XNAS:NTRS Northern Trust Corp Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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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, 2012

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

241,149,572 Shares - $1.66 2/3 Par Value

(Shares of Common Stock Outstanding on March 31, 2012)

 

 

 


CONSOLIDATED FINANCIAL HIGHLIGHTS

(UNAUDITED)

($ In Millions Except Per Share Information)

 

      Three Months
Ended March  31
 

PERIOD ENDED:

   2012     2011     % Change  
     (Unaudited)     (Unaudited)        

Noninterest Income

      

Trust, Investment and Other Servicing Fees

   $ 575.2      $ 514.9        12 

Foreign Exchange Trading Income

     61.9        84.8        (27

Treasury Management Fees

     17.4        18.6        (6

Security Commissions and Trading Income

     18.3        15.0        22   

Other Operating Income

     38.6        35.7        8   

Investment Security Gains (Losses), net

     (2.4     (5.5     (57
  

 

 

   

 

 

   

 

 

 

Total Noninterest Income

     709.0        663.5        7   
  

 

 

   

 

 

   

 

 

 

Net Interest Income

     256.4        234.4        9   

Provision for Credit Losses

     5.0        15.0        (67
  

 

 

   

 

 

   

 

 

 

Income before Noninterest Expenses

     960.4        882.9        9   
  

 

 

   

 

 

   

 

 

 

Noninterest Expense

      

Compensation

     321.6        294.0        9   

Employee Benefits

     68.1        54.8        24   

Outside Services

     128.2        124.0        3   

Equipment and Software

     90.8        73.4        24   

Occupancy

     41.8        42.6        (2

Visa Indemnification Benefit

     —          (10.1     (100

Other Operating Expense

     73.1        74.2        (2
  

 

 

   

 

 

   

 

 

 

Total Noninterest Expense

     723.6        652.9        11   
  

 

 

   

 

 

   

 

 

 

Income before Income Taxes

     236.8        230.0        3   

Provision for Income Taxes

     75.6        79.0        (4
  

 

 

   

 

 

   

 

 

 

Net Income

   $ 161.2      $ 151.0        7
  

 

 

   

 

 

   

 

 

 

Average Total Assets

   $ 95,128.1      $ 83,265.7        14 
  

 

 

   

 

 

   

 

 

 

Per Common Share

      

Net Income   – Basic

   $ 0.66      $ 0.62        6

  – Diluted

     0.66        0.61        8   

Cash Dividends Declared Per Common Share

     0.58        0.28        N/M   

Book Value – End of Period (EOP)

     29.95        28.65        5   

Market Price – EOP

     47.45        50.75        (7
  

 

 

   

 

 

   

 

 

 

Ratios

      

Return on Average Common Equity

     9.04     8.94  

Return on Average Assets

     0.68        0.74     

Dividend Payout Ratio

     87.9        45.4     

Average Stockholders’ Equity to Average Assets

     7.5        8.2     
  

 

 

   

 

 

   

 

 

 

PERIOD END:

   March 31,
2012
    December 31,
2011
    % Change  
     (Unaudited)              

Balance Sheet

      

Senior Notes

   $ 2,122.6      $ 2,126.7        —  

Long-Term Debt

     1,785.6        2,133.3        (16

Floating Rate Capital Debt

     277.0        276.9        —     
  

 

 

   

 

 

   

 

 

 

Ratios

      

Tier 1 Capital to Risk-Weighted Assets – EOP

     12.4     12.5  

Total Capital to Risk-Weighted Assets – EOP

     14.0        14.2     

Tier 1 Leverage Ratio

     7.6        7.3     

 

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) and 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 to PFS and C&IS clients are provided 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 for the first quarter of 2012 totaled $161.2 million compared with $151.0 million in the first quarter of 2011. Net income per common share on a diluted basis was $0.66 compared with $0.61 in the prior year quarter.

The performance in the current quarter produced an annualized return on average common equity of 9.0% compared to 8.9% in the prior year quarter. The annualized return on average assets was 0.7% in both the current and prior year quarters.

Consolidated revenue of $965.4 million increased $67.5 million, or 8%, in the current quarter from $897.9 million in the prior year quarter, partly due to acquisitions completed in June and July of 2011. Noninterest income, which represented 73% of revenue, increased $45.5 million, or 7%, to $709.0 million from the prior year quarter’s $663.5 million, primarily reflecting higher trust, investment and other servicing fees, partially offset by lower foreign exchange trading income. Trust, investment and other servicing fees, which represented 60% of current quarter revenue, were $575.2 million in the current quarter, up $60.3 million, or 12%, from $514.9 million in the prior year quarter. Foreign exchange trading income totaled $61.9 million, down $22.9 million, or 27%, compared with $84.8 million in the prior year quarter.

Net interest income for the quarter increased $22.0 million, or 9%, to $256.4 million compared to $234.4 million in the prior year quarter.

Noninterest expense totaled $723.6 million for the current quarter compared to $652.9 million in the prior year quarter, an increase of $70.7 million, or 11%. The current quarter

 

3


Overview (continued)

 

includes expense attributable to the acquisitions completed in June and July of 2011, higher equipment and software expense, and restructuring and integration related charges of $3.9 million ($2.6 million after tax, or $0.01 per common share), primarily related to outside services expense. The prior year quarter included restructuring and integration related charges of $3.8 million ($3.2 million after tax, or $0.02 per common share). The prior year quarter also included the pre-tax benefit of $10.1 million ($6.4 million after tax, or $0.02 per common share) that was recorded in connection with the reduction of a liability related to potential losses from indemnified litigation involving Visa, Inc. (Visa).

Noninterest Income

The components of noninterest income are provided below.

 

Noninterest Income

   Three Months Ended March 31,  

($ In Millions)

   2012     2011     Change  

Trust, Investment and Other Servicing Fees

   $ 575.2      $ 514.9      $ 60.3        12

Foreign Exchange Trading Income

     61.9        84.8        (22.9     (27

Treasury Management Fees

     17.4        18.6        (1.2     (6

Security Commissions and Trading Income

     18.3        15.0        3.3        22   

Other Operating Income

     38.6        35.7        2.9        8   

Investment Security Gains (Losses), net

     (2.4     (5.5     3.1        (57
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Noninterest Income

   $ 709.0      $ 663.5      $ 45.5        7
  

 

 

   

 

 

   

 

 

   

 

 

 

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 calculations on which fees are based are performed on a monthly or quarterly basis in arrears. Certain investment management fee arrangements also may provide for performance fees based on client portfolio returns that exceed predetermined levels. Based on an analysis of historical trends and current asset and product mix, management estimates that a 10% rise or fall in overall equity markets would cause a corresponding increase or decrease in Northern Trust’s trust, investment and other servicing fees of approximately 3% and in total revenues of approximately 2%.

 

4


Noninterest Income (continued)

 

The following table presents Northern Trust’s assets under custody and assets under management by business segment.

 

                          Change     Change  
Assets Under Custody    March 31,      December 31,      March 31,      Q1-12/     Q1-12/  

($ In Billions)

   2012      2011      2011      Q4-11     Q1-11  

Corporate and Institutional

   $ 4,188.6       $ 3,877.6       $ 3,971.4         8     5

Personal

     406.6         385.2         384.6         6        6   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Assets Under Custody

   $ 4,595.2       $ 4,262.8       $ 4,356.0         8     5
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
                          Change     Change  
Assets Under Management    March 31,      December 31,      March 31,      Q1-12/     Q1-12/  

($ In Billions)

   2012      2011      2011      Q4-11     Q1-11  

Corporate and Institutional

   $ 537.4       $ 489.2       $ 493.8         10     9

Personal

     179.1         173.7         168.4         3        6   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Assets Under Management

   $ 716.5       $ 662.9       $ 662.2         8     8
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Corporate & Institutional Services (C&IS) assets under custody totaled $4.2 trillion, up 5% from the prior year quarter, and included $2.6 trillion of global custody assets, 4% higher compared to the prior year quarter. C&IS assets under management included $96.5 billion of securities lending collateral, a 12% decrease from the prior year quarter. Changes in assets under custody and under management are in comparison to the twelve month increase in the S&P 500 index of 6% and decline in the EAFE index (USD) of 9%.

Custodied and managed assets at the current and prior year quarter ends were invested as follows:

 

     March 31, 2012     March 31, 2011  

Assets Under Custody

   C&IS     PFS     Consolidated     C&IS     PFS     Consolidated  

Equities

     45     45     45     49     46     48

Fixed Income Securities

     36        26        35        34        26        33   

Cash and Other Assets

     19        29        20        17        28        19   
     March 31, 2012     March 31, 2011  

Assets Under Management

   C&IS     PFS     Consolidated     C&IS     PFS     Consolidated  

Equities

     51     37     47     47     37     44

Fixed Income Securities

     14        32        19        14        30        18   

Cash and Other Assets

     35        31        34        39        33        38   

 

5


Noninterest Income (continued)

 

Trust, investment and other servicing fees from C&IS increased $45.7 million, or 17%, totaling $317.0 million compared to the prior year quarter’s $271.3 million.

 

C&IS Trust, Investment and Other Servicing Fees

   Three Months Ended March 31,  

($ In Millions)

   2012      2011      Change  

Custody and Fund Administration

   $ 209.8       $ 169.0       $ 40.8        24

Investment Management

     61.8         67.1         (5.3     (8

Securities Lending

     21.5         17.0         4.5        27   

Other

     23.9         18.2         5.7        31   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 317.0       $ 271.3       $ 45.7        17
  

 

 

    

 

 

    

 

 

   

 

 

 

Custody and fund administration fees, the largest component of C&IS fees, increased 24%, primarily reflecting revenue attributable to the 2011 acquisitions and other new business. C&IS investment management fees declined 8% as the benefit of new business was offset by waived fees in money market mutual funds due to the persistent low short-term interest rates. Money market mutual fund fee waivers in C&IS totaled $10.6 million in the current quarter compared with $4.6 million in the prior year quarter.

Trust, investment and other servicing fees from PFS totaled $258.2 million in the current quarter, increasing $14.6 million, or 6%, from $243.6 million in the prior year quarter. The increase in the current quarter primarily reflects strong new business and revised fee structures, partially offset by higher waived fees in money market mutual funds. Money market mutual fund fee waivers in PFS totaled $14.8 million in the current quarter compared with $12.1 million in the prior year quarter.

Foreign exchange trading income totaled $61.9 million, down $22.9 million, or 27%, compared with $84.8 million in the prior year quarter. The current quarter decrease is attributable to reduced market volatility and client trading volumes.

Other operating income totaled $38.6 million, up 8% from $35.7 million in the prior year quarter. The components of other operating income are provided below.

 

Other Operating Income

   Three Months Ended March 31,  

($ In Millions)

   2012      2011      Change  

Loan Service Fees

   $ 16.8       $ 15.6       $ 1.2        

Banking Service Fees

     13.9         13.9         —           —     

Other Income

     7.9         6.2         1.7         26   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Other Operating Income

   $ 38.6       $ 35.7       $ 2.9        
  

 

 

    

 

 

    

 

 

    

 

 

 

The increase in other operating income is primarily attributable to increases in loan service fees and miscellaneous other income items.

Net investment security losses totaled $2.4 million in the current quarter compared to $5.5 million in the prior year quarter. The current quarter included credit-related other-than-temporary impairment of residential mortgage-backed securities and auction rate securities totaling $3.1 million. The prior year quarter included $5.1 million of other-than-temporary impairment of residential mortgage-backed securities.

 

6


Net Interest Income

Net interest income for the quarter stated on a fully taxable equivalent (FTE) basis totaled $266.3 million, up $21.4 million, or 9%, from $244.9 million reported in the prior year quarter. The increase is primarily attributable to higher average earning assets, partially offset by a decline in the net interest margin. 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-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 19.

Average earning assets for the quarter increased $10.7 billion, or 14%, to $86.1 billion from $75.4 billion in the prior year quarter, while the net interest margin was 1.24%, down from 1.32% in the prior year quarter. Average earning assets increased primarily due to increases in demand deposits and non-U.S. office interest-bearing deposits, which were invested primarily in investment securities and interest-bearing deposits with banks. The benefit of higher deposits was limited as yields on high quality investments declined resulting in a lower net interest margin.

Average investment securities increased $9.1 billion, or 41%, to $31.3 billion in the current quarter compared to $22.2 billion in the prior year quarter. Average interest-bearing deposits with banks totaled $18.2 billion for the current quarter compared to $16.2 billion for the prior year quarter, an increase of $2.0 billion, or 13%.

Loans and leases averaged $28.6 billion, an increase of $820.6 million, or 3%, from $27.8 billion in the prior year quarter. The increase was primarily attributable to growth in commercial and institutional loans, which averaged $7.0 billion in the current quarter, up $1.0 billion, or 17%, from the prior year quarter’s average of $6.0 billion.

Northern Trust utilizes a diverse mix of funding sources. Total interest-bearing deposits averaged $56.7 billion in the current quarter compared to $53.8 million in the prior year quarter. The increase of $2.9 billion, or 5%, was primarily attributable to non-U.S. office interest-bearing deposits. Other interest-related funds averaged $8.6 billion in the quarter, a decrease of $1.4 billion, or 14%, as compared to $10.0 billion in the prior year quarter, primarily due to lower levels of short-term borrowings and long-term debt. The balances within these classifications vary based on funding requirements and strategies, interest rate levels, changes in the volume of lower-cost deposit sources, and the availability of collateral to secure these borrowings. Average net noninterest-related funds utilized to fund earning assets increased $9.2 billion, or 80%, to $20.8 billion from $11.6 billion in the prior year quarter, resulting primarily from higher levels of U.S. office demand and other noninterest-bearing deposits. Deposit balances are down from the December 31, 2011 levels, however, with March 31, 2012 interest-bearing deposits totaling $54.0 billion, down $2.4 billion, or 4%, and noninterest-bearing deposits totaling $19.9 billion, down $6.4 billion, or 24%, as client deposits declined in the current quarter.

 

7


Net Interest Income (continued)

 

For additional 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 20.

Provision for Credit Losses

The provision for credit losses was $5.0 million in the current quarter and $15.0 million in the prior year quarter. Net charge-offs totaled $5.8 million for the current quarter and included $8.6 million of recoveries, compared to $21.6 million of net charge-offs in the prior year quarter which included $13.8 million of recoveries. Nonperforming loans decreased $63.0 million, or 19%, from the prior year quarter. Commercial and institutional loans and commercial real estate loans reflect improvement from the prior year quarter, while weakness persists within residential real estate loans. Other real estate owned decreased $33.9 million, or 60%, compared to the prior year quarter, primarily reflecting sales of properties. For additional discussion of the provision and allowance for credit losses, refer to the “Asset Quality” section below.

Noninterest Expense

The components of noninterest expense are provided below.

 

Noninterest Expense

   Three Months Ended March 31,  

($ In Millions)

   2012      2011     Change  

Compensation

   $ 321.6       $ 294.0      $ 27.6       

Employee Benefits

     68.1         54.8        13.3        24   

Outside Services

     128.2         124.0        4.2        3   

Equipment and Software

     90.8         73.4        17.4        24   

Occupancy

     41.8         42.6        (0.8     (2

Visa Indemnification Benefit

     —           (10.1     10.1        N/M   

Other Operating Expenses

     73.1         74.2        (1.1     (2
  

 

 

    

 

 

   

 

 

   

 

 

 

Total Noninterest Expense

   $ 723.6       $ 652.9      $ 70.7        11 
  

 

 

    

 

 

   

 

 

   

 

 

 

The increase in noninterest expense in the current quarter primarily reflects the acquisitions completed in June and July of 2011, higher equipment and software expense, and the pre-tax benefit of $10.1 million that was recorded in the prior year quarter from the reduction of the Visa indemnification liability.

Compensation expense, the largest component of noninterest expense, equaled $321.6 million, up $27.6 million, or 9%, compared to $294.0 million in the prior year quarter. The increase primarily reflects higher full-time equivalent staff levels, the majority of the increase being attributable to the 2011 acquisitions, and annual merit increases. Staff on a full-time equivalent basis at March 31, 2012 totaled approximately 13,900, up 7% from a year ago.

Employee benefit expense equaled $68.1 million, up $13.3 million, or 24%, compared to $54.8 million in the prior year quarter. Employee benefit expense for the prior year quarter included a $9.7 million reversal of an employee benefit related accrual for which

 

8


Noninterest Expense (continued)

 

the 2010 goal was not met. The current quarter reflects higher full-time equivalent staff levels and higher federal and unemployment insurance expense.

Expense associated with outside services totaled $128.2 million, up 3% from $124.0 million in the prior year quarter. The increase was primarily due to higher expense associated with technical services, due in part to the 2011 acquisitions, partially offset by lower consulting and third-party advisory fees.

Equipment and software expense totaled $90.8 million, an increase of $17.4 million, or 24%, from $73.4 million in the prior year quarter. The current quarter reflects a $4.6 million software write-off and higher levels of software amortization and related software support costs from the continued investment in capital assets.

The components of other operating expense are provided below.

 

Other Operating Expense

   Three Months Ended March 31,  

($ In Millions)

   2012      2011      Change  

Business Promotion

   $ 28.3       $ 29.4       $ (1.1     (4 )% 

FDIC Insurance Premiums

     4.3         7.9         (3.6     (46

Staff Related

     7.6         7.7         (0.1     (1

Other Intangible Amortization

     4.6         3.3         1.3        38   

Other Expenses

     28.3         25.9         2.4        9   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Other Operating Expense

   $ 73.1       $ 74.2       $ (1.1     (2 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

The decrease in Federal Deposit Insurance Corporation (FDIC) premiums primarily reflects lower premiums resulting from changes in the FDIC’s assessment methodology. Other intangible amortization for the current quarter includes expense associated with intangible assets acquired in 2011. The increase in other expenses reflects increases within various other miscellaneous expense categories.

Provision for Income Taxes

Income tax expense was $75.6 million in the current quarter, representing an effective tax rate of 31.9%, and $79.0 million in the prior year quarter, representing an effective tax rate of 34.3%. The prior year quarter included adjustments to deferred tax provisions as a result of the Illinois corporate income tax rate increase which was enacted in January 2011.

 

9


BUSINESS UNIT REPORTING

The following table reflects the earnings contributions and average assets of Northern Trust’s business units for the three month periods ended March 31, 2012 and 2011. 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)

   2012     2011     2012     2011     2012     2011     2012     2011  

Noninterest Income Trust, Investment

and Other Servicing Fees

   $ 317.0      $ 271.3      $ 258.2      $ 243.6      $ —        $ —        $ 575.2      $ 514.9   

Other

     106.1        124.3        27.1        31.6        0.6        (7.3     133.8        148.6   

Net Interest Income (FTE)*

     77.0        61.7        161.1        149.2        28.2        34.0        266.3        244.9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Revenues*

     500.1        457.3        446.4        424.4        28.8        26.7        975.3        908.4   

Provision for Credit Losses

     0.5        (14.6     4.5        29.6        —          —          5.0        15.0   

Noninterest Expenses

     398.0        339.9        303.7        290.0        21.9        23.0        723.6        652.9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before Income Taxes*

     101.6        132.0        138.2        104.8        6.9        3.7        246.7        240.5   

Provision for Income Taxes*

     33.6        49.8        52.3        41.7        (0.4     (2.0     85.5        89.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

   $ 68.0      $ 82.2      $ 85.9      $ 63.1      $ 7.3      $ 5.7      $ 161.2      $ 151.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of Consolidated Net Income

     42     54     53     42     5     4     100     100

Average Assets

   $ 49,662.2      $ 43,710.7      $ 23,563.9      $ 23,630.3      $ 21,902.0      $ 15,924.7      $ 95,128.1      $ 83,265.7   

 

* Stated on a fully taxable equivalent basis (FTE). Total consolidated includes FTE adjustments of $9.9 million for 2012 and $10.5 million for 2011.

Corporate and Institutional Services

C&IS net income for the quarter was $68.0 million compared with $82.2 million in the prior year quarter, a decrease of $14.2 million, or 17%.

 

C&IS Trust, Investment and Other Servicing Fees

   Three Months Ended March 31,  

($ In Millions)

   2012      2011      Change  

Custody and Fund Administration

   $ 209.8       $ 169.0       $ 40.8        24

Investment Management

     61.8         67.1         (5.3     (8

Securities Lending

     21.5         17.0         4.5        27   

Other

     23.9         18.2         5.7        31   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 317.0       $ 271.3       $ 45.7        17
  

 

 

    

 

 

    

 

 

   

 

 

 

The increase in C&IS trust, investment and other servicing fees primarily reflects revenue attributable to the 2011 acquisitions and other new business, partially offset by increased money market mutual fund fee waivers. Custody and fund administration fees, the largest component of C&IS fees, increased 24%, primarily as a result of the 2011 acquisitions and other new business. The decrease in investment management fees is primarily due to higher waived fees in money market mutual funds attributable to the persistent low level of short-term interest rates, partially offset by new business. Money market mutual fund fee waivers in C&IS totaled $10.6 million in the current quarter compared with $4.6 million in the prior year quarter. Securities lending revenue increased 27%, primarily due to higher spreads on the investment of cash collateral.

 

10


Corporate and Institutional Services (continued)

 

Other noninterest income decreased $18.2 million, or 15%, in the current quarter as compared to the prior year quarter, as a result of lower foreign exchange trading income. The decrease in foreign exchange trading income is attributable to reduced market volatility and client volumes.

Net interest income stated on an FTE basis was up $15.3 million, or 25%, from the prior year quarter, primarily reflecting an increase in average earning assets. The net interest margin equaled 0.74% compared with 0.62% reported in the prior year quarter. The higher net interest margin is primarily attributable to increased interest rates earned on investments in short-term interest-bearing deposits with banks that were funded by lower yielding interest-bearing deposits. Earning assets averaged $41.7 billion for the quarter, an increase of $3.5 billion, or 9%, from $38.2 billion the prior year quarter, funded chiefly by higher non-U.S. custody related interest-bearing deposits which were primarily invested in low yielding short-term interest-bearing deposits with banks and in securities.

A provision for credit losses of $0.5 million was recorded in the current quarter, reflecting improvement in underlying asset quality metrics within commercial and institutional loans and commercial real estate loans. Total loans and leases averaged $5.9 billion in the current quarter up $1.3 billion, or 27%, from the prior year quarter. The prior year quarter’s negative provision totaled $14.6 million, partially attributable to a high level of charge-off recoveries in the period.

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 $398.0 million compared with $339.9 million for the prior year quarter, an increase of $58.1 million, or 17%. The increase reflects higher compensation and outside service expenses, partly due to the 2011 acquisitions, and increased indirect expense allocations.

Personal Financial Services

PFS net income for the current quarter was $85.9 million compared to $63.1 million reported in the prior year quarter, an increase of $22.8 million, or 36%. Noninterest income was $285.3 million, up $10.1 million, or 4%, from $275.2 million in the prior year quarter. Trust, investment and other servicing fees totaled $258.2 million in the current quarter, increasing $14.6 million, or 6%, from $243.6 million in the prior year quarter. The increase in trust, investment and other servicing fees was primarily the result of strong new business and revised fee structures, partially offset by higher waived fees in money market mutual funds. PFS waived fees in money market mutual funds, attributable to the continued low level of short-term interest rates, totaled $14.8 million in the current quarter compared with $12.1 million in the prior year quarter. Other noninterest income totaled $27.1 million, down 14% from $31.6 million in the prior year quarter due to decreases within various miscellaneous noninterest income categories.

 

11


Personal Financial Services (continued)

 

Net interest income stated on an FTE basis was $161.1 million in the current quarter, an increase of $11.9 million, or 8%, compared to $149.2 million in the prior year quarter. The net interest margin was 2.82% in the current quarter compared to 2.60% in the prior year quarter. The higher net interest margin is primarily due to a change in the application of internal funds transfer pricing used in determining net interest income, as well as a decline in the average cost of interest-bearing funds.

A provision for credit losses of $4.5 million was recorded in the current quarter. The prior year quarter’s provision totaled $29.6 million. The current quarter provision reflects improvement in the underlying asset quality metrics within commercial and institutional loans and commercial real estate loans, partially offset by continued weakness in residential real estate loans. For a fuller discussion of the consolidated allowance and provision for credit losses refer to the “Asset Quality” section below.

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 $303.7 million compared with $290.0 million in the prior year quarter, an increase of $13.7 million, or 5%. The increase was primarily attributable to higher indirect expense allocations.

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 for the current quarter totaled $0.6 million, compared with negative $7.3 million in the prior year quarter. The change in other noninterest income is due to increases within various miscellaneous noninterest income categories and lower levels of investment security losses. The current quarter included charges of $3.1 million for credit-related other-than-temporary impairment of residential mortgage-backed securities and auction rate securities. The prior year quarter included charges of $5.1 million for credit-related other-than-temporary impairment of residential mortgage-backed securities. Net interest income in the current quarter was $28.2 million, compared to $34.0 million in the prior year quarter, a decrease of $5.8 million, or 17%. The decrease reflects a change in the application of internal funds transfer pricing used in determining net interest income, as well as lower yields on securities in the prolonged low interest rate environment. Average assets increased $6.0 billion, or 38%, to $21.9 billion in the current quarter, reflecting higher levels of interest-bearing deposits and investment securities, funded primarily by non-U.S interest-bearing deposits and allocated capital. Noninterest expense for the quarter totaled $21.9 million compared with $23.0 million in the prior year quarter, a decrease of 5%.

 

12


BALANCE SHEET

Total assets at March 31, 2012 were $91.6 billion and averaged $95.1 billion for the current quarter, compared with total assets of $92.7 billion at March 31, 2011 and average total assets of $83.3 billion in the prior year 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 $29.2 billion at March 31, 2012 and averaged $28.6 billion in the current quarter as compared to $27.9 billion at March 31, 2011 and a $27.8 billion average in the prior year quarter. Securities totaled $32.1 billion at March 31, 2012 and averaged $31.3 billion for the quarter, up 38% and 41%, respectively, compared with $23.2 billion at March 31, 2011 and $22.2 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 $21.4 billion at March 31, 2012 and averaged $26.2 billion in the current quarter, down 33% and up 3%, respectively, from the year-ago quarter balances. The increase in average total assets was funded primarily by higher levels of demand and other non-interest bearing balances and non-U.S. office interest-bearing deposits.

Total stockholders’ equity averaged $7.2 billion, up $314.5 million, or 5%, from the prior year quarter’s average of $6.9 billion. The current quarter 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 current quarter, the Corporation repurchased 328,687 shares at a cost of $14.5 million ($43.98 average price per share). The Corporation’s common stock repurchase authorization was replaced in March of 2012, pursuant to which the Corporation is authorized to purchase up to 10.0 million shares after March 31, 2012.

Northern Trust’s risk-based capital ratios remained strong at March 31, 2012 and were well above the minimum regulatory requirements established by U.S. banking regulators of 4% for tier 1 capital, 8% for total capital (risk-based), and 3% for leverage (tier 1 capital to period average assets). The Corporation and the Bank each had capital ratios at March 31, 2012 that were above the level required for classification as a “well capitalized” institution. Shown below are the March 31, 2012 and December 31, 2011 capital ratios of the Corporation and the Bank for the three months ended March 31, 2012 and December 31, 2011.

 

     March 31, 2012     December 31, 2011  
      Tier 1
Capital
    Total
Capital
    Leverage
Ratio
    Tier 1
Capital
    Total
Capital
    Leverage
Ratio
 

Northern Trust Corporation

     12.4     14.0     7.6     12.5     14.2     7.3

The Northern Trust Company

     11.7     13.6     7.1     11.7     13.8     6.8

 

13


BALANCE SHEET (continued)

 

The following table provides a reconciliation of the Corporation’s tier 1 common equity to tier 1 capital calculated in accordance with applicable regulatory requirements and GAAP.

 

     March 31,     December 31,  

($ In Millions)

   2012     2011  

Tier 1 Capital

   $ 7,157.4      $ 7,104.6   

Less – Floating Rate Capital Securities

     268.6        268.6   
  

 

 

   

 

 

 

Tier 1 Common Equity

   $ 6,888.8      $ 6,836.0   
  

 

 

   

 

 

 

Ratios

    

Tier 1 Capital

     12.4     12.5

Tier 1 Common Equity

     11.9     12.1

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

ASSET QUALITY

Securities Portfolio

Northern Trust maintains a high quality securities portfolio, with 85% of the combined available for sale, held to maturity, and trading account portfolios at March 31, 2012 composed of U.S. Treasury and government sponsored agency securities and triple-A rated corporate notes, asset-backed securities, covered bonds, supranational 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, supranational bonds, auction rate securities and other securities, of which as a percentage of the total securities portfolio, 4% was rated double-A, 1% 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 gross unrealized losses within the investment securities portfolio at March 31, 2012 were $66.8 million as compared to $85.0 million at December 31, 2011. Of the total gross unrealized losses on securities at March 31, 2012, $23.9 million relate to non-agency residential mortgage-backed securities. Non-agency residential mortgage-backed securities rated below double-A at March 31, 2012 represented 85% of the total fair value of non-agency residential mortgage-backed securities, were comprised primarily of sub-prime and Alt-A securities, and had a total amortized cost and fair value of $140.5 million and $117.2 million, respectively.

Northern Trust has evaluated non-agency residential mortgage-backed securities, and all other securities with unrealized losses, for possible OTTI in accordance with GAAP and

 

14


ASSET QUALITY (continued)

 

Northern Trust’s security impairment review policy. Credit related losses recognized in earnings on other-than-temporarily impaired securities totaled $3.1 million for the three months ended March 31, 2012. There were $5.1 million of credit-related losses recognized in earnings for the three months ended March 31, 2011 on other-than-temporarily impaired securities.

Northern Trust is a participant in the repurchase agreement market. This market 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

As of March 31, 2012, Northern Trust’s gross exposure to obligors in Portugal, Italy, Ireland, Greece and Spain, eurozone countries considered by Northern Trust to be experiencing significant economic, fiscal and/or political strains, totaled approximately $610 million, or less than 1% of Northern Trust’s total consolidated assets. The largest such exposure, totaling $608 million, was to obligors in Ireland, of which $6 million was to banks and $602 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. The remaining exposure reflects $2 million to banks in Spain in connection with foreign exchange contracts. There was negligible exposure to obligors in Portugal, Italy, or Greece. Exposure levels at March 31, 2012 reflect Northern Trust’s risk management policies and practices, which operated to limit exposures to higher risk European financial and sovereign entities.

 

15


ASSET QUALITY (continued)

 

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.

 

     March 31,     December 31,     March 31,  

($ In Millions)

   2012     2011     2011  

Nonperforming Loans and Leases

Commercial

      

Commercial and Institutional

   $ 28.6      $  31.3      $ 52.3   

Commercial Real Estate

     69.8        79.5        111.9   
  

 

 

   

 

 

   

 

 

 

Total Commercial

     98.4        110.8        164.2   
  

 

 

   

 

 

   

 

 

 

Personal

      

Residential Real Estate

     160.0        177.6        158.0   

Private Client

     3.7        5.3        2.9   
  

 

 

   

 

 

   

 

 

 

Total Personal

     163.7        182.9        160.9   
  

 

 

   

 

 

   

 

 

 

Total Nonperforming Loans and Leases

     262.1        293.7        325.1   

Other Real Estate Owned

     22.4        21.2        56.3   
  

 

 

   

 

 

   

 

 

 

Total Nonperforming Assets

   $ 284.5      $ 314.9      $ 381.4   
  

 

 

   

 

 

   

 

 

 

90 Day Past Due Loans Still Accruing

   $ 21.0      $ 13.1      $ 13.9   
  

 

 

   

 

 

   

 

 

 

Nonperforming Loans and Leases to Total Loans and Leases

     0.90     1.01     1.17
  

 

 

   

 

 

   

 

 

 

Allowance for Credit Losses Assigned to Loans and Leases to Nonperforming Loans

     1.1     1.0     1.0
  

 

 

   

 

 

   

 

 

 

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. The duration and severity of the economic downturn which began in 2008, together with its impact on equity and real estate values, had a negative effect on Northern Trust’s credit portfolio and resulted in increases from prior historical levels of credits downgraded to nonperforming, primarily the residential real estate and commercial real estate loan classes, and of OREO properties. The $30.4 million decrease in nonperforming assets during the current quarter primarily reflects nonperforming loan payoffs and sales as well as amounts charged off, partially offset by additional loans classified as nonperforming, though at a lower level than in the more recent periods.

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

 

16


ASSET QUALITY (continued)

 

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.

A $5.0 million provision for credit losses was recorded in the current quarter and a $15.0 million provision was recorded in the prior year first quarter. The current quarter provision reflects improvement in the commercial and institutional loan class, partially offset by continued weakness in the commercial real estate and residential real estate loan classes.

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, 2012 and 2011 due to charge-offs, recoveries, and the provision for credit losses.

 

17


ASSET QUALITY (continued)

 

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, 2012     December 31, 2011     March 31, 2011  

($ 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

   $ 36.5        —   %    $ 47.3        —     $ 60.4        —  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allocated Inherent Allowance

Commercial

            

Commercial and Institutional

     88.9        24        90.0        24        106.7        21   

Commercial Real Estate

     79.0        10        77.1        10        78.6        12   

Lease Financing, net

     3.1        4        1.8        3        1.5        4   

Non-U.S.

     3.7        4        4.7        4        4.0        3   

Other

     —          2        —          1        —          3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Commercial

     174.7        44        173.6        42        190.8        43   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Personal

            

Residential Real Estate

     100.2        36        92.0        37        85.9        39   

Private Client

     16.7        19        16.0        20        13.7        18   

Other

     —          1        —          1        —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Personal

     116.9        56        108.0        58        99.6        57   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Allocated Inherent Allowance

   $ 291.6        100 %    $ 281.6        100   $ 290.4        100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Allowance for Credit Losses

     328.1          328.9          350.8     
  

 

 

     

 

 

     

 

 

   

Allowance Assigned to:

            

Loans and Leases

   $ 295.5        $ 294.8        $ 313.5     

Unfunded Commitments and Standby Letters of Credit

     32.6          34.1          37.3     
  

 

 

     

 

 

     

 

 

   

Total Allowance for Credit Losses

   $ 328.1        $ 328.9        $ 350.8     
  

 

 

     

 

 

     

 

 

   

Allowance Assigned to Loans and Leases to Total Loans and Leases

     1.01       1.01       1.12  
  

 

 

     

 

 

     

 

 

   

MARKET RISK MANAGEMENT

As described in the 2011 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, 2011.

 

18


RECONCILIATION OF REPORTED NET INTEREST INCOME TO FULLY TAXABLE EQUIVALENT

The table below presents 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 this presentation provides a clearer indication of net interest margins for comparative purposes.

 

     Three Months Ended  
     March 31, 2012     March 31, 2011  

($ In Millions)

   Reported     FTE Adj.      FTE*     Reported     FTE Adj.      FTE*  

Interest Income

   $ 341.0      $ 9.9       $ 350.9      $ 347.1      $ 10.5       $ 357.6   

Interest Expense

     84.6        —           84.6        112.7                   112.7   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Net Interest Income

   $ 256.4      $ 9.9       $ 266.3      $ 234.4      $ 10.5       $ 244.9   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Net Interest Margin

     1.20        1.24     1.26        1.32
  

 

 

      

 

 

   

 

 

      

 

 

 

 

* Fully taxable equivalent (FTE).

 

19


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)    2012     2011  

($ 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       $ 246.6        0.12   $ 0.1      $ 251.1        0.15

Interest-Bearing Deposits with Banks

     50.6         18,246.4        1.11        37.6        16,153.8        0.94   

Federal Reserve Deposits and Other Interest-Bearing

Securities

     5.1         7,685.3        0.27        6.4        8,950.1        0.29   

U.S. Government

     7.6         2,969.8        1.03        4.4        973.6        1.82   

Obligations of States and Political Subdivisions

     8.1         493.0        6.60        10.9        667.9        6.54   

Government Sponsored Agency

     29.7         17,542.9        0.68        24.2        12,615.5        0.78   

Other (1)

     30.9         10,264.7        1.21        26.3        7,989.4        1.34   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Securities

     76.3         31,270.4        0.98        65.8        22,246.4        1.20   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans and Leases (2)

     218.8         28,615.6        3.08        247.7        27,795.0        3.61   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Earning Assets

     350.9         86,064.3        1.64        357.6        75,396.4        1.92   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for Credit Losses Assigned to Loans and Leases

     —           (293.0     —          —          (319.2     —     

Cash and Due from Banks

     —           4,002.5        —          —          3,431.6        —     

Buildings and Equipment

     —           492.3        —          —          503.8        —     

Client Security Settlement Receivables

     —           421.0        —          —          428.9        —     

Goodwill

     —           534.1        —          —          405.1        —     

Other Assets

     —           3,906.9        —          —          3,419.1        —     
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Assets

   $ —         $ 95,128.1        —     $ —        $ 83,265.7        —  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average Source of Funds

             

Deposits

             

Savings and Money Market

   $ 5.2       $ 14,606.8        0.14   $ 8.1      $ 13,901.7        0.24

Savings Certificates and Other Time

     5.1         3,071.4        0.67        8.1        3,831.3        0.85   

Non-U.S. Offices - Interest-Bearing

     36.0         38,980.8        0.37        50.5        36,075.3        0.57   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Interest-Bearing Deposits

     46.3         56,659.0        0.33        66.7        53,808.3        0.50   

Short-Term Borrowings

     1.5         4,228.2        0.14        2.5        5,130.3        0.20   

Senior Notes

     16.9         2,125.2        3.20        15.7        1,893.2        3.36   

Long-Term Debt

     19.1         1,989.4        3.86        27.1        2,723.3        4.04   

Floating Rate Capital Debt

     0.8         277.0        1.12        0.7        276.9        0.87   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Interest-Related Funds

     84.6         65,278.8        0.52        112.7        63,832.0        0.72   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest Rate Spread

     —           —          1.12        —          —          1.20   

Demand and Other Noninterest-Bearing Deposits

     —           19,467.2        —          —          9,748.8        —     

Other Liabilities

     —           3,214.8        —          —          2,832.1        —     

Stockholders’ Equity

     —           7,167.3        —          —          6,852.8        —     
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

     —         $ 95,128.1        —          —        $ 83,265.7        —     
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Interest Income/Margin (FTE Adjusted)

   $ 266.3       $ —          1.24   $ 244.9      $ —          1.32
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Interest Income/Margin (Unadjusted)

   $ 256.4       $ —          1.20   $ 234.4      $ —          1.26
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
ANALYSIS OF NET INTEREST INCOME CHANGES              
DUE TO VOLUME AND RATE              
                        Three Months 2012/2011  
                        Change Due To  

(In Millions)

                      Average
Balance
    Rate     Total  

Earning Assets (FTE)

          $ 38.3      $ (45.0   $ (6.7

Interest-Related Funds

            (2.3     (25.8     (28.1
         

 

 

   

 

 

   

 

 

 

Net Interest Income (FTE)

          $ 40.6      $ (19.2   $ 21.4   
         

 

 

   

 

 

   

 

 

 

 

(1) Other securities include Federal Reserve and Federal Home Loan Bank stock and certain affordable housing investments which are classified in other assets on the consolidated balance sheet as of March 31, 2012 and 2011.
(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 $9.9 million and $10.5 million for the three months ended March 31, 2012 and 2011, 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.

 

 

20


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 recent downgrade of U.S. Government issued 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 the recent disruption and 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 other 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

 

21


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 revenues 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 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 recent 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 potential legislation and regulations, including Basel III and regulations that may be promulgated under the Dodd-Frank Act, could affect required

 

22


FACTORS AFFECTING FUTURE RESULTS (continued)

 

regulatory capital for financial institutions, including Northern Trust, potentially 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 2011 Annual Report to Shareholders (pages 49-61), in the section of the “Notes to Consolidated Financial Statements” in the 2011 Annual Report to Shareholders captioned “Note 25 – Contingent Liabilities” (pages 111 and 112), in the sections of “Item 1 – Business” of the 2011 Annual Report on Form 10-K captioned “Government Monetary and Fiscal Policies,” “Competition” and “Regulation and Supervision” (pages 3-14), and in “Item 1A – Risk Factors” of the 2011 Annual Report on Form 10-K (pages 28-37). 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.

 

23


FINANCIAL STATEMENTS

 

CONSOLIDATED BALANCE SHEET    NORTHERN TRUST CORPORATION

 

($ In Millions Except Share Information)

   March 31
2012
    December 31
2011
 
     (Unaudited)        

Assets

    

Cash and Due from Banks

   $ 4,280.3      $ 4,315.3   

Federal Funds Sold and Securities Purchased under Agreements to Resell

     290.9        121.3   

Interest-Bearing Deposits with Banks

     18,871.3        16,696.4   

Federal Reserve Deposits and Other Interest-Bearing

     2,228.0        13,448.6   

Securities

    

Available for Sale

     30,906.8        30,192.5   

Held to Maturity (Fair value of $727.2 and $817.1)

     709.7        799.2   

Trading Account

     9.3        8.0   
  

 

 

   

 

 

 

Total Securities

     31,625.8        30,999.7   
  

 

 

   

 

 

 

Loans and Leases

    

Commercial

     12,685.5        12,354.3   

Personal

     16,470.8        16,709.6   
  

 

 

   

 

 

 

Total Loans and Leases (Net of unearned income of $365.6 and $374.1)

     29,156.3        29,063.9   
  

 

 

   

 

 

 

Allowance for Credit Losses Assigned to Loans and Leases

     (295.5     (294.8

Buildings and Equipment

     481.2        494.5   

Client Security Settlement Receivables

     985.3        778.3   

Goodwill

     536.5        532.0   

Other Assets

     3,444.2        4,068.5   
  

 

 

   

 

 

 

Total Assets

   $ 91,604.3      $ 100,223.7   
  

 

 

   

 

 

 

Liabilities

    

Deposits

    

Demand and Other Noninterest-Bearing

   $ 16,412.4      $ 22,792.0   

Savings and Money Market

     14,349.0        17,470.8   

Savings Certificates and Other Time

     3,093.8        3,058.3   

Non U.S. Offices – Noninterest-Bearing

     3,502.4        3,488.4   

 – Interest-Bearing

     36,575.4        35,868.0   
  

 

 

   

 

 

 

Total Deposits

     73,933.0        82,677.5   

Federal Funds Purchased

     1,973.7        815.3   

Securities Sold Under Agreements to Repurchase

     284.0        1,198.8   

Other Borrowings

     1,103.0        931.5   

Senior Notes

     2,122.6        2,126.7   

Long-Term Debt

     1,785.6        2,133.3   

Floating Rate Capital Debt

     277.0        276.9   

Other Liabilities

     2,902.2        2,946.4   
  

 

 

   

 

 

 

Total Liabilities

     84,381.1        93,106.4   
  

 

 

   

 

 

 

Stockholders’ Equity

    

Common Stock, $1.66 2/3 Par Value; Authorized 560,000,000 shares; Outstanding shares of 241,149,572 and 241,008,509

     408.6        408.6   

Additional Paid-In Capital

     981.9        977.5   

Retained Earnings

     6,323.5        6,302.3   

Accumulated Other Comprehensive Loss

     (276.3     (345.6

Treasury Stock (4,021,952 and 4,163,015 shares, at cost)

     (214.5     (225.5
  

 

 

   

 

 

 

Total Stockholders’ Equity

     7,223.2        7,117.3   
  

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 91,604.3      $ 100,223.7   
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

24


CONSOLIDATED STATEMENT OF INCOME

(UNAUDITED)

   NORTHERN TRUST CORPORATION

 

      Three Months
Ended March 31
 

($ In Millions Except Per Share Information)

   2012     2011  

Noninterest Income

    

Trust, Investment and Other Servicing Fees

   $ 575.2      $ 514.9   

Foreign Exchange Trading Income

     61.9        84.8   

Treasury Management Fees

     17.4        18.6   

Security Commissions and Trading Income

     18.3        15.0   

Other Operating Income

     38.6        35.7   

Investment Security Gains (Losses), net (1)

     (2.4     (5.5
  

 

 

   

 

 

 

Total Noninterest Income

     709.0        663.5   
  

 

 

   

 

 

 

Net Interest Income

    

Interest Income

     341.0        347.1   

Interest Expense

     84.6        112.7   
  

 

 

   

 

 

 

Net Interest Income

     256.4        234.4   

Provision for Credit Losses

     5.0        15.0   
  

 

 

   

 

 

 

Net Interest Income after Provision for Credit Losses

     251.4        219.4   
  

 

 

   

 

 

 

Noninterest Expense

    

Compensation

     321.6        294.0   

Employee Benefits

     68.1        54.8   

Outside Services

     128.2        124.0   

Equipment and Software

     90.8        73.4   

Occupancy

     41.8        42.6   

Visa Indemnification Benefit

     —          (10.1

Other Operating Expense

     73.1        74.2   
  

 

 

   

 

 

 

Total Noninterest Expense

     723.6        652.9   
  

 

 

   

 

 

 

Income before Income Taxes

     236.8        230.0   

Provision for Income Taxes

     75.6        79.0   
  

 

 

   

 

 

 

Net Income

   $ 161.2      $ 151.0   
  

 

 

   

 

 

 

Net Income Applicable to Common Stock

   $ 161.2      $ 151.0   
  

 

 

   

 

 

 

Per Common Share

    

Net Income – Basic

   $ 0.66      $ 0.62   

 – Diluted

     0.66        0.61   
  

 

 

   

 

 

 

Average Number of Common Shares Outstanding – Basic

     241,090,093        242,126,162   

 – Diluted

     241,556,096        242,969,629   
  

 

 

   

 

 

 

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(UNAUDITED)

   NORTHERN TRUST CORPORATION

 

     Three Months
Ended March 31
 

(In Millions)

   2012     2011  

Net Income

   $ 161.2      $ 151.0   

Other Comprehensive Income (Net of Tax and Reclassifications)

    

Net Unrealized Gains on Securities Available for Sale

     20.0        3.4   

Net Unrealized Gains on Cash Flow Hedges

     11.3        9.0   

Foreign Currency Translation Adjustments

     15.8        7.2   

Pension and Other Postretirement Benefit Adjustments

     22.2        6.1   
  

 

 

   

 

 

 

Other Comprehensive Income

     69.3        25.7   
  

 

 

   

 

 

 

Comprehensive Income

   $ 230.5      $ 176.7   
  

 

 

   

 

 

 

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

   $ (3.1   $ 0.1   

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

     —          (5.2

Other Security Gains (Losses), net

     0.7        (0.4
  

 

 

   

 

 

 

Investment Security Gains (Losses), net

   $ (2.4   $ (5.5
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

25


CONSOLIDATED STATEMENT OF CHANGES IN

STOCKHOLDERS’ EQUITY

(UNAUDITED)

   NORTHERN TRUST CORPORATION

 

     Three Months
Ended March 31
 

(In Millions)

   2012     2011  

Common Stock

    

Balance at January 1 and March 31

   $ 408.6      $ 408.6   
  

 

 

   

 

 

 

Additional Paid-in Capital

    

Balance at January 1

     977.5        920.0   

Treasury Stock Transactions – Stock Options and Awards

     (18.9     (9.5

Stock Options and Awards – Amortization

     24.1        22.8   

Stock Options and Awards – Tax Benefits

     (0.8     (0.5
  

 

 

   

 

 

 

Balance at March 31

     981.9        932.8   
  

 

 

   

 

 

 

Retained Earnings

    

Balance at January 1

     6,302.3        5,972.1   

Net Income

     161.2        151.0   

Dividends Declared – Common Stock

     (140.0     (68.6
  

 

 

   

 

 

 

Balance at March 31

     6,323.5        6,054.5   
  

 

 

   

 

 

 

Accumulated Other Comprehensive Income (Loss)

    

Balance at January 1

     (345.6     (305.3

Net Unrealized Gains on Securities Available for Sale

     20.0        3.4   

Net Unrealized Gains on Cash Flow Hedges

     11.3        9.0   

Foreign Currency Translation Adjustments

     15.8        7.2   

Pension and Other Postretirement Benefit Adjustments

     22.2        6.1   
  

 

 

   

 

 

 

Balance at March 31

     (276.3     (279.6
  

 

 

   

 

 

 

Treasury Stock

    

Balance at January 1

     (225.5     (165.1

Stock Options and Awards

     25.4        13.4   

Stock Purchased

     (14.4     (36.4
  

 

 

   

 

 

 

Balance at March 31

     (214.5     (188.1
  

 

 

   

 

 

 

Total Stockholders’ Equity at March 31

   $ 7,223.2      $ 6,928.2   
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

26


CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

   NORTHERN TRUST CORPORATION

 

     Three Months
Ended March 31
 

(In Millions)

   2012     2011  

Cash Flows from Operating Activities:

    

Net Income

   $ 161.2      $ 151.0   

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

    

Investment Security (Gains) Losses, net

     2.4        5.5   

Amortization and Accretion of Securities and Unearned Income

     (19.6     (9.0

Provision for Credit Losses

     5.0        15.0   

Depreciation on Buildings and Equipment

     22.4        22.2   

Amortization of Computer Software

     44.6        38.0   

Amortization of Intangibles

     4.6        3.3   

Qualified Pension Plan Contribution

     (12.3     (10.6

Visa Indemnification Benefit

     —          (10.1

Increase in Receivables

     (17.4     (34.9

Decrease in Interest Payable

     (13.8     (11.8

Net Change in Derivative Fair Value, Including Required Collateral

     173.2        (53.2

Other Operating Activities, net

     407.3        (32.5
  

 

 

   

 

 

 

Net Cash Provided by Operating Activities

     757.6        72.9   
  

 

 

   

 

 

 

Cash Flows from Investing Activities:

    

Net (Increase) Decrease in Federal Funds Sold and Securities Purchased under Agreements to Resell

     (169.6     70.0   

Net Increase in Interest-Bearing Deposits with Banks

     (2,174.9     (1,540.2

Net (Increase) Decrease in Federal Reserve Deposits and Other Interest-Bearing Assets

     11,220.7        (4,155.9

Purchases of Securities – Held to Maturity

     (53.2     (48.0

Proceeds from Maturity and Redemption of Securities – Held to Maturity

     143.9        67.2   

Purchases of Securities – Available for Sale

     (9,107.1     (6,597.4

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

     8,448.2        4,588.2   

Net (Increase) Decrease in Loans and Leases

     (97.3     201.5   

Purchases of Buildings and Equipment, net

     (9.9     (8.9

Purchases and Development of Computer Software

     (47.4     (69.0

Net Increase in Client Security Settlement Receivables

     (207.0     (602.8

Other Investing Activities, net

     (43.3     89.6   
  

 

 

   

 

 

 

Net Cash Provided by (Used in) Investing Activities

     7,903.1        (8,005.7
  

 

 

   

 

 

 

Cash Flows from Financing Activities:

    

Net (Decrease) Increase in Deposits

     (8,744.6     6,879.7   

Net Increase in Federal Funds Purchased

     1,158.4        672.7   

Net Decrease in Securities Sold under Agreements to Repurchase

     (914.8     (156.0

Net Increase in Short-Term Other Borrowings

     115.9        878.0   

Proceeds from Term Federal Funds Purchased

     —          2,800.0   

Repayments of Term Federal Funds Purchased

     —          (2,119.0

Proceeds from Senior Notes and Long-Term Debt

     —          16.1   

Repayments of Senior Notes and Long-Term Debt

     (350.9     (208.0

Treasury Stock Purchased

     (14.4     (36.2

Net Proceeds from Stock Options

     30.6        26.4   

Cash Dividends Paid on Common Stock

     (67.5     (68.6

Other Financing Activities, net

     —          (0.5
  

 

 

   

 

 

 

Net Cash Provided by (Used in) Financing Activities

     (8,787.3     8,684.6   
  

 

 

   

 

 

 

Effect of Foreign Currency Exchange Rates on Cash

     91.6        23.0   
  

 

 

   

 

 

 

Increase (Decrease) in Cash and Due from Banks

     (35.0     774.8   

Cash and Due from Banks at Beginning of Year

     4,315.3        2,818.0   
  

 

 

   

 

 

 

Cash and Due from Banks at End of Period

   $ 4,280.3      $ 3,592.8   
  

 

 

   

 

 

 

Supplemental Disclosures of Cash Flow Information:

    

Interest Paid

   $ 413.3      $ 124.5   

Income Taxes Paid

     4.8        11.3   

Transfers from Loans to OREO

     11.0        24.3   
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

27


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, 2012 and 2011, 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. Certain prior period balances have been reclassified consistent with the current period’s presentations. For a description of Northern Trust’s significant accounting policies, refer to Note 1 of the Notes to Consolidated Financial Statements in the 2011 Annual Report to Shareholders.

2. Recent Accounting Pronouncements – There are no accounting pronouncements that were issued during the quarter ended March 31, 2012 but not yet adopted that are expected to 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.

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. Their fair values are determined by external pricing vendors, or in limited cases internally, using widely accepted income-based (discounted cash flow) models that incorporate observable current market yield curves and assumptions regarding anticipated prepayments and defaults.

 

28


Notes to Consolidated Financial Statements (continued)

 

Level 2 assets and liabilities also include derivative contracts which are valued 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 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 include financial guarantees relating to standby letters of credit and acquisition related contingent consideration liabilities. Northern Trust’s recorded liability for standby letters of credit, reflecting the obligation that Northern Trust has undertaken, is measured as the amount of unamortized fees on these instruments. Fees are determined by applying basis points to the principal amounts of the letters of credit. The significant unobservable inputs used in the fair value measurement are the market fees on the instruments. Significant increases (decreases) in the market fees would result in significantly higher (lower) fair value measurements. The fair values of contingent purchase consideration liabilities are 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.

 

29


Notes to Consolidated Financial Statements (continued)

 

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 Loan Operations, Treasury Risk Management, Credit Policy, Business Practice & Marketing, and Northern Trust Hedge Fund services) 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 of department to conclude as to the appropriate fair value of the asset or liability.

The following presents 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, 2012 and December 31, 2011.

 

Financial Instrument

   Valuation Technique    Unobservable Input    Range of Quantitative
Information

Auction Rate Securities

   Discounted Cash Flow    Remaining lives

Discount rates

   2.4 – 8.6 years

3 – 9%

Contingent Consideration

   Discounted Cash Flow    Discount rates

Business growth rates

   10.5%

1 – 10%

Standby Letters of Credit

   Market Approach    Market fees    $50.1 million

 

30


Notes to Consolidated Financial Statements (continued)

 

The following presents assets and liabilities measured at fair value on a recurring basis as of March 31, 2012 and December 31, 2011, segregated by fair value hierarchy level.

 

(In Millions)

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

March 31, 2012

             

Securities

             

Available for Sale

             

U.S. Government

   $ 2,766.5       $ —         $ —         $ —        $ 2,766.5   

Obligations of States and Political Subdivisions

     —           15.0         —           —          15.0   

Government Sponsored Agency

     —           17,605.3         —           —          17,605.3   

Corporate Debt

     —           2,839.7         —           —          2,839.7   

Covered Bonds

     —           1,376.4         —           —          1,376.4   

Non-U.S. Government

     —           192.2         —           —          192.2   

Supranational Bonds

     —           911.1         —           —          911.1   

Residential Mortgage-Backed

     —           137.6         —           —          137.6   

Other Asset-Backed

     —           2,035.0         —           —          2,035.0   

Certificates of Deposit

     —           2,448.5         —           —          2,448.5   

Auction Rate

     —           —           176.3         —          176.3   

Other

     —           403.2         —           —          403.2   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Available for Sale

     2,766.5         27,964.0         176.3         —          30,906.8   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Trading Account

     —           9.3         —           —          9.3   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Available for Sale and Trading

   $ 2,766.5       $ 27,973.3       $ 176.3       $ —        $ 30,916.1   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Other Assets

             

Derivatives

             

Foreign Exchange Contracts

   $ —         $ 3,142.4       $ —         $ —        $ 3,142.4   

Interest Rate Swaps

     —           323.9         —           —          323.9   

Interest Rate Options

     —           0.1         —           —          0.1   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Derivatives

     —           3,466.4         —           (2,168.9     1,297.5   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Other Liabilities

             

Derivatives

             

Foreign Exchange Contracts

   $ —         $ 3,109.2       $ —         $ —        $ 3,109.2   

Interest Rate Swaps

     —           222.9         —           —          222.9   

Interest Rate Options

     —           0.1         —           —          0.1   

Credit Default Swaps

     —           0.2         —           —          0.2   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Derivatives

     —           3,332.4         —           (2,111.7     1,220.7   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Other

             

Standby Letters of Credit

   $ —         $ —         $ 50.1       $ —        $ 50.1   

Contingent Consideration

     —           —           58.6         —          58.6   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Other

     —           —           108.7         —          108.7   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

* 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, 2012, derivative assets and liabilities shown above also include reductions of $350.3 million and $293.1 million, respectively, as a result of cash collateral received from and deposited with derivative counterparties.

 

31


Notes to Consolidated Financial Statements (continued)

 

(In Millions)

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

December 31, 2011

             

Securities

             

Available for Sale

             

U.S. Government

   $ 4,029.4       $ —         $ —         $ —        $ 4,029.4   

Obligations of States and Political Subdivisions

     —           15.8         —           —          15.8   

Government Sponsored Agency

     —           16,771.4         —           —          16,771.4   

Corporate Debt

     —           2,676.7         —           —          2,676.7   

Covered Bonds

     —           754.9         —           —          754.9   

Non-U.S. Government

     —           173.7         —           —          173.7   

Supranational Bonds

     —           972.1         —           —          972.1   

Residential Mortgage-Backed

     —           163.8         —           —          163.8   

Other Asset-Backed

     —           1,604.8         —           —          1,604.8   

Certificates of Deposit

     —           2,418.1         —           —          2,418.1   

Auction Rate

     —           —           178.3         —          178.3   

Other

     —           433.5         —           —          433.5   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Available for Sale

     4,029.4         25,984.8         178.3         —          30,192.5   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Trading Account

     —           8.0         —           —          8.0   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Available for Sale and Trading

   $ 4,029.4       $ 25,992.8       $ 178.3       $ —        $ 30,200.5   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Other Assets

             

Derivatives

             

Foreign Exchange Contracts

   $ —         $ 3,087.3       $ —         $ —        $ 3,087.3   

Interest Rate Swaps

     —           338.3         —           —          338.3   

Credit Default Swaps

     —           0.7         —           —          0.7   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Derivatives

     —           3,426.3         —           (2,243.7     1,182.6   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Other Liabilities

             

Derivatives

             

Foreign Exchange Contracts

   $ —         $ 2,991.6       $ —         $ —        $ 2,991.6   

Interest Rate Swaps

     —           231.9         —           —          231.9   

Credit Default Swaps

     —           0.1         —           —          0.1   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Derivatives

     —           3,223.6         —           (2,281.0     942.6   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Other

             

Standby Letters of Credit

     —           —           43.8         —          43.8   

Contingent Consideration

     —           —           56.8         —          56.8   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Other

     —           —           100.6         —          100.6   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

* 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, 2011, derivative assets and liabilities shown above also include reductions of $220.1 million and $257.4 million, respectively, as a result of cash collateral received from and deposited with derivative counterparties.

 

32


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, 2012 and 2011.

 

(In Millions)

   Auction Rate Securities  

Three Months Ended March 31

   2012     2011  

Fair Value at January 1

   $ 178.3      $ 367.8   

Total Gains and (Losses) for the Period

    

Included in Earnings

     (1.5     4.4   

Included in Other Comprehensive Income

     (0.2     (6.4

Purchases, Issues, Sales, and Settlements

    

Sales

     —          (1.5

Settlements

     (0.3     (79.0
  

 

 

   

 

 

 

Fair Value at March 31

   $ 176.3      $ 285.3   
  

 

 

   

 

 

 

(In Millions)

   Other Liabilities *  

Three Months Ended March 31

   2012     2011  

Fair Value at January 1

   $ 100.6      $ 58.6   

Total (Gains) and Losses for the Period

    

Included in Earnings

     2.3        (1.6

Included in Other Comprehensive Income

     0.4        —     

Purchases, Issues, Sales, and Settlements

    

Issues

     5.5        2.5   

Settlements

     (0.1     (10.3
  

 

 

   

 

 

 

Fair Value at March 31

   $ 108.7      $ 49.2   
  

 

 

   

 

 

 

 

* Balances relate to standby letters of credit and contingent consideration liabilities.

For the period ended March 31, 2012, there were no transfers into or out of Level 3 assets or liabilities. Unrealized losses related to auction rate securities and contingent consideration liabilities are included in net unrealized gains on securities available for sale and in foreign currency translation adjustments, respectively, within the consolidated statement of comprehensive income.

The following tables provide the amounts and locations within the consolidated statement of income of gains and losses recognized in connection with changes in Level 3 assets and liabilities for the three months ended March 31, 2012 and 2011.

 

2012

 
     Operating Income
(Expense)
    Interest
Income
     Investment Security
Gains (Losses)
 

Total gains or losses included in earnings *

   $ (2.3   $ 0.1       $ (1.6

 

2011

 
     Operating Income
(Expense)
     Interest
Income
     Investment Security
Gains (Losses)
 

Total gains or losses included in earnings **

   $ 1.6       $ 4.3       $ 0.1   
  

 

 

    

 

 

    

 

 

 

 

* Changes in unrealized gains or losses included in earnings for assets and liabilities held at period-end include operating expense of $2.3 million. There were no changes in unrealized gains or losses included in earnings for assets or liabilities held at the end of the period that were included in interest income or investment security gains or losses.
** Changes in unrealized gains or losses included in earnings for assets and liabilities held at period-end include operating income of $1.6 million. There were no changes in unrealized gains or losses included in earnings for assets or liabilities held at the end of the period that were included in interest income or investment security gains or losses.

 

33


Notes to Consolidated Financial Statements (continued)

 

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.

The following provides information regarding those assets measured at fair value on a nonrecurring basis at March 31, 2012 and 2011, segregated by fair value hierarchy level.

 

(In Millions)

   Level 1      Level 2      Level 3      Total
Fair Value
 

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   
  

 

 

    

 

 

    

 

 

    

 

 

 

March 31, 2011

           

Loans (1)

   $ —         $ —         $ 80.7       $ 80.7   

Other Real Estate Owned (2)

     —           —           13.9         13.9   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Assets at Fair Value

   $ —         $ —         $ 94.6       $ 94.6   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) In accordance with Accounting Standard Codification (ASC) Subtopic 310-10, Northern Trust recorded individually impaired loans at fair value and reduced by $9.5 million the level of specific reserves on these loans during the three months ended March 31, 2012. An additional $3.1 million of specific reserves was provided during the three months ended March 31, 2011 to reduce the fair value of 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 $0.1 million and $0.3 million through other operating expenses during the three months ended March 31, 2012 and 2011, 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 valuation techniques, significant unobservable inputs, and quantitative information used to develop the significant unobservable inputs for Northern Trust’s Level 3 assets and liabilities that are not measured at fair value on a recurring basis as of March 31, 2012 and December, 2011.

 

Financial Instrument

   Valuation Technique    Unobservable Input    Range of Quantitative
Information

Loans

   Market Approach    Discount to reflect
realizable value
   15 – 30%

OREO

   Market Approach    Discount to reflect
realizable value
   15 – 30%

 

34


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, modeled internally, using widely accepted models which are based on an income approach that incorporates current market yield curves and assumptions regarding anticipated prepayments and defaults.

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.

Affordable Housing Investments. The fair values of these instruments were estimated using a revised income approach (discounted cash flow) methodology that incorporates current market rates. Previously, their carrying values were considered to approximate fair value.

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.

 

35


Notes to Consolidated Financial Statements (continued)

 

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.

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.

 

36


Notes to Consolidated Financial Statements (continued)

 

The following tables summarize fair values of financial instruments.

 

(In Millions)

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

Assets

              

Cash and Due from Banks

   $ 4,280.3       $ 4,280.3       $ 4,280.3       $ —         $ —     

Federal Funds Sold and Resell Agreements

     290.9         290.9         —           290.9         —     

Interest-Bearing Deposits with Banks

     18,871.3         18,871.3         —           18,871.3         —     

Federal Reserve Deposits and Other Interest-Bearing

     2,228.0         2,228.0         —           2,228.0         —     

Securities

              

Available for Sale (1)

     30,906.8         30,906.8         2,766.5         27,964.0         176.3   

Held to Maturity

     709.7         727.2         —           727.2         —     

Trading Account

     9.3         9.3         —           9.3         —     

Loans (excluding Leases)

              

Held for Investment

     27,845.6         27,957.9         —              27,957.9   

Held for Sale

     0.1         0.1         —           —           0.1   

Client Security Settlement Receivables

     985.3         985.3         —           985.3         —     

Other Assets

              

Federal Reserve and Federal Home Loan Bank Stock

     172.9         172.9         —           172.9         —     

Affordable Housing Investments

     280.5         306.60         —           306.60         —     

Rabbi Trust Investments

     122.6         122.6         83.6         39.0         —     

Liabilities

              

Deposits

              

Demand, Noninterest-Bearing, Savings and Money Market

   $ 34,263.8       $ 34,263.8       $ 34,263.8       $ —         $ —     

Savings Certificates and Other Time

     3,093.8         3,101.3         —           3,101.3         —     

Non U. S. Offices Interest-Bearing

     36,575.4         36,575.4         —           36,575.4         —     

Federal Funds Purchased

     1,973.7         1,973.7         —           1,973.7         —     

Securities Sold under Agreements to Repurchase

     284.0         284.0         —           284.0         —     

Other Borrowings

     1,103.0         1,103.0         —           1,103.0         —     

Senior Notes

     2,122.6         2,192.2         —           2,192.2         —     

Long Term Debt (excluding Leases)

              

Subordinated Debt

     1,036.6         1,055.5         —           1,055.5         —     

Federal Home Loan Bank Borrowings

     705.0         723.7         —           723.7         —     

Floating Rate Capital Debt

     277.0         232.3         —           232.3         —     

Other Liabilities

              

Standby Letters of Credit

     50.1         50.1         —           —           50.1   

Contingent Consideration

     58.6         58.6         —           —           58.6   

Loan Commitments

     28.9         28.9         —           —