NTRS

Business Context and Reporting Period

Company: Northern Trust Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2003
Business Overview: Northern Trust is a financial services corporation specializing in trust, asset management, and banking services. The reporting period reflects a challenging global economic environment characterized by declining equity markets and low interest rates, which adversely impacted earnings performance.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased 6% year-over-year. Noninterest income fell to $373.1 million (from $399.2 million), driven primarily by an 8% drop in trust fees due to lower equity market valuations. Net interest income declined 6% to $140.7 million.
• Expense Increase: Noninterest expenses rose 6% to $370.0 million. Increases were attributed to salary adjustments, technology investments, and costs associated with the acquisition of Deutsche Bank AG's passive asset management business.
• Asset Quality: Nonperforming assets decreased to $93.6 million from $118.7 million a year ago. The provision for credit losses remained flat at $5.0 million.
• Balance Sheet: Total assets decreased by approximately $1.5 billion compared to the prior year, largely due to a reduction in money market assets and securities.

Outlook, Risks, and Unusual Items

Management Commentary and Guidance

Management noted that the business environment remained challenging. While expenses were closely managed, the company continued to invest in core businesses and technology. The productivity ratio was 142% for the quarter. No specific forward-looking financial guidance was provided in this filing, though management expects additional assets from recent acquisitions to transition in the coming quarter.

Acquisitions and Subsequent Events

• Deutsche Bank Acquisition: Closed in January 2003 for approximately $109 million, adding $51.1 billion in assets under management.
• Legacy South Acquisition: Closed in April 2003 for an expected $11.5 million.
• NTRC Sale: Executed a letter of intent in April 2003 to sell Northern Trust Retirement Consulting, L.L.C. to Hewitt Associates. The company expects to recognize approximately $20 million in charges related to this transaction.
• Asset Sale: Agreed to sell certain banking assets in Chicago to First Midwest Bancorp, Inc., expecting a net gain of $14 million to $17 million.

Risks and Contingencies

• Enron Litigation: A subsidiary is a defendant in Enron-related class action suits. Management believes these matters will not have a material effect on financial position.
• Market Risk: Interest rate risk and foreign exchange risk are managed through simulation and value-at-risk models. Management stated these positions had not changed significantly since year-end 2002.
• Regulatory Capital: Risk-based capital ratios remained strong at 11.1% for Tier 1 and 15.0% for Total Capital, well above regulatory minimums.

Investor Verification Checklist

• Trust Fee Sensitivity: Verify the correlation between equity market performance and the company's trust fee revenue, which constitutes the majority of noninterest income.
• Acquisition Integration: Monitor the transition of assets from the Deutsche Bank and Legacy South acquisitions to ensure projected fee revenue materializes.
• NTRC Transaction Charges: Confirm the timing and magnitude of the expected $20 million charge related to the sale of the retirement consulting business.
• Asset Quality Trends: Review the specific reserve allocations for commercial loans, particularly regarding the Enron-related charge-offs and the remaining nonperforming secured loan.
• Capital Deployment: Track the execution of the share buyback program, which was increased by 11.5 million shares in April 2003.