Exhibit Number (99)
To 3/31/97 Form 10-Q
Barry G. Hastings
Annual Meeting Remarks
April 15, 1997
Thanks Bill and Good Morning. Through 107 years of providing outstanding
service to clients worldwide, Northern Trust has built leading market positions
in two core businesses. We enjoy a diverse and profitable business mix that we
believe is unmatched in the industry. This morning I'll share with you how we
have strengthened our market positioning over the past year in these core
businesses and also how we are poised to seize growth opportunities going
forward. But first I'll take a few minutes to review our 1996 and first quarter
1997 financial performance.
1996 was our ninth consecutive year of record earnings and a year unmatched
for new business wins in both our corporate and personal businesses. The
corporation earned net income of almost $259 million - an 18% increase from a
year ago. Trust fees, which constitute half of our revenue base of $1.3 billion,
grew 17% during the year. Trust assets increased 27% to $779 billion at year
end. Strong revenue growth coupled with well-managed expenses and excellent
credit quality drove this exceptional performance. We achieved a 4% spread
between revenue growth of 12% and expense growth of 8% which allowed our revenue
growth to have a direct and significant impact on bottom line profitability. As
we go forward, our success in expense management continues to be an integral
component of our strategic business planning. But we also remain firmly
committed to funding those areas with strong revenue growth opportunities.
Growth in all of Northern's revenue sources contributed to our success in
exceeding our strategic financial targets. Earnings per share increased 19%,
well above our minimum target of 10%. Return on equity was 18.6%, solidly within
our 18%-20% target range, and we achieved $1.56 of revenue for each $1.00 of
noninterest expense - well above the $1.50 objective we have had for many years.
I am pleased to announce that today we are raising our sights. Going forward,
our goal will be to earn $1.60 for each $1.00 of noninterest expense.
As Bill indicated, the momentum of 1996 has carried into 1997 with excellent
first quarter results. Net income rose 17% to a record $71.7 million. Trust
fees, which account for almost half of total revenues, grew 10%, and foreign
exchange had an exceptional quarter with 64% growth from the same period last
year. In addition, solid loan growth, of $1.4 billion, fueled net interest
income which grew 12%. This strong performance on the revenue side resulted in
total revenue growth of 11%.
We made excellent progress against all our financial targets in the first
quarter. Earnings per share were up 19%, well ahead of our minimum of 10%.
Return on Common Equity of 19.9% reached the high end of our target range. And
our 1st quarter productivity ratio of 157% exceeded our prior goal and is
progressing toward our newly revised goal of 160%.
Now for the next 20 minutes or so, I want to share a few comments with you on
the condition of our businesses and opportunities for our continued growth. It's
a good story and one that you, as shareholders, should genuinely enjoy.
As most of you are aware, we compete as a top-tier provider in both our
personal and our corporate & institutional markets. Our focused commitment to
these businesses has been critical as the importance of technology continues to
escalate. On the corporate and institutional side, substantial investments in
leading-edge technology have built a strong platform that allows rapid
development in key areas of client interest such as risk management and
consulting. Our Passport system, now being actively used by almost 300 clients,
provides access to decision support tools and worldwide financial information
from a single on-line desktop tool. Our large outlay in technology, which
exceeds $600 million over the last five years, is now being leveraged by our
personal businesses through the development of the Northern Relationship
Network. This national network will streamline our client servicing and
informational capabilities and improve operational effectiveness in all of our
locations.
From our goal to meet client expectations for wide ranging investment
strategies and rapid information needs, we have evolved into a complex and
expansive operations and systems organization. Using large computer databases,
processing huge transaction volumes and controlling the flow of enormous dollar
movements, our operations team, which today totals over 2,800 people, provides
accurate and timely account information to clients all over the globe.
From time to time when we attempt to put in perspective the breadth and depth
of our operations worldwide, the numbers become so stunning that they are nearly
beyond comprehension. However, if we convert the macro numbers to other
comparisons, the true enormity of our daily accomplishments is much clearer. For
example, we set up on our system each minute of each working day of the year one
totally new asset, adding to our collective asset base which currently totals
just under 500,000 marketable and non-marketable assets.
We produce reports in enormous numbers today. If all of the reports that were
produced in 1996 were stacked one on top of the other, they would be more than
twice as high as Mount Everest, and 44 times as high as the Sears Tower. Last
year, we produced and mailed to our clients 17,000,000 statements, reports,
benefit checks, and letters - roughly 1% of the total amount of mail handled by
the Chicago Post Office in all of 1996. And finally, while we are a $22 billion
bank, because of this large processing and custody component, more than $90
billion of cash and securities pass through the Northern each business day...
over 4 times the size of our bank.
Northern's investment management business benefited significantly in 1996 from
strong equity markets around the world. Northern's consultative approach to
investment management complements industry trends such as the globalization of
the financial markets, greater focus on risk evaluation and management, and the
increasing preference of investors to use fewer managers. Assets under
management for personal and institutional clients rose $25 billion in 1996 to
over $130 billion. This places Northern among the largest, and fastest growing,
investment managers worldwide. Northern's
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mutual funds have also made good progress. Through our Benchmark Funds, for our
institutional clients, and our Northern Funds, for our personal clients, we now
offer a total of 35 no-load funds which are priced daily and meet a wide range
of investment objectives. We offer domestic and international equity and fixed
income funds, tax-exempt funds, and money market funds. Over the past three
years, our mutual funds have grown to almost $13 billion in assets and make up
the 12th largest bank mutual funds complex in the country. And some of the
country's top performing funds were in our complex during 1996. In particular,
our Technology Fund which was organized last April became the number one ranked
Science and Technology fund for the 3rd quarter of 1996. Also, our Growth Income
Equity fund ranked in the top 15% of all such comparable funds for 1996. Our
fixed income performance remains among the nation's best in the 3, 5, 7, and 10
year timeframes. And our active management of cash continues to grow
dramatically. We are currently managing on average approximately $75 billion
daily which makes us one of the country's largest cash managers. Our team of
cash managers has consistently produced top-tier results.
As a result of our highly focused business strategy and investment in our core
businesses, Northern is capturing a significant share of the growth in these
markets. Overall annualized new business fees for 1996 exceeded $100 million, a
record year by over $25 million. For example, to give you an idea of the new
business momentum in our personal business, in 1996, excluding any new business
booked in our Wealth Management group, which focuses on families with assets in
excess of $100 million, we acquired 41 new pieces of recurring fee business from
around the country, each involving assets of over $50 million. Never in our
history have we booked so many large accounts. And while our major focus
continues to be on the fee side of our businesses, net interest income derived
from loans is extraordinarily important to our success. Through a client focused
approach, we provide financial and credit products to our targeted market
segments. Thousands of fee-based clients from both our personal and corporate
business units use these credit products. And while our loan growth has been
impressive, growing 13% in 1996, we continue to maintain exceptional credit
quality. At the end of 1996, nonperforming assets to total loans were two-tenths
of 1% on loans outstanding of $11 billion which placed us #1 in our peer group
of the largest 35 U.S. banks. It is this combination of net interest income from
quality loans and fee revenues that drives our total relationship strategy, and
ultimately, our superior corporate return on equity.
In our Corporate & Institutional business, we administer and manage global
investment asset pools for corporate and institutional clients worldwide. In
September, we introduced a new positioning of our products and services for the
corporate and institutional market. MasterSource positions Northern as a premier
provider of "integrated solutions from one trusted source." As clients
increasingly look to fewer providers to do more, Northern is able to offer a
comprehensive array of retirement plan, global, investment, treasury management,
credit, and risk management products and services. Recent mergers and
acquisitions in the financial services industry have changed the landscape for
the Corporate and Institutional Services business. Likewise, a number of players
have exited the business for reasons such as lack of scale, costs associated
with technology investment, and strategic focus. All of these changes have
presented increased opportunities for Northern and contributed to our record new
business results.
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In the third quarter, First Chicago NBD announced its intention to exit the
master trust and institutional custody business, joining Harris Bank and
Continental/BOA who had exited this business earlier, and First Chicago named
Northern the preferred provider for its clients. We have been very successful in
meeting new business goals from targeted First Chicago NBD clients. To date,
clients with over $30 billion in assets and representing approximately $8
million in annualized recurring fees have selected Northern as their custodian.
We have also been successful in winning business from other providers who have
exited the business. Among our largest new clients in 1996 were some very
recognizable names: State of Maine, AT&T, United Airlines, Whirlpool, IBM
Netherlands and Bank of Botswana.
In the Corporate & Institutional unit, we are focused on the growth
opportunities in three inter-related areas of business - Retirement Services,
Investment Services, and International. Northern Trust and our subsidiary
Northern Trust Retirement Consulting, formerly known as Hazlehurst & Associates,
provide consulting and administration services for both defined contribution and
defined benefit plans. Demographic trends in the United States point to strong
growth in retirement assets. Plan sponsors from both the private and public
sectors can look to Northern to provide a broad range of retirement services
including plan consulting, design, communication, actuarial, trust and custody,
recordkeeping, benefit payment and participant services. Central to our success
is technology, and Northern has built a comprehensive servicing platform which
we have named RetirementSource and which is delivered through Passport. With
RetirementSource, both the plan sponsor and Northern can readily access
recordkeeping and benefit payment information.
Northern Trust's broad range of investment service capabilities provides
products and services for every phase in the management of investment programs -
plan design, implementation, monitoring and evaluation. Rather than focusing on
promoting specific investment products, Northern takes a consultative approach
to assessing client needs and implementing solutions. As investment products
become more complex, the need for investment monitoring tools is increasing. In
response to clients' needs, Northern has developed on-line risk management
capabilities such as Alerts, which was the first of its kind in the industry.
Securities Lending is another significant fee-generating capability for
Northern's investment services group. Northern now has traders in Chicago,
London, and Hong Kong lending in excess of $40 billion in securities daily.
Many Corporate & Institutional clients are now taking advantage of the wide
range of investment management services Northern Trust offers both through
internally developed capabilities and through high quality manager-of-manager
programs structured by Northern Trust Global Advisors, formerly known as RCB
International, which we acquired in 1995.
Internationally, we have an attractive and expanding client base in 20
countries across Asia, Africa, Europe, the Middle East and Canada. This global
client base represents a diverse population including pension funds, fund
managers, insurance companies, central banks and governments. Northern's strong
credit ratings and long-standing reputation for risk management position us
favorably for growth in our key markets, perhaps most of all internationally. In
1996, we expanded our global presence by opening an office in Singapore,
enabling us to offer our clients 24 hour foreign exchange coverage.
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Perhaps surprising to you, we are currently the eighth largest U.S. bank in
foreign exchange trading revenues. Over the past five years, this revenue source
has experienced average annual growth of 28% and has become a very important
component of our revenue mix. One of the keys to Northern's success in this area
has been our ability to leverage off the growth of our global custody assets
which increased 27% in 1996 to $108 billion.
We are servicing these global clients through our strong and growing
subcustodian network in 70 countries throughout the world and have plans to add
another 13 countries in 1997.
Personal Financial Services is our other core business. We believe we have a
one-of-a-kind strategy of marketing trust, investment management and private
banking services to individuals in targeted high growth, affluent markets. This
strategy brings together the key elements of people, product range, delivery,
marketing and focus. Within each of these Northern enjoys competitive
advantages.
Our reputation is outstanding in this business, and enables us to attract and,
most importantly, retain professionals of the highest caliber. Our people have
many years of professional experience and they are actively involved and well-
known in their communities. We continue to strongly encourage all of our vice-
presidents & above who have client relationship responsibilities to become
actively involved in at least one philanthropic, cultural, social, or
educational organization of their choosing. Over the years, this has returned
wonderful dividends for our employees, the charitable organizations involved,
and our company.
The quality and range of products that we offer stand out in the industry.
Northern has the capability to manage and administer non-traditional investments
such as closely-held businesses, complex partnerships, and structured
investments. And, as today is April 15, we are filing over 36,000 fiduciary,
partnership, and income tax returns for individuals and trust beneficiaries. We
believe we prepare more fiduciary and income tax returns than any other bank in
the country. These special skills, along with a full range of more traditional
banking, investment and fiduciary products, enable us to service clients
throughout their lives.
We are strategically located where the demographics are very favorable and the
demand is strong for our distinguishing "high touch" service style. Our full
range of expertise is available on site in each of our locations and that is
unique in our industry. Our trust administrators, private bankers, new business
officers, tax experts, and portfolio managers work as a team to ensure total
client satisfaction. Unrivaled service delivery is imperative and is enhanced by
facilities which are truly superior, quite nontraditional, and consistent with
our image as the bank of choice for our targeted market.
We are effective in building professional referral networks of estate planning
attorneys, accountants and financial planners, but our best source of referrals
for new business always has been and continues to be our satisfied clients. We
blend this more traditional avenue of new business development with a unique
style of marketing. For example, we host hundreds of targeted events each year
throughout the country where we invite clients and prospects to meet and listen
to well-known authors, philosophers,
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entertainers, and political commentators and frankly, to just get another good
"booster shot" of our unique banking/personal trust relationship approach. These
varied events have proven to be highly effective in building client loyalty as
well as attracting new business. With almost $35 million in new recurring fee
business, 1996 turned out to be PFS's most successful year and our leverage of
new business vs. business distributed or terminated reached 4 to 1 in 1996 - for
the first time ever; that is $4.00 of new business for every $1.00 of lost
business. This puts us at the very top of our peer group.
And because this core business generates more than half of total corporate
revenues, it receives significant senior management attention. For example, the
members of our management committee with client responsibilities spend a
disproportionate amount of time with both clients and prospects of this
business - with each of us having specific objectives for 350 active calls each
year.
Our franchise today spans five states, each of which is profitable. In fact,
in 1996, and listen carefully, the net income generated from our banks outside
of Illinois was over $58 million. That is substantially more than the net income
for the entire corporation just 10 years ago. We now have a total of 60 office
locations, and currently administer over $85 billion of trust assets for
individuals, with $50 billion of that under our investment direction. In 1996,
these assets under management grew by 21%. This past year saw our franchise
expand with six new office locations. Among these was our acquisition in
November of Bent Tree National Bank in Texas. This acquisition filled a critical
need for us in the rapidly growing North Dallas area. And while on Texas, I
should add that we earned over $4 million there last year. This state has far
surpassed the financial models we used when deciding to enter Texas in 1989; it
continues to have excellent momentum.
We plan to continue our expansion program by further penetrating our existing
markets and by expanding our network of locations. In 1997, we have already
opened new offices in Montecito and LaJolla, California and Tampa, Florida. We
have also scheduled office openings for later this year in NW Tucson, Arizona
and the Doral section in Miami, Florida. The following slides show some of our
newer offices added since our last annual meeting:
1. Sun City West, AZ (opened 4/96)
2. East Valley (Mesa), AZ (opened 11/96)
3. Winnetka, Illinois (new facility 11/96)
4. Chicago South, Illinois (new facility 11/96)
5. Montecito, CA - new in 1/1997
6. Tampa (opened 1997)
Wealth Management, which I referred to earlier, is another important Personal
Financial Services business. Headquartered in Chicago, it addresses the complex
financial needs of families who utilize multiple money managers and have assets
exceeding $100 million. This group had an exceptional year in 1996 with assets
under administration growing 42% from $15 billion in 1995 to more than $22
billion. Total revenues grew 27% and there was a comparable growth in the number
of families served. We now have 140 families from all over the nation and
several foreign countries who benefit from the sophisticated technology of
Northern's master trust and global custody businesses as well as the
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fiduciary, banking, investment management, and tax expertise of the Personal
Financial Services business.
Northern remains firmly committed to meeting the diverse needs of the
communities it serves. This commitment to our overall community development
program was further strengthened in December when our Illinois bank became the
first bank in the country to receive regulatory approval of its Community
Reinvestment Act (CRA) Strategic Plan. Effective January 1, this three year plan
outlines goals for affordable and conventional mortgages in low- and moderate-
income census tracts, lending to small businesses, and community development
loans. We know we will have help in accomplishing these goals, since we have
developed relationships over the years with over 50 neighborhood-based community
development organizations in Chicago and its suburbs.
Northern's nationwide bank network also takes part in a variety of community
development initiatives ranging from participating in lending consortia for
housing and small businesses in Florida and California to taking a leadership
role in the revitalization of a historic district in downtown Phoenix. We are
truly committed to helping build stronger communities through involvement by the
corporation and our employees.
Our core businesses are growing rapidly and require significant investment of
capital, but the strength of our earnings generates equity capital in excess of
projected needs. We are currently repurchasing common shares to manage our
capital position and to enhance shareholder return. In 1996, the stock buyback
continued with 4.1 million shares being repurchased. In November, 1996, your
Board of Directors increased the stock buyback authorization by another 4.2
million shares, and in the first quarter of 1997, we repurchased 445 thousand of
those shares.
Northern also marked 100 consecutive years of dividends paid to investors in
1996 and increased the annual dividend 16% to $0.72 per share. This record of
consistent performance has been achieved by only a few of America's strongest
businesses. 1996 was the ninth straight year that the dividend has been
increased to keep pace with earnings growth. This dividend increase combined
with the 2 for 1 stock split in December demonstrates our continued confidence
and positive outlook for the future.
Reflecting the strong earnings growth, the stock price rose 30% during 1996,
on top of a 60% rise in 1995 and well ahead of the overall market. Northern
Trust's consistent performance over the years is evident in the stock price
which has had an average annual growth rate of 24% during this decade. This is
in line with the Keefe 50 bank index and well ahead of the S&P 500 which grew an
average of 14% annually over the same period.
In summary, 1996 marked the ninth consecutive year of record earnings for the
corporation and 1997 is off to an excellent start. Our confidence in Northern's
strategic opportunities continues to be high and our business development
momentum has never been stronger. We are optimistic that we can continue to
deliver a consistently strong operating performance to you, our shareholders.
Finally, on behalf of Bill and our senior management team, I thank you and our
Board of Directors for your continued confidence in us. And now, I'll turn the
podium back to Bill.
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