It wasn't so long ago that Wall Street held out Northern Trust Corp. as a fool-proof investment. Propelled by steadily rising fee income, the logic went, Northern should flourish in virtually any banking environment.

But a modest fourth-quarter slowdown at Chicago-based Northern has driven home the point that trust institutions aren't immune to volatility. Some analysts said that lesson, combined with investors' new-found skepticism, could affect Northern's stock price for some time to come.

Trust assets under management or administration rose by an annualized 3.7% in the fourth quarter, to $499.4 billion. However, trust revenues declined at a 4.1% annualized rate.

And overhead expenses rose. Excluding a $9.6 million pretax pension charge, Northern's fourth-quarter noninterest expenses grew by a hefty 5.5% from the third quarter, to $175.3 million.

Excluding the pension charge and tax benefits, fourth-quarter net income at Northern fell 8.33% from the third quarter.

"I was surprised, and I think management was surprised," said James M. Schutz, an analyst at Chicago Corp.

Driving down trust revenue, analysts said, were declines in the values of personal trust assets under administration and narrowing margins in the highly competitive corporate trust business.

Though commercial banking operations at the $18.6 billion-asset Northern appear solid, the company is enveloped in the same trend as the industry - stretching for asset growth to offset margin declines.

Earning assets rose by 13.1% in 1994, with loans climbing by 12.7% and securities investments ballooning by 25.1%. But the fourth-quarter net interest margin was off 23 basis points from a year ago, to 2.38%, and that held growth in quarterly taxable equivalent net interest income to 5.6%.

Late Wednesday, Northern's common stock was trading at $tk, or tk times analysts' consensus ($3.59) forecast of 1995 earnings per share, as published by First Call Corp.

That's healthy compared with most banks. But it still is a tk% decline from Northern's 52-week high of $43.25.

Goldman, Sachs & Co. analyst Sally Pope Davis contends that Northern's stock has been overly penalized. She rates it a "moderate outperformer."

The analyst said she is encouraged by growth prospects at Northern Trust outposts in Arizona, California, Florida, and Texas. She added that bond and equity trading values could stabilize this year, supporting the asset base on which Northern assesses personal trust management fees.

By contrast, Chicago Corp.'s Mr. Schutz reduced his rating to "hold," from "buy." He estimated that Northern's stock price would fluctuate between $33 and $36 per share this year. He cited concerns about thinning margins in the corporate trust business - and about Northern's expenses.

In a January conference call with analysts, Northern's officers unveiled plans to cut $15 million of expenses in 1995, $30 million in 1996, and $45 million in 1997.

However, management cautioned that the moves would only slow the rate of expense growth, not reduce the total. To combat slowing personal trust growth at its Chicago lead bank, for example, Northern will continue spending to expand its presence in Chicago suburbs.

Perry Pero, Northern's chief financial officer, said in an interview that the company expects trust revenues to grow at a double-digit pace in 1995. He said year-to-year progress is more important than what happens from one quarter to the next.

But Merrill Lynch & Co. analyst Livia Asher said Northern Trust's stock price depends largely on "how quickly the company gets its cost-cutting program in place."

Ms. Asher maintained a "neutral" near-term rating on Northern's stock and a "buy" long-term rating.

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