Form 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the Quarterly Period Ended March 31, 2010

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

241,849,640 Shares - $1.66 2/3 Par Value

(Shares of Common Stock Outstanding on March 31, 2010)

 

 

 


PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

CONSOLIDATED BALANCE SHEET   NORTHERN TRUST CORPORATION

 

     March 31     December 31     March 31  

($ In Millions Except Share Information)

   2010     2009     2009  
     (Unaudited)           (Unaudited)  

Assets

      

Cash and Due from Banks

   $ 2,651.7      $ 2,491.8      $ 2,104.1   

Federal Funds Sold and Securities Purchased under Agreements to Resell

     150.4        250.0        451.3   

Time Deposits with Banks

     15,939.3        12,905.2        18,334.9   

Federal Reserve Deposits and Other Interest-Bearing

     6,892.8        14,973.0        2,989.8   

Securities

      

Available for Sale

     16,640.8        17,462.1        16,671.5   

Held to Maturity (Fair value - $1,246.0 at March 2010, $1,185.7 at December 2009, $1,148.8 at March 2009)

     1,226.0        1,161.4        1,131.7   

Trading Account

     9.8        9.9        5.1   
                        

Total Securities

     17,876.6        18,633.4        17,808.3   
                        

Loans and Leases

      

Commercial and Other

     17,164.0        16,998.0        19,822.9   

Residential Mortgages

     10,798.0        10,807.7        10,588.0   
                        

Total Loans and Leases (Net of unearned income - $489.1 at March 2010, $486.0 at Dec. 2009, $509.4 at March 2009)

     27,962.0        27,805.7        30,410.9   
                        

Reserve for Credit Losses Assigned to Loans and Leases

     (320.5     (309.2     (286.2

Buildings and Equipment

     540.5        543.5        535.2   

Client Security Settlement Receivables

     970.6        794.8        702.3   

Goodwill

     394.0        401.6        387.4   

Other Assets

     3,261.1        3,651.6        5,026.6   
                        

Total Assets

   $ 76,318.6      $ 82,141.5      $ 78,464.6   
                        

Liabilities

      

Deposits

      

Demand and Other Noninterest-Bearing

   $ 8,239.1      $ 9,177.5      $ 9,019.0   

Savings and Money Market

     13,442.4        15,044.0        10,940.8   

Savings Certificates

     2,198.2        2,476.7        2,838.3   

Other Time

     1,482.8        1,524.5        984.0   

Non U.S. Offices - Noninterest-Bearing

     2,947.0        2,305.8        1,777.0   

- Interest-Bearing

     29,125.7        27,752.8        27,785.5   
                        

Total Deposits

     57,435.2        58,281.3        53,344.6   

Federal Funds Purchased

     3,739.4        6,649.8        7,735.6   

Securities Sold Under Agreements to Repurchase

     673.0        1,037.5        1,021.2   

Other Borrowings

     1,042.6        2,078.3        2,202.6   

Senior Notes

     1,395.0        1,551.8        1,049.0   

Long-Term Debt

     2,725.4        2,837.8        3,144.2   

Floating Rate Capital Debt

     276.8        276.8        276.7   

Other Liabilities

     2,584.1        3,116.1        3,166.0   
                        

Total Liabilities

     69,871.5        75,829.4        71,939.9   
                        

Stockholders’ Equity

      

Preferred Stock - Series B (Net of discount - $71.4)

     —          —          1,504.6   

Common Stock, $1.66 2/3 Par Value; Authorized 560,000,000 shares;

      

Outstanding 241,849,640 shares at March 2010, 241,679,942 shares at December 2009 and 223,669,263 shares at March 2009

     408.6        408.6        379.8   

Additional Paid-In Capital

     895.2        888.3        163.0   

Retained Earnings

     5,665.0        5,576.0        5,166.6   

Accumulated Other Comprehensive Income (Loss)

     (332.5     (361.6     (446.1

Treasury Stock - (at cost, 3,321,884 shares at March 2010, 3,491,582 shares at December 2009, and 4,252,261 shares at March 2009)

     (189.2     (199.2     (243.2
                        

Total Stockholders’ Equity

     6,447.1        6,312.1        6,524.7   
                        

Total Liabilities and Stockholders’ Equity

   $ 76,318.6      $ 82,141.5      $ 78,464.6   
                        

 

2


CONSOLIDATED STATEMENT OF INCOME

(UNAUDITED)

  NORTHERN TRUST CORPORATION

 

     Three Months
Ended March 31

($ In Millions Except Per Share Information)

   2010    2009

Noninterest Income

     

Trust, Investment and Other Servicing Fees

   $ 515.1    $ 410.7

Foreign Exchange Trading Income

     79.7      131.1

Security Commissions and Trading Income

     13.3      16.8

Treasury Management Fees

     20.1      20.4

Other Operating Income

     39.0      37.1

Security Gains (Losses), net

     .3      .4
             

Total Noninterest Income

     667.5      616.5
             

Net Interest Income

     

Interest Income

     314.3      393.8

Interest Expense

     83.9      116.7
             

Net Interest Income

     230.4      277.1

Provision for Credit Losses

     40.0      55.0
             

Net Interest Income after Provision for Credit Losses

     190.4      222.1
             

Noninterest Expenses

     

Compensation

     274.7      258.3

Employee Benefits

     63.1      65.8

Outside Services

     105.6      95.7

Equipment and Software Expense

     66.6      61.7

Occupancy Expense

     42.7      41.8

Other Operating Expenses

     67.0      70.2
             

Total Noninterest Expenses

     619.7      593.5
             

Income before Income Taxes

     238.2      245.1

Provision for Income Taxes

     81.0      83.3
             

Net Income

   $ 157.2    $ 161.8
             

Net Income Applicable to Common Stock

   $ 157.2    $ 138.8
             

Per Common Share

     

Net Income - Basic

   $ .65    $ .62

 - Diluted 

     .64      .61

Cash Dividends Declared

     .28      .28
             

Average Number of Common Shares Outstanding - Basic

     241,724,178      223,357,446

                                            - Diluted

     242,513,391      224,401,185
             

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(UNAUDITED)

  NORTHERN TRUST CORPORATION

 

     Three Months
Ended March 31
 

(In Millions)

   2010     2009  

Net Income

   $ 157.2      $ 161.8   

Other Comprehensive Income (Loss) (net of tax and reclassifications)

    

Net Unrealized Gains on Securities Available for Sale

     12.7        42.3   

Net Unrealized Gains on Cash Flow Hedge Designations

     21.6        6.8   

Foreign Currency Translation Adjustments

     (11.4     (3.5

Pension and Other Postretirement Benefit Adjustments

     6.2        3.2   
                

Other Comprehensive Income

     29.1        48.8   
                

Comprehensive Income

   $ 186.3      $ 210.6   
                

 

3


CONSOLIDATED STATEMENT OF CHANGES IN

STOCKHOLDERS’ EQUITY

(UNAUDITED)

  NORTHERN TRUST CORPORATION

 

     Three Months
Ended March 31
 

(In Millions)

   2010     2009  

Preferred Stock

    

Balance at January 1

   $ —        $ 1,501.3   

Discount Accretion - Preferred Stock

     —          3.3   
                

Balance at March 31

     —          1,504.6   
                

Common Stock

    

Balance at January 1 and March 31

     408.6        379.8   
                

Additional Paid-in Capital

    

Balance at January 1

     888.3        178.5   

Treasury Stock Transactions - Stock Options and Awards

     (10.8     (12.7

Stock Options and Awards - Amortization

     17.5        (5.1

Stock Options and Awards - Tax Benefits

     .2        2.3   
                

Balance at March 31

     895.2        163.0   
                

Retained Earnings

    

Balance at January 1

     5,576.0        5,091.2   

Net Income

     157.2        161.8   

Dividends Declared - Common Stock

     (68.2     (63.2

Dividends Declared - Preferred Stock

     —          (19.9

Discount Accretion - Preferred Stock

     —          (3.3
                

Balance at March 31

     5,665.0        5,166.6   
                

Accumulated Other Comprehensive Income (Loss)

    

Balance at January 1

     (361.6     (494.9

Other Comprehensive Income

     29.1        48.8   
                

Balance at March 31

     (332.5     (446.1
                

Treasury Stock

    

Balance at January 1

     (199.2     (266.5

Stock Options and Awards

     13.8        29.6   

Stock Purchased

     (3.8     (6.3
                

Balance at March 31

     (189.2     (243.2
                

Total Stockholders’ Equity at March 31

   $ 6,447.1      $ 6,524.7   
                

 

4


CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

  NORTHERN TRUST CORPORATION

 

     Three Months
Ended March 31
 

(In Millions)

   2010     2009  

Cash Flows from Operating Activities:

    

Net Income

   $ 157.2      $ 161.8   

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

    

Provision for Credit Losses

     40.0        55.0   

Depreciation on Buildings and Equipment

     22.4        21.5   

Amortization of Computer Software

     32.8        29.9   

Amortization of Intangibles

     4.0        3.9   

Decrease in Receivables

     .3        120.6   

Decrease in Interest Payable

     (18.4     (31.7

Amortization and Accretion of Securities and Unearned Income, net

     (13.6     (6.5

Investment Security (Gains) Losses, net

     (.3     (.4

Qualified Pension Plan Contribution

     (20.0     —     

Excess Tax Benefits from Stock Incentive Plans

     (.2     (2.3

Net (Increase) Decrease in Trading Account Securities

     .1        (2.8

Other Operating Activities, net

     (169.5     97.8   
                

Net Cash Provided by Operating Activities

     34.8        446.8   
                

Cash Flows from Investing Activities:

    

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

     99.6        (282.3

Net Increase in Time Deposits with Banks

     (3,034.1     (1,613.9

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

     8,080.2        6,414.0   

Purchases of Securities-Held to Maturity

     (224.1     (31.1

Proceeds from Maturity and Redemption of Securities-Held to Maturity

     215.8        54.7   

Purchases of Securities-Available for Sale

     (4,100.4     (4,466.6

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

     4,338.5        2,260.2   

Net (Increase) Decrease in Loans and Leases

     (195.5     349.5   

Purchases of Buildings and Equipment, net

     (19.4     (50.2

Purchases and Development of Computer Software

     (61.0     (55.7

Net (Increase) Decrease in Client Security Settlement Receivables

     (175.8     7.0   

Other Investing Activities, net

     582.2        (1,163.2
                

Net Cash Provided by Investing Activities

     5,506.0        1,422.4   
                

Cash Flows from Financing Activities:

    

Net Decrease in Deposits

     (846.1     (9,061.8

Net Increase (Decrease) in Federal Funds Purchased

     (2,910.4     5,952.1   

Net Decrease in Securities Sold under Agreements to Repurchase

     (364.5     (507.9

Net Increase (Decrease) in Short-Term Other Borrowings

     (459.6     1,460.1   

Proceeds from Term Federal Funds Purchased

     6,196.0        2,881.0   

Repayments of Term Federal Funds Purchased

     (6,772.0     (2,875.0

Repayments of Senior Notes & Long-Term Debt

     (256.5     (132.1

Treasury Stock Purchased

     (3.8     (4.2

Net Proceeds from Stock Options

     4.0        14.8   

Excess Tax Benefits from Stock Incentive Plans

     .2        2.3   

Cash Dividends Paid on Common Stock

     (67.7     (62.5

Cash Dividends Paid on Preferred Stock

     —          (19.9

Other Financing Activities, net

     114.5        (13.6
                

Net Cash Used in Financing Activities

     (5,365.9     (2,366.7
                

Effect of Foreign Currency Exchange Rates on Cash

     (15.0     (46.6
                

Increase (Decrease) in Cash and Due from Banks

     159.9        (544.1

Cash and Due from Banks at Beginning of Year

     2,491.8        2,648.2   
                

Cash and Due from Banks at End of Period

   $ 2,651.7      $ 2,104.1   
                

Supplemental Disclosures of Cash Flow Information:

    

Interest Paid

   $ 102.3      $ 148.4   

Income Taxes Paid (Refunded)

     (58.5     106.9   
                

 

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 March 31, 2010 and 2009, have not been audited by the Corporation’s independent registered public accounting firm. In the opinion of management, all accounting entries and adjustments, including normal recurring accruals, necessary for a fair presentation of the financial position and the results of operations for the interim periods have been made. For a description of Northern Trust’s significant accounting policies, refer to Note 1 of the Notes to Consolidated Financial Statements in the 2009 Annual Report to Shareholders.

2. Recent Accounting Pronouncements – In March 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) “Effect of a Loan Modification When It Is Part of a Pool That Is Accounted for as a Single Asset”. This guidance states that a modified loan within a pool of purchased, credit-impaired loans which are accounted for as a single asset, should remain in the pool even if the modification would otherwise be considered a Troubled Debt Restructuring (TDR). A one-time election to terminate accounting for a group of loans in a pool, which may be made on a pool-by-pool basis, is allowed upon adoption of the ASU. The ASU does not require any additional recurring disclosures and will be effective for modifications of loans accounted for within a pool in interim or annual periods ending on or after July 15, 2010. Adoption of this ASU is not expected to have a material impact on Northern Trust’s consolidated financial position or results of operations.

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

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.

 

6


Notes to Consolidated Financial Statements (continued)

 

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

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

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. To estimate their fair value, Northern Trust developed an internal income-based model. The lack of activity in the auction rate security market has resulted in a lack of observable market inputs to incorporate in the model. Therefore, significant inputs to the model include Northern Trust’s own assumptions about future cash flows and appropriate discount rates, both 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. Level 3 liabilities include financial guarantees relating to standby letters of credit and a net estimated liability for Visa related indemnifications. Northern Trust’s recorded liability for standby letters of credit, reflecting the obligation it has undertaken, is measured as the amount of unamortized fees on these instruments. The fair value of the net estimated liability for Visa related indemnifications is based on a market approach, but requires management to exercise significant judgment given the limited number of market transactions involving identical or comparable liabilities.

 

7


Notes to Consolidated Financial Statements (continued)

 

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

The following presents assets and liabilities measured at fair value on a recurring basis as of March 31, 2010 and December 31, 2009, segregated by fair value hierarchy level.

 

(In Millions)

March 31, 2010

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

Securities

             

Available for Sale

             

U.S. Government

   $ 59.0    $ —      $ —      $ —        $ 59.0

Obligations of States and Political Subdivisions

     —        43.1      —        —          43.1

Government Sponsored Agency

     —        10,705.9      —        —          10,705.9

Non-U.S. Government

     —        255.0      —        —          255.0

Corporate Debt

     —        2,968.3      —        —          2,968.3

Residential Mortgage-Backed

     —        304.9      —        —          304.9

Other Asset-Backed

     —        1,464.2      —        —          1,464.2

Auction Rate

     —        —        411.7      —          411.7

Other

     —        428.7      —        —          428.7
                                   

Total

     59.0      16,170.1      411.7      —          16,640.8
                                   

Trading Account

     —        9.8      —        —          9.8
                                   

Total

     59.0      16,179.9      411.7      —          16,650.6
                                   

Other Assets

             

Derivatives

             

Foreign Exchange Contracts

     —        2,380.7      —        —          2,380.7

Interest Rate Swap Contracts

     —        235.9      —        —          235.9

Interest Rate Option Contracts

     —        .2      —        —          .2

Credit Default Swap Contracts

     —        .1      —        —          .1
                                   

Total

     —        2,616.9      —        (1,284.6     1,332.3
                                   

All Other

     71.3      36.5      —        —          107.8
                                   

Total

     71.3      2,653.4      —        (1,284.6     1,440.1
                                   

Total Assets at Fair Value

   $ 130.3    $ 18,833.3    $ 411.7    $ (1,284.6   $ 18,090.7
                                   

Other Liabilities

             

Derivatives

             

Foreign Exchange Contracts

   $ —      $ 2,326.5    $ —      $ —        $ 2,326.5

Interest Rate Swap Contracts

     —        129.0      —        —          129.0

Interest Rate Option Contracts

     —        .2      —        —          .2

Credit Default Swap Contracts

     —        2.0      —        —          2.0
                                   

Total

     —        2,457.7      —        (1,490.9     966.8
                                   

All Other

     —        —        92.4      —          92.4
                                   

Total Liabilities at Fair Value

   $ —      $ 2,457.7    $ 92.4    $ (1,490.9   $ 1,059.2
                                   

 

* Northern Trust has elected to net derivative assets and liabilities when legally enforceable master netting agreements exist between Northern Trust and the counterparty. As of March 31, 2010, derivative assets and liabilities shown above also include reductions of $242.6 million and $448.9 million, respectively, as a result of cash collateral received from and deposited with derivative counterparties.

 

8


Notes to Consolidated Financial Statements (continued)

 

(In Millions)

December 31, 2009

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

Securities

             

Available for Sale

             

U.S. Government

   $ 74.0    $ —      $ —      $ —        $ 74.0

Obligations of States and Political Subdivisions

     —        47.0      —        —          47.0

Government Sponsored Agency

     —        12,325.4      —        —          12,325.4

Non-U.S. Government

     —        80.6      —        —          80.6

Corporate Debt

     —        2,822.1      —        —          2,822.1

Residential Mortgage-Backed

     —        314.0      —        —          314.0

Other Asset-Backed

     —        1,181.3      —        —          1,181.3

Auction Rate

     —        —        427.7      —          427.7

Other

     —        190.0      —        —          190.0
                                   

Total

     74.0      16,960.4      427.7      —          17,462.1
                                   

Trading Account

     —        9.9      —        —          9.9
                                   

Total

     74.0      16,970.3      427.7      —          17,472.0
                                   

Other Assets

             

Derivatives

             

Foreign Exchange Contracts

     —        2,078.3      —        —          2,078.3

Interest Rate Swap Contracts

     —        213.7      —        —          213.7

Interest Rate Option Contracts

     —        .4      —        —          .4
                                   

Total

     —        2,292.4      —        (1,156.0     1,136.4
                                   

All Other

     59.9      35.1      —        —          95.0
                                   

Total

     59.9      2,327.5      —        (1,156.0     1,231.4
                                   

Total Assets at Fair Value

   $ 133.9    $ 19,297.8    $ 427.7    $ (1,156.0   $ 18,703.4
                                   

Other Liabilities

             

Derivatives

             

Foreign Exchange Contracts

   $ —      $ 2,059.5    $ —      $ —        $ 2,059.5

Interest Rate Swap Contracts

     —        117.3      —        —          117.3

Interest Rate Option Contracts

     —        .4      —        —          .4

Credit Default Swap Contracts

     —        2.2      —        —          2.2
                                   

Total

     —        2,179.4      —        (1,133.1     1,046.3
                                   

All Other

     3.9      —        94.4      —          98.3
                                   

Total Liabilities at Fair Value

   $ 3.9    $ 2,179.4    $ 94.4    $ (1,133.1   $ 1,144.6
                                   

 

* Northern Trust has elected to net derivative assets and liabilities when legally enforceable master netting agreements exist between Northern Trust and the counterparty. As of December 31, 2009, derivative assets and liabilities shown above also include reductions of $216.2 million and $193.3 million, respectively, as a result of cash collateral received from and deposited with derivative counterparties.

 

9


Notes to Consolidated Financial Statements (continued)

 

The following presents the changes in Level 3 assets for the three months ended March 31, 2010 and 2009.

 

     Securities
Available for  Sale (1)
 

(In Millions)

   2010     2009  

Fair Value at January 1

   $ 427.7      $ 453.1   

Total Realized and Unrealized:

    

Losses (Gains) Included in Earnings

     (.5     (2.2

Gains (Losses) Included in Other Comprehensive Income

     (7.9     25.5   

Purchases, Sales, Issuances, and Settlements, net

     (7.6     (.1
                

Fair Value at March 31

   $ 411.7      $ 476.3   
                

 

(1) Balance represents the fair value of auction rate securities.

Northern Trust purchased certain illiquid auction rate securities from clients in 2008 which were recorded at their purchase date fair market values and designated as available for sale securities. Subsequent to their purchase, the securities are reported at fair value and unrealized gains and losses are credited or charged, net of the tax effect, to accumulated other comprehensive income (AOCI). As of March 31, 2010, the net unrealized gain related to these securities was $10.1 million ($6.4 million net of tax); at December 31, 2009, the net unrealized loss was $18.0 million ($11.4 million net of tax). Amounts included in earnings represent realized gains from redemptions by issuers and are included in interest income within the consolidated statement of income.

The following presents the changes in Level 3 liabilities for the three months ended March 31, 2010 and 2009.

 

     Other Liabilities  
     Derivatives    All Other (2)  

(In Millions)

   2010    2009(1)    2010     2009  

Fair Value at January 1

   $ —      $ 314.1    $ 94.4      $ 104.2   

Total Realized and Unrealized (Gains) Losses:

          

Included in Earnings

     —        8.3      (2.2     (1.8

Included in Other Comprehensive Income

     —        —        —          —     

Purchases, Sales, Issuances, and Settlements, net

     —        —        .2        6.5   
                              

Fair Value at March 31

   $ —      $ 322.4    $ 92.4      $ 108.9   
                              

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

     —        8.3      —          —     
                              

 

(1) Balance represents the fair value of Capital Support Agreements.
(2) Balance represents standby letters of credit and the net estimated liability for Visa related indemnifications.

All realized and unrealized gains and losses related to Level 3 liabilities for the periods presented are included in other operating income or other operating expenses.

 

10


Notes to Consolidated Financial Statements (continued)

 

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

During the three months ended March 31, 2010 and 2009, Northern Trust provided an additional $13.5 million and $17.8 million, respectively, in specific reserves to adjust certain impaired loans held at those quarter-ends to their total estimated fair value of $67.8 million and $32.5 million, respectively. Northern Trust also charged $.5 million and $.2 million, respectively, through other operating expenses during the three months ended March 31, 2010 and 2009 to reduce the value of certain Other Real Estate Owned (OREO) properties held at those quarter-ends to their total estimated fair value of $.1 million and $.5 million, respectively. The fair values of loan collateral and OREO properties were estimated using a market approach that was supported by third party appraisals and were discounted to reflect management’s judgment as to the realizable value of the collateral and the real estate. The fair value measurements of these impaired loans and OREO are classified as Level 3.

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 recorded at fair value on Northern Trust’s consolidated balance sheet are discussed above. The following methods and assumptions were used in estimating the fair values of financial instruments that are not carried at fair value.

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

Loans (excluding lease receivables). The fair values of one-to-four family residential mortgages were valued using a market approach 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 an income approach (discounted cash flow) 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 an income approach (discounted cash flow) that incorporates market interest rates.

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

 

11


Notes to Consolidated Financial Statements (continued)

 

Loan Commitments. The fair values of 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); client security settlement receivables; federal funds purchased; securities sold under agreements to repurchase; and other borrowings (includes Treasury Investment Program balances, term federal funds purchased, and other short-term borrowings). As required by GAAP, the fair values required to be disclosed for demand, noninterest-bearing, savings, and money market deposits must equal the amounts disclosed in the consolidated balance sheet, even though such deposits are typically priced at a premium in banking industry consolidations.

 

12


Notes to Consolidated Financial Statements (continued)

 

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

 

     March 31, 2010    December 31, 2009

(In Millions)

   Book Value    Fair Value    Book Value    Fair Value

Assets

           

Cash and Due from Banks

   $ 2,651.7    $ 2,651.7    $ 2,491.8    $ 2,491.8

Money Market Assets

     22,982.5      22,982.5      28,128.2      28,128.2

Securities:

           

Available for Sale

     16,640.8      16,640.8      17,462.1      17,462.1

Held to Maturity

     1,226.0      1,246.0      1,161.4      1,185.7

Trading Account

     9.8      9.8      9.9      9.9

Loans (excluding Leases)

           

Held for Investment

     26,611.0      26,711.2      26,497.0      26,539.1

Held for Sale

     1.3      1.3      4.2      4.2

Client Security Settlement Receivables

     970.6      970.6      794.8      794.8

Liabilities

           

Deposits:

           

Demand, Noninterest-Bearing, and Savings and Money Market

     24,628.5      24,628.5      26,527.3      26,527.3

Savings Certificates, Other Time and Foreign Offices Time

     32,806.7      32,830.5      31,754.0      31,783.6

Federal Funds Purchased

     3,739.4      3,739.4      6,649.8      6,649.8

Securities Sold under Agreements to Repurchase

     673.0      673.0      1,037.5      1,037.5

Other Borrowings

     1,042.6      1,042.6      2,078.3      2,078.3

Senior Notes

     1,395.0      1,457.0      1,551.8      1,611.3

Long Term Debt:

           

Subordinated Debt

     1,125.7      1,155.5      1,132.5      1,150.6

Federal Home Loan Bank Borrowings

     1,592.5      1,681.1      1,697.5      1,792.6

Floating Rate Capital Debt

     276.8      202.7      276.8      159.4

Financial Guarantees

     93.0      93.0      94.4      94.4

Loan Commitments

     27.5      27.5      28.4      28.4

Derivative Instruments

           

Asset/Liability Management:

           

Foreign Exchange Contracts

           

Assets

     26.7      26.7      46.1      46.1

Liabilities

     46.9      46.9      51.0      51.0

Interest Rate Swap Contracts

           

Assets

     108.0      108.0      98.8      98.8

Liabilities

     3.9      3.9      4.2      4.2

Credit Default Swaps

           

Assets

     .1      .1      —        —  

Liabilities

     2.0      2.0      2.2      2.2

Client-Related and Trading:

           

Foreign Exchange Contracts

           

Assets

     2,354.0      2,354.0      2,032.2      2,032.2

Liabilities

     2,279.6      2,279.6      2,008.5      2,008.5

Interest Rate Swap Contracts

           

Assets

     127.9      127.9      114.9      114.9

Liabilities

     125.1      125.1      113.1      113.1

Interest Rate Option Contracts

           

Assets

     .2      .2      .4      .4

Liabilities

     .2      .2      .4      .4

 

13


Notes to Consolidated Financial Statements (continued)

 

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

 

     March 31, 2010    December 31, 2009    March 31, 2009

(In Millions)

   Book
Value
   Fair
Value
   Book
Value
   Fair
Value
   Book
Value
   Fair
Value

Available for Sale

                 

U.S. Government

   $ 59.0    $ 59.0    $ 74.0    $ 74.0    $ 16.2    $ 16.2

Obligations of States and Political Subdivisions

     43.1      43.1      47.0      47.0      31.5      31.5

Government Sponsored Agency

     10,705.9      10,705.9      12,325.4      12,325.4      13,364.9      13,364.9

Non-U.S. Government

     255.0      255.0      80.6      80.6      125.9      125.9

Corporate Debt

     2,968.3      2,968.3      2,822.1      2,822.1      961.4      961.4

Residential Mortgage-Backed

     304.9      304.9      314.0      314.0      377.3      377.3

Other Asset-Backed

     1,464.2      1,464.2      1,181.3      1,181.3      1,143.8      1,143.8

Auction Rate

     411.7      411.7      427.7      427.7      476.3      476.3

Other

     428.7      428.7      190.0      190.0      174.2      174.2
                                         

Subtotal

     16,640.8      16,640.8      17,462.1      17,462.1      16,671.5      16,671.5
                                         

Held to Maturity

                 

Obligations of States and Political Subdivisions

     675.0      705.5      692.6      726.5      768.2      801.0

Government Sponsored Agency

     142.8      145.3      114.6      116.8      55.9      57.6

Other

     408.2      395.2      354.2      342.4      307.6      290.2
                                         

Subtotal

     1,226.0      1,246.0      1,161.4      1,185.7      1,131.7      1,148.8
                                         

Trading Account

     9.8      9.8      9.9      9.9      5.1      5.1
                                         

Total Securities

   $ 17,876.6    $ 17,896.6    $ 18,633.4    $ 18,657.7    $ 17,808.3    $ 17,825.4
                                         

 

Reconciliation of Amortized Cost to Fair

Values of Securities Available for Sale

   March 31, 2010

(In Millions)

   Amortized
Cost
   Gross Unrealized    Fair
Value
      Gains    Losses   

U.S. Government

   $ 59.0    $ —      $ —      $ 59.0

Obligations of States and Political Subdivisions

     41.1      2.0      —        43.1

Government Sponsored Agency

     10,659.4      57.4      10.9      10,705.9

Non-U.S. Government

     255.7      —        .7      255.0

Corporate Debt

     2,962.9      7.2      1.8      2,968.3

Residential Mortgage-Backed

     408.8      —        103.9      304.9

Other Asset-Backed

     1,462.9      2.3      1.0      1,464.2

Auction Rate

     401.6      12.2      2.1      411.7

Other

     428.8      —        .1      428.7
                           

Total

   $ 16,680.2    $ 81.1    $ 120.5    $ 16,640.8
                           

 

Reconciliation of Amortized Cost to Fair

Values of Securities Held to Maturity

   March 31, 2010

(In Millions)

   Book
Value
   Gross Unrealized    Fair
Value
      Gains    Losses   

Obligations of States and Political Subdivisions

   $ 675.0    $ 31.0    $ .5    $ 705.5

Government Sponsored Agency

     142.8      2.8      .3      145.3

Other

     408.2      —        13.0      395.2
                           

Total

   $ 1,226.0    $ 33.8    $ 13.8    $ 1,246.0
                           

Federal Reserve and Federal Home Loan Bank Stock. Stock in Federal Reserve and Federal Home Loan Banks, included at cost within other securities available for sale above, totaled $42.6 million and $147.0 million, respectively, as of March 31, 2010 and December 31, 2009, and $27.6 million and $146.1 million, respectively, as of March 31, 2009.

 

14


Notes to Consolidated Financial Statements (continued)

 

Reconciliation of Amortized Cost to Fair

Values of Securities Available for Sale

   December 31, 2009

(In Millions)

   Amortized
Cost
   Gross Unrealized    Fair
Value
      Gains    Losses   

U.S. Government

   $ 74.0    $ —      $ —      $ 74.0

Obligations of States and Political Subdivisions

     45.6      1.4      —        47.0

Government Sponsored Agency

     12,278.9      58.9      12.4      12,325.4

Non-U.S. Government

     80.6      —        —        80.6

Corporate Debt

     2,820.2      7.7      5.8      2,822.1

Residential Mortgage-Backed

     439.7      —        125.7      314.0

Other Asset-Backed

     1,183.8      .5      3.0      1,181.3

Auction Rate

     409.7      18.2      .2      427.7

Other

     190.0      —        —        190.0
                           

Total

   $ 17,522.5    $ 86.7    $ 147.1    $ 17,462.1
                           

 

Reconciliation of Amortized Cost to Fair

Values of Securities Held to Maturity

   December 31, 2009

(In Millions)

   Book
Value
   Gross Unrealized    Fair
Value
      Gains    Losses   

Obligations of States and Political Subdivisions

   $ 692.6    $ 34.5    $ .6    $ 726.5

Government Sponsored Agency

     114.6      2.4      .2      116.8

Other

     354.2      —        11.8      342.4
                           

Total

   $ 1,161.4    $ 36.9    $ 12.6    $ 1,185.7
                           

The following table provides the remaining maturity of securities as of March 31, 2010.

 

(In Millions)

   Amortized
Cost
   Fair
Value

Available for Sale

     

Due in One Year or Less

   $ 5,725.7    $ 5,697.7

Due After One Year Through Five Years

     9,986.3      9,985.0

Due After Five Years Through Ten Years

     481.4      475.8

Due After Ten Years

     486.8      482.3
             

Total

     16,680.2      16,640.8
             

Held to Maturity

     

Due in One Year or Less

     177.2      177.7

Due After One Year Through Five Years

     442.6      453.7

Due After Five Years Through Ten Years

     534.0      548.2

Due After Ten Years

     72.2      66.4
             

Total

   $ 1,226.0    $ 1,246.0
             

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 March 31, 2010 and December 31, 2009.

 

Securities with Unrealized Losses

as of March 31, 2010

   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

   $ 4.2    $ .1    $ 2.7    $ 0.4    $ 6.9    $ .5

Government Sponsored Agency

     729.8      3.0      448.2      8.2      1,178.0      11.2

Non-U.S. Government

     148.8      .7      —        —        148.8      .7

Corporate Debt

     1,203.0      1.8      —        —        1,203.0      1.8

Residential Mortgage-Backed

     .4      1.4      304.5      102.5      304.9      103.9

Other Asset-Backed

     331.7      .9      171.5      .1      503.2      1.0

Auction Rate

     99.8      2.0      4.0      .1      103.8      2.1

Other

     140.5      5.3      33.9      7.8      174.4      13.1
                                         

Total

   $ 2,658.2    $ 15.2    $ 964.8    $ 119.1    $ 3,623.0    $ 134.3
                                         

 

Securities with Unrealized Losses

as of December 31, 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

   $ 7.7    $ .2    $ 2.6    $ .4    $ 10.3    $ .6

Government Sponsored Agency

     810.6      3.0      523.3      9.6      1,333.9      12.6

Corporate Debt

     1,220.7      5.8      —        —        1,220.7      5.8

Residential Mortgage-Backed

     .5      1.5      313.5      124.2      314.0      125.7

Other Asset-Backed

     222.1      .5      570.1      2.5      792.2      3.0

Auction Rate

     7.0      .2      —        —        7.0      .2

Other

     4.1      2.7      34.0      9.1      38.1      11.8
                                         

Total

   $ 2,272.7    $ 13.9    $ 1,443.5    $ 145.8    $ 3,716.2    $ 159.7
                                         

As of March 31, 2010, 317 securities with a combined fair value of $3.6 billion were in an unrealized loss position, with their unrealized losses totaling $134.3 million. The majority reflects the impact of credit and liquidity spreads on the valuations of residential mortgage-backed securities with unrealized losses totaling $103.9 million. Of these, 34 securities with total unrealized losses of $102.5 million have been in an unrealized loss position for more than 12 months. Residential mortgage-backed securities rated below double-A, which represented 75% of total residential mortgage-backed securities, had a total amortized cost and fair value of $283.1 million and $189.0 million, respectively, and were comprised primarily of sub-prime and Alt-A securities. Securities classified as “other asset-backed” at March 31, 2010 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 $11.2 million related to government sponsored agency securities are primarily attributable to widened credit spreads since their purchase. The majority of the $13.1 million of unrealized losses in securities classified as “other” at March 31, 2010 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 $2.1 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 $1.8 million within corporate debt securities primarily reflect widened credit spreads since their purchase and 93% of the corporate debt portfolio is backed by guarantees provided by U.S. and non-U.S. governmental entities. The remaining unrealized losses on Northern Trust’s securities portfolio as of March 31, 2010 are attributable to changes in overall market interest rates, increased credit spreads, and reduced market liquidity.

Security impairment reviews are conducted quarterly to identify and evaluate securities that have indications of possible OTTI. A determination as to whether a security’s decline in market value is other-than-temporary takes into consideration numerous factors and the relative significance of any single factor can vary by security. Factors Northern Trust considers in determining whether impairment is other than temporary include, but are not limited to, the length of time which the security has been impaired; the severity of the impairment; the cause of the impairment and the financial condition and near-term prospects of the issuer; activity in the market of the issuer which may indicate adverse credit conditions; and Northern Trust’s ability and intent not to sell, and the likelihood that it will not be required to sell, the security for a period of time sufficient to allow for the recovery of the security’s amortized cost basis. For each security meeting the requirements of Northern Trust’s internal screening process, an extensive review is conducted to determine if OTTI has occurred.

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

 

17


Notes to Consolidated Financial Statements (continued)

 

The factors used in developing the expected loss on mortgage-backed securities vary by year of origination and type of collateral. As of March 31, 2010, the expected loss on 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 100% for underlying assets that are 30 days or more past due as to principal and interest payments or in foreclosure. Severities of loss ranging from 45% to 85% were assumed for underlying assets that may ultimately end up in default.

Credit Losses on Debt Securities. The table below provides information regarding cumulative credit-related losses recognized in earnings on debt securities other-than-temporarily impaired. There were no credit-related losses recognized in earnings for the three months ended March 31, 2010.

 

(In Millions)

    

Cumulative Credit-Related Losses on Securities – Beginning of Period

   $ 73.0

Plus: Losses on Newly Identified Impairments

     —  

Additional Losses on Previously Identified Impairments

     —  
      

Cumulative Credit-Related Losses on Securities – End of Period

   $ 73.0
      

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

 

(In Millions)

   March 31,
2010
    December 31,
2009
    March 31,
2009
 

U.S.

      

Residential Real Estate

   $ 10,798.0      $ 10,807.7      $ 10,588.0   

Commercial

     6,363.4        6,312.1        7,826.8   

Commercial Real Estate

     3,265.2        3,213.2        3,144.8   

Personal

     4,873.8        4,965.8        4,625.3   

Other

     654.4        774.0        1,169.9   

Lease Financing, net

     1,040.7        1,004.4        986.3   
                        

Total U.S.

     26,995.5        27,077.2        28,341.1   

Non-U.S.

     966.5        728.5        2,069.8   
                        

Total Loans and Leases

     27,962.0        27,805.7        30,410.9   

Reserve for Credit Losses Assigned to

      

Loans and Leases

     (320.5     (309.2     (286.2
                        

Net Loans and Leases

   $ 27,641.5      $ 27,496.5      $ 30,124.7   
                        

Other U.S. loans and non-U.S. loans included $1.0 billion at March 31, 2010, $1.0 billion at December 31, 2009, and $2.6 billion at March 31, 2009 of short duration advances, primarily related to overdrafts associated with the timing of custody clients’ investments.

 

18


Notes to Consolidated Financial Statements (continued)

 

The following table shows outstanding amounts of nonperforming and impaired loans as of March 31, 2010, December 31, 2009, and March 31, 2009.

 

(In Millions)

   March 31,
2010
   December 31,
2009
   March 31,
2009

Nonperforming Loans

   $ 319.5    $ 278.5    $ 167.8

Nonperforming Loans Classified as Impaired:

        

Impaired Loans with Reserves

     120.5      94.5      85.7

Impaired Loans without Reserves*

     141.6      133.6      66.0
                    

Total Impaired Loans**

   $ 262.1    $ 228.1    $ 151.7

Reserves for Impaired Loans

     52.6      43.8      42.7

Average Balance of Impaired Loans During the Period

     212.5      193.8      116.7
                    

 

* 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.
** Included within total impaired loans as of March 31, 2010 and December 31, 2009 were $35.7 million and $24.3 million, respectively, of loans deemed troubled debt restructurings.

At March 31, 2010, residential real estate loans totaling $1.3 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 $20.3 million at March 31, 2010. 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 March 31, 2010, legally binding commitments to extend credit totaled $25.1 billion compared with $25.7 billion at December 31, 2009, and $26.9 billion at March 31, 2009.

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

 

     Three Months
Ended March 31,
 

(In Millions)

   2010     2009  

Balance at Beginning of Period

   $ 340.6      $ 251.1   

Charge-Offs

     (32.7     (5.4

Recoveries

     2.1        2.7   
                

Net Charge-Offs

     (30.6     (2.7

Provision for Credit Losses

     40.0        55.0   

Effect of Foreign Exchange Rates

     —          (.1
                

Balance at End of Period

   $ 350.0      $ 303.3   
                

Reserve for Credit Losses Assigned to:

    

Loans and Leases

     320.5        286.2   

Unfunded Commitments and Standby Letters of Credit

     29.5        17.1   
                

Total Reserve for Credit Losses

   $ 350.0      $ 303.3   
                

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.

 

19


Notes to Consolidated Financial Statements (continued)

 

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 $22.9 billion on March 31, 2010, $24.1 billion on December 31, 2009, and $22.9 billion on March 31, 2009. Included in the March 31, 2010 pledged assets were securities available for sale of $703.5 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 March 31, 2010, December 31, 2009, and March 31, 2009 was $47.4 million, $227.9 million, and $48.9 million, respectively. There was no repledged collateral at March 31, 2010, December 31, 2009, or March 31, 2009.

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 March 31, 2010, December 31, 2009, and March 31, 2009.

 

(In Millions)

   March 31,
2010
   December 31,
2009
   March 31,
2009

Corporate and Institutional Services

   $ 327.2    $ 334.7    $ 320.7

Personal Financial Services

     66.8      66.9      66.7
                    

Total Goodwill

   $ 394.0    $ 401.6    $ 387.4
                    

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 March 31, 2010, December 31, 2009, and March 31, 2009, which include the effect of foreign exchange rates on non-U.S. dollar denominated intangible assets, were as follows:

 

(In Millions)

   March 31,
2010
   December 31,
2009
   March 31,
2009

Gross Carrying Amount

   $ 155.0    $ 157.0    $ 152.8

Accumulated Amortization

     100.3      96.3      84.1
                    

Net Book Value

   $ 54.7    $ 60.7    $ 68.7
                    

Other intangible assets consist primarily of the value of acquired client relationships. Amortization expense related to other intangible assets totaled $4.0 million and $3.9 million for the quarters ended March 31, 2010 and 2009. Amortization for the remainder of 2010 and for the years 2011, 2012, 2013, and 2014 is estimated to be $10.9 million, $10.6 million, $10.4 million, $10.2 million and $10.0 million, respectively.

9. Business Units – The tables on page 39, reflecting the earnings contribution of Northern Trust’s business units for the three month periods ended March 31, 2010 and 2009, are incorporated by reference.

 

20


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 March 31, 2010 and 2009, and changes during the three-month periods then ended.

 

     Period Change  

(In Millions)

   Beginning
Balance
(Net of Tax)
    Before Tax
Amount
    Tax
Effect
    Ending
Balance
(Net of Tax)
 

Three Months Ended March 31, 2010

        

Noncredit-Related Unrealized Losses on Securities OTTI

   $ (42.0   $ 10.7      $ (4.0   $ (35.3

Other Unrealized Gains (Losses) on Securities Available for Sale, net

     .3        9.9        (3.7     6.5   

Less: Reclassification Adjustments

     —          .3        (.1     .2   
                                

Net Unrealized Gains (Losses) on Securities Available for Sale

     (41.7     20.3        (7.6     (29.0

Unrealized Gains (Losses) on Cash Flow Hedge Designations

     (26.2     32.0        (11.7     (5.9

Less: Reclassification Adjustments

     —          (2.1     .8        (1.3
                                

Net Unrealized Gains (Losses) on Cash Flow Hedge Designations

     (26.2     34.1        (12.5     (4.6

Foreign Currency Translation Adjustments

     11.3        22.4        (33.8     (.1

Pension and Other Postretirement Benefit Adjustments

     (305.0     .7        (.3     (304.6

Less: Reclassification Adjustments

     —          (6.5     .7        (5.8
                                

Total Pension and Other Postretirement Benefit Adjustments

     (305.0     7.2        (1.0     (298.8
                                

Accumulated Other Comprehensive Income (Loss)

   $ (361.6   $ 84.0      $ (54.9   $ (332.5
                                

Three Months Ended March 31, 2009

        

Unrealized Gains (Losses) on Securities Available for Sale

   $ (212.9   $ 67.0      $ (24.6   $ (170.5

Less: Reclassification Adjustments

     —          .2        (.1     .1   
                                

Net Unrealized Gains (Losses) on Securities Available for Sale

     (212.9     66.8        (24.5     (170.6

Unrealized Gains (Losses) on Cash Flow Hedge Designations

     (20.7     19.0        (7.1     (8.8

Less: Reclassification Adjustments

     —          8.1        (3.0     5.1   
                                

Net Unrealized Gains (Losses) on Cash Flow Hedge Designations

     (20.7     10.9        (4.1     (13.9

Foreign Currency Translation Adjustments

     12.8        13.2        (16.7     9.3   

Pension and Other Postretirement Benefit Adjustments

     (274.1     —          —          (274.1

Less: Reclassification Adjustments

     —          4.9        (1.7     3.2   
                                

Total Pension and Other Postretirement Benefit Adjustments

     (274.1     4.9        (1.7     (270.9
                                

Accumulated Other Comprehensive Income (Loss)

   $ (494.9   $ 95.8      $ (47.0   $ (446.1
                                

 

21


Notes to Consolidated Financial Statements (continued)

 

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

 

     Three Months Ended March 31,

(In Millions Except Per Share Information)

   2010    2009

Basic Net Income Per Common Share

     

Average Number of Common Shares Outstanding

     241,724,178      223,357,446

Net Income

   $ 157.2    $ 161.8

Less: Dividends on Preferred Stock

     —        23.0
             

Net Income Applicable to Common Stock

     157.2      138.8

Less: Earnings Allocated to Participating Securities

     1.3      1.2
             

Earnings Allocated to Common Shares Outstanding

   $ 155.9    $ 137.6

Basic Net Income Per Common Share

   $ .65    $ .62
             

Diluted Net Income Per Common Share

     

Average Number of Common Shares Outstanding

     241,724,178      223,357,446

Plus Stock Option Dilution

     789,213      1,043,739
             

Average Common and Potential Common Shares

     242,513,391      224,401,185

Earnings Allocated to Common and Potential Common Shares

   $ 155.9    $ 137.6

Diluted Net Income Per Common Share

   $ .64    $ .61
             

Note: Common stock equivalents totaling 10,218,983 and 6,070,031 for the three months ended March 31, 2010 and March 31, 2009, respectively, were not included in the computation of diluted net income per common share because their inclusion would have been antidilutive.

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

 

     Three Months Ended March 31,

(In Millions)

   2010    2009

Interest Income

     

Loans and Leases

   $ 224.3    $ 243.5

Securities – Taxable

     44.7      56.4

                 – Non-Taxable

     7.5      9.1

Time Deposits with Banks

     33.5      81.2

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

     4.3      3.6
             

Total Interest Income

     314.3      393.8
             

Interest Expense

     

Deposits

     39.9      65.4

Federal Funds Purchased

     1.3      1.4

Securities Sold Under Agreements to Repurchase

     .2      .4

Other Borrowings

     1.1      1.0

Senior Notes

     11.5      8.6

Long-Term Debt

     29.5      38.4

Floating Rate Capital Debt

     .4      1.5
             

Total Interest Expense

     83.9      116.7
             

Net Interest Income

   $ 230.4    $ 277.1
             

 

22


Notes to Consolidated Financial Statements (continued)

 

13. Visa Membership – Northern Trust, in conjunction with other member banks of Visa U.S.A Inc. (Visa U.S.A.), is obligated to share in losses resulting from certain indemnified litigation involving Visa Inc. (Visa) and is also required to recognize the contingent obligation to indemnify Visa for potential losses arising from other indemnified litigation that has not yet settled at its estimated fair value in accordance with GAAP. Northern Trust’s net Visa related indemnification liability, included within other liabilities in the consolidated balance sheet, totaled $56.1 million at March 31, 2010 and December 31, 2009, and $73.9 million at March 31, 2009.

Visa has established an escrow account to fund the settlements of, or judgments in, the indemnified litigation. The funding by Visa of its escrow account has resulted in reductions of Northern Trust’s Visa related indemnification liability and of the future realization of the value of outstanding shares of Visa common stock held by Northern Trust as a member bank of Visa U.S.A. These shares are recorded at their original cost basis of zero and have restrictions as to their sale or transfer. It is expected that required additional contributions to the litigation escrow account will result in additional adjustments to the Visa related liability and to the future realization of the value of the outstanding shares. 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.

14. Income Taxes – Income tax expense of $81.0 million was recorded in the current quarter and $83.3 million in the prior year quarter. The effective tax rate equaled 34.0% in both periods.

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. Northern Trust has deposits with the IRS to mitigate interest that would become due should the IRS prevail on the remaining tax positions.

 

23


Notes to Consolidated Financial Statements (continued)

 

There have been no changes to the December 31, 2009 leveraged lease related uncertain tax position balance of $67.9 million. 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.

15. Pension and Other Postretirement Plans – The following tables set forth the net periodic pension expense for Northern Trust’s U.S. and non-U.S. pension plans, supplemental pension plan, and other postretirement plan for the three months ended March 31, 2010 and 2009.

 

Net Periodic Pension Expense

U.S. Plan

   Three Months Ended
March 31,
 

(In Millions)

   2010     2009  

Service Cost

   $ 9.5      $ 8.3   

Interest Cost

     9.2        8.3   

Expected Return on Plan Assets

     (18.3     (14.9

Amortization:

    

Net Loss

     5.0        3.0   

Prior Service Cost

     .4        .3   
                

Net Periodic Pension Expense

   $ 5.8      $ 5.0   
                

Net Periodic Pension Expense

Non U.S. Plans

   Three Months Ended
March 31,
 

(In Millions)

   2010     2009  

Service Cost

   $ 1.0      $ .9   

Interest Cost

     1.8        1.6   

Expected Return on Plan Assets

     (2.1     (1.9

Net Loss Amortization

     .4        .3   
                

Net Periodic Pension Expense

   $ 1.1      $ .9   
                

Net Periodic Pension Expense

Supplemental Plan

   Three Months Ended
March 31,
 

(In Millions)

   2010     2009  

Service Cost

   $ .8      $ .6   

Interest Cost

     1.2        1.0   

Net Loss Amortization

     1.5        1.0   
                

Net Periodic Pension Expense

   $ 3.5      $ 2.6   
                

Net Periodic Pension Expense

Other Postretirement Plan

   Three Months Ended
March 31,
 

(In Millions)

   2010     2009  

Service Cost

   $ .2      $ .4   

Interest Cost

     .7        .9   

Amortization:

    

Transition Obligation

     —          .2   

Net Loss

     .5        .1   

Prior Service Credit

     (1.3     —     
                

Net Periodic Pension Expense

   $ .1      $ 1.6   
                

 

24


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 first quarter of 2010, the Corporation granted 2,100,142 nonqualified stock options with a total grant-date fair value of $30.4 million and 777,569 stock unit awards with a total grant-date fair value of $39.7 million. Compensation expense recorded in the first quarter of 2010 includes $6.8 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 months ended March 31, 2009 reflects the reversal of accruals related to performance stock units which were not expected to vest. Total compensation expense for share-based payment arrangements and the associated tax impacts were as follows:

 

     Three Months
Ended March 31,
 

(In Millions)

   2010    2009  

Stock Options

   $ 11.8    $ 5.5   

Stock and Stock Unit Awards

     5.8      4.3   

Performance Stock Units

     —        (14.9
               

Total Share-Based Compensation Expense

     17.6      (5.1

Tax (Cost) Benefits Recognized

   $ 6.4    $ (1.9
               

17. Variable Interest Entities – Northern Trust acts as sponsor and/or asset manager to various funds in which clients of Northern Trust are investors. As asset manager of funds, the Corporation earns a competitively priced fee which is based on assets managed and which varies with each fund’s investment objective. Under GAAP, certain of these funds are considered variable interest entities (VIE).

In June 2009, the FASB issued guidance which amends the criteria for determining whether the consolidation of a VIE is required. The guidance changes the approach for determining the primary beneficiary of a VIE from a quantitative risk and reward model to a qualitative model based on control and economics. In February 2010, the FASB issued a deferral of this guidance for asset managers, allowing asset managers to continue applying for money market funds and other funds that prepare financial statements in accordance with the AICPA Investment Company Guide (or funds having similar attributes). Northern Trust’s adoption of the initial amended guidance and subsequent deferral did not impact its consolidated financial position or results of operations. Based on its analysis under existing consolidation accounting guidance, consistent with the deferral, Northern Trust’s interests in funds considered VIEs, and for which it serves as asset manager, are not considered significant variable interests under GAAP.

 

25


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 $4.8 billion on March 31, 2010, $4.8 billion on December 31, 2009 and $4.4 billion on March 31, 2009. 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 $36.3 million at March 31, 2010, $38.3 million at December 31, 2009, and $35.0 million at March 31, 2009.

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 $88.2 billion at March 31, 2010, $82.3 billion at December 31, 2009, and $71.9 billion at March 31, 2010. Because of the credit quality of the borrowers and the requirement to fully collateralize securities borrowed, management believes that the exposure to credit loss from this activity is not significant and no liability was recorded at March 31, 2010, December 31, 2009, or March 31, 2009 related to these indemnifications.

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 March 31, 2010 and December 31, 2009, and $73.9 million at March 31, 2009.

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

 

26


Notes to Consolidated Financial Statements (continued)

 

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.

A number of participants in our securities lending program, which is associated with the Corporation’s asset servicing business, have commenced either individual lawsuits or putative class actions in which they claim, among other things, that we failed to exercise prudence in the investment management of the collateral received from the borrowers of the securities, resulting in losses that they seek to recover. The cases assert various contractual, statutory and common law claims, including claims for breach of fiduciary duty under common law and under ERISA.

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

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 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.

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.

 

27


Notes to Consolidated Financial Statements (continued)

 

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 has elected to net derivative assets and liabilities when legally enforceable master netting agreements exist between Northern Trust and the counterparty. As of March 31, 2010 and December 31, 2009, derivative assets and liabilities recorded on the consolidated balance sheet were reduced by $1,042.0 million and 939.8 million, respectively, as a result of master netting agreements in place. Derivative assets and liabilities recorded at March 31, 2010 also reflect reductions of $242.6 million and $448.9 million, respectively, as a result of cash collateral received from and deposited with derivative counterparties. This compares with reductions of derivative assets and liabilities of $216.2 million and $193.3 million, respectively, at December 31, 2009. Additional cash collateral received from and deposited with derivative counterparties totaling $12.7 million and $176.9 million, respectively, of as of March 31, 2010, and $10.8 million and $21.7 million, respectively, as of December 31, 2009, were not offset against derivative assets and liabilities on the consolidated balance sheet as the amounts exceeded the net derivative positions with those counterparties.

Certain master netting agreements Northern Trust enters into with derivative counterparties contain credit-risk-related contingent features in which the counterparty has the option to declare Northern Trust in default and accelerate cash settlement of 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 March 31, 2010, was $634.9 million. Cash collateral amounts deposited with derivative counterparties include $378.0 million posted against these liabilities, resulting in a net maximum amount of termination payments that could have been required at March 31, 2010 of $256.9 million. Accelerated settlement due to such events would not have a material effect on the consolidated financial position or liquidity of Northern Trust.

 

28


Notes to Consolidated Financial Statements (continued)

 

Client-Related and Trading Derivative Instruments. In excess of 97% of Northern Trust’s derivatives outstanding at March 31, 2010 and December 31, 2009, 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 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.

 

     March 31, 2010    December 31, 2009

(In Millions)

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

Foreign Exchange Contracts

   $ 205,236.8    $ 2,354.0    $ 2,279.6    $ 173,159.1    $ 2,032.2    $ 2,008.5

Interest Rate Option Contracts

     178.0      .2      .2      178.1      .4      .4

Interest Rate Swap Contracts

     3,977.5      127.9      125.1      4,195.2      114.9      113.1

Futures Contracts

     —        —        —        .2      —        —  
                                         

Total

   $ 209,392.3    $ 2,482.1    $ 2,404.9    $ 177,532.6    $ 2,147.5    $ 2,122.0
                                         

Changes in the fair value of client-related and trading derivative instruments are recognized currently in income. The following table shows the location and amount of gains and losses recorded in the consolidated statement of income for the three months ended March 31, 2010 and 2009.

 

(In Millions)

  

Location of Derivative Gain/(Loss)
Recognized in Income

   Amount of Derivative  Gain/(Loss)
Recognized in Income
      2010    2009

Foreign Exchange Contracts

  

Foreign Exchange Trading Income

   $ 79.7    $ 131.1

Interest Rate Swap Contracts

  

Other Operating Income

     1.0      1.0
                

Total

      $ 80.7    $ 132.1
                

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 trading instruments.

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.

 

29


Notes to Consolidated Financial Statements (continued)

 

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

 

     Derivative
Instrument
   Risk    March 31, 2010    December 31, 2009

(In Millions)

         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

  

$

405.0

  

$

.4

  

$

3.9

  

$

257.7 $

  

 

.7

  

$

4.2

Senior Notes and Long- Term Subordinated Debt

   Interest Rate

Swap Contracts

   Interest

Rate

  

 

1,100.0

  

 

107.6

  

 

—  

  

 

1,100.0

  

 

98.1

  

 

—  

Cash Flow Hedges

                       

Forecasted Foreign Currency Denominated Transactions

  

Foreign Exchange

Contracts

  

Foreign

Currency

  

 

1,634.3

  

 

26.1

  

 

35.6

  

 

1,516.7

  

 

40.8

  

 

42.8

Net Investment Hedges

                       

Net Investments in Non-U.S. Affiliates

   Foreign Exchange

Contracts

   Foreign

Currency

  

 

1,244.9

  

 

—  

  

 

10.6

  

 

1,177.4

  

 

2.9

  

 

5.2

                                               

Total

         $ 4,384.2    $ 134.1    $ 50.1    $ 4,051.8    $ 142.5    $ 52.2
                                               

In addition to the above, Sterling denominated debt, totaling $227.7 million and $413.2 million at March 31, 2010 and December 31, 2009, respectively, were designated as hedges of the foreign exchange risk associated with the net investment in certain non-U.S. affiliates.

Derivatives are designated as fair value hedges to limit Northern Trust’s exposure to changes in the fair value of assets and liabilities due to movements in interest rates. 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 months ended March 31, 2010 and 2009.

 

(In Millions)

  

Derivative
Instrument

  

Location of Derivative Gain/(Loss)
Recognized in Income

   Amount of Derivative Gain/(Loss)
Recognized in Income
 
               2010     2009  

Available for Sale
Investment Securities

   Interest Rate Swap Contracts    Interest Income   

$

(2.8

 

$

(1.6

Senior Notes and Long-
Term Subordinated Debt

  

Interest Rate Swap

Contracts

   Interest Expense   

 

23.8

  

 

 

(6.3

                      

Total

         $ 21.0      $ (7.9
                      

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. There was no ineffectiveness recorded for available for sale investment securities, senior notes, or long-term subordinated debt during the three months ended March 31, 2010 or 2009.

 

30


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 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 March 31, 2010, twenty-three months is the maximum length of time over which the exposure to variability in future cash flows of forecasted foreign currency denominated transactions is being hedged.

The following table provides cash flow hedge derivative gains and losses recognized in AOCI and the amounts reclassified to earnings during the three months ended March 31, 2010 and 2009.

 

     Foreign Exchange
Contracts
    Interest Rate
Swap Contracts

(In Millions)

   2010     2009     2010    2009

Net Gain/(Loss) Recognized in AOCI

   $ 32.0      $ 19.0      $ —      $ —  
                             

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

         

Trust, Investment and Other Servicing Fees

     4.4        13.8        —        —  

Other Operating Income

     .3        (.1     —        —  

Interest Income

     1.1        4.7        —        .2

Interest Expense

     .1        (.5     —        —  

Compensation

     (5.0     (16.6     —        —  

Employee Benefits

     (1.6     (4.1     —        —  

Equipment and Software Expense

     (.1     (.2     —        —  

Occupancy Expense

     (.7     (2.3     —        —  

Other Operating Expense

     (.6     (3.0     —        —  
                             

Total

   $ (2.1   $ (8.3   $ —      $ .2
                             

During the three months ended March 31, 2010, there were no transactions discontinued due to the original forecasted transactions no longer being probable of occurring. The $8.3 million of net foreign exchange contract losses reclassified from AOCI during the three months ended March 31, 2009 included $1.7 million of net losses relating to cash flow hedges of forecasted foreign currency denominated revenue and expenditure transactions that were discontinued as the original forecasted transactions were no longer probable of occurring. It is estimated that a net loss of $7.1 million will be reclassified into earnings within the next twelve months relating to cash flow hedges.

 

31


Notes to Consolidated Financial Statements (continued)

 

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 months ended March 31, 2010 or 2009. Amounts recorded in AOCI are reclassified to earnings only upon the sale or liquidation of an investment in a non-U.S. branch or subsidiary. The following table provides net investment hedge gains and losses recognized in AOCI during the three months ended March 31, 2010 and 2009.

 

     Amount of Hedging Instrument Gain/(Loss)
Recognized in OCI  (Before Tax)

(In Millions)

   2010    2009

Foreign Exchange Contracts

   $ 67.3    $ 35.4

Sterling Denominated Subordinated Debt

     10.4      3.6

Sterling Denominated Senior Debt

     14.4      2.4
             

Total

   $ 92.1    $ 41.4
             

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 loan commitments. The following table identifies the types and classifications of risk management derivative instruments not formally designated as hedges, their notional and fair values, and the respective risks addressed.

 

(In Millions)

   Derivative
Instrument
   Risk
Classification
   March 31, 2010    December 31, 2009
         Notional
Value
   Fair Value    Notional
Value
   Fair Value
            Asset    Liability       Asset    Liability

Commercial Loans and Loan Commitments

   Credit Default

Swap Contracts

  

Credit

  

$

127.0

  

$

.1

  

$

2.0

  

$

127.0

  

$

—  

  

$

2.2

Commercial Loans

   Foreign Exchange

Contracts

   Foreign

Currency

  

 

85.1

  

 

.6

  

 

.5

  

 

118.7

  

 

2.3

  

 

.7

Net Investments in Non-U.S. Affiliates

   Foreign Exchange

Contracts

   Foreign

Currency

  

 

65.1

  

 

 

 

—  

  

 

.2

  

 

66.6

  

 

.1

  

 

2.3

                                               

Total

         $ 277.2    $ .7    $ 2.7    $ 312.3    $ 2.4    $ 5.2
                                               

Changes in the fair value of derivative instruments not formally designated as hedges are recognized currently in income. The following table provides the location and amount of gains and losses recorded in the consolidated statement of income for the three months ended March 31, 2010 and 2009.

 

(In Millions)

   Location of Derivative  Gain/(Loss)
Recognized in Income
   Recognized in Income
          2010     2009

Credit Default Swap Contracts

   Other Operating Income    $ .3      $ 2.8

Foreign Exchange Contracts

   Other Operating Income      (1.3     5.1
                 

Total

      $ (1.0   $ 7.9
                 

 

32


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

FIRST QUARTER CONSOLIDATED RESULTS OF OPERATIONS

Overview

Net income totaled $157.2 million compared with $161.8 million in the first quarter of last year. Net income per common share on a diluted basis for the first quarter was $.64 compared with net income per common share of $.61 reported in the first quarter of 2009. The prior year quarter’s earnings per share were reduced by $.10 in connection with Northern Trust’s participation in the U.S. Department of the Treasury’s Capital Purchase Program (Capital Purchase Program).

The performance in the current quarter produced an annualized return on average common equity (ROE) of 9.9% versus 10.9% reported for the comparable quarter last year and an annualized return on average assets (ROA) of .85%, unchanged from the prior year.

Consolidated revenues stated on a fully taxable equivalent (FTE) basis totaled $907.6 million, up slightly from last year’s first quarter revenues of $904.2 million. Trust, investment and other servicing fees increased 25% from last year to $515.1 million. Foreign exchange trading income decreased $51.4 million, or 39%, to $79.7 million from $131.1 million in the prior year. Net interest income on an FTE basis totaled $240.1 million, a decrease of 17%. Noninterest expenses totaled $619.7 million in the current quarter and $593.5 in the prior year quarter, a current quarter increase of 4% or $26.2 million.

Noninterest Income

Noninterest income of $667.5 million for the quarter accounted for 74% of total taxable equivalent revenue. Trust, investment and other servicing fees represented 57% of total taxable equivalent revenue. The $51.0 million increase in trust, investment and other servicing fees from the prior year quarter primarily reflects higher securities lending and asset management fee revenues, partially offset by $20.2 million of waived fees in money market funds due to the low level of interest rates. Foreign exchange trading income results reflect lower currency volatility compared to the higher volatility levels experienced in the 2009 quarter. Revenues from security commissions and trading income decreased due to lower revenue from core brokerage and transition management services.

 

33


Noninterest Income (continued)

 

The components of noninterest income are provided below.

 

Noninterest Income

(In Millions)

   Three Months Ended March 31  
   2010    2009    % Change  

Trust, Investment and Other Servicing Fees

   $ 515.1    $ 410.7    25   

Foreign Exchange Trading Income

     79.7      131.1    (39

Treasury Management Fees

     20.1      20.4    (1

Security Commissions and Trading Income

     13.3      16.8    (21

Other Operating Income

     39.0      37.1    5   

Investment Security Gains (Losses), net

     .3      .4    (28
                    

Total Noninterest Income

   $ 667.5    $ 616.5    8   
                    

Trust, investment and other servicing fees are based generally on the market value of assets held in custody, managed and serviced; the volume of transactions; securities lending volume and spreads; and fees for other services rendered. Certain market value calculations on which fees are based are performed on a monthly or quarterly basis in arrears. Certain investment management fee arrangements also may provide for performance fees, based on client portfolio returns that exceed predetermined levels. Securities lending fees also are impacted by Northern Trust’s share of unrealized investment gains and losses in one investment fund that is used in our securities lending activities and is accounted for at fair value. Based on an analysis of historical trends and current asset and product mix, management estimates that a 10% rise or fall in overall equity markets would cause a corresponding increase or decrease in Northern Trust’s trust, investment and other servicing fees of approximately 4% and in total revenues of approximately 2%.

 

Assets Under Custody

(In Billions)

   March 31,
2010
   December 31,
2009
   March 31,
2009
   % Change
1Q 10/

4Q 09
   % Change
1Q 10/

1Q 09

Corporate and Institutional

   $ 3,373.5    $ 3,325.9    $ 2,559.3    1    32

Personal

     340.7      331.1      281.7    3    21
                              

Total Assets Under Custody

   $ 3,714.2    $ 3,657.0    $ 2,841.0    2    31
                              

Assets Under Management

(In Billions)

   March 31,
2010
   December 31,
2009
   March 31,
2009
   % Change
1Q 10/

4Q 09
   % Change
1Q 10/

1Q 09

Corporate and Institutional

   $ 498.2    $ 482.0    $ 392.0    3    27

Personal

     149.1      145.2      130.3    3    14
                              

Total Assets Under Management

   $ 647.3    $ 627.2    $ 522.3    3    24
                              

C&IS assets under custody of $3.4 trillion at March 31, 2010 included $2.0 trillion of global custody assets, 44% higher than a year ago. C&IS assets under management of $498.2 billion included $121.3 billion of securities lending related collateral, a 28% increase from the prior year quarter. The changes in assets under custody and under management are in comparison to the twelve month improvement in the S&P 500 index of 47% and the EAFE index (USD) of 53%. As of the current quarter-end, managed assets were invested 43% in equities, 18% in fixed-income securities, and 39% in cash and other assets.

 

34


Noninterest Income (continued)

 

As of the current quarter-end, C&IS managed assets were invested 45% in equities, 14% in fixed-income securities, and 41% in cash and other assets. PFS managed assets at quarter-end were invested 35% in equities, 33% in fixed-income securities, and 32% in cash and other assets.

Trust, investment and other servicing fees from Corporate & Institutional Services (C&IS) increased 44% from the year-ago quarter to $297.3 million. The largest component of C&IS fees is custody and fund administration fees which increased 17% to $159.2 million, reflecting improved market valuations and new business. C&IS investment management fees for the first quarter of 2010 equaled $63.7 million, up 5% from the prior year quarter. The increase primarily reflects improved market valuations and new business, partially offset by $4.2 million of waived fees in money market funds due to low level of interest rates. Securities lending fees totaled $55.6 million compared with negative $7.9 million in the first quarter of last year. The increase is attributable to the recovery of previously recorded unrealized asset valuation losses of approximately $38 million in a mark-to-market investment fund used in securities lending activities, as compared to unrealized asset valuation losses of approximately $52 million recorded in the prior year quarter. Excluding the impact of valuation adjustments, the decrease in securities lending fees of approximately $27 million is attributable to significantly lower spreads on the investment of cash collateral, while volumes improved from the prior year quarter’s levels.

Trust, investment and other servicing fees from Personal Financial Services (PFS) in the quarter increased 7% and totaled $217.8 million. The increase in PFS fees was primarily a result of higher market valuations and new business, which were largely offset by $16.0 million of waived fees in money market funds due to low level of interest rates.

The components of other operating income are provided below.

 

Other Operating Income

(In Millions)

   Three Months Ended March 31  
   2010    2009     % Change  

Loan Service Fees

   $ 14.6    $ 9.5      54   

Banking Service Fees

     14.4      11.9      21   

Non-Trading Foreign Exchange Gains (Losses), net

     1.7      (1.3   —     

Credit Default Swaps Gains (Losses), net

     .3      2.8      (89

Gain on Sale of Leased Equipment

     .5      7.8      (94

Other Income

     7.5      6.4      17   
                     

Total Other Operating Income

   $ 39.0    $ 37.1      5   
                     

The current quarter increases in loan and banking service fees reflect higher commercial loan and letter of credit fees, respectively.

 

35


Net Interest Income

Net interest income for the quarter totaled $230.4 million, 17% lower than the $277.1 million reported in the first quarter of 2009. Net interest income is defined as the total of interest income and amortized fees on earning assets, less interest expense on deposits and borrowed funds, adjusted for the impact of interest-related hedging activity. Net interest income for the quarter, stated on an FTE basis, totaled $240.1 million, down 17% from $287.7 million reported in the prior year first quarter. When adjusted to an FTE basis, yields on taxable, nontaxable and partially taxable assets are comparable, although the adjustment to an FTE basis has no impact on net income.

Average earning assets of $67.4 billion were 3% lower than a year ago, driven by a decrease in average loans and leases and in money market assets, partially offset by growth in average securities. Loans and leases averaged $27.5 billion, down 7% from the first quarter of last year, and money market assets averaged $21.6 billion for the quarter, a decrease of 6%. The securities portfolio averaged $18.3 billion, up 9% from last year’s quarter, and primarily reflecting an increase in the average balance of government sponsored agency securities and corporate debt. The net interest margin, stated on an FTE basis, was 1.44%, compared with 1.68% in the prior year quarter, primarily reflecting the compression of the spread between interest rates on short-term investments and on overnight funding sources and the diminished value of non-interest bearing funds in the current low interest rate environment.

Average U.S. loans and leases outstanding during the quarter totaled $27.5 billion, 7% lower than the $29.7 billion in last year’s first quarter. Within the loan and lease portfolio, residential real estate loans averaged $10.8 billion in the quarter, up 3% from the prior year’s first quarter, and represented 39% of the average loan and lease portfolio. Commercial loans averaged $6.4 billion, down 22% from $8.2 billion last year, while personal loans averaged $4.9 billion, up 4% from last year’s first quarter. Loans outside the U.S. averaged $656.5 million, a 50% decrease from $1.3 billion in the prior year quarter.

Northern Trust utilizes a diverse mix of funding sources. Total interest-bearing deposits averaged $44.7 billion, up 2%, from the first quarter of 2009. The increase was attributable to higher levels of average domestic savings and money market deposits, partially offset by a decline of $2.6 billion, or 8%, in non-U.S. office deposits from last year’s first quarter. The decline in non-U.S. office deposits resulted primarily from a decrease in global custody related deposit balances. Other interest-related funds averaged $11.4 billion in the quarter, consistent with $11.2 billion in last year’s first quarter. The balances within these classifications vary based on funding requirements and strategies, interest rate levels, changes in the volume of lower-cost deposit sources, and the availability of collateral to secure these borrowings. The increase in other interest-related funds resulted primarily from higher levels of short-term borrowings and senior notes. The increase in senior notes reflects the May 2009 issuance of $500 million of fixed-rate senior notes of the Corporation. Net noninterest-related funds utilized to fund earning assets averaged $11.3 billion compared with $14.5 billion in last year’s first quarter, the decrease resulting primarily from lower levels of U.S. office noninterest-bearing deposits.

 

36


Provision for Credit Losses

The provision for credit losses was $40.0 million in the first quarter compared with $55.0 million in the prior year quarter. The current quarter provision reflects the continued weakness in the broader economic environment. The reserve for credit losses at March 31, 2010 was $350.0 million compared with $340.6 million at December 31, 2009 and $303.3 million at March 31, 2009. Net charge-offs totaled $30.6 million for the quarter. Net charge-offs in the prior year quarter totaled $2.7 million. For additional discussion of the provision and reserve for credit losses, refer to the “Asset Quality” section below.

Noninterest Expenses

The components of noninterest expenses are provided below.

 

Noninterest Expenses

(In Millions)

   Three Months Ended March 31  
   2010    2009    % Change  

Compensation

   $ 274.7    $ 258.3    6   

Employee Benefits

     63.1      65.8    (4

Outside Services

     105.6      95.7    10   

Equipment and Software Expense

     66.6      61.7    8   

Occupancy Expense

     42.7      41.8    2   

Other Operating Expenses

     67.0      70.2    (5
                    

Total Noninterest Expenses

   $ 619.7    $ 593.5    4   
                    

Compensation and employee benefit expenses, the largest component of noninterest expenses, increased $13.7 million, or 4%, to $337.8 million compared with the prior year quarter. The primary driver of the increase was share-based compensation expense, which totaled $17.6 million in the current quarter compared to a negative $5.1 million in the prior year quarter. Share-based compensation expense in the prior year quarter related to a performance plan totaled a negative $14.9 million due to the reversal of accruals for stock units which were not expected to vest. Additionally, share-based compensation expense attributable to stock options totaled $11.8 million in the current quarter, compared with $5.5 million in the prior year quarter, reflecting an increase in the number of stock options granted during the current quarter. Offsetting the increase in share-based compensation expense was a reduction in salaries and benefits reflecting decreased employee benefit expense and lower costs associated with temporary contracted services. Staff on a full-time equivalent basis at March 31, 2010 totaled approximately 12,500, up 2% from a year ago.

Expenses associated with outside services totaled $105.6 million, up $9.9 million, or 10%, from $95.7 million in the prior year quarter due to higher expenses for investment manager sub-advisory and technical services.

Equipment and software expense, comprised of depreciation and amortization; rental; and maintenance costs, totaled $66.6 million, up 8% from $61.7 million in the prior year quarter. The increase resulted primarily from higher levels of depreciation expense from capital investments in technology. Net occupancy expense equaled $42.7 million, up 2% from $41.8 million in the prior year quarter.

 

37


Other Operating Expenses

The components of other operating expenses are provided below.

 

Other Operating Expenses

(In Millions)

   Three Months Ended March 31  
   2010    2009    % Change  

Business Promotion

   $ 25.5    $ 24.2    5   

FDIC Insurance Premiums

     10.9      8.5    28   

Other Intangible Amortization

     4.0      3.9    3   

Client Support Related Charges

     —        8.3    —     

Other Expenses

     26.6      25.3    5   
                    

Total Other Operating Expenses

   $ 67.0    $ 70.2    (5
                    

Client support related charges in the prior year quarter consist of $8.3 million of expense incurred in connection with Capital Support Agreements that had been established to support certain Northern Trust investment vehicles. As of December 31, 2009, all such agreements had expired in connection with the final settlements of covered securities. The current quarter included higher Federal Deposit Insurance Corporation insurance premiums and advertising expenses.

Provision for Income Taxes

Income tax expense of $81.0 million was recorded in the current quarter and $83.3 million in the prior year quarter. The effective tax rate equaled 34.0% in both periods.

 

38


BUSINESS UNIT REPORTING

The following tables reflect the earnings contribution and average assets of Northern Trust’s business units for the three months ended March 31, 2010 and 2009. Business unit financial information, presented on an internal management-reporting basis, is determined by accounting systems that are used to allocate revenue and expenses related to each segment, and which incorporate processes for allocating assets, liabilities, and equity, and the applicable interest income and expense.

 

Three Months Ended March 31,

($ in Millions)

   Corporate and
Institutional Services
    Personal Financial
Services
    Treasury and
Other
    Total
Consolidated
 
   2010     2009     2010     2009     2010     2009     2010     2009  

Noninterest Income

                

Trust, Investment and Other Servicing Fees

   $ 297.3      $ 207.0      $ 217.8      $ 203.7      $ —        $ —        $ 515.1      $ 410.7   

Other

     117.8        169.7        32.5        32.5        2.1        3.6        152.4        205.8   

Net Interest Income
(FTE)*

     73.5        146.9        140.3        132.1        26.3        8.7        240.1        287.7   
                                                                

Revenues (FTE)*

     488.6        523.6        390.6        368.3        28.4        12.3        907.6        904.2   

Provision for Credit Losses

     (5.7     13.6        45.7        41.4        —          —          40.0        55.0   

Noninterest Expenses

     322.7        327.6        266.6        252.6        30.4        13.3        619.7        593.5   
                                                                

Income (Loss) before
Income Taxes*

  

 

171.6

  

 

 

182.4

  

 

 

78.3

  

 

 

74.3

  

 

 

(2.0

 

 

(1.0

 

 

247.9

  

 

 

255.7

  

Provision for Income
Taxes*

  

 

60.8

  

 

 

63.3

  

 

 

29.7

  

 

 

28.4

  

 

 

.2

  

 

 

2.2

  

 

 

90.7

  

 

 

93.9

  

                                                                

Net Income (Loss)

   $ 110.8      $ 119.1      $ 48.6      $ 45.9      $ (2.2   $ (3.2   $ 157.2      $ 161.8   
                                                                

Percentage of Consolidated
Net Income

  

 

70

 

 

74

 

 

31

 

 

28

 

 

(1

)% 

 

 

(2

)% 

 

 

100

 

 

100

                                                                

Average Assets

   $ 37,358.0      $ 46,082.1      $ 23,508.1      $ 21,347.3      $ 14,103.5      $ 9,926.1      $ 74,969.6      $ 77,355.5   
                                                                

 

* Stated on a fully taxable equivalent basis (FTE). Total consolidated includes FTE adjustments of $9.7 million for 2010 and $10.6 million for 2009.

Corporate and Institutional Services

C&IS net income for the quarter was $110.8 million compared with $119.1 million in the first quarter of 2009. Noninterest income was $415.1 million, up 10% from $376.7 million in last year’s first quarter. Trust, investment and other servicing fees from C&IS increased 44% from the year-ago quarter to $297.3 million. The largest component of C&IS fees is custody and fund administration fees which increased 17% to $159.2 million, reflecting improved market valuations and new business. C&IS investment management fees for the first quarter of 2010 equaled $63.7 million, up 5% from the prior year quarter. The increase primarily reflects improved market valuations and new business, partially offset by $4.2 million of waived fees in money market funds due to the low level of interest rates. Securities lending fees totaled $55.6 million compared with negative $7.9 million in the first quarter of last year. The increase is attributable to the recovery of previously recorded unrealized asset valuation losses of approximately $38 million in a mark-to-market investment fund used in securities lending activities, as compared to unrealized asset valuation losses of approximately $52 million recorded in the prior year quarter. Excluding the impact of valuation adjustments, the decrease in securities lending fees of approximately $27 million is attributable to significantly lower spreads on the investment of cash collateral, while volumes improved from the prior year quarter’s levels.

 

39


Corporate and Institutional Services (continued)

 

Other noninterest income was $117.8 million compared with $169.7 million in last year’s first quarter. Foreign exchange trading income equaled $78.3 million, down 39% from last year’s first quarter, reflecting reduced currency volatility as compared to the higher volatility levels which benefited last year’s first quarter.

Net interest income stated on an FTE basis was $73.5 million, down 50% from $146.9 million in last year’s first quarter, primarily reflecting a reduction in earning assets and a decline in the net interest margin. Earning assets averaged $35.1 billion for the quarter compared with $41.4 billion in the first quarter of last year, reflecting a $5.1 billion decline in average loans outstanding and a decrease in global custody related deposits which are primarily invested in short-term money market assets. The net interest margin equaled .85% compared with 1.44% reported in the prior year quarter. The decrease is primarily attributable to reduced levels of loans and money market assets and the compression of short-term interest rate spreads in the current quarter.

A provision for credit losses of negative $5.7 million was recorded in the current quarter compared with $13.6 million recorded in the prior year first quarter. The negative provision for the current quarter primarily reflects lower commercial loan outstandings.

Total noninterest expenses of C&IS, which includes the direct expenses of the business unit, indirect expense allocations from Northern Trust Global Investments (NTGI) and Operations and Technology (O&T) for product and operating support, and indirect expense allocations for certain corporate support services, totaled $322.7 million compared with $327.6 million for the first quarter of last year. The decrease is primarily attributable to lower compensation costs and other operating expenses, partially offset by higher indirect expense allocations.

Personal Financial Services

PFS net income for the current quarter was $48.6 million compared to $45.9 million reported a year ago. Noninterest income was $250.3 million, up 6% from $236.2 million in last year’s first quarter. Trust, investment and other servicing fees in the quarter increased 7% and totaled $217.8 million, compared with $203.7 million a year ago. The increase in PFS fees was primarily a result of higher market valuations and new business, which were largely offset by $16.0 million of waived fees in money market funds due to low level of interest rates. Other noninterest income totaled $32.5 million, unchanged from the prior year quarter.

Net interest income stated on an FTE basis was $140.3 million in the current quarter compared with $132.1 million in the prior year’s first quarter, reflecting a decline in the net interest margin. The net interest margin was 2.47% in the current quarter, compared to 2.55% in the prior year quarter.

A provision for credit losses of $45.7 million was recorded in the current quarter compared with a provision of $41.4 million recorded in the prior year first quarter. The provision for the current quarter reflects the continued weakness in the broader economic environment. For a fuller discussion of the reserve and provision for credit losses refer to the “Asset Quality” section below.

 

40


Personal Financial Services (continued)

 

Total noninterest expenses of PFS, which includes the direct expenses of the business unit, indirect expense allocations from NTGI and O&T for product and operating support, and indirect expense allocations for certain corporate support services, totaled $266.6 million compared with $252.6 million for the first quarter of last year, an increase of $14.0 million, or 6%. The increase primarily reflects higher indirect expense allocations, partially offset by lower other operating expenses.

Treasury and Other

Treasury and Other includes income and expense associated with the wholesale funding activities and the investment portfolios of the Corporation and its principal subsidiary, The Northern Trust Company (Bank), and certain corporate-based expenses, executive level compensation, and nonrecurring items not allocated to the business units. The increase in Treasury and Other average assets of $4.2 billion from the prior year quarter reflects higher levels of short-term securities and money market assets, funded primarily by short-term borrowings, senior notes and long-term debt, and noninterest-bearing deposits. Net interest income in the current quarter was $26.3 million, as compared to $8.7 million in the prior year quarter. The increase reflects the higher asset levels, partially offset by the low interest rate environment. Other noninterest income for the current quarter totaled $2.1 million, compared with $3.6 million in the year-ago quarter. Noninterest expenses for the quarter increased $17.1 million to $30.4 million, compared to $13.3 million in the year-ago first quarter, reflecting higher share-based compensation in the current quarter. The prior year quarter’s share-based compensation expense related to a performance plan included the reversal of accruals for stock units which were not expected to vest.

BALANCE SHEET

Total assets at March 31, 2010 were $76.3 billion and averaged $75.0 billion for the first quarter, compared with total assets of $78.5 billion at March 31, 2009 and an average balance of $77.4 billion in the prior year first quarter. Average balances are considered to be a better measure of balance sheet trends as period-end balances can be impacted on a short term basis by deposit and withdrawal activity involving large balances of short-term client funds. Loans and leases totaled $28.0 billion at March 31, 2010 and averaged $27.5 billion for the first quarter, compared with $30.4 billion at March 31, 2009 and a $29.7 billion average for the first quarter last year. Securities totaled $18.3 billion at March 31, 2010 and averaged $18.3 billion for the quarter, compared with $17.8 billion at March 31, 2009 and $16.8 billion on average in last year’s quarter. Money market assets, which include federal funds sold and securities purchased under agreements to resell, time deposits with banks, and federal reserve deposits and other interest-bearing assets, totaled $23.0 billion at March 31, 2010 and averaged $21.6 billion in the first quarter, down 6% from the year-ago quarter’s average. The decrease in the average balance of total assets was due to lower levels of funding from noninterest-bearing deposits.

 

41


BALANCE SHEET (continued)

 

Total stockholders’ equity averaged $6.5 billion at March 31, 2010, down 3% from prior year’s first quarter average of $6.7 billion. The current quarter average includes the May 2009 issuance of 17,250,000 common shares in connection with a public offering and the retention of earnings. The prior year quarter average includes the November 2008 issuance of senior preferred stock and related warrant to the U.S. Department of the Treasury pursuant to the terms of the Capital Purchase Program, which were repurchased in June and August of 2009, respectively.

Northern Trust’s risk-based capital ratios remained strong at March 31, 2010 and were well above the minimum regulatory requirements established by U.S. banking regulators of 4% for tier 1 capital, 8% for total risk-based capital, and 3% for leverage (tier 1 capital to period average assets). Each of Northern Trust’s U.S. subsidiary banks had capital ratios at March 31, 2010 that were above the level required for classification as a “well capitalized” institution. Shown below are the March 31, 2010 and 2009 capital ratios of the Corporation and of each of its subsidiary banks whose net income for the three-months ended March 31, 2010 or 2009 exceeded 10% of the consolidated total.

 

     March 31, 2010     March 31, 2009  
     Tier 1
Capital
    Total
Capital
    Leverage
Ratio
    Tier 1
Capital
    Total
Capital
    Leverage
Ratio
 

Northern Trust Corporation

   13.4   15.5   8.9   13.0   15.2   8.9

The Northern Trust Company

   12.8   15.9   8.0   11.0   14.0   7.0

Northern Trust, NA

   9.9   11.5   8.4   9.9   11.4   8.5
                                    

The ratio of tier 1 common equity to risk-weighted assets, a non-GAAP financial measure, was 12.8% at March 31, 2010 unchanged from December 31, 2009 and up from 9.6% at March 31, 2009. The following table provides a reconciliation of tier 1 common equity to tier 1 capital calculated in accordance with applicable regulatory requirements.

 

($ in Millions)

   March 31,
2010
    December 31,
2009
    March 31,
2009
 

Tier 1 Capital

   $ 6,630.9      $ 6,522.0      $ 6,818.4   

Less: Preferred Stock

     —          —          1,504.6   

 Floating Rate Capital Securities

     268.5        268.0        268.4   
                        

Tier 1 Common Equity

     6,362.4        6,254.0        5,045.4   
                        

Tier 1 Capital Ratio

     13.4     13.4     13.0

Tier 1 Common Equity Ratio

     12.8     12.8     9.6
                        

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

 

42


ASSET QUALITY

Securities Portfolio

Northern Trust maintains a high quality securities portfolio, with 90% of the total portfolio at March 31, 2010 composed of U.S. Treasury and government sponsored agency securities, Federal Home Loan Bank and Federal Reserve Bank stock, and triple-A rated asset-backed securities, auction rate securities and obligations of states and political subdivisions. The remaining 10% of the portfolio was composed of asset-backed securities, obligations of states and political subdivisions, auction rate securities and other securities, of which as a percentage of the total securities portfolio, 3% was rated double-A, 3% was rated below double-A, and 4% was not rated by Standard and Poor’s or Moody’s Investors Service.

Total gross unrealized losses within the investment securities portfolio at March 31, 2010 were $134.3 million as compared to $159.7 million at December 31, 2009. The $25.4 million decrease in unrealized losses from December 31, 2009 primarily reflects higher valuations of asset-backed securities due to an improvement in credit spreads. Of the total gross unrealized losses on securities at March 31, 2010, $103.9 million relate to residential mortgage-backed securities. Residential mortgage-backed securities rated below double-A, which represented 75% of total residential mortgage-backed securities, had a total amortized cost and fair value at March 31, 2010 of $283.1 million and $189.0 million, respectively, and were comprised primarily of sub-prime and Alt-A securities.

Northern Trust has