Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the Quarterly Period Ended September 30, 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

235,505,008 Shares – $1.66 2/3 Par Value

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

 

 

 


Table of Contents

NORTHERN TRUST CORPORATION

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2014

TABLE OF CONTENTS

 

     Page  

Consolidated Financial Highlights (unaudited)

     2   

Part I – Financial Information

  

Items 2 and 3: Management’s Discussion and Analysis of Financial Condition and Results of Operations; Quantitative and Qualitative Disclosures About Market Risk

     3   

Item 1: Consolidated Financial Statements (unaudited)

     29   

Consolidated Balance Sheet

     29   

Consolidated Statement of Income

     30   

Consolidated Statement of Comprehensive Income

     30   

Consolidated Statement of Changes in Stockholders’ Equity

     31   

Consolidated Statement of Cash Flows

     32   

Notes to Consolidated Financial Statements

     33   

Item 4: Controls and Procedures

     77   

Part II – Other Information

  

Item 1: Legal Proceedings

     77   

Item 2: Unregistered Sales of Equity Securities and Use of Proceeds

     77   

Item 6: Exhibits

     78   

 

1


Table of Contents

CONSOLIDATED FINANCIAL HIGHLIGHTS

(UNAUDITED)

CONDENSED INCOME STATEMENT (In Millions)

  Three Months
Ended September 30,
    Nine Months
Ended September 30,
 
  2014     2013     % Change (*)     2014     2013     % Change (*)  

Noninterest Income

  $ 829.6      $ 810.2        2   $ 2,459.5      $ 2,360.9        4

Net Interest Income

    249.3        237.0        5        741.6        683.2        9   

Provision for Credit Losses

    —          5.0        (100     3.0        15.0        (80

Noninterest Expense

    774.7        740.7        5        2,353.7        2,199.3        7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before Income Taxes

    304.2        301.5        1        844.4        829.8        2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Provision for Income Taxes

    99.7        95.0        5        276.6        268.2        3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

  $ 204.5      $ 206.5        (1 )%    $ 567.8      $ 561.6        1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

PER COMMON SHARE

           

Net Income — Basic

  $ 0.85      $ 0.85        —     $ 2.36      $ 2.31        2

— Diluted

    0.84        0.84        —          2.34        2.29        2   

Cash Dividends Declared Per Common Share

    0.33        0.31        6        0.97        0.92        5   

Book Value — End of Period (EOP)

    34.62        32.71        6        34.62        32.71        6   

Market Price — EOP

    68.03        54.38        25        68.03        54.38        25   

SELECTED BALANCE SHEET DATA (In Millions)

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

End of Period:

           

Assets

  $ 111,153.7      $ 102,947.3        8      

Earning Assets

    101,133.8        93,367.2        8         

Deposits

    91,722.5        84,098.1        9         

Stockholders’ Equity

    8,542.6        7,912.0        8         
    Three Months
Ended September 30,
    Nine Months
Ended September 30,
 
    2014     2013     % Change (*)     2014     2013     % Change (*)  

Average Balances:

           

Assets

  $ 105,244.7      $ 95,212.5        11   $ 102,955.8      $ 93,223.5        10

Earning Assets

    96,967.5        85,529.1        13        94,773.8        83,615.3        13   

Deposits

    85,717.2        75,454.4        14        83,721.6        74,069.2        13   

Stockholders’ Equity

    8,285.5        7,697.8        8        8,054.3        7,630.3        6   

SELECTED RATIOS AND METRICS

                                   
    Three Months
Ended September 30,
    Nine Months
Ended September 30,
 
    2014     2013     % Change (*)     2014     2013     % Change (*)  

Financial Ratios:

           

Return on Average Common Equity

    10.09     10.64     (5 )%      9.52     9.84     (3 )% 

Return on Average Assets

    0.77        0.86        (10     0.74        0.81        (9

Dividend Payout Ratio

    39.3        36.9        6        41.5        40.2        3   

Net Interest Margin (**)

    1.05        1.14        (8     1.08        1.13        (4

 

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

Capital Ratios:

          

Northern Trust Corporation

          

Common Equity Tier 1

     12.7 %     12.8     12.7     12.7 %     12.9

Tier 1

     13.4       13.6        12.9        12.9       13.4   

Total

     15.3       16.0        14.9        15.4       15.8   

Leverage

     n/a        7.9        n/a        7.6       7.9   

The Northern Trust Company

          

Common Equity Tier 1

     11.7 %     11.6     11.7     11.4 %     11.5

Tier 1

     11.7       11.6        11.6        11.4       11.5   

Total

     13.7       14.0        13.7        14.0       14.3   

Leverage

     n/a        6.8        n/a        6.7       6.8   

CLIENT ASSETS (In Billions)

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

Assets Under Custody

     $ 5,910.3      $ 5,575.7        6  

Assets Under Management

       923.3        884.5        4    

 

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

 

(**) Net interest margin is presented on a fully taxable equivalent basis (FTE).

 

(a) Effective with the second quarter of 2014, Northern Trust exited its parallel run. Accordingly, the September 30, 2014, and 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 September 30, 2014, and June 30, 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


Table of Contents

PART I – FINANCIAL INFORMATION

ITEMS 2. AND 3. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THIRD QUARTER CONSOLIDATED RESULTS OF OPERATIONS

General

Northern Trust Corporation (the Corporation), together with its subsidiaries, is a leading provider of asset servicing, fund administration, asset management, fiduciary and banking solutions for corporations, institutions, families, and individuals worldwide. Northern Trust focuses on servicing and managing client assets through its two primary business units, 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. The Corporation conducts business through various U.S. and non-U.S. subsidiaries, including through its principal subsidiary, The Northern Trust Company. Except where the context otherwise requires, the term “Northern Trust” refers to Northern Trust Corporation and its subsidiaries on a consolidated basis.

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

Overview

Net income per diluted common share in the current quarter was $0.84, consistent with $0.84 in the third quarter of 2013. Net income was $204.5 million as compared to $206.5 million in the prior year quarter. The performance in the current quarter produced an annualized return on average common equity of 10.1% as compared to 10.6% in the prior year quarter. The annualized return on average assets was 0.8% as compared to 0.9% in the prior year quarter.

The prior year quarter included a $32.6 million pre-tax gain ($20.3 million after tax, or $0.08 per common share) on the sale of an office building property. Excluding this gain, net income per diluted common share, net income, and return on average common equity in the prior year quarter were $0.76, $186.2 million, and 9.6%, respectively.

Revenue of $1.08 billion was up $31.7 million, or 3%, from $1.05 billion in the prior year quarter. Noninterest income increased $19.4 million, or 2%, to $829.6 million from the prior year quarter’s $810.2 million. Excluding the prior year quarter gain on the sale of an office building property, noninterest income increased $52.0 million, or 7%, 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 $12.3 million, or 5%, to $249.3 million as compared to $237.0 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 $774.7 million, up $34.0 million, or 5%, from $740.7 million in the prior year quarter, primarily reflecting higher compensation, employee benefits and equipment and software expense.

 

3


Table of Contents

THIRD QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)

 

Noninterest Income

The components of noninterest income are provided below.

 

Noninterest Income

   Three Months Ended September 30,  

($ In Millions)

   2014      2013     Change  

Trust, Investment and Other Servicing Fees

   $ 718.2       $ 648.0      $ 70.2        11

Foreign Exchange Trading Income

     46.4         62.8        (16.4     (26

Treasury Management Fees

     16.4         17.6        (1.2     (7

Security Commissions and Trading Income

     14.2         16.8        (2.6     (16

Other Operating Income

     34.1         67.2        (33.1     (49

Investment Security Gains (Losses), net

     0.3         (2.2     2.5        N/M   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total Noninterest Income

   $ 829.6       $ 810.2      $ 19.4        2
  

 

 

    

 

 

   

 

 

   

 

 

 

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)

   September 30,
2014
     June 30,
2014
     September 30,
2013
     Change
Q3-14/
Q2-14
    Change
Q3-14/
Q3-13
 

Corporate & Institutional

   $ 5,403.1       $ 5,488.0       $ 4,766.5         (2 )%      13

Wealth Management

     507.2         516.6         470.5         (2 )     8  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Assets Under Custody

   $ 5,910.3       $ 6,004.6       $ 5,237.0         (2 )%      13
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

Assets Under Management

 

($ In Billions)

   September 30,
2014
     June 30,
2014
     September 30,
2013
     Change
Q3-14/
Q2-14
    Change
Q3-14/
Q3-13
 

Corporate & Institutional

   $ 702.9       $ 701.5       $ 634.6         —       11

Wealth Management

     220.4         222.9         211.6         (1 )     4  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Assets Under Management

   $ 923.3       $ 924.4       $ 846.2         —       9
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

C&IS assets under custody totaled $5.4 trillion, up 13% from the prior year quarter, and includes $3.4 trillion of global custody assets, 14% higher compared to the prior year quarter. C&IS assets under management include $120.9 billion of securities lending collateral, a 16% 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 17.3% and 1.5%, respectively.

 

4


Table of Contents

THIRD QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)

Noninterest Income (continued)

 

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

 

     2014     2013  

Assets Under Custody

   C&IS     WM     Consolidated     C&IS     WM     Consolidated  

Equities

     44     55     45     46     53     47

Fixed Income Securities

     37       22       36       35       23       34  

Cash and Other Assets

     19       23       19       19       24       19  

Assets Under Management

                                    

Equities

     53     48     52     54     45     52

Fixed Income Securities

     13       28       17       13       28       17  

Cash and Other Assets

     34       24       31       33       27       31  

Trust, investment and other servicing fees in C&IS increased $40.1 million, or 11%, to $399.9 million from the prior year quarter’s $359.8 million.

 

C&IS Trust, Investment and Other Servicing Fees

   Three Months Ended September 30,  

($ In Millions)

   2014      2013      Change  

Custody and Fund Administration

   $ 275.0       $ 239.4       $ 35.6        15

Investment Management

     75.4         71.3         4.1        6   

Securities Lending

     22.0         22.7         (0.7     (3

Other

     27.5         26.4         1.1        4   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 399.9       $ 359.8       $ 40.1        11
  

 

 

    

 

 

    

 

 

   

 

 

 

Custody and fund administration fees, the largest component of C&IS fees, increased 15%, driven by new business as well as the favorable impacts of equity markets and movements in foreign exchange rates. C&IS investment management fees increased 6%, as higher equity markets and new business 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 $16.7 million, compared to waived fees of $15.3 million in the prior year quarter. Securities lending revenue decreased 3%, primarily reflecting lower spreads offset by higher volumes in the current quarter. Other fees in C&IS increased 4%, primarily reflecting new business in investment risk and analytical services.

Trust, investment and other servicing fees in Wealth Management totaled $318.3 million, increasing $30.1 million, or 10%, from $288.2 million in the prior year quarter. The increased fee income is attributable to higher equity markets and new business. Money market mutual fund fee waivers in Wealth Management totaled $16.9 million compared with $17.1 million in the prior year quarter.

Foreign exchange trading income totaled $46.4 million, down $16.4 million, or 26%, compared with $62.8 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


Table of Contents

THIRD QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)

Noninterest Income (continued)

 

Other operating income totaled $34.1 million, down $33.1 million, or 49%, from $67.2 million in the prior year quarter. The components of other operating income are provided below.

 

Other Operating Income

   Three Months Ended September 30,  

($ In Millions)

   2014      2013      Change  

Loan Service Fees

   $ 15.3       $ 15.8       $ (0.5     (3 )% 

Banking Service Fees

     12.3         12.8         (0.5     (4

Other Income

     6.5         38.6         (32.1     (83
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Other Operating Income

   $ 34.1       $ 67.2       $ (33.1     (49 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

The other income component of other operating income in the prior year quarter included the $32.6 million pre-tax gain on the sale of an office building property. Excluding the prior year quarter gain, other operating income was relatively unchanged.

Net Interest Income

Net interest income on an FTE basis totaled $256.2 million, up $11.4 million, or 5%, compared to $244.8 million in the prior year quarter. The increase is the result of higher levels of earning assets, partially offset by a decline in the net interest margin. Earning assets for the quarter averaged $97.0 billion, up $11.5 billion, or 13%, from $85.5 billion in the prior year quarter, primarily attributable to higher levels of Federal Reserve deposits and securities, reflecting higher levels of non-U.S. office interest-bearing deposits and demand deposits. The net interest margin declined to 1.05% from 1.14% in the prior year quarter, primarily reflecting 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 21.

Federal Reserve deposits averaged $15.9 billion as compared to $8.0 billion in the prior year quarter, an increase of $7.9 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 $33.6 billion, up $3.0 billion, or 10%, from $30.6 billion in the prior year quarter.

Loans and leases averaged $30.3 billion, up $1.6 billion, or 6%, from $28.7 billion in the prior year quarter, primarily reflecting higher levels of commercial and institutional loans and private client loans. Commercial and institutional loans averaged $8.0 billion, up $801.4 million, or 11%, from the prior year quarter’s average of $7.2 billion. Private client loans averaged $6.5 billion, up $655.3 million, or 11%, from the prior year quarter’s average of $5.9 billion.

Northern Trust utilizes a diverse mix of funding sources. Total interest-bearing deposits averaged $65.6 billion, compared to $59.3 billion in the prior year quarter, an increase of $6.3 billion, or 11%. Other interest-bearing funds averaged $8.3 billion, a decrease of $624.5 million, or 7%, from $8.9 billion in the prior year quarter, attributable to decreased senior notes and short-term borrowings, partially offset by increased long-term debt.

 

6


Table of Contents

THIRD QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)

Net Interest Income (continued)

 

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 $5.7 billion, or 33%, to $23.0 billion from $17.3 billion in the prior year quarter, primarily resulting from higher levels of demand and other noninterest-bearing deposits.

For additional quantitative analysis of average balances and interest rate changes affecting net interest income, refer to the Average Consolidated Balance Sheet with Analysis of Net Interest Income and the Analysis of Net Interest Income Changes Due To Volume and Rate on pages 22 through 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 $5.2 million, resulting from charge-offs of $8.6 million and recoveries of $3.4 million. The prior year quarter included $8.3 million of net charge-offs, resulting from $11.6 million of charge-offs and $3.3 million of recoveries. Nonperforming assets decreased 19% from the prior year quarter. Residential real estate loans and commercial real estate loans accounted for 67% and 18%, respectively, of total nonperforming loans and leases at September 30, 2014. For additional discussion of the provision and allowance for credit losses, refer to the “Asset Quality” section beginning on page 16.

Noninterest Expense

The components of noninterest expense are provided below.

 

Noninterest Expense

   Three Months Ended September 30,  

($ In Millions)

     2014          2013          Change    

Compensation

   $ 348.0       $ 324.6       $ 23.4        7

Employee Benefits

     70.6         63.5         7.1        11   

Outside Services

     142.4         145.9         (3.5     (2

Equipment and Software

     100.5         95.5         5.0        5   

Occupancy

     43.8         43.3         0.5        1   

Other Operating Expense

     69.4         67.9         1.5        2   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Noninterest Expense

   $ 774.7       $ 740.7       $ 34.0        5
  

 

 

    

 

 

    

 

 

   

 

 

 

Compensation expense, the largest component of noninterest expense, equaled $348.0 million, up $23.4 million, or 7%, from $324.6 million in the prior year quarter. The increase primarily reflects higher staff levels, base pay adjustments and the unfavorable impact of movements in foreign exchange rates. Staff on a full-time equivalent basis at September 30, 2014, totaled approximately 15,200, up 5% from a year ago.

Employee benefit expense totaled $70.6 million, up $7.1 million, or 11%, from $63.5 million in the prior year quarter. The increase is 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 $142.4 million, down 2% from $145.9 million in the prior year quarter, reflecting decreased consulting and technical services expense, partially offset by increased sub-custodian expense.

Equipment and software expense totaled $100.5 million, up $5.0 million, or 5%, from $95.5 million in the prior year quarter. The current quarter reflects higher software amortization and related software support costs.

 

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THIRD QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)

Noninterest Expense (continued)

 

Occupancy expense equaled $43.8 million, up 1% from $43.3 million in the prior year quarter.

Other operating expense totaled $69.4 million, up 2% from $67.9 million in the prior year quarter. The components of other operating expense are provided below.

 

Other Operating Expense

   Three Months Ended September 30,  

($ In Millions)

       2014              2013              Change      

Business Promotion

   $ 19.1       $ 17.9       $ 1.2        7

Staff Related

     10.8         7.3         3.5        48   

FDIC Insurance Premiums

     5.8         6.6         (0.8     (12

Other Intangibles Amortization

     4.8         5.2         (0.4     (8

Other Expenses

     28.9         30.9         (2.0     (6
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Other Operating Expense

   $ 69.4       $ 67.9       $ 1.5        2
  

 

 

    

 

 

    

 

 

   

 

 

 

Provision for Income Taxes

Income tax expense was $99.7 million, representing an effective tax rate of 32.8%, and $95.0 million in the prior year quarter, representing an effective tax rate of 31.5%.

BUSINESS UNIT REPORTING

The following tables reflect the earnings contributions and average assets of Northern Trust’s business units for the three and nine month periods ended September 30, 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 September 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

  $ 399.9      $ 359.8      $ 318.3      $ 288.2      $ —        $ —        $ 718.2      $ 648.0   

Foreign Exchange Trading Income

    44.4        61.8        2.0        1.0        —          —          46.4        62.8   

Other Noninterest Income

    42.8        44.3        20.9        54.3        1.3        0.8        65.0        99.4   

Net Interest Income*

    78.4        70.1        131.2        136.3        46.6        38.4        256.2        244.8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Revenue*

    565.5        536.0        472.4        479.8        47.9        39.2        1,085.8        1,055.0   

Provision for Credit Losses

    0.9        0.4        (0.9     4.6        —          —          —          5.0   

Noninterest Expense

    429.6        412.0        312.1        297.3        33.0        31.4        774.7        740.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before Income Taxes*

    135.0        123.6        161.2        177.9        14.9        7.8        311.1        309.3   

Provision (Benefit) for Income Taxes*

    42.4        38.8        60.7        67.0        3.5        (3.0     106.6        102.8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

  $ 92.6      $ 84.8      $ 100.5      $ 110.9      $ 11.4      $ 10.8      $ 204.5      $ 206.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of Consolidated Net Income

    45     41     49     54     6     5     100     100

Average Assets

  $ 59,907.1      $ 53,653.5      $ 26,061.8      $ 22,923.6      $ 19,275.8      $ 18,635.4      $ 105,244.7      $ 95,212.5   

 

* Stated on a fully taxable equivalent basis (FTE). Total consolidated includes FTE adjustments of $6.9 million for 2014 and $7.8 million for 2013.

 

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Table of Contents

BUSINESS UNIT REPORTING (continued)

 

Nine Months Ended September 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

  $ 1,174.5      $ 1,072.7      $ 930.1      $ 863.3      $ —        $ —        $ 2,104.6      $ 1,936.0   

Foreign Exchange Trading Income

    143.2        189.8        6.2        3.8        —          —          149.4        193.6   

Other Noninterest Income

    134.3        130.1        66.7        95.8        4.5        5.4        205.5        231.3   

Net Interest Income*

    228.8        200.2        398.8        425.3        136.4        81.0        764.0        706.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Revenue*

    1,680.8        1,592.8        1,401.8        1,388.2        140.9        86.4        3,223.5        3,067.4   

Provision for Credit Losses

    4.5        (1.1     (1.5     16.1        —          —          3.0        15.0   

Noninterest Expense

    1,299.5        1,206.7        960.3        900.9        93.9        91.7        2,353.7        2,199.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before Income Taxes*

    376.8        387.2        443.0        471.2        47.0        (5.3     866.8        853.1   

Provision (Benefit) for Income Taxes*

    113.3        123.0        166.9        177.8        18.8        (9.3     299.0        291.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

  $ 263.5      $ 264.2      $ 276.1      $ 293.4      $ 28.2      $ 4.0      $ 567.8      $ 561.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of Consolidated Net Income

    46     47     49     52     5     1     100     100

Average Assets

  $ 59,061.3      $ 52,323.8      $ 23,613.4      $ 22,863.1      $ 20,281.1      $ 18,036.6      $ 102,955.8      $ 93,223.5   

 

* Stated on a fully taxable equivalent basis (FTE). Total consolidated includes FTE adjustments of $22.4 million for 2014 and $23.3 million for 2013.

Corporate & Institutional Services

C&IS net income totaled $92.6 million compared to $84.8 million in the prior year quarter, an increase of $7.8 million, or 9%. Noninterest income was $487.1 million, up $21.2 million, or 5%, from $465.9 million in the prior year quarter, 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 September 30,  

($ In Millions)

     2014          2013          Change    

Custody and Fund Administration

   $ 275.0       $ 239.4       $ 35.6        15

Investment Management

     75.4         71.3         4.1        6   

Securities Lending

     22.0         22.7         (0.7     (3

Other

     27.5         26.4         1.1        4   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 399.9       $ 359.8       $ 40.1        11
  

 

 

    

 

 

    

 

 

   

 

 

 

Custody and fund administration fees, the largest component of C&IS fees, increased 15%, driven by new business as well as the favorable impacts of equity markets and movements in foreign exchange rates. C&IS investment management fees increased 6%, as higher equity markets and new business 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 $16.7 million, compared to waived fees of $15.3 million in the prior year quarter. Securities lending revenue decreased 3%, primarily reflecting lower spreads offset by higher volumes in the current quarter. Other fees in C&IS increased 4%, primarily reflecting new business in investment risk and analytical services.

Foreign exchange trading income totaled $44.4 million, a decrease of $17.4 million, or 28%, from $61.8 million in the prior year quarter. The decrease is attributable to lower currency market volatility and trading volumes as compared to the prior year quarter.

Other noninterest income in C&IS totaled $42.8 million, down 3% from $44.3 million in the prior year quarter, primarily reflecting lower treasury management fees.

Net interest income stated on an FTE basis was $78.4 million, up $8.3 million, or 12% from $70.1 million in the prior year quarter. The increase in net interest income is attributable to higher levels of average earning assets,

 

9


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BUSINESS UNIT REPORTING (continued)

Corporate & Institutional Services (continued)

 

partially offset by a decrease in the net interest margin. Average earning assets totaled $53.3 billion, an increase of $7.5 billion, or 16%, from $45.8 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 $44.6 billion in the current quarter, up $7.6 billion, or 20%, from $37.0 billion in the prior year quarter. The net interest margin declined to 0.58% 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 $0.9 million was recorded for the current quarter, 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 $0.4 million.

Total C&IS noninterest expense, which includes the direct expense of the business unit, indirect expense allocations for product and operating support, and indirect expense allocations for certain corporate support services, totaled $429.6 million, up $17.6 million, or 4%, from the prior year quarter’s $412.0 million. The increase is primarily attributable to higher indirect expense allocations and compensation expense in the current quarter.

Wealth Management

Wealth Management net income was $100.5 million, down $10.4 million, or 9%, from $110.9 million in the prior year quarter. Noninterest income was $341.2 million, down 1% from $343.5 million in the prior year quarter. Trust, investment and other servicing fees in Wealth Management totaled $318.3 million, up $30.1 million, or 10%, from $288.2 million in the prior year quarter. The increased fee income is attributable to higher equity markets and new business. Money market mutual fund fee waivers in Wealth Management totaled $16.9 million compared with $17.1 million in the prior year quarter. Other noninterest income totaled $20.9 million, down $33.4 million, or 62%, from $54.3 million in the prior year quarter. The prior year quarter included the $32.6 million pre-tax gain on the sale of an office building property. Excluding the prior year quarter gain, other noninterest income decreased 4%, from 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 $131.2 million, down $5.1 million, or 4%, from $136.3 million in the prior year quarter, reflecting a decline in the net interest margin, partially offset by higher levels of average earning assets. The net interest margin decreased to 2.26% from 2.40% in the prior year quarter due to lower yields on earning assets, partially offset by lower deposit rates, each reflecting the low interest rate environment. Earning assets averaged $23.0 billion, up 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 $0.9 million was recorded in the current quarter, primarily reflecting improvement in the credit quality of residential real estate loans and commercial real estate loans, and a decrease in the level of residential real estate loans. While the credit quality of residential real estate loans improved from the prior year quarter, nonperforming residential real estate loans remain elevated from historical levels. A provision for credit losses of $4.6 million was recorded in the prior year quarter.

Total noninterest expense, which includes the direct expense of the business unit, indirect expense allocations for product and operating support, and indirect expense allocations for certain corporate support services, totaled $312.1 million compared with $297.3 million in the prior year quarter, an increase of $14.8 million, or 5%. The increase is primarily attributable to higher indirect expense allocations and higher compensation expense in the current quarter.

 

10


Table of Contents

BUSINESS UNIT REPORTING (continued)

 

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, and certain corporate-based expenses, and nonrecurring items not allocated to the business units. Noninterest income totaled $1.3 million compared to noninterest income in the prior year quarter of $0.8 million. Net interest income increased $8.2 million, or 21%, to $46.6 million compared to $38.4 million in the prior year quarter, due to higher levels of earning assets, partially offset by lower internal yields on funds provided to business units. Average earning assets increased $3.5 billion, or 20%, to $20.6 billion in the current quarter, compared to $17.1 billion in the prior year quarter.

Noninterest expense totaled $33.0 million, up 5% from $31.4 million in the prior year quarter. The increase primarily reflects higher compensation, employee benefits and equipment and software expense, partially offset by higher indirect expense allocations to C&IS and Wealth Management as compared to the prior year quarter.

NINE-MONTH CONSOLIDATED RESULTS OF OPERATIONS

Overview

Net income per diluted common share was $2.34 for the nine months ended September 30, 2014, and $2.29 in the comparable prior year period. Net income totaled $567.8 million, up $6.2 million, or 1%, as compared to $561.6 million in the prior year period. The performance in the current period produced an annualized return on average common equity of 9.5%, compared to 9.8% 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 $2.45, $595.6 million, and 10.0%, respectively. The prior year period included the $32.6 million pre-tax gain on the sale of an office building property. Excluding this gain, the prior year period net income per diluted common share, net income, and return on average common equity were $2.21, $541.3 million and 9.5%, respectively.

Revenue for the nine months ended September 30, 2014, totaled $3.20 billion, up $157.0 million, or 5%, from the prior year period’s $3.04 billion. Noninterest income was $2.50 billion, up $98.6 million, or 4%, from $2.36 billion in the prior year period. Trust, investment and other servicing fees increased $168.6 million, or 9%, to $2.10 billion from $1.94 billion in the prior year period.

Noninterest Income

The components of noninterest income are provided below.

 

Noninterest Income

   Nine Months Ended September 30,  

($ In Millions)

   2014     2013     Change  

Trust, Investment and Other Servicing Fees

   $ 2,104.6      $ 1,936.0      $ 168.6        9

Foreign Exchange Trading Income

     149.4        193.6        (44.2     (23

Treasury Management Fees

     49.8        51.5        (1.7     (3

Security Commissions and Trading Income

     46.7        53.4        (6.7     (13

Other Operating Income

     112.3        128.3        (16.0     (13

Investment Security Gains (Losses), net

     (3.3     (1.9     (1.4     76   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Noninterest Income

   $ 2,459.5      $ 2,360.9      $ 98.6        4
  

 

 

   

 

 

   

 

 

   

 

 

 

 

11


Table of Contents

NINE-MONTH CONSOLIDATED RESULTS OF OPERATIONS (continued)

Noninterest Income (continued)

 

Trust, investment and other servicing fees from C&IS increased $101.8 million, or 9%, totaling $1.17 billion, compared to $1.07 billion a year ago.

 

C&IS Trust, Investment and Other Servicing Fees

   Nine Months Ended September 30,  

($ In Millions)

   2014      2013      Change  

Custody and Fund Administration

   $ 788.3       $ 697.6       $ 90.7        13

Investment Management

     228.1         220.7         7.4        3   

Securities Lending

     74.7         76.1         (1.4     (2

Other

     83.4         78.3         5.1        7   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 1,174.5       $ 1,072.7       $ 101.8        9
  

 

 

    

 

 

    

 

 

   

 

 

 

Custody and fund administration fees, the largest component of C&IS fees, increased 13%, driven by new business and the favorable impacts of equity markets and movements in foreign exchange rates. C&IS investment management fees increased 3%, as higher equity markets and new business 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 $46.4 million, compared to waived fees of $33.9 million in the prior year period. Securities lending revenue decreased 2%, primarily reflecting lower spreads offset by higher loan volumes in the current year period. Other fees in C&IS increased 7%, primarily reflecting new business in investment risk and analytical services.

Trust, investment and other servicing fees in Wealth Management totaled $930.1 million, increasing $66.8 million, or 8%, from $863.3 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 $50.4 million compared with $43.4 million in the prior year period.

Foreign exchange trading income decreased $44.2 million, or 23%, and totaled $149.4 million compared with $193.6 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 decreased $16.0 million, or 13%, to $112.3 million compared with $128.3 million in the prior year period. The components of other operating income are provided below.

 

Other Operating Income

   Nine Months Ended September 30,  

($ In Millions)

   2014      2013      Change  

Loan Service Fees

   $ 47.0       $ 45.4       $ 1.6        3

Banking Service Fees

     37.2         38.1         (0.9     (2

Other Income

     28.1         44.8         (16.7     (37
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Other Operating Income

   $ 112.3       $ 128.3       $ (16.0     (13 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

The prior year period’s other income component of other operating income included a $32.6 million gain on the sale of an office building property and a $12.4 million write-off of certain fee receivables resulting from the correction of an accrual methodology followed in prior years. Excluding the prior year period gain on sale and fee receivables write-off, the other income component of other operating income increased $3.5 million, or 14%, in the current year period, primarily reflecting gains from currency-related hedging activity.

Net investment security losses totaled $3.3 million, compared to $1.9 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.

 

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Table of Contents

NINE-MONTH CONSOLIDATED RESULTS OF OPERATIONS (continued)

 

Net Interest Income

Net interest income stated on an FTE basis totaled $764.0 million, an increase of $57.5 million, or 8%, from $706.5 million reported in the prior year period. The increase is the result of higher levels of earning assets, partially offset by a decline in the net interest margin. Earning assets averaged $94.8 billion, up $11.2 million, or 13%, from $83.6 billion in the prior year period, primarily attributable to higher levels of Federal Reserve deposits and investment securities. The increased Federal Reserve deposits and securities primarily reflect higher levels of non-U.S. interest-bearing client deposits and demand deposits as compared to the prior year. The net interest margin declined to 1.08% from 1.13% in the prior year period reflecting lower yields on earning assets, partially offset by a lower cost of interest-related funds.

Provision for Credit Losses

A provision for credit losses of $3.0 million was recorded in the current year period. A provision of $15.0 million was recorded in the prior year period. Net charge-offs totaled $12.6 million resulting from $27.9 million of charge-offs and $15.3 million of recoveries, compared to net charge-offs of $25.1 million in the prior year period resulting from $39.8 million of charge-offs and $14.7 million of recoveries. The current period provision reflects improvement in the credit quality of the residential real estate, commercial and institutional, and commercial real estate loan classes. Residential real estate loans, however, continued to reflect weakness relative to the overall portfolio, accounting for 67% and 70% of total nonperforming loans and leases at September 30, 2014, and 2013, respectively. For a fuller discussion of the consolidated allowance and provision for credit losses refer to the “Asset Quality” section beginning on page 16.

Noninterest Expense

Noninterest expense totaled $2.35 billion for the current period, up $154.4 million, or 7%, from the prior year period’s $2.20 billion. The components of noninterest expense are provided below.

 

Noninterest Expense

   Nine Months Ended September 30,  

($ In Millions)

   2014      2013      Change  

Compensation

   $ 1,062.2       $ 971.8       $ 90.4        9

Employee Benefits

     206.0         191.0         15.0        8   

Outside Services

     431.4         412.0         19.4        5   

Equipment and Software

     317.9         279.0         38.9        14   

Occupancy

     135.2         130.0         5.2        4   

Other Operating Expense

     201.0         215.5         (14.5     (7
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Noninterest Expense

   $ 2,353.7       $ 2,199.3       $ 154.4        7
  

 

 

    

 

 

    

 

 

   

 

 

 

Compensation expense, the largest component of noninterest expense, increased $90.4 million, or 9%, to $1.06 billion from the prior year period’s $971.8 million. The current year period includes pre-tax severance-related charges of $25.5 million. Excluding the severance-related charges, compensation expense increased $64.9 million, or 7%, primarily reflecting higher staff levels, base pay adjustments and the unfavorable impact of movements in foreign exchange rates.

Employee benefit expense increased $15.0 million, or 8% to $206.0 million from $191.0 million in the prior year period, and includes $1.9 million of severance-related charges. Excluding these charges, employee benefit expense increased $13.1 million, or 7%, primarily attributable to higher expense associated with employee medical benefits and payroll tax expense, partially offset by lower pension expense.

Outside services expense equaled $431.4 million, up $19.4 million, or 5%, from $412.0 million in the prior year period. Outside services expense includes $1.1 million of severance-related charges in the current period.

 

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NINE-MONTH CONSOLIDATED RESULTS OF OPERATIONS (continued)

Noninterest Expense (continued)

 

Excluding these charges, outside services expense increased $18.3 million, or 4%, primarily reflecting volume-driven growth in global sub-custodian expense as well as higher consulting and legal services expense.

Equipment and software expense totaled $317.9 million, up $38.9 million, or 14% from $279.0 million in the prior year period. The current period includes $9.5 million of pre-tax write-offs of replaced or eliminated software. Excluding these write-offs, equipment and software expense increased $29.4 million, or 11%, reflecting higher software amortization and related software support costs.

Occupancy expense equaled $135.2 million, up $5.2 million, or 4%, from $130.0 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 increased 1% from the prior year period.

The components of other operating expense are provided below.

 

Other Operating Expense

   Nine Months Ended September 30,  

($ In Millions)

   2014      2013      Change  

Business Promotion

   $ 66.6       $ 67.2       $ (0.6     (1 )% 

FDIC Insurance Premiums

     16.4         18.4         (2.0     (11

Staff Related

     30.3         25.8         4.5        18   

Other Intangibles Amortization

     14.7         15.5         (0.8     (5

Other Expenses

     73.0         88.6         (15.6     (18
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Other Operating Expense

   $ 201.0       $ 215.5       $ (14.5     (7 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

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

Provision for Income Taxes

Income tax expense was $276.6 million for the nine months ended September 30, 2014, representing an effective tax rate of 32.8%. This compares with $268.2 million of income tax expense and an effective tax rate of 32.3% in the prior year period.

BALANCE SHEET

Total assets at September 30, 2014, were $111.2 billion and averaged $105.2 billion for the current quarter, compared with total assets of $96.0 billion at September 30, 2013, and average total assets of $95.2 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 by deposit and withdrawal activity involving large client balances. Loans and leases totaled $30.7 billion at September 30, 2014, and averaged $30.3 billion in the current quarter, each up 6% compared to $29.1 billion at September 30, 2013, and a $28.7 billion average in the prior year quarter. Securities, inclusive of Federal Reserve stock, Federal Home Loan Bank stock, and certain community development investments, which are classified in other assets in the consolidated balance sheet, totaled $32.7 billion at September 30, 2014, and averaged $33.6 billion for the current quarter, up 6% and 10%, respectively, as compared to $31.0 billion at September 30, 2013, and $30.6 billion on average 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 totaled $37.7 billion at September 30, 2014, and averaged $33.1 billion in the current quarter, up 43% and 26%, respectively, from the prior year quarter balances, primarily reflecting increased Federal Reserve deposits. Interest-bearing deposits at

 

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Table of Contents

BALANCE SHEET (continued)

 

September 30, 2014, totaled $67.0 billion and averaged $65.6 billion, up 10% and 11%, respectively, compared to $60.8 billion at September 30, 2013, and a $59.3 billion average in the prior year quarter. Noninterest-bearing deposits at September 30, 2014, totaled $24.7 billion and averaged $20.1 billion, up 42% and 24%, respectively, compared to $17.4 billion at September 30, 2013, and a $16.1 billion average in the prior year quarter.

Total stockholders’ equity at September 30, 2014, was $8.5 billion and averaged $8.3 billion for the current quarter, up 9% and 8%, respectively, as compared to $7.8 billion at September 30, 2013, and $7.7 billion on average for the prior year quarter. The increase is primarily attributable to earnings retained and the issuance of preferred stock, partially offset by dividend declarations and the repurchase of common stock pursuant to the Corporation’s share buyback program. On August 5, 2014, Northern Trust issued 16,000 shares of Series C Non-Cumulative Perpetual Preferred Stock (“Series C Preferred Stock”), without par value, for proceeds of approximately $390 million. Shares of the Series C Preferred Stock rank senior to Northern Trust’s common stock. During the three and nine months ended September 30, 2014, Northern Trust repurchased 1,141,349 shares of common stock at a cost of $77.3 million ($67.76 average price per share) and 5,001,481 shares of common stock at a cost of $315.2 million ($63.03 average price per share), respectively.

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

 

Capital Ratios — Northern Trust Corporation

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

Common Equity Tier 1

     12.7     12.8     12.7     12.7     12.9

Tier 1

     13.4        13.6        12.9        12.9        13.4   

Total

     15.3        16.0        14.9        15.4        15.8   

Leverage

     n/a        7.9        n/a        7.6        7.9   

 

Capital Ratios — The Northern Trust Company

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

Common Equity Tier 1

     11.7     11.6     11.7     11.4     11.5

Tier 1

     11.7        11.6        11.6        11.4        11.5   

Total

     13.7        14.0        13.7        14.0        14.3   

Leverage

     n/a        6.8        n/a        6.7        6.8   

 

(a) Effective with the second quarter of 2014, Northern Trust exited its parallel run. Accordingly, the September 30, 2014, and 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 September 30, 2014, and June 30, 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

Net cash provided by operating activities was $1.3 billion and $960.9 million for the nine months ended September 30, 2014, and 2013, respectively. Net cash provided by operating activities in both periods was primarily attributable to period earnings, inclusive of the impact of non-cash charges such as the amortization of computer software, and a reduction of net collateral deposited with derivative counterparties.

 

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STATEMENT OF CASH FLOWS (continued)

 

Net cash used in investing activities of $9.1 billion for the nine months ended September 30, 2014, is primarily attributable to increased levels of Federal Reserve deposits, net purchases of securities held to maturity, and increased levels of loans and leases, partially offset by decreased levels of interest-bearing deposits with banks. The increase in Federal Reserve deposits and the decrease in interest-bearing deposits with banks primarily reflect the redeployment of investments in bank time deposits to Federal Reserve deposits and securities held to maturity. The increase in Federal Reserve deposits also reflects increases in demand and other noninterest-bearing deposits and in interest-bearing and noninterest-bearing non-U.S. office client deposits.

Net cash provided by investing activities of $510.0 million for the nine months ended September 30, 2013, primarily reflects a decrease in interest-bearing deposits with banks and net changes within securities held to maturity and available for sale, partially offset by increased Federal Reserve deposits. The decrease in interest-bearing deposits with banks and the increase in Federal Reserve deposits primarily reflect the redeployment of investments in bank time deposits to Federal Reserve deposits. The increase in Federal Reserve deposits also reflects an increase in short-term other borrowings, offset by a decline in U.S. office client deposits.

For the nine months ended September 30, 2014, net cash provided by financing activities totaled $7.5 billion, primarily reflecting increased total deposits and proceeds from the issuance of Series C Preferred Stock, partially offset by repayments of senior notes and other long term debt and the repurchase of common stock pursuant to the Corporation’s share buyback program. The increase in total deposits is attributable to increases in demand and other noninterest-bearing client deposits and in interest-bearing and noninterest-bearing non-U.S. office client deposits. The decreases in senior notes and other long term debt reflect the maturity of $500 million of fixed-rate senior notes and repayments of borrowings from the Federal Home Loan Bank, respectively.

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

ASSET QUALITY

Securities Portfolio

Northern Trust maintains a high quality securities portfolio, with 84% of the combined available for sale, held to maturity, and trading account portfolios at September 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, 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 7% was not rated by Standard and Poor’s or Moody’s Investors Service (primarily negotiable certificates of deposits of banks whose long term ratings are at least A).

Net unrealized gains within the investment securities portfolio totaled $59.9 million at September 30, 2014, comprised of $142.4 million and $82.5 million of gross unrealized gains and losses, respectively. Of the unrealized losses on securities at September 30, 2014, the largest component, totaling $33.4 million, related to corporate debt securities, primarily reflecting higher market rates since purchase; 40% of the corporate debt portfolio is backed by guarantees provided by U.S. and non-U.S. governmental entities. Unrealized losses of $25.2 million related to government sponsored agency securities are primarily attributable to changes in market rates since their purchase.

 

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ASSET QUALITY (continued)

Securities Portfolio (continued)

 

For the nine months ended September 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 September 30, 2014, or for the three or nine months ended September 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 September 30, 2014, Northern Trust’s gross cross-border exposure to obligors in Ireland totaled approximately $660 million, or less than 1% of Northern Trust’s total consolidated assets. Of the cross-border exposure to obligors in Ireland, $6 million was to banks and the remainder was to commercial and other borrowers, primarily funds domiciled in Ireland whose assets and investment activities are broadly diversified by investment strategy, issuer type, country of risk, and/or instrument type. Exposures to 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 of September 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 September 30, 2014, reflect Northern Trust’s risk management policies and practices, which operate to limit exposures to higher risk financial and sovereign entities.

 

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Table of Contents

ASSET QUALITY (continued)

 

Nonperforming Loans and Other Real Estate Owned

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

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

 

($ In Millions)

   September 30,
2014
    June 30,
2014
    December 31,
2013
    September 30,
2013
 

Nonperforming Loans and Leases

        

Commercial

        

Commercial and Institutional

   $ 31.7      $ 20.8      $ 23.1      $ 24.1   

Commercial Real Estate

     39.9        45.4        49.2        54.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Commercial

     71.6        66.2        72.3        78.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Personal

        

Residential Real Estate

     147.3        161.7        189.1        189.8   

Private Client

     1.6        1.4        1.4        1.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Personal

     148.9        163.1        190.5        191.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Nonperforming Loans and Leases

     220.5        229.3        262.8        270.1   

Other Real Estate Owned

     10.7        12.6        11.9        13.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Nonperforming Assets

     231.2        241.9        274.7        284.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

90 Day Past Due Loans Still Accruing

   $ 25.1      $ 13.1      $ 16.4      $ 24.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Nonperforming Loans and Leases to Total Loans and Leases

     0.72     0.75     0.89     0.93
  

 

 

   

 

 

   

 

 

   

 

 

 

Coverage of Loan and Lease Allowance to Nonperforming Loans and Leases

     1.2x        1.2x        1.1x        1.1x   
  

 

 

   

 

 

   

 

 

   

 

 

 

Nonperforming assets of $231.2 million as of September 30, 2014, reflect improved credit quality from the prior year, though they remain elevated from levels preceding the economic downturn in 2008 and its impact on residential property valuations and general economic conditions. The current period loan portfolio reflects improvement in the credit quality of the residential real estate, commercial and institutional, and commercial real estate loan classes. In addition to the negative impact on net interest income and the risk of credit losses, nonperforming assets also increase operating costs due to the expense associated with collection efforts. Changes in credit quality, including nonperforming loan balances, impact the level of the allowance for credit losses through the resultant adjustment of the specific allowance and of the qualitative factors used in the determination of the inherent allowance levels within the allowance for credit losses.

Northern Trust focuses its lending efforts on clients who are looking to utilize a full range of financial services with Northern Trust. Northern Trust’s underwriting standards do not allow for the origination of loan types generally considered to be of high risk in nature, such as option ARM loans, subprime loans, loans with initial “teaser” rates, and loans with excessively high loan-to-value ratios. Residential real estate loans consist of traditional first lien mortgages and 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.

 

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Table of Contents

ASSET QUALITY (continued)

Nonperforming Loans and Other Real Estate Owned (continued)

 

The commercial real estate class consists primarily of commercial mortgages and a limited number of construction, acquisition and development loans extended primarily to 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 $5.2 million, resulting from $8.6 million of charge-offs and $3.4 million of recoveries, compared to $8.3 million of net charge-offs in the prior year quarter, resulting from $11.6 million of charge-offs and $3.3 million of recoveries. The current quarter reflects improvement in the credit quality of the residential real estate, commercial and institutional, and commercial real estate loan classes. Residential real estate loans continued to reflect weakness relative to the overall portfolio, accounting for 67% and 70% of total nonperforming loans and leases at September 30, 2014, and 2013, respectively.

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

 

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Table of Contents

ASSET QUALITY (continued)

Provision and Allowance for Credit Losses (continued)

 

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

 

    September 30, 2014     June 30, 2014     December 31, 2013     September 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

  $ 24.0        —     $ 23.8        —     $ 24.9        —     $ 32.3        —  

Allocated Inherent Allowance

               

Commercial

               

Commercial and Institutional

    71.9        27        71.4        26        67.5        25        72.4        25   

Commercial Real Estate

    68.3        10        69.3        10        71.5        10        72.2        10   

Lease Financing, net

    3.7        3        3.4        3        4.2        3        4.4        3   

Non-U.S.

    2.1        5        2.7        4        2.1        3        2.4        4   

Other

    —          —         —          2       —          2       —          1  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Commercial

    146.0        45       146.8        45       145.3        43       151.4        43  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Personal

               

Residential Real Estate

    110.4        32        114.6        33        118.7        35        117.0        36   

Private Client

    17.9        23        18.3        22        19.0        22        16.8        21   

Other

    —          —         —          —         —          —         —          —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Personal

    128.3        55       132.9        55       137.7        57       133.8        57  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Allocated Inherent Allowance

  $ 274.3        100   $ 279.7        100   $ 283.0        100   $ 285.2        100
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Allowance for Credit Losses

    298.3          303.5          307.9          317.5     
 

 

 

     

 

 

     

 

 

     

 

 

   

Allowance Assigned to

               

Loans and Leases

  $ 269.4        $ 275.2        $ 278.1        $ 287.2     

Undrawn Commitments and Standby Letters of Credit

    28.9          28.3          29.8          30.3     
 

 

 

     

 

 

     

 

 

     

 

 

   

Total Allowance for Credit Losses

  $ 298.3        $ 303.5        $ 307.9        $ 317.5     
 

 

 

     

 

 

     

 

 

     

 

 

   

Allowance Assigned to Loans and Leases to Total Loans and Leases

    0.88       0.90       0.95       0.99  

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.

 

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RECONCILIATION OF REPORTED NET INTEREST INCOME TO FULLY TAXABLE EQUIVALENT

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

 

     Three Months Ended  
     September 30, 2014     September 30, 2013  

($ In Millions)

   Reported     FTE Adj.      FTE     Reported     FTE Adj.      FTE  

Interest Income

   $ 293.8      $ 6.9       $ 300.7      $ 291.1      $ 7.8       $ 298.9   

Interest Expense

     44.5        —           44.5        54.1        —           54.1   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Net Interest Income

   $ 249.3      $ 6.9       $ 256.2      $ 237.0      $ 7.8       $ 244.8   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Net Interest Margin

     1.02        1.05     1.10        1.14

 

     Nine Months Ended  
     September 30, 2014     September 30, 2013  

($ In Millions)

   Reported     FTE Adj.      FTE     Reported     FTE Adj.      FTE  

Interest Income

   $ 883.0      $ 22.4       $ 905.4      $ 853.1      $ 23.3       $ 876.4   

Interest Expense

     141.4        —           141.4        169.9        —           169.9   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Net Interest Income

   $ 741.6      $ 22.4       $ 764.0      $ 683.2      $ 23.3       $ 706.5   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Net Interest Margin

     1.05        1.08     1.09        1.13

 

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Table of Contents

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)

   Third 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

   $ 1.0       $ 923.1        0.44 %    $ 0.7         548.2        0.52

Interest-Bearing Deposits with Banks

     30.9         16,288.3        0.75        36.3         17,767.6        0.81   

Federal Reserve Deposits

     10.4         15,914.3        0.26        5.1         7,987.5        0.26   

Securities

              

U.S. Government

     7.9         3,031.9        1.03        4.5         1,619.2        1.11   

Obligations of States and Political Subdivisions

     2.5         148.5        6.74        4.2         268.8        6.31   

Government Sponsored Agency

     34.2         17,385.6        0.78        36.0         17,082.6        0.84   

Other (1)

     27.5         13,019.4        0.84        25.0         11,592.8        0.85   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Securities

     72.1         33,585.4        0.85        69.8         30,563.4        0.91   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Loans and Leases (2)

     186.3         30,256.4        2.44        187.0         28,662.4        2.59   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Earning Assets

     300.7         96,967.5        1.23        298.9         85,529.1        1.39   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Allowance for Credit Losses Assigned to Loans and Leases

     —           (273.4 )      —          —           (289.6     —     

Cash and Due from Banks

     —           2,783.0        —          —           2,776.8        —     

Buildings and Equipment

     —           445.6        —          —           453.0        —     

Client Security Settlement Receivables

     —           820.8        —          —           714.8        —     

Goodwill

     —           541.9        —          —           532.5        —     

Other Assets

     —           3,959.3        —          —           5,495.9        —     
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Assets

   $ —         $ 105,244.7        —   %    $ —         $ 95,212.5        —  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Average Source of Funds

              

Deposits

              

Savings and Money Market

   $ 2.5       $ 15,019.0        0.07 %    $ 2.3       $ 14,286.5        0.06

Savings Certificates and Other Time

     1.4         1,902.9        0.30        2.8         1,969.0        0.56   

Non-U.S. Offices — Interest-Bearing

     17.7         48,725.5        0.14        20.7         43,064.7        0.19   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Interest-Bearing Deposits

     21.6         65,647.4        0.13        25.8         59,320.2        0.17   

Short-Term Borrowings

     1.5         4,860.3        0.12        1.3         5,447.2        0.09   

Senior Notes

     11.6         1,496.8        3.10        18.4         2,192.5        3.33   

Long-Term Debt

     9.2         1,636.5        2.23        8.0         978.5        3.23   

Floating Rate Capital Debt

     0.6         277.2        0.81        0.6         277.1        0.85   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Interest-Related Funds

     44.5         73,918.2        0.24        54.1         68,215.5        0.31   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Interest Rate Spread

     —           —          0.99        —           —          1.08   

Demand and Other Noninterest-Bearing Deposits

     —           20,069.8        —          —           16,134.2        —     

Other Liabilities

     —           2,971.2        —          —           3,165.0        —     

Stockholders’ Equity

     —           8,285.5        —          —           7,697.8        —     
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ —         $ 105,244.7        —   %    $ —         $ 95,212.5        —  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net Interest Income/Margin (FTE Adjusted)

   $ 256.2       $ —          1.05 %    $ 244.8       $ —          1.14
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net Interest Income/Margin (Unadjusted)

   $ 249.3       $ —          1.02 %    $ 237.0       $ —          1.10
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

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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)

   $ 40.1       $ (38.3 )    $ 1.8   

Interest-Related Funds

     4.5         (14.1 )      (9.6 ) 
  

 

 

    

 

 

   

 

 

 

Net Interest Income (FTE)

   $ 35.6       $ (24.2 )    $ 11.4   
  

 

 

    

 

 

   

 

 

 
(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 September 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 September 30 2014 and 2013, respectively. Total taxable equivalent interest adjustments amounted to $6.9 million and $7.8 million for the three months ended September 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.

 

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Table of Contents

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)
   Nine 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

   $ 2.3       $ 670.6        0.47 %    $ 1.2       $ 370.2        0.44

Interest-Bearing Deposits with Banks

     96.6         16,879.0        0.77        105.8         18,018.7        0.79   

Federal Reserve Deposits

     26.9         13,967.6        0.26        11.0         5,726.8        0.26   

Securities

              

U.S. Government

     21.0         2,574.0        1.09        13.8         1,729.2        1.07   

Obligations of States and Political Subdivisions

     8.8         176.4        6.68        13.9         292.1        6.34   

Government Sponsored Agency

     108.3         17,858.3        0.81        96.7         17,540.1        0.74   

Other (1)

     83.5         12,815.0        0.87        70.7         11,296.2        0.84   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Securities

     221.6         33,423.7        0.89        195.2         30,857.6        0.85   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Loans and Leases (2)

     558.0         29,832.9        2.50        563.2         28,642.0        2.63   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Earning Assets

     905.4         94,773.8        1.28        876.4         83,615.3        1.40   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Allowance for Credit Losses Assigned to Loans and Leases

     —           (276.0 )      —          —           (292.0     —     

Cash and Due from Banks

     —           2,814.6        —          —           3,042.4        —     

Buildings and Equipment

     —           451.3        —          —           460.7        —     

Client Security Settlement Receivables

     —           835.1        —          —           776.5        —     

Goodwill

     —           541.9        —          —           532.2        —     

Other Assets

     —           3,815.1        —          —           5,088.4        —     
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Assets

   $ —         $ 102,955.8        —   %    $ —         $ 93,223.5        —  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Average Source of Funds

              

Deposits

              

Savings and Money Market

   $ 7.3       $ 14,854.9        0.07 %    $ 7.4       $ 14,598.3        0.07

Savings Certificates and Other Time

     4.8         1,908.5        0.34        10.1         2,183.0        0.62   

Non-U.S. Offices — Interest-Bearing

     52.0         48,101.2        0.14        62.4         40,457.1        0.21   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Interest-Bearing Deposits

     64.1         64,864.6        0.13        79.9         57,238.4        0.19   

Short-Term Borrowings

     3.8         4,544.5        0.11        3.8         4,541.7        0.11   

Senior Notes

     42.8         1,716.5        3.34        56.9         2,331.4        3.26   

Long-Term Debt

     29.0         1,668.9        2.32        27.5         1,119.4        3.29   

Floating Rate Capital Debt

     1.7         277.2        0.81        1.8         277.1        0.86   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Interest-Related Funds

     141.4         73,071.7        0.26        169.9         65,508.0        0.35   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Interest Rate Spread

     —           —          1.02        —           —          1.05   

Demand and Other Noninterest-Bearing Deposits

     —           18,857.0        —          —           16,830.8        —     

Other Liabilities

     —           2,972.8        —          —           3,254.4        —     

Stockholders’ Equity

     —           8,054.3        —          —           7,630.3        —     
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ —         $ 102,955.8        —   %    $ —         $ 93,223.5        —  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net Interest Income/Margin (FTE Adjusted)

   $ 764.0       $ —          1.08 %    $ 706.5       $ —          1.13
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net Interest Income/Margin (Unadjusted)

   $ 741.6       $ —          1.05 %    $ 683.2       $ —          1.09
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

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Table of Contents
ANALYSIS OF NET INTEREST INCOME CHANGES DUE TO VOLUME AND RATE                                   
                    Nine Months 2014/2013  
                    Change Due To  

(In Millions)

                  Average
Balance
     Rate     Total  

Earning Assets (FTE)

            $ 116.8       $ (87.8 )    $ 29.0   

Interest-Related Funds

              19.8         (48.3 )      (28.5 ) 
           

 

 

    

 

 

   

 

 

 

Net Interest Income (FTE)

            $ 97.0       $ (39.5 )    $ 57.5   
           

 

 

    

 

 

   

 

 

 

 

(1) Other securities include Federal Reserve and Federal Home Loan Bank stock and certain community development investments which are classified in other assets in the consolidated balance sheet as of September 30, 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 nine months ending September 30 2014 and 2013, respectively. Total taxable equivalent interest adjustments amounted to $22.5 million and $23.3 million for the nine months ended September 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.

 

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Table of Contents

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, including those 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 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 portfolios;

 

    our success in managing various risks inherent in our businesses, 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;

 

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Table of Contents

FORWARD-LOOKING STATEMENTS (continued)

 

    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 our 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 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;

 

    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

 

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Table of Contents

FORWARD-LOOKING STATEMENTS (continued)

 

 

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.

 

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Table of Contents

ITEM 1. FINANCIAL STATEMENTS

 

CONSOLIDATED BALANCE SHEET    NORTHERN TRUST CORPORATION

 

(In Millions Except Share Information)

   September 30,
2014
    December 31,
2013
 
     (Unaudited)        

Assets

    

Cash and Due from Banks

   $ 2,918.9      $ 3,162.4   

Federal Funds Sold and Securities Purchased under Agreements to Resell

     1,010.0        529.6   

Interest-Bearing Deposits with Banks

     15,334.5        19,397.4   

Federal Reserve Deposits

     21,328.0        12,911.5   

Securities

    

Available for Sale

     28,107.7        28,392.8   

Held to Maturity (Fair value of $4,195.1 and $2,321.4)

     4,196.7        2,325.8   

Trading Account

     4.3        1.7   
  

 

 

   

 

 

 

Total Securities

     32,308.7        30,720.3   
  

 

 

   

 

 

 

Loans and Leases

    

Commercial

     13,868.6        12,620.0   

Personal

     16,851.3        16,765.5   
  

 

 

   

 

 

 

Total Loans and Leases (Net of unearned income of $299.2 and $286.2)

     30,719.9        29,385.5   
  

 

 

   

 

 

 

Allowance for Credit Losses Assigned to Loans and Leases

     (269.4     (278.1

Buildings and Equipment

     436.6        458.8   

Client Security Settlement Receivables

     1,538.6        1,355.2   

Goodwill

     538.1        540.7   

Other Assets

     5,289.8        4,764.0   
  

 

 

   

 

 

 

Total Assets

   $ 111,153.7      $ 102,947.3   
  

 

 

   

 

 

 

Liabilities

    

Deposits

    

Demand and Other Noninterest-Bearing

   $ 21,609.6      $ 16,888.7   

Savings and Money Market

     14,525.1        14,991.5   

Savings Certificates and Other Time

     1,869.0        1,874.4   

Non U.S. Offices — Noninterest-Bearing

     3,132.7        1,881.8   

                              — Interest-Bearing

     50,586.1        48,461.7   
  

 

 

   

 

 

 

Total Deposits

     91,722.5        84,098.1   

Federal Funds Purchased

     786.4        965.1   

Securities Sold Under Agreements to Repurchase

     866.8        917.3   

Other Borrowings

     1,758.3        1,558.6   

Senior Notes

     1,496.9        1,996.6   

Long-Term Debt

     1,598.7        1,709.2   

Floating Rate Capital Debt

     277.2        277.1   

Other Liabilities

     4,104.3        3,513.3   
  

 

 

   

 

 

 

Total Liabilities

     102,611.1        95,035.3   
  

 

 

   

 

 

 

Stockholders’ Equity

    

Preferred Stock, No Par Value; Authorized 10,000,000 shares:

    

Series C, outstanding shares of 16,000 and 0

     388.5        —     

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

    

Outstanding shares of 235,505,008 and 237,322,035

     408.6        408.6   

Additional Paid-In Capital

     1,055.5        1,035.7   

Retained Earnings

     7,469.4        7,134.8   

Accumulated Other Comprehensive Loss

     (218.4     (244.3

Treasury Stock (9,666,516 and 7,849,489 shares, at cost)

     (561.0     (422.8
  

 

 

   

 

 

 

Total Stockholders’ Equity

     8,542.6        7,912.0   
  

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 111,153.7      $ 102,947.3   
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

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Table of Contents

CONSOLIDATED STATEMENT OF INCOME

(UNAUDITED)

   NORTHERN TRUST CORPORATION

 

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

(In Millions Except Share Information)

  2014     2013     2014     2013  

Noninterest Income

       

Trust, Investment and Other Servicing Fees

  $ 718.2      $ 648.0      $ 2,104.6      $ 1,936.0   

Foreign Exchange Trading Income

    46.4        62.8        149.4        193.6   

Treasury Management Fees

    16.4        17.6        49.8        51.5   

Security Commissions and Trading Income

    14.2        16.8        46.7        53.4   

Other Operating Income

    34.1        67.2        112.3        128.3   

Investment Security Gains (Losses), net (Note)

    0.3        (2.2     (3.3     (1.9
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Noninterest Income

    829.6        810.2        2,459.5        2,360.9   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net Interest Income

       

Interest Income

    293.8        291.1        883.0        853.1   

Interest Expense

    44.5        54.1        141.4        169.9   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net Interest Income

    249.3        237.0        741.6        683.2   

Provision for Credit Losses

    —          5.0        3.0        15.0   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net Interest Income after Provision for Credit Losses

    249.3        232.0        738.6        668.2   
 

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest Expense

       

Compensation

    348.0        324.6        1,062.2        971.8   

Employee Benefits

    70.6        63.5        206.0        191.0   

Outside Services

    142.4        145.9        431.4        412.0   

Equipment and Software

    100.5        95.5        317.9        279.0   

Occupancy

    43.8        43.3        135.2        130.0   

Other Operating Expense

    69.4        67.9        201.0        215.5   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Noninterest Expense

    774.7        740.7        2,353.7        2,199.3   
 

 

 

   

 

 

   

 

 

   

 

 

 

Income before Income Taxes

    304.2        301.5        844.4        829.8   

Provision for Income Taxes

    99.7        95.0        276.6        268.2   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

  $ 204.5      $ 206.5      $ 567.8      $ 561.6   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net Income Applicable to Common Stock

  $ 204.5      $ 206.5      $ 567.8      $ 561.6   
 

 

 

   

 

 

   

 

 

   

 

 

 

Per Common Share

       

Net Income — Basic

  $ 0.85      $ 0.85      $ 2.36      $ 2.31   

                    — Diluted

    0.84        0.84        2.34        2.29   
 

 

 

   

 

 

   

 

 

   

 

 

 

Average Number of Common Shares Outstanding

                     — Basic

    235,701,076        239,930,074        236,301,789        239,614,868   

                    — Diluted

    237,737,129        241,330,652        238,175,696        240,857,697   

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(UNAUDITED)

   NORTHERN TRUST CORPORATION

 

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

(In Millions)

       2014             2013             2014             2013      

Net Income

   $ 204.5      $ 206.5      $ 567.8     $ 561.6   

Other Comprehensive Income (Net of Tax and Reclassifications)

        

Net Unrealized Gains (Losses) on Securities Available for Sale

     (5.7     5.8        32.3       (74.4

Net Unrealized Gains (Losses) on Cash Flow Hedges

     (7.4     4.3        (6.4 )     1.2   

Foreign Currency Translation Adjustments

     (3.6     (4.4     (10.5 )     (2.8

Pension and Other Postretirement Benefit Adjustments

     3.5        7.1        10.5       21.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other Comprehensive Income (Loss)

     (13.2     12.8        25.9       (54.9
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive Income

   $ 191.3      $ 219.3      $ 593.7     $ 506.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     0.3        (2.2     0.6       (1.9
  

 

 

   

 

 

   

 

 

   

 

 

 

  Investment Security Gains (Losses), net

   $ 0.3      $ (2.2   $ (3.3 )   $ (1.9
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

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CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

   NORTHERN TRUST CORPORATION

 

     Nine Months
Ended September 30,
 

(In Millions)

   2014     2013  

Preferred Stock

    

Balance at January 1

   $ —        $ —     

Issuance of Preferred Stock, Series C

     388.5        —     
  

 

 

   

 

 

 

Balance at September 30

   $ 388.5      $ —     
  

 

 

   

 

 

 

Common Stock

    

Balance at January 1 and September 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

     (55.0     (41.2

Stock Options and Awards — Amortization

     60.4        57.4   

Stock Options and Awards — Tax Benefits

     14.4        2.9   
  

 

 

   

 

 

 

Balance at September 30

     1,055.5        1,031.8   
  

 

 

   

 

 

 

Retained Earnings

    

Balance at January 1

     7,134.8        6,702.7   

Net Income

     567.8        561.6   

Dividends Declared — Common Stock

     (233.2     (224.2
  

 

 

   

 

 

 

Balance at September 30

     7,469.4        7,040.1   
  

 

 

   

 

 

 

Accumulated Other Comprehensive Income (Loss)

    

Balance at January 1

     (244.3     (283.0

Net Unrealized Gains (Losses) on Securities Available for Sale

     32.3        (74.4

Net Unrealized Gains (Losses) on Cash Flow Hedges

     (6.4     1.2   

Foreign Currency Translation Adjustments

     (10.5     (2.8

Pension and Other Postretirement Benefit Adjustments

     10.5        21.1   
  

 

 

   

 

 

 

Balance at September 30

     (218.4     (337.9
  

 

 

   

 

 

 

Treasury Stock

    

Balance at January 1

     (422.8     (314.0

Stock Options and Awards

     177.0        175.6   

Stock Purchased

     (315.2     (187.1
  

 

 

   

 

 

 

Balance at September 30

     (561.0     (325.5
  

 

 

   

 

 

 

Total Stockholders’ Equity at September 30

   $ 8,542.6      $ 7,817.1   
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

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Table of Contents

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

   NORTHERN TRUST CORPORATION
     Nine Months Ended
September 30,
 

(In Millions)

   2014     2013  

Cash Flows from Operating Activities:

    

Net Income

   $ 567.8      $ 561.6   

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

    

Investment Security Losses (Gains), net

     3.3        1.9   

Amortization and Accretion of Securities and Unearned Income, net

     30.1        25.8   

Provision for Credit Losses

     3.0        15.0   

Depreciation on Buildings and Equipment

     68.0        69.5   

(Gains) Losses on Sale of Buildings and Equipment

     —          (32.6

Amortization of Computer Software

     167.9        152.5   

Amortization of Intangibles

     14.7        15.5   

Computer Software Write-Offs

     9.5        —     

Pension Plan Contributions

     (13.9     (16.4

Change in Receivables

     42.1        (27.9

Change in Interest Payable

     (2.9     (14.7

Change in Collateral With Derivative Counterparties, net

     163.1        111.0   

Other Operating Activities, net

     220.8        99.7   
  

 

 

   

 

 

 

Net Cash Provided by Operating Activities

     1,273.5        960.9   
  

 

 

   

 

 

 

Cash Flows from Investing Activities:

    

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

     (480.4     (223.8

Change in Interest-Bearing Deposits with Banks

     3,498.1        1,150.7   

Net Change in Federal Reserve Deposits

     (8,416.5     (833.2

Purchases of Securities — Held to Maturity

     (5,596.9     (5,068.8

Proceeds from Maturity and Redemption of Securities — Held to Maturity

     3,505.4        4,515.8   

Purchases of Securities — Available for Sale

     (8,969.2     (5,333.4

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

     9,254.9        6,359.2   

Change in Loans and Leases

     (1,352.0     387.6   

Purchases of Buildings and Equipment

     (51.0     (43.8

Proceeds from Sale of Buildings

     —          38.8   

Purchases and Development of Computer Software

     (235.2     (203.8

Change in Client Security Settlement Receivables

     (181.8     416.7   

Other Investing Activities, net

     (41.3     (652.0
  

 

 

   

 

 

 

Net Cash (Used in) Provided by Investing Activities

     (9,065.9     510.0   
  

 

 

   

 

 

 

Cash Flows from Financing Activities:

    

Change in Deposits

     8,556.6        (2,845.7

Change in Federal Funds Purchased

     (178.7     273.4   

Change in Securities Sold under Agreements to Repurchase

     (50.5     (230.8

Change in Short-Term Other Borrowings

     33.4        1,382.4   

Repayments of Senior Notes and Long-Term Debt

     (638.7     (803.2

Contingent Consideration Liability Payment

     (55.3     —     

Proceeds from Issuance of Preferred Stock — Series C

     388.5        —     

Treasury Stock Purchased

     (315.2     (186.8

Net Proceeds from Stock Options

     122.0        134.1   

Cash Dividends Paid on Common Stock

     (225.4     (146.3

Other Financing Activities, net

     (145.6     (2.9
  

 

 

   

 

 

 

Net Cash Provided by (Used in) Financing Activities

     7,491.1        (2,425.8
  

 

 

   

 

 

 

Effect of Foreign Currency Exchange Rates on Cash

     57.8        (107.1
  

 

 

   

 

 

 

Decrease in Cash and Due from Banks

     (243.5     (1,062.0

Cash and Due from Banks at Beginning of Year

     3,162.4        3,752.7   
  

 

 

   

 

 

 

Cash and Due from Banks at End of Period

   $ 2,918.9      $ 2,690.7   
  

 

 

   

 

 

 

Supplemental Disclosures of Cash Flow Information:

    

Interest Paid

   $ 146.4      $ 185.0   

Income Taxes Paid

     159.7        184.2   

Transfers from Loans to OREO

     10.0        16.4   

See accompanying notes to the consolidated financial statements.

 

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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 September 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. 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 International Accounting Standards Board (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 August 2014, the FASB issued ASU No. 2014-14, “Receivables — Troubled Debt Restructurings by Creditors (Subtopic 310-40): Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force).” This ASU requires that a mortgage loan be derecognized and a separate receivable, measured based on the amount of the loan balance expected to be recovered from the guarantor, be recognized upon foreclosure if certain conditions are met. This ASU is effective for interim and annual reporting periods beginning after December 15, 2014. The adoption of this ASU is not expected to significantly impact Northern Trust’s consolidated financial position or results of operations.

3. Fair Value Measurements — Fair Value Hierarchy. The following describes the hierarchy of valuation inputs (Levels 1, 2, and 3) used to measure fair value and the primary valuation methodologies used by Northern Trust for financial instruments measured at fair value on a recurring basis. Observable inputs reflect market data obtained from sources independent of the reporting entity; unobservable inputs reflect the entity’s own assumptions about how market participants would value an asset or liability based on the best information available. 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 nine months ended September 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

 

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Table of Contents

Notes to Consolidated Financial Statements (continued)

 

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 September 30, 2014, Northern Trust’s available for sale securities portfolio included 843 Level 2 securities with an aggregate market value of $24.6 billion. Of those, 842 securities, with an aggregate market value of $24.5 billion, were valued by external pricing vendors. The remaining security, with an aggregate market value of $88.0 million, was valued consistent with prices of similar securities as there were no vended prices available for that security. 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 $4.3 million and $1.7 million as of September 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 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

 

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Table of Contents

Notes to Consolidated Financial Statements (continued)

 

Northern Trust’s own assumptions about business growth rates and applicable discount rates, which represented unobservable inputs to the model. In April 2014, Northern Trust made a payment of $55.3 million to extinguish the contingent consideration liability at the value agreed by the parties.

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 September 30, 2014.

 

Financial Instrument

   Fair Value      Valuation
Technique
   Unobservable Inputs    Range of Lives
and Rates

Auction Rate Securities

   $ 85.2 million       Discounted Cash
Flow
   Remaining lives

Discount rates

   1.7 — 8.6 years

0.2% — 7.9%

 

35


Table of Contents

Notes to Consolidated Financial Statements (continued)

 

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

September 30, 2014

                                 

Securities

             

Available for Sale

             

U.S. Government

   $ 3,409.6       $ —         $ —         $ —        $ 3,409.6   

Obligations of States and Political Subdivisions

     —           4.6         —           —          4.6   

Government Sponsored Agency

     —           16,174.4         —           —          16,174.4   

Non-U.S. Government

     —           310.5         —           —          310.5   

Corporate Debt

     —           3,364.8         —           —          3,364.8   

Covered Bonds

     —           1,978.9         —           —          1,978.9   

Supranational and Non-U.S. Agency Bonds

     —           360.2         —           —          360.2   

Residential Mortgage-Backed

     —           17.6         —           —          17.6   

Other Asset-Backed

     —           2,233.1         —           —          2,233.1   

Auction Rate

     —           —           85.2         —          85.2   

Other

     —           168.8         —           —          168.8   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Available for Sale

     3,409.6         24,612.9         85.2         —          28,107.7   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Trading Account

     —           4.3         —           —          4.3   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Available for Sale and Trading Securities

     3,409.6         24,617.2         85.2         —          28,112.0   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Other Assets

             

Derivative Assets

             

Foreign Exchange Contracts

     —           4,203.8         —           —          4,203.8   

Interest Rate Contracts

     —           213.5         —           —          213.5   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Derivative Assets

     —           4,417.3         —           (2,358.4     2,058.9   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Other Liabilities

             

Derivative Liabilities

             

Foreign Exchange Contracts

     —           4,141.6         —           —          4,141.6   

Interest Rate Swaps

     —           123.5         —           —          123.5   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Derivative Liabilities

   $ —         $ 4,265.1       $ —         $ (2,752.3   $ 1,512.8   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

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 September 30, 2014, derivative assets and liabilities shown above also include reductions of $207.4 million and $601.3 million, respectively, as a result of cash collateral received from and deposited with derivative counterparties.

 

36


Table of Contents

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   

Non-U.S. Government

     —           310.6         —           —          310.6   

Corporate Debt

     —           3,524.5         —           —          3,524.5   

Covered Bonds

     —           1,943.9         —           —          1,943.9   

Supranational and Non-U.S. Agency Bonds

     —           410.0         —           —          410.0   

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.

 

37


Table of Contents

Notes to Consolidated Financial Statements (continued)

 

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

 

Level 3 Assets (In Millions)

   Auction Rate Securities  

Three Months Ended September 30,

   2014     2013  

Fair Value at July 1

   $ 98.8      $ 99.1   

Total Gains (Losses):

    

Included in Earnings

     0.7        —     

Included in Other Comprehensive Income (2)

     0.1        0.3   

Purchases, Issues, Sales, and Settlements:

    

Sales

     (14.4     —     
  

 

 

   

 

 

 

Fair Value at September 30

   $ 85.2      $ 98.7   
  

 

 

   

 

 

 

 

Nine Months Ended September 30,

   2014     2013  

Fair Value at January 1

   $ 98.9      $ 97.8   

Total Gains (Losses):

    

Included in Earnings (1)

     0.7        0.1   

Included in Other Comprehensive Income (2)

     0.4        3.0   

Purchases, Issues, Sales, and Settlements:

    

Sales

     (14.4     —     

Settlements

     (0.4     (2.2
  

 

 

   

 

 

 

Fair Value at September 30

   $ 85.2      $ 98.7   
  

 

 

   

 

 

 

 

(1) Realized gains for the three and nine months ended September 30, 2014, of $0.7 million, represent gains from sales of securities. Realized gains for the nine month period ended September 30, 2013, of $0.1 million, represent gains from redemptions by issuers. Gains on sales are recorded in investment security gains (losses) and gains on redemptions 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  

Three Months Ended September 30,

   2014     2013  

Fair Value at July 1

   $ —        $ 52.7   

Total (Gains) Losses:

    

Included in Earnings (1)

     —          1.3   

Included in Other Comprehensive Income

     —          —     

Purchases, Issues, Sales, and Settlements

     —          —     
  

 

 

   

 

 

 

Fair Value at September 30

   $ —        $ 54.0   
  

 

 

   

 

 

 

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

   $ —        $ 1.3   
  

 

 

   

 

 

 

Nine Months Ended September 30,

   2014     2013  

Fair Value at January 1

   $ 55.4      $ 50.1   

Total (Gains) Losses:

    

Included in Earnings (1)

     (0.1     3.9   

Included in Other Comprehensive Income

     —          —     

Purchases, Issues, Sales, and Settlements:

    

Settlements

     (55.3     —     
  

 

 

   

 

 

 

Fair Value at September 30

   $ —        $ 54.0   
  

 

 

   

 

 

 

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

   $ —        $ 3.9   
  

 

 

   

 

 

 

 

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

 

38


Table of Contents

Notes to Consolidated Financial Statements (continued)

 

During the nine months ended September 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 September 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 $26.6 million and $1.5 million, respectively, at September 30, 2014, and $38.1 million and $1.6 million, respectively, at September 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 September 30, 2014.

 

Financial Instrument

  

Fair Value

  

Valuation
Technique

  

Unobservable Input

  

Range of Discounts
Applied

Loans

   $26.6 million    Market Approach    Discount to reflect realizable value    15% — 25%

OREO

   $1.5 million    Market Approach    Discount to reflect realizable value    15% — 20%

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 (discounted cash flow) 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.

 

39


Table of Contents

Notes to Consolidated Financial Statements (continued)

 

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

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

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

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

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

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

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

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

Financial Instruments Valued at Carrying Value. Due to their short maturity, the carrying values of certain financial instruments approximated their fair values. These financial instruments include cash and due from banks; federal funds sold and securities purchased under agreements to resell, interest-bearing deposits with banks, Federal Reserve deposits; 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.

 

40


Table of Contents

Notes to Consolidated Financial Statements (continued)

 

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

 

(In Millions)

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

Assets

        

Cash and Due from Banks

   $ 2,918.9       $ 2,918.9       $ 2,918.9       $ —         $ —     

Federal Funds Sold and Resell Agreements

     1,010.0         1,010.0         —           1,010.0         —     

Interest-Bearing Deposits with Banks

     15,334.5         15,334.5         —           15,334.5         —     

Federal Reserve Deposits

     21,328.0         21,328.0         —           21,328.0         —     

Securities

        

Available for Sale (1)

     28,107.7         28,107.7         3,409.6         24,612.9         85.2   

Held to Maturity

     4,196.7         4,195.1         —           4,195.1         —     

Trading Account

     4.3         4.3         —           4.3         —     

Loans (excluding Leases)

        

Held for Investment

     29,499.6         29,522.7         —           —           29,522.7   

Held for Sale

     2.1         2.1         —           —           2.1   

Client Security Settlement Receivables

     1,538.6         1,538.6         —           1,538.6         —     

Other Assets

        

Federal Reserve and Federal Home Loan Bank Stock

     207.5         207.5         —           207.5         —     

Community Development Investments

     225.1         223.8         —           223.8         —     

Employee Benefit and Deferred Compensation

     145.2         147.4         97.4         50.0         —     

Liabilities

        

Deposits

        

Demand, Noninterest-Bearing, Savings and Money Market

   $ 39,267.4       $ 39,267.4       $ 39,267.4       $ —         $ —     

Savings Certificates and Other Time

     1,869.0         1,869.5         —           1,869.5         —     

Non U.S. Offices Interest-Bearing

     50,586.1         50,586.1         —           50,586.1         —     

Federal Funds Purchased

     786.4         786.4         —           786.4         —     

Securities Sold under Agreements to Repurchase

     866.8         866.8         —           866.8         —     

Other Borrowings

     1,758.3         1,758.9         —           1,758.9         —     

Senior Notes

     1,496.9         1,526.8         —           1,526.8         —     

Long Term Debt (excluding Leases)

        

Subordinated Debt

     1,565.5         1,595.5         —           1,595.5         —     

Federal Home Loan Bank Borrowings

     —           —           —           —           —     

Floating Rate Capital Debt

     277.2         242.8         —           242.8         —     

Other Liabilities

        

Standby Letters of Credit

     57.0         57.0         —           —           57.0   

Loan Commitments

     28.7         28.7         —           —           28.7   

Derivative Instruments

           

Asset/Liability Management

           

Foreign Exchange Contracts

           

Assets

   $ 71.0       $ 71.0       $ —         $ 71.0       $ —     

Liabilities

     16.1         16.1         —           16.1         —     

Interest Rate Contracts

           

Assets

     113.3         113.3         —           113.3         —     

Liabilities

     27.6         27.6         —           27.6         —     

Client-Related and Trading

              

Foreign Exchange Contracts

              

Assets

     4,132.8         4,132.8         —           4,132.8         —     

Liabilities

     4,125.5         4,125.5         —           4,125.5         —     

Interest Rate Contracts

           

Assets

     100.2         100.2         —           100.2         —     

Liabilities

     95.9         95.9         —           95.9         —     

 

(1) Refer to the table located on page 36 for the disaggregation of available for sale securities.

 

41


Table of Contents

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

              

Assets

     115.1         115.1         —           115.1         —     

Liabilities

     78.2         78.2         —           78.2         —     

Client-Related and Trading

              

Foreign Exchange Contracts

              

Assets

     2,844.7         2,844.7         —           2,844.7         —     

Liabilities

     2,846.2         2,846.2         —           2,846.2         —     

Interest Rate Contracts

              

Assets

     122.8         122.8         —           122.8         —     

Liabilities

     117.0         117.0         —           117.0         —     

 

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

 

42


Table of Contents

Notes to Consolidated Financial Statements (continued)

 

 

4. Securities — The following tables provide the amortized cost and fair values of securities at September 30, 2014, and December 31, 2013.

 

                                                               

Securities Available for Sale

   September 30, 2014  
     Amortized
Cost
     Gross Unrealized      Fair
Value
 

(In Millions)

      Gains      Losses     

U.S. Government

   $ 3,395.1       $ 16.0       $ 1.5       $ 3,409.6   

Obligations of States and Political Subdivisions

     4.5         0.1         —           4.6   

Government Sponsored Agency

     16,114.2         85.4         25.2         16,174.4   

Non-U.S. Government

     309.3         1.2         —           310.5   

Corporate Debt

     3,393.5         4.7         33.4         3,364.8   

Covered Bonds

     1,966.9         12.2         0.2         1,978.9   

Supranational and Non-U.S. Agency Bonds

     360.0         1.4         1.2         360.2   

Residential Mortgage-Backed

     18.8         0.1         1.3         17.6   

Other Asset-Backed

     2,232.0         1.3         0.2         2,233.1   

Auction Rate

     83.4         2.3         0.5         85.2   

Other

     168.5         0.3