Form 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2013

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File No. 0-5965

 

 

NORTHERN TRUST CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   36-2723087

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

50 South LaSalle Street

Chicago, Illinois

  60603
(Address of principal executive offices)   (Zip Code)

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

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer”, and “small reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

239,239,836 Shares - $1.66 2/3 Par Value

(Shares of Common Stock Outstanding on March 31, 2013)

 

 

 


CONSOLIDATED FINANCIAL HIGHLIGHTS

(UNAUDITED)

 

     Three Months
Ended March 31,
 

FOR THE PERIOD ($ In Millions)

   2013     2012     % Change (**)  

Noninterest Income

      

Trust, Investment and Other Servicing Fees

   $ 630.7      $ 575.2        10

Foreign Exchange Trading Income

     59.5        61.9        (4

Treasury Management Fees

     16.8        17.4        (3

Security Commissions and Trading Income

     18.3        18.3        —     

Other Operating Income

     24.8        38.6        (36

Investment Security Gains (Losses), net

     0.2        (2.4     N/M   
  

 

 

   

 

 

   

 

 

 

Total Noninterest Income

     750.3        709.0        6   
  

 

 

   

 

 

   

 

 

 

Net Interest Income

     226.1        256.4        (12

Provision for Credit Losses

     5.0        5.0        —     
  

 

 

   

 

 

   

 

 

 

Net Interest Income after Provision for Credit Losses

     221.1        251.4        (12
  

 

 

   

 

 

   

 

 

 

Noninterest Expense

      

Compensation

     320.3        321.6        —     

Employee Benefits

     63.3        68.1        (7

Outside Services

     129.9        128.2        1   

Equipment and Software

     91.4        90.8        1   

Occupancy

     43.2        41.8        3   

Other Operating Expense

     80.8        73.1        10   
  

 

 

   

 

 

   

 

 

 

Total Noninterest Expense

     728.9        723.6        1   
  

 

 

   

 

 

   

 

 

 

Income before Income Taxes

     242.5        236.8        2   

Provision for Income Taxes

     78.5        75.6        4   
  

 

 

   

 

 

   

 

 

 

Net Income

   $ 164.0      $ 161.2        2
  

 

 

   

 

 

   

 

 

 

Average Total Assets

   $ 91,569.3      $ 95,128.1        (4 )% 

PER COMMON SHARE

                  

Net Income – Basic

   $ 0.68      $ 0.66        3

                    – Diluted

     0.67        0.66        2   

Cash Dividends Declared Per Common Share (*)

     0.30        0.58        N/M   

Book Value – End of Period (EOP)

     31.82        29.95        6   

Market Price – EOP

     54.56        47.45        15   

RATIOS

                  

Return on Average Common Equity

     8.82     9.04  

Return on Average Assets

     0.73        0.68     

Dividend Payout Ratio

     44.8        87.9     

Average Stockholders’ Equity to Average Assets

     8.2        7.5     

 

PERIOD END ($ In Millions)

   March 31,
2013
    December 31,
2012
    % Change (**)  

Assets

   $ 93,156.8      $ 97,463.8        (4 )% 

Earning Assets

     84,193.6        87,472.7        (4

Deposits

     75,822.1        81,407.8        (7

Stockholders’ Equity

     7,612.1        7,527.0        1   

PERIOD END CLIENT ASSETS ($ In Billions)

                  

Assets Under Custody

   $ 5,024.4      $ 4,804.9        5

Assets Under Management

     810.2        758.9        7   

RATIOS

                  

Tier 1 Capital to Risk-Weighted Assets – EOP

     13.3     12.8  

Total Capital to Risk-Weighted Assets – EOP

     14.7        14.3     

Tier 1 Leverage Ratio

     8.4        8.2     

 

(*) The 2012 first quarter Cash Dividends Declared per Common Share balance of $0.58 was comprised of a $0.28 per common share dividend declared January 17, 2012, paid April 2, 2012, and a $0.30 per common share dividend declared March 14, 2012, paid July 2, 2012.
(**) Percentage calculations are based on actual balances rather than the rounded amounts presented in the Consolidated Financial Highlights.

 

2


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

FIRST QUARTER CONSOLIDATED RESULTS OF OPERATIONS

General

Northern Trust Corporation (the Corporation), together with its subsidiaries, is a leading provider of asset servicing, fund administration, asset management, fiduciary and banking solutions for corporations, institutions, families, and individuals worldwide. Northern Trust focuses on servicing and managing client assets through its two primary business units, Personal Financial Services (PFS) and Corporate & Institutional Services (C&IS). Asset management and related services are provided to PFS and C&IS clients primarily by a third business unit, Northern Trust Global Investments (NTGI). Northern Trust emphasizes quality through a high level of service complemented by the effective use of technology, delivered by a fourth business unit, Operations & Technology (O&T). Except where the context otherwise requires, the term “Northern Trust” refers to Northern Trust Corporation and its subsidiaries on a consolidated basis.

The following should be read in conjunction with the consolidated financial statements and related footnotes included in this report. Investors should also read the section entitled “Factors Affecting Future Results.”

Overview

Net income per common share in the first quarter of 2013 was $0.67 compared to $0.66 per common share in the first quarter of 2012. Net income for the current quarter was $164.0 million, up 2% from $161.2 million in the prior year quarter. The current quarter includes a $12.4 million write-off of certain fee receivables resulting from the correction of an accrual methodology followed in prior years, as well as restructuring and integration related charges of $1.8 million. These current quarter items total $14.2 million ($8.9 million after tax, or $0.04 per common share). The prior year quarter included restructuring, acquisition and integration related charges of $3.9 million ($2.6 million after tax, or $0.01 per common share).

The performance in the current quarter produced an annualized return on average common equity of 8.8% as compared to 9.0% in the prior year quarter. The annualized return on average assets was 0.7% in both the current and prior year quarter.

Consolidated revenue of $976.4 million in the current quarter was up $11.0 million, or 1%, from $965.4 million in the prior year quarter. Noninterest income, which represented 77% of revenue, increased $41.3 million, or 6%, to $750.3 million from the prior year quarter’s $709.0 million, primarily reflecting higher trust, investment and other servicing fees.

Net interest income for the quarter decreased $30.3 million, or 12%, to $226.1 million as compared to $256.4 million in the prior year quarter, primarily due to a continued decline in the net interest margin and lower average earning assets.

 

3


Overview (continued)

 

Noninterest expense totaled $728.9 million in the current quarter compared to $723.6 million in the prior year quarter. The increase of 1% primarily reflects an increase in other operating expense, partially offset by a decrease in employee benefit expense.

Noninterest Income

The components of noninterest income are provided below.

 

Noninterest Income

   Three Months Ended March 31,  

($ In Millions)

   2013      2012     Change  

Trust, Investment and Other Servicing Fees

   $ 630.7       $ 575.2      $ 55.5        10

Foreign Exchange Trading Income

     59.5         61.9        (2.4     (4

Treasury Management Fees

     16.8         17.4        (0.6     (3

Security Commissions and Trading Income

     18.3         18.3        —          —     

Other Operating Income

     24.8         38.6        (13.8     (36

Investment Security Gains (Losses), net

     0.2         (2.4     2.6        N/M   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total Noninterest Income

   $ 750.3       $ 709.0      $ 41.3        6
  

 

 

    

 

 

   

 

 

   

 

 

 

Trust, investment and other servicing fees are based generally on the market value of assets held in custody, managed and serviced; the volume of transactions; securities lending volume and spreads; and fees for other services rendered. Certain market value fee calculations are performed on a monthly or quarterly basis and can be based on the beginning, ending or daily average value of the client portfolio. Certain investment management fee arrangements also may provide for performance fees based on client portfolio returns that exceed predetermined levels.

The following tables present Northern Trust’s assets under custody and assets under management by business segment.

 

                          Change     Change  
Assets Under Custody    March 31,      December 31,      March 31,      Q1-13/     Q1-13/  

($ In Billions)

   2013      2012      2012      Q4-12     Q1-12  

Corporate and Institutional

   $ 4,569.1       $ 4,358.6       $ 4,188.6         5     9

Personal

     455.3         446.3         406.6         2        12   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Assets Under Custody

   $ 5,024.4       $ 4,804.9       $ 4,595.2         5     9
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
                           Change     Change  
Assets Under Management    March 31,      December 31,      March 31,      Q1-13/     Q1-13/  

($ In Billions)

   2013      2012      2012      Q4-12     Q1-12  

Corporate and Institutional

   $ 604.2       $ 561.2       $ 537.4         8     12

Personal

     206.0         197.7         179.1         4        15   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Assets Under Management

   $ 810.2       $ 758.9       $ 716.5         7     13
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

C&IS assets under custody totaled $4.6 trillion, up 9% from the prior year quarter, and included $2.8 trillion of global custody assets, 10% higher compared to the prior year quarter. C&IS assets under management included $100.9 billion of securities lending collateral, a 5% increase from the prior year quarter.

 

4


Noninterest Income (continued)

 

Changes in assets under custody and under management are in comparison to the twelve month increase in the S&P 500 index and EAFE index (USD) of 11.4% and 7.8%, respectively.

Custodied and managed assets were invested as follows at March 31:

 

     2013     2012  

Assets Under Custody

   C&IS     PFS     Consolidated     C&IS     PFS     Consolidated  

Equities

     46     50     46     45     45     45

Fixed Income Securities

     36        24        35        36        26        35   

Cash and Other Assets

     18        26        19        19        29        20   

Assets Under Management

                                    

Equities

     53     41     50     51     37     47

Fixed Income Securities

     14        29        18        14        32        19   

Cash and Other Assets

     33        30        32        35        31        34   

Trust, investment and other servicing fees in C&IS increased $31.7 million, or 10%, to $348.7 million in the current quarter from the prior year quarter’s $317.0 million.

 

C&IS Trust, Investment and Other Servicing Fees

   Three Months Ended March 31,  

($ In Millions)

   2013      2012      Change  

Custody and Fund Administration

   $ 223.8       $ 209.8       $ 14.0         7

Investment Management

     75.5         61.8         13.7         22   

Securities Lending

     22.3         21.5         0.8         4   

Other

     27.1         23.9         3.2         13   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 348.7       $ 317.0       $ 31.7         10
  

 

 

    

 

 

    

 

 

    

 

 

 

Custody and fund administration fees, the largest component of C&IS fees, increased 7%, primarily reflecting the favorable impact of equity markets on fees and new business. C&IS investment management fees increased 22%, reflecting new business, the favorable impact of markets, and lower waived fees in money market mutual funds. Money market mutual fund fee waivers in C&IS, attributable to persistent low short-term interest rates, totaled $8.8 million in the current quarter, compared to waived fees of $10.6 million in the prior year quarter. Securities lending revenue increased 4%, primarily reflecting higher spreads and loan volumes in the current quarter.

Trust, investment and other servicing fees in PFS totaled $282.0 million in the current quarter, increasing $23.8 million, or 9%, from $258.2 million in the prior year quarter. The increased fees in the current quarter are primarily attributable to new business and the favorable impact of equity markets on fees. Money market mutual fund fee waivers in PFS totaled $13.4 million in the current quarter compared with $14.8 million in the prior year quarter.

Foreign exchange trading income totaled $59.5 million, down 4% compared with $61.9 million in the prior year quarter. The current quarter decrease is attributable to lower currency market volatility compared to the prior year quarter.

 

5


Noninterest Income (continued)

 

The components of other operating income are provided below.

 

Other Operating Income

   Three Months Ended March 31,  

($ In Millions)

   2013     2012      Change  

Loan Service Fees

   $ 14.9      $ 16.8       $ (1.9     (11 )% 

Banking Service Fees

     12.4        13.9         (1.5     (11

Other Income

     (2.5     7.9         (10.4     N/M   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Other Operating Income

   $ 24.8      $ 38.6       $ (13.8     (36 )% 
  

 

 

   

 

 

    

 

 

   

 

 

 

The other income component of other operating income includes the $12.4 million write-off of certain fee receivables resulting from a correction of an accrual methodology followed in prior years.

Net investment security gains totaled $226.6 thousand in the current quarter compared to net losses of $2.4 million in the prior year quarter.

Net Interest Income

Net interest income for the current quarter stated on a fully taxable equivalent (FTE) basis totaled $233.7 million, down $32.6 million, or 12%, from $266.3 million in the prior year quarter. The decrease reflects a continued decline in the net interest margin to 1.15% from 1.24% in the prior year quarter and lower average earning assets. The current quarter decline in the net interest margin primarily reflects lower yields on earning assets and a lower level of demand deposits, partially offset by a lower cost of interest-bearing liabilities. Average earning assets for the quarter were $82.2 billion, down $3.9 billion, or 5%, from $86.1 billion in the prior year quarter, primarily reflecting decreased Federal Reserve deposits. Net interest income is defined as the total of interest income and amortized fees on earning assets, less interest expense on deposits and borrowed funds, adjusted for the impact of interest-related hedging activity. Net interest income stated on an FTE basis is a non-generally accepted accounting principle (GAAP) financial measure that facilitates the analysis of asset yields. When adjusted to an FTE basis, yields on taxable, nontaxable, and partially taxable assets are comparable; however, the adjustment to an FTE basis has no impact on net income. A reconciliation of net interest income on a GAAP basis to net interest income on an FTE basis is provided on page 17.

Average Federal Reserve deposits and other interest-bearing assets totaled $3.9 billion for the current quarter compared to $7.7 billion for the prior year quarter, a decrease of $3.8 billion, or 50%.

Average securities, inclusive of Federal Reserve and Federal Home Loan Bank stock and certain community development investments, which are classified in other assets in the consolidated balance sheet, were $31.3 billion, relatively unchanged from the prior year quarter. Loans and leases averaged $28.7 billion, up slightly from $28.6 billion in the prior year quarter, reflecting growth in commercial and institutional loans, partially offset by a decrease in residential real estate loans. Commercial and institutional loans averaged $7.5 billion in the current quarter, up $0.5 billion, or 7%, from the prior year quarter’s average of $7.0 billion.

 

6


Net Interest Income (continued)

 

Residential real estate loans averaged $10.4 billion in the current quarter, down $0.4 billion, or 3%, from the prior year quarter’s average of $10.8 billion.

Northern Trust utilizes a diverse mix of funding sources. Total interest-bearing deposits averaged $56.5 billion in the current quarter compared to $56.7 billion in the prior year quarter, a decrease of $0.2 billion, or less than 1%. Other interest-bearing funds averaged $7.4 billion in the current quarter, a decrease of $1.2 billion, or 15%, as compared to $8.6 billion in the prior year quarter, primarily due to lower levels of short-term borrowings and long-term debt. The balances within short-term borrowing classifications vary based on funding requirements and strategies, interest rate levels, changes in the volume of lower-cost deposit sources, and the availability of collateral to secure these borrowings. Average net noninterest-related funds utilized to fund earning assets decreased $2.5 billion, or 12%, to $18.3 billion from $20.8 billion in the prior year quarter, resulting primarily from lower levels of demand and other noninterest-bearing deposits.

For additional quantitative analysis of average balances and interest rate changes affecting net interest income, refer to the Average Consolidated Balance Sheet with Analysis of Net Interest Income and the Analysis of Net Interest Income Changes Due To Volume and Rate on page 18.

Provision for Credit Losses

The provision for credit losses was $5.0 million in both the current quarter and prior year quarter. Net charge-offs totaled $8.7 million for the current quarter resulting from $12.6 million of charge-offs and $3.9 million of recoveries, compared to $5.8 million of net charge-offs in the prior year quarter resulting from $14.4 million of charge-offs and $8.6 million of recoveries. Nonperforming loans and leases decreased $10.4 million, or 4%, from the prior year quarter. Residential real estate loans and commercial real estate loans accounted for 69% and 21%, respectively, of total nonperforming loans at March 31, 2013. For additional discussion of the provision and allowance for credit losses, refer to the “Asset Quality” section on page 13.

Noninterest Expense

The components of noninterest expense are provided below.

 

Noninterest Expense

   Three Months Ended March 31,  

($ In Millions)

   2013      2012      Change  

Compensation

   $ 320.3       $ 321.6       $ (1.3     —  

Employee Benefits

     63.3         68.1         (4.8     (7

Outside Services

     129.9         128.2         1.7        1   

Equipment and Software

     91.4         90.8         0.6        1   

Occupancy

     43.2         41.8         1.4        3   

Other Operating Expense

     80.8         73.1         7.7        10   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Noninterest Expense

   $ 728.9       $ 723.6       $ 5.3        1
  

 

 

    

 

 

    

 

 

   

 

 

 

 

7


Noninterest Expense (continued)

 

Compensation expense, the largest component of noninterest expense, equaled $320.3 million, down slightly from $321.6 million in the prior year quarter. Staff on a full-time equivalent basis at March 31, 2013 totaled approximately 14,200, up 2% from a year ago.

Employee benefit expense equaled $63.3 million, down 7% compared to $68.1 million in the prior year quarter. The current quarter decrease primarily reflects lower expense associated with employee medical benefits.

Expense associated with outside services totaled $129.9 million, up 1% from $128.2 million in the prior year quarter, primarily reflecting higher technical services expense in the current quarter.

Equipment and software expense totaled $91.4 million, up 1% from $90.8 million in the prior year quarter. The prior year quarter included a $4.6 million software write-off. The current quarter includes higher levels of software amortization and support costs associated with the continued investment in technology related assets.

Occupancy expense equaled $43.2 million, an increase of 3% from $41.8 million in the prior year quarter. The current quarter includes $1.5 million of restructuring charges related to reductions in office space.

The components of other operating expense are provided below.

 

Other Operating Expense

   Three Months Ended March 31,  

($ In Millions)

   2013      2012      Change  

Business Promotion

   $ 28.6       $ 28.3       $ 0.3         1

FDIC Insurance Premiums

     6.6         4.3         2.3         56   

Staff Related

     10.5         9.7         0.8         8   

Other Intangible Amortization

     5.2         4.6         0.6         14   

Other Expenses

     29.9         26.2         3.7         14   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Other Operating Expense

   $ 80.8       $ 73.1       $ 7.7         10
  

 

 

    

 

 

    

 

 

    

 

 

 

The current quarter increase in the other expenses component of other operating expense primarily reflects higher charges associated with account servicing activities.

Provision for Income Taxes

Income tax expense was $78.5 million in the current quarter, representing an effective tax rate of 32.4%, and $75.6 million in the prior year quarter, representing an effective tax rate of 31.9%.

 

8


BUSINESS UNIT REPORTING

The following tables reflect the earnings contributions and average assets of Northern Trust’s business units for the three month periods ended March 31, 2013 and 2012. Business unit financial information, presented on an internal management-reporting basis, is determined by accounting systems that are used to allocate revenue and expense related to each segment and incorporates processes for allocating assets, liabilities, and equity, and the applicable interest income and expense.

 

Three Months Ended March 31,

   Corporate and Institutional
Services
    Personal Financial Services     Treasury and Other     Total Consolidated  

($ In Millions)

   2013     2012     2013     2012     2013     2012     2013     2012  

Noninterest Income

                

Trust, Investment and Other Servicing Fees

   $ 348.7      $ 317.0      $ 282.0      $ 258.2      $ —        $ —        $ 630.7      $ 575.2   

Foreign Exchange Trading Income

     58.2        57.5        1.3        4.4        —          —          59.5        61.9   

Other Noninterest Income

     40.2        48.6        17.2        22.7        2.7        0.6        60.1        71.9   

Net Interest Income (FTE)*

     64.1        77.0        147.8        161.1        21.8        28.2        233.7        266.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Revenue*

     511.2        500.1        448.3        446.4        24.5        28.8        984.0        975.3   

Provision for Credit Losses

     (2.7     0.5        7.7        4.5        —          —          5.0        5.0   

Noninterest Expense

     398.7        398.0        301.8        303.7        28.4        21.9        728.9        723.6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before Income Taxes*

     115.2        101.6        138.8        138.2        (3.9     6.9        250.1        246.7   

Provision for Income Taxes*

     35.9        33.6        52.8        52.3        (2.6     (0.4     86.1        85.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

   $ 79.3      $ 68.0      $ 86.0      $ 85.9      $ (1.3   $ 7.3      $ 164.0      $ 161.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of Consolidated Net Income

     48     42     52     53     N/M        5     100     100

Average Assets

   $ 51,316.8      $ 49,662.2      $ 22,861.4      $ 23,563.9      $ 17,391.1      $ 21,902.0      $ 91,569.3      $ 95,128.1   

 

* Stated on a fully taxable equivalent basis (FTE). Total consolidated includes FTE adjustments of $7.6 million for 2013 and $9.9 million for 2012.

Corporate and Institutional Services

C&IS net income for the quarter was $79.3 million, compared with $68.0 million in the prior year quarter, an increase of $11.3 million, or 17%.

 

C&IS Trust, Investment and Other Servicing Fees    Three Months Ended March 31,  

($ In Millions)

   2013      2012      Change  

Custody and Fund Administration

   $ 223.8       $ 209.8       $ 14.0         7

Investment Management

     75.5         61.8         13.7         22   

Securities Lending

     22.3         21.5         0.8         4   

Other

     27.1         23.9         3.2         13   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 348.7       $ 317.0       $ 31.7         10
  

 

 

    

 

 

    

 

 

    

 

 

 

Custody and fund administration fees, the largest component of C&IS fees, increased 7%, primarily reflecting the favorable impact of equity markets on fees and new business. Investment management fees increased 22%, reflecting new business, the favorable impact of markets, and lower waived fees in money market mutual funds. Money market mutual fund fee waivers in C&IS, attributable to persistent low short-term interest rates, totaled $8.8 million in the current quarter, compared to $10.6 million in the prior year quarter. Securities lending revenue increased 4%, primarily reflecting higher spreads and loan volumes in the current quarter.

 

9


Corporate and Institutional Services (continued)

 

Foreign exchange trading income totaled $58.2 million in the current quarter, an increase of 1% from $57.5 million in the prior year quarter, attributable to higher client volumes, partially offset by lower market volatility compared to the prior year quarter.

Other noninterest income totaled $40.2 million in the current quarter, a decrease of $8.4 million, or 17%, from $48.6 million in the prior year quarter. The current quarter includes a $6.6 million reduction in connection with the write-off of certain fee receivables.

Net interest income stated on an FTE basis was $64.1 million, down $12.9 million, or 17%, from $77.0 million in the prior year quarter, primarily reflecting a decrease in the net interest margin. The current quarter net interest margin equaled 0.59% as compared with 0.74% reported in the prior year quarter. The lower net interest margin is primarily due to lower yields on earning assets, partially offset by lower deposit rates as a result of the persistently low interest rate environment. Earning assets averaged $43.8 billion for the quarter, an increase of $2.1 billion, or 5%, from $41.7 billion in the prior year quarter. Earning assets were primarily comprised of interest-bearing deposits with banks and loans and leases. Funding sources were primarily comprised of non-U.S. custody related interest-bearing deposits.

A provision for credit losses of negative $2.7 million was recorded in the current quarter as compared to the prior year quarter’s provision of $0.5 million, reflecting continued improvement in loan portfolio credit quality metrics.

Total C&IS noninterest expense, which includes the direct expense of the business unit, indirect expense allocations from NTGI and O&T for product and operating support, and indirect expense allocations for certain corporate support services, totaled $398.7 million, relatively unchanged from the prior year quarter.

Personal Financial Services

PFS net income for the current quarter was $86.0 million, up slightly from the prior year quarter. Noninterest income was $300.5 million, up $15.2 million, or 5%, from $285.3 million in the prior year quarter. Trust, investment and other servicing fees totaled $282.0 million in the current quarter, increasing $23.8 million, or 9%, from $258.2 million in the prior year quarter. The increased fees primarily reflect new business and the favorable impact of markets. PFS waived fees in money market mutual funds, attributable to persistent low short-term interest rates, totaled $13.4 million in the current quarter compared with $14.8 million in the prior year quarter. Other noninterest income totaled $17.2 million, down $5.5 million, or 24%, from $22.7 million in the prior year quarter, reflecting a $5.8 million reduction in connection with the write-off of certain fee receivables.

Net interest income stated on an FTE basis was $147.8 million, down $13.3 million, or 8%, from $161.1 million in the prior year quarter, primarily due to a lower net interest margin. The net interest margin decreased to 2.65% from 2.82% in the prior year quarter as a result of lower yields on loans and leases, partially offset by lower borrowing rates.

 

10


Personal Financial Services (continued)

 

A provision for credit losses of $7.7 million was recorded in the current quarter, compared to $4.5 million in the prior year quarter. While credit quality metrics for the overall portfolio have improved, the current quarter provision reflects continued weakness within the residential real estate class.

Total PFS noninterest expense, which includes the direct expense of the business unit, indirect expense allocations from NTGI and O&T for product and operating support, and indirect expense allocations for certain corporate support services, totaled $301.8 million, down slightly from the prior year quarter.

Treasury and Other

Treasury and Other includes income and expense associated with the wholesale funding activities and the investment portfolios of the Corporation and its principal subsidiary, The Northern Trust Company (Bank), and certain corporate-based expense, executive level compensation, and nonrecurring items not allocated to the business units. Other noninterest income in the current quarter totaled $2.7 million, compared with $0.6 million in the prior year quarter. The prior year quarter included charges of $3.1 million for credit-related other-than-temporary impairment of residential mortgage-backed securities and auction rate securities. Net interest income in the current quarter was $21.8 million, compared to $28.2 million in the prior year quarter, a decrease of $6.4 million, or 23%. The decrease primarily reflects lower yields on securities and a decline in average earning assets of $5.6 billion, or 26%, to $15.7 billion in the current quarter. Noninterest expense for the quarter totaled $28.4 million compared with $21.9 million in the prior year quarter, an increase of $6.5 million, or 30%, reflecting current quarter increases within various miscellaneous expense categories.

BALANCE SHEET

Total assets at March 31, 2013 were $93.2 billion and averaged $91.6 billion for the current quarter, compared with total assets of $91.6 billion at March 31, 2012 and average total assets of $95.1 billion in the prior year first quarter. Average balances are considered to be a better measure of balance sheet trends as period-end balances can be impacted on a short term basis by deposit and withdrawal activity involving large balances of short-term client funds. Loans and leases totaled $28.9 billion at March 31, 2013 and averaged $28.7 billion in the current quarter as compared to $29.2 billion at March 31, 2012 and a $28.6 billion average in the prior year quarter. Securities, including Federal Reserve and Federal Home Loan Bank stock and certain community development investments which are classified in other assets in the consolidated balance sheet, totaled $30.6 billion at March 31, 2013 and averaged $31.3 billion for the quarter, down 5% and unchanged, respectively, compared with $32.1 billion at March 31, 2012 and $31.3 billion on average in the prior year quarter. Federal funds sold and securities purchased under agreements to resell, interest-bearing deposits with banks, and Federal Reserve deposits and other interest-bearing assets in aggregate totaled $24.8 billion at March 31, 2013 and averaged $22.2 billion in the current quarter, up 16% and down 15%, respectively, from the prior year quarter. Interest-bearing deposits at March 31, 2013 totaled $56.9 billion and averaged $56.5 billion, compared to $54.0 billion at March 31, 2012 and a $56.7 billion average in the prior year quarter.

 

11


BALANCE SHEET (continued)

 

Noninterest-bearing deposits at March 31, 2013 totaled $18.9 billion and averaged $16.9 billion, compared to $19.9 billion at March 31, 2012 and a $19.5 billion average in the prior year quarter.

Total stockholders’ equity averaged $7.5 billion, up $0.3 million, or 5%, from the prior year quarter’s average of $7.2 billion. The increase primarily reflects earnings, partially offset by dividend declarations and the repurchase of common stock pursuant to the Corporation’s share buyback program. During the three months ended March 31, 2013, the Corporation repurchased 1,403,366 shares at a cost of $74.5 million ($53.08 average price per share). Under the Corporation’s capital plan, which was reviewed without objection by the Federal Reserve in March of 2013, the Corporation may repurchase up to $400.0 million of common stock after March 31, 2013 through March 31, 2014. As of March 31, 2013, under the Corporation’s previous stock buyback program, the Corporation was authorized by its Board of Directors to purchase up to 5.4 million additional shares. On April 16, 2013, the Board of Directors authorized a new stock buyback program that replaced the previous program and provides for the purchase of up to 12.0 million shares of the Corporation’s common stock. The current stock buyback program has no fixed expiration date.

Northern Trust’s risk-based capital ratios remained strong at March 31, 2013 and exceeded the minimum regulatory requirements established by U.S. banking regulators. The Corporation and the Bank each had capital ratios at March 31, 2013 that were above the level required for classification as a “well capitalized” institution. Shown below are the capital ratios of the Corporation and the Bank as of March 31, 2013 and December 31, 2012.

 

     March 31, 2013     December 31, 2012  
     Tier 1     Total     Leverage     Tier 1     Total     Leverage  
     Capital     Capital     Ratio     Capital     Capital     Ratio  

Northern Trust Corporation

     13.3     14.7     8.4     12.8     14.3     8.2

The Northern Trust Company

     12.2     14.0     7.7     11.9     13.7     7.6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Minimum to Qualify as Well Capitalized

     6.0     10.0     5.0     6.0     10.0     5.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table provides the Corporation’s ratios of tier 1 capital and tier 1 common equity to risk-weighted assets, as well as a reconciliation of tier 1 capital calculated in accordance with applicable regulatory requirements and GAAP to tier 1 common equity.

 

($ In Millions)

   March 31, 2013     December 31, 2012  

Ratios

    

Tier 1 Capital

     13.3     12.8

Tier 1 Common Equity

     12.8     12.4
  

 

 

   

 

 

 

Tier 1 Capital

   $ 7,587.0      $ 7,489.0   

Less: Floating Rate Capital Securities

     268.7        268.7   
  

 

 

   

 

 

 

Tier 1 Common Equity

   $ 7,318.3      $ 7,220.3   
  

 

 

   

 

 

 

Northern Trust is providing the tier 1 common equity ratio, a non-GAAP financial measure, in addition to its capital ratios prepared in accordance with regulatory requirements and GAAP as it is a measure that Northern Trust and investors use to assess capital adequacy.

 

12


ASSET QUALITY

Securities Portfolio

Northern Trust maintains a high quality securities portfolio, with 84% of the combined available for sale, held to maturity, and trading account portfolios at March 31, 2013 composed of U.S. Treasury and government sponsored agency securities and triple-A rated corporate notes, asset-backed securities, supranational, sovereign and non-U.S. agency bonds, auction rate securities and obligations of states and political subdivisions. The remaining portfolio was composed of corporate notes, asset-backed securities, negotiable certificates of deposit, obligations of states and political subdivisions, auction rate securities and other securities, of which as a percentage of the total securities portfolio, 4% was rated double-A, 2% was rated below double-A, and 10% was not rated by Standard and Poor’s or Moody’s Investors Service (primarily negotiable certificates of deposits of banks whose long term ratings are at least A).

Total unrealized losses within the investment securities portfolio at March 31, 2013 were $25.5 million as compared to $30.2 million at December 31, 2012. Of the total unrealized losses on securities at March 31, 2013, the largest component, totaling $7.9 million, was non-agency residential mortgage-backed securities. Non-agency residential mortgage-backed securities at March 31, 2013 had a total amortized cost and fair value of $78.7 million and $70.9 million, respectively.

Northern Trust has evaluated non-agency residential mortgage-backed securities, and all other securities with unrealized losses, for possible other-than-temporary impairment in accordance with GAAP and Northern Trust’s security impairment review policy. There were no other-than-temporary impairment losses for the three months ended March 31, 2013. Credit related losses recognized in earnings on other-than-temporarily impaired securities totaled $3.1 million for the three months ended March 31, 2012.

Northern Trust is a participant in the repurchase agreement market. This provides a relatively low cost alternative for short-term funding. Securities purchased under agreements to resell and securities sold under agreements to repurchase are accounted for as collateralized financings and recorded at the amounts at which the securities were acquired or sold plus accrued interest. To minimize potential credit risk associated with these transactions, the fair value of the securities purchased or sold is monitored, limits are set on exposure with counterparties, and the financial condition of counterparties is regularly assessed. It is Northern Trust’s policy to take possession of securities purchased under agreements to resell. Securities sold under agreements to repurchase are held by the counterparty until the repurchase.

Eurozone Exposure

Northern Trust continues to closely monitor developments related to the European debt crisis. Northern Trust considers Ireland, Portugal, Italy, Greece, Spain and Cyprus to be those eurozone countries experiencing significant economic, fiscal and/or political strains. At March 31, 2013, Northern Trust’s gross exposure to obligors in Ireland totaled approximately $885 million, less than 1% of Northern Trust’s total consolidated assets. There was no exposure to obligors in Portugal, Italy, Greece, Spain or Cyprus and no exposure to sovereign debt securities as of March 31, 2013.

 

13


ASSET QUALITY (continued)

 

Of the total exposure to obligors in Ireland, $5 million was to banks and $880 million was to commercial and other borrowers, primarily funds domiciled in Ireland whose assets and investment activities are broadly diversified by investment strategy, issuer type, country of risk, and/or instrument type. Exposures to these borrowers in Ireland may be secured or unsecured, committed or uncommitted, but are typically for short periods of a year or less for foreign exchange, overdraft accommodations, and loans. Exposure levels at March 31, 2013 reflect Northern Trust’s risk management policies and practices, which operate to limit exposures to higher risk European financial and sovereign entities.

Nonperforming Loans and Other Real Estate Owned

Nonperforming assets consist of nonperforming loans and Other Real Estate Owned (OREO). OREO is comprised of commercial and residential properties acquired in partial or total satisfaction of loans.

The following table provides the amounts of nonperforming loans, by segment and class, and of OREO that were outstanding at the dates shown, as well as the balance of loans that were delinquent 90 days or more and still accruing interest. The balance of loans delinquent 90 days or more and still accruing interest can fluctuate widely based on the timing of cash collections, renegotiations and renewals.

 

($ In Millions)

   March 31,
2013
    December 31,
2012
    March 31,
2012
 

Nonperforming Loans and Leases

      

Commercial

      

Commercial and Institutional

   $ 21.1      $ 21.6      $ 28.6   

Commercial Real Estate

     53.7        56.4        69.8   
  

 

 

   

 

 

   

 

 

 

Total Commercial

     74.8        78.0        98.4   
  

 

 

   

 

 

   

 

 

 

Personal

      

Residential Real Estate

     173.6        174.6        160.0   

Private Client

     3.3        2.2        3.7   
  

 

 

   

 

 

   

 

 

 

Total Personal

     176.9        176.8        163.7   
  

 

 

   

 

 

   

 

 

 

Total Nonperforming Loans and Leases

     251.7        254.8        262.1   

Other Real Estate Owned

     10.5        20.3        22.4   
  

 

 

   

 

 

   

 

 

 

Total Nonperforming Assets

   $ 262.2      $ 275.1      $ 284.5   
  

 

 

   

 

 

   

 

 

 

90 Day Past Due Loans Still Accruing

   $ 11.1      $ 19.0      $ 21.0   
  

 

 

   

 

 

   

 

 

 

Nonperforming Loans and Leases to Total Loans and Leases

     0.87     0.86     0.90
  

 

 

   

 

 

   

 

 

 

Coverage of Loan and Lease Allowance to Nonperforming Loans and Leases

     1.2x        1.2x        1.1x   
  

 

 

   

 

 

   

 

 

 

Maintaining a low level of nonperforming assets is important to the ongoing success of a financial institution. In addition to the negative impact on both net interest income and credit losses, nonperforming assets also increase operating costs due to the expense associated with collection efforts. Nonperforming assets as of March 31, 2013, while down $12.9 million from the prior quarter, remain elevated from historical levels and continue to reflect the deterioration in overall economic conditions experienced since the onset of the economic downturn in 2008 and its effect on Northern Trust’s loan portfolio, primarily within the residential real estate and commercial real estate loan classes.

 

14


ASSET QUALITY (continued)

 

Importantly, Northern Trust focuses its lending efforts on clients who are looking to utilize a full range of financial services with Northern Trust. Northern Trust’s underwriting standards do not allow for the origination of loan types generally considered to be of high risk in nature, such as option ARM loans, subprime loans, loans with initial “teaser” rates, and loans with excessively high loan-to-value ratios. Residential real estate loans consist of conventional home mortgages and equity credit lines, which generally require a loan to collateral value of no more than 65% to 80% at inception. Revaluations of supporting collateral are obtained upon refinancing or default or when otherwise considered warranted. Collateral revaluations for mortgages are performed by independent third parties. The commercial real estate portfolio consists of commercial mortgages and construction, acquisition and development loans extended primarily to highly experienced developers and/or investors well known to Northern Trust. Underwriting standards generally reflect conservative loan-to-value ratios and debt service coverage requirements. Recourse to borrowers through guarantees is also commonly required.

Provision and Allowance for Credit Losses

The provision for credit losses is the charge to current earnings that is determined by management, through a disciplined credit review process, to be the amount needed to maintain the allowance for credit losses at an appropriate level to absorb probable credit losses that have been identified with specific borrower relationships (specific loss component) and probable losses that are believed to be inherent in the loan and lease portfolios, unfunded commitments, and standby letters of credit (inherent loss component). Control processes and analyses employed to evaluate the appropriateness of the allowance for credit losses are reviewed on at least an annual basis and modified as considered necessary.

The amount of specific allowance is determined through an individual evaluation of loans and lending-related commitments considered impaired that is based on expected future cash flows, the value of collateral, and other factors that may impact the borrower’s ability to pay. Changes in collateral values, delinquency ratios, portfolio volume and concentration, and other asset quality metrics, including management’s subjective evaluation of economic and business conditions, result in adjustments of qualitative allowance factors that are applied in the determination of inherent allowance requirements.

 

15


ASSET QUALITY (continued)

 

A $5.0 million provision for credit losses was recorded in both the current and prior year quarters. The current quarter provision reflects continued weakness within the residential real estate loan class, partially offset by improvement within the commercial and institutional and commercial real estate loan classes. Net charge-offs totaled $8.7 million for the current quarter resulting from $12.6 million of charge-offs and $3.9 million of recoveries, compared to $5.8 million of net charge-offs in the prior year quarter resulting from $14.4 million of charge-offs and $8.6 million of recoveries. Nonperforming loans and leases decreased $10.4 million, or 4%, from the prior year quarter.

Note 6 to the consolidated financial statements includes a table that details the changes in the allowance for credit losses during the three months ended March 31, 2013 and 2012 due to charge-offs, recoveries, and the provision for credit losses.

The following table shows the specific portion of the allowance and the inherent portion of the allowance and its components, each by loan and lease segment and class.

 

     March 31, 2013     December 31, 2012     March 31, 2012  

($ In Millions)

   Allowance
Amount
    Percent of
Loans to
Total Loans
    Allowance
Amount
    Percent of
Loans to
Total Loans
    Allowance
Amount
    Percent of
Loans to
Total Loans
 

Specific Allowance

   $ 34.8        —      $ 32.5        —      $ 36.5        —   

Allocated Inherent Allowance

            

Commercial

            

Commercial and Institutional

     74.4        25        79.2        25        88.9        24   

Commercial Real Estate

     77.0        10        80.6        10        79.0        10   

Lease Financing, net

     5.0        4        5.5        4        3.1        4   

Non-U.S.

     2.7        4        3.4        4        3.7        4   

Other

     —          2        —          1        —          2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Commercial

     159.1        45        168.7        44        174.7        44   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Personal

            

Residential Real Estate

     115.2        35        110.9        35        100.2        36   

Private Client

     14.7        20        15.5        21        16.7        19   

Other

     —          —          —          —          —          1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Personal

     129.9        55        126.4        56        116.9        56   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Allocated Inherent Allowance

   $ 289.0        100   $ 295.1        100   $ 291.6        100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Allowance for Credit Losses

     323.8          327.6          328.1     
  

 

 

     

 

 

     

 

 

   

Allowance Assigned to

            

Loans and Leases

   $ 294.1        $ 297.9        $ 295.5     

Unfunded Commitments and Standby Letters of Credit

     29.7          29.7          32.6     
  

 

 

     

 

 

     

 

 

   

Total Allowance for Credit Losses

   $ 323.8        $ 327.6        $ 328.1     
  

 

 

     

 

 

     

 

 

   

Allowance Assigned to Loans and Leases to Total Loans and Leases

     1.02       1.01       1.01  
  

 

 

     

 

 

     

 

 

   

MARKET RISK MANAGEMENT

As described in the 2012 Annual Report to Shareholders, Northern Trust manages its interest rate risk through two primary measurement techniques: simulation of earnings and simulation of economic value of equity. Also, as part of its risk management activities, it regularly measures the risk of loss associated with foreign currency positions using a Value-at-Risk (VaR) model.

Based on this continuing evaluation process, Northern Trust’s interest rate risk position, as measured by current market implied forward interest rates and sensitivity analyses, and the VaR associated with the foreign exchange trading portfolio, have not changed significantly since December 31, 2012.

 

16


RECONCILIATION OF REPORTED NET INTEREST INCOME TO FULLY TAXABLE EQUIVALENT

The tables below present a reconciliation of interest income and net interest income prepared in accordance with GAAP to interest income and net interest income on a fully taxable equivalent (FTE) basis, a non-GAAP financial measure. Management believes an FTE presentation provides a clearer indication of net interest margins for comparative purposes.

 

     Three Months Ended  
      March 31, 2013     March 31, 2012  

($ In Millions)

   Reported     FTE Adj.      FTE     Reported     FTE Adj.      FTE  

Interest Income

   $ 286.7      $ 7.6       $ 294.3      $ 341.0      $ 9.9       $ 350.9   

Interest Expense

     60.6        —           60.6        84.6        —           84.6   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Net Interest Income

   $ 226.1      $ 7.6       $ 233.7      $ 256.4      $ 9.9       $ 266.3   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Net Interest Margin

     1.12        1.15     1.20        1.24
  

 

 

      

 

 

   

 

 

      

 

 

 

 

17


The following schedule should be read in conjunction with the Net Interest Income section of Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

AVERAGE CONSOLIDATED BALANCE SHEET    NORTHERN TRUST CORPORATION
WITH ANALYSIS OF NET INTEREST INCOME   

 

(INTEREST AND RATE ON A FULLY TAXABLE    First Quarter  
EQUIVALENT BASIS)    2013     2012  

($ In Millions)

   Interest      Average
Balance
    Rate (3)     Interest      Average
Balance
    Rate (3)  

Average Earning Assets

              

Federal Funds Sold and Securities Purchased under Agreements to Resell

   $ 0.1       $ 249.5        0.18   $ 0.1       $ 246.6        0.12

Interest-Bearing Deposits with Banks

     35.0         18,099.5        0.78        50.6         18,246.4        1.11   

Federal Reserve Deposits and Other Interest-Bearing

     2.5         3,872.0        0.26        5.1         7,685.3        0.27   

Securities

              

U.S. Government

     4.6         1,782.8        1.05        7.6         2,969.8        1.03   

Obligations of States and Political Subdivisions

     5.1         321.1        6.32        8.1         493.0        6.60   

Government Sponsored Agency

     28.0         18,280.6        0.62        29.7         17,542.9        0.68   

Other (1)

     29.9         10,890.6        1.11        30.9         10,264.7        1.21   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Securities

     67.6         31,275.1        0.88        76.3         31,270.4        0.98   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Loans and Leases (2)

     189.1         28,661.9        2.68        218.8         28,615.6        3.08   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Earning Assets

     294.3         82,158.0        1.45        350.9         86,064.3        1.64   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Allowance for Credit Losses Assigned to Loans and Leases

     —           (296.1     —          —           (293.0     —     

Cash and Due from Banks

     —           3,392.5        —          —           4,002.5        —     

Buildings and Equipment

     —           467.5        —          —           492.3        —     

Client Security Settlement Receivables

     —           793.3        —          —           421.0        —     

Goodwill

     —           532.6        —          —           534.1        —     

Other Assets

     —           4,521.5        —          —           3,906.9        —     
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Assets

   $ —         $ 91,569.3        —     $ —         $ 95,128.1        —  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Average Source of Funds

              

Deposits

              

Savings and Money Market

   $ 2.8       $ 14,880.3        0.08   $ 5.2       $ 14,606.8        0.14

Savings Certificates and Other Time

     3.9         2,385.6        0.67        5.1         3,071.4        0.67   

Non-U.S. Offices – Interest-Bearing

     22.4         39,221.1        0.23        36.0         38,980.8        0.37   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Interest-Bearing Deposits

     29.1         56,487.0        0.21        46.3         56,659.0        0.33   

Short-Term Borrowings

     1.1         3,405.5        0.13        1.5         4,228.2        0.14   

Senior Notes

     19.2         2,403.9        3.24        16.9         2,125.2        3.20   

Long-Term Debt

     10.6         1,277.7        3.37        19.1         1,989.4        3.86   

Floating Rate Capital Debt

     0.6         277.1        0.88        0.8         277.0        1.12   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Interest-Related Funds

     60.6         63,851.2        0.39        84.6         65,278.8        0.52   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Interest Rate Spread

     —           —          1.06        —           —          1.12   

Demand and Other Noninterest-Bearing Deposits

     —           16,899.1        —          —           19,467.2        —     

Other Liabilities

     —           3,275.8        —          —           3,214.8        —     

Stockholders’ Equity

     —           7,543.2        —          —           7,167.3        —     
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ —         $ 91,569.3        —     $ —         $ 95,128.1        —  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net Interest Income/Margin (FTE Adjusted)

   $ 233.7       $ —          1.15   $ 266.3       $ —          1.24
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net Interest Income/Margin (Unadjusted)

   $ 226.1       $ —          1.12   $ 256.4       $ —          1.20
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

ANALYSIS OF NET INTEREST INCOME CHANGES

DUE TO VOLUME AND RATE

 

     Three Months 2013/2012  
     Change Due To  
     Average              

(In Millions)

   Balance     Rate     Total  

Earning Assets (FTE)

   $ (5.2   $ (51.4   $ (56.6

Interest-Related Funds

     (5.7     (18.3     (24.0
  

 

 

   

 

 

   

 

 

 

Net Interest Income (FTE)

   $ 0.5      $ (33.1   $ (32.6
  

 

 

   

 

 

   

 

 

 

 

(1) Other securities include Federal Reserve and Federal Home Loan Bank stock and certain community development investments which are classified in other assets in the consolidated balance sheet as of March 31, 2013 and 2012.
(2) Average balances include nonaccrual loans. Lease financing receivable balances are reduced by deferred income.
(3) Rate calculations are based on actual balances rather than the rounded amounts presented in the Average Consolidated Balance Sheet with Analysis of Net Interest Income.
Notes: Net Interest Income (FTE Adjusted) includes adjustments to a fully taxable equivalent basis for loans and securities. Such adjustments are based on a blended federal and state tax rate of 37.7%. Total taxable equivalent interest adjustments amounted to $7.6 million and $9.9 million for the three months ended March 31, 2013 and 2012, respectively.

Interest revenue on cash collateral positions is reported above within interest-bearing deposits with banks and within loans and leases. Interest expense on cash collateral positions is reported above within non-U.S. offices interest-bearing deposits. Related cash collateral received from and deposited with derivative counterparties is recorded net of the associated derivative contract within other assets and other liabilities, respectively.

 

18


FACTORS AFFECTING FUTURE RESULTS

This report contains statements that may be considered forward-looking, such as the statements relating to Northern Trust’s financial goals, capital adequacy, dividend policy, expansion and business development plans, risk management policies, anticipated expense levels and projected profit improvements, business prospects and positioning with respect to market, demographic and pricing trends, strategic initiatives, reengineering and outsourcing activities, new business results and outlook, changes in securities market prices, credit quality including allowance levels, planned capital expenditures and technology spending, anticipated tax benefits and expenses, and the effects of any extraordinary events and various other matters (including developments with respect to litigation, other contingent liabilities and obligations, and regulation involving Northern Trust and changes in accounting policies, standards and interpretations) on Northern Trust’s business and results.

Forward-looking statements are typically identified by words or phrases such as “believe”, “expect”, “anticipate”, “intend”, “estimate”, “may increase”, “may fluctuate”, “plan”, “goal”, “target”, “strategy”, and similar expressions or future or conditional verbs such as “may”, “will”, “should”, “would”, and “could.” Forward-looking statements are Northern Trust’s current estimates or expectations of future events or future results. Actual results could differ materially from the results indicated by these statements because the realization of those results is subject to many risks and uncertainties including: the health of the U.S. and international economies and particularly the continuing uncertainty in Europe; the downgrade of U.S. Government issued and other securities; the health and soundness of the financial institutions and other counterparties with which Northern Trust conducts business; changes in financial markets, including debt and equity markets, that impact the value, liquidity, or credit ratings of financial assets in general, or financial assets in particular investment funds, client portfolios, or securities lending collateral pools, including those funds, portfolios, collateral pools, and other financial assets with respect to which Northern Trust has taken, or may in the future take, actions to provide asset value stability or additional liquidity; the impact of stress in the financial markets, the effectiveness of governmental actions taken in response, and the effect of such governmental actions on Northern Trust, its competitors and counterparties, financial markets generally and availability of credit specifically, and the U.S. and international economies, including special deposit assessments or potentially higher FDIC premiums; changes in foreign exchange trading client volumes, fluctuations and volatility in foreign currency exchange rates, and Northern Trust’s success in assessing and mitigating the risks arising from such changes, fluctuations and volatility; decline in the value of securities held in Northern Trust’s investment portfolio, particularly asset-backed securities, the liquidity and pricing of which may be negatively impacted by periods of economic turmoil and financial market disruptions; uncertainties inherent in the complex and subjective judgments required to assess credit risk and establish appropriate allowances therefor; difficulties in measuring, or determining whether there is other-than-temporary impairment in, the value of securities held in Northern Trust’s investment portfolio; Northern Trust’s success in managing various risks inherent in its business, including credit risk, operational risk, interest rate risk and liquidity risk, particularly during times of economic uncertainty and volatility in the credit and financial markets; geopolitical risks and the risks of extraordinary events such as natural disasters, terrorist events, war and the U.S. and other governments’ responses to those events; the pace and extent of

 

19


FACTORS AFFECTING FUTURE RESULTS (continued)

continued globalization of investment activity and growth in worldwide financial assets; regulatory and monetary policy developments; failure to obtain regulatory approvals when required, including for the use and distribution of capital; changes in tax laws, accounting requirements or interpretations and other legislation in the U.S. or other countries that could affect Northern Trust or its clients, including changes in accounting rules for fair value measurements and recognizing impairments; changes in the nature and activities of Northern Trust’s competition, including increased consolidation within the financial services industry; Northern Trust’s success in maintaining existing business and continuing to generate new business in its existing markets; Northern Trust’s success in identifying and penetrating targeted markets, through acquisition, strategic alliance or otherwise; Northern Trust’s success in integrating acquisitions and strategic alliances; Northern Trust’s success in addressing the complex needs of a global client base across multiple time zones and from multiple locations, and managing compliance with legal, tax, regulatory and other requirements in areas of faster growth in its businesses, especially in immature markets; Northern Trust’s ability to maintain a product mix that achieves acceptable margins; Northern Trust’s ability to continue to generate investment results that satisfy its clients and continue to develop its array of investment products; Northern Trust’s success in generating revenue in its securities lending business for itself and its clients, especially in periods of economic and financial market uncertainty; Northern Trust’s success in recruiting and retaining the necessary personnel to support business growth and expansion and maintain sufficient expertise to support increasingly complex products and services; Northern Trust’s success in implementing its revenue enhancement and expense management initiatives; Northern Trust’s ability, as products, methods of delivery, and client requirements change or become more complex, to continue to fund and accomplish innovation, improve risk management practices and controls, and address operating risks, including human errors or omissions, data security breach risks, pricing or valuation of securities, fraud, systems performance or defects, systems interruptions, and breakdowns in processes or internal controls; Northern Trust’s success in controlling expenses, particularly in a difficult economic environment; uncertainties inherent in Northern Trust’s assumptions concerning its pension plan, including discount rates and expected contributions, returns and payouts; increased costs of compliance and other risks associated with changes in regulation and the current regulatory environment, including the requirements of the Basel II and Basel III capital regime and the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), areas of increased regulatory emphasis and oversight in the U.S. and other countries such as anti-money laundering, anti-bribery, and client privacy and the potential for substantial changes in the legal, regulatory and enforcement framework and oversight applicable to financial institutions in reaction to adverse financial market events, including changes pursuant to the Dodd-Frank Act that may, among other things, affect the leverage limits and risk-based capital and liquidity requirements for certain financial institutions, including Northern Trust, require those financial institutions to pay higher assessments, expose them to certain liabilities of their subsidiary depository institutions, and restrict or increase the regulation of certain activities, including foreign exchange, carried on by financial institutions, including Northern Trust; risks that evolving regulations, such as Basel II and Basel III, and potential legislation and regulations, including regulations that may be promulgated under the Dodd-Frank Act, could affect required regulatory capital for financial institutions, including Northern Trust, potentially

 

20


FACTORS AFFECTING FUTURE RESULTS (continued)

 

resulting in changes to the cost and composition of capital for Northern Trust; risks and uncertainties inherent in the litigation and regulatory process, including the adequacy of contingent liability, tax, and other accruals; and the risk of events that could harm Northern Trust’s reputation and so undermine the confidence of clients, counterparties, rating agencies, and stockholders.

Some of these and other risks and uncertainties that may affect future results are discussed in more detail in the section of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” captioned “Risk Management” in the 2012 Annual Report to Shareholders (pages 47-59), in the section of the “Notes to Consolidated Financial Statements” in the 2012 Annual Report to Shareholders captioned “Note 24 – Contingent Liabilities” (pages 108-110), in the sections of “Item 1 – Business” of the 2012 Annual Report on Form 10-K captioned “Government Monetary and Fiscal Policies,” “Competition” and “Regulation and Supervision” (pages 2-14), and in “Item 1A – Risk Factors” of the 2012 Annual Report on Form 10-K (pages 28-38). All forward-looking statements included in this report are based upon information presently available, and Northern Trust assumes no obligation to update any forward-looking statements.

 

21


FINANCIAL STATEMENTS

 

CONSOLIDATED BALANCE SHEET    NORTHERN TRUST CORPORATION

 

(In Millions Except Share Information)

   March 31,
2013
    December 31,
2012
 
     (Unaudited)        

Assets

    

Cash and Due from Banks

   $ 3,773.5      $ 3,752.7   

Federal Funds Sold and Securities Purchased under Agreements to Resell

     251.5        60.8   

Interest-Bearing Deposits with Banks

     18,694.8        18,803.5   

Federal Reserve Deposits and Other Interest-Bearing

     5,828.6        7,619.7   

Securities

    

Available for Sale

     27,171.9        28,643.5   

Held to Maturity (Fair value of $2,943.3 and $2,394.8)

     2,931.7        2,382.0   

Trading Account

     6.9        8.0   
  

 

 

   

 

 

 

Total Securities

     30,110.5        31,033.5   
  

 

 

   

 

 

 

Loans and Leases

    

Commercial

     12,682.0        12,897.2   

Personal

     16,180.9        16,607.3   
  

 

 

   

 

 

 

Total Loans and Leases (Net of unearned income of $286.6 and $297.9)

     28,862.9        29,504.5   
  

 

 

   

 

 

 

Allowance for Credit Losses Assigned to Loans and Leases

     (294.1     (297.9

Buildings and Equipment

     457.2        469.9   

Client Security Settlement Receivables

     816.5        2,049.1   

Goodwill

     529.5        537.8   

Other Assets

     4,125.9        3,930.2   
  

 

 

   

 

 

 

Total Assets

   $ 93,156.8      $ 97,463.8   
  

 

 

   

 

 

 

Liabilities

    

Deposits

    

Demand and Other Noninterest-Bearing

   $ 13,908.9      $ 20,519.0   

Savings and Money Market

     14,819.8        15,189.7   

Savings Certificates and Other Time

     2,296.1        2,466.1   

Non U.S. Offices – Noninterest-Bearing

     4,974.9        3,512.8   

                                        – Interest-Bearing

     39,822.4        39,720.2   
  

 

 

   

 

 

 

Total Deposits

     75,822.1        81,407.8   

Federal Funds Purchased

     1,320.5        780.2   

Securities Sold Under Agreements to Repurchase

     490.2        699.8   

Other Borrowings

     1,435.3        367.4   

Senior Notes

     2,402.0        2,405.8   

Long-Term Debt

     1,198.4        1,421.6   

Floating Rate Capital Debt

     277.1        277.0   

Other Liabilities

     2,599.1        2,577.2   
  

 

 

   

 

 

 

Total Liabilities

     85,544.7        89,936.8   
  

 

 

   

 

 

 

Stockholders’ Equity

    

Common Stock, $1.66 2/3 Par Value; Authorized 560,000,000 shares; Outstanding shares of 239,239,836 and 238,914,988

     408.6        408.6   

Additional Paid-In Capital

     995.2        1,012.7   

Retained Earnings

     6,793.8        6,702.7   

Accumulated Other Comprehensive Loss

     (284.1     (283.0

Treasury Stock (5,931,688 and 6,256,536 shares, at cost)

     (301.4     (314.0
  

 

 

   

 

 

 

Total Stockholders’ Equity

     7,612.1        7,527.0   
  

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 93,156.8      $ 97,463.8   
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

22


CONSOLIDATED STATEMENT OF INCOME    NORTHERN TRUST CORPORATION
(UNAUDITED)   

 

          Three Months
Ended March 31,
 

(In Millions Except Share Information)

        2013      2012  

Noninterest Income

     

Trust, Investment and Other Servicing Fees

   $ 630.7       $ 575.2   

Foreign Exchange Trading Income

     59.5         61.9   

Treasury Management Fees

     16.8         17.4   

Security Commissions and Trading Income

     18.3         18.3   

Other Operating Income

     24.8         38.6   

Investment Security Gains (Losses), net (Note)

     0.2         (2.4
     

 

 

    

 

 

 

Total Noninterest Income

     750.3         709.0   
     

 

 

    

 

 

 

Net Interest Income

     

Interest Income

     286.7         341.0   

Interest Expense

     60.6         84.6   
     

 

 

    

 

 

 

Net Interest Income

     226.1         256.4   

Provision for Credit Losses

     5.0         5.0   
     

 

 

    

 

 

 

Net Interest Income after Provision for Credit Losses

     221.1         251.4   
     

 

 

    

 

 

 

Noninterest Expense

     

Compensation

     320.3         321.6   

Employee Benefits

     63.3         68.1   

Outside Services

     129.9         128.2   

Equipment and Software

     91.4         90.8   

Occupancy

     43.2         41.8   

Other Operating Expense

     80.8         73.1   
     

 

 

    

 

 

 

Total Noninterest Expense

     728.9         723.6   
     

 

 

    

 

 

 

Income before Income Taxes

     242.5         236.8   

Provision for Income Taxes

     78.5         75.6   
     

 

 

    

 

 

 

Net Income

   $ 164.0       $ 161.2   
     

 

 

    

 

 

 

Net Income Applicable to Common Stock

   $ 164.0       $ 161.2   
     

 

 

    

 

 

 

Per Common Share

     

Net Income             – Basic

   $ 0.68       $ 0.66   

             – Diluted

     0.67         0.66   
     

 

 

    

 

 

 

Average Number of Common Shares Outstanding

  

– Basic

     239,167,559         241,090,093   
  

– Diluted

     240,189,215         241,556,096   
     

 

 

    

 

 

 

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME    NORTHERN TRUST CORPORATION
(UNAUDITED)   

 

         Three Months
Ended March 31,
 

(In Millions)

   2013     2012  

Net Income

   $ 164.0      $ 161.2   

Other Comprehensive Income (Net of Tax and Reclassifications)

    

Net Unrealized Gains (Losses) on Securities Available for Sale

     1.3        20.0   

Net Unrealized Gains (Losses) on Cash Flow Hedges

     (5.2     11.3   

Foreign Currency Translation Adjustments

     (4.2     15.8   

Pension and Other Postretirement Benefit Adjustments

     7.0        22.2   
    

 

 

   

 

 

 

Other Comprehensive Income

     (1.1     69.3   
    

 

 

   

 

 

 

Comprehensive Income

   $ 162.9      $ 230.5   
    

 

 

   

 

 

 
      
      

Note:

 

Changes in Other-Than-Temporary-Impairment (OTTI) Losses

   $ —        $ (3.1
 

Noncredit-related OTTI Losses Recorded in/(Reclassified from) OCI

     —          —     
 

Other Security Gains (Losses), net

     0.2        0.7   
    

 

 

   

 

 

 
 

Investment Security Gains (Losses), net

   $ 0.2      $ (2.4
    

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

23


CONSOLIDATED STATEMENT OF CHANGES IN    NORTHERN TRUST CORPORATION
STOCKHOLDERS’ EQUITY   
(UNAUDITED)   

 

     Three Months
Ended March 31,
 

(In Millions)

   2013     2012  

Common Stock

    

Balance at January 1 and March 31

   $ 408.6      $ 408.6   
  

 

 

   

 

 

 

Additional Paid-in Capital

    

Balance at January 1

     1,012.7        977.5   

Treasury Stock Transactions – Stock Options and Awards

     (35.6     (18.9

Stock Options and Awards – Amortization

     20.8        24.1   

Stock Options and Awards – Tax Benefits

     (2.7     (0.8
  

 

 

   

 

 

 

Balance at March 31

     995.2        981.9   
  

 

 

   

 

 

 

Retained Earnings

    

Balance at January 1

     6,702.7        6,302.3   

Net Income

     164.0        161.2   

Dividends Declared – Common Stock

     (72.9     (140.0
  

 

 

   

 

 

 

Balance at March 31

     6,793.8        6,323.5   
  

 

 

   

 

 

 

Accumulated Other Comprehensive Income (Loss)

    

Balance at January 1

     (283.0     (345.6

Net Unrealized Gains (Losses) on Securities Available for Sale

     1.3        20.0   

Net Unrealized Gains (Losses) on Cash Flow Hedges

     (5.2     11.3   

Foreign Currency Translation Adjustments

     (4.2     15.8   

Pension and Other Postretirement Benefit Adjustments

     7.0        22.2   
  

 

 

   

 

 

 

Balance at March 31

     (284.1     (276.3
  

 

 

   

 

 

 

Treasury Stock

    

Balance at January 1

     (314.0     (225.5

Stock Options and Awards

     87.1        25.4   

Stock Purchased

     (74.5     (14.4
  

 

 

   

 

 

 

Balance at March 31

     (301.4     (214.5
  

 

 

   

 

 

 

Total Stockholders’ Equity at March 31

   $ 7,612.1      $ 7,223.2   
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

24


CONSOLIDATED STATEMENT OF CASH FLOWS    NORTHERN TRUST CORPORATION
(UNAUDITED)   

 

     Three Months
Ended March 31,
 

(In Millions)

   2013     2012  

Cash Flows from Operating Activities:

    

Net Income

   $ 164.0      $ 161.2   

Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:

    

Investment Security (Gains) Losses, net

     (0.2     2.4   

Amortization and Accretion of Securities and Unearned Income

     1.5        (19.6

Provision for Credit Losses

     5.0        5.0   

Depreciation on Buildings and Equipment

     22.4        22.4   

Amortization of Computer Software

     48.7        44.6   

Amortization of Intangibles

     5.2        4.6   

Pension Plan Contribution

     (16.4     (12.3

Change in Receivables

     (32.3     (17.4

Change in Interest Payable

     (18.8     (13.8

Net Changes in Derivative Fair Value, Including Required Collateral

     (55.0     173.2   

Other Operating Activities, net

     188.4        407.3   
  

 

 

   

 

 

 

Net Cash Provided by (Used in) Operating Activities

     312.5        757.6   
  

 

 

   

 

 

 

Cash Flows from Investing Activities:

    

Net Change in Federal Funds Sold and Securities Purchased under Agreements to Resell

     (190.7     (169.6

Change in Interest-Bearing Deposits with Banks

     108.7        (2,174.9

Net Change in Federal Reserve Deposits and Other Interest-Bearing Assets

     1,791.0        11,220.7   

Purchases of Securities – Held to Maturity

     (2,182.6     (53.2

Proceeds from Maturity and Redemption of Securities – Held to Maturity

     1,633.6        143.9   

Purchases of Securities – Available for Sale

     (2,276.8     (9,107.1

Proceeds from Sale, Maturity and Redemption of Securities – Available for Sale

     3,728.9        8,448.2   

Change in Loans and Leases

     637.4        (97.3

Purchases of Buildings and Equipment, net

     (11.9     (9.9

Purchases and Development of Computer Software

     (60.4     (47.4

Change in Client Settlement Receivables and Payables

     1,232.6        (207.0

Other Investing Activities, net

     29.1        (43.3
  

 

 

   

 

 

 

Net Cash Provided by (Used in) Investing Activities

     4,438.9        7,903.1   
  

 

 

   

 

 

 

Cash Flows from Financing Activities:

    

Change in Deposits

     (5,778.3     (8,744.6

Change in Federal Funds Purchased

     540.3        1,158.4   

Change in Securities Sold under Agreements to Repurchase

     (209.6     (914.8

Change in Short-Term Other Borrowings

     1,057.3        115.9   

Repayments of Senior Notes and Long-Term Debt

     (201.0     (350.9

Treasury Stock Purchased

     (74.2     (14.4

Net Proceeds from Stock Options

     51.1        30.6   

Cash Dividends Paid on Common Stock

     (1.1     (67.5

Other Financing Activities, net

     (52.1     —     
  

 

 

   

 

 

 

Net Cash Provided by (Used in) Financing Activities

     4,667.6        (8,787.3
  

 

 

   

 

 

 

Effect of Foreign Currency Exchange Rates on Cash

     (63.0     91.6   
  

 

 

   

 

 

 

Increase (Decrease) in Cash and Due from Banks

     20.8        (35.0

Cash and Due from Banks at Beginning of Year

     3,752.7        4,315.3   
  

 

 

   

 

 

 

Cash and Due from Banks at End of Period

   $ 3,773.5      $ 4,280.3   
  

 

 

   

 

 

 

Supplemental Disclosures of Cash Flow Information:

    

Interest Paid

   $ 79.4      $ 98.4   

Income Taxes Paid

     14.5        4.8   

Transfers from Loans to OREO

     4.4        11.0   

See accompanying notes to the consolidated financial statements.

 

25


Notes to Consolidated Financial Statements

1. Basis of Presentation – The consolidated financial statements include the accounts of Northern Trust Corporation (Corporation) and its subsidiaries (collectively, Northern Trust). Significant intercompany balances and transactions have been eliminated. The consolidated financial statements, as of and for the periods ended March 31, 2013 and 2012, have not been audited by the Corporation’s independent registered public accounting firm. In the opinion of management, all accounting entries and adjustments, including normal recurring accruals, necessary for a fair presentation of the financial position and the results of operations for the interim periods have been made. For a description of Northern Trust’s significant accounting policies, refer to Note 1 of the Notes to Consolidated Financial Statements in the 2012 Annual Report to Shareholders.

2. Recent Accounting Pronouncements – In January 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-01, “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.” This ASU amends the scope of FASB ASU No. 2011-11, “Disclosures about Offsetting Assets and Liabilities,” which requires additional disclosure regarding offsetting of assets and liabilities to enable users of financial statements to evaluate the effect or potential effect of netting arrangements on an entity’s financial position. The provisions of the ASUs were effective for annual and interim reporting periods beginning on or after January 1, 2013. Northern Trust’s disclosures under the ASUs are provided in Note 19 – Offsetting Assets and Liabilities. As the ASUs address financial statement disclosures only, their retrospective adoption effective January 1, 2013 did not impact Northern Trust’s consolidated financial position or results of operations.

In February 2013, the FASB issued ASU No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” This ASU requires disclosures regarding reclassifications out of accumulated other comprehensive income in a single location in the financial statements. Northern Trust’s components of accumulated other comprehensive income are disclosed in Note 10 – Accumulated Other Comprehensive Income (Loss). Since this ASU addresses prospective financial statement disclosures only, its adoption effective January 1, 2013 did not impact Northern Trust’s consolidated financial position or results of operations.

3. Fair Value Measurements – Fair Value Hierarchy. The following describes the hierarchy of valuation inputs (Levels 1, 2, and 3) used to measure fair value and the primary valuation methodologies used by Northern Trust for financial instruments measured at fair value on a recurring basis. Observable inputs reflect market data obtained from sources independent of the reporting entity; unobservable inputs reflect the entity’s own assumptions about how market participants would value an asset or liability based on the best information available. GAAP requires an entity measuring fair value to maximize the use of observable inputs and minimize the use of unobservable inputs and establishes a fair value hierarchy of inputs. Financial instruments are categorized within the hierarchy based on the lowest level input that is significant to their valuation. Northern Trust’s policy is to recognize transfers into and transfers out of fair value levels as of the end of the reporting period in which the transfer occurred.

 

26


Notes to Consolidated Financial Statements (continued)

 

No transfers between fair value levels occurred during the three months ended March 31, 2013 or the year ended December 31, 2012.

Level 1 – Quoted, active market prices for identical assets or liabilities.

Northern Trust’s Level 1 assets are comprised of available for sale investments in U.S. treasury securities.

Level 2 – Observable inputs other than Level 1 prices, such as quoted active market prices for similar assets or liabilities, quoted prices for identical or similar assets in inactive markets, and model-derived valuations in which all significant inputs are observable in active markets.

Northern Trust’s Level 2 assets include available for sale and trading account securities, the fair values of which are determined by external pricing vendors, or in limited cases internally based on similar securities. Northern Trust reviews the valuation methodology used by external pricing vendors for suitability and performs additional reviews of their valuation techniques and assumptions used for selected securities. Northern Trust also reviews the market values provided by external vendors through a comparison of assigned market values to other third party prices for reasonableness. A price obtained from a vendor may be adjusted if it is found to be sufficiently inconsistent with other market prices.

Level 2 assets and liabilities also include derivative contracts which are valued internally using widely accepted income-based models that incorporate inputs readily observable in actively quoted markets and reflect the contractual terms of the contracts. Observable inputs include foreign exchange rates and interest rates for foreign exchange contracts; credit spreads, default probabilities, and recovery rates for credit default swap contracts; interest rates for interest rate swap contracts and forward contracts; and interest rates and volatility inputs for interest rate option contracts. Northern Trust evaluates the impact of counterparty credit risk and its own credit risk on the valuation of its derivative instruments. Factors considered include the likelihood of default by Northern Trust and its counterparties, the remaining maturities of the instruments, net exposures after giving effect to master netting agreements, available collateral, and other credit enhancements in determining the appropriate fair value of derivative instruments. The resulting valuation adjustments have not been considered material.

Level 3 – Valuation techniques in which one or more significant inputs are unobservable in the marketplace.

Northern Trust’s Level 3 assets consist of auction rate securities purchased in 2008 from Northern Trust clients. To estimate the fair value of auction rate securities, for which trading is limited and market prices are generally unavailable, Northern Trust developed

 

27


Notes to Consolidated Financial Statements (continued)

 

and maintains a pricing model that discounts estimated cash flows over their estimated remaining lives. Significant inputs to the model include the contractual terms of the securities, credit risk ratings, discount rates, forward interest rates, credit/liquidity spreads, and Northern Trust’s own assumptions about the estimated remaining lives of the securities. The significant unobservable inputs used in the fair value measurement are Northern Trust’s own assumptions about the estimated remaining lives of the securities and the applicable discount rates. Significant increases (decreases) in the estimated remaining lives or the discount rates in isolation would result in a significantly lower (higher) fair value measurement. Level 3 liabilities consist of acquisition related contingent consideration liabilities. The fair values of these contingent consideration liabilities have been determined using an income-based (discounted cash flow) model that incorporates Northern Trust’s own assumptions about business growth rates and applicable discount rates, which represent unobservable inputs to the model. Significant increases (decreases) in projected growth rates in isolation would result in significantly higher (lower) fair value measurements, while significant increases (decreases) in the discount rate in isolation would result in significantly lower (higher) fair value measurements.

Northern Trust believes its valuation methods for its assets and liabilities carried at fair value are appropriate; however, the use of different methodologies or assumptions, particularly as applied to Level 3 assets and liabilities, could have a material effect on the computation of their estimated fair values.

Management of various businesses and departments of Northern Trust (including Corporate Market Risk, Credit Policy, Corporate Financial Management, and relevant business unit personnel) determine the valuation policies and procedures for Level 3 assets and liabilities. Each business and department represents a component of Northern Trust’s business units, and reports to management of their respective business units. Generally, valuation policies are reviewed by management of each business or department. Fair value measurements are performed upon acquisitions of an asset or liability. As necessary, the valuation models are reviewed by management of the appropriate business or department, and adjusted for changes in inputs. Management of each business or department reviews the inputs in order to substantiate the unobservable inputs used in each fair value measurement. When appropriate, management reviews forecasts used in the valuation process in light of other relevant financial projections to understand any variances between current and previous fair value measurements. In certain circumstances, third party information is used to support the fair value measurements. If certain third party information seems inconsistent with consensus views, a review of the information is performed by management of the respective business or department to conclude as to the appropriate fair value of the asset or liability.

 

28


Notes to Consolidated Financial Statements (continued)

 

The following presents the fair values of, and the valuation techniques, significant unobservable inputs, and quantitative information used to develop significant unobservable inputs for, Northern Trust’s Level 3 assets and liabilities as of March 31, 2013.

 

Financial Instrument

   Fair Value     

Valuation
Technique

  

Unobservable Input

  

Range of Lives
and Rates

Auction Rate Securities

   $ 99.6 million       Discounted Cash Flow   

Remaining lives

Discount rates

  

1.3 – 8.6 years

0.3 % – 7.7 %

Contingent Consideration

   $ 51.4 million       Discounted Cash Flow   

Discount rate

Business growth rates

  

10.5%

19% – 35%

 

29


Notes to Consolidated Financial Statements (continued)

 

The following presents assets and liabilities measured at fair value on a recurring basis as of March 31, 2013 and December 31, 2012, segregated by fair value hierarchy level.

 

(In Millions)

   Level 1      Level 2      Level 3      Netting     Assets/Liabilities
at Fair Value
 

March 31, 2013

                                 

Securities

             

Available for Sale

             

U.S. Government

   $ 1,782.4       $ —         $ —         $ —        $ 1,782.4   

Obligations of States and Political Subdivisions

     —           14.7         —           —          14.7   

Government Sponsored Agency

     —           16,859.4         —           —          16,859.4   

Corporate Debt

     —           2,941.8         —           —          2,941.8   

Covered Bonds

     —           1,868.5         —           —          1,868.5   

Supranational and Non-U.S. Agency Bonds

     —           815.7         —           —          815.7   

Residential Mortgage-Backed

     —           70.9         —           —          70.9   

Other Asset-Backed

     —           2,438.7         —           —          2,438.7   

Auction Rate

     —           —           99.6         —          99.6   

Other

     —           280.2         —           —          280.2   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Available for Sale

     1,782.4         25,289.9         99.6         —          27,171.9   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Trading Account

     —           6.9         —           —          6.9   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Available for Sale and Trading

     1,782.4         25,296.8         99.6         —          27,178.8   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Other Assets

             

Derivatives

             

Foreign Exchange Contracts

     —           2,390.5         —           —          2,390.5   

Interest Rate Swaps

     —           283.5         —           —          283.5   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Derivatives

     —           2,674.0         —           (1,725.8     948.2   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Other Liabilities

             

Derivatives

             

Foreign Exchange Contracts

     —           2,298.4         —           —          2,298.4   

Interest Rate Swaps

     —           220.8         —           —          220.8   

Credit Default Swaps

     —           0.1         —           —          0.1   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Derivatives

     —           2,519.3         —           (1,979.9     539.4   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Contingent Consideration

   $ —         $ —         $ 51.4       $ —        $ 51.4   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Note: Northern Trust has elected to net derivative assets and liabilities when legally enforceable master netting agreements exist between Northern Trust and the counterparty. As of March 31, 2013, derivative assets and liabilities shown above also include reductions of $218.1 million and $472.2 million, respectively, as a result of cash collateral received from and deposited with derivative counterparties.

 

30


Notes to Consolidated Financial Statements (continued)

 

(In Millions)

   Level 1      Level 2      Level 3      Netting     Assets/Liabilities
at Fair Value
 

December 31, 2012

                                 

Securities

             

Available for Sale

             

U.S. Government

   $ 1,784.6       $ —         $ —         $ —        $ 1,784.6   

Obligations of States and Political Subdivisions

     —           14.1         —           —          14.1   

Government Sponsored Agency

     —           18,638.8         —           —          18,638.8   

Corporate Debt

     —           2,618.4         —           —          2,618.4   

Covered Bonds

     —           1,748.0         —           —          1,748.0   

Supranational Bonds

     —           1,060.7         —           —          1,060.7   

Residential Mortgage-Backed

     —           92.0         —           —          92.0   

Other Asset-Backed

     —           2,283.9         —           —          2,283.9   

Auction Rate

     —           —           97.8         —          97.8   

Other

     —           305.2         —           —          305.2   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Available for Sale

     1,784.6         26,761.1         97.8         —          28,643.5   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Trading Account

     —           8.0         —           —          8.0   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Available for Sale and Trading

     1,784.6         26,769.1         97.8         —          28,651.5   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Other Assets

             

Derivatives

             

Foreign Exchange Contracts

     —           1,756.6         —           —          1,756.6   

Interest Rate Swaps

     —           310.3         —           —          310.3   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Derivatives

     —           2,066.9         —           (1,101.1     965.8   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Other Liabilities

             

Derivatives

             

Foreign Exchange Contracts

     —           1,772.7         —           —          1,772.7   

Interest Rate Swaps

     —           249.3         —           —          249.3   

Credit Default Swaps

     —           1.0         —           —          1.0   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Derivatives

     —           2,023.0         —           (1,407.5     615.5   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Contingent Consideration

   $ —         $ —         $ 50.1       $ —        $ 50.1   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Note: Northern Trust has elected to net derivative assets and liabilities when legally enforceable master netting agreements exist between Northern Trust and the counterparty. As of December 31, 2012, derivative assets and liabilities shown above also include reductions of $118.6 million and $425.0 million, respectively, as a result of cash collateral received from and deposited with derivative counterparties.

 

31


Notes to Consolidated Financial Statements (continued)

 

The following tables present the changes in Level 3 assets and liabilities for the three months ended March 31, 2013 and 2012.

 

Level 3 Assets (In Millions)

   Auction Rate Securities  

Three Months Ended March 31,

   2013     2012  

Fair Value at January 1

   $ 97.8      $ 178.3   

Total Gains and (Losses):

    

Included in Earnings (1)

     0.1        (1.5

Included in Other Comprehensive Income (2)

     2.7        (0.2

Purchases, Issues, Sales, and Settlements

    

Sales

     —          —     

Settlements

     (1.0     (0.3
  

 

 

   

 

 

 

Fair Value at March 31

   $ 99.6      $ 176.3   
  

 

 

   

 

 

 

 

(1) Realized gains for the three months ended March 31, 2013 of $0.1 million represent gains from redemptions by issuers. Realized losses for the three months ended March 31, 2012 of $1.5 million include $1.6 million of OTTI losses, partially offset by $0.1 million of gains from redemptions by issuers. Gains on redemptions are recorded in interest income and sales and impairment losses are recorded in investment security gains (losses), net, within the consolidated statement of income.
(2) Unrealized losses related to auction rate securities are included in net unrealized gains (losses) on securities available for sale, within the consolidated statement of comprehensive income.

 

Level 3 Liabilities (In Millions)

   Contingent Consideration  

Three Months Ended March 31,

   2013      2012  

Fair Value at January 1

   $ 50.1       $ 56.8   

Total (Gains) and Losses:

     

Included in Earnings (1)

     1.3         1.4   

Included in Other Comprehensive Income (2)

     —           0.4   

Purchases, Issues, Sales, and Settlements

     

Issues

     —           —     

Settlements

     —           —     
  

 

 

    

 

 

 

Fair Value at March 31

   $ 51.4       $ 58.6   
  

 

 

    

 

 

 

Unrealized (Gain) Losses Included in Earnings Related to Financial Instruments Held at March 31 (1)

   $ 1.3       $ 1.4   
  

 

 

    

 

 

 

 

(1) Gains (losses) are recorded in other operating income (expense) within the consolidated statement of income.
(2) Unrealized foreign currency related losses are included in foreign currency translation adjustments within the consolidated statement of comprehensive income.

During the three months ended March 31, 2013 and 2012, there were no transfers into or out of Level 3 assets or liabilities.

Carrying values of assets and liabilities that are not measured at fair value on a recurring basis may be adjusted to fair value in periods subsequent to their initial recognition, for example, to record an impairment of an asset. GAAP requires entities to separately disclose these subsequent fair value measurements and to classify them under the fair value hierarchy.

 

32


Notes to Consolidated Financial Statements (continued)

 

The following provides information regarding those assets measured at fair value on a nonrecurring basis at March 31, 2013 and 2012, segregated by fair value hierarchy level.

 

(In Millions)

   Level 1      Level 2      Level 3      Total Fair Value  

March 31, 2013

                           

Loans (1)

   $ —         $ —         $ 32.4       $ 32.4   

Other Real Estate Owned (2)

     —           —           1.5         1.5   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Assets at Fair Value

   $ —         $ —         $ 33.9       $ 33.9   
  

 

 

    

 

 

    

 

 

    

 

 

 

March 31, 2012

                           

Loans (1)

   $ —         $ —         $ 25.5       $ 25.5   

Other Real Estate Owned (2)

     —           —           1.4         1.4   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Assets at Fair Value

   $ —         $ —         $ 26.9       $ 26.9   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) In accordance with Accounting Standard Codification (ASC) Subtopic 310-10, Northern Trust recorded individually impaired loans at fair value and, for the three months ended March 31, 2013 increased by $1.9 million the level of specific allowances on these loans. During the three months ended March 31, 2012, Northern Trust reduced by $9.5 million the level of specific allowances on these loans.
(2) In accordance with ASC Subtopics 310-40 and 360-10, Northern Trust recorded Other Real Estate Owned (OREO) at fair value and subsequently charged $0.3 million and $0.1 million through other operating expenses during the three months ended March 31, 2013 and March 31, 2012, respectively, to reduce the fair values of these OREO properties.

The fair values of real-estate loan collateral and OREO properties were estimated using a market approach typically supported by third party valuations and property specific fees and taxes, and were subject to adjustments to reflect management’s judgment as to their realizable value. Other loan collateral is valued using a market approach, adjusted for asset specific characteristics, and in limited instances, third party valuations are used. Other loan collateral typically consists of accounts receivable, inventory and equipment.

The following table provides the fair value of, and the valuation technique, significant unobservable inputs, and quantitative information used to develop the significant unobservable inputs for, Northern Trust’s Level 3 assets that were measured at fair value on a nonrecurring basis as of March 31, 2013.

 

Financial Instrument

   Fair Value     

Valuation
Technique

  

Unobservable Input

  

Range of
Discounts
Applied

Loans

   $ 32.4 million       Market Approach    Discount to reflect realizable value    15% – 40%

OREO

   $ 1.5 million       Market Approach    Discount to reflect realizable value    15% – 40%

 

33


Notes to Consolidated Financial Statements (continued)

 

Fair Value of Financial Instruments. GAAP requires disclosure of the estimated fair value of certain financial instruments and the methods and significant assumptions used to estimate fair value. It excludes from this requirement nonfinancial assets and liabilities, as well as a wide range of franchise, relationship, and intangible values that add value to Northern Trust. Accordingly, the required fair value disclosures provide only a partial estimate of the fair value of Northern Trust. Financial instruments recorded at fair value on Northern Trust’s consolidated balance sheet are discussed above. The following methods and assumptions were used in estimating the fair values of financial instruments that are not carried at fair value.

Held to Maturity Securities. The fair values of held to maturity securities were modeled by external pricing vendors, or in limited cases internally, using widely accepted models which are based on an income approach that incorporates current market yield curves.

Loans (excluding lease receivables). The fair value of the loan portfolio was estimated using an income approach (discounted cash flow) that incorporates current market rates offered by Northern Trust as of the date of the consolidated financial statements. The fair values of all loans were adjusted to reflect current assessments of loan collectability.

Federal Reserve and Federal Home Loan Bank Stock. The fair values of Federal Reserve and Federal Home Loan Bank stock are equal to their carrying values which represent redemption value.

Community Development Investments. The fair values of these instruments were estimated using an income approach (discounted cash flow) that incorporates current market rates.

Employee Benefit and Deferred Compensation. These assets include U.S. treasury securities and investments in mutual and collective trust funds held to fund certain supplemental employee benefit obligations and deferred compensation plans. Fair values of U.S. treasury securities were determined using quoted, active market prices for identical securities. The fair values of investments in mutual and collective trust funds were valued at the funds’ net asset values based on a market approach.

Savings Certificates and Other Time Deposits. The fair values of these instruments were estimated using an income approach (discounted cash flow) that incorporates market interest rates currently offered by Northern Trust for deposits with similar maturities.

Senior Notes, Subordinated Debt, and Floating Rate Capital Debt. Fair values were determined using a market approach based on quoted market prices, when available. If quoted market prices were not available, fair values were based on quoted market prices for comparable instruments.

Federal Home Loan Bank Borrowings. The fair values of these instruments were estimated using an income approach (discounted cash flow) that incorporates market interest rates available to Northern Trust.

Loan Commitments. The fair values of loan commitments represent the estimated costs to terminate or otherwise settle the obligations with a third party adjusted for any related allowance for credit losses.

 

34


Notes to Consolidated Financial Statements (continued)

 

Standby Letters of Credit. The fair values of standby letters of credit are measured as the amount of unamortized fees on these instruments, inclusive of the related allowance for credit losses. Fees are determined by applying basis points to the principal amounts of the letters of credit.

Financial Instruments Valued at Carrying Value. Due to their short maturity, the carrying values of certain financial instruments approximated their fair values. These financial instruments include cash and due from banks; federal funds sold and securities purchased under agreements to resell, interest-bearing deposits with banks, Federal Reserve deposits and other interest-bearing assets; client security settlement receivables; non-U.S. offices interest-bearing deposits; federal funds purchased; securities sold under agreements to repurchase; and other borrowings (includes term federal funds purchased, and other short-term borrowings). As required by GAAP, the fair values required to be disclosed for demand, noninterest-bearing, savings, and money market deposits must equal the amounts disclosed in the consolidated balance sheet, even though such deposits are typically priced at a premium in banking industry consolidations.

 

35


Notes to Consolidated Financial Statements (continued)

 

The following tables summarize the fair values of financial instruments.

 

(In Millions)

   March 31, 2013  
     Book Value      Total Fair
Value
     Fair Value  
         Level 1      Level 2      Level 3  

Assets

              

Cash and Due from Banks

   $ 3,773.5       $ 3,773.5       $ 3,773.5       $ —         $ —     

Federal Funds Sold and Resell Agreements

     251.5         251.5         —           251.5         —     

Interest-Bearing Deposits with Banks

     18,694.8         18,694.8         —           18,694.8         —     

Federal Reserve Deposits and Other Interest-Bearing

     5,828.6         5,828.6         —           5,828.6         —     

Securities

              

Available for Sale (1)

     27,171.9         27,171.9         1,782.4         25,289.9         99.6   

Held to Maturity

     2,931.7         2,943.3         —           2,943.3         —     

Trading Account

     6.9         6.9         —           6.9         —     

Loans (excluding Leases)

              

Held for Investment

     27,567.1         27,588.2         —           —           27,588.2   

Held for Sale

     1.1         1.1         —           —           1.1   

Client Security Settlement Receivables

     816.5         816.5         —           816.5         —     

Other Assets

              

Federal Reserve and Federal Home Loan Bank Stock

     203.7         203.7         —           203.7         —     

Community Development Investments

     241.5         260.3         —           260.3         —     

Employee Benefit and Deferred Compensation

     133.4         135.4         92.3         43.1         —     

Liabilities

              

Deposits

              

Demand, Noninterest-Bearing, Savings and Money Market

   $ 33,703.6       $ 33,703.6       $ 33,703.6       $ —         $ —     

Savings Certificates and Other Time

     2,296.1         2,304.8         —           2,304.8         —     

Non U.S. Offices Interest-Bearing

     39,822.4         39,822.4         —           39,822.4         —     

Federal Funds Purchased

     1,320.5         1,320.5         —           1,320.5         —     

Securities Sold under Agreements to Repurchase

     490.2         490.2         —           490.2         —     

Other Borrowings

     1,435.3         1,435.3         —           1,435.3         —     

Senior Notes

     2,402.0         2,495.9         —           2,495.9         —     

Long Term Debt (excluding Leases)

              

Subordinated Debt

     823.2         850.0         —           850.0         —     

Federal Home Loan Bank Borrowings

     335.0         342.4         —           342.4         —     

Floating Rate Capital Debt

     277.1         232.3         —           232.3         —     

Other Liabilities

              

Standby Letters of Credit

     60.1         60.1         —           —           60.1   

Contingent Consideration

     51.4         51.4         —           —           51.4   

Loan Commitments

     37.7         37.7         —           —           37.7   

Derivative Instruments

              

Asset/Liability Management

              

Foreign Exchange Contracts

              

Assets

   $ 53.4       $ 53.4       $ —         $ 53.4       $ —     

Liabilities

     18.2         18.2            18.2         —     

Interest Rate Swaps

              

Assets

     116.6         116.6         —           116.6         —     

Liabilities

     61.0         61.0         —           61.0         —     

Credit Default Swaps

              

Liabilities

     0.1         0.1         —           0.1         —     

Client-Related and Trading

              

Foreign Exchange Contracts

              

Assets

     2,337.1         2,337.1         —           2,337.1         —     

Liabilities

     2,280.2         2,280.2         —           2,280.2         —     

Interest Rate Swaps

              

Assets

     166.9         166.9         —           166.9         —     

Liabilities

     159.8         159.8         —           159.8         —     

 

(1) Refer to the table located on page 30 for the disaggregation of available for sale securities.

 

36


Notes to Consolidated Financial Statements (continued)

 

(In Millions)

   December 31, 2012  
     Book
Value
     Total
Fair Value
     Fair Value  
         Level 1      Level 2      Level 3  

Assets

              

Cash and Due from Banks

   $ 3,752.7       $ 3,752.7       $ 3,752.7       $ —         $ —     

Federal Funds Sold and Resell Agreements

     60.8         60.8         —           60.8         —     

Interest-Bearing Deposits with Banks

     18,803.5         18,803.5         —           18,803.5         —     

Federal Reserve Deposits and Other Interest-Bearing

     7,619.7         7,619.7         —           7,619.7         —     

Securities

              

Available for Sale (1)

     28,643.5         28,643.5         1,784.6         26,761.1         97.8   

Held to Maturity

     2,382.0         2,394.8         —           2,394.8         —     

Trading Account

     8.0         8.0         —           8.0         —     

Loans (excluding Leases)

              

Held for Investment

     28,165.4         28,220.2         —           —           28,220.2   

Held for Sale

     11.7         11.7         —           —           11.7   

Client Security Settlement Receivables

     2,049.1         2,049.1         —           2,049.1         —     

Other Assets

              

Federal Reserve and Federal Home Loan Bank Stock

     197.6         197.6         —           197.6         —     

Community Development Investments

     253.2         275.1         —           275.1         —     

Employee Benefit and Deferred Compensation

     121.3         126.1         86.7         39.4         —     

Liabilities

              

Deposits

              

Demand, Noninterest-Bearing, Savings and Money Market

   $ 39,221.5       $ 39,221.5       $ 39,221.5       $ —         $ —     

Savings Certificates and Other Time

     2,466.1         2,746.7         —           2,746.7         —     

Non U.S. Offices Interest-Bearing

     39,720.2         39,720.2         —           39,720.2         —     

Federal Funds Purchased

     780.2         780.2         —           780.2         —     

Securities Sold under Agreements to Repurchase

     699.8         699.8         —           699.8         —     

Other Borrowings

     367.4         367.4         —           367.4         —     

Senior Notes

     2,405.8         2,513.4         —           2,513.4         —     

Long Term Debt (excluding Leases)

              

Subordinated Debt

     1,045.4         1,065.3         —           1,065.3         —     

Federal Home Loan Bank Borrowings

     335.0         345.4         —           345.4         —     

Floating Rate Capital Debt

     277.0         228.0         —           228.0         —     

Other Liabilities

              

Standby Letters of Credit

     60.5         60.5         —           —           60.5   

Contingent Consideration

     50.1         50.1         —           —           50.1   

Loan Commitments

     38.9         38.9         —           —           38.9   

Derivative Instruments

              

Asset/Liability Management

              

Foreign Exchange Contracts

              

Assets

   $ 21.3       $ 21.3       $ —         $ 21.3       $ —     

Liabilities

     42.3         42.3         —           42.3         —     

Interest Rate Swaps

              

Assets

     129.7         129.7         —           129.7         —     

Liabilities

     75.3         75.3         —           75.3         —     

Credit Default Swaps

              

Liabilities

     1.0         1.0         —           1.0         —     

Client-Related and Trading

              

Foreign Exchange Contracts

              

Assets

     1,735.3         1,735.3         —           1,735.3         —     

Liabilities

     1,730.4         1,730.4         —           1,730.4         —     

Interest Rate Swaps

              

Assets

     180.6         180.6         —           180.6         —     

Liabilities

     174.0         174.0         —           174.0         —     

 

(1) Refer to the table located on page 31 for the disaggregation of available for sale securities.

 

37


Notes to Consolidated Financial Statements (continued)

 

4. Securities – The following tables provide the amortized cost and fair values of securities at March 31, 2013 and December 31, 2012.

 

                                                               

Securities Available for Sale

   March 31, 2013  
     Amortized
Cost
     Gross Unrealized      Fair
Value
 

(In Millions)

      Gains      Losses     

U.S. Government

   $ 1,748.1       $ 34.3       $ —         $ 1,782.4   

Obligations of States and Political Subdivisions

     13.9         0.8         —           14.7   

Government Sponsored Agency

     16,747.3         116.7         4.6         16,859.4   

Corporate Debt

     2,927.7         17.4         3.3         2,941.8   

Covered Bonds

     1,820.6         47.9         —           1,868.5   

Supranational and Non-U.S. Agency Bonds

     808.7         7.0         —           815.7   

Residential Mortgage-Backed

     78.7         0.1         7.9         70.9   

Other Asset-Backed

     2,436.0         3.1         0.4         2,438.7   

Auction Rate

     98.7         2.3         1.4         99.6   

Other

     279.3         0.9         —           280.2   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 26,959.0       $ 230.5       $ 17.6       $ 27,171.9   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

                                                               

Securities Held to Maturity

   March 31, 2013  
     Amortized
Cost
     Gross Unrealized      Fair
Value
 

(In Millions)

      Gains      Losses     

Obligations of States and Political Subdivisions

   $ 292.7       $ 15.6       $ —         $ 308.3   

Government Sponsored Agency

     80.2         2.7         —           82.9   

Non-U.S. Government Debt

     210.8         —           —           210.8   

Certificates of Deposit

     2,069.9         0.2         0.9         2,069.2   

Other

     278.1         1.0         7.0         272.1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,931.7       $ 19.5       $ 7.9       $ 2,943.3   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

                                                               

Securities Available for Sale

   December 31, 2012  
     Amortized
Cost
     Gross Unrealized      Fair
Value
 

(In Millions)

      Gains      Losses     

U.S. Government

   $ 1,747.9       $ 36.7       $ —         $ 1,784.6   

Obligations of States and Political Subdivisions

     13.9         0.2         —           14.1   

Government Sponsored Agency

     18,520.6         122.2         4.0         18,638.8   

Corporate Debt

     2,602.4         18.1         2.1         2,618.4   

Covered Bonds

     1,697.1         51.0         0.1         1,748.0   

Supranational Bonds

     1,053.9         7.0         0.2         1,060.7   

Residential Mortgage-Backed

     102.4         0.4         10.8         92.0   

Other Asset-Backed

     2,280.0         4.3         0.4         2,283.9   

Auction Rate

     99.6         2.1         3.9         97.8   

Other

     304.4         0.8         —           305.2   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 28,422.2       $ 242.8       $ 21.5       $ 28,643.5   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

                                                               

Securities Held to Maturity

   December 31, 2012  
     Amortized
Cost
     Gross Unrealized      Fair
Value
 

(In Millions)

      Gains      Losses     

Obligations of States and Political Subdivisions

   $ 329.3       $ 17.2       $ —         $ 346.5   

Government Sponsored Agency

     112.9         3.8         —           116.7   

Non-U.S. Government Debt

     205.0         —           —           205.0   

Certificates of Deposit

     1,667.6         0.2         0.6         1,667.2   

Other

     67.2         0.3         8.1         59.4   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,382.0       $ 21.5       $ 8.7       $ 2,394.8   
  

 

 

    

 

 

    

 

 

    

 

 

 

Securities held to maturity consist of debt securities that management intends to, and Northern Trust has the ability to, hold until maturity.

 

38


Notes to Consolidated Financial Statements (continued)

 

The following table provides the remaining maturity of securities as of March 31, 2013.

 

(In Millions)

   Amortized
Cost
     Fair
Value
 

Available for Sale

     

Due in One Year or Less

   $ 6,818.3       $ 6,839.7   

Due After One Year Through Five Years

     17,678.8         17,850.1   

Due After Five Years Through Ten Years

     1,748.5         1,762.7   

Due After Ten Years

     713.4         719.4   
  

 

 

    

 

 

 

Total

     26,959.0         27,171.9   
  

 

 

    

 

 

 

Held to Maturity

     

Due in One Year or Less

     2,430.0         2,431.9   

Due After One Year Through Five Years

     429.3         440.4   

Due After Five Years Through Ten Years

     37.9         41.9   

Due After Ten Years

     34.5         29.1   
  

 

 

    

 

 

 

Total

   $ 2,931.7       $ 2,943.3   
  

 

 

    

 

 

 

Note: Mortgage-backed and asset-backed securities are included in the above table taking into account anticipated future prepayments.

Investment Security Gains and Losses. Net investment security gains of $0.2 million were recognized for the three months ended March 31, 2013, representing net realized gains from the sale of securities. Gross proceeds from the sale of securities during the three months ended March 31, 2013 of $55.7 million resulted in gross realized gains of $0.2 million. Net investment security losses of $2.4 million were recognized for the three months ended March 31, 2012 and included OTTI losses of $3.1 million and net realized gains of $0.7 million from the sale of securities. Gross proceeds from the sale of securities during the three months ended March 31, 2012 of $1.3 billion resulted in gross realized gains of $1.6 million and gross realized losses of $0.9 million.

Securities with Unrealized Losses. The following tables provide information regarding securities that had been in a continuous unrealized loss position for less than 12 months and for 12 months or longer as of March 31, 2013 and December 31, 2012.

 

Securities with Unrealized Losses as of March 31, 2013

   Less than 12 Months      12 Months or Longer      Total  

(In Millions)

   Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 

Government Sponsored Agency

   $ 980.1       $ 2.2       $ 278.2       $ 2.4       $ 1,258.3       $ 4.6   

Corporate Debt

     760.2         3.2         25.0         0.1         785.2         3.3   

Residential Mortgage-Backed

     —           —           68.1         7.9         68.1         7.9   

Other Asset-Backed

     624.3         0.3         25.5         0.1         649.8         0.4   

Certificates of Deposit

     1,081.9         0.9         —           —           1,081.9         0.9   

Auction Rate

     1.0         0.1         15.5         1.3         16.5         1.4   

Other

     10.5         2.5         40.2         4.5         50.7         7.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,458.0       $ 9.2       $ 452.5       $ 16.3       $ 3,910.5       $ 25.5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

39


Notes to Consolidated Financial Statements (continued)

 

Securities with Unrealized Losses as of December 31, 2012

   Less than 12 Months      12 Months or Longer      Total  

(In Millions)

   Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 

Government Sponsored Agency

   $ 482.2       $ 1.0       $ 1,171.8       $ 3.0       $ 1,654.0       $ 4.0   

Corporate Debt

     441.5         2.0         50.0         0.1         491.5         2.1   

Covered Bonds

     20.1         0.1         —           —           20.1         0.1   

Supranational Bonds

     113.8         0.2         —           —           113.8         0.2   

Residential Mortgage-Backed

     —           —           84.7         10.8         84.7         10.8   

Other Asset-Backed

     146.1         0.1         40.0         0.3         186.1         0.4   

Certificates of Deposit

     1,178.8         0.6         —           —           1,178.8         0.6   

Auction Rate

     2.7         0.3         41.0         3.6         43.7         3.9   

Other

     9.3         1.9         43.8         6.2         53.1         8.1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,394.5       $ 6.2       $ 1,431.3       $ 24.0       $ 3,825.8       $ 30.2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As of March 31, 2013, 245 securities with a combined fair value of $3.9 billion were in an unrealized loss position, with their unrealized losses totaling $25.5 million. Unrealized losses on residential mortgage-backed securities totaling $7.9 million reflect the impact of wider credit and liquidity spreads on the valuations of 9 residential mortgage-backed securities since purchase, with $68.1 million having been in an unrealized loss position for more than 12 months. Residential mortgage-backed securities at March 31, 2013 had a total amortized cost and fair value of $78.7 million and $70.9 million, respectively. Securities classified as “other asset-backed” had average lives less than 5 years, and 99% were rated triple-A.

Unrealized losses of $4.6 million related to government sponsored agency securities are primarily attributable to changes in market rates since their purchase. The majority of the $7.0 million of unrealized losses in securities classified as “other” at March 31, 2013 relate to securities which Northern Trust purchases for compliance with the Community Reinvestment Act (CRA). Unrealized losses on these CRA related other securities are attributable to their purchase at below market rates for the purpose of supporting institutions and programs that benefit low to moderate income communities within Northern Trust’s market area. Unrealized losses of $1.4 million related to auction rate securities primarily reflect reduced market liquidity as a majority of auctions continue to fail preventing holders from liquidating their investments at par. Unrealized losses of $3.3 million within corporate debt securities primarily reflect widened credit spreads; 47% of the corporate debt portfolio is backed by guarantees provided by U.S. and non-U.S. governmental entities. The remaining unrealized losses on Northern Trust’s securities portfolio as of March 31, 2013 are attributable to changes in overall market interest rates, increased credit spreads, or reduced market liquidity.

Security impairment reviews are conducted quarterly to identify and evaluate securities that have indications of possible OTTI. A determination as to whether a security’s decline in market value is other-than-temporary takes into consideration numerous factors and the relative significance of any single factor can vary by security. Factors Northern Trust considers in determining whether impairment is other-than-temporary include, but are not

 

40


Notes to Consolidated Financial Statements (continued)

 

limited to, the length of time the security has been impaired; the severity of the impairment; the cause of the impairment and the financial condition and near-term prospects of the issuer; activity in the market of the issuer which may indicate adverse credit conditions; Northern Trust’s intent regarding the sale of the security as of the balance sheet date; and the likelihood that it will not be required to sell the security for a period of time sufficient to allow for the recovery of the security’s amortized cost basis. For each security meeting the requirements of Northern Trust’s internal screening process, an extensive review is conducted to determine if OTTI has occurred.

While all securities are considered, the following describes Northern Trust’s process for identifying credit impairment within non-agency residential mortgage-backed securities, the security type for which Northern Trust has previously recognized the majority of its OTTI. To determine if an unrealized loss on a non-agency residential mortgage-backed security is other-than-temporary, economic models are used to perform cash flow analyses by developing multiple scenarios in order to create reasonable forecasts of the security’s future performance using available data including servicers’ loan charge off patterns, prepayment speeds, annualized default rates, each security’s current delinquency pipeline, the delinquency pipeline’s growth rate, the roll rate from delinquency to default, loan loss severities and historical performance of like collateral, along with Northern Trust’s outlook for the housing market and the overall economy. If the present value of future cash flows projected as a result of this analysis is less than the current amortized cost of the security, a credit related OTTI loss is recorded to earnings equal to the difference between the two amounts.

Impairments of non-agency residential mortgage-backed securities are influenced by a number of factors, including but not limited to, U.S. economic and housing market performance, security credit enhancement level, insurance coverage, year of origination, and type of collateral. The factors used in estimating losses on non-agency residential mortgage-backed securities vary by year of origination and type of collateral. As of March 31, 2013, loss estimates for subprime, Alt-A, prime and 2nd lien collateral portfolios were developed using default roll rates, determined primarily by the stage of delinquency of the underlying instrument, that generally assumed ultimate default rates approximating 5% to 30% for current loans; 30% for loans 30 to 60 days delinquent; 80% for loans 60 to 90 days delinquent; 90% for loans delinquent greater than 90 days; and 100% for OREO properties and loans that are in foreclosure. March 31, 2013 amortized cost, weighted average ultimate default rates, and impairment severity rates for the non-agency residential mortgage-backed securities portfolio, by security type, are provided in the following table.

 

41


Notes to Consolidated Financial Statements (continued)

 

                  Loss Severity Rates  

Security Type

   Amortized
Cost
     Weighted Average
Ultimate Default Rates
    Low     High     Weighted
Average
 

Prime

   $ 8.2         18.2     34.4     45.0     41.5

Alt-A

     12.7         41.3        67.7        67.7        67.7   

Subprime

     41.7         48.7        57.0        85.6        79.7   

2nd Lien

     16.1         33.3        98.9        99.0        99.0   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total Non-Agency Residential Mortgage-Backed Securities

   $ 78.7         40.8     34.4     99.0     77.7
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Northern Trust’s processes for identifying credit impairment within auction rate securities are largely consistent with the processes utilized for non-agency residential mortgage-backed securities and include analyses of expected loss severities and default rates adjusted for the type of underlying loan and the presence of government guarantees, as applicable. There were no OTTI losses recognized during the three months ended March 31, 2013. OTTI losses of $3.1 million were recorded for the three months ended March 31, 2012, of which $1.5 million related to non-agency residential mortgage-backed securities and $1.6 million related to auction rate securities.

Credit Losses on Debt Securities. The table below provides information regarding total other-than-temporarily impaired securities, including noncredit-related amounts recognized in other comprehensive income and net impairment losses recognized in earnings, for the three months ended March 31, 2013 and 2012.

 

     Three Months Ended
March 31,
 

(In Millions)

   2013      2012  

Changes in OTTI Losses (1)

   $ —         $ (3.1

Noncredit-related Losses Recorded in / (Reclassified from) OCI (2)

     —           —     
  

 

 

    

 

 

 

Net Impairment Losses Recognized in Earnings

   $ —         $ (3.1
  

 

 

    

 

 

 

 

(1) For initial other-than-temporary impairments in the respective period, the balance includes the excess of the amortized cost over the fair value of the impaired securities. For subsequent impairments of the same security, the balance includes any additional changes in fair value of the security subsequent to its most recently recorded OTTI.
(2) For initial other-than-temporary impairments in the respective period, the balance includes the portion of the excess of amortized cost over the fair value of the impaired securities that was recorded in OCI. For subsequent impairments of the same security, the balance includes additional changes in OCI for that security subsequent to its most recently recorded OTTI.

 

42


Notes to Consolidated Financial Statements (continued)

 

Provided in the table below are the cumulative credit-related losses recognized in earnings on debt securities other-than-temporarily impaired.

 

     Three Months Ended
March 31,
 

(In Millions)

   2013     2012  

Cumulative Credit-Related Losses on Securities Held – Beginning of Period

   $ 42.3      $ 68.2   

Plus: Losses on Newly Identified Impairments

     —          1.6   

         Additional Losses on Previously Identified Impairments

     —          1.5   

Less: Current and Prior Period Losses on Securities Sold During the Period

     (33.5     (26.5
  

 

 

   

 

 

 

Cumulative Credit-Related Losses on Securities Held – End of Period

   $ 8.8      $ 44.8   
  

 

 

   

 

 

 

The table below provides information regarding debt securities held as of March 31, 2013 and December 31, 2012, for which an OTTI loss has been recognized in the current period or previously.

 

(In Millions)

   March 31,
2013
    December 31,
2012
 

Fair Value

   $ 42.2      $ 51.5   

Amortized Cost Basis

     47.6        59.0   
  

 

 

   

 

 

 

Noncredit-related Losses Recognized in OCI

     (5.4     (7.5

Tax Effect

     2.0        2.8   
  

 

 

   

 

 

 

Amount Recorded in OCI

   $ (3.4   $ (4.7
  

 

 

   

 

 

 

5. Loans and Leases – Amounts outstanding for loans and leases, by segment and class, are shown below.

 

(In Millions)

   March 31,
2013
    December 31,
2012
 

Commercial

    

Commercial and Institutional

   $ 7,255.6      $ 7,468.5   

Commercial Real Estate

     2,822.9        2,859.8   

Lease Financing, net

     1,005.6        1,035.0   

Non-U.S.

     1,152.7        1,192.3   

Other

     445.2        341.6   
  

 

 

   

 

 

 

Total Commercial

     12,682.0        12,897.2   
  

 

 

   

 

 

 

Personal

    

Residential Real Estate

     10,147.9        10,375.2   

Private Client

     5,900.0        6,130.1   

Other

     133.0        102.0   
  

 

 

   

 

 

 

Total Personal

     16,180.9        16,607.3   
  

 

 

   

 

 

 

Total Loans and Leases

     28,862.9        29,504.5   
  

 

 

   

 

 

 

Allowance for Credit Losses Assigned to Loans and Leases

     (294.1     (297.9
  

 

 

   

 

 

 

Net Loans and Leases

   $ 28,568.8      $ 29,206.6   
  

 

 

   

 

 

 

Residential real estate loans consist of conventional home mortgages and equity credit lines that generally require a loan to collateral value of no more than 65% to 80% at inception. Northern Trust’s equity credit line products have draw periods of up to 10 years

 

43


Notes to Consolidated Financial Statements (continued)

 

and a balloon payment of any outstanding balance is due at maturity. Payments are interest only with variable interest rates. Northern Trust does not offer equity credit lines that include an option to convert the outstanding balance to an amortizing payment loan. As of March 31, 2013 and December 31, 2012, equity credit lines totaled $2.2 billion and $2.3 billion, respectively, and equity credit lines for which the first liens were held by Northern Trust at those dates represented 86% of the respective totals.

Included within the non-U.S., commercial-other, and personal-other classes are short duration advances primarily related to the processing of custodied client investments that totaled $1.6 billion and $1.5 billion at March 31, 2013 and December 31, 2012, respectively. Demand deposits reclassified as loan balances totaled $234.3 million and $224.7 million at March 31, 2013 and December 31, 2012, respectively. Loans classified as held for sale totaled $1.1 million and $11.7 million at March 31, 2013 and December 31, 2012, respectively.

Credit Quality Indicators. Credit quality indicators are statistics, measurements or other metrics that provide information regarding the relative credit risk of loans and leases. Northern Trust utilizes a variety of credit quality indicators to assess the credit risk of loans and leases at the segment, class, and individual credit exposure levels.

As part of its credit process, Northern Trust utilizes an internal borrower risk rating system to support identification, approval, and monitoring of credit risk. Borrower risk ratings are used in credit underwriting, management reporting, and the calculation of credit loss allowances and economic capital.

Risk ratings are used for ranking the credit risk of borrowers and the probability of their default. Each borrower is rated using one of a number of ratings models, which consider both quantitative and qualitative factors. The ratings models vary among classes of loans and leases in order to capture the unique risk characteristics inherent within each particular type of credit exposure. Provided below are the more significant performance indicator attributes considered within Northern Trust’s borrower rating models, by loan and lease class.

 

   

Commercial and Institutional: leverage, profit margin, liquidity, return on assets, asset size, and capital levels;

 

   

Commercial Real Estate: debt service coverage and leasing status for income-producing properties; loan-to-value and loan-to-cost ratios, leasing status, and guarantor support for loans associated with construction and development properties;

 

   

Lease Financing and Commercial-Other: leverage and profit margin levels;

 

   

Non-U.S.: entity type, liquidity, size, and leverage;

 

   

Residential Real Estate: payment history, credit bureau scores, and cash flow-to-debt and net worth ratios;

 

   

Private Client: cash flow-to-debt and net worth ratios, leverage, and profit margin levels; and

 

   

Personal-Other: cash flow-to-debt and net worth ratios.

 

44


Notes to Consolidated Financial Statements (continued)

 

While the criteria vary by model, the objective is for the borrower ratings to be consistent in both the measurement and ranking of risk. Each model is calibrated to a master rating scale to support this consistency. Ratings for borrowers not in default range from “1” for the strongest credits to “7” for the weakest non-defaulted credits. Ratings of “8” or “9” are used for defaulted borrowers. Borrower risk ratings are monitored and are revised when events or circumstances indicate a change is required. Risk ratings are validated at least annually.

Loan and lease segment and class balances as of March 31, 2013 and December 31, 2012 are provided below, segregated by borrower ratings into “1 to 3”, “4 to 5” and “6 to 9” (watch list), categories.

 

     March 31, 2013      December 31, 2012  

(In Millions)

   1 to 3
Category
     4 to 5
Category
     6 to 9
Category
(Watch List)
     Total      1 to 3
Category
     4 to 5
Category
     6 to 9
Category
(Watch List)
     Total  

Commercial

                       

Commercial and Institutional

   $ 4,216.7       $ 2,902.3       $ 136.6       $ 7,255.6       $ 4,291.8       $ 3,040.6       $ 136.1       $ 7,468.5   

Commercial Real Estate

     918.6         1,663.3         241.0         2,822.9         888.6         1,710.9         260.3         2,859.8   

Lease Financing, net

     623.1         377.1         5.4         1,005.6         647.1         382.3         5.6         1,035.0   

Non-U.S.

     443.8         708.9         —           1,152.7         542.7         646.6         3.0         1,192.3   

Other

     264.7         180.5         —           445.2         167.2         174.4         —           341.6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Commercial

     6,466.9         5,832.1         383.0         12,682.0         6,537.4         5,954.8         405.0         12,897.2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Personal

                       

Residential Real Estate

     2,936.4         6,641.7         569.8         10,147.9         3,003.3         6,868.2         503.7         10,375.2   

Private Client

     3,564.4         2,309.1         26.5         5,900.0         3,741.3         2,365.4         23.4         6,130.1   

Other

     79.1         53.9         —           133.0         50.0         52.0         —           102.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Personal

     6,579.9         9,004.7         596.3         16,180.9         6,794.6         9,285.6         527.1         16,607.3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Loans and Leases

   $ 13,046.8       $ 14,836.8       $ 979.3       $ 28,862.9       $ 13,332.0       $ 15,240.4       $ 932.1       $ 29,504.5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans and leases in the “1 to 3” category are expected to exhibit minimal to modest probabilities of default and are characterized by borrowers having the strongest financial qualities, including above average financial flexibility, cash flows and capital levels. Borrowers assigned these ratings are anticipated to experience very little to moderate financial pressure in adverse down cycle scenarios. As a result of these characteristics, borrowers within this category exhibit a minimal to modest likelihood of loss.

Loans and leases in the “4 to 5” category are expected to exhibit moderate to acceptable probabilities of default and are characterized by borrowers with less financial flexibility than those in the “1 to 3” category. Cash flows and capital levels are generally sufficient to allow for borrowers to meet current requirements, but have reduced cushion in adverse down cycle scenarios. As a result of these characteristics, borrowers within this category exhibit a moderate likelihood of loss.

Loans and leases in the watch list category have elevated credit risk profiles that are monitored through internal watch lists, and consist of credits with borrower ratings of “6 – 9”. These credits, which include all nonperforming credits, are expected to exhibit minimally acceptable probabilities of default, elevated risk of default, or are currently in default. Borrowers associated with these risk profiles that are not currently in default have limited financial flexibility. Cash flows and capital levels range from acceptable to

 

45


Notes to Consolidated Financial Statements (continued)

 

potentially insufficient to meet current requirements, particularly in adverse down cycle scenarios. As a result of these characteristics, borrowers in this category exhibit an elevated to probable likelihood of loss.

Recognition of Income. Interest income on loans is recorded on an accrual basis unless, in the opinion of management, there is a question as to the ability of the debtor to meet the terms of the loan agreement, or interest or principal is more than 90 days contractually past due and the loan is not well-secured and in the process of collection. At the time a loan is determined to be nonperforming, interest accrued but not collected is reversed against interest income of the current period and the loan is classified as nonperforming. Interest collected on nonperforming loans is applied to principal unless, in the opinion of management, collectability of principal is not in doubt. Management’s assessment of the indicators of loan and lease collectability, and its policies relative to the recognition of interest income, including the suspension and subsequent resumption of income recognition, do not meaningfully vary between loan and lease classes. Nonperforming loans are returned to performing status when factors indicating doubtful collectability no longer exist. Factors considered in returning a loan to performing status are consistent across all classes of loans and leases and, in accordance with regulatory guidance, relate primarily to expected payment performance. Loans are eligible to be returned to performing status when: (i) no principal or interest that is due is unpaid and repayment of the remaining contractual principal and interest is expected or (ii) the loan has otherwise become well-secured (possessing realizable value sufficient to discharge the debt, including accrued interest, in full) and is in the process of collection (through action reasonably expected to result in debt repayment or restoration to a current status in the near future). A loan that has not been brought fully current may be restored to performing status provided there has been a sustained period of repayment performance (generally a minimum of six months) by the borrower in accordance with the contractual terms, and Northern Trust is reasonably assured of repayment within a reasonable period of time.

Additionally, a loan that has been formally restructured so as to be reasonably assured of repayment and performance according to its modified terms may be returned to accrual status, provided there was a well-documented credit evaluation of the borrower’s financial condition and prospects of repayment under the revised terms and there has been a sustained period of repayment performance (generally a minimum of six months) under the revised terms.

 

46


Notes to Consolidated Financial Statements (continued)

 

Past due status is based on how long since the contractual due date a principal or interest payment has been past due. For disclosure purposes, loans that are 29 days past due or less are reported as current. The following tables provide balances and delinquency status of performing and nonperforming loans and leases by segment and class, as well as the total other real estate owned and nonperforming asset balances, as of March 31, 2013 and December 31, 2012.

 

March 31, 2013

                                                

(In Millions)

   Current      30-59 Days
Past Due
     60-89 Days
Past Due
     90 Days or
More Past Due
     Total
Performing
     Nonperforming      Total Loans
and Leases
 

Commercial

                    

Commercial and Institutional

   $ 7,219.3       $ 9.2       $ 3.0       $ 3.0       $ 7,234.5       $ 21.1       $ 7,255.6   

Commercial Real Estate

     2,739.9         19.4         7.9         2.0         2,769.2         53.7         2,822.9   

Lease Financing, net

     1,005.6         —           —           —           1,005.6         —           1,005.6   

Non-U.S.

     1,152.7         —           —           —           1,152.7         —           1,152.7   

Other

     445.2         —           —           —           445.2         —           445.2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Commercial

     12,562.7         28.6         10.9         5.0         12,607.2         74.8         12,682.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Personal

                    

Residential Real Estate

     9,873.4         84.8         11.8         4.3         9,974.3         173.6         10,147.9   

Private Client

     5,849.9         38.0         7.0         1.8         5,896.7         3.3         5,900.0   

Other

     133.0         —           —           —           133.0         —           133.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Personal

     15,856.3         122.8         18.8         6.1         16,004.0         176.9         16,180.9   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Loans and Leases

   $ 28,419.0       $ 151.4       $ 29.7       $ 11.1       $ 28,611.2       $ 251.7       $ 28,862.9   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other Real Estate Owned

                    10.5      
                 

 

 

    

Total Nonperforming Assets

                  $ 262.2      
                 

 

 

    

 

December 31, 2012

                                                

(In Millions)

   Current      30-59 Days
Past Due
     60-89 Days
Past Due
     90 Days or
More Past Due
     Total
Performing
     Nonperforming      Total Loans
and Leases
 

Commercial

                    

Commercial and Institutional

   $ 7,433.4       $ 6.4       $ 5.5       $ 1.6       $ 7,446.9       $ 21.6       $ 7,468.5   

Commercial Real Estate

     2,782.0         6.9         13.1         1.4         2,803.4         56.4         2,859.8   

Lease Financing, net

     1,035.0         —           —           —           1,035.0         —           1,035.0   

Non-U.S.

     1,192.3         —           —           —           1,192.3         —           1,192.3   

Other

     341.6         —           —           —           341.6         —           341.6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Commercial

     12,784.3         13.3         18.6         3.0         12,819.2         78.0         12,897.2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Personal

                    

Residential Real Estate

     10,096.3         68.1         25.7         10.5         10,200.6         174.6         10,375.2   

Private Client

     6,091.3         14.8         16.3         5.5         6,127.9         2.2         6,130.1   

Other

     102.0         —           —           —           102.0         —           102.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Personal

     16,289.6         82.9         42.0         16.0         16,430.5         176.8         16,607.3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Loans and Leases

   $ 29,073.9       $ 96.2       $ 60.6       $ 19.0       $   29,249.7       $ 254.8       $ 29,504.5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other Real Estate Owned

                    20.3      
                 

 

 

    

Total Nonperforming Assets

                  $ 275.1      
                 

 

 

    

Impaired Loans. A loan is considered to be impaired when, based on current information and events, management determines that it is probable that Northern Trust will be unable to collect all amounts due according to the contractual terms of the loan agreement. A loan is also considered to be impaired if its terms have been modified as a concession resulting from the debtor’s financial difficulties, referred to as a troubled debt restructuring (TDR) and discussed in further detail below. Impairment is measured based upon the loan’s market price, the present value of expected future cash flows, discounted at the loan’s effective interest rate, or the fair value of the collateral if the loan is collateral

 

47


Notes to Consolidated Financial Statements (continued)

 

dependent. If the loan valuation is less than the recorded value of the loan, based on the certainty of loss, either a specific allowance is established or a charge-off is recorded for the difference. Smaller balance (individually less than $250,000) homogeneous loans are collectively evaluated for impairment and excluded from impaired loan disclosures as allowed under applicable accounting standards. Northern Trust’s accounting policies for impaired loans is consistent across all classes of loans and leases.

Impaired loans are identified through ongoing credit management and risk rating processes, including the formal review of past due and watch list credits. Payment performance and delinquency status are critical factors in identifying impairment for all loans and leases, particularly those within the residential real estate, private client and personal-other classes. Other key factors considered in identifying impairment of loans and leases within the commercial and institutional, non-U.S., lease financing, and commercial-other classes relate to the borrower’s ability to perform under the terms of the obligation as measured through the assessment of future cash flows, including consideration of collateral value, market value, and other factors.

The following tables provide information related to impaired loans by segment and class.

 

     As of March 31, 2013      As of December 31, 2012  

(In Millions)

   Recorded
Investment
     Unpaid
Principal
Balance
     Specific
Allowance
     Recorded
Investment
     Unpaid
Principal
Balance
     Specific
Allowance
 

With No Related Specific Allowance

                 

Commercial and Institutional

   $ 13.8       $ 17.9       $ —         $ 15.1       $ 19.3       $ —     

Commercial Real Estate

     44.0         53.6         —           64.9         76.9         —     

Lease Financing, net

     4.6         4.6         —           4.6         4.6         —     

Residential Real Estate

     165.3         201.9         —           131.3         165.7         —     

Private Client

     13.7         13.8         —           0.8         1.0         —     

With a Related Specific Allowance

                 

Commercial and Institutional

     11.0         13.1         4.7         8.1         10.2         2.8   

Commercial Real Estate

     30.5         32.6         8.8         32.3         33.8         8.2   

Residential Real Estate

     9.8         11.1         5.2         11.8         13.0         6.1   

Private Client

     1.6         1.7         1.6         0.9         0.9         0.9   

Total

                 

Commercial

     103.9         121.8         13.5         125.0         144.8         11.0   

Personal

     190.4         228.5         6.8         144.8         180.6         7.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 294.3       $ 350.3       $ 20.3       $ 269.8       $ 325.4       $ 18.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

48


Notes to Consolidated Financial Statements (continued)

 

     Three Months Ended March 31,  
     2013      2012  

(In Millions)

   Average
Recorded
Investment
     Interest
Income
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With No Related Specific Allowance

           

Commercial and Institutional

   $ 12.2       $ —         $ 18.9       $ —     

Commercial Real Estate

     39.6         0.2         57.3         0.1   

Lease Financing, net

     4.6         —           —           —     

Residential Real Estate

     141.0         0.5         108.1         0.3   

Private Client

     9.4         0.1         1.3         —     

With a Related Specific Allowance

           

Commercial and Institutional

     11.0         —           10.5         —     

Commercial Real Estate

     30.4         —           20.7         —     

Residential Real Estate

     9.8         —           15.6         —     

Private Client

     1.1         —           1.7         —     

Total

           

Commercial

     97.8         0.2         107.4         0.1   

Personal

     161.3         0.6         126.7         0.3   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 259.1       $ 0.8       $ 234.1       $ 0.4   
  

 

 

    

 

 

    

 

 

    

 

 

 

Note: Average recorded investment in impaired loans is calculated as the average of the month-end impaired loan balances for the period.

Interest income that would have been recorded for nonperforming loans in accordance with their original terms for the three months ended March 31, 2013 and 2012 was $2.6 million and $3.1 million, respectively.

There were $3.0 million and $2.1 million of aggregate unfunded loan commitments and standby letters of credit at March 31, 2013 and December 31, 2012, respectively, issued to borrowers whose loans were classified as nonperforming or impaired.

Troubled Debt Restructurings. Included within impaired loans, there were $48.6 million and $49.8 million of nonperforming TDRs, and $100.1 million and $74.7 million of performing TDRs as of March 31, 2013 and December 31, 2012, respectively. All TDRs are reported as impaired loans in the calendar year of their restructuring. In subsequent years, a TDR may cease being reported as impaired if the loan was modified at a market rate and has performed according to the modified terms for at least six months. A loan that has been modified at a below market rate will return to performing status if it satisfies the six month performance requirement; however, it will remain reported as impaired.

 

49


Notes to Consolidated Financial Statements (continued)

 

The following tables provide, by segment and class, the number of loans and leases modified in TDRs during the three month periods ended March 31, 2013 and 2012, and the recorded investments and unpaid principal balances as of March 31, 2013 and 2012.

 

($ In Millions)

   Three Months Ended
March 31, 2013
 
     Number of
Loans and Leases
     Recorded
Investment
     Unpaid Principal
Balance
 

Commercial

        

Commercial and Institutional

     7       $ 2.5       $ 3.1   

Commercial Real Estate

     1         0.1         0.1   
  

 

 

    

 

 

    

 

 

 

Total Commercial

     8         2.6         3.2   
  

 

 

    

 

 

    

 

 

 

Personal

        

Residential Real Estate

     48         41.7         43.1   

Private Client

     5         12.8         12.8   
  

 

 

    

 

 

    

 

 

 

Total Personal

     53         54.5         55.9   
  

 

 

    

 

 

    

 

 

 

Total Loans and Leases

     61       $ 57.1       $ 59.1   
  

 

 

    

 

 

    

 

 

 

Note: Period end balances reflect all paydowns and charge-offs during the period.

 

($ In Millions)

   Three Months Ended
March 31, 2012
 
     Number of
Loans and Leases
     Recorded
Investment
     Unpaid Principal
Balance
 

Commercial

        

Commercial and Institutional

     2       $ 0.7       $ 1.2   

Commercial Real Estate

     4         3.8         3.8   
  

 

 

    

 

 

    

 

 

 

Total Commercial

     6         4.5         5.0   
  

 

 

    

 

 

    

 

 

 

Personal

        

Residential Real Estate

     32         5.6         6.9   
  

 

 

    

 

 

    

 

 

 

Total Personal

     32         5.6         6.9   
  

 

 

    

 

 

    

 

 

 

Total Loans and Leases

     38       $ 10.1       $ 11.9   
  

 

 

    

 

 

    

 

 

 

Note: Period end balances reflect all paydowns and charge-offs during the period.

TDR modifications primarily involve interest rate concessions, extensions of term, deferrals of principal, and other modifications. Other modifications typically reflect other nonstandard terms which Northern Trust would not offer in non-troubled situations. During the three month period ended March 31, 2013, TDR modifications of loans within the commercial and institutional, commercial real estate, and private client classes were primarily deferrals of principal, extensions of term, and other modifications. During the three months ended March 31, 2013, TDR modifications of loans within the residential real estate class were primarily deferrals of principal, interest rate concessions, extension of term, and other modifications.

During the three month period ended March 31, 2012, TDR modifications of loans within the commercial and institutional and commercial real estate classes were primarily deferrals of principal, extensions of term and other modifications. During the three months ended March 31, 2012, TDR modifications of loans within the residential real estate class were primarily interest rate concessions, deferrals of principal and extensions of term.

 

50


Notes to Consolidated Financial Statements (continued)

 

There were no loans or leases modified as TDRs in the 12 months ended December 31, 2012 or 2011 which subsequently became nonperforming during the three months ended March 31, 2013 or 2012, respectively.

All loans and leases modified in troubled debt restructurings are evaluated for impairment. The nature and extent of impairment of TDRs, including those which have experienced a subsequent default, is considered in the determination of an appropriate level of allowance for credit losses.

6. Allowance for Credit Losses – The allowance for credit losses, which represents management’s estimate of probable losses related to specific borrower relationships and inherent in the various loan and lease portfolios, unfunded commitments, and standby letters of credit, is determined by management through a disciplined credit review process. Northern Trust’s accounting policies related to the estimation of the allowance for credit losses and the charging off of loans, leases and other extensions of credit deemed uncollectible are consistent across both loan and lease segments.

In establishing the inherent portion of the allowance for credit losses, Northern Trust’s Loan Loss Allowance Committee assesses a common set of qualitative factors applicable to both the commercial and personal loan segments. The risk characteristics underlying these qualitative factors, and management’s assessments as to the relative importance of a qualitative factor, can vary between loan segments and between classes within loan segments. Factors evaluated include those related to external matters, such as economic conditions and changes in collateral value, and those related to internal matters, such as changes in asset quality metrics and loan review activities. In addition to the factors noted above, risk characteristics such as portfolio delinquencies, percentage of portfolio on the watch list and on nonperforming status, and average borrower ratings are assessed in the determination of the inherent allowance. Loan-to-value levels are considered for collateral-secured loans and leases in both the personal and commercial segments. Borrower debt service coverage is evaluated in the personal segment, and cash flow coverage is analyzed in the commercial segment. Similar risk characteristics by type of exposure are analyzed when determining the allowance for unfunded commitments and standby letters of credit. These qualitative factors, together with historical loss rates, serve as the basis for the allowance for credit losses.

Loans, leases and other extensions of credit deemed uncollectible are charged to the allowance for credit losses. Subsequent recoveries, if any, are credited to the allowance. Determinations as to whether an uncollectible loan is charged-off or a specific allowance is established are based on management’s assessment as to the level of certainty regarding the amount of loss.

 

51


Notes to Consolidated Financial Statements (continued)

 

The following table provides information regarding changes in the allowance for credit losses by segment during the three month periods ended March 31, 2013 and 2012.

 

     Three Months Ended March 31,  
     2013     2012  

(In Millions)

   Commercial     Personal     Total     Commercial     Personal     Total  

Balance at Beginning of Period

   $ 194.2      $ 133.4      $ 327.6      $ 211.0      $ 117.9      $ 328.9   

Charge-Offs

     (0.9     (11.7     (12.6     (3.2     (11.2     (14.4

Recoveries

     1.8        2.1        3.9        3.7        4.9        8.6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (Charge-Offs) Recoveries

     0.9        (9.6     (8.7     0.5        (6.3     (5.8

Provision for Credit Losses

     (7.9     12.9        5.0        (9.5     14.5        5.0   

Effect of Foreign Exchange Rates

     (0.1     —          (0.1     —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at End of Period

   $ 187.1      $ 136.7      $ 323.8      $ 202.0      $ 126.1      $ 328.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table provides information regarding the balances of the recorded investments in loans and leases and the allowance for credit losses by segment as of March 31, 2013 and December 31, 2012.

 

     March 31, 2013      December 31, 2012  

(In Millions)

   Commercial      Personal      Total      Commercial      Personal      Total  

Loans and Leases

                 

Specifically Evaluated for Impairment

   $ 103.9       $ 190.4       $ 294.3       $ 125.0       $ 144.8       $ 269.8   

Evaluated for Inherent Impairment

     12,578.1         15,990.5         28,568.6         12,772.2         16,462.5         29,234.7   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Loans and Leases

     12,682.0         16,180.9         28,862.9         12,897.2         16,607.3         29,504.5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Allowance for Loans and Leases

                 

Specifically Evaluated for Impairment

     13.5         6.8         20.3         11.0         7.0         18.0   

Evaluated for Inherent Impairment

     146.1         127.7         273.8         155.1         124.8         279.9   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Allowance Assigned to Loans and Leases

     159.6         134.5         294.1         166.1         131.8         297.9   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Allowance for Unfunded Exposures

                 

Commitments and Standby Letters of Credit

     27.5         2.2         29.7         28.1         1.6         29.7   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Allowance for Credit Losses

   $ 187.1       $ 136.7       $ 323.8       $ 194.2       $ 133.4       $ 327.6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

7. Pledged Assets – Certain of Northern Trust’s subsidiaries, as required or permitted by law, pledge assets to secure public and trust deposits, repurchase agreements, Federal Home Loan Bank borrowings, and for other purposes, including support for securities settlement, primarily related to client activities, and for potential Federal Reserve Bank discount window borrowings. At March 31, 2013, securities and loans totaling $26.7 billion ($18.6 billion of government sponsored agency and other securities, $296.3 million of obligations of states and political subdivisions, and $7.8 billion of loans) were pledged. This compares to $27.2 billion ($19.0 billion of government sponsored agency and other securities, $334.0 million of obligations of states and political subdivisions, and $7.9 billion of loans) at December 31, 2012. Collateral required for these purposes totaled $4.8 billion and $3.4 billion at March 31, 2013 and December 31, 2012, respectively. Included in the total pledged assets at March 31, 2013 and December 31, 2012 were available for sale securities with a total fair value of $480.1 million and $690.1 million, respectively, which were pledged as collateral for agreements to repurchase securities sold transactions. The secured parties to these transactions have the right to repledge or sell these securities.

 

52


Notes to Consolidated Financial Statements (continued)

 

Northern Trust is permitted to repledge or sell collateral from agreements to resell securities purchased transactions. The total fair value of accepted collateral as of March 31, 2013 and December 31, 2012 was $250.0 million and $35.4 million, respectively. There was no repledged or sold collateral at March 31, 2013 or December 31, 2012. Deposits maintained to meet Federal Reserve Bank reserve requirements averaged $0.9 billion and $1.1 billion for the three months ended March 31, 2013 and 2012, respectively.

8. Goodwill and Other Intangibles – The carrying amounts of goodwill at March 31, 2013 and December 31, 2012 were as follows:

 

(In Millions)

   March 31,
2013
     December 31,
2012
 

Corporate and Institutional Services

   $ 458.2       $ 466.3   

Personal Financial Services

     71.3         71.5   
  

 

 

    

 

 

 

Total Goodwill

   $ 529.5       $ 537.8   
  

 

 

    

 

 

 

Note: Amounts include the effect of foreign exchange rates on non-U.S. dollar denominated goodwill.

Other intangible assets are included within other assets in the consolidated balance sheet. The gross carrying amount and accumulated amortization of other intangible assets subject to amortization at March 31, 2013 and December 31, 2012 were as follows:

 

(In Millions)

   March 31,
2013
     December 31,
2012
 

Gross Carrying Amount

   $ 250.3       $ 252.1   

Less: Accumulated Amortization

     153.3         148.1   
  

 

 

    

 

 

 

Net Book Value

   $ 97.0       $ 104.0   
  

 

 

    

 

 

 

Note: Amounts include the effect of foreign exchange rates on non-U.S. dollar denominated intangible assets.

Other intangible assets consist primarily of the value of acquired client relationships. Amortization expense related to other intangible assets totaled $5.2 million and $4.6 million for the three months ended March 31, 2013 and 2012, respectively. Amortization for the remainder of 2013 and for the years 2014, 2015, 2016, and 2017 is estimated to be $15.2 million, $20.3 million, $11.6 million, $9.0 million and $9.0 million, respectively.

 

53


Notes to Consolidated Financial Statements (continued)

 

9. Business Units – The following table shows the earnings contributions of Northern Trust’s business units for the three month periods ended March 31, 2013 and 2012.

 

Three Months Ended March 31,

   Corporate and
Institutional Services
    Personal Financial
Services
    Treasury and
Other
    Total
Consolidated
 

($ In Millions)

   2013     2012     2013     2012     2013     2012     2013     2012  

Noninterest Income

                

Trust, Investment and Other Servicing Fees

   $ 348.7      $ 317.0      $ 282.0      $ 258.2      $ —        $ —        $ 630.7      $ 575.2   

Foreign Exchange Trading Income

     58.2        57.5        1.3        4.4        —          —          59.5        61.9   

Other Noninterest Income

     40.2        48.6        17.2        22.7        2.7        0.6        60.1        71.9   

Net Interest Income (FTE)*

     64.1        77.0        147.8        161.1        21.8        28.2        233.7        266.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Revenue*

     511.2        500.1        448.3        446.4        24.5        28.8        984.0        975.3   

Provision for Credit Losses

     (2.7     0.5        7.7        4.5        —          —          5.0        5.0   

Noninterest Expense

     398.7        398.0        301.8        303.7        28.4        21.9        728.9        723.6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before Income Taxes*

     115.2        101.6        138.8        138.2        (3.9     6.9        250.1        246.7   

Provision for Income Taxes*

     35.9        33.6        52.8        52.3        (2.6     (0.4     86.1        85.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

   $ 79.3      $ 68.0      $ 86.0      $ 85.9      $ (1.3   $ 7.3      $ 164.0      $ 161.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of Consolidated Net Income

     48     42     52     53     N/M        5     100     100

Average Assets

   $ 51,316.8      $ 49,662.2      $ 22,861.4      $ 23,563.9      $ 17,391.1      $ 21,902.0      $ 91,569.3      $ 95,128.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

* Stated on a fully taxable equivalent basis (FTE). Total consolidated includes FTE adjustments of $7.6 million for 2013 and $9.9 million for 2012.

Further discussion of business unit results is provided within the “Business Unit Reporting” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

54


Notes to Consolidated Financial Statements (continued)

 

10. Accumulated Other Comprehensive Income (Loss) – The following tables summarize the changes in the components of accumulated other comprehensive income (loss) during the three months ended March 31, 2013 and 2012.

 

(In Millions)

   Balance at
December 31,
2012
    Net Change     Balance at
March 31,
2013
 

Net Unrealized Gains (Losses) on Securities Available for Sale

   $ 101.0      $ 1.3      $ 102.3   

Net Unrealized Gains (Losses) on Cash Flow Hedges

     (1.4     (5.2     (6.6

Net Foreign Currency Adjustments

     10.5        (4.2     6.3   

Net Pension and Other Postretirement Benefit Adjustments

     (393.1     7.0        (386.1
  

 

 

   

 

 

   

 

 

 

Total

   $ (283.0   $ (1.1   $ (284.1
  

 

 

   

 

 

   

 

 

 

 

(In Millions)

   Balance at
December 31,
2011
    Net Change      Balance at
March 31,
2012
 

Net Unrealized Gains (Losses) on Securities Available for Sale

   $ 39.8      $ 20.0       $ 59.8   

Net Unrealized Gains (Losses) on Cash Flow Hedges

     (7.0     11.3         4.3   

Net Foreign Currency Adjustments

     (9.5     15.8         6.3   

Net Pension and Other Postretirement Benefit Adjustments

     (368.9     22.2         (346.7
  

 

 

   

 

 

    

 

 

 

Total

   $ (345.6   $ 69.3       $ (276.3
  

 

 

   

 

 

    

 

 

 

 

     Three Months Ended March 31,  
     2013     2012  

(In Millions)

   Before Tax     Tax Effect     After Tax     Before Tax     Tax Effect     After Tax  

Unrealized Gains (Losses) on Securities Available for Sale

            

Noncredit-Related Unrealized Losses on Securities OTTI

   $ 2.1      $ (0.8   $ 1.3      $ 5.8      $ (2.2   $ 3.6   

Other Unrealized Gains (Losses) on Securities Available for Sale

     0.2        (0.1     0.1        29.6        (11.1     18.5   

Reclassification Adjustment for (Gains) Losses Included in Net Income

     (0.2     0.1        (0.1     (3.4     1.3        (2.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Change

   $ 2.1      $ (0.8   $ 1.3      $ 32.0      $ (12.0   $ 20.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized Gains (Losses) on Cash Flow Hedges

            

Unrealized Gains (Losses) on Cash Flow Hedges

   $ (9.2   $ 2.9      $ (6.3   $ 18.9      $ (7.0   $ 11.9   

Reclassification Adjustment for (Gains) Losses Included in Net Income

     1.8        (0.7     1.1        (1.0     0.4        (0.6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Change

   $ (7.4   $ 2.2      $ (5.2   $ 17.9      $ (6.6   $ 11.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Foreign Currency Adjustments

            

Foreign Currency Translation Adjustments

   $ (56.4   $ 0.5      $ (55.9   $ 34.9      $ —        $ 34.9   

Net Investment Hedge Gains (Losses)

     82.8        (31.1     51.7        (45.2     26.1        (19.1

Reclassification Adjustment for (Gains) Losses Included in Net Income

     —          —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Change

   $ 26.4      $ (30.6   $ (4.2   $ (10.3   $ 26.1      $ 15.8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pension and Other Postretirement Benefit Adjustments

            

Net Actuarial Gain (Loss)

   $ —        $ —        $ —        $ 26.7      $ (10.1   $ 16.6   

Reclassification Adjustment for (Gains) Losses Included in Net Income

   $ 11.2      $ (4.2   $ 7.0      $ 8.7      $ (3.1   $ 5.6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Change

   $ 11.2      $ (4.2   $ 7.0      $ 35.4      $ (13.2   $ 22.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

55


Notes to Consolidated Financial Statements (continued)

 

The following table provides the location and before-tax amounts of reclassifications out of accumulated other comprehensive income (loss) during the three month period ended March 31, 2013.

 

(In Millions)

  

Location of
Reclassification Adjustments
Recognized in Income

   Amount of Reclassification
Adjustments Recognized
in Income for the

Three Months Ended
March 31, 2013
 

Securities Available for Sale

     

Realized (Gains) Losses on Securities Available for Sale

   Investment Security Gains (Losses), net    $ (0.2
     

 

 

 

Realized (Gains) Losses on Cash Flow Hedges

     

Foreign Exchange Contracts

   Other Operating Income/ Expense    $ 1.8   
     

 

 

 

Pension and Other Postretirement Benefit Adjustments

     

Amortization of Net Actuarial (Gain) Loss

   Employee Benefits    $ 11.9   

Amortization of Prior Service Cost

   Employee Benefits      (0.7
     

 

 

 

Gross Reclassification Adjustment

      $ 11.2   
     

 

 

 

11. Net Income Per Common Share Computations – The computations of net income per common share are presented in the following table.

 

($ In Millions Except Per Common Share Information)

   2013      2012  

Basic Net Income Per Common Share

     

Average Number of Common Shares Outstanding

     239,167,559         241,090,093   

Net Income Applicable to Common Stock

   $ 164.0       $ 161.2   

Less: Earnings Allocated to Participating Securities

     2.5         2.1   
  

 

 

    

 

 

 

Earnings Allocated to Common Shares Outstanding

   $ 161.5       $ 159.1   
  

 

 

    

 

 

 

Basic Net Income Per Common Share

     0.68         0.66   
  

 

 

    

 

 

 

Diluted Net Income Per Common Share

     

Average Number of Common Shares Outstanding

     239,167,559         241,090,093   

Plus: Dilutive Effect of Share-based Compensation

     1,021,656         466,003   
  

 

 

    

 

 

 

Average Common and Potential Common Shares

     240,189,215         241,556,096   
  

 

 

    

 

 

 

Earnings Allocated to Common and Potential Common Shares

   $ 161.5       $ 160.0   

Diluted Net Income Per Common Share

     0.67         0.66   
  

 

 

    

 

 

 

Note: Common stock equivalents totaling 4,603,526 and 15,013,663 for the three months ended March 31, 2013 and 2012, respectively, were not included in the computation of diluted net income per common share because their inclusion would have been antidilutive.

 

56


Notes to Consolidated Financial Statements (continued)

 

12. Net Interest Income – The components of net interest income were as follows:

 

     Three Months Ended
March 31,
 

(In Millions)

   2013      2012  

Interest Income

     

Loans and Leases

   $ 187.6       $ 217.6   

Securities – Taxable

     58.2         62.4   

       – Non-Taxable

     3.3         5.2   

Interest-Bearing Deposits with Banks

     35.0         50.6   

Federal Reserve Deposits and Other

     2.6         5.2   
  

 

 

    

 

 

 

Total Interest Income

     286.7         341.0   
  

 

 

    

 

 

 

Interest Expense

     

Deposits

     29.1         46.3   

Federal Funds Purchased

     0.3         0.4   

Securities Sold Under Agreements to Repurchase

     0.1         0.1   

Other Borrowings

     0.7         1.0   

Senior Notes

     19.2         16.9   

Long-Term Debt

     10.6         19.1   

Floating Rate Capital Debt

     0.6         0.8   
  

 

 

    

 

 

 

Total Interest Expense

     60.6         84.6   
  

 

 

    

 

 

 

Net Interest Income

   $ 226.1       $ 256.4   
  

 

 

    

 

 

 

13. Income Taxes – Income tax expense of $78.5 million was recorded in the current quarter, representing an effective tax rate of 32.4%. The prior year quarter provision for income taxes was $75.6 million, representing an effective tax rate of 31.9%.

 

57


Notes to Consolidated Financial Statements (continued)

 

14. Pension and Other Postretirement Plans – The following tables set forth the net periodic pension and postretirement benefit expense for Northern Trust’s U.S. and non-U.S. pension plans, supplemental pension plan, and other postretirement plan for the three months ended March 31, 2013 and 2012.

 

Net Periodic Pension Expense

U.S. Plan

   Three Months Ended
March 31,
 

(In Millions)

   2013     2012  

Service Cost

   $ 7.6      $ 8.8   

Interest Cost

     10.5        10.4   

Expected Return on Plan Assets

     (23.1     (21.8

Amortization

    

Net Actuarial Loss

     10.4        8.6   

Prior Service Cost

     (0.1     (0.1
  

 

 

   

 

 

 

Net Periodic Pension Expense

   $ 5.3      $ 5.9   
  

 

 

   

 

 

 

 

Net Periodic Pension Expense

Non U.S. Plans

   Three Months Ended
March 31,
 

(In Millions)

   2013     2012  

Interest Cost

   $ 1.7      $ 1.6   

Expected Return on Plan Assets

     (1.5     (1.6

Net Actuarial Loss Amortization

     0.1        0.2   
  

 

 

   

 

 

 

Net Periodic Pension Expense

   $ 0.3      $ 0.2   
  

 

 

   

 

 

 

 

Net Periodic Pension Expense

Supplemental Plan

   Three Months Ended
March 31,
 

(In Millions)

   2013      2012  

Service Cost

   $ 0.4       $ 0.7   

Interest Cost

     1.1         1.1   

Amortization

     

Net Actuarial Loss

     1.7         1.5   

Prior Service Cost

     0.1         0.1   
  

 

 

    

 

 

 

Net Periodic Pension Expense

   $ 3.3       $ 3.4   
  

 

 

    

 

 

 

 

Net Periodic Postretirement Benefit

Other Postretirement Plan

   Three Months Ended
March 31,
 

(In Millions)

   2013     2012  

Service Cost

   $ —        $ 0.1   

Interest Cost

     0.3        0.4   

Amortization

    

Net Actuarial Gain

     (0.3     (0.3

Prior Service Cost

     (0.7     (1.3
  

 

 

   

 

 

 

Net Periodic Postretirement Benefit

   $ (0.7   $ (1.1
  

 

 

   

 

 

 

 

58


Notes to Consolidated Financial Statements (continued)

 

15. Share-Based Compensation Plans – The Amended and Restated Northern Trust Corporation 2012 Stock Plan provides for the grant of nonqualified stock options, incentive stock options, stock appreciation rights, stock awards, stock units, and performance stock units.

In the first quarter of 2013, the Corporation granted 446,868 nonqualified stock options with a total grant-date fair value of $5.5 million, 1,149,213 stock unit awards with a total grant-date fair value of $60.6 million, and 296,650 performance stock units with a total grant-date fair value of $15.6 million. Stock and stock unit award compensation expense for the three months ended March 31, 2013 and 2012 include $1.5 million and $2.3 million, respectively, attributable to restricted stock units which vested in full and were expensed in their entirety on their date of grant. Compensation expense for the three months ended March 31, 2013 and 2012 include $2.1 million and $5.3 million, respectively, attributable to stock options granted to retirement-eligible employees that were expensed in their entirety on the grant date. Total compensation expense for share-based payment arrangements and the associated tax impacts were as follows for the three months ended March 31, 2013 and 2012.

 

     Three Months Ended
March 31,
 

(In Millions)

   2013      2012  

Stock and Stock Unit Awards

   $ 12.4       $ 12.7   

Stock Options

     6.9         11.2   

Performance Stock Units

     1.2         0.3   
  

 

 

    

 

 

 

Total Share-Based Compensation Expense

     20.5         24.2   
  

 

 

    

 

 

 

Tax Benefits Recognized

   $ 7.7       $ 9.1   
  

 

 

    

 

 

 

16. Variable Interest Entities – Variable Interest Entities (VIEs) are defined within GAAP as entities which either have a total equity investment that is insufficient to permit the entity to finance its activities without additional subordinated financial support or whose equity investors lack the characteristics of a controlling financial interest. Investors that finance a VIE through debt or equity interests, or other counterparties that provide other forms of support, such as guarantees, subordinated fee arrangements, or certain types of derivative contracts, are variable interest holders in the entity and the variable interest holder, if any, that has both the power to direct the activities that most significantly impact the entity and a variable interest that could potentially be significant to the entity is deemed to be the VIE’s primary beneficiary and is required to consolidate the VIE.

Leveraged Leases. In leveraged leasing transactions, Northern Trust acts as lessor of the underlying asset subject to the lease and typically funds 20% of the asset’s cost via an equity ownership in a trust with the remaining 80% provided by third party non-recourse debt holders. In such transactions, the trusts, which are VIEs, are created to provide the lessee use of the property with substantially all of the rights and obligations of ownership. The lessee’s maintenance and operation of the leased property has a direct effect on the fair value of the underlying property, and the lessee also has the ability to increase the benefits it can receive and limit the losses it can suffer by the manner in which it uses the property. As a result, Northern Trust has determined that it is not the primary beneficiary of these VIEs given it lacks the power to direct the activities that most significantly impact the economic performance of the VIEs.

 

59


Notes to Consolidated Financial Statements (continued)

 

Northern Trust’s maximum exposure to loss as a result of its involvement with the leveraged lease trust VIEs is limited to the carrying amounts of its leveraged lease investments. As of March 31, 2013 and December 31, 2012, the carrying amounts of these investments, which are included in loans and leases in the consolidated balance sheet, were $666.8 million and $673.6 million, respectively. Northern Trust’s funding requirements relative to the VIEs are limited to its invested capital. Northern Trust has no other liquidity arrangements or obligations to purchase assets of the VIEs that would expose Northern Trust to a loss.

Tax Credit Structures. Northern Trust invests in community development projects that are designed to generate a return primarily through the realization of tax credits. The community development projects are formed as limited partnerships and LLCs, and Northern Trust typically invests as a limited partner/investor member in the form of equity contributions. The economic performance of the community development projects, which are deemed to be VIEs, is driven by the performance of their underlying investment projects as well as the VIEs’ ability to operate in compliance with the rules and regulations necessary for the qualification of tax credits generated by equity investments. Northern Trust has determined that it is not the primary beneficiary of any community development projects as it lacks the power to direct the activities that most significantly impact the economic performance of the underlying project or to affect the VIEs’ ability to operate in compliance with the rules and regulations necessary for the qualification of tax credits generated by equity investments. This power is held by the general partners and managing members who exercise full and exclusive control of the operations of the VIEs.

Northern Trust’s maximum exposure to loss as a result of its involvement with community development projects is limited to the carrying amounts of its investments, including any unfunded commitments. As of March 31, 2013 and December 31, 2012, the carrying amounts of these investments in community development projects deemed to be VIEs, which are included in other assets in the consolidated balance sheet, were $236.7 million and $248.2 million, respectively. As of March 31, 2013 and December 31, 2012, liabilities related to unfunded commitments on investments in community development projects, which are included in other liabilities in the consolidated balance sheet, were $30.3 million and $33.1 million, respectively. Northern Trust’s funding requirements are limited to its invested capital and any additional unfunded commitments for future equity contributions. Northern Trust has no other liquidity arrangements or obligations to purchase assets of the community development projects that would expose it to a loss.

Trust Preferred Securities. In 1997, Northern Trust issued Floating Rate Capital Securities, Series A and Series B, through NTC Capital I and NTC Capital II, respectively, statutory business trusts wholly-owned by the Corporation. The sole assets of the trusts are Subordinated Debentures of the Corporation that have the same interest rates and maturity dates as the corresponding distribution rates and redemption dates of the Floating Rate Capital Securities. NTC Capital I and NTC Capital II are considered VIEs; however, as the sole asset of each trust is a receivable from the Corporation and the proceeds to the Corporation from the receivable exceed the Corporation’s investment in the VIEs’ equity shares, the Corporation is not permitted to consolidate the trusts, even

 

60


Notes to Consolidated Financial Statements (continued)

 

though the Corporation owns all of the voting equity shares of the trusts, has fully guaranteed the trusts’ obligations, and has the right to redeem the preferred securities in certain circumstances. Northern Trust recognizes the subordinated debentures on its consolidated balance sheet as long-term liabilities.

Investment Funds. Northern Trust acts as asset manager for various funds in which clients of Northern Trust are investors. As an asset manager of funds, the Corporation earns a competitively priced fee that is based on assets managed and varies with each fund’s investment objective. Based on its analysis, Northern Trust has determined that it is not the primary beneficiary of these VIEs under GAAP.

17. Contingent Liabilities – Standby Letters of Credit and Indemnifications. Standby letters of credit obligate Northern Trust to meet certain financial obligations of its clients, if, under the contractual terms of the agreement, the clients are unable to do so. These instruments are primarily issued to support public and private financial commitments, including commercial paper, bond financing, initial margin requirements on futures exchanges, and similar transactions. Certain standby letters of credit have been secured with cash deposits or participated to others and in certain cases Northern Trust is able to recover the amounts paid through recourse against these cash deposits or other participants. Standby letters of credit outstanding were $4.5 billion at March 31, 2013 and $4.6 billion at December 31, 2012.

As part of its securities custody activities and at the direction of its clients, Northern Trust lends securities owned by clients to borrowers who are reviewed by the Northern Trust Senior Credit Committee. In connection with these activities, Northern Trust has issued indemnifications against certain losses resulting from the bankruptcy of borrowers of securities. Borrowers are required to fully collateralize securities received with cash or marketable securities. As securities are loaned, collateral is maintained at a minimum of 100% of the fair value of the securities plus accrued interest. The collateral is revalued on a daily basis. The amount of securities loaned subject to indemnification was $79.3 billion at March 31, 2013 and $69.7 billion at December 31, 2012. Because of the credit quality of the borrowers and the requirement to fully collateralize securities borrowed, management believes that the exposure to credit loss from this activity is not significant and no liability was recorded at March 31, 2013 or December 31, 2012 related to these indemnifications.

Legal Proceedings. In the normal course of business, the Corporation and its subsidiaries are routinely defendants in or parties to a number of pending and threatened legal actions, including, but not limited to, actions brought on behalf of various claimants or classes of claimants, regulatory matters, employment matters, and challenges from tax authorities regarding the amount of taxes due. In certain of these actions and proceedings, claims for substantial monetary damages or adjustments to recorded tax liabilities are asserted.

Based on current knowledge, after consultation with legal counsel and after taking into account current accruals, management does not believe that losses, if any, arising from

 

61


Notes to Consolidated Financial Statements (continued)

 

pending litigation or threatened legal actions or regulatory matters will have a material adverse effect on the consolidated financial position or liquidity of the Corporation, although such matters could have a material adverse effect on the Corporation’s operating results for a particular period.

Under GAAP, (i) an event is “probable” if the “future event or events are likely to occur”; (ii) an event is “reasonably possible” if “the chance of the future event or events occurring is more than remote but less than likely”; and (iii) an event is “remote” if “the chance of the future event or events occurring is slight”. Thus, references to the upper end of the range of reasonably possible loss for cases in which the Corporation is able to estimate a range of reasonably possible loss mean the upper end of the range of loss for cases for which the Corporation believes the risk of loss is more than remote.

For the reasons set out in this paragraph, the outcome of some matters is inherently difficult to predict and/or the range of loss cannot be reasonably estimated. This may be the case in matters that (i) will be decided by a jury, (ii) are in early stages, (iii) involve uncertainty as to the likelihood of a class being certified or the ultimate size of the class, (iv) are subject to appeals or motions, (v) involve significant factual issues to be resolved, including with respect to the amount of damages, or (vi) seek very large damages based on novel and complex damage and liability legal theories. Accordingly, the Corporation cannot reasonably estimate the eventual outcome of these pending matters, the timing of their ultimate resolution, or what the eventual loss, fines or penalties, if any, related to each pending matter will be.

In accordance with applicable accounting guidance, the Corporation records accruals for litigation and regulatory matters when those matters present loss contingencies that are both probable and reasonably estimable. When loss contingencies are not both probable and reasonably estimable, the Corporation does not record accruals. No material accruals have been recorded for pending litigation or threatened legal actions or regulatory matters.

For a limited number of the matters for which a loss is reasonably possible in future periods, whether in excess of an accrued liability or where there is no accrued liability, the Corporation is able to estimate a range of possible loss. As of March 31, 2013, the Corporation has estimated the upper end of the range of reasonably possible losses for these matters to be approximately $126 million in the aggregate. This aggregate amount of reasonably possible loss is based upon currently available information and is subject to significant judgment and a variety of assumptions, and known and unknown uncertainties. The matters underlying the estimated range will change from time to time, and actual results will vary significantly from the current estimate.

In certain other pending matters, there may be a range of reasonably possible losses (including reasonably possible losses in excess of amounts accrued) that cannot be reasonably estimated for the reasons described above. The following is a description of the nature of certain of these matters.

 

62


Notes to Consolidated Financial Statements (continued)

 

As previously disclosed, a number of participants in our securities lending program, which is associated with the Corporation’s asset servicing business, have commenced putative class actions in which they claim, among other things, that we failed to exercise prudence in the investment management of the collateral received from the borrowers of the securities, resulting in losses that they seek to recover. The cases assert various contractual, statutory and common law claims, including claims for breach of fiduciary duty under common law and under the Employee Retirement Income Security Act (ERISA). Based on our review of these matters, we believe we operated our securities lending program prudently and appropriately. At this stage of these proceedings, however, it is not possible for management to assess the probability of a material adverse outcome or reasonably estimate the amount of any potential loss.

On August 24, 2010, a lawsuit (hereinafter referred to as the “Securities Class Action”) was filed in federal court in the Northern District of Illinois against the Corporation and three of its present or former officers, including the present and former Chief Executive Officers of the Corporation, on behalf of a purported class of purchasers of Corporation stock during the period from October 17, 2007 to October 20, 2009. The amended complaint alleges that during the purported class period the defendants violated Sections 10(b) and 20(a) of the Exchange Act by allegedly taking insufficient provisions for credit losses with respect to the Corporation’s real estate loan portfolio and failing to make sufficient disclosures regarding its securities lending business. Plaintiff seeks compensatory damages in an unspecified amount. In March 2013, the court dismissed the Securities Class Action with leave to amend. At this stage of the suit, it is not possible for management to assess the probability of a material adverse outcome or reasonably estimate the amount of any potential loss.

On September 7, 2010, a shareholder derivative lawsuit, purportedly brought on behalf of the Corporation, was filed in the Circuit Court of Cook County, Illinois against a number of the Corporation’s current and former officers and directors. The Corporation is named as a nominal defendant. The complaint asserts that the individual defendants violated their fiduciary duties to the Corporation based upon substantially the same allegations made in the Securities Class Action complaint. Certain individual defendants are also alleged to have sold some of their holdings of Northern Trust Corporation stock while in possession of material nonpublic information. Plaintiff seeks compensatory damages in an unspecified amount from the individual defendants on behalf of the Corporation. The only relief sought against the Corporation is an order requiring the implementation of certain corporate governance procedures. On December 20, 2011, the court granted the Corporation’s motion to dismiss the derivative lawsuit but gave plaintiff leave to file an amended complaint. Plaintiff elected, instead, to enter into an agreed order staying the derivative suit until the judge in the Securities Class Action rules on the Corporation’s motion to dismiss that complaint.

Visa Membership. Northern Trust, as a member of Visa U.S.A. Inc. (Visa U.S.A.) and in connection with the 2007 initial public offering of Visa, Inc. (Visa), received shares of restricted stock in Visa, a portion of which was redeemed pursuant to a mandatory redemption. The proceeds of the redemption totaled $167.9 million and were recorded as

 

63


Notes to Consolidated Financial Statements (continued)

 

a gain in 2008. The remaining Visa shares held by Northern Trust are recorded at their original cost basis of zero and as of March 31, 2013 had restrictions as to their sale or transfer.

Northern Trust is obligated to indemnify Visa for losses resulting from certain indemnified litigation involving Visa and has been required to recognize, at its estimated fair value in accordance with GAAP, a guarantee liability arising from such litigation that has not yet settled.

During 2007, Northern Trust recorded charges and corresponding liabilities of $150 million relating to Visa indemnified litigation. Subsequently, Visa established an escrow account to cover the settlements of, or judgments in, indemnified litigation. The fundings by Visa of its escrow account have resulted in reductions of Northern Trust’s Visa related indemnification liability and of the future realization of the value of outstanding shares of Visa common stock held by Northern Trust as a member bank of Visa U.S.A. Reductions of Northern Trust’s indemnification liability totaling $23.1 million, $33.0 million, and $17.8 million were recorded in 2011, 2010, and 2009, respectively, which combined with a $76.1 million reduction recorded in 2008, fully eliminated the recorded indemnification liability as of December 31, 2011.

On October 19, 2012, Visa signed a settlement agreement with plaintiff representatives for binding settlement of the indemnified litigation relating to interchange fees. While the final settlement and ultimate resolution of outstanding Visa related litigation and the timing for removal of selling restrictions on shares owned by Northern Trust are highly uncertain, based upon the settlement terms announced by Visa, Northern Trust anticipates that the value of its remaining shares of Visa stock will be adequate to offset any remaining indemnification obligations related to Visa litigation.

Contingent Purchase Consideration. In connection with acquisitions consummated in 2011, contingent consideration was recorded relating to certain performance-related purchase price adjustments. The fair value of the contingent consideration at March 31, 2013 and December 31, 2012 was $51.4 million and $50.1 million, respectively.

18. Derivative Financial Instruments – Northern Trust is a party to various derivative financial instruments that are used in the normal course of business to meet the needs of its clients; as part of its trading activity for its own account; and as part of its risk management activities. These instruments include foreign exchange contracts, interest rate contracts, and credit default swap contracts.

Northern Trust’s primary risks associated with these instruments is the possibility that interest rates, foreign exchange rates, or credit spreads could change in an unanticipated manner, resulting in higher costs or a loss in the underlying value of the instrument. These risks are mitigated by establishing limits, monitoring the level of actual positions taken against such established limits, and monitoring the level of any interest rate sensitivity gaps created by such positions. When establishing position limits, market liquidity and volatility, as well as experience in each market, are taken into account.

 

64


Notes to Consolidated Financial Statements (continued)

 

The estimated credit risk associated with derivative instruments relates to the failure of the counterparty and the failure of Northern Trust to pay based on the contractual terms of the agreement, and is generally limited to the unrealized fair value gains and losses on these instruments, respectively. The amount of credit risk will increase or decrease during the lives of the instruments as interest rates, foreign exchange rates, or credit spreads fluctuate. This risk is controlled by limiting such activity to an approved list of counterparties and by subjecting such activity to the same credit and quality controls as are followed in lending and investment activities. Credit Support Annex agreements are currently in place with a number of counterparties which mitigate the aforementioned credit risk associated with derivative activity conducted with those counterparties by requiring that significant net unrealized fair value gains be supported by collateral placed with Northern Trust.

All derivative financial instruments, whether designated as hedges or not, are recorded in the consolidated balance sheet at fair value within other assets or other liabilities. As noted in the discussions below, the manner in which changes in the fair value of a derivative is accounted for in the consolidated statement of income depends on whether the contract has been designated as a hedge and qualifies for hedge accounting under GAAP. Northern Trust has elected to net derivative assets and liabilities when legally enforceable master netting agreements exist between Northern Trust and the counterparty. Derivative assets and liabilities recorded in the consolidated balance sheet were each reduced by $1,507.7 million as of March 31, 2013 and by $982.5 million as of December 31, 2012, as a result of master netting agreements in place. Derivative assets and liabilities recorded at March 31, 2013, also reflect reductions of $218.1 million and $472.2 million, respectively, as a result of cash collateral received from and deposited with derivative counterparties. This compares with reductions of derivative assets and liabilities of $118.6 million and $425.0 million, respectively, at December 31, 2012. Additional cash collateral received from and deposited with derivative counterparties totaling $64.8 million and $67.8 million, respectively, as of March 31, 2013, and $1.6 million and $73.3 million, respectively, as of December 31, 2012, were not offset against derivative assets and liabilities on the consolidated balance sheet as the amounts exceeded the net derivative positions with those counterparties.

Certain master netting agreements Northern Trust enters into with derivative counterparties contain credit risk-related contingent features in which the counterparty has the option to declare Northern Trust in default and accelerate cash settlement of the net derivative liabilities with the counterparty in the event Northern Trust’s credit rating falls below specified levels. The aggregate fair value of all derivative instruments with credit risk-related contingent features that were in a liability position was $168.6 million and $178.9 million at March 31, 2013 and December 31, 2012, respectively. Cash collateral amounts deposited with derivative counterparties on those dates included $150.7 million and $155.4 million, respectively, posted against these liabilities, resulting in a net maximum amount of termination payments that could have been required at March 31, 2013 and December 31, 2012 of $17.9 million and $23.5 million, respectively. Accelerated settlement of these liabilities would not have a material effect on the consolidated financial position or liquidity of Northern Trust.

 

65


Notes to Consolidated Financial Statements (continued)

 

Foreign exchange contracts are agreements to exchange specific amounts of currencies at a future date, at a specified rate of exchange. Foreign exchange contracts are entered into primarily to meet the foreign exchange needs of clients. Foreign exchange contracts are also used for trading purposes and risk management. For risk management purposes, Northern Trust uses foreign exchange contracts to reduce its exposure to changes in foreign exchange rates relating to certain forecasted non-functional currency denominated revenue and expenditure transactions, foreign currency denominated assets and liabilities, and net investments in non-U.S. affiliates.

Interest rate contracts include swap and option contracts. Interest rate swap contracts involve the exchange of fixed and floating rate interest payment obligations without the exchange of the underlying principal amounts. Northern Trust enters into interest rate swap contracts on behalf of its clients and also utilizes such contracts to reduce or eliminate the exposure to changes in the cash flows or fair value of hedged assets or liabilities due to changes in interest rates. Interest rate option contracts consist of caps, floors, and swaptions, and provide for the transfer or reduction of interest rate risk in exchange for a fee. Northern Trust enters into option contracts primarily as a seller of interest rate protection to clients. Northern Trust receives a fee at the outset of the agreement for the assumption of the risk of an unfavorable change in interest rates. This assumed interest rate risk is then mitigated by entering into an offsetting position with an outside counterparty. Northern Trust may also purchase option contracts for risk management purposes.

Credit default swap contracts are agreements to transfer credit default risk from one party to another in exchange for a fee. Northern Trust enters into credit default swaps with outside counterparties where the counterparty agrees to assume the underlying credit exposure of a specific Northern Trust commercial loan or loan commitment.

Client-Related and Trading Derivative Instruments. In excess of 96% of Northern Trust’s derivatives outstanding at March 31, 2013 and December 31, 2012, measured on a notional value basis, relate to client-related and trading activities. These activities consist principally of providing foreign exchange services to clients in connection with Northern Trust’s global custody business. However, in the normal course of business, Northern Trust also engages in trading of currencies for its own account.

 

66


Notes to Consolidated Financial Statements (continued)

 

The following table shows the notional and fair values of client-related and trading derivative financial instruments. Notional amounts of derivative financial instruments do not represent credit risk, and are not recorded in the consolidated balance sheet. They are used merely to express the volume of this activity. Northern Trust’s credit related risk of loss is limited to the positive fair value of the derivative instrument, which is significantly less than the notional amount.

 

     March 31, 2013      December 31, 2012  
     Notional
Value
     Fair Value      Notional
Value
     Fair Value  

(In Millions)

      Asset      Liability         Asset      Liability  

Foreign Exchange Contracts

   $ 234,808.9       $ 2,337.1       $ 2,280.2       $ 213,246.7       $ 1,735.3       $ 1,730.4   

Interest Rate Option Contracts

     23.9         —           —           31.4         —           —     

Interest Rate Swap Contracts

     4,882.7         166.9         159.8         4,915.2         180.6         174.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 239,715.5       $ 2,504.0       $ 2,440.0       $ 218,193.3       $ 1,915.9       $ 1,904.4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Changes in the fair value of client-related and trading derivative instruments are recognized currently in income. The following table shows the location and amount of gains and losses recorded in the consolidated statement of income for the three months ended March 31, 2013 and 2012.

 

(In Millions)

  

Location of Derivative

Gain/(Loss) Recognized in

Income

   Amount of Derivative Gain/(Loss)
Recognized in Income
 
      Three Months Ended March 31,  
      2013      2012  

Foreign Exchange Contracts

   Foreign Exchange Trading Income    $ 59.5       $ 61.9   

Interest Rate Swap and Option Contracts

   Security Commissions and Trading Income      3.3         2.5   
     

 

 

    

 

 

 

Total

      $ 62.8       $ 64.4   
     

 

 

    

 

 

 

Risk Management Instruments. Northern Trust uses derivative instruments to hedge its exposure to foreign currency, interest rate, and credit risk. Certain hedging relationships are formally designated and qualify for hedge accounting under GAAP as fair value, cash flow, or net investment hedges. Other derivatives that are entered into for risk management purposes as economic hedges are not formally designated as hedges and changes in fair value are recognized currently in other operating income.

In order to qualify for hedge accounting, a formal assessment is performed on a calendar quarter basis to verify that derivatives used in designated hedging transactions continue to be highly effective in offsetting the changes in fair value or cash flows of the hedged item. If a derivative ceases to be highly effective, matures, is sold, or is terminated, or if a hedged forecasted transaction is no longer probable of occurring, hedge accounting is terminated and the derivative is treated as if it were a trading instrument.

 

67


Notes to Consolidated Financial Statements (continued)

 

The following table identifies the types and classifications of derivative instruments designated as hedges and used by Northern Trust to manage risk, their notional and fair values, and the respective risks addressed.

 

               March 31, 2013      December 31, 2012  
     Derivative
Instrument
   Risk
Classification
   Notional
Value
     Fair Value      Notional
Value
     Fair Value  

(In Millions)

            Asset      Liability         Asset      Liability  

Fair Value Hedges

                       

Available for Sale Investment Securities

   Interest Rate
Swap Contracts
   Interest
Rate
   $ 3,495.7       $ 5.7       $ 60.9       $ 3,617.0       $ 3.4       $ 75.1   

Senior Notes and Long-Term Subordinated

   Interest Rate
Swap Contracts
   Interest
Rate
     900.0         110.9         0.1         900.0         126.3         0.2   

Cash Flow Hedges

                       

Forecasted Foreign Currency Denominated Transactions

   Foreign
Contracts
   Foreign
Currency
     531.7         5.9         15.4         669.0         8.7         11.5   

Net Investment Hedges

                       

Net Investments in Non-U.S. Affiliates

   Foreign
Contracts
   Foreign
Currency
     1,551.0         46.5         0.7         1,451.4         2.3         27.8   
        

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

         $ 6,478.4       $ 169.0       $ 77.1       $ 6,637.4       $ 140.7       $ 114.6   
        

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

In addition to the above, Sterling denominated debt, totaling $227.3 million and $242.3 million at March 31, 2013 and December 31, 2012, respectively, was designated as a hedge of the foreign exchange risk associated with the net investment in certain non-U.S. affiliates.

Derivatives are designated as fair value hedges to limit Northern Trust’s exposure to changes in the fair value of assets and liabilities due to movements in interest rates. For a fair value hedge, changes in the fair value of the derivative instrument and changes in the fair value of the hedged asset or liability attributable to the hedged risk are recorded currently in income. The following table shows the location and amount of derivative gains and losses recorded in the consolidated statement of income related to fair value hedges for the three months ended March 31, 2013 and 2012.

 

(In Millions)

   Derivative
Instrument
   Location of
Derivative
Gain/(Loss)
Recognized
in Income
   Amount of Derivative
Gain/(Loss) Recognized
in Income
 
         Three Months Ended
March 31,
 
         2013     2012  

Available for Sale Investment Securities

   Interest Rate
Swap Contracts
   Interest
Income
   $ 3.4      $ (3.9

Senior Notes and Long-Term Subordinated Debt

   Interest Rate
Swap Contracts
   Interest
Expense
     (0.7     35.4   
        

 

 

   

 

 

 

Total

         $ 2.7      $ 31.5   
        

 

 

   

 

 

 

Northern Trust applies the “shortcut” method of accounting, available under GAAP, to substantially all of its fair value hedges, which assumes there is no ineffectiveness in a hedge. As a result, changes recorded in the fair value of the hedged item are equal to the offsetting gain or loss on the derivative and are reflected in the same line item as the gain or loss. For fair value hedges that do not qualify for the “shortcut” method of accounting, Northern Trust utilizes regression analysis, a “long-haul” method of accounting, in

 

68


Notes to Consolidated Financial Statements (continued)

 

assessing whether the hedging relationships are highly effective at inception and on an ongoing basis. There were losses of $0.3 million and gains of $0.3 million recorded as changes within the fair values of hedged items for such “long-haul” hedges for the three months ended March 31, 2013 and 2012, respectively. Losses of $0.2 million and gains of $0.6 million related to hedge ineffectiveness were recorded during the three months ended March 31, 2013 and 2012, respectively, in connection with the hedging of available for sale investment securities, senior notes, and subordinated debt. Ineffectiveness resulting from fair value hedges is recorded in either interest income or interest expense.

Derivatives are also designated as cash flow hedges in order to minimize the variability in cash flows of earning assets or forecasted transactions caused by movements in interest or foreign exchange rates. The effective portion of changes in the fair value of such derivatives is recognized in AOCI, a component of stockholders’ equity, and there is no change to the accounting for the hedged item. When the hedged forecasted transaction impacts earnings, balances in AOCI are also reclassified to earnings. Northern Trust assesses effectiveness using regression analysis for cash flow hedges of available for sale securities. Ineffectiveness is measured using the hypothetical derivative method. For cash flow hedges of forecasted foreign currency denominated revenue and expenditure transactions, Northern Trust closely matches all terms of the hedged item and the hedging derivative at inception and on an ongoing basis which limits hedge ineffectiveness. To the extent all terms are not perfectly matched, effectiveness is assessed using the dollar-offset method and any ineffectiveness is measured using the hypothetical derivative method. There was no ineffectiveness recognized in earnings for cash flow hedges during the three months ended March 31, 2013 and 2012, respectively. As of March 31, 2013, twenty-three months is the maximum length of time over which the exposure to variability in future cash flows of forecasted foreign currency denominated transactions is being hedged.

The following table provides cash flow hedge derivative gains and losses recognized in AOCI and the amounts reclassified to earnings during the three months ended March 31, 2013 and 2012.

 

(In Millions)

   Foreign Exchange
Contracts (Before Tax)
    Interest Rate Swap
Contracts (Before Tax)
 

Three Months Ended March 31,

   2013     2012     2013      2012  

Net Gain/(Loss) Recognized in AOCI

   $ (9.2   $ 18.9      $ —         $ —     
  

 

 

   

 

 

   

 

 

    

 

 

 

Net Gain/(Loss) Reclassified from AOCI to Earnings

         

Other Operating Income

     (0.7     (1.5     —           —     

Interest Income

     —          —          —           0.2   

Other Operating Expense

     (1.1     2.3        —           —     
  

 

 

   

 

 

   

 

 

    

 

 

 

Total

   $ (1.8   $ 0.8      $ —         $ 0.2   
  

 

 

   

 

 

   

 

 

    

 

 

 

During the three months ended March 31, 2013 and 2012, there were no transactions discontinued due to the original forecasted transactions no longer being probable of occurring. It is estimated that a net loss of $6.1 million will be reclassified into earnings within the next twelve months relating to cash flow hedges.

 

69


Notes to Consolidated Financial Statements (continued)

 

Certain foreign exchange contracts and qualifying nonderivative instruments are designated as net investment hedges to minimize Northern Trust’s exposure to variability in the foreign currency translation of net investments in non-U.S. branches and subsidiaries. The effective portion of changes in the fair value of the hedging instrument is recognized in AOCI consistent with the related translation gains and losses of the hedged net investment. For net investment hedges, all critical terms of the hedged item and the hedging instrument are matched at inception and on an ongoing basis to minimize the risk of hedge ineffectiveness. To the extent all terms are not perfectly matched, any ineffectiveness is measured using the hypothetical derivative method. Ineffectiveness resulting from net investment hedges is recorded in other operating income. There was no ineffectiveness recorded during the three months ended March 31, 2013 and 2012. Amounts recorded in AOCI are reclassified to earnings only upon the sale or liquidation of an investment in a non-U.S. branch or subsidiary.

The following table provides net investment hedge gains and losses recognized in AOCI during the three months ended March 31, 2013 and 2012.

 

     Hedging Gain/(Loss)
Recognized in OCI (Before Tax)
 
     Three Months Ended March 31,  

(In Millions)

   2013      2012  

Foreign Exchange Contracts

   $ 66.3       $ (36.3

Sterling Denominated Subordinated Debt

     16.5         (8.9
  

 

 

    

 

 

 

Total

   $ 82.8       $ (45.2
  

 

 

    

 

 

 

Derivatives not formally designated as hedges under GAAP are entered into to manage the foreign currency risk of non-U.S. dollar denominated assets and liabilities, the net investment in certain non-U.S. affiliates, forecasted foreign currency denominated transactions, and the credit risk and interest rate risk of loans and loan commitments. The following table identifies the types and classifications of risk management derivative instruments not formally designated as hedges, their notional and fair values, and the respective risks addressed.

 

               March 31, 2013      December 31, 2012  

(In Millions)

  

Derivative

Instrument

  

Risk
Classification

   Notional
Value
     Fair Value      Notional
Value
     Fair Value  
            Asset      Liability         Asset      Liability  

Commercial Loans and Loan Commitments

   Credit Default Swap Contracts    Credit    $ 25.0       $  —         $ 0.1       $ 42.5       $ —         $ 1.0   

Forecasted Foreign Currency Denominated Transactions

   Foreign Exchange Contracts    Foreign Currency      7.1         —           0.2         2.2         0.1         —     

Commercial Loans

   Foreign Exchange Contracts    Foreign Currency      134.6         0.7         1.6         135.8         1.3         0.7   

Net Investments in Non-U.S. Affiliates

   Foreign Exchange Contracts    Foreign Currency      54.3         0.3         0.3         1,051.8         8.9         2.3   
        

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

         $ 221.0       $ 1.0       $ 2.2       $ 1,232.3       $ 10.3       $ 4.0   
        

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

70


Notes to Consolidated Financial Statements (continued)

 

Changes in the fair value of derivative instruments not formally designated as hedges are recognized currently in income. The following table provides the location and amount of gains and losses recorded in the consolidated statement of income for the three months ended March 31, 2013 and 2012.

 

(In Millions)

  

Location of

Derivative Gain/

(Loss) Recognized

in Income

   Amount of Derivative Gain/(Loss)
Recognized in Income
 
      Three Months Ended
March  31,
 
      2013     2012  

Credit Default Swap Contracts

   Other Operating Income    $ (0.1   $ (1.1

Foreign Exchange Contracts

   Other Operating Income      (2.9     (0.3
     

 

 

   

 

 

 

Total

      $ (3.0   $ (1.4
     

 

 

   

 

 

 

19. Offsetting of Assets and Liabilities

The following tables provide information regarding the offsetting of derivative assets and securities purchased under agreements to resell within the consolidated balance sheet as of March 31, 2013 and December 31, 2012.

 

March 31, 2013

                                  

(In Millions)

   Gross
Recognized
Assets
     Gross
Amounts
Offset
     Net
Amounts
Presented
     Gross
Amounts
Not Offset
     Net
Amount ****
 

Derivative Assets *

              

Foreign Exchange Contracts Over the Counter (OTC)

   $ 2,390.5       $ 1,411.5       $ 979.0       $ —         $ 979.0   

Interest Rate Swaps OTC

     283.5         60.2         223.3         —           223.3   

Cross Product Netting Adjustment

     —           36.0         —           —           —     

Cross Product Collateral Adjustment

     —           218.1         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total **

   $ 2,674.0       $ 1,725.8       $ 948.2       $ —         $ 948.2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
              
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Securities Purchased under Agreements to Resell ***

   $ 250.0       $ —         $ 250.0       $ 250.0       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

* Derivative assets are reported in other assets in the consolidated balance sheet. Other assets (excluding derivative assets) totaled $3,177.7 million as of March 31, 2013.
** All derivative assets are subject to a master netting or similar arrangement.
*** Securities purchased under agreements to resell are reported in federal funds sold and securities purchased under agreements to resell in the consolidated balance sheet. Federal funds sold totaled $1.5 million as of March 31, 2013.
**** Northern Trust did not possess any cash collateral that was not offset in the consolidated balance sheet that could have been used to offset the net amounts presented in the consolidated balance sheet as of March 31, 2013.

 

71


Notes to Consolidated Financial Statements (continued)

 

December 31, 2012

                                  

(In Millions)

   Gross
Recognized
Assets
     Gross
Amounts
Offset
     Net
Amounts
Presented
     Gross
Amounts
Not Offset
     Net
Amount ****
 

Derivative Assets *

              

Foreign Exchange Contracts OTC

   $ 1,756.6       $ 877.1       $ 879.5       $ —         $ 879.5   

Interest Rate Swaps OTC

     310.3         68.3         242.0         —           242.0   

Cross Product Netting Adjustment

     —           37.1         —           —           —     

Cross Product Collateral Adjustment

     —           118.6         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total **

   $ 2,066.9       $ 1,101.1       $ 965.8       $ —         $ 965.8   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
              
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Securities Purchased under Agreements to Resell ***

   $ 35.4       $ —         $ 35.4       $ 35.4       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

* Derivative assets are reported in other assets in the consolidated balance sheet. Other assets (excluding derivative assets) totaled $2,964.4 million as of December 31, 2012.
** All derivative assets are subject to a master netting or similar arrangement.
*** Securities purchased under agreements to resell are reported in federal funds sold and securities purchased under agreements to resell in the consolidated balance sheet. Federal funds sold totaled $25.4 million as of December 31, 2012.
**** Northern Trust did not possess any cash collateral that was not offset in the consolidated balance sheet that could have been used to offset the net amounts presented in the consolidated balance sheet as of December 31, 2012.

The following tables provide information regarding the offsetting of derivative liabilities and securities sold under agreements to repurchase within the consolidated balance sheet as of March 31, 2013 and December 31, 2012.

 

March 31, 2013

                                  

(In Millions)

   Gross
Recognized
Liabilities
     Gross
Amounts
Offset
     Net
Amounts
Presented
     Gross
Amounts
Not Offset
     Net
Amount ***
 

Derivative Liabilities *

              

Foreign Exchange Contracts OTC

   $ 2,298.4       $ 1,411.5       $ 886.9       $ —         $ 886.9   

Interest Rate Swaps OTC

     220.8         60.2         160.6         —           160.6   

Credit Default Swaps OTC

     0.1         —           0.1         —           0.1   

Cross Product Netting Adjustment

     —           36.0         —           —           —     

Cross Product Collateral Adjustment

     —           472.2         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total **

   $ 2,519.3       $ 1,979.9       $ 539.4       $ —         $ 539.4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
              
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Securities Purchased under Agreements to Resell

   $ 490.2       $ —         $ 490.2       $ 490.2       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

* Derivative liabilities are reported in other liabilities in the consolidated balance sheet. Other liabilities (excluding derivative liabilities) totaled $2,059.7 million as of March 31, 2013.
** All derivative liabilities are subject to a master netting or similar arrangement.
*** Northern Trust did not place any cash collateral with counterparties that was not offset in the consolidated balance sheet that could have been used to offset the net amounts presented in the consolidated balance sheet as of March 31, 2013.

 

72


Notes to Consolidated Financial Statements (continued)

 

December 31, 2012

                                  

(In Millions)

   Gross
Recognized
Liabilities
     Gross
Amounts
Offset
     Net
Amounts
Presented
     Gross
Amounts
Not Offset
     Net
Amount ***
 

Derivative Liabilities *

              

Foreign Exchange Contracts OTC

   $ 1,772.7       $ 877.1       $ 895.6       $ —         $ 895.6   

Interest Rate Swaps OTC

     249.3         68.3         181.0         —           181.0   

Credit Default Swaps OTC

     1.0         —           1.0         —           1.0   

Cross Product Netting Adjustment

     —           37.1         —           —           —     

Cross Product Collateral Adjustment

     —           425.0         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total **

   $ 2,023.0       $ 1,407.5       $ 615.5       $ —         $ 615.5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
              
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Securities Purchased under Agreements to Resell

   $ 699.8       $ —         $ 699.8       $ 699.8       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

* Derivative liabilities are reported in other liabilities in the consolidated balance sheet. Other liabilities (excluding derivative liabilities) totaled $1,961.7 million as of December 31, 2012.
** All derivative liabilities are subject to a master netting or similar arrangement.
*** Northern Trust did not place any cash collateral with counterparties that was not offset in the consolidated balance sheet that could have been used to offset the net amounts presented in the consolidated balance sheet as of December 31, 2012.

All of Northern Trust’s securities sold under agreements to repurchase (repurchase agreements) and securities purchased under agreements to resell (reverse repurchase agreements) involve the transfer of financial assets in exchange for cash subject to a right and obligation to repurchase those assets for an agreed upon amount. In the event of a repurchase failure, the cash or financial assets are available for offset. All of Northern Trust’s repurchase agreements and reverse repurchase agreements are subject to a master netting agreement, which sets forth the rights and obligations for repurchase and offset. Under the master netting agreement, Northern Trust is entitled to set off receivables from and collateral placed with a single counterparty against obligations owed to that counterparty. In addition, collateral held by Northern Trust can be offset against receivables from that counterparty.

Derivative asset and liability positions with a single counterparty can be offset against each other in cases where legally enforceable master netting agreements exist. Derivative assets and liabilities can be further offset by cash collateral received from, and deposited with, the transacting counterparty. The basis for this view is that, upon termination of transactions subject to a master netting arrangement, the individual derivative receivables do not represent resources to which general creditors have rights and individual derivative payables do not represent claims that are equivalent to the claims of general creditors.

 

73


Item 1. Financial Statements

The information called for by this item is incorporated herein by reference to the “Financial Statements” section within this Form 10-Q.

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The information called for by this item is incorporated herein by reference to the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section within this Form 10-Q.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The information called for by this item is incorporated herein by reference to the “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Market Risk Management” section within this Form 10-Q.

 

Item 4. Controls and Procedures

The Corporation’s management, with the participation of the Corporation’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of Northern Trust’s “disclosure controls and procedures” (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report. Based on such evaluation, such officers have concluded that, as of the end of the period covered by this report, the Corporation’s disclosure controls and procedures are effective in bringing to their attention on a timely basis material information relating to the Corporation (including its consolidated subsidiaries) required to be included in the Corporation’s periodic filings under the Exchange Act.

There have been no changes in the Corporation’s internal control over financial reporting during the last fiscal quarter that have materially affected, or that are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

The information presented in Note 17 titled “Contingent Liabilities” within this Form 10-Q is incorporated herein by reference.

 

Item 1A. Risk Factors

Except as set forth below, there are no material changes to the risk factors set forth in Part I, Item 1A in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2012.

 

74


Item 1A. Risk Factors (continued)

Changes in regulatory capital requirements, and the application of those capital requirements to our business activities, could materially change the calculation of our risk-weighted assets, the capital required to operate our businesses, and our capital ratios over time. The Dodd-Frank Act, and the implementation of the Basel II and Basel III capital standards, could lead to higher capital requirements, higher capital charges and more restrictive leverage and liquidity ratios. We use the “advanced measurement approach” to calculate capital under Basel II and Basel III, and that requires us to calculate our credit, market and operational risk exposures using current and historical data, including our own loss data as well as industry data. These calculations are largely quantitative, but they involve various assumptions and judgments as to credit and operational loss data, volatility measures, correlations and statistical models, that may vary from our actual experience. Our calculations are subject to periodic update and revalidation depending upon changes in our business activities, our actual experiences, market forces and events, regulatory rules and interpretations, and other factors. These changes could impact, and lead to greater volatility in, our Basel II and Basel III Advanced capital ratios that could be material over time.

In addition, the risk factor relating to attracting and retaining personnel is revised as follows:

Failure to attract and retain skilled people could negatively affect our prospects. Our success depends, in large part, on our ability to attract and retain key talent. Competition for the best people in most of our activities can be intense and we may not be able to hire and retain key personnel, including as a result of any restrictions on our compensation practices that may be imposed by governments or regulators. The unexpected loss of services of one or more of our key personnel could have a material adverse impact on our business because of their skills, knowledge of our market, years of industry experience and the difficulty of promptly finding qualified replacement personnel. In addition, significant aspects of our compensation programs are performance-based. If we do not achieve applicable performance thresholds for a relevant period, employee compensation may be adversely affected, which could negatively affect our ability to attract and retain key personnel.

 

75


Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(c) The following table shows certain information relating to the Corporation’s purchases of common stock for the three months ended March 31, 2013.

 

Period

   Total Number
of Shares
Purchased (1)
     Average
Price Paid
per Share
     Total Number of
Shares Purchased
as Part of a Publicly
Announced Plan (2)
     Maximum Number of
Shares  that May Yet
be Purchased

Under the Plan (3)
 

January 1-31, 2013

     169,549       $ 51.05         169,549         6,640,623   

February 1-28, 2013

     728,343         52.81         728,343         5,912,280   

March 1-31, 2013

     505,474         54.15         505,474         5,406,806   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total (First Quarter)

     1,403,366       $ 53.08         1,403,366         5,406,806   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes shares purchased from employees in connection with equity plan transactions such as the surrender of shares to pay an option exercise price or tax withholding.
(2) These shares were purchased under the Corporation’s previous stock buyback program, announced March 14, 2012, which authorized the purchase of up to 10.0 million shares of the Corporation’s common stock.
(3) The maximum does not include shares authorized for purchase under the Corporation’s current stock buyback program announced April 16, 2013, which authorizes the purchase of up to 12.0 million shares of the Corporation’s common stock. The Corporation’s current stock buyback program has no fixed expiration date.

 

Item 6. Exhibits

A list of exhibits to this Form 10-Q is set forth on the Exhibit Index immediately preceding such exhibits and is incorporated herein by reference.

 

76


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

            NORTHERN TRUST CORPORATION
                                     (Registrant)

Date: April 30, 2013

    By:   /s/ Michael G. O’Grady
      Michael G. O’Grady
      Executive Vice President and
      Chief Financial Officer

 

   

Date: April 30, 2013

    By:   /s/ Richard D. Kukla
      Richard D. Kukla
      Senior Vice President and Controller
      (Chief Accounting Officer)

 

77


EXHIBIT INDEX

The following exhibits have been filed with the Securities and Exchange Commission with Northern Trust Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2013. You may obtain copies of these exhibits from the SEC’s Internet site at http://www.sec.gov. Stockholders may also obtain copies of such exhibits by writing Rose A. Ellis, Secretary, Northern Trust Corporation, 50 South LaSalle Street, Chicago, Illinois 60603.

 

Exhibit
Number

           

Description

(31)           Rule 13a-14(a)/15d-14(a) Certifications
          (i)    Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
          (ii)    Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(32)           Section 1350 Certifications
          (i)    Certifications of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(101)           Interactive Data File
          (i)    Includes the following financial and related information from Northern Trust’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2013 formatted in Extensible Business Reporting Language (XBRL): (1) the Consolidated Balance Sheet (2) the Consolidated Statement of Income, (3) the Consolidated Statement of Comprehensive Income (4) the Consolidated Statement of Changes in Stockholders’ Equity, (5) the Consolidated Statement of Cash Flows, and (6) Notes to Consolidated Financial Statements.

 

78