XNAS:NTRS Northern Trust Corp Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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 June 30, 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

240,516,692 Shares—$1.66 2/3 Par Value

(Shares of Common Stock Outstanding on June 30, 2012)

 

 

 


CONSOLIDATED FINANCIAL HIGHLIGHTS

(UNAUDITED)

 

     Three Months
Ended June 30
    Six Months
Ended June 30
       

FOR THE PERIOD ($ In Millions)

   2012     2011     % Change     2012     2011     % Change  

Noninterest Income

            

Trust, Investment and Other Servicing Fees

   $ 605.8      $ 557.8        9   $ 1,181.0      $ 1,072.7        10

Foreign Exchange Trading Income

     59.4        80.8        (27     121.3        165.6        (27

Treasury Management Fees

     17.3        18.6        (8     34.7        37.2        (7

Security Commissions and Trading Income

     17.4        15.9        10        35.7        30.9        16   

Other Operating Income

     34.0        42.2        (19     72.6        77.9        (7

Investment Security Gains (Losses), net

     0.5        (16.6     N/M        (1.9     (22.1     (91
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Noninterest Income

     734.4        698.7        5        1,443.4        1,362.2        6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Interest Income

     254.1        246.1        3        510.5        480.5        6   

Provision for Credit Losses

     5.0        10.0        (50     10.0        25.0        (60
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Interest Income after Provision for Credit Losses

     249.1        236.1        6        500.5        455.5        10   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest Expense

            

Compensation

     313.8        320.2        (2     635.4        614.2        3   

Employee Benefits

     64.9        67.2        (4     133.0        122.0        9   

Outside Services

     133.7        134.9        (1     261.9        258.9        1   

Equipment and Software

     99.4        83.1        20        190.2        156.5        22   

Occupancy

     42.6        43.2        (2     84.4        85.8        (2

Visa Indemnification Benefit

     —          —          —          —          (10.1     N/M   

Other Operating Expense

     62.9        56.7        11        136.0        130.9        4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Noninterest Expense

     717.3        705.3        2        1,440.9        1,358.2        6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before Income Taxes

     266.2        229.5        16        503.0        459.5        9   

Provision for Income Taxes

     86.6        77.5        12        162.2        156.5        4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

   $ 179.6      $ 152.0        18   $ 340.8      $ 303.0        12
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average Total Assets

   $ 92,410.6      $ 92,359.1        N/M    $ 93,769.3      $ 87,837.4        7

PER COMMON SHARE

                                    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income—Basic

   $ 0.73      $ 0.62        18   $ 1.39      $ 1.24        12

                      —Diluted

     0.73        0.62        18        1.39        1.24        12   

Cash Dividends Declared Per Common Share

     **        0.28        N/M        0.58        0.56        4   

Book Value—End of Period (EOP)

     30.73        29.15        5        30.73        29.15        5   

Market Price—EOP

     46.02        45.96        N/M        46.02        45.96        N/M   

RATIOS

                                    
  

 

 

   

 

 

     

 

 

   

 

 

   

Return on Average Common Equity

     9.91     8.76       9.48     8.85  

Return on Average Assets

     0.78        0.66          0.73        0.70     

Dividend Payout Ratio

     **        45.2          41.7        45.2     

Average Stockholders’ Equity to Average Assets

     7.9        7.5          7.7        7.9     
  

 

 

   

 

 

     

 

 

   

 

 

   

PERIOD END ($ In Millions)

   June 30,
2012
    December 31,
2011
    % Change                    

Assets

   $ 94,455.9      $ 100,223.7        (6 )%       

Earning Assets

     86,221.3        90,793.6        (5      

Deposits

     76,995.9        82,677.5        (7      

Stockholders’ Equity

     7,390.3        7,117.3        4         

PERIOD END CLIENT ASSETS ($ In Billions)

                                    
  

 

 

   

 

 

   

 

 

       

Assets Under Custody

   $ 4,563.9      $ 4,262.8        7      

Assets Under Management

     704.3        662.9        6         

RATIOS

                                    
  

 

 

   

 

 

         

Tier 1 Capital to Risk-Weighted Assets—EOP

     12.9     12.5        

Total Capital to Risk-Weighted Assets—EOP

     14.4        14.2           

Tier 1 Leverage Ratio

     8.0        7.3           
  

 

 

   

 

 

         

 

(**) Cash dividends of $0.58 per common share were declared in the first quarter of 2012, comprised of a $0.28 per common share dividend declared January 17, 2012, paid April 2, 2012, and a $0.30 per common share dividend declared March 14, 2012, paid July 2, 2012.

 

2


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

SECOND QUARTER CONSOLIDATED RESULTS OF OPERATIONS

General

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

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

Overview

Net income per common share on a diluted basis in the second quarter of 2012 was $0.73 compared to $0.62 per common share in the second quarter of 2011. Net income for the current quarter was $179.6 million compared to $152.0 million in the prior year quarter.

The performance in the current quarter produced an annualized return on average common equity of 9.9% compared to 8.8% in the prior year quarter. The annualized return on average assets was 0.8% in the current quarter and 0.7% in the prior year quarter.

Consolidated revenue of $988.5 million in the current quarter increased $43.7 million, or 5%, from $944.8 million in the prior year quarter, and includes the full period benefit of acquisitions completed in June and July of 2011. Noninterest income, which represented 74% of revenue, increased $35.7 million, or 5%, to $734.4 million from the prior year quarter’s $698.7 million, primarily reflecting higher trust, investment and other servicing fees and lower net investment security losses, partially offset by lower foreign exchange trading income.

Net interest income for the quarter increased $8.0 million, or 3%, to $254.1 million compared to $246.1 million in the prior year quarter.

 

3


Overview (continued)

 

Noninterest expense totaled $717.3 million in the current quarter compared to $705.3 million in the prior year quarter. The increase of $12.0 million, or 2%, primarily reflects the acquisitions completed in 2011 and higher equipment and software expense, partially offset by lower restructuring, acquisition, and integration related charges. The current quarter and prior year quarter include restructuring, acquisition, and integration related charges of $3.6 million ($2.3 million after tax, or $0.01 per common share) and $22.6 million ($18.8 million after tax, or $0.08 per common share), respectively.

Noninterest Income

The components of noninterest income are provided below.

 

Noninterest Income

   Three Months Ended June 30,  

($ In Millions)

   2012      2011     Change  

Trust, Investment and Other Servicing Fees

   $ 605.8       $ 557.8      $ 48.0        9

Foreign Exchange Trading Income

     59.4         80.8        (21.4     (27

Treasury Management Fees

     17.3         18.6        (1.3     (8

Security Commissions and Trading Income

     17.4         15.9        1.5        10   

Other Operating Income

     34.0         42.2        (8.2     (19

Investment Security Gains (Losses), net

     0.5         (16.6     17.1        N/M   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total Noninterest Income

   $ 734.4       $ 698.7      $ 35.7        5
  

 

 

    

 

 

   

 

 

   

 

 

 

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

 

Assets Under Custody
($ In Billions)

   June 30,
2012
     March 31,
2012
     June 30,
2011
     Change
Q2-12/
Q1-12
    Change
Q2-12/
Q2-11
 

Corporate and Institutional

   $ 4,152.7       $ 4,188.6       $ 4,028.1         (1 )%      3

Personal

     411.2         406.6         387.8         1        6   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Assets Under Custody

   $ 4,563.9       $ 4,595.2       $ 4,415.9         (1 )%      3
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Assets Under Management
($ In Billions)

   June 30,
2012
     March 31,
2012
     June 30,
2011
     Change
Q2-12/
Q1-12
    Change
Q2-12/
Q2-11
 

Corporate and Institutional

   $ 528.4       $ 537.4       $ 512.1         (2 )%      3

Personal

     175.9         179.1         172.0         (2     2   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Assets Under Management

   $ 704.3       $ 716.5       $ 684.1         (2 )%      3
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

C&IS assets under custody totaled $4.2 trillion, up 3% from the prior year quarter, and included $2.5 trillion of global custody assets, 1% higher compared to the prior year quarter. C&IS assets under management included $93.7 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 3% and decline in the EAFE index (USD) of 17%.

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

 

     June 30, 2012     June 30, 2011  

Assets Under Custody

   C&IS     PFS     Consolidated     C&IS     PFS     Consolidated  

Equities

     43     46     43     48     46     47

Fixed Income Securities

     37        26        36        34        26        34   

Cash and Other Assets

     20        28        21        18        28        19   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     June 30, 2012     June 30, 2011  

Assets Under Management

   C&IS     PFS     Consolidated     C&IS     PFS     Consolidated  

Equities

     50     36     47     47     37     45

Fixed Income Securities

     16        33        20        14        30        18   

Cash and Other Assets

     34        31        33        39        33        37   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

5


Noninterest Income (continued)

 

Trust, investment and other servicing fees from C&IS increased $29.9 million, or 10%, totaling $338.4 million compared to the prior year quarter’s $308.5 million.

 

C&IS Trust, Investment and Other Servicing Fees

   Three Months Ended June 30,  

($ In Millions)

   2012      2011      Change  

Custody and Fund Administration

   $ 215.0       $ 189.9       $ 25.1        13

Investment Management

     71.8         69.9         1.9        3   

Securities Lending

     30.7         30.9         (0.2     (1

Other

     20.9         17.8         3.1        18   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 338.4       $ 308.5       $ 29.9        10
  

 

 

    

 

 

    

 

 

   

 

 

 

Custody and fund administration fees, the largest component of C&IS fees, increased 13%, primarily reflecting revenue attributable to the 2011 acquisitions and other new business, partially offset by the negative impact of equity markets on fees. C&IS investment management revenue includes the impact of waived fees in money market mutual funds due to persistent low short-term interest rates. Money market mutual fund fee waivers in C&IS totaled $7.0 million in the current quarter, relatively unchanged from waived fees of $7.5 million in the prior year quarter.

Trust, investment and other servicing fees from PFS totaled a record $267.4 million in the current quarter, increasing $18.1 million, or 7%, from $249.3 million in the prior year quarter. The increase in the current quarter primarily reflects strong new business. Money market mutual fund fee waivers in PFS totaled $10.0 million in the current quarter compared with $15.2 million in the prior year quarter.

Foreign exchange trading income totaled $59.4 million, down $21.4 million, or 27%, compared with $80.8 million in the prior year quarter. The current quarter decrease is attributable to reduced currency market volatility and client volumes.

The components of other operating income are provided below.

 

                                   

Other Operating Income

   Three Months Ended June 30,  

($ In Millions)

   2012      2011      Change  

Loan Service Fees

   $ 14.8       $ 16.7       $ (1.9     (11 )% 

Banking Service Fees

     13.7         14.2         (0.5     (4

Other Income

     5.5         11.3         (5.8     (51
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Other Operating Income

   $ 34.0       $ 42.2       $ (8.2     (19 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

The decrease in the “other income” component of other operating income is primarily attributable to a gain on the sale of a leasing asset recorded in the prior year quarter and current quarter decreases within various miscellaneous income categories.

 

6


Noninterest Income (continued)

 

Net investment security gains totaled $0.5 million in the current quarter compared to losses of $16.6 million in the prior year quarter. The current quarter includes realized gains of $21.5 million on sales of U.S. Treasury Notes, offset by realized losses of $21.0 million on sales of auction rate securities. The prior year quarter included $16.9 million of other-than-temporary impairment of residential mortgage-backed securities.

Net Interest Income

Net interest income for the quarter stated on a fully taxable equivalent (FTE) basis totaled $264.3 million, up $7.7 million, or 3%, from $256.6 million reported in the prior year quarter. The increase reflects an increase in the net interest margin to 1.28% in the current quarter from 1.23% in the prior year quarter. 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 23.

The higher net interest margin primarily reflects a higher percentage of funding from noninterest-bearing deposits, lower levels of deposits with the Federal Reserve, and increased investment in securities. Average earning assets for the quarter were $83.2 billion compared to $83.7 billion in the prior year quarter.

Average Federal Reserve Deposits and Other Interest-Bearing assets totaled $3.6 billion for the current quarter compared to $14.8 billion for the prior year quarter, a decrease of $11.2 billion, or 75%.

Average investment securities increased $7.5 billion, or 31%, to $31.5 billion in the current quarter compared to $24.0 billion in the prior year quarter. Loans and leases averaged $29.1 billion, an increase of $726.6 million, or 3%, from $28.3 billion in the prior year quarter. The increase was primarily attributable to growth in commercial and institutional loans, which averaged $7.3 billion in the current quarter, up $1.0 billion, or 16%, from the prior year quarter’s average of $6.3 billion.

Northern Trust utilizes a diverse mix of funding sources. Total interest-bearing deposits averaged $53.6 billion in the current quarter compared to $59.5 billion in the prior year quarter. The decrease of $5.9 billion, or 10%, was primarily within non-U.S. office interest-bearing deposits. Other interest-bearing funds averaged $8.2 billion in the quarter, a decrease of $3.8 billion, or 32%, as compared to $12.0 billion in the prior year quarter, primarily due to lower levels of short-term borrowings and long-term debt. The balances within short-term borrowing classifications vary based on funding requirements and strategies, interest rate levels, changes in the volume of lower-cost deposit sources, and the availability of collateral to secure these borrowings. Average net noninterest-related

 

7


Net Interest Income (continued)

 

funds utilized to fund earning assets increased $9.2 billion, or 76%, to $21.3 billion from $12.1 billion in the prior year quarter, resulting primarily from higher levels of U.S. office demand and other noninterest-bearing deposits.

For additional quantitative analysis of average balances and interest rate changes affecting net interest income, refer to the Average Consolidated Balance Sheet with Analysis of Net Interest Income and the Analysis of Net Interest Income Changes Due To Volume and Rate on pages 24 and 25.

Provision for Credit Losses

The provision for credit losses was $5.0 million in the current quarter and $10.0 million in the prior year quarter. Net charge-offs totaled $3.2 million for the current quarter and include $13.0 million of recoveries, compared to $15.0 million of net charge-offs in the prior year quarter which included $2.2 million of recoveries. Nonperforming loans and leases decreased $88.2 million, or 27%, from the prior year quarter. While credit quality metrics for the overall portfolio have improved, residential real estate loans continued to reflect weakness relative to the overall portfolio, accounting for 68% and 50% of total nonperforming loans at June 30, 2012 and June 30, 2011, respectively. 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 June 30,  

($ In Millions)

   2012      2011      Change  

Compensation

   $ 313.8       $ 320.2       $ (6.4     (2 )% 

Employee Benefits

     64.9         67.2         (2.3     (4

Outside Services

     133.7         134.9         (1.2     (1

Equipment and Software

     99.4         83.1         16.3        20   

Occupancy

     42.6         43.2         (0.6     (2

Other Operating Expense

     62.9         56.7         6.2        11   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Noninterest Expense

   $ 717.3       $ 705.3       $ 12.0        2
  

 

 

    

 

 

    

 

 

   

 

 

 

The increase in noninterest expense in the current quarter primarily reflects the acquisitions completed in 2011 and higher equipment and software expense, partially offset by lower restructuring, acquisition, and integration related charges. The current and prior year quarters include restructuring, acquisition, and integration related charges of $3.6 million and $22.6 million, respectively.

Compensation expense, the largest component of noninterest expense, equaled $313.8 million, down $6.4 million, or 2%, compared to $320.2 million in the prior year quarter. The prior year quarter included severance related restructuring charges of $18.4 million. Excluding the prior year quarter severance related charges, compensation expense increased $12.0 million, or 4%, primarily reflecting higher full-time equivalent staff levels,

 

8


Noninterest Expense (continued)

 

the majority of which are attributable to the acquisitions completed in 2011, as well as annual merit increases. Staff on a full-time equivalent basis at June 30, 2012 totaled approximately 14,000, up 3% from a year ago.

Employee benefit expense equaled $64.9 million, down 4% compared to $67.2 million in the prior year quarter. The current quarter reflects lower expense associated with retirement benefits, partially offset by higher full-time equivalent staff levels.

Expense associated with outside services totaled $133.7 million, down 1%, from $134.9 million in the prior year quarter. The current quarter includes lower third-party advisory fees and other categories of outside services expense, partially offset by higher expense associated with technical services, primarily due to the 2011 acquisitions.

Equipment and software expense totaled $99.4 million, an increase of $16.3 million, or 20%, from $83.1 million in the prior year quarter. The current quarter includes a $10.5 million software write-off and higher levels of software amortization and related software support costs from the continued investment in technology related assets.

The components of other operating expense are provided below.

 

Other Operating Expense

   Three Months Ended June 30,  

($ In Millions)

   2012      2011      Change  

Business Promotion

   $ 20.4       $ 21.9       $ (1.5     (7 )% 

FDIC Insurance Premiums

     7.2         5.8         1.4        25   

Staff Related

     7.4         9.8         (2.4     (25

Other Intangible Amortization

     5.5         2.9         2.6        90   

Other Expenses

     22.4         16.3         6.1        37   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Other Operating Expense

   $ 62.9       $ 56.7       $ 6.2        11
  

 

 

    

 

 

    

 

 

   

 

 

 

Other intangible amortization for the current quarter includes expense associated with intangible assets acquired in 2011. The increase in the “other expenses” component of other operating expense reflects increased expense associated with account servicing activities and within other miscellaneous expense categories.

Provision for Income Taxes

Income tax expense was $86.6 million in the current quarter, representing an effective tax rate of 32.5%, and $77.5 million in the prior year quarter, representing an effective tax rate of 33.8%. The prior year quarter’s effective tax rate was higher primarily due to certain restructuring, acquisition, and integration related expenses attributable to lower tax rate jurisdictions.

 

9


BUSINESS UNIT REPORTING

The following tables reflect the earnings contributions and average assets of Northern Trust’s business units for the three and six month periods ended June 30, 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

June 30,

   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

   $ 338.4      $ 308.5      $ 267.4      $ 249.3      $ —        $ —        $ 605.8      $ 557.8   

Other

     103.6        124.5        27.0        32.6        (2.0     (16.2     128.6        140.9   

Net Interest Income (FTE)*

     72.0        66.2        158.4        150.3        33.9        40.1        264.3        256.6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Revenues*

     514.0        499.2        452.8        432.2        31.9        23.9        998.7        955.3   

Provision for Credit Losses

     (0.5     (2.3     5.5        12.3        —          —          5.0        10.0   

Noninterest Expense

     397.5        380.5        289.5        302.7        30.3        22.1        717.3        705.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before

                

Income Taxes*

     117.0        121.0        157.8        117.2        1.6        1.8        276.4        240.0   

Provision for Income

                

Taxes*

     35.8        47.3        59.8        46.5        1.2        (5.8     96.8        88.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

   $ 81.2      $ 73.7      $ 98.0      $ 70.7      $ 0.4      $ 7.6      $ 179.6      $ 152.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of Consolidated Net Income

     45     48     55     47         5     100     100

Average Assets

   $ 48,616.8      $ 47,706.7      $ 23,488.3      $ 23,646.5      $ 20,305.5      $ 21,005.9      $ 92,410.6      $ 92,359.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

* Stated on a fully taxable equivalent basis (FTE). Total consolidated includes FTE adjustments of $10.2 million for 2012 and $10.5 million for 2011.

 

Six Months Ended

June 30,

   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

   $ 655.4      $ 579.8      $ 525.6      $ 492.9      $ —        $ —        $ 1,181.0      $ 1,072.7   

Other

     209.7        248.8        54.1        64.2        (1.4     (23.5     262.4        289.5   

Net Interest Income (FTE)*

     149.0        127.9        319.5        299.5        62.1        74.1        530.6        501.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Revenues*

     1,014.1        956.5        899.2        856.6        60.7        50.6        1,974.0        1,863.7   

Provision for Credit Losses

     —          (16.9     10.0        41.9        —          —          10.0        25.0   

Noninterest Expense

     795.5        720.4        593.2        592.7        52.2        45.1        1,440.9        1,358.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before

                

Income Taxes*

     218.6        253.0        296.0        222.0        8.5        5.5        523.1        480.5   

Provision for Income

                

Taxes*

     69.4        97.1        112.1        88.2        0.8        (7.8     182.3        177.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

   $ 149.2      $ 155.9      $ 183.9      $ 133.8      $ 7.7      $ 13.3      $ 340.8      $ 303.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of Consolidated Net Income

     44     52     54     44     2     4     100     100

Average Assets

   $ 49,139.5      $ 45,719.7      $ 23,526.1      $ 23,638.4      $ 21,103.7      $ 18,479.3      $ 93,769.3      $ 87,837.4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

* Stated on a fully taxable equivalent basis (FTE). Total consolidated includes FTE adjustments of $20.1 million for 2012 and $21.0 million for 2011.

 

10


Corporate and Institutional Services

C&IS net income for the quarter was $81.2 million, compared with $73.7 million in the prior year quarter, an increase of $7.5 million, or 10%.

 

C&IS Trust, Investment and Other Servicing Fees

   Three Months Ended June 30,  

($ In Millions)

   2012      2011      Change  

Custody and Fund Administration

   $ 215.0       $ 189.9       $ 25.1        13

Investment Management

     71.8         69.9         1.9        3   

Securities Lending

     30.7         30.9         (0.2     (1

Other

     20.9         17.8         3.1        18   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 338.4       $ 308.5       $ 29.9        10
  

 

 

    

 

 

    

 

 

   

 

 

 

Custody and fund administration fees, the largest component of C&IS fees, increased 13%, primarily reflecting revenue attributable to the 2011 acquisitions and other new business, partially offset by the negative impact of equity markets on fees. Investment management fees reflect waived fees in money market mutual funds attributable to the persistent low short-term interest rates. Money market mutual fund fee waivers in C&IS totaled $7.0 million in the current quarter compared with $7.5 million in the prior year quarter.

Other noninterest income totaled $103.6 million in the current quarter, a decrease of $20.9 million, or 17%, from $124.5 million in the prior year quarter. The decrease reflects lower foreign exchange trading income, attributable to reduced currency market volatility and client volumes.

Net interest income stated on an FTE basis was up $5.8 million, or 9%, from the prior year quarter, primarily reflecting an increase in the net interest margin. The net interest margin equaled 0.71% compared with 0.64% reported in the prior year quarter. The higher net interest margin reflects a higher percentage of funding from noninterest-bearing deposits, as well as reduced rates paid on interest-bearing deposits, primarily within non-U.S. office deposits. Earning assets averaged $40.9 billion for the quarter, a decrease of $346.0 million, or 1%, from $41.2 billion the prior year quarter. Earning assets were primarily comprised of short-term interest-bearing deposits with banks and investment securities. Funding sources were primarily comprised of non-U.S. custody related interest-bearing deposits.

A provision for credit losses of negative $0.5 million was recorded in the current quarter, reflecting continued improvement in loan portfolio credit quality metrics. Total loans and leases averaged $6.2 billion in the current quarter up $1.1 billion, or 21%, from the prior year quarter. The prior year quarter’s negative provision totaled $2.3 million.

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

 

11


Corporate and Institutional Services (continued)

 

indirect expense allocations for certain corporate support services, totaled $397.5 million compared with $380.5 million for the prior year quarter, an increase of $17.0 million, or 4%. The increase primarily reflects increased indirect expense allocations, as well as higher full-time equivalent staff levels, intangible amortization, and outside services expense, due in part to the 2011 acquisitions. These increases were partially offset by lower restructuring, acquisition, and integration charges.

Personal Financial Services

PFS net income for the current quarter was $98.0 million compared to $70.7 million reported in the prior year quarter, an increase of $27.3 million, or 39%. Noninterest income was $294.4 million, up $12.5 million, or 4%, from $281.9 million in the prior year quarter. Trust, investment and other servicing fees totaled $267.4 million in the current quarter, increasing $18.1 million, or 7%, from $249.3 million in the prior year quarter. The increase in trust, investment and other servicing fees primarily reflects strong new business. PFS waived fees in money market mutual funds, attributable to low short-term interest rates, totaled $10.0 million in the current quarter compared with $15.2 million in the prior year quarter. Other noninterest income totaled $27.0 million, down $5.6 million, or 17%, from $32.6 million in the prior year quarter, reflecting decreases within various miscellaneous income categories.

Net interest income stated on an FTE basis was $158.4 million in the current quarter, an increase of $8.1 million, or 5%, compared to $150.3 million in the prior year quarter. The net interest margin was 2.76% in the current quarter compared to 2.59% in the prior year quarter. The higher net interest margin is primarily due to a reduction of internal borrowing rates as a result of the lower interest rate environment.

A provision for credit losses of $5.5 million was recorded in the current quarter. While credit quality metrics for the overall portfolio have improved, residential real estate loans continued to reflect weakness relative to the overall portfolio. The prior year quarter’s provision totaled $12.3 million.

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 $289.5 million compared with $302.7 million in the prior year quarter, a decrease of $13.2 million, or 4%. The decrease primarily reflects lower compensation and employee benefits expense.

 

12


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 negative $2.0 million, compared with negative $16.2 million in the prior year quarter. Other noninterest income in the prior year quarter included $16.9 million of charges for credit-related other-than-temporary impairment of residential mortgage-backed securities. Net interest income in the current quarter was $33.9 million, compared to $40.1 million in the prior year quarter, a decrease of $6.2 million, or 15%. The decrease primarily reflects reductions of internal yields on funds provided to business units, as well as lower levels of deposits with the Federal Reserve. Average assets decreased $694.1 million, or 3%, to $20.3 billion in the current quarter. Noninterest expense for the quarter totaled $30.3 million compared with $22.1 million in the prior year quarter, an increase of $8.2 million, or 37%, primarily reflecting a software write-off of $10.5 million in the current quarter.

SIX-MONTH CONSOLIDATED RESULTS OF OPERATIONS

Net income per common share of $1.39 was reported for the six months ended June 30, 2012, compared with net income per common share of $1.24 reported in the comparable prior year period. The current period’s net income of $340.8 million compares to $303.0 million in the prior year period. Net income in the current and prior year periods include restructuring, acquisition, and integration related charges totaling $7.5 million ($4.9 million after tax, or $0.02 per common share) and $26.4 million ($22.1 million after tax, or $0.09 per common share), respectively. Net income in the prior year period also included a benefit of $10.1 million ($6.4 million after tax, or $0.03 per common share) that was recorded in connection with a reduction of a liability related to potential losses from indemnified litigation involving Visa, Inc. (Visa).

The performance in the current period produced an annualized return on average common equity of 9.5% compared to 8.9% in the prior year period. The annualized return on average assets was 0.7% in the current and prior year period.

Revenues for the six months ended June 30, 2012 totaled $1.95 billion, up $111.2 million, or 6%, from the prior year period’s revenues of $1.84 billion. Trust, investment and other servicing fees were $1.18 billion for the period, $108.3 million, or 10%, higher as compared with $1.07 billion in the prior year period, partly due to acquisitions completed in 2011. Trust, investment and other servicing fees for the current period represented 60% of total revenue, and noninterest income in total represented 74% of total revenue.

 

13


Noninterest Income

The components of noninterest income are provided below.

 

                                                                                                   

Noninterest Income

   Six Months Ended June 30,  

($ In Millions)

   2012     2011     Change  

Trust, Investment and Other Servicing Fees

   $ 1,181.0      $ 1,072.7      $ 108.3        10

Foreign Exchange Trading Income

     121.3        165.6        (44.3     (27

Treasury Management Fees

     34.7        37.2        (2.5     (7

Security Commissions and Trading Income

     35.7        30.9        4.8        16   

Other Operating Income

     72.6        77.9        (5.3     (7

Investment Security Gains (Losses), net

     (1.9     (22.1     20.2        (91
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Noninterest Income

   $ 1,443.4      $ 1,362.2      $ 81.2        6
  

 

 

   

 

 

   

 

 

   

 

 

 

Trust, investment and other servicing fees from C&IS increased $75.6 million, or 13%, totaling $655.4 million compared to $579.8 million a year ago.

 

                                                                                                   

C&IS Trust, Investment and Other Servicing Fees

   Six Months Ended June 30,  

($ In Millions)

   2012      2011      Change  

Custody and Fund Administration

   $ 424.8       $ 358.9       $ 65.9        18

Investment Management

     133.6         137.0         (3.4     (2

Securities Lending

     52.2         47.9         4.3        9   

Other

     44.8         36.0         8.8        25   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 655.4       $ 579.8       $ 75.6        13
  

 

 

    

 

 

    

 

 

   

 

 

 

Custody and fund administration fees, the largest component of C&IS fees, increased 18%, primarily reflecting revenue attributable to the 2011 acquisitions and other new business, partially offset by the negative impact of equity markets on fees. C&IS investment management fees reflect higher waived fees in money market mutual funds, attributable to the low short-term interest rates. Money market fee waivers for C&IS totaled $17.6 million in the current period compared with $12.0 million in the prior year period. The increase in C&IS other fees primarily relates to higher income from risk advisory services.

Trust, investment and other servicing fees from PFS increased $32.7 million, or 7%, to $525.6 million compared with $492.9 million a year ago. The increase in PFS fees resulted primarily from strong new business and revised fee structures. Waived fees in money market mutual funds, attributable to the low short-term interest rates, totaled $24.8 million in the current period compared with $27.4 million in the prior year period.

Foreign exchange trading income decreased $44.3 million, or 27%, and totaled $121.3 million in the period compared with $165.6 million in the prior year period. The decrease reflects reduced currency market volatility and client volumes as compared with the prior year’s six-month period.

Other operating income decreased $5.3 million, or 7%, for the period to $72.6 million, compared with $77.9 million last year, primarily due to a gain on the sale of a leasing asset in the prior year period and current period decreases within various other miscellaneous income categories.

 

14


Noninterest Income (continued)

 

Net investment security losses in the current period totaled $1.9 million compared to $22.1 million in the prior year period. Net investment security losses in the current period include $3.1 million of credit-related other-than-temporary impairment of residential mortgage backed securities and auction rate securities. Net investment security losses in the prior year period included $22.0 million of credit-related other-than-temporary impairment of residential mortgage backed securities.

Net Interest Income

Net interest income, stated on an FTE basis, totaled $530.6 million, an increase of $29.1 million, or 6%, from $501.5 million reported in the prior year period. The increase primarily reflects higher levels of average earning assets; a lower cost of funding, primarily within non-U.S. office interest-bearing deposits; and a higher percentage of funding from noninterest-bearing deposits. The net interest margin on an FTE basis was 1.26% for the current period, down from 1.27% in the prior year period, primarily due to lower yields on certain categories of earning assets, partially offset by lower rates paid on interest-bearing deposits. Total average earning assets of $84.6 billion were $5.0 billion, or 6%, higher than a year ago, chiefly due to increased demand deposits, which were invested primarily in investment securities and interest-bearing deposits with banks.

Provision for Credit Losses

The provision for credit losses was $10.0 million for the current year period compared to $25.0 million in the comparable 2011 period. Net charge-offs totaled $9.0 million in the current year period compared to $36.6 million in the 2011 period, and included recoveries of $21.6 million and $16.0 million, respectively. The current period provision reflects improvement in the commercial and institutional and commercial real estate loan classes and reduced levels of charge-offs, partially offset by continued weakness in the residential real estate loan class. For a fuller discussion of the consolidated allowance and provision for credit losses refer to the “Asset Quality” section below.

Noninterest Expense

Noninterest expense totaled $1.44 billion for the period, up $82.7 million, or 6%, from the prior year period’s $1.36 billion. The current period includes restructuring, acquisition, and integration related charges of $7.5 million. The prior year period included restructuring, acquisition, and integration related charges totaling $26.4 million and a benefit of $10.1 million from the reduction of the Visa related indemnification liability. Excluding these current and prior year period items, noninterest expense in the current period increased by $91.5 million, or 7%, primarily reflecting the full period impact of acquisitions completed in 2011 and higher equipment and software expense.

 

15


Noninterest Expense (continued)

 

The components of noninterest expense are provided below.

 

Noninterest Expense

   Six Months Ended June 30,  

($ In Millions)

   2012      2011     Change  

Compensation

   $ 635.4       $ 614.2      $ 21.2        3

Employee Benefits

     133.0         122.0        11.0        9   

Outside Services

     261.9         258.9        3.0        1   

Equipment and Software

     190.2         156.5        33.7        22   

Occupancy

     84.4         85.8        (1.4     (2

Visa Indemnification Benefit

     —           (10.1     10.1        N/M   

Other Operating Expense

     136.0         130.9        5.1        4   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total Noninterest Expense

   $ 1,440.9       $ 1,358.2      $ 82.7        6
  

 

 

    

 

 

   

 

 

   

 

 

 

Compensation expense in the prior year period included severance related restructuring charges of $18.4 million. Excluding the severance related charges, compensation expense increased $39.6 million, or 7%, primarily reflecting higher full-time equivalent staff levels, the majority of which are attributable to the acquisitions completed in 2011, as well as annual merit increases.

The increase in employee benefit expense primarily reflects the reversal in the prior year period of a $9.7 million employee benefit related accrual for which the 2010 goal was not met as well as higher current period full-time equivalent staff levels, partially offset by lower expense associated with retirement benefits.

Outside services expense increased 1% from the prior year period, primarily reflecting higher expense associated with technical services, offset by lower consulting and third-party advisory fees.

Equipment and software expense in the current period includes software write-offs of $15.1 million and higher levels of software amortization and related software support costs from the continued investment in technology related assets.

The components of other operating expense are provided below.

 

Other Operating Expense

   Six Months Ended June 30,  

($ In Millions)

   2012      2011      Change  

Business Promotion

   $ 48.7       $ 51.3       $ (2.6     (5 )% 

FDIC Insurance Premiums

     11.5         13.7         (2.2     (16

Staff Related

     17.2         17.5         (0.3     (2

Other Intangible Amortization

     10.3         6.2         4.1        65   

Other Expenses

     48.3         42.2         6.1        14   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Other Operating Expense

   $ 136.0       $ 130.9       $ 5.1        4
  

 

 

    

 

 

    

 

 

   

 

 

 

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 period includes expense associated with intangible assets acquired in 2011. The increase in the “other expenses” component of other operating expense primarily reflects higher charges associated with account servicing activities and increases within various other miscellaneous expense categories.

 

16


Provision for Income Taxes

Total income tax expense was $162.2 million for the six months ended June 30, 2012, representing an effective tax rate of 32.3%. This compares with $156.5 million of income tax expense and an effective tax rate of 34.1% in the prior year period. The prior year period’s effective tax rate was higher primarily due to certain restructuring, acquisition, and integration related charges attributable to lower tax rate jurisdictions, and adjustments to deferred tax reserves recorded in the prior year period as a result of an Illinois corporate income tax rate increase enacted in January 2011.

BALANCE SHEET

Total assets at June 30, 2012 were $94.5 billion and averaged $92.4 billion for the current quarter, compared with total assets of $97.4 billion at June 30, 2011 and average total assets of $92.4 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 $29.6 billion at June 30, 2012 and averaged $29.1 billion in the current quarter as compared to $28.6 billion at June 30, 2011 and a $28.3 billion average in the prior year quarter. Securities totaled $29.7 billion at June 30, 2012 and averaged $31.5 billion for the quarter, up 18% and up 31%, respectively, compared with $25.2 billion at June 30, 2011 and $24.0 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 $26.9 billion at June 30, 2012 and averaged $22.7 billion in the current quarter, down 16% and 28%, respectively, from the prior year quarter average balances, primarily attributable to lower deposits with the Federal Reserve. Interest-bearing deposits at June 30, 2012 totaled $55.3 billion and averaged $53.6 billion, compared to $60.8 billion at June 30, 2011 and $59.5 billion in the prior year quarter. Noninterest-bearing deposits at June 30, 2012 totaled $21.7 billion and averaged $19.7 billion, compared to $16.7 billion at June 30, 2011 and $11.0 billion in the prior year quarter.

Total stockholders’ equity averaged $7.3 billion, up $332.1 million, or 5%, from the prior year quarter’s average of $7.0 billion. The increase primarily reflects earnings, partially offset by dividend declarations and the repurchase of common stock pursuant to the Corporation’s share buyback program. During the six months ended June 30, 2012, the Corporation repurchased 1,127,933 shares at a cost of $50.4 million ($44.67 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 9.2 million additional shares after June 30, 2012.

Northern Trust’s risk-based capital ratios remained strong at June 30, 2012 and exceeded 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

 

17


BALANCE SHEET (continued)

 

period average assets). The Corporation and the Bank each had capital ratios at June 30, 2012 that were above the level required for classification as a “well capitalized” institution. Shown below are the June 30, 2012 and December 31, 2011 capital ratios of the Corporation and the Bank as of June 30, 2012 and December 31, 2011.

 

      June 30, 2012     December 31, 2011  
      Tier 1
Capital
    Total
Capital
    Leverage
Ratio
    Tier 1
Capital
    Total
Capital
    Leverage
Ratio
 

Northern Trust Corporation

     12.9     14.4     8.0     12.5     14.2     7.3

The Northern Trust Company

     11.9     13.8     7.4     11.7     13.8     6.8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

($ In Millions)

   June 30,
2012
    December 31,
2011
 

Ratios

    

Tier 1 Capital

     12.9     12.5

Tier 1 Common Equity

     12.4     12.1

Tier 1 Capital

   $ 7,328.4      $ 7,104.6   

Less: Floating Rate Capital Securities

     268.7        268.6   
  

 

 

   

 

 

 

Tier 1 Common Equity

   $ 7,059.7      $ 6,836.0   
  

 

 

   

 

 

 

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

ASSET QUALITY

Securities Portfolio

Northern Trust maintains a high quality securities portfolio, with 87% of the combined available for sale, held to maturity, and trading account portfolios at June 30, 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 13% of the 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 8% 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).

 

18


ASSET QUALITY (continued)

 

Total gross unrealized losses within the investment securities portfolio at June 30, 2012 were $44.9 million as compared to $85.0 million at December 31, 2011. Of the total gross unrealized losses on securities at June 30, 2012, $18.3 million relate to non-agency residential mortgage-backed securities. Non-agency residential mortgage-backed securities rated below double-A at June 30, 2012 represented 92% 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 $131.5 million and $113.7 million, respectively.

Northern Trust has evaluated non-agency residential mortgage-backed securities, and all other securities with unrealized losses, for possible other-than-temporary impairment in accordance with GAAP and Northern Trust’s security impairment review policy. Credit related losses recognized in earnings on other-than-temporarily impaired securities totaled $3.1 million for the six months ended June 30, 2012, and $16.9 million and $22.0 million, respectively, for the three and six months ended June 30, 2011.

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

Eurozone Exposure

Northern Trust continues to closely monitor developments related to the European debt crisis. As of June 30, 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 $933 million, or 1% of Northern Trust’s total consolidated assets. There was no exposure to sovereign debt securities as of June 30, 2012. The largest aggregate country exposure, totaling $727 million, was to obligors in Ireland, of which $11 million was to banks and $716 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 primarily reflects $201 million to banks in Spain in connection with short-term deposits which matured and were repaid in full in July of 2012 and were not renewed. There was negligible exposure to obligors in Portugal, Italy, and Greece at June 30, 2012. Exposure levels at June 30, 2012 reflect Northern Trust’s risk management policies and practices, which operate to limit exposures to higher risk European financial and sovereign entities.

 

19


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.

 

($ In Millions)

   June 30,
2012
    March 31,
2012
    December 31,
2011
    June 30,
2011
 

Nonperforming Loans and Leases

        

Commercial

        

Commercial and Institutional

   $ 32.9      $ 28.6      $ 31.3      $ 55.7   

Commercial Real Estate

     41.1        69.8        79.5        106.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Commercial

     74.0        98.4        110.8        162.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Personal

        

Residential Real Estate

     163.1        160.0        177.6        163.0   

Private Client

     2.7        3.7        5.3        2.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Personal

     165.8        163.7        182.9        165.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Nonperforming Loans and Leases

     239.8        262.1        293.7        328.0   

Other Real Estate Owned

     25.3        22.4        21.2        31.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Nonperforming Assets

   $ 265.1      $ 284.5      $ 314.9      $ 359.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

90 Day Past Due Loans Still Accruing

   $ 31.6      $ 21.0      $ 13.1      $ 21.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Nonperforming Loans and Leases to Total Loans and Leases

     0.81     0.90     1.01     1.15
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     1.3x        1.1x        1.0x        0.9x   
  

 

 

   

 

 

   

 

 

   

 

 

 

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 in the residential real estate and commercial real estate loan classes, and of OREO properties. The $19.4 million decrease in nonperforming assets during the current quarter primarily reflects loan payoffs, the return of a loan previously classified as nonperforming to performing status in accordance with Northern Trust’s established policies, as well as amounts charged off, partially offset by additional loans classified as nonperforming.

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

 

20


ASSET QUALITY (continued)

 

collateral value of no more than 65% to 80% at inception. Revaluations of supporting collateral are obtained upon refinancing or default or when otherwise considered warranted. Collateral revaluations for mortgages are performed by independent third parties. The commercial real estate portfolio consists of commercial mortgages and construction, acquisition and development loans extended primarily to highly experienced developers and/or investors well known to Northern Trust. Underwriting standards generally reflect conservative loan-to-value ratios and debt service coverage requirements. Recourse to borrowers through guarantees is also commonly required.

Provision and Allowance for Credit Losses

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

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

A $5.0 million provision for credit losses was recorded in the current quarter and a $10.0 million provision was recorded in the prior year quarter. While credit quality metrics for the overall portfolio have improved, residential real estate loans continued to reflect weakness relative to the overall portfolio, accounting for 68% and 50% of total nonperforming loans at June 30, 2012 and June 30, 2011, respectively.

Note 6 to the consolidated financial statements includes a table that details the changes in the allowance for credit losses during the three and six months ended June 30, 2012 and 2011 due to charge-offs, recoveries, and the provision for credit losses.

 

21


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.

 

     June 30, 2012     March 31, 2012     December 31, 2011     June 30, 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
    Allowance
Amount
    Percent of
Loans to
Total Loans
 

Specific Allowance

   $ 30.9        —     $ 36.5        —     $ 47.3        —     $ 61.3        —  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allocated Inherent Allowance

                

Commercial

                

Commercial and Institutional

     85.8        24        88.9        24        90.0        24        97.2        22   

Commercial Real Estate

     82.8        10        79.0        10        77.1        10        79.1        11   

Lease Financing, net

     3.4        3        3.1        4        1.8        3        1.8        4   

Non-U.S.

     4.1        4        3.7        4        4.7        4        4.2        6   

Other

     —          3        —          2        —          1        —          1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Commercial

     176.1        44        174.7        44        173.6        42        182.3        44   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Personal

                

Residential Real Estate

     107.1        36        100.2        36        92.0        37        88.0        37   

Private Client

     15.8        19        16.7        19        16.0        20        14.2        18   

Other

     —          1        —          1        —          1        —          1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Personal

     122.9        56        116.9        56        108.0        58        102.2        56   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Allocated Inherent Allowance

   $ 299.0        100   $ 291.6        100   $ 281.6        100   $ 284.5        100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Allowance for Credit Losses

     329.9          328.1          328.9          345.8     
  

 

 

     

 

 

     

 

 

     

 

 

   

Allowance Assigned to:

                

Loans and Leases

   $ 300.3        $ 295.5        $ 294.8        $ 311.3     

Unfunded Commitments and Standby Letters of Credit

     29.6          32.6          34.1          34.5     
  

 

 

     

 

 

     

 

 

     

 

 

   

Total Allowance for Credit Losses

   $ 329.9        $ 328.1        $ 328.9        $ 345.8     
  

 

 

     

 

 

     

 

 

     

 

 

   

Allowance Assigned to Loans and Leases to Total Loans and Leases

     1.01       1.01       1.01       1.09  
  

 

 

     

 

 

     

 

 

     

 

 

   

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.

 

22


RECONCILIATION OF REPORTED NET INTEREST INCOME TO FULLY TAXABLE EQUIVALENT

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

 

     Three Months Ended  
     June 30, 2012     June 30, 2011  

($ In Millions)

   Reported     FTE Adj.      FTE     Reported     FTE Adj.      FTE  

Interest Income

   $ 321.5      $ 10.2       $ 331.7      $ 359.7      $ 10.5       $ 370.2   

Interest Expense

     67.4        —           67.4        113.6        —           113.6   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Net Interest Income

   $ 254.1      $ 10.2       $ 264.3      $ 246.1      $ 10.5       $ 256.6   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Net Interest Margin

     1.23        1.28     1.18        1.23
  

 

 

      

 

 

   

 

 

      

 

 

 
     Six Months Ended  
     June 30, 2012     June 30, 2011  

($ In Millions)

   Reported     FTE Adj.      FTE     Reported     FTE Adj.      FTE  

Interest Income

   $ 662.5      $ 20.1       $ 682.6      $ 706.8      $ 21.0       $ 727.8   

Interest Expense

     152.0        —           152.0        226.3        —           226.3   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Net Interest Income

   $ 510.5      $ 20.1       $ 530.6      $ 480.5      $ 21.0       $ 501.5   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Net Interest Margin

     1.21        1.26     1.22        1.27
  

 

 

      

 

 

   

 

 

      

 

 

 

 

23


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    Second 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       $ 260.3        0.18   $ 0.1       $ 272.5        0.07

Interest-Bearing Deposits with Banks

     43.5         18,788.9        0.93        44.7         16,230.6        1.11   

Federal Reserve Deposits and Other Interest-Bearing

     2.2         3,643.4        0.24        9.6         14,799.6        0.26   

Securities

              

U.S. Government

     6.8         2,546.9        1.08        4.6         1,001.2        1.86   

Obligations of States and Political Subdivisions

     6.9         422.1        6.57        10.3         609.9        6.71   

Government Sponsored Agency

     28.5         17,827.2        0.64        22.8         12,794.0        0.71   

Other (1)

     36.5         10,661.9        1.38        33.7         9,628.1        1.41   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Securities

     78.7         31,458.1        1.01        71.4         24,033.2        1.19   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Loans and Leases (2)

     207.2         29,057.5        2.86        244.4         28,330.9        3.46   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Earning Assets

     331.7         83,208.2        1.60        370.2         83,666.8        1.77   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Allowance for Credit Losses Assigned to Loans and Leases

     —           (298.1     —          —           (308.2     —     

Cash and Due from Banks

     —           3,860.7        —          —           3,861.7        —     

Buildings and Equipment

     —           469.0        —          —           500.5        —     

Client Security Settlement Receivables

     —           488.1        —          —           409.8        —     

Goodwill

     —           535.0        —          —           417.4        —     

Other Assets

     —           4,147.7        —          —           3,811.1        —     
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Assets

   $ —         $ 92,410.6        —     $ —         $ 92,359.1        —  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Average Source of Funds

              

Deposits

              

Savings and Money Market

   $ 4.9       $ 14,095.6        0.14   $ 7.3       $ 14,222.9        0.20

Savings Certificates and Other Time

     5.2         3,098.3        0.67        7.3         3,686.9        0.80   

Non-U.S. Offices—Interest-Bearing

     22.6         36,431.2        0.25        55.7         41,568.4        0.54   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Interest-Bearing Deposits

     32.7         53,625.1        0.25        70.3         59,478.2        0.47   

Short-Term Borrowings

     1.9         4,165.6        0.18        2.5         7,114.6        0.14   

Senior Notes

     16.8         2,119.5        3.21        15.6         1,891.9        3.32   

Long-Term Debt

     15.3         1,674.9        3.66        24.7         2,756.9        3.59   

Floating Rate Capital Debt

     0.7         277.0        1.06        0.5         276.9        0.86   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Interest-Related Funds

     67.4         61,862.1        0.44        113.6         71,518.5        0.64   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Interest Rate Spread

     —           —          1.16        —           —          1.13   

Demand and Other Noninterest-Bearing Deposits

     —           19,720.1        —          —           11,017.4        —     

Other Liabilities

     —           3,539.6        —          —           2,866.5        —     

Stockholders’ Equity

     —           7,288.8        —          —           6,956.7        —     
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ —         $ 92,410.6        —     $ —         $ 92,359.1        —  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net Interest Income/Margin (FTE Adjusted) (4)

   $ 264.3       $ —          1.28   $ 256.6       $ —          1.23
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net Interest Income/Margin (Unadjusted)

   $ 254.1       $ —          1.23   $ 246.1       $ —          1.18
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

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)

   $ 28.1      $ (66.6   $ (38.5

Interest-Related Funds

     (15.6     (30.6     (46.2
  

 

 

   

 

 

   

 

 

 

Net Interest Income (FTE)

   $ 43.7      $ (36.0   $ 7.7   
  

 

 

   

 

 

   

 

 

 

 

(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 June 30, 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.
(4) 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 $10.2 million and $10.5 million for the three months ended June 30, 2012 and 2011, respectively.
Note: 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.

 

24


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    Six Months  
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

   $ 0.2       $ 253.5        0.15   $ 0.2       $ 261.9        0.11

Interest-Bearing Deposits with Banks

     94.0         18,517.6        1.02        82.3         16,192.4        1.02   

Federal Reserve Deposits and Other Interest-Bearing

     7.3         5,664.4        0.26        16.0         11,891.0        0.27   

Securities

              

U.S. Government

     14.4         2,758.4        1.05        9.0         987.4        1.84   

Obligations of States and Political Subdivisions

     15.1         457.5        6.59        21.2         638.7        6.63   

Government Sponsored Agency

     58.2         17,685.0        0.66        47.0         12,705.3        0.75   

Other (1)

     67.4         10,463.3        1.29        60.0         8,813.3        1.38   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Securities

     155.1         31,364.2        0.99        137.2         23,144.7        1.20   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Loans and Leases (2)

     426.0         28,836.6        2.97        492.1         28,064.4        3.54   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Earning Assets

     682.6         84,636.3        1.62        727.8         79,554.4        1.84   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Allowance for Credit Losses Assigned to Loans and Leases

     —           (295.5     —          —           (313.7     —     

Cash and Due from Banks

     —           3,931.6        —          —           3,647.8        —     

Buildings and Equipment

     —           480.7        —          —           502.1        —     

Client Security Settlement Receivables

     —           454.6        —          —           419.3        —     

Goodwill

     —           534.5        —          —           411.3        —     

Other Assets

     —           4,027.1        —          —           3,616.2        —     
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Assets

   $ —         $ 93,769.3        —     $ —         $ 87,837.4        —  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Average Source of Funds

              

Deposits

              

Savings and Money Market

   $ 10.2       $ 14,351.2        0.14   $ 15.4       $ 14,063.2        0.22

Savings Certificates and Other Time

     10.3         3,084.9        0.67        15.4         3,758.7        0.82   

Non-U.S. Offices—Interest-Bearing

     58.6         37,706.0        0.31        106.2         38,837.0        0.55   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Interest-Bearing Deposits

     79.1         55,142.1        0.29        137.0         56,658.9        0.49   

Short-Term Borrowings

     3.2         4,196.9        0.16        5.0         6,127.9        0.16   

Senior Notes

     33.8         2,122.4        3.20        31.3         1,892.5        3.34   

Long-Term Debt

     34.4         1,832.1        3.77        51.8         2,740.2        3.81   

Floating Rate Capital Debt

     1.5         277.0        1.09        1.2         276.9        0.87   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Interest-Related Funds

     152.0         63,570.5        0.48        226.3         67,696.4        0.67   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Interest Rate Spread

     —           —          1.14        —           —          1.17   

Demand and Other Noninterest-Bearing Deposits

     —           19,593.6        —          —           10,386.6        —     

Other Liabilities

     —           3,377.2        —          —           2,849.4        —     

Stockholders’ Equity

     —           7,228.0        —          —           6,905.0        —     
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ —         $ 93,769.3        —     $ —         $ 87,837.4        —  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net Interest Income/Margin (FTE Adjusted) (4)

   $ 530.6       $ —          1.26   $ 501.5       $ —          1.27
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net Interest Income/Margin (Unadjusted)

   $ 510.5       $ —          1.21   $ 480.5       $ —          1.22
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

ANALYSIS OF NET INTEREST INCOME CHANGES

DUE TO VOLUME AND RATE

 

     Six Months 2012/2011  
     Change Due To  
     Average              

(In Millions)

   Balance     Rate     Total  

Earning Assets (FTE)

   $ 66.1      $ (111.3   $ (45.2

Interest-Related Funds

     (18.6     (55.7     (74.3
  

 

 

   

 

 

   

 

 

 

Net Interest Income (FTE)

   $ 84.7      $ (55.6   $ 29.1   
  

 

 

   

 

 

   

 

 

 

 

(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 June 30, 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.
(4) 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 $20.1 million and $21.0 million for the six months ended June 30, 2012 and 2011, respectively.
Note: 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.

 

25


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

 

26


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

 

27


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.

 

28


FINANCIAL STATEMENTS

 

CONSOLIDATED BALANCE SHEET   NORTHERN TRUST CORPORATION

 

($ In Millions Except Share Information)

   June 30
2012
    December 31
2011
 
     (Unaudited)        

Assets

    

Cash and Due from Banks

   $ 3,594.3      $ 4,315.3   

Federal Funds Sold and Securities Purchased under Agreements to Resell

     22.5        121.3   

Interest-Bearing Deposits with Banks

     18,442.4        16,696.4   

Federal Reserve Deposits and Other Interest-Bearing

     8,433.5        13,448.6   

Securities

    

Available for Sale

     26,836.7        30,192.5   

Held to Maturity (Fair value of $2,365.5 and $817.1)

     2,348.1        799.2   

Trading Account

     6.5        8.0   
  

 

 

   

 

 

 

Total Securities

     29,191.3        30,999.7   
  

 

 

   

 

 

 

Loans and Leases

    

Commercial

     13,094.3        12,354.3   

Personal

     16,507.8        16,709.6   
  

 

 

   

 

 

 

Total Loans and Leases (Net of unearned income of $309.4 and $374.1)

     29,602.1        29,063.9   
  

 

 

   

 

 

 

Allowance for Credit Losses Assigned to Loans and Leases

     (300.3     (294.8

Buildings and Equipment

     462.0        494.5   

Client Security Settlement Receivables

     724.8        778.3   

Goodwill

     533.2        532.0   

Other Assets

     3,750.1        4,068.5   
  

 

 

   

 

 

 

Total Assets

   $ 94,455.9      $ 100,223.7   
  

 

 

   

 

 

 

Liabilities

    

Deposits

    

Demand and Other Noninterest-Bearing

   $ 18,373.8      $ 22,792.0   

Savings and Money Market

     13,877.1        17,470.8   

Savings Certificates and Other Time

     3,119.6        3,058.3   

Non U.S. Offices – Noninterest-Bearing

     3,365.4        3,488.4   

                              – Interest-Bearing

     38,260.0        35,868.0   
  

 

 

   

 

 

 

Total Deposits

     76,995.9        82,677.5   

Federal Funds Purchased

     2,042.3        815.3   

Securities Sold Under Agreements to Repurchase

     232.8        1,198.8   

Other Borrowings

     977.7        931.5   

Senior Notes

     2,117.0        2,126.7   

Long-Term Debt

     1,662.6        2,133.3   

Floating Rate Capital Debt

     277.0        276.9   

Other Liabilities

     2,760.3        2,946.4   
  

 

 

   

 

 

 

Total Liabilities

     87,065.6        93,106.4   
  

 

 

   

 

 

 

Stockholders’ Equity

    

Common Stock, $1.66 2/3 Par Value; Authorized 560,000,000 shares; Outstanding shares of 240,516,692 and 241,008,509

     408.6        408.6   

Additional Paid-In Capital

     995.3        977.5   

Retained Earnings

     6,502.2        6,302.3   

Accumulated Other Comprehensive Loss

     (274.1     (345.6

Treasury Stock (4,654,832 and 4,163,015 shares, at cost)

     (241.7     (225.5
  

 

 

   

 

 

 

Total Stockholders’ Equity

     7,390.3        7,117.3   
  

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 94,455.9      $ 100,223.7   
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

29


CONSOLIDATED STATEMENT OF INCOME    NORTHERN TRUST CORPORATION
(UNAUDITED)   

 

     Three Months
Ended June 30
    Six Months
Ended June 30
 

($ In Millions Except Per Common Share Information)

   2012      2011     2012     2011  

Noninterest Income

         

Trust, Investment and Other Servicing Fees

   $ 605.8       $ 557.8      $ 1,181.0      $ 1,072.7   

Foreign Exchange Trading Income

     59.4         80.8        121.3        165.6   

Treasury Management Fees

     17.3         18.6        34.7        37.2   

Security Commissions and Trading Income

     17.4         15.9        35.7        30.9   

Other Operating Income

     34.0         42.2        72.6        77.9   

Investment Security Gains (Losses), net (1)

     0.5         (16.6     (1.9     (22.1
  

 

 

    

 

 

   

 

 

   

 

 

 

Total Noninterest Income

     734.4         698.7        1,443.4        1,362.2   
  

 

 

    

 

 

   

 

 

   

 

 

 

Net Interest Income

         

Interest Income

     321.5         359.7        662.5        706.8   

Interest Expense

     67.4         113.6        152.0        226.3   
  

 

 

    

 

 

   

 

 

   

 

 

 

Net Interest Income

     254.1         246.1        510.5        480.5   

Provision for Credit Losses

     5.0         10.0        10.0        25.0   
  

 

 

    

 

 

   

 

 

   

 

 

 

Net Interest Income after Provision for Credit Losses

     249.1         236.1        500.5        455.5   
  

 

 

    

 

 

   

 

 

   

 

 

 

Noninterest Expense

         

Compensation

     313.8         320.2        635.4        614.2   

Employee Benefits

     64.9         67.2        133.0        122.0   

Outside Services

     133.7         134.9        261.9        258.9   

Equipment and Software

     99.4         83.1        190.2        156.5   

Occupancy

     42.6         43.2        84.4        85.8   

Visa Indemnification Benefit

     —           —          —          (10.1

Other Operating Expense

     62.9         56.7        136.0        130.9   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total Noninterest Expense

     717.3         705.3        1,440.9        1,358.2   
  

 

 

    

 

 

   

 

 

   

 

 

 

Income before Income Taxes

     266.2         229.5        503.0        459.5   

Provision for Income Taxes

     86.6         77.5        162.2        156.5   
  

 

 

    

 

 

   

 

 

   

 

 

 

Net Income

   $ 179.6       $ 152.0      $ 340.8      $ 303.0   
  

 

 

    

 

 

   

 

 

   

 

 

 

Net Income Applicable to Common Stock

   $ 179.6       $ 152.0      $ 340.8      $ 303.0   
  

 

 

    

 

 

   

 

 

   

 

 

 

Per Common Share

         

Net Income – Basic

   $ 0.73       $ 0.62      $ 1.39      $ 1.24   

                   – Diluted

     0.73         0.62        1.39        1.24   
  

 

 

    

 

 

   

 

 

   

 

 

 

Average Number of Common Shares Outstanding – Basic

     240,900,839         241,484,195        240,995,466        241,803,405   

                                                           – Diluted

     241,367,982         241,912,058        241,462,039        242,437,963   
  

 

 

    

 

 

   

 

 

   

 

 

 

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME    NORTHERN TRUST CORPORATION
(UNAUDITED)   

 

     Three Months
Ended June 30
    Six Months
Ended June 30
 

(In Millions)

   2012     2011     2012     2011  

Net Income

   $ 179.6      $ 152.0      $ 340.8      $ 303.0   

Other Comprehensive Income (Net of Tax and Reclassifications)

        

Net Unrealized Gains on Securities Available for Sale

     11.7        30.4        31.7        33.8   

Net Unrealized Gains (Losses) on Cash Flow Hedges

     (8.9     (2.0     2.4        7.0   

Foreign Currency Translation Adjustments

     (5.9     2.2        9.9        9.4   

Pension and Other Postretirement Benefit Adjustments

     5.3        5.7        27.5        11.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other Comprehensive Income

     2.2        36.3        71.5        62.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive Income

   $ 181.8      $ 188.3      $ 412.3      $ 365.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ —        $ (1.7   $ (3.1   $ (1.6

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

     —          (15.2     —          (20.4

Other Security Gains (Losses), net

     0.5        0.3        1.2        (0.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Investment Security Gains (Losses), net

   $ 0.5      $ (16.6   $ (1.9   $ (22.1
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

30


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