<PAGE>
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1995
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------- -------------
Commission file number 0-5965
NORTHERN TRUST CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 36-2723087
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
50 SOUTH LA SALLE STREET
CHICAGO, ILLINOIS 60675
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (312) 630-6000
_____________________________
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No [_]
55,980,309 Shares - $1.66 2/3 Par Value
(Shares of Common Stock Outstanding on March 31, 1995)
================================================================================
1
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET Northern Trust Corporation
<TABLE>
<CAPTION>
March 31 December 31 March 31
--------- ----------- ---------
($ In Millions) 1995 1994 1994
- ---------------------------------------------------------------------------- --------- ----------- ---------
<S> <C> <C> <C>
ASSETS
Cash and Due from Banks $ 1,180.8 $ 1,192.5 $ 1,167.2
Money Market Assets
Federal Funds Sold and Securities Purchased under Agreements to Resell 176.3 777.0 418.3
Time Deposits with Banks 1,767.7 1,864.7 2,420.8
Other 14.3 9.5 168.1
- ---------------------------------------------------------------------------- --------- --------- ---------
Total 1,958.3 2,651.2 3,007.2
- ---------------------------------------------------------------------------- --------- --------- ---------
Securities (Fair value $5,523.3 at March 1995, $5,069.7 at December 1994 and
$4,730.2 at March 1994) 5,495.1 5,053.1 4,689.9
Loans and Leases (Net of unearned income of $71.2 at March 1995, $70.4 at
December 1994 and $64.4 at March 1994) 8,875.7 8,590.6 8,081.2
Reserve for Credit Losses (145.8) (144.8) (145.6)
Buildings and Equipment 280.8 274.7 295.0
Customers' Acceptance Liability 52.6 56.3 81.4
Trust Security Settlement Receivables 232.2 305.7 295.6
Other Assets 806.4 582.3 695.2
- ---------------------------------------------------------------------------- --------- --------- ---------
Total Assets $18,736.1 $18,561.6 $18,167.1
- ---------------------------------------------------------------------------- --------- --------- ---------
LIABILITIES
Deposits
Demand and Other Noninterest-Bearing $ 2,475.1 $ 2,604.7 $ 2,553.6
Savings and Money Market Deposits 3,050.1 3,176.3 3,096.9
Savings Certificates 1,974.6 1,524.5 1,115.2
Other Time 334.9 342.2 322.4
Foreign Offices -- Demand 264.5 225.4 460.6
-- Time 3,510.7 3,861.3 3,095.8
- ---------------------------------------------------------------------------- --------- --------- ---------
Total Deposits 11,609.9 11,734.4 10,644.5
Federal Funds Purchased 1,471.1 972.0 1,159.5
Securities Sold under Agreements to Repurchase 2,283.0 2,216.9 1,667.7
Commercial Paper 134.4 123.8 144.9
Other Borrowings 623.9 1,077.9 1,820.0
Senior Medium-Term Notes 392.0 547.0 807.0
Notes Payable 244.8 244.8 326.8
Liability on Acceptances 52.6 56.3 81.4
Other Liabilities 576.3 307.8 331.3
- ---------------------------------------------------------------------------- --------- --------- ---------
Total Liabilities 17,388.0 17,280.9 16,983.1
- ---------------------------------------------------------------------------- --------- --------- ---------
STOCKHOLDERS' EQUITY
Preferred Stock 170.0 170.0 170.0
Common Stock -- $1.66 2/3 Par Value 93.3 90.6 89.7
March 1995 December 1994 March 1994
---------------------------------------------------------------
Shares authorized 140,000,000 140,000,000 140,000,000
Shares issued 55,994,352 54,360,374 53,826,261
Shares outstanding 55,980,309 54,089,259 53,378,320
Capital Surplus 306.7 302.2 303.3
Retained Earnings 810.7 762.7 664.0
Net Unrealized Loss on Securities (9.2) (15.8) (5.9)
Translation Adjustments -- -- .6
Common Stock Issuable -- Performance Plan 16.7 17.9 20.2
Deferred Compensation -- ESOP and Other (39.6) (38.8) (48.1)
Treasury Stock-(at cost, 14,043 shares at March 1995, 271,115 shares at
December 1994 and 447,941 shares at March 1994) (.5) (8.1) (9.8)
- ---------------------------------------------------------------------------- --------- --------- ---------
Total Stockholders' Equity 1,348.1 1,280.7 1,184.0
- ---------------------------------------------------------------------------- --------- --------- ---------
Total Liabilities and Stockholders' Equity $18,736.1 $18,561.6 $18,167.1
- ---------------------------------------------------------------------------- --------- --------- ---------
</TABLE>
2
<PAGE>
CONSOLIDATED STATEMENT OF INCOME Northern Trust Corporation
<TABLE>
<CAPTION>
FIRST QUARTER
ENDED MARCH 31
-----------------------
($ In Millions Except Per Share Information) 1995 1994
- ------------------------------------------------------------ ---------- ----------
<S> <C> <C>
Interest Income
Money Market Assets
Federal Funds Sold and Securities Purchased under
Agreements to Resell $ 3.5 $ 2.2
Time Deposits with Banks 26.7 22.5
Other .2 1.0
- ------------------------------------------------------------ ------ ------
Total 30.4 25.7
- ------------------------------------------------------------ ------ ------
Securities 85.1 47.7
Loans and Leases 145.7 110.8
- ------------------------------------------------------------ ------ ------
Total Interest Income 261.2 184.2
- ------------------------------------------------------------ ------ ------
Interest Expense
Deposits -- Savings and Money Market Deposits 26.6 19.2
-- Savings Certificates 24.5 11.3
-- Other Time 6.4 3.1
-- Foreign Offices 50.6 23.3
Federal Funds Purchased 16.1 13.3
Securities Sold under Agreements to Repurchase 24.1 9.3
Commercial Paper 2.1 1.0
Other Borrowings 10.5 9.5
Senior Medium-Term Notes 6.9 6.5
Notes Payable 4.9 6.2
- ------------------------------------------------------------ ------ ------
Total Interest Expense 172.7 102.7
- ------------------------------------------------------------ ------ ------
Net Interest Income 88.5 81.5
Provision for Credit Losses 1.5 3.0
- ------------------------------------------------------------ ------ ------
Net Interest Income after Provision for Credit Losses 87.0 78.5
- ------------------------------------------------------------ ------ ------
Noninterest Income
Trust Fees 120.8 109.5
Security Commissions and Trading Income 5.9 6.8
Other Operating Income 34.8 33.1
Investment Security Gains .1 .2
- ------------------------------------------------------------ ------ ------
Total Noninterest Income 161.6 149.6
- ------------------------------------------------------------ ------ ------
Income before Noninterest Expenses 248.6 228.1
- ------------------------------------------------------------ ------ ------
Noninterest Expenses
Salaries 82.5 74.4
Pension and Other Employee Benefits 21.5 19.1
Occupancy Expense 14.2 13.7
Equipment Expense 12.6 11.3
Other Operating Expenses 46.5 43.4
- ------------------------------------------------------------ ------ ------
Total Noninterest Expenses 177.3 161.9
- ------------------------------------------------------------ ------ ------
Income before Income Taxes 71.3 66.2
Provision for Income Taxes 22.0 20.8
- ------------------------------------------------------------ ------ ------
NET INCOME $ 49.3 $ 45.4
- ------------------------------------------------------------ ------ ------
Net Income Applicable to Common Stock $ 47.2 $ 43.8
- ------------------------------------------------------------ ------ ------
NET INCOME PER COMMON SHARE -- PRIMARY $ .86 $ .80
-- FULLY DILUTED .85 .80
- ------------------------------------------------------------ ------ ------
Average Number of Common Shares Outstanding -- Primary 55,168,319 54,681,649
-- Fully Diluted 56,394,815 55,899,002
- ------------------------------------------------------------ ---------- ----------
</TABLE>
3
<PAGE>
Northern Trust Corporation
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
FIRST QUARTER
ENDED MARCH 31
------------------
(In Millions) 1995 1994
- ---------------------------------------------------------- -------- --------
<S> <C> <C>
PREFERRED STOCK
Balance at January 1 and March 31 $ 170.0 $ 170.0
- ---------------------------------------------------------- -------- --------
COMMON STOCK
Balance at January 1 90.6 89.7
Pooled Affiliate-Stock Issued 2.7 --
- ---------------------------------------------------------- -------- --------
Balance at March 31 93.3 89.7
- ---------------------------------------------------------- -------- --------
CAPITAL SURPLUS
Balance at January 1 302.2 303.0
Stock Issued--Incentive Plan and Awards (2.4) .3
Pooled Affiliate-Stock Issued 6.9 --
- ---------------------------------------------------------- -------- --------
Balance at March 31 306.7 303.3
- ---------------------------------------------------------- -------- --------
RETAINED EARNINGS
Balance at January 1 762.7 631.9
Net Income 49.3 45.4
Dividend Declared on Common Stock (14.1) (11.8)
Dividends Declared on Preferred Stock (2.3) (1.5)
Pooled Affiliate 15.1 --
- ---------------------------------------------------------- -------- --------
Balance at March 31 810.7 664.0
- ---------------------------------------------------------- -------- --------
NET UNREALIZED LOSS ON SECURITIES
Balance at January 1 (15.8) (.4)
Unrealized Gain (Loss), net 6.6 (5.5)
- ---------------------------------------------------------- -------- --------
Balance at March 31 (9.2) (5.9)
- ---------------------------------------------------------- -------- --------
TRANSLATION ADJUSTMENTS
Balance at January 1 and March 31 -- .6
- ---------------------------------------------------------- -------- --------
COMMON STOCK ISSUABLE--PERFORMANCE PLAN
Balance at January 1 17.9 11.8
Stock Issuable, net of Stock Issued (1.2) 8.4
- ---------------------------------------------------------- -------- --------
Balance at March 31 16.7 20.2
- ---------------------------------------------------------- -------- --------
DEFERRED COMPENSATION--ESOP AND OTHER
Balance at January 1 (38.8) (43.5)
Compensation Deferred (1.5) (5.3)
Compensation Amortized .7 .7
- ---------------------------------------------------------- -------- --------
Balance at March 31 (39.6) (48.1)
- ---------------------------------------------------------- -------- --------
TREASURY STOCK
Balance at January 1 (8.1) (11.4)
Stock Options and Awards 10.4 2.1
Stock Purchased (2.8) (.5)
- ---------------------------------------------------------- -------- --------
Balance at March 31 (.5) (9.8)
- ---------------------------------------------------------- -------- --------
TOTAL STOCKHOLDERS' EQUITY AT MARCH 31 $1,348.1 $1,184.0
- ---------------------------------------------------------- -------- --------
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS Northern Trust Corporation
First Quarter
Ended March 31
----------------------
(In Millions) 1995 1994
- --------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 49.3 $ 45.4
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Provision for Credit Losses 1.5 3.0
Depreciation on Buildings and Equipment 10.8 10.9
Increase in Interest Receivable (18.5) (34.6)
Increase in Interest Payable 5.6 .5
Amortization and Accretion of Securities and Unearned Income (45.6) 18.4
Net Increase in Trading Account Securities (53.9) (19.6)
Other Noncash, net 66.7 (17.9)
- --------------------------------------------------------------------------------- --------- ---------
Net Cash Flows from Operating Activities 15.9 6.1
- --------------------------------------------------------------------------------- --------- ---------
Cash Flows from Investing Activities:
Net Decrease in Federal Funds Sold and Securities Purchased under Agreements
to Resell 613.8 159.5
Net (Increase) Decrease in Time Deposits with Banks 97.0 (330.4)
Net Increase in Other Money Market Assets (4.8) (95.8)
Purchases of Securities-Held to Maturity (179.4) (86.7)
Proceeds from Maturity and Redemption of Securities-Held to Maturity 238.9 87.6
Purchases of Securities-Available for Sale (3,724.4) (2,377.4)
Proceeds from Sale of Securities-Available for Sale 36.7 85.6
Proceeds from Maturity and Redemption of Securities-Available for Sale 3,367.7 1,636.3
Net Increase in Loans and Leases (183.9) (457.3)
Purchases of Buildings and Equipment (12.3) (14.1)
Net (Increase) Decrease in Trust Security Settlement Receivables 73.5 (2.5)
Other, net .4 (3.2)
- --------------------------------------------------------------------------------- --------- ---------
Net Cash Flows from Investing Activities 323.2 (1,398.4)
- --------------------------------------------------------------------------------- --------- ---------
Cash Flows from Financing Activities:
Net Increase (Decrease) in Deposits (303.9) 311.1
Net Increase (Decrease) in Federal Funds Purchased 499.1 (56.3)
Net Increase in Securities Sold under Agreement to Repurchase 66.1 1,065.5
Net Increase in Commercial Paper 10.6 20.8
Net Decrease in Short-Term Other Borrowings (262.0) (391.7)
Proceeds from Term Federal Funds Purchased 437.9 1,419.2
Repayments of Term Federal Funds Purchased (629.9) (1,308.3)
Repayments of Senior Medium-Term Notes (155.0) (10.0)
Treasury Stock Purchased-Incentive Plans (1.9) (.2)
Net Proceeds from Stock Options 1.1 1.0
Cash Dividends Paid on Common and Preferred Stock (16.3) (13.2)
Other, net 3.4 1.9
- --------------------------------------------------------------------------------- --------- ---------
Net Cash Flows from Financing Activities (350.8) 1,039.8
- --------------------------------------------------------------------------------- --------- ---------
Decrease in Cash and Due from Banks (11.7) (352.5)
Cash and Due from Banks at Beginning of Year 1,192.5 1,519.7
- --------------------------------------------------------------------------------- --------- ---------
Cash and Due from Banks at March 31 $ 1,180.8 $ 1,167.2
- --------------------------------------------------------------------------------- --------- ---------
Schedule of Noncash Investing and Financing Activities:
Acquisition of Affiliate for Stock $ 24.7 $ --
Supplemental Disclosures of Cash Flow Information:
Interest Paid on Deposits and Short- and Long-Term Borrowings $ 166.7 $ 101.8
Income Taxes Received (5.3) (1.3)
- --------------------------------------------------------------------------------- --------- ---------
</TABLE>
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION - The consolidated financial statements include
the accounts of Northern Trust Corporation and its subsidiaries ("Northern
Trust"), all of which are wholly owned. Significant intercompany balances and
transactions have been eliminated. The consolidated financial statements as of
March 31, 1995 and 1994 have not been audited by independent public accountants.
In the opinion of management, all adjustments necessary for a fair presentation
of the financial position and the results of operations for the interim periods
have been made. All such adjustments are of a normal recurring nature. 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. For a description of Northern Trust's
significant accounting principles, refer to the Notes to Consolidated Financial
Statements in the 1994 Annual Report to Stockholders.
<TABLE>
<CAPTION>
2. SECURITIES - The following table summarizes the book and fair values of
securities.
March 31, 1995 December 31, 1994 March 31, 1994
--------------------------------------------------------------------
Book Fair Book Fair Book Fair
(In Millions) Value Value Value Value Value Value
- ---------------------------------------------------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Held to Maturity
U.S. Government $ 117.8 $ 117.6 $ 137.2 $ 137.0 $ 71.5 $ 71.4
Obligations of States and
Political Subdivisions 445.8 474.8 474.5 491.3 478.2 518.6
Federal Agency 22.4 21.8 - - - -
Other 29.3 29.3 29.6 29.6 30.3 30.3
- ---------------------------------------------------- -------- -------- -------- -------- -------- --------
Subtotal 615.3 643.5 641.3 657.9 580.0 620.3
- ---------------------------------------------------- -------- -------- -------- -------- -------- --------
Available for Sale
U.S. Government 854.0 854.0 801.3 801.3 2,494.2 2,494.2
Federal Agency 3,619.1 3,619.1 3,251.5 3,251.5 1,194.4 1,194.4
Preferred Stock 196.4 196.4 196.6 196.6 173.2 173.2
Other 152.4 152.4 158.4 158.4 192.2 192.2
- ---------------------------------------------------- -------- -------- -------- -------- -------- --------
Subtotal 4,821.9 4,821.9 4,407.8 4,407.8 4,054.0 4,054.0
- ---------------------------------------------------- -------- -------- -------- -------- -------- --------
Trading Account 57.9 57.9 4.0 4.0 55.9 55.9
- ---------------------------------------------------- -------- -------- -------- -------- -------- --------
Total Securities $5,495.1 $5,523.3 $5,053.1 $5,069.7 $4,689.9 $4,730.2
- ---------------------------------------------------- -------- -------- -------- -------- -------- --------
Reconciliation of Book Values to Fair Values of
Securities Held to Maturity March 31, 1995
--------------------------------------------
Gross Unrealized
Book -------------------- Fair
(In Millions) Value Gains Losses Value
- ---------------------------------------------------- -------- -------- -------- --------
Held to Maturity
U.S. Government $ 117.8 $ - $ .2 $ 117.6
Obligations of States and
Political Subdivisions 445.8 29.4 .4 474.8
Federal Agency 22.4 .1 .7 21.8
Other 29.3 - - 29.3
- ---------------------------------------------------- -------- -------- -------- --------
Total $ 615.3 $ 29.5 $ 1.3 $ 643.5
- ---------------------------------------------------- -------- -------- -------- --------
</TABLE>
6
<PAGE>
Reconciliation of Amortized Cost to Fair Values of
Securities Available for Sale March 31, 1995
----------------------------------------
Amortized Gross Unrealized Fair
----------------
(In Millions) Cost Gains Losses Value
----------------------------------------
Available for Sale
U.S. Government $ 863.2 $ .7 $ 9.9 $ 854.0
Federal Agency 3,621.7 1.8 4.4 3,619.1
Preferred Stock 196.7 .1 .4 196.4
Other 157.2 .1 4.9 152.4
----------------------------------------
Total $4,838.8 $2.7 $19.6 $4,821.9
----------------------------------------
Unrealized gains and losses on off-balance sheet financial instruments used to
hedge available for sale securities totaled $7.2 million and $5.2 million,
respectively, as of March 31, 1995. Unrealized gains on these hedges are
reported as other assets in the consolidated balance sheet; unrealized losses
are reported as other liabilities. As of March 31, 1995, stockholders' equity
included a charge of $9.2 million, net of tax, to recognize the depreciation on
securities available for sale and the related hedges.
3. PLEDGED ASSETS - Securities and loans pledged to secure public and trust
deposits, repurchase agreements and for other purposes as required or permitted
by law were $3.7 billion on March 31, 1995 and December 31, 1994 and $4.4
billion on March 31, 1994.
4. CONTINGENT LIABILITIES - Standby letters of credit outstanding were
$833.7 million on March 31, 1995, $819.9 million on December 31, 1994 and $800.8
million on March 31, 1994.
5. LOANS AND LEASES - Amounts outstanding in selected loan categories are
shown below:
<TABLE>
<CAPTION>
March 31 December 31 March 31
(In Millions) 1995 1994 1994
---------------------------------------
<S> <C> <C> <C>
Domestic
Commercial $2,990.3 $2,672.0 $2,619.3
Residential Real Estate 3,429.5 3,299.1 3,037.8
Commercial Real Estate 505.6 494.1 486.0
Broker 169.9 274.6 319.9
Consumer 633.5 662.1 598.0
Other 614.8 642.1 455.0
Lease Financing 154.6 159.9 141.3
----------------------------------------
Total Domestic 8,498.2 8,203.9 7,657.3
International 377.5 386.7 423.9
----------------------------------------
Total Loans and Leases $8,875.7 $8,590.6 $8,081.2
----------------------------------------
</TABLE>
7
<PAGE>
At March 31, 1995, other domestic and international loans include $732.9 million
of overnight trust-related advances in connection with next day security
settlements, compared with $716.5 million at December 31, 1994 and $679.0
million at March 31, 1994.
Northern Trust adopted Statements of Financial Accounting Standards Nos. 114 and
118, "Accounting by Creditors for Impairment of a Loan", effective January 1,
1995. These statements provide guidance as to when loans should be classified
and reported as impaired and address how the reserve for credit losses related
to these loans should be determined. A loan is impaired when, based on current
information and events, it is probable that Northern Trust will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. These new statements require that an impaired loan be measured based
on the present value of expected future cash flows discounted at the loan's
effective interest rate, or at the loan's market price, or, if the loan is
collateral dependent, based on the fair value of the collateral. Any shortfall
in the estimated value of the impaired loan compared with the recorded
investment of the loan is identified as an allocated portion of the reserve
for credit losses and is one of the factors considered by management in their
overall assessment of reserve adequacy. No changes were required to Northern
Trust's accounting policies for loans, charge-offs and interest income as a
result of adopting these statements. These policies are described in Notes to
Consolidated Financial Statements (Footnotes 1E and 1F) in the 1994 Annual
Report.
At March 31, 1995, nonperforming assets totaled $25.4 million. Included in this
amount were loans with a recorded investment of $21.0 million which were also
classified as impaired. Impaired loans totaling $16.6 million had no portion of
the reserve for credit losses allocated to them, while $4.4 million had an
allocated reserve of $1.1 million. For the first quarter of 1995, the total
recorded investment in impaired loans averaged $26.5 million.
Interest payments received on nonaccrual loans are applied to reduce principal
if the ultimate collectibility of principal, wholly or partially, is in doubt.
If specific facts support that principal is fully recoverable, interest payments
are applied to interest in accordance with the loan's original contract terms.
Total interest income recognized on impaired loans for the quarter ended March
31, 1995 was $148 thousand, most of which was recognized using the cash-basis
method of accounting.
6. RESERVE FOR CREDIT LOSSES - Changes in the reserve for credit losses were
as follows:
<TABLE>
<CAPTION>
Three Months
Ended March 31
----------------
(In Millions) 1995 1994
----------------
<S> <C> <C>
Balance at Beginning of Period $144.8 $145.5
Charge-Offs (2.7) (4.2)
Recoveries 1.1 1.3
---------------
Net Charge-Offs (1.6) (2.9)
Provision for Credit Losses 1.5 3.0
Reserve Related to Acquisition 1.1 -
---------------
Balance at End of Period $145.8 $145.6
---------------
</TABLE>
8
<PAGE>
7. ACQUISITIONS - The acquisition of Beach One Financial Services, Inc., parent
company of The Beach Bank of Vero Beach, Florida, was completed on March 31,
1995. The acquisition was effected through a merger in which Northern Trust
Corporation issued 1,622,568 shares of its Common Stock. The Corporation has
accounted for the transaction as a pooling-of-interests. Prior period
consolidated financial statements were not restated due to the immateriality of
the transaction.
In February, 1995, the Corporation entered into a definitive agreement to
acquire Tanglewood Bancshares, Inc., parent company of Tanglewood Bank N.A.,
Houston for $33.0 million in cash. Tanglewood's assets totaled $229.9 million
at December 31, 1994 and net income totaled $2.6 million in 1994. The agreement
is subject to the approval of Tanglewood shareholders and to various regulatory
approvals and is expected to close in the second half of 1995.
In March, 1995, the Corporation entered into a definitive agreement to acquire
RCB International, Inc., an international provider of institutional investment
management services, for approximately $14.2 million in cash and 608,571 shares
of Northern Trust Corporation Common Stock, with a portion payable at closing
and the balance payable through a deferred compensation plan. RCB,
headquartered in Stamford, Connecticut and with offices in Toronto and the
United Kingdom, had net revenues of $10.3 million in the fiscal year ending June
30, 1994. The agreement is subject to the approval of RCB shareholders, final
due diligence, regulatory approvals and other legal requirements and is expected
to close in the second half of 1995.
9
<PAGE>
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER EARNINGS HIGHLIGHTS
Net income for the first quarter totaled a record $49.3 million, an increase of
9% from the $45.4 million reported in the first quarter of 1994. Net income per
common share on a fully diluted basis increased 7% to $.85 from $.80 in 1994.
This earnings performance produced an annualized return on average common equity
(ROE) of 16.84% versus 17.86% reported last year and a return on average assets
(ROA) of 1.09% versus 1.06% in 1994. Record levels of trust fees, net interest
income, foreign exchange trading profits and a lower provision for credit losses
as a result of continued strong asset quality contributed to the quarter's
performance. Partially offsetting these positive factors was a 9.5% increase in
noninterest expenses compared with the first quarter of last year.
NONINTEREST INCOME
Noninterest income totaled $161.6 million for the quarter, accounting for 62% of
total taxable equivalent revenue, an 8% improvement from the $149.6 million
earned in the first quarter of 1994. Trust fees, which represent 75% of
noninterest income and 47% of total taxable equivalent revenue, grew 10% or
$11.3 million over last year reaching $120.8 million. The increase in trust
fees reflects $4.7 million in fees from Hazlehurst & Associates, Inc., an April
1994 acquisition, higher securities lending revenues, and growth in investment
management services, as well as stronger trust fees from Personal Financial
Services (PFS). Total trust assets under administration at quarter-end were
$519.9 billion, up $40.1 billion from one year ago.
Trust fees from Corporate and Institutional Services (C&IS) were up 15% to $61.5
million. The Hazlehurst acquisition, securities lending activities and
investment management services were the principal factors contributing to the
growth over the year ago quarter. Domestic and international lending fees, up
34% versus last year, reflect a 14% increase in the volume of securities loaned
as well as higher spreads earned from the investment of the cash collateral.
The higher spreads are attributable to the short-term nature of the cash
collateral pools which has allowed for favorable fund management during a period
of rising interest rates. Investment management fees increased 18% as a result
of new business, particularly in actively managed equity funds and fixed income
investments. C&IS trust assets under administration grew 8% or $34.8 billion
over last year and now total $464.9 billion. Assets under the management of
Northern Trust total $53.9 billion, up 19% from a year ago.
PFS trust fees increased 6% to $59.3 million. The main contributors to this fee
growth were the Wealth Management Group and the Florida, California and Texas
subsidiaries. PFS trust assets under administration grew $5.3 billion or 11% to
$55.0 billion of which $33.6 billion is managed by Northern Trust. Total PFS
trust assets under management grew 10% from the prior year.
10
<PAGE>
Security commissions and trading income totaled $5.9 million, compared with $6.8
million reported in the first quarter of last year. The decline in fee income
resulted primarily from a lower level of client transaction activity in the
fixed income markets during the quarter.
Other operating income of $34.8 million increased 5% from the first quarter of
1994. Foreign exchange trading profits were at record levels and totaled $11.2
million, an increase of 12%. The fee portion of treasury management revenues
rose 3% to $12.3 million. Total treasury management revenues, which, in
addition to fees, include the value of compensating deposit balances, increased
11% and totaled $19.9 million. These compensating deposit balances contributed
to the improvement in net interest income.
NET INTEREST INCOME
Net interest income for the first quarter totaled a record $88.5 million, 9%
higher than the $81.5 million reported in the first quarter of 1994. 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. When net interest income is
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 the first quarter was a record $98.1 million, up 10% from the $89.4 million
reported in 1994. This increase is due to higher levels of average earning
assets in addition to a modest improvement in the net interest margin to 2.43%
from 2.40% last year.
Earning assets for the first quarter averaged $16.3 billion, up 8% from the
$15.1 billion in the first quarter of 1994. The $1.2 billion growth in earning
assets reflects an 8% or $605 million increase in average loans, a $971 million
or 20% growth in average securities and a $338 million or 14% decrease in
average money market assets.
Loan volume averaged $8.5 billion, an increase of $605 million from the first
quarter of 1994, reflecting a $693 million or 9% growth in domestic lending.
Approximately one-half of the increase in domestic lending is attributed to
residential mortgage loans now accounting for 39% of the total loan portfolio.
In addition, domestic and international overnight advances related to processing
certain trust client investments averaged $589 million, up $116 million from a
year ago. Securities for the quarter averaged $5.7 billion, up 20% from the
$4.8 billion reported last year, due primarily to a $2.9 billion increase in
short-term federal agency securities, partially offset by a $2.0 billion
reduction in U.S. Government securities. Money market assets averaged $2.1
billion in the first quarter versus $2.4 billion in 1994.
The $1.2 billion increase in average earning assets was funded primarily by
growth in interest-bearing time deposits and noninterest-related funds.
Interest-bearing deposits averaged $9.3 billion, up $1.8 billion from the first
quarter of 1994. This growth is principally from savings certificates (up $618
million), global custody deposit activity in London (up $593 million), and an
increase of $655 million in other foreign time deposits. The 56% increase in
the average volume of savings certificates is due in large part to successful
certificate of deposit campaigns conducted periodically over the past several
quarters. This inflow of funds has helped to reduce the reliance on wholesale
funding sources, as average borrowed funds declined by $899 million from last
year. Average noninterest-related funds increased $327 million, mainly due to
growth
11
<PAGE>
in stockholders' equity and other liabilities. Total average stockholders'
equity, supported by continued strong earnings performance, increased $142
million or 12% from the first quarter of 1994.
The net interest margin increased to 2.43% compared with 2.40% last year due
primarily to a significant growth in noninterest-related funds, improved spreads
on short-term federal agency securities and the widening spread between short-
term assets and various short-term deposits.
PROVISION FOR CREDIT LOSSES
Significant improvement in asset quality continued, resulting in a reduction in
the provision for credit losses to $1.5 million from the $3.0 million in the
first quarter of 1994. For a discussion of the reserve for credit losses, refer
to the Asset Quality section on pages 13 through 15.
NONINTEREST EXPENSES
Noninterest expenses totaled $177.3 million for the quarter, up $15.4 million or
9.5% from $161.9 million in the first quarter of 1994. Approximately $4.0
million of the increase resulted from the inclusion of expenses from Hazlehurst
& Associates, Inc., acquired in the second quarter of 1994. The remainder of
the increase was concentrated primarily in salaries and benefits, and expenses
from technology-related investments, personal trust business expansion, and
Northern's growing global custody business.
Salaries and benefits, which represent 59% of total noninterest expenses,
increased 11% to $104.0 million. Salary costs, the largest component of
noninterest expenses, totaled $82.5 million, up 11% from a year ago. Merit
increases, higher levels of agency clerical services and overtime costs, and
additions to staff from the Hazlehurst acquisition were the principal
contributors to the increase. Staff on a full-time equivalent basis, including
174 positions at Hazlehurst, averaged 6,601 compared with 6,260 in 1994.
Employee benefit costs for the quarter totaled $21.5 million, up 13% from the
prior year. The majority of the increase in benefit costs was attributable to
health care, retirement benefits and higher payroll taxes.
Net occupancy expenses totaled $14.2 million, up 4% or $.5 million from $13.7
million in 1994. The principal components of the increase were higher
maintenance and lease operating costs and amortization of leasehold
improvements, as well as expansion costs related to the opening of new offices
in Florida and Illinois.
Equipment expense, which includes depreciation, rental, and maintenance costs,
totaled $12.6 million, up 11% from $11.3 million in the first quarter of 1994,
reflecting increases in depreciation, maintenance and rental costs for equipment
and computers to support trust business expansion.
Other operating expenses totaled $46.5 million, up 7% from $43.4 million in the
first quarter of 1994. Computer software amortization which increased $1.6
million to $8.2 million, along with increases in professional services,
transaction-based depository fees, business promotion and advertising, telephone
and postage contributed to the expense growth. Partially offsetting these
12
<PAGE>
expense increases were lower levels of costs incurred from processing errors and
other real estate owned operating costs.
PROVISION FOR INCOME TAXES
The provision for income taxes was $22.0 million for the first quarter compared
with $20.8 million in 1994. The higher tax provision in 1995 resulted from the
growth in taxable earnings for federal income tax purposes while tax-exempt
income declined slightly. Partially offsetting this was a lower state income
tax provision due to increased levels of tax-exempt income for state purposes.
The effective tax rate was 31% for both periods.
BALANCE SHEET
On March 31, 1995, Northern Trust Corporation issued 1,622,568 shares of common
stock, valued at $56.2 million under the acquisition agreement, to complete the
acquisition of Beach One Financial Services, Inc., parent of The Beach Bank of
Vero Beach, Florida ("Beach Bank"). The acquisition was accounted for as a
pooling-of-interests and the balance sheet reflects the assets and liabilities
of Beach Bank as of March 31, 1995 only. Due to the immateriality of the
transaction, Northern Trust elected not to restate prior period financial
statements.
Total assets as of March 31, 1995 were $18.7 billion and averaged $18.4 billion
for the first quarter, up 6% from the year ago quarter's average of $17.3
billion. With increased lending activity, in addition to the March 31
acquisition of Beach Bank, loans and leases totaled $8.9 billion at March 31,
1995, and averaged $8.5 billion for the quarter. This compares with $8.1
billion in total loans on March 31, 1994 and $7.9 billion on average for the
first quarter of last year. Driven primarily by continued strong earnings
growth and the acquisition of Beach Bank, common stockholders' equity increased
16% and totaled $1.178 billion at March 31, 1995, versus $1.014 billion at March
31, 1994. Total stockholders' equity increased commensurately and totaled
$1.348 billion at March 31, 1995 compared with $1.184 billion at March 31, 1994.
Northern Trust's risk-based capital ratios remained strong at 9.4% for tier 1
and 12.8% for total capital at quarter end. These capital ratios are well above
the minimum regulatory requirements of 4% for tier 1 and 8% for total risk-based
capital ratios. The leverage ratio (tier 1 capital to first quarter average
assets) of 6.6% at March 31, 1995, also exceeded the regulatory requirement of
3%.
See footnote 7 in Notes to Consolidated Financial Statements for a description
of pending acquisitions.
ASSET QUALITY
Nonperforming assets consist of nonaccrual loans and leases, restructured loans,
and other real estate owned (OREO). Nonperforming assets at March 31, 1995
totaled $25.4 million, the lowest level since September, 1981, compared with
$30.0 million at December 31, 1994 and $45.8 million at March 31, 1994.
Domestic nonaccrual loans and leases, consisting primarily of commercial loans,
totaled $19.7 million, or .23% of total domestic loans and leases at March 31,
1995. Included in this total are commercial real estate loans of $9.5 million.
At December 31,
13
<PAGE>
1994 and March 31, 1994, domestic nonaccrual loans totaled $26.5 million and
$38.7 million, respectively.
The following Nonperforming Asset table presents the outstanding amounts of
nonaccrual loans and leases, restructured loans and OREO. Also shown are loans
that have interest or principal payments that are delinquent 90 days or more and
are still accruing interest. The balance in this category at any quarter end
can fluctuate widely based on the timing of cash collections, renegotiations and
renewals.
Nonperforming Assets and 90 Day Past Due Loans and Leases
<TABLE>
<CAPTION>
March 31 December 31 March 31
(In Millions) 1995 1994 1994
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Nonaccrual Loans and Leases
Domestic $19.7 $26.5 $38.7
International 1.3 1.3 1.3
- --------------------------------------------------------------------------
Total Nonaccrual Loans and Leases 21.0 27.8 40.0
Restructured Loans 2.8 - -
OREO 1.6 2.2 5.8
- --------------------------------------------------------------------------
Total Nonperforming Assets $25.4 $30.0 $45.8
- --------------------------------------------------------------------------
Total 90 Day Past Due Loans
(still accruing) $11.6 $17.3 $19.1
- --------------------------------------------------------------------------
</TABLE>
PROVISION AND RESERVE FOR CREDIT LOSSES. The provision for credit losses is the
charge against current earnings that is determined by management through a
disciplined credit review process as the amount needed to maintain a reserve
that is sufficient to absorb credit losses inherent in Northern Trust's loan and
lease portfolios and other credit undertakings. While the largest portion of
this reserve is intended to cover loan and lease losses, it is considered a
general reserve that is available to cover all credit-related exposures.
The 1995 first quarter provision for credit losses was $1.5 million, compared
with $3.0 million in 1994. Net charge-offs totaled $1.6 million in the first
quarter of 1995 versus net charge-offs of $2.9 million last year. The reserve
for credit losses was $145.8 million equal to 1.64% of outstanding loans at
March 31, 1995. This compares with $144.8 million or 1.69% of outstanding loans
at December 31, 1994 and $145.6 million or 1.80% of outstanding loans at March
31, 1994. The lower reserve to outstanding loans ratio at March 31, 1995 is
attributable to loan growth, a significant portion of which is in low-risk
residential lending.
The overall credit quality of the domestic portfolio has remained good as
evidenced by the low level of nonperforming loans and net charge-offs.
Management's assessment of the current U.S. economy and the financial condition
of certain clients facing financial difficulties together with portfolio growth
were primary factors impacting management's decision to maintain the reserve for
credit losses at $145.8 million at March 31, 1995, essentially unchanged from
December 31, 1994 and March 31, 1994.
14
<PAGE>
Northern Trust continues to monitor closely several credits, but the overall
quality of its loan portfolio remains sound and the reserve for credit losses is
adequate to cover credit-related uncertainties as they exist today. Established
credit review procedures ensure that close attention is given to commercial real
estate-related loans and other commercial loans, as well as other credit
exposures that might be adversely affected by significant increases in interest
rates or unexpected downturns in segments of the economies of the United States
or other countries.
15
<PAGE>
The following schedule should be read in conjunction with the Net Interest
Income section of Management's Discussion and Analysis of Financial Condition
and Results of Operations:
CONSOLIDATED ANALYSIS OF NET INTEREST INCOME Northern Trust Corporation
<TABLE>
<CAPTION>
FIRST QUARTER
--------------------------------------------------
(Interest and rate on a 1995 1994
taxable equivalent basis) ------------------------ ------------------------
($ Amounts in Millions) INTEREST VOLUME RATE Interest Volume Rate
- -------------------------- -------- --------- ----- -------- --------- -----
<S> <C> <C> <C> <C> <C> <C>
AVERAGE EARNING ASSETS
Money Market Assets
Federal Funds Sold and
Repurchase Agreements $ 3.5 $ 233.6 5.99% $ 2.2 $ 248.9 3.59%
Time Deposits with Banks 26.7 1,856.4 5.83 22.5 2,077.9 4.39
Other .2 14.1 6.26 1.0 115.0 3.57
- -------------------------- ------ --------- ----- ------ --------- -----
Total Money Market Assets 30.4 2,104.1 5.85 25.7 2,441.8 4.27
- -------------------------- ------ --------- ----- ------ --------- -----
Securities
U.S. Government 13.0 992.4 5.32 27.6 2,979.9 3.76
Obligations of States and
Political Subdivisions 12.5 453.0 11.04 13.9 484.4 11.48
Federal Agency 61.7 3,878.3 6.45 8.6 934.9 3.73
Other 6.0 382.2 6.35 3.7 311.4 4.77
Trading Account .5 26.4 8.23 .9 50.7 7.60
- -------------------------- ------ --------- ----- ------ --------- -----
Total Securities 93.7 5,732.3 6.62 54.7 4,761.3 4.64
- -------------------------- ------ --------- ----- ------ --------- -----
Loans and Leases 146.7 8,535.9 6.97 111.7 7,930.4 5.71
- -------------------------- ------ --------- ----- ------ --------- -----
Total Earning Assets $270.8 $16,372.3 6.71% $192.1 $15,133.5 5.15%
- -------------------------- ------ --------- ----- ------ --------- -----
AVERAGE SOURCE OF FUNDS
Deposits
Savings and Money Market
Deposits $ 26.6 $ 3,263.1 3.31% $ 19.2 $ 3,463.8 2.24%
Savings Certificates 24.5 1,717.5 5.79 11.3 1,099.8 4.16
Other Time 6.4 456.6 5.67 3.1 311.2 3.98
Foreign Offices Time 50.6 3,911.9 5.24 23.3 2,663.8 3.55
- -------------------------- ------ --------- ----- ------ --------- -----
Total Deposits 108.1 9,349.1 4.69 56.9 7,538.6 3.06
Federal Funds Purchased 16.1 1,122.6 5.81 13.3 1,672.8 3.22
Repurchase Agreements 24.1 1,697.0 5.77 9.3 1,174.1 3.21
Commercial Paper 2.1 143.8 5.84 1.0 123.5 3.23
Other Borrowings 10.5 807.8 5.25 9.5 1,336.0 2.89
Senior Medium-Term Notes 6.9 469.6 5.92 6.5 751.5 3.46
Notes Payable 4.9 244.8 8.13 6.2 326.8 7.81
- -------------------------- ------ --------- ----- ------ --------- -----
Total Interest-Related
Funds 172.7 13,834.7 5.06 102.7 12,923.3 3.22
- -------------------------- ------ --------- ----- ------ --------- -----
Interest Rate Spread -- -- 1.65% -- -- 1.93%
- -------------------------- ------ --------- ----- ------ --------- -----
Noninterest-Related Funds -- 2,537.6 -- -- 2,210.2 --
- -------------------------- ------ --------- ----- ------ --------- -----
Total Source of Funds $172.7 $16,372.3 4.28% $102.7 $15,133.5 2.75%
- -------------------------- ------ --------- ----- ------ --------- -----
NET INTEREST INCOME/MARGIN $ 98.1 -- 2.43% $ 89.4 -- 2.40%
- -------------------------- ------ --------- ----- ------ --------- -----
</TABLE>
ANALYSIS OF NET INTEREST INCOME CHANGES DUE TO VOLUME AND RATE
<TABLE>
<CAPTION>
FIRST QUARTER
1995/94
-------------------
CHANGE DUE
TO
------------
(In Millions) VOLUME RATE TOTAL
- --------------------------------------------------------- ------ ----- -----
<S> <C> <C> <C>
Earning Assets $26.7 $52.0 $78.7
Interest-Related Funds 12.5 57.5 70.0
- --------------------------------------------------------- ----- ----- -----
Net Interest Income $14.2 $(5.5) $ 8.7
- --------------------------------------------------------- ----- ----- -----
</TABLE>
16
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Securities Holders
The annual meeting of stockholders of Northern Trust Corporation was
held on April 18, 1995 for the purposes of electing fifteen Directors to hold
office until the next annual meeting of stockholders. Proxies for the meeting
were solicited pursuant to Section 14(a) of the Securities Exchange Act of 1934
and there was no solicitation in opposition to management's nominees. All of
management's nominees for Directors as listed in the proxy statement were
elected by the following votes set forth below. There were no broker non-votes
for any candidate.
Candidates "FOR" "WITHHELD"
- ---------- ----- ----------
Worley H. Clark 48,707,028 149,985
Dolores E. Cross 48,661,207 149,985
David W. Fox 48,698,795 149,985
Robert S. Hamada 48,710,193 149,985
Barry G. Hastings 48,698,263 149,985
Robert A. Helman 48,688,261 149,985
Arthur L. Kelly 48,701,711 149,985
Ardis Krainik 48,690,971 149,985
Robert D. Krebs 48,703,673 149,985
Frederick A. Krehbiel 48,709,498 149,985
William G. Mitchell 48,702,092 149,985
William A. Osborn 48,724,373 149,985
Harold B. Smith 48,704,345 149,985
William D. Smithburg 48,701,335 149,985
Bibe L. Thomas 48,708,349 149,985
17
<PAGE>
At the annual meeting stockholders also voted to approve the Amended 1992
Incentive Stock Plan. The Amended Plan, which was described in the Corporation's
Proxy Statement dated March 13, 1995, consists of the 1992 Incentive Stock Plan
(as approved by stockholders in 1992 and subsequently amended), with two
amendments: one to extend the option exercise period following termination of
employment on account of retirement, disability or death from three years to
five years, and the other to limit the number of shares for which options may be
awarded to an individual under the Amended Plan.
Votes cast for approval of the Amended Plan were 45,326,577. 2,273,061 votes
were cast against approval, the holders of 460,922 shares specifically
abstained from voting on the resolution and there were 790,098 broker held non
voted shares.
18
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a.) Exhibits
--------
Exhibit(10) Northern Trust Corporation Amended 1992 Incentive
Stock Plan.
Exhibit(11) Computation of Per Share Earnings.
Exhibit(27) Financial Data Schedule.
Exhibit(99) Remarks delivered by David W. Fox and William A.
Osborn at the Annual Meeting of Stockholders of
Northern Trust Corporation held on April 18, 1995.
(b.) Reports on Form 8-K
-------------------
In a report on Form 8-K dated January 17, 1995 the Corporation
disclosed pursuant to Item 5 the information contained in its
January 17, 1995 press release, reporting on its earnings for the
fourth quarter of 1994 and for its 1994 fiscal year. Also disclosed
pursuant to Item 7 were related financial statements and exhibits.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORTHERN TRUST CORPORATION
--------------------------
(Registrant)
Date: May 12, 1995 By: PERRY R. PERO
---------------------
PERRY R. PERO
Senior Executive Vice President
and Chief Financial Officer
Date: May 12, 1995 By: HARRY W. SHORT
---------------------
HARRY W. SHORT
Senior Vice President and Controller
(Chief Accounting Officer)
20
<PAGE>
Exhibit Number (10)
To 3/31/95 Form 10Q
NORTHERN TRUST CORPORATION
AMENDED 1992 INCENTIVE STOCK PLAN
1. PURPOSE. The Northern Trust Corporation Amended 1992 Incentive Stock Plan
(the "Plan") is intended to provide a sense of recognition and managerial
participation among key officers of Northern Trust Corporation (the
"Corporation") and its subsidiaries, by providing them with opportunities to
acquire shares of Common Stock of the Corporation ("Common Stock") and cash
payments ("Awards") based on the value or increase in the value of such
shares in accordance with the terms of the Awards described herein.
2. ADMINISTRATION. The Plan will be administered by the Compensation and
Benefits Committee (the "Committee") of the Board of Directors of the
Corporation. The Committee shall consist of at least two (2) of such
Directors as the Board may designate from time to time. Notwithstanding
anything to the contrary contained herein, membership of the Committee shall
be limited to Board members who meet the "disinterested person" definition
in Rule 16b-3 under Section 16 of the Securities Exchange Act of 1934 and
the "outside director" definition under Section 162(m) of the Internal
Revenue Code and the regulations thereunder.
3. PARTICIPANTS. Participants will consist of key officers of the Corporation
or its subsidiaries as the Committee in its sole discretion determines to be
mainly responsible for the success and future growth and profitability of
the Corporation and whom the Committee may designate from time to time to
receive Awards under the Plan. Awards may be granted to participants who are
or were previously participants under this or other plans of the Corporation
or any subsidiary and, with the agreement of the participant, may be granted
in substitution, exchange or cancellation of any rights or benefits then or
theretofore held under this or other plans of the Corporation or any
subsidiary. The Corporation may continue to award bonuses and other
compensation to participants under other programs now in existence or
hereafter established.
4. TYPES OF AWARDS. Awards under the Plan may be granted in any one or a
combination of (a) Stock Options, (b) Stock Appreciation Rights, (c)
Performance Shares, (d) Stock Awards, and (e) Stock Equivalents, all as
described below.
5. SHARES RESERVED UNDER THE PLAN. There is hereby reserved for issuance under
the Plan an aggregate of 3,750,000 (reflecting an adjustment for the
November, 1992 three-for-two stock split) shares of Common Stock, $1.66 2/3
par value, which may be authorized but unissued or treasury shares. Such
total number of shares shall be adjusted in accordance with the provisions
of Section 11 hereof, and a share subject to a Stock Option and its related
Stock Appreciation Right shall only be counted once. The maximum number of
shares of Common Stock as to which a participant may receive Stock Options
and Stock Appreciation Rights under the Plan is 300,000, subject to the
provisions of Section 11 hereof. Any shares subject to Stock Options or
Stock Appreciation Rights, issued as Performance Shares or Stock Awards or
allotted as Stock Equivalents may thereafter be subject to new Stock Options
or Stock Appreciation Rights, issued as Performance Shares or Stock Awards
or allotted as Stock Equivalents under this Plan if there is a lapse,
cancellation, forfeiture, surrender, expiration or termination of any such
Stock Options, Stock Appreciation Rights, Performance Shares, Stock Awards
or Stock Equivalents, or if shares are issued under such Stock Options or
Stock Appreciation Rights or as such Performance Shares, Stock Awards or
Stock Equivalents, and thereafter are reacquired by the Corporation pursuant
to rights reserved by the Corporation upon issuance thereof.
6. STOCK OPTIONS. The Committee may, in its discretion, grant Stock Options
under the Plan to any participant hereunder. Each Stock Option granted
hereunder shall be subject to such terms and conditions as the Committee may
determine at the time of grant, the general provisions of the
<PAGE>
Plan, the terms and conditions of the applicable Stock Option Agreement, and
the following specific rules:
(a) Stock Options granted to a participant under the Plan shall be governed
by a Stock Option Agreement, which shall specify such terms and
conditions, not inconsistent with the terms and conditions of the Plan,
as the Committee shall determine.
(b) Except as provided in subsection (d) below, Stock Options will consist
of options to purchase Common Stock at purchase prices not less than
100% of the fair market value thereof on the date the Stock Options are
granted.
(c) Stock Options will be exercisable not earlier than six months after the
date they are granted and will terminate not later than three years
after termination of employment for any reason other than death.
Notwithstanding the preceding sentence, Stock Options granted on or
after April 18, 1995, which are not Incentive Stock Options, will
terminate not later than five years from the date of the participant's
termination of employment on account of retirement, disability or death
(but in no event beyond the expiration of ten years from the date of
grant).
(d) Stock Options may, but need not, be "Incentive Stock Options" under
Section 422 of the Internal Revenue Code of 1986 ("Code"); provided,
however, that (i) the exercise price of each Incentive Stock Option
shall be at least 100% of the fair market value of the Common Stock
subject to such Incentive Stock Option on the date of grant; (ii)
Incentive Stock Options will be exercisable not later than ten years
after the date of grant; and (iii) in the case of an Incentive Stock
Option granted to a participant who, at the time of grant, owns (as
defined in Section 425(d) of the Code) stock of the Corporation or its
subsidiaries possessing more than 10% of the total combined voting
power of all classes of stock of any such corporation, the exercise
price shall be at least 110% of the fair market value of the Common
Stock subject to the Incentive Stock Option at the time it is granted
and the Incentive Stock Option, by its terms, shall not be exercisable
after the expiration of five (5) years from the date of its grant. The
aggregate fair market value (determined with respect to each Incentive
Stock Option as of the time such Incentive Stock Option is granted) of
the shares of capital stock with respect to which Incentive Stock
Options are exercisable for the first time by a participant during any
calendar year (under all Incentive Stock Option plans of the
Corporation and subsidiary corporations) shall not exceed $100,000.
(e) Leaves of absence for military service or illness, and transfers of
employment between the Corporation and any subsidiary thereof or
between subsidiaries, shall not constitute termination of employment.
(f) Stock Options may provide that they may be exercised by payment of the
purchase price (i) in cash, (ii) by the Corporation's withholding a
portion of the shares of Common Stock otherwise distributable to the
participant, and/or (iii) by the participant's delivering to the
corporation shares of Common Stock of the Corporation. In the event
that the exercise price of a Stock Option is paid in whole or in part
by the withholding or delivery of shares of Common Stock pursuant to
clause (ii) or (iii) above, the number of shares so withheld or
delivered shall be the number of shares having an aggregate fair market
value on the date of such withholding or delivery equal to such Stock
Option exercise price, or portion thereof, so paid.
(g) Notwithstanding any other provision of the Plan to the contrary, a
Stock Option Agreement may provide that a Stock Option will become
exercisable as of the date of a Change in Control of the Corporation.
For purposes of the Plan, a "Change in Control" of the Corporation
shall be deemed to occur on the earliest of:
(i) The receipt by the Corporation of a Schedule 13D or other statement
filed under Section 13(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), indicating that any entity, person, or
group has acquired beneficial ownership, as that
<PAGE>
term is defined in Rule 13d-3 under the Exchange Act, of more than
30% of the outstanding capital stock of the Corporation entitled to
vote for the election of directors ("voting stock");
(ii) The commencement by an entity, person, or group (other than the
Corporation or a subsidiary of the Corporation) of a tender offer
or an exchange offer for more than 20% of the outstanding voting
stock of the Corporation;
(iii) The effective time of (1) a merger or consolidation of the
Corporation with one or more other corporations as a result of which
the holders of the outstanding voting stock of the Corporation
immediately prior to such merger or consolidation hold less than 80%
of the voting stock of the surviving or resulting corporation, or (2)
a transfer of substantially all of the property of the Corporation
other than to an entity of which the Corporation owns at least 80% of
the voting stock; or
(iv) The election to the Board of Directors of the Corporation, without
the recommendation or approval of the incumbent Board of Directors
of the Corporation, of the lesser of (1) three directors or (2)
directors constituting a majority of the number of directors of the
Corporation then in office.
(h) The Committee may prescribe such other terms and conditions applicable
to Stock Options granted to a participant under the Plan that are
neither inconsistent with nor prohibited by the Plan or any Stock
Option Agreement.
7. STOCK APPRECIATION RIGHTS. The Committee may, in its discretion, grant a
Stock Appreciation Right under the Plan to the holder of any Stock Option
granted hereunder. Each Stock Appreciation Right granted hereunder shall be
subject to such terms and conditions as the Committee may determine at the
time of grant, the general provisions of the Plan, the terms and conditions
of the applicable Stock Appreciation Right Agreement, and the following
specific rules:
(a) Stock Appreciation Rights granted to a participant under the Plan shall
be governed by a Stock Appreciation Right Agreement, which shall
specify such terms and conditions, not inconsistent with the terms and
conditions of the Plan, as the Committee shall determine.
(b) A Stock Appreciation Right may be granted in connection with a Stock
Option at the time of the grant of the Stock Option or at any time
thereafter up to six months prior to the expiration of the Stock
Option.
(c) Each Stock Appreciation Right will entitle the holder to elect to
receive, in lieu of exercising the Stock Option to which it relates, an
amount (payable in cash or in shares of Common Stock of the
Corporation, or a combination thereof, determined by the Committee and
set forth in the related Stock Appreciation Agreement) of up to 100%
(or such lesser percentage as determined by the Committee and set forth
in the related Stock Appreciation Right Agreement) of the excess of (i)
the fair market value per share of Common Stock on the date of exercise
of such Stock Appreciation Right, multiplied by the number of shares of
the Common Stock with respect to which the Stock Appreciation Right is
being exercised, over (ii) the aggregate exercise price under the terms
of the related Stock Option for such number of shares.
(d) Each Stock Appreciation Right will be exercisable at the time and to
the extent that the Stock Option to which it relates is exercisable,
provided that no Stock Appreciation Right shall be exercisable during
the first six months following the date of its grant.
(e) Upon exercise of a Stock Appreciation Right, the Stock Option (or
portion thereof) with respect to which such Stock Appreciation Right is
exercised and any other Stock Appreciation Rights with respect to such
Stock Option (or portion thereof) shall be surrendered to the
Corporation and shall not thereafter be exercisable.
<PAGE>
(f) Exercise of a Stock Appreciation Right will reduce the number of shares
of Common Stock purchasable pursuant to the related Stock Option and
available under the Plan to the extent of the total number of shares of
Common Stock with respect to which the Stock Appreciation Right is
exercised.
(g) The Committee may, in its discretion, grant Limited Stock Appreciation
Rights, which shall be exercisable only for cash automatically upon a
Change in Control of the Corporation (as defined in Section 6(g)).
Except as provided in this subsection (g) hereof, a Limited Stock
Appreciation Right shall be subject to the same terms and conditions as
other Stock Appreciation Rights.
(h) The Committee may prescribe such other terms and conditions applicable
to Stock Appreciation Rights and Limited Stock Appreciation Rights that
are neither inconsistent with nor prohibited by the Plan or any Stock
Appreciation Right Agreement.
8. PERFORMANCE SHARES. The Committee may, in its discretion, grant Performance
Shares under the Plan to any participant hereunder. Each Performance Share
granted hereunder shall be subject to such terms and conditions as the
Committee may determine at the time of grant, the general provisions of the
Plan, the terms and conditions of the related Performance Share Agreement,
and the following specific rules:
(a) Performance Shares granted to a participant under the Plan shall be
governed by a Performance Share Agreement, which shall specify such
terms and conditions, not inconsistent with the terms and conditions of
the Plan, as the Committee shall determine.
(b) With respect to each performance period (each of which shall be no less
than one year in duration), the Committee shall establish such
performance goals relating to the profitability of the Corporation over
such performance periods measured by such factors or combination of
factors, as the Committee in its sole discretion shall determine.
Performance goals may vary among participants. If, in the sole opinion
of the Committee, achievement of established performance goals has
ceased to be a reasonable measure of the intended performance, the
Committee may, in its sole discretion, increase or decrease such
performance goals and establish new performance goals that are a
reasonable measure of the intended performance.
(c) With respect to each performance period, the Committee shall establish
targets for participants for achievement of performance goals. All
targets so established shall be stated as numbers of Performance
Shares, each of which shall represent the right, subject to the terms
and conditions of the Plan and the Performance Share Agreement
governing its grant, to the distribution of a share of Common Stock of
the Corporation plus dividends, as adjusted, accruing from the
effective date of the credit (as described in subsection (d) below) of
such Performance Share.
(d) Following the completion of each performance period, the Committee
shall determine the extent to which performance goals for that
performance period have been achieved and shall authorize credit as of
the end of such performance period of Performance Shares, in accordance
with the terms of the applicable Performance Share Agreements, to the
Accounts of participants for whom targets were established, which
Accounts shall be maintained by the Corporation for each participant
who is credited with Performance Shares under the Plan and remains
eligible for any distribution therefrom.
(e) Each Performance Share credited to a participant's Account, along with
dividends accruing from the effective date of credit of such
Performance Share, shall be distributed to him, or in the event of his
death to his beneficiary, upon the first to occur during his employment
of (i) his retirement, disability or death, (ii) the third anniversary
of the date on which such Performance Share was credited to the
participant's Account, or (iii) for any other reason deemed appropriate
by the Committee in its sole discretion. Notwithstanding, clause (ii)
of the preceding sentence, a participant may elect, in writing, to have
a Performance Share and
<PAGE>
related dividends distributed to him on a date later than on the third
anniversary of the date on which such Performance Share was credited to
his Account; provided, however, that in such event, distribution of the
Performance Share and related dividends shall be distributed on the
first to occur during the participant's employment of the events
specified in clause (i) or (iii) above or, if earlier, upon the first to
occur of the date specified by the participant or the date his
employment with the Corporation terminates for any reason following the
third anniversary of the date on which such Performance Share was
credited to his Account.
(f) Notwithstanding any other provision of the Plan to the contrary, a
Performance Share Agreement may provide that Performance Shares
credited to participants' Accounts, as well as Performance Shares
targeted with respect to any performance period, will become
immediately distributable to participants, in whole or in part, upon a
Change in Control (as defined in Section 6(g)).
(g) The Committee may prescribe such other terms and conditions applicable
to Performance Shares granted to a participant under the Plan that are
neither inconsistent with nor prohibited by the Plan or any Performance
Share Agreement.
9. STOCK AWARDS. The Committee may, in its discretion, grant, or sell for such
amount of cash, Common Stock or such other consideration as the Committee
deems appropriate (which amount may be less than the fair market value of
the Common Stock on the date of grant or sale), shares of Common Stock under
the Plan to any participant hereunder. Each share of Common Stock granted or
sold hereunder shall be subject to such restrictions, conditions and other
terms as the Committee may determine at the time of grant or sale, the
general provisions of the Plan, the restrictions, terms and conditions of
the related Stock Award Agreement, and the following specific rules:
(a) Shares of Common Stock issued to a participant under the Plan shall be
governed by a Stock Award Agreement, which shall specify whether the
shares of Common Stock are granted or sold to the participant and such
other provisions, not inconsistent with the terms and conditions of the
Plan, as the Committee shall determine.
(b) The Corporation shall issue, in the name of the participant, stock
certificates representing the total number of shares of Common Stock
granted or sold to the participant, as soon as may be reasonably
practicable after such grant or sale, which shall be held by the
Secretary of the Corporation as provided in subsection (g) hereof.
(c) Subject to the provisions of subsections (b) and (d) hereof, and the
restrictions set forth in the related Stock Award Agreement, the
participants receiving a grant of or purchasing Common Stock shall
thereupon be a stockholder with respect to all of the shares
represented by such certificate or certificates and shall have the
rights of a stockholder with respect to such shares, including the
right to vote such shares and to receive dividends and other
distributions paid with respect to such shares.
(d) The Committee may prescribe, in its discretion, that any share of
Common Stock granted to a participant pursuant to the Plan shall be
forfeited, and any share of Common Stock sold to a participant pursuant
to the Plan shall, at the Corporation's option, be resold to the
Corporation for an amount equal to the value of the cash and/or
property paid therefor, and, in either case, such shares shall revert
to the Corporation, if (i) the participant violates a non-competition
or confidentiality agreement or other condition set forth in the Stock
Award Agreement, or (ii) the participant's employment with the
Corporation or its subsidiaries terminates prior to a date or dates for
expiration of the forfeiture or resale provisions set forth in his
Stock Award Agreement, which date shall not be earlier than the first
anniversary of such grant or sale. The Corporation shall exercise its
right to require a forfeiture, and may exercise its right to require a
resale, of Common Stock pursuant to this subsection by giving written
notice to the participant at any time within the thirty-day period
following (i) the date that the Corporation acquires knowledge of his
violation of a non-competition or confidentiality agreement or other
condition, or (ii) the participant's termination of
<PAGE>
employment with the Corporation or its subsidiaries prior to such date
set forth in the related Stock Award Agreement. Upon receipt of such
notice, the Secretary of the Corporation shall promptly cancel shares of
Common Stock that are forfeited or resold to the Corporation, and the
Corporation shall make payment therefor, if applicable, as soon as
reasonably practicable following the date of such resale.
(e) The Committee, in its discretion, shall have the power to accelerate
the date on which the restrictions contained in any Stock Award
Agreement shall lapse with respect to any or all shares of Common Stock
granted or sold under the Plan that have been outstanding for at least
one year.
(f) Notwithstanding any provision of the Plan to the contrary, a Stock
Award Agreement may provide that (i) upon the participant's termination
of employment because of his retirement, death or disability (as
determined by the Committee), or (ii) upon a Change in Control of the
Corporation (as described in section 6(g)), any restrictions of this
Section 9 or in any Stock Award Agreement shall lapse.
(g) The Secretary of the Corporation shall hold the certificate or
certificates representing shares of Common Stock issued under this
Section 9 of the Plan on behalf of each participant who holds such
shares, whether by grant or sale, until such time as the Common Stock
is forfeited, resold to the Corporation, or the restrictions lapse.
(h) The Committee may prescribe such other restrictions, terms and
conditions applicable to the shares of Common Stock issued to a
participant under this Section 9 of the Plan that are neither
inconsistent with nor prohibited by the Plan or any Stock Award
Agreement, including, without limitation, terms providing for a lapse
of the restrictions of this Section 9 or in any Stock Award Agreement,
in installments.
10. STOCK EQUIVALENTS. The Committee may, in its discretion, award Stock
Equivalents under the Plan to participants hereunder. Each Stock Equivalent
granted hereunder shall be subject to such terms and conditions as the
Committee may determine at the time of grant, the general provisions of the
Plan, the terms and conditions of the applicable Stock Equivalent Agreement
and the following specific rules:
(a) Grants of Stock Equivalents to a participant under the Plan shall be
governed by a Stock Equivalent Agreement, which shall specify such
terms and conditions, not inconsistent with the terms and conditions of
the Plan, as the Committee shall determine.
(b) Any participant who is awarded a Stock Equivalent shall be entitled to
receive a payment, in cash or in shares of Common Stock of the
Corporation, as provided in the Stock Equivalent Agreement, equal to
(i) the fair market value or book value, at a specified date or dates,
of a designated number of shares of Common Stock; (ii) the appreciation
in the fair market value or the book value, occurring during a
specified period of time, of a designated number of shares of Common
Stock; or (iii) the fair market value or book value, at the date of the
Award, payable at a specified date or dates, of a designated number of
shares of Common Stock.
(c) The date or dates for determining fair market value or book value, or
for payment, or the period of time over which the appreciation in fair
market value or book value shall be measured, as the case may be, shall
be established by the Committee and shall be specified in the
applicable Stock Equivalent Agreement, provided that such date, dates
or period of time shall not include any dates or period occurring later
than ten years after the date of the Award.
(d) Stock Equivalents may be subject to such terms and conditions, not
inconsistent with the terms and conditions of the Plan, as the
Committee determines appropriate, which may include, without
limitation, requirements for the achievement of performance goals.
(e) Any Stock Equivalent may provide that the participant shall receive, on
the date of payment of any dividend on Common Stock occurring during
the period preceding payment of the Award, an amount in cash equal in
value to the dividends that the participant would have
<PAGE>
received had he been the actual owner of the number of shares of Common
Stock designated by the Committee at the time of the Award.
(f) The Corporation's obligation to make payments or distributions with
respect to Stock Equivalents shall not be funded or secured in any
manner.
(g) Notwithstanding any provision of the Plan to the contrary, a Stock
Equivalent Agreement may provide that a Stock Equivalent will become
immediately vested and payable, in whole or in part, upon a Change in
Control (as defined in Section 6(g)).
(h) The Committee may prescribe such other terms and conditions applicable
to Stock Equivalents granted to a participant under the Plan that are
neither inconsistent with nor prohibited by the Plan or any Stock
Equivalent Agreement.
11. ADJUSTMENT PROVISIONS.
(a) The aggregate number of shares of Common Stock with respect to which
Awards may be granted, the aggregate number of shares of Common Stock
subject to each outstanding Award, and, where applicable, the exercise
price per share of each Award, may all be appropriately adjusted as the
Board of Directors of the Corporation may determine for any increase or
decrease in the number of shares of issued Common Stock resulting from
a subdivision or consolidation of shares, whether through
reorganization, recapitalization, stock split-up, stock distribution or
combination of shares, or the payment of a share dividend or other
increase or decrease in the number of such shares outstanding effected
without receipt of consideration by the Corporation. Adjustments under
this Section 11 shall be made according to the sole discretion of the
Board of Directors of the Corporation, and its decision shall be
binding and conclusive.
(b) Notwithstanding any other provisions of the Plan, and without affecting
the number of shares reserved or available hereunder, the Committee may
authorize the issuance or assumption of benefits in connection with any
merger, consolidation, acquisition of property or stock, or
reorganization upon such terms and conditions as it may deem
appropriate.
(c) If the shares of Common Stock shall be changed into another kind of
stock of the Corporation or into securities of another corporation,
whether through reorganization, sale of assets, merger, consolidation,
or similar transaction, the Corporation shall cause adequate provision
to be made whereby participants shall thereafter be entitled to
receive, upon distribution of their Awards, the securities that they
would have been entitled to receive for shares distributed pursuant to
the Plan immediately prior to the effective date of the transaction.
12. NONTRANSFERABILITY. Except as provided below, each Award granted under the
Plan to an employee shall not be transferable by him other than by will or
the laws of descent and distribution and shall be exercisable, during his
lifetime, only by him. In the event of the death of a participant during
employment or prior to the termination, expiration, cancellation or
forfeiture of any Award held by him hereunder, each Award theretofore
granted to him shall be exercisable or payable to the extent provided
therein but no later than five years after his death and then only:
(a) by or to the executor or administrator of the estate of the deceased
participant or the person or persons to whom the deceased participant's
rights under the Award shall pass by will or the laws of descent and
distribution; and
(b) to the extent set forth in the Agreement.
Notwithstanding the foregoing, a Stock Option Agreement for an Award of
Stock Options that are not Incentive Stock Options (including a Stock
Option Agreement for an Award made prior to the January 1, 1995 effective
date of the amendment to this Section 12), may permit the participant who
received the Award, at any time prior to his death, to assign all or any
portion of the Stock Option granted to him to: (i) his spouse or lineal
descendants; (ii) the trustee of a trust for the primary benefit of his
spouse or lineal descendants; or (iii) a partnership of which his spouse
and lineal descendants are the only partners. In such event, the spouse,
lineal descendant,
<PAGE>
trustee or partnership will be entitled to all of the rights of the
participant with respect to the assigned portion of such Stock Option, and
such portion of the Stock Option will continue to be subject to all of the
terms, conditions and restrictions applicable to the Award, as set forth
herein and in the related Stock Option Agreement immediately prior to the
effective date of the assignment. Any such assignment will be permitted
only if: (i) the participant does not receive any consideration therefor;
and (ii) the assignment is expressly permitted by the applicable Stock
Option Agreement (as such Stock Option Agreement may be amended) as
approved by the Committee. Any such assignment shall be evidenced by an
appropriate written document executed by the participant, and a copy
thereof shall be delivered to the Committee on or prior to the effective
date of the assignment.
13. OTHER PROVISIONS. Any Award under the Plan shall be subject to other
provisions as the Committee determines, including, without limitation,
provisions for the installment purchase of Common Stock under Stock
options, provisions to assist the participant in financing the acquisition
of Common Stock, provisions for the forfeiture of, or restrictions on
resale or other disposition of shares acquired under any Award, provisions
to comply with Federal and state securities laws, provisions permitting
acceleration of exercise in the event of death or disability,
understandings or conditions as to the participant's employment in addition
to those specifically provided for under the Plan, provisions giving the
Corporation the right to repurchase shares acquired under any Award in the
event the participant elects to dispose of such shares, provisions
requiring the achievement of specified performance goals, and provisions
permitting acceleration of exercise upon the occurrence of specified events
or otherwise in the discretion of the Committee.
14. TAXES. The Corporation shall be entitled, if necessary or desirable, to pay
or withhold the amount of any tax attributable to any amounts payable under
any benefit after giving the person entitled to receive such amount notice
as far in advance as practicable, and the Corporation may defer making
payment as to any benefit if any such tax, charge or assessment may be
pending until indemnified to its satisfaction. In connection with an Award
under the Plan in the form of shares of Common Stock, and in lieu of
requiring a participant to make a cash payment to the Corporation in an
amount related to the tax resulting from such benefit, the Committee may,
in its discretion, provide that, at the participant's election, the tax
withholding obligation in connection with such benefit shall be satisfied
by the Corporation's withholding a portion of the shares otherwise
distributable to the participant or by the participant's delivering to the
Corporation the shares previously delivered by the Corporation in respect
of such Award, such shares being valued in either event at their fair
market value as of the date of such withholding or delivery, as the case
may be. Notwithstanding any provision of the Plan to the contrary, (i) a
participant's election pursuant to the preceding sentence must be made on
or prior to the date as of which income is realized by the participant in
connection with such Award and must be irrevocable; and (ii) if the
election is made by a participant who is subject to the restrictions of
Section 16 of the Securities Exchange Act of 1934, then the election must
be made in accordance with such restrictions and the restrictions of Rule
16b-3.
15. AMENDMENT, SUSPENSION OR TERMINATION OF PLAN. The Board of Directors of the
Corporation may at any time suspend or terminate the Plan or amend the Plan
as it deems advisable and in the best interests of the Corporation. No
amendment, without approval of the stockholders of the Corporation, shall
(i) except as provided in Section 11, materially increase the total number
of shares that may be issued under the Plan, or increase the amount or type
of benefits that may be granted under the Plan, provided that,
notwithstanding the foregoing, in no event shall the number of shares
issuable under the Plan as Incentive Stock Options exceed 2,500,000, as
adjusted pursuant to Section 11; (ii) materially change the class of
eligible employees; or (iii) materially increase benefits to any
participant who is subject to the restrictions of Section 16 of the
Securities Exchange Act of 1934. All benefits in effect at the time of
termination of the Plan shall remain in effect according to their original
terms.
<PAGE>
16. NO CONTRACT OF EMPLOYMENT. Neither the adoption of the Plan nor the grant
of any Award hereunder shall be deemed to obligate the Corporation or any
subsidiary thereof to continue the employment of any participant for any
particular period, nor shall the granting of an Award constitute a request
or consent to postpone the retirement date of any participant.
17. STOCKHOLDER APPROVAL. The Plan has been adopted by the Board of Directors
of the Corporation as of May 1, 1992, and approved by the stockholders of
the Corporation. The Plan was amended on February 21, 1995, with certain
amendments adopted subject to approval by stockholders of the Corporation.
These amendments shall be null and void if stockholder approval is not
obtained.
18. DURATION OF THE PLAN. This Plan shall be effective for the ten-year period
commencing May 1, 1992 and no benefits shall be granted hereunder after
April 30, 2002.
19. APPLICABLE LAW. All questions pertaining to the validity, construction and
administration of the Plan and all Awards hereunder shall be determined in
conformity with the laws of the State of Illinois and, in the case of
Incentive Stock Options, Section 422 of the Code and regulations issued
thereunder.
<PAGE>
EXHIBIT NUMBER (11)
TO 3/31/95 FORM 10-Q
NORTHERN TRUST CORPORATION
COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
First Quarter Ended March 31
----------------------------
1995 1994
----------- -----------
<S> <C> <C>
Computations Required by
- ---------------------------
Regulation S-K
- ---------------------------
Primary Earnings Per Share
- ---------------------------
Net Income Applicable to
Common Shares $47,181,699 $43,763,865
=========== ===========
Weighted Average Number of Common
and Common Equivalent Shares Outstanding
Common Shares 54,250,684 53,323,765
Dilutive Effect of Common
Equivalent Shares (A)
Stock Options 586,299 994,098
Long Term Performance Stock Plan 323,123 357,989
Other 8,213 5,797
----------- -----------
55,168,319 54,681,649
=========== ===========
Net Income Per Common and
Common Equivalent Share $0.86 $0.80
=========== ===========
</TABLE>
(A) Determined by application of the treasury stock method.
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER (11)
TO 3/31/95 FORM 10-Q
NORTHERN TRUST CORPORATION
COMPUTATION OF PER SHARE EARNINGS
First Quarter Ended March 31
---------------------------------
1995 1994
----------- -----------
<S> <C> <C>
Computations Required by
- ------------------------
Regulation S-K
- --------------
Fully Diluted Earnings Per Share
- --------------------------------
Net Income Applicable to
Common Shares $47,181,699 $43,763,865
Add Back: Dividend on Series E Convertible
Preferred Stock 777,147 777,051
----------- -----------
$47,958,846 $44,540,916
=========== ===========
Weighted Average Number of Common
and Common Equivalent Shares Outstanding
Common Shares 54,250,684 53,323,765
Dilutive Effect of Common
Equivalent Shares (A)
Stock Options 604,437 1,004,670
Long Term Performance Stock Plan 326,028 359,572
Other 8,846 6,175
Other Potentially Dilutive Securities
Equivalent Shares Assuming Conversion of
Series E Convertible Preferred Stock 1,204,820 1,204,820
----------- -----------
56,394,815 55,899,002
=========== ===========
Net Income Per Common and
Common Equivalent Share $ 0.85 $ 0.80
=========== ===========
</TABLE>
(A) Determined by application of the treasury stock method.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF INCOME
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<CASH> 1,180,751
<INT-BEARING-DEPOSITS> 1,767,701
<FED-FUNDS-SOLD> 176,307
<TRADING-ASSETS> 57,927
<INVESTMENTS-HELD-FOR-SALE> 4,821,966
<INVESTMENTS-CARRYING> 615,238
<INVESTMENTS-MARKET> 643,418
<LOANS> 8,875,675
<ALLOWANCE> 145,805
<TOTAL-ASSETS> 18,736,122
<DEPOSITS> 11,609,927
<SHORT-TERM> 4,787,366
<LIABILITIES-OTHER> 628,944
<LONG-TERM> 361,791
<COMMON> 93,324
0
170,000
<OTHER-SE> 1,084,770
<TOTAL-LIABILITIES-AND-EQUITY> 18,736,122
<INTEREST-LOAN> 145,688
<INTEREST-INVEST> 84,675
<INTEREST-OTHER> 30,860
<INTEREST-TOTAL> 261,223
<INTEREST-DEPOSIT> 108,087
<INTEREST-EXPENSE> 172,697
<INTEREST-INCOME-NET> 88,526
<LOAN-LOSSES> 1,500
<SECURITIES-GAINS> 119
<EXPENSE-OTHER> 177,336
<INCOME-PRETAX> 71,277
<INCOME-PRE-EXTRAORDINARY> 49,321
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 49,321
<EPS-PRIMARY> .86
<EPS-DILUTED> .85
<YIELD-ACTUAL> 2.19
<LOANS-NON> 21,047
<LOANS-PAST> 11,629
<LOANS-TROUBLED> 2,800
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 144,838
<CHARGE-OFFS> 2,698
<RECOVERIES> 1,114
<ALLOWANCE-CLOSE> 145,805
<ALLOWANCE-DOMESTIC> 108,952
<ALLOWANCE-FOREIGN> 2,773
<ALLOWANCE-UNALLOCATED> 34,080
</TABLE>
<PAGE>
Exhibit Number (99)
To 3/31/95 Form 10-Q
Chairman David W. Fox delivered the following remarks on the highlights of 1994
and the first quarter 1995 at the annual meeting.
As announced in February, I informed our Board about eighteen months ago that
it was my intention to retire on October 3 of this year, which is my fortieth
anniversary date with Northern and is shortly after my sixty-fourth birthday.
The Board has approved a plan of succession whereby Bill Osborn will succeed me
as CEO on June 30 and then also become Chairman in October. Barry Hastings will
become COO on June 30 and assume the additional title of President in October.
It is also my intention to leave Northern's Board at that time, having served
as a Director for the past fourteen years.
This will be, therefore, the last annual meeting at which I will preside as
Chairman.
Before turning the podium over to Bill Osborn for a look at Northern's future,
let me make a few observations about the last five and a half years. As Chief
Executive Officer, one of my most important responsibilities to shareholders and
our Board was to provide for a successful and orderly transition of senior
management. With the positioning of Bill Osborn and Barry Hastings this has been
accomplished. Both have long career histories with Northern and bring a wealth
of talent, experience and leadership skills to their new roles. Northern will
not miss a beat under their stewardship, reinforcing my feeling that this is the
right time to make a management transition. These have been exciting and
fulfilling years, and the strong and unfailing support of my colleagues, our
shareholders and our Board of Directors has meant a great deal to me, and I want
to publicly thank them all.
We are a different bank than we were five years ago, and we will be a
different bank five years from now. Since 1989, trust assets and trust fees have
more than doubled. Northern's market capitalization also doubled in that period,
to $2.1 billion, and net income available for shareholders grew over 65%. While
our stock did not perform as well in 1994 as we would have liked, it has
rewarded long term holders exceedingly well.
Of even greater importance for the future is that Northern is now in a
position to capitalize further on the growth opportunities in its markets. The
bulk of our $125 million investment in our new trust management system is now
behind us, and the benefits to the Bank and our clients will become more
evident as the year progresses.
Over $200 million has been spent on acquisitions in the past five years,
significantly expanding our market share and service capabilities.
The number of domestic office locations also has grown, by 50%, in that same
period. We have adapted to and taken advantage of the changing nature of our
markets, yet remained a highly focused financial institution with a diverse and
profitable business mix.
The competitive challenges, of course, are greater than ever, but the future
is bright. Serving clients exceptionally well will remain our primary mission
and the cornerstone of our success. At the same time we must remain sensitive to
the needs and well-being of Northern people, without whom success is not
possible. We recognize also that we must continue to improve--that clients
expect from us premium quality and premium service at competitive prices, that
they deserve no less. As we grow our revenues, therefore, we must be
particularly mindful of prudently managing our costs. To that end, as previously
announced, we have committed to reducing base-line expenses by $50 million over
the next three years as we work toward our minimum return on equity goal of 18%.
Good progress toward these objectives was made in the first quarter, but we
still have much work to do. I'm pleased to report that yesterday we announced
very satisfactory first quarter earnings of $49.3 million, up 9% from a year
ago and a new first quarter record. Trust fees grew in excess of 10% in the
quarter and trust assets under administration reached a new high of over $500
billion. But enough of the past. Let me now turn the meeting over to Bill
Osborn for a look ahead.
The following remarks on Northern's ongoing business strategies for enhancing
shareholder value were delivered by President William A. Osborn.
Good Morning. For Northern Trust, 1994 was another successful year. We built
upon our market leadership position in our corporate and personal
<PAGE>
businesses in several respects. We did so by establishing a record level of new
business, by extending our market reach with new offices and additional
capabilities made possible by investment and strategic acquisition, and by
implementing technology upgrades that enhanced the quality and cost structure
of our internal operations. All of this culminated in net income of $182.2
million, the seventh consecutive year that Northern Trust shareholders have
enjoyed record earnings.
As we move forward in 1995 and beyond, management is keenly focused on
improving upon past accomplishments. We will continue to operate under the
strategic vision that has served so well in making Northern Trust a unique
growth company with attributes attractive to shareholders and clients. Our
overarching strategy is to position Northern within selected individual and
corporate market niches as an unrivaled provider of fiduciary and investment
services, supported by highly focused personal and commercial banking
capabilities and a strong relationship emphasis with clients. Key underlying
objectives of this strategy are to:
. Achieve consistent, quality earnings per share growth.
. Increase shareholder value and market capitalization.
. Build on our present leading market positions in our Corporate and Personal
businesses.
. Differentiate the quality, cost competitiveness and performance attributes
of Northern's products and services.
I would like to outline for you our key growth opportunities and initiatives
that, in combination with a clear and focused business strategy, are expected
to increase value for you, the shareholders of Northern Trust.
Northern's clients are individuals, corporations and institutions in very
targeted sectors which provide excellent growth opportunities. In our markets,
Northern is a major, and in some cases, dominant provider. For example, in the
Corporate and Institutional market Northern ranks among the top five providers
in Master Trust and Custody. This group as a whole commands market share fast
approaching 70%. The Corporate and Institutional Services business generates
about 50% of Northern's trust fees, and, combined with other fees and net
interest income, accounts for about 50% of total revenues and profits as well.
There are three key areas of opportunity for sustained growth within our
Corporate and Institutional market: Retirement Services, International Services
and Investment Services. I'll comment on two of these now, and discuss
Investment Services later in the context of opportunities in both our Corporate
and Personal trust markets.
The opportunity in Retirement Services arises from the projected growth of
financial assets in retirement plans and the shifting of investment
responsibility for these assets from employers to employees. We anticipate
financial asset accumulation will be unprecedented as the baby boom generation
passes through peak wealth-generating years and enters a phase of life where
saving for retirement is a financial priority. With a large client base and a
long history of serving the employee benefit plans of corporations and public
entities, where the dominant portion of retirement savings will be held, we are
in position to serve this rapidly growing asset base.
The emergence of the defined contribution style retirement plan, which is an
employee-directed alternative to the more traditional defined benefit pension
plan, is the other important trend underlying our growth opportunity in
Retirement Services. Among U.S. private pension plans, defined contribution
assets of $1.2 trillion are now about equal to defined benefit assets. The
primary segment of the defined contribution market, 401(k) plans, is growing at
14% annually versus 9% for defined benefit plans. By 2003, defined contribution
balances are projected to exceed home equity as the largest asset for many
households. The employee-directed nature of defined contribution plans calls
for a higher level of service. Employees require education about saving for
retirement and making asset allocation and investment choices for their
retirement savings portfolio. Recordkeeping and servicing becomes more complex
as the focus moves from the plan level to the participant level.
Northern's ability to capture market share and benefit from the expanding fee-
based revenue opportunities of this fast growing market was significantly
bolstered by our Hazlehurst & Associates acquisition in 1994. The Northern
Trust/Hazlehurst combination can meet virtually every retirement service demand
in the marketplace. This is a significant competitive advantage for Northern as
prospective clients
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increasingly seek out providers of a complete, bundled product. We are now win-
ning business in the market where clients sign up for our entire array of re-
tirement services. These services include plan design and administration, par-
ticipant servicing and recordkeeping, and fiduciary, custody, asset management
and benefit payments services.
In addition, Northern is well-positioned to benefit from the developing trend
of companies wishing to outsource many benefits administration functions that
they have traditionally managed in-house. In 1994, approximately 20% of our new
business in retirement services related to outsourcing arrangements.
The acquisition and integration of Hazlehurst & Associates has been extremely
successful. We are very pleased that new business in 1994 exceeded our
expectations, and market trends give us reason to be optimistic that the pace of
growth in our Retirement Services business will continue to be robust.
International Services is another key growth area within our Corporate &
Institutional business. International Services, which encompasses non-U.S.
clients in 19 countries as well as non-U.S. assets for all our clients, is
attractive for both its growth characteristics and its relative profitability.
This is because the margins can be substantially more attractive than those
available in the domestic market. Our international client asset base of $49
billion is our fastest growing market segment and represented a significant 30%
of our new business fees sold in the corporate trust market in 1994. Global
market trends that underlie this growth opportunity include privatization of
government pension funds and increased cross-border investment, as foreign
government asset allocation restrictions are reduced in an effort to boost
returns. As these trends emerge, sponsors of non-U.S. based asset pools are
gradually accepting the master custodian concept as a means to control operating
risk, enhance efficiency, and consolidate information. Northern, and other
select major U.S. providers, are competitively-advantaged in this market as non-
U.S. providers are some years behind in the development of systems and
expertise.
Northern has been particularly successful winning new business with
governmental entities, especially in the Middle East and Pacific Rim. We
are the first master custodian to have a client in Africa and recently became
the first non-Canadian bank to obtain full trust powers in Canada. To service
clients and conduct securities lending activities in the Pacific Rim, we
established an office in Hong Kong earlier this year.
The other dimension of International Services is the global custody of our
domestic clients' non-U.S. assets. U.S. pension funds have substantially
increased their international asset allocation from 3% as recently as 1988 to
over 7% in 1993. Projections indicate that this percentage will approach 12% by
1998. In total, our $65 billion of global custody assets ranks us among the
largest global providers. The growth in this business has been very strong with
global assets increasing an average of 34% annually over the past three years.
The growth in global financial asset activity and our competitive position as a
sophisticated provider of service to this market bode well for the continued
expansion of revenues and profitability of our Corporate & Institutional
business.
Now I'd like to talk about our Personal Financial Services business, which
generates the remaining half of our trust fees and about 50% of our total
revenue and profits. Through an experienced staff that offers a quality of
service unmatched in the marketplace, we provide individual clients with value-
added fiduciary, asset management, tax and estate planning, and private banking
services. We have a broad national presence with a unique network of 47 offices
located in the most affluent areas of five states. These states--Illinois,
Florida, Texas, Arizona and California--have very desirable demographics from
the standpoint of population growth and wealth accumulation. In addition, these
states have a high concentration of established wealth, representing fully one-
third of all wealthy households in the U.S. We are the investment manager for
$34 billion of personal trust assets and administer another $21 billion,
ranking Northern among the top providers in the nation.
Plans for growth in this business call for an accelerated pace of geographic
expansion for the next several years, possibly supplemented by selective
acquisitions. Our most aggressive plans are in Florida, where over the next
three to four years we will nearly double our network to about 30 offices. When
this expansion is completed, Northern will be in reach of 62% of Florida's
total population and over 80% of our target market. We have already begun this
ambitious program. Offices in Delray Beach, Bonita Springs and Tampa are on
schedule to open in late 1995 or early 1996,
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and site selection is underway in several other areas as well. In addition, our
acquisition of Beach Bank closed on March 31. This strategic acquisition
extended Northern's reach up the southeast coast of Florida with two locations
in Vero Beach and a leading position in this new market.
Northern Trust Bank of Florida is a highly profitable operation, earning ROEs
in excess of 30% and ROAs over 2.00%. Florida has grown primarily on a de novo
basis over the past 20 plus years. Our expansion plans here and in other
markets are based on the formula that has proven so successful in Florida,
where profitability of a new office is typically achieved in 18 to 36 months.
In 1994, Northern celebrated its twentieth year in Arizona and, like Florida,
Arizona's profitability now exceeds all of Northern's key financial targets. To
ensure continued growth, we intend to expand our franchise from the current
four locations to eight over the next several years. Plans are now in place for
a new office in early 1996 in Sun City West, and we have identified other
locations for expansion as well.
In Illinois, which includes both our Chicago and suburban offices, we also
plan a stepped up pace of expansion. We opened an office in Highland Park in
April of 1994 and have targeted a number of other affluent suburban
communities, including Barrington and Hinsdale, for new offices. We also intend
to open another Chicago location to build on our inner city presence
established with the opening of the Chicago South Financial Center in December.
We have ramped up marketing efforts in Illinois, highlighted by the attendance
of 4,000 clients and prospects at the newly introduced series of Northern Trust
Forums, featuring prominent speakers. Geographic expansion, coupled with
increased marketing and product development efforts, should lead to an improved
rate of revenue growth in Illinois.
In Texas, the recently announced acquisition of Tanglewood Bank will add an
important level of scale and momentum to our presence in that state. The
addition of Tanglewood Bank, located in an affluent community within Houston,
will more than double the size of our existing Texas franchise and will
accelerate by more than a year our target for profitability in Texas.
Momentum is building in California and we now project that operation will be
profitable in 1995. Through successful marketing efforts and an established
presence, we have increased our visibility in our six California markets and
are now enjoying the benefits of greater name recognition. In 1994 new business
levels were strong and 1995 is on a record setting pace as well. Tight expense
control combined with a growing revenue stream has profitability on the upswing
in California.
Investment management is a key component in both our Corporate and Personal
product lines. Assets under management now total $88 billion, of which we
manage $54 billion for corporate clients. The remaining $34 billion is invested
for individual clients. We are one of the largest investment managers in the
U.S., evidenced in a survey by Pensions & Investments magazine that ranked
Northern 14th at year-end 1993 with assets then under management of $77
billion. Investment management has attractive margins. Based on our wide
ranging capabilities and product offerings designed to meet clients' increasing
asset management needs, we expect this business to be an important factor in
trust fee growth. Revenue growth momentum in this area will be enhanced when
our recently announced acquisition of RCB International is closed later this
year. RCB is a well-known and highly respected international equity investment
advisor with a broad range of expertise and products. The firm is particularly
adept at discovering emerging managers and styles. Through a "manager of
managers" approach, RCB offers a variety of global funds as well as regional
and single country investment funds. Acting as a consultant, RCB offers clients
expertise in development of overall investment strategy, in making asset
allocation and investment decisions, and in ongoing portfolio analysis. This
collaboration with clients is an element of plan outsourcing that I commented
on before as a trend that is gaining momentum in the marketplace. This
acquisition is similar to our Hazlehurst acquisition in that it immediately
expands Northern's capabilities to serve an emerging, high growth segment of
our corporate trust business.
In addition to aggressively pursuing these revenue growth opportunities,
management has two other priorities in 1995. The first is to complete our key
technology initiatives and to positively position our advanced technology in
support of marketing efforts. Technology is fundamental to success in our
business, particularly in the Corporate & Institutional market where investment
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requirements are significant and technological capabilities define competitive
position. We have technology implementation plans in 1995 that culminate
several multi-year efforts, the most notable being our new Trust Management
System, or TMS. In 1995 we will invest over $30 million to complete the
development and implementation of TMS. This implementation will give Northern
the means to strengthen service quality, lower our cost structure, advantage
new product development, and enhance financial and operating controls. A key
aspect of the TMS implementation is the launch of Northern Trust Passport.
Through Passport, we are defining the next generation of on-line information
delivery. Passport provides clients a user-friendly single point of access to
TMS and decision support tools. It also brings clients closer to Northern
Trust and our network of experts and information than ever before.
We already have over 200 client users of Passport, and the feedback from them
is very positive. For example, at PepsiCo, one of our largest clients,
Passport was installed to streamline the data management associated with
administering their defined benefit plan. Changes to participant information
that took up to three weeks can now be completed in one day because Passport
gives on-line access to each of PepsiCo's eight benefit administration sites.
PepsiCo, like many of our clients, was actively involved in the development of
Passport. The collaborative approach used in our product development is
proving itself through a high level of client satisfaction with our new
products. With TMS and Passport, Northern will have the newest and most state-
of-the-art system available, effectively positioning Northern in the market as
a client-responsive technology leader.
The second management priority for 1995 is the implementation of a
disciplined process to reduce our expense base. We have set as our goal the
removal of at least $15 million from the expense base in each of the next
three years, and $50 million in total. This amounts to an annual reduction in
excess of 2% on our 1994 recurring expense base of $671 million. Although
expenses in total are expected to increase over this period, the pace of
expense growth will be significantly slowed. This commitment to base line
expense reduction will enhance productivity performance and earnings per share
while still enabling Northern to invest in important revenue growth
opportunities.
In summary, our outlook is very positive. Our financial goals continue to be
to grow earnings per share in excess of 10% annually, to earn a long-term
return on equity in the 18% to 20% range and a return on assets in excess of
1.00%, and to achieve a productivity ratio of over 150%. Completion of the
Beach Bank acquisition has cleared the way for us to move forward with our
announced plan to buy back four million shares of our common stock. Management
has a clear focus on increasing return on equity, and this share repurchase plan
will importantly supplement our operating results. Our strategies are focused on
those opportunities with the greatest potential for growth and increased
profitability. This, coupled with our initiatives to maximize the benefits from
our technology investments and contain expense growth, should lead to increasing
shareholder value.
Finally, I would like to close with a few personal comments that I know are
shared by all Northern people and our Directors.
This will be Dave Fox's last annual meeting as Chairman and Chief Executive
Officer since Dave is retiring in October after 40 years of service. Each of
those years has been noteworthy for the contributions he has made at every
level, but his leadership as CEO over the past five and one-half years has been
particularly outstanding as the Corporation has continued its uninterrupted
growth in earnings during some very challenging times. Dave has put in place a
lasting emphasis on quality, provided a great balance between tradition and
innovation, and embodied the values that have made Northern special: integrity,
fairness, and an intense focus on client and employee well-being. He is one of
the most respected business and community leaders in Chicago, and his peers in
the banking industry around the world respect his accomplishments and value his
counsel. We have all benefited from his guidance as a leader and warmth as an
individual.
There will be other opportunities in the next six months for those of us who
have worked with and for Dave to expand on these sentiments and, I hope
embarrass him quite a bit. Today, I would simply ask all of you to join me in
expressing to Dave and his wife Mike how much we will miss them, and in
wishing them all the best in his retirement.
