================================================================================
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 June 30, 2002
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 [ ]
221,667,202 Shares - $1.66 2/3 Par Value
(Shares of Common Stock Outstanding on June 30, 2002)
================================================================================
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEET NORTHERN TRUST CORPORATION
June 30 December 31 June 30
--------- ----------- ---------
($ In Millions Except Share Information) 2002 2001 2001
---------------------------------------------------------------------------- --------- ----------- ---------
Assets
Cash and Due from Banks .................................................... $ 2,369.9 $ 2,592.3 $ 2,224.3
Federal Funds Sold and Securities Purchased under Agreements to Resell ..... 533.6 3,565.1 355.7
Time Deposits with Banks ................................................... 7,176.5 6,955.9 3,598.0
Other Interest-Bearing ..................................................... 22.5 25.0 23.7
Securities
Available for Sale .................................................... 5,739.9 5,648.6 8,905.2
Held to Maturity (Fair value - $773.1 at June 2002, $673.1 at
December 2001, $612.7 at June 2001) ................................... 752.8 663.6 602.4
Trading Account ....................................................... 13.2 18.9 11.2
---------------------------------------------------------------------------- --------- ----------- ---------
Total Securities ........................................................... 6,505.9 6,331.1 9,518.8
---------------------------------------------------------------------------- --------- ----------- ---------
Loans and Leases
Commercial and Other .................................................. 10,565.4 10,552.0 11,070.6
Residential Mortgages ................................................. 7,708.4 7,427.9 7,124.3
---------------------------------------------------------------------------- --------- ----------- ---------
Total Loans and Leases (Net of unearned income - $399.9 at June 2002,
$427.3 at December 2001, $367.5 at June 2001) .............................. 18,273.8 17,979.9 18,194.9
---------------------------------------------------------------------------- --------- ----------- ---------
Reserve for Credit Losses .................................................. (153.3) (154.3) (150.4)
Buildings and Equipment .................................................... 497.3 488.7 480.4
Customers' Acceptance Liability ............................................ 16.4 9.7 24.0
Trust Security Settlement Receivables ...................................... 771.6 571.4 544.9
Other Assets ............................................................... 1,787.2 1,307.0 1,378.8
---------------------------------------------------------------------------- --------- ----------- ---------
Total Assets ............................................................... $37,801.4 $39,671.8 $36,193.1
---------------------------------------------------------------------------- --------- ----------- ---------
Liabilities
Deposits
Demand and Other Noninterest-Bearing ................................... $ 4,475.9 $ 6,237.4 $ 4,303.9
Savings and Money Market Deposits ...................................... 6,074.6 6,808.5 5,486.5
Savings Certificates ................................................... 1,930.6 2,024.4 2,173.6
Other Time ............................................................. 343.2 404.6 1,429.6
Foreign Offices - Demand ............................................... 1,196.5 872.7 1,422.2
- Time ................................................. 8,902.7 8,671.7 8,030.4
---------------------------------------------------------------------------- --------- ----------- ---------
Total Deposits ............................................................. 22,923.5 25,019.3 22,846.2
Federal Funds Purchased .................................................... 3,226.7 815.5 1,605.1
Securities Sold Under Agreements to Repurchase ............................. 1,460.5 1,407.4 1,277.2
Commercial Paper ........................................................... 141.0 137.7 144.6
Other Borrowings ........................................................... 3,978.3 6,841.2 4,722.7
Senior Notes ............................................................... 450.0 450.0 500.0
Long-Term Debt ............................................................. 766.3 766.8 767.2
Debt - Floating Rate Capital Securities .................................... 267.8 267.7 267.7
Liability on Acceptances ................................................... 16.4 9.7 24.0
Other Liabilities .......................................................... 1,657.6 1,183.0 1,377.3
---------------------------------------------------------------------------- --------- ----------- ---------
Total Liabilities .......................................................... 34,888.1 36,898.3 33,532.0
---------------------------------------------------------------------------- --------- ----------- ---------
Stockholders' Equity
Preferred Stock ............................................................ 120.0 120.0 120.0
Common Stock, $1.66 2/3 Par Value; Authorized 560,000,000 shares at June
2002, December 2001 and June 2001; Outstanding 221,667,202 at June
2002, 221,647,260 at December 2001 and 222,609,563 at June 2001 ....... 379.8 379.8 379.8
Capital Surplus ............................................................ -- -- --
Retained Earnings .......................................................... 2,672.9 2,520.1 2,376.6
Accumulated Other Comprehensive Income ..................................... 3.8 (2.4) (13.2)
Common Stock Issuable - Stock Incentive Plans .............................. 125.9 147.6 154.6
Deferred Compensation ...................................................... (54.2) (58.1) (80.5)
Treasury Stock - (at cost, 6,254,322 shares at June 2002, 6,274,264 shares
at December 2001, and 5,311,961 shares at June 2001) .................. (334.9) (333.5) (276.2)
---------------------------------------------------------------------------- --------- ----------- ---------
Total Stockholders' Equity ................................................. 2,913.3 2,773.5 2,661.1
---------------------------------------------------------------------------- --------- ----------- ---------
Total Liabilities and Stockholders' Equity ................................. $37,801.4 $39,671.8 $36,193.1
---------------------------------------------------------------------------- --------- ----------- ---------
2
CONSOLIDATED STATEMENT OF INCOME NORTHERN TRUST CORPORATION
Second Quarter Six Months
Ended June 30 Ended June 30
------------------------- -------------------------
($ In Millions Except Per Share Information) 2002 2001 2002 2001
----------------------------------------------------- ----------- ----------- ----------- -----------
Noninterest Income
Trust Fees $312.6 $317.7 $629.0 $622.9
Foreign Exchange Trading Profits 36.9 40.5 61.2 75.4
Treasury Management Fees 23.5 20.6 46.9 40.7
Security Commissions and Trading Income 9.7 8.5 19.6 18.1
Other Operating Income 17.6 27.0 35.3 46.7
Investment Security Gains .1 - .1 -
----------------------------------------------------- ----------- ----------- ----------- -----------
Total Noninterest Income 400.4 414.3 792.1 803.8
----------------------------------------------------- ----------- ----------- ----------- -----------
Net Interest Income
Interest Income 311.1 449.7 626.1 943.1
Interest Expense 159.8 303.3 325.6 648.6
----------------------------------------------------- ----------- ----------- ----------- -----------
Net Interest Income 151.3 146.4 300.5 294.5
Provision for Credit Losses 5.0 11.5 10.0 16.5
----------------------------------------------------- ----------- ----------- ----------- -----------
Net Interest Income after Provision for Credit Losses 146.3 134.9 290.5 278.0
----------------------------------------------------- ----------- ----------- ----------- -----------
Noninterest Expenses
Compensation 167.4 175.5 329.8 345.9
Employee Benefits 33.5 31.5 69.3 65.3
Occupancy Expense 26.0 25.3 52.0 50.0
Equipment Expense 22.8 21.6 45.4 42.8
Other Operating Expenses 106.2 97.9 202.2 189.4
----------------------------------------------------- ----------- ----------- ----------- -----------
Total Noninterest Expenses 355.9 351.8 698.7 693.4
----------------------------------------------------- ----------- ----------- ----------- -----------
Income before Income Taxes 190.8 197.4 383.9 388.4
Provision for Income Taxes 64.0 66.1 129.5 129.9
----------------------------------------------------- ----------- ----------- ----------- -----------
Net Income $126.8 $131.3 $254.4 $258.5
----------------------------------------------------- ----------- ----------- ----------- -----------
Net Income Applicable to Common Stock $126.2 $130.2 $253.3 $256.0
----------------------------------------------------- ----------- ----------- ----------- -----------
Net Income Per Common Share - Basic $ .57 $ .59 $1.15 $1.16
- Diluted .56 .57 1.12 1.12
----------------------------------------------------- ----------- ----------- ----------- -----------
Average Number of Common Shares Outstanding - Basic 220,864,358 221,701,482 220,859,388 221,635,066
- Diluted 226,552,122 229,484,490 226,959,991 229,651,680
----------------------------------------------------- ----------- ----------- ----------- -----------
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME NORTHERN TRUST CORPORATION
Second Quarter Six Months
Ended June 30 Ended June 30
--------------- ---------------
(In Millions) 2002 2001 2002 2001
------------------------------------------------------------------------------------------- ------ ------ ------ ------
Net Income $126.8 $131.3 $254.4 $258.5
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
$2.0 million and $.2 million for the quarters ended June 30, 2002 and 2001,
respectively. Net of tax provision of $1.3 million and $1.2 million for the
six months ended June 30, 2002 and 2001, respectively). 3.3 .3 1.9 1.8
Less: Reclassification Adjustments for Gains Included in Net Income (.1) - (.1) -
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 (Losses) Arising During the Period (net of tax benefit (provision)
of $(3.4) million and $.6 million for the quarters ended June 30, 2002 and 2001,
respectively. Net of tax benefit (provision) of $(2.9) million and $1.7 million for
the six months ended June 30, 2002 and 2001, respectively). 5.5 (1.0) 4.8 (2.9)
Less: Reclassification Adjustments of Losses Included in Net Income (net of
tax benefit of $.4 million for the quarter ended June 30, 2001. Net of tax benefit
(provision) of $(.3) million and $.8 million for the six months ended
June 30, 2002 and 2001). - .6 (.5) 1.3
Foreign Currency Translation Adjustments .1 - .1 -
------------------------------------------------------------------------------------------- ------ ------ ------ ------
Other Comprehensive Income 8.8 (.1) 6.2 -
------------------------------------------------------------------------------------------- ------ ------ ------ ------
Comprehensive Income $135.6 $131.2 $260.6 $258.5
------------------------------------------------------------------------------------------- ------ ------ ------ ------
3
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY NORTHERN TRUST CORPORATION
Six Months
Ended June 30
-----------------------------
(In Millions) 2002 2001
------------------------------------------------------------------------------------------------ ---------- ----------
Preferred Stock
Balance at January 1 and June 30 $ 120.0 $ 120.0
------------------------------------------------------------------------------------------------ ---------- ----------
Common Stock
Balance at January 1 and June 30 379.8 379.8
------------------------------------------------------------------------------------------------ ---------- ----------
Retained Earnings
Balance at January 1 2,520.1 2,200.0
Net Income 254.4 258.5
Dividends Declared - Common Stock (75.4) (69.0)
Dividends Declared - Preferred Stock (1.1) (2.3)
Stock Issued - Incentive Plan and Awards (25.1) (10.6)
------------------------------------------------------------------------------------------------ ---------- ----------
Balance at June 30 2,672.9 2,376.6
------------------------------------------------------------------------------------------------ ---------- ----------
Accumulated Other Comprehensive Income
Balance at January 1 (2.4) (13.2)
Other Comprehensive Income 6.2 -
------------------------------------------------------------------------------------------------ ---------- ----------
Balance at June 30 3.8 (13.2)
------------------------------------------------------------------------------------------------ ---------- ----------
Common Stock Issuable - Stock Incentive Plans
Balance at January 1 147.6 110.2
Stock Issuable, net of Stock Issued (21.7) 44.4
------------------------------------------------------------------------------------------------ ---------- ----------
Balance at June 30 125.9 154.6
------------------------------------------------------------------------------------------------ ---------- ----------
Deferred Compensation
Balance at January 1 (58.1) (57.9)
Compensation Deferred (7.8) (37.2)
Compensation Amortized 11.7 14.6
------------------------------------------------------------------------------------------------ ---------- ----------
Balance at June 30 (54.2) (80.5)
------------------------------------------------------------------------------------------------ ---------- ----------
Treasury Stock
Balance at January 1 (333.5) (276.7)
Stock Options and Awards 85.3 64.9
Stock Purchased (86.7) (64.4)
------------------------------------------------------------------------------------------------ ---------- ----------
Balance at June 30 (334.9) (276.2)
------------------------------------------------------------------------------------------------ ---------- ----------
Total Stockholders' Equity at June 30 $ 2,913.3 $ 2,661.1
------------------------------------------------------------------------------------------------ ---------- ----------
4
CONSOLIDATED STATEMENT OF CASH FLOWS NORTHERN TRUST CORPORATION
Six Months
Ended June 30
----------------------------
(In Millions) 2002 2001
------------------------------------------------------------------------------------------- ---------- ----------
Cash Flows from Operating Activities:
Net Income $ 254.4 $ 258.5
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Provision for Credit Losses 10.0 16.5
Depreciation on Buildings and Equipment 42.6 39.6
(Increase) Decrease in Interest Receivable (14.2) 46.9
Increase (Decrease) in Interest Payable (.4) 9.9
Amortization and Accretion of Securities and Unearned Income (69.6) (135.6)
Amortization of Computer Software 38.9 37.4
Amortization of Goodwill and Other Intangibles 3.3 8.2
Net Decrease in Trading Account Securities 5.7 2.2
Other Noncash, net 48.0 184.6
------------------------------------------------------------------------------------------- ---------- ----------
Net Cash Provided by Operating Activities 318.7 468.2
------------------------------------------------------------------------------------------- ---------- ----------
Cash Flows from Investing Activities:
Net Decrease in Federal Funds Sold and Securities Purchased under Agreements to Resell 3,031.5 194.1
Net (Increase) Decrease in Time Deposits with Banks (220.6) 1,595.8
Net Decrease in Other Interest-Bearing Assets 2.5 97.6
Purchases of Securities-Held to Maturity (112.4) (55.9)
Proceeds from Maturity and Redemption of Securities-Held to Maturity 30.6 65.0
Purchases of Securities-Available for Sale (16,349.0) (36,037.3)
Proceeds from Sale, Maturity and Redemption of Securities-Available for Sale 16,301.7 33,918.1
Net Increase in Loans and Leases (278.4) (73.1)
Purchases of Buildings and Equipment (51.2) (71.8)
Purchases and Development of Computer Software (70.6) (75.6)
Net (Increase) Decrease in Trust Security Settlement Receivables (200.2) 70.3
Decrease in Cash Due to Acquisitions - (1.5)
Other, net 2.2 20.3
------------------------------------------------------------------------------------------- ---------- ----------
Net Cash Provided by (Used in) Investing Activities 2,086.1 (354.0)
------------------------------------------------------------------------------------------- ---------- ----------
Cash Flows from Financing Activities:
Net Increase (Decrease) in Deposits (2,095.8) 18.3
Net Increase (Decrease) in Federal Funds Purchased 2,411.2 (2,009.9)
Net Increase (Decrease) in Securities Sold under Agreements to Repurchase 53.1 (299.9)
Net Decrease in Commercial Paper 3.3 2.2
Net Increase (Decrease) in Short-Term Other Borrowings (2,535.9) 2,148.2
Proceeds from Term Federal Funds Purchased 722.0 3,346.4
Repayments of Term Federal Funds Purchased (1,049.0) (3,401.4)
Proceeds from Senior Notes & Long-Term Debt - 154.5
Repayments of Senior Notes & Long-Term Debt (.5) (25.4)
Treasury Stock Purchased (84.2) (61.2)
Net Proceeds from Stock Options 14.1 9.9
Cash Dividends Paid on Common and Preferred Stock (76.5) (71.5)
Other, net 11.0 12.1
------------------------------------------------------------------------------------------- ---------- ----------
Net Cash Used in Financing Activities (2,627.2) (177.7)
------------------------------------------------------------------------------------------- ---------- ----------
Decrease in Cash and Due from Banks (222.4) (63.5)
Cash and Due from Banks at Beginning of Year 2,592.3 2,287.8
------------------------------------------------------------------------------------------- ---------- ----------
Cash and Due from Banks at End of Period $ 2,369.9 $ 2,224.3
------------------------------------------------------------------------------------------- ---------- ----------
Schedule of Noncash Investing Activities:
Transfer of Securities from Held to Maturity to Available for Sale $ - $ 167.0
Supplemental Disclosures of Cash Flow Information:
Interest Paid $ 326.0 $ 638.7
Income Taxes Paid 21.4 6.1
------------------------------------------------------------------------------------------- ---------- ----------
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
June 30, 2002 and 2001 have not been audited by the Corporation's independent
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 2001 Annual Report to Shareholders.
2. Securities - The following table summarizes the book and fair values of
securities.
June 30, 2002 December 31, 2001 June 30, 2001
--------------------------------------------------------------------------------
Book Fair Book Fair Book Fair
(In Millions) Value Value Value Value Value Value
-----------------------------------------------------------------------------------------------------------------------
Held to Maturity
U.S. Government $ - $ - $ - $ - $ 10.0 $ 10.0
Obligations of States and
Political Subdivisions 606.1 631.0 528.9 542.9 471.7 486.7
Federal Agency 4.7 4.7 4.9 4.9 5.4 5.4
Other 142.0 137.4 129.8 125.3 115.3 110.6
-----------------------------------------------------------------------------------------------------------------------
Subtotal 752.8 773.1 663.6 673.1 602.4 612.7
-----------------------------------------------------------------------------------------------------------------------
Available for Sale
U.S. Government 159.6 159.6 158.9 158.9 165.5 165.5
Obligations of States and
Political Subdivisions 31.4 31.4 30.0 30.0 16.6 16.6
Federal Agency 5,275.7 5,275.7 5,188.9 5,188.9 8,439.9 8,439.9
Preferred Stock 82.9 82.9 82.9 82.9 103.1 103.1
Other 190.3 190.3 187.9 187.9 180.1 180.1
-----------------------------------------------------------------------------------------------------------------------
Subtotal 5,739.9 5,739.9 5,648.6 5,648.6 8,905.2 8,905.2
-----------------------------------------------------------------------------------------------------------------------
Trading Account 13.2 13.2 18.9 18.9 11.2 11.2
-----------------------------------------------------------------------------------------------------------------------
Total Securities $6,505.9 $6,526.2 $6,331.1 $6,340.6 $9,518.8 $9,529.1
-----------------------------------------------------------------------------------------------------------------------
6
Reconciliation of Book Values to Fair Values of
Securities Held to Maturity June 30, 2002
---------------------------------------------------------------------------------
Gross
Unrealized
Book ------------- Fair
(In Millions) Value Gains Losses Value
---------------------------------------------------------------------------------
U.S. Government $ - $ - $ - $ -
Obligations of States and Political Subdivisions 606.1 24.9 - 631.0
Federal Agency 4.7 .2 .2 4.7
Other 142.0 - 4.6 137.4
---------------------------------------------------------------------------------
Total $752.8 $25.1 $ 4.8 $773.1
---------------------------------------------------------------------------------
Reconciliation of Amortized Cost to Fair Values of
Securities Available for Sale June 30, 2002
----------------------------------------------------------------------------------------
Gross
Unrealized
Amortized -------------- Fair
(In Millions) Cost Gains Losses Value
----------------------------------------------------------------------------------------
U.S. Government $ 159.1 $ .5 $ - $ 159.6
Obligations of States and Political Subdivisions 30.7 .7 - 31.4
Federal Agency 5,266.6 9.2 .1 5,275.7
Preferred Stock 82.9 - - 82.9
Other 190.2 .1 - 190.3
----------------------------------------------------------------------------------------
Total $5,729.5 $10.5 $.1 $5,739.9
----------------------------------------------------------------------------------------
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 $9.5 billion on June 30, 2002, $10.5 billion on December 31, 2001
and $11.5 billion on June 30, 2001. Included in the June 30, 2002 pledged assets
were securities available for sale of $1.3 billion, which were pledged as
collateral for agreements to repurchase securities sold transactions. The
secured parties to these transactions have the right to repledge or sell these
securities.
Northern Trust is permitted to repledge or sell collateral from agreements to
resell securities purchased transactions. The total fair value of accepted
collateral as of June 30, 2002, December 31, 2001 and June 30, 2001 was $396.6
million, $1.6 billion and $267.3 million, respectively. The fair value of
repledged collateral as of June 30, 2002, December 31, 2001 and June 30, 2001
was $55.0 million, $1.2 billion and $59.1 million, respectively. Repledged
collateral was used in other agreements to repurchase securities sold
transactions.
4. Contingent Liabilities - Standby letters of credit outstanding were $2.6
billion on June 30, 2002, $2.5 billion on December 31, 2001 and $2.3 billion on
June 30, 2001.
Because of the nature of its activities, Northern Trust is subject to pending
and threatened legal actions that arise in the normal course of business.
Management cannot estimate the specific possible loss or range of loss that may
result from these proceedings since it is not possible to formulate a meaningful
opinion as to the range of possible outcomes and plaintiffs' ultimate damage
claims. In the judgment of management, after consultation with legal counsel,
none of the litigation to which the Corporation or any of its subsidiaries
7
is a party, including the litigation described below, will have a material
effect, either individually or in the aggregate, on the Corporation's
consolidated financial position or results of operations.
One subsidiary of the Corporation has been named as a defendant in several
Enron-related class action suits that have been consolidated under a single
complaint in the Federal District Court for the Southern District of Texas
(Houston). Individual participants in the employee pension benefit plans
sponsored by Enron Corp. sued various corporate entities and individuals,
including The Northern Trust Company, in its capacity as the former trustee of
the Enron Savings Plan and former service-provider for the Enron Employee Stock
Ownership Plan. The actions make claims, inter alia, for breach of fiduciary
duty to the plan participants, and seek equitable relief and monetary damages in
an unspecified amount against the defendants. The Corporation and the defendant
company intend to defend these actions vigorously. Based upon the information
developed to date and recognizing that the outcome of complex litigation is
uncertain, management believes that the litigation will be resolved without
material impact on the Corporation's consolidated financial position or results
of operations.
5. Loans and Leases - Amounts outstanding in selected loan categories are
shown below.
------------------------------------- ------------------------ ------------------------- --------------------------
(In Millions) June 30, 2002 December 31, 2001 June 30, 2001
------------------------------------- ------------------------ ------------------------- --------------------------
Domestic
Residential Real Estate $ 7,708.4 $ 7,427.9 $ 7,124.3
Commercial 4,367.6 4,741.6 4,957.0
Broker 41.3 11.8 144.7
Commercial Real Estate 1,118.9 1,025.6 984.6
Personal 2,243.8 2,208.8 2,104.7
Other 925.2 768.6 893.3
Lease Financing 1,200.2 1,202.6 1,083.6
------------------------------------- ------------------------ ------------------------- --------------------------
Total Domestic 17,605.4 17,386.9 17,292.2
International 668.4 593.0 902.7
------------------------------------- ------------------------ ------------------------- --------------------------
Total Loans and Leases $18,273.8 $17,979.9 $18,194.9
------------------------------------- ------------------------ ------------------------- --------------------------
At June 30, 2002, other domestic and international loans included $1.2 billion
of overnight trust-related advances, primarily in connection with next day
security settlements, compared with $812.0 million at December 31, 2001 and $1.2
billion at June 30, 2001.
At June 30, 2002, nonperforming loans and leases totaled $109.7 million.
Included in this amount were loans with a recorded investment of $108.1 million
(net of $36.9 million in charge-offs), which were also classified as impaired. A
loan is impaired when, based on available information, it is probable that a
creditor will be unable to collect all amounts due according to the contractual
terms of the loan agreement. Impaired loans totaling $14.8 million (net of $12.6
million in charge-offs) had no portion of the reserve for credit losses
allocated to them while impaired loans totaling $93.3 million (net of $24.3
million in charge-offs) had an allocated reserve of $24.4 million. For the
second quarter of 2002, the total recorded investment in impaired loans averaged
$112.9 million. There was no interest income recorded on impaired loans for the
quarter ended June 30, 2002.
8
At June 30, 2001, nonperforming loans and leases totaled $107.9 million and
included $105.0 million (net of 3.3 million in charge-offs) of impaired loans.
Of these impaired loans, $11.0 million (net of $3.3 million in charge-offs) had
no portion of the reserve for credit losses allocated to them while $94.0
million had an allocated reserve of $23.4 million. Total recorded investment in
impaired loans for the second quarter of 2001 averaged $102.7 million with no
interest income recognized on such loans. The $3.8 million net increase from
June 30, 2001 to June 30, 2002 in impaired loans where no reserve has been
assigned was driven primarily by changes relating to the commercial loan
portfolio with the largest being a loan to an Enron affiliate, which became
impaired in late 2001.
At June 30, 2002, residential real estate loans totaling $10.1 million were held
for sale and were included in other assets in the consolidated balance sheet.
Loan commitments for residential real estate loans which when funded will be
held for sale are carried at fair value, while all other loan commitments are
carried at the amount of unamortized fees.
6. Reserve for Credit Losses - Changes in the reserve for credit losses were as
follows:
--------------------------------------------------------------------------------
Six Months
Ended June 30
--------------------------------------------------------------------------------
(In Millions) 2002 2001
--------------------------------------------------------------------------------
Balance at Beginning of Period $161.6 $162.9
Charge-Offs (11.9) (20.6)
Recoveries .6 .9
--------------------------------------------------------------------------------
Net Charge-Offs (11.3) (19.7)
Provision for Credit Losses 10.0 16.5
--------------------------------------------------------------------------------
Balance at End of Period $160.3 $159.7
--------------------------------------------------------------------------------
Reserve for Credit Losses Assigned to-
Loans and Leases 153.3 150.4
Unfunded Commitments and Standby Letters of Credit 7.0 9.3
--------------------------------------------------------------------------------
Balance at End of Period $160.3 $159.7
--------------------------------------------------------------------------------
In the second quarter of 2002, Northern Trust began to record the reserve for
unfunded commercial loan commitments, standby letters of credit and derivatives
in a liability account. Previously, this portion of the reserve was included in
the reserve for credit losses and shown as a contra-asset on the consolidated
balance sheet. Prior period amounts have been reclassified.
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.
9
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 inherent in the process of estimating expected credit losses.
7. Net Income Per Common Share Computations - The computation of net income
per common share is presented in the following table.
------------------------------------------------------------------------------------------------------------------------------------
Second Quarter Ended June 30 Six Months Ended June 30
------------------------------------------------------------------------------------------------------------------------------------
($ In Millions Except Per Share Information) 2002 2001 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
Basic Net Income Per Common Share
Reported Net Income $126.8 $131.3 $254.4 $258.5
Less: Dividends on Preferred Stock (.6) (1.1) (1.1) (2.5)
Add Back: Goodwill Amortization, After Tax - 2.1 - 4.2
------------------------------------------------------------------------------------------------------------------------------------
Adjusted Net Income Applicable to Common Stock $126.2 $132.3 $253.3 $260.2
Average Number of Common Shares Outstanding 220,864,358 221,701,482 220,859,388 221,635,066
Reported Basic Net Income Per Common Share $ .57 $ .59 $ 1.15 $ 1.16
Goodwill Amortization, After Tax - .01 - .02
Adjusted Basic Net Income Per Common Share $ .57 $ .60 $ 1.15 $ 1.18
------------------------------------------------------------------------------------------------------------------------------------
Diluted Net Income Per Common Share
Reported Net Income Applicable to Common Stock $126.2 $130.2 $253.3 $256.0
Add Back: Goodwill Amortization, After Tax - 2.1 - 4.2
Adjusted Net Income Applicable to Common Stock $126.2 $132.3 $253.3 $260.2
Average Number of Common Shares Outstanding 220,864,358 221,701,482 220,859,388 221,635,066
Plus Dilutive Potential Common Shares:
Stock Options 3,784,200 5,536,597 4,218,909 5,822,402
Stock Incentive Plans* 1,903,564 2,246,411 1,881,694 2,194,212
------------------------------------------------------------------------------------------------------------------------------------
Average Common and Potential Common Shares 226,552,122 229,484,490 226,959,991 229,651,680
Reported Diluted Net Income Per Common Share $ .56 $ .57 $ 1.12 $ 1.12
Goodwill Amortization, After Tax - .01 - .02
Adjusted Diluted Net Income Per Common Share $ .56 $ .58 $ 1.12 $ 1.14
------------------------------------------------------------------------------------------------------------------------------------
* Includes Dilutive Potential Common Shares related to restricted stock issued
in connection with an acquisition subject to performance and vesting
requirements and to stock and stock unit awards subject to vesting
requirements. Refer to Footnote 25, Stock-Based Compensation Plans, on Pages
85 and 86 of the Corporation's 2001 Annual Report to Shareholders.
10
8. Accumulated Other Comprehensive Income
For the Six Months Ended June 30, 2002
-----------------------------------------------------------------------------------------------------------
Unrealized Gains Foreign Accumulated
(Losses) on Minimum Gains (Losses) Currency Other
Securities Pension On Cash Flow Translation Comprehensive
(In Millions) Available For Sale Liability Hedge Designations Adjustments Income
-----------------------------------------------------------------------------------------------------------
Beginning Balance $(.1) $(3.6) $1.5 $(.2) $(2.4)
Current-Period Change 1.8 - 4.3 .1 6.2
-----------------------------------------------------------------------------------------------------------
Ending Balance $1.7 $(3.6) $5.8 $(.1) $ 3.8
-----------------------------------------------------------------------------------------------------------
For the Six Months Ended June 30, 2001
-----------------------------------------------------------------------------------------------------------
Unrealized Gains Foreign Accumulated
(Losses) on Minimum Gains (Losses) Currency Other
Securities Pension On Cash Flow Translation Comprehensive
(In Millions) Available For Sale Liability Hedge Designations Adjustments Income
-----------------------------------------------------------------------------------------------------------
Beginning Balance $(.9) $(12.3) $ - $ - $(13.2)
Cumulative-effect
of Adopting SFAS No. 133 - - (.2) - (.2)
Current-Period Change 1.8 - (1.6) - .2
-----------------------------------------------------------------------------------------------------------
Ending Balance $ .9 $(12.3) $(1.8) $ - $(13.2)
-----------------------------------------------------------------------------------------------------------
9. The Northern Trust Corporation 2002 Stock Plan - The Board of Directors
approved the Northern Trust Corporation 2002 Stock Plan (the "2002 Plan"), which
was then subsequently approved by the Corporation's stockholders at the 2002
annual meeting of stockholders. The 2002 Plan is a compensation plan authorizing
the grant of stock options, stock appreciation rights, stock awards, performance
shares and stock units. An aggregate of 22,000,000 shares of the Corporation's
Common Stock has been reserved for issuance under the 2002 Plan. The 2002 Plan
replaces the Northern Trust Corporation Amended 1992 Incentive Stock Plan (the
"1992 Plan"). No awards may be granted under the 1992 Plan after April 30, 2002.
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation", establishes financial accounting and reporting
standards for stock-based compensation plans.
SFAS No. 123 allows two alternative accounting methods: (1) a fair-value-based
method, or (2) an intrinsic-value-based method which is prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
No. 25) and related interpretations. Northern Trust has elected to account for
its stock-based incentive plans and awards under APB No. 25, and has adopted the
disclosure requirements of SFAS No. 123.
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123, and has been determined as if the corporation had accounted for
its stock-based compensation under SFAS No. 123.
A description of Northern Trust's stock-based compensation is presented in
greater detail on pages 85 through 87 of the 2001 Annual Report to Shareholders.
11
10. Accounting Standards Pronouncements - The following accounting standard was
adopted in the first quarter of 2002.
SFAS No. 142, "Goodwill and Other Intangible Assets" supersedes APB Opinion No.
17, "Intangible Assets" and addresses the accounting for goodwill and other
intangible assets. As required, Northern Trust applied the provisions of this
Statement effective January 1, 2002 to all goodwill and other intangible assets
reflected in the consolidated financial statements at that date.
Goodwill - 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 an accounting
principle and any subsequent impairment losses are required to be reported as
operating expenses. Management completed the initial goodwill impairment test as
of January 1, 2002 and determined that no transitional impairment charge was
necessary. Goodwill at both January 1, 2002 and June 30, 2002 totaled $90.1
million. Application of the nonamortization provisions of the Statement will
reduce noninterest expense by approximately $10.0 million annually, resulting in
an increase in net income of approximately $8.0 million in 2002 compared to
2001. Goodwill amortization in the first six months of 2001 totaled $5.2 million
or $4.2 million after taxes.
Intangible Assets Subject to Amortization - Other separately identifiable
acquired intangible assets will continue to be amortized over their estimated
useful life. At June 30, 2002, acquired intangible assets had a book value of
$31.8 million, which was net of accumulated amortization on these assets of
$55.9 million. Amortization for the first six months of the year amounted to
$3.3 million. Amortization expense for the years ended 2002, 2003, 2004, 2005
and 2006 are estimated to be $6.7 million, $6.6 million, $6.6 million, $5.5
million and $5.1 million, respectively.
11. Business Segments - The tables on page 18, reflecting the earnings
contribution of Northern Trust's business segments for the second quarter and
six months ended June 30, 2002, are incorporated by reference.
12. RemitStream Investment - In June 2001, Northern Trust sold an 80% interest
in RemitStream Solutions LLC (RemitStream) to Fiserv, Inc. for $14 million in
cash. Northern Trust accounts for its 20% equity interest in RemitStream using
the equity method of accounting.
12
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SECOND QUARTER EARNINGS HIGHLIGHTS
Net income per common share on a diluted basis was $.56 for the second quarter,
a decrease of 2% from $.57 earned in the year-ago quarter. Net income totaled
$126.8 million, compared to $131.3 million reported for the second quarter of
last year. This earnings performance produced an annualized return on average
common equity (ROE) of 18.57% versus 21.10% reported for the comparable quarter
last year, and an annualized return on average assets (ROA) of 1.37% versus
1.45% in 2001. The business environment during the quarter remained very
challenging given the significant and prolonged weakness in equity markets. As a
result, this performance was achieved through the continued aggressive
management of expenses, which were up just 1% compared to last year's second
quarter. Revenues were essentially unchanged from last year, after adjusting for
a $9.2 million nonrecurring gain in the prior year's second quarter, resulting
in a productivity ratio of 158%.
Noninterest Income
Noninterest income totaled $400.4 million for the quarter, accounting for 71% of
total taxable equivalent revenue. Trust fees were $312.6 million in the quarter,
down 2% compared to $317.7 million in the second quarter of last year and
represented 55% of total taxable equivalent revenue. The decline in trust fees
resulted primarily from weak equity markets and was partially offset by new
business. Trust assets under administration totaled $1.66 trillion, a decrease
of less than 1% since June 2001, and trust assets under the management of
Northern Trust fell 4% to $327.4 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.
13
Noninterest Income (continued)
Trust fees from Personal Financial Services (PFS) in the quarter decreased
slightly and totaled $153.9 million compared to $154.7 million in the year-ago
quarter. The decline in PFS trust fees primarily resulted from weakness in the
equity markets, offset partially by new business. Northern Trust's network of
PFS offices totals 82 locations in twelve states, and it is currently estimated
that there will be approximately 100 offices by the end of 2005. Personal trust
assets under administration totaled $163.4 billion at June 30, 2002 compared to
$161.1 billion at June 30, 2001 and $166.8 billion at December 31, 2001. Of the
total assets under administration, $91.8 billion is managed by Northern Trust,
compared to $94.7 billion one year ago. With the exception of Florida and
California locations where trust assets are revalued throughout the quarter,
trust fees in PFS are largely based on the level of trust assets at the end of
the previous quarter. Thus, trust fees in the third quarter will be impacted by
the lower level of trust assets at the end of the second quarter. At June 30,
2002, 46% of personal trust assets under management were invested in equity
securities. Net new recurring PFS trust business transitioned during the first
six months totaled approximately $22 million in annualized fees.
Trust fees from C&IS in the quarter decreased 3% to $158.7 million compared to
$163.0 million in the year-ago quarter. The decline resulted from lower
securities lending fees, which totaled $33.4 million compared to $42.7 million
in last year's second quarter. In the prior year, securities lending spreads
benefited from three decreases in the federal funds rate during the quarter.
Driven primarily by growth in institutional money market funds, fees from C&IS
trust asset management increased 4% and totaled $46.4 million compared to $44.7
million in the year-ago quarter. Custody fees increased 1% to $51.1 million.
Northern Trust Retirement Consulting, L.L.C. recorded fees of $17.2 million
compared to $15.1 million in last year's second quarter.
C&IS trust assets under administration totaled $1.50 trillion at June 30, 2002,
compared to $1.52 trillion at both June 30, 2001 and December 31, 2001. Of the
C&IS trust assets under administration, $235.6 billion is managed by Northern
Trust, down from $246.8 billion at June 30, 2001, but essentially unchanged from
$236.1 billion at year-end. At June 30, 2002, approximately 25% of assets under
management were invested in equity securities. Trust assets under administration
include $496.4 billion of global custody assets, up 13% from a year ago,
reflecting strong new business in this area. Net new recurring C&IS trust
business transitioned during the first six months totaled approximately $26
million in annualized fees.
Foreign exchange trading profits were $36.9 million for the quarter, compared to
$40.5 million in the second quarter of last year and $24.3 million in the first
quarter of 2002. The improvement from the first quarter reflects higher client
trading volumes and greater market volatility in the U.S. dollar against other
major currencies.
14
Noninterest Income (continued)
Treasury management revenues, which include both fees and the computed value of
compensating deposit balances, were $29.3 million, up 2% from last year's second
quarter, due to new business and higher transaction volumes from existing
clients. The fee portion of these revenues in the quarter was $23.5 million, up
14% from $20.6 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.
Revenues from security commissions and trading income were $9.7 million, up 13%
from the prior year. Other operating income was $17.6 million for the second
quarter compared to $27.0 million in the same period last year, which included a
$9.2 million nonrecurring gain on the sale of an 80% interest in Northern
Trust's lockbox operations. After adjusting for this one-time gain, other
operating income was essentially unchanged from last year.
Net Interest Income
Net interest income for the quarter totaled $151.3 million, 3% higher than the
$146.4 million reported in the second quarter of 2001. Net interest income is
defined as the total of interest income and amortized fees on earning assets,
less interest expense on deposits and borrowed funds, adjusted for the impact of
hedging activity. When net interest income is adjusted to a fully taxable
equivalent (FTE) basis, yields on taxable, nontaxable and partially taxable
assets are comparable, although the adjustment to a FTE basis has no impact on
net income. Net interest income on a FTE basis for the quarter was $163.2
million, up 2% from $160.7 million reported in the second quarter of 2001. Total
average earning assets of $33.0 billion were essentially unchanged from last
year's second quarter, while the net interest margin improved to 1.99% from
1.96%.
Earning assets for the second quarter averaged $33.0 billion compared to $32.8
billion in last year's second quarter. Money market assets averaged $8.7
billion; up from $4.5 billion last year, while the securities portfolio averaged
$6.6 billion, down from $10.3 billion in the prior year. Loans and leases
averaged $17.6 billion in the quarter, down 2% from the second quarter of last
year.
Domestic loans outstanding were unchanged, averaging $17.2 billion, while
international loans decreased by $315 million from a year ago to average $450
million. Residential mortgages increased $641 million, or 9%, to average $7.6
billion for the quarter and represented 43% of the total loan portfolio.
Commercial and industrial loans averaged $4.3 billion, down from $5.1 billion in
last year's second quarter.
15
Net Interest Income (continued)
Northern Trust utilizes a diverse mix of funding sources. Total interest-related
deposits averaged $17.7 billion, virtually unchanged from the second quarter of
2001. Foreign office time deposits increased $1.1 billion as a result of
increased global custody activity, offset by lower levels of nonpersonal time
deposits. Other interest-related funds averaged $10.1 billion in the quarter
compared to $9.9 billion in last year's second quarter. The increase in other
interest-related funds was due primarily to higher levels of overnight federal
funds purchased, offset in part by reductions in treasury investment program
balances and repurchase agreements. The balances within these classifications
vary based on funding requirements and strategies, interest rate levels, changes
in the volume of lower cost deposit sources, and the availability of collateral
to secure these borrowings. Noninterest-related funds were also unchanged from
the prior year, averaging $5.2 billion.
Provision for Credit Losses
The provision for credit losses was $5.0 million in the quarter compared to
$11.5 million for the same quarter last year and $5.0 million in the first
quarter of 2002. For a discussion of the provision and reserve for credit
losses, refer to the Asset Quality section beginning on page 22.
Noninterest Expenses
Noninterest expenses totaled $355.9 million for the quarter, up 1% from $351.8
million in the year-ago quarter. Expenses continue to be closely monitored
through various initiatives implemented by management to control certain expense
categories, including controlling staff levels and limiting staff-related and
other discretionary costs.
Compensation and employee benefits represented 56% of total operating expenses
and totaled $200.9 million, down 3% from a year ago as lower performance-based
pay and the transfer of staff to the lockbox joint venture more than offset
salary increases and higher employee benefit costs. The cost of lockbox
operations is now included in other operating expenses as a direct payment to
the joint venture for services. Staff on a full-time equivalent basis at June
30, 2002 totaled 9,384, a decline of 69 positions since year-end and an increase
of 1% from a year ago, after adjusting for the impact of RemitStream, the
lockbox service entity in which Northern Trust owns a 20% equity interest and
Fiserv, Inc. owns an 80% equity interest.
Net occupancy expense totaled $26.0 million, up 3% from $25.3 million in the
second quarter of 2001, due primarily to the opening of new PFS offices, the
remodeling of existing offices over the past twelve months and additional space
leased to support growth in other business units. The principal components of
the increase in occupancy expense were higher net rental costs and amortization
expense of leasehold improvements.
16
Noninterest Expenses (continued)
Equipment expense, comprised of depreciation, rental and maintenance costs,
totaled $22.8 million, up 6% from the $21.6 million reported in the second
quarter of 2001. The increase was concentrated primarily in depreciation and
maintenance of computer hardware and increased costs for data line leases.
Other operating expenses in the quarter totaled $106.2 million compared to $97.9
million last year. Other expense categories reflect increased costs associated
with processing errors incurred in servicing and managing financial assets and
performing banking activities, technology investments, office expansion, and
payments made to RemitStream for receivables management and lockbox services.
The increase in processing errors was the result of two unusually large losses
experienced in corporate actions. One of the errors related to a stock tender
offer in which Northern Trust over-tendered and had to acquire the security in
the open market. The second involved a situation where Northern Trust intends to
pursue a legal course of action to recover the loss. These increases were
partially offset by initiatives to manage costs that resulted in decreases in
various expense categories, including travel, hiring and other discretionary
costs. In addition, the adoption of new accounting requirements in 2002 that
eliminates goodwill amortization costs reduced expenses by $2.6 million or $2.1
million after-tax. The following table shows the components of other operating
expenses.
--------------------------------------------------------------------------------
Second Quarter
Other Operating Expenses Ended June 30
--------------------------------------------------------------------------------
(In Millions) 2002 2001
--------------------------------------------------------------------------------
Business Promotion $ 10.8 $ 13.9
Outside Services Purchased 42.7 34.2
Telecommunications 1.8 4.5
Postage and Supplies 5.3 7.8
Software Amortization 18.8 18.7
Goodwill Amortization - 2.6
Other Intangibles Amortization 1.7 1.5
Other Expenses 25.1 14.7
--------------------------------------------------------------------------------
Total Other Operating Expenses $106.2 $ 97.9
--------------------------------------------------------------------------------
Provision for Income Taxes
The provision for income taxes was $64.0 million for the second quarter compared
with $66.1 million in the year-ago quarter. The lower tax provision in 2002
resulted primarily from lower federal taxable earnings, partially offset by
higher state income taxes brought about by a reduction in income exempt for
state tax purposes. The effective tax rate for the quarter was 33.5%, unchanged
from the second quarter of 2001.
17
BUSINESS SEGMENTS
The following table reflects the earnings contribution and average assets of
Northern Trust's business segments for the second quarter ended June 30, 2002
and 2001.
Corporate and
Institutional Personal Financial Treasury and Total
Second Quarter Services Services Other Consolidated
--------------------------------------------------------------------------------------------------------------------
($ In Millions) 2002 2001 2002 2001 2002 2001 2002 2001
--------------------------------------------------------------------------------------------------------------------
Noninterest Income
Trust Fees $ 158.7 $ 163.0 $ 153.9 $ 154.7 $ - $ - $ 312.6 $ 317.7
Other 69.0 78.8 17.7 16.6 1.1 1.2 87.8 96.6
Net Interest Income after
Provision for Credit Losses* 41.9 45.1 110.7 98.2 5.6 5.9 158.2 149.2
Noninterest Expenses 173.2 167.5 175.6 172.2 7.1 12.1 355.9 351.8
--------------------------------------------------------------------------------------------------------------------
Income before Income Taxes* 96.4 119.4 106.7 97.3 (.4) (5.0) 202.7 211.7
Provision for Income Taxes* 37.5 46.4 41.1 37.7 (2.7) (3.7) 75.9 80.4
--------------------------------------------------------------------------------------------------------------------
Reported Net Income $ 58.9 $ 73.0 $ 65.6 $ 59.6 $ 2.3 $ (1.3) $ 126.8 $ 131.3
Goodwill, After Taxes - .9 - 1.2 - - - 2.1
--------------------------------------------------------------------------------------------------------------------
Adjusted Net Income $ 58.9 $ 73.9 $ 65.6 $ 60.8 $ 2.3 $ (1.3) $ 126.8 $ 133.4
--------------------------------------------------------------------------------------------------------------------
Percentage Net Income
Contribution 46% 56% 52% 45% 2% (1)% 100% 100%
--------------------------------------------------------------------------------------------------------------------
Average Assets $16,663.6 $17,295.8 $15,044.6 $14,755.3 $5,377.6 $4,260.6 $37,085.8 $36,311.7
--------------------------------------------------------------------------------------------------------------------
*Stated on a fully taxable equivalent basis (FTE). Total includes FTE
adjustments of $11.9 million for 2002 and $14.3 million for 2001.
Note: Certain reclassifications have been made to 2001 financial information
to conform to the current year presentation.
The following table reflects the earnings contribution and average assets of
Northern Trust's business segments for the six months ended June 30, 2002 and
2001.
Corporate and
Institutional Personal Financial Treasury and Total
Six Months Services Services Other Consolidated
-------------------------------------------------------------------------------------------------------------------
($ In Millions) 2002 2001 2002 2001 2002 2001 2002 2001
-------------------------------------------------------------------------------------------------------------------
Noninterest Income
Trust Fees $ 316.5 $ 312.1 $ 312.5 $ 310.8 $ - $ - $ 629.0 $ 622.9
Other 125.5 144.0 36.4 35.1 1.2 1.8 163.1 180.9
Net Interest Income after
Provision for Credit Losses* 84.3 91.4 214.4 204.5 15.4 10.3 314.1 306.2
Noninterest Expenses 340.8 334.7 346.4 342.1 11.5 16.6 698.7 693.4
-------------------------------------------------------------------------------------------------------------------
Income before Income Taxes* 185.5 212.8 216.9 208.3 5 1 (4.5) 407.5 416.6
Provision for Income Taxes* 72.0 82.6 83.5 80.7 (2.4) (5.2) 153.1 158.1
-------------------------------------------------------------------------------------------------------------------
Reported Net Income $ 113.5 $ 130.2 $ 133.4 $ 127.6 $ 7.5 $ .7 $ 254.4 $ 258.5
-------------------------------------------------------------------------------------------------------------------
Goodwill, After Taxes - 1.7 - 2.5 - - - 4.2
-------------------------------------------------------------------------------------------------------------------
Adjusted Net Income $ 113.5 $ 131.9 $ 133.4 $ 130.1 $ 7.5 $ .7 $ 254.4 $ 262.7
-------------------------------------------------------------------------------------------------------------------
Percentage Net Income
Contribution 45% 50% 52% 50% 3% -% 100% 100%
-------------------------------------------------------------------------------------------------------------------
Average Assets $16,425.1 $17,761.7 $15,029.9 $14,615.9 $5,928.8 $3,612.2 $37,383.8 $35,989.8
-------------------------------------------------------------------------------------------------------------------
*Stated on a fully taxable equivalent basis (FTE). Total includes FTE
adjustments of $23.6 million for 2002 and $28.2 million for 2001.
Note: Certain reclassifications have been made to 2001 financial information
to conform to the current year presentation.
18
Corporate and Institutional Services
C&IS net income for the quarter totaled $58.9 million, down 19% from $73.0
million reported in 2001. Noninterest income was 6% lower than the second
quarter of 2001 and totaled $227.7 million. Trust fees decreased 3% to $158.7
million in the current quarter compared to $163.0 million in the year-ago
quarter, due primarily to a $9.3 million or 22% decline in securities lending
fees to $33.4 million. In the prior year, securities lending spreads benefited
from three decreases in the federal funds rate during the second quarter. Asset
management fees grew 4% to $46.4 million, while custody fees increased 1.4% and
fees generated by Northern Trust Retirement Consulting, L.L.C. were $17.2
million compared to $15.1 million in last year's second quarter. Other
noninterest income was $69.0 million, down 12% from $78.8 million in last year's
second quarter. The prior year results include a $9.2 million nonrecurring gain
on the sale of an 80% interest in Northern Trust's lockbox operations. Foreign
exchange trading profits were $36.4 million, down 10% from the $40.4 million in
the prior year's second quarter. Partially offsetting this reduction were higher
letter of credit fees and a $2.1 million increase in fees for treasury
management services due to new business, higher transaction volumes from
existing clients and more clients electing to pay for services in fees rather
than in compensating deposit balances.
Net interest income after the provision for credit losses, stated on a FTE
basis, was $41.9 million, down 7% from $45.1 million in last year's second
quarter. The decrease reflects lower levels of earning assets, concentrated
primarily in loans, which declined 12% or $659 million from last year to average
$4.8 billion. The net interest margin improved to 1.29% from 1.26% in the prior
year quarter. The provision for credit losses for the quarter totaled $3.4
million, essentially unchanged from the prior year. The provision for the second
quarter of 2001 included $6.5 million of additional charges related to the sale
of $44.5 million of nonperforming loans, which was partially offset by decreases
in allocated inherent reserves resulting from a decline in outstanding loans.
Noninterest expenses increased 3% to $173.2 million in the current quarter
compared to $167.5 million last year. The increase reflects higher costs
associated with processing errors incurred in servicing and managing financial
assets and performing banking activities and payments made to RemitStream, the
lockbox service entity formed in 2001, in which the Corporation owns a 20%
equity interest and Fiserv, Inc. owns an 80% equity interest. These increases
were offset by lower compensation levels, business promotion costs, and
allocations for product and operations support. Compensation costs were lower
than the previous year due to both reductions in staff resulting from the
outsourcing of the lockbox operations and lower performance-based pay.
Previously the cost of the lockbox operations was primarily included in
compensation and employee benefits. The adoption of new accounting requirements
in 2002 that eliminates goodwill amortization costs reduced expenses by $1.2
million compared to the second quarter of last year.
19
Personal Financial Services
PFS net income for the quarter was $65.6 million, 10% higher than the $59.6
million reported a year ago. Noninterest income was $171.6 million in the
current quarter compared to $171.3 million in last year's second quarter. The
slight improvement was due primarily to higher other noninterest-related
revenues, offset by a slight reduction in trust fees, which totaled $153.9
million in the current quarter. The decline in PFS trust fees resulted from the
continued weakness in the equity markets partially offset by new business.
Net interest income after the provision for credit losses, stated on a FTE
basis, increased 13% to $110.7 million in the current quarter. The improved
results reflect a $6.3 million decrease in the provision for credit losses, a 3%
increase in average loans concentrated in the mortgage loan portfolio, and an
improvement in the net interest margin from 2.99% last year to 3.13% in the
current quarter. The higher provision level in 2001 was associated primarily
with a bankruptcy filing by a middle market client in this segment.
Noninterest expenses increased to $175.6 million in the current quarter from
$172.2 million in last year's second quarter reflecting higher costs associated
with processing errors incurred in servicing and managing financial assets and
performing banking activities. Compensation and employee benefits were
essentially unchanged as the effects of staff growth, merit increases and
employee benefits were offset by lower performance-based incentive pay.
Occupancy costs were $.9 million or 10% higher as a result of opening new PFS
offices and the remodeling of existing locations, while outside services
purchased increased $1.0 million to $4.7 million in this year's second quarter.
Partially offsetting the above was the adoption of new accounting requirements
in 2002 that eliminates goodwill amortization costs, which reduced expenses by
$1.4 million, and lower allocations for product and operations support.
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 second quarter was $5.6 million compared to $5.9
million in the year-ago quarter. Noninterest expenses totaled $7.1 million for
the quarter compared to $12.1 million in the year-ago period reflecting lower
performance-based incentives and a reduction in stock-related directors
compensation resulting from the decline in the price of Northern Trust
Corporation common stock during the quarter.
20
SIX-MONTH EARNINGS HIGHLIGHTS
Net income per common share on a diluted basis was $1.12 for the six-month
period ended June 30, 2002, unchanged from the same period last year. Net income
was $254.4 million compared to $258.5 million earned last year. The ROE was
18.99% compared to 21.31% last year, while the ROA was 1.37% compared to 1.45%
in the previous year. The productivity ratio was 160% compared to 162% last
year.
Total revenues, stated on a fully taxable equivalent basis of $1.12 billion,
decreased 1% from the 2001 level of $1.13 billion. Trust fees totaled $629.0
million, up 1% from $622.9 million last year. Foreign exchange trading profits
totaled $61.2 million, 19% below the $75.4 million in the prior year. Treasury
management revenues from both fees and the computed value of compensating
deposit balances increased 2% to $59.0 million. The fee portion of these
revenues accrued in the period totaled $46.9 million, up 15% from $40.7 million
in 2001. Revenues from security commissions and trading income rose 8% to $19.6
million. Other operating income totaled $35.3 million in the period compared
with $46.7 million in 2001, which included the $9.2 million nonrecurring gain
recorded in the second quarter of last year.
Net interest income, stated on a FTE basis, totaled $324.1 million compared to
$322.7 million reported last year. The $10.0 million provision for credit losses
was $6.5 million lower than the $16.5 million required in 2001. Net charge-offs
totaled $11.3 million and represented .13% of average loans compared to $19.7
million or .22% of average loans in 2001. Noninterest expenses were up 1% and
totaled $698.7 million compared to $693.4 million a year ago.
21
BALANCE SHEET
Total assets at June 30, 2002 were $37.8 billion and averaged $37.1 billion for
the second quarter, up 2% from last year's average of $36.3 billion. Loans and
leases totaled $18.3 billion at June 30, 2002 and averaged $17.6 billion for the
second quarter, each virtually unchanged from the respective periods of 2001.
Securities totaled $6.5 billion at June 30, 2002 and averaged $6.6 billion for
the quarter, compared to $9.5 billion at June 30, 2001 and $10.3 billion on
average in last year's second quarter. Money market assets totaled $7.7 billion
at June 30, 2002 and averaged $8.7 billion in the second quarter, up 93% from
the year-ago quarter as proceeds from the maturities of short-term federal
agency securities were reinvested in time deposits with banks.
Driven by the retention of earnings, offset in part by stock repurchases under
Northern Trust's ongoing stock buyback program, common stockholders' equity
increased to $2.79 billion at June 30, 2002 and averaged $2.73 billion for the
quarter, up 10% from the $2.47 billion average in last year's second quarter.
Total stockholders' equity averaged $2.85 billion compared with $2.59 billion in
the second quarter of 2001.
During the quarter, the Corporation acquired a total of 773,031 shares of its
common stock at a cost of $40.7 million. An additional 3.0 million shares may be
purchased after June 30, 2002 under the current stock buyback program.
Northern Trust's risk-based capital ratios remained strong at 10.8% for tier 1
capital and 13.9% for total capital at June 30, 2002. 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 second quarter
average assets) of 7.9% at June 30, 2002, also exceeded the minimum regulatory
requirement of 3%. The Bank's risk-based capital ratios at June 30, 2002 were
9.2% for tier 1 capital, 12.3% for total capital and 6.8% for the leverage
ratio. Each of Northern Trust's other subsidiary banks had a ratio of 10.8% or
higher for tier 1 capital, 11.4% for total risk-based capital, and 7.7% for the
leverage ratio.
ASSET QUALITY
Nonperforming assets consist of nonaccrual loans and other real estate owned
(OREO). Nonperforming assets at June 30, 2002 totaled $110.6 million, compared
with $118.7 million at March 31, 2002, $109.5 million at December 31, 2001 and
$109.4 million at June 30, 2001. Domestic nonaccrual loans and leases,
consisting primarily of commercial loans, totaled $109.7 million, or .62% of
total domestic loans and leases at June 30, 2002. At March 31, 2002, December
31, 2001 and June 30, 2001, domestic nonaccrual loans and leases totaled $117.9
million, $108.7 million and $107.9 million, respectively. The decrease in the
second quarter reflects the partial charge-off, totaling $5.0 million, of two
commercial loans where deterioration was deemed to be permanent, and the
restoration to accrual status of two commercial real estate credits that were
brought fully current by the borrowers.
22
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 increase in
loans past due 90 days or more was caused primarily by two commercial clients
whose loans have since been brought to current status. The balance in this
category at any quarter-end can fluctuate widely based on the timing of cash
collections, renegotiations and renewals.
----------------------------------------------------------------------------------------------------------------------------
(In Millions) June 30, March 31, December 31, June 30,
2002 2002 2001 2001
----------------------------------------------------------------------------------------------------------------------------
Nonaccrual Loans
Domestic
Residential Real Estate $ 4.7 $ 4.9 $ 5.0 $ 8.0
Commercial 102.9 108.0 99.3 96.9
Commercial Real Estate 1.5 4.7 4.3 2.6
Personal .6 .3 .1 .4
----------------------------------------------------------------------------------------------------------------------------
Total Domestic 109.7 117.9 108.7 107.9
International - - - -
----------------------------------------------------------------------------------------------------------------------------
Total Nonaccrual Loans 109.7 117.9 108.7 107.9
Other Real Estate Owned .9 .8 .8 1.5
----------------------------------------------------------------------------------------------------------------------------
Total Nonperforming Assets $110.6 $118.7 $109.5 $109.4
----------------------------------------------------------------------------------------------------------------------------
Total 90 Day Past Due Loans (still accruing) $ 25.5 $ 16.4 $ 14.5 $ 30.3
----------------------------------------------------------------------------------------------------------------------------
Provision and Reserve for Credit Losses
The provision for credit losses is the charge against current earnings that is
determined, through a disciplined credit risk management 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 reserve) and for probable losses that are
believed to be inherent in the loan and lease portfolios and other credit
undertakings but that have not yet been specifically identified (inherent
reserve).
Note 6 to the Consolidated Financial Statements includes a table that analyzes
the reserve for credit losses for the six months ended June 30, 2002 and June
30, 2001 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 at June 30, 2002, March 31, 2002, December 31, 2001 and June 30, 2001.
23
Provision and Reserve for Credit Losses (continued)
ALLOCATION OF THE RESERVE FOR CREDIT LOSSES
---------------------------------------------------------------------------------------------------------------------------------
June 30, 2002 March 31, 2002 December 31, 2001 June 30, 2001
-------------------------------------------------------------------------------------------------
Percent of Percent of Percent of Percent of
Reserve Loans to Reserve Loans to Reserve Loans to Reserve Loans to
Amount Total Amount Total Amount Total Amount Total
($ in millions) Loans Loans Loans Loans
---------------------------------------------------------------------------------------------------------------------------------
Specific Reserve $ 24.4 - % $ 24.6 - % $ 21.1 - % $ 23.4 - %
---------------------------------------------------------------------------------------------------------------------------------
Allocated Inherent Reserve
Residential Real Estate 10.9 42 10.4 42 9.7 41 11.0 39
Commercial 77.5 24 76.3 26 81.7 27 75.9 28
Commercial Real Estate 14.8 6 14.3 6 14.8 6 13.8 5
Personal 3.8 12 3.7 12 3.8 12 4.0 12
Other - 5 - 4 - 4 - 5
Lease Financing 4.0 7 3.8 7 3.0 7 2.9 6
International 2.8 4 4.6 3 5.0 3 4.7 5
---------------------------------------------------------------------------------------------------------------------------------
Total Allocated Inherent Reserve $113.8 100 % $113.1 100 % $118.0 100 % $112.3 100 %
---------------------------------------------------------------------------------------------------------------------------------
Unallocated Inherent Reserve 22.1 - 22.6 - 22.5 - 24.0 -
---------------------------------------------------------------------------------------------------------------------------------
Total Reserve $160.3 100 % $160.3 100 % $161.6 100 % $159.7 100 %
---------------------------------------------------------------------------------------------------------------------------------
Reserve Assigned to:
Loans and Leases $153.3 $153.3 $154.3 $150.4
Unfunded Commitments
and Standby, Letters
of Credit 7.0 7.0 7.3 9.3
---------------------------------------------------------------------------------------------------------------------------------
Total Reserve $160.3 $160.3 $161.6 $159.7
---------------------------------------------------------------------------------------------------------------------------------
Specific Reserve. At June 30, 2002, the specific component of the reserve stood
at $24.4 million, compared to $24.6 million at March 31, 2002. The $.2 million
reduction in the specific component of the reserve during the quarter reflects
the partial charge-off totaling $5.0 million of the two commercial loans
mentioned on page 22, offset by the recognition of an additional $4.9 million
reserve on Enron Corp. related credit exposure, as well as certain other middle
market commercial loans. The charge-offs on the two loans had been previously
reserved for in the earlier periods. During the second quarter of 2002,
valuation for the unsecured credit to Enron was modified based on more
up-to-date market oriented information resulting in the $4.9 million provision.
As commented on in the 2001 Annual Report to Shareholders, Northern Trust
reported $47.4 million of nonaccrual commercial credits involving three
companies with exposure to asbestos-related claims that had filed for Chapter 11
reorganization. During the first quarter of this year $6.9 million of this
exposure was sold, as reported in that quarter's Form 10-Q filing, reducing the
amount of exposure to $40.5 million. Specific reserves for these commercial
credits were established based on market values provided by debt trading desks
of major investment banking firms.
Allocated Inherent Reserve. The allocated inherent portion of the reserve
increased by a net $700 thousand during the quarter to $113.8 million at June
30, 2002. The change in this component of the reserve reflects the migration of
various loans to lower rated credit categories where higher provision factors
are applied, offset in part by the repayment of other higher risk credits,
thereby reducing required reserve levels for these credits.
24
Provision and Reserve for Credit Losses (continued)
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 primarily inherent in the commercial portfolio, which are not
necessarily captured by the application of historical loss ratios. This portion
of the reserve analysis involves the exercise of judgment and reflects
considerations such as management's view that the reserve should have a margin
that recognizes the imprecision inherent in the process of estimating expected
credit losses. The unallocated inherent portion of the reserve was $22.1
million, a decrease of $.5 million from March 31, 2002, reflecting management's
judgment that there have been only minor changes in the factors affecting this
component of the reserve.
Other Factors. At June 30, 2002, there were no significant changes in
concentration of credits that impacted asset quality. The total amount of the
two highest risk loan groupings, those rated "7" and "8" (based on Northern
Trust's internal rating scale, which closely parallels that of the banking
regulators), was $278 million, of which $108.1 million was classified as
impaired, up from $267 million at March 31, 2002, when $115.5 million was
impaired and up from $149 million at June 30, 2001 when $104.7 million was
impaired. The increase from March 31, 2002 reflects the migration of certain
loans to lower credit ratings offset in part by the partial charge-off of the
two commercial loans discussed earlier and paydowns on other loans. The increase
from the prior year primarily reflects lower credit ratings on certain loans,
including Enron Corp. related credit exposure, credits affected by
asbestos-related exposure and those significantly impacted by the current
economic downturn.
Total Reserve. Management's evaluation of the factors above resulted in a
reserve for credit losses of $160.3 million at June 30, 2002, the same level as
at March 31, 2002. The reserve assigned to loans and leases as a percentage of
total loans and leases was .84% at June 30, 2002, compared to .86% at March 31,
2002.
Provision. The provision for credit losses was $5.0 million during the second
quarter of 2002, compared to $11.5 million in the prior year quarter. The
provision for the second quarter of 2001 was higher, in part due to a $6.5
million provision related to the sale of $44.5 million in nonperforming loans.
MARKET RISK MANAGEMENT
As described in the 2001 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, 2001.
25
FORWARD-LOOKING INFORMATION
This report contains statements that may be considered forward-looking, such as
the statements relating to Northern Trust's financial goals, dividend policy,
expansion and business development plans, 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, including consumer confidence in the securities markets,
that affect wealth creation, investment and savings patterns, and Northern
Trust's interest rate risk exposure and credit risk.
.. Changes in U.S. and worldwide securities markets, with respect to the
market values of financial assets, the stability of particular securities
markets and the level of volatility in certain markets such as foreign
exchange.
.. U.S. and international economic factors that may impact Northern Trust's
interest rate risk exposure and credit risk.
.. Any extraordinary events (such as the September 11, 2001 events and the
U.S. government's response to those events).
.. Changes in the level of cross-border investing by clients resulting from
changing economic factors, political conditions or currency markets.
.. Regulatory and banking 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.
26
FORWARD-LOOKING INFORMATION (continued)
. 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.
. 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 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
(including pension-reform legislation) 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 2001
Annual Report to Shareholders (pp. 48-60) and in the sections of "Item 1 -
Business" of the 2001 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.
27
THIS PAGE INTENTIONALLY LEFT BANK
28
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
Second Quarter
-------------------------------------------------------------------------------
(Interest and rate on a taxable 2002 2001
equivalent basis) ------------------------------------- -------------------------------------
($ in Millions) Interest Volume Rate Interest Volume Rate
--------------------------------------------- -------- --------- ---- -------- --------- -----
Average Earning Assets
Money Market Assets
Federal Funds Sold and Resell Agreements $ 2.2 $ 469.6 1.81% $ 5.1 $ 475.0 4.33%
Time Deposits with Banks 52.0 8,234.8 2.53 45.9 4,012.0 4.59
Other Interest-Bearing .1 23.8 2.80 .2 24.2 4.11
--------------------------------------------- -------- --------- ---- -------- --------- -----
Total Money Market Assets 54.3 8,728.2 2.49 51.2 4,511.2 4.56
--------------------------------------------- -------- --------- ---- -------- --------- -----
Securities
U.S. Government 1.1 165.6 2.66 3.1 207.4 5.90
Obligations of States and Political
Subdivisions 12.0 602.8 7.94 9.8 487.4 8.02
Federal Agency 27.3 5,456.5 2.01 111.0 9,225.9 4.83
Other 5.9 402.2 5.88 6.9 401.4 7.00
Trading Account .1 9.2 4.38 .3 16.6 6.22
--------------------------------------------- -------- --------- ---- -------- --------- -----
Total Securities 46.4 6,636.3 2.80 131.1 10,338.7 5.09
--------------------------------------------- -------- --------- ---- -------- --------- -----
Loans and Leases 222.3 17,607.2 5.07 281.7 17,961.4 6.29
--------------------------------------------- -------- --------- ---- -------- --------- -----
Total Earning Assets $323.0 $32,971.7 3.93% $464.0 $32,811.3 5.67%
--------------------------------------------- -------- --------- ---- -------- --------- -----
Reserve for Credit Losses -- (153.3) -- -- (154.5) --
Cash and Due from Banks -- 1,774.3 -- -- 1,474.2 --
Other Assets -- 2,493.1 -- -- 2,180.7 --
--------------------------------------------- -------- --------- ---- -------- --------- -----
Total Assets -- $37,085.8 -- -- $36,311.7 --
--------------------------------------------- -------- --------- ---- -------- --------- -----
Average Source of Funds
Deposits
Savings and Money Market $ 17.0 $ 6,022.1 1.13% $ 44.9 $ 5,695.5 3.16%
Savings Certificates 16.7 1,930.3 3.47 30.4 2,229.5 5.48
Other Time 2.5 385.7 2.59 19.6 1,519.3 5.19
Foreign Offices Time 42.4 9,361.5 1.82 84.1 8,306.9 4.06
--------------------------------------------- -------- --------- ---- -------- --------- -----
Total Deposits 78.6 17,699.6 1.78 179.0 17,751.2 4.04
Federal Funds Purchased 20.9 4,914.8 1.71 39.3 3,573.7 4.40
Securities Sold Under Agreements to
Repurchase 5.2 1,230.3 1.69 16.7 1,607.3 4.17
Commercial Paper .6 139.1 1.82 1.4 130.8 4.42
Other Borrowings 31.9 2,352.0 5.45 41.3 3,024.1 5.48
Senior Notes 7.8 450.0 6.92 8.5 500.0 6.86
Long-Term Debt 13.1 766.3 6.82 13.4 779.3 6.86
Debt - Floating Rate Capital Securities 1.7 267.8 2.56 3.7 267.7 5.54
--------------------------------------------- -------- --------- ---- -------- --------- -----
Total Interest-Related Funds 159.8 27,819.9 2.30 303.3 27,634.1 4.40
--------------------------------------------- -------- --------- ---- -------- --------- -----
Interest Rate Spread -- -- 1.63% -- -- 1.27%
Noninterest-Related Deposits -- 5,180.5 -- -- 4,947.9 --
Other Liabilities -- 1,238.1 -- -- 1,134.8 --
Stockholders' Equity -- 2,847.3 -- -- 2,594.9 --
--------------------------------------------- -------- --------- ---- -------- --------- -----
Total Liabilities and Stockholders' Equity -- $37,085.8 -- -- $36,311.7 --
--------------------------------------------- -------- --------- ---- -------- --------- -----
Net Interest Income/Margin $163.2 -- 1.99% $160.7 -- 1.96%
--------------------------------------------- -------- --------- ---- -------- --------- -----
ANALYSIS OF NET INTEREST INCOME CHANGES DUE TO VOLUME AND RATE
Second Quarter 2002/01
-----------------------------------
Change Due To
----------------------
(In Millions) Volume Rate Total
------------------------------------------------- ------ -------- --------
Earning Assets $ 7.2 $(148.2) $(141.0)
Interest-Related Funds (7.6) (135.9) (143.5)
------------------------------------------------- ------ -------- --------
Net Interest Income $14.8 $ (12.3) $ 2.5
------------------------------------------------- ------ -------- --------
29
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
Six Months
--------------------------------------------------------------
2002 2001
(Interest and rate on a taxable equivalent basis) --------------------------- -----------------------------
($ in Millions) Interest Volume Rate Interest Volume Rate
-------------------------------------------------------- -------- ---------- ------ -------- ---------- ------
Average Earning Assets
Money Market Assets
Federal Funds Sold and Resell Agreements $ 7.9 $ 885.0 1.79% $ 15.9 $ 607.7 5.28%
Time Deposits with Banks 100.7 7,935.5 2.56 93.4 3,888.7 4.84
Other Interest-Bearing .3 24.1 2.82 .6 24.2 5.42
-------------------------------------------------------- ------- --------- ----- ------ --------- ----
Total Money Market Assets 108.9 8,844.6 2.48 109.9 4,520.6 4.91
-------------------------------------------------------- ------- --------- ----- ------ --------- ----
Securities
U.S. Government 2.4 161.7 3.02 6.5 208.0 6.28
Obligations of States and Political Subdivisions 23.0 582.0 7.89 18.9 470.8 8.02
Federal Agency 57.8 5,825.5 2.00 239.4 9,015.7 5.36
Other 11.9 401.8 5.96 14.3 399.6 7.23
Trading Account .2 9.7 4.82 .5 15.7 6.14
-------------------------------------------------------- ------- --------- ----- ------ --------- ----
Total Securities 95.3 6,980.7 2.75 279.6 10,109.8 5.57
-------------------------------------------------------- ------- --------- ----- ------ --------- ----
Loans and Leases 445.5 17,640.3 5.09 581.8 17,838.3 6.58
-------------------------------------------------------- ------- --------- ----- ------ --------- ----
Total Earning Assets $649.7 $33,465.6 3.91% $971.3 $32,468.7 6.03%
-------------------------------------------------------- ------- --------- ----- ------ --------- ----
Reserve for Credit Losses - (153.7) - - (154.2) -
Cash and Due from Banks - 1,675.8 - - 1,461.4 -
Other Assets - 2,396.1 - - 2,213.9 -
-------------------------------------------------------- ------- --------- ----- ------ --------- ----
Total Assets - $37,383.8 - - $35,989.8 -
-------------------------------------------------------- ------- --------- ----- ------ --------- ----
Average Source of Funds
Deposits
Savings and Money Market Deposits $ 36.5 $ 6,115.7 1.20% $ 99.7 $ 5,658.2 3.55%
Savings Certificates 35.0 1,956.5 3.61 65.1 2,290.1 5.73
Other Time 5.1 383.7 2.70 37.4 1,406.8 5.36
Foreign Offices Time 84.2 9,266.6 1.83 187.0 8,473.6 4.45
-------------------------------------------------------- ------- --------- ----- ------ --------- ----
Total Deposits 160.8 17,722.5 1.83 389.2 17,828.7 4.40
Federal Funds Purchased 37.1 4,356.9 1.72 73.3 3,036.0 4.87
Securities Sold Under Agreements to Repurchase 10.6 1,263.0 1.68 40.0 1,666.5 4.84
Commercial Paper 1.2 135.6 1.83 3.4 135.4 5.09
Other Borrowings 70.7 3,235.2 4.41 92.2 3,245.6 5.73
Senior Notes 15.6 450.0 6.92 17.1 500.0 6.86
Long-Term Debt 26.2 766.5 6.82 25.3 732.2 6.91
Floating Rate Capital Securities 3.4 267.8 2.54 8.1 267.7 6.02
-------------------------------------------------------- ------- --------- ----- ------ --------- ----
Total Interest-Related Funds 325.6 28,197.5 2.33 648.6 27,412.1 4.77
-------------------------------------------------------- ------- --------- ----- ------ --------- ----
Interest Rate Spread - - 1.58% - - 1.26%
Noninterest-Related Deposits - 5,180.2 - - 4,849.9 -
Other Liabilities - 1,195.7 - - 1,184.6 -
Stockholders' Equity - 2,810.4 - - 2,543.2 -
-------------------------------------------------------- ------- --------- ----- ------ --------- ----
Total Liabilities and Stockholders' Equity - $37,383.8 - - $35,989.8 -
-------------------------------------------------------- ------- --------- ----- ------ --------- ----
Net Interest Income/Margin $324.1 - 1.95% $322.7 - 2.00%
-------------------------------------------------------- ------- --------- ----- ------ --------- ----
ANALYSIS OF NET INTEREST INCOME CHANGES
DUE TO VOLUME AND RATE
Six Months 2002/01
-----------------------------
Change Due To
-----------------
(In Millions) Volume Rate Total
--------------------------------- ------ ------- -------
Earning Assets $24.6 $(346.2) $(321.6)
Interest-Related Funds (2.6) (320.4) (323.0)
--------------------------------- ----- ------- -------
Net Interest Income $27.2 $ (25.8) $ 1.4
--------------------------------- ----- ------- -------
30
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 25 of this document.
31
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
(10) Material Contracts
(i) Northern Trust Corporation (2002) Annual Performance Plan
(99) Additional Exhibits
(i) Certification of CEO and CFO Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
-------------------
In a report on Form 8-K filed April 15, 2002, Northern Trust
Corporation incorporated in Item 5 its April 15, 2002 press release,
reporting on its earnings for the first quarter of 2002. The press
release, with summary financial information, was filed pursuant to
Item 7.
In a report on Form 8-K filed on April 19, 2002, Northern Trust
Corporation reported under Item 4, "Changes in Registrant's Certifying
Accountant" that its Board of Directors selected KPMG LLP as Northern
Trust's independent public accountants for 2002. Attached as an exhibit
to the Form 8-K was the Corporation's press release dated April
16, 2002.
32
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: August 13, 2002 By: Perry R. Pero
-------------
Perry R. Pero
Vice Chairman
and Chief Financial Officer
Date: August 13, 2002 By: Harry W. Short
--------------
Harry W. Short
Executive Vice President and Controller
(Chief Accounting Officer)
33
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 June 30, 2002. You may obtain copies of these exhibits from
the SEC's site on the worldwide web at http://www.sec.gov. Stockholders may also
obtain copies of such exhibits by writing Rose A. Ellis, Secretary, Northern
Trust Corporation, 50 South LaSalle Street, Chicago, Illinois 60675.
Exhibit
Number Description
------ -----------
(10) Material Contracts
(i) Northern Trust Corporation (2002) Annual Performance Plan
(99) Additional Exhibits
(i) Certification of CEO and CFO Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
34