Form 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the Quarterly Period Ended March 31, 2014

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   (I.R.S. Employer
incorporation or organization)   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

236,481,078 Shares - $1.66 2/3 Par Value

(Shares of Common Stock Outstanding on March 31, 2014)

 

 

 


CONSOLIDATED FINANCIAL HIGHLIGHTS
(UNAUDITED)

 

     Three Months  
     Ended March 31,  

FOR THE PERIOD (In Millions)

   2014     2013     % Change (*)  

Noninterest Income

      

Trust, Investment and Other Servicing Fees

   $ 679.5      $ 630.7        8

Foreign Exchange Trading Income

     50.1        59.5        (16

Treasury Management Fees

     16.8        16.8        —     

Security Commissions and Trading Income

     14.7        18.3        (20

Other Operating Income

     37.7        24.8        53   

Investment Security Gains (Losses), net

     (4.0     0.2        N/M   
  

 

 

   

 

 

   

 

 

 

Total Noninterest Income

     794.8        750.3        6   
  

 

 

   

 

 

   

 

 

 

Net Interest Income

     245.7        226.1        9   

Provision for Credit Losses

     3.0        5.0        (40
  

 

 

   

 

 

   

 

 

 

Net Interest Income after Provision for Credit Losses

     242.7        221.1        10   
  

 

 

   

 

 

   

 

 

 

Noninterest Expense

      

Compensation

     341.8        320.3        7   

Employee Benefits

     66.9        63.3        6   

Outside Services

     144.4        129.9        11   

Equipment and Software

     101.3        91.4        11   

Occupancy

     44.2        43.2        2   

Other Operating Expense

     69.4        80.8        (14
  

 

 

   

 

 

   

 

 

 

Total Noninterest Expense

     768.0        728.9        5   
  

 

 

   

 

 

   

 

 

 

Income before Income Taxes

     269.5        242.5        11   

Provision for Income Taxes

     88.1        78.5        12   
  

 

 

   

 

 

   

 

 

 

Net Income

   $ 181.4      $ 164.0        11
  

 

 

   

 

 

   

 

 

 

Average Total Assets

   $ 100,243.5      $ 91,569.3        9

PER COMMON SHARE

      
  

 

 

   

 

 

   

 

 

 

Net Income – Basic

   $ 0.75      $ 0.68        10

    – Diluted

     0.75        0.67        12   

Cash Dividends Declared Per Common Share

     0.31        0.30        3   

Book Value – End of Period (EOP)

     33.61        31.82        6   

Market Price – EOP

     65.56        54.56        20   

RATIOS

      
  

 

 

   

 

 

   

Return on Average Common Equity

     9.28     8.82  

Return on Average Assets

     0.73        0.73     

Dividend Payout Ratio

     41.3        44.8     

Average Stockholders’ Equity to Average Assets

     7.9        8.2     
  

 

 

   

 

 

   
PERIOD END (In Millions)    March 31,
2014
    December 31,
2013
    % Change (*)  

Assets

   $ 103,832.6      $ 102,947.3        1

Earning Assets

     93,702.4        93,367.2        —     

Deposits

     86,267.7        84,098.1        3   

Stockholders’ Equity

     7,948.3        7,912.0        —     

PERIOD END CLIENT ASSETS (In Billions)

  

 

   

 

   

 

 

Assets Under Custody

   $ 5,753.5      $ 5,575.7        3

Assets Under Management

     915.4        884.5        3   

RATIOS

      
  

 

 

   

 

 

   

Tier 1 Capital to Risk-Weighted Assets – EOP

     13.0     13.4  

Total Capital to Risk-Weighted Assets – EOP

     15.5        15.8     

Common Equity Tier 1 Capital to Risk-Weighted Assets - EOP (**)

     12.8       

Tier 1 Leverage Ratio

     7.8        7.9     
  

 

 

   

 

 

   

 

(*) Percentage calculations are based on actual balances rather than the rounded amounts presented in the Consolidated Financial Highlights.
(**) Beginning January 1, 2014, common equity tier 1 capital is calculated in accordance with the Basel III risk-based capital guidelines.

 

2


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

FIRST 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, Wealth Management (WM) and Corporate & Institutional Services (C&IS). Asset management and related services are provided to Wealth Management and C&IS clients primarily by a third business unit, Asset Management. Northern Trust emphasizes a high level of client service complemented by the effective use of technology, delivered by a fourth business unit, Operations & Technology (O&T). Except where the context otherwise requires, the term “Northern Trust” refers to Northern Trust Corporation and its subsidiaries on a consolidated basis.

The following should be read in conjunction with the consolidated financial statements and related footnotes included in this report. Investors should also read the section entitled “Forward-Looking Statements.”

Overview

Net income per diluted common share in the first quarter of 2014 was $0.75 compared to $0.67 per common share in the first quarter of 2013. Net income for the current quarter was $181.4 million, up $17.4 million, or 11%, from $164.0 million in the prior year quarter. The performance in the current quarter produced an annualized return on average common equity of 9.3% as compared to 8.8% in the prior year quarter. The annualized return on average assets was 0.73% in both the current and prior year quarter.

The prior year quarter included a $12.4 million pre-tax write-off of certain fee receivables resulting from the correction of an accrual methodology followed in prior years, as well as restructuring and integration related charges of $1.8 million. These prior year quarter items totaled $14.2 million ($8.9 million after tax, or $0.04 per common share).

Revenue of $1.04 billion in the current quarter was up $64.1 million, or 7%, from $976.4 million in the prior year quarter. Noninterest income, which represented 76% of revenue, increased $44.5 million, or 6%, to $794.8 million from the prior year quarter’s $750.3 million, primarily reflecting higher trust, investment and other servicing fees, partially offset by lower foreign exchange trading income as compared to the prior year quarter.

Net interest income for the current quarter increased $19.6 million, or 9%, to $245.7 million as compared to $226.1 million in the prior year quarter, due to higher levels of average earning assets, partially offset by a decrease in the net interest margin.

Net investment security losses totaled $4.0 million in the current quarter, reflecting $3.9 million of charges relating to the other-than-temporary impairment of certain Community Reinvestment Act (CRA) eligible securities.

 

3


Overview (continued)

 

Noninterest expense totaled $768.0 million in the current quarter, up $39.1 million, or 5%, from $728.9 million in the prior year quarter, reflecting higher compensation, outside services, and equipment and software expense, partially offset by lower other operating expense.

Noninterest Income

The components of noninterest income are provided below.

 

Noninterest Income

   Three Months Ended March 31,  

($ In Millions)

   2014     2013      Change  

Trust, Investment and Other Servicing Fees

   $ 679.5      $ 630.7       $ 48.8        8

Foreign Exchange Trading Income

     50.1        59.5         (9.4     (16

Treasury Management Fees

     16.8        16.8         —          —     

Security Commissions and Trading Income

     14.7        18.3         (3.6     (20

Other Operating Income

     37.7        24.8         12.9        53   

Investment Security Gains (Losses), net

     (4.0     0.2         (4.2     N/M   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Noninterest Income

   $ 794.8      $ 750.3       $ 44.5        6
  

 

 

   

 

 

    

 

 

   

 

 

 

Trust, investment and other servicing fees are based generally on the market value of assets held in custody, managed and serviced; the volume of transactions; securities lending volume and spreads; and fees for other services rendered. Certain market value calculations on which fees are based are performed on a monthly or quarterly basis and can be based on the beginning, ending or daily average value of the client portfolio.

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

 

                          Change     Change  
Assets Under Custody    March 31,      December 31,      March 31,      Q1-14/     Q1-14/  

($ In Billions)

   2014      2013      2013      Q4-13     Q1-13  

Corporate & Institutional

   $ 5,249.9       $ 5,079.7       $ 4,569.1         3     15

Wealth Management

     503.6         496.0         455.3         2        11   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Assets Under Custody

   $ 5,753.5       $ 5,575.7       $ 5,024.4         3     15
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

                          Change     Change  
Assets Under Management    March 31,      December 31,      March 31,      Q1-14/     Q1-14/  

($ In Billions)

   2014      2013      2013      Q4-13     Q1-13  

Corporate & Institutional

   $ 698.2       $ 662.7       $ 604.2         5     16

Wealth Management

     217.2         221.8         206.0         (2     5   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Assets Under Management

   $ 915.4       $ 884.5       $ 810.2         3     13
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

C&IS assets under custody totaled $5.2 trillion, up 15% from the prior year quarter, and include $3.3 trillion of global custody assets, 19% higher compared to the prior year quarter. C&IS assets under management include $116.4 billion of securities lending collateral, a 15% increase from the prior year quarter.

 

4


Noninterest Income (continued)

 

Changes in assets under custody and under management are in comparison to the twelve month increase in the S&P 500® index and MSCI EAFE® index (USD) of 19.3% and 14.4%, respectively.

Custodied and managed assets were invested as follows at March 31:

 

     2014     2013  

Assets Under Custody

   C&IS     WM     Consolidated     C&IS     WM     Consolidated  

Equities

     45     55     46     46     50     46

Fixed Income Securities

     37        22        35        36        24        35   

Cash and Other Assets

     18        23        19        18        26        19   

Assets Under Management

                                    

Equities

     55     46     53     53     41     50

Fixed Income Securities

     13        28        16        14        29        18   

Cash and Other Assets

     32        26        31        33        30        32   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Trust, investment and other servicing fees in C&IS increased $30.5 million, or 9%, to $379.2 million in the current quarter from the prior year quarter’s $348.7 million.

 

C&IS Trust, Investment and Other Servicing Fees

   Three Months Ended March 31,  

($ In Millions)

   2014      2013      Change  

Custody and Fund Administration

   $ 252.2       $ 223.8       $ 28.4        13

Investment Management

     75.0         75.5         (0.5     (1

Securities Lending

     22.7         22.3         0.4        2   

Other

     29.3         27.1         2.2        8   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 379.2       $ 348.7       $ 30.5        9
  

 

 

    

 

 

    

 

 

   

 

 

 

Custody and fund administration fees, the largest component of C&IS fees, increased 13%, primarily driven by new business and the favorable impact of equity markets. C&IS investment management fees decreased 1%, primarily reflecting higher waived fees in money market mutual funds, partially offset by higher equity markets and new business. Money market mutual fund fee waivers in C&IS, attributable to persistent low short-term interest rates, totaled $14.9 million in the current quarter, compared to waived fees of $8.8 million in the prior year quarter. Securities lending revenue increased 2%, primarily reflecting higher volumes in the current quarter.

Trust, investment and other servicing fees in Wealth Management totaled $300.3 million in the current quarter, increasing $18.3 million, or 6%, from $282.0 million in the prior year quarter. The increased fees in the current quarter are primarily due to higher equity markets and new business, partially offset by higher waived fees in money market mutual funds and the impact of fee reductions in certain mutual funds. Money market mutual fund fee waivers in Wealth Management totaled $17.6 million in the current quarter compared with $13.4 million in the prior year quarter.

 

5


Noninterest Income (continued)

 

Foreign exchange trading income totaled $50.1 million, down $9.4 million, or 16%, compared with $59.5 million in the prior year quarter. The decrease is attributable to lower currency market volatility as compared to the prior year quarter.

Other operating income totaled $37.7 million in the current quarter, up $12.9 million, or 53%, from $24.8 million in the prior year quarter. The components of other operating income are provided below.

 

Other Operating Income

   Three Months Ended March 31,  

($ In Millions)

   2014      2013     Change  

Loan Service Fees

   $ 15.7       $ 14.9      $ 0.8        5

Banking Service Fees

     12.3         12.4        (0.1     (1

Other Income

     9.7         (2.5     12.2        N/M   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total Other Operating Income

   $ 37.7       $ 24.8      $ 12.9        53
  

 

 

    

 

 

   

 

 

   

 

 

 

The other income component of other operating income in the prior year quarter included the $12.4 million write-off of certain fee receivables.

Net investment security losses totaled $4.0 million in the current quarter, reflecting $3.9 million of charges relating to the other-than-temporary impairment of certain CRA eligible securities.

Net Interest Income

Net interest income for the quarter on an FTE basis totaled $254.4 million, up $20.7 million, or 9%, compared to $233.7 million in the prior year quarter. The increase is the result of higher levels of average earning assets, partially offset by a decline in the net interest margin to 1.12% from 1.15% in the prior year quarter. Average earning assets for the quarter were $91.8 billion, up $9.6 billion, or 12%, from $82.2 billion in the prior year quarter, primarily reflecting higher levels of Federal Reserve deposits. The increase in Federal Reserve deposits as compared to the prior year quarter is due to higher levels of non-U.S. office client interest-bearing deposits and other short-term borrowings.

The decline in the net interest margin reflects lower yields on earning assets, partially offset by a lower cost of interest-related funds. 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 20.

 

6


Net Interest Income (continued)

 

The balance sheet line item Federal Reserve Deposits and Other Interest-Bearing averaged $12.7 billion in the current quarter as compared to $3.9 billion in the prior year quarter, an increase of $8.8 billion.

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 $32.4 billion, up $1.1 billion, or 3%, from $31.3 billion in the prior year quarter.

Loans and leases averaged $29.2 billion in the current quarter, up $515.5 million, or 2%, from $28.7 billion in the prior year quarter, primarily reflecting an increase in average private client loans and commercial real estate loans. Private client loans averaged $6.2 billion in the current quarter, up $338.3 million, or 6%, from the prior year quarter’s average of $5.9 billion. Commercial real estate loans averaged $3.0 billion in the current quarter, up $57.1 million, or 2%, from the prior year quarter’s average of $2.9 billion.

Northern Trust utilizes a diverse mix of funding sources. Total interest-bearing deposits averaged $63.1 billion in the current quarter, compared to $56.5 billion in the prior year quarter, an increase of $6.6 billion, or 12%. Other interest-bearing funds averaged $8.6 billion in the current quarter, an increase of $1.2 billion, or 16%, from $7.4 billion in the prior year quarter, attributable to higher average short-term borrowings and long-term debt. The balances within short-term borrowing classifications vary based on funding requirements and strategies, interest rate levels, changes in the volume of lower-cost deposit sources, and the availability of collateral to secure these borrowings. Average net noninterest-related funds utilized to fund earning assets increased $1.9 billion, or 10%, to $20.2 billion from $18.3 billion in the prior year quarter, primarily resulting from higher 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 page 21.

Provision for Credit Losses

The provision for credit losses was $3.0 million in the current quarter compared to $5.0 million in the prior year quarter. Net charge-offs were $1.5 million in the current quarter resulting from $11.5 million of charge-offs and $10.0 million of recoveries, compared to $8.7 million of net charge-offs in the prior year quarter resulting from $12.6 million of charge-offs and $3.9 million of recoveries. Nonperforming assets increased 3% from the prior year quarter. Residential real estate loans accounted for 70% and 69% of total nonperforming loans and leases at March 31, 2014 and 2013, respectively. For additional discussion of the provision and allowance for credit losses, refer to the “Asset Quality” section beginning on page 15.

 

7


Noninterest Expense

 

The components of noninterest expense are provided below.

 

Noninterest Expense

   Three Months Ended March 31,  

($ In Millions)

   2014      2013      Change  

Compensation

   $ 341.8       $ 320.3       $ 21.5        7

Employee Benefits

     66.9         63.3         3.6        6   

Outside Services

     144.4         129.9         14.5        11   

Equipment and Software

     101.3         91.4         9.9        11   

Occupancy

     44.2         43.2         1.0        2   

Other Operating Expense

     69.4         80.8         (11.4     (14
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Noninterest Expense

   $ 768.0       $ 728.9       $ 39.1        5
  

 

 

    

 

 

    

 

 

   

 

 

 

Compensation expense, the largest component of noninterest expense, equaled $341.8 million, up $21.5 million, or 7%, from $320.3 million in the prior year quarter, primarily attributable to higher staff levels and base pay adjustments. Staff on a full-time equivalent basis at March 31, 2014 totaled approximately 14,900, up 5% from a year ago.

Employee benefit expense equaled $66.9 million, up 6% from $63.3 million in the prior year quarter, reflecting higher payroll tax expense and expense associated with employee medical benefits, partially offset by lower pension expense.

Expense associated with outside services totaled $144.4 million, up $14.5 million, or 11%, from $129.9 million in the prior year quarter. The increase primarily reflects higher consulting expense, including costs associated with an evolving set of regulatory and compliance requirements, as well as increased sub-custodian and technical services expense.

Equipment and software expense totaled $101.3 million, up $9.9 million, or 11%, from $91.4 million in the prior year quarter. The current quarter includes higher software amortization and related software support costs.

Occupancy expense equaled $44.2 million, up 2% from $43.2 million in the prior year quarter.

 

8


Noninterest Expense (continued)

 

Other operating expense totaled $69.4 million, down $11.4 million, or 14%, from $80.8 million in the prior year quarter. The components of other operating expense are provided below.

 

Other Operating Expense

   Three Months Ended March 31,  

($ In Millions)

   2014      2013      Change  

Business Promotion

   $ 28.4       $ 28.6       $ (0.2     (1 )% 

FDIC Insurance Premiums

     5.9         6.6         (0.7     (12

Staff Related

     9.4         10.5         (1.1     (10

Other Intangible Amortization

     4.9         5.2         (0.3     (5

Other Expenses

     20.8         29.9         (9.1     (30
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Other Operating Expense

   $ 69.4       $ 80.8       $ (11.4     (14 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

The decrease in the other expenses component of other operating expense primarily reflects lower charges associated with account servicing activities.

Provision for Income Taxes

Income tax expense was $88.1 million, representing an effective tax rate of 32.7%, and $78.5 million in the prior year quarter, representing an effective tax rate of 32.4%.

 

9


BUSINESS UNIT REPORTING

The following tables reflect the earnings contributions and average assets of Northern Trust’s business units for the three month periods ended March 31, 2014 and 2013. 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

  Corporate &     Wealth     Treasury and     Total  

March 31,

  Institutional Services     Management     Other     Consolidated  

($ In Millions)

  2014     2013     2014     2013     2014     2013     2014     2013  

Noninterest Income

               

Trust, Investment and Other Servicing Fees

  $ 379.2      $ 348.7      $ 300.3      $ 282.0      $ —        $ —        $ 679.5      $ 630.7   

Foreign Exchange Trading Income

    48.1        58.2        2.0        1.3        —          —          50.1        59.5   

Other Noninterest Income

    44.4        40.2        22.7        17.2        (1.9     2.7        65.2        60.1   

Net Interest Income (FTE)*

    73.7        64.1        135.0        147.8        45.7        21.8        254.4        233.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Revenue*

    545.4        511.2        460.0        448.3        43.8        24.5        1,049.2        984.0   

Provision for Credit Losses

    1.2        (2.7     1.8        7.7        —          —          3.0        5.0   

Noninterest Expense

    423.5        398.7        318.8        301.8        25.7        28.4        768.0        728.9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before Income Taxes*

    120.7        115.2        139.4        138.8        18.1        (3.9     278.2        250.1   

Provision (Benefit) for Income Taxes*

    34.8        35.9        52.6        52.8        9.4        (2.6     96.8        86.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

  $ 85.9      $ 79.3      $ 86.8      $ 86.0      $ 8.7      $ (1.3   $ 181.4      $ 164.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of Consolidated Net Income

    47     48     48     52     5     N/M        100     100

Average Assets

  $ 57,252.4      $ 51,316.8      $ 22,528.7      $ 22,861.4      $ 20,462.4      $ 17,391.1      $ 100,243.5      $ 91,569.3   

 

* Stated on a fully taxable equivalent basis (FTE). Total consolidated includes FTE adjustments of $8.7 million for 2014 and $7.6 million for 2013.

Corporate & Institutional Services

C&IS net income totaled $85.9 million as compared to $79.3 million in the prior year quarter, an increase of $6.6 million, or 8%. Noninterest income was $471.7 million, up $24.6 million, or 6%, from $447.1 million in the prior year quarter, primarily reflecting higher trust, investment and other servicing fees, partially offset by lower foreign exchange trading income.

 

C&IS Trust, Investment and Other Servicing Fees

   Three Months Ended March 31,  

($ In Millions)

   2014      2013      Change  

Custody and Fund Administration

   $ 252.2       $ 223.8       $ 28.4        13

Investment Management

     75.0         75.5         (0.5     (1

Securities Lending

     22.7         22.3         0.4        2   

Other

     29.3         27.1         2.2        8   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 379.2       $ 348.7       $ 30.5        9
  

 

 

    

 

 

    

 

 

   

 

 

 

Custody and fund administration fees, the largest component of C&IS fees, increased 13%, primarily driven by new business and the favorable impact of equity markets. C&IS investment management fees decreased 1%, primarily reflecting higher waived fees in money market mutual funds, partially offset by higher equity markets and new business. Money market mutual fund fee waivers in C&IS, attributable to persistent low short-term

 

10


Corporate & Institutional Services (continued)

 

interest rates, totaled $14.9 million in the current quarter, compared to waived fees of $8.8 million in the prior year quarter. Securities lending revenue increased 2%, primarily reflecting higher volumes in the current quarter.

Foreign exchange trading income totaled $48.1 million, a decrease of $10.1 million, or 17%, from $58.2 million in the prior year quarter, attributable to lower currency market volatility compared to the prior year quarter.

Other noninterest income in C&IS totaled $44.4 million, up $4.2 million, or 10%, from $40.2 million in the prior year quarter. The current quarter includes lower security commissions and trading income as compared to the prior year quarter. The prior year quarter included a $6.6 million reduction in connection with the write-off of certain fee receivables.

Net interest income stated on an FTE basis was $73.7 million, up $9.6 million, or 15% from $64.1 million in the prior year quarter. The net interest margin equaled 0.59%, unchanged from the prior year quarter. The increase in net interest income is attributable to higher levels of average earning assets. Average earning assets totaled $50.6 billion, an increase of $6.8 billion, or 16%, from $43.8 billion in the prior year quarter, and 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, which averaged $43.1 billion in the current quarter, up $8.7 billion, or 25%, from $34.4 billion in the prior year quarter.

A provision for credit losses of $1.2 million was recorded in the current quarter, primarily reflecting higher levels of commercial and institutional loans, partially offset by continued improvement in the credit quality of the commercial and institutional loan class. The prior year quarter included a negative provision of $2.7 million.

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 $423.5 million, up $24.8 million, or 6%, from the prior year quarter’s $398.7 million. The increase reflects higher indirect expense allocations, as well as increased compensation, outside services and employee benefits expense as compared to the prior year quarter.

Wealth Management

Wealth Management net income was $86.8 million, up 1% from $86.0 million in the prior year quarter. Noninterest income was $325.0 million, up $24.5 million, or 8%, from $300.5 million in the prior year quarter. Trust, investment and other servicing fees in Wealth Management totaled $300.3 million, increasing $18.3 million, or 6%, from $282.0 million in the prior year quarter. The increased fees are primarily due to higher equity markets and new business, partially offset by higher waived fees in money market mutual funds and the impact of fee reductions in certain mutual funds. Money market mutual fund fee waivers

 

11


Wealth Management (continued)

 

in Wealth Management totaled $17.6 million compared with $13.4 million in the prior year quarter. Other noninterest income totaled $22.7 million, up $5.5 million, or 32%, from $17.2 million in the prior year quarter. Other noninterest income for the prior year quarter reflected a $5.8 million reduction in connection with the write-off of certain fee receivables.

Net interest income stated on an FTE basis was $135.0 million, down $12.8 million, or 9%, from $147.8 million in the prior year quarter, reflecting a decline in the net interest margin. The net interest margin decreased to 2.39% from 2.65% 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 $22.9 billion, up $282.9 million, or 1%, from $22.6 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 $1.8 million was recorded in the current quarter, primarily reflecting continued weakness in the residential real estate loan class, partially offset by a lower level of residential real estate loans and continued improvement in the credit quality of the commercial and institutional loan class. A provision for credit losses of $7.7 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 $318.8 million compared with $301.8 million in the prior year quarter, an increase of $17.0 million, or 6%. The increase reflects higher indirect expense allocations and increased compensation expense as compared to the prior year quarter.

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 (the Bank), and certain corporate-based expense, executive level compensation, and nonrecurring items not allocated to the business units. Noninterest income totaled negative $1.9 million, and includes charges of $3.9 million relating to the other-than-temporary impairment of certain CRA eligible securities. Noninterest income in the prior year quarter totaled $2.7 million.

Net interest income was $45.7 million, compared to $21.8 million in the prior year quarter, an increase of $23.9 million. The increase reflects higher internal yields on funds provided to business units and an increase in average earning assets of $2.6 billion, or 17%, to $18.3 billion in the current quarter from $15.7 billion in the prior year quarter.

Noninterest expense totaled $25.7 million, down 10% from $28.4 million in the prior year quarter, reflecting higher indirect expense allocations to C&IS and Wealth Management, partially offset by current quarter increases within compensation, equipment and software and outside services expense.

 

12


BALANCE SHEET

Total assets at March 31, 2014 were $103.8 billion and averaged $100.2 billion for the current quarter, compared with total assets of $93.2 billion at March 31, 2013 and average total assets of $91.6 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 $29.7 billion at March 31, 2014 and averaged $29.2 billion in the current quarter, up 3% and 2%, respectively, compared to $28.9 billion at March 31, 2013 and a $28.7 billion average in the prior year quarter. Securities, inclusive of Federal Reserve stock, Federal Home Loan Bank stock, and certain community development investments, which are classified in other assets in the consolidated balance sheet, totaled $34.2 billion at March 31, 2014 and averaged $32.4 billion for the current quarter, up 12% and 3%, respectively, compared to $30.6 billion at March 31, 2013 and $31.3 billion on average in the prior year quarter. In aggregate, the balance sheet line items federal funds sold and securities purchased under agreements to resell, interest-bearing deposits with banks, and Federal Reserve deposits and other interest-bearing totaled $29.9 billion at March 31, 2014 and averaged $30.3 billion in the current quarter, up 21% and 36%, respectively, from the prior year quarter balances. Interest-bearing deposits at March 31, 2014 totaled $65.1 billion and averaged $63.1 billion, up 14% and 12%, respectively, compared to $56.9 billion at March 31, 2013 and a $56.5 billion average in the prior year quarter. Noninterest-bearing deposits at March 31, 2014 totaled $21.2 billion and averaged $17.6 billion, up 12% and 4%, respectively, compared to $18.9 billion at March 31, 2013 and a $16.9 billion average in the prior year quarter.

Total stockholders’ equity averaged $7.9 billion, up 5%, from the prior year quarter’s average of $7.5 billion. The increase is primarily attributable to retained earnings, partially offset by dividend declarations and the repurchase of common stock pursuant to the Corporation’s share buyback program. During the three months ended March 31, 2014, the Corporation repurchased 2,624,715 shares at a cost of $163.0 million ($62.10 average price per share).

Northern Trust’s risk-based capital ratios remained strong at March 31, 2014 and exceeded the minimum regulatory requirements established by U.S. banking regulators.

 

13


BALANCE SHEET (continued)

 

The Corporation and the Bank each had capital ratios at March 31, 2014 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 March 31, 2014 and December 31, 2013.

 

     March 31, 2014     December 31, 2013  
     Tier 1
Capital
    Total
Capital
    Leverage
Ratio
    Tier 1
Capital
    Total
Capital
    Leverage
Ratio
 

Northern Trust Corporation

     13.0     15.5     7.8     13.4     15.8     7.9

The Northern Trust Company

     11.7     14.2     6.9     11.5     14.3     6.8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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 ratio of tier 1 capital and of common equity tier 1 capital to risk-weighted assets. Beginning January 1, 2014, common equity tier 1 capital is calculated in accordance with the Basel III risk-based capital guidelines, which requires the phasing out of tier 1 capital of 50% of trust preferred securities, and the inclusion in common equity tier 1 capital of certain additional capital items excluded from tier 1 capital.

 

($ In Millions)

   March 31,
2014
 

Ratios

  

Tier 1 Capital

     13.0

Common Equity Tier 1 Capital

     12.8
  

 

 

 

Tier 1 Capital

   $ 7,761.3   

Less: Floating Rate Capital Securities

     134.4   

Other adjustments

     2.6   
  

 

 

 

Common Equity Tier 1 Capital

   $ 7,629.5   
  

 

 

 

STATEMENT OF CASH FLOWS

For the three months ended March 31, 2014, net cash provided by operating activities was $538.5 million, primarily attributable to a reduction of net collateral deposited with derivative counterparties, as well as earnings, including the impact of non-cash charges such as the amortization of computer software, partially offset by increased receivables. Net cash provided by operating activities for the three months ended March 31, 2013 was $312.5 million, primarily the result of earnings and reflecting non-cash charges, as well as decreased net collateral deposited with derivative counterparties, partially offset by increased receivables.

Net cash used in investing activities of $822.1 million for the three months ended March 31, 2014 is primarily attributable to net purchases of securities held to maturity and available for sale, as well as increases within client settlement security receivables and loans and leases, partially offset by decreases within interest-bearing deposits with banks and Federal Reserve deposits.

 

14


STATEMENT OF CASH FLOWS (continued)

 

Net cash provided by investing activities of $4.4 billion for the three months ended March 31, 2013 primarily reflects a decrease in Federal Reserve deposits, net changes within securities available for sale, and changes in client settlement receivables. The decrease in Federal Reserve deposits in the prior year quarter was primarily the result of lower client deposits, partially offset by higher levels of short-term other borrowings.

For the three months ended March 31, 2014, net cash provided by financing activities totaled $788.1 million, primarily reflecting increased levels of total deposits, partially offset by lower levels of short-term other borrowings. The increase in the level of total deposits was primarily attributable to an increase in demand and other noninterest-bearing client deposits. The decrease in short-term other borrowings in the current year quarter reflects maturities of short-term other borrowings from the Federal Home Loan Bank.

For the three months ended March 31, 2013, net cash used in financing activities totaled $4.7 billion, primarily reflecting a decline in the level of U.S. demand deposits from the level at December 31, 2012, partially offset by increases in the levels of non-U.S. office noninterest-bearing deposits and short-term other borrowings. The decrease in U.S. demand deposits was largely driven by the expiration on December 31, 2012 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 prior year quarter was primarily attributable to additional short-term other borrowings from the Federal Home Loan Bank.

ASSET QUALITY

Securities Portfolio

Northern Trust maintains a high quality securities portfolio, with 87% of the combined available for sale, held to maturity, and trading account portfolios at March 31, 2014 comprised 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 comprised 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 6% 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 $14.4 million at March 31, 2014, comprised of $126.2 million and $111.8 million of gross unrealized gains and losses, respectively. Of the unrealized losses on securities at March 31, 2014, the largest component, totaling $45.7 million, related to government sponsored agency securities, primarily attributable to changes in market rates since their purchase. Unrealized losses of $41.2 million related to corporate debt securities primarily reflect widened credit spreads and higher market rates since purchase; 46% of the corporate debt portfolio is backed by guarantees provided by U.S. and non-U.S. governmental entities.

 

15


ASSET QUALITY (continued)

 

For the three months ended March 31, 2014, charges of $3.9 million were recorded relating to the other-than-temporary impairment (OTTI) of certain CRA eligible securities. There were no OTTI losses for the three months ended March 31, 2013. Northern Trust has evaluated non-agency residential mortgage-backed securities, and all other securities with unrealized losses, for possible OTTI in accordance with GAAP and Northern Trust’s security impairment review policy.

Northern Trust participates in the repurchase agreement market as 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, either directly or via third party custodians, 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, Cyprus and Slovenia to be those eurozone countries experiencing significant economic, fiscal and/or political strains. At March 31, 2014, Northern Trust’s gross exposure to obligors in Ireland totaled approximately $887 million, or less than 1% of Northern Trust’s total consolidated assets. There was no exposure to obligors in Portugal, Italy, Greece, Spain, Cyprus or Slovenia and no exposure to sovereign debt securities in those countries as of March 31, 2014. Of the total exposure to obligors in Ireland, $7 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 March 31, 2014 reflect Northern Trust’s risk management policies and practices, which operate to limit exposures to higher risk European financial and sovereign entities.

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.

 

16


ASSET QUALITY (continued)

 

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.

 

     March 31,     December 31,     March 31,  

($ In Millions)

   2014     2013     2013  

Nonperforming Loans and Leases

      

Commercial

      

Commercial and Institutional

   $ 26.1      $ 23.1      $ 21.1   

Commercial Real Estate

     51.6        49.2        53.7   
  

 

 

   

 

 

   

 

 

 

Total Commercial

     77.7        72.3        74.8   
  

 

 

   

 

 

   

 

 

 

Personal

      

Residential Real Estate

     180.9        189.1        173.6   

Private Client

     1.3        1.4        3.3   
  

 

 

   

 

 

   

 

 

 

Total Personal

     182.2        190.5        176.9   
  

 

 

   

 

 

   

 

 

 

Total Nonperforming Loans and Leases

   $ 259.9      $ 262.8      $ 251.7   

Other Real Estate Owned

     9.8        11.9        10.5   
  

 

 

   

 

 

   

 

 

 

Total Nonperforming Assets

   $ 269.7      $ 274.7      $ 262.2   
  

 

 

   

 

 

   

 

 

 

90 Day Past Due Loans Still Accruing

   $ 12.3      $ 16.4      $ 11.1   
  

 

 

   

 

 

   

 

 

 

Nonperforming Loans and Leases to Total Loans and Leases

     0.88     0.89     0.87
  

 

 

   

 

 

   

 

 

 

Coverage of Loan and Lease Allowance to

      

Nonperforming Loans and Leases

     1.1     1.1     1.2
  

 

 

   

 

 

   

 

 

 

Nonperforming assets of $269.7 million as of March 31, 2014 remain elevated from historical levels reflecting the effect of the economic downturn in 2008 on residential property valuations and general economic conditions. Residential real estate loans have exhibited persistent weakness, while commercial and institutional loans and commercial real estate loans have remained stable. 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. Changes in credit quality, including nonperforming loan balances, impact the level of the allowance for credit losses through the resultant adjustment of the specific allowance and of the qualitative factors used in the determination of the inherent allowance levels within the allowance for credit losses.

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 home equity credit lines, which generally require loan to collateral values of no more than 65% to 80% at inception. Revaluations of supporting collateral are obtained upon refinancing or default or when otherwise considered warranted. Collateral revaluations for mortgages are performed by independent third parties.

 

17


ASSET QUALITY (continued)

 

The commercial real estate class 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 for probable losses that are believed to be inherent in the loan and lease portfolios, undrawn 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, collateral value, 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 $3.0 million in the current quarter compared to $5.0 million in the prior year quarter. The current quarter provision reflects higher levels of commercial and institutional loans and continued weakness in residential real estate loans relative to the overall portfolio, partially offset by improvement in the credit quality of the commercial and institutional loan class. Residential real estate loans accounted for 70% and 69% of total nonperforming loans and leases at March 31, 2014 and 2013, respectively.

Note 6 to the consolidated financial statements includes a table that details the changes in the allowance for credit losses during the three months ended March 31, 2014 and 2013 due to charge-offs, recoveries, and the provision for credit losses.

 

18


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.

 

     March 31, 2014     December 31, 2013     March 31, 2013  
           Percent of           Percent of           Percent of  
     Allowance     Loans to     Allowance     Loans to     Allowance     Loans to  

($ In Millions)

   Amount     Total Loans     Amount     Total Loans     Amount     Total Loans  

Specific Allowance

   $ 26.3        —     $ 24.9          $ 34.8       
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allocated Inherent Allowance

            

Commercial

            

Commercial and Institutional

     70.5        26        67.5        25        74.4        25   

Commercial Real Estate

     72.2        10        71.5        10        77.0        10   

Lease Financing, net

     3.5        3        4.2        3        5.0        4   

Non-U.S.

     2.6        5        2.1        3        2.7        4   

Other

     —          1        —          2        —          2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Commercial

     148.8        45        145.3        43        159.1        45   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Personal

            

Residential Real Estate

     116.8        34        118.7        35        115.2        35   

Private Client

     17.5        21        19.0        22        14.7        20   

Other

     —          —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Personal

     134.3        55        137.7        57        129.9        55   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Allocated Inherent Allowance

   $ 283.1        100   $ 283.0        100   $ 289.0        100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Allowance for Credit Losses

     309.4          307.9          323.8     
  

 

 

     

 

 

     

 

 

   

Allowance Assigned to Loans and Leases

   $ 279.2        $ 278.1        $ 294.1     

Undrawn Commitments and Standby Letters of Credit

     30.2          29.8          29.7     
  

 

 

     

 

 

     

 

 

   

Total Allowance for Credit Losses

   $ 309.4        $ 307.9        $ 323.8     
  

 

 

     

 

 

     

 

 

   

Allowance Assigned to Loans and Leases to Total Loans and Leases

     0.94       0.95       1.02  
  

 

 

     

 

 

     

 

 

   

MARKET RISK MANAGEMENT

As described in the 2013 Annual Report to Shareholders, Northern Trust manages its interest rate risk through two primary measurement techniques: simulation of earnings and simulation of economic value of equity. Also, as part of its risk management activities, it regularly measures the risk of loss associated with foreign currency positions using a Value-at-Risk (VaR) model.

Based on this continuing evaluation process, Northern Trust’s interest rate risk position, as measured by current market implied forward rates and sensitivity analyses, and the VaR associated with the foreign exchange trading portfolio, have not changed significantly since December 31, 2013.

 

19


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  
     March 31, 2014     March 31, 2013  

($ In Millions)

   Reported     FTE Adj.      FTE     Reported     FTE Adj.      FTE  

Interest Income

   $ 295.4      $ 8.7       $ 304.1      $ 286.7      $ 7.6       $ 294.3   

Interest Expense

     49.7        —           49.7        60.6        —           60.6   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Net Interest Income

   $ 245.7      $ 8.7       $ 254.4      $ 226.1      $ 7.6       $ 233.7   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Net Interest Margin

     1.09        1.12     1.12        1.15

 

20


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

 

AVERAGE CONSOLIDATED BALANCE SHEET    NORTHERN TRUST CORPORATION
WITH ANALYSIS OF NET INTEREST INCOME   

 

(INTEREST AND RATE ON A FULLY TAXABLE    First Quarter  
EQUIVALENT BASIS)    2014     2013  
            Average                  Average        

($ In Millions)

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

Average Earning Assets

              

Federal Funds Sold and Securities Purchased under Agreements to Resell

   $ 0.7       $ 530.3        0.51   $ 0.1       $ 249.5        0.18

Interest-Bearing Deposits with Banks

     32.1         17,062.5        0.76        35.0         18,099.5        0.78   

Federal Reserve Deposits and Other Interest-Bearing

     8.0         12,702.5        0.26        2.5         3,872.0        0.26   

Securities

              

U.S. Government

     6.4         2,313.7        1.13        4.6         1,782.8        1.05   

Obligations of States and Political Subdivisions

     3.5         213.1        6.56        5.1         321.1        6.32   

Government Sponsored Agency

     32.5         17,834.7        0.74        28.0         18,280.6        0.62   

Other (1)

     36.5         12,006.5        1.23        29.9         10,890.6        1.11   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Securities

     78.9         32,368.0        0.99        67.6         31,275.1        0.88   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Loans and Leases (2)

     184.4         29,177.4        2.56        189.1         28,661.9        2.68   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Earning Assets

     304.1         91,840.7        1.34        294.3         82,158.0        1.45   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Allowance for Credit Losses Assigned to Loans and Leases

     —           (277.8     —          —           (296.1     —     

Cash and Due from Banks

     —           2,806.6        —          —           3,392.5        —     

Buildings and Equipment

     —           457.7        —          —           467.5        —     

Client Security Settlement Receivables

     —           904.4        —          —           793.3        —     

Goodwill

     —           540.8        —          —           532.6        —     

Other Assets

     —           3,971.1        —          —           4,521.5        —     
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Assets

   $ —         $ 100,243.5          $ —         $ 91,569.3       
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Average Source of Funds

              

Deposits

              

Savings and Money Market

   $ 2.3       $ 14,713.8        0.06   $ 2.8       $ 14,880.3        0.08

Savings Certificates and Other Time

     1.8         1,825.5        0.39        3.9         2,385.6        0.67   

Non-U.S. Offices - Interest-Bearing

     16.0         46,566.4        0.14        22.4         39,221.1        0.23   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Interest-Bearing Deposits

     20.1         63,105.7        0.13        29.1         56,487.0        0.21   

Short-Term Borrowings

     1.1         4,552.0        0.10        1.1         3,405.5        0.13   

Senior Notes

     17.5         1,996.6        3.57        19.2         2,403.9        3.24   

Long-Term Debt

     10.4         1,728.9        2.43        10.6         1,277.7        3.37   

Floating Rate Capital Debt

     0.6         277.1        0.81        0.6         277.1        0.88   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Interest-Related Funds

     49.7         71,660.3        0.28        60.6         63,851.2        0.39   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Interest Rate Spread

     —           —          1.06        —           —          1.06   

Demand and Other Noninterest-Bearing Deposits

     —           17,642.1        —          —           16,899.1        —     

Other Liabilities

     —           3,014.7        —          —           3,275.8        —     

Stockholders’ Equity

     —           7,926.4        —          —           7,543.2        —     
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ —         $ 100,243.5          $ —         $ 91,569.3       
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net Interest Income/Margin (FTE Adjusted)

   $ 254.4       $ —          1.12   $ 233.7       $ —          1.15
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net Interest Income/Margin (Unadjusted)

   $ 245.7       $ —          1.09   $ 226.1       $ —          1.12
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

ANALYSIS OF NET INTEREST INCOME CHANGES

DUE TO VOLUME AND RATE

 

     Three Months 2013/2012  
     Change Due To  
     Average               

(In Millions)

   Balance      Rate     Total  

Earning Assets (FTE)

   $ 34.6       $ (24.8   $ 9.8   

Interest-Related Funds

     7.5         (18.4     (10.9
  

 

 

    

 

 

   

 

 

 

Net Interest Income (FTE)

   $ 27.1       $ (6.4   $ 20.7   
  

 

 

    

 

 

   

 

 

 

 

(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 March 31, 2014 and 2013.
(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 37.5%. Total taxable equivalent interest adjustments amounted to $8.7 million and $7.6 million for the three months ended March 31 2014 and 2013, 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.

 

21


FORWARD-LOOKING STATEMENTS

This report contains statements that are forward-looking, such as statements concerning Northern Trust’s financial results and outlook, capital adequacy, dividend policy, risk management policies, litigation-related matters and contingent liabilities, accounting estimates and assumptions, industry trends, strategic initiatives, credit quality including allowance levels, planned capital expenditures and technology spending, future pension plan contributions, anticipated tax benefits and expenses, the expected impact of recent legislation and accounting pronouncements, and all other statements that do not relate to historical facts.

Forward-looking statements are typically identified by words or phrases such as “believe”, “expect”, “anticipate”, “intend”, “estimate”, “project”, “likely”, “may increase”, “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 and involve risks and uncertainties that are difficult to predict. These statements are based on assumptions about many important factors, 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 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;

 

    changes in foreign exchange trading client volumes, fluctuations and volatility in foreign currency exchange rates;

 

    a 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;

 

22


FORWARD-LOOKING STATEMENTS (continued)

 

    difficulties in measuring, or determining whether there is other-than-temporary impairment in, the value of securities held in Northern Trust’s investment portfolio;

 

    our ability to manage risks inherent in our business, including credit risk, operational risk, interest rate risk, liquidity risk, and strategic risk;

 

    natural disasters, pandemics, terrorist events, and global conflicts;

 

    the pace and extent of continued globalization of investment activity and growth in worldwide financial assets; regulatory and monetary policy developments;

 

    failure to satisfy regulatory standards or 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;

 

    our ability to maintain existing business, continue to generate new business in our existing markets, and identify and penetrate targeted markets;

 

    the impact of equity markets on fee revenue;

 

    our ability to address the complex needs of a global client base and manage compliance with legal, tax, regulatory and other requirements globally, especially in immature markets;

 

    our ability to maintain a product mix that achieves acceptable margins and to continue to generate investment results that satisfy clients and to develop an array of investment products;

 

    our success in generating revenue in our securities lending business, including for our clients;

 

    our success in recruiting and retaining employees and maintaining sufficient expertise;

 

    our success in controlling expenses and implementing revenue enhancement initiatives;

 

    our ability to innovate, 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;

 

    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, the current regulatory environment, and areas of increased regulatory emphasis and oversight in the U.S. and other countries such as anti-money laundering, anti-bribery, and client privacy;

 

23


FORWARD-LOOKING STATEMENTS (continued)

 

    risks that evolving regulations, such as Basel III and those 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;

 

    changes in the legal, regulatory and enforcement framework and oversight applicable to financial institutions, including changes that may affect leverage limits and risk-based capital and liquidity requirements for certain financial institutions, require financial institutions to pay higher assessments, expose financial institutions 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 and uncertainties inherent in the litigation and regulatory process, including the adequacy of contingent liability, tax, and other accruals;

 

    the risk of damage to our reputation which may undermine the confidence of clients, counterparties, rating agencies, and stockholders;

 

    risks associated with being a holding company, including our dependence on dividends from our principal subsidiary; and

 

    other factors identified elsewhere in this report and other filings with the U.S. Securities and Exchange Commission, including those factors described in “Item 1A – Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013, all of which are available on our website.

Actual results may differ materially from those expressed or implied by the forward-looking statements. Northern Trust assumes no obligation to update its forward-looking statements.

 

24


CONSOLIDATED BALANCE SHEET    NORTHERN TRUST CORPORATION

 

(In Millions Except Share Information)

   March 31,
2014
    December 31,
2013
 
     (Unaudited)        

Assets

    

Cash and Due from Banks

   $ 3,676.3      $ 3,162.4   

Federal Funds Sold and Securities Purchased under Agreements to Resell

     510.0        529.6   

Interest-Bearing Deposits with Banks

     17,155.8        19,397.4   

Federal Reserve Deposits and Other Interest-Bearing

     12,211.0        12,911.5   

Securities

    

Available for Sale

     29,540.6        28,392.8   

Held to Maturity (Fair value of $4,209.2 and $2,321.4)

     4,211.7        2,325.8   

Trading Account

     1.5        1.7   
  

 

 

   

 

 

 

Total Securities

     33,753.8        30,720.3   
  

 

 

   

 

 

 

Loans and Leases

    

Commercial

     13,280.7        12,620.0   

Personal

     16,380.1        16,765.5   
  

 

 

   

 

 

 

Total Loans and Leases (Net of unearned income of $300.4 and $286.2)

     29,660.8        29,385.5   
  

 

 

   

 

 

 

Allowance for Credit Losses Assigned to Loans and Leases

     (279.2     (278.1

Buildings and Equipment

     449.4        458.8   

Client Security Settlement Receivables

     1,845.2        1,355.2   

Goodwill

     541.6        540.7   

Other Assets

     4,307.9        4,764.0   
  

 

 

   

 

 

 

Total Assets

   $ 103,832.6      $ 102,947.3   
  

 

 

   

 

 

 

Liabilities

    

Deposits

    

Demand and Other Noninterest-Bearing

   $ 19,102.4      $ 16,888.7   

Savings and Money Market

     15,506.0        14,991.5   

Savings Certificates and Other Time

     2,034.5        1,874.4   

Non U.S. Offices – Noninterest-Bearing

     2,060.4        1,881.8   

   – Interest-Bearing

     47,564.4        48,461.7   
  

 

 

   

 

 

 

Total Deposits

     86,267.7        84,098.1   

Federal Funds Purchased

     1,013.9        965.1   

Securities Sold Under Agreements to Repurchase

     736.6        917.3   

Other Borrowings

     652.4        1,558.6   

Senior Notes

     1,996.7        1,996.6   

Long-Term Debt

     1,731.3        1,709.2   

Floating Rate Capital Debt

     277.2        277.1   

Other Liabilities

     3,208.5        3,513.3   
  

 

 

   

 

 

 

Total Liabilities

     95,884.3        95,035.3   
  

 

 

   

 

 

 

Stockholders’ Equity

    

Common Stock, $1.66 2/3 Par Value; Authorized 560,000,000 shares; Outstanding shares of 236,481,078 and 237,322,035

     408.6        408.6   

Additional Paid-In Capital

     1,022.9        1,035.7   

Retained Earnings

     7,241.4        7,134.8   

Accumulated Other Comprehensive Loss

     (236.1     (244.3

Treasury Stock (8,690,446 and 7,849,489 shares, at cost)

     (488.5     (422.8
  

 

 

   

 

 

 

Total Stockholders’ Equity

     7,948.3        7,912.0   
  

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 103,832.6      $ 102,947.3   
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

25


CONSOLIDATED STATEMENT OF INCOME    NORTHERN TRUST CORPORATION
(UNAUDITED)   
     Three Months
Ended March 31,
 

(In Millions Except Share Information)

   2014     2013  

Noninterest Income

    

Trust, Investment and Other Servicing Fees

   $ 679.5      $ 630.7   

Foreign Exchange Trading Income

     50.1        59.5   

Treasury Management Fees

     16.8        16.8   

Security Commissions and Trading Income

     14.7        18.3   

Other Operating Income

     37.7        24.8   

Investment Security Gains (Losses), net (Note)

     (4.0     0.2   
  

 

 

   

 

 

 

Total Noninterest Income

     794.8        750.3   
  

 

 

   

 

 

 

Net Interest Income

    

Interest Income

     295.4        286.7   

Interest Expense

     49.7        60.6   
  

 

 

   

 

 

 

Net Interest Income

     245.7        226.1   

Provision for Credit Losses

     3.0        5.0   
  

 

 

   

 

 

 

Net Interest Income after Provision for Credit Losses

     242.7        221.1   
  

 

 

   

 

 

 

Noninterest Expense

    

Compensation

     341.8        320.3   

Employee Benefits

     66.9        63.3   

Outside Services

     144.4        129.9   

Equipment and Software

     101.3        91.4   

Occupancy

     44.2        43.2   

Other Operating Expense

     69.4        80.8   
  

 

 

   

 

 

 

Total Noninterest Expense

     768.0        728.9   
  

 

 

   

 

 

 

Income before Income Taxes

     269.5        242.5   

Provision for Income Taxes

     88.1        78.5   
  

 

 

   

 

 

 

Net Income

   $ 181.4      $ 164.0   
  

 

 

   

 

 

 

Net Income Applicable to Common Stock

   $ 181.4      $ 164.0   
  

 

 

   

 

 

 

Per Common Share

    

Net Income – Basic

   $ 0.75      $ 0.68   

                     – Diluted

     0.75        0.67   
  

 

 

   

 

 

 

Average Number of Common Shares Outstanding – Basic

     237,208,151        239,167,559   

                                                                                         – Diluted

     239,050,714        240,189,215   
  

 

 

   

 

 

 

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(UNAUDITED)

   NORTHERN TRUST CORPORATION
                                                              
          Three Months
Ended March 31,
 

(In Millions)

        2014        2013  

Net Income

   $     181.4         $ 164.0   

Other Comprehensive Income (Net of Tax and Reclassifications)

       

Net Unrealized Gains (Losses) on Securities Available for Sale

     4.5           1.3   

Net Unrealized Gains (Losses) on Cash Flow Hedges

     1.6           (5.2

Foreign Currency Translation Adjustments

     (1.3        (4.2

Pension and Other Postretirement Benefit Adjustments

     3.4           7.0   
     

 

 

      

 

 

 

Other Comprehensive Income (Loss)

     8.2           (1.1
     

 

 

      

 

 

 

Comprehensive Income

   $ 189.6         $ 162.9   
     

 

 

      

 

 

 

Note:

  

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

   $ (4.6      $ —     
  

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

     0.7           —     
  

Other Security Gains (Losses), net

     (0.1        0.2   
     

 

 

      

 

 

 
  

Investment Security Gains (Losses), net

   $ (4.0      $ 0.2   
     

 

 

      

 

 

 

See accompanying notes to the consolidated financial statements.

 

26


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

 

     Three Months
Ended March 31,
 

(In Millions)

   2014     2013  

Common Stock

    

Balance at January 1 and March 31

   $ 408.6      $ 408.6   
  

 

 

   

 

 

 

Additional Paid-in Capital

    

Balance at January 1

     1,035.7        1,012.7   

Treasury Stock Transactions – Stock Options and Awards

     (43.2     (35.6

Stock Options and Awards – Amortization

     23.3        20.8   

Stock Options and Awards – Tax Benefits

     7.1        (2.7
  

 

 

   

 

 

 

Balance at March 31

     1,022.9        995.2   
  

 

 

   

 

 

 

Retained Earnings

    

Balance at January 1

     7,134.8        6,702.7   

Net Income

     181.4        164.0   

Dividends Declared – Common Stock

     (74.8     (72.9
  

 

 

   

 

 

 

Balance at March 31

     7,241.4        6,793.8   
  

 

 

   

 

 

 

Accumulated Other Comprehensive Income (Loss)

    

Balance at January 1

     (244.3     (283.0

Net Unrealized Gains (Losses) on Securities Available for Sale

     4.5        1.3   

Net Unrealized Gains (Losses) on Cash Flow Hedges

     1.6        (5.2

Foreign Currency Translation Adjustments

     (1.3     (4.2

Pension and Other Postretirement Benefit Adjustments

     3.4        7.0   
  

 

 

   

 

 

 

Balance at March 31

     (236.1     (284.1
  

 

 

   

 

 

 

Treasury Stock

    

Balance at January 1

     (422.8     (314.0

Stock Options and Awards

     97.3        87.1   

Stock Purchased

     (163.0     (74.5
  

 

 

   

 

 

 

Balance at March 31

     (488.5     (301.4
  

 

 

   

 

 

 

Total Stockholders’ Equity at March 31

   $ 7,948.3      $ 7,612.1   
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

27


CONSOLIDATED STATEMENT OF CASH FLOWS    NORTHERN TRUST CORPORATION
(UNAUDITED)   

 

     Three Months
Ended March 31,
 

(In Millions)

   2014     2013  

Cash Flows from Operating Activities:

    

Net Income

   $ 181.4      $ 164.0   

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

    

Investment Security (Gains) Losses, net

     4.0        (0.2

Amortization and Accretion of Securities and Unearned Income, net

     3.0        1.5   

Provision for Credit Losses

     3.0        5.0   

Depreciation on Buildings and Equipment

     23.0        22.4   

Amortization of Computer Software

     55.6        48.7   

Amortization of Intangibles

     4.9        5.2   

Pension Plan Contributions

     (13.9     (16.4

Change in Receivables

     (254.9     (32.3

Change in Interest Payable

     (0.1     (18.8

Change in Collateral With Derivative Counterparties, net

     505.7        52.3   

Other Operating Activities, net

     26.8        81.1   
  

 

 

   

 

 

 

Net Cash Provided by Operating Activities

     538.5        312.5   
  

 

 

   

 

 

 

Cash Flows from Investing Activities:

    

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

     19.6        (190.7

Change in Interest-Bearing Deposits with Banks

     2,329.1        108.7   

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

     700.2        1,791.0   

Purchases of Securities – Held to Maturity

     (2,467.4     (2,182.6

Proceeds from Maturity and Redemption of Securities – Held to Maturity

     597.6        1,633.6   

Purchases of Securities – Available for Sale

     (3,939.1     (2,276.8

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

     2,803.7        3,728.9   

Change in Loans and Leases

     (274.9     637.4   

Purchases of Buildings and Equipment

     (13.5     (11.9

Purchases and Development of Computer Software

     (74.9     (60.4

Change in Client Security Settlement Receivables

     (485.6     1,232.6   

Other Investing Activities, net

     (16.9     29.1   
  

 

 

   

 

 

 

Net Cash Provided by (Used in) Investing Activities

     (822.1     4,438.9   
  

 

 

   

 

 

 

Cash Flows from Financing Activities:

    

Change in Deposits

     2,082.4        (5,778.3

Change in Federal Funds Purchased

     48.8        540.3   

Change in Securities Sold under Agreements to Repurchase

     (180.7     (209.6

Change in Short-Term Other Borrowings

     (1,004.4     1,057.3   

Repayments of Senior Notes and Long-Term Debt

     (1.1     (201.0

Treasury Stock Purchased

     (163.0     (74.2

Net Proceeds from Stock Options

     54.0        51.1   

Cash Dividends Paid on Common Stock

     (75.0     (1.1

Other Financing Activities, net

     27.1        (52.1
  

 

 

   

 

 

 

Net Cash Provided by (Used in) Financing Activities

     788.1        (4,667.6
  

 

 

   

 

 

 

Effect of Foreign Currency Exchange Rates on Cash

     9.4        (63.0
  

 

 

   

 

 

 

Increase in Cash and Due from Banks

     513.9        20.8   

Cash and Due from Banks at Beginning of Year

     3,162.4        3,752.7   
  

 

 

   

 

 

 

Cash and Due from Banks at End of Period

   $ 3,676.3      $ 3,773.5   
  

 

 

   

 

 

 

Supplemental Disclosures of Cash Flow Information:

    

Interest Paid

   $ 50.4      $ 79.4   

Income Taxes Paid

     15.1        14.5   

Transfers from Loans to OREO

     1.9        4.4   
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

28


Notes to Consolidated Financial Statements

1. Basis of Presentation – The consolidated financial statements include the accounts of Northern Trust Corporation (Corporation) and its subsidiaries (collectively, Northern Trust). Significant intercompany balances and transactions have been eliminated. The consolidated financial statements, as of and for the periods ended March 31, 2014 and 2013, have not been audited by the Corporation’s independent registered public accounting firm. In the opinion of management, all accounting entries and adjustments, including normal recurring accruals, necessary for a fair presentation of the financial position and the results of operations for the interim periods have been made. Certain reclassifications have been made to the prior period consolidated financial statements to place them on a basis comparable with the current period’s consolidated financial statements. Within the statement of cash flows, net changes in the fair values of derivative assets and liabilities, previously included within Net Changes in Derivative Fair Value, Including Required Collateral, are included in Other Operating Activities, net. For a description of Northern Trust’s significant accounting policies, refer to Note 1 of the Notes to Consolidated Financial Statements in the 2013 Annual Report to Shareholders.

2. Recent Accounting Pronouncements – As of January 1, 2014, Northern Trust adopted Accounting Standards Update (ASU) No. 2014-01, “Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects (a consensus of the FASB Emerging Issues Task Force)”, and has elected to account for investments in qualified affordable housing projects using the proportional amortization method when the conditions to apply are met. Northern Trust recognized the cumulative effect of the adoption in the current period, resulting in a $1.1 million increase in the provision for income taxes and a $0.2 million increase in income before income taxes, and the adoption of the ASU will not have a material impact on Northern Trust’s consolidated financial position or results of operations going forward.

3. Fair Value Measurements – Fair Value Hierarchy. The following describes the hierarchy of valuation inputs (Levels 1, 2, and 3) used to measure fair value and the primary valuation methodologies used by Northern Trust for financial instruments measured at fair value on a recurring basis. Observable inputs reflect market data obtained from sources independent of the reporting entity; unobservable inputs reflect the entity’s own assumptions about how market participants would value an asset or liability based on the best information available. GAAP requires an entity measuring fair value to maximize the use of observable inputs and minimize the use of unobservable inputs and establishes a fair value hierarchy of inputs. Financial instruments are categorized within the hierarchy based on the lowest level input that is significant to their valuation. Northern Trust’s policy is to recognize transfers into and transfers out of fair value levels as of the end of the reporting period in which the transfer occurred. No transfers between fair value levels occurred during the three months ended March 31, 2014 or the year ended December 31, 2013.

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

Northern Trust’s Level 1 assets are comprised of available for sale investments in U.S. treasury securities.

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

 

29


Notes to Consolidated Financial Statements (continued)

 

Northern Trust’s Level 2 assets include available for sale and trading account securities, the fair values of which are determined predominantly by external pricing vendors. Prices received from vendors are compared to other vendor and third-party prices. If a security price obtained from a pricing vendor is determined to exceed pre-determined tolerance levels that are assigned based on an asset type’s characteristics, the exception is researched and, if the price is not able to be validated, an alternate pricing vendor is utilized, consistent with Northern Trust’s pricing source hierarchy. As of March 31, 2014, Northern Trust’s available for sale securities portfolio included 891 Level 2 securities with an aggregate market value of $27.0 billion. All 891 securities were valued by external pricing vendors. As of December 31, 2013, Northern Trust’s available for sale securities portfolio included 831 Level 2 securities with an aggregate market value of $26.4 billion. Of those, 829 securities, with an aggregate market value of $26.3 billion, were valued by external pricing vendors. The remaining 2 securities, with an aggregate market value of $57.4 million, were valued consistent with prices of similar securities as there were no vended prices available for these securities. Trading account securities, which totaled $1.5 million and $1.7 million as of March 31, 2014 and December 31, 2013, respectively, were all valued using external pricing vendors.

Northern Trust has established processes and procedures to assess the suitability of valuation methodologies used by external pricing vendors, including reviews of valuation techniques and assumptions used for selected securities. On a daily basis, periodic quality control reviews of prices received from vendors are conducted which include comparisons to prices on similar security types received from multiple pricing vendors and to the previous day’s reported prices for each security. Predetermined tolerance level exceptions are researched and may result in additional validation through available market information or the use of an alternate pricing vendor. Quarterly, Northern Trust reviews documentation from third-party pricing vendors regarding the valuation processes and assumptions used in their valuations and assesses whether the fair value levels assigned by Northern Trust to each security classification are appropriate. Annually, valuation inputs used within third-party pricing vendor valuations are reviewed for propriety on a sample basis through a comparison of inputs used to comparable market data, including security classifications that are less actively traded and security classifications comprising significant portions of the portfolio.

Level 2 assets and liabilities also include derivative contracts which are valued internally using widely accepted income-based models that incorporate inputs readily observable in actively quoted markets and reflect the contractual terms of the contracts. Observable inputs include foreign exchange rates and interest rates for foreign exchange contracts; credit spreads, default probabilities, and recovery rates for credit default swap contracts; interest rates for interest rate swap contracts and forward contracts; and interest rates and volatility inputs for interest rate option contracts. Northern Trust evaluates the impact of counterparty credit risk and its own credit risk on the valuation of its derivative instruments. Factors considered include the likelihood of default by Northern Trust and its counterparties, the remaining maturities of the instruments, net exposures after giving effect to master netting arrangements or similar agreements, available collateral, and other credit enhancements in determining the appropriate fair value of derivative instruments. The resulting valuation adjustments have not been considered material.

 

30


Notes to Consolidated Financial Statements (continued)

 

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

Northern Trust’s Level 3 assets consist of auction rate securities purchased in 2008 from Northern Trust clients. To estimate the fair value of auction rate securities, for which trading is limited and market prices are generally unavailable, Northern Trust developed and maintains a pricing model that discounts estimated cash flows over their estimated remaining lives. Significant inputs to the model include the contractual terms of the securities, credit risk ratings, discount rates, forward interest rates, credit/liquidity spreads, and Northern Trust’s own assumptions about the estimated remaining lives of the securities. The significant unobservable inputs used in the fair value measurement are Northern Trust’s own assumptions about the estimated remaining lives of the securities and the applicable discount rates. Significant increases (decreases) in the estimated remaining lives or the discount rates in isolation would result in a significantly lower (higher) fair value measurement. Level 3 liabilities at December 31, 2013 consisted of acquisition-related contingent consideration liabilities, the fair value of which was determined using an income-based (discounted cash flow) model that incorporated Northern Trust’s own assumptions about business growth rates and applicable discount rates, which represented unobservable inputs to the model. As of March 31, 2014, the value of the acquisition-related consideration had been agreed by the parties to be $55.3 million, removing the contingency.

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

Management of various businesses and departments of Northern Trust (including Corporate Market Risk, Credit Policy, Corporate Financial Management, and relevant business unit personnel) determine the valuation policies and procedures for Level 3 assets and liabilities. Each business and department represents a component of Northern Trust’s business units, and reports to management of their respective business units. Generally, valuation policies are reviewed by management of each business or department. Fair value measurements are performed upon acquisitions of an asset or liability. As necessary, the valuation models are reviewed by management of the appropriate business or department, and adjusted for changes in inputs. Management of each business or department reviews the inputs in order to substantiate the unobservable

 

31


Notes to Consolidated Financial Statements (continued)

 

inputs used in each fair value measurement. When appropriate, management reviews forecasts used in the valuation process in light of other relevant financial projections to understand any variances between current and previous fair value measurements. In certain circumstances, third party information is used to support the fair value measurements. If certain third party information seems inconsistent with consensus views, a review of the information is performed by management of the respective business or department to conclude as to the appropriate fair value of the asset or liability.

The following presents the fair values of, and the valuation techniques, significant unobservable inputs, and quantitative information used to develop significant unobservable inputs for, Northern Trust’s Level 3 assets as of March 31, 2014.

 

Financial Instrument

 

Fair Value

 

Valuation Technique

 

Unobservable Input

 

Range of Lives and Rates

Auction Rate Securities   $98.5 million   Discounted Cash Flow  

Remaining lives

Discount rates

 

2.2 – 8.6 years

0.2% – 7.8%

 

32


Notes to Consolidated Financial Statements (continued)

 

The following presents assets and liabilities measured at fair value on a recurring basis as of March 31, 2014 and December 31, 2013, segregated by fair value hierarchy level.

 

(In Millions)

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

March 31, 2014

             

Securities

             

Available for Sale

             

U.S. Government

   $ 2,414.7       $ —         $ —         $ —        $ 2,414.7   

Obligations of States and Political Subdivisions

     —           4.6         —           —          4.6   

Government Sponsored Agency

     —           18,150.8         —           —          18,150.8   

Corporate Debt

     —           3,626.0         —           —          3,626.0   

Covered Bonds

     —           1,978.5         —           —          1,978.5   

Supranational, Sovereign and Non-U.S. Agency Bonds

     —           720.5         —           —          720.5   

Residential Mortgage-Backed

     —           45.7         —           —          45.7   

Other Asset-Backed

     —           2,304.7         —           —          2,304.7   

Auction Rate

     —           —           98.5         —          98.5   

Other

     —           196.6         —           —          196.6   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Available for Sale

     2,414.7         27,027.4         98.5         —          29,540.6   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Trading Account

     —           1.5         —           —          1.5   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Available for Sale and Trading Securities

     2,414.7         27,028.9         98.5         —          29,542.1   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Other Assets

             

Derivative Assets

             

Foreign Exchange Contracts

     —           1,866.1         —           —          1,866.1   

Interest Rate Contracts

     —           228.4         —           —          228.4   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Derivative Assets

     —           2,094.5         —           (1,393.7     700.8   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Other Liabilities

             

Derivative Liabilities

             

Foreign Exchange Contracts

     —           1,890.4         —           —          1,890.4   

Interest Rate Contracts

     —           154.8         —           —          154.8   

Credit Default Swaps

     —           —           —           —          —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Derivative Liabilities

     —           2,045.2         —           (1,445.0     600.2   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Note: Northern Trust has elected to net derivative assets and liabilities when legally enforceable master netting arrangements or similar agreements exist between Northern Trust and the counterparty. As of March 31, 2014, derivative assets and liabilities shown above also include reductions of $313.6 million and $364.9 million, respectively, as a result of cash collateral received from and deposited with derivative counterparties.

 

33


Notes to Consolidated Financial Statements (continued)

 

(In Millions)

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

December 31, 2013

             

Securities

             

Available for Sale

             

U.S. Government

   $ 1,917.9       $ —         $ —         $ —        $ 1,917.9   

Obligations of States and Political Subdivisions

     —           4.6         —           —          4.6   

Government Sponsored Agency

     —           17,528.0         —           —          17,528.0   

Corporate Debt

     —           3,524.5         —           —          3,524.5   

Covered Bonds

     —           1,943.9         —           —          1,943.9   

Supranational, Sovereign and Non-U.S. Agency Bonds

     —           720.6         —           —          720.6   

Residential Mortgage-Backed

     —           48.1         —           —          48.1   

Other Asset-Backed

     —           2,391.8         —           —          2,391.8   

Auction Rate

     —           —           98.9         —          98.9   

Other

     —           214.5         —           —          214.5   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Available for Sale

     1,917.9         26,376.0         98.9         —          28,392.8   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Trading Account

     —           1.7         —           —          1.7   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Available for Sale and Trading Securities

     1,917.9         26,377.7         98.9         —          28,394.5   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Other Assets

             

Derivative Assets

             

Foreign Exchange Contracts

     —           2,865.7         —           —          2,865.7   

Interest Rate Contracts

     —           237.9         —           —          237.9   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Derivative Assets

     —           3,103.6         —           (1,369.0     1,734.6   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Other Liabilities

             

Derivative Liabilities

             

Foreign Exchange Contracts

     —           2,905.7         —           —          2,905.7   

Interest Rate Swaps

     —           195.2         —           —          195.2   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Derivative Liabilities

     —           3,100.9         —           (1,926.0     1,174.9   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Contingent Consideration

   $ —         $ —         $ 55.4       $ —        $ 55.4   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Note: Northern Trust has elected to net derivative assets and liabilities when legally enforceable master netting arrangements or similar agreements exist between Northern Trust and the counterparty. As of December 31, 2013, derivative assets and liabilities shown above also include reductions of $210.7 million and $767.7 million, respectively, as a result of cash collateral received from and deposited with derivative counterparties.

 

34


Notes to Consolidated Financial Statements (continued)

 

The following tables present the changes in Level 3 assets and liabilities for the three months ended March 31, 2014 and 2013.

 

Level 3 Assets (In Millions)

   Auction Rate Securities  

Three Months Ended March 31,

   2014     2013  

Fair Value at January 1

   $ 98.9      $ 97.8   

Total Gains (Losses):

    

Included in Earnings (1)

     —          0.1   

Included in Other Comprehensive Income (2)

     (0.2     2.7   

Purchases, Issues, Sales, and Settlements

    

Sales

     0.1        —     

Settlements

     (0.3     (1.0
  

 

 

   

 

 

 

Fair Value at March 31

   $ 98.5      $ 99.6   
  

 

 

   

 

 

 

 

(1) Realized gains for the three month period ended March 31, 2013 of $0.1 million represent gains from redemptions by issuers, which are recorded in interest income within the consolidated statement of income.
(2) Unrealized gains (losses) related to auction rate securities are included in net unrealized gains (losses) on securities available for sale within the consolidated statement of comprehensive income.

 

Level 3 Liabilities (In Millions)

   Contingent Consideration  

Three Months Ended March 31,

   2014     2013  

Fair Value at January 1

   $ 55.4      $ 50.1   

Total (Gains) and Losses:

    

Included in Earnings (1)

     (0.1     1.3   

Included in Other Comprehensive Income

     —          —     

Purchases, Issues, Sales, and Settlements

    

Purchases

     —          —     

Settlements

     (55.3     —     
  

 

 

   

 

 

 

Fair Value at March 31

   $ —        $ 51.4   
  

 

 

   

 

 

 

Unrealized (Gains) Losses Included in Earnings Related to Financial Instruments Held at March 31 (1)

   $ —        $ 1.3   
  

 

 

   

 

 

 

 

(1) Gains (losses) are recorded in other operating income (expense) within the consolidated statement of income.

During the three months ended March 31, 2014 and 2013, there were no transfers into or out of Level 3 assets or liabilities.

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

 

35


Notes to Consolidated Financial Statements (continued)

 

Assets measured at fair value on a nonrecurring basis at March 31, 2014 and 2013, all of which were categorized as Level 3 under the fair value hierarchy, were comprised of impaired loans whose values were based on real estate and other available collateral, and of Other Real Estate Owned (OREO) properties. Fair values of real estate loan collateral were estimated using a market approach typically supported by third party valuations and property specific fees and taxes. Other loan collateral, which typically consists of accounts receivable, inventory and equipment, is valued using a market approach adjusted for asset specific characteristics and in limited instances third party valuations are used. OREO assets are carried at the lower of cost or fair value less estimated costs to sell, with fair value typically based on third-party appraisals.

Collateral-based impaired loans and OREO assets that have been adjusted to fair value totaled $33.3 million and $1.5 million, respectively, at March 31, 2014, and $32.4 million and $1.5 million, respectively, at March 31, 2013. Assets measured at fair value on a nonrecurring basis reflect management’s judgment as to realizable value.

The following table provides the fair value of, and the valuation technique, significant unobservable inputs, and quantitative information used to develop the significant unobservable inputs for, Northern Trust’s Level 3 assets that were measured at fair value on a nonrecurring basis as of March 31, 2014.

 

Financial

Instrument

 

Fair Value

 

Valuation

Technique

 

Unobservable Input

 

Range of

Discounts

Applied

Loans   $33.3 million   Market Approach   Discount to reflect realizable value   15% – 40%
OREO   $1.5 million   Market Approach   Discount to reflect realizable value   15% – 40%

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

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

Loans (excluding lease receivables). The fair value of the loan portfolio was estimated using an income approach (discounted cash flow) that incorporates current market rates offered by Northern Trust as of the date of the consolidated financial statements. The fair values of all loans were adjusted to reflect current assessments of loan collectability.

 

36


Notes to Consolidated Financial Statements (continued)

 

Federal Reserve and Federal Home Loan Bank Stock. The fair values of Federal Reserve and Federal Home Loan Bank stock are equal to their carrying values which represent redemption value.

Community Development Investments. The fair values of these instruments were estimated using an income approach (discounted cash flow) that incorporates current market rates.

Employee Benefit and Deferred Compensation. These assets include U.S. treasury securities and investments in mutual and collective trust funds held to fund certain supplemental employee benefit obligations and deferred compensation plans. Fair values of U.S. treasury securities were determined using quoted, active market prices for identical securities. The fair values of investments in mutual and collective trust funds were valued at the funds’ net asset values based on a market approach.

Savings Certificates and Other Time Deposits. The fair values of these instruments were estimated using an income approach (discounted cash flow) that incorporates market interest rates currently offered by Northern Trust for deposits with similar maturities.

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

Federal Home Loan Bank Borrowings. The fair values of these instruments were estimated using an income approach (discounted cash flow) that incorporates market interest rates available to Northern Trust.

Loan Commitments. The fair values of loan commitments represent the estimated costs to terminate or otherwise settle the obligations with a third party adjusted for any related allowance for credit losses.

Standby Letters of Credit. The fair values of standby letters of credit are measured as the amount of unamortized fees on these instruments, inclusive of the related allowance for credit losses. Fees are determined by applying basis points to the principal amounts of the letters of credit.

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

 

37


Notes to Consolidated Financial Statements (continued)

 

The following tables summarize the fair values of all financial instruments.

 

(In Millions)

   March 31, 2014  
     Book      Total      Fair Value  
     Value      Fair Value      Level 1      Level 2      Level 3  

Assets

              

Cash and Due from Banks

   $ 3,676.3       $ 3,676.3       $ 3,676.3       $ —         $ —     

Federal Funds Sold and Resell Agreements

     510.0         510.0         —           510.0         —     

Interest-Bearing Deposits with Banks

     17,155.8         17,155.8         —           17,155.8         —     

Federal Reserve Deposits and Other Interest-Bearing

     12,211.0         12,211.0         —           12,211.0         —     

Securities

              

Available for Sale (1)

     29,540.6         29,540.6         2,414.7         27,027.4         98.5   

Held to Maturity

     4,211.7         4,209.2         —           4,209.2         —     

Trading Account

     1.5         1.5         —           1.5         —     

Loans (excluding Leases)

              

Held for Investment

     28,492.5         28,533.1         —           —           28,533.1   

Held for Sale

     —           —           —           —           —     

Client Security Settlement Receivables

     1,845.2         1,845.2         —           1,845.2         —     

Other Assets

              

Federal Reserve and Federal Home Loan Bank Stock

     194.7         194.7         —           194.7         —     

Community Development Investments

     216.3         219.9         —           219.9         —     

Employee Benefit and Deferred Compensation

     149.3         145.6         93.9         51.7         —     

Liabilities

              

Deposits

              

Demand, Noninterest-Bearing, Savings and Money Market

   $ 36,668.8       $ 36,668.8       $ 36,668.8       $ —         $ —     

Savings Certificates and Other Time

     2,034.5         2,036.6         —           2,036.6         —     

Non U.S. Offices Interest-Bearing

     47,564.4         47,564.4         —           47,564.4         —     

Federal Funds Purchased

     1,013.9         1,013.9         —           1,013.9         —     

Securities Sold under Agreements to Repurchase

     736.6         736.6         —           736.6         —     

Other Borrowings

     652.4         652.4         —           652.4         —     

Senior Notes

     1,996.7         2,020.1         —           2,020.1         —     

Long Term Debt (excluding Leases)

              

Subordinated Debt

     1,560.4         1,587.1         —           1,587.1         —     

Federal Home Loan Bank Borrowings

     135.0         135.7         —           135.7         —     

Floating Rate Capital Debt

     277.2         238.9         —           238.9         —     

Other Liabilities

              

Standby Letters of Credit

     57.6         57.6         —           —           57.6   

Loan Commitments

     33.0         33.0         —           —           33.0   

Derivative Instruments

              

Asset/Liability Management

              

Foreign Exchange Contracts

              

Assets

   $ 11.9       $ 11.9       $ —         $ 11.9       $ —     

Liabilities

     23.7         23.7         —           23.7         —     

Interest Rate Contracts

              

Assets

     111.7         111.7         —           111.7         —     

Liabilities

     43.5         43.5         —           43.5         —     

Client-Related and Trading

              

Foreign Exchange Contracts

              

Assets

     1,854.2         1,854.2         —           1,854.2         —     

Liabilities

     1,866.7         1,866.7         —           1,866.7         —     

Interest Rate Contracts

              

Assets

     116.7         116.7         —           116.7         —     

Liabilities

     111.3         111.3         —           111.3         —     

 

(1) Refer to the table located on page 33 for the disaggregation of available for sale securities.

 

38


Notes to Consolidated Financial Statements (continued)

 

(In Millions)

   December 31, 2013  
     Book      Total      Fair Value  
     Value      Fair Value      Level 1      Level 2      Level 3  

Assets

              

Cash and Due from Banks

   $ 3,162.4       $ 3,162.4       $ 3,162.4       $       $ —     

Federal Funds Sold and Resell Agreements

     529.6         529.6         —           529.6         —     

Interest-Bearing Deposits with Banks

     19,397.4         19,397.4         —           19,397.4         —     

Federal Reserve Deposits and Other Interest-Bearing

     12,911.5         12,911.5         —           12,911.5         —     

Securities

              

Available for Sale (1)

     28,392.8         28,392.8         1,917.9         26,376.0         98.9   

Held to Maturity

     2,325.8         2,321.4         —           2,321.4         —     

Trading Account

     1.7         1.7         —           1.7         —     

Loans (excluding Leases)

              

Held for Investment

     28,136.5         28,147.2         —           —           28,147.2   

Held for Sale

     —           —           —           —           —     

Client Security Settlement Receivables

     1,355.2         1,355.2         —           1,355.2         —     

Other Assets

              

Federal Reserve and Federal Home Loan Bank Stock

     194.7         194.7         —           194.7         —     

Community Development Investments

     228.1         227.8         —           227.8         —     

Employee Benefit and Deferred Compensation

     132.7         126.9         79.3         47.6         —     

Liabilities

              

Deposits

              

Demand, Noninterest-Bearing, Savings and Money Market

   $ 33,762.0       $ 33,762.0       $ 33,762.0       $ —         $ —     

Savings Certificates and Other Time

     1,874.4         1,877.1         —           1,877.1         —     

Non U.S. Offices Interest-Bearing

     48,461.7         48,461.7         —           48,461.7         —     

Federal Funds Purchased

     965.1         965.1         —           965.1         —     

Securities Sold under Agreements to Repurchase

     917.3         917.3         —           917.3         —     

Other Borrowings

     1,558.6         1,558.6         —           1,558.6         —     

Senior Notes

     1,996.6         1,989.3         —           1,989.3         —     

Long Term Debt (excluding Leases)

              

Subordinated Debt

     1,537.3         1,563.5         —           1,563.5         —     

Federal Home Loan Bank Borrowings

     135.0         137.2         —           137.2         —     

Floating Rate Capital Debt

     277.1         230.2         —           230.2         —     

Other Liabilities

              

Standby Letters of Credit

     59.6         59.6         —           —           59.6   

Contingent Consideration

     55.4         55.4         —           —           55.4   

Loan Commitments

     35.7         35.7         —           —           35.7   

Derivative Instruments

              

Asset/Liability Management

              

Foreign Exchange Contracts

              

Assets

   $ 21.0       $ 21.0       $ —         $ 21.0       $ —     

Liabilities

     59.5         59.5         —           59.5         —     

Interest Rate Swaps

              

Assets

     115.1         115.1         —           115.1         —     

Liabilities

     78.2         78.2         —           78.2         —     

Client-Related and Trading

              

Foreign Exchange Contracts

              

Assets

     2,844.7         2,844.7         —           2,844.7         —     

Liabilities

     2,846.2         2,846.2         —           2,846.2         —     

Interest Rate Contracts

              

Assets

     122.8         122.8         —           122.8         —     

Liabilities

     117.0         117.0         —           117.0         —     

 

(1) Refer to the table located on page 34 for the disaggregation of available for sale securities.

 

39


Notes to Consolidated Financial Statements (continued)

 

4. Securities – The following tables provide the amortized cost and fair values of securities at March 31, 2014 and December 31, 2013.

 

Securities Available for Sale

   March 31, 2014  
     Amortized      Gross Unrealized      Fair  

(In Millions)

   Cost      Gains      Losses      Value  

U.S. Government

   $ 2,396.0       $ 20.5       $ 1.8       $ 2,414.7   

Obligations of States and Political Subdivisions

     4.5         0.1         —           4.6   

Government Sponsored Agency

     18,131.4         65.1         45.7         18,150.8   

Corporate Debt

     3,661.9         5.3         41.2         3,626.0   

Covered Bonds

     1,965.2         13.7         0.4         1,978.5   

Supranational, Sovereign and Non-U.S. Agency Bonds

     719.9         2.0         1.4         720.5   

Residential Mortgage-Backed

     48.6         0.1         3.0         45.7   

Other Asset-Backed

     2,302.8         2.0         0.1         2,304.7   

Auction Rate

     97.3         2.1         0.9         98.5   

Other

     196.1         0.5         —           196.6   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 29,523.7       $ 111.4       $ 94.5       $ 29,540.6   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Securities Held to Maturity

   March 31, 2014  
     Amortized      Gross Unrealized      Fair  

(In Millions)

   Cost      Gains      Losses      Value  

Obligations of States and Political Subdivisions

   $ 196.2       $ 9.7       $ —         $ 205.9   

Government Sponsored Agency

     32.1         1.1         —           33.2   

Non-U.S. Government Debt

     176.1         —           0.1         176.0   

Certificates of Deposit

     1,531.8         0.1         0.1         1,531.8   

Supranational, Sovereign and Non-U.S. Agency Bonds

     2,217.5         3.8         6.3         2,215.0   

Other

     58.0         0.1         10.8         47.3   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,211.7       $ 14.8       $ 17.3       $ 4,209.2   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Securities Available for Sale

   December 31, 2013  
     Amortized      Gross Unrealized      Fair  

(In Millions)

   Cost      Gains      Losses      Value  

U.S. Government

   $ 1,896.7       $ 22.6       $ 1.4       $ 1,917.9   

Obligations of States and Political Subdivisions

     4.5         0.1         —           4.6   

Government Sponsored Agency

     17,495.2         80.7         47.9         17,528.0   

Corporate Debt

     3,615.2         10.5         101.2         3,524.5   

Covered Bonds

     1,898.9         50.9         5.9         1,943.9   

Supranational, Sovereign and Non-U.S. Agency Bonds

     717.0         5.3         1.7         720.6   

Residential Mortgage-Backed

     52.4         0.1         4.4         48.1   

Other Asset-Backed

     2,390.8         1.4         0.4         2,391.8   

Auction Rate

     97.5         2.2         0.8         98.9   

Other

     214.1         0.4         —           214.5   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 28,382.3       $ 174.2       $ 163.7       $ 28,392.8   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Securities Held to Maturity

   December 31, 2013  
     Amortized      Gross Unrealized      Fair  

(In Millions)

   Cost      Gains      Losses      Value  

Obligations of States and Political Subdivisions

   $ 225.2       $ 10.3       $ —         $ 235.5   

Government Sponsored Agency

     35.9         1.1         —           37.0   

Non-U.S. Government Debt

     197.3         —           —           197.3   

Certificates of Deposit

     698.1         —           0.2         697.9   

Supranational, Sovereign and Non-U.S. Agency Bonds

     1,109.4         0.8         4.3         1,105.9   

Other

     59.9         0.1         12.2         47.8   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,325.8       $ 12.3       $ 16.7       $ 2,321.4   
  

 

 

    

 

 

    

 

 

    

 

 

 

Securities held to maturity consist of debt securities that management intends to, and Northern Trust has the ability to, hold until maturity.

 

40


Notes to Consolidated Financial Statements (continued)

 

The following table provides the remaining maturity of securities as of March 31, 2014.

 

(In Millions)

   Amortized
Cost
     Fair Value  

Available for Sale

     

Due in One Year or Less

   $ 9,112.9       $ 9,117.7   

Due After One Year Through Five Years

     15,997.9         16,023.6   

Due After Five Years Through Ten Years

     2,946.9         2,937.8   

Due After Ten Years

     1,466.0         1,461.5   
  

 

 

    

 

 

 

Total

     29,523.7         29,540.6   
  

 

 

    

 

 

 

Held to Maturity

     

Due in One Year or Less

     1,897.9         1,900.9   

Due After One Year Through Five Years

     2,256.4         2,257.5   

Due After Five Years Through Ten Years

     25.3         25.9   

Due After Ten Years

     32.1         24.9   
  

 

 

    

 

 

 

Total

   $ 4,211.7       $ 4,209.2   
  

 

 

    

 

 

 

 

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

Investment Security Gains and Losses. Net investment security losses of $4.0 million were recognized in the three months ended March 31, 2014, and include $3.9 million of charges related to the other-than-temporary impairment of certain Community Reinvestment Act (CRA) eligible held to maturity securities. Gross proceeds from the sale of securities during the three months ended March 31, 2014 of $199.7 million resulted in gross realized gains of $0.3 million and gross realized losses of $0.4 million. Gross proceeds from the sale of securities during the three months ended March 31, 2013 of $55.7 million resulted in gross realized gains of $0.2 million.

Securities with Unrealized Losses. The following tables provide information regarding securities that had been in a continuous unrealized loss position for less than 12 months and for 12 months or longer as of March 31, 2014 and December 31, 2013.

 

as of March 31, 2014

   Less than 12 Months      12 Months or Longer      Total  
     Fair      Unrealized      Fair      Unrealized      Fair      Unrealized  

(In Millions)

   Value      Losses      Value      Losses      Value      Losses  

U.S. Government

   $ 1,195.6       $ 1.8       $ —         $ —         $ 1,195.6       $ 1.8   

Government Sponsored Agency

     6,055.6         33.6         913.1         12.1         6,968.7         45.7   

Corporate Debt

     1,323.6         20.8         497.0         20.4         1,820.6         41.2   

Covered Bonds

     190.1         0.2         9.9         0.2         200.0         0.4   

Supranational, Sovereign and Non-U.S. Agency Bonds

     1,260.4         7.7         —           —           1,260.4         7.7   

Residential Mortgage-Backed

     —           —           41.0         3.0         41.0         3.0   

Other Asset-Backed

     187.4         0.1         —           —           187.4         0.1   

Auction Rate

     23.2         0.2         13.7         0.7         36.9         0.9   

Non-U.S. Government Debt

     148.9         0.1         —           —           148.9         0.1   

Certificates of Deposit

     473.5         0.1         —           —           473.5         0.1   

Other

     41.3         3.5         29.0         7.3         70.3         10.8   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 10,899.6       $ 68.1       $ 1,503.7       $ 43.7       $ 12,403.3       $ 111.8   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

41


Notes to Consolidated Financial Statements (continued)

 

Securities with Unrealized Losses

as of December 31, 2013

   Less than 12 Months      12 Months or Longer      Total  
     Fair      Unrealized      Fair      Unrealized      Fair      Unrealized  

(In Millions)

   Value      Losses      Value      Losses      Value      Losses  

U.S. Government

   $ 896.4       $ 1.4       $ —         $ —         $ 896.4       $ 1.4   

Government Sponsored Agency

     4,340.8         42.6         413.7         5.3         4,754.5         47.9   

Corporate Debt

     1,759.5         85.4         267.0         15.8         2,026.5         101.2   

Covered Bonds

     278.8         5.7         9.9         0.2         288.7         5.9   

Supranational, Sovereign and Non-U.S. Agency Bonds

     789.4         6.0         —           —           789.4         6.0   

Residential Mortgage-Backed

     —           —           42.0         4.4         42.0         4.4   

Other Asset-Backed

     677.0         0.4         —           —           677.0         0.4   

Certificates of Deposit

     684.2         0.2         —           —           684.2         0.2   

Auction Rate

     22.1         0.1         14.0         0.7         36.1         0.8   

Other

     25.7         4.0         29.5         8.2         55.2         12.2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 9,473.9       $ 145.8       $ 776.1       $ 34.6       $ 10,250.0       $ 180.4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As of March 31, 2014, 509 securities with a combined fair value of $12.4 billion were in an unrealized loss position, with their unrealized losses totaling $111.8 million. Unrealized losses of $45.7 million related to government sponsored agency securities are primarily attributable to changes in market rates since their purchase. Unrealized losses of $41.2 million within corporate debt securities primarily reflect widened credit spreads and higher market rates since purchase; 46% of the corporate debt portfolio is backed by guarantees provided by U.S. and non-U.S. governmental entities.

Unrealized losses on residential mortgage-backed securities totaling $3.0 million reflect the impact of wider credit and liquidity spreads on the valuations of 5 residential mortgage-backed securities since purchase, with $41.0 million having been in an unrealized loss position for more than 12 months. Residential mortgage-backed securities at March 31, 2014 had a total amortized cost and fair value of $48.6 million and $45.7 million, respectively. Securities classified as “other asset-backed” had average lives less than 5 years, and 99% were rated triple-A.

The majority of the $10.8 million of unrealized losses in securities classified as “other” at March 31, 2014 relate to securities which Northern Trust purchases for compliance with CRA. Unrealized losses on these CRA related securities are attributable to their purchase at below market rates for the purpose of supporting institutions and programs that benefit low to moderate income communities within Northern Trust’s market area. Unrealized losses of $0.9 million related to auction rate securities primarily reflect reduced market liquidity as a majority of auctions continue to fail preventing holders from liquidating their investments at par. The remaining unrealized losses on Northern Trust’s securities portfolio as of March 31, 2014 are attributable to changes in overall market interest rates, increased credit spreads, or reduced market liquidity. As of March 31, 2014, Northern Trust does not intend to sell any investment in an unrealized loss position and it is not more likely than not that Northern Trust will be required to sell any such investment before the recovery of its amortized cost basis, which may be maturity.

 

42


Notes to Consolidated Financial Statements (continued)

 

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

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

Impairments of non-agency residential mortgage-backed securities are influenced by a number of factors, including but not limited to, U.S. economic and housing market performance, security credit enhancement level, insurance coverage, year of origination, and type of collateral. The factors used in estimating losses on non-agency residential mortgage-backed securities vary by year of origination and type of collateral.

As of March 31, 2014, loss estimates for subprime, Alt-A, prime and 2nd lien collateral portfolios were developed using default roll rates, determined primarily by the stage of delinquency of the underlying instrument, that generally assumed ultimate default rates approximating 5% to 30% for current loans; 30% for loans 30 to 60 days delinquent; 80% for loans 60 to 90 days delinquent; 90% for loans delinquent greater than 90 days; and 100% for OREO properties and loans that are in foreclosure. March 31, 2014 amortized cost, weighted average ultimate default rates, and impairment severity rates for the non-agency residential mortgage-backed securities portfolio, by security type, are provided in the following table.

 

43


Notes to Consolidated Financial Statements (continued)

 

($ In Millions)

   March 31, 2014  
                  Loss Severity Rates  

Security Type

   Amortized
Cost
     Weighted Average
Ultimate Default Rates
    Low     High     Weighted
Average
 

Prime

   $ 7.2         19.7     32.5     53.4     47.0

Alt-A

     11.8         40.1        64.7        64.7        64.7   

Subprime

     21.6         47.1        74.0        77.1        74.7   

2nd Lien

     8.0         32.3        98.9        99.0        99.0   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total Non-Agency Residential Mortgage-Backed Securities

   $ 48.6         38.5     32.5     99.0     72.1
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Northern Trust’s processes for identifying credit impairment within auction rate securities are largely consistent with the processes utilized for non-agency residential mortgage-backed securities and include analyses of expected loss severities and default rates adjusted for the type of underlying loan and the presence of government guarantees, as applicable.

The process for identifying credit impairment within CRA eligible mortgage-backed securities incorporates an expected loss approach on the underlying collateral pools. To evaluate whether an unrealized loss on CRA mortgage-backed securities is other-than-temporary, a reasonable forecast of the security’s ultimate recovery value is calculated using available data including default rates, current delinquency pipeline, loan loss severities and historical performance of like collateral, along with Northern Trust’s outlook for the housing market and the overall economy. If the estimated recovery value of the collateral pools is less than the current amortized cost of the security, a credit-related OTTI loss is recorded to earnings equal to the difference between the two amounts.

Impairments of CRA mortgage-backed securities are influenced by a number of factors, including but not limited to, U.S. economic and housing market performance, pool credit enhancement level, year of origination, and estimated credit quality of the collateral. The factors used in estimating losses related to CRA mortgage-backed securities vary by vintage of loan origination and collateral quality.

As of March 31, 2014, impairment estimates for CRA mortgage-backed securities were developed using default and loss severity rates sourced from industry mortgage data. Ultimate recovery value of the securities was determined by applying default and severity rates against remaining collateral balances in the pools. An expected loss amount was calculated by applying loss severity rates on defaulted amounts. Lastly, book values were compared against collateral values net of expected losses in order to determine OTTI.

There was $3.9 million of OTTI losses recognized during the three months ended March 31, 2014 related to CRA eligible mortgage-backed securities. There were no OTTI losses recognized during the three months ended March 31, 2013.

 

44


Notes to Consolidated Financial Statements (continued)

 

Credit Losses on Debt Securities. The table below provides information regarding total other-than-temporarily impaired securities, including noncredit-related amounts recognized in other comprehensive income and net impairment losses recognized in earnings, for the three months ended March 31, 2014 and 2013.

 

     Three Months Ended
March 31,
 

(In Millions)

   2014     2013  

Changes in OTTI Losses*

   $ (4.6   $ —     

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

     0.7        —     
  

 

 

   

 

 

 

Net Impairment Losses Recognized in Earnings

   $ (3.9   $ —     
  

 

 

   

 

 

 

 

* For initial other-than-temporary impairments in the respective period, the balance includes the excess of the amortized cost over the fair value of the impaired securities. For subsequent impairments of the same security, the balance includes any additional changes in fair value of the security subsequent to its most recently recorded OTTI.
** For initial other-than-temporary impairments in the respective period, the balance includes the portion of the excess of amortized cost over the fair value of the impaired securities that was recorded in OCI. For subsequent impairments of the same security, the balance includes additional changes in OCI for that security subsequent to its most recently recorded OTTI.

Provided in the table below are the cumulative credit-related losses recognized in earnings on debt securities other-than-temporarily impaired.

 

     Three Months Ended
March 31,
 

(In Millions)

   2014      2013  

Cumulative Credit-Related Losses on Securities Held – Beginning of Period

   $ 8.8       $ 42.3   

Plus: Losses on Newly Identified Impairments

     1.8         —     

Additional Losses on Previously Identified Impairments

     2.1         —     

Less: Current and Prior Period Losses on Securities Sold During the Period

     —           (33.5
  

 

 

    

 

 

 

Cumulative Credit-Related Losses on Securities Held – End of Period

   $ 12.7       $ 8.8   
  

 

 

    

 

 

 

The table below provides information regarding debt securities held as of March 31, 2014 and December 31, 2013, for which an OTTI loss has been recognized in the current period or previously.

 

(In Millions)

   March 31,
2014
    December 31,
2013
 

Fair Value

   $ 52.4      $ 38.3   

Amortized Cost Basis

     55.4        42.8   
  

 

 

   

 

 

 

Noncredit-related Losses Recognized in OCI

     (3.0     (4.5

Tax Effect

     1.1        1.7   
  

 

 

   

 

 

 

Amount Recorded in OCI

   $ (1.9   $ (2.8
  

 

 

   

 

 

 

 

45


Notes to Consolidated Financial Statements (continued)

 

5. Loans and Leases – Amounts outstanding for loans and leases, by segment and class, are shown below.

 

(In Millions)

   March 31,
2014
    December 31,
2013
 

Commercial

    

Commercial and Institutional

   $ 7,738.2      $ 7,375.8   

Commercial Real Estate

     3,018.9        2,955.8   

Lease Financing, net

     892.6        975.1   

Non-U.S.

     1,349.7        954.7   

Other

     281.3        358.6   
  

 

 

   

 

 

 

Total Commercial

     13,280.7        12,620.0   
  

 

 

   

 

 

 

Personal

    

Residential Real Estate

     10,093.9        10,271.3   

Private Client

     6,247.8        6,445.6   

Other

     38.4        48.6   
  

 

 

   

 

 

 

Total Personal

     16,380.1        16,765.5   
  

 

 

   

 

 

 

Total Loans and Leases

     29,660.8        29,385.5   
  

 

 

   

 

 

 

Allowance for Credit Losses Assigned to Loans and Leases

     (279.2     (278.1
  

 

 

   

 

 

 

Net Loans and Leases

   $ 29,381.6      $ 29,107.4   
  

 

 

   

 

 

 

Residential real estate loans consist of conventional home mortgages and equity credit lines that generally require a loan to collateral value of no more than 65% to 80% at inception. Northern Trust’s equity credit line products generally have draw periods of up to 10 years and a balloon payment of any outstanding balance is due at maturity. Payments are interest only with variable interest rates. Northern Trust does not offer equity credit lines that include an option to convert the outstanding balance to an amortizing payment loan.

As of March 31, 2014 and December 31, 2013, equity credit lines totaled $1.9 billion and $2.0 billion, respectively, and equity credit lines for which first liens were held by Northern Trust represented 87% of the total equity credit lines as of those dates.

Included within the non-U.S., commercial-other, and personal-other classes are short duration advances primarily related to the processing of custodied client investments, that totaled $1.5 billion at March 31, 2014 and $1.3 billion at December 31, 2013. Demand deposits reclassified as loan balances totaled $117.5 million and $104.1 million at March 31, 2014 and December 31, 2013, respectively. There were no loans classified as held for sale at March 31, 2014 or December 31, 2013.

Credit Quality Indicators. Credit quality indicators are statistics, measurements or other metrics that provide information regarding the relative credit risk of loans and leases. Northern Trust utilizes a variety of credit quality indicators to assess the credit risk of loans and leases at the segment, class, and individual credit exposure levels.

As part of its credit process, Northern Trust utilizes an internal borrower risk rating system to support identification, approval, and monitoring of credit risk. Borrower risk ratings are

 

46


Notes to Consolidated Financial Statements (continued)

 

used in credit underwriting, management reporting, and the calculation of credit loss allowances and economic capital.

Risk ratings are used for ranking the credit risk of borrowers and the probability of their default. Each borrower is rated using one of a number of ratings models, which consider both quantitative and qualitative factors. The ratings models vary among classes of loans and leases in order to capture the unique risk characteristics inherent within each particular type of credit exposure. Provided below are the more significant performance indicator attributes considered within Northern Trust’s borrower rating models, by loan and lease class.

 

    Commercial and Institutional: leverage, profit margin, liquidity, return on assets, asset size, and capital levels;

 

    Commercial Real Estate: debt service coverage and leasing status for income-producing properties; loan-to-value and loan-to-cost ratios, leasing status, and guarantor support for loans associated with construction and development properties;

 

    Lease Financing and Commercial-Other: leverage and profit margin levels;

 

    Non-U.S.: entity type, liquidity, size, and leverage;

 

    Residential Real Estate: payment history, credit bureau scores, and cash flow-to-debt and net worth ratios;

 

    Private Client: cash flow-to-debt and net worth ratios, leverage, and profit margin levels; and

 

    Personal-Other: cash flow-to-debt and net worth ratios.

While the criteria vary by model, the objective is for the borrower ratings to be consistent in both the measurement and ranking of risk. Each model is calibrated to a master rating scale to support this consistency. Ratings for borrowers not in default range from “1” for the strongest credits to “7” for the weakest non-defaulted credits. Ratings of “8” or “9” are used for defaulted borrowers. Borrower risk ratings are monitored and are revised when events or circumstances indicate a change is required. Risk ratings are validated at least annually.

 

47


Notes to Consolidated Financial Statements (continued)

 

Loan and lease segment and class balances as of March 31, 2014 and December 31, 2013 are provided below, segregated by borrower ratings into “1 to 3”, “4 to 5” and “6 to 9” (watch list), categories.

 

     March 31, 2014      December 31, 2013  

(In Millions)

   1 to 3
Category
     4 to 5
Category
     6 to 9
Category
(Watch List)
     Total      1 to 3
Category
     4 to 5
Category
     6 to 9
Category
(Watch List)
     Total  

Commercial

                       

Commercial and Institutional

   $ 4,730.7       $ 2,860.4       $ 147.1       $ 7,738.2       $ 4,432.5       $ 2,801.5       $ 141.8       $ 7,375.8   

Commercial Real Estate

     1,150.6         1,709.7         158.6         3,018.9         1,053.7         1,748.7         153.4         2,955.8   

Lease Financing, net

     458.9         429.3         4.4         892.6         685.7         285.0         4.4         975.1   

Non-U.S.

     523.2         825.6         0.9         1,349.7         442.8         511.9         —           954.7   

Other

     172.7         108.6         —           281.3         157.7         200.9         —           358.6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Commercial

     7,036.1         5,933.6         311.0         13,280.7         6,772.4         5,548.0         299.6         12,620.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Personal

                       

Residential Real Estate

     3,124.3         6,473.6         496.0         10,093.9         3,204.6         6,563.6         503.1         10,271.3   

Private Client

     3,932.5         2,308.3         7.0         6,247.8         3,957.6         2,481.2         6.8         6,445.6   

Other

     23.4         15.0         —           38.4         21.2         27.4         —           48.6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Personal

     7,080.2         8,796.9         503.0         16,380.1         7,183.4         9,072.2         509.9         16,765.5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Loans and Leases

   $ 14,116.3       $ 14,730.5       $ 814.0       $ 29,660.8       $ 13,955.8       $ 14,620.2       $ 809.5       $ 29,385.5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans and leases in the “1 to 3” category are expected to exhibit minimal to modest probabilities of default and are characterized by borrowers having the strongest financial qualities, including above average financial flexibility, cash flows and capital levels. Borrowers assigned these ratings are anticipated to experience very little to moderate financial pressure in adverse down cycle scenarios. As a result of these characteristics, borrowers within this category exhibit a minimal to modest likelihood of loss.

Loans and leases in the “4 to 5” category are expected to exhibit moderate to acceptable probabilities of default and are characterized by borrowers with less financial flexibility than those in the “1 to 3” category. Cash flows and capital levels are generally sufficient to allow for borrowers to meet current requirements, but have reduced cushion in adverse down cycle scenarios. As a result of these characteristics, borrowers within this category exhibit a moderate likelihood of loss.

Loans and leases in the watch list category have elevated credit risk profiles that are monitored through internal watch lists, and consist of credits with borrower ratings of “6 to 9”. These credits, which include all nonperforming credits, are expected to exhibit minimally acceptable probabilities of default, elevated risk of default, or are currently in default. Borrowers associated with these risk profiles that are not currently in default have limited financial flexibility. Cash flows and capital levels range from acceptable to potentially insufficient to meet current requirements, particularly in adverse down cycle scenarios. As a result of these characteristics, borrowers in this category exhibit an elevated to probable likelihood of loss.

 

48


Notes to Consolidated Financial Statements (continued)

 

Recognition of Income. Interest income on loans is recorded on an accrual basis unless, in the opinion of management, there is a question as to the ability of the debtor to meet the terms of the loan agreement, or interest or principal is more than 90 days contractually past due and the loan is not well-secured and in the process of collection. At the time a loan is determined to be nonperforming, interest accrued but not collected is reversed against interest income of the current period and the loan is classified as nonperforming. Interest collected on nonperforming loans is applied to principal unless, in the opinion of management, collectability of principal is not in doubt. Management’s assessment of the indicators of loan and lease collectability, and its policies relative to the recognition of interest income, including the suspension and subsequent resumption of income recognition, do not meaningfully vary between loan and lease classes. Nonperforming loans are returned to performing status when factors indicating doubtful collectability no longer exist. Factors considered in returning a loan to performing status are consistent across all classes of loans and leases and, in accordance with regulatory guidance, relate primarily to expected payment performance. Loans are eligible to be returned to performing status when: (i) no principal or interest that is due is unpaid and repayment of the remaining contractual principal and interest is expected or (ii) the loan has otherwise become well-secured (possessing realizable value sufficient to discharge the debt, including accrued interest, in full) and is in the process of collection (through action reasonably expected to result in debt repayment or restoration to a current status in the near future). A loan that has not been brought fully current may be restored to performing status provided there has been a sustained period of repayment performance (generally a minimum of six months) by the borrower in accordance with the contractual terms, and Northern Trust is reasonably assured of repayment within a reasonable period of time.

Additionally, a loan that has been formally restructured so as to be reasonably assured of repayment and performance according to its modified terms may be returned to accrual status, provided there was a well-documented credit evaluation of the borrower’s financial condition and prospects of repayment under the revised terms and there has been a sustained period of repayment performance (generally a minimum of six months) under the revised terms.

 

49


Notes to Consolidated Financial Statements (continued)

 

Past due status is based on how long since the contractual due date a principal or interest payment has been past due. For disclosure purposes, loans that are 29 days past due or less are reported as current. The following tables provide balances and delinquency status of performing and nonperforming loans and leases by segment and class, as well as the total other real estate owned and nonperforming asset balances, as of March 31, 2014 and December 31, 2013.

 

March 31, 2014

 

(In Millions)

   Current      30-59 Days
Past Due
     60-89 Days
Past Due
     90 Days or
More Past Due
     Total
Performing
     Nonperforming      Total Loans
and Leases
 

Commercial

                    

Commercial and Institutional

   $ 7,700.8       $ 5.5       $ 4.2       $ 1.6       $ 7,712.1       $ 26.1       $ 7,738.2   

Commercial Real Estate

     2,934.0         22.5         3.8         7.0         2,967.3         51.6         3,018.9   

Lease Financing, net

     892.6         —           —           —           892.6         —           892.6   

Non-U.S.

     1,349.7         —           —           —           1,349.7         —           1,349.7   

Other

     281.3         —           —           —           281.3         —           281.3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Commercial

     13,158.4         28.0         8.0         8.6         13,203.0         77.7         13,280.7   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Personal

                    

Residential Real Estate

     9,841.0         65.7         3.2         3.1         9,913.0         180.9         10,093.9   

Private Client

     6,206.8         30.9         8.2         0.6         6,246.5         1.3         6,247.8   

Other

     38.4         —           —           —           38.4         —           38.4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Personal

     16,086.2         96.6         11.4         3.7         16,197.9         182.2         16,380.1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Loans and Leases

   $ 29,244.6       $ 124.6       $ 19.4       $ 12.3       $ 29,400.9       $ 259.9       $ 29,660.8   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
           Other Real Estate Owned         9.8      
                 

 

 

    
        Total Nonperforming Assets       $ 269.7      
                 

 

 

    

 

December 31, 2013

 

(In Millions)

   Current      30-59 Days
Past Due
     60-89 Days
Past Due
     90 Days or
More Past Due
     Total
Performing
     Nonperforming      Total Loans
and Leases
 

Commercial

                    

Commercial and Institutional

   $ 7,332.3       $ 5.0       $ 12.1       $ 3.3       $ 7,352.7       $ 23.1       $ 7,375.8   

Commercial Real Estate

     2,881.1         4.1         14.6         6.8         2,906.6         49.2         2,955.8   

Lease Financing, net

     975.1         —           —           —           975.1         —           975.1   

Non-U.S.

     954.7         —           —           —           954.7         —           954.7   

Other

     358.6         —           —           —           358.6         —           358.6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Commercial

     12,501.8         9.1         26.7         10.1         12,547.7