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 June 30, 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

242,090,858 Shares - $1.66 2/3 Par Value

(Shares of Common Stock Outstanding on June 30, 2010)

 

 

 


PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

CONSOLIDATED BALANCE SHEET    NORTHERN TRUST CORPORATION

 

($ In Millions Except Share Information)

   June 30
2010
    December 31
2009
    June 30
2009
 
     (Unaudited)           (Unaudited)  

Assets

      

Cash and Due from Banks

   $ 3,524.2      $ 2,491.8      $ 2,531.3   

Federal Funds Sold and Securities Purchased under Agreements to Resell

     262.2        250.0        1,074.8   

Time Deposits with Banks

     13,276.5        12,905.2        16,054.9   

Federal Reserve Deposits and Other Interest-Bearing

     9,787.7        14,973.0        2,984.0   

Securities

      

Available for Sale

     18,624.5        17,462.1        16,345.6   

Held to Maturity (Fair value - $1,206.1 at June 2010, $1,185.7 at December 2009, $1,177.2 at June 2009)

     1,184.0        1,161.4        1,164.6   

Trading Account

     11.6        9.9        4.7   
                        

Total Securities

     19,820.1        18,633.4        17,514.9   
                        

Loans and Leases

      

Commercial and Other

     17,482.5        16,998.0        18,288.8   

Residential Mortgages

     10,922.3        10,807.7        10,738.3   
                        

Total Loans and Leases (Net of unearned income - $482.3 at June 2010, $486.0 at December 2009, and $504.6 at June 2009)

     28,404.8        27,805.7        29,027.1   
                        

Reserve for Credit Losses Assigned to Loans and Leases

     (326.7     (309.2     (297.3

Buildings and Equipment

     529.5        543.5        548.1   

Client Security Settlement Receivables

     861.7        794.8        1,162.8   

Goodwill

     393.0        401.6        405.3   

Other Assets

     3,515.9        3,651.7        4,039.3   
                        

Total Assets

   $ 80,048.9      $ 82,141.5      $ 75,045.2   
                        

Liabilities

      

Deposits

      

Demand and Other Noninterest-Bearing

   $ 6,877.9      $ 9,177.5      $ 8,040.7   

Savings and Money Market

     12,799.5        15,044.0        11,375.6   

Savings Certificates and Other Time

     3,548.7        4,001.2        4,088.2   

Non U.S. Offices - Noninterest-Bearing

     2,898.5        2,305.8        2,816.9   

- Interest-Bearing

     31,827.5        27,752.8        27,259.2   
                        

Total Deposits

     57,952.1        58,281.3        53,580.6   

Federal Funds Purchased

     4,441.2        6,649.8        5,028.8   

Securities Sold Under Agreements to Repurchase

     633.0        1,037.5        700.0   

Other Borrowings

     2,002.9        2,078.3        1,354.9   

Senior Notes

     1,401.2        1,551.8        1,554.4   

Long-Term Debt

     3,327.3        2,837.8        3,133.2   

Floating Rate Capital Debt

     276.8        276.8        276.7   

Other Liabilities

     3,394.8        3,116.1        3,287.9   
                        

Total Liabilities

     73,429.3        75,829.4        68,916.5   
                        

Stockholders’ Equity

      

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

      

Outstanding 242,090,858 shares at June 2010, 241,679,942 shares at December 2009 and 241,402,594 shares at June 2009

     408.6        408.6        408.6   

Additional Paid-In Capital

     905.2        888.3        965.2   

Retained Earnings

     5,796.6        5,576.0        5,323.5   

Accumulated Other Comprehensive Loss

     (315.3     (361.6     (353.4

Treasury Stock - (at cost, 3,080,666 shares at June 2010, 3,491,582 shares at December 2009, and 3,768,930 shares at June 2009)

     (175.5     (199.2     (215.2
                        

Total Stockholders’ Equity

     6,619.6        6,312.1        6,128.7   
                        

Total Liabilities and Stockholders’ Equity

   $ 80,048.9      $ 82,141.5      $ 75,045.2   
                        

 

2


CONSOLIDATED STATEMENT OF INCOME

   NORTHERN TRUST CORPORATION

(UNAUDITED)

  

 

    Three Months
Ended June 30
    Six Months
Ended June 30
 

($ In Millions Except Per Share Information)

  2010     2009     2010     2009  

Noninterest Income

       

Trust, Investment and Other Servicing Fees

  $ 543.5      $ 601.4      $ 1,058.6      $ 1,012.1   

Foreign Exchange Trading Income

    115.4        134.3        195.1        265.4   

Security Commissions and Trading Income

    15.3        16.8        28.6        33.6   

Treasury Management Fees

    19.9        21.8        40.0        42.2   

Other Operating Income

    37.4        28.2        76.4        65.3   

Other-Than-Temporary-Impairment (OTTI) Losses

    (.7     (80.2     (.7     (80.2

Less: OTTI Recognized in Other Comprehensive Income

    .6        62.1        .6        62.1   

Other Security Gains (Losses), net

    —          .6        .3        1.0   
                               

Total Investment Security Gains (Losses), net

    (.1     (17.5     .2        (17.1
                               

Total Noninterest Income

    731.4        785.0        1,398.9        1,401.5   
                               

Net Interest Income

       

Interest Income

    317.9        354.7        632.2        748.5   

Interest Expense

    85.1        104.5        169.0        221.2   
                               

Net Interest Income

    232.8        250.2        463.2        527.3   

Provision for Credit Losses

    50.0        60.0        90.0        115.0   
                               

Net Interest Income after Provision for Credit Losses

    182.8        190.2        373.2        412.3   
                               

Noninterest Expenses

       

Compensation

    278.2        288.1        552.9        546.4   

Employee Benefits

    58.8        61.7        121.9        127.5   

Outside Services

    114.6        102.1        220.2        197.8   

Equipment and Software Expense

    69.8        61.2        136.4        122.9   

Occupancy Expense

    41.9        40.4        84.6        82.2   

Visa Indemnification Charges

    (12.7     —          (12.7     —     

Other Operating Expenses

    63.8        (50.8     130.8        19.4   
                               

Total Noninterest Expenses

    614.4        502.7        1,234.1        1,096.2   
                               

Income before Income Taxes

    299.8        472.5        538.0        717.6   

Provision for Income Taxes

    100.2        158.3        181.2        241.6   
                               

Net Income

  $ 199.6      $ 314.2      $ 356.8      $ 476.0   
                               

Net Income Applicable to Common Stock

  $ 199.6      $ 226.1      $ 356.8      $ 364.9   
                               

Per Common Share

       

Net Income - Basic

  $ .82      $ .95      $ 1.46      $ 1.58   

 - Diluted

    .82        .95        1.46        1.57   

Cash Dividends Declared

    .28        .28        .56        .56   
                               

Average Number of Common Shares Outstanding - Basic

    242,045,799        235,455,068        241,885,877        229,439,676   

         - Diluted

    242,597,066        236,346,486        242,555,460        230,407,045   
                               

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

   NORTHERN TRUST CORPORATION

(UNAUDITED)

  

 

    Three Months
Ended June 30
    Six Months
Ended June 30
 

( In Millions)

            2010                          2009                          2010                        2009             

Net Income

  $ 199.6      $ 314.2      $ 356.8   $ 476.0   

April 1 Adjustment for Cumulative Effect of Applying FSP FAS 115-2 and 124-2

    —          (9.5     —       (9.5

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

       

Net Unrealized Gains on Securities Available for Sale

    7.7        84.1        20.4     126.4   

Net Unrealized Gains on Cash Flow Hedges

    (11.2     11.0        10.4     17.8   

Foreign Currency Translation Adjustments

    14.4        4.8        3.0     1.3   

Pension and Other Postretirement Benefit Adjustments

    6.3        2.3        12.5     5.5   
                             

Other Comprehensive Income

    17.2        92.7        46.3     141.5   
                             

Comprehensive Income

  $ 216.8      $ 406.9      $ 403.1   $ 617.5   
                             

 

3


CONSOLIDATED STATEMENT OF CHANGES IN

   NORTHERN TRUST CORPORATION

STOCKHOLDERS’ EQUITY

  

(UNAUDITED)

  

 

      Six Months
Ended June 30
 

(In Millions)

   2010     2009  

Preferred Stock

    

Balance at January 1

   $ —        $ 1,501.3   

Redemption of Preferred Stock, Series B

     —          (1,576.0

Discount Accretion - Preferred Stock

     —          74.7   
                

Balance at June 30

     —          —     
                

Common Stock

    

Balance at January 1

     408.6        379.8   

Issuance of Common Stock

     —          28.8   
                

Balance at June 30

     408.6        408.6   
                

Additional Paid-in Capital

    

Balance at January 1

     888.3        178.5   

Common Stock Issuance

     —          805.3   

Treasury Stock Transactions - Stock Options and Awards

     (14.5     (28.4

Stock Options and Awards - Amortization

     30.4        6.3   

Stock Options and Awards - Tax Benefits

     1.0        3.5   
                

Balance at June 30

     905.2        965.2   
                

Retained Earnings

    

Balance at January 1

     5,576.0        5,091.2   

April 1 Adjustment for the Cumulative Effect of Applying FSP FAS 115-2 and 124-2

     —          9.5   

Net Income

     356.8        476.0   

Dividends Declared - Common Stock

     (136.2     (131.9

Dividends Declared - Preferred Stock

     —          (46.6

Discount Accretion - Preferred Stock

     —          (74.7
                

Balance at June 30

     5,796.6        5,323.5   
                

Accumulated Other Comprehensive Income (Loss)

    

Balance at January 1

     (361.6     (494.9

April 1 Adjustment for the Cumulative Effect of Applying FSP FAS 115-2 and 124-2

     —          (9.5

Other Comprehensive Income

     46.3        151.0   
                

Balance at June 30

     (315.3     (353.4
                

Treasury Stock

    

Balance at January 1

     (199.2     (266.5

Stock Options and Awards

     28.6        62.4   

Stock Purchased

     (4.9     (11.1
                

Balance at June 30

     (175.5     (215.2
                

Total Stockholders’ Equity at June 30

   $ 6,619.6      $ 6,128.7   
                

 

4


CONSOLIDATED STATEMENT OF CASH FLOWS

   NORTHERN TRUST CORPORATION

(UNAUDITED)

  

 

     Six Months
Ended June 30
 

(In Millions)

   2010     2009  

Cash Flows from Operating Activities:

    

Net Income

   $ 356.8      $ 476.0   

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

    

Provision for Credit Losses

     90.0        115.0   

Client Support-Related Charges (Benefit)

     —          (130.1

Depreciation on Buildings and Equipment

     44.3        45.7   

Amortization of Computer Software

     66.9        60.7   

Investment Security (Gains) Losses, net

     (.2     17.1   

Amortization of Intangibles

     7.5        7.9   

Decrease in Receivables

     51.3        68.8   

Capital Support Agreement Payments

     —          (66.7

Decrease in Interest Payable

     (4.3     (10.0

Amortization and Accretion of Securities and Unearned Income

     (27.4     (16.9

Qualified Pension Plan Contribution

     (20.0     —     

Excess Tax Benefits from Stock Incentive Plans

     (1.0     (3.5

Net Increase in Trading Account Securities

     (1.7     (2.4

Visa Indemnification Charges

     (12.7     —     

Other Operating Activities, net

     217.9        (218.4
                

Net Cash Provided by Operating Activities

     767.4        343.2   
                

Cash Flows from Investing Activities:

    

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

     (12.2     (905.8

Net (Increase) Decrease in Time Deposits with Banks

     (371.3     666.1   

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

     5,185.3        6,419.8   

Purchases of Securities-Held to Maturity

     (279.5     (115.6

Proceeds from Maturity and Redemption of Securities-Held to Maturity

     271.5        108.0   

Purchases of Securities-Available for Sale

     (7,626.7     (7,739.0

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

     5,921.3        5,988.2   

Net (Increase) Decrease in Loans and Leases

     (664.2     1,709.9   

Purchases of Buildings and Equipment, net

     (30.3     (87.3

Purchases and Development of Computer Software

     (105.7     (95.4

Net Increase in Client Security Settlement Receivables

     (67.0     (453.5

Other Investing Activities, net

     560.3        333.7   
                

Net Cash Provided by Investing Activities

     2,781.5        5,829.1   
                

Cash Flows from Financing Activities:

    

Net Decrease in Deposits

     (329.2     (8,825.8

Net Increase (Decrease) in Federal Funds Purchased

     (2,208.6     3,245.3   

Net Decrease in Securities Sold under Agreements to Repurchase

     (404.5     (829.1

Net Increase (Decrease) in Short-Term Other Borrowings

     (461.2     424.5   

Proceeds from Term Federal Funds Purchased

     11,785.0        7,354.0   

Repayments of Term Federal Funds Purchased

     (11,399.0     (7,160.0

Proceeds from Senior Notes & Long-Term Debt

     600.0        500.0   

Repayments of Senior Notes & Long-Term Debt

     (282.1     (139.0

Treasury Stock Purchased

     (3.9     (8.0

Net Proceeds from Stock Options

     13.1        30.9   

Excess Tax Benefits from Stock Incentive Plans

     1.0        3.5   

Cash Dividends Paid on Common Stock

     (135.5     (125.1

Proceeds from Common Stock Issuance

     —          834.5   

Cash Dividends Paid on Preferred Stock

     —          (46.6

Redemption of Preferred Stock—Series B

     —          (1,576.0

Other Financing Activities, net

     355.8        (4.5
                

Net Cash Used in Financing Activities

     (2,469.1     (6,321.4
                

Effect of Foreign Currency Exchange Rates on Cash

     (47.4     32.2   
                

Increase (Decrease) in Cash and Due from Banks

     1,032.4        (116.9

Cash and Due from Banks at Beginning of Year

     2,491.8        2,648.2   
                

Cash and Due from Banks at End of Period

   $ 3,524.2      $ 2,531.3   
                

Supplemental Disclosures of Cash Flow Information:

    

Interest Paid

   $ 173.5      $ 231.2   

Income Taxes Paid

     33.3        189.4   
                

 

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 June 30, 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 July 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses”. This guidance requires a greater level of disaggregated information about the credit quality of financing receivables and reserves for credit losses, including increased disclosure of credit quality indicators, past due information, and modifications of financing receivables. Disclosures regarding period end information are effective for interim and annual reporting periods ending on or after December 15, 2010. Disclosures regarding activity during a reporting period are effective for interim and annual reporting periods beginning on or after December 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 at the funds’ net asset values on a market approach.

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 within 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 June 30, 2010 and December 31, 2009, segregated by fair value hierarchy level.

 

(In Millions)

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

June 30, 2010

             

Securities

             

Available for Sale

             

U.S. Government

   $ 154.6    $ —      $ —      $ —        $ 154.6

Obligations of States and Political Subdivisions

     —        39.9      —        —          39.9

Government Sponsored Agency

     —        11,716.7      —        —          11,716.7

Corporate Debt

     —        2,969.3      —        —          2,969.3

Non-U.S. Government

     —        381.8      —        —          381.8

Residential Mortgage-Backed

     —        284.5      —        —          284.5

Other Asset-Backed

     —        1,622.1      —        —          1,622.1

Certificates of Deposit

     —        708.4      —        —          708.4

Auction Rate

     —        —        384.9      —          384.9

Other

     —        362.3      —        —          362.3
                                   

Total

     154.6      18,085.0      384.9      —          18,624.5
                                   

Trading Account

     —        11.6      —        —          11.6
                                   

Total

     154.6      18,096.6      384.9      —          18,636.1
                                   

Other Assets

             

Derivatives

             

Foreign Exchange Contracts

     —        3,025.9      —        —          3,025.9

Interest Rate Swap Contracts

     —        311.1      —        —          311.1

Interest Rate Option Contracts

     —        .1      —        —          .1

Credit Default Swap Contracts

     —        .1      —        —          .1
                                   

Total

     —        3,337.2      —        (1,712.4     1,624.8
                                   

All Other

     70.1      36.2      —        —          106.3
                                   

Total

     70.1      3,373.4      —        (1,712.4     1,731.1
                                   

Total Assets at Fair Value

   $ 224.7    $ 21,470.0    $ 384.9    $ (1,712.4   $ 20,367.2
                                   

Other Liabilities

             

Derivatives

             

Foreign Exchange Contracts

   $ —      $ 3,020.0    $ —      $ —        $ 3,020.0

Interest Rate Swap Contracts

     —        174.6      —        —          174.6

Interest Rate Option Contracts

     —        .1      —        —          .1

Credit Default Swap Contracts

     —        1.5      —        —          1.5
                                   

Total

     —        3,196.2      —        (1,709.4     1,486.8
                                   

All Other

     —        —        81.0      —          81.0
                                   

Total Liabilities at Fair Value

   $ —      $ 3,196.2    $ 81.0    $ (1,709.4   $ 1,567.8
                                   

 

* 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 June 30, 2010, derivative assets and liabilities shown above also include reductions of $220.7 million and $217.7 million, respectively, as a result of cash collateral received from and deposited with derivative counterparties.

 

8


Notes to Consolidated Financial Statements (continued)

 

(In Millions)

   Level 1    Level 2    Level 3    Netting*     Fair Value

December 31, 2009

             

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

Corporate Debt

     —        2,822.1      —        —          2,822.1

Non-U.S. Government

     —        80.6      —        —          80.6

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 and six months ended June 30, 2010 and 2009.

 

     Securities
Available for  Sale (1)
 

(In Millions)

   2010     2009  

Three Months Ended June 30

    

Fair Value at April 1

   $ 411.7      $ 476.3   

Total Realized and Unrealized:

    

Losses (Gains) Included in Earnings

     (2.1     .5   

Gains Included in Other Comprehensive Income

     2.0        9.8   

Purchases, Sales, Issuances, and Settlements, net

     (26.7     (11.1
                

Fair Value at June 30

   $ 384.9      $ 474.5   
                

Six Months Ended June 30

    

Fair Value at January 1

   $ 427.7      $ 453.1   

Total Realized and Unrealized:

    

Losses (Gains) Included in Earnings

     (2.6     2.7   

Gains (Losses) Included in Other Comprehensive Income

     (5.9     35.3   

Purchases, Sales, Issuances, and Settlements, net

     (34.3     (11.2
                

Fair Value at June 30

   $ 384.9      $ 474.5   
                

 

(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 June 30, 2010, the net unrealized gain related to these securities was $12.1 million; at December 31, 2009, the net unrealized gain was $18.0 million. 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 and six months ended June 30, 2010 and 2009.

 

     Other Liabilities  
     Derivatives (1)     All Other (2)  

(In Millions)

   2010    2009     2010     2009  

Three Months Ended June 30

         

Fair Value at April 1

   $ —      $ 322.4      $ 92.4      $ 108.9   

Total Realized and Unrealized (Gains) Losses:

         

Included in Earnings

     —        (130.1     1.5        (2.0

Included in Other Comprehensive Income

     —        —          —          —     

Purchases, Sales, Issuances, and Settlements, net

     —        (66.7     (12.9     6.1   
                               

Fair Value at June 30

   $ —      $ 125.6      $ 81.0      $ 113.0   
                               

Unrealized (Gains) Losses Included in Earnings Related to Financial Instruments Held at June 30

     —        (38.2     —          —     

 

(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.

 

10


Notes to Consolidated Financial Statements (continued)

 

     Other Liabilities  
     Derivatives (1)     All Other (2)  

(In Millions)

   2010    2009     2010     2009  

Six Months Ended June 30

         

Fair Value at January 1

   $ —      $ 314.1      $ 94.4      $ 104.2   

Total Realized and Unrealized (Gains) Losses:

         

Included in Earnings

     —        (121.8     (.7     (3.8

Included in Other Comprehensive Income

     —        —          —          —     

Purchases, Sales, Issuances, and Settlements, net

     —        (66.7     (12.7     12.6   
                               

Fair Value at June 30

   $ —      $ 125.6      $ 81.0      $ 113.0   
                               

Unrealized (Gains) Losses Included in Earnings Related to Financial Instruments Held at June 30

     —        (29.9     —          —     

 

(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.

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.

The following provides information regarding those assets measured at fair value on a nonrecurring basis at June 30, 2010 and 2009, segregated by fair value hierarchy level.

 

(In Millions)

   Level 1    Level 2    Level 3    Fair Value

June 30, 2010

           

Loans (1)

   $ —      $ —      $ 105.6    $ 105.6

Other Real Estate Owned (2)

     —        —        1.2      1.2
                           

Total Assets at Fair Value

   $ —      $ —      $ 106.8      106.8
                           

June 30, 2009

           

Loans (1)

   $ —      $ —      $ 72.5    $ 72.5

Other Real Estate Owned (2)

     —        —        .5      .5
                           

Total Assets at Fair Value

   $ —      $ —      $ 73.0    $ 73.0
                           

 

(1) Northern Trust provided an additional $4.5 million and $2.9 million of specific reserves to reduce the fair value of these loans during the three months ended June 30, 2010 and 2009, respectively. During the six months ended June 30, 2010 and 2009, these loans were reduced by $18.0 million and $20.7 million, respectively.
(2) Northern Trust charged $.5 million and $.1 million through other operating expenses during the three months ended June 30, 2010 and 2009, respectively, to reduce the fair values of Other Real Estate Owned (OREO) properties. During the six months ended June 30, 2010 and 2009, the fair values of OREO properties were reduced by $1.0 million and $.2 million, respectively, through charges to other operating expenses.

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.

 

11


Notes to Consolidated Financial Statements (continued)

 

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

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

Loans (excluding lease receivables). The fair 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.

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.

 

     June 30, 2010    December 31, 2009

(In Millions)

   Book Value    Fair Value    Book Value    Fair Value

Assets

           

Cash and Due from Banks

   $ 3,524.2    $ 3,524.2    $ 2,491.8    $ 2,491.8

Money Market Assets

     23,326.4      23,326.4      28,128.2      28,128.2

Securities:

           

Available for Sale

     18,624.5      18,624.5      17,462.1      17,462.1

Held to Maturity

     1,184.0      1,206.1      1,161.4      1,185.7

Trading Account

     11.6      11.6      9.9      9.9

Loans (excluding Leases)

           

Held for Investment

     27,038.8      27,266.6      26,497.0      26,539.1

Held for Sale

     1.9      1.9      4.2      4.2

Client Security Settlement Receivables

     861.7      861.7      794.8      794.8
     June 30, 2010    December 31, 2009

(In Millions)

   Book Value    Fair Value    Book Value    Fair Value

Liabilities

           

Deposits:

           

Demand, Noninterest-Bearing, and Savings and Money Market

     22,575.9      22,575.9      26,527.3      26,527.3

Savings Certificates, Other Time and Non U. S. Offices Time

     35,376.2      35,396.3      31,754.0      31,783.6

Federal Funds Purchased

     4,441.2      4,441.2      6,649.8      6,649.8

Securities Sold under Agreements to Repurchase

     633.0      633.0      1,037.5      1,037.5

Other Borrowings

     2,002.9      2,002.9      2,078.3      2,078.3

Senior Notes

     1,401.2      1,469.0      1,551.8      1,611.3

Long Term Debt (excluding Leases):

           

Subordinated Debt

     1,153.2      1,182.8      1,132.5      1,150.6

Federal Home Loan Bank Borrowings

     2,167.5      2,262.7      1,697.5      1,792.6

Floating Rate Capital Debt

     276.8      226.5      276.8      159.4

Financial Guarantees

     81.0      81.0      94.4      94.4

Loan Commitments

     25.1      25.1      25.7      25.7

 

13


Notes to Consolidated Financial Statements (continued)

 

     June 30, 2010    December 31, 2009

(In Millions)

   Book Value    Fair Value    Book Value    Fair Value

Derivative Instruments

           

Asset/Liability Management:

           

Foreign Exchange Contracts

           

Assets

   53.8    53.8    46.1    46.1

Liabilities

   60.7    60.7    51.0    51.0

Interest Rate Swap Contracts

           

Assets

   146.2    146.2    98.8    98.8

Liabilities

   12.4    12.4    4.2    4.2

Credit Default Swaps

           

Assets

   .1    .1    —      —  

Liabilities

   1.5    1.5    2.2    2.2

Client-Related and Trading:

           

Foreign Exchange Contracts

           

Assets

   2,972.1    2,972.1    2,032.2    2,032.2

Liabilities

   2,959.3    2,959.3    2,008.5    2,008.5

Interest Rate Swap Contracts

           

Assets

   164.9    164.9    114.9    114.9

Liabilities

   162.2    162.2    113.1    113.1

Interest Rate Option Contracts

           

Assets

   .1    .1    .4    .4

Liabilities

   .1    .1    .4    .4

4. Securities – The following tables provide the amortized cost and fair values of securities at June 30, 2010 and December 31, 2009.

 

Securities Available for Sale

   June 30, 2010
     Amortized    Gross Unrealized    Fair

(In Millions)

   Cost    Gains    Losses    Value

U.S. Government

   $ 154.6    $ —      $ —      $ 154.6

Obligations of States and Political Subdivisions

     37.8      2.1      —        39.9

Government Sponsored Agency

     11,668.5      54.9      6.7      11,716.7

Corporate Debt

     2,962.3      9.8      2.8      2,969.3

Non-U.S. Government Debt

     381.8      —        —        381.8

Residential Mortgage-Backed

     379.6      .1      95.2      284.5

Other Asset-Backed

     1,622.8      1.5      2.2      1,622.1

Certificates of Deposit

     708.4      —        —        708.4

Auction Rate

     372.8      15.1      3.0      384.9

Other

     360.0      2.5      .2      362.3
                           

Total

   $ 18,648.6    $ 86.0    $ 110.1    $ 18,624.5
                           

Securities Held to Maturity

   June 30, 2010
     Book    Gross Unrealized    Fair

(In Millions)

   Value    Gains    Losses    Value

Obligations of States and Political Subdivisions

   $ 664.3    $ 32.1    $ .4    $ 696.0

Government Sponsored Agency

     151.8      4.5      —        156.3

Other

     367.9      —        14.1      353.8
                           

Total

   $ 1,184.0    $ 36.6    $ 14.5    $ 1,206.1
                           

 

14


Notes to Consolidated Financial Statements (continued)

 

Securities Available for Sale

   December 31, 2009
     Amortized    Gross Unrealized    Fair

(In Millions)

   Cost    Gains    Losses    Value

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

Corporate Debt

     2,820.2      7.7      5.8      2,822.1

Non-U.S. Government Debt

     80.6      —        —        80.6

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
                           

Securities Held to Maturity

   December 31, 2009
     Book    Gross Unrealized    Fair

(In Millions)

   Value    Gains    Losses    Value

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
                           

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 $147.5 million, respectively, as of June 30, 2010, and $42.6 million and $147.0 million, respectively, as of December 31, 2009.

The following table provides the remaining maturity of securities as of June 30, 2010.

 

(In Millions)

   Amortized
Cost
   Fair
Value

Available for Sale

     

Due in One Year or Less

   $ 8,450.6    $ 8,418.0

Due After One Year Through Five Years

     9,430.3      9,459.7

Due After Five Years Through Ten Years

     411.0      397.1

Due After Ten Years

     166.6      159.6

Other Securities Without Stated Maturities

     190.1      190.1
             

Total

     18,648.6      18,624.5
             

Held to Maturity

     

Due in One Year or Less

     184.5      186.3

Due After One Year Through Five Years

     508.7      521.8

Due After Five Years Through Ten Years

     437.0      450.7

Due After Ten Years

     53.8      47.3
             

Total

   $ 1,184.0    $ 1,206.1
             

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 June 30, 2010 and December 31, 2009.

 

Securities with Unrealized Losses as of June 30, 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

   $ —      $ —      $ 3.2    $ .4    $ 3.2    $ .4

Government Sponsored Agency

     1,108.7      2.4      430.8      4.3      1,539.5      6.7

Corporate Debt

     1,102.5      2.6      99.8      .2      1,202.3      2.8

Residential Mortgage-Backed

     —        —        278.4      95.2      278.4      95.2

Other Asset-Backed

     591.4      2.1      95.3      .1      686.7      2.2

Auction Rate

     78.0      3.0      —        —        78.0      3.0

Other

     139.7      5.6      32.3      8.7      172.0      14.3
                                         

Total

   $ 3,020.3    $ 15.7    $ 939.8    $ 108.9    $ 3,960.1    $ 124.6
                                         

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 June 30, 2010, 257 securities with a combined fair value of $4.0 billion were in an unrealized loss position, with their unrealized losses totaling $124.6 million. The majority of the unrealized losses reflect the impact of credit and liquidity spreads on the valuations of 31 residential mortgage-backed securities with unrealized losses totaling $95.2 million, all of which have been in an unrealized loss position for more than 12 months. Residential mortgage-backed securities rated below double-A at June 30, 2010 represented 66% of the total fair value of residential mortgage-backed securities, were comprised primarily of sub-prime and Alt-A securities, and had a total amortized cost and fair value of $276.2 million and $188.4 million, respectively. Securities classified as “other asset-backed” at June 30, 2010 were predominantly floating rate with average lives less than 5 years, and 100% were rated triple-A.

Unrealized losses of $6.7 million related to government sponsored agency securities are primarily attributable to widened credit spreads since their purchase. The majority of the $14.3 million of unrealized losses in securities classified as “other” at June 30, 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

 

16


Notes to Consolidated Financial Statements (continued)

 

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. The remaining unrealized losses on Northern Trust’s securities portfolio as of June 30, 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.

The factors used in developing the expected loss on mortgage-backed securities vary by year of origination and type of collateral. As of June 30, 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.

 

17


Notes to Consolidated Financial Statements (continued)

 

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.

 

(In Millions)

  Three Months Ended
June 30, 2010
  Six Months Ended
June 30, 2010

Cumulative Credit-Related Losses on Securities – Beginning of Period

  $ 73.0   $ 73.0

Plus: Losses on Newly Identified Impairments

    —       —  

Additional Losses on Previously Identified Impairments

    .1     .1
           

Cumulative Credit-Related Losses on Securities – End of Period

  $ 73.1   $ 73.1
           

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

 

(In Millions)

   June 30,
2010
    December 31,
2009
    June 30,
2009
 

U.S.

      

Residential Real Estate

   $ 10,922.3      $ 10,807.7      $ 10,738.3   

Commercial

     6,059.7        6,312.1        7,322.4   

Commercial Real Estate

     3,229.1        3,213.2        3,118.5   

Personal

     4,975.9        4,965.8        4,790.6   

Other

     793.3        774.0        1,136.4   

Lease Financing, net

     1,039.0        1,004.4        983.3   
                        

Total U.S.

     27,019.3        27,077.2        28,089.5   

Non-U.S.

     1,385.5        728.5        937.6   
                        

Total Loans and Leases

     28,404.8        27,805.7        29,027.1   

Reserve for Credit Losses Assigned to Loans and Leases

     (326.7     (309.2     (297.3
                        

Net Loans and Leases

   $ 28,078.1      $ 27,496.5      $ 28,729.8   
                        

Other U.S. loans and non-U.S. loans included $1.7 billion at June 30, 2010, $1.0 billion at December 31, 2009, and $1.5 billion at June 30, 2009 of short duration advances, primarily related to overdrafts associated with the timing of custody clients’ investments.

The following table shows outstanding amounts of nonperforming and impaired loans as of June 30, 2010, December 31, 2009, and June 30, 2009.

 

(In Millions)

   June 30,
2010
   December 31,
2009
   June 30,
2009

Nonperforming Loans

   $ 345.5    $ 278.5    $ 227.9

Nonperforming Loans Classified as Impaired:

        

Impaired Loans with Reserves

     135.7      94.5      100.1

Impaired Loans without Reserves*

     147.2      133.6      119.7
                    

Total Impaired Loans**

   $ 282.9    $ 228.1    $ 219.8

Reserves for Impaired Loans

     51.8      43.8      39.7

Average Balance of Impaired Loans During the Period

     230.5      193.8      176.2

 

* 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 June 30, 2010 and December 31, 2009 were $27.1 million and $24.3 million, respectively, of loans deemed troubled debt restructurings.

 

18


Notes to Consolidated Financial Statements (continued)

 

At June 30, 2010, residential real estate loans totaling $1.9 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 $15.3 million at June 30, 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 June 30, 2010, legally binding commitments to extend credit totaled $25.1 billion compared with $25.7 billion at December 31, 2009, and $26.0 billion at June 30, 2009.

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

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 

(In Millions)

   2010     2009     2010     2009  

Balance at Beginning of Period

   $ 350.0      $ 303.3      $ 340.6      $ 251.1   

Charge-Offs

     (40.3     (45.0     (73.0     (50.4

Recoveries

     2.0        .3        4.1        3.0   
                                

Net Charge-Offs

     (38.3     (44.7     (68.9     (47.4

Provision for Credit Losses

     50.0        60.0        90.0        115.0   

Effect of Foreign Exchange Rates

     (.1     .5        (.1     .4   
                                

Balance at End of Period

   $ 361.6      $ 319.1      $ 361.6      $ 319.1   
                                

Reserve for Credit Losses Assigned to:

        

Loans and Leases

     326.7        297.3        326.7        297.3   

Unfunded Commitments and Standby Letters of Credit

     34.9        21.8        34.9        21.8   
                                

Total Reserve for Credit Losses

   $ 361.6      $ 319.1      $ 361.6      $ 319.1   
                                

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

7. Pledged Assets – Securities and loans pledged to secure public and trust deposits, repurchase agreements, and for other purposes as required or permitted by law were $22.9 billion on June 30, 2010, $24.1 billion on December 31, 2009, and $22.8 billion on June 30, 2009. Included in the June 30, 2010 pledged assets were securities available for sale of $646.9 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 June 30, 2010, December 31, 2009, and June 30, 2009 was $118.8 million, $227.9 million, and $124.3 million, respectively. There was no repledged collateral at June 30, 2010, December 31, 2009, or June 30, 2009.

 

19


Notes to Consolidated Financial Statements (continued)

 

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 June 30, 2010, December 31, 2009, and June 30, 2009.

 

(In Millions)

   June 30,
2010
   December 31,
2009
   June 30,
2009

Corporate and Institutional Services

   $ 326.2    $ 334.7    $ 338.4

Personal Financial Services

     66.8      66.9      66.9
                    

Total Goodwill

   $ 393.0    $ 401.6    $ 405.3
                    

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 June 30, 2010, December 31, 2009, and June 30, 2009, which include the effect of foreign exchange rates on non-U.S. dollar denominated intangible assets, were as follows:

 

(In Millions)

   June 30,
2010
   December 31,
2009
   June 30,
2009

Gross Carrying Amount

   $ 154.8    $ 157.0    $ 158.0

Accumulated Amortization

     103.8      96.3      88.1
                    

Net Book Value

   $ 51.0    $ 60.7    $ 69.9
                    

Other intangible assets consist primarily of the value of acquired client relationships. Amortization expense related to other intangible assets totaled $3.5 million and $4.0 million for the quarters ended June 30, 2010 and 2009, respectively, and $7.5 million and $7.9 million for the six months ended June 30, 2010 and 2009, respectively. Amortization for the remainder of 2010 and for the years 2011, 2012, 2013, and 2014 is estimated to be $7.4 million, $10.6 million, $10.3 million, $10.1 million and $10.0 million, respectively.

 

20


Notes to Consolidated Financial Statements (continued)

 

9. Business Units – The following tables show the earnings contribution of Northern Trust’s business units for the three and six month periods ended June 30, 2010 and 2009.

 

Three Months Ended June 30,

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

($ in Millions)

  2010     2009     2010     2009     2010     2009     2010     2009  

Noninterest Income

               

Trust, Investment and Other Servicing Fees

  $ 316.0      $ 390.9      $ 227.5      $ 210.5      $ —        $ —        $ 543.5      $ 601.4   

Other

    152.2        160.2        34.2        36.5        1.5        (13.1     187.9        183.6   

Net Interest Income (FTE)*

    67.2        108.3        148.0        130.4        27.2        21.4        242.4        260.1   
                                                               

Revenues*

    535.4        659.4        409.7        377.4        28.7        8.3        973.8        1,045.1   

Provision for Credit Losses

    (2.8     6.0        52.8        54.0        —          —          50.0        60.0   

Noninterest Expenses

    324.6        214.3        272.9        263.8        16.9        24.6        614.4        502.7   
                                                               

Income (Loss) before Income Taxes*

    213.6        439.1        84.0        59.6        11.8        (16.3     309.4        482.4   

Provision for Income Taxes*

    75.0        158.9        31.8        22.6        3.0        (13.3     109.8        168.2   
                                                               

Net Income (Loss)

  $ 138.6      $ 280.2      $ 52.2      $ 37.0      $ 8.8      $ (3.0   $ 199.6      $ 314.2   
                                                               

Percentage of Consolidated Net Income

    70     89     26     12     4     (1 )%      100     100
                                                               

Average Assets

  $ 37,278.0      $ 38,139.0      $ 23,577.3      $ 24,530.6      $ 13,430.5      $ 11,127.4      $ 74,285.8      $ 73,797.0   
                                                               

 

* Stated on a fully taxable equivalent basis (FTE). Total consolidated includes FTE adjustments of $9.6 million for 2010 and $9.9 million for 2009.

 

Six Months Ended June 30,

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

($ in Millions)

  2010     2009     2010     2009     2010     2009     2010     2009  

Noninterest Income

               

Trust, Investment and Other Servicing Fees

  $ 613.3      $ 597.9      $ 445.3      $ 414.2      $ —        $ —        $ 1,058.6      $ 1,012.1   

Other

    270.0        329.9        66.7        69.0        3.6        (9.5     340.3        389.4   

Net Interest Income (FTE)*

    140.7        255.3        288.3        262.5        53.5        30.0        482.5        547.8   
                                                               

Revenues*

    1,024.0        1,183.1        800.3        745.7        57.1        20.5        1,881.4        1,949.3   

Provision for Credit Losses

    (8.5     19.6        98.5        95.4        —          —          90.0        115.0   

Noninterest Expenses

    647.3        541.9        539.5        516.5        47.3        37.8        1,234.1        1,096.2   
                                                               

Income (Loss) before Income Taxes*

    385.2        621.6        162.3        133.8        9.8        (17.3     557.3        738.1   

Provision for Income Taxes*

    135.8        222.3        61.5        51.0        3.2        (11.2     200.5        262.1   
                                                               

Net Income (Loss)

  $ 249.4      $ 399.3      $ 100.8      $ 82.8      $ 6.6      $ (6.1   $ 356.8      $ 476.0   
                                                               

Percentage of Consolidated Net Income

    70     84     28     17     2     (1 )%      100     100
                                                               

Average Assets

  $ 37,305.5      $ 40,557.4      $ 23,543.5      $ 24,475.4      $ 13,735.9      $ 10,533.6      $ 74,584.9      $ 75,566.4   
                                                               

 

* Stated on a fully taxable equivalent basis (FTE). Total consolidated includes FTE adjustments of $19.3 million for 2010 and $20.5 million for 2009.

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

 

21


Notes to Consolidated Financial Statements (continued)

 

10. Accumulated Other Comprehensive Income (Loss) – The following tables summarize the components of accumulated other comprehensive income (loss) at June 30, 2010 and 2009, and changes during the three and six 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 June 30, 2010

        

Noncredit-Related Unrealized Losses on Securities OTTI

   $ (35.3   $ .2      $ —        $ (35.1

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

     6.5        11.9        (4.4     14.0   

Less: Reclassification Adjustments

     .2        —          —          .2   
                                

Net Unrealized Gains (Losses) on Securities Available for Sale

     (29.0     12.1        (4.4     (21.3

Unrealized Gains (Losses) on Cash Flow Hedge Designations

     (5.9     (18.3     6.6        (17.6

Less: Reclassification Adjustments

     (1.3     (.7     .2        (1.8
                                

Net Unrealized Gains (Losses) on Cash Flow Hedge Designations

     (4.6     (17.6     6.4        (15.8

Foreign Currency Translation Adjustments

     (.1     41.3        (26.9     14.3   

Pension and Other Postretirement Benefit Adjustments

     (304.6     1.5        (.2     (303.3

Less: Reclassification Adjustments

     (5.8     (6.1     1.1        (10.8
                                

Total Pension and Other Postretirement Benefit Adjustments

     (298.8     7.6        (1.3     (292.5
                                

Accumulated Other Comprehensive Income (Loss)

   $ (332.5   $ 43.4      $ (26.2   $ (315.3
                                
     Period Change  

(In Millions)

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

Three Months Ended June 30, 2009

        

Cummulative Effect of Applying FSP FAS 115-2

   $ —        $ (15.0   $ 5.5      $ (9.5

Noncredit-Related Unrealized Losses on Securities OTTI

     —          (98.1     36.0        (62.1

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

     (170.6     214.0        (78.5     (35.1

Less: Reclassification Adjustments

     —          (16.9     6.2        (10.7
                                

Net Unrealized Gains (Losses) on Securities Available for Sale

     (170.6     132.8        (48.7     (86.5

Unrealized Gains (Losses) on Cash Flow Hedge Designations

     (13.9     20.4        (7.5     (1.0

Less: Reclassification Adjustments

     —          2.9        (1.0     1.9   
                                

Net Unrealized Gains (Losses) on Cash Flow Hedge Designations

     (13.9     17.5        (6.5     (2.9

Foreign Currency Translation Adjustments

     9.3        (49.8     54.6        14.1   

Pension and Other Postretirement Benefit Adjustments

     (270.9     —          —          (270.9

Less: Reclassification Adjustments

     —          4.9        (2.6     2.3   
                                

Total Pension and Other Postretirement Benefit Adjustments

     (270.9     4.9        (2.6     (268.6
                                

Accumulated Other Comprehensive Income (Loss)

   $ (446.1   $ 90.4      $ 2.3      $ (353.4
                                

 

22


Notes to Consolidated Financial Statements (continued)

 

     Period Change  

(In Millions)

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

Six Months Ended June 30, 2010

        

Noncredit-Related Unrealized Losses on Securities OTTI

   $ (42.0   $ 10.9      $ (4.0   $ (35.1

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

     .3        21.8        (8.1     14.0   

Less: Reclassification Adjustments

     —          .3        (.1     .2   
                                

Net Unrealized Gains (Losses) on Securities Available for Sale

     (41.7     32.4        (12.0     (21.3

Unrealized Gains (Losses) on Cash Flow Hedge Designations

     (26.2     13.7        (5.1     (17.6

Less: Reclassification Adjustments

     —          (2.8     1.0        (1.8
                                

Net Unrealized Gains (Losses) on Cash Flow Hedge Designations

     (26.2     16.5        (6.1     (15.8

Foreign Currency Translation Adjustments

     11.3        63.7        (60.7     14.3   

Pension and Other Postretirement Benefit Adjustments

     (305.0     2.2        (.5     (303.3

Less: Reclassification Adjustments

     —          (12.6     1.8        (10.8
                                

Total Pension and Other Postretirement Benefit Adjustments

     (305.0     14.8        (2.3     (292.5
                                

Accumulated Other Comprehensive Income (Loss)

   $ (361.6   $ 127.4      $ (81.1   $ (315.3
                                
     Period Change  

(In Millions)

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

Six Months Ended June 30, 2009

        

Cummulative Effect of Applying FSP FAS 115-2

   $ —        $ (15.0   $ 5.5      $ (9.5

Noncredit-Related Unrealized Losses on Securities OTTI

     —          (98.1     36.0        (62.1

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

     (212.9     281.0        (103.1     (35.0

Less: Reclassification Adjustments

     —          (16.7     6.1        (10.6
                                

Net Unrealized Gains (Losses) on Securities Available for Sale

     (212.9     199.6        (73.2     (86.5

Unrealized Gains (Losses) on Cash Flow Hedge Designations

     (20.7     39.4        (14.6     4.1   

Less: Reclassification Adjustments

     —          11.0        (4.0     7.0   
                                

Net Unrealized Gains (Losses) on Cash Flow Hedge Designations

     (20.7     28.4        (10.6     (2.9

Foreign Currency Translation Adjustments

     12.8        (36.6     37.9        14.1   

Pension and Other Postretirement Benefit Adjustments

     (274.1     —          —          (274.1

Less: Reclassification Adjustments

     —          9.8        (4.3     5.5   
                                

Total Pension and Other Postretirement Benefit Adjustments

     (274.1     9.8        (4.3     (268.6
                                

Accumulated Other Comprehensive Income (Loss)

   $ (494.9   $ 186.2      $ (44.7   $ (353.4
                                

 

23


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
June 30,
  Six Months Ended
June 30,

(In Millions Except Share Information)

  2010   2009   2010   2009

Basic Net Income Per Common Share

       

Average Number of Common Shares Outstanding

    242,045,799     235,455,068     241,885,877     229,439,676

Net Income

  $ 199.6   $ 314.2   $ 356.8   $ 476.0

Less: Dividends on Preferred Stock

    —       16.7     —       36.4

Preferred Stock Discount Accretion

    —       71.4     —       74.7
                       

Net Income Applicable to Common Stock

    199.6     226.1     356.8     364.9

Less: Earnings Allocated to Participating Securities

    1.6     1.5     2.9     2.7
                       

Earnings Allocated to Common Shares Outstanding

  $ 198.0   $ 224.6   $ 353.9   $ 362.2

Basic Net Income Per Common Share

    .82     .95     1.46     1.58
                       

Diluted Net Income Per Common Share

       

Average Number of Common Shares Outstanding

    242,045,799     235,455,068     241,885,877     229,439,676

Plus Stock Option Dilution

    551,267     891,418     669,583     967,369
                       

Average Common and Potential Common Shares

    242,597,066     236,346,486     242,555,460     230,407,045

Earnings Allocated to Common and Potential Common Shares

  $ 198.0   $ 224.6   $ 353.9   $ 362.2

Diluted Net Income Per Common Share

    .82     .95     1.46     1.57
                       

Note: Common stock equivalents totaling 6,917,382 and 8,554,802 for the three and six months ended June 30, 2010, respectively, and 5,964,892 and 5,968,052 for the three and six months ended June 30, 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
June 30,
   Six Months Ended
June 30,

(In Millions)

   2010    2009    2010    2009

Interest Income

           

Loans and Leases

   $ 226.2    $ 239.6    $ 455.0    $ 483.1

Securities – Taxable

     50.1      53.2      94.8      109.6

  – Non-Taxable

     7.3      8.4      14.8      17.5

Time Deposits with Banks

     31.6      51.3      60.6      132.5

Federal Reserve Deposits and Other

     2.7      2.2      7.0      5.8
                           

Total Interest Income

     317.9      354.7      632.2      748.5
                           

Interest Expense

           

Deposits

     41.5      52.3      81.4      117.7

Federal Funds Purchased

     1.6      1.0      2.8      2.4

Securities Sold Under Agreements to Repurchase

     .3      .3      .5      .7

Other Borrowings

     1.5      1.1      2.7      2.1

Senior Notes

     11.4      11.3      22.9      19.9

Long-Term Debt

     28.2      37.3      57.7      75.7

Floating Rate Capital Debt

     .6      1.2      1.0      2.7
                           

Total Interest Expense

     85.1      104.5      169.0      221.2
                           

Net Interest Income

   $ 232.8    $ 250.2    $ 463.2    $ 527.3
                           

 

24


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 $43.4 million at June 30, 2010, $56.1 million at December 31, 2009, and $73.9 million at June 30, 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. On June 1, 2010, Visa deposited additional funds into its litigation escrow account. Accordingly, Northern Trust recorded its proportionate share of the deposit, $12.7 million, as a reduction to the Visa related indemnification liability and related charges. 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 $100.2 million was recorded in the current quarter and resulted in an effective tax rate of 33.4%. The prior year quarter provision for income taxes was $158.3 million, representing an effective tax rate of 33.5%.

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.

 

25


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 and six months ended June 30, 2010 and 2009.

 

Net Periodic Pension Expense

U.S. Plan

   Three Months Ended
June 30
    Six Months Ended
June 30
 

(In Millions)

   2010     2009     2010     2009  

Service Cost

   $ 9.5      $ 8.3      $ 19.0      $ 16.6   

Interest Cost

     9.2        8.3        18.4        16.6   

Expected Return on Plan Assets

     (18.3     (14.9     (36.6     (29.8

Amortization:

        

Net Loss

     5.0        3.0        10.0        6.0   

Prior Service Cost

     .4        .3        .8        .6   
                                

Net Periodic Pension Expense

   $ 5.8      $ 5.0      $ 11.6      $ 10.0   
                                

Net Periodic Pension Expense

Non U.S. Plans

   Three Months Ended
June 30
    Six Months Ended
June 30
 

(In Millions)

   2010     2009     2010     2009  

Service Cost

   $ .6      $ .9      $ 1.6      $ 1.8   

Interest Cost

     1.5        1.7        3.3        3.3   

Expected Return on Plan Assets

     (1.8     (2.0     (3.9     (3.9

Net Loss Amortization

     —          .3        .4        .6   

Gain on Curtailment of one Non-U.S.

     (2.2     —          (2.2     —     
                                

Net Periodic Pension Expense

   $ (1.9   $ .9      $ (.8   $ 1.8   
                                

Net Periodic Pension Expense

Supplemental Plan

   Three Months Ended
June 30
    Six Months Ended
June 30
 

(In Millions)

   2010     2009     2010     2009  

Service Cost

   $ .8      $ .6      $ 1.6      $ 1.2   

Interest Cost

     1.2        1.0        2.4        2.0   

Net Loss Amortization

     1.5        1.0        3.0        2.0   
                                

Net Periodic Pension Expense

   $ 3.5      $ 2.6      $ 7.0      $ 5.2   
                                

Net Periodic Pension Expense

Other Postretirement Plan

   Three Months Ended
June 30
    Six Months Ended
June 30
 

(In Millions)

   2010     2009     2010     2009  

Service Cost

   $ .2      $ .4      $ .4      $ .8   

Interest Cost

     .7        .9        1.4        1.8   

Amortization:

        

Transition Obligation

            .2               .4   

Net Loss

     .5        .1        1.0        .2   

Prior Service Credit

     (1.3            (2.6       
                                

Net Periodic Pension Expense

   $ .1      $ 1.6      $ .2      $ 3.2   
                                

 

26


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.

Total compensation expense for share-based payment arrangements and the associated tax impacts were as follows:

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
 

(In Millions)

   2010    2009    2010    2009  

Stock Options

   $ 5.5    $ 4.3    $ 17.3    $ 9.8   

Stock and Stock Unit Awards

     6.4      4.4      12.2      8.7   

Performance Stock Units

     —        1.7      —        (13.2
                             

Total Share-Based Compensation Expense

     11.9      10.4      29.5      5.3   

Tax (Cost) Benefits Recognized

   $ 4.4    $ 3.8    $ 10.8    $ 1.9   
                             

Share-based compensation expense for the six months ended June 30, 2009 reflects the reversal of accruals related to performance stock units which were not expected to vest.

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 an asset manager of funds, the Corporation earns a competitively priced fee that is based on assets managed and varies with each fund’s investment objective. Under GAAP, certain of these funds are considered variable interest entities (VIE). Based on its analysis under existing consolidation accounting guidance, Northern Trust’s interests in funds considered VIEs are not considered significant variable interests under GAAP.

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 $4.4 billion on June 30, 2010, $4.8 billion on December 31, 2009 and $4.8 billion on June 30, 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 $37.6 million at June 30, 2010, $38.3 million at December 31, 2009, and $39.1 million at June 30, 2009.

 

27


Notes to Consolidated Financial Statements (continued)

 

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 $80.0 billion at June 30, 2010, $82.3 billion at December 31, 2009, and $75.5 billion at June 30, 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 June 30, 2010, December 31, 2009, or June 30, 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 $43.4 million at June 30, 2010, $56.1 million at December 31, 2009, and $73.9 million at June 30, 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 parties, the Corporation cannot state with confidence the eventual outcome of these pending matters, the timing of their ultimate resolution, or what the eventual loss, fines or penalties, if any, related to each pending matter will be.

In accordance with applicable accounting guidance, the Corporation records accruals for litigation and regulatory matters when those matters present loss contingencies that are both probable and reasonably estimable. When loss contingencies are not both probable and reasonably estimable, the Corporation does not record accruals. No material accruals have been recorded for pending litigation or threatened legal actions or regulatory matters. In certain matters for which the Corporation has recorded an accrual and other pending matters, there may be a range of possible losses (including possible losses in excess of amounts accrued), which either cannot be estimated or, to the extent a range could possibly be determined, the range would be so imprecise, uncertain or wide, that it would not be meaningful.

 

28


Notes to Consolidated Financial Statements (continued)

 

Based on current knowledge, after consultation with legal counsel and after taking into account current accruals, management does not believe that losses, if any, arising from pending litigation or threatened legal actions or regulatory matters will have a material adverse effect on the consolidated financial position or liquidity of the Corporation, although such matters could have a material adverse effect on the Corporation’s operating results for a particular period. Following is a description of the nature of certain of these matters.

As previously disclosed, 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.

 

29


Notes to Consolidated Financial Statements (continued)

 

Credit default swap contracts are agreements to transfer credit default risk from one pa