Form 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the Quarterly Period Ended September 30, 2013

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

  

238,983,842 Shares - $1.66 2/3 Par Value

(Shares of Common Stock Outstanding on September 30, 2013)

 

 

 


CONSOLIDATED FINANCIAL HIGHLIGHTS

(UNAUDITED)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 

FOR THE PERIOD (In Millions)

   2013     2012     % Change (*)     2013     2012     % Change (*)  

Noninterest Income

            

Trust, Investment and Other Servicing Fees

   $ 648.0      $ 601.9        8   $ 1,936.0      $ 1,782.9        9

Foreign Exchange Trading Income

     62.8        44.0        43        193.6        165.3        17   

Treasury Management Fees

     17.6        16.3        8        51.5        51.0        1   

Security Commissions and Trading Income

     16.8        17.9        (6     53.4        53.6        —     

Other Operating Income

     67.2        46.6        44        128.3        119.2        8   

Investment Security Gains (Losses), net

     (2.2     0.2        N/M        (1.9     (1.7     10   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Noninterest Income

     810.2        726.9        11        2,360.9        2,170.3        9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Interest Income

     237.0        245.6        (4     683.2        756.1        (10

Provision for Credit Losses

     5.0        10.0        (50     15.0        20.0        (25
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Interest Income after Provision for Credit Losses

     232.0        235.6        (2     668.2        736.1        (9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest Expense

            

Compensation

     324.6        315.7        3        971.8        951.1        2   

Employee Benefits

     63.5        61.3        4        191.0        194.3        (2

Outside Services

     145.9        126.6        15        412.0        388.5        6   

Equipment and Software

     95.5        86.0        11        279.0        276.2        1   

Occupancy

     43.3        43.8        (1     130.0        128.2        1   

Other Operating Expense

     67.9        63.0        8        215.5        199.0        8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Noninterest Expense

     740.7        696.4        6        2,199.3        2,137.3        3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before Income Taxes

     301.5        266.1        13        829.8        769.1        8   

Provision for Income Taxes

     95.0        87.3        9        268.2        249.5        8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

   $ 206.5      $ 178.8        15   $ 561.6      $ 519.6        8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average Total Assets

   $ 95,212.5      $ 92,709.9        3   $ 93,223.5      $ 93,413.6        —  

PER COMMON SHARE

            
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income – Basic

   $ 0.85      $ 0.73        16   $ 2.31      $ 2.13        8

                    – Diluted

     0.84        0.73        15        2.29        2.12        8   

Cash Dividends Declared Per Common Share

     0.31        0.30        3        0.92        0.88        5   

Book Value – End of Period (EOP)

     32.71        31.41        4        32.71        31.41        4   

Market Price – EOP

     54.38        46.42        17        54.38        46.42        17   

RATIOS

            
  

 

 

   

 

 

     

 

 

   

 

 

   

Return on Average Common Equity

     10.64     9.59       9.84     9.52  

Return on Average Assets

     0.86        0.77          0.81        0.74     

Dividend Payout Ratio

     36.9        41.1          40.2        41.5     

Average Stockholders’ Equity to Average Assets

     8.1        8.0          8.2        7.8     
  

 

 

   

 

 

     

 

 

   

 

 

   

PERIOD END (In Millions)

   September 30,
2013
    December 31,
2012
    % Change (*)        

Assets

   $ 95,969.5      $ 97,463.8        (2 )%   

Earning Assets

     86,413.4        87,472.7        (1  

Deposits

     78,161.7        81,407.8        (4  

Stockholders’ Equity

     7,817.1        7,527.0        4     

PERIOD END CLIENT ASSETS (In Billions)

        
  

 

 

   

 

 

   

 

 

   

Assets Under Custody

   $ 5,237.0      $ 4,804.9        9  

Assets Under Management

     846.2        758.9        12     

RATIOS

        
  

 

 

   

 

 

     

Tier 1 Capital to Risk-Weighted Assets – EOP

     13.6     12.8    

Total Capital to Risk-Weighted Assets – EOP

     14.9        14.3       

Tier 1 Leverage Ratio

     8.3        8.2       
  

 

 

   

 

 

     

 

(*) Percentage calculations are based on actual balances rather than the rounded amounts presented in the Consolidated Financial Highlights.

 

2


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

THIRD QUARTER CONSOLIDATED RESULTS OF OPERATIONS

General

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

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

Overview

Net income per common share in the third quarter of 2013 was $0.84 compared to $0.73 per common share in the third quarter of 2012. Net income for the current quarter was $206.5 million, up $27.7 million, or 15%, from $178.8 million in the prior year quarter. The performance in the current quarter produced an annualized return on average common equity of 10.6% as compared to 9.6% in the prior year quarter. The annualized return on average assets was 0.9% in the current quarter and 0.8% in the prior year quarter.

The current quarter includes a $32.6 million pre-tax gain ($20.3 million after tax, or $0.08 per common share) on the sale of an office building property. Excluding the current quarter gain, net income per diluted common share, net income, and return on average common equity would have been $0.76, $186.2 million, and 9.6%, respectively.

Consolidated revenue of $1.05 billion in the current quarter was up $74.7 million, or 8%, from $972.5 million in the prior year quarter. Noninterest income, which represented 77% of revenue, increased $83.3 million, or 11%, to $810.2 million from the prior year quarter’s $726.9 million, primarily reflecting higher trust, investment and other servicing fees; other operating income; and foreign exchange trading income.

Net interest income for the quarter decreased $8.6 million, or 4%, to $237.0 million as compared to $245.6 million in the prior year quarter, primarily due to a decrease in the net interest margin.

Noninterest expense totaled $740.7 million in the current quarter, up $44.3 million, or 6%, from $696.4 million in the prior year quarter, primarily reflecting higher outside services, equipment and software, and compensation expense.

 

3


Noninterest Income

The components of noninterest income are provided below.

 

Noninterest Income

   Three Months Ended September 30,  

($ In Millions)

   2013     2012      Change  

Trust, Investment and Other Servicing Fees

   $ 648.0      $ 601.9       $ 46.1        8

Foreign Exchange Trading Income

     62.8        44.0         18.8        43   

Treasury Management Fees

     17.6        16.3         1.3        8   

Security Commissions and Trading Income

     16.8        17.9         (1.1     (6

Other Operating Income

     67.2        46.6         20.6        44   

Investment Security Gains (Losses), net

     (2.2     0.2         (2.4     N/M   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Noninterest Income

   $ 810.2      $ 726.9       $ 83.3        11
  

 

 

   

 

 

    

 

 

   

 

 

 

Trust, investment and other servicing fees are based generally on the market value of assets held in custody, managed and serviced; the volume of transactions; securities lending volume and spreads; and fees for other services rendered. Certain market value fee calculations are performed on a monthly or quarterly basis and can be based on the beginning, ending or daily average value of the client portfolio. Certain investment management fee arrangements also may provide for performance fees based on client portfolio returns that exceed predetermined levels.

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

 

Assets Under Custody

($ In Billions)

   September 30,
2013
     June 30,
2013
     September 30,
2012
     Change
Q3-13/
Q2-13
    Change
Q3-13/
Q3-12
 

Corporate and Institutional

   $ 4,766.5       $ 4,538.9       $ 4,331.9         5     10

Wealth Management

     470.5         452.6         429.5         4        10   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Assets Under Custody

   $ 5,237.0       $ 4,991.5       $ 4,761.4         5     10
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

Assets Under Management

($ In Billions)

   September 30,
2013
     June 30,
2013
     September 30,
2012
     Change
Q3-13/
Q2-13
    Change
Q3-13/
Q3-12
 

Corporate and Institutional

   $ 634.6       $ 600.5       $ 565.6         6     12

Wealth Management

     211.6         202.5         184.1         4        15   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Assets Under Management

   $ 846.2       $ 803.0       $ 749.7         5     13
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

C&IS assets under custody totaled $4.8 trillion, up 10% from the prior year quarter, and included $3.0 trillion of global custody assets, 13% higher compared to the prior year quarter. C&IS assets under management included $104.6 billion of securities lending collateral, a 7% increase from the prior year quarter.

Changes in assets under custody and under management are in comparison to the twelve month increase in the S&P 500 index and EAFE index (USD) of 16.7% and 20.4%, respectively.

 

4


Noninterest Income (continued)

 

Custodied and managed assets were invested as follows at September 30:

 

     2013     2012  
      C&IS     WM     Consolidated     C&IS     WM     Consolidated  

Assets Under Custody

            

Equities

     46     53     47     44     47     44

Fixed Income Securities

     35        23        34        36        25        36   

Cash and Other Assets

     19        24        19        20        28        20   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Assets Under Management

            

Equities

     54     45     52     50     37     47

Fixed Income Securities

     13        28        17        16        32        20   

Cash and Other Assets

     33        27        31        34        31        33   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Trust, investment and other servicing fees in C&IS increased $25.4 million, or 8%, to $359.8 million in the current quarter from the prior year quarter’s $334.4 million.

 

C&IS Trust, Investment and Other Servicing Fees

   Three Months Ended September 30,  

($ In Millions)

   2013      2012      Change  

Custody and Fund Administration

   $ 239.4       $ 214.4       $ 25.0        12

Investment Management

     71.3         73.2         (1.9     (3

Securities Lending

     22.7         23.8         (1.1     (5

Other

     26.4         23.0         3.4        15   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 359.8       $ 334.4       $ 25.4        8
  

 

 

    

 

 

    

 

 

   

 

 

 

Custody and fund administration fees, the largest component of C&IS fees, increased 12%, primarily driven by favorable equity markets and new business. C&IS investment management fees decreased 3%, primarily due to higher waived fees in money market mutual funds, partially offset by favorable equity markets and new business. Money market mutual fund fee waivers in C&IS, attributable to persistently low short-term interest rates, totaled $15.3 million in the current quarter, compared to waived fees of $6.5 million in the prior year quarter. Securities lending revenue decreased 5%, primarily reflecting lower spreads in the current quarter, partially offset by higher volumes.

Trust, investment and other servicing fees in Wealth Management totaled $288.2 million in the current quarter, increasing $20.7 million, or 8%, from $267.5 million in the prior year quarter. The increased fees in the current quarter are primarily due to new business and the favorable impact of equity markets on fees, partially offset by higher waived fees in money market mutual funds. Money market mutual fund fee waivers in Wealth Management totaled $17.1 million in the current quarter compared with $10.3 million in the prior year quarter.

Foreign exchange trading income totaled $62.8 million, up $18.8 million, or 43%, compared with $44.0 million in the prior year quarter. The current quarter increase is attributable to higher currency market volatility and trading volumes compared to the prior year quarter.

 

5


Noninterest Income (continued)

 

Other operating income totaled $67.2 million in the current quarter, up $20.6 million, or 44%, from $46.6 million in the prior year quarter. The current quarter includes the $32.6 million pre-tax gain on the sale of an office building property. The prior year quarter included a $5.3 million gain on foreign exchange contracts related to hedges of certain investments in foreign currency denominated subsidiaries. Excluding the current and prior year quarter gains, other operating income decreased $6.7 million. The components of other operating income are provided below.

 

Other Operating Income

   Three Months Ended September 30,  

($ In Millions)

   2013      2012      Change  

Loan Service Fees

   $ 15.8       $ 16.7       $ (0.9     (5 )% 

Banking Service Fees

     12.8         13.8         (1.0     (7

Other Income

     38.6         16.1         22.5        139   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Other Operating Income

   $ 67.2       $ 46.6       $ 20.6        44
  

 

 

    

 

 

    

 

 

   

 

 

 

Net investment security losses totaled $2.2 million, reflecting realized losses on the sale of securities in the current quarter.

Net Interest Income

Net interest income for the quarter on an FTE basis totaled $244.8 million, down $12.1 million, or 5%, compared to $256.9 million in the prior year quarter. The decrease is primarily the result of a decline in the net interest margin to 1.14% from 1.21% in the prior year quarter, partially offset by higher levels of average earning assets. The decline in the net interest margin primarily reflects lower yields on earning assets, partially offset by a lower cost of interest-related funds due to lower short-term interest rates. Average earning assets for the quarter were $85.5 billion, up $1.0 billion, or 1%, from $84.5 billion in the prior year quarter. Net interest income is defined as the total of interest income and amortized fees on earning assets, less interest expense on deposits and borrowed funds, adjusted for the impact of interest-related hedging activity. Net interest income stated on an FTE basis is a non-generally accepted accounting principle (GAAP) financial measure that facilitates the analysis of asset yields. When adjusted to an FTE basis, yields on taxable, nontaxable, and partially taxable assets are comparable; however, the adjustment to an FTE basis has no impact on net income. A reconciliation of net interest income on a GAAP basis to net interest income on an FTE basis is provided on page 23.

Federal Reserve deposits and other interest-bearing assets averaged $8.0 billion in the current quarter as compared to $6.1 billion in the prior year quarter, an increase of $1.9 billion, or 31%.

Average securities, inclusive of Federal Reserve and Federal Home Loan Bank stock and certain community development investments, which are classified in other assets in the consolidated balance sheet, were $30.6 billion, up $698.3 million, or 2%, from $29.9 billion in the prior year quarter.

 

6


Net Interest Income (continued)

 

Loans and leases averaged $28.7 billion in the current quarter, down $383.6 million, or 1%, from $29.0 billion in the prior year quarter. Commercial and institutional loans averaged $7.2 billion in the current quarter, down $205.5 million, or 3%, from the prior year quarter’s average of $7.4 billion. Residential real estate loans averaged $10.1 billion in the current quarter, down $308.4 million, or 3%, from the prior year quarter’s average of $10.4 billion.

Northern Trust utilizes a diverse mix of funding sources. Total interest-bearing deposits averaged $59.3 billion in the current quarter, compared to $55.7 billion in the prior year quarter, an increase of $3.6 billion, or 7%. Other interest-bearing funds averaged $8.9 billion in the current quarter, an increase of $2.5 million, or 40%, from $6.4 billion in the prior year quarter, primarily attributable to an increase in short-term borrowings, partially offset by a decrease in long-term debt and senior notes. The balances within short-term borrowing classifications vary based on funding requirements and strategies, interest rate levels, changes in the volume of lower-cost deposit sources, and the availability of collateral to secure these borrowings. Average net noninterest-related funds utilized to fund earning assets decreased $5.2 billion, or 23%, to $17.3 billion from $22.5 billion in the prior year quarter, resulting primarily from lower levels of demand and other noninterest-bearing deposits.

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

Provision for Credit Losses

The provision for credit losses was $5.0 million in the current quarter compared to $10.0 million in the prior year quarter. Net charge-offs were $8.3 million in the current quarter resulting from $11.6 million of charge-offs and $3.3 million of recoveries, compared to $11.9 million of net charge-offs in the prior year quarter resulting from $16.3 million of charge-offs and $4.4 million of recoveries. Nonperforming assets declined slightly from the prior year quarter. Residential real estate loans accounted for 70% and 66% of total nonperforming loans and leases at September 30, 2013 and 2012, respectively. For additional discussion of the provision and allowance for credit losses, refer to the “Asset Quality” section beginning on page 18.

 

7


Noninterest Expense

The components of noninterest expense are provided below.

 

Noninterest Expense

   Three Months Ended September 30,  

($ In Millions)

   2013      2012      Change  

Compensation

   $ 324.6       $ 315.7       $ 8.9        3

Employee Benefits

     63.5         61.3         2.2        4   

Outside Services

     145.9         126.6         19.3        15   

Equipment and Software

     95.5         86.0         9.5        11   

Occupancy

     43.3         43.8         (0.5     (1

Other Operating Expense

     67.9         63.0         4.9        8   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Noninterest Expense

   $ 740.7       $ 696.4       $ 44.3        6
  

 

 

    

 

 

    

 

 

   

 

 

 

Compensation expense, the largest component of noninterest expense, equaled $324.6 million, up $8.9 million, or 3%, from $315.7 million in the prior year quarter, attributable to higher staff levels. Staff on a full-time equivalent basis at September 30, 2013 totaled approximately 14,600, up 3% from a year ago. Employee benefit expense equaled $63.5 million, up 4% from $61.3 million in the prior year quarter.

Expense associated with outside services totaled $145.9 million, up $19.3 million, or 15%, from $126.6 million in the prior year quarter. The current quarter increase is primarily due to higher consulting and technical services expense, including costs associated with a growing set of regulatory and compliance requirements.

Equipment and software expense totaled $95.5 million, up $9.5 million, or 11%, from $86.0 million in the prior year quarter. The current quarter includes higher software amortization associated with the continued investment in technology related assets. Occupancy expense equaled $43.3 million, relatively unchanged from $43.8 million in the prior year quarter.

Other operating expense totaled $67.9 million compared with $63.0 million in the prior year quarter, an increase of 8%. The components of other operating expense are provided below.

 

Other Operating Expense

   Three Months Ended September 30,  

($ In Millions)

   2013      2012      Change  

Business Promotion

   $ 17.9       $ 16.4       $ 1.5        9

FDIC Insurance Premiums

     6.6         5.7         0.9        16   

Staff Related

     7.3         10.9         (3.6     (33

Other Intangible Amortization

     5.2         5.2         —          —     

Other Expenses

     30.9         24.8         6.1        25   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Other Operating Expense

   $ 67.9       $ 63.0       $ 4.9        8
  

 

 

    

 

 

    

 

 

   

 

 

 

The increase in the “other expenses” component of other operating expense reflects increases in various miscellaneous expense categories.

 

8


Provision for Income Taxes

Income tax expense was $95.0 million in the current quarter, representing an effective tax rate of 31.5%, and $87.3 million in the prior year quarter, representing an effective tax rate of 32.8%.

BUSINESS UNIT REPORTING

The following tables reflect the earnings contributions and average assets of Northern Trust’s business units for the three and nine month periods ended September 30, 2013 and 2012. Business unit financial information, presented on an internal management-reporting basis, is determined by accounting systems that are used to allocate revenue and expense related to each segment and incorporates processes for allocating assets, liabilities, and equity, and the applicable interest income and expense.

 

Three Months Ended

September 30,

   Corporate &
Institutional Services
    Wealth
Management
    Treasury and
Other
    Total
Consolidated
 

($ In Millions)

   2013     2012     2013     2012     2013     2012     2013     2012  

Noninterest Income

                

Trust, Investment and Other Servicing Fees

   $ 359.8      $ 334.4      $ 288.2      $ 267.5      $ —        $ —        $ 648.0      $ 601.9   

Foreign Exchange Trading Income

     61.8        41.3        1.0        2.7        —          —          62.8        44.0   

Other Noninterest Income

     44.3        50.2        54.3        23.3        0.8        7.5        99.4        81.0   

Net Interest Income (FTE)*

     70.1        68.0        136.3        157.4        38.4        31.5        244.8        256.9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Revenue*

     536.0        493.9        479.8        450.9        39.2        39.0        1,055.0        983.8   

Provision for Credit Losses

     0.4        (1.6     4.6        11.6        —          —          5.0        10.0   

Noninterest Expense

     412.0        394.5        297.3        285.2        31.4        16.7        740.7        696.4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before Income Taxes*

     123.6        101.0        177.9        154.1        7.8        22.3        309.3        277.4   

Provision (Benefit) for Income Taxes*

     38.8        32.7        67.0        58.1        (3.0     7.8        102.8        98.6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

   $ 84.8      $ 68.3      $ 110.9      $ 96.0      $ 10.8      $ 14.5      $ 206.5      $ 178.8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of Consolidated Net Income

     41     38     54     54     5     8     100     100

Average Assets

   $ 53,653.5      $ 50,638.6      $ 22,923.6      $ 23,530.7      $ 18,635.4      $ 18,540.6      $ 95,212.5      $ 92,709.9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

* Stated on a fully taxable equivalent basis (FTE). Total consolidated includes FTE adjustments of $7.8 million for 2013 and $11.3 million for 2012.

 

Nine Months Ended

September 30,

   Corporate &
Institutional Services
    Wealth
Management
    Treasury and
Other
    Total
Consolidated
 

($ In Millions)

   2013     2012     2013     2012     2013     2012     2013     2012  

Noninterest Income

                

Trust, Investment and Other Servicing Fees

   $ 1,072.7      $ 989.8      $ 863.3      $ 793.1      $ —        $ —        $ 1,936.0      $ 1,782.9   

Foreign Exchange Trading Income

     189.8        155.3        3.8        10.0        —          —          193.6        165.3   

Other Noninterest Income

     130.1        145.9        95.8        70.1        5.4        6.1        231.3        222.1   

Net Interest Income (FTE)*

     200.2        217.0        425.3        476.9        81.0        93.6        706.5        787.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Revenue*

     1,592.8        1,508.0        1,388.2        1,350.1        86.4        99.7        3,067.4        2,957.8   

Provision for Credit Losses

     (1.1     (1.6     16.1        21.6        —          —          15.0        20.0   

Noninterest Expense

     1,206.7        1,190.0        900.9        878.4        91.7        68.9        2,199.3        2,137.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before Income Taxes*

     387.2        319.6        471.2        450.1        (5.3     30.8        853.1        800.5   

Provision (Benefit) for Income Taxes*

     123.0        102.1        177.8        170.2        (9.3     8.6        291.5        280.9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

   $ 264.2      $ 217.5      $ 293.4      $ 279.9      $ 4.0      $ 22.2      $ 561.6      $ 519.6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of Consolidated Net Income

     47     42     52     54     1     4     100     100

Average Assets

   $ 52,323.8      $ 49,642.8      $ 22,863.1      $ 23,527.6      $ 18,036.6      $ 20,243.2      $ 93,223.5      $ 93,413.6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

* Stated on a fully taxable equivalent basis (FTE). Total consolidated includes FTE adjustments of $23.3 million for 2013 and $31.4 million for 2012.

 

9


Corporate & Institutional Services

C&IS net income for the current quarter totaled $84.8 million as compared to $68.3 million in the prior year quarter, an increase of $16.5 million, or 24%. Noninterest income was $465.9 million, up $40.0 million, or 9%, from $425.9 million in the prior year quarter, reflecting higher trust, investment and other servicing fees and increased foreign exchange trading income.

 

C&IS Trust, Investment and Other Servicing Fees

   Three Months Ended September 30,  

($ In Millions)

   2013      2012      Change  

Custody and Fund Administration

   $ 239.4       $ 214.4       $ 25.0        12

Investment Management

     71.3         73.2         (1.9     (3

Securities Lending

     22.7         23.8         (1.1     (5

Other

     26.4         23.0         3.4        15   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 359.8       $ 334.4       $ 25.4        8
  

 

 

    

 

 

    

 

 

   

 

 

 

Custody and fund administration fees, the largest component of C&IS fees, increased 12%, primarily driven by favorable equity markets and new business. C&IS investment management fees decreased 3%, primarily due to higher waived fees in money market mutual funds, partially offset by favorable equity markets and new business. Money market mutual fund fee waivers in C&IS, attributable to persistently low short-term interest rates, totaled $15.3 million in the current quarter, compared to waived fees of $6.5 million in the prior year quarter. Securities lending revenue decreased 5%, primarily reflecting lower spreads in the current quarter, partially offset by higher volumes.

Foreign exchange trading income totaled $61.8 million in the current quarter, an increase of $20.5 million, or 50%, from $41.3 million in the prior year quarter, attributable to higher currency market volatility and trading volumes compared to the prior year quarter.

Other noninterest income totaled $44.3 million, down $5.9 million, or 12%, from $50.2 million in the prior year quarter, primarily reflecting current quarter decreases within various miscellaneous categories of other operating income.

Net interest income stated on an FTE basis was $70.1 million, up 3% from $68.0 million in the prior year quarter. The current quarter net interest margin equaled 0.61% as compared to 0.62% in the prior year quarter. The current quarter increase in net interest income is attributable to higher levels of average earning assets. Average earning assets totaled $45.8 billion for the current quarter, an increase of $1.9 billion, or 4%, from $43.9 billion in the prior year quarter. Average earning assets were primarily comprised of interest-bearing deposits with banks and loans and leases. Funding sources were primarily comprised of non-U.S. custody related interest-bearing deposits.

A provision for credit losses of $0.4 million was recorded in the current quarter, reflecting higher loan balances, partially offset by continued improvement in loan portfolio credit quality metrics. The prior year quarter included a negative provision of $1.6 million.

 

10


Corporate & Institutional Services (continued)

 

Total C&IS noninterest expense, which includes the direct expense of the business unit, indirect expense allocations from Asset Management and O&T for product and operating support, and indirect expense allocations for certain corporate support services, totaled $412.0 million, up $17.5 million, or 4%, from the prior year quarter’s $394.5 million. The current quarter increase primarily reflects higher outside services expense and increases within various miscellaneous categories of other operating expense.

Wealth Management

Wealth Management net income for the current quarter was $110.9 million, up $14.9 million, or 16%, from $96.0 million in the prior year quarter. Noninterest income was $343.5 million, up $50.0 million, or 17%, from $293.5 million in the prior year quarter. Trust, investment and other servicing fees in Wealth Management totaled $288.2 million in the current quarter, increasing $20.7 million, or 8%, from $267.5 million in the prior year quarter. The increased fees in the current quarter are primarily due to new business and the favorable impact of equity markets on fees, partially offset by higher waived fees in money market mutual funds. Money market mutual fund fee waivers in Wealth Management totaled $17.1 million in the current quarter compared with $10.3 million in the prior year quarter. Other noninterest income in the current quarter totaled $54.3 million and included the $32.6 million pre-tax gain on the sale of an office building property. Excluding the current quarter gain, other noninterest income in the current quarter was $21.7 million, down slightly from $23.3 million in the prior year quarter.

Net interest income stated on an FTE basis was $136.3 million, down $21.1 million, or 13%, from $157.4 million in the prior year quarter, reflecting a decline in the net interest margin and lower levels of average earning assets. The net interest margin decreased to 2.40% from 2.71% in the prior year quarter as a result of lower yields on earnings assets, partially offset by lower deposit rates, each reflecting the low interest rate environment. Earning assets averaged $22.6 billion in the current quarter, down $536.1 million, or 2%, from $23.1 billion in the prior year quarter. Earning assets and funding sources were primarily comprised of loans and domestic retail interest-bearing deposits, respectively.

A provision for credit losses of $4.6 million was recorded in the current quarter, primarily reflecting continued weakness in the residential real estate loan class, partially offset by improvement in the commercial and institutional and commercial real estate loan classes. A provision for credit losses of $11.6 million was recorded in the prior year quarter.

Total noninterest expense, which includes the direct expense of the business unit, indirect expense allocations from Asset Management and O&T for product and operating support, and indirect expense allocations for certain corporate support services, totaled $297.3 million compared with $285.2 million in the prior year quarter, an increase of $12.1 million, or 4%. The increase primarily reflects higher indirect expense allocations in the current quarter.

 

11


Treasury and Other

Treasury and Other includes income and expense associated with the wholesale funding activities and the investment portfolios of the Corporation and its principal subsidiary, The Northern Trust Company (Bank), and certain corporate-based expense, executive level compensation, and nonrecurring items not allocated to the business units. Other noninterest income in the current quarter totaled $0.8 million, compared to $7.5 million in the prior year quarter, which included the $5.3 million hedge-related gain. The current quarter includes higher security commissions and trading income, partially offset by $2.2 million of realized losses on the sale of investment securities.

Net interest income in the current quarter was $38.4 million, compared to $31.5 million in the prior year quarter, an increase of $6.9 million, or 22%. The increase is primarily due to higher internal yields on funds provided to business units.

Noninterest expense for the quarter totaled $31.4 million compared with $16.7 million in the prior year quarter, an increase of $14.7 million, reflecting current quarter increases within outside services and equipment and software expense categories, partially offset by higher indirect expense allocations to C&IS and Wealth Management in the current quarter.

NINE-MONTH CONSOLIDATED RESULTS OF OPERATIONS

Net income per common share of $2.29 was reported for the nine months ended September 30, 2013 compared with net income per common share of $2.12 reported in the comparable prior year period. The current period’s net income totaled $561.6 million, up $42.0 million, or 8%, as compared to $519.6 million in the prior year period. The performance in the current period produced an annualized return on average common equity of 9.8%, compared to 9.5% in the prior year period. The annualized return on average assets was 0.8% in the current period and 0.7% in prior year period.

The current year period includes the $32.6 million pre-tax gain ($20.3 million after tax, or $0.08 per common share) on the sale of an office building property. The prior year period included restructuring, acquisition, and integration related charges totaling $10.4 million ($6.8 million after tax, or $0.03 per common share).

Revenue for the nine months ended September 30, 2013 totaled $3.04 billion, up $117.7 million, or 4%, from the prior year period’s $2.93 billion. Noninterest income, which represented 78% of total revenue, was $2.36 billion, up $190.6 million, or 9%, from the prior year period. Trust, investment and other servicing fees increased $153.1 million, or 9%, to $1.94 billion in the current period.

 

12


Noninterest Income

The components of noninterest income are provided below.

 

Noninterest Income

   Nine Months Ended September 30,  

($ In Millions)

   2013     2012     Change  

Trust, Investment and Other Servicing Fees

   $ 1,936.0      $ 1,782.9      $ 153.1        9

Foreign Exchange Trading Income

     193.6        165.3        28.3        17   

Treasury Management Fees

     51.5        51.0        0.5        1   

Security Commissions and Trading Income

     53.4        53.6        (0.2     —     

Other Operating Income

     128.3        119.2        9.1        8   

Investment Security Gains (Losses), net

     (1.9     (1.7     (0.2     10   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Noninterest Income

   $ 2,360.9      $ 2,170.3      $ 190.6        9
  

 

 

   

 

 

   

 

 

   

 

 

 

Trust, investment and other servicing fees from C&IS increased $82.9 million, or 8%, totaling $1.07 billion, compared to $989.8 million a year ago.

 

C&IS Trust, Investment and Other Servicing Fees

   Nine Months Ended September 30,  

($ In Millions)

   2013      2012      Change  

Custody and Fund Administration

   $ 697.6       $ 639.2       $ 58.4         9

Investment Management

     220.7         206.8         13.9         7   

Securities Lending

     76.1         76.0         0.1         —     

Other

     78.3         67.8         10.5         15   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,072.7       $ 989.8       $ 82.9         8
  

 

 

    

 

 

    

 

 

    

 

 

 

Custody and fund administration fees, the largest component of C&IS fees, increased 9%, primarily reflecting favorable equity markets and new business. C&IS investment management fees increased 7%, reflecting the favorable impact of equity markets and new business, partially offset by higher waived fees in money market mutual funds. Money market mutual fund fee waivers in C&IS, attributable to persistent low short-term interest rates, totaled $33.9 million in the current period compared to waived fees of $24.1 million in the prior year period.

Trust, investment and other servicing fees in Wealth Management totaled $863.3 million in the current period, increasing $70.2 million, or 9%, from $793.1 million in the prior year period. The increase in the current period is primarily attributable to new business and the favorable impact of equity markets on fees, partially offset by higher waived fees in money market mutual funds. Money market mutual fund fee waivers in Wealth Management totaled $43.4 million in the current period compared with $35.1 million in the prior year period.

Foreign exchange trading income increased $28.3 million, or 17%, and totaled $193.6 million in the period compared with $165.3 million in the prior year period. The current period increase is attributable to higher currency market volatility and trading volumes compared to the prior year period.

 

13


Noninterest Income (continued)

 

Other operating income increased $9.1 million, or 8%, for the period to $128.3 million compared with $119.2 million in the prior year period. The components of other operating income are provided below.

 

Other Operating Income

   Nine Months Ended September 30,  

($ In Millions)

   2013      2012      Change  

Loan Service Fees

   $ 45.4       $ 48.3       $ (2.9     (6 )% 

Banking Service Fees

     38.1         41.4         (3.3     (8

Other Income

     44.8         29.5         15.3        51   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Other Operating Income

   $ 128.3       $ 119.2       $ 9.1        8
  

 

 

    

 

 

    

 

 

   

 

 

 

The current period’s “other income” component of other operating income includes the $32.6 million gain on the sale of an office building property and a $12.4 million write-off of certain fee receivables resulting from the correction of an accrual methodology followed in prior years. The prior year period included a $5.3 million hedge-related gain within the “other income” component. Excluding these current and prior year period items, the “other income” component of other operating income was relatively unchanged from the prior year quarter.

Net investment security losses in the current period totaled $1.9 million, compared to $1.7 million in the prior year period. Net investment security losses in the prior year period included $3.3 million of credit-related other-than-temporary impairment of residential mortgage backed securities and auction rate securities.

Net Interest Income

Net interest income, stated on an FTE basis, totaled $706.5 million, a decrease of $81.0 million, or 10%, from $787.5 million reported in the prior year period. The decrease reflects a continued decline in the net interest margin to 1.13% from 1.24% in the prior year period, as well as lower average earning assets. The decline in the net interest margin primarily reflects lower yields on earning assets, partially offset by a lower cost of interest-related funds due to lower short-term interest rates. Average earning assets for the period were $83.6 billion, down $983.9 million, or 1%, from $84.6 billion in the prior year period.

Provision for Credit Losses

The provision for credit losses was $15.0 million for the current nine-month period compared to $20.0 million in the comparable 2012 period. Net charge-offs totaled $25.1 million in the current period resulting from $39.8 million of charge-offs and $14.7 million of recoveries, compared to net charge-offs of $20.9 million in the prior year period resulting from $46.9 million of charge-offs and $26.0 million of recoveries. The current period provision reflects improvement in the commercial and institutional and commercial real estate loan classes, partially offset by continued weakness in the residential real estate loan class. For a fuller discussion of the consolidated allowance and provision for credit losses refer to the “Asset Quality” section beginning on page 18.

 

14


Noninterest Expense

Noninterest expense totaled $2.2 billion for the current period, up $62.0 million, or 3%, from the prior year period’s $2.14 billion. The prior year period includes pre-tax restructuring, acquisition, and integration related charges of $10.4 million. The components of noninterest expense are provided below.

 

Noninterest Expense

   Nine Months Ended September 30,  

($ In Millions)

   2013      2012      Change  

Compensation

   $ 971.8       $ 951.1       $ 20.7        2

Employee Benefits

     191.0         194.3         (3.3     (2

Outside Services

     412.0         388.5         23.5        6   

Equipment and Software

     279.0         276.2         2.8        1   

Occupancy

     130.0         128.2         1.8        1   

Other Operating Expense

     215.5         199.0         16.5        8   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Noninterest Expense

   $ 2,199.3       $ 2,137.3       $ 62.0        3
  

 

 

    

 

 

    

 

 

   

 

 

 

Compensation expense, the largest component of noninterest expense, increased $20.7 million, or 2%, to $971.8 million from the prior year period’s $951.1 million, primarily reflecting base pay adjustments and higher performance based compensation. Employee benefit expense decreased 2% to $191.0 million from $194.3 million in the prior year period.

Outside services expense equaled $412.0 million, up $23.5 million, or 6%, from $388.5 million in the prior year period, primarily reflecting higher technical services and consulting expense, including costs associated with a growing set of regulatory and compliance requirements.

Equipment and software expense totaled $279.0 million, up 1% from $276.2 million in the prior year period. The prior year period included equipment and software write-offs of $15.1 million. Excluding the prior period write-off, equipment and software expense increased $17.9 million, or 7%, in the current period, primarily due to higher software amortization associated with the continued investment in technology related assets.

The components of other operating expense are provided below.

 

Other Operating Expense

   Nine Months Ended September 30,  

($ In Millions)

   2013      2012      Change  

Business Promotion

   $ 67.2       $ 65.1       $ 2.1        3

FDIC Insurance Premiums

     18.4         17.2         1.2        7   

Staff Related

     25.8         28.1         (2.3     (8

Other Intangible Amortization

     15.5         15.0         0.5        3   

Other Expenses

     88.6         73.6         15.0        20   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Other Operating Expense

   $ 215.5       $ 199.0       $ 16.5        8
  

 

 

    

 

 

    

 

 

   

 

 

 

 

15


Noninterest Expense (continued)

 

The increase in the other expenses component of other operating expense primarily reflects higher charges associated with account servicing activities and increases within various other miscellaneous expense categories.

Provision for Income Taxes

Total income tax expense was $268.2 million for the nine months ended September 30, 2013, representing an effective tax rate of 32.3%. This compares with $249.5 million of income tax expense and an effective tax rate of 32.4% in the prior year period.

BALANCE SHEET

Total assets at September 30, 2013 were $96.0 billion and averaged $95.2 billion for the current quarter compared with total assets of $93.6 billion at September 30, 2012 and average total assets of $92.7 billion in the prior year quarter. Average balances are considered to be a better measure of balance sheet trends as period-end balances can be impacted on a short term basis by deposit and withdrawal activity involving large balances of short-term client funds. Loans and leases totaled $29.1 billion at September 30, 2013 and averaged $28.7 billion in the current quarter, down 2% and 1%, respectively, compared to $29.5 billion at September 30, 2012 and a $29.0 billion average in the prior year quarter. Securities, including Federal Reserve and Federal Home Loan Bank stock and certain community development investments which are classified in other assets in the consolidated balance sheet, totaled $31.0 billion at September 30, 2013 and averaged $30.6 billion for the current quarter, up 4% and 2%, respectively, compared to $29.7 billion at September 30, 2012 and $29.9 billion on average in the prior year quarter. Federal funds sold and securities purchased under agreements to resell, interest-bearing deposits with banks, and Federal Reserve deposits and other interest-bearing assets in aggregate totaled $26.4 billion at September 30, 2013 and averaged $26.3 billion in the current quarter, up 1% and 3%, respectively, from the prior year quarter balances. Interest-bearing deposits at September 30, 2013 totaled $60.8 billion and averaged $59.3 billion, up 9% and 7%, respectively, compared to $55.6 billion at September 30, 2012 and a $55.7 billion average in the prior year quarter. Noninterest-bearing deposits at September 30, 2013 totaled $17.4 billion and averaged $16.1 billion, down 18% and 20%, respectively, compared to $21.4 billion at September 30, 2012 and a $20.2 billion average in the prior year quarter.

Total stockholders’ equity averaged $7.7 billion, up 4%, from the prior year quarter’s average of $7.4 billion. The increase is primarily attributable to earnings, partially offset by dividend declarations and the repurchase of common stock pursuant to the Corporation’s share buyback program. During the three and nine months ended September 30, 2013, the Corporation repurchased 1,715,921 shares at a cost of $97.3 million ($56.73 average price per share) and 3,400,613 shares at a cost of $187.1 million ($55.02 average price per share), respectively. The Corporation is authorized to purchase up to 10.0 million additional shares of common stock after September 30, 2013, pursuant to the authorization announced and approved by the board of directors in April of 2013.

Northern Trust’s risk-based capital ratios remained strong at September 30, 2013 and exceeded the minimum regulatory requirements established by U.S. banking regulators.

 

16


BALANCE SHEET (continued)

 

The Corporation and the Bank each had capital ratios at September 30, 2013 that were above the level required for classification as a “well capitalized” institution. Shown below are the capital ratios of the Corporation and the Bank as of September 30, 2013 and December 31, 2012.

 

     September 30, 2013     December 31, 2012  
     Tier 1
Capital
    Total
Capital
    Leverage
Ratio
    Tier 1
Capital
    Total
Capital
    Leverage
Ratio
 

Northern Trust Corporation

     13.6     14.9     8.3     12.8     14.3     8.2

The Northern Trust Company

     11.7     13.3     7.2     11.9     13.7     7.6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Minimum to Qualify as Well Capitalized

     6.0     10.0     5.0     6.0     10.0     5.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

($ In Millions)

   September 30, 2013     December 31, 2012  

Ratios

    

Tier 1 Capital

     13.6     12.8

Tier 1 Common Equity

     13.1     12.4
  

 

 

   

 

 

 

Tier 1 Capital

   $ 7,849.5      $ 7,489.0   

Less: Floating Rate Capital Securities

     268.8        268.7   
  

 

 

   

 

 

 

Tier 1 Common Equity

   $ 7,580.7      $ 7,220.3   
  

 

 

   

 

 

 

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

STATEMENT OF CASH FLOWS

For the nine months ended September 30, 2013 and 2012, net cash provided by operating activities was $960.9 million and $791.2 million, respectively, and was primarily the result of earnings in both periods.

Net cash provided by investing activities of $510.0 million for the nine months ended September 30, 2013 primarily reflects a decrease in interest-bearing deposits with banks and net changes within securities held to maturity and available for sale, partially offset by increased Federal Reserve deposits and other interest-bearing assets. The decrease in interest-bearing deposits with banks and the increase in Federal Reserve deposits and other interest-bearing assets primarily reflects the redeployment of

 

17


STATEMENT OF CASH FLOWS (continued)

 

investments in bank time deposits to Federal Reserve deposits. The increase in Federal Reserve deposits and other interest-bearing assets also reflects an increase in short-term other borrowings, offset by a decline in U.S. office client deposits.

Net cash provided by investing activities of $5.3 billion for the nine months ended September 30, 2012 primarily reflects decreases in Federal Reserve deposits and other interest-bearing assets and net changes within securities available for sale, partially offset by increased interest-bearing deposits with banks. The decrease in Federal Reserve deposits and other interest-bearing assets in the prior year period was primarily the result of lower client deposit and short-term borrowing levels, while the increased interest-bearing deposits with banks was primarily attributable to an increase in time deposits of certain currencies due to an increase in client deposits denominated in those currencies.

For the nine months ended September 30, 2013, net cash used in financing activities totaled $2.4 billion, primarily reflecting a decline in the level of total deposits, partially offset by an increase in short-term other borrowings. The decline in the level of total deposits was primarily due to a decline in U.S. demand deposits from the level at December 31, 2012, largely driven by the expiration on that date of the Federal Deposit Insurance Corporation’s Temporary Liquidity Guarantee Program which had provided unlimited deposit insurance. The increase in short-term other borrowings in the current year period reflects additional short-term borrowings from the Federal Home Loan Bank.

For the nine months ended September 30, 2012, net cash used in financing activities totaled $7.1 billion, primarily reflecting a decline in the level of deposits from temporarily elevated levels at December 31, 2011.

ASSET QUALITY

Securities Portfolio

Northern Trust maintains a high quality securities portfolio, with 86% of the combined available for sale, held to maturity, and trading account portfolios at September 30, 2013 composed of U.S. Treasury and government sponsored agency securities and triple-A rated corporate notes, asset-backed securities, supranational, sovereign and non-U.S. agency bonds, auction rate securities and obligations of states and political subdivisions. The remaining portfolio was composed of corporate notes, asset-backed securities, negotiable certificates of deposit, obligations of states and political subdivisions, auction rate securities and other securities, of which as a percentage of the total securities portfolio, 4% was rated double-A, 3% was rated below double-A, and 7% was not rated by Standard and Poor’s or Moody’s Investors Service (primarily negotiable certificates of deposits of banks whose long term ratings are at least A).

Net unrealized gains within the investment securities portfolio totaled $55.9 million at September 30, 2013, comprised of $171.4 million and $115.5 million of gross unrealized gains and losses, respectively. Of the unrealized losses on securities at September 30, 2013, the largest component, totaling $54.5 million, was corporate debt securities, primarily reflecting widened credit spreads and higher market rates since purchase; 51%

 

18


ASSET QUALITY (continued)

 

of the corporate debt portfolio is backed by guarantees provided by U.S. and non-U.S. governmental entities. Unrealized losses of $36.1 million related to government sponsored agency securities are primarily attributable to changes in market rates since their purchase.

There were no other-than-temporary impairment losses for the three or nine months ended September 30, 2013. For the three and nine months ended September 30, 2012, credit-related losses recognized in earnings on other-than-temporarily impaired securities totaled $148.6 thousand and $3.3 million, respectively. Northern Trust has evaluated non-agency residential mortgage-backed securities, and all other securities with unrealized losses, for possible other-than-temporary impairment in accordance with GAAP and Northern Trust’s security impairment review policy.

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

Eurozone Exposure

Northern Trust continues to closely monitor economic developments in the eurozone. Northern Trust considers Ireland, Portugal, Italy, Greece, Spain and Cyprus to be those eurozone countries experiencing significant economic, fiscal and/or political strains. At September 30, 2013, Northern Trust’s gross exposure to obligors in Ireland totaled approximately $1 billion, or 1% of Northern Trust’s total consolidated assets. There was no exposure to obligors in Portugal, Italy, Greece, Spain or Cyprus and no exposure to sovereign debt securities in those countries as of September 30, 2013. Of the total exposure to obligors in Ireland, $6 million was to banks and the remainder was to commercial and other borrowers, primarily funds domiciled in Ireland whose assets and investment activities are broadly diversified by investment strategy, issuer type, country of risk, and/or instrument type. Exposures to these borrowers in Ireland may be secured or unsecured, committed or uncommitted, but are typically for short periods of a year or less for foreign exchange, overdraft accommodations, and loans. Exposure levels at September 30, 2013 reflect Northern Trust’s risk management policies and practices, which operate to limit exposures to higher risk European financial and sovereign entities.

 

19


ASSET QUALITY (continued)

 

Nonperforming Loans and Other Real Estate Owned

Nonperforming assets consist of nonperforming loans and Other Real Estate Owned (OREO). OREO is comprised of commercial and residential properties acquired in partial or total satisfaction of loans.

The following table provides the amounts of nonperforming loans, by segment and class, and of OREO that were outstanding at the dates shown, as well as the balance of loans that were delinquent 90 days or more and still accruing interest. The balance of loans delinquent 90 days or more and still accruing interest can fluctuate widely based on the timing of cash collections, renegotiations and renewals.

 

($ In Millions)

   September 30,
2013
    June 30,
2013
    December 31,
2012
    September 30,
2012
 

Nonperforming Loans and Leases

        

Commercial

        

Commercial and Institutional

   $ 24.1      $ 25.0      $ 21.6      $ 29.9   

Commercial Real Estate

     54.3        61.5        56.4        59.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Commercial

     78.4        86.5        78.0        89.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Personal

        

Residential Real Estate

     189.8        177.2        174.6        176.6   

Private Client

     1.9        3.0        2.2        2.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Personal

     191.7        180.2        176.8        179.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Nonperforming Loans and Leases

   $ 270.1      $ 266.7      $ 254.8      $ 269.0   

Other Real Estate Owned

     13.9        14.5        20.3        20.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Nonperforming Assets

   $ 284.0      $ 281.2      $ 275.1      $ 289.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

90 Day Past Due Loans Still Accruing

   $ 24.8      $ 18.5      $ 19.0      $ 32.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Nonperforming Loans and Leases to Total Loans and Leases

     0.93     0.93     0.86     0.91
  

 

 

   

 

 

   

 

 

   

 

 

 

Coverage of Loan and Lease Allowance to Nonperforming Loans and Leases

     1.1     1.1     1.2     1.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Maintaining a low level of nonperforming assets is important to the ongoing success of a financial institution. In addition to the negative impact on net interest income and the risk of credit losses, nonperforming assets also increase operating costs due to the expense associated with collection efforts. Nonperforming assets of $284.0 million as of September 30, 2013 continue to reflect the deterioration in overall economic conditions experienced since the onset of the economic downturn in 2008 and its effect on Northern Trust’s loan portfolio, primarily within the residential real estate loan class.

Importantly, Northern Trust focuses its lending efforts on clients who are looking to utilize a full range of financial services with Northern Trust. Northern Trust’s underwriting standards do not allow for the origination of loan types generally considered to be of high risk in nature, such as option ARM loans, subprime loans, loans with initial “teaser” rates, and loans with excessively high loan-to-value ratios. Residential real estate loans consist of conventional home mortgages and equity credit lines, which generally require loan to collateral values of no more than 65% to 80% at inception. Revaluations of supporting

 

20


ASSET QUALITY (continued)

 

collateral are obtained upon refinancing or default or when otherwise considered warranted. Collateral revaluations for mortgages are performed by independent third parties.

The commercial real estate portfolio consists of commercial mortgages and construction, acquisition and development loans extended primarily to highly experienced developers and/or investors well known to Northern Trust. Underwriting standards generally reflect conservative loan-to-value ratios and debt service coverage requirements. Recourse to borrowers through guarantees is also commonly required.

Provision and Allowance for Credit Losses

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

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

The provision for credit losses totaled $5.0 million in the current quarter compared to $10.0 million in the prior year quarter. Residential real estate loans continued to reflect weakness relative to the overall portfolio, accounting for 70% and 66% of total nonperforming loans and leases at September 30, 2013 and 2012, respectively.

Note 6 to the consolidated financial statements includes a table that details the changes in the allowance for credit losses during the three and nine months ended September 30, 2013 and 2012 due to charge-offs, recoveries, and the provision for credit losses.

 

21


ASSET QUALITY (continued)

 

The following table shows the specific portion of the allowance and the inherent portion of the allowance and its components, each by loan and lease segment and class.

 

    September 30, 2013     June 30, 2013     December 31, 2012     September 30, 2012  

($ In Millions)

  Allowance
Amount
    Percent of
Loans to
Total Loans
    Allowance
Amount
    Percent of
Loans to
Total Loans
    Allowance
Amount
    Percent of
Loans to
Total Loans
    Allowance
Amount
    Percent of
Loans to
Total Loans
 

Specific Allowance

  $ 32.3        —     $ 32.9        —     $ 32.5        —     $ 36.6        —  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allocated Inherent Allowance

               

Commercial

               

Commercial and Institutional

    72.4        25        73.7        25        79.2        25        80.8        25   

Commercial Real Estate

    72.2        10        74.6        10        80.6        10        83.6        10   

Lease Financing, net

    4.4        3        4.5        3        5.5        4        3.4        3   

Non-U.S.

    2.4        4        2.3        5        3.4        4        4.0        4   

Other

    —          1        —          1        —          1        —          2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Commercial

    151.4        43        155.1        44        168.7        44        171.8        44   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Personal

               

Residential Real Estate

    117.0        36        116.4        36        110.9        35        104.7        35   

Private Client

    16.8        21        16.3        20        15.5        21        14.9        20   

Other

    —          —          —          —          —          —          —          1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Personal

    133.8        57        132.7        56        126.4        56        119.6        56   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Allocated Inherent Allowance

  $ 285.2        100   $ 287.8        100   $ 295.1        100   $ 291.4        100
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Allowance for Credit Losses

    317.5          320.7          327.6          328.0     
 

 

 

     

 

 

     

 

 

     

 

 

   

Allowance Assigned to Loans and Leases

  $ 287.2        $ 290.4        $ 297.9        $ 298.6     

Unfunded Commitments and Standby Letters of Credit

    30.3          30.3          29.7          29.4     
 

 

 

     

 

 

     

 

 

     

 

 

   

Total Allowance for Credit Losses

  $ 317.5        $ 320.7        $ 327.6        $ 328.0     
 

 

 

     

 

 

     

 

 

     

 

 

   

Allowance Assigned to Loans and Leases to Total Loans and Leases

    0.99       1.01       1.01       1.01  
 

 

 

     

 

 

     

 

 

     

 

 

   

MARKET RISK MANAGEMENT

As described in the 2012 Annual Report to Shareholders, Northern Trust manages its interest rate risk through two primary measurement techniques: simulation of earnings and simulation of economic value of equity. Also, as part of its risk management activities, it regularly measures the risk of loss associated with foreign currency positions using a Value-at-Risk (VaR) model.

Based on this continuing evaluation process, the VaR associated with the foreign exchange trading portfolio has not changed significantly since December 31, 2012. Northern Trust’s interest rate risk position relative to rising rates, as measured by current market implied forward interest rates and sensitivity analyses, has increased as a result of a higher interest rate environment, a projected increase in the sensitivity of non-U.S. office deposit rates, and an extension of the securities portfolio duration.

 

22


RECONCILIATION OF REPORTED NET INTEREST INCOME TO FULLY TAXABLE EQUIVALENT

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

 

     Three Months Ended  
     September 30, 2013     September 30, 2012  

($ In Millions)

   Reported     FTE Adj.      FTE     Reported     FTE Adj.      FTE  

Interest Income

   $ 291.1      $ 7.8       $ 298.9      $ 323.1      $ 11.3       $ 334.4   

Interest Expense

     54.1        —           54.1        77.5        —           77.5   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Net Interest Income

   $ 237.0      $ 7.8       $ 244.8      $ 245.6      $ 11.3       $ 256.9   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Net Interest Margin

     1.10        1.14     1.16        1.21
  

 

 

      

 

 

   

 

 

      

 

 

 
     Nine Months Ended  
     September 30, 2013     September 30, 2012  

($ In Millions)

   Reported     FTE Adj.      FTE     Reported     FTE Adj.      FTE  

Interest Income

   $ 853.1      $ 23.3       $ 876.4      $ 985.6      $ 31.4       $ 1,017.0   

Interest Expense

     169.9        —           169.9        229.5        —           229.5   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Net Interest Income

   $ 683.2      $ 23.3       $ 706.5      $ 756.1      $ 31.4       $ 787.5   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Net Interest Margin

     1.09        1.13     1.19        1.24
  

 

 

      

 

 

   

 

 

      

 

 

 

 

23


The following schedule should be read in conjunction with the Net Interest Income section of Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

AVERAGE CONSOLIDATED BALANCE SHEET

WITH ANALYSIS OF NET INTEREST INCOME

   NORTHERN TRUST CORPORATION

 

(INTEREST AND RATE ON A FULLY TAXABLE    Third Quarter  
    EQUIVALENT BASIS)    2013     2012  

($ In Millions)

   Interest      Average
Balance
    Rate (3)     Interest      Average
Balance
    Rate (3)  

Average Earning Assets

              

Federal Funds Sold and Securities Purchased under Agreements to Resell

   $ 0.7       $ 548.2        0.52   $ 0.1       $ 285.6        0.19

Interest-Bearing Deposits with Banks

     36.3         17,767.6        0.81        44.8         19,215.4        0.93   

Federal Reserve Deposits and Other Interest-Bearing

     5.1         7,987.5        0.26        4.0         6,113.7        0.26   

Securities

              

U.S. Government

     4.5         1,619.2        1.11        4.7         1,786.4        1.04   

Obligations of States and Political Subdivisions

     4.2         268.8        6.31        6.4         398.4        6.44   

Government Sponsored Agency

     28.0         17,082.6        0.65        34.7         18,694.1        0.74   

Other (1)

     33.1         11,592.8        1.13        31.3         8,986.2        1.38   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Securities

     69.8         30,563.4        0.91        77.1         29,865.1        1.03   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Loans and Leases (2)

     187.0         28,662.4        2.59        208.4         29,046.0        2.85   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Earning Assets

     298.9         85,529.1        1.39        334.4         84,525.8        1.57   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Allowance for Credit Losses Assigned to Loans and Leases

     —           (289.6     —          —           (297.8     —     

Cash and Due from Banks

     —           2,776.8        —          —           3,446.6        —     

Buildings and Equipment

     —           453.0        —          —           461.7        —     

Client Security Settlement Receivables

     —           714.8        —          —           434.7        —     

Goodwill

     —           532.5        —          —           534.8        —     

Other Assets

     —           5,495.9        —          —           3,604.1        —     
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Assets

   $ —         $ 95,212.5        —     $ —         $ 92,709.9        —  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Average Source of Funds

              

Deposits

              

Savings and Money Market

   $ 2.3       $ 14,286.5        0.06   $ 4.5       $ 13,687.1        0.13

Savings Certificates and Other Time

     2.8         1,969.0        0.56        5.2         3,083.6        0.67   

Non-U.S. Offices - Interest-Bearing

     20.7         43,064.7        0.19        34.1         38,896.8        0.35   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Interest-Bearing Deposits

     25.8         59,320.2        0.17        43.8         55,667.5        0.31   

Short-Term Borrowings

     1.3         5,447.2        0.09        1.4         2,200.7        0.26   

Senior Notes

     18.4         2,192.5        3.33        18.6         2,439.6        3.04   

Long-Term Debt

     8.0         978.5        3.23        13.0         1,452.9        3.55   

Floating Rate Capital Debt

     0.6         277.1        0.85        0.7         277.0        1.03   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Interest-Related Funds

     54.1         68,215.5        0.31        77.5         62,037.7        0.50   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Interest Rate Spread

     —           —          1.08        —           —          1.07   

Demand and Other Noninterest-Bearing Deposits

     —           16,134.2        —          —           20,235.8        —     

Other Liabilities

     —           3,165.0        —          —           3,014.5        —     

Stockholders’ Equity

     —           7,697.8        —          —           7,421.9        —     
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ —         $ 95,212.5        —     $ —         $ 92,709.9        —  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net Interest Income/Margin (FTE Adjusted)

   $ 244.8       $ —          1.14   $ 256.9       $ —          1.21
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net Interest Income/Margin (Unadjusted)

   $ 237.0       $ —          1.10   $ 245.6       $ —          1.16
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

ANALYSIS OF NET INTEREST INCOME CHANGES

DUE TO VOLUME AND RATE

 

     Three Months 2013/2012  
     Change Due To  

(In Millions)

   Average
Balance
    Rate     Total  

Earning Assets (FTE)

   $ 4.0      $ (39.5   $ (35.5

Interest-Related Funds

     7.8        (31.2     (23.4
  

 

 

   

 

 

   

 

 

 

Net Interest Income (FTE)

   $ (3.8   $ (8.3   $ (12.1
  

 

 

   

 

 

   

 

 

 

 

(1) Other securities include Federal Reserve and Federal Home Loan Bank stock and certain community development investments which are classified in other assets in the consolidated balance sheet as of September 30, 2013 and 2012.
(2) Average balances include nonaccrual loans. Lease financing receivable balances are reduced by deferred income.
(3) Rate calculations are based on actual balances rather than the rounded amounts presented in the Average Consolidated Balance Sheet with Analysis of Net Interest Income.

 

Notes: Net Interest Income (FTE Adjusted) includes adjustments to a fully taxable equivalent basis for loans and securities. Such adjustments are based on a blended federal and state tax rate of 37.7%. Total taxable equivalent interest adjustments amounted to $7.8 million and $11.3 million for the three months ended September 30, 2013 and 2012, respectively.

Interest revenue on cash collateral positions is reported above within interest-bearing deposits with banks and within loans and leases. Interest expense on cash collateral positions is reported above within non-U.S. offices interest-bearing deposits. Related cash collateral received from and deposited with derivative counterparties is recorded net of the associated derivative contract within other assets and other liabilities, respectively.

 

24


The following schedule should be read in conjunction with the Net Interest Income section of Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

AVERAGE CONSOLIDATED BALANCE SHEET

WITH ANALYSIS OF NET INTEREST INCOME

   NORTHERN TRUST CORPORATION

 

(INTEREST AND RATE ON A FULLY TAXABLE    Nine Months  
    EQUIVALENT BASIS)    2013     2012  

($ In Millions)

   Interest      Average
Balance
    Rate (3)     Interest      Average
Balance
    Rate (3)  

Average Earning Assets

              

Federal Funds Sold and Securities Purchased under Agreements to Resell

   $ 1.2       $ 370.2        0.44   $ 0.3       $ 264.3        0.16

Interest-Bearing Deposits with Banks

     105.8         18,018.7        0.79        138.8         18,751.9        0.99   

Federal Reserve Deposits and Other Interest-Bearing

     11.0         5,726.8        0.26        11.2         5,815.2        0.26   

Securities

              

U.S. Government

     13.8         1,729.2        1.07        19.1         2,432.0        1.05   

Obligations of States and Political Subdivisions

     13.9         292.1        6.34        21.5         437.7        6.54   

Government Sponsored Agency

     73.4         17,540.1        0.56        93.0         18,159.9        0.68   

Other (1)

     94.1         11,296.2        1.11        98.6         9,831.3        1.34   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Securities

     195.2         30,857.6        0.85        232.2         30,860.9        1.00   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Loans and Leases (2)

     563.2         28,642.0        2.63        634.5         28,906.9        2.93   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Earning Assets

     876.4         83,615.3        1.40        1,017.0         84,599.2        1.61   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Allowance for Credit Losses Assigned to Loans and Leases

     —           (292.0     —          —           (296.3     —     

Cash and Due from Banks

     —           3,042.4        —          —           3,768.8        —     

Buildings and Equipment

     —           460.7        —          —           474.3        —     

Client Security Settlement Receivables

     —           776.5        —          —           447.9        —     

Goodwill

     —           532.2        —          —           534.6        —     

Other Assets

     —           5,088.4        —          —           3,885.1        —     
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Assets

   $ —         $ 93,223.5        —     $ —         $ 93,413.6        —  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Average Source of Funds

              

Deposits

              

Savings and Money Market

   $ 7.4       $ 14,598.3        0.07   $ 14.7       $ 14,128.2        0.14

Savings Certificates and Other Time

     10.1         2,183.0        0.62        15.5         3,084.4        0.67   

Non-U.S. Offices - Interest-Bearing

     62.4         40,457.1        0.21        92.7         38,105.9        0.32   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Interest-Bearing Deposits

     79.9         57,238.4        0.19        122.9         55,318.5        0.30   

Short-Term Borrowings

     3.8         4,541.7        0.11        4.7         3,526.6        0.18   

Senior Notes

     56.9         2,331.4        3.26        52.4         2,228.9        3.14   

Long-Term Debt

     27.5         1,119.4        3.29        47.3         1,704.8        3.71   

Floating Rate Capital Debt

     1.8         277.1        0.86        2.2         277.0        1.07   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Interest-Related Funds

     169.9         65,508.0        0.35        229.5         63,055.8        0.49   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Interest Rate Spread

     —           —          1.05        —           —          1.12   

Demand and Other Noninterest-Bearing Deposits

     —           16,830.8        —          —           19,809.2        —     

Other Liabilities

     —           3,254.4        —          —           3,255.5        —     

Stockholders’ Equity

     —           7,630.3        —          —           7,293.1        —     
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ —         $ 93,223.5        —     $ —         $ 93,413.6        —  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net Interest Income/Margin (FTE Adjusted)

   $ 706.5       $ —          1.13   $ 787.5       $ —          1.24
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net Interest Income/Margin (Unadjusted)

   $ 683.2       $ —          1.09   $ 756.1       $ —          1.19
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

ANALYSIS OF NET INTEREST INCOME CHANGES

DUE TO VOLUME AND RATE

 

     Nine Months 2013/2012  
     Change Due To  

(In Millions)

   Average
Balance
    Rate     Total  

Earning Assets (FTE)

   $ (11.8   $ (128.8   $ (140.6

Interest-Related Funds

     9.0        (68.6     (59.6
  

 

 

   

 

 

   

 

 

 

Net Interest Income (FTE)

   $ (20.8   $ (60.2   $ (81.0
  

 

 

   

 

 

   

 

 

 

 

(1) Other securities include Federal Reserve and Federal Home Loan Bank stock and certain community development investments which are classified in other assets in the consolidated balance sheet as of September 30, 2013 and 2012.
(2) Average balances include nonaccrual loans. Lease financing receivable balances are reduced by deferred income.
(3) Rate calculations are based on actual balances rather than the rounded amounts presented in the Average Consolidated Balance Sheet with Analysis of Net Interest Income.

 

Notes: Net Interest Income (FTE Adjusted) includes adjustments to a fully taxable equivalent basis for loans and securities. Such adjustments are based on a blended federal and state tax rate of 37.7%. Total taxable equivalent interest adjustments amounted to $23.3 million and $31.4 million for the nine months ended September 30, 2013 and 2012, respectively.

Interest revenue on cash collateral positions is reported above within interest-bearing deposits with banks and within loans and leases. Interest expense on cash collateral positions is reported above within non-U.S. offices interest-bearing deposits. Related cash collateral received from and deposited with derivative counterparties is recorded net of the associated derivative contract within other assets and other liabilities, respectively.

 

25


FACTORS AFFECTING FUTURE RESULTS

This report contains statements that may be considered forward-looking, such as the statements relating to Northern Trust’s financial goals, capital adequacy, dividend policy, expansion and business development plans, risk management policies, anticipated expense levels and projected profit improvements, business prospects and positioning with respect to market, demographic and pricing trends, strategic initiatives, reengineering and outsourcing activities, new business results and outlook, changes in securities market prices, credit quality including allowance levels, planned capital expenditures and technology spending, anticipated tax benefits and expenses, and the effects of any extraordinary events and various other matters (including developments with respect to litigation, other contingent liabilities and obligations, and regulation involving Northern Trust and changes in accounting policies, standards and interpretations) on Northern Trust’s business and results.

Forward-looking statements are typically identified by words or phrases such as “believe”, “expect”, “anticipate”, “intend”, “estimate”, “may increase”, “may fluctuate”, “plan”, “goal”, “target”, “strategy”, and similar expressions or future or conditional verbs such as “may”, “will”, “should”, “would”, and “could.” Forward-looking statements are Northern Trust’s current estimates or expectations of future events or future results. Actual results could differ materially from the results indicated by these statements because the realization of those results is subject to many risks and uncertainties including: the health of the U.S. and international economies and particularly the continuing uncertainty in Europe; the downgrade of U.S. Government issued and other securities; the health and soundness of the financial institutions and other counterparties with which Northern Trust conducts business; changes in financial markets, including debt and equity markets, that impact the value, liquidity, or credit ratings of financial assets in general, or financial assets in particular investment funds, client portfolios, or securities lending collateral pools, including those funds, portfolios, collateral pools, and other financial assets with respect to which Northern Trust has taken, or may in the future take, actions to provide asset value stability or additional liquidity; the impact of stress in the financial markets, the effectiveness of governmental actions taken in response, and the effect of such governmental actions on Northern Trust, its competitors and counterparties, financial markets generally and availability of credit specifically, and the U.S. and international economies, including special deposit assessments or potentially higher FDIC premiums; a significant downgrade of any of our debt ratings, including as a result of the review currently underway by Moody’s Investor Services of our long-term credit ratings; changes in foreign exchange trading client volumes, fluctuations and volatility in foreign currency exchange rates, and Northern Trust’s success in assessing and mitigating the risks arising from such changes, fluctuations and volatility; decline in the value of securities held in Northern Trust’s investment portfolio, particularly asset-backed securities, the liquidity and pricing of which may be negatively impacted by periods of economic turmoil and financial market disruptions; uncertainties inherent in the complex and subjective judgments required to assess credit risk and establish appropriate allowances therefor; difficulties in measuring, or determining whether there is other-than-temporary impairment in, the value of securities held in Northern Trust’s investment portfolio; Northern Trust’s success in managing various risks inherent in its business, including credit risk, operational risk, interest rate risk and liquidity risk, particularly during times of economic uncertainty and volatility in the credit and financial markets; geopolitical risks and the risks of extraordinary events such

 

26


FACTORS AFFECTING FUTURE RESULTS (continued)

 

as natural disasters, terrorist events, war and the U.S. and other governments’ responses to those events; the pace and extent of continued globalization of investment activity and growth in worldwide financial assets; regulatory and monetary policy developments; the impact of money market reforms; failure to obtain regulatory approvals when required, including for the use and distribution of capital; changes in tax laws, accounting requirements or interpretations and other legislation in the U.S. or other countries that could affect Northern Trust or its clients, including changes in accounting rules for fair value measurements and recognizing impairments; changes in the nature and activities of Northern Trust’s competition, including increased consolidation within the financial services industry; Northern Trust’s success in maintaining existing business and continuing to generate new business in its existing markets; the impact of equity markets on fee revenue; Northern Trust’s success in identifying and penetrating targeted markets, through acquisition, strategic alliance or otherwise; Northern Trust’s success in integrating acquisitions and strategic alliances; Northern Trust’s success in addressing the complex needs of a global client base across multiple time zones and from multiple locations, and managing compliance with legal, tax, regulatory and other requirements in areas of faster growth in its businesses, especially in immature markets; Northern Trust’s ability to maintain a product mix that achieves acceptable margins; Northern Trust’s ability to continue to generate investment results that satisfy its clients and continue to develop its array of investment products; Northern Trust’s success in generating revenue in its securities lending business for itself and its clients, especially in periods of economic and financial market uncertainty; Northern Trust’s success in recruiting and retaining the necessary personnel to support business growth and expansion and maintain sufficient expertise to support increasingly complex products and services; Northern Trust’s success in implementing its revenue enhancement and expense management initiatives; Northern Trust’s ability, as products, methods of delivery, and client requirements change or become more complex, to continue to fund and accomplish innovation, improve risk management practices and controls, and address operating risks, including human errors or omissions, data security breach risks, pricing or valuation of securities, fraud, systems performance or defects, systems interruptions, and breakdowns in processes or internal controls; Northern Trust’s success in controlling expenses, particularly in a difficult economic environment; uncertainties inherent in Northern Trust’s assumptions concerning its pension plan, including discount rates and expected contributions, returns and payouts; increased costs of compliance and other risks associated with changes in regulation and the current regulatory environment, including the requirements of Basel II, Basel III and the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), areas of increased regulatory emphasis and oversight in the U.S. and other countries such as anti-money laundering, anti-bribery, and client privacy and the potential for substantial changes in the legal, regulatory and enforcement framework and oversight applicable to financial institutions in reaction to adverse financial market events, including changes pursuant to the Dodd-Frank Act that may, among other things, affect the leverage limits and risk-based capital and liquidity requirements for certain financial institutions, including Northern Trust, require those financial institutions to pay higher assessments, expose them to certain liabilities of their subsidiary depository institutions, and restrict or increase the regulation of certain activities, including foreign exchange, carried on by financial institutions, including Northern Trust; risks that evolving regulations, such as Basel II and Basel III, and potential legislation and regulations, including additional regulations that may

 

27


FACTORS AFFECTING FUTURE RESULTS (continued)

 

be promulgated under the Dodd-Frank Act, could affect required regulatory capital for financial institutions, including Northern Trust, potentially resulting in changes to the cost and composition of capital for Northern Trust; risks and uncertainties inherent in the litigation and regulatory process, including the adequacy of contingent liability, tax, and other accruals; and the risk of events that could harm Northern Trust’s reputation and so undermine the confidence of clients, counterparties, rating agencies, and stockholders.

Some of these and other risks and uncertainties that may affect future results are discussed in more detail in the section of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” captioned “Risk Management” in the 2012 Annual Report to Shareholders (pages 47-59), in the section of the “Notes to Consolidated Financial Statements” in the 2012 Annual Report to Shareholders captioned “Note 24 – Contingent Liabilities” (pages 108-110), in the sections of “Item 1 – Business” of the 2012 Annual Report on Form 10-K captioned “Government Monetary and Fiscal Policies,” “Competition” and “Regulation and Supervision” (pages 2-14), and in “Item 1A – Risk Factors” of the 2012 Annual Report on Form 10-K (pages 28-38) as modified by Item 1A in the Corporation’s Quarterly Reports on Form 10-Q for the quarters ended March 31, 2013 and June 30, 2013. All forward-looking statements included in this report are based upon information presently available, and Northern Trust assumes no obligation to update any forward-looking statements.

 

28


CONSOLIDATED BALANCE SHEET   
   NORTHERN TRUST CORPORATION

 

        
     September 30,     December 31,  

(In Millions Except Share Information)

   2013     2012  
     (Unaudited)        

Assets

    

Cash and Due from Banks

   $ 2,690.7      $ 3,752.7   

Federal Funds Sold and Securities Purchased under Agreements to Resell

     534.6        60.8   

Interest-Bearing Deposits with Banks

     17,383.9        18,803.5   

Federal Reserve Deposits and Other Interest-Bearing

     8,452.8        7,619.7   

Securities

    

Available for Sale

     27,501.6        28,643.5   

Held to Maturity (Fair value of $3,053.2 and $2,394.8)

     3,053.6        2,382.0   

Trading Account

     9.6        8.0   
  

 

 

   

 

 

 

Total Securities

     30,564.8        31,033.5   
  

 

 

   

 

 

 

Loans and Leases

    

Commercial

     12,481.2        12,897.2   

Personal

     16,583.6        16,607.3   
  

 

 

   

 

 

 

Total Loans and Leases (Net of unearned income of $273.0 and $297.9)

     29,064.8        29,504.5   
  

 

 

   

 

 

 

Allowance for Credit Losses Assigned to Loans and Leases

     (287.2     (297.9

Buildings and Equipment

     444.3        469.9   

Client Security Settlement Receivables

     1,630.2        2,049.1   

Goodwill

     537.7        537.8   

Other Assets

     4,952.9        3,930.2   
  

 

 

   

 

 

 

Total Assets

   $ 95,969.5      $ 97,463.8   
  

 

 

   

 

 

 

Liabilities

    

Deposits

    

Demand and Other Noninterest-Bearing

   $ 15,990.1      $ 20,519.0   

Savings and Money Market

     13,802.6        15,189.7   

Savings Certificates and Other Time

     1,939.6        2,466.1   

Non U.S. Offices – Noninterest-Bearing

     1,412.2        3,512.8   

                             – Interest-Bearing

     45,017.2        39,720.2   
  

 

 

   

 

 

 

Total Deposits

     78,161.7        81,407.8   

Federal Funds Purchased

     1,053.6        780.2   

Securities Sold Under Agreements to Repurchase

     469.0        699.8   

Other Borrowings

     1,804.7        367.4   

Senior Notes

     1,996.5        2,405.8   

Long-Term Debt

     993.5        1,421.6   

Floating Rate Capital Debt

     277.1        277.0   

Other Liabilities

     3,396.3        2,577.2   
  

 

 

   

 

 

 

Total Liabilities

     88,152.4        89,936.8   
  

 

 

   

 

 

 

Stockholders’ Equity

    

Common Stock, $1.66 2/3 Par Value; Authorized 560,000,000 shares; Outstanding shares of 238,983,842 and 238,914,988

     408.6        408.6   

Additional Paid-In Capital

     1,031.8        1,012.7   

Retained Earnings

     7,040.1        6,702.7   

Accumulated Other Comprehensive Loss

     (337.9     (283.0

Treasury Stock (6,187,682 and 6,256,536 shares, at cost)

     (325.5     (314.0
  

 

 

   

 

 

 

Total Stockholders’ Equity

     7,817.1        7,527.0   
  

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 95,969.5      $ 97,463.8   
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

29


CONSOLIDATED STATEMENT OF INCOME    NORTHERN TRUST CORPORATION
(UNAUDITED)   

 

     Three Months
Ended September 30,
     Nine Months
Ended September 30,
 

(In Millions Except Share Information)

   2013     2012      2013     2012  

Noninterest Income

         

Trust, Investment and Other Servicing Fees

   $ 648.0      $ 601.9       $ 1,936.0      $ 1,782.9   

Foreign Exchange Trading Income

     62.8        44.0         193.6        165.3   

Treasury Management Fees

     17.6        16.3         51.5        51.0   

Security Commissions and Trading Income

     16.8        17.9         53.4        53.6   

Other Operating Income

     67.2        46.6         128.3        119.2   

Investment Security Gains (Losses), net (Note)

     (2.2     0.2         (1.9     (1.7
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Noninterest Income

     810.2        726.9         2,360.9        2,170.3   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net Interest Income

         

Interest Income

     291.1        323.1         853.1        985.6   

Interest Expense

     54.1        77.5         169.9        229.5   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net Interest Income

     237.0        245.6         683.2        756.1   

Provision for Credit Losses

     5.0        10.0         15.0        20.0   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net Interest Income after Provision for Credit Losses

     232.0        235.6         668.2        736.1   
  

 

 

   

 

 

    

 

 

   

 

 

 

Noninterest Expense

         

Compensation

     324.6        315.7         971.8        951.1   

Employee Benefits

     63.5        61.3         191.0        194.3   

Outside Services

     145.9        126.6         412.0        388.5   

Equipment and Software

     95.5        86.0         279.0        276.2   

Occupancy

     43.3        43.8         130.0        128.2   

Other Operating Expense

     67.9        63.0         215.5        199.0   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Noninterest Expense

     740.7        696.4         2,199.3        2,137.3   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income before Income Taxes

     301.5        266.1         829.8        769.1   

Provision for Income Taxes

     95.0        87.3         268.2        249.5   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net Income

   $ 206.5      $ 178.8       $ 561.6      $ 519.6   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net Income Applicable to Common Stock

   $ 206.5      $ 178.8       $ 561.6      $ 519.6   
  

 

 

   

 

 

    

 

 

   

 

 

 

Per Common Share

         

Net Income – Basic

   $ 0.85      $ 0.73       $ 2.31      $ 2.13   

                    – Diluted

     0.84        0.73         2.29        2.12   
  

 

 

   

 

 

    

 

 

   

 

 

 

Average Number of Common Shares Outstanding – Basic

     239,930,074        240,237,014         239,614,868        240,740,803   

                                                                                   – Diluted

     241,330,652        240,697,062         240,857,697        241,205,186   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

   NORTHERN TRUST CORPORATION

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(UNAUDITED)

  

 

     Three Months
Ended September 30,
    Nine Months
Ended September 30,
 

(In Millions)

   2013     2012     2013     2012  

Net Income

   $ 206.5      $ 178.8      $ 561.6      $ 519.6   

Other Comprehensive Income (Net of Tax and Reclassifications)

        

Net Unrealized Gains (Losses) on Securities Available for Sale

     5.8        35.6        (74.4     67.3   

Net Unrealized Gains (Losses) on Cash Flow Hedges

     4.3        3.1        1.2        5.5   

Foreign Currency Translation Adjustments

     (4.4     14.2        (2.8     24.1   

Pension and Other Postretirement Benefit Adjustments

     7.1        5.3        21.1        32.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other Comprehensive Income

     12.8        58.2        (54.9     129.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive Income

   $ 219.3      $ 237.0      $ 506.7      $ 649.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Note:    Changes in Other-Than-Temporary-Impairment (OTTI) Losses

   $ —        $ 0.4      $ —        $ (2.7

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

     —          (0.6     —          (0.6

Other Security Gains (Losses), net

     (2.2     0.4        (1.9     1.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Investment Security Gains (Losses), net

   $ (2.2   $ 0.2      $ (1.9   $ (1.7
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

30


CONSOLIDATED STATEMENT OF CHANGES IN    NORTHERN TRUST CORPORATION

STOCKHOLDERS’ EQUITY

(UNAUDITED)

  

 

     Nine Months  
     Ended September 30,  

(In Millions)

   2013     2012  

Common Stock

    

Balance at January 1 and September 30

   $ 408.6      $ 408.6   
  

 

 

   

 

 

 

Additional Paid-in Capital

    

Balance at January 1

     1,012.7        977.5   

Treasury Stock Transactions – Stock Options and Awards

     (41.2     (32.2

Stock Options and Awards – Amortization

     57.4        58.2   

Stock Options and Awards – Tax Benefits

     2.9        1.3   
  

 

 

   

 

 

 

Balance at September 30

     1,031.8        1,004.8   
  

 

 

   

 

 

 

Retained Earnings

    

Balance at January 1

     6,702.7        6,302.3   

Net Income

     561.6        519.6   

Dividends Declared – Common Stock

     (224.2     (214.0
  

 

 

   

 

 

 

Balance at September 30

     7,040.1        6,607.9   
  

 

 

   

 

 

 

Accumulated Other Comprehensive Income (Loss)

    

Balance at January 1

     (283.0     (345.6

Net Unrealized Gains (Losses) on Securities Available for Sale

     (74.4     67.3   

Net Unrealized Gains (Losses) on Cash Flow Hedges

     1.2        5.5   

Foreign Currency Translation Adjustments

     (2.8     24.1   

Pension and Other Postretirement Benefit Adjustments

     21.1        32.8   
  

 

 

   

 

 

 

Balance at September 30

     (337.9     (215.9
  

 

 

   

 

 

 

Treasury Stock

    

Balance at January 1

     (314.0     (225.5

Stock Options and Awards

     175.6        52.3   

Stock Purchased

     (187.1     (100.0
  

 

 

   

 

 

 

Balance at September 30

     (325.5     (273.2
  

 

 

   

 

 

 

Total Stockholders’ Equity at September 30

   $ 7,817.1      $ 7,532.2   
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

31


CONSOLIDATED STATEMENT OF CASH FLOWS    NORTHERN TRUST CORPORATION
(UNAUDITED)   

 

      Nine Months
Ended September 30,
 

(In Millions)

   2013     2012  

Cash Flows from Operating Activities:

    

Net Income

   $ 561.6      $ 519.6   

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

    

Investment Security (Gains) Losses, net

     1.9        1.7   

Amortization and Accretion of Securities and Unearned Income

     25.8        (37.7

Provision for Credit Losses

     15.0        20.0   

Depreciation on Buildings and Equipment

     69.5        66.2   

(Gains) Losses on Sale of Buildings and Equipment

     (32.6     —     

Amortization of Computer Software

     152.5        134.2   

Amortization of Intangibles

     15.5        15.0   

Pension Plan Contribution

     (16.4     (12.3

Change in Receivables

     (27.9     (35.6

Change in Interest Payable

     (14.7     1.2   

Change in Collateral With Derivative Counterparties, net

     111.0        (85.4

Other Operating Activities, net