NTRS

Business Context and Reporting Period

Company: Northern Trust Corporation (a financial holding company and bank holding company incorporated in Delaware).

Reporting Period: Fiscal year ended December 31, 2005.

Overview: Northern Trust operates globally through its principal subsidiary, The Northern Trust Company (the Bank), and various other subsidiaries. The company focuses on two primary 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). As of December 31, 2005, the Corporation held consolidated total assets of $53.4 billion and stockholders' equity of $3.6 billion. The Bank held consolidated assets of $44.9 billion.

Key Developments: In March 2005, the Bank completed the acquisition of Financial Services Group Limited (FSG) from Baring Asset Management Holdings Limited, expanding capabilities in institutional fund administration, custody, and hedge fund/private equity administration. The company also opened a representative office in Beijing, China, and permanent offices in Boston and Minneapolis.

Key Financial Metrics

Note: The following data is derived from the unaudited Consolidated Statement of Income for The Northern Trust Company (the Bank) and statistical disclosures within the filing. Consolidated Corporation-level income statement figures are incorporated by reference to the Annual Report to Shareholders and are not explicitly detailed in the provided text.

The Northern Trust Company (Bank) - Year Ended Dec 31, 2005

Capital Adequacy (Consolidated)

As of December 31, 2005, Northern Trust Corporation and all banking subsidiaries exceeded the "well-capitalized" minimum ratios.

Asset Quality

Reserve for Credit Losses: $136.0 million at year-end 2005 (down from $139.3 million in 2004).

Net Charge-Offs: $5.8 million in 2005 (0.03% of year-end loans), compared to $2.9 million in 2004.

Provision for Credit Losses: $2.5 million in 2005 (compared to a release of $15.0 million in 2004).

Material Changes vs. Prior Period

• Revenue Growth: The Bank's Net Income increased by 13.5% to $404.7 million. Total revenue (Net Interest + Noninterest) grew significantly, driven by a 20.7% increase in Noninterest Income to $1.5 billion.
• Fee Income Dominance: Noninterest income ($1.5 billion) significantly exceeded Net Interest Income ($400.5 million), reinforcing the company's strategy of recurring fee-based revenue.
• Deposit Expansion: Total deposits at the Bank increased by approximately 28.6% to $31.5 billion, largely driven by a surge in Non-U.S. Time Deposits (from $14.96 billion to $20.91 billion).
• Loan Growth: Total Loans and Leases at the Bank grew by 14.0% to $11.5 billion. Consolidated loans (Corporation level) grew to $19.97 billion, with Non-U.S. loans increasing substantially from $563.3 million to $1.61 billion.
• Interest Rate Environment: Net Interest Income increased by $68 million (20.5%) year-over-year, primarily due to higher rates on interest-earning assets and increased balances, offsetting higher interest expense on deposits.
• Acquisition Impact: The acquisition of FSG contributed to growth in assets under custody ($2.7 trillion for C&IS) and assets under management ($501 billion for C&IS).

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 company 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 Basel II would have a positive impact on Tier I and Total risk-based capital ratios.

The company continues to focus on expanding recurring fee-based revenue and maintaining a conservative balance sheet. A charter consolidation process for national bank subsidiaries is expected to complete in 2006.

Risk Factors

• Economic Risks: Sensitivity to global economic downturns, falling equity markets (which reduce fee income), and interest rate fluctuations.
• Operating Risks: Exposure to human error, systems defects, and external events (natural disasters, terrorism) given the large transaction volumes processed.
• Regulatory Risks: Subject to extensive regulation by the Federal Reserve, FDIC, SEC, and international bodies. Changes in regulations (e.g., Basel II, anti-money laundering) may impose costs or restrict activities.
• Reputation Risks: Critical to client confidence; failures in service or compliance could damage the brand and affect business.
• Litigation Risks: Exposure to claims regarding contract performance or fiduciary duties, particularly in trust and investment management.

Contingencies

Legal proceedings and contingent liabilities are detailed in Note 25 of the Financial Annual Report to Shareholders (incorporated by reference). The company maintains a reserve for credit losses of $136.0 million, with $125.4 million assigned to loans and leases and $10.6 million to unfunded commitments.

Investor Verification Checklist

• Consolidated vs. Bank Data: Verify the distinction between the unaudited Bank-only financial statements provided in the text and the consolidated Corporation figures (which are incorporated by reference to the Annual Report to Shareholders).
• Fee Income Sustainability: Assess the sustainability of the high noninterest income growth ($1.5B) relative to market asset values and transaction volumes.
• Non-U.S. Exposure: Review the significant increase in Non-U.S. deposits and loans (loans grew from $563M to $1.6B) and associated credit and currency risks.
• Basel II Impact: Confirm the final regulatory rules for Basel II implementation and their specific impact on Northern Trust's capital requirements.
• Acquisition Integration: Monitor the integration progress and financial contribution of the FSG acquisition.
• Dividend Policy: Note that the Corporation's ability to pay dividends depends on the Bank's ability to pay dividends, which is subject to regulatory capital constraints.