10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the Quarterly Period Ended June 30, 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

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

50 South LaSalle Street

Chicago, Illinois

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

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

 

 

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

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

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

 

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

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

235,584,991 Shares – $1.66 2/3 Par Value

(Shares of Common Stock Outstanding on June 30, 2014)

 

 

 


CONSOLIDATED FINANCIAL HIGHLIGHTS

(UNAUDITED)

 

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

FOR THE PERIOD (In Millions)

   2014     2013     % Change (*)     2014     2013     % Change (*)  

Noninterest Income

            

Trust, Investment and Other Servicing Fees

   $ 706.9      $ 657.3        8   $ 1,386.4      $ 1,288.0        8

Foreign Exchange Trading Income

     52.9        71.3        (26     103.0        130.8        (21

Treasury Management Fees

     16.6        17.1        (2     33.4        33.9        (1

Security Commissions and Trading Income

     17.8        18.3        (3     32.5        36.6        (11

Other Operating Income

     40.5        36.3        11        78.2        61.1        28   

Investment Security Gains (Losses), net

     0.4        0.1        N/M        (3.6     0.3        N/M   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Noninterest Income

     835.1        800.4        4        1,629.9        1,550.7        5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Interest Income

     246.6        220.1        12        492.3        446.2        10   

Provision for Credit Losses

     —          5.0        (100     3.0        10.0        (70
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Interest Income after Provision for Credit Losses

     246.6        215.1        15        489.3        436.2        12   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest Expense

            

Compensation

     372.4        326.9        14        714.2        647.2        10   

Employee Benefits

     68.5        64.2        7        135.4        127.5        6   

Outside Services

     144.6        136.2        6        289.0        266.1        9   

Equipment and Software

     116.1        92.1        26        217.4        183.5        18   

Occupancy

     47.2        43.5        9        91.4        86.7        5   

Other Operating Expense

     62.2        66.8        (7     131.6        147.6        (11
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Noninterest Expense

     811.0        729.7        11        1,579.0        1,458.6        8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before Income Taxes

     270.7        285.8        (5     540.2        528.3        2   

Provision for Income Taxes

     88.8        94.7        (6     176.9        173.2        2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

   $ 181.9      $ 191.1        (5 )%    $ 363.3      $ 355.1        2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average Total Assets

   $ 103,324.1      $ 92,849.6        11   $ 101,792.3      $ 92,213.0        10

PER COMMON SHARE

                                    

Net Income – Basic

   $ 0.76      $ 0.78        (3 )%    $ 1.51      $ 1.46        3

                    – Diluted

     0.75        0.78        (4     1.50        1.45        3   

Cash Dividends Declared Per Common Share

     0.33        0.31        6        0.64        0.61        5   

Book Value – End of Period (EOP)

     34.14        32.17        6        34.14        32.17        6   

Market Price – EOP

     64.21        57.90        11        64.21        57.90        11   

FINANCIAL RATIOS

                                    

Return on Average Common Equity

     9.18     10.02       9.23     9.43  

Return on Average Assets

     0.71        0.83          0.72        0.78     

Dividend Payout Ratio

     44.00        39.74          42.67        42.07     

PERIOD END (In Millions)

   June 30,
2014
    December 31,
2013
    % Change (*)                    

Assets

   $ 105,761.2      $ 102,947.3        3      

Earning Assets

     96,050.9        93,367.2        3         

Deposits

     88,862.5        84,098.1        6         

Stockholders’ Equity

     8,042.6        7,912.0        2         

PERIOD END CLIENT ASSETS (In Billions)

                                    

Assets Under Custody

   $ 6,004.6      $ 5,575.7        8      

Assets Under Management

     924.4        884.5        5         

CAPITAL RATIOS

                                    
Northern Trust Corporation    June 30, 2014     March 31,
2014 (b)
    December 31,
2013 (c)
             
     Advanced
Approach (a)
    Standardized
Approach (b)
                 

Common Equity Tier 1

     12.7     12.7     12.8     12.9    

Tier 1

     12.9        12.9        13.0        13.4       

Total

     14.9        15.4        15.5        15.8       

Leverage

     n/a        7.6        7.8        7.9       
The Northern Trust Company    June 30, 2014     March 31,
2014 (b)
    December 31,
2013 (c)
             
     Advanced
Approach (a)
    Standardized
Approach (b)
                 

Common Equity Tier 1

     11.7     11.4     11.7     11.5    

Tier 1

     11.6        11.4        11.7        11.5       

Total

     13.7        14.0        14.2        14.3       

Leverage

     n/a        6.7        6.9        6.8       

 

(*) Percentage calculations are based on actual balances rather than the rounded amounts presented in the Consolidated Financial Highlights.
(a) Effective with the second quarter of 2014, Northern Trust exited its parallel run. Accordingly, the June 30, 2014 ratios are calculated in compliance with the Basel III Advanced Approach final rules released by the Board of Governors of the Federal Reserve on July 2, 2013.
(b) Standardized Approach capital components in 2014 are determined by Basel III phased in requirements and risk weighted assets are determined by Basel I requirements. The June 30, 2014 and March 31, 2014 ratios calculated under the Standardized Approach comply with the final rules released by the Board of Governors of the Federal Reserve on July 2, 2013.
(c) The December 31, 2013 ratios are calculated in accordance with Basel I requirements.

 

2


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

SECOND 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.

On July 23, 2014, the SEC approved rules implementing money market mutual fund reform, which, among other things, require institutional prime money market funds to maintain a floating net asset value and implement procedures that may restrict redemptions in certain circumstances. Given the uncertainty regarding the implementation of these rules, we are unable to predict with any degree of certainty what impact they will ultimately have on our business.

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 second quarter of 2014 was $0.75 compared to $0.78 per common share in the second quarter of 2013. Net income was $181.9 million, down $9.2 million, or 5%, from $191.1 million in the prior year quarter. The performance in the current quarter produced an annualized return on average common equity of 9.2% as compared to 10.0% in the prior year quarter. The annualized return on average assets was 0.7% as compared to 0.8% in the prior year quarter.

The current quarter includes pre-tax charges and write-offs totaling $42.3 million. Excluding these charges and write-offs, net income per diluted common share, net income, and return on average common equity were $0.87, $209.8 million, and 10.6%, respectively.

Revenue of $1.08 billion was up $61.2 million, or 6%, from $1.02 billion in the prior year quarter. Noninterest income increased $34.7 million, or 4%, to $835.1 million from $800.4 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 increased $26.5 million, or 12%, to $246.6 million as compared to $220.1 million in the prior year quarter, due to higher levels of average earning assets, partially offset by a decrease in the net interest margin.

Noninterest expense totaled $811.0 million, up $81.3 million, or 11%, from $729.7 million in the prior year quarter. Excluding the current quarter pre-tax charges and write-offs of $42.3 million, noninterest expense was $768.7 million, up $39.0 million, or 5%, from the prior year quarter, primarily reflecting higher compensation, equipment and software and outside services expense.

 

3


Noninterest Income

The components of noninterest income are provided below.

 

Noninterest Income

   Three Months Ended June 30,  

($ In Millions)

       2014              2013          Change  

Trust, Investment and Other Servicing Fees

   $ 706.9       $ 657.3       $ 49.6        8

Foreign Exchange Trading Income

     52.9         71.3         (18.4     (26

Treasury Management Fees

     16.6         17.1         (0.5     (2

Security Commissions and Trading Income

     17.8         18.3         (0.5     (3

Other Operating Income

     40.5         36.3         4.2        11   

Investment Security Gains (Losses), net

     0.4         0.1         0.3        N/M   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Noninterest Income

   $ 835.1       $ 800.4       $ 34.7        4
  

 

 

    

 

 

    

 

 

   

 

 

 

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.

 

Assets Under Custody

($ In Billions)

   June 30,
2014
     March 31,
2014
     June 30,
2013
     Change
Q2-14/
Q1-14
    Change
Q2-14/
Q2-13
 

Corporate & Institutional

   $ 5,488.0       $ 5,249.9       $ 4,538.9         5     21

Wealth Management

     516.6         503.6         452.6         3        14   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Assets Under Custody

   $ 6,004.6       $ 5,753.5       $ 4,991.5         4     20
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Assets Under Management

($ In Billions)

   June 30,
2014
     March 31,
2014
     June 30,
2013
     Change
Q2-14/
Q1-14
    Change
Q2-14/
Q2-13
 

Corporate & Institutional

   $ 701.5       $ 698.2       $ 600.5         —       17

Wealth Management

     222.9         217.2         202.5         3        10   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Assets Under Management

   $ 924.4       $ 915.4       $ 803.0         1     15
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

C&IS assets under custody totaled $5.5 trillion, up 21% from the prior year quarter, and includes $3.5 trillion of global custody assets, 27% higher compared to the prior year quarter. C&IS assets under management include $116.4 billion of securities lending collateral, a 19% increase from the prior year quarter.

Changes in assets under custody and under management are in comparison to the twelve month increase in the S&P 500® index and MSCI EAFE® index (USD) of 22.0% and 20.3%, respectively.

 

4


Noninterest Income (continued)

 

Custodied and managed assets were invested as follows at June 30, 2014 and 2013:

 

     2014     2013  

Assets Under Custody

   C&IS     WM     Consolidated     C&IS     WM     Consolidated  

Equities

     45     56     46     46     52     46

Fixed Income Securities

     37        21        36        35        24        34   

Cash and Other Assets

     18        23        18        19        24        20   

Assets Under Management

            

Equities

     56     48     54     54     43     51

Fixed Income Securities

     13        28        16        14        29        18   

Cash and Other Assets

     31        24        30        32        28        31   

Trust, investment and other servicing fees in C&IS increased $31.2 million, or 9%, to $395.4 million from the prior year quarter’s $364.2 million.

 

C&IS Trust, Investment and Other Servicing Fees

   Three Months Ended June 30,  

($ In Millions)

   2014      2013      Change  

Custody and Fund Administration

   $ 261.1       $ 234.4       $ 26.7        11

Investment Management

     77.7         73.9         3.8        5   

Securities Lending

     30.0         31.1         (1.1     (4

Other

     26.6         24.8         1.8        8   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 395.4       $ 364.2       $ 31.2        9
  

 

 

    

 

 

    

 

 

   

 

 

 

Custody and fund administration fees, the largest component of C&IS fees, increased 11%, primarily driven by new business, as well as the favorable impact of equity markets and movements in foreign exchange rates. C&IS investment management fees increased 5%; new business and higher equity markets were partially offset by higher waived fees in money market mutual funds. Money market mutual fund fee waivers in C&IS, attributable to persistent low short-term interest rates, totaled $14.8 million, compared to waived fees of $9.8 million in the prior year quarter. Securities lending revenue decreased 4%, primarily reflecting lower spreads partially offset by higher volumes in the current quarter. Other fees in C&IS increased 8%, primarily reflecting new business in investment risk and analytical services.

Trust, investment and other servicing fees in Wealth Management totaled $311.5 million, increasing $18.4 million, or 6%, from $293.1 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. Money market mutual fund fee waivers in Wealth Management totaled $15.9 million compared with $12.9 million in the prior year quarter.

Foreign exchange trading income totaled $52.9 million, down $18.4 million, or 26%, compared with $71.3 million in the prior year quarter. The decrease is attributable to lower currency market volatility and client volumes as compared to the prior year quarter.

 

5


Noninterest Income (continued)

 

Other operating income totaled $40.5 million, up $4.2 million, or 11%, from $36.3 million in the prior year quarter. The components of other operating income are provided below.

 

Other Operating Income

   Three Months Ended June 30,  

($ In Millions)

   2014      2013      Change  

Loan Service Fees

   $ 16.0       $ 14.7       $ 1.3        9

Banking Service Fees

     12.6         13.0         (0.4     (2

Other Income

     11.9         8.6         3.3        36   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Other Operating Income

   $ 40.5       $ 36.3       $ 4.2        11
  

 

 

    

 

 

    

 

 

   

 

 

 

The increase in the other income component of other operating income is primarily attributable to gains from currency-related hedging activity in the current quarter.

Net Interest Income

Net interest income on an FTE basis totaled $253.4 million, up $25.4 million, or 11%, compared to $228.0 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. Average earning assets for the quarter were $95.5 billion, up $12.4 billion, or 15%, from $83.1 billion in the prior year quarter, primarily reflecting higher levels of Federal Reserve deposits and securities. The increased Federal Reserve deposits and securities as compared to the prior year quarter reflect higher levels of non-U.S. office interest-bearing deposits and demand deposits. The decline in the net interest margin to 1.06% from 1.10% in the prior year quarter 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 23.

The balance sheet line item Federal Reserve Deposits and Other Interest-Bearing averaged $13.3 billion as compared to $5.3 billion in the prior year quarter, an increase of $8.0 billion.

Average securities, inclusive of Federal Reserve and Federal Home Loan Bank stock and certain community development investments which are recorded in other assets in the consolidated balance sheet, were $34.3 billion, up $3.6 billion, or 12%, from $30.7 billion in the prior year quarter.

Loans and leases averaged $30.1 billion, up $1.5 billion, or 5%, from $28.6 billion in the prior year quarter, primarily reflecting an increase in average private client loans and commercial and institutional loans. Private client loans averaged $6.5 billion, up $883.8

 

6


Net Interest Income (continued)

 

million, or 16%, from the prior year quarter’s average of $5.6 billion. Commercial and Institutional loans averaged $7.9 billion, up $433.1 million, or 6%, from the prior year quarter’s average of $7.5 billion.

Northern Trust utilizes a diverse mix of funding sources. Total interest-bearing deposits averaged $65.8 billion, compared to $55.9 billion in the prior year quarter, an increase of $9.9 billion, or 18%. Other interest-bearing funds averaged $7.8 billion, a decrease of $733.4 million, or 9%, from $8.5 billion in the prior year quarter, attributable to lower average senior notes and short-term borrowings, partially offset by increased average 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 $3.2 billion, or 17%, to $21.9 billion from $18.7 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 pages 24 and 25.

Provision for Credit Losses

There was no provision for credit losses recorded in the current quarter. A provision of $5.0 million was recorded in the prior year quarter. Net charge-offs were $5.9 million, resulting from $7.8 million of charge-offs and $1.9 million of recoveries, compared to $8.1 million of net charge-offs in the prior year quarter, resulting from $15.6 million of charge-offs and $7.5 million of recoveries. Nonperforming assets decreased 14% from the prior year quarter. Residential real estate loans accounted for 71% and 66% of total nonperforming loans and leases at June 30, 2014 and 2013, respectively. For additional discussion of the provision and allowance for credit losses, refer to the “Asset Quality” section beginning on page 18.

Noninterest Expense

The components of noninterest expense are provided below.

 

Noninterest Expense

   Three Months Ended June 30,  

($ In Millions)

   2014      2013      Change  

Compensation

   $ 372.4       $ 326.9       $ 45.5        14

Employee Benefits

     68.5         64.2         4.3        7   

Outside Services

     144.6         136.2         8.4        6   

Equipment and Software

     116.1         92.1         24.0        26   

Occupancy

     47.2         43.5         3.7        8   

Other Operating Expense

     62.2         66.8         (4.6     (7
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Noninterest Expense

   $ 811.0       $ 729.7       $ 81.3        11
  

 

 

    

 

 

    

 

 

   

 

 

 

 

7


Noninterest Expense (continued)

 

Compensation expense, the largest component of noninterest expense, equaled $372.4 million, up $45.5 million, or 14%, from $326.9 million in the prior year quarter. The current quarter includes pre-tax severance-related charges of $25.5 million. Excluding these charges, compensation expense increased $20.0 million, or 6%, reflecting higher staff levels, base pay adjustments and the impact of unfavorable movements in foreign exchange rates. Staff on a full-time equivalent basis at June 30, 2014 totaled approximately 15,100, up 4% from a year ago.

Employee benefit expense equaled $68.5 million, up $4.3 million, or 7%, from $64.2 million in the prior year quarter, and includes $1.9 million of severance-related charges. Excluding these charges, employee benefit expense increased 4%, attributable to higher expense associated with employee medical benefits and payroll tax expense, partially offset by lower pension expense.

Expense associated with outside services totaled $144.6 million, up $8.4 million, or 6%, from $136.2 million in the prior year quarter. Outside services expense includes $1.1 million of severance-related charges in the current quarter. Excluding these charges, outside services expense increased $7.3 million, or 5%, primarily reflecting volume-driven growth in global sub-custodian expense as well as increased legal services expense.

Equipment and software expense totaled $116.1 million, up $24.0 million, or 26%, from $92.1 million in the prior year quarter. The current quarter includes $9.5 million of pre-tax write-offs of replaced or eliminated software. Excluding these write-offs, equipment and software expense increased $14.5 million, or 16%, reflecting higher software amortization and related software support costs.

Occupancy expense equaled $47.2 million, up $3.7 million, or 8%, from $43.5 million in the prior year quarter. The current quarter includes pre-tax charges totaling $4.3 million in connection with reductions in office space. Excluding these charges, occupancy expense decreased 1% from the prior year quarter.

Other operating expense totaled $62.2 million, down 7% from $66.8 million in the prior year quarter. The components of other operating expense are provided below.

 

Other Operating Expense

   Three Months Ended June 30,  

($ In Millions)

   2014      2013      Change  

Business Promotion

   $ 19.1       $ 20.7       $ (1.6     (8 )% 

Staff Related

     10.1         8.0         2.1        26   

FDIC Insurance Premiums

     4.7         5.1         (0.4     (7

Other Intangibles Amortization

     5.0         5.1         (0.1     (4

Other Expenses

     23.3         27.9         (4.6     (17
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Other Operating Expense

   $ 62.2       $ 66.8       $ (4.6     (7 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

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

 

8


Provision for Income Taxes

Income tax expense in the current quarter was $88.8 million, representing an effective tax rate of 32.8%, and $94.7 million in the prior year quarter, representing an effective tax rate of 33.1%.

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 June 30, 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 June 30,

  Corporate &
Institutional Services
    Wealth
Management
    Treasury and
Other
    Total
Consolidated
 

($ In Millions)

  2014     2013     2014     2013     2014     2013     2014     2013  

Noninterest Income

               

Trust, Investment and Other Servicing Fees

  $ 395.4      $ 364.2      $ 311.5      $ 293.1      $ —        $ —        $ 706.9      $ 657.3   

Foreign Exchange Trading Income

    50.7        69.8        2.2        1.5        —          —          52.9        71.3   

Other Noninterest Income

    47.1        45.6        23.1        24.3        5.1        1.9        75.3        71.8   

Net Interest Income
(FTE)*

    76.7        66.0        132.6        141.2        44.1        20.8        253.4        228.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Revenue*

    569.9        545.6        469.4        460.1        49.2        22.7        1,088.5        1,028.4   

Provision for Credit Losses

    2.4        1.2        (2.4     3.8        —          —          —          5.0   

Noninterest Expense

    446.4        396.0        329.4        301.8        35.2        31.9        811.0        729.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before Income Taxes*

    121.1        148.4        142.4        154.5        14.0        (9.2     277.5        293.7   

Provision (Benefit) for Income Taxes*

    36.1        48.3        53.6        58.0        5.9        (3.7     95.6        102.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

  $ 85.0      $ 100.1      $ 88.8      $ 96.5      $ 8.1      $ (5.5   $ 181.9      $ 191.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of Consolidated Net Income

    47     52     49     51     4     (3 )%      100     100

Average Assets

  $ 59,995.2      $ 51,976.0      $ 22,210.8      $ 22,803.8      $ 21,118.1      $ 18,069.8      $ 103,324.1      $ 92,849.6   

 

* Stated on a fully taxable equivalent basis (FTE). Total consolidated includes FTE adjustments of $6.8 million for 2014 and $7.9 million for 2013.

 

Six Months Ended June 30,

  Corporate &
Institutional Services
    Wealth
Management
    Treasury and
Other
    Total
Consolidated
 

($ In Millions)

  2014     2013     2014     2013     2014     2013     2014     2013  

Noninterest Income

               

Trust, Investment and Other Servicing Fees

  $ 774.6      $ 712.9      $ 611.8      $ 575.1      $ —        $ —        $ 1,386.4      $ 1,288.0   

Foreign Exchange Trading Income

    98.8        128.0        4.2        2.8        —          —          103.0        130.8   

Other Noninterest Income

    91.5        85.8        45.8        41.5        3.2        4.6        140.5        131.9   

Net Interest Income (FTE)*

    150.4        130.1        267.6        289.0        89.8        42.6        507.8        461.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Revenue*

    1,115.3        1,056.8        929.4        908.4        93.0        47.2        2,137.7        2,012.4   

Provision for Credit Losses

    3.6        (1.5     (0.6     11.5        —          —          3.0        10.0   

Noninterest Expense

    869.9        794.7        648.2        603.6        60.9        60.3        1,579.0        1,458.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before Income Taxes*

    241.8        263.6        281.8        293.3        32.1        (13.1     555.7        543.8   

Provision (Benefit) for Income Taxes*

    70.9        84.2        106.2        110.8        15.3        (6.3     192.4        188.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

  $ 170.9      $ 179.4      $ 175.6      $ 182.5      $ 16.8      $ (6.8   $ 363.3      $ 355.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of Consolidated Net Income

    47     51     48     51     5     (2 )%      100     100

Average Assets

  $ 58,631.4      $ 51,648.2      $ 22,368.8      $ 22,832.4        20,792.1      $ 17,732.4      $ 101,792.3      $ 92,213.0   

 

* Stated on a fully taxable equivalent basis (FTE). Total consolidated includes FTE adjustments of $15.5 million for both 2014 and 2013.

 

9


Corporate & Institutional Services

C&IS net income totaled $85.0 million compared to $100.1 million in the prior year quarter, a decrease of $15.1 million, or 15%. Noninterest income was $493.2 million, up $13.6 million, or 3%, from $479.6 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 June 30,  

($ In Millions)

   2014      2013      Change  

Custody and Fund Administration

   $ 261.1       $ 234.4       $ 26.7        11

Investment Management

     77.7         73.9         3.8        5   

Securities Lending

     30.0         31.1         (1.1     (4

Other

     26.6         24.8         1.8        8   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 395.4       $ 364.2       $ 31.2        9
  

 

 

    

 

 

    

 

 

   

 

 

 

Custody and fund administration fees, the largest component of C&IS fees, increased 11%, primarily driven by new business, as well as the favorable impact of equity markets and movements in foreign exchange rates. C&IS investment management fees increased 5%, as new business and higher equity markets were partially offset by higher waived fees in money market mutual funds. Money market mutual fund fee waivers in C&IS, attributable to persistent low short-term interest rates, totaled $14.8 million, compared to waived fees of $9.8 million in the prior year quarter. Securities lending revenue decreased 4%, primarily reflecting lower spreads partially offset by higher volumes in the current quarter. Other fees in C&IS increased 8% primarily reflecting new business in investment risk and analytical services.

Foreign exchange trading income totaled $50.7 million, a decrease of $19.1 million, or 27%, from $69.8 million in the prior year quarter, attributable to lower currency market volatility and trading volumes compared to the prior year quarter.

Other noninterest income in C&IS totaled $47.1 million, up 3% from $45.6 million in the prior year quarter, reflecting higher security commissions and trading income as compared to the prior year quarter.

Net interest income stated on an FTE basis was $76.7 million, up $10.7 million, or 16% from $66.0 million in the prior year quarter. The increase in net interest income is attributable to higher levels of average earning assets, partially offset by a decrease in the net interest margin. Average earning assets totaled $53.8 billion, an increase of $9.7 billion, or 22%, from $44.1 billion in the prior year quarter, and were comprised of interest-bearing deposits with banks, loans and leases and investment securities. Funding sources were primarily comprised of non-U.S. custody-related interest-bearing deposits, which averaged $45.2 billion in the current quarter, up $11.0 billion, or 32%, from $34.2 billion in the prior year quarter. The net interest margin declined to 0.57% from 0.61% in the prior year quarter, reflecting lower yields on earning assets, partially offset by a lower cost of interest-related funds.

A provision for credit losses of $2.4 million was recorded in the current quarter, primarily

 

10


Corporate & Institutional Services (continued)

 

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 provision of $1.2 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 $446.4 million, up $50.4 million, or 13%, from the prior year quarter’s $396.0 million. The current quarter includes $20.9 million of pre-tax charges relating to severance activities and reductions in office space and write-offs of replaced or eliminated software. Excluding these charges and write-offs, C&IS noninterest expense increased $29.5 million, or 7%, attributable to higher indirect expense allocations, compensation and outside services expense.

Wealth Management

Wealth Management net income was $88.8 million, down $7.7 million, or 8%, from $96.5 million in the prior year quarter. Noninterest income was $336.8 million, up $17.9 million, or 6%, from $318.9 million in the prior year quarter. Trust, investment and other servicing fees in Wealth Management totaled $311.5 million, increasing $18.4 million, or 6%, from $293.1 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. Money market mutual fund fee waivers in Wealth Management totaled $15.9 million compared with $12.9 million in the prior year quarter. Other noninterest income totaled $23.1 million, down 5% from $24.3 million in the prior year quarter, primarily reflecting lower security commissions and trading income in the current quarter.

Net interest income stated on an FTE basis was $132.6 million, down $8.6 million, or 6%, from $141.2 million in the prior year quarter, primarily reflecting a decline in the net interest margin. The net interest margin decreased to 2.32% from 2.54% 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 $23.0 billion, up $393.9 million, or 2%, 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 negative provision for credit losses of $2.4 million was recorded in the current quarter, reflecting improvement in the credit quality of the commercial and institutional and commercial real estate loan classes while residential real estate loans continued to reflect weakness relative to the overall portfolio. Loan balances within private client, commercial and institutional and commercial real estate loan classes increased in the current quarter, while the residential real estate loan balance decreased. A provision for credit losses of $3.8 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 $329.4

 

11


Wealth Management (continued)

 

million compared with $301.8 million in the prior year quarter, an increase of $27.6 million, or 9%. Noninterest expense in the current quarter includes $16.8 million of pre-tax charges relating to severance activities and reductions in office space and write-offs of replaced or eliminated software. Excluding these charges and write-offs noninterest expense increased $10.8 million, or 4%, primarily reflecting higher indirect expense allocations 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 $5.1 million compared to noninterest income in the prior year quarter of $1.9 million. The increase primarily reflects current quarter gains from currency-related hedging activities.

Net interest income was $44.1 million, compared to $20.8 million in the prior year quarter, an increase of $23.3 million. The increase reflects higher internal yields on funds provided to business units and increased average earning assets, up $2.3 billion, or 14%, to $18.7 billion in the current quarter from $16.4 billion in the prior year quarter.

Noninterest expense totaled $35.2 million, up 10% from $31.9 million in the prior year quarter, and includes $4.6 million of pre-tax severance-related charges. Excluding these charges, noninterest expense decreased 4%, primarily reflecting higher indirect expense allocations to C&IS and Wealth Management, partially offset by higher equipment and software and compensation expense as compared to the prior year quarter.

SIX-MONTH CONSOLIDATED RESULTS OF OPERATIONS

Overview

Net income per diluted common share was $1.50 for the six months ended June 30, 2014 and $1.45 in the comparable prior year period. Net income totaled $363.3 million, up $8.2 million, or 2%, as compared to $355.1 million in the prior year period. The performance in the current period produced an annualized return on average common equity of 9.2%, compared to 9.4% in the prior year period. The annualized return on average assets was 0.7%, compared to 0.8% in the prior year period.

The current year period includes pre-tax charges and write-offs totaling $42.3 million. Excluding these charges and write-offs, net income per diluted common share, net income, and return on average common equity were $1.61, $391.1 million, and 9.9% respectively.

Revenue for the six months ended June 30, 2014 totaled $2.12 billion, up $125.3 million, or 6%, from the prior year period’s $2.00 billion. Noninterest income was $1.63 billion, up

 

12


Overview (continued)

 

$79.2 million, or 5%, from $1.55 billion in the prior year period. Trust, investment and other servicing fees increased $98.4 million, or 8%, to $1.39 billion from $1.29 billion in the prior year period.

Noninterest Income

The components of noninterest income are provided below.

 

Noninterest Income

   Six Months Ended June 30,  

($ In Millions)

   2014     2013      Change  

Trust, Investment and Other Servicing Fees

   $ 1,386.4      $ 1,288.0       $ 98.4        8

Foreign Exchange Trading Income

     103.0        130.8         (27.8     (21

Treasury Management Fees

     33.4        33.9         (0.5     (1

Security Commissions and Trading Income

     32.5        36.6         (4.1     (11

Other Operating Income

     78.2        61.1         17.1        28   

Investment Security Gains (Losses), net

     (3.6     0.3         (3.9     N/M   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Noninterest Income

   $ 1,629.9      $ 1,550.7       $ 79.2        5
  

 

 

   

 

 

    

 

 

   

 

 

 

Trust, investment and other servicing fees from C&IS increased $61.7 million, or 9%, totaling $774.6 million, compared to $712.9 million a year ago.

 

C&IS Trust, Investment and Other Servicing Fees

   Six Months Ended June 30,  

($ In Millions)

   2014      2013      Change  

Custody and Fund Administration

   $ 513.3       $ 458.2       $ 55.1        12

Investment Management

     152.7         149.4         3.3        2   

Securities Lending

     52.7         53.4         (0.7     (1

Other

     59.9         51.9         4.0        8   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 774.6       $ 712.9       $ 61.7        9
  

 

 

    

 

 

    

 

 

   

 

 

 

Custody and fund administration fees, the largest component of C&IS fees, increased 12%, primarily driven by new business, as well as the favorable impact of equity markets and movements in foreign exchange rates. C&IS investment management fees increased 2%, primarily reflecting higher equity markets and new business, partially offset by higher waived fees in money market mutual funds. Money market mutual fund fee waivers in C&IS, attributable to persistent low short-term interest rates, totaled $29.7 million, compared to waived fees of $18.6 million in the prior year period. Securities lending revenue decreased 1%, primarily reflecting lower spreads offset by higher loan volumes in the current period. Other fees in C&IS increased 8%, primarily reflecting new business in investment risk and analytical services.

Trust, investment and other servicing fees in Wealth Management totaled $611.8 million, increasing $36.7 million, or 6%, from $575.1 million in the prior year period. The increase is primarily due to higher equity markets and new business, partially offset by higher waived fees in money market mutual funds. Money market mutual fund fee waivers in Wealth Management totaled $33.5 million compared with $26.3 million in the prior year period.

 

13


Noninterest Income (continued)

 

Foreign exchange trading income decreased $27.8 million, or 21%, and totaled $103.0 million compared with $130.8 million in the prior year period. The decrease is attributable to lower currency market volatility and client volumes compared to the prior year period.

Other operating income increased $17.1 million, or 28%, to $78.2 million compared with $61.1 million in the prior year period. The components of other operating income are provided below.

 

Other Operating Income

   Six Months Ended June 30,  

($ In Millions)

   2014      2013      Change  

Loan Service Fees

   $ 31.7       $ 29.6       $ 2.1        7

Banking Service Fees

     24.9         25.4         (0.5     (2

Other Income

     21.6         6.1         15.5        N/M   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Other Operating Income

   $ 78.2       $ 61.1       $ 17.1        28
  

 

 

    

 

 

    

 

 

   

 

 

 

The prior year period’s other income component of other operating income included a $12.4 million write-off of certain fee receivables resulting from the correction of an accrual methodology followed in prior years. Excluding the prior year period write-off, the other income component of other operating income increased 6% in the current year period, primarily reflecting gains from currency-related hedging activity.

Net investment security losses totaled $3.6 million, compared to net investment security gains totaling $0.3 million in the prior year period. The current year period includes $3.9 million of charges relating to the other-than-temporary impairment of certain Community Reinvestment Act (CRA) eligible securities.

Net Interest Income

Net interest income, stated on an FTE basis, totaled $507.8 million, an increase of $46.1 million, or 10%, from $461.7 million reported in the prior year period. The increase is the result of higher levels of average earning assets, partially offset by a decline in the net interest margin. Average earning assets were $93.7 billion, up $11.1 million, or 13%, from $82.6 billion in the prior year period, primarily attributable to higher levels of Federal Reserve deposits and securities. The increased Federal Reserve deposits and securities primarily reflect higher levels of non-U.S. interest-bearing deposits and demand deposits as compared to the prior year. The net interest margin declined to 1.09% from 1.13% in the prior year period reflecting lower yields on earning assets, partially offset by a lower cost of interest-related funds due to lower short-term interest rates.

Provision for Credit Losses

A provision for credit losses of $3.0 million was recorded in the current year period. A provision of $10.0 million was recorded in the prior year period. Net charge-offs totaled $7.4 million resulting from $19.3 million of charge-offs and $11.9 million of recoveries, compared to net charge-offs of $16.8 million in the prior year period resulting from $28.2 million of charge-offs and $11.4 million of recoveries. The current period provision reflects improvement in the credit quality of the commercial and institutional and commercial real

 

14


Provision for Credit Losses (continued)

 

estate loan classes while residential real estate loans continued to reflect weakness relative to the overall portfolio, accounting for 71% and 66% of total nonperforming loans and leases at June 30, 2014 and 2013, respectively. Loan balances within the commercial and institutional and commercial real estate loan classes increased in the current quarter, while the residential real estate loan balance decreased. For a fuller discussion of the consolidated allowance and provision for credit losses refer to the “Asset Quality” section beginning on page 18.

Noninterest Expense

Noninterest expense totaled $1.58 billion for the current period, up $120.4 million, or 8%, from the prior year period’s $1.46 billion. The components of noninterest expense are provided below.

 

Noninterest Expense

   Six Months Ended June 30,  

($ In Millions)

   2014      2013      Change  

Compensation

   $ 714.2       $ 647.2       $ 67.0        10

Employee Benefits

     135.4         127.5         7.9        6   

Outside Services

     289.0         266.1         22.9        9   

Equipment and Software

     217.4         183.5         33.9        18   

Occupancy

     91.4         86.7         4.7        5   

Other Operating Expense

     131.6         147.6         (16.0     (11
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Noninterest Expense

   $ 1,579.0       $ 1,458.6       $ 120.4        8
  

 

 

    

 

 

    

 

 

   

 

 

 

Compensation expense, the largest component of noninterest expense, increased $67.0 million, or 10%, to $714.2 million from the prior year period’s $647.2 million. The current year period includes pre-tax severance-related charges of $25.5 million. Excluding the severance-related charges, compensation expense increased $41.5 million, or 6%, reflecting higher staff levels, base pay adjustments and the unfavorable impact of movements in foreign exchange rates.

Employee benefit expense increased $7.9 million, or 6% to $135.4 million from $127.5 million in the prior year period, and includes $1.9 million of severance-related charges. Excluding these charges, employee benefit expense increased $6.0 million, or 5%, primarily attributable to higher expense associated with employee medical benefits and payroll tax expense, partially offset by lower pension expense.

Outside services expense equaled $289.0 million, up $22.9 million, or 9%, from $266.1 million in the prior year period. Outside services expense includes $1.1 million of severance-related charges in the current period. Excluding these charges, outside services expense increased $21.8 million, or 8%, primarily reflecting volume-driven growth in global sub-custodian expense as well as higher consulting and legal services expense.

Equipment and software expense totaled $217.4 million, up $33.9 million, or 18% from $183.5 million in the prior year period. The current period includes $9.5 million of pre-tax

 

15


Noninterest Expense (continued)

 

write-offs of replaced or eliminated software. Excluding these write-offs, equipment and software expense increased $24.4 million, or 13%, reflecting higher software amortization and related software support costs.

Occupancy expense equaled $91.4 million, up 5% from $86.7 million in the prior year period. The current period includes pre-tax charges totaling $4.3 million in connection with reductions in office space. Excluding these charges, occupancy expense was relatively unchanged from the prior year period.

The components of other operating expense are provided below.

 

Other Operating Expense

   Six Months Ended June 30,  

($ In Millions)

       2014              2013          Change  

Business Promotion

   $ 47.5       $ 49.4       $ (1.9     (4 )% 

Staff Related

     19.5         18.5         1.0        6   

FDIC Insurance Premiums

     10.6         11.8         (1.2     (10

Other Intangibles Amortization

     9.9         10.3         (0.4     (5

Other Expenses

     44.1         57.6         (13.5     (24
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Other Operating Expense

   $ 131.6       $ 147.6       $ (16.0     (11 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

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 $176.9 million and $173.2 million for the six months ended June 30, 2014 and 2013, respectively, representing an effective tax rate of 32.8% in both periods.

BALANCE SHEET

Total assets at June 30, 2014 were $105.8 billion and averaged $103.3 billion for the current quarter, compared with total assets of $97.2 billion at June 30, 2013 and average total assets of $92.8 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 $30.7 billion at June 30, 2014 and averaged $30.1 billion in the current quarter, up 7% and 5%, respectively, compared to $28.8 billion at June 30, 2013 and a $28.6 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 $34.4 billion at June 30, 2014 and averaged $34.3 billion for the current quarter, each up 12% as compared to $30.7 billion on average and at June 30, 2013 in the prior year quarter. In aggregate, the balance sheet line item categories of federal funds sold and securities purchased under agreements to resell, interest-bearing deposits with banks, and Federal Reserve deposits and other interest-bearing totaled $31.0 billion at June 30, 2014 and averaged $31.1 billion in the current quarter, up 23% and 31%, respectively, from the prior year quarter balances. Interest-bearing deposits at June 30, 2014 totaled and

 

16


BALANCE SHEET (continued)

 

averaged $65.8 billion, up 16% and 18%, respectively, compared to $56.8 billion at June 30, 2013 and a $55.9 billion average in the prior year quarter. Noninterest-bearing deposits at June 30, 2014 totaled $23.0 billion and averaged $18.8 billion, up 17% and 8%, respectively, compared to $19.7 billion at June 30, 2013 and a $17.5 billion average in the prior year quarter.

Total stockholders’ equity at June 30, 2014 was $8.0 billion and averaged $7.9 billion for the current quarter, each up 4% as compared to $7.7 billion at June 30, 2013 and $7.6 billion on average for the prior year quarter. The increase is primarily attributable to earnings, partially offset by dividend declarations and the repurchase of common stock pursuant to the Corporation’s share buyback program. During the three and six months ended June 30, 2014, the Corporation repurchased 1,235,417 shares at a cost of $74.9 million ($60.63 average price per share) and 3,860,132 shares at a cost of $237.9 million ($61.63 average price per share), respectively.

The capital ratios of Northern Trust and its principal subsidiary bank, The Northern Trust Company, remained strong at June 30, 2014, with all ratios applicable to classification as “well capitalized” under U.S. regulatory requirements having been exceeded.

 

Capital Ratios – Northern Trust Corporation

   June 30, 2014     March 31, (b)
2014
    December 31, (c)
2013
 
   Advanced (a)
Approach
    Standardized (b)
Approach
     

Common Equity Tier 1

     12.7     12.7     12.8     12.9

Tier 1

     12.9     12.9     13.0     13.4

Total

     14.9     15.4     15.5     15.8

Leverage

     n/a        7.6     7.8     7.9

 

Capital Ratios – The Northern Trust Company

   June 30, 2014     March 31, (b)
2014
    December 31, (c)
2013
 
   Advanced (a)
Approach
    Standardized (b)
Approach
     

Common Equity Tier 1

     11.7     11.4     11.7     11.5

Tier 1

     11.6     11.4     11.7     11.5

Total

     13.7     14.0     14.2     14.3

Leverage

     n/a        6.7     6.9     6.8

 

(a) Effective with the second quarter of 2014, Northern Trust exited its parallel run. Accordingly, the June 30, 2014 ratios are calculated in compliance with the Basel III Advanced Approach final rules released by the Board of Governors of the Federal Reserve on July 2, 2013.
(b) Standardized Approach capital components in 2014 are determined by Basel III phased in requirements and risk weighted assets are determined by Basel I requirements. The June 30, 2014 and March 31, 2014 ratios calculated under the Standardized Approach comply with the final rules released by the Board of Governors of the Federal Reserve on July 2, 2013.
(c) The December 31, 2013 ratios are calculated in accordance with Basel I requirements.

STATEMENT OF CASH FLOWS

For the six months ended June 30, 2014, net cash provided by operating activities was $1.5 billion, primarily attributable to a reduction of net collateral deposited with derivative counterparties, as well as period earnings, inclusive of the impact of non-cash charges such as the amortization of computer software, and decreased receivables. Net cash used

 

17


STATEMENT OF CASH FLOWS (continued)

 

in operating activities for the six months ended June 30, 2013 was $1.3 billion, primarily attributable to increased net collateral deposited with derivative counterparties as a result of market movements on client-related and trading derivative instruments, partially offset by period earnings, inclusive of non-cash charges.

Net cash used in investing activities of $3.1 billion for the six months ended June 30, 2014 is primarily attributable to net purchases of securities held to maturity and available for sale, as well as increased loans and leases, partially offset by decreases within interest-bearing deposits with banks.

Net cash provided by investing activities of $2.7 billion for the six months ended June 30, 2013 primarily reflects decreases in Federal Reserve deposits and loans and leases, as well as net changes within securities available for sale and held to maturity, and within client settlement receivables. The decrease in Federal Reserve deposits was primarily the result of lower client deposits, partially offset by higher levels of short-term other borrowings.

For the six months ended June 30, 2014, net cash provided by financing activities totaled $2.2 billion, primarily reflecting increased total deposits, partially offset by lower levels of short-term other borrowings and senior notes. The increase in total deposits was attributable to increases in demand and other noninterest-bearing client deposits and non-U.S. office interest-bearing deposits. The decreases in short-term other borrowings and senior notes, respectively, reflect a decline in outstanding short-term other borrowings from the Federal Home Loan Bank and the maturity of $500 million of fixed-rate senior notes during the current quarter.

For the six months ended June 30, 2013, net cash used in financing activities totaled $436.5 million, 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 federal funds purchased 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 increases in federal funds purchased and short-term other borrowings reflect additional borrowing activity in the federal funds market and additional short-term borrowings from the Federal Home Loan Bank.

ASSET QUALITY

Securities Portfolio

Northern Trust maintains a high quality securities portfolio, with 85% of the combined available for sale, held to maturity, and trading account portfolios at June 30, 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,

 

18


ASSET QUALITY (continued)

 

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, 6% 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 $65.3 million at June 30, 2014, comprised of $146.7 million and $81.4 million of gross unrealized gains and losses, respectively. Of the unrealized losses on securities at June 30, 2014, the largest component, totaling $31.2 million, related to corporate debt securities, primarily reflecting widened credit spreads and higher market rates since purchase; 44% of the corporate debt portfolio is backed by guarantees provided by U.S. and non-U.S. governmental entities. Unrealized losses of $23.6 million related to government sponsored agency securities are primarily attributable to changes in market rates since their purchase.

For the six months ended June 30, 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 June 30, 2014 or for the three or six months ended June 30, 2013. Northern Trust has evaluated all 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.

Exposures in Europe

Northern Trust continues to monitor closely economic developments in Europe. Northern Trust considers Ireland, Portugal, Italy, Greece, Spain, Cyprus and Slovenia to be those European countries experiencing significant economic, fiscal and/or political strains. At June 30, 2014, Northern Trust’s gross cross-border exposure to obligors in Ireland totaled approximately $690 million, or less than 1% of Northern Trust’s total consolidated assets. Of the cross-border exposure to obligors in Ireland, $10 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 the 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. As

 

19


ASSET QUALITY (continued)

 

of June 30, 2014, there was no cross-border exposure to obligors in Italy, Portugal, Greece, Spain, Cyprus or Slovenia, and there was no exposure to sovereign debt securities in any of the European countries deemed to be experiencing significant economic, fiscal and/or political strains. Exposure levels at June 30, 2014 reflect Northern Trust’s risk management policies and practices, which operate to limit exposures to higher risk 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.

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

 

($ In Millions)

   June 30,
2014
    March 31,
2014
    December 31,
2013
    June 30,
2013
 

Nonperforming Loans and Leases

        

Commercial

        

Commercial and Institutional

   $ 20.8      $ 26.1      $ 23.1      $ 25.0   

Commercial Real Estate

     45.4        51.6        49.2        61.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Commercial

     66.2        77.7        72.3        86.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Personal

        

Residential Real Estate

     161.7        180.9        189.1        177.2   

Private Client

     1.4        1.3        1.4        3.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Personal

     163.1        182.2        190.5        180.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Nonperforming Loans and Leases

   $ 229.3      $ 259.9      $ 262.8      $ 266.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other Real Estate Owned

     12.6        9.8        11.9        14.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Nonperforming Assets

   $ 241.9      $ 269.7      $ 274.7      $ 281.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

90 Day Past Due Loans Still Accruing

   $ 13.1      $ 12.3      $ 16.4      $ 18.5   

Nonperforming Loans and Leases to Total Loans and Leases

     0.75     0.88     0.89     0.93

Coverage of Loan and Lease Allowance to

        

Nonperforming Loans and Leases

     1.2x        1.1x        1.1x        1.1x   

Nonperforming assets of $241.9 million as of June 30, 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 relative to the overall portfolio, while the credit quality of commercial and institutional loans and commercial real estate loans have improved. 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

 

20


ASSET QUALITY (continued)

 

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.

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.

There was no provision for credit losses recorded in the current quarter. A provision of $5.0 million was recorded in the prior year quarter. Net charge-offs were $5.9 million, resulting from $7.8 million of charge-offs and $1.9 million of recoveries, compared to $8.1 million of net charge-offs in the prior year quarter, resulting from $15.6 million of charge-offs and $7.5 million of recoveries. The current quarter reflects improvement in the credit quality of the commercial and institutional and commercial real estate loan classes while residential real estate loans continued to reflect weakness relative to the overall portfolio,

 

21


ASSET QUALITY (continued)

 

accounting for 71% and 66% of total nonperforming loans and leases at June 30, 2014 and 2013, respectively. The residential real estate loan balance decreased in the current quarter, partially offset by higher levels of commercial and institutional loans and commercial real estate loans.

Note 6 to the consolidated financial statements includes a table that details the changes in the allowance for credit losses during the three and six months ended June 30, 2014 and 2013 due to charge-offs, recoveries, and the provision for credit losses.

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.

 

     June 30, 2014     March 31, 2014     December 31, 2013     June 30, 2013  

($ In Millions)

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

Specific Allowance

   $ 23.8        —     $ 26.3        —     $ 24.9        —     $ 32.9        —  

Allocated Inherent Allowance

                

Commercial

                

Commercial and Institutional

     71.4        26        70.5        26        67.5        25        73.7        25   

Commercial Real Estate

     69.3        10        72.2        10        71.5        10        74.6        10   

Lease Financing, net

     3.4        3        3.5        3        4.2        3        4.5        3   

Non-U.S.

     2.7        4        2.6        5        2.1        3        2.3        5   

Other

     —          2        —          1        —          2        —          1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Commercial

     146.8        45        148.8        45        145.3        43        155.1        44   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Personal

                

Residential Real Estate

     114.6        33        116.8        34        118.7        35        116.4        36   

Private Client

     18.3        22        17.5        21        19.0        22        16.3        20   

Other

     —          —          —          —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Personal

     132.9        55        134.3        55        137.7        57        132.7        56   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Allocated Inherent Allowance

   $ 279.7        100   $ 283.1        100   $ 283.0        100   $ 287.8        100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Allowance for Credit Losses

     303.5          309.4          307.9          320.7     
  

 

 

     

 

 

     

 

 

     

 

 

   

Allowance Assigned to

                

Loans and Leases

   $ 275.2        $ 279.2        $ 278.1        $ 290.4     

Undrawn Commitments and Standby Letters of Credit

     28.3          30.2          29.8          30.3     
  

 

 

     

 

 

     

 

 

     

 

 

   

Total Allowance for Credit Losses

   $ 303.5        $ 309.4        $ 307.9        $ 320.7     
  

 

 

     

 

 

     

 

 

     

 

 

   

Allowance Assigned to Loans and Leases to Total Loans and Leases

     0.90       0.94       0.95       1.01  

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 risk of loss as measured by the VaR associated with the foreign exchange trading portfolio, have not changed significantly since December 31, 2013.

 

22


RECONCILIATION OF REPORTED NET INTEREST INCOME TO FULLY TAXABLE EQUIVALENT

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

 

     Three Months Ended  
     June 30, 2014     June 30, 2013  

($ In Millions)

   Reported     FTE Adj.      FTE     Reported     FTE Adj.      FTE  

Interest Income

   $ 293.8      $ 6.8       $ 300.6      $ 275.3      $ 7.9       $ 283.2   

Interest Expense

     47.2        —           47.2        55.2        —           55.2   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Net Interest Income

   $ 246.6      $ 6.8       $ 253.4      $ 220.1      $ 7.9       $ 228.0   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Net Interest Margin

     1.04        1.06     1.06        1.10
  

 

 

      

 

 

   

 

 

      

 

 

 

 

     Six Months Ended  
     June 30, 2014     June 30, 2013  

($ In Millions)

   Reported     FTE Adj.      FTE     Reported     FTE Adj.      FTE  

Interest Income

   $ 589.2      $ 15.5       $ 604.7      $ 562.0      $ 15.5       $ 577.5   

Interest Expense

     96.9        —           96.9        115.8        —           115.8   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Net Interest Income

   $ 492.3      $ 15.5       $ 507.8      $ 446.2      $ 15.5       $ 461.7   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Net Interest Margin

     1.06        1.09     1.09        1.13
  

 

 

      

 

 

   

 

 

      

 

 

 

 

23


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

 

AVERAGE CONSOLIDATED BALANCE SHEET

WITH ANALYSIS OF NET INTEREST INCOME

   NORTHERN TRUST CORPORATION

 

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

($ In Millions)

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

Average Earning Assets

              

Federal Funds Sold and Securities Purchased under Agreements to Resell

   $ 0.7       $ 554.1        0.47   $ 0.4         309.8        0.51

Interest-Bearing Deposits with Banks

     33.6         17,294.6        0.78        34.5         18,192.6        0.76   

Federal Reserve Deposits and Other Interest-Bearing

     8.4         13,266.4        0.26        3.4         5,275.5        0.26   

Securities

              

U.S. Government

     6.7         2,368.7        1.13        4.7         1,787.4        1.05   

Obligations of States and Political Subdivisions

     2.8         168.4        6.76        4.6         287.0        6.39   

Government Sponsored Agency

     33.3         18,359.8        0.73        25.0         17,270.4        0.58   

Other (1)

     27.8         13,407.8        0.83        23.5         11,397.2        0.83   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Securities

     70.6         34,304.7        0.83        57.8         30,742.0        0.75   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Loans and Leases (2)

     187.3         30,052.9        2.50        187.1         28,601.8        2.62   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Earning Assets

     300.6         95,472.7        1.26        283.2         83,121.7        1.37   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Allowance for Credit Losses Assigned to Loans and Leases

     —           (276.8     —          —           (290.2     —     

Cash and Due from Banks

     —           2,838.4        —          —           2,964.6        —     

Buildings and Equipment

     —           450.7        —          —           461.6        —     

Client Security Settlement Receivables

     —           781.0        —          —           822.2        —     

Goodwill

     —           543.0        —          —           531.3        —     

Other Assets

     —           3,515.1        —          —           5,238.4        —     
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Assets

   $ —         $ 103,324.1        —     $ —         $ 92,849.6        —  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Average Source of Funds

              

Deposits

              

Savings and Money Market

   $ 2.4       $ 14,828.6        0.06   $ 2.3       $ 14,634.7        0.06

Savings Certificates and Other Time

     1.6         1,996.2        0.32        3.4         2,199.1        0.62   

Non-U.S. Offices – Interest-Bearing

     18.4         48,988.1        0.15        19.3         39,043.3        0.20   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Interest-Bearing Deposits

     22.4         65,812.9        0.14        25.0         55,877.1        0.18   

Short-Term Borrowings

     1.2         4,217.8        0.12        1.4         4,750.0        0.12   

Senior Notes

     13.7         1,661.6        3.30        19.3         2,400.1        3.21   

Long-Term Debt

     9.4         1,642.4        2.30        8.9         1,105.2        3.24   

Floating Rate Capital Debt

     0.5         277.2        0.80        0.6         277.1        0.86   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Interest-Related Funds

     47.2         73,611.9        0.26        55.2         64,409.5        0.34   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Interest Rate Spread

     —           —          1.00        —           —          1.03   

Demand and Other Noninterest-Bearing Deposits

     —           18,832.3        —          —           17,468.1        —     

Other Liabilities

     —           2,932.7        —          —           3,323.7        —     

Stockholders’ Equity

     —           7,947.2        —          —           7,648.3        —     
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ —         $ 103,324.1        —     $ —         $ 92,849.6        —  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net Interest Income/Margin (FTE Adjusted)

   $ 253.4       $ —          1.06   $ 228.0       $ —          1.10
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net Interest Income/Margin (Unadjusted)

   $ 246.6       $ —          1.04   $ 220.1       $ —          1.06
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

ANALYSIS OF NET INTEREST INCOME CHANGES

DUE TO VOLUME AND RATE

 

     Three Months 2014/2013  
     Change Due To  

(In Millions)

   Average
Balance
     Rate     Total  

Earning Assets (FTE)

   $ 42.2       $ (24.8   $ 17.4   

Interest-Related Funds

     7.8         (15.8     (8.0
  

 

 

    

 

 

   

 

 

 

Net Interest Income (FTE)

   $ 34.4       $ (9.0   $ 25.4   
  

 

 

    

 

 

   

 

 

 

 

(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 June 30, 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 37.8% and 37.5% for the three months ending June 30 2014 and 2013, respectively. Total taxable equivalent interest adjustments amounted to $6.8 million and $7.9 million for the three months ended June 30 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.

 

24


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

 

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

 

(INTEREST AND RATE ON A FULLY TAXABLE
EQUIVALENT BASIS)
   Six Months  
   2014     2013  

($ In Millions)

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

Average Earning Assets

              

Federal Funds Sold and Securities Purchased under Agreements to Resell

   $ 1.3       $ 542.3        0.49   $ 0.5       $ 279.8        0.36

Interest-Bearing Deposits with Banks

     65.7         17,179.2        0.77        69.5         18,146.3        0.77   

Federal Reserve Deposits and Other Interest-Bearing

     16.5         12,986.0        0.26        5.9         4,577.7        0.26   

Securities

              

U.S. Government

     13.1         2,341.3        1.13        9.3         1,785.1        1.05   

Obligations of States and Political Subdivisions

     6.3         190.6        6.65        9.7         304.0        6.36   

Government Sponsored Agency

     74.2         18,098.7        0.83        60.7         17,772.7        0.69   

Other (1)

     55.9         12,711.0        0.89        45.7         11,145.2        0.83   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Securities

     149.5         33,341.6        0.90        125.4         31,007.0        0.82   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Loans and Leases (2)

     371.7         29,617.6        2.53        376.2         28,631.7        2.65   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Earning Assets

     604.7         93,666.7        1.30        577.5         82,642.5        1.41   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Allowance for Credit Losses Assigned to Loans and Leases

     —           (277.3     —          —           (293.2     —     

Cash and Due from Banks

     —           2,822.6        —          —           3,177.4        —     

Buildings and Equipment

     —           454.2        —          —           464.5        —     

Client Security Settlement Receivables

     —           842.3        —          —           807.8        —     

Goodwill

     —           541.9        —          —           532.0        —     

Other Assets

     —           3,741.9        —          —           4,882.0        —     
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Assets

   $ —         $ 101,792.3        —     $ —         $ 92,213.0        —  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Average Source of Funds

              

Deposits

              

Savings and Money Market

   $ 4.7       $ 14,771.5        0.06   $ 5.2       $ 14,756.8        0.07

Savings Certificates and Other Time

     3.4         1,911.3        0.36        7.3         2,291.8        0.64   

Non-U.S. Offices – Interest-Bearing

     34.4         47,784.0        0.15        41.6         39,132.1        0.21   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Interest-Bearing Deposits

     42.5         64,466.8        0.13        54.1         56,180.7        0.19   

Short-Term Borrowings

     2.3         4,384.0        0.11        2.5         4,081.4        0.13   

Senior Notes

     31.2         1,828.2        3.44        38.5         2,402.0        3.22   

Long-Term Debt

     19.8         1,685.4        2.37        19.5         1,191.0        3.31   

Floating Rate Capital Debt

     1.1         277.2        0.81        1.2         277.1        0.87   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Interest-Related Funds

     96.9         72,641.6        0.27        115.8         64,132.2        0.36   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Interest Rate Spread

     —           —          1.03        —           —          1.05   

Demand and Other Noninterest-Bearing Deposits

     —           18,240.5        —          —           17,184.9        —     

Other Liabilities

     —           2,973.4        —          —           3,299.9        —     

Stockholders’ Equity

     —           7,936.8        —          —           7,596.0        —     
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ —         $ 101,792.3        —     $ —         $ 92,213.0        —  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net Interest Income/Margin (FTE Adjusted)

   $ 507.8       $ —          1.09   $ 461.7       $ —          1.13
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net Interest Income/Margin (Unadjusted)

   $ 492.3       $ —          1.06   $ 446.2       $ —          1.09
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

ANALYSIS OF NET INTEREST INCOME CHANGES

DUE TO VOLUME AND RATE

 

     Six Months 2014/2013  
     Change Due To  

(In Millions)

   Average
Balance
     Rate     Total  

Earning Assets (FTE)

   $ 77.1       $ (49.9   $ 27.2   

Interest-Related Funds

     15.2         (34.1     (18.9
  

 

 

    

 

 

   

 

 

 

Net Interest Income (FTE)

   $ 61.9       $ (15.8   $ 46.1   
  

 

 

    

 

 

   

 

 

 

 

(1) Other securities include Federal Reserve and Federal Home Loan Bank stock and certain community development investments which are classified in other assets in the consolidated balance sheet as of June 30, 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 37.8 % and 37.5% for the six months ending June 30 2014 and 2013, respectively. Total taxable equivalent interest adjustments amounted to $15.5 million and $15.5 million for the six months ended June 30, 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.

 

25


FORWARD-LOOKING STATEMENTS

This report contains statements that are forward-looking, such as statements concerning Northern Trust’s financial goals, 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, anticipated expense levels, future pension plan contributions, anticipated tax benefits and expenses, the 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.” You should carefully read the risk factors described in “Risk factors” in our Annual Report on Form 10-K for the year ended December 31, 2013 for a description of certain risks that could, among other things, cause our actual results to differ from these forward looking statements.

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. Actual results could differ materially from the results indicated by these statements because the realization of those results is subject to many risks and uncertainties including:

 

    the health of the U.S. and international economies and particularly the continuing uncertainty in Europe;

 

    the downgrade of U.S. Government issued and other securities;

 

    the health and soundness of the financial institutions and other counterparties with which Northern Trust conducts business;

 

    changes in financial markets, including debt and equity markets, that impact the value, liquidity, or credit ratings of financial assets in general, or financial assets in particular investment funds, client portfolios, or securities lending collateral pools, including those funds, portfolios, collateral pools, and other financial assets with respect to which Northern Trust has taken, or may in the future take, actions to provide asset value stability or additional liquidity;

 

    the impact of stress in the financial markets, the effectiveness of governmental actions taken in response, and the effect of such governmental actions on Northern Trust, its competitors and counterparties, financial markets generally and availability of credit specifically, and the U.S. and international economies, including special deposit assessments or potentially higher FDIC premiums;

 

    a significant downgrade of any of our debt ratings;

 

    changes in foreign exchange trading client volumes and volatility in foreign currency exchange rates, and Northern Trust’s success in assessing and mitigating the risks arising from such changes and volatility;

 

   

a decline in the value of securities held in Northern Trust’s investment portfolio, particularly asset-backed securities, the liquidity and pricing of which

 

26


FORWARD-LOOKING STATEMENTS (continued)

 

 

may be negatively impacted by periods of economic turmoil and financial market disruptions;

 

    uncertainties inherent in the complex and subjective judgments required to assess credit risk and establish appropriate allowances therefor;

 

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

 

    our success in managing various risks inherent in its business, including credit risk, operational risk, interest rate risk, liquidity risk and strategic risk, particularly during times of economic uncertainty and volatility in the credit and financial markets;

 

    geopolitical risks and the risks of extraordinary events such as natural disasters, terrorist events, war and the U.S. and other governments’ responses to those events;

 

    the pace and extent of continued globalization of investment activity and growth in worldwide financial assets;

 

    regulatory and monetary policy developments;

 

    failure to satisfy regulatory standards or to obtain regulatory approvals when required, including for the use and distribution of capital;

 

    changes in tax laws, accounting requirements or interpretations and other legislation in the U.S. or other countries that could affect Northern Trust or its clients;

 

    changes in the nature and activities of Northern Trust’s competition, including increased consolidation within the financial services industry;

 

    our success in maintaining existing business and continuing to generate new business in its existing markets;

 

    the impact of equity markets on fee revenue;

 

    our success in identifying and penetrating targeted markets;

 

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

 

    our ability to maintain a product mix that achieves acceptable margins;

 

    our ability 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, especially in periods of economic and financial market uncertainty;

 

    our success in recruiting and retaining the necessary personnel to support business growth and expansion and maintain sufficient expertise to support increasingly complex products and services;

 

    our success in controlling expenses and implementing revenue enhancement initiatives;

 

    our ability, as products, methods of delivery, and client requirements change or become more complex, to continue to fund and accomplish innovation;

 

27


FORWARD-LOOKING STATEMENTS (continued)

 

    our ability to 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;

 

    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;

 

    the potential for substantial changes in the legal, regulatory and enforcement framework and oversight applicable to financial institutions in reaction to adverse financial market events, including changes 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;

 

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

 

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

 

    other factors identified in our Annual Report on Form 10-K, including those factors described in “Item 1A – Risk Factors”, and other filings with the SEC, all of which are available on our website.

Actual results may differ materially from those expressed or implied by the forward-looking statements. The information contained herein is current only as of the date of that information. All forward-looking statements included in this document are based upon information presently available, and Northern Trust assumes no obligation to update its forward-looking statements.

 

28


CONSOLIDATED BALANCE SHEET   NORTHERN TRUST CORPORATION

 

(In Millions Except Share Information)

   June 30,
2014
    December 31,
2013
 

Assets

     (Unaudited)     

Cash and Due from Banks

   $ 3,945.2      $ 3,162.4   

Federal Funds Sold and Securities Purchased under Agreements to Resell

     579.5        529.6   

Interest-Bearing Deposits with Banks

     17,059.8        19,397.4   

Federal Reserve Deposits and Other Interest-Bearing

     13,338.5        12,911.5   

Securities

    

Available for Sale

     29,689.4        28,392.8   

Held to Maturity (Fair value of $4,265.4 and $2,321.4)

     4,270.6        2,325.8   

Trading Account

     2.7        1.7   
  

 

 

   

 

 

 

Total Securities

     33,962.7        30,720.3   
  

 

 

   

 

 

 

Loans and Leases

    

Commercial

     13,991.4        12,620.0   

Personal

     16,706.2        16,765.5   
  

 

 

   

 

 

 

Total Loans and Leases (Net of unearned income of $298.8 and $286.2)

     30,697.6        29,385.5   
  

 

 

   

 

 

 

Allowance for Credit Losses Assigned to Loans and Leases

     (275.2     (278.1

Buildings and Equipment

     441.9        458.8   

Client Security Settlement Receivables

     1,596.4        1,355.2   

Goodwill

     544.6        540.7   

Other Assets

     3,870.2        4,764.0   
  

 

 

   

 

 

 

Total Assets

   $ 105,761.2      $ 102,947.3   
  

 

 

   

 

 

 

Liabilities

    

Deposits

    

Demand and Other Noninterest-Bearing

   $ 20,793.3      $ 16,888.7   

Savings and Money Market

     14,394.6        14,991.5   

Savings Certificates and Other Time

     1,967.4        1,874.4   

Non U.S. Offices – Noninterest-Bearing

     2,249.5        1,881.8   

                                      – Interest-Bearing

     49,457.7        48,461.7   
  

 

 

   

 

 

 

Total Deposits

     88,862.5        84,098.1   

Federal Funds Purchased

     968.5        965.1   

Securities Sold Under Agreements to Repurchase

     919.6        917.3   

Other Borrowings

     151.7        1,558.6   

Senior Notes

     1,496.8        1,996.6   

Long-Term Debt

     1,653.4        1,709.2   

Floating Rate Capital Debt

     277.2        277.1   

Other Liabilities

     3,388.9        3,513.3   
  

 

 

   

 

 

 

Total Liabilities

     97,718.6        95,035.3   
  

 

 

   

 

 

 

Stockholders’ Equity

    

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

    

Outstanding shares of 235,584,991 and 237,322,035

     408.6        408.6   

Additional Paid-In Capital

     1,039.3        1,035.7   

Retained Earnings

     7,344.1        7,134.8   

Accumulated Other Comprehensive Loss

     (205.2     (244.3

Treasury Stock (9,586,533 and 7,849,489 shares, at cost)

     (544.2     (422.8
  

 

 

   

 

 

 

Total Stockholders’ Equity

     8,042.6        7,912.0   
  

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 105,761.2      $ 102,947.3   
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

29


CONSOLIDATED STATEMENT OF INCOME    NORTHERN TRUST CORPORATION
(UNAUDITED)   

 

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

(In Millions Except Share Information)

   2014      2013      2014     2013  

Noninterest Income

          

Trust, Investment and Other Servicing Fees

   $ 706.9       $ 657.3       $ 1,386.4      $ 1,288.0   

Foreign Exchange Trading Income

     52.9         71.3         103.0        130.8   

Treasury Management Fees

     16.6         17.1         33.4        33.9   

Security Commissions and Trading Income

     17.8         18.3         32.5        36.6   

Other Operating Income

     40.5         36.3         78.2        61.1   

Investment Security Gains (Losses), net (Note)

     0.4         0.1         (3.6     0.3   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Noninterest Income

     835.1         800.4         1,629.9        1,550.7   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net Interest Income

          

Interest Income

     293.8         275.3         589.2        562.0   

Interest Expense

     47.2         55.2         96.9        115.8   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net Interest Income

     246.6         220.1         492.3        446.2   

Provision for Credit Losses

     —           5.0         3.0        10.0   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net Interest Income after Provision for Credit Losses

     246.6         215.1         489.3        436.2   
  

 

 

    

 

 

    

 

 

   

 

 

 

Noninterest Expense

          

Compensation

     372.4         326.9         714.2        647.2   

Employee Benefits

     68.5         64.2         135.4        127.5   

Outside Services

     144.6         136.2         289.0        266.1   

Equipment and Software

     116.1         92.1         217.4        183.5   

Occupancy

     47.2         43.5         91.4        86.7   

Other Operating Expense

     62.2         66.8         131.6        147.6   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Noninterest Expense

     811.0         729.7         1,579.0        1,458.6   
  

 

 

    

 

 

    

 

 

   

 

 

 

Income before Income Taxes

     270.7         285.8         540.2        528.3   

Provision for Income Taxes

     88.8         94.7         176.9        173.2   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net Income

   $ 181.9       $ 191.1       $ 363.3      $ 355.1   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net Income Applicable to Common Stock

   $ 181.9       $ 191.1       $ 363.3      $ 355.1   
  

 

 

    

 

 

    

 

 

   

 

 

 

Per Common Share

          

Net Income – Basic

   $ 0.76       $ 0.78       $ 1.51      $ 1.46   

                    – Diluted

     0.75         0.78         1.50        1.45   
  

 

 

    

 

 

    

 

 

   

 

 

 

Average Number of Common Shares Outstanding – Basic

     236,012,703         239,738,592         236,607,125        239,454,653   

                                                                                        – Diluted

     237,753,679         241,040,681         238,398,614        240,617,300   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(UNAUDITED)

     NORTHERN TRUST CORPORATION   
    Three Months Ended June 30,     Six Months Ended June 30,  

(In Millions)

        2014                 2013                2014                2013        

Net Income

  $ 181.9      $ 191.1      $ 363.3      $ 355.1   

Other Comprehensive Income (Net of Tax and Reclassifications)

       

Net Unrealized Gains (Losses) on Securities Available for Sale

    33.5        (81.5     38.0        (80.2

Net Unrealized Gains (Losses) on Cash Flow Hedges

    (0.6     2.1        1.0        (3.1

Foreign Currency Translation Adjustments

    (5.6     5.8        (6.9     1.6   

Pension and Other Postretirement Benefit Adjustments

    3.6        7.0        7.0        14.0   
 

 

 

   

 

 

   

 

 

   

 

 

 

Other Comprehensive Income (Loss)

    30.9        (66.6     39.1        (67.7
 

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive Income

  $ 212.8      $ 124.5      $ 402.4      $ 287.4   
 

 

 

   

 

 

   

 

 

   

 

 

 

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

    0.4        0.1        0.3        0.3   
 

 

 

   

 

 

   

 

 

   

 

 

 

Investment Security Gains (Losses), net

  $ 0.4      $ 0.1      $ (3.6   $ 0.3   
 

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

30


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

 

     Six Months
Ended June 30,
 

(In Millions)

   2014     2013  

Common Stock

    

Balance at January 1 and June 30

   $ 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

     (47.1     (38.5

Stock Options and Awards – Amortization

     42.1        39.2   

Stock Options and Awards – Tax Benefits

     8.6        0.9   
  

 

 

   

 

 

 

Balance at June 30

     1,039.3        1,014.3   
  

 

 

   

 

 

 

Retained Earnings

    

Balance at January 1

     7,134.8        6,702.7   

Net Income

     363.3        355.1   

Dividends Declared – Common Stock

     (154.0     (148.6
  

 

 

   

 

 

 

Balance at June 30

     7,344.1        6,909.2   
  

 

 

   

 

 

 

Accumulated Other Comprehensive Income (Loss)

    

Balance at January 1

     (244.3     (283.0

Net Unrealized Gains (Losses) on Securities Available for Sale

     38.0        (80.2

Net Unrealized Gains (Losses) on Cash Flow Hedges

     1.0        (3.1

Foreign Currency Translation Adjustments

     (6.9     1.6   

Pension and Other Postretirement Benefit Adjustments

     7.0        14.0   
  

 

 

   

 

 

 

Balance at June 30

     (205.2     (350.7
  

 

 

   

 

 

 

Treasury Stock

    

Balance at January 1

     (422.8     (314.0

Stock Options and Awards

     116.5        147.0   

Stock Purchased

     (237.9     (89.8
  

 

 

   

 

 

 

Balance at June 30

     (544.2     (256.8
  

 

 

   

 

 

 

Total Stockholders’ Equity at June 30

   $ 8,042.6      $ 7,724.6   
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

31


CONSOLIDATED STATEMENT OF CASH FLOWS      NORTHERN TRUST CORPORATION   
(UNAUDITED)   

 

     Six Months
Ended June 30,
 

(In Millions)

   2014     2013  

Cash Flows from Operating Activities:

    

Net Income

   $ 363.3      $ 355.1   

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

    

Investment Security Losses (Gains), net

     3.6        (0.3

Amortization and Accretion of Securities and Unearned Income, net

     17.2        19.5   

Provision for Credit Losses

     3.0        10.0   

Depreciation on Buildings and Equipment

     46.5        46.4   

Amortization of Computer Software

     113.0        99.6   

Amortization of Intangibles

     9.9        10.3   

Computer Software Write-Offs

     9.5        —     

Pension Plan Contributions

     (13.9     (16.4

Change in Receivables

     140.5        94.5   

Change in Interest Payable

     (10.2     (12.2

Change in Collateral With Derivative Counterparties, net

     527.9        (1,818.0

Other Operating Activities, net

     329.7        (70.2
  

 

 

   

 

 

 

Net Cash Provided by (Used in) Operating Activities

     1,540.0        (1,281.7
  

 

 

   

 

 

 

Cash Flows from Investing Activities:

    

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

     (49.9     (220.4

Change in Interest-Bearing Deposits with Banks

     2,578.7        169.4   

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

     (427.0     853.8   

Purchases of Securities – Held to Maturity

     (3,758.9     (3,671.6

Proceeds from Maturity and Redemption of Securities – Held to Maturity

     1,846.0        3,256.2   

Purchases of Securities – Available for Sale

     (6,442.8     (3,729.4

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

     5,185.3        4,761.3   

Change in Loans and Leases

     (1,318.9     646.5   

Purchases of Buildings and Equipment

     (32.4     (31.7

Purchases and Development of Computer Software

     (159.6     (130.7

Change in Client Security Settlement Receivables

     (234.0     561.1   

Other Investing Activities, net

     (271.1     246.6   
  

 

 

   

 

 

 

Net Cash (Used in) Provided by Investing Activities

     (3,084.6     2,711.1   
  

 

 

   

 

 

 

Cash Flows from Financing Activities:

    

Change in Deposits

     4,468.0        (3,595.4

Change in Federal Funds Purchased

     3.4        1,503.2   

Change in Securities Sold under Agreements to Repurchase

     2.3        77.9   

Change in Short-Term Other Borrowings

     (1,644.8     1,458.3   

Repayments of Senior Notes and Long-Term Debt

     (602.4     (402.1

Contingent Consideration Liability Payment

     (55.3     —     

Treasury Stock Purchased

     (237.9     (89.5

Net Proceeds from Stock Options

     69.4        108.1   

Cash Dividends Paid on Common Stock

     (149.9     (71.8

Other Financing Activities, net

     362.2        574.8   
  

 

 

   

 

 

 

Net Cash Provided by (Used in) Financing Activities

     2,215.0        (436.5
  

 

 

   

 

 

 

Effect of Foreign Currency Exchange Rates on Cash

     112.4        (114.7
  

 

 

   

 

 

 

Increase in Cash and Due from Banks

     782.8        878.2   

Cash and Due from Banks at Beginning of Year

     3,162.4        3,752.7   
  

 

 

   

 

 

 

Cash and Due from Banks at End of Period

   $ 3,945.2      $ 4,630.9   
  

 

 

   

 

 

 

Supplemental Disclosures of Cash Flow Information:

    

Interest Paid

   $ 108.4      $ 127.9   

Income Taxes Paid

     74.1        91.9   

Transfers from Loans to OREO

     8.7        14.7   
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

32


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 June 30, 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 Change in Collateral with Derivative Counterparties, net, 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 – In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” The ASU is a converged standard between the FASB and the IASB that provides a single comprehensive revenue recognition model for all contracts with customers across transactions and industries. The primary objective of the ASU is revenue recognition that represents the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU is effective for interim and annual reporting periods beginning after December 15, 2016. Northern Trust is currently assessing the impact of adoption of ASU 2014-09.

In June 2014, the FASB issued ASU No. 2014-11, “Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.” This ASU requires secured borrowing accounting treatment for repurchase-to-maturity transactions and provides guidance on accounting for repurchase financing arrangements. This ASU is effective for interim and annual reporting periods beginning after December 15, 2014. The adoption of this ASU will result in additional disclosures, but is not expected to impact significantly Northern Trust’s consolidated financial position or results of operations.

In June 2014, the FASB also issued ASU No. 2014-12, “Compensation – Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could be Achieved after the Requisite Service Period.” This ASU requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition and should not be reflected in estimating the grant-date fair value of the award. This ASU is effective for interim and annual reporting periods beginning after December 15, 2015 with earlier adoption permitted. The adoption of this ASU is not expected to impact significantly Northern Trust’s consolidated financial position or results of operations.

 

33


Notes to Consolidated Financial Statements (continued)

 

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 six months ended June 30, 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.

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 June 30, 2014, Northern Trust’s available for sale securities portfolio included 837 Level 2 securities with an aggregate market value of $27.2 billion. All 837 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 $2.7 million and $1.7 million as of June 30, 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

 

34


Notes to Consolidated Financial Statements (continued)

 

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.

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

 

35


Notes to Consolidated Financial Statements (continued)

 

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 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 June 30, 2014.

 

Financial Instrument

   Fair Value    Valuation
Technique
   Unobservable Inputs    Range of Lives
and Rates

Auction Rate Securities

   $98.8 million    Discounted Cash
Flow
   Remaining lives

Discount rates

   1.9 – 8.6 years

0.2% – 8.0%

 

36


Notes to Consolidated Financial Statements (continued)

 

The following tables present assets and liabilities measured at fair value on a recurring basis as of June 30, 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
 

June 30, 2014

             

Securities

             

Available for Sale

             

U.S. Government

   $ 2,417.7       $ —         $ —         $ —        $ 2,417.7   

Obligations of States and Political Subdivisions

     —           4.6         —           —          4.6   

Government Sponsored Agency

     —           18,168.9         —           —          18,168.9   

Corporate Debt

     —           3,670.7         —           —          3,670.7   

Covered Bonds

     —           1,988.8         —           —          1,988.8   

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

     —           722.3         —           —          722.3   

Residential Mortgage-Backed

     —           42.9         —           —          42.9   

Other Asset-Backed

     —           2,391.0         —           —          2,391.0   

Auction Rate

     —           —           98.8         —          98.8   

Other

     —           183.7         —           —          183.7   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Available for Sale

     2,417.7         27,172.9         98.8         —          29,689.4   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Trading Account

     —           2.7         —           —          2.7   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Available for Sale and Trading Securities

     2,417.7         27,175.6         98.8         —          29,692.1   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Other Assets

             

Derivative Assets

             

Foreign Exchange Contracts

     —           1,796.9         —           —          1,796.9   

Interest Rate Contracts

     —           223.7         —           —          223.7   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Derivative Assets

     —           2,020.6         —           (1,458.7     561.9   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Other Liabilities

             

Derivative Liabilities

             

Foreign Exchange Contracts

     —           1,830.8         —           —          1,830.8   

Interest Rate Swaps

     —           152.5         —           —          152.5   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Derivative Liabilities

     —           1,983.3         —           (1,487.8     495.5   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

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 June 30, 2014, derivative assets and liabilities shown above also include reductions of $552.0 million and $581.1 million, respectively, as a result of cash collateral received from and deposited with derivative counterparties.

 

37


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.

 

38


Notes to Consolidated Financial Statements (continued)

 

The following tables present the changes in Level 3 assets and liabilities for the three and six months ended June 30, 2014 and 2013.

 

Level 3 Assets (In Millions)    Auction Rate Securities  
       2014             2013      

Three Months Ended June 30,

    

Fair Value at April 1

   $ 98.5      $ 99.6   

Total Gains (Losses):

    

Included in Earnings

     —          —     

Included in Other Comprehensive Income (2)

     0.5        —     

Purchases, Issues, Sales, and Settlements

     (0.2     (0.5
  

 

 

   

 

 

 

Fair Value at June 30

   $ 98.8      $ 99.1   
  

 

 

   

 

 

 
     2014     2013  

Six Months Ended June 30,

    

Fair Value at January 1

   $ 98.9      $ 97.8   

Total Gains (Losses):

    

Included in Earnings (1)

     —          0.1   

Included in Other Comprehensive Income (2)

     0.3        2.7   

Purchases, Issues, Sales, and Settlements

    

Sales

     0.1        —     

Settlements

     (0.5     (1.5
  

 

 

   

 

 

 

Fair Value at June 30

   $ 98.8      $ 99.1   
  

 

 

   

 

 

 

 

(1) Realized gains for the six month period ended June 30, 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) 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  
       2014             2013      

Three Months Ended June 30,

    

Fair Value at April 1

   $ —        $ 51.4   

Total (Gains) and Losses:

    

Included in Earnings (1)

     —          1.3   

Included in Other Comprehensive Income

     —          —     

Purchases, Issues, Sales, and Settlements

     —          —     
  

 

 

   

 

 

 

Fair Value at June 30

   $ —        $ 52.7   
  

 

 

   

 

 

 

Unrealized (Gains) Losses Included in Earnings Related to Financial Instruments Held at June 30 (1)

   $ —        $ 1.3   
  

 

 

   

 

 

 
     2014     2013  

Six Months Ended June 30,

    

Fair Value at January 1

   $ 55.4      $ 50.1   

Total (Gains) Losses:

    

Included in Earnings (1)

     (0.1     2.6   

Included in Other Comprehensive Income

     —          —     

Purchases, Issues, Sales, and Settlements

    

Settlements

     (55.3     —     
  

 

 

   

 

 

 

Fair Value at June 30

   $ —        $ 52.7   
  

 

 

   

 

 

 

Unrealized (Gains) Losses Included in Earnings Related to Financial Instruments Held at June 30 (1)

   $ —        $ 2.6   
  

 

 

   

 

 

 

 

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

 

39


Notes to Consolidated Financial Statements (continued)

 

During the six months ended June 30, 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 disclose separately these subsequent fair value measurements and to classify them under the fair value hierarchy.

Assets measured at fair value on a nonrecurring basis at June 30, 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 $16.9 million and $1.4 million, respectively, at June 30, 2014, and $45.6 million and $2.9 million, respectively, at June 30, 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 June 30, 2014.

 

Financial

Instrument

   Fair Value    Valuation
Technique
   Unobservable Input    Range of
Discounts
Applied

Loans

   $16.9 million    Market Approach    Discount to reflect
realizable value
   15% – 40%

OREO

   $1.4 million    Market Approach    Discount to reflect
realizable value
   15% – 40%

 

40


Notes to Consolidated Financial Statements (continued)

 

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

Held to Maturity Securities. The fair values of held to maturity securities were modeled by external pricing vendors, or in limited cases 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.

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.

 

41


Notes to Consolidated Financial Statements (continued)

 

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.

 

42


Notes to Consolidated Financial Statements (continued)

 

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

 

(In Millions)

   June 30, 2014  
     Book
Value
     Total
Fair Value
     Fair Value  
           Level 1      Level 2      Level 3  

Assets

              

Cash and Due from Banks

   $ 3,945.2       $ 3,945.2       $ 3,945.2       $ —         $ —     

Federal Funds Sold and Resell Agreements

     579.5         579.5         —           579.5         —     

Interest-Bearing Deposits with Banks

     17,059.8         17,059.8         —           17,059.8         —     

Federal Reserve Deposits and Other Interest-Bearing

     13,338.5         13,338.5         —           13,338.5         —     

Securities

              

Available for Sale (1)

     29,689.4         29,689.4         2,417.7         27,172.9         98.8   

Held to Maturity

     4,270.6         4,265.4         —           4,265.4         —     

Trading Account

     2.7         2.7         —           2.7         —     

Loans (excluding Leases)

              

Held for Investment

     29,493.3         29,568.4         —           —           29,568.4   

Held for Sale

     9.5         9.5         —           —           9.5   

Client Security Settlement Receivables

     1,596.4         1,596.4         —           1,596.4         —     

Other Assets

              

Federal Reserve and Federal Home Loan Bank Stock

     207.5         207.5         —           207.5         —     

Community Development Investments

     205.2         204.5         —           204.5         —     

Employee Benefit and Deferred Compensation

     148.2         147.6         96.5         51.1         —     

Liabilities

              

Deposits

              

Demand, Noninterest-Bearing, Savings and Money Market

   $ 37,437.4       $ 37,437.4       $ 37,437.4       $ —         $ —     

Savings Certificates and Other Time

     1,967.4         1,969.2         —           1,969.2         —     

Non U.S. Offices Interest-Bearing

     49,457.7         49,457.7         —           49,457.7         —     

Federal Funds Purchased

     968.5         968.5         —           968.5         —     

Securities Sold under Agreements to Repurchase

     919.6         919.6         —           919.6         —     

Other Borrowings

     151.7         151.7         —           151.7         —     

Senior Notes

     1,496.8         1,534.4         —           1,534.4         —     

Long Term Debt (excluding Leases)

              

Subordinated Debt

     1,583.9         1,620.6         —           1,620.6         —     

Federal Home Loan Bank Borrowings

     35.0         35.3         —           35.3         —     

Floating Rate Capital Debt

     277.2         240.5         —           240.5         —     

Other Liabilities

              

Standby Letters of Credit

     61.2         61.2         —           —           61.2   

Loan Commitments

     29.3         29.3         —           —           29.3   

Derivative Instruments

              

Asset/Liability Management

              

Foreign Exchange Contracts

              

Assets

   $ 12.6       $ 12.6       $ —         $ 12.6       $ —     

Liabilities

     43.7         43.7         —           43.7         —     

Interest Rate Contracts

              

Assets

     107.9         107.9         —           107.9         —     

Liabilities

     41.5         41.5         —           41.5         —     

Client-Related and Trading

              

Foreign Exchange Contracts

              

Assets

     1,784.3         1,784.3         —           1,784.3         —     

Liabilities

     1,787.1         1,787.1         —           1,787.1         —     

Interest Rate Contracts

              

Assets

     115.8         115.8         —           115.8         —     

Liabilities

     111.0         111.0         —           111.0         —     

 

(1) Refer to the table located on page 37 for the disaggregation of available for sale securities.

 

43


Notes to Consolidated Financial Statements (continued)

 

(In Millions)

   December 31, 2013  
     Book
Value
     Total
Fair 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