Northern Trust Economic Research. About Northern Trust

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1 About Northern Trust 2001 Northern Trust Corporation Northern Trust Corporation, whose business began in 1889, is a multi-bank holding company with its headquarters in Chicago, a growing network of offices in 12 states, international offices in five countries and over 9,400 employees worldwide at the end of Northern Trust had assets of $36 billion at year-end. Trust assets under administration were $1.7 trillion including $338 billion under our investment management. Northern Trust has earned distinction as a leading provider of personal fiduciary, asset management, personal and private banking and master trust/custody, global custody and treasury management services. A one hundred and eleven-year tradition of combining high-touch service and expertise with industry leading technology distinguishes Northern Trust in its two primary businesses, Personal Financial Services and Corporate and Institutional Services. Brought to you by Global Reports [4/4/ :25:27 AM]

2 Consolidated Financial Highlights For the Year ($ In Millions) Percent Change Net Income $ $ % Net Income Applicable to Common Stock Dividends Declared on Common Stock Per Common Share Net Income-Basic $ 2.17 $ % Net Income-Diluted Dividends Declared Book Value-End of Period Market Price-End of Period Averages ($ In Millions) Total Assets $34,043.3 $30, % Total Earning Assets 30, , Securities 9, , Loans and Leases 16, , Deposits 21, , Stockholders' Equity 2, , Common Stockholders' Equity 2, , At Year-End ($ In Millions) Total Assets $36,022.3 $28, % Total Earning Assets 31, , Securities 7, , Loans and Leases 18, , Reserve for Credit Losses Deposits 22, , Stockholders' Equity 2, , Common Stockholders' Equity 2, , Ratios Return on Average Assets 1.43% 1.34% Return on Average Common Equity Productivity Ratio Tier 1 Capital to Risk-Adjusted Assets Total Capital to Risk-Adjusted Assets Leverage Ratio Brought to you by Global Reports (1 of 2) [4/4/ :25:29 AM]

3 2001 Northern Trust Corporation At Year-End ($ In Billions) Total Managed Trust Assets $ $ % Total Trust Assets Under Administration 1, , Brought to you by Global Reports (2 of 2) [4/4/ :25:29 AM]

4 Management's Letter to Shareholders In 2000, Northern Trust achieved exceptional results for shareholders. The year marked the 13th consecutive year of record earnings with net income per share of $2.08, an increase of 20% from per share earnings in Net income increased 20% for a record $485.1 million from the $405.0 million earned the previous year. Strong earnings performance placed Northern Trust in the top-tier of the banking industry and resulted in a return on average common equity of 22.1%, above our 18-20% target for the fourth consecutive year. Our productivity ratio reached an all-time high of 160%. This growth was supported by record new business and outstanding results in Northern s investment management business. Trust assets under administration reached $1.7 trillion and managed assets grew 13% to $338 billion again making Northern Trust one of the nation s largest asset management firms. Given Northern s strategic focus on expanding our investment management business, it is gratifying to report that managed assets grew at a rate greater than the growth rate of assets under administration. The growth in trust assets is not the result of mergers or acquisitions, but reflects organic growth the result of winning new business and meeting and exceeding the expectations of clients. Northern experienced strong revenue growth throughout 2000 with total revenues increasing 20% to $2.2 billion. The revenue mix continues to be an attractive one with 71% generated by trust and other fees and net interest income contributing 29%. Ours is a well balanced revenue stream with our personal and corporate and institutional businesses each contributing one-half of the Corporation s revenues. Both businesses grew impressively, combining to produce a 23% increase in trust fees, which account for over one-half of total revenues. This growth was complemented by a 12% increase in net interest income and strong foreign exchange trading profits. The Corporation raised the quarterly cash dividend to 15.5 cents per share of common stock, an increase of 14.8%, marking the 104th year of consecutive dividends paid and the 14th year of consecutive increases. These earnings results were reflected in the performance of Northern Trust stock, which increased 54% during the year, significantly outperforming both the S&P 500 and the KBW50 Bank Index, which were -10% and 17%, respectively. The compound growth rate of Northern Trust stock for the five years ended December 31, 2000 is an impressive 42%, compared to 16% for the S&P 500 and 18% for the KBW50. The marketplace has awarded Northern Trust one of the highest price-earnings ratios among financial services companies in recognition of the success of our finely-tuned business strategy and consistent, strong financial performance. A Strategic Business Focus While others in the financial services industry have wavered in the face of major consolidations and fluctuating markets, we have steadfastly pursued our strategy. We are positioned within selected individual and corporate market niches as an unrivaled provider of trust and investment services with a strong relationship emphasis. Brought to you by Global Reports (1 of 8) [4/4/ :25:39 AM]

5 Northern s corporate culture, with its unique client focus, has remained undiluted by mergers so that people throughout the organization have a clear understanding of who we are and how we serve clients. We have made acquisitions sparingly, to add capabilities or extend our geographic presence in target markets. Northern continues to focus on two principal businesses Personal Financial Services (PFS) and Corporate and Institutional Services (C&IS). These businesses are effectively supported by our investment unit, Northern Trust Global Investments (NTGI), and by Worldwide Operations and Technology (WWOT). PFS achieved outstanding new business growth as all states recorded increases in trust fees of more than 20%, with Arizona and Texas each increasing more than 30%. PFS trust fees totaled $613.4 million, an impressive 25% increase over the prior year. Three years ago, Northern Trust served clients from 62 PFS locations in five states. At year-end 2000 the PFS network of offices included 81 locations in twelve states. During the year we entered new markets in Nevada, Missouri and Wisconsin and added offices in Arizona, Michigan and Texas. Through these offices, Northern has a one-of-a-kind distribution capability for personal trust and private banking and is located within a 30-minute drive of 28% of the U.S. millionaire population a rapidly growing market segment. Over the next five years, the U.S. population is expected to grow at 1% annually. In contrast, the affluent segment individuals with more than $1 million in investable assets is expected to grow at 8.3% annually, translating to more than one million additional affluent households in Northern s target market. In addition, the phenomenon of immense intergenerational wealth transfer is having a dramatic positive impact on our PFS business with a significant increase in the demand for estate planning, asset management and advisory services. Brought to you by Global Reports (2 of 8) [4/4/ :25:39 AM]

6 As Northern Trust has expanded into new markets and added or refined products, we have been careful to keep decision makers close to clients and to ensure that clients receive a full range of financial services on site from a highly professional and experienced relationship team. The longevity of Northern s staff combined with high-touch service are hallmarks of the organization and recognized by clients as a valuable asset. In a recent PFS survey, 73% of clients said they have recommended Northern Trust to others. One of the most rapidly growing segments within PFS is the Wealth Management Group, serving wealthy families who typically manage their finances from a family office and have a complex investment structure with multiple money managers. Wealth Management trust fees increased 31% and the group now administers $61.4 billion in assets, a 17% increase from The momentum in Wealth Management is strong with referrals from existing clients providing an important source of new business. Last year, the portion of new business that came from investment services increased substantially, and more than one-half of Wealth Management new business was investment-related. Northern s investment organization, Northern Trust Global Investments (NTGI), is a global, multi-asset class investment manager serving corporate and personal clients worldwide. It is one of the largest and fastest growing investment managers in the country. NTGI s performance in 2000 was outstanding with managed assets at year end totaling $338 billion. Since 1995, assets under management have grown at an impressive compound annual growth rate of over 26%. NTGI is the 14th largest U.S. money manager and is one of the largest active equity managers for high net worth clients. NTGI offers a broad array of passive and active investment products for both personal and institutional clients. Strategic efforts last year focused on building consistent, top-tier investment returns, robust product management and distribution, and strong marketing and client servicing. Mutual fund offerings expanded with the addition of three new funds. NTGI now offers 51 funds through two fund families Northern Funds and Northern Institutional Funds. Many of these funds have been awarded top rankings for investment performance by Morningstar and Lipper Analytical Services. In July, Northern Trust announced the establishment of Northern Trust Global Investments (Europe) Ltd. which allows Northern to market investment management services broadly in Europe where it is expected that over the next five years significant growth will occur in funded pension plans. In May, Northern completed the acquisition of Northern Trust Value Investors, formerly Carl Domino Associates, L.P., giving Northern a value equity investment capability to complement our historical growth equity style. C&IS continued to focus on the execution of established and successful strategies in 2000 as we provided trust, custody, investment and banking services to corporations and institutions worldwide. C&IS clients included a wide range of public and private retirement plans, foundations and endowments, and global fund managers and other asset pools such as government entities. Although market volatility last year offered challenges, it also allowed Northern to show how valuable our risk culture and risk management tools are to clients. Amid the accelerating pace of consolidations and realignments of financial service providers, our commitment, stability and strong relationship focus also became increasingly important to clients and prospects. Brought to you by Global Reports (3 of 8) [4/4/ :25:39 AM]

7 Several industry trends that we mentioned in our 1999 annual report continued last year to have an increasingly positive effect on Northern s C&IS businesses: the privatization of global retirement funds; increased global orientation of clients; increased cross-border investing; and the growth of defined contribution plans and complete outsourcing of retirement plan management. Excellent new business during the year led to a 21% increase in trust fees, which totaled $587.8 million. Total C&IS trust assets under administration rose to $1.5 trillion. This figure includes $385 billion of global custody assets in 90 markets worldwide. Northern s global custody assets have been growing at an impressive rate of 35% per year since In May, Global Investor published the Global Custody Survey 2000 which ranked Northern Trust fifth overall on a variety of service measurements, putting us ahead of all of our major competitors. In a recent trust/custody satisfaction survey conducted for Northern by an outside vendor, 93% said Northern has met or exceeded their expectations and 92% of C&IS clients said they would be willing to recommend us to others. The acquisition in May of Northern Trust (Ireland) Ltd., formerly Ulster Bank Investment Services, the IFSC (International Financial Services Centre) licensed custody and fund administration subsidiary of Ulster Bank Group, was an important step in Northern s international business strategy. The acquisition expands C&IS s current global custody capabilities by adding a full package of offshore fund services for investment managers worldwide. Also in May, Northern Trust transitioned all depository-eligible assets in Canada from our subcustodian to our own account at the Canadian Depository for Securities Limited. This move was precipitated by our strong growth in Canada, having increased our assets under custody for Canadian clients by 230% over the last two years. The International and Global Fund Services group, which serves clients from 37 countries, is the fastest growing segment in C&IS. In 2000, Northern added 67 new clients in this market segment; of those clients, 28 have assets in excess of $500 million. Brought to you by Global Reports (4 of 8) [4/4/ :25:39 AM]

8 Foreign exchange trading profits for the year were $152.7 million, up 42%. This performance benefited from market volatility in the major currencies, particularly the continued volatility in the euro, as well as growth in global assets under custody and a higher level of client transaction volumes. Clients continued to increase their use of Northern Trust FX Passport SM as we completed the roll-out of this browser-based application system developed with Reuters. FX Passport enables clients to enter into foreign exchange transactions with Northern Trust via the Internet and is a key element of the Northern Trust Passport product suite. Worldwide Operations and Technology supports both PFS and C&IS. One technology platform allows Northern to manage costs and leverage efficiencies across business lines. While business opportunities in the marketplace have never been greater, the challenges to ensure that Northern Trust maintains a leadership position in a rapidly changing, technology-driven environment are also great. To meet those challenges, over the past three years Northern has committed $700 million to technology with $259 million spent in We expect to spend an additional $1 billion over the next Brought to you by Global Reports (5 of 8) [4/4/ :25:39 AM]

9 three years. This investment in technology has allowed us to continue to improve product quality and has enabled Northern to introduce new industry-leading products and services. Across all businesses, we have built an Internet-based portfolio of applications that addresses the diverse needs of both personal and corporate and institutional clients. At Northern Trust, the Internet is used to strengthen Northern s personal client service, not to replace it. With that in mind, and recognizing client demand for even greater use of the Internet, Northern undertook a number of e-business initiatives which included naming an e-business director who leads a team representing each business unit. The team worked to identify opportunities, create cross-business unit solutions and establish best practices and policies across the Corporation. Northern People Northern people are a critical factor in Northern s success. In the most recent employee opinion survey, 86% of Northern employees across the Corporation said they consider client service to be an important and positive aspect of their jobs. The survey also showed that employees positively view the Corporation as committed to hiring, valuing and accepting diverse people. A strong relationship management culture permeates the entire Northern organization both in the U.S. and abroad. The deep relationships Northern people develop with clients are a key competitive advantage and a distinguishing feature of Northern Trust. And, Northern people have a financial commitment to the organization and a strong interest in its success; 84% of our employees are shareholders. Fourteen percent of Northern s stock is owned by employees and retirees through our ESOP, 401(k) and personal holdings. We are committed to maintaining and improving the workplace to ensure that Northern Trust continues to be an employer of choice. The Corporation s efforts to provide employees with a work environment that appreciates the need to balance work/life issues was recognized by Working Mother magazine. For the ninth time, the magazine named Northern Trust to its list of 100 Best Companies for Working Mothers. From across the nation companies were selected that demonstrate a steady commitment to the advancement of women in their organizations and a commitment to helping employees balance work and personal lives. Chicago magazine in its October issue ranked Northern Trust as one of the 25 best places to work in the city. We were the only bank/trust company included on the list. Companies were ranked on how they compared in terms of human resources practices and employee satisfaction. In December, the London Branch, along with NTGI (Europe), was accredited with the prestigious Investors in People award for quality of training and people development. Investors in People is a challenging national standard in the United Kingdom that evaluates training and development and is supported by the British government. Northern is the first global custodian to become accredited as an Investor in People. Northern in the Community The Northern Trust Company once again received an outstanding CRA rating from the Federal Reserve Bank of Chicago. The rating is based upon an evaluation of how well a financial institution is meeting the goals outlined in its strategic plan for community reinvestment. Northern s strategic plan, approved by the Federal Reserve Brought to you by Global Reports (6 of 8) [4/4/ :25:39 AM]

10 Board in 1997, set specific lending goals for mortgages in low- or moderate-income census tracts, for lending to small businesses and for community development loans. Northern Trust s charitable giving in 2000 totaled more than $8 million, including $3.7 million that was donated last year by Northern s Charitable Trust to organizations which are responsive to the needs of low- and moderate-income residents of Cook County. $750,000 went to support the United Way/Crusade of Mercy s more than 400 local health and human services agencies. The Million Dollar Award was given to Northern for being a company that led the way through generous corporate and employee contributions of $1 million or more (the corporate donation plus employee contributions totaled nearly $2.4 million). Of equal priority are contributions to major cultural, educational and health care institutions. Financial support is crucial for not-for-profit organizations but so are the time and expertise donated by thousands of Northern people in our offices across the country. Their efforts help sustain both nationally known and local educational institutions, human services agencies, hospitals and a wide variety of cultural organizations and events. Details about Northern s involvement in the communities we serve appear on pages of this report. Management Changes In September, Sheila A. Penrose, President Corporate and Institutional Services, retired after a distinguished 23-year career with Northern Trust. She was succeeded by Peter L. Rossiter who joined Northern in 1992 and served as Executive Vice President and General Counsel. Northern Trust s Board of Directors at its July meeting approved the appointment of Kelly R. Welsh as Executive Vice President and General Counsel. He previously was Executive Vice President and General Counsel of Ameritech. Prior to that Kelly was Corporation Counsel for the City of Chicago and a partner with the firm of Mayer, Brown & Platt. Orie L. Dudley, Jr. joined Northern Trust in October as Chief Investment Officer for Northern Trust Global Investments (NTGI). He previously held the position of Chief Executive Officer and Acting Chief Investment Officer for Scottish Widows Investment Partnership, Ltd. in Edinburgh, Scotland. Orie succeeds James M. Snyder who assumed the new role of Vice Chairman of NTGI. In June, William S. Trukenbrod, Executive Vice President and Chairman of Credit Policy, retired after 38 years of dedicated service to the company. Bill was succeeded by John P. Grube who has been with Northern Trust since John became a member of Credit Policy in 1991 and served as Chairman of the Counterparty Risk Management Committee. Acknowledgements Stockholders at Northern Trust s annual meeting in April, 2000, elected Robert C. McCormack to Northern Trust Corporation s Board of Directors. Bob is co-chairman and managing director of Trident Capital, Inc., a private equity firm he helped found in All of our directors continue to contribute importantly to the success of the Corporation and to them we extend our thanks for their counsel and support. As of year-end 2000, more than 9,400 people worldwide worked for Northern Trust. Without their dedication, creativity and commitment we would not be able to offer clients the quality products and service that are the hallmark of Northern Trust. We are Brought to you by Global Reports (7 of 8) [4/4/ :25:39 AM]

11 well aware that clients have numerous choices of financial services providers and we are grateful to them for selecting Northern Trust. We will do all that we can to continue to earn their confidence. Each year brings new challenges and 2001 is no exception with the economy and markets under stress. However, your company remains well positioned to build on our proven strategies and to take advantage of new opportunities as they occur. We look forward to Northern s future with confidence Northern Trust Corporation February 20, 2001 Brought to you by Global Reports (8 of 8) [4/4/ :25:39 AM]

12 Northern Trust Business Review Personal Financial Services Corporate & Institutional Services Northern Trust Global Investments Worldwide Operations & Technology 2001 Northern Trust Corporation Brought to you by Global Reports [4/4/ :25:44 AM]

13 Northern Trust Business Review Personal Financial Services An outstanding performance across our national Personal Financial Services (PFS) business in 2000 further established Northern s leadership role in this marketplace. Guided by our mission to be the premier provider of financial solutions to our targeted market, PFS delivered a wide array of trust, investment management and banking services to a record level of high-net-worth individuals and their families. Northern s hallmark of high-touch, personalized service and the continuing development of innovative and specialized products and services helped to ensure our competitive edge in this expanding market. PFS financial performance in 2000 reflects the success of strategies in place to grow our business. At year-end, assets under administration totaled $168.8 billion and managed assets were $98.1 billion. Personal trust fees increased 25%, to $613.4 million. Loans increased to $12.3 billion, accounting for 74% of the Corporation s loans. Deposits averaged $8.5 billion. Expansion Strategy on Target Our growth comes, not from mergers and acquisitions as is common today, but from proven strategies in place to attract new clients and expand existing relationships. The present PFS network of 81 offices in 12 states as of year-end 2000 places us in convenient proximity to 28% of U.S. millionaire households. Our goal is to have a national distribution network of 100 offices by the end of 2003 in selected affluent markets where demographics indicate concentrations of clustered wealth and strong growth potential. Moving toward this goal, we entered three new states in 2000, opening offices in St. Louis, Missouri, Las Vegas, Nevada, and Milwaukee, Wisconsin. Additional PFS offices were opened this past year in Austin, Texas, Grosse Pointe, Michigan, and in the Phoenix, Arizona suburban locations of Sun Lakes and North Scottsdale. While new locations are important to Northern s growth, we continue to be very successful in building market share in existing locations. At a number of PFS locations, Client Advisory Boards help us assess client and community opinions regarding our market position and marketing strategies, and provide valuable direction for product and service enhancements as well as introductions to prospective clients. Focused for Growth The growth potential for our target market remains strong, and we are well positioned to take advantage of favorable demographic and industry trends. Over the next few years, the U.S. population is expected to grow at 1% annually, while our targeted segment individuals with more than $1 million in investable assets is expected to grow at over eight times that rate. Immense intergenerational wealth transfer also is expected to cause an increasing demand for estate planning, asset management and advisory services. A swell in single-stock millionaires (often due to stock options) combined with increasing numbers of retirement-age business owners who are cashing out of their companies open new arenas for our capabilities. Northern Trust s century-long presence in this industry and reputation for dedication to quality have made us one of the most respected providers of financial services to wealthy Americans and set us apart in an industry experiencing mega-mergers and consolidations. At the heart of our growth strategy is a strong relationship-driven culture and a decentralized operation, with clients at each location receiving a full range of Brought to you by Global Reports (1 of 4) [4/4/ :25:48 AM]

14 financial services onsite from highly professional and experienced relationship teams. Marketing Distinguishes Efforts Distinguishing Northern throughout our PFS network of offices is a unique nationwide event marketing approach, with clients and prospective clients being invited to events designed around their specific interests. Events range from financially oriented meetings with Northern Trust experts and presentations by noted speakers covering a variety of non-banking topics to private museum showings and art exhibit previews. This past year, for instance, guests at several Northern Trust locations attended a presentation by Donald Jackson, Welsh artist and art director for the renowned St. John s Bible Project. In California, literary and historical societies launched in 2000 will provide ongoing educational and informative experiences. Through financial contributions and sponsorships, as well as staff involvement, Northern also builds relationships with leaders of cultural, civic and charitable groups and fosters our reputation for community support. While this marketing strategy continues to be highly successful, we also recognize the importance of marketing our capabilities to specialized segments of our target market. As the nature of wealth accumulation rapidly changes from that of largely inherited wealth to now include phenomenal levels of created wealth, we have enhanced our contact management system to better identify these prospects and have initiated targeted marketing programs to attract them. Northern s acclaimed DreamMakers Forum convened for a second year, and brought together successful African-American entrepreneurs with leading financiers to share experiences, discuss possible collaborations and network with each other. A similar format for a spring 2001 forum titled VisionKeepers will provide comparable opportunities for a select group of high level women entrepreneurs. Retirement plan distributions are another rapidly growing segment of created wealth. Recognizing that through Northern Trust Retirement Consulting (NTRC), the retirement services arm of Corporate and Institutional Services, we currently service over 2.2 million retirement plan participants, PFS, Northern Funds and NTRC team members have developed an innovative linkage to help capture these distributions. With plan sponsor permission, participants receiving distributions are educated about the rollover process and made aware of Northern products and services that may fit their investment plan, and automatic links are provided Brought to you by Global Reports (2 of 4) [4/4/ :25:48 AM]

15 to the appropriate areas of PFS. Ongoing Product Innovation PFS offers clients products and services that add value through superior technology, customization, and personalized care. Leveraging our investment in technology, Northern s Internet-based Private Passport SM service now provides easier access 24 hours a day to all of an individual s Northern Trust relationships across trust, asset management, brokerage, mutual funds and banking. We enhanced Private Passport SM features with a fully integrated national bill payment system, the ability to execute time-dated money movement and enlarged capabilities to download data to third party software rollouts will focus on online trading capabilities, enhanced cross product money movement, links to relationship management staff and third party aggregation of a client s financial data. Also included in this new generation of Private Passport will be third party and proprietary financial commentary, news feeds and stock quotes, and alerts that can be initiated by clients to keep them apprised of issues associated with their Northern relationship. Our Northern Funds, a mutual fund family comprising 31 no-load funds for individual investors, added three new mutual funds in Assets of Northern Funds grew 14% to $20.4 billion. Northern Trust Securities, Inc. in early 2001 introduced a self-directed brokerage account for NTRC to offer retirement plan sponsors looking to broaden their 401(k) menus. The self-directed account includes access to over 9,000 mutual funds, including Northern Trust s own family of funds, and to stocks and options on major U.S. exchanges and in over-the-counter issues. Plan participants can trade online through their retirement plan sponsor s Web site or place orders by phone, using the automated Northern Trust Brokerage by Phone system initiated in 2000 that provides clients with immediate access to their investment accounts to make trades and to obtain quotes or account information. To attract the rapidly growing market segment of wealth creators, we offer our proven middle market lending business and have developed tailored financial consulting regarding options, investment, retirement and estate planning. We also offer expertise in single stock risk management and have made available a broader spectrum of investment options such as private equity and value style funds. Wealth Management Takes Top Ranking The Wealth Management Group, one of the fastest growing segments of PFS, serves the complex financial needs of families with assets exceeding $100 million and who typically invest globally and employ multiple money managers. We currently serve 255 families in 31 states and 8 other countries with a number of specialty services tailored to meet their needs. Reflecting our success in attracting new business in this market segment, Wealth Management assets under administration in 2000 increased 17% to over $61 billion, of which $14 billion is under management. An important capability for Wealth Management clients is Family Passport SM, a customized version of the Northern Trust Passport desktop information system. The system provides a real time, interactive doorway to Northern s services and resources and enables the family office to execute account transfers and trades and conduct investment-related functions on a global basis. Client testing of new features being developed for this site is scheduled for the first quarter of Using portal technology, these features will include full financial reporting and links to external tools and content, and will allow user customization. One of our services for this group is an annual educational forum with presentations that provide not only helpful tools for managing wealth, but deal with some of the broader family-related issues facing these clients. More than 300 clients and prospects attended the 2000 forum entitled Investing in the Family. Worth magazine, in its 2000 Readers Choice Survey article, ranked Northern Trust first in the area of Top Wealth Management services. Noting the scope and success of investment strategies Northern provides this Brought to you by Global Reports (3 of 4) [4/4/ :25:48 AM]

16 elite group of clients, the article concluded, The hallmark of Northern s service, however, remains its personal touch Northern Trust Corporation Brought to you by Global Reports (4 of 4) [4/4/ :25:48 AM]

17 Northern Trust Business Review Corporate and Institutional Services Northern Trust's Corporate and Institutional Services business unit (C&IS) is an established global leader specializing in trust and custody, investment, retirement and treasury management services to corporations and institutions around the world, with credit services used to support selected client relationships. Northern s clients range from corporations, governments and financial institutions to public retirement and Taft-Hartley funds. Our teams of C&IS professionals and our comprehensive array of services and products are complemented by a Web-based delivery platform that enables us to offer high-tech solutions while maintaining the high-touch service for which we are known. In 2000, C&IS reported outstanding results, with total revenues up 22% to over $1.0 billion for the first time. Trust assets under administration grew to $1.5 trillion, up 9.3% over 1999, while managed assets reached $239.9 billion, an increase of 15.6%. This kind of success and our position as an industry leader are a result of our consultative team approach. This approach serves to differentiate C&IS in the marketplace by focusing intently on the client relationship as the driver of strategy and every other aspect of our business. By listening closely to clients, we develop long-term partnerships that grow as client needs grow and become more complex Leadership Through Listening One of the direct results of listening to clients about their changing needs was the development of Northern Trust Passport, which was initially launched in 1994 as one of the industry s first desktop information systems delivered via the Internet. The Northern Trust Passport suite of products now covers the entire range of C&IS capabilities, including custody, foreign exchange, risk and performance, treasury management, securities lending, retirement services, and correspondent services. During 2000, we enhanced Passport s capabilities, adding a Web-based wire transfer function to Treasury Passport SM to fill out the full suite of treasury management services available online. C&IS s treasury management professionals deliver sophisticated tools to help clients manage payables, receivables and cash concentration and investment information. We also completed the worldwide rollout of FX Passport SM, Northern Trust s joint online venture with Reuters. This service provides investment managers 24-hour access to the range of foreign exchange services from quote requests at competitive rates to order execution in 59 currencies as well as straight through processing. Early in 2001 we launched a new version of Retirement Passport SM with a robust set of new interactive features and enhanced third-party advice services provided by Financial Engines, a Web-based investment advisory firm. As the retirement plan market moves increasingly toward the outsourcing of benefit-related functions, Retirement Passport provides an efficient way for plan sponsors to give participants access to online inquiry, transactions, and financial planning tools. The redesigned Retirement Passport was instrumental in Motorola s decision to award the outsourcing of defined benefit and defined contribution administration to Northern Trust Retirement Consulting (NTRC), our retirement services arm with offices in Atlanta, Chicago and Seattle. NTRC now serves more than 250 plan sponsors and 2.2 million plan participants, generating fees of $60 million in 2000, an increase of 28% over We leverage capabilities throughout Northern Trust to develop new products and services for plan participants, including self-directed brokerage via the Internet and direct rollover of 401(k) distributions to Northern Trust-advised mutual funds. Solidly investment products from Brought to you by Global Reports (1 of 4) [4/4/ :25:53 AM]

18 Northern Trust Global Investments are already an important part of NTRC s offerings, and we are focused in 2001 on helping clients meet their plan needs with NTGI funds that are right for them. Work also continues on the client-centric enhancements that constitute the key elements of the next generation of Northern Trust Passport, as it moves to a truly interactive transaction-based environment. Among the strategic initiatives currently underway are portals that integrate all of our institutional Passport products and can be personalized by clients to their individual specifications. This enhanced capability, which is scheduled for rollout in mid-2001, will enable clients to quickly access daily and historical fund performance as well as real-time market information, news, and quotes in a fully customized format using standard Web browsers. Product Innovation As the demand for cutting-edge products and services increases, we continue to find innovative ways to add value. Working closely with several major clients, we recently developed a product that targets an exciting new niche in the market corporate venture portfolios. Our venture investing services offer an effective way for clients to monitor these asset pools, including securities tracking, performance calculation, reporting, and management of physical securities. This service combines traditional safekeeping with online information management and online trading with Northern Trust s trading input network. In our role as a leader in the pension industry, we also worked with RiskMetrics, the world s leading provider of risk measurement expertise, to create PensionMetrics Risk Universe, the industry s first standard comparative risk measure. This universe was developed in response to the increased need for a standard methodology to measure investment risk in a volatile market environment. PensionMetrics Risk Universe, available free of charge on Northern Trust s Web site, allows plan sponsors to gauge their risk profiles relative to their peers, enabling them to make more informed investment decisions. Expanding C&IS Services Worldwide The implementation of Northern s international business strategy was illustrated by significant achievements, including the enhancements of services and products provided by the International and Global Fund Services Brought to you by Global Reports (2 of 4) [4/4/ :25:53 AM]

19 group. The group serves clients in 37 countries and represents the fastest growing segment within C&IS. Northern Trust is consistently ranked among the top global custodians in industry surveys measuring quality and service, including being named Custodian of the Year by Professional Pensions in the UK. Global custody assets under administration grew to $385 billion, up 38%. This growth, as well as increased market volatility in the euro and other major currencies, benefited our foreign exchange business, which achieved record trading profits of $151.9 million in 2000, an increase of 42%. Northern Trust ranks as the eighth largest U.S. bank in terms of foreign exchange revenues, with trading coverage in 78 currencies. Northern Trust ranks among the top providers of securities lending with average volume increases of 27% per year over the past five years. In 2000, securities lending revenues totaled $117.3 million, a 20% increase. C&IS also saw accelerated growth in our multinational client segment, where we are a leader in providing solutions to the complex cross-border investment, administration, reporting, and tax issues encountered by large companies with pension funds in two or more countries. This year, Exxon Mobil joined clients such as Ford Motor Company and IBM in selecting Northern Trust as master trustee for multinational plans. In May, we acquired Ulster Bank Investment Services and its custody and fund administration subsidiaries, headquartered in Dublin, Ireland. This acquisition, now known as Northern Trust (Ireland) Ltd., enables us to offer a full service package of offshore fund services for investment managers and institutional clients, including trust and custody, fund administration, fund accounting, and shareholder registration services. In Canada, where C&IS assets under custody have grown by more than 230% in the past two years, we took another strategic step by becoming a direct participant in the Canadian Depository for Securities Limited, transitioning assets to our own custodial account in May. We continue to rapidly gain share in the Canadian market, where one of the premier institutions of higher learning, the University of Western Ontario (UWO), selected Northern Trust as trustee and custodian of its CAD 1.1 billion defined contribution plan. UWO was one of six Canadian universities added to our client roster during Brought to you by Global Reports (3 of 4) [4/4/ :25:53 AM]

20 The past year also saw substantial new business growth in the UK, especially in the public pension fund area, as Northern s expertise with public funds in the U.S. translated to leadership in this segment of the UK market. We now have a 16% market share among the top 200 funds in the UK pension market. In the Far East, we continued to build on our strong market presence in Singapore and Hong Kong while exploring opportunities to penetrate the Japanese market. Exceeding Client Expectations In every aspect of C&IS, our goal is continued excellence and client satisfaction, which form the basis for client retention and new business success. To measure how we are doing, we surveyed more than 300 C&IS trust clients worldwide, representing all client segments, to gauge their satisfaction with Northern people and services. The survey was conducted by an external market research firm and determined that 92% of clients were satisfied with Northern Trust, an increase from 84% in a similar survey two years ago. Ninety-three percent indicated that we met or exceeded their expectations, and 92% would recommend us to others, up from 84%. These and other overwhelmingly positive results confirm that we really are listening well to our clients, so that our strategic initiatives are closely aligned with the services and features clients want. Using survey results, as well as information gathered from client advisory councils, relationship reviews, and focus groups, we will continue to shape strategies that increase the value we add to client relationships. The C&IS strategy going forward is not complicated. We believe that the opportunities for growth in the markets C&IS has chosen continue to be excellent. To capitalize on those opportunities, we must remain close to our clients and maintain our focus on providing high-touch relationship management, while developing the new technologies and services that clients will need Northern Trust Corporation Brought to you by Global Reports (4 of 4) [4/4/ :25:53 AM]

21 Northern Trust Business Review Northern Trust Global Investments Northern Trust Global Investments (NTGI) is a multi-asset class investment manager serving both institutional and private clients worldwide. Representing the synthesis of Northern s portfolio management, research, trading, client servicing, marketing, and product management activities, NTGI successfully follows a highly focused business strategy that has earned us distinction as an industry leader and world-class provider of investment management products and services. A coordinated approach benefits our current client base and attracts new business by enhancing the delivery of Northern s renowned high-touch service. This effort, in turn, has furthered our goal of forming long-term partnerships with clients. In 2000, NTGI built on the momentum created by an ongoing emphasis on excellence, product innovation, and client service. With a 13% annual growth rate across our investment product line, NTGI s assets under management reached $338 billion, establishing us as one of the world s largest and fastest growing investment managers. During 2000, Pensions & Investments ranked NTGI as the 14th largest investment manager in the United States and the country s fifth largest manager of tax-exempt assets. In addition, NTGI s $37.7 billion in mutual fund assets placed NTGI as the third largest bank-sponsored mutual fund organization, according to the Financial Research Corporation. In terms of new institutional investment management business, we ranked second among all investment management firms for net assets added in Growth: Performance and Awareness Our strong growth in managed assets can be attributed to excellent investment returns, increased awareness of NTGI s performance record, and expanded distribution efforts. A recent study of bank mutual fund performance over the past three years showed that NTGI was first in the number of funds ranked in the top quartile, with 65% of our funds attaining that distinction. During the year, we used results such as these to build stronger awareness of the Northern Trust name and reputation through branding. By consistently communicating NTGI s philosophy, strategies, and commitment, we can help to accelerate our growth and profitability. We also worked to increase the distribution of our investment products through channels such as Charles Schwab & Co. and Fidelity Investments, participation in wrap programs offered by major brokerages, and an institutional consultant calling program. To further enhance our distribution efforts and find new markets for our funds, NTGI plans to develop new external distribution channels, while leveraging our Internet resources as a highly effective way to reach new clients. Within the next year, we anticipate that expanded Web site capabilities already underway will give our clients the ability to execute transactions online. Brought to you by Global Reports (1 of 3) [4/4/ :25:59 AM]

22 Global Expansion Over the past year, we made significant investments in both staff and product development, with the goal of further enhancing our investment management capabilities. In July, to better serve the expanding global needs of clients, we announced the establishment of Northern Trust Global Investments (Europe) Ltd. in London. This strategic new venture enhances our ability to market our investment services broadly across Europe and enables us to build on relationships established over the 30 years since Northern Trust first opened a London office to serve institutional clients. We believe that NTGI s flexible approach to investment and risk management places us in an excellent position to benefit from current European investment trends, including the outsourcing of investment management services, increased cross-border investing, and significant growth in private pension programs. Staffing NTGI (Europe) is our international equity team, a team expert in international investing, as well as sales, client servicing and product management groups experienced in pension products and active and multi-manager funds. Building on our position as one of the world s leading investment managers, NTGI also appointed a new chief investment officer with a global investment perspective, whose extensive international experience will help solidify the association between the Northern brand and excellent investment performance, as we enter new global markets. Enhanced Product Lines NTGI expanded our product offerings by establishing three new mutual funds and a new index fund that further extended our core product line. In May, we introduced the first of our new mutual funds, the Northern Global Communications Fund, which focuses on the largest subsector within the technology industry. Later in the year, we launched the Northern Growth Opportunities Fund, which invests in rapidly growing companies of all sizes, with an emphasis on small and mid-sized companies. Also in May, we acquired Carl Domino Associates, L.P., a value manager with approximately $2 billion in assets under management based in West Palm Beach, Florida. This acquisition, which now operates under the name Northern Trust Value Investors, provides a high-quality value equity capability that complements our historical emphasis on growth investing and allows us to offer clients a more complete range of core equity Brought to you by Global Reports (2 of 3) [4/4/ :25:59 AM]

23 approaches. Shortly after the acquisition, we leveraged this new capability by launching the first of our value mutual funds, the Northern Large-Cap Value Fund, with additional value-oriented mutual funds planned for the future. With the introduction of these three funds, NTGI now offers 51 mutual funds through our two fund families: Northern Funds and Northern Institutional Funds. By year-end 2000, our mutual fund assets had reached $37.7 billion, an increase of 15% from December Reflecting the attractiveness of our client base, the average mutual fund balance with Northern is almost four times that of the industry average. As the seventh largest index fund manager in the United States, NTGI currently offers 85 separate index funds, representing $70 billion under management. Our newest offering in this area is the Common Monthly Russell 1000 Index Fund, an institutional fund for tax-exempt clients introduced in October. We worked to meet the increasingly diversified needs of our clients by developing several non-traditional investment products, including hedge funds, an exchange fund and private equity placements. The hedge fund series, which will be introduced in early 2001, offers funds suitable for pension funds, foundations and endowments, and high net worth individuals. Plans also call for our London team to develop additional global and international funds, including sector and regional funds. By providing more choices for clients and prospects, these options enable us to attract, retain, and expand our client relationships. With our unique client focus, expanded global presence, and robust product line, we believe NTGI is well positioned to sustain our outstanding record of growth. To enhance this potential, we plan to continue to broaden our investment product mix, provide investment options tailored to the needs of our diverse, worldwide client base, and find additional ways to leverage our capabilities. By focusing on flawless execution in each of these areas, we can achieve our primary goal: exceeding the expectations of our institutional and private clients and Northern Trust s shareholders Northern Trust Corporation Brought to you by Global Reports (3 of 3) [4/4/ :25:59 AM]

24 Northern Trust Business Review Worldwide Operations and Technology Worldwide Operations and Technology (WWOT) staff of nearly 4,000 people worked diligently last year to provide support to both our personal and institutional businesses. Northern s outstanding new business record translated into increased processing demands for WWOT areas with volumes rising by 30% to 60% in a number of Operations areas. Increased demand for specialized and customized activities along with new product features also brought volume challenges. However, WWOT people were able to meet these challenges and worked to execute several million transactions flawlessly. They carefully and accurately moved over $23 trillion through our systems last year meeting and often exceeding client expectations here and abroad while at the same time effectively controlling expenses. With the Y2K transition and the euro conversion successfully accomplished, the securities industry including Northern Trust has focused on the major concern of global standardization and consistency of data for transactions. The current cross-border trade processing environment faces a variety of issues which are exacerbated by global economic and demographic trends. These issues include a lack of standardization, incompatible technologies and different settlement cycles. Northern clients expect accuracy, reduced risk, speed, efficiency and standardization regarding any financial service transaction process we provide. To that end, we have taken a proactive, leadership role in developing technologies to address these global initiatives for the securities industry. Northern Trust has substantial representation in industry groups, as we continue to participate in order to ensure input into the industry solutions and build a deep foundation of knowledge within our staff. As an example, during the year 2000, WWOT staff members became actively involved in the Global Straight Through Processing Association (GSTPA). This industry body is developing a utility for cross-border trade communication and is open to all investment managers, broker/dealers and global custodians involved in the processing of cross-border trades. The major goal of the association is to organize and promote the efficient, electronic flow of cross-border trade information on trade date. This will enable interconnectivity among investment managers, broker/dealers and global custodians who are involved in post-trade, pre-settlement securities processing and improve the accuracy, completeness and timeliness of trade information. We have established a team of individuals who are dedicating their time to the planning, implementation and management of our GSTP efforts in-house. This involvement will continue throughout 2001 and beyond with the initial testing taking place in the summer. At the same time, we are addressing our preparation for the U.S. move to trade date plus one (T+1) settlement, which will reduce the time allowed to settle trades from the current three days to one, an effort which will launch in The advantage of reducing the settlement cycle by two days is to decrease outstanding settlement exposure. All trades will be locked in at the point of execution and thus improve Brought to you by Global Reports (1 of 3) [4/4/ :26:02 AM]

25 matching and settlement. Operational risks for custodians will be dramatically reduced due to the decrease in the number of pending settlements and greater accuracy in determining entitlements for corporate actions, income processing and proxies. The efficiency and effectiveness of the U.S. securities market around the world will be enhanced. Focus on Technology With the goal of improving client service, Northern Trust also worked last year to increase employees efficiency and their ability to easily access information. One method was through the company s internal Web site, nside northern. The upgraded site is an easily accessible home page on every Northern PC worldwide. The site has proved so helpful that employees seeking internal information about procedures, forms and servicing tools access it thousands of times per day. During 2000, a new initiative was begun with the design of Partner Passport, an employee portal system that will be launched in pilot during the first quarter of The goal of Partner Passport is to increase productivity by allowing employees access to common enterprise-wide applications such as , calendaring, job-specific tools and information necessary to perform their specific jobs. The appetite for technology development in the financial services marketplace is enormous and requires that we judiciously allocate financial resources and talent to be sure that both are employed in the most profitable manner. Our commitment to and investment in technology remains strong, with $700 million spent over the past three years. Plans call for that investment to continue as we create innovative products and services, enhance the capabilities of existing ones, and work to keep pace with the accelerating demand for rapid, if not instant, access to information. E-business Initiatives The Internet now plays an important role in all aspects of our business, and last year we moved our Internet development forward in a number of meaningful ways. We named an e-business director who heads a team of e-business professionals representing each of our businesses. To ensure we are adapting products and processes at e-speed, the team works from very focused task plans which are designed to provide rapid decision-making and relatively short delivery cycles. In March 2001, Northern Trust will introduce a more complete, user-friendly redesign of Northern s Web site, which can be viewed at as well as related Web sites for our mutual funds and retirement plan servicing. Northern s Web site provides a gateway to the Northern Trust Passport suite of online financial services for both institutional and personal clients. Our approach in offering clients a single financial solutions portal through which they can access a broad array of products and services contrasts with the silo approach that has been often used by others. As we build upon our Internet infrastructure and activate sites, we focus on our belief that Northern is not the central point with clients revolving around us. We know our Internet solutions must surround our clients needs. At Northern Trust, Internet technology is employed to enhance client relationships; it is not a substitute for personal attention. The e-business team is working to develop a cohesive approach to serving clients regardless of their service delivery preference. If they choose to approach us via the Internet, we want to be certain that their privacy is protected, and that their etouch SM experiences are satisfying and reflect the high standards of service Brought to you by Global Reports (2 of 3) [4/4/ :26:02 AM]

26 2001 Northern Trust Corporation that have been Northern Trust s hallmark for over 100 years. It takes an unusually talented staff to produce excellent results in such a fast-paced and demanding environment, and as an employer we have needed to be creative in seeking and retaining people for a wide range of positions in a very demanding labor market. Last year Northern initiated an innovative pilot program to test the appeal of a Chicago suburban satellite work site. Northern leased space in a Roosevelt University facility and arranged for our people to have access to the University s childcare center located on campus. Eighty Information Delivery staff members who support other business units with accounting and auditing functions will work at this site. The location allows us to hire well-qualified early-retired seniors, parents returning to the workforce and people seeking part-time positions. These are individuals who prefer or need to work closer to their homes rather than commuting to downtown Chicago. While the program is still being monitored, early indications are that Northern is successfully tapping an additional source of talent. Brought to you by Global Reports (3 of 3) [4/4/ :26:02 AM]

27 Northern Trust Business Review Community Involvement Improving the quality of life in the neighborhoods served by Northern Trust remains an important corporate mission. Northern s efforts were recognized in early 2000 with the bank earning our second consecutive Outstanding Community Reinvestment Act (CRA) rating by the Federal Reserve Bank of Chicago. The rating was based on our lending, service and investment performance under an approved CRA Strategic Plan. The Northern Trust Company also received its fifth consecutive Bank Enterprise Award from the U.S. Department of the Treasury. The nearly $3 million in award proceeds have been used to fund additional community development activities and partnerships. Throughout the year, The Northern Trust Company continued to develop and expand community partnerships, making investments and CRA grants of more than $7 million to further Chicago area initiatives. Additional investments were made this year in the Community Reinvestment Fund, Chicago Community Loan Fund, Nonprofit Financial Center and Neighborhood Housing Services of Chicago. New investment relationships were begun with ACCION Chicago, Urban Enterprise Fund and South Shore Bank. Northern also made a major contribution to a community campaign started by the Chicago office of the Local Initiatives Support Corporation and was the sole funder of an expanded Individual Development Account program administered by the Women s Self Employment Project. The funding and support of Community Development Financial Institutions is a core component of the bank s revitalization efforts. As one of the first corporations to fund the new Chicago Children s Capital Fund Investment Program with the Illinois Facilities Fund, Northern Trust committed $2 million to this joint venture with the City of Chicago. Through new construction, expansion and conversion of existing centers, licensed childcare will be increased in 20 Chicago neighborhoods. A Nationwide Commitment This community commitment is repeated across our national network of offices. Northern Trust Bank of Texas invested $1 million in the Houston Economic Fund II created to expand small business opportunities and undertook a low-income housing tax credit transaction of $2.3 million to increase affordable housing in the Dallas area. Northern Trust Bank of Arizona received its second consecutive Bank Enterprise Award for increased lending activity undertaken in distressed communities, and was an initial investor in Magnet Capital, a small business investment corporation in Phoenix. Northern Trust Bank of Florida entered into a new investment partnership with the Florida Community Loan Fund. A low-income housing tax credit investment of $5.8 million also was completed and $4.8 million in loans were made for community Brought to you by Global Reports (1 of 3) [4/4/ :26:08 AM]

28 development purposes. The Rocky Mountain Mutual Housing Association received an investment of $250,000 from Northern Trust Bank of Colorado in a new investment fund to support affordable housing development in Colorado, and a low-income housing tax credit investment of $3.4 million was made in the Denver area. In Seattle, Washington, Northern made a $1 million investment in Cascadia Loan Fund, a community development financial institution that provides small business loans. A $500,000 investment was made in Impact Capital, which addresses affordable housing needs, and an additional $500,000 commitment was made to Washington Community Reinvestment Association in Seattle to help expand affordable housing. In 2000, Northern Trust s charitable giving totaled more than $8 million. Of that amount, $3.7 million was donated by Northern s Charitable Trust and included $750,000 to support the United Way/Crusade of Mercy. Grants totaling $2.2 million were made to a wide range of organizations including one to the new Chicago Public Education Fund. In our Matching Gift Program, corporate contributions rose 30% to $894,000. Hands-on Participation Important to the success of these projects is the dedication of Northern people who serve on boards, organize and participate in fundraising events and volunteer on an ongoing basis. Northern received The Federal Home Loan Bank System s 2000 Community Partnership Award for our lead role in helping finance a 207-unit single room occupancy (SRO) building in Chicago s South Loop. Key to the success of this project was the dedication of a Northern partner who for six years has served as board chairman of Lakefront SRO, Inc., the nonprofit developer of this SRO. Again in Chicago, Northern Trust served as a corporate sponsor in the citywide 2000 Juvenile Diabetes Foundation s Walk to Cure Diabetes, while a Northern executive served as the Chicago-area Corporate Walk Chairman. Our team of over 800 participants raised nearly $300,000. And throughout the year, more than 50 Chicago staff members mentored and tutored children from several city schools. In Dallas, Texas, Northern staff members have been involved since 1995 in a number of projects with St. Philips School and Community Center and with St. Philip s Neighborhood Development Corporation, and the bank has provided financial donations and assistance in planning the school s capital campaign. Through the leadership efforts of Northern people in Phoenix, Arizona, a scholarship and mentoring program was initiated that will allow talented children from families lacking financial resources the opportunity to attend college. In Fort Lauderdale, Florida, more than half of the Northern staff there have volunteered to help build four houses with Habitat for Humanity over a four-year period. Northern also provides construction as well as permanent financing to Habitat and individual homeowners. Brought to you by Global Reports (2 of 3) [4/4/ :26:08 AM]

29 2001 Northern Trust Corporation Brought to you by Global Reports (3 of 3) [4/4/ :26:08 AM]