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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1995
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-5965
NORTHERN TRUST CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 36-2723087
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
50 SOUTH LA SALLE STREET
CHICAGO, ILLINOIS 60675
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (312) 630-6000
_____________________________
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No [_]
55,980,309 Shares - $1.66 2/3 Par Value
(Shares of Common Stock Outstanding on March 31, 1995)
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1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET Northern Trust Corporation
March 31 December 31 March 31
--------- ----------- ---------
($ In Millions) 1995 1994 1994
- ---------------------------------------------------------------------------- --------- ----------- ---------
ASSETS
Cash and Due from Banks $ 1,180.8 $ 1,192.5 $ 1,167.2
Money Market Assets
Federal Funds Sold and Securities Purchased under Agreements to Resell 176.3 777.0 418.3
Time Deposits with Banks 1,767.7 1,864.7 2,420.8
Other 14.3 9.5 168.1
- ---------------------------------------------------------------------------- --------- --------- ---------
Total 1,958.3 2,651.2 3,007.2
- ---------------------------------------------------------------------------- --------- --------- ---------
Securities (Fair value $5,523.3 at March 1995, $5,069.7 at December 1994 and
$4,730.2 at March 1994) 5,495.1 5,053.1 4,689.9
Loans and Leases (Net of unearned income of $71.2 at March 1995, $70.4 at
December 1994 and $64.4 at March 1994) 8,875.7 8,590.6 8,081.2
Reserve for Credit Losses (145.8) (144.8) (145.6)
Buildings and Equipment 280.8 274.7 295.0
Customers' Acceptance Liability 52.6 56.3 81.4
Trust Security Settlement Receivables 232.2 305.7 295.6
Other Assets 806.4 582.3 695.2
- ---------------------------------------------------------------------------- --------- --------- ---------
Total Assets $18,736.1 $18,561.6 $18,167.1
- ---------------------------------------------------------------------------- --------- --------- ---------
LIABILITIES
Deposits
Demand and Other Noninterest-Bearing $ 2,475.1 $ 2,604.7 $ 2,553.6
Savings and Money Market Deposits 3,050.1 3,176.3 3,096.9
Savings Certificates 1,974.6 1,524.5 1,115.2
Other Time 334.9 342.2 322.4
Foreign Offices -- Demand 264.5 225.4 460.6
-- Time 3,510.7 3,861.3 3,095.8
- ---------------------------------------------------------------------------- --------- --------- ---------
Total Deposits 11,609.9 11,734.4 10,644.5
Federal Funds Purchased 1,471.1 972.0 1,159.5
Securities Sold under Agreements to Repurchase 2,283.0 2,216.9 1,667.7
Commercial Paper 134.4 123.8 144.9
Other Borrowings 623.9 1,077.9 1,820.0
Senior Medium-Term Notes 392.0 547.0 807.0
Notes Payable 244.8 244.8 326.8
Liability on Acceptances 52.6 56.3 81.4
Other Liabilities 576.3 307.8 331.3
- ---------------------------------------------------------------------------- --------- --------- ---------
Total Liabilities 17,388.0 17,280.9 16,983.1
- ---------------------------------------------------------------------------- --------- --------- ---------
STOCKHOLDERS' EQUITY
Preferred Stock 170.0 170.0 170.0
Common Stock -- $1.66 2/3 Par Value 93.3 90.6 89.7
March 1995 December 1994 March 1994
---------------------------------------------------------------
Shares authorized 140,000,000 140,000,000 140,000,000
Shares issued 55,994,352 54,360,374 53,826,261
Shares outstanding 55,980,309 54,089,259 53,378,320
Capital Surplus 306.7 302.2 303.3
Retained Earnings 810.7 762.7 664.0
Net Unrealized Loss on Securities (9.2) (15.8) (5.9)
Translation Adjustments -- -- .6
Common Stock Issuable -- Performance Plan 16.7 17.9 20.2
Deferred Compensation -- ESOP and Other (39.6) (38.8) (48.1)
Treasury Stock-(at cost, 14,043 shares at March 1995, 271,115 shares at
December 1994 and 447,941 shares at March 1994) (.5) (8.1) (9.8)
- ---------------------------------------------------------------------------- --------- --------- ---------
Total Stockholders' Equity 1,348.1 1,280.7 1,184.0
- ---------------------------------------------------------------------------- --------- --------- ---------
Total Liabilities and Stockholders' Equity $18,736.1 $18,561.6 $18,167.1
- ---------------------------------------------------------------------------- --------- --------- ---------
2
CONSOLIDATED STATEMENT OF INCOME Northern Trust Corporation
FIRST QUARTER
ENDED MARCH 31
-----------------------
($ In Millions Except Per Share Information) 1995 1994
- ------------------------------------------------------------ ---------- ----------
Interest Income
Money Market Assets
Federal Funds Sold and Securities Purchased under
Agreements to Resell $ 3.5 $ 2.2
Time Deposits with Banks 26.7 22.5
Other .2 1.0
- ------------------------------------------------------------ ------ ------
Total 30.4 25.7
- ------------------------------------------------------------ ------ ------
Securities 85.1 47.7
Loans and Leases 145.7 110.8
- ------------------------------------------------------------ ------ ------
Total Interest Income 261.2 184.2
- ------------------------------------------------------------ ------ ------
Interest Expense
Deposits -- Savings and Money Market Deposits 26.6 19.2
-- Savings Certificates 24.5 11.3
-- Other Time 6.4 3.1
-- Foreign Offices 50.6 23.3
Federal Funds Purchased 16.1 13.3
Securities Sold under Agreements to Repurchase 24.1 9.3
Commercial Paper 2.1 1.0
Other Borrowings 10.5 9.5
Senior Medium-Term Notes 6.9 6.5
Notes Payable 4.9 6.2
- ------------------------------------------------------------ ------ ------
Total Interest Expense 172.7 102.7
- ------------------------------------------------------------ ------ ------
Net Interest Income 88.5 81.5
Provision for Credit Losses 1.5 3.0
- ------------------------------------------------------------ ------ ------
Net Interest Income after Provision for Credit Losses 87.0 78.5
- ------------------------------------------------------------ ------ ------
Noninterest Income
Trust Fees 120.8 109.5
Security Commissions and Trading Income 5.9 6.8
Other Operating Income 34.8 33.1
Investment Security Gains .1 .2
- ------------------------------------------------------------ ------ ------
Total Noninterest Income 161.6 149.6
- ------------------------------------------------------------ ------ ------
Income before Noninterest Expenses 248.6 228.1
- ------------------------------------------------------------ ------ ------
Noninterest Expenses
Salaries 82.5 74.4
Pension and Other Employee Benefits 21.5 19.1
Occupancy Expense 14.2 13.7
Equipment Expense 12.6 11.3
Other Operating Expenses 46.5 43.4
- ------------------------------------------------------------ ------ ------
Total Noninterest Expenses 177.3 161.9
- ------------------------------------------------------------ ------ ------
Income before Income Taxes 71.3 66.2
Provision for Income Taxes 22.0 20.8
- ------------------------------------------------------------ ------ ------
NET INCOME $ 49.3 $ 45.4
- ------------------------------------------------------------ ------ ------
Net Income Applicable to Common Stock $ 47.2 $ 43.8
- ------------------------------------------------------------ ------ ------
NET INCOME PER COMMON SHARE -- PRIMARY $ .86 $ .80
-- FULLY DILUTED .85 .80
- ------------------------------------------------------------ ------ ------
Average Number of Common Shares Outstanding -- Primary 55,168,319 54,681,649
-- Fully Diluted 56,394,815 55,899,002
- ------------------------------------------------------------ ---------- ----------
3
Northern Trust Corporation
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FIRST QUARTER
ENDED MARCH 31
------------------
(In Millions) 1995 1994
- ---------------------------------------------------------- -------- --------
PREFERRED STOCK
Balance at January 1 and March 31 $ 170.0 $ 170.0
- ---------------------------------------------------------- -------- --------
COMMON STOCK
Balance at January 1 90.6 89.7
Pooled Affiliate-Stock Issued 2.7 --
- ---------------------------------------------------------- -------- --------
Balance at March 31 93.3 89.7
- ---------------------------------------------------------- -------- --------
CAPITAL SURPLUS
Balance at January 1 302.2 303.0
Stock Issued--Incentive Plan and Awards (2.4) .3
Pooled Affiliate-Stock Issued 6.9 --
- ---------------------------------------------------------- -------- --------
Balance at March 31 306.7 303.3
- ---------------------------------------------------------- -------- --------
RETAINED EARNINGS
Balance at January 1 762.7 631.9
Net Income 49.3 45.4
Dividend Declared on Common Stock (14.1) (11.8)
Dividends Declared on Preferred Stock (2.3) (1.5)
Pooled Affiliate 15.1 --
- ---------------------------------------------------------- -------- --------
Balance at March 31 810.7 664.0
- ---------------------------------------------------------- -------- --------
NET UNREALIZED LOSS ON SECURITIES
Balance at January 1 (15.8) (.4)
Unrealized Gain (Loss), net 6.6 (5.5)
- ---------------------------------------------------------- -------- --------
Balance at March 31 (9.2) (5.9)
- ---------------------------------------------------------- -------- --------
TRANSLATION ADJUSTMENTS
Balance at January 1 and March 31 -- .6
- ---------------------------------------------------------- -------- --------
COMMON STOCK ISSUABLE--PERFORMANCE PLAN
Balance at January 1 17.9 11.8
Stock Issuable, net of Stock Issued (1.2) 8.4
- ---------------------------------------------------------- -------- --------
Balance at March 31 16.7 20.2
- ---------------------------------------------------------- -------- --------
DEFERRED COMPENSATION--ESOP AND OTHER
Balance at January 1 (38.8) (43.5)
Compensation Deferred (1.5) (5.3)
Compensation Amortized .7 .7
- ---------------------------------------------------------- -------- --------
Balance at March 31 (39.6) (48.1)
- ---------------------------------------------------------- -------- --------
TREASURY STOCK
Balance at January 1 (8.1) (11.4)
Stock Options and Awards 10.4 2.1
Stock Purchased (2.8) (.5)
- ---------------------------------------------------------- -------- --------
Balance at March 31 (.5) (9.8)
- ---------------------------------------------------------- -------- --------
TOTAL STOCKHOLDERS' EQUITY AT MARCH 31 $1,348.1 $1,184.0
- ---------------------------------------------------------- -------- --------
4
CONSOLIDATED STATEMENT OF CASH FLOWS Northern Trust Corporation
First Quarter
Ended March 31
----------------------
(In Millions) 1995 1994
- --------------------------------------------------------------------------------- --------- ---------
Cash Flows from Operating Activities:
Net Income $ 49.3 $ 45.4
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Provision for Credit Losses 1.5 3.0
Depreciation on Buildings and Equipment 10.8 10.9
Increase in Interest Receivable (18.5) (34.6)
Increase in Interest Payable 5.6 .5
Amortization and Accretion of Securities and Unearned Income (45.6) 18.4
Net Increase in Trading Account Securities (53.9) (19.6)
Other Noncash, net 66.7 (17.9)
- --------------------------------------------------------------------------------- --------- ---------
Net Cash Flows from Operating Activities 15.9 6.1
- --------------------------------------------------------------------------------- --------- ---------
Cash Flows from Investing Activities:
Net Decrease in Federal Funds Sold and Securities Purchased under Agreements
to Resell 613.8 159.5
Net (Increase) Decrease in Time Deposits with Banks 97.0 (330.4)
Net Increase in Other Money Market Assets (4.8) (95.8)
Purchases of Securities-Held to Maturity (179.4) (86.7)
Proceeds from Maturity and Redemption of Securities-Held to Maturity 238.9 87.6
Purchases of Securities-Available for Sale (3,724.4) (2,377.4)
Proceeds from Sale of Securities-Available for Sale 36.7 85.6
Proceeds from Maturity and Redemption of Securities-Available for Sale 3,367.7 1,636.3
Net Increase in Loans and Leases (183.9) (457.3)
Purchases of Buildings and Equipment (12.3) (14.1)
Net (Increase) Decrease in Trust Security Settlement Receivables 73.5 (2.5)
Other, net .4 (3.2)
- --------------------------------------------------------------------------------- --------- ---------
Net Cash Flows from Investing Activities 323.2 (1,398.4)
- --------------------------------------------------------------------------------- --------- ---------
Cash Flows from Financing Activities:
Net Increase (Decrease) in Deposits (303.9) 311.1
Net Increase (Decrease) in Federal Funds Purchased 499.1 (56.3)
Net Increase in Securities Sold under Agreement to Repurchase 66.1 1,065.5
Net Increase in Commercial Paper 10.6 20.8
Net Decrease in Short-Term Other Borrowings (262.0) (391.7)
Proceeds from Term Federal Funds Purchased 437.9 1,419.2
Repayments of Term Federal Funds Purchased (629.9) (1,308.3)
Repayments of Senior Medium-Term Notes (155.0) (10.0)
Treasury Stock Purchased-Incentive Plans (1.9) (.2)
Net Proceeds from Stock Options 1.1 1.0
Cash Dividends Paid on Common and Preferred Stock (16.3) (13.2)
Other, net 3.4 1.9
- --------------------------------------------------------------------------------- --------- ---------
Net Cash Flows from Financing Activities (350.8) 1,039.8
- --------------------------------------------------------------------------------- --------- ---------
Decrease in Cash and Due from Banks (11.7) (352.5)
Cash and Due from Banks at Beginning of Year 1,192.5 1,519.7
- --------------------------------------------------------------------------------- --------- ---------
Cash and Due from Banks at March 31 $ 1,180.8 $ 1,167.2
- --------------------------------------------------------------------------------- --------- ---------
Schedule of Noncash Investing and Financing Activities:
Acquisition of Affiliate for Stock $ 24.7 $ --
Supplemental Disclosures of Cash Flow Information:
Interest Paid on Deposits and Short- and Long-Term Borrowings $ 166.7 $ 101.8
Income Taxes Received (5.3) (1.3)
- --------------------------------------------------------------------------------- --------- ---------
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION - The consolidated financial statements include
the accounts of Northern Trust Corporation and its subsidiaries ("Northern
Trust"), all of which are wholly owned. Significant intercompany balances and
transactions have been eliminated. The consolidated financial statements as of
March 31, 1995 and 1994 have not been audited by independent public accountants.
In the opinion of management, all adjustments necessary for a fair presentation
of the financial position and the results of operations for the interim periods
have been made. All such adjustments are of a normal recurring nature. Certain
reclassifications have been made to prior periods' consolidated financial
statements to place them on a basis comparable with the current period's
consolidated financial statements. For a description of Northern Trust's
significant accounting principles, refer to the Notes to Consolidated Financial
Statements in the 1994 Annual Report to Stockholders.
2. SECURITIES - The following table summarizes the book and fair values of
securities.
March 31, 1995 December 31, 1994 March 31, 1994
--------------------------------------------------------------------
Book Fair Book Fair Book Fair
(In Millions) Value Value Value Value Value Value
- ---------------------------------------------------- -------- -------- -------- -------- -------- --------
Held to Maturity
U.S. Government $ 117.8 $ 117.6 $ 137.2 $ 137.0 $ 71.5 $ 71.4
Obligations of States and
Political Subdivisions 445.8 474.8 474.5 491.3 478.2 518.6
Federal Agency 22.4 21.8 - - - -
Other 29.3 29.3 29.6 29.6 30.3 30.3
- ---------------------------------------------------- -------- -------- -------- -------- -------- --------
Subtotal 615.3 643.5 641.3 657.9 580.0 620.3
- ---------------------------------------------------- -------- -------- -------- -------- -------- --------
Available for Sale
U.S. Government 854.0 854.0 801.3 801.3 2,494.2 2,494.2
Federal Agency 3,619.1 3,619.1 3,251.5 3,251.5 1,194.4 1,194.4
Preferred Stock 196.4 196.4 196.6 196.6 173.2 173.2
Other 152.4 152.4 158.4 158.4 192.2 192.2
- ---------------------------------------------------- -------- -------- -------- -------- -------- --------
Subtotal 4,821.9 4,821.9 4,407.8 4,407.8 4,054.0 4,054.0
- ---------------------------------------------------- -------- -------- -------- -------- -------- --------
Trading Account 57.9 57.9 4.0 4.0 55.9 55.9
- ---------------------------------------------------- -------- -------- -------- -------- -------- --------
Total Securities $5,495.1 $5,523.3 $5,053.1 $5,069.7 $4,689.9 $4,730.2
- ---------------------------------------------------- -------- -------- -------- -------- -------- --------
Reconciliation of Book Values to Fair Values of
Securities Held to Maturity March 31, 1995
--------------------------------------------
Gross Unrealized
Book -------------------- Fair
(In Millions) Value Gains Losses Value
- ---------------------------------------------------- -------- -------- -------- --------
Held to Maturity
U.S. Government $ 117.8 $ - $ .2 $ 117.6
Obligations of States and
Political Subdivisions 445.8 29.4 .4 474.8
Federal Agency 22.4 .1 .7 21.8
Other 29.3 - - 29.3
- ---------------------------------------------------- -------- -------- -------- --------
Total $ 615.3 $ 29.5 $ 1.3 $ 643.5
- ---------------------------------------------------- -------- -------- -------- --------
6
Reconciliation of Amortized Cost to Fair Values of
Securities Available for Sale March 31, 1995
----------------------------------------
Amortized Gross Unrealized Fair
----------------
(In Millions) Cost Gains Losses Value
----------------------------------------
Available for Sale
U.S. Government $ 863.2 $ .7 $ 9.9 $ 854.0
Federal Agency 3,621.7 1.8 4.4 3,619.1
Preferred Stock 196.7 .1 .4 196.4
Other 157.2 .1 4.9 152.4
----------------------------------------
Total $4,838.8 $2.7 $19.6 $4,821.9
----------------------------------------
Unrealized gains and losses on off-balance sheet financial instruments used to
hedge available for sale securities totaled $7.2 million and $5.2 million,
respectively, as of March 31, 1995. Unrealized gains on these hedges are
reported as other assets in the consolidated balance sheet; unrealized losses
are reported as other liabilities. As of March 31, 1995, stockholders' equity
included a charge of $9.2 million, net of tax, to recognize the depreciation on
securities available for sale and the related hedges.
3. PLEDGED ASSETS - Securities and loans pledged to secure public and trust
deposits, repurchase agreements and for other purposes as required or permitted
by law were $3.7 billion on March 31, 1995 and December 31, 1994 and $4.4
billion on March 31, 1994.
4. CONTINGENT LIABILITIES - Standby letters of credit outstanding were
$833.7 million on March 31, 1995, $819.9 million on December 31, 1994 and $800.8
million on March 31, 1994.
5. LOANS AND LEASES - Amounts outstanding in selected loan categories are
shown below:
March 31 December 31 March 31
(In Millions) 1995 1994 1994
---------------------------------------
Domestic
Commercial $2,990.3 $2,672.0 $2,619.3
Residential Real Estate 3,429.5 3,299.1 3,037.8
Commercial Real Estate 505.6 494.1 486.0
Broker 169.9 274.6 319.9
Consumer 633.5 662.1 598.0
Other 614.8 642.1 455.0
Lease Financing 154.6 159.9 141.3
----------------------------------------
Total Domestic 8,498.2 8,203.9 7,657.3
International 377.5 386.7 423.9
----------------------------------------
Total Loans and Leases $8,875.7 $8,590.6 $8,081.2
----------------------------------------
7
At March 31, 1995, other domestic and international loans include $732.9 million
of overnight trust-related advances in connection with next day security
settlements, compared with $716.5 million at December 31, 1994 and $679.0
million at March 31, 1994.
Northern Trust adopted Statements of Financial Accounting Standards Nos. 114 and
118, "Accounting by Creditors for Impairment of a Loan", effective January 1,
1995. These statements provide guidance as to when loans should be classified
and reported as impaired and address how the reserve for credit losses related
to these loans should be determined. A loan is impaired when, based on current
information and events, it is probable that Northern Trust will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. These new statements require that an impaired loan be measured based
on the present value of expected future cash flows discounted at the loan's
effective interest rate, or at the loan's market price, or, if the loan is
collateral dependent, based on the fair value of the collateral. Any shortfall
in the estimated value of the impaired loan compared with the recorded
investment of the loan is identified as an allocated portion of the reserve
for credit losses and is one of the factors considered by management in their
overall assessment of reserve adequacy. No changes were required to Northern
Trust's accounting policies for loans, charge-offs and interest income as a
result of adopting these statements. These policies are described in Notes to
Consolidated Financial Statements (Footnotes 1E and 1F) in the 1994 Annual
Report.
At March 31, 1995, nonperforming assets totaled $25.4 million. Included in this
amount were loans with a recorded investment of $21.0 million which were also
classified as impaired. Impaired loans totaling $16.6 million had no portion of
the reserve for credit losses allocated to them, while $4.4 million had an
allocated reserve of $1.1 million. For the first quarter of 1995, the total
recorded investment in impaired loans averaged $26.5 million.
Interest payments received on nonaccrual loans are applied to reduce principal
if the ultimate collectibility of principal, wholly or partially, is in doubt.
If specific facts support that principal is fully recoverable, interest payments
are applied to interest in accordance with the loan's original contract terms.
Total interest income recognized on impaired loans for the quarter ended March
31, 1995 was $148 thousand, most of which was recognized using the cash-basis
method of accounting.
6. RESERVE FOR CREDIT LOSSES - Changes in the reserve for credit losses were
as follows:
Three Months
Ended March 31
----------------
(In Millions) 1995 1994
----------------
Balance at Beginning of Period $144.8 $145.5
Charge-Offs (2.7) (4.2)
Recoveries 1.1 1.3
---------------
Net Charge-Offs (1.6) (2.9)
Provision for Credit Losses 1.5 3.0
Reserve Related to Acquisition 1.1 -
---------------
Balance at End of Period $145.8 $145.6
---------------
8
7. ACQUISITIONS - The acquisition of Beach One Financial Services, Inc., parent
company of The Beach Bank of Vero Beach, Florida, was completed on March 31,
1995. The acquisition was effected through a merger in which Northern Trust
Corporation issued 1,622,568 shares of its Common Stock. The Corporation has
accounted for the transaction as a pooling-of-interests. Prior period
consolidated financial statements were not restated due to the immateriality of
the transaction.
In February, 1995, the Corporation entered into a definitive agreement to
acquire Tanglewood Bancshares, Inc., parent company of Tanglewood Bank N.A.,
Houston for $33.0 million in cash. Tanglewood's assets totaled $229.9 million
at December 31, 1994 and net income totaled $2.6 million in 1994. The agreement
is subject to the approval of Tanglewood shareholders and to various regulatory
approvals and is expected to close in the second half of 1995.
In March, 1995, the Corporation entered into a definitive agreement to acquire
RCB International, Inc., an international provider of institutional investment
management services, for approximately $14.2 million in cash and 608,571 shares
of Northern Trust Corporation Common Stock, with a portion payable at closing
and the balance payable through a deferred compensation plan. RCB,
headquartered in Stamford, Connecticut and with offices in Toronto and the
United Kingdom, had net revenues of $10.3 million in the fiscal year ending June
30, 1994. The agreement is subject to the approval of RCB shareholders, final
due diligence, regulatory approvals and other legal requirements and is expected
to close in the second half of 1995.
9
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER EARNINGS HIGHLIGHTS
Net income for the first quarter totaled a record $49.3 million, an increase of
9% from the $45.4 million reported in the first quarter of 1994. Net income per
common share on a fully diluted basis increased 7% to $.85 from $.80 in 1994.
This earnings performance produced an annualized return on average common equity
(ROE) of 16.84% versus 17.86% reported last year and a return on average assets
(ROA) of 1.09% versus 1.06% in 1994. Record levels of trust fees, net interest
income, foreign exchange trading profits and a lower provision for credit losses
as a result of continued strong asset quality contributed to the quarter's
performance. Partially offsetting these positive factors was a 9.5% increase in
noninterest expenses compared with the first quarter of last year.
NONINTEREST INCOME
Noninterest income totaled $161.6 million for the quarter, accounting for 62% of
total taxable equivalent revenue, an 8% improvement from the $149.6 million
earned in the first quarter of 1994. Trust fees, which represent 75% of
noninterest income and 47% of total taxable equivalent revenue, grew 10% or
$11.3 million over last year reaching $120.8 million. The increase in trust
fees reflects $4.7 million in fees from Hazlehurst & Associates, Inc., an April
1994 acquisition, higher securities lending revenues, and growth in investment
management services, as well as stronger trust fees from Personal Financial
Services (PFS). Total trust assets under administration at quarter-end were
$519.9 billion, up $40.1 billion from one year ago.
Trust fees from Corporate and Institutional Services (C&IS) were up 15% to $61.5
million. The Hazlehurst acquisition, securities lending activities and
investment management services were the principal factors contributing to the
growth over the year ago quarter. Domestic and international lending fees, up
34% versus last year, reflect a 14% increase in the volume of securities loaned
as well as higher spreads earned from the investment of the cash collateral.
The higher spreads are attributable to the short-term nature of the cash
collateral pools which has allowed for favorable fund management during a period
of rising interest rates. Investment management fees increased 18% as a result
of new business, particularly in actively managed equity funds and fixed income
investments. C&IS trust assets under administration grew 8% or $34.8 billion
over last year and now total $464.9 billion. Assets under the management of
Northern Trust total $53.9 billion, up 19% from a year ago.
PFS trust fees increased 6% to $59.3 million. The main contributors to this fee
growth were the Wealth Management Group and the Florida, California and Texas
subsidiaries. PFS trust assets under administration grew $5.3 billion or 11% to
$55.0 billion of which $33.6 billion is managed by Northern Trust. Total PFS
trust assets under management grew 10% from the prior year.
10
Security commissions and trading income totaled $5.9 million, compared with $6.8
million reported in the first quarter of last year. The decline in fee income
resulted primarily from a lower level of client transaction activity in the
fixed income markets during the quarter.
Other operating income of $34.8 million increased 5% from the first quarter of
1994. Foreign exchange trading profits were at record levels and totaled $11.2
million, an increase of 12%. The fee portion of treasury management revenues
rose 3% to $12.3 million. Total treasury management revenues, which, in
addition to fees, include the value of compensating deposit balances, increased
11% and totaled $19.9 million. These compensating deposit balances contributed
to the improvement in net interest income.
NET INTEREST INCOME
Net interest income for the first quarter totaled a record $88.5 million, 9%
higher than the $81.5 million reported in the first quarter of 1994. Net
interest income is defined as the total of interest income and amortized fees on
earning assets less interest expense on deposits and borrowed funds adjusted for
the impact of off-balance sheet hedging activity. When net interest income is
adjusted to a fully taxable equivalent (FTE) basis, yields on taxable,
nontaxable and partially taxable assets are comparable, although the adjustment
to a FTE basis has no impact on net income. Net interest income on a FTE basis
for the first quarter was a record $98.1 million, up 10% from the $89.4 million
reported in 1994. This increase is due to higher levels of average earning
assets in addition to a modest improvement in the net interest margin to 2.43%
from 2.40% last year.
Earning assets for the first quarter averaged $16.3 billion, up 8% from the
$15.1 billion in the first quarter of 1994. The $1.2 billion growth in earning
assets reflects an 8% or $605 million increase in average loans, a $971 million
or 20% growth in average securities and a $338 million or 14% decrease in
average money market assets.
Loan volume averaged $8.5 billion, an increase of $605 million from the first
quarter of 1994, reflecting a $693 million or 9% growth in domestic lending.
Approximately one-half of the increase in domestic lending is attributed to
residential mortgage loans now accounting for 39% of the total loan portfolio.
In addition, domestic and international overnight advances related to processing
certain trust client investments averaged $589 million, up $116 million from a
year ago. Securities for the quarter averaged $5.7 billion, up 20% from the
$4.8 billion reported last year, due primarily to a $2.9 billion increase in
short-term federal agency securities, partially offset by a $2.0 billion
reduction in U.S. Government securities. Money market assets averaged $2.1
billion in the first quarter versus $2.4 billion in 1994.
The $1.2 billion increase in average earning assets was funded primarily by
growth in interest-bearing time deposits and noninterest-related funds.
Interest-bearing deposits averaged $9.3 billion, up $1.8 billion from the first
quarter of 1994. This growth is principally from savings certificates (up $618
million), global custody deposit activity in London (up $593 million), and an
increase of $655 million in other foreign time deposits. The 56% increase in
the average volume of savings certificates is due in large part to successful
certificate of deposit campaigns conducted periodically over the past several
quarters. This inflow of funds has helped to reduce the reliance on wholesale
funding sources, as average borrowed funds declined by $899 million from last
year. Average noninterest-related funds increased $327 million, mainly due to
growth
11
in stockholders' equity and other liabilities. Total average stockholders'
equity, supported by continued strong earnings performance, increased $142
million or 12% from the first quarter of 1994.
The net interest margin increased to 2.43% compared with 2.40% last year due
primarily to a significant growth in noninterest-related funds, improved spreads
on short-term federal agency securities and the widening spread between short-
term assets and various short-term deposits.
PROVISION FOR CREDIT LOSSES
Significant improvement in asset quality continued, resulting in a reduction in
the provision for credit losses to $1.5 million from the $3.0 million in the
first quarter of 1994. For a discussion of the reserve for credit losses, refer
to the Asset Quality section on pages 13 through 15.
NONINTEREST EXPENSES
Noninterest expenses totaled $177.3 million for the quarter, up $15.4 million or
9.5% from $161.9 million in the first quarter of 1994. Approximately $4.0
million of the increase resulted from the inclusion of expenses from Hazlehurst
& Associates, Inc., acquired in the second quarter of 1994. The remainder of
the increase was concentrated primarily in salaries and benefits, and expenses
from technology-related investments, personal trust business expansion, and
Northern's growing global custody business.
Salaries and benefits, which represent 59% of total noninterest expenses,
increased 11% to $104.0 million. Salary costs, the largest component of
noninterest expenses, totaled $82.5 million, up 11% from a year ago. Merit
increases, higher levels of agency clerical services and overtime costs, and
additions to staff from the Hazlehurst acquisition were the principal
contributors to the increase. Staff on a full-time equivalent basis, including
174 positions at Hazlehurst, averaged 6,601 compared with 6,260 in 1994.
Employee benefit costs for the quarter totaled $21.5 million, up 13% from the
prior year. The majority of the increase in benefit costs was attributable to
health care, retirement benefits and higher payroll taxes.
Net occupancy expenses totaled $14.2 million, up 4% or $.5 million from $13.7
million in 1994. The principal components of the increase were higher
maintenance and lease operating costs and amortization of leasehold
improvements, as well as expansion costs related to the opening of new offices
in Florida and Illinois.
Equipment expense, which includes depreciation, rental, and maintenance costs,
totaled $12.6 million, up 11% from $11.3 million in the first quarter of 1994,
reflecting increases in depreciation, maintenance and rental costs for equipment
and computers to support trust business expansion.
Other operating expenses totaled $46.5 million, up 7% from $43.4 million in the
first quarter of 1994. Computer software amortization which increased $1.6
million to $8.2 million, along with increases in professional services,
transaction-based depository fees, business promotion and advertising, telephone
and postage contributed to the expense growth. Partially offsetting these
12
expense increases were lower levels of costs incurred from processing errors and
other real estate owned operating costs.
PROVISION FOR INCOME TAXES
The provision for income taxes was $22.0 million for the first quarter compared
with $20.8 million in 1994. The higher tax provision in 1995 resulted from the
growth in taxable earnings for federal income tax purposes while tax-exempt
income declined slightly. Partially offsetting this was a lower state income
tax provision due to increased levels of tax-exempt income for state purposes.
The effective tax rate was 31% for both periods.
BALANCE SHEET
On March 31, 1995, Northern Trust Corporation issued 1,622,568 shares of common
stock, valued at $56.2 million under the acquisition agreement, to complete the
acquisition of Beach One Financial Services, Inc., parent of The Beach Bank of
Vero Beach, Florida ("Beach Bank"). The acquisition was accounted for as a
pooling-of-interests and the balance sheet reflects the assets and liabilities
of Beach Bank as of March 31, 1995 only. Due to the immateriality of the
transaction, Northern Trust elected not to restate prior period financial
statements.
Total assets as of March 31, 1995 were $18.7 billion and averaged $18.4 billion
for the first quarter, up 6% from the year ago quarter's average of $17.3
billion. With increased lending activity, in addition to the March 31
acquisition of Beach Bank, loans and leases totaled $8.9 billion at March 31,
1995, and averaged $8.5 billion for the quarter. This compares with $8.1
billion in total loans on March 31, 1994 and $7.9 billion on average for the
first quarter of last year. Driven primarily by continued strong earnings
growth and the acquisition of Beach Bank, common stockholders' equity increased
16% and totaled $1.178 billion at March 31, 1995, versus $1.014 billion at March
31, 1994. Total stockholders' equity increased commensurately and totaled
$1.348 billion at March 31, 1995 compared with $1.184 billion at March 31, 1994.
Northern Trust's risk-based capital ratios remained strong at 9.4% for tier 1
and 12.8% for total capital at quarter end. These capital ratios are well above
the minimum regulatory requirements of 4% for tier 1 and 8% for total risk-based
capital ratios. The leverage ratio (tier 1 capital to first quarter average
assets) of 6.6% at March 31, 1995, also exceeded the regulatory requirement of
3%.
See footnote 7 in Notes to Consolidated Financial Statements for a description
of pending acquisitions.
ASSET QUALITY
Nonperforming assets consist of nonaccrual loans and leases, restructured loans,
and other real estate owned (OREO). Nonperforming assets at March 31, 1995
totaled $25.4 million, the lowest level since September, 1981, compared with
$30.0 million at December 31, 1994 and $45.8 million at March 31, 1994.
Domestic nonaccrual loans and leases, consisting primarily of commercial loans,
totaled $19.7 million, or .23% of total domestic loans and leases at March 31,
1995. Included in this total are commercial real estate loans of $9.5 million.
At December 31,
13
1994 and March 31, 1994, domestic nonaccrual loans totaled $26.5 million and
$38.7 million, respectively.
The following Nonperforming Asset table presents the outstanding amounts of
nonaccrual loans and leases, restructured loans and OREO. Also shown are loans
that have interest or principal payments that are delinquent 90 days or more and
are still accruing interest. The balance in this category at any quarter end
can fluctuate widely based on the timing of cash collections, renegotiations and
renewals.
Nonperforming Assets and 90 Day Past Due Loans and Leases
March 31 December 31 March 31
(In Millions) 1995 1994 1994
- --------------------------------------------------------------------------
Nonaccrual Loans and Leases
Domestic $19.7 $26.5 $38.7
International 1.3 1.3 1.3
- --------------------------------------------------------------------------
Total Nonaccrual Loans and Leases 21.0 27.8 40.0
Restructured Loans 2.8 - -
OREO 1.6 2.2 5.8
- --------------------------------------------------------------------------
Total Nonperforming Assets $25.4 $30.0 $45.8
- --------------------------------------------------------------------------
Total 90 Day Past Due Loans
(still accruing) $11.6 $17.3 $19.1
- --------------------------------------------------------------------------
PROVISION AND RESERVE FOR CREDIT LOSSES. The provision for credit losses is the
charge against current earnings that is determined by management through a
disciplined credit review process as the amount needed to maintain a reserve
that is sufficient to absorb credit losses inherent in Northern Trust's loan and
lease portfolios and other credit undertakings. While the largest portion of
this reserve is intended to cover loan and lease losses, it is considered a
general reserve that is available to cover all credit-related exposures.
The 1995 first quarter provision for credit losses was $1.5 million, compared
with $3.0 million in 1994. Net charge-offs totaled $1.6 million in the first
quarter of 1995 versus net charge-offs of $2.9 million last year. The reserve
for credit losses was $145.8 million equal to 1.64% of outstanding loans at
March 31, 1995. This compares with $144.8 million or 1.69% of outstanding loans
at December 31, 1994 and $145.6 million or 1.80% of outstanding loans at March
31, 1994. The lower reserve to outstanding loans ratio at March 31, 1995 is
attributable to loan growth, a significant portion of which is in low-risk
residential lending.
The overall credit quality of the domestic portfolio has remained good as
evidenced by the low level of nonperforming loans and net charge-offs.
Management's assessment of the current U.S. economy and the financial condition
of certain clients facing financial difficulties together with portfolio growth
were primary factors impacting management's decision to maintain the reserve for
credit losses at $145.8 million at March 31, 1995, essentially unchanged from
December 31, 1994 and March 31, 1994.
14
Northern Trust continues to monitor closely several credits, but the overall
quality of its loan portfolio remains sound and the reserve for credit losses is
adequate to cover credit-related uncertainties as they exist today. Established
credit review procedures ensure that close attention is given to commercial real
estate-related loans and other commercial loans, as well as other credit
exposures that might be adversely affected by significant increases in interest
rates or unexpected downturns in segments of the economies of the United States
or other countries.
15
The following schedule should be read in conjunction with the Net Interest
Income section of Management's Discussion and Analysis of Financial Condition
and Results of Operations:
CONSOLIDATED ANALYSIS OF NET INTEREST INCOME Northern Trust Corporation
FIRST QUARTER
--------------------------------------------------
(Interest and rate on a 1995 1994
taxable equivalent basis) ------------------------ ------------------------
($ Amounts in Millions) INTEREST VOLUME RATE Interest Volume Rate
- -------------------------- -------- --------- ----- -------- --------- -----
AVERAGE EARNING ASSETS
Money Market Assets
Federal Funds Sold and
Repurchase Agreements $ 3.5 $ 233.6 5.99% $ 2.2 $ 248.9 3.59%
Time Deposits with Banks 26.7 1,856.4 5.83 22.5 2,077.9 4.39
Other .2 14.1 6.26 1.0 115.0 3.57
- -------------------------- ------ --------- ----- ------ --------- -----
Total Money Market Assets 30.4 2,104.1 5.85 25.7 2,441.8 4.27
- -------------------------- ------ --------- ----- ------ --------- -----
Securities
U.S. Government 13.0 992.4 5.32 27.6 2,979.9 3.76
Obligations of States and
Political Subdivisions 12.5 453.0 11.04 13.9 484.4 11.48
Federal Agency 61.7 3,878.3 6.45 8.6 934.9 3.73
Other 6.0 382.2 6.35 3.7 311.4 4.77
Trading Account .5 26.4 8.23 .9 50.7 7.60
- -------------------------- ------ --------- ----- ------ --------- -----
Total Securities 93.7 5,732.3 6.62 54.7 4,761.3 4.64
- -------------------------- ------ --------- ----- ------ --------- -----
Loans and Leases 146.7 8,535.9 6.97 111.7 7,930.4 5.71
- -------------------------- ------ --------- ----- ------ --------- -----
Total Earning Assets $270.8 $16,372.3 6.71% $192.1 $15,133.5 5.15%
- -------------------------- ------ --------- ----- ------ --------- -----
AVERAGE SOURCE OF FUNDS
Deposits
Savings and Money Market
Deposits $ 26.6 $ 3,263.1 3.31% $ 19.2 $ 3,463.8 2.24%
Savings Certificates 24.5 1,717.5 5.79 11.3 1,099.8 4.16
Other Time 6.4 456.6 5.67 3.1 311.2 3.98
Foreign Offices Time 50.6 3,911.9 5.24 23.3 2,663.8 3.55
- -------------------------- ------ --------- ----- ------ --------- -----
Total Deposits 108.1 9,349.1 4.69 56.9 7,538.6 3.06
Federal Funds Purchased 16.1 1,122.6 5.81 13.3 1,672.8 3.22
Repurchase Agreements 24.1 1,697.0 5.77 9.3 1,174.1 3.21
Commercial Paper 2.1 143.8 5.84 1.0 123.5 3.23
Other Borrowings 10.5 807.8 5.25 9.5 1,336.0 2.89
Senior Medium-Term Notes 6.9 469.6 5.92 6.5 751.5 3.46
Notes Payable 4.9 244.8 8.13 6.2 326.8 7.81
- -------------------------- ------ --------- ----- ------ --------- -----
Total Interest-Related
Funds 172.7 13,834.7 5.06 102.7 12,923.3 3.22
- -------------------------- ------ --------- ----- ------ --------- -----
Interest Rate Spread -- -- 1.65% -- -- 1.93%
- -------------------------- ------ --------- ----- ------ --------- -----
Noninterest-Related Funds -- 2,537.6 -- -- 2,210.2 --
- -------------------------- ------ --------- ----- ------ --------- -----
Total Source of Funds $172.7 $16,372.3 4.28% $102.7 $15,133.5 2.75%
- -------------------------- ------ --------- ----- ------ --------- -----
NET INTEREST INCOME/MARGIN $ 98.1 -- 2.43% $ 89.4 -- 2.40%
- -------------------------- ------ --------- ----- ------ --------- -----
ANALYSIS OF NET INTEREST INCOME CHANGES DUE TO VOLUME AND RATE
FIRST QUARTER
1995/94
-------------------
CHANGE DUE
TO
------------
(In Millions) VOLUME RATE TOTAL
- --------------------------------------------------------- ------ ----- -----
Earning Assets $26.7 $52.0 $78.7
Interest-Related Funds 12.5 57.5 70.0
- --------------------------------------------------------- ----- ----- -----
Net Interest Income $14.2 $(5.5) $ 8.7
- --------------------------------------------------------- ----- ----- -----
16
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Securities Holders
The annual meeting of stockholders of Northern Trust Corporation was
held on April 18, 1995 for the purposes of electing fifteen Directors to hold
office until the next annual meeting of stockholders. Proxies for the meeting
were solicited pursuant to Section 14(a) of the Securities Exchange Act of 1934
and there was no solicitation in opposition to management's nominees. All of
management's nominees for Directors as listed in the proxy statement were
elected by the following votes set forth below. There were no broker non-votes
for any candidate.
Candidates "FOR" "WITHHELD"
- ---------- ----- ----------
Worley H. Clark 48,707,028 149,985
Dolores E. Cross 48,661,207 149,985
David W. Fox 48,698,795 149,985
Robert S. Hamada 48,710,193 149,985
Barry G. Hastings 48,698,263 149,985
Robert A. Helman 48,688,261 149,985
Arthur L. Kelly 48,701,711 149,985
Ardis Krainik 48,690,971 149,985
Robert D. Krebs 48,703,673 149,985
Frederick A. Krehbiel 48,709,498 149,985
William G. Mitchell 48,702,092 149,985
William A. Osborn 48,724,373 149,985
Harold B. Smith 48,704,345 149,985
William D. Smithburg 48,701,335 149,985
Bibe L. Thomas 48,708,349 149,985
17
At the annual meeting stockholders also voted to approve the Amended 1992
Incentive Stock Plan. The Amended Plan, which was described in the Corporation's
Proxy Statement dated March 13, 1995, consists of the 1992 Incentive Stock Plan
(as approved by stockholders in 1992 and subsequently amended), with two
amendments: one to extend the option exercise period following termination of
employment on account of retirement, disability or death from three years to
five years, and the other to limit the number of shares for which options may be
awarded to an individual under the Amended Plan.
Votes cast for approval of the Amended Plan were 45,326,577. 2,273,061 votes
were cast against approval, the holders of 460,922 shares specifically
abstained from voting on the resolution and there were 790,098 broker held non
voted shares.
18
Item 6. Exhibits and Reports on Form 8-K
(a.) Exhibits
--------
Exhibit(10) Northern Trust Corporation Amended 1992 Incentive
Stock Plan.
Exhibit(11) Computation of Per Share Earnings.
Exhibit(27) Financial Data Schedule.
Exhibit(99) Remarks delivered by David W. Fox and William A.
Osborn at the Annual Meeting of Stockholders of
Northern Trust Corporation held on April 18, 1995.
(b.) Reports on Form 8-K
-------------------
In a report on Form 8-K dated January 17, 1995 the Corporation
disclosed pursuant to Item 5 the information contained in its
January 17, 1995 press release, reporting on its earnings for the
fourth quarter of 1994 and for its 1994 fiscal year. Also disclosed
pursuant to Item 7 were related financial statements and exhibits.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORTHERN TRUST CORPORATION
--------------------------
(Registrant)
Date: May 12, 1995 By: PERRY R. PERO
---------------------
PERRY R. PERO
Senior Executive Vice President
and Chief Financial Officer
Date: May 12, 1995 By: HARRY W. SHORT
---------------------
HARRY W. SHORT
Senior Vice President and Controller
(Chief Accounting Officer)
20