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 March 31, 2015

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   ¨  (Do not check if a smaller reporting company)    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

233,368,512 Shares – $1.66 2/3 Par Value

(Shares of Common Stock Outstanding on March 31, 2015)

 

 

 


Table of Contents

NORTHERN TRUST CORPORATION

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2015

TABLE OF CONTENTS

 

     Page  

Consolidated Financial Highlights (unaudited)

     1   

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)

     24   

Consolidated Balance Sheet

     24   

Consolidated Statement of Income

     25   

Consolidated Statement of Comprehensive Income

     25   

Consolidated Statement of Changes in Stockholders’ Equity

     26   

Consolidated Statement of Cash Flows

     27   

Notes to Consolidated Financial Statements

     28   

Item 4: Controls and Procedures

     71   

Part II – Other Information

  

Item 1: Legal Proceedings

     71   

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

     71   

Item 6: Exhibits

     71   

Signatures

     72   

 

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Table of Contents

CONSOLIDATED FINANCIAL HIGHLIGHTS

(UNAUDITED)

 

     Three Months
Ended March 31,
 

CONDENSED INCOME STATEMENT (In Millions)

   2015     2014      % Change (*)  

Noninterest Income

   $ 873.9      $ 794.8         10

Net Interest Income

     260.6        245.7         6   

Provision for Credit Losses

     (4.5     3.0         N/M   

Noninterest Expense

     789.0        768.0         3   
  

 

 

   

 

 

    

 

 

 

Income before Income Taxes

  350.0      269.5      30   
  

 

 

   

 

 

    

 

 

 

Provision for Income Taxes

  119.3      88.1      36   
  

 

 

   

 

 

    

 

 

 

Net Income

$ 230.7    $ 181.4      27
  

 

 

   

 

 

    

 

 

 

PER COMMON SHARE

Net Income — Basic

$ 0.95    $ 0.75      27

— Diluted

  0.94      0.75      25   

Cash Dividends Declared Per Common Share

  0.33      0.31      6   

Book Value — End of Period (EOP)

  35.22      33.61      5   

Market Price — EOP

  69.65      65.56      6   

 

SELECTED BALANCE SHEET DATA (In Millions)

        
     March 31,      December 31,         
     2015      2014      % Change (*)  

End of Period:

        

Assets

   $ 106,952.0       $ 109,946.5         (3 )% 

Earning Assets

     97,203.9         100,889.8         (4

Deposits

     86,736.5         90,757.0         (4

Stockholders’ Equity

     8,607.6         8,448.9         2   

 

     Three Months
Ended March 31,
 
     2015      2014      % Change (*)  

Average Balances:

        

Assets

   $ 107,513.2       $ 100,243.5         7

Earning Assets

     98,693.1         91,840.7         7   

Deposits

     86,526.1         80,747.8         7   

Stockholders’ Equity

     8,472.7         7,926.4         7   

 

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Table of Contents

SELECTED RATIOS AND METRICS

      
     Three Months
Ended March 31,
 
     2015     2014     % Change (*)  

Financial Ratios:

      

Return on Average Common Equity

     11.28     9.28     22

Return on Average Assets

     0.87        0.73        19   

Dividend Payout Ratio

     35.1        41.3        (15

Net Interest Margin (**)

     1.10        1.12        (2

 

     March 31, 2015     December 31, 2014  
     Advanced
(a) Approach
    Standardized
(b) Approach
    Advanced
(a) Approach
    Standardized
(c) Approach
 

Capital Ratios:

        

Northern Trust Corporation

        

Common Equity Tier 1

     11.8 %     10.5     12.4     12.5

Tier 1

     12.4       11.1       13.2       13.3  

Total

     14.2       13.1       15.0       15.5  

Tier 1 Leverage

     7.8       7.8       n/a        7.8  

Supplementary Leverage (d)

     6.4       n/a        n/a        n/a   

The Northern Trust Company

        

Common Equity Tier 1

     11.3 %     10.0     12.0     11.8

Tier 1

     11.3       10.0       12.0       11.8  

Total

     13.0       11.8       13.8       14.0  

Tier 1 Leverage

     6.9       6.9       n/a        6.9  

Supplementary Leverage (d)

     5.7       n/a        n/a        n/a   

 

CLIENT ASSETS (In Billions)

        March 31,
2015
     December 31,
2014
     % Change (*)  

Assets Under Custody

      $ 6,090.8      $ 5,968.8        2

Assets Under Management

        960.1        934.1        3  

 

(*) 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 (FTE) basis, a non-generally-accepted-accounting-principle (GAAP) financial measure that facilitates the analysis of asset yields. The net interest margin on a GAAP basis and a reconciliation of net interest income on a GAAP basis to net interest income on an FTE basis are presented on page 19.

 

(a) Effective with the second quarter of 2014, Northern Trust exited parallel run. Accordingly, the March 31, 2015, and December 31, 2014, ratios were 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) Effective with the first quarter of 2015, Standardized Approach risk weighted assets are calculated in compliance with the Basel III Standardized Approach final rules released by the Board of Governors of the Federal Reserve on July 2, 2013.

 

(c) Standardized Approach capital components in 2014 were determined by Basel III phased in requirements and risk weighted assets were determined by Basel I requirements. The December 31, 2014, ratios calculated under the Standardized Approach comply with the final rules released by the Board of Governors of the Federal Reserve on July 2, 2013.

 

(d) Advanced Approaches banking organizations must calculate and report their supplementary leverage ratio beginning with the first quarter of 2015. Northern Trust must maintain a minimum supplementary leverage ratio of 3 percent beginning with the first quarter of 2018.

 

2


Table of Contents

PART I – FINANCIAL INFORMATION

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Quantitative and Qualitative Disclosures about Market Risk

FIRST QUARTER CONSOLIDATED RESULTS OF OPERATIONS

General

Northern Trust Corporation (Corporation) is a financial holding company that 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 managing and servicing client assets through its two client-focused reporting segments: Corporate & Institutional Services (C&IS) and Wealth Management (WM). Asset management and related services are provided to C&IS and Wealth Management clients primarily by the Asset Management business. Except where the context requires otherwise, the term “Northern Trust,” “we”, “us”, “our” or similar terms mean the 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 $0.94, up from $0.75 in the first quarter of 2014. Net income was $230.7 million in the current quarter as compared to $181.4 million in the prior-year quarter. Annualized return on average common equity in the quarter was 11.3% as compared to 9.3% in the prior-year quarter. The annualized return on average assets was 0.9% as compared to 0.7% in the prior-year quarter.

Revenue of $1.13 billion in the current quarter was up $94.0 million, or 9%, from $1.04 billion in the prior-year quarter. Noninterest income increased $79.1 million, or 10%, to $873.9 million from $794.8 million in the prior-year quarter, primarily reflecting higher trust, investment and other servicing fees and foreign exchange trading income.

Net interest income increased $14.9 million, or 6%, to $260.6 million in the current quarter as compared to $245.7 million in the prior-year quarter, due to growth in earning assets, offset partially by a lower net interest margin.

Net investment security gains totaled $0.1 million in the current quarter compared to net investment security losses of $4.0 million in the prior-year quarter. The prior-year quarter included $3.9 million of charges relating to the other-than-temporary impairment (OTTI) of certain Community Reinvestment Act (CRA) eligible securities.

The provision for credit losses was a credit of $4.5 million in the current quarter, reflecting improved credit quality across the loan portfolio. A provision of $3.0 million was recorded in the prior-year quarter.

Noninterest expense totaled $789.0 million, up $21.0 million, or 3%, from $768.0 million in the prior-year quarter, primarily attributable to higher compensation, equipment and software and employee benefits expense, partially offset by lower outside services expense.

 

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FIRST QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)

 

Noninterest Income

The components of noninterest income are provided below.

Table 1: Noninterest Income

 

Noninterest Income

   Three Months
Ended March 31,
             

($ In Millions)

   2015      2014     Change  

Trust, Investment and Other Servicing Fees

   $ 727.5       $ 679.5      $ 48.0        7

Foreign Exchange Trading Income

     71.6         50.1        21.5        43   

Treasury Management Fees

     16.3         16.8        (0.5     (3

Security Commissions and Trading Income

     19.8         14.7        5.1        35   

Other Operating Income

     38.6         37.7        0.9        2   

Investment Security Gains (Losses), net

     0.1         (4.0     4.1        104   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total Noninterest Income

$ 873.9    $ 794.8    $ 79.1      10
  

 

 

    

 

 

   

 

 

   

 

 

 

Trust, investment and other servicing fees are based primarily 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 in arrears. For a further discussion of trust, investment and other servicing fees and how they are derived, refer to the “Reporting Segments” section.

The following table presents Northern Trust’s assets under custody by reporting segment.

Table 2: Assets Under Custody

 

Assets Under Custody

   March 31,
2015
     December 31,
2014
     March 31,
2014
     Change
Q1-15/
Q4-14
    Change
Q1-15/
Q1-14
 

($ In Billions)

             

Corporate & Institutional

   $ 5,566.2       $ 5,453.1       $ 5,249.9         2     6

Wealth Management

     524.6         515.7         503.6         2        4   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Assets Under Custody

$ 6,090.8    $ 5,968.8    $ 5,753.5      2   6
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Custodied assets by reporting segment were invested as follows at March 31, 2015, and 2014:

Table 3: Allocations of Assets Under Custody

 

     March 31, 2015     March 31, 2014  

Assets Under Custody

   C&IS     WM     Consolidated     C&IS     WM     Consolidated  

Equities

     45     55     46     45     55     46

Fixed Income Securities

     37        23        35        37        22        35   

Cash and Other Assets

     18        22        19        18        23        19   

C&IS assets under custody totaled $5.6 trillion as of March 31, 2015, and included $3.4 trillion of global custody assets, 6% and 5% higher compared to March 31, 2014, respectively.

 

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FIRST QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)

Noninterest Income (continued)

 

The following table presents Northern Trust’s assets under management by reporting segment.

Table 4: Assets Under Management

 

Assets Under Management

   March 31,
2015
     December 31,
    2014    
     March 31,
2014
     Change
Q1-15/
Q4-14
    Change
Q1-15/
Q1-14
 

($ In Billions)

             

Corporate & Institutional

   $ 727.0       $ 709.6       $ 698.2         2     4

Wealth Management

     233.1         224.5         217.2         4        7   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Assets Under Management

$ 960.1    $ 934.1    $ 915.4      3   5
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

The following table presents consolidated assets under management as of March 31, 2015, and March 31, 2014, by investment type.

Table 5: Assets Under Management by Investment Type

 

($ In Billions)

   March 31, 2015      March 31, 2014  

Equities

   $ 495.8       $ 485.5   

Fixed Income Securities

     168.0         150.1   

Cash and Other Assets

     173.1         163.3   

Securities Lending Collateral

     123.2         116.5   
  

 

 

    

 

 

 

Total Assets Under Management

$ 960.1    $ 915.4   
  

 

 

    

 

 

 

The 5% increase in consolidated assets under management from $915.4 billion at March 31, 2014, to $960.1 billion as of March 31, 2015, primarily reflected higher equity and bond markets and net new business from institutional clients, primarily in fixed income and cash.

Custodied and managed assets by reporting segment were invested as follows at March 31, 2015, and 2014:

Table 6: Allocations of Assets Under Management

 

     March 31, 2015     March 31, 2014  

Assets Under Management

   C&IS     WM     Consolidated     C&IS     WM     Consolidated  

Equities

     53     46     52     55     46     53

Fixed Income Securities

     14        28        17        13        28        16   

Securities Lending

     17        —          13        17        —          13   

Cash and Other Assets

     16        26        18        15        26        18   

Changes in assets under custody and under management are in comparison to the twelve month increase in the S&P 500® index of 10.4% and decline in the MSCI EAFE® index (USD) of 3.5%.

Foreign exchange trading income totaled $71.6 million in the current quarter, up $21.5 million, or 43%, compared to $50.1 million in the prior-year quarter. The increase was primarily attributable to higher currency volatility and client volumes as compared to the prior-year quarter.

Security commissions and trading income totaled $19.8 million, up $5.1 million, or 35%, compared with $14.7 million in the prior-year quarter. The increase is attributable to higher income from interest rate protection products sold to clients as well as higher core brokerage revenues.

 

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Table of Contents

FIRST QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)

Noninterest Income (continued)

 

Other operating income totaled $38.6 million in the current quarter, up 2%, from $37.7 million in the prior-year quarter. The components of other operating income are provided below.

Table 7: Other Operating Income

 

Other Operating Income

   Three Months
Ended March 31,
               

($ In Millions)

   2015      2014      Change  

Loan Service Fees

   $ 14.9       $ 15.7       $ (0.8      (5 )% 

Banking Service Fees

     11.9         12.3         (0.4      (4

Other Income

     11.8         9.7         2.1         21   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Other Operating Income

$ 38.6    $ 37.7    $ 0.9      2
  

 

 

    

 

 

    

 

 

    

 

 

 

The increase in the other income component of other operating income was primarily attributable to additional income in the current quarter associated with a third-party servicing agreement modified in the prior quarter.

Net Interest Income

Net interest income on an FTE basis totaled $266.8 million, up $12.4 million, or 5%, compared to $254.4 million in the prior-year quarter. The increase was primarily the result of growth in earning assets, partially offset by a lower net interest margin. Earning assets for the current quarter averaged $98.7 billion, up $6.9 billion, or 7%, from $91.8 billion in the prior-year quarter, primarily resulting from higher levels of Federal Reserve deposits, securities and loans, reflecting higher levels of demand and interest-bearing deposits.

The net interest margin declined to 1.10% in the current quarter from 1.12% 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. 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 (a non-GAAP financial measure) is provided on page 19.

Federal Reserve deposits averaged $14.5 billion, up $1.8 billion, or 14%, from $12.7 billion in the prior-year quarter.

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 sheets, were $35.8 billion, up $3.4 billion, or 11%, from $32.4 billion in the prior-year quarter.

Loans and leases averaged $32.1 billion, up $2.9 billion, or 10%, from $29.2 billion in the prior-year quarter, primarily reflecting higher levels of commercial and institutional loans, private client loans, and commercial real estate loans. Commercial and institutional loans averaged $8.8 billion, up $1.3 billion, or 17%, from $7.5 billion for the prior-year quarter. Private client loans averaged $7.5 billion, up $1.2 billion, or 19%, from $6.2 billion for the prior-year quarter. Commercial real estate loans averaged $3.4 billion, up $461.0 million, or 16%, from $3.0 billion for the prior-year quarter.

Northern Trust utilizes a diverse mix of funding sources. Total interest-bearing deposits averaged $64.5 billion, compared to $63.1 billion in the prior-year quarter, an increase of $1.4 billion, or 2%. Other interest-bearing funds averaged $8.5 billion, a decrease of $21.1 million, from $8.6 billion in the prior-year quarter, attributable

 

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FIRST QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)

Net Interest Income (continued)

 

to decreased senior notes and long-term debt, partially offset by increased short-term borrowings. 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 $5.5 billion, or 27%, to $25.7 billion from $20.2 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 Sheets with Analysis of Net Interest Income and the Analysis of Net Interest Income Changes Due To Volume and Rate on pages 20 and 21.

Provision for Credit Losses

The provision for credit losses was a credit of $4.5 million in the current quarter, reflecting improved credit quality across the loan portfolio. A provision of $3.0 million was recorded in the prior-year quarter. Net charge-offs in the current quarter were $4.6 million, resulting from charge-offs of $7.5 million and recoveries of $2.9 million. The prior-year quarter included $1.5 million of net charge-offs, resulting from $11.5 million of charge-offs and $10.0 million of recoveries. Nonperforming assets decreased 15% from the prior-year quarter. Residential real estate loans and commercial real estate loans accounted for 72% and 18%, respectively, of total nonperforming loans and leases at March 31, 2015. For additional discussion of the provision and allowance for credit losses, refer to the “Asset Quality” section beginning on page 14.

Noninterest Expense

The components of noninterest expense are provided below.

Table 8: Noninterest Expense

 

Noninterest Expense

   Three Months Ended
March 31,
               

($ In Millions)

     2015          2014          Change    

Compensation

   $ 354.3       $ 341.8       $ 12.5         4

Employee Benefits

     72.9         66.9         6.0         9   

Outside Services

     135.1         144.4         (9.3      (6

Equipment and Software

     110.3         101.3         9.0         9   

Occupancy

     43.0         44.2         (1.2      (3

Other Operating Expense

     73.4         69.4         4.0         6   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Noninterest Expense

$ 789.0    $ 768.0    $ 21.0      3
  

 

 

    

 

 

    

 

 

    

 

 

 

Compensation expense, the largest component of noninterest expense, equaled $354.3 million in the current quarter, up $12.5 million, or 4%, from $341.8 million in the prior-year quarter, reflecting higher performance-based compensation, base pay adjustments and staff growth, partially offset by the favorable impact of movements in foreign exchange rates. Staff on a full-time equivalent basis at March 31, 2015, totaled approximately 15,600, up 5% from March 31, 2014.

Employee benefit expense totaled $72.9 million in the current quarter, up $6.0 million, or 9%, from $66.9 million in the prior-year quarter. The increase was primarily attributable to higher pension and employee medical expense.

 

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FIRST QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)

Noninterest Expense (continued)

 

Expense associated with outside services totaled $135.1 million in the current quarter, down $9.3 million, or 6%, from $144.4 million in the prior-year quarter, primarily reflecting lower legal, third-party advisor fees, consulting and sub-custodian expense.

Equipment and software expense totaled $110.3 million in the current quarter, up $9.0 million, or 9%, from $101.3 million in the prior-year quarter. The current quarter included higher software amortization and related software support costs.

Other operating expense totaled $73.4 million in the current quarter, up 6%, from $69.4 million in the prior-year quarter. The components of other operating expense are provided below.

Table 9: Other Operating Expense

 

Other Operating Expense

   Three Months Ended
March 31,
               

($ In Millions)

     2015          2014        Change  

Business Promotion

   $ 28.3       $ 28.4       $ (0.1      —  

Staff Related

     9.8         9.4         0.4         4   

FDIC Insurance Premiums

     5.8         5.9         (0.1      (2

Other Intangibles Amortization

     4.6         4.9         (0.3      (7

Other Expenses

     24.9         20.8         4.1         20   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Other Operating Expense

$ 73.4    $ 69.4    $ 4.0      6
  

 

 

    

 

 

    

 

 

    

 

 

 

The increase in the other expenses component of other operating expense in the current quarter was attributable to increased charitable contributions and deferred expenses related to client onboarding.

Provision for Income Taxes

Income tax expense was $119.3 million in the current quarter, representing an effective tax rate of 34.1%, compared to $88.1 million in the prior-year quarter, representing an effective tax rate of 32.7%.

REPORTING SEGMENTS

Northern Trust is organized around its two client-focused reporting segments: C&IS and Wealth Management. Asset management and related services are provided to C&IS and Wealth Management clients primarily by the Asset Management business. The revenue and expenses of Asset Management and certain other support functions are allocated fully to C&IS and Wealth Management. Income and expense associated with the wholesale funding activities and investment portfolios of the Corporation and its principal subsidiary, The Northern Trust Company (the Bank), as well as certain corporate-based expense, executive level compensation and nonrecurring items, are not allocated to C&IS and Wealth Management, and are reported in Northern Trust’s third reporting segment, Treasury and Other, in the following pages.

The following table reflects the earnings contributions and average assets of Northern Trust’s reporting segments for the three-month periods ended March 31, 2015, and 2014. Reporting segment 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, equity and the applicable interest income and expense.

 

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REPORTING SEGMENTS (continued)

 

Table 10: Results of Reporting Segments

 

Three Months Ended March 31,

  Corporate &
Institutional Services
    Wealth
Management
    Treasury and
Other
    Total
Consolidated
 

($ In Millions)

  2015     2014     2015     2014     2015     2014     2015     2014  

Noninterest Income

               

Trust, Investment and Other Servicing Fees

  $ 407.3      $ 379.2      $ 320.2      $ 300.3      $ —        $ —        $ 727.5      $ 679.5   

Foreign Exchange Trading Income

    67.5        48.1        4.1        2.0        —          —          71.6        50.1   

Other Noninterest Income

    41.9        44.4        28.8        22.7        4.1        (1.9     74.8        65.2   

Net Interest Income*

    96.0        73.7        138.3        135.0        32.5        45.7        266.8        254.4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Revenue*

    612.7        545.4        491.4        460.0        36.6        43.8        1,140.7        1,049.2   

Provision for Credit Losses

    (2.2     1.2        (2.3     1.8        —          —          (4.5     3.0   

Noninterest Expense

    434.9        423.5        321.9        318.8        32.2        25.7        789.0        768.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before Income Taxes*

    180.0        120.7        171.8        139.4        4.4        18.1        356.2        278.2   

Provision for Income Taxes*

    57.3        34.8        64.6        52.6        3.6        9.4        125.5        96.8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

  $ 122.7      $ 85.9      $ 107.2      $ 86.8      $ 0.8      $ 8.7      $ 230.7      $ 181.4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of Consolidated Net Income

    53     47     47     48     —       5     100     100

Average Assets

  $ 39,762.4      $ 57,252.4      $ 24,308.8      $ 22,528.7      $ 43,442.0      $ 20,462.4      $ 107,513.2      $ 100,243.5   

 

* Stated on an FTE basis. Total consolidated includes FTE adjustments of $6.2 million for 2015 and $8.7 million for 2014.

Corporate & Institutional Services

C&IS net income totaled $122.7 million in the current quarter compared to $85.9 million in the prior-year quarter, an increase of $36.8 million, or 43%. Noninterest income was $516.7 million in the current quarter, up $45.0 million, or 10%, from $471.7 million in the prior-year quarter, reflecting higher trust, investment and other servicing fees and foreign exchange trading income.

Table 11: C&IS Trust, Investment and Other Servicing Fees

 

     Three Months Ended
March 31,
               

($ In Millions)

     2015          2014          Change    

Custody and Fund Administration

   $ 277.1       $ 252.2       $ 24.9         10

Investment Management

     76.4         75.0         1.4         2   

Securities Lending

     21.6         22.7         (1.1      (5

Other

     32.2         29.3         2.9         10   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total C&IS Trust, Investment and Other Servicing Fees

$ 407.3    $ 379.2    $ 28.1      7
  

 

 

    

 

 

    

 

 

    

 

 

 

Custody and fund administration fees, the largest component of C&IS fees, are driven primarily by values of client assets under custody, transaction volumes and number of accounts. The asset values used to calculate these fees vary depending on the individual fee arrangements negotiated with each client. Custody fees related to asset values are client specific and are priced based on quarter-end or month-end values, values at the beginning of each quarter or average values for a month or quarter. The fund administration fees that are asset-value-related are priced using month-end, quarter-end, or average daily balances. Investment management fees, which are based generally on client assets under management, are based primarily on market values throughout a period.

Custody and fund administration fees increased 10%, driven by new business and higher equity markets, partially offset by the unfavorable impact of movements in foreign exchange rates. C&IS investment management fees increased 2% due to new business and higher equity markets. Money market mutual fund fee waivers in C&IS totaled $15.2 million, compared to waived fees of $14.9 million in the prior-year quarter.

 

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REPORTING SEGMENTS (continued)

Corporate & Institutional Services (continued)

 

Foreign exchange trading income totaled $67.5 million in the current quarter, an increase of $19.4 million, or 40%, from $48.1 million in the prior-year quarter. The increase was primarily attributable to higher currency volatility and client volumes as compared to the prior-year quarter.

Other noninterest income in C&IS totaled $41.9 million in the current quarter, down 6%, from $44.4 million in the prior-year quarter, primarily reflecting decreases within various miscellaneous categories of other operating income.

Net interest income stated on an FTE basis was $96.0 million in the current quarter, up $22.3 million, or 30% from $73.7 million in the prior-year quarter. The increase in net interest income was attributable to an increase in the net interest margin, partially offset by lower levels of average earning assets. The changes to both the net interest margin and average earning assets versus prior-year period were partially due to a change in presentation, as certain assets were transferred to the Treasury and Other segment in the current quarter and the related internal funds pricing method was updated. As a result, the net interest margin increased to 1.19% from 0.59% in the prior-year quarter while average earning assets totaled $32.7 billion, a decrease of $17.9 billion, or 35%, from $50.6 billion in the prior-year quarter. The earning assets that remain consist primarily of loans and leases and intercompany assets. Funding sources were primarily comprised of non-U.S. custody-related interest-bearing deposits, which averaged $42.6 billion in the current quarter, relatively unchanged from the prior-year quarter.

The provision for credit losses was a credit of $2.2 million in the current quarter, reflecting continued improvement in the credit quality of the commercial and institutional loan class, partially offset by an increase in the level of commercial and institutional loans. The prior-year quarter included a provision of $1.2 million.

Total C&IS noninterest expense, which includes the direct expense of the reporting segment, indirect expense allocations for product and operating support and indirect expense allocations for certain corporate support services, totaled $434.9 million in the current quarter, up $11.4 million, or 3%, from $423.5 million in the prior-year quarter. The increase was primarily attributable to higher indirect expense allocations and compensation expense, partially offset by the favorable impact of movements in foreign exchange rates and lower expense for outside services in the current quarter.

Wealth Management

Wealth Management net income was $107.2 million in the current quarter, up $20.4 million, or 24%, from $86.8 million in the prior-year quarter. Noninterest income was $353.1 million, up $28.1 million, or 9%, from $325.0 million in the prior-year quarter, primarily reflecting higher trust, investment and other servicing fees.

Trust, investment and other servicing fees in Wealth Management totaled $320.2 million in the current quarter, up $19.9 million, or 7%, from $300.3 million in the prior-year quarter. The following table provides a summary of Wealth Management trust, investment and other servicing fees.

Table 12: Wealth Management Trust, Investment and Other Servicing Fees

 

     Three Months
Ended March 31,
               

($ In Millions)

   2015      2014      Change  

Central

   $ 130.8       $ 124.1       $ 6.7         5

East

     82.4         76.7         5.7         7   

West

     66.8         62.4         4.4         7   

Global Family Office

     40.2         37.1         3.1         8   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Wealth Management Trust, Investment and Other Servicing Fees

$ 320.2    $ 300.3    $ 19.9      7
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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REPORTING SEGMENTS (continued)

Wealth Management (continued)

 

Wealth Management fee income is calculated primarily based on market values. The increased Wealth Management fees across regions and Global Family Office were primarily attributable to higher equity markets and new business. Money market mutual fund fee waivers in Wealth Management totaled $17.7 million in the current quarter compared to $17.6 million in the prior-year quarter.

Other noninterest income totaled $28.8 million in the current quarter, up $6.1 million, or 27%, from $22.7 million in the prior-year quarter, primarily reflecting higher security commissions and trading income.

Net interest income stated on an FTE basis was $138.3 million in the current quarter, up 2% from $135.0 million in the prior-year quarter, reflecting higher levels of average earning assets, partially offset by a decline in the net interest margin. The net interest margin decreased to 2.33% in the current quarter from 2.39% in the prior-year quarter due to lower yields on earning assets, partially offset by a lower cost of interest-related funds.

Earning assets averaged $24.0 billion, up $1.1 billion, or 5%, from $22.9 billion in the prior-year quarter. Earning assets and funding sources were primarily comprised of loans and domestic retail interest-bearing deposits, respectively.

The provision for credit losses was a credit of $2.3 million in the current quarter, reflecting improvement in the credit quality of residential real estate, commercial real estate and private client loans, and a decrease in the level of residential real estate loans, partially offset by an increase in the level of private client and commercial real estate loans. A provision for credit losses of $1.8 million was recorded in the prior-year quarter.

Total noninterest expense, which includes the direct expense of the reporting segment, indirect expense allocations for product and operating support and indirect expense allocations for certain corporate support services, totaled $321.9 million in the current quarter, compared to $318.8 million in the prior-year quarter, an increase of 1%. The increase was primarily attributable to higher indirect expense allocations and employee benefits expense, partially offset by lower expense for outside services in the current quarter.

Treasury and Other

Treasury and Other includes income and expense associated with the wholesale funding activities and the investment portfolios of the Corporation and the Bank, and certain corporate-based expenses, executive-level compensation and nonrecurring items not allocated to C&IS and Wealth Management.

Treasury and Other noninterest income totaled $4.1 million in the current quarter, compared to negative noninterest income in the prior-year quarter of $1.9 million. Noninterest income in the prior-year quarter included charges of $3.9 million relating to the OTTI of certain CRA-eligible securities.

Net interest income decreased $13.2 million, or 29%, to $32.5 million in the current quarter, compared to $45.7 million in the prior-year quarter. The decrease reflects a decline in the net interest margin, partially offset by higher levels of earning assets. The changes to both the net interest margin and average earning assets versus prior-year are partially due to a change in presentation, as certain assets have been transferred to Treasury and Other from C&IS and the related internal funds pricing method was updated. Average earning assets increased $23.6 billion to $42.0 billion from the prior-year quarter’s $18.3 billion.

Noninterest expense totaled $32.2 million in the current quarter, up $6.5 million, or 25%, from $25.7 million in the prior-year quarter, primarily reflecting higher general overhead costs, including compensation 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.

 

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CONSOLIDATED BALANCE SHEETS

Total assets were $107.0 billion and $109.9 billion at March 31, 2015, and December 31, 2014, respectively, and averaged $107.5 billion in the current quarter compared with $100.2 billion in the quarter ended March 31, 2014. 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 $32.6 billion and $31.6 billion at March 31, 2015, and December 31, 2014, respectively, and averaged $32.1 billion in the current quarter, up 10% from $29.2 billion in the quarter ended March 31, 2014. 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 sheets, totaled $37.0 billion and $34.2 billion at March 31, 2015, and December 31, 2014, respectively, and averaged $35.8 billion for the current quarter, up 11% from $32.4 billion in the quarter ended March 31, 2014. In aggregate, the categories of federal funds sold and securities purchased under agreements to resell, interest-bearing due from and deposits with banks, and Federal Reserve deposits totaled $27.6 billion and $35.1 billion at March 31, 2015, and December 31, 2014, respectively, and averaged $30.8 billion in the current quarter, up 2% from the quarter ended March 31, 2014 balances, primarily reflecting increased Federal Reserve deposits. Interest-bearing client deposits at March 31, 2015, and December 31, 2014, totaled $63.6 billion and $65.2 billion, respectively, and averaged $64.5 billion in the current quarter, up 2% compared to $63.1 billion in the quarter ended March 31, 2014. Noninterest-bearing client deposits at March 31, 2015, and December 31, 2014, totaled $23.1 billion and $25.5 billion, respectively, and averaged $22.0 billion in the current quarter, up 25% from $17.6 billion in the quarter ended March 31, 2014.

Total stockholders’ equity at March 31, 2015, was $8.6 billion compared to $8.4 billion at December 31, 2014, and averaged $8.5 billion for the current quarter, up 7% from $7.9 billion for the quarter ended March 31, 2014. The increase in average stockholders’ equity compared to the prior-year quarter was primarily attributable to earnings retained and the issuance of preferred stock in August 2014, partially offset by dividend declarations and the repurchase of common stock pursuant to the Corporation’s share repurchase program. During the current quarter, the Corporation declared cash dividends totaling $5.9 million to preferred stockholders, and cash dividends totaling $78.5 million to common stockholders. During the three months ended March 31, 2015, the Corporation repurchased 1,555,870 shares of common stock at a cost of $107.2 million ($68.93 average price per share).

 

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CAPITAL RATIOS

The capital ratios of the Corporation and the Bank remained strong at March 31, 2015, with all ratios applicable to classification as “well-capitalized” under U.S. regulatory requirements having been exceeded.

Table 13: Regulatory Capital Ratios

 

Capital Ratios — Northern Trust Corporation

   March 31, 2015     December 31, 2014     March 31, 2014  
   Advanced (a)
Approach
    Standardized (b)
Approach
    Advanced (a)
Approach
    Standardized (c)
Approach
    Standardized (c)
Approach
 

Common Equity Tier 1

     11.8     10.5     12.4     12.5     12.8

Tier 1

     12.4     11.1     13.2     13.3     13.0

Total

     14.2     13.1     15.0     15.5     15.5

Tier 1 Leverage

     7.8     7.8     n/a        7.8     7.8

Supplementary Leverage (d)

     6.4     n/a        n/a        n/a        n/a   

 

Capital Ratios — The Northern Trust
Company

   March 31, 2015     December 31, 2014     March 31, 2014  
   Advanced (a)
Approach
    Standardized (b)
Approach
    Advanced (a)
Approach
    Standardized (c)
Approach
    Standardized (c)
Approach
 

Common Equity Tier 1

     11.3     10.0     12.0     11.8     11.7

Tier 1

     11.3     10.0     12.0     11.8     11.7

Total

     13.0     11.8     13.8     14.0     14.2

Tier 1 Leverage

     6.9     6.9     n/a        6.9     6.9

Supplementary Leverage (d)

     5.7     n/a        n/a        n/a        n/a   

 

(a) Effective with the second quarter of 2014, Northern Trust exited parallel run. Accordingly, the March 31, 2015, and December 31, 2014, ratios were 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) Effective with the first quarter of 2015, Standardized Approach risk weighted assets are calculated in compliance with the Basel III Standardized Approach final rules released by the Board of Governors of the Federal Reserve on July 2, 2013.
(c) Standardized Approach capital components in 2014 were determined by Basel III phased in requirements and risk weighted assets were determined by Basel I requirements. The December 31, 2014, and March 31, 2014, ratios calculated under the Standardized Approach comply with the final rules released by the Board of Governors of the Federal Reserve on July 2, 2013.
(d) Advanced Approaches banking organizations must calculate and report their supplementary leverage ratio beginning with the first quarter of 2015. Northern Trust must maintain a minimum supplementary leverage ratio of 3 percent beginning with the first quarter of 2018.

STATEMENTS OF CASH FLOWS

Net cash provided by operating activities of $490.8 million for the three months ended March 31, 2015, 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, partially offset by increased other operating activities. Net cash provided by operating activities of $538.5 million for the three months ended March 31, 2014, was primarily attributable to a reduction of net collateral deposited with counterparties, as well as earnings, including the impact of non-cash charges, partially offset by increased receivables.

Net cash provided by investing activities of $2.8 billion for the three months ended March 31, 2015, was primarily attributable to decreased levels of Federal Reserve deposits, partially offset by net purchases of securities held to maturity and available for sale, increased levels of loans and leases and interest-bearing

 

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STATEMENTS OF CASH FLOWS (continued)

 

deposits with banks. The decrease in Federal Reserve deposits reflected the redeployment of Federal Reserve deposits to securities held to maturity and available for sale, as well as decreases in demand and other noninterest-bearing deposits and in interest-bearing and noninterest-bearing non-U.S. office client deposits.

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

For the three months ended March 31, 2015, net cash used in financing activities totaled $2.2 billion, primarily reflecting decreased levels of total deposits, federal funds purchased, securities sold under agreements to repurchase and repayments of senior notes and long-term debt, partially offset by higher levels of short-term other borrowings. The decrease in total deposits was attributable to lower levels of demand and other noninterest-bearing client and interest-bearing non-U.S. office client deposits.

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

ASSET QUALITY

Securities Portfolio

Northern Trust maintains a high quality securities portfolio, with 82% of the combined available for sale, held to maturity, and trading account portfolios at March 31, 2015, comprised of U.S. Treasury and government sponsored agency securities and triple-A rated corporate notes, asset-backed securities, sub-sovereign, 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, 5% was rated double-A, 3% was rated below double-A, and 10% 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 $140.3 million at March 31, 2015, comprised of $189.5 million and $49.2 million of gross unrealized gains and losses, respectively. Of the unrealized losses on securities at March 31, 2015, the largest component was $19.0 million of unrealized losses in securities classified as “other,” related to securities primarily purchased at a premium or par by Northern Trust for compliance with the CRA. Unrealized losses on these CRA-related securities were attributable to yields that are below market rates for the purpose of supporting institutions and programs that benefit low- to moderate- income communities within Northern Trust’s market area. Also, $16.9 million of the unrealized losses related to corporate debt securities, primarily reflecting higher market rates since purchase; 39% of the corporate debt portfolio is backed by guarantees provided by U.S. and non-U.S. governmental entities. Unrealized losses of $10.3 million related to government sponsored agency securities were primarily attributable to changes in market rates since their purchase.

For the three months ended March 31, 2014, charges of $3.9 million were recorded relating to the OTTI of certain CRA-eligible securities. There were no OTTI losses for the three months ended March 31, 2015. Northern Trust has evaluated all securities with unrealized losses for possible OTTI in accordance with GAAP and Northern Trust’s security impairment review policy.

 

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ASSET QUALITY (continued)

Securities Portfolio (continued)

 

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.

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 loan and lease 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.

Table 14: Nonperforming Assets

 

($ In Millions)

   March 31,
2015
    December 31,
2014
    March 31,
2014
 

Nonperforming Loans and Leases

      

Commercial

      

Commercial and Institutional

   $ 20.9      $ 15.0      $ 26.1   

Commercial Real Estate

     39.9        37.1        51.6   
  

 

 

   

 

 

   

 

 

 

Total Commercial

  60.8      52.1      77.7   
  

 

 

   

 

 

   

 

 

 

Personal

Residential Real Estate

  157.7      162.4      180.9   

Private Client

  1.1      1.2      1.3   
  

 

 

   

 

 

   

 

 

 

Total Personal

  158.8      163.6      182.2   
  

 

 

   

 

 

   

 

 

 

Total Nonperforming Loans and Leases

  219.6      215.7      259.9   

Other Real Estate Owned

  8.5      16.6      9.8   
  

 

 

   

 

 

   

 

 

 

Total Nonperforming Assets

  228.1      232.3      269.7   
  

 

 

   

 

 

   

 

 

 

90 Day Past Due Loans Still Accruing

$ 9.4    $ 22.7    $ 12.3   
  

 

 

   

 

 

   

 

 

 

Nonperforming Loans and Leases to Total Loans and Leases

  0.67   0.68   0.88
  

 

 

   

 

 

   

 

 

 

Coverage of Loan and Lease Allowance to Nonperforming Loans and Leases

  1.2x      1.2x      1.1x   
  

 

 

   

 

 

   

 

 

 

Nonperforming assets of $228.1 million as of March 31, 2015, reflected improved credit quality from the prior-year, though they remained elevated from levels preceding the economic downturn in 2008 and its impact on residential property valuations and general economic conditions. The loan portfolio in the current quarter reflected improvement in the credit quality of the residential real estate, commercial and institutional, commercial real estate and private client 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 the level of nonperforming assets may be indicative of changes in the credit quality of one or more loan classes. Changes in credit quality impact the allowance for credit losses through the

 

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ASSET QUALITY (continued)

Nonperforming Loans and Other Real Estate Owned (continued)

 

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’s underwriting standards do not allow for the origination of loan types generally considered to be of high risk in nature, such as option adjustable rate mortgages, 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.

The commercial real estate class consists of commercial mortgages and construction, acquisition and development loans extended to experienced 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-period earnings that is determined by management, through a disciplined credit review process, to be the amount needed to maintain the allowance for credit losses at an appropriate level to absorb probable credit losses that have been identified with specific borrower relationships (specific loss component) and for probable losses that are believed to be inherent in the loan and lease portfolios, undrawn commitments and standby letters of credit (inherent loss component). Control processes and analyses employed to evaluate the appropriateness of the allowance for credit losses are reviewed on at least an annual basis and modified as considered necessary.

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

The provision for credit losses was a credit of $4.5 million in the current quarter, compared to a provision of $3.0 million in the prior-year quarter. Net charge-offs were $4.6 million, resulting from $7.5 million of charge-offs and $2.9 million of recoveries, compared to $1.5 million of net charge-offs in the prior-year quarter, resulting from $11.5 million of charge-offs and $10.0 million of recoveries. Residential real estate loans accounted for 72% and 70% of total nonperforming loans and leases at March 31, 2015, and 2014, respectively.

Note 6 to the consolidated financial statements includes a table that details the changes in the allowance for credit losses during the three months ended March 31, 2015, and 2014 due to charge-offs, recoveries and provisions for credit losses.

 

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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.

Table 15: Allocation of the Allowance for Credit Losses

 

    March 31, 2015     December 31, 2014     March 31, 2014  

($ 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
 

Specific Allowance

  $ 22.9        —     $ 21.1        —     $ 26.3        —  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allocated Inherent Allowance

Commercial

Commercial and Institutional

  70.3      28      73.0      26      70.5      26   

Commercial Real Estate

  66.6      11      69.4      10      72.2      10   

Lease Financing, net

  3.2      3      3.6      3      3.5      3   

Non-U.S.

  2.8      5      3.3      5      2.6      5   

Other

  —        1      —        1      —        1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Commercial

  142.9      48      149.3      45      148.8      45   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Personal

Residential Real Estate

  102.4      29      107.7      31      116.8      34   

Private Client

  18.5      23      17.8      24      17.5      21   

Other

  —        —        —        —        —        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Personal

  120.9      52      125.5      55      134.3      55   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Allocated Inherent Allowance

$ 263.8      100 $ 274.8      100 $ 283.1      100
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Allowance for Credit Losses

$ 286.7    $ 295.9    $ 309.4   
 

 

 

     

 

 

     

 

 

   

Allowance Assigned to

Loans and Leases

$ 259.0    $ 267.0    $ 279.2   

Undrawn Commitments and Standby Letters of Credit

  27.7      28.9      30.2   
 

 

 

     

 

 

     

 

 

   

Total Allowance for Credit Losses

$ 286.7    $ 295.9    $ 309.4   
 

 

 

     

 

 

     

 

 

   

Allowance Assigned to Loans and Leases to Total Loans and Leases

  0.79   0.84   0.94
 

 

 

     

 

 

     

 

 

   

MARKET RISK MANAGEMENT

Northern Trust faces two primary types of market risk through its business operations: interest rate risk, which is the potential for movements in interest rates to cause changes in earnings and the economic value of equity; and trading risk, which is the potential for movements in market variables such as foreign exchange rates and interest rates to cause changes in the value of trading positions.

Northern Trust uses two primary measurement techniques to manage interest rate risk: sensitivity of earnings (SOE) and sensitivity of economic value of equity (SEVE). SOE provides management with a short-term view of the impact of interest rate changes on future earnings. SEVE provides management with a long-term view of interest rate changes on the economic value of equity as of the period-end balance sheet. Both simulation models use the same initial market interest rates and product balances. These two techniques, which are performed monthly, are complementary and are used in concert to provide a comprehensive interest rate risk management capability.

 

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MARKET RISK MANAGEMENT (continued)

 

As part of its risk management activities, Northern Trust also regularly measures the risk of loss associated with foreign currency positions using a Value-at-Risk (VaR) model. The following information about Northern Trust’s management of market risk should be read in conjunction with the Annual Report on Form 10-K for the year ended December 31, 2014.

Sensitivity of Earnings The modeling of SOE incorporates on-balance-sheet positions, as well as derivative financial instruments (principally interest rate swaps) that are used to manage interest rate risk. Northern Trust uses market-implied forward interest rates as the base case and measures the sensitivity (i.e. change) in earnings if future rates are 100 or 200 basis points higher than base case forward rates. The following table shows the estimated impact on the next twelve months of pre-tax earnings of 100 and 200 basis point upward movements in interest rates relative to forward rates. Given the low level of interest rates, the simulation of earnings for rates 100 and 200 basis points lower would not provide meaningful results.

Table 16: Sensitivity of Earnings to Changes in Interest Rates

 

($ In Millions)

   Increase/(Decrease)
Estimated Impact on
Next Twelve Months of
Pre-Tax Earnings
 

Increase in Interest Rates Above Market-Implied Forward Rates

  

100 Basis Points

   $ 29   

200 Basis Points

   $ 14   

The simulations of earnings incorporate several assumptions but do not incorporate any management actions that may be used to mitigate negative consequences of actual interest rate movements. For that reason and others, they do not reflect the likely actual results but serve as conservative estimates of interest rate risk. SOE is not directly comparable to actual results disclosed elsewhere or directly predictive of future values of other measures provided.

Sensitivity of Economic Value of Equity Economic value of equity is defined as the present value of assets minus the present value of liabilities, net of the value of instruments that are used to manage the interest rate risk of balance sheet items. The potential effect of interest rate changes on economic equity is derived from the impact of such changes on projected future cash flows and the present value of these cash flows and is then compared to the established limit. Northern Trust uses current market rates (and the future rates implied by these market rates) as the base case and measures the sensitivity (i.e. change) if current rates are immediately shocked up by 100 or 200 basis points. The following table shows the estimated impact on economic value of equity of 100 and 200 basis point shocks up from current interest rates. Given the low level of interest rates and assumed interest rate floors as rates approach zero, the simulation of the economic value of equity for rates 100 or 200 basis points lower would not provide meaningful results.

Table 17: Sensitivity of Economic Value of Equity to Changes in Interest Rates as of March 31, 2015

 

($ In Millions)

   Increase/(Decrease)
Estimated Impact on
Economic Value of Equity
 

Increase in Interest Rates Above Market Rates

  

100 Basis Points

   $ (10

200 Basis Points

   $ (266

The simulations of economic value of equity incorporate several assumptions but do not incorporate any management actions that may be used to mitigate negative consequences of actual interest rate movements. For that reason and others, they do not reflect the likely actual results but serve as conservative estimates of interest rate risk. SEVE is not directly comparable to actual results disclosed elsewhere or directly predictive of future values of other measures provided.

 

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MARKET RISK MANAGEMENT (continued)

 

Foreign Currency Value-At-Risk (VaR) Northern Trust measures daily the risk of loss associated with all non-U.S. currency positions using a VaR model and applying the historical simulation methodology. This statistical model provides estimates, based on a variety of high confidence levels, of the potential loss in value that might be incurred if an adverse shift in non-U.S. currency exchange rates were to occur over a small number of days. The model incorporates foreign currency and interest rate volatilities and correlations in price movements among the currencies. VaR is computed for each trading desk and for the global portfolio.

Northern Trust monitors several variations of the foreign exchange VaR measures to meet specific regulatory and internal management needs. Variations include different methodologies (historical, variance-covariance and Monte Carlo), equally-weighted and exponentially-weighted volatilities, horizons of one day and ten days, confidence levels ranging from 95% to 99.95% and look-back periods of one year and four years. The table below presents the levels of total regulatory VaR and its subcomponents for global foreign currency as March 31, 2015, and December 31, 2014, based on the historical simulation methodology, a 99% confidence level, a one-day horizon and equally-weighted volatility. The total VaR for foreign currency is typically less than the sum of its two components due to diversification benefits derived from the two subcomponents.

Table 18: Foreign Currency Value-At-Risk

 

($ In Millions)

   Total VaR
(Spot and Forward)
     Foreign Exchange Spot
VaR
     Foreign Exchange
Forward VaR
 
   March 31,
2015
     December 31,
2014
     March 31,
2015
     December 31,
2014
     March 31,
2015
     December 31
2014
 

High

   $ 0.4       $ 0.5       $ 0.4       $ 0.5       $ 0.2       $ 0.1   

Low

     0.1         —           —           —           0.1         —     

Average

     0.2         0.2         0.1         0.1         0.1         0.1   

Quarter-End

     0.4         0.2         0.4         0.3         0.2         0.1   

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 an 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.

Table 19: Reconciliation of Reported Net Interest Income to Fully Taxable Equivalent

 

     Three Months Ended  
     March 31, 2015     March 31, 2014  

($ In Millions)

   Reported     FTE Adj.      FTE     Reported     FTE Adj.      FTE  

Interest Income

   $ 298.8      $ 6.2       $ 305.0      $ 295.4      $ 8.7       $ 304.1   

Interest Expense

     38.2        —           38.2        49.7        —           49.7   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Net Interest Income

$ 260.6    $ 6.2    $ 266.8    $ 245.7    $ 8.7    $ 254.4   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Net Interest Margin

  1.07   1.10   1.09   1.12
  

 

 

      

 

 

   

 

 

      

 

 

 

 

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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.

 

Table 20: AVERAGE CONSOLIDATED BALANCE SHEET

WITH ANALYSIS OF NET INTEREST INCOME

                 NORTHERN TRUST CORPORATION  

(INTEREST AND RATE ON A FULLY TAXABLE

EQUIVALENT BASIS)

   Three Months Ended March 31,  
   2015     2014  

($ In Millions)

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

Average Earning Assets

              

Federal Funds Sold and Securities Purchased under

              

Agreements to Resell

   $ 1.2       $ 1,033.7        0.45   $ 0.7         530.3        0.51

Interest-Bearing Deposits with Banks

     26.6         15,263.1        0.71        32.1         17,062.5        0.76   

Federal Reserve Deposits

     9.2         14,504.0        0.26        8.0         12,702.5        0.26   

Securities

              

U.S. Government

     12.7         4,580.0        1.13        6.4         2,313.7        1.13   

Obligations of States and Political Subdivisions

     2.1         121.6        6.75        3.5         213.1        6.56   

Government Sponsored Agency

     37.4         16,511.9        0.92        40.8         17,834.7        0.93   

Other (1)

     30.4         14,579.0        0.85        28.2         12,006.5        0.95   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

Total Securities

     82.6         35,792.5        0.94        78.9         32,368.0        0.99   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Loans and Leases (2)

     185.4         32,099.8        2.34        184.4         29,177.4        2.56   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Earning Assets

     305.0         98,693.1        1.25        304.1         91,840.7        1.34   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Allowance for Credit Losses Assigned to Loans and Leases

     —           (265.9     —          —           (277.8     —     

Cash and Due from Banks

     —           1,573.4        —          —           2,806.6        —     

Buildings and Equipment

     —           446.9        —          —           457.7        —     

Client Security Settlement Receivables

     —           959.7        —          —           904.4        —     

Goodwill

     —           529.7        —          —           540.8        —     

Other Assets

     —           5,576.3        —          —           3,971.1        —     
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Assets

   $ —         $ 107,513.2        —     $ —         $ 100,243.5        —  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Average Source of Funds

              

Deposits

              

Savings and Money Market

   $ 2.4       $ 15,361.0        0.06   $ 2.3       $ 14,713.8        0.06

Savings Certificates and Other Time

     1.2         1,741.7        0.28        1.8         1,825.5        0.39   

Non-U.S. Offices — Interest-Bearing

     13.1         47,399.8        0.11        16.0         46,566.4        0.14   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Interest-Bearing Deposits

     16.7         64,502.5        0.10        20.1         63,105.7        0.13   

Short-Term Borrowings

     1.5         5,187.4        0.12        1.1         4,552.0        0.10   

Senior Notes

     11.6         1,497.0        3.17        17.5         1,996.6        3.57   

Long-Term Debt

     7.8         1,571.9        2.02        10.4         1,728.9        2.43   

Floating Rate Capital Debt

     0.6         277.2        0.82        0.6         277.1        0.81   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Interest-Related Funds

     38.2         73,036.0        0.21        49.7         71,660.3        0.28   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Interest Rate Spread

     —           —          1.04        —           —          1.06   

Demand and Other Noninterest-Bearing Deposits

     —           22,023.6        —          —           17,642.1        —     

Other Liabilities

     —           3,980.9        —          —           3,014.7        —     

Stockholders’ Equity

     —           8,472.7        —          —           7,926.4        —     
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ —         $ 107,513.2        —     $ —         $ 100,243.5        —  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net Interest Income/Margin (FTE Adjusted)

   $ 266.8       $ —          1.10   $ 254.4       $ —          1.12
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net Interest Income/Margin (Unadjusted)

   $ 260.6       $ —          1.07   $ 245.7       $ —          1.09
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

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ANALYSIS OF NET INTEREST INCOME CHANGES

DUE TO VOLUME AND RATE

                   
     Three Months Ended March 31, 2015
Compared to 2014
 
     Change Due To  

(In Millions)

   Average
Balance
     Rate     Total  

Earning Assets (FTE)

   $ 22.6       $ (21.7   $ 0.9   

Interest-Related Funds

     0.9         (12.4     (11.5
  

 

 

    

 

 

   

 

 

 

Net Interest Income (FTE)

   $ 21.7       $ (9.3   $ 12.4   
  

 

 

    

 

 

   

 

 

 
(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 March 31, 2015 and 2014.
(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 37.4% and 37.5% for the three months ended March 31, 2015 and 2014, respectively. Total taxable equivalent interest adjustments amounted to $6.2 million and $8.7 million for the three months ended March 31, 2015 and 2014, 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.”

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

 

    financial market disruptions or economic recession, whether in the U.S., Europe, the Middle East, or other regions;

 

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

 

    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 or client portfolios including those funds, portfolios, 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;

 

    a significant downgrade of any of Northern Trust’s 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;

 

    geopolitical risks and the risks of extraordinary events such as natural disasters, terrorist events and war, and the responses of the United States and other countries to those events;

 

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

 

    regulatory and monetary policy developments;

 

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

 

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

 

    changes in the nature and activities of Northern Trust’s competition;

 

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Table of Contents

FORWARD-LOOKING STATEMENTS (continued)

 

    Northern Trust’s success in maintaining existing business and continuing to generate new business in existing and targeted markets and its ability to deploy deposits in a profitable manner consistent with its liquidity requirements;

 

    the impact of equity markets on fee revenue;

 

    Northern Trust’s ability to address the complex needs of a global client base and manage compliance with legal, tax, regulatory and other requirements;

 

    Northern Trust’s ability to maintain a product mix that achieves acceptable margins;

 

    Northern Trust’s ability to continue to generate investment results that satisfy clients and to develop an array of investment products;

 

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

 

    Northern Trust’s success in controlling expenses and implementing revenue enhancement initiatives;

 

    uncertainties inherent in Northern Trust’s assumptions concerning its pension plan, including discount rates and expected contributions, returns and payouts;

 

    Northern Trust’s ability to address operating risks, including human errors or omissions, data security breach risks, pricing or valuation of securities, fraud, systems performance or defects, systems interruptions, and breakdowns in processes or internal controls;

 

    Northern Trust’s success in improving risk management practices and controls and managing risks inherent in its businesses, including credit risk, operational risk, market and liquidity risk, fiduciary risk, compliance risk and strategic risk;

 

    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;

 

    the potential for substantial changes in the legal, regulatory and enforcement framework and oversight applicable to financial institutions, including changes that may affect leverage limits and risk-based capital and liquidity requirements, 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 Northern Trust’s dependence on dividends from its principal subsidiary;

 

    the risk of damage to Northern Trust’s reputation which may undermine the confidence of clients, counterparties, rating agencies, and stockholders; and

 

    other factors identified elsewhere in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2014, including those factors described in Item 1A, “Risk Factors,” and other filings with the SEC, all of which are available on Northern Trust’s 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 SHEETS NORTHERN TRUST CORPORATION

 

(In Millions Except Share Information)

   March 31,
2015
    December 31,
2014
 
     (Unaudited)        

Assets

    

Cash and Due from Banks

   $ 4,074.8      $ 3,050.6   

Federal Funds Sold and Securities Purchased under Agreements to Resell

     1,113.9        1,062.7   

Interest-Bearing Deposits with Banks

     15,432.3        14,928.3   

Federal Reserve Deposits

     8,804.2        17,386.3   

Securities

    

Available for Sale

     30,945.7        29,558.5   

Held to Maturity (Fair value of $5,665.0 and $4,176.1)

     5,655.8        4,170.8   

Trading Account

     1.4        4.7   
  

 

 

   

 

 

 

Total Securities

  36,602.9      33,734.0   
  

 

 

   

 

 

 

Loans and Leases

Commercial

  15,491.3      14,353.6   

Personal

  17,138.9      17,286.6   
  

 

 

   

 

 

 

Total Loans and Leases (Net of unearned income of $277.0 and $287.7)

  32,630.2      31,640.2   
  

 

 

   

 

 

 

Allowance for Credit Losses Assigned to Loans and Leases

  (259.0   (267.0

Buildings and Equipment

  442.4      444.3   

Client Security Settlement Receivables

  2,219.3      1,568.8   

Goodwill

  527.3      533.2   

Other Assets

  5,363.7      5,865.1   
  

 

 

   

 

 

 

Total Assets

$ 106,952.0    $ 109,946.5   
  

 

 

   

 

 

 

Liabilities

Deposits

Demand and Other Noninterest-Bearing

$ 20,816.6    $ 22,815.0   

Savings and Money Market

  15,892.2      15,916.4   

Savings Certificates and Other Time

  1,777.9      1,757.4   

Non U.S. Offices — Noninterest-Bearing

  2,307.6      2,723.2   

                              — Interest-Bearing

  45,942.2      47,545.0   
  

 

 

   

 

 

 

Total Deposits

  86,736.5      90,757.0   

Federal Funds Purchased

  410.7      932.9   

Securities Sold Under Agreements to Repurchase

  613.2      885.1   

Other Borrowings

  2,874.1      1,685.2   

Senior Notes

  1,497.1      1,497.0   

Long-Term Debt

  1,399.1      1,615.1   

Floating Rate Capital Debt

  277.2      277.2   

Other Liabilities

  4,536.5      3,848.1   
  

 

 

   

 

 

 

Total Liabilities

  98,344.4      101,497.6   
  

 

 

   

 

 

 

Stockholders’ Equity

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

Series C, outstanding shares of 16,000

  388.5      388.5   

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

Outstanding shares of 233,368,512 and 233,390,705

  408.6      408.6   

Additional Paid-In Capital

  1,024.9      1,050.9   

Retained Earnings

  7,771.7      7,625.4   

Accumulated Other Comprehensive Loss

  (266.4   (319.7

Treasury Stock (11,803,012 and 11,780,819 shares, at cost)

  (719.7   (704.8
  

 

 

   

 

 

 

Total Stockholders’ Equity

  8,607.6      8,448.9   
  

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

$ 106,952.0    $ 109,946.5   
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

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Table of Contents

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

NORTHERN TRUST CORPORATION

 

     Three Months
Ended March 31,
 

(In Millions Except Share Information)

   2015     2014  

Noninterest Income

    

Trust, Investment and Other Servicing Fees

   $ 727.5      $ 679.5   

Foreign Exchange Trading Income

     71.6        50.1   

Treasury Management Fees

     16.3        16.8   

Security Commissions and Trading Income

     19.8        14.7   

Other Operating Income

     38.6        37.7   

Investment Security Gains (Losses), net (Note)

     0.1        (4.0
  

 

 

   

 

 

 

Total Noninterest Income

  873.9      794.8   
  

 

 

   

 

 

 

Net Interest Income

Interest Income

  298.8      295.4   

Interest Expense

  38.2      49.7   
  

 

 

   

 

 

 

Net Interest Income

  260.6      245.7   

Provision for Credit Losses

  (4.5   3.0   
  

 

 

   

 

 

 

Net Interest Income after Provision for Credit Losses

  265.1      242.7   
  

 

 

   

 

 

 

Noninterest Expense

Compensation

  354.3      341.8   

Employee Benefits

  72.9      66.9   

Outside Services

  135.1      144.4   

Equipment and Software

  110.3      101.3   

Occupancy

  43.0      44.2   

Other Operating Expense

  73.4      69.4   
  

 

 

   

 

 

 

Total Noninterest Expense

  789.0      768.0   
  

 

 

   

 

 

 

Income before Income Taxes

  350.0      269.5   

Provision for Income Taxes

  119.3      88.1   
  

 

 

   

 

 

 

Net Income

$ 230.7    $ 181.4   
  

 

 

   

 

 

 

Preferred Stock Dividends

  5.9      —     
  

 

 

   

 

 

 

Net Income Applicable to Common Stock

$ 224.8    $ 181.4   
  

 

 

   

 

 

 

Per Common Share

Net Income — Basic

$ 0.95    $ 0.75   

                    — Diluted

  0.94      0.75   
  

 

 

   

 

 

 

Average Number of Common Shares Outstanding

                     — Basic

  233,381,168      237,208,151   

                    — Diluted

  235,288,695      239,050,714   
  

 

 

   

 

 

 

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

NORTHERN TRUST CORPORATION

 

     Three Months
Ended March 31,
 

(In Millions)

       2015             2014      

Net Income

   $ 230.7      $ 181.4   

Other Comprehensive Income (Loss) (Net of Tax and Reclassifications)

    

Net Unrealized Gains on Securities Available for Sale

     54.1        4.5   

Net Unrealized Gains (Losses) on Cash Flow Hedges

     (1.1     1.6   

Foreign Currency Translation Adjustments

     (5.9     (1.3

Pension and Other Postretirement Benefit Adjustments

     6.2        3.4   
  

 

 

   

 

 

 

Other Comprehensive Income

  53.3      8.2   
  

 

 

   

 

 

 

Comprehensive Income

$ 284.0    $ 189.6   
  

 

 

   

 

 

 

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

$ —      $ (4.6

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

  —        0.7   

  Other Security Gains (Losses), net

  0.1      (0.1
  

 

 

   

 

 

 

  Investment Security Gains (Losses), net

$ 0.1    $ (4.0
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

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Table of Contents

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

NORTHERN TRUST CORPORATION

 

(In Millions)

   2015     2014  

Preferred Stock

    

Balance at January 1 and March 31

   $ 388.5      $ —     

Common Stock

    

Balance at January 1 and March 31

     408.6        408.6   
  

 

 

   

 

 

 

Additional Paid-in Capital

Balance at January 1

  1,050.9      1,035.7   

Treasury Stock Transactions — Stock Options and Awards

  (60.1   (43.2

Stock Options and Awards — Amortization

  23.4      23.3   

Stock Options and Awards — Tax Benefits

  10.7      7.1   
  

 

 

   

 

 

 

Balance at March 31

  1,024.9      1,022.9   
  

 

 

   

 

 

 

Retained Earnings

Balance at January 1

  7,625.4      7,134.8   

Net Income

  230.7      181.4   

Dividends Declared — Common Stock

  (78.5   (74.8

Dividends Declared — Preferred Stock

  (5.9   —     
  

 

 

   

 

 

 

Balance at March 31

  7,771.7      7,241.4   
  

 

 

   

 

 

 

Accumulated Other Comprehensive Income (Loss)

Balance at January 1

  (319.7   (244.3

Net Unrealized Gains (Losses) on Securities Available for Sale

  54.1      4.5   

Net Unrealized Gains (Losses) on Cash Flow Hedges

  (1.1   1.6   

Foreign Currency Translation Adjustments

  (5.9   (1.3

Pension and Other Postretirement Benefit Adjustments

  6.2      3.4   
  

 

 

   

 

 

 

Balance at March 31

  (266.4   (236.1
  

 

 

   

 

 

 

Treasury Stock

Balance at January 1

  (704.8   (422.8

Stock Options and Awards

  92.3      97.3   

Stock Purchased

  (107.2   (163.0
  

 

 

   

 

 

 

Balance at March 31

  (719.7   (488.5
  

 

 

   

 

 

 

Total Stockholders’ Equity at March 31

$ 8,607.6    $ 7,948.3   
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

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Table of Contents

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

NORTHERN TRUST CORPORATION
    Three Months Ended
March 31,
 

(In Millions)

  2015     2014  

Cash Flows from Operating Activities:

   

Net Income

  $ 230.7      $ 181.4   

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

   

Investment Security Losses (Gains), net

    (0.1     4.0   

Amortization and Accretion of Securities and Unearned Income, net

    10.7        3.0   

Provision for Credit Losses

    (4.5     3.0   

Depreciation on Buildings and Equipment

    23.1        23.0   

Amortization of Computer Software

    60.7        55.6   

Amortization of Intangibles

    4.6        4.9   

Pension Plan Contributions

    (16.5     (13.9

Change in Receivables

    50.3        (254.9

Change in Interest Payable

    (6.2     (0.1

Change in Collateral With Derivative Counterparties, net

    289.5        505.7   

Other Operating Activities, net

    (151.5     26.8   
 

 

 

   

 

 

 

Net Cash Provided by Operating Activities

  490.8      538.5   
 

 

 

   

 

 

 

Cash Flows from Investing Activities:

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

  (51.2   19.6   

Change in Interest-Bearing Deposits with Banks

  (1,242.6   2,329.1   

Net Change in Federal Reserve Deposits

  8,582.1      700.2   

Purchases of Securities — Held to Maturity

  (2,101.1   (2,467.4

Proceeds from Maturity and Redemption of Securities — Held to Maturity

  278.4      597.6   

Purchases of Securities — Available for Sale

  (2,992.5   (3,939.1

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

  1,686.8      2,803.7   

Change in Loans and Leases

  (1,004.2   (274.9

Purchases of Buildings and Equipment

  (25.5   (13.5

Purchases and Development of Computer Software

  (68.4   (74.9

Change in Client Security Settlement Receivables

  (660.7   (485.6

Other Investing Activities, net

  404.8      (16.9
 

 

 

   

 

 

 

Net Cash Provided by (Used in) Investing Activities

  2,805.9      (822.1
 

 

 

   

 

 

 

Cash Flows from Financing Activities:

Change in Deposits

  (2,817.7   2,082.4   

Change in Federal Funds Purchased

  (522.2   48.8   

Change in Securities Sold under Agreements to Repurchase

  (271.9   (180.7

Change in Short-Term Other Borrowings

  1,064.2      (1,004.4

Repayments of Senior Notes and Long-Term Debt

  (230.1   (1.1

Treasury Stock Purchased

  (107.2   (163.0

Net Proceeds from Stock Options

  32.2      54.0   

Cash Dividends Paid on Common Stock

  (77.0   (75.0

Cash Dividends Paid on Preferred Stock

  (9.5   —     

Other Financing Activities, net

  747.9      27.1   
 

 

 

   

 

 

 

Net Cash (Used in) Provided by Financing Activities

  (2,191.3   788.1   
 

 

 

   

 

 

 

Effect of Foreign Currency Exchange Rates on Cash

  (81.2   9.4   
 

 

 

   

 

 

 

Increase in Cash and Due from Banks

  1,024.2      513.9   

Cash and Due from Banks at Beginning of Year

  3,050.6      3,162.4   
 

 

 

   

 

 

 

Cash and Due from Banks at End of Period

$ 4,074.8    $ 3,676.3   
 

 

 

   

 

 

 

Supplemental Disclosures of Cash Flow Information:

Interest Paid

$ 44.9    $ 50.4   

Income Taxes Paid

  40.5      15.1   

Transfers from Loans to OREO

  4.6      1.9   
 

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

27


Table of Contents

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 three months ended March 31, 2015, and 2014, 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. The accounting and financial reporting policies of Northern Trust conform with U.S. generally accepted accounting principles (GAAP) and reporting practices prescribed by the banking industry. For a description of Northern Trust’s significant accounting policies, refer to Note 1 of the Notes to Consolidated Financial Statements in the Annual Report on Form 10-K for the year ended December 31, 2014.

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 February 2015, the FASB issued ASU No. 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis” which changes the guidance with respect to the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. The amendments include: (1) modifying the evaluation of limited partnerships and similar legal entities, (2) amending when fees paid to a decision maker should be included in the variable interest entity analysis, (3) amending the related party relationship guidance, and (4) providing a scope exception from the consolidation guidance for reporting entities with interests in certain investment funds. The ASU is effective for interim and annual reporting periods beginning after December 15, 2015, although early adoption is permitted. Northern Trust is currently assessing the impact of adoption of ASU 2015-02.

In April 2015, the FASB issued ASU No. 2015-03, “Interest — Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs” which requires that debt issuance costs be presented in the balance sheet as a direct deduction to the carrying amount of the associated debt liability. The ASU is effective for interim and annual periods beginning after December 15, 2015, although early adoption is permitted. Northern Trust is currently assessing the impact of adoption of ASU 2015-03.

3. Fair Value Measurements — Fair Value Hierarchy. The following describes the hierarchy of valuation inputs (Levels 1, 2, and 3) used to measure fair value and the primary valuation methodologies used by Northern Trust for financial instruments measured at fair value on a recurring basis. Observable inputs reflect market data obtained from sources independent of the reporting entity; unobservable inputs reflect the entity’s own assumptions about how market participants would value an asset or liability based on the best information available. GAAP requires an entity measuring fair value to maximize the use of observable inputs and minimize the use of unobservable inputs and establishes a fair value hierarchy of inputs. Financial instruments are categorized within the hierarchy based on the lowest level input that is significant to their valuation. Northern Trust’s policy is to recognize transfers into and transfers out of fair value levels as of the end of the reporting period in which the transfer occurred. No transfers between fair value levels occurred during the three months ended March 31, 2015, or the year ended December 31, 2014.

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.

 

28


Table of Contents

Notes to Consolidated Financial Statements (continued)

 

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

Northern Trust’s Level 2 assets include available for sale and trading account securities, the fair values of which are determined predominantly by external pricing vendors. Prices received from vendors are compared to other vendor and third-party prices. If a security price obtained from a pricing vendor is determined to exceed pre-determined tolerance levels that are assigned based on an asset type’s characteristics, the exception is researched and, if the price is not able to be validated, an alternate pricing vendor is utilized, consistent with Northern Trust’s pricing source hierarchy. As of March 31, 2015, Northern Trust’s available for sale securities portfolio included 924 Level 2 securities with an aggregate market value of $26.3 billion. All 924 securities were valued by external pricing vendors. As of December 31, 2014, Northern Trust’s available for sale securities portfolio included 881 Level 2 securities with an aggregate market value of $25.0 billion. All 881 securities were valued by external pricing vendors. Trading account securities, which totaled $1.4 million and $4.7 million as of March 31, 2015, and December 31, 2014, 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

 

29


Table of Contents

Notes to Consolidated Financial Statements (continued)

 

the discount rates in isolation would result in a significantly lower (higher) fair value measurement. Level 3 liabilities at January 1, 2014, consisted of an acquisition-related contingent consideration liability, the fair value of which was determined using an income-based (discounted cash flow) model that incorporated Northern Trust’s own assumptions about business growth rates and applicable discount rates, which represented unobservable inputs to the model. 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 Risk Management, Corporate Financial Management, C&IS and Wealth Management) determine the valuation policies and procedures for Level 3 assets and liabilities. 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 March 31, 2015.

Table 21: Level 3 Significant Unobservable Inputs

 

Financial Instrument

   Fair Value      Valuation
Technique
   Unobservable Inputs    Range of Lives
and Rates

Auction Rate Securities

   $ 17.5 million       Discounted Cash
Flow
   Remaining lives

Discount rates

   1.2 — 8.6 years

0.1% — 8.4%

 

30


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 March 31, 2015, and December 31, 2014, segregated by fair value hierarchy level.

Table 22: Recurring Basis Hierarchy Leveling

 

(In Millions)

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

March 31, 2015

                                 

Securities

             

Available for Sale

             

U.S. Government

   $ 4,627.4       $ —         $ —         $ —        $ 4,627.4   

Obligations of States and Political Subdivisions

     —           4.5         —           —          4.5   

Government Sponsored Agency

     —           16,634.2         —           —          16,634.2   

Non-U.S. Government

     —           311.4         —           —          311.4   

Corporate Debt

     —           3,651.3         —           —          3,651.3   

Covered Bonds

     —           2,049.3         —           —          2,049.3   

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

     —           561.0         —           —          561.0   

Residential Mortgage-Backed

     —           4.4         —           —          4.4   

Other Asset-Backed

     —           2,949.3         —           —          2,949.3   

Auction Rate

     —           —           17.5         —          17.5   

Other

     —           135.4         —           —          135.4   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Available for Sale

  4,627.4      26,300.8      17.5      —        30,945.7   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Trading Account

  —        1.4      —        —        1.4   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Available for Sale and Trading Securities

  4,627.4      26,302.2      17.5      —        30,947.1   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Other Assets

Derivative Assets

Foreign Exchange Contracts

  —        4,798.6      —        —        4,798.6   

Interest Rate Contracts

  —        272.0      —        —        272.0   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Derivative Assets

  —        5,070.6      —        (2,884.2   2,186.4   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Other Liabilities

Derivative Liabilities

Foreign Exchange Contracts

  —        4,714.1      —        —        4,714.1   

Interest Rate Swaps

  —        148.2      —        —        148.2   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Derivative Liabilities

$ —      $ 4,862.3    $ —      $ (3,510.9 $ 1,351.4   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

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 March 31, 2015, derivative assets and liabilities shown above also include reductions of $440.8 million and $1.1 billion, respectively, as a result of cash collateral received from and deposited with derivative counterparties.

 

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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, 2014

                                 

Securities

             

Available for Sale

             

U.S. Government

   $ 4,506.9       $ —         $ —         $ —        $ 4,506.9   

Obligations of States and Political Subdivisions

     —           4.6         —           —          4.6   

Government Sponsored Agency

     —           16,389.2         —           —          16,389.2   

Non-U.S. Government

     —           310.4         —           —          310.4   

Corporate Debt

     —           3,577.7         —           —          3,577.7   

Covered Bonds

     —           1,907.5         —           —          1,907.5   

Supranational and Non-U.S. Agency Bonds

     —           360.6         —           —          360.6   

Residential Mortgage-Backed

     —           6.4         —           —          6.4   

Other Asset-Backed

     —           2,321.3         —           —          2,321.3   

Auction Rate

     —           —           18.1         —          18.1   

Other

     —           155.8         —           —          155.8   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Available for Sale

  4,506.9      25,033.5      18.1      —        29,558.5   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Trading Account

  —        4.7      —        —        4.7   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Available for Sale and Trading Securities

  4,506.9      25,038.2      18.1      —        29,563.2   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Other Assets

Derivative Assets

Foreign Exchange Contracts

  —        4,275.2      —        —        4,275.2   

Interest Rate Contracts

  —        232.3      —        —        232.3   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Derivative Assets

  —        4,507.5      —        (2,257.1   2,250.4   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Other Liabilities

Derivative Liabilities

Foreign Exchange Contracts

  —        4,095.5      —        —        4,095.5   

Interest Rate Swaps

  —        131.8      —        —        131.8   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Derivative Liabilities

$ —      $ 4,227.3    $ —      $ (3,173.3 $ 1,054.0   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

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, 2014, derivative assets and liabilities shown above also include reductions of $315.8 million and $1.2 billion, respectively, as a result of cash collateral received from and deposited with derivative counterparties.

 

32


Table of Contents

Notes to Consolidated Financial Statements (continued)

 

The following tables present the changes in Level 3 assets and liabilities for the three months ended March 31, 2015, and 2014.

Table 23: Changes in Level 3 Assets

 

Level 3 Assets (In Millions)

   Auction Rate Securities  

Three Months Ended March 31,

   2015      2014  

Fair Value at January 1

   $ 18.1       $ 98.9   

Total Gains (Losses):

     

Included in Earnings

     —           —     

Included in Other Comprehensive Income (1)

     (0.3      (0.2

Purchases, Issues, Sales, and Settlements

     

Sales

     —           0.1   

Settlements

     (0.3      (0.3
  

 

 

    

 

 

 

Fair Value at March 31

$ 17.5    $ 98.5   
  

 

 

    

 

 

 

 

(1) Unrealized gains (losses) are included in net unrealized gains (losses) on securities available for sale in the consolidated statements of comprehensive income.

Table 24: Changes in Level 3 Liabilities

 

Level 3 Liabilities (In Millions)

   Contingent Consideration  

Three Months Ended March 31

   2015      2014  

Fair Value at January 1

   $ —         $ 55.4   

Total (Gains) Losses:

     

Included in Earnings (1)

     —           (0.1

Included in Other Comprehensive Income

     —           —     

Purchases, Issues, Sales, and Settlements

     —           —     

Purchases

     —           —     

Settlements

     —           (55.3
  

 

 

    

 

 

 

Fair Value at March 31

$ —      $ —     
  

 

 

    

 

 

 

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

$ —      $ —     
  

 

 

    

 

 

 

 

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

During the three months ended March 31, 2015, and 2014 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 March 31, 2015, and 2014, 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, and were subject to adjustments to reflect management’s judgment as to realizable value. 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.

 

33


Table of Contents

Notes to Consolidated Financial Statements (continued)

 

Collateral-based impaired loans and OREO assets that have been adjusted to fair value totaled $23.1 million and $0.3 million, respectively, at March 31, 2015, and $33.3 million and $1.5 million, respectively, at March 31, 2014. Assets measured at fair value on a nonrecurring basis reflect management’s judgment as to realizable value.

The following table provides the fair value of, and the valuation technique, significant unobservable inputs and quantitative information used to develop the significant unobservable inputs for, Northern Trust’s Level 3 assets that were measured at fair value on a nonrecurring basis as of March 31, 2015.

Table 25: Level 3 Nonrecurring Basis Significant Unobservable Inputs

 

Financial Instrument

  

Fair Value

  

Valuation
Technique

  

Unobservable Input

  

Range of Discounts
Applied

Loans

   $23.1 million    Market Approach    Discount to reflect realizable value    15% — 25%

OREO

   $0.3 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 in Northern Trust’s consolidated balance sheets 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.

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.

 

34


Table of Contents

Notes to Consolidated Financial Statements (continued)

 

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

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

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

Financial Instruments Valued at Carrying Value. Due to their short maturity, the carrying values of certain financial instruments approximated their fair values. These financial instruments include: cash and due from banks; federal funds sold and securities purchased under agreements to resell; interest-bearing deposits with banks; Federal Reserve deposits; 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). The fair values of demand, noninterest-bearing, savings, and money market deposits represent the amounts payable on demand as of the reporting date, although such deposits are typically priced at a premium in banking industry consolidations.

 

35


Table of Contents

Notes to Consolidated Financial Statements (continued)

 

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

Table 26: Fair Value of Financial Instruments

 

(In Millions)

   March 31, 2015  
     Book
Value
     Total
Fair Value
     Fair Value  
           Level 1      Level 2      Level 3  

Assets

        

Cash and Due from Banks

   $ 4,074.8       $ 4,074.8       $ 4,074.8       $ —         $ —     

Federal Funds Sold and Resell Agreements

     1,113.9         1,113.9         —           1,113.9         —     

Interest-Bearing Deposits with Banks

     15,432.3         15,432.3         —           15,432.3         —     

Federal Reserve Deposits

     8,804.2         8,804.2         —           8,804.2         —     

Securities

        

Available for Sale (1)

     30,945.7         30,945.7         4,627.4         26,300.8         17.5   

Held to Maturity

     5,655.8         5,665.0         —           5,665.0         —     

Trading Account

     1.4         1.4         —           1.4         —     

Loans (excluding Leases)

        

Held for Investment

     31,503.8         31,747.7         —           —           31,747.7   

Client Security Settlement Receivables

     2,219.3         2,219.3         —           2,219.3         —     

Other Assets

              

Federal Reserve and Federal Home Loan Bank Stock

     207.5         207.5         —           207.5         —     

Community Development Investments

     198.4         198.7         —           198.7         —     

Employee Benefit and Deferred Compensation

     162.1         165.5         113.9         51.6         —     

Liabilities

              

Deposits

        

Demand, Noninterest-Bearing, Savings and Money Market

   $ 39,016.4       $ 39,016.4       $ 39,016.4       $ —         $ —     

Savings Certificates and Other Time

     1,777.9         1,783.1         —           1,783.1         —     

Non U.S. Offices Interest-Bearing

     45,942.2         45,942.2         —           45,942.2         —     

Federal Funds Purchased

     410.7         410.7         —           410.7         —     

Securities Sold under Agreements to Repurchase

     613.2         613.2         —           613.2         —     

Other Borrowings

     2,874.1         2,875.7         —           2,875.7         —     

Senior Notes

     1,497.1         1,566.9         —           1,566.9         —     

Long Term Debt (excluding Leases)

              

Subordinated Debt

     1,368.6         1,374.9         —           1,374.9         —     

Floating Rate Capital Debt

     277.2         241.4         —           241.4         —     

Other Liabilities

              

Standby Letters of Credit

     58.3         58.3         —           —           58.3   

Loan Commitments

     26.8         26.8         —           —           26.8   

Derivative Instruments

              

Asset/Liability Management

              

Foreign Exchange Contracts

              

Assets

   $ 67.4       $ 67.4       $ —         $ 67.4       $ —     

Liabilities

     27.7         27.7         —           27.7         —     

Interest Rate Contracts

           

Assets

     148.9         148.9         —           148.9         —     

Liabilities

     28.9         28.9         —           28.9         —     

Client-Related and Trading

              

Foreign Exchange Contracts

              

Assets

     4,731.2         4,731.2         —           4,731.2         —     

Liabilities

     4,686.4         4,686.4         —           4,686.4         —     

Interest Rate Contracts

           

Assets

     123.1         123.1         —           123.1         —     

Liabilities

     119.3         119.3         —           119.3         —     

 

(1) Refer to the table located on page 31 for the disaggregation of available for sale securities.

 

36


Table of Contents

Notes to Consolidated Financial Statements (continued)

 

(In Millions)

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

Assets

              

Cash and Due from Banks

   $ 3,050.6       $ 3,050.6       $ 3,050.6       $ —         $ —     

Federal Funds Sold and Resell Agreements

     1,062.7         1,062.7         —           1,062.7         —     

Interest-Bearing Deposits with Banks

     14,928.3         14,928.3         —           14,928.3         —     

Federal Reserve Deposits

     17,386.3         17,386.3         —           17,386.3         —     

Securities

              

Available for Sale (1)

     29,558.5         29,558.5         4,506.9         25,033.5         18.1   

Held to Maturity

     4,170.8         4,176.1         —           4,176.1         —     

Trading Account

     4.7         4.7         —           4.7         —     

Loans (excluding Leases)

              

Held for Investment

     30,458.0         30,600.4         —           —           30,600.4   

Held for Sale

     2.5         2.5         —           —           2.5   

Client Security Settlement Receivables

     1,568.8         1,568.8         —           1,568.8         —     

Other Assets

              

Federal Reserve and Federal Home Loan Bank Stock

     207.5         207.5         —           207.5         —     

Community Development Investments

     209.9         210.8         —           210.8         —     

Employee Benefit and Deferred Compensation

     143.2         146.7         96.7         50.0         —     

Liabilities

              

Deposits

              

Demand, Noninterest-Bearing, Savings and Money Market

   $ 41,454.6       $ 41,454.6       $ 41,454.6       $ —         $ —     

Savings Certificates and Other Time

     1,757.4         1,757.4         —           1,757.4         —     

Non U.S. Offices Interest-Bearing

     47,545.0         47,545.0         —           47,545.0         —     

Federal Funds Purchased

     932.9         932.9         —           932.9         —     

Securities Sold under Agreements to Repurchase

     885.1         885.1         —           885.1         —     

Other Borrowings

     1,685.2         1,686.2         —           1,686.2         —     

Senior Notes

     1,497.0         1,541.8         —           1,541.8         —     

Long Term Debt (excluding Leases)

              

Subordinated Debt

     1,583.3         1,583.3         —           1,583.3         —     

Floating Rate Capital Debt

     277.1         242.8         —           242.8         —     

Other Liabilities

              

Standby Letters of Credit

     60.1         60.1         —           —           60.1   

Loan Commitments

     28.3         28.3         —           —           28.3   

Derivative Instruments

              

Asset/Liability Management

              

Foreign Exchange Contracts

              

Assets

   $ 125.7       $ 125.7       $ —         $ 125.7       $ —     

Liabilities

     23.5         23.5         —           23.5         —     

Interest Rate Contracts

              

Assets

     126.8         126.8         —           126.8         —     

Liabilities

     30.5         30.5         —           30.5         —     

Client-Related and Trading

              

Foreign Exchange Contracts

              

Assets

     4,149.5         4,149.5         —           4,149.5         —     

Liabilities

     4,072.0         4,072.0         —           4,072.0         —     

Interest Rate Contracts

              

Assets

     105.5         105.5         —           105.5         —     

Liabilities

     101.3         101.3         —           101.3         —     

 

(1) Refer to the table located on page 32 for the disaggregation of available for sale securities.

 

37


Table of Contents

Notes to Consolidated Financial Statements (continued)

 

4. Securities — The following tables provide the amortized cost and fair values of securities at March 31, 2015, and December 31, 2014.

Table 27: Reconciliation of Amortized Cost to Fair Value of Securities Available for Sale

 

Securities Available for Sale

   March 31, 2015  
     Amortized
Cost
     Gross Unrealized      Fair
Value
 

(In Millions)

      Gains      Losses     

U.S. Government

   $ 4,593.9       $ 33.5       $ —         $ 4,627.4   

Obligations of States and Political Subdivisions

     4.5         —           —           4.5   

Government Sponsored Agency

     16,536.9         107.6         10.3         16,634.2   

Non-U.S. Government

     310.5         0.9         —           311.4   

Corporate Debt

     3,661.5         6.7         16.9         3,651.3   

Covered Bonds

     2,040.5         8.8         —           2,049.3   

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

     560.0         1.4         0.4         561.0   

Residential Mortgage-Backed

     4.9         —           0.5         4.4   

Other Asset-Backed

     2,948.7         1.1         0.5         2,949.3   

Auction Rate

     18.1         0.5         1.1         17.5   

Other

     135.1         0.3         —           135.4   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 30,814.6    $ 160.8    $ 29.7    $ 30,945.7   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Securities Available for Sale

   December 31, 2014  
     Amortized
Cost
     Gross Unrealized      Fair
Value
 

(In Millions)

      Gains      Losses     

U.S. Government

   $ 4,493.5       $ 15.1       $ 1.7       $ 4,506.9   

Obligations of States and Political Subdivisions

     4.5         0.1         —           4.6   

Government Sponsored Agency

     16,326.4         82.3         19.5         16,389.2   

Non-U.S. Government

     309.5         0.9         —           310.4   

Corporate Debt

     3,617.5         1.8         41.6         3,577.7   

Covered Bonds

     1,899.9         7.9         0.3         1,907.5   

Supranational and Non-U.S. Agency Bonds

     360.0         1.5         0.9         360.6   

Residential Mortgage-Backed

     6.9         —           0.5         6.4   

Other Asset-Backed

     2,321.8         0.5         1.0         2,321.3   

Auction Rate

     18.4         0.5         0.8         18.1   

Other

     155.7         0.3         0.2         155.8   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 29,514.1    $ 110.9    $ 66.5    $ 29,558.5   
  

 

 

    

 

 

    

 

 

    

 

 

 

Table 28: Reconciliation of Amortized Cost to Fair Value of Securities Held to Maturity

 

Securities Held to Maturity

   March 31, 2015  
     Amortized
Cost
     Gross Unrealized      Fair
Value
 

(In Millions)

      Gains      Losses     

Obligations of States and Political Subdivisions

   $ 112.6       $ 7.0       $ —         $ 119.6   

Government Sponsored Agency

     15.5         1.0         —           16.5   

Non-U.S. Government

     1,104.3         8.0         —           1,112.3   

Certificates of Deposit

     2,575.7         0.2         0.3         2,575.6   

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

     1,769.7         12.5         0.2         1,782.0   

Other

     78.0         —           19.0         59.0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 5,655.8    $ 28.7    $ 19.5    $ 5,665.0   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

38


Table of Contents

Notes to Consolidated Financial Statements (continued)

 

 

Securities Held to Maturity

   December 31, 2014  
     Amortized
Cost
     Gross Unrealized      Fair
Value
 

(In Millions)

      Gains      Losses     

Obligations of States and Political Subdivisions

   $ 121.9       $ 7.4       $ —         $ 129.3   

Government Sponsored Agency

     18.4         1.1         —           19.5   

Non-U.S. Government

     1,281.6         6.6         0.4         1,287.8   

Certificates of Deposit

     924.3         0.1         0.1         924.3   

Supranational and Non-U.S. Agency Bonds

     1,745.8         10.9         0.5         1,756.2   

Other

     78.8         0.3         20.1         59.0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 4,170.8    $ 26.4    $ 21.1    $ 4,176.1   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

The following table provides the remaining maturity of securities as of March 31, 2015.

Table 29: Remaining Maturity of Securities Available for Sale and Held to Maturity

 

     March 31, 2015  

(In Millions)

   Amortized
Cost
     Fair
Value
 

Available for Sale

     

Due in One Year or Less

   $ 7,702.6       $ 7,731.3   

Due After One Year Through Five Years

     18,210.8         18,295.1   

Due After Five Years Through Ten Years

     3,650.7         3,659.6   

Due After Ten Years

     1,250.5         1,259.7   
  

 

 

    

 

 

 

Total

  30,814.6      30,945.7   
  

 

 

    

 

 

 

Held to Maturity

Due in One Year or Less

  3,219.3      3,220.7   

Due After One Year Through Five Years

  2,374.5      2,397.5   

Due After Five Years Through Ten Years

  21.4      19.4   

Due After Ten Years

  40.6      27.4   
  

 

 

    

 

 

 

Total

$ 5,655.8    $ 5,665.0   
  

 

 

    

 

 

 

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

Investment Security Gains and Losses. Net investment security gains of $0.1 million were recognized in the three months ended March 31, 2015, representing net realized gains from the sale of securities. Net investment security losses of $4.0 million were recognized in the three months ended March 31, 2014, and included $3.9 million of charges related to the OTTI of certain Community Reinvestment Act (CRA) eligible held to maturity securities. For the three months ended March 31, 2015, proceeds of $102.0 million were received from the sale of securities, resulting in gross realized gains of $0.1 million. For the three months ended March 31, 2014, proceeds of $199.7 million were received from the sale of securities, resulting in gross realized gains and losses of $0.3 million and $0.4 million, respectively.

 

39


Table of Contents

Notes to Consolidated Financial Statements (continued)

 

Securities with Unrealized Losses. The following tables provide information regarding securities that had been in a continuous unrealized loss position for less than 12 months and for 12 months or longer as of March 31, 2015, and December 31, 2014.

Table 30: Securities with Unrealized Losses

 

Securities with Unrealized Losses as of

March 31, 2015

   Less than 12 Months      12 Months or Longer      Total  

(In Millions)

   Fair Value      Unrealized
Losses
     Fair Value      Unrealized
Losses
     Fair Value      Unrealized
Losses
 

Government Sponsored Agency

   $ 1,946.0       $ 3.9       $ 1,091.7       $ 6.4       $ 3,037.7       $ 10.3   

Corporate Debt

     391.4         0.6         1,217.8         16.3         1,609.2         16.9   

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

     149.8         0.2         170.7         0.4         320.5         0.6   

Residential Mortgage-Backed

     —           —           4.4         0.5         4.4         0.5   

Other Asset-Backed

     1,071.1         0.5         —           —           1,071.1         0.5   

Certificates of Deposit

     1,395.3         0.3         —           —           1,395.3         0.3   

Auction Rate

     1.4         0.2         5.5         0.9         6.9         1.1   

Other

     17.7         10.8         48.3         8.2         66.0         19.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 4,972.7    $ 16.5    $ 2,538.4    $ 32.7    $ 7,511.1    $ 49.2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Securities with Unrealized Losses as of

December 31, 2014

   Less than 12 Months      12 Months or Longer      Total  

(In Millions)

   Fair Value      Unrealized
Losses
     Fair Value      Unrealized
Losses
     Fair Value      Unrealized
Losses
 

U.S. Government

   $ 998.2       $ 1.7       $ —         $ —         $ 998.2       $ 1.7   

Government Sponsored Agency

     2,344.9         6.6         1,730.0         12.9         4,074.9         19.5   

Non-U.S. Government

     292.9         0.4         —           —           292.9         0.4   

Corporate Debt

     1,244.5         3.9         1,338.8         37.7         2,583.3         41.6   

Covered Bonds

     142.3         0.2         10.0         0.1         152.3         0.3   

Supranational and Non-U.S. Agency Bonds

     313.2         0.3         175.5         1.1         488.7         1.4   

Residential Mortgage-Backed

     —           —           4.5         0.5         4.5         0.5   

Other Asset-Backed

     1,297.6         1.0         —           —           1,297.6         1.0   

Certificates of Deposit

     438.6         0.1         —           —           438.6         0.1   

Auction Rate

     2.4         0.2         4.7         0.6         7.1         0.8   

Other

     27.1         12.1         45.6         8.2         72.7         20.3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 7,101.7    $ 26.5    $ 3,309.1    $ 61.1    $ 10,410.8    $ 87.6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As of March 31, 2015, 391 securities with a combined fair value of $7.5 billion were in an unrealized loss position, with their unrealized losses totaling $49.2 million. Unrealized losses of $16.9 million within corporate debt securities primarily reflected higher market rates since purchase; 39% of the corporate debt portfolio is backed by guarantees provided by U.S. and non-U.S. governmental entities. Unrealized losses of $10.3 million related to government sponsored agency securities were primarily attributable to changes in market rates since their purchase.

Unrealized losses on residential mortgage-backed securities totaling $0.5 million reflected the impact of wider credit and liquidity spreads on the valuations of one residential mortgage-backed security since purchase, with it having been in an unrealized loss position for more than 12 months. Securities classified as “other asset-backed” had average lives less than 5 years, and 100% were rated triple-A.

The majority of the $19.0 million of unrealized losses in securities classified as “other” at March 31, 2015, related to securities primarily purchased at a premium or par by Northern Trust for compliance with the CRA.

 

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Notes to Consolidated Financial Statements (continued)

 

Unrealized losses on these CRA-related securities were attributable to yields that are below market rates for the purpose of supporting institutions and programs that benefit low- to moderate- income communities within Northern Trust’s market area. Unrealized losses of $1.1 million related to auction rate securities primarily reflected reduced market liquidity as a majority of auctions continued to fail preventing holders from liquidating their investments at par. The remaining unrealized losses on Northern Trust’s securities portfolio as of March 31, 2015, were attributable to changes in overall market interest rates, increased credit spreads or reduced market liquidity. As of March 31, 2015, Northern Trust did not intend to sell any investment in an unrealized loss position and it was not more likely than not that Northern Trust would be required to sell any such investment before the recovery of its amortized cost basis, which may be maturity.

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

While all securities are considered, the process for identifying credit impairment within CRA-eligible mortgage-backed securities, the security type for which Northern Trust recognized all of the OTTI in 2014, incorporates an expected loss approach using discounted cash flows on the underlying collateral pools. To evaluate whether an unrealized loss on CRA-eligible mortgage-backed securities is other-than-temporary, a calculation of the security’s present value is made using current pool data, the current delinquency pipeline, default rates and loan loss severities based on the historical performance of like collateral, and Northern Trust’s outlook for the housing market and the overall economy. If the present value of the collateral pools was found to be less than the current amortized cost of the security, a credit-related OTTI loss would be recorded in earnings equal to the difference between the two amounts.

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

As of March 31, 2015, impairment estimates for CRA-eligible mortgage-backed securities were developed using default and loss severity rates sourced from industry mortgage data. Ultimate recovery value of the securities was determined by applying default and severity rates against remaining collateral balances in the pools. An expected loss amount was calculated by applying loss severity rates on defaulted amounts. Lastly, book values were compared against collateral values net of expected losses in order to determine OTTI.

There were no OTTI losses recognized in the three months ended March 31, 2015. There were $3.9 million of OTTI losses recognized during the three months ended March 31, 2014, related to CRA-eligible mortgage-backed securities.

 

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Notes to Consolidated Financial Statements (continued)

 

Credit Losses on Debt Securities. The table below provides information regarding total other-than-temporarily-impaired securities, including noncredit-related amounts recognized in other comprehensive income and net impairment losses recognized in earnings, for the three months ended March 31, 2015, and 2014.

Table 31: Net Impairment Losses Recognized in Earnings

 

     Three Months Ended
March 31,
 

(In Millions)

       2015              2014      

Changes in OTTI Losses*

   $ —         $ (4.6

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

     —           0.7   
  

 

 

    

 

 

 

Net Impairment Losses Recognized in Earnings

$ —      $ (3.9
  

 

 

    

 

 

 

 

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

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

Table 32: Cumulative Credit-Related Losses on Securities

 

     Three Months Ended
March 31,
 

(In Millions)

       2015              2014      

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

   $ 5.2       $ 8.8   

Plus: Losses on Newly Identified Impairments

     —           1.8   

 Additional Losses on Previously Identified Impairments

     —           2.1   

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

     —           —     
  

 

 

    

 

 

 

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

$ 5.2    $ 12.7   
  

 

 

    

 

 

 

 

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Table of Contents

Notes to Consolidated Financial Statements (continued)

 

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

Table 33: Loans and Leases

 

(In Millions)

   March 31,
2015
     December 31,
2014
 

Commercial

  

Commercial and Institutional

   $ 9,030.2       $ 8,381.9   

Commercial Real Estate

     3,500.9         3,333.3   

Lease Financing, net

     870.6         916.3   

Non-U.S.

     1,661.6         1,530.6   

Other

     428.0         191.5   
  

 

 

    

 

 

 

Total Commercial

  15,491.3      14,353.6   
  

 

 

    

 

 

 

Personal

Residential Real Estate

  9,440.2      9,782.6   

Private Client

  7,615.8      7,466.9   

Other

  82.9      37.1   
  

 

 

    

 

 

 

Total Personal

  17,138.9      17,286.6   
  

 

 

    

 

 

 

Total Loans and Leases

  32,630.2      31,640.2   
  

 

 

    

 

 

 

Allowance for Credit Losses Assigned to Loans and Leases

  (259.0   (267.0
  

 

 

    

 

 

 

Net Loans and Leases

$ 32,371.2    $ 31,373.2   
  

 

 

    

 

 

 

Residential real estate loans consist of traditional first lien mortgages and equity credit lines that generally require a loan-to-collateral value of no more than 65% to 80% at inception. Northern Trust’s equity credit line products generally have draw periods of up to 10 years and a balloon payment of any outstanding balance is due at maturity. Payments are interest only with variable interest rates. Northern Trust does not offer equity credit lines that include an option to convert the outstanding balance to an amortizing payment loan. As of March 31, 2015, and December 31, 2014, equity credit lines totaled $1.7 billion and $1.8 billion, respectively, and equity credit lines for which first liens were held by Northern Trust represented 89% of the total equity credit lines as of each of those dates.

Included within the non-U.S., commercial-other and personal-other classes are short-duration advances primarily related to the processing of custodied client investments, that totaled $1.7 billion at March 31, 2015, and $1.5 billion at December 31, 2014. Demand deposits reclassified as loan balances totaled $77.6 million and $92.1 million at March 31, 2015, and December 31, 2014, respectively. There were no loans classified as held for sale at March 31, 2015. Loans classified as held for sale totaled $2.5 million at December 31, 2014.

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

As part of its credit process, Northern Trust utilizes an internal borrower risk rating system to support identification, approval and monitoring of credit risk. Borrower risk ratings are used in credit underwriting, management reporting and the calculation of credit loss allowances and economic capital.

 

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Notes to Consolidated Financial Statements (continued)

 

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

 

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

 

    Commercial Real Estate: debt service coverage, loan-to-value ratio, leasing status and guarantor support;

 

    Lease Financing and Commercial-Other: leverage, profit margin, liquidity, asset size and capital levels;

 

    Non-U.S.: leverage, profit margin, liquidity, return on assets and capital levels;

 

    Residential Real Estate: payment history, credit bureau scores and loan-to-value ratio;

 

    Private Client: cash-flow-to-debt and net worth ratios, leverage and liquidity; and

 

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

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

Loan and lease segment and class balances as of March 31, 2015, and December 31, 2014, are provided below, segregated by borrower ratings into “1 to 3,” “4 to 5” and “6 to 9” (watch list), categories.

Table 34: Borrower Ratings

 

    March 31, 2015     December 31, 2014  

(In Millions)

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

Commercial

               

Commercial and Institutional

  $ 5,628.3      $ 3,314.9      $ 87.0      $ 9,030.2      $ 5,340.9      $ 2,947.3      $ 93.7      $ 8,381.9   

Commercial Real Estate

    1,452.5        1,949.9        98.5        3,500.9        1,371.7        1,861.8        99.8        3,333.3   

Lease Financing, net

    510.6        324.0        36.0        870.6        552.5        360.3        3.5        916.3   

Non-U.S.

    513.8        1,147.6        0.2        1,661.6        636.8        892.9        0.9        1,530.6   

Other

    353.0        75.0        —          428.0        108.1        83.4        —          191.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Commercial

  8,458.2      6,811.4      221.7      15,491.3      8,010.0      6,145.7      197.9      14,353.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Personal

Residential Real Estate

  2,734.2      6,304.9      401.1      9,440.2      3,148.0      6,207.0      427.6      9,782.6   

Private Client

  4,907.1      2,699.4      9.3      7,615.8      5,143.8      2,311.7      11.4      7,466.9   

Other

  68.5      14.4      —        82.9      21.1      16.0      —        37.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Personal

  7,709.8      9,018.7      410.4      17,138.9      8,312.9      8,534.7      439.0      17,286.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Loans and Leases

$ 16,168.0    $ 15,830.1    $ 632.1    $ 32,630.2    $ 16,322.9    $ 14,680.4    $ 636.9    $ 31,640.2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans and leases in the “1 to 3” category are expected to exhibit minimal to modest probabilities of default and are characterized by borrowers having the strongest financial qualities, including above average financial flexibility, cash flows and capital levels. Borrowers assigned these ratings are anticipated to experience very little

 

44


Table of Contents

Notes to Consolidated Financial Statements (continued)

 

to moderate financial pressure in adverse down cycle scenarios. As a result of these characteristics, borrowers within this category exhibit a minimal to modest likelihood of loss.

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

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

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

Past due status is based on how long since the contractual due date a principal or interest payment has been past due. For disclosure purposes, loans that are 29 days past due or less are reported as current. The following tables provide balances and delinquency status of performing and nonperforming loans and leases by segment and class, as well as the total OREO and nonperforming asset balances, as of March 31, 2015, and December 31, 2014.

 

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Notes to Consolidated Financial Statements (continued)

 

Table 35: Delinquency Status

 

March 31, 2015

 

(In Millions)

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

Commercial

             

Commercial and Institutional

  $ 8,980.4      $ 21.2      $ 4.6      $ 3.1      $ 9,009.3      $ 20.9      $ 9,030.2   

Commercial Real Estate

    3,442.9        10.2        4.8        3.1        3,461.0        39.9        3,500.9   

Lease Financing, net

    870.6        —          —          —          870.6        —          870.6   

Non-U.S.

    1,661.6        —          —          —          1,661.6        —          1,661.6   

Other

    428.0        —          —          —          428.0        —          428.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Commercial

  15,383.5      31.4      9.4      6.2      15,430.5      60.8      15,491.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Personal

Residential Real Estate

  9,240.2      37.5      2.6      2.2      9,282.5      157.7      9,440.2   

Private Client

  7,573.7      32.8      7.2      1.0      7,614.7      1.1      7,615.8   

Other

  82.9      —        —        —        82.9      —        82.9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Personal

  16,896.8      70.3      9.8      3.2      16,980.1      158.8      17,138.9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Loans and Leases

$ 32,280.3    $ 101.7    $ 19.2    $ 9.4    $ 32,410.6    $ 219.6    $ 32,630.2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  Other Real Estate Owned      8.5   
           

 

 

   
  Total Nonperforming Assets    $ 228.1   
           

 

 

   

 

December 31, 2014

 

(In Millions)

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

Commercial

             

Commercial and Institutional

  $ 8,340.5      $ 14.5      $ 4.0      $ 7.9      $ 8,366.9      $ 15.0      $ 8,381.9   

Commercial Real Estate

    3,274.3        9.6        9.8        2.5        3,296.2        37.1        3,333.3   

Lease Financing, net

    916.3        —          —          —          916.3        —          916.3   

Non-U.S.

    1,530.6        —          —          —          1,530.6        —          1,530.6   

Other

    191.5        —          —          —          191.5        —          191.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Commercial

  14,253.2      24.1      13.8      10.4      14,301.5      52.1      14,353.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Personal

Residential Real Estate

  9,556.3      49.5      9.9      4.5      9,620.2      162.4      9,782.6   

Private Client

  7,396.0      56.0      5.9      7.8      7,465.7      1.2      7,466.9   

Other

  37.1      —        —        —        37.1      —        37.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Personal

  16,989.4      105.5      15.8      12.3      17,123.0      163.6      17,286.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Loans and Leases

$ 31,242.6    $ 129.6    $ 29.6    $ 22.7    $ 31,424.5    $ 215.7    $ 31,640.2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  Other Real Estate Owned      16.6   
           

 

 

   
  Total Nonperforming Assets    $ 232.3   
           

 

 

   

Impaired Loans. A loan is considered to be impaired when, based on current information and events, management determines that it is probable that Northern Trust will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are identified through ongoing credit management and risk rating processes, including the formal review of past due and watch list credits. Payment performance and delinquency status are critical factors in identifying impairment for all loans and leases, particularly those within the residential real estate, private client and personal-other classes. Other key factors considered in identifying impairment of loans and leases within the commercial and institutional, non-U.S., lease financing and commercial-other classes relate to the borrower’s ability to perform under the terms of the

 

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Table of Contents

Notes to Consolidated Financial Statements (continued)

 

obligation as measured through the assessment of future cash flows, including consideration of collateral value, market value and other factors. A loan is also considered to be impaired if its terms have been modified as a concession resulting from the debtor’s financial difficulties, referred to as a troubled debt restructuring (TDR) and discussed in further detail below. Impairment is measured based upon the loan’s market price, the present value of expected future cash flows, discounted at the loan’s effective interest rate, or the fair value of the collateral if the loan is collateral dependent. If the loan valuation is less than the recorded value of the loan, based on the certainty of loss, either a specific allowance is established or a charge-off is recorded for the difference. Smaller balance (individually less than $250,000) homogeneous loans are collectively evaluated for impairment and excluded from impaired loan disclosures as allowed under applicable accounting standards. Northern Trust’s accounting policies for impaired loans is consistent across all classes of loans and leases.

The following tables provide information related to impaired loans by segment and class.

Table 36: Information about Impaired Loans as of the Period End

 

     As of March 31, 2015      As of December 31, 2014  

(In Millions)

   Recorded
Investment
     Unpaid
Principal
Balance
     Specific
Allowance
     Recorded
Investment
     Unpaid
Principal
Balance
     Specific
Allowance
 

With No Related Specific Allowance

                 

Commercial and Institutional

   $ 7.9       $ 9.9       $ —         $ 9.0       $ 12.0       $ —     

Commercial Real Estate

     49.1         54.1