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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to __________
Commission File No. 0-5965
NORTHERN TRUST CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-2723087
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
50 South LaSalle Street
Chicago, Illinois 60675
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (312) 630-6000
------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
222,114,864 Shares - $1.66 2/3 Par Value
(Shares of Common Stock Outstanding on September 30, 2001)
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEET NORTHERN TRUST CORPORATION
September 30 December 31 September 30
------------ ----------- ------------
($ In Millions) 2001 2000 2000
- ---------------------------------------------------------------------------------------- ------------ ----------- ------------
Assets
Cash and Due from Banks $ 1,685.6 $ 2,287.8 $ 1,361.8
Federal Funds Sold and Securities Purchased under Agreements to Resell 1,574.2 549.8 544.6
Time Deposits with Banks 4,542.5 5,193.8 2,743.2
Other Interest-Bearing Assets 23.8 121.3 12.5
Securities
Available for Sale 5,362.1 6,477.8 9,241.2
Held to Maturity (Fair value - $659.7 at September 2001,
$782.1 at December 2000, $788.9 at September 2000) 641.0 778.4 794.9
Trading Account 13.7 13.4 13.9
- ---------------------------------------------------------------------------------------- ------------ ----------- ------------
Total Securities 6,016.8 7,269.6 10,050.0
- ---------------------------------------------------------------------------------------- ------------ ----------- ------------
Loans and Leases
Commercial and Other 11,423.0 11,321.8 11,086.6
Residential Mortgages 7,332.4 6,822.8 6,643.5
- ---------------------------------------------------------------------------------------- ------------ ----------- ------------
Total Loans and Leases (Net of unearned income - $428.9 at September 2001,
$365.3 at December 2000, $421.1 at September 2000) 18,755.4 18,144.6 17,730.1
- ---------------------------------------------------------------------------------------- ------------ ----------- ------------
Reserve for Credit Losses (158.1) (162.9) (158.0)
Buildings and Equipment 484.6 448.1 409.8
Customers' Acceptance Liability 21.2 9.3 20.2
Trust Security Settlement Receivables 709.9 615.2 656.7
Other Assets 1,468.5 1,545.7 1,422.8
- ---------------------------------------------------------------------------------------- ------------ ----------- ------------
Total Assets $ 35,124.4 $ 36,022.3 $ 34,793.7
- ---------------------------------------------------------------------------------------- ------------ ----------- ------------
Liabilities
Deposits
Demand and Other Noninterest-Bearing $ 4,379.9 $ 4,547.7 $ 4,266.4
Savings and Money Market 6,168.9 5,521.7 5,379.8
Savings Certificates 2,139.8 2,331.2 2,284.6
Other Time 756.3 427.3 440.0
Foreign Offices - Demand 908.8 827.5 792.6
- Time 8,434.8 9,172.5 7,991.2
- ---------------------------------------------------------------------------------------- ------------ ----------- ------------
Total Deposits 22,788.5 22,827.9 21,154.6
Federal Funds Purchased 1,340.0 3,615.0 1,394.9
Securities Sold Under Agreements to Repurchase 1,017.1 1,577.1 1,043.2
Commercial Paper 139.0 142.4 126.7
Other Borrowings 4,257.5 2,629.5 6,175.7
Senior Notes 450.0 500.0 500.0
Long-Term Debt 767.0 638.1 638.3
Debt - Floating Rate Capital Securities 267.7 267.6 267.6
Liability on Acceptances 21.2 9.3 20.2
Other Liabilities 1,350.6 1,353.2 1,112.0
- ---------------------------------------------------------------------------------------- ------------ ----------- ------------
Total Liabilities 32,398.6 33,560.1 32,433.2
- ---------------------------------------------------------------------------------------- ------------ ----------- ------------
Stockholders' Equity
Preferred Stock 120.0 120.0 120.0
Common Stock, $1.66 2/3 Par Value; Authorized 560,000,000 shares at
September 2001, December 2000, and September 2000; Outstanding
222,114,864 at September 2001, 222,232,395 at December 2000 and
221,782,062 at September 2000 379.8 379.8 379.8
Capital Surplus - - -
Retained Earnings 2,462.7 2,200.0 2,116.8
Accumulated Other Comprehensive Income (7.9) (13.2) (13.1)
Common Stock Issuable - Stock Incentive Plans 150.0 110.2 113.9
Deferred Compensation (71.5) (57.9) (67.4)
Treasury Stock - (at cost, 5,806,660 shares at September 2001, 5,689,129
shares at December 2000, and 6,139,462 shares at September 2000) (307.3) (276.7) (289.5)
- ---------------------------------------------------------------------------------------- ------------ ----------- ------------
Total Stockholders' Equity 2,725.8 2,462.2 2,360.5
- ---------------------------------------------------------------------------------------- ------------ ----------- ------------
Total Liabilities and Stockholders' Equity $ 35,124.4 $ 36,022.3 $ 34,793.7
- ---------------------------------------------------------------------------------------- ------------ ----------- ------------
2
CONSOLIDATED STATEMENT OF INCOME NORTHERN TRUST CORPORATION
Third Quarter Nine Months
Ended September 30 Ended September 30
------------------------------- ------------------------------
($ In Millions Except Per Share Information) 2001 2000 2001 2000
- --------------------------------------------------------- ------------- ------------- ------------- -------------
Noninterest Income
Trust Fees $304.3 $304.7 $927.2 $896.3
Foreign Exchange Trading Profits 37.2 37.6 112.6 113.7
Treasury Management Fees 21.0 18.1 61.7 53.4
Security Commissions and Trading Income 8.1 8.0 26.2 25.9
Other Operating Income 19.2 23.5 65.9 57.9
Investment Security Gains - - - -
- --------------------------------------------------------- ------------- ------------- ------------- -------------
Total Noninterest Income 389.8 391.9 1,193.6 1,147.2
- --------------------------------------------------------- ------------- ------------- ------------- -------------
Net Interest Income
Interest Income 396.1 531.3 1,339.2 1,467.0
Interest Expense 247.1 388.5 895.7 1,044.0
- --------------------------------------------------------- ------------- ------------- ------------- -------------
Net Interest Income 149.0 142.8 443.5 423.0
Provision for Credit Losses 5.0 5.0 21.5 19.0
- --------------------------------------------------------- ------------- ------------- ------------- -------------
Net Interest Income after Provision for Credit Losses 144.0 137.8 422.0 404.0
- --------------------------------------------------------- ------------- ------------- ------------- -------------
Noninterest Expenses
Compensation 174.1 179.8 520.0 514.6
Employee Benefits 30.1 27.5 95.4 84.0
Occupancy Expense 25.8 21.8 75.8 64.8
Equipment Expense 20.8 18.1 63.6 54.5
Other Operating Expenses 92.8 97.7 282.2 291.3
- --------------------------------------------------------- ------------- ------------- ------------- -------------
Total Noninterest Expenses 343.6 344.9 1,037.0 1,009.2
- --------------------------------------------------------- ------------- ------------- ------------- -------------
Income before Income Taxes 190.2 184.8 578.6 542.0
Provision for Income Taxes 63.6 61.5 193.5 182.4
- --------------------------------------------------------- ------------- ------------- ------------- -------------
Net Income $126.6 $123.3 $385.1 $359.6
- --------------------------------------------------------- ------------- ------------- ------------- -------------
Net Income Applicable to Common Stock $125.7 $121.8 $381.7 $355.4
- --------------------------------------------------------- ------------- ------------- ------------- -------------
Net Income Per Common Share - Basic $ .57 $ .55 $ 1.72 $ 1.61
- Diluted .55 .53 1.66 1.54
- --------------------------------------------------------- ------------- ------------- ------------- -------------
Average Number of Common Shares Outstanding - Basic 221,453,555 220,749,384 221,573,897 220,985,573
- Diluted 228,778,525 230,936,938 229,357,126 230,513,163
- --------------------------------------------------------- ------------- ------------- ------------- -------------
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME NORTHERN TRUST CORPORATION
Third Quarter Nine Months
Ended September 30 Ended September 30
------------------------------------------
(In Millions) 2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income $126.6 $123.3 $385.1 $359.6
Other Comprehensive Income (net of tax)
Unrealized Gains (Losses) on Securities Available for Sale
Unrealized Holding Gains Arising during the Period (net of tax provision of
$.8 million and $.6 million for the third quarter ended September 30, 2001 and
2000, respectively. Net of tax provision of $2.0 million and $.6 million for
the nine months ended September 30, 2001 and 2000, respectively). 1.2 - 3.0 .1
Less: Reclassification Adjustments for Gains Included in Net Income - - - -
Unrealized Gains (Losses) on Cash Flow Hedge Designations
Cumulative-Effect of Adopting SFAS No. 133 (net of tax benefit of $.1 million) - - (.2) -
Unrealized Gains Arising During the Period (net of tax expense of $2.4 million
for the quarter ended September 30, 2001. Net of tax expense of $1.5 million
for the nine months ended September 30, 2001). 4.0 - 1.1 -
Less: Reclassification Adjustments of Losses Included in Net Income (net of
tax benefit of $.8 million for the nine months ended September 30, 2001). .1 - 1.4 -
- ----------------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income 5.3 - 5.3 .1
- ----------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income $131.9 $123.3 $390.4 $359.7
- ----------------------------------------------------------------------------------------------------------------------------------
3
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY NORTHERN TRUST CORPORATION
Nine Months
Ended September 30
----------------------------------
(In Millions) 2001 2000
- ------------------------------------------------------------------------------------------- --------------- ----------------
Preferred Stock
Balance at January 1 and September 30 $ 120.0 $ 120.0
- ------------------------------------------------------------------------------------------- --------------- ----------------
Common Stock
Balance at January 1 and September 30 379.8 379.8
- ------------------------------------------------------------------------------------------- --------------- ----------------
Retained Earnings
Balance at January 1 2,200.0 1,870.7
Net Income 385.1 359.6
Dividends Declared - Common Stock (103.4) (89.9)
Dividends Declared - Preferred Stock (3.2) (4.6)
Stock Issued - Incentive Plan and Awards (15.8) (19.0)
- ------------------------------------------------------------------------------------------- --------------- ----------------
Balance at September 30 2,462.7 2,116.8
- ------------------------------------------------------------------------------------------- --------------- ----------------
Accumulated Other Comprehensive Income
Balance at January 1 (13.2) (13.2)
Other Comprehensive Income 5.3 0.1
- ------------------------------------------------------------------------------------------- --------------- ----------------
Balance at September 30 (7.9) (13.1)
- ------------------------------------------------------------------------------------------- --------------- ----------------
Common Stock Issuable - Stock Incentive Plans
Balance at January 1 110.2 55.0
Stock Issuable, net of Stock Issued 39.8 58.9
- ------------------------------------------------------------------------------------------- --------------- ----------------
Balance at September 30 150.0 113.9
- ------------------------------------------------------------------------------------------- --------------- ----------------
Deferred Compensation
Balance at January 1 (57.9) (33.4)
Compensation Deferred (36.5) (51.0)
Compensation Amortized 22.9 17.0
- ------------------------------------------------------------------------------------------- --------------- ----------------
Balance at September 30 (71.5) (67.4)
- ------------------------------------------------------------------------------------------- --------------- ----------------
Treasury Stock
Balance at January 1 (276.7) (204.2)
Stock Options and Awards 80.9 87.1
Stock Purchased (111.5) (172.4)
- ------------------------------------------------------------------------------------------- --------------- ----------------
Balance at September 30 (307.3) (289.5)
- ------------------------------------------------------------------------------------------- --------------- ----------------
Total Stockholders' Equity at September 30 $2,725.8 $2,360.5
- ------------------------------------------------------------------------------------------- --------------- ----------------
4
CONSOLIDATED STATEMENT OF CASH FLOWS NORTHERN TRUST CORPORATION
Nine Months
Ended September 30
----------- -----------
(In Millions) 2001 2000
- ------------------------------------------------------------------------------------------------------- ----------- -----------
Cash Flows from Operating Activities:
Net Income $ 385.1 $ 359.6
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Provision for Credit Losses 21.5 19.0
Depreciation on Buildings and Equipment 58.6 51.1
(Increase) Decrease in Interest Receivable 43.6 (25.0)
Decrease in Interest Payable (10.6) (.8)
Amortization and Accretion of Securities and Unearned Income (115.3) (99.2)
Amortization of Computer Software 56.1 46.9
Amortization of Goodwill and Other Intangibles 12.4 11.5
Net Increase in Trading Account Securities (.3) (2.9)
Other Noncash, net 110.9 (169.1)
- ------------------------------------------------------------------------------------------------------- ----------- -----------
Net Cash Provided by Operating Activities 562.0 191.1
- ------------------------------------------------------------------------------------------------------- ----------- -----------
Cash Flows from Investing Activities:
Net (Increase) Decrease in Federal Funds Sold and Securities Purchased under Agreements to Resell (1,024.4) 539.2
Net (Increase) Decrease in Time Deposits with Banks 651.3 (451.0)
Net Decrease in Other Interest-Bearing Assets 97.5 50.7
Purchases of Securities-Held to Maturity (113.0) (123.4)
Proceeds from Maturity and Redemption of Securities-Held to Maturity 83.5 87.4
Purchases of Securities-Available for Sale (54,773.3) (35,337.4)
Proceeds from Sale, Maturity and Redemption of Securities-Available for Sale 56,244.7 31,778.7
Net Increase in Loans and Leases (701.7) (2,468.3)
Purchases of Buildings and Equipment (95.1) (80.5)
Purchases and Development of Computer Software (108.4) (77.4)
Net Increase in Trust Security Settlement Receivables (94.7) (333.6)
Decrease in Cash Due to Acquisitions (1.5) (31.5)
Other, net 22.3 37.5
- ------------------------------------------------------------------------------------------------------- ----------- -----------
Net Cash Provided by (Used in) Investing Activities 187.2 (6,409.6)
- ------------------------------------------------------------------------------------------------------- ----------- -----------
Cash Flows from Financing Activities:
Net Decrease in Deposits (39.4) (216.4)
Net Increase (Decrease) in Federal Funds Purchased (2,275.0) 1,024.7
Net Increase (Decrease) in Securities Sold under Agreements to Repurchase (560.0) 45.4
Net Decrease in Commercial Paper (3.4) (18.4)
Net Increase in Short-Term Other Borrowings 1,585.0 5,403.9
Proceeds from Term Federal Funds Purchased 3,494.4 7,943.3
Repayments of Term Federal Funds Purchased (3,451.4) (8,326.8)
Proceeds from Senior Notes & Long-Term Debt 154.5 102.6
Repayments of Senior Notes & Long-Term Debt (75.6) (123.7)
Treasury Stock Purchased (108.2) (170.4)
Net Proceeds from Stock Options 14.4 21.1
Cash Dividends Paid on Common and Preferred Stock (107.0) (94.7)
Other, net 20.3 11.8
- ------------------------------------------------------------------------------------------------------- ----------- -----------
Net Cash Provided by (Used in) Financing Activities (1,351.4) 5,602.4
- ------------------------------------------------------------------------------------------------------- ----------- -----------
Decrease in Cash and Due from Banks (602.2) (616.1)
Cash and Due from Banks at Beginning of Year 2,287.8 1,977.9
- ------------------------------------------------------------------------------------------------------- ----------- -----------
Cash and Due from Banks at End of Year $ 1,685.6 $ 1,361.8
- ------------------------------------------------------------------------------------------------------- ----------- -----------
Schedule of Noncash Investing Activities:
Transfer of Securities from Held to Maturity to Available for Sale $ 167.1 $ -
Supplemental Disclosures of Cash Flow Information:
Interest Paid $ 906.3 $ 1,044.8
Income Taxes Paid 28.2 87.3
- ------------------------------------------------------------------------------------------------------- ----------- -----------
5
Notes to Consolidated Financial Statements
1. Basis of Presentation - The consolidated financial statements include the
accounts of Northern Trust Corporation and its subsidiaries (Northern Trust),
all of which are wholly-owned. Significant intercompany balances and
transactions have been eliminated. The consolidated financial statements as of
September 30, 2001 and 2000 have not been audited by the Corporation's public
accountants. In the opinion of management, all adjustments necessary for a fair
presentation of the financial position and the results of operations for the
interim periods have been made. All such adjustments are of a normal recurring
nature. 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. For a description of Northern
Trust's significant accounting policies, refer to Note 1 of the Notes to
Consolidated Financial Statements in the 2000 Annual Report to Shareholders.
2. Securities - The following table summarizes the book and fair values of
securities.
- ------------------------------------------------------------------------------------------------------------------
September 30, 2001 December 31, 2000 September 30, 2000
-------------------------------------------------------------------------------------
Book Fair Book Fair Book Fair
(In Millions) Value Value Value Value Value Value
- ------------------------------------------------------------------------------------------------------------------
Held to Maturity
U.S. Government $ - $ - $ 55.0 $ 55.0 $ 54.9 $ 54.9
Obligations of States and
Political Subdivisions 504.1 527.4 435.7 445.1 455.4 454.1
Federal Agency 5.2 5.3 5.5 5.5 6.0 5.8
Other 131.7 127.0 282.2 276.5 278.6 274.1
- ------------------------------------------------------------------------------------------------------------------
Subtotal 641.0 659.7 778.4 782.1 794.9 788.9
- ------------------------------------------------------------------------------------------------------------------
Available for Sale
U.S. Government 160.4 160.4 174.6 174.6 181.3 181.3
Obligations of States and
Political Subdivisions 17.0 17.0 15.7 15.7 15.6 15.6
Federal Agency 4,899.3 4,899.3 6,172.1 6,172.1 8,926.1 8,926.1
Preferred Stock 99.3 99.3 101.2 101.2 100.9 100.9
Other 186.1 186.1 14.2 14.2 17.3 17.3
- ------------------------------------------------------------------------------------------------------------------
Subtotal 5,362.1 5,362.1 6,477.8 6,477.8 9,241.2 9,241.2
- ------------------------------------------------------------------------------------------------------------------
Trading Account 13.7 13.7 13.4 13.4 13.9 13.9
- ------------------------------------------------------------------------------------------------------------------
Total Securities $ 6,016.8 $ 6,035.5 $7,269.6 $7,273.3 $10,050.0 $10,044.0
- ------------------------------------------------------------------------------------------------------------------
6
- ------------------------------------------------------------------------------------------------------------------
Reconciliation of Book Values to Fair Values of
Securities Held to Maturity September 30, 2001
- ------------------------------------------------------------------------------------------------------------------
Gross Unrealized
Book -------------------------- Fair
(In Millions) Value Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------
U.S. Government $ - $ - $ - $ -
Obligations of States and Political Subdivisions 504.1 23.3 - 527.4
Federal Agency 5.2 .2 .1 5.3
Other 131.7 .1 4.8 127.0
- -----------------------------------------------------------------------------------------------------------------
Total $ 641.0 $ 23.6 $ 4.9 $ 659.7
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Reconciliation of Amortized Cost to Fair Values of
Securities Available for Sale September 30, 2001
- -----------------------------------------------------------------------------------------------------------------
Gross Unrealized
Amortized -------------------------- Fair
(In Millions) Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------
U.S. Government $ 159.2 $ 1.2 $ - $ 160.4
Obligations of States and Political Subdivisions 16.8 .2 - 17.0
Federal Agency 4,890.2 9.1 - 4,899.3
Preferred Stock 99.4 .1 .2 99.3
Other 186.1 - - 186.1
- -----------------------------------------------------------------------------------------------------------------
Total $ 5,351.7 $ 10.6 $ .2 $ 5,362.1
- -----------------------------------------------------------------------------------------------------------------
3. Pledged Assets - Securities and loans pledged to secure public and trust
deposits, repurchase agreements and for other purposes as required or permitted
by law were $9.6 billion on September 30, 2001, $10.5 billion on December 31,
2000 and $13.7 billion on September 30, 2000. Included in the September 30,
2001 pledged assets were securities available for sale of $665.4 million, which
were pledged as collateral for repurchase agreement transactions. The secured
parties to these transactions have the right to repledge or sell these
securities.
Northern Trust is permitted to repledge collateral accepted from reverse
repurchase agreement transactions. The total fair value of accepted collateral
as of September 30, 2001, December 31, 2000 and September 30, 2000 was $1.0
billion, $296.4 million and $297.9 million, respectively. The fair value of
repledged collateral as of September 30, 2001, December 31, 2000 and September
30, 2000 was $257.1 million, $125.6 million and $99.4 million, respectively.
Repledged collateral was used in other repurchase agreement transactions.
4. Contingent Liabilities - Standby letters of credit outstanding were $2.4
billion on September 30, 2001, $2.0 billion on December 31, 2000 and $2.1
billion on September 30, 2000.
7
5. Loans and Leases - Amounts outstanding in selected loan categories are
shown below.
- --------------------------------------------------------------------------------------------------------
(In Millions) September 30, 2001 December 31, 2000 September 30, 2000
- --------------------------------------------------------------------------------------------------------
Domestic
Residential Real Estate $ 7,332.4 $ 6,822.8 $ 6,643.5
Commercial 4,898.8 4,796.8 5,003.1
Broker 72.1 126.4 166.7
Commercial Real Estate 1,006.9 911.0 878.5
Personal 2,120.0 2,289.3 2,225.5
Other 1,088.1 1,207.1 1,008.1
Lease Financing 1,186.6 1,034.4 862.2
- -------------------------------------------------------------------------------------------------------
Total Domestic 17,704.9 17,187.8 16,787.6
International 1,050.5 956.8 942.5
- -------------------------------------------------------------------------------------------------------
Total Loans and Leases $18,755.4 $18,144.6 $17,730.1
- -------------------------------------------------------------------------------------------------------
At September 30, 2001, other domestic and international loans included $1.4
billion of overnight trust-related advances, primarily in connection with next
day security settlements, compared with $1.4 billion at December 31, 2000 and
$1.3 billion at September 30, 2000.
At September 30, 2001, nonperforming loans and leases totaled $114.2 million.
Included in this amount were loans with a recorded investment of $112.8 million,
which were also classified as impaired. A loan is impaired when, based on
current information, it is probable that a creditor will be unable to collect
all amounts due according to the contractual terms of the loan agreement.
Impaired loans totaling $25.3 million had no portion of the reserve for credit
losses allocated to them while impaired loans totaling $87.5 million had an
allocated reserve of $20.1 million. For the third quarter of 2001, the total
recorded investment in impaired loans averaged $107.2 million. There was $66
thousand of interest income recorded on impaired loans for the quarter ended
September 30, 2001.
At September 30, 2000, nonperforming loans and leases totaled $76.8 million and
included $75.2 million of impaired loans. Of these impaired loans, $28.3
million had no portion of the reserve for credit losses allocated to them while
$46.9 million had an allocated reserve of $18.4 million. Total recorded
investment in impaired loans for the third quarter of 2000 averaged $58.7
million with no interest income recognized on such loans.
8
6. Reserve for Credit Losses - Changes in the reserve for credit losses were
as follows:
- --------------------------------------------------------------------------
Nine Months
Ended September 30
- --------------------------------------------------------------------------
(In Millions) 2001 2000
- --------------------------------------------------------------------------
Balance at Beginning of Period $162.9 $150.9
Charge-Offs (27.3) (12.9)
Recoveries 1.0 1.0
- --------------------------------------------------------------------------
Net Charge-Offs (26.3) (11.9)
Provision for Credit Losses 21.5 19.0
- --------------------------------------------------------------------------
Balance at End of Period $158.1 $158.0
- --------------------------------------------------------------------------
The reserve for credit losses represents management's estimate of probable
inherent losses that have occurred as of the date of the financial statements.
The loan and lease portfolio and other credit exposures are regularly reviewed
to evaluate the adequacy of the reserve for credit losses. In determining the
level of the reserve, Northern Trust evaluates the reserve necessary for
specific nonperforming loans and also estimates losses inherent in other credit
exposures.
The result is a reserve with the following components:
Specific Reserve. The amount of specific reserve is determined through a loan-
by-loan analysis of nonperforming loans that considers expected future cash
flows, the value of collateral and other factors that may impact the borrower's
ability to pay.
Allocated Inherent Reserve. The amount of the allocated portion of the inherent
loss reserve is based on loss factors assigned to Northern Trust's credit
exposures, which depend upon internal credit ratings. These loss factors
primarily include management's judgment concerning the effect of the business
cycle on the creditworthiness of Northern Trust's borrowers as well as
historical charge-off experience.
Unallocated Inherent Reserve. Management determines the unallocated portion of
the inherent reserve based on factors that cannot be associated with a specific
credit or loan category. These factors include management's subjective
evaluation of local and national economic and business conditions, portfolio
concentration and changes in the character and size of the loan portfolio. The
unallocated portion of the inherent reserve reflects management's attempt to
ensure that the overall reserve appropriately reflects a margin for the
imprecision necessarily inherent in estimates of expected credit losses.
9
7. Net Income Per Common Share Computations - The computation of net income
per common share is presented in the following table.
- --------------------------------------------------------------------------------------------------------------
Third Quarter Nine Months
Ended September 30 Ended September 30
- --------------------------------------------------------------------------------------------------------------
($ In Millions Except Per Share Information) 2001 2000 2001 2000
- --------------------------------------------------------------------------------------------------------------
Basic Net Income Per Common Share
Net Income $ 126.6 $ 123.3 $ 385.1 $ 359.6
Less: Dividends on Preferred Stock (.9) (1.5) (3.4) (4.2)
- --------------------------------------------------------------------------------------------------------------
Net Income Applicable to Common Stock $ 125.7 $ 121.8 $ 381.7 $ 355.4
Average Number of Common Shares Outstanding 221,453,555 220,749,384 221,573,897 220,985,573
Basic Net Income Per Common Share $ .57 $ .55 $ 1.72 $ 1.61
- --------------------------------------------------------------------------------------------------------------
Diluted Net Income Per Common Share
Net Income Applicable to Common Stock $ 125.7 $ 121.8 $ 381.7 $ 355.4
Average Number of Common Shares Outstanding 221,453,555 220,749,384 221,573,897 220,985,573
Plus Dilutive Potential Common Shares:
Stock Options 5,042,620 7,638,346 5,559,619 7,098,795
Stock Incentive Plans 2,282,350 2,549,208 2,223,610 2,428,795
- --------------------------------------------------------------------------------------------------------------
Average Common and Potential Common Shares 228,778,525 230,936,938 229,357,126 230,513,163
Diluted Net Income Per Common Share $ .55 $ .53 $ 1.66 $ 1.54
- --------------------------------------------------------------------------------------------------------------
8. Accumulated Other Comprehensive Income
- -------------------------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30, 2001
- -------------------------------------------------------------------------------------------------------------------------------
Unrealized Gains Minimum Gains (Losses) Accumulated
(Losses) on Pension On Cash Flow Other
Securities Available Liability Hedge Designations Comprehensive
(In Millions) For Sale (net of tax) (net of tax) (net of tax) Income
- -------------------------------------------------------------------------------------------------------------------------------
Beginning Balance $(.9) $(12.3) $ - $(13.2)
Cumulative-effect of adopting SFAS 133 - - (.2) (.2)
Current-Period Change 3.0 - 2.5 5.5
- -------------------------------------------------------------------------------------------------------------------------------
Ending Balance $2.1 $(12.3) $2.3 $ (7.9)
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30, 2000
- -------------------------------------------------------------------------------------------------------------------------------
Unrealized Gains Minimum Gains (Losses) Accumulated
(Losses) on Pension On Cash Flow Other
Securities Available Liability Hedge Designations Comprehensive
(In Millions) For Sale (net of tax) (net of tax) (net of tax) Income
- -------------------------------------------------------------------------------------------------------------------------------
Beginning Balance $(2.4) $(10.8) $ - $(13.2)
Current-Period Change .1 - - .1
- -------------------------------------------------------------------------------------------------------------------------------
Ending Balance $(2.3) $(10.8) $ - $(13.1)
- -------------------------------------------------------------------------------------------------------------------------------
10
9. Accounting Standards Pronouncements - In July 2001, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 141, "Business Combinations", and No. 142, "Goodwill and
Other Intangible Assets".
SFAS No. 141 supersedes Accounting Principles Board (APB) Opinion No. 16,
"Business Combinations" and discontinues the use of the pooling-of-interests
method of accounting for business combinations as permitted under APB No. 16.
The provisions of SFAS No. 141 apply to all business combinations initiated
after June 30, 2001 and require that all business combinations be accounted for
by a single method -- the purchase method.
SFAS No. 142 supersedes APB Opinion No. 17, "Intangible Assets" and addresses
the accounting for goodwill and other intangible assets. The provisions of this
Statement, as they relate to Northern Trust, are required to be applied
beginning January 1, 2002 to all goodwill and other intangible assets reflected
in the financial statements at that date. The Statement discontinues
amortization of goodwill over its estimated useful life and requires a
transitional impairment test of goodwill as of January 1, 2002. An annual
impairment test of goodwill is also required in the year of adoption and in
subsequent years. Impairment losses for goodwill that arise due to the initial
application of this Statement, resulting from the transitional impairment test,
are to be reported as a change in accounting principle and any subsequent
impairment losses are required to be reported as operating expenses. Goodwill
at September 30, 2001 totaled $92.2 million and is currently being amortized on
a straight-line method primarily over fifteen years. Application of the
nonamortization provisions of the Statement is expected to reduce noninterest
expense by approximately $10.0 million annually, resulting in an increase in net
income of $8.0 million in 2002 compared to 2001. Management has not yet
completed the initial goodwill impairment test to determine whether any
transitional impairment charge will be necessary. Other separately identifiable
acquired intangible assets will continue to be amortized over their estimated
useful life. At September 30, 2001, acquired intangible assets totaled $36.8
million and amortization for the first nine months of the year amounted to $4.9
million.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". SFAS No. 144 supersedes SFAS No. 121 and the
accounting and reporting provisions of APB Opinion No. 30. The Statement
addresses the accounting for a segment of a business accounted for as a
discontinued operation and the accounting for long-lived assets to be disposed
of. The provisions of this Statement are effective for financial statements
issued for fiscal years beginning after December 15, 2001. Northern will adopt
the requirements of this Statement at the beginning of 2002. It is not
anticipated that the adoption of SFAS No. 144 will have a material effect on
Northern Trust's results of operations.
10. Business Segments
The tables on page 17, reflecting the earnings contribution of Northern Trust's
business segments for the third quarter and nine months ended September 30,
2001, are incorporated by reference.
11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THIRD QUARTER EARNINGS HIGHLIGHTS
Net income increased 3% to $126.6 million from the $123.3 million earned in the
third quarter of last year. Net income per common share on a diluted basis
increased 4% to $.55 for the third quarter, up from $.53 earned a year ago.
This earnings performance produced an annualized return on average common equity
(ROE) of 19.63% versus 22.12% reported last year, and an annualized return on
average assets (ROA) of 1.43% versus 1.42% in 2000. While total revenues in the
quarter were essentially flat from last year, management of expenses was
particularly effective, resulting in positive operating leverage and a
productivity ratio of 160%.
Noninterest Income
Noninterest income totaled $389.8 million for the quarter, accounting for 71% of
total taxable equivalent revenue. Trust fees were essentially unchanged at
$304.3 million in the quarter, compared to $304.7 million in the third quarter
of last year and represented 55% of total taxable equivalent revenue. The flat
trust fee performance resulted from sharply lower equity markets, offset by new
business. New business sold remained strong in this difficult environment. As
a result of this new business, trust assets under administration declined only
6% to $1.58 trillion since September 2000, despite the significant declines in
equity markets, as evidenced by the 28% decline in the S&P equity index during
this period. Trust assets under the management of Northern Trust declined 3%
since last year and totaled $327.5 billion.
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 trust 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 trust fee income.
In addition, certain accounts may be on a fixed annual fee. Therefore, market
value or other changes in a portfolio's size do not typically have a directly
proportionate impact on the level of the fees. In addition, Corporate and
Institutional Services (C&IS) trust relationships are increasingly priced to
reflect earnings from activities such as custody-related deposits and foreign
exchange trading which are not included in trust fees.
12
Noninterest Income (continued)
Trust fees from Personal Financial Services (PFS) in the quarter totaled $153.5
million, compared to $158.7 million in the year-ago quarter. The decline in PFS
trust fees resulted from sharply lower equity markets, partially offset by new
business throughout Northern Trust's national PFS network. Northern Trust's
network of Personal Financial Services offices totals 82 locations in twelve
states, and it is currently estimated that there will be approximately 100
offices operating within as many as fifteen states by the end of 2005.
Personal trust assets under administration totaled $149.8 billion at September
30, 2001, and reflect the transfer of $3.0 billion in assets to Corporate &
Institutional Services (C&IS). This compares to $171.2 billion at September
30, 2000. Of the total assets under administration, $89.8 billion is managed by
Northern Trust, compared to $100.1 billion one year ago. At September 30, 2001,
approximately 50% of the personal trust assets under administration and 46% of
assets under management were invested in domestic equity securities. Net new
recurring PFS trust business sold in the first nine months totaled approximately
$47 million in annualized fees.
Trust fees from C&IS in the quarter increased 3% to $150.8 million, compared to
$146.0 million in the year-ago quarter. Securities lending fees increased 8%
to $29.3 million and were the principal contributor to the overall increase. The
securities lending growth reflected higher volumes, as well as increased spreads
earned on the investment of collateral. Custody fees increased to $51.2
million, up 4%, largely driven by new global custody business. Fees from asset
management totaled $46.2 million, up slightly from the $46.0 million in the
year-ago quarter, which included $3.4 million of performance-based fees compared
to $.7 million in the current quarter. Northern Trust Retirement Consulting,
L.L.C. recorded fees of $14.2 million, essentially unchanged from last year's
third quarter.
C&IS trust assets under administration totaled $1.43 trillion at September 30,
2001, compared to $1.52 trillion at September 30, 2000. Of the C&IS trust
assets under administration, $237.7 billion is managed by Northern Trust, down
slightly from September 30, 2000. At September 30, 2001, approximately 35% of
assets under administration and 25% of assets under management were invested in
domestic equity securities. Trust assets under administration included $424.9
billion of global custody assets, up 12% from a year ago. Net new recurring
C&IS trust business sold in the first nine months totaled approximately $57
million in annualized fees.
Foreign exchange trading profits were $37.2 million for the quarter, compared to
$37.6 million in the third quarter of 2000. The current quarter reflects
continued volatility in major currencies and transaction flows associated with
global custody assets.
Treasury management revenues, which include both fees and the computed value of
compensating deposit balances, totaled $28.6 million, up 5% from last year's
third quarter, due to new business and higher transaction volumes from existing
clients. The fee portion of these revenues in the quarter was $21.0 million, up
16% from $18.1 million in the comparable quarter last year, partly as a result
of more clients electing to pay for services in fees rather than in compensating
deposit balances.
13
Noninterest Income (continued)
Revenues from security commissions and trading income totaled $8.1 million,
essentially unchanged from last year. Other operating income was $19.2 million
for the third quarter compared with $23.5 million in the same period of last
year. Included in the prior year results was $2.5 million in nonrecurring
income from an asset exchange. The remainder of the change in other operating
income primarily reflects lower levels of trust deposit-related revenues.
Net Interest Income
Net interest income for the quarter totaled $149.0 million, 4% higher than the
$142.8 million reported in the third quarter of 2000. 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. When net interest income is adjusted to a
fully taxable equivalent (FTE) basis, yields on taxable, nontaxable and
partially taxable assets are comparable, although the adjustment to a FTE basis
has no impact on net income. Net interest income on a FTE basis for the quarter
was $161.6 million, up 3% from $157.1 million reported in the third quarter of
2000. Total average earning assets of $31.4 billion were unchanged from last
year's third quarter, but the net interest margin improved to 2.05% from 1.99%.
The net interest margin benefited from loan growth of 6% to $17.9 billion and
the favorable impact of lower short-term funding costs during the quarter. The
Federal Reserve Open Market Committee reduced the federal funds rate target
twice during the third quarter to 3.00%. This compares to a rate of 6.50% at
the start of 2001. Other favorable factors included a 6% increase in
noninterest-related funds and a 6% increase in retail savings deposits.
Earning assets for the third quarter averaged $31.4 billion, unchanged from last
year's third quarter. The $1.1 billion growth in average loans and the $2.0
billion increase in money market assets were offset by a 29% decline in the
securities portfolio to average $7.7 billion.
The loan growth was concentrated predominantly in the domestic portfolio, which
increased $1.0 billion to average $17.1 billion, while international loans
increased by $88 million to $783 million from a year ago. Residential mortgage
loans, which represent 40% of the total average loan portfolio, increased $633
million or 10% to average $7.2 billion for the quarter. The lease portfolio
grew $334 million or 44%, and averaged $1.1 billion for the quarter.
Commercial and industrial loans averaged $4.9 billion, unchanged from a year
ago.
14
Net Interest Income (continued)
Funding for the growth in earning assets came from several sources. Total
interest-related deposits averaged $17.8 billion, up 10% or $1.6 billion from
the third quarter of 2000. This growth was concentrated primarily in savings
and money market deposits, up $.6 billion, and foreign office time deposits, up
$1.2 billion as a result of increased global custody activity. Other interest-
related funds averaged $8.4 billion in the quarter compared to $10.3 billion in
last year's third quarter. The decline in other interest-related funds was due
primarily to lower levels of treasury tax deposit balances and term federal
funds sold. The balances within these classifications vary based on funding
requirements and strategies, interest rate levels, growth in lower cost deposit
sources, and the availability of collateral to secure these borrowings.
Noninterest-related funds increased 6% to average $5.1 billion due to growth in
common stockholders' equity resulting from retained earnings, and to a higher
level of demand deposits.
Provision for Credit Losses
The provision for credit losses was $5.0 million in the third quarter, unchanged
from the same quarter last year and down from $11.5 million recorded in the
second quarter of 2001. The second quarter included a provision related to
sales of nonperforming loans. For a discussion of the provision and reserve for
credit losses, refer to the Asset Quality section beginning on page 20.
Noninterest Expenses
Noninterest expenses totaled $343.6 million for the quarter, essentially
unchanged from $344.9 million in the year-ago quarter. Expenses continue to be
closely monitored through various initiatives implemented by management
including controlling staff levels, limiting staff-related and other
discretionary expenses, and modifying some cash incentive plans for 2001 to
include a stock option grant component. This last initiative, announced earlier
in the year, resulted in a $6.1 million expense savings in the current quarter
when compared to programs in place prior to this initiative.
Compensation and employee benefits, represented approximately 59% of total
noninterest expenses and totaled $204.2 million, down 1% from a year ago. Staff
growth and salary increases were more than offset by lower performance-based
pay. Performance-based pay in the prior year quarter was impacted by strong new
business, excellent investment management performance and record net income.
Current year compensation levels reflect the impact of slower revenue growth,
lower investment portfolio performance and the modifications made to incentive
plans. Staff on a full-time equivalent basis at September 30, 2001 totaled
9,353 and reflects the reduction of staff resulting from the previously
announced formation of a joint venture with Fiserv, Inc., to provide receivables
management services. The expenses related to this service are now a component
of other operating expenses. After adjusting for the impact of this venture,
staff levels have increased 4% since September 30, 2000 and 2% since December
31, 2000.
15
Noninterest Expenses (continued)
Net occupancy expense totaled $25.8 million, up 19% from $21.8 million in the
third quarter of 2000, due primarily to the opening of new or remodeled PFS
offices over the past twelve months and additional space leased to support
business growth. The principal components of the increase in occupancy expense
were higher net rental, operating and maintenance costs, real estate taxes and
utilities, building depreciation and amortization expense of leasehold
improvements.
Equipment expense, comprised of depreciation, rental and maintenance costs,
totaled $20.8 million, up 15% from the $18.1 million reported in the third
quarter of 2000. The increase was primarily in depreciation of computer
hardware and office furniture and equipment, higher maintenance costs for
computers and equipment, and increased costs for data line leases.
Other operating expenses in the quarter totaled $92.8 million compared to $97.7
million last year. The decline in other operating expenses reflects the net
impact of several factors. These included expense reductions as a result of a
decrease in performance-based fees paid to investment sub-advisors, lower levels
of business development costs, and a reduction in charges associated with
processing errors incurred in servicing and managing financial assets and
performing banking activities. Other operating expenses also benefited from
lower stock-related directors compensation due to the decline in the stock price
of Northern Trust Corporation from the end of the second quarter. These lower
expenses were partially offset by higher costs associated with continued
investment in technology, expansion of the PFS office network, other
expenditures to support business growth and payments made to Fiserv, Inc. for
receivables management services. The following table shows the components of
other operating expenses.
- -------------------------------------------------------------------------------
Third Quarter
Other Operating Expenses Ended September 30
- -------------------------------------------------------------------------------
(In Millions) 2001 2000
- -------------------------------------------------------------------------------
Business Development $ 8.7 $10.6
Purchased Professional Services 38.3 36.3
Telecommunications 4.6 4.6
Postage and Supplies 7.2 7.4
Software Amortization 18.7 15.4
Goodwill and Other Intangibles Amortization 4.2 4.1
Other Expenses 11.1 19.3
- -------------------------------------------------------------------------------
Total Other Operating Expenses $92.8 $97.7
- -------------------------------------------------------------------------------
16
Provision for Income Taxes
The provision for income taxes was $63.6 million for the third quarter compared
with $61.5 million in the year-ago quarter. The higher tax provision in 2001
resulted primarily from the growth in taxable earnings for both federal and
state income tax purposes. The effective tax rate for the third quarter was
33.4% compared to 33.3% for the third quarter of 2000.
BUSINESS SEGMENTS
The following table reflects the earnings contribution and average assets of
Northern Trust's business segments for the third quarter ended September 30,
2001 and 2000.
Corporate and
Institutional Personal Financial Treasury and Total
Third Quarter Services Services Other Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
($ In Millions) 2001 2000 2001 2000 2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
Noninterest Income
Trust Fees $ 150.8 $ 146.0 $ 153.5 $ 158.7 $ - $ - $ 304.3 $ 304.7
Other 67.8 66.5 16.7 18.4 1.0 2.3 85.5 87.2
Net Interest Income after
Provision for Credit Losses* 46.9 49.3 106.5 99.9 3.2 2.9 156.6 152.1
Noninterest Expenses 165.9 157.1 167.7 168.0 10.0 19.8 343.6 344.9
- -----------------------------------------------------------------------------------------------------------------------------------
Income before Income Taxes* 99.6 104.7 109.0 109.0 (5.8) (14.6) 202.8 199.1
Provision for Income Taxes* 38.7 40.7 42.1 42.3 (4.6) (7.2) 76.2 75.8
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income $ 60.9 $ 64.0 $ 66.9 $ 66.7 $ (1.2) $ (7.4) $ 126.6 $ 123.3
- -----------------------------------------------------------------------------------------------------------------------------------
Percentage Net Income
Contribution 48% 52% 53% 54% (1)% (6)% 100% 100%
- -----------------------------------------------------------------------------------------------------------------------------------
Average Assets $18,317.7 $16,347.9 $14,885.7 $13,658.4 $1,856.6 $4,468.9 $35,060.0 $34,475.2
- -----------------------------------------------------------------------------------------------------------------------------------
*Stated on a fully taxable equivalent basis (FTE). Total includes FTE
adjustments of $12.6 million for 2001 and $14.3 million for 2000.
Note: Certain reclassifications have been made to 2000 financial information to
conform to the current year presentation.
The following table reflects the earnings contribution and average assets of
Northern Trust's business segments for the nine-month period ended September 30,
2001 and 2000.
Corporate and
Institutional Personal Financial Treasury and Total
Nine Months Services Services Other Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
($ In Millions) 2001 2000 2001 2000 2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
Noninterest Income
Trust Fees $ 462.9 $ 439.5 $ 464.3 $ 456.8 $ $ $ 927.2 $ 896.3
Other 211.9 195.7 50.8 51.6 3.7 3.6 266.4 250.9
Net Interest Income after
Provision for Credit Losses* 138.6 136.7 312.0 296.7 12.2 9.6 462.8 443.0
Noninterest Expenses 500.7 466.7 509.8 481.3 26.5 61.2 1,037.0 1,009.2
- ---------------------------------------------------------------------------------------------------------------------------------
Income before Income Taxes* 312.7 305.2 317.3 323.8 (10.6) (48.0) 619.4 581.0
Provision for Income Taxes* 121.4 118.4 122.8 125.8 (9.9) (22.8) 234.3 221.4
- ---------------------------------------------------------------------------------------------------------------------------------
Net Income $ 191.3 $ 186.8 $ 194.5 $ 198.0 $ (.7) $ (25.2) $ 385.1 $ 359.6
- ---------------------------------------------------------------------------------------------------------------------------------
Percentage Net Income
Contribution 50% 52% 50% 55% -% (7)% 100% 100%
- ---------------------------------------------------------------------------------------------------------------------------------
Average Assets $17,949.5 $16,225.5 $14,778.0 $13,152.8 $2,942.8 $3,980.2 $35,670.3 $33,358.5
- ---------------------------------------------------------------------------------------------------------------------------------
*Stated on a fully taxable equivalent basis (FTE). Total includes FTE
adjustments of $40.8 million for 2001 and $39.0 million for 2000.
Note: Certain reclassifications have been made to 2000 financial information to
conform to the current year presentation.
17
Corporate and Institutional Services
C&IS net income for the quarter totaled $60.9 million, down 5% from the third
quarter of 2000. Noninterest income increased 3% to $218.6 million in the third
quarter of 2001 from $212.5 million in last year's third quarter. Trust fees
increased 3% to $150.8 million in the current quarter compared to $146.0 million
in the year-ago quarter, due primarily to an 8% increase in securities lending
fees. Other income was $67.8 million, up 2% from $66.5 million in last year's
third quarter. The increase reflects a 14% or $2.2 million increase in fees for
treasury management services due to new business, higher transaction volumes
from existing clients and clients electing to pay for services in fees rather
than in compensating deposit balances. Foreign exchange trading profits were
down slightly from last year's third quarter.
Net interest income after the provision for credit losses, stated on a FTE
basis, was $46.9 million, down 5% from $49.3 million in last year's third
quarter. The impact of the $1.9 billion increase in average earning assets was
more than offset by a decline in the net interest margin to 1.23% from 1.42% in
the prior year quarter and a $1.6 million increase in the provision for possible
credit losses.
Noninterest expenses increased 6% to $165.9 million in the current quarter due
primarily to staff growth, merit increases, higher occupancy costs and expense
allocations for product and operations support. Salaries and employee benefits
increased, resulting from staff growth and merit increases, but were partially
offset by lower performance-based pay.
Personal Financial Services
PFS net income for the quarter was $66.9 million, essentially unchanged from
$66.7 million reported a year ago. Noninterest income was $170.2 million in the
current quarter compared to $177.1 million in last year's third quarter. The
decrease was due primarily to lower trust fees, which totaled $153.5 million in
the current quarter, resulting from sharply lower equity markets, partially
offset by new business throughout Northern Trust's national PFS network. Other
income totaled $16.7 million in the current quarter, compared with $18.4 million
in the prior year, which included $2.5 million of nonrecurring income from an
asset exchange.
Net interest income after the provision for credit losses, stated on a FTE
basis, increased 7% to $106.5 million in the current quarter. The increase was
due primarily to a $1.1 billion or 9% increase in average loan volume, offset in
part by a reduction in the net interest margin to 2.99% from 3.09% last year.
18
Personal Financial Services (continued)
Noninterest expenses decreased slightly to $167.7 million in the current quarter
from $168.0 million in last year's third quarter. Expense allocations for
product and operations support increased 11% or $6.3 million in the quarter.
Occupancy costs were $1.1 million or 14% higher as a result of opening new PFS
offices and the expansion of existing locations. Salaries and employee benefits
declined 1% as the effects of staff growth and merit increases were more than
offset by lower performance-based pay. In addition, business development
expenses and operating costs associated with processing errors incurred in
servicing and managing financial assets were down from a year ago.
Treasury and Other
The Treasury Department is responsible for managing The Northern Trust Company's
(Bank) wholesale funding, capital position and interest rate risk, as well as
the investment portfolio. "Other" corporate income and noninterest expenses
represent items that are not allocated to the business units and generally
represent certain nonrecurring items and certain executive level compensation.
Net interest income for the third quarter was up slightly from a year ago
resulting primarily from the impact of falling interest rates in 2001.
Noninterest expenses totaled $10.0 million for the quarter compared with $19.8
million in last year's third quarter. The decline in operating expenses relates
to lower accruals for certain corporate-based incentive plans. In addition,
expenses were reduced due to lower stock-related directors compensation
resulting from the decline in the price of Northern Trust Corporation common
stock from the end of the second quarter.
NINE-MONTH EARNINGS HIGHLIGHTS
Net income per common share on a diluted basis increased 8% to $1.66 for the
nine-month period ended September 30, 2001, up from $1.54 last year. Net income
increased 7% to $385.1 million from $359.6 million in the year-ago period. The
ROE was 20.72% compared to 22.21% last year, while the ROA was unchanged at
1.44%. The productivity ratio improved to 162% from 159% last year.
Total revenues, stated on a fully taxable equivalent basis, increased 4% from
2000 levels. Trust fees totaled $927.2 million, up 3% from $896.3 million last
year. Foreign exchange trading profits totaled $112.6 million, down 1% from
last year's strong performance. Treasury management revenues from both fees and
the computed value of compensating deposit balances increased 8% to $86.2
million. The fee portion of these revenues accrued in the period totaled $61.7
million, up 16% from 2000 levels. Other operating income totaled $65.9 million
in the period compared with $57.9 million in 2000. The increase from last year
is comprised of the $9.2 million nonrecurring gain recorded in this year's
second quarter, in addition to higher loan and trust deposit-related fees. The
third quarter of 2000 included $2.5 million of nonrecurring income from an asset
exchange.
Net interest income, stated on a FTE basis, totaled $484.3 million, up 5% from
$462.0 million reported last year. The $21.5 million provision for credit
losses was $2.5 million higher than the $19.0 million required in the same
period last year. Noninterest expenses were up 3% and totaled $1.04 billion
compared to $1.01 billion a year ago.
19
BALANCE SHEET
Total assets at September 30, 2001 were $35.1 billion and also averaged $35.1
billion for the third quarter, up 2% from last year's average of $34.5 billion.
Due to continued credit demand, loans and leases grew to $18.8 billion at
September 30, 2001 and averaged $17.9 billion for the quarter. This compares
with $17.7 billion in total loans and leases at September 30, 2000 and $16.8
billion on average for the third quarter of last year. Securities totaled $6.0
billion at September 30, 2001 and averaged $7.7 billion for the third quarter,
compared to $10.0 billion at September 30, 2000 and $10.8 billion on average in
the third quarter of 2000. Money market assets totaled $6.1 billion at
September 30, 2001 and averaged $5.7 billion in the third quarter, up 54% from
the year-ago quarter.
Driven by continued strong earnings growth, offset in part by stock repurchases
under Northern Trust's ongoing stock buyback program, common stockholders'
equity increased to $2.61 billion at September 30, 2001 and averaged $2.54
billion for the quarter, up 16% from the $2.19 billion average in last year's
third quarter. Total stockholders' equity averaged $2.66 billion compared with
$2.31 billion in the third quarter of 2000.
During the quarter, the Corporation acquired a total of 798,342 shares at a cost
of $47.1 million. An additional 5.4 million shares may be purchased after
September 30, 2001 under the current stock buyback program.
Northern Trust's risk-based capital ratios remained strong at 10.6% for tier 1
capital and 13.9% for total capital at September 30, 2001. These ratios are
well above the minimum regulatory requirements of 4% for tier 1 and 8% for total
risk-based capital ratios. The leverage ratio (tier 1 capital to third quarter
average assets) of 7.9% at September 30, 2001, also exceeded the minimum
regulatory requirement of 3%. The Bank's risk-based capital ratios at September
30, 2001 were 9.0% for tier 1 capital, 12.4% for total capital and 6.7% for the
leverage ratio. Each of Northern Trust's other subsidiary banks had a ratio of
10.7% or higher for tier 1 capital, 11.3% for total risk-based capital, and 7.1%
for the leverage ratio.
ASSET QUALITY
Nonperforming assets consist of nonaccrual loans and other real estate owned
(OREO). Nonperforming assets at September 30, 2001 totaled $115.8 million,
compared with $109.4 million at June 30, 2001, $78.5 million at December 31,
2000 and $78.8 million at September 30, 2000. Domestic nonaccrual loans
consisting primarily of commercial loans, totaled $114.2 million, representing
.65% of total domestic loans and leases at September 30, 2001. At June 30,
2001, December 31, 2000 and September 30, 2000, domestic nonaccrual loans and
leases totaled $107.9 million, $76.3 million and $76.8 million, respectively.
The change during the third quarter from June 30, 2001 reflects further
deterioration, principally, in two middle market commercial loans, offset in
part by the partial charge-off of a commercial loan currently involved in
Chapter 11 reorganization proceedings and the repayment of another large loan
through the successful completion of a workout program.
20
ASSET QUALITY (continued)
The following table presents the outstanding amounts of nonaccrual loans and
OREO. Also shown are loans that have interest or principal payments that are
delinquent 90 days or more and are still accruing interest. The balance in this
category at any quarter-end can fluctuate widely based on the timing of cash
collections, renegotiations and renewals.
- ---------------------------------------------------------------------------------------------------------------
September 30, June 30, December 31, September 30,
(In Millions) 2001 2001 2000 2000
- ---------------------------------------------------------------------------------------------------------------
Nonaccrual Loans
Domestic
Residential Real Estate $ 4.9 $ 8.0 $ 2.9 $ 3.7
Commercial 105.0 96.9 71.2 70.6
Commercial Real Estate 4.2 2.6 1.8 2.0
Personal .1 .4 .4 .5
- ---------------------------------------------------------------------------------------------------------------
Total Domestic 114.2 107.9 76.3 76.8
International - - - -
- ---------------------------------------------------------------------------------------------------------------
Total Nonaccrual Loans 114.2 107.9 76.3 76.8
Other Real Estate Owned 1.6 1.5 2.2 2.0
- ---------------------------------------------------------------------------------------------------------------
Total Nonperforming Assets $115.8 $109.4 $78.5 $78.8
- ---------------------------------------------------------------------------------------------------------------
Total 90 Day Past Due Loans (still accruing) $ 47.7 $ 30.3 $30.5 $31.8
- ---------------------------------------------------------------------------------------------------------------
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, as 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).
Note 6 to the Consolidated Financial Statements includes a table that analyzes
the reserve for credit losses for the nine months ended September 30, 2001 and
September 30, 2000 and identifies the charge-offs, recoveries and the provision
for credit losses during the respective periods. The table on the following
page shows (i) the specific reserve, (ii) the allocated portion of the inherent
reserve and its components by loan category and (iii) the unallocated portion of
the inherent reserve, in each case, at September 30, 2001, June 30, 2001,
December 31, 2000 and September 30, 2000.
21
Provision and Reserve for Credit Losses (continued)
- ----------------------------------------------------------------------------------------------------------------------------------
ALLOCATION OF THE RESERVE FOR CREDIT LOSSES
- -----------------------------------------------------------------------------------------------------------------------------------
September 30, 2001 June 30, 2001 December 31, 2000 September 30, 2000
----------------------------------------------------------------------------------------------------
Percent of Percent of Percent of Percent of
Reserve Loans to Reserve Loans to Reserve Loans to Reserve Loans to
($ in millions) Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
- ----------------------------------------------------------------------------------------------------------------------------------
Specific Reserve $ 20.1 -% $ 23.4 -% $ 24.3 -% $ 18.4 -%
- ----------------------------------------------------------------------------------------------------------------------------------
Inherent Reserve
Residential Real Estate 9.6 39 11.0 39 9.6 38 8.7 37
Commercial 82.1 27 75.9 28 79.1 27 80.5 29
Commercial Real Estate 13.5 5 13.8 5 13.2 5 13.4 5
Personal 3.9 11 4.0 12 4.3 13 4.1 13
Other - 6 - 5 - 6 - 6
Lease Financing 3.0 6 2.9 6 2.9 6 2.9 5
International 3.0 6 4.7 5 3.4 5 3.1 5
Unallocated 22.9 - 24.0 - 26.1 - 26.9 -
- ----------------------------------------------------------------------------------------------------------------------------------
Total Inherent Reserve $138.0 100% $136.3 100% $138.6 100% $139.6 100%
- ----------------------------------------------------------------------------------------------------------------------------------
Total Reserve $158.1 100% $159.7 100% $162.9 100% $158.0 100%
- ----------------------------------------------------------------------------------------------------------------------------------
Specific Reserve. At September 30, 2001, the specific component of the reserve
stood at $20.1 million, compared to $23.4 million at June 30, 2001. The $3.3
million reduction in the specific component of the reserve during the quarter
reflects, primarily, the partial charge-off of one commercial loan currently in
Chapter 11 reorganization proceedings, offset in part by deterioration in
certain middle market commercial loans. The charge-off referred to above
totaled $5.6 million, all of which had previously been reserved for.
Allocated Inherent Reserve. The allocated inherent portion of the reserve
increased by a net $2.8 million during the third quarter to $115.1 million at
September 30, 2001. The change in this component of the reserve reflects
primarily the impact of the transfer of certain commercial loans to weaker
rating categories for which larger reserve provision factors are applied. In
addition, during the quarter, management completed its periodic review of all
loss factors utilized in estimating the inherent loss in the portfolio. As a
result of this review, the loss factors for certain credit rating categories for
commercial credits were reduced. The loss factor adjustments reflected
management's assessment of the credit risk inherent for these categories and
historical loss experience.
Unallocated Inherent Reserve. The unallocated portion of the inherent reserve
is based on management's review of overall factors affecting the determination
of probable losses inherent primarily in the commercial loan 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. The unallocated inherent portion of the reserve was $22.9
million, a decrease of $1.1 million from June 30, 2001.
22
Provision and Reserve for Credit Losses (continued)
Other Factors. During the quarter ended September 30, 2001, there were no
significant changes in concentration of credits that impacted asset quality at
the time reserve determinations were made for the quarter. At that time, the
total amount of loans in the two highest risk groupings, those rated "7" and "8"
(based on Northern Trust's internal rating scale, which closely parallels that
of the banking regulators), was $311 million of which $111.5 million was
classified as impaired, up from $149 million at June 30, 2001 when $104.7
million was classified as impaired, and up from $160 million at September 30,
2000 when $53 million was impaired. The increase from June 30, 2001 primarily
reflects the transfer of certain loans to lower credit ratings with
approximately 44% of the increase related to one large commercial loan whose
rating has been lowered due to exposure to potential asbestos-related claims.
The increase from the prior year primarily reflects similar rating changes on
certain loans.
Total Reserve. Management's evaluation of the factors above resulted in a total
reserve for credit losses of $158.1 million at September 30, 2001 compared to
$159.7 million at June 30, 2001. The reserve as a percentage of total loans
stood at .84% at September 30, 2001, versus .88% at June 30, 2001.
Provision. The provision for credit losses was $5.0 million during the third
quarter of 2001, compared to $11.5 million in the second quarter of 2001 and
$5.0 million in the prior year quarter. The provision for the second quarter of
2001 was affected by the $6.5 million provision related to the sale of $44.5
million in nonperforming loans.
MARKET RISK MANAGEMENT
As described in the 2000 Annual Report to Shareholders, Northern Trust manages
its interest rate risk through measurement techniques which include simulation
of earnings, simulation of the economic value of equity, and gap analysis.
Also, as part of its risk management activities, it regularly measures the risk
of loss associated with foreign currency positions using a value at risk model.
Based on this continuing evaluation process, Northern Trust's interest rate risk
position and the value at risk associated with the foreign exchange trading
portfolio have not changed significantly since December 31, 2000.
23
FORWARD-LOOKING INFORMATION
This 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, changes in
securities market prices, 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.
. Any extraordinary events (such as the September 11, 2001 events).
. 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 clients' needs.
. Northern Trust's success in further developing and executing on implementing
initiatives that integrate the Internet into methods of product distribution,
new business development and client service.
24
FORWARD-LOOKING INFORMATION (continued)
. Northern Trust's ability to continue to fund and accomplish technological
innovation, improve processes and controls, address technology risks,
including material systems interruptions or errors, 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 section of "Management's Discussion and Analysis of Financial
Condition and Results of Operations" captioned "Risk Management" in the 2000
Annual Report to Shareholders (pp. 38-48) and in the sections of "Item 1 -
Business" of the 2000 Annual Report on Form 10-K captioned "Government
Policies", "Competition" and "Regulation and Supervision" (pp. 7-12). All
forward-looking statements included in this report are based upon information
presently available, and Northern Trust assumes no obligation to update any
forward-looking statement.
25
THIS PAGE INTENTIONALLY LEFT BLANK.
26
The following schedule should be read in conjunction with the Net Interest
Income section of Management's Discussion and Analysis of Financial Condition
and Results of Operations.
CONSOLIDATED AVERAGE STATEMENT OF CONDITION NORTHERN TRUST CORPORATION
WITH ANALYSIS OF NET INTEREST INCOME
Third Quarter
---------------------------------------------------------------------
(Interest and rate on a taxable equivalent basis) 2001 2000
-------------------------------- ----------------------------------
($ in Millions) Interest Volume Rate Interest Volume Rate
- ------------------------------------------------------ -------- ---------- -------- ---------- ---------- --------
Average Earning Assets
Money Market Assets
Federal Funds Sold and Resell Agreements $ 5.9 $ 673.1 3.49% $ 7.9 $ 476.9 6.63%
Time Deposits with Banks 48.8 5,029.4 3.85 46.8 3,220.8 5.77
Other Interest-Bearing .3 23.8 4.87 .4 14.6 9.67
- ------------------------------------------------------ -------- ---------- -------- --------- ---------- --------
Total Money Market Assets 55.0 5,726.3 3.81 55.1 3,712.3 5.90
- ------------------------------------------------------ -------- ---------- -------- --------- ---------- --------
Securities
U.S. Government 2.1 169.3 4.99 3.7 234.0 6.32
Obligations of States and Political Subdivisions 10.1 502.9 8.01 9.5 473.5 8.06
Federal Agency 67.5 6,653.5 4.02 167.5 9,680.7 6.89
Other 6.6 400.0 6.58 8.6 441.6 7.72
Trading Account .1 10.9 4.68 .3 12.0 7.81
- ------------------------------------------------------ -------- ---------- -------- --------- ---------- --------
Total Securities 86.4 7,736.6 4.43 189.6 10,841.8 6.96
- ------------------------------------------------------ -------- ---------- -------- --------- ---------- --------
Loans and Leases 267.3 17,887.6 5.93 300.9 16,825.3 7.12
- ------------------------------------------------------ -------- ---------- -------- --------- ---------- --------
Total Earning Assets $ 408.7 31,350.5 5.17% $ 545.6 31,379.4 6.92%
- ------------------------------------------------------ -------- ---------- -------- --------- ---------- --------
Reserve for Credit Losses - (158.9) - - (158.6) -
Cash and Due from Banks - 1,586.2 - - 1,257.8 -
Other Assets - 2,282.2 - - 1,996.6 -
- ------------------------------------------------------ -------- ---------- -------- --------- ---------- --------
Total Assets - $ 35,060.0 - - $ 34,475.2 -
- ------------------------------------------------------ -------- ---------- -------- --------- ---------- --------
Average Source of Funds
Deposits
Savings and Money Market $ 36.7 $ 5,693.2 2.56% $ 53.7 $ 5,099.4 4.19%
Savings Certificates 26.6 2,146.8 4.91 34.4 2,266.7 6.03
Other Time 12.6 1,066.3 4.67 19.0 1,197.3 6.33
Foreign Offices Time 73.7 8,942.7 3.27 110.7 7,715.3 5.71
- ------------------------------------------------------ -------- ---------- -------- --------- ---------- --------
Total Deposits 149.6 17,849.0 3.33 217.8 16,278.7 5.32
Federal Funds Purchased 22.5 2,548.7 3.51 42.0 2,534.1 6.59
Securities Sold Under Agreements to Repurchase 11.6 1,345.8 3.42 22.6 1,392.3 6.46
Commercial Paper 1.3 135.6 3.68 2.3 136.1 6.66
Other Borrowings 37.3 2,820.1 5.25 79.1 4,820.5 6.53
Senior Notes 8.5 492.4 6.87 8.6 500.0 6.86
Long-Term Debt 13.1 767.0 6.82 11.2 638.3 7.03
Debt - Floating Rate Capital Securities 3.2 267.7 4.71 4.9 267.6 7.23
- ------------------------------------------------------ -------- ---------- -------- --------- ---------- --------
Total Interest-Related Funds 247.1 26,226.3 3.74 388.5 26,567.6 5.82
- ------------------------------------------------------ -------- ---------- -------- --------- ---------- --------
Interest Rate Spread - - 1.43% - - 1.10%
Noninterest-Related Deposits - 4,954.3 - - 4,388.0 -
Other Liabilities - 1,218.7 - - 1,209.0 -
Stockholders' Equity - 2,660.7 - - 2,310.6 -
- ------------------------------------------------------ -------- ---------- -------- --------- ---------- --------
Total Liabilities and Stockholders' Equity - $ 35,060.0 - - $ 34,475.2 -
- ------------------------------------------------------ -------- ---------- -------- --------- ---------- --------
Net Interest Income/Margin $ 161.6 - 2.05% $ 157.1 - 1.99%
- ------------------------------------------------------ -------- ---------- -------- --------- ---------- --------
ANALYSIS OF NET INTEREST INCOME CHANGES
DUE TO VOLUME AND RATE
Third Quarter 2001/00
-----------------------------------
Change Due To
---------------------
(In Millions) Volume Rate Total
- ------------------------------------------------ -------- ---------- -----------
Earning Assets $ (3.5) $ (133.4) $ (136.9)
Interest-Related Funds (16.9) (124.5) (141.4)
- ------------------------------------------------ -------- ---------- -----------
Net Interest Income $ 13.4 $ (8.9) $ 4.5
- ------------------------------------------------ -------- ---------- -----------
27
The following schedule should be read in conjunction with the Net Interest
Income section of Management's Discussion and Analysis of Financial Condition
and Results of Operations.
CONSOLIDATED AVERAGE STATEMENT OF CONDITION NORTHERN TRUST CORPORATION
WITH ANALYSIS OF NET INTEREST INCOME
Nine Months
------------------------------------------------------------------------
(Interest and rate on a taxable equivalent basis) 2001 2000
--------------------------------- ------------------------------------
($ in Millions) Interest Volume Rate Interest Volume Rate
- ------------------------------------------------------- ----------- ---------- --------- ----------- ----------- --------
Average Earning Assets
Money Market Assets
Federal Funds Sold and Resell Agreements $ 21.8 $ 629.7 4.63% $ 32.6 $ 701.4 6.21%
Time Deposits with Banks 142.2 4,273.1 4.45 138.8 3,471.5 5.34
Other Interest-Bearing .9 24.1 5.23 1.9 33.4 7.42
- ------------------------------------------------------- ----------- ---------- --------- ----------- ----------- --------
Total Money Market Assets 164.9 4,926.9 4.48 173.3 4,206.3 5.50
- ------------------------------------------------------- ----------- ---------- --------- ----------- ----------- --------
Securities
U.S. Government 8.6 195.0 5.91 10.7 239.7 5.96
Obligations of States and Political Subdivisions 29.0 481.6 8.02 29.4 480.7 8.17
Federal Agency 306.9 8,219.7 4.99 419.5 8,534.3 6.57
Other 20.9 399.7 7.01 23.8 415.7 7.64
Trading Account .6 14.1 5.76 .7 12.0 7.66
- ------------------------------------------------------- ----------- ---------- --------- ----------- ----------- --------
Total Securities 366.0 9,310.1 5.26 484.1 9,682.4 6.68
- ------------------------------------------------------- ----------- ---------- --------- ----------- ----------- --------
Loans and Leases 849.1 17,854.9 6.36 848.6 16,261.3 6.97
- ------------------------------------------------------- ----------- ---------- --------- ----------- ----------- --------
Total Earning Assets $ 1,380.0 32,091.9 5.75% $ 1,506.0 30,150.0 6.67%
- ------------------------------------------------------- ----------- ---------- --------- ----------- ----------- --------
Reserve for Credit Losses - (162.1) - - (155.7) -
Cash and Due from Banks - 1,503.5 - - 1,402.6 -
Other Assets - 2,237.0 - - 1,961.6 -
- ------------------------------------------------------- ----------- ---------- --------- ----------- ----------- --------
Total Assets - $ 35,670.3 - - $ 33,358.5 -
- ------------------------------------------------------- ----------- ---------- --------- ----------- ----------- --------
Average Source of Funds
Deposits
Savings and Money Market Deposits $ 136.4 $ 5,670.0 3.22% $ 149.4 $ 5,170.9 3.86%
Savings Certificates 91.7 2,241.8 5.47 97.3 2,245.6 5.79
Other Time 50.0 1,292.0 5.17 47.5 1,042.6 6.09
Foreign Offices Time 260.7 8,631.7 4.04 312.4 7,841.6 5.32
- ------------------------------------------------------- ----------- ---------- --------- ----------- ----------- --------
Total Deposits 538.8 17,835.5 4.04 606.6 16,300.7 4.97
Federal Funds Purchased 95.8 2,871.8 4.46 107.4 2,302.5 6.23
Securities Sold Under Agreements to Repurchase 51.6 1,558.4 4.43 62.5 1,370.9 6.09
Commercial Paper 4.7 135.5 4.61 6.5 137.1 6.33
Other Borrowings 129.5 3,102.3 5.58 187.2 3,988.6 6.27
Senior Notes 25.6 497.4 6.87 25.8 504.0 6.81
Long-Term Debt 38.4 743.9 6.88 33.8 640.5 7.03
Floating Rate Capital Securities 11.3 267.7 5.60 14.2 267.6 7.02
- ------------------------------------------------------- ----------- ---------- --------- ----------- ----------- --------
Total Interest-Related Funds 895.7 27,012.5 4.43 1,044.0 25,511.9 5.47
- ------------------------------------------------------- ----------- ---------- --------- ----------- ----------- --------
Interest Rate Spread - - 1.32% - - 1.20%
Noninterest-Related Deposits - 4,885.1 - - 4,473.7 -
Other Liabilities - 1,189.9 - - 1,115.8 -
Stockholders' Equity - 2,582.8 - - 2,257.1 -
- ------------------------------------------------------- ----------- ---------- --------- ----------- ----------- --------
Total Liabilities and Stockholders' Equity - $ 35,670.3 - - $ 33,358.5 -
- ------------------------------------------------------- ----------- ---------- --------- ----------- ----------- --------
Net Interest Income/Margin $ 484.3 - 2.02% $ 462.0 - 2.05%
- ------------------------------------------------------- =========== ========== ========= =========== =========== ========
ANALYSIS OF NET INTEREST INCOME CHANGES
DUE TO VOLUME AND RATE
Nine Months 2001/00
-------------------------------------------
Change Due To
-------------------------
(In Millions) Volume Rate Total
- ------------------------------------------------------- ------------ ----------- --------------
Earning Assets $ 84.1 $ (210.1) $ (126.0)
Interest-Related Funds 38.5 (186.8) (148.3)
- ------------------------------------------------------- ------------ ----------- --------------
Net Interest Income $ 45.6 $ (23.3) $ 22.3
- ------------------------------------------------------- ------------ ----------- --------------
28
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
The information called for by this item is incorporated herein by reference to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Market Risk Management" on page 23 of this document.
29
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
(4) Instruments Defining Rights of Security Holders:
(i) Form of The Northern Trust Company's Global Senior Bank
Note (Floating Rate) (supercedes Exhibit 4(i) filed with
the Quarterly Report on Form 10-Q for the quarter ended
September 30, 2000)
(ii) Form of The Northern Trust Company's Global Senior Bank
Note (Fixed Rate) (supercedes Exhibit 4(i) filed with the
Annual Report on Form 10-K for the year ended December 31,
1999)
(iii) Form of The Northern Trust Company's Global Subordinated
Bank Note (Floating Rate) (supercedes Exhibit 4(ii) filed
with the Quarterly Report on Form 10-Q for the quarter
ended September 30, 2000)
(iv) Form of The Northern Trust Company's Global Subordinated
Bank Note (Fixed Rate) (supercedes Exhibit 4(iii) filed
with the Annual Report on Form 10-K for the year ended
December 31, 1999)
(10) Material Contracts
(i) Amendment dated September 25, 2001 to the Northern Trust
Employee Stock Ownership Plan
(ii) Amendment dated September 25, 2001 to the Restated
Northern Trust Supplemental Pension Plan
(iii) Amendment dated September 25, 2001 to the Amended 1992
Incentive Stock Plan
(iv) Form of Amendment to Form of Employment Security Agreement
(amends Exhibit 10(xx) filed with the Annual Report on
Form 10-K for the year ended December 31, 2000)
(v) Form of Amendment to Form of Employment Security Agreement
(amends Exhibit 10(xxi) filed with the Annual Report on
Form 10-K for the year ended December 31, 2000)
(vi) Form of Amendment to Form of Employment Security Agreement
(amends Exhibit 10(xxii) filed with the Annual Report on
Form 10-K for the year ended December 31, 2000)
30
PART II - OTHER INFORMATION (continued)
(b) Reports on Form 8-K
-------------------
In a report on Form 8-K filed July 16, 2001, Northern Trust
Corporation incorporated in Item 5 its July 16, 2001 press
release, reporting on its earnings for the second quarter of
2001. The press release, with summary financial information, was
filed pursuant to Item 7.
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORTHERN TRUST CORPORATION
--------------------------
(Registrant)
Date: November 8, 2001 By: Perry R. Pero
-------------
Perry R. Pero
Vice Chairman
and Chief Financial Officer
Date: November 8, 2001 By: Harry W. Short
--------------
Harry W. Short
Executive Vice President and Controller
(Chief Accounting Officer)
32
EXHIBIT INDEX
The following exhibits have been filed with the Securities and Exchange
Commission with Northern Trust Corporation's Quarterly Report on Form 10-Q for
the quarter ended September 30, 2001. Stockholders may obtain copies of such
exhibits by writing Rose A. Ellis, Secretary, Northern Trust Corporation, 50
South LaSalle Street, Chicago, Illinois 60675.
Exhibit
Number Description
- ------ -----------
(4) Instruments Defining Rights of Security Holders:
(i) Form of The Northern Trust Company's Global Senior Bank Note
(Floating Rate) (supercedes Exhibit 4(i) filed with the
Quarterly Report on Form 10-Q for the quarter ended September
30, 2000).
(ii) Form of The Northern Trust Company's Global Senior Bank Note
(Fixed Rate) (supercedes Exhibit 4(i) filed with the Annual
Report on Form 10-K for the year ended December 31, 1999).
(iii) Form of The Northern Trust Company's Global Subordinated Bank
Note (Floating Rate) (supercedes Exhibit 4(ii) filed with the
Quarterly Report on Form 10-Q for the quarter ended September
30, 2000).
(iv) Form of The Northern Trust Company's Global Subordinated Bank
Note (Fixed Rate) (supercedes Exhibit 4(iii) filed with the
Quarterly Report on Form 10-Q for the quarter ended September
30, 2000).
(10) Material Contracts
(i) Amendment dated September 25, 2001 to the Northern Trust
Employee Stock Ownership Plan
(ii) Amendment dated September 25, 2001 to the Restated Northern
Trust Supplemental Pension Plan
(iii) Amendment dated September 25, 2001 to the Amended 1992
Incentive Stock Plan
(iv) Form of Amendment to Form of Employment Security Agreement
(amends Exhibit 10(xx) filed with the Annual Report on Form
10-K for the year ended December 31, 2000)
(v) Form of Amendment to Form of Employment Security Agreement
(amends Exhibit 10(xxi) filed with the Annual Report on Form
10-K for the year ended December 31, 2000)
(vi) Form of Amendment to Form of Employment Security Agreement
(amends Exhibit 10(xxii) filed with the Annual Report on Form
10-K for the year ended December 31, 2000)
33