Form 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the Quarterly Period Ended September 30, 2009

OR

 

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

For the transition period from              to             

Commission File No. 0-5965

 

 

NORTHERN TRUST CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   36-2723087

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

50 South LaSalle Street

Chicago, Illinois

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

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

 

 

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

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

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

 

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

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

241,505,420 Shares - $1.66 2/3 Par Value

(Shares of Common Stock Outstanding on September 30, 2009)

 

 

 


PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

NORTHERN TRUST CORPORATION

CONSOLIDATED BALANCE SHEET

 

($ In Millions Except Share Information)

   September 30
2009
    December 31
2008
    September 30
2008
 
     (Unaudited)           (Unaudited)  

Assets

      

Cash and Due from Banks

   $ 2,885.9      $ 2,648.2      $ 3,775.7   

Federal Funds Sold and Securities Purchased under Agreements to Resell

     53.8        169.0        869.9   

Time Deposits with Banks

     14,155.8        16,721.0        25,187.9   

Federal Reserve Deposits and Other Interest-Bearing

     9,924.7        9,403.8        21.2   

Securities

      

Available for Sale

     16,260.4        14,414.4        12,195.2   

Held to Maturity (Fair value - $1,215.5 at Sept. 2009, $1,156.1 at Dec. 2008, $1,142.7 at Sept. 2008)

     1,186.5        1,154.1        1,155.2   

Trading Account

     10.0        2.3        8.7   
                        

Total Securities

     17,456.9        15,570.8        13,359.1   
                        

Loans and Leases

      

Commercial and Other

     17,304.7        20,374.0        19,912.6   

Residential Mortgages

     10,818.2        10,381.4        9,957.6   
                        

Total Loans and Leases (Net of unearned income - $499.6 at Sept. 2009, $539.5 at Dec. 2008, and $541.7 at Sept. 2008)

     28,122.9        30,755.4        29,870.2   
                        

Reserve for Credit Losses Assigned to Loans and Leases

     (307.8     (229.1     (194.7

Buildings and Equipment

     542.7        506.6        492.9   

Client Security Settlement Receivables

     787.1        709.3        857.0   

Goodwill

     401.4        389.4        410.0   

Other Assets

     3,878.1        5,409.2        4,594.8   
                        

Total Assets

   $ 77,901.5      $ 82,053.6      $ 79,244.0   
                        

Liabilities

      

Deposits

      

Demand and Other Noninterest-Bearing

   $ 7,623.1      $ 11,823.6      $ 7,004.5   

Savings and Money Market

     12,882.7        9,079.2        8,104.7   

Savings Certificates

     2,773.2        2,606.8        2,177.4   

Other Time

     1,256.8        801.6        639.6   

Non U.S. Offices

 

- Noninterest-Bearing

     2,516.2        2,855.7        3,452.5   
 

- Interest-Bearing

     28,272.1        35,239.5        41,060.4   
                        

Total Deposits

     55,324.1        62,406.4        62,439.1   
                        

Federal Funds Purchased

     6,703.6        1,783.5        1,500.0   

Securities Sold Under Agreements to Repurchase

     717.1        1,529.1        1,012.7   

Other Borrowings

     914.3        736.7        271.3   

Senior Notes

     1,557.0        1,052.6        1,038.2   

Long-Term Debt

     2,907.6        3,293.4        3,267.6   

Floating Rate Capital Debt

     276.7        276.7        276.6   

Other Liabilities

     3,277.8        4,585.8        4,602.5   
                          

Total Liabilities

     71,678.2        75,664.2        74,408.0   
                          

Stockholders’ Equity

      

Preferred Stock - Series B (Net of discount of $74.7)

     —          1,501.3        —     

Common Stock, $1.66  2 /3 Par Value; Authorized 560,000,000 shares; Outstanding 241,505,420 shares at September 2009, 223,263,132 shares at December 2008 and 223,034,210 shares at September 2008

     408.6        379.8        379.8   

Additional Paid-In Capital

     893.9        178.5        105.9   

Retained Earnings

     5,443.3        5,091.2        4,821.1   

Accumulated Other Comprehensive Income (Loss)

     (313.1     (494.9     (190.2

Treasury Stock - (at cost, 3,666,104 shares at September 2009, 4,658,392 shares at December 2008, and 4,887,314 shares at September 2008)

     (209.4     (266.5     (280.6
                          

Total Stockholders’ Equity

     6,223.3        6,389.4        4,836.0   
                          

Total Liabilities and Stockholders’ Equity

   $ 77,901.5      $ 82,053.6      $ 79,244.0   
                          

 

2


NORTHERN TRUST CORPORATION

CONSOLIDATED STATEMENT OF INCOME

(UNAUDITED)

 

     Three Months
Ended September 30
    Nine Months
Ended September 30
 

($ In Millions Except Per Share Information)

   2009     2008     2009     2008  

Noninterest Income

        

Trust, Investment and Other Servicing Fees

   $ 523.1      $ 474.9      $ 1,535.2      $ 1,646.8   

Foreign Exchange Trading Income

     92.9        141.8        358.3        381.6   

Security Commissions and Trading Income

     12.9        19.2        46.5        57.4   

Treasury Management Fees

     19.4        17.6        61.6        53.4   

Gain on Visa Share Redemption

     —          —          —          167.9   

Other Operating Income

     35.1        36.2        100.4        102.8   

Security Gains and (Losses), including Other-Than-Temporary-Impairment (OTTI) Losses, net

     (35.5     (16.9     (114.7     (11.9

Less: OTTI Recognized in Other Comprehensive Income

     31.5        —          93.6        —     
                                

Total Investment Security Gains (Losses), net

     (4.0     (16.9     (21.1     (11.9
                                

Total Noninterest Income

     679.4        672.8        2,080.9        2,398.0   
                                

Net Interest Income

        

Interest Income

     333.2        640.9        1,081.7        1,906.9   

Interest Expense

     94.9        387.5        316.1        1,163.9   
                                

Net Interest Income

     238.3        253.4        765.6        743.0   

Provision for Credit Losses

     60.0        25.0        175.0        55.0   
                                

Net Interest Income after Provision for Credit Losses

     178.3        228.4        590.6        688.0   
                                

Noninterest Expenses

        

Compensation

     283.6        230.3        830.0        822.5   

Employee Benefits

     59.6        52.4        187.1        172.4   

Outside Services

     108.7        106.5        306.5        306.6   

Equipment and Software Expense

     65.6        60.7        188.5        171.8   

Occupancy Expense

     45.3        41.8        127.5        122.9   

Visa Indemnification Charges

     (17.8     30.0        (17.8     (46.1

Other Operating Expenses

     54.2        632.3        73.6        782.5   
                                

Total Noninterest Expenses

     599.2        1,154.0        1,695.4        2,332.6   
                                

Income (Loss) before Income Taxes

     258.5        (252.8     976.1        753.4   

Provision (Benefit) for Income Taxes

     70.6        (104.5     312.2        300.9   
                                

Net Income (Loss)

   $ 187.9      $ (148.3   $ 663.9      $ 452.5   
                                

Net Income (Loss) Applicable to Common Stock

   $ 187.9      $ (148.3   $ 552.8      $ 452.5   
                                

Per Common Share

        

Net Income (Loss) - Basic

   $ .77      $ (.66   $ 2.35      $ 2.03   

                               - Diluted

     .77        (.66     2.34        2.00   

Cash Dividends Declared

     .28        .28        .84        .84   
                                

Average Number of Common Shares Outstanding - Basic

     241,415,698        221,899,198        233,475,552        220,944,632   

                                                                                  - Diluted

     242,631,248        221,899,198        234,526,417        224,240,453   
                                

 

NORTHERN TRUST CORPORATION

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(UNAUDITED)

 

  

  

  

     Three Months
Ended September 30
    Nine Months
Ended September 30
 

(In Millions)

   2009     2008     2009     2008  

Net Income

   $ 187.9      $ (148.3   $ 663.9      $ 452.5   

April 1 Cumulative Effect Adjustment from New Accounting Standard

     —          —          (9.5     —     

Other Comprehensive Income (Loss) (net of tax and reclassifications) Security OTTI Losses Recognized in Other Comprehensive Income

     (3.1     —          (42.4     —     

Other Unrealized Gains (Losses) on Securities, net

     44.0        (32.4     209.7        (101.8

Unrealized Gains (Losses) on Cash Flow Hedge Designations, net

     (1.9     (2.2     15.9        (2.7

Foreign Currency Translation Adjustments

     (2.1     (9.0     (.8     (1.7

Pension and Other Postretirement Benefit Adjustments

     3.4        1.8        8.9        6.3   
                                

Other Comprehensive Income (Loss)

     40.3        (41.8     191.3        (99.9
                                

Comprehensive Income

   $ 228.2      $ (190.1   $ 845.7      $ 352.6   
                                

 

3


NORTHERN TRUST CORPORATION

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

 

     Nine Months
Ended September 30
 

(In Millions)

   2009     2008  

Preferred Stock

    

Balance at January 1

   $ 1,501.3      $ —     

Redemption of Preferred Stock, Series B

     (1,576.0     —     

Discount Accretion - Preferred Stock

     74.7        —     
                

Balance at September 30

     —          —     
                

Common Stock

    

Balance at January 1

     379.8        379.8   

Common Stock Issuance

     28.8        —     
                

Balance at September 30

     408.6        379.8   
                

Additional Paid-in Capital

    

Balance at January 1

     178.5        69.1   

Common Stock Issuance

     805.3        —     

Repurchase of Warrant to Purchase Common Stock

     (87.0     —     

Treasury Stock Transactions - Stock Options and Awards

     (31.2     (26.7

Stock Options and Awards - Amortization

     24.4        29.9   

Stock Options and Awards - Tax Benefits

     3.9        33.6   
                

Balance at September 30

     893.9        105.9   
                

Retained Earnings

    

Balance at January 1

     5,091.2        4,556.2   

April 1 Cumulative Effect of Applying FSP FAS 115-2 (ASC 320-10)

     9.5        —     

Net Income

     663.9        452.5   

Dividends Declared - Common Stock

     (200.0     (187.6

Dividends Declared - Preferred Stock

     (46.6     —     

Discount Accretion - Preferred Stock

     (74.7     —     
                

Balance at September 30

     5,443.3        4,821.1   
                

Accumulated Other Comprehensive Income (Loss)

    

Balance at January 1

     (494.9     (90.3

April 1 Cumulative Effect of Applying FSP FAS 115-2 (ASC 320-10)

     (9.5     —     

Other Comprehensive Income (Loss)

     191.3        (99.9
                

Balance at September 30

     (313.1     (190.2
                

Treasury Stock

    

Balance at January 1

     (266.5     (405.7

Stock Options and Awards

     68.9        195.8   

Stock Purchased

     (11.8     (70.7
                

Balance at September 30

     (209.4     (280.6
                

Total Stockholders’ Equity at September 30

   $ 6,223.3      $ 4,836.0   
                

 

4


NORTHERN TRUST CORPORATION

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

 

     Nine Months
Ended September 30
 

(In Millions)

   2009     2008  

Cash Flows from Operating Activities:

    

Net Income

   $ 663.9      $ 452.5   

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

    

Provision for Credit Losses

     175.0        55.0   

Client Support-Related (Benefit) Charges

     (121.3     571.4   

Capital Support Agreement Payments

     (66.7     —     

Depreciation on Buildings and Equipment

     70.4        63.4   

Amortization of Computer Software

     94.7        81.9   

Investment Security Losses, net

     21.1        11.9   

Amortization of Intangibles

     12.0        13.7   

Decrease in Receivables

     63.7        88.1   

Decrease in Interest Payable

     (22.4     (9.7

Amortization and Accretion of Securities and Unearned Income

     (37.7     (10.6

Excess Tax Benefits from Stock Incentive Plans

     (3.9     (33.6

Net Increase in Trading Account Securities

     (7.7     (5.6

Visa Indemnification Charges

     (17.8     (46.1

Other Operating Activities, net

     (130.8     (313.1
                

Net Cash Provided by Operating Activities

     692.5        919.2   
                

Cash Flows from Investing Activities:

    

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

     115.2        2,920.8   

Net (Increase) Decrease in Time Deposits with Banks

     2,565.2        (3,927.9

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

     (520.9     .3   

Purchases of Securities-Held to Maturity

     (164.2     (165.6

Proceeds from Maturity and Redemption of Securities-Held to Maturity

     150.9        160.1   

Purchases of Securities-Available for Sale

     (12,239.4     (10,430.9

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

     10,695.3        5,809.2   

Net (Increase) Decrease in Loans and Leases

     2,507.2        (4,528.6

Purchases of Buildings and Equipment, net

     (106.6     (64.4

Purchases and Development of Computer Software

     (137.0     (157.6

Net Increase in Client Security Settlement Receivables

     (77.8     (293.9

Other Investing Activities, net

     232.9        (171.8
                

Net Cash Provided by (Used in) Investing Activities

     3,020.8        (10,850.3
                

Cash Flows from Financing Activities:

    

Net Increase (Decrease) in Deposits

     (7,082.3     11,226.0   

Net Increase in Federal Funds Purchased

     4,920.1        34.2   

Net Decrease in Securities Sold under Agreements to Repurchase

     (812.0     (750.9

Net Increase (Decrease) in Short-Term Other Borrowings

     42.0        (1,804.6

Proceeds from Term Federal Funds Purchased

     11,921.5        84.7   

Repayments of Term Federal Funds Purchased

     (11,785.5     (118.7

Proceeds from Senior Notes & Long-Term Debt

     500.0        1,863.1   

Repayments of Senior Notes & Long-Term Debt

     (371.8     (859.5

Treasury Stock Purchased

     (8.6     (63.9

Net Proceeds from Stock Options

     34.6        159.1   

Excess Tax Benefits from Stock Incentive Plans

     3.9        33.6   

Cash Dividends Paid on Common Stock

     (192.7     (185.4

Proceeds from Common Stock Issuance

     834.1        —     

Cash Dividends Paid on Preferred Stock

     (46.6     —     

Redemption of Preferred Stock - Series B

     (1,576.0     —     

Repurchase of Warrant to Purchase Common Stock

     (87.0     —     

Other Financing Activities, net

     146.9        281.6   
                

Net Cash Provided by (Used in) Financing Activities

     (3,559.4     9,899.3   
                

Effect of Foreign Currency Exchange Rates on Cash

     83.8        (114.1
                

Increase (Decrease) in Cash and Due from Banks

     237.7        (145.9

Cash and Due from Banks at Beginning of Year

     2,648.2        3,921.6   
                

Cash and Due from Banks at End of Period

   $ 2,885.9      $ 3,775.7   
                

Supplemental Disclosures of Cash Flow Information:

    

Interest Paid

   $ 338.5      $ 1,173.6   

Income Taxes Paid

     301.1        288.2   
                

 

5


Notes to Consolidated Financial Statements

1. Basis of Presentation – The consolidated financial statements include the accounts of Northern Trust Corporation (Corporation) and its subsidiaries (collectively, Northern Trust), all of which are wholly-owned. Significant intercompany balances and transactions have been eliminated. The consolidated financial statements, as of and for the periods ended September 30, 2009 and 2008, have not been audited by the Corporation’s independent registered public accounting firm. In the opinion of management, all accounting entries and adjustments, including normal recurring accruals, necessary for a fair presentation of the financial position and the results of operations for the interim periods have been made. Events occurring subsequent to the date of the balance sheet have been evaluated for potential recognition or disclosure in the consolidated financial statements through October 30, 2009, the date of the filing of the consolidated financial statements with the Securities and Exchange Commission. For a description of Northern Trust’s significant accounting policies, refer to Note 1 of the Notes to Consolidated Financial Statements in the 2008 Annual Report to Shareholders.

2. Recent Accounting Pronouncements – In June 2009, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement No. 162.” (FASB Accounting Standards Codification (ASC) Topic 105, “Generally Accepted Accounting Principles”). Upon adoption as of September 30, 2009, FASB ASC Topic 105 is the sole source of authoritative U.S. Generally Accepted Accounting Principles (GAAP) recognized by the FASB. FASB ASC Topic 105 does not alter existing GAAP and its adoption as of September 30, 2009 had no impact on Northern Trust’s consolidated financial position or results of operations.

In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets - an amendment of FASB Statement No. 140” (FASB ASC Topic 860, “Transfers and Servicing”). SFAS No. 166 amends SFAS No. 140 to improve the relevance and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and the transferor’s continuing involvement, if any, in transferred financial assets. SFAS No. 166 is effective for interim and annual reporting periods that begin after November 15, 2009. Northern Trust is currently assessing the impact of the adoption of SFAS No. 166; however, its impact on Northern Trust’s consolidated financial position and results of operations is not expected to be material.

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (FASB ASC Topic 810, “Consolidations”). SFAS No. 167 significantly changes the criteria for determining whether the consolidation of a variable interest entity is required. SFAS No. 167 also addresses the effect of changes required by SFAS No. 166 on FASB Interpretation No. 46(R), “Consolidation of Variable Interest Entities” (FASB ASC Topic 860, “Transfers and Servicing”), and concerns regarding the application of certain provisions of Interpretation No. 46(R), including concerns that the accounting and disclosures under the Interpretation do not always provide timely and useful information about an entity’s involvement in a variable interest entity. SFAS No. 167 is effective for

 

6


Notes to Consolidated Financial Statements (continued)

 

interim and annual reporting periods that begin after November 15, 2009. Northern Trust is currently analyzing the statement and actively monitoring ongoing discussions among industry participants, accounting standard setters, and banking regulators regarding differing interpretations of its requirements. Significant interpretative issues remain open regarding when investment managers such as Northern Trust are required to consolidate certain assets in funds that they manage. Based on Northern Trust’s preliminary assessment, the value of assets in funds that may need to be consolidated is likely to be immaterial. Northern Trust will continue to closely monitor and evaluate the resolution of open questions regarding the statement as they could have a significant bearing on the impact of Northern Trust’s adoption of SFAS No. 167.

In August 2009, the FASB issued Accounting Standard Update (ASU) 2009-05, “Measuring Liabilities at Fair Value” (ASU 2009-05). ASU 2009-05 reiterates that the definition of fair value for a liability is the price that would be paid to transfer it in an orderly transaction between market participants at the measurement date and that a company must consider its own nonperformance risk, including its own credit risk, in fair-value measurements of liabilities. ASU 2009-05 is effective for interim and annual reporting periods that begin after August 27, 2009 and applies to all fair value measurements of liabilities required by FASB ASC Topic 820 (previously, SFAS No. 157, “Fair Value Measurements and Disclosures”). No new fair value measurements are required by the new guidance. Adoption of ASU 2009-05 as of October 1, 2009 is not expected to have a material impact on Northern Trust’s consolidated financial position or results of operations.

In September 2009, the FASB issued ASU 2009-12, “Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)” (ASU 2009-12). ASU 2009-12 allows investors to use net asset value to estimate the fair value of investments in investment companies that do not have a readily determinable fair value if the investees have the attributes of investment companies and the net asset values or their equivalents are calculated consistent with the AICPA Audit and Accounting Guide, “Investment Companies.” This methodology is considered a “practical expedient” as the fair-value measurement guidance in FASB ASC Topic 820, “Fair Value Measurements and Disclosures” (previously, SFAS No. 157, “Fair Value Measurements”) defines an asset’s fair value as its current exit price. ASU 2009-12 has limitations and disclosure requirements about the nature and terms of the investments within the scope of the new guidance. ASU 2009-12 is effective for interim and annual reporting periods that begin after December 15, 2009. Adoption of ASU 2009-12 is not expected to have a material impact on Northern Trust’s consolidated financial position or results of operations.

 

7


Notes to Consolidated Financial Statements (continued)

 

3. Fair Value Measurements – Fair Value Hierarchy. The following describes the hierarchy of inputs used to measure fair value and the primary valuation methodologies used by Northern Trust for financial instruments measured at fair value on a recurring basis. The hierarchy of valuation inputs (Levels 1, 2, and 3) is based on the extent to which the inputs are observable in the marketplace. Observable inputs reflect market data obtained from sources independent of the reporting entity; unobservable inputs reflect the entity’s own assumptions about how market participants would value an asset or liability based on the best information available.

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

Northern Trust’s Level 1 assets and liabilities include available for sale investments in U.S. treasury securities, seed investments for the development of managed fund products consisting of common stock and securities sold but not yet purchased, and U.S. treasury securities held to fund employee benefit and deferred compensation obligations.

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

Northern Trust’s Level 2 assets include available for sale and trading account investments in government sponsored agency securities, asset-backed securities, obligations of states and political subdivisions, corporate debt securities, and non-U.S. government securities, the fair values of which are modeled by external pricing vendors or, in limited cases, modeled internally, using a discounted cash flow approach that incorporates current market yield curves and assumptions regarding anticipated prepayments and defaults.

Level 2 assets and liabilities also include derivative contracts such as foreign exchange, interest rate, and credit default swap contracts that are valued using widely accepted models that incorporate inputs readily observable in actively quoted markets and do not require significant judgment. Inputs to these models reflect the contractual terms of the contracts and, based on the type of instrument, can include foreign exchange rates, interest rates, credit spreads, and volatility inputs. Northern Trust evaluated the impact of counterparty credit risk and its own credit risk on the valuation of its derivative instruments. Factors considered included the likelihood of default by Northern Trust and its counterparties, the remaining maturities of the instruments, net exposures after giving effect to master netting agreements, available collateral, and other credit enhancements in determining the appropriate fair value of Northern Trust’s derivative instruments. The resulting valuation adjustments are not considered material. Level 2 other assets represent investments in mutual funds held to fund employee benefit and deferred compensation obligations. These investments are valued at the funds’ net asset values.

 

8


Notes to Consolidated Financial Statements (continued)

 

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

Northern Trust’s Level 3 assets consist of auction rate securities purchased from Northern Trust clients. The lack of activity in the auction rate security market has limited the amount of observable market inputs to use in determining fair value. Therefore, Northern Trust has incorporated its own assumptions about future cash flows and appropriate discount rates adjusted for credit and liquidity factors. In developing these assumptions, Northern Trust incorporated the contractual terms of the securities, the types of collateral, any credit enhancements available, and relevant market data, where available. Northern Trust’s Level 3 liabilities include capital support agreements (Capital Support Agreements) with certain entities for which Northern Trust acts as investment advisor, which are discussed in further detail in Note 17. These agreements are valued based on an option pricing model which incorporates agreement-specific assumptions, the value of covered investments, and future volatility assumptions of underlying assets in the affected entities. Level 3 liabilities also include financial guarantees relating to standby letters of credit and a net estimated liability for Visa related indemnifications, discussed in further detail in Notes 18 and 13, respectively, the fair values of which are based on available market data and significant management judgment.

 

9


Notes to Consolidated Financial Statements (continued)

 

The following presents assets and liabilities measured at fair value on a recurring basis as of September 30, 2009 and December 31, 2008, segregated by fair value level.

 

(In Millions)

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

September 30, 2009

             

Securities

             

Available for Sale

             

U.S. Government

   $ 73.7    $ —      $ —      $ —        $ 73.7

Obligations of States and Political Subdivisions

     —        46.1      —        —          46.1

Government Sponsored Agency

     —        11,289.6      —        —          11,289.6

Corporate Debt

     —        2,723.5      —        —          2,723.5

Residential Mortgage-Backed

     —        336.0      —        —          336.0

Other Asset-Backed

     —        1,044.7      —        —          1,044.7

Auction Rate

     —        —        450.6      —          450.6

Other

     —        296.2      —        —          296.2
                                   

Total

     73.7      15,736.1      450.6      —          16,260.4
                                   

Trading Account

     —        10.0      —        —          10.0
                                   

Total

     73.7      15,746.1      450.6      —          16,270.4
                                   

Other Assets

             

Derivatives

     —        3,059.0      —        (911.8     2,147.2

All Other

     65.8      31.1      —        —          96.9
                                   

Total

     65.8      3,090.1      —        (911.8     2,244.1
                                   

Total Assets at Fair Value

   $ 139.5    $ 18,836.2    $ 450.6    $ (911.8   $ 18,514.5
                                   

Other Liabilities

             

Derivatives

   $ —      $ 2,979.8    $ 126.1    $ (1,591.2   $ 1,514.7

All Other

     3.7      —        95.3      —          99.0
                                   

Total Liabilities at Fair Value

   $ 3.7    $ 2,979.8    $ 221.4    $ (1,591.2   $ 1,613.7
                                   

December 31, 2008

             

Securities

             

Available for Sale

             

U.S. Government

   $ 19.9    $ —      $ —      $ —        $ 19.9

Obligations of States and Political Subdivisions

     —        31.6      —        —          31.6

Government Sponsored Agency

     —        11,261.4      —        —          11,261.4

Corporate Debt

     —        739.6      —        —          739.6

Residential Mortgage-Backed

     —        439.3      —        —          439.3

Other Asset-Backed

     —        1,133.3      —        —          1,133.3

Auction Rate

     —        —        453.1      —          453.1

Other

     —        336.2      —        —          336.2
                                   

Total

     19.9      13,941.4      453.1      —          14,414.4
                                   

Trading Account

     —        2.3      —        —          2.3
                                   

Total

     19.9      13,943.7      453.1      —          14,416.7
                                   

Other Assets

             

Derivatives

     —        4,968.7      —        (1,649.0     3,319.7

All Other

     58.5      27.2      —        —          85.7
                                   

Total

     58.5      4,995.9      —        (1,649.0     3,405.4
                                   

Total Assets at Fair Value

   $ 78.4    $ 18,939.6    $ 453.1    $ (1,649.0   $ 17,822.1
                                   

Other Liabilities

             

Derivatives

   $ —      $ 4,466.5    $ 314.1    $ (1,649.0   $ 3,131.6

All Other

     3.3      —        104.2      —          107.5
                                   

Total Liabilities at Fair Value

   $ 3.3    $ 4,466.5    $ 418.3    $ (1,649.0   $ 3,239.1
                                   

 

* As permitted under GAAP, Northern Trust has elected to net derivative assets and liabilities when legally enforceable master netting agreements exist. As of September 30, 2009, derivative assets and liabilities have been further reduced by $221.2 million and $900.6 million, respectively, as a result of cash collateral received from and deposited with derivative counterparties.

 

10


Notes to Consolidated Financial Statements (continued)

 

The following presents the changes in Level 3 asset and liabilities for the three and nine months ended September 30, 2009 and 2008.

 

(In Millions)

   Securities
Available for Sale (1)
   Other Liabilities  
      Derivatives(2)    All Other (3)  

Three Months Ended September 30

   2009     2008    2009     2008    2009     2008  

Fair Value at June 30

   $ 474.5      $ —      $ (125.6   $ 9.9    $ (113.0   $ 93.7   

Realized and Unrealized Gains (Losses)

              

Included in Earnings

     .6 (4)      —        (.5     313.9      19.5        27.6   

Included in Other Comprehensive Income

     .8        —        —          —        —          —     

Purchases, Sales, Issuances, and Settlements

     (24.1     —        —          —        (1.8     7.7   
                                              

Fair Value at September 30

   $ 450.6      $ —      $ (126.1   $ 323.8    $ (95.3   $ 129.0   
                                              

Nine Months Ended September 30

                                  

Fair Value at January 1

   $ 453.1      $ —      $ (314.1   $ —      $ (104.2   $ 162.9   

Realized and Unrealized Gains (Losses)

              

Included in Earnings

     3.3 (4)      —        121.3        323.8      23.3        (52.4

Included in Other Comprehensive Income

     36.1        —        —          —        —          —     

Purchases, Sales, Issuances, and Settlements

     (35.3     —        66.7        —        (14.4     18.5   
                                              

Fair Value at September 30

   $ 450.6      $ —      $ (126.1   $ 323.8    $ (95.3   $ 129.0   
                                              

 

(1) Amounts reflect changes in the fair value of auction rate securities.
(2) Amounts reflect changes in the fair value of the Capital Support Agreements.
(3) Amounts reflect changes in the fair values of standby letters of credit and the net estimated liability for Visa related indemnifications.
(4) Represents gains realized on the redemptions of auction rate securities by the issuers that are included within investment security gains (losses), net, in the consolidated statement of income.

Realized and unrealized gains and losses related to Level 3 other liabilities are included in other operating income or expense. Of the total realized and unrealized gains and losses included in earnings for the three and nine months ended September 30, 2009, losses of $.5 million and net gains of $29.4 million, respectively, relating to the valuation of the Corporation’s estimated liability under the Capital Support Agreements at September 30, 2009 were unrealized.

Impaired loans whose valuation was determined based on available collateral are classified as nonrecurring Level 3 assets. During the three and nine months ended September 30, 2009, respectively, Northern Trust provided an additional $6.5 million and $36.4 million, respectively, in specific reserves for credit losses to adjust impaired loans to their total estimated fair value of $22.0 million and $82.1 million, respectively. Reserves were based on the fair value of the loans’ collateral as supported by third party appraisals, discounted to reflect management’s judgment as to the realizable value of the collateral.

 

11


Notes to Consolidated Financial Statements (continued)

 

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

Held to Maturity Securities. The fair values of held to maturity securities are modeled by external pricing vendors or, in limited cases, modeled internally, using a discounted cash flow approach that incorporates current market yield curves and assumptions regarding anticipated prepayments and defaults.

Loans (excluding lease receivables). The fair values of one-to-four family residential mortgages were based on quoted market prices of similar loans sold, adjusted for differences in loan characteristics. The fair values of the remainder of the loan portfolio were estimated using a discounted cash flow method in which the interest component of the discount rate used was the rate at which Northern Trust would have originated the loan had it been originated as of the date of the consolidated financial statements. The fair values of all loans were adjusted to reflect current assessments of loan collectibility.

Savings Certificates, Other Time, and Non-U.S. Offices Interest-Bearing Deposits. The fair values of these instruments were estimated using a discounted cash flow method that incorporated market interest rates.

Senior Notes, Subordinated Debt, Federal Home Loan Bank Borrowings, and Floating Rate Capital Debt. Fair values were based on quoted market prices, when available. If quoted market prices were not available, fair values were based on quoted market prices for comparable instruments.

Financial Guarantees and Loan Commitments. The fair values of financial guarantees and loan commitments represent the amount of unamortized fees on these instruments.

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

 

12


Notes to Consolidated Financial Statements (continued)

 

The following table summarizes the book and fair values of financial instruments.

 

(In Millions)

   September 30, 2009    December 31, 2008
   Book Value    Fair Value    Book Value    Fair Value

Assets

           

Cash and Due from Banks

   $ 2,885.9    $ 2,885.9    $ 2,648.2    $ 2,648.2

Money Market Assets

     24,134.3      24,134.3      26,293.8      26,293.8

Securities:

           

Available for Sale

     16,260.4      16,260.4      14,414.4      14,414.4

Held to Maturity

     1,186.5      1,215.5      1,154.1      1,156.1

Trading Account

     10.0      10.0      2.3      2.3

Loans (excluding Leases)

           

Held to Maturity

     26,806.4      26,965.2      29,378.4      29,506.0

Held for Sale

     9.7      9.7      7.3      7.3

Client Security Settlement Receivables

     787.1      787.1      709.3      709.3

Liabilities

           

Deposits:

           

Demand, Noninterest-Bearing, and Savings and Money Market

     23,022.0      23,022.0      23,758.5      23,758.5

Savings Certificates, Other Time and Foreign Offices Time

     32,302.1      32,340.1      38,647.9      38,676.4

Federal Funds Purchased

     6,703.6      6,703.6      1,783.5      1,783.5

Securities Sold under Agreements to Repurchase

     717.1      717.1      1,529.1      1,529.1

Other Borrowings

     914.3      914.3      736.7      736.7

Senior Notes

     1,557.0      1,613.9      1,052.6      998.4

Long Term Debt:

           

Subordinated Debt

     1,151.7      1,168.2      1,365.7      1,277.6

Federal Home Loan Bank Borrowings

     1,747.5      1,848.6      1,917.7      1,942.2

Floating Rate Capital Debt

     276.7      142.1      276.7      208.8

Financial Guarantees

     221.4      221.4      418.3      418.3

Loan Commitments

     29.6      29.6      19.9      19.9

Derivative Instruments

           

Asset/Liability Management:

           

Foreign Exchange Contracts

           

Assets

     51.6      51.6      103.0      103.0

Liabilities

     70.8      70.8      121.9      121.9

Interest Rate Swap Contracts

           

Assets

     121.0      121.0      170.2      170.2

Liabilities

     6.1      6.1      31.8      31.8

Credit Default Swaps

           

Assets

     .2      .2      38.4      38.4

Liabilities

     .9      .9      .3      .3

Client-Related and Trading:

           

Foreign Exchange Contracts

           

Assets

     2,743.0      2,743.0      2,931.8      2,931.8

Liabilities

     2,695.8      2,695.8      2,591.1      2,591.1

Interest Rate Swap Contracts

           

Assets

     142.7      142.7      190.7      190.7

Liabilities

     141.9      141.9      184.9      184.9

Interest Rate Option Contracts

           

Assets

     .5      .5      .3      .3

Liabilities

     .5      .5      .3      .3

 

13


Notes to Consolidated Financial Statements (continued)

 

4. Securities – The following table summarizes the book and fair values of securities.

 

(In Millions)

   September 30, 2009    December 31, 2008    September 30, 2008
   Book
Value
   Fair
Value
   Book
Value
   Fair
Value
   Book
Value
   Fair
Value

Available for Sale

                 

U.S. Government

   $ 73.7    $ 73.7    $ 19.9    $ 19.9    $ 20.0    $ 20.0

Obligations of States and Political Subdivisions

     46.1      46.1      31.6      31.6      31.7      31.7

Government Sponsored Agency

     11,289.6      11,289.6      11,261.4      11,261.4      9,868.8      9,868.8

Corporate Debt

     2,723.5      2,723.5      739.6      739.6      149.2      149.2

Residential Mortgage-Backed

     336.0      336.0      439.3      439.3      572.5      572.5

Other Asset-Backed

     1,044.7      1,044.7      1,133.3      1,133.3      1,227.4      1,227.4

Auction Rate

     450.6      450.6      453.1      453.1      —        —  

Other

     296.2      296.2      336.2      336.2      325.6      325.6
                                         

Subtotal

     16,260.4      16,260.4      14,414.4      14,414.4      12,195.2      12,195.2
                                         

Held to Maturity

                 

Obligations of States and Political Subdivisions

     723.8      764.5      791.2      819.3      797.6      805.1

Government Sponsored Agency

     87.1      89.4      55.0      56.1      37.2      37.3

Other

     375.6      361.6      307.9      280.7      320.4      300.3
                                         

Subtotal

     1,186.5      1,215.5      1,154.1      1,156.1      1,155.2      1,142.7
                                         

Trading Account

     10.0      10.0      2.3      2.3      8.7      8.7
                                         

Total Securities

   $ 17,456.9    $ 17,485.9    $ 15,570.8    $ 15,572.8    $ 13,359.1    $ 13,346.6
                                         

Reconciliation of Amortized Cost to Fair Values of Securities Available for Sale

 

      September 30, 2009

(In Millions)

   Amortized
Cost
   Gross Unrealized    Fair
Value
      Gains    Losses   

U.S. Government

   $ 73.7    $ —      $ —      $ 73.7

Obligations of States and Political Subdivisions

     44.8      1.3      —        46.1

Government Sponsored Agency

     11,242.2      62.7      15.3      11,289.6

Corporate Debt

     2,718.7      9.0      4.2      2,723.5

Residential Mortgage-Backed

     482.3      —        146.3      336.0

Other Asset-Backed

     1,047.6      .5      3.4      1,044.7

Auction Rate

     435.6      19.7      4.7      450.6

Other

     296.1      .1      —        296.2
                           

Total

   $ 16,341.0    $ 93.3    $ 173.9    $ 16,260.4
                           

Reconciliation of Book Values to Fair Values of Securities Held to Maturity

      September 30, 2009

(In Millions)

   Book
Value
   Gross Unrealized    Fair
Value
      Gains    Losses   

Obligations of States and Political Subdivisions

   $ 723.8    $ 41.1    $ .4    $ 764.5

Government Sponsored Agency

     87.1      2.4      .1      89.4

Other

     375.6      —        14.0      361.6
                           

Total

   $ 1,186.5    $ 43.5    $ 14.5    $ 1,215.5
                           

 

14


Notes to Consolidated Financial Statements (continued)

 

Reconciliation of Amortized Cost to Fair Values of Securities Available for Sale

 

     December 31, 2008

(In Millions)

   Amortized
Cost
   Gross Unrealized    Fair
Value
      Gains    Losses   

U.S. Government

   $ 19.8    $ .1    $ —      $ 19.9

Obligations of States and Political Subdivisions

     30.5      1.1      —        31.6

Government Sponsored Agency

     11,256.4      37.7      32.7      11,261.4

Corporate Debt

     743.7      .9      5.0      739.6

Residential Mortgage-Backed

     638.3      1.7      200.7      439.3

Other Asset-Backed

     1,241.0      —        107.7      1,133.3

Auction Rate

     467.0      —        13.9      453.1

Other

     336.2      —        —        336.2
                           

Total

   $ 14,732.9    $ 41.5    $ 360.0    $ 14,414.4
                           

Reconciliation of Book Values to Fair Values of Securities Held to Maturity

 

     December 31, 2008

(In Millions)

   Book
Value
   Gross Unrealized    Fair
Value
      Gains    Losses   

Obligations of States and Political Subdivisions

   $ 791.2    $ 28.6    $ .5    $ 819.3

Government Sponsored Agency

     55.0      1.1      —        56.1

Other

     307.9      .2      27.4      280.7
                           

Total

   $ 1,154.1    $ 29.9    $ 27.9    $ 1,156.1
                           

The following table provides the remaining maturity of securities as of September 30, 2009.

 

(In Millions)

   Amortized
Cost
   Fair
Value

Available for Sale Due in One Year or Less

   $ 6,429.1    $ 6,392.1

Due After One Year Through Five Years

     9,092.8      9,063.7

Due After Five Years Through Ten Years

     425.8      411.5

Due After Ten Years

     393.3      393.1
             

Total

   $ 16,341.0    $ 16,260.4
             

Held to Maturity Due in One Year or Less

   $ 144.4    $ 144.1

Due After One Year Through Five Years

     471.1      483.7

Due After Five Years Through Ten Years

     497.3      518.8

Due After Ten Years

     73.7      68.9
             

Total

   $ 1,186.5    $ 1,215.5
             

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

 

15


Notes to Consolidated Financial Statements (continued)

 

Securities with Unrealized Losses. The following tables provide information regarding securities that have been in a continuous unrealized loss position for less than 12 months and for 12 months or longer as of September 30, 2009 and December 31, 2008.

Securities with Unrealized Losses as of September 30, 2009

 

      Less Than 12 Months    12 Months or Longer    Total

(In Millions)

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

Obligations of States and Political Subdivisions

   $ 3.4    $ .1    $ 2.9    $ .3    $ 6.3    $ .4

Government Sponsored Agency

     976.7      7.0      511.3      8.4      1,488.0      15.4

Corporate Debt

     1,074.9      4.2      —        —        1,074.9      4.2

Residential Mortgage-Backed

     2.3      9.0      333.6      137.3      335.9      146.3

Other Asset-Backed

     73.5      .4      578.9      3.0      652.4      3.4

Auction Rate

     42.0      4.7      —        —        42.0      4.7

Other

     11.6      3.8      36.8      10.2      48.4      14.0
                                         

Total

   $ 2,184.4    $ 29.2    $ 1,463.5    $ 159.2    $ 3,647.9    $ 188.4
                                         

Securities with Unrealized Losses as of December 31, 2008

 

     Less Than 12 Months    12 Months or Longer    Total

(In Millions)

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

Obligations of States and Political Subdivisions

   $ 13.0    $ .2    $ 3.6    $ .3    $ 16.6    $ .5

Government Sponsored Agency

     4,956.5      26.9      160.9      5.8      5,117.4      32.7

Corporate Debt

     271.3      3.5      23.4      1.5      294.7      5.0

Residential Mortgage-Backed

     56.8      11.6      379.4      189.1      436.2      200.7

Other Asset-Backed

     471.8      35.5      661.5      72.2      1,133.3      107.7

Auction Rate

     445.8      13.9      —        —        445.8      13.9

Other

     7.4      7.1      28.3      20.3      35.7      27.4
                                         

Total

   $ 6,222.6    $ 98.7    $ 1,257.1    $ 289.2    $ 7,479.7    $ 387.9
                                         

As of September 30, 2009, 261 securities with a combined fair value of $3.6 billion were in an unrealized loss position. Of the total $188.4 million of unrealized losses at September 30, 2009, the majority reflects the impact of credit and liquidity spreads on the valuations of residential mortgage-backed securities with unrealized losses totaling $146.3 million. Of these, 3 securities with total unrealized losses of $9.0 million have been in an unrealized loss position for less than 12 months. The remaining 33 securities with total unrealized losses of $137.3 million have been in an unrealized loss position for more than 12 months. Residential mortgage-backed securities rated below double-A, which represented 73% of total residential mortgage-backed securities, had a total amortized cost and fair value of $333.7 million and $205.9 million, respectively, and were comprised primarily of sub-prime and Alt-A securities. Securities classified as “other asset-backed” at September 30, 2009 were predominantly floating rate, with average lives less than 5 years, and 100% were rated triple-A.

 

16


Notes to Consolidated Financial Statements (continued)

 

Unrealized losses of $15.4 million related to government sponsored agency securities are primarily attributable to widened credit spreads since their purchase. The majority of the $14.0 million of unrealized losses in securities classified as “other” at September 30, 2009 relate to securities which Northern Trust purchases for compliance with the Community Reinvestment Act (CRA). Unrealized losses on these CRA related other securities are attributable to their purchase at below market rates for the purpose of supporting institutions and programs that benefit low to moderate income communities within Northern Trust’s market area. Unrealized losses of $4.7 million related to auction rate securities primarily reflect reduced market liquidity as a majority of auctions continue to fail preventing holders from liquidating their investments at par. Unrealized losses of $4.2 million within corporate debt securities primarily reflect widened credit spreads and 89% of the corporate debt portfolio is backed by guarantees provided by U.S. and non-U.S. governmental entities. The remaining unrealized losses on Northern Trust’s securities portfolio as of September 30, 2009 are attributable to changes in overall market interest rates, increased credit spreads, and reduced market liquidity.

A security is considered to be other-than-temporarily impaired if the present value of cash flows expected to be collected are less than the security’s amortized cost basis (the difference being defined as the credit loss) or if the fair value of the security is less than the security’s amortized cost basis and Northern Trust intends, or more-likely-than-not will be required, to sell the security before recovery of the security’s amortized cost basis. If an other-than-temporary impairment (OTTI) exists, the charge to earnings is limited to the amount of credit loss if Northern Trust does not intend to sell the security, and it is more-likely-than-not that it will not be required to sell the security, before recovery of the security’s amortized cost basis. Any remaining difference between fair value and amortized cost is recognized in other comprehensive income, net of applicable taxes. However, if an OTTI exists and Northern Trust intends to, or will more-likely-than-not be required to, sell the security before recovery of the security’s amortized cost basis, the entire difference between fair value and amortized cost is charged to earnings.

Security impairment reviews are conducted at least quarterly to identify and evaluate securities that have indications of possible OTTI. A determination as to whether a security’s decline in market value is other-than-temporary takes into consideration numerous factors and the relative significance of any single factor can vary by security. For each security meeting the requirements of our internal screening process, an extensive review is conducted to determine if OTTI has occurred.

While all securities are considered, the securities primarily impacted by the OTTI testing are residential mortgage-backed securities. To determine if an unrealized loss on a mortgage-backed security, including a residential mortgage-backed security, is other-than-temporary, economic models are used to perform cash flow analyses by developing multiple scenarios in order to create reasonable forecasts of the security’s future performance using available data including servicers’ loan charge off patterns, prepayment speeds, annualized default rates, each security’s current delinquency pipeline, the delinquency pipeline’s growth rate, roll rate from delinquency to

 

17


Notes to Consolidated Financial Statements (continued)

 

default, loan loss severities and historical performance of like collateral, along with Northern Trust’s outlook for the housing market and the overall economy. If the present value of future cash flows projected as a result of this analysis is less than the current amortized cost of the security, an OTTI loss is recorded equal to the difference between the two amounts.

The factors used in developing the expected loss on mortgage-backed securities vary by year of origination and type of collateral. The expected loss on our subprime and Alt-A portfolios was developed using default roll rates ranging from 2% to 25% for underlying assets that are current and ranging from 30% to 90% for underlying assets that are 30 days or more past due as to principal and interest payments. Severities of loss ranging from 45% to 85% were assumed for underlying assets that may ultimately end up in default. During the nine months ended September 30, 2009, performance metrics specific to subprime and Alt-A loans deteriorated resulting in OTTI losses related to residential mortgage-backed securities recognized in the three months and nine months ended September 30, 2009, respectively, of $5.3 million in connection with six securities and $23.3 million in connection with twelve securities.

Credit Losses on Debt Securities. The table below provides information regarding credit-related losses recognized in earnings on debt securities other-than-temporarily impaired for the three and nine months ended September 30, 2009.

 

(In Millions)

   Three Months
Ended
   Nine Months
Ended

Cumulative Credit-Related Losses on Securities – Beginning of Period

   $ 64.2    $ 46.2

Plus: Losses on Newly Identified Impairments

     4.3      18.0

Additional Losses on Previously Identified Impairments

     1.0      5.3
             

Cumulative Credit-Related Losses on Securities – End of Period

   $ 69.5    $ 69.5
             

5. Loans and Leases – Amounts outstanding in selected loan categories are shown below.

 

(In Millions)

   September 30,
2009
    December 31,
2008
    September 30,
2008
 

U.S.

      

Residential Real Estate

   $ 10,818.2      $ 10,381.4      $ 9,957.6   

Commercial

     6,807.5        8,253.6        7,741.7   

Commercial Real Estate

     3,126.9        3,014.0        2,940.8   

Personal

     4,738.8        4,766.7        4,629.0   

Other

     811.9        1,404.2        1,747.8   

Lease Financing

     1,015.2        1,143.8        1,122.6   
                        

Total U.S.

     27,318.5        28,963.7        28,139.5   

Non-U.S.

     804.4        1,791.7        1,730.7   
                        

Total Loans and Leases

   $ 28,122.9      $ 30,755.4      $ 29,870.2   

Reserve for Credit Losses Assigned to Loans and Leases

     (307.8     (229.1     (194.7
                        

Net Loans and Leases

   $ 27,815.1      $ 30,526.3      $ 29,675.5   
                        

 

18


Notes to Consolidated Financial Statements (continued)

 

Other U.S. loans and non-U.S. loans included $1.0 billion at September 30, 2009, $1.9 billion at December 31, 2008, and $2.5 billion at September 30, 2008 of short duration advances, primarily related to overdrafts associated with the timing of custody clients’ investments.

The following table shows outstanding amounts of nonperforming and impaired loans as of September 30, 2009, December 31, 2008, and September 30, 2008.

 

(In Millions)

   September 30,
2009
   December 31,
2008
   September 30,
2008

Nonperforming Loans

   $ 292.3    $ 96.7    $ 58.8

Nonperforming Loans Classified as Impaired:

        

Impaired Loans with Reserves

   $ 112.7    $ 31.5    $ 33.1

Impaired Loans without Reserves*

     135.5      54.1      15.5
                    

Total Impaired Loans

   $ 248.2    $ 85.6    $ 48.6

Reserves for Impaired Loans

   $ 45.7    $ 15.5    $ 7.9

Average Balance of Impaired Loans During the Period

   $ 198.8    $ 31.5    $ 28.4
                    

 

* When an impaired loan’s discounted cash flows, collateral value, or market price equals or exceeds its carrying value (net of charge-offs), a reserve is not required.

At September 30, 2009, residential real estate loans totaling $9.7 million were held for sale and carried at the lower of cost or market. Loan commitments for residential real estate loans that will be held for sale when funded are carried at fair value and had a total notional amount of $25.9 million at September 30, 2009. All other loan commitments are carried at the amount of unamortized fees with a reserve for credit loss liability recognized for estimated probable losses. At September 30, 2009, legally binding commitments to extend credit totaled $25.7 billion compared with $25.4 billion at December 31, 2008, and $24.7 billion at September 30, 2008.

6. Reserve for Credit Losses – Changes in the reserve for credit losses were as follows:

 

(In Millions)

   Three Months Ended
September 30
    Nine Months Ended
September 30
 
   2009     2008     2009     2008  

Balance at Beginning of Period

   $ 319.1      $ 183.1      $ 251.1      $ 160.2   

Charge-Offs

     (46.9     (1.5     (97.3     (9.2

Recoveries

     .8        1.2        3.8        1.8   
                                

Net Charge-Offs

     (46.1     (.3     (93.5     (7.4

Provision for Credit Losses

     60.0        25.0        175.0        55.0   

Effect of Foreign Exchange Rates

     —          (.3     .4        (.3
                                

Balance at End of Period

   $ 333.0      $ 207.5      $ 333.0      $ 207.5   
                                

Reserve for Credit Losses Assigned to:

        

Loans and Leases

   $ 307.8      $ 194.7      $ 307.8      $ 194.7   

Unfunded Commitments and Standby Letters of Credit

     25.2        12.8        25.2        12.8   
                                

Total Reserve for Credit Losses

   $ 333.0      $ 207.5      $ 333.0      $ 207.5   
                                

 

19


Notes to Consolidated Financial Statements (continued)

 

The reserve for credit losses represents management’s estimate of probable inherent losses that have occurred as of the date of the financial statements. The loan and lease portfolio and other credit exposures are regularly reviewed to evaluate the adequacy of the reserve for credit losses. In determining the level of the reserve, Northern Trust evaluates the reserve necessary for specific nonperforming loans and also estimates losses inherent in other credit exposures.

7. Pledged Assets – Securities and loans pledged to secure public and trust deposits, repurchase agreements, and for other purposes as required or permitted by law were $23.5 billion on September 30, 2009, $23.6 billion on December 31, 2008 and $21.4 billion on September 30, 2008. Included in the September 30, 2009 pledged assets were securities available for sale of $684.2 million that were pledged as collateral for agreements to repurchase securities sold transactions. The secured parties to these transactions have the right to repledge or sell these securities.

Northern Trust is permitted to repledge or sell collateral from agreements to resell securities purchased transactions. The total fair value of accepted collateral as of September 30, 2009, December 31, 2008, and September 30, 2008 was $24.2 million, $32.4 million, and $127.3 million, respectively. There was no repledged collateral at September 30, 2009, December 31, 2008, or September 30, 2008.

8. Goodwill and Other Intangibles – The following table shows the carrying amounts of goodwill by business unit, which include the effect of foreign exchange rates on non-U.S. dollar denominated goodwill, at September 30, 2009, December 31, 2008, and September 30, 2008.

 

(In Millions)

   September 30,
2009
   December 31,
2008
   September 30,
2008

Corporate and Institutional Services

   $ 334.5    $ 322.6    $ 349.4

Personal Financial Services

     66.9      66.8      60.6
                    

Total Goodwill

   $ 401.4    $ 389.4    $ 410.0
                    

Other intangible assets are included in other assets in the consolidated balance sheet. The gross carrying amount and accumulated amortization of other intangible assets subject to amortization at September 30, 2009, December 31, 2008, and September 30, 2008, which include the effect of foreign exchange rates on non-U.S. dollar denominated intangible assets, were as follows:

 

(In Millions)

   September 30,
2009
   December 31,
2008
   September 30,
2008

Gross Carrying Amount

   $ 156.9    $ 153.4    $ 160.1

Accumulated Amortization

     92.2      80.2      76.1
                    

Net Book Value

   $ 64.7    $ 73.2    $ 84.0
                    

 

20


Notes to Consolidated Financial Statements (continued)

 

Other intangible assets consist primarily of the value of acquired client relationships. Amortization expense related to other intangible assets totaled $4.1 million and $4.3 million for the quarters ended September 30, 2009 and 2008, respectively, and $12.0 million and $13.7 million for the nine months ended September 30, 2009 and 2008, respectively. Amortization for the remainder of 2009 and for the years 2010, 2011, 2012, and 2013 is estimated to be $4.2 million, $14.6 million, $11.0 million, $10.8 million and $10.5 million, respectively.

9. Business Units – The tables on page 45, reflecting the earnings contribution of Northern Trust’s business units for the three and nine month periods ended September 30, 2009 and 2008, are incorporated by reference.

 

21


Notes to Consolidated Financial Statements (continued)

 

10. Accumulated Other Comprehensive Income (Loss) – The following tables summarize the components of accumulated other comprehensive income (loss) at September 30, 2009 and 2008, and changes during the three and nine months then ended.

 

(In Millions)

   Beginning     Period Change     Ending  
   Balance
(Net of Tax)
    Pre-Tax
Amount
    Tax Effect     Balance
(Net of Tax)
 

Three Months Ended September 30, 2009

        

Unrealized Gains (Losses) on Securities Available for Sale

   $ (96.0   $ 60.5      $ (22.2   $ (57.7

Less: Reclassification Adjustments

     —          (4.1     1.5        (2.6
                                

Net Unrealized Gains (Losses) on Securities Available for Sale

     (96.0     64.6        (23.7     (55.1

Unrealized Gains (Losses) on Cash Flow Hedge Designations

     (2.9     1.1        (.4     (2.2

Less: Reclassification Adjustments

     —          4.2        (1.6     2.6   
                                

Net Unrealized Gains (Losses) on Cash Flow Hedge Designations

     (2.9     (3.1     1.2        (4.8

Foreign Currency Translation Adjustments

     14.1        (3.7     1.6        12.0   

Pension and Other Postretirement Benefit Adjustments

     (268.6     —          —          (268.6

Less: Reclassification Adjustments

     —          4.9        (1.5     3.4   
                                

Total Pension and Other Postretirement Benefit Adjustments

     (268.6     4.9        (1.5     (265.2
                                

Accumulated Other Comprehensive Income (Loss)

   $ (353.4   $ 62.7      $ (22.4   $ (313.1
                                

Three Months Ended September 30, 2008

        

Unrealized Gains (Losses) on Securities Available for Sale

   $ (98.1   $ (34.6   $ 12.8      $ (119.9

Less: Reclassification Adjustments

     —          16.9        (6.3     10.6   
                                

Net Unrealized Gains (Losses) on Securities Available for Sale

     (98.1     (51.5     19.1        (130.5

Unrealized Gains (Losses) on Cash Flow Hedge Designations

     (3.5     (.3     .1        (3.7

Less: Reclassification Adjustments

     —          3.3        (1.3     2.0   
                                

Net Unrealized Gains (Losses) on Cash Flow Hedge Designations

     (3.5     (3.6     1.4        (5.7

Foreign Currency Translation Adjustments

     28.5        58.2        (67.2     19.5   

Pension and Other Postretirement Benefit Adjustments

     (75.3     —          —          (75.3

Less: Reclassification Adjustments

     —          3.4        (1.6     1.8   
                                

Total Pension and Other Postretirement Benefit Adjustments

     (75.3     3.4        (1.6     (73.5
                                

Accumulated Other Comprehensive Income (Loss)

   $ (148.4   $ 6.5      $ (48.3   $ (190.2
                                

Nine Months Ended September 30, 2009

        

Unrealized Gains (Losses) on Securities Available for Sale

   $ (212.9   $ 243.4      $ (89.4   $ (58.9

Cumulative Effect of Applying FSP FAS 115-2 (ASC 320-10)

     —          (15.0     5.5        (9.5

Less: Reclassification Adjustments

     —          (20.9     7.6        (13.3
                                

Net Unrealized Gains (Losses) on Securities Available for Sale

     (212.9     249.3        (91.5     (55.1

Unrealized Gains (Losses) on Cash Flow Hedge Designations

     (20.7     40.5        (14.9     4.9   

Less: Reclassification Adjustments

     —          15.4        (5.7     9.7   
                                

Net Unrealized Gains (Losses) on Cash Flow Hedge Designations

     (20.7     25.1        (9.2     (4.8

Foreign Currency Translation Adjustments

     12.8        (40.3     39.5        12.0   

Pension and Other Postretirement Benefit Adjustments

     (274.1     —          —          (274.1

Less: Reclassification Adjustments

     —          14.7        (5.8     8.9   
                                

Total Pension and Other Postretirement Benefit Adjustments

     (274.1     14.7        (5.8     (265.2
                                

Accumulated Other Comprehensive Income (Loss)

     (494.9     248.8        (67.0     (313.1
                                

Nine Months Ended September 30, 2008

        

Unrealized Gains (Losses) on Securities Available for Sale

   $ (28.7   $ (149.9   $ 55.6      $ (123.0

Less: Reclassification Adjustments

     —          11.9        (4.4     7.5   
                                

Net Unrealized Gains (Losses) on Securities Available for Sale

     (28.7     (161.8     60.0        (130.5

Unrealized Gains (Losses) on Cash Flow Hedge Designations

     (3.0     (4.6     1.7        (5.9

Less: Reclassification Adjustments

     —          (.3     .1        (.2
                                

Net Unrealized Gains (Losses) on Cash Flow Hedge Designations

     (3.0     (4.3     1.6        (5.7

Foreign Currency Translation Adjustments

     21.2        39.2        (40.9     19.5   

Pension and Other Postretirement Benefit Adjustments

     (79.8     —          —          (79.8

Less: Reclassification Adjustments

     —          10.3        (4.0     6.3   
                                

Total Pension and Other Postretirement Benefit Adjustments

     (79.8     10.3        (4.0     (73.5
                                

Accumulated Other Comprehensive Income (Loss)

   $ (90.3   $ (116.6   $ 16.7      $ (190.2
                                

 

22


Notes to Consolidated Financial Statements (continued)

 

11. Earnings Per Common Share Computations – The computations of net income (loss) per common share are presented in the following table and reflect the adoption of FASB EITF 03-06-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (FASB ASC 260-10-45-61A), on January 1, 2009.

 

($ In Millions Except Per Share Information)

   Three Months
Ended September 30
    Nine Months
Ended September 30
   2009    2008     2009    2008

Basic Earnings Per Common Share

          

Average Number of Common Shares Outstanding

     241,415,698      221,899,198        233,475,552      220,944,632

Net Income (Loss)

   $ 187.9    $ (148.3   $ 663.9    $ 452.5

Less: Dividends on Preferred Stock

     —        —          111.1      —  
                            

Net Income (Loss) Applicable to Common Stock

   $ 187.9      (148.3   $ 552.8      452.5

Less: Earnings Allocated to Participating Securities

     1.2      (1.0     4.0      3.9
                            

Earnings (Loss) Allocated to Common Shares Outstanding

   $ 186.7    $ (147.3   $ 548.8    $ 448.6

Basic Earnings (Loss) Per Common Share

   $ .77    $ (.66   $ 2.35    $ 2.03
                            

Diluted Earnings Per Common Share

          

Average Number of Common Shares Outstanding

     241,415,698      221,899,198        233,475,552      220,944,632

Plus – Stock Option Dilution

     1,215,550      —          1,050,865      3,295,821
                            

Average Common and Potential Common Shares

     242,631,248      221,899,198        234,526,417      224,240,453

Earnings (Loss) Allocated to Common and Potential Common Shares

   $ 186.7    $ (147.3   $ 548.8    $ 448.6

Diluted Earnings (Loss) Per Common Share

   $ .77    $ (.66   $ 2.34    $ 2.00
                            

Note: Common stock equivalents totaling 5,809,957 and 5,879,291 for the three and nine months ended September 30, 2009, respectively, and 18,300,500 and 556,498 for the three and nine months ended September 30, 2008, respectively, were not included in the computation of diluted earnings per share because their inclusion would have been antidilutive.

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

 

(In Millions)

   Three Months
Ended September 30
   Nine Months
Ended September 30
   2009    2008    2009    2008

Interest Income

           

Loans and Leases

   $ 234.5    $ 290.9    $ 717.6    $ 877.7

Securities – Taxable

     48.1      80.0      157.7      245.1

       – Non-Taxable

     8.1      8.8      25.6      27.1

Time Deposits with Banks

     40.7      252.9      173.2      720.7

Federal Funds Sold and Securities Purchased under Agreements to Resell and Other

     1.8      8.3      7.6      36.3
                           

Total Interest Income

     333.2      640.9      1,081.7      1,906.9
                           

Interest Expense

           

Deposits

     45.4      317.6      163.1      944.9

Federal Funds Purchased

     1.5      6.8      3.9      28.4

Securities Sold Under Agreements to Repurchase

     .3      4.5      1.0      21.6

Other Borrowings

     1.0      4.5      3.1      18.3

Senior Notes

     12.4      12.0      32.3      30.2

Long-Term Debt

     33.5      39.8      109.2      112.4

Floating Rate Capital Debt

     .8      2.3      3.5      8.1
                           

Total Interest Expense

     94.9      387.5      316.1      1,163.9
                           

Net Interest Income

   $ 238.3    $ 253.4    $ 765.6    $ 743.0
                           

 

23


Notes to Consolidated Financial Statements (continued)

 

13. Visa Membership – In connection with Visa, Inc.’s (Visa) March 2008 initial public offering, a portion of the shares of Visa common stock held by Northern Trust as a member bank of Visa U.S.A. Inc. (Visa U.S.A.) was redeemed pursuant to a mandatory redemption. The proceeds of the redemption totaled $167.9 million and were recorded as a gain in the first quarter of 2008. The remaining Visa shares held by Northern Trust are recorded at their original cost basis of zero. These shares have restrictions as to their sale or transfer and the ultimate realization of their value is subject to future adjustments based on the resolution of outstanding indemnified litigation. Northern Trust, as a member bank of Visa U.S.A., and in conjunction with other member banks, is obligated to share in losses resulting from certain indemnified litigation involving Visa and is also required to recognize the contingent obligation to indemnify Visa for potential losses arising from the other indemnified litigation that has not yet settled at its estimated fair value in accordance with GAAP.

During 2007, Northern Trust recorded charges and corresponding liabilities of $150.0 million relating to Visa indemnified litigation. In March 2008, Visa placed a portion of the proceeds from its initial public offering into an escrow account to fund the settlements of, or judgments in, the indemnified litigation. Northern Trust recorded $76.1 million, its proportionate share of the escrow account balance, in the first quarter of 2008 as an offset to the indemnification liabilities and related charges recorded in the fourth quarter of 2007, reducing the net indemnification liability to $73.9 million. In the third quarter of 2008, in consideration of Visa’s announced settlement of the litigation involving Discover Financial Services, Northern Trust recorded a charge of $30.0 million to increase the Visa indemnification liability. In the fourth quarter of 2008, Northern Trust fully reversed the $30.0 million charge recorded in the third quarter as Visa funded its litigation escrow account to cover the amount of the settlement. On July 16, 2009, Visa deposited additional funds in its litigation escrow account. Accordingly, in the third quarter of 2009, Northern Trust recorded its proportionate share of the deposit, $17.8 million, as a reduction to the Visa related indemnification liability and related charges. Visa’s funding resulted in a reduction in the future realization of the value of the outstanding shares held by Northern Trust and other Visa U.S.A. member banks.

Northern Trust’s net Visa related indemnification liability, included within other liabilities in the consolidated balance sheet, totaled $56.1 million at September 30, 2009, $73.9 million at December 31, 2008, and $103.9 million at September 30, 2008.

It is expected that required additional contributions to the litigation escrow account will result in additional adjustments to the future realization of the value of the outstanding shares held by Visa U.S.A. member banks. While the ultimate resolution of outstanding Visa related litigation is highly uncertain and the estimation of any potential losses is highly judgmental, Northern Trust anticipates that the value of its remaining shares of Visa stock will be more than adequate to offset any remaining indemnification liabilities related to Visa litigation.

 

24


Notes to Consolidated Financial Statements (continued)

 

14. Income Taxes – Income tax expense of $70.6 million was recorded in the current quarter and resulted in an effective tax rate of 27.3%. The current quarter effective tax rate was 34.0% after excluding the $17.4 million of income tax benefits recognized as a result of the resolution of certain state and structured leasing tax positions taken in prior periods as discussed below. An income tax benefit of $104.5 million was recorded in the prior year quarter due to the pre-tax loss reported for the quarter. This resulted in a prior period effective tax rate of 41.3% as the operating loss resulted primarily from U.S. activities while foreign operations, with lower tax rates, remained profitable. The prior year quarter effective tax rate excluding the impact of client support, Visa indemnification, and leasing related charges was 32.0%. Total income tax expense was $312.2 million for the nine months ended September 30, 2009, representing an effective rate of 32.0%. The effective tax rate for the current period excluding the Visa related adjustments, the valuation adjustment for the CSA liability, and the $15.7 million of income tax benefits was 33.4%. This compares with $300.9 million in income tax expense and an effective rate of 39.9% for the prior year period. The effective tax rate for the nine months ended September 30, 2008, excluding the impact of the client support, Visa indemnification, and leasing related adjustments, was 32.3%.

As part of its audit of federal tax returns filed from 1997-2004, the Internal Revenue Service (IRS) challenged the Corporation’s tax position with respect to certain structured leasing transactions and proposed to disallow certain tax deductions and assess related interest and penalties. In September 2009, the Corporation reached a settlement agreement with the IRS with respect to certain of these transactions, resulting in the acceleration of $88.6 million in tax payments to the IRS. The acceleration of tax payments did not affect net income. The Corporation anticipates that the IRS will continue to disallow deductions relating to the remaining challenged leases and possibly include other lease transactions with similar characteristics as part of its audit of tax returns filed after 2004. The Corporation believes that these transactions are valid leases for U.S. tax purposes and that its tax treatment of these transactions is appropriate based on its interpretation of the tax regulations and legal precedents; a court or other judicial authority, however, could disagree. The Corporation believes it has appropriate reserves to cover its tax liabilities, including liabilities related to structured leasing transactions, and related interest and penalties. The Corporation will continue to defend its position on the tax treatment of its structured leasing transactions vigorously.

Included in unrecognized tax benefits at December 31, 2008 were $292.0 million of U.S. federal and state tax positions related to leveraged leasing tax deductions. During the first quarter of 2009, Northern Trust sold certain of the structured leases challenged by the IRS. The terms of the settlement agreement with the IRS provided for gains recorded in the first quarter of 2009 on the sale of these leases to be tax exempt, resulting in a tax benefit in the current quarter which reduced current quarter income tax expense by $6.2 million. In connection with these sales, the amount of leveraged lease related uncertain tax positions was reduced by $136.2 million. The acceleration of tax payments relating to the sold leases did not affect net income. As a result of the settlement agreement reached in the third quarter of 2009, the amount of leveraged lease related uncertain tax positions was reduced by an additional $88.6 million, leaving a remaining balance of $67.2 million as of September 30, 2009. Other unrecognized tax benefits were reduced

 

25


Notes to Consolidated Financial Statements (continued)

 

by $8.3 million and related interest reserves were reduced by $2.9 million in the current quarter as a result of reaching resolution on certain state tax positions taken in prior periods.

GAAP requires a reallocation of lease income from the inception of a leveraged lease if during its term the expected timing of lease related income tax deductions is revised. For the three and nine months ended September 30, 2008, revised cash flow estimates regarding the timing of leveraged lease income tax deductions reduced interest income by $9.5 million and $38.9 million, respectively, and increased the provision for income taxes, inclusive of interest and penalties, by $3.4 million and $61.3 million, respectively. Revised cash flow estimates in the current quarter reduced interest income by $1.0 million and increased the provision for income taxes, inclusive of interest and penalties, by $.4 million.

It is possible that additional changes in the amount of leveraged lease related uncertain tax positions and related cash flows could occur in the next twelve months if Northern Trust terminates additional leases, is able to resolve this matter with the IRS, or if management becomes aware of new information that would lead it to change its assumptions regarding the timing or amount of any potential payments to the IRS. Management does not believe that future changes, if any, would have a material effect on the consolidated financial position or liquidity of Northern Trust, although they could have a material effect on operating results for a particular period.

 

26


Notes to Consolidated Financial Statements (continued)

 

15. Pension and Other Postretirement Plans – The following tables set forth the net periodic pension cost of Northern Trust’s U.S. and non-U.S. pension plans, supplemental pension plan, and other postretirement plan for the three and nine months ended September 30, 2009 and 2008.

 

Net Periodic Pension Expense

U.S. Plan

   Three Months Ended
September 30
    Nine Months Ended
September 30
 

(In Millions)

   2009     2008     2009     2008  

Service Cost

   $ 8.3      $ 7.4      $ 24.9      $ 22.2   

Interest Cost

     8.3        7.7        24.9        23.1   

Expected Return on Plan Assets

     (14.9     (14.3     (44.7     (42.9

Amortization:

        

Net Loss

     3.0        2.0        9.0        6.0   

Prior Service Cost

     .3        .3        .9        .9   
                                

Net Periodic Pension Expense

   $ 5.0      $ 3.1      $ 15.0      $ 9.3   
                                

Net Periodic Pension Expense

Non-U.S. Plans

   Three Months Ended
September 30
    Nine Months Ended
September 30
 

(In Millions)

   2009     2008     2009     2008  

Service Cost

   $ 1.0      $ 1.1      $ 2.8      $ 3.4   

Interest Cost

     1.7        1.6        5.0        5.2   

Expected Return on Plan Assets

     (2.1     (2.3     (6.0     (7.2

Net Loss Amortization

     .3        .1        .9        .3   
                                

Net Periodic Pension Expense

   $ .9      $ .5      $ 2.7      $ 1.7   
                                

Net Periodic Pension Expense

Supplemental Plan

   Three Months Ended
September 30
    Nine Months Ended
September 30
 

(In Millions)

   2009     2008     2009     2008  

Service Cost

   $ .6      $ .5      $ 1.8      $ 1.5   

Interest Cost

     1.0        .9        3.0        2.7   

Net Loss Amortization

     1.0        .6        3.0        1.8   
                                

Net Periodic Pension Expense

   $ 2.6      $ 2.0      $ 7.8      $ 6.0   
                                

Net Periodic Benefit Expense

Other Postretirement Plan

   Three Months Ended
September 30
    Nine Months Ended
September 30
 

(In Millions)

   2009     2008     2009     2008  

Service Cost

   $ .4      $ .4      $ 1.2      $ 1.2   

Interest Cost

     .9        1.0        2.7        3.0   

Amortization:

        

Transition Obligation

     .2        .1        .6        .3   

Net Loss

     .1        .3        .3        .9   
                                

Net Periodic Benefit Expense

   $ 1.6      $ 1.8      $ 4.8      $ 5.4   
                                

 

27


Notes to Consolidated Financial Statements (continued)

 

16. Share-Based Compensation Plans – The Amended and Restated Northern Trust Corporation 2002 Stock Plan provides for the grant of nonqualified stock options, incentive stock options, stock appreciation rights, stock awards, stock units, and performance shares.

In the third quarter of 2009, the Corporation granted 1,033,574 nonqualified stock options with a total grant-date fair value of $19.0 million and 179,965 stock unit awards with a total grant-date fair value of $10.4 million. Compensation expense recorded in the third quarter of 2009 includes $8.3 million attributable to stock options granted to retirement-eligible employees that were expensed in their entirety on the grant date. Total share-based compensation expense for the three and nine months ended September 30, 2009 reflects the reversal of accruals related to performance stock units which are not expected to vest. Total compensation expense for share-based payment arrangements and the associated tax impacts were as follows:

 

($ In Millions)

   Three Months Ended
September 30
    Nine Months Ended
September 30
   2009     2008     2009     2008

Stock Options

   $ 13.5      $ 3.1      $ 23.3      $ 15.8

Stock and Stock Unit Awards

     6.0        3.8        14.7        11.2

Performance Stock Units

     (1.4     (3.1     (14.6     5.3
                              

Total Share-Based Compensation Expense

   $ 18.1      $ 3.8      $ 23.4      $ 32.3

Tax Benefits Recognized

   $ 6.7      $ 1.4      $ 8.6      $ 12.0
                              

17. Variable Interest Entities – Northern Trust acts as investment advisor to Registered Investment Companies, Undertakings for the Collective Investment of Transferable Securities and certain unregistered short-term investment pools in which various clients of Northern Trust are investors. Although not obligated to do so, in 2008 the Corporation entered into Capital Support Agreements (CSAs) with certain of these entities (Entities) which held notes and other instruments issued by Whistlejacket Capital LLC and/or White Pine Finance LLC or asset backed securities whose values had been adversely impacted by widening risk premiums and liquidity spreads and significant rating agency downgrades. The Corporation entered into the CSAs to assist the Entities in maintaining net asset values of $1.00 in order to provide financial stability to the Entities and investors in the Entities. The CSAs also allowed the registered funds to hold assets that had fallen to below investment grade, thus avoiding a forced sale in an inactive market.

In the second quarter of 2009, as a part of the restructuring and final settlement related to Whistlejacket Capital LLC and White Pine Finance LLC, which were covered by eight of the nine CSAs, the Corporation made cash payments totaling $66.7 million. As a result of the restructuring and the related support payments, seven of the nine CSAs were terminated in June 2009.

Under the terms of the remaining two CSAs, which expire on November 6, 2009, the Corporation would be required to contribute capital to two funds (Funds), not to exceed $200.2 million in the aggregate and for no consideration, should certain asset loss events

 

28


Notes to Consolidated Financial Statements (continued)

 

occur. The estimated fair value of the Corporation’s contingent liability under the CSAs was $126.1 million and $314.1 million at September 30, 2009 and December 31, 2008, respectively, and was recorded within other liabilities in the consolidated balance sheet. The reduction in the liability reflects the cash payments of $66.7 million and an expense reduction associated with the valuation adjustment of the liability, both recorded in the second quarter of 2009.

Under GAAP the Funds are considered variable interest entities (VIE) and the CSAs are considered to reflect Northern Trust’s variable interest in the credit risk of the Funds. GAAP requires the disclosure of an entity’s maximum exposure to loss where it has a “significant” variable interest in an unconsolidated VIE. “Significant” is not defined and, as such, judgment is required. The variable interest holder, if any, that will absorb a majority of a VIE’s expected losses, receive a majority of the entity’s expected residual returns, or both, is deemed to be the primary beneficiary of the VIE and is required to consolidate the VIE. Assessments of variable interests are based on expected losses and residual returns, which consider various scenarios on a probability-weighted basis.

The Funds were designed to create and pass to investors interest rate and credit risk. In determining whether Northern Trust is the primary beneficiary of the Funds, expected loss calculations based on the characteristics of the underlying investments in the Funds are used to estimate the expected losses related to interest rate and credit risk, while also considering the relative rights and obligations of each of the variable interest holders. These analyses concluded that interest rate risk is the primary driver of expected losses within the Funds. As such, Northern Trust has determined that it is not the primary beneficiary of the Funds and is not required to consolidate them within its balance sheet.

The following table summarizes Northern Trust’s significant involvement with unconsolidated VIEs as of September 30, 2009 and December 31, 2008:

 

(In Millions)

   September 30,
2009
   December 31,
2008

Fair Value of Assets Held By the Funds

   $ 31,441.3    $ 114,157.2

Capital Support Agreement Contingent Liability

     126.1      314.1

Maximum Exposure To Loss

     200.2      550.0
             

The valuation of the contingent liability under the CSAs as of September 30, 2009 uses a proprietary model which incorporates agreement-specific assumptions. Significant inputs to the model are the period-end fair value and amortized cost of investments in the applicable Fund, the termination date of the CSA and future volatility assumptions based on historical trading volatility. For each CSA, the model performs a Monte Carlo simulation of the fair value of the covered investments in the Fund and the resulting fair value of the Fund. Each simulated path calculates the amount of funding that would be required by the particular CSA to bring the per unit NAV of the Fund to $.999. The estimated fair value of each CSA is the average of the results of the Monte Carlo simulation.

 

29


Notes to Consolidated Financial Statements (continued)

 

18. Contingent Liabilities – Standby letters of credit obligate Northern Trust to meet certain financial obligations of its clients, if, under the contractual terms of the agreement, the clients are unable to do so. These instruments are primarily issued to support public and private financial commitments, including commercial paper, bond financing, initial margin requirements on futures exchanges, and similar transactions. Certain standby letters of credit have been secured with cash deposits or participated to others and in certain cases Northern Trust is able to recover the amounts paid through recourse against these cash deposits or other participants. Standby letters of credit outstanding were $4.9 billion on September 30, 2009, $4.0 billion on December 31, 2008 and $3.7 billion on September 30, 2008. Northern Trust’s liability included within the consolidated balance sheet for standby letters of credit, measured as the amount of unamortized fees on these instruments, was $39.2 million at September 30, 2009, $30.3 million at December 31, 2008, and $25.1 million at September 30, 2008.

As part of its securities custody activities and at the direction of its clients, Northern Trust lends securities owned by clients to borrowers who are reviewed by the Northern Trust Senior Credit Committee. In connection with these activities, Northern Trust has issued indemnifications against certain losses resulting from the bankruptcy of the borrower of the securities. The borrowing party is required to fully collateralize securities received with cash, marketable securities, or irrevocable standby letters of credit. As securities are loaned, collateral is maintained at a minimum of 100% of the fair value of the securities plus accrued interest. The collateral is revalued on a daily basis. The amount of securities loaned subject to indemnification was $81.8 billion at September 30, 2009, $82.7 billion at December 31, 2008, and $113.8 billion at September 30, 2008. Because of the credit quality of the borrowers and the requirement to fully collateralize securities borrowed, management believes that the exposure to credit loss from this activity is not significant and no liability was recorded at September 30, 2009, December 31, 2008, or September 30, 2008 related to these indemnifications.

As discussed in further detail in Note 17, the estimated fair value of the Corporation’s contingent liability under Capital Support Agreements with certain Northern Trust investment vehicles, recorded within other liabilities in the consolidated balance sheet, was $126.1 million at September 30, 2009.

As discussed in further detail in Note 13, Northern Trust, as a member bank of Visa U.S.A., and in conjunction with other member banks, is obligated to share in losses resulting from certain indemnified litigation involving Visa. The estimated fair value of the net Visa indemnification liability, recorded within other liabilities in the consolidated balance sheet, totaled $56.1 million at September 30, 2009, $73.9 million at December 31, 2008, and $103.9 million at September 30, 2008.

 

30


Notes to Consolidated Financial Statements (continued)

 

In the normal course of business, the Corporation and its subsidiaries are routinely defendants in or parties to a number of pending and threatened legal actions, including, but not limited to, actions brought on behalf of various classes of claimants, regulatory matters, employment matters, and challenges from tax authorities regarding the amount of taxes due. In certain of these actions and proceedings, claims for substantial monetary damages or adjustments to recorded tax liabilities are asserted. In view of the inherent difficulty of predicting the outcome of such matters, particularly matters that will be decided by a jury and actions that seek very large damages based on novel and complex damage and liability legal theories or that involve a large number of parties, the Corporation cannot state with confidence the eventual outcome of these matters or the timing of their ultimate resolution, or estimate the possible loss or range of loss associated with them; however, based on current knowledge and after consultation with legal counsel, management does not believe that judgments or settlements in excess of amounts already reserved, if any, arising from pending or threatened legal actions, regulatory matters, employment matters, or challenges from tax authorities, either individually or in the aggregate, would have a material adverse effect on the consolidated financial position or liquidity of the Corporation, although they could have a material adverse effect on operating results for a particular period.

19. Derivative Financial Instruments – Effective January 1, 2009, Northern Trust adopted FASB Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an Amendment of FASB Statement 133” (FASB ASC 815 “Derivatives and Hedging”), which increased required disclosures regarding derivatives and hedging activities, including disclosures regarding how an entity uses derivative instruments and how derivative instruments and related hedged items are accounted for and affect an entity’s financial position, financial performance, and cash flows. Northern Trust is a party to various derivative financial instruments that are used in the normal course of business to meet the needs of its clients; as part of its trading activity for its own account; and as part of its risk management activities. These instruments include foreign exchange contracts, interest rate contracts, and credit default swap contracts.

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

 

31


Notes to Consolidated Financial Statements (continued)

 

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

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

All derivative financial instruments, whether designated as hedges or not, are recorded on the consolidated balance sheet at fair value within other assets or other liabilities. The accounting for changes in the fair value of a derivative in the consolidated statement of income depends on whether the contract has been designated as a hedge and qualifies for hedge accounting in accordance with GAAP.

Northern Trust enters into master netting agreements with many of our derivative counterparties. Certain of these agreements contain credit-risk-related contingent features in which the counterparty has the option to declare Northern Trust in default and accelerate cash settlement of our net derivative liabilities with the counterparty in the event Northern Trust’s credit rating falls below specified levels. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that are in a liability position on September 30, 2009, was $1.1 billion. Northern Trust has posted collateral of $901 million against these liabilities and therefore the maximum amount of termination payments that could have been required at September 30, 2009 was $183 million. Accelerated settlement because of such events would not affect net income and would not have a material effect on the consolidated financial position or liquidity of Northern Trust.

 

32


Notes to Consolidated Financial Statements (continued)

 

Client-Related and Trading Derivative Instruments. In excess of 96% of Northern Trust’s derivatives outstanding at September 30, 2009 and 2008, measured on a notional value basis, related to client-related and trading activities. These activities consist principally of providing foreign exchange services to clients in connection with Northern Trust’s global custody business. However, in the normal course of business Northern Trust also engages in proprietary trading of non-U.S. currencies. The following table shows the notional amounts of client-related and trading derivative financial instruments. Notional amounts of derivative financial instruments do not represent credit risk, and are not recorded in the consolidated balance sheet. They are used merely to express the volume of this activity. Credit risk is limited to the positive fair value of the derivative instrument, which is significantly less than the notional amount.

 

(In Millions)

   September 30, 2009    September 30, 2008
   Notional
Value
   Fair Value    Notional
Value
   Fair Value
      Asset    Liability       Asset    Liability

Foreign Exchange Contracts

   $ 160,675.3    $ 2,743.0    $ 2,695.8    $ 187,160.7    $ 2,194.7    $ 2,084.4
                                         

Interest Rate Option Contracts

     218.3      .5      .5      389.2      1.9      1.9
                                         

Interest Rate Swap Contracts

     4,129.2      142.7      141.9      3,154.2      65.1      59.7
                                         

Futures Contracts

     .3      —        —        1.4      —        .1
                                         

Total

   $ 165,023.1    $ 2,886.2    $ 2,838.2    $ 190,705.5    $ 2,261.7    $ 2,146.1
                                         

Changes in the fair value of client related and trading derivative instruments are recognized currently in income. The following table shows the location and amount of gains and losses recorded in the consolidated statement of income for the three and nine months ended September 30, 2009.

 

(In Millions)

  

Location of Derivative Gain/(Loss)
Recognized in Income

   Amount of Derivative Gain/(Loss)
Recognized in Income
      Three Months Ended
September 30, 2009
   Nine Months Ended
September 30, 2009

Foreign Exchange Contracts

   Foreign Exchange Trading Income    $ 92.9    $ 358.3

Interest Rate Swap Contracts

   Other Income      —        4.1
                

Total

      $ 92.9    $ 362.4
                

Risk Management Instruments. Northern Trust uses derivative instruments to hedge its exposure to foreign currency, interest rate, and credit risk. Certain hedging relationships are formally designated and qualify for hedge accounting under GAAP as fair value, cash flow, or net investment hedges. Other derivatives that are entered into for risk management purposes as economic hedges are not formally designated as hedges and, therefore, are accounted for as if they were trading instruments.

 

33


Notes to Consolidated Financial Statements (continued)

 

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

The following table identifies the types and classifications of derivative instruments designated as hedges, their notional and fair values, and the respective risks addressed.

 

(In Millions)

  

Derivative Instrument

   Risk
Classification
   September 30, 2009    September 30, 2008
         Notional
Value
   Fair Value    Notional
Value
   Fair Value
            Asset    Liability       Asset    Liability
Fair Value Hedges                        

Available for Sale Investment Securities

   Interest Rate Swap Contracts    Interest Rate    $ 260.4    $ —      $ 5.6    $ 3,734.1    $ 26.1    $ 56.5

Senior Notes and Long-Term Subordinated Debt

   Interest Rate Swap Contracts    Interest Rate      1,100.0      121.0      .5      1,100.0      38.9      2.4
Cash Flow Hedges                        

Available for Sale Investment Securities

   Interest Rate Swap Contracts    Interest Rate      —        —        —        100.0      .5      .5

Forecasted Foreign Denominated Transactions

   Foreign Exchange Contracts    Foreign
Currency
     1,625.7      50.9      56.5      1,282.1      44.6      48.5
Net Investment Hedges                        

Net Investments in Non-U.S. Affiliates

   Foreign Exchange Contracts    Net
Investment
     1,158.6      —        4.0      1,140.0      30.6      —  
                                               

Total

         $ 4,144.7    $ 171.9    $ 66.6    $ 7,356.2    $ 140.7    $ 107.9
                                               

Derivatives are designated as fair value hedges to limit Northern Trust’s exposure to changes in the fair value of assets and liabilities due to movements in interest rates. Changes in fair value of these derivatives are recognized currently in income. The following table shows the location and amount of derivative gains and losses recorded in the consolidated statement of income related to fair value hedges for the three and nine months ended September 30, 2009.

 

(In Millions)

  

Derivative Instrument

  

Location of

Derivative

Gain/(Loss)

Recognized in

Income

   Amount of Derivative Gain/(Loss)
Recognized in Income
 
         Three Months Ended
September 30, 2009
    Nine Months Ended
September 30, 2009
 

Available for Sale Investment Securities

  

Interest Rate

Swap Contracts

   Interest Income    $ (1.9   $ (4.7

Senior Notes and Long-Term Subordinated Debt

  

Interest Rate

Swap Contracts

   Interest Expense      31.7        (19.8
                      

Total

         $ 29.8      $ 24.5   
                      

For fair value hedges, Northern Trust applies the “shortcut” method of accounting, available under GAAP, which assumes there is no ineffectiveness in a hedge. As a result, changes recorded in the fair value of the hedged item are equal to the offsetting gain or loss on the derivative and are reflected in the same line item.

 

34


Notes to Consolidated Financial Statements (continued)

 

Derivatives are also designated as cash flow hedges in order to minimize the variability in cash flows of earning assets or forecasted transactions caused by movements in interest or foreign exchange rates. The effective portion of changes in the fair value of such derivatives is recognized in accumulated other comprehensive income (AOCI), a component of stockholders’ equity. When the hedged forecasted transaction impacts earnings, balances in AOCI are reclassified to the same income or expense classification as the hedged item. Northern Trust applies the “shortcut” method of accounting for cash flow hedges of available for sale securities. For cash flow hedges of forecasted foreign currency denominated revenue and expenditure transactions, Northern Trust utilizes the dollar-offset method, a “long-haul” method of accounting under GAAP, in assessing whether these hedging relationships are highly effective at inception and on an ongoing basis. Any ineffectiveness is recognized currently in earnings. As of September 30, 2009, twenty-three months is the maximum length of time over which the exposure to variability in future cash flows of forecasted foreign currency denominated transactions is being hedged.

The following table provides cash flow hedge derivative gains and losses recognized in AOCI and the amounts reclassified to earnings during the three and nine months ended September 30, 2009.

 

(In Millions)

   Foreign Exchange
Contracts
    Interest Rate Swap
Contracts

Three Months Ended September 30, 2009

    
              

Net Gain/(Loss) Recognized in AOCI (Effective Portion)

   $ (7.2   $ —  
              

Net Gain/(Loss) Reclassified from AOCI to Earnings

    

Trust, Investment and Other Servicing Fees

     1.0        —  

Other Operating Income

     .2        —  

Interest Income

     3.1        —  

Interest Expense

     .2        —  

Compensation

     (6.0     —  

Employee Benefits

     (1.8     —  

Equipment and Software Expense

     (.1     —  

Occupancy Expense

     (1.0     —  

Other Operating Expense

     .2        —  
              

Total

   $ (4.2   $ —  
              

Nine Months Ended September 30, 2009

    
              

Net Gain/(Loss) Recognized in AOCI (Effective Portion)

   $ 32.2      $ —  
              

Net Gain/(Loss) Reclassified from Accumulated AOCI to Earnings

    

Trust, Investment and Other Servicing Fees

     18.4        —  

Other Operating Income

     1.4        —  

Interest Income

     11.9        .2

Interest Expense

     (.1  

Compensation

     (31.7     —  

Employee Benefits

     (8.7     —  

Equipment and Software Expense

     (.5     —  

Occupancy Expense

     (4.4     —  

Other Operating Expense

     (1.7     —  
              

Total

   $ (15.4   $ .2
              

 

35


Notes to Consolidated Financial Statements (continued)

 

Included in the $15.4 million of net derivative losses reclassified from AOCI during the nine months ended September 30, 2009 was $.1 million of net foreign exchange contract losses relating to cash flow hedges of forecasted foreign currency denominated revenue and expenditure transactions that were discontinued as it was no longer probable that the original forecasted transactions would occur. There were no net foreign exchange contract gains or losses relating to transactions that were discontinued because it was no longer probable that the original forecasted transactions would occur included in the $4.2 million of derivative losses reclassified during the three months ended September 30, 2009. It is estimated that a net loss of $5.7 million will be reclassified into earnings within the next twelve months relating to cash flow hedges.

Foreign exchange contracts and qualifying nonderivative instruments are designated as net investment hedges to minimize Northern Trust’s exposure to variability in the foreign currency translation of net investments in non-U.S. branches and subsidiaries. The effective portion of changes in the fair value of the hedging instrument is recognized in AOCI consistent with the related translation gains and losses. For net investment hedges, all critical terms of the hedged item and the hedging instrument are matched at inception and on an ongoing basis to eliminate hedge ineffectiveness. As a result, no ineffectiveness was recorded for these hedges during the three and nine months ended September 30, 2009 or 2008. Amounts recorded in AOCI would be reclassified to earnings only upon the sale or liquidation of an investment in a non-U.S. branch or subsidiary. The following table provides net investment hedge gains and losses recognized in AOCI during the three and nine months ended September 30, 2009.

 

(In Millions)

   Amount of Hedging Instrument Gain/(Loss)
Recognized in OCI (Before Tax)
 
   Three Months Ended
September 30, 2009
    Nine Months Ended
September 30, 2009
 

Foreign Exchange Contracts

   $ (15.5   $ (73.8

Sterling Denominated Subordinated Debt

     7.4        (23.0

Sterling Denominated Senior Debt

     5.0        (15.3
                

Total

   $ (3.1   $ (112.1
                

 

36


Notes to Consolidated Financial Statements (continued)

 

Derivatives not formally designated as hedges under GAAP are entered into to manage the foreign currency risk of non-U.S. dollar denominated assets and liabilities and the credit risk of loans and leases. The following table identifies the types and classifications of risk management derivative instruments not formally designated as hedges, their notional and fair values, and the respective risks addressed.

 

(In Millions)

  

Derivative

Instrument

   Risk
Classification
   September 30, 2009    September 30, 2008
         Notional
Value
   Asset
Fair
Value
   Liability
Fair
Value
   Notional
Value
   Asset
Fair
Value
   Liability
Fair
Value

Loans and Leases-Commercial and Other

  

Credit Default

Swap Contracts

   Credit    $ 102.5    $ .2    $ .9    $ 269.3    $ 17.6    $ .1

Loans and Leases-Commercial and Other

  

Foreign

Exchange

Contracts

   Foreign
Currency
     111.4      .7      2.2      89.3      1.5      .1

Net Investments in Non-U.S. Affiliates

  

Foreign

Exchange

Contracts

   Foreign
Currency
     58.7      —        8.1      50.4      .1      .2
                                               

Total

         $ 272.6    $ .9    $ 11.2    $ 409.0    $ 19.2    $ .4
                                               

Changes in the fair value of derivative instruments not formally designated as hedges are recognized currently in income. The following table provides the location and amount of gains and losses recorded in the consolidated statement of income for the three and nine months ended September 30, 2009.

 

(In Millions)

  

Location of Derivative Gain/(Loss)
Recognized in Income

   Amount Recognized in Income  
      Three Months Ended
September 30, 2009
    Nine Months Ended
September 30, 2009
 

Credit Default Swap Contracts

   Other Income    $ (1.2   $ (3.2

Foreign Exchange Contracts

  

Other Income

     (3.5     (4.5

Foreign Exchange Contracts

   Other Income      (4.6     (7.0
                   

Total

      $ (9.3   $ (14.7
                   

20. Warrant – On August 26, 2009, the Corporation repurchased at a cost of $87 million the warrant to purchase shares of the Corporation’s common stock issued to the U.S. Department of the Treasury under the Capital Purchase Program, completing Northern Trust’s participation in the Capital Purchase Program. The repurchase of the warrant was recorded as a decrease to additional paid-in capital in the consolidated statement of changes in stockholders’ equity.

 

37


Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THIRD QUARTER CONSOLIDATED RESULTS OF OPERATIONS

Overview

Net income totaled $187.9 million on a reported basis compared with a reported net loss of $148.3 million in the third quarter of last year. Reported net income per common share on a diluted basis for the third quarter was $.77 compared with a net loss per common share of $.66 reported in the third quarter of 2008. The prior year quarter’s results were negatively impacted by client support related charges totaling $561.5 million ($353.2 million after tax or $1.59 per common share). Operating earnings were $176.7 million, or $.72 per common share, compared with an operating loss of $129.4 million, or $.58 per common share, in the third quarter of last year. Operating results exclude a current quarter $17.8 million pre-tax benefit from the reduction of an indemnification liability related to Visa, Inc. (Visa), consistent with the current quarter’s increased funding by Visa of its litigation related escrow account, and a prior year $30.0 million pre-tax charge relating to Visa indemnifications.

The following table provides a reconciliation of operating earnings, a non-GAAP financial measure which excludes Visa related adjustments, to reported earnings prepared in accordance with U.S. generally accepted accounting principles (GAAP). Northern Trust is providing operating earnings in addition to its reported results prepared in accordance with GAAP in order to provide a clearer indication of the results and trends in Northern Trust’s core businesses.