NTRS

Business Context and Reporting Period

Company: Northern Trust Corporation (NORTHERN TRUST CORP)
Filing Type: Form 10-K (Annual Report)
Reporting Period: Fiscal year ended December 31, 2006
Business Overview: Northern Trust is a financial holding company and leading provider of investment management, asset and fund administration, fiduciary, and banking solutions. Operations are organized into two principal business units: Corporate and Institutional Services (C&IS) and Personal Financial Services (PFS), supported by Northern Trust Global Investments (NTGI) and Worldwide Operations and Technology (WWOT).
Scale: As of December 31, 2006, the Corporation had consolidated total assets of $60.7 billion and stockholders' equity of $3.9 billion. The principal subsidiary, The Northern Trust Company (the Bank), held $52.3 billion in assets.

Key Financial Metrics

Balance Sheet (Consolidated - Dec 31, 2006):

• Total Assets: $60.7 billion
• Total Liabilities: Not explicitly stated in the summary text, but derived from Assets ($60.7B) minus Equity ($3.9B) = ~$56.8 billion.
• Stockholders' Equity: $3.9 billion
• Loans and Leases: $22.6 billion (Year-end)
• Deposits: $36.96 billion (Average for 2006)

Income Statement (The Northern Trust Company - Unaudited):

• Total Interest Income: $1,735.0 million
• Total Interest Expense: $1,265.5 million
• Net Interest Income: $469.5 million
• Total Noninterest Income: $1,768.2 million
• Provision for Credit Losses: $13.0 million
• Total Noninterest Expenses: $1,469.7 million
• Net Income: $493.0 million

Capital Adequacy (Dec 31, 2006):

• Tier 1 Capital Ratio (Corporation): 9.8% (Minimum required: 4.0%)
• Total Capital Ratio (Corporation): 11.9% (Minimum required: 8.0%)
• Leverage Ratio (Corporation): 6.7% (Minimum required: 3.0%)
• Classification: "Well capitalized" under federal regulations.

Assets Under Management/Custody:

• C&IS Assets Under Custody: $3.26 trillion
• C&IS Assets Under Management: $562.5 billion
• PFS Assets Under Custody: $281.9 billion
• PFS Assets Under Management: $134.7 billion

Material Changes vs. Prior Period

Asset Growth: Total consolidated assets increased to $60.7 billion in 2006 from $52.3 billion for the Bank alone in the prior year (Note: Consolidated 2005 total assets not explicitly stated in text, but Bank assets grew from $44.9B in 2005 to $52.3B in 2006).
Loan Portfolio: Total loans and leases increased to $22.6 billion in 2006 from $19.97 billion in 2005. Commercial loans saw significant growth ($4.68B vs $3.55B).
Deposits: Average total deposits rose to $36.96 billion in 2006 from $32.10 billion in 2005, driven largely by Non-U.S. offices ($23.63B vs $18.26B).
Net Interest Income: Net interest income for the Bank increased to $469.5 million in 2006 from $400.5 million in 2005. This was driven by both higher average balances and higher rates.
Noninterest Income: Increased to $1,768.2 million in 2006 from $1,500.0 million in 2005, with Trust, Investment and Other Servicing Fees rising to $1,378.3 million.
Net Income: The Bank's net income increased to $493.0 million in 2006 from $404.7 million in 2005.
Provision for Credit Losses: The provision increased to $13.0 million in 2006 compared to a negative provision (release) of $1.0 million in 2005, reflecting a shift in credit risk assessment.

Guidance, Outlook, Risks, and Contingencies

Outlook and Strategy: Management expects the Bank to remain the major source of consolidated assets, revenues, and net income. The strategy focuses on recurring fee-based income, which exceeds net interest income, and maintaining a conservative balance sheet.
Regulatory Environment: The Corporation is preparing for the implementation of the Basel II capital framework, expected to be fully effective in the U.S. in January 2009. Preliminary analysis suggests a positive impact on Tier 1 and Total risk-based capital ratios.
Risk Factors:

• Economic/Market Risk: Sensitivity to interest rate changes, equity market volatility, and global economic conditions affecting asset valuations and fee income.
• Credit Risk: Exposure to loan defaults, though net charge-offs remained low at 0.01% of average loans in 2006.
• Operational Risk: Dependence on automated systems and potential for errors in high-volume transaction processing.
• Litigation: Ongoing defense of Enron-related lawsuits (one settled for $37.5M, fully insured; others pending regarding commercial paper buybacks).
• Tax Risk: IRS investigation into structured leasing transactions; Corporation believes reserves are adequate but cannot predict final outcome.

Unusual Items: The Enron-related settlement of $37.5 million was fully covered by insurance. No material adverse effect on financial position is expected from pending litigation.

Investor Verification Checklist

• Fee-Based Revenue Mix: Verify the continued dominance of noninterest income (fees) over net interest income as a core business model.
• Basel II Impact: Monitor the finalization of Basel II rules and their specific impact on Northern Trust's capital requirements and ratios.
• Credit Quality Trends: Track the provision for credit losses and net charge-off ratios, noting the shift from a release in 2005 to a provision in 2006.
• Legal Contingencies: Review updates on the Enron commercial paper litigation and the IRS investigation into structured leasing transactions.
• Capital Ratios: Confirm that Tier 1 and Total Capital ratios remain well above the "well capitalized" thresholds (6.0% and 10.0% respectively).
• Non-U.S. Exposure: Assess the growth and risk profile of Non-U.S. operations, which accounted for 34% of average assets and 49% of average liabilities.