LW51611_cov 3/3/04 9:47 PM Page 1
2003
Annual Report to Shareholders
n
o
r
t
h
e
r
n
t
r
u
s
t
c
o
r
p
o
r
a
t
i
o
n
2
0
0
3
a
n
n
u
a
l
r
e
p
o
r
t
t
o
s
h
a
r
e
h
o
l
d
e
r
s
n o r t h e r n t r u s t c o r p o r at i o n
5 0 s o u t h l a s a l l e s t r e e t ¥ c h i c a g o , i l l i n o i s 6 0 6 7 5
Quantum Color Graphics, L.L.C.
6511 W. Oakton St.
Morton Grove, Il 60053
(847) 967-3600
RR Donnelley
Cover (BC/FC)
CYAN MAG YELO BLK pms873 varnish
51611
02.16.2004
98
2
98
2
98
2
98
2
LW51611_cov 3/3/04 9:47 PM Page 2
Quantum Color Graphics, L.L.C.
6511 W. Oakton St.
Morton Grove, Il 60053
(847) 967-3600
RR Donnelley
Cover (IFC/IBC)
CYAN MAG YELO BLK pms873 varnish
51611
02.16.2004
98
2
98
2
98
2
98
2
LW51611_Body 3/3/04 9:48 PM Page 1
N
o rt h e r n Tru st
Corporation is a
leading provider of
investment management,
As of December 31, 2003,
asset and fund adminis-
Northern Trust had assets
tration, fiduciary and
under administration
banking solutions
of $2.2 trillion, assets
for corporations,
under investment
institutions and affluent
management of $478.6
individuals worldwide.
billion and banking
Northern Trust, a
assets of $41 billion.
multibank holding
Northern Trust,
company based in
founded in 1889, has
Chicago, has a growing
earned distinction as
network of offices in
an industry leader in
15 U.S. states and has
combining high-touch
international offices
service and expertise
in six countries.
with innovative products
and technology. For
more information, visit
www.northerntrust.com.
Quantum Color Graphics, L.L.C.
6511 W. Oakton St.
Morton Grove, Il 60053
(847) 967-3600
#51611
RR Donnelley
(cid:210)P01(cid:211)
02.16.04
CYAN MAG YELO BLK PMS873 PMS343
LW51611_Body 3/3/04 9:48 PM Page 2
Consolidated Financial Highlights
2003
2002
percent change
for the year [$ in millions]
Net Income
Net Income Applicable to Common Stock
Dividends Declared on Common Stock
per common share
Net Income (cid:209) Basic
(cid:209) Diluted
Dividends Declared
Book Value (cid:209) End of Period
Market Price (cid:209) End of Period
averages [$ in millions]
Total Assets
Total Earning Assets
Securities
Loans and Leases
Deposits
Stockholders(cid:213) Equity
Common Stockholders(cid:213) Equity
at year-end [$ in millions]
Total Assets
Total Earning Assets
Securities
Loans and Leases
Reserve for Credit Losses Assigned to Loans
Deposits
Stockholders(cid:213) Equity
Common Stockholders(cid:213) Equity
ratios
Return on Average Assets
Return on Average Common Equity
Productivity Ratio
Tier 1 Capital to Risk-adjusted Assets
Total Capital to Risk-adjusted Assets
Leverage Ratio
at year-end [$ in billions]
$
$
404.8
404.1
154.2
1.84
1.80
.70
13.88
46.28
$ 39,115.2
34,788.2
8,438.9
17,506.9
24,281.7
2,975.7
2,927.3
$ 41,450.2
36,850.2
9,471.3
17,813.8
149.2
26,270.0
3,055.3
3,055.3
$
$
447.1
444.9
150.4
2.02
1.97
.68
13.04
35.05
$ 37,596.7
33,622.0
7,202.2
17,614.2
23,349.4
2,866.8
2,746.8
$ 39,478.2
33,989.9
6,593.9
18,063.7
161.1
26,062.1
2,999.8
2,879.8
1.04 %
13.81
147
11.06
13.96
7.55
1.19 %
16.20
156
11.13
14.13
7.76
(9.4)%
(9.2)
2.5
(8.9)%
(8.6)
2.9
6.4
32.0
4.0 %
3.5
17.2
(.6)
4.0
3.8
6.6
5.0 %
8.4
43.6
(1.4)
(7.4)
.8
1.9
6.1
Total Managed Trust Assets
Total Trust Assets Under Administration
$
478.6
2,155.1
$
302.5
1,503.6
58.2 %
43.3
2
n o r t h e r n t r u s t c o r p o r at i o n
Quantum Color Graphics, L.L.C.
6511 W. Oakton St.
Morton Grove, Il 60053
(847) 967-3600
#51611
RR Donnelley
(cid:210)P02(cid:211)
02.16.04
CYAN MAG YELO BLK PMS873 PMS343
LW51611_Body 3/3/04 9:48 PM Page 3
Table of Contents
4 Management(cid:213)s Letter to Shareholders
10 Personal Financial Services
14 Corporate and Institutional Services
18 Northern Trust Global Investments
22 Worldwide Operations and Technology
26 Community Involvement
2 0 0 3 f i n a n c i a l r e v i e w
29 Management(cid:213)s Discussion and Analysis of
Financial Condition and Results of Operations
59 Consolidated Financial Statements
63 Notes to Consolidated Financial Statements
96 Report of Independent Public Accountants
97 Consolidated Financial Statistics
100
Senior Officers
101 Board of Directors
102 Corporate Structure
104 Corporate Information
Quantum Color Graphics, L.L.C.
6511 W. Oakton St.
Morton Grove, Il 60053
(847) 967-3600
#51611
RR Donnelley
(cid:210)P03(cid:211)
02.16.04
CYAN MAG YELO BLK PMS873 PMS343
LW51611_Body 3/3/04 9:48 PM Page 4
Management(cid:213)s Letter to Shareholders
N o rt h e r n t ru st fac e d
significant challenges as 2003
began, with a continuing down-
turn in global equity markets and
the U.S. economy still struggling.
But even this sort of climate presents opportunities
for an organization whose clearly defined, consis-
tently executed strategy centers on clients. We used
2003 to sharpen both our strategic focus and our
client service model, to make targeted investments
in capabilities, markets and facilities and to assure
our clients of our unwavering commitment to
meeting their needs. By the fourth quarter, we
were able to report a 35 percent increase over the
prior year in both net income and earnings per
share, as the economy gained strength and markets
improved dramatically. We are pleased with the
momentum we have established as we enter 2004.
For the full year 2003, Northern Trust
reported net income per share of $1.80, compared
with $1.97 reported in 2002. Net income was
$404.8 million, compared with $447.1 million
earned last year. This resulted in a return on average
common equity of 13.8 percent.
Trust assets under administration rose 43
percent to a record $2.2 trillion, and assets under
management increased 58 percent to a record
$478.6 billion at year end. Managed assets at year-
end 2003 included $75 billion in index assets
acquired earlier in the year from Deutsche Bank
AG. After three consecutive years of decline, equity
markets rebounded in the second half of the year
with the S&P increasing 26.4 percent for the year.
Total revenue from continuing operations
was $2.14 billion, up 1 percent from the previous
year. Credit quality as of year end was strong, with
net chargeoffs for the year totaling $13.8 million.
In June 2003, we announced a number
of steps to reduce expenses, improve efficiencies
and position the company for profitable growth(cid:209)
resulting in a reduction to Northern Trust(cid:213)s expense
base by $75 million annually over the following
12 months. As of January 2004, we had completed
almost 90 percent of the total annual target of $75
million and will complete the remaining amount
by June 2004. Throughout the Corporation, we
aggressively manage expenses while maintaining
an exceptional level of client service. Careful
expense management allows us to focus resources
in growth areas where Northern Trust has a lead-
ership position and a clear competitive advantage.
The Corporation declared a quarterly cash
dividend of 19 cents per share, marking the 107th
year of consecutive dividends paid.
The price of Northern Trust Corporation
stock increased 32 percent in 2003 from $35.05
at year-end 2002 to $46.28 at the end of 2003.
Northern Trust stock(cid:213)s compound annual growth
rate for the 10-year period ending December 31,
2003, was 16.7 percent, compared with 13.6 percent
for the KBW50 Bank Index and 9.1 percent for
the S&P 500. The Management Discussion and
Analysis beginning on page 29 includes more
detailed financial results.
a va lu e d b r a n d
Amid the many challenges and changes that
occurred last year, Northern Trust(cid:213)s focused business
strategy remained constant. Northern Trust is a
leading provider of global financial solutions for
the investment management, asset and fund
administration, fiduciary and banking needs of
corporations, institutions and affluent individuals.
Our primary focus is on the administration, custody
4
n o r t h e r n t r u s t c o r p o r at i o n
Quantum Color Graphics, L.L.C.
6511 W. Oakton St.
Morton Grove, Il 60053
(847) 967-3600
#51611
RR Donnelley
(cid:210)P04(cid:211)
02.16.04
CYAN MAG YELO BLK PMS873 PMS343
Quantum Color Graphics, L.L.C.
6511 W. Oakton St.
Morton Grove, Il 60053
(847) 967-3600
LW51611_Body 3/3/04 9:48 PM Page 5
William A. Osborn
chairman and chief executive officer
We at Northern Trust look forward with the confidence that we are well positioned
for continued success in the year ahead.
n o r t h e r n t r u s t c o r p o r at i o n
5
Quantum Color Graphics, L.L.C.
6511 W. Oakton St.
Morton Grove, Il 60053
(847) 967-3600
#51611
RR Donnelley
(cid:210)P05(cid:211)
02.16.04
CYAN MAG YELO BLK PMS873 PMS343
LW51611_Body 3/3/04 9:48 PM Page 6
m a n a g e m e n t (cid:213) s l e t t e r t o s h a r e h o l d e r s
Amid the many
challenges and
changes that
occurred last year,
Northern Trust(cid:213)s
focused business
strategy remained
constant.
and management of clients(cid:213) assets in two specific
markets(cid:209)affluent individuals and institutions.
These services are delivered to private clients
through our Personal Financial Services (PFS)
business unit and to institutional and corporate
clients through Corporate and
Institutional Services (C&IS).
These businesses are supported
by our world-class investment
organization, Northern Trust
Global Investments (NTGI),
and a leading-edge technology
unit, Worldwide Operations
and Technology (WWOT).
Since opening for busi-
ness in 1889, Northern Trust
has delivered high-touch trust,
asset management and private
banking services to affluent
individuals and families and
has done so under the same
brand name(cid:209)a significant
accomplishment in this era of mergers and acqui-
sitions. PFS serves private banking and personal
trust clients through our national network of 82
distinctive offices in 15 states. In 2003, Northern
Trust opened offices in New York City and Stamford,
Connecticut, and in Atlanta, Georgia, with the
acquisition of Legacy South, Inc., a private wealth
management firm. Plans call for continuation of
expansion on the East Coast with the opening
of an office in Boston, Massachusetts, in 2004, as
we extend Northern Trust(cid:213)s reach as the (cid:210)Wealth
Specialist(cid:211) that can most effectively meet the com-
plex needs of high-net-worth clients. When the
Boston office is opened, Northern Trust will have a
presence in 16 states and will have reached the goal
of being within close proximity to 40 percent to 45
percent of the nation(cid:213)s millionaire population. No
other provider has this kind of reach in attractive,
affluent growth markets.
Northern Trust, which already enjoys a strong
market reputation, intends to continue to grow our
PFS business by offering clients in both existing
and new markets a broad spectrum of sophisticated
services delivered by respected, experienced pro-
fessionals. Through three PFS
segments (cid:209)Private Banking
and Personal Trust, Wealth
Advisory Services, and Wealth
Management(cid:209)Northern
Trust has the ability to reach
a full range of clients.
C&IS has achieved a
top-tier position in the industry
by serving selected markets
worldwide through a strong
team of professionals who create
value for clients by offering
innovative financial, credit and
investment solutions for their
complex needs. In 2003, C&IS
added record new business,
grew market share and expanded into additional
markets. C&IS serves public and private retirement
plans, foundations, endowments, insurance
companies, global fund managers and other asset
pools, such as governmental entities. C&IS,
which contributes approximately one-half of the
Corporation(cid:213)s revenues, provides asset servicing, fund
administration, investment management and advi-
sory services to institutional investors worldwide.
Northern Trust is one of the top 10 custodi-
ans worldwide in terms of assets under custody.
Of a total of nearly $2 trillion in assets under
administration in C&IS at year end, global custody
assets accounted for $751 billion. Over the last
decade, global custody assets grew at a compound
annual rate of 31 percent.
C&IS has a strong foundation of global
growth with clients in 38 countries and services
offered in 100 markets. We have experienced
6
n o r t h e r n t r u s t c o r p o r at i o n
Quantum Color Graphics, L.L.C.
6511 W. Oakton St.
Morton Grove, Il 60053
(847) 967-3600
#51611
RR Donnelley
(cid:210)P06(cid:211)
02.16.04
CYAN MAG YELO BLK PMS873 PMS343
Quantum Color Graphics, L.L.C.
6511 W. Oakton St.
Morton Grove, Il 60053
(847) 967-3600
LW51611_Body 3/3/04 9:48 PM Page 7
In addition to William Osborn, the Management Committee members are (front row, from left)
Steven L. Fradkin, Timothy P. Moen, Terence J. Toth, Frederick H. Waddell, Kelly R. Welsh and
(back row, from left) Perry R. Pero, Alison A. Winter, William L. Morrison and Timothy J. Theriault.
especially strong growth in Europe and the Asia-
Pacific region. Our international business is now
one of Northern Trust(cid:213)s fastest-growing areas, and
we have a demonstrated track record for success
in this arena.
NTGI is a world-class diversified asset
manager with $478.6 billion under management at
year-end 2003, an increase of 58 percent over the
previous year, including $75 billion in index assets
acquired in 2003. This allows NTGI to offer clients
a full range of leading global index products and
brings Northern Trust significantly greater scale
and additional capabilities.
To grow its business, NTGI continues to
focus on five keys to success: investments, branding,
product management, distribution and client service.
In April 2003, Northern Trust expanded
its international presence by opening an office in
Tokyo. This is an important part of Northern Trust(cid:213)s
plan to further develop as a global investment firm.
Since the opening, NTGI has been awarded several
significant mandates for passive management from
n o r t h e r n t r u s t c o r p o r at i o n
7
Quantum Color Graphics, L.L.C.
6511 W. Oakton St.
Morton Grove, Il 60053
(847) 967-3600
#51611
RR Donnelley
(cid:210)P07(cid:211)
02.16.04
CYAN MAG YELO BLK PMS873 PMS343
LW51611_Body 3/3/04 9:48 PM Page 8
m a n a g e m e n t (cid:213) s l e t t e r t o s h a r e h o l d e r s
some of the most prominent institutions in Japan,
including the Government Pension Investment
Fund. Seeking to expand outside the U.S., NTGI
has established joint ventures and other relationships
with major European financial organizations, such
as Helaba Invest KAG in Germany, Mediolanum in
Italy, Groupama in France and Scottish Equitable
in Scotland.
Through an integrated, single-technology
platform, WWOT effectively supports PFS, C&IS
and NTGI with creative solutions for the complex
needs of both institutional and individual clients
worldwide. Northern Trust is committed to
remaining a technology leader. In 2003, industry
publication ComputerWorld recognized Northern
Trust as one of the Best Places to Work in
Information Technology. Going forward, WWOT
will continue to work to increase productivity,
decrease cost and risk while expanding Northern
Trust(cid:213)s business continuity efforts. Our business
continuity planning allows the company to anticipate
events that could affect critical functions and to
develop plans to respond quickly and effectively
to events such as earthquakes and power outages.
To support business continuity efforts, in 2003
Northern Trust opened a data center in the western
suburbs of Chicago. This permanent workspace
allows some of Northern Trust(cid:213)s mission-critical
functions, such as wire transfer and securities pro-
cessing, to be done dually at our Canal operations
center and at the west suburban site.
In 2003, Northern Trust(cid:213)s Passport products
continued to be well received as WWOT partnered
with the business units to enhance and refine this
suite of online financial services for institutional
and personal clients and internal partners.
n o rt h e r n t ru s t (cid:213)s r e p u tat i o n
of good reputation and trust. This has never been
more true than during the past year that saw an
unprecedented number of corporate scandals. In this
unsettled atmosphere, we were pleased to have been
recognized by a number of independent sources as
both a safe and ethical company(cid:209)qualities that we
have emphasized throughout our history.
In October 2003, Global Finance magazine
named Northern Trust one of the World(cid:213)s Safest
Banks. Crain(cid:213)s Chicago Business selected Northern
Trust as one of Chicago(cid:213)s (cid:210)icons,(cid:211) citing a legacy of
(cid:210)loyalty to the organization(cid:213)s historically conserva-
tive principles and the culture of caring, charitable
giving and civic participation(cid:201)(cid:211) An article in
U.S. Banker entitled (cid:210)Character is Foundation
of Firm(cid:213)s Reputation(cid:211) states that Northern Trust
Corporation received the highest reputation rating
in a survey of 600 executives and financial analysts.
And for the third consecutive year, Northern Trust
was named one of the 100 Best Corporate Citizens
by Business Ethics magazine.
a t r a d i t i o n o f s e rv i c e
When economic conditions are unfavorable, as
they were last year, it is especially important that
organizations continue to actively support the
communities they serve. In 2003, Northern Trust(cid:213)s
charitable giving was more than $9.5 million in
cash contributions; we donate approximately
1.5 percent of pre-tax profits to charities each year.
One important aspect of our giving relates to the
United Way /Crusade of Mercy. Approximately
76 percent of the Chicago-area staff contributed
a total of $1.5 million, and the Corporation(cid:213)s
contribution was $750,000(cid:209)bringing the total to
$2.3 million, which was donated to agencies serving
more than 2 million people in the Chicago area.
Northern Trust(cid:213)s community support is
Although the financial services industry is highly
dependent on technology, financial institutions are
ultimately judged by the traditional fundamentals
not only financial. Equally important is the time
and energy Northern Trust partners across the
organization devote to a wide range of volunteer
8
n o r t h e r n t r u s t c o r p o r at i o n
Quantum Color Graphics, L.L.C.
6511 W. Oakton St.
Morton Grove, Il 60053
(847) 967-3600
#51611
RR Donnelley
(cid:210)P08(cid:211)
02.16.04
CYAN MAG YELO BLK PMS873 PMS343
Quantum Color Graphics, L.L.C.
6511 W. Oakton St.
Morton Grove, Il 60053
(847) 967-3600
LW51611_Body 3/3/04 9:48 PM Page 9
m a n a g e m e n t (cid:213) s l e t t e r t o s h a r e h o l d e r s
activities. Volunteerism is an integral part of
Northern Trust(cid:213)s culture, and last year, our partners
worldwide volunteered more than 180,000 hours
to community service.
Through a number of lending and commu-
nity reinvestment programs, Northern Trust
strengthens communities where we do business.
The Northern Trust Company has maintained
an (cid:210)outstanding(cid:211) Community Reinvestment Act
rating from the Federal Reserve Bank of Chicago
for the last four years.
m a nag e m e n t c h a n g e s
Stephen B. Timbers, Vice Chairman and President
of Northern Trust Global Investments (NTGI) and
a member of the Management Committee, retired
in February 2004. Steve joined Northern Trust in
1998 and, since that time, has introduced successful
strategies that have led to NTGI becoming a premier
asset management company. Terence J. Toth,
Executive Vice President and Global Head of
Northern Trust Quantitative Management,
Securities Lending, Transition Management and
Commission Recapture, was named President of
NTGI and became a member of the Management
Committee. Terry joined Northern Trust in 1982.
In November 2003, Mark Stevens, Vice
Chairman, retired after 24 years with the company.
At the time of his retirement, he was responsible for
coordinating strategic corporate expansion activities.
Also in January 2004, Steven L. Fradkin,
Executive Vice President and Head of Northern
Trust(cid:213)s Finance Group, was named Chief Financial
Officer (CFO) of the Corporation and became a
member of the Management Committee. The CFO
position previously was held by Vice Chairman
Perry R. Pero, who will continue as Vice Chairman
and as a member of the Management Committee.
Peter L. Rossiter, Executive Vice President,
previously Northern Trust(cid:213)s General Counsel
and most recently head of the Corporate Risk
Management area, left Northern Trust in
February 2004 to return to the practice of law.
Perry has added Peter Rossiter(cid:213)s responsibilities
to his current responsibilities as Chairman of the
Asset and Liability Policy Committee and head of
credit risk management.
We are fortunate to have worked with such
talented professionals and thank them for their
contributions to Northern Trust(cid:213)s success. We are
equally fortunate to have an outstanding team of
seasoned professionals, who in their new positions
will contribute importantly to Northern Trust(cid:213)s
continued success.
ac k n ow l e d g e m e n ts
I would be remiss if I did not acknowledge the
exceptional efforts of Northern Trust people across
the Corporation who worked in partnership to
meet the many challenges of a difficult year. They
were called upon to embrace some major changes
while at the same time maintaining the highest
standard of service to our clients. They met the
challenges, and I thank each of them for their
extraordinary performance.
To each of our Directors, I want to express
gratitude for the time, effort and wise counsel they bring
to the important mission of corporate governance.
On behalf of the entire Corporation, I thank
our loyal clients and shareholders for their continued
support and belief in our organization.
As equity markets stabilize and the economy
strengthens, we at Northern Trust look forward
with the confidence that we are well positioned for
continued success in the year ahead.
william a. osborn
Chairman and Chief Executive Officer
February 17, 2004
n o r t h e r n t r u s t c o r p o r at i o n
9
Quantum Color Graphics, L.L.C.
6511 W. Oakton St.
Morton Grove, Il 60053
(847) 967-3600
#51611
RR Donnelley
(cid:210)P09(cid:211)
02.16.04
CYAN MAG YELO BLK PMS873 PMS343
LW51611_Body 3/3/04 9:48 PM Page 10
Personal Financial Services
m i s s i o n :
DELIVERING HIGH-TOUCH TRUST, INVESTMENT MANAGEMENT, FINANCIAL CONSULTING AND
BANKING SERVICES TO AFFLUENT INDIVIDUALS AND FAMILIES IN TARGETED MARKETS.
In t e g r i t y. co m m i t m e n t. t ru st.
In our 115-year history, Northern Trust has
never wavered from these deeply rooted
principles. Our reputation for excellence,
high-touch client service, professional
expertise and innovative products and services is
the hallmark of Northern Trust(cid:213)s Personal Financial
Services (PFS) business unit, a leading provider of
private banking, personal trust, custody and invest-
ment management services for affluent individuals,
families and family offices. Trusted, experienced
professionals strive to exceed client expectations
with a personalized, consultative approach to
financial management and client care. The unpar-
alleled, high-touch service we provide, coupled
with comprehensive financial solutions, truly
distinguishes us in the financial services marketplace.
At year-end 2003, PFS(cid:213) trust assets under
administration were $195 billion, compared with
$156.7 billion a year earlier, and managed assets
were $104.3 billion. Personal trust fees were $599
million, compared with $608 million in 2002.
Despite 2003(cid:213)s economic and political uncertainties
and fluctuating equity markets, PFS trust assets
grew as a result of new business and market
expansion. Given our sharp focus on serving the
affluent market, we are well positioned to generate
more significant growth as economic conditions
continue to improve.
With 82 offices in 15 states, Northern Trust
is one of the largest providers of integrated financial
services for the personal high-net-worth market
in the United States. We serve households with
at least $1 million of investable assets and have
offices strategically located within a 30-minute
drive of approximately 40 percent of the nation(cid:213)s
millionaire population, including corporate execu-
tives, professionals, retirees, entrepreneurs and
business owners. Over the past 10 years, PFS revenue
has grown from just under $400 million to nearly
$1.2 billion annually. To continue building on this
success, our strategy is to expand into key markets
with compelling demographics that will generate
new opportunities and that will enable us to
extend the unique delivery of our renowned service
model on a decentralized basis through local offices.
Today(cid:213)s projected affluent and intergenerational
wealth transfer growth rates reinforce that a con-
sistent and focused growth strategy targeted to this
market is appropriate. According to a 2003 world
wealth report by Merrill Lynch/Cap Gemini Ernst
and Young, high-net-worth wealth is expected to
grow an average 7 percent a year, reaching approx-
imately $38 trillion by 2007. In addition, a Boston
College study estimates that over the next 20 years,
intergenerational wealth transfer in the U.S. will
exceed $12 trillion. These rising affluent profiles
will increase demand for the types of trust and
10
n o r t h e r n t r u s t c o r p o r at i o n
Quantum Color Graphics, L.L.C.
6511 W. Oakton St.
Morton Grove, Il 60053
(847) 967-3600
#51611
RR Donnelley
(cid:210)P10(cid:211)
02.16.04
CYAN MAG YELO BLK PMS873 PMS343
Quantum Color Graphics, L.L.C.
6511 W. Oakton St.
Morton Grove, Il 60053
(847) 967-3600
LW51611_Body 3/3/04 9:48 PM Page 11
Northern Trust further expanded its private client and wealth management networks with
the successful launch of a new office in New York City(cid:209)serving the affluent and
ultra-wealthy clients in the Northeastern corridor, where the greatest number of high-net-worth
individuals in the U.S. resides. The team overseeing this region includes (from left)
Jeff Kauffman, President/Northern Trust Bank(cid:209)Greater New York,
Alison Winter, President/Personal Financial Services(cid:209)Northeast, and
Tom Smith, Managing Director/Wealth Management(cid:209)Northeast.
n o r t h e r n t r u s t c o r p o r at i o n
1 1
Quantum Color Graphics, L.L.C.
6511 W. Oakton St.
Morton Grove, Il 60053
(847) 967-3600
#51611
RR Donnelley
(cid:210)P11(cid:211)
02.16.04
CYAN MAG YELO BLK PMS873 PMS343
LW51611_Body 3/3/04 9:48 PM Page 12
p e r s o n a l f i n a n c i a l s e r v i c e s
investment services that PFS provides, including
financial planning, estate planning and asset
management. Other trends that should generate
growth in our business include financial industry
consolidation, as well as people(cid:213)s increasing desire
for privacy, security, business
ethics and integrity. Northern
Trust(cid:213)s long-standing reputation
of integrity and high ethical
standards has attracted clients
to us. We also continue to gain
new business from loyal clients
who add services and recom-
mend us to others. In fact, a
recent client survey, conducted
by an external market research
firm, found that 70 percent
of our PFS clients have recom-
mended us to others.
(cid:201)unconditional
client commitment,
unmatched
capabilities and
uncompromising
character continue
to distinguish us
as a leader(cid:201)
locations, together with the prospective Boston
location, will enable Northern Trust to establish an
effective presence and a broader geographic reach
for its full spectrum of innovative products and
services in the ultra-wealthy Northeast region.
PFS also continued to
invest in private client offices
in existing markets by expand-
ing, renovating and relocating
offices to help increase local
exposure. Such developments
occurred in 2003 in seven loca-
tions, including Park Ridge
and Highland Park, Illinois;
Grosse Pointe, Michigan;
Austin, Texas; Tucson, Arizona;
and Aventura and Boca Raton,
Florida. We closed or sold five
offices that were not aligned
with our strategic focus(cid:209)
ensuring that we more effec-
tively and efficiently leverage
u n m atc h e d nat i o na l
o f f i c e n et wo r k
In 2003, Northern Trust made significant progress
in the implementation of our national strategy
and generated new business growth both by
expanding in current locations and by entering
new, lucrative markets(cid:209)further reinforcing that
our affluent market reach and national office network
remain unmatched. PFS entered the Atlanta market
in April 2003 with the acquisition of the wealth
management firm Legacy South, Inc., and we
established a strong foothold in the Northeast
corridor(cid:209)where the greatest number of high-net-
worth individuals in the U.S. resides(cid:209)with the
July opening of our New York City office. Following
the successful Manhattan office launch was the
December 2003 opening of the Stamford,
Connecticut, office(cid:209)marking Northern Trust(cid:213)s
personal financial services entry into its 15th state.
In 2004, we plan to open a Boston office. The
combination of the New York City and Stamford
operations, avoid redundancies and best maximize
resources in local markets.
Within a span of six years ending in 2003,
Northern Trust has nearly tripled the number of
states within which we do business, with locations
offering convenient access to affluent households.
Because of our consistent strategic focus and
competitive advantage, we are well positioned for
future growth through the expansion of existing
relationships and by capturing untapped potential
in our current franchise geography. In addition, we
continue to build our personal financial advisory
service, which generates new business across the
entire product spectrum, and to work closely with
Northern Trust Global Investments in developing
broader investment capabilities in order to provide
clients with a more diversified set of investment
solutions to meet their unique financial needs.
12
n o r t h e r n t r u s t c o r p o r at i o n
Quantum Color Graphics, L.L.C.
6511 W. Oakton St.
Morton Grove, Il 60053
(847) 967-3600
#51611
RR Donnelley
(cid:210)P12(cid:211)
02.16.04
CYAN MAG YELO BLK PMS873 PMS343
Quantum Color Graphics, L.L.C.
6511 W. Oakton St.
Morton Grove, Il 60053
(847) 967-3600
LW51611_Body 3/3/04 9:48 PM Page 13
p e r s o n a l f i n a n c i a l s e r v i c e s
PFS(cid:213) ability to deliver comprehensive
Also serving the ultra-wealthy market is
financial solutions and our high-touch client care
are complemented by Northern Trust Private
Passport¤, a highly customized, secure online service
that allows clients 24-hour access to a complete
suite of financial information, transaction and
account aggregation services. PassportfolioSM,
accessed via Private Passport, is a specialized
aggregation service that allows clients to view their
non-Northern Trust online accounts.
w e a lt h m a nag e m e n t
The Wealth Management Group, an industry leader
in the ultra high-net-worth market, is a specialized
PFS segment that provides comprehensive financial
solutions to successful individuals and families
worldwide who generally have more than $75 million
in investable assets, who implement investment
programs using multiple money managers and
who often employ a family office. In 2003, assets
under administration were $85 billion, compared
with $65 billion in 2002, and assets under manage-
ment totaled $17 billion, compared with $14.4 billion
a year earlier.
Currently, Northern Trust has relationships
with approximately 20 percent of the Forbes 400
group of families and serves 275 families in 49
states and nine countries. Wealth Management(cid:213)s
specialized services include asset management,
investment consulting, global custody, trust,
fiduciary and private banking. The specialized
services are complemented by Family Passport¤,
an Internet-based product that helps clients and
their family offices effectively manage their
finances. In July 2003, Wealth Management
opened a new office in the New York City location
(cid:209)marking the first time the group has established
an office outside Chicago. The group(cid:213)s physical
presence will greatly enhance its ability to grow
ultra-wealthy market share in the populated
Northeast corridor.
our Wealth Advisory Services group, which delivers
specialized, consultative global custody, investment
management and performance reporting solutions
and fiduciary services. Continued development of
our Wealth Management and Wealth Advisory
Services groups will be a strong PFS emphasis as
we continue to target this most important segment
of our market.
u n i q u e ph i l a n t h ro p y a n d ev e n ts
Northern Trust(cid:213)s local and strategic philanthropic
activities and client-tailored events also have
become a trademark of our unique client service.
They are key components of our business growth
and relationship management strategies, as they
generate strong community ties, attract new clients
and nurture existing relationships. Many successful
events were held in 2003 across our offices nation-
ally, including educational and financial seminars,
cultural events, prominent speakers and the special
women-oriented VisionKeepers(cid:213) Forum.
c a r e a n d c o n f i d e n c e
Northern Trust(cid:213)s unconditional client commitment,
unmatched capabilities and uncompromising
character continue to distinguish us as a leader
in our industry. Consistent and focused growth
strategies have proved highly successful, and we
will continue to provide integrated financial services
through attractive offices in local markets that
contain high concentrations of affluent house-
holds. We will continue to expand our array of
products and capabilities as clients(cid:213) needs evolve
and to leverage our strengths to create competitive
advantage through which we should be able to
sustain a high level of profitable growth. At
Northern Trust, we go beyond financial management
by nurturing deep relationships and by adhering
to principles that endure.
n o r t h e r n t r u s t c o r p o r at i o n
1 3
Quantum Color Graphics, L.L.C.
6511 W. Oakton St.
Morton Grove, Il 60053
(847) 967-3600
#51611
RR Donnelley
(cid:210)P13(cid:211)
02.16.04
CYAN MAG YELO BLK PMS873 PMS343
LW51611_Body 3/3/04 9:48 PM Page 14
Corporate and Institutional Services
m i s s i o n :
DELIVERING SUPERIOR ASSET SERVICING, FUND ADMINISTRATION, INVESTMENT MANAGEMENT
AND ADVISORY SERVICES TO CORPORATIONS AND INSTITUTIONS WORLDWIDE, WITH INNOVATIVE
TECHNOLOGY AND A STRONG EMPHASIS ON RELATIONSHIPS.
W ith a long history of
integrity and service excel-
lence, Northern Trust(cid:213)s
Corporate and Institutional
Services (C&IS) business
unit has grown to be a global leader that provides
clients with a full range of sophisticated, value-added
financial services to effectively manage their complex
and changing needs. Spanning approximately 100
markets and serving clients in 38 countries, C&IS
has established a strong global network anchored
by our unparalleled client focus, professional
experience, world-class technology and leading-
edge products and services.
Through our successful global network,
we support corporate and public entity retirement
funds, Taft-Hartley funds, foundations and
endowments, government funds, financial institu-
tions, insurance companies, fund managers and
multinational corporations. Globally, we deliver
integrated and customized investment management,
asset servicing and fund administration, with support
services in treasury management and credit.
Northern Trust is one of the top 10 custodians
worldwide for assets under custody, and the scope
and scale of our growing global presence has
translated into an established market presence in
the United States, Canada, U.K., Europe and the
Asia-Pacific region. In 2003, C&IS(cid:213) focused growth
strategy, strong global market position and new
business helped drive our expansion. In 2003,
C&IS reported nearly $2 trillion in total trust
assets under administration, with $374.3 billion
under management, and we achieved record global
custody assets of $751 billion. Our worldwide client
base has increased over the years, with assets under
custody from these clients growing 59 percent,
compared with 2002.
Despite a competitive environment in 2003,
C&IS gained strong momentum in new business
growth from a number of new client relationships
and from current clients adding more services.
Several factors also helped drive growth in the U.S.
and abroad, including financial industry consolidation
and the long-term trends in privatization of pension
funding, cross-border investment strategies, use of
multiple investment managers and outsourcing.
In addition, our reputation for security, ethics and
integrity has attracted new clients who want to
partner with a trustworthy, stable organization.
e s ta b l i s h e d a n d s t ro n g
g lo ba l p r e s e n c e
C&IS(cid:213) success in generating new and expanded
business relationships in 2003 reinforces that our
focused strategies in select markets give us the
competitive edge in the U.S. and abroad. Our
international group continues to be an area of
14
n o r t h e r n t r u s t c o r p o r at i o n
Quantum Color Graphics, L.L.C.
6511 W. Oakton St.
Morton Grove, Il 60053
(847) 967-3600
#51611
RR Donnelley
(cid:210)P14(cid:211)
02.16.04
CYAN MAG YELO BLK PMS873 PMS343
Quantum Color Graphics, L.L.C.
6511 W. Oakton St.
Morton Grove, Il 60053
(847) 967-3600
LW51611_Body 3/3/04 9:48 PM Page 15
Northern Trust(cid:213)s international group has experienced strong business growth in the European
markets. Northern Trust provides Varma Mutual Pension Insurance Company, the largest private sector
pension insurer in Finland, with a range of services, including global custody, financial accounting
and securities lending. Standing outside Varma(cid:213)s Helsinki headquarters are (from left)
Northern Trust(cid:213)s Vice President Peter Cole; Varma(cid:213)s P(cid:138)ivi Kalapuro, Head of Back Office;
Northern Trust(cid:213)s Senior Vice President Lesley Hodgson; Varma(cid:213)s Petri Kuusisto, Director of Investments;
and Northern Trust(cid:213)s Vice President Anne Lise Winge.
n o r t h e r n t r u s t c o r p o r at i o n
1 5
Quantum Color Graphics, L.L.C.
6511 W. Oakton St.
Morton Grove, Il 60053
(847) 967-3600
#51611
RR Donnelley
(cid:210)P15(cid:211)
02.16.04
CYAN MAG YELO BLK PMS873 PMS343
LW51611_Body 3/3/04 9:48 PM Page 16
c o r p o r at e a n d i n s t i t u t i o n a l s e r v i c e s
intense focus, with further business penetration in
the Asia-Pacific, U.K. and European markets. For
the fourth consecutive year, Northern Trust was
named Custodian of the Year for 2003 by the U.K.
publication Professional Pensions. In 2003, we also
were named the top overall
custodian for North America by
the R&M global custody survey.
In the U.K., Northern
Trust serves 18 percent of the
top 200 pension plans and serves
25 percent of the local authority
market. We plan to open a
Luxembourg office in 2004 to
capture growth opportunities
and to expand our capabilities in
serving the fund managers and
large multinational segments.
In 2003, we added a number
of new international clients,
including AMF Pension, one
of Sweden(cid:213)s largest pension
insurance companies, for which we provide global
custody and securities lending. We also welcomed
Alecta, the largest manager of pension assets in the
Nordic region, for which we provide a range of
services, including global custody and securities
lending. C&IS remains well positioned in the Asia-
Pacific region through our offices and strategic
initiatives, such as our cooperation agreement
with the Bank of Communications in China,
which enables us to gain insight into this financial
services market and build name awareness.
Our U.S. expansion continued to gain
significant momentum in 2003, with solid new
business growth both from new and expanding
client relationships in our focused, high-growth
segments. Currently, Northern Trust serves 30
percent of the 200 largest pension funds in the
U.S. The large corporate segment generated many
expanded and new client relationships in 2003,
including Harris Corporation, a Melbourne,
Florida-based international communications
equipment company. We continue to strengthen
(cid:201)a strong global
network anchored by
our client focus,
professional experience,
world-class
technology
and leading-edge
products and services(cid:201)
and add to the public funds
and Taft-Hartley client base.
Additions in 2003 include
the State of New Mexico, for
which we provide services that
include global custody, risk
and investment management.
Northern Trust currently
serves 22 percent of the top
100 U.S. public funds and
20 percent of the top U.S.
Taft-Hartley plans. C&IS(cid:213)
foundations and endowments
segment also saw continued
new business growth. Among
the new clients we welcomed in
2003 is The Edna McConnell
Clark Foundation. Northern Trust serves
foundations and endowments clients world-
wide and works closely with 28 percent of the
top 50 U.S. foundations and 20 percent of the top
50 U.S. endowments.
As part of Northern Trust(cid:213)s long-term
strategy to focus resources on core businesses for
profitable growth, Northern Trust and Hewitt
Associates in 2003 formed a preferred provider
relationship for retirement services. The arrange-
ment includes Hewitt(cid:213)s acquisition of Northern
Trust Retirement Consulting, L.L.C., assets and
encompasses the companies collaborating as
preferred providers in each firm(cid:213)s core area of
expertise(cid:209)Hewitt(cid:213)s human resources consulting
services and Northern Trust(cid:213)s trustee, custody and
pension payroll services.
16
n o r t h e r n t r u s t c o r p o r at i o n
Quantum Color Graphics, L.L.C.
6511 W. Oakton St.
Morton Grove, Il 60053
(847) 967-3600
#51611
RR Donnelley
(cid:210)P16(cid:211)
02.16.04
CYAN MAG YELO BLK PMS873 PMS343
Quantum Color Graphics, L.L.C.
6511 W. Oakton St.
Morton Grove, Il 60053
(847) 967-3600
LW51611_Body 3/3/04 9:48 PM Page 17
c o r p o r at e a n d i n s t i t u t i o n a l s e r v i c e s
event(cid:213)s impact on a portfolio(cid:213)s market exposure
and performance.
u n wav e r i n g c l i e n t c o m m i t m e n t
C&IS adheres to the century-long principles that
continue to guide our business. To maintain our
high standards for service excellence and product
innovation, we measure our performance through
client surveys, focus groups and client advisory
boards. The latest client satisfaction survey con-
ducted by an outside firm showed that 97 percent
of C&IS clients said that Northern Trust met or
exceeded expectations. The outstanding client
satisfaction results only reinforce how our strong
client commitment and dedication to high-quality
service distinguish us in the industry. This is a
people business, and we are proud of our experi-
enced and expert professionals who dedicate
themselves to our clients(cid:213) needs. Our proven
global strategies position us well to serve the
diverse financial needs of large corporate and
institutional investors worldwide, to continue
expanding our international and fund manager
services in existing and selective new global markets,
and to lead the industry in technological product
advances and unparalleled client service.
wo r l d - c l a s s t e c h n o lo g y
C&IS(cid:213) experienced professionals and unrivaled
consultative approach to client service are
supported by our leadership as an innovator in
Internet-based client products and services. Working
with our clients to understand their evolving needs,
we translate our knowledge into product innova-
tion and development. In 2003, Northern Trust
introduced many new and enhanced capabilities
for corporate and institutional clients, including
an enhanced trade services capability for back-office
outsourcing, the improved Trade Execution Analysis
monitoring tool, a new electronic payment and
check conversion service, and the new Northern
Trust Benefit Payments Passport¤, an Internet-
based tool that enables plan sponsors to easily
manage participant information. In addition,
Northern Trust developed and implemented the
industry(cid:213)s first cross-border pension pooling
structure for multinationals, which can provide
more effective control of risk, greater operational
efficiency and reduced cost.
We deepen our client relationships by
leveraging our portal capabilities, such as
Northern Trust Global Investor Passport¤, which
continues to be a dynamic tool for corporate and
institutional clients. Global Investor Passport
combines our proprietary technology with high-
touch service to keep clients informed of relevant
news tied to their portfolios and to empower
client decision making in order for them to
manage risk effectively. Through Global Investor
Passport, clients can generate reports, execute
trades and access valuable information daily, while
using state-of-the-art risk management, compliance
monitoring and analytical tools. Northern Trust
Event AnalystSM, the industry(cid:213)s only automated
investment-monitoring tool, identifies market
events and automatically notifies clients of an
n o r t h e r n t r u s t c o r p o r at i o n
1 7
Quantum Color Graphics, L.L.C.
6511 W. Oakton St.
Morton Grove, Il 60053
(847) 967-3600
#51611
RR Donnelley
(cid:210)P17(cid:211)
02.16.04
CYAN MAG YELO BLK PMS873 PMS343
LW51611_Body 3/3/04 9:48 PM Page 18
Northern Trust Global Investments
m i s s i o n :
PROVIDING WORLD-CLASS INVESTMENT MANAGEMENT PRODUCTS AND SERVICES
TO PERSONAL AND INSTITUTIONAL CLIENTS WORLDWIDE.
N o rt h e r n t ru st g l o ba l
i n v e st m e n ts (NTGI) is a
global, multi-asset class investment
manager serving personal and
institutional clients worldwide.
NTGI provides a full array of investment manage-
ment products and also offers comprehensive
portfolio services, including securities lending,
securities brokerage, commission recapture and
transition management, to help clients effectively
manage their investment programs.
NTGI ranks as the 13th-largest worldwide
asset manager, the seventh-largest institutional
asset manager, the sixth-largest manager of tax-
exempt assets and the third-largest institutional
index manager. These rankings were adjusted from
a previously published Pensions and Investments
list to include the 2003 acquisition of Deutsche
Bank AG(cid:213)s passive asset management business.
As one of the world(cid:213)s largest and most
reputable diversified asset managers, NTGI adheres
to a sharply focused strategy that contributed to
our 2003 success. This strategy is based on five key
initiatives: generating superior investment results,
developing innovative investment products to
anticipate and meet client needs, expanding distri-
bution channels worldwide, promoting our reputable
brand and supporting client relationships through
high-touch, high-quality service.
Despite a fluctuating investment environment
in 2003, NTGI(cid:213)s assets under management grew 58
percent to $478.6 billion from $302.5 billion a year
earlier. Contributing to the asset growth were the
2003 acquisition of Deutsche Bank AG(cid:213)s passive
asset management business, expansion in invest-
ment-driven distribution through outside channels
and strong new business.
Since 1997, assets under management have
grown at a compound annual rate of 16 percent,
approximately seven times that of the S&P 500.
Our mutual fund assets increased in 2003 to $46
billion, compared with $44.8 billion a year earlier.
According to industry publication FRC Monitor,
the Northern Funds family ranks as the sixth-largest
bank-run mutual fund family.
Our manager-of-managers subsidiary,
Northern Trust Global Advisors, Inc. (NTGA), in
2003 managed and advised assets of more than
$17 billion, compared with $12.3 billion in 2002,
for 499 clients. Its key products include partial and
total investment program outsourcing, alternative
investment programs, emerging and minority-
owned manager programs, multi-advisor funds
and a U.K.-based multi-manager fund.
18
n o r t h e r n t r u s t c o r p o r at i o n
Quantum Color Graphics, L.L.C.
6511 W. Oakton St.
Morton Grove, Il 60053
(847) 967-3600
#51611
RR Donnelley
(cid:210)P18(cid:211)
02.16.04
CYAN MAG YELO BLK PMS873 PMS343
Quantum Color Graphics, L.L.C.
6511 W. Oakton St.
Morton Grove, Il 60053
(847) 967-3600
LW51611_Body 3/3/04 9:48 PM Page 19
Since 1995, Northern Trust has expanded its relationship with Adobe Systems,
a company providing world-leading digital imaging, design and document technology platforms
for consumers, creative professionals and enterprise customers. The relationship has grown from treasury
management to include credit and management of the company(cid:213)s balance sheet reserves overseas
with an innovative, multi-currency fixed-income investment strategy. At Adobe(cid:213)s San Jose headquarters,
(from left) Northern Trust(cid:213)s Vice Presidents Wayne Bowers, Steve Everett and John Brazzale
meet with Adobe(cid:213)s Barbara Hill, Vice President and Treasurer, and Stuart Loan, Director of Cash and
Investments, to discuss Adobe(cid:213)s growing global needs.
n o r t h e r n t r u s t c o r p o r at i o n
1 9
Quantum Color Graphics, L.L.C.
6511 W. Oakton St.
Morton Grove, Il 60053
(847) 967-3600
#51611
RR Donnelley
(cid:210)P19(cid:211)
02.16.04
CYAN MAG YELO BLK PMS873 PMS343
LW51611_Body 3/3/04 9:48 PM Page 20
n o r t h e r n t r u s t g l o b a l i n v e s t m e n t s
Alternative investments(cid:209)designed to
provide lower correlation to the equity markets
and greater diversification than traditional equity
approaches(cid:209)are an important asset class for
investors. At year-end 2003, Northern Trust
managed $550 million in hedge
fund assets for personal and
institutional clients, compared
with $335 million a year earlier.
Total investment program
outsourcing continued to accel-
erate, as institutional clients
increasingly seek to outsource
various capabilities, including
plan design, asset allocation,
manager selection and monitor-
ing and performance reporting.
(cid:201).disciplined,
client-focused
strategy
to provide clients
with a complete
range of products
and investment
i n c r e a s e d
g lo ba l p o s i t i o n ,
s c o pe a n d s c a l e
capabilities(cid:201)
The increased scope and scale of our passive asset
management business also benefited our related
securities lending business, which generated securities
lending volumes approximately $5 billion higher
prior to the larger index base.
The successful integration
of the acquired global index
business enabled us to expand
our Chicago and London
operations and to establish a
presence in New York City and
Tokyo. In April 2003, NTGI
opened our first office in
Japan, which reinforces our
strategic plan to further develop
in key growth markets. As
a result of the Tokyo office
opening, NTGI gained new
business, including several
significant mandates for passive
management from some of the
most prominent institutions
With our acquisition of the
passive asset management business, we significantly
increased our market position, breadth of global
index products and global reach. In addition, the
acquisition brought $64 billion in new assets and
more than 130 new client relationships worldwide.
As a result of the acquisition, we moved from
the seventh-largest to third-largest institutional
index manager worldwide(cid:209)giving us the scale and
prominent global position that provide us with
opportunities for future growth. In addition, we
greatly expanded the breadth of global index
products to include a full array of global passive
and enhanced equity, as well as enhanced fixed-
income products. In turn, the depth and breadth
of our product line have created more cross-selling
opportunities among our personal and institutional
businesses to attract new investment management
business and to further diversify client portfolios.
in Japan. In July 2003, we collaborated with
Personal Financial Services (PFS) and Corporate
and Institutional Services (C&IS) and opened a
Northern Trust office in New York City, which
enables us to cost-efficiently leverage our invest-
ment management capabilities across businesses
and expand our global presence.
va lu e - a d d e d p o rt f o l i o s e rv i c e s
In addition to the complete range of world-class
investment programs, Northern Trust offers sup-
porting portfolio services to clients, including
transition management, securities lending and
securities brokerage. Transition management
continued to gain momentum in 2003. At an
increasing pace, plan sponsors hire Northern Trust
to act as an independent transition manager to
move their assets between asset classes and among
20
n o r t h e r n t r u s t c o r p o r at i o n
Quantum Color Graphics, L.L.C.
6511 W. Oakton St.
Morton Grove, Il 60053
(847) 967-3600
#51611
RR Donnelley
(cid:210)P20(cid:211)
02.16.04
CYAN MAG YELO BLK PMS873 PMS343
Quantum Color Graphics, L.L.C.
6511 W. Oakton St.
Morton Grove, Il 60053
(847) 967-3600
LW51611_Body 3/3/04 9:48 PM Page 21
n o r t h e r n t r u s t g l o b a l i n v e s t m e n t s
multiple investment managers. Northern Trust(cid:213)s
position as a leading custodian and investment
manager provides a market-leading platform to offer
a premier transition service. The assets transitioned
by NTGI rose in 2003 to nearly $27 billion for more
than 414 clients.
Securities lending revenues in 2003 were
$99.2 million, compared with $101 million in
2002. New client business and market appreciation
positively impacted our securities lending revenues;
however, this positive impact was offset by the
current low interest rate environment, which
contributed to the slight decline relative to 2002.
Our securities lending volume increased 9 percent
in 2003 as a result of the global index business
integration. We maintain a strong reputation and
global position in the securities lending industry.
For the second year in a row, FinanceAsia magazine
named Northern Trust as Best Securities Lending
House. Also in 2003, International Securities
Finance magazine named Northern Trust the top
securities lender in both Europe and Asia.
Northern Trust Securities, Inc. (NTSI),
Northern Trust(cid:213)s brokerage arm, offers a full array
of brokerage products and services, including
stocks, bonds and mutual funds, to Northern
Trust(cid:213)s private and institutional clients. In 2003,
NTSI continued to expand its personal and insti-
tutional brokerage capabilities with enhanced
trading and transition management services and
a competitive commission recapture program.
Cross-selling and investment-driven distri-
bution initiatives continue to be strong drivers
of our success in delivering NTGI(cid:213)s investment
products and services in key, high-growth markets
worldwide. NTGI actively cross-sells with PFS and
C&IS to identify additional distribution opportunities
within our existing personal and institutional
client base. In turn, our cross-selling initiative
enables PFS and C&IS to offer a more diversified
investment portfolio and attract new business.
e x pa n d i n g a n d s t r e n g t h e n i n g
g lo ba l d i s t r i bu t i o n
In addition to serving our existing client base,
NTGI strengthens the investment-driven distribu-
tion of our investment management products via
multiple outside channels. Domestically, we continue
to expand our distribution network through direct
sales, wrap programs offered by major brokerages,
relationships with mutual fund supermarkets and
an extensive institutional consultant calling program.
Globally, international distribution has been
expanded significantly by our joint ventures,
alliances and distribution arrangements with major
financial entities in Europe and abroad, including
Canada, Germany, Ireland, Japan, Scotland, the
United Kingdom and the Cayman Islands. In
Germany, NTGI manages more than $2 billion for
Helaba, a main German bank, and in Italy, we have
a more than $600 million mandate for Mediolanum,
an Italian banking group, to manage four mutual
funds. In 2003, Northern Trust formed an alliance
with Groupama, France(cid:213)s largest mutual insurer,
where we manage a $300 million U.S. equity fund.
NTGI(cid:213)s strong asset management base,
diversified product array and prominent global
presence achieved in 2003 are a testament to our
disciplined, client-focused strategy to provide
clients with a complete range of products and
investment capabilities to effectively diversify their
portfolios. Our reputation, integrity and high-
touch client service, coupled with our talented
team of expert professionals, give us a competitive
edge in the marketplace. With that combination,
we now have the unique platform to further grow
our investment management business worldwide
and raise it to a new level.
n o r t h e r n t r u s t c o r p o r at i o n
2 1
Quantum Color Graphics, L.L.C.
6511 W. Oakton St.
Morton Grove, Il 60053
(847) 967-3600
#51611
RR Donnelley
(cid:210)P21(cid:211)
02.16.04
CYAN MAG YELO BLK PMS873 PMS343
LW51611_Body 3/3/04 9:48 PM Page 22
Worldwide Operations and Technology
m i s s i o n :
CREATING AND DELIVERING INNOVATIVE PRODUCTS AND SERVICES THAT
MEET CLIENT NEEDS AND STRENGTHEN CLIENT RELATIONSHIPS.
Northern trust(cid:213)s worldwide
operations and technology
(WWOT) group supports the
Personal Financial Services,
Corporate and Institutional
Services and Northern Trust Global Investments
businesses and integrates robust technologies
with our high-touch consultative approach, which
further deepen client relationships and better serve
clients(cid:213) complex needs. With operations in North
America, the United Kingdom, Europe and the
Asia-Pacific region, our integrated, single-technol-
ogy platform enables us to cost-efficiently leverage
capabilities across businesses and to effectively
perform seamless and timely processing of
client transactions worldwide. State-of-the-art
operations and technologies are backed by
more than a century of experience in protecting
clients(cid:213) privacy and in safeguarding financial
transactions through highly advanced, global
security methods.
As an industry leader in security and
preparedness, Northern Trust has always placed
the highest priority on ensuring a safe and secure
systems environment. We continuously assess
systems, critical functions and disaster recovery
processes to further develop and maintain global
continuity plans, which are designed to effectively
deal with events that might cause serious business
interruption. Northern Trust continued to enhance
its business continuity strategy in 2003 with the
opening of a new, 65,000-square-foot data center
in the western suburbs of Chicago. The data center
mirrors all of the main hub(cid:213)s functions and serves
as an alternate facility to execute business operations
during an emergency.
Northern Trust actively participates in
industry initiatives and remains at the forefront of
developing technology-based products and services
that improve financial services management. Our
intense client focus drives our global business
initiative to create cost-effective, highly customized
products and services that strengthen our market
position, help enhance business unit revenue
capabilities and deliver great value to our clients
and company.
22
n o r t h e r n t r u s t c o r p o r at i o n
Quantum Color Graphics, L.L.C.
6511 W. Oakton St.
Morton Grove, Il 60053
(847) 967-3600
#51611
RR Donnelley
(cid:210)P22(cid:211)
02.16.04
CYAN MAG YELO BLK PMS873 PMS343
Quantum Color Graphics, L.L.C.
6511 W. Oakton St.
Morton Grove, Il 60053
(847) 967-3600
LW51611_Body 3/3/04 9:48 PM Page 23
Northern Trust places a high priority on our systems and disaster recovery and
business continuity strategies. Leading our corporate-wide initiatives and expert, professional
WWOT team are Connie Lindsey, Senior Vice President and Deputy Business Unit Head, and (from left)
Senior Vice Presidents Don Adamis and John Fowler. They stand in the new, state-of-the-art
data center that opened in 2003 in the western suburbs of Chicago. The 65,000-square-foot center
mirrors the main hub(cid:213)s functions and serves as an alternate facility to execute
business operations in case of an emergency.
n o r t h e r n t r u s t c o r p o r at i o n
2 3
Quantum Color Graphics, L.L.C.
6511 W. Oakton St.
Morton Grove, Il 60053
(847) 967-3600
#51611
RR Donnelley
(cid:210)P23(cid:211)
02.16.04
CYAN MAG YELO BLK PMS873 PMS343
LW51611_Body 3/3/04 9:48 PM Page 24
w o r l d w i d e o p e r at i o n s a n d t e c h n o l o g y
wo r l d - c l a s s i n n ovat i o n
Our Internet site, www.northerntrust.com,
provides a gateway to the Northern Trust Passport¤
suite of online financial services, which has seen
a significant increase in enrollment and usage
over the past few years, as
more and more personal and
institutional clients go online
to access their portfolios and
our customized services,
including retirement, custody,
foreign exchange and risk and
performance. From one portal,
clients can manage their assets
anytime 24 hours a day, seven
days a week and from any
location via phone, wireless
or the Internet.
(cid:201)WWOT integrates
robust technologies
with our high-touch
consultative approach,
which further deepen
client relationships and
better serve clients(cid:213)
complex needs.
Northern Trust Private
institutional clients. Global Investor Passport
combines Northern Trust(cid:213)s proprietary technology
with high-touch service to keep clients informed
of relevant news tied to their portfolios and to
empower client decision making in order for
them to manage risk effectively.
Its industry-leading compli-
ance monitoring system,
Northern Trust Compliance
Analyst¤, allows clients to
ensure adherence to risk and
investment guidelines, and
Northern Trust Event AnalystSM,
the industry(cid:213)s only automated
investment-monitoring tool,
identifies market events
and allows clients to see the
impact on a portfolio(cid:213)s market
exposure and performance.
Passport¤ is our renowned
Internet-based service for
PFS clients that allows 24-
hour access to a suite of highly personalized
financial information, transaction and account
aggregation services. PassportfolioSM, accessed
via Private Passport, allows clients to view
their non-Northern Trust online accounts.
A comprehensive tool for ultra-wealthy
clients, Family Passport¤, integrates Wealth
Management services and helps clients
and their family offices effectively manage
their finances.
Northern Trust Global Investor Passport¤
continues to be a dynamic tool for corporate and
Passport also includes
our Internet-based Corporate
Actions Delivery and Response
(CDR) tool, which provides institutional clients
and fund managers with a secure, streamlined
method to efficiently receive, organize and
respond to events that may affect their portfo-
lios. In 2003, trade publication Operations
Management recognized Northern Trust for
Best Implementation of a New Back-Office
System(cid:209)acknowledging its industry impact for
the creation of the CDR system, which replaced
a manual approach to corporate actions process-
ing. For plan sponsors and other institutional
investors, the Northern Trust Fund Peek ThroughSM
24
n o r t h e r n t r u s t c o r p o r at i o n
Quantum Color Graphics, L.L.C.
6511 W. Oakton St.
Morton Grove, Il 60053
(847) 967-3600
#51611
RR Donnelley
(cid:210)P24(cid:211)
02.16.04
CYAN MAG YELO BLK PMS873 PMS343
Quantum Color Graphics, L.L.C.
6511 W. Oakton St.
Morton Grove, Il 60053
(847) 967-3600
LW51611_Body 3/3/04 9:48 PM Page 25
w o r l d w i d e o p e r at i o n s a n d t e c h n o l o g y
c l i e n t - d r i v e n f o c u s
To remain globally competitive and at the forefront
of industry technologies, Northern Trust will
continue to develop and integrate more capabilities
and improvements, while maintaining a secure
operating platform, to meet
clients(cid:213) diverse and complex
needs. In 2003, industry
publication ComputerWorld
recognized Northern Trust as
one of the Best Places to Work
in Information Technology.
We attribute our success and
industry accolades to WWOT(cid:213)s
great team of talented, expe-
rienced professionals who are
excited about and dedicated
to providing clients with the
valuable tools that enhance
their financial services rela-
tionship with us.
State-of-the-art
operations and
technologies are
backed by
more than a century
of experience(cid:201)
tool allows clients to easily access detailed asset
information about their mutual and commingled
fund holdings.
As part of the ongoing focus on a high-
quality online experience, Northern Trust
continues to introduce new
services and make user-friendly
enhancements and upgrades
to our proprietary tools.
Enhancements to Private
Passport in 2003 included
improved content, navigation
and sign-on features. We intro-
duced many new and added
capabilities for corporate and
institutional clients, including
a new electronic payment and
check conversion system, an
improved trade execution
monitoring tool, an enhanced
trade services capability for
back-office outsourcing and a
new Internet-based benefit payments system.
In addition, Northern Trust developed and
launched the industry(cid:213)s first cross-border pension
pooling structure for multinationals, which can
provide more effective control of risk, greater
operational efficiency and reduced cost.
n o r t h e r n t r u s t c o r p o r at i o n
2 5
Quantum Color Graphics, L.L.C.
6511 W. Oakton St.
Morton Grove, Il 60053
(847) 967-3600
#51611
RR Donnelley
(cid:210)P25(cid:211)
02.16.04
CYAN MAG YELO BLK PMS873 PMS343
LW51611_Body 3/3/04 9:48 PM Page 26
Community Involvement
Northern trust has advanced
a culture of caring and a commit-
ment to helping improve quality
of life by investing in the commu-
nities we serve since our founding
in 1889. Our philanthropic mission is to help improve
people(cid:213)s lives by providing educational opportunities,
building inclusive communities and promoting
cultural outreach. We actively participate in a range
of worthy causes in the educational, human services,
civic and cultural areas through community lending
programs, grants, development investments, chari-
table giving and employee volunteer activities.
Corporate contributions are a key initiative
in our long-standing mission to serve communities.
In 2003, Northern Trust(cid:213)s corporate philanthropy
program awarded numerous nonprofit organizations
worldwide more than $9.5 million in cash contri-
butions. The majority of funds was directed to
human service organizations that provide critical
services to low- and moderate-income families
striving to build better lives. Through our matching
gift and volunteer grant programs, an additional
$1 million in corporate contributions were made
to numerous worthy organizations nationally.
During the past five years, Northern Trust
has made cash contributions of more than $45
million to community service organizations globally.
In addition, we donate nearly 1.5 percent of our
pre-tax profits to charities each year.
In 2003, Northern Trust ranked ninth on
BusinessWeek magazine(cid:213)s Most Generous Cash Givers
list and was named as one of Global Finance maga-
zine(cid:213)s World(cid:213)s Most Socially Responsible Companies.
Northern Trust has a strong tradition of
meeting our Community Reinvestment Act (CRA)
goals through community development activities
that target increased access to affordable housing
and economic development in underserved com-
munities. Northern Trust partners with nonprofit
organizations across the country(cid:209)providing them
with capital, loans and grants to further each group(cid:213)s
mission of community development and revital-
ization in the neighborhoods served. These efforts
were rewarded with (cid:210)outstanding(cid:211) CRA ratings for
Illinois from the Federal Reserve Bank of Chicago
and for Texas and California from the Office of the
Comptroller of the Currency.
In 2003, Northern Trust provided more
than $137 million in mortgage loans to low- and
moderate-income families in the neighborhoods
we serve across the country. More than $25 million
in community development loans were made in these
communities and more than $22 million in com-
munity development investments were provided to
further strengthen and develop these underserved
communities. In 2003, we renewed or expanded
relationships with a number of local nonprofit
organizations working in our neighborhoods,
including the Community Reinvestment Fund,
Chicago Equity Fund, Neighborhood Housing
Services of Chicago, Local Initiatives Support
Corporation, Florida Community Loan Fund,
Habitat for Humanity, East Dallas Community
Organization and Millennium Housing.
Deeply rooted in our community commitment
is volunteerism, with numerous Northern Trust
26
n o r t h e r n t r u s t c o r p o r at i o n
Quantum Color Graphics, L.L.C.
6511 W. Oakton St.
Morton Grove, Il 60053
(847) 967-3600
#51611
RR Donnelley
(cid:210)P26(cid:211)
02.19.04
CYAN MAG YELO BLK PMS873 PMS343
Quantum Color Graphics, L.L.C.
6511 W. Oakton St.
Morton Grove, Il 60053
(847) 967-3600
LW51611_Body 3/3/04 9:48 PM Page 27
Northern Trust has had a long-standing relationship with Misericordia/Heart of Mercy,
a Chicago-based nonprofit organization that supports and provides services to individuals with
developmental disabilities. Among the several Northern Trust employees who actively volunteer
with Misericordia are Vice Presidents Bill Meyer and (center) Kerry Webber. They are dining with
Misericordia(cid:213)s Director Sister Rosemary Connelly in the organization(cid:213)s Greenhouse Inn restaurant,
which provides a range of job opportunities for individuals who reside at Misericordia.
employees contributing to local communities and
charitable efforts worldwide in many ways, including
fundraising, mentoring and tutoring. In 2003,
more than 2,500 employees volunteered more
than 180,000 hours to nonprofit organizations.
We are very proud of our employees whose energy,
compassion, devotion and generosity help make a
difference in people(cid:213)s lives.
Northern Trust(cid:213)s philanthropic mission is a
strong, long-standing tradition, but also a business
goal. We believe that it is our responsibility to be
good corporate citizens and to help grow strong,
vibrant communities where we do business. That(cid:213)s
because a strong, healthy community benefits all
who live in it, and we want to give back to the
communities that support us and help us succeed.
n o r t h e r n t r u s t c o r p o r at i o n
2 7
Quantum Color Graphics, L.L.C.
6511 W. Oakton St.
Morton Grove, Il 60053
(847) 967-3600
#51611
RR Donnelley
(cid:210)P27(cid:211)
02.16.04
CYAN MAG YELO BLK PMS873 PMS343
LW51611_Body 3/3/04 9:48 PM Page 28
Financial Review
2 0 0 3 f i n a n c i a l r e v i e w
29 Management(cid:213)s Discussion and Analysis of
Financial Condition and Results of Operations
59 Consolidated Financial Statements
63 Notes to Consolidated Financial Statements
96 Report of Independent Public Accountants
97 Consolidated Financial Statistics
100
Senior Officers
101 Board of Directors
102 Corporate Structure
104 Corporate Information
Quantum Color Graphics, L.L.C.
6511 W. Oakton St.
Morton Grove, Il 60053
(847) 967-3600
#51611
RR Donnelley
(cid:210)P28(cid:211)
02.16.04
CYAN MAG YELO BLK PMS873 PMS343
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
($ In Millions Except Per Share Information)
2003
2002
2001
2000
1999
Noninterest Income
Trust Fees
Foreign Exchange Trading Profits
Treasury Management Fees
Security Commissions and Trading Income
Other Noninterest Income
Total Noninterest Income
Net Interest Income
Provision for Credit Losses
$1,189.1
109.6
95.6
54.8
93.1
1,542.2
548.2
2.5
$1,161.0
106.4
96.3
42.9
58.1
1,464.7
601.8
37.5
$1,190.8
139.8
86.4
35.5
91.7
1,544.2
595.6
66.5
$1,159.4
152.7
73.9
34.3
78.1
1,498.4
568.5
24.0
$ 942.7
107.7
70.3
30.2
55.9
1,206.8
518.6
12.5
Income before Noninterest Expenses
2,087.9
2,029.0
2,073.3
2,042.9
1,712.9
Noninterest Expenses
Compensation
Employee Benefits
Occupancy Expense
Equipment Expense
Other Operating Expenses
Total Noninterest Expenses
Income from Continuing Operations before Income Taxes
Provision for Income Taxes
Net Income from Continuing Operations
Net Income (Loss) from Discontinued Operations
Net Income
Net Income Applicable to Common Stock
Per Common Share
Net Income–Basic
–Diluted
Dividends Declared
Book Value–End of Period (EOP)
Market Price–EOP
Average Total Assets
Senior Notes–EOP
Long-Term Debt–EOP
Floating Rate Capital Debt–EOP
652.1
133.1
132.7
88.2
450.7
629.6
125.5
101.8
85.0
418.1
652.6
118.1
95.7
80.1
399.4
660.7
105.6
84.5
69.6
407.0
560.8
95.8
72.2
60.8
318.9
1,456.8
1,360.0
1,345.9
1,327.4
1,108.5
631.1
207.8
$ 423.3
(18.5)
$ 404.8
$ 404.1
$
1.84
1.80
.70
13.88
46.28
$ 39,115
350
865
276
669.0
221.9
$ 447.1
—
$ 447.1
$ 444.9
$
2.02
1.97
.68
13.04
35.05
$ 37,597
450
766
268
727.4
242.7
$ 484.7
2.8
$ 487.5
$ 483.4
$
2.18
2.11
.635
11.97
60.22
$ 35,633
450
767
268
715.5
239.3
$ 476.2
8.9
$ 485.1
$ 479.4
$
2.17
2.08
.56
10.54
81.56
$ 34,057
500
638
268
604.4
206.7
$ 397.7
7.3
$ 405.0
$ 400.2
$
1.81
1.74
.495
9.25
53.00
$ 30,193
500
659
268
Ratios
Dividend Payout Ratio
Return on Average Assets
Return on Average Common Equity
Tier 1 Capital to Risk-Weighted Assets–EOP
Total Capital to Risk-Weighted Assets–EOP
Leverage Ratio
Average Stockholders’ Equity to Average Assets
Average Loans and Leases Times Average Stockholders’ Equity
Stockholders–EOP
Staff–EOP (full-time equivalent)
38.1%
1.04
13.81
11.06
13.96
7.55
7.61
5.9x
3,288
8,056
33.8%
1.19
16.20
11.13
14.13
7.76
7.63
6.1x
3,130
9,317
29.2%
1.37
19.34
10.88
14.25
7.93
7.35
6.8x
3,183
9,453
25.9%
1.42
22.09
9.79
12.85
6.91
6.72
7.2x
3,194
9,466
27.6%
1.34
20.67
9.92
13.60
7.14
6.81
7.1x
3,251
8,583
Note: Certain reclassifications have been made to prior periods’ financial information to conform to the current year’s presentation. Refer to Notes 3 and 4
of the Consolidated Financial Statements.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
Legal Structure. Northern Trust Corporation
(Corporation) was organized as a bank holding company
in 1971 to hold all of the outstanding capital stock of its
principal subsidiary, The Northern Trust Company
(Bank), an Illinois banking corporation headquartered in
the Chicago financial district. The Corporation also owns
national bank subsidiaries with offices in Arizona, Cal-
ifornia, Colorado, Florida and Texas, a federal savings
bank subsidiary with offices in Connecticut, Georgia, Mas-
sachusetts, Michigan, Missouri, Nevada, New York, Ohio,
Washington and Wisconsin, trust companies in Con-
necticut and New York and various other nonbank sub-
sidiaries, including a securities brokerage firm and an
institutional investment management company. Effective
as of November 20, 2003, the Corporation became a
financial holding company under the Gramm-Leach-Bliley
Act. The Bank also operates in London and has various
subsidiaries including an investment management com-
pany, a leasing company, a Canadian trust company, a
New York Edge Act company, a UK incorporated bank
subsidiary and a Dublin-based fund administration com-
pany. The Corporation expects that, although the oper-
ations of other subsidiaries will continue to be of
increasing significance to the Corporation, the Bank will in
the foreseeable future continue to be the major source of
the Corporation’s consolidated assets, revenues and net
income.
Except where the context otherwise requires, all
references to “Northern Trust” refer to Northern Trust
Corporation and its subsidiaries on a consolidated basis.
Focused Business Strategy. Northern Trust is a leading
provider of global financial solutions for investment man-
agement, asset administration, fiduciary and banking
needs of corporations, institutions, and affluent in-
dividuals. Northern Trust continues to exclusively focus on
administering and managing client assets in two target
markets, affluent individuals in the U.S. through its
Personal Financial Services (PFS) business unit and
institutional investors worldwide through its Corporate
and Institutional (C&IS) business unit. An important ele-
ment in this strategy is increasing the penetration of the
C&IS and PFS target markets with investment manage-
ment and related services and products provided by a third
business unit, Northern Trust Global Investments (NTGI).
In executing this strategy, Northern Trust emphasizes
service quality through a high level of personal service
complemented by the effective use of technology. Operat-
ing and systems support for these business units is pro-
vided through the Worldwide Operations and Technology
(WWOT) business unit. Northern Trust closely monitors
expense growth and capital expenditures to ensure that
short- and long-term business strategies and performance
objectives are effectively balanced.
Northern Trust’s long-term financial goals are to
achieve average earnings per share growth of 10% or
greater, 18%-20% return on average common equity and a
minimum productivity ratio of 160%. The productivity
ratio is defined as total revenue on a taxable equivalent
basis divided by noninterest expenses. These financial
goals are meant to serve as long-term objectives across
economic cycles.
Overview. Net income for 2003 totaled $404.8 million,
down 9% from $447.1 million earned in 2002, which
compared with $487.5 million earned in 2001. Diluted net
income per common share also decreased 9% to $1.80
from $1.97 in 2002, which was down 7% from $2.11 in
2001. The net income performance produced a return on
average common stockholders’ equity of 13.81% com-
pared with 16.20% in 2002 and 19.34% in 2001. The re-
turn on average assets was 1.04% in 2003 compared with
1.19% in 2002 and 1.37% in 2001. The productivity ratio
was 147% for 2003, 156% in 2002 and 163% in 2001.
Significant 2003 Events:
(cid:127) Northern Trust acquired the global passive
(cid:127)
equity, enhanced equity and passive fixed in-
come investment management business of
Deutsche Bank AG, adding $75 billion in
managed assets.
Improvement in equity markets in the second
half of the year, together with acquisitions and
net new business, resulted in a 2% increase in
trust fees, reversing the declining trend of the
prior year and first half of 2003.
(cid:127) Mortgage loan refinancing activity and the
continuing low interest rate environment re-
sulted in an 8% decline in net interest income.
(cid:127) Northern Trust took actions to strategically
position itself for future growth and to reduce
annualized operating costs by $75 million by
June 2004. These actions resulted in pre-tax
charges totaling $56.3 million in 2003.
(cid:127) Northern Trust sold its retirement consulting
and recordkeeping business incurring a loss on
sale of $20.2 million. The net loss in 2003
from this discontinued operation totaled
$18.5 million or $.09 per share.
(cid:127) Northern Trust closed or sold five PFS branch
locations that were not aligned with its strate-
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
gic focus, recognizing a gain on sale from the
Higgins Road location of $17.8 million.
(cid:127) Marked improvement in the already strong
credit quality of the loan portfolio resulted in a
$35.0 million reduction in the provision for
credit losses from the prior year.
(cid:127) Northern Trust entered the Atlanta market
with the acquisition of wealth management
firm Legacy South, Inc. and entered the
Northeast region with new offices in New York
City and Stamford, Connecticut.
Stockholders’ equity grew to $3.06 billion, as com-
pared with $3.0 billion at December 31, 2002 and $2.77
billion at December 31, 2001, primarily through the re-
tention of earnings, offset in part by the redemption of
preferred stock and repurchase of common stock pursuant
to the Corporation’s share buyback program.
In November 2003, the Board of Directors in-
creased the quarterly dividend per common share 12% to
$.19 for an annual rate of $.76. The Board’s action reflects
a policy of establishing the dividend rate commensurate
with profitability while retaining sufficient earnings to al-
low for strategic expansion and the maintenance of a
strong balance sheet and capital ratios. The dividend in-
crease is a reflection of the continued financial strength of
Northern Trust.
Noninterest Income. Noninterest income represented
72% of total taxable equivalent revenue in 2003 compared
with 69% in 2002 and 70% in 2001. Fees that are generated
from asset management, custody and related fiduciary
services are the largest component of revenues accounting
for 55% of Northern Trust’s 2003 revenue base. The com-
ponents of noninterest income and a discussion of sig-
nificant changes in balances during 2003 and 2002 follows.
(In Millions)
2003
2002
2001
Trust Fees
Foreign Exchange Trading Profits
Treasury Management Fees
Security Commissions and
Trading Income
Other Operating Income
Investment Security Gains
$1,189.1 $1,161.0 $1,190.8
139.8
86.4
109.6
95.6
106.4
96.3
54.8
93.1
—
42.9
57.8
.3
35.5
91.7
—
Total Noninterest Income
$1,542.2 $1,464.7 $1,544.2
Trust Fees. Trust fees accounted for 77% of total
noninterest income and 55% of total taxable equivalent
revenue in 2003. Trust fees for 2003 increased 2% to $1.19
billion from $1.16 billion in 2002, which was down 3%
from $1.19 billion in 2001. Over the past five years, trust
fees have increased at a compound growth rate of 8%. For
a more detailed discussion of trust fees, refer to the busi-
ness unit reporting section beginning on page 35. Total
trust assets under administration at December 31, 2003
were a record $2.2 trillion, up 43% from $1.50 trillion a
year ago, including $750.9 billion of global custody assets.
Trust assets under administration included managed assets
of $478.6 billion, including $76 billion related to acquis-
itions, up 58% from $302.5 billion at the end of 2002.
Trust fees are generally based on the market value
of assets managed and administered, the volume of trans-
actions, securities lending volume and spreads, and fees for
other services rendered. Certain investment management
fee arrangements also may provide for performance fees,
which are based on client portfolio returns exceeding pre-
determined levels. In addition, C&IS trust relationships are
generally priced to reflect earnings from activities such as
foreign exchange trading and custody-related deposits that
are not included in trust fees. Custody-related deposits
maintained with bank subsidiaries and foreign branches
are primarily interest-bearing and averaged $11.2 billion in
2003, $9.8 billion in 2002 and $9.3 billion in 2001.
($ In Billions)
Corporate & Institutional
Personal
Total Managed Trust Assets
Corporate & Institutional
Personal
December 31
Percent
Change
Five-Year
Compound
Growth Rate
2003
2002
2001
2000
1999
2003/02
$ 374.3
104.3
$ 214.8
87.7
$ 225.9
94.0
$ 227.5
98.1
$ 200.5
91.6
478.6
302.5
319.9
325.6
292.1
1,585.8
90.7
1,132.1
69.0
1,281.7
72.8
1,275.1
70.7
1,178.4
60.4
74%
19
58
40
31
40
19%
7
15
10
14
10
11%
Total Non-Managed Trust Assets
1,676.5
1,201.1
1,354.5
1,345.8
1,238.8
Consolidated Trust Assets Under
Administration
$2,155.1
$1,503.6
$1,674.4
$1,671.4
$1,530.9
43%
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
Foreign Exchange Trading Profits. Foreign ex-
change trading profits totaled $109.6 million, 3% higher
than $106.4 million reported in 2002, which in turn was
24% lower than the $139.8 million in 2001. Northern
Trust provides foreign exchange services in the normal
course of business as an integral part of its global custody
services. Active management of currency positions, within
conservative limits, also contributes to trading profits. The
current year foreign exchange results reflect increased
market volatility and increased client flows compared to
the prior year. The decline in profits in 2002 reflected
lower client volumes and reduced market volatility in the
major currencies.
Treasury Management Fees. The fee portion of
treasury management revenues totaled $95.6 million in
2003, a decrease of 1% from the $96.3 million reported in
2002 compared with $86.4 million in 2001.
Security Commissions and Trading Income.
Security commissions and trading income totaled $54.8
million in 2003, compared with $42.9 million in 2002 and
$35.5 million in 2001. This income is primarily generated
from securities brokerage services provided by Northern
Trust Securities, Inc. (NTSI). The 28% increase in 2003
primarily reflects higher revenue from security trades and
transition management services for institutional clients,
while the 21% increase in 2002 resulted primarily from
growth in securities brokerage activities.
Other Operating Income. The components of
other operating income were as follows:
(In Millions)
Loan Service Fees
Banking Service Fees
Losses from Equity Investments
Gain on Sale of Higgins Road Branch
Gain on Sale of Lockbox Operations
Other Income
2003
2002
2001
$24.0
31.6
(2.7)
17.8
—
22.4
$ 26.4
$23.1
26.3
29.8
(21.4) —
—
9.2
33.1
—
—
23.0
Total Other Operating Income
$93.1
$ 57.8
$91.7
Losses from equity investments in 2002 included a
$15.0 million write-off of an equity investment in myCFO,
Inc. and a $4.8 million write-off of an equity investment in
the Global Straight Through Processing Association in-
dustry utility. Other income in 2002 included gains of $8.5
million from the sale of leased equipment at the end of the
scheduled lease terms and a $4.6 million write-off of the
residual value of an aircraft leased to United Airlines. Ex-
cluding nonrecurring items, the remainder of the decrease
in other operating income in 2002 was primarily attribut-
able to lower levels of trust deposit-related revenues due to
lower interest rates, partially offset by higher loan service,
standby letter of credit, and banking-related fees.
Investment Security Gains. Net security gains
were zero in 2003. This compares with net gains of $.3 mil-
lion in 2002 and zero in 2001.
Net Interest Income. An analysis of net interest income, major balance sheet components impacting net interest income,
and related ratios are provided below.
₍₎
($ In Millions)
Interest Income
FTE Adjustment
Interest Income–FTE
Interest Expense
Net Interest Income–FTE Adjusted
Net Interest Income–Unadjusted
Average Balance
Earning Assets
Interest-Related Funds
Net Noninterest-Related Funds
Average Rate
Earning Assets
Interest-Related Funds
Interest Rate Spread
Total Source of Funds
Net Interest Margin
Refer to pages 98 and 99 for a detailed analysis of net interest income.
2003
2002
2001
2003/02
2002/01
Percent Change
$ 1,055.7
52.4
1,108.1
507.5
$
$
600.6
548.2
$34,788.2
29,434.8
5,353.4
$ 1,238.3
48.7
1,287.0
636.5
$
$
650.5
601.8
$33,622.0
28,196.4
5,425.6
$ 1,681.4
52.6
1,734.0
1,085.8
$
$
648.2
595.6
$32,041.8
26,924.6
5,117.2
(14.7)%
7.6
(13.9)
(20.3)
(7.7)%
(8.9)%
3.5 %
4.4
(1.3)
(26.4)%
(7.4)
(25.8)
(41.4)
.4 %
1.0 %
4.9 %
4.7
6.0
Change in Percentage
3.19%
1.72
1.47
1.46
1.73%
3.83%
2.26
1.57
1.90
1.93%
5.41%
4.03
1.38
3.39
2.02%
(.64)
(.54)
(.10)
(.44)
(.20)
(1.58)
(1.77)
.19
(1.49)
(.09)
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
Net Interest Income. Net interest income is defined as the
total of interest income and amortized fees on earning as-
sets, less interest expense on deposits and borrowed funds,
adjusted for the impact of off-balance sheet hedging activ-
ity. Earning assets, which consist of securities, loans and
money market assets, are financed by a large base of
interest-bearing funds, including retail deposits, wholesale
deposits, short-term borrowings, senior notes and long-
term debt. Earning assets are also funded by net
noninterest-related funds. Net noninterest-related funds
consist of demand deposits, the reserve for credit losses
and stockholders’ equity, reduced by nonearning assets in-
cluding cash and due from banks, items in process of
collection, buildings and equipment and other nonearning
assets. Variations in the level and mix of earning assets,
interest-bearing funds and net noninterest-related funds,
and their relative sensitivity to interest rate movements, are
the dominant factors affecting net interest income. In
addition, net interest income is impacted by the level of
nonperforming assets and client use of compensating de-
posit balances to pay for services.
Net interest income for 2003 was $548.2 million,
down 9% from $601.8 million in 2002, which was up 1%
from $595.6 million in 2001. When adjusted to a fully tax-
able equivalent (FTE) basis, yields on taxable, nontaxable
and partially taxable assets are comparable, although the
adjustment to a FTE basis has no impact on net income.
Net interest income on a FTE basis for 2003 was $600.6
million, a decline of 8% from $650.5 million in 2002 which
in turn was up slightly from $648.2 million in 2001. The
decrease in net interest income in 2003 is a result of a de-
cline in the net interest margin from 1.93% last year to
1.73% in the current year. The declining margin is a result
of the low interest rate environment experienced in the
past year. This environment has led to a high volume of
mortgage loan refinancing activity in 2003, which reduced
yields on this portfolio as loans were refinanced at gen-
erally lower interest rates. Further, the low interest rates
have reduced the value of noninterest-related funds and
compressed the spreads on short-term investing activities.
Earning assets averaged $34.8 billion, up 3% from
the $33.6 billion reported in 2002, which was up from
$32.0 billion in 2001. The growth in average earning as-
sets reflects a $1.2 billion increase in securities, while loans
and money market assets were virtually unchanged from a
year ago.
Loans averaged $17.5 billion compared with $17.6
billion last year. The change reflects an 11% decline in
average commercial loans to $3.8 billion, partially offset by
increases in both residential mortgages and personal loans.
Residential mortgages rose 2% to average $7.8 billion and
personal loans increased 9% to $2.4 billion. International
loans were unchanged from the prior year at $383 million.
The loan portfolio includes noninterest-bearing domestic
and international overnight advances related to processing
certain trust client investments, which averaged $512 mil-
lion in 2003, down from $673 million a year ago. Securities
averaged $8.4 billion in 2003, up 17% resulting primarily
from higher levels of U.S. agency securities. Money market
assets averaged $8.8 billion in both 2003 and 2002.
The increase in average earning assets of $1.2 bil-
lion was funded primarily through growth in interest-
bearing deposits and other interest-related funds. The
deposit growth was concentrated primarily in foreign of-
fice time deposits, up $770 million resulting from in-
creased global custody activity, and savings and money
market deposits, up $595 million. Partially offsetting these
increases were lower levels of personal and commercial
certificates of deposit and time deposits, down a combined
$311 million on average for the year.
Other interest-related funds averaged $10.2 billion,
up $184 million, principally from higher levels of federal
funds purchased and securities sold under agreements to
repurchase. Average net noninterest-related funds de-
creased slightly and averaged $5.4 billion, mainly due to
lower noninterest-bearing deposits. Stockholders’ equity
for the year averaged $3.0 billion, an increase of $108.9
million or 4% from 2002, principally due to the retention
of earnings, offset in part by the $120 million redemption
of all outstanding preferred stock and the repurchase of
over 2.8 million shares of common stock at a total cost of
$113.0 million pursuant to the Corporation’s share buy-
back program.
The net interest spread decreased to 1.47% in 2003
from 1.57% in 2002 while the net interest margin declined
by 20 basis points to 1.73%. The primary cause of the re-
duced spread and margin was the continual decline in the
yield on the residential mortgage loan portfolio due to the
impact of refinancing activity and a decline in the value of
noninterest-related funds. Also contributing to the current
year decline was the compression in spreads available on
U.S. agency securities and money market assets, resulting
from the static, low interest rate environment. For addi-
tional analysis of average balances and interest rate changes
affecting net interest income, refer to the Average State-
ment of Condition with Analysis of Net Interest Income
on pages 98 and 99.
Provision for Credit Losses. The provision for credit
losses of $2.5 million was $35.0 million lower than the
$37.5 million required in 2002, which was $29.0 million
lower than the $66.5 million provision in 2001. For a dis-
cussion of the reserve and provision for credit losses, refer
to pages 51 through 54.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
Noninterest Expenses. Noninterest expenses from
continuing operations for 2003 totaled $1.46 billion, up
$96.8 million or 7% from $1.36 billion in 2002, which was
up 1% from $1.35 billion in 2001. The components of
noninterest expenses and a discussion of significant changes
in balances during 2003 and 2002 is provided below.
(In Millions)
Compensation
Employee Benefits
Occupancy Expense
Equipment Expense
Other Operating Expenses
2003
2002
2001
$ 652.1
133.1
132.7
88.2
450.7
$ 629.6
125.5
101.8
85.0
418.1
$ 652.6
118.1
95.7
80.1
399.4
Total Noninterest Expenses
$1,456.8
$1,360.0
$1,345.9
Noninterest expenses in 2003 includes charges for
severance, office space and software retirements which to-
taled $56.3 million associated with Northern Trust’s
strategic business review. Expenses resulting from the ac-
quisitions of the passive asset management business and
the Atlanta-based private wealth management firm were
approximately $19.7 million. Northern Trust was able to
control expense growth in 2002 primarily through the
ongoing initiatives implemented by management in 2001
to reduce certain discretionary expenses. These initiatives
included closely monitoring staffing levels, limiting staff-
related and other discretionary expenses, and maintaining
the change that was made in 2001 to certain incentive
plans to include a stock option grant component in lieu of
cash. In addition, the adoption of new accounting
requirements in 2002 to eliminate goodwill amortization
costs reduced expenses by $9.9 million or $8.0 million
after-tax compared with 2001.
The productivity ratio, defined as total revenue on
a taxable equivalent basis divided by noninterest expenses,
was 147% for 2003, 156% in 2002 and 163% in 2001.
Compensation and Benefits. Compensation and
benefits, which represent 54% of total noninterest ex-
penses, increased 4% to $785.2 million in 2003 from
$755.1 million in 2002, which was 2% lower than $770.7
million in 2001. Included in the current year expense is
$20.6 million in severance-related costs. Compensation
costs, which are the largest component of noninterest ex-
penses, totaled $652.1 million, up $22.5 million from
$629.6 million a year ago, driven primarily by the sev-
erance charge and salary increases. The lower compensa-
tion level in 2002 compared with 2001 resulted from the
full-year impact of outsourcing lockbox services in the
third quarter of 2001 and lower performance-based pay
which offset salary increases and higher benefit costs.
Compensation levels in both 2002 and 2001 reflect the
impact on incentive plans of slower revenue growth, lower
investment portfolio performance, corporate earnings per-
formance and modifications made to certain cash incentive
plans. After adjusting for discontinued operations, staff on
a full-time equivalent basis averaged 8,400 in 2003, down
4% compared with 8,767 in 2002. The decline in average
staffing levels during 2003 reflects the second quarter
elimination of positions resulting from Northern Trust’s
strategic business review. Staff on a full-time equivalent
basis totaled 8,056 at December 31, 2003 compared with
8,681 at December 31, 2002, after adjusting for dis-
continued operations.
Employee benefit costs for 2003 totaled $133.1 mil-
lion, up $7.6 million or 6% from $125.5 million in 2002,
which was 6% higher than the $118.1 million in 2001. The
increase in 2003 employee benefits was primarily due to
higher pension plan accruals, offset by lower benefits in the
TIP and ESOP due to plan changes and lower corporate
performance. The 2002 increase compared with 2001 re-
flects higher payroll taxes, medical and dental plan costs,
and retirement plan benefits, which included higher bene-
fits associated with revisions made to the ESOP.
Occupancy Expense. Net occupancy expense to-
taled $132.7 million, up 30% or $30.9 million from $101.8
million in 2002, which was up 6% from $95.7 million in
2001. Included in the current year is the $18.9 million
charge associated with a reduction in required office space.
The remainder of the increase was the result of higher rent,
utilities and building maintenance costs, primarily result-
ing from the full year impact of an expansion in London
and from new offices in New York and Atlanta. The
principal components of the 2002 occupancy expense in-
crease were higher rent and the expansion and renovation
of existing offices, including the mid-year relocation of
London Branch staff to a new facility in the Canary Wharf
district. These increases were partially offset by lower real
estate taxes and utility costs.
Equipment Expense. Equipment expense, com-
prised of depreciation, rental and maintenance costs, to-
taled $88.2 million, up 4% from $85.0 million in 2002,
which was 6% higher than the $80.1 million in 2001. The
2003 and 2002 results reflect higher levels of depreciation
and maintenance of computer hardware and data line lease
costs, partly offset by lower costs for equipment main-
tenance and depreciation of personal computers.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
Other Operating Expenses. The components of
other operating expenses were as follows:
(In Millions)
Outside Services Purchased
Software Amortization & Other Costs
Business Promotion
Other Intangibles Amortization
Software Asset Retirements
Goodwill Amortization
Other Expenses
2003
2002
2001
$208.5 $187.5 $160.9
83.6
89.6
101.9
40.0
41.5
41.6
6.6
6.6
10.4
—
—
13.4
9.9
—
—
98.4
92.9
74.9
Total Other Operating Expenses
$450.7 $418.1 $399.4
Other operating expenses for 2003 totaled $450.7
million, up 8% from $418.1 million in 2002, which was up
5% from $399.4 million in 2001. Included in the current
year expenses is the previously disclosed software write-
downs of $13.4 million and outplacement benefit charges
of $3.4 million. The remainder of the increase from 2002 is
primarily attributable to acquisitions, technology invest-
ments that increased software amortization and other pro-
fessional fees. These increases were partially offset by lower
costs associated with operating risks related to servicing
and managing financial assets.
The higher expense level for 2002 compared with
2001 was due in part to higher costs associated with pro-
fessional services, software amortization, increased costs
associated with operating risks related to servicing and
managing financial assets, and other expenditures to sup-
port business growth. Higher professional services include
increased costs associated with payments made for receiv-
ables management and lockbox services. Partially offsetting
these increases was the adoption of new accounting
requirements in 2002 to eliminate goodwill amortization
costs, which reduced expenses by $9.9 million or $8.0 mil-
lion after-tax.
Provision for Income Taxes. The provision for income
taxes on continuing operations was $207.8 million in 2003
compared with $221.9 million in 2002 and $242.7 million
in 2001. The current year reflects a lower federal and state
income tax provision resulting primarily from the reduc-
tion in pre-tax earnings for the year. The effective tax rate
was 33% for all three years.
Northern Trust, under Chairman and Chief Executive Offi-
cer William A. Osborn, organizes around its two principal
client-focused business units, C&IS and PFS. Investment
management services and products are provided to the cli-
ents of these business units by NTGI. Operating and sys-
tems support is provided to each of the business units by
WWOT. Each of these four business units has a president
who reports to Mr. Osborn. For financial management
reporting purposes, the operations of NTGI and WWOT
are allocated to C&IS and PFS. Mr. Osborn has been
identified as the chief operating decision maker because he
has final authority over resource allocation decisions and
performance assessment.
C&IS and PFS results are presented in order to
promote a greater understanding of their financial
performance. The information, presented on an internal
management-reporting basis, is derived from internal ac-
counting systems that support the strategic objectives and
management structure. Management has developed ac-
counting systems to allocate revenue and expenses related
to each segment, as well as certain corporate support serv-
ices, worldwide operations and systems development ex-
penses. The management reporting systems also
incorporate processes for allocating assets, liabilities and
the applicable interest income and expense. Tier 1 and
tier 2 capital are allocated based on the federal risk-based
capital guidelines at a level that is consistent with Northern
Trust’s consolidated capital ratios, coupled with manage-
ment’s judgment of the operational risks inherent in the
business. Allocations of capital and certain corporate ex-
penses may not be representative of levels that would be
required if the segments were independent entities. The
accounting policies used for management reporting are the
same as those described in “Accounting Policies,” in the
Notes to Consolidated Financial Statements. Transfers of
income and expense items are recorded at cost; there is no
intercompany profit or loss on sales or transfers between
business units. Northern Trust’s presentations are not
necessarily consistent with similar information for other
financial institutions. For management reporting purposes,
certain corporate income and expense items are not allo-
cated to the business units and are presented as part of
“Treasury and Other.” These items include the impact of
long-term debt, preferred equity, holding company
investments, and certain corporate operating expenses.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
The following table summarizes the consolidated results of
operations of Northern Trust.
($ In Millions)
Noninterest Income
Trust Fees
Other
Net Interest Income (FTE)*
Provision for Credit Losses
Noninterest Expenses
Income before Income
Taxes*
Provision for Income Taxes*
Income from Continuing
Operations
Income (Loss) from
Discontinued
Operations
Reported Net Income
Goodwill, after Taxes
Adjusted Net Income
2003
2002
2001
$ 1,189.1
353.1
600.6
2.5
1,456.8
$ 1,161.0
303.7
650.5
37.5
1,360.0
$ 1,190.8
353.4
648.2
66.5
1,345.9
683.5
260.2
717.7
270.6
780.0
295.3
423.3
447.1
484.7
(18.5)
404.8
—
404.8
$
$
—
447.1
—
447.1
$
$
2.8
487.5
8.0
495.5
$
$
Percentage of Reported Net
Income Contribution
100%
100%
100%
Average Assets
$39,115.2
$37,596.7
$35,632.7
*Stated on a fully taxable equivalent basis (FTE). The consolidated figures
include $52.4 million, $48.7 million and $52.6 million of FTE adjustment
for 2003, 2002 and 2001, respectively.
Note: Certain reclassifications have been made to 2002 and 2001 financial
information to conform to the current year’s presentation.
Corporate and Institutional Services. The C&IS business
unit, under the direction of Frederick H. Waddell,
President—C&IS, is a leading worldwide provider of asset
management, administration and related services to
corporate and public entity retirement funds, foundations
and endowments, fund managers, insurance companies
and government funds. Asset management and admin-
istration services encompass a full range of state-of-the-art
capabilities including: worldwide master trust and master
custody, settlement and reporting; cash management; and
investment risk and analytical services. Trust and custody
relationships managed by C&IS often include asset
management, securities lending, transition management
and commission recapture services provided through the
NTGI business unit. In addition to asset management and
administration services, C&IS offers a full range of com-
mercial banking services through the Bank, placing special
emphasis on developing and supporting institutional rela-
tionships in two target markets: large domestic corpo-
rations and financial institutions (both domestic and
international). Institutional relationships include insurance
companies and trust services for domestic correspondent
banks. Treasury management services are provided to cor-
porations and financial institutions and include a variety of
other products and services to accelerate cash collections,
control disbursement outflows and generate information
to manage cash products. The following table summarizes
the results of operations of C&IS for the years ended
December 31, 2003, 2002 and 2001 on a management-
reporting basis.
($ In Millions)
Noninterest Income
Trust Fees
Other
Net Interest Income (FTE)
Provision for Credit Losses
Noninterest Expenses
Income before Income
Taxes
Provision for Income Taxes
Income from Continuing
Operations
Income (Loss) from
Discontinued
Operations
Reported Net Income
Goodwill, after Taxes
Adjusted Net Income
Percentage of Reported Net
Income Contribution
2003
2002
2001
$
$
$
590.3
231.0
155.5
(17.0)
675.8
318.0
123.4
553.2
228.6
171.6
26.1
625.8
301.5
117.0
574.1
262.1
189.1
49.2
619.8
356.3
138.2
194.6
184.5
218.1
(18.5)
176.1
—
176.1
$
$
—
184.5
—
184.5
$
$
2.8
220.9
3.1
224.0
$
$
44%
41%
45%
Average Assets
$17,132.0
$16,479.8
$17,086.6
Net income for C&IS decreased 5% in 2003 and
totaled $176.1 million compared with $184.5 million in
2002, which was down 16% from $220.9 million in 2001.
Included in the above are the operating results of Northern
Trust Retirement Consulting, L.L.C. (NTRC) that have
been reclassified and shown as discontinued operations for
all periods presented. In addition to the $20.2 million pre-
tax loss on the sale ($12.3 million after tax), NTRC in-
curred a net loss from operations of $6.2 million in 2003
compared with breakeven results in 2002 and net income
of $2.8 million in 2001. Income from continuing oper-
ations increased 5% to $194.6 million over the prior year
resulting primarily from higher trust fees and a lower
provision for credit losses. The decline in net income for
2002 was driven primarily by lower trust fees and foreign
exchange trading profits.
C&IS Trust Fees. C&IS trust fees are attributable to
four general product types: Custody Services, Investment
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
Management, Securities Lending, and Other Services. Cus-
tody services are priced, in general, using asset values at the
beginning of the quarter. There are, however, fees within
custody services that are not related to asset values, but in-
stead are based on transaction volumes or account fees.
Investment management fees are primarily based on the
current quarter market values. Securities lending revenue
is impacted by market values and the demand for securities
to be lent, which drives volumes, and the interest rate
spread earned on the investment of cash deposited by in-
vestment firms as collateral for securities they have bor-
rowed. The other services fee category in C&IS includes
such products as benefit payment, performance analysis,
electronic delivery, and other services. Revenues from
these products are generally based on the volume of serv-
ices provided or a fixed fee.
Trust fees in C&IS increased 7% in 2003 to $590.3
million from $553.2 million in 2002, which was down 4%
from $574.1 million in 2001. The components of trust fees
summarized both on a product and on a market basis and
a breakdown of trust assets by market follows.
(In Millions)
Custody Services
Investment Management
Securities Lending
Other Services
Total Trust Fees
2003
$ 227.1
210.3
98.6
54.3
$ 590.3
2002
$ 218.6
185.4
100.0
49.2
$ 553.2
2001
$ 214.0
182.4
135.7
42.0
$ 574.1
(In Millions)
Domestic
Retirement Plans
Institutional
International
Total Trust Fees
2003
2002
2001
$ 287.0
130.1
173.2
$ 590.3
$ 279.7
117.0
156.5
$ 553.2
$ 299.6
115.2
159.3
$ 574.1
(In Billions)
Domestic
December 31
2003
2002
2001
Retirement Plans
Institutional
International
Securities Lending/Other
Total Trust Assets
$ 901.5
330.4
589.4
138.8
$1,960.1
$ 591.4
271.7
391.7
92.1
$1,346.9
$ 772.2
268.4
372.1
94.9
$1,507.6
(In Billions)
Domestic
Retirement Plans
Institutional
International
Securities Lending/Other
Total Trust Assets
December 31
2003
2002
2001
$156.9
34.0
44.6
138.8
$374.3
$ 78.8
26.3
17.6
92.1
$214.8
$ 82.2
24.3
24.5
94.9
$225.9
The improvement in C&IS trust fees resulted pri-
marily from higher levels of asset management and cus-
tody fees and included approximately $22.9 million in
fees resulting from the acquisition of the passive asset
management business. Custody fees totaled $227.1 million
for the year compared with $218.6 million a year ago, re-
flecting strong growth in global custody fees. Fees from
asset management totaled $210.3 million, which include
$17.5 million in fees relating to the acquired passive asset
management business, compared with $185.4 million in
the year-ago period. Securities lending fees totaled $98.6
million compared with $100.0 million last year, reflecting
reduced spreads earned on the investment of collateral
resulting from low short-term interest rates, partially offset
by higher lending volumes.
C&IS trust assets under administration totaled
$1.96 trillion at December 31, 2003, 46% higher than $1.35
trillion at December 31, 2002. Included in C&IS assets
administered are those for which Northern Trust has
management responsibility. Managed assets totaled $374.3
billion and $214.8 billion at December 31, 2003 and 2002,
respectively, and as of the current year-end were invested
39% in equity securities, 15% in fixed income securities
and 46% in cash and other assets. The level of assets under
management invested in equity securities was up from
24% in the previous year resulting from the acquisition of
the passive asset management business. The cash and other
assets that have been deposited by investment firms as col-
lateral for securities they have borrowed from trust clients
are invested by Northern Trust and are included in trust
assets under administration as managed assets. The
collateral totaled $132.5 billion and $89.0 billion at
December 31, 2003 and 2002, respectively.
New recurring C&IS business sold and transi-
tioned net of lost business in 2003 reached record levels
and represented approximately $68 million in annualized
trust fees, compared with $43 million in 2002, reflecting
improved business activity and market conditions. The
prior year level of net new business sold also reflects the
loss of two large custody clients through the periodic
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
rebidding process and the loss of several clients due to
mergers and acquisitions. Approximately 49% of the new
2003 business sold came from existing clients and 51%
from new relationships.
C&IS Other Noninterest Income. Other non-
interest income in 2003 increased 1% from the prior year
primarily due to a 3% increase in foreign exchange trading
profits. The decline in other noninterest income in 2002
resulted primarily from lower levels of foreign exchange
trading profits and trust deposit-related revenues. These
were partially offset by a 9% increase in treasury manage-
ment fees, higher levels of loan service and letter of credit
fees, and an increase in gains on the sale of lease residuals.
The 2001 results included a $9.2 million nonrecurring
gain on the sale of an 80% interest in Northern Trust’s
lockbox operations.
C&IS Net Interest Income. Net interest income
decreased 9% in 2003 primarily resulting from a decrease
in the net interest margin of 15 basis points to 1.04% on
average earning assets of $15.0 billion. While average earn-
ing assets were $563 million or 4% higher than a year ago,
the mix of assets changed with average loan balances de-
creasing $501 million and short-term money market assets
increasing nearly $1.1 billion. The shift of balances from
loans to lower-rate money market assets compressed both
the net interest spread and margin. Net interest income for
2002 decreased 9% from the previous year, driven by lower
average earning assets concentrated in the loan portfolio,
and a decrease in the net interest margin to 1.19% from
1.25% in 2001. The provision for credit losses was a neg-
ative $17.0 million for 2003, resulting from improved
credit quality brought about primarily by cash payments
received on loans rated internally in the two lowest credit
categories, which require higher reserve levels. The prior
year’s provision level reflects adverse results of the 2002
industry-wide Shared National Credit review conducted by
banking regulators. The higher provision for credit losses
in 2001 was associated primarily with charge-offs taken on
Enron-related credits and additional provisions necessary
on credits to clients with exposure to asbestos claims.
C&IS Noninterest Expenses. Total noninterest
expenses of C&IS, which include both the direct expenses
of the business unit and indirect expense allocations from
NTGI and WWOT for product and operating support,
increased 8% in 2003 and 1% in 2002. The growth in ex-
penses for 2003 reflects severance charges and costs asso-
ciated with software retirements. The higher expense level
also reflects costs associated with technology investments
and higher operating costs to support business growth.
The 2002 expenses reflect increased costs associated with
payments made for receivables management and lockbox
services, technology investments, relocation of London
Branch staff to Canary Wharf and higher operating costs to
support business growth. Partially offsetting the impact of
this expense growth were lower levels of performance-
based compensation and the impact of adopting new ac-
counting requirements in 2002 to eliminate goodwill
amortization costs.
Personal Financial Services. The PFS business unit, under
the direction of William L. Morrison, President—PFS,
provides personal trust, custody and investment manage-
ment services; individual retirement accounts; guardian-
ship and estate administration; banking (including private
banking); and residential mortgage lending. PFS focuses
on high net worth individuals, executives, retirees and
small/mid-size businesses in each banking subsidiary’s tar-
get market.
Northern Trust has positioned itself in markets
having significant concentrations of wealth and growth
potential. During the year, Northern Trust entered the
Atlanta market with the acquisition of the wealth
management firm Legacy South, Inc. A strong foothold in
the Northeast corridor was also established with the July
opening of the New York City office, followed by the De-
cember opening of the Stamford, Connecticut office.
Northern Trust continued to invest in private client offices
in existing markets by building new facilities and by ex-
panding, remodeling and relocating existing offices. The
Personal Financial Services unique office network includes
82 locations in 15 states. PFS also includes the Wealth
Management Group, which provides customized products
and services to meet the complex financial needs of fami-
lies and individuals in the United States and throughout
the world with assets typically exceeding $75 million.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
The following table summarizes the results of oper-
ations of PFS for the years ended December 31, 2003, 2002
and 2001 on a management-reporting basis.
($ In Millions)
Noninterest Income
Trust Fees
Other
Net Interest Income (FTE)
Provision for Credit Losses
Noninterest Expenses
Income before Income
Taxes
Provision for Income Taxes
Reported Net Income
Goodwill, after Taxes
Adjusted Net Income
Percentage of Reported Net
Income Contribution
2003
2002
2001
$
$
$
598.8
115.2
436.8
19.5
720.7
410.6
157.7
252.9
—
252.9
$
$
$
607.8
76.0
443.6
11.4
702.6
413.4
159.0
254.4
—
254.4
$
$
$
616.7
84.7
438.9
17.3
690.1
432.9
167.5
265.4
4.9
270.3
62%
57%
54%
Average Assets
$15,868.4
$15,445.2
$15,041.2
PFS net income totaled $252.9 million in 2003, a
decrease of 1% from 2002, which in turn was 4% below the
net income achieved in 2001. Revenue growth of 2% com-
bined with a 3% increase in operating expenses and a
higher provision for credit losses, contributed to the rela-
tively flat year-to-year performance. The decline in 2002
earnings was attributed primarily to the continued decline
in the equity markets, combined with a 2% increase in
expenses, partly offset by a decrease in the provision for
credit losses.
PFS Trust Fees. A summary of trust fees and trust
assets by state and for Wealth Management follows.
(In Millions)
Illinois
Florida
California
Arizona
Texas
Other States
Wealth Management
Total Trust Fees
2003
$210.8
157.3
69.4
35.5
24.1
32.2
69.5
$598.8
2002
$212.1
163.2
70.2
37.6
25.1
24.8
74.8
$607.8
2001
$217.1
174.2
72.0
38.5
25.0
19.2
70.7
$616.7
(In Billions)
Illinois
Florida
California
Arizona
Texas
Other States
Wealth Management
Total Trust Assets
December 31
2003
$ 43.8
27.6
13.9
6.2
4.8
13.8
84.9
$195.0
2002
$ 34.9
24.8
11.4
5.5
4.3
10.7
65.1
$156.7
(In Billions)
Illinois
Florida
California
Arizona
Texas
Other States
Wealth Management
Total Trust Assets
December 31
2003
$ 33.6
23.6
9.4
4.7
3.2
12.8
17.0
$104.3
2002
$ 26.9
21.5
7.9
4.2
3.0
9.8
14.4
$ 87.7
2001
$ 39.8
28.6
12.3
5.8
4.8
10.6
64.9
$166.8
2001
$ 29.7
24.9
8.5
4.2
3.3
9.5
13.9
$ 94.0
Fees in the majority of the states that PFS operates
in are billed quarterly based on the beginning of the quar-
ter market value. Fees in Florida and California and all
mutual fund-related revenue are priced based on market
values throughout the current quarter. PFS trust fees to-
taled $598.8 million for the year, compared with $607.8
million in 2002 and $616.7 million in 2001. The current
year performance was impacted by equity markets, the
average performance of which was lower in 2003 than in
2002, partially offset by net new business. Net new recur-
ring PFS business sold and transitioned in 2003 totaled
approximately $31 million in annualized trust fees, down
from $41 million in 2002. The poor equity market con-
ditions in the first half of the year together with weak in-
vestor confidence slowed new business activity during 2003.
At December 31, 2003, trust assets under admin-
istration in PFS totaled $195.0 billion, compared with
$156.7 billion at December 31, 2002. Included in assets
administered are those for which Northern Trust has
management responsibility. Managed assets totaled $104.3
billion at December 31, 2003 and were invested 50% in
equity securities, 36% in fixed income securities and 14%
in cash and other assets.
PFS Other Noninterest Income. Other noninterest
income for 2003 increased 52% or $39.2 million compared
with the prior year and included the $17.8 million gain
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
from the sale of the Higgins Road retail branch assets. The
previous year results reflect the $15.0 million write-off of
the investment in myCFO, Inc. The remainder of the in-
crease is attributed to higher treasury management and
other banking-related fees.
PFS Net Interest Income of $436.8 million was 2%
lower than the previous year. Average loan volume grew
$421.2 million or 3% concentrated primarily in residential
real estate and personal loans. The net interest margin
continued to be under pressure due to the impact of re-
financing activity in the residential mortgage loan portfo-
lio, falling to 2.89% from 3.01% in 2002. Driven primarily
by growth in residential real estate lending, net interest
income increased 1% in 2002, relative to 2001 and totaled
$443.6 million. The 2003 provision for credit losses reflects
deterioration in certain commercial loans that required
higher specific reserve allocations.
PFS Noninterest Expenses. PFS noninterest ex-
penses, which include both the direct expenses of the
business unit and indirect expense allocations from NTGI
and WWOT for product and operating support, increased
3% in 2003 and 2% in 2002. The increase in 2003 expenses
primarily reflects severance charges and costs associated
with the retirement of software, higher employee benefit
charges, legal and other professional services, in addition
to increased occupancy costs resulting from the remodel-
ing and expansion of existing locations. Partially offsetting
these increases were lower levels of costs associated with
operating risk related to servicing and managing financial
assets. The increase in 2002 expenses primarily reflects
merit increases, higher employee benefit charges, costs
associated with operating risks related to servicing and
managing financial assets and higher operating expenses to
support business growth. These costs were partially offset
by a reduction in performance-based compensation and
the impact of adopting new accounting requirements in
2002 to eliminate goodwill amortization costs.
Northern Trust Global Investments. The NTGI business
unit, under the direction of Terence J. Toth, President—
NTGI, provides a broad range of investment management
and related services and other products to domestic and
international clients of C&IS and PFS through various
subsidiaries of the Corporation. Clients include institu-
tional and individual separately managed accounts, bank
common and collective funds, registered investment com-
panies, non-U.S. collective investment funds and un-
registered private investment funds, including funds of
funds. NTGI offers both active and passive equity and
fixed income portfolio management, as well as traditional
multi-manager products and services. NTGI’s activities
also encompass brokerage, securities lending and related
services. NTGI’s international business operates through
subsidiaries, joint ventures, alliances and distribution ar-
rangements in Canada, France, Germany, Ireland, Italy,
Japan, the United Kingdom and the Cayman Islands. The
revenues and expenses of this business unit are fully allo-
cated to C&IS and PFS.
NTGI’s strategic focus on investment manage-
ment, branding, product management, distribution and
client servicing helped drive Northern Trust’s continued
growth in new business. Northern Trust continued to
achieve solid investment results across asset classes. For
example, 25 of 51 eligible mutual funds advised by North-
ern Trust were ranked in the top two quintiles for 2003
investment performance by Lipper Analytical Services.
Similarly, 19 of 39 eligible Northern-managed mutual
funds, were rated as 4- or 5-star overall by Morningstar.
In 2003, Northern Trust substantially completed its
acquisition of Deutsche Bank AG’s global passive equity,
enhanced equity and passive fixed income investment
management businesses. With this acquisition, at year-end
2003, assets under management associated with the global
index and enhanced index business totaled approximately
$166 billion.
At year-end, Northern Trust managed $478.6 bil-
lion in trust assets for personal and institutional clients, a
new record, up 58% from $302.5 billion at year-end 2002.
The increase in trust assets is attributable to improving
equity markets, strong new business, and acquisitions.
Trust assets under management have grown at a five-year
compound annual rate of 15.5%.
Worldwide Operations and Technology. The WWOT
business unit, under the direction of Timothy J. Theriault,
President—WWOT, supports all of Northern Trust’s
business activities, including the processing and product
management activities of C&IS, PFS and NTGI. These ac-
tivities are conducted principally in the operations and
technology centers in Chicago and London. The Northern
Trust Company of New York is also part of this unit.
Treasury and Other. The Financial Management Group,
under the direction of Steven L. Fradkin, Executive Vice
President and Chief Financial Officer, includes the Treas-
ury, Corporate Controller, Corporate Treasurer, Corpo-
rate Development, Investor Relations and Strategic
Sourcing functions. Treasury is responsible for managing
the Bank’s wholesale funding, capital position and interest
rate risk, as well as the portfolio of interest rate risk man-
agement instruments under the direction of the Corporate
Asset and Liability Policy Committee. Treasury is also re-
sponsible for the investment portfolios of the Corporation
and the Bank and provides investment advice and
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
management services to the subsidiary banks. “Other”
corporate income and expenses represent items that are
not allocated to the business units and generally represent
certain nonrecurring items and certain executive level
compensation.
The following table summarizes the results of
operations of Treasury and Other for the years ended
December 31, 2003, 2002 and 2001 on a management-
reporting basis.
($ In Millions)
Noninterest Income
Trust Fees
Other
Net Interest Income (FTE)
Provision for Credit Losses
Noninterest Expenses
Income (Loss) before
Income Taxes
Benefit for Income Taxes
Reported Net Income
2003
2002
2001
$ — $ — $ —
6.6
20.2
—
36.0
(.9)
35.3
—
31.6
6.9
8.3
—
60.3
(45.1)
20.9
2.8
5.4
(9.2)
10.4
(Loss)
$ (24.2)
$
8.2
$
1.2
Percentage of Reported Net
Income Contribution
(6)%
2%
1%
Average Assets
$6,114.8
$5,671.7
$3,504.9
The increase in other noninterest income is primar-
ily due to the prior year $4.8 million write-off of the
investment in the Global Straight Through Processing
Association industry utility. Net interest income for 2003
was $8.3 million compared with $35.3 million in the prior
year. The decline in net interest income resulted from the
decrease in the net interest margin, due in large part to a
decline in the yield on the residential mortgage loan
portfolio resulting from refinancing activity. In addition,
low interest rates compressed the spreads on short-term
investing activity conducted by the Treasury Department.
The improvement in net interest income in 2002 was pri-
marily the result of lower interest rates, which reduced the
funding costs allocated to corporate centers.
Noninterest expenses totaled $60.3 million for
2003 and included charges associated with the reduction in
leased office space. Also contributing to the increase were
higher costs associated with insurance, professional serv-
ices, and stock-related directors fees due to the increase in
the value of Northern Trust Corporation’s common stock.
Expenses in 2002 were 12% lower than 2001. Increases in
expenses incurred for professional services were more than
offset by a reduction in the cost for certain executive level
compensation plans.
Risk Management Group. Headed by Perry R. Pero, Vice
Chairman and Head of Corporate Risk Management, the
Risk Management Group includes the Credit Policy and
Corporate Risk Management functions. The Credit Policy
function is described in the “Loans and Other Extensions
of Credit” section on page 46 . The Corporate Risk
Management function monitors, measures and manages
non-credit risks across the businesses of the Corporation
and its subsidiaries. Corporate Risk Management also in-
cludes the Economic Research function.
The use of estimates and assumptions is required in the
preparation of financial statements in conformity with
generally accepted accounting principles and actual results
could differ from those estimates. The Securities and Ex-
change Commission has issued guidance and proposed
rules relating to the disclosure of critical accounting poli-
cies. Critical accounting policies are those that require
management to make subjective or complex judgments
about the effect of matters that are inherently uncertain
and may change in subsequent periods. Changes that may
be required in the underlying assumptions or estimates in
these areas could have a material impact on Northern
Trust’s future financial condition and results of operations.
For Northern Trust, accounting policies that are
viewed as critical are those relating to reserving for credit
losses, pension plan accounting, and estimating useful lives
of purchased and internally developed software. Because of
their critical nature, management has discussed the devel-
opment and selection of each critical accounting estimate
with the Audit Committee of the Board of Directors.
Reserve for Credit Losses. The reserve for credit losses
represents management’s estimate of probable inherent
losses that have occurred as of the date of the financial
statements. The loan and lease portfolio and other credit
exposures are regularly reviewed to evaluate the adequacy
of the reserve for credit losses. In determining the level of
the reserve, Northern Trust evaluates the reserve necessary
for specific nonperforming loans and also estimates losses
inherent in other credit exposures. The result is a reserve
with the following components:
Specific Reserve. The amount of specific reserves is
determined through a loan-by-loan analysis of non-
performing loans that considers expected future cash
flows, the value of collateral and other factors that may
impact the borrower’s ability to pay.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
Allocated Inherent Reserve. The amount of the
allocated portion of the inherent loss reserve is based on
loss factors assigned to Northern Trust’s credit exposures
based on internal credit ratings. These loss factors are pri-
marily based on management’s judgment of estimated
credit losses inherent in the loan portfolio as well as histor-
ical charge-off experience. The Credit Policy Group de-
termines credit ratings at the time each loan is approved.
These credit ratings are then subject to periodic reviews by
the Credit Policy Group, which is independent of business
unit management. Credit Policy makes the final determi-
nation of each loan’s rating. Credit ratings range from “1”
for the strongest credits to “9” for the weakest credits; a “9”
rated loan would normally represent a complete loss.
Unallocated Inherent Reserve. Management de-
termines the unallocated portion of the inherent loss re-
serve based on factors that cannot be associated with a
specific credit or loan category. These factors include
management’s subjective evaluation of local and national
economic and business conditions, portfolio concentration
and changes in the character and size of the loan portfolio.
The unallocated portion of the inherent loss reserve re-
flects management’s attempt to ensure that the overall re-
serve appropriately reflects a margin for the imprecision
necessarily inherent in estimates of expected credit losses.
Loans, leases and other extensions of credit
deemed uncollectible are charged to the reserve. Sub-
sequent recoveries, if any, are credited to the reserve. The
related provision for credit losses, which is charged to in-
come, is the amount necessary to adjust the reserve to the
level determined through the above process. Actual losses
may vary from current estimates and the amount of the
provision may be either greater than or less than actual net
charge-offs.
The control process maintained by Credit Policy
and the lending staff, and the quarterly analysis of specific
and inherent loss components are the principal methods
relied upon by management to ensure that changes in
estimated credit loss levels are adjusted on a timely basis.
In addition to Northern Trust’s own experience, manage-
ment also considers the experience of peer institutions and
regulatory guidance.
Management’s estimates utilized in establishing an
adequate reserve for credit losses are not dependent on any
single assumption. Management evaluates numerous
variables, many of which are interrelated or dependent on
other assumptions and estimates, in determining reserve
adequacy. Due to the inherent imprecision in accounting
estimates, other estimates or assumptions could reasonably
have been used in the current period and changes in esti-
mates are reasonably likely to occur from period to period.
However, management believes that the established reserve
for credit losses appropriately addresses these uncertainties
and is adequate to cover probable inherent losses which
have occurred as of the date of the financial statements.
Pension Plan Accounting. As summarized in Note 21 to
the consolidated financial statements, Northern Trust
maintains a noncontributory defined benefit pension plan
covering substantially all domestic employees. Measuring
cost and reporting liabilities resulting from defined benefit
pension plans requires the use of several assumptions re-
garding future interest rates, asset returns, compensation
increases and other actuarial-based projections relating to
the plan. Due to the long-term nature of this obligation
and the estimates that are required to be made, the
assumptions used in determining the periodic pension
expense and the projected pension obligation are closely
monitored and annually reviewed for adjustments that
may be required. Under generally accepted accounting
principles, differences between these estimates and actual
experience are required to be amortized over the future
working lifetime of eligible participants. As a result, these
differences are not recognized as they occur but are recog-
nized systematically and gradually over subsequent
periods.
Northern Trust recognizes the significant impact
that these pension-related assumptions have on the
determination of the pension obligations and related ex-
pense and has established procedures for monitoring and
setting these assumptions each year. These procedures in-
clude an annual review of actual demographic and
investment experience with the pension plan’s actuaries. In
addition to actual experience, adjustments to these
assumptions consider published interest rate indices,
known compensation trends and policies and economic
conditions that may impact the estimated long-term rate
of return on plan assets.
In determining the pension expense in 2003,
Northern Trust utilized a discount rate of 6.75% for the
Qualified Plan and 5.50% for the Nonqualified Plan. The
rate of increase in the compensation level is based on a
sliding scale that averaged 3.60%. This rate reflects a 140
basis point reduction in the compensation rate assumption
from the prior year to recognize a 75 basis point reduction
for inflation and an additional 65 basis point reduction
due to the temporary effect of modifying the pension plan
compensation assumption for a three-year period. The
expected long-term rate of return on Qualified Plan assets
was 8.75%. In order to provide an understanding of the
sensitivity of these assumptions on the periodic pension
expense and projected benefit obligation, the following
table is presented to show the effect of increasing or
decreasing each of these assumptions by 25 basis points.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
(In Millions)
Increase (Decrease) of 2003 Pension
Expense
Discount Rate Change
Compensation Level Change
Rate of Return on Asset
Change
Increase (Decrease) of Projected
Benefit Obligation
Discount Rate Change
Compensation Level Change
(15.2)
5.1
25 Basis
Point
Increase
25 Basis
Point
Decrease
(2.2)
1.3
(.8)
2.8
(.9)
.8
16.4
(3.7)
In evaluating possible revisions to pension-related
assumptions as of Northern Trust’s September 30, 2003
measurement date, the following events were considered:
Discount Rate: Northern Trust utilizes the
Moody’s AA Corporate Bond rate in establishing the dis-
count rate for the Qualified Plan. Since this benchmark
rate fell approximately 65 basis points, Northern Trust
lowered the discount rate for the Qualified Plan from
6.75% to 6.00%. The reference rate for establishing the
discount rate for the Nonqualified Plan is the long-term
treasury bond rate. Historically, long-term treasury bond
rates have fallen short of Corporate Bond rates by about
50 basis points. For this reason, Northern Trust elected to
maintain the discount rate for the Nonqualified Plan at
5.50% or 50 basis points below the Qualified Plan dis-
count rate.
Compensation Level: No changes were recom-
mended to the compensation scale assumption in the cur-
rent year.
Rate of Return on Plan Assets: The expected return
on plan assets is based on an estimate of the long-term rate
of return on plan assets. Accounting guidance requires this
assumption be reviewed every three to five years. In 2002,
Northern Trust’s Employee Benefit Committee completed
an in-depth Pension Asset and Liability Modeling study.
Based on the asset allocation recommended, the weighted
average expected return for each asset class was de-
termined, which resulted in a recommendation to set the
expected rate of return at 8.75%. As a result of the reduc-
tion in head count that occurred in 2003, the asset mix for
the Pension Plan was re-evaluated by the Employee Benefit
Committee. Based on this review, it was determined that
no changes were required in the recommended asset
model or long-term rate of return assumption.
As a result of the pension-related assumptions
currently utilized and other actuarial experiences of the
qualified and nonqualified plans, the estimated pension
expense is expected to increase by approximately $8.0
million in 2004.
Purchased and Internally Developed Software. A sig-
nificant portion of Northern Trust’s products and services
are dependent on complex and sophisticated computer
systems based primarily on purchased and internally
developed software programs. Under Northern Trust’s
accounting policy, purchased software and other allowable
internal costs, including compensation, relating to soft-
ware developed for internal use are capitalized. Capitalized
software is then amortized over its estimated useful life
ranging from 3 to 10 years. Northern Trust believes that
the accounting estimate relating to the determination and
ongoing review of the estimated useful lives of capitalized
software is a critical accounting policy. Northern Trust has
this view because rapidly changing technology can un-
expectedly change software functionality, resulting in a
significant change in the useful life, including a complete
write-off of software applications. In addition, product
changes can also render existing software obsolete requir-
ing a write-off of the carrying value of the asset.
In order to address this risk, Northern Trust’s ac-
counting procedures require a quarterly review of all soft-
ware applications to confirm the reasonableness of asset
book values and remaining useful lives. Required adjust-
ments if any, which may result from this process are re-
viewed by senior management. At December 31, 2003,
capitalized software totaled $354.8 million and software
amortization in 2003 totaled $93.7 million, which included
$13.4 million in software write-downs primarily resulting
from a detailed strategic business review.
Information related to new accounting pronouncements
adopted during 2003 is contained in Footnote 2, “Recent
Accounting Pronouncements,” on page 67.
Northern Trust’s Management Committee reviews and
approves proposed significant capital expenditures. This
process is designed to assure that the major projects to
which Northern Trust commits its resources produce
benefits compatible with corporate strategic goals.
Capital expenditures in 2003 included ongoing
enhancements to Northern Trust’s hardware and software
capabilities and expansion or renovation in several exist-
ing offices. Capital expenditures for 2003 totaled $180.3
million, of which $98.4 million was for software, $22.1
million was for building and leasehold improvements,
$50.4 million for computer hardware and machinery and
$9.4 million for furnishings. These capital expenditures
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
are designed principally to support and enhance the trans-
action processing, investment management and securities
handling capability of the trust and banking businesses, as
well as relationship management and client interaction.
Additional capital expenditures planned for systems tech-
nology will result in future expenses for the depreciation
of hardware and amortization of software. Depreciation
and software amortization associated with these capital
expenditures are charged to equipment and other operat-
ing expenses, respectively. The unamortized capitalized
cost of corporate-wide software development projects as
of December 31, 2003 was $354.8 million, compared with
$371.1 million at the previous year-end.
-
Trust Assets. Northern Trust, in the normal course of
business, holds trust assets under administration and un-
der management in a fiduciary or agency capacity for its
clients. In accordance with accounting principles generally
accepted in the United States, these assets are not assets of
Northern Trust and are not included in its consolidated
balance sheet.
Financial Guarantees. Northern Trust issues financial
guarantees in the form of standby letters of credit to meet
the liquidity and credit enhancement needs of its clients.
Standby letters of credit obligate Northern Trust to meet
certain financial obligations of its clients, if, under the con-
tractual terms of the agreement, the clients are unable to
do so. These instruments are primarily issued to support
public and private financial commitments, including
commercial paper, bond financing, initial margin require-
ments on futures exchanges and similar transactions.
Credit risk is the principal risk associated with
these instruments. The contractual amounts of these
instruments represent the credit risk should the instru-
ment be fully drawn upon and the client defaults. To con-
trol the credit risk associated with issuing letters of credit,
Northern Trust subjects such activities to the same credit
quality and monitoring controls as its lending activities.
Certain standby letters of credit have been secured with
cash deposits or participated to others. Northern Trust is
obligated to meet the entire financial obligation of these
agreements and in certain cases is able to recover the
amounts paid through recourse against cash deposits or
other participants. Subsequent to its adoption in
January 2003 of FASB Interpretation No. 45, “Guarantor’s
Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others,”
Northern Trust records a liability on its consolidated bal-
ance sheet reflecting the obligation it has undertaken in
issuing standby letters of credit. Northern Trust’s recorded
liability for standby letters of credit, measured at the esti-
mated fair value of these instruments, totaled $4.4 million
at December 31, 2003.
The following table shows the contractual amounts
of standby letters of credit.
(In Millions)
Standby Letters of Credit:
Corporate
Industrial Revenue
Other
Total Standby Letters of Credit*
December 31
2003
2002
$ 617.6
1,286.5
617.2
$2,521.3
$ 683.8
1,353.1
491.7
$2,528.6
*These amounts include $271.1 million and $256.3 million of standby
letters of credit secured by cash deposits or participated to others as of
December 31, 2003 and 2002, respectively. The weighted average maturity
of standby letters of credit was 20 months at December 31, 2003 and
December 31, 2002.
Variable Interests. In 1997, Northern Trust issued $150
million of Floating Rate Capital Securities, Series A, and
$120 million of Floating Rate Capital Securities, Series B,
through statutory business trusts wholly-owned by the
Corporation (“NTC Capital I” and “NTC Capital II”,
respectively). The sole assets of the trusts are Subordinated
Debentures of Northern Trust Corporation that have the
same interest rates and maturity dates as the correspond-
ing distribution rates and redemption dates of the Floating
Rate Capital Securities.
The outstanding principal amount of the Sub-
ordinated Debentures, net of discount, held by the trusts
totaled $276.2 million as of December 31, 2003. The book
value of the Series A and Series B Securities totaled $267.9
million as of December 31, 2003. Both Series A and B
Securities qualify as tier 1 capital for regulatory purposes.
Effective with its adoption of FASB revised Inter-
pretation No. 46 (FIN 46) in December 2003, the Corpo-
ration deconsolidated the trusts which issued the Floating
Rate Capital Securities. The impact of deconsolidating the
trusts was an increase in long-term debt of $8.3 million as
of December 31, 2003, as the Corporation now records the
outstanding balances of the Subordinated Debentures on
its consolidated balance sheet. Previous to this change, the
Corporation recorded the outstanding balances of the Ser-
ies A and B Securities on its consolidated balance sheet and
the Subordinated Debentures were eliminated in con-
solidation as intercompany balances. The Federal Reserve
Board issued a supervisory letter in July 2003 indicating
that securities such as the Series A and B Securities would
continue to qualify as tier 1 capital for regulatory pur-
poses until further notice and that it would continue to
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
review the regulatory implications of any accounting
treatment changes and provide further guidance, if needed.
Northern Trust has interests in other variable inter-
est entities as defined by FIN 46; however, Northern Trust
is not considered the primary beneficiary of these entities
and the interests in these entities do not have a material
impact on Northern Trust’s consolidated financial position
or results of operations.
Liquidity Risk Management. The objectives of liquidity
risk management are to ensure that Northern Trust can
meet its cash flow requirements and to capitalize on busi-
ness opportunities on a timely and cost effective basis.
Management monitors the liquidity position on a daily
basis to make funds available at a minimum cost to meet
loan and deposit cash flows. The liquidity profile is also
structured so that the capital needs of the Corporation and
its banking subsidiaries are met. Management maintains a
detailed liquidity contingency plan designed to adequately
respond to dramatic changes in market conditions.
Liquidity is secured by managing the mix of items
on the balance sheet and expanding potential sources of
liquidity. The balance sheet sources of liquidity include the
short-term money market portfolio, unpledged available
for sale securities, maturing loans and the ability to securi-
tize a portion of the loan portfolio. Further, liquidity arises
from the diverse funding base and the fact that a significant
portion of funding comes from clients that have other
relationships with Northern Trust.
A significant source of liquidity is the ability to
draw funding from both domestic and international mar-
kets. The Bank’s senior long-term debt is rated AA- by
Standard & Poor’s, Aa3 by Moody’s Investors Service, and
AA- by Fitch. These ratings allow the Bank to access capital
markets on favorable terms.
Northern Trust maintains a liquid balance sheet
with loans representing only 43% of total assets. Further, at
December 31, 2003, there was a significant liquidity reserve
on the consolidated balance sheet in the form of cash and
due from banks, securities available for sale, and money
market assets, which in aggregate totaled $19.6 billion or
47% of total assets.
The Corporation’s uses of cash consist mainly of
dividend payments to the Corporation’s common and
preferred stockholders, the payment of principal and
interest to note holders, purchases of its common stock
and acquisitions. These cash needs are met largely by divi-
dend payments from its subsidiaries, and by interest and
dividends earned on investment securities and money
market assets. Bank subsidiary dividends are subject to
certain restrictions that are explained in Note 28 on
page 88. Bank subsidiaries have the ability to pay dividends
during 2004 equal to their 2004 eligible net profits plus
$229.4 million. The Corporation’s liquidity, defined as the
amount of marketable assets in excess of commercial pa-
per, was strong at $233.1 million at year-end 2003. The
cash flows of the Corporation are shown in Note 32 on
page 95. The Corporation also has a $50 million back-up
line of credit for its commercial paper issuance.
The following table shows Northern Trust’s con-
tractual obligations at December 31, 2003.
Payment Due by Period
(In Millions)
Total
One Year
and Less
1-3
Years
4-5
Years
Over 5
Years
Bank-Senior
Notes*
Subordinated
Debt*
Floating Rate
$ 350.0
$150.0 $200.0 $ — $ —
850.0
— 200.0
100.0
550.0
Capital Debt*
278.4
Capital Lease
Obligations**
21.1
Operating
—
2.4
—
4.8
—
5.0
278.4
8.9
Leases**
570.6
49.6
94.3
82.1
344.6
Purchase
Obligations***
380.4
95.2
147.2
134.8
3.2
Total Contractual
Obligations
$2,450.5
$297.2 $646.3 $321.9 $1,185.1
* Refer to Notes 12 and 13 to the Consolidated Financial Statements for
further details
** Refer to Note 10 to the Consolidated Financial Statements for further
details
*** Purchase obligations consist primarily of ongoing operating costs re-
lated to outsourcing arrangements for certain cash management services
and the support and maintenance of the Corporation’s technological re-
quirements. Certain obligations are in the form of variable rate contracts
and, in some instances, 2003 activity was used as a base to project future
obligations.
Capital Management. One of management’s primary ob-
jectives is to maintain a strong capital position to merit the
confidence of clients, the investing public, bank regulators
and stockholders. A strong capital position helps Northern
Trust take advantage of profitable investment oppor-
tunities when they arise and helps withstand unforeseen
adverse developments. In 2003, capital levels were
strengthened as average common equity increased 7% or
$180.5 million reaching a record $3.06 billion at year-end,
while total risk-weighted assets rose 3%. In 2003, all of the
outstanding Series C and Series D preferred stock, with a
total book value of $120.0 million, was redeemed. During
2003, the Corporation purchased 2,813,469 of its own
common shares at a cost of $113.0 million, as part of its
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
share buyback program. The buyback program is designed,
among other things, to help offset the dilutive effect of the
Corporation’s incentive stock programs. Under this pro-
gram, the Corporation may purchase up to 10.2 million
additional shares after December 31, 2003.
($ In Millions)
Tier 1 Capital
Common Stockholders’ Equity
Floating Rate Capital Debt
Goodwill and Other Intangible Assets
Net Unrealized Gain on Securities
Nonfinancial Equity Investments
December 31
2003
2002
$ 3,055
268
(235)
(3)
(3)
$ 2,880
268
(110)
(12)
(3)
Total Tier 1 Capital
3,082
3,023
Tier 2 Capital
Auction Rate Preferred Stock
Reserve for Credit Losses Assigned to
Loans and Leases
Off-Balance Sheet Credit Loss Reserve
Reserves Against Identified Losses
Long-Term Debt*
Total Tier 2 Capital
Total Risk-Based Capital
Risk-Weighted Assets**
Total Assets–End of Period (EOP)
Average Fourth Quarter Assets**
Total Loans–EOP
—
149
8
(37)
690
810
120
161
8
(25)
550
814
$ 3,892
$27,876
$41,450
40,804
17,814
$ 3,837
$27,150
$39,478
38,967
18,064
Ratios
Risk-Based Capital to Risk-Weighted Assets
Tier 1
Total (Tier 1 and Tier 2)
Leverage
Common Stockholders’ Equity to
Total Loans EOP
Total Assets EOP
Stockholders’ Equity to
Total Loans EOP
Total Assets EOP
11.1%
14.0
7.6
17.2%
7.4
17.2%
7.4
11.1%
14.1
7.8
15.9%
7.3
16.6%
7.6
Notes:
*Long-Term Debt that qualifies for risk-based capital amortizes for the
purpose of inclusion in tier 2 capital during the five years before maturity.
**Assets have been adjusted for goodwill and other intangible assets, net
unrealized (gain) loss on securities and excess reserve for credit losses that
have been excluded from tier 1 and tier 2 capital, if any.
The Board of Directors increased the quarterly divi-
dend by 12% to $.19 per common share in November
2003. The common dividend has increased 58% from its
level five years ago.
The higher capital levels in 2003 were the result of
Northern Trust’s ongoing policy of retaining a sufficient
percentage of earnings in the Corporation to allow for
strategic expansion while maintaining a strong balance
sheet. All of Northern Trust’s capital ratios were well above
the ratios that are a requirement for regulatory classi-
fication as “well capitalized.” At December 31, 2003, tier 1
capital was 11.1% and total capital was 14.0% of risk-
weighted assets. These risk-based capital ratios are well
above the minimum requirements of 4.0% for tier 1 and
8.0% for total risk-based capital ratios. Northern Trust’s
leverage ratio (tier 1 capital to fourth quarter average as-
sets) of 7.6% is also well above the regulatory requirement
of 3.0%. In addition, each of the subsidiary banks had a
ratio of at least 8.9% for tier 1 capital, 11.4% for total risk-
based capital, and 5.9% for the leverage ratio.
Asset Quality and Credit Risk Management-Securities.
Northern Trust maintains a high quality securities portfo-
lio, with 85% of the total portfolio composed of U.S.
Treasury or federal agency securities. The remainder of the
portfolio consists of obligations of states and political sub-
divisions, preferred stock and other securities, including
Federal Home Loan Bank stock and Federal Reserve Bank
stock. At December 31, 2003, 81% of these securities were
rated triple-A or double-A, 3% were rated single-A and
16% were below A or not rated by Standard and Poor’s
and/or Moody’s Investors Service.
Northern Trust is an active participant in the re-
purchase agreement market. This market provides a rela-
tively low cost alternative for short-term funding.
Securities purchased under agreements to resell and secu-
rities sold under agreements to repurchase are recorded at
the amounts at which the securities were acquired or sold
plus accrued interest. To minimize any potential credit risk
associated with these transactions, the fair value of the
securities purchased or sold is continuously monitored,
limits are set on exposure with counterparties, and the fi-
nancial condition of counterparties is regularly assessed. It
is Northern Trust’s policy to take possession of securities
purchased under agreements to resell. Securities sold un-
der agreements to repurchase are held by the counterparty
until the repurchase transaction matures.
Loans and Other Extensions of Credit. Credit risk is in-
herent in Northern Trust’s various lending activities.
Northern Trust focuses its lending efforts on clients with
existing trust or treasury management relationships or who
are looking to build a full range of financial services. Credit
risk is managed through the Credit Policy function, which
is designed to assure adherence to a high level of credit
standards. The Credit Policy function reports to the
Corporation’s Head of Corporate Risk Management.
Credit Policy provides a system of checks and balances for
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
Northern Trust’s diverse credit-related activities by estab-
lishing and monitoring all credit-related policies and
practices throughout Northern Trust and assuring their
uniform application. These activities are designed to di-
versify credit exposure on an industry and client basis, thus
lessening overall credit risk. These credit management ac-
tivities also apply to Northern Trust’s use of derivative fi-
nancial instruments, including foreign exchange contracts
and interest risk management instruments.
Individual credit authority for commercial and
other loans is limited to specified amounts and maturities.
Credit decisions involving commitment exposure in excess
of the specified individual limits are submitted to the ap-
propriate Credit Approval Committee (Committee). Each
Committee is chaired by the executive in charge of the area
and has a Credit Policy officer as a voting participant. Each
Committee’s credit approval authority is specified, based
on commitment levels, credit ratings and maturities. Cred-
its involving commitment exposure in excess of these lim-
its require the approval of the Senior Credit Committee.
The Counterparty Risk Management Committee
established by Credit Policy manages counterparty risk.
This committee has sole credit authority for exposure to all
foreign banks, certain domestic banks which Credit Policy
deems to be counterparties and which do not have com-
mercial credit relationships within the Corporation, and
certain other exposures.
Under the auspices of Credit Policy, country ex-
posure limits are reviewed and approved on a country-by-
country basis.
As part of Northern Trust’s ongoing credit grant-
ing process, internal credit ratings are assigned to each cli-
ent and credit before credit is extended, based on an
assessment of creditworthiness. Credit Policy performs at
least annually, a review of selected significant credit ex-
posures to identify at the earliest possible stages, clients
who might be facing financial difficulties. Internal credit
ratings are also reviewed during this process. Above aver-
age risk loans receive special attention by both lending
officers and Credit Policy. This approach allows manage-
ment to take remedial action in an effort to deal with
potential problems.
An integral part of the Credit Policy function is a
formal review of past due and potential problem loans to
determine which credits, if any, need to be placed on non-
accrual status or charged off. As more fully described on
pages 51 through 54, the provision for credit losses is re-
viewed quarterly to determine the amount necessary to
maintain an adequate reserve for credit losses.
A further way in which credit risk is managed is by
requiring collateral. Management’s assessment of the bor-
rower’s creditworthiness determines whether collateral is
obtained. The amount and type of collateral held varies but
may include deposits held in financial institutions, U.S.
Treasury securities, other marketable securities, income-
producing commercial properties, accounts receivable,
property, plant and equipment, and inventory. Collateral
values are monitored on a regular basis to ensure that they
are maintained at an appropriate level.
The largest component of credit risk relates to the loan portfolio. In addition, credit risk is inherent in certain
contractual obligations such as legally binding unfunded commitments to extend credit, commercial letters of credit and
standby letters of credit. These contractual obligations and arrangements are discussed in Note 26 and are presented in
the tables that follow.
(In Millions)
Domestic
Residential Real Estate
Commercial
Broker
Commercial Real Estate
Personal
Other
Lease Financing
Total Domestic
International
Total Loans and Leases
December 31
2003
2002
2001
2000
1999
$ 7,975.3
3,405.3
7.0
1,297.1
2,699.9
743.9
1,228.0
$17,356.5
457.3
$ 7,808.1
3,968.3
8.8
1,168.5
2,480.8
959.3
1,276.0
$17,669.8
393.9
$ 7,427.9
4,741.6
11.8
1,025.6
2,208.8
768.6
1,202.6
$17,386.9
593.0
$ 6,822.8
4,796.8
126.4
911.0
2,289.3
1,207.1
1,034.4
$17,187.8
956.8
$ 6,257.7
4,704.1
88.8
780.4
1,659.9
566.5
691.5
$14,748.9
625.6
$17,813.8
$18,063.7
$17,979.9
$18,144.6
$15,374.5
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
-
(In Millions)
Unfunded Commitments to Extend Credit
One Year and Less
Over One Year
Total
Standby Letters of Credit
Commercial Letters of Credit
Custody Securities Lent with Indemnification
,
December 31
2003
2002
$ 8,892.9
7,648.7
$16,541.6
2,521.3
26.1
73,966.3
$10,031.5
7,152.1
$17,183.6
2,528.6
49.5
49,158.1
(In Millions)
Industry Sector
Finance and Insurance
Holding Companies
Manufacturing
Mining
Public Administration
Retail Trade
Security and Commodity Brokers
Services
Transportation and Warehousing
Utilities
Wholesale Trade
Other Commercial
Total Commercial and Broker*
Residential Real Estate
Commercial Real Estate
Personal
Other
Lease Financing
International
Total
Commitment Expiration
Total
Commitments
One Year
and Less
Over One
Year
Outstanding
Loans
$ 2,573.2
230.1
3,861.1
353.8
52.0
482.1
100.1
3,145.8
439.0
339.1
879.3
322.2
$12,777.8
1,247.1
185.1
1,839.2
386.4
—
106.0
$16,541.6
$1,671.0
181.9
1,670.1
162.8
7.5
240.4
100.0
1,830.9
186.5
228.5
336.0
174.4
$6,790.0
129.2
56.4
1,470.6
340.7
—
106.0
$8,892.9
$
902.2
48.2
2,191.0
191.0
44.5
241.7
.1
1,314.9
252.5
110.6
543.3
147.8
$ 5,987.8
1,117.9
128.7
368.6
45.7
—
—
$ 7,648.7
$
423.5
116.5
599.6
8.8
118.7
102.3
7.0
1,243.0
69.4
21.4
359.6
342.5
$ 3,412.3
7,975.3
1,297.1
2,699.9
743.9
1,228.0
457.3
$17,813.8
* Commercial and Broker industry sector information is presented on the basis of the North American Industry Classification System(NAICS). NAICS has
replaced the Standard Industrial Classification(SIC) system, which was the basis for reporting in the prior year.
Although credit exposure is well diversified, there
are certain groups of loans that meet the accounting defi-
nition under SFAS No. 107 of credit risk concentrations.
According to this statement, group concentrations of
credit risk exist if a number of borrowers or other
counterparties are engaged in similar activities and have
similar economic characteristics that would cause their
ability to meet contractual obligations to be similarly af-
fected by changes in economic or other conditions. The
fact that an extension of credit falls into one of these
groups does not necessarily indicate that the credit has a
higher than normal degree of credit risk. These groups are:
residential real estate, middle market companies and small
businesses, banks and bank holding companies, commer-
cial real estate and commercial aircraft leases.
Residential Real Estate. The residential real estate
loan portfolio totaled $8.0 billion or 46% of total domestic
loans at December 31, 2003, compared with $7.8 billion or
44% at December 31, 2002. Residential real estate loans
consist of conventional home mortgages and equity credit
lines, which generally require a loan to collateral value of
no more than 75% to 80% at inception.
Of the total $8.0 billion in residential real estate
loans, $3.3 billion were in the greater Chicago area with the
remainder distributed throughout the other geographic
regions served by Northern Trust. Legally binding
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
commitments to extend credit, which are primarily equity
credit lines, totaled $1.2 billion at both December 31, 2003
and 2002.
$283.8 million and standby letters of credit were $123.5
million.
Commercial Real Estate. In managing its credit
Middle Market Companies and Small Businesses.
Credit exposure to middle market companies and small
businesses is primarily in the form of commercial loans,
which totaled $1.9 billion at both December 31, 2003 and
December 31, 2002. These loans are to a diversified group
of borrowers that are predominantly in the manufacturing,
wholesaling, distribution and services industries, most of
which have total annual sales of less than $500 million. The
largest component of this group of borrowers is located in
the mid-western areas served by the Bank. Middle market
and small businesses have been an important focus of
Northern Trust’s business development efforts both for
commercial banking and personal trust/private banking
services and it is part of the strategic plan to continue to
selectively grow the portfolio with such entities. The credit
risk associated with middle market and small business
lending is principally influenced by general economic
conditions and the resulting impact on the borrower’s
operations.
Legally binding commitments to extend credit,
standby letters of credit, and commercial letters of credit to
middle market companies and small businesses totaled
$3.2 billion, $1.5 billion, and $22.6 million, respectively, as
of December 31, 2003, and $2.9 billion, $1.4 billion, and
$16.3 million, respectively, as of December 31, 2002.
exposure, management has defined a commercial real es-
tate loan as one where: (1) the borrower’s principal busi-
ness activity is the acquisition or the development of real
estate for commercial purposes; (2) the principal collateral
is real estate held for commercial purposes, and loan
repayment is expected to flow from the operation of the
property; or (3) the loan repayment is expected to flow
from the sale or refinance of real estate as a normal and
ongoing part of the business. Unsecured lines of credit to
firms or individuals engaged in commercial real estate
endeavors are included without regard to the use of loan
proceeds. The commercial real estate portfolio consists of
interim loans and commercial mortgages.
Short-term interim loans provide financing for the
initial phases of the acquisition or development of
commercial real estate, with the intent that the borrower
will refinance the loan through another financial institu-
tion or sell the project upon its completion. The interim
loans are primarily in those markets where Northern Trust
has a strong presence and a thorough knowledge of the
local economy. The interim loans, which totaled $436.1
million and $388.1 million as of December 31, 2003 and
2002, respectively, are composed primarily of loans to de-
velopers that are highly experienced and well known to
Northern Trust.
Banks and Bank Holding Companies. On-balance
Commercial mortgage financing, which totaled
sheet credit risk to banks and bank holding companies,
both domestic and international, totaled $11.3 billion and
$10.8 billion at December 31, 2003 and 2002, respectively.
The majority of this exposure consisted of short-term
money market assets, which totaled $9.5 billion and $9.2
billion at December 31, 2003 and December 31, 2002, re-
spectively, and noninterest-bearing demand balances
maintained at correspondent banks which totaled $1.3 bil-
lion and $1.2 billion at December 31, 2003 and
December 31, 2002, respectively. Commercial loans to
banks totaled $139.5 million and $229.0 million, re-
spectively, as of December 31, 2003 and 2002. The
majority of these loans were to U.S. bank holding compa-
nies, primarily in the Greater Midwest, for their acquis-
ition and other corporate purposes. Such lending activity is
limited to entities, which have a substantial business rela-
tionship with Northern Trust. At December 31, 2003, le-
gally binding commitments to extend credit to banks and
bank holding companies totaled $215.9 million and
standby letters of credit totaled $79.3 million. At
December 31, 2002, legally binding commitments were
$861.0 million and $780.4 million as of December 31, 2003
and 2002, respectively, is provided for the acquisition of
income producing properties. Cash flows from the proper-
ties generally are sufficient to amortize the loan. These
loans average less than $500,000 each and are primarily
located in the suburban Chicago and Florida markets.
At December 31, 2003, legally binding commit-
ments to extend credit and standby letters of credit to
commercial real estate developers totaled $227.5 million
and $23.6 million, respectively. At December 31, 2002, le-
gally binding commitments were $254.2 million and
standby letters of credit were $123.1 million.
Commercial Aircraft Leases. Through its leasing
subsidiary, Norlease, Inc., Northern Trust has entered into
leveraged lease transactions involving commercial aircraft
totaling $240 million, which are a part of the $1.2 billion
lease financing portfolio at December 31, 2003. $139 mil-
lion of the leveraged leases involve aircraft leases to foreign
airlines, where the leases are fully backed by a combination
of pledged marketable securities and guarantees from
either a domestic “AAA” rated insurance company or a
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
large U.S.-based banking institution. $10 million repre-
sents leases to domestic airlines; $71 million to commercial
transport companies; and, the balance for commuter air-
craft leases, the last of which are guaranteed by aircraft
manufacturers or by sovereign entities.
Foreign Outstandings. As used in this discussion, foreign
outstandings are cross-border outstandings as defined by
the Securities and Exchange Commission. They consist of
loans, acceptances, interest-bearing deposits with financial
institutions, accrued interest and other monetary assets.
Not included are letters of credit, loan commitments, and
foreign office local currency claims on residents funded by
local currency liabilities. Foreign outstandings related to a
specific country are net of guarantees given by third parties
resident outside the country and the value of tangible, liq-
uid collateral held outside the country. However, trans-
actions with branches of foreign banks are included in
these outstandings and are classified according to the
country location of the foreign banks’ head office.
Short-term interbank time deposits with foreign
banks represent the largest category of foreign out-
standings. The Chicago head office and the London
Branch actively participate in the interbank market with
U.S. and foreign banks. International commercial lending
activities also include import and export financing for
U.S.-based clients.
Northern Trust places deposits with counterparties
that have high internal (Northern Trust) and external
credit ratings. These foreign banks are approved and
monitored by Northern Trust’s Counterparty Risk
Management Committee. The Committee has credit au-
thority for exposure to all foreign banks and employs a re-
view process that results in credit limits. This process
includes financial analysis of the foreign banks, use of an
internal rating system and consideration of external ratings
from rating agencies. Each counterparty is reviewed at least
annually. Separate from the entity-specific review process,
the average life to maturity of deposits with foreign banks
is deliberately maintained on a short-term basis in order to
respond quickly to changing credit conditions. Addition-
ally, the Committee performs a country-risk analysis and
imposes limits to country exposure. The following table
provides information on foreign outstandings by country
that exceed 1.00% of Northern Trust’s assets.
(In Millions)
At December 31, 2003
France
United Kingdom
Germany
Netherlands
Spain
Belgium
Ireland
Italy
At December 31, 2002
United Kingdom
France
Italy
Belgium
Netherlands
Canada
Germany
Sweden
Ireland
At December 31, 2001
Germany
United Kingdom
Canada
France
Netherlands
Italy
Belgium
Switzerland
Banks
$1,377
1,348
784
595
567
559
415
420
$ 954
949
614
579
520
507
520
471
423
$ 992
916
832
762
475
433
431
409
Commercial
and Other
$—
17
13
16
—
2
17
—
$39
—
—
1
23
22
—
5
21
$—
71
—
—
13
—
—
—
Total
$1,377
1,365
797
611
567
561
432
420
$ 993
949
614
580
543
529
520
476
444
$ 992
987
832
762
488
433
431
409
Countries whose aggregate outstandings totaled between .75% and 1.00%
of total assets were as follows: Switzerland, Canada and Singapore with
aggregate outstandings of $1.0 billion at December 31, 2003, Spain and
Singapore with aggregate outstandings of $614 million at December 31,
2002, and Ireland and Sweden with aggregate outstandings of $654 million
at December 31, 2001.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
(In Millions)
Nonaccrual Loans
Domestic
Residential Real Estate
Commercial
Commercial Real Estate
Personal
International
Total Nonaccrual Loans
Other Real Estate Owned
Total Nonperforming Assets
Total 90 Day Past Due Loans (still accruing)
Nonperforming Assets and 90 Day Past Due Loans.
Nonperforming assets consist of nonaccrual loans,
restructured loans and Other Real Estate Owned (OREO).
OREO is comprised of commercial and residential proper-
ties acquired in partial or total satisfaction of problem
loans. Past due loans are loans that are delinquent 90 days
or more and still accruing interest. The level of 90 day past
due loans at any reporting period can fluctuate widely
based on the timing of cash collections, renegotiations and
renewals.
Maintaining a low level of nonperforming assets is
important to the ongoing success of a financial institution.
In addition to the negative impact on both net interest
income and credit losses, nonperforming assets also in-
crease operating costs due to the expense associated with
collection efforts. Northern Trust’s comprehensive credit
review and approval process is a critical part of its ability to
minimize nonperforming assets on a long-term basis.
The table above presents the nonperforming assets
and past due loans for the current and prior years. Of the
total loan portfolio of $17.8 billion at December 31, 2003,
$80.0 million or .45% was nonaccrual, a decrease of $13.4
million from year-end 2002. Nonaccrual loans at the end
of 2003 include $40.5 million relating to two commercial
clients that have exposure to asbestos-related claims.
Included in the portfolio of nonaccrual loans are
those loans that meet the criteria of being “impaired.”
A loan is impaired when, based on current information
and events, it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms
of the loan agreement. As of December 31, 2003, impaired
loans, all of which have been classified as nonaccrual,
totaled $78.7 million, net of $12.0 million in charge-offs.
These loans had $37.0 million of the reserve for credit
losses allocated to them.
December 31
2003
2002
2001
2000
1999
$ 4.5
75.3
.1
.1
—
80.0
.3
$80.3
$21.0
$ 4.8
87.6
.7
.3
—
93.4
1.2
$94.6
$15.2
$
5.0
99.3
4.3
.1
—
108.7
.8
$109.5
$ 14.5
$ 2.9
71.2
1.8
.4
—
76.3
2.2
$78.5
$30.5
$ 6.4
50.3
1.9
.7
—
59.3
1.3
$60.6
$15.4
Provision and Reserve for Credit Losses. Changes in the
reserve for credit losses were as follows:
(In Millions)
Balance at Beginning of Year
Charge-Offs
Recoveries
Net Charge-Offs
Provision for Credit Losses
2003
2002
2001
$168.5
(22.3)
8.5
$161.6
(36.6)
6.0
$162.9
(69.0)
1.2
(13.8)
2.5
(30.6)
37.5
(67.8)
66.5
Balance at End of Year
$157.2
$168.5
$161.6
The provision for credit losses is the charge against
current earnings that is determined by management,
through a disciplined credit review process, to be the
amount needed to maintain a reserve that is sufficient to
absorb credit losses inherent in Northern Trust’s loan and
lease portfolios and other credit undertakings. The reserve
provides for probable losses that have been identified with
specific borrower relationships (specific loss component)
and for probable losses that are believed to be inherent in
the loan and lease portfolios and other credit undertakings
but that have not yet been specifically identified (inherent
loss component). The table on page 53 shows (i) the
specific portion of the reserve, (ii) the allocated portion of
the inherent reserve and its components by loan category
and (iii) the unallocated portion of the reserve at
December 31, 2003 and each of the prior four year-ends.
Specific Component of the Reserve. The specific
component of the reserve is determined on a loan-by-loan
basis as part of the regular review of impaired loans and
potential charge-offs. The specific reserve is based on a
loan’s current book value compared with the present value
of its projected future cash flows, collateral value or market
value, as is relevant for the particular loan.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
At December 31, 2003, the specific reserve compo-
nent amounted to $37.0 million compared with $25.0 mil-
lion at the end of 2002. The $12.0 million increase was due
primarily to additional reserves required on commercial
loans that were reclassified as nonperforming and further
deterioration in the credit quality of certain loans, which
had previously been identified by management as impaired
loans. Offsetting these increases in part were principal re-
payments and charge-offs of loans that had been reserved
for in prior periods.
The increase in the specific loss component of the
reserve in the prior year from $21.1 million in 2001 to
$25.0 million in 2002 was primarily caused by several
commercial loans that were impacted by the economic
downturn as well as specific reserves required for two
commercial clients that have exposure to asbestos-related
claims.
Allocated Inherent Component of the Reserve.
The allocated portion of the inherent reserve is based on
management’s review of historical charge-off experience as
well as its judgment regarding loans in each credit rating
category over a period of time that management de-
termines is adequate to reflect longer-term economic
trends. One building block in reaching the appropriate
allocated inherent reserve is an analysis of loans by credit
rating categories. Credit ratings are determined by mem-
bers of the Credit Policy Group at the time each loan is
approved. These credit ratings are then subject to periodic
reviews by the Credit Policy Group, which is independent
of business unit management. Credit Policy makes the fi-
nal determination of each loan’s rating. Credit ratings
range from “1” for the strongest credits to “9” for the
weakest credits; a “9” rated loan would normally represent
a complete loss.
Several factors are considered by management to
determine the level of the allocated inherent component of
the reserve. One of the factors is the historical loss ratio for
each credit rating category over the prior five years. The
historical loss ratios are evaluated by management and
adjusted based on current facts and circumstances. The
historical loss factors on higher-risk loans, those rated “5”
through “8”, are also refined by considering the current
economic environment and regulatory guidelines in order
to provide a more consistent and reliable method for tak-
ing account of credit trends in measuring loss exposure.
Management also maintains a reserve for the
commercial, commercial real estate and international
segments of the portfolio that have credit ratings from “1”
through “4”, in order to measure the loss estimated to be
inherent in these riskier segments. Because of the higher
degree of uncertainty in these portfolios and Northern
Trust’s past experience, which included significant losses
over brief periods of time, management believes it appro-
priate to maintain a reserve higher than recent charge-off
experience would suggest. This is intended to prevent an
understatement of reserves based upon over-reliance on
more favorable economic conditions included in the
historic look-back period.
The allocated inherent component of the reserve
also covers the credit exposure associated with undrawn
loan commitments and standby letters of credit. To de-
termine the exposure on these instruments, management
uses conversion rates used in risk-based capital calcu-
lations to determine the balance sheet equivalent amount
and assigns a loss factor based on the methodology utilized
for outstanding loans.
The allocated portion of the inherent reserve de-
creased $22.7 million to $100.7 million at December 31,
2003 compared with $123.4 million at December 31, 2002.
The decrease in this component of the reserve primarily
reflects the overall improvement in credit quality experi-
enced during 2003 as evidenced by the reduction in the
outstanding balance of the highest risk rated loans.
In 2002, the allocated portion of the inherent
reserve increased $5.4 million from $118.0 million at
December 31, 2001. The increase during 2002 primarily
reflected the net impact of credit rating changes on several
commercial loans that were downgraded due to the decline
in their credit quality as a result of the economic slowdown.
Unallocated Inherent Component of the Reserve.
The unallocated portion of the inherent loss reserve is
based on management’s review of other factors affecting
the determination of probable losses inherent in the
portfolio, which are not necessarily captured by the
application of historical loss ratios. This portion of the re-
serve analysis involves the exercise of judgment and reflects
considerations such as management’s view that the reserve
should have a margin that recognizes the imprecision in-
herent in the process of estimating expected credit losses.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
December 31
2003
2002
2001
2000
1999
Percent of
Loans to
Total Loans
Reserve
Amount
Percent of
Loans to
Total Loans
Reserve
Amount
Percent of
Loans to
Total Loans
Reserve
Amount
Percent of
Loans to
Total Loans
Reserve
Amount
Percent of
Loans to
Total Loans
—% $ 25.0
—% $ 21.1
—% $ 24.3
—% $ 15.0
—%
45
19
7
15
4
7
3
11.5
85.2
15.5
5.0
—
4.8
1.4
43
22
7
14
5
7
2
9.7
81.7
14.8
3.8
—
3.0
5.0
41
27
6
12
4
7
3
9.6
79.1
13.2
4.3
—
2.9
3.4
38
27
5
13
6
6
5
11.5
73.2
12.2
3.3
—
2.9
3.5
41
31
5
11
4
4
4
($ In Millions)
Specific Reserve
Allocated Inherent
Reserve
Residential Real Estate
Commercial
Commercial Real Estate
Personal
Other
Lease Financing
International
Total Allocated
Reserve
Amount
$ 37.0
11.9
60.9
16.8
5.2
—
4.3
1.6
Inherent Reserve
$100.7
100% $123.4
100% $118.0
100% $112.5
100% $106.6
100%
Unallocated Inherent
Reserve
Total Reserve for Credit
19.5
—
20.1
—
22.5
—
26.1
—
29.3
—
Losses
$157.2
100% $168.5
100% $161.6
100% $162.9
100% $150.9
100%
Reserve Assigned to:
Loans and Leases
Unfunded
Commitments,
Standby
Letters of
Credit and
Derivatives
Total Reserve for
Credit Losses
$149.2
$161.1
$154.3
$152.6
$135.3
8.0
$157.2
7.4
$168.5
7.3
$161.6
10.3
$162.9
15.6
$150.9
In evaluating the level of the unallocated portion of
the reserve in 2003, management concluded that there
were no significant changes in concentration of credits or
other qualitative factors impacting asset quality that had
not been recognized in the specific and allocated compo-
nents of the reserve. Based on these factors and manage-
ment’s current evaluation of the overall quality of the
portfolio, the unallocated portion of the reserve at year-
end was $19.5 million compared with $20.1 million last
year.
Other Factors. The total amount of the two highest
risk loan groupings, those rated “7” and “8” (based on
Northern Trust’s internal rating scale, which closely paral-
lels that of the banking regulators), decreased $103 million
to $213 million, of which $78.7 million was classified as
impaired. This compares with $316 million last year-end
when $90.8 million was classified as impaired. The de-
crease primarily reflects cash received during the year on
certain commercial loans and the migration of certain
higher risk rated loans, which require higher reserves, to
lower risk credit ratings as a result of improving credit
quality. There were no “9” rated loans reported at any time
during the periods because loans are charged-off when
they are so rated. At December 31, 2003, these highest risk
loans represent 1.2% of outstanding loans.
Overall Reserve. In establishing the overall reserve
level, management considers that 45% of the loan portfolio
consists of lower risk residential mortgage loans. The
evaluation of the factors above resulted in a reserve for
credit losses of $157.2 million at December 31, 2003 com-
pared with $168.5 million at the end of 2002. The reserve
of $149.2 million assigned to loans and leases, as a
percentage of total loans and leases was .84% at December
31, 2003, compared with .89% at December 31, 2002. The
decrease in the reserve level reflects the overall improve-
ment in credit quality within Northern Trust’s commercial
loan portfolio.
Reserves assigned to unfunded loan commitments,
standby letters of credits and derivative products totaled
$8.0 million at December 31, 2003, compared with $7.4
million at December 31, 2002.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
Provision. The resulting provision for credit losses
was $2.5 million for the year, while net charge-offs totaled
$13.8 million. This compares with a provision for credit
losses of $37.5 million and net charge-offs of $30.6 million
in 2002. Overall improved credit quality led to the lower
provision in the current year. In addition, the prior year’s
provision level reflected the adverse results of the 2002
industry-wide Shared National Credit review conducted by
the banking regulators and charge-offs for a leveraged lease
transaction involving United Airlines and the remaining
unsecured Enron Corp. exposure.
In 2001, the $66.5 million provision primarily re-
flected charges taken to address credit exposure to Enron
Corp., which filed for bankruptcy in December 2001, as
well as other credit risks stemming from the economic
recession.
Overview. The Board of Directors has overall responsi-
bility for Northern Trust’s interest rate and foreign ex-
change risk management policies. To ensure adherence to
these policies, the Corporate Asset and Liability Policy
Committee (ALCO) establishes and monitors guidelines to
control the sensitivity of earnings to changes in interest
rates. The guidelines apply to both on- and off-balance
sheet positions. ALCO also establishes and monitors limits
for foreign exchange risk. The goal of the ALCO process is
to maximize earnings while maintaining a high quality
balance sheet and carefully controlling interest rate and
foreign exchange risk.
Asset/Liability Management. Asset/liability management
activities include lending, accepting and placing deposits,
investing in securities, issuing debt, and hedging interest
rate risk with off-balance sheet instruments. The primary
market risk associated with asset/liability management ac-
tivities is interest rate risk. Sensitivity of earnings to interest
rate changes arises when yields on assets change in a
different time period or in a different amount from that of
interest costs on liabilities. To mitigate interest rate risk,
the structure of the balance sheet is managed so that
movements of interest rates on assets and liabilities
(adjusted for off-balance sheet hedges) are highly corre-
lated which allows Northern Trust’s interest-bearing assets
and liabilities to contribute to earnings even in periods of
volatile interest rates.
Northern Trust utilizes the following measurement
techniques in the management of interest rate risk: simu-
lation of earnings; simulation of the economic value of
equity; and gap analysis. These three techniques are com-
plementary and are used in concert to provide a compre-
hensive interest rate risk management capability.
Simulation of earnings is the primary tool used to
measure the sensitivity of earnings to interest rate changes.
Using computer-modeling techniques, Northern Trust is
able to measure the potential impact of different interest
rate assumptions on pre-tax earnings. All on-balance sheet
positions, as well as derivative financial instruments
(principally interest rate swaps) that are used to manage
interest rate risk, are included in the model simulation.
Northern Trust used model simulations to measure
its earnings sensitivity relative to management’s most likely
interest rate scenarios as of December 31, 2003 and De-
cember 31, 2002. Similar to the prior year simulation, the
2004 interest rate scenario assumes a stable interest rate
environment during the first half of the year, with moder-
ately rising interest rates for the remainder of the year.
The interest sensitivity was tested by running alternative
scenarios above and below the most likely interest rate out-
come. The table on the following page shows the effect on
2003 and 2004 pre-tax earnings of 100 and 200 basis point
upward and 100 basis point downward movements in
interest rates relative to management’s interest rate assump-
tions. Each of the movements in interest rates was assumed
to have occurred gradually over a one-year period. The 100
basis point increase, for example, consisted of twelve
consecutive monthly increases of 8.3 basis points. The fol-
lowing assumptions were also incorporated into the model
simulations:
(cid:127)
(cid:127)
the balance sheet size was assumed to remain
constant over the one-year simulation horizon;
(cid:127) maturing assets and liabilities were invested or
deposited into identical items with the same
term;
prepayments on mortgage loans were pro-
jected under each rate scenario using a mort-
gage analytics system that incorporated market
prepayment assumptions; and
changes in the spreads between retail deposit
rates and asset yields were estimated based on
historical patterns and current competitive
trends.
(cid:127)
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
-
, ,
interest rates relative to the current expectations of market
price participants.
Estimated Impact On
A variety of actions are used to implement risk
(In Millions)
Increase in Interest Rates Above
Management’s Interest Rate
Forecast
100 Basis Points
200 Basis Points
Decrease in Interest Rates Below
Management’s Interest Rate
Forecast
100 Basis Points
200 Basis Points
2004
Pre-Tax
Income
Increase/
(Decrease)
2003
Pre-Tax
Income
Increase/
(Decrease)
$ (5.6)
(12.7)
$ (7.9)
(17.7)
$ 3.8
*
$ 4.6
*
*With the targeted federal funds rate at year-end 2003 at 1.00%, a scenario
of decreasing interest rates by 200 basis points was not considered reason-
able and therefore not presented.
The simulations of earnings do not incorporate
any management actions that might moderate the negative
consequences of actual interest rate deviations. For that
reason and others, they do not reflect likely actual results
but serve as conservative estimates of interest rate risk.
A second technique used to measure interest rate
risk is simulation of the economic value of equity, which
provides estimates of the potential future impact on equity
of various changes in interest rates. The potential effect of
interest rate changes on equity is derived from the impact
of such changes on the market values of assets, liabilities
and off-balance sheet instruments. Northern Trust limits
aggregate market risk, as measured in this fashion, to
an acceptable level within the context of risk-return
trade-offs.
The third technique that is used to measure inter-
est rate risk is gap analysis. The calculation of the interest
sensitivity gap measures the timing mismatches between
assets and liabilities. This interest sensitivity gap is de-
termined by subtracting the amount of liabilities from the
volume of assets that reprice in a particular time interval. A
liability sensitive position results when more liabilities than
assets reprice or mature within a given period. Under this
scenario, as interest rates decline, increased net interest
revenue will be generated. Conversely, an asset sensitive
position results when more assets than liabilities reprice
within a given period; in this instance, net interest revenue
would benefit from an increasing interest rate environ-
ment. The economic impact of a liability or asset sensitive
position depends on the magnitude of actual changes in
management strategies including:
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
purchases of securities;
sales of securities that are classified as available
for sale;
sales of held for sale residential real estate
loans;
issuance of senior notes and subordinated
notes;
collateralized borrowings from the Federal
Home Loan Bank;
placing and taking Eurodollar time deposits;
and
hedging with various types of derivative finan-
cial instruments.
Northern Trust strives to use the most effective in-
struments for implementing its interest risk management
strategies, considering the costs, liquidity, collateral and
capital requirements of the various alternatives.
Foreign Exchange Trading. Foreign exchange trading ac-
tivities consist principally of providing foreign exchange
services to clients. Most of these services are provided in
connection with Northern Trust’s growing global custody
business. However, in the normal course of business
Northern Trust also engages in proprietary trading of for-
eign currencies. The primary market risk associated with
these activities is foreign exchange risk.
Foreign currency positions exist when aggregate
obligations to purchase and sell a currency other than the
U.S. dollar do not offset each other, or offset each other in
different time periods and also include holdings of foreign
denominated non-trading assets and liabilities that are not
converted to U.S. dollars through the use of hedge contracts.
Northern Trust mitigates the risk related to its foreign cur-
rency positions by establishing limits on the amounts of,
and durations of its positions. The limits on overnight in-
ventory positions are generally lower than the limits estab-
lished for intra-day trading activity. All overnight positions
are monitored by a risk management function, which is
separate from the trading function, to ensure that the limits
are not exceeded. Although position limits are important in
controlling foreign exchange risk, they are not a substitute
for the experience or judgment of Northern Trust’s senior
management and its foreign currency traders, who have ex-
tensive knowledge of the foreign currency markets. Foreign
currency positions and strategies are adjusted as needed in
response to changing market conditions.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
As part of its risk management activities, Northern
Trust regularly measures the risk of loss associated with
foreign currency positions using a value at risk model. This
statistical model provides an estimate, based on a 95%
confidence level, of the potential loss in earnings that may
be incurred if an adverse one-day shift in foreign currency
exchange rates were to occur. The model, which is based
on a variance/co-variance methodology, incorporates his-
torical currency price data and historical correlations in
price movement among the currencies. All foreign cur-
rency positions, including foreign denominated non-
trading assets and liabilities that were not converted to U.S.
dollars through the use of hedge contracts, are included in
the model.
Northern Trust’s value at risk based on foreign
currency positions totaled $49 thousand and $57 thousand
as of December 31, 2003 and 2002, respectively. Value at
risk totals representing the average, high and low for 2003
were $188 thousand, $385 thousand and $49 thousand,
respectively, with the average, high and low for 2002 being
$199 thousand, $390 thousand and $57 thousand, re-
spectively. These totals indicate the degree of risk inherent
in foreign currency positions as of year-end and during the
year; however, it is not a prediction of an expected gain or
loss. Actual future gains and losses will vary depending on
market conditions and the size and duration of future for-
eign currency positions.
Other Trading Activities. Market risk associated with
other trading activities is negligible. Northern Trust is a
party to various derivative financial instruments, most of
which consist of interest rate swaps entered into to meet
clients’ interest risk management needs. When Northern
Trust enters into such swaps, its policy is to mitigate the
resulting interest rate risk with an offsetting swap or with
futures contracts. Northern Trust carries in its trading
portfolio a small inventory of securities that are held for
sale to its clients. The interest rate risk associated with
these securities is insignificant.
In providing banking and trust services, Northern Trust, in
addition to safekeeping and managing trust and corporate
assets, processes cash and securities transactions which
expose Northern Trust to operational and fiduciary risk.
Controls over such processing activities are closely moni-
tored to safeguard the assets of Northern Trust and its cli-
ents. However, from time to time Northern Trust has
incurred losses related to these risks and there can be no
assurance that such losses will not occur in the future.
Operational risk is the risk of unexpected losses
attributable to human error, systems failures, fraud, or
inadequate internal controls and procedures. This risk is
mitigated through a system of internal controls that are
designed to keep operating risk at levels appropriate to
Northern Trust’s corporate standards in view of the risks
inherent in the markets in which Northern Trust operates.
The system of internal controls includes policies and
procedures that require the proper authorization, appro-
val, documentation and monitoring of transactions. Each
business unit is responsible for complying with corporate
policies and external regulations applicable to the unit, and
is responsible for establishing specific procedures to do so.
Northern Trust’s internal auditors monitor the overall ef-
fectiveness of the system of internal controls on an ongoing
basis.
Fiduciary risk is the risk of loss that may occur as a
result of breaching a fiduciary duty to a client. To limit this
risk, the Trust Investment Committee establishes corpo-
rate policies and procedures to reduce the risk that obliga-
tions to clients would not be discharged faithfully or in
compliance with applicable legal and regulatory require-
ments. These policies and procedures provide guidance
and establish standards related to the creation, sale, and
management of investment products, trade execution, and
counterparty selection.
Business units have the primary responsibility for
adhering to the policies and procedures applicable to their
businesses.
This annual report contains statements that may be consid-
ered forward-looking, such as the statements relating to
Northern Trust’s financial goals, dividend policy, ex-
pansion and business development plans, projected profit
improvements, business prospects and positioning with
respect to market and pricing trends, strategic initiatives,
re-engineering and outsourcing activities, new business
results and outlook, changes in securities market prices,
credit quality including reserve levels, planned capital ex-
penditures and technology spending, and the effects of any
extraordinary events and various other matters (including
changes in accounting standards and interpretations) on
Northern Trust’s business and results. Forward-looking
statements are typically identified by words or phrases,
such as “believe,” “expect,” “anticipate,” “intend,”
“estimate,” “may increase,” “may fluctuate,” “plan,”
“goal,” “strategy,” and similar expressions or future or
conditional verbs such as “will,” “should,” “would,” and
“could.” Forward-looking statements are Northern Trust’s
current estimates or expectations of future events or future
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
results. Actual results could differ materially from the re-
sults indicated by these statements because the realization
of those results is subject to many risks and uncertainties
including:
(cid:127)
(cid:127)
The future health of the U.S. and international
economies and other economic factors (such
as the pace of inflation/deflation and consumer
confidence in the securities markets) that affect
wealth creation, investment and savings pat-
terns and Northern Trust’s interest rate risk
and credit risk exposure;
Changes in U.S. and worldwide securities mar-
kets with respect to the market values of finan-
cial assets, the stability of particular securities
markets and the level of volatility in certain
markets such as foreign exchange;
(cid:127) U.S. and international economic factors that
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
may impact Northern Trust’s interest rate risk,
including the level of or change in interest
rates, and credit risk exposure;
Factors or conditions that may affect Northern
Trust’s liquidity management objectives, in-
cluding a decline in the confidence of potential
debt and/or equity securities purchasers in the
funds markets generally or in Northern Trust
in particular or a change in Northern Trust’s
credit ratings;
The effects of any extraordinary events (such as
terrorist events, war and the U.S. government’s
response to those events), contagious disease
outbreaks or epidemics (such as a SARS out-
break) or natural disasters;
Changes in the level of cross-border investing
by clients resulting from changing economic
factors, political conditions or currency mar-
kets;
Regulatory, monetary and banking develop-
ments and changes in accounting requirements
or interpretations in the U.S. and other coun-
tries where Northern Trust has significant
business;
Success in obtaining regulatory approvals
when required;
Changes in the nature of Northern Trust’s
competition, including changes resulting from
industry consolidation and the regulatory
environment, as well as actions taken by
particular competitors;
Expansion or contraction of Northern Trust’s
products, services, and targeted markets in
response to strategic opportunities and
changes in the nature of Northern Trust’s
competition, coupled with changes in the level
of investment or reinvestment in those prod-
ucts, services, and targeted markets, and the
pricing of those products and services;
(cid:127) Northern Trust’s success in continuing to gen-
erate new business in its existing markets, as
well as its success in identifying and penetrat-
ing targeted markets, through acquisition,
strategic alliance or otherwise, and generating a
profit in those markets in a reasonable time;
(cid:127) Northern Trust’s ability to continue to gen-
erate strong investment results for clients and
continue to develop its array of investment
products, internally or through acquisition, in
a manner that meets client needs;
(cid:127) Northern Trust’s ability to continue to fund
and accomplish technological innovation,
improve internal processes and controls, ad-
dress operating and technology risks
(including material systems interruptions,
human errors or omissions, fraud, and
breaches of internal controls), and attract and
retain capable staff in order to address operat-
ing and technology challenges and increasing
volume and complexity in many of its busi-
nesses;
(cid:127)
(cid:127)
(cid:127) Northern Trust’s success in integrating recent
and future acquisitions, strategic alliances and
preferred provider arrangements and using the
acquired businesses, completed alliances and
preferred provider arrangements to execute its
business strategy;
The success of Northern Trust’s strategic ini-
tiatives and its re-engineering and outsourcing
activities;
The impact of divestiture or discontinuance of
portions of Northern Trust’s businesses;
The ability of each of Northern Trust’s princi-
pal businesses to maintain a product mix that
achieves acceptable margins;
Changes in tax laws or other legislation in the
U.S. or other countries (including pension re-
form legislation) that could affect Northern
Trust or clients of its personal and institutional
asset administration businesses; and
(cid:127)
(cid:127)
(cid:127) Uncertainties inherent in the regulatory and
litigation process, given that the Northern
Trust is subject to various pending and threat-
ened legal actions and proceedings the risks of
which are evaluated within the context of cur-
rent judicial decisions and legislative and regu-
latory interpretations, and with respect to
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
which a trier of fact, either a judge or jury, could
decide a case contrary to Northern Trust’s
evaluation of the relevant facts or law, and a
court or regulatory agency could act to change
or modify existing law on a particular issue.
Some of these risks and uncertainties that may af-
fect future results are discussed in more detail in the sec-
tions of “Item 1—Business” of the 2003 Annual Report on
Form 10-K captioned “Government Policies,”
“Competition” and “Regulation and Supervision.” All
forward-looking statements included in this annual report
are based upon information presently available, and
Northern Trust assumes no obligation to update any
forward-looking statements.
Consolidated Balance Sheet
($ In Millions Except Share Information)
Assets
Cash and Due from Banks
Federal Funds Sold and Securities Purchased under Agreements to Resell (Note 6)
Time Deposits with Banks
Other Interest-Bearing
Securities (Notes 5 and 27)
Available for Sale
Held to Maturity (Fair value–$1,081.6 in 2003 and $942.9 in 2002)
Trading Account
Total Securities
Loans and Leases (Notes 7 and 27)
Commercial and Other
Residential Mortgages
Total Loans and Leases (Net of unearned income–$435.7 in 2003 and $398.7 in 2002)
Reserve for Credit Losses Assigned to Loans and Leases (Note 8)
Buildings and Equipment (Notes 9 and 10)
Customers’ Acceptance Liability
Trust Security Settlement Receivables
Other Assets (Notes 11 and 29)
Total Assets
Liabilities
Deposits
Demand and Other Noninterest-Bearing
Savings and Money Market
Savings Certificates
Other Time
Foreign Offices–Demand
–Time
Total Deposits
Federal Funds Purchased
Securities Sold under Agreements to Repurchase (Note 6)
Commercial Paper
Other Borrowings
Senior Notes (Note 12)
Long-Term Debt (Note 12)
Floating Rate Capital Debt (Note 13)
Liability on Acceptances
Other Liabilities (Notes 8 and 29)
Total Liabilities
Stockholders’ Equity
Preferred Stock (Note 14)
Common Stock, $1.66 2⁄ 3 Par Value; Authorized 560,000,000 shares in 2003 and 2002;
Outstanding 220,118,476 shares in 2003 and 220,800,402 shares in 2002 (Notes 14 and 16)
Retained Earnings
Accumulated Other Comprehensive Income (Note 15)
Common Stock Issuable–Stock Incentive Plans (Note 22)
Deferred Compensation
Treasury Stock (at cost–7,803,048 shares in 2003 and 7,121,122 shares in 2002)
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
See accompanying notes to consolidated financial statements on pages 63–95.
December 31
2003
2002
$ 1,595.9
754.6
8,767.7
42.8
8,422.4
1,041.5
7.4
9,471.3
9,838.5
7,975.3
17,813.8
(149.2)
498.3
11.2
170.6
2,473.2
$ 2,672.2
964.8
8,268.2
99.3
5,681.2
905.0
7.7
6,593.9
10,255.6
7,808.1
18,063.7
(161.1)
515.0
22.5
608.5
1,831.2
$41,450.2
$39,478.2
$ 5,084.1
7,102.6
1,524.5
273.6
683.2
11,602.0
26,270.0
2,629.4
1,827.8
142.3
3,677.0
350.0
864.7
276.2
11.2
2,346.3
38,394.9
$ 5,715.2
7,101.9
1,827.1
341.8
886.9
10,189.2
26,062.1
1,672.5
1,564.0
143.6
3,741.0
450.0
765.8
267.8
22.5
1,789.1
36,478.4
—
120.0
379.8
2,990.7
(8.9)
88.6
(26.4)
(368.5)
3,055.3
379.8
2,775.3
7.1
118.2
(40.2)
(360.4)
2,999.8
$41,450.2
$39,478.2
Consolidated Statement of Income
($ In Millions Except Per Share Information)
Noninterest Income
Trust Fees
Foreign Exchange Trading Profits
Treasury Management Fees
Security Commissions and Trading Income
Other Operating Income (Note 18)
Investment Security Gains, net (Note 5)
Total Noninterest Income
Net Interest Income (Note 17)
Interest Income
Interest Expense
Net Interest Income
Provision for Credit Losses (Note 8)
Net Interest Income after Provision for Credit Losses
Noninterest Expenses
Compensation (Notes 22 and 23)
Employee Benefits (Note 21)
Occupancy Expense (Notes 9 and 10)
Equipment Expense (Notes 9 and 10)
Other Operating Expenses (Note 18)
Total Noninterest Expenses
Income from Continuing Operations before Income Taxes
Provision for Income Taxes (Note 20)
Income from Continuing Operations
Discontinued Operations (Note 3)
Income (Loss) from Discontinued Operations of NTRC
Loss on Disposal of NTRC
Income Tax Benefit (Expense)
Income (Loss) from Discontinued Operations
Net Income
Net Income Applicable to Common Stock
Per Common Share
Income from Continuing Operations (Note 16)–Basic
–Diluted
Net Income (Note 16)–Basic
–Diluted
Cash Dividends Declared
Average Number of Common Shares Outstanding–Basic
–Diluted
For the Year Ended December 31
2003
2002
2001
$1,189.1
109.6
95.6
54.8
93.1
—
1,542.2
1,055.7
507.5
548.2
2.5
545.7
652.1
133.1
132.7
88.2
450.7
1,456.8
631.1
207.8
423.3
(10.0)
(20.2)
11.7
(18.5)
$ 404.8
$ 404.1
$1,161.0
106.4
96.3
42.9
57.8
.3
1,464.7
1,238.3
636.5
601.8
37.5
564.3
629.6
125.5
101.8
85.0
418.1
1,360.0
669.0
221.9
447.1
—
—
—
—
$ 447.1
$ 444.9
$1,190.8
139.8
86.4
35.5
91.7
—
1,544.2
1,681.4
1,085.8
595.6
66.5
529.1
652.6
118.1
95.7
80.1
399.4
1,345.9
727.4
242.7
484.7
4.5
—
(1.7)
2.8
$ 487.5
$ 483.4
$
$
1.92
1.89
1.84
1.80
.70
220,203,094
224,067,844
$
$
2.02
1.97
2.02
1.97
.68
220,552,132
225,834,377
$
$
2.17
2.10
2.18
2.11
.635
221,425,584
228,971,338
Consolidated Statement of Comprehensive Income
(In Millions)
Net Income
Other Comprehensive Income (net of tax and reclassifications)
Net Unrealized Gains (Losses) on Securities Available for Sale
Net Unrealized Gains (Losses) on Cash Flow Hedge Designations
Cumulative-Effect of Adopting SFAS No. 133
Foreign Currency Translation Adjustments
Minimum Pension Liability Adjustment
Other Comprehensive Income (Note 15)
Comprehensive Income
See accompanying notes to consolidated financial statements on pages 63–95.
For the Year Ended December 31
2003
$ 404.8
(3.0)
(5.5)
—
.5
(8.0)
(16.0)
$ 388.8
2002
$ 447.1
5.8
4.3
—
(.2)
(.4)
9.5
$ 456.6
2001
$ 487.5
.8
1.7
(.2)
(.2)
8.7
10.8
$ 498.3
Consolidated Statement of Changes in Stockholders’ Equity
(In Millions)
Preferred Stock
Balance at January 1
Series C Redeemed
Series D Redeemed
Balance at December 31
Common Stock
Balance at January 1
Balance at December 31
Retained Earnings
Balance at January 1
Net Income
Dividends Declared–Common Stock
Dividends Declared–Preferred Stock
Stock Issued–Incentive Plan and Awards
Balance at December 31
Accumulated Other Comprehensive Income
Balance at January 1
Other Comprehensive Income (Loss)
Balance at December 31
Common Stock Issuable–Stock Incentive Plans
Balance at January 1
Stock Issuable, net of Stock Issued
Balance at December 31
Deferred Compensation
Balance at January 1
Compensation Deferred
Compensation Amortized
Balance at December 31
Treasury Stock
Balance at January 1
Stock Options and Awards
Stock Purchased
Balance at December 31
For the Year Ended December 31
2003
2002
2001
$ 120.0
(60.0)
(60.0)
—
$ 120.0
—
—
120.0
$ 120.0
—
—
120.0
379.8
379.8
2,775.3
404.8
(154.2)
(.6)
(34.6)
2,990.7
7.1
(16.0)
(8.9)
118.2
(29.6)
88.6
(40.2)
(5.3)
19.1
(26.4)
(360.4)
104.9
(113.0)
(368.5)
379.8
379.8
2,520.1
447.1
(150.4)
(2.2)
(39.3)
2,775.3
(2.4)
9.5
7.1
147.6
(29.4)
118.2
(58.1)
(6.6)
24.5
(40.2)
(333.5)
115.7
(142.6)
(360.4)
379.8
379.8
2,200.0
487.5
(141.1)
(3.9)
(22.4)
2,520.1
(13.2)
10.8
(2.4)
110.2
37.4
147.6
(57.9)
(36.0)
35.8
(58.1)
(276.7)
100.0
(156.8)
(333.5)
Total Stockholders’ Equity at December 31
$3,055.3
$2,999.8
$2,773.5
See accompanying notes to consolidated financial statements on pages 63–95.
Consolidated Statement of Cash Flows
(In Millions)
Cash Flows from Operating Activities:
Net Income
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Provision for Credit Losses
Depreciation on Buildings and Equipment
(Increase) Decrease in Receivables
Decrease in Interest Payable
Amortization and Accretion of Securities and Unearned Income
Severance Liability Relating to Staff Reductions (Note 19)
Reduction in Office Space Leased and Owned, net (Note 19)
Loss on Sale of NTRC Assets (Note 3)
Gain on Sale of Higgins Road Branch Assets (Note 18)
Amortization and Retirement of Computer Software (Note 19)
Amortization of Intangibles
Deferred Income Tax
Net (Increase) Decrease in Trading Account Securities
Other Operating Activities, net
Net Cash Provided by Operating Activities
Cash Flows from Investing Activities:
Net (Increase) Decrease in Federal Funds Sold and Securities Purchased under
Agreements to Resell
Net Increase in Time Deposits with Banks
Net (Increase) Decrease in Other Interest-Bearing Assets
Purchases of Securities–Held to Maturity
Proceeds from Maturity and Redemption of Securities–Held to Maturity
Purchases of Securities–Available for Sale
Proceeds from Sale, Maturity and Redemption of Securities–Available for Sale
Net (Increase) Decrease in Loans and Leases
Purchases of Buildings and Equipment
Proceeds from Sale of Buildings and Equipment
Purchases and Development of Computer Software
Net (Increase) Decrease in Trust Security Settlement Receivables
Decrease in Cash Due to Acquisitions
Proceeds from Sale of Subsidiary and Branch Assets
Other Investing Activities, net
Net Cash Provided by (Used in) Investing Activities
Cash Flows from Financing Activities:
Net Increase in Deposits
Net Increase (Decrease) in Federal Funds Purchased
Net Increase (Decrease) in Securities Sold under Agreements to Repurchase
Net Increase (Decrease) in Commercial Paper
Net Increase (Decrease) in Short-Term Other Borrowings
Proceeds from Term Federal Funds Purchased
Repayments of Term Federal Funds Purchased
Proceeds from Senior Notes & Long-Term Debt
Repayments of Senior Notes & Long-Term Debt
Treasury Stock Purchased
Net Proceeds from Stock Options
Cash Dividends Paid on Common Stock
Cash Dividends Paid on Preferred Stock
Redemption of Preferred Stock
Other Financing Activities, net
Net Cash Provided by (Used in) Financing Activities
Increase (Decrease) in Cash and Due from Banks
Cash and Due from Banks at Beginning of Year
Cash and Due from Banks at End of Year
Schedule of Noncash Investing Activities:
Transfer of Securities from Held to Maturity to Available for Sale
Supplemental Disclosures of Cash Flow Information:
Interest Paid
Income Taxes Paid
See accompanying notes to consolidated financial statements on pages 63–95.
For the Year Ended December 31
2003
2002
2001
$
404.8
$
447.1
$
487.5
2.5
82.2
(76.7)
(9.0)
(20.3)
7.7
17.7
20.2
(17.8)
93.7
10.4
87.9
.3
(92.2)
511.4
210.2
(499.5)
56.5
(215.4)
70.8
(20,287.0)
17,795.1
190.6
(81.9)
—
(98.4)
437.9
(133.3)
35.4
(60.7)
(2,579.7)
207.9
956.9
263.8
(1.3)
(55.6)
3,817.9
(3,826.3)
300.0
(301.1)
(109.9)
25.4
(149.9)
(.8)
(120.0)
(15.0)
992.0
(1,076.3)
2,672.2
37.5
81.0
(25.4)
(5.1)
(108.4)
—
—
—
—
71.2
6.6
93.7
11.2
72.5
681.9
2,600.3
(1,312.3)
(74.3)
(281.4)
54.3
(28,930.2)
28,965.3
(91.8)
(110.4)
—
(116.6)
(37.1)
—
—
(24.6)
641.2
1,042.8
857.0
156.6
5.9
(2,788.2)
4,293.0
(4,605.0)
–
(1.0)
(139.4)
19.8
(150.5)
(2.3)
—
68.1
(1,243.2)
79.9
2,592.3
66.5
74.5
70.1
(13.6)
(141.2)
—
—
—
—
67.7
16.5
127.2
(5.5)
6.7
756.4
(3,015.3)
(1,762.1)
96.3
(150.0)
99.5
(65,235.4)
66,441.8
33.7
(128.3)
9.1
(135.1)
43.8
(1.5)
—
(42.7)
(3,746.2)
2,191.4
(2,799.5)
(169.7)
(4.7)
3,939.7
4,675.4
(4,403.4)
154.5
(75.8)
(152.8)
19.7
(137.9)
(4.4)
—
61.8
3,294.3
304.5
2,287.8
$ 1,595.9
$ 2,672.2
$ 2,592.3
$
$
—
516.6
91.6
$
$
—
$
167.1
641.6
75.4
$ 1,099.9
60.5
Notes to Consolidated Financial Statements
1. Accounting Policies—The consolidated financial
statements have been prepared in conformity with
accounting principles generally accepted in the United
States and reporting practices prescribed for the banking
industry. A description of the significant accounting poli-
cies follows:
A. Basis of Presentation. The consolidated finan-
cial statements include the accounts of Northern Trust
Corporation (Corporation) and its wholly-owned sub-
sidiary, The Northern Trust Company (Bank), and their
wholly-owned subsidiaries. Throughout the notes, the
term “Northern Trust” refers to Northern Trust Corpo-
ration and its subsidiaries. Intercompany balances and
transactions have been eliminated in consolidation. The
consolidated statement of income includes results of ac-
quired subsidiaries from the dates of acquisition. As a re-
sult of its disposition in June 2003, the operating results of
Northern Trust Retirement Consulting, L.L.C. (NTRC) for
all periods presented have been reclassified and shown as
discontinued operations in the consolidated statement
of income.
B. Nature of Operations. In November 2003, the
Corporation became a financial holding company under
the Gramm-Leach-Bliley Act. The principal subsidiary
of the Corporation is the Chicago-based Bank. The
Corporation also owns national bank subsidiaries with
offices in Arizona, California, Colorado, Florida, and
Texas, a federal savings bank subsidiary with offices in
Connecticut, Georgia, Massachusetts, Michigan, Missouri,
Nevada, New York, Ohio, Washington and Wisconsin,
trust companies in Connecticut and New York and various
other nonbank subsidiaries, including a securities broker-
age firm and an institutional investment management
company. The Bank has offices in the Chicago metropoli-
tan area, operations in London and various subsidiaries,
including an investment management company, a leasing
company, a Canadian trust company, a New York Edge
Act company, a UK incorporated bank subsidiary, and a
Dublin-based fund administration company. Northern
Trust generates the majority of its revenues from its two
primary business units: Corporate and Institutional Serv-
ices (C&IS) and Personal Financial Services (PFS).
Investment management services and products are pro-
vided to C&IS and PFS through a third business unit,
Northern Trust Global Investments (NTGI). Operating
and systems support for these business units are provided
by a fourth business unit, Worldwide Operations and
Technology (WWOT).
The C&IS business unit provides asset manage-
ment, administration, and related services worldwide to
corporate and public entity retirement funds, foundation
and endowment clients, fund managers, insurance
companies and government funds; a full range of commer-
cial banking services to large domestic corporations and
financial institutions including treasury management; and
foreign exchange services for global custody clients and
Northern Trust’s own account.
The PFS business unit provides personal trust, cus-
tody and investment management services, individual re-
tirement accounts, guardianship and estate administration,
banking (including private banking) and residential real
estate mortgage lending services, and also provides com-
mercial banking services to small/mid-sized businesses.
These services are delivered through the Bank in Illinois
and the network of subsidiaries with offices in Arizona,
California, Colorado, Connecticut, Florida, Georgia,
Massachusetts, Michigan, Missouri, Nevada, New York,
Ohio, Texas, Washington and Wisconsin.
C. Use of Estimates in the Preparation of Finan-
cial Statements. The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the
reported amounts of revenues and expenses during
the reporting period. Actual results could differ from
those estimates.
D. Foreign Currency Translation. If the functional
currency of a foreign branch or subsidiary is the U.S. dol-
lar, foreign currency asset and liability accounts are trans-
lated at current rates of exchange, except for buildings and
equipment which are translated at rates in effect at the date
of acquisition. Results from remeasurement are reported
in other operating income. Income and expense accounts
are translated at month-end rates of exchange.
If the functional currency of a foreign branch or
subsidiary is its local currency, the local currency asset
and liability accounts are translated at current rates. Trans-
lation adjustments are reported, net of tax, directly to
accumulated other comprehensive income, a component
of stockholders’ equity. Income and expense accounts are
translated at month-end rates of exchange.
E. Securities. Securities Available for Sale are re-
ported at fair value, with unrealized gains and losses
credited or charged, net of the tax effect, to accumulated
other comprehensive income, a component of stock-
holders’ equity. Realized gains and losses on secu-
rities available for sale are determined on a specific
identification basis and are reported in the consolidated
statement of income as investment security gains and
losses. Interest income is recorded on the accrual basis
adjusted for amortization of premium and accretion
of discount.
Notes to Consolidated Financial Statements
Securities Held to Maturity consist of debt secu-
Cash flow hedge designations are made between
rities that management intends to, and Northern Trust has
the ability to, hold until maturity. Such securities are re-
ported at cost, adjusted for amortization of premium and
accretion of discount. Interest income is recorded on the
accrual basis adjusted for amortization of premium and
accretion of discount.
Securities Held for Trading are stated at fair value.
Realized and unrealized gains and losses on securities held
for trading are reported in the consolidated statement of
income under security commissions and trading income.
derivatives and forecasted cash inflows or outflows so as to
hedge against variability due to a specific risk. The effective
portion of unrealized gains and losses on such derivatives
is recognized in accumulated other comprehensive in-
come, a component of stockholders’ equity. When the
hedged forecasted transaction impacts earnings, balances
in other comprehensive income are reclassified to the same
income or expense classification as the hedged item. Any
hedge ineffectiveness is recognized in the income or ex-
pense classification of the hedged item.
F. Derivative Financial Instruments. Northern
Net investment hedge designations are made be-
Trust is a party to various derivative instruments as part of
its asset/liability management activities, to meet the risk
management needs of its clients and as part of its trading
activity for its own account. Derivative financial instru-
ments include interest rate swap contracts, futures con-
tracts, forward foreign currency contracts, credit default
swaps, options and similar contracts. Unrealized gains
and receivables on derivative instruments are reported
as other assets and unrealized losses and payables are
reported as other liabilities in the consolidated
balance sheet.
Asset/Liability Management. Fair value, cash flow
or net investment hedge derivatives are designated and
formally documented as such on the date they are trans-
acted. The formal documentation describes the hedge rela-
tionship and identifies the hedging instruments and
hedged items. Included in the documentation is a dis-
cussion of the risk management objectives and strategies
for undertaking such hedges, as well as a description of the
method for assessing hedge effectiveness at inception and
on an ongoing basis. A formal assessment is performed on
a calendar quarter basis to determine that derivatives used
in hedging transactions are highly effective as offsets to
changes in fair value or cash flows of the hedged item. If a
derivative ceases to be highly effective, the hedged item
matures, is sold, or is terminated, or if hedged forecasted
transactions are no longer expected to occur, hedge ac-
counting is terminated and the derivative is treated as if it
were a client-related or trading instrument.
Fair value hedge designations are made between a
derivative and a recognized asset or liability. Interest ac-
cruals and changes in fair value of the derivative are
recognized as a component of the interest income or ex-
pense classification of the hedged item. Changes in fair
value of the hedged asset or liability attributable to the risk
being hedged are reflected in its carrying amount and are
also recognized as a component of its interest income or
expense.
tween a forward foreign currency contract and a net
investment in a foreign branch or subsidiary. Changes in
the fair value of the hedging contract are recognized in
accumulated other comprehensive income. Hedge in-
effectiveness is calculated based on changes in forward
rates of the derivative and the hedged net investment. Any
ineffectiveness is recorded to other income only if the no-
tional amount of the derivative does not match the portion
of the net investment designated as being hedged.
Other derivatives transacted as economic hedges of
foreign denominated assets and liabilities and of credit risk
are carried on the balance sheet at fair value and any
changes in fair value are recognized currently in income.
Client-Related and Trading Instruments. De-
rivative financial instruments entered into to meet clients’
risk management needs or for trading purposes are carried
at fair value, with realized and unrealized gains and losses
included in security commissions and trading income.
G. Loans and Leases. Loans that are held to ma-
turity are reported at the principal amount outstanding,
net of unearned income. Residential real estate loans
classified as held for sale are reported at the lower of ag-
gregate cost or market value. Loan commitments for resi-
dential real estate loans that will be classified as
held for sale at the time of funding and which have an
interest-rate lock, are recorded on the balance sheet at fair
value with associated gains or losses recognized as other
income. Unrealized gains are reported as other assets,
with unrealized losses reported as other liabilities. Other
unfunded loan commitments that are not held for sale
are carried at the amount of unamortized fees with a
reserve for credit loss liability recognized for any
probable losses.
Interest income on loans is recorded on an accrual
basis until, in the opinion of management, there is a ques-
tion as to the ability of the debtor to meet the terms of the
contract, or when interest or principal is more than
90 days contractually past due and the loan is not
Notes to Consolidated Financial Statements
well-secured and in the process of collection. At the time a
loan is placed on nonaccrual status, interest accrued but
not collected is reversed against interest income of the cur-
rent period. Loans are returned to accrual status when fac-
tors indicating doubtful collectibility no longer exist.
Interest collected on nonaccrual loans is applied to princi-
pal unless, in the opinion of management, collectibility of
principal is not in doubt.
A loan is considered to be impaired when, based
on current information and events, management de-
termines that it is probable that the Northern Trust will be
unable to collect all amounts due according to the con-
tractual terms of the loan agreement. Impaired loans are
measured based upon the loan’s market price, the present
value of expected future cash flows, discounted at the
loan’s initial effective interest rate, or at the fair value of
the collateral if the loan is collateral dependent. If the loan
valuation is less than the recorded value of the loan, a spe-
cific reserve is established for the difference.
Premiums and discounts on loans are recognized
as an adjustment of yield using the interest method based
on the contractual terms of the loan. Commitment fees
that are considered to be an adjustment to the loan yield,
loan origination fees and certain direct costs are deferred
and accounted for as an adjustment to the yield.
Unearned lease income from direct financing and
leveraged leases is recognized using the interest method.
This method provides a constant rate of return on the un-
recovered investment over the life of the lease.
H. Reserve for Credit Losses. The reserve for
credit losses represents management’s estimate of probable
inherent losses, which have occurred as of the date of the
financial statements. The loan and lease portfolio and
other credit exposures are regularly reviewed to evaluate
the adequacy of the reserve for credit losses. In determin-
ing the level of the reserve, Northern Trust evaluates the
reserve necessary for specific nonperforming loans and
also estimates losses inherent in other credit exposures.
The result is a reserve with the following components:
Specific Reserve. The amount of specific reserves is
determined through a loan-by-loan analysis of non-
performing loans that considers expected future cash
flows, the value of collateral and other factors that may
impact the borrower’s ability to pay.
Allocated Inherent Reserve. The amount of the
allocated portion of the inherent loss reserve is based on
loss factors assigned to Northern Trust’s credit exposures
based on internal credit ratings. These loss factors are pri-
marily based on management’s judgment of estimated
credit losses inherent in the loan portfolio as well as histor-
ical charge-off experience.
Unallocated Inherent Reserve. Management de-
termines the unallocated portion of the inherent loss re-
serve based on factors that cannot be associated with a
specific credit or loan category. These factors include
management’s subjective evaluation of local and national
economic and business conditions, portfolio concentration
and changes in the character and size of the loan portfolio.
The unallocated portion of the reserve for credit losses re-
flects management’s attempt to ensure that the overall re-
serve appropriately reflects a margin for the imprecision
necessarily inherent in estimates of expected credit losses.
Loans, leases and other extensions of credit
deemed uncollectible are charged to the reserve. Sub-
sequent recoveries, if any, are credited to the reserve. Ac-
tual losses may vary from current estimates and the
amount of the provision may be either greater than or less
than actual net charge-offs. The related provision for credit
losses, which is charged to income, is the amount necessary
to adjust the reserve to the level determined through the
above process.
The control process maintained by Credit Policy
and the lending staff, and the quarterly analysis of specific
and inherent loss components are the principal methods
relied upon by management to ensure that changes in
estimated credit loss levels are adjusted on a timely basis.
In addition to Northern Trust’s own experience, manage-
ment also considers the experience of peer institutions and
regulatory guidance.
Although Northern Trust analyzes its exposure to
credit losses from both on- and off-balance sheet activity as
one process, the portion of the reserve assigned to loans
and leases is reported as a contra asset, directly following
loans and leases in the consolidated balance sheet. The
portion of the reserve assigned to unfunded commitments,
standby letters of credit and derivatives is reported in other
liabilities for financial reporting purposes.
I. Fees on Standby Letters of Credit and Bankers
Acceptances. Fees on standby letters of credit are recog-
nized in other operating income on the straight-line
method over the lives of the underlying agreements. In-
come from commissions on bankers acceptances is recog-
nized in other operating income when the payment from
the customer is received by the accepting bank.
J. Buildings and Equipment. Buildings and
equipment owned are carried at original cost less accumu-
lated depreciation. The charge for depreciation is com-
puted on the straight-line method based on the following
range of lives: buildings—10 to 30 years; equipment—3 to
10 years; and leasehold improvements—lease term to 15
years. Leased properties meeting certain criteria are cap-
italized and amortized using the straight-line method over
the lease period.
Notes to Consolidated Financial Statements
K. Other Real Estate Owned (OREO). OREO is
comprised of commercial and residential real estate
properties acquired in partial or total satisfaction of prob-
lem loans. OREO assets are carried at the lower of cost or
fair value. Losses identified at the time of acquisition
of such properties are charged against the reserve for
credit losses assigned to loans. Subsequent write-downs
that may be required to the carrying value of these assets
and losses realized from asset sales are charged to other
operating expenses.
L. Unconsolidated Affiliates. Northern Trust’s
20% interest in RemitStream Solutions, LLC (lockbox
services), its interest in EquiLend LLC (securities lending
services) and its 50% interest in Helaba Northern Trust
GMBH (investment management services) are carried on
the equity method of accounting. The combined book
value of these investments at December 31, 2003 totaled
$3.8 million. Northern Trust’s $4.9 million investment in
CLS Group Holdings (foreign exchange settlement serv-
ices) is carried at cost.
M. Intangible Assets. Effective with its adoption in
January 2002 of the Financial Accounting Standards Board
(FASB) Statement of Financial Accounting Standard
(SFAS) No. 142, “Goodwill and Other Intangible Assets,”
the Corporation discontinued amortization of goodwill.
Prior to the adoption of this Statement, goodwill had been
amortized on the straight-line method primarily over fif-
teen years.
Other separately identifiable acquired intangible
assets are amortized using the straight-line method over
their estimated useful lives. Purchased software and other
allowable internal costs, including compensation, relating
to software developed for internal use are capitalized.
Software is being amortized using the straight-line method
over the estimated useful life of the asset, ranging from 3 to
10 years.
Intangible assets are reviewed for impairment on
an annual basis.
N. Trust Assets and Fees. Assets held in fiduciary
or agency capacities are not included in the consolidated
balance sheet, since such items are not assets of
Northern Trust.
Fees from trust activities are recorded on the ac-
crual basis, over the period in which the service is pro-
vided. Fees are a function of the market value of assets
managed and administered, the volume of transactions,
securities lending volume and spreads, and fees for other
services rendered, as set forth in the underlying client
agreement. This revenue recognition involves the use of
estimates and assumptions, including components that
are calculated based on estimated asset valuations and
transaction volumes.
Certain investment management fee arrangements
also may provide performance fees that are based on client
portfolio returns exceeding predetermined levels. North-
ern Trust adheres to a policy in which it does not record
any performance-based fee income until the end of the
contract year, thereby eliminating the potential that rev-
enue will be recognized in one quarter and reversed in a
future quarter. Therefore, Northern Trust does not record
any revenue under incentive fee programs that is at risk
due to future performance contingencies. These arrange-
ments often contain similar terms for the payment of
performance-based fees to sub-advisors. The accounting
for these performance-based expenses matches the treat-
ment for the related performance-based revenues.
Client reimbursed out-of-pocket expenses on occa-
sion involve trust activities. Where such reimbursements
are an extension of the trust service rendered, they are
recorded on a gross basis as trust revenue.
O. Trust Security Settlement Receivables. These
receivables represent other collection items presented on
behalf of trust clients.
P. Income Taxes. Northern Trust follows an asset
and liability approach to account for income taxes. The
objective is to recognize the amount of taxes payable or
refundable for the current year, and to recognize deferred
tax assets and liabilities resulting from temporary differ-
ences between the amounts reported in the financial
statements and the tax bases of assets and liabilities. The
measurement of tax assets and liabilities is based on
enacted tax laws and applicable tax rates.
Q. Cash Flow Statements. Cash and cash
equivalents have been defined as “Cash and Due
from Banks.”
R. Stock-Based Compensation Plans. SFAS
No. 123, “Accounting for Stock-Based Compensation,”
establishes financial accounting and reporting standards
for stock-based compensation plans. SFAS No. 123 allows
two alternative accounting methods: (1) a fair-value-based
method, or (2) an intrinsic-value-based method which is
prescribed by Accounting Principles Board Opinion
No. 25, “Accounting for Stock Issued to Employees”
(APB No. 25) and related interpretations. Northern Trust
has elected to account for its stock-based incentives under
APB No. 25, and has adopted the disclosure requirements
of SFAS No. 123 which have been amended by SFAS
No. 148, “Accounting for Stock-Based Compensation—
Transition and Disclosure.”
Pro forma information regarding net income and
earnings per share is required by SFAS No. 123, and has
been determined as if the Corporation had accounted for
its stock-based compensation under SFAS No. 123. For
purposes of estimating the fair value of the Corporation’s
Notes to Consolidated Financial Statements
12.7
16.2
21.2
In April 2003, the FASB issued SFAS No. 149,
employee stock options at the grant-date, a Black-Scholes
option pricing model was used with the following weighted
average assumptions for 2003, 2002 and 2001, respectively:
risk-free interest rates of 3.94%, 5.11% and 5.36%; divi-
dend yields of 2.08%, 1.29% and 1.00%; volatility factors
of the expected market price of the Corporation’s common
stock of 33.5%, 31.2% and 30.0%; and a weighted average
expected life of the options of 6.1 years, 6.2 years and 5.9
years.
The weighted average fair value of options granted
in 2003, 2002 and 2001 was $10.41, $18.75 and $24.30,
respectively. For purposes of pro forma disclosures, the
estimated fair value of the options is amortized to expense
over the options’ six months to three-year vesting periods.
The pro forma information follows:
2003
2002
2001
$404.8
$447.1
$487.5
(In Millions Except
Per Share Information)
Net Income as Reported
Add:
Stock-Based Employee
Compensation Expense
Included in Reported Net
Income, Net of Tax
Deduct:
Total Stock-Based Employee
Compensation Expense
Determined Under the Fair
Value Method, Net of Tax
59.3
70.3
64.5
Pro Forma Net Income
$358.2
$393.0
$444.2
Earnings Per Share as Reported:
Basic
Diluted
Pro Forma Earnings Per Share:
Basic
Diluted
$ 1.84
1.80
$ 2.02
1.97
$ 2.18
2.11
$ 1.62
1.59
$ 1.77
1.73
$ 1.99
1.92
2. Recent Accounting Pronouncements—In June 2002,
the FASB issued SFAS No. 146, “Accounting for Costs
Associated with Exit or Disposal Activities.” SFAS No. 146
applies to exit and disposal costs including: the cost of
termination benefits provided to current employees that
are involuntarily terminated under the terms of a benefit
arrangement that, in substance, is not an ongoing benefit
arrangement or an individual deferred compensation con-
tract; costs to terminate a contract that is not a capital
lease; and costs to consolidate facilities or relocate
employees. This Statement requires that a liability for cost
associated with an exit or disposal activity be recognized
and measured initially at fair value only when a liability is
incurred. The provisions of this Statement are effective
for exit or disposal activities that are initiated after
December 31, 2002. The adoption of this Statement as of
January 1, 2003 did not have a material effect on
Northern Trust’s consolidated financial position or results
of operations.
In November 2002, the FASB issued Interpretation
No. 45, “Guarantor’s Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guaran-
tees of Indebtedness of Others.” This Interpretation elabo-
rates on the disclosures required to be made by a guarantor
in its interim and annual financial statements regarding its
obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at
the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The
disclosure provisions of this Interpretation were effective
for existing guarantees as of December 31, 2002. The initial
recognition and initial measurement provisions
are applicable on a prospective basis to guarantees issued
or modified after December 31, 2002, irrespective of the
guarantor’s fiscal year-end. Adoption of the recognition
and measurement provisions of this Interpretation as
of January 1, 2003 did not have a material effect on
Northern Trust’s consolidated financial position or results
of operations.
“Amendment of Statement 133 on Derivative Instruments
and Hedging Activities.” SFAS No. 149 amends and
clarifies accounting for derivative instruments, including
certain derivative instruments embedded in other con-
tracts, and for hedging activities under FASB Statement
No. 133, “Accounting for Derivative Instruments and
Hedging Activities.” SFAS No. 149 is effective for
contracts entered into or modified after June 30, 2003,
with some exceptions, and for hedging relationships
designated after June 30, 2003, and is to be applied
prospectively. Adoption of this statement as of July 1, 2003
did not have a material effect on Northern Trust’s con-
solidated results of operations.
In May 2003, the FASB issued SFAS No. 150,
“Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity.” SFAS
No. 150 establishes standards for how an issuer classifies
and measures certain financial instruments with character-
istics of both liabilities and equity. It requires that an
issuer classify certain financial instruments as liabilities
that were previously classified as equity. The adoption of
SFAS No. 150 as of June 1, 2003 did not, and is not ex-
pected to have a material effect on Northern Trust’s con-
solidated financial position.
In December 2003, the FASB issued revised Inter-
pretation No. 46 (FIN 46), “Consolidation of Varia-
ble Interest Entities,” which replaced the original
Interpretation No. 46 that had been issued in January
2003. FIN 46 clarifies the application of Accounting Re-
Notes to Consolidated Financial Statements
search Bulletin No. 51, “Consolidated Financial
Statements,” to certain entities in which equity investors
do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the en-
tity to finance its activities without additional subordinated
financial support from other parties. Such entities are
termed variable interest entities. The objective of FIN 46 is
to improve financial statement comparability between
entities involved in similar activities. FIN 46 sets forth
guidance for the identification of variable interest entities
and the assessment of a company’s interest in the variable
interest entity in order to determine whether consolidation
of the entity is required. Public entities that have interests
in variable interest entities considered special purpose
entities are required to apply the requirements of FIN 46 in
financial statements for periods ending after December 15,
2003. Application of FIN 46 by public entities for all other
types of variable interest entities is required in financial
statements for periods ending after March 15, 2004. The
adoption of the requirements of this interpretation has not
had a material effect on Northern Trust’s consolidated fi-
nancial position or results of operations. Northern Trust
will continue to monitor, evaluate and apply authoritative
guidance and interpretations relating to variable interest
accounting as it is issued.
In December 2003, the FASB issued SFAS No. 132
(revised 2003), “Employers’ Disclosures about Pensions
and Other Postretirement Benefits.” This Statement retains
the disclosure requirements contained in the original FASB
Statement No. 132, Employers’ Disclosures about Pensions
and Other Postretirement Benefits, which it replaces.
It requires additional disclosures to those in the original
Statement No. 132 regarding assets, investment strategies,
obligations and cash flows of defined benefit pension plans
and other defined benefit postretirement plans. The adop-
tion of the disclosure requirements of SFAS No. 132
(revised 2003), effective December 31, 2003, had no impact
on Northern Trust’s consolidated results of operations.
3. Discontinued Operations—On June 15, 2003, North-
ern Trust completed the sale to Hewitt Associates (Hewitt)
of substantially all of the assets of NTRC. NTRC provided
nearly 200 companies and more than 1 million partic-
ipants with defined benefit, defined contribution and
retiree health and welfare administrative services, includ-
ing recordkeeping and customer service, and also provided
retirement consulting and actuarial services, including plan
design and communication.
The sale of NTRC assets resulted in a pre-tax net
loss on disposal of $20.2 million in the second quarter of
2003, principally reflecting the write-off of unamortized
technology investments, lease exit costs and severance
benefits. The NTRC transaction entailed a reduction of
Northern Trust’s staff of approximately 650 positions.
Additional pre-tax charges of $2.9 million associated with
the business transition were incurred in 2003 subsequent
to the sale and it is expected that approximately $500
thousand in additional transition related charges will be
incurred in 2004. The operating results of the NTRC busi-
ness for the current and all prior periods presented, and
the loss on its disposal, are reflected as discontinued oper-
ations in the consolidated statement of income and in the
C&IS business unit results of operations.
Revenue from NTRC totaled $32.8 million, $72.1
million, and $68.0 million for the period January 1, 2003
through June 15, 2003, and for the twelve months ended
December 31, 2002, and December 31, 2001, respectively.
4. Reclassifications—In addition to reclassifications re-
lated to discontinued operations, other reclassifications
have been made to prior periods’ consolidated financial
statements to place them on a basis comparable with the
current period’s consolidated financial statements.
Notes to Consolidated Financial Statements
5. Securities—Securities Available for Sale. The following tables summarize the amortized cost, fair values and remain-
ing maturities of securities available for sale.
(In Millions)
U.S. Government
Obligations of States and Political Subdivisions
Federal Agency
Preferred Stock
Other
Total
(In Millions)
U.S. Government
Obligations of States and Political Subdivisions
Federal Agency
Preferred Stock
Other
Total
(In Millions)
Due in One Year or Less
Due After One Year Through Five Years
Due After Five Years Through Ten Years
Due After Ten Years
Total
December 31, 2003
Gross
Unrealized
Gains
Gross
Unrealized
Losses
$ .1
2.4
11.7
—
1.0
$15.2
$ —
—
—
—
—
$ —
December 31, 2002
Gross
Unrealized
Gains
Gross
Unrealized
Losses
$
.4
2.4
19.2
—
.8
$22.8
$ —
—
—
—
—
$ —
Fair
Value
$ 103.3
33.0
7,756.2
79.1
450.8
$8,422.4
Fair
Value
$ 104.0
33.1
5,024.4
80.8
438.9
$5,681.2
Amortized
Cost
$ 103.2
30.6
7,744.5
79.1
449.8
$8,407.2
Amortized
Cost
$ 103.6
30.7
5,005.2
80.8
438.1
$5,658.4
December 31, 2003
Amortized
Cost
$7,498.2
613.9
16.8
278.3
$8,407.2
Fair
Value
$7,503.2
621.7
26.0
271.5
$8,422.4
Mortgage-backed securities are included in the above table taking into account anticipated future prepayments.
Notes to Consolidated Financial Statements
Securities Held to Maturity. The following tables summarize the book values, fair values and remaining maturities of
securities held to maturity.
December 31, 2003
(In Millions)
Obligations of States and Political Subdivisions
Federal Agency
Other
Total
(In Millions)
Obligations of States and Political Subdivisions
Federal Agency
Other
Total
Book
Value
$ 851.2
10.2
180.1
$1,041.5
Book
Value
$ 756.8
8.4
139.8
$ 905.0
(In Millions)
Due in One Year or Less
Due After One Year Through Five Years
Due After Five Years Through Ten Years
Due After Ten Years
Total
Gross
Unrealized
Gains
$45.8
.1
.2
$46.1
Gross
Unrealized
Losses
.7
.1
5.2
6.0
$
$
December 31, 2002
Gross
Unrealized
Gains
$42.7
.2
.3
$43.2
Gross
Unrealized
Losses
.7
.3
4.3
5.3
$
$
Fair
Value
$ 896.3
10.2
175.1
$1,081.6
Fair
Value
$ 798.8
8.3
135.8
$ 942.9
December 31, 2003
$
Book
Value
54.5
147.2
385.1
454.7
$1,041.5
$
Fair
Value
55.3
148.7
404.8
472.8
$1,081.6
Mortgage-backed securities are included in the above table taking into account anticipated future prepayments.
Securities with Unrealized Losses. The following table provides information regarding securities at December 31, 2003
that have been in a continuous unrealized loss position for less than 12 months or for 12 months or longer.
(In Millions)
Obligations of States and Political Subdivisions
Federal Agency
Other
Total Temporarily Impaired Securities
Less than 12 Months
12 Months or Longer
Total
Fair
Value
$37.7
7.8
12.5
$58.0
Unrealized
Losses
$ .7
.1
2.7
$3.5
Fair
Value
$ —
—
12.1
$12.1
Unrealized
Losses
$ —
—
2.5
$2.5
Fair
Value
$37.7
7.8
24.6
$70.1
Unrealized
Losses
$ .7
.1
5.2
$6.0
As of December 31, 2003, 134 securities with a
combined fair value of $70.1 million were in an unrealized
loss position. The majority of these securities (97 securities
with a combined fair value of $37.7 million) are municipal
bonds that have been in an unrealized loss position for less
than 12 months. The unrealized losses on these bonds rep-
resent less than 2% of the bonds’ total book value and are
attributable to changes in overall market interest rates.
The remaining 37 securities in an unrealized loss
were purchased at below market rates for the purpose of
supporting institutions and programs that benefit low to
moderate income communities within Northern Trust’s
market area. Prices of corporate or mortgage-backed
bonds with comparable credit quality are used to value
CRA-related securities. Northern Trust has the ability and
intent to hold all CRA-related securities until maturity and
expects timely payment of all principal and interest.
position consist of federal agency and other securities with
a fair value of $32.4 million and a combined unrealized
loss of $5.3 million (or 14% of their combined book value)
that were purchased for compliance with the Community
Reinvestment Act (CRA). These CRA-related securities
Investment Security Gains and Losses. There were no
security gains or losses in 2003. Realized gross security
gains and losses totaled $.3 million and none, respectively,
in 2002. Realized gross security gains and losses totaled
$.1 million and $.1 million, respectively, in 2001.
Notes to Consolidated Financial Statements
6. Securities Purchased Under Agreements to Resell and
Securities Sold Under Agreements to Repurchase—
Securities purchased under agreements to resell and secu-
rities sold under agreements to repurchase are
recorded at the amounts at which the securities were ac-
quired or sold plus accrued interest. To minimize any po-
tential credit risk associated with these transactions, the
fair value of the securities purchased or sold is con-
tinuously monitored, limits are set on exposure with
counterparties, and the financial condition of counter-
parties is regularly assessed. It is Northern Trust’s policy to
take possession of securities purchased under agreements
to resell.
The following tables summarize information re-
lated to securities purchased under agreements to resell
and securities sold under agreements to repurchase.
Other domestic and international loans include
$672.2 million at December 31, 2003, and $899.3 million
at December 31, 2002 of overnight trust-related advances
in connection with next day security settlements. Lease fi-
nancing includes leveraged leases of $810.3 million at
December 31, 2003, and $731.4 million at December 31,
2002.
Residential real estate loans classified as held for
sale totaled $1.1 million at December 31, 2003 and
$14.2 million at December 31, 2002.
Concentrations of Credit Risk. The information
in the section titled “Residential Real Estate” on page 48
through the section titled “Commercial Aircraft Leases” on
page 50, is incorporated herein by reference.
($ In Millions)
Average Balance During the Year
Average Interest Rate Earned During
the Year
December 31
2003
$ 455.6
2002
$ 523.9
1.25%
1.72%
Maximum Month-End Balance
During the Year
649.4
3,126.9
($ In Millions)
Average Balance During the Year
Average Interest Rate Paid During
the Year
Maximum Month-End Balance
During the Year
December 31
2003
$1,711.1
2002
$1,282.9
1.05%
1.59%
2,149.4
1,850.4
7. Loans and Leases—Amounts outstanding in selected
loan categories are shown below.
(In Millions)
Domestic
Residential Real Estate
Commercial
Broker
Commercial Real Estate
Personal
Other
Lease Financing
Total Domestic
International
Total Loans and Leases
Reserve for Credit Losses Assigned to
Loans and Leases
Net Loans and Leases
December 31
2003
2002
$ 7,975.3
3,405.3
7.0
1,297.1
2,699.9
743.9
1,228.0
17,356.5
457.3
17,813.8
$ 7,808.1
3,968.3
8.8
1,168.5
2,480.8
959.3
1,276.0
17,669.8
393.9
18,063.7
(149.2)
$17,664.6
(161.1)
$17,902.6
(In Millions)
Nonaccrual Loans
Domestic
International
Total Nonaccrual Loans
Other Real Estate Owned
Total Nonperforming Assets
Total 90 Day Past Due Loans (still accruing)
December 31
2003
2002
$80.0
—
80.0
.3
$80.3
$21.0
$93.4
—
93.4
1.2
$94.6
$15.2
Included in nonperforming assets were loans with
a recorded investment at December 31, 2003 and
December 31, 2002 of $78.7 million (net of $12.0 million
in charge-offs) and $90.9 million (net of $23.0 million in
charge-offs), respectively, which were also classified as
impaired. At December 31, 2003 and December 31, 2002,
impaired loans totaling $5.6 million (net of $4.8 million in
charge-offs) and $13.0 million (net of $12.6 million in
charge-offs), respectively, had no portion of the reserve
for credit losses specifically allocated to them, while
$73.1 million (net of $7.2 million in charge-offs) at
December 31, 2003 had a specific allocated reserve of
$37.0 million and $77.9 million (net of $10.4 million in
charge-offs) at December 31, 2002 had a specific allocated
reserve of $25.0 million. Total recorded investment in
impaired loans averaged $92.0 million in 2003 and
$106.8 million in 2002.
There were $6.4 million of unfunded loan commit-
ments and standby letters of credit issued to borrowers
whose loans were classified as nonaccrual at December 31,
2003, and $23.2 million at December 31, 2002.
Interest income that would have been recorded on
nonaccrual loans in accordance with their original terms
amounted to $5.6 million in 2003, $6.4 million in 2002 and
$9.4 million in 2001, compared with amounts that were
actually recorded of $345 thousand, $77 thousand and $66
thousand, respectively.
Notes to Consolidated Financial Statements
indices or increases in real estate taxes and other operating
expenses and renewal option clauses calling for increased
rentals. There are no restrictions imposed by any lease
agreement regarding the payment of dividends, debt
financing or Northern Trust entering into further lease
agreements. Minimum annual lease commitments as of
December 31, 2003 for all non-cancelable operating leases
with a term of 1 year or more are as follows:
8. Reserve for Credit Losses—Changes in the reserve for
credit losses were as follows:
(In Millions)
Balance at Beginning of Year
Charge-Offs
Recoveries
Net Charge-Offs
Provision for Credit Losses
Balance at End of Year
2003
2002
2001
$168.5
(22.3)
8.5
$161.6
(36.6)
6.0
$162.9
(69.0)
1.2
(13.8)
2.5
(30.6)
37.5
(67.8)
66.5
$157.2
$168.5
$161.6
(In Millions)
Reserve for Credit Losses Assigned to:
Loans and Leases
Unfunded Commitments, Standby
$149.2
$161.1
$154.3
Letters of Credit and Derivatives
8.0
7.4
7.3
Total Reserve for Credit Losses
$157.2
$168.5
$161.6
2004
2005
2006
2007
2008
Later Years
Future Minimum
Lease Payments
$ 49.6
48.1
46.2
43.6
38.5
344.6
$570.6
9. Buildings and Equipment—A summary of buildings
and equipment is presented below.
(In Millions)
Land and Improvements
Buildings
Equipment
Leasehold Improvements
Buildings Leased under
Capital Leases
(Note 10)
Total Buildings and
Equipment
(In Millions)
Land and Improvements
Buildings
Equipment
Leasehold Improvements
Buildings Leased under
Capital Leases
(Note 10)
Total Buildings and
Equipment
December 31, 2003
Original
Cost
Accumulated
Depreciation
Net Book
Value
$ 37.5
176.9
369.2
145.6
$
.3
59.7
178.8
46.6
$ 37.2
117.2
190.4
99.0
81.1
26.6
54.5
$810.3
$312.0
$498.3
December 31, 2002
Original
Cost
Accumulated
Depreciation
Net Book
Value
$ 38.3
188.0
373.7
134.2
$
.2
56.0
180.7
39.2
$ 38.1
132.0
193.0
95.0
81.1
24.2
56.9
$815.3
$300.3
$515.0
The charge for depreciation, which includes amor-
tization of assets recorded under capital leases, amounted
to $82.2 million in 2003, $81.0 million in 2002 and $74.5
million in 2001.
10. Lease Commitments—At December 31, 2003, North-
ern Trust was obligated under a number of non-cancelable
operating leases for premises and equipment. Certain
leases contain rent escalation clauses based on market
Total Minimum Lease Payments
Net rental expense for all operating leases is in-
cluded in occupancy expense and amounted to
$70.3 million in 2003, $44.3 million in 2002 and
$39.2 million in 2001. Net rental expense for 2003 in-
cluded the $18.9 million charge relating to reduced office
space requirements.
One of the buildings and related land utilized for
Chicago operations has been leased under an agreement
that qualifies as a capital lease. The long-term financing for
the property was provided by the Corporation and the
Bank. In the event of sale or refinancing, the Bank will
receive all proceeds except for 58% of any proceeds in
excess of the original project costs, which will be paid to
the lessor.
The following table reflects the future minimum
lease payments required under capital leases, net of
any payments received on the long-term financing,
and the present value of net capital lease obligations at
December 31, 2003.
(In Millions)
2004
2005
2006
2007
2008
Later Years
Total Minimum Lease Payments, net
Less: Amount Representing Interest
Net Present Value under Capital
Lease Obligations
Future Minimum
Lease Payments, Net
$ 2.4
2.4
2.4
2.5
2.5
8.9
21.1
6.4
$14.7
Notes to Consolidated Financial Statements
11. Business Combinations—In 2003, Northern Trust
substantially completed its acquisition of Deutsche Bank
AG’s global passive equity, enhanced equity and passive
fixed income investment management businesses. The
majority of the accounts were acquired and transitioned in
January 2003 and the remainder of the accounts were
transitioned over the next four months of the year. The
purchase price totaled $123.8 million, which was primarily
based on the value of revenues represented by managed
assets transferred. At December 31, 2003, assets under
management associated with this acquisition totaled ap-
proximately $75 billion. Included in the acquisition cost
were $99.6 million of goodwill and $24.2 million of other
intangible assets.
In April 2003, Northern Trust acquired Legacy
South, an Atlanta-based private wealth management firm
that services high net worth individuals, families and pri-
vate foundations. The purchase price, which is based on
the total value of revenues represented by managed assets
transferred, is expected to approximate $13.2 million and
will be made in multiple payments over a 16-month peri-
od. Through December 31, 2003, Northern Trust has paid
$9.5 million of the estimated purchase price. Included in
the acquisition cost was $7.1 million of goodwill and $2.4
million of other intangible assets. Legacy South was
merged into Northern Trust Bank, FSB. Assets under
management at December 31, 2003 associated with this
acquisition totaled approximately $472 million.
Goodwill and other intangible assets are included
in other assets in the consolidated balance sheet. The
changes in the carrying amount of goodwill for the years
ended December 31 2003, and 2002, are as follows:
Corporate
and
Institutional
Services
Personal
Financial
Services
Total
(In Millions)
Balance at
December 31, 2001
$ 42.1
$48.0
$ 90.1
Balance at
December 31, 2002
Goodwill Acquired
Deutsche Bank
Legacy South
Balance at
42.1
99.6
—
48.0
90.1
—
7.1
99.6
7.1
December 31, 2003
$141.7
$55.1
$196.8
The gross carrying amount and accumulated amortization
of other intangible assets as of December 31, 2003 and
2002, is as follows:
December 31, 2003
Gross
Carrying
Amount
Accumulated
Amortization
Net
Book
Value
(In Millions)
Other Intangible Assets–
Subject to Amortization
$114.3
$69.6
$44.7
December 31, 2002
Gross
Carrying
Amount
Accumulated
Amortization
Net
Book
Value
(In Millions)
Other Intangible Assets–
Subject to Amortization
$ 87.7
$59.2
$28.5
Other intangible assets consist primarily of the
value of acquired customer relationships. Other intangible
assets of $26.6 million acquired during 2003 have a
weighted average amortization period of 8 years. Amor-
tization expense related to other intangible assets was $10.4
million, $6.6 million, and $6.6 million for the years ended
December 31, 2003, 2002, and 2001, respectively. Amor-
tization for the years 2004, 2005, 2006, 2007, and 2008 is
estimated to be $9.8 million, $8.7 million, $8.4 million,
$6.1 million, and $4.2 million, respectively.
12. Senior Notes, Long-Term Debt and Lines of Credit—
Senior Notes. A summary of Bank senior notes out-
standing at December 31 is presented below.
($ In Millions)
Rate
2003
2002
Bank-Senior Notes (a) (b) (d)
Fixed Rate Due Oct. 2003
Fixed Rate Due Nov. 2004
Fixed Rate Due Feb. 2005
Fixed Rate Due Dec. 2006
Total Bank Senior Notes
6.625% $ —
6.65
150.0
7.50
100.0
2.875
100.0
$350.0
$200.0
150.0
100.0
—
$450.0
Notes to Consolidated Financial Statements
Long-Term Debt. A summary of long-term debt out-
standing at December 31 is presented below.
($ In Millions)
Bank-Subordinated Debt (d)
6.50% Notes due May 2003 (a)
6.70% Notes due Sept. 2005 (a) (b)
7.30% Notes due Sept. 2006 (a) (b)
6.25% Notes due June 2008 (a) (b)
7.10% Notes due Aug. 2009 (a) (b)
6.30% Notes due March 2011 (a) (b)
4.60% Notes due Feb. 2013 (a) (b)
Subordinated Long-Term Debt
Capital Lease Obligations (c)
Total Long-Term Debt
Long-Term Debt Qualifying as
Risk-Based Capital
2003
2002
$ — $100.0
100.0
100.0
100.0
100.0
100.0
100.0
200.0
200.0
150.0
150.0
—
200.0
850.0
14.7
750.0
15.8
$864.7
$765.8
$690.0
$550.0
(a) Not redeemable prior to maturity.
(b) Under the terms of its current Offering Circular, the Bank has the abil-
ity to offer from time to time its senior bank notes in an aggregate principal
amount of up to $4.5 billion at any one time outstanding and up to an
additional $300 million of subordinated notes. Each senior note will ma-
ture from 30 days to fifteen years and each subordinated note will mature
from five years to fifteen years, following its date of original issuance. Each
note will mature on such date as selected by the initial purchaser and
agreed to by the Bank.
(c) Refer to Note 10.
(d) Debt issue costs are recorded as an asset and amortized on a straight-
line basis over the life of the Note.
Line of Credit. The Corporation currently maintains a
commercial paper back-up line of credit with two banks
totaling $50 million. The termination date is November
2005. A pricing matrix that is based on the long-term
senior debt ratings of the Corporation determines the
commitment fee. Currently, the annual fee is 8 basis points
of the commitment. There were no borrowings under
commercial paper back-up facilities during 2003 or 2002.
13. Floating Rate Capital Debt—The following tables
summarize the December 31, 2003 book values of the out-
standing Subordinated Debentures and the December 31,
2002 book values of the outstanding Floating Rate
Capital Securities:
(In Millions)
December 31, 2003
NTC Capital I Subordinated Debentures
due January 15, 2027
NTC Capital II Subordinated Debentures
due April 15, 2027
Total Subordinated Debentures
$153.5
122.7
$276.2
(In Millions)
December 31, 2002
$150 Million Series A due January 15, 2027
$120 Million Series B due April 15, 2027
Total Debt-Floating Rate Capital Securities
$148.8
119.0
$267.8
In January 1997, the Corporation issued $150 mil-
lion of Floating Rate Capital Securities, Series A, through a
statutory business trust wholly-owned by the Corporation
(“NTC Capital I”). In April 1997, the Corporation also is-
sued, through a separate wholly-owned statutory business
trust (“NTC Capital II”), $120 million of Floating Rate
Capital Securities, Series B. The sole assets of the trusts are
Subordinated Debentures of Northern Trust Corporation
that have the same interest rates and maturity dates as the
corresponding distribution rates and redemption dates of
the Floating Rate Capital Securities. The Series A Securities
were issued at a discount to yield 60.5 basis points above
the three-month London Interbank Offered Rate (LIBOR)
and are due January 15, 2027. The Series B Securities were
issued at a discount to yield 67.9 basis points above the
three-month LIBOR and are due April 15, 2027. Both
Series A and B Securities qualify as tier 1 capital for regu-
latory purposes.
The Corporation has fully, irrevocably and uncon-
ditionally guaranteed all payments due on such Capital
Securities. The holders of the Capital Securities are entitled
to receive preferential cumulative cash distributions quar-
terly in arrears (based on the liquidation amount of $1,000
per Capital Security) at an interest rate equal to the rate on
the corresponding Subordinated Debentures. The interest
rate on the Series A and Series B securities is equal to
three-month LIBOR plus 0.52% and 0.59%, respectively.
Subject to certain exceptions, the Corporation has the right
to defer payment of interest on the Subordinated
Debentures at any time or from time to time for a period
not exceeding 20 consecutive quarterly periods provided
that no extension period may extend beyond the stated
maturity date. If interest is deferred on the Subordinated
Debentures, distributions on the Capital Securities will also
be deferred and the Corporation will not be permitted,
subject to certain exceptions, to pay or declare any cash
distributions with respect to the Corporation’s capital
stock or debt securities that rank the same as or junior to
the Subordinated Debentures, until all past due dis-
tributions are paid. The Subordinated Debentures are un-
secured and subordinated to substantially all of the
Corporation’s existing indebtedness.
The Corporation has the right to redeem the
Series A Subordinated Debentures on or after January 15,
2007 and the Series B Subordinated Debentures on or after
April 15, 2007, in each case in whole or in part. In
addition, the Corporation has the right to redeem the
Subordinated Debentures held by either trust in whole but
not in part at any time within 90 days following certain
defined tax or regulatory capital treatment changes, at a
price equal to the principal amount plus accrued and
unpaid interest.
Notes to Consolidated Financial Statements
Effective with its adoption of the FASB revised In-
terpretation No. 46 in December 2003, the Corporation
deconsolidated the trusts which issued the Floating Rate
Capital Securities. The impact of deconsolidating the trusts
was an increase in long-term debt of $8.3 million as of
December 31, 2003, as the Corporation now records the
outstanding balances of the Subordinated Debentures on
its consolidated balance sheet. Prior to this change, the
Corporation recorded the outstanding balances of the Ser-
ies A and B Securities on its consolidated balance sheet and
the Subordinated Debentures were eliminated in con-
solidation as intercompany balances. Prior periods have
not been restated as the amounts are not considered
material to the financial position of the Corporation. The
Federal Reserve Board issued a supervisory letter in
July 2003 indicating that securities such as the Series A
and B Securities would continue to qualify as tier 1 capital
for regulatory purposes until further notice and that it
would continue to review the regulatory implications of
any accounting treatment changes and provide further
guidance, if needed.
14. Stockholders’ Equity—Preferred Stock. The Corpo-
ration is authorized to issue 10,000,000 shares of preferred
stock without par value. The Board of Directors of the
Corporation is authorized to fix the particular preferences,
rights, qualifications and restrictions for each series of pre-
ferred stock issued. A summary of preferred stock out-
standing is presented below.
(In Millions)
Auction Rate Preferred Stock Series C
600 shares @ $100,000 per share
Flexible Auction Rate Cumulative
Preferred Stock Series D
600 shares @ $100,000 per share
Total Preferred Stock
December 31
2003
2002
$—
$ 60.0
—
$—
60.0
$120.0
Northern Trust Corporation (i) redeemed on
May 21, 2003 all of its outstanding Auction Preferred
Stock, Series C at the redemption price of $100,000 per
share, plus accrued and unpaid dividends thereon to
May 21, 2003 of $197.36 per share, for a total payment of
$100,197.36 per share and (ii) redeemed on June 4, 2003
all of its outstanding Flexible Auction Preferred Stock,
Series D at the redemption price of $100,000 per share,
plus accrued and unpaid dividends thereon to June 4, 2003
of $204.17 per share, for a total payment of $100,204.17
per share.
Preferred Stock Purchase Rights—On July 21, 1998 the
Board of Directors of the Corporation declared a dividend
distribution of one Preferred Stock Purchase Right for each
outstanding share of the Corporation’s common stock
issuable to stockholders of record at the close of business
on October 31, 1999. As a result of anti-dilution provi-
sions, each share of common stock now has one-half of
one Right associated with it. Each Right is exercisable for
one one-hundredth of a share of Series A Junior
Participating Preferred Stock at an exercise price of
$330.00, subject to adjustment. The Rights will be evi-
denced by the common stock certificates and will not be
exercisable or transferable apart from the common stock
until twenty days after a person or group acquires
15 percent or more of the shares of common stock then
outstanding or announces a tender or exchange offer
which if consummated would result in ownership of
15 percent or more of the outstanding common stock.
In the event that any person or group acquires
15 percent or more of the outstanding shares of common
stock, each Right entitles the holder, other than such per-
son or group, to purchase that number of shares of com-
mon stock of the Corporation having a market value of
twice the exercise price of the Right. At any time thereafter
if the Corporation consummates a business combination
transaction or sells substantially all of its assets, each Right
entitles the holder, other than the person or group acquir-
ing 15 percent or more of the outstanding shares of com-
mon stock, to purchase that number of shares of surviving
company stock which at the time of the transaction would
have a market value of twice the exercise price of the Right.
The Rights do not have voting rights and are re-
deemable at the option of the Corporation at a price of
one-half of one cent per Right at any time prior to the
close of business on the twentieth day following
announcement by the Corporation of the acquisition of
15 percent or more of the outstanding common stock by a
person or group. Unless earlier redeemed, the Rights will
expire on October 31, 2009.
Common Stock. An analysis of changes in the number of
shares of common stock outstanding follows:
Balance at January 1
Employee Benefit Plans:
Incentive Plan and
Awards
Stock Options Exercised
Treasury Stock
Purchased
2003
2002
2001
220,800,402 221,647,260 222,232,395
626,180
1,505,363
733,552
1,441,501
598,940
1,363,160
(2,813,469)
(3,021,911)
(2,547,235)
Balance at December 31
220,118,476 220,800,402 221,647,260
Notes to Consolidated Financial Statements
The Corporation’s current stock buyback program
authorization was increased to 12.0 million shares in April
2003. Under this program, the Corporation may purchase
up to 10.2 million additional shares after December 31,
2003. The repurchased shares would be used primarily for
management incentive plans and other corporate purposes.
15. Accumulated Other Comprehensive Income—The following table summarizes the components of accumulated
other comprehensive income at December 31, 2003, 2002 and 2001, and changes during the years then ended, presented
on an after-tax basis.
December 31, 2003
(In Millions)
Unrealized Gains (Losses) on Securities Available for Sale
Less: Reclassification Adjustments
Net Unrealized Gains (Losses) on Securities Available for Sale
Unrealized Gains (Losses) on Cash Flow Hedge Designations
Less: Reclassification Adjustments
Net Unrealized Gains (Losses) on Cash Flow Hedge Designations
Foreign Currency Translation Adjustments
Minimum Pension Liability
Accumulated Other Comprehensive Income
December 31, 2002
(In Millions)
Unrealized Gains (Losses) on Securities Available for Sale
Less: Reclassification Adjustments
Net Unrealized Gains (Losses) on Securities Available for Sale
Unrealized Gains (Losses) on Cash Flow Hedge Designations
Less: Reclassification Adjustments
Net Unrealized Gains (Losses) on Cash Flow Hedge Designations
Foreign Currency Translation Adjustments
Minimum Pension Liability
Accumulated Other Comprehensive Income
December 31, 2001
(In Millions)
Unrealized Gains (Losses) on Securities Available for Sale
Less: Reclassification Adjustments
Net Unrealized Gains (Losses) on Securities Available for Sale
Unrealized Gains (Losses) on Cash Flow Hedge Designations
Less: Reclassification Adjustments
Cumulative Effect of Adopting SFAS No. 133
Net Unrealized Gains (Losses) on Cash Flow Hedge Designations
Foreign Currency Translation Adjustments
Minimum Pension Liability
Accumulated Other Comprehensive Income
Beginning
Balance
(Net of Tax)
$ 5.7
—
5.7
5.8
—
5.8
(.4)
(4.0)
Period Change
Before Tax
Amount
Tax Effect
Ending
Balance
(Net of Tax)
$ (4.6)
—
(4.6)
5.2
14.0
(8.8)
.9
(12.8)
$ 1.6
—
1.6
(2.0)
(5.3)
3.3
(.4)
4.8
$ 2.7
—
2.7
9.0
8.7
.3
.1
(12.0)
$ (8.9)
$ 7.1
$(25.3)
$ 9.3
Beginning
Balance
(Net of Tax)
$
(.1)
—
(.1)
1.5
—
1.5
(.2)
(3.6)
Period Change
Before Tax
Amount
$ 9.5
.2
9.3
15.2
8.2
7.0
(.4)
(.7)
Tax Effect
$(3.6)
(.1)
(3.5)
(5.8)
(3.1)
(2.7)
.2
.3
Ending
Balance
(Net of Tax)
$ 5.8
.1
5.7
10.9
5.1
5.8
(.4)
(4.0)
$ (2.4)
$ 15.2
$(5.7)
$ 7.1
Period Change
Beginning
Balance
(Net of Tax)
$
(.9)
—
(.9)
—
—
—
—
—
(12.3)
$(13.2)
Before Tax
Amount
$ 1.5
—
1.5
.8
(2.0)
(.3)
2.5
(.3)
14.0
$ 17.7
Tax Effect
Ending
Balance
(Net of Tax)
$ (.7)
—
(.7)
(.3)
.8
.1
(1.0)
.1
(5.3)
$(6.9)
$
(.1)
—
(.1)
.5
(1.2)
(.2)
1.5
(.2)
(3.6)
$ (2.4)
Notes to Consolidated Financial Statements
16. Net Income Per Common Share Computations—The computation of net income per common share is presented
below.
($ In Millions Except Per Share Information)
Basic Net Income Per Common Share
Average Number of Common Shares Outstanding
Reported Income from Continuing Operations
Less: Dividends on Preferred Stock
Add Back: Goodwill Amortization, After Tax
Adjusted Income from Continuing Operations Applicable to Common Stock
Reported Basic Income from Continuing Operations Per Common Share
Goodwill Amortization, After Tax Per Common Share
Income (Loss) from Discontinued Operations
Basic Income (Loss) from Discontinued Operations Per Common Share
Net Income Applicable to Common Stock
Adjusted Basic Net Income Per Common Share
Diluted Net Income Per Common Share
Adjusted Net Income Applicable to Common Stock
Average Number of Common Shares Outstanding
Plus: Dilutive Potential Common Shares
Stock Options
Stock Incentive Plans (Note 22)
Average Common and Potential Common Shares
Income from Continuing Operations Applicable to Common Stock
Add Back: Goodwill Amortization, After Tax
Reported Diluted Income from Continuing Operations Per Common Share
Goodwill Amortization, After Tax Per Common Share
Income (Loss) from Discontinued Operations
Diluted Income (Loss) from Discontinued Operations Per Common Share
Net Income Applicable to Common Stock
Adjusted Diluted Net Income Per Common Share
2003
2002
2001
220,203,094
$423.3
(.7)
—
220,552,132
$447.1
(2.2)
—
221,425,584
$484.7
(4.1)
8.0
422.6
1.92
—
(18.5)
(.08)
$404.1
1.84
444.9
2.02
—
—
—
$444.9
2.02
488.6
2.17
.04
2.8
.01
$483.4
2.22
$404.1
220,203,094
$444.9
220,552,132
$491.4
221,425,584
2,563,423
1,301,327
224,067,844
$422.6
—
3,261,214
2,021,031
225,834,377
$444.9
—
5,310,288
2,235,466
228,971,338
$480.6
8.0
1.89
—
(18.5)
(.09)
$404.1
1.80
1.97
—
—
—
$444.9
1.97
2.10
.04
2.8
.01
$483.4
2.15
17. Net Interest Income—The components of net interest income were as follows:
(In Millions)
Interest Income
Loans and Leases
Securities–Taxable
–Non-Taxable
Time Deposits with Banks
Federal Funds Sold and Securities Purchased under Agreements to Resell and
Other
Total Interest Income
Interest Expense
Deposits
Federal Funds Purchased
Securities Sold under Agreements to Repurchase
Commercial Paper
Other Borrowings
Senior Notes
Long-Term Debt
Floating Rate Capital Debt
Total Interest Expense
Net Interest Income
2003
2002
2001
$ 737.4
106.1
39.9
162.2
10.1
1,055.7
232.2
47.9
18.0
1.6
118.3
28.0
56.5
5.0
507.5
$ 861.5
128.6
31.6
203.9
12.7
1,238.3
316.9
68.4
20.4
2.5
138.2
31.1
52.2
6.8
636.5
$ 548.2
$ 601.8
$1,077.7
352.7
26.2
194.3
30.5
1,681.4
645.9
109.8
58.0
5.6
168.2
33.4
51.4
13.5
1,085.8
$ 595.6
Notes to Consolidated Financial Statements
18. Other Operating Income and Expenses—The
components of other operating income were as follows:
Changes in the consolidated balance sheet during
2003 related to these actions were as follows:
(In Millions)
Loan Service Fees
Banking Service Fees
Losses from Equity Investments
Gain on Sale of Higgins Road
Branch
Gain on Sale of Lockbox
Operations
Other Income
2003
$24.0
31.6
(2.7)
17.8
—
22.4
2002
$ 26.4
29.8
(21.4)
—
—
23.0
2001
$23.1
26.3
—
—
9.2
33.1
Total Other Operating Income
$93.1
$ 57.8
$91.7
Losses from equity investments in 2002 included a
$15.0 million write-off of an equity investment in myCFO,
Inc. and a $4.8 million write-off of an equity investment in
the Global Straight Through Processing Association in-
dustry utility. Other income in 2002 included gains of
$8.5 million from the sale of leased equipment at the end
of the scheduled lease terms and a $4.6 million write-off of
the residual value of an aircraft leased to United Airlines.
The components of other operating expenses were
(In Millions)
Severance
Office
Space Technology
Total
Asset Write-downs
$ — $
.2
$13.4 $ 13.6
Liabilities:
Established
Cash Payments
Balance at
24.0
(16.3)
18.7
(1.2)
— 42.7
— (17.5)
December 31, 2003
$ 7.7
$17.5
$ — $ 25.2
20. Income Taxes—The table below reconciles the total
provision for income taxes from continuing operations
recorded in the consolidated statement of income with the
amounts computed at the statutory federal tax rate of 35%.
(In Millions)
Tax at Statutory Rate
Tax Exempt Income
State Taxes, net
Other
Provision for Income Taxes on
Continuing Operations
2003
2002
2001
$220.9
(14.2)
16.0
(14.9)
$234.1
(11.1)
13.1
(14.2)
$254.5
(9.5)
9.5
(11.8)
$207.8
$221.9
$242.7
2003
2002
2001
$208.5
$187.5
$160.9
The components of the consolidated provision for income
taxes for each of the three years ended December 31 are as
follows:
as follows:
(In Millions)
Outside Services Purchased
Software Amortization and
Other Costs
Business Promotion
Other Intangibles
Amortization
Software Asset Retirements
Goodwill Amortization
Other Expenses
Total Other Operating
Expenses
101.9
41.6
10.4
13.4
—
74.9
89.6
41.5
6.6
—
—
92.9
83.6
40.0
6.6
—
9.9
98.4
$450.7
$418.1
$399.4
19. Other Charges—During 2003, Northern Trust im-
plemented a number of strategic steps to reduce expenses
and better position itself for improved profitability, result-
ing in pre-tax charges included in noninterest expenses of
$56.3 million. Of this charge, $24.0 million represents sev-
erance costs relating to the elimination of approximately
700 positions; $18.9 million reflects the reduction in the
amount of required leased and owned office space as a re-
sult of lower staff levels; and $13.4 million relates to other
charges consisting primarily of asset retirements due to the
standardization, replacement and elimination of software
applications.
(In Millions)
Current Tax Provision:
Federal
State
Foreign
Total
Deferred Tax Provision:
Federal
State
Total
Provision for Income Taxes on
Continuing Operations
Provision (Benefit) for Income Taxes
on Discontinued Operations
Income Tax Liabilities (Benefits)
Reported in Stockholders’
Equity for the Following Items:
Current Tax Benefit for Stock
Options and Other
Benefit Plans
Deferred Tax Effect of Other
Comprehensive Income
Total Income Taxes
2003
2002
2001
$ 91.9
9.7
18.3
$ 95.3
7.8
25.1
$ 81.6
7.4
26.5
119.9
128.2
115.5
72.9
15.0
87.9
81.4
12.3
93.7
120.1
7.1
127.2
$207.8
$221.9
$242.7
(11.7)
—
1.7
(6.6)
(16.9)
(26.6)
(9.3)
5.7
6.9
$180.2
$210.7
$224.7
Notes to Consolidated Financial Statements
Deferred taxes result from temporary differences
between the amounts reported in the consolidated finan-
cial statements and the tax bases of assets and liabilities.
Deferred tax liabilities and assets have been computed
as follows:
(In Millions)
2003
2002
2001
December 31
Deferred Tax Liabilities:
Lease Financing
Software Development
Accumulated
Depreciation
State Taxes, net
Other Liabilities
$571.2
91.8
$537.7
99.8
$470.6
84.8
45.1
38.7
13.8
36.0
30.7
16.4
29.3
20.0
8.6
Gross Deferred Tax Liabilities
760.6
720.6
613.3
Deferred Tax Assets:
Reserve for Credit Losses
Compensation and Benefits
Other Assets
Gross Deferred Tax Assets
Valuation Reserve
Deferred Tax Assets, net of
Valuation Reserve
56.8
9.1
27.1
93.0
—
93.0
Net Deferred Tax Liabilities
$667.6
61.1
29.4
32.4
122.9
—
56.6
35.9
21.0
113.5
—
122.9
$597.7
113.5
$499.8
No valuation allowance related to deferred tax as-
sets has been recorded at December 31, 2003 and 2002 as
management believes it is more likely than not that the
deferred tax assets will be fully realized.
At December 31, 2003, Northern Trust had state
net operating loss carryforwards of $420.4 million, which
are available to reduce future state tax return liabilities.
If not used, $2.7 million will expire in 2006 and the re-
mainder from 2019 through 2021. The carryforwards are
subject to various limitations imposed by tax laws.
21. Employee Benefits—Pension. A noncontributory
qualified defined benefit pension plan covers substantially
all domestic employees of Northern Trust. Assets held by
the plan consist primarily of listed stocks and corporate
bonds.
Effective January 1, 2002, the pension formula was
changed from a traditional final average pay formula to
what is generally known as a pension equity formula. All
employees hired on or after June 1, 2001 are required to
have their pension computed under the pension equity
formula. All employees hired before June 1, 2001 (and
continually active throughout 2001) were entitled to a
one-time pension election to either remain with the tradi-
tional pension plan formula or change to the new pension
equity formula for accruals after December 31, 2001. Al-
though these changes are expected to reduce the long-term
cost of the plan, the plan change increased the annual serv-
ice cost by approximately $.5 million in 2003 and 2002.
Northern Trust also maintains a noncontributory
nonqualified pension plan for participants whose retire-
ment benefit payments under the qualified plan are ex-
pected to exceed the limits imposed by federal tax law.
Northern Trust has a nonqualified trust, referred to as a
“Rabbi” Trust, to fund benefits in excess of those permit-
ted in certain of its qualified plans. The primary purpose of
the trust is to fund nonqualified retirement benefits. This
arrangement offers participants a degree of assurance for
payment of benefits in excess of those permitted in the
related qualified plans. The assets remain subject to the
claims of creditors and are not the property of the
employees. Therefore, they are accounted for as corporate
assets and are included in other assets in the consolidated
balance sheet.
Notes to Consolidated Financial Statements
The following tables set forth the status and the net periodic pension cost of the domestic qualified and non-
qualified pension benefit plans for 2003 and 2002 based on a September 30 measurement date. Prior service costs are be-
ing amortized on a straight-line basis over the average future-working lifetime of the eligible participants at the time of
the plan change. As of January 1, 2003, the average future-working lifetime of the eligible participants is 11.3 years.
($ In Millions)
Accumulated Benefit Obligation
Projected Benefit
Plan Assets at Fair Value
Plan Assets Less Than Projected Benefit Obligations
Unrecognized Net Loss
Unrecognized Prior Service Cost (Benefit)
Prepaid (Accrued) Pension Expense at September 30
Funding October to December
Fourth Quarter Pension Cost
Additional Minimum Liability at December 31
Prepaid (Accrued) Pension Expense at December 31
Weighted-Average Assumptions:
Discount Rates
Rate of Increase in Compensation Level
Expected Long-Term Rate of Return on Assets
($ In Millions)
Service Cost
Interest Cost
Expected Return on Plan Assets
Amortization:
Net Loss
Prior Service Cost (Benefit)
Curtailment Cost
Net Periodic Pension Expense
Weighted-Average Assumptions:
Discount Rates
Rate of Increase in Compensation Level
Expected Long-Term Rate of Return on Assets
September 30
Qualified
Plan
Nonqualified
Plan
2003
2002
$313.5
$245.1
2003
$ 45.3
2002
$ 29.0
371.5
324.9
(46.6)
160.3
2.0
115.7
30.0
(3.2)
—
291.5
246.8
(44.7)
116.5
2.4
74.2
6.0
(1.0)
—
54.5
—
(54.5)
32.6
(2.3)
(24.2)
.3
(1.8)
(19.3)
50.9
—
(50.9)
32.7
(2.6)
(20.8)
.2
(1.8)
(6.4)
$142.5
$ 79.2
$(45.0)
$(28.8)
6.00% 6.75%
3.60
8.75
3.60
8.75
5.50%
3.60
N/A
5.50%
3.60
N/A
Qualified
Plan
Nonqualified
Plan
2003
2002
$ 17.7
20.3
(27.7)
$ 12.5
18.6
(28.2)
2003
$ 2.0
2.9
N/A
2.4
.1
.3
—
.1
—
2.6
(.3)
—
2002
$ 1.9
2.8
N/A
2.6
(.3)
—
$ 13.1
$
3.0
$ 7.2
$ 7.0
6.75% 7.50%
3.60
8.75
5.00
9.00
5.50%
3.60
N/A
6.00%
5.00
N/A
The pension expense for 2001 was $2.8 million and $7.8 million for the qualified and nonqualified plans, respectively.
Notes to Consolidated Financial Statements
(In Millions)
Beginning Balance
Service Cost
Interest Cost
Actuarial Loss
Curtailment
Benefit
Benefits Paid
Qualified
Plan
Nonqualified
Plan
2003
$291.5
17.7
20.3
73.9
2002
$242.9
12.5
18.6
50.2
2003
$ 50.9
2.0
2.9
2.5
2002
$ 46.0
1.9
2.8
5.2
(8.3)
(23.6)
—
(32.7)
—
(3.8)
—
(5.0)
Ending Balance
$371.5
$291.5
$ 54.5
$ 50.9
(In Millions)
2003
2002
Fair Value of Assets at Beginning of
Plan Year
Actual Return on Assets
Employer Contribution
Benefits Paid
Fair Value of Assets at End of Plan Year
$246.8
49.6
52.1
(23.6)
$324.9
$298.1
(18.6)
—
(32.7)
$246.8
The minimum required contribution for the quali-
fied plan in 2004 is estimated to be zero. The maximum
deductible contribution is dependent upon final legislation
regarding interest rates to be utilized and is estimated to
range from $20 million to $54 million. The benefit pay-
ments for the nonqualified plan in 2004 are estimated to
approximate $3.8 million.
traded equities, fixed income and some private equity in-
vestments. Furthermore, equity investments are diversified
across U.S. and non-U.S. stocks as well as growth, value
and small and large capitalizations. Other assets such as
private equity and hedge funds are used judiciously to en-
hance long-term returns while improving portfolio
diversification. Derivatives may be used to gain market
exposure in an efficient and timely manner; however, de-
rivatives may not be used to leverage the portfolio beyond
the market value of the underlying investments. Investment
risk is measured and monitored on an ongoing basis
through annual liability measurements, periodic asset/
liability studies, and quarterly investment portfolio reviews.
Northern Trust employs a building block approach
in determining the long-term rate of return for plan assets.
Historical markets and long-term historical relationships
between equities, fixed income and other asset classes are
studied using the widely-accepted capital market principle
that assets with higher volatility generate a greater return
over the long-run. Current market factors such as inflation
and interest rates are evaluated before long-term capital
market assumptions are determined. The long-term
portfolio return is established, giving proper consideration
to diversification and rebalancing. Peer data and historical
returns are reviewed to check for reasonability and appro-
priateness. Based on this approach and the plan’s target
asset allocation, the expected long-term rate of return on
assets was set at 8.75%.
The allocation of the fair value of Northern Trust’s
Total assets in the “Rabbi” Trust related to the
total pension plan assets at the end of the 2003 and 2002
plan year, and the target allocation, by asset category, are
as follows:
Asset Category
Allocation Actual–2003 Actual–2002
Target
Equity Securities
Debt Securities
Other
Total
65.0%
25.0
10.0
63.6%
23.7
12.7
66.6%
28.5
4.9
100.0%
100.0%
100.0%
Northern Trust employs a total return investment
strategy approach whereby a mix of equities and fixed in-
come investments are used to maximize the long-term re-
turn of plan assets for a prudent level of risk. The intent of
this strategy is to minimize plan expenses by out-
performing plan liabilities over the long run. Risk toler-
ance is established through careful consideration of plan
liabilities, plan funded status, and corporate financial con-
dition. Assets held consist primarily of commingled funds
that invest primarily in a diversified blend of publicly
nonqualified pension plan at December 31, 2003 and 2002
amounted to $38.7 million and $31.6 million, respectively.
A defined benefit and a defined contribution plan
are maintained for the London Branch employees. At
December 31, 2003, the fair value of assets and the pro-
jected benefit obligation of the defined benefit plan totaled
$23.5 million and $26.1 million, respectively. At December
31, 2002, the fair value of assets and the projected benefit
obligation were $18.7 million and $21.4 million, re-
spectively. Pension expense for 2003, 2002 and 2001 was
$4.5 million, $3.3 million and $3.4 million, respectively.
Thrift-Incentive Plan. The Corporation and its sub-
sidiaries have a defined contribution Thrift-Incentive Plan
covering substantially all employees. One half of the
Corporation’s matching contribution is contingent upon
meeting a predefined earnings target for the year. The
estimated contribution to this plan is charged to employee
benefits and totaled $14.5 million in 2003, $16.3 million in
2002 and $15.0 million in 2001.
Notes to Consolidated Financial Statements
Employee Stock Ownership Plan (ESOP). In 2003 and
2002, the corporate contribution to the ESOP was equal to
approximately 1% and 2%, respectively, of an employee’s
salary. ESOP compensation expense in 2003, 2002, and
2001 totaled $6.1 million, $9.9 million, and $6.8 million,
respectively.
Other Postretirement Benefits. Northern Trust maintains
an unfunded postretirement health care plan. Employees
retiring at age 55 or older under the provisions of The
Northern Trust Company Pension Plan who have attained
15 years of service are eligible for postretirement health
care coverage. Effective January 1, 2003, the cost of this
benefit is no longer subsidized by Northern Trust for new
employee hires or employees who were under age 40 at
December 31, 2002. This plan change reduced the post-
retirement benefit obligation by $1.5 million at December
31, 2002. The provisions of this plan may be changed fur-
ther at the discretion of Northern Trust, which also re-
serves the right to terminate these benefits at any time.
The following tables set forth the plan status at
December 31 and the net periodic postretirement
benefit cost of the domestic postretirement health care
plan for 2003 and 2002. The transition obligation at
January 1, 1993 is being amortized to expense over a
twenty-year period.
(In Millions)
Accumulated Postretirement Benefit
Obligation (APBO) Measured at
September 30:
Retirees and Dependents
Actives Eligible for Benefits
Actives Not Yet Eligible
Total APBO
Unamortized Transition Obligation
Unrecognized Net Loss
Prior Service Cost
2003
2002
$ 23.3
8.1
18.5
49.9
(4.9)
(17.7)
1.1
$ 20.2
5.9
16.5
42.6
(5.8)
(11.9)
1.2
Net Postretirement Benefit Liability
$ 28.4
$ 26.1
(In Millions)
Service Cost
Interest Cost
Amortization
Transition Obligation
Net Loss
Prior Service Benefit
Curtailment Cost
Net Periodic Postretirement Benefit
Expense
2003
$ 1.5
2.9
2002
$ 1.3
2.6
.6
.6
(.1)
.2
.6
—
—
—
$ 5.7
$ 4.5
(In Millions)
Beginning Balance
Service Cost
Interest Cost
Actuarial Loss
Curtailment Gain
Benefits Paid
Plan Change
Ending Balance
2003
$42.6
1.5
2.9
8.0
(1.7)
(3.4)
—
$49.9
2002
$34.6
1.3
2.6
8.2
—
(2.6)
(1.5)
$42.6
Postretirement health care expense for 2001 was
$4.0 million. The benefit payments for the postretirement
health care plan in 2004 are estimated to approximate $3.7
million.
The weighted average discount rate used in de-
termining the accumulated postretirement benefit obliga-
tion was 6.00% at December 31, 2003 and 6.75% at
December 31, 2002. For measurement purposes, a 9.5%
annual increase in the cost of covered health care benefits
was assumed for 2004. This rate is assumed to decrease to
5.5% in 2008 and remain at that level thereafter. The
health care cost trend rate assumption has an effect on the
amounts reported. For example, increasing or decreasing
the assumed health care trend rate by one percentage point
in each year would have the following effect.
(In Millions)
Effect on Total Service and
Interest Cost
Components
Effect on Postretirement
Benefit Obligation
1–Percentage
Point Increase
1–Percentage
Point Decrease
$—
.8
$—
(.7)
Subsequent to the Northern Trust measurement date of
September 30, 2003, President Bush signed into law on
December 8, 2003, a bill that expands Medicare, primarily
adding a prescription drug benefit for Medicare-eligible
retirees starting in 2006. Northern Trust anticipates that
future benefit payments will be lower as a result of the new
Medicare provisions. The retiree medical obligations and
costs reported do not reflect the impact of this legislation.
22. Stock-Based Compensation Plans—A description of
Northern Trust’s stock-based compensation is presented
below.
2002 Stock Plan. Effective April 16, 2002, the Corporation
adopted the Northern Trust Corporation 2002 Stock Plan
(the “Plan”) to replace the Northern Trust Corporation
Amended 1992 Incentive Stock Plan (1992 Plan). The Plan
Notes to Consolidated Financial Statements
is administered by the Compensation and Benefits Com-
mittee (Committee) of the Board of Directors. All
employees of the Corporation and its subsidiaries and all
directors of the Corporation are eligible to receive awards
under the Plan. The Plan provides for the grant of in-
centive stock options, nonqualified stock options, stock
appreciation rights, stock awards, performance shares and
stock units. The total number of shares of the Corpo-
ration’s common stock authorized for issuance under the
Plan is 22,000,000. As of December 31, 2003, shares avail-
able for future grant under the plan totaled 13,705,724.
The 1992 Plan expired by its terms on April 30, 2002 and
no awards may be granted under the 1992 Plan after that
date.
The following description applies to awards under
the Plan and the 1992 Plan, as applicable.
Stock Options. Stock options consist of options to
purchase common stock at purchase prices not less than
100% of the fair market value thereof on the date the op-
tion is granted. Options have a maximum ten-year life
and generally vest and become exercisable in six months
to three years after the date of grant. In addition, all op-
tions may become exercisable upon a “change of control”
as defined in the Plan or the 1992 Plan. All options
terminate at such time as determined by the Committee
and as provided in the terms and conditions of the re-
spective option grants.
Stock and Stock Unit Awards. Stock or stock unit
awards can be granted by the Committee to participants
which entitle them to receive a payment in cash or North-
ern Trust Corporation common stock under the terms of
the Plan or the 1992 Plan and such other terms and con-
ditions as the Committee deems appropriate.
Total expense applicable to stock and stock unit
awards including dividend equivalents was $14.7 million in
2003, $13.4 million in 2002 and $12.7 million in 2001.
Stock and stock unit grants totaled 242,777 in 2003,
256,264 in 2002 and 292,500 in 2001, with a weighted
average grant-date fair value of $32.68, $50.92 and $67.32,
respectively. As of December 31, 2003, restricted stock
awards and stock units outstanding totaled 1,429,539
shares, of which 239,641 shares are fully vested with dis-
tribution deferred. These shares generally vest, subject to
continuing employment, over a period of one to nine years.
Performance Shares. Under the performance share
provisions, participants are entitled to have each award
credited to an account maintained for them if established
performance goals are achieved. Distribution of the award
is then made after vesting. The value of shares that have
not been distributed is credited to performance share ac-
counts and is shown in stockholders’ equity as Common
Stock Issuable-Stock Incentive Plans. Total compensation
expense for performance shares was $5.4 million in 2003,
$10.6 million in 2002 and $19.1 million in 2001. The last
grant of performance shares was in 1998 and all shares
were vested as of December 31, 2003.
Notes to Consolidated Financial Statements
A summary of the status of stock options under the Plan and the 1992 Plan at December 31, 2003, 2002 and 2001
and changes during the years then ended is presented in the table below.
Options Outstanding, January 1
Granted ($32.62 to $47.21 per share in 2003)
Exercised ($9.42 to $45.16 per share in 2003)
Cancelled
Options Outstanding December 31
Options Exercisable, December 31
2003
2002
2001
Weighted
Average
Exercise
Price
$45.15
32.72
18.96
50.23
Weighted
Average
Exercise
Price
$41.27
52.60
16.01
56.37
Shares
17,987,455
4,493,524
(1,441,501)
(479,533)
Shares
20,559,945
5,036,605
(1,505,363)
(643,416)
Shares
16,701,201
2,756,250
(1,363,160)
(106,836)
23,447,771
$44.04
20,559,945
$45.15
17,987,455
17,154,121
$43.96
14,523,937
$39.11
12,104,945
Weighted
Average
Exercise
Price
$35.06
67.83
17.46
62.69
$41.27
$29.98
The following is a summary of outstanding and exercisable options under the Plan and the 1992 Plan at
December 31, 2003.
$ 9.42 to $20.00 per share
$20.01 to $35.00 per share
$35.01 to $50.00 per share
$50.01 to $65.00 per share
$65.01 to $83.47 per share
Options Outstanding
Number
Outstanding
2,616,377
8,122,652
3,258,050
4,118,742
5,331,950
Exercisable
2,616,377
4,892,255
3,201,551
1,906,551
4,537,387
Weighted Average
Remaining
Contractual Life
Weighted Average
Exercise Price
2.0 years
6.7 years
4.9 years
8.0 years
6.4 years
$13.80
32.26
44.95
52.79
69.44
Director Stock Awards. In January 2000, each non-
employee director received a grant of 2,400 stock units
under the 1992 Plan, with 800 stock units vesting on elec-
tion or re-election as a director of the Corporation in each
of the years 2000, 2001 and 2002. In January 2003, each
non-employee director received a grant of 2,400 stock
units under the Plan, with 800 units vesting on election or
re-election as a director of the Corporation in each of the
years 2003, 2004 and 2005. Directors may elect to defer the
payment of their annual stock unit grant and cash-based
compensation until termination of services as director.
Amounts deferred are converted into stock units
representing shares of common stock of the Corporation.
Distributions of deferred stock units will be made in stock.
Distributions of the stock unit account that relate to cash-
based compensation will be made in cash based on the fair
value of the stock units at the time of distribution.
Other Stock-Based Compensation Arrangements. Total
compensation expense related to restricted shares granted
in conjunction with an acquisition was $.2 million in
2003, $2.0 million in 2002 and $2.2 million in 2001. As of
December 31, 2003, there are no restricted shares
outstanding.
23. Cash-Based Compensation Plans—Various incentive
plans provide for cash incentives and bonuses to selected
employees based upon accomplishment of corporate net
income objectives, business unit goals and individual per-
formance. The plans provide for acceleration of benefits in
certain circumstances including a change in control. The
estimated contributions to these plans are charged to
compensation expense and totaled $89.6 million in 2003,
$84.8 million in 2002 and $99.7 million in 2001.
24. Contingent Liabilities—Because of the nature of its
activities, Northern Trust is subject to pending and threat-
ened legal actions that arise in the normal course of busi-
ness. Management cannot estimate the specific possible
loss or range of loss that may result from these proceedings
since it is not possible to formulate a meaningful opinion
as to the range of possible outcomes and plaintiffs’ ulti-
mate damage claims. In the judgment of management, af-
ter consultation with legal counsel, none of the litigation to
which the Corporation or any of its subsidiaries is a party,
including the matters described below, will have a material
effect, either individually or in the aggregate, on the
Corporation’s consolidated financial position or results of
operations.
Notes to Consolidated Financial Statements
One subsidiary of the Corporation has been named
as a defendant in several Enron-related class action suits
that have been consolidated under a single complaint in
the Federal District Court for the Southern District of
Texas (Houston). Individual participants in the employee
pension benefit plans sponsored by Enron Corp. sued
various corporate entities and individuals, including the
Bank in its capacity as the former directed trustee of the
Enron Corp. Savings Plan and former service-provider for
the Enron Corp. Employee Stock Ownership Plan. The
lawsuit makes claims, inter alia, for breach of fiduciary
duty to the plan participants, and seeks equitable relief and
monetary damages in an unspecified amount against the
defendants. On September 30, 2003, the court denied the
Bank’s motion to dismiss the complaint as a matter of law.
In an Amended Consolidated Complaint filed on
January 2, 2004, plaintiffs continue to assert claims against
the Bank and other defendants under the Employee
Retirement Income Security Act of 1974 (“ERISA”), seek-
ing a finding that defendants are liable to restore to the
benefit plans and the plaintiffs hundreds of millions of
dollars of losses allegedly caused by defendants’ alleged
breaches of fiduciary duty. The Corporation and the Bank
will continue to defend this action vigorously. In June
2003, after conducting an extensive investigation, which
included the Bank and NTRC, the U.S. Department of
Labor (DOL) filed a civil action against numerous parties
charging that they violated their obligations to the Enron
plan participants. The DOL did not name any Northern
Trust entity or employee as a defendant in its suit. In
another matter, in November and December 2003, Enron
as debtor-in-possession filed two lawsuits seeking to
recover for its bankruptcy estate more than $1 billion it
paid in the fall of 2001 to buy back its commercial paper.
Enron claims that the money it paid to buy back its com-
mercial paper approximately six weeks prior to its bank-
ruptcy filing represented “preference” payments and
“fraudulent transfers” that can be reversed with the money
going back to Enron. Since the Bank sold approximately
$197 million of this Enron commercial paper that it held
for some of its clients, the Bank and those clients are
among scores of defendants named in these complaints.
The Corporation and the Bank will defend these actions
vigorously. Based upon the information developed to date
and recognizing that the outcome of complex litigation
and related matters is uncertain, management believes that
these matters will be resolved without material impact on
the Corporation’s consolidated financial position or results
of operations.
25. Derivative Financial Instruments—Northern Trust is
a party to various derivative financial instruments that are
used in the normal course of business as part of its asset/
liability management activities; to meet the risk manage-
ment needs of its clients; and as part of its trading activity
for its own account. These instruments include foreign
exchange contracts, foreign currency and interest rate
futures contracts, and various interest and credit risk
management instruments.
The major risk associated with these instruments is
that interest or foreign exchange rates could change in an
unanticipated manner, resulting in higher interest costs or a
loss in the underlying value of the instrument. These risks
are mitigated by establishing limits for risk management
positions, monitoring the level of actual positions taken
against such established limits, monitoring the level of any
interest rate sensitivity gaps created by such positions, and
using hedging techniques. When establishing position
limits, market liquidity and volatility, as well as experience
in each market, are all taken into account.
The estimated credit risk associated with these in-
struments relates to the failure of the counterparty to pay
based on the contractual terms of the agreement, and is
generally limited to the gross unrealized market value gains
on these instruments. The amount of credit risk will in-
crease or decrease during the lives of the instruments as
interest or foreign exchange rates fluctuate. This risk is
controlled by limiting such activity to an approved list of
counterparties and by subjecting such activity to the same
credit and quality controls as are followed in lending and
investment activities.
Foreign Exchange Contracts are agreements to
exchange specific amounts of currencies at a future date, at
a specified rate of exchange. Foreign exchange contracts
are entered into primarily to meet the foreign exchange
risk management needs of clients. Foreign exchange con-
tracts are also used for trading purposes and asset/liability
management.
Interest Rate Swap Contracts involve the exchange
of fixed and floating rate interest payment obligations
without the exchange of the underlying principal amounts.
Credit Default Swaps are contracts entered into by
Northern Trust with an external third party where the ex-
ternal party assumes credit risk exposure related to a
specific commercial loan or commitment issued by
Northern Trust by agreeing to pay Northern Trust in the
event of bankruptcy, failure to pay, or restructuring. In
return, Northern Trust agrees to pay a fee to the third
party to transfer the related credit default risk.
Notes to Consolidated Financial Statements
Foreign Currency and Interest Rate Futures Con-
tracts are agreements for delayed delivery of foreign cur-
rency, securities or money market instruments in which
the buyer agrees to take delivery at a specified future date
of a specified currency, security, or instrument, at a speci-
fied price or yield. All of Northern Trust’s futures con-
tracts are traded on organized exchanges that require the
daily settlement of changes in the value of the contracts.
Futures contracts are utilized in trading activities and
asset/liability management to limit Northern Trust’s
exposure to unfavorable fluctuations in foreign exchange
rates or interest rates.
Interest Rate Protection Contracts are agreements
that enable clients to transfer, modify or reduce their
interest rate risk. As a seller of interest rate protection,
Northern Trust receives a fee at the outset of the agree-
ment and then assumes the risk of an unfavorable change
in interest rates. Northern Trust offsets this assumed
interest rate risk by entering into an offsetting position
with an outside counterparty. Northern Trust also pur-
chases interest rate protection contracts for asset/liability
management.
Exchange-Traded Option Contracts grant the
buyer the right, but not the obligation, to purchase or sell
at a specified price, a stated number of units of an under-
lying financial instrument, at a future date.
Forward Sale Contracts represent commitments to
sell a specified amount of securities at an agreed upon date
and price.
(In Millions)
Asset/Liability Management:
Foreign Exchange Contracts
Interest Rate Protection Contracts
Purchased
Interest Rate Futures Contracts
Sold
Interest Rate Swap Contracts
Forward Sale Contracts
Credit Default Swaps
Client-Related and Trading:
Foreign Exchange Contracts
Interest Rate Protection Contracts
Purchased
Sold
Interest Rate Swap Contracts
Contractual/
Notional Amounts
December 31
2003
2002
$
160.9
$
170.9
—
3.5
—
411.9
—
68.8
1.7
519.6
15.4
97.5
28,385.1
15,547.7
15.2
15.2
257.9
12.7
12.7
94.8
Fair Value Hedge Designations. Northern Trust
may designate certain derivatives as hedges of specific fixed
rate assets or liabilities on its balance sheet. The risk man-
agement policy for such hedges is to reduce or eliminate
the exposure to changes in the value of the hedged assets or
liabilities due to a specified risk. As of December 31, 2003,
certain interest rate swaps were designated and qualified as
fair value hedges against changes in LIBOR interest rates
for specific fixed rate agency and asset-backed securities.
There was no ineffectiveness in fair value hedges through
December 31, 2003.
The following table shows the contractual/notional
Cash Flow Hedge Designations. Certain de-
amounts of risk management instruments. The notional
amounts of risk management instruments do not represent
credit risk, and are not recorded in the consolidated bal-
ance sheet. They are used merely to express the volume of
this activity. Credit risk is limited to the positive market
value of the derivative financial instrument, which is sig-
nificantly less than the notional amount, and is shown as
the asset amounts in the Fair Values of Off-Balance Sheet
and Derivative Financial Instruments table on page 90.
rivatives may be designated as hedges against exposure to
variability in expected future cash flows attributable to
particular risks, such as fluctuations in foreign exchange or
interest rates. Northern Trust currently uses cash flow
hedges to reduce or eliminate the exposure to changes in
foreign exchange and LIBOR interest rates. As of
December 31, 2003, certain forward foreign exchange
contracts were designated and qualified as cash flow hedges
against changes in certain forecasted foreign denominated
revenue and expenditure transactions. It is estimated that a
net gain of $.6 million will be reclassified into earnings
within the next 12 months. The maximum length of time
over which these hedges will exist is 15 months. Cash flow
ineffectiveness was negligible through December 31, 2003.
As of December 31, 2003, interest rate swaps were
designated and qualified as hedges against variability in
interest cash flows due to changes in LIBOR interest rates
for specific time deposits with banks. It is estimated that
$.1 million of net gains associated with these hedges will
be reclassified into earnings within the next 12 months.
There was no hedge ineffectiveness through December 31,
2003.
Notes to Consolidated Financial Statements
Net Investment Hedge Designations. Northern
Trust has designated specific forward foreign currency
contracts as hedges against foreign currency exposure for
net investments in foreign affiliates. For the year ended
December 31, 2003, a net loss of $1.1 million was recorded
in accumulated other comprehensive income.
Other Derivatives not Designated as Hedges.
Forward foreign exchange contracts were used to reduce
exposure to fluctuations in the dollar value of capital
investments in foreign subsidiaries and from foreign cur-
rency assets and obligations. Realized and unrealized gains
and losses on such contracts are recognized as a compo-
nent of other operating income. Credit Default Swaps are
used to mitigate exposure to a borrower’s inability to pay
on their loan obligation or other credit related event.
Credit Default Swaps are adjusted to their fair market
value each quarter with gains or losses recorded as
adjustments to income for that period.
Client and Trading-Related Derivative Financial
Instruments. Net revenue associated with client and
trading-related interest rate derivative financial instru-
ments totaled $2.1 million, $.1 million and $.2 million
during 2003, 2002 and 2001, respectively. The majority of
these revenues are related to interest rate swaps and inter-
est rate protection agreements.
26. Off-Balance Sheet Financial Instruments—
Commitments and Letters of Credit. Northern Trust, in
the normal course of business, enters into various types of
commitments and issues letters of credit to meet the
liquidity and credit enhancement needs of its clients.
Credit risk is the principal risk associated with these
instruments. The contractual amounts of these instru-
ments represent the credit risk should the instrument be
fully drawn upon and the client defaults. To control the
credit risk associated with entering into commitments and
issuing letters of credit, Northern Trust subjects such
activities to the same credit quality and monitoring con-
trols as its lending activities.
following:
Legally Binding Commitments to Extend Credit
generally have fixed expiration dates or other termination
clauses. Since a significant portion of the commitments are
expected to expire without being drawn upon, the total
commitment amount does not necessarily represent future
loans or liquidity requirements.
Bankers Acceptances obligate Northern Trust, in
the event of default by the counterparty, to reimburse the
holder of the acceptance.
Commercial Letters of Credit are instruments is-
sued by Northern Trust on behalf of its clients that author-
ize a third party (the beneficiary) to draw drafts up to a
stipulated amount under the specified terms and con-
ditions of the agreement. Commercial letters of credit are
issued primarily to facilitate international trade.
Standby Letters of Credit obligate Northern Trust
to meet certain financial obligations of its clients, if, under
the contractual terms of the agreement, the clients are
unable to do so. These instruments are primarily issued to
support public and private financial commitments, includ-
ing commercial paper, bond financing, initial margin re-
quirements on futures exchanges and similar transactions.
Certain standby letters of credit have been secured with
cash deposits or participated to others. Northern Trust is
obligated to meet the entire financial obligation of these
agreements and in certain cases is able to recover the
amounts paid through recourse against cash deposits or
other participants. Subsequent to its adoption in
January 2003 of FASB Interpretation No. 45, “Guarantor’s
Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others,”
Northern Trust records a liability on its consolidated bal-
ance sheet reflecting the obligation it has undertaken in
issuing standby letters of credit. Northern Trust’s recorded
liability for standby letters of credit, measured as the
amount of unamortized fees on these instruments, totaled
$4.4 million at December 31, 2003.
The following table shows the contractual amounts
of commitments and letters of credit.
(In Millions)
Legally Binding Commitments to
Extend Credit*
Standby Letters of Credit:
Corporate
Industrial Revenue
Other
December 31
2003
2002
$16,541.6
26.1
$17,183.6
49.5
617.6
1,286.5
617.2
683.8
1,353.1
491.7
Total Standby Letters of Credit**
$ 2,521.3
$ 2,528.6
*These amounts exclude $522.2 million and $470.4 million of commit-
ments participated to others at December 31, 2003 and 2002, respectively.
**These amounts include $271.1 million and $256.3 million of standby
letters of credit secured by cash deposits or participated to others as of
December 31, 2003 and 2002, respectively. The weighted average maturity
of standby letters of credit was 20 months at December 31, 2003 and
December 31, 2002.
Commitments and letters of credit consist of the
Commercial Letters of Credit
Notes to Consolidated Financial Statements
Other Off-Balance Sheet Financial Instruments. As part
of securities custody activities and at the direction of trust
clients, Northern Trust lends securities owned by clients to
borrowers who are reviewed and approved by the Credit
Policy Credit Approval Committee. In connection with
these activities, Northern Trust has issued certain in-
demnifications against loss resulting from the bankruptcy
of the borrower of securities. The borrowing party is re-
quired to fully collateralize securities received with cash,
marketable securities, or irrevocable standby letters of
credit. As securities are loaned, collateral is maintained at a
minimum of 100 percent of the fair value of the securities
plus accrued interest, with revaluation of the collateral
on a daily basis. The amount of securities loaned as of
December 31, 2003 and 2002 subject to indemnification
was $74.0 billion and $49.2 billion, respectively. Because of
the borrower’s requirement to fully collateralize securities
borrowed, management believes that the exposure to
credit loss from this activity is remote.
The Bank is a participating member of various
cash, securities and foreign exchange clearing and settle-
ment organizations such as The Depository Trust Com-
pany in New York. It participates in these organizations on
behalf of its clients and on behalf of itself as a result of its
own investment and trading activities. A wide variety of
cash and securities transactions are settled through these
organizations, including those involving obligations of
states and political subdivisions, asset-backed securities,
commercial paper, dollar placements and securities issued
by the Government National Mortgage Association.
As a result of its participation in cash, securities
and foreign exchange clearing and settlement orga-
nizations, the Bank could be responsible for a pro rata
share of certain credit-related losses arising out of the
clearing activities. The method in which such losses would
be shared by the clearing members is stipulated in each
clearing organization’s membership agreement. Credit
exposure related to these agreements varies from day to
day, primarily as a result of fluctuations in the volume of
transactions cleared through the organizations. The esti-
mated credit exposure at December 31, 2003 and 2002 was
$67 million and $48 million, respectively, based on the
membership agreements and clearing volume for those
days. Controls related to these clearing transactions are
closely monitored to protect the assets of Northern Trust
and its clients.
27. Pledged and Restricted Assets—Certain of Northern
Trust’s subsidiaries, as required or permitted by law,
pledge assets to secure public and trust deposits, re-
purchase agreements and for other purposes. On
December 31, 2003, securities and loans totaling $10.1
billion ($6.1 billion of U.S. Government and agency secu-
rities, $792 million of obligations of states and political
subdivisions and $3.2 billion of loans and other securities),
were pledged. Collateral required for these purposes to-
taled $6.5 billion. Included in the total pledged assets is the
fair value of $1.7 billion of available for sale securities
which were pledged as collateral for agreements to re-
purchase securities sold transactions. The secured parties
to these transactions have the right to repledge or sell
these securities.
Northern Trust is permitted to repledge or sell col-
lateral accepted from agreements to resell securities pur-
chased transactions. The total fair value of accepted
collateral as of December 31, 2003 and 2002 was $407.2
million and $328.6 million, respectively. The fair value of
repledged collateral as of December 31, 2003 and 2002 was
$50.4 million and $88.7 million, respectively. Repledged
collateral was used in other agreements to repurchase
securities sold transactions.
Deposits maintained at the Federal Reserve Bank to
meet reserve requirements averaged $605.0 million in 2003
and $525.4 million in 2002.
28. Restrictions on Subsidiary Dividends and Loans or
Advances—Provisions of state and federal banking laws
restrict the amount of dividends that can be paid to the
Corporation by its banking subsidiaries. Under applicable
state and federal laws, no dividends may be paid in an
amount greater than the net profits then on hand, subject
to other applicable provisions of law. In addition, prior
approval from the relevant federal banking regulator is
required if dividends declared by any of the Corporation’s
banking subsidiaries in any calendar year will exceed its net
profits (as defined) for that year, combined with its re-
tained net profits for the preceding two years. Based on
these regulations, the Corporation’s banking subsidiaries,
without regulatory approval, could declare dividends dur-
ing 2004 equal to their 2004 eligible net profits (as defined)
plus $229.4 million. The ability of each banking subsidiary
to pay dividends to the Corporation may be further re-
stricted as a result of regulatory policies and guidelines re-
lating to dividend payments and capital adequacy.
State and federal laws limit the transfer of funds by
a banking subsidiary to the Corporation and certain of its
affiliates in the form of loans or extensions of credit,
investments or purchases of assets. Transfers of this kind to
the Corporation or a nonbanking subsidiary by a banking
subsidiary are each limited to 10% of the banking sub-
sidiary’s capital and surplus with respect to each affiliate
and to 20% in the aggregate, and are also subject to certain
collateral requirements. These transactions, as well as other
transactions between a banking subsidiary and the
Notes to Consolidated Financial Statements
Corporation or its affiliates, must also be on terms sub-
stantially the same as, or at least as favorable as, those pre-
vailing at the time for comparable transactions with non-
affiliated companies or, in the absence of comparable
transactions, on terms, or under circumstances, including
credit standards, that would be offered to, or would apply
to, non-affiliated companies.
29. Fair Value of Financial Instruments—SFAS No. 107,
“Disclosures About Fair Value of Financial Instruments,”
requires disclosure of the estimated fair value of certain
financial instruments. Considerable judgment is required
to interpret market data when computing estimates of fair
value. Accordingly, the estimates presented are not
necessarily indicative of the amounts Northern Trust could
have realized in a market exchange.
The information provided below should not be
interpreted as an estimate of the fair value of Northern
Trust since the disclosures, in accordance with SFAS
No. 107, exclude the values of nonfinancial assets and li-
abilities, as well as a wide range of franchise, relationship,
and intangible values, which are integral to a full assess-
ment of the consolidated financial position.
The use of different assumptions and/or estimation
methods may have a material effect on the computation of
estimated fair values. Therefore, comparisons between
Northern Trust’s disclosures and those of other financial
institutions may not be meaningful.
The following methods and assumptions were used
in estimating the fair values of the financial instruments:
Securities. Fair values of securities were based on
quoted market values, when available. If quoted market
values were not available, fair values were based on quoted
market values for comparable instruments.
Loans (not including lease financing receivables).
The fair values of one-to-four family residential mortgages
were based on quoted market prices of similar loans sold,
adjusted for differences in loan characteristics. The fair
values of the remainder of the loan portfolio were esti-
mated using a discounted cash flow method in which the
discount rate used was the rate at which Northern Trust
would have originated the loan had it been originated as
of the financial statement date, giving effect to current
economic conditions on loan collectibility.
Savings Certificates, Other Time, Foreign Offices
Time Deposits and Other Borrowings. The fair values of
these instruments were estimated using a discounted cash
flow method that incorporated market interest rates.
Senior Notes, Subordinated Debt and Floating
Rate Capital Debt. Fair values were based on quoted mar-
ket prices, when available. If quoted market prices were
not available, fair values were based on quoted market
prices for comparable instruments.
Financial Guarantees. The fair values of financial
guarantees represent the amount of unamortized fees on
these instruments.
Off-Balance Sheet Financial Instruments. The fair
values of commitments represent the amount of un-
amortized fees on these instruments. The fair values of all
other off-balance sheet financial instruments were esti-
mated using market prices, pricing models, or
quoted market prices of financial instruments with
similar characteristics.
Financial Instruments Valued at Carrying Value.
Due to their short maturity, the respective carrying values
of certain on-balance sheet financial instruments
approximated their fair values. These financial instruments
include cash and due from banks; money market assets;
customers’ acceptance liability; trust security settlement
receivables; federal funds purchased; securities sold under
agreements to repurchase; commercial paper; certain other
borrowings; and liability on acceptances.
The fair values required to be disclosed for de-
mand, savings, and money market deposits pursuant to
SFAS No. 107 must equal the amounts disclosed in the
consolidated balance sheet, even though such deposits
are typically priced at a premium in banking
industry consolidations.
Notes to Consolidated Financial Statements
Fair Values of On-Balance Sheet Financial Instruments. The following table summarizes the fair values of on-
balance sheet financial instruments.
(In Millions)
Assets
Cash and Due from Banks
Money Market Assets
Securities:
Available for Sale
Held to Maturity
Trading Account
Loans (excluding Leases)
Net of Credit
Loss Reserve:
Held to Maturity
Held for Sale
Customers’ Acceptance Liability
Trust Security Settlement Receivables
Liabilities
Deposits:
Demand, Savings and Money Market
Savings Certificates, Other Time and Foreign Offices Time
Federal Funds Purchased
Repurchase Agreements
Commercial Paper
Other Borrowings
Senior Notes
Subordinated Debt
Floating Rate Capital Debt
Liability on Acceptances
Financial Guarantees
December 31
2003
2002
Book Value
Fair Value
Book Value
Fair Value
$ 1,595.9
9,565.1
$ 1,595.9
9,565.1
$ 2,672.2
9,332.3
$ 2,672.2
9,332.3
8,422.4
1,041.5
7.4
8,422.4
1,081.6
7.4
5,681.2
905.0
7.7
5,681.2
942.9
7.7
16,435.5
1.1
11.2
170.6
12,869.9
13,400.1
2,629.4
1,827.8
142.3
3,677.0
350.0
850.0
276.2
11.2
4.4
16,660.3
1.1
11.2
170.6
12,869.9
13,421.9
2,629.4
1,827.8
142.3
3,823.0
363.5
921.8
275.9
11.2
4.4
16,612.4
14.2
22.5
608.5
13,704.0
12,358.1
1,672.5
1,564.0
143.6
3,741.0
450.0
750.0
267.8
22.5
.1
16,953.8
14.6
22.5
608.5
13,704.0
12,396.3
1,672.5
1,564.0
143.6
3,946.8
480.7
839.8
199.8
22.5
.1
Fair Values of Off-Balance Sheet and Derivative Financial Instruments. The following table summarizes the fair
values of off-balance sheet and derivative financial instruments.
(In Millions)
Loan Commitments
Asset/Liability Management:
Foreign Exchange Contracts
Assets
Liabilities
Interest Rate Swap Contracts
Assets
Liabilities
Other Financial Instruments
Assets
Liabilities
Client-Related and Trading:*
Foreign Exchange Contracts
Assets
Liabilities
Credit Default Swaps
Assets
Liabilities
Interest Rate Swap Contracts
Assets
Liabilities
December 31
2003
2002
Book Value/Fair Value
8.0
$ 7.8
$
5.0
4.5
.6
9.5
—
—
892.0
858.4
.3
.2
4.2
2.3
8.8
3.7
4.8
11.9
—
.2
588.4
588.0
1.1
—
2.7
2.5
*Assets and liabilities associated with foreign exchange contracts averaged $527.7 million and $496.2 million, respectively, during 2003. Assets and liabilities
associated with other client-related and trading account instruments averaged $3.9 million and $2.7 million, respectively, during 2003.
Notes to Consolidated Financial Statements
30. Business Units and Related Information—
Information regarding the Corporation’s major business
units is contained in the Results of Operations tables in-
cluded in the section titled Business Unit Reporting
beginning on page 35 and is incorporated herein by refer-
ence.
The operations of Northern Trust are managed on
a business unit basis and include components of both
domestic and foreign source income and assets. Foreign
source income and assets are not separately identified in its
internal management reporting system. However, North-
ern Trust is required to disclose foreign activities based on
the domicile of the customer. Due to the complex and in-
tegrated nature of its foreign and domestic activities, it is
impossible to segregate with precision revenues, expenses
and assets between its U.S. and foreign-domiciled custom-
ers. Therefore, certain subjective estimates and assump-
tions have been made to allocate revenues, expenses and
assets between domestic and international operations as
described below.
banking businesses of the Bank, three foreign bank
branches, a UK incorporated bank subsidiary, one Edge
Act subsidiary, foreign subsidiaries located in Canada,
Hong Kong, Ireland, Japan and the UK, Northern Trust
Global Advisors, Inc., and Northern Trust Bank of
Florida N.A. Net income from international operations
includes the direct net income contributions of foreign
branches, foreign subsidiaries and the Edge Act sub-
sidiary. The Bank and Northern Trust Bank of Florida
N.A. international profit contributions reflect direct sal-
ary and other expenses of the business units, plus expense
allocations for interest, occupancy, overhead and the
provision for credit losses. For purposes of this disclosure,
all foreign exchange profits have been allocated to
international operations. Interest expense is allocated to
international operations based on specifically matched or
pooled funding. Allocations of indirect noninterest ex-
penses related to international activities are not sig-
nificant but, when made, are based on various methods
such as time, space and number of employees.
Northern Trust’s international activities are cen-
The table below summarizes international perform-
tered in the global custody, treasury activities, foreign
exchange, investment management and commercial
ance based on the domicile of the primary obligor without
regard to guarantors or the location of collateral.
(In Millions)
2003
International
Domestic
Total
2002
International
Domestic
Total
2001
International
Domestic
Total
Assets
Operating
Income*
Income from
Continuing
Operations before
Income Taxes
Net Income
$10,772.5
30,677.7
$41,450.2
$ 9,774.7
29,703.5
$39,478.2
$ 8,253.2
31,418.6
$ 402.0
1,688.4
$2,090.4
$ 312.5
1,754.0
$2,066.5
$ 344.5
1,795.3
$2,139.8
$163.8
467.3
$631.1
$148.5
520.5
$669.0
$188.5
538.9
$727.4
$102.2
302.6
$404.8
$ 92.6
354.5
$447.1
$117.6
369.9
$487.5
Total
*Operating Income is comprised of net interest income and noninterest income.
$39,671.8
31. Regulatory Capital Requirements—Northern Trust
and its subsidiary banks are subject to various regulatory
capital requirements administered by the federal bank
regulatory authorities. Under these requirements, banks
must maintain specific ratios of total and tier 1 capital to
risk-weighted assets and of tier 1 capital to average quar-
terly assets in order to be classified as “well capitalized.”
The regulatory capital requirements impose certain re-
strictions upon banks that meet minimum capital
requirements but are not “well capitalized” and obligate
the federal bank regulatory authorities to take “prompt
corrective action” with respect to banks that do not main-
tain such minimum ratios. Such prompt corrective action
could have a direct material effect on a bank’s financial
statements.
As of December 31, 2003, each of Northern’s sub-
sidiary banks had capital ratios above the level required for
classification as a “well capitalized” institution and had not
received any regulatory notification of a lower classi-
fication. There are no conditions or events since that date
that management believes have adversely affected the capi-
tal categorization of any subsidiary bank for these purposes.
Notes to Consolidated Financial Statements
The table below summarizes the risk-based capital amounts and ratios for Northern Trust and for each of its sub-
sidiary banks whose net income for 2003 exceeded 10% of the consolidated total.
($ In Millions)
As of December 31, 2003
Total Capital to Risk-Weighted Assets
Consolidated
The Northern Trust Company
Northern Trust Bank of Florida N.A.
Tier 1 Capital to Risk-Weighted Assets
Consolidated
The Northern Trust Company
Northern Trust Bank of Florida N.A.
Tier 1 Capital (to Fourth Quarter Average Assets)
Consolidated
The Northern Trust Company
Northern Trust Bank of Florida N.A.
As of December 31, 2002
Total Capital to Risk-Weighted Assets
Consolidated
The Northern Trust Company
Northern Trust Bank of Florida N.A.
Tier 1 Capital to Risk-Weighted Assets
Consolidated
The Northern Trust Company
Northern Trust Bank of Florida N.A.
Tier 1 Capital (to Fourth Quarter Average Assets)
Consolidated
The Northern Trust Company
Northern Trust Bank of Florida N.A.
Actual
Minimum to
Qualify as
Well Capitalized
Amount
Ratio
Amount
Ratio
$3,892
2,719
403
3,082
1,950
384
3,082
1,950
384
$3,837
2,754
368
3,023
2,098
349
3,023
2,098
349
14.0%
12.4
11.4
$2,788
2,198
353
10.0%
10.0
10.0
11.1
8.9
10.9
7.6
5.9
8.3
14.1%
12.7
11.0
11.1
9.7
10.4
7.8
6.6
7.7
1,673
1,319
212
2,040
1,662
231
$2,715
2,167
335
1,629
1,300
201
1,948
1,594
225
6.0
6.0
6.0
5.0
5.0
5.0
10.0%
10.0
10.0
6.0
6.0
6.0
5.0
5.0
5.0
The bank regulatory authorities of several nations,
individually and through the Basel Committee on Banking
Supervision (Committee), have proposed for comment
and are considering changes to the risk-based capital ad-
equacy framework that could affect the capital guidelines
applicable to financial holding companies and banks. In
October 2003, the Committee announced its intention to
finalize the new Basel Capital Accord (BCA) by no later
than mid-year 2004, with implementation of the BCA capi-
tal adequacy framework by year-end 2006. The Corpo-
ration is monitoring the status and progress of the
proposed rules and has over several years been engaged in
preparing to qualify for the approaches to calculating
minimum regulatory capital under the BCA that U.S.
regulators have proposed to adopt.
Notes to Consolidated Financial Statements
32. Northern Trust Corporation (Corporation only)—Condensed financial information is presented below. Invest-
ments in wholly-owned subsidiaries are carried on the equity method of accounting.
(In Millions)
Assets
Cash on Deposit with Subsidiary Bank
Time Deposits with Banks
Securities
Investments in Wholly-Owned Subsidiaries–Bank
–Nonbank
Loans–Nonbank Subsidiaries
–Other
Buildings and Equipment
Other Assets
Total Assets
Liabilities
Commercial Paper
Long-Term Debt
Other Liabilities
Total Liabilities
Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
December 31
2003
2002
$
.1
296.3
84.9
2,802.6
171.5
—
.2
3.5
257.6
$
.1
225.9
87.4
2,788.5
154.9
6.3
.9
3.4
249.2
$3,616.7
$3,516.6
$ 142.3
284.5
134.6
561.4
3,055.3
$ 143.6
276.1
97.1
516.8
2,999.8
$3,616.7
$3,516.6
Notes to Consolidated Financial Statements
(In Millions)
Operating Income
Dividends–Bank Subsidiaries
–Nonbank Subsidiaries
Intercompany Interest and Other Charges
Interest and Other Income
Total Operating Income
Operating Expenses
Interest Expense
Other Operating Expenses
Total Operating Expenses
Income before Income Taxes and Equity in Undistributed Net Income of Subsidiaries
Benefit for Income Taxes
Income before Equity in Undistributed Net Income of Subsidiaries
Equity in Undistributed Net Income of Subsidiaries–Bank
–Nonbank
Net Income
Net Income Applicable to Common Stock
For the Year Ended December 31
2003
2002
2001
$384.5
11.2
2.7
1.7
400.1
7.0
10.7
17.7
382.4
9.5
391.9
22.5
(9.6)
$404.8
$404.1
$234.5
8.7
3.3
(13.7)
232.8
9.5
7.1
16.6
216.2
18.4
234.6
206.6
5.9
$447.1
$444.9
$310.0
7.9
5.8
5.6
329.3
20.3
10.6
30.9
298.4
13.1
311.5
170.7
5.3
$487.5
$483.4
Notes to Consolidated Financial Statements
(In Millions)
Operating Activities:
Net Income
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Equity in Undistributed Net Income of Subsidiaries
(Increase) Decrease in Accrued Income
Decrease in Prepaid Expenses
Other, net
Net Cash Provided by Operating Activities
Investing Activities:
Net Increase in Time Deposits with Banks
Purchases of Securities
Sales of Securities
Proceeds from Maturity and Redemption of Securities
Net Increase in Capital Investments in Subsidiaries
Net (Increase) Decrease in Loans to Subsidiaries
Net Decrease in Other Loans
Other, net
Net Cash Used in Investing Activities
Financing Activities:
Net Increase (Decrease) in Commercial Paper
Redemption of Preferred Stock
Repayment of Long-Term Debt
Treasury Stock Purchased
Cash Dividends Paid on Common Stock
Cash Dividends Paid on Preferred Stock
Net Proceeds from Stock Options
Other, net
Net Cash Used in Financing Activities
Net Change in Cash on Deposit with Subsidiary Bank
Cash on Deposit with Subsidiary Bank at Beginning of Year
Cash on Deposit with Subsidiary Bank at End of Year
For the Year Ended December 31
2003
2002
2001
$ 404.8
$ 447.1
$ 487.5
(12.9)
—
.5
22.3
414.7
(70.4)
(4.5)
—
6.2
(25.7)
6.3
.7
(4.5)
(91.9)
(1.3)
(120.0)
—
(109.9)
(149.9)
(.8)
25.4
33.7
(322.8)
—
.1
.1
$
(212.5)
(.1)
.6
33.5
268.6
(32.0)
(5.9)
8.0
—
(14.6)
6.5
.2
.5
(37.3)
5.9
—
—
(139.4)
(150.5)
(2.3)
19.8
35.2
(231.3)
—
.1
.1
$
(176.0)
.3
.8
46.4
359.0
(68.3)
(90.3)
49.7
59.0
(15.6)
(3.1)
1.0
(19.1)
(86.7)
(4.7)
—
(25.0)
(152.8)
(137.9)
(4.4)
19.7
32.8
(272.3)
—
.1
.1
$
Report of Independent Public Accountants
:
We have audited the accompanying consolidated balance sheets of Northern Trust Corporation (a Delaware corporation)
and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of income, comprehensive
income, changes in stockholders’ equity and cash flows for each of the years in the three year period ended December 31,
2003. These financial statements are the responsibility of the Corporation’s management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall financial statement presentation. We be-
lieve that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial posi-
tion of Northern Trust Corporation and subsidiaries as of December 31, 2003 and 2002, and the results of their oper-
ations and their cash flows for each of the years in the three year period ended December 31, 2003 in conformity with
accounting principles generally accepted in the United States of America.
, ,
,
Consolidated Financial Statistics
₍₎
Statement of Income
2003
2002
($ In Millions Except Per Share Information)
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
Trust Fees
Other Noninterest Income
Net Interest Income
Interest Income
Interest Expense
Net Interest Income
Provision for Credit Losses
Noninterest Expenses
Provision for Income Taxes
Income from Continuing Operations
Income (Loss) from Discontinued Operations
Net Income
Net Income Applicable to Common Stock
Per Common Share
Net Income–Basic
–Diluted
Average Balance Sheet
Assets
Cash and Due from Banks
Money Market Assets
Securities
Loans and Leases
Reserve for Credit Losses Assigned to Loans
Other Assets
304.0
87.4
254.5
120.2
134.3
5.0
347.4
58.5
114.8
(1.0)
113.8
113.8
293.9
107.2
270.2
133.2
137.0
7.5
412.5
36.7
81.4
(14.8)
66.6
66.3
$
310.6
83.5
256.4
120.2
136.2
(15.0)
347.4
67.4
130.5
(.8)
129.7
129.7
$
$
$
.59
.58
.52
.51
.30
.30
$
$
$
$
280.6
75.0
274.6
133.9
140.7
5.0
349.5
45.2
96.6
(1.9)
94.7
94.3
.43
.42
275.8
65.9
304.1
152.7
151.4
7.5
342.3
46.2
97.1
(.8)
96.3
95.8
.43
.43
281.4
72.5
308.1
158.2
149.9
20.0
338.9
47.4
97.5
(1.1)
96.4
95.8
.44
.43
300.3
89.1
311.1
159.8
151.3
5.0
346.4
63.4
125.9
.9
126.8
126.2
.57
.56
303.5
76.2
315.0
165.8
149.2
5.0
332.4
64.9
126.6
1.0
127.6
127.1
.58
.56
1,853.9
8,597.8
8,153.7
1,773.0
8,820.3
8,804.6
1,631.0
$ 1,897.9
8,359.7
9,578.9
9,381.2
7,390.2
17,462.5 17,452.8 17,546.7 17,567.3
(161.8)
2,675.1
(163.8)
2,572.8
(157.0)
2,915.0
(165.1)
2,632.1
1,602.1
8,272.6
6,558.6
1,774.3
8,728.2
6,636.3
1,576.2
$ 1,585.1
8,962.4
9,261.8
8,281.8
7,328.8
17,587.5 17,589.3 17,607.2 17,673.8
(153.9)
2,298.0
(153.3)
2,493.1
(156.8)
2,625.6
(160.6)
2,564.9
Total Assets
$41,078.5 39,317.7 38,561.1 37,461.5
$39,120.5 36,491.4 37,085.8 37,685.3
Liabilities and Stockholders’ Equity
Deposits
Demand and Other Noninterest-Bearing
Savings and Other Interest-Bearing
Other Time
Foreign Offices
Total Deposits
Purchased Funds
Senior Notes
Long-Term Debt
Floating Rate Capital Debt
Other Liabilities
Stockholders’ Equity
$ 4,469.9
8,530.8
276.9
4,299.8
8,378.0
354.7
12,051.9 11,340.5 11,237.0 10,419.5
4,046.0
8,366.2
327.6
4,197.3
8,508.7
300.5
$ 4,520.9
8,156.2
342.2
4,226.3
7,952.4
385.7
11,567.1 10,254.0 10,315.7
4,236.9
8,139.0
361.4
4,390.8
8,193.4
381.6
9,959.8
25,329.5 24,347.0 23,976.8 23,452.0
7,788.9
9,537.9
450.0
275.0
903.4
864.9
267.8
267.9
1,607.7
1,803.4
2,991.7
2,999.9
8,416.8
450.0
898.3
267.9
1,572.9
2,978.4
8,870.0
450.0
865.1
267.9
1,584.7
2,933.0
24,586.4 22,991.3 22,880.1 22,925.6
9,349.1
8,642.3
450.0
450.0
766.6
765.9
267.7
267.8
1,153.0
1,461.8
2,773.3
2,946.3
8,636.2
450.0
766.3
267.8
1,238.1
2,847.3
7,578.3
450.0
766.1
267.8
1,539.6
2,898.3
Total Liabilities and Stockholders’ Equity
$41,078.5 39,317.7 38,561.1 37,461.5
$39,120.5 36,491.4 37,085.8 37,685.3
Analysis of Net Interest Income
Earning Assets
Interest-Related Funds
Noninterest-Related Funds
Net Interest Income (Taxable equivalent)
Net Interest Margin (Taxable equivalent)
Common Stock Dividend and Market Price
Dividends
Market Price Range–High
–Low
$36,422.6 35,077.7 34,298.2 33,317.2
31,003.7 29,813.4 29,067.8 27,815.2
5,502.0
5,418.9
153.5
149.6
1.87
1.63%
5,230.4
150.1
1.76
5,264.3
147.4
1.67
$35,131.1 32,420.5 32,971.7 33,965.0
29,306.8 27,083.9 27,819.9 28,579.0
5,386.0
5,824.3
160.9
164.3
1.92
1.85%
5,151.8
163.2
1.99
5,336.6
162.1
1.98
$
.19
48.75
42.29
.17
44.68
40.68
.17
42.28
30.22
$
.17
37.70
27.64
.17
40.99
30.41
.17
45.90
31.58
.17
60.05
42.33
.17
62.67
51.70
Note: The common stock of Northern Trust Corporation is traded on the Nasdaq Stock Market under the symbol NTRS.
Consolidated Financial Statistics
(Interest and Rate on a Taxable Equivalent Basis)
2003
2002
($ In Millions)
Average Earning Assets
Money Market Assets
Federal Funds Sold and Resell Agreements
Time Deposits with Banks
Other Interest-Bearing
Total Money Market Assets
Securities
U.S. Government
Obligations of States and Political Subdivisions
Federal Agency
Other
Trading Account
Total Securities
Loans and Leases
Total Earning Assets
Reserve for Credit Losses Assigned to Loans
Cash and Due from Banks
Other Assets
Total Assets
Average Source of Funds
Deposits
Savings and Money Market
Savings Certificates
Other Time
Foreign Offices Time
Total Deposits
Federal Funds Purchased
Securities Sold under Agreements to Repurchase
Commercial Paper
Other Borrowings
Senior Notes
Long-Term Debt
Floating Rate Capital Debt
Total Interest-Related Funds
Interest Rate Spread
Noninterest-Bearing Deposits
Other Liabilities
Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
Net Interest Income/Margin (FTE Adjusted)
Net Interest Income/Margin (Unadjusted)
Net Interest Income/Margin Components
Domestic
International
Consolidated
Notes–Average balance includes nonaccrual loans.
Interest
Average
Balance Rate
Interest
Average
Balance Rate
$
9.0
162.2
1.1
172.3
1.7
62.7
91.7
27.6
.2
183.9
751.9
$
$
710.3
8,029.8
102.3
1.27%
2.02
1.06
8,842.4
1.95
105.1
859.3
6,794.7
674.1
5.7
8,438.9
17,506.9
1.64
7.31
1.35
4.09
3.87
2.18
4.30
12.0
203.9
.7
216.6
4.2
49.8
114.2
25.5
.4
194.1
876.3
$
689.5
8,082.5
33.6
1.74%
2.52
2.03
8,805.6
2.46
154.4
640.0
5,905.4
493.1
9.3
7,202.2
17,614.2
2.71
7.78
1.93
5.17
4.66
2.70
4.97
$1,108.1
34,788.2
3.19%
$1,287.0
33,622.0
3.83%
—
—
—
(160.6) —
1,789.6 —
2,698.0 —
—
—
—
(156.5) —
1,634.3 —
2,496.9 —
— $39,115.2 —
— $37,596.7 —
$
51.0
43.4
5.5
132.3
232.2
47.9
18.0
1.6
118.3
28.0
56.5
5.0
507.5
—
—
—
—
$
$ 6,791.2
1,655.3
314.7
10,458.3
.75%
2.62
1.74
1.27
19,219.5
4,510.9
1,711.1
142.0
2,294.7
405.9
882.8
267.9
29,434.8
1.21
1.06
1.05
1.18
5.15
6.88
6.40
1.88
1.72
— 1.47
5,062.2 —
1,642.5 —
2,975.7 —
70.1
65.5
9.4
171.9
316.9
68.4
20.4
2.5
138.2
31.1
52.2
6.8
636.5
—
—
—
—
$ 6,196.6
1,913.6
367.6
9,687.7
1.13%
3.42
2.55
1.77
18,165.5
4,175.5
1,282.9
140.1
2,948.4
450.0
766.2
267.8
28,196.4
1.74
1.64
1.59
1.79
4.69
6.92
6.82
2.53
2.26
— 1.57
5,183.9 —
1,349.6 —
2,866.8 —
— $39,115.2 —
— $37,596.7 —
$ 600.6
$ 548.2
— 1.73%
— 1.58%
$ 650.5
$ 601.8
— 1.93%
— 1.79%
$ 517.5
83.1
$26,219.2
8,569.0
1.97%
.97
$ 571.5
79.0
$25,016.5
8,605.5
2.28%
.92
$ 600.6
$34,788.2
1.73%
$ 650.5
$33,622.0
1.93%
–Total interest income includes adjustments on loans and securities to a taxable equivalent basis. Such adjustments are based on the U.S. federal
income tax rate (35%) and State of Illinois income tax rate (7.30% for 2003 and 7.18% for other years). Lease financing receivable balances are
reduced by deferred income. Total taxable equivalent interest adjustments amounted to $52.4 million in 2003, $48.7 million in 2002, $52.6 million
in 2001, $53.3 million in 2000, and $38.6 million in 1999.
Consolidated Financial Statistics
2001
Average
Balance
Interest
2000
1999
Rate
Interest
Average
Balance Rate
Interest
Average
Balance Rate
$
29.5
194.3
1.0
224.8
10.3
39.8
339.2
27.5
.7
417.5
$
$
800.9
4,832.0
24.7
5,657.6
3.68%
4.02
4.36
3.97
$
$
642.5
3,822.8
47.8
6.29%
5.39
6.72
4,513.1
5.53
40.4
206.0
3.3
249.7
14.6
38.7
567.6
31.4
.9
653.2
237.7
475.9
8,551.9
409.4
12.1
9,687.0
6.13
8.14
6.64
7.68
7.35
6.74
7.02
55.8
164.3
4.0
224.1
15.5
40.5
363.6
21.7
.8
442.1
940.8
$ 1,095.7
3,562.0
79.6
5.09%
4.61
5.14
4,737.3
4.73
285.3
497.4
6,838.5
322.7
12.5
7,956.4
14,547.8
5.43
8.15
5.32
6.72
6.58
5.56
6.47
186.1
495.1
7,434.2
404.7
13.6
8,533.7
5.52
8.04
4.56
6.80
5.45
4.89
6.12
1,091.7
17,850.5
1,161.4
16,548.6
$1,734.0
32,041.8
5.41%
$2,064.3
30,748.7
6.71%
$1,607.0
27,241.5
5.90%
—
—
—
(153.3)
1,536.2
2,208.0
— $35,632.7
—
—
—
—
—
—
—
(143.4) —
1,421.3 —
2,030.5 —
—
—
—
(132.8) —
1,368.0 —
1,715.9 —
— $34,057.1 —
— $30,192.6 —
$ 163.4
114.2
55.0
313.3
$ 5,753.6
2,203.7
1,110.0
8,649.2
2.84%
5.18
4.96
3.62
$ 206.8
133.0
59.1
431.4
$ 5,203.9
2,263.3
964.6
8,064.5
3.97%
5.88
6.13
5.35
$ 155.6
117.3
32.7
286.3
$ 4,845.3
2,191.0
650.5
6,592.1
3.21%
5.35
5.03
4.34
645.9
109.8
58.0
5.6
168.2
33.4
51.4
13.5
17,716.5
2,839.0
1,474.1
137.5
3,254.6
485.5
749.7
267.7
1,085.8
26,924.6
—
—
—
—
—
4,893.4
1,194.5
2,620.2
— $35,632.7
$ 648.2
$ 595.6
—
—
$ 602.6
45.6
$26,363.8
5,678.0
$ 648.2
$32,041.8
3.65
3.87
3.93
4.05
5.17
6.88
6.86
5.03
4.03
1.38
—
—
—
—
2.02%
1.86%
2.29%
.80
2.02%
830.3
167.8
91.8
8.8
245.2
34.4
44.8
19.4
16,496.3
2,644.7
1,476.4
138.3
3,890.0
503.0
639.9
267.6
1,442.5
26,056.2
5.03
6.34
6.22
6.40
6.30
6.82
7.01
7.25
5.54
—
—
—
—
— 1.17
4,550.6 —
1,160.6 —
2,289.7 —
591.9
161.0
95.8
7.3
109.2
30.6
37.9
16.1
14,278.9
3,226.1
1,954.5
141.0
2,177.3
579.5
545.3
267.5
1,049.8
23,170.1
4.15
4.99
4.90
5.15
5.02
5.28
6.96
6.02
4.53
—
—
—
—
— 1.37
4,086.0 —
880.8 —
2,055.7 —
— $34,057.1 —
— $30,192.6 —
$ 621.8
$ 568.5
— 2.02%
— 1.85%
$ 557.2
$ 518.6
— 2.05%
— 1.90%
$ 605.9
15.9
$26,143.9
4,604.8
2.32%
.35
$ 545.5
11.7
$23,131.3
4,110.2
2.36%
.30
$ 621.8
$30,748.7
2.02%
$ 557.2
$27,241.5
2.05%
Jeffrey D. Cohodes
Senior Vice President
Strategic Planning
William R. Dodds, Jr.
Senior Vice President and Treasurer
Rose A. Ellis
Corporate Secretary and
Assistant General Counsel
Beverly J. Fleming
Senior Vice President and
Director, Investor Relations
Dan E. Phelps
Senior Vice President and
General Auditor
Catherine J. Treiber
Vice President and
Assistant Corporate Treasurer
The Northern Trust Company
Other Executive Vice Presidents
Gregg D. Behrens
John V.N. McClure
Patrick J. McDougal
Teresa A. Parker
Stephen N. Potter
Joyce St. Clair
Jana R. Schreuder
Lee S. Selander
Jean E. Sheridan
Lloyd A. Wennlund
Senior Officers
Northern Trust Corporation and
The Northern Trust Company
Sherry S. Barrat
Northern Trust—PFS West
Management Committee
William A. Osborn
Chairman of the Board,
Chief Executive Officer and President
Steven L. Fradkin
Executive Vice President and
Chief Financial Officer
Timothy P. Moen
Executive Vice President
Human Resources
William L. Morrison
President
Personal Financial Services
Perry R. Pero
Vice Chairman and
Head of Corporate Risk Management
Timothy J. Theriault
President
Worldwide Operations and Technology
Terence J. Toth
President
Northern Trust Global Investments
Frederick H. Waddell
President
Corporate and Institutional Services
Kelly R. Welsh
Executive Vice President and
General Counsel
Alison A. Winter
President
Personal Financial Services—Northeast
Heads of the Corporation’s
Subsidiary Banks and State Offices
Douglas P. Regan
Northern Trust of Florida Corporation
David A. Highmark
Northern Trust—PFS Southwest
David A. Highmark
Northern Trust Bank, N.A.—
Arizona
Tony Bolazina
Northern Trust Bank, N.A.—
Colorado
Sherry S. Barrat
Northern Trust of California
Corporation
Patrick J. Everett
Northern Trust Bank, FSB—Nevada
Dennis B. Mitchell
Northern Trust Bank, FSB—
Washington
Alison A. Winter
Northern Trust—PFS Northeast
John J. (Jeff) Kauffman
Northern Trust Bank, FSB—
Greater New York and Connecticut
John V.N. McClure
Northern Trust—PFS Midwest
David C. Blowers
Northern Trust—Illinois
Buell C. Cole
Northern Trust Bank, FSB—Michigan
John D. Fumagalli
Northern Trust Bank, FSB—Missouri
Gordon A. Anhold
Northern Trust Bank, FSB—Ohio
James M. Rauh
Northern Trust Bank, FSB—Wisconsin
Martin J. Weiland
Northern Trust of Texas Corporation
Robert Meier
Northern Trust Bank, FSB—Georgia
Northern Trust Corporation
Other Senior Officers
Orie L. Dudley, Jr.
Executive Vice President and
Chief Investment Officer
John P. Grube
Executive Vice President
Credit Policy
Harry W. Short
Executive Vice President and Controller
Patricia K. Bartler
Senior Vice President and
Chief Compliance Officer
1 0 0
Board of Directors
John W. Rowe
Chairman and Chief Executive Officer
Exelon Corporation
Producer and wholesale marketer of energy (1, 5)
Harold B. Smith
Chairman of the Executive Committee
Illinois Tool Works Inc.
Manufacturer and marketer of engineered components
and industrial systems and consumables (2, 3, 4, 5)
William D. Smithburg
Retired Chairman, President and Chief Executive Officer
The Quaker Oats Company
Worldwide manufacturer and marketer of
beverages and grain-based products (2, 3, 4)
Board Committees
1. Audit Committee
2. Compensation and Benefits Committee
3. Corporate Governance Committee
4. Executive Committee
5. Business Risk Committee
6. Business Strategy Committee
William A. Osborn
Chairman of the Board, Chief Executive Officer
and President
Northern Trust Corporation and
The Northern Trust Company (4)
Duane L. Burnham
Retired Chairman and Chief Executive Officer
Abbott Laboratories
Global diversified health care products
and services company (1, 2, 3)
Dolores E. Cross
Visiting Scholar
Professor of Education
DePaul University
Educational institution (3, 5, 6)
Susan Crown
Vice President
Henry Crown and Company
Company with diversified manufacturing operations,
real estate and securities (1, 2)
Robert S. Hamada
Edward Eagle Brown Distinguished Service
Professor of Finance Emeritus
Graduate School of Business, University of Chicago
Educational institution (1, 6)
Robert A. Helman
Partner
Mayer, Brown, Rowe & Maw
Law firm (3, 5, 6)
Arthur L. Kelly
Managing Partner
KEL Enterprises L.P.
Holding and investment partnership (1, 2, 4, 6)
Frederick A. Krehbiel
Co-Chairman
Molex Incorporated
Manufacturer of electrical/electronic
interconnecting products and systems (3, 5, 6)
Robert C. McCormack
Chairman and Managing Director
Trident Capital, Inc.
Venture capital firm (5, 6)
Edward J. Mooney
Retired Délégué Général—North America
Suez Lyonnaise des Eaux
Worldwide provider of energy, water, waste
and communications services;
Retired Chairman and Chief Executive Officer
Nalco Chemical Company
Manufacturer of specialized service chemicals (1, 2, 4)
1 0 1
Corporate Structure
50 South La Salle Street, Chicago, Illinois 60675
312-630-6000
Principal Subsidiary
The Northern Trust Company
50 South La Salle Street, Chicago, Illinois 60675
120 East Oak Street, Chicago, Illinois 60611
201 East Huron Street, Chicago, Illinois 60611
2814 West Fullerton Avenue, Chicago, Illinois 60647
7801 South State Street, Chicago, Illinois 60619
770 W. Northwest Highway, Barrington, Illinois 60010
2550 Waukegan Road, Glenview, Illinois 60025
1700 Green Bay Road, Highland Park, Illinois 60035
4 North Washington Street, Hinsdale, Illinois 60521
120 East Scranton Avenue, Lake Bluff, Illinois 60044
265 East Deerpath Road, Lake Forest, Illinois 60045
959 South Waukegan Road, Lake Forest, Illinois 60045
400 East Diehl Road, Naperville, Illinois 60563
One Oakbrook Terrace, Oakbrook Terrace, Illinois 60181
250 S. Northwest Highway, Park Ridge, Illinois 60068
1501 Woodfield Road, Schaumburg, Illinois 60173
62 Green Bay Road, Winnetka, Illinois 60093
101 W. Ohio Street, Suite 2000, Indianapolis, Indiana 46204
London Branch
50 Bank Street, Canary Wharf
London E145NT, United Kingdom
Cayman Islands Branch
P.O. Box 501, Georgetown, Grand Cayman Islands
British West Indies
Singapore Branch
80 Raffles Place 46th Floor, UOB Plaza 1, Singapore 048624
Subsidiaries of The Northern Trust Company
The Northern Trust International Banking Corporation
40 Broad Street, 10th Floor, New York, New York 10004
The Northern Trust Company of Hong Kong Limited
Suite 703-4 One Pacific Place, 88 Queensway, Hong Kong
Northern Trust Trade Services Limited
7/F CITIC Tower, 1 Tim Mei Avenue, Central, Hong Kong
Northern Trust Fund Managers (Ireland) Limited
George’s Quay House, 43 Townsend Street, Dublin 2, Ireland
Northern Trust Global Investments (Europe) Limited
6 Devonshire Square, London, EC2A 4YE, United Kingdom
Northern Trust (Ireland) Limited
Northern Trust Investor Services (Ireland) Limited
Northern Trust Custodial Services (Ireland) Limited
Northern Trust Fund Services (Ireland) Limited
George’s Quay House, 43 Townsend Street
Dublin 2, Ireland
Northern Trust Management Services Limited
50 Bank Street, Canary Wharf, London E145NT
Northern Trust Investments, N.A.
50 South La Salle Street, Chicago, Illinois 60675
Norlease, Inc.
50 South La Salle Street, Chicago, Illinois 60675
The Northern Trust Company, Canada
161 Bay Street, Suite 4540, B.C.E. Place
Toronto, Ontario, Canada M5J 2S1
NTG Services LLC
50 Bank Street, Canary Wharf, London E145NT
NT Mortgage Holdings LLC
50 South La Salle Street, Chicago, Illinois 60675
Northern Trust Holdings Limited
50 Bank Street, Canary Wharf, London E145NT
Northern Trust Global Services Limited
50 Bank Street, Canary Wharf, London E145NT
Other Subsidiaries of the Corporation
Northern Trust Bank of Florida N.A.
700 Brickell Avenue, Miami, Florida 33131
8600 NW 17th Street, Suite 120, Miami, Florida 33126
595 Biltmore Way, Coral Gables, Florida 33134
328 Crandon Boulevard, Suite 101,
Key Biscayne, Florida 33149
18909 NE 29th Avenue, Aventura, Florida 33180
1100 East Las Olas Boulevard, Fort Lauderdale, Florida 33301
2601 East Oakland Park Boulevard,
Fort Lauderdale, Florida 33306
2300 Weston Road, Weston, Florida 33326
3100 N. Military Trail, Boca Raton, Florida 33431
770 East Atlantic Avenue, Delray Beach, Florida 33483
440 Royal Palm Way, Palm Beach, Florida 33480
11301 U.S. Highway 1, Suite 100,
North Palm Beach, Florida 33408
2201 S.E. Kingswood Terrace, Monterey Commons,
Stuart, Florida 34996
755 Beachland Boulevard, Vero Beach, Florida 32963
4001 Tamiami Trail North, Naples, Florida 34103
375 Fifth Avenue South, Naples, Florida 34102
26790 South Tamiami Trail, Bonita Springs, Florida 34134
8060 College Parkway S.W., Fort Myers, Florida 33919
1515 Ringling Boulevard, Sarasota, Florida 34236
901 Venetia Bay Boulevard, Suite 100, Venice, Florida 34292
540 Bay Isles Road, Longboat Key, Florida 34228
6320 Venture Drive, Suite 100, Bradenton, Florida 34202
525 Indian Rocks Road, Belleair Bluffs, Florida 33770
100 Second Avenue South, St. Petersburg, Florida 33701
425 North Florida Avenue, Tampa, Florida 33602
1 0 2
Northern Trust Cayman International, Ltd.
P.O. Box 1586, Georgetown, Grand Cayman
Cayman Islands, British West Indies
Northern Trust Bank, N.A.
2398 East Camelback Road, Phoenix, Arizona 85016
7600 E. Doubletree Ranch Road, Scottsdale, Arizona 85258
7501 East Thompson Peak Parkway, Scottsdale, Arizona 85255
8525 East Pinnacle Peak Road, Scottsdale, Arizona 85255
10015 West Royal Oak Road, Sun City, Arizona 85351
19432 R. H. Johnson Boulevard, Sun City West, Arizona 85375
1525 South Greenfield Road, Mesa, Arizona 85206
908 South Power Road, Mesa, Arizona 85206
23714 South Alma School Road, Sun Lakes, Arizona 85248
6444 East Tanque Verde Road, Tucson, Arizona 85715
3450 East Sunrise Drive, Tucson, Arizona 85718
16 Market Square, 1573 Market Street, Denver, Colorado 80202
Northern Trust Bank of California N.A.
355 South Grand Avenue, Suite 2600,
Los Angeles, California 90071
10877 Wilshire Boulevard (Westwood),
Los Angeles, California 90024
16 Corporate Plaza, Newport Beach, California 92660
4370 La Jolla Village Drive, Suite 1000,
San Diego, California 92122
1125 Wall Street, La Jolla, California 92037
206 East Anapamu Street, Santa Barbara, California 93101
1485 East Valley Road, (Montecito),
Santa Barbara, California 93108
69-710 Highway 111, Rancho Mirage, California 92270
580 California Street, Suite 1800, San Francisco, California 94104
575 Redwood Highway, Mill Valley, California 94941
270 Third Street, Los Altos, California 94022
Northern Trust Bank of Texas N.A.
2020 Ross Avenue, Dallas, Texas 75201
5540 Preston Road, Dallas, Texas 75205
16475 Dallas Parkway, Addison, Texas 75001
2701 Kirby Drive, Houston, Texas 77098
600 Bering Drive, Houston, Texas 77057
10000 Memorial Drive, Houston, Texas 77024
98 San Jacinto Boulevard, Suite 350, Austin, Texas 78701
Northern Trust Bank, FSB
Connecticut
300 Atlantic Street, Suite 400, Stamford, Connecticut 06901
Georgia
3350 Riverwood Parkway, Atlanta, Georgia 30339
Massachusetts
60 State Street, Suite 700, Boston, Massachusetts 02109
Michigan
10 West Long Lake Road, Bloomfield Hills, Michigan 48304
161 Ottawa Avenue, Northwest
Grand Rapids, Michigan 49503
120 Kercheval, Grosse Pointe Farms, Michigan 48236
Missouri
190 Carondelet Plaza, St. Louis, Missouri 63105
Nevada
1995 Village Center Circle, Las Vegas, Nevada 89134
New York
65 E. 55th Street, 24th Floor, New York, New York 10022
Ohio
127 Public Square, Suite 5150, Cleveland, Ohio 44114
Washington
1414 Fourth Avenue, Seattle, Washington 98101
Wisconsin
526 East Wisconsin Avenue, Milwaukee, Wisconsin 53202
Northern Trust Global Advisors, Inc.
300 Atlantic Street, Suite 400, Stamford, Connecticut 06901
The Northern Trust Company of Connecticut
300 Atlantic Street, Suite 400, Stamford, Connecticut 06901
NT Global Advisors, Inc.
161 Bay Street, Suite 4540, B.C.E. Place
Toronto, Ontario, Canada M5J 2S1
Northern Trust Global Advisors, Limited
50 Bank Street, Canary Wharf, London E145NT
United Kingdom
The Northern Trust Company of New York
40 Broad Street, New York, New York 10004
Northern Trust Securities, Inc.
50 South La Salle Street, Chicago, Illinois 60675
Northern Trust Global Investments Japan, K.K.
Izumi Garden Tower, 1-6-1 Roppongi, Minato-ku, Tokyo, Japan
1 0 3
Corporate Information
Quarterly Earnings Releases
Copies of the Corporation’s quarterly earnings releases may
be obtained by accessing Northern Trust’s Web site at
www.northerntrust.com or by calling the Corporate
Communications department at (312) 444-4272.
Investor Relations
Please direct Investor Relations inquiries to Beverly J. Fleming,
Director of Investor Relations, at (312) 444-7811 or
ir@northerntrust.com.
www.northerntrust.com
Information about the Corporation, including financial
performance and products and services, is available on
Northern Trust’s Web site at www.northerntrust.com.
NTGI
Northern Trust Corporation uses the name Northern Trust
Global Investments to identify the investment management
business, including portfolio management, research and
trading, carried on by several of its affiliates, including The
Northern Trust Company, Northern Trust Global Advisors
and Northern Trust Investments.
Annual Meeting
The annual meeting of stockholders will be held on
Tuesday, April 20, 2004, at 10:30 a.m. (Central Daylight Time)
at 50 South La Salle Street, Chicago, Illinois.
Stock Listing
The common stock of Northern Trust Corporation is traded
on the Nasdaq Stock Market under the symbol NTRS.
Stock Transfer Agent, Registrar and
Dividend Disbursing Agent
Wells Fargo Bank, N.A.
P.O. Box 64854
St. Paul, Minnesota 55164-0854
Phone: 1-800-468-9716
E-mail: stocktransfer@wellsfargo.com
Available Information
The Corporation’s Internet address is www.northerntrust.com.
Through our Web site, we make available free of charge our
annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and all amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d)
of the Exchange Act (15 U.S.C. 78m(a) or 78o(d)) as soon as
reasonably practicable after we electronically file such material
with, or furnish such material to, the Securities and Exchange
Commission. Information contained on the Web site is not
part of this Annual Report.
10-K Report
Copies of the Corporation’s 2003 10-K Report filed with the
Securities and Exchange Commission will be available by
the end of March 2004 and will be mailed to stockholders and
other interested persons upon written request to:
Rose A. Ellis
Corporate Secretary
Northern Trust Corporation
50 South La Salle Street
Chicago, Illinois 60675
4
LW51611_cov 3/3/04 9:47 PM Page 2
Quantum Color Graphics, L.L.C.
6511 W. Oakton St.
Morton Grove, Il 60053
(847) 967-3600
RR Donnelley
Cover (IFC/IBC)
CYAN MAG YELO BLK pms873 varnish
51611
02.16.2004
98
2
98
2
98
2
98
2
LW51611_cov 3/3/04 9:47 PM Page 1
2003
Annual Report to Shareholders
n
o
r
t
h
e
r
n
t
r
u
s
t
c
o
r
p
o
r
a
t
i
o
n
2
0
0
3
a
n
n
u
a
l
r
e
p
o
r
t
t
o
s
h
a
r
e
h
o
l
d
e
r
s
n o r t h e r n t r u s t c o r p o r at i o n
5 0 s o u t h l a s a l l e s t r e e t ¥ c h i c a g o , i l l i n o i s 6 0 6 7 5
Quantum Color Graphics, L.L.C.
6511 W. Oakton St.
Morton Grove, Il 60053
(847) 967-3600
RR Donnelley
Cover (BC/FC)
CYAN MAG YELO BLK pms873 varnish
51611
02.16.2004
98
2
98
2
98
2
98
2