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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the transition period from                      to                     

Commission File No. 0-5965

NORTHERN TRUST CORPORATION

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (312) 630-6000

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $1.66 ²/3 Par Value

Preferred Stock Purchase Rights

Floating Rate Capital Securities, Series A of NTC Capital I, and Series B of NTC Capital II  Fully and Unconditionally Guaranteed by the Registrant

Floating Rate Junior Subordinated Debentures,

Series A and Series B of the Registrant

(Title of Class)

The aggregate market value of the Common Stock as of June 28, 2002 (the last business day of the registrant’s most recently completed second quarter), based upon the last sale price of the common stock at June 28, 2002 as reported by The Nasdaq Stock Market, held by non-affiliates was approximately $8,682,763,737. Determination of stock ownership by non-affiliates was made solely for the purpose of responding to this requirement and the registrant is not bound by this determination for any other purpose.

At February 13, 2003, 220,977,148 shares of Common Stock, $1.66 ²/3 par value, were outstanding.

Portions of the following documents are incorporated by reference:

Annual Report to Shareholders for the Fiscal Year Ended December 31, 2002—Part I and Part II

2003 Notice and Proxy Statement for the Annual Meeting of Stockholders to be held on April 15, 2003—Part III

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Northern Trust Corporation

FORM 10-K

Annual Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

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PART I

Item 1—Business

NORTHERN TRUST CORPORATION

Northern Trust Corporation (Corporation) was organized in Delaware in 1971 and that year became the owner of all of the outstanding capital stock, except directors’ qualifying shares, of The Northern Trust Company (Bank), an Illinois banking corporation headquartered in the Chicago financial district and the Corporation’s principal subsidiary. The Corporation also owns national bank subsidiaries with offices in Arizona, California, Colorado, Florida and Texas, a federal savings bank with offices in Michigan, Missouri, Nevada, Ohio, Washington and Wisconsin, a trust company in New York and various other nonbank subsidiaries, including an investment management company owned through the Bank, a securities brokerage firm, an international investment consulting firm and a retirement services company. The Corporation expects that, although the operations of other subsidiaries continue to be of increasing significance, the Bank will in the foreseeable future continue to be the major source of the Corporation’s assets, revenues and net income. Except where the context otherwise requires, the term “Northern Trust” refers to Northern Trust Corporation and its consolidated subsidiaries, including the Bank. Northern Trust has not utilized unconsolidated special purpose entities to provide financing, improve liquidity, transfer assets or manage credit risk.

At December 31, 2002, Northern Trust had consolidated total assets of approximately $39.5 billion and stockholders’ equity of approximately $3.0 billion. As of September 30, 2002, Northern Trust was the third largest bank holding company in Illinois and the 26th largest in the United States based on consolidated total assets on that date.

THE NORTHERN TRUST COMPANY

The Bank was founded by Byron L. Smith in 1889 to provide banking and trust services to the public. Throughout its 114 years, the Bank’s growth has come primarily from internal sources rather than through merger or acquisition. At December 31, 2002, the Bank had consolidated assets of approximately $32.0 billion and common equity capital of approximately $2.1 billion. At September 30, 2002, the Bank was the third largest bank in Illinois and the 36th largest in the United States, based on consolidated total assets of approximately $32.5 billion on that date.

The Bank currently has 19 banking offices in the Chicago area and the following active wholly-owned subsidiaries. Northern Trust Investments, Inc. provides investment management services and products to domestic and international institutional clients. Norlease, Inc. conducts leasing and leasing-related lending activities. MFC Company, Inc. holds properties that are received from the Bank in connection with certain problem loans. NT Mortgage Holdings LLC, a real estate investment trust, holds a 100% participation in a significant portion of the Bank’s residential mortgage portfolio, and its parent, NTG Services LLC, conducts market and other studies for the Bank’s global businesses. Nortrust Nominees Limited, located in London, is a United Kingdom trust corporation organized to hold United Kingdom real estate for fiduciary accounts. The Northern Trust Company U.K. Pension Plan Limited, located in London, was established in connection with the pension plan for the Bank’s London Branch. The Northern Trust Company, Canada, located in Toronto, offers institutional trust products and services to Canadian entities.

Also a subsidiary of the Bank, The Northern Trust International Banking Corporation is an Edge Act corporation organized for the purpose of conducting international business. Its business is conducted through the following subsidiaries. Northern Trust (Ireland) Limited, through its three principal subsidiaries, provides trust, custody, fund administration, fund accounting and shareholder registration services to international fund sponsors offering off-shore investment funds. Northern Trust Fund Managers (Ireland) Limited facilitates the offering of

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off-shore collective investment products to institutional clients. Northern Trust Global Investments (Europe) Limited provides investment management services to institutional clients in the United Kingdom and continental Europe. The Northern Trust Company of Hong Kong Limited provides securities lending and relationship servicing for large asset custody clients in Asia and the Pacific Rim. Northern Trust Trade Services Limited facilitates the issuance and processing of commercial letters of credit in Hong Kong.

OTHER NORTHERN TRUST CORPORATION SUBSIDIARIES

The Corporation’s Florida banking subsidiary, Northern Trust Bank of Florida N.A., at December 31, 2002 had 27 offices located throughout Florida and consolidated total assets of approximately $5.0 billion. Northern Trust Bank, N.A., at December 31, 2002 had consolidated total assets of approximately $1.1 billion and served clients from nine office locations in Arizona and one office location in Denver, Colorado. The Corporation’s Texas banking subsidiary, Northern Trust Bank of Texas N.A., had seven office locations and consolidated total assets of approximately $890 million at December 31, 2002. At December 31, 2002, Northern Trust Bank of California N.A., the Corporation’s California banking subsidiary, had 11 office locations in California and consolidated total assets of approximately $1.2 billion. The Corporation’s Federal Savings Bank subsidiary, Northern Trust Bank, FSB, commenced operations in 1998 and currently has branch offices in Michigan, Missouri, Nevada, Washington and Wisconsin and a trust office in Ohio. At December 31, 2002, Northern Trust Bank, FSB had consolidated total assets of approximately $412 million.

The Corporation has several nonbank subsidiaries. Northern Trust Securities, Inc. provides full brokerage services to clients of the Bank and the Corporation’s other banking and trust subsidiaries and selectively underwrites general obligation tax-exempt securities. Northern Trust Retirement Consulting, L.L.C. is a retirement benefit plan services company in Atlanta, Georgia. Northern Trust Global Advisors, Inc., in Stamford, Connecticut, is an international provider of institutional investment management services and is the parent of The Northern Trust Company of Connecticut. Northern Investment Corporation holds certain investments, including a loan made to a developer of a property in which the Bank is the principal tenant. The Northern Trust Company of New York provides security clearance services for all nondepository eligible securities held by trust, agency, and fiduciary accounts administered by the Corporation’s subsidiaries. Northern Trust Cayman International, Ltd. provides fiduciary services to certain clients residing outside of the United States. Northern Trust Global Investments Japan, K.K., a recently formed entity, initially will provide investment management services to clients in Japan.

INTERNAL ORGANIZATION

Northern Trust, under Chairman of the Board, Chief Executive Officer and President William A. Osborn, organizes client services around two client-focused principal business units: Corporate and Institutional Services and Personal Financial Services. Two other business units provide services to the two principal business units: Northern Trust Global Investments, which provides investment management products, and Worldwide Operations and Technology, which provides trust and banking operations and systems activities. The presidents of all four business units and a Risk Management unit, which focuses on financial and risk management, report directly to Mr. Osborn. Financial information regarding the Corporation’s business units is included in the Corporation’s Annual Report to Shareholders for the year ended December 31, 2002.

The following is a brief summary of each unit’s business activities.

Corporate and Institutional Services (C&IS)

Headed by Peter L. Rossiter, President—Corporate and Institutional Services, C&IS is a leading provider of investment asset administration and related services to the following worldwide markets: corporate and public

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entity retirement funds, foundation and endowment clients, fund managers, insurance companies and government funds. Investment asset administration services encompass a full range of state-of-the-art capabilities including: worldwide master trust and master custody, settlement and reporting; cash management; and risk and performance analysis services. Trust and custody relationships managed by C&IS often include investment management, securities lending, transition management and commission recapture services provided through the Northern Trust Global Investments business unit. Services with respect to securities traded in foreign markets are provided primarily through the Bank’s London Branch. Related foreign exchange services are rendered at the London and Singapore Branches as well as in Chicago. In addition to investment asset administration services, C&IS offers a comprehensive array of retirement consulting, actuarial and recordkeeping services through Northern Trust Retirement Consulting, L.L.C. At December 31, 2002, total assets under administration, excluding personal trust assets, were $1.35 trillion, of which $214.8 billion were managed.

C&IS also offers a full range of commercial banking services through the Bank, placing special emphasis on developing and supporting institutional relationships in two target markets: large domestic corporations and financial institutions (both domestic and international). Treasury management services are provided to corporations and financial institutions and include a variety of other products and services to accelerate cash collections, control disbursement outflows and generate information to manage cash positions, as well as receivables management or lockbox services supplied by RemitStream, the lockbox services entity owned by Fiserv, Inc. and Northern Trust.

Personal Financial Services (PFS)

Headed by Mark Stevens, President—Personal Financial Services, PFS provides personal trust, custody and investment management services; individual retirement accounts; guardianship; estate administration; banking (including private banking) and residential real estate mortgage lending. PFS services are delivered through the Bank in Illinois and also through a network of national bank subsidiaries with offices in Arizona, California, Colorado, Florida and Texas, and a federal savings bank subsidiary with branch offices in Michigan, Missouri, Nevada, Washington and Wisconsin, and a trust office in Ohio. Northern Trust currently has 82 PFS offices in 12 states. It is currently estimated that there will be approximately 100 PFS offices operating within as many as 15 states by the end of 2005. PFS is one of the largest bank managers of personal trust assets in the United States, with $156.7 billion in assets under administration and $87.7 billion in assets under management at December 31, 2002.

In November 2002, Northern Trust signed a definitive agreement to acquire Legacy South, an Atlanta-based private wealth management firm that services high net worth individuals, families and private foundations. Legacy South, established in 1996, has approximately $300 million of assets under management as of year-end. The purchase price is based on the total value of revenues represented by managed assets transferred. The agreement is subject to regulatory approvals and other customary closing conditions, and is expected to close in the first quarter of 2003.

PFS focuses on high net worth individuals, executives, retirees and small/mid-size businesses in each banking subsidiary’s target market. Generally, the financial needs of individuals and families with assets exceeding $100 million are served through its Wealth Management Group.

Northern Trust Global Investments (NTGI)

Headed by Stephen B. Timbers, President—Northern Trust Global Investments, NTGI, through various subsidiaries of the Corporation, provides a broad range of investment management and related services and products to domestic and international clients of C&IS and PFS. Clients include institutional and individual separately managed accounts, bank common and collective funds, registered investment companies, non-U.S. collective investment funds and unregistered private investment funds, including funds of funds. NTGI offers both active and passive equity and fixed income portfolio management, as well as traditional multi-manager

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products and services. NTGI’s activities also encompass brokerage, securities lending and related services. NTGI’s international relationships include joint ventures, alliances and distribution arrangements with entities in the United Kingdom, Ireland, Germany, Japan and the Cayman Islands.

In 2002, NTGI completed the initial funding of its private equity fund and introduced both an actively managed hedge fund and an arbitrage fund, its second hedge fund of funds. NTGI also undertook a change in entity structure of its UK unregulated collective investment fund to Irish unit trust and variable capital company funds, regulated by the Central Bank of Ireland. Completed in January 2003, this migration will provide for broader distribution of NTGI’s multi-manager capabilities throughout Europe.

On January 31, 2003, Northern Trust closed its acquisition of Deutsche Bank AG’s global passive equity, enhanced equity and passive fixed income investment management businesses. Under the terms of the agreement, Northern Trust paid approximately $100 million primarily based on assets under management of $44.1 billion. This payment takes into consideration certain assets that are expected to transition during the next several months. Additional payments will also be made as other assets are transitioned later this year.

Worldwide Operations and Technology (WWOT)

Headed by Timothy J. Theriault, President—Worldwide Operations and Technology, WWOT supports all of Northern Trust’s business activities, including the sales, relationship management, asset management, securities lending, transaction processing and product management activities of C&IS, PFS and NTGI. These activities are conducted principally in the operations and technology centers in Chicago and London. The Northern Trust Company of New York is also part of this unit.

Risk Management

The Risk Management Unit, headed by Vice Chairman and Chief Financial Officer Perry R. Pero, includes the Credit Policy and Treasury functions. The Credit Policy function is described in the sections of the Annual Report to Shareholders for the year ended December 31, 2002 referenced on pages 45–46. The Treasury Department is responsible for managing the Bank’s wholesale funding, capital position and interest rate risk, as well as the portfolio of interest rate risk management instruments under the direction of the Corporate Asset and Liability Policy Committee. It is also responsible for the investment portfolios of the Corporation and the Bank and provides investment advice and management services to the subsidiary banks.

The Risk Management Unit also includes the Corporate Controller, Corporate Treasurer, Investor Relations and Economic Research functions.

GOVERNMENT POLICIES

The earnings of Northern Trust are affected by numerous external influences. Chief among these are general economic conditions, both domestic and international, and actions that the United States and foreign governments and their central banks take in managing their economies. These general conditions affect all of the Northern Trust’s businesses, as well as the quality, value and profitability of their loan and investment portfolios.

The Board of Governors of the Federal Reserve System is an important regulator of domestic economic conditions and has the general objective of promoting orderly economic growth in the United States. Implementation of this objective is accomplished by its open market operations in United States Government securities, its setting of the discount rate at which member banks may borrow from Federal Reserve Banks and its changes in the reserve requirements for deposits. The policies adopted by the Federal Reserve Board may strongly influence interest rates and hence what banks earn on their loans and investments and what they pay on their savings and time deposits and other purchased funds. Fiscal policies in the United States and abroad also affect the composition and use of Northern Trust’s resources.

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COMPETITION

The businesses in which Northern Trust operates are very competitive. Competition is provided by both unregulated and regulated financial services organizations, whose products and services span the local, national, and global markets in which Northern Trust conducts operations.

Northern Trust’s principal business strategy is to provide quality financial services to targeted markets in which it believes it has a competitive advantage and favorable growth prospects. As part of this strategy, Northern Trust seeks to deliver a level of service to its clients that distinguishes it from its competitors. In addition, Northern Trust emphasizes the development and growth of recurring sources of fee-based income and is one of a select group of major bank holding companies in the United States that generates more revenues from fee-based services than from net interest income. Northern Trust seeks to develop and expand its recurring fee-based revenue by identifying selected markets with good growth characteristics and providing a high level of individualized service to its clients in those markets. Northern Trust also seeks to preserve its asset quality through established credit review procedures and to maintain a conservative balance sheet. Finally, Northern Trust seeks to operate with a strong management team that includes senior officers having broad experience and long tenure.

Commercial banks, savings banks, savings and loan associations, and credit unions actively compete for deposits, and money market funds and investment banking firms offer deposit-like services. These institutions, as well as consumer and commercial finance companies, national retail chains, factors, insurance companies and pension trusts, are important competitors for various types of loans. Issuers of commercial paper compete actively for funds and reduce demand for bank loans. For personal and corporate trust services and investment counseling services, trust companies, investment banking firms, insurance companies, investment counseling firms, and others offer active competition. A wide variety of domestic and foreign companies compete for settlement and other services.

REGULATION AND SUPERVISION

Bank Holding Company Act

The Corporation is subject to the supervision, examination and regulation of the Federal Reserve Board under the Bank Holding Company Act (BHCA). The BHCA and other federal laws subject bank holding companies to particular restrictions on the types of activities in which they may engage and to a range of supervisory requirements and activities, including regulatory enforcement actions for violations of laws and regulations. As a bank holding company, the Corporation’s activities and those of its banking subsidiaries are generally limited to the business of banking and activities closely related or incidental to banking, and the Corporation may not directly or indirectly acquire the ownership or control of more than 5% of any class of voting shares or substantially all of the assets of any company, including a bank, without the prior approval of the Federal Reserve Board.

Supervision and regulation of bank holding companies and their subsidiaries are intended primarily for the protection of depositors, the deposit insurance funds of the FDIC and the banking system as a whole, not for the protection of bank holding company stockholders or creditors. The banking regulators have broad enforcement power over bank holding companies and banks, including the power to impose substantial fines and other penalties for violation of laws and regulations.

Subsidiary Regulation

The Bank is a member of the Federal Reserve System, its deposits are insured by the FDIC, and it is subject to regulation by both these entities, as well as by the Illinois Office of Banks and Real Estate. The Bank is also a member of and subject to the rules of the Chicago Clearinghouse Association, and is registered as a government

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securities dealer in accordance with the Government Securities Act of 1986. As a government securities dealer, its activities are subject to the rules and regulations of the Department of the Treasury. The Bank is registered as a transfer agent with the Federal Reserve and is therefore subject to the rules and regulations of the Federal Reserve in this area.

The Corporation’s national bank subsidiaries are members of the Federal Reserve System and the FDIC and are subject to regulation by the Office of the Comptroller of the Currency. Northern Trust Bank, FSB is a federal savings bank that is not a member of the Federal Reserve System and is subject to regulation by the Office of Thrift Supervision and the FDIC.

The Corporation’s nonbanking affiliates are all subject to examination by the Federal Reserve. In addition, The Northern Trust Company of New York is subject to regulation by the Banking Department of the State of New York. Northern Trust Securities, Inc. is registered as a broker-dealer with the SEC and is a member of the National Association of Securities Dealers, Inc., and, as such, is subject to the rules and regulations of both of these bodies. Northern Trust Retirement Consulting, L.L.C., Northern Trust Global Advisors, Inc., Northern Trust Investments, Inc., and Northern Trust Bank, FSB are each registered with the SEC under the Investment Advisers Act of 1940 and are subject to that Act and the rules and regulations promulgated thereunder. In addition, Northern Trust Investments, Inc. is subject to regulation by the Illinois Office of Banks and Real Estate, and Northern Trust Retirement Consulting, L.L.C. and the Bank are registered as transfer agents with the SEC under the Securities Exchange Act of 1934 and are subject to that Act and the rules and regulations promulgated thereunder. The Northern Trust Company of Connecticut is subject to regulation by the Connecticut Department of Banking. Two families of mutual funds for which the Bank acts as investment adviser are subject to regulation by the SEC under the Investment Company Act of 1940. The Bank also acts as investment adviser of an investment company that is subject to regulation by the Central Bank of Ireland under the Companies Act, 1990. The London Branch of The Northern Trust Company, Northern Trust Global Investments (Europe) Limited, and Northern Trust Global Advisors, Limited are each subject to regulation by the UK Financial Services Authority. Various other subsidiaries and branches conduct business in other states and foreign countries and are subject to their regulations and restrictions.

Functional Regulation

Enacted in late 1999, the Gramm-Leach-Bliley Act (GLBA) establishes a system of federal and state regulation based on functional regulation, meaning that primary regulatory oversight for a particular activity generally resides with the federal or state regulator designated as having the principal responsibility for that activity. Banking is supervised by banking regulators, insurance by state insurance regulators and securities activities by the SEC and state securities regulators. A significant component of the functional regulation provided in the GLBA relates to the application of federal securities laws and SEC oversight of some bank securities activities previously exempt from broker-dealer regulation. Among other things, the GLBA amends the definitions of “broker” and “dealer” under the Securities Exchange Act of 1934 to remove the blanket exemption for banks. Banks now may conduct securities activities without broker-dealer registration only if the activities fall within a set of activity-based exemptions designed to allow banks to conduct only those activities traditionally considered to be primarily banking or trust activities. Securities activities outside these exemptions, as a practical matter, need to be conducted by a registered broker-dealer affiliate. The SEC issued interim final rules to define certain terms in, and grant additional exemptions from, the provisions of the GLBA in May 2001. By order, the SEC has extended the blanket exemption for banks from the definition of “dealer” until February 10, 2003 and from the definition of “broker” until May 12, 2003. The SEC expects to amend its interim final rules and extend the temporary exemptions as appropriate. The GLBA also amends the Investment Advisers Act of 1940 to require the registration of any bank or separately identifiable division of the bank that acts as investment adviser for mutual funds.

The Corporation has completed an evaluation of its securities activities, particularly the fiduciary aspects of these activities, in light of the amendments to the Securities Exchange Act of 1934 and the Investment Advisers

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Act of 1940 discussed above, to determine what, if any, additional registrations may be required and whether certain activities currently engaged in should instead be conducted by one of its nonbanking affiliates. The Corporation believes that it has taken the necessary actions in light of this evaluation. Nonetheless, additional SEC rulemaking relating to the GLBA’s broker-dealer exemptions discussed above could require additional evaluation.

The Corporation has not elected to become a financial holding company and would expect to do so if and when it proposes to conduct, outside a financial subsidiary, one of the activities specifically authorized for financial holding companies by the GLBA or if it would be more expeditious to conduct its current activities by means of a financial holding company. The Corporation does expect that the affiliations and activities permitted financial services organizations will over time change the nature of its competition, but it is not possible to predict the full nature and effect of the changes that may occur.

Cross-Guarantees Under the Federal Deposit Insurance Act

Under the Federal Deposit Insurance Act (FDIA), when two or more insured depository institutions are under common control, each of those depository institutions may be liable for any loss incurred, or expected to be incurred, by the FDIC in connection with the default of any of the others. Each may also be liable for any assistance the FDIC provides to the other institutions. “Default” means the appointment of a conservator or receiver for the institution. Thus, any of the Corporation’s banking subsidiaries could be liable to the FDIC if the FDIC were to suffer a loss in connection with any of the Corporation’s other banking subsidiaries. This cross-guarantee liability for a loss at a commonly controlled institution would be subordinated in right of payment to deposit liabilities, secured obligations, any other general or senior liability and any obligation subordinated to depositors or other general creditors, other than obligations owed to any affiliate of the depository institution (with certain exceptions). Although neither the Corporation nor any of its nonbanking subsidiaries may be assessed for such loss under the FDIA, the Corporation has agreed to indemnify each of its banking subsidiaries, other than the Bank, for any payments a banking subsidiary may be liable to pay to the FDIC pursuant to these provisions of the FDIA.

Under Federal Reserve Board policy, a bank holding company is expected to act as a source of financial strength to its banking subsidiaries and commit resources to their support. This support may be required by the Federal Reserve Board at times when, absent this Federal Reserve policy, the Corporation may not be inclined to provide it. In addition, any capital loans by a bank holding company to any of its depository institution subsidiaries are subordinate in right of payment to deposits and to certain other indebtedness of the banks.

Payment of Dividends

The Corporation is a legal entity separate and distinct from its subsidiaries. The principal source of funds for the Corporation is dividends from the Bank. As a result, the Corporation’s ability to pay dividends on its common stock will depend primarily on the ability of the Bank to pay dividends to the Corporation in amounts sufficient to service its obligations. Dividend payments from the Bank are subject to Illinois law and to regulatory limitations, generally based on capital levels and current and retained earnings, imposed by various regulatory agencies with authority over the Bank. The ability of the Bank to pay dividends is also subject to regulatory restrictions if paying dividends would impair its profitability, financial condition or other cash flow requirements.

The Federal Reserve Board has issued a policy statement with regard to the payment of cash dividends by bank holding companies. The policy statement provides that, as a matter of prudent banking, a bank holding company should not maintain a rate of cash dividends unless its net income available to common stockholders has been sufficient to fully fund the dividends, and the prospective rate of earnings retention appears to be consistent with the holding company’s capital needs, asset quality and overall financial condition. Accordingly, a bank holding company should not pay cash dividends that exceed its net income or can only be funded in ways that weaken the bank holding company’s financial health, such as by borrowing.

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Various federal and state statutory provisions limit the amount of dividends the Bank can pay to the Corporation without regulatory approval. Approval of the Federal Reserve Board is required for payment of any dividend by a state chartered bank that is a member of the Federal Reserve System if the total of all dividends declared by the bank in any calendar year would exceed the total of its net profits (as defined by regulatory agencies) for that year combined with its retained net profits for the preceding two years. In addition, a state member bank may not pay a dividend in an amount greater than its net profits. State member banks may also be subject to similar restrictions imposed by the laws of the states in which they are chartered.

The Bank is also prohibited under federal law from paying any dividend that would cause it to become undercapitalized. In addition, the federal regulatory agencies are authorized to prohibit a bank or bank holding company from engaging in an unsafe or unsound banking practice. The payment of dividends could, depending on the financial condition of the Bank, be deemed to constitute an unsafe or unsound practice.

Capital Adequacy Requirements

The Federal Reserve Board has adopted risk-based capital guidelines for bank holding companies. The minimum ratio of total capital to risk-weighted assets (which are the credit risk equivalents of balance sheet assets and certain off-balance sheet items such as standby letters of credit) is 8 percent. At least half of the total capital must be composed of common stockholders’ equity (including retained earnings), qualifying non-cumulative perpetual preferred stock (and, for bank holding companies only, a limited amount of qualifying cumulative perpetual preferred stock), and minority interests in the equity accounts of consolidated subsidiaries, less goodwill, other disallowed intangibles and disallowed deferred tax assets, among other items (“Tier 1 Capital”). The remainder may consist of a limited amount of subordinated debt, other perpetual preferred stock, hybrid capital instruments, mandatory convertible debt securities that meet certain requirements, as well as a limited amount of reserves for loan losses (“Tier 2 Capital”). The Federal Reserve Board has also adopted a minimum leverage ratio for bank holding companies, requiring Tier 1 Capital of at least 3 percent of average quarterly total consolidated assets.

The federal banking regulators have also established risk-based and leverage capital guidelines that insured banks and thrifts are required to meet. These regulations are generally similar to those established by the Federal Reserve Board for bank holding companies. The capital ratios for the Corporation and its banking subsidiaries are provided in the following chart.

The federal bank regulatory agencies’ risk-based and leverage ratios are minimum supervisory ratios generally applicable to banking organizations that meet certain specified criteria, assuming that they have the highest regulatory rating. Banking organizations not meeting these criteria are expected to operate with capital positions well above the minimum ratios. The federal bank regulatory agencies may set capital requirements for a particular banking organization that are higher than the minimum ratios when circumstances warrant. Federal Reserve Board guidelines also provide that banking organizations experiencing internal growth or making

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acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets. In addition, the regulations of the Federal Reserve Board provide that concentration of credit risk, interest rate risk and certain risks arising from nontraditional activities, as well as an institution’s ability to manage these risks, are important factors to be taken into account by regulatory agencies in assessing an organization’s overall capital adequacy. The agencies have also adopted an adjustment to the risk-based capital calculations to cover market risk in trading accounts of certain institutions. The risk-based capital regulations also require banking institutions to effectively measure and monitor their interest rate risk and to maintain adequate capital for that risk.

Domestic bank regulatory authorities and international bank supervisory organizations, principally the Basel Committee on Banking Supervision, have proposed for comment and are considering changes to the risk-based capital adequacy framework that could affect the capital guidelines applicable to bank holding companies and banks. In December 2001, the Committee indicated its desire to issue a new consultative package on the new Basel Capital Accord (BCA). In July 2002, the Committee announced its intention to finalize the new BCA in the fourth quarter of 2003, with implementation of the BCA capital adequacy framework by year-end 2006. The Corporation is monitoring the status and progress of the proposed rule and evaluating the potential impact the BCA, if adopted, would have on the financial condition or results of operations of the Corporation and its banking subsidiaries.

Prompt Corrective Action

Under the Federal Deposit Insurance Corporation Improvement Act of 1991, the federal banking agencies must take prompt supervisory and regulatory actions against undercapitalized depository institutions. Depository institutions are assigned one of five capital categories: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized,” and are subjected to differential regulation corresponding to the capital category within which the institution falls. Under certain circumstances, a well capitalized, adequately capitalized or undercapitalized institution may be treated as if the institution were in the next lower capital category. A depository institution is generally prohibited from making capital distributions (including paying dividends) or paying management fees to a holding company if the institution would thereafter be undercapitalized. Adequately capitalized institutions cannot accept, renew or roll over brokered deposits except with a waiver from the FDIC, and are subject to restrictions on the interest rates that can be paid on such deposits. Undercapitalized institutions may not accept, renew or roll over brokered deposits.

The banking regulatory agencies are permitted or, in certain cases, required to take certain actions with respect to institutions falling within one of the three undercapitalized categories. Depending on the level of an institution’s capital, the agency’s corrective powers include, among other things:

A banking institution that is undercapitalized is required to submit a capital restoration plan, and such a plan will not be accepted unless, among other things, the banking institution’s holding company guarantees the plan up to a certain specified amount. Any such guarantee from a depository institution’s holding company is entitled

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to a priority of payment in bankruptcy. Failure to meet capital guidelines could subject the bank to a variety of enforcement remedies by federal bank regulatory agencies, including termination of deposit insurance by the FDIC, and restrictions on certain business activities. As of December 31, 2002, the Corporation and all of its banking subsidiaries exceeded the required capital ratios for classification as “well capitalized.”

Enforcement Powers Of The Federal Banking Agencies

The federal banking agencies have broad enforcement powers, including the power to terminate deposit insurance, impose substantial fines and other civil and criminal penalties and appoint a conservator or receiver. Failure to comply with applicable laws, regulations and supervisory agreements could subject the Corporation and its banking subsidiaries, as well as officers, directors and other institution-affiliated parties of these organizations, to administrative sanctions and potentially substantial civil money penalties. In addition to the grounds discussed under “Prompt Corrective Action,” the appropriate federal banking agency may appoint the FDIC as conservator or receiver for a banking institution (or the FDIC may appoint itself, under certain circumstances) if any one or more of a number of circumstances exist, including, without limitation:

Restrictions on Transactions with Affiliates and Insiders

The Bank is subject to restrictions under federal law, including Regulation W of the Federal Reserve Board, which limit certain transactions with the Corporation, including loans, other extensions of credit, investments or asset purchases. Such transactions by a banking subsidiary with any one affiliate are limited in amount to 10 percent of the bank’s capital and surplus and, with all affiliates together, to an aggregate of 20 percent of the bank’s capital and surplus. Furthermore, such loans and extensions of credit, as well as certain other transactions, are required to be secured in specified amounts. These and certain other transactions, including any payment of money to the Corporation, must be on terms and conditions that are or in good faith would be offered to nonaffiliated companies.

The restrictions on loans to directors, executive officers, principal stockholders and their related interests (collectively referred to herein as “insiders”) contained in the Federal Reserve Act and Regulation O apply to all federally insured institutions and their subsidiaries and holding companies. These restrictions include limits on loans to one borrower and conditions that must be met before such a loan can be made. There is also an aggregate limitation on all loans to insiders and their related interests. These loans cannot exceed the institution’s total unimpaired capital and surplus, and the FDIC may determine that a lesser amount is appropriate. Insiders are subject to enforcement actions for knowingly accepting loans in violation of applicable restrictions. Regulation O institutions are not subject to the prohibitions of the Sarbanes-Oxley Act of 2002 on certain loans to insiders.

Anti-Terrorism Legislation

On October 26, 2001, the President signed into law the USA PATRIOT Act of 2001, which contains the International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001. That Act contains anti-money laundering measures affecting insured depository institutions, broker-dealers and certain other financial institutions. The Act requires U.S. financial institutions to adopt new policies and procedures to combat money laundering and grants the Secretary of the Treasury broad authority to establish regulations and to impose requirements and restrictions on financial institutions’ operations. The Corporation has established policies and procedures to ensure compliance with the Act and the related regulations.

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Deposit Insurance

Under the FDIC’s risk-based insurance assessment system, each insured bank is required to pay deposit insurance premium assessments to the FDIC. Each insured bank is placed in one of nine risk categories based on its level of capital and other relevant information and its insurance assessment rate is then determined by the FDIC. There is currently a 27 basis point spread between the highest and lowest assessment rates, so that banks classified as strongest by the FDIC are subject in 2003 to no insurance assessment, and banks classified as weakest by the FDIC are subject to an insurance assessment rate of .27%. In addition to its insurance assessment, each insured bank is subject in 2003 to quarterly debt service assessments in connection with bonds issued by a government corporation that financed the federal savings and loans bailout. The first quarter 2003 debt service assessment was .0168%.

Control Acquisitions

The Change in Bank Control Act prohibits a person or group of persons from acquiring “control” of a bank holding company unless the Federal Reserve Board has been notified and has not objected to the transaction. Under a rebuttable presumption established by the Federal Reserve Board, the acquisition of 10% or more of a class of voting stock of a bank holding company with a class of securities registered under Section 12 of the Securities Exchange Act of 1934, such as the Corporation, would, under the circumstances set forth in the presumption, constitute acquisition of control of the Corporation.

In addition, any company is required to obtain the approval of the Federal Reserve Board under the BHCA before acquiring 25% (5% in the case of an acquirer that is a bank holding company) or more of the outstanding common stock of the Corporation, or otherwise obtaining control or a “controlling influence” over the Corporation or its banking subsidiaries.

Interstate Banking and Branching

The Riegle-Neal Act enacted in 1994 permits an adequately capitalized and adequately managed bank holding company, with Federal Reserve Board approval, to acquire banking institutions located in states other than the bank holding company’s home state without regard to whether the transaction is prohibited under state law. In addition, national banks and state banks with different home states are permitted to merge across state lines, with the approval of the appropriate federal banking agency, unless the home state of a participating banking institution has passed legislation prior to that date that expressly prohibits interstate mergers. De novo interstate branching is permitted if the laws of the host state so authorize. De novo branching by thrift institutions (like Northern Trust Bank, FSB) may freely branch on an interstate basis. Moreover, national banks, like many of the Corporation’s banking subsidiaries, may provide trust services in any state to the same extent as a trust company chartered by that state.

Community Reinvestment Act

The Corporation’s banking subsidiaries are subject to the Community Reinvestment Act (CRA). The CRA and the regulations issued thereunder are intended to encourage banks to help meet the credit needs of their service area, including low and moderate income neighborhoods, consistent with the safe and sound operations of the banks. These regulations also provide for regulatory assessment of a bank’s record in meeting the needs of its service area when considering applications to establish branches, merger applications and applications to acquire the assets and assume the liabilities of another bank. The Financial Institutions Reform, Recovery and Enforcement Act of 1989 requires federal banking agencies to make public a rating of a bank’s performance under the CRA. In the case of a bank holding company, the CRA performance record of its bank subsidiaries is reviewed by federal banking agencies in connection with the filing of an application to acquire ownership or control of shares or assets of a bank or thrift or to merge with any other bank holding company. An unsatisfactory record can substantially delay or block the transaction. The Bank has elected to be evaluated for CRA purposes

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under a strategic plan that details how the Bank intends to satisfy its CRA obligation. The Bank’s revised CRA strategic plan for years 2000 to 2002 was approved by the Federal Reserve on March 10, 2002. Each of the Corporation’s banking subsidiaries, including the Bank, received at least a satisfactory CRA rating from its regulator at its most recent CRA examination.

Privacy

The GLBA also establishes a minimum federal standard of financial privacy by, among other provisions, requiring banks to adopt and disclose privacy policies with respect to consumer information and setting forth certain rules with respect to the disclosure to third parties of consumer information. The Corporation has adopted and disseminated its privacy policies pursuant to the GLBA. In addition, the GLBA requires the disclosure of agreements reached with community groups that relate to the CRA, and contains various other provisions designed to improve the delivery of financial services to consumers while maintaining an appropriate level of safety in the financial services industry.

Consumer Laws and Regulations

In addition to the laws and regulations discussed herein, the Bank is also subject to certain consumer laws and regulations that are designed to protect consumers in transactions with banks. While the list set forth herein is not exhaustive, these laws and regulations include the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Fair Credit Reporting Act and the Real Estate Settlement Procedures Act among others. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits, making loans to or engaging in other types of transactions with such customers. Failure to comply with these laws and regulations could lead to substantial penalties, operating restrictions and reputational damage to the financial institution.

Future Legislation

Various legislation is from time to time introduced in Congress, and state legislatures with respect to the regulation of financial institutions. Such legislation may change the banking statutes and the operating environment of the Corporation and its banking subsidiaries in substantial and unpredictable ways. The Corporation cannot determine the ultimate effect that potential legislation, or implementing regulations, if enacted, would have upon the financial condition or results of operations of the Corporation or its banking subsidiaries.

STAFF

Northern Trust employed 9,317 full-time equivalent officers and staff members as of December 31, 2002, approximately 6,611 of whom were employed by the Bank.

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STATISTICAL DISCLOSURES

The following statistical disclosures, included in the Corporation’s Annual Report to Shareholders for the year ended December 31, 2002, are incorporated herein by reference.

Additional statistical information on a consolidated basis is set forth below. Certain reclassifications have been made to prior periods’ financial information to conform to the current year’s presentation.

Remaining Maturity and Average Yield of Securities Held to Maturity and Available for Sale

(Yield calculated on amortized cost and presented on a taxable equivalent basis giving effect to the applicable federal and state tax rates)

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Securities Held to Maturity and Available for Sale

Loans and Leases by Type

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Remaining Maturity of Selected Loans and Leases

Average Deposits by Type

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Average Rates Paid on Time Deposits by Type