Management's Discussion and Analysis
of Financial Condition and Results of Operations
----------------------------------
Summary of Selected Consolidated Financial Data
- --------------------------------------------------------------------------------
($ In Millions Except Per Share
Information) 2000 1999 1998 1997 1996
- --------------------------------------------------------------------------------
Noninterest Income
Trust Fees $1,201.2 $ 974.2 $ 816.3 $ 689.2 $ 594.4
Foreign Exchange Trading Profits 152.7 107.7 103.5 104.8 58.8
Treasury Management Fees 71.5 67.9 69.9 60.2 55.3
Security Commissions and Trading
Income 34.3 30.2 28.0 26.1 23.9
Other Noninterest Income 77.3 55.2 53.9 54.2 47.6
- --------------------------------------------------------------------------------
Total Noninterest Income 1,537.0 1,235.2 1,071.6 934.5 780.0
- --------------------------------------------------------------------------------
Net Interest Income 568.6 518.8 477.2 438.2 388.3
Provision for Credit Losses 24.0 12.5 9.0 9.0 12.0
- --------------------------------------------------------------------------------
Income before Noninterest
Expenses 2,081.6 1,741.5 1,539.8 1,363.7 1,156.3
- --------------------------------------------------------------------------------
Noninterest Expenses
Compensation 689.1 582.6 518.1 448.3 368.8
Employee Benefits 109.3 98.5 91.3 79.0 72.5
Occupancy Expense 87.3 74.3 67.9 66.7 60.7
Equipment Expense 73.1 63.6 62.2 62.2 56.0
Other Operating Expenses 392.7 306.0 257.6 235.6 210.9
- --------------------------------------------------------------------------------
Total Noninterest Expenses 1,351.5 1,125.0 997.1 891.8 768.9
- --------------------------------------------------------------------------------
Income before Income Taxes 730.1 616.5 542.7 471.9 387.4
Provision for Income Taxes 245.0 211.5 188.8 162.5 128.6
- --------------------------------------------------------------------------------
Net Income $ 485.1 $ 405.0 $ 353.9 $ 309.4 $ 258.8
- --------------------------------------------------------------------------------
Net Income Applicable to Common
Stock $ 479.4 $ 400.2 $ 349.0 $ 304.4 $ 253.9
- --------------------------------------------------------------------------------
Per Common Share
Net Income
Basic $ 2.17 $ 1.81 $ 1.58 $ 1.37 $ 1.13
Diluted 2.08 1.74 1.52 1.33 1.11
Dividends Declared .56 .495 .435 .375 .325
Book Value--End of Period (EOP) 10.54 9.25 8.19 7.27 6.40
Market Price--EOP 81.56 53.00 43.66 34.88 18.13
- --------------------------------------------------------------------------------
Average Total Assets $ 34,043 $30,177 $27,191 $24,052 $20,964
Senior Notes--EOP 500 500 700 785 305
Long-Term Debt--EOP 638 659 458 440 428
Debt-Floating Rate Capital
Securities--EOP 268 268 267 267 --
- --------------------------------------------------------------------------------
Ratios
Dividend Payout Ratio 25.9% 27.6% 27.7% 27.5% 28.5%
Return on Average Assets 1.43 1.34 1.30 1.29 1.23
Return on Average Common Equity 22.09 20.67 20.47 20.17 18.64
Tier 1 Capital to Risk-Weighted
Assets--EOP 9.79 9.92 9.78 9.61 8.19
Total Capital to Risk-Weighted
Assets--EOP 12.85 13.60 13.06 12.78 11.87
Leverage Ratio 6.91 7.14 6.90 6.87 6.42
Average Stockholders' Equity to
Average Assets 6.73 6.81 6.71 6.78 7.09
Average Loans and Leases Times
Average Stockholders' Equity 7.2x 7.1x 7.3x 7.2x 7.0x
- --------------------------------------------------------------------------------
Stockholders--EOP 3,194 3,251 3,373 3,380 3,335
Staff--EOP (full-time equivalent) 9,466 8,583 8,156 7,553 6,933
Northern Trust Corporation (Corporation) is a bank holding company organized in
1971 to hold all of the outstanding capital stock of The Northern Trust Company
(Bank), an Illinois banking corporation with its headquarters located in the
Chicago financial district. The Corporation also owns banks with offices in
Arizona, California, Colorado, Florida and Texas, a federal savings bank with
offices in Michigan, Missouri, Nevada, Ohio, Washington and Wisconsin, a trust
company in New York and various other nonbank subsidiaries, including an
investment management company, a securities brokerage firm, an international
investment consulting firm and a retirement services company. The Bank has
global custody operations in London, offices in the Chicago metropolitan area
and various subsidiaries including a leasing company, a Canadian trust company,
a New York Edge Act company and a global fund services provider. Although
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- -- --
27
Northern Trust Corporation
Management's Discussion and Analysis
of Financial Condition and Results of Operations
----------------------------------
the operations of other subsidiaries will be of increasing significance to the
Corporation, it is expected that the Bank will continue to be the major source
of the consolidated assets, revenues and net income in the foreseeable future.
All references to "Northern Trust" refer to Northern Trust Corporation and its
subsidiaries on a consolidated basis.
The Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with Northern Trust's Consolidated
Financial Statements and Consolidated Financial Statistics included herein.
Results of Operations
- --------------------------------------------------------------------------------
Overview. Net income for 2000 totaled a record $485.1 million, a 20% increase
from the $405.0 million earned in 1999 which in turn was 14% greater than the
$353.9 million earned in 1998. Diluted net income per common share increased
20% to $2.08 from $1.74 in 1999, which was up 14% from $1.52 in 1998. The
record net income performance produced a return on average common stockholders'
equity of 22.09% compared with 20.67% in 1999 and 20.47% in 1998. The return on
average assets was 1.43% in 2000 compared with 1.34% in 1999 and 1.30% in 1998.
2000 marks the thirteenth consecutive year of record earnings. Trust fees, net
interest income, foreign exchange trading profits and treasury management fees
were all at record levels, while trust assets under administration reached
$1.68 trillion at December 31, 2000, up $145.9 billion from a year ago.
Strength in all of Northern Trust's diversified revenue sources produced a 20%
increase in revenues while operating expenses also increased by 20%, resulting
in a 160% productivity ratio, an all-time high.
Stockholders' equity grew to $2.46 billion, as compared to $2.17 billion at
December 31, 1999 and $1.94 billion at December 31, 1998, primarily through the
retention of earnings, offset in part by the repurchase of common stock
pursuant to the Corporation's share buyback program.
The Board of Directors increased the quarterly dividend per common share 14.8%
in November 2000, to $.155 from $.135, for a new annual rate of $.62. This is
the fourteenth consecutive year in which the dividend rate has been increased.
The Board's action reflects a policy of increasing the dividend rate with
increased profitability while retaining sufficient earnings to allow for
strategic expansion and the maintenance of a strong balance sheet and capital
ratios.
Northern Trust's strategy will continue to focus on growing its two principal
business units: Corporate and Institutional Services (C&IS) and Personal
Financial Services (PFS). C&IS administers and manages domestic and global
investment pools for corporate and institutional clients worldwide. PFS
provides financial services to individuals and closely held businesses through
a unique personal financial services network in twelve states. An important
element in this strategy is increasing the penetration of the C&IS and PFS
target markets with investment products and services provided by a third
business unit, Northern Trust Global Investments (NTGI). In executing this
strategy, Northern Trust emphasizes service quality through a high level of
personal service complemented by the effective use of technology. Operating
support for these business units is provided through the Worldwide Operations
and Technology business unit (WWOT). Expense growth and capital expenditures
are closely monitored to ensure that short- and long-term business strategies
and performance objectives are effectively balanced.
Noninterest Income. Noninterest income represented 71% of total taxable
equivalent revenue in 2000, compared with 69% one year ago. Noninterest income
totaled $1.54 billion in 2000, $1.24 billion in 1999, and $1.07 billion in
1998.
Trust Fees. Trust fees accounted for 78% of total noninterest income and 56%
of total taxable equivalent revenue in 2000. Trust fees for 2000 increased 23%
to $1.2 billion from $974.2 million in 1999, which was up 19% from $816.3
million in 1998. Trust fees have increased at a compound growth rate of 19% for
the past five years. Total trust assets under administration at December 31,
2000 were $1.68 trillion compared to $1.54 trillion a year ago, an increase of
9.5%. Included in the above is $385.3 billion of global custody assets. Trust
assets under management, also included in the above, increased 13% to $338.0
billion, up from $299.1 billion at the end of 1999.
Trust fees are 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. Asset-based fees are typically determined 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 fee income. Therefore,
market value or other changes in a portfolio's size do not typically have a
proportionate impact on the level of trust fees. Certain investment management
fee arrangements also may provide for
- -- --
- -- --
28
Northern Trust Corporation
Management's Discussion and Analysis
of Financial Condition and Results of Operations
----------------------------------
performance fees which are based on client portfolio returns exceeding
predetermined levels. In addition, C&IS trust relationships are increasingly
priced to reflect earnings from activities such as custody-related deposits and
foreign exchange trading that are not included in trust fees. Custody-related
deposits maintained with bank subsidiaries and foreign branches are primarily
interest-bearing and averaged $7.7 billion in 2000, $7.0 billion in 1999 and
$6.0 billion in 1998.
Northern Trust's fiduciary business encompasses Master Trust, Master Custody,
investment management and retirement services for corporate and institutional
asset pools, as well as a complete range of estate planning, fiduciary and
asset management services for individuals. Fees from these services are fairly
evenly distributed between C&IS and PFS. A discussion of the trust related
services provided by each of these business units and NTGI follows. The
operating results, which include both trust and banking services, for C&IS and
PFS are provided on pages 34-37.
Corporate and Institutional Services. Trust fees in C&IS increased 21% in 2000
to $587.8 million from $484.6 million in 1999, which was up 14% from $423.7
million in 1998. These fees are derived from the full set of Master Trust and
Master Custody services that Northern Trust provides to retirement plans and
institutional clients worldwide. Northern Trust's products include worldwide
custody, settlement, reporting and investment management. Investment related
services include cash management, securities lending, performance analysis,
risk management and a broad range of active and passive investment products
provided through NTGI. In addition to these services, Northern Trust offers its
clients a comprehensive array of retirement consulting and recordkeeping
services.
The following table summarizes C&IS trust fees by product:
Corporate and Institutional Services
Summary of Trust Fees by Product
- --------------------------------------------------------------------------------
(In Millions) 2000 1999 1998
- ----------------------------------------------------
Custody Services $194.5 $157.4 $149.2
Investment Management 178.6 149.2 123.2
Securities Lending 117.3 97.6 85.2
Retirement Consulting Services 59.9 46.7 34.9
Other Services 37.5 33.7 31.2
- ----------------------------------------------------
Total Trust Fees $587.8 $484.6 $423.7
All services provided by C&IS contributed to the $103.2 million increase in
trust fees. Fees from custody services increased 24% as a result of new
business and accounted for $37.1 million or 36% of the growth in C&IS trust
fees. The increase reflects strong growth in global custody and the May 2000
acquisition of Northern Trust (Ireland) Limited (formerly Ulster Bank
Investment Services Limited), which contributed $4.8 million of incremental
custody fee income. Domestic and international securities lending fees were
strong, combining to increase $19.7 million or 20% to $117.3 million, resulting
predominantly from higher volumes. New business drove a $13.2 million or 28%
increase in retirement services recordkeeping and consulting fees.
C&IS trust fees also benefited from new asset management business,
demonstrating continued success in its offerings of both passive and actively
managed investment products to trust and banking clients. Excellent new
business, together with strong investment results, drove a $29.4 million or 20%
increase in fees from investment products. These higher fees include $7.5
million of revenue earned for co-administration services rendered to Northern
Institutional Funds compared with $5.4 million in 1999. Investment management
fees also include $11.0
Consolidated Trust Assets Under Administration
- --------------------------------------------------------------------------------
Five-
Year
Compound
Percent Growth
December 31 Change Rate
- --------------------------------------------------------------------------------------
($ In Billions) 2000 1999 1998 1997 1996 2000/99
- --------------------------------------------------------------------------------------
Corporate &
Institutional $ 239.9 $ 207.5 $ 162.6 $ 138.1 $ 83.7 16% 29%
Personal 98.1 91.6 73.4 58.5 46.6 7 21
- --------------------------------------------------------------------------------------
Total Managed Trust
Assets 338.0 299.1 236.0 196.6 130.3 13 26
- --------------------------------------------------------------------------------------
Corporate &
Institutional 1,275.1 1,178.4 975.9 845.3 618.2 8 21
Personal 70.7 60.4 47.8 37.4 30.4 17 23
- --------------------------------------------------------------------------------------
Total Non-Managed Trust
Assets 1,345.8 1,238.8 1,023.7 882.7 648.6 9 21
- --------------------------------------------------------------------------------------
Consolidated Trust
Assets Under
Administration $1,683.8 $1,537.9 $1,259.7 $1,079.3 $778.9 9% 22%
- -- --
- -- --
Northern Trust Corporation
29
Management's Discussion and Analysis
of Financial Condition and Results of Operations
----------------------------------
million, compared to $2.9 million in 1999, of performance-based incentive fees
for several Northern Trust Global Advisors' (NTGA) "manager of manager" funds.
These fees are largely offset by performance-based incentive payments to the
sub-advisors of these funds that are reflected in other operating expenses.
Total C&IS trust assets under administration increased 9.3% from December 31,
1999 to $1.51 trillion at December 31, 2000. Of the C&IS trust assets under
administration, 40% was invested in equity securities, 24% in fixed income
securities, 12% in cash and other assets and 24% in global custody assets.
Included in C&IS assets administered are those for which Northern Trust has
management responsibility. Managed assets were invested 27% in equity
securities, 18% in fixed income securities and 55% in cash and other assets.
The cash and other assets that have been deposited by investment firms as
collateral for securities they have borrowed from trust clients are invested by
Northern Trust and are included in trust assets under administration as managed
assets. The collateral totaled $94.6 billion and $80.7 billion at December 31,
2000 and 1999, respectively.
Net new recurring C&IS business sold and transitioned in 2000 was
approximately $79 million in annualized trust fees, compared with $80 million
in 1999, which was adjusted to be on a comparable basis to 2000. Approximately
55% of the new business sold came from existing clients and 45% from
new relationships.
Personal Financial Services. Northern Trust has positioned itself in markets
having significant concentrations of wealth and growth potential. With the
establishment of new offices in St. Louis, Missouri, Las Vegas, Nevada and
Milwaukee, Wisconsin, and the addition of four other new offices in existing
states in 2000, Northern Trust's unique network of Personal Financial Services
offices reached 81 locations in twelve states. PFS also includes the Wealth
Management Group, which provides customized products and services to meet the
complex financial needs of families in the United States and throughout the
world with assets typically exceeding $100 million.
At December 31, 2000 trust assets under administration in PFS totaled $168.8
billion, an increase of 11.0% from $152.0 billion at December 31, 1999,
reflecting record new business development. Of the personal trust assets under
administration, 59% was invested in equity securities, 25% in fixed income
securities and 16% in cash and other assets. Included in assets administered
are those for which Northern Trust has management responsibility. Managed
assets were invested 55% in equity securities,
29% in fixed income securities and 16% in cash and other assets.
PFS trust fees also reached record levels, increasing 25% to $613.4 million
for the year compared to $489.6 million in 1999 and $392.6 million in 1998.
Included in these results were $4.2 million of fees generated by Northern Trust
Value Investors (formerly Carl Domino Associates, L.P.), a May 2000
acquisition. Every state in the PFS network recorded trust fee increases of 20%
or more, with Arizona and Texas over 30%. The Wealth Management Group also had
excellent performance, with trust fees increasing 31%, and at year-end
administered $61.4 billion for significant family asset pools nationwide, up
17.5% from last year. Included in the prior year results were $9.6 million of
additional fees resulting from strong investment performance in several NTGA
"manager of manager" funds for PFS clients. These fees were largely offset by
increased performance-based incentive payments to sub-advisors that are
reflected in other operating expenses.
Net recurring new business sold and transitioned in 2000 totaled a record $89
million in annualized trust fees, up 22% from 1999.
Northern Trust Global Investments. Northern Trust Global Investments brings
together the investment activities of the C&IS and PFS businesses. The revenues
associated with this business unit are fully allocated to C&IS and PFS. NTGI
integrates Northern Trust's portfolio management, research and trading with
client servicing, institutional sales, marketing and product management, while
continuing to emphasize Northern Trust's overall relationship orientation.
In May 2000, Northern Trust completed the acquisition of Carl Domino
Associates, L.P., providing NTGI with a value equity investment management
capability to complement its historical growth equity style. This acquisition,
which now operates as Northern Trust Value Investors, is located in West Palm
Beach, Florida and had approximately $2 billion in assets under management at
the time of acquisition.
NTGI's strategic focus on investment management, branding, product management,
distribution and client servicing helped drive Northern Trust's strong growth
in assets under management during 2000. Northern Trust continued to achieve
solid investment results across asset classes. For example, 19 of 38 capital
market mutual funds advised by Northern Trust earned high ("A" or "B") one-year
rankings by Lipper Analytical Services, a respected mutual fund rating agency.
Also, 17 of 28 funds earned "A" or "B" three-year rankings by Lipper. Many of
Northern Trust's other investment products also demonstrated strong performance
during the year.
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30
Northern Trust Corporation
Management's Discussion and Analysis
of Financial Condition and Results of Operations
----------------------------------
New capabilities were added to Northern Trust's array of investment products
in 2000. Equity and fixed income product lines were strategically expanded with
the addition of several new funds, complementing the well-established core
capabilities in both asset classes. To support the expanding product line,
Northern Trust continued to add experienced investment personnel, adding an
international equity team in London, as well as a hedge fund professional and
private equity fund professionals in Chicago. Northern Trust's institutional
and retail mutual funds continued to enjoy significant growth, reaching $37.7
billion in assets by year-end.
Northern Trust's competitive investment results, combined with new product
offerings, improvements in sales and client servicing and increases in market
values, provided the foundation for another year of strong growth in assets
under management. By year-end, Northern Trust managed $338.0 billion for
personal and institutional clients, up from $299.1 billion at year-end 1999.
To further strengthen the structure of NTGI and respond to the provisions of
the Gramm-Leach-Bliley Act of 1999 relating to investment advisory activities,
in January 2001 NTGI consolidated certain of its institutional investment
management services into Northern Trust Investments, Inc. (NTI), a separate
subsidiary of the Bank. This subsidiary, a registered investment advisor, will
provide investment management services to Northern Trust's two mutual fund
families and institutional clients. This structure will make the administration
of these activities more efficient as well as accommodate future development of
Northern Trust's investment business.
Foreign Exchange Trading Profits. Foreign exchange trading profits totaled a
record $152.7 million, up 42% from $107.7 million in 1999 and $103.5 million in
1998. As custodian, Northern Trust provides foreign exchange services in the
normal course of business. Active management of currency positions, within
conservative limits, also contributes to trading profits. The current year
foreign exchange results benefited from market volatility in the major
currencies, including high volatility in the euro throughout the year, as well
as growth in global assets under custody and a higher level of client
transaction volume. The increase in profits in 1999 primarily reflects strong
results of active management offset by a decline in client activity resulting
from the conversion to the euro.
Treasury Management Fees. The fee portion of treasury management revenues
totaled $71.5 million in 2000, a 5% increase from the $67.9 million reported in
1999 compared with $69.9 million in 1998. Total treasury management revenues,
which, in addition to fees, include the computed value of compensating deposit
balances, increased 8% to $107.2 million from $99.3 million in 1999 compared to
$97.0 million in 1998, reflecting the continued growth of new business in both
paper- and electronic-based products.
Security Commissions and Trading Income. Security commissions and trading
income totaled $34.3 million in 2000, compared with $30.2 million in 1999 and
$28.0 million in 1998. This income is primarily generated from securities
brokerage services provided by Northern Trust Securities, Inc. (NTSI).
Additional revenue is provided from underwriting selected general obligation
tax-exempt securities and interest risk management activities with clients. The
increase in both years reflects continued strong growth in securities brokerage
activities, up 13% in 2000 and 15% in 1999.
Other Operating Income. Other operating income includes loan, letter of credit
and deposit-related service fees and other miscellaneous income from asset
sales. Other operating income in 2000 totaled $77.1 million compared with $54.5
million in 1999 and $52.6 million in 1998. Nonrecurring gains from the sale of
assets in 2000 totaled $4.5 million, compared to $4.0 million in 1999 and $3.8
million in 1998. Excluding nonrecurring items, the increase in other operating
income in 2000 is primarily attributable to higher loan service, trust deposit
and banking-related fees.
Investment Security Gains. Net security gains totaling $.2 million were
realized in 2000. This compares with net gains of $.7 million in 1999 and $1.3
million in 1998.
Net Interest Income. 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 off-balance sheet hedging
activity. Earning assets, which consist of securities, loans and money market
assets, are financed by a large base of interest-bearing funds, including
retail deposits, wholesale deposits, short-term borrowings, senior notes and
long-term debt. Earning assets are also funded by net noninterest-related
funds. Net noninterest-related funds consist of demand deposits, the reserve
for credit losses and stockholders' equity, reduced by nonearning assets
including cash and due from banks, items in process of collection, buildings
and equipment and other nonearning assets. Variations in the level and mix of
earning assets, interest-bearing funds and net noninterest-related funds, and
their relative sensitivity to interest rate movements, are the dominant factors
affecting net interest income. In addition, net interest income is impacted by
the level of nonperforming assets and
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31
Northern Trust Corporation
Management's Discussion and Analysis
of Financial Condition and Results of Operations
----------------------------------
client use of compensating deposit balances to pay for services.
Net interest income for 2000 was a record $568.6 million, up 10% from $518.8
million in 1999, which was up 9% from $477.2 million in 1998. When 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 on a FTE basis for 2000 was a
record $621.9 million, an increase of $64.5 million or 12% from $557.4 million
in 1999 which in turn was up 9% from $513.1 million in 1998. Through steady
asset growth and conservative interest rate risk management, Northern Trust has
been successful in generating year over year improvement in net interest income
as evidenced by the fact that 2000 represents the seventeenth consecutive year
of record performance. The improvement in FTE net interest income in 2000 was
driven primarily by a 13% increase in average earning assets and a 15% increase
in noninterest-related funds.
The net interest margin declined to 2.02% from 2.05% last year. The decline in
the margin is primarily attributable to the growth in low-spread federal agency
securities. Earning assets averaged $30.7 billion, up 13% from the $27.2
billion reported in 1999, which was up from $24.6 billion in 1998. The $3.5
billion growth in average earning assets reflects a 14% or $2.0 billion
increase in loans and a 22% or $1.7 billion increase in securities, partially
offset by a $224 million decrease in money market assets. For a complete
analysis of volume and interest rate changes affecting net interest income,
refer to the Average Statement of Condition with Analysis of Net Interest
Income on pages 80 and 81.
Loan volume for the year averaged $16.5 billion with the predominant portion
of the growth reflected in the domestic portfolio. The domestic growth came
from residential mortgage activities, up $424 million to $6.5 billion on
average, and commercial and industrial loans, up $392 million to $4.8 billion.
In addition, reflecting strong growth in lending to Wealth Management and
private banking clients, personal loans increased $560 million, to average $2.0
billion for the year. International loans increased $110 million to average
$643 million. The loan portfolio includes noninterest-bearing domestic and
international overnight advances related to processing certain trust client
investments, which averaged $938 million in 2000, up from $694 million a year
ago. Securities averaged $9.7 billion in 2000, up 22% from $8.0 billion a year
ago resulting primarily from higher levels of federal agency securities. Money
market assets averaged $4.5 billion in 2000 versus $4.7 billion in 1999.
The increase in average earning assets of $3.5 billion was funded through
growth in interest-bearing deposits, other interest-related funding sources,
and noninterest-related funds. The deposit growth was concentrated primarily in
foreign office time deposits, up $1.5 billion resulting from increased global
custody activity, other time and savings certificates, up $386 million and
Analysis of Net Interest Income (FTE)
- --------------------------------------------------------------------------------
Percent Change
- -----------------------------------------------------------------------------------------------
($ In Millions) 2000 1999 1998 2000/99 1999/98
- -----------------------------------------------------------------------------------------------
Interest Income $ 2,011.1 $ 1,568.6 $ 1,503.1 28.2% 4.4%
FTE Adjustment 53.3 38.6 35.9 38.1 7.5
- -----------------------------------------------------------------------------------------------
Interest Income-FTE 2,064.4 1,607.2 1,539.0 28.4 4.4
Interest Expense 1,442.5 1,049.8 1,025.9 37.4 2.3
- -----------------------------------------------------------------------------------------------
Net Interest Income-FTE $ 621.9 $ 557.4 $ 513.1 11.6% 8.6%
- -----------------------------------------------------------------------------------------------
Average Volume
Earning Assets $30,748.7 $27,241.5 $24,624.5 12.9% 10.6%
Interest-Related Funds 26,056.2 23,170.1 20,940.7 12.5 10.6
Noninterest-Related
Funds 4,692.5 4,071.4 3,683.8 15.3 10.5
- -----------------------------------------------------------------------------------------------
Change in Percentage
- -----------------------------------------------------------------------------------------------
Average Rate
Earning Assets 6.71% 5.90% 6.25% .81 (.35)
Interest-Related Funds 5.54 4.53 4.90 1.01 (.37)
Interest Rate Spread 1.17 1.37 1.35 (.20) .02
Total Source of Funds 4.69 3.85 4.17 .84 (.32)
- -----------------------------------------------------------------------------------------------
Net Interest Margin 2.02% 2.05% 2.08% (.03) (.03)
Refer to pages 80 and 81 for a detailed analysis of net interest income.
- -- --
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32
Northern Trust Corporation
Management's Discussion and Analysis
of Financial Condition and Results of Operations
----------------------------------
higher levels of savings and money market deposits, up $359 million. Other
interest-related funds averaged $9.6 billion, up $669 million, principally from
higher treasury, tax and loan balances and borrowings from the Federal Home
Loan Bank. Partially offsetting this increase were lower levels of federal
funds sold and securities sold under agreements to repurchase. Average net
noninterest-related funds increased $621 million, mainly due to higher demand
deposits and stockholders' equity. Stockholders' equity for the year averaged
$2.3 billion, an increase of $234 million or 11% from 1999, principally due to
the strong earnings performance, offset in part by the repurchase of common
stock pursuant to the Corporation's share buyback program.
Provision for Credit Losses. The provision for credit losses of $24.0 million
was $11.5 million higher than the $12.5 million required in 1999 which in turn
was $3.5 million greater than the $9.0 million provision in 1998. The overall
quality of the loan portfolio remains strong. For a discussion of the reserve
for credit losses, refer to pages 42 through 44.
Noninterest Expenses. Noninterest expenses for 2000 totaled $1.35 billion, up
$226.5 million or 20% from $1.13 billion in 1999, which was up 13% from $997.1
million in 1998. Expense increases during 2000 reflect a variety of growth
initiatives, including staff additions and higher operating expenses necessary
to support record levels of new business and growing transaction volumes,
investments in technology, (including e-business initiatives) and PFS office
expansion, business promotion and the expenses of co-administration services
now being provided to the two mutual fund families. Performance-based
compensation increased 26%, resulting from exceptional new business results,
record net income, client investment portfolio performance, and the 54%
increase in the price of Northern Trust Corporation common stock during the
year. Incremental expenses resulting from two mid-year acquisitions totaled
$13.3 million in 2000.
Noninterest expenses for 1999 increased $127.9 million or 13% over 1998.
Expenses in 1999 reflect $6.8 million of project costs related to Year 2000
initiatives compared to $11.5 million in 1998. The expense increase in 1999
reflects staff additions and higher operating expenses necessary to support new
business and growing transaction volumes, investments in technology and PFS
office expansion, business promotion and the expenses of co-administration
services provided to the two mutual fund families. Performance-based
compensation also increased, resulting from excellent new business results,
improved client investment portfolio performance, strong corporate earnings and
the price increase in Northern Trust Corporation common stock.
The productivity ratio, defined as total revenue on a taxable equivalent basis
divided by noninterest expenses, was 160% for 2000, an all-time high, up from
159% in both 1999 and 1998.
Compensation and Benefits. Compensation and benefits, which represent 59% of
total noninterest expenses, increased 17% to $798.4 million in 2000 from $681.1
million in 1999, which was up 12% from $609.4 million in 1998. Compensation
costs, the largest component of noninterest expenses, totaled $689.1 million,
up $106.5 million or 18% from $582.6 million a year ago. The increase in 2000
was primarily attributable to staff additions, higher performance-based
compensation and salary increases. Performance-based compensation expense was
up from the prior year by $38.7 million in 2000 and $32.8 million in 1999,
reflecting the impact of excellent new business results, strong client
investment portfolio performance, record corporate earnings and the price
increase in Northern Trust Corporation common stock. As a result of adopting
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" in 1999, Northern Trust capitalized
salary and benefit costs totaling $19.8 million in 2000 and $13.5 million in
1999 as software.
Staff on a full-time equivalent basis averaged 9,019 in 2000, up 10% compared
with 8,200 in 1999, which was up 5% from 7,844 in 1998. The increase in staff
levels during 2000 was required to support growth initiatives and strong new
business in both C&IS and PFS. Average staff levels in 1999 would have been
approximately 8% higher than in 1998 and compensation expense would have
increased more, had Northern Trust not outsourced Illinois check processing at
the end of 1998. These expenses are now included in outside services purchased
and reflected in other operating expenses. Staff on a full-time equivalent
basis totaled 9,466 at December 31, 2000, an increase of 10% from 8,583 at the
end of last year.
Employee benefit costs for 2000 totaled $109.3 million, up $10.8 million or
11% from $98.5 million in 1999 which was 8% higher than the $91.3 million in
1998. The increase in employee benefits in each of the past two years primarily
reflects higher payroll taxes, medical and dental plan costs, and retirement
plan benefits resulting predominantly from staff growth.
Occupancy Expense. Net occupancy expense totaled $87.3 million, up 18% or
$13.0 million from $74.3 million in 1999, which was up 9% from $67.9 million in
1998. The principal components of the 2000
- -- --
- -- --
33
Northern Trust Corporation
Management's Discussion and Analysis
of Financial Condition and Results of Operations
----------------------------------
increase were higher rental and utility costs, real estate taxes, and
depreciation and maintenance of buildings and leasehold improvements associated
with office expansion. The increase in 1999 resulted from higher rental costs,
real estate taxes, and depreciation and maintenance of buildings.
Equipment Expense. Equipment expense, which includes depreciation, rental, and
maintenance costs, totaled $73.1 million, up 15% from $63.6 million in 1999,
which was 2% higher than the $62.2 million in 1998. The 2000 results reflect
higher levels of computer hardware depreciation expense, rental and maintenance
costs of computers and equipment. The 1999 results reflect higher levels of
computer hardware depreciation expense, offset by lower rental and maintenance
costs of computers and equipment.
Other Operating Expenses. Other operating expenses for 2000 totaled $392.7
million, up 28% from $306.0 million in 1999, which was up 19% from $257.6
million in 1998. The increase in the 2000 expense level was principally the
result of continued investment in technology, including e-business initiatives,
business promotion, co-administration services provided to Northern Trust's two
mutual fund families, expansion of the personal trust and banking office
network, and higher operating expenses necessary to support business growth.
These initiatives resulted in increases in technical and consulting service
fees, data processing costs, subcustodian fees, business development efforts,
amortization of software and operating costs relating to the significant growth
in volumes. Also, as a result of the rapid growth in Northern Trust's global
business, London-based personnel increased by 13% to over 600 staff during the
year. In response to this growth, the Bank entered into a lease for additional
space which will allow for the relocation of the majority of the staff to a
larger facility during 2002. This decision resulted in a $3.8 million charge in
2000 relating to the estimated cost to exit an existing location.
Investments in technology are designed principally to support and enhance the
transaction processing, investment management and securities handling
capability of the trust and banking businesses, as well as relationship
management and client interaction. Additional capital expenditures planned for
systems technology will result in future expenses for the depreciation of
hardware and amortization of software. Depreciation and software amortization
are charged to equipment and other operating expenses, respectively.
Provision for Income Taxes. The provision for income taxes was $245.0 million
in 2000 compared with $211.5 million in 1999 and $188.8 million in 1998. The
increase reflects the continued growth in income from federally taxable sources
while tax-exempt municipal interest has remained relatively stable. The
effective tax rate was 34% for 2000 and 1999 compared with 35% for 1998.
Business Segments
- --------------------------------------------------------------------------------
Northern Trust Corporation, under Chairman and Chief Executive Officer William
A. Osborn, organizes client services around two principal business units, C&IS
and PFS. Investment management services and products are provided to the
clients of these business units by NTGI. Operating and systems support is
provided to each of the business units by WWOT. Each of these four business
units has a president who reports to President and Chief Operating Officer
Barry G. Hastings. For management reporting purposes, the operations of NTGI
and WWOT are allocated to the other business units. The Risk Management Unit
includes the Treasury Department and reports directly to Mr. Osborn. Mr. Osborn
has been identified as the chief operating decision maker because he has final
authority over resource allocation decisions and performance assessment.
Business unit results are presented in order to promote a greater
understanding of their financial performance. The information, presented on an
internal management reporting basis, is derived from internal accounting
systems that support the strategic objectives and management structure.
Management has developed accounting systems to allocate revenue and expenses
related to each segment, as well as certain corporate support services,
worldwide operations and systems development expenses. The management reporting
systems also incorporate processes for allocating assets, liabilities and the
applicable interest income and expense. Tier 1 and tier 2 capital is allocated
based on the federal risk-based capital guidelines at a level that is
consistent with Northern Trust's consolidated capital ratios, coupled with
management's judgment of the operational risks inherent in the business.
Allocations of capital and certain corporate expenses may not be representative
of levels that would be required if the segments were independent entities. The
accounting policies used for management reporting are the same as those
described in "Accounting Policies," in the Notes to Consolidated Financial
Statements. Transfers of income and expense items are recorded at cost; there
is no intercompany profit or loss on sales or transfers between business units.
Northern Trust's presentations are not necessarily consistent with similar
information for other financial institutions. For management reporting
purposes, certain corporate income and expense items are not allocated to the
business units and are
- -- --
- -- --
34
Northern Trust Corporation
Management's Discussion and Analysis
of Financial Condition and Results of Operations
----------------------------------
presented as part of "Treasury and Other." These items include the impact of
long-term debt, preferred equity, holding company investments, and certain
corporate operating expenses.
The following tables reflect the earnings contribution of Northern Trust's
business segments for the years ended December 31, 2000, 1999 and 1998 on the
basis described above.
Corporate and
Institutional Services
- ---------------------------------------------------------------------------
($ In Millions) 2000 1999 1998
- ---------------------------------------------------------------------------
Noninterest Income
Trust Fees $ 587.8 $ 484.6 $ 423.7
Other 264.5 199.4 196.5
Net Interest Income after Provision for
Credit Losses* 185.5 168.8 147.6
Noninterest Expenses 630.6 534.4 503.5
- ---------------------------------------------------------------------------
Income before Income Taxes* 407.2 318.4 264.3
Provision for Income Taxes* 157.8 124.1 103.4
- ---------------------------------------------------------------------------
Net Income $ 249.4 $ 194.3 $ 160.9
- ---------------------------------------------------------------------------
Percentage Net Income Contribution 51% 48% 45%
- ---------------------------------------------------------------------------
Average Assets $16,561.5 $13,324.0 $11,552.9
Personal
Financial Services
- ---------------------------------------------------------------------------
($ In Millions) 2000 1999 1998
- ---------------------------------------------------------------------------
Noninterest Income
Trust Fees $ 613.4 $ 489.6 $ 392.6
Other 68.7 60.1 52.9
Net Interest Income after Provision for
Credit Losses* 400.7 375.6 335.5
Noninterest Expenses 643.9 550.7 460.3
- ---------------------------------------------------------------------------
Income before Income Taxes* 438.9 374.6 320.7
Provision for Income Taxes* 170.5 146.7 127.2
- ---------------------------------------------------------------------------
Net Income $ 268.4 $ 227.9 $ 193.5
- ---------------------------------------------------------------------------
Percentage Net Income Contribution 55% 56% 55%
- ---------------------------------------------------------------------------
Average Assets $13,485.0 $11,798.2 $10,394.7
Treasury and Other
- ---------------------------------------------------------------------------
($ In Millions) 2000 1999 1998
- ---------------------------------------------------------------------------
Noninterest Income
Trust Fees $ -- $ -- $ --
Other 2.6 1.5 5.9
Net Interest Income after Provision for
Credit Losses* 11.7 .5 21.0
Noninterest Expenses 77.0 39.9 33.3
- ---------------------------------------------------------------------------
Loss before Income Taxes* (62.7) (37.9) (6.4)
Benefit for Income Taxes* (30.0) (20.7) (5.9)
- ---------------------------------------------------------------------------
Net Loss $ (32.7) $ (17.2) $ (.5)
- ---------------------------------------------------------------------------
Percentage Net Income Contribution (6)% (4)% --%
- ---------------------------------------------------------------------------
Average Assets $ 3,996.8 $ 5,054.8 $ 5,243.1
Consolidated
- -------------------------------------------------------------------------
($ In Millions) 2000 1999 1998
- -------------------------------------------------------------------------
Noninterest Income
Trust Fees $ 1,201.2 $ 974.2 $ 816.3
Other 335.8 261.0 255.3
Net Interest Income after Provision for
Credit Losses* 597.9 544.9 504.1
Noninterest Expenses 1,351.5 1,125.0 997.1
- -------------------------------------------------------------------------
Income before Income Taxes* 783.4 655.1 578.6
Provision for Income Taxes* 298.3 250.1 224.7
- -------------------------------------------------------------------------
Net Income $ 485.1 $ 405.0 $ 353.9
- -------------------------------------------------------------------------
Percentage Net Income Contribution 100% 100% 100%
- -------------------------------------------------------------------------
Average Assets $34,043.3 $30,177.0 $27,190.7
*Stated on a fully taxable equivalent basis (FTE). The consolidated figures
include $53.3 million, $38.6 million and $35.9 million of FTE adjustment for
2000, 1999 and 1998, respectively.
Note: Certain reclassifications have been made to 1999 and 1998 financial
information to conform to the current year's presentation.
Corporate and Institutional Services. The C&IS business unit, under the
direction of Peter L. Rossiter, President--C&IS, provides trust, commercial
banking and treasury management services to corporate and institutional
clients. Trust activities encompass custody services for securities in the
United States and foreign markets, as well as securities lending, asset
management and actuarial and recordkeeping services for retirement plans.
Foreign exchange services, which primarily relate to global custody activities,
are also part of C&IS, as is a full range of commercial banking services.
Treasury management services are provided to corporations and financial
institutions and include a variety of products and services to accelerate cash
collections, control disbursement outflows and generate information to manage
cash products.
Net income for C&IS increased 28% in 2000 and totaled $249.4 million compared
to $194.3 million in 1999 which was up 21% from the $160.9 million in 1998. The
current year growth in net income was primarily driven by a 21% increase in
trust fees and a 42% increase in foreign exchange trading profits. Trust fees
represented 57% of total C&IS revenues in both 2000 and 1999.
Northern Trust, through C&IS, is a leading provider of Master Trust and Master
Custody services to three targeted markets: retirement plans, institutional
clients, and international clients. Retirement plans include the large
corporate market, middle market and public and union retirement funds. The
institutional market includes insurance companies, foundations and endowments
and trust services for domestic correspondent banks. International clients
include asset pools domiciled outside the U.S. and group trusts. A
- -- --
- -- --
35
Northern Trust Corporation
Management's Discussion and Analysis
of Financial Condition and Results of Operations
----------------------------------
summary of C&IS trust fees and trust assets for each market follows.
Corporate and Institutional Services
Summary of Trust Fees
- --------------------------------------------------------------------------------
(In Millions) 2000 1999 1998
- ----------------------------------------------
Domestic
Retirement Plans $ 352.8 $ 304.3 $ 273.5
Institutional 106.8 85.0 74.5
International 128.2 95.3 75.7
- ----------------------------------------------
Total Trust Fees $ 587.8 $ 484.6 $ 423.7
Corporate and Institutional Services
Summary of Trust Assets Under Administration
- --------------------------------------------------------------------------------
December 31
- -------------------------------------------------------
(In Billions) 2000 1999 1998
- -------------------------------------------------------
Domestic
Retirement Plans $ 849.3 $ 800.4 $ 662.3
Institutional 242.9 250.1 229.4
International 326.3 253.6 180.9
Securities Lending/Other 96.5 81.8 65.9
- -------------------------------------------------------
Total Trust Assets $1,515.0 $1,385.9 $1,138.5
The growth in other noninterest income in 2000 resulted primarily from a 42%
increase in foreign exchange trading profits and higher levels of trust
deposit-related revenues and loan service fees. Treasury management fees also
contributed to the improvement, increasing 6% from 1999. Net interest income
after provision for credit losses on a FTE basis increased 10% in 2000 and 14%
in 1999. The increase in 2000 was driven by a 25% increase in earning assets,
with loans increasing 18% and money market assets increasing 30%. Earning
assets in 1999 were up 15% from 1998 primarily the result of growth in loans
and money market assets.
Total noninterest expenses of C&IS, which include both the direct expenses of
the business unit and indirect expense allocations from NTGI and WWOT for
product and operating support, increased 18% in 2000 and 6% in 1999. The growth
in expenses is primarily attributable to increases in compensation and employee
benefits and higher operating costs to support business growth.
Personal Financial Services. The PFS business unit, under the direction of Mark
Stevens, President--PFS, encompasses personal trust and investment management
services, estate administration, banking and residential mortgage lending
offered through the Bank in Illinois and affiliates in eleven other states. The
PFS strategy is to focus on small/mid-size businesses, owners and executives,
retirees and high net worth individuals in each banking subsidiary's target
market. The financial needs of families with assets exceeding $100 million are
served through its Wealth Management Group internationally. NTSI is also part
of PFS.
PFS net income totaled $268.4 million in 2000, an increase of 18% from 1999
which in turn was 18% above the net income achieved in 1998. Growth in trust
activities continued to be the driver of the record performance for the
business unit, with trust fees increasing 25% for the second consecutive year,
resulting from record new business throughout Northern Trust's PFS network.
Trust fees for Illinois in 1999 included $9.6 million of performance-based fees
earned by NTGA as a result of strong investment performance in several funds
managed for PFS clients. A summary of trust fees and trust assets by state and
for Wealth Management follows.
Personal Financial Services
Summary of Trust Fees
- --------------------------------------------------------------------------------
(In Millions) 2000 1999 1998
- --------------------------------------------
Illinois $219.8 $181.8 $148.2
Florida 179.1 146.9 116.8
California 72.8 59.5 50.3
Arizona 38.8 29.2 23.4
Texas 24.1 17.9 13.8
Other States 12.0 3.3 .1
Wealth Management 66.8 51.0 40.0
- --------------------------------------------
Total Trust Fees $613.4 $489.6 $392.6
Personal Financial Services
Summary of Trust Assets Under Administration
- --------------------------------------------
December 31
- --------------------------------------------
(In Billions) 2000 1999 1998
- --------------------------------------------
Illinois $ 43.7 $ 41.9 $ 36.9
Florida 31.3 30.5 24.5
California 13.4 12.2 11.4
Arizona 6.1 5.9 4.6
Texas 4.4 4.3 3.6
Other States 8.5 4.9 1.8
Wealth Management 61.4 52.3 38.4
- --------------------------------------------
Total Trust Assets $168.8 $152.0 $121.2
A significant portion of PFS growth has come from adding business in
established locations. This growth has been supplemented by expansion within
existing and new markets. From its 81 office network, Northern Trust is in
close proximity to approximately 28% of the nation's high net worth households,
defined as those with at least $1 million of investable assets. Over
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- -- --
36
Northern Trust Corporation
Management's Discussion and Analysis
of Financial Condition and Results of Operations
----------------------------------
the next three years, Northern Trust plans to continue its expansion in
existing and new markets with promising demographics. The goal is to build the
PFS national network to approximately 100 offices within as many as fifteen
states in targeted markets in close proximity to approximately 45% of all U.S.
high net worth households.
The growth in other noninterest revenues in 2000 reflects 13% growth in
brokerage commissions at NTSI, and a $3.5 million nonrecurring gain resulting
from the sale of assets. Nonrecurring gains in 1999 totaled $4.0 million.
Driven by growth in lending to Wealth Management and private banking clients,
ongoing growth in the residential mortgage portfolio and an increase in loans
to middle market companies, net interest income after provision for credit
losses increased 7% in 2000 and totaled $400.7 million. The provision for loan
losses totaled $10.0 million, an increase of approximately $9.0 million from
the prior year. In 1999, net interest income totaled $375.6 million and
increased 12% over 1998.
PFS noninterest expenses, which include both the direct expenses of the
business unit and indirect expense allocations from NTGI and WWOT for
product and operating support, increased 17% in 2000 and 20% in 1999. The
increase in 2000 primarily reflects merit increases and staff growth to support
record new business, performance-based compensation, and higher operating costs
to support business growth. Performance-based compensation for PFS was up 19%
as a result of record net income and strong new business development.
Treasury and Other. The Risk Management Unit, under the direction of Perry R.
Pero, Vice Chairman and Chief Financial Officer, includes the treasury
function. The Treasury Department is responsible for managing the Bank's
wholesale funding, capital position and interest rate risk, as well as the
portfolio of interest rate risk management instruments. It is also responsible
for the investment portfolios of the Corporation and the Bank and provides
investment advice and management services to the subsidiary banks. "Other"
corporate income and expenses represent items that are not allocated to the
business units and generally represent certain nonrecurring items and certain
executive level compensation.
The changes in net interest income for the periods shown are primarily the
result of adjustments in the rate used to allocate tier 2 capital to the
business units. In 2000, the rate adjustments, together with the change in the
level of tier 2 capital, increased Treasury and Other net interest income by
$7.0 million and decreased C&IS and PFS net interest income by $4.4 million and
$2.6 million, respectively. The rate change for allocating capital in 1999
reduced Treasury and Other net interest income by $14.4 million compared to
1998 and increased C&IS and PFS net interest income by $9.0 million and $5.4
million, respectively.
The $37.1 million increase in noninterest expenses is the result of several
factors. Record profits and the significant increase in the price of Northern
Trust Corporation common stock drove up incentive compensation, accounting for
approximately 50% of the increase. In addition, corporate-related expenses
increased as a result of the purchase of the technology center in January 2000,
the planned relocation costs in London and e-business initiatives.
Northern Trust Global Investments. The NTGI business unit, under the direction
of Stephen B. Timbers, President--NTGI, provides investment products and
services to clients of C&IS and PFS through registered and bank investment
managers. NTGI activities include equity and fixed income research and
portfolio management services. NTGI also acts as the investment adviser and,
beginning in 1999, co-administrator to the Corporation's two families of
proprietary mutual funds, Northern Funds and Northern Institutional Funds. NTGA
and NTI, which includes two operating divisions, Northern Trust Quantitative
Advisors and Northern Trust Value Investors, are also included in NTGI. The
revenues and expenses of this business unit are fully allocated to C&IS and
PFS.
Worldwide Operations and Technology. The WWOT business unit, under the
direction of James J. Mitchell, President--WWOT, supports sales, relationship
management, transaction processing and product management activities for C&IS,
PFS and NTGI. The expenses of this business unit are fully allocated to other
business units.
Subsequent Implementation of Accounting Standards
- --------------------------------------------------------------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded on the
balance sheet as either an asset or liability measured at its fair value. SFAS
No. 133 requires that changes in the derivative's fair value
- -- --
- -- --
37
Northern Trust Corporation
Management's Discussion and Analysis
of Financial Condition and Results of Operations
----------------------------------
be recognized currently in earnings unless specific hedge accounting criteria
are met. Special accounting for qualifying hedges allows a derivative's gains
and losses to offset related results on the hedged item in the income statement
and requires that a company formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting.
In July 1999, the FASB issued SFAS No. 137 which amended SFAS No. 133 by
deferring the effective date by one year to January 1, 2001 from January 1,
2000 for calendar year-end entities. Northern Trust adopted the new statement
on January 1, 2001.
In June 2000, the FASB issued SFAS No. 138, which further amended SFAS No. 133
by addressing a limited number of issues that have caused implementation
difficulties. The accounting requirements of these statements are complex and
the Financial Accounting Standards Board continues to receive and respond to
interpretation requests. Conclusions to these interpretation requests may have
an impact on Northern Trust's current and future hedge strategies. Based on the
existing accounting guidance, the January 1, 2001 adoption of these statements
increased earnings by less than $10 thousand and reduced other comprehensive
income, a component of capital, by $.2 million.
In addition, Northern Trust concluded that certain previous hedge strategies
used to manage fixed interest rate risk in its loan portfolio would not qualify
for the special hedge accounting treatment allowed by SFAS No. 133.
Accordingly, management implemented alternative strategies for managing
interest rate risk which included the termination and run-off of certain swap
contracts used to hedge fixed rate loans and increased utilization of longer-
term fixed rate liabilities. Management estimates that utilization of these
alternative strategies to manage interest rate risk will reduce net interest
income by approximately $750 thousand on an annualized basis.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." SFAS No. 140
replaces SFAS No. 125, the previous standard of the same title. It revises the
standards for accounting for securitizations and other transfers of financial
assets and collateral and requires certain disclosures, but it retains most of
the accounting requirements of SFAS No. 125. The accounting requirements of the
Statement are effective for transactions occurring after March 31, 2001 and the
disclosure requirements of the Statement are effective for fiscal years ending
after December 15, 2000. Northern Trust will adopt the accounting and has
adopted the disclosure requirements on their respective effective dates. It is
not anticipated that the adoption of SFAS No. 140 will have a material effect
on Northern Trust's results of operations.
Capital Expenditures
- --------------------------------------------------------------------------------
Northern Trust's Management Committee reviews and approves proposed capital
expenditures that exceed $500,000. This process is designed to assure that the
major projects to which Northern Trust commits its resources produce benefits
compatible with corporate strategic goals.
Capital expenditures in the current year included ongoing enhancements to
Northern Trust's hardware and software capabilities and leasehold improvements
and furnishings associated with the opening of new offices in Arizona,
Michigan, Missouri, Nevada, Texas, and Wisconsin as well as expansion or
remodeling in several existing offices. Capital expenditures for 2000 totaled
$247.4 million, of which $62.9 million was for building and leasehold
improvements, $19.6 million for furnishings, $54.6 million for computer
hardware and machinery and $110.3 million for software. In January 1999
Northern Trust adopted Statement of Position
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," which requires the capitalization of certain external and
internal costs of computer software developed or obtained for internal use. As
a result of this accounting change, Northern Trust capitalized salary and
related internal costs totaling $19.8 million in 2000 and $13.5 million in
1999.
The unamortized capitalized cost of corporate-wide software development
projects as of December 31, 2000 was $267.5 million, of which $14.4 million
represented the book value of the trust management system.
Risk Management
- --------------------------------------------------------------------------------
Asset Quality and Credit Risk Management
Securities. Northern Trust maintains a high quality securities portfolio, with
88% of the total portfolio composed of U.S. Treasury or federal agency
securities. The remainder of the portfolio consists of obligations of states
and political subdivisions, preferred stock and other securities. At December
31, 2000, 69% of these securities were rated triple-A or double-A, 9% were
rated single-A and 22% were below A or not rated by Standard and Poor's and/or
Moody's Investors Service. Other securities include Federal Home Loan Bank
stock and Federal Reserve Bank stock.
Northern Trust is an active participant in the repurchase agreement market.
This market provides a
- -- --
- -- --
38
Northern Trust Corporation
Management's Discussion and Analysis
of Financial Condition and Results of Operations
----------------------------------
relatively low cost alternative for short-term funding. Securities sold under
agreements to repurchase are held by the counterparty until the repurchase
transaction matures. Increases in the fair value of these securities in excess
of the repurchase liability could subject Northern Trust to credit risk in the
event of default by the counterparty. To minimize this risk, collateral values
are continuously monitored and Northern Trust sets limits on exposure with
counterparties and regularly assesses their financial condition.
Loans and Other Extensions of Credit. A certain degree of credit risk is
inherent in Northern Trust's various lending activities. Credit risk is managed
through the Credit Policy function, which is designed to ensure adherence to a
high level of credit standards. The Credit Policy function reports to the
Corporation's Chief Financial Officer. Credit Policy provides a system of
checks and balances for Northern Trust's diverse credit-related activities by
establishing and monitoring all credit-related policies and practices
throughout Northern Trust and ensuring their uniform application. These
activities are designed to ensure that credit exposure is diversified on an
industry and client basis, thus lessening overall credit risk. These credit
management activities also apply to Northern Trust's use of derivative
financial instruments, including foreign exchange contracts and interest risk
management instruments.
Individual credit authority for commercial and other loans is limited to
specified amounts and maturities. Credit decisions involving commitment
exposure in
excess of the specified individual limits are submitted to the appropriate
Credit Approval Committee (Committee).
Each Committee is chaired by the executive in charge of the area and has a
Credit Policy officer as a voting participant. Each Committee's credit approval
authority is specified, based on commitment levels, credit ratings and
maturities. Credits involving commitment exposure in excess of these group
credit limits require the approval of the Senior Credit Committee.
The Counterparty Risk Management Committee established by Credit Policy
manages counterparty risk. This committee has sole credit authority for
exposure to all foreign banks, certain domestic banks which Credit Policy deems
to be counterparties and which do not have commercial credit relationships
within the Corporation, and certain other exposures.
Under the auspices of Credit Policy, country exposure limits are reviewed and
approved on a country-by-country basis.
As part of Northern Trust's ongoing credit granting process, internal credit
ratings are assigned to each client and credit before credit is extended, based
on creditworthiness. Credit Policy performs at least annually a review of
selected significant credit exposures to identify at the earliest possible
stages clients who might be facing financial difficulties. Internal credit
ratings are also reviewed during this process. Above average risk loans, which
will vary from time to time, receive special attention by both lending officers
and Credit Policy. This approach allows management to take remedial action in
an effort to deal with potential problems.
An integral part of the Credit Policy function is a formal review of all past
due and potential problem loans to determine which credits, if any, need to be
placed on nonaccrual status or charged off. As more fully described on pages 42
through 44, the provision for credit losses is reviewed quarterly to determine
the amount necessary to maintain an adequate reserve for credit losses.
Management of credit risk is reviewed by various bank regulatory agencies.
Independent auditors also perform a review of credit-related procedures, the
loan portfolio and other extensions of credit, and the reserve for credit
losses as part of their examination of the consolidated financial statements.
An important element in managing credit risk is Northern Trust's relationship-
oriented approach to lending. Northern Trust focuses its lending efforts on
clients with existing trust or treasury management relationships or who are
looking to build a full range of financial services. Northern Trust is not in
the syndicated loan business per se, but may enter into these loans as a result
of a particular relationship.
A further way in which credit risk is managed is by requiring collateral.
Management's assessment of the borrower's creditworthiness determines whether
collateral is obtained. The amount and type of collateral held varies but may
include deposits held in financial institutions, U.S. Treasury securities,
other marketable securities, income-producing commercial properties, accounts
receivable, property, plant and equipment, and inventory. Collateral values are
monitored on a regular basis to ensure that they are maintained at an
appropriate level.
The largest component of credit risk relates to the loan portfolio. Although
credit exposure is well-diversified, there are certain groups of loans that
meet the accounting definition under SFAS No. 105 of credit risk
concentrations. According to this statement, group concentrations of credit
risk exist if a number of borrowers or other counterparties are engaged in
similar activities and have similar economic characteristics that would cause
their ability to meet contractual obligations to be similarly affected by
changes in economic or other conditions. The fact that
- -- --
- -- --
39
Northern Trust Corporation
Management's Discussion and Analysis
of Financial Condition and Results of Operations
----------------------------------
an extension of credit falls into one of these groups does not indicate that
the credit has a higher than normal degree of credit risk. These groups are:
residential real estate, middle market companies and small businesses, banks
and bank holding companies and commercial real estate.
Residential Real Estate. The residential real estate loan portfolio totaled
$6.8 billion or 40% of total domestic loans at December 31, 2000, compared with
$6.3 billion or 42% at December 31, 1999. Residential real estate loans consist
of conventional home mortgages and equity credit lines, which generally require
a loan to collateral value of no more than 75% to 80% at inception.
Of the total $6.8 billion in residential real estate loans, $3.3 billion were
in the greater Chicago area with the remainder distributed throughout the other
geographic regions served by Northern Trust. Legally binding commitments to
extend credit, which are primarily equity credit lines, totaled $644.1 million
and $506.2 million as of December 31, 2000 and 1999, respectively.
Middle Market Companies and Small Businesses. Credit exposure to middle market
companies and small businesses is primarily in the form of commercial loans,
which totaled $2.2 billion at December 31, 2000 and $2.0 billion as of December
31, 1999. These loans are to a diversified group of borrowers that are
predominantly in the manufacturing, wholesaling, distribution and services
industries, most of which have total annual sales of less than $500 million.
The largest component of this group of borrowers is located in the midwestern
areas served by the Bank. Middle market and small businesses have been an
important focus of Northern Trust's business development efforts both for
commercial banking and personal trust/private banking services and it is part
of the strategic plan to continue to selectively grow the portfolio with such
entities. The credit risk associated with middle market and small business
lending is principally influenced by general economic conditions and the
resulting impact on the borrower's operations.
Off-balance sheet credit exposure to middle market companies and small
businesses in the form of legally binding commitments to extend credit, standby
letters of credit, and commercial letters of credit totaled $2.5 billion, $1.1
billion, and $21.6 million respectively, as of December 31, 2000, and $2.4
billion, $1.1 billion, and $25.5 million, respectively, as of December 31,
1999.
Banks and Bank Holding Companies. On-balance sheet credit risk to banks and
bank holding companies, both domestic and international, totaled $8.0 billion
and $4.7 billion at December 31, 2000 and 1999, respectively. The majority of
this exposure consisted of short-term money market assets, which totaled $5.9
billion at December 31, 2000 and $3.4 billion at December 31, 1999, and
noninterest-bearing demand balances maintained at correspondent banks which
totaled $1.5 billion as of December 31, 2000, compared to $947 million at year-
end 1999. Commercial loans to banks totaled $381 million and $232 million,
respectively, as of December 31, 2000 and 1999. The majority of these loans
were to U.S. bank holding companies, primarily in the seventh Federal Reserve
District, for their acquisition purposes. Such lending activity is limited to
entities which have a substantial business relationship with Northern Trust.
Legally binding commitments to extend credit to banks and bank holding
companies totaled $229 million and $165 million as of December 31, 2000 and
1999, respectively.
Commercial Real Estate. In managing its credit exposure, management has
defined a commercial real estate loan as one where: (1) the borrower's
principal business activity is the acquisition or the development of real
estate for commercial purposes; (2) the principal collateral is real estate
held for commercial purposes, and loan repayment is expected to flow from the
operation of the property; or (3) the loan repayment is expected to flow from
the sale or refinance of real estate as a normal and ongoing part of the
business. Unsecured lines of credit to firms or individuals engaged in
commercial real estate endeavors are included without regard to the use of loan
proceeds. The commercial real estate portfolio consists of interim loans and
commercial mortgages.
Short-term interim loans provide financing for the initial phases of the
acquisition or development of commercial real estate, with the intent that the
borrower will refinance the loan through another financial institution or sell
the project upon its completion. The interim loans are primarily in the Chicago
market where Northern Trust has a strong presence and a thorough knowledge of
the local economy. The interim loans, which totaled $349.5 million and $313.7
million as of December 31, 2000 and 1999, respectively, are composed primarily
of loans to developers that are highly experienced and well- known to Northern
Trust.
Commercial mortgage financing, which totaled $561.5 million and $466.7 million
as of December 31, 2000 and 1999, respectively, is provided for the acquisition
of income producing properties. Cash flows from the properties generally are
sufficient to amortize the loan. These loans average less than $500,000 each
and are primarily located in the suburban Chicago and Florida markets.
- -- --
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40
Northern Trust Corporation
Management's Discussion and Analysis
of Financial Condition and Results of Operations
----------------------------------
Nonperforming Assets and 90 Day Past Due Loans
- --------------------------------------------------------------------------------
December 31
- ---------------------------------------------------------------------------
(In Millions) 2000 1999 1998 1997 1996
- ---------------------------------------------------------------------------
Nonaccrual Loans
Domestic
Residential Real Estate $ 2.9 $ 6.4 $ 5.2 $ 5.3 $ 3.2
Commercial 71.2 50.3 21.8 26.3 2.2
Commercial Real Estate 1.8 1.9 2.9 7.1 11.3
Personal .4 .7 .6 .2 .2
- ---------------------------------------------------------------------------
Total Domestic 76.3 59.3 30.5 38.9 16.9
International -- -- -- -- --
- ---------------------------------------------------------------------------
Total Nonaccrual Loans 76.3 59.3 30.5 38.9 16.9
- ---------------------------------------------------------------------------
Restructured Loans -- -- 2.4 2.5 2.6
Other Real Estate Owned 2.2 1.3 2.3 1.9 1.9
- ---------------------------------------------------------------------------
Total Nonperforming Assets $78.5 $60.6 $35.2 $43.3 $21.4
- ---------------------------------------------------------------------------
Total 90 Day Past Due Loans (still accruing) $30.5 $15.4 $30.0 $13.9 $15.2
At December 31, 2000, off-balance sheet credit exposure to commercial real
estate developers in the form of legally binding commitments to extend credit
and standby letters of credit totaled $64.5 million and $22.0 million,
respectively. At December 31, 1999, legally binding commitments were $72.7
million and standby letters of credit were $21.0 million.
Foreign Outstandings. Short-term interbank time deposits with foreign banks
represent the largest category of foreign outstandings. The Chicago head office
and the London Branch actively participate in the interbank market with U.S.
and foreign banks. In recent years, international commercial lending activities
have been focused on import and export financing for U.S.-based clients.
As used in this discussion, foreign outstandings are cross-border outstandings
as defined by the Securities and Exchange Commission. They consist of loans,
acceptances, interest-bearing deposits with financial institutions, accrued
interest and other monetary assets. Not included are letters of credit, loan
commitments, and foreign office local currency claims on residents funded by
local currency liabilities. Foreign outstandings related to a specific country
are net of guarantees given by third parties resident outside the country and
the value of tangible, liquid collateral held outside the country. However,
transactions with branches of foreign banks are included in these outstandings
and are classified according to the country location of the foreign banks' head
office.
Risk related to foreign outstandings is continually monitored and internal
limits are imposed on foreign exposure. The following table provides
information on foreign outstandings by country that exceed 1.00% of Northern
Trust's assets.
Foreign Outstandings
- --------------------------------------------------------------------------------
Commercial
(In Millions) Banks and Other Total
- ----------------------------------------------
At December 31, 2000
Germany $1,132 $ -- $1,132
United Kingdom 844 158 1,002
Italy 664 -- 664
Belgium 545 -- 545
- ----------------------------------------------
At December 31, 1999
Germany $ 359 $ -- $ 359
- ----------------------------------------------
At December 31, 1998
Germany $1,007 $ -- $1,007
Italy 396 -- 396
United Kingdom 316 61 377
France 312 -- 312
Belgium 289 -- 289
- ----------------------------------------------
Aggregate foreign outstandings by country falling between .75% and 1.00% of
total assets at December 31, 2000 totaled $658 million to Austria and the
Netherlands. This compares to $217 million to France at December 31, 1999 and
$266 million to the Netherlands at December 31, 1998.
Nonperforming Assets and 90 Day Past Due Loans. Nonperforming assets consist of
nonaccrual loans, restructured loans and Other Real Estate Owned (OREO). OREO
is comprised of commercial and residential properties acquired in partial or
total satisfaction of problem loans. Past due loans are loans that are
delinquent 90 days or more and still accruing interest. The balance in this
category at any reporting period can fluctuate widely based on the timing of
cash collections, renegotiations and renewals.
- -- --
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41
Northern Trust Corporation
Management's Discussion and Analysis
of Financial Condition and Results of Operations
----------------------------------
Maintaining a low level of nonperforming assets is important to the ongoing
success of a financial institution. In addition to the negative impact on both
net interest income and credit losses, nonperforming assets also increase
operating costs due to the expense associated with collection efforts. Northern
Trust's comprehensive credit review and approval process is critical to the
ability to minimize nonperforming assets on a long-term basis.
The table on the preceding page presents the nonperforming assets and past due
loans for the current year and the prior years. Of the total loan portfolio of
$18.1 billion at December 31, 2000, $76.3 million or .42% was nonaccrual, an
increase of $17.0 million from year-end 1999. This increase is discussed more
fully in the following Provision and Reserve for Credit Losses section.
Included in the portfolio of nonaccrual loans are those which meet the
criteria as being "impaired" under the definition in SFAS No. 114. A loan is
impaired when, based on current information and events, it is probable that a
creditor will be unable to collect all amounts due according to the contractual
terms of the loan agreement. As of December 31, 2000, impaired loans, all of
which have been classified as nonaccrual, totaled $74.8 million, with $24.3
million of the reserve for credit losses allocated to these loans.
Provision and Reserve for Credit Losses. The provision for credit losses is the
charge against current earnings that is determined by management, through a
disciplined credit review process, to be the amount needed to maintain a
reserve that is sufficient to absorb credit losses inherent in Northern Trust's
loan and lease portfolios and other credit undertakings. The reserve provides
for probable losses that have been identified with specific borrower
relationships (specific loss component) and for probable losses that are
believed to be inherent in the loan and lease portfolios and other credit
undertakings but that have not yet been specifically identified (inherent loss
component). The table presented in Note 6 to Consolidated Financial Statements
on page 58 analyzes the reserve for credit losses and identifies the charge-
offs and recoveries and the provision for credit losses during the year ended
December 31, 2000. The table on page 43 shows (i) the specific portion of the
reserve, (ii) the allocated portion of the inherent reserve and its components
by loan category and (iii) the unallocated portion of the reserve at December
31, 2000 and each of the prior four year-ends.
Specific Component of the Reserve. The specific component of the reserve is
determined on a loan-by-loan basis as part of the regular review of impaired
loans and potential charge-offs. The specific reserve is based on a loan's
current book value compared to the present value of its projected future cash
flows, collateral value or market value, as is relevant for the particular
loan.
At December 31, 2000, the specific reserve component amounted to $24.3 million
compared to $15.0 million at the end of 1999, a $9.3 million net increase. The
increase primarily relates to two large commercial credits, one of which filed
for Chapter 11 reorganization in 2000, and further deterioration in the second
which had commenced reorganization proceedings in 1999. The increase in the
specific loss component of the reserve in the prior year from $5.9 million in
1998 to $15.0 million in 1999 was principally related to two commercial credits
to companies that had filed for Chapter 11 reorganization during the year. The
increase was partially offset by charge-offs on loans which had specific
reserves allocated to them in prior years. Management did not view the
developments in either year as evidence of significant change in credit
quality trends.
Allocated Inherent Component of the Reserve. The allocated portion of the
inherent reserve is based on management's review of historical charge-off
experience as well as its judgment regarding loans in each credit rating
category over a period of time that management determines is adequate to
reflect longer-term economic trends. One building block in reaching the
appropriate allocated inherent reserve is an analysis of loans by credit rating
categories. Credit ratings are determined by members of the Credit Policy Group
at the time each loan is approved. These credit ratings are then subject to
periodic reviews by the Credit Policy Group, which is independent of line
management. Credit Policy makes the final determination of each loan's rating.
Credit ratings range from "1" for the strongest credits to "9" for the weakest
credits; a "9" rated loan would normally represent a complete loss.
Several factors are considered by management to determine the level of the
allocated inherent component of the reserve. One of the factors is the
historical loss ratio for each credit rating category over the prior five
years. The historical loss ratios are evaluated by management and adjusted
based on current facts and circumstances. The historical loss factors on
higher-risk loans, those rated "5" through "8", are also refined by considering
historical loss ratios and regulatory guidelines in order to provide a
- -- --
- -- --
42
Northern Trust Corporation
Management's Discussion and Analysis
of Financial Condition and Results of Operations
----------------------------------
more consistent and reliable method for taking account of credit trends in
measuring loss exposure.
Management also utilizes an "industry base" reserve for the commercial,
commercial real estate and international segments of the portfolio in order to
measure the loss estimated to be inherent in these riskier segments. Because of
the higher degree of uncertainty in these portfolios and Northern Trust's past
experience, which included significant losses in brief periods at particular
points in the economic cycles, management believes it appropriate to use a
reserve higher than recent charge-off experience would suggest. This approach
is supported by what management perceives to be industry practice for minimum
reserve levels, and is intended to prevent an understatement of reserves based
upon over-reliance on recent favorable economic conditions.
The allocated inherent component of the reserve also covers the credit
exposure associated with undrawn loan commitments and standby letters of
credit. To determine the exposure on these instruments, management uses the
factors applied in risk-based capital calculations to determine the balance
sheet equivalent amount and assigns a reserve provision factor based on
adjusted historical loss experience.
The allocated portion of the inherent reserve increased $5.9 million during
2000 to $112.5 million at December 31, 2000. The increase in this component of
the reserve reflects the net impact of two factors. First, the credit ratings
on several commercial loans were lowered. Second, as a result of management's
periodic review of all loss factors utilized in estimating the allocated
inherent reserve, certain loss factors applied primarily to commercial loans
and off-balance sheet exposures were reduced. The loss factor adjustments
reflect management's assessment of the credit risk inherent for these
categories and historical loss experience.
The $3.3 million decrease in the allocated portion of the inherent reserve
during 1999 to $106.6 million at December 31, 1999, reflects the net effect of
several factors. The principal amount of residential real estate and commercial
real estate loans outstanding at the time near year-end when reserves were
determined had increased, resulting in a slight increase in the allocated
inherent portion of the reserve for these loans. Offsetting this growth was the
impact of the migration of certain commercial loans to impaired loan status
where specific reserves are established. In addition, during 1999 management
refined its methodology for determining the allocated inherent portion of the
reserve with respect to loans within the higher risk credit rating categories.
Unallocated Inherent Component of the Reserve. The unallocated portion of the
inherent loss reserve is based on management's review of other factors
affecting the determination of probable losses inherent in the portfolio, which
are not necessarily captured by the application of historical loss ratios. This
portion of the reserve analysis involves the exercise of judgment and reflects
considerations such as management's view that the reserve should have a margin
that recognizes the imprecision inherent in the process of estimating expected
credit losses.
Although the loan portfolio continued to grow in 2000 as it had done
throughout the period 1995-99,
Allocation of the Reserve for Credit Losses
- --------------------------------------------------------------------------------
December 31
- ------------------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
Reserve to Total Reserve to Total Reserve to Total Reserve to Total Reserve to Total
($ in Millions) Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
- ------------------------------------------------------------------------------------------------------------------
Specific Reserve $ 24.3 --% $ 15.0 --% $ 5.9 --% $ 10.7 --% $ .8 --%
- ------------------------------------------------------------------------------------------------------------------
Inherent Reserve
Residential Real Estate 9.6 38 11.5 41 11.0 43 3.7 41 7.1 42
Commercial 79.1 27 73.2 31 77.4 29 87.1 30 71.2 29
Commercial Real Estate 13.2 5 12.2 5 11.8 5 6.4 5 5.1 5
Personal 4.3 13 3.3 11 3.2 11 .6 10 6.2 9
Other -- 6 -- 4 -- 5 -- 7 -- 9
Lease Financing 2.9 6 2.9 4 2.9 4 2.9 3 2.9 2
International 3.4 5 3.5 4 3.6 3 -- 4 2.3 4
Unallocated 26.1 -- 29.3 -- 31.0 -- 36.2 -- 52.7 --
- ------------------------------------------------------------------------------------------------------------------
Total Inherent Reserve $138.6 100% $135.9 100% $140.9 100% $136.9 100% $147.5 100%
- ------------------------------------------------------------------------------------------------------------------
Total Reserve $162.9 100% $150.9 100% $146.8 100% $147.6 100% $148.3 100%
- -- --
- -- --
43
Northern Trust Corporation
Management's Discussion and Analysis
of Financial Condition and Results of Operations
----------------------------------
management concluded that the credit risk associated with the growth was
appropriately reflected in the factors affecting the allocated portion of the
inherent reserve. Management also concluded that there were no significant
changes in concentration of credits that impacted asset quality. The decrease
in the unallocated portion of the reserve from $29.3 million to $26.1 million
primarily reflects management's current evaluation of the overall quality of
the portfolio.
Other Factors. The total amount of the two highest risk loan groupings, those
rated "7" and "8" (based on Northern Trust's internal rating scale, which
closely parallels that of the banking regulators), was $153 million, of which
$74.7 million was classified as impaired, up from $84 million last year when
$56.3 million was classified as impaired. This increase primarily reflects
rating changes on certain loans. There were no "9" rated loans reported at any
time during the periods because loans are charged-off when they are so rated.
After the increase, these loans represent .8% of outstanding loans.
Overall Reserve. Management's evaluation of the factors above resulted in a
reserve for credit losses of $162.9 million at December 31, 2000 compared to
$150.9 million at the end of 1999. The reserve as a percentage of total loans
declined to .90% at December 31, 2000 from .98% at year-end 1999. This decline
recognizes the fact that a significant part of the growth in Northern Trust's
loan portfolio continues to be in lower risk residential mortgage loans and
collateralized personal loans. In addition, Northern Trust's underwriting
standards have enabled Northern Trust to maintain strong credit quality as
evidenced by favorable charge-off experience in recent years.
Provision. The resulting provision for credit losses was $24.0 million for the
year, while net charge-offs totaled $12.0 million. This compares to a provision
for credit losses of $12.5 million and net charge-offs of $8.4 million in 1999.
Market Risk Management
Overview. The Board of Directors has overall responsibility for Northern
Trust's interest rate and foreign exchange risk management policies. To ensure
adherence to these policies, the Corporate Asset and Liability Policy Committee
(ALCO) establishes and monitors guidelines to control the sensitivity of
earnings to changes in interest rates. The guidelines apply to both on- and
off-balance sheet positions. ALCO also establishes and monitors limits for
foreign exchange risk. The goal of the ALCO process is to maximize earnings
while maintaining a high quality balance sheet and carefully controlling
interest rate and foreign exchange risk.
Asset/Liability Management. Asset/liability management activities include
lending, accepting and placing deposits, investing in securities, issuing debt,
and hedging interest rate risk with off-balance sheet instruments. The primary
market risk associated with asset/liability management activities is interest
rate risk. Sensitivity of earnings to interest rate changes arises when yields
on assets change in a different time period or in a different amount from that
of interest costs on liabilities. To mitigate interest rate risk, the structure
of the balance sheet is managed so that movements of interest rates on assets
and liabilities (adjusted for off-balance sheet hedges) are highly correlated
and contribute to earnings even in periods of volatile interest rates.
Northern Trust utilizes the following measurement techniques in the management
of interest rate risk: simulation of earnings; simulation of the economic value
of equity; and gap analysis. These three techniques are complementary and are
used in concert to provide a comprehensive interest rate risk management
capability.
Simulation of earnings is the primary tool used to measure the sensitivity of
earnings to interest rate changes. Using computer modeling techniques, Northern
Trust is able to measure the potential impact of different interest rate
assumptions on pre-tax earnings. All on-balance sheet positions, as well as
derivative financial instruments (principally interest rate swaps) that are
used to manage interest rate risk, are included in the model simulation.
Northern Trust used model simulations to measure its earnings sensitivity
relative to management's most likely interest rate scenario as of December 31,
2000. This interest rate scenario assumed a moderately falling interest rate
environment during the first half of 2001, with stable interest rates for the
remainder of the year. The interest sensitivity was tested by running
alternative scenarios above and below the most likely interest rate outcome.
The following table shows the effect on 2001 pre-tax earnings of 100 and 200
basis point upward and downward movements in interest rates relative to
management's interest rate assumptions. Each of the movements in interest rates
was assumed to have occurred gradually over a one year period. The 100 basis
point increase, for example, consisted of twelve consecutive monthly increases
of 8.3 basis points. The following assumptions were also incorporated into the
model simulations:
. the balance sheet size was assumed to remain constant over the one year
simulation horizon;
. maturing assets and liabilities were invested or deposited into identical
items with the same term;
- -- --
- -- --
44
Northern Trust Corporation
Management's Discussion and Analysis
of Financial Condition and Results of Operations
----------------------------------
. prepayments on mortgage loans were projected under each rate scenario using
a mortgage analytics system that incorporated market prepayment
assumptions; and
. changes in the spreads between retail deposit rates and asset yields were
estimated based on historical patterns and current competitive trends.
Interest Rate Risk Simulation of Pre-Tax Income as of
December 31, 2000
- --------------------------------------------------------------------------------
Estimated Impact
On 2001 Pre-tax
Income
(In Millions) Increase/(Decrease)
- ----------------------------------------------------------------------------
Increase in Interest Rates Above
Management's Interest Rate Forecast
100 Basis Points $ (7.4)
200 Basis Points (15.0)
Decrease in Interest Rates Below Management's Interest
Rate Forecast
100 Basis Points $ 6.6
200 Basis Points 12.5
The simulations of earnings do not incorporate any management actions that
might moderate the negative consequences of interest rate deviations. For that
reason and others, they do not reflect likely actual results but serve as
conservative estimates of interest rate risk.
A second technique used to measure interest rate risk is simulation of the
economic value of equity, which provides estimates of the potential future
impact on equity of various changes in interest rates. The potential effect of
interest rate changes on equity is derived from the impact of such changes on
the market values of assets, liabilities and off-balance sheet instruments.
Northern Trust limits aggregate market risk, as measured in this fashion, to an
acceptable level within the context of risk-return trade-offs.
The third technique that is used to measure interest rate risk is gap
analysis. The calculation of the interest sensitivity gap measures the timing
mismatches between assets and liabilities. This interest sensitivity gap is
determined by subtracting the amount of liabilities from the volume of assets
that reprice in a particular time interval. A liability sensitive position
results when more liabilities than assets reprice or mature within a given
period. Under this scenario, as interest rates decline, increased net interest
revenue will be generated. Conversely, an asset sensitive position results when
more assets than liabilities reprice within a given period; in this instance,
net interest revenue would benefit from an increasing interest rate
environment. The economic impact of creating a liability or asset sensitive
position depends on the magnitude of actual changes in interest rates relative
to the current expectations of market participants.
A variety of actions are used to implement interest risk management
strategies, including:
. purchases of securities;
. sales of securities that are classified as available for sale;
. sales of held for sale residential real estate loans;
. issuance of senior notes;
. collateralized borrowings from The Federal Home Loan Bank;
. placing and taking Eurodollar time deposits; and
. hedging with various types of derivative financial instruments.
Northern Trust strives to use the most effective instruments for implementing
its interest risk management strategies, considering the costs,
liquidity, collateral and capital requirements of the various alternatives. For
more detail regarding how derivative financial instruments are used to
implement interest risk management strategies, refer to Note 20 on page 67.
Foreign Exchange Trading. Foreign exchange trading activities consist
principally of providing foreign exchange services to clients. Most of these
services are provided in connection with Northern Trust's growing global
custody business. However, in the normal course of business Northern Trust also
engages in proprietary trading of foreign currencies. The primary market risk
associated with these activities is foreign exchange risk.
Foreign currency positions exist when aggregate obligations to purchase and
sell a currency other than the U.S. dollar do not offset each other, or offset
each other in different time periods. Northern Trust mitigates the risk related
to its foreign currency positions by establishing limits on the amounts of, and
durations of its positions. The limits on overnight inventory positions are
generally lower than the limits established for intra-day trading activity. All
overnight positions are monitored by a risk management function, which is
separate from the trading function, to ensure that the limits are not exceeded.
Although position limits are important in controlling foreign exchange risk,
they are not a substitute for the experience or judgment of Northern Trust's
senior management and its foreign currency traders, who have extensive
knowledge of the foreign currency markets. Foreign currency positions and
strategies are adjusted as needed in response to changing market conditions.
- -- --
- -- --
45
Northern Trust Corporation
Management's Discussion and Analysis
of Financial Condition and Results of Operations
----------------------------------
As part of its risk management activities, Northern Trust regularly measures
the risk of loss associated with foreign currency positions using a value at
risk model. This statistical model provides an estimate, based on a 95%
confidence level, of the potential loss in earnings that may be incurred if an
adverse one-day shift in foreign currency exchange rates were to occur. The
model, which is based on a variance/co-variance methodology, incorporates
historical currency price data and historical correlations in price movement
among the currencies. All foreign currency positions, including foreign
denominated assets and liabilities that were not converted to U.S. dollars
through the use of hedge contracts, are included in the model.
Northern Trust's value at risk based on foreign currency positions totaled
$107 thousand and $52 thousand as of December 31, 2000 and 1999, respectively.
Value at risk totals representing the average, high and low for 2000 were $181
thousand, $345 thousand and $78 thousand, respectively, with the average, high
and low for 1999 being $209 thousand, $421 thousand and $52 thousand,
respectively. These totals indicate the degree of risk inherent in foreign
currency positions as of year-end and during the year, however, it is not a
prediction of an expected loss. Actual future gains and losses will vary
depending on market conditions and the size and duration of future foreign
currency positions.
Other Trading Activities. Market risk associated with other trading activities
is negligible. Northern Trust is a party to various interest risk management
instruments, most of which consist of interest rate swaps entered into to meet
clients' interest risk management needs. When Northern Trust enters into such
swaps, its policy is to mitigate the resulting interest rate risk with an
offsetting swap or with futures contracts. Northern Trust carries in its
trading portfolio a small inventory of securities that are held for sale to its
clients. The interest rate risk associated with these securities is
insignificant.
Liquidity Risk Management
The objectives of liquidity risk management are to ensure that Northern Trust
can meet its cash flow requirements and to capitalize on business opportunities
on a timely and cost effective basis. Management monitors the liquidity
position on a daily basis to make funds available at a minimum cost to meet
loan and deposit cash flows. The liquidity profile is also structured so that
the capital needs of the Corporation and its banking subsidiaries are met.
Management maintains a detailed liquidity contingency plan designed to
adequately respond to dramatic changes in market conditions.
Liquidity is secured by managing the mix of items on the balance sheet and
expanding potential sources of liquidity. The balance sheet sources of
liquidity include the short-term money market portfolio, unpledged available
for sale securities, maturing loans and the ability to securitize a portion of
the loan portfolio. Further, liquidity arises from the diverse funding base and
the fact that a significant portion of funding comes from clients that have
other relationships with Northern Trust.
A significant source of liquidity is the ability to draw funding from both
domestic and international markets. The Bank's senior long-term debt is rated
AA- by Standard & Poor's, Aa3 by Moody's Investors Service, and AA by Fitch.
These ratings put The Northern Trust Company in the top tier of United States
banks
and allow it to access capital markets on favorable terms.
Northern Trust maintains a liquid balance sheet with loans representing only
50% of total assets. Further, at December 31, 2000, it had a significant
liquidity reserve on its balance sheet in the form of cash and due from banks,
securities available for sale, and money market assets, which in aggregate
totaled $14.6 billion or 41% of total assets.
The Corporation's uses of cash consist mainly of dividend payments to the
Corporation's common and preferred stockholders, the payment of principal and
interest to note holders, purchases of its common stock and acquisitions. These
requirements are met largely by dividend payments from its subsidiaries, and by
interest and dividends earned on investment securities and money market assets.
Bank subsidiary dividends are subject to certain restrictions that are
explained in Note 14 on page 63. Bank subsidiaries have the ability to pay
dividends during 2001 equal to their 2001 eligible net profits plus $486.6
million. The Corporation's liquidity, defined as the amount of marketable
assets in excess of commercial paper, was strong at $92.2 million at year-end
2000. The cash flows of the Corporation are shown in Note 29 on page 77. The
Corporation also has a $50 million back-up line of credit for its commercial
paper issuance.
Capital Management
One of management's primary objectives is to maintain a strong capital position
to merit the confidence of clients, the investing public, bank regulators and
stockholders. A strong capital position helps Northern Trust take advantage of
profitable investment opportunities when they arise and helps withstand
unforeseen adverse developments. In 2000, average
- -- --
- -- --
46
Northern Trust Corporation
Management's Discussion and Analysis
of Financial Condition and Results of Operations
----------------------------------
common equity increased 12% or $234 million reaching a record $2.34 billion at
year-end, while total risk-weighted assets rose 14%. Total equity as of
December 31, 2000 was $2.46 billion, including $120 million of auction rate
preferred stock. The average dividend rate declared on the $120 million of
auction rate preferred stock, was 4.79% during 2000. During 2000, the
Corporation purchased 2,784,007 of its own shares as part of its buyback
program. The buyback program is designed, among other things, to help offset
the dilutive effect of the Corporation's incentive stock programs. The
Corporation may purchase up to 7.1 million additional shares after December 31,
2000.
Capital Adequacy
- --------------------------------------------------------------------------------
December 31
- -------------------------------------------------------------
($ In Millions) 2000 1999
- -------------------------------------------------------------
Tier 1 Capital
Common Stockholders' Equity $ 2,342 $ 2,055
Debt-Floating Rate Capital Securities 267 267
Goodwill and Other Intangible Assets (126) (112)
Net Unrealized Loss on Securities 1 2
- -------------------------------------------------------------
Total Tier 1 Capital 2,484 2,212
- -------------------------------------------------------------
Tier 2 Capital
Auction Rate Preferred Stock 120 120
Reserve for Credit Losses 163 151
Reserves Created Against Identified Losses (24) (15)
Long-Term Debt* 520 565
- -------------------------------------------------------------
Total Tier 2 Capital 779 821
- -------------------------------------------------------------
Total Risk-Based Capital 3,263 3,033
- -------------------------------------------------------------
Risk-Weighted Assets** $25,385 $22,305
- -------------------------------------------------------------
Total Assets-End of Period (EOP) $36,022 $28,708
Average Fourth Quarter Assets** 35,932 30,968
Total Loans-EOP 18,145 15,374
- -------------------------------------------------------------
Ratios
Risk-Based Capital to Risk-Weighted Assets
Tier 1 9.8% 9.9%
Total (Tier 1 and Tier 2) 12.9 13.6
Leverage 6.9 7.1
- -------------------------------------------------------------
Common Stockholders' Equity to
Total Loans EOP 12.9% 13.4%
Total Assets EOP 6.5 7.2
Stockholders' Equity to
Total Loans EOP 13.6 14.1
Total Assets EOP 6.8 7.6
Notes:
*Long-Term Debt that qualifies for risk-based capital amortizes for the purpose
of inclusion in tier 2 capital during the five years before maturity.
**Assets have been adjusted for goodwill and other intangible assets, net
unrealized loss on securities, reserves created against identified losses and
excess reserve for credit losses that have been excluded from tier 1 and tier 2
capital, if any.
The Board of Directors increased the quarterly dividend by 14.8% to $.155 per
common share in November 2000. The common dividend has increased 100% from its
level five years ago.
The higher capital levels in 2000 were the result of Northern Trust's ongoing
policy of retaining a sufficient percentage of earnings in the Corporation to
allow for strategic expansion while maintaining a strong balance sheet. All of
Northern Trust's capital ratios were well above the ratios that are a
requirement for regulatory treatment as "well capitalized." At December 31,
2000, tier 1 capital was 9.8% and total capital was 12.9% of risk-weighted
assets. These risk-based capital ratios are well above the minimum requirements
of 4.0% for tier 1 and 8.0% for total risk-based capital ratios. Northern
Trust's leverage ratio (tier 1 capital to fourth quarter average assets) of
6.9% is also well above the regulatory requirement of 3.0%. In addition, each
of the subsidiary banks had a ratio of at least 8.7% for tier 1 capital, 10.8%
for total risk-based capital, and 6.0% for the leverage ratio.
Operational and Fiduciary Risk Management
In providing banking and trust services, Northern Trust, in addition to
safekeeping and managing trust and corporate assets, processes cash and
securities transactions exceeding $165 billion on average each business day.
These activities expose Northern Trust to operational and fiduciary risk.
Controls over such processing activities are closely monitored to safeguard the
assets of Northern Trust and its clients. However, from time to time Northern
Trust has incurred losses related to these risks and there can be no assurance
that such losses will not occur in the future.
Operational risk is the risk of unexpected losses attributable to human error,
systems failures, fraud, or inadequate internal controls and procedures. This
risk is mitigated through a system of internal controls that are designed to
keep operating risk at levels appropriate to Northern Trust's corporate
standards in view of the risks inherent in the markets in which Northern Trust
operates. The system of internal controls includes policies and procedures that
require the proper authorization, approval, documentation and monitoring of
transactions. Each business unit is responsible for complying with corporate
policies and external regulations applicable to the unit, and is responsible
for establishing specific procedures to do so. Northern Trust's internal
auditors monitor the overall effectiveness of the system of internal controls
on an ongoing basis.
- -- --
- -- --
47
Northern Trust Corporation
Management's Discussion and Analysis
of Financial Condition and Results of Operations
----------------------------------
Fiduciary risk is the risk of loss that may occur as a result of breaching a
fiduciary duty to a client. To limit this risk, the Trust Investment Committee
establishes corporate policies and procedures to reduce the risk that
obligations to clients would not be discharged faithfully or in compliance with
applicable legal and regulatory requirements. These policies and procedures
provide guidance and establish standards related to the creation, sale, and
management of investment products, trade execution, and counterparty selection.
Business units have the primary responsibility for adhering to the policies and
procedures applicable to their businesses.
Factors Affecting Future Results
- --------------------------------------------------------------------------------
This annual report contains statements that may be considered forward-looking,
such as the discussion of Northern Trust's financial goals, dividend policy,
expansion and business development plans, business prospects and positioning
with respect to market and pricing trends, new business results and outlook,
credit quality, planned capital expenditures and technology spending, and the
effect of various matters (including changes in accounting standards and
interpretations) on Northern Trust's business and results. These statements
speak of Northern Trust's plans, goals, beliefs or expectations, refer to
estimates or use similar terms. Actual results could differ materially from the
results indicated by these statements because the realization of those results
is subject to many uncertainties including:
. The future health of the U.S. and international economies and other
economic factors that affect wealth creation, investment and savings
patterns and Northern Trust's interest rate risk exposure and credit risk.
. Changes in U.S. and worldwide securities markets, with respect to the
market values of financial assets, the stability of particular securities
markets and the level of volatility in certain markets such as foreign
exchange.
. Changes in the level of cross-border investing by clients resulting from
changing economic factors, political conditions or currency markets.
. Regulatory developments and changes in accounting requirements or
interpretations in the U.S. and other countries where Northern Trust has
significant business.
. Changes in the nature of Northern Trust's competition resulting from
industry consolidation, enactment of the Gramm-Leach-Bliley Act of 1999 and
other regulatory changes and other factors, as well as actions taken by
particular competitors.
. Northern Trust's success in continuing to generate new business in its
existing markets, as well as its success in identifying and penetrating
targeted markets, through acquisition or otherwise, and generating a profit
in those markets in a reasonable time.
. Northern Trust's ability to continue to generate strong investment results
for clients and continue to develop its array of investment products,
internally or through acquisition, in a manner that meets client needs.
. Northern Trust's success in further developing and executing on initiatives
that integrate the Internet into its methods of product distribution, new
business development and client service.
. Northern Trust's ability to continue to fund and accomplish technological
innovation, improve processes and controls and attract and retain capable
staff in order to deal with technology challenges and increasing volume and
complexity in many of its businesses.
. Northern Trust's success in integrating recent and future acquisitions and
using the acquired businesses to execute its business strategy.
. The ability of each of Northern Trust's principal businesses to maintain a
product mix that achieves satisfactory margins.
. Changes in tax laws or other legislation in the U.S. or other countries
that could affect Northern Trust or clients of its personal and
institutional asset administration businesses.
Some of these uncertainties that may affect future results are discussed in
more detail in the sections of "Item 1--Business" of the 2000 Annual Report on
Form 10-K captioned "Government Policies," "Competition" and "Regulation and
Supervision." All forward-looking statements included in this document are
based upon information presently available, and Northern Trust assumes no
obligation to update any forward-looking statement.
- -- --
- -- --
48
Northern Trust Corporation
Consolidated Balance Sheet
----------------------------------
December 31
- ------------------------------------------------------------------------------
($ In Millions Except Share Information) 2000 1999
- ------------------------------------------------------------------------------
Assets
Cash and Due from Banks $ 2,287.8 $ 1,977.9
Federal Funds Sold and Securities Purchased under
Agreements to Resell (Note 4) 549.8 1,083.8
Time Deposits with Banks 5,193.8 2,292.2
Other Interest-Bearing 121.3 63.2
Securities (Note 3)
Available for Sale 6,477.8 5,480.0
Held to Maturity (Fair value-$782.1 in 2000 and $740.4
in 1999) 778.4 752.7
Trading Account 13.4 11.0
- ------------------------------------------------------------------------------
Total Securities 7,269.6 6,243.7
- ------------------------------------------------------------------------------
Loans and Leases (Note 5)
Commercial and Other 11,321.8 9,116.8
Residential Mortgages 6,822.8 6,257.7
- ------------------------------------------------------------------------------
Total Loans and Leases (Net of unearned income-$365.3
in 2000 and $321.3 in 1999) 18,144.6 15,374.5
- ------------------------------------------------------------------------------
Reserve for Credit Losses (Note 6) (162.9) (150.9)
Buildings and Equipment (Notes 7 and 8) 448.1 380.4
Customers' Acceptance Liability 9.3 34.7
Trust Security Settlement Receivables 615.2 323.1
Other Assets (Note 17) 1,545.7 1,085.6
- ------------------------------------------------------------------------------
Total Assets $36,022.3 $28,708.2
- ------------------------------------------------------------------------------
Liabilities
Deposits
Demand and Other Noninterest-Bearing $ 4,547.7 $ 4,476.0
Savings and Money Market 5,521.7 5,299.7
Savings Certificates 2,331.2 2,338.6
Other Time 427.3 913.0
Foreign Offices-Demand 827.5 468.8
-Time 9,172.5 7,874.9
- ------------------------------------------------------------------------------
Total Deposits 22,827.9 21,371.0
Federal Funds Purchased 3,615.0 370.2
Securities Sold under Agreements to Repurchase (Note 4) 1,577.1 997.8
Commercial Paper 142.4 145.1
Other Borrowings 2,629.5 1,155.3
Senior Notes (Note 9) 500.0 500.0
Long-Term Debt (Note 9) 638.1 659.4
Debt-Floating Rate Capital Securities (Note 10) 267.6 267.5
Liability on Acceptances 9.3 34.7
Other Liabilities 1,353.2 1,032.5
- ------------------------------------------------------------------------------
Total Liabilities 33,560.1 26,533.5
- ------------------------------------------------------------------------------
Stockholders' Equity
Preferred Stock (Note 11) 120.0 120.0
Common Stock, $1.66 2/3 Par Value; Authorized
560,000,000 shares in 2000 and 280,000,000 in 1999;
Outstanding 222,232,395 shares and 222,161,934 shares
in 2000 and 1999, respectively (Notes 11 and 13) 379.8 379.8
Capital Surplus -- --
Retained Earnings 2,200.0 1,870.7
Net Unrealized Loss on Securities Available for Sale
(Note 3) (.9) (2.4)
Common Stock Issuable-Stock Incentive Plans (Note 24) 110.2 55.0
Deferred Compensation-ESOP and Other (70.2) (44.2)
Treasury Stock (at cost-5,689,129 shares in 2000 and
5,759,590 shares in 1999) (276.7) (204.2)
- ------------------------------------------------------------------------------
Total Stockholders' Equity 2,462.2 2,174.7
- ------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $36,022.3 $28,708.2
See accompanying notes to consolidated financial statements on pages 53-77.
- -- --
- -- --
49
Northern Trust Corporation
Consolidated Statement of Income
----------------------------------
For the Year Ended December 31
- --------------------------------------------------------------------------------
($ In Millions Except Per Share
Information) 2000 1999 1998
- --------------------------------------------------------------------------------
Noninterest Income
Trust Fees $1,201.2 $ 974.2 $ 816.3
Foreign Exchange Trading Profits 152.7 107.7 103.5
Treasury Management Fees 71.5 67.9 69.9
Security Commissions and Trading Income 34.3 30.2 28.0
Other Operating Income (Note 15) 77.1 54.5 52.6
Investment Security Gains, net (Note 3) .2 .7 1.3
- --------------------------------------------------------------------------------
Total Noninterest Income 1,537.0 1,235.2 1,071.6
- --------------------------------------------------------------------------------
Net Interest Income (Note 16)
Interest Income 2,011.1 1,568.6 1,503.1
Interest Expense 1,442.5 1,049.8 1,025.9
- --------------------------------------------------------------------------------
Net Interest Income 568.6 518.8 477.2
Provision for Credit Losses (Note 6) 24.0 12.5 9.0
- --------------------------------------------------------------------------------
Net Interest Income after Provision for
Credit Losses 544.6 506.3 468.2
- --------------------------------------------------------------------------------
Noninterest Expenses
Compensation (Notes 24 and 25) 689.1 582.6 518.1
Employee Benefits (Note 18) 109.3 98.5 91.3
Occupancy Expense (Notes 7 and 8) 87.3 74.3 67.9
Equipment Expense (Note 7) 73.1 63.6 62.2
Other Operating Expenses (Note 17) 392.7 306.0 257.6
- --------------------------------------------------------------------------------
Total Noninterest Expenses 1,351.5 1,125.0 997.1
- --------------------------------------------------------------------------------
Income before Income Taxes 730.1 616.5 542.7
Provision for Income Taxes (Note 12) 245.0 211.5 188.8
- --------------------------------------------------------------------------------
Net Income $ 485.1 $ 405.0 $ 353.9
- --------------------------------------------------------------------------------
Net Income Applicable to Common Stock $ 479.4 $ 400.2 $ 349.0
- --------------------------------------------------------------------------------
Net Income Per Common Share (Note 13)-Basic $ 2.17 $ 1.81 $ 1.58
- -Diluted 2.08 1.74 1.52
- --------------------------------------------------------------------------------
Average Number of Common Shares
Outstanding-Basic 220,961,477 221,673,316 221,366,976
- -Diluted 230,613,311 229,874,028 229,734,116
Consolidated Statement of Comprehensive Income
----------------------------------
For the Year Ended
December 31
- -------------------------------------------------------------------------------
(In Millions) 2000 1999 1998
- -------------------------------------------------------------------------------
Net Income $ 485.1 $ 405.0 $ 353.9
Other Comprehensive Income (net of tax)
Net Unrealized Gains (Losses) on Securities
Available for Sale
Unrealized Holding Gains (Losses) Arising
During Period
(Net of tax (provision) benefit of $(1.1) in
2000, $.5 in 1999 and $1.2 in 1998) 1.6 (1.4) (2.0)
Less: Reclassification Adjustments for Gains
Included in Net Income
(Net of tax provision of $.1 in 2000, $.3 in
1999 and $.3 in 1998) (.1) (.4) (.7)
Minimum Pension Liability Adjustment
(Net of tax benefit of $1.0 in 2000, $2.3 in
1999 and $2.2 in 1998) (1.6) (3.9) (3.5)
- -------------------------------------------------------------------------------
Other Comprehensive Income (.1) (5.7) (6.2)
- -------------------------------------------------------------------------------
Comprehensive Income $ 485.0 $ 399.3 $ 347.7
See accompanying notes to consolidated financial statements on pages 53-77.
- -- --
- -- --
50
Northern Trust Corporation
Consolidated Statement of Changes in Stockholders' Equity
----------------------------------
For the Year Ended
December 31
- -------------------------------------------------------------------------------
(In Millions) 2000 1999 1998
- -------------------------------------------------------------------------------
Preferred Stock
Balance at January 1 $ 120.0 $ 120.0 $ 120.0
- -------------------------------------------------------------------------------
Balance at December 31 120.0 120.0 120.0
- -------------------------------------------------------------------------------
Common Stock
Balance at January 1 379.8 189.9 189.9
Transfer from Capital Surplus-Two-for-One Stock
Split -- 189.9 --
- -------------------------------------------------------------------------------
Balance at December 31 379.8 379.8 189.9
- -------------------------------------------------------------------------------
Capital Surplus
Balance at January 1 -- 212.9 225.5
Transfer to Common Stock-Two-for-One Stock Split -- (189.9) --
Stock Issued-Incentive Plan and Awards -- (23.0) (12.6)
- -------------------------------------------------------------------------------
Balance at December 31 -- -- 212.9
- -------------------------------------------------------------------------------
Retained Earnings
Balance at January 1 1,870.7 1,582.9 1,330.8
Net Income 485.1 405.0 353.9
Dividends Declared-Common Stock (124.3) (110.3) (96.9)
Dividends Declared-Preferred Stock (5.7) (4.8) (4.9)
Stock Issued-Incentive Plan and Awards (25.8) (2.1) --
- -------------------------------------------------------------------------------
Balance at December 31 2,200.0 1,870.7 1,582.9
- -------------------------------------------------------------------------------
Net Unrealized Gain (Loss) on Securities
Available for Sale
Balance at January 1 (2.4) (.6) 2.1
Unrealized Gain (Loss), net 1.5 (1.8) (2.7)
- -------------------------------------------------------------------------------
Balance at December 31 (.9) (2.4) (.6)
- -------------------------------------------------------------------------------
Common Stock Issuable-Stock Incentive Plans
Balance at January 1 55.0 30.4 11.7
Stock Issuable, net of Stock Issued 55.2 24.6 18.7
- -------------------------------------------------------------------------------
Balance at December 31 110.2 55.0 30.4
- -------------------------------------------------------------------------------
Deferred Compensation-ESOP and Other
Balance at January 1 (44.2) (44.3) (37.5)
Compensation Deferred (52.6) (13.3) (18.3)
Compensation Amortized 28.2 17.3 15.0
Unfunded Pension Liability, net (1.6) (3.9) (3.5)
- -------------------------------------------------------------------------------
Balance at December 31 (70.2) (44.2) (44.3)
- -------------------------------------------------------------------------------
Treasury Stock
Balance at January 1 (204.2) (150.9) (103.5)
Stock Options and Awards 121.6 87.0 69.9
Stock Purchased (194.1) (140.3) (117.3)
- -------------------------------------------------------------------------------
Balance at December 31 (276.7) (204.2) (150.9)
- -------------------------------------------------------------------------------
Total Stockholders' Equity at December 31 $2,462.2 $2,174.7 $1,940.3
See accompanying notes to consolidated financial statements on pages 53-77.
- -- --
- -- --
51
Northern Trust Corporation
Consolidated Statement of Cash Flows
----------------------------------
For the Year Ended December 31
- -------------------------------------------------------------------------------
(In Millions) 2000 1999 1998
- -------------------------------------------------------------------------------
Cash Flows From Operating Activities:
Net Income $ 485.1 $ 405.0 $ 353.9
Adjustments to Reconcile Net Income to
Net Cash Provided by
Operating Activities:
Provision for Credit Losses 24.0 12.5 9.0
Depreciation on Buildings and Equipment 67.8 58.2 52.4
Increase in Interest Receivable (34.1) (9.2) (23.0)
Increase (Decrease) in Interest Payable (6.7) 17.5 (10.7)
Amortization and Accretion of Securities
and Unearned Income (233.5) (86.2) (214.9)
Amortization of Software, Goodwill and
Other Intangibles 76.9 62.3 54.1
Deferred Income Tax 88.4 95.3 57.0
Net Increase in Trading Account
Securities (2.4) (1.9) (.3)
Other, net (94.4) 53.3 222.2
- -------------------------------------------------------------------------------
Net Cash Provided by Operating
Activities 371.1 606.8 499.7
- -------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Net Decrease in Federal Funds Sold and
Securities Purchased under Agreements to
Resell 534.0 80.6 1,827.3
Net (Increase) Decrease in Time Deposits
with Banks (2,901.6) 972.5 (981.5)
Net (Increase) Decrease in Other
Interest-Bearing Assets (58.1) (41.4) 12.7
Purchases of Securities-Held to Maturity (146.4) (201.2) (233.4)
Proceeds from Maturity and Redemption of
Securities-Held to Maturity 126.9 160.2 218.9
Purchases of Securities-Available for
Sale (41,011.9) (45,965.0) (110,806.2)
Proceeds from Sale, Maturity and
Redemption of Securities-Available for
Sale 40,297.6 45,777.4 109,456.3
Net Increase in Loans and Leases (2,827.7) (1,834.3) (1,147.7)
Purchases of Buildings and Equipment (137.1) (99.9) (84.5)
Proceeds from Sale of Buildings and
Equipment 1.7 1.5 8.3
Purchases and Development of Computer
Software (110.3) (96.3) (68.8)
Net (Increase) Decrease in Trust
Security Settlement Receivables (292.1) 13.6 (45.3)
Decrease in Cash Due to Acquisitions (32.5) -- (15.0)
Other, net 41.0 2.7 (1.7)
- -------------------------------------------------------------------------------
Net Cash Used in Investing Activities (6,516.5) (1,229.6) (1,860.6)
- -------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Net Increase in Deposits 1,456.9 3,168.3 1,842.7
Net Increase (Decrease) in Federal Funds
Purchased 3,244.8 (1,654.9) 1,203.9
Net Increase (Decrease) in Securities
Sold under Agreements to Repurchase 579.3 (1,117.1) 975.2
Net Increase (Decrease) in Commercial
Paper (2.7) (3.0) 1.3
Net Increase (Decrease) in Short-Term
Other Borrowings 2,052.7 (556.1) (1,770.8)
Proceeds from Term Federal Funds
Purchased 14,215.6 7,516.8 1,730.8
Repayments of Term Federal Funds
Purchased (14,794.1) (6,904.6) (1,737.4)
Proceeds from Senior Notes & Long-Term
Debt 102.6 701.4 801.4
Repayments on Senior Notes & Long-Term
Debt (123.9) (700.2) (867.7)
Treasury Stock Purchased (191.5) (139.7) (116.5)
Net Proceeds from Stock Options 28.4 24.1 19.5
Cash Dividends Paid on Common and
Preferred Stock (125.8) (111.4) (98.5)
Other, net 13.0 11.1 4.1
- -------------------------------------------------------------------------------
Net Cash Provided by Financing
Activities 6,455.3 234.7 1,988.0
- -------------------------------------------------------------------------------
Increase (Decrease) in Cash and Due from
Banks 309.9 (388.1) 627.1
Cash and Due from Banks at Beginning of
Year 1,977.9 2,366.0 1,738.9
- -------------------------------------------------------------------------------
Cash and Due From Banks at End of Year $ 2,287.8 $ 1,977.9 $ 2,366.0
- -------------------------------------------------------------------------------
Schedule of Noncash Investing Activities:
Transfer of Securities from Available
for Sale to Held to Maturity $ -- $ 239.8 $ --
Supplemental Disclosures of Cash Flow
Information:
Interest Paid $ 1,449.2 $ 1,032.4 $ 1,036.6
Income Taxes Paid 112.7 69.7 128.0
See accompanying notes to consolidated financial statements on pages 53-77.
- -- --
- -- --
52
Northern Trust Corporation
Notes to Consolidated Financial Statements
----------------------------------
1. Accounting Policies--The consolidated financial statements have been
prepared in conformity with generally accepted accounting principles and
reporting practices prescribed for the banking industry. A description of the
significant accounting policies follows:
A. Basis of Presentation. The consolidated financial statements include the
accounts of Northern Trust Corporation (Corporation) and its wholly-owned
subsidiary The Northern Trust Company (Bank) and their wholly-owned
subsidiaries. Throughout the notes, the term "Northern Trust" refers to
Northern Trust Corporation and subsidiaries. Significant intercompany balances
and transactions have been eliminated in consolidation. The consolidated
statement of income includes results of acquired and pooled subsidiaries from
the dates of acquisition.
B. Nature of Operations. The Corporation is a bank holding company whose
principal subsidiary is the Chicago-based Bank. The Corporation also owns banks
in Arizona, California, Colorado, Florida, and Texas, a federal savings bank
with offices in Michigan, Missouri, Nevada, Ohio, Washington and Wisconsin, a
trust company in New York and various other nonbank subsidiaries, including an
investment management company, a securities brokerage firm, an international
investment consulting firm and a retirement services company. The Bank has
global custody operations in London and various subsidiaries, including a
leasing company, a Canadian trust company, a New York Edge Act company and a
global fund services provider. Northern Trust generates the majority of its
revenues from its two primary business units, Corporate and Institutional
Services (C&IS) and Personal Financial Services (PFS). Investment products and
services are provided to C&IS and PFS through a third business unit, Northern
Trust Global Investments (NTGI). Operations and system support for these
business units are provided by a fourth business unit, Worldwide Operations and
Technology (WWOT).
The C&IS business unit provides trust and custody-related services in the
United States and foreign markets to corporations and institutions; investment
management services; a full range of commercial banking services to large
domestic corporations and financial institutions; treasury management services
to meet the needs of major corporations and financial institutions; and foreign
exchange services for global custody clients and Northern Trust's own account.
The PFS business unit provides personal trust, investment management, estate
administration, personal banking and mortgage lending services, and also
provides commercial banking services to middle market companies. These services
are delivered through the Bank in Illinois and the network of subsidiaries in
Arizona, California, Colorado, Florida, Michigan, Missouri, Nevada, Ohio,
Texas, Washington and Wisconsin.
C. Use of Estimates in the Preparation of Financial Statements. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
D. Foreign Currency Translation. Foreign currency asset and liability accounts
of overseas branches and subsidiaries are translated at current rates of
exchange, except for buildings and equipment which are translated at rates in
effect at the date of acquisition. Income and expense accounts are translated
at month-end rates of exchange.
Foreign exchange trading positions are valued daily at prevailing market
rates. Gains and losses on trading positions and on positions entered into to
hedge foreign denominated investments are recognized currently in other
operating income. Unrealized gains on trading positions are reported as other
assets and unrealized losses are reported as other liabilities in the
consolidated balance sheet. Gains and losses on foreign currency positions that
were entered into to hedge specific, firm foreign currency obligations are
deferred and recognized in income over the life of the underlying asset or
liability or as the underlying expense or commitment is incurred.
E. Securities. Securities Available for Sale consist of debt and equity
securities that are not intended to be held to maturity and are not held for
trading. Securities available for sale are reported at fair value, with
unrealized gains and losses credited or charged, net of the tax effect,
directly to stockholders' equity. Realized gains and losses on securities
available for sale are determined on a specific identification basis and are
reported in the consolidated statement of income as investment security gains
and losses.
Securities Held to Maturity consist of debt securities that management intends
to, and Northern Trust has the ability to, hold until maturity. Such securities
are reported at cost, adjusted for amortization of premium and accretion of
discount.
Securities Held for Trading are stated at fair value. Realized and unrealized
gains and losses on securities held for trading are reported in the
consolidated statement of income under security commissions and trading income.
- -- --
- -- --
53
Northern Trust Corporation
Notes to Consolidated Financial Statements
----------------------------------
F. Interest Risk Management Instruments. Interest risk management instruments
include interest rate swap contracts, futures contracts, options and similar
contracts. Northern Trust is a party to various interest risk management
instruments as part of its asset/liability management activities, to meet the
interest risk management needs of its clients and as part of its trading
activity for its own account. Unrealized gains and receivables on interest risk
management instruments are reported as other assets and unrealized losses and
payables are reported as other liabilities in the consolidated balance sheet.
Asset/Liability Management Instruments. Interest rate swaps were traditionally
the primary interest risk management instrument used for asset/liability
management purposes. Futures contracts, options, and similar contracts are
occasionally used for asset/liability management, but these contracts do not
have a material impact on Northern Trust's financial condition or net income.
Accrued interest income or expense on asset/liability management swaps is
recognized as a component of the interest income or expense of the hedged
items. Unrealized gains and losses on such swaps are recognized consistent with
the method of accounting for the hedged items. For example, there is no
recognition of unrealized gains and losses on swaps used to hedge items that
are carried at their amortized cost. Unrealized gains and losses on interest
rate swaps used to hedge available for sale securities are reported in
stockholders' equity, net of applicable taxes.
A swap that is classified in the asset/liability management category must be
assigned to hedge a specific asset or liability and must reduce Northern
Trust's interest rate risk. It must also achieve its intended objective of
converting the yield on the hedged asset or liability to the desired rate. This
criteria is assumed to have been met if the interest rate on the hedged asset
or liability is identical to the offsetting interest rate on the swap. If the
two rates are not identical, the correlation between the levels of the two
rates since the inception of the swap must be measured to ensure that the swap
is meeting its intended objective. In addition, the notional amount of the swap
must be less than or equal to the par amount of the item being hedged. If a
forward swap is entered into to hedge an anticipated transaction, the
significant terms (e.g., the expected date, type of instrument, quantity, and
maturity date) of the anticipated transaction must be identified, and it must
be probable that the anticipated transaction will occur.
If an asset/liability management swap is terminated or ceases to meet the
criteria described above, any realized or unrealized gain or loss at the time
is deferred and amortized over the remainder of the original hedge period. Any
subsequent realized or unrealized gains or losses are reported as security
commissions and trading income in the consolidated statement of income. If the
item being hedged is sold, any deferred or unrealized gain or loss on the swap
at the time of the transaction is considered in the calculation of the gain or
loss on the sale. If the swap is not terminated, it must be marked to market on
a prospective basis, with realized and unrealized gains and losses included in
security commissions and trading income in the consolidated statement
of income.
Client-Related and Trading Instruments. Interest risk management instruments
entered into to meet clients' interest risk management needs or for trading
purposes are carried at fair value, with realized and unrealized gains and
losses included in security commissions and trading income.
G. Loans and Leases. Loans that are held to maturity are reported at the
principal amount outstanding, net of unearned income. Residential real estate
loans classified as held for sale are reported at the lower of aggregate cost
or market value. Interest income on loans is recorded on an accrual basis
until, in the opinion of management, there is a question as to the ability of
the debtor to meet the terms of the contract, or when interest or principal is
more than 90 days past due and the loan is not well-secured and in the process
of collection. At the time a loan is placed on nonaccrual status, interest
accrued but not collected is reversed against interest income of the current
period. Loans are returned to accrual status when factors indicating doubtful
collectibility no longer exist. Interest collected on nonaccrual loans is
applied to principal unless, in the opinion of management, collectibility of
principal is not in doubt.
Premiums and discounts on loans are recognized as an adjustment of yield using
the interest method based on the contractual terms of the loan. Commitment fees
that are considered to be an adjustment to the loan yield, loan origination
fees and certain direct costs are deferred and accounted for as an adjustment
to the yield.
Unearned lease income from direct financing and leveraged leases is recognized
using the interest method. This method provides a constant rate of return on
the unrecovered investment over the life of the lease.
H. Reserve for Credit Losses. The reserve for credit losses represents
management's estimate of probable inherent losses which have occurred as of the
date of the financial statements. The loan and lease
- -- --
- -- --
54
Northern Trust Corporation
Notes to Consolidated Financial Statements
----------------------------------
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 these components:
Specific Reserve. The amount of specific reserves 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 based on internal credit ratings. These loss factors are
primarily based on management's judgment of estimated credit losses inherent in
the loan portfolio as well as historical charge-off experience.
Unallocated Inherent Reserve. Management determines the unallocated portion of
the inherent loss reserve based on factors that cannot be associated with a
specific credit or loan categories. These factors include management's
subjective evaluation of local and national economic and business conditions,
portfolio concentration and changes in the character and size of the loan
portfolio. The unallocated portion of the inherent loss reserve reflects
management's attempt to ensure that the overall reserve appropriately reflects
a margin for the imprecision necessarily inherent in estimates of expected
credit losses.
Loans, leases and other extensions of credit deemed uncollectible are charged
to the reserve. Subsequent recoveries, if any, are credited to the reserve.
Actual losses may vary from current estimates and the amount of the provision
may be either greater than or less than actual net charge-offs. The related
provision for credit losses, which is charged to income, is the amount
necessary to adjust the reserve to the level determined through the above
process.
The control process maintained by the Credit Policy Group and the lending
staff, and the quarterly analysis of specific and inherent loss components are
the principal methods relied upon by management to ensure that changes in
estimated credit loss levels are adjusted on a timely basis. In addition to
Northern Trust's own experience, management also considers the experience of
peer institutions and regulatory guidance.
I. Fees on Standby Letters of Credit and Participations in Bankers
Acceptances. Fees on standby letters of credit are recognized in other
operating income on the straight-line method over the lives of the underlying
agreements. Commissions on bankers acceptances are recognized in other
operating income when received.
J. Buildings and Equipment. Buildings and equipment owned are carried at
original cost less accumulated depreciation. The charge for depreciation is
computed on the straight-line method based on the following range of lives:
buildings--10 to 30 years; equipment--4 to 10 years; and leasehold
improvements--lease term to 15 years. Leased properties meeting certain
criteria are capitalized and amortized using the straight-line method over the
lease period.
K. Other Real Estate Owned (OREO). OREO is comprised of commercial and
residential real estate properties acquired in partial or total satisfaction of
problem loans. OREO assets are carried at the lower of cost or fair value.
Losses identified at the time of acquisition of such properties are charged
against the reserve for credit losses. Subsequent write-downs that may be
required to the carrying value of these assets and losses realized from asset
sales are charged to other operating expenses.
L. Intangible Assets. Goodwill, arising from the excess of purchase price over
the fair value of net assets of acquired businesses, is being amortized using
the straight-line method primarily over fifteen years.
Other purchased intangible assets arising from acquisitions are amortized
using various methods over the estimated lives of the assets. Software is being
amortized using the straight-line method over the estimated useful life of the
asset, ranging from 3 to 7 years.
M. Trust Assets and Fees. Assets held in fiduciary or agency capacities are
not included in the consolidated balance sheet, since such items are not assets
of Northern Trust. Fees from trust activities are recorded on the accrual
basis.
N. Trust Security Settlement Receivables. These receivables represent other
items in the process of collection presented on behalf of trust clients.
O. Income Taxes. In accordance with SFAS No. 109, "Accounting for Income
Taxes," an asset and liability approach to accounting for income taxes is
followed. The objective is to recognize the amount of taxes payable or
refundable for the current year, and to recognize deferred tax assets and
liabilities resulting from temporary differences between the amounts reported
in the financial statements and the tax bases of assets and liabilities. The
measurement of tax assets and liabilities is based on enacted tax laws and
applicable tax rates.
- -- --
- -- --
55
Northern Trust Corporation
Notes to Consolidated Financial Statements
----------------------------------
P. Cash Flow Statements. Cash and cash equivalents have been defined as "Cash
and Due from Banks."
2. Reclassifications--Certain 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.
3. Securities--Securities Available For Sale. The following tables summarize
the amortized cost, fair values and remaining maturities of securities
available for sale.
Reconciliation of Amortized Cost to Fair Values of Securities Available for
Sale
- --------------------------------------------------------------------------------
December 31, 2000
- -----------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(In Millions) Cost Gains Losses Value
- -----------------------------------------------------------------------------
U.S. Government $ 174.0 $ .6 $ -- $ 174.6
Obligations of States and Political
Subdivisions 16.8 .1 1.2 15.7
Federal Agency 6,171.2 1.9 1.0 6,172.1
Preferred Stock 101.3 .2 .3 101.2
Other 14.2 -- -- 14.2
- -----------------------------------------------------------------------------
Total $6,477.5 $2.8 $2.5 $6,477.8
There were no outstanding off-balance sheet financial instruments used to
hedge available for sale securities as of December 31, 2000. As of December 31,
2000, stockholders' equity included a charge of $.9 million, net of the related
tax benefit, to recognize the depreciation on securities available for sale.
December 31, 1999
- -----------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(In Millions) Cost Gains Losses Value
- -----------------------------------------------------------------------------
U.S. Government $ 192.4 $ -- $ .4 $ 192.0
Obligations of States and Political
Subdivisions 16.8 -- 1.5 15.3
Federal Agency 5,109.7 .7 4.8 5,105.6
Preferred Stock 101.6 -- .3 101.3
Other 66.1 -- .3 65.8
- -----------------------------------------------------------------------------
Total $5,486.6 $ .7 $7.3 $5,480.0
Unrealized gains and losses on off-balance sheet financial instruments used to
hedge available for sale securities totaled $3.5 million and none,
respectively, as of December 31, 1999. Unrealized gains on these hedges are
reported as other assets in the consolidated balance sheet. As of December 31,
1999, stockholders' equity included a charge of $2.4 million, net of the
related tax benefit, to recognize the depreciation on securities available for
sale, net of the related hedges.
Remaining Maturity of Securities Available for Sale
- --------------------------------------------------------------------------------
December 31, 2000
- ----------------------------------------------------------
Amortized Fair
(In Millions) Cost Value
- ----------------------------------------------------------
Due in One Year or Less $6,348.5 $6,350.2
Due After One Year Through Five Years 13.0 13.0
Due After Five Years Through Ten Years 7.8 7.8
Due After Ten Years 108.2 106.8
- ----------------------------------------------------------
Total $6,477.5 $6,477.8
Mortgage-backed securities were included in the above table taking into account
anticipated future prepayments.
Securities Held to Maturity. The following tables summarize the book values,
fair values and remaining maturities of securities held to maturity.
Reconciliation of Book Values to Fair Values of Securities Held to Maturity
- --------------------------------------------------------------------------------
December 31, 2000
- ------------------------------------------------------------------------
Gross Gross
Book Unrealized Unrealized Fair
(In Millions) Value Gains Losses Value
- ------------------------------------------------------------------------
U.S. Government $ 55.0 $ -- $ -- $ 55.0
Obligations of States and Political
Subdivisions 435.7 9.4 -- 445.1
Federal Agency 5.5 .1 .1 5.5
Other 282.2 .1 5.8 276.5
- ------------------------------------------------------------------------
Total $778.4 $9.6 $ 5.9 $782.1
December 31, 1999
- ------------------------------------------------------------------------
Gross Gross
Book Unrealized Unrealized Fair
(In Millions) Value Gains Losses Value
- ------------------------------------------------------------------------
U.S. Government $ 55.1 $ -- $ .1 $ 55.0
Obligations of States and Political
Subdivisions 476.0 3.2 12.6 466.6
Federal Agency .9 -- .2 .7
Other 220.7 -- 2.6 218.1
- ------------------------------------------------------------------------
Total $752.7 $3.2 $15.5 $740.4
- -- --
- -- --
56
Northern Trust Corporation
Notes to Consolidated Financial Statements
----------------------------------
Remaining Maturity of Securities Held to Maturity
- --------------------------------------------------------------------------------
December 31,
2000
- -----------------------------------------------------
Book Fair
(In Millions) Value Value
- -----------------------------------------------------
Due in One Year or Less $ 83.4 $ 83.7
Due After One Year Through Five Years 125.3 129.1
Due After Five Years Through Ten Years 196.1 197.6
Due After Ten Years 373.6 371.7
- -----------------------------------------------------
Total $778.4 $782.1
Mortgage-backed securities were included in the above table taking into account
anticipated future prepayments.
Investment Security Gains and Losses. Realized gross security gains and losses,
which were included in the consolidated statement of income, totaled $.3
million and $.1 million, respectively in 2000. Realized gross security gains
totaled $.7 million in 1999 and $1.3 million in 1998.
4. Securities Purchased Under Agreements to Resell and Securities Sold Under
Agreements to Repurchase--Securities purchased under agreements to resell and
securities sold under agreements to repurchase are recorded at the amounts at
which the securities were acquired or sold plus accrued interest. To minimize
any potential credit risk associated with these transactions, the fair value of
the securities purchased or sold is continuously monitored, limits are set on
exposure with counterparties, and the financial condition of counterparties is
regularly assessed. It is Northern Trust's policy to take possession of
securities purchased under agreements to resell.
The following tables summarize information related to securities purchased
under agreements to resell and securities sold under agreements to repurchase.
Securities Purchased Under Agreements to Resell
- --------------------------------------------------------------------------------
December 31
- ---------------------------------------------------------------
($ In Millions) 2000 1999
- ---------------------------------------------------------------
Average Balance During the Year $269.9 $749.8
Average Interest Rate Earned During the
Year 6.19% 5.03%
Maximum Month-End Balance During
the Year 304.3 913.6
Securities Sold Under Agreements to Repurchase
- --------------------------------------------------------------------------------
December 31
- ---------------------------------------------------------------
($ In Millions) 2000 1999
- ---------------------------------------------------------------
Average Balance During the Year $1,476.4 $1,954.5
Average Interest Rate Paid During the Year 6.22% 4.90%
Maximum Month-End Balance During
the Year 3,353.9 3,573.2
5. Loans and Leases--Amounts outstanding in selected loan categories are shown
below.
December 31
- --------------------------------------------
(In Millions) 2000 1999
- --------------------------------------------
Domestic
Residential Real Estate $ 6,822.8 $ 6,257.7
Commercial 4,796.8 4,704.1
Broker 126.4 88.8
Commercial Real Estate 911.0 780.4
Personal 2,289.3 1,659.9
Other 1,207.1 566.5
Lease Financing 1,034.4 691.5
- --------------------------------------------
Total Domestic 17,187.8 14,748.9
International 956.8 625.6
- --------------------------------------------
Total Loans and Leases $18,144.6 $15,374.5
Other domestic and international loans include $1.4 billion at December 31,
2000, and $701.8 million at December 31, 1999 of overnight trust-related
advances in connection with next day security settlements. Lease financing
includes leveraged leases of $603.5 million at December 31, 2000, and $399.3
million at December 31, 1999.
Residential real estate loans held for sale totaled $5.6 million and $14.8
million at December 31, 2000 and 1999, respectively.
Refer to Note 20 for detail related to interest risk management instruments
used to hedge loans.
Nonperforming Assets. Presented below are outstanding amounts of nonaccrual
loans, restructured loans and OREO.
December 31
- --------------------------------------------
(In Millions) 2000 1999
- --------------------------------------------
Nonaccrual Loans
Domestic-Commercial Real Estate $ 1.8 $ 1.9
-Other 74.5 57.4
International -- --
- --------------------------------------------
Total Nonaccrual Loans 76.3 59.3
Restructured Loans -- --
Other Real Estate Owned 2.2 1.3
- --------------------------------------------
Total Nonperforming Assets $78.5 $60.6
- -- --
- -- --
57
Northern Trust Corporation
Notes to Consolidated Financial Statements
----------------------------------
Included in nonperforming assets were loans with a recorded investment at
December 31, 2000 and December 31, 1999 of $74.8 million and $56.3 million,
respectively, which were also classified as impaired. At December 31, 2000 and
December 31, 1999, impaired loans totaling $3.0 million and $7.9 million,
respectively, had no portion of the reserve for credit losses specifically
allocated to them, while $71.8 million at December 31, 2000 had a specific
allocated reserve of $24.3 million and $48.4 million at December 31, 1999 had a
specific allocated reserve of $15.0 million. Total recorded investment in
impaired loans averaged $60.6 million in 2000 and $33.5 million in 1999. Total
interest income recognized on impaired loans was $26 thousand and $235 thousand
in 2000 and 1999, respectively.
There were $11.5 million of unfunded loan commitments and standby letters of
credit issued to borrowers whose loans were classified as nonaccrual at
December 31, 2000, while there were $7.1 million at December 31, 1999.
Interest income that would have been recorded on domestic nonaccrual loans in
accordance with their original terms amounted to $6.5 million in 2000 and $3.2
million in both 1999 and 1998, compared with amounts that were actually
recorded of $26 thousand, $.2 million and $.3 million, respectively.
Write-downs and realized losses on OREO of $31 thousand in 2000, $.3 million
in 1999 and $52 thousand in 1998 were charged to other operating expenses.
6. Reserve for Credit Losses--Changes in the reserve for credit losses were as
follows:
(In Millions) 2000 1999 1998
- --------------------------------------------------------
Balance at Beginning of Year $150.9 $146.8 $147.6
- --------------------------------------------------------
Charge-Offs
Domestic (13.5) (9.8) (11.8)
International -- -- --
- --------------------------------------------------------
Total Charge-Offs (13.5) (9.8) (11.8)
Recoveries 1.5 1.4 1.8
- --------------------------------------------------------
Net Charge-Offs (12.0) (8.4) (10.0)
Provision for Credit Losses 24.0 12.5 9.0
Reserve Related to Acquisitions -- -- .2
- --------------------------------------------------------
Balance at End of Year $162.9 $150.9 $146.8
7. Buildings and Equipment--Summary of buildings and equipment is presented
below.
December 31, 2000
- ----------------------------------------------------------------------------
Net
Original Accumulated Book
(In Millions) Cost Depreciation Value
- ----------------------------------------------------------------------------
Land $ 37.9 $ -- $ 37.9
Buildings 155.8 43.7 112.1
Equipment 336.0 149.7 186.3
Leasehold Improvements 88.5 33.7 54.8
Buildings Leased under
Capital Leases (Note 8) 76.6 19.6 57.0
- ----------------------------------------------------------------------------
Total Buildings and Equipment $694.8 $246.7 $448.1
December 31, 1999
- ----------------------------------------------------------------------------
Net
Original Accumulated Book
(In Millions) Cost Depreciation Value
- ----------------------------------------------------------------------------
Land $ 37.9 $ -- $ 37.9
Buildings 111.8 40.5 71.3
Equipment 290.8 129.7 161.1
Leasehold Improvements 70.0 28.1 41.9
Buildings Leased under Capital Leases (Note 8) 86.6 18.4 68.2
- ----------------------------------------------------------------------------
Total Buildings and Equipment $597.1 $216.7 $380.4
The charge for depreciation, which includes amortization of assets recorded
under capital leases, amounted to $67.8 million in 2000, $58.2 million in 1999
and $52.4 million in 1998.
- -- --
- -- --
58
Northern Trust Corporation
Notes to Consolidated Financial Statements
----------------------------------
8. Lease Commitments--At December 31, 2000, Northern Trust was obligated under
a number of non-cancelable operating leases for premises and equipment. Certain
leases contain rent escalation clauses, based on market indices or increases in
real estate taxes and other operating expenses and renewal option clauses
calling for increased rentals. There are no restrictions imposed by any lease
agreement regarding the payment of dividends, debt financing or Northern Trust
entering into further lease agreements. Minimum annual lease commitments as of
December 31, 2000 for all non-cancelable operating leases are as follows:
Future Minimum
(In Millions) Lease Payments
- --------------------------------------------
2001 $ 37.8
2002 38.4
2003 39.9
2004 37.2
2005 36.2
Later Years 368.4
- --------------------------------------------
Total Minimum Lease Payments $557.9
Net rental expense for all operating leases is included in occupancy expense
and amounted to $36.9 million in 2000, $31.5 million in 1999 and $27.8 million
in 1998.
The building and land utilized at the Chicago operations center has been
leased under an agreement that qualifies as a capital lease. The long-term
financing for the property was provided by the Corporation and the Bank. In the
event of sale or refinancing, the Bank will receive all proceeds except for 58%
of any proceeds in excess of the original project costs which will be paid to
the lessor.
In January 2000, the Bank closed on an agreement to purchase a building and
adjacent land located across the street from the Chicago operations center for
$23.5 million. The building contains approximately 340,000 square feet of
rentable office space. Prior to the purchase date, the Bank leased under the
agreement approximately 130,000 square feet of this building. At dates prior to
the purchase, the present value of the land and building is reported in
buildings and equipment, and the related purchase obligation is included in
long-term debt in the consolidated balance sheet.
The following table reflects the future minimum lease payments required under
capital leases, net of any payments received on the long-term financing, and
the present value of net capital lease obligations at December 31, 2000.
Future Minimum
(In Millions) Lease Payments, Net
- -------------------------------------------------------
2001 $ 1.9
2002 1.9
2003 1.9
2004 1.9
2005 1.9
Later Years 10.9
- -------------------------------------------------------
Total Minimum Lease Payments, net 20.4
Less: Amount Representing Interest 7.3
- -------------------------------------------------------
Net Present Value under Capital Lease Obligations$13.1
9. Senior Notes, Long-Term Debt and Lines of Credit--Senior Notes. A summary of
Bank senior notes outstanding at December 31 is presented below.
($ In Millions) Rate 2000 1999
- ---------------------------------------------------
Bank-Senior Notes (a) (b)
Fixed Rate Due 2000 5.10% $ -- $100.0
Fixed Rate Due 2001 6.30 50.0 50.0
Fixed Rate Due 2003 6.625 200.0 200.0
Fixed Rate Due 2004 6.65 150.0 150.0
Fixed Rate Due 2005 7.50 100.0 --
- ---------------------------------------------------
Total Bank Senior Notes $500.0 $500.0
Long-Term Debt. Summary of long-term debt outstanding at December 31 is
presented below.
($ In Millions) 2000 1999
- ---------------------------------------------------
Corporation-Subordinated Debt
9.20% Notes due May 2001 (a) $ 25.0 $ 25.0
Bank-Subordinated Debt
6.50% Notes due May 2003 (a) 100.0 100.0
6.70% Notes due Sept. 2005 (a) (b) 100.0 100.0
7.30% Notes due Sept. 2006 (a) (b) 100.0 100.0
6.25% Notes due June 2008 (a) (b) 100.0 100.0
7.10% Notes due Aug. 2009 (a) (b) 200.0 200.0
- ---------------------------------------------------
Subordinated Long-Term Debt 625.0 625.0
- ---------------------------------------------------
Capital Lease Obligations (c) 13.1 11.0
Building Purchase Obligation (c) -- 23.4
- ---------------------------------------------------
Other Long-Term Debt 13.1 34.4
- ---------------------------------------------------
Total Long-Term Debt $638.1 $659.4
- ---------------------------------------------------
Long-Term Debt Qualifying
as Risk-Based Capital $520.0 $565.0
(a) Not redeemable prior to maturity.
(b) Under the terms of its current Offering Circular, the Bank has the ability
to offer from time to time its senior bank notes in an aggregate principal
amount of up to $3.7 billion at any one time outstanding and up to an
additional $300 million of subordinated notes. Each senior note will mature
from 30 days to fifteen years and each subordinated note will mature from
five years to fifteen years, following its date of original issuance. Each
note will mature on such date as selected by the initial purchaser and
agreed to by the Bank.
(c) Refer to Note 8.
- -- --
- -- --
59
Northern Trust Corporation
Notes to Consolidated Financial Statements
----------------------------------
Lines of Credit. The Corporation currently maintains a commercial paper back-up
line of credit with three banks totaling $50 million. The termination date is
November 2001. The commitment fee is determined by a pricing matrix that is
based on the long-term senior debt ratings of the Corporation. Currently, the
annual fee is one-tenth of 1% of the commitment. There were no borrowings under
commercial paper back-up facilities during 2000 or 1999.
10. Debt--Floating Rate Capital Securities. The following table summarizes the
book value of Floating Rate Capital Securities outstanding.
December 31
- ------------------------------------------------------------
(In Millions) 2000 1999
- ------------------------------------------------------------
$150 Million Series A due January 15, 2027 $148.7 $148.6
$120 Million Series B due April 15, 2027 118.9 118.9
- ------------------------------------------------------------
Total Debt-Floating Rate Capital Securities $267.6 $267.5
In January 1997, the Corporation issued $150 million of Floating Rate Capital
Securities, Series A, through a statutory business trust wholly-owned by the
Corporation ("NTC Capital I"). In April 1997, the Corporation also issued,
through a separate wholly-owned statutory business trust ("NTC Capital II"),
$120 million of Floating Rate Capital Securities, Series B. The sole assets of
the trusts are Subordinated Debentures of Northern Trust Corporation which have
the same interest rates and maturity dates as the corresponding distribution
rates and redemption dates of the Floating Rate Capital Securities. The
outstanding principal amounts of the Subordinated Debentures held by NTC
Capital I and NTC Capital II are $154.6 million and $123.7 million,
respectively. The Series A Securities were issued at a discount to yield 60.5
basis points above the three-month London Interbank Offered Rate (LIBOR), while
the Series B Securities were issued at a discount to yield 67.9 basis points
above the three-month LIBOR. Both Series A and B Securities qualify as tier 1
capital for regulatory purposes.
The Corporation has fully, irrevocably and unconditionally guaranteed all
payments due on such Capital Securities. The holders of the Capital Securities
are entitled to receive preferential cumulative cash distributions quarterly in
arrears (based on the liquidation amount of $1,000 per Capital Security) at an
interest rate equal to the rate on the corresponding Subordinated Debentures.
The interest rate on the Series A and Series B securities is equal to three-
month LIBOR plus 0.52% and 0.59%, respectively. Subject to certain exceptions,
the Corporation has the right to defer payment of interest on the Subordinated
Debentures at any time or from time to time for a period not exceeding 20
consecutive quarterly periods provided that no extension period may extend
beyond the stated maturity date. If interest is deferred on the Subordinated
Debentures, distributions on the Capital Securities will also be deferred and
the Corporation will not be permitted, subject to certain exceptions, to pay or
declare any cash distributions with respect to the Corporation's capital stock
or debt securities that rank the same as or junior to the Subordinated
Debentures, until all past due distributions are paid. The Subordinated
Debentures are unsecured and subordinated to substantially all of the
Corporation's existing indebtedness.
The Corporation has the right to redeem the Series A Subordinated Debentures
on or after January 15, 2007 and the Series B Subordinated Debentures on or
after April 15, 2007, in each case in whole or in part. In addition, the
Corporation has the right to redeem the Subordinated Debentures held by either
trust in whole but not in part at any time within 90 days following certain
defined tax or regulatory capital treatment changes, at a price equal to the
principal amount plus accrued and unpaid interest.
11. Stockholders' Equity--Preferred Stock. The Corporation is authorized to
issue 10,000,000 shares of preferred stock without par value. The Board of
Directors of the Corporation is authorized to fix the particular preferences,
rights, qualifications and restrictions for each series of preferred stock
issued. A summary of preferred stock outstanding is presented below.
December 31
- ------------------------------------------------------
(In Millions) 2000 1999
- ------------------------------------------------------
Auction Rate Preferred Stock Series C
600 shares @ $100,000 per share $ 60.0 $ 60.0
Flexible Auction Rate Cumulative
Preferred Stock Series D
600 shares @ $100,000 per share 60.0 60.0
- ------------------------------------------------------
Total Preferred Stock $120.0 $120.0
Series C--In 1987, 600 shares of Auction Rate Preferred Stock Series C (APS)
were issued, with a $100,000 per share stated value. Dividends on the shares of
APS are cumulative. Rates are determined every 49 days by Dutch auction unless
the Corporation fails to pay a dividend or redeem any shares for which it has
given notice of redemption, in which case the dividend rate will be set at 175%
of the 60-day "AA"
- -- --
- -- --
60
Northern Trust Corporation
Notes to Consolidated Financial Statements
----------------------------------
Composite Commercial Paper Rate. The dividend rate in any auction will not
exceed a percentage determined by the prevailing credit rating of the APS. The
current maximum dividend rate is 120% of the 60-day "AA" Composite Commercial
Paper Rate. No dividends other than dividends payable in junior stock, such as
common stock, may be paid on common stock until full cumulative dividends on
the APS have been paid. The average rate for this issue as declared during 2000
was 4.77%. The shares of APS are redeemable at the option of the Corporation,
in whole or in part, on any Dividend Payment Date at $100,000 per share, plus
accrued and unpaid dividends.
Series D--In 1990, 600 shares of Flexible Auction Rate Cumulative Preferred
Stock Series D (FAPS) were issued with a $100,000 per share stated value. Each
dividend period contains 49 days (the "Short-Term Dividend Period") or a number
of days greater than 49 days (as selected by the Term Selection Agent) which is
divisible by seven (the "Long-Term Dividend Period"). Rates for each dividend
period are determined by Dutch auction unless the Corporation fails to pay the
full amount of any dividend or redemption. The dividend rate in any auction
will not exceed a percentage (currently 125%), determined by the prevailing
credit rating of the FAPS, of the 60-day "AA" Composite Commercial Paper Rate
or the Reference Rate, which rate is the Composite Commercial Paper Rate or the
Treasury Rate, as appropriate for the length of each Short-Term or Long-Term
Dividend Period, respectively. If the Corporation fails to pay the full amount
of any dividend or redemption, each dividend period thereafter (until auctions
are resumed) will be a Short-Term Dividend Period and the dividend rate will be
250% of the 60-day "AA" Composite Commercial Paper Rate; additional dividends
will accrue for the balance of any Long-Term Dividend Period in which such a
failure to pay occurs. No dividends other than dividends payable in junior
stock, such as common stock, may be paid on common stock until full cumulative
dividends on the FAPS have been paid. The average rate for this issue as
declared during 2000 was 4.80%. The shares of FAPS are redeemable at the option
of the Corporation, in whole or in part, at $100,000 per share plus accrued and
unpaid dividends.
Preferred Stock Purchase Rights--On July 21, 1998 the Board of Directors of the
Corporation declared a dividend distribution of one Preferred Stock Purchase
Right for each outstanding share of the Corporation's common stock issuable to
stockholders of record at the close of business on October 31, 1999 (the
expiration date of a prior 1989 Rights Agreement). As a result of anti-dilution
provisions, each share of common stock now has one-half of one Right associated
with it. Each Right is exercisable for one one-hundredth of a share of Series A
Junior Participating Preferred Stock at an exercise price of $330.00, subject
to adjustment. The Rights will be evidenced by the common stock certificates
and will not be exercisable or transferable apart from the common stock until
twenty days after a person or group acquires 15 percent or more of the shares
of common stock then outstanding or announces a tender or exchange offer which
if consummated would result in ownership of 15 percent or more of the
outstanding common stock.
In the event that any person or group acquires 15 percent or more of the
outstanding shares of common stock, each Right entitles the holder, other than
such person or group, to purchase that number of shares of common stock of the
Corporation having a market value of twice the exercise price of the Right. At
any time thereafter if the Corporation consummates a business combination
transaction or sells substantially all of its assets, each Right entitles the
holder, other than the person or group acquiring 15 percent or more of the
outstanding shares of common stock, to purchase that number of shares of
surviving company stock which at the time of the transaction would have a
market value of twice the exercise price of the Right.
The Rights do not have voting rights and are redeemable at the option of the
Corporation at a price of one-half of one cent per Right at any time prior to
the close of business on the twentieth day following announcement by the
Corporation of the acquisition of 15 percent or more of the outstanding common
stock by a person or group. Unless earlier redeemed, the Rights will expire on
October 31, 2009.
Common Stock. In November 1999, the Corporation declared a two-for-one split of
its common stock to be effected by means of a 100% stock distribution. One
share for each share held by shareholders of record on November 29, 1999 was
distributed on December 9, 1999. In May 1999, the Corporation announced that it
increased its common stock buyback authorization by approximately 10.0 million
(split-adjusted) shares. These shares may be repurchased from time to time in
open market purchases, and the shares would be used primarily for management
incentive plans and other corporate purposes. Under the current buyback
program, the Corporation may purchase up to 7.1 million shares after December
31, 2000.
- -- --
- -- --
61
Northern Trust Corporation
Notes to Consolidated Financial Statements
----------------------------------
An analysis of changes in the number of shares of common stock outstanding
follows:
2000 1999 1998
- -------------------------------------------------------------------------------
Balance at January 1 222,161,934 111,214,740 111,367,436
Distribution of Two-for-One Stock Split -- 111,214,740 --
Employee Benefit Plans:
Incentive Plan and Awards 490,397 347,518 302,677
Stock Options Exercised 2,364,071 2,518,802 1,170,840
Treasury Stock Purchased (2,784,007) (3,133,866) (1,626,213)
- -------------------------------------------------------------------------------
Balance at December 31 222,232,395 222,161,934 111,214,740
Note: 1999 share activity reflects the December 1999 two-for-one stock split
effected by means of a 100% stock distribution.
12. Income Taxes--The table below reconciles the total provision for income
taxes recorded in the consolidated statement of income with the amounts
computed at the statutory federal tax rate of 35%.
(In Millions) 2000 1999 1998
- ---------------------------------------------------
Tax at Statutory Rate $255.5 $215.8 $189.9
Tax Exempt Income (9.4) (10.5) (10.6)
State Taxes, net 6.1 7.5 8.9
Other (7.2) (1.3) .6
- ---------------------------------------------------
Provision for Income Taxes $245.0 $211.5 $188.8
The components of the consolidated provision for income taxes for each of the
three years ended December 31, are as follows:
(In Millions) 2000 1999 1998
- -------------------------------------------------
Current Tax Provision:
Federal $118.9 $ 92.9 $113.1
State 10.3 8.4 7.6
Foreign 27.4 14.9 11.1
- -------------------------------------------------
Total 156.6 116.2 131.8
- -------------------------------------------------
Deferred Tax Provision:
Federal 89.3 92.2 51.0
State (.9) 3.1 6.0
- -------------------------------------------------
Total 88.4 95.3 57.0
- -------------------------------------------------
Provision for Income Taxes $245.0 $211.5 $188.8
In addition to the amounts shown in the above tables, tax liabilities or
(benefits) have been recorded directly to stockholders' equity for the
following items:
(In Millions) 2000 1999
- --------------------------------------------------------------------------
Current Tax Benefit for Employee Stock
Options and Other Employee Benefit Plans $(45.9) $(30.4)
Deferred Tax Effect of Unrealized Security Gains (Losses) 1.2 (.8)
Deferred Tax Effect of Minimum
Pension Liabilities (1.0) (2.3)
Deferred taxes result from temporary differences between the amounts reported
in the consolidated financial statements and the tax bases of assets and
liabilities. Deferred tax liabilities and assets have been computed as follows:
December 31
- ------------------------------------------------------------
(In Millions) 2000 1999
- ------------------------------------------------------------
Deferred Tax Liabilities:
Lease Financing $347.5 $264.3
Software Development 67.7 57.4
Accumulated Depreciation 19.8 14.2
State Taxes, net 14.8 20.5
Other Liabilities 10.8 10.6
- ------------------------------------------------------------
Gross Deferred Tax Liabilities 460.6 367.0
- ------------------------------------------------------------
Deferred Tax Assets:
Reserve for Credit Losses 57.0 52.8
Compensation and Benefits 31.9 26.0
Other Assets 21.6 17.3
- ------------------------------------------------------------
Gross Deferred Tax Assets 110.5 96.1
Valuation Reserve -- --
- ------------------------------------------------------------
Deferred Tax Assets, net of Valuation Reserve 110.5 96.1
- ------------------------------------------------------------
Net Deferred Tax Liabilities $350.1 $270.9
At December 31, 2000, Northern Trust had a federal net operating loss
carryforward of $2.7 million resulting from the acquisition of businesses that
had existing net operating loss carryforwards. These carryforwards are
available to reduce future tax return liabilities. In addition, Northern Trust
had state net operating loss and tax credit carryforwards of $354.3 million and
$1.2 million, respectively. The carryforwards are subject to various
limitations imposed by tax law.
- -- --
- -- --
62
Northern Trust Corporation
Notes to Consolidated Financial Statements
----------------------------------
13. Net Income Per Common Share Computations--The computation of net income per
common share is presented below.
($ In Millions Except Per Share
Information) 2000 1999 1998
- ------------------------------------------------------------------------------
Basic Net Income Per Common Share
Net Income $485.1 $405.0 $353.9
Less: Dividends on Preferred Stock (5.7) (4.8) (4.9)
- ------------------------------------------------------------------------------
Net Income Applicable to Common Stock $479.4 $400.2 $349.0
Average Number of Common Shares
Outstanding 220,961,477 221,673,316 221,366,976
Basic Net Income Per Common Share $ 2.17 $ 1.81 $ 1.58
- ------------------------------------------------------------------------------
Diluted Net Income Per Common Share
Net Income Applicable to Common Stock $479.4 $400.2 $349.0
Average Number of Common Shares
Outstanding 220,961,477 221,673,316 221,366,976
Plus: Dilutive Potential Common Shares
Stock Options 7,181,145 6,021,348 6,464,554
Performance Shares 1,677,531 1,457,993 1,229,968
Other 793,158 721,371 672,618
- ------------------------------------------------------------------------------
Average Common and Potential Common
Shares 230,613,311 229,874,028 229,734,116
- ------------------------------------------------------------------------------
Diluted Net Income Per Common Share $ 2.08 $ 1.74 $ 1.52
Note: Per share data and average number of shares of common stock outstanding
have been restated to give effect to the two-for-one common stock split
effected by means of a 100% stock distribution on December 9, 1999.
14. Restrictions on Subsidiary Dividends and Loans or Advances--Provisions of
state and federal banking laws restrict the amount of dividends that can be
paid to the Corporation by its banking subsidiaries. Under applicable state and
federal laws, no dividends may be paid in an amount greater than the net
profits then on hand, subject to other applicable provisions of law. In
addition, prior approval from the relevant federal banking regulator is
required if dividends declared by any of the Corporation's banking subsidiaries
in any calendar year will exceed its net profits (as defined) for that year,
combined with its retained net profits for the preceding two years. Based on
these regulations, the Corporation's banking subsidiaries, without regulatory
approval, could declare dividends during 2001 equal to their 2001 eligible net
profits (as defined) plus $486.6 million. The ability of each banking
subsidiary to pay dividends to the Corporation may be further restricted as a
result of regulatory policies and guidelines relating to dividend payments and
capital adequacy.
State and federal laws limit the transfer of funds by a banking subsidiary to
the Corporation and certain of its affiliates in the form of loans or
extensions of credit, investments or purchases of assets. Transfers of this
kind to the Corporation or a nonbanking subsidiary by a banking subsidiary are
each limited to 10% of the banking subsidiary's capital and surplus with
respect to each affiliate and to 20% in the aggregate, and are also subject to
certain collateral requirements. These transactions, as well as other
transactions between a banking subsidiary and the Corporation or its
affiliates, must also be on terms substantially the same as, or at least as
favorable as, those prevailing at the time for comparable transactions with
non-affiliated companies or, in the absence of comparable transactions, on
terms, or under circumstances, including credit standards, that would be
offered to, or would apply to, non-affiliated companies.
15. Other Operating Income--Nonrecurring gains in 2000 totaled $4.5 million
resulting from the sale of assets. In 1999 and 1998, nonrecurring gains totaled
$4.0 million and $3.8 million, respectively.
- -- --
- -- --
Northern Trust Corporation
63
Notes to Consolidated Financial Statements
----------------------------------
16. Net Interest Income--The components of net interest income were as follows:
(In Millions) 2000 1999 1998
- ------------------------------------------------------------------------------
Interest Income
Loans and Leases $1,154.6 $ 938.6 $ 884.4
Securities-Taxable 580.6 379.4 383.1
-Non-Taxable 26.1 26.3 24.9
Time Deposits with Banks 206.0 164.3 155.0
Federal Funds Sold and Securities Purchased under
Agreements
to Resell and Other 43.8 60.0 55.7
- ------------------------------------------------------------------------------
Total Interest Income 2,011.1 1,568.6 1,503.1
- ------------------------------------------------------------------------------
Interest Expense
Deposits 830.3 591.9 580.4
Federal Funds Purchased 167.8 161.0 139.8
Securities Sold under Agreements to Repurchase 91.8 95.8 80.2
Commercial Paper 8.8 7.3 8.0
Other Borrowings 245.2 109.2 132.3
Senior Notes 34.4 30.6 36.5
Long-Term Debt 44.8 37.9 31.8
Debt-Floating Rate Capital Securities 19.4 16.1 16.9
- ------------------------------------------------------------------------------
Total Interest Expense 1,442.5 1,049.8 1,025.9
- ------------------------------------------------------------------------------
Net Interest Income $ 568.6 $ 518.8 $ 477.2
17. Other Operating Expenses--The components of other operating expenses were
as follows:
(In Millions) 2000 1999 1998
- -----------------------------------------------------------------
Business Promotion $ 54.6 $ 42.2 $ 36.4
Outside Services Purchased 136.4 118.8 86.1
Telecommunications 17.9 17.8 15.4
Postage and Supplies 28.8 26.8 23.3
Software Amortization 61.3 48.1 40.0
Goodwill and Other Intangibles Amortization 15.6 14.2 14.1
Other Expense 78.1 38.1 42.3
- -----------------------------------------------------------------
Total Other Operating Expenses $392.7 $306.0 $257.6
Software, goodwill and other intangible assets are included in other assets in
the consolidated balance sheet. Software totaled $267.5 million at December 31,
2000 and $219.0 million at December 31, 1999. Goodwill totaled $98.0 million at
December 31, 2000 and $89.1 million at December 31, 1999. Other intangibles
totaled $41.8 million at December 31, 2000 and $39.1 million at December 31,
1999.
18. Employee Benefits--Pension. A noncontributory qualified pension plan covers
substantially all employees. Assets held by the plan consist primarily of
listed stocks and corporate bonds.
Northern Trust also maintains a noncontributory nonqualified pension plan for
participants whose retirement benefit payments under the qualified plan are
expected to exceed the limits imposed by federal tax law. Northern Trust has a
nonqualified trust, referred to as a "Rabbi" Trust, to fund benefits in excess
of those permitted in certain of its qualified plans. The primary purpose of
the trust is to fund nonqualified retirement benefits. This arrangement offers
participants a degree of assurance for payment of benefits in excess of those
permitted in the related qualified plans. The assets remain subject to the
claims of creditors and are not the property of the employees. Therefore, they
are accounted for as corporate assets and are included in other assets in the
consolidated balance sheet.
- -- --
- -- --
64
Northern Trust Corporation
Notes to Consolidated Financial Statements
----------------------------------
The following tables set forth the status and the net periodic pension cost of
the domestic qualified and nonqualified pension benefit plans for 2000 and
1999. Prior service costs and unrecognized net assets established at January 1,
1986 are being amortized on a straight-line basis over 13.2 years.
Plan Status
- --------------------------------------------------------------------------------
Qualified Nonqualified
Plan Plan
- -------------------------------------------------------------------------------
September 30
- -------------------------------------------------------------------------------
($ In Millions) 2000 1999 2000 1999
- -------------------------------------------------------------------------------
Accumulated Benefit Obligation $183.6 $161.9 $ 38.0 $ 30.4
- -------------------------------------------------------------------------------
Projected Benefit 216.7 200.4 48.8 40.7
Plan Assets at Fair Value 372.0 305.3 -- --
- -------------------------------------------------------------------------------
Plan Assets In Excess of (Less Than) Projected
Benefit Obligations 155.3 104.9 (48.8) (40.7)
Unrecognized Net Liability .3 .4 -- --
Unrecognized Net Loss (Gain) (88.4) (40.3) 35.5 32.6
Unrecognized Prior Service Benefit (1.5) (1.7) (3.3) (3.7)
Valuation Adjustment (.1) (.2) -- --
- -------------------------------------------------------------------------------
Prepaid (Accrued) Pension Cost at September 30 65.6 63.1 (16.6) (11.8)
Net Funding October to December 13.8 6.6 .8 (1.2)
Additional Minimum Liability at December 31 -- -- (19.8) (17.2)
- -------------------------------------------------------------------------------
Prepaid (Accrued) Pension Cost at December 31 $ 79.4 $ 69.7 $(35.6) $(30.2)
- -------------------------------------------------------------------------------
Assumptions:
Discount Rates 8.00% 7.75% 6.00% 6.00%
Rate of Increase in Compensation Level 5.40 5.40 5.40 5.40
Expected Long-Term Rate of Return on Assets 9.00 9.00 N/A N/A
Net Periodic Pension Cost
- -------------------------------------------------------------------------------
Qualified Nonqualified
Plan Plan
- -------------------------------------------------------------------------------
(In Millions) 2000 1999 2000 1999
- -------------------------------------------------------------------------------
Service Cost $ 12.8 $ 13.2 $ 1.7 $ 1.7
Interest Cost 15.9 16.4 2.5 1.9
Expected Return on Plan Assets (24.0) (22.6) N/A N/A
Amortization:
Net Loss -- 1.8 2.5 1.5
Transition Asset -- (1.4) -- --
Prior Service Cost (Benefit) (.2) (.5) (.3) .3
- -------------------------------------------------------------------------------
Net Periodic Pension Cost $ 4.5 $ 6.9 $ 6.4 $ 5.4
Change in Benefit Obligation
- --------------------------------------------------------------------------------
Qualified Nonqualified
Plan Plan
- ------------------------------------------------------
(In Millions) 2000 1999 2000 1999
- ------------------------------------------------------
Beginning Balance $200.4 $231.2 $ 40.7 $ 30.4
Service Cost 12.8 13.2 1.7 1.7
Interest Cost 15.9 16.4 2.5 1.9
Actuarial (Gain) Loss 8.2 (33.2) 9.0 15.2
Benefits Paid (20.6) (31.6) (5.1) (3.5)
Plan Change -- 4.4 -- (5.0)
- ------------------------------------------------------
Ending Balance $216.7 $200.4 $ 48.8 $ 40.7
Change in Qualified Plan Assets
- --------------------------------------------------------------------------------
(In Millions) 2000 1999
- ---------------------------------------------------------
Fair Value of Assets at Beginning
of Plan Year $305.3 $284.0
Actual Return on Assets 79.0 52.9
Employer Contribution 8.3 --
Benefits Paid (20.6) (31.6)
- ---------------------------------------------------------
Fair Value of Assets at End of Plan Year $372.0 $305.3
Pension expense for 1998 was $6.7 million and $4.3 million for the qualified
and nonqualified plans, respectively.
Total assets in the "Rabbi" Trust related to the nonqualified pension plan at
December 31, 2000 and 1999 amounted to $23.3 million and $19.8 million,
respectively.
A defined benefit and a defined contribution plan is maintained for the London
Branch employees. At December 31, 2000, the fair value of assets and the
projected benefit obligation of the defined benefit Plan totaled approximately
$16.9 million and $16.5 million, respectively. At December 31, 1999, the fair
value of assets and the projected benefit obligation were $14.6 million and
$13.2 million, respectively. Pension expense for 2000 and 1999 was $2.2 million
and $2.1 million, respectively.
Thrift Incentive Plan. The Corporation and its subsidiaries have a defined
contribution Thrift Incentive Plan covering substantially all employees. The
corporate contribution is contingent upon the level of employee contribution
and meeting a predefined earnings target for the year. The maximum corporate
contribution equals 4% of an employee's salary. The estimated contribution to
this plan is charged to employee benefits and totaled $13.2 million in 2000,
$10.7 million in 1999 and $10.4 million in 1998.
- -- --
- -- --
65
Northern Trust Corporation
Notes to Consolidated Financial Statements
----------------------------------
Employee Stock Ownership Plan (ESOP). A leveraged ESOP in which substantially
all employees of Northern Trust are eligible to participate was established in
1989. Of the original 18 million shares in the ESOP Trust, 17.1 million shares
have been allocated as of December 31, 2000. The remaining ESOP shares will be
allocated December 31, 2001. The Corporation has committed to make an
additional contribution of $5.4 million in cash or shares of common stock in
each of the years 2002 and 2003.
Dividends paid on unallocated shares held in the ESOP Trust are used for debt
service on the ESOP notes. Although the original debt used to purchase the ESOP
shares has been repaid, a loan provided by the Corporation in 1996 to refinance
a portion of the original debt will continue to be repaid through 2001.
Compensation expense is accounted for based primarily on the amount of cash
paid by Northern Trust to the ESOP for principal payments on the ESOP notes.
The ESOP shares not yet allocated to individual accounts are treated as
deferred compensation and accounted for as a reduction of stockholders' equity.
The following table presents information related to the ESOP.
(In Millions) 2000 1999
- --------------------------------------------------------------------------
Total ESOP Compensation Expense $5.9 $4.3
Dividends and Interest on Unallocated ESOP Shares Used for Debt
Service 1.2 1.5
Other Postretirement Benefits. Northern Trust maintains an unfunded
postretirement health care plan. Employees retiring under the provisions of The
Northern Trust Pension Plan who have attained 15 years of service are eligible
for postretirement health care coverage. These benefits are provided either
through an indemnity plan, subject to deductibles, co-payment provisions and
other limitations, or through health maintenance organizations. The provisions
may be changed at the discretion of Northern Trust, which also reserves the
right to terminate these benefits at any time.
The following tables set forth the plan status at December 31 and the net
periodic postretirement benefit cost of the domestic postretirement health care
plan for 2000 and 1999. The transition obligation at January 1, 1993 is being
amortized to expense over a twenty-year period.
Plan Status
- --------------------------------------------------------------------------------
(In Millions) 2000 1999
- -------------------------------------------------------
Accumulated Postretirement Benefit Obligation
(APBO) Measured at September 30:
Retirees and Dependents $15.5 $16.1
Actives Eligible for Benefits 3.6 3.4
Actives Not Yet Eligible 10.9 9.9
- -------------------------------------------------------
Total APBO 30.0 29.4
Unamortized Transition Obligation (7.0) (7.5)
Unrecognized Net Gain (Loss) .3 (.7)
Prior Service Cost (.3) (.4)
- -------------------------------------------------------
Net Postretirement Benefit Liability $23.0 $20.8
Net Periodic Postretirement Benefit Cost
- -------------------------------------------------------
(In Millions) 2000 1999
- -------------------------------------------------------
Service Cost $ .9 $ 1.0
Interest Cost 2.3 2.1
Amortization--Transition Obligation .6 .6
- -------------------------------------------------------
Net Periodic Postretirement Benefit Cost $ 3.8 $ 3.7
Change in Postretirement Benefit Obligation
- -------------------------------------------------------
(In Millions) 2000 1999
- -------------------------------------------------------
Beginning Balance $29.4 $31.5
Service Cost .9 1.0
Interest Cost 2.3 2.1
Actuarial Gain (.6) (3.7)
Benefits Paid (2.0) (1.9)
Plan Change -- .4
- -------------------------------------------------------
Ending Balance $30.0 $29.4
Postretirement health care expense for 1998 was $3.6 million.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 8.0% at December 31, 2000 and 7.75% at
December 31, 1999. For measurement purposes, a 6.9% annual increase in the cost
of covered health care benefits was assumed for 2001. This rate is assumed to
decrease gradually to 5.5% in 2003 and remain at that level thereafter. The
health care cost trend rate assumption has a significant effect on the amounts
reported. For example, increasing or decreasing the assumed health care trend
rate by one percentage point in each year would have the following effect.
1--Percentage 1--Percentage
(In Millions) Point Increase Point Decrease
- ---------------------------------------------------------------------------
Effect on Total Service and Interest Cost
Components $ .1 $ (.1)
Effect on Postretirement Benefit Obligation 1.0 (1.0)
- -- --
- -- --
66
Northern Trust Corporation
Notes to Consolidated Financial Statements
----------------------------------
19. Contingent Liabilities--Because of the nature of its activities, Northern
Trust is subject to pending and threatened legal actions that arise in the
normal course of business. 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 will have a material effect, either individually or
in the aggregate, on the consolidated financial position or results of
operations.
20. Off-Balance Sheet Financial Instruments--Commitments and Letters of Credit.
Northern Trust, in the normal course of business, enters into various types of
commitments and issues letters of credit to meet the liquidity and credit
enhancement needs of its clients. Credit risk is the principal risk associated
with these instruments. The contractual amounts of these instruments represent
the credit risk should the instrument be fully drawn upon and the client
default. To control the credit risk associated with entering into commitments
and issuing letters of credit, Northern Trust subjects such activities to the
same credit quality and monitoring controls as its lending activities.
Commitments and letters of credit consist of the following:
Legally Binding Commitments to Extend Credit generally have fixed expiration
dates or other termination clauses. Since a significant portion of the
commitments are expected to expire without being drawn upon, the total
commitment amount does not necessarily represent future loans or liquidity
requirements.
Participations in Bankers Acceptances obligate Northern Trust, in the event of
default by the counterparty, to reimburse the holder of the acceptance an
amount equal to its participation in the acceptance.
Commercial Letters of Credit are instruments issued by Northern Trust on
behalf of its clients that authorize a third party (the beneficiary) to draw
drafts up to a stipulated amount under the specified terms and conditions of
the agreement. Commercial letters of credit are issued primarily to facilitate
international trade.
Standby Letters of Credit obligate Northern Trust to meet certain financial
obligations of its clients, if, under the contractual terms of the agreement,
the clients are unable to do so. These instruments are primarily issued to
support public and private financial commitments, including commercial paper,
bond financing, initial margin requirements on futures exchanges and similar
transactions.
The following table shows the contractual amounts of commitments and letters
of credit.
Commitments and Letters of Credit
- --------------------------------------------------------------------------------
December 31
- ------------------------------------------------------------------
(In Millions) 2000 1999
- ------------------------------------------------------------------
Legally Binding Commitments to Extend Credit* $15,513.0 $15,704.1
Commercial Letters of Credit 103.3 143.9
Standby Letters of Credit:
Corporate 563.2 424.9
Industrial Revenue 1,034.8 1,000.2
Other 424.5 531.9
- ------------------------------------------------------------------
Total Standby Letters of Credit** $ 2,022.5 $ 1,957.0
*These amounts exclude $433.0 million and $407.9 million of commitments
participated to others at December 31, 2000 and 1999, respectively.
**These amounts include $195.9 million and $173.7 million of standby letters of
credit secured by cash deposits or participated to others as of December 31,
2000 and 1999, respectively. The weighted average maturity of standby letters
of credit was 20 months at December 31, 2000 and 22 months at December 31,
1999.
Risk Management Instruments. These instruments include foreign exchange
contracts, foreign currency and interest rate futures contracts, and various
interest risk management instruments.
Northern Trust is a party to various risk management instruments that are used
in the normal course of business to meet the risk management needs of its
clients; as part of its trading activity for its own account; and as part of
its asset/liability management activities. The major risk associated with these
instruments is that interest or foreign exchange rates could change in an
unanticipated manner, resulting in higher interest costs or a loss in the
underlying value of the instrument. These risks are mitigated by establishing
limits for risk management positions, monitoring the level of actual positions
taken against such established limits, monitoring the level of any interest
rate sensitivity gaps created by such positions, and by using hedging
techniques. When establishing position limits, market liquidity and volatility,
as well as experience in each market, are all taken into account.
The estimated credit risk associated with these instruments relates to the
failure of the counterparty to pay based on the contractual terms of the
agreement, and is generally limited to the gross unrealized market value gains
on these instruments. The amount of credit risk will increase or decrease
during the lives of the instruments as interest or foreign exchange rates
fluctuate. This risk is controlled by limiting such activity to an approved
list of counterparties and by subjecting such activity to the same credit and
quality controls as are followed in lending and investment activities.
- -- --
- -- --
67
Northern Trust Corporation
Notes to Consolidated Financial Statements
----------------------------------
Risk management instruments include:
Foreign Exchange Contracts are agreements to exchange specific amounts of
currencies at a future date, at a specified rate of exchange. Foreign exchange
contracts are entered into primarily to meet the foreign exchange risk
management needs of clients. Foreign exchange contracts are also used for
trading purposes and asset/liability management.
Foreign Currency and Interest Rate Futures Contracts are agreements for
delayed delivery of foreign currency, securities or money market instruments in
which the buyer agrees to take delivery at a specified future date of a
specified currency, security, or instrument, at a specified price or yield. All
of Northern Trust's futures contracts are traded on organized exchanges that
require the daily settlement of changes in the value of the contracts. Futures
contracts are utilized in trading activities and asset/liability management to
limit Northern Trust's exposure to unfavorable fluctuations in foreign exchange
rates or interest rates.
Interest Rate Protection Contracts are agreements that enable clients to
transfer, modify or reduce their interest rate risk. As a seller of interest
rate protection, Northern Trust receives a fee at the outset of the agreement
and then assumes the risk of an unfavorable change in interest rates. Northern
Trust also purchases interest rate protection contracts for asset/liability
management.
Interest Rate Swap Contracts involve the exchange of fixed and floating rate
interest payment obligations without the exchange of the underlying principal
amounts.
Forward Sale Contracts represent commitments to sell a specified amount of
securities at an agreed upon date and price. Northern Trust utilizes forward
sale contracts principally in connection with its sale of mortgage loans.
Exchange-Traded Option Contracts grant the buyer the right, but not the
obligation, to purchase or sell at a specified price, a stated number of units
of an underlying financial instrument, at a future date.
The following table shows the contractual/notional amounts of risk management
instruments. The notional amounts of risk management instruments do not
represent credit risk, and are not recorded in the consolidated balance sheet.
They are used merely to express the volume of this activity.
Risk Management Instruments
- --------------------------------------------------------------------------------
Contractual/
Notional Amounts
December 31
- ----------------------------------------------------------
(In Millions) 2000 1999
- ----------------------------------------------------------
Asset/Liability Management:
Foreign Exchange Contracts $ 245.0 $ 130.3
Interest Rate Protection Contracts
-Purchased -- 130.0
Interest Rate Swap Contracts 43.6 2,043.6
Forward Sale Contracts 4.0 14.9
Client-Related and Trading:
Foreign Exchange Contracts 17,777.8 14,922.4
Interest Rate Futures Contracts Sold -- 1.0
Interest Rate Protection Contracts
-Purchased 49.5 7.8
-Sold 4.5 10.8
Interest Rate Swap Contracts 44.0 20.0
Risk Management Instruments Used for Asset/ Liability Management. Northern
Trust adopted SFAS No. 133 and its related amendments on January 1, 2001. In
reviewing the accounting requirements of these statements, Northern Trust
concluded that certain hedge strategies previously used to manage fixed
interest rate risk would not qualify for special hedge accounting treatment.
Management implemented alternative strategies for managing interest rate risk
that included the termination and run-off of certain interest rate swap
contracts used to hedge fixed rate loans and increased utilization of longer-
term fixed rate liabilities. The cumulative effect of adopting these statements
increased earnings by less than $10 thousand and reduced other comprehensive
income by $.2 million.
Deferred gains and losses related to interest risk management instruments used
for various asset/liability management purposes and included in the
consolidated balance sheet at year-end 2000 totaled $19.6 million and $5.8
million, respectively. Deferred gains and losses at year-end 1999 totaled $11.6
million and $8.2 million, respectively.
Forward foreign exchange contracts and foreign currency futures contracts were
used to reduce exposure to fluctuations in the dollar value of capital
investments in foreign subsidiaries and from foreign currency assets and
obligations. The notional amounts of these contracts at year-end 2000 were
$245.0 million of forward foreign exchange contracts.
- -- --
- -- --
68
Northern Trust Corporation
Notes to Consolidated Financial Statements
----------------------------------
Client and Trading-Related Interest Risk Management Instruments. Net revenue
associated with client and trading-related interest risk management activities
totaled $.7 million, $.2 million, and $.2 million during 2000, 1999, and 1998,
respectively. The majority of these revenues are related to interest rate
swaps, futures contracts, and interest rate protection agreements, and are
reported as trading income in the consolidated statement of income.
Other Off-Balance Sheet Financial Instruments. As part of securities custody
activities and at the direction of trust clients, Northern Trust lends
securities owned by clients to borrowers who are reviewed 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, with revaluation of the collateral on a daily basis. The
amount of securities loaned as of December 31, 2000 and 1999 subject to
indemnification was $49.5 billion and $35.9 billion, respectively. Because of
the requirement to fully collateralize securities borrowed, management believes
that the exposure to credit loss from this activity is remote.
The Bank is a participating member of various cash and securities clearing
organizations such as The Depository Trust Company in New York. It participates
in these organizations on behalf of its clients and on behalf of itself as a
result of its own investment and trading activities. A wide variety of cash and
securities transactions are settled through these organizations, including
those involving obligations of states and political subdivisions, asset-backed
securities, commercial paper, dollar placements and securities issued by the
Government National Mortgage Association.
As a result of its participation in cash and securities clearing
organizations, the Bank could be responsible for a pro rata share of certain
credit-related losses arising out of the clearing activities. The method in
which such losses would be shared by the clearing members is stipulated in each
clearing organization's membership agreement. Credit exposure related to these
agreements varies from day to day, primarily as a result of fluctuations in the
volume of transactions cleared through the organizations. The estimated credit
exposure at December 31, 2000 and 1999 was $73 million and $71 million,
respectively, based on the clearing volume for those days. Controls related to
these clearing transactions are closely monitored to protect the assets of
Northern Trust.
21. Fair Value of Financial Instruments--SFAS No. 107, "Disclosures About Fair
Value of Financial Instruments," requires disclosure of the estimated fair
value of certain financial instruments. Considerable judgment is required to
interpret market data when computing estimates of fair value. Accordingly, the
estimates presented are not necessarily indicative of the amounts Northern
Trust could have realized in a market exchange.
The information provided below should not be interpreted as an estimate of the
fair value of Northern Trust since the disclosures, in accordance with SFAS No.
107, exclude the values of nonfinancial assets and liabilities, as well as a
wide range of franchise, relationship, and intangible values, which are
integral to a full assessment of the consolidated financial position.
The use of different assumptions and/or estimation methods may have a material
effect on the computation of estimated fair values. Therefore, comparisons
between Northern Trust's disclosures and those of other financial institutions
may not be meaningful.
The following methods and assumptions were used in estimating the fair values
of the financial instruments:
Securities. Fair values of securities were based on quoted market values, when
available. If quoted market values were not available, fair values were based
on quoted market values for comparable instruments.
Loans (not including lease financing receivables). The fair values of one-to-
four family residential mortgages were based on quoted market prices of similar
loans sold in conjunction with securitization transactions, adjusted for
differences in loan characteristics. The fair values of the remainder of the
loan portfolio were estimated using a discounted cash flow method in which the
discount rate used was the rate at which Northern Trust would have originated
the loan had it been originated as of the financial statement date, giving
effect to current economic conditions on loan collectibility.
Savings Certificates, Other Time, Foreign Offices Time Deposits and Other
Borrowings. The fair values of these instruments were estimated using a
discounted cash flow method that incorporated market interest rates.
- -- --
- -- --
69
Northern Trust Corporation
Notes to Consolidated Financial Statements
----------------------------------
Senior Notes, Long-Term Debt, and Floating Rate Capital Securities. Fair
values were based on quoted market prices, when available. If quoted market
prices were not available, fair values were based on quoted market prices for
comparable instruments.
Off-Balance Sheet Financial Instruments. The fair values of commitments and
letters of credit represent the amount of unamortized fees on these
instruments. The fair values of all other off-balance sheet financial
instruments were estimated using market prices, pricing models, or quoted
market prices of financial instruments with similar characteristics.
Financial Instruments Valued at Carrying Value. Due to their short maturity,
the respective carrying values of certain on-balance sheet financial
instruments approximated their fair values. These financial instruments include
cash and due from banks; money market assets; customers' acceptance liability;
trust security settlement receivables; federal funds purchased; securities sold
under agreements to repurchase; commercial paper; certain other borrowings; and
liability on acceptances.
The fair values required to be disclosed for demand, savings, and money market
deposits pursuant to SFAS No. 107 must equal the amounts disclosed in the
consolidated balance sheet, even though such deposits are typically priced at a
premium in banking industry consolidations.
Fair Values of On-Balance Sheet Financial Instruments. The following table
summarizes the fair values of on-balance sheet financial instruments.
December 31
- ------------------------------------------------------------------------------
2000 1999
- ------------------------------------------------------------------------------
Book Fair Book Fair
(In Millions) Value Value Value Value
- ------------------------------------------------------------------------------
Assets
Cash and Due from Banks $ 2,287.8 $ 2,287.8 $ 1,977.9 $ 1,977.9
Money Market Assets 5,864.9 5,864.9 3,439.2 3,439.2
Securities:
Available for Sale 6,477.8 6,477.8 5,480.0 5,480.0
Held to Maturity 778.4 782.1 752.7 740.4
Trading Account 13.4 13.4 11.0 11.0
Loans (excluding leases),
Net of Credit Loss Reserve:
Held to Maturity 16,941.7 17,022.1 14,517.3 14,302.1
Held for Sale 5.6 5.7 14.8 14.8
Acceptance Liability 9.3 9.3 34.7 34.7
Trust Security Settlement Receivables 615.2 615.2 323.1 323.1
Liabilities
Deposits:
Demand, Savings and Money Market 10,896.9 10,896.9 10,244.5 10,244.5
Savings Certificates, Other Time and
Foreign Offices Time 11,931.0 11,933.5 11,126.5 11,097.4
Federal Funds Purchased 3,615.0 3,615.0 370.2 370.2
Repurchase Agreements 1,577.1 1,577.1 997.8 997.8
Commercial Paper 142.4 142.4 145.1 145.1
Other Borrowings 2,629.5 2,647.3 1,155.3 1,155.3
Senior Notes 500.0 512.6 500.0 493.0
Long-Term Debt 638.1 655.9 659.4 631.5
Debt-Floating Rate Capital Securities 267.6 248.6 267.5 254.5
Liability on Acceptances 9.3 9.3 34.7 34.7
- -- --
- -- --
70
Northern Trust Corporation
Notes to Consolidated Financial Statements
----------------------------------
Fair Values of Off-Balance Sheet Financial Instruments. The following tables
summarize the fair values of off-balance sheet financial instruments.
December 31
- -----------------------------------------------------------
2000 1999
- -----------------------------------------------------------
Book Fair Book Fair
(In Millions) Value Value Value Value
- -----------------------------------------------------------
Commitments and Letters of Credit:
Loan Commitments $ .1 $ .1 $ -- $ --
Letters of Credit .7 .7 1.8 1.8
Asset/Liability Management:
Foreign Exchange Contracts
Assets 12.5 12.5 .6 .6
Liabilities 3.2 3.2 1.5 1.5
Interest Rate Swap Contracts
Assets -- -- 8.2 17.6
Liabilities .1 .7 1.2 3.2
Other Financial Instruments
Assets -- -- .3 .1
Liabilities -- -- -- --
Fair Value
- -------------------------------------------
(In Millions) 2000 1999
- -------------------------------------------
Client-Related and Trading:*
Foreign Exchange Contracts
Assets $462.7 $188.6
Liabilities 454.7 181.0
Interest Rate Swap Contracts
Assets .3 --
Liabilities .3 --
*Assets and liabilities associated with foreign exchange contracts averaged
$293.1 million and $287.6 million, respectively, during 2000. Assets and
liabilities associated with other client-related and trading account
instruments averaged $.2 million and $.1 million, respectively, during 2000.
22. Concentrations of Credit Risk--The information in the section titled Loans
and Other Extensions of Credit found on pages 39 through 41 is incorporated by
reference.
23. Pledged and Restricted Assets--Certain of Northern Trust's subsidiaries, as
required or permitted by law, pledge assets to secure public and trust
deposits, repurchase agreements and for other purposes. On December 31, 2000,
securities and loans totaling $10.5 billion ($4.6 billion of U.S. Government
and agency securities, $426 million of obligations of states and political
subdivisions and $5.5 billion of loans and other securities), were pledged.
Collateral required for these purposes totaled $4.6 billion. Northern Trust is
permitted to repledge collateral accepted from reverse repurchase agreement
transactions. The total fair value of accepted collateral as of December 31,
2000 and 1999 was $296.4 million and $443.4 million, respectively. The fair
value of repledged collateral as of December 31, 2000 and 1999 was $125.6
million and $285.9 million, respectively. Repledged collateral was used in
other repurchase agreement transactions. Deposits maintained at the Federal
Reserve Bank to meet reserve requirements averaged $317.6 million in 2000 and
$315.1 million in 1999.
24. Stock-Based Compensation Plans--Statement of Financial Accounting Standards
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 25) and related interpretations. Northern Trust has elected to
account for its stock-based incentive plans and awards under APB 25, and has
adopted the disclosure requirements of SFAS No. 123.
A description of Northern Trust's stock-based compensation is presented below.
Amended Incentive Stock Plan--Amended 1992 Incentive Stock Plan (Plans). The
Amended Incentive Stock Plan was superseded by the Amended 1992 Incentive Stock
Plan and terminated on December 31, 1994. Outstanding grants and awards under
the Amended Incentive Stock Plan will remain in effect in accordance with their
terms, but no further grants or awards will be made.
The Amended 1992 Incentive Stock Plan (Plan) was adopted in 1992 and has been
amended on several occasions. The Plan is administered by the Compensation and
Benefits Committee (Committee) of the Board of Directors. Directors and key
officers of the Corporation or its subsidiaries are eligible to receive awards
under the Plan. Awards under the Plan may be granted in any one or a
combination of (a) incentive stock options and nonqualified stock options, (b)
stock appreciation rights, (c) stock awards, (d) performance shares, and (e)
stock units or equivalents.
The total number of shares of the Corporation's common stock authorized for
distribution under the Plan is 32,000,000. As of December 31, 2000, shares
available for future grants under the Plan totaled 4,224,493.
- -- --
- -- --
71
Northern Trust Corporation
Notes to Consolidated Financial Statements
----------------------------------
Stock Options. Stock addition, the Plan
options consist of options provides that all options
to purchase common stock may become exercisable
at purchase prices not upon a change of control
less than 100% of the fair as defined in the Plan.
market value thereof on All options terminate at
the date the option is such time as determined by
granted. Options have a the Committee and as
maximum ten year life and provided in the terms and
will vest and become conditions of the
exercisable in six months respective option grants.
to three years after the
date of grant. In
A summary of the status of stock options under the Plans at December 31, 2000,
1999 and 1998 and changes during the years then ended is presented in the table
below.
2000 1999 1998
- ---------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- ---------------------------------------------------------------------------------------------------
Options Outstanding, January 1 15,992,322 $24.96 15,148,424 $17.83 14,888,804 $13.36
Granted ($64.81 to $83.47 per
share in 2000) 3,113,450 70.53 3,441,700 45.19 2,672,300 34.72
Exercised ($4.21 to $35.78 per
share in 2000) (2,364,071) 13.15 (2,518,802) 9.83 (2,341,680) 8.59
Cancelled (40,500) 49.93 (79,000) 33.95 (71,000) 21.76
- ---------------------------------------------------------------------------------------------------
Options Outstanding December
31
($7.75 to $83.47 per share) 16,701,201 $35.06 15,992,322 $24.96 15,148,424 $17.83
- ---------------------------------------------------------------------------------------------------
Options Exercisable, December
31 10,201,385 $20.91 9,963,322 $15.46 10,205,124 $11.12
The following is a summary of outstanding and exercisable options under the
Plans at December 31, 2000.
Options Outstanding
- ---------------------------------------------------------------------------------------------------
Weighted
Average Weighted
Remaining Average
Number Contractual Exercise
Outstanding Exercisable Life Price
- ---------------------------------------------------------------------------------------------------
$7.75 to $16.75 per share 5,739,733 5,739,733 4.0 years $12.34
$28.31 to $37.79 per share 4,417,318 4,417,318 7.2 years 31.82
$40.09 to $83.47 per share 6,544,150 44,334 8.8 years 57.18
- -- --
- -- --
72
Northern Trust Corporation
Notes to Consolidated Financial Statements
----------------------------------
Stock and Stock Unit Awards. Under the Plan, stock or stock unit awards can be
granted by the Committee to participants which entitle them to receive a
payment in cash or Northern Trust Corporation common stock under the terms of
the Plan and such other terms and conditions as the Committee deems
appropriate.
Total expense applicable to stock and stock unit awards was $8.0 million in
2000, $4.0 million in 1999 and $2.1 million in 1998. In 2000, 1999 and 1998,
374,500 shares and stock units, 378,000 stock units and 130,000 shares,
respectively, were granted with a weighted average grant-date fair value of
$69.02, $45.16 and $36.61, respectively. As of December 31, 2000, restricted
stock awards and stock units outstanding totaled 1,195,610 shares. These shares
vest, subject to continuing employment, over a period of one to nine years.
Performance Shares. Under the performance share provisions of the Plans,
participants are entitled to have each award credited to an account maintained
for them if established performance goals are achieved with distribution after
vesting. The value of shares earned but not yet distributed under the Plan is
credited to performance share accounts and is shown in stockholders' equity as
Common Stock Issuable-Stock Incentive Plans.
Total salary expense for performance shares was $32.6 million in 2000, $23.4
million in 1999 and $23.6 million in 1998. In 1998, 639,000 shares were granted
with a weighted average grant-date fair value of $36.00. As of December 31,
2000, 1,687,410 shares of stock had been credited to performance share accounts
subject to meeting vesting conditions and 571,056 share grants are outstanding,
subject to meeting established performance goals and vesting conditions.
Director Stock Plan. Each non-employee director of the Corporation received a
grant of 1,000 shares of common stock on the date of each annual meeting of
stockholders in the years 1997, 1998 and 1999 under the Northern Trust
Corporation 1997 Stock Plan for Non-Employee Directors. Directors may elect to
defer the payment of their annual stock grant or cash-based compensation until
termination of services as director. Amounts deferred are converted into stock
units representing shares of common stock of the Corporation. Distributions of
stock grants will be distributed in stock. Distributions of the stock unit
account that relates to cash-based compensation will be made in cash based on
the fair value of the stock units. In January 2000, each non-employee director
received a grant of 2,400 stock units under the Amended 1992 Incentive Stock
Plan, with 800 stock units vesting on election or reelection as a director of
the Corporation in each of the years 2000, 2001 and 2002.
Other Stock-Based Compensation Arrangements.
Total salary expense related to restricted shares granted in conjunction with
an acquisition was $2.4 million in 2000, $2.1 million in 1999 and $3.2 million
in 1998. As of December 31, 2000, restricted stock outstanding totaled 770,700
shares.
Pro Forma Information. Pro forma information regarding net income and earnings
per share is required by SFAS No. 123, and has been determined as if the
Corporation had accounted for its stock-based compensation under SFAS No. 123.
For purposes of estimating the fair value of the Corporation's employee stock
options at the grant-date, a Black-Scholes option pricing model was used with
the following weighted average assumptions for 2000, 1999 and 1998,
respectively: risk-free interest rates of 6.41%, 6.60% and 5.68%; dividend
yields of .88%, 1.20% and 1.21%; volatility factors of the expected market
price of the Corporation's common stock of 30.0%, 26.5% and 24.4%; and a
weighted average expected life of the option of 5.4 years, 5.3 years and 7.6
years.
The weighted average fair value of options granted in 2000, 1999 and 1998 was
$25.92, $15.13 and $12.58, respectively. For purposes of pro forma disclosures,
the estimated fair value of the options is amortized to expense over the
options' six months to three year vesting period. Under SFAS No. 123, options
and awards granted prior to 1995 are not required to be included in the pro
forma information. Because the SFAS No. 123 method of accounting has not been
applied to options and other stock-based compensation granted prior to January
1, 1995, the resulting pro forma compensation cost may not be representative of
that to be expected in future years.
- -- --
- -- --
Northern Trust Corporation
73
Notes to Consolidated Financial Statements
----------------------------------
The Corporation's pro forma information follows:
(In Millions Except
Per Share Information) 2000 1999 1998
- --------------------------------------------------------------------------
Net Income as Reported $485.1 $405.0 $353.9
Pro Forma Adjustments Increase (Decrease) Due To:
Stock Options (47.4) (28.5) (14.7)
Performance Shares and Other Arrangements 13.3 9.7 8.2
- --------------------------------------------------------------------------
Pro Forma Net Income $451.0 $386.2 $347.4
- --------------------------------------------------------------------------
Earnings Per Share as Reported:
Basic $ 2.17 $ 1.81 $ 1.58
Diluted 2.08 1.74 1.52
Pro Forma Earnings Per Share:
Basic $ 2.01 $ 1.72 $ 1.55
Diluted 1.93 1.66 1.49
25. Cash-Based Compensation Plans--Various incentive plans provide for cash
incentives and bonuses to selected employees based upon accomplishment of
corporate net income objectives, business unit goals and individual
performance. The plans provide for acceleration of benefits in certain
circumstances including a change in control. The estimated contributions to
these plans are charged to salary expense and totaled $139.4 million in 2000,
$116.1 million in 1999 and $86.0 million in 1998.
26. Business Segments and Related Information--Information describing the
Corporation's major business segments is contained in the section titled
Business Segments, found on pages 34 through 37, and is incorporated by
reference.
The operations of Northern Trust are managed on a business unit basis and
include components of both domestic and foreign source income and assets.
Foreign source income and assets are not separately identified in its internal
management reporting system. However, in order to comply with the financial
reporting requirements of the Securities and Exchange Commission, Northern
Trust is required to disclose foreign activities based on the domicile of the
customer. Due to the complex and integrated nature of its foreign and domestic
activities, it is impossible to segregate with precision revenues, expenses and
assets between its U.S. and foreign domiciled customers. Therefore, certain
subjective estimates and assumptions have been made to allocate revenues,
expenses and assets between domestic and international operations as described
below.
Northern Trust's international activities are centered in the commercial
banking, treasury activities, foreign exchange and global custody businesses of
the Bank, three overseas branches, one Edge Act subsidiary, foreign
subsidiaries located in Canada, Ireland and Hong Kong, NTGA, and Northern Trust
of Florida. Net income from international operations includes the direct net
income contributions of foreign branches, foreign subsidiaries and the Edge Act
subsidiary. The Bank and Northern Trust of Florida international profit
contributions reflect direct salary and other expenses of the business units,
plus expense allocations for interest, occupancy, overhead and the provision
for credit losses. For purposes of this disclosure, all foreign exchange
profits have been allocated to international operations. The interest expense
is allocated to international operations based on specifically matched or
pooled funding. Allocations of indirect noninterest expenses related to
international activities are not significant but, when made, are based on
various methods such as time, space and number of employees.
The table below summarizes international performance based on the domicile of
the primary obligor without regard to guarantors or the location of collateral.
Distribution of Total Assets and Operating Performance
- --------------------------------------------------------------------------------
2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------
Income Income Income
Total Operating before Net Total Operating before Net Total Operating before Net
(In Millions) Assets Income* Taxes Income Assets Income* Taxes Income Assets Income* Taxes Income
- --------------------------------------------------------------------------------------------------------------------
International $ 7,293.9 $ 334.9 $174.5 $108.9 $ 3,244.6 $ 256.9 $126.3 $ 78.8 $ 4,371.8 $ 220.5 $119.5 $ 74.5
Domestic 28,728.4 1,770.7 555.6 376.2 25,463.6 1,497.1 490.2 326.2 23,498.2 1,328.3 423.2 279.4
- --------------------------------------------------------------------------------------------------------------------
Total $36,022.3 $2,105.6 $730.1 $485.1 $28,708.2 $1,754.0 $616.5 $405.0 $27,870.0 $1,548.8 $542.7 $353.9
*Operating Income is comprised of net interest income and noninterest income.
- -- --
- -- --
74
Northern Trust Corporation
Notes to Consolidated Financial Statements
----------------------------------
27. Acquisitions--On May 15, 1998, the Corporation completed the acquisition of
Trustbank Financial Corp., parent of Trust Bank of Colorado, for $15 million in
cash. The transaction was recorded under the purchase method of accounting.
Included in the acquisition cost was $10.4 million of goodwill which is being
amortized over fifteen years.
On May 2, 2000, Northern Trust completed the purchase acquisition of Carl
Domino Associates, L.P., a registered investment advisor in West Palm Beach,
Florida, for $21 million. Subsequent to acquisition, the company became an
operating division of Northern Trust Investments, Inc. known as Northern Trust
Value Investors. The transaction was recorded under the purchase method of
accounting. Included in the acquisition cost was $15 million of goodwill and $4
million of other intangibles which will be amortized over fifteen and eight
years, respectively.
On May 15, 2000, Northern Trust completed the purchase acquisition of Ulster
Bank Investment Services Limited (UBIS), the IFSC (International Financial
Service Centre) licensed custody and fund administration subsidiary of Ulster
Bank Group. Subsequent to the acquisition, the company was renamed Northern
Trust (Ireland) Limited. The purchase price, which is based in part on a
formula related to transitioned business, is expected to approximate $12.7
million and is being paid over a twelve month period. The transaction was
recorded under the purchase method of accounting. Included in the acquisition
cost will be approximately $4 million of goodwill and $4 million of other
intangibles which will be amortized over fifteen and eight years, respectively.
28. Regulatory Capital Requirements--Northern Trust and its subsidiary banks
are subject to various regulatory capital requirements administered by the
federal bank regulatory authorities. Under these requirements, banks must
maintain specific ratios of total and tier 1 capital to risk-weighted assets
and of tier 1 capital to average assets in order to be classified as "well
capitalized." The regulatory capital requirements impose certain restrictions
upon banks that meet minimum capital requirements but are not "well
capitalized" and obligate the federal bank regulatory authorities to take
"prompt corrective action" with respect to banks that do not maintain such
minimum ratios. Such prompt corrective action could have a direct material
effect on a bank's financial statements.
As of December 31, 2000, each of Northern's subsidiary banks had capital
ratios above the level required for classification as a "well capitalized"
institution and had not received any regulatory notification of a lower
classification. There are no conditions or events since that date that
management believes have adversely affected the capital categorization of any
subsidiary bank for these purposes. The table below summarizes the risk-based
capital amounts and ratios for Northern Trust and for each of its subsidiary
banks whose net income for 2000 exceeded 10% of the consolidated total.
Minimum to
Qualify as
Well
Actual Capitalized
- -------------------------------------------------------------------------------
($ In Millions) Amount Ratio Amount Ratio
- -------------------------------------------------------------------------------
As of December 31, 2000:
Total Capital to Risk-Weighted Assets
Consolidated $3,263 12.9% $2,539 10.0%
The Northern Trust Company 2,430 11.7 2,076 10.0
Northern Trust Bank of Florida N.A. 304 11.1 275 10.0
Tier 1 Capital to Risk-Weighted Assets
Consolidated 2,484 9.8 1,523 6.0
The Northern Trust Company 1,806 8.7 1,245 6.0
Northern Trust Bank of Florida N.A. 287 10.4 165 6.0
Tier 1 Capital (to Fourth Quarter Average Assets)
Consolidated 2,484 6.9 1,797 5.0
The Northern Trust Company 1,806 6.0 1,501 5.0
Northern Trust Bank of Florida N.A. 287 7.6 190 5.0
As of December 31, 1999:
Total Capital to Risk-Weighted Assets
Consolidated $3,033 13.6% $2,231 10.0%
The Northern Trust Company 2,312 12.5 1,854 10.0
Northern Trust Bank of Florida N.A. 275 12.1 228 10.0
Tier 1 Capital to Risk-Weighted Assets
Consolidated 2,212 9.9 1,339 6.0
The Northern Trust Company 1,650 8.9 1,113 6.0
Northern Trust Bank of Florida N.A. 256 11.2 137 6.0
Tier 1 Capital (to Fourth Quarter Average Assets)
Consolidated 2,212 7.1 1,548 5.0
The Northern Trust Company 1,650 6.3 1,302 5.0
Northern Trust Bank of Florida N.A. 256 7.8 164 5.0
- -- --
- -- --
75
Northern Trust Corporation
Notes to Consolidated Financial Statements
----------------------------------
29. Northern Trust Corporation (Corporation only) Condensed financial
information is presented below. Investments in wholly-owned subsidiaries are
carried on the equity method of accounting.
Condensed Balance Sheet
- --------------------------------------------------------------------------------
December 31
- -------------------------------------------------------------
(In Millions) 2000 1999
- -------------------------------------------------------------
Assets
Cash on Deposit with Subsidiary Bank $ .1 $ .1
Time Deposits with Banks 125.6 139.6
Securities 109.0 109.9
Investments in Wholly-Owned
Subsidiaries-Bank 2,360.8 2,146.3
- -Nonbank 151.8 112.4
Loans-Nonbank Subsidiaries 9.7 8.3
- -Other 2.1 3.5
Buildings and Equipment 7.0 7.2
Other Assets 278.3 216.8
- -------------------------------------------------------------
Total Assets $3,044.4 $2,744.1
- -------------------------------------------------------------
Liabilities
Commercial Paper $ 142.4 $ 145.1
Long-Term Debt 301.0 301.0
Other Liabilities 138.8 123.3
- -------------------------------------------------------------
Total Liabilities 582.2 569.4
Stockholders' Equity 2,462.2 2,174.7
- -------------------------------------------------------------
Total Liabilities and Stockholders' Equity $3,044.4 $2,744.1
Condensed Statement of Income
- --------------------------------------------------------------------------------
For the Year Ended
December 31
- -----------------------------------------------------------------------------
(In Millions) 2000 1999 1998
- -----------------------------------------------------------------------------
Operating Income
Dividends-Bank Subsidiaries $259.7 $112.0 $113.5
- -Nonbank Subsidiaries 10.7 19.3 21.9
Intercompany Interest and Other Charges 8.3 7.2 11.2
Interest and Other Income 10.5 6.1 5.2
- -----------------------------------------------------------------------------
Total Operating Income 289.2 144.6 151.8
- -----------------------------------------------------------------------------
Operating Expenses
Interest Expense 31.1 26.2 30.5
Other Operating Expenses 16.4 13.2 13.6
- -----------------------------------------------------------------------------
Total Operating Expenses 47.5 39.4 44.1
- -----------------------------------------------------------------------------
Income before Income Taxes and Equity in Undistributed
Net Income of Subsidiaries 241.7 105.2 107.7
Benefit for Income Taxes 16.9 15.1 13.8
- -----------------------------------------------------------------------------
Income before Equity in Undistributed Net Income of
Subsidiaries 258.6 120.3 121.5
Equity in Undistributed Net Income (Loss) of
Subsidiaries-Bank 211.0 274.9 232.8
- -Nonbank 15.5 9.8 (.4)
- -----------------------------------------------------------------------------
Net Income $485.1 $405.0 $353.9
- -----------------------------------------------------------------------------
Net Income Applicable to Common Stock $479.4 $400.2 $349.0
- -- --
- -- --
76
Northern Trust Corporation
Notes to Consolidated Financial Statements
----------------------------------
Condensed Statement of Cash Flows
- --------------------------------------------------------------------------------
For the Year Ended
December 31
- -------------------------------------------------------------------------------
(In Millions) 2000 1999 1998
- -------------------------------------------------------------------------------
Operating Activities:
Net Income $ 485.1 $ 405.0 $ 353.9
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Equity in Undistributed Net Income of Subsidiaries (226.5) (284.7) (232.4)
(Increase) Decrease in Accrued Income .1 (.1) 2.1
(Increase) Decrease in Prepaid Expenses .8 1.7 (.3)
Other, net 23.5 65.4 27.6
- -------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 283.0 187.3 150.9
- -------------------------------------------------------------------------------
Investing Activities:
Net (Increase) Decrease in Time Deposits with
Banks 14.0 (16.1) 155.9
Purchases of Securities (92.6) (134.6) (303.7)
Sales of Securities 88.6 166.8 290.9
Proceeds from Maturity and Redemption of
Securities 6.5 10.0 2.0
Net (Increase) Decrease in Capital Investments in
Subsidiaries (25.9) 8.8 (26.3)
Net (Increase) Decrease in Loans to Subsidiaries (1.4) (.7) .7
Net (Increase) Decrease in Other Loans 1.4 (2.2) .1
Other, net (1.3) (.3) (1.9)
- -------------------------------------------------------------------------------
Net Cash Provided by (Used in) Investing
Activities (10.7) 31.7 117.7
- -------------------------------------------------------------------------------
Financing Activities:
Net Increase (Decrease) in Commercial Paper (2.7) (3.0) 1.3
Repayment of Long-Term Debt -- -- (82.5)
Repayment of Long-Term Debt Issued to Subsidiaries -- -- (.1)
Treasury Stock Purchased (191.5) (139.7) (116.5)
Cash Dividends Paid on Common and Preferred Stock (125.8) (111.4) (98.5)
Net Proceeds from Stock Options 28.4 24.1 19.5
Other, net 19.3 10.7 8.0
- -------------------------------------------------------------------------------
Net Cash Used in Financing Activities (272.3) (219.3) (268.8)
- -------------------------------------------------------------------------------
Net Change in Cash on Deposit with Subsidiary Bank -- (.3) (.2)
Cash on Deposit with Subsidiary Bank at Beginning
of Year .1 .4 .6
- -------------------------------------------------------------------------------
Cash on Deposit with Subsidiary Bank at End of Year $ .1 $ .1 $ .4
- -- --
- -- --
77
Northern Trust Corporation
Report of Independent Public Accountants
----------------------------------
To the Stockholders and Board of Directors of Northern Trust Corporation:
- --------------------------------------------------------------------------------
We have audited the accompanying consolidated balance sheet of Northern Trust
Corporation (a Delaware Corporation) and subsidiaries as of December 31, 2000
and 1999, and the related consolidated statements of income, comprehensive
income, changes in stockholders' equity and cash flows for each of the three
years in the period ended December 31, 2000. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Northern Trust Corporation and
subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted
in the United States.
Arthur Andersen LLP
Chicago, Illinois,
January 16, 2001
- -- --
- -- --
78
Northern Trust Corporation
Consolidated Financial Statistics
----------------------------------
Quarterly Financial Data
- --------------------------------------------------------------------------------
Statement of Income 2000 1999
- -----------------------------------------------------------------------------------------------------------
($ In Millions Except Fourth Third Second First Fourth Third Second First
Per Share Information) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------------------
Trust Fees $ 304.9 304.7 305.6 286.0 $ 271.1 242.4 236.2 224.5
Other Noninterest Income 84.9 87.2 87.3 76.4 69.3 64.0 66.1 61.6
Net Interest Income
Interest Income 544.1 531.3 499.9 435.8 424.1 404.3 370.0 370.2
Interest Expense 398.5 388.5 359.1 296.4 285.8 276.0 243.4 244.6
- -----------------------------------------------------------------------------------------------------------
Net Interest Income 145.6 142.8 140.8 139.4 138.3 128.3 126.6 125.6
Provision for Credit
Losses 5.0 5.0 10.0 4.0 6.5 .5 5.0 .5
Noninterest Expenses 342.3 344.9 338.2 326.1 310.8 276.1 271.7 266.4
Provision for Income
Taxes 62.6 61.5 62.5 58.4 55.4 53.9 52.5 49.7
- -----------------------------------------------------------------------------------------------------------
Net Income $ 125.5 123.3 123.0 113.3 $ 106.0 104.2 99.7 95.1
- -----------------------------------------------------------------------------------------------------------
Net Income Applicable to
Common Stock $ 124.0 121.8 121.6 112.0 $ 104.7 102.9 98.6 94.0
- -----------------------------------------------------------------------------------------------------------
Per Common Share
Net Income-Basic $ .56 .55 .55 .51 $ .47 .46 .44 .42
- -Diluted .54 .53 .53 .49 .46 .45 .43 .41
- -----------------------------------------------------------------------------------------------------------
Average Balance Sheet
Assets
Cash and Due from Banks $ 1,477.0 1,257.8 1,550.2 1,401.2 $ 1,358.5 1,386.6 1,256.9 1,470.9
Money Market Assets 5,426.7 3,712.3 4,374.7 4,537.5 5,656.0 4,649.4 3,896.9 4,737.8
Securities 9,701.0 10,841.8 10,174.6 8,017.9 7,288.8 8,907.5 8,136.4 7,484.8
Loans and Leases 17,404.0 16,825.3 16,375.4 15,577.2 15,207.0 14,620.5 14,271.2 14,079.2
Reserve for Credit
Losses (160.4) (158.6) (157.0) (152.8) (147.9) (148.4) (149.6) (147.1)
Other Assets 2,234.5 1,996.6 2,010.3 1,879.0 1,717.5 1,679.2 1,712.5 1,754.7
- -----------------------------------------------------------------------------------------------------------
Total Assets $36,082.8 34,475.2 34,328.2 31,260.0 $31,079.9 31,094.8 29,124.3 29,380.3
- -----------------------------------------------------------------------------------------------------------
Liabilities and
Stockholders' Equity
Deposits
Demand and Other
Noninterest-Bearing $ 4,107.4 3,890.8 3,958.8 3,923.6 $ 3,895.9 3,530.6 3,566.5 3,627.2
Savings and Other
Interest-Bearing 7,618.0 7,366.1 7,444.1 7,439.8 7,375.1 7,029.4 6,921.1 6,813.5
Other Time 732.3 1,197.3 1,139.6 789.2 757.5 566.5 716.4 560.4
Foreign Offices 9,400.7 8,212.5 8,608.0 8,354.9 8,142.3 7,290.0 6,309.4 6,326.2
- -----------------------------------------------------------------------------------------------------------
Total Deposits 21,858.4 20,666.7 21,150.5 20,507.5 20,170.8 18,416.5 17,513.4 17,327.3
Purchased Funds 9,192.9 8,883.0 8,381.3 6,121.1 6,499.9 8,357.9 7,376.7 7,765.7
Senior Notes 500.0 500.0 500.0 512.1 436.4 498.4 640.6 746.6
Long-Term Debt 638.2 638.3 638.4 644.7 659.2 602.3 458.6 458.3
Debt-Floating Rate
Capital Securities 267.6 267.6 267.6 267.6 267.5 267.5 267.5 267.5
Other Liabilities 1,239.0 1,209.0 1,125.7 1,011.6 908.1 873.4 832.3 846.1
Stockholders' Equity 2,386.7 2,310.6 2,264.7 2,195.4 2,138.0 2,078.8 2,035.2 1,968.8
- -----------------------------------------------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity $36,082.8 34,475.2 34,328.2 31,260.0 $31,079.9 31,094.8 29,124.3 29,380.3
- -----------------------------------------------------------------------------------------------------------
Analysis of Net Interest
Income
Earning Assets $32,531.7 31,379.4 30,924.7 28,132.6 $28,151.8 28,177.4 26,304.5 26,301.8
Interest-Related Funds 27,677.3 26,567.6 26,315.3 23,641.3 23,650.6 24,170.9 22,250.6 22,585.6
Noninterest-Related
Funds 4,854.4 4,811.8 4,609.4 4,491.3 4,501.2 4,006.5 4,053.9 3,716.2
Net Interest Income
(Taxable equivalent) 159.9 157.1 154.1 150.8 148.2 138.9 135.8 134.5
Net Interest Margin
(Taxable equivalent) 1.96% 1.99 2.00 2.16 2.09% 1.95 2.07 2.07
- -----------------------------------------------------------------------------------------------------------
Common Stock Dividend
and Market Price
Dividends $ .155 .135 .135 .135 $ .135 .12 .12 .12
Market Price Range-High 92.13 90.88 73.31 77.25 54.63 49.81 50.00 47.38
- -Low 70.75 64.88 57.38 46.75 41.28 40.16 42.94 40.31
- -----------------------------------------------------------------------------------------------------------
Note: The common stock of Northern Trust Corporation is traded on the Nasdaq
National Market under the symbol NTRS.
- -- --
- -- --
79
Northern Trust Corporation
Consolidated Financial Statistics
----------------------------------
Average Statement of Condition with Analysis of Net Interest Income
- --------------------------------------------------------------------------------
(Interest and Rate on a
Taxable Equivalent Basis) 2000 1999
- -------------------------------------------------------------------------------
($ In Millions) Interest Volume Rate Interest Volume Rate
- -------------------------------------------------------------------------------
Average Earning Assets
Money Market Assets
Federal Funds Sold and
Resell Agreements $ 40.4 $ 642.5 6.29% $ 55.8 $ 1,095.7 5.09%
Time Deposits with Banks 206.0 3,822.8 5.39 164.3 3,562.0 4.61
Other 3.4 47.8 6.95 4.2 79.6 5.36
- -------------------------------------------------------------------------------
Total Money Market Assets 249.8 4,513.1 5.53 224.3 4,737.3 4.74
- -------------------------------------------------------------------------------
Securities
U.S. Government 14.6 237.7 6.13 15.5 285.3 5.43
Obligations of States and
Political Subdivisions 38.7 475.9 8.14 40.5 497.4 8.15
Federal Agency 567.6 8,551.9 6.64 363.6 6,838.5 5.32
Other 31.4 409.4 7.68 21.7 322.7 6.72
Trading Account .9 12.1 7.35 .8 12.5 6.58
- -------------------------------------------------------------------------------
Total Securities 653.2 9,687.0 6.74 442.1 7,956.4 5.56
- -------------------------------------------------------------------------------
Loans and Leases 1,161.4 16,548.6 7.02 940.8 14,547.8 6.47
- -------------------------------------------------------------------------------
Total Earning Assets $2,064.4 30,748.7 6.71% $1,607.2 27,241.5 5.90%
- -------------------------------------------------------------------------------
Reserve for Credit Losses -- (157.2) -- -- (148.4) --
Cash and Due from Banks -- 1,421.3 -- -- 1,368.0 --
Other Assets -- 2,030.5 -- -- 1,715.9 --
- -------------------------------------------------------------------------------
Total Assets -- $34,043.3 -- -- $30,177.0 --
- -------------------------------------------------------------------------------
Average Source of Funds
Deposits
Savings and Money Market $ 206.8 $ 5,203.9 3.97% $ 155.6 $ 4,845.3 3.21%
Savings Certificates 133.0 2,263.3 5.88 117.3 2,191.0 5.35
Other Time 59.1 964.6 6.13 32.7 650.5 5.03
Foreign Offices Time 431.4 8,064.5 5.35 286.3 6,592.1 4.34
- -------------------------------------------------------------------------------
Total Deposits 830.3 16,496.3 5.03 591.9 14,278.9 4.15
Federal Funds Purchased 167.8 2,644.7 6.34 161.0 3,226.1 4.99
Securities Sold under
Agreements to Repurchase 91.8 1,476.4 6.22 95.8 1,954.5 4.90
Commercial Paper 8.8 138.3 6.40 7.3 141.0 5.15
Other Borrowings 245.2 3,890.0 6.30 109.2 2,177.3 5.02
Senior Notes 34.4 503.0 6.82 30.6 579.5 5.28
Long-Term Debt 44.8 639.9 7.01 37.9 545.3 6.96
Debt-Floating Rate Capital
Securities 19.4 267.6 7.25 16.1 267.5 6.02
- -------------------------------------------------------------------------------
Total Interest-Related
Funds 1,442.5 26,056.2 5.54 1,049.8 23,170.1 4.53
- -------------------------------------------------------------------------------
Interest Rate Spread -- -- 1.17 -- -- 1.37
Noninterest-Related
Deposits -- 4,550.6 -- -- 4,086.0 --
Other Liabilities -- 1,146.8 -- -- 865.2 --
Stockholders' Equity -- 2,289.7 -- -- 2,055.7 --
- -------------------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity -- $34,043.3 -- -- $30,177.0 --
- -------------------------------------------------------------------------------
Net Interest Income/Margin $ 621.9 -- 2.02% $ 557.4 -- 2.05%
- -------------------------------------------------------------------------------
Net Interest Income/Margin
Components
Domestic $ 606.0 $26,143.9 2.32% $ 545.7 $23,131.3 2.36%
International 15.9 4,604.8 .35 11.7 4,110.2 .30
- -------------------------------------------------------------------------------
Consolidated $ 621.9 $30,748.7 2.02% $ 557.4 $27,241.5 2.05%
- -------------------------------------------------------------------------------
Notes-Average volume includes nonaccrual loans.
- -Total interest income includes adjustments on loans and securities to a
taxable equivalent basis. Such adjustments are based on the U.S. federal
income tax rate (35%) and State of Illinois income tax rate (7.18%). Lease
financing receivable balances are reduced by deferred income. Total taxable
equivalent interest adjustments amounted to $53.3 million in 2000, $38.6
million in 1999, $35.9 million in 1998, $32.7 million in 1997 and $33.6
million in 1996.
- -Interest on loans and money market assets includes fees of $1.2 million in
2000, $3.4 million in 1999, $4.3 million in 1998, $3.9 million in 1997, and
$4.3 million in 1996.
- -- --
- -- --
80
Northern Trust Corporation
----------------------------------
- --------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------
Interest Volume Rate Interest Volume Rate Interest Volume Rate
- ------------------------------------------------------------------------------
$ 53.0 $ 967.5 5.48% $ 45.9 $ 815.3 5.63% $ 18.3 $ 333.3 5.49%
155.0 2,827.1 5.48 133.5 2,574.7 5.18 84.9 1,699.5 5.00
2.7 44.1 6.14 3.0 52.6 5.68 3.0 50.7 5.91
- ------------------------------------------------------------------------------
210.7 3,838.7 5.49 182.4 3,442.6 5.30 106.2 2,083.5 5.10
- ------------------------------------------------------------------------------
22.4 374.2 5.99 48.8 822.9 5.94 97.6 1,702.0 5.73
38.2 434.0 8.81 38.1 408.8 9.32 40.8 414.1 9.86
362.1 6,385.0 5.67 281.9 4,890.1 5.77 228.4 4,010.7 5.69
18.3 265.8 6.87 14.9 243.4 6.11 13.7 228.2 6.00
.8 11.8 6.53 .7 9.0 7.33 .6 8.8 7.09
- ------------------------------------------------------------------------------
441.8 7,470.8 5.91 384.4 6,374.2 6.03 381.1 6,363.8 5.99
- ------------------------------------------------------------------------------
886.5 13,315.0 6.66 798.7 11,812.9 6.76 697.8 10,332.1 6.75
- ------------------------------------------------------------------------------
$1,539.0 24,624.5 6.25% $1,365.5 21,629.7 6.32% $1,185.1 18,779.4 6.31%
- ------------------------------------------------------------------------------
-- (147.1) -- -- (148.1) -- -- (147.5) --
-- 1,205.7 -- -- 1,095.4 -- -- 1,072.9 --
-- 1,507.6 -- -- 1,474.7 -- -- 1,259.5 --
- ------------------------------------------------------------------------------
-- $27,190.7 -- -- $24,051.7 -- -- $20,964.3 --
- ------------------------------------------------------------------------------
$ 141.3 $ 4,263.3 3.31% $ 125.8 $ 3,895.4 3.23% $ 114.3 $ 3,620.7 3.16%
122.1 2,144.5 5.69 117.2 2,035.8 5.76 119.1 2,062.4 5.78
30.6 571.8 5.35 39.4 717.3 5.50 29.9 549.2 5.44
286.4 5,781.7 4.95 239.8 4,971.2 4.82 184.5 3,826.2 4.82
- ------------------------------------------------------------------------------
580.4 12,761.3 4.55 522.2 11,619.7 4.49 447.8 10,058.5 4.45
139.8 2,620.6 5.34 92.4 1,690.2 5.47 97.9 1,842.2 5.31
80.2 1,506.0 5.33 81.7 1,519.9 5.38 103.4 1,973.3 5.24
8.0 145.9 5.51 7.9 142.7 5.54 7.8 143.7 5.40
132.3 2,540.4 5.21 112.4 2,120.9 5.30 64.5 1,274.1 5.07
36.5 653.3 5.58 30.9 539.3 5.75 14.4 267.5 5.37
31.8 445.8 7.14 32.6 435.8 7.48 27.4 360.7 7.59
16.9 267.4 6.32 14.5 224.1 6.49 -- -- --
- ------------------------------------------------------------------------------
1,025.9 20,940.7 4.90 894.6 18,292.6 4.89 763.2 15,920.0 4.79
- ------------------------------------------------------------------------------
-- -- 1.35 -- -- 1.43 -- -- 1.52
-- 3,731.8 -- -- 3,450.3 -- -- 3,080.7 --
-- 693.6 -- -- 679.3 -- -- 477.9 --
-- 1,824.6 -- -- 1,629.5 -- -- 1,485.7 --
- ------------------------------------------------------------------------------
-- $27,190.7 -- -- $24,051.7 -- -- $20,964.3 --
- ------------------------------------------------------------------------------
$ 513.1 -- 2.08% $ 470.9 -- 2.18% $ 421.9 -- 2.25%
- ------------------------------------------------------------------------------
$ 502.7 $21,118.7 2.38% $ 466.0 $18,492.2 2.52% $ 420.6 $16,678.5 2.52%
10.4 3,505.8 .30 4.9 3,137.5 .16 1.3 2,100.9 .06
- ------------------------------------------------------------------------------
$ 513.1 $24,624.5 2.08% $ 470.9 $21,629.7 2.18% $ 421.9 $18,779.4 2.25%
- ------------------------------------------------------------------------------
- -- --
- -- --
81
Northern Trust Corporation
Corporate Structure
-------------------------------------
================================================================================
NORTHERN TRUST CORPORATION
50 South La Salle Street, Chicago, Illinois 60675
(312) 630-6000
PRINCIPAL SUBSIDIARY
The Northern Trust Company
50 South La Salle Street, Chicago, Illinois 60675
120 East Oak Street, Chicago, Illinois 60611
201 East Huron Street, Chicago, Illinois 60611
125 South Wacker Drive, Chicago, Illinois 60675
2814 West Fullerton Avenue, Chicago, Illinois 60647
7801 South State Street, Chicago, Illinois 60619
8501 West Higgins Road, Chicago, Illinois 60631
826 S. Northwest Highway, Barrington, Illinois 60010
2550 Waukegan Road, Glenview, Illinois 60025
579 Central Avenue, Highland Park, Illinois 60035
4 North Washington Street, Hinsdale, Illinois 60521
120 East Scranton Avenue, Lake Bluff, Illinois 60044
265 Deerpath Road, Lake Forest, Illinois 60045
959 South Waukegan Road, Lake Forest, Illinois 60045
701 South McKinley Road, Lake Forest, Illinois 60045
400 East Diehl Road, Naperville, Illinois 60563
One Oakbrook Terrace, Oakbrook Terrace, Illinois 60181
1501 Woodfield Road Schaumburg, Illinois 60173
62 Green Bay Road, Winnetka, Illinois 60093
London Branch
155 Bishopsgate, London EC2M 3XS, United Kingdom
Cayman Islands Branch
P.O. Box 501, Georgetown, Cayman Islands,
British West Indies
Singapore Branch
80 Raffles Place 46th Floor, UOB Plaza 1,
Singapore 048624
SUBSIDIARIES OF THE NORTHERN
TRUST COMPANY
The Northern Trust
International Banking Corporation
40 Broad Street, 10th Floor
New York, New York 10004
The Northern Trust Company
of Hong Kong Limited
Suite 703-4 One Pacific Place
88 Queensway, Hong Kong
Northern Trust Trade Services Limited
7/F CITIC Tower, I Tim Mei Avenue,
Central, Hong Kong
Northern Trust Fund Managers (Ireland) Limited
Ulster Bank Centre
Georges Quay, Dublin 2
Ireland
Northern Trust Global Investments (Europe) Limited
6 Devonshire Square
London, EC2A 4YE, United Kingdom
Northern Trust (Ireland) Limited
Northern Trust Investor Services (Ireland) Limited
Northern Trust Custodial Services (Ireland)
Northern Trust Fund Services (Ireland) Limited
Ulster Bank Group Centre
Georges Quay, Dublin 2
Ireland
Northern Trust Investments, Inc.
50 South La Salle Street, Chicago, Illinois 60675
Norlease, Inc.
50 SOUTH LASALLE STREET, CHICAGO, ILLINOIS 60675
The Northern Trust Company, Canada
161 Bay Street, Suite 4540, B.C.E. Place
Toronto, Ontario, Canada M5J 2SJ
NTG Services LLC
155 Bishopsgate, London
EC2M 3XS, United Kingdom
NT Mortgage Holdings LLC
50 South La Salle Street
Chicago, Illinois 60675
OTHER SUBSIDIARIES OF THE CORPORATION
Northern Trust Bank of Florida N.A.
700 Brickell Avenue, Miami, Florida 33131
595 Biltmore Way, Coral Gables, Florida 33134
328 Crandon Boulevard, Suite 101,
Key Biscayne, Florida 33149
3001 Aventura Boulevard, Aventura, Florida 33180
8600 NW 17th Street, Suite 120, Miami, Florida 33126
1100 East Las Olas Boulevard,
Fort Lauderdale, Florida 33301
2601 East Oakland Park Boulevard,
Fort Lauderdale, Florida 33306
2300 Weston Road, Weston, Florida 33326
301 Yamato Road, Boca Raton, Florida 33431
770 East Atlantic Avenue, Delray Beach, Florida 33483
440 Royal Palm Way, Palm Beach, Florida 33480
11301 U.S. Highway 1, Suite 100,
North Palm Beach, Florida 33408
2201 S.E. Kingswood Terrace, Monterey Commons,
Stuart, Florida 34996
755 Beachland Boulevard, Vero Beach, Florida 32963
1440 South AIA, Vero Beach, Florida 32963
4001 Tamiami Trail North, Naples, Florida 34103
375 Fifth Avenue South, Naples, Florida 34102
26790 South Tamiami Trail, Bonita Springs, Florida 34134
8060 College Parkway S.W., Fort Myers, Florida 33919
1515 Ringling Boulevard, Sarasota, Florida 34236
================================================================================
84
Northern Trust Corporation
Corporate Structure
------------------------------------------------
================================================================================
901 Venetia Bay Boulevard, Suite 100, Venice, Florida 34292
540 Bay Isles Road, Longboat Key, Florida 34228
233 15th Street West, Bradenton, Florida 34205
6320 Venture Drive, Suite 100, Bradenton, Florida 34202
100 Second Avenue South, St. Petersburg, Florida 33701
425 North Florida Avenue, Tampa, Florida 33602
Northern Trust Cayman International, Ltd.
P.O. Box 1586, Georgetown, Grand Cayman,
Cayman Islands, British West Indies
Northern Trust Bank of Arizona N.A.
2398 East Camelback Road, Phoenix, Arizona 85016
7600 E. Doubletree Ranch Road, Scottsdale, Arizona 85258
7501 East Thompson Peak Parkway,
Scottsdale, Arizona 85255
8525 East Pinnacle Peak Road, Scottsdale, Arizona 85255
10220 West Bell Road, Sun City, Arizona 85351
10015 West Royal Oak Road, Sun City, Arizona 85351
19432 R. H. Johnson Boulevard,
Sun City West, Arizona 85375
1525 South Greenfield Road, Mesa, Arizona 85206
23714 South Alma School Road, Sun Lakes, Arizona 85248
6373 East Tanque Verde Road, Tucson, Arizona 85715
3450 East Sunrise Drive, Tucson, Arizona 85718
Northern Trust Bank of California N.A.
355 South Grand Avenue, Suite 2600,
Los Angeles, California 90071
16 Corporate Plaza, Newport Beach, California 92660
4370 La Jolla Village Drive, Suite 1000,
San Diego, California 92122
1125 Wall Street, La Jolla, California 92037
206 East Anapamu Street,
Santa Barbara, California 93101
1485 East Valley Road, (Montecito),
Santa Barbara, California 93108
580 California Street, Suite 1800,
San Francisco, California 94104
575 Redwood Highway, Mill Valley, California 94941
10877 Wilshire Boulevard (Westwood),
Los Angeles, California 90024
74-900 Highway 111, Suite 121,
Indian Wells, California 92210,
421 North Rodeo Drive, Beverly Hills, California 90210
Northern Trust Bank of Texas N.A.
2020 Ross Avenue, Dallas, Texas 75201
5540 Preston Road, Dallas, Texas 75205
16475 Dallas Parkway, Addison, Texas 75001
2701 Kirby Drive, Houston, Texas 77098
600 Bering Drive, Houston, Texas 77057
10000 Memorial Drive, Houston, Texas 77024
700 Rusk Street, Houston, Texas 77002
600 Congress Avenue, Austin, Texas 78701
Northern Trust Bank, FSB
Michigan
40701 Woodward Avenue, Suite 110,
Bloomfield Hills, Michigan 48304
161 Ottawa Avenue, Northwest, Suites Ill and 114,
Grand Rapids, Michigan 49503
16980 Kercheval,
Grosse Pointe, Michigan 48230
Missouri
7733 Forsyth Boulevard, Suite 1440,
St. Louis, Missouri 63105
Nevada
7251 West Lake Mead Boulevard, 3rd Floor,
Las Vegas, Nevada 89128
Ohio
127 Public Square, Suite 5150,
Cleveland, Ohio 44114
Washington
1414 Fourth Avenue, Seattle, Washington 98101
Wisconsin
526 East Wisconsin Avenue, Milwaukee, Wisconsin 53202
Northern Trust Bank of Colorado
1200 17th Street, Denver, Colorado 80202
Northern Trust Global Advisors, Inc.
300 Atlantic Street, Suite 400,
Stamford, Connecticut 06901
The Northern Trust Company of Connecticut
300 Atlantic Street, Suite 400, Stamford, Connecticut 06901
NT Global Advisors, Inc.
161 Bay Street, Suite 4540, B.C.E. Place,
Toronto, Ontario, Canada M5J 2S1
NT Fund Advisors of Quebec, Inc.
770 Sherbrooke Street West, Suite 1420, Montreal, Quebec, Canada H3A lGl
Northern Trust Global Advisors, Limited
155 Bishopsgate, London EC2M 3XS, United Kingdom
The Northern Trust Company of New York
40 Broad Street, New York, New York 10004
Northern Trust Securities, Inc.
50 South La Salle Street, Chicago, Illinois 60675
Northern Trust Retirement Consulting, L.L.C.
3003 Summit Boulevard, Suite 100,
Atlanta, Georgia 30319
20020 120th Avenue Northeast, Suite 200,
Bothell, Washington 98011
================================================================================
85
NORTHERN TRUST CORPORATION