NTRS

Business Context and Reporting Period

Company: Northern Trust Corporation (Northern Trust)

Reporting Period: Fiscal year ended December 31, 1998

Business Overview: Northern Trust is a bank holding company headquartered in Chicago, Illinois, organized in Delaware in 1971. Its principal subsidiary is The Northern Trust Company (the Bank), founded in 1889. The Corporation operates through two principal business units: Corporate and Institutional Services (C&IS) and Personal Financial Services (PFS), supported by Northern Trust Global Investments (NTGI). The Company is a leading provider of Master Trust and Master Custody services, emphasizing recurring fee-based income over net interest income.

Scale: At December 31, 1998, Northern Trust had consolidated total assets of approximately $27.9 billion and stockholders' equity of approximately $1.9 billion. It was the second-largest bank holding company in Illinois and the 32nd largest in the United States.

Key Financial Metrics

Note: Consolidated financial statements for the Corporation are incorporated by reference from the Annual Report to Stockholders. The following data is derived from the unaudited consolidated financial statements of The Northern Trust Company (Bank) provided in the filing text.

Capital Adequacy: The Corporation maintained a Tangible Tier 1 Leverage Ratio of 6.9% as of December 31, 1998. The Bank and all subsidiary banks met or exceeded the minimum regulatory ratios to be considered "well capitalized."

Assets Under Administration: Total assets under administration (excluding personal trust assets) were $1.14 trillion. Personal Financial Services managed $73.4 billion in assets under management and $121.2 billion in assets under administration.

Material Changes vs. Prior Period

• Revenue Growth: Net income for the Bank increased by approximately 9.5% to $253.6 million from $231.6 million in 1997. Total noninterest income rose to $736.5 million, driven by a 14.4% increase in Trust Fees ($522.9 million) and growth in Treasury Management Fees.
• Interest Income: Net interest income increased by $29.6 million (9.5%) to $341.0 million. This was primarily due to volume increases in loans and securities, partially offset by rate decreases.
• Asset Expansion: Total assets for the Bank grew by approximately $2.1 billion (10.0%). Loans and leases increased by $322 million, while securities available for sale grew significantly from $3.4 billion to $5.1 billion.
• Expense Management: Total noninterest expenses for the Bank increased to $690.3 million from $621.2 million, with compensation expenses rising to $370.4 million.
• Acquisitions and Divestitures: In 1998, the Corporation acquired Northern Trust Bank of Colorado. It also exited the futures brokerage business and sold the assets of its San Francisco investment management firm, Berry, Hartell, Evers & Osborne, Inc.

Outlook, Risks, and Management Commentary

Management Strategy: Northern Trust continues to focus on providing quality financial services to targeted market segments with a competitive advantage. The strategy emphasizes recurring fee-based income, conservative balance sheet management, and high levels of individualized service.

Regulatory Environment: The Corporation is subject to extensive regulation by the Federal Reserve, FDIC, and state banking authorities. It is classified as "well capitalized" under FDICIA standards. The filing notes that earnings are affected by general economic conditions and Federal Reserve policies regarding interest rates.

Risk Management:

• Credit Risk: The Company maintains established credit review procedures. Net charge-offs for the Bank were $3.0 million in 1998 (down from $5.6 million in 1997), with a provision for credit losses of $3.0 million.
• Interest Rate Risk: The Treasury Department manages interest rate risk and the portfolio of interest rate risk management instruments. The filing incorporates detailed interest rate sensitivity analysis by reference.
• Market Risk: The Company is exposed to market risks associated with its trading activities and investment portfolios, managed through the Risk Management Unit.

Contingencies: Legal proceedings and contingent liabilities are disclosed in the Annual Report to Stockholders (Note 20), incorporated by reference. The filing states there were no disagreements with accountants.

Investor Verification Checklist

• Consolidated vs. Bank Data: Verify that financial analysis uses the consolidated figures from the Annual Report to Stockholders (incorporated by reference) rather than the Bank-only unaudited statements provided in the text, as the latter excludes non-bank subsidiaries.
• Fee-Based Revenue Mix: Confirm the ratio of fee-based income to net interest income to validate the Company's strategic positioning as a fee-driven institution.
• Capital Ratios: Review the "Regulatory Capital Requirements" section (Note 29 in the Annual Report) to verify the specific Tier 1 and Total Capital ratios for the consolidated entity.
• Asset Quality: Examine the "Nonperforming Assets and 90 Day Past Due Loans" schedule (incorporated by reference) for a detailed breakdown of asset quality beyond the aggregate charge-off figures.
• International Exposure: Review the "International Operations" section to assess the concentration of assets and liabilities in foreign offices, which represented 14% of total consolidated average assets in 1998.