-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DRx2bCgrgJYklHaBlsG39Ul+sFxyMhrIBkFTG2G52wvHbuplNjlstv865703vxgO mIJNzNP7tOpK19M/zXjOBw== 0000950131-97-001800.txt : 19970317 0000950131-97-001800.hdr.sgml : 19970317 ACCESSION NUMBER: 0000950131-97-001800 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970314 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORTHERN TRUST CORP CENTRAL INDEX KEY: 0000073124 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 362723087 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-05965 FILM NUMBER: 97556739 BUSINESS ADDRESS: STREET 1: 50 S LA SALLE ST CITY: CHICAGO STATE: IL ZIP: 60675 BUSINESS PHONE: 3126306000 FORMER COMPANY: FORMER CONFORMED NAME: NORTRUST CORP DATE OF NAME CHANGE: 19780525 10-K 1 FORM 10-K - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------------------------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 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 -------------------------------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $1.66 2/3 Par Value ------------ Preferred Stock Purchase Rights ------------ Floating Rate Capital Securities, Series A of NTC Capital I, Fully and Unconditionally Guaranteed by the Registrant -------------------------------------- Floating Rate Junior Subordinated Debentures, Series A of the Registrant (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] At February 12, 1997, 111,454,205 shares of Common Stock, $1.66 2/3 par value, were outstanding, and the aggregate market value of the Common Stock (based upon the last sale price of the common stock at February 12, 1997, as reported by the Nasdaq Stock Market) held by non-affiliates was approximately $4,326,135,396. Determination of stock ownership by non-affiliates was made solely for the purpose of responding to this requirement and the registrant is not bound by this determination for any other purpose. Portions of the following documents are incorporated by reference: Annual Report to Stockholders for the Fiscal Year Ended December 31, 1996 - Part I and Part II 1997 Notice and Proxy Statement for the Annual Meeting of Stockholders to be held on April 15, 1997 - Part III - -------------------------------------------------------------------------------- 1 - -------------------------------------------------------------------------------- [THIS PAGE INTENTIONALLY LEFT BLANK] - -------------------------------------------------------------------------------- 2 - --------------------------------------------------------------------------------
Northern Trust Corporation FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 INDEX Page PART I Item 1 Business............................................................ 4 Supplemental Item-Executive Officers of the Registrant.............. 22 Item 2 Properties.......................................................... 23 Item 3 Legal Proceedings................................................... 23 Item 4 Submission of Matters to a Vote of Security Holders................. 23 PART II Item 5 Market for Registrant's Common Equity and Related Stockholder Matters............................................................. 24 Item 6 Selected Financial Data............................................. 24 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................... 24 Item 8 Financial Statements and Supplementary Data......................... 24 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................................ 24 PART III Item 10 Directors and Executive Officers of the Registrant.................. 25 Item 11 Executive Compensation.............................................. 25 Item 12 Security Ownership of Certain Beneficial Owners and Management...... 25 Item 13 Certain Relationships and Related Transactions...................... 25 PART IV Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................................................ 26 Signatures.................................................................. 28 Exhibit Index............................................................... 29
- -------------------------------------------------------------------------------- 3 - -------------------------------------------------------------------------------- PART I Item 1--Business NORTHERN TRUST CORPORATION Northern Trust Corporation (Corporation) is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended. The Corporation was organized in Delaware in 1971 and that year became the owner of all of the outstanding capital stock, except directors' qualifying shares of The Northern Trust Company (Bank), an Illinois banking corporation headquartered in the Chicago financial district and the Corporation's principal subsidiary. The Corporation also owns banking subsidiaries in Arizona, California, Florida and Texas, trust companies in Connecticut and New York and various other nonbank subsidiaries, including a securities brokerage firm, a retirement services company and a futures commission merchant. The Corporation expects that although the operations of other subsidiaries will be of increasing significance, the Bank will in the foreseeable future continue to be the major source of the Corporation's assets, revenues and net income. Except where the context otherwise requires, the term "Northern Trust" refers to Northern Trust Corporation and its consolidated subsidiaries. At December 31, 1996, Northern Trust had consolidated total assets of approximately $21.6 billion and stockholders' equity of approximately $1.5 billion. At September 30, 1996 Northern Trust was the second largest bank holding company headquartered in Illinois and the 34th largest in the United States, based on consolidated total assets of approximately $21.4 billion on that date. THE NORTHERN TRUST COMPANY The Bank was founded by Byron L. Smith in 1889 to provide banking and trust services to the public. Currently in its 108th year, the Bank's growth has come primarily from internal sources rather than through merger or acquisition. At December 31, 1996, the Bank had consolidated assets of approximately $18.1 billion. At September 30, 1996, the Bank was the third largest bank in Illinois and the 33rd largest in the United States, based on consolidated total assets of approximately $18.2 billion on that date. The Bank currently has sixteen banking offices in the Chicago metropolitan area and nine active wholly owned subsidiaries: The Northern Trust International Banking Corporation, NorLease, Inc., MFC Company, Inc., Nortrust Nominees Ltd., The Northern Trust Company U.K. Pension Plan Limited, The Northern Trust Company, Canada, Northern Global Financial Services Limited, Northern Trust Trade Services Limited and Northern Trust Fund Managers (Ireland) Ltd. The Northern Trust International Banking Corporation, located in New York, was organized under the Edge Act for the purpose of conducting international business. NorLease, Inc. was established by the Bank to enable it to broaden its leasing and leasing-related lending activities. MFC Company, Inc. holds properties that are received from the Bank in connection with certain problem loans. Nortrust Nominees Ltd., located in London, is a U.K. trust corporation organized to hold U.K. real estate for fiduciary accounts. The Northern Trust Company U.K. Pension Plan Limited, located in London, was established in connection with the pension plan for the Bank's London Branch. The Northern Trust Company, Canada, located in Toronto, was established to offer institutional trust products and services to Canadian entities. Northern Global Financial Services Ltd., located in Hong Kong, provides securities lending and relationship services for large asset custody clients in Asia and the Pacific Rim. Northern Trust Trade Services Limited provides trade finance services, and Northern Trust Fund Managers (Ireland) Ltd. provides fund management services to offshore clients. OTHER NORTHERN TRUST CORPORATION SUBSIDIARIES The Corporation's Florida banking subsidiary, Northern Trust Bank of Florida N.A., headquartered in Miami, at December 31, 1996 had twenty-two offices located throughout Florida, with total assets of approximately $2.3 billion. The Corporation's Arizona banking subsidiary, Northern Trust Bank of Arizona N.A., is headquartered in Phoenix and at December 31, 1996 had total assets of approximately $401 million and served clients from six office locations in Arizona. The Corporation's Texas banking subsidiaries, Northern Trust Bank of Texas N.A., headquartered in Dallas, and Bent Tree National Bank, also headquartered in Dallas, had seven office locations and total assets of approximately $604 million at December 31, 1996. The Corporation's California banking subsidiary, Northern Trust Bank of California N.A., is headquartered in Santa Barbara. At December 31, 1996, it had six office locations and total assets of approximately $437 million. The Corporation has several nonbank subsidiaries. Among them are Northern Trust Securities, Inc. which provides full brokerage services to clients of the Bank and the Corporation's other banking and trust subsidiaries and selectively underwrites general obligation tax-exempt securities. Northern Futures Corporation is a futures commission merchant. Northern Investment Corporation holds certain investments, including a loan made to a developer of a property in which the Bank is the principal tenant. Berry, Hartell, Evers & Osborne, Inc. is an investment management firm in San Francisco, California. The Northern Trust Company of New York provides security clearance services for all nondepository eligible - -------------------------------------------------------------------------------- 4 securities held by trust, agency, and fiduciary accounts administered by the Corporation's subsidiaries. Northern Trust Cayman International, Ltd. provides fiduciary services to clients residing outside of the United States. Northern Trust Retirement Consulting, Inc. is a retirement benefit plan services company in Atlanta, Georgia, and was formerly known as Hazlehurst & Associates, Inc. Northern Trust Global Advisors, Inc. in Stamford, Connecticut (formerly known as RCB International Inc.) is an international provider of institutional investment management services, and the parent of RCB Trust Company. INTERNAL ORGANIZATION Northern Trust, under Chairman and Chief Executive Officer William A. Osborn, organizes client services into two principal business units: Corporate and Institutional Services and Personal Financial Services. In addition, the Worldwide Operations and Technology business unit encompasses all trust and banking operations and systems activities. These three business units, and the Investment Services Group report to President and Chief Operating Officer Barry G. Hastings. Also, a Risk Management unit focuses on financial and risk management. The following is a brief summary of each unit's business activities. Corporate and Institutional Services Corporate and Institutional Services (C&IS), headed by Sheila A. Penrose, Executive Vice President of the Corporation and of the Bank, provides trust, commercial banking and treasury management services to corporate and institutional clients. Trust activities encompass custody services for owners of securities in the United States and foreign markets, as well as securities lending, asset management and related cash management services. Master Trust and Master Custody are the principal products. Services with respect to securities traded in foreign markets are provided primarily through the Bank's London Branch. Related foreign exchange services are also rendered at the London Branch as well as in Chicago and in Singapore. As measured by assets administered and by number of clients, Northern Trust is a leading provider of Master Trust and Master Custody services in various market segments. At December 31, 1996, total assets under administration were $693.7 billion. The major market segments served are large U.S. corporate, institutional (insurance companies, foundations and endowments, and correspondent trust services) and international clients, and public and union retirement funds. The Northern Trust Company of New York, The Northern Trust Company, Canada, NorLease, Inc., The Northern Trust International Banking Corporation, Northern Futures Corporation, Northern Trust Retirement Consulting, Inc., and Northern Trust Global Advisors, Inc. are also included in C&IS. A full range of commercial banking services is offered through the Bank, which places special emphasis on developing institutional relationships in two target markets: large domestic corporations and financial institutions (both domestic and international). Credit services are administered in two groups: a Large Corporate Group and a Financial Institutions Group. Treasury management services are provided to corporations and financial institutions and include lockbox collection, controlled disbursement products and electronic banking, and other products and services to accelerate cash collections, control disbursement outflows, and generate information to manage cash positions. Personal Financial Services Services to individuals is another major dimension of the trust business. Headed by Mark Stevens, Executive Vice President of the Corporation and of the Bank, Personal Financial Services (PFS) encompasses personal trust, estate administration, personal banking, mortgage lending and trust and banking services to individuals and middle market companies. A key element of the personal trust business is to provide private banking and trust services to targeted high net worth individuals in rapidly growing areas of wealth concentration. PFS services are delivered through the Bank and a network of banking subsidiaries located in Arizona, California, Florida and Texas. PFS is one of the largest bank managers of personal trust assets in the United States, with total assets under administration of $85.2 billion at December 31, 1996. Northern Trust Securities, Inc. and Berry, Hartell, Evers & Osborne, Inc. are also part of PFS. Worldwide Operations and Technology Supporting all of Northern Trust's business activities is the Worldwide Operations and Technology Unit. Headed by James J. Mitchell, Executive Vice President of the Corporation and of the Bank, this unit focuses on supporting sales, relationship management, transaction processing and product management activities for C&IS and PFS. - -------------------------------------------------------------------------------- 5 - -------------------------------------------------------------------------------- Investment Services The Investment Services Group, headed by Executive Vice President James M. Snyder, provides equity and fixed income research and portfolio management services to clients of C&IS and PFS. The Group also acts as the investment adviser to the Corporation's two families of mutual funds, the Northern Funds and The Benchmark Funds. Risk Management The Risk Management Unit, headed by Senior Executive Vice President and Chief Financial Officer Perry R. Pero, includes the Credit Policy and Treasury functions. The Credit Policy function is described fully on page 16 of this report. The Treasury Department is responsible for managing the Bank's wholesale funding and interest rate risk, as well as the portfolio of interest rate risk management instruments under the direction of the Corporate Asset and Liability Policy Committee. It is also responsible for the investment portfolios of the Corporation and the Bank and provides investment advice and management services to the subsidiary banks. The Risk Management Unit also includes Corporate Controller, Corporate Treasurer, Investor Relations and Economic Research functions. GOVERNMENT POLICIES The earnings of Northern Trust are affected by numerous external influences, principally general economic conditions, both domestic and international, and actions that the United States and foreign governments and their central banks take in managing their economies. These general conditions affect all of the Northern Trust's businesses, as well as the quality and volume of their loan and investment portfolios. The Board of Governors of the Federal Reserve System is an important regulator of domestic economic conditions and has the general objective of promoting orderly economic growth in the United States. Implementation of this objective is accomplished by its open market operations in United States Government securities, its setting of the discount rate at which member banks may borrow from Federal Reserve Banks and its changes in the reserve requirements for deposits. The policies adopted by the Federal Reserve Board may strongly influence interest rates and hence what banks earn on their loans and investments and what they pay on their savings and time deposits and other purchased funds. Fiscal policies in the United States and abroad also affect the composition and use of Northern Trust's resources. COMPETITION Northern Trust's principal business strategy is to provide quality financial services to targeted market segments in which it believes it has a competitive advantage and favorable growth prospects. As part of this strategy, Northern Trust seeks to deliver a level of service to its clients that distinguishes it from its competitors. In addition, Northern Trust emphasizes the development and growth of recurring sources of fee-based income and is one of only five major bank holding companies in the United States that generates more revenues from fee-based services than from net interest income. Northern Trust seeks to develop and expand its recurring fee-based revenue by identifying selected market niches and providing a high level of individualized service to its clients in such markets. Northern Trust also seeks to preserve its asset quality through established credit review procedures and by maintaining a conservative balance sheet. Finally, Northern Trust seeks to maintain a strong management team with senior officers having broad experience and long tenure. Active competition exists in all principal areas in which the subsidiaries are presently engaged. C&IS and PFS compete with domestic and foreign financial institutions, trust companies, financial companies, personal loan companies, mutual funds and investment advisers. Northern Trust is a leading provider of Master Trust and Master Custody services and has the leading market share in the Chicago area personal trust market. Commercial banking and treasury management services compete with domestic and foreign financial institutions, finance companies and leasing companies. These products also face increased competition due to the general trend among corporations and other institutions to rely more upon direct access to the credit and capital markets (such as through the direct issuance of commercial paper) and less upon commercial banks and other traditional financial intermediaries. The chief local competitors of the Bank for trust and banking business are Bank of America Illinois N.A., First National Bank of Chicago and its affiliate American National Bank and Trust Company of Chicago, Harris Trust and Savings Bank, and LaSalle National Bank. Competitive pressures within the custody market have resulted in consolidation in the industry, and the chief national competitors of the Bank for Master Trust/Master Custody services are now Mellon Bank Corporation, State Street Boston Corporation, Bankers Trust New York Corporation, Chase Manhattan Corporation and Bank of New York Company, Inc. - -------------------------------------------------------------------------------- 6 - -------------------------------------------------------------------------------- REGULATION AND SUPERVISION The Corporation is a bank holding company subject to the Bank Holding Company Act of 1956, as amended (Act), and to regulation by the Board of Governors of the Federal Reserve System. The Act limits the activities which may be engaged in by the Corporation and its nonbanking subsidiaries to those so closely related to banking or managing or controlling banks as to be a proper incident thereto. Also, under section 106 of the 1970 amendments to the Act and subject to certain exceptions, subsidiary banks are prohibited from engaging in certain tie-in arrangements with non-banking affiliates in connection with any extension of credit or provision of any property or services. The Act also prohibits bank holding companies from acquiring substantially all the assets of or owning more than 5% of the voting shares of any bank or nonbanking company which is not already majority owned without prior approval of the Board of Governors. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (Interstate Act) permits an adequately capitalized and adequately managed bank holding company to acquire, with Federal Reserve Board approval, a bank located in a state other than the bank holding company's home state, without regard to whether the transaction is permitted under any state law, except that a host state may establish by statute the minimum age of its banks (up to a maximum of 5 years) subject to acquisition by out-of-state bank holding companies. The Federal Reserve Board may not approve the acquisition if the applicant bank holding company, upon consummation, would control more than 10% of total U.S. insured depository institution deposits or more than 30% of the host state's total insured depository institution deposits. The Interstate Act also permits a bank, with the approval of the appropriate Federal bank regulatory agency, to establish a de novo branch in a state, other than the bank's home state, in which the bank does not presently maintain a branch if the host state has enacted a law that applies equally to all banks and expressly permits all out-of-state banks to branch de novo into the host state. Commencing June 1, 1997, banks having different home states may, with approval of the appropriate Federal bank regulatory agency, merge across state lines, unless the home state of a participating bank has opted-out. In addition, the Interstate Act permits any bank subsidiary of a bank holding company to receive deposits, renew time deposits, close loans, service loans and receive payments on loans and other obligations as agent for a bank or thrift affiliate, whether such affiliate is located in a different state or in the same state. State laws governing the Corporation's banking subsidiaries allow each bank to establish branches anywhere in its state. Under the Federal Deposit Insurance Act (FDIA), an insured depository institution which is commonly controlled with another insured depository institution shall generally be liable for any loss incurred, or reasonably anticipated to be incurred, by the Federal Deposit Insurance Corporation (FDIC) in connection with the default of such commonly controlled institution, or for any assistance provided by the FDIC to such commonly controlled institution, which is in danger of default. The term "default" is defined to mean the appointment of a conservator or receiver for such institution. Thus, any of the Corporation's banking subsidiaries could incur liability to the FDIC pursuant to this statutory provision in the event of a loss suffered by the FDIC in connection with any of the Corporation's other banking subsidiaries (whether due to a default or the provision of FDIC assistance). Such liability is subordinated in right of payment to deposit liabilities, secured obligations, any other general or senior liability and any obligation subordinated to depositors and or other general creditors, other than obligations owed to any affiliate of the depository institution (with certain exceptions) and any obligations to shareholders in such capacity. Although neither the Corporation nor any of its nonbanking subsidiaries may be assessed for such loss under the FDIA, the Corporation has agreed to indemnify each of its banking subsidiaries, other than the Bank, for any payments a banking subsidiary may be liable to pay to the FDIC pursuant to these provisions of the FDIA. The Bank is a member of the Federal Reserve System, its deposits are insured by the FDIC and it is subject to regulation by both these entities, as well as by the Illinois Office of Banks and Real Estate. The Bank is also a member of and subject to the rules of the Chicago Clearinghouse Association, and is registered as a government securities dealer in accordance with the Government Securities Act of 1986. As a government securities dealer its activities are subject to the rules and regulations of the Department of the Treasury. The Bank is registered as a transfer agent with the Federal Reserve and is therefore subject to the rules and regulations of the Federal Reserve in this area. The national bank subsidiaries are members of the Federal Reserve System and the FDIC and are subject to regulation by the Comptroller of the Currency. The Corporation's nonbanking affiliates are all subject to examination by the Federal Reserve. In addition, The Northern Trust Company of New York is subject to regulation by the Banking Department of the State of New York. Northern Futures Corporation, which is registered as a futures commission merchant with the Commodity Futures Trading Commission, is a member of the National Futures Association, the Chicago Board of Trade and the Board of Trade Clearing Corporation, and a clearing member of the Chicago Mercantile Exchange. Northern Trust Securities, Inc. is registered with the Securities and Exchange Commission and is a member of the National Association of Securities Dealers, Inc., and, as such, is subject to the rules and regulations of both these bodies. Berry, Hartell, Evers & Osborne, Inc. and Northern Trust - -------------------------------------------------------------------------------- 7 - -------------------------------------------------------------------------------- Retirement Consulting, Inc. are both registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940 and are subject to that Act and the rules and regulations of the Commission promulgated thereunder. Northern Trust Retirement Consulting, Inc. is also registered as a transfer agent with the Securities and Exchange Commission under the Securities Exchange Act of 1934 and is subject to that Act and the rules and regulations of the Commission promulgated thereunder. Northern Trust Global Advisors, Inc. is subject to regulation by the Securities and Exchange Commission and the Illinois Securities Department. Its subsidiary RCB Trust Company is subject to regulation by the Connecticut Department of Banking. Two families of mutual funds for which the Bank acts as investment adviser are also subject to regulation by the Securities and Exchange Commission under the Investment Company Act. The Bank also acts as investment adviser of an investment company which is subject to regulation by the Central Bank of Ireland under the Companies Act, 1990. Various other subsidiaries and branches conduct business in other states and foreign countries and are subject to their regulations and restrictions. The Corporation and its subsidiaries are affiliates within the meaning of the Federal Reserve Act so that the banking subsidiaries are subject to certain restrictions with respect to loans to the Corporation or its nonbanking subsidiaries and certain other transactions with them or involving their securities. Information regarding these restrictions, and dividend restrictions on banking subsidiaries, is incorporated herein by reference to Note 14 titled "Restrictions on Subsidiary Dividends and Loans or Advances" on page 49 of the Corporation's Annual Report to Stockholders for the year ended December 31, 1996. Under the FDIC's risk-based insurance assessment system, each insured bank is placed in one of nine risk categories based on its level of capital and other relevant information. Each insured bank's insurance assessment rate is then determined by the risk category in which it has been classified by the FDIC. There is currently a twenty-seven basis point spread between the highest and lowest assessment rates, so that banks classified as strongest by the FDIC are subject in 1997 to .013% assessment, and banks classified as weakest by the FDIC are subject to an assessment rate of .283%. The Federal bank regulators have adopted risk-based capital guidelines for bank holding companies and banks. The minimum ratio of qualifying total capital to risk-weighted assets (including certain off-balance sheet items) (Total Capital Ratio) is 8%. At least half of the Total Capital is to be comprised of common stock, retained earnings, noncumulative perpetual preferred stock, minority interests and, for bank holding companies, a limited amount of qualifying cumulative perpetual preferred stock, less certain intangibles including goodwill (Tier 1 capital). The balance may consist of other preferred stock, certain other instruments, and limited amounts of subordinated debt and the loan and lease loss allowance. In addition, the Federal Reserve has established minimum Leverage Ratio (Tier 1 capital to quarterly average total assets) guidelines for bank holding companies and banks. The Federal Reserve's guidelines provide for a minimum Leverage Ratio of 3% for bank holding companies and banks that meet certain specified criteria, including having the highest regulatory rating. All other banking organizations are required to maintain a Leverage Ratio of at least 3% plus an additional cushion of 100 to 200 basis points. The guidelines also provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets. Furthermore, the guidelines indicate that the Federal Reserve will continue to consider a "Tangible Tier 1 Leverage Ratio" in evaluating proposals for expansion or new activities. The Tangible Tier 1 Leverage Ratio is the ratio of Tier 1 capital, less intangibles not deducted from Tier 1 capital, to quarterly average total assets. As of December 31, 1996, the Federal Reserve had not advised the Corporation of any specific minimum Leverage Ratio applicable to it. Federal bank regulators continue to indicate their desire to raise capital requirements applicable to banking organizations. The Federal Reserve has recently added interest rate and market risk components to risk-based capital requirements. In addition to the effects of the provisions described above, the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) substantially revised the depository institution regulatory and funding provisions of the FDIA and made revisions to several other federal banking statutes. Among other things, FDICIA requires the federal banking regulators to take prompt corrective action in respect of FDIC-insured depository institutions that do not meet minimum capital requirements. FDICIA establishes five capital tiers: "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" and "critically undercapitalized." A depository institution's capital tier will depend upon how its capital levels compare to various relevant capital measures and certain other factors, as established by regulation. Under applicable regulations, an FDIC-insured bank is defined to be well capitalized if it maintains a Leverage Ratio of at least 5%, a Tier 1 Capital Ratio (Tier 1 capital to risk-weighted assets) of at least 6% and a Total Capital Ratio of at least 10% and is not otherwise in a "troubled condition" as specified by its appropriate federal regulatory agency. A bank is generally considered to be adequately capitalized if it is not defined to be well capitalized but meets all of its minimum capital requirements, i.e., if it has a Total Capital Ratio of 8% or greater, a Tier 1 capital ratio of 4% or greater and a Leverage Ratio of 4% or greater (or a Leverage Ratio of 3% or greater if - -------------------------------------------------------------------------------- 8 - -------------------------------------------------------------------------------- the institution is rated composite 1 in its most recent report of examination, subject to appropriate federal banking agency guidelines). A bank will be considered undercapitalized if it fails to meet any minimum required measure, significantly undercapitalized if it is significantly below such measure and critically undercapitalized if it maintains a level of tangible equity capital equal to or less than 2% of total assets. A bank may be deemed to be in a capitalization category that is lower than is indicated by its actual capital position if it receives an unsatisfactory examination rating. FDICIA generally prohibits an FDIC-insured depository institution from making any capital distribution (including payment of dividends) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. Undercapitalized depository institutions are subject to growth limitations and are required to submit a capital restoration plan. The federal banking agencies may not accept a capital plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution's capital. In addition, for an undercapitalized depository institution's capital restoration plan to be acceptable, its holding company must guarantee the capital plan up to an amount equal to the lesser of 5% of the depository institution's assets at the time it became undercapitalized or the amount of the capital deficiency when the institution fails to comply with the plan. In the event of the parent holding company's bankruptcy, such guarantee would take priority over the parent's general unsecured creditors. If a depository institution fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized. Significantly undercapitalized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets and cessation of receipt of deposits from correspondent banks. Critically undercapitalized depository institutions are subject to appointment of a receiver or conservator. At December 31, 1996, the Bank and each of the Corporation's other subsidiary banks met or exceeded the minimum regulatory ratios that are one of the conditions for them to be considered to be well capitalized. At December 31, 1996, the Bank had Leverage, Total Capital and Tier 1 Capital Ratios of 6.1%, 10.8% and 7.8%, respectively. FDICIA also contains a variety of other provisions that affect the operations of a bank, including reporting requirements, regulatory standards for real estate lending, "truth in savings" provisions and a requirement that a depository institution give 90 days' prior notice to customers and regulatory authorities before closing any branch. STAFF Northern Trust employed 6,933 full-time equivalent officers and staff members as of December 31, 1996, approximately 5,053 of whom were employed by the Bank. - -------------------------------------------------------------------------------- 9 ================================================================================ STATISTICAL DISCLOSURES The following statistical disclosures, included in the Corporation's Annual Report to Stockholders for the year ended December 31, 1996, are incorporated herein by reference.
1996 Annual Report Schedule Page - ------------------------------------------------------------------------------- Foreign Outstandings................................................ 29 Nonperforming Assets and 90 Day Past Due Loans...................... 30 Analysis of Reserve for Credit Losses............................... 31 Average Balance Sheet............................................... 66 Ratios.............................................................. 66 Analysis of Net Interest Income..................................... 68 - -------------------------------------------------------------------- ------ ================================================================================
Additional statistical information on a consolidated basis is set forth below. Remaining Maturity and Average Yield of Securities Held to Maturity and Available for Sale (Yield on a taxable equivalent basis giving effect of the federal and state tax rates)
December 31, 1996 ------------------------------------------------------------------------------------------ One Year or Less One to Five Years Five to Ten Years Over Ten Years ---------------- ----------------- ----------------- -------------- Average ($ in Millions) Book Yield Book Yield Book Yield Book Yield Maturity - ----------------------------------- ------- ----- -------- ----- -------- ----- ----- ----- -------- Securities Held to Maturity U.S. Government $ 70.8 6.75% $ 2.6 5.27% $ -- -- % $ -- -- % 6 mos. Obligations of States and Political Subdivisions 44.0 11.15 128.4 11.01 109.9 10.51 33.6 8.64 59 mos. Federal Agency 2.0 7.14 16.2 6.32 -- -- -- -- 24 mos. Other--Fixed 9.8 5.04 2.7 3.31 -- -- 19.5 6.02 77 mos. --Floating 1.3 7.75 .8 7.75 .6 6.65 56.2 7.00 116 mos. - ------------------------------------ -------- ------ ------ ----- ------ ----- ------ ----- -------- Total Securities Held to Maturity $ 127.9 8.15% $150.7 10.25% $110.5 10.49% $109.3 7.33% 58 mos. - ------------------------------------ -------- ------ ------ ----- ------ ----- ------ ----- -------- Securities Available for Sale U.S. Government $809.0 5.90% $ 97.7 5.97% $ -- -- % $ -- -- % 7 mos. Obligations of States and Political Subdivisions -- -- .5 9.88 10.0 9.68 106.5 8.32 146 mos. Federal Agency 2,735.5 5.76 296.6 6.15 58.9 6.23 5.9 6.64 6 mos. Other--Fixed 17.2 5.69 12.8 5.66 -- -- -- -- 11 mos. --Floating 4.0 6.17 7.1 6.17 10.7 7.35 139.3 4.44 112 mos. - ------------------------------------ -------- ------ ------ ----- ------ ----- ------ ----- -------- Total Securities Available for Sale $3,565.7 5.79% $414.7 6.10% $ 79.6 6.81% $251.7 6.13% 14 mos. - ------------------------------------ -------- ------ ------ ----- ------ ----- ------ ----- --------
December 31, 1995 ------------------------------------------------------------------------------------------ One Year or Less One to Five Years Five to Ten Years Over Ten Years ---------------- ----------------- ----------------- -------------- Average ($ in Millions) Book Yield Book Yield Book Yield Book Yield Maturity - ----------------------------------- ------- ----- -------- ----- -------- ----- ----- ----- -------- Securities Held to Maturity U.S. Government $ 108.5 6.61% $ 7.6 5.58% $ -- -- % $ -- -- % 5 mos. Obligations of States and Political Subdivisions 48.1 11.44 149.1 11.10 127.3 10.72 42.4 8.72 63 mos. Federal Agency -- -- 22.2 5.96 -- -- -- -- 36 mos. Other--Fixed 8.1 6.98 1.5 9.70 .1 10.49 17.6 6.03 81 mos. --Floating .3 8.00 2.0 8.00 .3 7.08 -- -- 34 mos. - ------------------------------------ -------- ------ -------- ----- ------ ----- ------ ----- -------- Total Securities Held to Maturity $ 165.0 8.04% $182.4 10.20% $127.7 10.71% $ 60.0 7.93% 50 mos. - ------------------------------------ -------- ------ -------- ----- ------ ----- ------ ----- -------- Securities Available for Sale U.S. Government $ 829.7 5.80% $838.0 5.98% $ -- -- % $ -- -- % 12 mos. Obligations of States and Political Subdivisions -- -- -- -- 4.9 9.59 65.3 8.68 155 mos. Federal Agency 2,236.0 6.04 883.2 6.30 27.4 6.42 6.2 6.57 9 mos. Other--Fixed 46.3 5.63 26.3 6.24 -- -- -- -- 12 mos. --Floating 7.7 6.51 7.8 6.51 .6 6.51 156.9 6.62 112 mos. - ------------------------------------ -------- ------ -------- ----- ------ ----- ------ ----- -------- Total Securities Available for Sale $3,119.7 5.97% $1,755.3 6.14% $ 32.9 6.89% $228.4 7.21% 15 mos. - ------------------------------------ -------- ------ -------- ----- ------ ----- ------ ----- -------- ==================================================================================================================================
10
- ------------------------------------------------------------------------------------------------------------------------------------ Securities Held to Maturity and Available for Sale December 31 ------------------------------------------------------ (In Millions) 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------ --------- -------- -------- -------- -------- Securities Held to Maturity U.S. Government $ 73.4 $ 116.1 $ 137.2 $2,343.7 $1,522.8 Obligations of States and Political Subdivisions 315.9 366.9 474.5 493.5 508.5 Federal Agency 18.2 22.2 - 833.1 559.2 Other 90.9 29.9 29.6 120.5 189.0 - ------------------------------------------------------------------------ --------- -------- -------- -------- -------- Total Securities Held to Maturity $ 498.4 $ 535.1 $ 641.3 $3,790.8 $2,779.5 - ------------------------------------------------------------------------ --------- -------- -------- -------- -------- Securities Available for Sale U.S. Government $ 906.7 $1,667.7 $ 801.3 $ - $ 227.6 Obligations of States and Political Subdivisions 117.0 70.2 - - - Federal Agency 3,096.9 3,152.8 3,251.5 40.9 46.1 Other 191.1 245.6 355.0 170.7 126.4 - ------------------------------------------------------------------------ --------- -------- -------- -------- -------- Total Securities Available for Sale $ 4,311.7 $5,136.3 $4,407.8 $ 211.6 $ 400.1 - ------------------------------------------------------------------------ --------- -------- -------- -------- -------- Average Total Securities $ 6,363.8 $6,193.0 $5,000.9 $4,232.0 $3,190.3 - ------------------------------------------------------------------------ --------- -------- -------- -------- -------- Total Securities at Year-End $ 4,814.9 $5,760.3 $5,053.1 $4,038.7 $3,181.2 - ------------------------------------------------------------------------ --------- -------- -------- -------- -------- - ------------------------------------------------------------------------------------------------------------------------------------ Loans and Leases by Type December 31 ------------------------------------------------------ (In Millions) 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------ --------- -------- -------- -------- -------- Domestic Residential Real Estate $ 4,557.5 $3,896.4 $3,299.1 $2,883.3 $2,372.8 Commercial 3,161.4 3,202.1 2,672.0 2,421.1 2,409.0 Broker 389.1 304.0 274.6 249.4 336.3 Commercial Real Estate 557.7 512.6 494.1 506.5 511.2 Consumer 989.8 758.9 662.1 617.5 505.9 Other 632.1 625.5 642.1 453.5 392.0 Lease Financing 267.8 202.3 159.9 138.4 135.2 - ------------------------------------------------------------------------ --------- -------- -------- -------- -------- Total Domestic $10,555.4 9,501.8 8,203.9 7,269.7 6,662.4 International 382.0 404.2 386.7 353.3 273.5 - ------------------------------------------------------------------------ --------- -------- -------- -------- -------- Total Loans and Leases $10,937.4 $9,906.0 $8,590.6 $7,623.0 $6,935.9 - ------------------------------------------------------------------------ --------- -------- -------- -------- -------- Average Loans and Leases $10,332.1 $9,136.0 $8,316.1 $7,297.1 $6,452.9 - ------------------------------------------------------------------------ --------- -------- -------- -------- -------- - ------------------------------------------------------------------------------------------------------------------------------------ Remaining Maturity of Selected Loans and Leases December 31, 1996 ------------------------------------------------------ One Year One to Over Five (In Millions) Total or Less Five Years Years - ------------------------------------------------------------------------ --------- --------- ---------- --------- Domestic (Excluding Residential Real Estate and Consumer Loans) Commercial $3,161.4 $2,340.3 $ 644.4 $ 176.7 Commercial Real Estate 557.7 178.2 315.3 64.2 Other 1,021.2 1,005.2 14.3 1.7 Lease Financing 267.8 41.1 67.7 159.0 - ------------------------------------------------------------------------ -------- -------- -------- -------- Total Domestic 5,008.1 3,564.8 1,041.7 401.6 International 382.0 291.9 67.3 22.8 - ------------------------------------------------------------------------ -------- -------- -------- -------- Total Selected Loans and Leases $5,390.1 $3,856.7 $1,109.0 $ 424.4 - ------------------------------------------------------------------------ -------- -------- -------- -------- Interest Rate Sensitivity of Loans and Leases Fixed Rate $4,033.8 $2,864.6 $ 798.4 $ 370.8 Variable Rate 1,356.3 992.1 310.6 53.6 - ------------------------------------------------------------------------ -------- -------- -------- -------- Total $5,390.1 $3,856.7 $1,109.0 $ 424.4 - ------------------------------------------------------------------------ -------- -------- -------- -------- - ------------------------------------------------------------------------------------------------------------------------------------
11 ================================================================================ Average Deposits by Type
(In Millions) 1996 1995 1994 1993 1992 - ------------------------------------------------- --------- --------- --------- --------- -------- Domestic Offices Demand and Noninterest-Bearing Individuals, Partnerships and Corporations $ 1,801.8 $ 1,651.1 $ 1,540.4 $ 1,487.5 $1,354.1 Correspondent Banks 115.2 129.8 192.2 201.1 199.6 Other 815.9 966.4 859.9 866.3 322.3 - ------------------------------------------------- --------- --------- --------- --------- -------- Total 2,732.9 2,747.3 2,592.5 2,554.9 1,876.0 - ------------------------------------------------- --------- --------- --------- --------- -------- Time Savings and Money Market Deposits $ 3,620.7 $ 3,312.4 $ 3,385.7 $ 3,432.1 $3,372.2 Savings Certificates less than $100,000 1,169.6 1,160.8 699.9 668.6 732.6 Savings Certificates $100,000 and more 892.8 839.5 529.7 504.3 638.2 Other Time 549.2 542.7 412.8 404.7 493.9 - ------------------------------------------------- --------- --------- --------- --------- -------- Total 6,232.3 5,855.4 5,028.1 5,009.7 5,236.9 - ------------------------------------------------- --------- --------- --------- --------- -------- Total Domestic Offices $ 8,965.2 $ 8,602.7 $ 7,620.6 $ 7,564.6 $7,112.9 - ------------------------------------------------- --------- ---------- --------- --------- -------- Foreign Offices Demand $ 347.8 $ 299.1 $ 361.7 $ 65.3 $ 56.2 Time 3,826.2 3,493.4 3,284.8 2,436.4 1,815.6 - ------------------------------------------------- --------- ---------- --------- --------- -------- Total Foreign Offices $ 4,174.0 $ 3,792.5 $ 3,646.5 $ 2,501.7 $1,871.8 - ------------------------------------------------- --------- ---------- --------- --------- --------- Total Deposits $13,139.2 $12,395.2 $11,267.1 $10,066.3 $8,984.7 - ------------------------------------------------- --------- --------- --------- --------- -------- ======================================================================================================================= Average Rates Paid on Time Deposits by Type 1996 1995 1994 1993 1992 - ------------------------------------------------- --------- --------- --------- --------- -------- Time Deposits Savings and Money Market Deposits 3.16% 3.29% 2.52% 2.30% 2.94% Savings Certificates less than $100,000 5.85 6.08 4.77 4.61 5.46 Savings Certificates $100,000 and more 5.67 5.95 4.45 3.91 4.68 Other Time 5.44 5.81 4.50 3.88 5.15 - ------------------------------------------------- --------- --------- --------- --------- -------- Total Domestic Offices 4.23 4.46 3.20 2.89 3.71 - ------------------------------------------------- --------- --------- --------- --------- -------- Total Foreign Offices Time 4.82 5.21 4.18 3.71 5.27 - ------------------------------------------------- --------- --------- --------- --------- -------- Total Time Deposits 4.45% 4.74% 3.58% 3.16% 4.11% - ------------------------------------------------- --------- --------- --------- --------- -------- =======================================================================================================================
Remaining Maturity of Time Deposits $100,000 and more
December 31, 1996 December 31, 1995 --------------------------------- ------------------------------------- Domestic Offices Domestic Offices ---------------------- ------------------------- Certificates Other Foreign Certificates Other Foreign (In Millions) of Deposit Time Offices of Deposit Time Offices - --------------------------------------- ------------- ----- -------- -------------- ----- -------- 3 Months or Less $ 738.6 $ 5.7 $3,466.1 $ 612.1 $ 3.4 $3,193.3 Over 3 through 6 Months 277.5 2.2 30.4 233.8 1.6 23.8 Over 6 through 12 Months 223.1 4.7 8.2 152.2 5.0 13.0 Over 12 Months 205.7 5.4 5.0 268.5 5.9 1.9 - --------------------------------------- ------------- ----- -------- -------------- ----- -------- Total $1,444.9 $18.0 $3,509.7 $1,266.6 $15.9 $3,232.0 - --------------------------------------- ------------- ----- -------- -------------- ----- -------- ==============================================================================================================================
12 =============================================================================== Purchased Funds Federal Funds Purchased (Overnight Borrowings)
($ in Millions) 1996 1995 1994 - ------------------------------- -------- -------- -------- Balance on December 31 $ 653.0 $2,300.1 $ 972.0 Highest Month-End Balance 2,715.2 3,620.1 1,595.9 Year-Average Balance 1,842.2 1,564.0 1,350.7 -Average Rate 5.31% 5.83% 4.11% Average Rate at Year-End 6.03 5.17 4.26 - ------------------------------- -------- -------- --------
Securities Sold under Agreements to Repurchase
($ in Millions) 1996 1995 1994 - ------------------------------- -------- -------- -------- Balance on December 31 $ 966.1 $1,858.7 $2,216.9 Highest Month-End Balance 2,922.2 2,283.0 2,777.1 Year-Average Balance 1,973.3 1,769.7 1,444.3 -Average Rate 5.24% 5.80% 4.28% Average Rate at Year-End 5.69 5.41 5.08 - ------------------------------- -------- -------- --------
Other Borrowings (Includes Treasury Tax and Loan Demand Notes and Term Federal Funds Purchased)
($ in Millions) 1996 1995 1994 - ------------------------------- -------- -------- -------- Balance on December 31 $3,142.1 $ 875.9 $1,077.9 Highest Month-End Balance 4,953.6 3,415.9 3,116.1 Year-Average Balance 1,274.1 1,034.5 1,007.5 -Average Rate 5.07% 5.38% 3.57% Average Rate at Year-End 5.82 3.61 4.71 - ------------------------------- -------- -------- --------
Total Purchased Funds
($ in Millions) 1996 1995 1994 - ------------------------------- -------- -------- -------- Balance on December 31 $4,761.2 $5,034.7 $4,266.8 Year-Average Balance 5,089.6 4,368.2 3,802.5 -Average Rate 5.22% 5.71% 4.03% - ------------------------------- -------- -------- --------
=============================================================================== Commercial Paper
($ in Millions) 1996 1995 1994 - ------------------------------- -------- -------- -------- Balance on December 31 $149.0 $146.7 $123.8 Highest Month-End Balance 153.0 154.4 172.3 Year-Average Balance 143.7 146.0 138.1 -Average Rate 5.40% 5.87% 4.31% Average Rate at Year-End 5.65 5.80 5.73 - ------------------------------- -------- -------- --------
=============================================================================== =============================================================================== 13 Changes in Net Interest Income
1996/95 1995/94 -------------------------------------------------------- Change Due To Change Due To ----------------- ---------------- (Interest on a taxable equivalent basis) (In Millions) Volume Rate Total Volume Rate Total - ------------------------------------------------------------ ------- ------ ------- ------- ------ ------- Increase (Decrease) In Interest Income Money Market Assets Federal Funds Sold and Resell Agreements $ 7.1 $ (1.1) $ 6.0 $ (2.0) $ 3.4 $ 1.4 Time Deposits with Banks 2.8 (10.0) (7.2) (23.5) 17.8 (5.7) Other 2.0 (.1) 1.9 (7.1) 3.0 (4.1) Securities U.S. Government 27.3 (.1) 27.2 (31.8) 28.4 (3.4) Obligations of States and Political Subdivisions (2.0) (4.0) (6.0) (3.3) (2.7) (6.0) Federal Agency (6.5) (23.9) (30.4) 112.4 32.2 144.6 Other (7.5) (.8) (8.3) (.9) 3.3 2.4 Trading Account (3.2) - (3.2) - (.5) (.5) Loans and Leases 80.8 (17.3) 63.5 56.9 73.9 130.8 - ------------------------------------------------------------ ------ ------- ----- ------ ------ ------ Total $100.8 $(57.3) $43.5 $100.7 $158.8 $259.5 - ------------------------------------------------------------ ------ ------- ----- ------ ------ ------ Increase (Decrease) In Interest Expense Deposits Savings and Money Market Deposits $ 9.7 $ (4.5) $ 5.2 $ (2.4) $ 26.2 $ 23.8 Savings Certificates 3.6 (5.1) (1.5) 46.5 17.2 63.7 Other Time .4 (2.0) (1.6) 7.5 5.4 12.9 Foreign Offices Time 16.1 (13.7) 2.4 10.8 34.1 44.9 Federal Funds Purchased 14.7 (8.0) 6.7 12.4 23.3 35.7 Repurchase Agreements 10.7 (9.9) .8 18.9 21.8 40.7 Commercial Paper (.1) (.7) (.8) .5 2.2 2.7 Other Borrowings 12.1 (3.2) 8.9 1.4 18.2 19.6 Senior Notes (6.8) (2.5) (9.3) (23.3) 13.2 (10.1) Notes Payable 6.8 (.8) 6.0 (1.7) .1 (1.6) - ------------------------------------------------------------ ------ ------- ----- ------ ------ ------ Total $67.2 $(50.4) $16.8 $ 70.6 $161.7 $232.3 - ------------------------------------------------------------ ------ ------- ----- ------ ------ ------ Increase (Decrease) In Net Interest Income $33.6 $ (6.9) $26.7 $ 30.1 $ (2.9) $ 27.2 - ------------------------------------------------------------ ------ ------- ----- ------ ------ ------ Note: Changes not due only to volume changes or rate changes are included in the change due to volume column. - ------------------------------------------------------------------------------------------------------------------------------ International Operations (Based on Obligor's Domicile) See also Note 25 titled "International Operations" on page 60 of the Corporation's Annual Report to Stockholders for the year ended December 31, 1996, which is incorporated herein by reference. Selected Average Assets and Liabilities Attributable to International Operations (In Millions) 1996 1995 1994 1993 1992 - ------------------------------------------------------------------ -------- -------- -------- -------- -------- Total Assets $2,365.5 $2,282.0 $2,820.5 $2,328.8 $2,033.0 - ------------------------------------------------------------------ -------- -------- -------- -------- -------- Time Deposits with Banks 1,699.3 1,643.7 2,063.1 1,956.7 1,618.6 Other Money Market Assets .1 .1 .4 .9 38.8 Loans 380.5 344.3 445.5 279.9 287.6 Customers' Acceptance Liability 1.1 1.9 3.0 4.8 3.8 Foreign Investments 23.4 14.3 21.6 29.8 31.4 - ------------------------------------------------------------------ -------- -------- -------- -------- -------- Total Liabilities $4,551.2 $4,163.5 $4,089.4 $2,715.0 $2,125.3 - ------------------------------------------------------------------ -------- -------- -------- -------- -------- Deposits 4,435.7 3,992.2 4,010.6 2,706.2 2,099.0 Liability on Acceptances 1.1 1.9 3.0 4.8 3.8 - ------------------------------------------------------------------ -------- -------- -------- -------- -------- - -------------------------------------------------------------------------------------------------------------------------------
14 ================================================================================ Percent of International Related Average Assets and Liabilities to Total Consolidated Average Assets
1996 1995 1994 1993 1992 - ------------------------------------ ----- ----- ----- ----- ----- Assets 11% 12% 16% 15% 15% - ------------------------------------ ----- ----- ----- ----- ----- Liabilities 22 21 23 17 16 - ------------------------------------ ----- ----- ----- ----- ----- ======================================================================================= Reserve for Credit Losses Relating to International Operations (In Millions) 1996 1995 1994 1993 1992 - ------------------------------------ ----- ----- ----- ----- ----- Balance at Beginning of Year $3.1 $4.6 $6.7 $5.3 $ 6.9 Charge-Offs (.2) (.7) -- (.6) (6.0) Recoveries .5 .5 -- .1 .4 Provision for Credit Losses (.2) (1.3) (2.1) 1.9 4.0 - ------------------------------------ ----- ----- ----- ----- ----- Balance at End of Year $3.2 $3.1 $4.6 $6.7 $ 5.3 - ------------------------------------ ----- ----- ----- ----- -----
The Securities and Exchange Commission requires the disclosure of the reserve for credit losses that is applicable to international operations. The above table has been prepared in compliance with this disclosure requirement and is used in determining international operating performance. The amounts shown in the table should not be construed as being the only amounts that are available for international loan charge-offs, since the entire reserve for credit losses is available to absorb losses on both domestic and international loans. In addition, these amounts are not intended to be indicative of future charge-off trends. ===============================================================================
Distribution of International Loans and Deposits by Type December 31 ------------------------------------------------ Loans 1996 1995 1994 1993 1992 - ------------------------------------ ------ ------ ------ ------ ------ Commercial $226.6 $259.9 $233.8 $157.9 $122.3 Foreign Governments and Official 118.3 103.7 72.8 47.1 26.4 Institutions Banks 22.8 37.3 77.0 145.9 121.9 Other 14.3 3.3 3.1 2.4 2.9 - ------------------------------------ ------ ------ ------ ------ ------ Total $382.0 $404.2 $386.7 $353.3 $273.5 - ------------------------------------ ------ ------ ------ ------ ------
December 31 -------------------------------------- Deposits 1996 1995 1994 - ------------------------------------ -------- -------- -------- Commercial $2,855.4 $2,557.2 $2,817.2 Foreign Governments and Official Institutions 708.6 749.5 803.8 Banks 350.7 415.7 485.2 Other Time 276.2 224.7 182.4 Other Demand 10.7 7.8 8.4 - ------------------------------------ -------- -------- -------- Total $4,201.6 $3,954.9 $4,297.0 - ------------------------------------ -------- -------- -------- =======================================================================================
15 - -------------------------------------------------------------------------------- CREDIT RISK MANAGEMENT Overview The Credit Policy function reports to the Corporation's Chief Financial Officer. Credit Policy provides a system of checks and balances for Northern Trust's diverse credit-related activities by establishing and monitoring all credit-related policies and practices and ensuring their uniform application. These activities are designed to ensure that credit exposure is diversified on an industry and client basis, thus lessening the overall credit risk. Individual credit authority for commercial loans and within Personal Financial Services is limited to specified amounts and maturities. Credit decisions involving commitment exposure in excess of the specified individual limits are submitted to the appropriate Credit Approval Committee (Committee). Each Committee is chaired by the executive in charge of the area and has a Credit Policy officer as a voting participant. Each Committee's credit approval authority is specified, based on commitment levels, credit ratings and maturities. Credits involving commitment exposure in excess of these group credit limits require, dependent upon the internal credit rating, the approval of the Senior Credit Committee, the head of Credit Policy or the business unit head. Credit Policy established the Counterparty Risk Management Committee in order to manage counterparty risk more effectively. This committee has sole credit authority for exposure to all foreign banks, certain domestic banks which Credit Policy deems to be counterparties and which do not have commercial credit relationships within the Corporation, and other organizations which Credit Policy deems to be counterparties. Under the auspices of Credit Policy, country exposure limits are reviewed and approved on a country-by-country basis. As part of the Northern Trust's ongoing credit granting process, internal credit ratings are assigned to each client and credit before credit is extended, based on creditworthiness. Credit Policy performs at least annually a review of selected significant credit exposures to identify at the earliest possible stages clients who might be facing financial difficulties. Internal credit ratings are also reviewed during this process. Above average risk loans, which will vary from time to time, receive special attention by both lending officers and Credit Policy. This approach allows management to take remedial action in an effort to deal with potential problems. An integral part of the Credit Policy function is a monthly formal review of all past due and potential problem loans to determine which credits, if any, need to be placed on nonaccrual status or charged off. The provision is reviewed quarterly to determine the amount necessary to maintain an adequate reserve for credit losses. Management of credit risk is reviewed by various bank regulatory agencies. Independent auditors also perform a review of credit-related procedures, the loan portfolio and other extensions of credit, and the reserve for credit losses as part of their examination of the consolidated financial statements. Allocation of the Reserve for Credit Losses The reserve for credit losses is established and maintained on an overall basis and in practice is not specifically allocated to specific loans or segments of the portfolio. Thus, the reserve is available to absorb credit losses from all loans and leases. Bank disclosure guidelines issued by the Securities and Exchange Commission request management to furnish a breakdown of the reserve for credit losses by loan category and provide the percentage of loans in each category to total loans. Prior to 1994, the allocation of the reserve represented an estimate of the amount that was necessary to provide for potential losses related to specific nonperforming loans only. Beginning in 1994, the methodology was revised to allocate the reserve for credit losses associated with all loans, leases and commitments based on historical loss experience, internal credit ratings and specific amounts designated for certain above average risk loans. Other factors taken into consideration are changes in economic or business conditions, changes in the nature or volume of the loan portfolio including trends in and the severity of past due and classified loans. This allocation method should not be interpreted as an indication of expected losses within the next year or any specified time period. - -------------------------------------------------------------------------------- 16 As required by the Securities and Exchange Commission, the following tables break down the reserve for credit losses: Reserve for Credit Losses
(In Millions) 1996 1995 1994 - --------------------------------------- ------ ------ ------ Allocated Reserve Residential Real Estate $ 7.0 $ 6.0 $ 5.0 Commercial 72.0 85.0 86.0 Commercial Real Estate 5.0 7.0 12.0 Consumer 6.0 8.0 6.0 Other - - - Lease Financing 3.0 3.0 3.0 International 2.0 3.0 3.0 Unallocated Reserve 53.3 35.1 29.8 - --------------------------------------- ------ ------ ------ Total Reserve $148.3 $147.1 $144.8 - --------------------------------------- ------ ------ ------
At December 31, 1993, $.2 million of the reserve was allocated based on an estimate of the amount that was necessary to provide for potential losses related to specific nonperforming loans only, while $145.3 million remained unallocated of the total $145.5 million reserve balance. At December 31, 1992, $11.0 million was so allocated, while $134.5 million remained unallocated of the total $145.5 million reserve balance. - -------------------------------------------------------------------------------- Loan and lease categories as a percent of total loans and leases as of December 31, 1992 through 1996, are presented below. Loan and Lease Category to Total Loans and Leases
1996 1995 1994 1993 1992 - --------------------------------------- ---- ---- ---- ---- ---- Loan and Lease Category Residential Real Estate 42% 39% 38% 38% 34% Commercial 29 32 31 32 35 Commercial Real Estate 5 5 6 6 7 Consumer 9 8 8 8 7 Other 9 10 11 9 11 Lease Financing 2 2 2 2 2 International 4 4 4 5 4 - --------------------------------------- ---- ---- ---- ---- ---- Total 100% 100% 100% 100% 100% - --------------------------------------- ---- ---- ---- ---- ----
- -------------------------------------------------------------------------------- 17 The information presented in the "Credit Risk Management" section should be read in conjunction with the following information that is incorporated herein by reference to the Corporation's Annual Report to Stockholders for the year ended December 31, 1996:
1996 Annual Report Notes to Consolidated Financial Statements Page(s) - ---------------------------------------------------------------- ------------- 1. Accounting Policies F. Interest Risk Management Instruments..................... 40 G. Loans and Leases......................................... 41 H. Reserve for Credit Losses................................ 41 L. Other Real Estate Owned.................................. 41 5. Loans and Leases............................................ 44 6. Reserve for Credit Losses................................... 45 18. Contingent Liabilities...................................... 52 20. Off-Balance Sheet Financial Instruments..................... 54-57 - ---------------------------------------------------------------- Management's Discussion and Analysis of Financial Condition and Results of Operations - ---------------------------------------------------------------- Asset Quality and Credit Risk Management........................ 27-30 - ---------------------------------------------------------------- -------------
In addition, the following schedules on page 15 of this Form 10-K should be read in conjunction with the "Credit Risk Management" section: Reserve for Credit Losses Relating to International Operations Distribution of International Loans and Deposits by Type ================================================================================ 18 INTEREST RATE SENSITIVITY ANALYSIS For the discussion of interest rate sensitivity, see the section entitled "Interest Rate Risk Management" on page 30 of Management's Discussion and Analysis of Financial Condition and Results of Operations of the Corporation's Annual Report to Stockholders for the year ended December 31, 1996, which is incorporated herein by reference. 19 - -------------------------------------------------------------------------------- The following unaudited Consolidated Balance Sheet and Consolidated Statement of Income for The Northern Trust Company were prepared in accordance with generally accepted accounting principles and are provided here for informational purposes. These consolidated financial statements should be read in conjunction with the footnotes accompanying the consolidated financial statements, included in the Corporation's Annual Report to Stockholders for the year ended December 31, 1996, and incorporated herein by reference on page 24 of this report. The Northern Trust Company Consolidated Balance Sheet (unaudited)
December 31 ------------------------- (In Millions) 1996 1995 - ---------------------------------------------- --------- --------- Assets Cash and Due from Banks $ 1,090.4 $ 1,139.3 Federal Funds Sold and Securities Purchased under Agreements to Resell 1,224.9 168.2 Time Deposits with Banks 2,059.7 1,567.4 Other Interest-Bearing 248.0 131.4 Securities Available for Sale 3,983.9 4,274.2 Held to Maturity (Fair Value-$436.1 in 1996 and $322.5 in 1995) 416.9 315.5 Trading account -- 82.4 - ---------------------------------------------- --------- --------- Total Securities 4,400.8 4,672.1 - ---------------------------------------------- --------- --------- Loans Commercial and Other 5,396.7 4,947.0 Residential Mortgages 2,589.5 1,713.5 - ---------------------------------------------- --------- --------- Total Loans and Leases (Net of unearned income-$106.6 in 1996 and $82.4 in 1995) 7,986.2 6,660.5 - ---------------------------------------------- --------- --------- Reserve for Credit Losses (120.9) (114.1) Buildings and Equipment 211.3 197.1 Customers' Acceptance Liability 42.3 32.8 Trust Security Settlement Receivables 362.3 327.1 Other Assets 621.9 448.7 - ---------------------------------------------- --------- --------- Total Assets $18,126.9 $15,230.5 - ---------------------------------------------- --------- --------- Liabilities Deposits Demand and Other Noninterest-Bearing $ 3,010.5 $ 2,320.5 Savings and Money Market Deposits 2,568.6 1,852.0 Savings Certificates 1,299.5 805.3 Other Time 335.0 135.4 Foreign Offices--Demand 411.1 459.8 --Time 3,518.6 3,268.3 - ---------------------------------------------- --------- --------- Total Deposits 11,143.3 8,841.3 - ---------------------------------------------- --------- --------- Federal Funds Purchased 759.6 2,314.7 Securities Sold under Agreements to Repurchase 883.4 1,680.7 Other Borrowings 3,028.9 808.9 Senior Notes 305.0 15.0 Notes Payable 333.9 284.3 Liability on Acceptances 42.3 32.8 Other Liabilities 527.5 387.8 - ---------------------------------------------- --------- --------- Total Liabilities 17,023.9 14,365.5 - ---------------------------------------------- --------- --------- Stockholder's Equity Capital Stock--Par Value $60 213.8 198.0 Surplus 245.3 198.0 Undivided Profits 642.6 468.2 Net Unrealized Gain on Securities Available for Sale 1.3 0.8 - ---------------------------------------------- --------- --------- Total Stockholder's Equity 1,103.0 865.0 - ---------------------------------------------- --------- --------- Total Liabilities and Stockholder's Equity $18,126.9 $15,230.5 - ---------------------------------------------- --------- ---------
- -------------------------------------------------------------------------------- 20
- ------------------------------------------------------------------------------------------------------------------------------ The Northern Trust Companys Consolidated Statement of Income (unaudited) For the Year Ended December 31 -------------------------------- (In Millions) 1996 1995 1994 - ----------------------------------------------------------------------- ------ ------ ------ Interest Income Loans and Leases $489.3 $406.6 $328.4 Securities - Available for Sale 303.7 275.7 164.9 - Held to Maturity 26.1 26.2 28.5 - Trading Account .1 3.3 3.7 - ----------------------------------------------------------------------- ------ ------ ------ Total Securities 329.9 305.2 197.1 - ----------------------------------------------------------------------- ------ ------ ------ Time Deposits with Banks 84.8 92.1 97.8 Federal Funds Sold and Securities Purchased under Agreements to Resell and Other 36.7 17.4 18.2 - ----------------------------------------------------------------------- ------ ------ ------ Total Interest Income 940.7 821.3 641.5 - ----------------------------------------------------------------------- ------ ------ ------ Interest Expense Deposits 373.6 317.0 225.5 Federal Funds Purchased 99.0 94.9 57.4 Securities Sold under Agreements to Repurchase 99.1 94.4 57.2 Other Borrowings 60.9 51.7 33.9 Senior Notes 14.4 23.5 33.6 Notes Payable 19.5 17.0 15.6 - ----------------------------------------------------------------------- ------ ------ ------ Total Interest Expense 666.5 598.5 423.2 - ----------------------------------------------------------------------- ------ ------ ------ Net Interest Income 274.2 222.8 218.3 Provision for Credit Losses 7.4 4.8 4.9 - ----------------------------------------------------------------------- ------ ------ ------ Net Interest Income after Provision for Credit Losses 266.8 218.0 213.4 - ----------------------------------------------------------------------- ------ ------ ------ Noninterest Income Trust Fees 397.8 348.3 326.7 Treasury Management Fees 54.2 48.3 44.7 Foreign Exchange Trading Profits 58.7 55.1 35.9 Security Commissions and Trading Income .9 .1 (.4) Other Operating Income 36.8 33.3 63.1 Investment Security Gains (Losses) .4 .6 (.1) - ----------------------------------------------------------------------- ------ ------ ------ Total Noninterest Income 548.8 485.7 469.9 - ----------------------------------------------------------------------- ------ ------ ------ Income before Noninterest Expenses 815.6 703.7 683.3 - ----------------------------------------------------------------------- ------ ------ ------ Noninterest Expenses Salaries 258.3 240.7 229.1 Pension and Other Employee Benefits 52.3 58.6 55.7 Occupancy Expense 45.9 40.2 39.2 Equipment Expense 45.3 39.7 48.6 Other Operating Expenses 131.3 108.9 124.1 - ----------------------------------------------------------------------- ------ ------ ------ Total Noninterest Expenses 533.1 488.1 496.7 - ----------------------------------------------------------------------- ------ ------ ------ Income before Income Taxes 282.5 215.6 186.6 Provision for Income Taxes 90.5 67.7 56.5 - ----------------------------------------------------------------------- ------ ------ ------ Net Income $192.0 $147.9 $130.1 - ----------------------------------------------------------------------- ------ ------ ------ Dividends Paid to the Corporation 80.0 89.0 48.0 - ----------------------------------------------------------------------- ------ ------ ------ - ------------------------------------------------------------------------------------------------------------------------------
21 Supplemental Item--Executive Officers of the Registrant WILLIAM A. OSBORN Mr. Osborn became Chairman of the Board of the Corporation and the Bank in October 1995, and Chief Executive Officer of the Corporation and the Bank in June 1995. He held the title of President of the Corporation and the Bank from January 1994 through September 1995 and Chief Operating Officer from January 1994 through June 1995. He was a Senior Executive Vice President of the Corporation and the Bank from November 1992 through 1993 and prior to that time had served as an Executive Vice President of the Bank since 1987, and of the Corporation since 1989. Mr. Osborn, 49, began his career with the Bank in 1970. BARRY G. HASTINGS Mr. Hastings became President of the Corporation and the Bank in October 1995, and Chief Operating Officer of the Corporation and the Bank in June 1995. He held the title of Vice Chairman of the Corporation and the Bank from January 1994 through June 1995. He was a Senior Executive Vice President of the Corporation and the Bank from November 1992 through 1993 and prior to that time had served as an Executive Vice President of the Bank since 1987, and of the Corporation since 1990. Mr. Hastings, 49, began his career with the Corporation in 1974. DAVID L. EDDY Mr. Eddy became a Senior Vice President of the Corporation and the Bank and Treasurer of the Corporation in 1986. Mr. Eddy, 60, joined the Bank in 1960. JAMES J. MITCHELL Mr. Mitchell was appointed an Executive Vice President of the Bank in December 1987 and of the Corporation in October 1994, and is currently head of the Worldwide Operations and Technology business unit. Mr. Mitchell, 54, joined the Bank in 1964. SHEILA A. PENROSE Ms. Penrose became an Executive Vice President of the Bank in November 1993 and of the Corporation in November 1994, and is currently head of the Corporate & Institutional Services business unit. From 1986 until 1993, she had been Senior Vice President of the Bank. Ms. Penrose, 51, began her career with the Corporation in 1977. PERRY R. PERO Mr. Pero is Chief Financial Officer of the Corporation and the Bank and Cashier of the Bank. Mr. Pero is also head of the Risk Management Unit and Chairman of the Corporate Asset and Liability Policy Committee. He became a Senior Executive Vice President of the Corporation and the Bank in 1992 after serving as an Executive Vice President of the Corporation and the Bank since 1987. Mr. Pero, 57, joined the Bank in 1964. PETER L. ROSSITER Mr. Rossiter was appointed General Counsel and Secretary of the Corporation and the Bank in April 1993. He joined the Corporation and the Bank in 1992 as an Executive Vice President and Associate General Counsel. Mr. Rossiter, 48, had been a partner in the law firm of Schiff Hardin & Waite from 1979 to 1992. HARRY W. SHORT Mr. Short was appointed Senior Vice President and Controller of the Corporation and the Bank in October 1994. He joined the Corporation and the Bank in January 1990 and served as Senior Vice President and General Auditor. Mr. Short, 48, had been a partner in the accounting firm of KPMG Peat Marwick from 1982 to 1990. 22 JAMES M. SNYDER Mr. Snyder was appointed Executive Vice President of the Corporation and the Bank in November 1996 and is currently the Chief Investment Officer. He had been a Senior Vice President of the Bank from 1991 to 1996. Mr. Snyder, 50, joined the Bank in 1969. MARK STEVENS Mr. Stevens was appointed an Executive Vice President of the Corporation and the Bank in February 1996, and at that time became head of the Personal Financial Services business unit. He served as Chief Executive Officer of Northern Trust Bank of Florida N.A., from 1987 to 1996. Mr. Stevens, 49, joined the Corporation in 1979. WILLIAM S. TRUKENBROD Mr. Trukenbrod was appointed an Executive Vice President of the Corporation and the Bank in February 1994, and is currently Chairman of the Credit Policy Committee. Previously, he served as head of the U.S. Corporate Group of Commercial Banking from 1987 to 1992. He had been a Senior Vice President of the Bank since 1980 and of the Corporation since 1992. Mr. Trukenbrod, 57, joined the Bank in 1962. There is no family relationship between any of the above executive officers and directors. The positions of Chairman of the Board, Chief Executive Officer, President and Vice Chairman are elected annually by the Board of Directors at the first meeting of the Board of Directors held after each annual meeting of stockholders. The other officers are appointed annually by the Board. Officers continue to hold office until their successors are duly elected or until their death, resignation or removal by the Board. Item 2-Properties The executive offices of the Corporation and the Bank are located at 50 South LaSalle Street in the financial district of Chicago. This Bank-owned building is occupied by various divisions of Northern Trust's business units. Financial services are provided by the Bank at this location. Adjacent to this building are two office buildings in which the Bank leases approximately 332,000 square feet of space principally for staff divisions of the business units. The Bank also leases approximately 112,000 square feet of a building at 125 South Wacker Drive in Chicago for computer facilities, banking operations and personal banking services. Financial services are also provided by the Bank at fourteen other Chicago metropolitan area locations, five of which are owned and nine of which are leased. The Bank's trust and banking operations are located in a 465,000 square foot facility at 801 South Canal Street in Chicago. The building is leased by the Corporation under terms that qualify as a capital lease. Space for the Bank's London Branch, Edge Act subsidiary and The Northern Trust Company, Canada are leased. The Corporation's other subsidiaries operate from 49 locations, 10 of which are owned and 39 of which are leased. Detailed information regarding the addresses of all Northern Trust's locations can be found on pages 74 and 75 in the Corporation's Annual Report to Stockholders for the year ended December 31, 1996, which is incorporated herein by reference. The facilities which are owned or leased are suitable and adequate for business needs. For additional information relating to properties and lease commitments, refer to Note 8 titled "Buildings and Equipment" and Note 9 titled "Lease Commitments" on pages 45 and 46 of the Corporation's Annual Report to Stockholders for the year ended December 31, 1996, which information is incorporated herein by reference. Item 3-Legal Proceedings The information called for by this item is incorporated herein by reference to Note 18 titled "Contingent Liabilities" on page 52 of the Corporation's Annual Report to Stockholders for the year ended December 31, 1996. Item 4-Submission of Matters to a Vote of Security Holders None. 23 PART II Item 5--Market for Registrant's Common Equity and Related Stockholder Matters The information called for by this item is incorporated herein by reference to the section of the Consolidated Financial Statistics titled "Common Stock Dividend and Market Price" on pages 70 and 71 of the Corporation's Annual Report to Stockholders for the year ended December 31, 1996. Information regarding dividend restrictions of the Corporation's banking subsidiaries is incorporated herein by reference to Note 14 titled "Restrictions on Subsidiary Dividends and Loans or Advances" on page 49 of the Corporation's Annual Report to Stockholders for the year ended December 31, 1996. Item 6--Selected Financial Data The information called for by this item is incorporated herein by reference to the table titled "Summary of Selected Consolidated Financial Data" on page 18 of the Corporation's Annual Report to Stockholders for the year ended December 31, 1996. Item 7--Management's Discussion and Analysis of Financial Condition and Results of Operations The information called for by this item is incorporated herein by reference to "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 18 through 35 of the Corporation's Annual Report to Stockholders for the year ended December 31, 1996. Item 8--Financial Statements and Supplementary Data The following financial statements of the Corporation and its subsidiaries included in the Corporation's Annual Report to Stockholders for the year ended December 31, 1996, are incorporated herein by reference.
1996 Annual Report For Northern Trust Corporation and Subsidiaries: Page(s) - ----------------------------------------------------------------------------------- -------------- Consolidated Balance Sheet--December 31, 1996 and 1995............................ 36 Consolidated Statement of Income--Years Ended December 31, 1996, 1995 and 1994.... 37 Consolidated Statement of Changes in Stockholders' Equity--Years Ended December 31, 1996, 1995 and 1994........................................................... 38 Consolidated Statement of Cash Flows--Years Ended December 31, 1996, 1995 and 1994.............................................................................. 39 - ----------------------------------------------------------------------------------- -------------- For Northern Trust Corporation (Corporation Only) - ----------------------------------------------------------------------------------- -------------- Condensed Balance Sheet--December 31, 1996 and 1995............................... 62 Condensed Statement of Income--Years Ended December 31, 1996, 1995 and 1994....... 62 Consolidated Statement of Changes in Stockholders' Equity--Years Ended December 31, 1996, 1995 and 1994........................................................... 38 Condensed Statement of Cash Flows--Years Ended December 31, 1996, 1995 and 1994... 63 - ----------------------------------------------------------------------------------- -------------- Notes to Consolidated Financial Statements........................................ 40-63 - ----------------------------------------------------------------------------------- -------------- Report of Independent Public Accountants.......................................... 64 - ----------------------------------------------------------------------------------- --------------
The section titled "Quarterly Financial Data" on pages 70 and 71 of the Corporation's Annual Report to Stockholders for the year ended December 31, 1996, is incorporated herein by reference. Item 9--Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 24 PART III Item 10-Directors and Executive Officers of the Registrant The information called for by Item 10, relating to Directors and Nominees for election to the Board of Directors, is incorporated herein by reference to pages 2 through 5 of the Corporation's definitive 1997 Notice and Proxy Statement filed on March 10, 1997 in connection with the solicitation of proxies for the Annual Meeting of Stockholders to be held April 15, 1997. The information called for by Item 10 relating to Executive Officers is set forth in Part I of this Annual Report on Form 10-K. Item 11-Executive Compensation The information called for by this item is incorporated herein by reference to pages 8 and 9 and pages 10 through 17 of the Corporation's definitive 1997 Notice and Proxy Statement filed in connection with the solicitation of proxies for the Annual Meeting of Stockholders to be held April 15, 1997. Item 12-Security Ownership of Certain Beneficial Owners and Management The information called for by this item is incorporated herein by reference to pages 6 and 7 of the Corporation's definitive 1997 Notice and Proxy Statement filed in connection with the solicitation of proxies for the Annual Meeting of Stockholders to be held April 15, 1997. Item 13-Certain Relationships and Related Transactions The information called for by this item is incorporated herein by reference to page 9 of the Corporation's definitive 1997 Notice and Proxy Statement filed in connection with the solicitation of proxies for the Annual Meeting of Stockholders to be held April 15, 1997. 25 - -------------------------------------------------------------------------------- PART IV Item 14--Exhibits, Financial Statement Schedules, and Reports on Form 8-K Item 14(a)(1) and (2)-- Northern Trust Corporation and Subsidiaries List of Financial Statements and Financial Statement Schedules The following financial information is set forth in Item 1 for informational purposes only: Financial Information of The Northern Trust Company (Bank Only): Unaudited Consolidated Balance Sheet--December 31, 1996 and 1995. Unaudited Consolidated Statement of Income--Years Ended December 31, 1996, 1995 and 1994. The following consolidated financial statements of the Corporation and its subsidiaries are incorporated by reference into Item 8 from the Corporation's Annual Report to Stockholders for the year ended December 31, 1996: Consolidated Financial Statements of Northern Trust Corporation and Subsidiaries: Consolidated Balance Sheet--December 31, 1996 and 1995. Consolidated Statement of Income--Years Ended December 31, 1996, 1995 and 1994. Consolidated Statement of Changes in Stockholders' Equity--Years Ended December 31, 1996, 1995 and 1994. Consolidated Statement of Cash Flows--Years Ended December 31, 1996, 1995 and 1994. The following financial information is incorporated by reference into Item 8 from the Corporation's Annual Report to Stockholders for the year ended December 31, 1996: Financial Statements of Northern Trust Corporation (Corporation): Condensed Balance Sheet--December 31, 1996 and 1995. Condensed Statement of Income--Years Ended December 31, 1996, 1995 and 1994. Consolidated Statement of Changes in Stockholders' Equity--Years Ended December 31, 1996, 1995 and 1994. Condensed Statement of Cash Flows--Years Ended December 31, 1996, 1995 and 1994. The Notes to Consolidated Financial Statements as of December 31, 1996, incorporated by reference into Item 8 from the Corporation's Annual Report to Stockholders for the year ended December 31, 1996, pertain to the Bank only information, consolidated financial statements and Corporation only information listed above. The Report of Independent Public Accountants incorporated by reference into Item 8 from the Corporation's Annual Report to Stockholders for the year ended December 31, 1996 pertains to the consolidated financial statements and Corporation only information listed above. Financial statement schedules have been omitted for the reason that they are not required or are not applicable. Item 14(a)3--Exhibits The exhibits listed on the Exhibit Index beginning on page 29 of this Form 10-K are filed herewith or are incorporated herein by reference to other filings. Item 14(b)--Reports on Form 8-K In a report on Form 8-K dated October 16, 1996, Northern Trust incorporated by reference in Item 5 its October 15, 1996 press release, reporting on its earnings for the third quarter and nine months of 1996. The press release, with summary financial information, was filed pursuant to Item 7 of the Form 8-K. - -------------------------------------------------------------------------------- 26 - -------------------------------------------------------------------------------- In a report on Form 8-K dated November 19, 1996, Northern Trust incorporated by reference in Item 5, its November 19, 1996 press release, reporting its Board of Directors had declared a 2-for-1 split of the common stock of the Corporation, to be effected December 9, 1996 by means of a 100% stock distribution. The Corporation also announced the declaration of a quarterly cash dividend on shares of its common stock outstanding after the split in the amount of 18 cents per share. The press release also reported that the Board of Directors had increased the Corporation's common stock buyback authorization by approximately 2.1 million shares, thus allowing the purchase in the future of up to an aggregate of 2.5 million shares of the Corporation's common stock (5 million shares post-split). The press release exhibit was filed pursuant to Item 7 of the Form 8-K. - -------------------------------------------------------------------------------- 27 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Form 10-K Report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 14, 1997 Northern Trust Corporation (Registrant) By William A. Osborn ------------------------------- William A. Osborn Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Form 10-K Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. Signature Title --------- ----- William A. Osborn - ---------------------------- Chairman of the Board, William A. Osborn Chief Executive Officer and Director Perry R. Pero - ---------------------------- Senior Executive Vice President Perry R. Pero and Chief Financial Officer Harry W. Short - ---------------------------- Senior Vice President and Controller Harry W. Short (Chief Accounting Officer) Dolores E. Cross Director Robert S. Hamada Director Barry G. Hastings Director Robert A. Helman Director Arthur L. Kelly Director Robert D. Krebs Director William G. Mitchell Director Edward J. Mooney Director Harold B. Smith Director William D. Smithburg Director Bide L. Thomas Director By: Peter L. Rossiter ---------------------------- Peter L. Rossiter Attorney-in-Fact Date: March 14, 1997 28 EXHIBIT INDEX The following Exhibits are filed herewith or are incorporated herein by reference.
Exhibit Incorporated By Reference to Exhibit of Same Name Exhibit in Prior Filing* Number Description or Filed Herewith - ------- ------------------------------------------------- ------------------- (3) Articles of Incorporation and By-laws (i) Amendment to Restated Certificate of Incorporation of Northern Trust Corporation.................................. Filed Herewith (ii) Restated Certificate of Incorporation of Northern Trust Corporation as amended to date...................................... Filed Herewith (iii) Amendment to By-laws of the Corporation and By-laws as amended....................... (9) (4) Instruments Defining the Rights of Security Holders (i) Form of The Northern Trust Company's Global Senior Bank Note (Fixed Rate)................ (1) (ii) Form of The Northern Trust Company's Global Senior Bank Note (Floating Rate)............. (1) (iii) Form of The Northern Trust Company's Global Subordinated Medium-Term Bank Note (Fixed Rate)................................. (1) (iv) Form of The Northern Trust Company's Global Subordinated Medium-Term Bank Note (Floating Rate).............................. (1) (v) Junior Subordinated Indenture, dated as of January 1, 1997, between Northern Trust Corporation and The First National Bank of Chicago, as Debenture Trustee................ (12) (10) Material Contracts (i) Northern Trust Corporation Amended Incentive Stock Plan, as amended May 20, 1986 **....... (2) (1) Amendment dated November 1, 1996......... (11) (ii) Long-Term Performance Stock Plan of Northern Trust Corporation, as amended April 19, 1988 **...................................... (3) (iii) Lease dated July 1, 1988 between American National Bank & Trust Company of Chicago as Trustee under Trust Agreement dated February 12, 1986 and known as Trust No. 66603 (Landlord) and Nortrust Realty Management, Inc. (Tenant)................................ (3) (iv) Restated Northern Trust Employee Stock Ownership Plan, dated January 1, 1989 as amended to date......................................... (11) (v) Amended Trust Agreement between The Northern Trust Company and Citizens and Southern Trust Company (Georgia), N.A., (predecessor of NationsBank) dated January 26, 1989............ (11) (vi) Form of Note Agreement dated January 26, 1989 between ESOP Trust and each of the institutional lenders, with respect to the 8.23% Notes of the ESOP Trust................................... (4) 29
- -------------------------------------------------------------------------------- (vii) Guaranty Agreement of Registrant with respect to the 8.23% Notes of the ESOP Trust, dated January 26, 1989................. (4) (viii) Share Acquisition Agreement between Registrant and the ESOP Trust, dated January 26, 1989.............................. (4) (ix) Implementation Agreement dated June 26, 1996 between the Registrant, The Northern Trust Company, the ESOP Trust and NationsBank (South) N.A. as Trustee....................... (10) (x) Term Loan Agreement between the ESOP Trust and the Registrant dated June 28, 1996........ (10) (xi) Restated Trust Agreement dated June 18, 1996, between The Northern Trust Company and Harris Trust & Savings Bank regarding the Supplemental Employee Stock Ownership Plan for Employees of The Northern Trust Company, the Supplemental Thrift-Incentive Plan for Employees of The Northern Trust Company and the Supplemental Pension Plan for Employees of The Northern Trust Company**..................................... (11) (xii) Supplemental Employee Stock Ownership Plan for Employees of The Northern Trust Company as amended and restated as of April 30, 1996**... (11) (xiii) Supplemental Thrift-Incentive Plan for Employees of The Northern Trust Company as amended and restated as of April 30, 1996**... (11) (xiv) Supplemental Pension Plan for Employees of The Northern Trust Company as amended and restated as of April 30, 1996**............... (11) (xv) Rights Agreement, dated as of October 17, 1989, between Northern Trust Corporation and Harris Trust & Savings Bank.......................... (5) (xvi) Amendments effective September 30, 1996 to the Northern Trust Employee Stock Ownership Plan for certain former employees of First Chicago NBD Corporation....................... Filed Herewith (xvii) Lease dated August 27, 1985 between American National Bank & Trust Company of Chicago as Trustee under Trust Agreement dated April 5, 1990 and known as Trust No. 110513-07 (Landlord) and The Northern Trust Company (Tenant), as amended.......................... (6) (1) First Amendment to Agreement of Lease dated August 15, 1986..................... (8) (2) Second Amendment to Agreement of Lease dated August 6, 1987...................... (8) (3) Third Amendment to Agreement of Lease dated May 20, 1988........................ (8) (4) Fourth Amendment to Agreement of Lease dated May 1, 1990......................... (8) (5) Fifth Amendment to Agreement of Lease dated January 12, 1995.................... (8) (6) Sixth Amendment to Agreement of Lease dated November 30, 1995................... (8) (xviii) Lease dated July 8, 1987 between American National Bank & Trust Company of Chicago as Trustee under Trust Agreement dated July 12, 1984 and known as Trust No. 61523 (Landlord) and The Northern Trust Company (Tenant), as amended.................................... (6) (1) First Amendment to Office Lease dated October 20, 1987.......................... Filed Herewith (xix) Amended 1992 Incentive Stock Plan**........... (7) (1) Amendment dated November 1, 1996.......... (11) (xx) Northern Trust Corporation (1996) Management Performance Plan**............................ (9) (xxi) Northern Trust Corporation (1996) Annual Performance Plan**............................ (9) (xxii) Form of Employment Security Agreement dated March 1, 1996 entered into between Northern Trust Corporation and each of 7 executive officers - as amended**....................... (10) (xxiii) Form of Employment Security Agreement dated May 21, 1996 entered into between Northern Trust Corporation and each of 30 officers**... (10) - -------------------------------------------------------------------------------- 30 - -------------------------------------------------------------------------------- (xxiv) Form of Employment Security Agreement dated May 21, 1996 entered into between Northern Trust Corporation and each of 14 officers**................................. (10) (xxv) Amended and Restated Trust Agreement of NTC Capital I, dated as of January 16, 1997, among Northern Trust Corporation, as Depositor, The First National Bank of Chicago, as Property Trustee, First Chicago Delaware, Inc., as Delaware Trustee, and the Administrative Trustees named therein................................. (12) (xxvi) Guarantee Agreement, dated as of January 16, 1997, relating to NTC Capital I, by and between Northern Trust Corporation, as Guarantor, and The First National Bank of Chicago, as Guarantee Trustee................. (12) (11) Computation of Per Share Earnings..................... Filed Herewith (13) 1996 Annual Report to Stockholders.................... Filed Herewith (21) Subsidiaries of the Registrant........................ Filed Herewith (23) Consent of Independent Public Accountants............. Filed Herewith (24) Powers of Attorney.................................... Filed Herewith (27) Financial Data Schedule............................... Filed Herewith - -------------------------------------------------------------------------------- 31 - -------------------------------------------------------------------------------- *Prior Filings (File No. 0-5965, except as noted) (1) Quarterly Report on Form 10-Q for the quarter ended September 30, 1995 (2) Quarterly Report on Form 10-Q for the quarter ended September 30, 1986 (3) Annual Report on Form 10-K for the year ended December 31, 1988 (4) Form 8-K dated January 26, 1989 (5) Form 8-A dated October 30, 1989 (6) Annual Report on Form 10-K for the year ended December 31, 1990 (7) Quarterly Report on Form 10-Q for the quarter ended March 31, 1995 (8) Annual Report on Form 10-K for the year ended December 31, 1995 (9) Quarterly Report on Form 10-Q for the quarter ended March 31, 1996 (10) Quarterly Report on Form 10-Q for the quarter ended June 30, 1996 (11) Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 (12) Form 8-K dated January 16, 1997 ** Denotes management contract or compensatory plan or arrangement Upon written request to Peter L. Rossiter, Secretary, Northern Trust Corporation, 50 South LaSalle Street, Chicago, Illinois 60675, copies of exhibits listed above are available to Northern Trust Corporation stockholders by specifically identifying each exhibit desired in the request. Pursuant to Item 601(b)(4)(iii) of Regulation S-K, the Corporation hereby agrees to furnish the Commission, upon request, any instrument defining the rights of holders of long-term debt of the Corporation not filed as an exhibit herein. No such instrument authorizes long-term debt securities in excess of 10% of the total assets of the Corporation and its subsidiaries on a consolidated basis. - -------------------------------------------------------------------------------- 32 EX-3.(I) 2 CERTIFICATE OF ELIMINATION EXHIBIT NUMBER (3)(i) To 1996 FORM 10-K CERTIFICATE OF ELIMINATION OF NORTHERN TRUST CORPORATION L, Peter L. Rossiter, Executive Vice President, General Counsel and Secretary of Northern Trust Corporation, a corporation organized and existing under the General Corporation Law of the State of Delaware, do hereby certify as follows: FIRST: That the Board of Directors of Northern Trust Corporation (the "Corporation"), by resolutions adopted at a meeting on February 20, 1996, determined to eliminate all of the 6.25% Cumulative Convertible Preferred Stock, Series E, of the Corporation, said resolutions being as follows: WHEREAS, the Corporation redeemed all of the outstanding shares of its 6.25% Cumulative Convertible Preferred Stock, Series E (the "Series E Preferred Stock"), on January 26, 1996; NOW, THEREFORE, BE IT RESOLVED, that the Series E Preferred Stock be returned to the status of "authorized but not issued," and that the Chairman of the Board, the President or any Executive or Senior Executive Vice President, or any one of them acting alone, be, and each of them hereby is, authorized and directed, in the name and on behalf of the Corporation, to execute and cause to filed with the Secretary of State of Delaware, a Certificate of Elimination, and to execute all other instruments and documents and to do and cause to be done all such further acts and things, as may be necessary or advisable to eliminate the Series E Preferred Stock and that all actions of said officers are hereby ratified, approved and confirmed in all respects; and BE IT FURTHER RESOLVED, that none of the authorized shares of the Series E Preferred Stock are outstanding and none will be issued. SECOND: In accordance with the provisions of Section 151 of the General Corporation Law of the State of Delaware, the Restated Certificate of Incorporation is hereby amended to eliminate all reference to the Series E Preferred Stock, and the Series E Preferred Stock shall be returned to the status of "authorized but not issued." IN WITNESS WHEREOF, I have signed this Certificate, this 21st day of February, 1996. NORTHERN TRUST CORPORATION By: /s/ Peter L. Rossiter -------------------------- Peter L. Rossiter Executive Vice President, General Counsel and Secretary 2 EX-3.(II) 3 RESTATED CERTIFICATION OF INCORPORATION EXHIBIT NUMBER (3)(ii) TO 1996 FORM 10-K RESTATED CERTIFICATE OF INCORPORATION OF NORTHERN TRUST CORPORATION NORTHERN TRUST CORPORATION, a Corporation organized and existing under the laws of the State of Delaware, hereby certifies as follows: 1. The name of the Corporation is Northern Trust Corporation. The date of filing its original Certificate of Incorporation, under the name Nortrust Corporation, with the Secretary of State was August 23, 1971. 2. This Restated Certificate of Incorporation restates and integrates and does not further amend the provisions of the Certificate of Incorporation as heretofore amended of this Corporation, and there is no discrepancy between this Restated Certificate of Incorporation and the Certificate of Incorporation as heretofore amended of this Corporation. 3. The text of the Certificate of Incorporation is restated hereby to read as herein set forth in full: RESTATED CERTIFICATE OF INCORPORATION OF NORTHERN TRUST CORPORATION ARTICLE FIRST Name The name of the Corporation is Northern Trust Corporation. ARTICLE SECOND Registered Office The address of its registered office in the State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle. The name of its registered agent at such address is The Corporation Trust Company. ARTICLE THIRD Purposes The nature of the business to be conducted or promoted and the purposes of the Corporation are to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. ARTICLE FOURTH Capital Stock Classes The total number of shares of all classes of capital stock which the Corporation has the authority to issue is 71,000,000 shares, which are divided into two classes as follows: 1,000,000 shares of Preferred Stock (Preferred Stock) without par value, and 70,000,000 shares of Common Stock (Common Stock) $1.66-2/3 par value per share. The designations, voting powers, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions of the above classes of stock are as follows: I Preferred Stock 1. Issuance in Series. Shares of Preferred Stock may be issued in one or more series at such time or times, and for such consideration or considerations as the Board of Directors may determine. All shares of any one series of Preferred Stock will be identical with each other in all respects, except that shares of any one series issued at different times may differ as to dates from which dividends thereon may be cumulative. All series will rank equally and be identical in all respects, except as permitted by the following provisions of paragraph 2 of this Division I. 2. Authority of the Board with respect to Series. The Board of Directors is authorized, at any time and from time to time, to provide for the issuance of shares of Preferred Stock in one or more series with such designations, preferences and relative, participating, optional or other special rights and qualifications, limitations or restrictions thereof as are stated and expressed in the resolution or resolutions providing for the issue thereof adopted by the Board of Directors, and as are not stated and expressed in this Restated Certificate of Incorporation or any amendment thereto including, but not limited to, determination of any of the following: (a) the distinctive serial designation and the number of shares constituting a series; -2- (b) the dividend rate or rates, whether dividends are cumulative and, if so, from which date, the payment date or dates for dividends, and the participating or other special rights, if any, with respect to dividends; (c) the voting powers, full or limited, if any, of the shares of the series; (d) whether the shares are redeemable and, if so, the price or prices at which, and the terms and conditions on which, the shares may be redeemed; (e) the amount or amounts payable upon the shares in the event of voluntary or involuntary liquidation, dissolution or winding up of the Corporation prior to any payment or distribution of the assets of the Corporation to any class or classes of stock of the Corporation ranking junior to the Preferred Stock; (f) whether the shares are entitled to the benefit of a sinking or retirement fund to be applied to the purchase or redemption of shares of a series and, if so entitled, the amount of the fund and the manner of its application, including the price or prices at which the shares may be redeemed or purchased through the application of the fund; (g) whether the shares are convertible into, or exchangeable for, shares of any other class or classes or of any other series of the same or any other class or classes of stock of the Corporation and, if so convertible or exchangeable, the conversion price or prices, or the rates of exchange, and the adjustments thereof, if any, at which the conversion or exchange may be made, and any other terms and conditions of the conversion or exchange; and (h) any other preferences, privileges and powers, and relative participating, optional or other special rights, and qualifications, limitations or restrictions of a series, as the Board of Directors may deem advisable and as are not inconsistent with the provisions of this Restated Certificate of Incorporation. 3. Dividends. Before any dividends on any class or classes of stock of the Corporation ranking junior to the Preferred stock (other than dividends payable in shares of any class or classes of stock of the Corporation ranking junior to the Preferred Stock) may be declared or paid or set apart for payment, the holders of shares of Preferred Stock of each series are entitled to such cash dividends, but only when and as declared by the Board of Directors out of funds legally available therefor, as they may be entitled to in accordance with the resolution or resolutions adopted by the Board of Directors providing for the issue of the series, payable on such dates in each year as may be fixed in the resolution or resolutions. The term "class or classes of stock of the Corporation ranking junior to the Preferred Stock" means the Common Stock and any other class or classes of stock of the Corporation hereafter authorized which rank junior to the Preferred Stock as to dividends or upon liquidation. -3- 4. Reacquired Shares. Shares of Preferred Stock which have been issued and reacquired in any manner by the Corporation (excluding, until the Corporation elects to retire them, shares which are held as treasury shares but including shares redeemed, shares purchased and retired and shares which have been converted into shares of Common Stock) will have the status of authorized and unissued shares of Preferred Stock and may be reissued. 5. Voting Rights. Unless and except to the extent otherwise required by law or provided in the resolution or resolutions of the Board of Directors creating any series of Preferred Stock pursuant to this Division I, the holders of the Preferred Stock shall have no voting power with respect to any matter whatsoever. In no event shall the Preferred Stock be entitled to more than one vote in respect of each share of stock except as may be required by law or by this Restated Certificate of Incorporation. 6. Outstanding or Reserved for Issuance Preferred Stock. (a) Series A Junior Participating Preferred Stock 1. Designation and Amount. The shares of such series shall be designated as "Series A Junior Participating Preferred Stock" (the "Series A Preferred Stock") and the number of shares constituting the Series A Preferred Stock shall be 350,000. Such number of shares may be increased or decreased by resolution of the Board; provided, that no decrease shall reduce the number of shares of Series A Preferred Stock to a number less than the number of shares then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by the Corporation convertible into Series A Preferred Stock. 2. Dividends and Distributions. (A) Subject to the rights of the holders of any shares of any series of Preferred Stock (or any similar stock) ranking prior and superior to the Series A Preferred Stock with respect to dividends, the holders of shares of Series A Preferred Stock, in preference to the holders of Common Stock, par value $1.66-2/3 per share (the "Common Stock"), of the Corporation, and of any other junior stock, shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the first day of March, June, September and December in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $31.00 or (b) subject to the provision for adjustment hereinafter set forth, 100 times the aggregate per share amount of all cash dividends, and 100 times the aggregate per share amount (payable in kind) of all non-cash -4- dividends or other distributions, other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock since the immediately preceding Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Preferred Stock. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) The Corporation shall declare a dividend or distribution on the Series A Preferred Stock as provided in paragraph (A) of this Section immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $31.00 per share on the Series A Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. (C) Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Preferred Stock from the Quarterly Dividends Payment Date next preceding the date of issue of such shares, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be not more than 60 days prior to the date fixed for the payment thereof. -5- 3. Voting Rights. The holders of shares of Series A Preferred Stock shall have the following voting rights: (A) Subject to the provision for adjustment hereinafter set forth, each share of Series A Preferred Stock shall entitle the holder thereof to 100 votes on all matters submitted to a vote of the stockholders of the Corporation. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the number of votes per share to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) Except as otherwise provided herein, in any Certificate of Designations creating a series of Preferred Stock or any similar stock, or by law, the holders of shares of Series A Preferred Stock and the holders of shares of Common Stock and any other capital stock of the Corporation having general voting rights shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation. (C) Except as set forth herein, or as otherwise provided by law, holders of Series A preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. 4. Certain Restrictions. (A) Whenever quarterly dividends or other dividends or distributions payable on the Series A Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Preferred Stock outstanding shall have been paid in full, the Corporation shall not: (i) declare or pay dividends, or make any other distributions, on any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock; (ii) declare or pay dividends, or make any other distributions, on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except dividends paid ratably on the Series A Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; -6- (iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such junior stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series A Preferred Stock; or (iv) redeem or purchase or otherwise acquire for consideration any shares of Series A Preferred Stock, or any shares of stock ranking on a parity with the Series A Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (B) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time in such manner. 5. Reacquired Shares. Any shares of Series A Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock subject to the conditions and restrictions on issuance set forth in this Restated Certificate of Incorporation or in any Certificate of Designations creating a series of Preferred Stock or any similar stock or as otherwise required by law. 6. Liquidation, Dissolution or Winding Up. Upon any liquidation, dissolution or winding up of the Corporation, no distribution shall be made (A) to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock unless, prior thereto, the holders of shares of Series A Preferred Stock shall have received $25,000 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, provided that the holders of shares of Series A Preferred Stock shall be entitled to receive an aggregate amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount to be distributed per share to holders of shares of Common Stock, or (B) to the holders of shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except distributions made ratably on the Series A Preferred Stock and all such parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up. In the event the Corporation shall at any time declare or pay -7- any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the aggregate amount to which holders of shares of Series A Preferred stock were entitled immediately prior to such event under the proviso in clause (A) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. 7. Consolidation, Merger, etc. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case each share of Series A Preferred Stock shall at the same time be similarly exchanged or changed into an amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Preferred Stock shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. 8. No Redemption. The shares of Series A Preferred Stock shall not be redeemable. 9. Rank. The Series A Preferred Stock shall rank, with respect to the payment of dividends and the distribution of assets, junior to all series of any other class of the Corporation's Preferred Stock, unless the terms of any such series shall provide otherwise. 10. Amendment. This Restated Certificate of Incorporation shall not be amended in any manner which would materially alter or change the powers, preferences or special rights of the Series A Preferred Stock so as to affect them adversely without the affirmative vote of the holders of at least two-thirds of the outstanding shares of Series A Preferred Stock, voting together as a single class. -8- (b) Auction Preferred Stock, Series C PART I 1. Designation. The designation of said series of Preferred Stock shall be Auction Preferred Stock, Series C (the "Series C Stock"). The number of shares of Series C Stock shall be 600. The stated value of the Series C Stock shall be $100,000 per share. 2. Dividends. (a) The Holders (as defined in Section 8 of this Part I) shall be entitled to receive; when and as declared by the Board of Directors (as defined in Section 8 of this Part I) out of funds legally available therefor, cumulative cash dividends, at the Applicable Rate (as defined in subparagraph (c)(i) of this Section 2) per annum, determined as set forth below, and no more, payable on the respective dates set forth below. (b)(i) Dividends on shares of Series C Stock at the Applicable Rate per annum shall accrue from the Date of Original Issue (as defined in Section 8 of this Part I). Accrued dividends shall be payable, when and as declared by the Board of Directors, commencing on September 2, 1987, and on October 28, 1987 and on each succeeding seventh Wednesday thereafter, except that if: (A)(l) the Securities Depository (as defined in Section 1 of Part II of this paragraph 6(b) of Article Fourth) shall not have advised the Trust Company (as defined in Section 8 of this Part I) at least five Business Days prior to such Wednesday that it will make available to its participants and members on Dividend Payment Dates, in funds immediately available in New York City, the amount due as dividends on such Dividend Payment Dates, and (2)(X) such Wednesday is not a Business Day (as defined in Section 8 of this Part I), (Y) the Thursday following such Wednesday is not a Business Day or (Z) both the Tuesday and the Monday preceding such Wednesday are not Business Days, then on the first Business Day that (i) is preceded by a Business Day that is, or falls after, such preceding Monday and (ii) is immediately followed by a Business day; or (B)(l) the Securities Depository shall have advised the Trust Company at least five Business Days prior to such Wednesday that it will make available to its participants and members on Dividend Payment Dates, in funds immediately available in New York City, the amount due as dividends on such Dividend Payment Dates and (2)(X) such Wednesday is not a Business Day or (Y) both the Tuesday and the Monday preceding such Wednesday are not Business Days, then on the first Business Day after such Wednesday that is preceded by a Business Day that is, or falls after, such preceding Monday; provided, however, that the Board of Directors, in the event of a change in law lengthening the minimum holding period (currently found in Section 246(c) of the Code (as defined in Section 8 of this Part I)) required for taxpayer's to be entitled to the dividends received deduction on -9- preferred stock held by nonaffiliated corporations (currently found in Section 243(a) of the Code), shall adjust the period of time between Dividend Payment Dates (as hereinafter defined) so as, subject to clauses (A) and (B) of this subparagraph (b)(i), to adjust uniformly the number of days (such number of days without giving effect to such clauses (A) and (B) being hereinafter referred to as "Dividend Period Days") in Dividend Periods (as defined in subparagraph (c)(i) of this Section 2) commencing after the date of such change in law to exceed the then current minimum holding period, provided that the number of Dividend Period Days shall not exceed by more than nine days the length of such then current minimum period and in no event shall exceed 98 days and that dividends shall continue to be payable, subject to clauses (A) and (B), on Wednesdays (each date of payment of dividends being herein referred to as a "Dividend Payment Date" and the first Dividend Payment Date being herein referred to as the "Initial Dividend Payment Date"). Upon any such change in the number of Dividend Period Days as a result of a change in law, the Corporation shall publish notice of such change in a newspaper of general circulation to the financial community in The City of New York, New York, which carries financial news and is customarily published on each Business Day and shall mail notice of such change by first class mail, postage prepaid, to each Holder at such Holder's address as the same appears on the stock register of the Corporation. (ii) As long as the Applicable Rate is based on the results of an Auction (as defined in Section 8 of this Part I), the Corporation shall pay to the Paying Agent (as defined in Section 8 of this Part I) not later than 12:00 noon, New York City time, on the Business Day next preceding each Dividend Payment Date, an aggregate amount of funds available on the next Business Day in The City of New York, New York, equal to the dividends to be paid to all Holders on such Dividend Payment Date. All such moneys shall be held in trust for the payment of such dividends by the Paying Agent for the benefit of the Holders specified in subparagraph (iii) of this paragraph (b). (iii) Each dividend shall be payable to the Holders as their names appear on the stock register of the Corporation on the Business Day next preceding the Dividend Payment Date thereof; provided, however, that if a Rate Adjustment Event (as defined in Section 8 of this Part I) shall have occurred and shall not have been cured by paying all dividends accrued and unpaid and unpaid redemption payments, such dividend shall be paid to such Holders as their names appear on the stock register of the Corporation on such date, not exceeding 15 days preceding the payment date thereof, as may be fixed by the Board of Directors. Dividends in arrears for any past Dividend Period may be declared and paid at any time, without reference to any regular Dividend Payment Date, to the Holders as their names appear on the stock register of the Corporation on such date, not exceeding 15 days preceding the payment date thereof, as may be fixed by the Board of Directors. (c)(i) The dividend rate of shares of Series C Stock shall be 4.85% per annum during the period from and after the Date of Original Issue to and including the Initial Dividend Payment Date (the "Initial Dividend Period"). Commencing on the Initial Dividend Payment Date, the dividend rate on shares of Series C Stock for each subsequent dividend period (hereinafter referred to as a "Subsequent Dividend Period" and collectively as "Subsequent Dividend Periods"; and the Initial Dividend Period or any Subsequent Dividend Period being hereinafter referred to as a "Dividend Period" and collectively as "Dividend Periods") thereafter, which Subsequent Dividend Periods shall commence on the day that is the last day of the preceding Dividend Period and shall end on and include the next succeeding Dividend Payment date, shall be equal to the rate per -10- annum that results from implementation of the Auction Procedures (as defined in Section 8 of this Part I); provided, however, that if a Rate Adjustment Event shall have occurred and shall not have been cured by paying all accrued and unpaid dividends and unpaid redemption payments prior to the first day of such Subsequent Dividend Period, the dividend rate for such Subsequent Dividend Period shall be a rate per annum equal to 175% of the 60-day "AA" Composite Commercial Paper Rate (the rate per annum at which dividends are payable on shares of Series C Stock for any Dividend Period being herein referred to as the "Applicable Rate"). Any amount of such dividend or redemption price not paid when due but paid within three business days after such due date shall incur a late charge to be paid therewith and calculated for such period of nonpayment at an annualized rate of 175% of the 60-day "AA" Composite Commercial Paper Rate applied to the amount of such non-payment. (ii) The amount of dividends per share accrued and payable on shares of Series C Stock for each Dividend Period shall be computed by multiplying the Applicable Rate for such Dividend Period by a fraction, the numerator of which shall be the number of days in such Dividend Period (calculated by counting the first day thereof but excluding the last day thereof) and the denominator of which shall be 360 and applying the rate obtained against $100,000; and the amount of dividends per share accrued for any part of any Dividend Period shall be computed by multiplying the Applicable Rate for such Dividend Period by a fraction the numerator of which shall be the number of days in such part of such Dividend Period (calculated by counting the first day thereof but excluding the last day thereof) and the denominator of which shall be 360 and applying the rate obtained against $100,000. (iii) The Applicable Rate for each Subsequent Dividend Period shall be published not later than the fifth Business Day next succeeding the first day of such Subsequent Dividend Period in a newspaper of general circulation to the financial community in The City of New York, New York, which carries financial news and is customarily published on each Business Day. (d)(i) No full dividends shall be declared or paid or set apart for payment on Preferred Stock of any series ranking, as to dividends, on a parity with or junior to the Series C Stock for any period unless full cumulative dividends have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for such payment on the Series C Stock for all Dividend Periods terminating on or prior to the date of payment of such full cumulative dividends. When dividends are not paid in full, as aforesaid, upon the Series C Stock and any other Preferred Stock ranking on a parity as to dividends with the Series C Stock, all dividends declared upon the Series C Stock and any other Preferred Stock ranking on a parity as to dividends with the Series C Stock shall be declared pro rata so that the amount of dividends declared per share on the Series C Stock and such other Preferred Stock shall in all cases bear to each other the same ratio that accrued dividends per share on the Series C Stock and such other Preferred Stock bear to each other. Holders of Series C Stock shall not be entitled to any dividend, whether payable in cash, property or stocks, in excess of the full cumulative dividends, as herein provided, on the Series C Stock. No interest, or sum of money in lieu of interest, shall be payable in respect of any dividend payments on the Series C Stock which may be in arrears. (ii) So long as any shares of Series C Stock are outstanding, no dividend (other than a dividend in Common Stock or in any other stock ranking junior to Series C stock as to dividends and upon liquidation and other than as provided in subparagraph (i) of this paragraph (d)) shall be declared or paid or set aside for payment or other distribution declared or made upon the -11- Common Stock or upon any other stock ranking junior to or on a parity with the Series C Stock as to dividends or upon liquidation, nor shall any Common Stock or any other stock of the Corporation ranking junior to or on a parity with the Series C Stock as to dividends or upon liquidation be redeemed, purchased or otherwise acquired for any consideration (or any moneys paid to or made available for a sinking fund for the redemption of any such stock) by the Corporation (except by conversion into or exchange for stock of the Corporation ranking junior to the Series C Stock as to dividends and upon liquidation) unless, in each case, the full cumulative dividends on all outstanding shares of Series C Stock shall have been paid for all past Dividend Periods. 3. Voting The Series C Stock shall not have any voting powers, either full or limited, except that: (a) Unless the vote or consent of the holders of a greater number of shares shall then be required by law, the consent of the holders of at least 66-2/3% of all of the shares of Preferred Stock at the time outstanding, given in person or by proxy, either in writing or by a vote at a meeting called for the purpose at which the holders of shares of Preferred Stock shall vote together as a separate class, shall be necessary for authorizing, effecting or validating the amendment, alteration or repeal of any of the provisions of this Restated Certificate of Incorporation or of any certificate amendatory thereof or supplemental thereto (including any Certificate of Designations or any similar document relating to any series of Preferred Stock) which would adversely affect the powers, preferences, rights or privileges of the Preferred Stock; provided, however, that if any such amendment, alteration or repeal would adversely affect the powers, preferences, rights or privileges of one or more series of the Preferred Stock, but shall not so affect the entire class, then only the shares of the one or more series so affected shall be considered to be a separate class entitled to vote upon or consent to such amendment, alteration or repeal; (b) Unless the vote or consent of the holders of a greater number of shares shall then be required by law, the consent of the holders of at least 66-2/3% of all of the Series C Stock and all other series of Preferred Stock ranking on a parity with the Series C Stock, either as to dividends or upon liquidation, at the time outstanding, given in person or by proxy, either in writing or by a vote at a meeting called for the purpose at which the holders of Series C Stock and such other series of Preferred Stock shall vote together as a single class without regard to series, shall be necessary for authorizing, effecting or validating the creation, authorization or issue of any shares of any class of stock of the Corporation ranking prior to the Series C Stock as to dividends or upon liquidation, or the reclassification of any authorized stock of the Corporation into any such prior shares, or the creation, authorization or issue of any obligation or security convertible into or evidencing the right to purchase any such prior shares; and (c) If at the time of any annual meeting of stockholders for the election of directors a default in preference dividends on the Preferred Stock shall exist, the number of directors constituting the Board of Directors shall be increased by two, and the holders of the Preferred Stock of all series shall have the right at such meeting, voting together as a single class without regard to series, to the exclusion of the holders of Common Stock, to elect two directors of the Corporation to fill such newly created directorships. Such right shall continue until there are no dividends in arrears upon the Preferred Stock. Each director elected by the holders of shares of Preferred Stock (herein called a "Preferred Director") shall continue to serve as such director for the full term for -12- which he shall have been elected, notwithstanding that prior to the end of such term a default in preference dividends shall cease to exist. Any Preferred Director may be removed by, and shall not be removed except by, the vote of the holders of record of the outstanding shares of Preferred Stock, voting together as a single class without regard to series, at a meeting of the stockholders, or of the holders of shares of Preferred Stock, called for that purpose. So long as a default in preference dividends on the Preferred Stock shall exist, (A) any vacancy in the office of a Preferred Director may be filled (except as provided in the following clause (B)) by an instrument in writing signed ny the remaining Preferred Director and filed with the Corporation and (B) in the case of the removal of any Preferred Director, the vacancy may be filled by the vote of the holders of the outstanding shares of Preferred Stock, voting together as a single class without regard to series, at the same meeting at which such removal shall be voted. Each director appointed as aforesaid by the remaining Preferred Director shall be deemed, for all purposes hereof, to be a Preferred Director. Whenever the term of office of the Preferred Directors shall end and a default in preference dividends shall no longer exist, the number of directors constituting the Board of Directors shall be reduced by two. For the purposes hereof, a "default in preference dividends" on the Preferred Stock shall be deemed to have occurred whenever the amount of accrued dividends upon any series of the Preferred Stock shall be equivalent to six full quarter-yearly dividends (which, with respect to the Series C Stock, shall be deemed to be dividends in respect of a number of Dividend Periods containing not less than 540 days) or more, and, having so occurred, such default shall be deemed to exist thereafter until, but only until, all accrued dividends on all shares of Preferred Stock of each and every series then outstanding shall have been paid to the end of the last preceding quarterly dividend period. 4. Redemption. (a)(i) The Series C Stock may be redeemed, at the option of the Corporation, as a whole or from time to time in part, on any Dividend Payment Date at a redemption price of $100,000 per share plus an amount equal to accrued and unpaid dividends thereon (whether or not earned or declared) to the date fixed for redemption. (ii) If fewer than all of the outstanding shares of Series C Stock are to be redeemed pursuant to subparagraph (i) of this paragraph (a), the number of shares to be redeemed shall be determined by the Board of Directors, and such shares shall be redeemed pro rata from the Holders in proportion to the number of such shares held by such Holders (with adjustments to avoid redemption of fractional shares). (b) If the Corporation shall redeem shares of Series C Stock pursuant to paragraph (a) of this Section 4, notice of such redemption shall be given by publication at least once in a newspaper printed in the English language and customarily published on each Business Day and, whenever published, of general circulation in Chicago, Illinois, such publication to be not less than 15 nor more than 45 days prior to the date fixed for such redemption. Notice of such redemption shall also be given by mailing the same by first class mail, postage prepaid, not less than 15 nor more than 45 days prior to the date fixed for redemption thereof, to each Holder of the shares to be redeemed, at such Holder's address as the same appears on the stock register of the Corporation. Each such notice shall state: (i) the redemption date; (ii) the number of shares of Series C Stock to be redeemed; (iii) the redemption price plus the amount of accrued and unpaid dividends to the redemption date; (iv) the place or places where certificates for such shares of Series C Stock are to be surrendered for payment of the redemption price; and (v) that dividends on the shares to be -13- redeemed will cease to accrue on such redemption date. If fewer than all shares held by any Holder are to be redeemed, the notice mailed to such Holder shall also specify the number of shares to be redeemed from such Holder. (c) Notwithstanding the provisions of paragraph (a) of this Section 4, if any dividends on the Series C Stock are in arrears, no shares of Series C Stock shall be redeemed unless all outstanding shares of Series C Stock are simultaneously redeemed, and the Corporation shall not purchase or otherwise acquire any shares of Series C Stock; provided, however, that the foregoing shall not prevent the purchase or acquisition of shares of Series C Stock pursuant to a purchase or exchange offer made on the same terms to Holders of all outstanding shares of Series C Stock. (d) If notice of redemption has been published under paragraph (b) of this Section 4 or the Corporation has irrevocably authorized and directed the Redemption Agent to begin promptly and complete such publication of notice, and the Corporation has deposited in trust with the Redemption Agent funds necessary for such redemption, from and after the later of the date of such notice or the date such deposit is made the shares of Series C Stock called for redemption shall no longer be deemed to be outstanding, and all rights of the Holders thereof as stockholders of the Corporation (except the right to receive the redemption price plus an amount equal to the accrued and unpaid dividends thereon to the date fixed for redemption) shall cease. Upon surrender in accordance with said notice of the certificates for any shares so redeemed (properly endorsed or assigned for transfer, if the Board of Directors shall so require and the notice shall so state), the redemption price set forth above plus an amount equal to such accrued and unpaid dividends shall be paid by the Redemption Agent to the Holders of the shares of Series C Stock subject to redemption as set forth in paragraph (e) of this Section 4. In case fewer than all of the shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares without cost to the Holder thereof. (e) As long as the Applicable Rate is based on the results of an Auction, the Corporation shall pay the applicable Redemption Deposit Amount (as defined in Section 8 of this Part I) to the Redemption Agent, in funds available on the next Business Day in The City of New York, New York, on the Business Day next preceding the redemption date for disbursement to Holders as appropriate. All such moneys shall be held in trust by the Redemption Agent for the benefit of Holders of shares so to be redeemed. 5. Liquidation Rights. (a) Upon the dissolution, liquidation or winding up of the Corporation, the holders of the Series C Stock shall be entitled to receive out of the assets of the Corporation, before any payment or distribution shall be made on the Common Stock or on any other class of stock ranking junior to the Preferred Stock upon liquidation, the amount of $100,000 per share, plus a sum equal to all dividends (whether or not earned or declared) on such shares accrued and unpaid thereon to the date of the final distribution. (b) Neither the sale of all or substantially all the property or business of the Corporation, nor the merger or consolidation of the Corporation into or with any other corporation or the merger or consolidation of any other corporation into or with the Corporation, shall be deemed to be a dissolution, liquidation or winding up, voluntary or involuntary, for the purposes of this Section 5. -14- (c) After the payment to the holders of the Series C Stock of the full preferential amounts provided for in this Section 5, the holders of Series C Stock as such shall have no right or claim to any of the remaining assets of the Corporation. (d) In the event the assets of the Corporation available for distribution to the holders of Series C Stock upon any dissolution, liquidation or winding up of the Corporation, whether voluntary or involuntary, shall be insufficient to pay in full all amounts to which such holders are entitled pursuant to paragraph (a) of this Section 5, no such distribution shall be made on account of any shares of any other class or series of Preferred Stock ranking on a parity with the Series C Stock upon such dissolution, liquidation or winding up unless proportionate distributive amounts shall be paid on account of the Series C Stock, ratably, in proportion to the full distributable amounts for which holders of all such parity shares are respectively entitled upon such dissolution, liquidation or winding up. (e) Upon the dissolution, liquidation or winding up of the Corporation, the holders of shares of Series C Stock then outstanding shall be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders all amounts to which such holders are entitled pursuant to paragraph (a) of this Section 5 before any payment shall be made to the holders of any class or series of capital stock of the Corporation ranking junior upon liquidation to the Series C Stock. 6. Sinking or Retirement Fund. The Series C Stock shall not be entitled to the benefit of a sinking or retirement fund to be applied to the purchase or redemption of such stock. 7. Rank For purposes of this paragraph 6(b) of Article Fourth, any stock of any class or classes of the Corporation shall be deemed to rank: (a) prior to the Series C Stock, either as to dividends or upon liquidation, if the holders of such class or classes shall be entitled to the receipt of dividends or of amounts distributable upon dissolution, liquidation or winding up of the Corporation, as the case may be, in preference or priority to the holders of Series C Stock; (b) on a parity with the Series C Stock, either as to dividends or upon liquidation, whether or not the dividend rates, dividend payments dates or redemption or liquidation prices per share or sinking fund provisions, if any, are different from those of the Series C Stock, if the holders of such stock shall be entitled to the receipt of dividends or of amounts distributable upon dissolution, liquidation or winding up of the Corporation, as the case may be, in proportion to their respective dividend rates or liquidation prices, without preference or priority, one over the other, as between the holders of such stock and the holders of Series C Stock; and (c) junior to the Series C Stock, either as to dividends or upon liquidation, if such class shall be Common Stock or if the holders of Series C Stock shall be entitled to receipt of dividends or of amounts distributable upon dissolution, liquidation or winding up of the Corporation, as the case may be, in preference or priority to the holders of shares of such class or classes. -15- 8. As used in Parts I and II of this paragraph 6(b) of Article Fourth, the following terms shall have the following meanings (with terms defined in the singular having comparable meanings when used in the plural and vice versa), unless the context otherwise requires: (a) "'AA' Composite Commercial Paper Rate," on any date, shall mean (i) the interest equivalent of the 60-day rate on commercial paper placed on behalf of issuers whose corporate bonds are rated "AA" by Standard & Poor's Corporation or its successor, or the equivalent of such rating by another rating agency, as such 60-day rate is made available on a discount basis or otherwise by the Federal Reserve Bank of New York for the immediately preceding Business Day prior to such date; or (ii) in the event that the Federal Reserve Bank of New York does not make available such a rate, then the arithmetic average of the interest equivalent of the 60-day rate on commercial paper placed on behalf of such issuers, as quoted on a discount basis or otherwise by the Commercial Paper Dealers to the Trust Company for the close of business on the immediately preceding Business Day prior to such date. If any Commercial Paper Dealer does not quote a rate required to determine the "AA" Composite Commercial Paper Rate, the "AA" Composite Commercial Paper Rate shall be determined on the basis of the quotation or quotations furnished by the remaining Commercial Paper Dealer or Commercial Paper Dealers and any Substitute Commercial Paper Dealer or Substitute Commercial Paper Dealers selected by the Corporation to provide such rate or rates not being supplied by any Commercial Paper Dealer or Commercial Paper Dealers, as the case may be, or, if the Corporation does not select any such Substitute Commercial Paper Dealer or Substitute Commercial Paper Dealers, by the remaining Commercial Paper Dealer or Commercial Paper Dealers. If the Board of Directors shall make the adjustment referred to in the proviso of the second sentence of subparagraph (b)(i) of Section 2 of this Part I, then (i) if the Dividend Period Days shall be 70 or more days but fewer than 85 days, such rate shall be the arithmetic average of the interest equivalent of the 60-day and 90-day rates on such commercial paper, and (ii) if the Dividend Period Days shall be 85 or more days but 98 or fewer days, such rate shall be the interest equivalent of the 90-day rate on such commercial paper. For purposes of this definition, the "interest equivalent" of a rate stated on a discount basis (a "discount rate") for commercial paper of a given day's maturity shall be equal to the quotient (rounded to the nearest one-thousandth (.001) of 1%) of (A) the discount rate divided by (B) the difference between (x) 1.00 and (y) a fraction the numerator of which shall be the product of the discount rate times the number of days in which such commercial paper matures and the denominator of which shall be 360. (b) "Applicable Rate" shall have the meaning specified in subparagraph (c)(i) of Section 2 of this Part I. (c) "Auction" shall mean each periodic implementation of the Auction Procedures. (d) "Auction Procedures" shall mean the procedures for conducting Auctions set forth in Part II hereof. (e) "Board of Directors" shall mean the Board of Directors of the Corporation or (except with respect to paragraph (c) of Section 3 of this Part I) a duly authorized committee thereof. (f) "Business Day" shall mean a day on which the New York Stock Exchange, Inc. is open for trading and on which banks in The City of New York, New York or in Chicago, Illinois, are not authorized by law to close. -16- (g) "Code" shall mean the Internal Revenue Code of 1986. (h) "Commercial Paper Dealers" shall mean Goldman, Sachs & Co., and Merrill Lynch, Pierce, Fenner & Smith Incorporated, Salomon Brothers Inc. and Lehman Commercial Paper Incorporated or, in lieu of any thereof, their respective affiliates or successors. (i) "Date of Original Issue" shall mean the date on which the Corporation originally issues shares of Series C Stock. (j) "Dividend Payment Date" shall have the meaning specified in subparagraph (b)(i) of Section 2 of this Part I. (k) "Dividend Period" and "Dividend Periods" shall have the respective meanings specified in subparagraph (c)(i) of Section 2 of this Part I. (l) "Dividend Period Days" shall have the meaning specified in subparagraph (b)(i) of Section 2 of this Part I. (m) "Holder" shall mean a holder of shares of Series C Stock as such holder's name appears on the stock register of the Corporation. (n) "Initial Dividend Payment Date" shall have the meaning specified in subparagraph (b)(i) of Section 2 of this Part I. (o) "Initial Dividend Period" shall have the meaning specified in subparagraph (c)(i) of Section 2 of this Part I. (p) "Paying Agent" shall mean a bank or trust company appointed as such by a resolution of the Board of Directors. (q) "Rate Adjustment Event" shall mean any failure by the Corporation to pay (i) to the Paying Agent on or within three Business Days after any Dividend Payment Date the full amount of any dividend (whether or not earned or declared) to be paid on such Dividend Payment Date on any share of Series C Stock or (ii) to the Redemption Agent on or within three Business Days after any redemption date the redemption price to be paid on such redemption date, plus an amount equal to the accrued and unpaid dividends thereon (whether or not earned or declared) to such redemption date, of any share of Series C Stock. (r) "Redemption Agent" shall mean a bank or trust company appointed as such by a resolution of the Board of Directors. (s) "Redemption Deposit Amount" shall mean the product of (i) the number of outstanding shares of Series C Stock to be redeemed times (ii) an amount equal to the applicable redemption price plus an amount equal to accrued and unpaid dividends (whether or not earned or declared) to the date fixed for redemption. (t) "Subsequent Dividend Period" and "Subsequent Dividend Periods" shall have the respective meanings specified in subparagraph (c)(i) of Section 2 of this Part I. -17- (u) "Substitute Commercial Paper Dealer" shall mean The First Boston Corporation or Morgan Stanley & Co. Incorporated, or their respective affiliates or successors; provided that neither such dealer nor any of its affiliates shall be a Commercial Paper Dealer. (v) "Trust Company" shall mean a bank or trust company appointed as such by a resolution of the Board of Directors. PART II 1. Certain Definitions. Capitalized terms not defined in this Section I shall have the respective meanings specified in Part I of this paragraph 6(b) of Article Fourth. As used in this Part II, the following terms shall have the following meanings, unless the context otherwise requires: (a) "'AA' Rate Multiple," on any Auction Date, shall mean the percentage determined as set forth below based on the prevailing rating of the Series C Stock in effect at the close of business on the Business Day immediately preceding such Auction Date: Prevailing Rating Percentage ----------------- ---------- AA/aa or Above 110% A/a 120% BBB/baa 130% Below BBB/Baa 175% For purposes of this definition, the "prevailing rating" of the Series C Stock shall be (i) AA/aa or Above, if the Series C Stock has a rating of AA- or better by Standard & Poor's Corporation or its successor ("S&P") or aa3 or better by Moody's Investors Service, Inc. or its successor ("Moody's"), or the equivalent of either or both of such ratings by a substitute rating agency or substitute rating agencies selected as provided below, (ii) if not AA/aa or Above, then A/a, if the Series C Stock has a rating of A- or better and lower than AA- by S&P or a3 or better and lower than aa3 by Moody's or the equivalent of either or both of such ratings by a substitute rating agency or substitute rating agencies selected as provided below, (iii) if not AA/aa or Above or A/a, then BBB/baa, if the Series C Stock has a rating of BBB- or better and lower than A- by S&P or baa3 or better and lower than a3 by Moody's or the equivalent of either or both of such ratings by a substitute rating agency or substitute rating agencies selected as provided below and (iv) if not AA/aa or Above, A/a or BBB/baa, then Below BBB/baa. The Corporation shall take all reasonable action necessary to enable S&P and Moody's to provide a rating for the Series C Stock. If S&P or Moody's or both shall not make such a rating available, Goldman, Sachs & Co. and Merrill Lynch, Pierce, Fenner & Smith Incorporated or their successors shall select a nationally recognized securities rating agency or two nationally recognized securities rating agencies to act as substitute rating agency or substitute rating agencies, as the case may be. (b) "Affiliate" shall mean any Person known to the Trust Company to be controlled by, in control of or under common control with the Corporation. -18- (c) "Agent Member" shall mean the member of the Securities Depository that will act on behalf of a Bidder and is identified as such in such Bidder's Purchaser's Letter. (d) "Auction" shall mean the periodic implementation of the procedures set forth in this Part II. (e) "Auction Date" shall mean the Business Day next preceding a Dividend Payment Date. (f) "Available Series C Stock" shall have the meaning specified in paragraph (a) of Section 4 of this Part II. (g) "Bid" and "Bids" shall have the respective meanings specified in paragraph (a) of Section 2 of this Part II. (h) "Bidder" and "Bidders" shall have the respective meanings specified in paragraph (a) of Section 2 of this Part II. (i) "Broker-Dealer" shall mean any broker-dealer, or other entity permitted by law to perform the function required of a Broker-Dealer in this Part II, that is a member of, or a participant in, the Securities Depository, and that has been selected by the Corporation and has entered into a Broker-Dealer Agreement with the Trust Company that remains effective. (j) "Broker-Dealer Agreement" shall mean an agreement between the Trust Company and a Broker-Dealer pursuant to which such Broker-Dealer agrees to follow the procedures specified in this Part II. (k) "Existing Holder," when used with respect to shares of Series C Stock, shall mean a Person who has signed a Purchaser's Letter and is listed as the beneficial owner of such shares of Series C Stock in the records of the Trust Company. (l) "Hold Order" and "Hold Orders" shall have the respective meanings specified in paragraph (a) of Section 2 of this Part II. (m) "Maximum Rate," on any Auction Date, shall mean the product of the "AA" Composite Commercial Paper Rate times the "AA" Rate Multiple. (n) "Order" and "Orders" shall have the respective meanings specified in paragraph (a) of Section 2 of this Part II. (o) "Outstanding" shall mean, as of any date, shares of Series C Stock theretofore issued by the Corporation except, without duplication, (i) any shares of Series C Stock theretofore canceled or delivered to the Trust Company for cancellation or redeemed by the Corporation or as to which the Corporation shall have published a notice of redemption or irrevocably authorized and directed the Redemption Agent to begin and promptly complete such publication of notice, and deposited in trust with the Redemption Agent funds necessary for such redemption in accordance with this Restated Certificate of Incorporation, (ii) any shares of Series C Stock as to which the Corporation or any Affiliate thereof (other than a Broker-Dealer Affiliate) shall be an Existing Holder and (iii) -19- any shares of Series C Stock represented by any certificate in lieu of which a new certificate has been executed and delivered by the Corporation. (p) "Person" shall mean and include an individual, a partnership, a corporation, a trust, an unincorporated association, a joint venture or other entity or a government or any agency or political subdivision thereof. (q) "Potential Holder" shall mean any Person, including any Existing Holder, (i) who shall have executed a Purchaser's Letter and (ii) who may be interested in acquiring shares of Series C Stock (or, in the case of an Existing Holder, additional shares of Series C Stock). (r) "Purchaser's Letter" shall mean a Master Purchaser's Letter, the form of which is attached hereto, addressed to the Corporation, the Trust Company and an Agent Member in which a Person agrees, among other things, to offer to purchase, to purchase, to offer to sell and/or to sell shares of Series C Stock as set forth in this Part II, or a similar letter containing substantially the same information and representations, or such other letter as the Board of Directors shall approve. (s) "Securities Depository" shall mean The Depository Trust Company and its successors and assigns or any other securities depository selected by the Corporation which agrees to follow the procedures required to be followed by such securities depository in connection with shares of Series C Stock. (t) "Sell Order" and "Sell Orders" shall have the respective meanings specified in paragraph (a) of Section (2) of this Part II. (u) "Submission Deadline" shall mean 12:30 P.M., New York City time, on any Auction Date or such other time on any Auction Date by which Broker-Dealers are required to submit Orders to the Trust Company as specified by the Trust Company from time to time. (v) "Submitted Bid" and "Submitted Bids" shall have the respective meanings specified in paragraph (a) of Section 4 of this Part II. (w) "Submitted Hold Order" and "Submitted Hold Orders" shall have the respective meanings specified in paragraph (a) of Section 4 of this Part II. (x) "Submitted Order" and "Submitted Orders" shall have the respective meanings specified in paragraph (a) of Section 4 of this Part II. (y) "Submitted Sell Order" and "Submitted Sell Orders" shall have the respective meanings specified in paragraph (a) of Section 4 of this Part II. (z) "Sufficient Clearing Bids" shall have the meaning specified in paragraph (a) of Section 4 of this Part II. (aa) "Winning Bid Rate" shall have the meaning specified in paragraph (a) of Section 4 of this Part II. -20- 2. Orders by Existing Holders and Potential Holders. (a) On or prior to the Submission Deadline on each Auction Date: (i) each Existing Holder may submit to a Broker-Dealer information as to: (A) the number of Outstanding shares, if any, of Series C Stock held by such Existing Holder with such Existing Holder desires to continue to hold without regard to the Applicable Rate for the next succeeding Dividend Period; (B) the number of Outstanding shares, if any, of Series C Stock that such Existing Holder desires to continue to hold if the Applicable Rate for the next succeeding Dividend Period shall not be less than the rate per annum specified by such Existing Holder; and/or (C) the number of Outstanding shares, if any, of Series C Stock held by such Existing Holder which such Existing Holder offers to sell without regard to the Applicable Rate for the next succeeding Dividend Period; and (ii) one or more Broker-Dealers, using lists of Potential Holders, shall in good faith for the purpose of conducting a competitive Auction in a commercially reasonable manner, contact Potential Holders, including Persons that are not Existing Holders, on such lists to determine the number of shares, if any, of Series C Stock which each such Potential Holder offers to purchase, provided that the Applicable Rate for the next succeeding Dividend Period shall not be less than the rate per annum specified by such Potential Holder. For the purposes hereof, the communication to a Broker-Dealer of information referred to in clause (i)(A), (i)(B), (i)(C) or (ii) of this paragraph (a) is hereinafter referred to as an "Order" and collectively as "Orders" and each Existing Holder and each Potential Holder placing an Order is hereinafter referred to as a "Bidder" and collectively as "Bidders"; an Order containing the information referred to in clause (i)(A) of this paragraph (a) is hereinafter referred to as a "Hold Order" and collectively as "Hold Orders"; an Order containing the information referred to in clause (i)(B) or (ii) of this paragraph (a) is hereinafter referred to as a "Bid" and collectively as "Bids"; and an Order containing the information referred to in clause (i)(C) of this paragraph (a) is hereinafter referred to as a "Sell Order" and collectively as "Sell Orders." (b)(i) A Bid by an Existing Holder shall constitute an irrevocable offer to sell: (A) the number of Outstanding shares of Series C Stock specified in such Bid if the Applicable Rate determined on such Auction Date shall be less than such specified rate; or (B) such number or a lesser number of Outstanding shares of Series C Stock to be determined as set forth in subparagraph (a)(iv) of Section 5 of this Part II if the Applicable Rate determined on such Auction Date shall be equal to such specified rate; or -21- (C) a lesser number of Outstanding shares of Series C Stock to be determined as set forth in paragraph (b)(iii) of Section 5 of this Part II if such specified rate shall be higher than the Maximum Rate and Sufficient Clearing Bids do not exist. (ii) A Sell Order by an Existing Holder shall constitute an irrevocable offer to sell: (A) the number of Outstanding shares of Series C Stock specified in such Sell Order; or (B) such number or a lesser number of Outstanding shares of Series C Stock as set forth in subparagraph (b)(iii) of Section 5 of this Part II if Sufficient Clearing Bids do not exist. (iii) A Bid by a Potential Holder shall constitute an irrevocable offer to purchase: (A) the number of Outstanding shares of Series C Stock specified in such Bid if the Applicable Rate determined on such Auction Date shall be higher than such specified rate; or (B) such number or a lesser number of Outstanding shares of Series C Stock as set forth in subparagraph (a)(v) of Section 5 of this Part II if the Applicable Rate determined on such Auction Date shall be equal to such specified rate. 3. Submission of Orders by Broker-Dealers to Trust Company. (a) Each Broker-Dealer shall submit in writing to the Trust Company prior to the Submission Deadline on each Auction Date all Orders obtained by such Broker-Dealer and specifying with respect to each Order: (i) the name of the Bidder placing such Order; (ii) the aggregate number of shares of Series C Stock that are the subject of such Order; (iii) to the extent that such Bidder is an Existing Holder: (A) the number of shares, if any, of Series C Stock subject to any Hold Order placed by such Existing Holder; (B) the number of shares, if any, of Series C Stock subject to any Bid placed by such Existing Holder and the rate specified in such Bid; and (C) the number of shares, if any, of Series C Stock subject to any sell Order placed by such Existing Holder; and (iv) to the extent such Bidder is a Potential Holder, the rate specified in such Potential Holder's Bid. -22- (b) If any rate specified in any Bid contains more than three figures to the right of the decimal point, the Trust Company shall round such rate up to the next highest one thousandth (.001) of 1%. (c) If an Order or Orders covering all of the Outstanding shares of Series C Stock held by any Existing Holder is not submitted to the Trust Company prior to the Submission Deadline, the Trust Company shall deem a Hold Order to have been submitted on behalf of such Existing Holder covering the number of Outstanding shares of Series C Stock held by such Existing Holder and not subject to Orders submitted to the Trust Company. (d) If one or more Orders covering in the aggregate more than the number of Outstanding shares of Series C Stock held by any Existing Holder are submitted to the Trust Company, such Orders shall be considered valid as follows and in the following order of priority: (i) all Hold Orders shall be considered valid, but only up to and including in the aggregate the number of shares of Series C Stock held by such Existing Holder, and, solely for purposes of allocating compensation among the Broker-Dealers submitting Hold Orders, if the number of shares of Series C Stock subject to such Hold Orders exceeds the number of shares of Series C Stock held by such Existing Holder, the number of shares subject to each Hold Order shall be reduced pro rata to cover the number of shares of Series C Stock held by such Existing Holder; (ii)(A) any Bid shall be considered valid up to and including the excess of the number of Outstanding shares of Series C Stock held by such Existing Holder over the number of shares of Series C Stock subject to any Hold Order referred to in subparagraph (i) above; (B) subject to clause (A), if more than one Bid with the same rate is submitted on behalf of such Existing Holder and the number of shares of Series C Stock subject to such Bids is greater than such excess, such Bids shall be considered valid up to the amount of such excess, and, solely for purposes of allocating compensation among the Broker- Dealers submitting Bids with the same rate, the number of shares of Series C Stock subject to each Bid with the same rate shall be reduced pro rata to cover the number of shares of Series C Stock equal to such excess; (C) subject to clause (A), if more than one Bid with different rates is submitted on behalf of such Existing Holder, such Bids shall be considered valid in the ascending order of their respective rates up to the amount of such excess; and (D) in any such event the number, if any, of such shares subject to Bids not valid under this subparagraph (ii) shall be treated as the subject of a Bid by a Potential Holder; and (iii) all Sell Orders shall be considered valid but only up to and including in the aggregate the excess of the number of Outstanding shares of Series C Stock held by such Existing Holder over the sum of the shares of Series C Stock subject to Hold Orders referred to in subparagraph (i) and valid Bids by Existing Holders referred to in subparagraph (ii) above. -23- (e) If more than one Bid is submitted on behalf of any Potential Holder, each Bid submitted shall be a separate bid with the rate therein specified. 4. Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable Rate. (a) Not earlier than the Submission Deadline on each Auction Date, the Trust Company shall assemble all Orders submitted or deemed submitted to it by the Broker-Dealers (each such Order as submitted or deemed submitted by a Broker-Dealer being hereinafter referred to individually as a "Submitted Hold Order," a "Submitted Bid" or a "Submitted Sell Order," as the case may be, or as a "Submitted Order" and collectively as "Submitted Hold Orders," "Submitted Bids" or "Submitted Sell Orders," as the case may be, or as "Submitted Orders") and shall determine: (i) the excess of the total number of Outstanding shares of Series C Stock over the number of Outstanding shares of Series C Stock that are the subject of Submitted Hold Orders (such excess being hereinafter referred to as the "Available Series C Stock"); (ii) from the Submitted Orders whether: (A) the number of Outstanding shares of Series C Stock that are the subject of Submitted Bids by Potential Holders specifying one or more rates equal to or lower than the Maximum Rate exceeds or is equal to the sum of: (I) the number of Outstanding shares of Series C Stock that are the subject of Submitted Bids by Existing Holders specifying one or more rates higher than the Maximum Rate, and (II) the number of Outstanding shares of Series C Stock that are subject to Submitted Sell Orders (in the event of such excess or such equality (other than because the sum of the number of shares of Series C Stock in clauses (I) and (II) above is zero because all of the Outstanding shares of Series C Stock are the subject of Submitted Hold Orders), such Submitted Bids in clause (A) above being hereinafter referred to collectively as "Sufficient Clearing Bids"); and (iii) if Sufficient Clearing Bids exist, the lowest rate specified in the Submitted Bids (the "Winning Bid Rate") which if: (A)(I) each Submitted Bid from Existing Holders specifying such lowest rate and (II) all other Submitted Bids from Existing Holders specifying lower rates were accepted, thus entitling such Existing Holders to continue to hold the shares of Series C Stock that are the subject of such Submitted Bids; and (B)(I) each Submitted Bid from Potential Holders specifying such lowest rate and (II) all other Submitted Bids from Potential Holders specifying lower rates were accepted, thus entitling the Potential Holders to purchase the shares of Series C Stock that are the subject of those Submitted Bids, -24- would result in such Existing Holders described in clause (A) continuing to hold an aggregate number of Outstanding shares of Series C Stock which, when added to the number of Outstanding shares of Series C Stock to be purchased by such Potential Holders described in clause (B), would equal not less than the Available Series C Stock. (b) Promptly after the Trust Company has made the determinations pursuant to paragraph (a) of this Section 4, the Trust Company shall advise the Corporation of the "AA" Composite Commercial Paper Rate and the Maximum Rate and, based on such determinations, the Applicable Rate for the next succeeding Dividend Period as follows: (i) if Sufficient Clearing Bids exist, that the Applicable Rate for the next succeeding Dividend Period shall be equal to the Winning Bid Rate so determined; (ii) if Sufficient Clearing Bids do not exist (other than because all of the Outstanding shares of Series C Stock are the subject of Submitted Hold Orders), that the Applicable Rate for the next succeeding Dividend Period shall be equal to the Maximum Rate; or (iii) if all the Outstanding shares of Series C Stock are the subject of Submitted Hold Orders, that the Applicable Rate for the next succeeding Dividend Period shall be equal to 59% of the "AA" Composite Commercial Paper Rate. 5. Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and Allocation of Shares. Based on the determinations made pursuant to paragraph (a) of Section 4 of this Part II, the Submitted Bids and Submitted Sell Orders shall be accepted or rejected and the Trust Company shall take such other action as set forth below: (a) If Sufficient Clearing Bids have been made, subject to the provisions of paragraphs (c), (d) and (e) of this Section 5, Submitted Bids and Submitted Sell Orders shall be accepted or rejected as follows in the following order of priority and all other Submitted Bids shall be rejected: (i) the Submitted Sell Orders of Existing Holders shall be accepted and the Submitted Bid of each of the Existing Holders specifying any rate that is higher than the Winning Bid Rate shall be rejected, thus requiring each such Existing Holder to sell the shares of Series C Stock that are the subject of such Submitted Bid; (ii) the Submitted Bid of each of the Existing Holders specifying any rate that is lower than the Winning Bid Rate shall be accepted, thus entitling each such Existing Holder to continue to hold the shares of Series C Stock that are the subject of each Submitted Bid; (iii) the Submitted Bid of each of the Potential Holders specifying any rate that is lower than the Winning Bid Rate shall be accepted; (iv) the Submitted Bid of each of the Existing Holders specifying a rate that is equal to the Winning Bid Rate shall be accepted, thus entitling each such Existing Holder -25- to continue to hold the shares of Series C Stock that are the subject of such Submitted Bid, unless the number of Outstanding shares of Series C Stock subject to all such Submitted Bids shall be greater than the number of shares of Series C Stock ("remaining shares") equal to the excess of the Available Series C Stock over the number of shares of Series C Stock subject to Submitted Bids described in subparagraphs (ii) and (iii) of this paragraph (a), in which event the Submitted Bids of each such Existing Holder shall be rejected, and each such Existing Holder shall be required to sell shares of Series C Stock, but only in an amount equal to the difference between (A) the number of Outstanding shares of Series C Stock then held by such Existing Holder subject to such Submitted Bid and (B) the number of shares of Series C Stock obtained by multiplying the number of remaining shares by a fraction the numerator of which shall be the number of Outstanding shares of Series C Stock held by such Existing Holder subject to such Submitted Bid and the denominator of which shall be the sum of the number of Outstanding shares of Series C Stock subject to such Submitted Bids made by all such Existing Holders that specified a rate equal to the Winning Bid Rate; and (v) the Submitted Bid of each of the Potential Holders specifying a rate that is equal to the Winning Bid Rate shall be accepted but only in an amount equal to the number of shares of Series C Stock obtained by multiplying the difference between the Available Series C Stock and the number of shares of Series C Stock subject to Submitted Bids described in subparagraphs (ii), (iii) and (iv) of this paragraph (a) by a fraction the numerator of which shall be the number of Outstanding shares of Series C Stock subject to such Submitted Bid and the denominator of which shall be the sum of the number of Outstanding shares of Series C Stock subject to such Submitted Bids made by all such Potential Holders that specified a rate equal to the Winning Bid Rate. (b) If Sufficient Clearing Bids have not been made (other than because all of the Outstanding shares of Series C Stock are subject to Submitted Hold Orders), subject to the provisions of paragraphs (c), (d) and (e) of this Section 5, Submitted Orders shall be accepted or rejected as follows in the following order of priority and all other Submitted Bids shall be rejected: (i) the Submitted Bid of each Existing Holder specifying any rate that is equal to or lower than the Maximum Rate shall be accepted, thus entitling such Existing Holder to continue to hold the shares of Series C Stock that are the subject of such Submitted Bid; (ii) the Submitted Bid of each Potential Holder specifying any rate that is equal to or lower than the Maximum Rate shall be accepted; and (iii) the Submitted Bids of each Existing Holder specifying any rate that is higher than the Maximum Rate shall be rejected and the Submitted Sell Orders of each Existing Holder shall be accepted, in both cases only in an amount equal to the difference between (A) the number of Outstanding shares of Series C Stock then held by such Existing Holder subject to such Submitted Bid or Submitted Sell Order and (B) the number of shares of Series C Stock obtained by multiplying the difference between the Available Series C Stock and the aggregate number of shares -26- of Series C Stock subject to Submitted Bids described in subparagraphs (i) and (ii) of this paragraph (b) by a fraction the numerator of which shall be the number of Outstanding shares of Series C Stock held by such Existing Holder subject to such Submitted Bid or Submitted Sell Order and the denominator of which shall be the number of Outstanding shares of Series C Stock subject to all such Submitted Bids and Submitted Sell Orders. (c) If all of the Outstanding shares of Series C Stock are the subject of Submitted Hold Orders, all Submitted Bids shall be rejected. (d) If, as a result of the procedures described in paragraph (a) or (b) of this Section 5, any Existing Holder would be entitled or required to sell, or any Potential Holder would be entitled or required to purchase, a fraction of a share of Series C Stock on any Auction Date, the Trust Company, in such manner as it shall determine in its sole discretion, shall round up or down the number of shares of Series C Stock to be purchased or sold by any Existing Holder or Potential Holder on such Auction Date so that the number of shares purchased or sold by each Existing Holder or Potential Holder on such Auction Date shall be whole shares of Series C Stock. (e) If, as a result of the procedures described in paragraph (a) of this Section 5, any Potential Holder would be entitled or required to purchase less than a whole share of Series C Stock on any Auction Date, the Trust Company, in such manner as it shall determine in its sole discretion, shall allocate shares for purchase among Potential Holders so that only whole shares of Series C Stock are purchased on such Auction Date by any Potential Holder, even if such allocation results in one or more of such Potential Holders not purchasing shares of Series C Stock on such Auction Date. (f) Based on the results of each Auction, the Trust Company shall determine the aggregate number of shares of Series C Stock to be purchased and the aggregate number of shares of Series C Stock to be sold by Potential Holders and Existing Holders on whose behalf each Broker-Dealer submitted Bids or Sell Orders and, with respect to each Broker-Dealer, to the extent that such aggregate number of shares to be purchased and such aggregate number of shares to be sold differ, determine to which other Broker-Dealer or Broker-Dealers acting for one or more purchasers such Broker-Dealer shall deliver, or from which other Broker-Dealer or Broker-Dealers acting for one or more sellers such Broker-Dealer shall receive, as the case may be, shares of Series C Stock. 6. Miscellaneous. (a) The Board of Directors may interpret the provisions of this Part II to resolve any inconsistency or ambiguity which may arise or be revealed in connection with the Auction Procedures provided for herein, and if such inconsistency or ambiguity reflects an inaccurate provision hereof, the Board of Directors may, in appropriate circumstances, authorize the filing of a Certificate of Correction or Certificate of Amendment. (b) So long as the Applicable Rate is based on the results of an Auction, an Existing Holder (i) may sell, transfer or otherwise dispose of shares of Series C Stock only pursuant to a Bid or Sell Order in accordance with the procedures described in this Part II or to or through a Broker-Dealer or to a Person that has delivered a signed copy of a Purchaser's Letter to the Trust Company, provided that in the case of all transfers other than pursuant to Auctions such Existing Holder or -27- its Broker-Dealer advises the Trust Company of such transfer, and (ii) shall have the ownership of the shares of Series C Stock held by it maintained in book entry form by the Securities Depository in the account of its Agent Member, which in turn will maintain records of such Existing Holder's beneficial ownership. (c) Neither the Corporation nor any affiliate thereof may submit an Order in any Auction. Any Broker-Dealer that is an affiliate of the Corporation may not submit Bids to purchase shares of Series C Stock in Auctions for its own account, and if such affiliated Broker-Dealer has otherwise acquired shares for its own account, it must submit a Sell Order in the next Auction with respect to such shares. (d) The Trust Company shall reject any Submitted Order of the Corporation or an Affiliate, except for Sell Orders of affiliated Broker-Dealers. (e) From and after the occurrence of a Rate Adjustment Event, shares of Series C Stock shall be registered for transfer or exchange and new certificates issued upon surrender of the old certificates deemed by the Trust Company (or any other transfer agent or registrar appointed by the Corporation) properly endorsed for transfer with all necessary endorsers' signatures guaranteed in such manner and form as the Trust Company (or such other transfer agent or registrar) may require by a guarantor reasonably believed by the Trust Company (or such other transfer agent or registrar) to be responsible, accompanied by such assurances as the Trust Company (or such other transfer agent or registrar) shall deem necessary or appropriate to evidence the genuineness and effectiveness of each necessary endorsement and satisfactory evidence of compliance with all applicable laws relating to the collection of taxes or funds necessary for the payment of such taxes. -28- TO BE SUBMITTED TO YOUR BROKER-DEALER WHO WILL THEN DELIVER COPIES ON YOUR BEHALF TO THE RESPECTIVE TRUST COMPANIES. Master Purchaser's Letter Relating to Securities Involving Rate Settings through Auctions To: The Corporation The Trust Company A Broker-Dealer An Agent Member Other Persons 1. This letter is designed to apply to auctions for publicly or privately offered debt or equity securities ("Securities") of any issuer ("Corporation") which are described in any final prospectus or other offering materials relating to such Securities as the same may be amended or supplemented (collectively, with respect to the particular Securities concerned, the "Prospectus") and which involve periodic rate settings through auctions ("Auctions"). This letter shall be for the benefit of any Corporation and of any trust company or auction agent (collectively, "trust company"), broker-dealer, agent member, securities depository or other interested person in connection with any Securities and related Auctions (it being understood that such persons may be required to execute specified agreements and nothing herein shall alter such requirements). The terminology used herein is intended to be general in its application and not to exclude any Securities in respect of which (in the Prospectus or otherwise) alternative terminology is used. 2. We may from time to time offer to purchase, purchase, offer to sell and/or sell Securities of any Corporation as described in the Prospectus relating thereto. We agree that this letter shall apply to all such purchases, sales and offers and to Securities owned by us. We understand that the dividend/interest rate on Securities may be based from time to time on the results of Auctions as set forth in the Prospectus. 3. We agree that any bid or sell order, placed by us shall constitute an irrevocable offer by us to purchase or sell the Securities subject to such bid or sell order, or such lesser amount of Securities as we shall be required to sell or purchase as a result of such Auction, at the applicable price, all as set forth in the Prospectus, and that if we fail to place a bid or sell order with respect to Securities owned by us with a broker-dealer on any auction date, or a broker-dealer to which we communicate a bid or sell order fails to submit such bid or sell order to the trust company concerned, we shall be deemed to have placed a hold order with respect to such Securities as described in the Prospectus. We authorize any broker-dealer that submits a bid or sell order as our agent in Auctions to execute contracts for the sale of Securities covered by such bid or sell order. We recognize that the payment by such broker-dealer for Securities purchased on our behalf shall not relieve us of any liability to such broker-dealer for payment for such Securities. 4. We agree that, during the applicable period as described in the Prospectus, dispositions of Securities can be made only in the denominations set forth in the Prospectus and we will sell, transfer or otherwise dispose of any Securities held by us from time to time only pursuant to a bid or sell order placed in an Auction, to or through a broker-dealer or, when permitted in the Prospectus, to a person that has signed and delivered, or caused to be delivered on its behalf, to the applicable trust company a letter substantially in the form of this letter (or -29- other applicable purchaser's letter), provided that in the case of all transfers other than pursuant to Auctions we or our broker-dealer or our agent member shall advise such trust company of such transfer. We understand that a restrictive legend will be placed on certificates representing the Securities and stop-transfer instructions will be issued to the transfer agent and/or registrar, all as set forth in the Prospectus. We agree to comply with any other transfer restrictions or other related procedures as described in the Prospectus. 5. We agree that, during the applicable period as described in the Prospectus, ownership of Securities shall be represented by a global certificate registered in the name of the applicable securities depository or its nominee, that we will not be entitled to receive any certificate representing the Securities and that our ownership of any Securities will be maintained in book entry form by the securities depository for the account of our agent member, which in turn will maintain records of our beneficial ownership. We authorize and instruct our agent member to disclose to the applicable trust company such information concerning our beneficial ownership of Securities as such trust company shall request. 6. We acknowledge that partial deliveries of Securities purchased in Auctions may be made to us and such deliveries shall constitute good delivery as set forth in the Prospectus. 7. This letter is not a commitment by us to purchase any Securities. 8. This letter supersedes any prior-dated version of this master purchaser's letter, and supplements any prior- or post-dated purchaser's letter specific to particular Securities; any recipient of this letter may rely upon it until such recipient has received a signed writing amending or revoking this letter. 9. The descriptions of Auction procedures set forth in each applicable Prospectus are incorporated by reference herein and, in case of any conflict between this letter and any such description, such description shall control. 10. Any xerographic or other copy of this letter shall be deemed of equal effect as a signed original. 11. Our agent member of the securities depository currently is ______________. 12. Our personnel authorized to place orders with broker-dealers for the purposes set forth in the Prospectus in Auctions currently is/are ______________ _________________ telephone number (____) ____________. 13. Our taxpayer identification number is _________________________. -30- 14. This letter is continued on the reverse hereof and the provisions there set forth pertaining to privately offered Securities shall have the same effect as if set forth at this place. Dated:_________________________________ _____________________________________ Mailing Address of Purchaser: (Name of Purchasers) _______________________________________ By:__________________________________ _______________________________________ Printed Name:________________________ _______________________________________ Title:_______________________________ 15. In the case of each offer to purchase, purchase, offer to sell or sale by us of Securities not registered under the Securities Act of 1933, as amended (the "Act"), we represent and agree as follows: A. We understand and expressly acknowledge that the Securities have not been and will not be registered under the Act and, accordingly, that the Securities may not be reoffered, resold or otherwise pledged, hypothecated or transferred unless an applicable exemption from the registration requirements of the Act is available. B. We hereby confirm that any purchase of Securities made by us will be for our own account, or for the account of one or more parties for which we are acting as trustee or agent with complete investment discretion and with authority to bind such parties, and not with a view to any public resale or distribution thereof. We and each other party for which we are acting which will acquire Securities will be "accredited investors" within the meaning of Regulation D under the Act with respect to the Securities to be purchased by us or such party, as the case may be, will have previously invested in similar types of instruments and will be able and prepared to bear the economic risks of investing in and holding such Securities. C. We acknowledge that prior to purchasing any Securities we shall have received a Prospectus (private placement memorandum) with respect thereto and acknowledge that we will have had access to such financial and other information, and have been afforded the opportunity to ask such questions of representatives of the Corporation and receive answers thereto, as we deem necessary in connection with our decision to purchase Securities. D. We recognize that the Corporation and broker-dealers will rely upon the truth and accuracy of the foregoing investment representations and agreements, and we agree that each of our purchases of Securities now or in the future shall be deemed to constitute our concurrence in all of the foregoing which shall be binding on us and each party for which we are acting as set forth in Subparagraph B above. (c) Flexible Auction Preferred Stock, Series D -31- PART I 1. Designation. The designation of said series of Preferred Stock shall be Flexible Auction Preferred Stock, Series D (the "Series D Stock"). The number of shares of Series D Stock shall be 600. The stated value of the Series D Stock shall be $100,000 per share. 2. Dividends. (a) The Holders (as defined in Section 9 of this Part I) shall be entitled to receive, when, as and if declared by the Board of Directors (as defined in Section 9 of this Part I) out of funds legally available therefor, cumulative cash dividends, at the Applicable Rate (as defined in clause (c)(i)(A) of this Section 2) per annum, determined as set forth below, and no more, payable on the respective dates set forth below. (b)(i) Dividends on shares of Series D Stock shall accrue at the Applicable Rate from the Date of Original Issue (as defined in Section 9 of this Part I). (b)(ii) Accrued dividends on the shares of the Series D Stock shall be payable commencing on August 15, 1990. Thereafter, dividends on the Series D Stock for a Short-Term Dividend Period (as defined in subparagraph (b)(vi) of this Section 2) shall be payable on the last day of such Short-Term Dividend Period. Dividends on the shares of Series D Stock for a Long-Term Dividend Period (as defined in subparagraph (b)(vi) of this Section 2) shall be payable on the last day of such Long-Term Dividend Period and, if occurring prior to the last day of such Long-Term Dividend Period, on the first day of the fourth month after the commencement of such Long-Term Dividend Period and quarterly thereafter on the first day of each succeeding third month. Each day on which dividends would be payable as determined as set forth in this subparagraph (ii) but for the provisions set forth in subparagraph (b)(iii) of this paragraph 2 is referred to herein as a "Normal Dividend Payment Date." (b)(iii) Notwithstanding the preceding subparagraph (ii) of this paragraph (b), if: (A)(1) the Securities Depository (as defined in Section 9 of this Part I) shall not have advised the Trust Company (as defined in Section 9 of this Part I) at least five Business Days prior to a Dividend Payment Date that it will make available to its participants and members on Dividend Payment Dates, in funds immediately available in New York City, the amount due as dividends on such Dividend Payment Dates, and (2)(X) a Normal Dividend Payment Date is not a Business Day (as defined in Section 9 of this Part I) or (Y) the day next succeeding such Dividend Payment Date is not a Business Day, then dividends shall be payable on the first Business Day preceding such Normal Dividend Payment Date that is next succeeded by a Business Day; or (B)(1) the Securities Depository shall have advised the Trust Company at least five Business Days prior to such Dividend Payment Date that it will make available to its participants and members on Dividend Payment Dates, in funds immediately available in New York City, the amount due as dividends on such -32- Dividend Payment Dates and (2) a Normal Dividend Payment Date is not a Business Day, then Dividends shall be payable on the first Business Day after such Normal Dividend Payment Date; (b)(iv) Notwithstanding the foregoing, if the date on which dividends on the shares of the Series D Stock would be payable as determined as set forth in subparagraphs (ii) and (iii) of this paragraph (b) is a day that would result in the number of days between successive Auction Dates (as defined in Section 9 of this Part I) for the Series D Stock (determined by including the first Auction Date and excluding the second Auction Date) not being at least equal to the then current Minimum Holding Period (as defined below), then dividends on such shares shall be payable, if clause (iii) (A) above would be applicable to the Series D Stock, on the first Business Day following such date on which dividends would be so payable that is next succeeded by a Business Day or, if clause (iii)(B) above would be applicable to the Series D Stock, on the first Business Day following such day on which dividends would be so payable, that in either case results in the number of days between such successive Auction Dates for the Series D Stock (determined as set forth above) being at least equal to the then current Minimum Holding Period. In addition, notwithstanding the foregoing, the Board of Directors, in the event of a change in law lengthening the minimum holding period (the "Minimum Holding Period") (currently found in Section 246(c) of the Code (as defined in Section 9 of this Part I) required for taxpayers to be entitled to the dividends-received deduction on Preferred Stock held by nonaffiliated corporations (currently found in Section 243(a) of the Code), shall adjust the period of time between Dividend Payment Dates (as hereinafter defined) so as, subject to clauses (A) and (B) of subparagraph (b)(iii), to adjust uniformly the number of Dividend Period Days (as defined in Section 9 of this Part I) in Short-Term Dividend Periods (as defined in subparagraph (b)(vi) of this Section 2) commencing after the date of such change in law to exceed the new Minimum Holding Period, provided that the number of Dividend Period Days shall not exceed by more than nine days the length of such new Minimum Holding Period and in no event shall exceed 98 days and shall consist of a whole number of weeks. (b)(v) Each date on which dividends on the shares of the Series D Stock shall be payable as determined as set forth above shall be referred to herein as a "Dividend Payment Date" and the first Dividend Payment Date shall be referred to herein as the "Initial Dividend Payment Date." If applicable, the period from the preceding Dividend Payment Date to and including the next Dividend Payment Date for the Series D Stock during a Long-Term Dividend Period is herein referred to as a "Dividend Quarter." Although any particular Dividend Payment Date for the Series D Stock may not occur on the originally scheduled Normal Dividend Payment Date for the Series D Stock because of the foregoing provisions, each succeeding Dividend Payment Date for the Series D Stock shall be, subject to such provision, the date determined as set forth in subparagraph (ii) above as if each preceding Dividend Payment Date had occurred on the respective originally scheduled Normal Dividend Payment Date. (b)(vi) The period from and after the Date of Original Issue to and including the Initial Dividend Payment Date (the "Initial Dividend Period") for the shares of Series D Stock shall contain 48 Dividend Period Days. After the Initial Dividend Period for the Series D Stock, each subsequent Dividend Period for the Series D Stock (except for the adjustments for non-Business Days provided in subparagraph (iii) above) shall contain 49 Dividend Period Days (each such period, subject to any adjustment as a result of a change in law lengthening the Minimum Holding -33- Period as provided in subparagraph (iv) above, being referred to herein as a "Short-Term Dividend Period"), unless as provided in subparagraph (vii) below, the Term Selection Agent specifies that any such subsequent Dividend Period shall be a Dividend Period containing any specified number of Dividend Period Days greater than the number of Dividend Period Days in a Short-Term Dividend Period and containing a number of Dividend Period Days evenly divisible by seven (each such period being referred to herein as a "Long-Term Dividend Period," and each such Short-Term Dividend Period and Long-Term Dividend Period, together with the Initial Dividend Period (as defined in clause (c)(i)(A)), being referred to herein as a "Dividend Period"). After the Initial Dividend Period for the Series D Stock, each successive Dividend Period for the Series D Stock shall commence on the Dividend Payment Date ending the preceding Dividend Period and shall end (i) during a Short-Term Dividend Period, on the next Dividend Payment Date for the Series D Stock and (ii) during a Long-Term Dividend Period, on the last day of the Long-Term Dividend Period specified by the Term Selection Agent in the related notice of Long-Term Dividend Period. (b)(vii) Not less than 10 and not more than 20 days prior to the date of an Auction (as defined in Section 9 of this Part I) for the Series D Stock and based on the criteria set forth below, the Term Selection Agent may give telephonic and written notice to the Corporation, the Trust Company, the Paying Agent and the Securities Depository that the next succeeding Dividend Period for the Series D Stock will be longer than a Short-Term Dividend Period (a "Notice of Long-Term Dividend Period"). Such notice will specify the next succeeding Dividend Period for the Series D Stock as a Long-Term Dividend Period, which may be any period designated by the Term Selection Agent greater than the Short-Term Dividend Period and containing a number of Dividend Period Days evenly divisible by seven, provided that for any Auction occurring after the initial Auction for the Series D Stock, the Term Selection Agent may not give a Notice of Long-Term Dividend Period for the Series D Stock (and any such notice shall be null and void) unless Sufficient Clearing Bids were made in the last occurring Auction for the Series D Stock and full cumulative dividends for the Series D Stock payable prior to the date of Notice of Long-Term Dividend Period have been paid in full. The Term Selection Agent shall state in each Notice of Long-Term Dividend Period (i) that the next succeeding Dividend Period for the Series D Stock shall be a Long-Term Dividend Period, (ii) the term thereof and (iii) the redemption provisions applicable for such Long-Term Dividend Period. The Term Selection Agent may establish a Long-Term Dividend Period, and, subject to the provisions of Section 4 of this paragraph 6(c) of Article Fourth, the applicable redemption provisions therefor, for the shares of the Series D Stock if the Term Selection Agent determines that such Long-Term Dividend Period and such redemption provisions, in its sole opinion, provide the Corporation with the most favorable financing alternative based upon the following: (i) short-term and long-term market rates and indices of such short-term and long-term rates, (ii) the amounts, maturities and interest or dividend rates on the then outstanding securities of the Corporation or its subsidiaries, (iii) market supply and demand for short-term and long-term securities, (iv) yield curves for short-term and long-term securities comparable to the shares of the Series D Stock, (v) industry and financial conditions which may affect the shares of the Series D Stock including the Term Selection Agent's expectations with respect thereto, (vi) current tax laws and administrative interpretations with respect thereto, (vii) the number of shares of the Series D Stock Outstanding on the next Auction Date and (viii) the number of potential purchasers. Any Notice of Long-Term Dividend Period may be revoked by the Term Selection Agent on or prior to the second Business Day prior to the related Auction by telephonic and written notice (a "Notice of Revocation") to the Corporation, the Trust Company, the Paying Agent and the Securities Depository, specifying that the Term Selection Agent has determined that because of subsequent changes in any of the foregoing factors, such Long-Term Dividend Period would not result in the -34- most favorable financing alternative for the Corporation, and shall be deemed to have been revoked if on or prior to the second Business Day prior to the related Auction, the Term Selection Agent shall have been removed and the Corporation shall have given written and telephonic notice of such removal ("Notice of Removal") to the Trust Company, the Paying Agent and the Securities Depository. Except with respect to a Notice of Long-Term Dividend Period that is deemed to be revoked, any Long-Term Dividend Period specified by the Term Selection Agent for the Series D Stock and any revocation thereof shall be conclusive and binding on the Corporation and the Holders. The Corporation may remove the Term Selection Agent for the Series D Stock upon 5 days' written notice. If there is no Term Selection Agent with respect to any Dividend Period, then such Dividend Period shall be a Short-Term Dividend Period. If the Term Selection Agent does not give a Notice of Long-Term Dividend Period with respect to the next succeeding Dividend Period for the Series D Stock or gives a Notice of Revocation with respect thereto or such Notice of Long-Term Dividend Period shall be deemed to have been revoked, such next succeeding Dividend Period shall be a Short-Term Dividend Period. In addition, in the event the Term Selection Agent has given a Notice of Long-Term Dividend Period with respect to the next succeeding Dividend Period for the Series D Stock and has not given a Notice of Revocation with respect thereto and such Notice of Long-Term Dividend Period shall not have been deemed revoked, but Sufficient Clearing Bids are not made in the related Auction for the Series D Stock or such Auction is not held for any reason, such next succeeding Dividend Period shall, notwithstanding such Notice of Long-Term Dividend Period, be a Short-Term Dividend Period and the Term Selection Agent may not again give a Notice of Long-Term Dividend Period (and any such notice shall be null and void) for the Series D Stock until sufficient Clearing Bids have been made in an Auction with respect to a Short-Term Dividend Period for the Series D Stock. (b)(viii) As long as the Applicable Rate is based on the results of an Auction, the Corporation shall pay to the Paying Agent (as defined in Section 9 of this Part I) not later than 12:00 noon, New York City time, on the Business Day next preceding each Dividend Payment Date, an aggregate amount of funds available on the next Business Day in the City of New York, New York, equal to the dividends to be paid to all Holders on such Dividend Payment Date. All such moneys shall be held in trust for the payment of such dividends by the Paying Agent for the benefit of the Holders specified in subparagraph (ix) or this paragraph (b). (b)(ix) Each dividend shall be payable to the Holders as their names appear on the stock register of the Corporation on the Business Day next preceding the Dividend Payment Date thereof; provided, however, that if a Rate Adjustment Event (as defined in Section 9 of this Part I) shall have occurred and shall not have been cured by paying all accrued and unpaid dividends and unpaid redemption payments as provided in clause (c)(i)(B), such dividend shall be paid to such Holders as their names appear on the stock register of the Corporation on such date, not exceeding 15 days preceding the payment date thereof, as may be fixed by the Board of Directors. Dividends in arrears for any past Dividend Period may be declared and paid at any time, without reference to any regular Dividend Payment Date, to the Holders as their names appear on the stock register of the Corporation on such date, not exceeding 15 days preceding the payment date thereof, as may be fixed by the Board of Directors. -35- (c)(i)(A) The dividend rate of shares of Series D Stock shall be 6.55% per annum during the Initial Dividend Period. Commencing on the Initial Dividend Payment Date, the dividend rate on shares of Series D Stock for each subsequent dividend period (hereinafter referred to as a "Subsequent Dividend Period" and collectively as "Subsequent Dividend Periods") thereafter, which Subsequent Dividend Periods shall commence on the day that is the last day of the preceding Dividend Period and shall end on and include the next succeeding Dividend Payment Date, shall be equal to the rate per annum that results from implementation of the Auction Procedures (as defined in Section 9 of this Part I); provided, however, that in the event that an Auction for any Dividend Period is not held for any reason (other than as a result of the existence of a Rate Adjustment Event on the Auction Date for such Dividend Period), the dividend rate for such Dividend Period shall be the Non-Auction Rate on the Auction Date with respect to such Dividend Period. The "Non-Auction Rate" on an Auction Date shall be the greater of (x) the Applicable Rate in effect immediately prior to such Auction Date or (y) the Maximum Rate in effect on such Auction Date for a Short-Term Dividend Period, regardless of whether an Auction is held. The dividend rate for any Dividend Period or part thereof determined as set forth in this paragraph (c) is referred to herein as the "Applicable Rate" for such Dividend Period or part thereof. (c)(i)(B) In the event a Rate Adjustment Event occurs on a Dividend Payment Date and is not cured in accordance with the next succeeding sentence. Auctions will be suspended until such time as set forth below, and the Applicable Rate for each Dividend Period thereafter (until Auctions are resumed), including the Dividend Period commencing on the date of such Rate Adjustment Event, shall be equal to the Maximum Rate with respect to such Dividend Period (but, for purposes of determining such Maximum Rate, with the prevailing rating for the Series D Stock being deemed to be "Below ba3"/BB-" and the first day of such Dividend Period being deemed to be the Auction Date) and each such Dividend Period shall be a Short-Term Dividend Period. Any such Rate Adjustment Event shall be deemed cured if by 12:00 noon, New York City time, on the third Business Day next succeeding any such Rate Adjustment Event, the Corporation shall have deposited with the Trust Company all accumulated and unpaid dividends and any unpaid redemption payments, including the full amount of any dividends to be paid with respect to the Dividend Period with respect to which such Rate Adjustment Event occurred, plus an amount computed by multiplying (i) 250% of the 60-Day "AA" Composite Commercial Paper Rate on the date on which such Rate Adjustment Event occurred by (ii) a fraction, the numerator of which shall be the number of days for which such Rate Adjustment Event is not cured in accordance with this sentence (including the day such Rate Adjustment Event occurs and excluding the day such Rate Adjustment Event is cured) and the denominator of which shall be 360, and applying the rate obtained against the aggregate amount not paid when due. 9(c)(ii) In the event a Rate Adjustment Event occurs during a Long- Term Dividend Period, the Applicable Rate for such Dividend Period shall remain unchanged, and an additional amount computed by multiplying (i) the Maximum Rate with respect to such Dividend Period (but, for purposes of determining such Maximum Rate, with the prevailing rating for the Series D Stock being deemed to be "Below "ba3"/BB-" and the date of such Rate Adjustment Event being deemed to be the Auction Date) by (ii) a fraction, the numerator of which shall be the number of days for which such Rate Adjustment Event is not cured (including the day such Rate Adjustment Event occurs and excluding the day such Rate Adjustment Event is cured) and the denominator of which shall be 360, and applying the rate obtained against accumulated dividends and redemption payments not paid when due, shall accumulate as additional dividends on the shares of the Series D Stock. In the event that such Rate Adjustment Event is not cured prior to the next succeeding -36- Auction Date for shares of the Series D Stock, Auctions for the Series D Stock shall be suspended, the next succeeding Dividend Period shall be a Short-Term Dividend Period and the Applicable Rate shall be equal to the Maximum Rate with respect to such Dividend Period (but, for purposes of determining such Maximum Rate, with the prevailing rating for the Series D Stock being deemed to be "Below "ba3"/BB-" and the first day of such Dividend Period being deemed to be the Auction Date). Thereafter until such Rate Adjustment Event shall have been cured and full and cumulative dividends on the shares of the Series D Stock shall have been paid in full or the Board of Directors of the Corporation shall have declared a dividend in such amount and funds sufficient for the payment thereof shall have been irrevocably deposited with the Paying Agent, each subsequent Dividend Period and Applicable Rate for the Series D Stock will be determined pursuant to the next preceding paragraph. (c)(iii) If prior to an Auction Date for shares of the Series D Stock, full and cumulative dividends shall have been paid in full or the Board of Directors of the Corporation shall have declared a dividend in such amount and funds sufficient for the payment thereof shall have been irrevocably deposited with the Paying Agent, and any unpaid redemption payments shall have been made, Auctions for the Series D Stock will resume. (c)(iv) The amount of dividends per share accrued and payable on shares of Series D Stock for each Dividend Period or Dividend Quarter shall be computed by multiplying the Applicable Rate for such Dividend Period or Dividend Quarter by a fraction, the numerator of which shall be the number of Dividend Period Days in such Dividend Period or Dividend Quarter (calculated by counting the first day of such Dividend Period or Dividend Quarter but excluding the last day thereof), and the denominator of which shall be 360 and applying the rate obtained against $100,000; and the amount of dividends per share accrued for any part of any Dividend Period shall be computed by multiplying the Applicable Rate for such Dividend Period by a fraction the numerator of which shall be the number of days in such part of such Dividend Period (calculated by counting the first day thereof but excluding the last day thereof) and the denominator of which shall be 360 and applying the rate obtained against $100,000. (d)(i) No full dividends shall be declared or paid or set apart for payment on Preferred Stock of any series ranking, as to dividends, on a parity with or junior to the Series D Stock for any period unless full cumulative dividends have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for such payment on the Series D Stock for all Dividend Periods terminating on or prior to the date of payment of such full cumulative dividends. When dividends are not paid in full, as aforesaid, upon the Series D Stock and any other Preferred Stock ranking on a parity as to dividends with the Series D Stock, all dividends declared upon the Series D Stock and any other Preferred Stock ranking on a parity as to dividends with the Series D Stock shall be declared pro rata so that the amount of dividends declared per share on the Series D Stock and such other Preferred Stock shall in all cases bear to each other the same ratio that accrued dividends per share on the Series D Stock and such other Preferred Stock bear to each other. Holders of Series D Stock shall not be entitled to any dividend, whether payable in cash, property or stocks, in excess of the full cumulative dividends, as herein provided, on the Series D Stock. No interest, or sum of money in lieu of interest, shall be payable in respect of any dividend payments on the Series D Stock which may be in arrears. (d)(ii) So long as any shares of Series D Stock are outstanding, no dividend (other than a dividend in Common Stock or in any other stock-ranking junior to Series D Stock as to -37- dividends and upon liquidation and other than as provided in subparagraph (i) of this paragraph (d)) shall be declared or paid or set aside for payment or other distribution declared or made upon the Common Stock or upon any other stock ranking junior to or on a parity with the Series D Stock as to dividends or upon liquidation, nor shall any Common Stock or any other stock of the Corporation ranking junior to or on a parity with the Series D Stock as to dividends or upon liquidation be redeemed, purchased or otherwise acquired for any consideration (or any moneys paid to or made available for a sinking fund for the redemption of any such stock) by the Corporation (except by conversion into or exchange for stock of the Corporation ranking junior to the Series D Stock as to dividends and upon liquidation) unless, in each case, the full cumulative dividends on all outstanding shares of Series D Stock shall have been paid for all past Dividend Periods. 3. Voting. (a) Unless the vote or consent of the holders of a greater number of shares shall then be required by law, the consent of the holders of at least 66-2/3% of all of the shares of the Series D Stock and all other series of Preferred Stock ranking on a parity with the Series D Stock, either as to dividends or upon liquidation, at the time outstanding given in person or by proxy either in writing or by a vote at a meeting called for the purpose at which the holders of shares of Series D Stock and shares of Preferred Stock ranking on a parity with the Series D Stock, either as to dividends or upon liquidation, shall vote together as a separate class, shall be necessary for authorizing, effecting or validating the amendment, alteration or repeal of any of the provisions of this Restated Certificate of Incorporation or of any certificate amendatory thereof or supplemental thereto (including any Certificate of Designations or any similar document relating to the Series D Stock or any series of Preferred Stock ranking on a parity with the Series D Stock, either as to dividends or upon liquidation) which would adversely affect the powers, preferences, rights or privileges of the Series D Stock or the Preferred Stock ranking on a parity with the Series D Stock, either as to dividends or upon liquidation; provided, however, that if any such amendment, alteration or repeal would adversely affect the powers, preferences, rights or privileges of the Series D Stock or one or more series of the Preferred Stock or ranking on a parity with the Series D Stock, either as to dividends or upon liquidation, but shall not so affect the entire class, then only the shares of the one or more series so affected shall be considered to be a separate class entitled to vote upon or consent to such amendment, alteration or repeal; (b) Unless the vote or consent of the holders of a greater number of shares shall then be required by law, the consent of the holders of at least 66-2/3% of all of the shares of the Series D Stock and all other series of Preferred Stock ranking on a parity with the Series D Stock, either as to dividends or upon liquidation, at the time outstanding, given in person or by proxy, either in writing or by a vote at a meeting called for the purpose at which the holders of shares of the Series D Stock and such other series of Preferred Stock ranking on a parity with the Series D Stock, either as to dividends or upon liquidation, shall vote together as a single class without regard to series, shall be necessary for authorizing, effecting or validating the creation, authorization or issue of any class of stock of the Corporation ranking prior to the shares of the Series D Stock and such other series of Preferred Stock ranking on a parity with the Series D Stock, either as to dividends or upon liquidation, as to dividends or upon liquidation, or the reclassification of any authorized stock of the Corporation into any such prior shares, or the creation, authorization or issue of any obligation or security convertible into or evidencing the right to purchase any such prior shares; and -38- (c) If at the time of any annual meeting of stockholders for the election of directors a default in preference dividends on the Series D Stock or the Preferred Stock ranking on a parity with the Series D Stock, either as to dividends or upon liquidation, shall exist, the number of directors constituting the Board of Directors shall be increased by two, and the holders of the Series D Stock and the Preferred Stock of all series ranking on a parity with the Series D Stock, either as to dividends or upon liquidation, shall have the right at such meeting, voting together as a single class without regard to series, to the exclusion of the holders of Common Stock, to elect two directors of the Corporation to fill such newly created directorships. Such right shall continue until there are no dividends in arrears upon the Series D Stock and the Preferred Stock ranking on a parity with the Series D Stock, either as to dividends or upon liquidation. Each director elected by the holders of shares of Series D Stock and Preferred Stock ranking on a parity with the Series D Stock, either as to dividends or upon liquidation, (herein called a "Preferred Director") shall continue to serve as such director for the full term for which he shall have been elected, notwithstanding that prior to the end of such term a default in preference dividends shall cease to exist. Any Preferred Director may be removed without cause by, and shall not be removed without cause except by, the vote of the holders of record of the outstanding shares of Series D stock and Preferred Stock ranking on a parity with the Series D Stock, either as to dividends or upon liquidation, voting together as a single class without regard to series, at a meeting of the stockholders, or of the holders of shares of Series D Stock and Preferred Stock ranking on a parity with the Series D Stock, either as to dividends or upon liquidation, called for that purpose. So long as a default in preference dividends on the Series D Stock or the Preferred Stock ranking on a parity with the Series D Stock, either as to dividends or upon liquidation shall exist, (A) any vacancy in the office of a Preferred Director may be filled (except as provided in the following clause (B)) by an instrument in writing signed by the remaining Preferred Director and filed with the Corporation and (B) in the case of the removal of any Preferred Director, the vacancy may be filled by the vote of the holders of the outstanding shares of Series D Stock and Preferred Stock ranking on a parity with the Series D Stock, either as to dividends or upon liquidation, voting together as a single class without regard to series, at the same meeting at which such removal shall be voted. Each director appointed as aforesaid by the remaining Preferred Director shall be deemed, for all purposes hereof, to be a Preferred Director. Whenever the term of office of the Preferred Directors shall end and a default in preference dividends shall no longer exist, the number of directors constituting the Board of Directors shall be reduced by two. For the purposes hereof, a "default in preference dividends" on the Series D Stock or the Preferred Stock ranking on a parity with the Series D Stock, either as to dividends or upon liquidation, shall be deemed to have occurred whenever the amount of accrued dividends upon the Series D Stock or any series of the Preferred Stock ranking on a parity with the Series D Stock, either as to dividends or upon liquidation, shall be equivalent to six full quarterly dividends (which, with respect to any Series D Stock providing for other than quarterly dividend periods, shall be deemed to be dividends in respect of a number of dividend periods containing not less than 540 days) or more, and, having so occurred, such default shall be deemed to exist thereafter until, but only until, all accrued dividends on all shares of Series D Stock and Preferred Stock ranking on a parity with the Series D Stock, either as to dividends or upon liquidation, of each and every series then outstanding shall have been paid to the end of the last preceding dividend period. 4. Redemption. (a)(i) The Series D Stock may be redeemed, at the option of the Corporation, as a whole or from time to time in part, (A) in the case of a Short-Term Dividend Period, on the -39- Dividend Payment Date for such period and (B) in the case of a Long-Term Dividend Period, on such Dividend Payment Dates as may be established by the Term Selection Agent as redemption dates, and on such other terms as may be established by the Term Selection Agent, such dates and other terms have been determined by the Term Selection Agent as the dates and terms which provide the Corporation with the most favorable financing alternatives, such determination to be based upon the factors listed in clauses (i)-(viii) of subparagraph 2(b) (vii) hereof at a redemption price of $100,000 per shares plus an amount equal to accrued and unpaid dividends thereon (whether or not earned or declared) to the date fixed for redemption. (a) (ii) If fewer than all of the outstanding shares of Series D Stock are to be redeemed pursuant to subparagraph (i) of this paragraph (a), the number of shares to be redeemed shall be determined by the Board of Directors, and such shares shall be redeemed pro rata from the Holders in proportion to the number of such shares held by such Holders (with adjustments to avoid redemption of fractional shares). (b) If the Corporation shall redeem shares of Series D Stock pursuant to paragraph (a) of this Section 4, notice of such redemption shall be given by mailing the same by first class mail, postage prepaid, not less than 30 nor more than 45 days prior to the date fixed for redemption thereof, to each Holder of the shares to be redeemed, at such Holder's address as the same appears on the stock register of the Corporation. Such notice shall state: (i) the redemption date; (ii) the number of shares of Series D Stock to be redeemed; (iii) the redemption price plus the amount of accrued and unpaid dividends to the redemption date; (iv) the place or places where certificates for such shares of Series D Stock are to be surrendered for payment of the redemption price; and (v) that dividends on the shares to be redeemed will cease to accrue on such redemption date. If fewer than all shares held by any Holder are to be redeemed, the notice mailed to such Holder shall also specify the number of shares to be redeemed from such Holder. (c) Notwithstanding the provisions of paragraph (a) of this Section 4, if any dividends on the Series D Stock are in arrears, no shares of Series D Stock shall be redeemed unless all outstanding shares of Series D Stock are simultaneously redeemed, and the Corporation shall not purchase or otherwise acquire any shares of Series D Stock; provided, however, that the foregoing shall not prevent the purchase or acquisition of shares of Series D Stock pursuant to a purchase or exchange offer made on the same terms to Holders of all outstanding shares of Series D Stock. (d) If notice of redemption has been given under paragraph (b) of this Section 4 or the Corporation has irrevocably authorized and directed the Redemption Agent to begin promptly and complete such giving of notice, and the Corporation has deposited in trust with the Redemption Agent funds necessary for such redemption, from and after the later of the date of such notice or the date such deposit is made, the shares of Series D Stock called for redemption shall no longer be deemed to be outstanding, and all rights of the Holders thereof as stockholders of the Corporation (except the right to receive the redemption price plus an amount equal to the accrued and unpaid dividends thereon to the date fixed for redemption) shall cease. Upon surrender in accordance with said notice of the certificates for any shares so redeemed (properly endorsed or assigned for transfer, if the Board of Directors shall so require and the notice shall so state), the redemption price set forth above plus an amount equal to such accrued and unpaid dividends shall be paid by the Redemption Agent to the Holders of the shares of Series D Stock subject to redemption as set forth in paragraph (c) of this Section 4. In case fewer than all of the -40- shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares without cost to the Holder thereof. (e) As long as the Applicable Rate is based on the results of an Auction, on the Business Day immediately preceding the date fixed for redemption, the Corporation shall pay the applicable Redemption Deposit Amount (as defined in Section 9 of this Part I) to the Redemption Agent, in funds available on the redemption date for disbursement to Holders as appropriate. All such moneys shall be held in trust by the Redemption Agent for the benefit of Holders of shares so to be redeemed. 5. Liquidation Rights. (a) Upon the dissolution, liquidation or winding up of the Corporation, the Holders of the Series D Stock shall be entitled to receive out of the assets of the Corporation available for distribution to stockholders, before any payment or distribution shall be made on the Common Stock or on any other class of stock ranking junior to the Series D Stock upon liquidation, the amount of $100,000 per share, plus a sum equal to all dividends (whether or not earned or declared) on such shares accrued and unpaid thereon to the date of the final distribution. (b) Neither the sale of all or substantially all the property or business of the Corporation, nor the merger or consolidation of the Corporation into or with any other corporation or the merger or consolidation of any other corporation into or with the Corporation, shall be deemed to be a dissolution, liquidation or winding up, voluntary or involuntary, for the purposes of this Section 5. (c) After the payment to the holders of the Series D Stock of the full preferential amounts provided for in this Section 5, the holders of Series D Stock as such shall have no right or claim to any of the remaining assets of the Corporation. (d) In the event the assets of the Corporation available for distribution to the holders of Series D Stock upon any dissolution, liquidation or winding up of the Corporation, whether voluntary or involuntary, shall be insufficient to pay in full all amounts to which such holders are entitled pursuant to paragraph (a) of this Section 5, no such distribution shall be made on account of any shares of any other class or series of Preferred Stock ranking on a parity with the Series D Stock upon such dissolution, liquidation or winding up unless proportionate distributive amounts shall be paid on account of the Series D Stock, ratably, in proportion to the full distributable amounts for which holders of all such parity shares are respectively entitled upon such dissolution, liquidation or winding up. (e) Upon the dissolution, liquidation or winding up of the Corporation, the holders of shares of Series D Stock then outstanding shall be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders all amounts to which such holders are entitled pursuant to paragraph (a) of this Section 5 before any payment shall be made to the holders of any class or series of capital stock of the Corporation ranking junior upon liquidation to the Series D Stock. 6. Sinking or Retirement Fund. -41- The Series D Stock shall not be entitled to the benefit of a sinking or retirement fund to be applied to the purchase or redemption of such stock. 7. Rank. For purposes of this paragraph 6(c) of Article Fourth, any stock of any class or classes of the Corporation shall be deemed to rank: (a) prior to the Series D Stock, either as to dividends or upon liquidation, if the holders of such class or classes shall be entitled to the receipt of dividends or of amounts distributable upon dissolution, liquidation or winding up of the Corporation, as the case may be, in preference or priority to the holders of Series D Stock; (b) on a parity with the Series D Stock, either as to dividends or upon liquidation, whether or not the dividend rates, dividend payment dates or redemption or liquidation prices per share or sinking fund provisions, if any, are different from those of the Series D Stock, or if the holders of such stock shall be entitled to the receipt of dividends or of amounts distributable upon dissolution, liquidation or winding up of the Corporation, as the case may be, in proportion to their respective dividend rates or liquidation prices, without preference or priority, one over the other, as between the holders of such stock and the holders of Series D Stock; and (c) junior to the Series D Stock, either as to dividends or upon liquidation, if such class shall be Common Stock or if the holders of Series D Stock shall be entitled to receipt of dividends or of amounts distributable upon dissolution, liquidation or winding up of the Corporation, as the case may be, in preference or priority to the holders of shares of such class or classes. 8. Additional Agreements. (a) Term Selection Agent. The Corporation shall use its best efforts to maintain a Term Selection Agent with respect to the Series D Stock to act in accordance with the provisions set forth herein. (b) Trust Company. The Corporation shall use its best efforts to maintain a Trust Company with respect to the Series D Stock to act in accordance with the provisions set forth herein. 9. As used in Parts I and II of this paragraph 6(c) of Article Fourth, the following terms shall have the following meanings (with terms defined in the singular having comparable meanings when used in the plural and vice versa), unless the context otherwise requires: (a) "60-day 'AA' Composite Commercial Paper Rate," on any date, shall mean (i) the interest equivalent of the 60-day rate on commercial paper placed on behalf of issuers whose corporate bonds are rated "AA" by Standard & Poor's or its successor, or the equivalent of such rating by another rating agency, as such 60-day rate is made available on a discount basis or otherwise by the Federal Reserve Bank of New York for the immediately preceding Business Day prior to such date; or (ii) in the event that the Federal Reserve Bank of New York does not make available -42- such a rate, then the arithmetic average of the interest equivalent of the 60-day rate on commercial paper placed on behalf of such issuers, as quoted on a discount basis or otherwise by the Commercial Paper Dealers to the Trust Company for the close of business on the immediately preceding Business Day prior to such date. If any Commercial Paper Dealer does not quote a rate required to determine the 60-day "AA" Composite Commercial Paper Rate, the 60-day "AA" Composite Commercial Paper Rate shall be determined on the basis of the quotation or quotations furnished by the remaining Commercial Paper Dealer or Commercial Paper Dealers and any Substitute Commercial Paper Dealer or Substitute Commercial Paper Dealers selected by the Corporation to provide such rate or rates not being supplied by any Commercial Paper Dealer or Commercial Paper Dealers, as the case may be, or, if the Corporation does not select any such Substitute Commercial Paper Dealer or Substitute Commercial Paper Dealers, by the remaining Commercial Paper Dealer or Commercial Paper Dealers. If the Board of Directors shall adjust the number of Dividend Period Days pursuant to the second sentence of subparagraph (b)(iv) of Section 2 of this Part I, then (i) if the Dividend Period Days shall be 70 or more days but fewer than 85 days, such rate shall be the arithmetic average of the interest equivalent of the 60-day and 90-day rates on such commercial Paper, and (ii) if the Dividend Period Days shall be 85 or more days but 98 or fewer days, such rate shall be the interest equivalent of the 90-day rate on such commercial paper. For purposes of this definition, the "interest equivalent" of a rate stated on a discount basis (a "discount rate") for commercial paper maturing in a given number of days shall be equal to the quotient (rounded to the nearest one-thousandth (.001) of 1%) of (A) the discount rate divided by (B) the difference between (x) 1.00 and (y) a fraction the numerator of which shall be the product of the discount rate times the number of days in which such commercial paper matures and the denominator of which shall be 360. (b) "Applicable 'AA' Composite Commercial Paper Rate" for any Long- Term Dividend Period on any date, shall mean (A) in the case of any Long- Term Dividend Period of less than 70 Dividend Period Days, the interest equivalent of the 60-day rate, (B) in the case of any Long-Term Dividend Period of 70 Dividend Period Days or more but less than 85 Dividend Period Days, the arithmetic average of the interest equivalent of the 60-day and 90-day rates, (C) in the case of any Long-Term Dividend Period of 85 Dividend Period Days or more but less than 120 Dividend Period Days, the interest equivalent of the 90-day rate, (D) in the case of any Long-Term Dividend Period of 120 Dividend Period Days or more but less than 148 Dividend Period Days, the arithmetic average of the interest equivalent of the 90-day and 180-day rates, (E) in the case of any Long-Term Dividend Period of 148 Dividend Period Days or more but less than 210 Dividend Period Days, the interest equivalent of the 180-day rate, (F) in the case of any Long-Term Dividend Period of 210 Dividend Period Days or more but less than 238 Dividend Period Days, the arithmetic average of the interest equivalent of the 180-day and 270-day rates and (G) in the case of any Long-Term Dividend Period of 238 or more Dividend Period Days, the interest equivalent of the 270-day rate, on commercial paper placed on behalf of issuers whose corporate bonds are rated "AA" by Standard & Poor's or its successor, or the equivalent of such rating by another rating agency as made available on a discount basis or otherwise by the Federal Reserve Bank of New York -43- for the Business Day immediately preceding such date or in the event that the Federal Reserve Bank of New York does not make available any such rate, then the arithmetic average of such rates, as quoted on a discount basis or otherwise, by the Commercial Paper Dealers, to the Trust Company for the close of business on the Business Day next preceding such date. If any Commercial Paper Dealer does not quote a rate required to determine the "AA" Composite Commercial Paper Rate, the "AA" Composite Commercial Paper Rate shall be determined on the basis of the quotation or quotations furnished by the remaining Commercial Paper Dealer or Commercial Paper Dealers and any Substitute Commercial Paper Dealer or Substitute Commercial Paper Dealers selected by the Corporation to provide such rate or rates not being supplied by any Commercial Paper Dealer or Commercial Paper Dealers, as the case may be, or, if the Corporation does not select any such Substitute Commercial Paper Dealer or Substitute Commercial Paper Dealers, by the remaining Commercial Paper Dealer or Commercial Paper Dealers. For purposes of this definition, the "interest equivalent" means the equivalent yield on a 360-day basis of a discount-basis security to an interest- bearing security. (c) "Applicable Rate" shall mean the rate per annum at which dividends are payable for any Dividend Period established pursuant to clause (c)(i)(A) of Section 2 of this Part I. (d) "Applicable Treasury Rate" on any date, which respect to the Series D Stock with a Long-Term Dividend Period of one year or more, shall mean the interest equivalent of the rate for direct obligations of the United States Treasury having an original maturity which is equal to, or next lower than, the length of such Long-Term Dividend Period, as published weekly by the Federal Reserve Board in "Federal Reserve Statistical Release H.15 (519)--Selected Interest Rates," or any successor publication by the Federal Reserve Board within five Business days preceding such date. In the event that the Federal Reserve Board does not publish such weekly per annum interest rate, or if such release is not yet available, the applicable Treasury Rate will be the arithmetic average of the secondary market bid rates as of approximately 3:30 p.m., New York City time, on the Business Day next preceding such date of the U.S. Government Securities Dealers obtained by the Trust Company (in the case of a determination of the Applicable Treasury Rate on any Auction Date) or the Corporation (in the case of a determination of such rate on any other day) for the issue of direct obligations of the United States Treasury, in an aggregate principal amount of at least $1,000,000, with a remaining maturity equal to, or next lower than, the number of Dividend Period Days in such Long-Term Dividend Period. If any U.S. Government Securities Dealer does not quote a rate required to determine the Applicable Treasury Rate, the Applicable Treasury Rate shall be determined on the basis of the quotation or quotations furnished by the remaining U.S. Government Securities Dealer or Dealers or any Substitute U.S. Government Securities Dealer or Dealers selected by the Corporation to provide such rate or rates not being supplied by any U.S. Government Securities Dealer or Dealers, as the case may be, or, if the Corporation does not select any such Substitute U.S. Government Securities Dealer or Dealers, by the remaining U.S. Government Securities Dealer or Dealers: provided that, in the event the Corporation is unable to cause such quotations to be furnished to the Trust -44- Company (or, if applicable, to the Corporation) by such sources, the Corporation may cause such rates to be furnished to the Trust Company (or, if applicable, to the Corporation) by such alternative source as the Corporation in good faith deems to be reliable. For purposes of this definition, the "interest equivalent" of a rate stated on a discount basis shall be equal to the quotient of (A) the discount rate divided by (B) the difference between 1.00 and the discount rate. (e) "Auction" shall mean each periodic implementation of the Auction procedures. (f) "Auction Date" shall mean the Business Day next preceding the first day of each Dividend Period after the Initial Dividend Period. (g) "Auction Procedures" shall mean the procedures for conducting Auctions set forth in Part II hereof. (h) "Board of Directors" shall mean the Board of Directors of the Corporation or (except in the context of the voting rights provisions relating to the Series D Stock as provided for in Section 3 of this Part I) a duly authorized committee thereof. (i) "Business Day" shall mean a day on which the New York Stock Exchange, Inc. is open for trading and on which banks in neither The City of New York, New York, nor Chicago, Illinois, are authorized by law to close. (j) "Code" shall mean the Internal Revenue Code of 1986. (k) "Commercial Paper Dealers" shall mean Goldman, Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Salomon Brothers Inc. and Shearson Lehman Hutton Inc. or, in lieu of any thereof, their respective affiliates or successors. (l) "Common Stock" shall mean all shares now or hereafter issued of any class of common stock of the Corporation presently authorized and any other shares of stock into which such stock may hereinafter be changed from time to time. (m) "Date of Original Issue" shall mean the date on which the Corporation originally issues shares of Series D Stock. (n) "Dividend Payment Date" shall have the meaning specified in subparagraph (b)(v) of Section 2 of this Part I. (o) "Dividend Period" and "Dividend Periods" shall have the meaning specified in subparagraph (b)(vi) of Section 2 of this Part I. (p) "Dividend Period Days" shall mean the number of days, without giving effect to clauses A and B of subparagraph 2(b)(iii), between successive Dividend -45- Payment Dates, and shall be calculated by including the first Dividend Payment Date and excluding the last Dividend Payment Date. (q) "Dividend Quarter" shall have the meaning specified in subparagraph (b)(v) of Section 2 of this Part I. (r) "Holder" shall mean a holder of shares of Series D Stock as such holder's name appears on the stock register of the Corporation. (s) "Initial Dividend Payment Date" shall have the meaning specified in subparagraph (b)(v) of Section 2 of this Part I. (t) "Initial Dividend Period" shall have the meaning specified in subparagraph (b)(vi) of Section 2 of this Part I. (u) "Long-Term Dividend Period" shall have the meaning specified in subparagraph (b)(vi) of Section 2 of this Part I. (v) "Maximum Rate," with respect to a Short-Term Dividend Period, on any Auction Date will be the rate obtained by multiplying the 60-day "AA" Composite Commercial Paper Rate on such Auction Date, and with respect to a Long-Term Dividend Period, the Maximum Rate on any Auction Date will be the rate obtained by multiplying the Reference Rate on such Auction Date, by a percentage determined as set forth below based on the credit ratings assigned to the Series D Stock by Moody's and Standard & Poor's (or by one of them and a Substitute Rating Agency if Moody's or Standard & Poor's shall not make such rating available, or by two Substitute Rating Agencies if neither Moody's nor Standard & Poor's shall make such rating available; in the event that only one such rating shall be available, the percentage will be based on such rating).
Credit Rating - ----------------------------------------- Applicable Percentage of 60-day "AA" Composite Moody's Standard & Poor's Commercial Paper Rate or Reference Rate - ----------------------------------------- -------------------------- "aa3" or Above AA- or Above 110% "a3" to "al" A- to A+ 125% "baa3" to "baal" BBB- to BBB+ 150% "ba3" to "bal" BB- to BB+ 200% Below "ba3" Below BB- 250%
If the ratings are split between two of the foregoing categories, the lower rating will determine the prevailing rating. The Corporation shall take all reasonable action necessary to enable Moody's and Standard & Poor's to provide a rating for the Series D Stock. If either Moody's or Standard & Poor's shall not make such rating available or neither Moody's nor Standard & Poor's shall make -46- such a rating available, Goldman, Sachs & Co. or its affiliates and successors, after consultation with the Corporation, shall select a Substitute Rating Agency or two Substitute Rating Agencies, as the case may be. (w) "Minimum Holding Period" shall have the meaning specified in subparagraph (b)(iv) of Section 2 of this Part I. (x) "Moody's" shall mean Moody's Investors Service, Inc., or its successor, so long as such agency (or successor) is in the business of rating securities of the type of the Series D Stock and, if such agency is not in such business, then a Substitute Rating Agency. (y) "Non-Auction Rate" shall have the meaning specified in clause (c)(i)(A) of Section 2 of this Part I. (z) "Notice of Long-Term Dividend Period" shall have the meaning specified in subparagraph (b)(vii) of Section 2 of this Part I. (aa) "Notice of Revocation" shall have the meaning specified in subparagraph (b)(vii) of Section 2 of this Part I. (bb) "Notice of Removal" shall have the meaning specified in subparagraph (b)(vii) of Section 2 of this Part I. (cc) "Outstanding" shall mean, as of any date, shares of Series D Stock theretofore issued by the Corporation except, without duplication, (i) any shares of Series D Stock theretofore canceled or delivered to the Trust Company for cancellation or redeemed by the Corporation or as to which the Corporation shall have published a notice of redemption or irrevocably authorized and directed the Redemption Agent to begin and promptly complete such publication of notice, and deposited in trust with the Redemption Agent funds necessary for such redemption in accordance with this Restated Certificate of Incorporation, (ii) any shares of Series D Stock as to which the Corporation or any Affiliate thereof (other than a Broker-Dealer affiliate) shall be an Existing Holder and (iii) any shares of Series D Stock represented by any certificate in lieu of which a new certificate has been executed and delivered by the Corporation. (dd) "Paying Agent" shall mean a bank or trust company appointed as such by a resolution of the Board of Directors. (ee) "Preferred Director" shall have the meaning specified in paragraph (c) of Section 3 of this Part I. (ff) "Rate Adjustment Event" shall mean any failure by the Corporation to pay (i) to the Paying Agent funds available on any Dividend Payment Date in the full amount of any dividend (whether or not earned or declared) to be paid on such Dividend Payment Date on any share of Series D Stock or (ii) to the Redemption Agent funds available on any redemption date in the full amount of the redemption -47- price to be paid on such redemption date, plus an amount equal to the accrued and unpaid dividends thereon (whether or not earned or declared) to such redemption date, of any share of Series D Stock after a notice of redemption has been given. (gg) "Redemption Agent" shall mean a bank or trust company appointed as such by a resolution of the Board of Directors. (hh) "Redemption Deposit Amount" shall mean the product of (i) the number of outstanding shares of Series D Stock to be redeemed times (ii) an amount equal to the applicable redemption price plus an amount equal to accrued and unpaid dividends (whether or not earned or declared) to the date fixed for redemption. (ii) "Reference Rate" shall, mean for Long-Term Dividend Periods (i) from 50 days to 270 days, the Applicable "AA" Composite Commercial Paper Rate, (ii) from 270 days to one year, the higher of the 270-day Applicable "AA" Composite Commercial Paper Rate and the one-year Applicable Treasury Rate and (iii) from one year to 10 years, the Applicable Treasury Rate. (jj) "Securities Depository" shall mean The Depository Trust Company and its successors and assigns or any other securities depository selected by the Corporation which agrees to follow the procedures required to be followed by such securities depository in connection with shares of Series D Stock. (kk) "Short-Term Dividend Period" shall have the meaning specified in subparagraph (b)(vi) of Section 2 of this Part I. (ll) "Standard & Poor's" shall mean Standard & Poor's Corporation, or its successor, so long as such agency (or successor) is in the business of rating securities of the type of the Series D Stock and, if such agency is not in such business, then a Substitute Rating Agency. (mm) "Subsequent Dividend Period" and "Subsequent Dividend Periods" shall have the respective meanings specified in clause (c)(i)(A) of Section 2 of this Part I. (nn) "Substitute Commercial Paper Dealer" shall mean The First Boston Corporation or Morgan Stanley & Co. Incorporated, or their respective affiliates or successors; provided that neither such dealer nor any of its affiliates shall be a Commercial Paper Dealer. (oo) "Substitute Rating Agency" shall mean a nationally recognized statistical rating organization (as that term is used in the rules and regulations of the Securities Exchange Act of 1934) selected by Goldman, Sachs & Co., or its successors or affiliates, after consultation with the Corporation. -48- (pp) "Substitute U.S. Government Securities Dealer" shall mean Morgan Stanley & Co. Incorporated or Salomon Brothers Inc., or their respective affiliates or successors. (qq) "Sufficient Clearing Bids" shall have the meaning specified in paragraph (a) of Section 4 of Part II hereof. (rr) "Term Selection Agent" shall mean Goldman, Sachs & Co., unless or until another investment banking firm has been appointed as such by a resolution of the Board of Directors of the Corporation. (ss) "Trust Company" shall mean a bank or trust company appointed as such by a resolution of the Board of Directors. (tt) "U.S. Government Securities Dealer" shall mean Goldman, Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, and The First Boston Corporation or, in lieu of any thereof, their respective affiliates or successors. PART II 1. Certain Definitions. Capitalized terms not defined in the Section 1 shall have the respective meanings specified in Part I of this paragraph 6(c) of Article Fourth. As used in this Part II, the following terms shall have the following meanings, unless the context otherwise requires: (a) "Affiliate" shall mean any Person known to the Trust Company to be controlled by, in control of or under common control with the Corporation. (b) "Agent Member" shall mean the member of the Securities Depository that will act on behalf of a Bidder and is identified as such in such Bidder's Purchaser's Letter. (c) "Available Series D Stock" shall have the meaning specified in paragraph (a) of Section 4 of this Part II. (d) "Bid" and "Bids" shall have the respective meanings specified in paragraph (a) of Section 2 of this Part II. (e) "Bidder" and Bidders" shall have the respective meanings specified in paragraph (a) of Section 2 of this Part II. (f) "Broker-Dealer" shall mean any broker-dealer, or other entity permitted by law to perform the function required of a broker-dealer in this Part II, that is a member of, or a participant in, the Securities Depository, and that has been selected -49- by the Corporation and has entered into a Broker-Dealer Agreement with the Trust Company that remains effective. (g) "Broker-Dealer Agreement" shall mean an agreement between the Trust Company and a Broker-Dealer pursuant to which such Broker-Dealer agrees to follow the procedures specified in this Part II. (h) "Existing Holder," when used with respect to shares of Series D Stock, shall mean a Person who signed a Purchaser's Letter and is listed as the beneficial owner of such shares of Series D Stock in the records of the Trust Company. (i) "Hold Order" and "Hold Orders" shall have the respective meanings specified in paragraph (a) of Section 2 of this Part II. (j) "Order" and "Orders" shall have the respective meanings specified in paragraph (a) of Section 2 of this Part II. (k) "Person" shall mean and include an individual, a partnership, a corporation, a trust, an incorporated association, a joint venture or other entity or a government or any agency or political subdivision thereof. (l) "Potential Holder" shall mean any Person, including any Existing Holder, (i) who shall have executed a Purchaser's Letter and (ii) who may be interested in acquiring shares of Series D Stock (or, in the case of an Existing Holder, additional shares of Series D Stock). (m) "Purchaser's Letter" shall mean a Master Purchaser's Letter, the form of which is attached hereto, addressed to the Corporation, the Trust Company and an Agent Member in which a Person agrees, among other things, to offer to purchase, to offer to sell and/or to sell shares of Series D Stock as set forth in this Part II, or a similar letter containing substantially the same information and representations, or such other letter as the Board of Directors shall approve. (n) "Sell Order" and "Sell Orders" shall have the respective meanings specified in paragraph (a) of Section 2 of this Part II. (o) "Submission Deadline" shall mean 12:30 P.M., New York City time, on any Auction Date or such other time on any Auction Date by which Broker-Dealers are required to submit Orders to the Trust Company as specified by the Trust Company from time to time. (p) "Submitted Bid" and "Submitted Bids" shall have the respective meanings specified in paragraph (a) of Section 4 of this Part II. (q) "Submitted Hold Order" and "Submitted Hold Orders" shall have the respective meanings specified in paragraph (a) of Section 4 of this Part II. -50- (r) "Submitted Order" and "Submitted Orders" shall have the respective meanings specified in paragraph (a) of Section 4 of this Part II. (s) "Submitted Sell Order" and "Submitted Sell Orders" shall have the respective meanings specified in paragraph (a) of Section 4 of this Part II. (t) "Winning Bid Rate" shall have the meaning specified in paragraph (a) of Section 4 of this Part II. 2. Orders by Existing Holders and Potential Holders. (a) On or prior to the Submission Deadline on each Auction Date: (i) each Existing Holder may submit to a Broker-Dealer information as to: (A) the number of Outstanding shares, if any, of Series D Stock held by such Existing Holder which such Existing Holder desires to continue to hold without regard to the Applicable Rate for the next succeeding Dividend Period; (B) the number of Outstanding shares, if any, of Series D Stock that such Existing Holder desires to continue to hold if the Applicable Rate for the next succeeding Dividend Period shall not be less than the rate per annum specified by such Existing Holder; and/or (C) the number of Outstanding shares, if any, of Series D Stock held by such Existing Holder which such Existing Holder offers to sell without regard to the Applicable Rate for the next succeeding Dividend Period; and (ii) one or more Broker-Dealers, using lists of Potential Holders, shall in good faith for the purpose of conducting a competitive Auction in a commercially reasonable manner, contact Potential Holders, including Persons that are not Existing Holders, on such lists to determine the number of shares, if any, of Series D Stock which each such Potential Holder offers to purchase, provided that the Applicable Rate for the next succeeding Dividend Period shall not be less than the rate per annum specified by such Potential Holder. For the purposes hereof, the communication to a Broker-Dealer of information referred to in clause (i)(A), (i)(B), (i)(C) or (ii) of this paragraph (a) is hereinafter referred to as an "Order" and collectively as "Orders" and each Existing Holder and each Potential Holder placing -51- an Order is hereinafter referred to as a "Bidder" and collectively as "Bidders"; an Order containing the information referred to in clause (i)(A) of this paragraph (a) is hereinafter referred to as a "Hold Order" and collectively as "Hold Orders"; an Order containing the information referred to in clause (i)(B) or (ii) of this paragraph (a) is hereinafter referred to as a "Bid" and collectively as "Bids"; and an Order containing the information referred to in clause (i)(C) of this paragraph (a) is hereinafter referred to as a "Sell Order" and collectively as "Sell Orders." (b)(i) A Bid by an Existing Holder shall constitute an irrevocable offer to sell: (A) the number of Outstanding shares of Series D Stock specified in such Bid if the Applicable Rate determined on such Auction Date shall be less than such specified rate; or (B) such number or a lesser number of Outstanding shares of Series D Stock to be determined as set forth in subparagraph (a)(iv) of Section 5 of this Part II if the Applicable Rate determined on such Auction Date shall be equal to such specified rate; or (C) a lesser number of Outstanding shares of Series D Stock to be determined as set forth in subparagraph (b)(iii) of Section 5 of this Part II if such specified rate shall be higher than the Maximum Rate and Sufficient Clearing Bids do not exist. (b)(ii) A Sell Order by an Existing Holder shall constitute an irrevocable offer to sell: (A) the number of Outstanding shares of Series D Stock specified in such Sell Order; or (B) such number or a lesser number of Outstanding shares of Series D Stock as set forth in subparagraph (b)(iii) of Section 5 of this Part II if Sufficient Clearing Bids do not exist. (b)(iii) A Bid by a Potential Holder shall constitute an irrevocable offer to purchase: (A) the number of Outstanding shares of Series D Stock specified in such Bid if the Applicable Rate determined on such Auction Date shall be higher than such specified rate; or -52- (B) such number or a lesser number of Outstanding shares of Series D Stock as set forth in subparagraph (a)(v) of Section 5 of this Part II if the Applicable Rate determined on such Auction Date shall be equal to such specified rate. 3. Submission of Orders by Broker-Dealers to Trust Company. (a) Each Broker-Dealer shall submit in writing to the Trust Company prior to the Submission Deadline on each Auction Date all Orders obtained by such Broker-Dealer and specifying with respect to each Order: (i) the name of the Bidder placing such Order; (ii) the aggregate number of shares of Series D Stock that are the subject of such Order; (iii) to the extent that such Bidder is an Existing Holder: (A) the number of shares, if any, of Series D Stock subject to any Hold Order placed by such Existing Holder; (B) the number of shares, if any, of Series D Stock subject to any Bid placed by such Existing Holder and the rate specified in such Bid; and (C) the number of shares, if any, of Series D Stock subject to any Sell Order placed by such Existing Holder; and (iv) to the extent such Bidder is a Potential Holder, the rate specified in such Potential Holder's Bid. (b) If any rate specified in any Bid contains more than three figures to the right of the decimal point, the Trust Company shall round such rate up to the next highest one thousandth (.001) of 1%. (c) If an Order or Orders covering all of the outstanding shares of Series D Stock held by any Existing Holder is not submitted to the Trust Company prior to the Submission Deadline, the Trust Company shall deem a Hold Order to have been submitted on behalf of such Existing Holder covering the number of Outstanding shares of Series D Stock held by such Existing Holder and not subject to Orders submitted to the Trust Company. (d) If one or more Orders covering in the aggregate more than the number of Outstanding shares of Series D Stock held by any Existing Holder are submitted -53- to the Trust Company, such Orders shall be considered valid as follows and in the following order of priority: (i) all Hold Orders shall be considered valid, but only up to and including in the aggregate the number of shares of Series D Stock held by such Existing Holder, and, solely for purposes of allocating compensation among the Broker-Dealers submitting Hold Orders, if the number of shares of Series D Stock held by such Existing Holder is less than the aggregate number of shares that are the subject of such Existing Holder's Hold Orders, the number of shares subject to each Hold Order shall be reduced pro rata to cover the number of shares of Series D Stock held by such Existing Holder; (ii)(A) any Bid shall be considered valid up to and including the excess of the number of outstanding shares of Series D Stock held by such Existing Holder over the number of shares of Series D Stock subject to any Hold Order referred to in subparagraph (i) above; (ii)(B) subject to clause (A), if more than one Bid with the same rate is submitted on behalf of such Existing Holder and the number of shares of Series D Stock subject to such Bids is greater than such excess, such Bids shall be considered valid up to the amount of such excess, and, solely for purposes of allocating compensation among the Broker-Dealers submitting Bids with the same rate, the number of shares of Series D Stock subject to each Bid with the same rate shall be reduced pro rata to cover the number of shares of Series D Stock equal to such excess; (ii)(C) subject to clause (A), if more than one Bid with different rates is submitted on behalf of such Existing Holder, such Bids shall be considered valid in the ascending order of their respective rates up to the amount of such excess; and (ii)(D) in any such event the number, if any, of such shares subject to Bids not valid under this subparagraph (ii) shall be treated as the subject of a Bid by a Potential Holder; and (iii) all Sell Orders shall be considered valid but only up to and including in the aggregate the excess of the number of Outstanding shares of Series D Stock held by such Existing Holder over the sum of the shares of Series D Stock subject to Hold Orders referred to in subparagraph (i) and valid Bids by Existing Holders referred to in subparagraph (ii) above. (e) If more than one Bid is submitted on behalf of any Potential Holder, each Bid submitted shall be a separate Bid with the rate therein specified. -54- 4. Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable Rate. (a) Not earlier than the Submission Deadline on each Auction Date, the Trust Company shall assemble all Orders submitted or deemed submitted to it by the Broker-Dealers (each such Order as submitted or deemed submitted by a Broker-Dealer being hereinafter referred to individually as a "Submitted Hold Order," a "Submitted Bid" or a "Submitted Sell Order," as the case may be, or as a "Submitted Order" and collectively as "Submitted Hold Orders," "Submitted Bids" or "Submitted Sell Orders," as the case may be, or as "Submitted Orders" and shall determine: (i) the excess of the total number of Series D Stock over the number of Outstanding shares of Series D Stock that are the subject of Submitted Hold Orders (such excess being hereinafter referred to as the "Available Series D Stock"); (ii) from the Submitted Orders whether: (A) the number of Outstanding shares of Series D Stock that are the subject of Submitted Bids by Potential Holders specifying one or more rates equal to or lower than the Maximum Rate exceeds or is equal to the sum of: (I) the number of Outstanding shares of Series D Stock that are the subject of Submitted Bids by Existing Holders specifying one or more rates higher than the Maximum Rate, and (II) the number of Outstanding shares of Series D Stock that are subject to Submitted Sell Orders (in the event of such excess or such equality (other than because the sum of the number of shares of Series D Stock in clauses (I) and (II) above is zero because all of the outstanding shares of Series D Stock are the subject of Submitted Hold Orders), such Submitted Bids in clause (A) above being hereinafter referred to collectively as "Sufficient Clearing Bids"); and (iii) if Sufficient Clearing Bids exist, the lowest rate specified in the Submitted Bids (the "Winning Bid Rate") which if: (A)(I) each Submitted Bid from Existing Holders specifying such lowest rate and (II) all other Submitted Bids from Existing Holders specifying lower rates were accepted, thus entitling such Existing Holders to continue to hold the shares of Series D -55- Stock that are the subject of such Submitted Bids; and (B)(I) each Submitted Bid from Potential Holders specifying such lowest rate and (II) all other Submitted Bids from Potential Holders specifying lower rates were accepted, thus entitling the Potential Holders to purchase the shares of Series D Stock that are the subject of those Submitted Bids, would result in such Existing Holders described in clause (A) continuing to hold an aggregate number of Outstanding shares of Series D Stock which, when added to the number of Outstanding shares of Series D Stock to be purchased by such Potential Holders described in clause (B), would equal not less than the Available Series D Stock. (b) Promptly after the Trust Company has made the determinations pursuant to paragraph (a) of this Section 4, the Trust Company shall advise the Corporation of the Maximum Rate and, based on such determinations, the Applicable Rate for the next succeeding Dividend Period as follows: (i) if Sufficient Clearing Bids exist, that the Applicable Rate for the next succeeding Dividend Period shall be equal to the Winning Bid Rate so determined; (ii) if Sufficient Clearing Bids do not exist (other than because all of the Outstanding shares of Series D Stock are the subject of Submitted Hold Orders), then (a) if the Term Selection Agent has not given a Notice of Long-Term Dividend Period with respect to the next succeeding Dividend Period or has given a Notice of Revocation with respect thereto or such Notice of Long- Term Dividend Period shall be deemed to have been revoked, the Applicable Rate for such next succeeding Dividend Period shall be the Maximum Rate on the Auction Date for a Short-Term Dividend Period and (b) if the Term Selection Agent has given a Notice of Long-Term Dividend Period with respect to the next succeeding Dividend Period and has not given a Notice of Revocation with respect thereto and such Notice of Long-Term Dividend Period shall not have been deemed revoked, such next succeeding Dividend Period shall, notwithstanding such Notice of Long-Term Dividend Period, be a Short-Term Dividend Period, and the Applicable Rate for such next succeeding Dividend Period shall be the greatest of (i) the Applicable Rate in effect immediately prior to the applicable Auction, (ii) the Maximum Rate on the Auction Date for a Short-Term Dividend Period or (iii) the Maximum Rate on the Auction Date for the specified Long-Term Dividend Period, or -56- (iii) if all the Outstanding shares of Series D Stock are the subject of Submitted Hold Orders, that the Applicable Rate for the next succeeding Dividend Period shall (1) in the case of a Short-Term Dividend Period, be equal to 59% of the 60-day "AA" Composite Commercial Paper Rate in effect on the date of such Auction; and (2) in the case of a Long-Term Dividend Period, 59% of the Reference Rate in effect on the date of such Auction. 5. Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and Allocation of Shares. Based on the determinations made pursuant to paragraph (a) of Section 4 of this Part II, the Submitted Bids and Submitted Sell Orders shall be accepted or rejected and the Trust Company shall take such other action as set forth below: (a) If Sufficient Clearing Bids have been made, subject to the provisions of paragraphs (c), (d) and (e) of this Section 5, Submitted Bids and Submitted Sell Orders shall be accepted or rejected as follows in the following order of priority and all other Submitted Bids shall be rejected: (i) the Submitted Sell Orders of Existing Holders shall be accepted and the Submitted Bid of each of the Existing Holders specifying any rate that is higher than the Winning Bid Rate shall be rejected, thus requiring each such Existing Holder to sell the shares of Series D Stock that are the subject of such Submitted Bid; (ii) the Submitted Bid of each of the Existing Holders specifying any rate that is lower than the Winning Bid Rate shall be accepted, thus entitling each such Existing Holder to continue to hold the shares of Series D Stock that are the subject of each Submitted Bid; (iii) the Submitted Bid of each of the Potential Holders specifying any rate that is lower than the Winning Bid Rate shall be accepted; (iv) the Submitted Bid of each of the Existing Holders specifying a rate that is equal to the Winning Bid Rate shall be accepted, thus entitling each such Existing Holder to continue to hold the shares of Series D Stock that are the subject of such Submitted Bid, unless the number of outstanding shares of Series D Stock subject to all such Submitted Bids shall be greater than the number of shares of Series D Stock ("remaining shares") equal to the excess of the Available Series D Stock over the number of shares of Series D Stock subject to Submitted Bids described in subparagraphs (ii) and (iii) of this paragraph (a), in which event the Submitted Bids of each such Existing Holder shall be rejected, and each such Existing Holder shall be required to sell shares of Series D Stock but only in -57- an amount equal to the difference between (A) the number of outstanding shares of Series D Stock then held by such Existing Holder subject to such Submitted Bid and (B) the number of shares of Series D Stock obtained by multiplying the number of remaining shares by a fraction the numerator of which shall be the number of Outstanding shares of Series D Stock held by such Existing Holder subject to such Submitted Bid and the denominator of which shall be the sum of the number of Outstanding shares of Series D Stock subject to such Submitted Bids made by all such Existing Holders that specified a rate equal to the Winning Bid Rate; and (v) the Submitted Bid of each of the Potential Holders specifying a rate that is equal to the Winning Bid Rate shall be accepted but only in an amount equal to the number of shares of Series D Stock obtained by multiplying the difference between the Available Series D Stock and the number of shares of Series D Stock subject to Submitted Bids described in subparagraphs (ii), (iii) and (iv) of this paragraph (a) by a fraction the numerator of which shall be the number of Outstanding shares of Series D Stock subject to such Submitted Bid and the denominator of which shall be the sum of the number of outstanding shares of Series D Stock subject to such Submitted Bids made by all such Potential Holders that specified a rate equal to the Winning Bid Rate. (b) If Sufficient Clearing Bids have not been made (other than because all of the Outstanding shares of Series D Stock are subject to Submitted Hold Orders), subject to the provisions of paragraphs (c), (d) and (e) of this Section 5, Submitted Orders shall be accepted or rejected as follows in the following order of priority and all other Submitted Bids shall be rejected: (i) the Submitted Bid of each Existing Holder specifying any rate that is equal to or lower than the Maximum Rate shall be accepted, thus entitling such Existing Holder to continue to hold the shares of Series D Stock that are the subject of such Submitted Bid; (ii) the Submitted Bid of each Potential Holder specifying any rate that is equal to or lower than the Maximum Rate shall be accepted; and (iii) the Submitted Bids of each Existing Holder specifying any rate that is higher than the Maximum Rate shall be rejected and the Submitted Sell Orders of each Existing Holder shall be accepted, in both cases only in an amount equal to the difference between (A) the number of Outstanding shares of Series D Stock then held by such Existing Holder subject to such Submitted Bid or Submitted Sell Order and (B) the number of shares of Series D Stock obtained by multiplying the difference between the Available Series D Stock and the aggregate number of shares of Series D Stock subject to -58- Submitted Bids described in subparagraphs (i) and (ii) of this paragraph (b) by a fraction the numerator of which shall be the number of Outstanding shares of Series D Stock held by such Existing Holder subject to such Submitted Bid or Submitted Sell Order and the denominator of which shall be the number of Outstanding shares of Series D Stock subject to all such Submitted Bids and Submitted Sell Orders. (c) If all of the Outstanding shares of Series D Stock are the subject of Submitted Hold Orders, all Submitted Bids shall be rejected. (d) If, as a result of the procedures described in paragraph (a) or (b) of this Section 5, any Existing Holder would be entitled or required to sell, or any Potential Holder would be entitled or required to purchase, a fraction of a share of Series D Stock on any Auction Date, the Trust Company, in such manner as it shall determine in its sole discretion, shall round up or down the number of shares of Series D Stock to be purchased or sold by any Existing Holder or Potential Holder on such Auction Date so that the number of shares purchased or sold by each Existing Holder or Potential Holder on such Auction Date shall be whole shares of Series D Stock. (e) If, as a result of the procedures described in paragraph (a) of this Section 5, any Potential Holder would be entitled or required to purchase less than a whole share of Series D Stock on any Auction Date, the Trust Company, in such manner as it shall determine in its sole discretion, shall allocate shares for purchase among Potential Holders so that only whole shares of Series D Stock are purchased on such Auction Date by any Potential Holder, even if such allocation results in one or more of such Potential Holders not purchasing shares of Series D Stock on such Auction Date. (f) Based on the results of each Auction, the Trust Company shall determine the aggregate number of shares of Series D Stock to be purchased and the aggregate number of shares of Series D Stock to be sold by Potential Holders and Existing Holders on whose behalf each Broker-Dealer submitted Bids or Sell Orders and, with respect to each Broker-Dealer, to the extent that such aggregated number of shares to be purchased and such aggregate number of shares to be sold differ, determine to which other Broker-Dealer or Broker-Dealers acting for one or more purchasers such Broker-Dealer shall deliver, or from which other Broker-Dealer or Broker-Dealers acting for one or more sellers such Broker-Dealer shall receive, as the case may be, shares of Series D Stock. 6. Miscellaneous. (a) The Board of Directors may interpret the provisions of this Part II to resolve any inconsistency or ambiguity which may arise or be revealed in connection which the Auction Procedures provided for herein, and if such inconsistency or ambiguity reflects an inaccurate provision hereof, the Board of Directors may, in -59- appropriate circumstances, authorize the filing of a Certificate of Correction or Certificate of Amendment. (b) So long as the Applicable Rate is based on the results of an Auction, an Existing Holder (i) may sell, transfer or otherwise dispose of shares of Series D Stock only pursuant to a Bid or Sell Order in accordance with the procedures described in this Part II or to or through a Broker- Dealer or to a Person that has delivered a signed copy of a Purchaser's Letter to the Trust Company, provided that in the case of all transfers other than pursuant to Auctions such Existing Holder or its Broker-Dealer advises the Trust Company of such transfer, and (ii) shall have the ownership of the shares of Series D Stock held by it maintained in book entry form by the Securities Depository in the account of its Agent Member, which in turn will maintain records of such Existing Holder's beneficial ownership. (c) Neither the Corporation nor any Affiliate thereof may submit an Order in any Auction. Any Broker-Dealer that is an Affiliate of the Corporation may not submit Bids to purchase shares of Series D Stock in Auctions for its own account, and if such affiliated Broker-Dealer has otherwise acquired shares for its own account, it must submit a Sell Order in the next Auction with respect to such shares. (d) The Trust Company shall reject any Submitted Order of the Corporation or an Affiliate, except for Sell Orders of affiliated Broker- Dealers. (e) From and after the occurrence of a Rate Adjustment Event, shares of Series D Stock shall be registered for transfer or exchange and new certificates issued upon surrender of the old certificates deemed by the Trust Company (or any other transfer agent or registrar appointed by the Corporation) properly endorsed for transfer with all necessary endorsers' signatures guaranteed in such manner and form as the Trust Company (or such other transfer agent or registrar) may require by a guarantor reasonably believed by the Trust Company (or such other transfer agent or registrar) to be responsible, accompanied by such assurances as the Trust Company (or such other transfer agent or registrar) shall deem necessary or appropriate to evidence the genuineness and effectiveness of each necessary endorsement and satisfactory evidence of compliance with all applicable laws relating to the collection of taxes or funds necessary for the payment of such taxes. (d) 6.25% Cumulative Convertible Preferred Stock, Series E 1. Designation. -60- The designation of said series of Preferred Stock shall be 6.25% Cumulative Convertible Preferred Stock, Series E (the "Series E Stock"). The maximum number of shares of Series E Stock shall be 50,000. The Series E Stock shall be without par value (stated value of $1,000.00 per share). 2. Dividends. (a) The Series E Stock shall be entitled to receive dividends at an annual rate of $62.50 per share. Such dividends shall accrue and be cumulative from the date of original issuance of the Series E Stock and shall be payable, when and as declared by the Board, on the 15th day of February, May, August and November of each year commencing the 15th day of May 1992. Each such dividend shall be paid to the holders of record of the Series E Stock as they appear on the stock register of the Corporation at the close of business on the applicable record date, which shall be the last day of the month preceding the month in which the dividend payment date of such dividend occurs, provided that no dividend shall be paid on shares of Series E Stock redeemed on a redemption date which is between a dividend payment record date and the corresponding dividend payment date (an amount equal to such dividend being payable with the redemption price pursuant to Section 4(a)). Dividends on account of arrears or any past dividend periods may be declared and paid at any time, without reference to any regular dividend payment date, to holders of record on such date, not exceeding 45 days preceding the payment date thereof, as may be fixed by the Board. (b) No full dividends shall be declared or paid or set aside for payment on Preferred Stock of any series ranking, as to dividends, on a parity with or junior to the Series E Stock for any period unless full cumulative dividends have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for such payment on the Series E Stock for all dividend payment periods terminating on or prior to the date of payment of such full cumulative dividends. When dividends are not paid in full, as aforesaid, upon the Series E Stock and any other Preferred Stock ranking on a parity as to dividends with the Series E Stock, all dividends declared upon the Series E Stock and any other Preferred Stock ranking on a parity as to dividends with the Series E Stock shall be declared pro rata so that the amount of dividends declared per share on the Series E Stock and such other Preferred Stock shall in all cases bear to each other the same ratio that accrued dividends per share on the Series E Stock and such other Preferred Stock bear to each other. Holders of Series E Stock shall not be entitled to any dividend, whether payable in cash, property or stocks, in excess of the full cumulative dividends, as herein provided, on the Series E Stock. No interest, or sum of money in lieu of interest, shall be payable in respect of any dividend payment on the Series E Stock which may be in arrears. (c) So long as any shares of Series E Stock are outstanding, no dividend (other than a dividend in Common Stock or in any other stock ranking junior to the Series E Stock as to dividends and upon liquidation and other than as provided in paragraph (b) of this Section 2) shall be declared or paid or set aside for payment or other distribution declared or made upon the Common Stock or upon any other stock ranking junior to or on a parity with the Series E Stock as to dividends or -61- upon liquidation, nor shall any Common Stock or any other stock of the Corporation ranking junior to or on a parity with the Series E Stock as to dividends or upon liquidation, or any depositary shares representing such stock, be redeemed, purchased or otherwise acquired for any consideration (or any moneys paid to or made available for a sinking fund or for the redemption of any such stock) by the Corporation (except by conversion into or exchange for stock of the Corporation ranking junior to the Series E Stock as to dividends and upon liquidation) unless, in each case, the full cumulative dividends on all outstanding shares of the Series E Stock shall have been paid for all past dividend payment periods. (d) Dividends payable on the Series E Stock for any period less than a full quarterly dividend period, and for the dividend period beginning on the date of issuance of the Series E Stock, shall be computed on the basis of a 360-day year consisting of twelve 30-day months. 3. Voting. (a) Unless the vote or consent of the holders of a greater number of shares shall then be required by law, the consent of the holders of a least 66-2/3% of all of the shares of the Series E Stock and all other series of Preferred Stock ranking on a parity with the Series E Stock, either as to dividends or upon liquidation, at the time outstanding, given in person or by proxy, either in writing or by a vote at a meeting called for the purpose at which the holders of shares of Series E Stock and shares of Preferred Stock ranking on a parity with the Series E Stock, either as to dividends or upon liquidation, shall vote together as a separate class, shall be necessary for authorizing, effecting or validating the amendment, alteration or repeal of any of the provisions of this Restated Certificate of Incorporation or of any certificate amendatory thereof or supplemental thereto (including any Certificate of Designations or any similar document relating to the Series E Stock or any series of Preferred Stock ranking on a parity with the Series E Stock, either as to dividends or upon liquidation) which would adversely affect the powers, preferences, rights or privileges of the Series E Stock or the Preferred Stock ranking on a parity with the Series E Stock, either as to dividends or upon liquidation; provided, however, that if any such amendment, alteration or repeal would adversely affect the powers, preferences, rights or privileges of the Series E Stock or one or more series of the Preferred Stock ranking on a parity with the Series E Stock, either as to dividends or upon liquidation, but shall not so affect the entire class, then only the shares of the one or more series so affected shall be considered to be a separate class entitled to vote upon or consent to such amendment, alteration or repeal; (b) Unless the vote or consent of the holders of a greater number of shares shall then be required by law, the consent of the holders of at least 66-2/3% of all of the shares of the Series E Stock and all other series of Preferred Stock ranking on a parity with the Series E Stock, either as to dividends or upon liquidation, at the time outstanding, given in person or by proxy, either in writing or by a vote at a meeting called for the purpose at which the holders of shares of the Series E Stock and such -62- other series of Preferred Stock ranking on a parity with the Series E Stock, either as to dividends or upon liquidation, shall vote together as a single class without regard to series, shall be necessary for authorizing, effecting or validating the creation, authorization or issue of any shares of any class of stock of the Corporation ranking prior to the shares of the Series E Stock and such other series of Preferred Stock ranking on a parity with the Series E Stock, either as to dividends or upon liquidation, as to dividends or upon liquidation, or the reclassification of any authorized stock of the Corporation into any such prior shares, or the creation, authorization or issue of any obligation or security convertible into or evidencing the right to purchase any such prior shares; and (c) If at the time of any annual meeting of stockholders for the election of directors a default in preference dividends on the Series E Stock or the Preferred Stock ranking on a parity with the Series E Stock, either as to dividends or upon liquidation, shall exist, the number of directors constituting the Board of Directors shall be increased by two, and the holders of the Series E Stock and the Preferred Stock of all series ranking on a parity with the Series E Stock, either as to dividends or upon liquidation, shall have the right at such meeting, voting together as a single class without regard to series, to the exclusion of the holders of Common Stock, to elect two directors of the Corporation to fill such newly created directorships. Such right shall continue until there are no dividends in arrears upon the Series E Stock and the Preferred Stock ranking on a parity with the Series E Stock, either as to dividends or upon liquidation. Each director elected by the holders of shares of Series E Stock and Preferred Stock ranking on a parity with the Series E Stock, either as to dividends or upon liquidation, (herein called a "Preferred Director") shall continue to serve as such director for the full term for which he shall have been elected, notwithstanding that prior to the end of such term a default in preference dividends shall cease to exist. Any Preferred Director may be removed without cause by, and shall not be removed without cause except by, the vote of the holders of record of the outstanding shares of Series E Stock and Preferred Stock ranking on a parity with the Series E Stock, either as to dividends or upon liquidation, voting together as a single class without regard to series, at a meeting of the stockholders, or of the holders of shares of Series E Stock and Preferred Stock ranking on a parity with the Series E Stock, either as to dividends or upon liquidation, called for that purpose. So long as a default in preference dividends on the Series E stock or the Preferred Stock ranking on a parity with the Series E Stock, either as to dividends or upon liquidation, shall exist, (A) any vacancy in the office of Preferred Director may be filled (except as provided in the following clause (B)) by an instrument in writing signed by the remaining Preferred Director and filed with the Corporation and (B) in the case of the removal of any Preferred Director, the vacancy may be filled by the vote of the holders of the outstanding shares of Series E Stock and Preferred Stock ranking on a parity with the Series E Stock, either as to dividends or upon liquidation, voting together as a single class without regard to series, at the same meeting at which such removal shall be voted. Each director appointed as aforesaid by the remaining Preferred Director shall be deemed, for all purposes hereof, to be a Preferred Director. Whenever the term of office of the Preferred Directors shall end and a default in preference dividends shall no longer exist, the number of directors constituting the Board of Directors shall be reduced by two. -63- For the purposes hereof, a "default in preference dividends" on the Series E Stock or the Preferred Stock ranking on a parity with the Series E Stock, either as to dividends or upon liquidation, shall be deemed to have occurred whenever the amount of accrued dividends upon the Series E Stock or any series of the Preferred Stock ranking on a parity with the Series E Stock, either as to dividends or upon liquidation, shall be equivalent to six full quarterly dividends (which, with respect to any Series E Stock or any Preferred Stock ranking on a parity with the Series E Stock, either as to dividends or upon liquidation, providing for other than quarterly dividend periods, shall be deemed to be dividends in respect of a number of dividend periods containing not less than 540 days) or more, and, having so occurred, such default shall be deemed to exist thereafter until, but only until, all accrued dividends on all shares of Series E Stock and Preferred Stock ranking on a parity with the Series E Stock, either as to dividends or upon liquidation, of each and every series then outstanding shall have been paid to the end of the last preceding dividend period. (d) Whenever the holders of the Series E stock shall be entitled to vote pursuant to this resolution, such holders shall have one vote for each whole share of Series E Stock. 4. Redemption. (a) The Corporation may, at its option, but only with prior approval of the Board of Governors of the Federal Reserve System, redeem the Series E Stock, as a whole or in part, at any time or from time to time prior to the conversion thereof pursuant to Section 5, at the redemption price indicated below if such redemption is during the periods indicated plus, in each case, accrued and unpaid dividends thereon through the day preceding the date fixed for redemption, whether or not earned or declared:
Redemption Price (as a Percentage of Year liquidation preference) ---- ---------------------- February 15, 1995 through February 14, 1996 104.375% February 15, 1996 through February 14, 1997 103.750% February 15, 1997 through February 14, 1998 103.125% February 15, 1998 through February 14, 1999 102.500% February 15, 1999 through February 14, 2000 101.875% February 15, 2000 through February 14, 2001 101.250% February 15, 2001 through February 14, 2002 100.625% February 15, 2002 and thereafter 100.000%
provided, however, that the Series E Stock may not be so redeemed prior to February 15, 1995. (b) In the event that fewer than all the outstanding shares of Series E Stock are to be redeemed, the number of shares of Series E Stock to be redeemed shall be -64- determined by the Board and the shares of Series E Stock to be redeemed shall be selected by lot or pro rata as may be determined by the Board or by any other method as may be determined by the Board in its sole discretion to be equitable. (c) In the event the Corporation shall redeem the Series E Stock, notice of such redemption shall be given by first class mail, postage prepaid, mailed not less than 20 nor more than 60 days prior to the redemption date, to each holder of record of the Series E Stock to be redeemed, at such holder's address as the same appears on the stock register of the Corporation. Each such notice shall state: (i) the redemption date; (ii) the number of shares of Series E Stock to be redeemed and, if fewer than all the shares of Series E Stock held by such holder are to be redeemed, the number of shares of Series E Stock to be redeemed from such holder; (iii) the redemption price; (iv) the Conversion Price then in effect; (v) the place or places where certificates for such shares of Series E Stock are to be surrendered for payment of the redemption price; and (vi) that dividends on the shares of Series E Stock to be redeemed will cease to accrue on such redemption date. (d) Notice having been mailed as aforesaid, from and after the redemption date (unless default shall be made by the Corporation in providing money for the payment of the redemption price) dividends on the shares of Series E Stock so called for redemption shall cease to accrue, and said shares of Series E Stock shall no longer be deemed to be outstanding, and all rights of the holders thereof as stockholders of the Corporation (except the right to receive from the Corporation the redemption price) shall cease. Upon surrender in accordance with said notice of the certificates for any shares of Series E Stock so redeemed (properly endorsed or assigned for transfer, if the Board shall so require and the notice shall so state), such shares of Series E Stock shall be redeemed by the Corporation at the redemption price aforesaid. In case fewer than all the shares of Series E Stock represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares of Series E Stock without cost to the holder thereof. (e) Notwithstanding the foregoing provisions of this Section 4, if any dividends on Series E Stock are in arrears, no Series E Stock shall be redeemed unless all outstanding shares of Series E Stock are simultaneously redeemed, and the Corporation shall not purchase or otherwise acquire any Series E Stock or any depositary shares representing Series E Stock; provided, however, that the foregoing shall not prevent the purchase or acquisition of Series E Stock or any depositary shares representing Series E Stock (i) upon the conversion of Series E Stock into shares of Common Stock pursuant to Section 5, (ii) in exchange for shares of Common Stock or any other class of stock ranking junior to the Series E Stock as to dividends or upon liquidation or (iii) pursuant to a purchase or exchange offer made on the same terms to holders of all outstanding shares of Series E Stock (treating holders of any depositary shares representing Series E Stock as holders of a proportionate number of shares of Series E Stock for these purposes). 5. Conversion. -65- (a) Subject to the provisions for adjustment hereinafter set forth, each share of Series E Stock shall be convertible at the option of the holder thereof, in the manner hereinafter set forth, into fully paid and nonassessable shares of Common Stock at the conversion price, determined as hereinafter provided, in effect on the date of conversion, each share of Series E Stock being credited at its stated value; provided that if any of the Series E Stock is called for redemption, the conversion rights pertaining thereto will terminate at the close of business on the redemption date. The price at which shares of Common Stock shall be delivered upon conversion of shares of Series E Stock (hereinafter referred to as the "Conversion Price") shall be initially $62.25 per share of Common Stock. The Conversion Price shall be adjusted in certain instances as provided in paragraph (b) of this Section 5. Any holder of Series E Stock desiring to convert such stock into shares of Common Stock shall surrender the certificate or certificates for the shares of Series E Stock being converted, duly endorsed or assigned to the Corporation or in blank, at the principal office of the Corporation or at a bank or trust company appointed by the Corporation for that purpose, accompanied by a written notice of conversion specifying the number of shares of Series E Stock to be converted and the name or names in which such holder wishes the certificate or certificates for shares of Common Stock to be issued; in case such notice shall specify a name or names other than that of such holder, such notice shall be accompanied by payment of all transfer taxes payable upon the issue of shares of Common Stock in such name or names. In case less than all of the shares of Series E Stock represented by a certificate are to be converted by a holder, upon such conversion the Corporation shall issue and deliver or cause to be issued and delivered to such holder a certificate or certificates for the shares of Series E Stock not so converted. The holders of shares of Series E Stock at the close of business on a dividend payment record date shall be entitled to receive the dividend payable on such shares of Series E Stock (except shares of Series E Stock redeemed on a redemption date between such record date and the dividend payment date) on the corresponding dividend payment date notwithstanding the subsequent conversion thereof or the Corporation's default in payment of the dividend due on such dividend payment date. However, shares of Series E Stock surrendered for conversion during the period from the close of business on any dividend payment record date for the Series E Stock to the opening of business on the corresponding dividend payment date (except shares of Series E Stock called for redemption on a redemption date during such period) must be accompanied by payment of an amount equal to the dividend payable on such shares of Series E Stock on such dividend payment date. A holder of shares of Series E Stock on a dividend payment record date who (or whose transferee) converts shares of Series E Stock on a dividend payment date will receive the dividend payable on such shares of Series E Stock by the Corporation on such date, and the converting holder need not include payment in the amount of such dividend upon surrender of shares of Series E Stock for conversion. Except as provided above, no payment or adjustment will be made on account of accrued or unpaid dividends upon the conversion of Series E Stock. As promptly as practicable after the surrender of certificates for shares of Series E Stock as aforesaid, the Corporation shall issue and shall deliver at such office to -66- such holder, or on his or her written order, a certificate or certificates for the number of full shares of Common Stock issuable upon the conversion of such shares in accordance with the provisions of this Section (5), and any fractional interest in respect of a share of Common Stock arising upon such conversion shall be promptly settled as provided in paragraph (k) of this Section (5). Each conversion shall be deemed to have been effected immediately prior to the close of business on the date on which the certificates for shares of Series E Stock shall have been surrendered and such notice received by the Corporation as aforesaid; the shares of Series E Stock so surrendered for conversion shall no longer be deemed to be outstanding and all rights with respect to such shares of Series E Stock shall cease, except the right of the holders thereof to receive full shares of Common Stock in exchange therefor and payment for any fractional shares; and the person or persons in whose name or names any certificate or certificates for shares of Common Stock shall be issuable upon such conversion shall be deemed to have become the holder or holders of record of the shares represented thereby at such time on such date and such conversion shall be at the Conversion Price in effect at such time on such date. All shares of Common Stock delivered upon conversions of the Series E Stock will upon delivery be duly and validly issued and fully paid and nonassessable. (b) The Conversion Price shall be adjusted from time to time as follows: (i) In case the Corporation shall pay or make a dividend or other distribution on any class of capital stock of the Corporation in shares of Common Stock, the Conversion Price in effect at the opening of business on the day following the date fixed for the determination of stockholders entitled to receive such dividend or other distribution shall be reduced by multiplying such Conversion Price by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for such determination and the denominator shall be the sum of such number of shares and the total number of shares constituting such dividend or other distribution, such reduction to become effective immediately after the opening of business on the day following the date fixed for such determination. (ii) In case the Corporation shall issue rights or warrants to all holders of its shares of Common Stock entitling them to subscribe for or purchase Common Stock at a price per share less than the current market price per share (determined as provided in paragraph (c)) of the Common Stock on the date fixed for the determination of stockholders entitled to receive such rights or warrants, the Conversion Price in effect at the opening of business on the day following the date fixed for such determination shall be reduced by multiplying such Conversion Price by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for such determination plus the number of shares of Common Stock which the aggregate offering price of the total number of shares of Common Stock so offered for subscription or purchase would -67- purchase at such current market price and the denominator shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for such determination plus the number of shares of Common Stock so offered for subscription or purchase, such reduction to become effective immediately after the opening of business on the day following the date fixed for such determination. (iii) In case the Corporation shall, by dividend or otherwise, distribute to all holders of shares of Common Stock evidences of indebtedness or assets (including securities, but excluding any rights or warrants referred to in paragraph (b)(ii), any dividend or distribution paid in cash out of the surplus of the Corporation and any dividend or distribution referred to in paragraph (b)(i)), the Conversion Price shall be adjusted so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the close of business on the date fixed for the determination of stockholders entitled to receive such distribution by a fraction of which the numerator shall be the current market price per share (determined as provided in paragraph (c)) of the Common Stock on the date fixed for such determination, less the then fair market value (as determined by the Board, whose determination shall be conclusive) of the portion of the assets or evidences of indebtedness so distributed allocable to one share of Common Stock, and the denominator shall be such current market price per share of Common Stock, such adjustment to become effective immediately prior to the opening of business on the day following the date fixed for the determination of stockholders entitled to receive such distribution. Notwithstanding the foregoing, in the event that the Corporation shall distribute or shall have distributed any rights or warrants to acquire capital stock ("Rights") pursuant to this subparagraph (iii), the distribution of separate certificates representing the Rights subsequent to their initial distribution (whether or not the initial distribution of the Rights shall have occurred prior to the date of the issuance of the Series E Stock) shall be deemed to be the distribution of the Rights for purposes of this subparagraph (iii); provided that the Corporation may, in lieu of making any adjustment pursuant to this subparagraph (iii) upon a distribution of separate certificates representing the Rights, make proper provision so that each holder of Series E Stock who converts such Series E Stock (or any portion thereof) (A) before the record date for such distribution of separate certificates shall be entitled to receive upon conversion shares of Common Stock issued with Rights and (B) after such record date and prior to the expiration, redemption or termination of the Rights shall be entitled to receive upon conversion, in addition to the shares of Common Stock issuable upon conversion, the same number of Rights as would a holder of the number of shares of Common Stock that such Series E Stock so converted would have entitled the holder thereof to purchase in accordance with the terms and provisions applicable to the Rights if such Series E Stock were converted immediately prior to the record date for such distribution. Common Stock owned by or held for the account of the Corporation or any -68- majority owned subsidiary shall not be deemed outstanding for the purpose of any adjustment required under this subparagraph (iii). (iv) In case the outstanding shares of Common Stock shall be subdivided into a greater number of shares, the Conversion Price in effect at the opening of business on the day following the day upon which such subdivision becomes effective shall be proportionately reduced, and, conversely, in case outstanding shares of Common Stock shall each be combined into a smaller number of shares, the Conversion Price in effect at the opening of business on the day following the day upon which such combination becomes effective shall be proportionately increased, such reduction or increase, as the case may be, to become effective immediately after the opening of business on the day following the day upon which such subdivision or combination becomes effective. (v) The reclassification of Common Stock into securities other than Common Stock (other than any reclassification upon a consolidation or merger to which paragraph (f) applies) shall be deemed to involve (i) a distribution of such securities other than Common Stock to all holders of Common Stock (and the effective date of such reclassification shall be deemed to be "the date fixed for the determination of stockholders entitled to receive such distribution" and the "date fixed for such determination" within the meaning of paragraph (b)(iii)), and (ii) a subdivision or combination, as the case may be, of the number of shares of Common Stock outstanding immediately prior to such reclassification into the number of shares of Common Stock outstanding immediately thereafter (and the effective date of such reclassification shall be deemed to be "the day upon which such subdivision becomes effective," or "the day upon which such combination becomes effective," as the case may be, and "the day upon which such subdivision or combination becomes effective" within the meaning of paragraph (b)(iv) of this Section 5. (c) For the purpose of any computation under paragraphs (b)(ii) and (b)(iii), the current market price per share of Common Stock on any day shall be deemed to be the average of the daily Closing Prices for any 15 consecutive Trading Days selected by the Board commencing not less than 20 nor more than 30 Trading Days before the day in question. (d) Notwithstanding the provisions of paragraphs (b) above, no adjustment in the Conversion Price shall be required unless such adjustment (plus any adjustments not previously made by reason of this paragraph (d)) would require an increase or decrease of at least 1% in such price; provided, however, that any adjustments which by reason of this paragraph (d) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 5 shall be made to the nearest cent. (e) The Corporation may make such reductions in the Conversion Price, in addition to those required by this Section 5, as it considers to be advisable in order -69- to avoid or diminish any income tax to any holder of shares of Common Stock resulting from any dividend or distribution of stock or issuance of rights or warrants to purchase or subscribe for stock or from any event treated as such for income tax purposes or for any other reasons. The Corporation shall have the power to resolve any ambiguity or correct any error in this Section 5 and its actions in so doing shall be final and conclusive. (f) In case the Corporation shall effect any capital reorganization of the Common Stock (other than a subdivision, combination, capital reorganization or reclassification provided for in paragraph (b)) or shall consolidate, merge or engage in a statutory share exchange with or into any other corporation (other than a consolidation, merger or share exchange in which the Corporation is the surviving corporation and each share of Common Stock outstanding immediately prior to such consolidation or merger is to remain outstanding immediately after such consolidation or merger) or shall sell or transfer all or substantially all its assets to any other corporation, lawful provision shall be made as a part of the terms of such transaction whereby the holders of Series E Stock shall receive upon conversion thereof, in lieu of each share of Common Stock which would have been issuable upon conversion of such stock if converted immediately prior to the consummation of such transaction, the same kind and amount of stock (or other securities, cash or property, if any) as may be issuable or distributable in connection with such transaction with respect to each share of Common Stock outstanding at the effective time of such transaction, subject to subsequent adjustments for subsequent stock dividends and distributions, subdivisions or combinations of shares, capital reorganizations, reclassifications, consolidations, mergers or share exchanges, as nearly equivalent as possible to the adjustments provided for in this Section 5. (g) Whenever the Conversion Price is adjusted as herein provided: (i) the Corporation shall compute the adjusted Conversion Price and shall cause to be prepared a certificate signed by the chief financial or accounting officer of the Corporation setting forth the adjusted Conversion Price and showing in reasonable detail the facts upon which such adjustment is based and the computation thereof and such certificate shall forthwith be filed with each transfer agent for the Series E Stock; and (ii) a notice stating that the Conversion Price has been adjusted and setting forth the adjusted Conversion Price shall, as soon as practicable, be mailed to the holders of record of outstanding shares of Series E Stock. (h) In case: (i) the Corporation shall declare a dividend or other distribution on the Common Stock otherwise than in cash out of its surplus; (ii) the Corporation shall authorize the granting to the holders of the Common Stock of rights or warrants entitling them to subscribe for or purchase any shares of capital stock of any class or of any other rights; -70- (iii) of any reclassification of the Common Stock (other than a subdivision or combination of outstanding shares of Common Stock), or of any consolidation, merger or share exchange to which the Corporation is a party and for which approval of any stockholders of the Corporation is required, or of the sale or transfer of all or substantially all the assets of the Corporation; or (iv) of the voluntary or involuntary liquidation, dissolution or winding up of the Corporation; then the Corporation shall cause to be mailed to each transfer agent for the Series E Stock and to the holders of record of the outstanding shares of Series E Stock, at least 20 days (or 10 days in any case specified in paragraphs (i) or (ii) above) prior to the applicable record or effective date hereinafter specified, a notice stating (i) the date as of which the holders of record of shares of Common Stock to be entitled to such dividend, distribution, rights or warrants are be determined, or (ii) the date on which such reclassification, consolidation, merger, share exchange, sale, transfer, liquidation, dissolution or winding up is expected to become effective and the date as of which it is expected that holders of record of Common Stock shall be entitled to exchange their shares for securities or other property, if any, deliverable upon such reclassification, consolidation, merger, share exchange, sale, transfer, liquidation, dissolution or winding up. Such notice shall also state whether such transaction will result in any adjustment in the Conversion Price applicable to the Series E Stock and, if so, shall state what the adjusted Conversion Price will be and when it will become effective. Neither the failure to give the notice required by this paragraph (h), nor any defect therein, to any particular holder shall affect the sufficiency of the notice or the legality or validity of the proceedings described in paragraphs (h)(i) through (h)(iv). (i) The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, for the purpose of issuance upon conversion of Series E Stock, the full number of shares of Common Stock then issuable upon the conversion of all shares of Series E Stock then outstanding and shall take all action necessary so that shares of Common Stock so issued will be validly issued, fully paid and nonassessable. (j) The Corporation will pay any and all stamp or similar taxes that may be payable in respect of the issuance or delivery of shares of Common Stock on conversion of Series E Stock. The Corporation shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of shares of Common Stock in a name other than that in which the Series E Stock so converted were registered, and no such issuance or delivery shall be made unless and until the person requesting such issuance has paid to the Corporation the amount of any such tax or has established to the satisfaction of the Corporation that such tax has been paid. (k) No fractional shares or scrip representing fractional shares of Common Stock shall be issued upon the conversion of Series E Stock. If any such conversion would -71- otherwise require the issuance of such a fractional share an amount equal to such fraction multiplied by the Closing Price per share of Common Stock on the day of conversion shall be paid to the holder in cash by the Corporation. (l) The certificate of any independent firm of public accountants of recognized standing selected by the Board shall be presumptive evidence of the correctness of any computation made under this Section 5. 6. Liquidation Rights. (a) Upon the dissolution, liquidation or winding up of the Corporation, the holders of the Series E Stock shall be entitled to receive out of the assets of the Corporation, before any payment or distribution shall be made on the Common Stock or on any other class of stock ranking junior to the Preferred Stock upon liquidation, the amount of $1,000.00 per share, plus a sum equal to all dividends (whether or not earned or declared) on such shares accrued and unpaid thereon to the date of the final distribution. (b) Neither the sale of all or substantially all the property or business of the Corporation, nor the merger or consolidation of the Corporation into or with any other corporation or the merger or consolidation of any other corporation into or with the Corporation, shall be deemed to be a dissolution, liquidation or winding up, voluntary or involuntary, for the purposes of this Section 6. (c) After the payment to the holders of the Series E Stock of the full preferential amounts provided for in this Section 6, the holders of Series E Stock as such shall have no right or claim to any of the remaining assets of the Corporation. (d) In the event the assets of the Corporation available for distribution to the holders of Series E Stock upon any dissolution, liquidation or winding up of the Corporation, whether voluntary or involuntary, shall be insufficient to pay in full all amounts to which such holders are entitled pursuant to paragraph (a) of this Section 6, no such distribution shall be made on account of any shares of any other class or series of Preferred Stock ranking on a parity with the Series E Stock upon such dissolution, liquidation or winding up unless proportionate distributive amounts shall be paid on account of the Series E Stock, ratably, in proportion to the full distributable amounts for which holders of all such parity shares are respectively entitled upon such dissolution, liquidation or winding up. (e) Upon the dissolution, liquidation or winding up of the Corporation, the holders of shares of Series E Stock then outstanding shall be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders all amounts to which such holders are entitled pursuant to paragraph (a) of this Section 6 before any payment shall be made to the holders of any class or series of capital stock of the Corporation ranking junior upon liquidation to the Series E Stock. 7. Sinking or Retirement Fund. 72 The Series E Stock shall not be entitled to the benefit of a sinking or retirement fund to be applied to the purchase or redemption of such stock. 8. Rank. For purposes of this resolution, any stock of any class or classes of the Corporation shall be deemed to rank: (a) prior to the Series E Stock, either as to dividends or upon liquidation, if the holders of such class or classes shall be entitled to the receipt of dividends or of amounts distributable upon dissolution, liquidation or winding up of the Corporation, as the case may be, in preference or priority to the holders of Series E Stock; (b) on a parity with the Series E Stock, either as to dividends or upon liquidation, whether or not the dividend rates, dividend payment dates or redemption or liquidation prices per share or sinking fund provisions, if any, are different from those of the Series E Stock, if such stock is the Corporation's Auction Preferred Stock, Series C, or Flexible Auction Preferred Stock, Series D, or if the holders of such stock shall be entitled to the receipt of dividends or of amounts distributable upon dissolution, liquidation or winding up of the Corporation, as the case may be, in proportion to their respective dividend rates or liquidation prices, without preference or priority, one over the other, as between the holders of such stock and the holders of Series E Stock; and (c) junior to the Series E Stock, either as to dividends or upon liquidation, if such class shall be the Corporation's Series A Junior Participating Preferred Stock, Common Stock or if the holders of Series E Stock shall be entitled to receipt of dividends or of amounts distributable upon dissolution, liquidation or winding up of the Corporation, as the case may be, in preference or priority to the holders of shares of such class or classes. -73- II Common Stock 1. Dividends. Subject to the preferential rights of the Preferred Stock, the holders of the Common Stock are entitled to receive, to the extent permitted by law, such dividends as may be declared from time to time by the Board of Directors. 2. Liquidation. In the event of the voluntary or involuntary liquidation, dissolution, distribution of assets or winding up of the Corporation, after distribution in full of the preferential amounts, if any, to be distributed to the holders of shares of Preferred Stock, holders of Common Stock shall be entitled to receive all of the remaining assets of the Corporation of whatever kind available for distribution to stockholders ratably in proportion to the number of shares of Common Stock held by them respectively. The Board of Directors may distribute in kind to the holders of Common Stock such remaining assets of the Corporation or may sell, transfer or otherwise dispose of all or any part of such remaining assets to any other corporation, trust or other entity and receive payment therefor in cash, stock or obligations of such other corporation, trust or other entity, or any combination thereof, and may sell all or any part of the consideration so received and distribute any balance thereof in kind to holders of Common Stock. The merger or consolidation of the Corporation into or with any other corporation, or the merger of any other corporation into it, or any purchase or redemption of shares of stock of the Corporation of any class, shall not be deemed to be a dissolution, liquidation or winding up of the Corporation for the purposes of this paragraph. 3. Voting Rights. Except as may be otherwise required by law or this Restated Certificate of Incorporation, each holder of Common Stock has one vote in respect of each share of stock held by him of record on the books of the Corporation on all matters voted upon by the Stockholders. III Other Provisions 1. Preemptive Rights. No stockholder shall have any preemptive right to subscribe to an additional issue of stock of any class or series or to any securities of the Corporation convertible into such stock. 2. Changes in Authorized Capital Stock. Subject to the protective conditions and restrictions of any outstanding Preferred Stock, any amendment to this Restated Certificate of Incorporation which increases or decreases the authorized capital stock of any class or classes may be adopted by the affirmative vote of the holders of a majority of the outstanding shares of the voting stock of the Corporation. -74- ARTICLE FIFTH Board of Directors 1. Powers of the Board. In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized: (a) To make, alter or repeal the by-laws of the Corporation. (b) To authorize and cause to be executed mortgages and liens upon the real and personal property of the Corporation. (c) To set apart out of any of the funds of the Corporation available for dividends a reserve or reserves for any proper purpose and to abolish any reserve in the manner in which it was created. (d) By a majority of the whole board, to designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. The by-laws may provide that in the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of Directors, or in the by- laws of the Corporation, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation and may authorize the seal of the Corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the Restated Certificate of Incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the Corporation's property and assets, recommending to the stockholders a dissolution of the Corporation or a revocation of a dissolution, or amending the by-laws of the Corporation; and, unless the resolution or by-laws expressly so provide, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock. (e) When and as authorized by the stockholders in accordance with statute, to sell, lease or exchange all or substantially all of the property and assets of the Corporation, including its good will and its corporate franchises, upon such terms and conditions and for such consideration, which may consist in whole or in part of money or property including shares of stock in, and/or other securities of, any other corporation or corporations, as the Board of Directors shall deem expedient and for the best interests of the Corporation. 2. Terms and Number of Board Members. -75- The number of members of the Board of Directors will be fixed from time to time by the Board of Directors, but (subject to vacancies) in no event may there be less than three directors. Each director shall serve until the next annual meeting of stockholders or until his successor is elected. If any vacancy occurs in the Board of Directors during a term, the remaining directors, by affirmative vote of a majority thereof, may elect a director to fill the vacancy until the next annual meeting of stockholders. 3. Cumulative Voting. At all elections of directors of the Corporation, each stockholder entitled generally to vote for the election of directors shall be entitled to as many votes as shall equal the number of votes which (except for this provision as to cumulative voting) he would be entitled to cast for the election of directors with respect to his shares of stock multiplied by the number of directors to be elected, and he may cast all of such votes for a single director or may distribute them among the number to be voted for, or for any two or more of them as he may see fit. ARTICLE SIXTH Records The books of the Corporation may be kept (subject to any provisions contained in the statutes) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the by-laws of the Corporation. Elections of directors need not be by written ballot unless the by-laws of the Corporation shall so provide. ARTICLE SEVENTH Certain Contracts No contract or transaction between the Corporation and one or more of its directors or officers, or between the Corporation and any other corporation, partnership, association, or other organization in which one or more of its directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the board or committee thereof which authorizes the contract or transaction, or solely because his or their votes are counted for such purpose, if: 1. The material facts as to his interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board of Directors or committee in good faith authorizes the contract or transaction by a vote sufficient for such purpose without counting the vote of the interested director or directors: or 2. The material facts as to his interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders: or -76- 3. The contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified, by the Board of Directors, a committee thereof, or the stockholders. Interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction. ARTICLE EIGHTH Indemnification 1. Claim Brought by Third Parties. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he is or was or has agreed to become a director or officer of the Corporation, or is or was serving or has agreed to serve at the request of the Corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, or by reason of any action alleged to have been taken or omitted by such person in such capacity, against costs, charges and other expenses (including attorneys' fees) ("Expenses"), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. 2. Claim By or in the Right of the Corporation. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgement in its favor by reason of the fact that he is or was or has agreed to become a director or officer of the Corporation, or is or was serving or has agreed to serve at the request of the Corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, or by reason of any action alleged to have been taken or omitted by such person in such capacity, against Expenses actually and reasonably incurred by him in connection with the investigation, defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Court of Chancery of the State of Delaware or the court in which such action or suit was brought shall determine upon application that despite the adjudication of liability -77- but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such Expenses which the Court of Chancery of the State of Delaware or such other court shall deem proper. 3. Additional Indemnification. In addition to the indemnification provided for in paragraphs 1 and 2 of this Article Eighth, the Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of another corporation, partnership, joint venture, trust or other enterprise by reason of the fact that he is or was serving or has agreed to serve at the request of the Corporation as a director of such other corporation, partnership, joint venture, trust or other enterprise against Expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding for breach of fiduciary duty as such director, except for liability: (i) for breach of the duty of loyalty to such other corporation, partnership, joint venture, trust or other enterprise; (ii) for acts or omissions not in good faith or which involve intentional misconduct or knowing violation of law; (iii) for unlawful payment of a dividend or unlawful purchase or redemption of stock; or (iv) for any transaction from which the director derived an improper personal benefit. 4. Successful Defense. To the extent that any person referred to in paragraphs 1, 2 or 3 of this Article Eighth has been successful on the merits or otherwise, including, without limitation, the dismissal of an action without prejudice, in defense of any action, suit or proceeding referred to therein or in defense of any claim, issue or matter therein, he shall be indemnified against Expenses actually and reasonably incurred by him in connection therewith. 5. Determination of Conduct. Any indemnification under paragraphs 1, 2 or 3 of this Article Eighth (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the director or officer is proper in the circumstances because he has met the applicable standard of conduct set forth in said paragraphs 1, 2 or 3 of this Article Eighth. Such determination shall be made (a) by the board of directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (b) if such quorum is not obtainable, or, even if obtainable and a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (c) by the stockholders. 6. Advance Payment. Expenses incurred by any person referred to in paragraphs 1, 2 or 3 of this Article Eighth in defending a civil or criminal action, suit or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such person to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation as provided in this Article Eighth. 7. Certificate of Incorporation Article Not Exclusive; Change in Law. -78- The indemnification and advancement of Expenses provided by, or granted pursuant to, this Article Eighth shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of Expenses may be entitled under any law (common or statutory), by-law, agreement, vote of stockholders or disinterested directors, or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director or officer and shall inure to the benefit of the heirs, executors and administrators of such a person. Notwithstanding the provisions of this Article Eighth, the Corporation shall indemnify and make advancement of Expenses to any person referred to in paragraphs 1, 2 or 3 of this Article Eighth to the fullest extent permitted under the laws of the State of Delaware and any other applicable laws, as they now exist or as they may be amended in the future. 8. Contract Rights. All rights to indemnification and advancement of Expenses provided by this Article Eighth shall be deemed to be a contract between the Corporation and each person referred to in paragraphs 1, 2 or 3 of this Article Eighth. Any repeal or modification of this Article Eighth or any repeal or modification of relevant provisions of the Delaware General Corporation Law or any other applicable law shall not in any way diminish any rights to indemnification or advancement of Expenses with respect to any state of facts then or previously existing or any action, suit or proceeding previously or thereafter brought or threatened based in whole or in part on such state of facts. 9. Insurance. The Corporation shall have power to purchase and maintain insurance on behalf of any person referred to in paragraphs 1, 2 or 3 of this Article Eighth against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this Article Eighth or of Section 145 of the Delaware General Corporation Law. 10. Indemnification of Employees or Agents. The Board of Directors may, by resolution, extend the indemnification and advancement of Expenses provisions of this Article Eighth to any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding by reason of the fact that he is or was or has agreed to become an employee or agent of the Corporation, or is or was serving or has agreed to serve at the request of the Corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise. 11. Definition of Corporation. For purposes of this Article Eighth, references to the "Corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees or agents so that any person who is or was or has agreed to become a director, officer, employee or agent of such constituent corporation, or is or was serving or has agreed to serve at the request of such constituent -79- corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Article Eighth with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. 12. Employee Benefit Plans. For purposes of this Article Eighth, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the Corporation" shall include any service as a director or officer of the Corporation which imposes duties on, or involves services by, such director or officer with respect to an employee benefit plan, its participants, or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interest of the Corporation" as referred to in this Article Eighth. ARTICLE NINTH Stockholder Action by Consent Any corporate action upon which a vote of stockholders is required or permitted may be taken without a meeting or vote of stockholders with the written consent of stockholders having not less than a majority of all of the stock entitled to vote upon the action if a meeting were held; provided, that in no case shall the written consent be by holders having less than the minimum percent of the vote required by statute for the proposed corporate action and provided that prompt notice be given to all stockholders of the taking of corporate action without a meeting and by less than unanimous written consent. ARTICLE TENTH Amendment The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Restated Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. ARTICLE ELEVENTH Limited Liability of Directors No person who was or is a director of the Corporation shall be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for breach of the duty of loyalty to the Corporation or its stockholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or knowing violation of law; (iii) under Section 174 of the Delaware General Corporation Law; or (iv) for any transaction from which the director derived an improper personal benefit. For purposes hereof, "fiduciary duty as a director" shall include fiduciary duties arising in serving at the request of the Corporation as -80- a director of another corporation, partnership, joint venture, trust or other enterprise, and "personally liable to the Corporation" shall include liabilities to such other corporations, partnerships, joint ventures, trusts or other enterprises, and liabilities to the Corporation in its capacity as a security holder, joint venturer, partner, beneficiary, creditor or investor of or in any such other corporation, partnership, joint venture, trust or other enterprise. _____________ 4. This Restated Certificate of Incorporation was duly adopted in accordance with provisions of Section 245 of the General Corporation Law of the State of Delaware. 5. The capital of said Corporation will not be reduced under or by reason of this Restated Certificate of Incorporation. IN WITNESS WHEREOF, Northern Trust Corporation has caused its corporate seal to be hereunto affixed and this Restated Certificate of Incorporation to be signed by John B. Snyder, its Executive Vice President, and the same to be attested by Victoria Antoni, its Assistant Secretary, this 29th day of SEPTEMBER, 1992. /s/ John B. Snyder ------------------------ (SEAL) John B. Snyder Executive Vice President /s/ Victoria Antoni - ------------------------- Victoria Antoni Assistant Secretary -81- TABLE OF CONTENTS
PAGE ---- ARTICLE FIRST................................................................................. 1 ARTICLE SECOND................................................................................ 1 ARTICLE THIRD................................................................................. 2 ARTICLE FOURTH................................................................................ 2 I. Preferred Stock..................................................................... 2 Issuance in Series............................................................. 2 Authority of the Board with respect to Series.................................. 2 Dividends...................................................................... 3 Reacquired Shares.............................................................. 4 Voting Rights.................................................................. 4 Outstanding or Reserved for Issuance Preferred Stock........................... 4 Series A Junior Participating Preferred Stock (subject to Preferred Stock purchase Rights).................................................. 5 Auction Preferred Stock, Series C......................................... 9 Flexible Auction Preferred Stock, Series D................................ 31 6.25% Cumulative Preferred Stock, Series E................................ 60 II. Common Stock........................................................................ 74 Dividends...................................................................... 74 Liquidation.................................................................... 74 Voting Rights.................................................................. 74 III. Other Provisions.................................................................... 74 Preemptive Rights.............................................................. 74 Changes in Authorized Capital Stock............................................ 74 ARTICLE FIFTH................................................................................. 75 Powers of the Board...................................................................... 75 Terms and Number of Board Members........................................................ 75 Cumulative Voting........................................................................ 75 ARTICLE SIXTH................................................................................. 76 ARTICLE SEVENTH............................................................................... 76 ARTICLE EIGHTH................................................................................ 77 Claim Brought by Third Parties........................................................... 77 Claim By or in the Right of the Corporation.............................................. 77 Additional Indemnification............................................................... 78 Successful Defense....................................................................... 78
Determination of Conduct.................................................................. 78 Advance payment........................................................................... 78 Certificate of Incorporation Article Not Exclusive; Change in Law......................... 78 Contract Rights........................................................................... 79 Insurance................................................................................. 79 Indemnification of Employees or Agents.................................................... 79 Definition of Corporation................................................................. 79 Employee.................................................................................. 80 ARTICLE NINTH.................................................................................. 80 ARTICLE TENTH.................................................................................. 80 ARTICLE ELEVENTH............................................................................... 80
CERTIFICATE OF AMENDMENT OF RESTATED CERTIFICATE OF INCORPORATION OF NORTHERN TRUST CORPORATION NORTHERN TRUST CORPORATION, a corporation organized and existing under the General Corporation Law of the State of Delaware (the "Corporation") does hereby certify: (1) The Corporation is regulated under the Bank Holding Company Act of 1956, 12 U.S.C., Section 1841, et seq., as that Act shall from time to time be amended; (2) At a meeting of the Board of Directors of the Corporation held on February 16, 1993, a resolution was adopted setting forth a proposed amendment of the Restated Certificate of Incorporation, declaring the amendment to be advisable and directing that the amendment be considered at a meeting of stockholders of the Corporation. The resolutions setting forth the proposed amendment are as follows: BE IT RESOLVED that the Board of Directors of Northern Trust Corporation declares it advisable that the first sentence of Article Fourth of the Restated Certificate of Incorporation be amended by (1) increasing the total number of shares which the Corporation has the authority to issue, referred to in the second line of Article Fourth, by 9,000,000 shares, and (2) revising the third line of Article Fourth to read in its entirety as follows: "10,000,000 shares of Preferred Stock (Preferred Stock) without par value, and". BE IT FURTHER RESOLVED that the foregoing proposed amendment be submitted to the stockholders of the Corporation for their consideration and approval at the next annual meeting of stockholders of the Corporation. (3) At a meeting of the Board of Directors of the Corporation held on February 16, 1993, resolutions were adopted setting forth a further proposed amendment of the Restated Certificate of Incorporation, declaring the amendment to be advisable and directing that the amendment be considered at a meeting of stockholders of the Corporation. The resolutions setting forth the proposed amendment are as follows: BE IT RESOLVED that the Board of Directors of Northern Trust Corporation declares it advisable that the first sentence of Article Fourth of the Restated Certificate of Incorporation be amended by (1) increasing the total number of shares which the Corporation has the authority to issue, referred to in the second line of Article Fourth, by 70,000,000 shares, and (2) revising the fourth line of Article Fourth to read in its entirety as follows: "140,000,000 shares of Common Stock (Common Stock), $1.66 2/3 par value per share." BE IT FURTHER RESOLVED that the foregoing proposed amendment be submitted to the stockholders of the Corporation for their consideration and approval at the next annual meeting of stockholders of the Corporation. (4) Thereafter, pursuant to such resolutions of its Board of Directors, the stockholders of the Corporation, at a meeting held on April 20, 1993, adopted both of the proposed amendments by voting the number of shares required by the statute in favor of each of the proposed amendments; (5) Each of the said amendments was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware; and (6) Accordingly, there has now been given all corporate authorization necessary to cause the first sentence of Article Fourth of the Restated Certificate of Incorporation to provide as follows: "The total number of shares of all classes of capital stock which the Corporation has the authority to issue is 150,000,000 shares, which are divided into two classes as follows: 10,000,000 shares of Preferred Stock (Preferred Stock) without par value, and 140,000,000 shares of Common Stock (Common Stock), $1.66 2/3 par value per share." (7) The Capital of the Corporation will not be reduced under or by reason of the aforesaid amendments. --2-- IN WITNESS WHEREOF, NORTHERN TRUST CORPORATION has caused this Certificate to be signed and attested by its duly authorized officers, this 20th day of April, 1993. NORTHERN TRUST CORPORATION By: /s/ David W. Fox ---------------------------- Chairman of the Board Attest: /s/ Peter L. Rossiter - ------------------------------ Secretary --3-- CERTIFICATE OF ELIMINATION OF NORTHERN TRUST CORPORATION I, Peter L. Rossiter, Executive Vice President, General Counsel and Secretary of Northern Trust Corporation, a corporation organized and existing under the General Corporation Law of the State of Delaware, do hereby certify as follows: FIRST: That the Board of Directors of Northern Trust Corporation (the "Corporation"), by resolutions adopted at a meeting on February 20, 1996, determined to eliminate all of the 6.25% Cumulative Convertible Preferred Stock, Series E, of the Corporation, said resolutions being as follows: WHEREAS, the Corporation redeemed all of the outstanding shares of its 6.25% Cumulative Convertible Preferred Stock, Series E (the "Series E Preferred Stock"), on January 26, 1996; NOW, THEREFORE, BE IT RESOLVED, that the Series E Preferred Stock be returned to the status of "authorized but not issued," and that the Chairman of the Board, the President or any Executive or Senior Executive Vice President, or any one of them acting alone, be, and each of them hereby is, authorized and directed, in the name and on behalf of the Corporation, to execute and cause to filed with the Secretary of State of Delaware, a Certificate of Elimination, and to execute all other instruments and documents and to do and cause to be done all such further acts and things, as may be necessary or advisable to eliminate the Series E Preferred Stock and that all actions of said officers are hereby ratified, approved and confirmed in all respects; and BE IT FURTHER RESOLVED, that none of the authorized shares of the Series E Preferred Stock are outstanding and none will be issued. SECOND: In accordance with the provisions of Section 151 of the General Corporation Law of the State of Delaware, the Restated Certificate of Incorporation is hereby amended to eliminate all reference to the Series E Preferred Stock, and the Series E Preferred Stock shall be returned to the status of "authorized but not issued." IN WITNESS WHEREOF, I have signed this Certificate, this 21st day of February, 1996. NORTHERN TRUST CORPORATION By: /s/ Peter L. Rossiter ---------------------------------- Peter L. Rossiter Executive Vice President, General Counsel and Secretary EX-10.(XVI) 4 AMENDMENTS TO ESOP EXHIBIT NUMBER (10)(xvi) TO 1996 FORM 10-K RESOLUTION 10/15/96 - -------------------------------------------------------------------------------- THE NORTHERN TRUST COMPANY EMPLOYEE BENEFIT PROVISIONS FOR CERTAIN FORMER EMPLOYEES OF FIRST CHICAGO NBD - ----------------------------------------------------------------------------- CORPORATION - ----------- WHEREAS the Company and First Chicago NBD Corporation ("FCNBD") entered into an Agreement dated October 3, 1996 (the "Agreement") pursuant to which FCNBD named the Company as the preferred provider for certain of FCNBD's master trust and institutional custody customers which FCNBD will no longer service; and WHEREAS, in connection with the Agreement, the Company wishes to hire certain employees of FCNBD and of banks affiliated with FCNBD ("FCNBD Banks") to assist with servicing former FCNBD customers who become customers of the Company (each such employee who is hired by the Company pursuant to Section 4.01 of the Agreement being referred to herein as an "FCNBD Employee"); and WHEREAS, it is now deemed desirable to provide for the manner in which the FCNBD Employees will be treated for purposes of certain welfare and retirement plans maintained by The Northern Trust Company; NOW, THEREFORE, BE IT RESOLVED, that The Northern Trust Company Pension Plan (the "Pension Plan"), The Northern Trust Thrift-Incentive Plan ("TIP") and the Northern Trust Employee Stock Ownership Plan ("ESOP") are hereby amended, effective September 30, 1996, to provide that an FCNBD Employee's service with FCNBD or an FCNBD Bank (or any predecessor of FCNBD or an FCNBD Bank) shall be considered service with the Company for purposes of determining Eligibility and Vesting Service under those retirement plans (but not for purposes of determining Credited Service under the Pension Plan, which shall be calculated based on the FCNBD Employee's date of hire with the Company). FURTHER RESOLVED, that for purposes of determining eligibility to participate and receive benefits under Northern's short- and long-term disability plans, an FCNBD Employee shall receive credit for his or her prior employment with FCNBD or an FCNBD Bank (and any predecessor of FCNBD or an FCNBD Bank) as if such FCNBD Employee had then been employed by the Company. FURTHER RESOLVED, that the foregoing resolutions shall apply only with respect to former employees of FCNBD and FCNBD Banks (or any predecessors of FCNBD or an FCNBD Bank) who are hired by the Company pursuant to Section 4.01 of the Agreement, and do not entitle such employees to receive benefits for periods prior to employment with Northern under any welfare or retirement plan maintained by The Northern Trust Company, except as expressly provided herein. Resolution -2- 10/15/96 - -------------------------------------------------------------------------------- The Northern Trust Company FURTHER RESOLVED, that any Executive Vice President or any Senior Vice President of The Northern Trust Company, or his or her delegate, is authorized to prepare and execute amendments to the affected plans and take any actions which are necessary or advisable to implement these resolutions, including any action which may be required to ensure that the tax-qualified status of The Northern Trust Company retirement plans is maintained. 26205 EX-10.(XVIII) 5 AMENDMENT TO OFFICE LEASE EXHIBIT NUMBER (10)(xviii)(1) TO 1996 FORM 10-K FIRST AMENDMENT TO OFFICE LEASE ------------------------------- THIS FIRST AMENDMENT TO OFFICE LEASE ("Amendment") is made as of this 20th day of October, 1987, by and between AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO, not personally but solely as Trustee under Trust Agreement dated July 12, 1984, and known as Trust No. 61523 ("Landlord"), and THE NORTHERN TRUST COMPANY, an Illinois corporation ("Tenant"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, Landlord and Tenant have entered into that certain Office Lease dated July 8, 1987 (the "Lease"), pursuant to which Landlord leases to Tenant and Tenant leases from Landlord certain Premises (as defined in the Lease) on floors 3, 4, 5, 6, 7, 8, 9, 10, 13 and 14 of the building commonly known as Manufacturers Hanover Plaza located at 10 South LaSalle Street, Chicago, Illinois (the "Building"); and WHEREAS, Landlord desires to lease to Tenant and Tenant desires to lease from Landlord certain additional premises located on floor 11 of the Building under the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the mutual promises contained herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Landlord and Tenant hereby agree as follows: 1. ADDITIONAL PREMISES. ------------------- A. 11th Floor 5-Year Space. Landlord leases to Tenant and Tenant leases from Landlord the additional premises located on floor 11 of the Building shown cross-hatched on Exhibit A attached hereto and labelled as "Northern Trust 5-Year Space" ("11th Floor 5-Year Space"). B. 11th Floor 3-Year Space. Landlord leases to Tenant and Tenant leases from Landlord the additional premises located on floor 11 of the Building shown lined on Exhibit A attached hereto and labelled "Northern Trust 3-Year Space" ("11th Floor 3-Year Space"). C. Incorporation of 11th Floor 5-Year Space and 11th Floor 3-Year Space. (1) Exhibit A attached hereto is hereby incorporated into the Lease as Exhibit A-1 thereto. (2) After the words "Trust Company" in the 6th to the last line of Paragraph 1.N. of the Lease, the following shall be inserted: "and the space on floor 11 of the Building cross-hatched on Exhibit A-1 attached hereto and identified as "Northern Trust 5-Year Space" ("11th Floor 5-Year Space") and the space on floor 11 of the Building lined on Exhibit A-1 attached hereto and identified as "Northern Trust 3-Year Space" ("11th Floor 3-Year Space")". (3) After the words "Long-Term Space" in the 3rd to the last line of Paragraph 1.N. of the Lease, the following shall be inserted: "and 11th Floor 5-Year Space and 11th Floor 3-Year Space". 2. TERM. ---- A. 11th Floor 5-Year Space Term. With respect to 11th Floor 5-Year Space, the Commencement Date of the Term (as defined in the Lease) shall be the earlier of (i) March 1, 1988, or (ii) the date Tenant first occupies all or part of the 11th Floor 5-Year Space for the conduct of business (the "11th Floor 5-Year Space Commencement Date"). The Expiration Date of the Term (as defined in the Lease) with respect to 11th Floor 5-Year Space shall be August 31, 1992 (the "11th Floor 5-Year Space Expiration Date"), unless terminated earlier or extended as otherwise provided in the Lease or herein. The period commencing on the 11th Floor 5-Year Space Commencement Date and ending on the 11th Floor 5- Year Space Expiration Date is hereinafter referred to as the "11th Floor 5-Year Space Term". B. 11th Floor 3-Year Space Term. With respect to 11th Floor 3-Year Space, the Commencement Date of the Term shall be the earlier of (i) March 1, 1988, or (ii) the date Tenant first occupies all or part of the 11th Floor 3- Year Space for the conduct of business (the "11th Floor 3-Year Space Commencement Date"). The Expiration Date of the Term with respect to 11th Floor 3-Year Space shall be August 31, 1990 (the "11th Floor 3-Year Space Expiration Date"), unless terminated earlier or extended as otherwise provided in the Lease or herein. The period commencing on the 11th Floor 3-Year Space Commencement Date and ending on the 11th Floor 3-Year Space Expiration Date is hereinafter referred to as the "11th Floor 3-Year Space Term". C. Confirmation of Term. At Landlord's request, Tenant shall execute a statement setting forth the 11th Floor 5-Year Space Commencement Date and the 11th Floor 3-Year Space Commencement Date, determined as provided above, but no failure by Tenant to do so shall affect the determination of such dates. D. Incorporation of 11th Floor 5-Year Space Term and 11th Floor 3- Year Space Term. 2 (1) The following shall be inserted at the end of Paragraph 1.E. of the Lease: "and from the 11th Floor 5-Year Space Commencement Date (as hereinafter defined) to and including the 11th Floor 5-Year Space Expiration Date (as hereinafter defined) as to 11th Floor 5-Year Space (as hereinafter defined) ("11th Floor 5-Year Space Term") and from the 11th Floor 3-Year Space Commencement Date (as hereinafter defined) to and including the 11th Floor 3-Year Space Expiration Date (as hereinafter defined) as to 11th Floor 3-Year Space (as hereinafter defined) ("11th Floor 3-Year Space Term")". (2) The following shall be inserted at the end of Paragraph 1.F. of the Lease: ", as to Short-Term Space and Long-Term Space and the earlier of (i) March 1, 1988, or (ii) the date Tenant first occupies all or part of the 11th Floor 5-Year Space for the conduct of business (the "11th Floor 5- Year Space Commencement Date") as to 11th Floor 5-Year Space and the earlier of (i) March 1, 1988, or (ii) the date Tenant first occupies all or part of the 11th Floor 3-Year Space for the conduct of business (the "11th Floor 3-Year Space Commencement Date") as to 11th Floor 3-Year Space". (3) Before the word "and" in line 6 of Paragraph 1.G. of the Lease, the following shall be inserted: "and as to 11th Floor 3-Year Space ("11th Floor 3-Year Space Expiration Date")". (4) The following shall be inserted at the end of Paragraph 1.G. of the Lease: "and the last day of the fifth (5th) Lease Year as to 11th Floor 5-Year Space ("11th Floor 5-Year Space Expiration Date")". (5) Before the words "Commencement Date" in line 6 of Paragraph 2 of the Lease, the word "respective" shall be inserted. (6) After the words "Long-Term Space," in line 9 of paragraph 2 of the Lease, the following shall be inserted: "and on the 11th Floor 5-Year Space Expiration Date, as to 11th Floor 5-Year Space, and on the 11th Floor 3-Year Space Expiration date, as to 11th Floor 3-Year Space". (7) Before the words "the Premises" in line 2 of Paragraph 4.A. of the Lease, the words "each portion of" shall be inserted. (8) Before the word "Commencement" in line 2 of Paragraph 4.A. of the Lease, the word "respective" shall be inserted. 3 (9) Wherever in Paragraph 13 of the Lease the phrase "Short-Term Space or Long-Term Space" shall appear the following shall be inserted after such phrase: "or 11th Floor 5-Year Space or 11th Floor 3-Year Space". (10) Wherever in Paragraph 13 of the Lease the phrase "Short-Term Space Term or Long-Term Space Term" shall appear the following shall be inserted after such phrase: "or 11th Floor 5-Year Space Term or 11th Floor 3-Year Space Term". (11) At the beginning of line 6 of Paragraph 14 of the Lease, the following shall be inserted: "or all or any part of the 11th Floor 5-Year Space after the 11th Floor 5-Year Space Expiration Date or all or any part of the 11th Floor 3-Year Space after the 11th Floor 3-Year Space Expiration Date". (12) After the words "Short-Term Space" in line 16 of Paragraph 14 of the Lease, the following shall be inserted: ", 11th Floor 5-Year Space, 11th Floor 3-Year Space". (13) After the words "Expiration Date" in line 7 of Paragraph 19 of the Lease, the following shall be inserted: ", 11th Floor 5-Year Space Expiration Date, 11th Floor 3-Year Space Expiration Date". 3. RENTABLE AREA AND TENANT'S PROPORTIONATE SHARE. ---------------------------------------------- A. Rentable Area. "Rentable Area of 11th Floor 5-Year Space" shall mean 4,001 square feet. "Rentable Area of 11th Floor 3-Year Space" shall mean 16,721 square feet. B. Tenant's Proportionate Share. Tenant's Proportionate Share (as defined in the Lease) as to 11th Floor 5-Year Space shall be .562%. Tenant's Proportionate Share as to 11th Floor 3-Year Space shall be 2.351%. C. Incorporation of Rentable Area and Tenant's Proportionate Share. (1) Paragraph 1.I. of the Lease is hereby deleted in its entirety and the following shall be substituted therefor: "I. Rentable Area of Premises: 199,130 square feet (78,051 square feet of Rentable Area of Short-Term Space, 100,357 square feet of Rentable Area of Long- Term Space, 4,001 square feet of Rentable Area of 11th 4 Floor 5-year Space, and 16,721 square feet of Rentable Area of 11th Floor 3-Year Space)". (2) Paragraph 1.L. of the Lease is hereby deleted in its entirety and the following shall be substituted therefor: "L. Tenant's Proportionate Share: 27.995% (10.973% as to Short-Term Space, 14.109% as to Long-Term Space, .562% as to 11th Floor 5- Year Space and 2.351% as to 11th Floor 3-Year Space)". (3) Before the words "shall mean" in line 4 of Paragraph 7.A(3) of the Lease, the following shall be inserted: "and "Rentable Area of 11th Floor 5-Years Space" and "Rentable Area of 11th Floor 3- Year Space "." (4) After the word "Space" in line 8 of Paragraph 7.A(3) of the Lease, the following shall be inserted: "and Rentable Area of 11th Floor 5-Year Space and Rentable Area of 11th Floor 3-Year Space". (5) After the words "Long-Term Space" in line 17 of Paragraph 7.A(3) of the Lease, the following shall be inserted: ",Rentable Area of 11th Floor 5-Year Space, Rentable Area of 11th Floor 3-Year Space". (6) After the Word "Date" in line 6 of Paragraph 7.A(5) of the Lease, the following shall be inserted: ", 11th Floor 5-Year Space Expiration Date or 11th Floor 3-Year Space Expiration Date". (7) Before the word "Tenant's" in line 8 of Paragraph 7.A(5) of the Lease, the following sentence shall be inserted: "Prior to the 11th Floor 5-Year Space Commencement Date and the 11th Floor 3- Year Space Commencement Date, Tenant's Proportionate Share shall not include the portion of Tenant's Proportionate Share attributable to 11th Floor 5-Year Space or 11th Floor 3-Year Space, respectively". 4.RENT. ---- A. Base Rent for 11th Floor 5-Year Space. Annual Base Rent for 11th Floor 5-Year Space shall be as follows: 5 Period Annual Base Rent ------ ---------------- First (1st) Lease Year $16.00 per square foot of Rentable Area of 11th Floor 5- Year Space (i.e., $64,016.00). Second (2nd) Lease Year $18.00 per square foot of Rentable Area of 11th Floor 5-Year Space (i.e., $72,018.00). Third (3rd) Lease Year $20.00 per square foot of Rentable Area of 11th Floor 5-Year Space (i.e., $80,020.00). Fourth (4th) Lease Year $23.50 per square foot of Rentable Area of 11th Floor 5-Year Space (i.e., $94,023.50). Fifth (5th) Lease Year $23.50 per square foot of Rentable Area of 11th Floor 5-Year Space (i.e., $94,023.50). B. Base Rent for 11th Floor 3-Year Space. Annual Base Rent for 11th Floor 3-Year Space shall be as follows: Period Annual Base Rent ------ ---------------- First (1st) Lease Year $16.00 per square foot of Rentable Area of 11th Floor 3- Year Space (i.e., $267,536.00). Second (2nd) Lease Year $18.00 per square foot of Rentable Area of 11th Floor 3-Year Space (i.e., $300,978.00). Third (3rd) Lease Year $20.00 per square foot of Rentable Area of 11th Floor 3-Year Space (i.e., $334,420.00). C. Definition of Lease Year. As used in this Amendment, the term "Lease Year" shall have the same meaning as set forth in the Lease (i.e., each twelve (12) consecutive calendar month period commencing on September 1 and ending on August 31). D. Incorporation of Rent. (1) The Annual Base Rent table for 11th Floor 5-Year Space set forth in Paragraph 4.A. above shall be incorporated into the Lease as Paragraph 1.H(iii). The Annual Base Rent table for 11th Floor 3-Year Space set forth in Paragraph 4.B. above shall be incorporated into the Lease as Paragraph 1.H(iv). 6 (2) After the words "Paragraph 6 below)" in line 18 of Paragraph 3.D. of the Lease, the following shall be inserted: "and 11th Floor 5-Year Space Rent (as defined in Paragraph 6 below) and 11th Floor 3-Year Space Rent (as defined in Paragraph 6 below)". (3) At the end of the first sentence of Paragraph 6 of the Lease, the following shall be inserted: ", as to Short-Term Space and Long-Term Space, and at the annual rate stated in Paragraph 1.H(iii), as to 11th Floor 5-Year Space, and at the annual rate stated in Paragraph 1.H(iv), as to 11th Floor 3-Year Space". (4) Before the words "Rent shall be" in line 12 of the second paragraph of Paragraph 6 of the Lease, the following sentence shall be inserted: "Base Rent pertaining to 11th Floor 5-Year Space, as set forth in Paragraph 1.H(iii) above, along with Rent Adjustment and additional rent pertaining to 11th Floor 5-Year Space, shall be collectively called "11th Floor 5-Year Space Rent" and Base Rent pertaining to 11th Floor 3-Year Space, as set forth in Paragraph 1.H(iv) above, along with Rent Adjustment and additional rent pertaining to 11th Floor 3-Year Space, shall be collectively called "11th Floor 3-Year Space Rent."." (5) After the word "Rent" in line 17 of Paragraph 16.A(3) of the Lease, the following shall be inserted: "11th Floor 5-Year Space Rent or 11th Floor 3-Year Space Rent". 5. TENANT ALLOWANCE. Landlord shall pay as an allowance towards the cost ---------------- of the Tenant Improvement Work (as defined in the Workletter Agreement attached to the Lease (the "Workletter")) an amount equal to $15.00 per square foot of Rentable Area of 11th Floor 5-Year Space and $15.00 per square foot of Rentable Area of 11th Floor 3-Year Space, payable in accordance with Paragraph 8 of the Workletter. Accordingly, the following shall be inserted at the end of Paragraph 1.S. of the Lease: "$15.00 per square foot of Rentable Area of 11th Floor 5-Year Space and $15.00 per square foot of Rentable Area of 11th Floor 3-Year Space". 6. ONE-YEAR OPTIONS TO EXTEND. -------------------------- A. One-Year Options to Extend. Provided that as of the 11th Floor 3-Year Space Expiration Date (i.e., August 31, 1990) and at the time each option described below is exercised, no Default of Tenant exists under the Lease or hereunder, Landlord hereby grants to Tenant the option to extend the 11th Floor 3-Year Space Term in respect to all (and not less than all) of the 11th Floor 3-Year Space upon the terms, covenants, conditions and provisions contained in the 7 Lease and herein (except that (i) Annual Base Rent will be as set forth in the following sentence, (ii) no additional construction allowance will be paid by Landlord and (iii) no additional options to extend will be created by the exercise of any such option to extend), for two (2) separate, successive periods of one (1) year each, to follow consecutively upon the 11th Floor 3-Year Space Expiration Date, so that the 11th Floor 3-Year Space Term shall expire on the Short-Term Space Expiration Date (as defined on the Lease) as extended pursuant to each of the two (2) respective one (1) year extension options granted under Paragraph 27.A. of the Lease. The Annual Base Rent for any such period shall be Twenty-Three Dollars and Fifty Cents ($23.50) per annum per square foot of Rentable Area of 11th Floor 3-Year Space (i.e., $392,943.50). Tenant's Rent Adjustment obligation under Paragraph 7 of the Lease shall continue. Each such option shall be exercisable by Tenant's giving written notice (which shall be irrevocable) to Landlord of its exercise of the same not less than one (1) year prior to the expiration date of the then current 11th Floor 3-Year Space Term. The option to extend for the second one-year extension period shall be conditioned upon Tenant's having exercised the option to extend the 11th Floor 3-Year Space Term for the first one-year extension period. B. No Assignment. Tenant shall have no right to assign, transfer, or otherwise dispose of any of its rights or interests under this Paragraph 6, such rights being granted solely to The Northern Trust Company; provided, however, any successor by merger, consolidation or acquisition of all or substantially all of the assets or capital stock of The Northern Trust Company shall be entitled to the rights granted to The Northern Trust Company hereunder. 7. TEN-YEAR OPTION TO EXTEND. ------------------------- A. 11th Floor 5-Year Space. Provided that as of the 11th Floor 5- Year Space Expiration Date (i.e., August 31, 1992) and at the time the option described below is exercised, no Default of Tenant exists under the Lease or hereunder and provided that Cameron Properties, Inc., has waived its expansion option with respect to the 11th Floor 5-Year Space or such option has expired, Landlord hereby grants to Tenant the option to extend the 11th Floor 5-Year Space Term in respect to all (and not less than all) of the 11th Floor 5-Year Space upon the terms, covenants, conditions and provisions contained in the Lease and herein (except that (i) Rent will be as set forth below in this Paragraph 7.A., (ii) additional construction allowance will be paid by Landlord as set forth below in this Paragraph 7.A., and (iii) no additional options to extend will be created by the exercise of such option to extend), for one (1) period of ten (10) years, to follow consecutively upon the 11th Floor 5-Year Space Expiration Date, so that the 11th Floor 5-Year Space Term shall expire on the Long-Term Space 8 Expiration Date (as defined in the Lease). The Rent for any Lease Year within such extension period shall be calculated on the basis of the prevailing rental rate(s) (as defined in Paragraph 27.B(ii) of the Lease), but in no event shall the Annual Base Rent for such extension term be less than the Annual Base Rent for 11th Floor 5-Year Space, as adjusted, for the fifth (5th) Lease Year. Such option shall be exercisable by Tenant's giving written notice (which shall be irrevocable) to Landlord of its exercise of the same not less than one (1) year prior to the 11th Floor 5-Year Space Expiration Date. If Tenant so exercises said option, Landlord shall pay as additional allowance toward the cost of Tenant Improvement Work for the 11th Floor 5-Year Space an amount equal to $15.00 per square foot of Rentable Area of 11th Floor 5-Year Space, payable in accordance with Paragraph 8 of the Workletter. B. 11th Floor 3-Year Space. Provided that Tenant has previously exercised both one (1) year extension options granted under Paragraph 6 above and that as of the 11th Floor 3-Year Space Expiration Date, as extended (i.e., August 31, 1992), and at the time the option described below is exercised, no Default of Tenant exists under the Lease or hereunder, Landlord hereby grants to Tenant the option to extend the 11th Floor 3-Year Space Term in respect to al (and not less than all) of the 11th Floor 3-Year Space upon the terms, covenants, conditions and provisions contained in the Lease and herein (except that (i) Rent will be as set forth below in this Paragraph 7.B., (ii) additional construction allowance will be paid by Landlord as set forth below in this Paragraph 7.B., and (iii) no additional options to extend will be created by the exercise of such option to extend), for one (1) period of ten (10) years, to follow consecutively upon the 11th Floor 3-Year Space Expiration Date as extended under Paragraph 6 above, so that the 11th Floor 3- Year Space Term shall expire on the Long-Term Space Expiration Date. The Rent for any Lease Year within such extension period shall be calculated on the basis of the prevailing rental rate(s) (as defined in Paragraph 27.B(ii) of the Lease), but in no event shall the Annual Base Rent for such extension term be less than the Annual Base Rent for 11th Floor 3-Year Space, as adjusted, for the fifth (5th) Lease Year. Such option shall be exercisable by Tenant's giving written notice (which shall be irrevocable) to Landlord of its exercise of the same not less than one (1) year prior to the 11th Floor 3-Year Space Expiration Date, as extended under Paragraph 6 above. If Tenant so exercises said option, Landlord shall pay as additional allowance toward the cost of Tenant Improvement Work for 11th Floor 3-Year Space an amount equal to $15.00 per square foot of Rentable Area of 11th Floor 3-Year Space, payable in accordance with Paragraph 8 of the Workletter. C. No Assignment. Tenant shall have no right to assign, transfer or otherwise dispose of any of its rights or interests under this Paragraph 7, such rights being granted 9 solely to The Northern Trust Company; provided, however, any successor by merger, consolidation or acquisition of all or substantially all of the assets or capital stock of The Northern Trust Company shall be entitled to the rights granted to The Northern Trust Company hereunder. 8. LONG-TERM OPTIONS TO EXTEND. --------------------------- A. Long-Term Options. Provided that Tenant has previously exercised both of the ten (10) year extension options granted under Paragraph 7 above, and that as of the 11th Floor 5-Year Space Expiration Date, as extended (i.e., August 31, 2002), and the 11th Floor 3-Year Space Expiration Date, as extended (i.e., August 31, 2002), and at the time that each option described below is exercised, no Default of Tenant exists hereunder, Landlord hereby grants to Tenant the option to extend the 11th Floor 5-Year Space Term and the 11th Floor 3-Year Space Term in respect to all (and not less than all) of the 11th Floor 5-Year Space and 11th Floor 3-Year Space upon the terms, covenants, conditions and provisions contained in the Lease and herein (except that (i) Rent will be as set forth in the following sentence, (ii) no additional construction allowance will be paid by Landlord and (iii) no additional options to extend will be created by the exercise of any such option to extend, for two (2) separate, successive periods of ten (10) years each, to follow consecutively upon the 11th Floor 5-Year Space Expiration Date and 11th Floor 3-year Space Expiration Date, respectively, so that the 11th Floor 5-Year Space Term and the 11th Floor 3-Year Space Term, respectively, shall expire on the Long-Term Space Expiration Date as extended pursuant to each of the two (2) respective ten (10) year extension options granted under Paragraph 27.B. of the Lease. The Rent for any Lease Year within such extension period shall be calculated on the basis of the prevailing rental rate(s) (as defined in Paragraph 27.B(ii) of the Lease), but in no event shall the Annual Base Rent for either extension term be less than the Annual Base Rent for the 11th Floor 5-Year Space and 11th Floor 3-Year Space, respectively, as adjusted, for the fifteenth (15th) Lease Year (in the case of the first extension option) or the last Lease Year of the first ten (10) year extension term granted under this Paragraph 8.A. (in the case of the second extension term). Each such option shall be exercisable by Tenant's giving written notice (which shall be irrevocable) to Landlord of its exercise of same not less than one (1) year prior to the expiration date of the then current 11th Floor 5-Year Space Term and 11th Floor 3-Year Space Term. The option to extend for the second ten-year extension period granted under this Paragraph 8.A. shall be conditioned upon Tenant's having exercised the option to extend the 11th Floor 5-Year Space Term and 11th Floor 3-Year Space Term for the first ten-year extension period. 10 B. No Assignment. Tenant shall have no right to assign, transfer or otherwise dispose of any of its rights or interests under this Paragraph 8, such rights being granted solely to the Northern Trust Company; provided, however, any successor by merger, consolidation or acquisition of all or substantially all of the assets or capital stock of The Northern Trust Company shall be entitled to the rights granted to The Northern Trust Company hereunder. 9. EXERCISE OF SHORT-TERM SPACE OPTIONS TO EXTEND WITH RESPECT TO FLOOR -------------------------------------------------------------------- 14. Notwithstanding anything to the contrary contained in the Lease, Tenant - -- hereby exercises its right to extend the Short-Term Space Term with respect to the Short-Term Space located on floor 14 of the Building for both of the one (1) year extension periods granted under Paragraph 27.A. of the Lease. Such extension periods shall be under the terms, covenants and conditions set forth in Paragraph 27.A. Nothing contained in this Paragraph 10 shall be construed as modifying or altering Paragraph 27.A. in any way with respect to the balance of the Short-Term Space. 10. PRIORITY OF EXERCISE OF SHORT-TERM SPACE OPTION TO EXTEND. --------------------------------------------------------- A. Amendment of Short-Term Space Options. Landlord hereby grants to Tenant the right to exercise the options to extend the Short-Term Space Term granted under Paragraph 27.A. of the Lease on a floor-by-floor basis (i.e., Tenant may exercise its option to extend with respect to all (but not less than all) of the Short-Term Space located on one or more floors of the Building). B. Priority. Tenant hereby agrees to exercise its Short-Term Space options to extend granted under Paragraph 27.A. of the Lease, as amended by Paragraph 10.A. above, in the following order of priority: (a) Tenant shall exercise its options to extend with respect to Short-Term Space located on floors 3, 9 or 11 of the Building prior to exercising its options to extend with respect to Short-Term Space located on floors 10 or 13 of the Building, and (b) Tenant shall exercise its options to extend with respect to Short-Term Space located on floor 10 of the Building prior to its exercising its option to extend with respect to Short-Term Space located on floor 13 of the Building. 11. BROKER. ------ A. Tenant Representation. Tenant represents to Landlord and the Beneficiary that except for Scribcor, Inc., Tenant has not dealt with any real estate broker, sales person or finder in connection with this Amendment and no other person initiated or participated in the negotiation of this 11 Amendment or showed the 11th Floor 5-Year Space or 11th Floor 3-Year Space to Tenant. Tenant agrees to indemnify, defend and hold harmless Landlord, the Beneficiary, the Manager and their respective officers, partners and employees, from and against any and all claims, demands, liabilities, actions, damages, costs and expenses (including attorneys' fees) for brokerage commissions or fees arising out of a breach of such representation. B. Landlord Representation. Landlord represents to Tenant that except for Scribor, Inc., Landlord has not dealt with any real estate broker, sales person or finder in connection with this Amendment, and no other person initiated or participated in the negotiation of this Amendment. Landlord agrees to indemnify, defend and hold harmless Tenant and its officers and employees from and against any and all claims, demands, liabilities, actions, damages, costs and expenses (including attorneys' fees) for brokerage commissions or fees arising out of a breach of such representation. C. Tenant Payment of Brokerage Fees. Scribor, Inc., has acted as consultant to Tenant in connection with this Amendment and Tenant shall be solely responsible for the payment of any and all fees, compensation and expenses due Scribor, Inc. Tenant agrees to indemnify, defend and hold harmless Landlord, the Beneficiary, the Manager and their respective officers, partners and employees from and against any and all claims, demands, liabilities, actions, damages, costs and expenses (including attorneys' fees) which may arise out of the failure of Tenant to pay such fees, compensations and expenses to Scribor, Inc. 12. AMENDMENTS TO WORKLETTER AGREEMENT. ---------------------------------- A. After the words "Refusal Space" in line 9 of Paragraph 2(a) on page C-6 of the Workletter, the following shall be inserted: "(iv) after October 20, 1987, with respect to additional Tenant Improvement Work in the 11th Floor 5-Year Space and the 11th Floor 3-Year Space". B. After the words "Refusal Space" in line 9 of Paragraph 2(b) on page C-7 of the Workletter, the following shall be inserted: "(iv) after October 20, 1987, with respect to additional Tenant Improvement Work in the 11th Floor 5-Year Space and the 11th Floor 3-Year Space". 13. FULL FORCE AND EFFECT. Except as specifically provided in this --------------------- Amendment, the Lease shall continue in full force and effect, and the same is hereby ratified nd confirmed as amended hereby. No waiver by Landlord of any Default by Tenant under the Lease, whether past, current or future, shall be implied or construed by any provision herein or because of Landlord's failure to act with respect thereto 12 14. EXCULPATION. This Amendment is executed by American National Bank ----------- and Trust Company of Chicago, not personally but as Trustee as aforesaid, in the exercise of the power and authority conferred upon and vested in it as such Trustee, and under the express direction of the beneficiaries of a certain Trust Agreement dated July 12, 1984, and known as Trust Number 61523 at American National Bank and Trust Company of Chicago, to all provisions of which Trust Agreement this Amendment is expressly made subject. It is expressly understood and agreed that nothing contained in this Amendment shall be construed as creating any liability whatsoever against said Trustee personally, and in particular without limiting the generality of the foregoing, there shall be no personal liability to pay any indebtedness accruing hereunder or to perform any covenant, either express or implied, contained herein, or to keep, preserve or sequester any property of said Trust, and that all personal liability of said Trustee of every sort, if any, is hereby expressly waived by Tenant, and by every person now or hereafter claiming any right or security hereunder; and that so far as the said Trustee is concerned the owner of any indebtedness or liability accruing hereunder shall look solely to the Premises for the payment of same. IN WITNESS WHEREOF, Landlord and Tenant have executed this Amendment as of the day and year first above written. LANDLORD: TENANT: AMERICAN NATIONAL BANK AND THE NORTHERN TRUST COMPANY TRUST COMPANY OF CHICAGO, not personally but solely as Trustee under Trust No. By: Stephen Kardel ------------------------------ 61523 Title: Vice President By: A.M. Lutkus ------------------------- Title: Authorized Officer 13 EXHIBIT A [ARTWORK OF FLOOR PLAN] EX-11 6 COMPUTATION OF PER SHARE EARNINGS EXHIBIT NUMBER (11) To 1996 Form 10-K NORTHERN TRUST CORPORATION COMPUTATION OF PER SHARE EARNINGS
For the Year Ended December 31, --------------------------------------------------- 1996 1995 1994 ------------- -------------- ------------- Computations Required by - ------------------------ Regulation S-K - -------------- Primary Earnings Per Share - -------------------------- Net Income Applicable to Common Shares $253,880,107 $211,461,135 $174,917,377 ------------ ------------ ------------ Weighted Average Number of Common and Common Equivalent Shares Outstanding Common Shares 111,933,829 110,737,342 107,733,026 Diluted Effect of Common Equivalent Shares (A) Stock Options 1,968,038 1,218,508 1,727,012 Long Term Performance Stock Plan 611,072 690,502 811,252 Other 135,251 29,482 17,138 ------------- -------------- -------------- 114,648,190 112,675,834 110,288,428 ============= ============== ============== Net Income Per Common and Common Equivalent Share $2.21 $1.88 $1.59 ----- ----- ---- (A) Determined by application of the treasury stock method.
NORTHERN TRUST CORPORATION COMPUTATION OF PER SHARE EARNINGS
For the Year Ended December 31, ----------------------------------------------------------------------- 1996 1995 1994 -------------- -------------- -------------- Computations Required by - ------------------------ Regulation S-K - -------------- Fully Diluted Earnings Per Share - -------------------------------- Net Income Applicable to Common Shares $253,880,107 $211,461,135 $174,917,377 Add Back: Dividend on Series E Convertible Preferred Stock 14,756 3,125,000 3,125,000 ------------- ------------- ------------- $253,894,863 $214,586,135 $178,042,377 ============= ============= ============= Weighted Average Number of Common and Common Equivalent Shares Outstanding Common Shares 111,933,829 110,737,342 107,733,026 Diluted Effect of Common Equivalent Shares (A) Stock Options 2,549,307 2,219,066 1,732,712 Long Term Performance Stock Plan 642,766 731,270 812,044 Other 149,671 40,248 17,328 Other Potentially Dilutive Securities Equivalent Shares Assuming Conversion of Series E Convertible Preferred Stock 190,928 2,409,640 2,409,640 ------------- ------------- ------------- 115,466,501 116,137,566 112,704,750 ============= ============= ============= Net Income Per Common and Common Equivalent Share $2.20 $1.85 $ 1.58 ------------- ------------- ------------- (A) Determined by application of the treasury stock method.
EX-13 7 1996 ANNUAL REPORT EXHIBIT NUMBER (13) TO 1996 FORM 10-K 1996 ANNUAL REPORT TO SHAREHOLDERS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- Northern Trust Corporation (Corporation) is a bank holding company organized in 1971 to hold all of the outstanding capital stock of The Northern Trust Company (Bank), an Illinois banking corporation with its headquarters located in the Chicago financial district. The Corporation also owns banks in Arizona, California, Florida and Texas, and various other nonbank subsidiaries, including a securities brokerage firm, a futures commission merchant, an international investment consulting firm and a retirement services company. The Corporation also owned three other Illinois banks which were merged into the Bank on February 29, 1996. Although the operations of other subsidiaries will be of increasing significance, it is expected that the Bank will continue to be the major source of the consolidated assets, revenues and net income in the foreseeable future. All references to Northern Trust refer to Northern Trust Corporation and its subsidiaries on a consolidated basis. The Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with Northern Trust's Consolidated Financial Statements and Consolidated Financial Statistics included herein. RESULTS OF OPERATIONS OVERVIEW. Net income for 1996 totaled a record $258.8 million, a 17.6% increase from the $220.0 million earned in 1995 which in turn was 20.8% greater than the $182.2 million earned in 1994. Fully diluted net income per common share, reflecting the two-for-one stock split in December, 1996, increased 19% to $2.20 in 1996, compared with net income per common share of $1.85 in 1995 and $1.58 in 1994. Over the past five years the compound growth rate in earnings per share has been 14%. The record 1996 net income performance, together with strong growth in equity, produced a return on average common stockholders' equity of 18.6% compared with 17.6% in 1995 and 16.6% in 1994. The return on average assets was 1.23% in 1996 compared with 1.13% in 1995 and 1.02% in 1994. 1996 marks the ninth consecutive year of record earnings. Trust fees, net interest income, foreign exchange profits and treasury management fees were all at record levels, while trust assets under administration reached $778.9 billion at December 31, 1996, up $165.0 billion from a year ago. Excellent growth in all of Northern Trust's diversified revenue sources produced a 12% increase in revenues while operating expenses increased by 8%. Primarily through the retention of earnings, offset in part by the repurchase of common stock pursuant to the Corporation's share buyback program, stockholders' equity grew to $1.54 billion, as compared to $1.45 billion at December 31, 1995 and $1.28 billion at December 31, 1994. The Board of Directors increased the quarterly dividend per common share 16.1% in November 1996, to $.18 from $.16, for a new annual rate of $.72. This is the tenth consecutive year in which the dividend rate has been increased. The Board's action reflects a policy of increasing the dividend rate with increased profitability while retaining sufficient earnings to allow for strategic expansion and the maintenance of a strong balance sheet.
- -------------------------------------------------------------------------------- SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA - ------------------------------------------------------------------------------ (In Millions Except Per Share Amounts) 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------ Net Interest Income $ 388.3 $ 357.6 $ 334.6 $ 327.9 $ 310.3 Provision for Credit Losses 12.0 6.0 6.0 19.5 29.5 Noninterest Income Trust Fees 592.3 505.0 453.4 404.8 368.4 Other Noninterest Income 185.6 173.1 180.0 149.0 141.9 Noninterest Expenses 766.8 709.2 700.5 628.2 584.6 Provision for Income Taxes 128.6 100.5 79.3 66.1 57.0 - ------------------------------------------------------------------------------ NET INCOME $ 258.8 $ 220.0 $ 182.2 $ 167.9 $ 149.5 - ------------------------------------------------------------------------------ Net Income Applicable to Common Stock $ 253.9 $ 211.5 $ 174.9 $ 161.6 $ 142.7 - ------------------------------------------------------------------------------ PER COMMON SHARE Net Income -- Primary $ 2.21 $ 1.88 $ 1.59 $ 1.48 $ 1.32 -- Fully Diluted 2.20 1.85 1.58 1.48 1.32 Dividends Declared .65 .55 .46 .39 .33 - ------------------------------------------------------------------------------ Average Total Assets $20,964.3 $19,409.5 $17,885.8 $15,700.2 $13,418.0 Senior Notes at Year-End 305.0 17.0 547.0 817.0 312.0 Notes Payable at Year-End 427.8 334.6 244.8 326.8 233.2 - --------------------------------------------------------------------------------
Note: Per common share data reflects the two-for-one stock split effected through a 100% stock distribution on December 9, 1996. 18 Northern Trust Corporation Northern Trust's strategy will continue to focus on growing its two sharply defined businesses: Corporate and Institutional Services (C&IS) and Personal Financial Services (PFS). C&IS focuses on administering and managing domestic and global investment pools for corporate and institutional clients worldwide. PFS provides financial services to individuals and closely held businesses through a unique five-state personal financial services franchise. In executing this strategy, Northern Trust emphasizes service quality through a high level of personal service and maximization of benefits derived from technology investments. Expense growth and capital expenditures are closely monitored to ensure that short- and long-term business strategies and performance objectives are effectively balanced. NONINTEREST INCOME. The success of Northern Trust's strategy of maintaining a diverse, fee-oriented revenue base is evidenced by the fact that noninterest income represented 65% of its total taxable equivalent revenue in 1996, compared with 63% one year ago. Noninterest income totaled $777.9 million in 1996, $678.1 million in 1995 and $633.4 million in 1994 which included the $28.5 million pretax gain on the sale of the Corporation's 21% interest in Banque Scandinave en Suisse (BSS). TRUST FEES. Trust fees accounted for 76% of total noninterest income and 49% of total taxable equivalent revenue in 1996. Trust fees for 1996 increased 17% to $592.3 million from $505.0 million in 1995 which was up 11% from $453.4 million in 1994. Trust fees have increased at a compound growth rate of 14% for the last five years. The increase in 1996 trust fees is principally the result of growth in business from new and existing clients, coupled with strong growth in stock and bond markets. Fees generated by Northern Trust Global Advisors, Inc. (NTGA), formerly RCB International Inc., an asset management subsidiary acquired on October 31, 1995, and The Beach Bank of Vero Beach, Florida (Beach Bank), a March 31, 1995 acquisition, contributed approximately $22.4 million of the trust fee growth in 1996. Contributing to the 1995 fee growth were new business results and higher stock and bond market values, as well as the incremental impact of fees contributed by NTGA, Beach Bank and Hazlehurst & Associates (acquired April 1994 and renamed Northern Trust Retirement Consulting, Inc.). Total trust assets under administration at December 31, 1996 were $778.9 billion compared to $613.9 billion a year ago, an increase of 27%. Trust assets under management, included in the above, increased 23% to $130.3 billion, from $105.5 billion at the end of 1995. Fees are based on the market value of assets managed and administered, the volume of transactions and securities lending activity, and fees for other services rendered. Asset-based fees are typically determined on a sliding scale so that as the value of a client portfolio grows in size, Northern Trust receives a smaller percentage of the increasing value as fee income. Therefore, market value or other incremental changes in a portfolio's size do not typically have a proportionate impact on the level of trust fees. In addition to fees, certain trust-related activities result in deposits, primarily interest-bearing, which are maintained with the bank subsidiaries and foreign branches. These deposits averaged $4.3 billion in 1996 and $4.2 billion in 1995. Northern Trust's fiduciary business encompasses Master Trust, Master Custody, investment management and retirement services for corporate and institutional asset pools, as well as a complete range of estate planning, fiduciary, and asset management services for individuals. Fees from these highly focused services are fairly evenly distributed between Northern Trust's two business units, C&IS and PFS. The discussion of trust activities in each of these business units follows. CORPORATE AND INSTITUTIONAL SERVICES. Northern Trust is a leading provider of Master Trust and Master Custody services to retirement plans and institutional and international clients. In addition to Master Trust and Master Custody, C&IS offers a comprehensive array of retirement consulting and recordkeeping services and investment products. At December 31, 1996 trust assets under administration in C&IS totaled $693.7 billion, an increase of 27% from $544.3 billion a year ago. Trust fees in C&IS increased 22% in 1996 to $298.3 million from $244.2 million in 1995 which was up 13% from $216.7 million in 1994. Excluding the incremental fee growth resulting from the NTGA acquisition, C&IS trust fees in 1996 increased 13% from the prior year. The increase in C&IS trust fees reflects record net new business and strong securities lending revenue, moderated by the effect of changing pricing structures for client relationships which focus on total client revenues. These client relationships increasingly involve services such as foreign exchange which generate revenues not reflected in trust fees. Retirement Plans. Trust fees from the retirement plans market segment, which includes the large U.S. corporate market and public and union retirement funds, totaled $176.4 million in 1996. Trust fees for this segment in 1995 and 1994 totaled $156.4 million and $139.9 million, respectively. Assets under administration totaled $375.2 billion at December 31, 1996 compared with $304.0 billion a year ago. Growth in this area has been driven by record new business from both new and existing clients. U.S. demographic trends are expected to advance the growth of retirement services in future years. Much of the anticipated growth in retirement assets is expected to come from defined contribution plans of U.S. corporations. Northern believes that it is well- positioned to benefit from this trend given its long-term relationships with corporate sponsors, its family of institutional mutual funds, and recordkeeping services offered through Northern Trust Retirement Consulting, Inc. (NTRC). The services offered through 19 Northern Trust Corporation MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- NTRC include retirement plan design, participant recordkeeping, and actuarial and consulting services that complement Northern Trust's custody, fiduciary and investment management capabilities in the strategically important retirement services market. Institutional. This market segment, which includes insurance companies, foundations and endowments, and correspondent trust services, provides attractive growth opportunities for trust and banking services. The insurance industry continues to consolidate its relationships with providers who can meet its full range of banking and custody needs. Northern Trust seeks to maintain an array of products and services, a strong capital position and systems capabilities that position it to increase its share of this market. Northern Trust leverages its investment in technology by providing smaller bank trust departments with custody, systems, and investment services through its correspondent trust services offerings. Trust fees from the institutional market segment in 1996, 1995 and 1994 totaled $53.2 million, $50.1 million and $48.0 million, respectively. Assets under administration at December 31, 1996 increased to $164.2 billion from $141.6 billion at December 31, 1995. International. This segment is composed of non-U.S. clients and group trusts. When compared to the other C&IS market segments, International has had the highest compound growth rate for the last four years measured in terms of assets under administration and trust fees. At December 31, 1996 assets under administration totaled $111.1 billion, up 65% from $67.3 billion at year-end 1995, which in turn was up 40% over the previous year-end. Trust fees for 1996 increased 27% to $43.0 million. This compares with $33.9 million in 1995 which was up 18% from $28.8 million in 1994. In October, 1996, Northern Trust expanded on its global presence by opening a full service office in Singapore. This office complements Northern Trust's securities lending and investment management services in Hong Kong, broadening its regional capabilities. Global Investment Services. Investment management, securities lending, and risk and performance analysis services are offered to C&IS clients. Fees associated with these activities, with the exception of NTGA-related fees, are included within the market segments above. Total assets under management grew from $64.4 billion at year-end 1995 to $80.4 billion at year-end 1996; $37.2 billion was associated with direct asset management, including sweep and custom cash funds, while the remaining $43.2 billion represented securities lending collateral. In 1996 Northern Trust accelerated its positioning as a global, multi-asset class manager with an expanded array of investment service and product capabilities. For example, Northern Trust has expanded its investment advisory service offerings to offshore clients through a new Dublin subsidiary, Northern Trust Fund Managers (Ireland) Limited. Northern Trust completed its acquisition of NTGA in the fourth quarter of 1995. NTGA provides specialized U.S. and international multiple manager programs to complement the capabilities of Northern Trust in the fixed income, equity and short-term markets. Total assets under management at NTGA at December 31, 1996 were $5.7 billion versus $5.0 billion at year-end 1995. NTGA earned $25.7 million in trust fees in 1996. Clients who utilize trust services may elect to have their securities lent to generate revenues, thereby improving their portfolio's total return. The cash that has been deposited by investment firms as collateral for securities they have borrowed from trust clients under the lending program is managed by Northern Trust and included in trust assets under management. The growth in domestic and international securities lending fees, up 49% over 1995, which in turn was up 19% over 1994, was due primarily to an increase in the volume of securities loaned. The cash collateral totaled $43.2 billion and $31.4 billion at December 31, 1996 and 1995, respectively. During the first quarter of 1995, Northern Trust commenced operations at its new Hong Kong subsidiary to better facilitate the lending of securities from its clients' global portfolios. Global Custody. In terms of assets under administration, global custody is one of the fastest growing products within C&IS. This product provides the necessary service capabilities for the growing volume of foreign assets that are held by U.S. and non-U.S. domiciled clients. Northern Trust continues to strengthen global securities processing and invest in the required systems capabilities and sub-custodial network in order to capitalize on the growth opportunities presented by the development of worldwide financial markets. Through its worldwide network of subcustodians in 70 countries, Northern Trust had global assets of approximately $108 billion under administration at December 31, 1996 which is 27% greater than last year. Competition. Competition in the corporate and institutional business has been impacted by recent financial services mergers and acquisitions and further consolidation in the industry as other providers exit the business. In the third quarter of 1996, Northern Trust was named preferred provider of master trust and domestic institutional custody services for clients of First Chicago NBD as it exits that business. Through January 1997, clients with approximately $29.0 billion in trust assets and annualized fee revenues of approximately $8.3 million have selected Northern Trust. The transition of these clients is expected to be completed during the first half of 1997. Targeted marketing efforts continue. Competition has remained intense in the master trust/master custody business affecting the pricing of associated products and services. Northern Trust believes that it is positioned to deal with these pressures and maintain profitability because of its focus on individual client service, developing deeper client relationships that include a range of services, economies of scale and technological innovation. 20 Northern Trust Corporation
- -------------------------------------------------------------------------------- CONSOLIDATED TRUST ASSETS UNDER ADMINISTRATION - -------------------------------------------------------------------------------- Percent Five-Year December 31 Change Compound ---------------------------------- ------- Growth ($ In Billions) 1996 1995 1994 1993 1992 1996/95 Rate - ------------------------------------------------------------------------------- Corporate $ 80.4 $ 64.4 $ 48.5 $ 43.4 $ 39.1 25% 19% Personal 49.9 41.1 33.8 33.7 30.5 21 14 - ------------------------------------------------------------------------------- TOTAL MANAGED TRUST AS- SETS $130.3 $105.5 $ 82.3 $ 77.1 $ 69.6 23% 17% - ------------------------------------------------------------------------------- Corporate $613.3 $479.9 $393.2 $377.7 $320.9 28% 17% Personal 35.3 28.5 23.1 21.7 21.2 24 9 - ------------------------------------------------------------------------------- TOTAL NON-MANAGED TRUST ASSETS $648.6 $508.4 $416.3 $399.4 $342.1 28% 16% - ------------------------------------------------------------------------------- CONSOLIDATED TRUST ASSETS UNDER ADMINISTRATION $778.9 $613.9 $498.6 $476.5 $411.7 27% 17% - -------------------------------------------------------------------------------
Note: Certain reclassifications have been made to prior years' financial information to conform to the current year presentation. PERSONAL FINANCIAL SERVICES. Northern Trust has positioned itself in states having significant concentrations of wealth and growth potential. With the addition of seven new offices in 1996 and three offices in early 1997, Northern Trust's unique national network of Personal Financial Services offices includes 60 locations in Illinois, Florida, California, Arizona, and Texas. PFS also includes the Wealth Management Group which provides customized products and services to meet the complex financial needs of families throughout the country with assets typically exceeding $100 million. At December 31, 1996 trust assets under administration in PFS totaled $85.2 billion, an increase of 22% from $69.6 billion at December 31, 1995. Trust fees increased 13% in 1996 to $294.0 million while 1995 trust fees totaled $260.8 million, an increase of 10% from $236.7 million in 1994. Although all geographic markets contributed to the 1996 increase, the strongest fee growth occurred in the Wealth Management Group and the Chicago, Florida and Texas markets. With an established presence and expanding network in growing markets, Northern Trust believes that it has the momentum to continue to grow personal trust fees. Illinois. Personal trust fees in Illinois increased 10% to $130.2 million in 1996 from $118.5 million in 1995, which was up 5% from $113.3 million in 1994. Trust assets under administration totaled $35.1 billion at December 31, 1996 compared with $30.4 billion a year ago. Over the years clients have been attracted by both the quality of trust services and the financial strength and stability which Northern Trust has consistently achieved. These qualities, combined with credit ratings that are top tier, have allowed Northern Trust to enhance the growth of its personal trust business. It is expected that the Chicago area market will continue to be a significant contributor to personal trust revenues. Florida. Northern Trust continues to strengthen its position in the Florida marketplace. Trust fees for 1996 totaled $77.3 million, up 17% from $65.9 million in 1995 which was up 15% from $57.2 million in 1994. Trust assets under administration were $15.3 billion at December 31, 1996, and $13.2 billion at year-end 1995, making Northern Trust the second largest provider of personal trust services in Florida. The five-year compound growth rates for trust fees and trust assets have been 14% and 13%, respectively. With new offices opened in Bonita Springs, Delray Beach and Stuart during 1996 and Tampa in 1997, Northern Trust now has twenty-three offices located in coastal communities encompassing the southern half of the state. Management believes there remains significant opportunity for growth in and around the markets currently served in Florida. California. With the opening of offices in La Jolla and Montecito in early 1997, Northern Trust's California subsidiary has eight offices strategically located throughout the state to reach the California trust market. Trust fees for 1996 increased 7% to $39.5 million from $37.0 million in 1995 which was up 9% from $34.0 million in 1994. Trust assets under administration totaled $7.3 billion at December 31, 1996 and $6.1 billion at December 31, 1995. Arizona. Northern Trust Bank of Arizona N.A. is one of the largest providers of personal trust services in the state. As in other markets, the strategy in Arizona includes providing private banking and trust services to targeted high net worth individuals. New offices were established during 1996 in Sun City West and Mesa, bringing to six the total number of offices in this growing market. Trust fees from this market were $15.4 million in 1996, $13.7 million in 1995 and $12.8 million in 1994. Assets under administration at December 31, 1996 and 1995 totaled $2.6 billion and $2.1 billion, respectively. Texas. Northern Trust expanded its growing presence in Texas during 1996 with the acquisition of Metroplex Bancshares, Inc., parent company of Bent Tree National Bank (Bent Tree) in Dallas, Texas. The acquisition added a north Dallas location to Northern Trust's six 21 Northern Trust Corporation MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS existing facilities in Dallas and Houston, the two most important metropolitan markets in the state. Northern Trust has expanded from one office to seven offices since its entry into the Texas market in 1989. The Texas facilities have experienced the highest percentage growth rate for the past two years for both trust fees and assets under administration of any of the states served by Northern Trust. Trust fees for 1996, 1995 and 1994 were $8.6 million, $6.9 million and $4.6 million, respectively. Trust assets under administration were $2.3 billion at December 31, 1996 and $1.9 billion at December 31, 1995. Wealth Management. Trust fees in the rapidly growing national Wealth Management Group grew 22% to $23.0 million in 1996 from $18.8 million in 1995, which was up 27% from $14.8 million in 1994. This group had $22.6 billion of trust assets under administration, a 42% increase from a year ago. The 140 families serviced by this group benefit from Northern Trust's sophisticated master trust and global custody services and the reporting capabilities of the Passport electronic delivery system. Expansion. The national personal trust strategy focuses primarily on increasing market share in present geographic locations and other selected upscale personal markets. In Florida, Northern Trust plans to expand into additional counties over the next three to five years. Selective acquisitions may be made where they can accelerate the pace of expansion. Northern Trust also plans to establish offices in the newer growth areas around Phoenix and Tucson, Arizona during the next several years. In Illinois, Northern Trust expects to establish new offices in several Chicago suburban communities, and an additional inner city location is also contemplated. INVESTMENT MANAGEMENT. Northern Trust's investment management business benefited significantly in 1996 from strong equity markets around the world, as well as from broader industry trends, including the increasing preference of investors to concentrate assets with fewer managers, the globalization of the financial markets and a greater focus on risk evaluation and management. Northern's competitive investment results, successful expansion of client relationships and new product offerings contributed to continued growth in assets under management. Today, Northern Trust manages $130.3 billion for personal and institutional clients, up 23% from year-end 1995, placing Northern Trust among the largest, and fastest growing, investment managers worldwide. Investment management performance for bond accounts has been consistently in the top quartile over the past ten years, as measured by SEI Investment Management Consulting, a nationally recognized plan sponsor consultant. Investment management performance for equity accounts was solidly above the median for the one, seven and ten year cumulative performance periods ended December 31, 1996, as measured by SEI. Northern Trust leveraged its investment expertise with the establishment in 1994 of a second mutual fund family, the Northern Funds. Assets in this family of 19 no-load funds have grown to $4.3 billion at year-end 1996. This mutual fund family serves the investment needs of personal clients, while the $8.3 billion Benchmark family of mutual funds continues to serve the needs of institutional clients. FOREIGN EXCHANGE TRADING PROFITS. Foreign exchange trading profits totaled a record $58.8 million, up 6% from $55.3 million reported a year ago, which was up from $35.9 million in 1994. A substantial component of foreign exchange profits continued to result from transactions associated with the growing global custody business. As custodian, Northern Trust provides foreign exchange services in the normal course of business. Active management of currency positions, within conservative limits, produced an ancillary component of aggregate trading profits. The opening of Northern's Singapore Branch in October, 1996 established round-the-clock foreign exchange capabilities to better serve global custody clients in the Asian region. TREASURY MANAGEMENT FEES. The fee portion of treasury management revenues totaled $55.3 million in 1996, an 11% increase from the $49.6 million reported in 1995 compared with $46.3 million in 1994. Total treasury management revenues, which, in addition to fees, include the computed value of compensating deposit balances, increased 11% to $86.0 million from $77.5 million in 1995 compared to $73.0 million in 1994, reflecting the continued growth in new business in both paper- and electronic-based products. SECURITY COMMISSIONS AND TRADING INCOME. Security commissions and trading income totaled $23.9 million in 1996, compared with $21.7 million in 1995 and $22.0 million in 1994. This income is primarily generated from securities brokerage and futures contract services. Additional revenue is provided from underwriting selected general obligation tax-exempt securities and interest risk management activities with clients. The 1996 results reflect strong growth in security brokerage activities offset by a decline in the clearing volume of futures contracts. OTHER OPERATING INCOME. Other operating income includes loan, letter of credit and deposit-related service fees and other miscellaneous income from asset sales. Other operating income in 1996 totaled $47.2 million compared with $45.5 million in 1995 and $75.9 million in 1994. The 1994 results included a $28.5 million pretax gain on the sale of Northern's investment in BSS, which was net of approximately $6.0 million in ancillary and other sale-related transition costs associated with the transfer of custody accounts from BSS to the Bank's London Branch. The slight increase in other operating income in 1996 reflects a gain from the sale of the Bank's merchant charge card business which was partially offset by a decrease in gains realized from the sale of lease residuals. INVESTMENT SECURITY GAINS AND LOSSES. Net security gains totaling $.4 million were realized in 1996. Of 22 Northern Trust Corporation
- -------------------------------------------------------------------------------- ANALYSIS OF NET INTEREST INCOME (FTE) - ------------------------------------------------------------------------------ Percent Change --------------------------------------------------- ($ In Millions) 1996 1995 1994 1996/95 1995/94 - ------------------------------------------------------------------------------ Interest Income $ 1,151.5 $ 1,104.0 $ 848.7 4.3% 30.1% Fully Taxable Equivalent Adjustment 33.6 37.6 33.4 (10.8) 12.6 - ------------------------------------------------------------------------------ Interest Income-FTE 1,185.1 1,141.6 882.1 3.8 29.4 Interest Expense 763.2 746.4 514.1 2.2 45.2 - ------------------------------------------------------------------------------ NET INTEREST INCOME-FTE 421.9 395.2 368.0 6.8 7.4 - ------------------------------------------------------------------------------ AVERAGE VOLUME Earning Assets 18,779.4 17,193.7 15,737.2 9.2 9.3 Interest-Related Funds 15,920.0 14,528.3 13,328.9 9.6 9.0 Noninterest-Related Funds 2,859.4 2,665.4 2,408.3 7.3 10.7 - ------------------------------------------------------------------------------ Change in Percentage ----------------------------- AVERAGE RATE Earning Assets 6.31% 6.64% 5.61% (.33) 1.03 Interest-Related Funds 4.79 5.14 3.86 (.35) 1.28 Interest Rate Spread 1.52 1.50 1.75 .02 (.25) Total Source of Funds 4.06 4.34 3.27 (.28) 1.07 - ------------------------------------------------------------------------------ NET INTEREST MARGIN 2.25% 2.30% 2.34% (.05) (.04) - ------------------------------------------------------------------------------
Refer to page 68 for detailed analysis of net interest income. this total, $.5 million resulted from held to maturity securities that were called at a premium, offset in part by $.1 million of net losses from the sale of securities classified as available for sale. This compares with net gains of $1.0 million in 1995 and $.1 million of net losses in 1994. NET INTEREST INCOME. Net interest income is defined as the total of interest income and amortized fees on earning assets less interest expense on deposits and borrowed funds, adjusted for the impact of off-balance sheet hedging activity. Earning assets, which consist of securities, loans and money market assets, are financed by a large base of interest-bearing funds, including retail deposits, wholesale deposits, short-term borrowings, senior notes and long-term debt. Earning assets are also funded by net noninterest-related funds. Net noninterest-related funds consist of demand deposits, the reserve for credit losses and stockholders' equity, reduced by nonearning assets including cash and due from banks, items in process of collection, buildings and equipment and other net nonearning assets. Variations in the level and mix of earning assets, interest-bearing funds and net noninterest-related funds, and their relative sensitivity to interest rate movements, are the dominant factors affecting net interest income. In addition, net interest income is impacted by the level of nonperforming assets and client use of compensating balances to pay for services. Net interest income for 1996 was a record $388.3 million, up 9% from $357.6 million in 1995, which was up 7% from $334.6 million in 1994. When adjusted to a fully taxable equivalent (FTE) basis, yields on taxable, nontaxable and partially taxable assets are comparable, although the adjustment to a FTE basis has no impact on net income. Net interest income on a FTE basis for 1996 was a record $421.9 million, an increase of $26.7 million or 7% from $395.2 million in 1995 which in turn was up 7% from $368.0 million in 1994. Through steady asset growth and conservative interest rate risk management, Northern Trust has been successful in generating year over year improvement in net interest income as evidenced by the fact that 1996 represents the thirteenth consecutive year of record performance. The increase in FTE net interest income in 1996 was essentially attributable to growth in average earning assets, which was partially offset by a decline in the net interest margin to 2.25% from 2.30% last year and 2.34% in 1994. Earning assets averaged $18.8 billion, up 9% or $1.6 billion from the $17.2 billion reported in 1995, which was up from $15.7 billion in 1994. The growth in average earning assets reflects a 13% or $1.2 billion increase in loans, a 3% or $171 million increase in securities and a 12% or $219 million increase in money market assets. Loan volume for the year averaged $10.3 billion with virtually all of the growth reflected in the domestic portfolio while international loans increased $36 million. The domestic growth came principally from residential mortgage activities, up $501 million, and commercial and industrial loans, up $229 million. Reflected in the total loan growth are non- interest bearing domestic and international overnight advances related to processing certain trust client investments, which averaged $596 million in 1996, down 10% from a year ago. Securities averaged $6.4 billion 23 Northern Trust Corporation MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- in 1996 versus $6.2 billion in 1995, due primarily to a $476 million increase in short-term U.S. Government securities, offset in part by a decline in other securities. Money market assets averaged $2.1 billion in 1996 versus $1.9 billion in 1995. The increase in average earning assets of $1.6 billion was funded through growth in interest-bearing deposits, other interest-related funding sources, and noninterest-related funds. The deposit growth was concentrated primarily in savings and money market deposits (up $308 million) and global custody deposit activity in the Cayman Islands Branch (up $446 million), offset in part by a reduction in the London Branch of $162 million. Other interest-related funds averaged $5.9 billion, up $682 million, principally from federal funds purchased (up $278 million), securities sold under agreements to repurchase (up $203 million) and other borrowings (up $240 million). Average net noninterest- related funds increased $194 million, mainly due to higher stockholders' equity and noninterest-bearing time and savings deposits. Stockholders' equity for the year averaged $1.5 billion, an increase of $113 million or 8% from 1995, principally due to the strong earnings performance, offset in part by the repurchase of common stock pursuant to the Corporation's share buyback program. The net interest margin declined to 2.25% from 2.30% last year due primarily to lower spreads on the higher volume of short-term liquid assets funded by short-term liabilities, coupled with lower loan-related fees. The margin was also impacted by a slightly higher reliance on interest-related funding sources to fund asset growth. PROVISION FOR CREDIT LOSSES. Asset quality remained exceptionally strong as nonperforming assets declined to $21.4 million, their lowest level in over fifteen years. The provision for credit losses increased to $12.0 million in 1996, up from $6.0 million in each of the last two years. For a discussion of the reserve for credit losses, refer to pages 30 and 31. NONINTEREST EXPENSES. Noninterest expenses for 1996 totaled $766.8 million, up $57.6 million or 8% from $709.2 million in 1995, which was up 1% from $700.5 million in 1994. Total expenses for 1996 included $25.3 million of incremental expenses resulting from acquisitions. As a result of a reduction in premium rates, FDIC insurance expense declined by $8.5 million compared to last year. Exclusive of these items for both years, 1996 noninterest expenses increased 6% over last year. In addition to acquisitions, expense increases during 1996 reflect a variety of growth initiatives, including investments in technology, PFS office expansion, the opening of a Singapore office, and staff additions and higher operating expenses necessary to support new business and growing transaction volumes. Incentive compensation also increased, reflecting client investment portfolio performance, excellent new business development results, record earnings and the impact of the Corporation's higher stock price on stock-based performance plans. These increases were partially offset by cost savings from changes in several benefit plans effective January 1, 1996 and favorable medical plan claim experience. The modest increase in 1995 noninterest expenses from 1994 results reflects the impact of $30.9 million of nonrecurring charges in 1994. Adjusting for these items, noninterest expenses grew 6% from 1994 to 1995 primarily as a result of salary adjustments, higher incentive compensation and incremental expenses from 1995 acquisitions. The productivity ratio, defined as noninterest income plus net interest income on a taxable equivalent basis before the provision for credit losses, divided by noninterest expenses, was 156% for 1996 compared with 151% in 1995 and 143% in 1994. SALARIES AND BENEFITS. Salaries and benefits, which represent 58% of total noninterest expenses, increased 5% to $441.3 million in 1996 from $419.1 million in 1995, which was up 7% from $391.4 million in 1994. Salary costs, the largest component of noninterest expenses, totaled $368.8 million, up $31.2 million or 9% from $337.6 million a year ago. The principal items contributing to the change in 1996 were salary adjustments, incentive compensation, and staff additions resulting from acquisitions and to support Northern Trust's growing trust activities and office expansion. The incentive-based compensation expense increase reflects the impact of client investment portfolio performance and record new business development results, as well as the 1996 record earnings performance and the price increase in Northern Trust Corporation common stock. Included in the 1995 results was $3.3 million in severance costs associated with staff reductions, while the 1994 results included a $4.2 million addition to salary expense relating to overtime back pay obligations. Staff on a full-time equivalent (FTE) basis averaged 6,665 compared with 6,548 in 1995 and 6,420 in 1994. The growth in staff during 1996 is the result of acquisitions and other staff additions primarily in the last half of the year. As of December 31, 1996, staff levels on a FTE basis totaled 6,933, an increase of 6% from 6,531 at the end of last year. As part of Northern Trust's ongoing program to control expense growth, a complete review of all employee benefit plans was conducted at the end of last year. As a result of this review, changes, effective January 1, 1996, were made to the pension, medical, Thrift Incentive and ESOP plans. Employee benefit costs for 1996 totaled $72.5 million, down $9.0 million or 11% from $81.5 million in 1995 which was up 9% from $74.8 million in 1994. The majority of the 1995 increase in benefit costs was attributable to higher medical and retirement benefit expenses and payroll taxes. OCCUPANCY EXPENSE. Net occupancy expense totaled $63.8 million, up 6% or $3.6 million from $60.2 24 Northern Trust Corporation million in 1995, which was up 5% from $57.4 million in 1994. The principal components of the 1996 increase were higher building and leasehold improvement amortization expenses and rental and operating costs primarily associated with business expansion. EQUIPMENT EXPENSE. Equipment expense, which includes depreciation, rental, and maintenance costs, totaled $54.6 million in 1996, 12% or $6.0 million higher than the $48.6 million in 1995, which was down 14% from the $56.4 million in 1994. Included in the 1994 expense is $11.2 million of nonrecurring expenses resulting from the trade-in and the sale and leaseback of mainframe computer equipment. Excluding these items, the expense levels in each of the three years primarily reflect planned increases in equipment and computer depreciation and related costs to support trust and banking business expansion. OTHER OPERATING EXPENSES. Other operating expenses for 1996 totaled $207.1 million, up 14% from $181.3 million in 1995, which was down 7% from $195.3 million in 1994. The increase in the 1996 expense level was primarily the result of acquisitions, continued investment in technology, expansion of the personal trust and banking office network, and higher operating expenses necessary to support business growth. These initiatives resulted in increases in computer software amortization, transaction-based depository fees, technical and consulting service fees and amortization of intangible assets. These increases, along with higher costs incurred from processing errors, were partially offset by lower levels of FDIC deposit insurance premiums. Included in the 1995 results are $4.1 million of pension settlement charges. Other operating expenses in 1994 included $9.6 million in pension settlement charges, a $3.5 million expense relating to an agreement between the Corporation and The Benchmark Funds, and a $2.4 million write-down of older trust-related software. Investments in technology are designed to support and enhance the transaction processing and securities handling capability of the trust and banking businesses. Additional capital expenditures planned for systems technology will result in future expenses for the depreciation of hardware and amortization of software. Depreciation and software amortization are charged to equipment and other operating expenses, respectively. PROVISION FOR INCOME TAXES. The provision for income taxes was $128.6 million in 1996 compared with $100.5 million in 1995 and $79.3 million in 1994. The effective tax rate was 33% for 1996 compared with 31% for 1995 and 30% for 1994. The higher tax provision in 1996 resulted from the growth in earnings for both federal and state income tax purposes while federally tax-exempt income declined. SUBSEQUENT IMPLEMENTATION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS. Statement of Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," provides accounting and reporting standards for a variety of transactions, including loan participations, sales of assets where servicing of the assets is retained, repurchase agreements and securities lending transactions. The portions of SFAS No. 125 that address accounting for loan participations and sales of assets where servicing of the assets is retained were implemented, as required, on January 1, 1997 and did not have a material impact on Northern Trust's consolidated financial statements. The remainder of SFAS No. 125 is expected to be implemented effective January 1, 1998 and is not expected to materially impact the consolidated financial statements. FINANCIAL CONDITION Average earning assets in 1996 increased 9% to $18.8 billion. Approximately 11% of the growth in average earning assets resulted from the full year impact of prior year acquisitions, as well as the fourth quarter 1996 addition of Bent Tree National Bank. The growth, including acquisitions, was concentrated primarily in residential mortgages, commercial and industrial loans, and short- term U.S. Government securities and money market assets. A high quality and liquid balance sheet is maintained with securities and money market assets averaging $8.4 billion or 45% of total earning assets. The management strategy for investment securities is to maintain a very high quality portfolio with generally short-term maturities. To maximize after-tax income, investments in tax-exempt municipal securities are utilized but with somewhat longer maturities. The average balance of the securities portfolio, which includes securities held to maturity and available for sale, increased 3% from last year to $6.4 billion. U.S. Government securities averaged $1.7 billion in 1996, up $476 million from 1995 levels. U.S. Government securities had an average maturity of seven months at December 31, 1996, compared with eleven months at the prior year-end. Average municipal securities declined $21 million to average $414 million and provided a fully taxable equivalent yield of 9.86%. The average maturity of municipal securities was 82 months, up from 78 months a year ago. Federal agency securities averaged $4.0 billion in 1996, down slightly from 1995, and had an average maturity at December 31, 1996 and 1995 of six months and nine months, respectively. Other securities, consisting primarily of preferred stock and privately issued collateralized mortgage obligations, averaged $228 million, down from $353 million last year. Included in federal agency securities were $376 million of agency issued collateralized mortgage obligations (CMO's). Included in other securities were $41 million of privately issued CMO's, all of which are rated triple-A and $12 million of which are collateralized by federal agency securities. CMO's in general have widely varying degrees of risk, which derives from the prepayment risk on the 25 Northern Trust Corporation MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- AVERAGE EARNING ASSETS AND SOURCE OF FUNDS - -------------------------------------------------------------------------------- Percent Change --------------------------------------------------- ($ In Millions) 1996 1995 1994 1996/95 1995/94 - ------------------------------------------------------------------------------ AVERAGE EARNING ASSETS Money Market Assets $ 2,083.5 $ 1,864.7 $ 2,420.2 11.7% (23.0)% Securities U.S. Government 1,702.0 1,225.7 1,779.6 38.9 (31.1) Obligations of States and Political Subdivisions 414.1 434.7 465.1 (4.7) (6.5) Federal Agency 4,010.7 4,124.8 2,333.6 (2.8) 76.8 Other 228.2 353.4 368.8 (35.4) (4.2) Trading Account 8.8 54.4 53.8 (83.7) 1.3 - ------------------------------------------------------------------------------ Total Securities 6,363.8 6,193.0 5,000.9 2.8 23.8 - ------------------------------------------------------------------------------ Loans and Leases-Domestic 9,951.6 8,791.8 7,870.6 13.2 11.7 -International 380.5 344.2 445.5 10.5 (22.7) - ------------------------------------------------------------------------------ Total Loans and Leases 10,332.1 9,136.0 8,316.1 13.1 9.9 - ------------------------------------------------------------------------------ Total Earning Assets $18,779.4 $17,193.7 $15,737.2 9.2% 9.3% - ------------------------------------------------------------------------------ AVERAGE SOURCE OF FUNDS Deposits-Savings and Money Market Deposits $ 3,620.7 $ 3,312.4 $ 3,385.7 9.3% (2.2)% -Savings Certificates 2,062.4 2,000.3 1,229.6 3.1 62.7 -Other Time 549.2 542.7 412.8 1.2 31.5 -Foreign Offices Time 3,826.2 3,493.4 3,284.8 9.5 6.4 - ------------------------------------------------------------------------------ Total Deposits 10,058.5 9,348.8 8,312.9 7.6 12.5 Federal Funds Purchased 1,842.2 1,564.0 1,350.7 17.8 15.8 Securities Sold under Agree- ments to Repurchase 1,973.3 1,769.7 1,444.3 11.5 22.5 Commercial Paper 143.7 146.0 138.1 (1.6) 5.7 Other Borrowings 1,274.1 1,034.5 1,007.5 23.2 2.7 Senior Notes 267.5 394.0 781.8 (32.1) (49.6) Notes Payable 360.7 271.3 293.6 32.9 (7.6) - ------------------------------------------------------------------------------ Total Interest-Related Funds 15,920.0 14,528.3 13,328.9 9.6 9.0 Noninterest-Related Funds, net 2,859.4 2,665.4 2,408.3 7.3 10.7 - ------------------------------------------------------------------------------ Total Source of Funds $18,779.4 $17,193.7 $15,737.2 9.2% 9.3% - --------------------------------------------------------------------------------
underlying mortgage loans. Northern Trust invests only in CMO's that have lesser degrees of prepayment risk. Of all CMO's held during 1996, $51 million paid a fixed rate of interest and $342 million paid a floating rate indexed to LIBOR. The fixed rate CMO's had an average life of 13 months at year-end 1996, based on an average of dealer prepayment estimates. As a result of the short average life, the prepayment risk of the fixed rate CMO's was immaterial. The floating rate CMO's had an average life of 32 months at year-end 1996, and have rate caps ranging from 9% to 14%, with an average cap of 10%. Approximately $1.0 billion of federal agency and other securities have variable rates that are reset at least every six months to reflect the level of short-term interest rates. At year-end 1996, the fair value of the securities portfolio of $4.8 billion exceeded the book value of these securities by $20.5 million. Loans averaged $10.3 billion in 1996 and increased 13% from the prior year. Average domestic loans increased 13% to $9.9 billion for the year while the average international portfolio increased to $380 million from $344 million in 1995. The increase in the average domestic loan portfolio reflects substantial growth in residential mortgages which increased 14% on average and totaled $4.6 billion at year-end. Commercial and industrial loans also contributed to the growth in the domestic portfolio, increasing 8% to average $3.3 billion for the year. During the year, commercial real estate loans increased $45 million due in part to acquisitions, and at December 31, 1996, totaled $558 million representing 5% of domestic loans. Money market assets averaged $2.1 billion, up 12% or $219 million from last year. Total interest-related funds averaged $15.9 billion in 1996, up $1.4 billion or 10% from 1995. Savings and money 26 Northern Trust Corporation market deposits increased 9% and averaged $3.6 billion while foreign office time deposits increased $333 million or 10%. The increase in foreign time deposits resulted primarily from greater global custody activity, particularly in the Cayman Islands Branch. Federal funds purchased, securities sold under agreements to repurchase, and other borrowings collectively increased $721 million on average compared to the prior year. The balances within these classifications vary based upon funding requirements, interest rate levels, and the availability of collateral used to secure these borrowings. Balances in other borrowings primarily represent treasury, tax and loan note option balances which provide a funding source at an attractive rate relative to federal funds. Deposits related to trust activities in the domestic banking subsidiaries, coupled with growth of the global custody business, continued to have a significant impact on the balance sheet as these deposits in 1996 averaged $4.3 billion representing 33% of total deposits. Senior notes averaged $267 million, down $127 million from last year. In September, The Northern Trust Company issued $100 million of 7.30% Subordinated Notes due 2006. The notes were issued under the terms of an Offering Circular allowing The Northern Trust Company to offer subordinated bank notes and up to $1.7 billion aggregate principal amount at any time outstanding of its senior bank notes (less certain senior bank notes issued prior to April 1993 and still outstanding), with maturities ranging from 30 days to 15 years. The senior notes are issued periodically and provide an additional funding source for the Bank. At December 31, 1996, an additional $100 million of subordinated bank notes with maturities ranging from 5 years to 15 years can be issued under the terms of the Offering Circular. On January 16, 1997, the Corporation issued $150 million of Floating Rate Capital Securities through a wholly owned statutory business trust. The securities, which qualify as Tier 1 capital for regulatory purposes, were issued at a discount to yield 60.5 basis points above the three-month London Interbank Offered Rate. CAPITAL EXPENDITURES Northern Trust's Management Committee reviews and approves proposed capital expenditures which exceed $500,000. This process assures that the major projects to which Northern Trust commits its resources produce benefits compatible with corporate strategic goals. During 1996, Northern Trust continued to improve its hardware and software capabilities, especially related to trust activities. Such improvements help assure that Northern Trust offers state-of-the-art technology which enables clients to obtain the highest level of quality service within a competitive cost structure, a characteristic which helps distinguish Northern Trust from its competitors. In this regard, through the efforts of internal staff and outside consultants, Northern Trust completed installation of several significant phases of its new trust management system, including the creation of new personal client statements and enhancements to the accounting systems. In addition, major systems development efforts in 1996 focused on Passport and retirement services products. Passport is Northern Trust's next generation of on-line desktop delivery services first offered to clients in 1995. Retirement services bring together a comprehensive array of Master Trust, participant recordkeeping, retirement plan design and actuarial services. The unamortized capitalized cost of corporate-wide software development projects at December 31, 1996 was $133.8 million, of which $82.8 million represented the book value of the trust management system. Northern Trust's 1997 technology initiatives will include the continued development of Passport and retirement services products and enhancements to multicurrency operating and accounting systems. Capital expenditures in 1996 also included the leasehold improvements and furnishings associated with the opening of new offices in Florida and Arizona and the construction costs for the Chicago South Financial Center and the new Winnetka, Illinois office, both of which opened in the third quarter, as well as expansion in several existing offices. Capital expenditures for 1996 totaled $93.7 million of which $17.1 million was for building and leasehold improvements, $5.4 million for furnishings, $33.5 million for hardware and machinery and $37.7 million for software. During 1997, in addition to its technology initiatives, Northern Trust will continue to invest in the expansion of the five-state network of Personal Financial Services offices. RISK MANAGEMENT ASSET QUALITY AND CREDIT RISK MANAGEMENT. SECURITIES. A high quality securities portfolio is maintained with 85% of the total portfolio comprised of U.S. Treasury or federal agency securities. The remainder of the portfolio is comprised of obligations of states and political subdivisions, preferred stock and other securities. At December 31, 1996, 75% of these securities were rated triple-A or double-A, 22% were rated single-A and 3% were below A or not rated by Standard and Poor's and/or Moody's Investors Service. Other securities consist primarily of privately issued collateralized mortgage obligations, backed by federal agency securities or mortgage loans. Northern Trust is an active participant in the repurchase agreement market. This market provides a relatively low cost alternative for short-term funding. Securities sold under repurchase agreements are held by the counterparty until the repurchase transaction matures. Increases in the fair value of these securities in excess of the repurchase liability could subject Northern Trust to credit risk in the event of default by the counterparty. To minimize this risk, collateral values are continuously monitored and Northern Trust sets limits on exposure with counterparties and regularly assesses their financial condition. 27 Northern Trust Corporation MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- LOANS AND OTHER EXTENSIONS OF CREDIT. A certain degree of credit risk is inherent in Northern Trust's various lending activities. Credit risk is managed through the Credit Policy function, which is designed to ensure adherence to a high level of credit standards. Credit Policy provides a system of checks and balances for Northern Trust's diverse credit-related activities by establishing and monitoring all credit-related policies and practices throughout Northern Trust and ensuring their uniform application. These activities are designed to ensure that credit exposure is diversified on an industry and client basis, thus lessening overall credit risk. These credit management activities also apply to Northern Trust's use of derivative financial instruments, including foreign exchange contracts and interest risk management instruments. A further way in which credit risk is managed is by requiring collateral. Management's assessment of the borrower's creditworthiness determines whether collateral is obtained. The amount and type of collateral held varies but may include deposits held in financial institutions, U.S. Treasury securities, other marketable securities, income-producing commercial properties, accounts receivable, property, plant and equipment, and inventory. Collateral values are monitored on a regular basis to ensure that they are maintained at an appropriate level. The largest component of credit risk relates to the loan portfolio. Although credit exposure is well-diversified, there are certain groups that meet the accounting definition under SFAS No. 105 of credit risk concentrations. According to this statement, group concentrations of credit risk exist if a number of borrowers or other counterparties are engaged in similar activities and have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. The fact that an extension of credit falls into one of these groups does not indicate that the credit has a higher than normal degree of credit risk. These groups are: residential real estate, middle market companies and small businesses, banks and bank holding companies and commercial real estate. RESIDENTIAL REAL ESTATE. The residential real estate loan portfolio totaled $4.6 billion or 43% of total domestic loans at December 31, 1996, compared with $3.9 billion or 41% at December 31, 1995. Residential real estate loans consist of conventional home mortgages and equity credit lines, which generally require a loan to collateral value of 75% to 80%. Of the total $4.6 billion in residential real estate loans, $2.6 billion were in the greater Chicago area with the remainder distributed throughout the other geographic regions served by Northern Trust. Legally binding commitments to extend credit, which are primarily equity credit lines, totaled $405.8 million and $372.2 million as of December 31, 1996 and 1995, respectively. MIDDLE MARKET COMPANIES AND SMALL BUSINESSES. Credit exposure to middle market companies and small businesses is primarily in the form of commercial loans, which totaled $1.4 billion at December 31, 1996 and $1.2 billion as of December 31, 1995. These loans are to a diversified group of borrowers that are predominantly in the manufacturing, wholesaling, distribution and services industries, with total sales of less than $500 million. The largest component of this group of borrowers is located in the greater Chicago area. Middle market and small businesses have been an important focus of business development, and it is part of the strategic plan to continue to selectively grow the portfolio with such entities. The credit risk associated with middle market and small business lending is principally influenced by general economic conditions and the resulting impact on the borrower's operations. Off-balance sheet credit exposure to middle market companies and small businesses in the form of legally binding commitments to extend credit, standby letters of credit, and commercial letters of credit totaled $1.5 billion, $748.7 million, and $18.1 million, respectively, as of December 31, 1996, and $1.2 billion, $405.6 million, and $12.5 million, respectively, as of December 31, 1995. BANKS AND BANK HOLDING COMPANIES. On-balance sheet credit risk to banks and bank holding companies, both domestic and international, totaled $4.4 billion and $3.0 billion at December 31, 1996 and 1995, respectively. The majority of this exposure consisted of short-term money market assets, which totaled $3.1 billion and $1.7 billion as of December 31, 1996 and 1995, respectively, and noninterest-bearing demand balances maintained at correspondent banks which totaled $896 million as of December 31, 1996, compared to $1.0 billion at year- end 1995. Commercial loans to banks totaled $247 million and $195 million, respectively, as of December 31, 1996 and 1995. The majority of these loans were to U.S. bank holding companies, primarily in the seventh Federal Reserve District, for their acquisition purposes. Such lending activity is limited to entities which have a substantial business relationship with Northern Trust. Legally binding commitments to extend credit to banks and bank holding companies totaled $178 million and $155 million as of December 31, 1996 and 1995, respectively. COMMERCIAL REAL ESTATE. In managing its credit exposure, management has defined a commercial real estate loan as one where: (1) the borrower's principal business activity is the acquisition of or the development of real estate for commercial purposes; (2) the principal collateral is real estate held for commercial purposes and loan repayment is expected to flow from the operation of the property; or (3) the loan repayment is expected to flow from the sale or refinance of real estate as a normal and ongoing part of the business. Unsecured lines of credit to firms or individuals engaged in commercial real estate endeavors are included without regard to the use of loan proceeds. The 28 Northern Trust Corporation commercial real estate portfolio consists of interim loans and commercial mortgages. The interim loans, which totaled $236.3 million and $184.5 million as of December 31, 1996 and 1995, respectively, are composed primarily of loans to developers that are highly experienced and well-known to Northern Trust. Short- term interim loans provide financing for the initial phases of the acquisition or development of commercial real estate, with the intent that the borrower will refinance the loan through another financial institution or sell the project upon its completion. The interim loans are primarily in the Chicago market in which Northern Trust has a strong presence and a thorough knowledge of the local economy. Commercial mortgage financing, which totaled $321.4 million and $328.1 million as of December 31, 1996 and 1995, respectively, is provided for the acquisition of income producing properties. Cash flows from the properties generally are sufficient to amortize the loan. These loans average less than $500,000 each and are primarily located in the suburban Chicago and Florida markets. At December 31, 1996, off-balance sheet credit exposure to commercial real estate developers in the form of legally binding commitments to extend credit and standby letters of credit totaled $61.5 million and $22.5 million, respectively. At December 31, 1995, legally binding commitments were $21.7 million and standby letters of credit were $16.5 million. FOREIGN OUTSTANDINGS. In recent years international banking activities have been focused on import and export financing for U.S. based clients and on correspondent banking. Northern Trust has extensive treasury activities involving short-term, credit-related business with foreign financial institutions. Interbank time deposits with foreign banks represent the largest category of foreign outstandings. The Chicago head office and the London Branch actively participate in the interbank market with U.S. and foreign banks. As used in this discussion, foreign outstandings are cross-border outstandings as defined by the Securities and Exchange Commission. They consist of loans, acceptances, interest-bearing deposits with financial institutions, accrued interest and other monetary assets. Not included are letters of credit, loan commitments, and foreign office local currency claims on residents funded by local currency liabilities. Foreign outstandings related to a specific country are net of guarantees given by third parties resident outside the country and the value of tangible, liquid collateral held outside the country. However, transactions with branches of foreign banks and corporations are included in these outstandings and are classified according to the country location of the foreign entities' head office. Risk related to foreign outstandings is continually monitored and internal limits are imposed on foreign exposure. The following table provides information on foreign outstandings by country that exceed 1.00% of Northern Trust's consolidated assets.
- ---------------------------------------------- FOREIGN OUTSTANDINGS - ---------------------------------------------- Commercial (In Millions) Banks and Other Total - ---------------------------------------------- AT DECEMBER 31, 1996 Japan $993 $ -- $993 - ---------------------------------------------- At December 31, 1995 Japan $259 $ -- $259 - ---------------------------------------------- At December 31, 1994 Japan $551 $ -- $551 United Kingdom 183 43 226 Canada 175 18 193 - ---------------------------------------------
There were no aggregate foreign outstandings by country falling between 0.75% and 1.00% of total assets at December 31, 1996 and 1995. This compares with $154 million to Germany in 1994. NONPERFORMING ASSETS AND 90 DAY PAST DUE LOANS. Nonperforming assets consist of nonaccrual loans, restructured loans and Other Real Estate Owned (OREO). OREO is comprised of commercial and residential properties acquired in partial or total satisfaction of problem loans. Past due loans are loans that are delinquent 90 days or more and still accruing interest. The balance in this category at any reporting period can fluctuate widely based on the timing of cash collections, renegotiations and renewals. Maintaining a low level of nonperforming assets is important to the ongoing success of a financial institution. Northern Trust's comprehensive credit review and approval process is critical to the ability to minimize nonperforming assets on a long-term basis. In addition to the negative impact on both net interest income and credit losses, nonperforming assets also increase operating costs due to the expense associated with collection efforts. The table on the following page presents the nonperforming assets and past due loans for the current year and the prior years. Of the total loan portfolio of $10.9 billion at December 31, 1996, $19.5 million or .18% was nonperforming, a decrease of $12.4 million from year-end 1995. Included in the portfolio of nonaccrual loans are those which meet the criteria as being "impaired" under the definition in SFAS No. 114. A loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. As of December 31, 1996, impaired loans, which also have been classified as nonperforming, totaled $16.8 million, with $.5 million of the reserve for credit losses allocated to these loans. 29 Northern Trust Corporation MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - --------------------------------------------------------------------------------
- ---------------------------------------------------------------------------- NONPERFORMING ASSETS AND 90 DAY PAST DUE LOANS - ---------------------------------------------------------------------------- December 31 ----------------------------- (In Millions) 1996 1995 1994 1993 1992 - ---------------------------------------------------------------------------- Nonaccrual Loans Domestic Commercial $ 2.2 $17.5 $15.7 $17.5 $47.9 Commercial Real Estate 11.3 9.0 9.1 4.8 13.1 Residential Real Estate 3.2 2.4 1.3 1.5 1.2 Consumer .2 .1 .3 .3 .8 Other -- -- -- -- .2 Lease Financing -- -- .1 1.9 3.2 - ---------------------------------------------------------------------------- Total Domestic 16.9 29.0 26.5 26.0 66.4 - ---------------------------------------------------------------------------- International -- .2 1.3 1.3 1.9 - ---------------------------------------------------------------------------- Total Nonaccrual Loans 16.9 29.2 27.8 27.3 68.3 - ---------------------------------------------------------------------------- Restructured Loans 2.6 2.7 -- -- -- Other Real Estate Owned 1.9 1.8 2.2 9.7 22.9 - ---------------------------------------------------------------------------- TOTAL NONPERFORMING ASSETS $21.4 $33.7 $30.0 $37.0 $91.2 - ---------------------------------------------------------------------------- TOTAL DOMESTIC 90 DAY PAST DUE LOANS (Still accruing) $15.2 $22.0 $17.3 $22.8 $42.9 - ----------------------------------------------------------------------------
RESERVE FOR CREDIT LOSSES. In evaluating the adequacy of the reserve for credit losses, management relies predominantly on a disciplined credit review process which is applicable to the full range of the credit exposures. The review process, directed by Credit Policy, is intended to identify as early as possible clients who might be facing financial difficulties. Once identified, the extent of the client's financial difficulty is carefully monitored by Credit Policy, which recommends to management the portion of any credits that need a specific reserve allocation or should be charged-off. Other factors considered by management in evaluating the adequacy of the reserve include: the relative size of the subsidiary banks' single loan lending limits; loan volume; historical net loan loss experience; level and composition of nonaccrual, past due and restructured loans; the condition of industries and geographic areas experiencing or expected to experience particular economic adversities; international developments; current and anticipated economic conditions; credit evaluations; and the liquidity and volatility of the markets. From time to time specific amounts of the reserve are designated for certain loans in connection with management's analysis of the adequacy of the reserve for credit losses, as well as its evaluation of impaired loans. The reserve balance is not a precise amount, but is derived from judgments based on the above factors. It represents management's best estimate of the reserve for credit losses necessary to adequately cover probable losses from current credit exposures. The provision for credit losses is the charge against current earnings that is determined by management as the amount needed to maintain an adequate reserve. The overall credit quality of the domestic portfolio has remained good as evidenced by the relatively low level of nonperforming loans and net charge- offs. Management's assessment of the financial condition of specific clients facing financial difficulties, and portfolio growth relating to low-risk residential lending and bank acquisitions, were among the factors impacting management's analysis of the adequacy of the reserve. The combination of these factors resulted in a reserve for credit losses of $148.3 million at December 31, 1996, compared with $147.1 million last year. The decline in the year-end reserve for credit losses as a percentage of outstanding loans and leases from 1.49% to 1.36% at year-end 1996 is primarily attributable to loan growth in low-risk residential lending and improved credit quality. The following table summarizes the changes in the reserve for credit losses for the current year and the prior years. INTEREST RATE RISK MANAGEMENT Policies and limits for the management of Northern Trust's interest rate risk are established by the Board of Directors. To ensure adherence to these policies and limits, the Corporate Asset and Liability Policy Committee (ALCO) establishes and monitors guidelines on the sensitivity of earnings to changes in interest rates caused by on- and off-balance sheet positions. The goal of the ALCO process is to manage the balance sheet to provide the maximum level of earnings while maintaining a high quality balance sheet and acceptable levels of interest rate risk and liquidity risk. Sensitivity of earnings to interest rate changes arises when yields on assets change differently from the interest costs on liabilities. To mitigate this interest rate risk, the structure of 30 Northern Trust Corporation
- -------------------------------------------------------------------------------- ANALYSIS OF RESERVE FOR CREDIT LOSSES - ------------------------------------------------------------------------------- ($ In Millions) 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------- Balance at Beginning of Year $ 147.1 $ 144.8 $ 145.5 $ 145.5 $ 145.7 - ------------------------------------------------------------------------------- Charge-Offs Commercial 6.2 5.5 5.3 11.2 14.8 Commercial Real Estate 7.4 3.6 4.1 7.8 5.6 Residential Real Estate .2 .6 .1 .2 .8 Consumer 1.5 1.2 1.2 2.1 3.6 Other .1 .2 -- .2 .5 Lease Financing -- -- -- 1.3 1.1 International .2 .6 -- .6 6.0 - ------------------------------------------------------------------------------- Total Charge-Offs 15.6 11.7 10.7 23.4 32.4 - ------------------------------------------------------------------------------- Recoveries Commercial .5 2.1 1.0 1.9 1.0 Commercial Real Estate 1.9 2.3 1.1 .7 .4 Residential Real Estate .2 -- -- .2 -- Consumer .6 .5 1.2 .8 .8 Other .1 .2 .2 .1 .1 Lease Financing -- -- .5 -- -- International .5 .7 -- .2 .4 - ------------------------------------------------------------------------------- Total Recoveries 3.8 5.8 4.0 3.9 2.7 - ------------------------------------------------------------------------------- Net Charge-Offs 11.8 5.9 6.7 19.5 29.7 Provision for Credit Losses 12.0 6.0 6.0 19.5 29.5 Reserve Related to Acqui- sitions 1.0 2.2 -- -- -- - ------------------------------------------------------------------------------- Net Change in Reserve 1.2 2.3 (.7) -- (.2) - ------------------------------------------------------------------------------- BALANCE AT END OF YEAR $ 148.3 $ 147.1 $ 144.8 $ 145.5 $ 145.5 - ------------------------------------------------------------------------------- Total Loans and Leases at Year-End $10,937.4 $9,906.0 $8,590.6 $7,623.0 $6,935.9 - ------------------------------------------------------------------------------- Average Total Loans and Leases $10,332.1 $9,136.0 $8,316.1 $7,297.1 $6,452.9 - ------------------------------------------------------------------------------- As a Percent of Year-End Loans and Leases Net Loan Charge-Offs .11% .06% .08% .26% .43% Provision for Credit Losses .11 .06 .07 .26 .43 Reserve Balance at Year- End 1.36 1.49 1.69 1.91 2.10 - ------------------------------------------------------------------------------- As a Percent of Average Loans and Leases Net Loan Charge-Offs .11% .06% .08% .27% .46% Reserve Balance at Year- End 1.44 1.61 1.74 1.99 2.25 - --------------------------------------------------------------------------------
the balance sheet is managed so that movements of interest rates on assets and liabilities (adjusted for off-balance sheet hedges) are highly correlated and produce an adequate level of earnings, even in periods of volatile interest rates. In the management of interest rate risk, Northern Trust utilizes the following measurement techniques: model simulation to determine the sensitivity of earnings, economic value sensitivity of the balance sheet, and gap analysis. These three techniques are complementary and are used in concert to provide a more complete picture of interest rate risk. Model simulation is the primary tool used to measure the sensitivity of earnings to interest rate changes. Using computer modeling techniques, Northern Trust is able to measure the potential impact on earnings, assuming the continuation of current balance sheet trends, different patterns of rate movements, and specific changes in the relationships among various instruments on and off the balance sheet. Northern Trust uses model simulation to measure its earnings sensitivity relative to management's most likely interest rate scenario. At December 31, 1996, this scenario assumed a gradual increase in interest rates during 1997. The interest sensitivity is then tested by running alternative scenarios above and below the most likely interest rate outcome. In 1996, this sensitivity calculation was always less than 3.5% of the annual income before income taxes, using alternative scenarios based on a one percentage point deviation from the rates assumed over a one year horizon. The simulations do not anticipate management's actions to moderate the negative 31 Northern Trust Corporation MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- consequences of interest rate deviations. Therefore, the simulations serve as conservative estimates of interest rate risk. The second technique that is used to measure interest rate risk is the analysis of the sensitivity of economic value of the balance sheet. The economic value sensitivity analysis examines the market value impact of on- and off-balance sheet positions to adverse interest rate movements. Northern Trust strives to limit the economic value sensitivity of the balance sheet to an acceptable level in the context of risk-return trade-offs. The third technique that is used to measure interest rate risk is gap analysis. The calculation of the interest sensitivity gap is shown in the following table, which measures the timing mismatches between assets and liabilities. This interest sensitivity gap is determined by subtracting the amount of liabilities from the volume of assets that reprice in a particular time interval. A liability sensitive position results when more liabilities than assets reprice or mature within a given period. Under this scenario, as interest rates decline, increased net interest revenue will be generated. Conversely, an asset sensitive position results when more assets than liabilities reprice within a given period; in this instance, net interest revenue would benefit from an increasing interest rate environment. The financial impact of creating a liability or asset sensitive position depends on the magnitude of actual changes in interest rates relative to the current expectations of market participants. A variety of actions are used to implement interest risk management strategies, including: . purchases of securities; . sales of securities that are classified as available for sale; . issuance of senior notes; . placing and taking Eurodollar time deposits; and . hedging with various types of derivative financial instruments. Northern Trust strives to use the most effective instrument for implementing its interest risk management strategies, considering the costs, liquidity and capital requirements of the various alternatives. For more detail regarding how derivative financial instruments are used to implement interest risk management strategies, refer to Note 20 on page 54.
- --------------------------------------------------------------------------------------- INTEREST RATE SENSITIVITY ANALYSIS - --------------------------------------------------------------------------------------- December 31, 1996 ----------------------------------------------------------- 1-3 4-12 1-2 3-5 Over 5 (In Millions) Months Months Years Years Years Total - --------------------------------------------------------------------------------------- EARNING ASSETS Money Market Assets $ 3,146.8 $ 50.1 $ -- $ -- $ -- $ 3,196.9 Securities-Available for Sale 3,514.2 545.6 74.6 52.2 125.1 4,311.7 -Held to Maturity 59.6 126.2 49.5 102.6 160.5 498.4 -Trading Account 4.8 -- -- -- -- 4.8 Loans and Leases 4,710.2 1,218.6 848.7 2,146.9 2,013.0 10,937.4 - --------------------------------------------------------------------------------------- Total Earning Assets $11,435.6 $1,940.5 $972.8 $2,301.7 $ 2,298.6 $18,949.2 - --------------------------------------------------------------------------------------- SOURCE OF FUNDS Savings and NOW Accounts $ 905.2 $ -- $ -- $ -- $ 1,034.6 $ 1,939.8 Money Market Deposit Ac- counts and Savings Certificates 2,910.2 1,137.7 176.8 393.8 24.1 4,642.6 Other Time 3,311.8 5.6 1.0 8.0 -- 3,326.4 Senior Notes and Notes Payable 200.1 109.0 87.9 26.7 309.1 732.8 Other Borrowings 4,732.8 168.8 8.4 .2 -- 4,910.2 Noninterest-Related Funds, net 988.0 -- 90.0 -- 2,319.4 3,397.4 - --------------------------------------------------------------------------------------- Total Source of Funds $13,048.1 $1,421.1 $364.1 $ 428.7 $ 3,687.2 $18,949.2 - --------------------------------------------------------------------------------------- Interest Sensitive Gap $(1,612.5) $ 519.4 $608.7 $1,873.0 $(1,388.6) $ -- Off-Balance Sheet Hedges 721.6 283.9 (40.7) (530.2) (434.6) -- - --------------------------------------------------------------------------------------- Adjusted Interest Sensi- tive Gap $ (890.9) $ 803.3 $568.0 $1,342.8 $(1,823.2) $ -- - --------------------------------------------------------------------------------------- Cumulative Interest Sen- sitive Gap $ (890.9) $ (87.6) $480.4 $1,823.2 $ -- $ -- - ---------------------------------------------------------------------------------------
- -Assets and liabilities whose rates are variable are reported based on their repricing dates. Those with fixed rates are reported based on their scheduled contractual repayment dates, except for certain investment securities and loans secured by 1-4 family residential properties that are based on anticipated prepayments. - -The interest rate sensitivity assumptions presented for demand deposits, noninterest-bearing time deposits, savings accounts and NOW accounts are based on historical and current experiences regarding product portfolio retention and interest rate repricing behavior. The portion of these deposits which are considered long-term and stable have been classified in the Over 5 Years category. 32 Northern Trust Corporation LIQUIDITY RISK MANAGEMENT The objective of liquidity risk management is to ensure that Northern Trust can meet its cash flow requirements and to capitalize on business opportunities on a timely and cost-effective basis. Management monitors the liquidity position on a daily basis to ensure that funds are available at a minimum cost to meet loan and deposit cash flows. The liquidity profile is also structured to ensure that the capital needs of the Corporation and its banking subsidiaries are met. Management maintains a detailed liquidity contingency plan designed to adequately respond to dramatic changes in market conditions. Liquidity is secured by managing the mix of items on the balance sheet and expanding potential sources of liquidity. The balance sheet sources of liquidity include the short-term money market portfolio, unpledged available for sale securities, maturing loans, and the ability to securitize a portion of the loan portfolio. Further, liquidity arises from the diverse funding base and the fact that a significant portion of funding comes from clients that have other relationships with Northern Trust. A significant source of liquidity is the ability to draw funding from both domestic and international markets. The Bank's senior long-term debt is rated AA- by Standard & Poor's, Aa3 by Moody's Investors Service, and AA+ by Thomson BankWatch. These ratings put The Northern Trust Company in the top tier of United States banks. Northern Trust maintains a liquid balance sheet with loans representing 51% of total assets. Further, at December 31, 1996, it had a significant liquidity reserve on its balance sheet in the form of cash and due from banks, securities available for sale, and money market assets, which in aggregate totaled $8.8 billion or 41% of total assets. The Corporation's uses of cash consist mainly of dividend payments to the Corporation's common and preferred stockholders, the payment of principal and interest to note holders, and purchases of its common stock. These requirements are met largely by dividend payments from its subsidiaries, and by interest and dividends earned on investment securities and money market assets. Bank subsidiaries have the ability to pay dividends during 1997 equal to their 1997 eligible net profits plus $208.2 million. Bank subsidiary dividends are subject to certain restrictions that are explained in Note 14 on page 49. The Corporation's liquidity, defined as the amount of marketable assets in excess of commercial paper, was strong at $102 million at year-end 1996. The cash flows of the Corporation are shown in Note 28 on page 63. The Corporation also has a $50 million back-up line of credit for its commercial paper issuance. The Corporation's strong credit ratings allow it to access credit markets on favorable terms. CAPITAL MANAGEMENT One of management's primary objectives is to maintain a strong capital position to merit the confidence of clients, the investing public, bank regulators and stockholders. A strong capital position helps Northern Trust withstand unforeseen adverse developments and take advantage of profitable investment opportunities when they arise. In 1996, common equity on average increased 13% or $159 million reaching a record $1.4 billion at year-end, while total risk- adjusted assets rose 15%. Total equity as of December 31, 1996 was $1.5 billion including $120 million of auction rate preferred stock. The average dividend rate declared on the $120 million of auction rate preferred stock was 4.00% during 1996 versus 4.51% in 1995. In January 1996, the Corporation called for redemption its $50 million Series E convertible preferred stock. Virtually all of the holders elected to convert rather than redeem their preferred stock, and in January the Corporation issued 2,396,744 shares of common stock in connection with the conversion. The shares issued upon conversion were previously reflected in the Corporation's fully diluted shares, so that conversion had no impact on fully diluted net income per common share. During 1996 the Corporation purchased 4,096,956 of its own shares as part of the buyback program authorized in 1994. In November, the Board of Directors authorized an increase in the Corporation's buyback program so that the Corporation may purchase, after December 31, 1996, up to 4.6 million shares. The Board of Directors increased the quarterly dividend by 16.1% to $.18 per common share in November 1996. Over the last five years the common dividend has increased 125%. At December 31, 1996, tier 1 capital was 8.2% and total capital was 11.9% of risk-adjusted assets. These risk-based capital ratios are well above the minimum requirements of 4.0% for tier 1 and 8.0% for total risk-based capital ratios. Northern Trust's leverage ratio (tier 1 capital to fourth quarter average assets) of 6.4% is also well above the regulatory requirement of 3.0%. In addition, each of the subsidiary banks had a ratio of at least 7.8% for tier 1 capital, 10.8% for total risk-based capital, and 6.1% for the leverage ratio. On January 16, 1997, the Corporation further strengthened its capital ratios with the issuance of $150 million of Floating Rate Capital Securities. 33 Northern Trust Corporation MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- CAPITAL ADEQUACY - ----------------------------------------------------------------------- December 31 ---------------- ($ In Millions) 1996 1995 - ----------------------------------------------------------------------- TIER 1 CAPITAL Common Stockholders' Equity $ 1,424 $ 1,283 Convertible Preferred Stock -- 50 Goodwill and Other Intangible Assets (81) (79) Net Unrealized Gain on Securities (2) (3) - ----------------------------------------------------------------------- Total Tier 1 Capital 1,341 1,251 - ----------------------------------------------------------------------- TIER 2 CAPITAL Auction Rate Preferred Stock 120 120 Reserve for Credit Losses 148 147 Notes Payable* 335 254 - ----------------------------------------------------------------------- Total Tier 2 Capital 603 521 - ----------------------------------------------------------------------- TOTAL RISK-BASED CAPITAL 1,944 1,772 - ----------------------------------------------------------------------- Risk-Weighted Assets** $16,380 $14,187 - ----------------------------------------------------------------------- Total Assets End of Period (EOP) $21,608 $19,934 Average Fourth Quarter 20,988 20,287 Total Loans-End of Period 10,937 9,906 - ----------------------------------------------------------------------- RATIOS Risk-Based Capital to Risk-Weighted Assets Tier 1 8.2% 8.8% Total (Tier 1 and 2) 11.9 12.5 Leverage (Tier 1 to Fourth Quarter Average Assets) 6.4 6.2 - ----------------------------------------------------------------------- Common Stockholders' Equity to Total Loans EOP 13.0% 12.9% Total Assets EOP 6.6 6.4 Stockholders' Equity to Total Loans EOP 14.1 14.7 Total Assets EOP 7.1 7.3 - -----------------------------------------------------------------------
Notes: *Notes payable that qualify for risk-based capital amortize for the purpose of inclusion in tier 2 capital during the five years before maturity. **Risk-weighted assets have been adjusted for goodwill and other intangible assets, net unrealized gain on securities and excess reserve for credit losses that have been excluded from tier 1 and tier 2 capital, if any. OPERATIONAL AND FIDUCIARY RISK MANAGEMENT In providing banking and trust services, Northern Trust, in addition to safekeeping and managing trust and corporate assets, processes cash and securities transactions exceeding $105 billion on average each business day. These activities expose Northern Trust to operational and fiduciary risk. Controls over such processing activities are closely monitored to safeguard the assets of Northern Trust and its clients. However, from time to time Northern Trust has suffered losses related to these risks and there can be no assurance that such losses will not occur in the future. Operational risk is the risk of unexpected losses attributable to human error, systems failures, fraud, or inadequate internal controls and procedures. This risk is mitigated through a system of internal controls that are designed to keep operating risk at appropriate levels in view of Northern Trust's corporate standards and the risks inherent in the markets in which Northern Trust operates. The system of internal controls includes policies and procedures that require the proper authorization, approval, documentation, and monitoring of transactions. Each business unit is responsible for complying with corporate policies and external regulations applicable to the unit, and is responsible for establishing specific procedures to do so. Northern Trust's internal auditors monitor the overall effectiveness of the system of internal controls on an ongoing basis. Fiduciary risk is the risk of loss that may occur as a result of breaching a fiduciary duty to a client. To limit this risk, the Trust Investment Committee establishes corporate policies and procedures to ensure that obligations to clients are discharged faithfully and in compliance with applicable legal and regulatory requirements. These policies and procedures provide guidance and establish standards related to the creation, sale, and management of investment products, trade execution, and counterparty selection. Business units have the primary responsibility for adhering to the policies and procedures applicable to their businesses. 34 Northern Trust Corporation LINES OF BUSINESS The results for the major business units are presented in order to promote a greater understanding of their financial performance and strategic direction. The information, presented on an internal management reporting basis, is derived from internal accounting systems that support the strategic objectives and management structure. Consequently, the results are not necessarily comparable with similar information for other financial institutions. Management has developed accounting systems to allocate revenue and expenses related to each line of business, as well as certain corporate support services, worldwide operations and systems development expenses. The systems also incorporate processes for allocating assets, liabilities and the applicable interest income and expense. Equity is primarily allocated using the federal regulatory risk-based capital guidelines, coupled with management's judgment of the operational risks inherent in the business. Allocations of capital and certain corporate expenses may not be representative of the levels that would be required if the businesses were independent entities. CORPORATE AND INSTITUTIONAL SERVICES. Corporate and Institutional Services includes corporate trust, investment management and securities lending services, commercial banking activities of the Bank, treasury management services, foreign exchange activities, the London and Singapore branches, NTRC, NTGA and Northern Futures Corporation. PERSONAL FINANCIAL SERVICES. Personal Financial Services encompasses personal trust and investment management services, estate administration, personal banking and mortgage and other lending to individuals and middle market companies. This business unit also includes the commercial banking activities of the affiliate banks and the activities of Northern Trust Securities, Inc. CORPORATE AND OTHER. Corporate and Other includes the Bank's Treasury Department and other corporate items, including the impact of long-term debt, preferred equity, holding company investments, and corporate operating expenses. The decline in noninterest expenses from 1995 to 1996 reflects decreases in severance costs and pension settlement charges, and lower salary and benefit expenses resulting from staff reductions in corporate support areas. Noninterest income for 1994 included the net gain of $28.5 million from the sale of the interest in BSS. 1994 noninterest expenses included non- recurring charges totaling $23.2 million. Of the $23.2 million, $13.6 million resulted from the trade-in and the sale and leaseback of mainframe computer equipment and the write-down of older trust-related software, and $9.6 million from pension settlement charges. The following table reflects the earnings contribution of Northern Trust's lines of business for the years ended December 31, 1996, 1995 and 1994 on the basis described above.
- -------------------------------------------------------------------------------- Corporate and Institutional Personal Corporate Services Financial Services and Other ---------------------- ---------------------- ------------------- ($ In Millions) 1996 1995 1994 1996 1995 1994 1996 1995 1994 - ----------------------------------------------------------------------------------------------- Net Interest Income(1) $115.4 $114.3 $102.1 $286.4 $260.4 $238.7 $20.1 $20.5 $27.2 Provision for Credit Losses (.6) 1.6 (.8) 15.3 4.3 8.0 (2.7) .1 (1.2) Noninterest Income Trust Fees 298.3 244.2 216.7 294.0 260.8 236.7 -- -- -- Other 138.8 134.1 112.5 43.1 38.6 35.7 3.7 .4 31.8 Noninterest Expenses 371.2 318.8 300.2 383.5 366.5 355.0 12.1 23.9 45.3 - ----------------------------------------------------------------------------------------------- Income before Taxes(1) 181.9 172.2 131.9 224.7 189.0 148.1 14.4 (3.1) 14.9 Provision for Income Taxes(1) 71.8 67.5 50.1 89.6 75.1 58.7 .8 (4.5) 3.9 - ----------------------------------------------------------------------------------------------- NET INCOME $110.1 $104.7 $ 81.8 $135.1 $113.9 $ 89.4 $13.6 $ 1.4 $11.0 - ----------------------------------------------------------------------------------------------- Percentage Contribution 43% 47% 45% 52% 52% 49% 5% 1% 6%
(1) On a fully taxable equivalent basis (FTE). Total includes $33.6 million, $37.6 million and $33.4 million of FTE adjustment for 1996, 1995 and 1994, respectively. Note: Certain reclassifications have been made to 1995 and 1994 financial information to conform to the current year presentation. 35 Northern Trust Corporation
- -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEET - ----------------------------------------------------------------------------- December 31 -------------------- ($ In Millions) 1996 1995 - ----------------------------------------------------------------------------- ASSETS Cash and Due from Banks $ 1,292.5 $ 1,308.9 Federal Funds Sold and Securities Purchased under Agreements to Resell (Note 4) 1,022.6 162.1 Time Deposits with Banks 2,060.0 1,567.6 Other Interest-Bearing 114.3 54.5 Securities (Note 3) Available for Sale 4,311.7 5,136.3 Held to Maturity (Fair value-$518.9 in 1996 and $562.6 in 1995) 498.4 535.1 Trading Account 4.8 88.9 - ----------------------------------------------------------------------------- Total Securities 4,814.9 5,760.3 - ----------------------------------------------------------------------------- Loans and Leases Commercial and Other 6,379.9 6,009.6 Residential Mortgages 4,557.5 3,896.4 - ----------------------------------------------------------------------------- Total Loans and Leases (Note 5) (Net of unearned in- come-$109.1 in 1996 and $89.6 in 1995) 10,937.4 9,906.0 - ----------------------------------------------------------------------------- Reserve for Credit Losses (Note 6) (148.3) (147.1) Buildings and Equipment (Notes 8 and 9) 291.5 281.5 Customers' Acceptance Liability 44.7 35.8 Trust Security Settlement Receivables 362.3 327.1 Other Assets (Note 16) 816.4 676.8 - ----------------------------------------------------------------------------- Total Assets $21,608.3 $19,933.5 - ----------------------------------------------------------------------------- LIABILITIES Deposits Demand and Other Noninterest-Bearing $ 3,476.7 $ 2,853.1 Savings and Money Market Deposits 3,880.1 3,385.3 Savings Certificates 2,056.3 2,158.8 Other Time 462.7 384.3 Foreign Offices-Demand 410.7 459.8 -Time 3,509.7 3,246.9 - ----------------------------------------------------------------------------- Total Deposits 13,796.2 12,488.2 Federal Funds Purchased 653.0 2,300.1 Securities Sold under Agreements to Repurchase (Note 4) 966.1 1,858.7 Commercial Paper 149.0 146.7 Other Borrowings 3,142.1 875.9 Senior Notes (Note 10) 305.0 17.0 Notes Payable (Note 10) (Qualifying as risk-based capital-$334.6 in 1996 and $254.2 in 1995) 427.8 334.6 Liability on Acceptances 44.7 35.8 Other Liabilities 580.3 423.9 - ----------------------------------------------------------------------------- Total Liabilities 20,064.2 18,480.9 - ----------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Preferred Stock (Note 11) 120.0 170.0 Common Stock, $1.66 2/3 Par Value; Authorized 140,000,000 shares in 1996 and 1995; Outstanding 111,247,732 and 55,664,412 in 1996 and 1995, re- spectively (Notes 11 and 13) 189.9 93.6 Capital Surplus 231.7 306.1 Retained Earnings 1,110.2 928.8 Net Unrealized Gain on Securities Available for Sale (Note 3) 1.6 2.6 Common Stock Issuable-Performance Plan (Note 23) 10.4 14.7 Deferred Compensation-ESOP and Other (35.5) (39.4) Treasury Stock-(at cost-2,712,780 shares in 1996 and 493,652 shares in 1995) (84.2) (23.8) - ----------------------------------------------------------------------------- Total Stockholders' Equity 1,544.1 1,452.6 - ----------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $21,608.3 $19,933.5 - -----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements on pages 40-63. 36 Northern Trust Corporation
- -------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF INCOME - -------------------------------------------------------------------------------- For the Year Ended December 31 ----------------------------------- ($ In Millions Except Per Share Information) 1996 1995 1994 - -------------------------------------------------------------------------------- Interest Income Loans and Leases (Note 5) $ 693.4 $ 630.9 $ 499.6 Securities (Note 3) Available For Sale 318.9 324.0 190.9 Held to Maturity 32.5 40.0 40.3 Trading Account .5 3.6 4.0 - -------------------------------------------------------------------------------- Total Securities 351.9 367.6 235.2 - -------------------------------------------------------------------------------- Time Deposits with Banks 84.9 92.1 97.8 Federal Funds Sold and Securities Pur- chased under Agreements to Resell and Other (Note 4) 21.3 13.4 16.1 - -------------------------------------------------------------------------------- Total Interest Income 1,151.5 1,104.0 848.7 - -------------------------------------------------------------------------------- Interest Expense Deposits 447.8 443.3 298.0 Federal Funds Purchased 97.9 91.2 55.5 Securities Sold under Agreements to Re- purchase (Note 4) 103.4 102.6 61.9 Commercial Paper 7.8 8.6 5.9 Other Borrowings 64.5 55.6 36.0 Senior Notes (Note 10) 14.4 23.7 33.8 Notes Payable (Note 10) 27.4 21.4 23.0 - -------------------------------------------------------------------------------- Total Interest Expense 763.2 746.4 514.1 - -------------------------------------------------------------------------------- Net Interest Income 388.3 357.6 334.6 Provision for Credit Losses (Note 6) 12.0 6.0 6.0 - -------------------------------------------------------------------------------- Net Interest Income after Provision for Credit Losses 376.3 351.6 328.6 - -------------------------------------------------------------------------------- Noninterest Income Trust Fees 592.3 505.0 453.4 Treasury Management Fees 55.3 49.6 46.3 Foreign Exchange Trading Profits 58.8 55.3 35.9 Security Commissions and Trading Income 23.9 21.7 22.0 Other Operating Income (Note 15) 47.2 45.5 75.9 Investment Security Gains (Losses) (Note 3) .4 1.0 (.1) - -------------------------------------------------------------------------------- Total Noninterest Income 777.9 678.1 633.4 - -------------------------------------------------------------------------------- Income before Noninterest Expenses 1,154.2 1,029.7 962.0 - -------------------------------------------------------------------------------- Noninterest Expenses Salaries (Notes 23 and 24) 368.8 337.6 316.6 Pension and Other Employee Benefits (Note 17) 72.5 81.5 74.8 Occupancy Expense (Notes 8 and 9) 63.8 60.2 57.4 Equipment Expense (Note 8) 54.6 48.6 56.4 Other Operating Expenses (Note 16) 207.1 181.3 195.3 - -------------------------------------------------------------------------------- Total Noninterest Expenses 766.8 709.2 700.5 - -------------------------------------------------------------------------------- Income before Income Taxes 387.4 320.5 261.5 Provision for Income Taxes (Note 12) 128.6 100.5 79.3 - -------------------------------------------------------------------------------- NET INCOME $ 258.8 $ 220.0 $ 182.2 - -------------------------------------------------------------------------------- Net Income Applicable to Common Stock $ 253.9 $ 211.5 $ 174.9 - -------------------------------------------------------------------------------- NET INCOME PER COMMON SHARE (Note 13)- PRIMARY $ 2.21 $ 1.88 $ 1.59 -FULLY DILUTED 2.20 1.85 1.58 - -------------------------------------------------------------------------------- Average Number of Common Shares Out- standing-Primary 114,648,190 112,675,834 110,288,428 -Fully Diluted 115,466,501 116,137,566 112,704,750 - --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements on pages 40-63. 37 Northern Trust Corporation
- -------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY - -------------------------------------------------------------------------------- For the Year Ended December 31 ---------------------------------- (In Millions) 1996 1995 1994 - ------------------------------------------------------------------------------- PREFERRED STOCK Balance at January 1 $ 170.0 $ 170.0 $ 170.0 Conversion of Preferred Stock, Series E (50.0) -- -- - ------------------------------------------------------------------------------- Balance at December 31 120.0 170.0 170.0 - ------------------------------------------------------------------------------- COMMON STOCK Balance at January 1 93.6 90.6 89.7 Stock Issued-Incentive Plan and Awards -- .3 -- Stock Issued-Acquisitions -- 2.7 .9 Conversion of Preferred Stock, Series E 1.3 -- -- Transfer from Capital Surplus-Two-for- One Stock Split 95.0 -- -- - ------------------------------------------------------------------------------- Balance at December 31 189.9 93.6 90.6 - ------------------------------------------------------------------------------- CAPITAL SURPLUS Balance at January 1 306.1 302.2 303.0 Stock Issued-Incentive Plan and Awards (8.6) (.2) (.4) Stock Issued-Acquisitions -- 4.1 (.4) Conversion of Preferred Stock, Series E 29.2 -- -- Transfer to Common Stock-Two-for-One Stock Split (95.0) -- -- - ------------------------------------------------------------------------------- Balance at December 31 231.7 306.1 302.2 - ------------------------------------------------------------------------------- RETAINED EARNINGS Balance at January 1 928.8 762.7 631.9 Net Income 258.8 220.0 182.2 Dividends Declared-Common Stock (72.5) (60.4) (49.6) Dividends Declared-Preferred Stock (4.9) (8.6) (7.2) Pooled Affiliates -- 15.1 5.4 - ------------------------------------------------------------------------------- Balance at December 31 1,110.2 928.8 762.7 - ------------------------------------------------------------------------------- NET UNREALIZED GAIN (LOSS) ON SECURITIES AVAILABLE FOR SALE Balance at January 1 2.6 (15.8) (.4) Unrealized Gain (Loss), net (1.0) 18.4 (15.4) - ------------------------------------------------------------------------------- Balance at December 31 1.6 2.6 (15.8) - ------------------------------------------------------------------------------- TRANSLATION ADJUSTMENTS Balance at January 1 -- -- .6 Sale of Foreign Investment -- -- (.6) - ------------------------------------------------------------------------------- Balance at December 31 -- -- -- - ------------------------------------------------------------------------------- COMMON STOCK ISSUABLE-PERFORMANCE PLAN Balance at January 1 14.7 17.9 11.8 Stock Issuable, net of Stock Issued (4.3) (3.2) 6.1 - ------------------------------------------------------------------------------- Balance at December 31 10.4 14.7 17.9 - ------------------------------------------------------------------------------- DEFERRED COMPENSATION-ESOP AND OTHER Balance at January 1 (39.4) (38.8) (43.5) Compensation Deferred (2.7) (11.8) (4.5) Compensation Amortized 7.5 10.3 10.1 Unfunded Pension Liability, net (.9) .9 (.9) - ------------------------------------------------------------------------------- Balance at December 31 (35.5) (39.4) (38.8) - ------------------------------------------------------------------------------- TREASURY STOCK Balance at January 1 (23.8) (8.1) (11.4) Stock Options and Awards 42.9 28.8 12.0 Stock Purchased (122.5) (65.5) (8.7) Stock Issued-Acquisitions -- 21.0 -- Conversion of Preferred Stock, Series E 19.2 -- -- - ------------------------------------------------------------------------------- Balance at December 31 (84.2) (23.8) (8.1) - ------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY AT DECEMBER 31 $ 1,544.1 $ 1,452.6 $ 1,280.7 - -------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements on pages 40-63. 38 Northern Trust Corporation
- -------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF CASH FLOWS - ------------------------------------------------------------------------------- For the Year Ended December 31 ---------------------------------- (In Millions) 1996 1995 1994 - ------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 258.8 $ 220.0 $ 182.2 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activi- ties: Provision for Credit Losses 12.0 6.0 6.0 Depreciation on Buildings and Equipment 46.8 42.2 41.4 (Increase) Decrease in Interest Receiv- able 17.7 (32.8) 22.9 Increase in Interest Payable 9.4 .3 5.2 Amortization and Accretion of Securi- ties and Unearned Income (120.2) (153.5) (27.7) Amortization of Software, Goodwill and Other Intangibles 42.3 35.8 28.3 Deferred Income Tax 29.5 17.7 22.7 Gain on Sale of Foreign Investment -- -- (34.5) Net (Increase) Decrease in Trading Ac- count Securities 84.1 (84.9) 32.3 Other, net (32.4) 91.0 108.9 - ------------------------------------------------------------------------------- Net Cash Provided by Operating Activi- ties 348.0 141.8 387.7 - ------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Net (Increase) Decrease in Federal Funds Sold and Securities Purchased under Agreements to Resell (860.5) 638.9 (199.2) Net (Increase) Decrease in Time Depos- its with Banks (492.4) 297.3 225.7 Net (Increase) Decrease in Other Inter- est-Bearing Assets (59.8) (45.0) 66.5 Purchases of Securities-Held to Matu- rity (2,068.7) (662.3) (544.1) Proceeds from Maturity and Redemption of Securities-Held to Maturity 2,112.9 819.6 515.8 Purchases of Securities-Available for Sale (31,666.5) (31,206.1) (12,838.3) Proceeds from Sale, Maturity and Re- demption of Securities-Available for Sale 32,611.3 30,828.7 11,823.2 Net Increase in Loans and Leases (1,066.5) (1,155.3) (979.2) Purchases of Buildings and Equipment (56.8) (41.8) (44.8) Proceeds from Sale of Buildings and Equipment -- 4.5 10.8 Sale of Foreign Investment -- -- 58.1 Net Increase in Trust Security Settle- ment Receivables (35.2) (21.4) (12.6) Decrease in Cash Due to Acquisitions (14.6) (43.5) -- Other, net (10.6) 2.3 6.9 - ------------------------------------------------------------------------------- Net Cash Used in Investing Activities (1,607.4) (584.1) (1,911.2) - ------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net Increase in Deposits 1,308.0 378.7 1,401.0 Net Increase (Decrease) in Federal Funds Purchased (1,647.1) 1,328.1 (243.9) Net Increase (Decrease) in Securities Sold under Agreements to Repurchase (892.6) (374.0) 1,614.7 Net Increase (Decrease) in Commercial Paper 2.3 22.9 (.3) Net Increase (Decrease) in Short-Term Other Borrowings 2,273.2 (56.1) (1,401.7) Proceeds from Term Federal Funds Pur- chased 2,630.2 4,132.7 3,918.4 Repayments of Term Federal Funds Pur- chased (2,637.2) (4,280.1) (3,684.2) Proceeds from Senior Notes & Notes Pay- able 901.5 1,260.0 430.0 Repayments on Senior Notes & Notes Pay- able (520.3) (1,700.2) (781.9) Treasury Stock Purchased (118.2) (63.7) (6.9) Net Proceeds from Stock Options 12.1 9.0 4.5 Cash Dividends Paid on Common and Pre- ferred Stock (74.7) (65.8) (54.1) Other, net 5.8 (32.8) .7 - ------------------------------------------------------------------------------- Net Cash Provided by Financing Activi- ties 1,243.0 558.7 1,196.3 - ------------------------------------------------------------------------------- Increase (Decrease) in Cash and Due from Banks (16.4) 116.4 (327.2) Cash and Due from Banks at Beginning of Year 1,308.9 1,192.5 1,519.7 - ------------------------------------------------------------------------------- CASH AND DUE FROM BANKS AT END OF YEAR $ 1,292.5 $ 1,308.9 $ 1,192.5 - ------------------------------------------------------------------------------- SCHEDULE OF NONCASH INVESTING AND FI- NANCING ACTIVITIES: Conversion of Preferred Stock, Series E to Common Stock $ 49.7 $ -- $ -- Acquisition of Affiliate for Stock, net -- 41.3 6.4 Transfer of Securities from Held to Ma- turity to Available for Sale -- 68.5 -- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest Paid on Deposits and Short- and Long-Term Borrowings $ 753.8 $ 745.0 $ 505.3 Income Taxes Paid 82.7 76.4 52.5 - --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements on pages 40-63. 39 Northern Trust Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. ACCOUNTING POLICIES--The consolidated financial statements have been prepared in conformity with generally accepted accounting principles and reporting practices prescribed for the banking industry. A description of the significant accounting policies follows: A. BASIS OF PRESENTATION. The consolidated financial statements include the accounts of Northern Trust Corporation (Corporation) and its wholly owned subsidiary The Northern Trust Company (Bank) and their wholly owned subsidiaries. Throughout the notes, the term ""Northern Trust'' refers to Northern Trust Corporation and subsidiaries. Significant intercompany balances and transactions have been eliminated in consolidation. The consolidated statement of income includes results of acquired and pooled subsidiaries from the dates of acquisition. B. NATURE OF OPERATIONS. The Corporation is a bank holding company whose principal subsidiary is the Chicago-based Bank. The Corporation also owns banks in Arizona, California, Florida and Texas, and various other nonbank subsidiaries, including a brokerage firm, a futures commission merchant, an international investment consulting firm and a retirement services company. The Corporation also owned three other Illinois banks which were merged into the Bank on February 29, 1996. Northern Trust generates the majority of its revenues from its two primary business units, Corporate and Institutional Services (C&IS) and Personal Financial Services (PFS). The C&IS unit provides trust and custody-related services in the United States and foreign markets to corporations and institutions; a full range of commercial banking services to large domestic corporations and financial institutions; treasury management services to meet the needs of major corporations and financial institutions; and foreign exchange services for global custody clients and Northern Trust's own account. The PFS unit provides personal trust, investment management, estate administration, personal banking and mortgage lending services, and also provides commercial banking services to middle market companies. These services are delivered through the Bank and the network of subsidiaries in Arizona, California, Florida and Texas. C. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. D. FOREIGN CURRENCY TRANSLATION. Foreign currency asset and liability accounts of overseas branches are translated at current rates of exchange, except for buildings and equipment which are translated at rates in effect at the date of acquisition. Income and expense accounts are translated at month-end rates of exchange. Foreign exchange trading positions are valued daily at prevailing market rates. Gains and losses on trading positions and on positions entered into to hedge foreign denominated investments are recognized currently in other operating income. Unrealized gains on trading positions are reported as other assets and unrealized losses are reported as other liabilities in the consolidated balance sheet. Gains and losses on foreign currency positions that were entered into to hedge specific, firm foreign currency obligations are deferred and recognized in income over the life of the underlying asset or liability or as the underlying expense or commitment is incurred. E. SECURITIES. Securities Available for Sale consist of debt and equity securities that are not intended to be held to maturity and are not held for trading. Securities available for sale are reported at fair value, with unrealized gains and losses credited or charged, net of the tax effect, directly to stockholders' equity. Realized gains and losses on securities available for sale are determined on a specific identification basis and are reported in the consolidated statement of income as investment security gains and losses. Securities Held to Maturity consist of debt securities that management intends to, and Northern Trust has the ability to, hold until maturity. Such securities are reported at cost, adjusted for amortization of premium and accretion of discount. Securities Held for Trading are stated at fair value. Realized and unrealized gains and losses on securities held for trading are reported in the consolidated statement of income under security commissions and trading income. F. INTEREST RISK MANAGEMENT INSTRUMENTS. Interest risk management instruments include interest rate swap contracts, futures contracts, options and similar contracts. Northern Trust is a party to various interest risk management instruments to meet the interest risk management needs of its clients, as part of its trading activity for its own account and as part of its asset/liability management activities. Unrealized gains and receivables on interest risk management instruments are reported as other assets and unrealized losses and payables are reported as other liabilities in the consolidated balance sheet. Interest risk management instruments entered into to meet clients' interest risk management needs or for trading purposes are carried at fair value, with realized and unrealized gains and losses included in security commissions and trading income. Interest risk management instruments entered into to hedge specifically identified existing assets and liabilities or anticipated transactions are accounted for under the accrual method or fair value method, as described below, if they effectively change the cash flows of the hedged item and the hedged item exposes Northern Trust to interest rate risk. 40 Northern Trust Corporation ACCRUAL METHOD. Under this method, the accrued interest income or expense on the interest risk management instrument is recognized as a component of the interest income or expense of the hedged item. There is no recognition of unrealized gains and losses on the instruments in the balance sheet. Realized gains and losses on futures contracts are deferred and recognized as an adjustment to interest income or expense over the life of the hedged item. FAIR VALUE METHOD. The fair value method is used in those cases where the hedged items are carried at fair value or the lower of cost or fair value. Under this method, the related interest risk management instruments are carried at fair value. Unrealized gains and losses on the interest risk management instruments are recognized consistent with the method of accounting for the hedged items. For example, unrealized gains and losses on interest rate swaps used to hedge available for sale securities are reported in stockholders' equity, net of applicable taxes. Accrued interest income and expense on swaps used to hedge available for sale securities is reported in interest income on securities. G. LOANS AND LEASES. Loans that are held to maturity are reported at the principal amount outstanding, net of unearned income. Residential real estate loans classified as held for sale are reported at the lower of aggregate cost or market value. Interest income on loans is recorded on an accrual basis until, in the opinion of management, there is a question as to the ability of the debtor to meet the terms of the contract, or when interest or principal is more than 90 days past due and the loan is not well-secured and in the process of collection. At the time a loan is placed on nonaccrual status, interest accrued but not collected is reversed against interest income of the current period. Loans are returned to accrual status when factors indicating doubtful collectibility no longer exist. Interest collected on nonaccrual loans is applied to principal unless, in the opinion of management, collectibility of principal is not in doubt. Premiums and discounts on loans are recognized as an adjustment of yield by the interest method based on the contractual terms of the loan. Commitment fees that are considered to be an adjustment to the loan yield, loan origination fees and certain direct costs are deferred and accounted for as an adjustment of the yield. Unearned lease income from direct financing and leveraged leases is recognized using the interest method. This method provides a constant rate of return on the unrecovered investment over the life of the lease. H. RESERVE FOR CREDIT LOSSES. The reserve for credit losses is established through provisions for credit losses charged to income. Loans, leases and other extensions of credit deemed uncollectible are charged to the reserve. Subsequent recoveries, if any, are credited to the reserve. The loan and lease portfolio and other extensions of credit are regularly reviewed to evaluate the adequacy of the reserve for credit losses. The impact of economic conditions on the creditworthiness of borrowers is given major consideration in determining the adequacy of the reserve. Credit loss experience, changes in the character and size of the loan portfolio, the estimated value of impaired loans compared to their recorded investment, and management's judgment are other factors used in assessing the overall adequacy of the reserve for credit losses and the resulting provision for credit losses. Actual losses may vary from current estimates and the amount of the provision may be either greater than or less than actual net charge-offs. I. MORTGAGE SERVICING RIGHTS. Effective January 1, 1996, Northern Trust adopted Statement of Financial Accounting Standards (SFAS) No. 122, ""Accounting for Mortgage Servicing Rights.'' This statement requires that mortgage servicing rights be capitalized as a separate asset when purchased or when acquired through the origination of mortgage loans that are subsequently sold with the servicing rights retained. The servicing rights are included in other assets and are amortized as an offset to other operating income over their estimated life. SFAS No. 122 also requires that servicing rights be evaluated for impairment based on their fair value. For purposes of measuring impairment, Northern Trust stratifies its servicing rights by loan type and interest rate. Fair value is determined considering market prices for similar assets. Impairment losses are recognized by establishing a valuation allowance for each stratum to the extent that the unamortized carrying value of servicing rights in the stratum exceeds fair value. Changes in the valuation allowances are recorded in other operating income. J. FEES ON STANDBY LETTERS OF CREDIT AND PARTICIPATIONS IN BANKERS ACCEPTANCES. Fees on standby letters of credit are recognized in other operating income on the straight-line method over the lives of the underlying agreements. Commissions on bankers acceptances are recognized in other operating income when received. K. BUILDINGS AND EQUIPMENT. Buildings and equipment owned are carried at original cost less accumulated depreciation. The charge for depreciation is computed on the straight-line method based on the following range of lives: buildings--10 to 30 years; equipment--4 to 10 years; and leasehold improvements--1 to 15 years. Leased properties meeting certain criteria are capitalized and amortized using the straight-line method over the lease period. L. OTHER REAL ESTATE OWNED (OREO). OREO is comprised of commercial and residential real estate properties acquired in partial or total satisfaction of problem loans. OREO assets are carried at the lower of cost or fair value. Losses identified at the time of acquisition of such properties are charged against the reserve for credit losses. Subsequent write-downs that may be required to the carrying value of these assets and losses realized from asset sales are charged to other operating expenses. Gains realized from the sale of OREO are included in other operating income. 41 Northern Trust Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- M. INTANGIBLE ASSETS. Goodwill, arising from the excess of purchase price over the fair value of net assets of acquired subsidiaries, is being amortized using the straight-line method over periods benefiting, ranging primarily from fifteen to twenty years. SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," establishes accounting standards for the impairment of such assets, certain identifiable intangibles, and goodwill related to those assets to be held and used and for similar assets and certain identifiable intangibles to be disposed of. This statement requires that those assets held and used be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable; and that those to be disposed of be reported at the lower of carrying amount or fair value less cost to sell, with certain exceptions. This statement was adopted January 1, 1996. No adjustments to the carrying value of long-lived assets were required as a result of adopting this statement. Other purchased intangible assets arising from acquisitions are amortized using various methods over the estimated lives of the assets. Software is being amortized using the straight-line method over the estimated useful life of the asset, ranging from three to seven years. N. TRUST ASSETS AND FEES. Assets held in fiduciary or agency capacities are not included in the consolidated balance sheet, since such items are not assets of Northern Trust. Income from trust activities is recorded on the accrual basis. O. TRUST SECURITY SETTLEMENT RECEIVABLES. These receivables represent other items in the process of collection presented on behalf of trust clients. P. INCOME TAXES. In accordance with SFAS No. 109, ""Accounting for Income Taxes,'' an asset and liability approach to accounting for income taxes is followed. The objective is to recognize the amount of taxes payable or refundable for the current year, and to recognize deferred tax assets and liabilities resulting from temporary differences between the amounts reported in the financial statements and the tax bases of assets and liabilities. The measurement of tax assets and liabilities is based on enacted tax laws and applicable tax rates. Q. CASH FLOW STATEMENTS. Cash and cash equivalents have been defined as those amounts included in the consolidated balance sheet as ""Cash and Due from Banks.'' 2. RECLASSIFICATIONS--Certain reclassifications have been made to prior periods' consolidated financial statements to place them on a basis comparable with the current period's consolidated financial statements. 3. SECURITIES--SECURITIES AVAILABLE FOR SALE. Realized gross security gains and losses, which were included in the consolidated statement of income, totaled $1.5 million and $1.1 million, respectively in 1996. Of the $1.5 million in gains in 1996, $1.0 million was related to the sale of securities classified as available for sale. The remaining $.5 million resulted when held to maturity securities were called at a premium. Realized gross security losses in 1996 resulted entirely from the sale of securities classified as available for sale. Realized gross security gains and losses totaled $1.0 million and none, respectively, in 1995. Of the $1.0 million in gains in 1995, $.1 million was related to the sale of securities classified as available for sale. The remaining $.9 million resulted when held to maturity securities were called at a premium. Realized gross security gains and losses in 1994 totaled $.2 million and $.3 million, respectively, all of which were related to securities available for sale. The following tables summarize the amortized cost, fair values and remaining maturities of securities available for sale.
- ------------------------------------------------------------------------------- RECONCILIATION OF AMORTIZED COST TO FAIR VALUES OF SECURITIES AVAILABLE FOR SALE - ------------------------------------------------------------------------------- December 31, 1996 ---------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair (In Millions) Cost Gains Losses Value - ------------------------------------------------------------------------------- U.S. Government $ 906.8 $ .9 $1.0 $ 906.7 Obligations of States and Political Subdivisions 114.5 2.9 .4 117.0 Federal Agency 3,095.0 2.7 .8 3,096.9 Preferred Stock 139.6 -- .2 139.4 Other 51.9 1.0 1.2 51.7 - ------------------------------------------------------------------------------- Total $4,307.8 $7.5 $3.6 $4,311.7 - -------------------------------------------------------------------------------
Unrealized gains and losses on off-balance sheet financial instruments used to hedge available for sale securities totaled $2.2 million and $3.5 million, respectively, as of December 31, 1996. Unrealized gains on these hedges are reported as other assets in the consolidated balance sheet; unrealized losses are reported as other liabilities. As of December 31, 1996, stockholders' equity included a credit of $1.6 million, net of tax, to recognize the appreciation on securities available for sale, net of the related hedges. 42 Northern Trust Corporation
- -------------------------------------------------------------------------------- December 31, 1995 ---------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair (In Millions) Cost Gains Losses Value - ------------------------------------------------------------------------------- U.S. Government $1,661.1 $ 7.3 $ .7 $1,667.7 Obligations of States and Political Subdivisions 68.5 2.5 .8 70.2 Federal Agency 3,142.9 10.8 .9 3,152.8 Preferred Stock 148.1 -- .3 147.8 Other 99.3 .5 2.0 97.8 - ------------------------------------------------------------------------------- Total $5,119.9 $21.1 $4.7 $5,136.3 - -------------------------------------------------------------------------------
Unrealized losses on off-balance sheet financial instruments used to hedge available for sale securities totaled $12.2 million as of December 31, 1995 and are reported as other liabilities in the consolidated balance sheet. As of December 31, 1995, stockholders' equity included a credit of $2.6 million, net of tax, to recognize the appreciation on securities available for sale, net of the related hedges.
- ------------------------------------------------------------ REMAINING MATURITY OF SECURITIES AVAILABLE FOR SALE - ------------------------------------------------------------ December 31, 1996 ------------------ Amortized Fair (In Millions) Cost Value - ------------------------------------------------------------ Due in One Year or Less $3,437.5 $3,437.7 Due After One Year Through Five Years 180.2 180.2 Due After Five Years Through Ten Years 107.7 108.2 Due After Ten Years 582.4 585.6 - ------------------------------------------------------------ Total $4,307.8 $4,311.7 - ------------------------------------------------------------
Asset-backed and mortgage-backed securities were included in the above table taking into account anticipated future prepayments. SECURITIES HELD TO MATURITY. The following tables summarize the book values, fair values and remaining maturities of securities held to maturity.
- -------------------------------------------------------------------------------- RECONCILIATION OF BOOK VALUES TO FAIR VALUES OF SECURITIES HELD TO MATURITY - -------------------------------------------------------------------------------- December 31, 1996 ----------------------------------- Gross Gross Book Unrealized Unrealized Fair (In Millions) Value Gains Losses Value - -------------------------------------------------------------------------- U.S. Government $ 73.4 $ .1 $ -- $ 73.5 Obligations of States and Political Subdivisions 315.9 20.5 .1 336.3 Federal Agency 18.2 .1 .1 18.2 Other 90.9 -- -- 90.9 - -------------------------------------------------------------------------- Total $498.4 $20.7 $ .2 $518.9 - --------------------------------------------------------------------------
December 31, 1995 ----------------------------------- Gross Gross Book Unrealized Unrealized Fair (In Millions) Value Gains Losses Value - -------------------------------------------------------------------------- U.S. Government $116.1 $ .2 $ -- $116.3 Obligations of States and Political Subdivisions 366.9 27.1 -- 394.0 Federal Agency 22.2 .3 .1 22.4 Other 29.9 -- -- 29.9 - -------------------------------------------------------------------------- Total $535.1 $27.6 $ .1 $562.6 - --------------------------------------------------------------------------
- ------------------------------------------------------- REMAINING MATURITY OF SECURITIES HELD TO MATURITY - ------------------------------------------------------- December 31, 1996 ------------- Book Fair (In Millions) Value Value - ------------------------------------------------------- Due in One Year or Less $127.8 $128.9 Due After One Year Through Five Years 150.6 159.6 Due After Five Years Through Ten Years 110.5 119.8 Due After Ten Years 109.5 110.6 - ------------------------------------------------------- Total $498.4 $518.9
Asset-backed and mortgage-backed securities were included in the above table taking into account anticipated future prepayments. 43 Northern Trust Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Income on obligations of states and political subdivisions totaled $26.8 million, $30.7 million and $34.6 million in 1996, 1995 and 1994, respectively. Dividends received on preferred stock totaled $4.4 million, $8.0 million and $6.4 million for 1996, 1995 and 1994, respectively. Refer to Note 20 for additional detail related to interest risk management instruments used to hedge securities. 4. SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE--Securities purchased under agreements to resell and securities sold under agreements to repurchase are recorded at the amounts at which the securities were acquired or sold plus accrued interest. To minimize any potential credit risk associated with these transactions, the fair value of the securities purchased or sold is continuously monitored, limits are set on exposure with counterparties, and the financial condition of counterparties is regularly assessed. It is Northern Trust's policy to take possession of securities purchased under agreements to resell. The following tables summarize information related to securities purchased under agreements to resell and securities sold under agreements to repurchase.
- ---------------------------------------------------------- SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL - ---------------------------------------------------------- December 31 ------------------ ($ In Millions) 1996 1995 - ---------------------------------------------------------- Average Balance During the Year $ 131.2 $ 71.7 Average Interest Rate Earned During the Year 5.39% 5.81% Maximum Month-End Balance During the Year 554.5 344.0 - ----------------------------------------------------------
- -------------------------------------------------------- SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE - -------------------------------------------------------- December 31 ------------------ ($ In Millions) 1996 1995 - -------------------------------------------------------- Average Balance During the Year $1,973.3 $1,769.7 Average Interest Rate Paid During the Year 5.24% 5.80% Maximum Month-End Balance During the Year 2,922.2 2,283.0 - --------------------------------------------------------
5. LOANS AND LEASES--Amounts outstanding in selected loan categories are shown below.
- ---------------------------------------------- December 31 ------------------ (In Millions) 1996 1995 - ---------------------------------------------- Domestic Residential Real Estate $ 4,557.5 $3,896.4 Commercial 3,161.4 3,202.1 Broker 389.1 304.0 Commercial Real Estate 557.7 512.6 Consumer 989.8 758.9 Other 632.1 625.5 Lease Financing 267.8 202.3 - ---------------------------------------------- Total Domestic 10,555.4 9,501.8 International 382.0 404.2 - ---------------------------------------------- Total Loans and Leases $10,937.4 $9,906.0 - ----------------------------------------------
Other domestic and international loans include $765.3 million at December 31, 1996, and $810.4 million at December 31, 1995 of overnight trust-related advances in connection with next day security settlements. Lease financing includes leveraged leases of $139.1 million at December 31, 1996, and $85.5 million at December 31, 1995. Residential real estate loans held for sale totaled $3.7 million and $7.6 million at December 31, 1996 and 1995, respectively. Refer to Note 20 for detail related to interest risk management instruments used to hedge loans. NONPERFORMING ASSETS. Presented below are outstanding amounts of nonaccrual loans, restructured loans and OREO.
- ----------------------------------------------- December 31 ----------- (In Millions) 1996 1995 - ----------------------------------------------- Nonaccrual Loans Domestic-Commercial Real Estate $11.3 $ 9.0 -Other 5.6 20.0 International -- .2 - ----------------------------------------------- Total Nonaccrual Loans 16.9 29.2 Restructured Loans 2.6 2.7 Other Real Estate Owned 1.9 1.8 - ----------------------------------------------- Total Nonperforming Assets $21.4 $33.7 - -----------------------------------------------
Included in nonperforming assets were loans with a recorded investment at December 31, 1996 and December 31, 1995 of $16.8 million and $27.6 million, respectively, which were also classified as impaired. At 44 Northern Trust Corporation December 31, 1996 and December 31, 1995 impaired loans totaling $13.6 million and $9.2 million, respectively, had no portion of the reserve for credit losses allocated to them, while $3.2 million at December 31, 1996 had an allocated reserve of $.5 million and $18.4 million at December 31, 1995 had an allocated reserve of $1.0 million. Total recorded investment in impaired loans averaged $27.6 million in 1996 and $26.4 million in 1995. Total interest income recognized on impaired loans was $1.0 million and $.7 million in 1996 and 1995, respectively, most of which was recognized using the cash-basis method of accounting. There were $61 thousand of unfunded loan commitments and standby letters of credit issued to borrowers whose loans were classified as nonaccrual at December 31, 1996 and none at December 31, 1995. Interest income that would have been recorded on domestic nonaccrual loans in accordance with their original terms amounted to $3.1 million in 1996, $2.9 million in 1995 and $3.1 million in 1994, compared with amounts that were actually recorded of $.9 million, $.7 million and $.2 million, respectively. Write-downs and realized losses on OREO of $.4 million in 1996, $.4 million in 1995 and $.3 million in 1994 were charged to other operating expenses. 6. RESERVE FOR CREDIT LOSSES--Changes in the reserve for credit losses were as follows:
- ---------------------------------------------------------- (In Millions) 1996 1995 1994 - ---------------------------------------------------------- Balance at Beginning of Year $147.1 $144.8 $145.5 - ---------------------------------------------------------- Charge-Offs Domestic Commercial Real Estate (7.4) (3.6) (4.1) Other (8.0) (7.5) (6.6) International (.2) (.6) -- - ---------------------------------------------------------- Total Charge-Offs (15.6) (11.7) (10.7) Recoveries 3.8 5.8 4.0 - ---------------------------------------------------------- Net Charge-Offs (11.8) (5.9) (6.7) Provision for Credit Losses 12.0 6.0 6.0 Reserve Related to Acquisitions 1.0 2.2 -- - ---------------------------------------------------------- Balance at End of Year $148.3 $147.1 $144.8 - ----------------------------------------------------------
7. MORTGAGE SERVICING RIGHTS--Northern Trust's servicing rights have been acquired as a result of originating mortgage loans and selling the loans with the servicing rights retained. Subsequent to the adoption of SFAS No. 122 on January 1, 1996, Northern Trust capitalized servicing rights totaling $307 thousand. Amortization of the servicing rights during 1996 totaled $22 thousand, resulting in a carrying value of $285 thousand as of December 31, 1996. There were no valuation allowances established to record impairment of mortgage servicing rights during 1996. 8. BUILDINGS AND EQUIPMENT--Summary of buildings and equipment is presented below.
- ---------------------------------------------------------- December 31, 1996 ------------------------------ Original Accumulated Net Book (In Millions) Cost Depreciation Value - ---------------------------------------------------------- Land $ 30.5 $ -- $ 30.5 Buildings 83.9 32.3 51.6 Equipment 228.0 114.0 114.0 Leasehold Improvements 61.5 28.3 33.2 Buildings Leased under Capital Leases (Note 9) 74.1 11.9 62.2 - ---------------------------------------------------------- Total Buildings and Equipment $478.0 $186.5 $291.5 - ----------------------------------------------------------
- ---------------------------------------------------------- December 31, 1995 ------------------------------ Original Accumulated Net Book (In Millions) Cost Depreciation Value - ---------------------------------------------------------- Land $ 28.4 $ -- $ 28.4 Buildings 76.3 29.8 46.5 Equipment 211.4 102.1 109.3 Leasehold Improvements 60.6 26.0 34.6 Building Leased Under Capital Lease (Note 9) 72.6 9.9 62.7 - ---------------------------------------------------------- Total Buildings and Equipment $449.3 $167.8 $281.5 - ----------------------------------------------------------
The charge for depreciation amounted to $46.8 million in 1996, $42.2 million in 1995 and $41.4 million in 1994. Occupancy expense has been reduced by $2.1 million in both 1996 and 1995, and $2.0 million in 1994 from rental income on leased premises. 45 Northern Trust Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 9. LEASE COMMITMENTS--At December 31, 1996, Northern Trust was obligated under a number of noncancellable operating leases for premises and equipment. Certain leases contain rent escalation clauses, based on market indices or increases in real estate taxes and other operating expenses and renewal option clauses calling for increased rentals. There are no restrictions imposed by any lease agreement regarding the payment of dividends, debt financing or Northern Trust entering into further lease agreements. Minimum annual lease commitments as of December 31, 1996, for all noncancellable operating leases are as follows:
- ---------------------------------------- Future Minimum Lease (In Millions) Payments - ---------------------------------------- 1997 $ 32.9 1998 29.6 1999 24.2 2000 22.8 2001 19.3 Later Years 106.3 - ---------------------------------------- Total Minimum Lease Payments $235.1 - ----------------------------------------
Rental expense for all operating leases is included in occupancy expense and amounted to $26.9 million in 1996, $25.0 million in 1995 and $24.5 million in 1994. The building and land utilized at the Chicago operations center has been leased under an agreement which qualifies as a capital lease. The long-term financing for the property was provided by the Corporation and the Bank. In the event of sale or refinancing, the Bank will receive all proceeds except for 58% of any proceeds in excess of the original project costs which will be paid to the lessor. The table below reflects the future minimum lease payments required under capital leases, net of any payments received on the long-term financing, and the present value of net capital lease obligations at December 31, 1996.
- -------------------------------------------------------------- Future Minimum Lease Payments, (In Millions) Net - -------------------------------------------------------------- 1997 $ 1.3 1998 1.3 1999 1.3 2000 1.4 2001 1.6 Later Years 14.6 - -------------------------------------------------------------- Total Minimum Lease Payments, net 21.5 Less: Amount Representing Interest 9.9 - -------------------------------------------------------------- Net Present Value under Capital Lease Obligations $11.6 - --------------------------------------------------------------
10. SENIOR NOTES, NOTES PAYABLE AND LINES OF CREDIT--SENIOR NOTES. Summary of senior notes outstanding at December 31 is presented below.
- ---------------------------------------------------------- ($ In Millions) Rate 1996 1995 - ---------------------------------------------------------- Corporation Due 1996 (a) 8.65% $ -- $ 2.0 Bank Due 1996 (a) (b) 4.63-5.38 -- 10.0 Due 1997 (a) (b) Fixed 5.10-5.65 225.0 -- Fixed-Convertible to Floating 4.93-5.07 75.0 -- Due 1998 (a) (b) 6.29 5.0 5.0 - ---------------------------------------------------------- Total Senior Notes $305.0 $17.0 - ----------------------------------------------------------
Refer to bottom of next table for applicable notes. NOTES PAYABLE. Summary of notes payable outstanding at December 31 is presented below.
- --------------------------------------------------------------------- ($ In Millions) 1996 1995 - --------------------------------------------------------------------- Corporation-Subordinated Notes 9.15% Notes due March 1998 (a) $ 10.0 $ 10.0 9.20% Notes due March 1998 (a) 13.0 13.0 9.00% Notes due May 1998 (a) 50.0 50.0 9.20% Notes due May 2001 (a) 25.0 25.0 Bank-Subordinated Notes 6.50% Notes due May 2003 (a) 100.0 100.0 6.70% Notes due Sept. 2005 (a) (b) 100.0 100.0 7.30% Notes due Sept. 2006 (a) (b) 100.0 -- - --------------------------------------------------------------------- Subordinated Notes Payable $398.0 $298.0 - --------------------------------------------------------------------- Corporation-Notes Payable 8.23% ESOP Installment Notes with Final Payment due December 1998 (c) $ 18.2 $ 26.3 Capital Lease Obligations (d) 11.6 10.3 - --------------------------------------------------------------------- Notes Payable $ 29.8 $ 36.6 - --------------------------------------------------------------------- Total Notes Payable $427.8 $334.6 - --------------------------------------------------------------------- Notes Payable Qualifying as Risk-Based Capital $334.6 $254.2 - ---------------------------------------------------------------------
(a) Not redeemable prior to maturity. (b) Under the terms of its current offering circular, the Bank has the ability to offer from time to time its senior bank notes in an aggregate principal amount of up to $1.7 billion at any one time outstanding and up to an additional $100 million of subordinated notes. Each senior note will mature from 30 days to fifteen years and each subordinated note will mature from five years to fifteen years, following its date of original issuance. Each note will mature on such date as selected by the initial purchaser and agreed to by the Bank. (c) Notes were issued directly by the ESOP trust to finance the purchase of 8,640,000 common shares. The Corporation unconditionally guarantees the payment of principal, premium, if any, and interest. The interest rate is subject to adjustment in the event of certain tax law changes affecting ESOP plans. Refer to Note 17. (d) Refer to Note 9. Refer to Note 20 for detail related to interest risk management instruments used to hedge notes. 46 Northern Trust Corporation LINES OF CREDIT. The Corporation currently maintains commercial paper back-up facility lines of credit with three banks totaling $50 million. The facility was amended in 1995. The current termination date is November 2000, with an optional one-year extension beyond that. The commitment fee is determined by a pricing matrix that is based on the long-term senior debt ratings of the Corporation. Currently, the annual fee is 1/10 of 1% of the commitment. There were no borrowings under commercial paper back-up facilities during 1996 or 1995. GUARANTEED PREFERRED BENEFICIAL INTERESTS IN CORPORATION'S JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES. On January 16, 1997, the Corporation issued $150 million of Floating Rate Capital Securities, Series A (Series A Capital Securities) through NTC Capital I, a wholly owned statutory business trust. The Corporation unconditionally guarantees all of the obligations of NTC Capital I. Proceeds of $148.5 million which was net of discount, were invested by NTC Capital I in $150 million principal amount of the Corporation's Floating Rate Junior Subordinated Deferrable Interest Debentures, Series A (Subordinated Debentures), with a stated maturity date of January 15, 2027. The holders of the Series A Capital Securities are entitled to receive preferential cumulative cash distributions quarterly in arrears (based on the liquidation amount of $1,000 per Capital Security) at an interest rate equal to 3-Month LIBOR plus 0.52%, which is the same as the interest rate on the Subordinated Debentures. Subject to certain exceptions, the Corporation has the right to defer payment of interest on the Subordinated Debentures at any time or from time to time for a period not exceeding 20 consecutive quarterly periods provided that no extension period may extend beyond the stated maturity date. If interest is deferred on the Subordinated Debentures, distributions on the Series A Capital Securities will also be deferred and the Corporation will not be permitted, subject to certain exceptions, to pay or declare any cash distributions with respect to the Corporation's capital stock or debt securities that rank the same as or are junior to the Subordinated Debentures, until all past due distributions are paid. The Subordinated Debentures are unsecured and subordinated to substantially all of the Corporation's existing indebtedness. Series A Capital Securities are subject to mandatory redemption in whole or in part upon the repayment of the Subordinated Debentures. The Subordinated Debentures are redeemable prior to maturity at the option of the Corporation, subject to regulatory approval, on or after January 15, 2007 in whole or in part or within 90 days following certain defined tax or regulatory capital treatment changes, at a price equal to the principal amount plus accrued and unpaid interest. 11. STOCKHOLDERS' EQUITY--PREFERRED STOCK. The Corporation is authorized to issue 10,000,000 shares of preferred stock without par value. The Board of Directors of the Corporation is authorized to fix the particular preferences, rights, qualifications and restrictions for each series of preferred stock issued. Summary of preferred stock outstanding is presented below.
- ------------------------------------------------------------------------------ December 31 ------------- (In Millions) 1996 1995 - ------------------------------------------------------------------------------ Auction Rate Preferred Stock Series C 600 shares @ $100,000 per share $ 60.0 $ 60.0 Flexible Auction Rate Cumulative Preferred Stock Series D 600 shares @ $100,000 per share 60.0 60.0 6.25% Cumulative Convertible Preferred Stock Series E 50,000 shares @ $1,000 per share -- 50.0 - ------------------------------------------------------------------------------ Total Preferred Stock $120.0 $170.0 - ------------------------------------------------------------------------------
SERIES C--In 1987, 600 shares of Auction Rate Preferred Stock (APS) Series C were issued, with a $100,000 per share stated value. Dividends on the shares of APS are cumulative. Rates are determined every 49 days by Dutch auction unless the Corporation fails to pay a dividend or redeem any shares for which it has given notice of redemption, in which case the dividend rate will be set at 175% of the 60-day "AA" Composite Commercial Paper Rate. The dividend rate in any auction will not exceed a percentage determined by the prevailing credit rating of the APS. The current maximum dividend rate is 120% of the 60-day "AA" Composite Commercial Paper Rate. No dividends other than dividends payable in junior stock, such as Common Stock, may be paid on Common Stock until full cumulative dividends on the APS have been paid. The average rate for this issue as declared during 1996 was 4.04%. The shares of APS are redeemable at the option of the Corporation, in whole or in part, on any Dividend Payment Date at $100,000 per share, plus accrued and unpaid dividends. SERIES D--In 1990, 600 shares of Flexible Auction Rate Cumulative Preferred Stock Series D (FAPS) were issued with a $100,000 per share stated value. Each dividend period shall contain 49 days (the "Short-Term Dividend Period") or a number of days greater than 49 days (as selected by the Term Selection Agent) which is divisible by seven (the "Long-Term Dividend Period"). Rates for each dividend period are determined by Dutch auction unless the Corporation fails to pay the full amount of any dividend or redemption. The dividend rate in any auction will not exceed a percentage (currently 125%), determined by the prevailing credit rating of the FAPS, of the 60-day "AA" 47 Northern Trust Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Composite Commercial Paper Rate or the Reference Rate, which rate is the Composite Commercial Paper Rate or the Treasury Rate, as appropriate for the length of each Short-Term or Long-Term Dividend Period, respectively. If the Corporation fails to pay the full amount of any dividend or redemption, each dividend period thereafter (until auctions are resumed) will be a Short-Term Dividend Period and the dividend rate will be 250% of the 60-day "AA" Composite Commercial Paper Rate; additional dividends will accrue for the balance of any Long-Term Dividend Period in which such a failure to pay occurs. No dividends other than dividends payable in junior stock, such as Common Stock, may be paid on Common Stock until full cumulative dividends on the FAPS have been paid. The average rate for this issue as declared during 1996 was 3.97%. The shares of FAPS are redeemable at the option of the Corporation, in whole or in part, at $100,000 per share plus accrued and unpaid dividends. SERIES E--On January 5, 1996, the Corporation called for redemption its outstanding 6.25% Cumulative Convertible Preferred Stock Series E. The Series E was sold to the public in the form of 1,000,000 Depositary Shares, each representing one-twentieth of a share of the Series E Preferred Stock (equal to 50,000 preferred shares). In January 1996, 994,737 of the total 1,000,000 Depositary Shares were converted at the option of the holders at a conversion price of $41.50 into 1,198,372 (2,396,744 shares on a post-split basis) shares of the Corporation's common stock. The conversion resulted in fractions of shares for which the Corporation paid cash. The remaining 5,263 Depositary Shares were redeemed on January 26, 1996, for cash at a redemption price of $52.8038 per Depositary Share. PREFERRED STOCK PURCHASE RIGHTS. In 1989, the Board of Directors of the Corporation declared a dividend distribution of one Preferred Stock Purchase Right on each outstanding share of the Corporation's common stock to the stockholders of record on October 31, 1989. The Rights are subject to anti- dilution provisions, and each Right is now exercisable for one-sixth of one- hundredth of a share of Series A Junior Participating Preferred Stock at an exercise price of $41.67 for each such fractional share. The Rights are evidenced by the common stock certificates and are not exercisable or transferable apart from the common stock until twenty days after a person or group acquires 15 percent or more of the Corporation's voting power or announces a tender or exchange offer which could result in ownership of 25 percent or more of the voting power. Shares of the Participating Preferred Stock purchasable upon exercise of the Rights will not be redeemable. In the event that a person or group acquires 25 percent or more of the Corporation voting power or if the Corporation merges or engages in certain self-dealing transactions with a 15 percent or more stockholder, each Right will entitle the holder, other than such person or group in certain circumstances, to purchase that number of shares of surviving company common stock which at the time of the transaction would have a market value of twice the exercise price of the Right. The Rights do not have voting rights and are redeemable at the option of the Corporation at a price of one cent per Right at any time prior to the close of business on the 20th day following publication of the acquisition of 15 percent or more of the voting power by a person or group. Unless earlier redeemed, the Rights will expire on October 31, 1999. COMMON STOCK. In November, 1996, the Corporation declared a two-for-one split of its common stock, to be effected by means of a 100% stock distribution. One share for each share held by shareholders of record on December 2, 1996 was distributed on December 9, 1996. Also in November, 1996, the Corporation announced that it increased its common stock buyback authorization by approximately 4.2 million shares, thus allowing the purchase after December 31, 1996 of up to an aggregate of 4.6 million shares of the Corporation's common stock. The shares may be repurchased from time to time in open market purchases, and the shares would be used primarily for management incentive plans and other corporate purposes. An analysis of changes in the number of shares of common stock outstanding follows:
- -------------------------------------------------------- COMMON STOCK OUTSTANDING - -------------------------------------------------------- 1996 1995 1994 - -------------------------------------------------------- Balance at January 1 55,664,412 54,089,259 53,292,967 Distribution of Two-for-One Stock Split 55,664,412 -- -- Conversion of Preferred Stock Series E 2,396,744 -- -- Employee Benefit Plans: Incentive Plan and Awards 377,086 406,084 44,525 Stock Options Exercised 1,242,034 640,229 461,739 Issued for Acquisitions -- 2,014,999 534,113 Treasury Stock Purchases (4,096,956) (1,486,159) (244,085) - -------------------------------------------------------- Balance at December 31 111,247,732 55,664,412 54,089,259 - --------------------------------------------------------
Note: 1996 share activity reflects the December 1996 two-for-one stock split. 48 Northern Trust Corporation 12. INCOME TAXES--The table below reconciles the total provision for income taxes recorded in the consolidated statement of income with the amount computed at the statutory federal tax rate of 35%.
- ---------------------------------------------------- Income Tax Provision --------------------- (In Millions) 1996 1995 1994 - ---------------------------------------------------- Tax at Statutory Rate $135.6 $112.2 $91.5 Tax-Exempt Income (11.6) (13.9) (15.2) State Taxes, net 4.8 2.4 4.2 Other (.2) (.2) (1.2) - ---------------------------------------------------- Provision for Income Taxes $128.6 $100.5 $79.3 - ----------------------------------------------------
The components of the consolidated provision for income taxes for each of the three years ended December 31, are as follows:
- ------------------------------------------------- (In Millions) 1996 1995 1994 - ------------------------------------------------- Current Tax Provision: Federal $ 91.4 $ 75.7 $47.4 State 3.8 2.9 3.6 Foreign 3.9 4.2 5.6 - ------------------------------------------------- Total 99.1 82.8 56.6 - ------------------------------------------------- Deferred Tax Provision: Federal 26.0 16.9 19.8 State 3.5 .8 2.9 - ------------------------------------------------- Total 29.5 17.7 22.7 - ------------------------------------------------- Provision for Income Taxes $128.6 $100.5 $79.3 - -------------------------------------------------
In addition to the amounts shown in the above tables, tax liabilities or (benefits) have been recorded directly to stockholders' equity for the following items:
- ------------------------------------------------------------ (In Millions) 1996 1995 - ------------------------------------------------------------ Current Tax Benefit for Employee Stock Options and Other Employee Benefit Plans $(8.7) $(5.1) Deferred Tax Effect of Unrealized Security Gains (Losses) (.6) 11.3 Deferred Tax Effect of Unfunded Pension Liabilities (.5) 0.5 - ------------------------------------------------------------
Deferred taxes result from temporary differences between the amounts reported in the consolidated financial statements and the tax bases of assets and liabilities. Deferred tax liabilities and assets have been computed based on the statutory federal tax rate of 35%, as follows:
- -------------------------------------------------------------- December 31 ------------- (In Millions) 1996 1995 - -------------------------------------------------------------- Deferred Tax Liabilities: Lease Financing $ 88.3 $ 58.0 Software Development 40.6 39.1 Accumulated Depreciation 6.5 8.0 Acquired Intangible Assets 6.5 7.0 Other Liabilities 16.7 15.6 - -------------------------------------------------------------- Gross Deferred Tax Liabilities 158.6 127.7 - -------------------------------------------------------------- Deferred Tax Assets: Reserve for Credit Losses 51.4 51.0 Leased Facilities 7.6 7.5 Other Assets 10.2 6.8 - -------------------------------------------------------------- Gross Deferred Tax Assets 69.2 65.3 Valuation Reserve -- -- - -------------------------------------------------------------- Deferred Tax Assets, net of Valuation Reserve 69.2 65.3 - -------------------------------------------------------------- Net Deferred Tax Liabilities $ 89.4 $ 62.4 - --------------------------------------------------------------
Northern Trust has state carryforwards which are available to offset future state tax return liabilities. As of December 31, 1996, there were state net operating loss and tax credit carryforwards of $22.6 million and $2.4 million, respectively. The carryforwards are subject to various limitations imposed by tax law. 13. NET INCOME PER COMMON SHARE COMPUTATIONS Per share data and average shares outstanding have been restated for all periods presented to give effect to the two-for-one common stock split effected by means of a 100% stock distribution on December 9, 1996. Primary net income per common share is computed by dividing net income, after deduction of the preferred stock dividends, by the daily average number of common and common equivalent shares outstanding. Common equivalent shares are based on outstanding stock options and common stock awards under the Amended 1992 and the Amended Incentive Stock Plans and other stock-based plans associated with acquisitions. Fully diluted net income per common share in 1995 and 1994 assumed, in addition to the above, the conversion of the Cumulative Convertible Preferred Stock Series E. 14. RESTRICTIONS ON SUBSIDIARY DIVIDENDS AND LOANS OR ADVANCES--Provisions of state and federal banking laws restrict the amount of dividends that can be paid to the Corporation by its banking subsidiaries. Under applicable state and federal laws, no dividends may be paid in an amount greater than the net profits then on hand, subject to other applicable provisions of law. In addition, 49 Northern Trust Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- prior approval of the relevant federal banking regulator is required if dividends declared by any of the Corporation's banking subsidiaries in any calendar year will exceed its net profits (as defined) for that year, combined with its retained net profits for the preceding two years. Based on these regulations, the Corporation's banking subsidiaries, without regulatory approval, could declare dividends during 1997 equal to their 1997 eligible net profits (as defined) plus $208.2 million. The ability of each banking subsidiary to pay dividends to the Corporation may be further restricted as a result of regulatory policies and guidelines relating to dividend payments and capital adequacy. State and federal laws limit the transfer of funds by a banking subsidiary to the Corporation and certain of its affiliates in the form of loans or extensions of credit, investments or purchases of assets. Transfers of this kind to the Corporation or a nonbanking subsidiary by a banking subsidiary are each limited to 10% of the banking subsidiary's capital and surplus with respect to each affiliate and to 20% in the aggregate, and are also subject to certain collateral requirements. These transactions, as well as other transactions between a banking subsidiary and the Corporation or its affiliates, must also be on terms substantially the same as, or at least as favorable as, those prevailing at the time for comparable transactions with non-affiliated companies or, in the absence of comparable transactions, on terms, or under circumstances, including credit standards, that would be offered to, or would apply to, non-affiliated companies. 15. OTHER OPERATING INCOME--Included in the 1994 results is a $28.5 million pretax gain on the sale of an investment in Banque Scandinave en Suisse (BSS), net of approximately $6.0 million in ancillary and other sale-related transition costs associated with the transfer of custody accounts from BSS to the Bank's London Branch. 16. OTHER OPERATING EXPENSES--The components of other operating expenses were as follows:
- ------------------------------------------------------------------- (In Millions) 1996 1995 1994 - ------------------------------------------------------------------- Business Development $ 26.9 $ 23.0 $ 22.8 Purchased Professional Services 74.6 57.3 54.1 Telecommunications 11.4 10.8 10.4 Postage and Supplies 21.9 20.7 19.1 FDIC Premium -- 8.5 16.2 Software Amortization 32.6 28.3 21.4 Goodwill and Other Intangibles Amortization 9.7 7.5 6.9 Pension Settlement Charges .5 4.1 9.6 Other Expense 29.5 21.1 34.8 - ------------------------------------------------------------------- Total Other Operating Expenses $207.1 $181.3 $195.3 - -------------------------------------------------------------------
Software, goodwill and other intangible assets are included in other assets in the consolidated balance sheet. Software totaled $133.8 million at December 31, 1996 and $129.8 million at December 31, 1995. Goodwill totaled $66.5 million at December 31, 1996 and $65.5 million at December 31, 1995. Other intangibles totaled $39.4 million at December 31, 1996 and $41.3 million at December 31, 1995. 17. PENSION AND OTHER EMPLOYEE BENEFITS--PENSION. A noncontributory qualified pension plan covers substantially all employees. The plan provides benefits for normal and early retirement, benefits for vested employees and, under certain circumstances, survivor benefits in the event of death. Benefits are based on the employees' years of service and their five highest consecutive years of compensation. The proportion of average compensation paid as a pension benefit is determined by length of service. Contributions to the plan satisfy or exceed the minimum funding requirements of ERISA. Certain retiree death benefits are funded through the pension plan and the related cost is included as pension expense. Assets held by the plan consist primarily of listed stocks and corporate bonds. Northern Trust also maintains a noncontributory nonqualified pension plan for participants whose retirement benefit payments under the qualified plan are expected to exceed the limits imposed by federal tax law. Northern Trust has a nonqualified trust, referred to as a "Rabbi" trust, to fund benefits in excess of those permitted in certain of its qualified plans. The primary purpose of the trust is to fund nonqualified retirement benefits. This arrangement offers certain officers a degree of assurance for payment of benefits in excess of those permitted in the related qualified plans. The assets remain subject to the claims of creditors and are not the property of the employees. Therefore, they are accounted for as corporate assets and are included in other assets in the consolidated balance sheet. 50 Northern Trust Corporation The following tables set forth the status and the net periodic pension cost of the domestic qualified and nonqualified pension benefit plans for 1996 and 1995. Prior service costs and unrecognized net assets established at January 1, 1986 are being amortized on the straight-line basis over 13.2 years.
- -------------------------------------------------------------------------------- PLAN STATUS - -------------------------------------------------------------------------------- Qualified Nonqualified Plan Plan -------------- -------------- September 30 ------------------------------ ($ In Millions) 1996 1995 1996 1995 - ------------------------------------------------------------------------------- Actuarial Present Value of Benefit Obligation: Vested Benefit Obligation $140.1 $125.7 $ 12.3 $ 9.9 Accumulated Benefit Obligation 155.6 136.4 13.2 10.7 - ------------------------------------------------------------------------------- Projected Benefit Obligation for Service Rendered to Date 206.1 185.1 19.4 19.4 Plan Assets at Fair Value 229.0 200.1 -- -- - ------------------------------------------------------------------------------- Plan Assets In Excess of (Less Than) Projected Benefit Obligation 22.9 15.0 (19.4) (19.4) Unrecognized Net Asset (Effective January 1, 1986) (3.6) (4.9) (.1) (.1) Unrecognized Net Loss 53.6 41.4 8.6 9.6 Unrecognized Prior Service Cost (7.9) 1.0 2.4 3.9 Valuation Adjustment (.3) (.4) -- -- - ------------------------------------------------------------------------------- Prepaid (Accrued) Pension Cost at September 30 64.7 52.1 (8.5) (6.0) Net (Expense) Funding October to December (1.7) (2.1) 1.0 (.7) Additional Minimum Liability at December 31 -- -- (3.8) (3.8) - ------------------------------------------------------------------------------- Prepaid (Accrued) Pension Cost at December 31 $ 63.0 $ 50.0 $(11.3) $(10.5) - ------------------------------------------------------------------------------- Assumptions: Discount Rates 7.50% 7.50% 7.00% 7.00% Rate of Increase in Compensation Level 5.00 5.00 5.00 5.00 Expected Long-Term Rate of Return on Assets 9.00 9.00 N/A N/A - -------------------------------------------------------------------------------
- ----------------------------------------------------------- NET PERIODIC PENSION COST - ----------------------------------------------------------- Qualified Nonqualified Plan Plan ------------ ------------- (In Millions) 1996 1995 1996 1995 - ----------------------------------------------------------- Service Cost $10.4 $11.3 $ 1.1 $ 1.1 Interest Cost 14.9 12.3 1.4 1.6 Actual Return on Plan Assets (27.9) (26.6) -- -- Net Amortization 10.0 11.3 1.0 1.1 - ----------------------------------------------------------- Net Periodic Pension Cost $ 7.4 $ 8.3 $ 3.5 $ 3.8 - -----------------------------------------------------------
Pension expense for 1994 was $7.7 million and $3.1 million for the qualified and nonqualified plans, respectively. In 1996, the service benefit formula and survivor annuity provisions were amended and the mortality assumptions were changed for the qualified and nonqualified plans. The changes reduced total 1996 pension expense by $1.1 million. Total assets in the "Rabbi" Trust primarily related to the nonqualified pension plan at December 31, 1996 and 1995 amounted to $10.3 million, and $8.7 million, respectively. A pension plan is also maintained for the London Branch employees. At December 31, 1996, the fair value of assets and the projected benefit obligation totaled approximately $7.8 million and $9.1 million, respectively. At December 31, 1995, the fair value of assets and the projected benefit obligation were $7.1 million and $8.1 million, respectively. Pension expense for 1996 and 1995 was $1.1 million and $.6 million, respectively. THRIFT INCENTIVE PLAN. The Corporation and its subsidiaries have a defined contribution Thrift Incentive Plan covering substantially all employees. The corporate contribution is contingent upon the level of employee contribution and meeting a predefined earnings target for the year. The maximum corporate contribution was equal to 4% of an employee's salary in 1996 and 5% in each of the years 1995 and 1994. The estimated contribution to this plan is charged to pension and other employee benefits and totaled $8.0 million in 1996, $11.3 million in 1995 and $10.6 million in 1994. 51 Northern Trust Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- EMPLOYEE STOCK OWNERSHIP PLAN (ESOP). A leveraged ESOP in which substantially all employees of Northern Trust are eligible to participate was established in 1989. Under the original terms of the ESOP, the shares were to be allocated over ten years. In 1996, the terms of the ESOP were amended. The original maturity of the ESOP-related debt was effectively extended by an additional three years through financing provided by the Corporation and the remaining ESOP shares are being allocated over the six year period ending December 31, 2001. The Corporation will make an additional contribution of $5.4 million in cash or shares of common stock in each of the years 2002 and 2003. Dividends paid on unallocated shares held in the ESOP Trust are used for debt service on the ESOP notes. Compensation expense is accounted for based primarily on the amount of cash paid by Northern Trust to the ESOP for principal payments on the ESOP notes. Of the original 9 million shares in the ESOP Trust, 6,750,300 shares have been allocated as of December 31, 1996. The ESOP shares not yet allocated to individual accounts are treated as deferred compensation and accounted for as a reduction of stockholders' equity. The following table presents information related to the ESOP.
- ---------------------------------------------------------------------------- (In Millions) 1996 1995 - ---------------------------------------------------------------------------- Total ESOP Compensation Expense $2.3 $5.8 Interest Incurred on ESOP-Related Debt 2.0 2.8 Amount Contributed to ESOP-Related Debt 3.6 8.2 Dividends and Interest on Unallocated ESOP Shares Used for Debt Service 1.9 2.0 - ----------------------------------------------------------------------------
OTHER POSTRETIREMENT BENEFITS. Northern Trust maintains an unfunded postretirement health care plan. Employees retiring under the provisions of The Northern Trust Pension Plan may be eligible for postretirement health care coverage. These benefits are provided either through an indemnity plan, subject to deductibles, co-payment provisions and other limitations or through health maintenance organizations. The provisions may be changed at the discretion of Northern Trust, which also reserves the right to terminate these benefits at any time. The following tables set forth the plan status at December 31 and the net periodic postretirement benefit cost of the domestic postretirement health care plan for 1996 and 1995. The transition obligation at January 1, 1993 is being amortized to expense over a twenty year period.
- -------------------------------------------------------------------------------- PLAN STATUS - -------------------------------------------------------------------------------- (In Millions) 1996 1995 - ----------------------------------------------------------------------- Accumulated Postretirement Benefit Obligation (APBO) Measured at September 30: Retirees and Dependents $ 15.9 $ 16.9 Actives Eligible for Benefits 5.3 5.6 Actives Not Yet Eligible 12.1 18.1 - ----------------------------------------------------------------------- Total APBO 33.3 40.6 Unamortized Transition Obligation (11.3) (23.8) Unrecognized Net Loss (8.2) (8.5) Unrecognized Prior Service Costs -- 2.6 - ----------------------------------------------------------------------- Net Postretirement Benefit Liability $ 13.8 $ 10.9 - -----------------------------------------------------------------------
- ----------------------------------------------------------------------- NET PERIODIC POSTRETIREMENT BENEFIT COST - ----------------------------------------------------------------------- (In Millions) 1996 1995 - ----------------------------------------------------------------------- Service Cost $ 1.3 $ 1.7 Interest Cost 2.6 2.9 Net Amortization 1.2 1.6 - ----------------------------------------------------------------------- Net Periodic Postretirement Benefit Cost $ 5.1 $ 6.2 - -----------------------------------------------------------------------
Postretirement health care expense for 1994 was $5.1 million. In 1996, the cost sharing provisions of the plan were amended and resulted in a reduction in 1996 expense of $1.8 million. For measurement purposes, a 10.8% annual increase in the cost of covered health care benefits was assumed for 1997. This rate is assumed to decrease gradually to 5.6% in 2021 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. For example, increasing the assumed health care trend rate by one percentage point in each year would increase the accumulated postretirement benefit obligation for the postretirement health care plan as of December 31, 1996 by approximately $1.8 million, and the aggregate of the service and interest cost components of the 1996 net periodic postretirement benefit cost by $.4 million. The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 7.50% at December 31, 1996 and 1995. 18. CONTINGENT LIABILITIES--Because of the nature of its activities, Northern Trust is subject to pending and threatened legal actions that arise in the normal course of business. In the judgment of management, after consultation with legal counsel, none of the litigation to which the Corporation or any of its subsidiaries is a party will have a material effect, either individually or in the aggregate, on the consolidated financial position or results of operations. 52 Northern Trust Corporation 19. FAIR VALUE OF FINANCIAL INSTRUMENTS--SFAS No. 107, ""Disclosures About Fair Value of Financial Instruments,'' requires disclosure of the estimated fair value of certain financial instruments. Considerable judgment is required to interpret market data when computing estimates of fair value. Accordingly, the estimates presented are not necessarily indicative of the amounts Northern Trust could have realized in a market exchange. The information provided below should not be interpreted as an estimate of the fair value of Northern Trust since the disclosures, in accordance with SFAS No. 107, exclude the values of nonfinancial assets and liabilities, as well as a wide range of franchise, relationship, and intangible values, which are integral to a full assessment of the consolidated financial position. The use of different assumptions and/or estimation methods may have a material effect on the computation of estimated fair values. Therefore, comparisons between Northern Trust's disclosures and those of other financial institutions may not be meaningful. The following methods and assumptions were used in estimating the fair values of the financial instruments: SECURITIES. Fair values of securities were based on quoted market values, when available. If quoted market values were not available, fair values were based on quoted market values for comparable instruments. LOANS (NOT INCLUDING LEASE FINANCING RECEIVABLES). The fair values of one-to- four family residential mortgages were based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. The fair values of the remainder of the loan portfolio were estimated using a discounted cash flow method in which the discount rate used was the rate at which Northern Trust would have originated the loan had it been originated as of the financial statement date, giving effect to current economic conditions on loan collectibility. SAVINGS CERTIFICATES, OTHER TIME AND FOREIGN OFFICES TIME DEPOSITS, AND SENIOR NOTES. The fair values of these instruments were estimated using a discounted cash flow method that incorporated market interest rates. NOTES PAYABLE. Fair values were based on quoted market prices, when available. If quoted market prices were not available, fair values were based on quoted market prices for comparable instruments. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS. The fair values of commitments and letters of credit represent the amount of unamortized fees on these instruments. The fair values of all other off-balance sheet financial instruments were estimated using market prices, pricing models, or quoted market prices of financial instruments with similar characteristics. FINANCIAL INSTRUMENTS VALUED AT CARRYING VALUE. Due to their short maturity, the respective carrying values of certain on-balance sheet financial instruments approximated their fair values. These financial instruments include cash and due from banks; money market assets; customers' acceptance liability; trust security settlement receivables; federal funds purchased; securities sold under agreements to repurchase; commercial paper; other borrowings; and liability on acceptances. The fair values required to be disclosed for demand, savings, and money market deposits pursuant to SFAS No. 107 must equal the amounts disclosed in the consolidated balance sheet. FAIR VALUES OF ON-BALANCE SHEET FINANCIAL INSTRUMENTS. The following table summarizes the fair values of on-balance sheet financial instruments.
- ------------------------------------------------------------------------------ December 31 ----------------------------------- 1996 1995 ----------------- ----------------- Book Fair Book Fair (In Millions) Value Value Value Value - ------------------------------------------------------------------------------ ASSETS Cash and Due From Banks $1,292.5 $1,292.5 $1,308.9 $1,308.9 Money Market Assets 3,196.9 3,196.9 1,784.2 1,784.2 Securities: Available for Sale 4,311.7 4,311.7 5,136.3 5,136.3 Held to Maturity 498.4 518.9 535.1 562.6 Trading Account 4.8 4.8 88.9 88.9 Loans (excluding leases), net of credit loss reserve: Held to Maturity 10,517.6 10,507.6 9,549.0 9,595.8 Held for Sale 3.7 3.7 7.6 7.6 Acceptance Liability 44.7 44.7 35.8 35.8 Trust Security Settlement Receivables 362.3 362.3 327.1 327.1 LIABILITIES Deposits: Demand, Savings and Money Market 7,767.5 7,767.5 6,698.2 6,698.2 Savings Certificates, Other Time and Foreign Offices Time 6,028.7 6,047.9 5,790.0 5,821.8 Federal Funds Purchased 653.0 653.0 2,300.1 2,300.1 Repurchase Agreements 966.1 966.1 1,858.7 1,858.7 Commercial Paper 149.0 149.0 146.7 146.7 Other Borrowings 3,142.1 3,142.1 875.9 875.9 Senior Notes 305.0 304.7 17.0 17.1 Notes Payable 427.8 432.2 334.6 351.9 Liability on Acceptances 44.7 44.7 35.8 35.8 - ------------------------------------------------------------------------------
53 Northern Trust Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- FAIR VALUES OF OFF-BALANCE SHEET FINANCIAL INSTRUMENTS. The following tables summarize the fair values of off-balance sheet financial instruments.
- --------------------------------------------------------------------- December 31 ----------------------- 1996 1995 ----------- ----------- Book Fair Book Fair (In Millions) Value Value Value Value - --------------------------------------------------------------------- Commitments and Letters of Credit: Loan Commitments $ 2.1 $ 2.1 $ 1.9 $ 1.9 Letters of Credit .7 .7 .8 .8 Asset/Liability Management: Foreign Exchange Contracts Assets -- -- .4 .4 Liabilities 2.9 2.9 .1 .1 Interest Rate Swap Contracts Assets 14.8 19.2 4.9 7.5 Liabilities 5.8 23.5 22.2 45.2 Interest Rate Protection Contracts-Assets .1 .1 .2 .3 - ---------------------------------------------------------------------
- ---------------------------------------------------- Fair Value ------------- (In Millions) 1996 1995 - ---------------------------------------------------- Client-Related and Trading:* Foreign Exchange Contracts Assets $142.0 $118.0 Liabilities 142.0 107.5 Interest Rate Swap Contracts Assets 7.6 4.2 Liabilities 7.5 4.2 Interest Rate Protection Contracts Assets .1 .1 Liabilities .1 .1 - ----------------------------------------------------
*Assets and liabilities associated with foreign exchange contracts averaged $127.1 million and $124.0 million, respectively, during 1996. Assets and liabilities associated with other client-related and trading account instruments averaged $10.8 million and $10.7 million, respectively, during 1996. 20. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS-- A. COMMITMENTS AND LETTERS OF CREDIT. Northern Trust, in the normal course of business, enters into various types of commitments and issues letters of credit to meet the liquidity and credit enhancement needs of its clients. Credit risk is the principal risk associated with these instruments. The contractual amounts of these instruments represent the credit risk should the instrument be fully drawn upon and the client default. To control the credit risk associated with entering into commitments and issuing letters of credit, Northern Trust subjects such activities to the same credit quality and monitoring controls as its lending activities. Commitments and letters of credit consist of the following: LEGALLY BINDING COMMITMENTS TO EXTEND CREDIT generally have fixed expiration dates or other termination clauses. Since a significant portion of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future loans or liquidity requirements. PARTICIPATIONS IN BANKERS ACCEPTANCES obligate Northern Trust, in the event of default by the counterparty, to reimburse the holder of the acceptance an amount equal to its participation in the acceptance. COMMERCIAL LETTERS OF CREDIT are instruments issued by Northern Trust on behalf of its clients that authorize a third party (the beneficiary) to draw drafts up to a stipulated amount under the specified terms and conditions of the agreement. Commercial letters of credit are issued primarily to facilitate international trade. STANDBY LETTERS OF CREDIT obligate Northern Trust to meet certain financial obligations of its clients, if, under the contractual terms of the agreement, the clients are unable to do so. These instruments are primarily issued to support public and private financial commitments, including commercial paper, bond financing, initial margin requirements on futures exchanges and similar transactions. The following table shows the contractual amounts of commitments and letters of credit.
- ----------------------------------------------------------- COMMITMENTS AND LETTERS OF CREDIT - ----------------------------------------------------------- December 31 ------------------ (In Millions) 1996 1995 - ----------------------------------------------------------- Legally Binding Commitments to Extend Credit $10,299.3 $8,906.0 Participations in Bankers Acceptances 20.6 1.5 Commercial Letters of Credit 117.8 167.7 Standby Letters of Credit: Corporate $ 378.4 $ 448.4 Industrial Revenue 724.5 379.9 Other 214.3 194.5 - ----------------------------------------------------------- Total Standby Letters of Credit* $ 1,317.2 $1,022.8 - -----------------------------------------------------------
*These amounts include $165.3 million and $96.2 million of standby letters of credit secured by cash deposits or participated to others as of December 31, 1996 and 1995, respectively. The weighted average maturity of standby letters of credit was 28 months at December 31, 1996 and 19 months at December 31, 1995. B. RISK MANAGEMENT INSTRUMENTS. These instruments include foreign exchange contracts, foreign currency futures contracts, and various interest risk management instruments. 54 Northern Trust Corporation Northern Trust is a party to various risk management instruments that are used in the normal course of business to meet the risk management needs of its clients; as part of its trading activity for its own account; and as part of its asset/liability management activities. The major risk associated with these instruments is that interest or foreign exchange rates could change in an unanticipated manner, resulting in higher interest costs or a loss in the underlying value of the instrument. These risks are mitigated by establishing limits for risk management positions, monitoring the level of actual positions taken against such established limits, monitoring the level of any interest rate sensitivity gaps created by such positions, and by using hedging techniques. When establishing position limits, market liquidity and volatility, as well as experience in each market, are all taken into account. The estimated credit risk associated with these instruments relates to the failure of the counterparty to pay based on the contractual terms of the agreement, and is generally limited to the gross unrealized market value gains on these instruments. The amount of credit risk will increase or decrease during the lives of the instruments as interest and foreign exchange rates fluctuate. This risk is controlled by limiting such activity to an approved list of counterparties and by subjecting such activity to the same credit and quality controls as are followed in lending and investment activities. Risk management instruments include: FOREIGN EXCHANGE CONTRACTS are agreements to exchange specific amounts of currencies at a future date, at a specified rate of exchange. Foreign exchange contracts are entered into primarily to meet the foreign exchange risk management needs of clients. Foreign exchange contracts are also used for trading purposes and asset/ liability management. FOREIGN CURRENCY AND INTEREST RATE FUTURES CONTRACTS are agreements for delayed delivery of foreign currency, securities or money market instruments in which the buyer agrees to take delivery at a specified future date of a specified currency, security, or instrument, at a specified price or yield. All of Northern Trust's futures contracts are traded on organized exchanges that require the daily settlement of changes in the value of the contracts. Futures contracts are utilized in trading activities and asset/liability management to protect Northern Trust's exposure to unfavorable fluctuations in foreign exchange rates or interest rates. INTEREST RATE PROTECTION CONTRACTS are agreements which enable clients to transfer, modify or reduce their interest rate risk. As a seller of interest rate protection, Northern Trust receives a fee at the outset of the agreement and then assumes the risk of an unfavorable change in interest rates. Northern Trust also purchases interest rate protection contracts for asset/liability management. INTEREST RATE SWAP CONTRACTS involve the exchange of fixed and floating rate interest payment obligations without the exchange of the underlying principal amounts; these types of transactions constitute the majority of the interest rate swap portfolio. Northern Trust has also entered into a limited number of more complex interest rate swap transactions that were executed concurrently with the purchase of $298 million of structured agency notes. The structured notes are included in the available for sale portion of the security portfolio. The interest rate swap contracts are used to hedge the nonstandard features of the structured notes thereby converting them to U.S. dollar denominated floating rate notes indexed to LIBOR. FORWARD SALE CONTRACTS represent commitments to sell a specified amount of securities at an agreed upon date and price. Northern Trust utilizes forward sale contracts principally in connection with its sale of mortgage loans. EXCHANGE-TRADED OPTION CONTRACTS grant the buyer the right, but not the obligation, to purchase or sell at a specified price, a stated number of units of an underlying financial instrument, at a future date. The following table shows the contractual/notional amounts of risk management instruments. The notional amounts of risk management instruments do not represent credit risk, and are not recorded in the consolidated balance sheet. They are used merely to express the volume of this activity.
- -------------------------------------------------------------------------------- RISK MANAGEMENT INSTRUMENTS - -------------------------------------------------------------------------------- Contractual/Notional Amounts December 31 --------------------- (In Millions) 1996 1995 - ---------------------------------------------------------------------- Asset/Liability Management: Foreign Exchange Contracts $ 46.0 $ 30.4 Foreign Currency Futures Contracts 3.3 1.8 Interest Rate Futures Contracts Sold 101.7 .7 Interest Rate Protection Contracts Purchased 25.0 25.0 Interest Rate Swap Contracts 2,571.4 2,600.7 Forward Sale Contracts 11.3 11.1 Exchange-Traded Option Contracts Purchased 2.8 2.0 Client-Related and Trading: Foreign Exchange Contracts 13,420.7 11,838.8 Interest Rate Futures Contracts Purchased -- 106.0 Sold 15.0 289.0 Interest Rate Protection Contracts Purchased 34.0 77.0 Sold 43.2 78.9 Interest Rate Swap Contracts 328.9 181.5 - --------------------------------------------------------------------------------
55 Northern Trust Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- RISK MANAGEMENT INSTRUMENTS USED FOR ASSET/LIABILITY MANAGEMENT. Northern Trust utilizes various types of risk management instruments, primarily interest rate swaps, as tools for managing interest rate and option risk related to its own balance sheet. The following table summarizes the expected maturities and weighted average interest rates to be paid and received on the asset/liability management swap portfolio at December 31, 1996. A key assumption in the preparation of the table is that floating rates remain constant at December 31, 1996 levels.
- ------------------------------------------------------------------------------- REMAINING MATURITY OF ASSET/LIABILITY MANAGEMENT INTEREST RATE SWAPS - ------------------------------------------------------------------------------- ($ In Millions) 1997 1998 1999 2000 2001 2002-2006 Total - ------------------------------------------------------------------------------- PAY FIXED Notional Amount $475.0 241.6 173.5 140.0 223.5 534.6 $1,788.2 Average Pay Rate 5.92% 5.72 6.58 6.27 6.94 6.84 6.39% Average Receive Rate 5.53 5.66 5.67 5.94 5.38 5.27 5.50 - ------------------------------------------------------------------------------- RECEIVE FIXED Notional Amount $200.0 100.0 -- -- -- 100.0 $ 400.0 Average Pay Rate 5.23% 5.56 -- -- -- 5.50 5.38% Average Receive Rate 5.08 5.98 -- -- -- 6.31 5.61 - ------------------------------------------------------------------------------- PAY AND RECEIVE VARIABLE (BASIS SWAPS) Notional Amount $358.7 24.5 -- -- -- -- $ 383.2 Average Pay Rate 5.16% 4.73 -- -- -- -- 5.13% Average Receive Rate 5.05 5.51 -- -- -- -- 5.08 - -------------------------------------------------------------------------------
Some of the principal uses of risk management instruments, together with the notional amounts outstanding, are described as follows: CONVERT YIELDS ON SECURITIES TO AN EFFECTIVE LIBOR RATE. At December 31, 1996, interest rate swaps with a notional amount of $915 million and purchased interest rate protection contracts with a notional amount of $25 million were used to convert fixed and floating rate interest payments on securities (classified as available for sale) to floating rate payments indexed to London Interbank Offered Rates (LIBOR). Swaps with a notional amount of $532 million were combined with fixed rate securities, $85 million were combined with floating rate securities indexed to Treasury Bill rates, and $298 million were combined with structured notes, whose non-standard features were hedged. The swaps were executed simultaneously with the purchase of the notes. The securities were converted to an effective LIBOR rate to match LIBOR-based funding costs. REDUCE INTEREST RATE RISK FROM FIXED RATE LOANS FUNDED WITH VARIABLE RATE LIABILITIES. Northern Trust paid a fixed rate and received a floating rate on interest rate swaps with a notional amount of $1.2 billion at December 31, 1996 to hedge the interest rate risk from fixed rate loans. For accounting purposes these swaps were designated to either convert the fixed rate on the loan to an effective floating rate or to convert floating rate funding to a fixed rate. SWAPS AND FUTURES CONTRACTS COMBINED WITH LIABILITIES TO OBTAIN FAVORABLE FUNDING COSTS. Interest rate swaps with a notional amount of $500 million at December 31, 1996 were used in conjunction with the issuance of senior notes and subordinated notes to obtain desired funding characteristics. Of these swaps, $225 million converted fixed rate notes to floating rate funding indexed to LIBOR, $75 million converted structured notes to a floating rate indexed to LIBOR, and $200 million converted a fixed rate note to a floating rate over part of its life. The use of swaps in combination with notes permitted Northern Trust to issue notes with rate and maturity features that were most desired by investors while converting the rate characteristics to meet its needs. Interest rate futures contracts with a notional amount of $100 million were used to hedge the anticipated issuance of federal funds purchased. HEDGING FOREIGN CURRENCY RISK. Forward foreign exchange contracts and foreign currency futures contracts were used to reduce exposure to fluctuations in the dollar value of capital investments in foreign subsidiaries and from foreign currency obligations. The notional amounts of these contracts at year-end 1996 were $46.0 million of forward foreign exchange contracts and $3.3 million of short sales of foreign currency futures contracts. HEDGING MORTGAGES HELD FOR SALE. Northern Trust hedges the market risk of its portfolio of fixed rate commitments and mortgages held for sale with a combination of derivative financial instruments. At December 31, 1996 the portfolio was hedged with $11.3 million of forward sales of mortgage-backed securities, $1.7 million of short sales of Treasury Note futures, and $2.8 million of purchases of put options on Treasury Note futures. 56 Northern Trust Corporation No deferred gains or losses related to interest risk management instruments used for asset/liability management were included in the consolidated balance sheet at year-end 1996 or 1995. CLIENT AND TRADING-RELATED INTEREST RISK MANAGEMENT INSTRUMENTS. Net revenue associated with client and trading-related interest risk management activities totaled $.3 million, $2.8 million, and $2.4 million during 1996, 1995, and 1994, respectively. The majority of these revenues are related to interest rate swaps, futures contracts, and interest rate protection agreements, and are reported as trading income in the consolidated statement of income. However, the amounts reported for 1995 and 1994 also include interest income earned on U.S. Government securities that were classified as trading account securities and hedged with futures contracts. C. OTHER OFF-BALANCE SHEET FINANCIAL INSTRUMENTS. As part of securities custody activities and at the direction of trust clients, Northern Trust lends securities owned by clients to borrowers who are reviewed by the Credit Policy Credit Approval Committee. In connection with these activities, Northern Trust has issued certain indemnifications against loss resulting from the bankruptcy of the borrower of securities. The borrowing party is required to fully collateralize securities received with cash, U.S. Government and government agency securities, or irrevocable standby letters of credit. As securities are loaned, collateral is maintained at a minimum of 100 percent of the fair value of the securities plus accrued interest, with revaluation of the collateral on a daily basis. The amount of securities loaned as of December 31, 1996 and 1995 subject to indemnification was $15.7 billion and $8.2 billion, respectively. Because of the requirement to fully collateralize securities borrowed, management believes that the exposure to credit loss from this activity is remote. The Bank is a participating member of various cash and securities clearing organizations. It participates in these organizations on behalf of its clients and on behalf of itself as a result of its own investment and trading activities. A wide variety of securities transactions are settled through these organizations, including those involving obligations of states and political subdivisions, asset-backed securities, commercial paper, Eurodollars and securities issued by the Government National Mortgage Association. As a result of its participation in cash and securities clearing organizations, the Bank could be responsible for a pro rata share of certain credit-related losses arising out of the clearing activities. The method in which such losses would be shared by the clearing members is stipulated in each clearing organization's membership agreement. Credit exposure related to these agreements varies from day to day, primarily as a result of fluctuations in the volume of transactions cleared through the organizations. The estimated credit exposure at December 31, 1996 and 1995 was $70 million and $71 million, respectively, based on the clearing volume for those days. Controls related to these clearing transactions are closely monitored to protect the assets of Northern Trust. 21. CONCENTRATIONS OF CREDIT RISK--The information in the section titled Loans and Other Extensions of Credit found on pages 28 through 29 is incorporated by reference. 22. PLEDGED AND RESTRICTED ASSETS--Certain of Northern Trust's subsidiaries, as required or permitted by law, pledge assets to secure public and trust deposits, repurchase agreements and for other purposes. On December 31, 1996, securities and loans totaling $5.5 billion ($2.8 billion of U.S. Government and agency securities, $393 million of obligations of states and political subdivisions and $2.3 billion of loans and other securities), were pledged. Collateral required for these purposes totaled $4.6 billion. Deposits maintained at the Federal Reserve Bank to meet reserve requirements averaged $247.8 million in 1996 and $278.1 million in 1995. 23. STOCK-BASED COMPENSATION PLANS--During 1995, the Financial Accounting Standards Board issued SFAS No. 123, ""Accounting for Stock-Based Compensation,'' which establishes financial accounting and reporting standards for stock-based compensation plans. SFAS No. 123 allows two alternative accounting methods: (1) a fair-value-based method, or (2) an intrinsic-value-based method which is prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related interpretations. Both the accounting and disclosure requirements of SFAS No. 123 were effective in 1996. Northern Trust has elected to continue accounting for its stock-based incentive plans and awards under its current method (APB 25), and has adopted the disclosure requirements of SFAS No. 123. A description of Northern Trust's stock-based compensation accounted for under APB 25 is presented below. AMENDED INCENTIVE STOCK PLAN--AMENDED 1992 INCENTIVE STOCK PLAN (PLANS). The Amended Incentive Stock Plan was superseded by the Amended 1992 Incentive Stock Plan and terminated on December 31, 1994. Outstanding grants and awards under the Amended Incentive Stock Plan will remain in effect in accordance with their terms, but no further grants or awards will be made. The Amended 1992 Incentive Stock Plan (Plan) was adopted in 1992 and amended in 1995. The Plan is administered by the Compensation and Benefits Committee (Committee) of the Board of Directors. Key officers of the Corporation or its subsidiaries are eligible to receive awards under the Plan. Awards under the Plan may be granted in 57 Northern Trust Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- any one or a combination of (a) incentive stock options and non-qualified stock options, (b) stock appreciation rights, (c) stock awards, (d) performance shares, and (e) stock equivalents. The total number of shares of the Corporation's common stock authorized for distribution under the Plan is 7,500,000. As of December 31, 1996, shares available for future grants under the Plan totaled 130,358. STOCK OPTIONS. Stock options consist of options to purchase common stock at purchase prices not less than 100% of the fair market value thereof on the date the option is granted. Options have a 10 year life and will vest and become exercisable in 2 years after the date of grant. In addition, the Plan provides that all options will become exercisable upon a change of control as defined in the Plan. All options terminate at such time as determined by the Committee and as provided in the terms and conditions of the respective option grants. A summary of the status of stock options under the Plans at December 31, 1996 and 1995 and changes during the years then ended is presented in the table and narrative below.
- --------------------------------------------------------- Outstanding Options --------------------- Weighted Average Exercise Shares Price - --------------------------------------------------------- Outstanding at December 31, 1994 7,574,804 $14.05 - --------------------------------------------------------- Cancelled during 1995 (85,000) 19.97 Exercised during 1995 (1,280,458) 8.45 Granted during 1995 1,259,600 23.41 - --------------------------------------------------------- Outstanding at December 31, 1995 7,468,946 16.52 - --------------------------------------------------------- Cancelled during 1996 (48,000) 21.77 Exercised during 1996 (1,242,034) 13.18 Granted during 1996 1,315,700 33.16 - --------------------------------------------------------- OUTSTANDING AT DECEMBER 31, 1996 7,494,612 $19.96 - ---------------------------------------------------------
Of the options outstanding at December 31, 1996: (1) 2,147,676 have exercise prices ranging between $6.96 and $15.50, with a weighted average exercise price of $10.65 and a weighted average contractual life of 3.3 years, all of which are exercisable; (2) 4,033,236 have exercise prices ranging between $18.63 and $23.50, with a weighted average exercise price of $20.62 and a weighted average contractual life of 7.4 years, 2,813,636 of which are exercisable with a weighted average exercise price of $19.41 and a weighted average contractual life of 6.8 years; and (3) 1,313,700 have exercise prices ranging between $26.78 and $33.50, with a weighted average exercise price of $33.16 and a weighted average contractual life of 9.7 years, none of which are exercisable. STOCK AWARDS. Under the Plans, stock awards or equivalents can be awarded by the Committee to participants which entitle them to receive a payment in cash or Northern Trust Corporation common stock based on such terms and conditions as the Committee deems appropriate. Total expense applicable to stock awards was $.5 million in 1996 and $.4 million in both 1995 and 1994. In 1996, 12,000 shares of restricted stock were awarded with a weighted average grant-date fair value of $26.78. No shares were awarded in 1995. As of December 31, 1996 restricted stock awards outstanding totaled 117,000 shares. These shares vest, subject to continuing employment, over a period of five to nine years. PERFORMANCE SHARES. Under the performance share provisions of the Plans, participants will be entitled to have each award credited to an account maintained for them if established performance goals are achieved with distribution after vesting. The value of shares earned but not yet distributed under the plan is credited to performance share accounts and is shown in stockholders' equity as common stock issuable-performance plan. Total salary expense for performance shares was $9.7 million in 1996, $5.6 million in 1995 and $5.2 million in 1994. In 1996 and 1995, 331,000 and 306,500 shares respectively, were granted with a weighted average grant-date fair value of $26.88 and $17.00, respectively. As of December 31, 1996, 505,000 shares of stock had been credited to performance share accounts subject to meeting vesting conditions and 1,119,548 shares had been granted, subject to meeting established performance goals and vesting conditions, for three-year performance periods ending in 1996 through 1998. OTHER STOCK-BASED COMPENSATION ARRANGEMENTS. The Corporation, in conjunction with an acquisition, awarded 432,280 restricted shares of the Corporation's common stock with a grant-date fair value of $23.75 to certain subsidiary employee participants contingent upon continued employment, non-competition agreements and, in some cases, meeting predetermined performance goals. Total salary expense related to this arrangement totaled $1.8 million in 1996 and $.3 million in 1995. PRO FORMA INFORMATION. Pro forma information regarding net income and earnings per share is required by SFAS No. 123, and has been determined as if the Corporation had accounted for its stock-based compensation under SFAS No. 123. For purposes of estimating the fair value of the Corporation's employee stock options at the grant-date, a Black-Scholes option pricing model was used with the following weighted average assumptions for 1996 and 1995, respectively: risk-free interest rates of 6.64% and 6.54%; dividend yields of 1.92% and 2.21%; volatility factors of the expected market price of the Corporation's common 58 Northern Trust Corporation stock of 22.4% and 19.2%; and a weighted average expected life of the option of 5.8 years. The weighted average fair value of options granted in 1996 and 1995 was $9.11 and $6.58, respectively. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' two year vesting period. Under SFAS No. 123, options and awards granted prior to 1995 are not required to be included in the pro forma information. Because the SFAS No. 123 method of accounting has not been applied to options and other stock-based compensation granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. The Corporation's pro forma information follows:
- ------------------------------------------------------------- (In Millions Except Per Share Information) 1996 1995 - ------------------------------------------------------------- Net Income as Reported $258.8 $220.0 Pro Forma Adjustments Increase (Decrease) Due To: Stock Options (4.8) (1.0) Performance Shares and Other Arrangements 1.4 .4 - ------------------------------------------------------------- Pro Forma Net Income $255.4 $219.4 - ------------------------------------------------------------- Earnings Per Share as Reported: Primary $ 2.21 $ 1.88 Fully Diluted 2.20 1.85 Pro Forma Earnings Per Share: Primary $ 2.18 $ 1.87 Fully Diluted 2.17 1.84 - -------------------------------------------------------------
24. CASH-BASED COMPENSATION PLANS--Various incentive plans provide for cash incentives and bonuses to selected employees based upon accomplishment of corporate net income objectives, business unit goals and individual performance. The plans provide for acceleration of benefits in certain circumstances including a change in control. The estimated contributions to these plans are charged to salary expense and totaled $45.3 million in 1996, $35.7 million in 1995 and $28.4 million in 1994. 59 Northern Trust Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 25. INTERNATIONAL OPERATIONS (BASED ON OBLIGOR'S DOMICILE)--Northern Trust's international activities are centered in the commercial banking, capital markets and global custody businesses of the Bank, three overseas branches, one Edge Act subsidiary, the Hong Kong subsidiaries, NTGA, and Northern Trust of Florida. Total assets employed in international operations were $2.8 billion on December 31, 1996, $2.3 billion on December 31, 1995 and $2.8 billion on December 31, 1994. Of these assets, $1.3 billion on December 31, 1996, $1.1 billion on December 31, 1995 and $1.5 billion on December 31, 1994 were employed in Europe. Net income from international operations includes the direct net income contributions of foreign branches, foreign subsidiaries and the Edge Act subsidiary. The Bank and Northern Trust of Florida international profit contributions reflect direct salary and other expenses of the business units, plus expense allocations for interest, occupancy, overhead and the provision for credit losses. The interest expense is allocated to international operations based on specifically matched or pooled funding. Allocations of indirect noninterest expenses related to international activities are not significant but, when made, are based on various methods such as time, space and number of employees.
- -------------------------------------------------------------------------------------------------------------------------- GEOGRAPHIC DISTRIBUTION OF SELECTED ASSETS - -------------------------------------------------------------------------------------------------------------------------- December 31, 1996 December 31, 1995 December 31, 1994 ---------------------------------- ---------------------------------- ---------------------------------- Time Other Time Other Time Other Deposits Money Customers' Deposits Money Customers' Deposits Money Customers' with Market Acceptance with Market Acceptance with Market Acceptance (In Millions) Banks Assets Loans Liability Banks Assets Loans Liability Banks Assets Loans Liability - -------------------------------------------------------------------------------------------------------------------------- Europe $1,047.2 $-- $ 97.1 $-- $ 849.6 $-- $ 70.0 $ -- $1,257.8 $-- $ 93.4 $ .9 North America 692.7 -- 100.7 -- 323.6 -- 123.4 -- 651.7 -- 141.9 -- Latin America -- -- 176.7* .2 236.1 .6 170.7* 1.8 64.1 -- 135.0* .6 Asia-Pacific 319.9 -- 7.5 .3 158.1 -- 40.1 .6 194.4 -- 16.4 -- - -------------------------------------------------------------------------------------------------------------------------- Total $2,059.8 $-- $382.0 $.5 $1,567.4 $ .6 $404.2 $2.4 $2,168.0 $-- $386.7 $1.5 - --------------------------------------------------------------------------------------------------------------------------
*Includes loans guaranteed by the Export-Import Bank of $122.2 million in 1996, $116.5 million in 1995 and $95.2 million in 1994. The majority of the remaining loans are trade-related.
- ----------------------------------------------------------------------------------------- GEOGRAPHIC DISTRIBUTION OF OPERATING PERFORMANCE - ----------------------------------------------------------------------------------------- 1996 1995 1994 ----------------------- ----------------------- ----------------------- Gross Income Gross Income Gross Income Operating Before Net Operating before Net Operating Before Net (In Millions) Income Taxes Income Income Taxes Income Income Taxes Income - ----------------------------------------------------------------------------------------- Europe $ 73.5 $15.9 $ 9.9 $ 67.0 $14.9 $ 9.2 $137.9 $19.1 $11.8 North America 187.1 19.7 12.2 113.8 15.4 9.5 133.9 9.1 5.6 Latin America 35.7 4.6 2.9 39.9 5.1 3.2 68.4 12.0 7.4 Asia-Pacific 97.5 15.7 9.8 105.8 20.3 12.6 42.4 7.7 4.8 - ----------------------------------------------------------------------------------------- Total $393.8 $55.9 $34.8 $326.5 $55.7 $34.5 $382.6 $47.9 $29.6 - -----------------------------------------------------------------------------------------
The table summarizes international performance based on the domicile of the primary obligor without regard to guarantors or the location of collateral. The 1994 pretax gain of $28.5 million ($17.7 million after-tax) on the sale of Banque Scandinave en Suisse was not included in the Geographic Distribution of Operating Performance. 26. ACQUISITIONS--On March 31, 1995, the Corporation completed the acquisition of Beach One Financial Services, Inc., parent company of The Beach Bank of Vero Beach, Florida. The acquisition was effected through a merger in which the Corporation issued 3,245,136 shares (adjusted for two-for-one stock split payable to stockholders of record at December 2, 1996) of its common stock totaling $56.2 million. The Corporation has accounted for the transaction as pooling-of-interests. Prior period consolidated financial statements were not restated due to the immateriality of the transaction. On July 31, 1995, the Corporation completed the acquisition of Tanglewood Bancshares, Inc., parent company of Tanglewood Bank N.A. of Houston, Texas for $32.5 million in cash. The transaction was recorded under the purchase method of accounting. Included in the acquisition cost were $14.4 million of goodwill and $5.8 million of other intangibles, which are being amortized over fifteen and ten years, respectively. On October 31, 1995, the Corporation completed the acquisition of RCB International Inc. (RCB), an international provider of institutional investment 60 Northern Trust Corporation management services. RCB shareholders received at closing $11.0 million in cash, $.6 million in notes and 784,862 shares (adjusted for two-for-one split) of Corporation common stock. The transaction was recorded under the purchase method of accounting. In addition, 432,280 shares (adjusted for two-for-one stock split) of Corporation common stock and $2.6 million in cash were allocated for various deferred compensation plans and other deferred payment arrangements. Shares and cash available under these deferred payment arrangements are payable over one to seven years and are contingent upon continued employment, non-competition agreements and, in some cases, meeting predetermined performance goals. Included in the acquisition cost of RCB were $18.8 million of goodwill and $8.0 million of other intangibles, both of which are being amortized over a fifteen year period. In August 1996, RCB's name was changed to Northern Trust Global Advisors, Inc. On November 15, 1996, the Corporation completed the acquisition of Metroplex Bancshares, Inc., parent company of Bent Tree National Bank (Bent Tree) in Dallas, Texas for $14.6 million in cash. The transaction was recorded under the purchase method of accounting. Included in the acquisition cost were $6.0 million of goodwill and $2.1 million of other intangibles, which are being amortized over fifteen and ten years, respectively. Bent Tree is expected to be merged into Northern Trust Bank of Texas N.A. during the first quarter of 1997. 27. REGULATORY CAPITAL REQUIREMENTS--Northern Trust and its subsidiary banks are subject to various regulatory capital requirements administered by the federal bank regulatory authorities. Under these requirements, banks must maintain specific ratios of total and tier I capital to risk-weighted assets and of tier I capital to average assets in order to be classified as ""well capitalized.'' The regulatory capital requirements impose certain restrictions upon banks that meet minimum capital requirements but are not ""well capitalized'' and obligate the federal bank regulatory authorities to take ""prompt corrective action'' with respect to banks that do not maintain such minimum ratios. Such prompt corrective action could have a direct material effect on a bank's financial statements. As of December 31, 1996, each of Northern's significant subsidiary banks had capital ratios above the level required for classification as a "well capitalized" institution and had not received any regulatory notification of a lower classification. There are no conditions or events since that date, that management believes have adversely affected the capital categorization of any significant subsidiary bank for these purposes. The following table summarizes the risk-
- -------------------------------------------------------------------------------- Minimum to Qualify as Well Actual Capitalized ------------ ------------ ($ In Millions) Amount Ratio Amount Ratio - ---------------------------------------------------------------------------- AS OF DECEMBER 31, 1996: Total Capital to Risk-Weighted Assets Consolidated $1,944 11.9% $1,638 10.0% The Northern Trust Company 1,512 10.8 1,399 10.0 Northern Trust Bank of Florida N.A. 170 11.1 153 10.0 Tier 1 Capital to Risk-Weighted Assets Consolidated 1,341 8.2 983 6.0 The Northern Trust Company 1,091 7.8 839 6.0 Northern Trust Bank of Florida N.A. 154 10.0 92 6.0 Tier 1 Capital (to Fourth Quarter Average As- sets) Consolidated 1,341 6.4 1,045 5.0 The Northern Trust Company 1,091 6.1 888 5.0 Northern Trust Bank of Florida N.A. 154 7.4 104 5.0 AS OF DECEMBER 31, 1995: Total Capital to Risk-Weighted Assets Consolidated 1,772 12.5 1,419 10.0 The Northern Trust Company 1,218 10.7 1,135 10.0 Northern Trust Bank of Florida N.A. 131 11.3 116 10.0 Tier 1 Capital to Risk-Weighted Assets Consolidated 1,251 8.8 851 6.0 The Northern Trust Company 864 7.6 681 6.0 Northern Trust Bank of Florida N.A. 117 10.0 70 6.0 Tier 1 Capital (to Fourth Quarter Average As- sets) Consolidated 1,251 6.2 1,010 5.0 The Northern Trust Company 864 5.5 787 5.0 Northern Trust Bank of Florida N.A. 117 7.4 79 5.0
61 Northern Trust Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- based capital amounts and ratios for Northern Trust on a consolidated basis and for each of its subsidiary banks whose net income for 1996 exceeded 10% of the consolidated total. 28. NORTHERN TRUST CORPORATION (Corporation only) Condensed financial information is presented below. Investments in wholly owned subsidiaries are carried on the equity method of accounting.
- ------------------------------------------------------------------- CONDENSED BALANCE SHEET - ------------------------------------------------------------------- December 31 --------------------- (In Millions) 1996 1995 - ------------------------------------------------------------------- ASSETS Cash on Deposit with Subsidiary Bank $ -- $ .2 Time Deposits with Banks-International 101.0 95.6 Securities 149.6 168.3 Investments in Wholly Owned Subsidiaries Bank Subsidiaries 1,415.3 1,261.6 Nonbank Subsidiaries 44.1 36.2 Loans-Bank Subsidiaries -- 50.0 -Nonbank Subsidiaries 16.2 13.4 -Other 27.6 27.8 Buildings and Equipment 7.8 7.3 Other Assets 96.1 94.6 - ------------------------------------------------------------------- Total Assets 1,857.7 1,755.0 - ------------------------------------------------------------------- LIABILITIES Commercial Paper 149.0 146.7 Notes Payable 116.6 126.8 Other Liabilities 48.0 28.9 - ------------------------------------------------------------------- Total Liabilities 313.6 302.4 Stockholders' Equity 1,544.1 1,452.6 - ------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $1,857.7 $1,755.0 - -------------------------------------------------------------------
- ------------------------------------------------------------------------------ CONDENSED STATEMENT OF INCOME - ------------------------------------------------------------------------------ For the Year Ended December 31 ---------------------- (In Millions) 1996 1995 1994 - ------------------------------------------------------------------------------ Operating Income Dividends-Bank Subsidiaries $113.9 $134.3 $ 82.1 -Nonbank Subsidiaries 1.6 1.6 6.6 Intercompany Interest and Other Charges 10.2 11.4 12.1 Interest and Other Income 8.0 11.3 9.6 - ------------------------------------------------------------------------------ Total Operating Income 133.7 158.6 110.4 - ------------------------------------------------------------------------------ Operating Expenses Interest Expense 18.9 20.6 21.5 Other Operating Expenses 6.9 7.2 17.1 - ------------------------------------------------------------------------------ Total Operating Expenses 25.8 27.8 38.6 - ------------------------------------------------------------------------------ Income before Income Taxes and Equity in Undistributed Net Income of Subsidi- aries 107.9 130.8 71.8 Benefit for Income Taxes (5.1) (6.1) (9.6) - ------------------------------------------------------------------------------ Income before Equity in Undistributed Net Income of Subsidiaries 113.0 136.9 81.4 Equity in Undistributed Net Income (Loss) of Sub- sidiaries Bank Subsidiaries 137.9 76.1 101.7 Nonbank Subsidiaries 7.9 7.0 (.9) - ------------------------------------------------------------------------------ NET INCOME $258.8 $220.0 $182.2 - ------------------------------------------------------------------------------ Net Income Applicable to Common Stock $253.9 $211.5 $174.9 - ------------------------------------------------------------------------------
62 Northern Trust Corporation
- -------------------------------------------------------------------------------- CONDENSED STATEMENT OF CASH FLOWS - -------------------------------------------------------------------------------- For the Year Ended December 31 ---------------------- (In Millions) 1996 1995 1994 - ------------------------------------------------------------------------------- OPERATING ACTIVITIES: Net Income $258.8 $220.0 $182.2 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Equity in Undistributed Net Income of Subsidiaries (145.8) (83.1) (100.8) (Increase) Decrease in Accrued Income .9 .6 (.9) (Increase) Decrease in Prepaid Expenses (.3) (.1) .6 Other, net 11.0 (6.8) 4.3 - ------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 124.6 130.6 85.4 - ------------------------------------------------------------------------------- INVESTING ACTIVITIES: Net (Increase) Decrease in Time Deposits with Banks (5.4) (53.6) 116.7 Purchases of Securities (354.4) (279.4) (227.1) Sales of Securities 361.3 173.7 157.1 Proceeds from Maturity and Redemption of Securities 19.2 142.0 8.6 Capital Investments in Subsidiaries (14.6) (43.5) (3.0) Net (Increase) Decrease in Loans to Subsidiaries 47.2 25.0 (2.5) Net (Increase) Decrease in Other Loans .2 .3 (1.2) Other, net (.5) (2.6) (1.9) - ------------------------------------------------------------------------------- Net Cash Provided by (Used in) Investing Activities 53.0 (38.1) 46.7 - ------------------------------------------------------------------------------- FINANCING ACTIVITIES: Net Increase (Decrease) in Commercial Paper 2.3 22.9 (.3) Repayment of Notes Payable (10.2) (10.2) (81.9) Treasury Stock Purchased (118.2) (63.7) (6.9) Cash Dividends Paid on Common and Preferred Stock (74.7) (65.8) (54.1) Net Proceeds from Stock Options 12.1 9.0 4.5 Other, net 10.9 13.2 8.8 - ------------------------------------------------------------------------------- Net Cash Used in Financing Activities (177.8) (94.6) (129.9) - ------------------------------------------------------------------------------- Net Change in Cash on Deposit with Subsidiary Bank (.2) (2.1) 2.2 Cash on Deposit with Subsidiary Bank at Beginning of Year .2 2.3 .1 - ------------------------------------------------------------------------------- CASH ON DEPOSIT WITH SUBSIDIARY BANK AT END OF YEAR $ -- $ .2 $ 2.3 - --------------------------------------------------------------------------------
63 Northern Trust Corporation REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS - -------------------------------------------------------------------------------- TO THE STOCKHOLDERS AND BOARD OF DIRECTORS, NORTHERN TRUST CORPORATION: We have audited the accompanying consolidated balance sheet of Northern Trust Corporation (a Delaware Corporation) and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Northern Trust Corporation and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. Arthur Andersen LLP Chicago, Illinois, January 21, 1997 64 Northern Trust Corporation CONSOLIDATED FINANCIAL STATISTICS - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- AVERAGE BALANCE SHEET - -------------------------------------------------------------------------------- ($ In Millions) 1996 1995 1994 1993 1992 - ---------------------------------------------------------------------------------- ASSETS Cash and Due from Banks $ 1,072.9 $ 1,178.7 $ 1,206.6 $ 1,025.3 $ 937.8 Federal Funds Sold and Securities Purchased under Agreements to Resell 333.3 204.2 237.0 171.3 237.8 Time Deposits with Banks 1,699.5 1,643.9 2,063.3 1,956.8 1,620.5 Other Interest-Bearing 50.7 16.6 119.9 73.5 104.4 Securities U.S. Government and Other 5,940.9 5,703.9 4,482.0 3,700.2 2,658.1 Obligations of States and Political Subdivi- sions 414.1 434.7 465.1 502.3 516.0 Trading Account 8.8 54.4 53.8 29.5 16.2 - ---------------------------------------------------------------------------------- Total Securities 6,363.8 6,193.0 5,000.9 4,232.0 3,190.3 - ---------------------------------------------------------------------------------- Loans and Leases Commercial and Other 6,251.1 5,556.3 5,183.1 4,704.9 4,432.4 Residential Mortgages 4,081.0 3,579.7 3,133.0 2,592.2 2,020.5 - ---------------------------------------------------------------------------------- Total Loans and Leases 10,332.1 9,136.0 8,316.1 7,297.1 6,452.9 - ---------------------------------------------------------------------------------- Reserve for Credit Losses (147.5) (146.2) (145.2) (145.5) (145.6) Other Assets 1,259.5 1,183.3 1,087.2 1,089.7 1,019.9 - ---------------------------------------------------------------------------------- Total Assets $20,964.3 $19,409.5 $17,885.8 $15,700.2 $13,418.0 - ---------------------------------------------------------------------------------- LIABILITIES Deposits Demand and Other Nonin- terest-Bearing $ 2,732.9 $ 2,747.3 $ 2,592.5 $ 2,554.9 $ 1,876.0 Savings and Money Mar- ket Deposits 3,620.7 3,312.4 3,385.7 3,432.1 3,372.2 Savings Certificates 2,062.4 2,000.3 1,229.6 1,172.9 1,370.8 Other Time 549.2 542.7 412.8 404.7 493.9 Foreign Offices-Demand 347.8 299.1 361.7 65.3 56.2 -Time 3,826.2 3,493.4 3,284.8 2,436.4 1,815.6 - ---------------------------------------------------------------------------------- Total Deposits 13,139.2 12,395.2 11,267.1 10,066.3 8,984.7 - ---------------------------------------------------------------------------------- Federal Funds Purchased 1,842.2 1,564.0 1,350.7 1,692.5 1,540.2 Securities Sold under Agreements to Repur- chase 1,973.3 1,769.7 1,444.3 664.4 542.9 Commercial Paper 143.7 146.0 138.1 131.5 132.9 Other Borrowings 1,274.1 1,034.5 1,007.5 940.8 561.0 Senior Notes 267.5 394.0 781.8 554.1 85.2 Notes Payable 360.7 271.3 293.6 297.9 258.8 Other Liabilities 477.9 462.1 377.2 279.6 385.2 - ---------------------------------------------------------------------------------- Total Liabilities 19,478.6 18,036.8 16,660.3 14,627.1 12,490.9 - ---------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY 1,485.7 1,372.7 1,225.5 1,073.1 927.1 - ---------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $20,964.3 $19,409.5 $17,885.8 $15,700.2 $13,418.0 - ---------------------------------------------------------------------------------- RATIOS Dividend Payout Ratio 28.5% 28.6% 28.4% 25.6% 24.4% Return on Average Assets 1.23 1.13 1.02 1.07 1.11 Return on Average Common Equity 18.64 17.58 16.57 17.89 18.71 Tier 1 Capital to Risk- Adjusted Assets-End of Period 8.19 8.82 8.95 9.31 8.08 Total Capital to Risk- Adjusted Assets-End of Period 11.87 12.49 12.36 13.41 11.56 Leverage Ratio 6.42 6.19 6.22 6.24 6.06 Average Stockholders' Equity to Average As- sets 7.09 7.07 6.85 6.83 6.91 Average Loans and Leases Times Average Stock- holders' Equity 7.0X 6.7x 6.8x 6.8x 7.0x - ---------------------------------------------------------------------------------- Stockholders-End of Pe- riod 3,335 3,331 2,962 2,922 2,893 Staff-End of Period (Full-time equivalent) 6,933 6,531 6,608 6,259 6,249 - ----------------------------------------------------------------------------------
66 Northern Trust Corporation CONSOLIDATED FINANCIAL STATISTICS - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- ANALYSIS OF NET INTEREST INCOME - -------------------------------------------------------------------------------- (Interest and Rate on a Taxable Equivalent Basis) 1996 1995 - -------------------------------------------------------------------------------- ($ In Millions) Interest Volume Rate Interest Volume Rate - -------------------------------------------------------------------------------- AVERAGE EARNING ASSETS Money Market Assets Federal Funds Sold and Resell Agreements $ 18.3 $ 333.3 5.49% $ 12.3 $ 204.2 6.02% Time Deposits with Banks 84.9 1,699.5 5.00 92.1 1,643.9 5.60 Other 3.0 50.7 5.91 1.1 16.6 6.88 - -------------------------------------------------------------------------------- Total Money Market Assets 106.2 2,083.5 5.10 105.5 1,864.7 5.66 - -------------------------------------------------------------------------------- Securities U.S. Government 97.6 1,702.0 5.73 70.4 1,225.7 5.74 Obligations of States and Political Subdivi- sions 40.8 414.1 9.86 46.8 434.7 10.75 Federal Agency 228.4 4,010.7 5.69 258.8 4,124.8 6.28 Other 13.7 228.2 6.00 22.0 353.4 6.21 Trading Account .6 8.8 7.09 3.8 54.4 7.04 - -------------------------------------------------------------------------------- Total Securities 381.1 6,363.8 5.99 401.8 6,193.0 6.49 - -------------------------------------------------------------------------------- Loans and Leases 697.8 10,332.1 6.75 634.3 9,136.0 6.94 - -------------------------------------------------------------------------------- Total Earning Assets $1,185.1 $18,779.4 6.31% $1,141.6 $17,193.7 6.64% - -------------------------------------------------------------------------------- AVERAGE SOURCE OF FUNDS Deposits Savings and Money Market Deposits $ 114.3 $ 3,620.7 3.16% $ 109.1 $ 3,312.4 3.29% Savings Certificates 119.1 2,062.4 5.78 120.6 2,000.3 6.03 Other Time 29.9 549.2 5.44 31.5 542.7 5.81 Foreign Offices Time 184.5 3,826.2 4.82 182.1 3,493.4 5.21 - -------------------------------------------------------------------------------- Total Deposits 447.8 10,058.5 4.45 443.3 9,348.8 4.74 Federal Funds Purchased 97.9 1,842.2 5.31 91.2 1,564.0 5.83 Repurchase Agreements 103.4 1,973.3 5.24 102.6 1,769.7 5.80 Commercial Paper 7.8 143.7 5.40 8.6 146.0 5.87 Other Borrowings 64.5 1,274.1 5.07 55.6 1,034.5 5.38 Senior Notes 14.4 267.5 5.37 23.7 394.0 6.00 Notes Payable 27.4 360.7 7.59 21.4 271.3 7.88 - -------------------------------------------------------------------------------- Total Interest-Related Funds 763.2 15,920.0 4.79 746.4 14,528.3 5.14 - -------------------------------------------------------------------------------- Interest Rate Spread -- -- 1.52% -- -- 1.50% - -------------------------------------------------------------------------------- Noninterest-Related Funds -- 2,859.4 -- -- 2,665.4 -- - -------------------------------------------------------------------------------- Total Source of Funds $ 763.2 $18,779.4 4.06% $ 746.4 $17,193.7 4.34% - -------------------------------------------------------------------------------- Net Interest Income/Margin $ 421.9 -- 2.25% $ 395.2 -- 2.30% - -------------------------------------------------------------------------------- NET INTEREST INCOME/MARGIN COMPONENTS Domestic $ 420.6 $16,678.5 2.52% $ 392.6 $15,193.7 2.58% International 1.3 2,100.9 .06 2.6 2,000.0 .13 - -------------------------------------------------------------------------------- Consolidated $ 421.9 $18,779.4 2.25% $ 395.2 $17,193.7 2.30% - --------------------------------------------------------------------------------
Notes-Average volume includes nonaccrual loans. -Interest on loans and money market assets includes fees of $4.3 million in 1996, $5.1 million in 1995, $6.8 million in 1994, $13.9 million in 1993 and $11.7 million in 1992. -Total interest income includes adjustments on loans and securities (primarily obligations of states and political subdivisions) to a taxable equivalent basis. Such adjustments are based on the U.S. federal income tax rate (35% for 1996-1993 and 34% for 1992) and State of Illinois income tax rate (7.18%) before giving effect to the deductibility of state taxes for federal income tax purposes. Lease financing receivable balances are reduced by deferred income. Total taxable equivalent interest adjustments amounted to $33.6 million in 1996, $37.6 million in 1995, $33.4 million in 1994, $34.1 million in 1993 and $32.5 million in 1992. -Yields on the portion of the securities portfolio classified as available for sale are based on amortized cost. 68 Northern Trust Corporation
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1994 1993 1992 - -------------------------------------------------------------------------------- Interest Volume Rate Interest Volume Rate Interest Volume Rate - -------------------------------------------------------------------------------- $ 10.9 $ 237.0 4.59% $ 5.5 $ 171.3 3.24% $ 8.8 $ 237.8 3.70% 97.8 2,063.3 4.74 86.5 1,956.8 4.42 95.6 1,620.5 5.90 5.2 119.9 4.31 2.6 73.5 3.53 4.6 104.4 4.46 - -------------------------------------------------------------------------------- 113.9 2,420.2 4.71 94.6 2,201.6 4.30 109.0 1,962.7 5.55 - -------------------------------------------------------------------------------- 73.8 1,779.6 4.15 102.5 2,646.6 3.87 90.3 1,759.7 5.13 52.8 465.1 11.35 58.6 502.3 11.66 59.2 516.0 11.46 114.2 2,333.6 4.90 29.7 773.9 3.84 23.9 521.6 4.59 19.6 368.8 5.31 13.6 279.7 4.88 22.9 376.8 6.07 4.3 53.8 7.91 2.2 29.5 7.52 1.0 16.2 6.01 - -------------------------------------------------------------------------------- 264.7 5,000.9 5.29 206.6 4,232.0 4.88 197.3 3,190.3 6.18 - -------------------------------------------------------------------------------- 503.5 8,316.1 6.05 439.3 7,297.1 6.02 448.1 6,452.9 6.94 - -------------------------------------------------------------------------------- $882.1 $15,737.2 5.61% $740.5 $13,730.7 5.39% $754.4 $11,605.9 6.50% - -------------------------------------------------------------------------------- $ 85.3 $ 3,385.7 2.52% $ 78.8 $ 3,432.1 2.30% $ 99.1 $ 3,372.2 2.94% 56.9 1,229.6 4.63 50.5 1,172.9 4.31 69.9 1,370.8 5.10 18.6 412.8 4.50 15.7 404.7 3.88 25.4 493.9 5.15 137.2 3,284.8 4.18 90.4 2,436.4 3.71 95.7 1,815.6 5.27 - -------------------------------------------------------------------------------- 298.0 8,312.9 3.58 235.4 7,446.1 3.16 290.1 7,052.5 4.11 55.5 1,350.7 4.11 51.1 1,692.5 3.02 53.5 1,540.2 3.47 61.9 1,444.3 4.28 20.0 664.4 3.00 19.8 542.9 3.65 5.9 138.1 4.31 4.3 131.5 3.23 5.2 132.9 3.88 36.0 1,007.5 3.57 26.0 940.8 2.76 19.0 561.0 3.39 33.8 781.8 4.32 18.4 554.1 3.33 3.0 85.2 3.49 23.0 293.6 7.84 23.3 297.9 7.84 21.0 258.8 8.11 - -------------------------------------------------------------------------------- 514.1 13,328.9 3.86 378.5 11,727.3 3.22 411.6 10,173.5 4.04 - -------------------------------------------------------------------------------- -- -- 1.75% -- -- 2.17% -- -- 2.46% - -------------------------------------------------------------------------------- -- 2,408.3 -- -- 2,003.4 -- -- 1,432.4 -- - -------------------------------------------------------------------------------- $514.1 $15,737.2 3.27% $378.5 $13,730.7 2.75% $411.6 $11,605.9 3.55% - -------------------------------------------------------------------------------- $368.0 -- 2.34% $362.0 -- 2.64% $342.8 -- 2.95% - -------------------------------------------------------------------------------- $357.3 $12,890.4 2.77% $344.2 $11,491.0 3.00% $324.8 $ 9,659.9 3.36% 10.7 2,846.8 .38 17.8 2,239.7 .79 18.0 1,946.0 .93 - -------------------------------------------------------------------------------- $368.0 $15,737.2 2.34% $362.0 $13,730.7 2.64% $342.8 $11,605.9 2.95% - --------------------------------------------------------------------------------
69 Northern Trust Corporation CONSOLIDATED FINANCIAL STATISTICS - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- QUARTERLY FINANCIAL DATA STATEMENT OF INCOME - -------------------------------------------------------------------------------- 1996 ------------------------------------------------- ($ In Millions Except Per Entire Fourth Third Second First Share Information) Year Quarter Quarter Quarter Quarter - -------------------------------------------------------------------------------- Interest Income $ 1,151.5 290.6 289.9 286.1 284.9 Interest Expense 763.2 190.0 191.1 190.6 191.5 - -------------------------------------------------------------------------------- Net Interest Income 388.3 100.6 98.8 95.5 93.4 Provision for Credit Losses 12.0 .5 2.5 4.0 5.0 Noninterest Income 777.5 200.6 194.4 195.1 187.4 Investment Security Gains (Losses) .4 .1 (.1) .1 .3 Noninterest Expenses 766.8 199.9 191.3 191.6 184.0 Provision for Income Taxes 128.6 33.5 32.8 31.7 30.6 - -------------------------------------------------------------------------------- NET INCOME 258.8 67.4 66.5 63.4 61.5 - -------------------------------------------------------------------------------- Net Income Applicable to Common Stock 253.9 66.2 65.3 62.2 60.2 - -------------------------------------------------------------------------------- PER COMMON SHARE Net Income-Primary $ 2.21 .58 .57 .54 .52 -Fully Diluted 2.20 .58 .57 .54 .52 - -------------------------------------------------------------------------------- AVERAGE BALANCE SHEET (In Millions) - -------------------------------------------------------------------------------- ASSETS Cash and Due from Banks $ 1,072.9 1,074.7 972.6 1,047.6 1,197.8 Money Market Assets 2,083.5 2,197.1 2,082.6 1,987.2 2,065.9 Securities 6,363.8 5,715.7 6,257.1 6,755.7 6,734.9 Loans and Leases 10,332.1 10,832.7 10,533.9 10,176.7 9,777.3 Reserve for Credit Losses (147.5) (147.9) (147.4) (147.3) (147.2) Other Assets 1,259.5 1,315.8 1,291.5 1,208.2 1,221.3 - -------------------------------------------------------------------------------- Total Assets $20,964.3 20,988.1 20,990.3 21,028.1 20,850.0 - -------------------------------------------------------------------------------- LIABILITIES AND STOCK- HOLDERS' EQUITY Deposits Demand and Other Nonin- terest-Bearing $ 2,732.9 2,773.7 2,620.4 2,686.0 2,852.5 Savings and Other Inter- est-Bearing 5,683.1 5,735.3 5,596.4 5,713.2 5,687.8 Other Time 549.2 599.4 523.0 462.6 611.4 Foreign Offices 4,174.0 4,270.0 4,375.0 4,146.7 3,901.2 - -------------------------------------------------------------------------------- Total Deposits 13,139.2 13,378.4 13,114.8 13,008.5 13,052.9 Purchased Funds 5,233.3 4,847.2 5,317.0 5,530.2 5,242.4 Senior Notes 267.5 296.3 205.0 254.5 314.4 Notes Payable 360.7 431.9 339.7 335.9 334.8 Other Liabilities 477.9 512.8 523.3 424.5 449.7 Stockholders' Equity 1,485.7 1,521.5 1,490.5 1,474.5 1,455.8 - -------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $20,964.3 20,988.1 20,990.3 21,028.1 20,850.0 - -------------------------------------------------------------------------------- ANALYSIS OF NET INTEREST INCOME ($ In Millions) - -------------------------------------------------------------------------------- Earning Assets $18,779.4 18,745.5 18,873.6 18,919.6 18,578.1 Interest-Related Funds 15,920.0 15,786.9 16,021.7 16,103.6 15,768.2 Noninterest-Related Funds 2,859.4 2,958.6 2,851.9 2,816.0 2,809.9 Net Interest Income (Tax- able equivalent) 421.9 108.4 107.2 104.3 102.0 Net Interest Margin (Tax- able equivalent) 2.25% 2.30 2.26 2.22 2.21 - -------------------------------------------------------------------------------- COMMON STOCK DIVIDEND AND MARKET PRICE Dividends $ .645 .18 .155 .155 .155 Market Price Range-High 37.75 37.75 34.00 29.00 28.125 -Low 24.625 32.00 28.375 25.375 24.625 - --------------------------------------------------------------------------------
Note: Per common share data has been restated to reflect the two-for-one stock split effected through a 100% stock distribution on December 9, 1996. The common stock of Northern Trust Corporation is traded on the Nasdaq National Market under the symbol NTRS. 70 Northern Trust Corporation
- ------------------------------------------------- - ------------------------------------------------- 1995 - ------------------------------------------------- Entire Fourth Third Second First Year Quarter Quarter Quarter Quarter - -------------------------------------------------- $ 1,104.0 285.9 285.8 271.1 261.2 746.4 194.2 196.4 183.1 172.7 - -------------------------------------------------- 357.6 91.7 89.4 88.0 88.5 6.0 1.0 2.0 1.5 1.5 677.1 174.1 173.1 168.4 161.5 1.0 .5 .3 .1 .1 709.2 178.5 175.5 177.9 177.3 100.5 27.3 27.2 24.0 22.0 - -------------------------------------------------- 220.0 59.5 58.1 53.1 49.3 - -------------------------------------------------- 211.5 57.4 56.0 50.9 47.2 - -------------------------------------------------- $ 1.88 .51 .49 .45 .43 1.85 .50 .49 .44 .43 - -------------------------------------------------- - -------------------------------------------------- $ 1,178.7 1,248.1 1,253.3 1,124.5 1,086.3 1,864.7 1,863.0 1,739.8 1,755.9 2,104.1 6,193.0 6,443.5 6,677.3 5,905.7 5,732.3 9,136.0 9,662.9 9,356.9 8,973.7 8,535.9 (146.2) (147.2) (146.6) (145.9) (145.3) 1,183.3 1,216.9 1,250.4 1,208.2 1,055.2 - -------------------------------------------------- $19,409.5 20,287.2 20,131.1 18,822.1 18,368.5 - -------------------------------------------------- $ 2,747.3 2,942.5 2,790.8 2,635.2 2,616.3 5,312.7 5,521.3 5,451.7 5,289.9 4,980.6 542.7 587.8 584.8 539.5 456.6 3,792.5 3,531.0 3,642.0 3,855.2 4,150.5 - -------------------------------------------------- 12,395.2 12,582.6 12,469.3 12,319.8 12,204.0 4,514.2 4,903.5 5,317.2 4,043.5 3,771.2 394.0 553.5 174.6 379.7 469.6 271.3 340.9 254.1 244.7 244.8 462.1 484.6 520.5 468.6 372.9 1,372.7 1,422.1 1,395.4 1,365.8 1,306.0 - -------------------------------------------------- $19,409.5 20,287.2 20,131.1 18,822.1 18,368.5 - -------------------------------------------------- - -------------------------------------------------- $17,193.7 17,969.4 17,774.0 16,635.3 16,372.3 14,528.3 15,061.5 15,120.8 14,076.3 13,834.7 2,665.4 2,907.9 2,653.2 2,559.0 2,537.6 395.2 100.7 98.9 97.5 98.1 2.30% 2.22 2.21 2.35 2.43 - -------------------------------------------------- $ .545 .155 .13 .13 .13 28.00 28.00 23.812 20.625 18.75 15.875 21.875 19.50 17.50 15.875 - -------------------------------------------------
71 Northern Trust Corporation CORPORATE STRUCTURE - -------------------------------------------------------------------------------- NORTHERN TRUST CORPORATION 50 South LaSalle Street, Chicago, Illinois 60675 (312) 630-6000 PRINCIPAL SUBSIDIARY THE NORTHERN TRUST COMPANY 50 South LaSalle Street, Chicago, Illinois 60675 120 East Oak Street, Chicago, Illinois 60611 125 South Wacker Drive, Chicago, Illinois 60675 7801 South State Street, Chicago, Illinois 60619 8501 West Higgins Road, Chicago, Illinois 60631 6401 North Harlem Avenue, Chicago, Illinois 60631 826 S. Northwest Highway, Barrington, Illinois 60010 579 Central Avenue, Highland Park, Illinois 60035 120 East Scranton Avenue, Lake Bluff, Illinois 60044 265 Deerpath Road, Lake Forest, Illinois 60045 959 South Waukegan Road, Lake Forest, Illinois 60045 701 South McKinley Road, Lake Forest, Illinois 60045 400 East Diehl Road, Naperville, Illinois 60563 One Oakbrook Terrace, Oakbrook Terrace, Illinois 60181 1501 Woodfield Road, Schaumburg, Illinois 60173 62 Green Bay Road, Winnetka, Illinois 60093 London Branch 155 Bishopsgate, London EC2M 3XS, England Cayman Islands Branch P.O. Box 501, Georgetown, Cayman Islands, British West Indies Singapore Branch 80 Raffles Place, #46-02, UOB Plaza 1, Singapore, 048624 SUBSIDIARIES OF THE NORTHERN TRUST COMPANY THE NORTHERN TRUST INTERNATIONAL BANKING CORPORATION One World Trade Center, New York, New York 10048 NORTHERN GLOBAL FINANCIAL SERVICES LIMITED 18 Harbour Road, Wanchai Hong Kong NORTHERN TRUST TRADE SERVICES LIMITED Asia Pacific Tower, 17th Floor, 3 Garden Road, Central, Hong Kong NORTHERN TRUST FUND MANAGERS (IRELAND) LIMITED Lifetime House, Fourth Floor Earlsfort Centre Earlsfort Terrace Dublin 2, Ireland NORLEASE, INC. 50 South LaSalle Street, Chicago, Illinois 60675 THE NORTHERN TRUST COMPANY, CANADA 161 Bay Street, Suite 4540, B.C.E. Place Toronto, Ontario, Canada M5J 2S1 INTERNATIONAL AFFILIATE TRANSATLANTIC TRUST CORPORATION 75 Rochford Street P.O. Box 429 Charlottetown, Prince Edward Island, Canada C1A 7K7 74 Northern Trust Corporation - -------------------------------------------------------------------------------- OTHER SUBSIDIARIES OF THE CORPORATION NORTHERN TRUST BANK OF FLORIDA N.A. 700 Brickell Avenue, Miami, Florida 33131 595 Biltmore Way, Coral Gables, Florida 33134 328 Crandon Boulevard, Suite 101, Key Biscayne, Florida 33149 3001 Aventura Boulevard, Aventura, Florida 33180 8600 NW 17th Street, Miami, Florida 33126 (opening mid-1997) 1100 East Las Olas Boulevard, Fort Lauderdale, Florida 33301 2601 East Oakland Park Boulevard, Fort Lauderdale, Florida 33306 301 Yamato Road, Suite 1111, Boca Raton, Florida 33431 770 East Atlantic Avenue, Delray Beach, Florida 33483 440 Royal Palm Way, Palm Beach, Florida 33480 11780 U.S. Highway 1, Suite 100, North Palm Beach, Florida 33408 2201 S.E. Kingswood Terrace, Monterey Commons, Stuart, Florida 34996 755 Beachland Boulevard, Vero Beach, Florida 32963 1440 South A1A, Vero Beach, Florida 32963 4001 Tamiami Trail North, Naples, Florida 34103 530 Fifth Avenue South, Naples, Florida 34102 26790 South Tamiami Trail, Bonita Springs, Florida 34134 8060 College Parkway S.W., Fort Myers, Florida 33919 1515 Ringling Boulevard, Sarasota, Florida 34236 901 Venetia Bay Boulevard, Suite 100, Venice, Florida 34292 540 Bay Isles Road, Longboat Key, Florida 34228 233 15th Street West, Bradenton, Florida 34205 100 Second Avenue South, St. Petersburg, Florida 33701 425 North Florida Avenue, Tampa, Florida 33602 NORTHERN TRUST BANK OF ARIZONA N.A. 2398 East Camelback Road, Phoenix, Arizona 85016 6373 East Tanque Verde Road, Tucson, Arizona 85715 10220 West Bell Road, Sun City, Arizona 85351 10015 Royal Oak Road, Sun City, Arizona 85351 7001 North Scottsdale Road, Scottsdale, Arizona 85253 19432 R. H. Johnson Boulevard, Sun City West, Arizona 85375 1525 South Greenfield Road, Mesa, Arizona 85206 NORTHERN TRUST BANK OF CALIFORNIA N.A. 355 South Grand Avenue, Suite 2600, Los Angeles, California 90071 620 Newport Center Drive, Suite 200, Newport Beach, California 92660 4370 La Jolla Village Drive, Suite 1000, San Diego, California 92122 1125 Wall Street, La Jolla, California 92037 206 East Anapamu Street, Santa Barbara, California 93101 1485 East Valley Road, (Montecito), Santa Barbara, California 93108 580 California Street, Suite 1800, San Francisco, California 94104 10877 Wilshire Boulevard (Westwood), Suite 100, Los Angeles, California 90024 NORTHERN TRUST BANK OF TEXAS N.A. 2020 Ross Avenue, Dallas, Texas 75201 5540 Preston Road, Dallas, Texas 75205 16475 Dallas Parkway, Dallas, Texas 75248 2701 Kirby Drive, Houston, Texas 77098 600 Bering Drive, Houston, Texas 77057 10000 Memorial Drive, Houston, Texas 77024 700 Rusk Street, Houston, Texas 77002 NORTHERN TRUST GLOBAL ADVISORS, INC. 300 Atlantic Street, Stamford, Connecticut 06901 RCB TRUST COMPANY 300 Atlantic Street, Stamford, Connecticut 06901 NT GLOBAL ADVISORS, INC. 20 Toronto Street, Suite 440, Toronto, Canada M5C 2B8 NORTHERN TRUST GLOBAL ADVISORS, LIMITED One Gloster Court, Segensworth West, Fareham, Hampshire PO15 5SH, England THE NORTHERN TRUST COMPANY OF NEW YORK 40 Broad Street, New York, New York 10004 NORTHERN TRUST CAYMAN INTERNATIONAL, LTD. P.O. Box 1586, Grand Cayman, Cayman Islands, British West Indies NORTHERN TRUST SECURITIES, INC. 50 South LaSalle Street, Chicago, Illinois 60675 BERRY, HARTELL, EVERS & OSBORNE, INC. 580 California Street, Suite 1900, San Francisco, California 94104 NORTHERN TRUST RETIREMENT CONSULTING, INC. 400 Perimeter Center Terrace, Suite 850, Atlanta, Georgia 30346 19119 North Creek Parkway, Suite 200, Bothell, Washington 98011 NORTHERN FUTURES CORPORATION 50 South LaSalle Street, Chicago, Illinois 60675 75 Northern Trust Corporation EX-21 8 SUBSIDIARIES EXHIBIT NUMBER (21) TO 1996 FORM 10-K NORTHERN TRUST CORPORATION SUBSIDIARIES AS OF MARCH 1, 1997
Percent Jurisdiction of Owned Incorporation ----- --------------- The Northern Trust Company 100% Illinois NorLease, Inc. 100% Delaware MFC Company, Inc. 100% Delaware The Northern Trust Company, Canada 100% Ontario, Canada Nortrust Nominees Ltd. 100% London The Northern Trust Company U.K. Pension Plan Limited 100% London The Northern Trust International Banking Corporation 100% Edge Act Nortrust International Finance (Hong Kong) Ltd. 100% Hong Kong Northern Global Financial Services Ltd. 100% Hong Kong Northern Trust Trade Services Limited 100% Hong Kong Northern Trust Fund Managers (Ireland) Limited 100% Ireland Northern Trust of Florida Corporation 100% Florida Northern Trust Cayman International, Ltd. 100% Cayman Islands, BWI Northern Trust Bank of Florida N.A. 100% National Bank Realnor Properties, Inc. 100% Florida Realnor Special Properties, Inc. 100% Florida Realnor 1177, Inc. 100% Florida Realnor Hallandale, Inc. 100% Florida Nortrust of Arizona Holding Corporation 100% Arizona Northern Trust Bank of Arizona N.A. 100% National Bank Northern Trust of California Corporation 100% Delaware Northern Trust Bank of California N.A. 100% National Bank Berry, Hartell, Evers & Osborne, Inc. 100% Delaware Northern Trust Bank of Texas N.A. 100%* National Bank Fiduciary Services Inc. 100% Texas Tanglewood Bancshares, Inc. 100% Texas Northern Futures Corporation 100% Delaware
- --------------- * 75.5% directly and 24.5% through Tanglewood Bancshares, Inc. NORTHERN TRUST CORPORATION SUBSIDIARIES AS OF MARCH 1, 1997 (continued)
Percent State of Owned Incorporation ----- ------------- Northern Investment Corporation 100% Delaware Northern Investment Management Company 100% Delaware Northern Trust Securities, Inc. 100% Delaware Northern Trust Services, Inc. 100% Illinois Nortrust Realty Management, Inc. 100% Illinois The Northern Trust Company of New York 100% New York Northern Trust Retirement Consulting, Inc. 100% Delaware Northern Trust Global Advisors, Inc. 100% Delaware NT Global Advisors, Inc. 100% Ontario, Canada Northern Trust Global Advisors Limited 100% England RCB Trust Company 100% Connecticut Metroplex Bancshares, Inc. 100% Texas Metroplex Delaware Financial Corporation 100% Delaware Bent Tree National Bank 100% National Bank
EX-23 9 CONSENT PUBLIC ACCOUNTANTS EXHIBIT NUMBER (23) TO 1996 FORM 10-K CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated January 21, 1997, incorporated by reference in Northern Trust Corporation's Annual Report on Form 10-K for the year ended December 31, 1996, into the Corporation's previously filed Form S-8 Registration Statements File Nos. 33-22546, 33-47597, 33-51971, 33-63843 and 333-00809; and the Corporation's previously filed Form S-3 No. 333-18951. ARTHUR ANDERSEN LLP Chicago, Illinois March 12, 1997 EX-24 10 POWER OF ATTORNEY EXHIBIT NUMBER (24) TO 1996 FORM 10-K POWER OF ATTORNEY - ----------------- KNOW ALL MEN BY THESE PRESENTS: That the undersigned officers and directors of Northern Trust Corporation hereby severally constitute and appoint William A. Osborn, Perry R. Pero and Peter L. Rossiter, and each of them singly, our true and lawful attorneys and agents with full power to them and each of them singly, to sign for us in our names, in the capacities indicated below, Form 10-K, annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, for the fiscal year ended December 31, 1996, and to file such Form, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys and agents, and each of them, full power of substitution and revocation in the premises, and generally to do all such things in our name and behalf in our capacities as officers and directors to enable Northern Trust Corporation to comply with the provisions of the Securities Exchange Act of 1934, as amended, and all regulations of the Securities and Exchange Commission thereunder, hereby ratifying and confirming our signatures as they may be signed by our attorneys, or any one of them, to such Form, and all that our attorneys and agents, or any of them, may do or cause to be done by virtue of these presents. IN WITNESS WHEREOF, the undersigned have hereunto executed this Power of Attorney this 18th day of February, 1997. ------- William A. Osborn Barry G. Hastings - -------------------------------- ------------------------------------- William A. Osborn Barry G. Hastings Chairman of the Board, Chief President, Chief Operating Executive Officer and Director Officer and Director Perry R. Pero Harry W. Short - -------------------------------- ------------------------------------ Perry R. Pero Harry W. Short Senior Executive Vice President Senior Vice President and Controller and Chief Financial Officer (Chief Accounting Officer) Dolores E. Cross Robert S. Hamada - -------------------------------- ------------------------------------- Dolores E. Cross Robert S. Hamada Director Director Robert A. Helman Arthur L. Kelly - -------------------------------- --------------------------------------- Robert A. Helman Arthur L. Kelly Director Director Robert D. Krebs William G. Mitchell - -------------------------------- --------------------------------------- Robert D. Krebs William G. Mitchell Director Director Edward J. Mooney Harold B. Smith - -------------------------------- --------------------------------------- Edward J. Mooney Harold B. Smith Director Director William D. Smithburg Bide L. Thomas - -------------------------------- --------------------------------------- William D. Smithburg Bide L. Thomas Director Director STATE OF ILLINOIS ) ) SS COUNTY OF COOK ) I, Victoria Antoni , a Notary Public, DO HEREBY CERTIFY that the ----------------------- above named directors and officers of Northern Trust Corporation, personally known to me to be the same persons whose names are subscribed to the foregoing instrument, appeared before me this day in person, and severally acknowledged that they signed and delivered the instrument as their free and voluntary act, for the uses and purposes therein set forth. GIVEN under my hand and notarial seal this 18th day of February, 1997. -------- Victoria Antoni ---------------------- Notary Public My Commission Expires: 7/25/99 --------------------------- EX-27 11 FINANCIAL DATA SCHEDULE
9 This schedule contains summary financial information extracted from the Consolidated Balance Sheet and the Consolidated Statement of Income and is qualified in its entirety by reference to such financial statements. 1,000 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 1,292,533 2,059,993 1,022,573 4,797 4,311,706 498,367 518,822 10,937,429 148,327 21,608,325 13,796,227 5,200,474 624,939 442,553 189,934 0 120,000 1,234,198 21,608,325 693,372 351,456 106,748 1,151,576 447,815 763,203 388,373 12,000 384 766,792 387,421 387,421 0 0 258,821 2.21 2.20 2.25 16,874 15,163 2,618 0 147,131 15,565 3,798 148,327 92,735 2,326 53,266
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