U.S. Publicly Traded Bank Analysis
Northern Trust

MGMT 6340

Financial Markets & Institutions

2/20/08

Table of Contents

1.0 Introduction 1.1 Overview 3 1.2 Background 3 1.3 Corporate Structure 3 1.3.1 Corporate and Institutional Services 3 1.3.2 Personal Financial Services 4 1.3.3 Northern Trust Global Investments 4 1.3.4 Worldwide Operations and Technology 4 1.4 History 5 1.4.1 Recent History 5 1.5 Corporate Governance 6

2.0 Financials 2.1 Financial Highlights 7 2.2 Financial Ratios 9 2.3 Analysis of Revenues 12 2.4 Analysis of Balance Sheet 15 2.5 Asset Quality Risk Management 17 2.5.1 Interest Risk Mitigation 19

3.0 Analysis 3.1 Predicted Model 20 3.2 Valuation Model 22

4.0 Conclusion 23

References 25

1 Introduction

1.1 Overview “Northern Trust is a leading provider of global financial solutions for investment management, asset servicing, and banking needs of corporations, institutions, and affluent individuals. Northern Trust is exclusively focused on the custody, management, and servicing of client assets in two target market segments, affluent individuals through its Personal Financial Services (PFS) business unit and its institutional investors worldwide through its Corporate and Institutional Services (C&IS) business unit.” 1 pg3 Northern trust markets these two business units via a third business unit (NTGI) Northern Trust Global Investments which delivers investment management related services and products. The company is focused in using technology as a key strategic advantage for cost control and facilitation of operations. The Northern Trust Corp was founded in 1889 in Chicago Illinois and trades under the ticker symbol NTRS on the NASDAQ. The Trust is classified as a commercial bank in the super regional group with likes of U S Bancorp Inc, Wells Fargo & Company, S V B Financial Group, B B & T Corp. The company’s headquarters still reside in Chicago and it currently employs approximately 10,900 people. As of Feb 20, 2008 Northern Trust has a market capitalization of 15.4 Billion and has approximately $757B and $4.1T global assets under management and under custody respectively.

1.2 Background “Northern Trust Corporation (corporation) is a financial holding company under the Gramm-Leach-Bliley Act and was originally organized as a bank holding company in 1971 to hold all of the outstanding capital stock of The Northern Trust Company (bank). The bank is an Illinois banking corporation headquartered in Chicago and the Corporation’s principal subsidiary. PFS services are delivered through a network of over 80 offices in 18 US states as well as offices in London and Guernsey. C&IS products are delivered to clients in approximately 40 countries through offices in North America, Europe, and the Asia Pacific Region.” 1 pg3

1.3 Corporate Structure (data & text here-in sect. 1.3 taken from Reuters unless specified otherwise)

1.3.1 Corporate and Institutional Services

C&IS offers a range of commercial banking services through the Bank, placing special emphasis on developing and supporting institutional relationships in two target markets: large corporations and financial institutions. The Company's asset administration, asset management and related services consist of a range of capabilities, including worldwide master trust, asset servicing, fund administration, settlement and reporting, cash management, and investment risk and performance analytical services. Non-United States client relationships are managed principally through the Bank's London and Singapore branches, and through the Bank's and the Company's non-United States subsidiaries , including support from international offices in North America, Europe, and the Asia-Pacific region. Trust and asset servicing relationships managed by C&IS includes investment management, securities lending, transition management and commission recapture services, which are provided through NTGI. C&IS also provides related foreign exchange services in Chicago, London, Singapore and Guernsey. At December 31, 2006, total C&IS assets under custody were $3.26 trillion and $562.5 billion were managed.

1.3.2 Personal Financial Services(data & text here-in sect. 1.3.2 taken from Reuters)

PFS provides a range of services, which include individual retirement accounts, guardianship and estate administration, qualified retirement plans, banking (including private banking), personal lending, and residential real estate mortgage lending. PFS focuses on high-net-worth individuals, business owners, executives, professionals, retirees and privately held businesses in its target markets. PFS also includes the Wealth Management Group, which provides customized products and services to meet the financial needs of families and individuals in the United States and worldwide, with assets typically exceeding $75 million. PFS is a provider of personal trust services in the United States. As of December 31, 2006, PFS had $281.9 billion in assets under custody and $134.7 billion in assets under management. PFS services are delivered through network of over 80 offices in 18 states in the United States, as well as offices in London and Guernsey. In 2006, the Company completed a charter consolidation process that resulted in four of its national bank subsidiaries becoming a single national bank.

1.3.3 Northern Trust Global Investments(data & text here-in sect. 1.3.3 taken from Reuters)

NTGI, through various subsidiaries of the Company, provides a range of investment management and related services, and other products to United States and non-United States clients of C&IS and PFS. Clients include institutional and individual separately managed accounts, bank common and collective funds, registered investment companies, non-United States collective investment funds and unregistered private investment funds. NTGI offers both active and passive equity and fixed-income portfolio management, as well as alternative asset classes (such as private equity and hedge funds of funds) and traditional multi-manager products and services. NTGI's activities also include brokerage, securities lending, transition management and related services. NTGI's business operates internationally through subsidiaries, joint ventures, alliances and distribution arrangements.

1.3.4 Worldwide Operations and Technology(text here-in sect. 1.3.4 taken from Reuters)

WWOT supports all of Northern Trust's business activities, including the processing and product management activities of C&IS, PFS and NTGI. These activities are conducted principally in the operations and technology centers in Chicago, London and Bangalore and a fund administration center in Dublin.

1.4 History (data here-in Sec. 1.4 taken from Mergent Database)

The Northern Trust Co traces its roots back to when it was founded in 1889 in Chicago. Its merger with Nortrust Corp. Northern Trust was incorporated in Delaware on Aug. 23, 1971 as Nortrust Corp., to effect merger of The Northern Trust Co. with Nortrust Bank. Transaction was effected Dec. 1, 1971, through exchange of one capital share of Northern Trust for each common share of Nortrust Corp. Pursuant to terms of merger The Northern Trust Co. continued as surviving subsidiary firm. The present name Northern Trust was adopted Mar. 7, 1978
Through a series of approximately 35 mergers and or acquisitions over the last 40 years the Northern Trust has evolved into what it is now known as today. For the analysis in this report only the relevant merger/divestiture activity of the last several years will be discussed.

1.4.1 Recent History (data here-in Sec. 1.4.1 taken from Mergent Database)

• On May 15, 2000, Co. acquired Dublin-based Ulster Bank Investment Services for approximately $12,700,000. • On Jan. 31, 2003, Co. announced the closing of its acquisition of Deutsche Bank's global passive equity, enhanced equity and passive fixed income businesses. Under the terms of the agreement, Co. paid approximately $100,000,000 primarily based on assets under management of $44,100,000,000. • On Apr. 29, 2003, Co. acquired Legacy South, Inc. The purchase price, which is based on the total value of revenues represented by managed assets transferred, is expected to approximate $11,500,000 and will be made in multiple payments over a 16-month period. • On June 15, 2003, Co. sold Northern Trust Retirement Consulting, L.L.C. to Hewitt Associates (Hewitt). • On Jan. 5, 2004, Co. opened a personal trust, banking and wealth management office in Stamford, CT. • On Nov. 22, 2004, Co. acquired Baring Asset Management's Financial Services Group (FSG) for approx. £$260,000,000 (approx. US$480,000,000). FSG is the institutional fund administration, custody and trust services arm of Baring Asset Management, a unit of ING Group. • On Jan. 3, 2005, Co. opened a personal trust, banking and wealth management office in Minneapolis, MN. • On Mar. 22, 2005, Co. opened a representative office in Beijing, China. • On Nov. 7, 2005, Co. established the Northern Trust Company of Delaware, a limited purpose trust company to give clients the advantage of Delaware trust law. • On Jan. 23, 2007, Co. entered into exclusive negotiations for the Guardians to award Northern Trust the mandate to act as custodian for the NZ$11.5 billion New Zealand Superannuation Fund. • On Feb. 21, 2007, Co. was a warded the Euro 2,300,000,000 (approximately US$3,000,000,000) custody mandate to provide global custody, securities lending, commission management, active collateral management, performance and risk reporting, cash management, and foreign exchange trading services to Stichting Bedrijfstakpensioenfonds Zorgverzekeraars, a pension fund for health insurers.

1.5 Corporate Governance

The company has a reputation for finding and retaining quality management. This can be demonstrated by the average length of time the key managers have been with the company and within the industry.

|Name |Title |Years w/ Northern Trust |Years w/ Industry |
|Rick Waddell |President-CEO |32 |32 |
|Sherry Barrat |President-PFS |17 |37 |
|Steve Fradkin |EVP & CFO |22 |22 |
|Tim Moen |EVP – HR Admin |6 |32 |
|Bill Morrison |President - PFS |11 |34 |
|Steve Potter |EVP - EMEA |25 |25 |
|Joyce St. Clair |EVP Corp Risk Manag |15 |26 |
|Jana Schreuder |President - WWOT |27 |27 |
|Tim Theriault |President C&IS |25 |27 |
|Kelly Welsh |EVP & Gen Counsel |7 |29 |

Data taken from corporate presentation at Citibank bank cnf Jan 08 Fig 1

The strong commitment to maintaining key management is critical to the company’s strategy. It is important to maintain strong committed relationship with management who in turn develop and maintain long lasting relations with clients. Maintaining and building client base and trust is of most importance in money management.

2 Financials

2.1 Financial Highlights In the Midst of a trouble banking market Northern Trust reported record full year 2007 operating results. Net earnings totaled $3.66 per share up 22% from 2006. Other milestones established in 2007 include:

• 12th consecutive quarter of double digit YoY EPS growth • 79th consecutive quarter of common equity growth • Record net income up 23% vs. 2006 • Record revenues up 17% vs. 2006 • Strong 17% growth in assets under custody vs. 2006 • 9% growth in assets under management vs. 2006 • Credit quality Improved: nonperforming assets decreased & reserve ratio improved vs. 2006 • NO securities or leveraged loan write-downs
Data taken from corporate presentation at Citibank bank cnf Jan 08

EPS Trend
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*2007 excludes .42 one time indemnification Fig 2

Northern Trust has been able to consistently grow net income over the last five years at an average rate of 14%. There was a dip of 9% in income from 2002 to 2003 which reduced the 5 year average growth number by approximately 6%.

Revenue Trend
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Fig 3

The Northern Trust generates revenue on a fee basis for its services. The company revenue trend has seen an increase in fee based revenue as a percent of total revenue due to the larger number of product and solution offerings as well as a larger value of assets under custody. Assets under custody increased 17% from 2006 to 4.1 trillion USD with 2.1Trillion global custody assets. Revenue growth was further augmented by a strong increase in foreign exchange trading income. Fig 2 shows net operating income but a note must be made that 2007Q4 net income had a one time charge of 150Million USD due to a VISA indemnification charge. Northern Trust is a VISA member bank and in so being, must share in some of the risks associated with the VISA bank. This particular one time charge of 150Million was Northern Trust’s portion of liability resulting from Visa’s litigation with American Express. The one time charge reduced 2007Q4 net by .42 per common diluted share. The company generated strong interest income up 12.5% over 2006 as a result of larger balance of serviced loans and better interest margin. Interest margin averaged 1.74% in the 2007 Q4 vs. 1.67% for Q4 2006. The spread increase in Q4 2007 was due to the FED rate cut and the stable rate in the 10year bond. This trend should continue as the FED funds rate drops in 2008 while (if) the 10year remains stable. Furthermore the quality of the loan portfolio remained very strong resulting in no write-downs. See Fig A to see a break down of Rev by Fee% and Fig B in the analysis of revenue section 2.2 to see a breakdown of the Fee Revenue by division. This trend is the result of the company’s strategy to focus on building assets under management and custody and to offer various services to high net worth individuals and Institutional clients. The Northern Trust has generated consistently higher fee based revenue due to its success in attaining and maintaining clients. The larger fee based revenue is less susceptible to interest rate trend which helps the company generate more consistent revenue streams. The company has stated

Dividend Trend
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Fig 4

that in poor equities markets the fee based revenue could decrease as a percent of assets. A rough estimate was given that a 10% decline in equities markets could correspond to a 2% decline in fee based revenue. This decline would be offset if the bank can continue its trend of increasing assets under custody. Additionally the company would benefit from an interest rate trend that offers better interest rate margin and hence the interest income could increase as a percent of total assets. This will be discussed more in the analysis section of the report. The annual dividend has been increased consistently and adds to the present value of the stock. This trend is expected to continue since the company has always maintained a conservative outlook in its operations. This will be discussed further in the analysis portion of the report.

2.2 Financial Ratios

Northern Trust has commanded an average five year PE of 22.1 which is well above its peers. This primarily due to the consistently double digit growth that management has been able to produce. Along with this above average growth management does an exceptional job of being disciplined by conservative risk management. Please see Fig 5 to compare Northern Trusts 5 year valuation ratios with that of the S&P and peer groups. The five year pre-tax margin average is 34.5% and this can be compared to the five year averages of 38.9, 26.8 and 18.2 for the industry, sector and S&P respectively. See (Fig6). Among the ratios of note the company stock has a premium relative to industry peers when considering valuation ratios. This is most likely due to the fee biased revenue and the consistent risk averse double digit growth that management has produced.
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Fig 5

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Fig 6
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Fig 7
Northern Trust’s 5 Yr average ROE & ROA are 16.84% and 1.23% respectively. This can be compared with the 5 yr ROA averages of the industry, sector and S&P of 1.24% 3.32%, 7.77% and ROE of 13.86%, 15.2% and 19.39% respectively. The company’s ROA is comparable to the industry but its ROE is about 3% higher compared to peers.
The ROE and ROA trend is positive as can be seen in Fig 7 and Fig 8.

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Fig 8

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Fig 9

Tracking the company’s near tern trend reveals an acceleration in earnings. Fig 9. This trend has been accomplished in spite of a difficult environment for the banking sector over the last half of calendar year 2007. This reinforces confidence in management’s ability to navigate the economic cycle and avoid high risk investments.

2.3 Analysis of Revenues Northern trust has increasing earned a greater portion of its revenues from fee based banking and the management and custody of an increasing asset base. As can be seen in Fig 11 much of the non interest revenue growth has come from fees associated with institution clients and treasury fees. These trends occur because the company has been successful at retaining large global clients (pension funds). The company’s growth in treasury fees associated with currency exchange is the result of currency volatility and the increase in international transactions & investments. This trend should continue as the company secures business with large institutional clients.

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Fig 10

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Fig 11

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Fig 12

Further breakdown of the revenue trend reveals that fees generated from corporate and institutional fund administrational services is the largest growth area followed by other institutional services. Fig 12. Some of the other corporate and institutional services include risk management and hedge consulting. Fig 13 breaks out revenue for the Personal Financial Services which targets high net worth individuals.

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Fig 13
The company’s largest holdings are retained by individuals living in the states of Florida and Illinois but recent trends resulted from management’s efforts to reduced that concentration by the diversify wealth management by region. The company states that over 50% of the millionaire market resides within a 45minute drive of all of Northern Trust’s US offices. This fact puts Northern Trust in a good position to capitalize on that market.

2.4 Analysis of Balance Sheet
Dec 31, 2007
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Fig 14 (data taken from q407 quarterly report)

The Northern trust balance sheet analysis in Fig 14 compares two periods ending December 31 of 2007 and 2006. The changes as a percent in line items are shown to the right. The most notable differences are the 49% increase in money market assets in 2007 and 30% reduction in government assets as opposed to 2006. On the Liability side Non- U.S. Offices Time Deposits increased 20% and that total interest related funds increased 11% while on the assets side total earning funds increased 15%. More notably common equity increased 14% through retained earnings. I believe the Trust bank is managing the economic cycle well by moving into cash equivalent assets during an increased market risk period seen during the second half of 2007. This will enable Northern Trust to take advantage of buying opportunities that may arise in the near future.

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Fig 15 (data taken from q407 quarterly report)

Analysis of the balance sheet shows an increasing positive trend for the company’s future. Management has done a great job of growing revenue and income without jeopardizing the quality of the portfolio of loans. Furthermore the company has consistently reduced strengthened the balance sheet by reducing the debt to equity ratio and by moving into cash assets during a tough financial climate. The company is well positioned, good liquidity, to make an acquisition as good opportunities may arise in the near future.

2.5 Asset Quality Risk Management

The company has no exposure to sub-prime loans and well capitalized as shown in figure 16. The “well capitalized” ratio is considered 10% which Northern Trust has maintained. Furthermore as shown in figure 17 the company has continued to improve its well capitalized status. The average leverage for 2007 was 6.7% which is tier one capital to average assets.

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Fig 16

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Fig 17

In addition to the continuously improved financial strength the management’s discipline is evident in the quality of its loan portfolio. Over the last 5 years management has weeded out poor quality loans and increased the total loan base at the same time. Total nonperforming loans were reduced to .12% of loan assets. Fig 18. This demonstrates Northern Trust’s management’s ability to not follow the heard and recognizing the risks in the credit market early. I believe this also proves that the management has along term focus by their investment decisions. This is what long term client investors want!

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Fig 18
Northern Trust manages a high quality securities portfolio. Since the 2007 annual report is not yet available I can only report on its loan portfolio at the end of 2006. As of the end of 2006 the Trust’s portfolio was 83% US Treasury or government sponsored agency securities. *4% of all of its securities were rated triple A or Double A, 1% were single A and 15% were below A or not rated by Moody’s.
At the end of 2006 the credit reserve was increased by 15 million to 151million. The increase in reserves was primarily due to an increase in credit risk environment and an increase in the loan portfolio. Northern Trust attributes its quality loan portfolio to a discipline and comprehensive credit review process.

2.5.1 Interest Risk Mitigation

Northern Trust mitigates its interest rate risk by maintaining a balance sheet with interest rates on assets highly correlated to the rates on liabilities. Furthermore the management risk team simulates rate change scenarios to anticipate changes in interest income. See figure 18 for interest rate spreads and margins that the company has experienced in the last 8 quarters.

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Fig 19

Q4 of 2007 was after the Fed’s rate cut in September and the resulting response was positive for Northern Trust’s interest margins.

3.0 Analysis

3.1 Predictive Model

The price of Northern Trust Stock as of 2/20/08 was $71.67. Using regression and historic revenue and earning trends I calculated revenue and earning predictions for the next year 2008. See figure 20 for calculations and historical trend.

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Fig 20

Using the excel trend-line function I plotted both the revenue trend and the earnings trend to create a predictive model of future values. The exponential curves used to fit the data have an equation posted on the respective charts below. Fig 21 & 22. The predictive model was carried out 2 periods. The Y values were extrapolated from the curve as estimates. Both fitted curves had R2 values of .99 or better. This does not however predict unforeseen negative events. I do believe that management has shown a conservative and discipline track record and income results even during a fairly rough financial market 2007. From extrapolation the 2008 Revenues and Income are predicted to be 4Billion USD and 960Million USD respectively.

Fig 21

Fig 22

3.2 Valuation Model

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Fig 23

From the predictive income and revenue models the dividend was calculated using the past payout trend which had been decreasing. The dividend payout ratio used was 26.5% which produced a year over year dividend increase of approximately 10%. The historical payout ratio had slowly been declining with last year’s payout coming in at 28%. The per-share income prediction calculated out to be $4.26 per share. This is based on the predicted income of 960Million USD and the current fully diluted share count plus an additional .5% shares. The predictive income as a percent of revenue prediction calculates out to be 24% which is about 1% higher net margins as compared to 2007. Fig 23 lays out the valuation models for NTRS stock based on three methods. The dividend yield, CAPM and the EPS model are all used to approximate the stock value of Northern Trust. The three one year out predictive models are then averaged to create a composite 12 month forecast price. The input data used are beta of 1.15, S&P fund growth of 15%, US Gov 5 yr bond rate of 4.8%, and a market PE of 20. The resulting 12 month valuations produced by each model were $82.49, $94.25, and $78.56 for the CAPM, EPS, and dividend yield models respectively. The resulting average 12 month price was $85.10. The capital gain associated with a purchase today if this model were to be accurate would be 18.75% and the Div gain would be 1.58% for a one year potential return of 20.33%.

4.0 Conclusion

After evaluating the company financials and using regression curve fitting to predict future earnings, revenues and the subsequent 12 month stock valuations for Northern Trust NTRS, I can say that the stock is a buy with a 12 month price target of 20.33%. However, considering the current status and uncertainty in the financial sector I recommend using caution when purchasing the stock. The current market will be volatile and may not value the stock in 12 months with the current premium it has if the market becomes more instable. Considering the increased risk in the market I would prefer to wait for buying opportunities with a potential 30% return which calculates to buying the stock at around $66.5. There is always the risk that unforeseen negative events occur which would cause the price model to fail. Considering the strengthening balance sheet trend and the fact the management has navigated through the sub-prime mess without a glitch and has significantly increased liquidity, I believe the company financials are safe and solid. The company has maintained more than adequate capital and leverage ratios and has managed to keep a high quality loan portfolio with a very small percentage of non performing loans. Over the last five years management has significantly reduced the number of nonperforming loans. Additionally management has built a balance sheet of highly correlated asset and liability interest rates to avoid losses during volatile rate periods. In fact during the fourth quarter of 2007 the company’s balance sheet produced a higher interest margin. This trend could be seen continuing throughout 2008 if the longer term rates remain relatively high compared to the Fed funds rate. The company does not have sub-prime exposure and generates most of its income from the management and services provided to large institutions, corporations and high net worth individuals. The focus on service fees increases the companies operating leverage and reduces interest rate risks. Northern Trust will continue to focus on attaining large asset clients in order to increase assets under management and custody from which it draws its servicing fees and interest. Its focus will be to gain large clients and or acquire large institutional funds. I believe the Trust has wisely raised liquid funds in 2007 in anticipation of purchase opportunities. I would expect that if an opportunity arises for Northern Trust to purchase or acquire large corporate or institutional assets at a discount it is prepared to do so. The financial environment poses many risks at this time but I believe Northern Trust has exceptional management that will capitalize on a downturn in this sector. Furthermore, Northern Trust as a Visa member bank is positioned to capitalize on the growth in Visa bank which plans to go public in 2008. Master Card has demonstrated great success in going public and has grown rapidly as a result of the capital it raised. If Visa matches Master Card’s performance then Northern Trust could see more rapid growth in service revenues. Northern Trust’s difference is in its exceptional management team. The management has diversified it loan portfolio and is continuing to diversify the regions from which it attains its high net worth clientele. Its client’s assets are drawn from a variety of industries and sectors and 85% of its loan portfolio has double A status or better. The Trust’s bank subsidiaries are global and the percentage of assets under custody are increasingly foreign. The company has set up offices in Europe and Asia to take advantage of the increasing number of global opportunities.

References

1. 2006 Annual Report http://www.northerntrust.com/pws/jsp/display2.jsp?XML=pages/nt/0512/1134489876627_4.xml&TYPE=interior

2 Q4 2007 Report http://www.northerntrust.com/pws/jsp/display2.jsp?XML=pages/nt/0602/1139520179571_885.xml

3 JAN09 Citibank Presentation http://www.northerntrust.com/pws/jsp/display2.jsp?XML=pages/nt/0401/42065702_3708.xml&TYPE=interior

4 FINANCIAL TRENDS REPORT http://www.northerntrust.com/pws/jsp/display2.jsp?XML=pages/nt/0412/72313793_3352.xml&TYPE=interior

5 Mergent Online Cole Library

6 Investor’s Business Daily http://www.investors.com/

7 GOOGLE FINANCE http://www.google.com/

8 Reuters http://www.reuters.com
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Increased Client Asset base. More money Managed as % of equity. Good for future growth

Reduced Risk while market chased trends

From international client growth