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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 0-5965
NORTHERN TRUST CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 36-2723087
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
50 SOUTH LA SALLE STREET
CHICAGO, ILLINOIS 60675
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (312)630-6000
------------------------
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 [_]
56,648,044 Shares - $1.66 2/3 Par Value
(Shares of Common Stock Outstanding on March 31, 1996)
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEET NORTHERN TRUST CORPORATION
March 31 December 31 March 31
------------ ------------ ------------
($ In Millions) 1996 1995 1995
- ---------------------------------------------------------------------------- ------------ ------------ ------------
Assets
Cash and Due from Banks $ 1,125.7 $ 1,308.9 $ 1,180.8
Money Market Assets
Federal Funds Sold and Securities Purchased under Agreements to Resell 118.8 162.1 176.3
Time Deposits with Banks 1,828.9 1,567.6 1,767.7
Other 54.4 54.5 14.3
--------------------------------------------------------------------------- ------------- ------------- -------------
Total 2,002.1 1,784.2 1,958.3
--------------------------------------------------------------------------- ------------ ------------- -------------
Securities (Fair value $6,110.5 at March 1996, $5,787.8 at December 1995 and
$5,523.3 at March 1995) 6,087.3 5,760.3 5,495.1
Loans and Leases (Net of unearned income of $89.6 at March 1996, $89.6 at
December 1995, and $71.2 at March 1995) 10,025.6 9,906.0 8,875.7
Reserve for Credit Losses (147.2) (147.1) (145.8)
Buildings and Equipment 287.9 281.5 280.8
Customers' Acceptance Liability 28.9 35.8 52.6
Trust Security Settlement Receivables 215.8 327.1 232.2
Other Assets 675.6 676.8 806.4
--------------------------------------------------------------------------- ------------- ------------- -------------
Total Assets $ 20,301.7 $ 19,933.5 $ 18,736.1
--------------------------------------------------------------------------- ------------- ------------- ------------
Liabilities
Deposits
Demand and Other Noninterest-Bearing $ 2,609.8 $ 2,853.1 $ 2,475.1
Savings and Money Market Deposits 3,598.4 3,385.3 3,050.1
Savings Certificates 2,077.9 2,158.8 1,974.6
Other Time 451.2 384.3 334.9
Foreign Offices - Demand 309.2 459.8 264.5
- Time 3,053.9 3,246.9 3,510.7
--------------------------------------------------------------------------- ------------- ------------- -------------
Total Deposits 12,100.4 12,488.2 11,609.9
Federal Funds Purchased 2,715.2 2,300.1 1,471.1
Securities Sold Under Agreements to Repurchase 1,911.5 1,858.7 2,283.0
Commercial Paper 144.3 146.7 134.4
Other Borrowings 914.8 875.9 623.9
Senior Notes 305.0 17.0 392.0
Notes Payable 336.1 334.6 244.8
Liability on Acceptances 28.9 35.8 52.6
Other Liabilities 376.9 423.9 576.3
--------------------------------------------------------------------------- ------------- ------------- -------------
Total Liabilities 18,833.1 18,480.9 17,388.0
--------------------------------------------------------------------------- ------------ ------------- ------------
Stockholders' Equity
Preferred Stock 120.0 170.0 170.0
Common Stock - $1.66 2/3 Par Value 95.0 93.6 93.3
March 1996 December 1995 March 1995
---------------------------------------------------------------------------
Shares authorized 140,000,000 140,000,000 140,000,000
Shares issued 56,979,579 56,158,064 55,994,352
Shares outstanding 56,648,044 55,664,412 55,980,309
Capital Surplus 332.7 306.1 306.7
Retained Earnings 971.7 928.8 810.7
Net Unrealized Gain (Loss) on Securities (3.0) 2.6 (9.2)
Common Stock Issuable - Performance Plan 10.4 14.7 16.7
Deferred Compensation - ESOP and Other (40.3) (39.4) (39.6)
Treasury Stock - (at cost, 331,535 shares at March 1996, 493,652 shares at
December 1995, and 14,043 shares at March 1995) (17.9) (23.8) (.5)
--------------------------------------------------------------------------- ------------ ------------- ------------
Total Stockholders' Equity 1,468.6 1,452.6 1,348.1
--------------------------------------------------------------------------- ------------ ------------ -------------
Total Liabilities and Stockholders' Equity $ 20,301.7 $ 19,933.5 $ 18,736.1
--------------------------------------------------------------------------- ------------ ------------ ------------
2
CONSOLIDATED STATEMENT OF INCOME NORTHERN TRUST CORPORATION
First Quarter
Ended March 31
------------------------
($ In Millions Except Per Share Information) 1996 1995
- -------------------------------------------------------------------------- ----------- -----------
Interest Income
Money Market Assets
Federal Funds Sold and Securities Purchased under Agreements to Resell $ 3.8 $ 3.5
Time Deposits with Banks 22.8 26.7
Other .8 .2
- -------------------------------------------------------------------------- ----------- -----------
Total 27.4 30.4
- -------------------------------------------------------------------------- ----------- -----------
Securities 93.6 85.1
Loans and Leases 163.9 145.7
- -------------------------------------------------------------------------- ----------- -----------
Total Interest Income 284.9 261.2
- -------------------------------------------------------------------------- ----------- -----------
Interest Expense
Deposits - Savings and Money Market Deposits 28.1 26.6
- Savings Certificates 30.9 24.5
- Other Time 8.4 6.4
- Foreign Offices 44.1 50.6
Federal Funds Purchased 28.7 16.1
Securities Sold under Agreements to Repurchase 26.1 24.1
Commercial Paper 1.9 2.1
Other Borrowings 12.8 10.5
Senior Notes 4.1 6.9
Notes Payable 6.4 4.9
- -------------------------------------------------------------------------- ----------- -----------
Total Interest Expense 191.5 172.7
- -------------------------------------------------------------------------- ----------- -----------
Net Interest Income 93.4 88.5
Provision for Credit Losses 5.0 1.5
- -------------------------------------------------------------------------- ----------- -----------
Net Interest Income after Provision for Credit Losses 88.4 87.0
- -------------------------------------------------------------------------- ----------- -----------
Noninterest Income
Trust Fees 143.9 120.8
Security Commissions and Trading Income 6.3 5.9
Other Operating Income 37.2 34.8
Investment Security Gains .3 .1
- -------------------------------------------------------------------------- ----------- -----------
Total Noninterest Income 187.7 161.6
- -------------------------------------------------------------------------- ----------- -----------
Income before Noninterest Expenses 276.1 248.6
- -------------------------------------------------------------------------- ----------- -----------
Noninterest Expenses
Salaries 87.7 82.5
Pension and Other Employee Benefits 20.4 21.5
Occupancy Expense 15.8 14.2
Equipment Expense 13.6 12.6
Other Operating Expenses 46.5 46.5
- -------------------------------------------------------------------------- ----------- -----------
Total Noninterest Expenses 184.0 177.3
- -------------------------------------------------------------------------- ----------- -----------
Income before Income Taxes 92.1 71.3
Provision for Income Taxes 30.6 22.0
- -------------------------------------------------------------------------- ----------- -----------
Net Income $ 61.5 $ 49.3
- -------------------------------------------------------------------------- ----------- -----------
Net Income Applicable to Common Stock $ 60.2 $ 47.2
- -------------------------------------------------------------------------- ----------- -----------
Net Income Per Common Share - Primary $ 1.05 $ .86
- Fully Diluted 1.04 .85
- -------------------------------------------------------------------------- ----------- -----------
Average Number of Common Shares Outstanding - Primary 57,490,937 55,168,319
- Fully Diluted 57,922,410 56,394,815
- -------------------------------------------------------------------------- ----------- -----------
3
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY NORTHERN TRUST CORPORATION
First Quarter
Ended March 31
--------------------
(In Millions) 1996 1995
- -------------------------------------------------------- --------- ---------
Preferred Stock
Balance at January 1 $ 170.0 $ 170.0
Conversion of Preferred Stock, Series E (50.0) -
- -------------------------------------------------------- --------- ---------
Balance at March 31 120.0 170.0
- -------------------------------------------------------- --------- ---------
Common Stock
Balance at January 1 93.6 90.6
Stock Issued in Acquisitions - 2.7
Conversion of Preferred Stock, Series E 1.4 -
- -------------------------------------------------------- --------- ---------
Balance at March 31 95.0 93.3
- -------------------------------------------------------- --------- ---------
Capital Surplus
Balance at January 1 306.1 302.2
Stock Issued - Incentive Plan and Awards (2.6) (2.4)
Stock Issued in Acquisitions - 6.9
Conversion of Preferred Stock, Series E 29.2 -
- -------------------------------------------------------- --------- ---------
Balance at March 31 332.7 306.7
- -------------------------------------------------------- --------- ---------
Retained Earnings
Balance at January 1 928.8 762.7
Net Income 61.5 49.3
Dividend Declared on Common Stock (17.6) (14.1)
Dividends Declared on Preferred Stock (1.0) (2.3)
Pooled Affiliates - 15.1
- -------------------------------------------------------- --------- ---------
Balance at March 31 971.7 810.7
- -------------------------------------------------------- --------- ---------
Net Unrealized Gain (Loss) on Securities
Balance at January 1 2.6 (15.8)
Unrealized Gain (Loss), net (5.6) 6.6
- -------------------------------------------------------- --------- ---------
Balance at March 31 (3.0) (9.2)
- -------------------------------------------------------- --------- ---------
Common Stock Issuable - Performance Plan
Balance at January 1 14.7 17.9
Stock Issuable, net of Stock Issued (4.3) (1.2)
- -------------------------------------------------------- --------- ---------
Balance at March 31 10.4 16.7
- -------------------------------------------------------- --------- ---------
Deferred Compensation - ESOP and Other
Balance at January 1 (39.4) (38.8)
Compensation Deferred (1.8) (1.5)
Compensation Amortized .9 .7
- -------------------------------------------------------- --------- ---------
Balance at March 31 (40.3) (39.6)
- -------------------------------------------------------- --------- ---------
Treasury Stock
Balance at January 1 (23.8) (8.1)
Stock Options and Awards 17.2 10.4
Stock Purchased (30.5) (2.8)
Conversion of Preferred Stock, Series E 19.2 -
- -------------------------------------------------------- --------- ---------
Balance at March 31 (17.9) (.5)
- -------------------------------------------------------- --------- ---------
Total Stockholders' Equity at March 31 $1,468.6 $1,348.1
- -------------------------------------------------------- --------- ---------
4
CONSOLIDATED STATEMENT OF CASH FLOWS Northern Trust Corporation
First Quarter
Ended March 31
--------------------------
(In Millions) 1996 1995
- --------------------------------------------------------------------------------- ----------- -----------
Cash Flows from Operating Activities:
Net Income $ 61.5 $ 49.3
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Provision for Credit Losses 5.0 1.5
Depreciation on Buildings and Equipment 11.8 10.8
Increase in Interest Receivable (2.7) (18.5)
Increase (Decrease) in Interest Payable (.7) 5.6
Amortization and Accretion of Securities and Unearned Income (29.7) (45.6)
Amortization of Software, Goodwill and Other Intangibles 11.0 9.1
Net (Increase) Decrease in Trading Account Securities 82.0 (53.9)
Other Noncash, net (22.9) 57.6
- --------------------------------------------------------------------------------- ---------- -----------
Net Cash Flows from Operating Activities 115.3 15.9
- --------------------------------------------------------------------------------- ---------- -----------
Cash Flows from Investing Activities:
Net Decrease in Federal Funds Sold and Securities Purchased under
Agreements to Resell 43.3 613.8
Net (Increase) Decrease in Time Deposits with Banks (261.3) 97.0
Net (Increase) Decrease in Other Money Market Assets .1 (4.8)
Purchases of Securities--Held to Maturity (62.7) (179.4)
Proceeds from Maturity and Redemption of Securities--Held to Maturity 108.5 238.9
Purchases of Securities--Available for Sale (7,198.0) (3,724.4)
Proceeds from Sale, Maturity and Redemption of Securities--Available for Sale 6,754.9 3,404.4
Net Increase in Loans and Leases (125.4) (183.9)
Purchases of Buildings and Equipment (16.7) (12.3)
Net Decrease in Trust Security Settlement Receivables 111.3 73.5
Other, net (13.2) .4
- --------------------------------------------------------------------------------- ---------- -----------
Net Cash Flows from Investing Activities (659.2) 323.2
- --------------------------------------------------------------------------------- ---------- -----------
Cash Flows from Financing Activities:
Net Decrease in Deposits (387.7) (303.9)
Net Increase in Federal Funds Purchased 415.1 499.1
Net Increase in Securities Sold under Agreement to Repurchase 52.8 66.1
Net Increase (Decrease) in Commercial Paper (2.4) 10.6
Net Increase (Decrease) in Short-Term Other Borrowings 135.3 (262.0)
Proceeds from Term Federal Funds Purchased 902.4 437.9
Repayments of Term Federal Funds Purchased (998.8) (629.9)
Proceeds from Senior Notes 700.0 --
Repayments of Senior Notes (412.0) (155.0)
Treasury Stock Purchased (29.2) (1.9)
Net Proceeds from Stock Options 2.1 1.1
Cash Dividends Paid on Common and Preferred Stock (18.4) (16.3)
Other, net 1.5 3.4
- --------------------------------------------------------------------------------- ---------- -----------
Net Cash Flows from Financing Activities 360.7 (350.8)
- --------------------------------------------------------------------------------- ---------- -----------
Decrease in Cash and Due from Banks (183.2) (11.7)
Cash and Due from Banks at Beginning of Year 1,308.9 1,192.5
- --------------------------------------------------------------------------------- ---------- -----------
Cash and Due from Banks at March 31 $ 1,125.7 $ 1,180.8
- --------------------------------------------------------------------------------- ---------- -----------
Schedule of Noncash Investing and Financing Activities:
Conversion of Preferred Stock, Series E to Common Stock $ 49.7 $ --
Acquisition of Affiliate for Stock -- 24.7
Supplemental Disclosures of Cash Flow Information:
Interest Paid on Deposits and Short- and Long-Term Borrowings $ 192.2 $ 166.7
Income Taxes Received (1.9) (5.3)
- --------------------------------------------------------------------------------- ---------- -----------
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, 1996 and 1995 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. For a
description of Northern Trust's significant accounting principles, refer to the
Notes to Consolidated Financial Statements in the 1995 Annual Report to
Stockholders.
2. SECURITIES - The following table summarizes the book and fair values of
securities.
March 31, 1996 December 31, 1995 March 31, 1995
-------------------------------------------------------------------------
Book Fair Book Fair Book Fair
(In Millions) Value Value Value Value Value Value
- ---------------------------------------------------------------------------------------------------------
Held to Maturity
U.S. Government $ 93.4 $ 93.3 $ 116.1 $ 116.3 $ 117.8 $ 117.6
Obligations of States and
Political Subdivisions 348.9 372.2 366.9 394.0 445.8 474.8
Federal Agency 18.2 18.2 22.2 22.4 22.4 21.8
Other 29.4 29.4 29.9 29.9 29.3 29.3
- ---------------------------------------------------------------------------------------------------------
Subtotal 489.9 513.1 535.1 562.6 615.3 643.5
- ---------------------------------------------------------------------------------------------------------
Available for Sale
U.S. Government 2,160.5 2,160.5 1,667.7 1,667.7 854.0 854.0
Obligations of States and
Political Subdivisions 73.2 73.2 70.2 70.2 - -
Federal Agency 3,167.6 3,167.6 3,152.8 3,152.8 3,619.1 3,619.1
Preferred Stock 112.4 112.4 147.8 147.8 196.4 196.4
Other 76.8 76.8 97.8 97.8 152.4 152.4
- ---------------------------------------------------------------------------------------------------------
Subtotal 5,590.5 5,590.5 5,136.3 5,136.3 4,821.9 4,821.9
- ---------------------------------------------------------------------------------------------------------
Trading Account 6.9 6.9 88.9 88.9 57.9 57.9
- ---------------------------------------------------------------------------------------------------------
Total Securities $6,087.3 $6,110.5 $5,760.3 $5,787.8 $5,495.1 $5,523.3
- ---------------------------------------------------------------------------------------------------------
Reconciliation of Book Values to Fair Values of
Securities Held to Maturity March 31, 1996
- ---------------------------------------------------------------------------------------------------------
Gross Unrealized
Book ---------------- Fair
(In Millions) Value Gains Losses Value
- ---------------------------------------------------------------------------------------------------------
Held to Maturity
U.S. Government $ 93.4 $ - $.1 $ 93.3
Obligations of States and
Political Subdivisions 348.9 23.5 .2 372.2
Federal Agency 18.2 .2 .2 18.2
Other 29.4 - - 29.4
- ---------------------------------------------------------------------------------------------------------
Total $489.9 $23.7 $.5 $513.1
- ---------------------------------------------------------------------------------------------------------
6
Reconciliation of Amortized Cost to Fair Values of
Securities Available for Sale March 31, 1996
- ----------------------------------------------------------------------------------
Gross Unrealized
Amortized ----------------- Fair
(In Millions) Cost Gains Losses Value
- ----------------------------------------------------------------------------------
Available for Sale
U.S. Government $2,162.4 $ 2.3 $ 4.2 $2,160.5
Obligations of States and
Political Subdivisions 72.3 1.9 1.0 73.2
Federal Agency 3,167.1 4.4 3.9 3,167.6
Preferred Stock 112.7 - .3 112.4
Other 77.8 .8 1.8 76.8
- ----------------------------------------------------------------------------------
Total $5,592.3 $ 9.4 $ 11.2 $5,590.5
- ----------------------------------------------------------------------------------
Unrealized gains and losses on off-balance sheet financial instruments used to
hedge available for sale securities totaled $3.3 million and $6.3 million,
respectively, as of March 31, 1996. Unrealized gains on these hedges are
reported as other assets in the consolidated balance sheet; unrealized losses
are reported as other liabilities. As of March 31, 1996, stockholders' equity
included a charge of $3.0 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 $4.4 billion on March 31, 1996, $3.9 billion on December 31, 1995
and $3.7 billion on March 31, 1995.
4. CONTINGENT LIABILITIES - Standby letters of credit outstanding were $1.1
billion on March 31, 1996, $1.0 billion on December 31, 1995 and $833.7 million
on March 31, 1995.
5. LOANS AND LEASES - Amounts outstanding in selected loan categories are
shown below:
March 31 December 31 March 31
---------------------------------
(In Millions) 1996 1995 1995
- --------------------------------------------------------------
Domestic
Commercial $ 3,052.1 $3,202.1 $2,990.3
Residential Real Estate 4,048.1 3,896.4 3,429.5
Commercial Real Estate 537.0 512.6 505.6
Broker 383.3 304.0 169.9
Consumer 748.1 758.9 633.5
Other 560.7 625.5 614.8
Lease Financing 198.9 202.3 154.6
- --------------------------------------------------------------
Total Domestic 9,528.2 9,501.8 8,498.2
International 497.4 404.2 377.5
- --------------------------------------------------------------
Total Loans and Leases $10,025.6 $9,906.0 $8,875.7
- --------------------------------------------------------------
7
At March 31, 1996, other domestic and international loans include $612.3 million
of overnight trust-related advances in connection with next day security
settlements, compared with $810.4 million at December 31, 1995 and $732.9
million at March 31, 1995.
At March 31, 1996, nonperforming assets totaled $32.1 million. Included in this
amount were loans with a recorded investment of $27.6 million which were also
classified as impaired. A loan is impaired when, based on current information
and events, it is probable that a creditor will be unable to collect all amounts
due according to the contractual terms of the loan agreement. Impaired loans
totaling $16.0 million had no portion of the reserve for credit losses allocated
to them, while $11.6 million had an allocated reserve of $3.8 million. For the
first quarter of 1996, the total recorded investment in impaired loans averaged
$24.4 million. Total interest income recognized on impaired loans for the
quarter ended March 31, 1996 was $53 thousand, most of which was recognized
using the cash-basis method of accounting.
At March 31, 1995, nonperforming assets totaled $25.4 million and included $21.0
million of impaired loans. $16.6 million of these impaired loans had no reserve
allocation while $4.4 million had an allocated reserve of $1.1 million. Impaired
loans for the first quarter of 1995 averaged $26.5 million with $148 thousand of
interest income recognized, principally on the cash-basis method.
6. RESERVE FOR CREDIT LOSSES - Changes in the reserve for credit losses were
as follows:
Three Months Ended March 31
------------------------------
(In Millions) 1996 1995
- ----------------------------------------------------------------
Balance at Beginning of Period $147.1 $144.8
Charge-Offs (5.7) (2.7)
Recoveries 0.8 1.1
- ----------------------------------------------------------------
Net Charge-Offs (4.9) (1.6)
- ----------------------------------------------------------------
Provision for Credit Losses 5.0 1.5
Reserve Related to Acquisition - 1.1
- ----------------------------------------------------------------
Balance at End of Period $147.2 $145.8
- ----------------------------------------------------------------
8
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 $61.5 million, an
increase of 25% from the $49.3 million reported in the first quarter of
1995. Net income per common share on a fully diluted basis increased 22%
to $1.04 from $.85 in 1995. This earnings performance produced an
annualized return on average common equity (ROE) of 18.35% versus 16.84%
reported last year, and an annualized return on average assets (ROA) of
1.19% versus 1.09% in 1995. The quarter's performance reflects the
leverage of a 12% increase in total revenues, driven by record levels of
trust fees, coupled with a modest 4% increase in operating expenses.
NONINTEREST INCOME
Noninterest income increased 16% and totaled $187.7 million for the
quarter, accounting for 65% of total taxable equivalent revenue. Trust
fees, which represented 77% of noninterest income and 50% of total taxable
equivalent revenue, grew 19% or $23.1 million over the like period of 1995
reaching $143.9 million. Fees generated by businesses acquired after the
first quarter of 1995 accounted for $6.9 million of the trust fee growth.
Exclusive of these fees, trust fees increased 13% compared to the first
quarter of last year. Trust assets under administration at March 31, 1996
totaled $641.2 billion compared to $519.9 billion a year ago.
Trust fees from Corporate and Institutional Services (C&IS) increased $14.6
million to $72.8 million. Fees generated by RCB International, Inc. (RCB),
an October 31, 1995 acquisition, accounted for $6.0 million of the trust
fee growth. Exclusive of the RCB contribution, C&IS trust fees increased
$8.6 million or 15% from the year ago quarter. The increase in fees
reflects substantial new business and strong growth across all product
lines, particularly custody, securities lending, retirement services and
investment management. Custody fees increased $2.7 million or 10% and
totaled $30.2 million for the quarter. The growth, in both domestic and
global custody, was driven by increased transaction-based fees and new
business. Domestic securities lending fees, up 30% versus last year,
reflect a 25% increase in the volume of securities loaned as well as a
modest increase in the spread earned from the investment of the cash
collateral. International securities lending fees increased 48% during the
quarter, driven by a 79% increase in the volume of securities loaned,
partially offset by narrowing spreads on the investment of the cash
collateral. Fees from retirement services generated by Hazlehurst &
Associates, Inc. increased 22%, principally from new business. Investment
management fees, primarily related to institutional funds and enhanced cash
products, increased 61% driven by new business and growth in customized
products tailored to client needs. C&IS trust assets under administration
grew 24% or $108.1 billion over last year and now total $567.1 billion.
C&IS assets under the management of Northern Trust total $70.3 billion, up
39% from a year ago.
Trust fees from Personal Financial Services (PFS) grew 14% from the prior
year level of $62.6 million and totaled $71.1 million for the first
quarter. PFS trust fee growth resulted primarily
9
from new business and higher market values of the assets administered. The
principal contributors to this fee growth were the Wealth Management Group and
PFS offices in Chicago, Florida, Arizona and Texas. The increase in fees also
reflects the contribution of $.9 million in fees from Beach Bank, a March 31,
1995 acquisition. During the first quarter of 1996, new offices were opened in
Bonita Springs and Delray Beach, bringing to 21 the total number of offices in
the high-growth Florida market. At March 31, 1996, Northern Trust's network of
PFS offices totaled 52 locations throughout Illinois, Florida, California,
Arizona and Texas. Total personal trust assets under administration increased
$13.2 billion from the prior year and totaled $74.1 billion at March 31, 1996,
with $44.2 billion under management.
Security commissions and trading income totaled $6.3 million compared with
$5.9 million reported in the first quarter of 1995. The increase resulted
primarily from a higher volume of trading activity by individual investors.
Other operating income totaled $37.2 million in the quarter, compared to
$34.8 million in the like quarter of 1995. The principal items included in
other operating income are foreign exchange trading profits and treasury
management fees. Foreign exchange trading profits of $12.5 million
increased 12% from the year ago quarter. Foreign exchange trading profits,
generated in both Chicago and London, continue to benefit from the increase
in cross-border investment activities of Master Trust/Master Custody
clients, although they are also impacted by market volatility. The fee
component of treasury management revenues rose 5% to $13.0 million compared
to the prior year. Total treasury management revenues, including both fees
and earnings on compensating deposit balances, were $20.5 million,
representing a 6% increase from the first quarter of 1995. This improvement
resulted from new business growth in all treasury management products,
particularly electronic services. The year to year comparison of treasury
management revenues was also impacted by a $.7 million decrease in the amount of
FDIC insurance premiums that were previously passed through to clients in 1995.
Other operating income in the first quarter also benefited from higher levels of
the trust-related overnight advances on which fees are charged.
NET INTEREST INCOME
Net interest income for the first quarter totaled a record $93.4 million, 5%
higher than the $88.5 million reported in the first quarter of 1995. 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 $102.0 million, up 4% from the $98.1 million reported
in 1995. The increase reflects the positive impact of 1995 acquisitions and
higher levels of earning assets, offset in part by a decline in the net interest
margin to 2.21% from 2.43% reported in the first quarter of 1995.
Earning assets for the first quarter averaged $18.6 billion, up 13% from
the $16.4 billion average for the first quarter of 1995. The $2.2 billion
growth in average earning assets reflects a 15% or
10
$1.2 billion increase in average loans, and a $1.0 billion or 17% growth in
average security holdings. Money market assets totaled $2.1 billion on
average for the quarter, down 2% from the like period of 1995.
The overall loan growth was concentrated in the domestic portfolio as
international loans were essentially unchanged from the prior year level.
Approximately one-half of the domestic growth was centered in residential
mortgage loans, which increased to $3.9 billion on average and comprised
40% of the total average loan portfolio. Commercial and industrial loans
grew $220 million to average $3.1 billion during the first quarter of 1996.
Securities for the quarter averaged $6.7 billion, up 17% from the $5.7
billion reported last year, due primarily to a $1.1 billion increase in
short-term U.S. Government securities.
The growth in average earning assets was funded primarily by increased
levels of interest-bearing deposits, federal funds purchased, repurchase
agreements, and noninterest-related funds. Total interest-bearing deposits
averaged $9.9 billion, up $528 million from the first quarter of 1995.
This growth came principally from savings certificates (up $393 million),
savings and money market deposits (up $314 million), and other time
deposits (up $155 million), offset by a decline in foreign office time
deposits of $334 million, concentrated primarily in the London Branch.
Noninterest-related funds increased $272 million and averaged $2.8 billion
due in large part to growth in stockholders' equity. Stockholders' equity
increased $150 million or 11% and averaged $1.46 billion due primarily to
growth in retained earnings. The remaining increase in average
noninterest-related funds came from higher levels of demand deposit
accounts resulting from acquisitions and growth from new and existing
relationships.
The net interest margin decreased to 2.21% compared with 2.43% last year.
The flat yield curve experienced throughout much of the first quarter of
1996 narrowed spreads between returns on short-term assets and rates paid
on retail deposits and various short-term funding sources.
PROVISION FOR CREDIT LOSSES
The provision for credit losses of $5.0 million compares to $1.5 million in
the first quarter of 1995. For a discussion of the provision and reserve
for credit losses, refer to the Asset Quality section on pages 13 through 15.
NONINTEREST EXPENSES
Noninterest expenses totaled $184.0 million for the quarter, up $6.7
million or 4% from $177.3 million in the first quarter of 1995. Operating
expenses of the three businesses acquired in 1995 accounted for
approximately $8.6 million of total expenses in the quarter, while the
reduction in FDIC insurance premiums that began in the second half of 1995
lowered expenses in the first quarter of 1996 by $4.0 million. Northern
Trust continues to invest in technology and in the expansion of its network
of personal trust and banking offices. The incremental costs of these
strategic programs in the first quarter have been largely offset by savings
obtained through Northern Trust's stringent expense control initiatives.
11
Salaries and benefits, which represent 59% of total noninterest expenses,
increased a modest 4% compared to the year ago quarter to $108.1 million. The
principal items contributing to the change were merit increases, incentive
compensation, and staff additions resulting from 1995 acquisitions and to
support Northern Trust's growing retirement services activities. These
increases were partially offset by a decline in staff levels in other areas of
Northern Trust and cost savings from changes in several benefit plans effective
January 1, 1996. Staff on a full-time equivalent basis at March 31, 1996
totaled 6,536 which is essentially unchanged from year-end 1995, but down 197
staff from March 31, 1995 (exclusive of 179 employees added through
acquisitions).
Net occupancy expense totaled $15.8 million, up 11% or $1.6 million from
$14.2 million in the first quarter of 1995, due in part to acquisitions and
new offices. The principal components of the increase were higher rent,
real estate taxes and utility costs, and amortization and depreciation of
leasehold improvements and buildings, offset in part by lower levels of
lease operating costs.
Equipment expense, which includes depreciation, rental, and maintenance
costs, totaled $13.6 million, up $1.0 million or 8% from the first quarter
of 1995. The principal components of the increase were higher levels of
depreciation primarily related to personal computers and computer hardware,
and higher rental costs associated with computer equipment and data
communication lines.
Other operating expenses totaled $46.5 million, unchanged from the prior
year level. The reduction in FDIC insurance premiums which took effect in
the second half of 1995 was offset by the addition of professional service
fees paid to RCB's network of investment managers, and higher levels of
software amortization, contract data processing costs, transaction-based
depository fees, and amortization expense of goodwill and other
intangibles.
The components of other operating expenses were as follows:
Three Months Ended March 31
---------------------------
(In Millions) 1996 1995
--------- ---------
Business Development $ 6.0 $ 5.9
Purchased Professional Services 16.8 14.0
Telecommunications 2.7 2.6
Postage and Supplies 5.8 5.5
FDIC Premium -- 4.0
Software Amortization 8.6 7.4
Goodwill and Other Intangibles Amortization 2.4 1.7
Other Expense 4.2 5.4
----------- ---------
Total Other Operating Expenses $ 46.5 $ 46.5
=========== =========
12
PROVISION FOR INCOME TAXES
The provision for income taxes was $30.6 million for the first quarter
compared with $22.0 million in the year ago quarter. The higher tax
provision in 1996 resulted from the growth in taxable earnings for both
federal and state income tax purposes and a decline in tax-exempt income
from the prior year. The effective tax rate was 33% for 1996 versus 31% in
1995.
BALANCE SHEET
In January, 1996, the Corporation issued 1,198,372 shares of common stock
upon conversion of its $50 million stated value Series E convertible
preferred stock, which on January 5, 1996 had been called for redemption.
The conversion has no impact on fully diluted net income per common share
since the shares issued upon conversion were already reflected in the
Corporation's fully diluted shares.
Total assets as of March 31, 1996 were $20.3 billion and averaged $20.9
billion for the first quarter, up 14% from last year's average of $18.4
billion. Due to increased lending activity, in addition to the Beach Bank
and Tanglewood Bank acquisitions, loans and leases totaled $10.0 billion at
March 31, 1996, and averaged $9.8 billion for the first quarter. This
compares with $8.9 billion in total loans at March 31, 1995 and $8.5
billion on average for the first quarter of last year.
Driven primarily by continued strong earnings growth, the conversion of the
Series E convertible preferred stock and stock issued in connection with
the March 31, 1995 acquisition of Beach Bank, common stockholders' equity
increased 16% and averaged $1.32 billion for the first quarter, versus
$1.14 billion last year. Total stockholders' equity for the quarter also
increased and averaged $1.46 billion compared with $1.31 billion last year.
During the quarter, the Corporation purchased 566,306 of its own shares at
a total cost of $30.5 million pursuant to the 4 million share buyback
program authorized by the Board of Directors in 1994. At March 31, 1996,
an additional 1.7 million shares remain to be purchased under this program.
Northern Trust's risk-based capital ratios remained strong at 9.1% for tier
1 and 12.7% for total capital at March 31, 1996. 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 6.1% at March 31, 1996, also exceeded the
regulatory requirement of 3%.
ASSET QUALITY
Nonperforming assets consist of nonaccrual loans, restructured loans and
other real estate owned (OREO). Nonperforming assets at March 31, 1996
totaled $32.1 million, compared with $33.7 million at December 31, 1995 and
$25.4 million at March 31, 1995. Domestic nonaccrual loans and leases,
consisting primarily of commercial loans, totaled $27.9 million, or .29% of
total domestic loans and leases at March 31, 1996. Included in this total
are commercial real estate loans of $16.3 million. At December 31, 1995
and March 31, 1995, domestic nonaccrual loans totaled $29.0 million and
$19.7 million, respectively.
13
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) 1996 1995 1995
- ------------------------------------------------------------------------------------------------------------------
Nonaccrual Loans and Leases
Domestic $27.9 $29.0 $19.7
International - .2 1.3
- ------------------------------------------------------------------------------------------------------------------
Total Nonaccrual Loans and Leases 27.9 29.2 21.0
Restructured Loans 2.7 2.7 2.8
OREO 1.5 1.8 1.6
- ------------------------------------------------------------------------------------------------------------------
Total Nonperforming Assets $32.1 $33.7 $25.4
- ------------------------------------------------------------------------------------------------------------------
Total 90 Day Past Due Loans
(still accruing) $36.9 $22.0 $11.6
- ------------------------------------------------------------------------------------------------------------------
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 1996 first quarter provision for credit losses was $5.0 million,
compared with $1.5 million in the first quarter of 1995. Net charge-offs
totaled $4.9 million in the first quarter of 1996, versus net charge-offs
of $1.6 million last year. The reserve for credit losses was $147.2
million or 1.47% of outstanding loans at March 31, 1996. This compares
with $147.1 million or 1.49% of outstanding loans at December 31, 1995 and
$145.8 million or 1.64% of outstanding loans at March 31, 1995. The lower
reserve to outstanding loans ratio at March 31, 1996 is attributable to
loan growth, a significant portion of which is in low-risk residential
mortgage lending.
The overall credit quality of the domestic portfolio has remained good as
evidenced by the low level of nonperforming loans and relatively moderate
level of net charge-offs. Management's assessment of the current U.S. economy
and the financial condition of certain clients facing financial
difficulties together with the types of loans creating portfolio growth
were primary factors impacting management's decision to maintain the
reserve for credit losses at $147.2 million at March 31, 1996, essentially
unchanged from December 31, 1995 and slightly higher
14
than March 31, 1995. Although difficult to predict, management presently
expects that the provision for credit losses for the balance of 1996 will
be somewhat above the very low level experienced in the comparable period
of 1995.
Northern Trust continues to monitor closely several credits, but the
overall quality of its loan portfolio remains sound and the reserve for
credit losses is adequate to cover credit-related uncertainties as they
exist today. Established credit review procedures ensure that close
attention is given to commercial real estate-related loans and other
commercial loans, as well as other credit exposures that might be adversely
affected by significant increases in interest rates or unexpected downturns
in segments of the economies of the United States or other countries.
15
The following schedule should be read in conjunction with the Net Interest
Income section of Management's Discussion and Analysis of Financial Condition
and Results of Operations.
CONSOLIDATED ANALYSIS OF NET INTEREST INCOME NORTHERN TRUST CORPORATION
First Quarter
----------------------------------------------------------------------------
(Interest and rate on a taxable equivalent basis) 1996 1995
------------------------------------ -------------------------------------
($ in Millions) Interest Volume Rate Interest Volume Rate
- -------------------------------------------------- -------- ----------- ------ --------- ----------- -----
Average Earning Assets
Money Market Assets
Federal Funds Sold and Repurchase Agreements $ 3.8 $ 267.1 5.66 % $ 3.5 $ 233.6 5.99 %
Time Deposits with Banks 22.8 1,745.3 5.26 26.7 1,856.4 5.83
Other .8 53.5 6.06 .2 14.1 6.26
- -------------------------------------------------- -------- ----------- ------ --------- ----------- -----
Total Money Market Assets 27.4 2,065.9 5.33 30.4 2,104.1 5.85
- -------------------------------------------------- -------- ----------- ------ --------- ----------- -----
Securities
U.S. Government 29.6 2,084.5 5.71 13.0 992.4 5.32
Obligations of States and Political Subdivision 10.5 422.1 9.99 12.5 453.0 11.04
Federal Agency 57.2 3,956.5 5.81 61.7 3,878.3 6.45
Other 3.9 262.3 6.02 6.0 382.2 6.35
Trading Account .2 9.5 7.25 .5 26.4 8.23
- -------------------------------------------------- -------- ----------- ------ --------- ----------- -----
Total Securities 101.4 6,734.9 6.05 93.7 5,732.3 6.62
- -------------------------------------------------- -------- ----------- ------ --------- ----------- -----
Loans and Leases 164.7 9,777.3 6.78 146.7 8,535.9 6.97
- -------------------------------------------------- -------- ----------- ------ --------- ----------- -----
Total Earning Assets $ 293.5 $ 18,578.1 6.35 % $ 270.8 $ 16,372.3 6.71 %
- -------------------------------------------------- -------- ----------- ------ --------- ----------- -----
Average Source of Funds
Deposits
Savings and Money Market Deposits $ 28.1 $ 3,577.7 3.16 % $ 26.6 $ 3,263.1 3.31 %
Savings Certificates 30.9 2,110.1 5.89 24.5 1,717.5 5.79
Other Time 8.4 611.4 5.53 6.4 456.6 5.67
Foreign Offices Time 44.1 3,577.4 4.96 50.6 3,911.9 5.24
- -------------------------------------------------- -------- ----------- ------ --------- ----------- -----
Total Deposits 111.5 9,876.6 4.54 108.1 9,349.1 4.69
Federal Funds Purchased 28.7 2,143.3 5.39 16.1 1,122.6 5.81
Repurchase Agreements 26.1 1,977.1 5.31 24.1 1,697.0 5.77
Commercial Paper 1.9 143.8 5.45 2.1 143.8 5.84
Other Borrowings 12.8 978.2 5.25 10.5 807.8 5.25
Senior Notes 4.1 314.4 5.25 6.9 469.6 5.92
Notes Payable 6.4 334.8 7.68 4.9 244.8 8.13
- -------------------------------------------------- -------- ----------- ------ --------- ----------- -----
Total Interest-Related Funds 191.5 15,768.2 4.88 172.7 13,834.7 5.06
- -------------------------------------------------- -------- ----------- ------ --------- ----------- -----
Interest Rate Spread - - 1.47 % - - 1.65 %
- -------------------------------------------------- -------- ----------- ------ --------- ----------- -----
Noninterest-Related Funds - 2,809.9 - - 2,537.6 -
- -------------------------------------------------- -------- ----------- ------ --------- ----------- -----
Total Source of Funds $ 191.5 $ 18,578.1 4.14 % $ 172.7 $ 16,372.3 4.28 %
- -------------------------------------------------- -------- ----------- ------ --------- ----------- -----
Net Interest Income/Margin $ 102.0 - 2.21 % $ 98.1 - 2.43 %
- -------------------------------------------------- -------- ----------- ------ --------- ----------- -----
ANALYSIS OF NET INTEREST INCOME CHANGES
DUE TO VOLUME AND RATE First Quarter 1996/95
------------------------------
Change Due To
--------------------
(In Millions) Volume Rate Total
- --------------------------------------------------------------------------- ------ -------- --------
Earning Assets $ 34.3 $ (11.6) $ 22.7
Interest-Related Funds 25.4 (6.6) 18.8
- --------------------------------------------------------------------------- -------- --------- ---------
Net Interest Income $ 8.9 $ (5.0) $ 3.9
- --------------------------------------------------------------------------- -------- --------- ---------
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 16, 1996 for the purposes of electing fourteen 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"
----------------------- ---------- ----------
Dolores E. Cross 51,209,909 162,420
Robert S. Hamada 51,236,472 162,420
Barry G. Hastings 51,325,451 162,420
Robert A. Helman 51,234,438 162,420
Arthur L. Kelly 51,229,042 162,420
Ardis Krainik 50,672,814 162,420
Robert D. Krebs 51,234,518 162,420
Frederick A. Krehbiel 50,753,093 162,420
William G. Mitchell 50,735,163 162,420
Edward J. Mooney 51,226,140 162,420
William A. Osborn 51,248,198 162,420
Harold B. Smith 51,235,715 162,420
William D. Smithburg 51,186,113 162,420
Bide L. Thomas 51,208,166 162,420
17
Item 6. Exhibits and Reports on Form 8-K
(a.) Exhibits
--------
Exhibit (3) Amendment to By-laws of the Corporation
and By-laws as amended.
Exhibit (10) Material Contracts:
(i) Northern Trust Corporation (1996)
Annual Performance Plan.
(ii) Northern Trust Corporation (1996)
Management Performance Plan.
Exhibit (11) Computation of Per Share Earnings.
Exhibit (27) Financial Data Schedule.
Exhibit (99) Remarks delivered by William A. Osborn at the
Annual Meeting of Stockholders of Northern Trust
Corporation held on April 16, 1996.
(b.) Reports on Form 8-K
-------------------
In a report on Form 8-K dated January 5, 1996, Northern Trust
incorporated by reference in Item 5 its January 5, 1996 press
release, reporting on its announced call for redemption on January
26, 1996 all of its outstanding 6.25% Series E Preferred Stock
Depository Shares.
In a report on Form 8-K dated January 16, 1996, Northern Trust
incorporated by reference in Item 5 its January 16, 1996 press
release, reporting on its earnings for the fourth quarter of 1995
and for its 1995 fiscal year. The press release, with summary
financial information, was filed pursuant to Item 7.
18
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 14, 1996 By: PERRY R. PERO
-------------------------------
PERRY R. PERO
Senior Executive Vice President
and Chief Financial Officer
Date: May 14, 1996 By: HARRY W. SHORT
------------------------------------
HARRY W. SHORT
Senior Vice President and Controller
(Chief Accounting Officer)
19