NTRS

Business Context and Reporting Period

Company: Northern Trust Corporation (Northern Trust)

Reporting Period: Fiscal year ended December 31, 2002

Business Overview: Northern Trust is a bank holding company organized in Delaware, with The Northern Trust Company (the Bank) as its principal subsidiary. The Corporation operates through four primary business units: Corporate and Institutional Services (C&IS), Personal Financial Services (PFS), Northern Trust Global Investments (NTGI), and Worldwide Operations and Technology (WWOT). The company emphasizes fee-based income, generating more revenue from fees than net interest income.

Key Statistics: As of December 31, 2002, Northern Trust had consolidated total assets of approximately $39.5 billion and stockholders' equity of approximately $3.0 billion. The Bank held approximately $32.0 billion in assets. The company employed 9,317 full-time equivalent staff.

Key Financial Metrics

Assets and Equity:

• Consolidated Total Assets: ~$39.5 billion
• Stockholders' Equity: ~$3.0 billion
• Bank Assets: ~$32.0 billion
• Bank Common Equity Capital: ~$2.1 billion

Capital Adequacy (December 31, 2002):

Note: All entities exceeded the "well capitalized" minimum ratios.

Loan Portfolio and Credit Quality:

• Total Loans and Leases: $18.06 billion
• Reserve for Credit Losses: $168.5 million
• Net Charge-offs: $30.6 million (0.17% of year-end loans)
• Provision for Credit Losses: $37.5 million

Interest Rate Environment:

• Total Net Interest Income decreased by $2.6 million compared to 2001, driven primarily by a $53.3 million decrease due to lower rates, partially offset by a $55.9 million increase due to higher average balances.
• Average rate on total purchased funds dropped to 2.70% in 2002 from 4.45% in 2001.

Material Changes vs. Prior Period

• Acquisitions: In November 2002, Northern Trust signed an agreement to acquire Legacy South, a private wealth management firm with ~$300 million in assets under management. In January 2003, the company closed the acquisition of Deutsche Bank AG's global passive equity, enhanced equity, and passive fixed income investment management businesses for approximately $100 million, adding $44.1 billion in assets under management.
• Interest Income: Total interest income declined significantly due to falling interest rates. Interest income on loans and leases dropped by $215.4 million year-over-year, and income on federal agency securities dropped by $225.0 million.
• Interest Expense: Total interest expense decreased by $449.7 million, largely due to lower rates on deposits and purchased funds.
• Charge-offs: Net charge-offs decreased to $30.6 million in 2002 from $67.8 million in 2001, reflecting improved asset quality or lower loan volumes in specific categories.

Guidance, Outlook, and Risks

Management Commentary and Outlook:

• The company expects the Bank to remain the major source of assets, revenues, and net income.
• Personal Financial Services (PFS) plans to expand from 82 offices to approximately 100 offices in up to 15 states by the end of 2005.
• Management emphasizes a strategy of recurring fee-based income and maintaining a conservative balance sheet.

Risks and Contingencies:

• Regulatory Risk: The company is subject to extensive regulation by the Federal Reserve, FDIC, and other agencies. Capital adequacy requirements are strictly monitored, and the company is monitoring the potential impact of the new Basel Capital Accord (BCA).
• Interest Rate Risk: Earnings are sensitive to changes in interest rates. The decline in rates in 2002 significantly impacted net interest income.
• Credit Risk: While net charge-offs were low, the company maintains a reserve for credit losses. International operations represent 25% of average assets and 31% of average liabilities.
• Legal Proceedings: Specific details on contingent liabilities are incorporated by reference from the Annual Report to Shareholders.

Investor Verification Checklist

• Fee-Based Revenue Mix: Verify the exact percentage of total revenue derived from non-interest income to confirm the strategic emphasis on fee-based services.
• Acquisition Integration: Monitor the integration and asset transition progress of the Deutsche Bank AG acquisition and the Legacy South purchase.
• Capital Ratios: Confirm that Tier 1 and Total Capital ratios remain well above the "well capitalized" thresholds in subsequent quarters.
• Interest Rate Sensitivity: Review the "Market Risk Management" section in the Annual Report to understand the specific impact of further rate changes on net interest income.
• Asset Quality Trends: Track the ratio of nonperforming assets to total loans to ensure the low charge-off rate of 2002 is sustainable.