Exhibit 99
EDITED VERSION OF REMARKS DELIVERED BY
MR. WILLIAM A. OSBORN AT THE ANNUAL MEETING
OF STOCKHOLDERS OF NORTHERN TRUST
CORPORATION HELD APRIL 16, 2002
FORWARD-LOOKING STATEMENTS
Before I begin, let me note that this presentation may include forward-looking
statements like those described in the projected slide.
Our 2001 annual report and periodic reports to the SEC contain information about
specific factors that could cause actual results to differ from these
statements, and you are urged to read them.
OVERVIEW
Despite an extremely challenging environment, net income in 2001 increased to
$487.5 million from $485.1 million in 2000. 2001 was the fourteenth consecutive
year of record earnings for Northern Trust. Revenue growth moderated during the
year, increasing 3% from 2000 levels to $2.2 billion. Our revenue mix continues
to be an attractive one, with 71% of revenues generated by trust and other fees
and net interest income contributing 29%. In addition, in 2001 we posted our
18th consecutive year of record net interest income.
Since 1997, the compound annual growth rate in net income is 12%. Revenues since
1997 have grown 12.4% annually, while expenses have grown 11.8%.
During 2001 we met or exceeded two of our three annual strategic financial
goals. Return on average common equity was 19.3%, reaching our target range of
18 to 20 percent for the sixth consecutive year. Our extremely effective
management of expenses resulted in a record productivity ratio of 162%, which
exceeded our target of 160%. After six consecutive years of exceeding our
earnings per share growth target of 10%, we fell short of the goal in 2001 with
EPS growth of 1%.
Let me review why our revenue growth moderated to 3%. As you know, trust fees
are the single largest component of Northern's revenue profile - accounting for
55% of total revenues and are the driver of our revenue growth.
Our trust fees have grown by a combination of net new trust fee business plus or
minus the impact of the markets on our trust assets. As you can see from the
chart, over the last 10 years, 2000 and 2001 were the only back-to-back declines
in the equity markets, and the first since 1973 and 1974. While the market
decline impacts both our corporate and personal trust assets, it has been
particularly difficult on the personal side, where we have approximately 50% of
our $96 billion of managed assets in equities. So, even though we added more
relationships, assets and transactions in our businesses, the negative impact of
the market on our fees was a strong drag to overcome.
As a result, our trust fees were up only 3% during 2001, which is quite unlike
the profile of the past decade. However, the fact that our trust fees were up is
an indication that we are not solely an equity manager. Of our total trust
assets under management, only 34% are in equities, the remainder being fixed
income and cash. And, fortunately we continued to generate strong new business.
The basis of our optimism and confidence in the future is that we continue to
have sales success in our target markets. The key enabling us to continue that
growth is our ability to win new business at an impressive rate. While net new
business sold during 2001 moderated due to lower asset values and weak
economic conditions, it still totaled $134 million and was equivalent to 11% of
total trust fees. This allowed us to report trust fee growth in a period when
the equity markets were down dramatically.
Our ability to effectively manage expenses was another key to our performance
last year. In the four years prior to 2001, our average annual expense growth
was 15%. During 2001 we pulled back that expense growth to only 2%. It is
important to realize that we achieved this level of expense management without
layoffs and we maintained our platform of highly experienced and talented
people. Consequently, we are very well positioned to continue to grow the
business as the economy and markets turnaround. Controlling expense growth to
just 2% allowed us to achieve positive operating leverage for the seventh
consecutive year.
A major factor impacting us during 2001 was the large increase in our provision
for loan losses, from $24 million in 2000 to $66.5 million in 2001 - an increase
of $42.5 million. During the fourth quarter, we took a loan provision of $45
million - more than half of which related to charging off part of our exposure
to Enron Corp. In total, we have $43.5 million of exposure to Enron with $24.5
million being unsecured and $19 million secured. We charged off $24.1 million
which addressed our exposure in both the secured and unsecured credits. We took
the provision to address aggressively our credit exposure to Enron as well as
other credit risks stemming from the economic recession.
We are often asked why we are in the lending business. Frankly, our clients want
us to be. It is one part of the complete financial relationship we strive to
develop with clients on both the personal and corporate sides. We have made good
money by being in this business. It is important to remember the profile of our
loan portfolio. Loans account for only 50% of our total assets. Secondly,
residential mortgages of $7.4 billion represent 41% of our loan portfolio. When
personal loans are added to that, our total loans to personal clients amount to
53% of overall loans. Losses on the residential and personal loan portfolio have
been nearly non-existent.
As a result of our aggressive action in dealing with our loan portfolio during
the fourth quarter, we ended 2001 with an asset quality which was stronger than
it was at the end of the Third Quarter. Nonperforming assets actually declined
$6.3 million during the quarter to $109.5 million, while our reserve for credit
losses increased by $3.6 million to $161.7 million. $66 million, or 60%, of our
nonperforming assets at year end were concentrated in four borrowers - Enron
Corp. and three bankrupt asbestos producers - USG, Owens Corning, and W.R.
Grace. I want to point this out to highlight that apart from these special
situations, only $43 million of the remainder of our almost $18 billion loan
portfolio is nonperforming. With nonperforming assets representing only 0.61% of
total loans at year-end, our credit quality remains in a leadership position
within our peer group.
PERSONAL FINANCIAL SERVICES
Now, let me briefly review our two client-focused businesses.
Our personal business and our corporate and institutional business each account
for approximately half of our revenues and profits. In Personal Financial
Services, our mission is to deliver high-touch trust, investment management and
banking services to individuals in affluent markets. We are truly a leader in
this market. At year-end in PFS, we administered $167 billion of trust assets
and had investment discretion for $94 billion of those assets. PFS trust fees
totaled $615 million.
Ten years ago we had only 38 offices in 5 states. Our PFS network now stands at
82 offices in 12 states. This gives us a one-of-kind distribution capability for
personal trust and private banking services. No one else has this kind of
presence in this market. We are in close proximity to approximately 30% of the
nation's millionaire population. Over the next 5 years, this affluent segment of
the population is expected to grow at nine times the rate of the general
population. So, we see many growth opportunities in this business.
We will continue to fill in and enhance our existing markets with additional
locations and renovated offices. We will also continue to look opportunistically
at new markets. Our goal is to have 100 offices by the end of 2005.
CORPORATE & INSTITUTIONAL SERVICES
Corporate & Institutional Services accounts for the other half of our revenues
and profits. In C&IS, we provide trust, custody, investment and banking services
to corporations and institutions around the world. Last year, C&IS trust fees
totaled $616 million. With $1.52 trillion in assets under administration at year
end, 97 countries in our subcustodian network, and clients in 37 countries, we
continue to be a market leader with a strong and growing global presence.
Providing trust and custody services to institutional investors outside the U.S.
is the fastest growing segment of the C&IS business. Over the last two years,
global custody assets have grown over 45 percent and stood at $452 billion at
year-end. The C&IS international client base has increased by almost 50 percent
over the last five years.
NORTHERN TRUST GLOBAL INVESTMENTS
Our investment organization, Northern Trust Global Investments, is a global,
multi-asset class investment manager. As one of the largest investment managers
in the world, NTGI follows a highly focused strategy that continued to
contribute to our success in 2001.
Despite the very challenging investment environment during 2001, NTGI's asset
base declined only slightly to $330 billion from $338 billion a year earlier.
Pensions & Investments magazine ranks us as the 15th largest U.S. money manager,
as well as the 12th largest institutional asset manager. In addition, we were
ranked the 5th largest U.S. tax exempt money manager and the 7th largest index
manager. Our mutual fund assets at year-end, totaling $44 billion, ranked us as
the 5th largest bank-run mutual fund family.
TECHNOLOGY
Worldwide Operations and Technology supports the business efforts of both our
PFS and C&IS businesses by developing and implementing innovative technologies
and systems to meet the sophisticated needs of our clients worldwide.
Our strategy of a single technology platform has enabled us to effectively
leverage our capabilities across our businesses. This distinguishes us as a
cost-effective technology leader in the financial services industry. There are
only a handful of companies that have the ability to do what we do. Our
technology is the driver of our competitive advantage.
During the past three years, we spent $800 million on technology. For the years
2002 through 2004, we estimate an expenditure of $950 million. Clearly, we are
still investing in our technology platform and it demonstrates our desire to
remain a leader.
FIRST QUARTER PERFORMANCE
Now let's review the First Quarter results.
Yesterday we reported earnings per share of $.56 for the quarter, an increase of
2% from a year ago. Although the economic environment remained a difficult one,
we were pleased to report an increase in our quarterly earnings. We achieved
this by our continued aggressive focus on managing expenses, which were flat as
compared to last year. Revenue growth was also flat, with weakness in foreign
exchange trading results offsetting the 4% increase in trust fees. Trust assets
under administration totaled $1.72 trillion, an increase of 4% from a year ago,
and assets under management grew slightly to $337.7 billion.
STOCK PERFORMANCE
During 2001, the performance of Northern Trust stock was a disappointment with a
decline of 26% for the year. However, the long-term track record of our common
stock remains solid. For the period beginning at the end of 1996 through the end
of 2001, Northern Trust stock has appreciated 232%. That compares extremely
favorably to the S&P 500 which was up 55% for the same period, as well as the
Keefe, Bruyette & Woods 50 Bank Index which was up 57%. On an annualized basis,
Northern stock was up 27% per year, while the S&P 500 and KBW50 were both up
only 9% per year. Our PE ratio continues to rank among the leaders in our peer
group with our stock closing 2001 at a PE multiple of 28.5 times earnings.
CLOSING
For more than 113 years, Northern Trust has stood as a symbol of strength and
stability in an ever-changing environment. Even during these challenging times,
Northern continues to deliver outstanding service by remaining true to our
standards: unrivaled trust, investment, and banking services; uncompromising
integrity; unquestioned financial strength; and an unparalleled client focus.
Despite the difficult environment facing the financial services industry today,
we see many reasons for continued confidence in Northern's success:
... We have experienced continous growth in capital and at times like these
capital strength matters. At the end of 2001, our capital reached $2.8
billion - four times our level of $700 million in 1990.
... Our unrivaled business focus to provide high-quality trust, custody,
investment management and banking services has been the most important
factor contributing to our success - resulting in 14 consecutive years of
record earnings and more than 100 consecutive years of annual dividend
payments to our shareholders.
... Our growth in trust assets has been extraordinary - a 15-fold increase in
the past 16 years.
... We are a leader within our peer group in asset quality. At year-end, our
nonperforming assets were 0.61% of our total loans - less than half of the
1.49% ten years earlier in 1991.
... Our balance sheet is exceptionally liquid. It is during these challenging
times when balance sheets matter most and ours is one of the most liquid in
financial services. U.S. Government securities account for 40% of our
investments and loans and leases represent only 50% of our total assets.
... Northern Trust has top-tier credit ratings. In fact, our "AA-" senior debt
rating from Standard & Poor's has been awarded to only 5 U.S. bank holding
companies.
In closing, I would like to thank our employees for their hard work and
dedication. They were truly at their best in 2001. They rose to the challenge of
delivering exceptional service during a truly challenging year. I would also
like to thank our clients for their confidence and trust in choosing Northern
Trust. I would like to thank our Board of Directors for their advice, counsel
and support during this turbulent time.
We continue to be very optimistic about your company. Given the strong support
of our clients, staff and directors, we look forward to the future with
confidence.
Finally, I would like to ask Jim Mitchell to stand. Jim is a 38-year veteran of
Northern, and currently serves as President of the Worldwide Operations &
Technology business unit. He has announced his intention to retire at the end of
May. I want to express my personal appreciation to Jim for his leadership, his
vision, his caring for our people and our clients, and the high standard he has
set while leading our operations and technology areas through a dramatic period
of growth and change. Jim, we will miss you.
* * * *
Mr. Osborn's above remarks may be deemed to include forward-looking statements
such as statements that relate to Northern Trust's financial goals, dividend
policy, expansion and business development plans, business prospects and
positioning with respect to market and pricing trends, new business results and
outlook, changes in securities market prices, credit quality, planned capital
expenditures and technology
spending, and the effect of any extraordinary events and various other matters
(including changes in accounting standards) on Northern Trust's business and
results. These statements speak of Northern Trust's plans, goals, beliefs, and
expectations, refer to estimates or use of similar terms. Actual results could
differ materially from those indicated by these statements because the
realization of those results is subject to many risks and uncertainties. Our
2001 annual report and periodic reports to the SEC contain information about
specific factors that could cause actual results to differ, and you are urged to
read them.