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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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
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Preferred Stock Purchase Rights
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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
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Northern Trust Corporation
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
INDEX
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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
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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
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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.
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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.
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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
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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
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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.
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STATISTICAL DISCLOSURES
The following statistical disclosures, included in the Corporation's Annual
Report to Stockholders for the year ended December 31, 1996, are incorporated
herein by reference.
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1996
Annual Report
Schedule Page
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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
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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)
<TABLE>
<CAPTION>
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
- ----------------------------------- ------- ----- -------- ----- -------- ----- ----- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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% $251.7 6.13% 14 mos.
- ------------------------------------ -------- ------ ------ ----- ------ ----- ------ ----- --------
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
------------------------------------------------------------------------------------------
One Year or Less One to Five Years Five to Ten Years Over Ten Years
---------------- ----------------- ----------------- -------------- Average
($ in Millions) Book Yield Book Yield Book Yield Book Yield Maturity
- ----------------------------------- ------- ----- -------- ----- -------- ----- ----- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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.
- ------------------------------------ -------- ------ -------- ----- ------ ----- ------ ----- --------
==================================================================================================================================
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Securities Held to Maturity and Available for Sale
December 31
------------------------------------------------------
(In Millions) 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------ --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
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
- ------------------------------------------------------------------------ -------- -------- -------- --------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
================================================================================
Average Deposits by Type
<TABLE>
<CAPTION>
(In Millions) 1996 1995 1994 1993 1992
- ------------------------------------------------- --------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
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%
- ------------------------------------------------- --------- --------- --------- --------- --------
=======================================================================================================================
</TABLE>
Remaining Maturity of Time Deposits $100,000 and more
<TABLE>
<CAPTION>
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
- --------------------------------------- ------------- ----- -------- -------------- ----- --------
<S> <C> <C> <C> <C> <C> <C>
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 $3,232.0
- --------------------------------------- ------------- ----- -------- -------------- ----- --------
==============================================================================================================================
</TABLE>
12
<PAGE>
===============================================================================
Purchased Funds
Federal Funds Purchased
(Overnight Borrowings)
<TABLE>
<CAPTION>
($ in Millions) 1996 1995 1994
- ------------------------------- -------- -------- --------
<S> <C> <C> <C>
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
- ------------------------------- -------- -------- --------
</TABLE>
Securities Sold under Agreements to Repurchase
<TABLE>
<CAPTION>
($ in Millions) 1996 1995 1994
- ------------------------------- -------- -------- --------
<S> <C> <C> <C>
Balance on December 31 $ 966.1 $1,858.7 $2,216.9
Highest Month-End Balance 2,922.2 2,283.0 2,777.1
Year-Average Balance 1,973.3 1,769.7 1,444.3
-Average Rate 5.24% 5.80% 4.28%
Average Rate at Year-End 5.69 5.41 5.08
- ------------------------------- -------- -------- --------
</TABLE>
Other Borrowings
(Includes Treasury Tax and Loan Demand Notes and Term Federal Funds Purchased)
<TABLE>
<CAPTION>
($ in Millions) 1996 1995 1994
- ------------------------------- -------- -------- --------
<S> <C> <C> <C>
Balance on December 31 $3,142.1 $ 875.9 $1,077.9
Highest Month-End Balance 4,953.6 3,415.9 3,116.1
Year-Average Balance 1,274.1 1,034.5 1,007.5
-Average Rate 5.07% 5.38% 3.57%
Average Rate at Year-End 5.82 3.61 4.71
- ------------------------------- -------- -------- --------
</TABLE>
Total Purchased Funds
<TABLE>
<CAPTION>
($ in Millions) 1996 1995 1994
- ------------------------------- -------- -------- --------
<S> <C> <C> <C>
Balance on December 31 $4,761.2 $5,034.7 $4,266.8
Year-Average Balance 5,089.6 4,368.2 3,802.5
-Average Rate 5.22% 5.71% 4.03%
- ------------------------------- -------- -------- --------
</TABLE>
===============================================================================
Commercial Paper
<TABLE>
<CAPTION>
($ in Millions) 1996 1995 1994
- ------------------------------- -------- -------- --------
<S> <C> <C> <C>
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
- ------------------------------- -------- -------- --------
</TABLE>
===============================================================================
===============================================================================
13
<PAGE>
Changes in Net Interest Income
<TABLE>
<CAPTION>
1996/95 1995/94
--------------------------------------------------------
Change Due To Change Due To
----------------- ----------------
(Interest on a taxable equivalent basis)
(In Millions) Volume Rate Total Volume Rate Total
- ------------------------------------------------------------ ------- ------ ------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
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
- ------------------------------------------------------------------ -------- -------- -------- -------- --------
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
================================================================================
Percent of International Related Average Assets and Liabilities to Total
Consolidated Average Assets
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
- ------------------------------------ ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
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
- ------------------------------------ ----- ----- ----- ----- -----
</TABLE>
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.
===============================================================================
<TABLE>
<CAPTION>
Distribution of International Loans and Deposits by Type
December 31
------------------------------------------------
Loans 1996 1995 1994 1993 1992
- ------------------------------------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
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
- ------------------------------------ ------ ------ ------ ------ ------
</TABLE>
<TABLE>
<CAPTION>
December 31
--------------------------------------
Deposits 1996 1995 1994
- ------------------------------------ -------- -------- --------
<S> <C> <C> <C>
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
- ------------------------------------ -------- -------- --------
=======================================================================================
</TABLE>
15
<PAGE>
- --------------------------------------------------------------------------------
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
<PAGE>
As required by the Securities and Exchange Commission, the following tables
break down the reserve for credit losses:
Reserve for Credit Losses
<TABLE>
<CAPTION>
(In Millions) 1996 1995 1994
- --------------------------------------- ------ ------ ------
Allocated Reserve
<S> <C> <C> <C>
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
- --------------------------------------- ------ ------ ------
</TABLE>
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
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
- --------------------------------------- ---- ---- ---- ---- ----
Loan and Lease Category
<S> <C> <C> <C> <C> <C>
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%
- --------------------------------------- ---- ---- ---- ---- ----
</TABLE>
- --------------------------------------------------------------------------------
17
<PAGE>
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:
<TABLE>
<CAPTION>
1996
Annual Report
Notes to Consolidated Financial Statements Page(s)
- ---------------------------------------------------------------- -------------
<S> <C>
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
- ---------------------------------------------------------------- -------------
</TABLE>
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
<PAGE>
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
<PAGE>
- --------------------------------------------------------------------------------
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)
<TABLE>
<CAPTION>
December 31
-------------------------
(In Millions) 1996 1995
- ---------------------------------------------- --------- ---------
<S> <C> <C>
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
- ---------------------------------------------- --------- ---------
</TABLE>
- --------------------------------------------------------------------------------
20
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
The Northern Trust Companys
Consolidated Statement of Income (unaudited)
For the Year Ended
December 31
--------------------------------
(In Millions) 1996 1995 1994
- ----------------------------------------------------------------------- ------ ------ ------
<S> <C> <C> <C>
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
- ----------------------------------------------------------------------- ------ ------ ------
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
<S> <C>
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
- ----------------------------------------------------------------------------------- --------------
</TABLE>
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
<PAGE>
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
<PAGE>
- --------------------------------------------------------------------------------
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
<PAGE>
- --------------------------------------------------------------------------------
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
<PAGE>
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
<PAGE>
EXHIBIT INDEX
The following Exhibits are filed herewith or are incorporated herein
by reference.
<TABLE>
<CAPTION>
Exhibit Incorporated
By Reference to
Exhibit of Same Name
Exhibit in Prior Filing*
Number Description or Filed Herewith
- ------- ------------------------------------------------- -------------------
<S> <C> <C>
(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
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
(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
<PAGE>
- --------------------------------------------------------------------------------
(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
<PAGE>
- --------------------------------------------------------------------------------
*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.
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32
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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;
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(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.
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<PAGE>
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
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<PAGE>
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.
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<PAGE>
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;
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<PAGE>
(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
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<PAGE>
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.
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(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
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<PAGE>
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
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<PAGE>
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
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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
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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
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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.
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(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.
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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.
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(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.
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(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.
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(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)
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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.
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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
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(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.
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(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.
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(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,
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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
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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
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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
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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.
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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
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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 _________________________.
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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
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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
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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
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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
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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.
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(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
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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
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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
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(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
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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
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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.
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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
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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
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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
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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
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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).
<TABLE>
<CAPTION>
Credit Rating
- ----------------------------------------- Applicable Percentage of
60-day "AA" Composite
Moody's Standard & Poor's Commercial Paper Rate
or Reference Rate
- ----------------------------------------- --------------------------
<S> <C> <C>
"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%
</TABLE>
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
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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
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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.
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(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
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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.
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(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
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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
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(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
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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.
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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
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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
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(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
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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
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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
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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.
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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
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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
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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.
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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:
<TABLE>
<CAPTION>
Redemption Price
(as a Percentage of
Year liquidation preference)
---- ----------------------
<S> <C>
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%
</TABLE>
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
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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.
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(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
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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
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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
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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
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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;
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(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
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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.
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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.
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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.
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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.
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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
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<PAGE>
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
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<PAGE>
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.
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<PAGE>
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
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<PAGE>
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
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<PAGE>
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
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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
</TABLE>
<PAGE>
<TABLE>
<S> <C>
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
</TABLE>
<PAGE>
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
<PAGE>
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--
<PAGE>
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--
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
(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
<PAGE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
EXHIBIT A
[ARTWORK OF FLOOR PLAN]
<PAGE>
EXHIBIT NUMBER (11)
To 1996 Form 10-K
NORTHERN TRUST CORPORATION
COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
For the Year Ended December 31,
---------------------------------------------------
1996 1995 1994
------------- -------------- -------------
<S> <C> <C> <C>
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.
</TABLE>
<PAGE>
NORTHERN TRUST CORPORATION
COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
For the Year Ended December 31,
-----------------------------------------------------------------------
1996 1995 1994
-------------- -------------- --------------
<S> <C> <C> <C>
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.
</TABLE>
<PAGE>
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.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA
- ------------------------------------------------------------------------------
(In Millions Except Per
Share Amounts) 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
- --------------------------------------------------------------------------------
</TABLE>
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
<PAGE>
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
<PAGE>
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 $8.3
million have selected Northern Trust. The transition of these clients is
expected to be completed during the first half of 1997. Targeted marketing
efforts continue.
Competition has remained intense in the master trust/master custody business
affecting the pricing of associated products and services. Northern Trust
believes that it is positioned to deal with these pressures and maintain
profitability because of its focus on individual client service, developing
deeper client relationships that include a range of services, economies of
scale and technological innovation.
20
Northern Trust Corporation
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
CONSOLIDATED TRUST ASSETS UNDER ADMINISTRATION
- --------------------------------------------------------------------------------
Percent Five-Year
December 31 Change Compound
---------------------------------- ------- Growth
($ In Billions) 1996 1995 1994 1993 1992 1996/95 Rate
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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%
- -------------------------------------------------------------------------------
</TABLE>
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
<PAGE>
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 $.4 million
were realized in 1996. Of
22
Northern Trust Corporation
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ANALYSIS OF NET INTEREST INCOME (FTE)
- ------------------------------------------------------------------------------
Percent Change
---------------------------------------------------
($ In Millions) 1996 1995 1994 1996/95 1995/94
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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)
- ------------------------------------------------------------------------------
</TABLE>
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
<PAGE>
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
<PAGE>
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 $12
million of which are collateralized by federal agency securities. CMO's in
general have widely varying degrees of risk, which derives from the prepayment
risk on the
25
Northern Trust Corporation
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AVERAGE EARNING ASSETS AND SOURCE OF FUNDS
- --------------------------------------------------------------------------------
Percent Change
---------------------------------------------------
($ In Millions) 1996 1995 1994 1996/95 1995/94
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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%
- --------------------------------------------------------------------------------
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
- ----------------------------------------------
FOREIGN OUTSTANDINGS
- ----------------------------------------------
Commercial
(In Millions) Banks and Other Total
- ----------------------------------------------
<S> <C> <C> <C>
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
- ---------------------------------------------
</TABLE>
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
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
NONPERFORMING ASSETS AND 90 DAY PAST DUE LOANS
- ----------------------------------------------------------------------------
December 31
-----------------------------
(In Millions) 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
- ----------------------------------------------------------------------------
</TABLE>
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 $147.1 million last year. The decline in the year-end
reserve for credit losses as a percentage of outstanding loans and leases from
1.49% to 1.36% at year-end 1996 is primarily attributable to loan growth in
low-risk residential lending and improved credit quality. The following table
summarizes the changes in the reserve for credit losses for the current year
and the prior years.
INTEREST RATE RISK MANAGEMENT
Policies and limits for the management of Northern Trust's interest rate risk
are established by the Board of Directors. To ensure adherence to these
policies and limits, the Corporate Asset and Liability Policy Committee (ALCO)
establishes and monitors guidelines on the sensitivity of earnings to changes
in interest rates caused by on- and off-balance sheet positions. The goal of
the ALCO process is to manage the balance sheet to provide the maximum level of
earnings while maintaining a high quality balance sheet and acceptable levels
of interest rate risk and liquidity risk.
Sensitivity of earnings to interest rate changes arises when yields on assets
change differently from the interest costs on liabilities. To mitigate this
interest rate risk, the structure of
30
Northern Trust Corporation
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ANALYSIS OF RESERVE FOR CREDIT LOSSES
- -------------------------------------------------------------------------------
($ In Millions) 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
- --------------------------------------------------------------------------------
</TABLE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
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
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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 $ -- $ --
- ---------------------------------------------------------------------------------------
</TABLE>
- -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
<PAGE>
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 $150 million of Floating Rate Capital Securities.
33
Northern Trust Corporation
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
CAPITAL ADEQUACY
- -----------------------------------------------------------------------
December 31
----------------
($ In Millions) 1996 1995
- -----------------------------------------------------------------------
<S> <C> <C>
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
- -----------------------------------------------------------------------
</TABLE>
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
<PAGE>
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 $9.6 million
from pension settlement charges.
The following table reflects the earnings contribution of Northern Trust's
lines of business for the years ended December 31, 1996, 1995 and 1994 on the
basis described above.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Corporate and
Institutional Personal Corporate
Services Financial Services and Other
---------------------- ---------------------- -------------------
($ In Millions) 1996 1995 1994 1996 1995 1994 1996 1995 1994
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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%
</TABLE>
(1) On a fully taxable equivalent basis (FTE). Total includes $33.6 million,
$37.6 million and $33.4 million of FTE adjustment for 1996, 1995 and 1994,
respectively.
Note: Certain reclassifications have been made to 1995 and 1994 financial
information to conform to the current year presentation.
35
Northern Trust Corporation
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET
- -----------------------------------------------------------------------------
December 31
--------------------
($ In Millions) 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C>
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 $19,933.5
- -----------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements on pages 40-63.
36
Northern Trust Corporation
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF INCOME
- --------------------------------------------------------------------------------
For the Year Ended December 31
-----------------------------------
($ In Millions Except Per Share
Information) 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- --------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements on pages 40-63.
37
Northern Trust Corporation
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
For the Year Ended December 31
----------------------------------
(In Millions) 1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- -------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements on pages 40-63.
38
Northern Trust Corporation
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
- -------------------------------------------------------------------------------
For the Year Ended December 31
----------------------------------
(In Millions) 1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- --------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements on pages 40-63.
39
Northern Trust Corporation
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- -------------------------------------------------------------------------------
</TABLE>
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
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
December 31, 1995
----------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(In Millions) Cost Gains Losses Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- -------------------------------------------------------------------------------
</TABLE>
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.
<TABLE>
<CAPTION>
- ------------------------------------------------------------
REMAINING MATURITY OF SECURITIES AVAILABLE FOR SALE
- ------------------------------------------------------------
December 31, 1996
------------------
Amortized Fair
(In Millions) Cost Value
- ------------------------------------------------------------
<S> <C> <C>
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
- ------------------------------------------------------------
</TABLE>
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.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- --------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
-----------------------------------
Gross Gross
Book Unrealized Unrealized Fair
(In Millions) Value Gains Losses Value
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- --------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------
REMAINING MATURITY OF SECURITIES HELD TO MATURITY
- -------------------------------------------------------
December 31,
1996
-------------
Book Fair
(In Millions) Value Value
- -------------------------------------------------------
<S> <C> <C>
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
</TABLE>
Asset-backed and mortgage-backed securities were included in the above table
taking into account anticipated future prepayments.
43
Northern Trust Corporation
<PAGE>
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
$6.4 million for 1996, 1995 and 1994, respectively.
Refer to Note 20 for additional detail related to interest risk management
instruments used to hedge securities.
4. SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND SECURITIES SOLD UNDER
AGREEMENTS TO REPURCHASE--Securities purchased under agreements to resell and
securities sold under agreements to repurchase are recorded at the amounts at
which the securities were acquired or sold plus accrued interest. To minimize
any potential credit risk associated with these transactions, the fair value of
the securities purchased or sold is continuously monitored, limits are set on
exposure with counterparties, and the financial condition of counterparties is
regularly assessed. It is Northern Trust's policy to take possession of
securities purchased under agreements to resell. The following tables summarize
information related to securities purchased under agreements to resell and
securities sold under agreements to repurchase.
<TABLE>
<CAPTION>
- ----------------------------------------------------------
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
- ----------------------------------------------------------
December 31
------------------
($ In Millions) 1996 1995
- ----------------------------------------------------------
<S> <C> <C>
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
- ----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
- --------------------------------------------------------
December 31
------------------
($ In Millions) 1996 1995
- --------------------------------------------------------
<S> <C> <C>
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
- --------------------------------------------------------
</TABLE>
5. LOANS AND LEASES--Amounts outstanding in selected loan categories are shown
below.
<TABLE>
<CAPTION>
- ----------------------------------------------
December 31
------------------
(In Millions) 1996 1995
- ----------------------------------------------
<S> <C> <C>
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
- ----------------------------------------------
</TABLE>
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.
<TABLE>
<CAPTION>
- -----------------------------------------------
December 31
-----------
(In Millions) 1996 1995
- -----------------------------------------------
<S> <C> <C>
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
- -----------------------------------------------
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
- ----------------------------------------------------------
(In Millions) 1996 1995 1994
- ----------------------------------------------------------
<S> <C> <C> <C>
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
- ----------------------------------------------------------
</TABLE>
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.
<TABLE>
<CAPTION>
- ----------------------------------------------------------
December 31, 1996
------------------------------
Original Accumulated Net Book
(In Millions) Cost Depreciation Value
- ----------------------------------------------------------
<S> <C> <C> <C>
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
- ----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------
December 31, 1995
------------------------------
Original Accumulated Net Book
(In Millions) Cost Depreciation Value
- ----------------------------------------------------------
<S> <C> <C> <C>
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
- ----------------------------------------------------------
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
- ----------------------------------------
Future
Minimum
Lease
(In Millions) Payments
- ----------------------------------------
<S> <C>
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
- ----------------------------------------
</TABLE>
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.
<TABLE>
<CAPTION>
- --------------------------------------------------------------
Future
Minimum
Lease
Payments,
(In Millions) Net
- --------------------------------------------------------------
<S> <C>
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 $11.6
- --------------------------------------------------------------
</TABLE>
10. SENIOR NOTES, NOTES PAYABLE AND LINES OF CREDIT--SENIOR NOTES. Summary of
senior notes outstanding at December 31 is presented below.
<TABLE>
<CAPTION>
- ----------------------------------------------------------
($ In Millions) Rate 1996 1995
- ----------------------------------------------------------
<S> <C> <C> <C>
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 $17.0
- ----------------------------------------------------------
</TABLE>
Refer to bottom of next table for applicable notes.
NOTES PAYABLE. Summary of notes payable outstanding at December 31 is presented
below.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
($ In Millions) 1996 1995
- ---------------------------------------------------------------------
<S> <C> <C>
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
- ---------------------------------------------------------------------
</TABLE>
(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
<PAGE>
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.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
December 31
-------------
(In Millions) 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C>
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
- ------------------------------------------------------------------------------
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
- --------------------------------------------------------
COMMON STOCK OUTSTANDING
- --------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------
<S> <C> <C> <C>
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
- --------------------------------------------------------
</TABLE>
Note: 1996 share activity reflects the December 1996 two-for-one stock split.
48
Northern Trust Corporation
<PAGE>
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%.
<TABLE>
<CAPTION>
- ----------------------------------------------------
Income Tax
Provision
---------------------
(In Millions) 1996 1995 1994
- ----------------------------------------------------
<S> <C> <C> <C>
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
- ----------------------------------------------------
</TABLE>
The components of the consolidated provision for income taxes for each of the
three years ended December 31, are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------
(In Millions) 1996 1995 1994
- -------------------------------------------------
<S> <C> <C> <C>
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
- -------------------------------------------------
</TABLE>
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:
<TABLE>
<CAPTION>
- ------------------------------------------------------------
(In Millions) 1996 1995
- ------------------------------------------------------------
<S> <C> <C>
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
- ------------------------------------------------------------
</TABLE>
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:
<TABLE>
<CAPTION>
- --------------------------------------------------------------
December 31
-------------
(In Millions) 1996 1995
- --------------------------------------------------------------
<S> <C> <C>
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
- --------------------------------------------------------------
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
(In Millions) 1996 1995 1994
- -------------------------------------------------------------------
<S> <C> <C> <C>
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
- -------------------------------------------------------------------
</TABLE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
PLAN STATUS
- --------------------------------------------------------------------------------
Qualified Nonqualified
Plan Plan
-------------- --------------
September 30
------------------------------
($ In Millions) 1996 1995 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------
NET PERIODIC PENSION COST
- -----------------------------------------------------------
Qualified Nonqualified
Plan Plan
------------ -------------
(In
Millions) 1996 1995 1996 1995
- -----------------------------------------------------------
<S> <C> <C> <C> <C>
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
- -----------------------------------------------------------
</TABLE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
(In Millions) 1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C>
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
- ----------------------------------------------------------------------------
</TABLE>
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.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
PLAN STATUS
- --------------------------------------------------------------------------------
(In Millions) 1996 1995
- -----------------------------------------------------------------------
<S> <C> <C>
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
- -----------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
NET PERIODIC POSTRETIREMENT BENEFIT COST
- -----------------------------------------------------------------------
(In Millions) 1996 1995
- -----------------------------------------------------------------------
<S> <C> <C>
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
- -----------------------------------------------------------------------
</TABLE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
December 31
-----------------------------------
1996 1995
----------------- -----------------
Book Fair Book Fair
(In Millions) Value Value Value Value
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- ------------------------------------------------------------------------------
</TABLE>
53
Northern Trust Corporation
<PAGE>
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.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
December 31
-----------------------
1996 1995
----------- -----------
Book Fair Book Fair
(In Millions) Value Value Value Value
- ---------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- ---------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------
Fair Value
-------------
(In Millions) 1996 1995
- ----------------------------------------------------
<S> <C> <C>
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
- ----------------------------------------------------
</TABLE>
*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.
<TABLE>
<CAPTION>
- -----------------------------------------------------------
COMMITMENTS AND LETTERS OF CREDIT
- -----------------------------------------------------------
December 31
------------------
(In Millions) 1996 1995
- -----------------------------------------------------------
<S> <C> <C>
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
- -----------------------------------------------------------
</TABLE>
*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
<PAGE>
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.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
RISK MANAGEMENT INSTRUMENTS
- --------------------------------------------------------------------------------
Contractual/Notional
Amounts
December 31
---------------------
(In Millions) 1996 1995
- ----------------------------------------------------------------------
<S> <C> <C>
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
- --------------------------------------------------------------------------------
</TABLE>
55
Northern Trust Corporation
<PAGE>
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.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
REMAINING MATURITY OF ASSET/LIABILITY MANAGEMENT INTEREST RATE SWAPS
- -------------------------------------------------------------------------------
($ In Millions) 1997 1998 1999 2000 2001 2002-2006 Total
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
- -------------------------------------------------------------------------------
</TABLE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
- ---------------------------------------------------------
Outstanding Options
---------------------
Weighted
Average
Exercise
Shares Price
- ---------------------------------------------------------
<S> <C> <C>
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
- ---------------------------------------------------------
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
- -------------------------------------------------------------
(In Millions Except
Per Share Information) 1996 1995
- -------------------------------------------------------------
<S> <C> <C>
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
- -------------------------------------------------------------
</TABLE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
*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.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
- -----------------------------------------------------------------------------------------
</TABLE>
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
<PAGE>
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 $2.1 million of other intangibles, which are being
amortized over fifteen and ten years, respectively. Bent Tree is expected to be
merged into Northern Trust Bank of Texas N.A. during the first quarter of 1997.
27. REGULATORY CAPITAL REQUIREMENTS--Northern Trust and its subsidiary banks
are subject to various regulatory capital requirements administered by the
federal bank regulatory authorities. Under these requirements, banks must
maintain specific ratios of total and tier I capital to risk-weighted assets and
of tier I capital to average assets in order to be classified as ""well
capitalized.'' The regulatory capital requirements impose certain restrictions
upon banks that meet minimum capital requirements but are not ""well
capitalized'' and obligate the federal bank regulatory authorities to take
""prompt corrective action'' with respect to banks that do not maintain such
minimum ratios. Such prompt corrective action could have a direct material
effect on a bank's financial statements.
As of December 31, 1996, each of Northern's significant subsidiary banks had
capital ratios above the level required for classification as a "well
capitalized" institution and had not received any regulatory notification of a
lower classification. There are no conditions or events since that date, that
management believes have adversely affected the capital categorization of any
significant subsidiary bank for these purposes. The following table summarizes
the risk-
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Minimum to
Qualify as
Well
Actual Capitalized
------------ ------------
($ In Millions) Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
</TABLE>
61
Northern Trust Corporation
<PAGE>
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.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
CONDENSED BALANCE SHEET
- -------------------------------------------------------------------
December 31
---------------------
(In Millions) 1996 1995
- -------------------------------------------------------------------
<S> <C> <C> <C>
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
- -------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
CONDENSED STATEMENT OF INCOME
- ------------------------------------------------------------------------------
For the Year Ended
December 31
----------------------
(In Millions) 1996 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- ------------------------------------------------------------------------------
</TABLE>
62
Northern Trust Corporation
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
CONDENSED STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------
For the Year Ended
December 31
----------------------
(In Millions) 1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- --------------------------------------------------------------------------------
</TABLE>
63
Northern Trust Corporation
<PAGE>
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
<PAGE>
CONSOLIDATED FINANCIAL STATISTICS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AVERAGE BALANCE SHEET
- --------------------------------------------------------------------------------
($ In Millions) 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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 $13,418.0
- ----------------------------------------------------------------------------------
RATIOS
Dividend Payout Ratio 28.5% 28.6% 28.4% 25.6% 24.4%
Return on Average Assets 1.23 1.13 1.02 1.07 1.11
Return on Average Common
Equity 18.64 17.58 16.57 17.89 18.71
Tier 1 Capital to Risk-
Adjusted Assets-End of
Period 8.19 8.82 8.95 9.31 8.08
Total Capital to Risk-
Adjusted Assets-End of
Period 11.87 12.49 12.36 13.41 11.56
Leverage Ratio 6.42 6.19 6.22 6.24 6.06
Average Stockholders'
Equity to Average As-
sets 7.09 7.07 6.85 6.83 6.91
Average Loans and Leases
Times Average Stock-
holders' Equity 7.0X 6.7x 6.8x 6.8x 7.0x
- ----------------------------------------------------------------------------------
Stockholders-End of Pe-
riod 3,335 3,331 2,962 2,922 2,893
Staff-End of Period
(Full-time equivalent) 6,933 6,531 6,608 6,259 6,249
- ----------------------------------------------------------------------------------
</TABLE>
66
Northern Trust Corporation
<PAGE>
CONSOLIDATED FINANCIAL STATISTICS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ANALYSIS OF NET INTEREST INCOME
- --------------------------------------------------------------------------------
(Interest and Rate on a
Taxable Equivalent Basis) 1996 1995
- --------------------------------------------------------------------------------
($ In Millions) Interest Volume Rate Interest Volume Rate
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AVERAGE EARNING ASSETS
Money Market Assets
Federal Funds Sold and
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%
- --------------------------------------------------------------------------------
</TABLE>
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
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1994 1993 1992
- --------------------------------------------------------------------------------
Interest Volume Rate Interest Volume Rate Interest Volume Rate
- --------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C> <S>
$ 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 $11,605.9 2.95%
- --------------------------------------------------------------------------------
</TABLE>
69
Northern Trust Corporation
<PAGE>
CONSOLIDATED FINANCIAL STATISTICS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
QUARTERLY FINANCIAL DATA
STATEMENT OF INCOME
- --------------------------------------------------------------------------------
1996
-------------------------------------------------
($ In Millions Except Per Entire Fourth Third Second First
Share Information) Year Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
- --------------------------------------------------------------------------------
</TABLE>
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
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------
- -------------------------------------------------
1995
- -------------------------------------------------
Entire Fourth Third Second First
Year Quarter Quarter Quarter Quarter
- --------------------------------------------------
<S> <C> <C> <C> <C>
$ 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
- -------------------------------------------------
</TABLE>
71
Northern Trust Corporation
<PAGE>
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
<PAGE>
- --------------------------------------------------------------------------------
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
<PAGE>
EXHIBIT NUMBER (21)
TO 1996 FORM 10-K
NORTHERN TRUST CORPORATION SUBSIDIARIES
AS OF MARCH 1, 1997
<TABLE>
<CAPTION>
Percent Jurisdiction of
Owned Incorporation
----- ---------------
<S> <C> <C>
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
</TABLE>
- ---------------
* 75.5% directly and 24.5% through Tanglewood Bancshares, Inc.
<PAGE>
NORTHERN TRUST CORPORATION SUBSIDIARIES
AS OF MARCH 1, 1997
(continued)
<TABLE>
<CAPTION>
Percent State of
Owned Incorporation
----- -------------
<S> <C> <C>
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
</TABLE>
<PAGE>
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
<PAGE>
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
<PAGE>
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
---------------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND> This schedule contains summary financial information extracted from
the Consolidated Balance Sheet and the Consolidated Statement of Income and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,292,533
<INT-BEARING-DEPOSITS> 2,059,993
<FED-FUNDS-SOLD> 1,022,573
<TRADING-ASSETS> 4,797
<INVESTMENTS-HELD-FOR-SALE> 4,311,706
<INVESTMENTS-CARRYING> 498,367
<INVESTMENTS-MARKET> 518,822
<LOANS> 10,937,429
<ALLOWANCE> 148,327
<TOTAL-ASSETS> 21,608,325
<DEPOSITS> 13,796,227
<SHORT-TERM> 5,200,474
<LIABILITIES-OTHER> 624,939
<LONG-TERM> 442,553
<COMMON> 189,934
0
120,000
<OTHER-SE> 1,234,198
<TOTAL-LIABILITIES-AND-EQUITY> 21,608,325
<INTEREST-LOAN> 693,372
<INTEREST-INVEST> 351,456
<INTEREST-OTHER> 106,748
<INTEREST-TOTAL> 1,151,576
<INTEREST-DEPOSIT> 447,815
<INTEREST-EXPENSE> 763,203
<INTEREST-INCOME-NET> 388,373
<LOAN-LOSSES> 12,000
<SECURITIES-GAINS> 384
<EXPENSE-OTHER> 766,792
<INCOME-PRETAX> 387,421
<INCOME-PRE-EXTRAORDINARY> 387,421
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 258,821
<EPS-PRIMARY> 2.21
<EPS-DILUTED> 2.20
<YIELD-ACTUAL> 2.25
<LOANS-NON> 16,874
<LOANS-PAST> 15,163
<LOANS-TROUBLED> 2,618
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 147,131
<CHARGE-OFFS> 15,565
<RECOVERIES> 3,798
<ALLOWANCE-CLOSE> 148,327
<ALLOWANCE-DOMESTIC> 92,735
<ALLOWANCE-FOREIGN> 2,326
<ALLOWANCE-UNALLOCATED> 53,266
</TABLE>
