being "impaired" under the definition in SFAS No. 114. A loan is
impaired when, based on current information and events, it is probable that a
creditor will be unable to collect all amounts due according to the contractual
terms of the loan agreement. As of December 31, 1996, impaired loans, which
also have been classified as nonperforming, totaled $16.8 million, with $.5
million of the reserve for credit losses allocated to these loans.
29
Northern Trust Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
- ----------------------------------------------------------------------------
NONPERFORMING ASSETS AND 90 DAY PAST DUE LOANS
- ----------------------------------------------------------------------------
December 31
-----------------------------
(In Millions) 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------
Nonaccrual Loans
Domestic
Commercial $ 2.2 $17.5 $15.7 $17.5 $47.9
Commercial Real Estate 11.3 9.0 9.1 4.8 13.1
Residential Real Estate 3.2 2.4 1.3 1.5 1.2
Consumer .2 .1 .3 .3 .8
Other -- -- -- -- .2
Lease Financing -- -- .1 1.9 3.2
- ----------------------------------------------------------------------------
Total Domestic 16.9 29.0 26.5 26.0 66.4
- ----------------------------------------------------------------------------
International -- .2 1.3 1.3 1.9
- ----------------------------------------------------------------------------
Total Nonaccrual Loans 16.9 29.2 27.8 27.3 68.3
- ----------------------------------------------------------------------------
Restructured Loans 2.6 2.7 -- -- --
Other Real Estate Owned 1.9 1.8 2.2 9.7 22.9
- ----------------------------------------------------------------------------
TOTAL NONPERFORMING ASSETS $21.4 $33.7 $30.0 $37.0 $91.2
- ----------------------------------------------------------------------------
TOTAL DOMESTIC 90 DAY PAST DUE LOANS (Still
accruing) $15.2 $22.0 $17.3 $22.8 $42.9
- ----------------------------------------------------------------------------
RESERVE FOR CREDIT LOSSES. In evaluating the adequacy of the reserve for credit
losses, management relies predominantly on a disciplined credit review process
which is applicable to the full range of the credit exposures. The review
process, directed by Credit Policy, is intended to identify as early as
possible clients who might be facing financial difficulties. Once identified,
the extent of the client's financial difficulty is carefully monitored by
Credit Policy, which recommends to management the portion of any credits that
need a specific reserve allocation or should be charged-off. Other factors
considered by management in evaluating the adequacy of the reserve include: the
relative size of the subsidiary banks' single loan lending limits; loan volume;
historical net loan loss experience; level and composition of nonaccrual, past
due and restructured loans; the condition of industries and geographic areas
experiencing or expected to experience particular economic adversities;
international developments; current and anticipated economic conditions; credit
evaluations; and the liquidity and volatility of the markets. From time to time
specific amounts of the reserve are designated for certain loans in connection
with management's analysis of the adequacy of the reserve for credit losses, as
well as its evaluation of impaired loans.
The reserve balance is not a precise amount, but is derived from judgments
based on the above factors. It represents management's best estimate of the
reserve for credit losses necessary to adequately cover probable losses from
current credit exposures. The provision for credit losses is the charge against
current earnings that is determined by management as the amount needed to
maintain an adequate reserve.
The overall credit quality of the domestic portfolio has remained good as
evidenced by the relatively low level of nonperforming loans and net charge-
offs. Management's assessment of the financial condition of specific clients
facing financial difficulties, and portfolio growth relating to low-risk
residential lending and bank acquisitions, were among the factors impacting
management's analysis of the adequacy of the reserve. The combination of these
factors resulted in a reserve for credit losses of $148.3 million at December
31, 1996, compared with $147.1 million last year. The decline in the year-end
reserve for credit losses as a percentage of outstanding loans and leases from
1.49% to 1.36% at year-end 1996 is primarily attributable to loan growth in
low-risk residential lending and improved credit quality. The following table
summarizes the changes in the reserve for credit losses for the current year
and the prior years.
INTEREST RATE RISK MANAGEMENT
Policies and limits for the management of Northern Trust's interest rate risk
are established by the Board of Directors. To ensure adherence to these
policies and limits, the Corporate Asset and Liability Policy Committee (ALCO)
establishes and monitors guidelines on the sensitivity of earnings to changes
in interest rates caused by on- and off-balance sheet positions. The goal of
the ALCO process is to manage the balance sheet to provide the maximum level of
earnings while maintaining a high quality balance sheet and acceptable levels
of interest rate risk and liquidity risk.
Sensitivity of earnings to interest rate changes arises when yields on assets
change differently from the interest costs on liabilities. To mitigate this
interest rate risk, the structure of
30
Northern Trust Corporation
- --------------------------------------------------------------------------------
ANALYSIS OF RESERVE FOR CREDIT LOSSES
- -------------------------------------------------------------------------------
($ In Millions) 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------
Balance at Beginning of
Year $ 147.1 $ 144.8 $ 145.5 $ 145.5 $ 145.7
- -------------------------------------------------------------------------------
Charge-Offs
Commercial 6.2 5.5 5.3 11.2 14.8
Commercial Real Estate 7.4 3.6 4.1 7.8 5.6
Residential Real Estate .2 .6 .1 .2 .8
Consumer 1.5 1.2 1.2 2.1 3.6
Other .1 .2 -- .2 .5
Lease Financing -- -- -- 1.3 1.1
International .2 .6 -- .6 6.0
- -------------------------------------------------------------------------------
Total Charge-Offs 15.6 11.7 10.7 23.4 32.4
- -------------------------------------------------------------------------------
Recoveries
Commercial .5 2.1 1.0 1.9 1.0
Commercial Real Estate 1.9 2.3 1.1 .7 .4
Residential Real Estate .2 -- -- .2 --
Consumer .6 .5 1.2 .8 .8
Other .1 .2 .2 .1 .1
Lease Financing -- -- .5 -- --
International .5 .7 -- .2 .4
- -------------------------------------------------------------------------------
Total Recoveries 3.8 5.8 4.0 3.9 2.7
- -------------------------------------------------------------------------------
Net Charge-Offs 11.8 5.9 6.7 19.5 29.7
Provision for Credit
Losses 12.0 6.0 6.0 19.5 29.5
Reserve Related to Acqui-
sitions 1.0 2.2 -- -- --
- -------------------------------------------------------------------------------
Net Change in Reserve 1.2 2.3 (.7) -- (.2)
- -------------------------------------------------------------------------------
BALANCE AT END OF YEAR $ 148.3 $ 147.1 $ 144.8 $ 145.5 $ 145.5
- -------------------------------------------------------------------------------
Total Loans and Leases at
Year-End $10,937.4 $9,906.0 $8,590.6 $7,623.0 $6,935.9
- -------------------------------------------------------------------------------
Average Total Loans and
Leases $10,332.1 $9,136.0 $8,316.1 $7,297.1 $6,452.9
- -------------------------------------------------------------------------------
As a Percent of Year-End
Loans and Leases
Net Loan Charge-Offs .11% .06% .08% .26% .43%
Provision for Credit
Losses .11 .06 .07 .26 .43
Reserve Balance at Year-
End 1.36 1.49 1.69 1.91 2.10
- -------------------------------------------------------------------------------
As a Percent of Average
Loans and Leases
Net Loan Charge-Offs .11% .06% .08% .27% .46%
Reserve Balance at Year-
End 1.44 1.61 1.74 1.99 2.25
- --------------------------------------------------------------------------------
the balance sheet is managed so that movements of interest rates on assets and
liabilities (adjusted for off-balance sheet hedges) are highly correlated and
produce an adequate level of earnings, even in periods of volatile interest
rates.
In the management of interest rate risk, Northern Trust utilizes the following
measurement techniques: model simulation to determine the sensitivity of
earnings, economic value sensitivity of the balance sheet, and gap analysis.
These three techniques are complementary and are used in concert to provide a
more complete picture of interest rate risk.
Model simulation is the primary tool used to measure the sensitivity of
earnings to interest rate changes. Using computer modeling techniques, Northern
Trust is able to measure the potential impact on earnings, assuming the
continuation of current balance sheet trends, different patterns of rate
movements, and specific changes in the relationships among various instruments
on and off the balance sheet. Northern Trust uses model simulation to measure
its earnings sensitivity relative to management's most likely interest rate
scenario. At December 31, 1996, this scenario assumed a gradual increase in
interest rates during 1997. The interest sensitivity is then tested by running
alternative scenarios above and below the most likely interest rate outcome. In
1996, this sensitivity calculation was always less than 3.5% of the annual
income before income taxes, using alternative scenarios based on a one
percentage point deviation from the rates assumed over a one year horizon. The
simulations do not anticipate management's actions to moderate the negative
31
Northern Trust Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
consequences of interest rate deviations. Therefore, the simulations serve as
conservative estimates of interest rate risk.
The second technique that is used to measure interest rate risk is the
analysis of the sensitivity of economic value of the balance sheet. The
economic value sensitivity analysis examines the market value impact of on- and
off-balance sheet positions to adverse interest rate movements. Northern Trust
strives to limit the economic value sensitivity of the balance sheet to an
acceptable level in the context of risk-return trade-offs.
The third technique that is used to measure interest rate risk is gap
analysis. The calculation of the interest sensitivity gap is shown in the
following table, which measures the timing mismatches between assets and
liabilities. This interest sensitivity gap is determined by subtracting the
amount of liabilities from the volume of assets that reprice in a particular
time interval. A liability sensitive position results when more liabilities
than assets reprice or mature within a given period. Under this scenario, as
interest rates decline, increased net interest revenue will be generated.
Conversely, an asset sensitive position results when more assets than
liabilities reprice within a given period; in this instance, net interest
revenue would benefit from an increasing interest rate environment. The
financial impact of creating a liability or asset sensitive position depends on
the magnitude of actual changes in interest rates relative to the current
expectations of market participants.
A variety of actions are used to implement interest risk management
strategies, including:
. purchases of securities;
. sales of securities that are classified as available
for sale;
. issuance of senior notes;
. placing and taking Eurodollar time deposits; and
. hedging with various types of derivative financial instruments.
Northern Trust strives to use the most effective instrument for implementing
its interest risk management strategies, considering the costs, liquidity and
capital requirements of the various alternatives. For more detail regarding how
derivative financial instruments are used to implement interest risk management
strategies, refer to Note 20 on page 54.
- ---------------------------------------------------------------------------------------
INTEREST RATE SENSITIVITY ANALYSIS
- ---------------------------------------------------------------------------------------
December 31, 1996
-----------------------------------------------------------
1-3 4-12 1-2 3-5 Over 5
(In Millions) Months Months Years Years Years Total
- ---------------------------------------------------------------------------------------
EARNING ASSETS
Money Market Assets $ 3,146.8 $ 50.1 $ -- $ -- $ -- $ 3,196.9
Securities-Available for
Sale 3,514.2 545.6 74.6 52.2 125.1 4,311.7
-Held to Maturity 59.6 126.2 49.5 102.6 160.5 498.4
-Trading Account 4.8 -- -- -- -- 4.8
Loans and Leases 4,710.2 1,218.6 848.7 2,146.9 2,013.0 10,937.4
- ---------------------------------------------------------------------------------------
Total Earning Assets $11,435.6 $1,940.5 $972.8 $2,301.7 $ 2,298.6 $18,949.2
- ---------------------------------------------------------------------------------------
SOURCE OF FUNDS
Savings and NOW Accounts $ 905.2 $ -- $ -- $ -- $ 1,034.6 $ 1,939.8
Money Market Deposit Ac-
counts and Savings
Certificates 2,910.2 1,137.7 176.8 393.8 24.1 4,642.6
Other Time 3,311.8 5.6 1.0 8.0 -- 3,326.4
Senior Notes and Notes
Payable 200.1 109.0 87.9 26.7 309.1 732.8
Other Borrowings 4,732.8 168.8 8.4 .2 -- 4,910.2
Noninterest-Related
Funds, net 988.0 -- 90.0 -- 2,319.4 3,397.4
- ---------------------------------------------------------------------------------------
Total Source of Funds $13,048.1 $1,421.1 $364.1 $ 428.7 $ 3,687.2 $18,949.2
- ---------------------------------------------------------------------------------------
Interest Sensitive Gap $(1,612.5) $ 519.4 $608.7 $1,873.0 $(1,388.6) $ --
Off-Balance Sheet Hedges 721.6 283.9 (40.7) (530.2) (434.6) --
- ---------------------------------------------------------------------------------------
Adjusted Interest Sensi-
tive Gap $ (890.9) $ 803.3 $568.0 $1,342.8 $(1,823.2) $ --
- ---------------------------------------------------------------------------------------
Cumulative Interest Sen-
sitive Gap $ (890.9) $ (87.6) $480.4 $1,823.2 $ -- $ --
- ---------------------------------------------------------------------------------------
- -Assets and liabilities whose rates are variable are reported based on their
repricing dates. Those with fixed rates are reported based on their scheduled
contractual repayment dates, except for certain investment securities and loans
secured by 1-4 family residential properties that are based on anticipated
prepayments.
- -The interest rate sensitivity assumptions presented for demand deposits,
noninterest-bearing time deposits, savings accounts and NOW accounts are based
on historical and current experiences regarding product portfolio retention and
interest rate repricing behavior. The portion of these deposits which are
considered long-term and stable have been classified in the Over 5 Years
category.
32
Northern Trust Corporation
LIQUIDITY RISK MANAGEMENT
The objective of liquidity risk management is to ensure that Northern Trust can
meet its cash flow requirements and to capitalize on business opportunities on
a timely and cost-effective basis. Management monitors the liquidity position
on a daily basis to ensure that funds are available at a minimum cost to meet
loan and deposit cash flows. The liquidity profile is also structured to ensure
that the capital needs of the Corporation and its banking subsidiaries are met.
Management maintains a detailed liquidity contingency plan designed to
adequately respond to dramatic changes in market conditions.
Liquidity is secured by managing the mix of items on the balance sheet and
expanding potential sources of liquidity. The balance sheet sources of
liquidity include the short-term money market portfolio, unpledged available
for sale securities, maturing loans, and the ability to securitize a portion of
the loan portfolio. Further, liquidity arises from the diverse funding base and
the fact that a significant portion of funding comes from clients that have
other relationships with Northern Trust.
A significant source of liquidity is the ability to draw funding from both
domestic and international markets. The Bank's senior long-term debt is rated
AA- by Standard & Poor's, Aa3 by Moody's Investors Service, and AA+ by Thomson
BankWatch. These ratings put The Northern Trust Company in the top tier of
United States banks.
Northern Trust maintains a liquid balance sheet with loans representing 51% of
total assets. Further, at December 31, 1996, it had a significant liquidity
reserve on its balance sheet in the form of cash and due from banks, securities
available for sale, and money market assets, which in aggregate totaled $8.8
billion or 41% of total assets.
The Corporation's uses of cash consist mainly of dividend payments to the
Corporation's common and preferred stockholders, the payment of principal and
interest to note holders, and purchases of its common stock. These requirements
are met largely by dividend payments from its subsidiaries, and by interest and
dividends earned on investment securities and money market assets. Bank
subsidiaries have the ability to pay dividends during 1997 equal to their 1997
eligible net profits plus $208.2 million. Bank subsidiary dividends are subject
to certain restrictions that are explained in Note 14 on page 49. The
Corporation's liquidity, defined as the amount of marketable assets in excess
of commercial paper, was strong at $102 million at year-end 1996. The cash
flows of the Corporation are shown in Note 28 on page 63. The Corporation also
has a $50 million back-up line of credit for its commercial paper issuance. The
Corporation's strong credit ratings allow it to access credit markets on
favorable terms.
CAPITAL MANAGEMENT
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 helps Northern Trust withstand
unforeseen adverse developments and take advantage of profitable investment
opportunities when they arise. In 1996, common equity on average increased 13%
or $159 million reaching a record $1.4 billion at year-end, while total risk-
adjusted assets rose 15%. Total equity as of December 31, 1996 was $1.5 billion
including $120 million of auction rate preferred stock. The average dividend
rate declared on the $120 million of auction rate preferred stock was 4.00%
during 1996 versus 4.51% in 1995. In January 1996, the Corporation called for
redemption its $50 million Series E convertible preferred stock. Virtually all
of the holders elected to convert rather than redeem their preferred stock, and
in January the Corporation issued 2,396,744 shares of common stock in
connection with the conversion. The shares issued upon conversion were
previously reflected in the Corporation's fully diluted shares, so that
conversion had no impact on fully diluted net income per common share.
During 1996 the Corporation purchased 4,096,956 of its own shares as part of
the buyback program authorized in 1994. In November, the Board of Directors
authorized an increase in the Corporation's buyback program so that the
Corporation may purchase, after December 31, 1996, up to 4.6 million shares.
The Board of Directors increased the quarterly dividend by 16.1% to $.18 per
common share in November 1996. Over the last five years the common dividend has
increased 125%.
At December 31, 1996, tier 1 capital was 8.2% and total capital was 11.9% of
risk-adjusted assets. These risk-based capital ratios are well above the
minimum requirements of 4.0% for tier 1 and 8.0% for total risk-based capital
ratios. Northern Trust's leverage ratio (tier 1 capital to fourth quarter
average assets) of 6.4% is also well above the regulatory requirement of 3.0%.
In addition, each of the subsidiary banks had a ratio of at least 7.8% for tier
1 capital, 10.8% for total risk-based capital, and 6.1% for the leverage ratio.
On January 16, 1997, the Corporation further strengthened its capital ratios
with the issuance of $150 million of Floating Rate Capital Securities.
33
Northern Trust Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CAPITAL ADEQUACY
- -----------------------------------------------------------------------
December 31
----------------
($ In Millions) 1996 1995
- -----------------------------------------------------------------------
TIER 1 CAPITAL
Common Stockholders' Equity $ 1,424 $ 1,283
Convertible Preferred Stock -- 50
Goodwill and Other Intangible Assets (81) (79)
Net Unrealized Gain on Securities (2) (3)
- -----------------------------------------------------------------------
Total Tier 1 Capital 1,341 1,251
- -----------------------------------------------------------------------
TIER 2 CAPITAL
Auction Rate Preferred Stock 120 120
Reserve for Credit Losses 148 147
Notes Payable* 335 254
- -----------------------------------------------------------------------
Total Tier 2 Capital 603 521
- -----------------------------------------------------------------------
TOTAL RISK-BASED CAPITAL 1,944 1,772
- -----------------------------------------------------------------------
Risk-Weighted Assets** $16,380 $14,187
- -----------------------------------------------------------------------
Total Assets
End of Period (EOP) $21,608 $19,934
Average Fourth Quarter 20,988 20,287
Total Loans-End of Period 10,937 9,906
- -----------------------------------------------------------------------
RATIOS
Risk-Based Capital to Risk-Weighted Assets
Tier 1 8.2% 8.8%
Total (Tier 1 and 2) 11.9 12.5
Leverage (Tier 1 to Fourth Quarter Average Assets) 6.4 6.2
- -----------------------------------------------------------------------
Common Stockholders' Equity to
Total Loans EOP 13.0% 12.9%
Total Assets EOP 6.6 6.4
Stockholders' Equity to
Total Loans EOP 14.1 14.7
Total Assets EOP 7.1 7.3
- -----------------------------------------------------------------------
Notes:
*Notes payable that qualify for risk-based capital amortize for the purpose of
inclusion in tier 2 capital during the five years before maturity.
**Risk-weighted assets have been adjusted for goodwill and other intangible
assets, net unrealized gain on securities and excess reserve for credit losses
that have been excluded from tier 1 and tier 2 capital, if any.
OPERATIONAL AND FIDUCIARY RISK MANAGEMENT
In providing banking and trust services, Northern Trust, in addition to
safekeeping and managing trust and corporate assets, processes cash and
securities transactions exceeding $105 billion on average each business day.
These activities expose Northern Trust to operational and fiduciary risk.
Controls over such processing activities are closely monitored to safeguard the
assets of Northern Trust and its clients. However, from time to time Northern
Trust has suffered losses related to these risks and there can be no assurance
that such losses will not occur in the future.
Operational risk is the risk of unexpected losses attributable to human error,
systems failures, fraud, or inadequate internal controls and procedures. This
risk is mitigated through a system of internal controls that are designed to
keep operating risk at appropriate levels in view of Northern Trust's corporate
standards and the risks inherent in the markets in which Northern Trust
operates. The system of internal controls includes policies and procedures that
require the proper authorization, approval, documentation, and monitoring of
transactions. Each business unit is responsible for complying with corporate
policies and external regulations applicable to the unit, and is responsible
for establishing specific procedures to do so. Northern Trust's internal
auditors monitor the overall effectiveness of the system of internal controls
on an ongoing basis.
Fiduciary risk is the risk of loss that may occur as a result of breaching a
fiduciary duty to a client. To limit this risk, the Trust Investment Committee
establishes corporate policies and procedures to ensure that obligations to
clients are discharged faithfully and in compliance with applicable legal and
regulatory requirements. These policies and procedures provide guidance and
establish standards related to the creation, sale, and management of investment
products, trade execution, and counterparty selection. Business units have the
primary responsibility for adhering to the policies and procedures applicable
to their businesses.
34
Northern Trust Corporation
LINES OF BUSINESS
The results for the major business units are presented in order to promote a
greater understanding of their financial performance and strategic direction.
The information, presented on an internal management reporting basis, is
derived from internal accounting systems that support the strategic objectives
and management structure. Consequently, the results are not necessarily
comparable with similar information for other financial institutions.
Management has developed accounting systems to allocate revenue and expenses
related to each line of business, as well as certain corporate support
services, worldwide operations and systems development expenses. The systems
also incorporate processes for allocating assets, liabilities and the
applicable interest income and expense. Equity is primarily allocated using the
federal regulatory risk-based capital guidelines, coupled with management's
judgment of the operational risks inherent in the business. Allocations of
capital and certain corporate expenses may not be representative of the levels
that would be required if the businesses were independent entities.
CORPORATE AND INSTITUTIONAL SERVICES. Corporate and Institutional Services
includes corporate trust, investment management and securities lending
services, commercial banking activities of the Bank, treasury management
services, foreign exchange activities, the London and Singapore branches, NTRC,
NTGA and Northern Futures Corporation.
PERSONAL FINANCIAL SERVICES. Personal Financial Services encompasses personal
trust and investment management services, estate administration, personal
banking and mortgage and other lending to individuals and middle market
companies. This business unit also includes the commercial banking activities
of the affiliate banks and the activities of Northern Trust Securities, Inc.
CORPORATE AND OTHER. Corporate and Other includes the Bank's Treasury
Department and other corporate items, including the impact of long-term debt,
preferred equity, holding company investments, and corporate operating
expenses. The decline in noninterest expenses from 1995 to 1996 reflects
decreases in severance costs and pension settlement charges, and lower salary
and benefit expenses resulting from staff reductions in corporate support
areas. Noninterest income for 1994 included the net gain of $28.5 million from
the sale of the interest in BSS. 1994 noninterest expenses included non-
recurring charges totaling $23.2 million. Of the $23.2 million, $13.6 million
resulted from the trade-in and the sale and leaseback of mainframe computer
equipment and the write-down of older trust-related software, and $9.6 million
from pension settlement charges.
The following table reflects the earnings contribution of Northern Trust's
lines of business for the years ended December 31, 1996, 1995 and 1994 on the
basis described above.
- --------------------------------------------------------------------------------
Corporate and
Institutional Personal Corporate
Services Financial Services and Other
---------------------- ---------------------- -------------------
($ In Millions) 1996 1995 1994 1996 1995 1994 1996 1995 1994
- -----------------------------------------------------------------------------------------------
Net Interest Income(1) $115.4 $114.3 $102.1 $286.4 $260.4 $238.7 $20.1 $20.5 $27.2
Provision for Credit
Losses (.6) 1.6 (.8) 15.3 4.3 8.0 (2.7) .1 (1.2)
Noninterest Income
Trust Fees 298.3 244.2 216.7 294.0 260.8 236.7 -- -- --
Other 138.8 134.1 112.5 43.1 38.6 35.7 3.7 .4 31.8
Noninterest Expenses 371.2 318.8 300.2 383.5 366.5 355.0 12.1 23.9 45.3
- -----------------------------------------------------------------------------------------------
Income before Taxes(1) 181.9 172.2 131.9 224.7 189.0 148.1 14.4 (3.1) 14.9
Provision for Income
Taxes(1) 71.8 67.5 50.1 89.6 75.1 58.7 .8 (4.5) 3.9
- -----------------------------------------------------------------------------------------------
NET INCOME $110.1 $104.7 $ 81.8 $135.1 $113.9 $ 89.4 $13.6 $ 1.4 $11.0
- -----------------------------------------------------------------------------------------------
Percentage Contribution 43% 47% 45% 52% 52% 49% 5% 1% 6%
(1) On a fully taxable equivalent basis (FTE). Total includes $33.6 million,
$37.6 million and $33.4 million of FTE adjustment for 1996, 1995 and 1994,
respectively.
Note: Certain reclassifications have been made to 1995 and 1994 financial
information to conform to the current year presentation.
35
Northern Trust Corporation
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET
- -----------------------------------------------------------------------------
December 31
--------------------
($ In Millions) 1996 1995
- -----------------------------------------------------------------------------
ASSETS
Cash and Due from Banks $ 1,292.5 $ 1,308.9
Federal Funds Sold and Securities Purchased under
Agreements to Resell (Note 4) 1,022.6 162.1
Time Deposits with Banks 2,060.0 1,567.6
Other Interest-Bearing 114.3 54.5
Securities (Note 3)
Available for Sale 4,311.7 5,136.3
Held to Maturity (Fair value-$518.9 in 1996 and
$562.6 in 1995) 498.4 535.1
Trading Account 4.8 88.9
- -----------------------------------------------------------------------------
Total Securities 4,814.9 5,760.3
- -----------------------------------------------------------------------------
Loans and Leases
Commercial and Other 6,379.9 6,009.6
Residential Mortgages 4,557.5 3,896.4
- -----------------------------------------------------------------------------
Total Loans and Leases (Note 5) (Net of unearned in-
come-$109.1 in 1996 and $89.6 in 1995) 10,937.4 9,906.0
- -----------------------------------------------------------------------------
Reserve for Credit Losses (Note 6) (148.3) (147.1)
Buildings and Equipment (Notes 8 and 9) 291.5 281.5
Customers' Acceptance Liability 44.7 35.8
Trust Security Settlement Receivables 362.3 327.1
Other Assets (Note 16) 816.4 676.8
- -----------------------------------------------------------------------------
Total Assets $21,608.3 $19,933.5
- -----------------------------------------------------------------------------
LIABILITIES
Deposits
Demand and Other Noninterest-Bearing $ 3,476.7 $ 2,853.1
Savings and Money Market Deposits 3,880.1 3,385.3
Savings Certificates 2,056.3 2,158.8
Other Time 462.7 384.3
Foreign Offices-Demand 410.7 459.8
-Time 3,509.7 3,246.9
- -----------------------------------------------------------------------------
Total Deposits 13,796.2 12,488.2
Federal Funds Purchased 653.0 2,300.1
Securities Sold under Agreements to Repurchase (Note
4) 966.1 1,858.7
Commercial Paper 149.0 146.7
Other Borrowings 3,142.1 875.9
Senior Notes (Note 10) 305.0 17.0
Notes Payable (Note 10) (Qualifying as risk-based
capital-$334.6 in 1996 and $254.2 in 1995) 427.8 334.6
Liability on Acceptances 44.7 35.8
Other Liabilities 580.3 423.9
- -----------------------------------------------------------------------------
Total Liabilities 20,064.2 18,480.9
- -----------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred Stock (Note 11) 120.0 170.0
Common Stock, $1.66 2/3 Par Value; Authorized
140,000,000 shares in 1996 and 1995; Outstanding
111,247,732 and 55,664,412 in 1996 and 1995, re-
spectively (Notes 11 and 13) 189.9 93.6
Capital Surplus 231.7 306.1
Retained Earnings 1,110.2 928.8
Net Unrealized Gain on Securities Available for Sale
(Note 3) 1.6 2.6
Common Stock Issuable-Performance Plan (Note 23) 10.4 14.7
Deferred Compensation-ESOP and Other (35.5) (39.4)
Treasury Stock-(at cost-2,712,780 shares in 1996 and
493,652 shares in 1995) (84.2) (23.8)
- -----------------------------------------------------------------------------
Total Stockholders' Equity 1,544.1 1,452.6
- -----------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $21,608.3 $19,933.5
- -----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements on pages 40-63.
36
Northern Trust Corporation
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF INCOME
- --------------------------------------------------------------------------------
For the Year Ended December 31
-----------------------------------
($ In Millions Except Per Share
Information) 1996 1995 1994
- --------------------------------------------------------------------------------
Interest Income
Loans and Leases (Note 5) $ 693.4 $ 630.9 $ 499.6
Securities (Note 3)
Available For Sale 318.9 324.0 190.9
Held to Maturity 32.5 40.0 40.3
Trading Account .5 3.6 4.0
- --------------------------------------------------------------------------------
Total Securities 351.9 367.6 235.2
- --------------------------------------------------------------------------------
Time Deposits with Banks 84.9 92.1 97.8
Federal Funds Sold and Securities Pur-
chased under Agreements to Resell and
Other (Note 4) 21.3 13.4 16.1
- --------------------------------------------------------------------------------
Total Interest Income 1,151.5 1,104.0 848.7
- --------------------------------------------------------------------------------
Interest Expense
Deposits 447.8 443.3 298.0
Federal Funds Purchased 97.9 91.2 55.5
Securities Sold under Agreements to Re-
purchase (Note 4) 103.4 102.6 61.9
Commercial Paper 7.8 8.6 5.9
Other Borrowings 64.5 55.6 36.0
Senior Notes (Note 10) 14.4 23.7 33.8
Notes Payable (Note 10) 27.4 21.4 23.0
- --------------------------------------------------------------------------------
Total Interest Expense 763.2 746.4 514.1
- --------------------------------------------------------------------------------
Net Interest Income 388.3 357.6 334.6
Provision for Credit Losses (Note 6) 12.0 6.0 6.0
- --------------------------------------------------------------------------------
Net Interest Income after Provision for
Credit Losses 376.3 351.6 328.6
- --------------------------------------------------------------------------------
Noninterest Income
Trust Fees 592.3 505.0 453.4
Treasury Management Fees 55.3 49.6 46.3
Foreign Exchange Trading Profits 58.8 55.3 35.9
Security Commissions and Trading Income 23.9 21.7 22.0
Other Operating Income (Note 15) 47.2 45.5 75.9
Investment Security Gains (Losses)
(Note 3) .4 1.0 (.1)
- --------------------------------------------------------------------------------
Total Noninterest Income 777.9 678.1 633.4
- --------------------------------------------------------------------------------
Income before Noninterest Expenses 1,154.2 1,029.7 962.0
- --------------------------------------------------------------------------------
Noninterest Expenses
Salaries (Notes 23 and 24) 368.8 337.6 316.6
Pension and Other Employee Benefits
(Note 17) 72.5 81.5 74.8
Occupancy Expense (Notes 8 and 9) 63.8 60.2 57.4
Equipment Expense (Note 8) 54.6 48.6 56.4
Other Operating Expenses (Note 16) 207.1 181.3 195.3
- --------------------------------------------------------------------------------
Total Noninterest Expenses 766.8 709.2 700.5
- --------------------------------------------------------------------------------
Income before Income Taxes 387.4 320.5 261.5
Provision for Income Taxes (Note 12) 128.6 100.5 79.3
- --------------------------------------------------------------------------------
NET INCOME $ 258.8 $ 220.0 $ 182.2
- --------------------------------------------------------------------------------
Net Income Applicable to Common Stock $ 253.9 $ 211.5 $ 174.9
- --------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE (Note 13)-
PRIMARY $ 2.21 $ 1.88 $ 1.59
-FULLY DILUTED 2.20 1.85 1.58
- --------------------------------------------------------------------------------
Average Number of Common Shares Out-
standing-Primary 114,648,190 112,675,834 110,288,428
-Fully Diluted 115,466,501 116,137,566 112,704,750
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements on pages 40-63.
37
Northern Trust Corporation
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
For the Year Ended December 31
----------------------------------
(In Millions) 1996 1995 1994
- -------------------------------------------------------------------------------
PREFERRED STOCK
Balance at January 1 $ 170.0 $ 170.0 $ 170.0
Conversion of Preferred Stock, Series E (50.0) -- --
- -------------------------------------------------------------------------------
Balance at December 31 120.0 170.0 170.0
- -------------------------------------------------------------------------------
COMMON STOCK
Balance at January 1 93.6 90.6 89.7
Stock Issued-Incentive Plan and Awards -- .3 --
Stock Issued-Acquisitions -- 2.7 .9
Conversion of Preferred Stock, Series E 1.3 -- --
Transfer from Capital Surplus-Two-for-
One Stock Split 95.0 -- --
- -------------------------------------------------------------------------------
Balance at December 31 189.9 93.6 90.6
- -------------------------------------------------------------------------------
CAPITAL SURPLUS
Balance at January 1 306.1 302.2 303.0
Stock Issued-Incentive Plan and Awards (8.6) (.2) (.4)
Stock Issued-Acquisitions -- 4.1 (.4)
Conversion of Preferred Stock, Series E 29.2 -- --
Transfer to Common Stock-Two-for-One
Stock Split (95.0) -- --
- -------------------------------------------------------------------------------
Balance at December 31 231.7 306.1 302.2
- -------------------------------------------------------------------------------
RETAINED EARNINGS
Balance at January 1 928.8 762.7 631.9
Net Income 258.8 220.0 182.2
Dividends Declared-Common Stock (72.5) (60.4) (49.6)
Dividends Declared-Preferred Stock (4.9) (8.6) (7.2)
Pooled Affiliates -- 15.1 5.4
- -------------------------------------------------------------------------------
Balance at December 31 1,110.2 928.8 762.7
- -------------------------------------------------------------------------------
NET UNREALIZED GAIN (LOSS) ON SECURITIES
AVAILABLE FOR SALE
Balance at January 1 2.6 (15.8) (.4)
Unrealized Gain (Loss), net (1.0) 18.4 (15.4)
- -------------------------------------------------------------------------------
Balance at December 31 1.6 2.6 (15.8)
- -------------------------------------------------------------------------------
TRANSLATION ADJUSTMENTS
Balance at January 1 -- -- .6
Sale of Foreign Investment -- -- (.6)
- -------------------------------------------------------------------------------
Balance at December 31 -- -- --
- -------------------------------------------------------------------------------
COMMON STOCK ISSUABLE-PERFORMANCE PLAN
Balance at January 1 14.7 17.9 11.8
Stock Issuable, net of Stock Issued (4.3) (3.2) 6.1
- -------------------------------------------------------------------------------
Balance at December 31 10.4 14.7 17.9
- -------------------------------------------------------------------------------
DEFERRED COMPENSATION-ESOP AND OTHER
Balance at January 1 (39.4) (38.8) (43.5)
Compensation Deferred (2.7) (11.8) (4.5)
Compensation Amortized 7.5 10.3 10.1
Unfunded Pension Liability, net (.9) .9 (.9)
- -------------------------------------------------------------------------------
Balance at December 31 (35.5) (39.4) (38.8)
- -------------------------------------------------------------------------------
TREASURY STOCK
Balance at January 1 (23.8) (8.1) (11.4)
Stock Options and Awards 42.9 28.8 12.0
Stock Purchased (122.5) (65.5) (8.7)
Stock Issued-Acquisitions -- 21.0 --
Conversion of Preferred Stock, Series E 19.2 -- --
- -------------------------------------------------------------------------------
Balance at December 31 (84.2) (23.8) (8.1)
- -------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY AT DECEMBER
31 $ 1,544.1 $ 1,452.6 $ 1,280.7
- -------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements on pages 40-63.
38
Northern Trust Corporation
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
- -------------------------------------------------------------------------------
For the Year Ended December 31
----------------------------------
(In Millions) 1996 1995 1994
- -------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 258.8 $ 220.0 $ 182.2
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activi-
ties:
Provision for Credit Losses 12.0 6.0 6.0
Depreciation on Buildings and Equipment 46.8 42.2 41.4
(Increase) Decrease in Interest Receiv-
able 17.7 (32.8) 22.9
Increase in Interest Payable 9.4 .3 5.2
Amortization and Accretion of Securi-
ties and Unearned Income (120.2) (153.5) (27.7)
Amortization of Software, Goodwill and
Other Intangibles 42.3 35.8 28.3
Deferred Income Tax 29.5 17.7 22.7
Gain on Sale of Foreign Investment -- -- (34.5)
Net (Increase) Decrease in Trading Ac-
count Securities 84.1 (84.9) 32.3
Other, net (32.4) 91.0 108.9
- -------------------------------------------------------------------------------
Net Cash Provided by Operating Activi-
ties 348.0 141.8 387.7
- -------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (Increase) Decrease in Federal
Funds Sold and Securities Purchased
under Agreements to Resell (860.5) 638.9 (199.2)
Net (Increase) Decrease in Time Depos-
its with Banks (492.4) 297.3 225.7
Net (Increase) Decrease in Other Inter-
est-Bearing Assets (59.8) (45.0) 66.5
Purchases of Securities-Held to Matu-
rity (2,068.7) (662.3) (544.1)
Proceeds from Maturity and Redemption
of Securities-Held to Maturity 2,112.9 819.6 515.8
Purchases of Securities-Available for
Sale (31,666.5) (31,206.1) (12,838.3)
Proceeds from Sale, Maturity and Re-
demption of Securities-Available for
Sale 32,611.3 30,828.7 11,823.2
Net Increase in Loans and Leases (1,066.5) (1,155.3) (979.2)
Purchases of Buildings and Equipment (56.8) (41.8) (44.8)
Proceeds from Sale of Buildings and
Equipment -- 4.5 10.8
Sale of Foreign Investment -- -- 58.1
Net Increase in Trust Security Settle-
ment Receivables (35.2) (21.4) (12.6)
Decrease in Cash Due to Acquisitions (14.6) (43.5) --
Other, net (10.6) 2.3 6.9
- -------------------------------------------------------------------------------
Net Cash Used in Investing Activities (1,607.4) (584.1) (1,911.2)
- -------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increase in Deposits 1,308.0 378.7 1,401.0
Net Increase (Decrease) in Federal
Funds Purchased (1,647.1) 1,328.1 (243.9)
Net Increase (Decrease) in Securities
Sold under Agreements to Repurchase (892.6) (374.0) 1,614.7
Net Increase (Decrease) in Commercial
Paper 2.3 22.9 (.3)
Net Increase (Decrease) in Short-Term
Other Borrowings 2,273.2 (56.1) (1,401.7)
Proceeds from Term Federal Funds Pur-
chased 2,630.2 4,132.7 3,918.4
Repayments of Term Federal Funds Pur-
chased (2,637.2) (4,280.1) (3,684.2)
Proceeds from Senior Notes & Notes Pay-
able 901.5 1,260.0 430.0
Repayments on Senior Notes & Notes Pay-
able (520.3) (1,700.2) (781.9)
Treasury Stock Purchased (118.2) (63.7) (6.9)
Net Proceeds from Stock Options 12.1 9.0 4.5
Cash Dividends Paid on Common and Pre-
ferred Stock (74.7) (65.8) (54.1)
Other, net 5.8 (32.8) .7
- -------------------------------------------------------------------------------
Net Cash Provided by Financing Activi-
ties 1,243.0 558.7 1,196.3
- -------------------------------------------------------------------------------
Increase (Decrease) in Cash and Due
from Banks (16.4) 116.4 (327.2)
Cash and Due from Banks at Beginning of
Year 1,308.9 1,192.5 1,519.7
- -------------------------------------------------------------------------------
CASH AND DUE FROM BANKS AT END OF YEAR $ 1,292.5 $ 1,308.9 $ 1,192.5
- -------------------------------------------------------------------------------
SCHEDULE OF NONCASH INVESTING AND FI-
NANCING ACTIVITIES:
Conversion of Preferred Stock, Series E
to Common Stock $ 49.7 $ -- $ --
Acquisition of Affiliate for Stock, net -- 41.3 6.4
Transfer of Securities from Held to Ma-
turity to Available for Sale -- 68.5 --
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest Paid on Deposits and Short-
and Long-Term Borrowings $ 753.8 $ 745.0 $ 505.3
Income Taxes Paid 82.7 76.4 52.5
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements on pages 40-63.
39
Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ACCOUNTING POLICIES--The consolidated financial statements have been
prepared in conformity with generally accepted accounting principles and
reporting practices prescribed for the banking industry. A description of the
significant accounting policies follows:
A. BASIS OF PRESENTATION. The consolidated financial statements include the
accounts of Northern Trust Corporation (Corporation) and its wholly owned
subsidiary The Northern Trust Company (Bank) and their wholly owned
subsidiaries. Throughout the notes, the term ""Northern Trust'' refers to
Northern Trust Corporation and subsidiaries. Significant intercompany balances
and transactions have been eliminated in consolidation. The consolidated
statement of income includes results of acquired and pooled subsidiaries from
the dates of acquisition.
B. NATURE OF OPERATIONS. The Corporation is a bank holding company whose
principal subsidiary is the Chicago-based Bank. The Corporation also owns banks
in Arizona, California, Florida and Texas, and various other nonbank
subsidiaries, including a brokerage firm, a futures commission merchant, an
international investment consulting firm and a retirement services company. The
Corporation also owned three other Illinois banks which were merged into the
Bank on February 29, 1996. Northern Trust generates the majority of its
revenues from its two primary business units, Corporate and Institutional
Services (C&IS) and Personal Financial Services (PFS).
The C&IS unit provides trust and custody-related services in the United States
and foreign markets to corporations and institutions; a full range of
commercial banking services to large domestic corporations and financial
institutions; treasury management services to meet the needs of major
corporations and financial institutions; and foreign exchange services for
global custody clients and Northern Trust's own account.
The PFS unit provides personal trust, investment management, estate
administration, personal banking and mortgage lending services, and also
provides commercial banking services to middle market companies. These services
are delivered through the Bank and the network of subsidiaries in Arizona,
California, Florida and Texas.
C. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
D. FOREIGN CURRENCY TRANSLATION. Foreign currency asset and liability accounts
of overseas branches are translated at current rates of exchange, except for
buildings and equipment which are translated at rates in effect at the date of
acquisition. Income and expense accounts are translated at month-end rates of
exchange.
Foreign exchange trading positions are valued daily at prevailing market
rates. Gains and losses on trading positions and on positions entered into to
hedge foreign denominated investments are recognized currently in other
operating income. Unrealized gains on trading positions are reported as other
assets and unrealized losses are reported as other liabilities in the
consolidated balance sheet. Gains and losses on foreign currency positions that
were entered into to hedge specific, firm foreign currency obligations are
deferred and recognized in income over the life of the underlying asset or
liability or as the underlying expense or commitment is incurred.
E. SECURITIES. Securities Available for Sale consist of debt and equity
securities that are not intended to be held to maturity and are not held for
trading. Securities available for sale are reported at fair value, with
unrealized gains and losses credited or charged, net of the tax effect,
directly to stockholders' equity. Realized gains and losses on securities
available for sale are determined on a specific identification basis and are
reported in the consolidated statement of income as investment security gains
and losses.
Securities Held to Maturity consist of debt securities that management intends
to, and Northern Trust has the ability to, hold until maturity. Such securities
are reported at cost, adjusted for amortization of premium and accretion of
discount.
Securities Held for Trading are stated at fair value. Realized and unrealized
gains and losses on securities held for trading are reported in the
consolidated statement of income under security commissions and trading income.
F. INTEREST RISK MANAGEMENT INSTRUMENTS. Interest risk management instruments
include interest rate swap contracts, futures contracts, options and similar
contracts. Northern Trust is a party to various interest risk management
instruments to meet the interest risk management needs of its clients, as part
of its trading activity for its own account and as part of its asset/liability
management activities. Unrealized gains and receivables on interest risk
management instruments are reported as other assets and unrealized losses and
payables are reported as other liabilities in the consolidated balance sheet.
Interest risk management instruments entered into to meet clients' interest
risk management needs or for trading purposes are carried at fair value, with
realized and unrealized gains and losses included in security commissions and
trading income.
Interest risk management instruments entered into to hedge specifically
identified existing assets and liabilities or anticipated transactions are
accounted for under the accrual method or fair value method, as described
below, if they effectively change the cash flows of the hedged item and the
hedged item exposes Northern Trust to interest rate risk.
40
Northern Trust Corporation
ACCRUAL METHOD. Under this method, the accrued interest income or expense on
the interest risk management instrument is recognized as a component of the
interest income or expense of the hedged item. There is no recognition of
unrealized gains and losses on the instruments in the balance sheet. Realized
gains and losses on futures contracts are deferred and recognized as an
adjustment to interest income or expense over the life of the hedged item.
FAIR VALUE METHOD. The fair value method is used in those cases where the
hedged items are carried at fair value or the lower of cost or fair value.
Under this method, the related interest risk management instruments are carried
at fair value. Unrealized gains and losses on the interest risk management
instruments are recognized consistent with the method of accounting for the
hedged items. For example, unrealized gains and losses on interest rate swaps
used to hedge available for sale securities are reported in stockholders'
equity, net of applicable taxes. Accrued interest income and expense on swaps
used to hedge available for sale securities is reported in interest income on
securities.
G. LOANS AND LEASES. Loans that are held to maturity are reported at the
principal amount outstanding, net of unearned income. Residential real estate
loans classified as held for sale are reported at the lower of aggregate cost
or market value. Interest income on loans is recorded on an accrual basis
until, in the opinion of management, there is a question as to the ability of
the debtor to meet the terms of the contract, or when interest or principal is
more than 90 days past due and the loan is not well-secured and in the process
of collection. At the time a loan is placed on nonaccrual status, interest
accrued but not collected is reversed against interest income of the current
period. Loans are returned to accrual status when factors indicating doubtful
collectibility no longer exist. Interest collected on nonaccrual loans is
applied to principal unless, in the opinion of management, collectibility of
principal is not in doubt.
Premiums and discounts on loans are recognized as an adjustment of yield by
the interest method based on the contractual terms of the loan. Commitment fees
that are considered to be an adjustment to the loan yield, loan origination
fees and certain direct costs are deferred and accounted for as an adjustment
of the yield.
Unearned lease income from direct financing and leveraged leases is recognized
using the interest method. This method provides a constant rate of return on
the unrecovered investment over the life of the lease.
H. RESERVE FOR CREDIT LOSSES. The reserve for credit losses is established
through provisions for credit losses charged to income. Loans, leases and other
extensions of credit deemed uncollectible are charged to the reserve.
Subsequent recoveries, if any, are credited to the reserve. The loan and lease
portfolio and other extensions of credit are regularly reviewed to evaluate the
adequacy of the reserve for credit losses. The impact of economic conditions on
the creditworthiness of borrowers is given major consideration in determining
the adequacy of the reserve. Credit loss experience, changes in the character
and size of the loan portfolio, the estimated value of impaired loans compared
to their recorded investment, and management's judgment are other factors used
in assessing the overall adequacy of the reserve for credit losses and the
resulting provision for credit losses. Actual losses may vary from current
estimates and the amount of the provision may be either greater than or less
than actual net charge-offs.
I. MORTGAGE SERVICING RIGHTS. Effective January 1, 1996, Northern Trust
adopted Statement of Financial Accounting Standards (SFAS) No. 122,
""Accounting for Mortgage Servicing Rights.'' This statement requires that
mortgage servicing rights be capitalized as a separate asset when purchased or
when acquired through the origination of mortgage loans that are subsequently
sold with the servicing rights retained. The servicing rights are included in
other assets and are amortized as an offset to other operating income over
their estimated life. SFAS No. 122 also requires that servicing rights be
evaluated for impairment based on their fair value. For purposes of measuring
impairment, Northern Trust stratifies its servicing rights by loan type and
interest rate. Fair value is determined considering market prices for similar
assets. Impairment losses are recognized by establishing a valuation allowance
for each stratum to the extent that the unamortized carrying value of servicing
rights in the stratum exceeds fair value. Changes in the valuation allowances
are recorded in other operating income.
J. FEES ON STANDBY LETTERS OF CREDIT AND PARTICIPATIONS IN BANKERS
ACCEPTANCES. Fees on standby letters of credit are 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.
K. BUILDINGS AND EQUIPMENT. Buildings and equipment owned are carried at
original cost less accumulated depreciation. The charge for depreciation is
computed on the straight-line method based on the following range of lives:
buildings--10 to 30 years; equipment--4 to 10 years; and leasehold
improvements--1 to 15 years. Leased properties meeting certain criteria are
capitalized and amortized using the straight-line method over the lease period.
L. OTHER REAL ESTATE OWNED (OREO). OREO is comprised of commercial and
residential real estate properties acquired in partial or total satisfaction of
problem loans.
OREO assets are carried at the lower of cost or fair value. Losses identified
at the time of acquisition of such properties are charged against the reserve
for credit losses. Subsequent write-downs that may be required to the carrying
value of these assets and losses realized from asset sales are charged to other
operating expenses. Gains realized from the sale of OREO are included in other
operating income.
41
Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
M. INTANGIBLE ASSETS. Goodwill, arising from the excess of purchase price over
the fair value of net assets of acquired subsidiaries, is being amortized using
the straight-line method over periods benefiting, ranging primarily from
fifteen to twenty years.
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," establishes accounting standards for the
impairment of such assets, certain identifiable intangibles, and goodwill
related to those assets to be held and used and for similar assets and certain
identifiable intangibles to be disposed of. This statement requires that those
assets held and used be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable; and
that those to be disposed of be reported at the lower of carrying amount or
fair value less cost to sell, with certain exceptions. This statement was
adopted January 1, 1996. No adjustments to the carrying value of long-lived
assets were required as a result of adopting this statement.
Other purchased intangible assets arising from acquisitions are amortized
using various methods over the estimated lives of the assets. Software is being
amortized using the straight-line method over the estimated useful life of the
asset, ranging from three to seven years.
N. TRUST ASSETS AND FEES. Assets held in fiduciary or agency capacities are
not included in the consolidated balance sheet, since such items are not assets
of Northern Trust. Income from trust activities is recorded on the accrual
basis.
O. TRUST SECURITY SETTLEMENT RECEIVABLES. These receivables represent other
items in the process of collection presented on behalf of trust clients.
P. INCOME TAXES. In accordance with SFAS No. 109, ""Accounting for Income
Taxes,'' an asset and liability approach to accounting for income taxes is
followed. The objective is to recognize the amount of taxes payable or
refundable for the current year, and to recognize deferred tax assets and
liabilities resulting from temporary differences between the amounts reported
in the financial statements and the tax bases of assets and liabilities. The
measurement of tax assets and liabilities is based on enacted tax laws and
applicable tax rates.
Q. CASH FLOW STATEMENTS. Cash and cash equivalents have been defined as those
amounts included in the consolidated balance sheet as ""Cash and Due from
Banks.''
2. RECLASSIFICATIONS--Certain reclassifications have been made to prior
periods' consolidated financial statements to place them on a basis comparable
with the current period's consolidated financial statements.
3. SECURITIES--SECURITIES AVAILABLE FOR SALE. Realized gross security gains and
losses, which were included in the consolidated statement of income, totaled
$1.5 million and $1.1 million, respectively in 1996. Of the $1.5 million in
gains in 1996, $1.0 million was related to the sale of securities classified as
available for sale. The remaining $.5 million resulted when held to maturity
securities were called at a premium. Realized gross security losses in 1996
resulted entirely from the sale of securities classified as available for sale.
Realized gross security gains and losses totaled $1.0 million and none,
respectively, in 1995. Of the $1.0 million in gains in 1995, $.1 million was
related to the sale of securities classified as available for sale. The
remaining $.9 million resulted when held to maturity securities were called at
a premium. Realized gross security gains and losses in 1994 totaled $.2 million
and $.3 million, respectively, all of which were related to securities
available for sale.
The following tables summarize the amortized cost, fair values and remaining
maturities of securities available for sale.
- -------------------------------------------------------------------------------
RECONCILIATION OF AMORTIZED COST TO FAIR VALUES OF SECURITIES AVAILABLE FOR
SALE
- -------------------------------------------------------------------------------
December 31, 1996
----------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(In Millions) Cost Gains Losses Value
- -------------------------------------------------------------------------------
U.S. Government $ 906.8 $ .9 $1.0 $ 906.7
Obligations of States and Political
Subdivisions 114.5 2.9 .4 117.0
Federal Agency 3,095.0 2.7 .8 3,096.9
Preferred Stock 139.6 -- .2 139.4
Other 51.9 1.0 1.2 51.7
- -------------------------------------------------------------------------------
Total $4,307.8 $7.5 $3.6 $4,311.7
- -------------------------------------------------------------------------------
Unrealized gains and losses on off-balance sheet financial instruments used to
hedge available for sale securities totaled $2.2 million and $3.5 million,
respectively, as of December 31, 1996. Unrealized gains on these hedges are
reported as other assets in the consolidated balance sheet; unrealized losses
are reported as other liabilities. As of December 31, 1996, stockholders'
equity included a credit of $1.6 million, net of tax, to recognize the
appreciation on securities available for sale, net of the related hedges.
42
Northern Trust Corporation
- --------------------------------------------------------------------------------
December 31, 1995
----------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(In Millions) Cost Gains Losses Value
- -------------------------------------------------------------------------------
U.S. Government $1,661.1 $ 7.3 $ .7 $1,667.7
Obligations of States and Political
Subdivisions 68.5 2.5 .8 70.2
Federal Agency 3,142.9 10.8 .9 3,152.8
Preferred Stock 148.1 -- .3 147.8
Other 99.3 .5 2.0 97.8
- -------------------------------------------------------------------------------
Total $5,119.9 $21.1 $4.7 $5,136.3
- -------------------------------------------------------------------------------
Unrealized losses on off-balance sheet financial instruments used to hedge
available for sale securities totaled $12.2 million as of December 31, 1995 and
are reported as other liabilities in the consolidated balance sheet. As of
December 31, 1995, stockholders' equity included a credit of $2.6 million, net
of tax, to recognize the appreciation on securities available for sale, net of
the related hedges.
- ------------------------------------------------------------
REMAINING MATURITY OF SECURITIES AVAILABLE FOR SALE
- ------------------------------------------------------------
December 31, 1996
------------------
Amortized Fair
(In Millions) Cost Value
- ------------------------------------------------------------
Due in One Year or Less $3,437.5 $3,437.7
Due After One Year Through Five Years 180.2 180.2
Due After Five Years Through Ten Years 107.7 108.2
Due After Ten Years 582.4 585.6
- ------------------------------------------------------------
Total $4,307.8 $4,311.7
- ------------------------------------------------------------
Asset-backed and mortgage-backed securities were included in the above table
taking into account anticipated future prepayments.
SECURITIES HELD TO MATURITY. The following tables summarize the book values,
fair values and remaining maturities of securities held to maturity.
- --------------------------------------------------------------------------------
RECONCILIATION OF BOOK VALUES TO FAIR VALUES OF SECURITIES HELD TO MATURITY
- --------------------------------------------------------------------------------
December 31, 1996
-----------------------------------
Gross Gross
Book Unrealized Unrealized Fair
(In Millions) Value Gains Losses Value
- --------------------------------------------------------------------------
U.S. Government $ 73.4 $ .1 $ -- $ 73.5
Obligations of States and Political
Subdivisions 315.9 20.5 .1 336.3
Federal Agency 18.2 .1 .1 18.2
Other 90.9 -- -- 90.9
- --------------------------------------------------------------------------
Total $498.4 $20.7 $ .2 $518.9
- --------------------------------------------------------------------------
December 31, 1995
-----------------------------------
Gross Gross
Book Unrealized Unrealized Fair
(In Millions) Value Gains Losses Value
- --------------------------------------------------------------------------
U.S. Government $116.1 $ .2 $ -- $116.3
Obligations of States and Political
Subdivisions 366.9 27.1 -- 394.0
Federal Agency 22.2 .3 .1 22.4
Other 29.9 -- -- 29.9
- --------------------------------------------------------------------------
Total $535.1 $27.6 $ .1 $562.6
- --------------------------------------------------------------------------
- -------------------------------------------------------
REMAINING MATURITY OF SECURITIES HELD TO MATURITY
- -------------------------------------------------------
December 31,
1996
-------------
Book Fair
(In Millions) Value Value
- -------------------------------------------------------
Due in One Year or Less $127.8 $128.9
Due After One Year Through Five Years 150.6 159.6
Due After Five Years Through Ten Years 110.5 119.8
Due After Ten Years 109.5 110.6
- -------------------------------------------------------
Total $498.4 $518.9
Asset-backed and mortgage-backed securities were included in the above table
taking into account anticipated future prepayments.
43
Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Income on obligations of states and political subdivisions totaled $26.8
million, $30.7 million and $34.6 million in 1996, 1995 and 1994, respectively.
Dividends received on preferred stock totaled $4.4 million, $8.0 million and
$6.4 million for 1996, 1995 and 1994, respectively.
Refer to Note 20 for additional detail related to interest risk management
instruments used to hedge securities.
4. SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND SECURITIES SOLD UNDER
AGREEMENTS TO REPURCHASE--Securities purchased under agreements to resell and
securities sold under agreements to repurchase are recorded at the amounts at
which the securities were acquired or sold plus accrued interest. To minimize
any potential credit risk associated with these transactions, the fair value of
the securities purchased or sold is continuously monitored, limits are set on
exposure with counterparties, and the financial condition of counterparties is
regularly assessed. It is Northern Trust's policy to take possession of
securities purchased under agreements to resell. The following tables summarize
information related to securities purchased under agreements to resell and
securities sold under agreements to repurchase.
- ----------------------------------------------------------
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
- ----------------------------------------------------------
December 31
------------------
($ In Millions) 1996 1995
- ----------------------------------------------------------
Average Balance During the Year $ 131.2 $ 71.7
Average Interest Rate Earned During
the Year 5.39% 5.81%
Maximum Month-End Balance
During the Year 554.5 344.0
- ----------------------------------------------------------
- --------------------------------------------------------
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
- --------------------------------------------------------
December 31
------------------
($ In Millions) 1996 1995
- --------------------------------------------------------
Average Balance During the Year $1,973.3 $1,769.7
Average Interest Rate Paid During
the Year 5.24% 5.80%
Maximum Month-End Balance
During the Year 2,922.2 2,283.0
- --------------------------------------------------------
5. LOANS AND LEASES--Amounts outstanding in selected loan categories are shown
below.
- ----------------------------------------------
December 31
------------------
(In Millions) 1996 1995
- ----------------------------------------------
Domestic
Residential Real Estate $ 4,557.5 $3,896.4
Commercial 3,161.4 3,202.1
Broker 389.1 304.0
Commercial Real Estate 557.7 512.6
Consumer 989.8 758.9
Other 632.1 625.5
Lease Financing 267.8 202.3
- ----------------------------------------------
Total Domestic 10,555.4 9,501.8
International 382.0 404.2
- ----------------------------------------------
Total Loans and Leases $10,937.4 $9,906.0
- ----------------------------------------------
Other domestic and international loans include $765.3 million at December 31,
1996, and $810.4 million at December 31, 1995 of overnight trust-related
advances in connection with next day security settlements. Lease financing
includes leveraged leases of $139.1 million at December 31, 1996, and $85.5
million at December 31, 1995.
Residential real estate loans held for sale totaled $3.7 million and $7.6
million at December 31, 1996 and 1995, respectively.
Refer to Note 20 for detail related to interest risk management instruments
used to hedge loans.
NONPERFORMING ASSETS. Presented below are outstanding amounts of nonaccrual
loans, restructured loans and OREO.
- -----------------------------------------------
December 31
-----------
(In Millions) 1996 1995
- -----------------------------------------------
Nonaccrual Loans
Domestic-Commercial Real Estate $11.3 $ 9.0
-Other 5.6 20.0
International -- .2
- -----------------------------------------------
Total Nonaccrual Loans 16.9 29.2
Restructured Loans 2.6 2.7
Other Real Estate Owned 1.9 1.8
- -----------------------------------------------
Total Nonperforming Assets $21.4 $33.7
- -----------------------------------------------
Included in nonperforming assets were loans with a recorded investment at
December 31, 1996 and December 31, 1995 of $16.8 million and $27.6 million,
respectively, which were also classified as impaired. At
44
Northern Trust Corporation
December 31, 1996 and December 31, 1995 impaired loans totaling $13.6 million
and $9.2 million, respectively, had no portion of the reserve for credit losses
allocated to them, while $3.2 million at December 31, 1996 had an allocated
reserve of $.5 million and $18.4 million at December 31, 1995 had an allocated
reserve of $1.0 million. Total recorded investment in impaired loans averaged
$27.6 million in 1996 and $26.4 million in 1995. Total interest income
recognized on impaired loans was $1.0 million and $.7 million in 1996 and 1995,
respectively, most of which was recognized using the cash-basis method of
accounting.
There were $61 thousand of unfunded loan commitments and standby letters of
credit issued to borrowers whose loans were classified as nonaccrual at
December 31, 1996 and none at December 31, 1995.
Interest income that would have been recorded on domestic nonaccrual loans in
accordance with their original terms amounted to $3.1 million in 1996, $2.9
million in 1995 and $3.1 million in 1994, compared with amounts that were
actually recorded of $.9 million, $.7 million and $.2 million, respectively.
Write-downs and realized losses on OREO of $.4 million in 1996, $.4 million in
1995 and $.3 million in 1994 were charged to other operating expenses.
6. RESERVE FOR CREDIT LOSSES--Changes in the reserve for credit losses were as
follows:
- ----------------------------------------------------------
(In Millions) 1996 1995 1994
- ----------------------------------------------------------
Balance at Beginning of Year $147.1 $144.8 $145.5
- ----------------------------------------------------------
Charge-Offs
Domestic
Commercial Real Estate (7.4) (3.6) (4.1)
Other (8.0) (7.5) (6.6)
International (.2) (.6) --
- ----------------------------------------------------------
Total Charge-Offs (15.6) (11.7) (10.7)
Recoveries 3.8 5.8 4.0
- ----------------------------------------------------------
Net Charge-Offs (11.8) (5.9) (6.7)
Provision for Credit Losses 12.0 6.0 6.0
Reserve Related to Acquisitions 1.0 2.2 --
- ----------------------------------------------------------
Balance at End of Year $148.3 $147.1 $144.8
- ----------------------------------------------------------
7. MORTGAGE SERVICING RIGHTS--Northern Trust's servicing rights have been
acquired as a result of originating mortgage loans and selling the loans with
the servicing rights retained. Subsequent to the adoption of SFAS No. 122 on
January 1, 1996, Northern Trust capitalized servicing rights totaling $307
thousand. Amortization of the servicing rights during 1996 totaled $22
thousand, resulting in a carrying value of $285 thousand as of December 31,
1996. There were no valuation allowances established to record impairment of
mortgage servicing rights during 1996.
8. BUILDINGS AND EQUIPMENT--Summary of buildings and equipment is presented
below.
- ----------------------------------------------------------
December 31, 1996
------------------------------
Original Accumulated Net Book
(In Millions) Cost Depreciation Value
- ----------------------------------------------------------
Land $ 30.5 $ -- $ 30.5
Buildings 83.9 32.3 51.6
Equipment 228.0 114.0 114.0
Leasehold Improvements 61.5 28.3 33.2
Buildings Leased under
Capital Leases (Note 9) 74.1 11.9 62.2
- ----------------------------------------------------------
Total Buildings and
Equipment $478.0 $186.5 $291.5
- ----------------------------------------------------------
- ----------------------------------------------------------
December 31, 1995
------------------------------
Original Accumulated Net Book
(In Millions) Cost Depreciation Value
- ----------------------------------------------------------
Land $ 28.4 $ -- $ 28.4
Buildings 76.3 29.8 46.5
Equipment 211.4 102.1 109.3
Leasehold Improvements 60.6 26.0 34.6
Building Leased Under
Capital Lease (Note 9) 72.6 9.9 62.7
- ----------------------------------------------------------
Total Buildings and
Equipment $449.3 $167.8 $281.5
- ----------------------------------------------------------
The charge for depreciation amounted to $46.8 million in 1996, $42.2 million
in 1995 and $41.4 million in 1994. Occupancy expense has been reduced by $2.1
million in both 1996 and 1995, and $2.0 million in 1994 from rental income on
leased premises.
45
Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. LEASE COMMITMENTS--At December 31, 1996, Northern Trust was obligated under
a number of noncancellable operating leases for premises and equipment. Certain
leases contain rent escalation clauses, based on market indices or increases in
real estate taxes and other operating expenses and renewal option clauses
calling for increased rentals. There are no restrictions imposed by any lease
agreement regarding the payment of dividends, debt financing or Northern Trust
entering into further lease agreements. Minimum annual lease commitments as of
December 31, 1996, for all noncancellable operating leases are as follows:
- ----------------------------------------
Future
Minimum
Lease
(In Millions) Payments
- ----------------------------------------
1997 $ 32.9
1998 29.6
1999 24.2
2000 22.8
2001 19.3
Later Years 106.3
- ----------------------------------------
Total Minimum Lease Payments $235.1
- ----------------------------------------
Rental expense for all operating leases is included in occupancy expense and
amounted to $26.9 million in 1996, $25.0 million in 1995 and $24.5 million in
1994.
The building and land utilized at the Chicago operations center has been
leased under an agreement which qualifies as a capital lease. The long-term
financing for the property was provided by the Corporation and the Bank. In the
event of sale or refinancing, the Bank will receive all proceeds except for 58%
of any proceeds in excess of the original project costs which will be paid to
the lessor.
The table below reflects the future minimum lease payments required under
capital leases, net of any payments received on the long-term financing, and
the present value of net capital lease obligations at December 31, 1996.
- --------------------------------------------------------------
Future
Minimum
Lease
Payments,
(In Millions) Net
- --------------------------------------------------------------
1997 $ 1.3
1998 1.3
1999 1.3
2000 1.4
2001 1.6
Later Years 14.6
- --------------------------------------------------------------
Total Minimum Lease Payments, net 21.5
Less: Amount Representing Interest 9.9
- --------------------------------------------------------------
Net Present Value under Capital Lease Obligations $11.6
- --------------------------------------------------------------
10. SENIOR NOTES, NOTES PAYABLE AND LINES OF CREDIT--SENIOR NOTES. Summary of
senior notes outstanding at December 31 is presented below.
- ----------------------------------------------------------
($ In Millions) Rate 1996 1995
- ----------------------------------------------------------
Corporation Due 1996 (a) 8.65% $ -- $ 2.0
Bank
Due 1996 (a) (b) 4.63-5.38 -- 10.0
Due 1997 (a) (b)
Fixed 5.10-5.65 225.0 --
Fixed-Convertible to Floating 4.93-5.07 75.0 --
Due 1998 (a) (b) 6.29 5.0 5.0
- ----------------------------------------------------------
Total Senior Notes $305.0 $17.0
- ----------------------------------------------------------
Refer to bottom of next table for applicable notes.
NOTES PAYABLE. Summary of notes payable outstanding at December 31 is presented
below.
- ---------------------------------------------------------------------
($ In Millions) 1996 1995
- ---------------------------------------------------------------------
Corporation-Subordinated Notes
9.15% Notes due March 1998 (a) $ 10.0 $ 10.0
9.20% Notes due March 1998 (a) 13.0 13.0
9.00% Notes due May 1998 (a) 50.0 50.0
9.20% Notes due May 2001 (a) 25.0 25.0
Bank-Subordinated Notes
6.50% Notes due May 2003 (a) 100.0 100.0
6.70% Notes due Sept. 2005 (a) (b) 100.0 100.0
7.30% Notes due Sept. 2006 (a) (b) 100.0 --
- ---------------------------------------------------------------------
Subordinated Notes Payable $398.0 $298.0
- ---------------------------------------------------------------------
Corporation-Notes Payable
8.23% ESOP Installment Notes with Final Payment due
December 1998 (c) $ 18.2 $ 26.3
Capital Lease Obligations (d) 11.6 10.3
- ---------------------------------------------------------------------
Notes Payable $ 29.8 $ 36.6
- ---------------------------------------------------------------------
Total Notes Payable $427.8 $334.6
- ---------------------------------------------------------------------
Notes Payable Qualifying as Risk-Based Capital $334.6 $254.2
- ---------------------------------------------------------------------
(a) Not redeemable prior to maturity.
(b) Under the terms of its current offering circular, the Bank has the ability
to offer from time to time its senior bank notes in an aggregate principal
amount of up to $1.7 billion at any one time outstanding and up to an
additional $100 million of subordinated notes. Each senior note will mature
from 30 days to fifteen years and each subordinated note will mature from
five years to fifteen years, following its date of original issuance. Each
note will mature on such date as selected by the initial purchaser and
agreed to by the Bank.
(c) Notes were issued directly by the ESOP trust to finance the purchase of
8,640,000 common shares. The Corporation unconditionally guarantees the
payment of principal, premium, if any, and interest. The interest rate is
subject to adjustment in the event of certain tax law changes affecting
ESOP plans. Refer to Note 17.
(d) Refer to Note 9.
Refer to Note 20 for detail related to interest risk management instruments
used to hedge notes.
46
Northern Trust Corporation
LINES OF CREDIT. The Corporation currently maintains commercial paper back-up
facility lines of credit with three banks totaling $50 million. The facility
was amended in 1995. The current termination date is November 2000, with an
optional one-year extension beyond that. The commitment fee is determined by a
pricing matrix that is based on the long-term senior debt ratings of the
Corporation. Currently, the annual fee is 1/10 of 1% of the commitment. There
were no borrowings under commercial paper back-up facilities during 1996 or
1995.
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN CORPORATION'S JUNIOR SUBORDINATED
DEFERRABLE INTEREST DEBENTURES. On January 16, 1997, the Corporation issued
$150 million of Floating Rate Capital Securities, Series A (Series A Capital
Securities) through NTC Capital I, a wholly owned statutory business trust. The
Corporation unconditionally guarantees all of the obligations of NTC Capital I.
Proceeds of $148.5 million which was net of discount, were invested by NTC
Capital I in $150 million principal amount of the Corporation's Floating Rate
Junior Subordinated Deferrable Interest Debentures, Series A (Subordinated
Debentures), with a stated maturity date of January 15, 2027. The holders of
the Series A Capital Securities are entitled to receive preferential cumulative
cash distributions quarterly in arrears (based on the liquidation amount of
$1,000 per Capital Security) at an interest rate equal to 3-Month LIBOR plus
0.52%, which is the same as the interest rate on the Subordinated Debentures.
Subject to certain exceptions, the Corporation has the right to defer payment
of interest on the Subordinated Debentures at any time or from time to time for
a period not exceeding 20 consecutive quarterly periods provided that no
extension period may extend beyond the stated maturity date. If interest is
deferred on the Subordinated Debentures, distributions on the Series A Capital
Securities will also be deferred and the Corporation will not be permitted,
subject to certain exceptions, to pay or declare any cash distributions with
respect to the Corporation's capital stock or debt securities that rank the
same as or are junior to the Subordinated Debentures, until all past due
distributions are paid. The Subordinated Debentures are unsecured and
subordinated to substantially all of the Corporation's existing indebtedness.
Series A Capital Securities are subject to mandatory redemption in whole or in
part upon the repayment of the Subordinated Debentures. The Subordinated
Debentures are redeemable prior to maturity at the option of the Corporation,
subject to regulatory approval, on or after January 15, 2007 in whole or in
part or within 90 days following certain defined tax or regulatory capital
treatment changes, at a price equal to the principal amount plus accrued and
unpaid interest.
11. STOCKHOLDERS' EQUITY--PREFERRED STOCK. The Corporation is authorized to
issue 10,000,000 shares of preferred stock without par value. The Board of
Directors of the Corporation is authorized to fix the particular preferences,
rights, qualifications and restrictions for each series of preferred stock
issued. Summary of preferred stock outstanding is presented below.
- ------------------------------------------------------------------------------
December 31
-------------
(In Millions) 1996 1995
- ------------------------------------------------------------------------------
Auction Rate Preferred Stock Series C 600 shares @ $100,000
per share $ 60.0 $ 60.0
Flexible Auction Rate Cumulative Preferred Stock Series D 600
shares @ $100,000 per share 60.0 60.0
6.25% Cumulative Convertible
Preferred Stock Series E 50,000 shares @ $1,000 per share -- 50.0
- ------------------------------------------------------------------------------
Total Preferred Stock $120.0 $170.0
- ------------------------------------------------------------------------------
SERIES C--In 1987, 600 shares of Auction Rate Preferred Stock (APS) Series C
were issued, with a $100,000 per share stated value. Dividends on the shares of
APS are cumulative. Rates are determined every 49 days by Dutch auction unless
the Corporation fails to pay a dividend or redeem any shares for which it has
given notice of redemption, in which case the dividend rate will be set at 175%
of the 60-day "AA" Composite Commercial Paper Rate. The dividend rate in any
auction will not exceed a percentage determined by the prevailing credit rating
of the APS. The current maximum dividend rate is 120% of the 60-day "AA"
Composite Commercial Paper Rate. No dividends other than dividends payable in
junior stock, such as Common Stock, may be paid on Common Stock until full
cumulative dividends on the APS have been paid. The average rate for this issue
as declared during 1996 was 4.04%. The shares of APS are redeemable at the
option of the Corporation, in whole or in part, on any Dividend Payment Date at
$100,000 per share, plus accrued and unpaid dividends.
SERIES D--In 1990, 600 shares of Flexible Auction Rate Cumulative Preferred
Stock Series D (FAPS) were issued with a $100,000 per share stated value. Each
dividend period shall contain 49 days (the "Short-Term Dividend Period") or a
number of days greater than 49 days (as selected by the Term Selection Agent)
which is divisible by seven (the "Long-Term Dividend Period"). Rates for each
dividend period are determined by Dutch auction unless the Corporation fails to
pay the full amount of any dividend or redemption. The dividend rate in any
auction will not exceed a percentage (currently 125%), determined by the
prevailing credit rating of the FAPS, of the 60-day "AA"
47
Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 1996 was 3.97%. 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--On January 5, 1996, the Corporation called for redemption its
outstanding 6.25% Cumulative Convertible Preferred Stock Series E. The Series E
was sold to the public in the form of 1,000,000 Depositary Shares, each
representing one-twentieth of a share of the Series E Preferred Stock (equal to
50,000 preferred shares). In January 1996, 994,737 of the total 1,000,000
Depositary Shares were converted at the option of the holders at a conversion
price of $41.50 into 1,198,372 (2,396,744 shares on a post-split basis) shares
of the Corporation's common stock. The conversion resulted in fractions of
shares for which the Corporation paid cash. The remaining 5,263 Depositary
Shares were redeemed on January 26, 1996, for cash at a redemption price of
$52.8038 per Depositary Share.
PREFERRED STOCK PURCHASE RIGHTS. In 1989, the Board of Directors of the
Corporation declared a dividend distribution of one Preferred Stock Purchase
Right on each outstanding share of the Corporation's common stock to the
stockholders of record on October 31, 1989. The Rights are subject to anti-
dilution provisions, and each Right is now exercisable for one-sixth of one-
hundredth of a share of Series A Junior Participating Preferred Stock at an
exercise price of $41.67 for each such fractional share. The Rights are
evidenced by the common stock certificates and are not exercisable or
transferable apart from the common stock until twenty days after a person or
group acquires 15 percent or more of the Corporation's voting power or
announces a tender or exchange offer which could result in ownership of 25
percent or more of the voting power. Shares of the Participating Preferred
Stock purchasable upon exercise of the Rights will not be redeemable.
In the event that a person or group acquires 25 percent or more of the
Corporation voting power or if the Corporation merges or engages in certain
self-dealing transactions with a 15 percent or more stockholder, each Right
will entitle the holder, other than such person or group in certain
circumstances, to purchase that number of shares of surviving company common
stock which at the time of the transaction would have a market value of twice
the exercise price of the Right.
The Rights do not have voting rights and are redeemable at the option of the
Corporation at a price of one cent per Right at any time prior to the close of
business on the 20th day following publication of the acquisition of 15 percent
or more of the voting power by a person or group. Unless earlier redeemed, the
Rights will expire on October 31, 1999.
COMMON STOCK. In November, 1996, the Corporation declared a two-for-one split
of its common stock, to be effected by means of a 100% stock distribution. One
share for each share held by shareholders of record on December 2, 1996 was
distributed on December 9, 1996.
Also in November, 1996, the Corporation announced that it increased its common
stock buyback authorization by approximately 4.2 million shares, thus allowing
the purchase after December 31, 1996 of up to an aggregate of 4.6 million
shares of the Corporation's common stock. The shares may be repurchased from
time to time in open market purchases, and the shares would be used primarily
for management incentive plans and other corporate purposes.
An analysis of changes in the number of shares of common stock outstanding
follows:
- --------------------------------------------------------
COMMON STOCK OUTSTANDING
- --------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------
Balance at
January 1 55,664,412 54,089,259 53,292,967
Distribution of
Two-for-One
Stock Split 55,664,412 -- --
Conversion of
Preferred Stock
Series E 2,396,744 -- --
Employee Benefit
Plans:
Incentive Plan
and Awards 377,086 406,084 44,525
Stock Options
Exercised 1,242,034 640,229 461,739
Issued for
Acquisitions -- 2,014,999 534,113
Treasury Stock
Purchases (4,096,956) (1,486,159) (244,085)
- --------------------------------------------------------
Balance at
December 31 111,247,732 55,664,412 54,089,259
- --------------------------------------------------------
Note: 1996 share activity reflects the December 1996 two-for-one stock split.
48
Northern Trust Corporation
12. INCOME TAXES--The table below reconciles the total provision for income
taxes recorded in the consolidated statement of income with the amount computed
at the statutory federal tax rate of 35%.
- ----------------------------------------------------
Income Tax
Provision
---------------------
(In Millions) 1996 1995 1994
- ----------------------------------------------------
Tax at Statutory Rate $135.6 $112.2 $91.5
Tax-Exempt Income (11.6) (13.9) (15.2)
State Taxes, net 4.8 2.4 4.2
Other (.2) (.2) (1.2)
- ----------------------------------------------------
Provision for Income Taxes $128.6 $100.5 $79.3
- ----------------------------------------------------
The components of the consolidated provision for income taxes for each of the
three years ended December 31, are as follows:
- -------------------------------------------------
(In Millions) 1996 1995 1994
- -------------------------------------------------
Current Tax Provision:
Federal $ 91.4 $ 75.7 $47.4
State 3.8 2.9 3.6
Foreign 3.9 4.2 5.6
- -------------------------------------------------
Total 99.1 82.8 56.6
- -------------------------------------------------
Deferred Tax Provision:
Federal 26.0 16.9 19.8
State 3.5 .8 2.9
- -------------------------------------------------
Total 29.5 17.7 22.7
- -------------------------------------------------
Provision for Income Taxes $128.6 $100.5 $79.3
- -------------------------------------------------
In addition to the amounts shown in the above tables, tax liabilities or
(benefits) have been recorded directly to stockholders' equity for the
following items:
- ------------------------------------------------------------
(In Millions) 1996 1995
- ------------------------------------------------------------
Current Tax Benefit for Employee Stock
Options and Other Employee Benefit
Plans $(8.7) $(5.1)
Deferred Tax Effect of Unrealized Security
Gains (Losses) (.6) 11.3
Deferred Tax Effect of Unfunded Pension
Liabilities (.5) 0.5
- ------------------------------------------------------------
Deferred taxes result from temporary differences between the amounts reported
in the consolidated financial statements and the tax bases of assets and
liabilities. Deferred tax liabilities and assets have been computed based on
the statutory federal tax rate of 35%, as follows:
- --------------------------------------------------------------
December 31
-------------
(In Millions) 1996 1995
- --------------------------------------------------------------
Deferred Tax Liabilities:
Lease Financing $ 88.3 $ 58.0
Software Development 40.6 39.1
Accumulated Depreciation 6.5 8.0
Acquired Intangible Assets 6.5 7.0
Other Liabilities 16.7 15.6
- --------------------------------------------------------------
Gross Deferred Tax Liabilities 158.6 127.7
- --------------------------------------------------------------
Deferred Tax Assets:
Reserve for Credit Losses 51.4 51.0
Leased Facilities 7.6 7.5
Other Assets 10.2 6.8
- --------------------------------------------------------------
Gross Deferred Tax Assets 69.2 65.3
Valuation Reserve -- --
- --------------------------------------------------------------
Deferred Tax Assets, net of Valuation Reserve 69.2 65.3
- --------------------------------------------------------------
Net Deferred Tax Liabilities $ 89.4 $ 62.4
- --------------------------------------------------------------
Northern Trust has state carryforwards which are available to offset future
state tax return liabilities. As of December 31, 1996, there were state net
operating loss and tax credit carryforwards of $22.6 million and $2.4 million,
respectively. The carryforwards are subject to various limitations imposed by
tax law.
13. NET INCOME PER COMMON SHARE COMPUTATIONS Per share data and average shares
outstanding have been restated for all periods presented to give effect to the
two-for-one common stock split effected by means of a 100% stock distribution
on December 9, 1996.
Primary net income per common share is computed by dividing net income, after
deduction of the preferred stock dividends, by the daily average number of
common and common equivalent shares outstanding. Common equivalent shares are
based on outstanding stock options and common stock awards under the Amended
1992 and the Amended Incentive Stock Plans and other stock-based plans
associated with acquisitions.
Fully diluted net income per common share in 1995 and 1994 assumed, in
addition to the above, the conversion of the Cumulative Convertible Preferred
Stock Series E.
14. RESTRICTIONS ON SUBSIDIARY DIVIDENDS AND LOANS OR ADVANCES--Provisions of
state and federal banking laws restrict the amount of dividends that can be
paid to the Corporation by its banking subsidiaries. Under applicable state and
federal laws, no dividends may be paid in an amount greater than the net
profits then on hand, subject to other applicable provisions of law. In
addition,
49
Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
prior approval of the relevant federal banking regulator is required if
dividends declared by any of the Corporation's banking subsidiaries in any
calendar year will exceed its net profits (as defined) for that year, combined
with its retained net profits for the preceding two years.
Based on these regulations, the Corporation's banking subsidiaries, without
regulatory approval, could declare dividends during 1997 equal to their 1997
eligible net profits (as defined) plus $208.2 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.
15. OTHER OPERATING INCOME--Included in the 1994 results is a $28.5 million
pretax gain on the sale of an investment in Banque Scandinave en Suisse (BSS),
net of approximately $6.0 million in ancillary and other sale-related
transition costs associated with the transfer of custody accounts from BSS to
the Bank's London Branch.
16. OTHER OPERATING EXPENSES--The components of other operating expenses were
as follows:
- -------------------------------------------------------------------
(In Millions) 1996 1995 1994
- -------------------------------------------------------------------
Business Development $ 26.9 $ 23.0 $ 22.8
Purchased Professional Services 74.6 57.3 54.1
Telecommunications 11.4 10.8 10.4
Postage and Supplies 21.9 20.7 19.1
FDIC Premium -- 8.5 16.2
Software Amortization 32.6 28.3 21.4
Goodwill and Other Intangibles Amortization 9.7 7.5 6.9
Pension Settlement Charges .5 4.1 9.6
Other Expense 29.5 21.1 34.8
- -------------------------------------------------------------------
Total Other Operating Expenses $207.1 $181.3 $195.3
- -------------------------------------------------------------------
Software, goodwill and other intangible assets are included in other assets in
the consolidated balance sheet. Software totaled $133.8 million at December 31,
1996 and $129.8 million at December 31, 1995. Goodwill totaled $66.5 million at
December 31, 1996 and $65.5 million at December 31, 1995. Other intangibles
totaled $39.4 million at December 31, 1996 and $41.3 million at December 31,
1995.
17. PENSION AND OTHER EMPLOYEE BENEFITS--PENSION. A noncontributory qualified
pension plan covers substantially all employees. The plan provides benefits for
normal and early retirement, benefits for vested employees and, under certain
circumstances, survivor benefits in the event of death. Benefits are based on
the employees' years of service and their five highest consecutive years of
compensation. The proportion of average compensation paid as a pension benefit
is determined by length of service. Contributions to the plan satisfy or exceed
the minimum funding requirements of ERISA. Certain retiree death benefits are
funded through the pension plan and the related cost is included as pension
expense. Assets held by the plan consist primarily of listed stocks and
corporate bonds.
Northern Trust also maintains a noncontributory nonqualified pension plan for
participants whose retirement benefit payments under the qualified plan are
expected to exceed the limits imposed by federal tax law. Northern Trust has a
nonqualified trust, referred to as a "Rabbi" trust, to fund benefits in excess
of those permitted in certain of its qualified plans. The primary purpose of
the trust is to fund nonqualified retirement benefits. This arrangement offers
certain officers a degree of assurance for payment of benefits in excess of
those permitted in the related qualified plans. The assets remain subject to
the claims of creditors and are not the property of the employees. Therefore,
they are accounted for as corporate assets and are included in other assets in
the consolidated balance sheet.
50
Northern Trust Corporation
The following tables set forth the status and the net periodic pension cost of
the domestic qualified and nonqualified pension benefit plans for 1996 and
1995. Prior service costs and unrecognized net assets established at January 1,
1986 are being amortized on the straight-line basis over 13.2 years.
- --------------------------------------------------------------------------------
PLAN STATUS
- --------------------------------------------------------------------------------
Qualified Nonqualified
Plan Plan
-------------- --------------
September 30
------------------------------
($ In Millions) 1996 1995 1996 1995
- -------------------------------------------------------------------------------
Actuarial Present Value of Benefit
Obligation:
Vested Benefit Obligation $140.1 $125.7 $ 12.3 $ 9.9
Accumulated Benefit Obligation 155.6 136.4 13.2 10.7
- -------------------------------------------------------------------------------
Projected Benefit
Obligation for Service Rendered to Date 206.1 185.1 19.4 19.4
Plan Assets at Fair Value 229.0 200.1 -- --
- -------------------------------------------------------------------------------
Plan Assets In Excess of (Less Than)
Projected Benefit Obligation 22.9 15.0 (19.4) (19.4)
Unrecognized Net Asset (Effective January 1,
1986) (3.6) (4.9) (.1) (.1)
Unrecognized Net Loss 53.6 41.4 8.6 9.6
Unrecognized Prior
Service Cost (7.9) 1.0 2.4 3.9
Valuation Adjustment (.3) (.4) -- --
- -------------------------------------------------------------------------------
Prepaid (Accrued) Pension Cost at September
30 64.7 52.1 (8.5) (6.0)
Net (Expense) Funding
October to December (1.7) (2.1) 1.0 (.7)
Additional Minimum
Liability at December 31 -- -- (3.8) (3.8)
- -------------------------------------------------------------------------------
Prepaid (Accrued) Pension Cost at
December 31 $ 63.0 $ 50.0 $(11.3) $(10.5)
- -------------------------------------------------------------------------------
Assumptions:
Discount Rates 7.50% 7.50% 7.00% 7.00%
Rate of Increase in Compensation Level 5.00 5.00 5.00 5.00
Expected Long-Term Rate of Return on Assets 9.00 9.00 N/A N/A
- -------------------------------------------------------------------------------
- -----------------------------------------------------------
NET PERIODIC PENSION COST
- -----------------------------------------------------------
Qualified Nonqualified
Plan Plan
------------ -------------
(In
Millions) 1996 1995 1996 1995
- -----------------------------------------------------------
Service Cost $10.4 $11.3 $ 1.1 $ 1.1
Interest Cost 14.9 12.3 1.4 1.6
Actual Return on Plan Assets (27.9) (26.6) -- --
Net Amortization 10.0 11.3 1.0 1.1
- -----------------------------------------------------------
Net Periodic Pension Cost $ 7.4 $ 8.3 $ 3.5 $ 3.8
- -----------------------------------------------------------
Pension expense for 1994 was $7.7 million and $3.1 million for the qualified
and nonqualified plans, respectively. In 1996, the service benefit formula and
survivor annuity provisions were amended and the mortality assumptions were
changed for the qualified and nonqualified plans. The changes reduced total
1996 pension expense by $1.1 million.
Total assets in the "Rabbi" Trust primarily related to the nonqualified
pension plan at December 31, 1996 and 1995 amounted to $10.3 million, and $8.7
million, respectively.
A pension plan is also maintained for the London Branch employees. At December
31, 1996, the fair value of assets and the projected benefit obligation totaled
approximately $7.8 million and $9.1 million, respectively. At December 31,
1995, the fair value of assets and the projected benefit obligation were $7.1
million and $8.1 million, respectively. Pension expense for 1996 and 1995 was
$1.1 million and $.6 million, respectively.
THRIFT INCENTIVE PLAN. The Corporation and its subsidiaries have a defined
contribution Thrift Incentive Plan covering substantially all employees. The
corporate contribution is contingent upon the level of employee contribution
and meeting a predefined earnings target for the year. The maximum corporate
contribution was equal to 4% of an employee's salary in 1996 and 5% in each of
the years 1995 and 1994. The estimated contribution to this plan is charged to
pension and other employee benefits and totaled $8.0 million in 1996, $11.3
million in 1995 and $10.6 million in 1994.
51
Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP). A leveraged ESOP in which substantially
all employees of Northern Trust are eligible to participate was established in
1989. Under the original terms of the ESOP, the shares were to be allocated
over ten years. In 1996, the terms of the ESOP were amended. The original
maturity of the ESOP-related debt was effectively extended by an additional
three years through financing provided by the Corporation and the remaining
ESOP shares are being allocated over the six year period ending December 31,
2001. The Corporation will make an additional contribution of $5.4 million in
cash or shares of common stock in each of the years 2002 and 2003.
Dividends paid on unallocated shares held in the ESOP Trust are used for debt
service on the ESOP notes. Compensation expense is accounted for based
primarily on the amount of cash paid by Northern Trust to the ESOP for
principal payments on the ESOP notes. Of the original 9 million shares in the
ESOP Trust, 6,750,300 shares have been allocated as of December 31, 1996. The
ESOP shares not yet allocated to individual accounts are treated as deferred
compensation and accounted for as a reduction of stockholders' equity.
The following table presents information related to the ESOP.
- ----------------------------------------------------------------------------
(In Millions) 1996 1995
- ----------------------------------------------------------------------------
Total ESOP Compensation Expense $2.3 $5.8
Interest Incurred on
ESOP-Related Debt 2.0 2.8
Amount Contributed to
ESOP-Related Debt 3.6 8.2
Dividends and Interest on Unallocated ESOP Shares Used for Debt
Service 1.9 2.0
- ----------------------------------------------------------------------------
OTHER POSTRETIREMENT BENEFITS. Northern Trust maintains an unfunded
postretirement health care plan. Employees retiring under the provisions of The
Northern Trust Pension Plan may be eligible for postretirement health care
coverage. These benefits are provided either through an indemnity plan, subject
to deductibles, co-payment provisions and other limitations or through health
maintenance organizations. The provisions may be changed at the discretion of
Northern Trust, which also reserves the right to terminate these benefits at
any time.
The following tables set forth the plan status at December 31 and the net
periodic postretirement
benefit cost of the domestic postretirement health care plan for 1996 and 1995.
The transition obligation at January 1, 1993 is being amortized to expense over
a twenty year period.
- --------------------------------------------------------------------------------
PLAN STATUS
- --------------------------------------------------------------------------------
(In Millions) 1996 1995
- -----------------------------------------------------------------------
Accumulated Postretirement Benefit Obligation (APBO)
Measured at September 30:
Retirees and Dependents $ 15.9 $ 16.9
Actives Eligible for Benefits 5.3 5.6
Actives Not Yet Eligible 12.1 18.1
- -----------------------------------------------------------------------
Total APBO 33.3 40.6
Unamortized Transition Obligation (11.3) (23.8)
Unrecognized Net Loss (8.2) (8.5)
Unrecognized Prior Service Costs -- 2.6
- -----------------------------------------------------------------------
Net Postretirement Benefit Liability $ 13.8 $ 10.9
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
NET PERIODIC POSTRETIREMENT BENEFIT COST
- -----------------------------------------------------------------------
(In Millions) 1996 1995
- -----------------------------------------------------------------------
Service Cost $ 1.3 $ 1.7
Interest Cost 2.6 2.9
Net Amortization 1.2 1.6
- -----------------------------------------------------------------------
Net Periodic Postretirement Benefit Cost $ 5.1 $ 6.2
- -----------------------------------------------------------------------
Postretirement health care expense for 1994 was $5.1 million. In 1996, the
cost sharing provisions of the plan were amended and resulted in a reduction in
1996 expense of $1.8 million.
For measurement purposes, a 10.8% annual increase in the cost of covered health
care benefits was assumed for 1997. This rate is assumed to decrease gradually
to 5.6% 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, 1996 by approximately $1.8
million, and the aggregate of the service and interest cost components of the
1996 net periodic postretirement benefit cost by $.4 million. The weighted
average discount rate used in determining the accumulated postretirement benefit
obligation was 7.50% at December 31, 1996 and 1995.
18. CONTINGENT LIABILITIES--Because of the nature of its activities, Northern
Trust is subject to pending and threatened legal actions that arise in the
normal course of business. In the judgment of management, after consultation
with legal counsel, none of the litigation to which the Corporation or any of
its subsidiaries is a party will have a material effect, either individually or
in the aggregate, on the consolidated financial position or results of
operations.
52
Northern Trust Corporation
19. FAIR VALUE OF FINANCIAL INSTRUMENTS--SFAS No. 107, ""Disclosures About Fair
Value of Financial Instruments,'' requires disclosure of the estimated fair
value of certain financial instruments. Considerable judgment is required to
interpret market data when computing estimates of fair value. Accordingly, the
estimates presented are not necessarily indicative of the amounts Northern
Trust could have realized in a market exchange.
The information provided below should not be interpreted as an estimate of the
fair value of Northern Trust since the disclosures, in accordance with SFAS No.
107, exclude the values of nonfinancial assets and liabilities, as well as a
wide range of franchise, relationship, and intangible values, which are
integral to a full assessment of the consolidated financial position.
The use of different assumptions and/or estimation methods may have a material
effect on the computation of estimated fair values. Therefore, comparisons
between Northern Trust's disclosures and those of other financial institutions
may not be meaningful.
The following methods and assumptions were used in estimating the fair values
of the financial instruments:
SECURITIES. Fair values of securities were based on quoted market values, when
available. If quoted market values were not available, fair values were based
on quoted market values for comparable instruments.
LOANS (NOT INCLUDING LEASE FINANCING RECEIVABLES). The fair values of one-to-
four family residential mortgages were based on quoted market prices of similar
loans sold in conjunction with securitization transactions, adjusted for
differences in loan characteristics. The fair values of the remainder of the
loan portfolio were estimated using a discounted cash flow method in which the
discount rate used was the rate at which Northern Trust would have originated
the loan had it been originated as of the financial statement date, giving
effect to current economic conditions on loan collectibility.
SAVINGS CERTIFICATES, OTHER TIME AND FOREIGN OFFICES TIME DEPOSITS, AND SENIOR
NOTES. The fair values of these instruments were estimated using a discounted
cash flow method that incorporated market interest rates.
NOTES PAYABLE. Fair values were based on quoted market prices, when available.
If quoted market prices were not available, fair values were based on quoted
market prices for comparable instruments.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS. The fair values of commitments and
letters of credit represent the amount of unamortized fees on these
instruments. The fair values of all other off-balance sheet financial
instruments were estimated using market prices, pricing models, or quoted
market prices of financial instruments with similar characteristics.
FINANCIAL INSTRUMENTS VALUED AT CARRYING VALUE. Due to their short maturity,
the respective carrying values of certain on-balance sheet financial
instruments approximated their fair values. These financial instruments include
cash and due from banks; money market assets; customers' acceptance liability;
trust security settlement receivables; federal funds purchased; securities sold
under agreements to repurchase; commercial paper; other borrowings; and
liability on acceptances.
The fair values required to be disclosed for demand, savings, and money market
deposits pursuant to SFAS No. 107 must equal the amounts disclosed in the
consolidated balance sheet.
FAIR VALUES OF ON-BALANCE SHEET FINANCIAL INSTRUMENTS. The following table
summarizes the fair values of on-balance sheet financial instruments.
- ------------------------------------------------------------------------------
December 31
-----------------------------------
1996 1995
----------------- -----------------
Book Fair Book Fair
(In Millions) Value Value Value Value
- ------------------------------------------------------------------------------
ASSETS
Cash and Due From Banks $1,292.5 $1,292.5 $1,308.9 $1,308.9
Money Market Assets 3,196.9 3,196.9 1,784.2 1,784.2
Securities:
Available for Sale 4,311.7 4,311.7 5,136.3 5,136.3
Held to Maturity 498.4 518.9 535.1 562.6
Trading Account 4.8 4.8 88.9 88.9
Loans (excluding leases), net of credit
loss reserve:
Held to Maturity 10,517.6 10,507.6 9,549.0 9,595.8
Held for Sale 3.7 3.7 7.6 7.6
Acceptance Liability 44.7 44.7 35.8 35.8
Trust Security Settlement Receivables 362.3 362.3 327.1 327.1
LIABILITIES
Deposits:
Demand, Savings and Money Market 7,767.5 7,767.5 6,698.2 6,698.2
Savings Certificates, Other Time and
Foreign Offices Time 6,028.7 6,047.9 5,790.0 5,821.8
Federal Funds Purchased 653.0 653.0 2,300.1 2,300.1
Repurchase Agreements 966.1 966.1 1,858.7 1,858.7
Commercial Paper 149.0 149.0 146.7 146.7
Other Borrowings 3,142.1 3,142.1 875.9 875.9
Senior Notes 305.0 304.7 17.0 17.1
Notes Payable 427.8 432.2 334.6 351.9
Liability on Acceptances 44.7 44.7 35.8 35.8
- ------------------------------------------------------------------------------
53
Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
FAIR VALUES OF OFF-BALANCE SHEET FINANCIAL INSTRUMENTS. The following tables
summarize the fair values of off-balance sheet financial instruments.
- ---------------------------------------------------------------------
December 31
-----------------------
1996 1995
----------- -----------
Book Fair Book Fair
(In Millions) Value Value Value Value
- ---------------------------------------------------------------------
Commitments and Letters of Credit:
Loan Commitments $ 2.1 $ 2.1 $ 1.9 $ 1.9
Letters of Credit .7 .7 .8 .8
Asset/Liability Management:
Foreign Exchange Contracts
Assets -- -- .4 .4
Liabilities 2.9 2.9 .1 .1
Interest Rate Swap Contracts
Assets 14.8 19.2 4.9 7.5
Liabilities 5.8 23.5 22.2 45.2
Interest Rate Protection Contracts-Assets .1 .1 .2 .3
- ---------------------------------------------------------------------
- ----------------------------------------------------
Fair Value
-------------
(In Millions) 1996 1995
- ----------------------------------------------------
Client-Related and Trading:*
Foreign Exchange Contracts
Assets $142.0 $118.0
Liabilities 142.0 107.5
Interest Rate Swap Contracts
Assets 7.6 4.2
Liabilities 7.5 4.2
Interest Rate Protection Contracts
Assets .1 .1
Liabilities .1 .1
- ----------------------------------------------------
*Assets and liabilities associated with foreign exchange contracts averaged
$127.1 million and $124.0 million, respectively, during 1996. Assets and
liabilities associated with other client-related and trading account
instruments averaged $10.8 million and $10.7 million, respectively, during
1996.
20. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS--
A. COMMITMENTS AND LETTERS OF CREDIT. Northern Trust, in the normal course of
business, enters into various types of commitments and issues letters of credit
to meet the liquidity and credit enhancement needs of its clients. Credit risk
is the principal risk associated with these instruments. The contractual
amounts of these instruments represent the credit risk should the instrument be
fully drawn upon and the client default. To control the credit risk associated
with entering into commitments and issuing letters of credit, Northern Trust
subjects such activities to the same credit quality and monitoring controls as
its lending activities.
Commitments and letters of credit consist of the following:
LEGALLY BINDING COMMITMENTS TO EXTEND CREDIT generally have fixed expiration
dates or other termination clauses. Since a significant portion of the
commitments are expected to expire without being drawn upon, the total
commitment amount does not necessarily represent future loans or liquidity
requirements.
PARTICIPATIONS IN BANKERS ACCEPTANCES obligate Northern Trust, in the event of
default by the counterparty, to reimburse the holder of the acceptance an
amount equal to its participation in the acceptance.
COMMERCIAL LETTERS OF CREDIT are instruments issued by Northern Trust on
behalf of its clients that authorize a third party (the beneficiary) to draw
drafts up to a stipulated amount under the specified terms and conditions of
the agreement. Commercial letters of credit are issued primarily to facilitate
international trade.
STANDBY LETTERS OF CREDIT obligate Northern Trust to meet certain financial
obligations of its clients, if, under the contractual terms of the agreement,
the clients are unable to do so. These instruments are primarily issued to
support public and private financial commitments, including commercial paper,
bond financing, initial margin requirements on futures exchanges and similar
transactions.
The following table shows the contractual amounts of commitments and letters
of credit.
- -----------------------------------------------------------
COMMITMENTS AND LETTERS OF CREDIT
- -----------------------------------------------------------
December 31
------------------
(In Millions) 1996 1995
- -----------------------------------------------------------
Legally Binding Commitments to
Extend Credit $10,299.3 $8,906.0
Participations in Bankers Acceptances 20.6 1.5
Commercial Letters of Credit 117.8 167.7
Standby Letters of Credit:
Corporate $ 378.4 $ 448.4
Industrial Revenue 724.5 379.9
Other 214.3 194.5
- -----------------------------------------------------------
Total Standby Letters of Credit* $ 1,317.2 $1,022.8
- -----------------------------------------------------------
*These amounts include $165.3 million and $96.2 million of standby letters of
credit secured by cash deposits or participated to others as of December 31,
1996 and 1995, respectively. The weighted average maturity of standby letters
of credit was 28 months at December 31, 1996 and 19 months at December 31,
1995.
B. RISK MANAGEMENT INSTRUMENTS. These instruments include foreign exchange
contracts, foreign currency futures contracts, and various interest risk
management instruments.
54
Northern Trust Corporation
Northern Trust is a party to various risk management instruments that are used
in the normal course of business to meet the risk management needs of its
clients; as part of its trading activity for its own account; and as part of
its asset/liability management activities. The major risk associated with these
instruments is that interest or foreign exchange rates could change in an
unanticipated manner, resulting in higher interest costs or a loss in the
underlying value of the instrument. These risks are mitigated by establishing
limits for risk management positions, monitoring the level of actual positions
taken against such established limits, monitoring the level of any interest
rate sensitivity gaps created by such positions, and by using hedging
techniques. When establishing position limits, market liquidity and volatility,
as well as experience in each market, are all taken into account.
The estimated credit risk associated with these instruments relates to the
failure of the counterparty to pay based on the contractual terms of the
agreement, and is generally limited to the gross unrealized market value gains
on these instruments. The amount of credit risk will increase or decrease
during the lives of the instruments as interest and foreign exchange rates
fluctuate. This risk is controlled by limiting such activity to an approved
list of counterparties and by subjecting such activity to the same credit and
quality controls as are followed in lending and investment activities.
Risk management instruments include:
FOREIGN EXCHANGE CONTRACTS are agreements to exchange specific amounts of
currencies at a future date, at a specified rate of exchange. Foreign exchange
contracts are entered into primarily to meet the foreign exchange risk
management needs of clients. Foreign exchange contracts are also used for
trading purposes and asset/ liability management.
FOREIGN CURRENCY AND INTEREST RATE FUTURES CONTRACTS are agreements for
delayed delivery of foreign currency, securities or money market instruments in
which the buyer agrees to take delivery at a specified future date of a
specified currency, security, or instrument, at a specified price or yield. All
of Northern Trust's futures contracts are traded on organized exchanges that
require the daily settlement of changes in the value of the contracts. Futures
contracts are utilized in trading activities and asset/liability management to
protect Northern Trust's exposure to unfavorable fluctuations in foreign
exchange rates or interest rates.
INTEREST RATE PROTECTION CONTRACTS are agreements which enable clients to
transfer, modify or reduce their interest rate risk. As a seller of interest
rate protection, Northern Trust receives a fee at the outset of the agreement
and then assumes the risk of an unfavorable change in interest rates. Northern
Trust also purchases interest rate protection contracts for asset/liability
management.
INTEREST RATE SWAP CONTRACTS involve the exchange of fixed and floating rate
interest payment obligations without the exchange of the underlying principal
amounts; these types of transactions constitute the majority of the interest
rate swap portfolio. Northern Trust has also entered into a limited number of
more complex interest rate swap transactions that were executed concurrently
with the purchase of $298 million of structured agency notes. The structured
notes are included in the available for sale portion of the security portfolio.
The interest rate swap contracts are used to hedge the nonstandard features of
the structured notes thereby converting them to U.S. dollar denominated
floating rate notes indexed to LIBOR.
FORWARD SALE CONTRACTS represent commitments to sell a specified amount of
securities at an agreed upon date and price. Northern Trust utilizes forward
sale contracts principally in connection with its sale of mortgage loans.
EXCHANGE-TRADED OPTION CONTRACTS grant the buyer the right, but not the
obligation, to purchase or sell at a specified price, a stated number of units
of an underlying financial instrument, at a future date.
The following table shows the contractual/notional amounts of risk management
instruments. The notional amounts of risk management instruments do not
represent credit risk, and are not recorded in the consolidated balance sheet.
They are used merely to express the volume of this activity.
- --------------------------------------------------------------------------------
RISK MANAGEMENT INSTRUMENTS
- --------------------------------------------------------------------------------
Contractual/Notional
Amounts
December 31
---------------------
(In Millions) 1996 1995
- ----------------------------------------------------------------------
Asset/Liability Management:
Foreign Exchange Contracts $ 46.0 $ 30.4
Foreign Currency Futures Contracts 3.3 1.8
Interest Rate Futures Contracts Sold 101.7 .7
Interest Rate Protection Contracts Purchased 25.0 25.0
Interest Rate Swap Contracts 2,571.4 2,600.7
Forward Sale Contracts 11.3 11.1
Exchange-Traded Option Contracts Purchased 2.8 2.0
Client-Related and Trading:
Foreign Exchange Contracts 13,420.7 11,838.8
Interest Rate Futures Contracts
Purchased -- 106.0
Sold 15.0 289.0
Interest Rate Protection Contracts
Purchased 34.0 77.0
Sold 43.2 78.9
Interest Rate Swap Contracts 328.9 181.5
- --------------------------------------------------------------------------------
55
Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
RISK MANAGEMENT INSTRUMENTS USED FOR ASSET/LIABILITY MANAGEMENT. Northern Trust
utilizes various types of risk management instruments, primarily interest rate
swaps, as tools for managing interest rate and option risk related to its own
balance sheet. The following table summarizes the expected maturities and
weighted average interest rates to be paid and received on the asset/liability
management swap portfolio at December 31, 1996. A key assumption in the
preparation of the table is that floating rates remain constant at December 31,
1996 levels.
- -------------------------------------------------------------------------------
REMAINING MATURITY OF ASSET/LIABILITY MANAGEMENT INTEREST RATE SWAPS
- -------------------------------------------------------------------------------
($ In Millions) 1997 1998 1999 2000 2001 2002-2006 Total
- -------------------------------------------------------------------------------
PAY FIXED
Notional Amount $475.0 241.6 173.5 140.0 223.5 534.6 $1,788.2
Average Pay Rate 5.92% 5.72 6.58 6.27 6.94 6.84 6.39%
Average Receive Rate 5.53 5.66 5.67 5.94 5.38 5.27 5.50
- -------------------------------------------------------------------------------
RECEIVE FIXED
Notional Amount $200.0 100.0 -- -- -- 100.0 $ 400.0
Average Pay Rate 5.23% 5.56 -- -- -- 5.50 5.38%
Average Receive Rate 5.08 5.98 -- -- -- 6.31 5.61
- -------------------------------------------------------------------------------
PAY AND RECEIVE VARIABLE
(BASIS SWAPS)
Notional Amount $358.7 24.5 -- -- -- -- $ 383.2
Average Pay Rate 5.16% 4.73 -- -- -- -- 5.13%
Average Receive Rate 5.05 5.51 -- -- -- -- 5.08
- -------------------------------------------------------------------------------
Some of the principal uses of risk management instruments, together with the
notional amounts outstanding, are described as follows:
CONVERT YIELDS ON SECURITIES TO AN EFFECTIVE LIBOR RATE. At December 31, 1996,
interest rate swaps with a notional amount of $915 million and purchased
interest rate protection contracts with a notional amount of $25 million were
used to convert fixed and floating rate interest payments on securities
(classified as available for sale) to floating rate payments indexed to London
Interbank Offered Rates (LIBOR). Swaps with a notional amount of $532 million
were combined with fixed rate securities, $85 million were combined with
floating rate securities indexed to Treasury Bill rates, and $298 million were
combined with structured notes, whose non-standard features were hedged. The
swaps were executed simultaneously with the purchase of the notes. The
securities were converted to an effective LIBOR rate to match LIBOR-based
funding costs.
REDUCE INTEREST RATE RISK FROM FIXED RATE LOANS FUNDED WITH VARIABLE RATE
LIABILITIES. Northern Trust paid a fixed rate and received a floating rate on
interest rate swaps with a notional amount of $1.2 billion at December 31, 1996
to hedge the interest rate risk from fixed rate loans. For accounting purposes
these swaps were designated to either convert the fixed rate on the loan to an
effective floating rate or to convert floating rate funding to a fixed rate.
SWAPS AND FUTURES CONTRACTS COMBINED WITH LIABILITIES TO OBTAIN FAVORABLE
FUNDING COSTS. Interest rate swaps with a notional amount of $500 million at
December 31, 1996 were used in conjunction with the issuance of senior notes
and subordinated notes to obtain desired funding characteristics. Of these
swaps, $225 million converted fixed rate notes to floating rate funding indexed
to LIBOR, $75 million converted structured notes to a floating rate indexed to
LIBOR, and $200 million converted a fixed rate note to a floating rate over
part of its life. The use of swaps in combination with notes permitted Northern
Trust to issue notes with rate and maturity features that were most desired by
investors while converting the rate characteristics to meet its needs. Interest
rate futures contracts with a notional amount of $100 million were used to
hedge the anticipated issuance of federal funds purchased.
HEDGING FOREIGN CURRENCY RISK. Forward foreign exchange contracts and foreign
currency futures contracts were used to reduce exposure to fluctuations in the
dollar value of capital investments in foreign subsidiaries and from foreign
currency obligations. The notional amounts of these contracts at year-end 1996
were $46.0 million of forward foreign exchange contracts and $3.3 million of
short sales of foreign currency futures contracts.
HEDGING MORTGAGES HELD FOR SALE. Northern Trust hedges the market risk of its
portfolio of fixed rate commitments and mortgages held for sale with a
combination of derivative financial instruments. At December 31, 1996 the
portfolio was hedged with $11.3 million of forward sales of mortgage-backed
securities, $1.7 million of short sales of Treasury Note futures, and $2.8
million of purchases of put options on Treasury Note futures.
56
Northern Trust Corporation
No deferred gains or losses related to interest risk management instruments
used for asset/liability management were included in the consolidated balance
sheet at year-end 1996 or 1995.
CLIENT AND TRADING-RELATED INTEREST RISK MANAGEMENT INSTRUMENTS. Net revenue
associated with client and trading-related interest risk management activities
totaled $.3 million, $2.8 million, and $2.4 million during 1996, 1995, and
1994, respectively. The majority of these revenues are related to interest rate
swaps, futures contracts, and interest rate protection agreements, and are
reported as trading income in the consolidated statement of income. However,
the amounts reported for 1995 and 1994 also include interest income earned on
U.S. Government securities that were classified as trading account securities
and hedged with futures contracts.
C. OTHER OFF-BALANCE SHEET FINANCIAL INSTRUMENTS. As part of securities custody
activities and at the direction of trust clients, Northern Trust lends
securities owned by clients to borrowers who are reviewed by the Credit Policy
Credit Approval Committee. In connection with these activities, Northern Trust
has issued certain indemnifications against loss resulting from the bankruptcy
of the borrower of securities. The borrowing party is required to fully
collateralize securities received with cash, U.S. Government and government
agency securities, or irrevocable standby letters of credit. As securities are
loaned, collateral is maintained at a minimum of 100 percent of the fair value
of the securities plus accrued interest, with revaluation of the collateral on a
daily basis. The amount of securities loaned as of December 31, 1996 and 1995
subject to indemnification was $15.7 billion and $8.2 billion, respectively.
Because of the requirement to fully collateralize securities borrowed,
management believes that the exposure to credit loss from this activity is
remote.
The Bank is a participating member of various cash and securities clearing
organizations. It participates in these organizations on behalf of its clients
and on behalf of itself as a result of its own investment and trading
activities. A wide variety of securities transactions are settled through these
organizations, including those involving obligations of states and political
subdivisions, asset-backed securities, commercial paper, Eurodollars and
securities issued by the Government National Mortgage Association.
As a result of its participation in cash and securities clearing
organizations, the Bank could be responsible for a pro rata share of certain
credit-related losses arising out of the clearing activities. The method in
which such losses would be shared by the clearing members is stipulated in each
clearing organization's membership agreement. Credit exposure related to these
agreements varies from day to day, primarily as a result of fluctuations in the
volume of transactions cleared through the organizations. The estimated credit
exposure at December 31, 1996 and 1995 was $70 million and $71 million,
respectively, based on the clearing volume for those days. Controls related to
these clearing transactions are closely monitored to protect the assets of
Northern Trust.
21. CONCENTRATIONS OF CREDIT RISK--The information in the section titled Loans
and Other Extensions of Credit found on pages 28 through 29 is incorporated by
reference.
22. PLEDGED AND RESTRICTED ASSETS--Certain of Northern Trust's subsidiaries, as
required or permitted by law, pledge assets to secure public and trust
deposits, repurchase agreements and for other purposes. On December 31, 1996,
securities and loans totaling $5.5 billion ($2.8 billion of U.S. Government and
agency securities, $393 million of obligations of states and political
subdivisions and $2.3 billion of loans and other securities), were pledged.
Collateral required for these purposes totaled $4.6 billion. Deposits
maintained at the Federal Reserve Bank to meet reserve requirements averaged
$247.8 million in 1996 and $278.1 million in 1995.
23. STOCK-BASED COMPENSATION PLANS--During 1995, the Financial Accounting
Standards Board issued SFAS No. 123, ""Accounting for Stock-Based
Compensation,'' which establishes financial accounting and reporting standards
for stock-based compensation plans.
SFAS No. 123 allows two alternative accounting methods: (1) a fair-value-based
method, or (2) an intrinsic-value-based method which is prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25) and related interpretations. Both the accounting and
disclosure requirements of SFAS No. 123 were effective in 1996. Northern Trust
has elected to continue accounting for its stock-based incentive plans and
awards under its current method (APB 25), and has adopted the disclosure
requirements of SFAS No. 123.
A description of Northern Trust's stock-based compensation accounted for under
APB 25 is presented below.
AMENDED INCENTIVE STOCK PLAN--AMENDED 1992 INCENTIVE STOCK PLAN (PLANS). The
Amended Incentive Stock Plan was superseded by the Amended 1992 Incentive Stock
Plan and terminated on December 31, 1994. Outstanding grants and awards under
the Amended Incentive Stock Plan will remain in effect in accordance with their
terms, but no further grants or awards will be made.
The Amended 1992 Incentive Stock Plan (Plan) was adopted in 1992 and amended
in 1995. The Plan is administered by the Compensation and Benefits Committee
(Committee) of the Board of Directors. Key officers of the Corporation or its
subsidiaries are eligible to receive awards under the Plan. Awards under the
Plan may be granted in
57
Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
any one or a combination of (a) incentive stock options and non-qualified stock
options, (b) stock appreciation rights, (c) stock awards, (d) performance
shares, and (e) stock equivalents.
The total number of shares of the Corporation's common stock authorized for
distribution under the Plan is 7,500,000. As of December 31, 1996, shares
available for future grants under the Plan totaled 130,358.
STOCK OPTIONS. Stock options consist of options to purchase common stock at
purchase prices not less than 100% of the fair market value thereof on the date
the option is granted. Options have a 10 year life and will vest and become
exercisable in 2 years after the date of grant. In addition, the Plan provides
that all options will become exercisable upon a change of control as defined in
the Plan. All options terminate at such time as determined by the Committee and
as provided in the terms and conditions of the respective option grants.
A summary of the status of stock options under the Plans at December 31, 1996
and 1995 and changes during the years then ended is presented in the table and
narrative below.
- ---------------------------------------------------------
Outstanding Options
---------------------
Weighted
Average
Exercise
Shares Price
- ---------------------------------------------------------
Outstanding at December 31, 1994 7,574,804 $14.05
- ---------------------------------------------------------
Cancelled during 1995 (85,000) 19.97
Exercised during 1995 (1,280,458) 8.45
Granted during 1995 1,259,600 23.41
- ---------------------------------------------------------
Outstanding at December 31, 1995 7,468,946 16.52
- ---------------------------------------------------------
Cancelled during 1996 (48,000) 21.77
Exercised during 1996 (1,242,034) 13.18
Granted during 1996 1,315,700 33.16
- ---------------------------------------------------------
OUTSTANDING AT
DECEMBER 31, 1996 7,494,612 $19.96
- ---------------------------------------------------------
Of the options outstanding at December 31, 1996: (1) 2,147,676 have exercise
prices ranging between $6.96 and $15.50, with a weighted average exercise price
of $10.65 and a weighted average contractual life of 3.3 years, all of which
are exercisable; (2) 4,033,236 have exercise prices ranging between $18.63 and
$23.50, with a weighted average exercise price of $20.62 and a weighted average
contractual life of 7.4 years, 2,813,636 of which are exercisable with a
weighted average exercise price of $19.41 and a weighted average contractual
life of 6.8 years; and (3) 1,313,700 have exercise prices ranging between
$26.78 and $33.50, with a weighted average exercise price of $33.16 and a
weighted average contractual life of 9.7 years, none of which are exercisable.
STOCK AWARDS. Under the Plans, stock awards or equivalents can be awarded by
the Committee to participants which entitle them to receive a payment in cash
or Northern Trust Corporation common stock based on such terms and conditions
as the Committee deems appropriate.
Total expense applicable to stock awards was $.5 million in 1996 and $.4
million in both 1995 and 1994. In 1996, 12,000 shares of restricted stock were
awarded with a weighted average grant-date fair value of $26.78. No shares were
awarded in 1995. As of December 31, 1996 restricted stock awards outstanding
totaled 117,000 shares. These shares vest, subject to continuing employment,
over a period of five to nine years.
PERFORMANCE SHARES. Under the performance share provisions of the Plans,
participants 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.
Total salary expense for performance shares was $9.7 million in 1996, $5.6
million in 1995 and $5.2 million in 1994. In 1996 and 1995, 331,000 and 306,500
shares respectively, were granted with a weighted average grant-date fair value
of $26.88 and $17.00, respectively. As of December 31, 1996, 505,000 shares of
stock had been credited to performance share accounts subject to meeting
vesting conditions and 1,119,548 shares had been granted, subject to meeting
established performance goals and vesting conditions, for three-year
performance periods ending in 1996 through 1998.
OTHER STOCK-BASED COMPENSATION ARRANGEMENTS. The Corporation, in conjunction
with an acquisition, awarded 432,280 restricted shares of the Corporation's
common stock with a grant-date fair value of $23.75 to certain subsidiary
employee participants contingent upon continued employment, non-competition
agreements and, in some cases, meeting predetermined performance goals.
Total salary expense related to this arrangement totaled $1.8 million in 1996
and $.3 million in 1995.
PRO FORMA INFORMATION. Pro forma information regarding net income and earnings
per share is required by SFAS No. 123, and has been determined as if the
Corporation had accounted for its stock-based compensation under SFAS No. 123.
For purposes of estimating the fair value of the Corporation's employee stock
options at the grant-date, a Black-Scholes option pricing model was used with
the following weighted average assumptions for 1996 and 1995, respectively:
risk-free interest rates of 6.64% and 6.54%; dividend yields of 1.92% and
2.21%; volatility factors of the expected market price of the Corporation's
common
58
Northern Trust Corporation
stock of 22.4% and 19.2%; and a weighted average expected life of the option of
5.8 years. The weighted average fair value of options granted in 1996 and 1995
was $9.11 and $6.58, respectively. For purposes of pro forma disclosures, the
estimated fair value of the options is amortized to expense over the options'
two year vesting period. Under SFAS No. 123, options and awards granted prior
to 1995 are not required to be included in the pro forma information. Because
the SFAS No. 123 method of accounting has not been applied to options and other
stock-based compensation granted prior to January 1, 1995, the resulting pro
forma compensation cost may not be representative of that to be expected in
future years. The Corporation's pro forma information follows:
- -------------------------------------------------------------
(In Millions Except
Per Share Information) 1996 1995
- -------------------------------------------------------------
Net Income as Reported $258.8 $220.0
Pro Forma Adjustments
Increase (Decrease) Due To:
Stock Options (4.8) (1.0)
Performance Shares and Other Arrangements 1.4 .4
- -------------------------------------------------------------
Pro Forma Net Income $255.4 $219.4
- -------------------------------------------------------------
Earnings Per Share as Reported:
Primary $ 2.21 $ 1.88
Fully Diluted 2.20 1.85
Pro Forma Earnings Per Share:
Primary $ 2.18 $ 1.87
Fully Diluted 2.17 1.84
- -------------------------------------------------------------
24. CASH-BASED COMPENSATION PLANS--Various incentive plans provide for cash
incentives and bonuses to selected employees based upon accomplishment of
corporate net income objectives, business unit goals and individual
performance. The plans provide for acceleration of benefits in certain
circumstances including a change in control. The estimated contributions to
these plans are charged to salary expense and totaled $45.3 million in 1996,
$35.7 million in 1995 and $28.4 million in 1994.
59
Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
25. INTERNATIONAL OPERATIONS (BASED ON OBLIGOR'S DOMICILE)--Northern Trust's
international activities are centered in the commercial banking, capital
markets and global custody businesses of the Bank, three overseas branches, one
Edge Act subsidiary, the Hong Kong subsidiaries, NTGA, and Northern Trust of
Florida. Total assets employed in international operations were $2.8 billion on
December 31, 1996, $2.3 billion on December 31, 1995 and $2.8 billion on
December 31, 1994. Of these assets, $1.3 billion on December 31, 1996, $1.1
billion on December 31, 1995 and $1.5 billion on December 31, 1994 were
employed in Europe.
Net income from international operations includes the direct net income
contributions of foreign branches, foreign subsidiaries and the Edge Act
subsidiary. The Bank and Northern Trust of Florida international profit
contributions reflect 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.
- --------------------------------------------------------------------------------------------------------------------------
GEOGRAPHIC DISTRIBUTION OF SELECTED ASSETS
- --------------------------------------------------------------------------------------------------------------------------
December 31, 1996 December 31, 1995 December 31, 1994
---------------------------------- ---------------------------------- ----------------------------------
Time Other Time Other Time Other
Deposits Money Customers' Deposits Money Customers' Deposits Money Customers'
with Market Acceptance with Market Acceptance with Market Acceptance
(In Millions) Banks Assets Loans Liability Banks Assets Loans Liability Banks Assets Loans Liability
- --------------------------------------------------------------------------------------------------------------------------
Europe $1,047.2 $-- $ 97.1 $-- $ 849.6 $-- $ 70.0 $ -- $1,257.8 $-- $ 93.4 $ .9
North America 692.7 -- 100.7 -- 323.6 -- 123.4 -- 651.7 -- 141.9 --
Latin America -- -- 176.7* .2 236.1 .6 170.7* 1.8 64.1 -- 135.0* .6
Asia-Pacific 319.9 -- 7.5 .3 158.1 -- 40.1 .6 194.4 -- 16.4 --
- --------------------------------------------------------------------------------------------------------------------------
Total $2,059.8 $-- $382.0 $.5 $1,567.4 $ .6 $404.2 $2.4 $2,168.0 $-- $386.7 $1.5
- --------------------------------------------------------------------------------------------------------------------------
*Includes loans guaranteed by the Export-Import Bank of $122.2 million in 1996,
$116.5 million in 1995 and $95.2 million in 1994.
The majority of the remaining loans are trade-related.
- -----------------------------------------------------------------------------------------
GEOGRAPHIC DISTRIBUTION OF OPERATING PERFORMANCE
- -----------------------------------------------------------------------------------------
1996 1995 1994
----------------------- ----------------------- -----------------------
Gross Income Gross Income Gross Income
Operating Before Net Operating before Net Operating Before Net
(In Millions) Income Taxes Income Income Taxes Income Income Taxes Income
- -----------------------------------------------------------------------------------------
Europe $ 73.5 $15.9 $ 9.9 $ 67.0 $14.9 $ 9.2 $137.9 $19.1 $11.8
North America 187.1 19.7 12.2 113.8 15.4 9.5 133.9 9.1 5.6
Latin America 35.7 4.6 2.9 39.9 5.1 3.2 68.4 12.0 7.4
Asia-Pacific 97.5 15.7 9.8 105.8 20.3 12.6 42.4 7.7 4.8
- -----------------------------------------------------------------------------------------
Total $393.8 $55.9 $34.8 $326.5 $55.7 $34.5 $382.6 $47.9 $29.6
- -----------------------------------------------------------------------------------------
The table summarizes international performance based on the domicile of the
primary obligor without regard to guarantors or the location of collateral.
The 1994 pretax gain of $28.5 million ($17.7 million after-tax) on the sale of
Banque Scandinave en Suisse was not included in the Geographic Distribution of
Operating Performance.
26. ACQUISITIONS--On March 31, 1995, the Corporation completed the acquisition
of Beach One Financial Services, Inc., parent company of The Beach Bank of Vero
Beach, Florida. The acquisition was effected through a merger in which the
Corporation issued 3,245,136 shares (adjusted for two-for-one stock split
payable to stockholders of record at December 2, 1996) of its common stock
totaling $56.2 million. The Corporation has accounted for the transaction as
pooling-of-interests. Prior period consolidated financial statements were not
restated due to the immateriality of the transaction.
On July 31, 1995, the Corporation completed the acquisition of Tanglewood
Bancshares, Inc., parent company of Tanglewood Bank N.A. of Houston, Texas for
$32.5 million in cash. The transaction was recorded under the purchase method
of accounting. Included in the acquisition cost were $14.4 million of goodwill
and $5.8 million of other intangibles, which are being amortized over fifteen
and ten years, respectively.
On October 31, 1995, the Corporation completed the acquisition of RCB
International Inc. (RCB), an international provider of institutional investment
60
Northern Trust Corporation
management services. RCB shareholders received at closing $11.0 million in
cash, $.6 million in notes and 784,862 shares (adjusted for two-for-one split)
of Corporation common stock. The transaction was recorded under the purchase
method of accounting. In addition, 432,280 shares (adjusted for two-for-one
stock split) of Corporation common stock and $2.6 million in cash were
allocated for various deferred compensation plans and other deferred payment
arrangements. Shares and cash available under these deferred payment
arrangements are payable over one to seven years and are contingent upon
continued employment, non-competition agreements and, in some cases, meeting
predetermined performance goals. Included in the acquisition cost of RCB were
$18.8 million of goodwill and $8.0 million of other intangibles, both of which
are being amortized over a fifteen year period. In August 1996, RCB's name was
changed to Northern Trust Global Advisors, Inc.
On November 15, 1996, the Corporation completed the acquisition of Metroplex
Bancshares, Inc., parent company of Bent Tree National Bank (Bent Tree) in
Dallas, Texas for $14.6 million in cash. The transaction was recorded under the
purchase method of accounting. Included in the acquisition cost were $6.0
million of goodwill and $2.1 million of other intangibles, which are being
amortized over fifteen and ten years, respectively. Bent Tree is expected to be
merged into Northern Trust Bank of Texas N.A. during the first quarter of 1997.
27. REGULATORY CAPITAL REQUIREMENTS--Northern Trust and its subsidiary banks
are subject to various regulatory capital requirements administered by the
federal bank regulatory authorities. Under these requirements, banks must
maintain specific ratios of total and tier I capital to risk-weighted assets and
of tier I capital to average assets in order to be classified as ""well
capitalized.'' The regulatory capital requirements impose certain restrictions
upon banks that meet minimum capital requirements but are not ""well
capitalized'' and obligate the federal bank regulatory authorities to take
""prompt corrective action'' with respect to banks that do not maintain such
minimum ratios. Such prompt corrective action could have a direct material
effect on a bank's financial statements.
As of December 31, 1996, each of Northern's significant subsidiary banks had
capital ratios above the level required for classification as a "well
capitalized" institution and had not received any regulatory notification of a
lower classification. There are no conditions or events since that date, that
management believes have adversely affected the capital categorization of any
significant subsidiary bank for these purposes. The following table summarizes
the risk-
- --------------------------------------------------------------------------------
Minimum to
Qualify as
Well
Actual Capitalized
------------ ------------
($ In Millions) Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------
AS OF DECEMBER 31, 1996:
Total Capital to Risk-Weighted Assets
Consolidated $1,944 11.9% $1,638 10.0%
The Northern Trust Company 1,512 10.8 1,399 10.0
Northern Trust Bank of Florida N.A. 170 11.1 153 10.0
Tier 1 Capital to Risk-Weighted Assets
Consolidated 1,341 8.2 983 6.0
The Northern Trust Company 1,091 7.8 839 6.0
Northern Trust Bank of Florida N.A. 154 10.0 92 6.0
Tier 1 Capital (to Fourth Quarter Average As-
sets)
Consolidated 1,341 6.4 1,045 5.0
The Northern Trust Company 1,091 6.1 888 5.0
Northern Trust Bank of Florida N.A. 154 7.4 104 5.0
AS OF DECEMBER 31, 1995:
Total Capital to Risk-Weighted Assets
Consolidated 1,772 12.5 1,419 10.0
The Northern Trust Company 1,218 10.7 1,135 10.0
Northern Trust Bank of Florida N.A. 131 11.3 116 10.0
Tier 1 Capital to Risk-Weighted Assets
Consolidated 1,251 8.8 851 6.0
The Northern Trust Company 864 7.6 681 6.0
Northern Trust Bank of Florida N.A. 117 10.0 70 6.0
Tier 1 Capital (to Fourth Quarter Average As-
sets)
Consolidated 1,251 6.2 1,010 5.0
The Northern Trust Company 864 5.5 787 5.0
Northern Trust Bank of Florida N.A. 117 7.4 79 5.0
61
Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
based capital amounts and ratios for Northern Trust on a consolidated basis and
for each of its subsidiary banks whose net income for 1996 exceeded 10% of the
consolidated total.
28. NORTHERN TRUST CORPORATION (Corporation only) Condensed financial
information is presented below. Investments in wholly owned subsidiaries are
carried on the equity method of accounting.
- -------------------------------------------------------------------
CONDENSED BALANCE SHEET
- -------------------------------------------------------------------
December 31
---------------------
(In Millions) 1996 1995
- -------------------------------------------------------------------
ASSETS
Cash on Deposit with Subsidiary Bank $ -- $ .2
Time Deposits with Banks-International 101.0 95.6
Securities 149.6 168.3
Investments in Wholly Owned Subsidiaries
Bank Subsidiaries 1,415.3 1,261.6
Nonbank Subsidiaries 44.1 36.2
Loans-Bank Subsidiaries -- 50.0
-Nonbank Subsidiaries 16.2 13.4
-Other 27.6 27.8
Buildings and Equipment 7.8 7.3
Other Assets 96.1 94.6
- -------------------------------------------------------------------
Total Assets 1,857.7 1,755.0
- -------------------------------------------------------------------
LIABILITIES
Commercial Paper 149.0 146.7
Notes Payable 116.6 126.8
Other Liabilities 48.0 28.9
- -------------------------------------------------------------------
Total Liabilities 313.6 302.4
Stockholders' Equity 1,544.1 1,452.6
- -------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $1,857.7 $1,755.0
- -------------------------------------------------------------------
- ------------------------------------------------------------------------------
CONDENSED STATEMENT OF INCOME
- ------------------------------------------------------------------------------
For the Year Ended
December 31
----------------------
(In Millions) 1996 1995 1994
- ------------------------------------------------------------------------------
Operating Income
Dividends-Bank Subsidiaries $113.9 $134.3 $ 82.1
-Nonbank Subsidiaries 1.6 1.6 6.6
Intercompany Interest and Other Charges 10.2 11.4 12.1
Interest and Other Income 8.0 11.3 9.6
- ------------------------------------------------------------------------------
Total Operating Income 133.7 158.6 110.4
- ------------------------------------------------------------------------------
Operating Expenses
Interest Expense 18.9 20.6 21.5
Other Operating Expenses 6.9 7.2 17.1
- ------------------------------------------------------------------------------
Total Operating Expenses 25.8 27.8 38.6
- ------------------------------------------------------------------------------
Income before Income Taxes
and Equity in Undistributed Net Income of Subsidi-
aries 107.9 130.8 71.8
Benefit for Income Taxes (5.1) (6.1) (9.6)
- ------------------------------------------------------------------------------
Income before Equity in Undistributed Net Income of
Subsidiaries 113.0 136.9 81.4
Equity in Undistributed Net Income (Loss) of Sub-
sidiaries
Bank Subsidiaries 137.9 76.1 101.7
Nonbank Subsidiaries 7.9 7.0 (.9)
- ------------------------------------------------------------------------------
NET INCOME $258.8 $220.0 $182.2
- ------------------------------------------------------------------------------
Net Income Applicable to Common Stock $253.9 $211.5 $174.9
- ------------------------------------------------------------------------------
62
Northern Trust Corporation
- --------------------------------------------------------------------------------
CONDENSED STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------
For the Year Ended
December 31
----------------------
(In Millions) 1996 1995 1994
- -------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net Income $258.8 $220.0 $182.2
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Equity in Undistributed Net Income of Subsidiaries (145.8) (83.1) (100.8)
(Increase) Decrease in Accrued Income .9 .6 (.9)
(Increase) Decrease in Prepaid Expenses (.3) (.1) .6
Other, net 11.0 (6.8) 4.3
- -------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 124.6 130.6 85.4
- -------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Net (Increase) Decrease in Time Deposits with Banks (5.4) (53.6) 116.7
Purchases of Securities (354.4) (279.4) (227.1)
Sales of Securities 361.3 173.7 157.1
Proceeds from Maturity and Redemption of Securities 19.2 142.0 8.6
Capital Investments in Subsidiaries (14.6) (43.5) (3.0)
Net (Increase) Decrease in Loans to Subsidiaries 47.2 25.0 (2.5)
Net (Increase) Decrease in Other Loans .2 .3 (1.2)
Other, net (.5) (2.6) (1.9)
- -------------------------------------------------------------------------------
Net Cash Provided by (Used in) Investing Activities 53.0 (38.1) 46.7
- -------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net Increase (Decrease) in Commercial Paper 2.3 22.9 (.3)
Repayment of Notes Payable (10.2) (10.2) (81.9)
Treasury Stock Purchased (118.2) (63.7) (6.9)
Cash Dividends Paid on Common and Preferred Stock (74.7) (65.8) (54.1)
Net Proceeds from Stock Options 12.1 9.0 4.5
Other, net 10.9 13.2 8.8
- -------------------------------------------------------------------------------
Net Cash Used in Financing Activities (177.8) (94.6) (129.9)
- -------------------------------------------------------------------------------
Net Change in Cash on Deposit with Subsidiary Bank (.2) (2.1) 2.2
Cash on Deposit with
Subsidiary Bank at
Beginning of Year .2 2.3 .1
- -------------------------------------------------------------------------------
CASH ON DEPOSIT WITH
SUBSIDIARY BANK AT
END OF YEAR $ -- $ .2 $ 2.3
- --------------------------------------------------------------------------------
63
Northern Trust Corporation
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS,
NORTHERN TRUST CORPORATION:
We have audited the accompanying consolidated balance sheet of Northern Trust
Corporation (a Delaware Corporation) and subsidiaries as of December 31, 1996
and 1995, 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, 1996. 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, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Chicago, Illinois,
January 21, 1997
64
Northern Trust Corporation
CONSOLIDATED FINANCIAL STATISTICS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AVERAGE BALANCE SHEET
- --------------------------------------------------------------------------------
($ In Millions) 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------
ASSETS
Cash and Due from Banks $ 1,072.9 $ 1,178.7 $ 1,206.6 $ 1,025.3 $ 937.8
Federal Funds Sold and
Securities Purchased
under
Agreements to Resell 333.3 204.2 237.0 171.3 237.8
Time Deposits with Banks 1,699.5 1,643.9 2,063.3 1,956.8 1,620.5
Other Interest-Bearing 50.7 16.6 119.9 73.5 104.4
Securities
U.S. Government and
Other 5,940.9 5,703.9 4,482.0 3,700.2 2,658.1
Obligations of States
and Political Subdivi-
sions 414.1 434.7 465.1 502.3 516.0
Trading Account 8.8 54.4 53.8 29.5 16.2
- ----------------------------------------------------------------------------------
Total Securities 6,363.8 6,193.0 5,000.9 4,232.0 3,190.3
- ----------------------------------------------------------------------------------
Loans and Leases
Commercial and Other 6,251.1 5,556.3 5,183.1 4,704.9 4,432.4
Residential Mortgages 4,081.0 3,579.7 3,133.0 2,592.2 2,020.5
- ----------------------------------------------------------------------------------
Total Loans and Leases 10,332.1 9,136.0 8,316.1 7,297.1 6,452.9
- ----------------------------------------------------------------------------------
Reserve for Credit
Losses (147.5) (146.2) (145.2) (145.5) (145.6)
Other Assets 1,259.5 1,183.3 1,087.2 1,089.7 1,019.9
- ----------------------------------------------------------------------------------
Total Assets $20,964.3 $19,409.5 $17,885.8 $15,700.2 $13,418.0
- ----------------------------------------------------------------------------------
LIABILITIES
Deposits
Demand and Other Nonin-
terest-Bearing $ 2,732.9 $ 2,747.3 $ 2,592.5 $ 2,554.9 $ 1,876.0
Savings and Money Mar-
ket Deposits 3,620.7 3,312.4 3,385.7 3,432.1 3,372.2
Savings Certificates 2,062.4 2,000.3 1,229.6 1,172.9 1,370.8
Other Time 549.2 542.7 412.8 404.7 493.9
Foreign Offices-Demand 347.8 299.1 361.7 65.3 56.2
-Time 3,826.2 3,493.4 3,284.8 2,436.4 1,815.6
- ----------------------------------------------------------------------------------
Total Deposits 13,139.2 12,395.2 11,267.1 10,066.3 8,984.7
- ----------------------------------------------------------------------------------
Federal Funds Purchased 1,842.2 1,564.0 1,350.7 1,692.5 1,540.2
Securities Sold under
Agreements to Repur-
chase 1,973.3 1,769.7 1,444.3 664.4 542.9
Commercial Paper 143.7 146.0 138.1 131.5 132.9
Other Borrowings 1,274.1 1,034.5 1,007.5 940.8 561.0
Senior Notes 267.5 394.0 781.8 554.1 85.2
Notes Payable 360.7 271.3 293.6 297.9 258.8
Other Liabilities 477.9 462.1 377.2 279.6 385.2
- ----------------------------------------------------------------------------------
Total Liabilities 19,478.6 18,036.8 16,660.3 14,627.1 12,490.9
- ----------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY 1,485.7 1,372.7 1,225.5 1,073.1 927.1
- ----------------------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity $20,964.3 $19,409.5 $17,885.8 $15,700.2 $13,418.0
- ----------------------------------------------------------------------------------
RATIOS
Dividend Payout Ratio 28.5% 28.6% 28.4% 25.6% 24.4%
Return on Average Assets 1.23 1.13 1.02 1.07 1.11
Return on Average Common
Equity 18.64 17.58 16.57 17.89 18.71
Tier 1 Capital to Risk-
Adjusted Assets-End of
Period 8.19 8.82 8.95 9.31 8.08
Total Capital to Risk-
Adjusted Assets-End of
Period 11.87 12.49 12.36 13.41 11.56
Leverage Ratio 6.42 6.19 6.22 6.24 6.06
Average Stockholders'
Equity to Average As-
sets 7.09 7.07 6.85 6.83 6.91
Average Loans and Leases
Times Average Stock-
holders' Equity 7.0X 6.7x 6.8x 6.8x 7.0x
- ----------------------------------------------------------------------------------
Stockholders-End of Pe-
riod 3,335 3,331 2,962 2,922 2,893
Staff-End of Period
(Full-time equivalent) 6,933 6,531 6,608 6,259 6,249
- ----------------------------------------------------------------------------------
66
Northern Trust Corporation
CONSOLIDATED FINANCIAL STATISTICS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ANALYSIS OF NET INTEREST INCOME
- --------------------------------------------------------------------------------
(Interest and Rate on a
Taxable Equivalent Basis) 1996 1995
- --------------------------------------------------------------------------------
($ In Millions) Interest Volume Rate Interest Volume Rate
- --------------------------------------------------------------------------------
AVERAGE EARNING ASSETS
Money Market Assets
Federal Funds Sold and
Resell Agreements $ 18.3 $ 333.3 5.49% $ 12.3 $ 204.2 6.02%
Time Deposits with Banks 84.9 1,699.5 5.00 92.1 1,643.9 5.60
Other 3.0 50.7 5.91 1.1 16.6 6.88
- --------------------------------------------------------------------------------
Total Money Market Assets 106.2 2,083.5 5.10 105.5 1,864.7 5.66
- --------------------------------------------------------------------------------
Securities
U.S. Government 97.6 1,702.0 5.73 70.4 1,225.7 5.74
Obligations of States
and Political Subdivi-
sions 40.8 414.1 9.86 46.8 434.7 10.75
Federal Agency 228.4 4,010.7 5.69 258.8 4,124.8 6.28
Other 13.7 228.2 6.00 22.0 353.4 6.21
Trading Account .6 8.8 7.09 3.8 54.4 7.04
- --------------------------------------------------------------------------------
Total Securities 381.1 6,363.8 5.99 401.8 6,193.0 6.49
- --------------------------------------------------------------------------------
Loans and Leases 697.8 10,332.1 6.75 634.3 9,136.0 6.94
- --------------------------------------------------------------------------------
Total Earning Assets $1,185.1 $18,779.4 6.31% $1,141.6 $17,193.7 6.64%
- --------------------------------------------------------------------------------
AVERAGE SOURCE OF FUNDS
Deposits
Savings and Money Market
Deposits $ 114.3 $ 3,620.7 3.16% $ 109.1 $ 3,312.4 3.29%
Savings Certificates 119.1 2,062.4 5.78 120.6 2,000.3 6.03
Other Time 29.9 549.2 5.44 31.5 542.7 5.81
Foreign Offices Time 184.5 3,826.2 4.82 182.1 3,493.4 5.21
- --------------------------------------------------------------------------------
Total Deposits 447.8 10,058.5 4.45 443.3 9,348.8 4.74
Federal Funds Purchased 97.9 1,842.2 5.31 91.2 1,564.0 5.83
Repurchase Agreements 103.4 1,973.3 5.24 102.6 1,769.7 5.80
Commercial Paper 7.8 143.7 5.40 8.6 146.0 5.87
Other Borrowings 64.5 1,274.1 5.07 55.6 1,034.5 5.38
Senior Notes 14.4 267.5 5.37 23.7 394.0 6.00
Notes Payable 27.4 360.7 7.59 21.4 271.3 7.88
- --------------------------------------------------------------------------------
Total Interest-Related
Funds 763.2 15,920.0 4.79 746.4 14,528.3 5.14
- --------------------------------------------------------------------------------
Interest Rate Spread -- -- 1.52% -- -- 1.50%
- --------------------------------------------------------------------------------
Noninterest-Related Funds -- 2,859.4 -- -- 2,665.4 --
- --------------------------------------------------------------------------------
Total Source of Funds $ 763.2 $18,779.4 4.06% $ 746.4 $17,193.7 4.34%
- --------------------------------------------------------------------------------
Net Interest
Income/Margin $ 421.9 -- 2.25% $ 395.2 -- 2.30%
- --------------------------------------------------------------------------------
NET INTEREST
INCOME/MARGIN COMPONENTS
Domestic $ 420.6 $16,678.5 2.52% $ 392.6 $15,193.7 2.58%
International 1.3 2,100.9 .06 2.6 2,000.0 .13
- --------------------------------------------------------------------------------
Consolidated $ 421.9 $18,779.4 2.25% $ 395.2 $17,193.7 2.30%
- --------------------------------------------------------------------------------
Notes-Average volume includes nonaccrual loans.
-Interest on loans and money market assets includes fees of $4.3 million in
1996, $5.1 million in 1995, $6.8 million in 1994, $13.9 million in 1993 and
$11.7 million in 1992.
-Total interest income includes adjustments on loans and securities
(primarily obligations of states and political subdivisions) to a taxable
equivalent basis. Such adjustments are based on the U.S. federal income tax
rate (35% for 1996-1993 and 34% for 1992) and State of Illinois income tax
rate (7.18%) before giving effect to the deductibility of state taxes for
federal income tax purposes. Lease financing receivable balances are
reduced by deferred income. Total taxable equivalent interest adjustments
amounted to $33.6 million in 1996, $37.6 million in 1995, $33.4 million in
1994, $34.1 million in 1993 and $32.5 million in 1992.
-Yields on the portion of the securities portfolio classified as available
for sale are based on amortized cost.
68
Northern Trust Corporation
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1994 1993 1992
- --------------------------------------------------------------------------------
Interest Volume Rate Interest Volume Rate Interest Volume Rate
- --------------------------------------------------------------------------------
$ 10.9 $ 237.0 4.59% $ 5.5 $ 171.3 3.24% $ 8.8 $ 237.8 3.70%
97.8 2,063.3 4.74 86.5 1,956.8 4.42 95.6 1,620.5 5.90
5.2 119.9 4.31 2.6 73.5 3.53 4.6 104.4 4.46
- --------------------------------------------------------------------------------
113.9 2,420.2 4.71 94.6 2,201.6 4.30 109.0 1,962.7 5.55
- --------------------------------------------------------------------------------
73.8 1,779.6 4.15 102.5 2,646.6 3.87 90.3 1,759.7 5.13
52.8 465.1 11.35 58.6 502.3 11.66 59.2 516.0 11.46
114.2 2,333.6 4.90 29.7 773.9 3.84 23.9 521.6 4.59
19.6 368.8 5.31 13.6 279.7 4.88 22.9 376.8 6.07
4.3 53.8 7.91 2.2 29.5 7.52 1.0 16.2 6.01
- --------------------------------------------------------------------------------
264.7 5,000.9 5.29 206.6 4,232.0 4.88 197.3 3,190.3 6.18
- --------------------------------------------------------------------------------
503.5 8,316.1 6.05 439.3 7,297.1 6.02 448.1 6,452.9 6.94
- --------------------------------------------------------------------------------
$882.1 $15,737.2 5.61% $740.5 $13,730.7 5.39% $754.4 $11,605.9 6.50%
- --------------------------------------------------------------------------------
$ 85.3 $ 3,385.7 2.52% $ 78.8 $ 3,432.1 2.30% $ 99.1 $ 3,372.2 2.94%
56.9 1,229.6 4.63 50.5 1,172.9 4.31 69.9 1,370.8 5.10
18.6 412.8 4.50 15.7 404.7 3.88 25.4 493.9 5.15
137.2 3,284.8 4.18 90.4 2,436.4 3.71 95.7 1,815.6 5.27
- --------------------------------------------------------------------------------
298.0 8,312.9 3.58 235.4 7,446.1 3.16 290.1 7,052.5 4.11
55.5 1,350.7 4.11 51.1 1,692.5 3.02 53.5 1,540.2 3.47
61.9 1,444.3 4.28 20.0 664.4 3.00 19.8 542.9 3.65
5.9 138.1 4.31 4.3 131.5 3.23 5.2 132.9 3.88
36.0 1,007.5 3.57 26.0 940.8 2.76 19.0 561.0 3.39
33.8 781.8 4.32 18.4 554.1 3.33 3.0 85.2 3.49
23.0 293.6 7.84 23.3 297.9 7.84 21.0 258.8 8.11
- --------------------------------------------------------------------------------
514.1 13,328.9 3.86 378.5 11,727.3 3.22 411.6 10,173.5 4.04
- --------------------------------------------------------------------------------
-- -- 1.75% -- -- 2.17% -- -- 2.46%
- --------------------------------------------------------------------------------
-- 2,408.3 -- -- 2,003.4 -- -- 1,432.4 --
- --------------------------------------------------------------------------------
$514.1 $15,737.2 3.27% $378.5 $13,730.7 2.75% $411.6 $11,605.9 3.55%
- --------------------------------------------------------------------------------
$368.0 -- 2.34% $362.0 -- 2.64% $342.8 -- 2.95%
- --------------------------------------------------------------------------------
$357.3 $12,890.4 2.77% $344.2 $11,491.0 3.00% $324.8 $ 9,659.9 3.36%
10.7 2,846.8 .38 17.8 2,239.7 .79 18.0 1,946.0 .93
- --------------------------------------------------------------------------------
$368.0 $15,737.2 2.34% $362.0 $13,730.7 2.64% $342.8 $11,605.9 2.95%
- --------------------------------------------------------------------------------
69
Northern Trust Corporation
CONSOLIDATED FINANCIAL STATISTICS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
QUARTERLY FINANCIAL DATA
STATEMENT OF INCOME
- --------------------------------------------------------------------------------
1996
-------------------------------------------------
($ In Millions Except Per Entire Fourth Third Second First
Share Information) Year Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
Interest Income $ 1,151.5 290.6 289.9 286.1 284.9
Interest Expense 763.2 190.0 191.1 190.6 191.5
- --------------------------------------------------------------------------------
Net Interest Income 388.3 100.6 98.8 95.5 93.4
Provision for Credit
Losses 12.0 .5 2.5 4.0 5.0
Noninterest Income 777.5 200.6 194.4 195.1 187.4
Investment Security Gains
(Losses) .4 .1 (.1) .1 .3
Noninterest Expenses 766.8 199.9 191.3 191.6 184.0
Provision for Income
Taxes 128.6 33.5 32.8 31.7 30.6
- --------------------------------------------------------------------------------
NET INCOME 258.8 67.4 66.5 63.4 61.5
- --------------------------------------------------------------------------------
Net Income Applicable to
Common Stock 253.9 66.2 65.3 62.2 60.2
- --------------------------------------------------------------------------------
PER COMMON SHARE
Net Income-Primary $ 2.21 .58 .57 .54 .52
-Fully Diluted 2.20 .58 .57 .54 .52
- --------------------------------------------------------------------------------
AVERAGE BALANCE SHEET
(In Millions)
- --------------------------------------------------------------------------------
ASSETS
Cash and Due from Banks $ 1,072.9 1,074.7 972.6 1,047.6 1,197.8
Money Market Assets 2,083.5 2,197.1 2,082.6 1,987.2 2,065.9
Securities 6,363.8 5,715.7 6,257.1 6,755.7 6,734.9
Loans and Leases 10,332.1 10,832.7 10,533.9 10,176.7 9,777.3
Reserve for Credit Losses (147.5) (147.9) (147.4) (147.3) (147.2)
Other Assets 1,259.5 1,315.8 1,291.5 1,208.2 1,221.3
- --------------------------------------------------------------------------------
Total Assets $20,964.3 20,988.1 20,990.3 21,028.1 20,850.0
- --------------------------------------------------------------------------------
LIABILITIES AND STOCK-
HOLDERS' EQUITY
Deposits
Demand and Other Nonin-
terest-Bearing $ 2,732.9 2,773.7 2,620.4 2,686.0 2,852.5
Savings and Other Inter-
est-Bearing 5,683.1 5,735.3 5,596.4 5,713.2 5,687.8
Other Time 549.2 599.4 523.0 462.6 611.4
Foreign Offices 4,174.0 4,270.0 4,375.0 4,146.7 3,901.2
- --------------------------------------------------------------------------------
Total Deposits 13,139.2 13,378.4 13,114.8 13,008.5 13,052.9
Purchased Funds 5,233.3 4,847.2 5,317.0 5,530.2 5,242.4
Senior Notes 267.5 296.3 205.0 254.5 314.4
Notes Payable 360.7 431.9 339.7 335.9 334.8
Other Liabilities 477.9 512.8 523.3 424.5 449.7
Stockholders' Equity 1,485.7 1,521.5 1,490.5 1,474.5 1,455.8
- --------------------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity $20,964.3 20,988.1 20,990.3 21,028.1 20,850.0
- --------------------------------------------------------------------------------
ANALYSIS OF NET INTEREST
INCOME
($ In Millions)
- --------------------------------------------------------------------------------
Earning Assets $18,779.4 18,745.5 18,873.6 18,919.6 18,578.1
Interest-Related Funds 15,920.0 15,786.9 16,021.7 16,103.6 15,768.2
Noninterest-Related Funds 2,859.4 2,958.6 2,851.9 2,816.0 2,809.9
Net Interest Income (Tax-
able equivalent) 421.9 108.4 107.2 104.3 102.0
Net Interest Margin (Tax-
able equivalent) 2.25% 2.30 2.26 2.22 2.21
- --------------------------------------------------------------------------------
COMMON STOCK DIVIDEND AND
MARKET PRICE
Dividends $ .645 .18 .155 .155 .155
Market Price Range-High 37.75 37.75 34.00 29.00 28.125
-Low 24.625 32.00 28.375 25.375 24.625
- --------------------------------------------------------------------------------
Note: Per common share data has been restated to reflect the two-for-one stock
split effected through a 100% stock distribution on December 9, 1996.
The common stock of Northern Trust Corporation is traded on the Nasdaq National
Market under the symbol NTRS.
70
Northern Trust Corporation
- -------------------------------------------------
- -------------------------------------------------
1995
- -------------------------------------------------
Entire Fourth Third Second First
Year Quarter Quarter Quarter Quarter
- --------------------------------------------------
$ 1,104.0 285.9 285.8 271.1 261.2
746.4 194.2 196.4 183.1 172.7
- --------------------------------------------------
357.6 91.7 89.4 88.0 88.5
6.0 1.0 2.0 1.5 1.5
677.1 174.1 173.1 168.4 161.5
1.0 .5 .3 .1 .1
709.2 178.5 175.5 177.9 177.3
100.5 27.3 27.2 24.0 22.0
- --------------------------------------------------
220.0 59.5 58.1 53.1 49.3
- --------------------------------------------------
211.5 57.4 56.0 50.9 47.2
- --------------------------------------------------
$ 1.88 .51 .49 .45 .43
1.85 .50 .49 .44 .43
- --------------------------------------------------
- --------------------------------------------------
$ 1,178.7 1,248.1 1,253.3 1,124.5 1,086.3
1,864.7 1,863.0 1,739.8 1,755.9 2,104.1
6,193.0 6,443.5 6,677.3 5,905.7 5,732.3
9,136.0 9,662.9 9,356.9 8,973.7 8,535.9
(146.2) (147.2) (146.6) (145.9) (145.3)
1,183.3 1,216.9 1,250.4 1,208.2 1,055.2
- --------------------------------------------------
$19,409.5 20,287.2 20,131.1 18,822.1 18,368.5
- --------------------------------------------------
$ 2,747.3 2,942.5 2,790.8 2,635.2 2,616.3
5,312.7 5,521.3 5,451.7 5,289.9 4,980.6
542.7 587.8 584.8 539.5 456.6
3,792.5 3,531.0 3,642.0 3,855.2 4,150.5
- --------------------------------------------------
12,395.2 12,582.6 12,469.3 12,319.8 12,204.0
4,514.2 4,903.5 5,317.2 4,043.5 3,771.2
394.0 553.5 174.6 379.7 469.6
271.3 340.9 254.1 244.7 244.8
462.1 484.6 520.5 468.6 372.9
1,372.7 1,422.1 1,395.4 1,365.8 1,306.0
- --------------------------------------------------
$19,409.5 20,287.2 20,131.1 18,822.1 18,368.5
- --------------------------------------------------
- --------------------------------------------------
$17,193.7 17,969.4 17,774.0 16,635.3 16,372.3
14,528.3 15,061.5 15,120.8 14,076.3 13,834.7
2,665.4 2,907.9 2,653.2 2,559.0 2,537.6
395.2 100.7 98.9 97.5 98.1
2.30% 2.22 2.21 2.35 2.43
- --------------------------------------------------
$ .545 .155 .13 .13 .13
28.00 28.00 23.812 20.625 18.75
15.875 21.875 19.50 17.50 15.875
- -------------------------------------------------
71
Northern Trust Corporation
CORPORATE STRUCTURE
- --------------------------------------------------------------------------------
NORTHERN TRUST CORPORATION
50 South LaSalle Street, Chicago, Illinois 60675
(312) 630-6000
PRINCIPAL SUBSIDIARY
THE NORTHERN TRUST COMPANY
50 South LaSalle Street, Chicago, Illinois 60675
120 East Oak Street, Chicago, Illinois 60611
125 South Wacker Drive, Chicago, Illinois 60675
7801 South State Street, Chicago, Illinois 60619
8501 West Higgins Road, Chicago, Illinois 60631
6401 North Harlem Avenue, Chicago, Illinois 60631
826 S. Northwest Highway, Barrington, Illinois 60010
579 Central Avenue, Highland Park, Illinois 60035
120 East Scranton Avenue, Lake Bluff, Illinois 60044
265 Deerpath Road, Lake Forest, Illinois 60045
959 South Waukegan Road, Lake Forest, Illinois 60045
701 South McKinley Road, Lake Forest, Illinois 60045
400 East Diehl Road, Naperville, Illinois 60563
One Oakbrook Terrace, Oakbrook Terrace, Illinois 60181
1501 Woodfield Road, Schaumburg, Illinois 60173
62 Green Bay Road, Winnetka, Illinois 60093
London Branch
155 Bishopsgate, London EC2M 3XS, England
Cayman Islands Branch
P.O. Box 501, Georgetown, Cayman Islands,
British West Indies
Singapore Branch
80 Raffles Place, #46-02, UOB Plaza 1,
Singapore, 048624
SUBSIDIARIES OF THE NORTHERN TRUST COMPANY
THE NORTHERN TRUST INTERNATIONAL BANKING CORPORATION
One World Trade Center, New York, New York 10048
NORTHERN GLOBAL FINANCIAL SERVICES LIMITED
18 Harbour Road, Wanchai
Hong Kong
NORTHERN TRUST TRADE SERVICES LIMITED
Asia Pacific Tower, 17th Floor,
3 Garden Road, Central, Hong Kong
NORTHERN TRUST FUND MANAGERS (IRELAND) LIMITED
Lifetime House, Fourth Floor
Earlsfort Centre
Earlsfort Terrace
Dublin 2, Ireland
NORLEASE, INC.
50 South LaSalle Street, Chicago, Illinois 60675
THE NORTHERN TRUST COMPANY, CANADA
161 Bay Street, Suite 4540, B.C.E. Place
Toronto, Ontario, Canada M5J 2S1
INTERNATIONAL AFFILIATE
TRANSATLANTIC TRUST CORPORATION
75 Rochford Street
P.O. Box 429
Charlottetown, Prince Edward Island,
Canada C1A 7K7
74
Northern Trust Corporation
- --------------------------------------------------------------------------------
OTHER SUBSIDIARIES OF THE CORPORATION
NORTHERN TRUST BANK OF FLORIDA N.A.
700 Brickell Avenue, Miami, Florida 33131
595 Biltmore Way, Coral Gables, Florida 33134
328 Crandon Boulevard, Suite 101, Key Biscayne, Florida 33149
3001 Aventura Boulevard, Aventura, Florida 33180
8600 NW 17th Street, Miami, Florida 33126 (opening mid-1997)
1100 East Las Olas Boulevard, Fort Lauderdale, Florida 33301
2601 East Oakland Park Boulevard,
Fort Lauderdale, Florida 33306
301 Yamato Road, Suite 1111, Boca Raton, Florida 33431
770 East Atlantic Avenue, Delray Beach, Florida 33483
440 Royal Palm Way, Palm Beach, Florida 33480
11780 U.S. Highway 1, Suite 100,
North Palm Beach, Florida 33408
2201 S.E. Kingswood Terrace, Monterey Commons,
Stuart, Florida 34996
755 Beachland Boulevard, Vero Beach, Florida 32963
1440 South A1A, Vero Beach, Florida 32963
4001 Tamiami Trail North, Naples, Florida 34103
530 Fifth Avenue South, Naples, Florida 34102
26790 South Tamiami Trail, Bonita Springs, Florida 34134
8060 College Parkway S.W., Fort Myers, Florida 33919
1515 Ringling Boulevard, Sarasota, Florida 34236
901 Venetia Bay Boulevard, Suite 100, Venice, Florida 34292
540 Bay Isles Road, Longboat Key, Florida 34228
233 15th Street West, Bradenton, Florida 34205
100 Second Avenue South, St. Petersburg, Florida 33701
425 North Florida Avenue, Tampa, Florida 33602
NORTHERN TRUST BANK OF ARIZONA N.A.
2398 East Camelback Road, Phoenix, Arizona 85016
6373 East Tanque Verde Road, Tucson, Arizona 85715
10220 West Bell Road, Sun City, Arizona 85351
10015 Royal Oak Road, Sun City, Arizona 85351
7001 North Scottsdale Road, Scottsdale, Arizona 85253
19432 R. H. Johnson Boulevard, Sun City West, Arizona 85375
1525 South Greenfield Road, Mesa, Arizona 85206
NORTHERN TRUST BANK OF CALIFORNIA N.A.
355 South Grand Avenue, Suite 2600,
Los Angeles, California 90071
620 Newport Center Drive, Suite 200,
Newport Beach, California 92660
4370 La Jolla Village Drive, Suite 1000,
San Diego, California 92122
1125 Wall Street, La Jolla, California 92037
206 East Anapamu Street, Santa Barbara, California 93101
1485 East Valley Road, (Montecito), Santa Barbara, California 93108
580 California Street, Suite 1800,
San Francisco, California 94104
10877 Wilshire Boulevard (Westwood),
Suite 100, Los Angeles, California 90024
NORTHERN TRUST BANK OF TEXAS N.A.
2020 Ross Avenue, Dallas, Texas 75201
5540 Preston Road, Dallas, Texas 75205
16475 Dallas Parkway, Dallas, Texas 75248
2701 Kirby Drive, Houston, Texas 77098
600 Bering Drive, Houston, Texas 77057
10000 Memorial Drive, Houston, Texas 77024
700 Rusk Street, Houston, Texas 77002
NORTHERN TRUST GLOBAL ADVISORS, INC.
300 Atlantic Street, Stamford, Connecticut 06901
RCB TRUST COMPANY
300 Atlantic Street, Stamford, Connecticut 06901
NT GLOBAL ADVISORS, INC.
20 Toronto Street, Suite 440, Toronto, Canada M5C 2B8
NORTHERN TRUST GLOBAL ADVISORS, LIMITED
One Gloster Court, Segensworth West, Fareham,
Hampshire PO15 5SH, England
THE NORTHERN TRUST COMPANY OF NEW YORK
40 Broad Street, New York, New York 10004
NORTHERN TRUST CAYMAN INTERNATIONAL, LTD.
P.O. Box 1586, Grand Cayman, Cayman Islands,
British West Indies
NORTHERN TRUST SECURITIES, INC.
50 South LaSalle Street, Chicago, Illinois 60675
BERRY, HARTELL, EVERS & OSBORNE, INC.
580 California Street, Suite 1900,
San Francisco, California 94104
NORTHERN TRUST RETIREMENT CONSULTING, INC.
400 Perimeter Center Terrace, Suite 850,
Atlanta, Georgia 30346
19119 North Creek Parkway, Suite 200,
Bothell, Washington 98011
NORTHERN FUTURES CORPORATION
50 South LaSalle Street, Chicago, Illinois 60675
75
Northern Trust Corporation