<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- - --- ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1994
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 LASALLE STREET
CHICAGO, ILLINOIS 60675
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (312) 630-6000
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
----- -----
53,378,320 SHARES - $1.66 2/3 PAR VALUE
(SHARES OF COMMON STOCK OUTSTANDING ON MARCH 31, 1994)
1
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET Northern Trust Corporation
<TABLE>
<CAPTION>
March 31 December 31 March 31
--------- ----------- ---------
(In Millions) 1994 1993 1993
- - ---------------------------------------- --------- ----------- ---------
<S> <C> <C> <C>
ASSETS
Cash and Due from Banks $ 1,167.2 $ 1,519.7 $ 1,039.1
Money Market Assets
Federal Funds Sold and Securities
Purchased under Agreements to Resell 418.3 577.8 158.7
Time Deposits with Banks 2,420.8 2,090.4 1,541.9
Other 168.1 72.3 52.9
- - ---------------------------------------- --------- --------- ---------
Total 3,007.2 2,740.5 1,753.5
- - ---------------------------------------- --------- --------- ---------
Securities (Fair value $4,730.2 at March
1994, $4,093.5 at December 1993 and
$4,260.4 at March 1993) 4,689.9 4,038.7 4,197.9
Loans and Leases (Net of unearned income
of $64.4 at March 1994, $69.4 at
December 1993 and $65.4 at March 1993) 8,081.2 7,623.0 7,187.8
Reserve for Credit Losses (145.6) (145.5) (145.5)
Buildings and Equipment 295.0 291.9 288.3
Customers' Acceptance Liability 81.4 56.9 134.1
Trust Security Settlement Receivables 295.6 293.1 240.8
Other Assets 695.2 484.3 573.0
- - ---------------------------------------- --------- --------- ---------
Total Assets $18,167.1 $16,902.6 $15,269.0
- - ---------------------------------------- --------- --------- ---------
LIABILITIES
Deposits
Demand and Other Noninterest-Bearing $ 2,553.6 $ 2,464.7 $ 2,506.5
Savings and Money Market Deposits 3,096.9 3,387.6 3,428.0
Savings Certificates 1,115.2 1,111.3 1,221.1
Other Time 322.4 333.4 384.8
Foreign Offices -- Demand 460.6 297.1 48.5
-- Time 3,095.8 2,739.3 1,956.4
- - ---------------------------------------- --------- --------- ---------
Total Deposits 10,644.5 10,333.4 9,545.3
Federal Funds Purchased 1,159.5 1,215.8 1,649.8
Securities Sold under Agreements to
Repurchase 1,667.7 602.2 1,507.3
Commercial Paper 144.9 124.1 125.2
Other Borrowings 1,712.5 2,001.2 313.6
Senior Medium-Term Notes 807.0 817.0 492.0
Notes Payable (Qualifying for risk-based
capital, $178.8 at March 1994,
$183.4 at December 1993 and $108.4 at
March 1993) 326.8 326.8 233.2
Liability on Acceptances 81.4 56.9 134.1
Other Liabilities 438.8 273.5 220.8
- - ---------------------------------------- --------- --------- ---------
Total Liabilities 16,983.1 15,750.9 14,221.3
- - ---------------------------------------- --------- --------- ---------
STOCKHOLDERS' EQUITY
Preferred Stock 170.0 170.0 170.0
Common Stock -- $1.66 2/3 Par Value 89.7 89.7 89.7
</TABLE>
<TABLE>
<CAPTION>
MARCH 1994 December 1993 March 1993
------------------------------------------------------------
<S> <C> <C> <C>
Shares authorized 140,000,000 140,000,000 70,000,000
Shares issued 53,826,261 53,826,261 53,826,261
Shares outstanding 53,378,320 53,292,967 52,942,234
</TABLE>
<TABLE>
<S> <C> <C> <C>
Capital Surplus 303.3 303.0 300.9
Retained Earnings 664.0 631.9 540.5
Net Unrealized Loss on Securities Available
for Sale (5.9) (.4) (.8)
Translation Adjustments .6 .6 .6
Common Stock Issuable -- Performance Plan 20.2 11.8 15.6
Deferred Compensation -- ESOP and Other (48.1) (43.5) (52.0)
Treasury Stock-at cost, 447,941 shares at
March 1994, 533,294 shares at
December 1993 and 884,027 shares at March
1993 (9.8) (11.4) (16.8)
- - ---------------------------------------- --------- --------- ---------
Total Stockholders' Equity 1,184.0 1,151.7 1,047.7
- - ---------------------------------------- --------- --------- ---------
Total Liabilities and Stockholders'
Equity $18,167.1 $16,902.6 $15,269.0
- - ---------------------------------------- --------- --------- ---------
</TABLE>
2
<PAGE>
CONSOLIDATED STATEMENT OF INCOME Northern Trust Corporation
<TABLE>
<CAPTION>
FIRST QUARTER
ENDED MARCH 31
---------------------
(In Millions) 1994 1993
- - ------------------------------------------------------ ---------- ----------
<S> <C> <C>
Interest Income
Money Market Assets
Federal Funds Sold and Securities Purchased under
Agreements to Resell $ 2.2 $ 1.9
Time Deposits with Banks 22.5 20.3
Other 1.0 .7
- - ------------------------------------------------------ ---------- ----------
Total 25.7 22.9
- - ------------------------------------------------------ ---------- ----------
Securities 47.7 42.8
Loans and Leases 110.8 105.0
- - ------------------------------------------------------ ---------- ----------
Total Interest Income 184.2 170.7
- - ------------------------------------------------------ ---------- ----------
Interest Expense
Deposits -- Savings and Money Market Deposits 19.2 20.5
-- Savings Certificates 11.3 13.6
-- Other Time 3.1 3.9
-- Foreign Offices 23.3 23.0
Federal Funds Purchased 13.3 11.2
Securities Sold under Agreements to Repurchase 9.3 3.7
Commercial Paper 1.0 1.2
Other Borrowings 9.1 5.4
Senior Medium-Term Notes 6.5 3.8
Notes Payable 6.2 4.8
- - ------------------------------------------------------ ---------- ----------
Total Interest Expense 102.3 91.1
- - ------------------------------------------------------ ---------- ----------
Net Interest Income 81.9 79.6
Provision for Credit Losses 3.0 6.0
- - ------------------------------------------------------ ---------- ----------
Net Interest Income after Provision for Credit Losses 78.9 73.6
- - ------------------------------------------------------ ---------- ----------
Noninterest Income
Trust Fees 109.5 98.9
Security Commissions and Trading Income 6.4 5.2
Other Operating Income 33.1 31.9
Investment Security Gains .2 1.6
- - ------------------------------------------------------ ---------- ----------
Total Noninterest Income 149.2 137.6
- - ------------------------------------------------------ ---------- ----------
Income before Noninterest Expenses 228.1 211.2
- - ------------------------------------------------------ ---------- ----------
Noninterest Expenses
Salaries 74.4 72.9
Pension and Other Employee Benefits 19.1 17.0
Occupancy Expense 13.7 13.7
Equipment Expense 11.3 10.5
Other Operating Expenses 43.4 39.9
- - ------------------------------------------------------ ---------- ----------
Total Noninterest Expenses 161.9 154.0
- - ------------------------------------------------------ ---------- ----------
Income before Income Taxes 66.2 57.2
Provision for Income Taxes (Includes related
investment security transactions tax provision of $.1
in 1994 and $.5 in 1993) 20.8 17.0
- - ------------------------------------------------------ ---------- ----------
NET INCOME $ 45.4 $ 40.2
- - ------------------------------------------------------ ---------- ----------
Net Income Applicable to Common Stock $ 43.8 $ 38.6
- - ------------------------------------------------------ ---------- ----------
NET INCOME PER COMMON SHARE -- PRIMARY $ .80 $ .71
-- FULLY DILUTED .80 .71
- - ------------------------------------------------------ ---------- ----------
Average Number of Common Shares Outstanding
-- Primary 54,681,649 54,479,957
-- Fully Diluted 55,899,002 55,893,947
- - ------------------------------------------------------ ---------- ----------
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY Northern Trust Corporation
FIRST QUARTER
ENDED MARCH 31
------------------
(In Millions) 1994 1993
- - ---------------------------------------------------- -------- --------
<S> <C> <C>
PREFERRED STOCK
Balance at January 1 and March 31 $ 170.0 $ 170.0
- - ---------------------------------------------------- -------- --------
COMMON STOCK
Balance at January 1 and March 31 89.7 89.7
- - ---------------------------------------------------- -------- --------
CAPITAL SURPLUS
Balance at January 1 303.0 300.0
Stock Issued--Incentive Plan and Awards .3 .9
- - ---------------------------------------------------- -------- --------
Balance at March 31 303.3 300.9
- - ---------------------------------------------------- -------- --------
RETAINED EARNINGS
Balance at January 1 631.9 511.7
Net Income 45.4 40.2
Dividend Declared on Common Stock (11.8) (9.8)
Dividends Declared on Preferred Stock (1.5) (1.6)
- - ---------------------------------------------------- -------- --------
Balance at March 31 664.0 540.5
- - ---------------------------------------------------- -------- --------
NET UNREALIZED LOSS ON SECURITIES AVAILABLE FOR SALE
Balance at January 1 (.4) (1.3)
Unrealized Gain (Loss), net (5.5) .5
- - ---------------------------------------------------- -------- --------
Balance at March 31 (5.9) (.8)
- - ---------------------------------------------------- -------- --------
TRANSLATION ADJUSTMENTS
Balance at January 1 and March 31 .6 .6
- - ---------------------------------------------------- -------- --------
COMMON STOCK ISSUABLE--PERFORMANCE PLAN
Balance at January 1 11.8 8.1
Stock Issuable, net of Stock Issued 8.4 7.5
- - ---------------------------------------------------- -------- --------
Balance at March 31 20.2 15.6
- - ---------------------------------------------------- -------- --------
DEFERRED COMPENSATION--ESOP AND OTHER
Balance at January 1 (43.5) (49.5)
Compensation Deferred (5.3) (3.0)
Compensation Amortized .7 .5
- - ---------------------------------------------------- -------- --------
Balance at March 31 (48.1) (52.0)
- - ---------------------------------------------------- -------- --------
TREASURY STOCK
Balance at January 1 (11.4) (18.8)
Stock Options and Awards 2.1 2.2
Stock Purchased (.5) (.2)
- - ---------------------------------------------------- -------- --------
Balance at March 31 (9.8) (16.8)
- - ---------------------------------------------------- -------- --------
TOTAL STOCKHOLDERS' EQUITY AT MARCH 31 $1,184.0 $1,047.7
- - ---------------------------------------------------- -------- --------
</TABLE>
4
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS Northern Trust Corporation
<TABLE>
<CAPTION>
FIRST QUARTER
ENDED MARCH 31
------------------
(In Millions) 1994 1993
- - ---------------------------------------------------------- -------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 45.4 $ 40.2
Adjustments to Reconcile Net Income to Net Cash Provided
by Operating Activities:
Provision for Credit Losses 3.0 6.0
Depreciation and Amortization 10.7 9.9
Increase in Interest Receivable (34.6) (14.7)
Increase (Decrease) in Interest Payable .5 (5.3)
Amortization and Accretion of Securities and Unearned
Income 18.4 16.8
Net Increase in Trading Account Securities (19.6) (29.5)
Other Noncash, net (10.0) (71.1)
- - ---------------------------------------------------------- -------- --------
Net Cash Provided by (Used in) Operating Activities 13.8 (47.7)
- - ---------------------------------------------------------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Securities--Held to Maturity (86.7) (252.7)
Proceeds from Maturity and Redemption of Securities--Held
to Maturity 87.6 9.5
Purchases of Securities--Available for Sale (2,377.4) (1,336.8)
Proceeds from Sale of Securities--Available for Sale 85.6 95.1
Proceeds from Maturity and Redemption of Securities--
Available for Sale 1,636.3 480.7
Net Decrease in Federal Funds Sold and Securities
Purchased under Agreements to Resell 159.5 297.8
Net (Increase) Decrease in Time Deposits with Banks (330.4) 317.6
Net (Increase) Decrease in Other Money Market Assets (95.8) 29.4
Net Increase in Loans and Leases (457.3) (256.5)
Purchases of Buildings and Equipment (13.9) (15.6)
Net (Increase) Decrease in Trust Security Settlement
Receivables (2.5) 321.3
Other, net (3.2) (.3)
- - ---------------------------------------------------------- -------- --------
Net Cash Used in Investing Activities (1,398.2) (310.5)
- - ---------------------------------------------------------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increase (Decrease) in Demand and Other Noninterest-
Bearing Deposits 252.4 (157.2)
Net Decrease in Savings and Money Market Deposits (290.7) (183.5)
Net Increase in Certificates of Deposit and Other
Interest-Bearing Deposits 349.4 15.4
Net Increase in Federal Funds Purchased and Short-Term
Other Borrowings 618.7 638.9
Proceeds from Other Borrowed Funds 1,593.8 211.1
Repayments of Other Borrowed Funds (1,492.0) (368.6)
Net Increase (Decrease) in Commercial Paper 20.8 (1.8)
Proceeds from Senior Medium-Term Notes and Notes Payable -- 180.0
Repayments of Senior Medium-Term Notes and Notes Payable (10.0) --
Purchase of Treasury Stock (.2) (.1)
Net Proceeds from Stock Options 1.0 1.5
Cash Dividends Paid on Common and Preferred Stock (13.2) (11.5)
Other, net 1.9 1.3
- - ---------------------------------------------------------- -------- --------
Net Cash Provided by Financing Activities 1,031.9 325.5
- - ---------------------------------------------------------- -------- --------
Decrease in Cash and Due from Banks (352.5) (32.7)
Cash and Due from Banks at Beginning of Year 1,519.7 1,071.8
- - ---------------------------------------------------------- -------- --------
CASH AND DUE FROM BANKS AT MARCH 31 $1,167.2 $1,039.1
- - ---------------------------------------------------------- -------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest Paid on Deposits and Short- and Long-Term
Borrowings $ 101.8 $ 96.4
Income Taxes Paid 9.9 1.3
- - ---------------------------------------------------------- -------- --------
</TABLE>
5
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION - The consolidated financial statements include the
accounts of Northern Trust Corporation and its subsidiaries, all of which are
wholly owned. Significant intercompany balances and transactions have been
eliminated. The financial statements as of March 31, 1994 and 1993 have not
been audited by independent public accountants. In the opinion of management,
all adjustments necessary for a fair presentation of the financial position and
the results of operations for the interim periods have been made. For a
description of significant accounting principles of the Corporation, see the
Notes to Financial Statements in the 1993 Annual Report to Stockholders.
2. SECURITIES - The Corporation adopted Statement of Financial Accounting
Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," effective January 1, 1994. Under SFAS No. 115, debt and equity
securities not intended to be held to maturity and not held for trading are
classified as "available for sale". Such securities are reported at fair value
with both unrealized gains and losses credited or charged, net of tax effect,
directly to stockholders' equity. As of March 31, 1994, stockholders' equity
decreased by $5.9 million, net of tax, to recognize the depreciation on
securities available for sale.
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. Realized gross gains related to
securities available for sale totaled $.2 million during the first quarter of
1994. There were no realized gross losses during the first quarter.
The following tables summarize the book and fair values of securities of the
Corporation.
<TABLE>
<CAPTION>
SECURITIES
March 31, 1994 December 31, 1993 March 31, 1993
----------------------------------------------------------
Fair Fair Fair
(In Millions) Book Value Book Value Book Value
- - ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
HELD TO MATURITY
U.S. Government............ $ 71.5 $ 71.4 $2,343.7 $2,345.6 $2,551.5 $2,555.8
Obligations of States and
Political Subdivisions... 478.2 518.6 493.5 546.9 503.6 560.4
Federal Agency............. - - 833.1 831.8 737.4 736.3
Other...................... 30.3 30.3 120.5 120.7 180.5 181.3
- - ---------------------------------------------------------------------------------------
Subtotal................. 580.0 620.3 3,790.8 3,845.0 3,973.0 4,033.8
- - ---------------------------------------------------------------------------------------
AVAILABLE FOR SALE*
U.S. Government............ 2,494.2 2,494.2 - - 71.2 71.9
Federal Agency............. 1,194.4 1,194.4 77.7 78.2 5.8 6.2
Other...................... 365.4 365.4 133.9 134.0 116.8 117.4
- - ---------------------------------------------------------------------------------------
Subtotal................. 4,054.0 4,054.0 211.6 212.2 193.8 195.5
- - ---------------------------------------------------------------------------------------
TRADING ACCOUNT 55.9 55.9 36.3 36.3 31.1 31.1
- - ---------------------------------------------------------------------------------------
TOTAL SECURITIES $4,689.9 $4,730.2 $4,038.7 $4,093.5 $4,197.9 $4,260.4
- - ---------------------------------------------------------------------------------------
</TABLE>
*Prior to 1994, securities shown as available for sale were classified as held
for sale and carried at the lower of cost or fair value.
6
<PAGE>
<TABLE>
<CAPTION>
March 31, 1994
----------------------------------------
Book Gross Unrealized Fair
---------------------
<S> <C> <C> <C> <C>
(In Millions) Value Gains Losses Value
- - ---------------------------------------------------------------------
Securities Held to Maturity
U.S. Government 71.5 - .1 71.4
Obligations of States and
Political Subdivisions 478.2 41.0 .6 518.6
Other 30.3 - - 30.3
- - ---------------------------------------------------------------------
Total $580.0 $41.0 $.7 $620.3
- - ---------------------------------------------------------------------
March 31, 1994
-----------------------------------------
Amortized Gross Unrealized Book/Fair
----------------
(In Millions) Cost Gains Losses Value
- - ---------------------------------------------------------------------
Securities Available for Sale
U.S. Government 2,503.2 .7 9.7 2,494.2
Federal Agency 1,193.8 2.2 1.6 1,194.4
Other 366.5 1.1 2.2 365.4
- - ---------------------------------------------------------------------
Total $4,063.5 $4.0 $13.5 $4,054.0
- - ---------------------------------------------------------------------
</TABLE>
3. PLEDGED ASSETS - Securities and loans pledged to secure public and trust
deposits and for other purposes as required or permitted by law were $4.4
billion on March 31, 1994, $3.6 billion on December 31, 1993 and $3.0 billion on
March 31, 1993.
4. CONTINGENT LIABILITIES - Standby letters of credit outstanding were $800.8
million on March 31, 1994, $827.4 million on December 31, 1993 and $746.6
million on March 31, 1993.
5. LOANS AND LEASES - Selected loan categories in the Corporation's loan
portfolio are shown below.
<TABLE>
<CAPTION>
March 31 December 31 March 31
-------------------------------
(In Millions) 1994 1993 1993
- - ------------------------------------------------------------
<S> <C> <C> <C>
Domestic
Commercial............... $2,619.3 $2,421.1 $2,449.9
Brokers.................. 319.9 249.4 311.6
Commercial Real Estate... 486.0 506.5 497.8
Residential Real Estate.. 3,037.7 2,883.3 2,379.5
Consumer................. 598.0 617.5 524.6
Other.................... 455.0 453.5 393.6
Lease Financing.......... 141.3 138.4 134.2
- - ------------------------------------------------------------
Total Domestic............. 7,657.2 7,269.7 6,691.2
International.............. 423.9 353.3 496.6
- - ------------------------------------------------------------
Total...................... $8,081.1 $7,623.0 $7,187.8
- - ------------------------------------------------------------
</TABLE>
At March 31, 1994, other domestic loans includes $384.9 million of overnight
trust-related advances in connection with next day security settlements,
compared with $375.6 million at December 31, 1993 and $364.1 million at March
31, 1993.
7
<PAGE>
6. RESERVE FOR CREDIT LOSSES - Changes in the reserve for credit losses were as
follows.
<TABLE>
<CAPTION>
First Quarter
Ended March 31
------------------
(In Millions) 1994 1993
- - ------------------------------------------------------
<S> <C> <C>
Balance at Beginning of Period $145.5 $145.5
Losses Charged to Reserve....... (4.2) (7.3)
Recoveries Credited to Reserve.. 1.3 1.3
- - ------------------------------------------------------
Net Losses Charged to Reserve..... (2.9) (6.0)
Provision for Credit Losses....... 3.0 6.0
- - ------------------------------------------------------
Balance at End of Period.......... $145.6 $145.5
- - ------------------------------------------------------
</TABLE>
7. ACCOUNTING FOR DERIVATIVE FINANCIAL INSTRUMENTS - In January, 1994, the
Corporation adopted Financial Accounting Standards Board (FASB) Interpretation
No. 39, "Offsetting of Amounts Related to Certain Contracts", and began
recording recognized gains and losses on foreign exchange contracts, interest
rate swaps, and interest rate protection contracts in the balance sheet on a
gross basis. As a result, other assets and other liabilities increased by $153
million. Prior to 1994, consistent with industry practice, the Corporation
recorded recognized gains and losses on these contracts on a net basis.
8. SUBSEQUENT EVENTS - On April 15, 1994, the Corporation completed the
acquisition of Hazlehurst Associates, Inc., a privately held retirement benefit
plan service company. Hazlehurst shareholders received 534,113 shares of
Northern Trust Corporation Common Stock (and cash for fractional shares)
totaling $22.5 million based on the $42.125 per share value calculated under the
acquisition agreement. As of March 31, 1994, Hazlehurst had total assets of
$8.6 million and pretax net income for the three months ended March 31, 1994 of
$.5 million. The transaction will be accounted for as a pooling of interests;
however, prior period financial statements will not be restated, due to the
immateriality of the acquisition.
On April 19, 1994, the Corporation sold its 21% interest in Banque Scandinave en
Suisse, Geneva, to Skandanaviska Enskilda Banken (SEB), Stockholm, Sweden,
majority owner of Banque Scandinave. The sale, net of ancillary and certain
nonrecurring transition costs associated with the transfer of custody accounts
to the London Branch estimated at $6 million, is expected to result in a pretax
gain of $28.5 million. The Corporation also received a final dividend of $2.3
million in April.
8
<PAGE>
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER EARNINGS HIGHLIGHTS
Net income for the first quarter totaled a record $45.4 million, an increase of
13% over the $40.2 million reported in 1993. On a fully diluted basis, net
income per common share also increased 13% to $.80 from $.71 in 1993. The
annualized return on average common equity was 17.9% versus 18.4% a year ago and
the return on average assets was 1.06% for 1994 compared with 1.09% last year.
Much of the strong earnings performance was attributable to record level trust
fees and substantial growth in foreign exchange trading profits. Earnings were
also favorably affected by higher security commissions and trading income, a
decline in the provision for credit losses and the limited growth in noninterest
expenses.
NONINTEREST INCOME
Noninterest income totaled $149.2 million for the quarter, accounting for 62% of
total taxable equivalent revenue, and was 8% above last year's $137.6 million.
Trust fees totaled $109.5 million, up $10.6 million or 11% from $98.9 million in
1993. Trust fees represent 73% of noninterest income and 46% of total taxable
equivalent revenue. Compared with 1993, Personal Financial Services fees
increased 9% to $55.9 million while Corporate Financial Services fees were up
12% to $53.6 million. Successful business development efforts and higher market
values for assets under administration were the principal factors underlying the
growth in trust fees. The overall increase reflected growth in revenues for the
core and ancillary trust products, including domestic and global custody,
investment management, personal trustee and security lending services.
A higher level of transaction activity, primarily by the clients of Northern
Futures Corporation, caused security commissions and trading income to increase
22% for a total of $6.4 million, compared with $5.2 million a year ago. Other
operating income amounted to $33.1 million, up 4%, from $31.9 million reported
in 1993. The majority of the increase in other operating income resulted from
the strong foreign exchange trading profits which totaled $10.0 million or $2.8
million higher than the $7.2 million reported in 1993. The fee portion of
treasury management revenues increased 3%, to $12.0 million. Total treasury
management revenues, which include interest earned on compensating deposit
balances, totaled $17.9 million, up 5% from the $17.1 million reported last
year. In 1993, other operating income benefited $3.6 million from the sale of
mortgages compared with $.4 million this year. Securities sales produced gains
of $241,000, compared with $1.6 million a year ago.
9
<PAGE>
NET INTEREST INCOME
Net interest income totaled $81.9 million, a 3% increase over the $79.6 million
in the first quarter of 1993. 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. When net interest income is adjusted to a fully
taxable equivalent (FTE) basis, yields on taxable, nontaxable and partially
taxable assets are comparable. Net interest income on a FTE basis for the first
quarter of 1994 totaled $89.8 million, up $2.2 million or 3% from $87.6 million
last year. The growth in net interest income was attributable to an 18% or $2.3
billion increase in average earning assets of which $343 million was funded by
an increase in noninterest-related funds. Partially offsetting these factors
was a decline in net interest margin from 2.76% to 2.41% for the first quarter
of 1994.
Earning assets for the first quarter averaged $15.1 billion, up 18% or $2.3
billion from the $12.9 billion reported in 1993. The growth in average earning
assets reflects a 29% or $543 million increase in average money market assets, a
19% or $769 million increase in average securities and a 14% or $971 million
increase in average loans. Loan volume averaged $7.9 billion for the quarter,
compared with $7.0 billion in 1993. The growth in loans was essentially related
to domestic lending activities with a high proportion of the increase in
residential mortgages, up $572 million. Securities for the quarter averaged
$4.8 billion versus $4.0 billion in 1993, principally due to an increase of $751
million in holdings of short-term U.S. Government and federal agency securities.
Money market assets, which averaged $2.4 billion compared with $1.9 billion for
the first quarter of 1993, consisted primarily of time deposits with banks.
The $2.3 billion growth in earning assets was funded primarily by a net increase
of $1.7 billion in average federal funds purchased, repurchase agreements,
senior medium-term notes and other borrowings. In addition, average time
deposits were up $276 million. This growth resulted principally from a $512
million increase in average foreign office time deposits, mainly from global
custody deposit activity in London, which was partially offset by a decrease in
domestic savings certificates and other time deposits. Average net noninterest-
related funds increased $343 million, due to growth in stockholders' equity and
deposits from trust-related activity. Total stockholders' equity, supported by
strong earnings performance, increased $144 million or 14% from the first
quarter of 1993.
The interest rate spread on earning assets declined to 1.92% from 2.24% last
year. The net interest margin also declined to 2.41% compared with 2.76% for
the first quarter of 1993. The lower interest rate spread and net interest
margin were attributable to slightly higher funding costs due to the increase in
short-term interest rates during the quarter, coupled with the low spreads
10
<PAGE>
in short-term interest rates during the quarter, coupled with the low spreads
obtained from the higher volume of short-term U.S. Government securities and
money market assets. Lower yields on longer-term assets such as residential
mortgages and the maturity of higher yielding term securities reduced the yield
on loans and securities, resulting in a negative impact on the interest rate
spread. The increase in noninterest related funds of $343 million, or 17%, had
a positive impact on net interest income in the first quarter.
PROVISION FOR POSSIBLE CREDIT LOSSES
The provision for credit losses declined to $3.0 million in the first quarter of
1994 versus $6.0 million in 1993. The decrease in the provision reflects the
reduction in the level of loan charge-offs and continued low level in
nonperforming loans. For a discussion of the provision and reserve for credit
losses, refer to page 13.
NONINTEREST EXPENSES
Noninterest expense totaled $161.9 million for the quarter, up 5% or $7.9
million from the $154.0 million reported in 1993. The modest growth in
noninterest expenses reflected successful expense control, while planned
investments in technology continued on schedule. The combination of strong
revenue growth and a slower growth rate in noninterest expenses resulted in an
improved productivity ratio of 148% versus 146% a year ago. The productivity
ratio is noninterest income plus net interest income on a taxable equivalent
basis before the provision for credit losses divided by noninterest expenses.
Salaries and employee benefits accounted for 45% of the 1994 total increase in
noninterest expenses. Salary costs totaled $74.4 million, up $1.5 million or 2%
from a year ago. Merit increases were the primary components of this increase
while staff levels and incentive compensation declined. Staff on a full time
equivalent (FTE) basis declined to 6,260 versus 6,314 in 1993, reflecting
management efforts to control staff growth. Employee benefit costs for the
quarter totaled $19.1 million, an increase of $2.1 million or 12% from $17.0
million in 1993. The majority of the increase in benefit costs was attributable
to health care, retirement benefits, and higher payroll taxes.
Reflecting the relatively stable rent expense and building depreciation during
the first quarter of 1994, net occupancy expenses totaled $13.7 million,
unchanged from 1993. Equipment expense increased 9% to $11.3 million from $10.5
million in 1993, primarily reflecting the ongoing expansion of computer systems
resulting in higher depreciation and related costs.
11
<PAGE>
Other operating expenses totaled $43.4 million, an increase of 9% from $39.9
million reported last year. Contributing to the $3.5 million increase in other
operating expense were costs from processing errors incurred in servicing and
managing financial assets and performing banking activities. The expense growth
was also attributable to higher amortization costs related to ongoing investment
in technology and increases in technical and consulting services, which were
partially offset by lower legal services and business promotional expenses.
PROVISION FOR INCOME TAXES
The income tax provision for the quarter totaled $20.8 million compared with
$17.0 million in 1993. The higher provision in 1994 resulted from growth in
taxable earnings for federal tax purposes, and the increase in the federal tax
rate from 34% to 35%. The effective tax rate for the quarter was 31% versus 30%
in 1993.
BALANCE SHEET
Total assets at March 31, 1994 were $18.2 billion and averaged $17.3 billion for
the first quarter, up 16% from last year's average of $14.9 billion. With
increased lending activity, loans and leases totaled $8.1 billion at March 31,
1994 and averaged $7.9 billion for the first quarter, an increase of 14% from
the average of $7.0 billion last year. Securities for the first quarter
averaged $4.8 billion up 19% and money market assets averaged $2.4 billion up
29% from a year ago. Reflecting continued strong earnings, common stockholders'
equity increased 16% surpassing the $1.0 billion mark for the first time at
March 31, 1994, versus $877.7 million last year. Total stockholders' equity
increased a commensurate amount, totaling $1.2 billion at March 31, 1994,
compared with $1.0 billion at March 31, 1993. The Corporation's risk-based
capital ratios remain strong at 8.9% for tier 1 and 12.7% for total capital at
March 31, 1994. These ratios substantially exceeded the regulatory guidelines
of 4% for tier 1 and 8% for total capital. The Corporation's leverage ratio
(tier 1 capital to first quarter average assets) of 6.0% at March 31, 1994, also
exceeded the regulatory minimum of 3%.
On April 15, the Corporation issued 534,113 shares to complete its acquisition
of Hazlehurst Associates, Inc., a leading employee benefit consulting and
recordkeeping firm, in a transaction that will be accounted for as a pooling of
interests.
On April 19, the Corporation completed the sale of its 21% interest in Banque
Scandinave en Suisse. The sale, net of ancillary and certain nonrecurring
transition costs associated with the transfer of custody accounts to the London
Branch estimated at $6 million, is expected to result in a pretax gain of $28.5
million. The Corporation has also received a final dividend late in April on
this investment of $2.3 million.
12
<PAGE>
ASSET QUALITY
Nonperforming assets consist of nonaccrual loans and leases, restructured loans,
and other real estate owned (OREO). Total nonperforming assets at March 31,
1994 increased to $45.8 million from $37.0 million at December 31, 1993 but
declined from $81.1 million at March 31, 1993. Domestic nonaccrual loans and
leases, consisting primarily of commercial loans, totaled $38.7 million, or .51%
of total domestic loans and leases at March 31, 1994. Included in this total
are commercial real estate loans of $8.1 million. At December 31, 1993 and
March 31, 1993, domestic nonaccrual loans totaled $26.0 million and $55.2
million, respectively.
OREO is comprised of commercial and residential real estate properties acquired
in partial or total satisfaction of problem loans. At March 31, 1994, OREO
assets, net of reserve, totaled $5.8 million, compared with a net of $9.7
million at December 31, 1993, and $24.0 million at March 31, 1993. The majority
of the OREO assets are commercial real estate properties.
Presented below are the outstanding amounts of nonaccrual loans and leases and
OREO. OREO is presented net of the related reserve. Also shown are loans that
have interest or principal payments that are delinquent 90 days or more and are
still accruing interest. The balance in this category at any quarter end can
fluctuate widely based on the timing of cash collections, renegotiations and
renewals.
NONPERFORMING ASSETS AND 90 DAY PAST DUE LOANS AND LEASES
<TABLE>
<CAPTION>
March 31 Dec. 31 March 31
--------- ------- --------
(In Millions) 1994 1993 1993
- - ------------------------------------------------------------------
<S> <C> <C> <C>
Nonaccrual Loans and Leases
Domestic........................... $38.7 $26.0 $55.2
International...................... 1.3 1.3 1.9
- - ------------------------------------------------------------------
Total Nonaccrual Loans and Leases 40.0 27.3 57.1
OREO, net........................... 5.8 9.7 24.0
- - ------------------------------------------------------------------
Total Nonperforming Assets.......... $45.8 $37.0 $81.1
- - ------------------------------------------------------------------
Total 90 Day Past Due Loans and Leases
(still accruing)................... $19.1 $22.8 $71.5
- - ------------------------------------------------------------------
</TABLE>
PROVISION AND RESERVE FOR CREDIT LOSSES. The provision for credit losses is the
charge against current earnings that is determined by management through a
disciplined credit review process as the amount needed to maintain a reserve
that is sufficient to absorb credit losses inherent in the Corporation's loan
and lease portfolios and other credit undertakings. While the largest portion
of this reserve is typically intended to cover loan and lease losses, it is
considered a general reserve that is available to cover all credit-related
exposures.
13
<PAGE>
The 1994 first quarter provision for credit losses was $3.0 million, compared
with $6.0 million in 1993. Net charge-offs totaled $2.9 million in the first
quarter of 1994 versus net charge-offs of $6.0 million last year. The reserve
for credit losses was $145.6 million equal to 1.80% of outstanding loans at
March 31, 1994. This compares with $145.5 million or 1.91% of outstanding loans
at December 31, 1993 and $145.5 million or 2.02% of outstanding loans at March
31, 1993. The lower reserve to outstanding loans ratio at March 31, 1994 is
attributable to loan growth primarily in low-risk residential lending.
The Corporation believes that the current economic expansion of the domestic
economy is likely to continue through 1994, although not all segments of the
economy will participate equally in the expansion. Although the Corporation
continues to monitor closely several credits in segments of the economy that
continue to show weakness, the overall quality of its loan portfolio remains
sound and the reserve for credit losses is adequate to cover credit-related
uncertainties as they exist today. Established credit review procedures ensure
that close attention is given to commercial real estate-related loans and other
commercial loans, as well as other credit exposures that might be adversely
affected by significant increases in interest rates or an unexpected downturn in
segments of the economies of the United States or other countries.
14
<PAGE>
The following schedule should be read in conjunction with the Net Interest
Income section of Management's Discussion and Analysis of Financial Condition
and Results of Operations:
CONSOLIDATED ANALYSIS OF NET INTEREST INCOME Northern Trust Corporation
<TABLE>
<CAPTION>
FIRST QUARTER
--------------------------------------------------
(Interest and rate on a 1994 1993
taxable equivalent basis) ------------------------ ------------------------
(Amounts in Millions) INTEREST VOLUME RATE Interest Volume Rate
- - -------------------------- -------- --------- ----- -------- --------- -----
<S> <C> <C> <C> <C> <C> <C>
AVERAGE EARNING ASSETS
Money Market Assets
Federal Funds Sold and
Repurchase Agreements $ 2.2 $ 248.9 3.59% $ 1.9 $ 241.4 3.31%
Time Deposits with Banks 22.5 2,077.9 4.39 20.3 1,576.0 5.19
Other 1.0 115.0 3.57 .7 81.4 3.68
- - -------------------------- ------ --------- ----- ------ --------- -----
Total Money Market Assets 25.7 2,441.8 4.27 22.9 1,898.8 4.89
- - -------------------------- ------ --------- ----- ------ --------- -----
Securities
U.S. Government 27.6 2,979.9 3.76 24.1 2,501.1 3.91
Obligations of States and
Political Subdivisions 13.9 484.4 11.48 14.7 506.0 11.64
Federal Agency 8.6 934.9 3.73 6.8 662.6 4.13
Other 3.7 311.4 4.77 3.9 301.1 5.22
Trading Account .9 50.7 7.60 .4 22.0 7.74
- - -------------------------- ------ --------- ----- ------ --------- -----
Total Securities 54.7 4,761.3 4.64 49.9 3,992.8 5.05
- - -------------------------- ------ --------- ----- ------ --------- -----
Loans and Leases 111.7 7,930.4 5.71 105.9 6,959.3 6.17
- - -------------------------- ------ --------- ----- ------ --------- -----
Total Earning Assets $192.1 $15,133.5 5.15% $178.7 $12,850.9 5.63%
- - -------------------------- ------ --------- ----- ------ --------- -----
AVERAGE SOURCE OF FUNDS
Deposits
Savings and Money Market
Deposits $ 19.2 $ 3,463.8 2.24% $ 20.5 $ 3,496.7 2.38%
Savings Certificates 11.3 1,099.8 4.16 13.6 1,229.1 4.47
Other Time 3.1 311.2 3.98 3.9 385.3 4.09
Foreign Offices Time 23.3 2,663.8 3.55 23.0 2,151.6 4.33
- - -------------------------- ------ --------- ----- ------ --------- -----
Total Deposits 56.9 7,538.6 3.06 61.0 7,262.7 3.40
Federal Funds Purchased 13.3 1,672.8 3.22 11.2 1,503.9 3.03
Repurchase Agreements 9.3 1,174.1 3.21 3.7 493.9 3.05
Commercial Paper 1.0 123.5 3.23 1.2 149.6 3.36
Other Borrowings 9.1 1,236.9 3.00 5.4 775.7 2.82
Senior Medium-Term Notes 6.5 751.5 3.46 3.8 465.4 3.28
Notes Payable 6.2 326.8 7.81 4.8 233.2 8.28
- - -------------------------- ------ --------- ----- ------ --------- -----
Total Interest-Related
Funds 102.3 12,824.2 3.23 91.1 10,884.4 3.39
- - -------------------------- ------ --------- ----- ------ --------- -----
Interest Rate Spread -- -- 1.92% -- -- 2.24%
- - -------------------------- ------ --------- ----- ------ --------- -----
Noninterest-Related Funds -- 2,309.3 -- -- 1,966.5 --
- - -------------------------- ------ --------- ----- ------ --------- -----
Total Source of Funds $102.3 $15,133.5 2.74% $ 91.1 $12,850.9 2.87%
- - -------------------------- ------ --------- ----- ------ --------- -----
NET INTEREST INCOME/MARGIN $ 89.8 -- 2.41% $ 87.6 -- 2.76%
- - -------------------------- ------ --------- ----- ------ --------- -----
</TABLE>
ANALYSIS OF NET INTEREST INCOME CHANGES DUE TO VOLUME AND RATE
<TABLE>
<CAPTION>
FIRST QUARTER
1994/93
--------------------
CHANGE DUE TO
-------------
(In Millions) VOLUME RATE TOTAL
- - ---------------------- ------ ------ -----
<S> <C> <C> <C>
Earning Assets $26.4 $(13.0) $13.4
Interest-Related Funds 16.4 (5.2) 11.2
- - ---------------------- ----- ------ -----
Net Interest Income $10.0 $ (7.8) $ 2.2
- - ---------------------- ----- ------ -----
</TABLE>
Note: 1993 first quarter taxable equivalent interest income was adjusted by $.3
million, to reflect the effect of the change in the federal tax rate from 34%
to 35%.
15
<PAGE>
Part II--Other Information
Item 4. Submission of Matters to a Vote of Securities Holders
The annual meeting of stockholders of Northern Trust Corporation was held on
April 19, 1994 for the purposes of electing sixteen Directors to hold office
until the next annual meeting of stockholders. Proxies for the meeting were
solicited pursuant to Section 14(a) of the Securities Exchange Act of 1934 and
there was no solicitation in opposition to management's nominees. All of
management's nominees for Directors as listed in the proxy statement were
elected by the following votes set forth below. There were no broker non-votes
for any candidate.
Candidates "FOR" "WITHHELD"
- - ---------- ---------- ----------
Worley H. Clark 48,571,928 151,893
Dolores E. Cross 48,543,262 178,427
David W. Fox 48,572,808 151,189
Robert S. Hamada 48,582,958 148,426
Barry G. Hastings 48,573,328 150,893
Robert A. Helman 48,575,757 149,913
Arthur L. Kelly 48,572,053 151,904
Ardis Krainik 48,569,443 153,908
Robert D. Krebs 48,581,225 148,635
Frederick A. Krehbiel 48,579,783 148,441
William G. Mitchell 48,577,586 149,042
William A. Osborn 48,624,712 147,227
Harold B. Smith 48,573,961 150,579
William D. Smithburg 48,572,104 151,859
John S. Sutfin 48,579,118 148,568
Bide L. Thomas 48,576,368 149,526
16
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a.) Exhibits
--------
Exhibit (11) Computation of Per Share Earnings
Exhibit (99) Remarks delivered by David W. Fox and William A.
Osborn at the Annual Meeting of Stockholders of
Northern Trust Corporation held on April 19, 1994.
(b.) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed for the three months ended March
31, 1994.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORTHERN TRUST CORPORATION
--------------------------
(Registrant)
Date: May 11, 1994 By: PERRY R. PERO
------------------------------------
PERRY R. PERO
Senior Executive Vice President
and Chief Financial Officer
Date: May 11, 1994 By: JOHN H. ROBINSON
------------------------------------
JOHN H. ROBINSON
Senior Vice President and Controller
(Chief Accounting Officer)
18
<PAGE>
EXHIBIT INDEX
The following Exhibits are filed herewith or are incorporated herein by
reference.
<TABLE>
<CAPTION>
Exhibit
Number Description
- - -------- ---------------------------
<S> <C>
(11) Computation of Per Share Earnings
(99) Remarks delivered by David W. Fox and William A. Osborn at the
Annual Meeting of Stockholders of Northern Trust Corporation
held on April 19, 1994.
</TABLE>
20
<PAGE>
EXHIBIT NUMBER (11)
TO 3/31/94 FORM 10-Q
NORTHERN TRUST CORPORATION
COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
First Quarter Ended March 31
----------------------------
1994 1993
------------ ------------
<S> <C> <C>
Computations Required by
- - ------------------------
Regulation S-K
- - --------------
Primary Earnings Per Share
- - --------------------------
Net Income Applicable to
Common Shares $43,763,865 $38,652,801
=========== ===========
Weighted Average Number of
Common and Common Equivalent
Shares Outstanding:
Common Shares 53,323,765 52,870,199
Dilutive Effect of Common
Equivalent Shares (A)
Stock Options 994,098 1,243,428
Long Term Performance Stock Plan 357,989 365,357
Other 5,797 973
----------- -----------
54,681,649 54,479,957
=========== ===========
Net Income Per Common and
Common Equivalent Share $0.80 $0.71
=========== ===========
</TABLE>
(A) Determined by application of the treasury stock method.
<PAGE>
EXHIBIT NUMBER (11)
TO 3/31/94 FORM 10-Q
NORTHERN TRUST CORPORATION
COMPUTATION OF PER SHARE EARNINGS
(Continued)
<TABLE>
<CAPTION>
First Quarter Ended March 31
----------------------------
1994 1993
----------- -----------
<S> <C> <C>
Computations Required by
- - ------------------------
Regulation S-K
- - --------------
Fully Diluted Earnings Per Share
- - --------------------------------
Net Income Applicable to
Common Shares $43,763,865 $38,652,801
Add Back: Dividend on Series E
Convertible Preferred Stock 777,051 764,079
----------- -----------
$44,540,916 $39,416,880
=========== ===========
Weighted Average Number of
Common and Common Equivalent
Shares Outstanding:
Common Shares 53,323,765 52,870,199
Dilutive Effect of Common
Equivalent Shares (A)
Stock Options 1,004,670 1,419,596
Long Term Performance
Stock Plan 359,572 397,855
Other 6,175 1,477
Other Potentially Dilutive
Securities
Equivalent Shares Assuming
Conversion of Series E
Convertible Preferred Stock 1,204,820 1,204,820
----------- -----------
55,899,002 55,893,947
=========== ===========
Net Income Per Common and
Common Equivalent Share $0.80 $0.71
=========== ===========
</TABLE>
(A) Determined by application of the treasury stock method.
<PAGE>
EXHIBIT NUMBER(99)
TO 3/31/94 FORM 10-Q
Chairman David W. Fox delivered the following remarks on the highlights of 1993
and the first quarter of 1994 at the annual meeting.
In a moment I'm going to ask our President, Bill Osborn, to review with you
Northern's ongoing business strategies, but before doing so I want to comment
briefly on the highlights of 1993 and the first quarter of 1994.
All of Northern's vital signs continued to be strong last year, resulting in
the sixth straight year in which the quarterly dividend was increased. Net
income increased 12% to $168 million and earnings per share also rose 12% to
$2.95. Of equal importance, we strengthened our position in the personal and
corporate trust markets, with trust fees growing 10% to a new high of $405
million. As noted in the annual report, important new offices were opened in
Florida, Texas and California and the pending acquisition of the Beach Bank in
Vero Beach provides access to yet another growing area of Florida's East Coast.
The acquisition of Hazlehurst & Associates adds significantly to Northern's
capabilities for further penetration of the rapidly growing market for defined
contribution employee benefit plans. I'm happy to report that regulatory
approval for Hazlehurst has now been received, and we can proceed with our
joint marketing plans.
The momentum with which we ended 1993 has continued into the first quarter of
this year. Yesterday we reported net income of $45.4 million, a gain of 13%
from the first quarter of 1993, and earnings per share also increased 13% to
$.80. Trust fees grew almost 11%, loans increased 14%, and expenses were well-
controlled, rising only 5%. Reflecting strong new business results, trust
assets under administration, despite weakness in the stock market, were almost
$46 billion higher than a year ago, and totaled $480 billion, a gain of 11%.
We also inaugurated a new advertising campaign during the quarter directed
toward the personal financial services market. Copies of the ads are displayed
in the outer room and you may have seen them as you entered the meeting today.
The campaign features a number of Northern's personal clients and carries the
tag line "Trust Northern. I Do and You Should Too,"-- and it has been extremely
well-received. Other important developments include the forthcoming opening
next month of a new office in Highland Park, offering a full range of banking,
trust and investment services to serve that important market. I'm also happy to
report that today we completed the previously announced sale of our 21%
interest in Banque Scandinave en Suisse in Geneva, Switzerland, resulting in a
second quarter pre-tax gain to Northern of approximately $31 million.
The most important message in all of this, of course, is that we continue to
expand and direct resources to our core businesses, building on Northern's
present strengths and positioning us to capitalize on future opportunities as
we see them. And now Bill Osborn will comment further on what we see ahead.
The following remarks on Northern's ongoing business strategies for enhancing
shareholder value were delivered by President William A. Osborn.
Good morning. As Dave indicated, I'm going to review Northern's continuing
strategies for enhancing shareholder value and then focus on our commitments to
Northern's other main constituencies: our clients, the communities we serve,
and our employees.
Our business plans build upon Northern's well-focused and successful strategy
to provide the highest quality financial services to clients in targeted
markets where we command a competitive advantage. This proven strategy clearly
profiles Northern as a highly differentiated financial services enterprise,
providing shareholders a unique investment opportunity and offering clients a
trusted, high-performance financial partner.
Management's underlying objective is to achieve consistent, quality earnings
growth and a financial return to shareholders that represents a premium
<PAGE>
EXHIBIT NUMBER(99)
TO 3/31/94 FORM 10-Q
on their investment. During 1994 we are particularly focused on the successful
execution of four key business initiatives:
. Emphasize growth in our fee-based trust businesses.
. Accelerate growth of high margin investment management services.
. Intensify productivity gains and quality expectations.
. Strengthen our market-driven relationship approach to clients, with the
objective of expanding existing relationships.
Trust fees, generated from our leading competitive positions in both the
personal and corporate markets, offer significant growth potential, and each
year have represented an ever larger portion of Northern's revenues. Growth
prospects for our national personal financial services business are very
positive. Major trends, notably the aging of the baby boom generation and the
growing wealth in pension funds and financial asset holdings, bode well for
continued expansion of the affluent market. We are conscious that our ability
to differentiate service quality and client responsiveness is critical to
success in the personal marketplace.
Northern's highly successful operations in Florida will be further augmented
by our recent agreement to acquire Beach Bank, the largest independent bank in
Indian River County. This important strategic move further positions Northern
as a leading private bank and investment manager in this attractive growth
market.
In our other major trust business, Northern is well-positioned to strengthen
our global market leadership in securities custody, investment services and
related product offerings with an expanding corporate and institutional client
base. A major objective in this market is to grow fee-based revenue by
increasing client dependence on Northern for cost-effective, value-adding
service linkages.
Northern's investment management capabilities provide another avenue of
profitable revenue growth as we extend our well-established investment process
that has produced top tier performance using a proven, consistent investment
style. We currently manage $76 billion out of a total of $480 billion in trust
assets under administration and have put greater emphasis on initiatives to
increase our percentage of managed assets given our strong investment track
record.
Last Thursday, we launched a new family of proprietary mutual funds--the
Northern Funds--which are designed to present a more complete line of
investment products to the individual market. In addition, the recent
acquisition of Hazlehurst & Associates strengthens Northern as a full-service
provider to the investment driven 401k market. While we are still finalizing
integration plans of Hazlehurst, we are very enthused about the fee-based
revenue opportunities it affords the corporation in the fast-growing defined
contribution business.
Northern's distinguishing business strategies and financial performance
continue to be viewed very favorably by the market which accords our stock one
of the highest market to book valuations of any bank, currently over 220%.
Although 1993 was a disappointing year for the stock, over a five-year period
Northern's performance at a 21.7% compound annual rate of growth is
considerably better than both the S&P 500 and the banking industry. In November
1993, the common dividend was raised 19% reflecting the strong earnings growth
and last month we announced an expansion of an existing stock buyback program.
Northern's management team is dedicated to sustaining a consistent, quality
earnings per share growth rate in excess of 10% per year. We recognize that
success will be highly dependent upon securing profitable revenue growth
coupled with continued vigilance on improved productivity and expense control.
In all of Northern's targeted markets, the potential to provide value-added
service while expanding relationships within our client franchise is our best
prospect for revenue growth. Our goal is to develop comprehensive, long-term
partnerships in which the contribution made by a Northern relationship is
valued by the client. We recognize that customers in both the personal and
corporate markets are afforded numerous choices of high quality providers of
financial services. In the face of this increasingly competitive environment,
all Northern people are committed to providing unrivaled client satisfaction
through responsive service and the delivery of exemplary product quality. We
are diligent about building a culture in which Northern people can clearly see
that the quality of their daily work truly does make a difference in customer
satisfaction. This
<PAGE>
EXHIBIT NUMBER(99)
TO 3/31/94 FORM 10-Q
commitment to quality may well be our best advantage in addressing the external
unknowns, competitive pressures, and increasing client expectations for high
service levels and good value from Northern's products.
In all market segments, we are accelerating the development of a superior
knowledge of client requirements through a focused relationship management
strategy. For example, in our corporate and institutional markets, we have
formed relationship teams comprised of people from each of our businesses to
strengthen this comprehensive effort with key clients. These teams are
responsible for defining the customer's overall requirements and for
formulating strategies to increase value to the client through tailored
solutions and service that clearly exceed expectations.
Across the country in our personal market, Northern's distinctive national
franchise represents a network for reaching prospective clients and an
important opportunity for additional business. Relationship teams are active in
our personal markets, and in many subsidiary locations the entire office staff
functions as a client team. Our mission is to present to customers, in all
locations, convenient access to and reliable delivery of Northern's
competitively distinct fiduciary, investment management and private banking
services. We believe that consistent, excellent delivery by this comprehensive
team approach is key to expanding our unique national personal financial
services franchise.
The communities where we live and do business are clearly another important
constituency for our organization. While my comments will be directed toward
our Illinois activities, we are involved in similar community initiatives
throughout the Northern Trust network.
Northern people have contributed greatly to the community in terms of devoting
their time and talent to address many pressing social needs. We encourage and
expect our senior people to be involved in and enlightened about the issues of
the entire Chicago metropolitan area. Beyond our people commitment, I will
touch on some of the other investments we have made and continue to make as
part of our ongoing pledge to support our community partners.
Along with other major banks and insurance companies in Chicago, Northern
Trust in 1993 invested $1 million in the South Shore Bank, one of the country's
outstanding community development banks. This participation will enable South
Shore Bank to expand development activities on the South and West Sides of
Chicago. Further, Northern increased its commitment to the Community Investment
Corporation, a partnership of banks and corporations providing acquisition and
rehabilitation financing for multi-family buildings in low- and moderate-income
neighborhoods in Chicago and Cook County. Last year, we increased our
commitment to $9.5 million, with an intent to invest up to a total of $30
million through the end of this decade.
Northern has some 30 specific programs targeted to making home ownership
possible in low- and moderate-income and minority communities in Cook County.
For example, our First Time Home Buyers Club has been in existence since 1989
and offers downpayments as low as 5% with no application fee and no points.
Last year, we made the "American Dream" come true for 175 first time
homebuyers. Under this and other mortgage lending programs, in 1993 our
housing-related loans to minority applicants increased by more than 160%.
Northern intends to expand our presence in the community by locating a lending
facility on the South or West Side of the city, either by acquiring and
developing an existing institution or by establishing a new branch. This will
build on our past effort with the Walgreen Company where we installed automatic
teller machines in neighborhoods with otherwise limited banking facilities.
Our historical record of active involvement in all areas of our community is
substantial and includes direct personal contact with advisory groups from
neighborhood organizations to assure that our programs meet the specific needs
of the communities. In 1994, we have earmarked a minimum of $25 million for
housing-related loans to be available through a wide range of community
reinvestment programs that specifically function with these groups. There is no
question that the management and employees of this Corporation are devoted to
making the communities where we live and work better places for all of us.
Here at Northern, our people provide the key competitive advantage which
enables us to achieve our objective of delivering unrivaled client service
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EXHIBIT NUMBER(99)
TO 3/31/94 FORM 10-Q
and superior performance. In a business like ours, establishing rapport with
clients, developing an understanding of their needs, and responding to those
needs in a manner that exceeds their expectations are essential ingredients for
success. While many tools are brought to bear on that task, no successful
service is provided to a client without the energetic involvement and support
of many Northern people.
The quality of our staff which distinguishes us from our competitors is an
ongoing source of pride to us, but if we wish to continue to attract and retain
talented people, what kind of employer must we be?
Employees today want and deserve a workplace in which people are treated with
honesty, dignity, and fairness. They want an environment that fosters
inclusiveness and participation not divisiveness. For this climate to exist,
employees need the skills to communicate with each other in an atmosphere of
sincere understanding and respect.
During the past year, we have continued our training program on workplace
diversity, extending it from managers to all employees. Employees have
responded very favorably. Many have said that the program has added important
value to their jobs and their lives and that they have come to a new
appreciation of people different from themselves in a way that will have a
lasting impact on how they treat one another.
Northern also is sensitive to the challenge our people face in balancing work
and family issues. We were one of the first Chicago companies to create our own
corporate childcare center and, last fall, when the Chicago public schools were
not in session, Northern opened a cooperative learning center for 85 children
of employees. We provided meaningful classroom instruction, with qualified
teachers, and also relieved parents of the concern of caring for their children
during this stressful period. In addition, our family assistance program helps
our employees and their families through times of crisis, including a referral
network which employees can access for information not only about childcare
options, but also about elder care resources.
In summary, Northern's success in delivering absolute quality service to
clients, in being an active, responsible member of the communities in which we
do business, and in providing value to our shareholders depends on our people,
on their continued teamwork, and upon Northern's commitment to providing a
workplace in which all people contribute 100%--and then some. While we face a
lot of hard work to improve upon our past accomplishments, we are confident
that with the continued support of our employees, shareholders, and the
communities we serve, the future will be bright.
