UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2003March 31, 2004
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File No. 0-5965
NORTHERN TRUST CORPORATION
(Exact name of registrant as specified in its charter)
| Delaware | 36-2723087 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
50 South LaSalle Street Chicago, Illinois | 60675 | |
| (Address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number, including area code: (312) 630-6000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx No¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yesx No¨
220,354,163220,388,521 Shares - $1.66 2/3 Par Value
(Shares of Common Stock Outstanding on September 30, 2003)March 31, 2004)
PART I - FINANCIAL INFORMATION ($ In Millions Except Share Information) Assets Cash and Due from Banks Federal Funds Sold and Securities Purchased under Agreements to Resell Time Deposits with Banks Other Interest-Bearing Securities Available for Sale Held to Maturity (Fair value - $1,049.6 at September 2003, $942.9 at December 2002, $861.2 at September 2002) Held to Maturity (Fair value - $1,138.7 at March 2004, $1,081.6 at December 2003, $1,035.4 at March 2003) Trading Account Total Securities Loans and Leases Commercial and Other Residential Mortgages Total Loans and Leases (Net of unearned income - $400.1 at September 2003, $398.7 at December 2002, $406.2 at September 2002) Total Loans and Leases (Net of unearned income - $430.3 at March 2004, $435.7 at December 2003, $423.6 at March 2003) Reserve for Credit Losses Assigned to Loans and Leases Buildings and Equipment, net Buildings and Equipment Customers’ Acceptance Liability Trust Security Settlement Receivables Other Assets 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 Commercial Paper Other Borrowings Senior Notes Long-Term Debt Debt - Floating Rate Capital Securities Floating Rate Capital Debt Liability on Acceptances Other Liabilities Total Liabilities Stockholders’ Equity Preferred Stock Common Stock, $1.66 2/3 Par Value; Authorized 560,000,000 shares at September 2003, December 2002, and September 2002; Outstanding 220,354,163 shares at September 2003, 220,800,402 shares at December 2002 and 220,923,315 shares at September2002 Common Stock, $1.66 2/3 Par Value; Authorized 560,000,000 shares at March 2004, December 2003 and March 2003; Outstanding 220,388,521 shares at March 2004, 220,118,476 shares at December 2003 and 220,415,774 shares at March 2003 Retained Earnings Accumulated Other Comprehensive Income Common Stock Issuable - Stock Incentive Plans Deferred Compensation Treasury Stock - (at cost, 7,567,361 shares at September 2003, 7,121,122 shares at December 2002, and 6,998,209 shares at September 2002) Treasury Stock - (at cost, 7,533,003 shares at March 2004, 7,803,048 shares at December 2003, and 7,505,750 shares at March 2003) Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity 2 ($ 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 Investment Security Gains Total Noninterest Income Net Interest Income Interest Income Interest Expense Net Interest Income Provision for Credit Losses Net Interest Income after Provision for Credit Losses 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 Income from Continuing Operations Discontinued Operations 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 - Basic - Diluted Net Income - Basic - Diluted Cash Dividends Declared Average Number of Common Shares Outstanding - Basic - Diluted Third Quarter Ended September 30 Nine Months Ended September 30 (In Millions) Net Income Other Comprehensive Income (net of tax) Net Unrealized Gains (Losses) on Securities Available for Sale Net Unrealized Gains (Losses) on Cash Flow Hedge Designations Foreign Currency Translation Adjustments Other Comprehensive Income Comprehensive Income First Quarter Ended March 31 ($ 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 Investment Security Gains Total Noninterest Income Net Interest Income Interest Income Interest Expense Net Interest Income Provision for Credit Losses Net Interest Income after Provision for Credit Losses 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 Income from Continuing Operations Discontinued Operations Income (Loss) from Discontinued Operations 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 - Basic - Diluted Net Income - Basic - Diluted Cash Dividends Declared Average Number of Common Shares Outstanding - Basic - Diluted ($ In Millions) Net Income Other Comprehensive Income (net of tax) Net Unrealized Losses on Securities Available for Sale Net Unrealized Losses on Cash Flow Hedge Designations Foreign Currency Translation Adjustments Other Comprehensive Income Comprehensive Income 3 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY - NORTHERN TRUST CORPORATION First Quarter Ended March 31 (In Millions) Preferred Stock Balance at January 1 Series C Redeemed Series D Redeemed Balance at September 30 Balance at January 1 and March 31 Common Stock Balance at January 1 and September 30 Balance at January 1 and March 31 Retained Earnings Balance at January 1 Net Income Dividends Declared - Common Stock Dividend Declared - Common Stock Dividends Declared - Preferred Stock Stock Issued - Incentive Plan and Awards Balance at September 30 Balance at March 31 Accumulated Other Comprehensive Income Balance at January 1 Other Comprehensive Income Other Comprehensive Income (Loss) Balance at September 30 Balance at March 31 Common Stock Issuable - Stock Incentive Plans Balance at January 1 Stock Issuable, net of Stock Issued Balance at September 30 Balance at March 31 Deferred Compensation Balance at January 1 Compensation Deferred Compensation Amortized Balance at September 30 Balance at March 31 Treasury Stock Balance at January 1 Stock Options and Awards Stock Purchased Balance at September 30 Balance at March 31 Total Stockholders’ Equity at September 30 Total Stockholders’ Equity at March 31 4 First Quarter Ended March 31 (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 in Receivables (Increase) Decrease in Receivables Decrease in Interest Payable Amortization and Accretion of Securities and Unearned Income Severance Costs Relating to Staff Reductions, net Reduction in Office Space Leased and Owned, net Loss on Sale of NTRC Assets Gain on Sale of Higgins Road Branch Assets Amortization and Retirement of Computer Software Amortization of Other Intangibles Net Decrease in Trading Account Securities Other Operating Activities, net Net Cash Provided by Operating Activities Cash Flows from Investing Activities: Net Decrease in Federal Funds Sold and Securities Purchased under Agreements to Resell Net (Increase) Decrease in Federal Funds Sold and Securities Purchased under Agreements to Resell Net (Increase) Decrease 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 Decrease in Loans and Leases Purchases 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 Used in Investing Activities Net Cash Provided by (Used in) Investing Activities Cash Flows from Financing Activities: Net Decrease in Deposits Net Increase in Federal Funds Purchased Net Increase (Decrease) in Securities Sold under Agreements to Repurchase Net Increase in Commercial Paper Net Increase (Decrease) in Deposits Net Increase (Decrease) in Federal Funds Purchased Net Decrease in Securities Sold under Agreements to Repurchase Net Increase (Decrease) in Commercial Paper Net 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 Dividend 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 Decrease in Cash and Due from Banks Cash and Due from Banks at Beginning of Year Cash and Due from Banks at End of Period Supplemental Disclosures of Cash Flow Information: Interest Paid Income Taxes Paid 5 Notes to Consolidated Financial Statements 1. Basis of Presentation - The consolidated financial statements include the accounts of Northern Trust Corporation (Corporation) and its subsidiaries (collectively, Northern Trust), all of which are wholly-owned. Significant intercompany balances and transactions have been eliminated. The consolidated financial statements, as of 2. Recent Accounting Pronouncements - In December 2003, the Financial Accounting Standards Board (FASB) issued revised Interpretation No. 46 (FIN 46(R)), “Consolidation of Variable Interest Entities,” which replaced the original Interpretation No. 46 that had been issued in January 2003. FIN 46(R) clarifies the application of Accounting Research 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 entity to finance its activities without additional subordinated financial support from other parties. Such entities are termed variable interest entities. Application of FIN 46(R) by public entities for all variable interest entities is required in financial statements for periods ending after March 15, 2004. Northern Trust re-evaluated the revised requirements of variable interest accounting with the issuance of FIN 46(R) and determined that there was no change required in Northern Trust’s accounting treatment currently in place for its existing variable interest entities. Northern Trust will continue to monitor, evaluate, and apply authoritative guidance and interpretations relating to variable interest accounting as it is issued. In March 2004, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 105 (SAB 105), “Application of Accounting Principles to Loan Commitments.” SAB 105 summarizes the Staff’s view that the fair value of recorded loan commitments that are required to follow derivative accounting under FASB Statement No. 133, should not consider the expected future cash flows related to the associated servicing of the loan. SAB 105 is required to be applied to loan commitments accounted for as derivatives that are entered into after March 31, 2004. The adoption of SAB 105 currently does not, and is not expected to have a material impact on Northern Trust’s consolidated financial position or results of operations. 6 Notes to Consolidated Financial Statements (continued) 3. Discontinued Operations - On June 15, 2003, Northern Trust completed the sale to Hewitt Associates of substantially all of the assets of NTRC. NTRC provided defined benefit, defined contribution and retiree health and welfare administrative services, including recordkeeping and customer service, and also provided retirement consulting and actuarial services, including plan design and communication. The operating results of the NTRC business for the current and all prior periods presented are reflected as discontinued operations in the Corporation’s consolidated statement of income and in the results of operations in the C&IS business unit. In the first quarter ended March 31, 2004, pre-tax income from discontinued operations of $.5 million was recorded primarily as a result of a change in the original estimates used to calculate the loss on the disposal of certain assets that were not transferred in the sale. 4. Securities - The following table summarizes the book and fair values of securities. (In Millions) Held to Maturity Obligations of States and Political Subdivisions Federal Agency Other Subtotal Available for Sale U.S. Government Obligations of States and Political Subdivisions Federal Agency Preferred Stock Other Subtotal Trading Account Total Securities Reconciliation of Book Values to Fair Values of Securities Held to Maturity (In Millions) Obligations of States and Political Subdivisions Federal Agency Other Total Reconciliation of Amortized Cost to Fair Values of Securities Available for Sale (In Millions) U.S. Government Obligations of States and Political Subdivisions Federal Agency Preferred Stock Other Total (In Millions) Held to Maturity U.S. Government Obligations of States and Political Subdivisions Federal Agency Other Subtotal Available for Sale U.S. Government Obligations of States and Political Subdivisions Federal Agency Preferred Stock Other Subtotal Trading Account Total Securities 7 Notes to Consolidated Financial Statements (continued) (In Millions) U.S. Government Obligations of States and Political Subdivisions Federal Agency Other Total Reconciliation of (In Millions) U.S. Government Obligations of States and Political Subdivisions Federal Agency Preferred Stock Other Total 5. 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 At 8 Notes to Consolidated Financial Statements (continued) At At At Loan commitments for residential real estate loans, which when funded will be held for sale with a notional amount of $3.8 million at March 31, 2004, are carried at fair 6. Reserve for Credit Losses -Changes in the reserve for credit losses were as follows: (In Millions) Balance at Beginning of Period Charge-Offs Recoveries Net Charge-Offs Provision for Credit Losses Balance at End of Period Reserve for Credit Losses Assigned to: Loans and Leases Unfunded Commitments, Standby Letters of Credit and Derivatives Total Reserve for Credit Losses 9 Notes to Consolidated Financial Statements (continued) Third Quarter Ended September 30 (In Millions) Balance at Beginning of Period Charge-Offs Recoveries Net Charge-Offs Provision for Credit Losses Balance at End of Period Reserve for Credit Losses Assigned to: Loans and Leases Unfunded Commitments, Standby Letters of Credit and Derivatives Balance at End of Period 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 reserve is determined through a loan-by-loan analysis of nonperforming 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, which depend upon internal credit ratings. These loss factors primarily include management’s judgment concerning the effect of the current business cycle on the creditworthiness of Northern Trust’s borrowers as well as historical charge-off experience. Unallocated Inherent Reserve.Management determines the unallocated portion of the inherent reserve 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 reserve reflects management’s attempt to ensure that the overall reserve appropriately reflects a margin for the imprecision inherent in the process of estimating probable credit losses. 7. Goodwill and Other Intangibles - Goodwill and other intangible assets are included in other assets in the consolidated balance sheet. The following table shows the changes in the carrying amount of goodwill, by business unit, for the first quarter ended March 31, 2004. (In Millions) Balance at December 31, 2003 Goodwill Acquired Balance at March 31, 2004 10 Notes to Consolidated Financial Statements (continued) The gross carrying amount and accumulated amortization of other intangible assets at March 31, 2004 and March 31, 2003, was as follows: (In Millions) Other Intangible Assets- Subject to Amortization Other intangible assets consist primarily of the value of acquired customer relationships. Amortization expense related to other intangible assets totaled $2.4 million and $2.3 million for the quarters ended March 31, 2004 and 2003, respectively. Amortization for the remainder of 2004 and for the years 2005, 2006, 2007 and 2008 is estimated to be $7.2 million, $8.7 million, $8.4 million, $6.1 million and $4.2 million, respectively. 8. Accumulated Other Comprehensive Income - The following table summarizes the components of accumulated other comprehensive income at March 31, 2004 and 2003, and changes during the three-month periods then ended, presented on an after-tax basis. (In Millions) Unrealized Gains (Losses) on Securities Available for Sale Less: Reclassification Adjustments Net Unrealized Gains (Losses) on Securities Available for Sale Unrealized Gains (Losses) on Cash Flow Hedge Designations Less: Reclassification Adjustments Net Unrealized Gains (Losses) on Cash Flow Hedge Designations Foreign Currency Translation Adjustments Minimum Pension Liability Accumulated Other Comprehensive Income (In Millions) Unrealized Gains (Losses) on Securities Available for Sale Less: Reclassification Adjustments Net Unrealized Gains (Losses) on Securities Available for Sale Unrealized Gains (Losses) on Cash Flow Hedge Designations Less: Reclassification Adjustments Net Unrealized Gains (Losses) on Cash Flow Hedge Designations Foreign Currency Translation Adjustments Minimum Pension Liability Accumulated Other Comprehensive Income 11 Notes to Consolidated Financial Statements (continued) ($ In Millions Except Per Share Information) Basic Net Income Per Common Share Average Number of Common Shares Outstanding Income from Continuing Operations Less: Dividends on Preferred Stock Income from Continuing Operations Applicable to Common Stock Basic Income from Continuing Operations Per Common Share Income (Loss) from Discontinued Operations Basic Income (Loss) from Discontinued Operations Per Common Share Net Income Applicable to Common Stock Basic Net Income Per Common Share Diluted Net Income Per Common Share Average Number of Common Shares Outstanding Plus Dilutive Potential Common Shares: Stock Options Stock Incentive Plans * Average Common and Potential Common Shares Income from Continuing Operations Applicable to Common Stock Diluted Income from Continuing Operations Per Common Share Income (Loss) from Discontinued Operations Diluted Income (Loss) from Discontinued Operations Per Common Share Net Income Applicable to Common Stock Diluted Net Income Per Common Share ($ 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 Income from Continuing Operations Applicable to Common Stock Reported Basic Income from Continuing Operations Per Common Share Income (Loss) from Discontinued Operations Basic Income (Loss) from Discontinued Operations Per Common Share Net Income Applicable to Common Stock Basic Net Income Per Common Share Diluted Net Income Per Common Share Average Number of Common Shares Outstanding Plus Dilutive Potential Common Shares: Stock Options Stock Incentive Plans * Average Common and Potential Common Shares Income from Continuing Operations Applicable to Common Stock Reported Diluted Income from Continuing Operations Per Common Share Income (Loss) from Discontinued Operations Diluted Income (Loss) from Discontinued Operations Per Common Share Net Income Applicable to Common Stock Diluted Net Income Per Common Share (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 (In Millions) Before Tax Amount 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 (In Millions) Before Tax Amount 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 (In Millions) Before Tax 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 (In Millions) Liabilities: Established in 2003 Cash Payments in 2003 Balance at December 31, 2003 Established in 2004 Cash Payments in 2004 Balance at March 31, 2004 12 Notes to Consolidated Financial Statements (continued) Components of Net Periodic Pension Expense First Quarter Ended March 31 First Quarter Ended March 31 (In Millions) Service Cost Interest Cost Expected Return on Plan Assets Amortization: Net Loss Prior Service Cost (Benefit) Net Periodic Pension Expense Components of Net Periodic Postretirement Benefit Expense First Quarter Ended March 31 (In Millions) Service Cost Interest Cost Amortization: Transition Obligation Net Loss Net Periodic Postretirement Benefit Expense For the quarter ended March 31, 2004, Northern Trust made no contributions to its qualified pension plan. The nonqualified plan made benefit payments totaling $1.6 million for the quarter ended March 31, 2004 and these payments are estimated to be approximately $3.8 million for the entire year. The benefit payments for the postretirement health care plan for the quarter totaled $1.0 million and these payments are estimated to be approximately $3.7 million for all of 2004. On April 10, 2004, the Pension Funding Equity Act of 2004 was signed into law. Based on this new law, the minimum contribution required to be made by Northern Trust to the qualified pension plan in 2004 is zero and the maximum deductible contribution is estimated to total approximately $54 million. On December 8, 2003, a bill was signed into law that added a prescription drug benefit for Medicare-eligible retirees in 2006. Northern Trust anticipates that future benefit payments will be lower as a result of the new Medicare provision. The retiree medical obligations and costs do not reflect any impact of this legislation because Northern Trust is unable to conclude whether the benefits provided by the plan are actuarially equivalent to Medicare Part D under the Act until final regulations are issued. 13 Notes to Consolidated Financial Statements (continued) 12. Stock-Based Compensation Plans -The Northern Trust Corporation 2002 Stock Plan (2002 Plan) provides for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, stock awards, performance shares and stock units. As of Statement of Financial Accounting Standards (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 incentive plans and awards under APB No. 25, and has adopted the disclosure requirements of SFAS No. 123, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” Pro forma information regarding net income and earnings per share has been determined as if the Corporation had accounted for all stock-based compensation under the fair value method of SFAS No. 123. For purposes of estimating the fair value of the Corporation’s employee stock options at the grant date, a Black-Scholes option pricing model was used with the following weighted average assumptions for The weighted average fair value of options granted in 2004 and 2003 The Corporation’s pro forma information follows. (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 Pro Forma Net Income Earnings Per Share as Reported: Basic Diluted Pro Forma Earnings Per Share: Basic Diluted (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 Pro Forma Net Income Earnings Per Share as Reported: Basic Diluted Pro Forma Earnings Per Share: Basic Diluted 14 Notes to Consolidated Financial Statements (continued) 13. Contingent Liabilities -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, including commercial paper, bond financing, initial margin requirements 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. Standby letters of credit outstanding were $2.7 billion on March 31, 2004, $2.5 billion on December 31, 2003 and $2.7 billion on March 31, 2003. Northern Trust’s liability on the consolidated balance sheet for standby letters of credit, measured as the amount of unamortized fees on these instruments, totaled $4.2 million at March 31, 2004. 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 by the Credit Policy Credit Approval Committee. In connection with these activities, Northern Trust has issued certain indemnifications against loss resulting from the bankruptcy of the borrower of securities. The Because of (In Millions) Liabilities: Balance at June 30, 2003 Liabilities Established Cash Payments Balance at September 30, 2003 15 Notes to Consolidated Financial Statements (continued) 14. Pledged Assets -Securities and loans pledged to secure public and trust deposits, repurchase agreements and for other purposes as required or permitted by law were $10.1 billion on March 31, 2004, $10.1 billion on December 31, 2003 and $8.5 billion on March 31, 2003. Included in the March 2004 pledged assets were securities available for sale of $1.4 billion, which were pledged as collateral for agreements to repurchase securities sold transactions. The secured parties to these transactions have the right to repledge or sell these securities. 16 Notes to Consolidated Financial Statements (continued) Northern Trust is also permitted to repledge or sell collateral from agreements to resell securities purchased transactions. The total fair value of accepted collateral as of March 31, 2004, December 31, 2003 and March 31, 2003 was $693.9 million, $407.2 million and $354.2 million, respectively. The fair value of repledged collateral as of March 31, 2004, December 31, 2003 and March 31, 2003 was $50.5 million, $50.4 million and $8.0 million, respectively. Repledged collateral was used in other agreements to repurchase securities sold transactions. 15. Business Units -The table on page 23, reflecting the earnings contribution of Northern Trust’s business units for the first quarter ended March 31, 2004, is incorporated by reference. 17 Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FIRST QUARTER CONSOLIDATED RESULTS OF OPERATIONS Overview Net income per common share on a diluted basis was As a result of its disposition in June 2003, the operating results of Revenues from continuing operations of Noninterest Income Noninterest income from continuing operations totaled Noninterest Income (In Millions) Trust Fees Foreign Exchange Trading Profits Treasury Management Fees Security Commissions and Trading Income Other Operating Income Total Noninterest Income Assets under administration totaled a record Consolidated Trust Assets Under Administration (In Billions) Corporate & Institutional Personal Total Managed Trust Assets Corporate & Institutional Personal Total Non-Managed Trust Assets Consolidated Trust Assets Under Administration Noninterest Income (continued) Consolidated Trust Assets Under Administration (In Billions) March 31, 2004 December 31, 2003 March 31, 2003 Corporate & Institutional Personal Total Managed Trust Assets Corporate & Institutional Personal Total Non-Managed Trust Assets Consolidated Trust Assets Under Administration Trust fees are generally based on the market value of assets managed and administered, the volume of transactions, securities lending volume and spreads, and fees for other services rendered. Trust fees from Personal Financial Services (PFS) in the first quarter increased Trust fees from 19 Noninterest Income (continued) C&IS assets under administration totaled Foreign exchange trading profits were Other Operating Income (In Millions) Loan Service Fees Banking Service Fees Other Income Total Other Operating Income Net Interest Income Net interest income for the quarter totaled 20 Net Interest Income (continued) Average domestic loans outstanding during the quarter, at Northern Trust utilizes a diverse mix of funding sources. Total interest-related deposits averaged Provision for Credit Losses The reserve for credit losses was reduced by $5.7 million in the quarter reflecting a negative provision for credit losses of $5.0 million and net charge-offs of $.7 million. Last year the provision was $5.0 million Noninterest Expenses Noninterest expenses from continuing operations totaled Noninterest Expenses (In Millions) Compensation Employee Benefits Occupancy Expense Equipment Expense Other Operating Expenses Total Noninterest Expenses 21 Noninterest Expenses Compensation and employee benefit expenses totaled Net occupancy expense totaled Equipment expense, comprised of depreciation, rental and maintenance costs totaled Other operating expenses in the quarter totaled Other Operating Expenses (In Millions) Outside Services Purchased Software Amortization and Related Costs Software Amortization and Other Costs Business Promotion Other Intangibles Amortization Software Replacement Other Expenses Total Other Operating Expenses 22 Provision for Income Taxes The provision for income taxes from continuing operations was BUSINESS The following table reflects the earnings contribution and average assets of Northern Trust’s business Results of Operations ($ In Millions) Noninterest Income Trust Fees Other Net Interest Income * Provision for Credit Losses Noninterest Expenses Income before Income Taxes* Provision for Income Taxes* Income from Continuing Operations Income (Loss) on Discontinued Operations Net Income Percentage of Net Income Contribution Average Assets Results of Operations First Quarter Treasury and Other Total Consolidated ($ In Millions) Noninterest Income Trust Fees Other Net Interest Income * Provision for Credit Losses Noninterest Expenses Income before Income Taxes* Provision for Income Taxes* Income from Continuing Operations Income (Loss) from Discontinued Operations Net Income Percentage of Net Income Contribution Average Assets Note: Certain reclassifications have been made to Results of Operations ($ In Millions) Noninterest Income Trust Fees Other Net Interest Income * Provision for Credit Losses Noninterest Expenses Income before Income Taxes* Provision for Income Taxes* Income from Continuing Operations Income (Loss) on Discontinued Operations Net Income Percentage of Net Income Contribution Average Assets Corporate and Institutional Services C&IS net income for the Corporate and Institutional Services (continued) Net interest income stated on a FTE basis was The Personal Financial Services PFS net income for the quarter was Net interest income stated on a FTE basis, was The 24 Treasury and Other The Treasury Department is responsible for managing the Bank’s wholesale funding, capital position and interest rate risk, as well as the investment portfolio. The ‘Other’ category of corporate income and noninterest expenses represents items that are not allocated to the business units and generally represent certain nonrecurring items and certain executive level compensation. Net interest income for the BALANCE SHEET Total assets at Common stockholders’ equity increased to Northern Trust’s risk-based capital ratios remained strong at ASSET QUALITY Nonperforming assets consist of nonaccrual loans and other real estate owned (OREO). Nonperforming assets at The following table presents the outstanding amounts of nonaccrual loans and OREO. Also shown are loans that have interest or principal payments that are delinquent 90 days or more and are still accruing interest. The balance of loans delinquent 90 days or more and still accruing interest can fluctuate widely based on the timing of cash collections, renegotiations and renewals. Nonperforming Assets and 90 Day Past Due Loans (In Millions) Nonaccrual Loans Domestic Residential Real Estate Commercial Commercial Real Estate Personal Total Domestic International Total Nonaccrual Loans Other Real Estate Owned Total Nonperforming Assets Total 90 Day Past Due Loans (still accruing) Provision and Reserve for Credit Losses The provision for credit losses is the charge against current earnings, determined through a disciplined credit risk management process, 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 reserve) 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 reserve). Note 6 to the Consolidated Financial Statements includes a table that details the changes in the reserve for credit losses during the 26 Provision and Reserve for Credit Losses (continued) Allocation of the Reserve for Credit Losses December 31, 2003 March 31, 2003 ($ in millions) Specific Reserve Allocated Inherent Reserve Residential Real Estate Commercial Commercial Real Estate Personal Other Lease Financing International Total Allocated Inherent Reserve Unallocated Inherent Reserve Total Reserve Reserve Assigned to: Loans and Leases Unfunded Commitments and Standby Letters of Credit Total Reserve Specific Reserve.At Allocated Inherent Reserve.The allocated inherent portion of the reserve 27 Provision and Reserve for Credit Losses (continued) Unallocated Inherent Other Factors.At Total Reserves assigned to unfunded loan commitments, standby letters of credit and derivative products, recorded as a liability on the consolidated balance sheet, totaled Provision. MARKET RISK MANAGEMENT As described in the Based on this continuing evaluation process, Northern Trust’s interest rate risk position and the value at risk associated with the foreign exchange trading portfolio have not changed significantly since December 31, FACTORS AFFECTING FUTURE RESULTS This report contains statements that may be considered forward-looking, such as the statements relating to Northern Trust’s financial goals, dividend policy, expansion and business development plans, anticipated expense levels and 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 expenditures and technology spending, and the 29 FACTORS AFFECTING FUTURE RESULTS (continued) �� 30 FACTORS AFFECTING FUTURE RESULTS (continued) Some of these risks and uncertainties that may affect future results are discussed in more detail in the The following schedule should be read in conjunction with the Net Interest Income section of Management’s Discussion and Analysis of Financial Condition and Results of Operations. WITH ANALYSIS OF NET INTEREST INCOME ($ 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 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 Securities Sold under Agreements to Repurchase Commercial Paper Other Borrowings Senior Notes Long-Term Debt Debt - Floating Rate Capital Securities Floating Rate Capital Debt Total Interest-Related Funds Interest Rate Spread Noninterest-Related Deposits Noninterest-Bearing Deposits Other Liabilities Stockholders’ Equity Total Liabilities and Stockholders’ Equity Net Interest Income/Margin (FTE Adjusted) Net Interest Income/Margin (Unadjusted) ANALYSIS OF NET INTEREST INCOME CHANGES DUE TO VOLUME AND RATE (In Millions) Earning Assets (FTE) Interest-Related Funds Net Interest Income (FTE) (In Millions) Earning Assets (FTE) Interest-Related Funds Net Interest Income (FTE) 32 ($ 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 Cash and Due from Banks Other Assets Total Assets Average Source of Funds Deposits Savings and Money Market Deposits 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 Securities Total Interest-Related Funds Interest Rate Spread Noninterest-Related Deposits Other Liabilities Stockholders’ Equity Total Liabilities and Stockholders’ Equity Net Interest Income/Margin (FTE Adjusted) Net Interest Income/Margin (Unadjusted) ANALYSIS OF NET INTEREST INCOME CHANGES DUE TO VOLUME AND RATE (In Millions) Earning Assets (FTE) Interest-Related Funds Net Interest Income (FTE) The information called for by this item is incorporated herein by reference to “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Market Risk Management” on page Item 4. Controls and Procedures 33 PART II - OTHER INFORMATION Item 2(e). Purchases of Equity Securities by the Issuer Period Total Number of Shares Purchased(1) Average Price Paid January 2004 February 2004 March 2004 First Quarter Item 4. Submission of Matters to a Vote of Security Holders. The annual meeting of the stockholders of Northern Trust Corporation was held on April 20, 2004 for the purposes of (i) electing thirteen Directors to hold office until the next annual meeting of stockholders and (ii) ratifying the appointment of independent public accountants for the year 2004. Proxies for the meeting were solicited pursuant to Section 14(a) of the Securities Exchange Act of 1934 and there was no solicitation in opposition to management’s nominees. All of management’s nominees for Director as listed in the proxy statement were elected by the votes set forth below. As contemplated by the description of cumulative voting procedures in the Corporation’s Proxy Statement, votes withheld from some (but less than all) of the nominees were distributed by the proxies among nominees with respect to whom authority was not withheld. There were no broker non-votes with respect to any nominees. NOMINEES Duane L. Burnham Dolores E. Cross Susan Crown Robert S. Hamada Robert A. Helman Dipak C. Jain Arthur L. Kelly Robert C. McCormack Edward J. Mooney William A. Osborn John W. Rowe Harold B. Smith William D. Smithburg 34 Item 4. Submission of Matters to a Vote of Security Holders (continued). The appointment of KPMG LLP as independent public accountants of the Corporation for the year 2004 (the “Appointment”) was ratified. 192,612,538 votes were cast in favor of the resolution to ratify the Appointment, 2,937,332 votes were cast against it, 1,526,501 shares abstained from voting on the resolution, and there were no broker non-votes. 35 (a)Exhibits 36 Item 6. Exhibits and Reports on Form 8-K (continued) (b)Reports on Form 8-K In a report on Form 8-K SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NORTHERN TRUST CORPORATION (Registrant) Date: By: /s/ Executive Vice President and Chief Financial Officer Date: By: /s/ Harry W. Short Executive Vice President and Controller (Chief Accounting Officer) EXHIBIT INDEX The following exhibits have been filed with the Securities and Exchange Commission with Northern Trust Corporation’s Quarterly Report on Form 10-Q for the quarter ended Exhibit Number Description (i) (i) (ii) 39 EXHIBIT INDEX (continued) PART I –Item 1. Financial Statements CONSOLIDATED BALANCE SHEET Financial StatementsNORTHERN TRUST CORPORATIONCONSOLIDATED BALANCE SHEET NORTHERN TRUST CORPORATION September 30
2003 December 31
2002 September 30
2002 March 31
2004 December 31
2003 March 31
2003 $ 1,425.4 $ 2,672.2 $ 1,951.9 $ 1,417.4 $ 1,595.9 $ 1,355.7 836.7 964.8 1,535.2 829.9 754.6 876.7 8,231.4 8,268.2 7,316.8 9,565.7 8,767.7 6,438.7 118.6 99.3 23.0 32.7 42.8 101.8 8,089.5 5,681.2 7,307.4 7,541.8 8,422.4 6,559.4 1,008.8 905.0 820.2 1,088.5 1,041.5 990.9 4.1 7.7 11.2 5.7 7.4 4.2 9,102.4 6,593.9 8,138.8 8,636.0 9,471.3 7,554.5 10,095.3 10,255.6 10,159.4 9,163.4 9,838.5 10,209.4 7,822.8 7,808.1 7,765.2 7,910.2 7,975.3 7,767.3 17,918.1 18,063.7 17,924.6 17,073.6 17,813.8 17,976.7 (164.9 ) (161.1 ) (160.3 ) (143.4 ) (149.2 ) (162.4 ) 503.9 515.0 506.8 491.4 498.3 521.6 15.1 22.5 4.7 1.3 11.2 1.1 318.3 608.5 762.5 284.7 170.6 127.9 2,439.2 1,831.2 1,666.5 1,989.6 2,473.2 1,657.4 $ 40,744.2 $ 39,478.2 $ 39,670.5 $ 40,178.9 $ 41,450.2 $ 36,449.7 $ 4,525.7 $ 5,715.2 $ 4,972.8 $ 4,524.6 $ 5,084.1 $ 4,928.5 7,597.5 7,101.9 6,770.1 7,698.6 7,102.6 6,963.6 1,559.0 1,827.1 1,867.8 1,490.6 1,524.5 1,758.4 283.9 341.8 348.7 295.5 273.6 372.5 1,189.2 886.9 921.6 741.9 683.2 811.0 10,498.7 10,189.2 9,492.1 13,696.4 11,602.0 9,648.4 25,654.0 26,062.1 24,373.1 28,447.6 26,270.0 24,482.4 3,661.1 1,672.5 3,163.4 1,476.9 2,629.4 2,097.7 1,696.2 1,564.0 1,200.6 1,590.5 1,827.8 1,249.1 146.9 143.6 143.3 145.0 142.3 131.8 3,070.9 3,741.0 4,841.9 2,092.5 3,677.0 2,443.8 450.0 450.0 450.0 350.0 350.0 450.0 865.0 765.8 766.0 864.5 864.7 965.6 267.9 267.8 267.8 276.2 276.2 267.8 15.1 22.5 4.7 1.3 11.2 1.1 1,916.8 1,789.1 1,514.6 1,816.0 2,346.3 1,334.3 37,743.9 36,478.4 36,725.4 37,060.5 38,394.9 33,423.6 — 120.0 120.0 — — 120.0 379.8 379.8 379.8 379.8 379.8 379.8 2,911.8 2,775.3 2,721.0 3,069.1 2,990.7 2,825.1 .8 7.1 7.3 (11.7 ) (8.9 ) 4.7 99.5 118.2 122.5 72.4 88.6 99.3 (33.0 ) (40.2 ) (46.2 ) (34.3 ) (26.4 ) (42.3 ) (358.6 ) (360.4 ) (359.3 ) (356.9 ) (368.5 ) (360.5 ) 3,000.3 2,999.8 2,945.1 3,118.4 3,055.3 3,026.1 $ 40,744.2 $ 39,478.2 $ 39,670.5 $ 40,178.9 $ 41,450.2 $ 36,449.7 CONSOLIDATED STATEMENT OF INCOME NORTHERN TRUST CORPORATION Third Quarter
Ended September 30 Nine Months
Ended September 30 2003 2002 2003 2002 $ 304.0 $ 281.4 $ 878.5 $ 885.2 28.9 26.3 82.4 87.5 24.1 23.9 72.4 71.9 13.7 11.6 41.5 31.2 20.7 10.6 73.3 47.0 — .1 — .2 391.4 353.9 1,148.1 1,123.0 254.5 308.1 799.3 934.2 120.2 158.2 387.3 483.8 134.3 149.9 412.0 450.4 5.0 20.0 17.5 30.0 129.3 129.9 394.5 420.4 157.9 160.3 493.6 472.7 32.9 32.7 101.4 98.9 29.3 27.1 102.5 76.7 21.5 21.4 66.6 64.5 105.8 97.4 345.3 304.9 347.4 338.9 1,109.4 1,017.7 173.3 144.9 433.2 525.7 58.5 47.4 140.4 175.7 114.8 97.5 292.8 350.0 (1.7 ) (1.7 ) (8.8 ) 1.4 — — (20.2 ) — .7 .6 11.3 (.6 ) (1.0 ) (1.1 ) (17.7 ) .8 $ 113.8 $ 96.4 $ 275.1 $ 350.8 $ 113.8 $ 95.8 $ 274.4 $ 349.1 $ .52 $ .44 $ 1.33 $ 1.58 .51 .43 1.31 1.54 $ .52 $ .44 $ 1.25 $ 1.58 .51 .43 1.23 1.54 .17 .17 .51 .51 220,263,066 220,431,828 220,311,056 220,715,302 224,652,577 225,098,182 223,982,185 226,383,081 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME NORTHERN TRUST
CORPORATION 2003 2002 2003 2002 $ 113.8 $ 96.4 $ 275.1 $ 350.8 (2.6 ) 3.2 (2.6 ) 5.0 (.5 ) .5 (3.9 ) 4.8 (.1 ) (.2 ) .2 (.1 ) (3.2 ) 3.5 (6.3 ) 9.7 $ 110.6 $ 99.9 $ 268.8 $ 360.5 CONSOLIDATED STATEMENT OF INCOME NORTHERN TRUST CORPORATION 2004 2003 $ 327.9 $ 280.6 41.4 20.7 23.0 24.0 14.5 12.8 19.7 17.5 — — 426.5 355.6 254.4 274.6 115.9 133.9 138.5 140.7 (5.0 ) 5.0 143.5 135.7 165.4 158.3 38.4 34.2 30.7 28.0 20.1 22.4 122.9 106.6 377.5 349.5 192.5 141.8 65.3 45.2 127.2 96.6 .5 (3.0 ) (.2 ) 1.1 .3 (1.9 ) $ 127.5 $ 94.7 $ 127.5 $ 94.3 $ .58 $ .44 .57 .43 $ .58 $ .43 .57 .42 .19 .17 220,102,831 220,373,864 224,384,348 223,435,626 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME NORTHERN TRUST CORPORATION First Quarter
Ended March 31 2004 2003 $ 127.5 $ 94.7 (.1 ) (.1 ) (2.3 ) (2.6 ) (.4 ) .3 (2.8 ) (2.4 ) $ 124.7 $ 92.3 Nine Months
Ended September 30 2003 2002 2004 2003 $ 120.0 $ 120.0 (60.0 ) — (60.0 ) — — 120.0 $ — $ 120.0 379.8 379.8 379.8 379.8 2,775.3 2,520.1 2,990.7 2,775.3 275.1 350.8 127.5 94.7 (112.4 ) (112.9 ) (41.9 ) (37.5 ) (.6 ) (1.6 ) — (.3 ) (25.6 ) (35.4 ) (7.2 ) (7.1 ) 2,911.8 2,721.0 3,069.1 2,825.1 7.1 (2.4 ) (8.9 ) 7.1 (6.3 ) 9.7 (2.8 ) (2.4 ) .8 7.3 (11.7 ) 4.7 118.2 147.6 88.6 118.2 (18.7 ) (25.1 ) (16.2 ) (18.9 ) 99.5 122.5 72.4 99.3 (40.2 ) (58.1 ) (26.4 ) (40.2 ) (7.5 ) (6.3 ) (11.3 ) (7.1 ) 14.7 �� 18.2 3.4 5.0 (33.0 ) (46.2 ) (34.3 ) (42.3 ) (360.4 ) (333.5 ) (368.5 ) (360.4 ) 71.9 104.3 57.1 32.9 (70.1 ) (130.1 ) (45.5 ) (33.0 ) (358.6 ) (359.3 ) (356.9 ) (360.5 ) $ 3,000.3 $ 2,945.1 $ 3,118.4 $ 3,026.1 CONSOLIDATED STATEMENT OF CASH FLOWS NORTHERN TRUST CORPORATION Nine Months
Ended September 30 2003 2002 2004 2003 $ 275.1 $ 350.8 $ 127.5 $ 94.7 17.5 30.0 (5.0 ) 5.0 61.7 64.2 19.9 20.5 (34.0 ) (123.6 ) 14.7 (122.2 ) (11.3 ) (7.2 ) (8.2 ) (3.6 ) (41.8 ) (79.9 ) (16.1 ) 11.7 10.5 — 18.2 — 20.2 — (17.8 ) — 73.4 56.5 20.2 20.2 7.9 4.9 2.4 2.3 3.6 7.7 1.7 3.5 187.3 203.0 97.4 41.4 570.5 506.4 254.5 73.5 128.1 2,029.9 (75.3 ) 88.1 36.8 (360.9 ) (798.0 ) 1,829.5 (19.3 ) 2.0 10.1 (2.5 ) (161.1 ) (180.1 ) (67.0 ) (120.8 ) 44.6 36.6 26.5 21.0 (16,154.6 ) (24,227.2 ) (3,988.4 ) (7,279.9 ) 13,776.6 22,635.5 4,677.3 6,411.0 126.9 51.0 741.6 56.1 (66.6 ) (82.3 ) (13.7 ) (28.3 ) (80.8 ) (95.5 ) (22.4 ) (39.9 ) 290.2 (191.1 ) (114.1 ) 480.6 (126.5 ) — — (109.0 ) 35.4 — (482.9 ) (30.8 ) 55.1 26.1 (2,653.2 ) (412.9 ) 431.7 1,332.0 (408.1 ) (646.2 ) 1,988.6 2,347.9 132.2 (206.8 ) 3.3 5.6 2,177.6 (1,579.7 ) (1,152.5 ) 425.2 (237.3 ) (314.9 ) 2.7 (11.8 ) (655.1 ) (1,757.3 ) (1,577.9 ) (1,581.4 ) 3,590.2 4,192.0 — 708.2 (3,605.2 ) (4,434.0 ) (6.6 ) (424.0 ) 200.0 — — 200.0 (100.8 ) (.8 ) (.2 ) (.2 ) (67.3 ) (127.2 ) (43.3 ) (32.3 ) 13.3 18.3 15.4 1.1 (112.5 ) (113.0 ) (41.8 ) (37.5 ) (.8 ) (1.6 ) — (.4 ) (120.0 ) — (21.9 ) (10.8 ) (.8 ) (74.3 ) 835.9 (733.9 ) (864.7 ) (2,722.0 ) (1,246.8 ) (640.4 ) (178.5 ) (1,316.5 ) 2,672.2 2,592.3 1,595.9 2,672.2 $ 1,425.4 $ 1,951.9 $ 1,417.4 $ 1,355.7 $ 398.6 $ 490.9 $ 124.1 $ 137.5 62.7 48.7 18.3 16.2 September 30,March 31, 2004 and 2003, and 2002, have not been audited by the Corporation’s independent public accountants. In the opinion of management, all accounting entries and adjustments, including normal recurring accruals, necessary for a fair presentation of the financial position and the results of operations for the interim periods have been made. As discussed in Note 133 of this Report, as a result of its disposition on June 15, 2003, the operating results of Northern Trust Retirement Consulting, L.L.C. (NTRC) for all prior periods presented have been reclassified and shown as discontinued operations in the consolidated statement of income. Certain 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. For a description of Northern Trust’s significant accounting policies, refer to Note 1 of the Notes to Consolidated Financial Statements in the 20022003 Annual Report to Shareholders. September 30, 2003 December 31, 2002 September 30, 2002 Book
Value Fair
Value Book
Value Fair
Value Book
Value Fair
Value $ 847.2 $ 893.0 $ 756.8 $ 798.8 $ 676.3 $ 721.8 7.4 7.5 8.4 8.3 4.5 4.4 154.2 149.1 139.8 135.8 139.4 135.0 1,008.8 1,049.6 905.0 942.9 820.2 861.2 103.9 103.9 104.0 104.0 155.8 155.8 33.2 33.2 33.1 33.1 33.3 33.3 7,457.9 7,457.9 5,024.4 5,024.4 6,552.6 6,552.6 80.8 80.8 80.8 80.8 80.8 80.8 413.7 413.7 438.9 438.9 484.9 484.9 8,089.5 8,089.5 5,681.2 5,681.2 7,307.4 7,307.4 4.1 4.1 7.7 7.7 11.2 11.2 $ 9,102.4 $ 9,143.2 $ 6,593.9 $ 6,631.8 $ 8,138.8 $ 8,179.8 6Notes to Consolidated Financial Statements (continued) September 30, 2003 Book
Value Gross Unrealized Fair
Value Gains Losses $ 847.2 $ 45.8 $ — $ 893.0 7.4 .1 — 7.5 154.2 .3 5.4 149.1 $ 1,008.8 $ 46.2 $ 5.4 $ 1,049.6 September 30, 2003 Amortized
Cost Gross Unrealized Fair
Value Gains Losses $ 103.8 $ .1 $ — $ 103.9 30.6 2.6 — 33.2 7,443.5 14.6 .2 7,457.9 80.8 — — 80.8 412.5 1.5 .3 413.7 $ 8,071.2 $ 18.8 $ .5 $ 8,089.5 3. Pledged Assets - Securities and loans pledged to secure public and trust deposits, repurchase agreements and for other purposes as required or permitted by law were $9.7 billion on September 30, 2003, $9.0 billion on December 31, 2002 and $9.6 billion on September 30, 2002. Included in the September 2003 pledged assets were securities available for sale of $1.6 billion, which were pledged as collateral for agreements to repurchase securities sold transactions. The secured parties to these transactions have the right to repledge or sell these securities.Northern Trust is also permitted to repledge or sell collateral from agreements to resell securities purchased transactions. The total fair value of accepted collateral as of September 30, 2003, December 31, 2002 and September 30, 2002 was $380.5 million, $328.6 million and $323.3 million, respectively. The fair value of repledged collateral as of September 30, 2003, December 31, 2002 and September 30, 2002 was $35.8 million, $88.7 million and $215.6 million, respectively. Repledged collateral was used in other agreements to repurchase securities sold transactions.4. Contingent Liabilities - 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, including commercial paper, bond financing, initial margin requirements 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. Standby letters of credit outstanding were $2.6 billion on September 30, 2003, $2.5 billion on December 31, 2002 and $2.6 billion on September 30, 2002. Northern Trust’s liability on the consolidated balance sheet for standby letters of credit, measured as the amount of unamortized fees on these instruments, totaled $3.6 million at September 30, 2003. March 31, 2004 December 31, 2003 March 31, 2003 Book
Value Fair
Value Book
Value Fair
Value Book
Value Fair
Value $ .5 $ .5 $ — $ — $ — $ — 898.2 952.6 851.2 896.3 843.9 892.1 9.9 9.9 10.2 10.2 9.3 9.3 179.9 175.7 180.1 175.1 137.7 134.0 1,088.5 1,138.7 1,041.5 1,081.6 990.9 1,035.4 102.2 102.2 103.3 103.3 102.9 102.9 34.3 34.3 33.0 33.0 33.4 33.4 6,831.7 6,831.7 7,756.2 7,756.2 5,892.1 5,892.1 64.1 64.1 79.1 79.1 80.8 80.8 509.5 509.5 450.8 450.8 450.2 450.2 7,541.8 7,541.8 8,422.4 8,422.4 6,559.4 6,559.4 5.7 5.7 7.4 7.4 4.2 4.2 $ 8,636.0 $ 8,686.2 $ 9,471.3 $ 9,511.4 $ 7,554.5 $ 7,599.0 As partReconciliation of securities custody activities and at the directionBook Values to Fair Values of trust clients, Northern Trust lends securities owned by clientsSecurities Held to borrowers who are reviewed by the Credit Policy Credit Approval Committee. In connection with these activities, Northern Trust has issued certain indemnifications against loss resulting from the bankruptcy of the borrower of securities. The borrowing party is required 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, and the collateral is revalued on a daily basis. The amount of securities loaned subject to indemnification was $65.6 billion at September 30, 2003, $49.2 billion at December 31, 2002 and $46.9 billion at September 30, 2002. Because of the requirement to fully collateralize securities borrowed, management believes that the exposure to credit loss from this activity is remote and there are no liabilities reflected on the consolidated balance sheet at September 30, 2003, December 31, 2002 or September 30, 2002, related to these indemnifications.Maturity March 31, 2004 Book
Value Gross
Unrealized Fair
Value Gains Losses $ .5 $ — $ — $ .5 898.2 54.9 .5 952.6 9.9 .1 .1 9.9 179.9 .3 4.5 175.7 $ 1,088.5 $ 55.3 $ 5.1 $ 1,138.7 Becausethe natureAmortized Cost to Fair Values of its activities, Northern Trust is subject to pending and threatened legal actions that arise in the normal course of business. 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’ ultimate damage claims. In the judgment of management, after 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.Securities Available for SaleOne 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 Northern Trust Company (Bank), in its capacity as the former trustee of the Enron Corp. Savings Plan and former service-provider for the Enron Corp. Employee Stock Ownership Plan. The actions make claims,inter alia, for breach of fiduciary duty to the plan participants, and seek 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. The Corporation and the Bank will continue to defend these actions vigorously. In addition, 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. 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.8Notes to Consolidated Financial Statements (continued) March 31, 2004 Amortized
Cost Gross
Unrealized Fair
Value Gains Losses $ 102.2 $ — $ — $ 102.2 30.6 3.7 — 34.3 6,822.4 9.3 — 6,831.7 64.1 — — 64.1 508.1 1.4 — 509.5 $ 7,527.4 $ 14.4 $ — $ 7,541.8 September 30,
2003 December 31,
2002 September 30,
2002 March 31,
2004 December 31,
2003 March 31,
2003 $ 7,822.8 $ 7,808.1 $ 7,765.2 $ 7,910.2 $ 7,975.3 $ 7,767.3 3,646.0 3,968.3 4,200.3 3,243.6 3,405.3 3,973.9 6.8 8.8 28.7 28.9 7.0 147.1 1,280.4 1,168.5 1,148.1 1,237.7 1,297.1 1,200.4 2,477.2 2,480.8 2,362.4 2,485.6 2,699.9 2,415.4 676.6 959.3 845.3 464.3 743.9 562.0 1,268.6 1,276.0 1,254.4 1,211.0 1,228.0 1,242.4 17,178.4 17,669.8 17,604.4 16,581.3 17,356.5 17,308.5 739.7 393.9 320.2 492.3 457.3 668.2 $ 17,918.1 $ 18,063.7 $ 17,924.6 $ 17,073.6 $ 17,813.8 $ 17,976.7 (143.4 ) (149.2 ) (162.4 ) $ 16,930.2 $ 17,664.6 $ 17,814.3 September 30, 2003,March 31, 2004, other domestic loans and international loans included a total of $810.2$490.9 million of overnight trust-related advances, compared with $899.3$672.2 million at December 31, 20022003 and $850.9$716.8 million at September 30, 2002.March 31, 2003.September 30, 2003,March 31, 2004, nonperforming loans and leases totaled $99.8$71.6 million. Included in this amount were loans with a recorded investment of $97.3$69.1 million (net of $19.8$14.8 million in charge-offs) which were also classified as impaired. A loan is impaired when, based on available information, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans totaling $12.6$5.1 million (net of $9.8$4.8 million in charge-offs) had no portion of the reserve for credit losses allocated to them while impaired loans totaling $84.7$64.0 million (net of $10.0 million in charge-offs) had an allocated reserve of $44.6$33.5 million. For the thirdfirst quarter of 2003,2004, the total recorded investment in impaired loans averaged $96.4$74.2 million. There was $99 thousand ofno interest income recorded on impaired loans for the quarter ended September 30, 2003.March 31, 2004.September 30, 2002,March 31, 2003, nonperforming loans and leases totaled $106.5$92.4 million and included $104.4$88.0 million (net of $25.4$10.9 million in charge-offs) of impaired loans. Of these impaired loans, $12.7$11.9 million (net of $15.2$4.8 million in charge-offs) had no portion of the reserve for credit losses allocated to them while $91.7$76.1 million (net of $10.2$6.1 million in charge-offs) had an allocated reserve of $21.8$33.5 million. Total recorded investment in impaired loans for the thirdfirst quarter of 20022003 averaged $106.0$89.9 million. There was $15$161 thousand of interest income recognized on such loans for the quarter ended September 30, 2002.March 31, 2003.September 30, 2003,March 31, 2004, residential real estate loans totaling $7.9$1.3 million were held for sale and carried at the lower of cost or market.value, while allvalue. All other loan commitments are carried at the amount of unamortized fees. At September 30, 2003,March 31, 2004, legally binding commitments to extend credit totaled $16.5$16.2 billion, compared with $17.2$16.5 billion at December 31, 20022003 and $15.7$16.9 billion at September 30, 2002.March 31, 2003. First Quarter
Ended March 31 2004 2003 $ 157.2 $ 168.5 (4.1 ) (6.0 ) 3.4 2.6 (.7 ) (3.4 ) (5.0 ) 5.0 $ 151.5 $ 170.1 $ 143.4 $ 162.4 8.1 7.7 $ 151.5 $ 170.1 6. Reserve for Credit Losses - Changes in the reserve for credit losses were as follows: Nine Months Ended
September 30 2003 2002 2003 2002 $ 172.7 $ 160.3 $ 168.5 $ 161.6 (5.9 ) (13.5 ) (17.3 ) (25.4 ) .9 1.6 4.0 2.2 (5.0 ) (11.9 ) (13.3 ) (23.2 ) 5.0 20.0 17.5 30.0 $ 172.7 $ 168.4 $ 172.7 $ 168.4 $ 164.9 $ 160.3 $ 164.9 $ 160.3 7.8 8.1 7.8 8.1 $ 172.7 $ 168.4 $ 172.7 $ 168.4 Corporate and
Institutional
Services Personal
Financial
Services Total $ 141.7 $ 55.1 $ 196.8 — — — $ 141.7 $ 55.1 $ 196.8 First Quarter Ended March 31 2004 2003 Gross
Carrying
Amount Accumulated
Amortization Gross
Carrying
Amount Accumulated
Amortization $ 114.3 $ 72.0 $ 109.5 $ 61.5 First Quarter Ended March 31, 2004 Beginning
Balance
(Net of Tax) Period Change Ending
Balance
(Net of Tax) Pre-Tax
Amount Tax
Effect $ 2.7 $ (.1 ) $ — $ 2.6 — — — — 2.7 (.1 ) — 2.6 .3 (.2 ) .1 .2 — 3.5 (1.3 ) 2.2 .3 (3.7 ) 1.4 (2.0 ) .1 (.8 ) .4 (.3 ) (12.0 ) — — (12.0 ) $ (8.9 ) $ (4.6 ) $ 1.8 $ (11.7 ) First Quarter Ended March 31, 2003 Beginning
Balance
(Net of Tax) Period Change Ending
Balance
(Net of Tax) Pre-Tax
Amount Tax
Effect $ 5.7 $ (.1 ) $ — $ 5.6 — — — — 5.7 (.1 ) — 5.6 5.8 (3.9 ) 1.5 3.4 — .3 (.1 ) .2 5.8 (4.2 ) 1.6 3.2 (.4 ) .5 (.2 ) (.1 ) (4.0 ) — — (4.0 ) $ 7.1 $ (3.8 ) $ 1.4 $ 4.7 7.9. Net Income Per Common Share Computations -The computation of net income per common share is presented in the following table. Third Quarter Ended
September 30 Nine Months Ended
September 30 2003 2002 2003 2002 220,263,066 220,431,828 220,311,056 220,715,302 $ 114.8 $ 97.5 $ 292.8 $ 350.0 — (.6 ) (.7 ) (1.7 ) $ 114.8 $ 96.9 $ 292.1 $ 348.3 $ .52 $ .44 $ 1.33 $ 1.58 $ (1.0 ) $ (1.1 ) $ (17.7 ) $ .8 $ — $ — $ (.08 ) $ — $ 113.8 $ 95.8 $ 274.4 $ 349.1 $ .52 $ .44 $ 1.25 $ 1.58 220,263,066 220,431,828 220,311,056 220,715,302 2,990,548 2,523,771 2,359,854 3,647,653 1,398,963 2,142,583 1,311,275 2,020,126 224,652,577 225,098,182 223,982,185 226,383,081 $ 114.8 $ 96.9 $ 292.1 $ 348.3 $ .51 $ .43 $ 1.31 $ 1.54 $ (1.0 ) $ (1.1 ) $ (17.7 ) $ .8 $ — $ — $ (.08 ) $ — $ 113.8 $ 95.8 $ 274.4 $ 349.1 $ .51 $ .43 $ 1.23 $ 1.54 First Quarter Ended March 31 2004 2003 220,102,831 220,373,864 $ 127.2 $ 96.6 — (.4 ) $ 127.2 $ 96.2 $ .58 $ .44 $ .3 $ (1.9 ) $ — $ (.01 ) $ 127.5 $ 94.3 $ .58 $ .43 220,102,831 220,373,864 3,278,296 1,808,123 1,003,221 1,253,639 224,384,348 223,435,626 $ 127.2 $ 96.2 $ .57 $ .43 $ .3 $ (1.9 ) $ — $ (.01 ) $ 127.5 $ 94.3 $ .57 $ .42 * Includes Dilutive Potential Common Shares related to restricted stock subject to performance and vesting requirements, and to stock and stock unit awards subject to vesting requirements. Refer to Note 24,22, “Stock-Based Compensation Plans” on pages 82 through 84 and 85 of the Corporation’s 20022003 Annual Report to Shareholders.11Notes10. Other Charges -During the second quarter of 2003, Northern Trust implemented a number of strategic steps to Consolidated Financial Statements (continued)reduce expenses and better position itself for improved profitability.8. Accumulated Other Comprehensive Income - The following tables summarizeChanges in the componentsother liabilities caption of Accumulated Other Comprehensive Income at September 30, 2003 and 2002, and changes during the three and nine-month periods then ended.consolidated balance sheet related to these actions were as follows: Third Quarter Ended September 30, 2003 Beginning
Balance
(Net of Tax) Before
Tax
Amount Tax Effect Ending
Balance
(Net of Tax) $ 5.7 $ (4.1 ) $ 1.5 $ 3.1 — — — — 5.7 (4.1 ) 1.5 3.1 2.4 1.3 (.4 ) 3.3 — 2.2 (.8 ) 1.4 2.4 (.9 ) .4 1.9 (.1 ) (.1 ) — (.2 ) (4.0 ) — — (4.0 ) $ 4.0 $ (5.1 ) $ 1.9 $ .8 Third Quarter Ended September 30, 2002 Beginning
Balance
(Net of Tax) Tax Effect Ending
Balance
(Net of Tax) $ 1.7 $ 1.3 $ 2.0 $ 5.0 — .1 — .1 1.7 1.2 2.0 4.9 5.8 2.1 — 7.9 — 1.6 — 1.6 5.8 .5 — 6.3 (.1 ) (.3 ) .1 (.3 ) (3.6 ) — — (3.6 ) $ 3.8 $ 1.4 $ 2.1 $ 7.3 Nine Months Ended September 30, 2003 Beginning
Balance
(Net of Tax) Tax Effect Ending
Balance
(Net of Tax) $ 5.7 $ (4.0 ) $ 1.4 $ 3.1 — — — — 5.7 (4.0 ) 1.4 3.1 5.8 3.2 (1.1 ) 7.9 — 9.6 (3.6 ) 6.0 5.8 (6.4 ) 2.5 1.9 (.4 ) .4 (.2 ) (.2 ) (4.0 ) — — (4.0 ) $ 7.1 $ (10.0 ) $ 3.7 $ .8 Nine Months Ended September 30, 2002 Beginning
Balance
(Net of Tax)
Amount Tax Effect Ending
Balance
(Net of Tax) $ (.1 ) $ 1.9 $ 3.2 $ 5.0 — .1 — .1 (.1 ) 1.8 3.2 4.9 1.5 3.5 (.3 ) 4.7 — 1.3 (2.9 ) (1.6 ) 1.5 2.2 2.6 6.3 (.2 ) (.2 ) .1 (.3 ) (3.6 ) — — (3.6 ) $ (2.4 ) $ 3.8 $ 5.9 $ 7.3 Severance Office Space Total $ 24.0 $ 18.7 $ 42.7 (16.3 ) (1.2 ) (17.5 ) 7.7 17.5 25.2 — 1.2 1.2 (2.0 ) (.7 ) (2.7 ) $ 5.7 $ 18.0 $ 23.7 9.11. Pension and Other Postretirement Plans -The following tables set forth the net periodic pension cost of the domestic qualified and nonqualified pension benefit plans and the other postretirement plan for the quarters ending March 31, 2004 and 2003. Qualified Plan Nonqualified Plan 2004 2003 2004 2003 $ 5.4 $ 4.4 $ .5 $ .5 5.8 5.0 .7 .7 (8.1 ) (7.0 ) — — 1.9 .6 .6 .6 — — — — $ 5.0 $ 3.0 $ 1.8 $ 1.8 2004 2003 $ .4 $ .4 .7 .7 .1 .1 .3 .2 $ 1.5 $ 1.4 September 30, 2003,March 31, 2004, shares available for future grant under the 2002 Plan totaled 13,534,009.11,098,964.20032004 and 2002,2003, respectively: risk-free interest rates of 3.94%3.13% and 5.11%3.94%; dividend yields of 2.08%2.53% and 1.29%2.08%; volatility factors of the expected market price of the Corporation’s common stock of 33.5%33.8% and 31.2%33.5%; and a weighted average expected life of the options of 6.15.5 years and 6.2 years.and 2002 was $10.40$13.66 per share and $18.75$10.38 per share, respectively. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ six-month to three-yearfour-year vesting periods. Third Quarter
Ended September 30 Nine Months
Ended September 30 2003 2002 2003 2002 $ 113.8 $ 96.4 $ 275.1 $ 350.8 3.1 4.2 9.8 12.1 (13.2 ) (17.7 ) (49.8 ) (56.7 ) $ 103.7 $ 82.9 $ 235.1 $ 306.2 $ .52 $ .44 $ 1.25 $ 1.58 .51 .43 1.23 1.54 $ .47 $ .37 $ 1.06 $ 1.38 .46 .37 1.04 1.34 13Notes to Consolidated Financial Statements (continued)10. Accounting Standards Pronouncements - There were no new accounting standards adopted by Northern Trust in the third quarter of 2003.FASB Interpretation No. 46, “Consolidation of Variable Interest Entities.” In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46 (FIN 46). On October 9, 2003, the FASB subsequently issued Staff Position No. FIN 46-6 deferring the effective date until the end of the first interim or annual period ending after December 15, 2003 for applying provisions of FIN 46 for interests held by public entities in variable interest entities or potential variable interest entities created before February 1, 2003. The adoption of the requirements of this interpretation is not expected to have a material effect on Northern Trust’s results of operations.11. Business Combinations - Northern Trust has completed its acquisition of Deutsche Bank AG’s global passive equity, enhanced equity and passive fixed income businesses. Under the terms of the agreement, Northern Trust paid approximately $117 million through September 30, 2003 primarily based on the value of revenues represented by managed assets transferred. At quarter-end, assets under management associated with this acquisition totaled $69.7 billion.On April 29, 2003, Northern Trust closed the acquisition of Legacy South, an Atlanta-based private wealth management firm that services high net worth individuals, families and private foundations. Legacy South, established in 1996, had $415 million of assets under management at September 30, 2003 and has been merged into Northern Trust Bank, FSB. The purchase price, which is based on the total value of revenues represented by managed assets transferred, is expected to approximate $11.5 million and will be made in multiple payments over a 16-month period. Through September 30, 2003, Northern Trust has paid $9.3 million of the estimated purchase price.12. Business Segments -The tables on page 21, reflecting the earnings contribution of Northern Trust’s business segments for the third quarter and nine months ended September 30, 2003, is incorporated by reference.13. Discontinued Operations -On June 15, 2003, Northern 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 participants with defined benefit, defined contribution and retiree health and welfare administrative services, including recordkeeping and customer service, and also provided retirement consulting and actuarial services, including plan design and communication. Hewitt and Northern Trust have agreed to work together as preferred providers in each firm’s core area of expertise – HR outsourcing and consulting services from Hewitt, and trustee, custody and pension payroll services from Northern Trust. First Quarter
Ended March 31 2004 2003 $ 127.5 $ 94.7 4.8 3.4 (13.0 ) (17.4 ) $ 119.3 $ 80.7 $ .58 $ .43 .57 .42 $ .54 $ .36 .53 .36 saleborrowing party is required to fully collateralize securities received with cash, marketable securities, or irrevocable standby letters of NTRC assets resulted incredit. As securities are loaned, collateral is maintained at a pre-tax netminimum of 100 percent of the fair value of the securities plus accrued interest. The collateral is revalued on a daily basis. The amount of securities loaned subject to indemnification was $92.4 billion at March 31, 2004, $74.0 billion at December 31, 2003 and $50.8 billion at March 31, 2003. Because of the requirement to fully collateralize securities borrowed, management believes that the exposure to credit loss from this activity is remote and there are no liabilities reflected on disposalthe consolidated balance sheet at March 31, 2004, December 31, 2003 or March 31, 2003, related to these indemnifications.$20.2 millionthe nature of its activities, Northern Trust is subject to pending and threatened legal actions that arise in the second quarternormal course of 2003, principally reflectingbusiness. Management cannot estimate the write-offspecific possible loss or range of unamortized technology investments, lease exit costsloss that may result from these proceedings since it is not possible to formulate a meaningful opinion as to the range of possible outcomes and severance benefits. The NTRC transaction entailed a reductionplaintiffs’ ultimate damage claims. In the judgment of Northern Trust’s staff of approximately 650 positions. The operating resultsmanagement, after consultation with legal counsel, none of the NTRC business forlitigation to which the current and all prior periods presented, andCorporation or any of its subsidiaries is a party, including the lossmatters described below, will have a material effect, either individually or in the aggregate, on its disposal are reflected as discontinued operations in the Corporation’s consolidated statement of income and in thefinancial position or results of operations in the C&IS business segment.14. Other Charges -In the second quarter of 2003, Northern Trust implemented a number of strategic steps to reduce expenses and better position the Corporation for improved profitability, resulting in pre-tax charges included in Noninterest Expenses of $48.5 million. Of this amount, $22.9 million represented severance costs relating to positions eliminated; $16.1 million reflected the reduction in the amount of required leased and owned office space as a result of lower staff levels; and $9.5 million related to other charges consisting primarily of asset retirements due to the standardization, replacement and elimination of software applications.Third quarter 2003 Noninterest Expenses included pre-tax charges totaling $7.0 million. Of this amount, $.8 million represented severance-related costs; $2.8 million reflected reductions in the amount of required leased office space; and $3.4 million related to asset retirements resulting from the replacement of software applications.The changes in balance sheet liabilities related to these actions were as follows: Severance Office Space
Leased
and Owned Total $ 22.3 $ 15.9 $ 38.2 .8 2.8 3.6 (12.2 ) (.7 ) (12.9 ) $ 10.9 $ 18.0 $ 28.9 15. Sale of Certain Banking Assets - -On June 16, 2003, Northern Trust sold certain banking assets and leasehold interests of its Higgins Road, Chicago retail branch. The sales price was based primarily on the level of deposits transferred and resulted in a net pre-tax gain of $17.8 million.operations.Item 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSTHIRD QUARTEROne 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 Northern Trust Company (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, seeking 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 commercial paper approximately six weeks prior to its bankruptcy filing represented “preference” payments and “fraudulent transfers” that can be reversed with the money going back to Enron. Since the Bank sold approximately $197 million of this Enron commercial paper that it held for some of its clients, the Bank and those clients are among scores of defendants named in these complaints. The Corporation and the Bank will defend these actions vigorously. Based upon the information developed to date and recognizing that the outcome of complex litigation and related matters is uncertain, management believes that these matters will be resolved without material impact on the Corporation’s consolidated financial position or results of operations.$.51$.57 for the thirdfirst quarter, an increase of 19%36% from $.43$.42 per share earned a year ago. Net income increased 18%35% to $113.8$127.5 million from $96.4$94.7 million reported forearned in the thirdfirst quarter of last year. This performance produced an annualized return on average common equity (ROE) of 15.40%16.74% versus 13.69%13.32% reported for the comparable quarter last year and an annualized return on average assets (ROA) of 1.15%1.30% versus 1.05%1.03% in 2002.2003.NTRCNorthern Trust Retirement Consulting, L.L.C. (NTRC) for the thirdfirst quarter and allthe prior periodsperiod presented are shown as discontinued operations in Northern Trust’s consolidated statement of income.$538.8$578.2 million were up 4%14% from the $516.0$509.1 million in last year’s thirdfirst quarter, while expenses from continuing operations rose 3%8%. The current quarter’s results benefited from actions announcedquarterly performance was driven by record trust fees, increased foreign exchange trading profits and continued improvement in the second quarter aimed at reducing operating costs and strategically positioning Northern Trust for improved profitability.credit quality.$391.4$426.5 million for the quarter, up 11%20% from $353.9$355.6 million reported last year, and accounted for 73%74% of total taxable equivalent revenue. Trust fees were $304.0$327.9 million in the quarter, up 8%17% compared with $281.4$280.6 million in the thirdfirst quarter of last year and represented 56%57% of total taxable equivalent revenue. The increase in trust fees resulted primarily from net new business, improved equity markets and fees resulting fromnet new business. The components of noninterest income for the acquisitionsfirst quarters of the Deutsche Bank passive asset management business2004 and an Atlanta-based private wealth management firm earlier2003 are listed in the year.following table: First Quarter
Ended March 31 2004 2003 $ 327.9 $ 280.6 41.4 20.7 23.0 24.0 14.5 12.8 19.7 17.5 $ 426.5 $ 355.6 $1.92$2.29 trillion at September 30, 2003 and included $70.1 billion of assets from the aforementioned acquisitions.March 31, 2004. This represents an increase in assets under administration of 27%6% from December 31, 2002,2003 and 33%44% from September 30, 2002.March 31, 2003. Assets under management also reached a new high and totaled $435.7$520.8 billion compared with $302.5$478.6 billion at December 31, 20022003 and $293.2$365.3 billion at September 30, 2002.March 31, 2003. September 30,
2003 June 30,
2003 December 31,
2002 September 30,
2002 $ 336.7 $ 329.2 $ 214.8 $ 207.4 99.0 94.2 87.7 85.8 435.7 423.4 302.5 293.2 1,399.5 1,327.8 1,132.1 1,078.4 81.8 78.7 69.0 64.9 1,481.3 1,406.5 1,201.1 1,143.3 $ 1,917.0 $ 1,829.9 $ 1,503.6 $ 1,436.5 1618 $ 414.3 $ 374.3 $ 278.0 106.5 104.3 87.3 520.8 478.6 365.3 1,669.3 1,585.8 1,151.9 98.3 90.7 68.7 1,767.6 1,676.5 1,220.6 $ 2,288.4 $ 2,155.1 $ 1,585.9 Asset-based trustCertain investment management fee arrangements also may provide for performance fees, which are typically determinedbased on a sliding scale so that as the value of a client portfolio grows in size, Northern Trust receives a smaller percentage of the increasing value as trust fee income. In addition, certain accounts may be on a fixed annual fee. Therefore, market value or other changes in a portfolio’s size do not typically have a directly proportionate impact on the level of the fees.returns exceeding predetermined levels. In addition, Corporate and& Institutional Services (C&IS) trust relationships are increasinglygenerally priced to reflect earnings from activities such as custody-related deposits and foreign exchange trading whichand custody-related deposits that are not included in trust fees.3%12% and totaled $152.5$161.6 million compared with $147.9$144.4 million in the year-ago quarter.a year-ago. The increase in PFS trust fees resulted primarily from improved equity markets and net new businessbusiness. Revenue growth was broad-based, with all states and improved equity markets.the Wealth Management Group reporting year-over-year increases in trust fees. Personal trust assets under administration totaled $180.8$204.8 billion at September 30, 2003,March 31, 2004, compared with $156.7$195.0 billion at December 31, 2002,2003 and $150.7$156.0 billion at September 30, 2002.March 31, 2003. Of the total assets under administration, $99.0$106.5 billion is managed by Northern Trust compared with $87.7$104.3 billion at December 31, 20022003 and $85.8$87.3 billion one year ago. At September 30, 2003, 46%March 31, 2004, 50% of personal assets under management were invested in equity securities compared with 40%39% one year ago. Net new recurring PFS trust business transitioned during the first nine monthsquarter represents approximately $24$9 million in annualized fees.Corporate & Institutional Services (C&IS)C&IS in the quarter increased 13%were up 22% to $151.5$166.3 million from $133.5$136.2 million in the year-ago quarter reflecting strong growth in all products and included approximately $7.1services, improved equity markets and net new business. Custody fees increased 23% to $65.3 million for the quarter, reflecting strong growth in global custody revenues, while fees resulting from the acquisition of the passive asset management business. With this acquisition, Northern Trust is now the third largest manager of institutional passive assets in the U.S.grew 20% to $58.1 million. Securities lending fees totaled $25.3$27.9 million compared with $17.0$21.9 million in last year’s thirdfirst quarter, reflecting both higher volumes, and increasedpartially offset by lower spreads earned on the investment of collateral. Fees from asset management totaled $54.5 million, which include $5.3 million in investment management fees relating to the acquired passive asset management business, compared with $47.0 million in the year-ago quarter. Custody fees totaled $58.2 million for the quarter, compared with $56.8 million a year ago.$1.74$2.08 trillion at September 30, 2003,March 31, 2004 compared with $1.35$1.96 trillion at December 31, 20022003 and $1.29$1.43 trillion at September 30, 2002.March 31, 2003. C&IS assets under management totaled $336.7$414.3 billion including $66.6 billion relating to the acquired passive asset business. This comparescompared with managed assets of $214.8$374.3 billion at December 31, 2002,2003 and $207.4$278.0 billion at September 30, 2002.March 31, 2003. Assets under administration include $660.7$823.9 billion of global custody assets, an increase of 73% compared with $448.5$476.0 billion one year ago. At September 30, 2003,March 31, 2004, approximately 39%38% of assets under management were invested in equity securities compared with 22%35% one year ago. The increase in the level of equity securities resulted from the acquisition of the passive asset17Noninterest Income (continued)management business. Year-to-date, Northern Trust has won on a worldwide basis, sixteen new custodial relationships with assets of approximately $64 billion from the former Deutsche Bank custody operations. Net new recurring C&IS trust business transitioned during the first nine monthsquarter represents approximately $43$18 million in annualized fees.$28.9$41.4 million in the quarter compared with $26.3$20.7 million in the thirdfirst quarter of last year. The improvement reflects currencyincreased volatility in major currencies throughout the quarter, including the euro and pound sterling and, toward quarter-end, the yen. In addition, a stronger economic climate versus the year-earlier period contributed to increased client volumes.activity. In the prior year, investment manager activity was negatively impacted by uncertainty leading up to the March 2003 invasion of Iraq. Treasury management fees in the quarter were $24.1$23.0 million up 1% fromcompared with $24.0 million in the comparablesame quarter last year. Revenues from security commissions and trading income were $13.7$14.5 million, up 19%13% from the prior year. The increase results from commissions from equity security trades and transition management services for institutional clients. Other operating income, the components of which are listed below, was $20.7$19.7 million for the thirdfirst quarter compared with $10.6$17.5 million in the same period last year. The prior year quarter was impacted by a $15.0 million write-off of an equity investment, partially offset by the recognition of approximately $8.5 million in gains by Norlease, Inc. from the sale of leased equipment. First Quarter
Ended March 31 2004 2003 $ 5.7 $ 6.2 2.4 2.3 11.6 9.0 $ 19.7 $ 17.5 $134.3$138.5 million, 10%2% lower than the $149.9$140.7 million reported in the thirdfirst quarter of 2002.2003. Net interest income is defined as the total of interest income and amortized fees on earning assets, less interest expense on deposits and borrowed funds, adjusted for the impact of hedging activity. When net interest income is adjusted to a fully taxable 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 for the quarter, stated on a FTE basis, totaled $147.4$151.7 million compared with $162.1$153.5 million reported in the prior year quarter. The net interest margin decreased to 1.67%1.73% from 1.98%1.87% in the prior year due primarily to a decline in the average yield onof the residential mortgage loan portfolio resulting fromattributable to the prior year refinancing activity. Total average earning assets of $35.1$35.2 billion were 8%6% higher than a year ago with the increase concentrated in securities. The securities portfolioand money market assets. Securities increased 9% and averaged $8.8$8.0 billion up 34% from last year, with the increase concentrated primarily in short-term U.S. agency securities. MoneyAverage money market assets averaged $8.8increased 18% to $9.9 billion up 7% from last year, while average loans declined slightly2% to $17.5$17.3 billion.$17.1$16.8 billion, were 1%2% below the $17.3$17.2 billion in the thirdfirst quarter of last year, while average international loans increased by $76$81 million from a year ago to average $384$444 million. Residential mortgages were virtually unchangedaveraged $7.9 billion in the quarter, up 2% from lastthe prior year’s third quarter and averaged $7.8 billion for thefirst quarter and represented 45%46% of the total average loan portfolio. Commercial and industrial loans averaged $3.8$3.4 billion, down $432 million or 10%15% from a$4.0 billion last year, ago, while personal loans increased $171 million or 8%4% to average $2.5 billion compared with $2.4 billion.18Net Interest Income (continued)billion in last year’s first quarter.$19.4$20.5 billion, up 7%11% from the thirdfirst quarter of 2002.2003. Foreign office time deposits increased $1.0$1.9 billion as a result of global custody activity, while retail deposit levels increased $686$273 million due primarily to higher balances in money market deposit accounts, offset in part by a reduction in savings certificates and nonpersonal time deposits. Other interest-related funds averaged $10.5$8.8 billion in the quarter compared with $9.1$9.4 billion in last year’s thirdfirst quarter. The balances within these classifications vary based on funding requirements and strategies, interest rate levels, changes in the volume of lower-cost deposit sources, and the availability of collateral to secure these borrowings. Noninterest-related funds decreased slightlyused to fund earning assets increased 6% from the prior year, averaging $5.3$5.8 billion.in the quarter, down from $20.0 million in the same period last year.and net charge-offs totaled $3.4 million. For a discussion of the provision and reserve for credit losses, refer to the “Asset Quality” section beginning on page 27.26.$347.4$377.5 million for the quarter, up 3%8% from $338.9$349.5 million in the year-ago quarter. The current quarter includes $2.8 millioncomponents of noninterest expenses and a discussion of significant changes in charges associated with reduced leased office space needs and $3.4 million relating to the replacement of software.balances during 2004 are provided below. First Quarter
Ended March 31 2004 2003 $ 165.4 $ 158.3 38.4 34.2 30.7 28.0 20.1 22.4 122.9 106.6 $ 377.5 $ 349.5 in the quarter resulting from the current year acquisitions of the passive asset management business and the Atlanta-based private wealth management firm were $4.6 million.(continued)$190.8$203.8 million compared with $193.0$192.5 million last year. The decrease reflects lower staffing levels,These expenses reflect annual salary increases, higher incentive compensation and increased pension and medical plan costs. These increases were partially offset by salary increases and higher pension plan accruals.lower staffing levels. Staff on a full-time equivalent basis at September 30, 2003March 31, 2004 totaled 8,094,7,994 compared with 8,239 at June 30, 2003 and 9,328 at September 30, 2002.8,683 a year ago. Staffing levels declined as alevel declines were the result of the second quarter 2003 saleselimination of NTRC and the Higgins retail branch assets. In addition, positions were also eliminated in 2003 as part ofresulting from Northern Trust’s previously disclosed strategic business review, offset in part by increases relating to acquisitions, staffing for new offices, and other strategic initiatives.$29.3$30.7 million, up 8%10% from $27.1$28.0 million in the thirdfirst quarter of 2002. Included in the2003. The current quarter was a $2.8included $1.2 million chargein charges associated with reduced leasedrevisions made to the estimated cost of reducing required office space needs.space. The remainder of the changeincrease in occupancy expense was due primarily to real estate tax refunds, partially offset by higher net rental costs utilities, and building maintenance.19Noninterest Expenses (continued)maintenance, partially offset by real estate tax refunds.$21.5$20.1 million, up 1%down 10% from $21.4$22.4 million reported in the thirdfirst quarter of 2002.2003. The increasedecrease was concentrated primarily in maintenance of computer hardware, data line lease costs and thelower depreciation and maintenance of computer hardware offset in part by lower depreciation ofand personal computers and maintenance of equipment.computers.$105.8$122.9 million compared with $97.4$106.6 million last year. Included in the third quarter’s otherThe increase reflects expenses associated with operating expenses is $3.4 millionrisks related to asset retirements resulting from the replacement of software applications. The remainder of the increase is primarily related to acquisitions,servicing and managing financial assets, investments in technology investments that increased software amortization, and higher insurance premiums.premiums and fees for global custody and asset management sub-advisor services. The first of these categories included an $11.6 million loss from securities processing activities related to a stock conversion offer that was not processed on a timely basis. These higher expensesincreases were partially offset by otherlower expenses from strategic initiatives implemented in 2003 to reduce operating expenses.costs. The following table shows the components of other operating expenses.expenses were as follows: Third Quarter
Ended September 30 First Quarter
Ended March 31 2003 2002 2004 2003 $ 49.6 $ 47.1 $ 52.4 $ 47.8 25.2 20.9 26.5 25.5 8.4 8.8 10.4 11.6 2.9 1.6 2.4 2.3 3.4 — 16.3 19.0 31.2 19.4 $ 105.8 $ 97.4 $ 122.9 $ 106.6 $58.5$65.3 million for the thirdfirst quarter compared with $47.4$45.2 million in the year-ago quarter. The higher tax provision in 20032004 primarily reflects the impact of higher earnings. The effective income tax rate for the quarter was 33.8%,33.9% compared with 32.7%31.9% in the thirdfirst quarter of 2002.2003. The increase in the Corporation’s effective income tax rate for the thirdfirst quarter of 20032004 is primarily attributable to the decrease in the Corporation’s federally tax-exempt income as a percentage of total income.20SEGMENTSUNIT REPORTINGsegmentsunits for the thirdfirst quarter ended September 30, 2003March 31, 2004 and 2002.2003.
Third Quarter Corporate and
Institutional
Services Personal Financial
Services Treasury and
Other Total
Consolidated 2003 2002 2003 2002 2003 2002 2003 2002 $ 151.5 $ 133.5 $ 152.5 $ 147.9 $ — $ — $ 304.0 $ 281.4 59.8 63.5 26.4 8.4 1.2 .6 87.4 72.5 37.5 41.9 108.8 113.0 1.1 7.2 147.4 162.1 (7.0 ) 18.5 12.0 1.5 — — 5.0 20.0 162.3 158.0 173.4 175.9 11.7 5.0 347.4 338.9 93.5 62.4 102.3 91.9 (9.4 ) 2.8 186.4 157.1 36.3 24.2 39.1 35.2 (3.8 ) .2 71.6 59.6 $ 57.2 $ 38.2 $ 63.2 $ 56.7 $ (5.6 ) $ 2.6 $ 114.8 $ 97.5 (1.0 ) (1.1 ) — — — — (1.0 ) (1.1 ) $ 56.2 $ 37.1 $ 63.2 $ 56.7 $ (5.6 ) $ 2.6 $ 113.8 $ 96.4 49 % 38 % 56 % 59 % (5 )% 3 % 100 % 100 % $ 16,924.0 $ 16,297.6 $ 15,586.1 $ 15,497.4 $ 6,807.6 $ 4,696.4 $ 39,317.7 $ 36,491.4 Corporate and
Institutional Services Personal Financial
Services 2004 2003 2004 2003 2004 2003 2004 2003 $ 166.3 $ 136.2 $ 161.6 $ 144.4 $ — $ — $ 327.9 $ 280.6 72.2 51.2 24.3 23.3 2.1 .5 98.6 75.0 41.4 39.7 109.6 109.4 .7 4.4 151.7 153.5 (4.7 ) (2.6 ) (.3 ) 7.6 — — (5.0 ) 5.0 178.0 162.0 185.2 181.1 14.3 6.4 377.5 349.5 106.6 67.7 110.6 88.4 (11.5 ) (1.5 ) 205.7 154.6 41.5 26.5 42.9 34.6 (5.9 ) (3.1 ) 78.5 58.0 $ 65.1 $ 41.2 $ 67.7 $ 53.8 $ (5.6 ) $ 1.6 $ 127.2 $ 96.6 .3 (1.9 ) — — — — .3 (1.9 ) $ 65.4 $ 39.3 $ 67.7 $ 53.8 $ (5.6 ) $ 1.6 $ 127.5 $ 94.7 51 % 41 % 53 % 57 % (4 )% 2 % 100 % 100 % $ 19,839.0 $ 16,302.9 $ 15,984.6 $ 15,918.5 $ 3,699.4 $ 5,240.1 $ 39,523.0 $ 37,461.5 * Stated on a fully taxable equivalent basis (FTE). Total includes FTE adjustments of $13.1$13.2 million for 20032004 and $12.2$12.8 million for 2002.2003.2002 financial information to conform to the current year presentation.The following table reflects the earnings contribution and average assets of Northern Trust’s business segments for the nine months ended September 30, 2003 and 2002.
Nine Months Corporate and
Institutional
Services Personal Financial
Services Treasury and
Other Total
Consolidated 2003 2002 2003 2002 2003 2002 2003 2002 $ 435.0 $ 423.3 $ 443.5 $ 461.9 $ — $ — $ 878.5 $ 885.2 175.4 182.7 90.8 53.0 3.4 2.1 269.6 237.8 116.0 127.5 328.7 329.8 6.3 28.9 451.0 486.2 (10.5 ) 23.8 28.0 6.2 — — 17.5 30.0 515.7 468.6 549.3 526.8 44.4 22.3 1,109.4 1,017.7 221.2 241.1 285.7 311.7 (34.7 ) 8.7 472.2 561.5 86.0 93.5 109.7 119.8 (16.3 ) (1.8 ) 179.4 211.5 $ 135.2 $ 147.6 $ 176.0 $ 191.9 $ (18.4 ) $ 10.5 $ 292.8 $ 350.0 (17.7 ) .8 — — — — (17.7 ) .8 $ 117.5 $ 148.4 $ 176.0 $ 191.9 $ (18.4 ) $ 10.5 $ 275.1 $ 350.8 43 % 42 % 64 % 55 % (7 )% 3 % 100 % 100 % $ 16,719.2 $ 16,215.0 $ 15,924.5 $ 15,354.8 $ 5,809.9 $ 5,513.5 $ 38,453.6 $ 37,083.3 *Stated on a fully taxable equivalent basis (FTE). Total includes FTE adjustments of $39.0 million for 2003 and $35.8 million for 2002.Note: Certain reclassifications have been made to 2002 financial information to conform to the current year presentation.thirdfirst quarter totaled $56.2$65.4 million, up 51%66% from $37.1$39.3 million reported in 2002.2003. Included in the above are the operating results of NTRC that have been reclassified and shown as discontinued operations for all periods presented. NTRC incurred areported net loss from operationsincome of $.3 million in the current quarter compared with a net loss of $1.0$1.9 million in the first quarter of 2003. Noninterest income from continuing operations was $238.5 million, up 27% from $187.4 million in last year’s first quarter. Trust fees in the quarter were up 22% to $166.3 million from $136.2 million in the year-ago quarter reflecting strong growth in all products and services, improved equity markets and net new business. Custody fees increased 23% to $65.3 million for the quarter, reflecting strong growth in global custody revenues, while fees from asset management grew 20% to $58.1 million. Securities lending fees totaled $27.9 million compared with $21.9 million in last year’s first quarter, reflecting higher volumes, partially offset by lower spreads earned on the investment of collateral.2123a net loss of $1.1 million in the third quarter of 2002. Noninterest income from continuing operations was $211.3 million, up 7% from $197.0 million in last year’s third quarter. Trust fees in the quarter increased 13% to $151.5 million from $133.5 million in the year-ago quarter, and included approximately $7.1 million in fees resulting from the acquisition of the Deutsche Bank passive asset management business. Securities lending fees totaled $25.3 million compared with $17.0 million in last year’s third quarter, reflecting both higher volumes and increased spreads earned on the investment of collateral. Fees from asset management totaled $54.5 million, which include $5.3 million in investment management fees relating to the acquired passive asset management business, compared with $47.0 million in the year-ago quarter. Custody fees totaled $58.2 million for the quarter, compared with $56.8 million a year ago. Other noninterest income was $59.8$72.2 million, down 6%up 41% from last year’s thirdfirst quarter, primarily the result of the recognition of approximately $8.5 million in gains by Norlease, Inc. from the sale of leased equipment in last year’s third quarter. Partially offsetting the decline was higher foreign exchange trading profits resulting from continued volatility in the currency markets and treasury management fees.increased client activity.$37.5$41.4 million, down 10%up 4% from $41.9$39.7 million in last year’s thirdfirst quarter. Net interest income was positively impacted by a $560$2.9 billion or 20% increase in average earning assets. The increase was concentrated in short-term money market assets, offset in part by a $429 million or 12% declinereduction in average loans and a reduction in theoutstanding. The net interest margin fell to 1.00%.97% for the current quarter from 1.18%1.13% in last year’s thirdfirst quarter. TheBoth the net interest spread and margin waswere negatively impacted by anthe increase in short-termlower-rate money market assets and a decline in the earnings capacity of noninterest-related funds due to lower interest rates.$7.0negative $4.7 million negative provision for credit losses in the current quarter resulted primarily from improved credit quality brought about by cash payments received on lower-rated loans that require higher reserve levels. Total noninterest expenses of C&IS, which include both the net impact of credit rating changes and principal repayments. Noninterestdirect expenses from continuing operations increased 3% to $162.3 million in the current quarter compared with $158.0 million in last year’s third quarter. The remainder of the increase primarily relates to higherbusiness unit and indirect expense allocations from Northern Trust Global Investments (NTGI) and Worldwide Operations and Technology (WWOT) for product and operations support.operating support, increased 10% and totaled $178.0 million for the first quarter. The expense increase was primarily the result of the $11.6 million loss from security processing activities related to a stock conversion offer, in addition to increased compensation expense resulting from higher performance-based pay.$63.2$67.7 million, 12%26% higher than the $56.7$53.8 million reported a year ago. The prior year third quarter was negatively impacted by the recognition of a $15.0 million write-off of an equity investment. Trust fees increased 3%12% and totaled $152.5$161.6 million in the current quarter compared with $147.9$144.4 million last year. The increase in PFS trust fees resulted primarily from improved equity markets and net new businessbusiness. Revenue growth was broad-based, with all states and improved equity markets.our Wealth Management Group reporting year-over-year increases in trust fees. Other operating income totaled $26.4$24.3 million compared with $8.4$23.3 million in the prior year quarter. Excluding the $15.0 million equity investment write-off in last year’s third quarter, the remainder of the improvement reflects higher treasury management, loan and banking-related fees.22Personal Financial Services (continued)$108.8$109.6 million in the quarter compared with $113.0$109.4 million in the prior year’s thirdfirst quarter. The results reflect a 3%2% increase in average loans, offset by a slight decrease in the net interest margin from 3.02%2.92% last year to 2.85%2.90% in the current quarter.$12.0negative $.3 million provision for credit losses, up $10.5down from $7.6 million in the current quarter,last year, is due primarily to the weakeningimproved credit quality of certain commercial loans. NoninterestTotal noninterest expenses decreasedof PFS, which include both the direct expenses of the business unit and indirect expense allocations from NTGI and WWOT for product and operating support, increased slightly to $173.4$185.2 million in the quarter from $175.9$181.1 million in last year’s thirdfirst quarter. Higher costs for legal and other professionalconsulting services, in addition to increased occupancy costs as a result ofexpense resulting from the remodeling and expansion of existing locations, were more than offset by reducedand higher allocations for product and operations support and lower business promotion costs.contributed to the overall increase in operating expenses.thirdfirst quarter was $1.1$.7 million compared with $7.2$4.4 million in the year-ago quarter. The decline in net interest income resulted from the decrease in the net interest margin, due in large part to athe continued decline in the yield on the residential mortgage loan portfolio resulting from refinancing activity. Primarily as a result ofactivity over the third quarter charge associated with the reduction in leased office space, noninterestpast year. Noninterest expenses totaled $11.7$14.3 million for the quarter compared with $5.0$6.4 million in the year-ago period. The increase reflects costs associated with vacant office space and higher corporate-based executive level compensation plan expenses.NINE-MONTH RESULTS OF OPERATIONSNet income per common share on a diluted basis was $1.23 for the nine-month period ended September 30, 2003, compared with $1.54 per share earned a year ago. Net income was $275.1 million compared with $350.8 million reported last year. The ROE was 12.64% for the first nine months compared with 17.16% last year, while the ROA was .96% compared with 1.26% in the previous year. Total revenues were 1% lower than the prior year while total expenses increased 9%, resulting in a productivity ratio of 144% compared with 158% last year.As a result of the second quarter disposition of the assets of NTRC, its operating results for 2003 and all prior periods are shown as discontinued operations in Northern Trust’s consolidated statement of income. The net loss from discontinued operations in the current year totaled $17.7 million, which included the $20.2 million pre-tax loss on the sale, and NTRC’s net loss from operations. This compares with net income of $.8 million for the same period last year.23Revenues from continuing operations of $1.60 billion were down 1% from the $1.61 billion last year. Trust fees were $878.5 million in the nine-month period, down 1% compared with $885.2 million in the same period of last year. Trust fees represented 55% of total revenues, and total fee-related income represented 72% of total revenues.Noninterest IncomeTrust fees from PFS in the period decreased 4% and totaled $443.5 million, compared with $461.9 million last year. The decline in PFS trust fees resulted from lower equity markets partially offset by net new business. Trust fees resulting from acquisitions totaled $1.7 million for the period.Trust fees from C&IS increased 3% to $435.0 million from $423.3 million in the year-ago period, and included approximately $15.6 million in fees resulting from the acquisition of the passive asset management business. Securities lending fees totaled $75.4 million compared with $79.2 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. Fees from asset management totaled $155.1 million, which include $12.0 million in fees relating to the acquired passive asset management business, compared with $140.9 million in the year-ago period. Custody fees totaled $165.1 million for the first nine months, compared with $166.7 million a year ago.Foreign exchange trading profits were $82.4 million in the period compared with $87.5 million in the first nine months of last year. Treasury management fees in the period were $72.4 million, up 1% from the comparable period last year. Revenues from security commissions and trading income were $41.5 million, up 33% from the prior year. The increase primarily reflects commissions from fixed income security trades and transition management services for institutional clients. Other operating income was $73.3 million for the period compared with $47.0 million in the same period last year. The current year includes the $17.8 million gain from the sale of the Higgins branch assets, while the prior year results were reduced by a $15.0 million write-off of an equity investment. Net gains on the sale of leased equipment by Norlease, Inc. totaled $1.8 million compared with $8.4 million last year.Net Interest IncomeNet interest income for the nine months, stated on a fully taxable equivalent basis, totaled $451.0 million, a decline of 7% from the $486.2 million reported in the prior year period. The net interest margin decreased to 1.76% from 1.96% in the prior year due in large part to a decline in the yield on the residential mortgage loan portfolio due to the impact of refinancing activity. Total average earning assets of $34.2 billion were 3% higher than a year ago with the increase concentrated in securities. Average money market assets decreased 1% while average loans were virtually unchanged at $17.5 billion.24Provision for Credit LossesThe 2003 provision for credit losses of $17.5 million was $12.5 million lower than the $30.0 million required in 2002. Net charge-offs totaled $13.3 million and represented .10% of average loans compared with $23.2 million or .18% of average loans in the first nine months of 2002.Noninterest ExpensesNoninterest expenses from continuing operations totaled $1.11 billion for the period, up 9% from $1.02 billion a year-ago. The current year includes severance charges in the second quarter ($22.9 million), office space charges in the second quarter ($16.1 million) and third quarter ($2.8 million) and software charges in the second quarter ($9.5 million) and third quarter ($3.4 million) which together totaled $54.7 million. Expenses resulting from the acquisitions of a passive asset management business and an Atlanta-based private wealth management firm were $16.2 million.Compensation and employee benefits represented 54% of total operating expenses and totaled $595.0 million, compared with $571.6 million last year, and included $19.5 million in severance-related costs. The remainder of the increase from a year ago resulted primarily from salary increases, partially offset by lower performance-based compensation.Net occupancy expense totaled $102.5 million, up 34% from $76.7 million in the prior year. Included in the current period was the $18.9 million charge associated with the reduction in leased office space needs. The remainder of the increase from the prior year was the result of higher rent, utilities and building maintenance costs, partially offset by real estate tax refunds.Equipment expense, comprised of depreciation, rental and maintenance costs, totaled $66.6 million, up 3% from $64.5 million in 2002. The current nine-month period reflects higher levels of depreciation and maintenance of computer hardware and data line lease costs, offset in part by lower depreciation of personal computers.Other operating expenses totaled $345.3 million for the nine-month period, up 13% from $304.9 million in 2002. Included in the current year results is the previously discussed software and outplacement benefit charges, which totaled $16.3 million. The remainder of the increase is primarily attributable to acquisitions, technology investments that increased software amortization, business promotion and other professional fees.25September 30, 2003March 31, 2004 were $40.7$40.2 billion and averaged $39.3$39.5 billion for the thirdfirst quarter, compared with last year’s average of $36.5$37.5 billion. Loans and leases totaled $17.9$17.1 billion at September 30, 2003March 31, 2004 and averaged $17.5$17.3 billion for the thirdfirst quarter, compared with $17.9$18.0 billion at September 30, 2002March 31, 2003 and $17.6 billion for the thirdfirst quarter of last year. Securities totaled $9.1$8.6 billion at September 30, 2003March 31, 2004 and averaged $8.8$8.0 billion for the quarter, compared with $8.1$7.6 billion at September 30, 2002March 31, 2003 and $6.5$7.4 billion on average last year. Money market assets totaled $9.2$10.4 billion at September 30, 2003March 31, 2004 and averaged $8.8$9.9 billion in the thirdfirst quarter, up 7%18% from the year-ago quarter. Other assets at the end of the quarter included $123.4 million of goodwill and other intangible assets associated with the acquisitions of the passive asset management business and an Atlanta-based private wealth management firm.$3.0$3.1 billion at September 30, 2003March 31, 2004 and averaged $2.9$3.1 billion for the quarter, up 6%7% from last year’s third quarter.first quarter average. The increase primarily reflects the retention of earnings offset in part by the repurchase of common stock pursuant to the Corporation’s share buyback program. During the quarter, the Corporation acquired 829,814938,989 shares at a cost of $35.6$45.5 million. An additional 11.19.3 million shares are authorized for purchase after September 30, 2003March 31, 2004 under the previously announced share buyback program.10.8%11.2% for tier 1 capital and 13.8%14.1% for total capital at September 30, 2003.March 31, 2004. These ratios are well above the minimum regulatory requirements of 4% for tier 1 and 8% for total risk-based capital ratios. The leverage ratio (tier 1 capital to thirdfirst quarter average assets) of 7.8%8.0% at September 30, 2003,March 31, 2004, also exceeded the minimum regulatory requirement of 3%. The Bank’s risk-based capital ratios at September 30, 2003March 31, 2004 were 8.6%9.0% for tier 1 capital, 12.1%12.5% for total capital and 6.0%6.3% for the leverage ratio. Each of Northern Trust’s other subsidiary banks had a ratio of 10.7%11.1% or higher for tier 1 capital, 11.3%11.6% or higher for total risk-based capital, and 8.1%8.2% or higher for the leverage ratio.2625September 30, 2003March 31, 2004 totaled $100.2$72.1 million, compared with $107.9 million at June 30, 2003, $94.6$80.3 million at December 31, 20022003 and $107.6$93.6 million at September 30, 2002.March 31, 2003. Domestic nonaccrual loans and leases, consisting primarily of commercial loans, totaled $99.8$71.6 million, or .58%.43% of total domestic loans and leases at September 30, 2003,March 31, 2004, of which $40.5 million relates to two commercial clients that have exposure to asbestos-related claims. At December 31, 20022003 and September 30, 2002,March 31, 2003, domestic nonaccrual loans and leases totaled $93.4$80.0 million and $106.5$92.4 million, respectively. The $7.7$8.4 million decrease in nonperforming loans during the quarter is the result of an additional $15.7$2.5 million in loans classified as nonaccrual, offset by $5.9$4.1 million in charge-offs and $17.5$6.8 million in net loan repayments. September 30,
2003 June 30,
2003 December 31,
2002 September 30,
2002 March 31,
2004 December 31,
2003 March 31,
2003 $ 3.5 $ 4.6 $ 4.8 $ 3.7 $ 4.0 $ 4.5 $ 4.4 95.9 102.1 87.6 101.6 67.4 75.3 86.9 .3 .4 .7 .6 .1 .1 .5 .1 .4 .3 .6 .1 .1 .6 99.8 107.5 93.4 106.5 — — — — — — — 99.8 107.5 93.4 106.5 71.6 80.0 92.4 .4 .4 1.2 1.1 .5 .3 1.2 $ 100.2 $ 107.9 $ 94.6 $ 107.6 $ 72.1 $ 80.3 $ 93.6 $ 15.5 $ 15.4 $ 15.2 $ 29.3 $ 14.1 $ 21.0 $ 19.5 27Provision and Reserve for Credit Losses (continued)three- and nine-monththree-month periods ended September 30,March 31, 2004 and March 31, 2003 and September 30, 2002 due to charge-offs, recoveries and the provision for credit losses during the respective periods. The following table below shows (i) the specific reserve, (ii) the allocated portion of the inherent reserve and its components by loan category, and (iii) the unallocated portion of the inherent reserve at September 30, 2003, June 30, 2003,March 31, 2004, December 31, 20022003 and September 30, 2002.March 31, 2003. September 30, 2003 June 30, 2003 December 31, 2002 September 30, 2002 March 31, 2004 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 Reserve
Amount Percent of
Loans to
Total
Loans Reserve
Amount Percent of
Loans to
Total
Loans Reserve
Amount Percent of
Loans to
Total
Loans $ 44.6 — % $ 37.9 — % $ 25.0 — % $ 21.8 — % $ 33.5 — % $ 37.0 — % $ 33.5 — % 12.3 44 11.9 43 11.5 43 11.5 43 12.0 46 11.9 45 11.5 43 68.3 20 77.3 22 85.2 22 88.2 24 54.9 19 60.9 19 80.1 23 17.2 7 16.9 7 15.5 7 15.3 6 16.9 7 16.8 7 15.6 7 4.9 14 4.9 14 5.0 14 4.2 13 5.1 15 5.2 15 4.5 13 — 4 — 4 — 5 — 5 — 3 — 4 — 3 4.6 7 4.7 7 4.8 7 4.4 7 4.3 7 4.3 7 4.8 7 1.7 4 .9 3 1.4 2 2.0 2 1.6 3 1.6 3 .9 4 $ 109.0 100 % $ 116.6 100 % $ 123.4 100 % $ 125.6 100 % $ 94.8 100 % $ 100.7 100 % $ 117.4 100 % 19.1 — 18.2 — 20.1 — 21.0 — 23.2 — 19.5 — 19.2 — $ 172.7 100 % $ 172.7 100 % $ 168.5 100 % $ 168.4 100 % $ 151.5 100 % $ 157.2 100 % $ 170.1 100 % $ 164.9 $ 165.2 $ 161.1 $ 160.3 $ 143.4 $ 149.2 $ 162.4 7.8 7.5 7.4 8.1 8.1 8.0 7.7 $ 172.7 $ 172.7 $ 168.5 $ 168.4 $ 151.5 $ 157.2 $ 170.1 September 30, 2003,March 31, 2004, the specific component of the reserve stood at $44.6$33.5 million compared with $37.9$37.0 million at June 30,December 31, 2003. The $6.7$3.5 million increasedecrease in specific reserves from June 30,December 31, 2003 is 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 repayments and the charge-off of twoa commercial loans,loan, which had been reserved for in a prior periods.28Provision and Reserve for Credit Losses (continued)period.decreased by a net $7.6 million during the quarter to $109.0totaled $94.8 million at September 30,March 31, 2004 compared with $100.7 million at December 31, 2003. The decrease in thisThis component of the reserve isdecreased by $5.9 million due primarily due to the migration of certain loans to impaired status requiring specific reserves and thenet reduction in the outstanding balance of lower-rated loans reflecting the receipt of principal repayments.Reserve.Reserve. The unallocated portion of the inherent reserve is based on management’s review of overall factors affecting the determination of probable inherent losses, primarily in the commercial portfolio, which are not necessarily captured by the application of historical loss ratios. This portion of the reserve 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 inherent in the process of estimating probable credit losses. TheAlthough credit quality and business conditions have shown signs of improvement, there continues to be uncertainty with regard to the breadth of the economic recovery as a result of continued weakness in the labor markets, high energy costs, governmental budget deficits, and the risk of increases in interest rates from current historically low levels. In light of these concerns, the unallocated inherent portion of the reserve was set at September 30, 2003 was $19.1 million.$23.2 million at March 31, 2004, compared with $19.5 million at December 31, 2003.September 30, 2003,March 31, 2004, 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 parallels that of the banking regulators), was $280$184 million (of which $97.3$69.1 million was classified as impaired), down $17$29 million, or 6%,14% from $297$213 million at June 30,December 31, 2003 when $105.4$78.7 million was impaired, and down from $319$270 million at September 30, 2002March 31, 2003 when $104.2$87.9 million was impaired. The majority of the decrease from June 30,December 31, 2003 reflects the receipt of principal repayments and the partial charge-off of twoan impaired commercial loans, offset in part by the migration of certain loans to higher risk credit ratings.loan.Reserve.Reserve. Management’s evaluation of the factors above resulted in a reserve for credit losses of $172.7$151.5 million at September 30, 2003.March 31, 2004. The reserve of $164.9$143.4 million assigned to loans and leases, as a percentage of total loans and leases, was .92%.84% at September 30, 2003,March 31, 2004, unchanged from June 30,December 31, 2003.$7.8$8.1 million at September 30, 2003,March 31, 2004, an increase of $.3$.1 million from June 30,December 31, 2003.TheA negative provision for credit losses wasof $5.0 million duringwas recorded in the thirdfirst quarter of 20032004 compared with $20.0a $5.0 million provision in the prior year quarter. The higher$10.0 million decrease in the provision resulted from overall continued improvement in the credit loss provision forquality of the prior year quarter reflects the impact of management’s credit evaluations at that time and the results of last year’s annual, industry-wide Shared National Credit regulatory reviews.loan portfolio.292820022003 Annual Report to Shareholders, Northern Trust manages its interest rate risk through measurement techniques which include simulation of earnings, simulation of the economic value of equity, and gap analysis. Also, as part of its risk management activities, it regularly measures the risk of loss associated with foreign currency positions using a value at risk model.2002.2003.effecteffects of any extraordinary events and various other matters (including developments in litigation and regulation involving Northern Trust and changes in accounting policies, 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,” “intent,“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 results. Actual results could differ materially from the results indicated by these statements because the realization of those results is subject to many risks and uncertainties including:30FACTORS AFFECTING FUTURE RESULTS (continued)the recenta SARS outbreak) or natural disasters;including(including material systems interruptions, and human errors or omissions, fraud, and breaches of internal controls), and attract and retain capable staff in order to address operating and technology challenges and increasing volume and complexity in many of its businesses;31FACTORS AFFECTING FUTURE RESULTS (continued)UncertaintiesRisks and uncertainties inherent in the regulatory and litigation process.process (including risks associated with pending and threatened legal actions and proceedings and the potential effects of adverse publicity arising from the failure or perceived failure to comply with legal and regulatory requirements) that are evaluated within the context of current judicial decisions and legislative and regulatory interpretations, and with respect to 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.sectionsections of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” captioned “Risk Management,” “Market Risk Management” and “Operational and Fiduciary Risk Management” in the 20022003 Annual Report to ShareholdersStockholders (pages 45-57)46-56) and in the sections of “Item 1 – 1—Business” of the 20022003 Annual Report on Form 10-K captioned “Government Policies,” “Competition” and “Regulation and Supervision” (pages 7-15)7-14). All forward-looking statements included in this report are based upon information presently available, and Northern Trust assumes no obligation to update any forward-looking statement.statements.3231CONSOLIDATED AVERAGE STATEMENT OF CONDITION NORTHERN TRUST CORPORATION Third Quarter First Quarter (Interest and rate on a fully taxable equivalent basis) 2003 2002 2004 2003 Interest Average
Balance Rate Interest Average
Balance Rate Interest Average
Balance Rate Interest Average
Balance Rate $ 2.4 $ 769.9 1.23 % $ 2.2 $ 494.4 1.81 % $ 2.4 $ 872.4 1.13 % $ 1.9 $ 589.2 1.32 % 36.2 7,930.6 1.81 51.4 7,752.8 2.63 46.0 8,974.5 2.06 43.0 7,669.6 2.27 .3 119.8 1.06 .2 25.4 2.83 .1 40.7 .58 .3 100.9 1.28 38.9 8,820.3 1.75 53.8 8,272.6 2.58 48.5 9,887.6 1.97 45.2 8,359.7 2.19 .3 104.0 1.25 1.0 158.1 2.36 .3 103.1 1.26 .6 103.3 2.47 15.8 872.8 7.27 12.8 659.3 7.77 15.9 886.2 7.17 15.0 809.8 7.43 23.2 7,170.5 1.28 25.9 5,279.7 1.95 20.0 6,333.6 1.27 21.7 5,777.7 1.52 6.8 651.7 4.15 6.0 453.9 5.27 7.2 712.6 4.08 6.8 692.8 4.01 .1 5.6 3.68 .1 7.6 4.11 — 3.8 3.21 .1 6.6 4.71 46.2 8,804.6 2.09 45.8 6,558.6 2.78 43.4 8,039.3 2.17 44.2 7,390.2 2.42 182.5 17,452.8 4.15 220.7 17,589.3 4.98 175.7 17,253.5 4.10 198.0 17,567.3 4.57 $ 267.6 35,077.7 3.03 % $ 320.3 32,420.5 3.92 % $ 267.6 35,180.4 3.06 % $ 287.4 33,317.2 3.50 % — (165.1 ) — — (156.8 ) — — (152.3 ) — — (161.8 ) — — 1,773.0 — — 1,602.1 — — 1,628.4 — — 1,631.0 — — 2,632.1 — — 2,625.6 — — 2,866.5 — — 2,675.1 — — $ 39,317.7 — — $ 36,491.4 — — $ 39,523.0 — — $ 37,461.5 — $ 12.2 $ 6,927.0 .70 % $ 18.0 $ 6,241.4 1.15 % $ 11.7 $ 7,132.6 .66 % $ 13.7 $ 6,575.3 .84 % 9.9 1,581.7 2.49 15.9 1,897.6 3.32 9.1 1,517.9 2.40 12.9 1,802.7 2.91 1.3 300.5 1.63 2.3 361.4 2.48 1.0 277.0 1.47 1.7 354.7 1.97 29.0 10,551.2 1.09 44.3 9,521.3 1.85 35.6 11,556.0 1.24 35.0 9,672.4 1.47 52.4 19,360.4 1.07 80.5 18,021.7 1.77 57.4 20,483.5 1.13 63.3 18,405.1 1.39 10.7 4,448.0 .96 14.0 3,268.0 1.70 8.1 3,482.4 .93 11.6 3,936.5 1.20 4.8 2,005.2 .95 5.1 1,228.1 1.65 3.9 1,685.3 .92 4.4 1,498.2 1.19 .4 140.6 1.11 .7 144.6 1.80 .4 143.1 1.05 .4 136.1 1.32 29.2 2,276.2 5.09 35.4 2,937.6 4.79 26.1 2,054.1 5.11 30.4 2,218.1 5.56 7.8 450.0 6.92 7.8 450.0 6.92 5.1 350.0 5.89 7.8 450.0 6.92 13.7 865.1 6.34 13.0 766.1 6.82 13.7 864.6 6.36 14.6 903.4 6.48 1.2 267.9 1.74 1.7 267.8 2.48 1.2 276.2 1.67 1.4 267.8 2.04 120.2 29,813.4 1.60 158.2 27,083.9 2.32 115.9 29,339.2 1.59 133.9 27,815.2 1.95 — — 1.43 % — — 1.60 % — — 1.47 % — — 1.55 % — 4,986.6 — — 4,969.6 — — 5,228.8 — — 5,046.9 — — 1,584.7 — — 1,539.6 — — 1,892.5 — — 1,607.7 — — 2,933.0 — — 2,898.3 — — 3,062.5 — — 2,991.7 — — $ 39,317.7 — — $ 36,491.4 — — $ 39,523.0 — — $ 37,461.5 — $ 147.4 — 1.67 % $ 162.1 — 1.98 % $ 151.7 — 1.73 % $ 153.5 — 1.87 % $ 134.3 — 1.52 % $ 149.9 — 1.83 % $ 138.5 — 1.58 % $ 140.7 — 1.71 % Third Quarter 2003/2002 Change Due To Volume Rate Total $ 12.4 $ (65.1 ) $ (52.7 ) .4 (38.4 ) (38.0 ) $ 12.0 $ (26.7 ) $ (14.7 ) 33ANALYSIS OF NET INTEREST INCOME CHANGES DUE TO VOLUME AND RATE First Quarter 2004/2003 Change Due To Average
Balance Rate Total $ 6.8 $ (26.6 ) $ (19.8 ) — (18.0 ) (18.0 ) $ 6.8 $ (8.6 ) $ (1.8 ) The following schedule should be read in conjunction with the Net Interest Income section of Management’s DiscussionItem 3. Quantitative and Analysis of Financial Condition and Results of Operations.CONSOLIDATED AVERAGE STATEMENT OF CONDITIONQualitative Disclosures about Market RiskWITH ANALYSIS OF NET INTEREST INCOMENORTHERN TRUST CORPORATION Nine Months (Interest and rate on a fully taxable equivalent basis) 2003 2002 Interest Average
Balance Rate Interest Average
Balance Rate $ 6.3 $ 651.7 1.28 % $ 10.1 $ 753.4 1.80 % 121.0 7,822.1 2.07 152.1 7,874.0 2.58 .9 120.5 1.07 .5 24.5 2.82 128.2 8,594.3 1.99 162.7 8,651.9 2.51 1.4 105.6 1.77 3.4 160.5 2.80 46.7 851.8 7.32 35.8 608.1 7.85 67.6 6,489.2 1.39 83.7 5,641.5 1.98 20.7 668.2 4.14 17.9 419.3 5.71 .2 6.6 3.64 .3 9.0 4.62 136.6 8,121.4 2.25 141.1 6,838.4 2.76 573.5 17,521.8 4.38 666.2 17,623.1 5.05 $ 838.3 34,237.5 3.27 % $ 970.0 33,113.4 3.92 % — (163.4 ) — — (155.3 ) — — 1,753.1 — — 1,651.0 — — 2,626.4 — — 2,474.2 — — $ 38,453.6 — — $ 37,083.3 — $ 39.2 $ 6,723.0 .78 % $ 54.5 $ 6,158.1 1.18 % 34.0 1,695.1 2.68 50.9 1,936.7 3.51 4.5 327.4 1.81 7.4 376.2 2.63 99.4 10,191.4 1.30 128.5 9,352.4 1.84 177.1 18,936.9 1.25 241.3 17,823.4 1.81 34.2 4,126.9 1.11 51.1 3,989.9 1.71 14.1 1,726.6 1.09 15.7 1,251.2 1.67 1.2 140.6 1.22 1.9 138.6 1.82 90.8 2,368.4 5.13 106.1 3,134.9 4.53 23.4 450.0 6.92 23.4 450.0 6.92 42.6 888.8 6.39 39.2 766.4 6.82 3.9 267.9 1.89 5.1 267.8 2.52 387.3 28,906.1 1.79 483.8 27,822.2 2.32 — — 1.48 % — — 1.60 % — 4,991.6 — — 5,109.2 — — 1,588.4 — — 1,311.8 — — 2,967.5 — — 2,840.1 — — $ 38,453.6 — — $ 37,083.3 — $ 451.0 — 1.76 % $ 486.2 — 1.96 % $ 412.0 — 1.61 % $ 450.4 — 1.82 % Nine Months 2003/2002 Change Due To Volume Rate Total $ 25.6 $ (157.3 ) $ (131.7 ) (12.6 ) (83.9 ) (96.5 ) $ 38.2 $ (73.4 ) $ (35.2 ) 34Item 3.Quantitative and Qualitative Disclosures about Market Risk3029 of this document.Item 4.Controls and ProceduresEvaluation of Disclosure Controls and Procedures. The Corporation’s management, with the participation of the Corporation’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of Northern Trust’s disclosure“disclosure controls and proceduresprocedures” (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)Exchange Act)) as of the end of the period covered by this report. Based on such evaluation, such officers have concluded that, as of the end of the period covered by this report, Northern Trust’s disclosure controls and procedures are effective in bringing to their attention on a timely basis material information relating to the Corporation (including its consolidated subsidiaries) required to be included in the Corporation’s periodic filings under the Exchange Act. Further, there have been no changes in the Corporation’s internal controls during the last fiscal quarter that have materially affected or that are reasonably likely to affect materially the Corporation’s internal controls over financial reporting.
per Share Total Number of
Shares Purchased as
Part of a Publicly
Announced Plan(2) Remaining Number of
Shares Authorized for
Purchase Under the Plan 100,313 $ 48.8231 100,313 692,676 48.1724 692,676 146,000 49.4938 146,000 938,989 48.4474 938,989 9,256,514 (1) The numbers include shares purchased from employees in connection with equity plan transactions such as the surrender of shares to pay an option exercise price or tax withholding. (2) The Corporation’s current stock buyback program announced, April 16, 2003, authorizes the purchase of up to 12.0 million shares of the Corporation’s common stock. The program has no fixed expiration date. FOR WITHHELD 192,164,889 5,361,647 200,194,743 5,361,647 194,262,966 5,361,647 197,283,547 5,361,647 144,701,525 5,361,647 199,014,229 5,361,647 191,285,459 5,361,647 200,267,173 5,361,647 194,306,512 5,361,647 198,306,838 5,361,647 199,040,285 5,361,647 193,633,233 5,361,647 187,830,014 5,361,647 PART II – OTHER INFORMATIONItem 6.Item 6. Exhibits and Reports on Form 8-K (3) Articles of Incorporation and By-laws: (a)(i)ExhibitsAmendment to By-laws and By-laws as amended to date (10) Material Contracts (i) Amendment dated February 17, 2004 to the Northern Trust Corporation 2002 Stock Plan (ii) Amendment Number Six effective as of June 15, 2003Ten dated March 29, 2004 to the Northern Trust Employee Stock Ownership Plan as amended and restated as of January 1, 2002.2002 (ii)(iii)Third Amendment Number Seven effective as of June 15, 2003dated March 25, 2004 to the Northern Trust Corporation Supplemental Employee Stock Ownership Plan as amended and restated as of JanuaryJuly 20, 1999(iv) Fourth Amendment dated March 25, 2004 to the Northern Trust Corporation Supplemental Thrift-Incentive Plan as amended and restated as of July 20, 1999 (v) Fifth Amendment dated March 25, 2004 to the Northern Trust Corporation Supplemental Pension Plan as amended and restated as of July 20, 1999 (vi) First Amendment dated March 25, 2004 to the Northern Trust Corporation Severance Plan (vii) Second Amendment dated March 25, 2004 to the Northern Trust Corporation Deferred Compensation Plan dated as of May 1, 2002.1998 (31) Rule 13a-14(a)/15d-14(a) Certifications (i) Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (ii) Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (32) Section 1350 Certifications (i) Certifications of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b)(99)Reports on Form 8-KAdditional Exhibits(i) Edited version of remarks delivered by William A. Osborn, Chairman and Chief Executive Officer, at the Annual Meeting of Stockholders of Northern Trust Corporation held on April 20, 2004. filed July 16, 2003,furnished to the Securities and Exchange Commission on January 21, 2004, Northern Trust Corporation incorporated in Items 9 andItem 12 by reference its July 16, 2003January 21, 2004 press release, reporting on its earnings for the secondfourth quarter of 2003.2003 and its 2003 fiscal year. The press release, with summary financial information, was filedincluded pursuant to Item 7.3637 October 31, 2003May 3, 2004 By:PERRY R. PERO Steven L. Fradkin Perry R. PeroVice Chairmanand Chief Financial OfficerSteven L. Fradkin October 31, 2003May 3, 2004 By:HARRYHarry W. SHORT Short 3738September 30, 2003.March 31, 2004. You may obtain copies of these exhibits from the SEC’s Internet site athttp://www.sec.gov.Stockholders may also obtain copies of such exhibits by writing Rose A. Ellis, Secretary, Northern Trust Corporation, 50 South LaSalle Street, Chicago, Illinois 60675. (3) Articles of Incorporation and By-laws: (i) Amendment to By-laws and By-laws as amended to date (10) Material Contracts Amendment dated February 17, 2004 to the Northern Trust Corporation 2002 Stock Plan (ii) Amendment Number Six effective as of June 15, 2003Ten dated March 29, 2004 to the Northern Trust Employee Stock Ownership Plan as amended and restated as of January 1, 2002.2002 (ii)(iii)Third Amendment Number Seven effective as of June 15, 2003dated March 25, 2004 to the Northern Trust Corporation Supplemental Employee Stock Ownership Plan as amended and restated as of JanuaryJuly 20, 1999(iv) Fourth Amendment dated March 25, 2004 to the Northern Trust Corporation Supplemental Thrift-Incentive Plan as amended and restated as of July 20, 1999 (v) Fifth Amendment dated March 25, 2004 to the Northern Trust Corporation Supplemental Pension Plan as amended and restated as of July 20, 1999 (vi) First Amendment dated March 25, 2004 to the Northern Trust Corporation Severance Plan (vii) Second Amendment dated March 25, 2004 to the Northern Trust Corporation Deferred Compensation Plan dated as of May 1, 2002.1998(31) Rule 13a-14(a)/15d-14(a) Certifications Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (32)(32) Section 1350 Certifications (i) Certifications of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (99 ) Additional Exhibits (i) Edited version of remarks delivered by William A. Osborn, Chairman and Chief Executive Officer, at the Annual Meeting of Stockholders of Northern Trust Corporation held on April 20, 2004. 3840