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 June 30, 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

232,852,813 Shares – $1.66 2/3 Par Value

(Shares of Common Stock Outstanding on June 30, 2015)

 

 

 


Table of Contents

NORTHERN TRUST CORPORATION

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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)

     31   

Consolidated Balance Sheet

     31   

Consolidated Statement of Income

     32   

Consolidated Statement of Comprehensive Income

     32   

Consolidated Statement of Changes in Stockholders’ Equity

     33   

Consolidated Statement of Cash Flows

     34   

Notes to Consolidated Financial Statements

     35   

Item 4: Controls and Procedures

     82   

Part II – Other Information

  

Item 1: Legal Proceedings

     82   

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

     82   

Item 6: Exhibits

     82   

Signatures

     83   

 

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Table of Contents

CONSOLIDATED FINANCIAL HIGHLIGHTS

(UNAUDITED)

 

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

CONDENSED INCOME STATEMENT (In Millions)

  2015     2014     % Change (*)     2015     2014     % Change (*)  

Noninterest Income

  $ 1,004.7      $ 835.1        20     1,878.6        1,629.9        15   

Net Interest Income

    251.2        246.6        2        511.8        492.3        4   

Provision for Credit Losses

    (10.0     —          N/M        (14.5     3.0        N/M   

Noninterest Expense

    854.5        811.0        5        1,643.5        1,579.0        4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before Income Taxes

    411.4        270.7        52        761.4        540.2        41   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Provision for Income Taxes

    142.2        88.8        60        261.5        176.9        48   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

  $ 269.2      $ 181.9        48   $ 499.9      $ 363.3        38
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

PER COMMON SHARE

           

Net Income — Basic

  $ 1.11      $ 0.76        46   $ 2.06      $ 1.51        36

— Diluted

    1.10        0.75        47        2.04        1.50        36   

Cash Dividends Declared Per Common Share

    0.36        0.33        9        0.69        0.64        8   

Book Value — End of Period (EOP)

    35.91        34.14        5        35.91        34.14        5   

Market Price — EOP

    76.46        64.21        19        76.46        64.21        19   
SELECTED BALANCE SHEET DATA (In Millions)                                    
    June 30,
2015
    December 31,
2014
    % Change (*)                    

End of Period:

           

Assets

  $ 119,942.9      $ 109,946.5        9      

Earning Assets

    109,565.3        100,889.8        9         

Deposits

    100,687.9        90,757.0        11         

Stockholders’ Equity

    8,749.3        8,448.9        4         
    Three Months
Ended June 30,
    Six Months
Ended June 30,
 
    2015     2014     % Change (*)     2015     2014     % Change (*)  

Average Balances:

           

Assets

  $ 111,691.1      $ 103,324.1        8   $ 109,613.7      $ 101,792.3        8   

Earning Assets

    103,806.0        95,472.7        9        101,263.7        93,666.7        8   

Deposits

    92,335.1        84,645.2        9        89,446.7        82,707.3        8   

Stockholders’ Equity

    8,607.9        7,947.2        8        8,540.7        7,936.8        8   

CLIENT ASSETS (In Billions)

  June 30,
2015
    December 31,
2014
    % Change (*)                    

Assets Under Custody

  $ 6,177.0      $ 5,968.8        3      

Assets Under Management

    945.6        934.1        1         

 

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Table of Contents
SELECTED RATIOS AND METRICS                                     
     Three Months
Ended June 30,
    Six Months
Ended June 30,
 
     2015     2014     % Change (*)     2015     2014     % Change (*)  

Financial Ratios:

            

Return on Average Common Equity

     12.85     9.18     40     12.08     9.23     31   

Return on Average Assets

     0.97        0.71        36        0.92        0.72        28   

Dividend Payout Ratio

     32.7        44.0        (26     33.8        42.7        (21

Net Interest Margin (**)

     1.00        1.06        (6     1.04        1.09        (5

 

     June 30, 2015     December 31, 2014  
     Advanced
Approach
    Standardized
Approach (a)
    Advanced
Approach
    Standardized
Approach (a)
 

Capital Ratios:

        

Northern Trust Corporation

        

Common Equity Tier 1

     12.0     10.7     12.4     12.5

Tier 1

     12.6        11.2        13.2        13.3   

Total

     14.4        13.2        15.0        15.5   

Tier 1 Leverage

     7.6        7.6        n/a        7.8   

Supplementary Leverage (b)

     6.3        n/a        n/a        n/a   

The Northern Trust Company

        

Common Equity Tier 1

     11.6     10.1     12.0     11.8

Tier 1

     11.6        10.1        12.0        11.8   

Total

     13.2        11.9        13.8        14.0   

Tier 1 Leverage

     6.8        6.8        n/a        6.9   

Supplementary Leverage (b)

     5.6        n/a        n/a        n/a   

 

(*) 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 27.

 

(a) In 2014, Standardized Approach risk-weighted assets were determined by Basel I requirements. Effective with the first quarter of 2015, risk-weighted assets are calculated in accordance with the Basel III Standardized Approach final rules.

 

(b) Beginning with the first quarter of 2015, advanced approaches banking organizations must calculate and report their supplementary leverage ratio. Effective January 1, 2018, advanced approaches institutions, such as the Corporation, will be subject to a minimum supplementary leverage ratio of 3 percent.

 

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

SECOND 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. The Corporation focuses on managing and servicing client assets through its two client-focused reporting segments: Corporate & Institutional Services (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. 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 also should read the section entitled “Forward-Looking Statements.”

Overview

Net income per diluted common share in the current quarter was $1.10, up from $0.75 in the second quarter of 2014. Net income was $269.2 million in the current quarter as compared to $181.9 million in the prior-year quarter. Annualized return on average common equity in the quarter was 12.8% as compared to 9.2% in the prior-year quarter. The annualized return on average assets was 1.0% as compared to 0.7% in the prior-year quarter.

The current quarter includes a net pre-tax gain on the sale of 1.0 million Visa Inc. Class B common shares totaling $99.9 million; voluntary cash contributions to certain constant dollar net-asset-value (NAV) funds of $45.8 million; and the impairment of the residual value of certain aircraft under leveraged lease agreements of $17.8 million. Excluding these items, net income per diluted common share, net income, and return on average common equity were $1.01, $246.7 million and 11.8%, respectively.

The prior-year quarter included pre-tax charges of $32.8 million for severance and related costs and for the realignment of the Corporation’s real estate portfolio and $9.5 million of software write-offs. Excluding these charges and write-offs, net income per diluted common share, net income, and return on average common equity were $0.87, $209.8 million, and 10.6%, respectively.

Revenue of $1.26 billion was up $174.2 million, or 16%, from $1.08 billion in the prior-year quarter. Noninterest income increased $169.6 million, or 20%, to $1.00 billion from $835.1 million in the prior-year quarter, primarily reflecting the $99.9 million net gain on the sale of Visa Inc. Class B common shares, higher trust, investment and other servicing fees and foreign exchange trading income.

Net interest income increased 2% to $251.2 million in the current quarter as compared to $246.6 million in the prior-year quarter, due to growth in earning assets, offset by the $17.8 million impairment of the residual value of certain aircraft under leveraged lease agreements and a lower net interest margin.

The provision for credit losses was a credit of $10.0 million in the current quarter, reflecting improved credit quality. There was no provision for credit losses recorded in the prior-year quarter.

Noninterest expense totaled $854.5 million, up $43.5 million, or 5%, from $811.0 million in the prior-year quarter. The current quarter includes the $45.8 million charge related to voluntary cash contributions to certain

 

3


Table of Contents

SECOND QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)

Overview (continued)

 

constant dollar NAV funds. The prior-year quarter includes the $32.8 million charge for severance and related costs and realignment of the Corporation’s real estate portfolio and $9.5 million of software write-offs. Excluding the current- and prior-year quarter charges and write-offs, noninterest expense increased $40.0 million, or 5%, primarily attributable to higher compensation, equipment and software, other operating and employee benefits expense.

Noninterest Income

The components of noninterest income are provided below.

Table 1: Noninterest Income

 

Noninterest Income

   Three Months
Ended June 30,
              

($ In Millions)

   2015     2014      Change  

Trust, Investment and Other Servicing Fees

   $ 756.8      $ 706.9       $ 49.9        7

Foreign Exchange Trading Income

     74.8        52.9         21.9        41   

Treasury Management Fees

     16.1        16.6         (0.5     (3

Security Commissions and Trading Income

     20.0        17.8         2.2        12   

Other Operating Income

     137.4        40.5         96.9        N/M   

Investment Security Gains (Losses), net

     (0.4     0.4         (0.8     N/M   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Noninterest Income

   $ 1,004.7      $ 835.1       $ 169.6        20
  

 

 

   

 

 

    

 

 

   

 

 

 

Trust, investment and other servicing fees are based primarily on: the market value of assets held in custody, managed or 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

   June 30,
2015
     March 31,
2015
     June 30,
2014
     Change
Q2-15/
Q1-15
    Change
Q2-15/
Q2-14
 

($ In Billions)

             

Corporate & Institutional

   $ 5,652.6       $ 5,566.2       $ 5,488.0         2     3

Wealth Management

     524.4         524.6         516.6         —          2   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Assets Under Custody

   $ 6,177.0       $ 6,090.8       $ 6,004.6         1     3
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

The following table presents the allocation of Northern Trust’s custodied assets by reporting segment.

Table 3: Allocations of Assets Under Custody

 

     June 30, 2015     March 31, 2015     June 30, 2014  

Assets Under Custody

   C&IS     WM     Total     C&IS     WM     Total     C&IS     WM     Total  

Equities

     45     55     46     45     55     46     45     56     46

Fixed Income Securities

     37        23        35        37        23        35        37        21        36   

Cash and Other Assets

     18        22        19        18        22        19        18        23        18   

 

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Table of Contents

SECOND QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)

Noninterest Income (continued)

 

The 3% increase in consolidated assets under custody from $6.09 trillion at June 30, 2014, to $6.18 trillion as of June 30, 2015, primarily reflected increased net new business driven by institutional clients in global funds services, primarily in equities.

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

Table 4: Assets Under Management

 

Assets Under Management

   June 30,
2015
     March 31,
2015
     June 30,
2014
     Change
Q2-15/
Q1-15
    Change
Q2-15/
Q2-14
 

($ In Billions)

             

Corporate & Institutional

   $ 713.6       $ 727.0       $ 701.5         (2 )%      2

Wealth Management

     232.0         233.1         222.9         —          4   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Assets Under Management

   $ 945.6       $ 960.1       $ 924.4         (2 )%      2
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

The following table presents consolidated assets under management as of June 30, 2015, and June 30, 2014, by investment type.

Table 5: Assets Under Management by Investment Type

 

($ In Billions)

   June 30, 2015      June 30, 2014  

Equities

   $ 487.7       $ 495.7   

Fixed Income Securities

     167.7         153.2   

Cash and Other Assets

     169.9         159.0   

Securities Lending Collateral

     120.3         116.5   
  

 

 

    

 

 

 

Total Assets Under Management

   $ 945.6       $ 924.4   
  

 

 

    

 

 

 

The 2% increase in consolidated assets under management from $924.4 billion at June 30, 2014, to $945.6 billion as of June 30, 2015, primarily reflected higher fixed income securities, cash and securities lending collateral, partially offset by lower equity assets, driven in part by a stronger U.S. dollar.

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

Table 6: Allocations of Assets Under Management

 

     June 30, 2015     March 31, 2015     June 30, 2014  

Assets Under Management

   C&IS     WM     Total     C&IS     WM     Total     C&IS     WM     Total  

Equities

     53     47     51     53     46     52     56     48     54

Fixed Income Securities

     14        28        18        14        28        17        13        28        16   

Securities Lending Collateral

     17        —          13        17        —          13        16        —          13   

Cash and Other Assets

     16        25        18        16        26        18        15        24        17   

Changes in assets under custody and under management are in comparison to the twelve month increase in the S&P 500® index of 5.2% and decline in the MSCI EAFE® index (USD) of 6.6%.

Foreign exchange trading income totaled $74.8 million in the current quarter, up $21.9 million, or 41%, compared to $52.9 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 $20.0 million, up 12%, compared with $17.8 million in the prior-year quarter. The increase was attributable to higher referral fees and higher income from interest rate protection products sold to clients.

 

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Table of Contents

SECOND QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)

Noninterest Income (continued)

 

Other operating income totaled $137.4 million, up $96.9 million, compared to $40.5 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 June 30,
               

($ In Millions)

   2015      2014      Change  

Loan Service Fees

   $ 14.6       $ 16.0       $ (1.4      (9 )% 

Banking Service Fees

     11.8         12.6         (0.8      (7

Other Income

     111.0         11.9         99.1         N/M   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Other Operating Income

   $ 137.4       $ 40.5       $ 96.9         N/M
  

 

 

    

 

 

    

 

 

    

 

 

 

Other income in the current quarter includes the $99.9 million net gain on the sale of 1.0 million Visa Inc. Class B common shares. Excluding the gain, other operating income totaled $37.5 million, down 7%, from the prior-year quarter, reflecting decreases in loan and banking services fees and various miscellaneous income categories.

 

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Table of Contents

SECOND QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)

 

Net Interest Income

The following table presents an analysis of average balances and interest rate changes affecting net interest income.

 

Table 8: AVERAGE CONSOLIDATED BALANCE SHEET

WITH ANALYSIS OF NET INTEREST INCOME

                 NORTHERN TRUST CORPORATION  
(INTEREST AND RATE ON A FULLY TAXABLE
EQUIVALENT BASIS)
   Second Quarter  
   2015     2014  

($ In Millions)

   Interest      Average
Balance
    Rate (4)     Interest      Average
Balance
    Rate (4)  

Average Earning Assets

              

Federal Funds Sold and Securities Purchased under

              

Agreements to Resell

   $ 1.2       $ 1,041.9        0.46   $ 0.7       $ 554.1        0.47

Interest-Bearing Due from and Deposits with Banks (1)

     28.7         16,920.6        0.68        33.6         17,294.6        0.78   

Federal Reserve Deposits

     9.5         14,992.1        0.25        8.4         13,266.4        0.26   

Securities

              

U.S. Government

     13.4         4,789.1        1.12        6.7         2,368.7        1.13   

Obligations of States and Political Subdivisions

     1.9         112.2        6.75        2.8         168.4        6.76   

Government Sponsored Agency

     34.2         16,821.7        0.82        33.3         18,359.8        0.73   

Other (2)

     33.8         16,207.0        0.84        27.8         13,407.8        0.83   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Securities

     83.3         37,930.0        0.88        70.6         34,304.7        0.83   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Loans and Leases (3)

     172.5         32,921.4        2.10        187.3         30,052.9        2.50   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Earning Assets

     295.2         103,806.0        1.14        300.6         95,472.7        1.26   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Allowance for Credit Losses Assigned to Loans and Leases

     —           (260.0     —          —           (276.8     —     

Cash and Due from Banks

     —           2,142.9        —          —           2,838.4        —     

Buildings and Equipment

     —           446.5        —          —           450.7        —     

Client Security Settlement Receivables

     —           945.0        —          —           781.0        —     

Goodwill

     —           531.1        —          —           543.0        —     

Other Assets

     —           4,079.6        —          —           3,515.1        —     
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Assets

   $ —         $ 111,691.1        —     $ —         $ 103,324.1        —  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Average Source of Funds

              

Deposits

              

Savings and Money Market

   $ 2.4       $ 15,705.4        0.06   $ 2.4       $ 14,828.6        0.06

Savings Certificates and Other Time

     2.1         1,779.5        0.48        1.6         1,996.2        0.32   

Non-U.S. Offices — Interest-Bearing

     13.9         49,291.8        0.11        18.4         48,988.1        0.15   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Interest-Bearing Deposits

     18.4         66,776.7        0.11        22.4         65,812.9        0.14   

Short-Term Borrowings

     1.3         4,404.8        0.12        1.2         4,217.8        0.12   

Senior Notes

     11.9         1,497.1        3.14        13.7         1,661.6        3.30   

Long-Term Debt

     5.5         1,380.2        1.59        9.4         1,642.4        2.30   

Floating Rate Capital Debt

     0.5         277.3        0.84        0.5         277.2        0.80   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Interest-Related Funds

     37.6         74,336.1        0.20        47.2         73,611.9        0.26   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Interest Rate Spread

     —           —          0.94        —           —          1.00   

Demand and Other Noninterest-Bearing Deposits

     —           25,558.4        —          —           18,832.3        —     

Other Liabilities

     —           3,188.7        —          —           2,932.7        —     

Stockholders’ Equity

     —           8,607.9        —          —           7,947.2        —     
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ —         $ 111,691.1        —     $ —         $ 103,324.1        —  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net Interest Income/Margin (FTE Adjusted)

   $ 257.6       $ —          1.00   $ 253.4       $ —          1.06
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net Interest Income/Margin (Unadjusted)

   $ 251.2       $ —          0.97   $ 246.6       $ —          1.04
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

7


Table of Contents

SECOND QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)

Net Interest Income (continued)

 

ANALYSIS OF NET INTEREST INCOME CHANGES

DUE TO VOLUME AND RATE

     Three Months Ended June 30, 2015/2014  
     Change Due To  

(In Millions)

   Average
Balance
     Rate     Total  

Earning Assets (FTE)

   $ 26.2       $ (31.6   $ (5.4

Interest-Related Funds

     0.5         (10.1     (9.6
  

 

 

    

 

 

   

 

 

 

Net Interest Income (FTE)

   $ 25.7       $ (21.5   $ 4.2   
  

 

 

    

 

 

   

 

 

 
(1) Interest-Bearing Due from and Deposits with Banks includes the interest-bearing component of Cash and Due from Banks and Interest-Bearing Deposits with Banks as presented on the consolidated balance sheet in our periodic filings with the U.S. Securities and Exchange Commission.
(2) Other securities include certain community development investments and Federal Home Loan Bank and Federal Reserve stock of $193.9 million, $131.1 million and $54.0 million, which are classified in other assets in the consolidated balance sheet as of June 30, 2015 and 2014.
(3) Average balances include nonaccrual loans. Lease financing receivable balances are reduced by deferred income.
(4) Rate calculations are based on actual balances rather than the rounded amounts presented in the Average Consolidated Balance Sheet with Analysis of Net Interest Income.
Notes: Net Interest Income (FTE Adjusted) includes adjustments to a fully taxable equivalent basis for loans and securities. Such adjustments are based on a blended federal and state tax rate of 37.7% and 37.8% for the three months ended June 30, 2015 and 2014, respectively. Total taxable equivalent interest adjustments amounted to $6.4 million and $6.8 million for the three months ended June 30, 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.

Net interest income is defined as the total of interest income and amortized fees on earning assets, less interest expense on deposits and borrowed funds, adjusted for the impact of interest-related hedging activity.

Net interest income on a fully taxable equivalent (FTE) basis totaled $257.6 million, up 2%, compared to $253.4 million in the prior-year quarter. The increase was primarily the result of growth in earning assets, partially offset by the $17.8 million impairment of the residual value of certain aircraft under leveraged lease agreements and a lower net interest margin. Earning assets for the current quarter averaged $103.8 billion, up $8.3 billion, or 9%, from $95.5 billion in the prior-year quarter, primarily resulting from higher levels of securities, reflecting demand deposit growth, combined with increased loan volume.

The net interest margin on an FTE basis, declined to 1.00% in the current quarter from 1.06% in the prior-year quarter. Excluding the impairment noted above, the net interest margin was 1.06%, unchanged from the prior-year quarter, as higher securities yields and lower cost of interest-related funds were offset by lower loan and short-term interest-bearing deposit yields.

When adjusted to an FTE basis, yields on taxable, nontaxable, and partially taxable assets are comparable; however, the adjustment to an FTE basis has no impact on net income. A reconciliation of net interest income on a GAAP basis to net interest income on an FTE basis (a non-GAAP financial measure) is provided on page 27.

Earning assets for the quarter averaged $103.8 billion, up $8.3 billion, or 9%, from $95.5 billion in the prior-year quarter. Federal Reserve deposits averaged $15.0 billion, up $1.7 billion, or 13%, from $13.3 billion in the prior-year quarter. Average securities were $37.9 billion, up $3.6 billion, or 11%, from $34.3 billion in the prior-year quarter and include certain community development investments and Federal Home Loan Bank and Federal Reserve stock of $193.9 million, $131.1 million and $54.0 million, respectively, which are recorded in other assets in the consolidated balance sheets.

Loans and leases averaged $32.9 billion, up $2.9 billion, or 10%, from $30.1 billion in the prior-year quarter, primarily reflecting higher levels of private client loans, commercial and institutional loans, and commercial real

 

8


Table of Contents

SECOND QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)

Net Interest Income (continued)

 

estate loans. Private client loans averaged $8.0 billion, up $1.5 billion, or 23%, from $6.5 billion for the prior-year quarter. Commercial and institutional loans averaged $9.0 billion, up $1.1 billion, or 14%, from $7.9 billion for the prior-year quarter. Commercial real estate loans averaged $3.6 billion, up $487.6 million, or 16%, from $3.1 billion for the prior-year quarter.

Northern Trust utilizes a diverse mix of funding sources. Total interest-bearing deposits averaged $66.8 billion, compared to $65.8 billion in the prior-year quarter, an increase of $963.8 million, or 1%. Other interest-bearing funds averaged $7.6 billion, a decrease of $239.6 million, from $7.8 billion in the prior-year quarter, attributable to decreased long-term debt and senior notes, 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 $7.6 billion, or 35%, to $29.5 billion from $21.9 billion in the prior-year quarter, primarily resulting from higher levels of demand and other noninterest-bearing deposits.

Provision for Credit Losses

The provision for credit losses was a credit of $10.0 million in the current quarter, reflecting improved credit quality. No provision for credit losses was recorded in the prior-year quarter. Net charge-offs in the current quarter were $2.6 million, resulting from charge-offs of $6.1 million and recoveries of $3.5 million. The prior-year quarter included $5.9 million of net charge-offs, resulting from $7.8 million of charge-offs and $1.9 million of recoveries. Nonperforming assets decreased 10% from the prior-year quarter. Residential real estate loans and commercial real estate loans accounted for 76% and 12%, respectively, of total nonperforming loans and leases at June 30, 2015. For additional discussion of the provision and allowance for credit losses, refer to the “Asset Quality” section beginning on page 22.

Noninterest Expense

The components of noninterest expense are provided below.

Table 9: Noninterest Expense

 

Noninterest Expense

   Three Months Ended
June 30,
               

($ In Millions)

   2015      2014      Change  

Compensation

   $ 361.9       $ 372.4       $ (10.5      (3 )% 

Employee Benefits

     73.2         68.5         4.7         7   

Outside Services

     147.2         144.6         2.6         2   

Equipment and Software

     114.4         116.1         (1.7      (2

Occupancy

     43.0         47.2         (4.2      (9

Other Operating Expense

     114.8         62.2         52.6         85   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Noninterest Expense

   $ 854.5       $ 811.0       $ 43.5         5
  

 

 

    

 

 

    

 

 

    

 

 

 

Compensation expense, the largest component of noninterest expense, totaled $361.9 million in the current quarter, down $10.5 million, or 3%, from $372.4 million in the prior-year quarter. The prior-year quarter included severance-related charges of $25.5 million. Excluding the severance-related charges, compensation expense increased $15.0 million, or 4%, reflecting higher performance-based compensation, staff levels and base pay adjustments, partially offset by the favorable impact in foreign exchange rates. Staff on a full-time equivalent basis at June 30, 2015, totaled approximately 15,800, up 4% from June 30, 2014.

 

9


Table of Contents

SECOND QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)

Noninterest Expense (continued)

 

Employee benefit expense totaled $73.2 million in the current quarter, up 7%, from $68.5 million in the prior-year quarter. The prior-year quarter included $1.9 million of severance- related charges. Excluding these charges, employee benefit expense increased $6.6 million, or 10%, attributable to higher pension and employee medical expense.

Expense associated with outside services totaled $147.2 million in the current quarter, up 2%, from $144.6 million in the prior-year quarter. The prior-year quarter included $1.1 million of severance-related charges. Excluding these charges, outside services expense increased 3%, reflecting higher technical services.

Equipment and software expense totaled $114.4 million in the current quarter, down 2%, from $116.1 million in the prior-year quarter. The prior-year quarter included $9.5 million of write-offs of replaced or eliminated software. Excluding these write-offs, equipment and software expense increased $7.8 million, or 7%, reflecting higher software amortization.

Occupancy expense totaled $43.0 million, down 9%, from $47.2 million in the prior-year quarter. The prior-year quarter included charges totaling $4.3 million in connection with reductions in office space. Excluding these charges, occupancy expense was relatively unchanged from the prior-year quarter.

Other operating expense totaled $114.8 million in the current quarter, up $52.6 million, or 85%, from $62.2 million in the prior-year quarter. The components of other operating expense are provided below.

Table 10: Other Operating Expense

 

Other Operating Expense

   Three Months Ended
June 30,
               

($ In Millions)

       2015              2014          Change  

Business Promotion

   $ 20.8       $ 19.1       $ 1.7         9

Staff Related

     9.3         10.1         (0.8      (8

FDIC Insurance Premiums

     5.8         4.7         1.1         22   

Other Intangibles Amortization

     2.1         5.0         (2.9      (57

Other Expenses

     76.8         23.3         53.5         N/M   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Other Operating Expense

   $ 114.8       $ 62.2       $ 52.6         85
  

 

 

    

 

 

    

 

 

    

 

 

 

In the current quarter, other expenses includes a charge related to voluntary cash contributions to certain constant dollar NAV funds totaling $45.8 million, to bring the NAVs of these funds to $1.00. Excluding the current-quarter charge, other operating expense increased $6.8 million, or 11%, reflecting higher charitable contributions and charges associated with account servicing activities.

Provision for Income Taxes

Income tax expense was $142.2 million in the current quarter, representing an effective tax rate of 34.6%, compared to $88.8 million in the prior-year quarter, representing an effective tax rate of 32.8%.

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.

 

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Table of Contents

REPORTING SEGMENTS (continued)

 

The following tables reflect the earnings contributions and average assets of Northern Trust’s reporting segments for the three- and six-month periods ended June 30, 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.

Table 11: Results of Reporting Segments

 

Three Months Ended June 30,

  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

  $ 432.0      $ 395.4      $ 324.8      $ 311.5      $ —        $ —        $ 756.8      $ 706.9   

Foreign Exchange Trading Income

    71.8        50.7        3.0        2.2        —          —          74.8        52.9   

Other Noninterest Income

    43.2        47.1        26.8        23.1        103.1        5.1        173.1        75.3   

Net Interest Income (FTE)*

    92.7        76.7        141.0        132.6        23.9        44.1        257.6        253.4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Revenue*

    639.7        569.9        495.6        469.4        127.0        49.2        1,262.3        1,088.5   

Provision for Credit Losses

    2.0        2.4        (12.0     (2.4     —          —          (10.0     —     

Noninterest Expense

    488.2        446.4        322.7        329.4        43.6        35.2        854.5        811.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before Income Taxes*

    149.5        121.1        184.9        142.4        83.4        14.0        417.8        277.5   

Provision for Income Taxes*

    45.3        36.1        69.6        53.6        33.7        5.9        148.6        95.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

  $ 104.2      $ 85.0      $ 115.3      $ 88.8      $ 49.7      $ 8.1      $ 269.2      $ 181.9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of Consolidated Net Income

    39     47     43     49     18     4     100     100

Average Assets

  $ 43,299.8      $ 59,995.2      $ 24,826.5      $ 22,210.8      $ 43,564.8      $ 21,118.1      $ 111,691.1      $ 103,324.1   

 

* Stated on a fully taxable equivalent basis (FTE). Total consolidated includes FTE adjustments of $6.4 million for 2015 and $6.8 million for 2014.

 

Six Months Ended June 30,

  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

  $ 839.3      $ 774.6      $ 645.0      $ 611.8      $ —        $ —        $ 1,484.3      $ 1,386.4   

Foreign Exchange Trading Income

    139.3        98.8        7.1        4.2        —          —          146.4        103.0   

Other Noninterest Income

    85.1        91.5        55.6        45.8        107.2        3.2        247.9        140.5   

Net Interest Income (FTE)*

    188.7        150.4        279.3        267.6        56.4        89.8        524.4        507.8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Revenue*

    1,252.4        1,115.3        987.0        929.4        163.6        93.0        2,403.0        2,137.7   

Provision for Credit Losses

    (0.2     3.6        (14.3     (0.6     —          —          (14.5     3.0   

Noninterest Expense

    923.1        869.9        644.6        648.2        75.8        60.9        1,643.5        1,579.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before Income Taxes*

    329.5        241.8        356.7        281.8        87.8        32.1        774.0        555.7   

Provision for Income Taxes*

    102.6        70.9        134.2        106.2        37.3        15.3        274.1        192.4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

  $ 226.9      $ 170.9      $ 222.5      $ 175.6      $ 50.5      $ 16.8      $ 499.9      $ 363.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of Consolidated Net Income

    45     47     45     48     10     5     100     100

Average Assets

  $ 41,540.9      $ 58,631.4      $ 24,569.1      $ 22,368.8        43,503.7        20,792.1      $ 109,613.7      $ 101,792.3   

 

* Stated on a fully taxable equivalent basis (FTE). Total consolidated includes FTE adjustments of $12.6 million for 2015 and $15.5 million for 2014.

 

11


Table of Contents

REPORTING SEGMENTS (continued)

 

Corporate & Institutional Services

C&IS net income totaled $104.2 million in the current quarter compared to $85.0 million in the prior-year quarter, an increase of $19.2 million, or 23%. Noninterest income was $547.0 million in the current quarter, up $53.8 million, or 11%, from $493.2 million in the prior-year quarter, reflecting higher trust, investment and other servicing fees and foreign exchange trading income. The following table provides a summary of C&IS trust, investment and other servicing fees.

Table 12: C&IS Trust, Investment and Other Servicing Fees

 

     Three Months
Ended June 30,
               

($ In Millions)

       2015              2014          Change  

Custody and Fund Administration

   $ 293.6       $ 261.1       $ 32.5         12

Investment Management

     80.6         77.7         2.9         4   

Securities Lending

     26.8         30.0         (3.2      (11

Other

     31.0         26.6         4.4         17   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total C&IS Trust, Investment and Other Servicing Fees

   $ 432.0       $ 395.4       $ 36.6         9
  

 

 

    

 

 

    

 

 

    

 

 

 

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 12%, driven by new business and higher equity markets, partially offset by the unfavorable impact of movements in foreign exchange rates. Investment management fees increased 4% due to new business, lower money market mutual fund fee waivers and higher equity markets. Money market mutual fund fee waivers in C&IS totaled $13.6 million in the current quarter compared to $14.8 million in the prior-year quarter. Securities lending decreased 11% due to changes in fee arrangements.

Foreign exchange trading income totaled $71.8 million in the current quarter, an increase of $21.1 million, or 42%, from $50.7 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 $43.2 million in the current quarter, down 8%, from $47.1 million in the prior-year quarter, primarily reflecting decreases within various miscellaneous categories of other operating income, partially offset by higher security commissions and trading income.

Net interest income stated on an FTE basis was $92.7 million in the current quarter, up $16.0 million, or 21% from $76.7 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 and a $17.8 million impairment of the residual value of certain aircraft under leveraged lease agreements. 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 prior quarter and the related internal funds pricing method was updated. As a result, the net interest margin increased to 0.99% from 0.57% in the prior-year quarter while average earning assets totaled $37.4 billion, a decrease of $16.4 billion, or 30%, from $53.8 billion in the prior-year quarter. The earning assets that remain consist primarily of intercompany assets and loans and leases. Funding sources were primarily comprised of non-U.S. custody-related interest-bearing deposits, which averaged $45.6 billion in the current quarter, relatively unchanged from the prior-year quarter.

 

12


Table of Contents

REPORTING SEGMENTS (continued)

Corporate & Institutional Services (continued)

 

The provision for credit losses totaled $2.0 million in the current quarter, reflecting an increase in the level of commercial and institutional loans, partially offset by continued improvement in credit quality. The prior-year quarter included a provision of $2.4 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 $488.2 million in the current quarter, up $41.8 million, or 9%, from $446.4 million in the prior-year quarter. The increase was primarily attributable to $36.6 million of the charge related to voluntary cash contributions to certain constant dollar NAV funds noted above allocated to C&IS.

Wealth Management

Wealth Management net income was $115.3 million in the current quarter, up $26.5 million, or 30%, from $88.8 million in the prior-year quarter. Noninterest income was $354.6 million, up $17.8 million, or 5%, from $336.8 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 $324.8 million in the current quarter, up $13.3 million, or 4%, from $311.5 million in the prior-year quarter. The following table provides a summary of Wealth Management trust, investment and other servicing fees.

Table 13: Wealth Management Trust, Investment and Other Servicing Fees

 

    Three Months
Ended June 30,
             

($ In Millions)

  2015     2014     Change  

Central

  $ 128.2      $ 126.2      $ 2.0        2

East

    85.9        83.0        2.9        3   

West

    68.5        65.0        3.5        5   

Global Family Office

    42.2        37.3        4.9        13   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Wealth Management Trust, Investment and Other Servicing Fees

  $ 324.8      $ 311.5      $ 13.3        4
 

 

 

   

 

 

   

 

 

   

 

 

 

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 $14.6 million in the current quarter compared to $15.9 million in the prior-year quarter.

Other noninterest income totaled $26.8 million in the current quarter, up $3.7 million, or 16%, from $23.1 million in the prior-year quarter, primarily reflecting increases within various miscellaneous categories of other operating income.

Net interest income stated on an FTE basis was $141.0 million in the current quarter, up $8.4 million, or 6%, from $132.6 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 2.30% in the current quarter from 2.32% 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 $24.5 billion, up $1.5 billion, or 7%, from $23.0 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 $12.0 million in the current quarter, reflecting improvement in the credit quality of 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. The provision for credit losses was a credit of $2.4 million in the prior-year quarter.

 

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REPORTING SEGMENTS (continued)

Wealth Management (continued)

 

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 $322.7 million in the current quarter, compared to $329.4 million in the prior-year quarter, a decrease of $6.7 million, or 2%. The decrease was primarily attributable to lower compensation and outside services expense, partially offset by higher indirect allocations, primarily attributable to $9.2 million of the charge related to voluntary cash contributions to certain constant dollar NAV funds allocated to Wealth Management.

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 $103.1 million in the current quarter, compared to $5.1 million in the prior-year quarter. The increase reflects the $99.9 million net gain on the sale of 1.0 million of Visa Inc. Class B common shares recognized by the Corporation during the quarter. As of June 30, 2015, the Corporation continued to hold approximately 5.2 million Visa Inc. Class B common shares.

Net interest income decreased $20.2 million, or 46%, to $23.9 million in the current quarter, compared to $44.1 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 were transferred to Treasury and Other from C&IS and the related internal funds pricing method was updated in the prior quarter. Average earning assets increased $23.1 billion to $41.8 billion from the prior-year quarter’s $18.7 billion.

Noninterest expense totaled $43.6 million in the current quarter, up $8.4 million, or 24%, from $35.2 million in the prior-year quarter, primarily reflecting higher general overhead costs, partially offset by higher indirect expense allocations to C&IS and Wealth Management as compared to the prior-year quarter.

SIX-MONTH CONSOLIDATED RESULTS OF OPERATIONS

Overview

Net income per diluted common share was $2.04 for the six months ended June 30, 2015 and $1.50 in the comparable prior-year period. Net income totaled $499.9 million, up $136.6 million, or 38%, as compared to $363.3 million in the prior-year period. The performance in the current period produced an annualized return on average common equity of 12.1%, compared to 9.2% in the prior-year period. The annualized return on average assets was 0.9%, compared to 0.7% in the prior-year period.

The current period includes a net pre-tax gain on the sale of 1.0 million Visa Inc. Class B common shares totaling $99.9 million; voluntary cash contributions to certain constant dollar NAV funds of $45.8 million; and the impairment of the residual value of certain aircraft under leveraged lease agreements of $17.8 million. Excluding the gain and charges, net income per diluted common share, net income, and return on average common equity were $1.95, $477.4 million and 11.5%, respectively.

The prior-year period included pre-tax charges of $32.8 million for severance and related costs and for the realignment of the Corporation’s real estate portfolio and $9.5 million of software write-offs. Excluding these charges and write-offs, net income per diluted common share, net income, and return on average common equity were $1.61, $391.1 million, and 9.9% respectively.

 

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SIX-MONTH CONSOLIDATED RESULTS OF OPERATIONS (continued)

Overview (continued)

 

Revenue for the six months ended June 30, 2015 totaled $2.39 billion, up $268.2 million, or 13%, as compared to $2.12 billion in the prior-year period. Noninterest income was $1.88 billion, up $248.7 million, or 15%, from $1.63 billion in the prior-year period. Trust, investment and other servicing fees increased $97.9 million, or 7%, to $1.48 billion from $1.39 billion in the prior-year period.

Noninterest Income

The components of noninterest income are provided below.

Table 14: Six Months Ended June 30 Noninterest Income

 

Noninterest Income

   Six Months
Ended June 30,
               

($ In Millions)

   2015      2014      Change  

Trust, Investment and Other Servicing Fees

   $ 1,484.3       $ 1,386.4       $ 97.9         7

Foreign Exchange Trading Income

     146.4         103.0         43.4         42   

Treasury Management Fees

     32.4         33.4         (1.0      (3

Security Commissions and Trading Income

     39.8         32.5         7.3         22   

Other Operating Income

     176.0         78.2         97.8         125   

Investment Security Gains (Losses), net

     (0.3      (3.6      3.3         (92
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Noninterest Income

   $ 1,878.6       $ 1,629.9       $ 248.7         15
  

 

 

    

 

 

    

 

 

    

 

 

 

As illustrated in the following table, trust, investment and other servicing fees from C&IS increased $64.7 million, or 8%, totaling $839.3 million, compared to $774.6 million a year ago.

Table 15: Six Months Ended June 30 C&IS Trust, Investment and Other Servicing Fees

 

C&IS Trust, Investment and Other Servicing Fees

   Six Months
Ended June 30,
               

($ In Millions)

   2015      2014      Change  

Custody and Fund Administration

   $ 570.7       $ 513.3       $ 57.4         11

Investment Management

     157.0         152.7         4.3         3   

Securities Lending

     48.4         52.7         (4.3      (8

Other

     63.2         55.9         7.3         13   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 839.3       $ 774.6       $ 64.7         8
  

 

 

    

 

 

    

 

 

    

 

 

 

Custody and fund administration fees, the largest component of C&IS fees, increased 11%, primarily 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 3%, primarily reflecting new business, lower money market mutual fund fee waivers and higher equity markets. Money market mutual fund fee waivers in C&IS totaled $28.8 million, compared to waived fees of $29.7 million in the prior-year period. Securities lending revenue decreased 8%, reflecting changes in fee arrangements and lower spreads, partially offset by higher loan volumes in the current period. Other fees in C&IS increased 13%, primarily reflecting increased sub-advisory fees.

 

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Table of Contents

SIX-MONTH CONSOLIDATED RESULTS OF OPERATIONS (continued)

Noninterest Income (continued)

 

As illustrated in the following table, trust, investment and other servicing fees from Wealth Management increased $33.2 million, or 5%, totaling $645.0 million, compared to $611.8 million a year ago.

Table 16: Six Months Ended June 30 Wealth Management Trust, Investment and Other Servicing Fees

 

     Six Months
Ended June 30,
               

($ In Millions)

   2015      2014      Change  

Wealth Management Trust, Investment and Other Servicing Fees

           

Central

   $ 259.0       $ 250.3       $ 8.7         3

East

     168.3         159.7         8.6         5   

West

     135.3         127.4         7.9         6   

Global Family Office

     82.4         74.4         8.0         11   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 645.0       $ 611.8       $ 33.2         5
  

 

 

    

 

 

    

 

 

    

 

 

 

The increase is primarily due to higher equity markets and new business. Money market mutual fund fee waivers in Wealth Management totaled $32.3 million compared with $33.5 million in the prior-year period.

Foreign exchange trading income increased $43.4 million, or 42%, and totaled $146.4 million compared with $103.0 million in the prior-year period. The increase was attributable to higher currency volatility and client volumes compared to the prior-year period.

Other operating income increased $97.8 million to $176.0 million compared with $78.2 million in the prior-year period. The components of other operating income are provided below.

Table 17: Six Months Ended June 30 Other Operating Income

 

Other Operating Income

   Six Months
Ended June 30,
               

($ In Millions)

   2015      2014      Change  

Loan Service Fees

   $ 29.5       $ 31.7       $ (2.2      (7 )% 

Banking Service Fees

     23.7         24.9         (1.2      (5

Other Income

     122.8         21.6         101.2         N/M   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Other Operating Income

   $ 176.0       $ 78.2       $ 97.8         125
  

 

 

    

 

 

    

 

 

    

 

 

 

The current-year period other income includes a $99.9 million net gain on the sale of a portion of the Visa Inc. Class B common shares held by the Corporation. Excluding the gain, other operating income totaled $76.1 million, down 3% from the prior-year period, primarily reflecting decreases in various miscellaneous income categories.

 

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SIX-MONTH CONSOLIDATED RESULTS OF OPERATIONS (continued)

Net Interest Income

 

The following table presents an analysis of average balances and interest rate changes affecting net interest income.

 

Table 18: AVERAGE CONSOLIDATED BALANCE SHEET

WITH ANALYSIS OF NET INTEREST INCOME

                
NORTHERN TRUST CORPORATION
 

(INTEREST AND RATE ON A FULLY TAXABLE

EQUIVALENT BASIS)

   Six Months ended June 30,  
     2015        2014   

($ In Millions)

   Interest      Average
Balance
    Rate (4)     Interest      Average
Balance
    Rate (4)  

Average Earning Assets

              

Federal Funds Sold and Securities Purchased under

              

Agreements to Resell

   $ 2.4       $ 1,037.8        0.46   $ 1.3       $ 542.3        0.49

Interest-Bearing Due from and Deposits with Banks (1)

     55.3         16,096.4        0.69        65.7         17,179.2        0.77   

Federal Reserve Deposits

     18.7         14,749.4        0.26        16.5         12,986.0        0.26   

Securities

              

U.S. Government

     26.1         4,685.1        1.12        13.1         2,341.3        1.13   

Obligations of States and Political Subdivisions

     3.9         116.9        6.71        6.3         190.6        6.65   

Government Sponsored Agency

     71.6         16,667.7        0.87        74.2         18,098.7        0.83   

Other (2)

     64.3         15,397.5        0.84        55.9         12,711.0        0.89   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Securities

     165.9         36,867.2        0.91        149.5         33,341.6        0.90   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Loans and Leases (3)

     357.9         32,512.9        2.22        371.7         29,617.6        2.53   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Earning Assets

     600.2         101,263.7        1.20        604.7         93,666.7        1.30   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Allowance for Credit Losses Assigned to Loans and Leases

     —           (262.9     —          —           (277.3     —     

Cash and Due from Banks

     —           1,859.7        —          —           2,822.6        —     

Buildings and Equipment

     —           446.7        —          —           454.2        —     

Client Security Settlement Receivables

     —           952.3        —          —           842.3        —     

Goodwill

     —           530.4        —          —           541.9        —     

Other Assets

     —           4,823.8        —          —           3,741.9        —     
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Assets

   $ —         $ 109,613.7        —     $ —         $ 101,792.3        —  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Average Source of Funds

              

Deposits

              

Savings and Money Market

   $ 4.9       $ 15,534.1        0.06   $ 4.7       $ 14,771.5        0.06

Savings Certificates and Other Time

     3.3         1,760.7        0.38        3.4         1,911.3        0.36   

Non-U.S. Offices — Interest-Bearing

     26.9         48,351.1        0.11        34.4         47,784.0        0.15   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Interest-Bearing Deposits

     35.1         65,645.9        0.11        42.5         64,466.8        0.13   

Short-Term Borrowings

     2.8         4,794.0        0.12        2.3         4,384.0        0.11   

Senior Notes

     23.5         1,497.1        3.15        31.2         1,828.2        3.44   

Long-Term Debt

     13.3         1,475.5        1.82        19.8         1,685.4        2.37   

Floating Rate Capital Debt

     1.1         277.2        0.83        1.1         277.2        0.81   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Interest-Related Funds

     75.8         73,689.7        0.21        96.9         72,641.6        0.27   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Interest Rate Spread

     —           —          0.99        —           —          1.03   


Demand and Other Noninterest-Bearing Deposits

     —           23,800.8        —          —           18,240.5        —     

Other Liabilities

     —           3,582.5        —          —           2,973.4        —     

Stockholders’ Equity

     —           8,540.7        —          —           7,936.8        —     
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ —         $ 109,613.7        —     $ —         $ 101,792.3        —  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net Interest Income/Margin (FTE Adjusted)

   $ 524.4       $ —          1.04   $ 507.8       $ —          1.09
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net Interest Income/Margin (Unadjusted)

   $ 511.8       $ —          1.02   $ 492.3       $ —          1.06
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

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Table of Contents

SIX-MONTH CONSOLIDATED RESULTS OF OPERATIONS (continued)

Net Interest Income (continued)

 

ANALYSIS OF NET INTEREST INCOME CHANGES

DUE TO VOLUME AND RATE

                  
     Six Months ended June 30, 2015/2014  
     Change Due To  

(In Millions)

   Average
Balance
    Rate     Total  

Earning Assets (FTE)

   $ 49.0      $ (53.5   $ (4.5

Interest-Related Funds

     (1.3     (15.6     (16.9
  

 

 

   

 

 

   

 

 

 

Net Interest Income (FTE)

   $ 50.3      $ (37.9   $ 12.4   
  

 

 

   

 

 

   

 

 

 

 

(1) Interest-Bearing Due from and Deposits with Banks includes the interest-bearing component of Cash and Due from Banks and Interest-Bearing Deposits with Banks as presented on the consolidated balance sheet in our periodic filings with the U.S. Securities and Exchange Commission.
(2) Other securities include certain community development investments and Federal Home Loan Bank and Federal Reserve stock of $199.8 million, $142.7 million and $53.5 million, which are classified in other assets in the consolidated balance sheet as of June 30, 2015 and 2014.
(3) Average balances include nonaccrual loans. Lease financing receivable balances are reduced by deferred income.
(4) Rate calculations are based on actual balances rather than the rounded amounts presented in the Average Consolidated Balance Sheet with Analysis of Net Interest Income.
Notes: Net Interest Income (FTE Adjusted) includes adjustments to a fully taxable equivalent basis for loans and securities. Such adjustments are based on a blended federal and state tax rate of 37.7% and 37.8% for the six months ended June 30, 2015 and 2014, respectively. Total taxable equivalent interest adjustments amounted to $12.6 million and $15.5 million for the three months ended June 30, 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.

Net interest income, stated on an FTE basis, totaled $524.4 million, an increase of $16.6 million, or 3%, from $507.8 million reported in the prior-year period. The increase is the result of growth in earning assets, offset by a $17.8 million impairment of the residual value of certain aircraft under leveraged lease agreements and a lower net interest margin. Average earning assets were $101.3 billion, up $7.6 billion, or 8%, from $93.7 billion in the prior-year period, primarily attributable to higher levels of securities, loans and Federal Reserve deposits, reflecting higher levels of deposits as compared to the prior year. The net interest margin, on an FTE basis, declined to 1.04% from 1.09% in the prior-year period. Excluding the impairment, the net interest margin was 1.08%, reflecting lower yields on earning assets, partially offset by a lower cost of interest-related funds.

Provision for Credit Losses

The provision for credit losses was a credit of $14.5 million in the current-year period, compared to a provision of $3.0 million recorded in the prior-year period. Net charge-offs in the current-year period totaled $7.2 million resulting from $13.6 million of charge-offs and $6.4 million of recoveries, compared to net charge-offs of $7.4 million in the prior-year period resulting from $19.3 million of charge-offs and $11.9 million of recoveries. The current period provision reflects improved credit quality. Residential real estate loans continued to reflect weakness relative to the overall portfolio, accounting for 76% and 71% of total nonperforming loans and leases at June 30, 2015 and 2014, respectively. Loan balances within the private client, commercial and institutional and commercial real estate loan portfolios increased in the current period, while the residential real estate loan balance decreased. For a fuller discussion of the consolidated allowance and provision for credit losses refer to the “Asset Quality” section beginning on page 22.

 

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Table of Contents

SIX-MONTH CONSOLIDATED RESULTS OF OPERATIONS (continued)

 

Noninterest Expense

Noninterest expense totaled $1.64 billion for the current period, up $64.5 million, or 4%, compared to $1.58 billion in the prior-year period. The components of noninterest expense are provided below.

Table 19: Six Months Ended June 30 Noninterest Expense

 

Noninterest Expense

   Six Months
Ended June 30,
               

($ In Millions)

   2015      2014      Change  

Compensation

   $ 716.2       $ 714.2       $ 2.0         —  

Employee Benefits

     146.1         135.4         10.7         8   

Outside Services

     282.3         289.0         (6.7      (2

Equipment and Software

     224.7         217.4         7.3         3   

Occupancy

     86.0         91.4         (5.4      (6

Other Operating Expense

     188.2         131.6         56.6         43   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Noninterest Expense

   $ 1,643.5       $ 1,579.0       $ 64.5         4
  

 

 

    

 

 

    

 

 

    

 

 

 

Compensation expense, the largest component of noninterest expense increased to $716.2 million from the prior-year period’s $714.2 million. The prior-year period included severance-related charges of $25.5 million. Excluding the severance-related charges, compensation expense increased $27.5 million, or 4%, reflecting higher performance- based compensation, staff levels and base pay adjustments, partially offset by favorable impact of movements in foreign exchange rates.

Employee benefit expense increased $10.7 million, or 8% to $146.1 million from $135.4 million in the prior-year period. The prior-year period included $1.9 million of severance-related charges. Excluding these charges, employee benefit expense increased $12.6 million, or 9%, primarily attributable to higher pension and employee medical expense.

Outside services expense equaled $282.3 million, down $6.7 million, or 2%, from $289.0 million in the prior-year period. In the prior-year period, outside services expense included $1.1 million of severance-related charges. Excluding these charges, outside services expense decreased $5.6 million, or 2%, primarily reflecting lower legal, third-party advisor fees, consulting and sub-custodian expense, partially offset by higher technical services.

Equipment and software expense totaled $224.7 million, up $7.3 million, or 3% from $217.4 million in the prior-year period. The prior-year period included $9.5 million of write-offs of replaced or eliminated software. Excluding these write-offs, equipment and software expense increased $16.8 million, or 8%, reflecting higher software amortization.

Occupancy expense equaled $86.0 million, down $5.4 million, or 6%, from $91.4 million in the prior-year period. The prior-year period included charges totaling $4.3 million in connection with reductions in office space. Excluding these charges, occupancy expense was relatively unchanged from the prior-year period.

 

19


Table of Contents

SIX-MONTH CONSOLIDATED RESULTS OF OPERATIONS (continued)

Noninterest Expense (continued)

 

The components of other operating expense are provided below.

Table 20: Six Months Ended June 30 Other Operating Expense

 

Other Operating Expense

   Six Months Ended
June 30,
               

($ In Millions)

   2015      2014      Change  

Business Promotion

   $ 49.1       $ 47.5       $ 1.6         3

Staff Related

     19.1         19.5         (0.4      (2

FDIC Insurance Premiums

     11.6         10.6         1.0         9   

Other Intangibles Amortization

     6.7         9.9         (3.2      (32

Other Expenses

     101.7         44.1         57.6         131   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Other Operating Expense

   $ 188.2       $ 131.6       $ 56.6         43
  

 

 

    

 

 

    

 

 

    

 

 

 

Other operating expense totaled $188.2 million, up $56.6 million, or 43%, from $131.6 million in the prior-year period. The current-year period other expenses includes a charge related to voluntary cash contributions to certain constant dollar NAV funds totaling $45.8 million. Excluding the current-period charge, other operating expense increased $10.8 million, or 8%, reflecting higher charitable contributions and charges associated with account servicing activities.

Provision for Income Taxes

Income tax expense was $261.5 million for the six months ended June 30, 2015, representing an effective tax rate of 34.4%. The provision for income taxes was $176.9 million for the six months ended June 30, 2014, representing an effective tax rate of 32.8%.

CONSOLIDATED BALANCE SHEETS

Total assets were $119.9 billion and $109.9 billion at June 30, 2015, and December 31, 2014, respectively, and averaged $111.7 billion in the current quarter compared with $103.3 billion in the quarter ended June 30, 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 $33.0 billion and $31.6 billion at June 30, 2015, and December 31, 2014, respectively, and averaged $32.9 billion in the current quarter, up 10% from $30.1 billion in the quarter ended June 30, 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 $39.2 billion and $34.2 billion at June 30, 2015, and December 31, 2014, respectively, and averaged $37.9 billion for the current quarter, up 11% from $34.3 billion in the quarter ended June 30, 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 $37.4 billion and $35.1 billion at June 30, 2015, and December 31, 2014, respectively, and averaged $33.0 billion in the current quarter, up 6% from the quarter ended June 30, 2014 balances, primarily reflecting increased Federal Reserve deposits and federal funds sold and securities purchased under agreements to resell. Interest-bearing client deposits at June 30, 2015, and December 31, 2014, totaled $70.2 billion and $65.2 billion, respectively, and averaged $66.8 billion in the current quarter, up 1% compared to $65.8 billion in the quarter ended June 30, 2014. Noninterest-bearing client deposits at June 30, 2015, and December 31, 2014, totaled $30.5 billion and $25.5 billion, respectively, and averaged $25.6 billion in the current quarter, up 36% from $18.8 billion in the quarter ended June 30, 2014.

 

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CONSOLIDATED BALANCE SHEETS (continued)

 

Total stockholders’ equity at June 30, 2015, was $8.7 billion compared to $8.4 billion at December 31, 2014, and averaged $8.6 billion for the current quarter, up 8% from $7.9 billion for the quarter ended June 30, 2014. The increase in average stockholders’ equity compared to the prior-year quarter was primarily attributable to earnings 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 three and six months ended June 30, 2015, the Corporation declared cash dividends $85.3 million and $163.8 million to common stockholders, and cash dividends totaling $5.8 million and $11.7 million to preferred stockholders, respectively. During the three and six months ended June 30, 2015, the Corporation repurchased 1,295,263 shares of common stock at a cost of $96.7 million ($74.64 average price per share) and 2,851,133 shares at a cost of $203.9 million ($71.52 average price per share), respectively.

CAPITAL RATIOS

The capital ratios of the Corporation and the Bank remained strong at June 30, 2015, with all ratios applicable to classification as “well-capitalized” under U.S. regulatory requirements having been exceeded.

The table below provides capital ratios for Northern Trust Corporation and The Northern Trust Company determined by Basel III phased-in requirements.

Table 21: Regulatory Capital Ratios

 

Capital Ratios — Northern Trust Corporation

   June 30, 2015     March 31, 2015     June 30, 2014  
   Advanced
Approach
    Standardized
Approach (a)
    Advanced
Approach
    Standardized
Approach (a)
    Advanced
Approach
    Standardized
Approach (a)
 

Common Equity Tier 1

     12.0     10.7     11.8     10.5     12.7     12.7

Tier 1

     12.6     11.2     12.4     11.1     12.9     12.9

Total

     14.4     13.2     14.2     13.1     14.9     15.4

Tier 1 Leverage

     7.6     7.6     7.8     7.8     n/a        7.6

Supplementary Leverage (b)

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

 

Capital Ratios — The Northern Trust Company

   June 30, 2015     March 31, 2015     June 30, 2014  
   Advanced
Approach
    Standardized
Approach (a)
    Advanced
Approach
    Standardized
Approach (a)
    Advanced
Approach
    Standardized
Approach (a)
 

Common Equity Tier 1

     11.6     10.1     11.3     10.0     11.7     11.4

Tier 1

     11.6     10.1     11.3     10.0     11.6     11.4

Total

     13.2     11.9     13.0     11.8     13.7     14.0

Tier 1 Leverage

     6.8     6.8     6.9     6.9     n/a        6.7

Supplementary Leverage (b)

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

 

(a) In 2014, Standardized Approach risk-weighted assets were determined by Basel I requirements. Effective with the first quarter of 2015, risk-weighted assets are calculated in accordance with the Basel III Standardized Approach final rules.
(b) Beginning with the first quarter of 2015, advanced approaches banking organizations must calculate and report their supplementary leverage ratio. Effective January 1, 2018, advanced approaches institutions, such as the Corporation, will be subject to a minimum supplementary leverage ratio of 3 percent.

 

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STATEMENTS OF CASH FLOWS

Net cash provided by operating activities of $1.5 billion for the six months ended June 30, 2015, was primarily attributable to a reduction of net collateral deposited with counterparties, as well as earnings, including the impact of non-cash charges such as amortization of computer software, partially offset by increased other operating activities. Net cash provided by operating activities of $1.5 billion for the six months ended June 30, 2014, was primarily attributable to a reduction of net collateral deposited with counterparties, as well as earnings, including the impact of non-cash charges such as amortization of computer software, and decreased receivables.

Net cash used in investing activities of $7.7 billion for the six months ended June 30, 2015, was primarily attributable to net purchases of securities held to maturity and available for sale, as well as increased loans and leases, interest-bearing deposits with banks, and client security settlement receivables, partially offset by decreases within other investing activities.

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

For the six months ended June 30, 2015, net cash provided by financing activities totaled $10.2 billion, primarily reflecting increased levels of total deposits and increased short-term other borrowings, partially offset by lower securities sold under agreements to repurchase and federal funds purchased. The increase in total deposits is attributable to higher levels of interest-bearing and noninterest-bearing non-U.S. office client and demand and other noninterest-bearing client deposits.

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

ASSET QUALITY

Securities Portfolio

Northern Trust maintains a high quality securities portfolio, with 80% of the combined available for sale, held to maturity, and trading account portfolios at June 30, 2015, comprised of U.S. Treasury and government sponsored agency securities and triple-A rated corporate notes, asset-backed securities, covered bonds, sub-sovereign, supranational, sovereign and non-U.S. agency bonds, auction rate securities, commercial mortgage-backed securties 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 12% 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 $90.7 million at June 30, 2015, comprised of $153.5 million and $62.8 million of gross unrealized gains and losses, respectively. Of the unrealized losses on securities at June 30, 2015, the largest component was $23.8 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 Community Reinvestment Act (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, $19.1 million of

 

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ASSET QUALITY (continued)

Securities Portfolio (continued)

 

the unrealized losses related to corporate debt securities, primarily reflecting higher market rates since purchase; 37% of the corporate debt portfolio is backed by guarantees provided by U.S. and non-U.S. governmental entities. Unrealized losses of $16.1 million related to government sponsored agency securities were primarily attributable to changes in market rates since their purchase.

There were no other-than-temporary impairment (OTTI) losses for the six months ended June 30, 2015. For the six months ended June 30, 2014, charges of $3.9 million were recorded relating to OTTI of certain CRA-eligible securities. Northern Trust has evaluated all securities with unrealized losses for possible OTTI in accordance with GAAP and Northern Trust’s security impairment review policy.

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

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 was 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 22: Nonperforming Assets

 

($ In Millions)

   June 30,
2015
    March 31,
2015
    June 30,
2014
 

Nonperforming Loans and Leases

      

Commercial

      

Commercial and Institutional

   $ 23.4      $ 20.9      $ 20.8   

Commercial Real Estate

     26.0        39.9        45.4   
  

 

 

   

 

 

   

 

 

 

Total Commercial

     49.4        60.8        66.2   
  

 

 

   

 

 

   

 

 

 

Personal

      

Residential Real Estate

     158.2        157.7        161.7   

Private Client

     1.1        1.1        1.4   
  

 

 

   

 

 

   

 

 

 

Total Personal

     159.3        158.8        163.1   
  

 

 

   

 

 

   

 

 

 

Total Nonperforming Loans and Leases

     208.7        219.6        229.3   

Other Real Estate Owned

     10.1        8.5        12.6   
  

 

 

   

 

 

   

 

 

 

Total Nonperforming Assets

     218.8        228.1        241.9   
  

 

 

   

 

 

   

 

 

 

90 Day Past Due Loans Still Accruing

   $ 14.9      $ 9.4      $ 13.1   
  

 

 

   

 

 

   

 

 

 

Nonperforming Loans and Leases to Total Loans and Leases

     0.63     0.67     0.75
  

 

 

   

 

 

   

 

 

 

Coverage of Loan and Lease Allowance to Nonperforming Loans and Leases

     1.2x        1.2x        1.2x   
  

 

 

   

 

 

   

 

 

 

 

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ASSET QUALITY (continued)

Nonperforming Loans and Other Real Estate Owned (continued)

 

Nonperforming assets of $218.8 million as of June 30, 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 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 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 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 $10.0 million in the current quarter, compared to no provision in the prior-year quarter. Net charge-offs were $2.6 million, resulting from $6.1 million of charge-offs and $3.5 million of recoveries, compared to $5.9 million of net charge-offs in the prior-year quarter, resulting from $7.8 million of charge-offs and $1.9 million of recoveries. Residential real estate loans accounted for 76% and 71% of total nonperforming loans and leases at June 30, 2015, and 2014, respectively.

Note 7 to the consolidated financial statements includes a table that details the changes in the allowance for credit losses during the three and six months ended June 30, 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 23: Allocation of the Allowance for Credit Losses

 

    June 30, 2015     March 31, 2015     June 30, 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

  $ 15.3        —     $ 22.9        —     $ 23.8        —  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allocated Inherent Allowance

           

Commercial

           

Commercial and Institutional

    66.7        27        70.3        28        71.4        26   

Commercial Real Estate

    67.8        11        66.6        11        69.3        10   

Lease Financing, net

    3.6        3        3.2        3        3.4        3   

Non-U.S.

    2.2        5        2.8        5        2.7        4   

Other

    —          1        —          1        —          2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Commercial

    140.3        47        142.9        48        146.8        45   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Personal

           

Residential Real Estate

    99.2        28        102.4        29        114.6        33   

Private Client

    19.4        25        18.5        23        18.3        22   

Other

    —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Personal

    118.6        53        120.9        52        132.9        55   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Allocated Inherent Allowance

  $ 258.9        100   $ 263.8        100   $ 279.7        100
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Allowance for Credit Losses

  $ 274.2        $ 286.7        $ 303.5     
 

 

 

     

 

 

     

 

 

   

Allowance Assigned to

           

Loans and Leases

  $ 257.3        $ 259.0        $ 275.2     

Undrawn Commitments and Standby Letters of Credit

    16.9          27.7          28.3     
 

 

 

     

 

 

     

 

 

   

Total Allowance for Credit Losses

  $ 274.2        $ 286.7        $ 303.5     
 

 

 

     

 

 

     

 

 

   

Allowance Assigned to Loans and Leases to Total Loans and Leases

    0.78       0.79       0.90  
 

 

 

     

 

 

     

 

 

   

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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Table of Contents

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 24: 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

   $ 8   

200 Basis Points

   $ (21

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 25: Sensitivity of Economic Value of Equity to Changes in Interest Rates as of June 30, 2015

 

($ In Millions)

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

Increase in Interest Rates Above Market Rates

  

100 Basis Points

   $ (116

200 Basis Points

   $ (436

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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Table of Contents

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 June 30, 2015, and March 31, 2015, 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 26: Foreign Currency Value-At-Risk

 

     Total VaR
(Spot and Forward)
     Foreign Exchange Spot
VaR
     Foreign Exchange
Forward VaR
 

($ In Millions)

   June 30,
2015
     March 31,
2015
     June 30,
2015
     March 31,
2015
     June 30,
2015
     March 31
2015
 

High

   $ 0.7       $ 0.4       $ 0.7       $ 0.4       $ 0.2       $ 0.2   

Low

     0.1         0.1         —           —           0.1         0.1   

Average

     0.2         0.2         0.1         0.1         0.1         0.1   

Quarter-End

     0.3         0.4         0.2         0.4         0.2         0.2   

RECONCILIATION OF CERTAIN REPORTED ITEMS TO FULLY TAXABLE EQUIVALENTS

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

Table 27: Reconciliation of Reported Net Interest Income to Fully Taxable Equivalent

 

     Three Months Ended  
     June 30, 2015     June 30, 2014  

($ In Millions)

   Reported     FTE Adj.      FTE     Reported     FTE Adj.      FTE  

Interest Income

   $ 288.8      $ 6.4       $ 295.2      $ 293.8      $ 6.8       $ 300.6   

Interest Expense

     37.6        —           37.6        47.2        —           47.2   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Net Interest Income

   $ 251.2      $ 6.4       $ 257.6      $ 246.6      $ 6.8       $ 253.4   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Net Interest Margin

     0.97        1.00     1.04        1.06
  

 

 

      

 

 

   

 

 

      

 

 

 

 

     Six Months Ended  
     June 30, 2015     June 30, 2014  

($ In Millions)

   Reported     FTE Adj.      FTE     Reported     FTE Adj.      FTE  

Interest Income

   $ 587.6      $ 12.6       $ 600.2      $ 589.2      $ 15.5       $ 604.7   

Interest Expense

     75.8        —           75.8        96.9        —           96.9   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Net Interest Income

   $ 511.8      $ 12.6       $ 524.4      $ 492.3      $ 15.5       $ 507.8   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Net Interest Margin

     1.02        1.04     1.06        1.09
  

 

 

      

 

 

   

 

 

      

 

 

 

 

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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,” “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 United States, Europe, the Middle East, Asia Pacific 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;

 

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FORWARD-LOOKING STATEMENTS (continued)

 

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

 

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

 

    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 United States 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.

 

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FORWARD-LOOKING STATEMENTS (continued)

 

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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Item 1. Financial Statements

 

CONSOLIDATED BALANCE SHEETS    NORTHERN TRUST CORPORATION

 

(In Millions Except Share Information)

   June 30,
2015
    December 31,
2014
 
     (Unaudited)        

Assets

    

Cash and Due from Banks

   $ 7,152.9      $ 3,050.6   

Federal Funds Sold and Securities Purchased under Agreements to Resell

     1,020.0        1,062.7   

Interest-Bearing Deposits with Banks

     15,650.3        14,928.3   

Federal Reserve Deposits

     17,488.7        17,386.3   

Securities

    

Available for Sale

     31,835.6        29,558.5   

Held to Maturity (Fair value of $6,986.4 and $4,176.1)

     6,990.8        4,170.8   

Trading Account

     1.2        4.7   
  

 

 

   

 

 

 

Total Securities

     38,827.6        33,734.0   
  

 

 

   

 

 

 

Loans and Leases

    

Commercial

     15,304.9        14,353.6   

Personal

     17,648.9        17,286.6   
  

 

 

   

 

 

 

Total Loans and Leases (Net of unearned income of $255.2 and $287.7)

     32,953.8        31,640.2   
  

 

 

   

 

 

 
Allowance for Credit Losses Assigned to Loans and Leases      (257.3     (267.0

Buildings and Equipment

     436.5        444.3   

Client Security Settlement Receivables

     2,034.2        1,568.8   

Goodwill

     534.3        533.2   

Other Assets

     4,101.9        5,865.1   
  

 

 

   

 

 

 

Total Assets

   $ 119,942.9      $ 109,946.5   
  

 

 

   

 

 

 

Liabilities

    

Deposits

    

Demand and Other Noninterest-Bearing

   $ 25,688.8      $ 22,815.0   

Savings and Money Market

     15,782.4        15,916.4   

Savings Certificates and Other Time

     1,540.5        1,757.4   

Non U.S. Offices — Noninterest-Bearing

     4,766.3        2,723.2   

                              — Interest-Bearing

     52,909.9        47,545.0   
  

 

 

   

 

 

 

Total Deposits

     100,687.9        90,757.0   

Federal Funds Purchased

     351.3        932.9   

Securities Sold Under Agreements to Repurchase

     29.8        885.1   

Other Borrowings

     3,322.9        1,685.2   

Senior Notes

     1,497.2        1,497.0   

Long-Term Debt

     1,362.3        1,615.1   

Floating Rate Capital Debt

     277.3        277.2   

Other Liabilities

     3,664.9        3,848.1   
  

 

 

   

 

 

 

Total Liabilities

     111,193.6        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 232,852,813 and 233,390,705

     408.6        408.6   

Additional Paid-In Capital

     1,044.6        1,050.9   

Retained Earnings

     7,949.8        7,625.4   

Accumulated Other Comprehensive Loss

     (273.7     (319.7

Treasury Stock (12,318,711 and 11,780,819 shares, at cost)

     (768.5     (704.8
  

 

 

   

 

 

 
Total Stockholders’ Equity      8,749.3        8,448.9   
  

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 119,942.9      $ 109,946.5   
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

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CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

   NORTHERN TRUST CORPORATION

 

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

(In Millions Except Share Information)

   2015     2014      2015     2014  

Noninterest Income

         

Trust, Investment and Other Servicing Fees

   $ 756.8      $ 706.9       $ 1,484.3      $ 1,386.4   

Foreign Exchange Trading Income

     74.8        52.9         146.4        103.0   

Treasury Management Fees

     16.1        16.6         32.4        33.4   

Security Commissions and Trading Income

     20.0        17.8         39.8        32.5   

Other Operating Income

     137.4        40.5         176.0        78.2   

Investment Security Gains (Losses), net (Note)

     (0.4     0.4         (0.3     (3.6
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Noninterest Income

     1,004.7        835.1         1,878.6        1,629.9   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net Interest Income

         

Interest Income

     288.8        293.8         587.6        589.2   

Interest Expense

     37.6        47.2         75.8        96.9   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net Interest Income

     251.2        246.6         511.8        492.3   

Provision for Credit Losses

     (10.0     —           (14.5     3.0   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net Interest Income after Provision for Credit Losses

     261.2        246.6         526.3        489.3   
  

 

 

   

 

 

    

 

 

   

 

 

 

Noninterest Expense

         

Compensation

     361.9        372.4         716.2        714.2   

Employee Benefits

     73.2        68.5         146.1        135.4   

Outside Services

     147.2        144.6         282.3        289.0   

Equipment and Software

     114.4        116.1         224.7        217.4   

Occupancy

     43.0        47.2         86.0        91.4   

Other Operating Expense

     114.8        62.2         188.2        131.6   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Noninterest Expense

     854.5        811.0         1,643.5        1,579.0   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income before Income Taxes

     411.4        270.7         761.4        540.2   

Provision for Income Taxes

     142.2        88.8         261.5        176.9   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net Income

   $ 269.2      $ 181.9       $ 499.9      $ 363.3   
  

 

 

   

 

 

    

 

 

   

 

 

 

Preferred Stock Dividends

     5.8        —           11.7      $ —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Net Income Applicable to Common Stock

   $ 263.4      $ 181.9       $ 488.2      $ 363.3   
  

 

 

   

 

 

    

 

 

   

 

 

 

Per Common Share

         

Net Income — Basic

   $ 1.11      $ 0.76       $ 2.06      $ 1.51   

                    — Diluted

     1.10        0.75         2.04        1.50   
  

 

 

   

 

 

    

 

 

   

 

 

 

Average Number of Common Shares Outstanding

                     — Basic

     233,149,020        236,012,703         233,264,453        236,607,125   

                    — Diluted

     235,232,835        237,753,679         235,260,611        238,398,614   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

CONSOLIDATED STATEMENTS OF

COMPREHENSIVE INCOME

(UNAUDITED)

   NORTHERN TRUST CORPORATION

 

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

(In Millions)

       2015             2014             2015             2014      

Net Income

   $ 269.2      $ 181.9      $ 499.9      $ 363.3   

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

        

Net Unrealized Gains (Losses) on Securities Available for Sale

     (22.4     33.5        31.7        38.0   

Net Unrealized Gains (Losses) on Cash Flow Hedges

     3.2        (0.6     2.1        1.0   

Foreign Currency Translation Adjustments

     5.8        (5.6     (0.1     (6.9

Pension and Other Postretirement Benefit Adjustments

     6.1        3.6        12.3        7.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other Comprehensive Income (Loss)

     (7.3     30.9        46.0        39.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive Income

   $ 261.9      $ 212.8      $ 545.9      $ 402.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ —        $ —        $ —        $ (4.6

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

     —          —          —          0.7   

  Other Security Gains (Losses), net

     (0.4     0.4        (0.3     0.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

  Investment Security Gains (Losses), net

   $ (0.4   $ 0.4      $ (0.3   $ (3.6
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

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CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

   NORTHERN TRUST CORPORATION

 

     Six Months
Ended June 30,
 

(In Millions)

   2015     2014  

Preferred Stock

    

Balance at January 1 and June 30

   $ 388.5      $ —     

Issuance of Preferred Stock, Series C

     —          —     
  

 

 

   

 

 

 

Balance at June 30

   $ 388.5      $ —     
  

 

 

   

 

 

 

Common Stock

    

Balance at January 1 and June 30

     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

     (64.3     (47.1

Stock Options and Awards — Amortization

     42.6        42.1   

Stock Options and Awards — Tax Benefits

     15.4        8.6   
  

 

 

   

 

 

 

Balance at June 30

     1,044.6        1,039.3   
  

 

 

   

 

 

 

Retained Earnings

    

Balance at January 1

     7,625.4        7,134.8   

Net Income

     499.9        363.3   

Dividends Declared — Common Stock

     (163.8     (154.0

Dividends Declared — Preferred Stock

     (11.7     —     
  

 

 

   

 

 

 

Balance at June 30

     7,949.8        7,344.1   
  

 

 

   

 

 

 

Accumulated Other Comprehensive Income (Loss)

    

Balance at January 1

     (319.7     (244.3

Net Unrealized Gains (Losses) on Securities Available for Sale

     31.7        38.0   

Net Unrealized Gains (Losses) on Cash Flow Hedges

     2.1        1.0   

Foreign Currency Translation Adjustments

     (0.1     (6.9

Pension and Other Postretirement Benefit Adjustments

     12.3        7.0   
  

 

 

   

 

 

 

Balance at June 30

     (273.7     (205.2
  

 

 

   

 

 

 

Treasury Stock

    

Balance at January 1

     (704.8     (422.8

Stock Options and Awards

     140.2        116.5   

Stock Purchased

     (203.9     (237.9
  

 

 

   

 

 

 

Balance at June 30

     (768.5     (544.2
  

 

 

   

 

 

 

Total Stockholders’ Equity at June 30

   $ 8,749.3      $ 8,042.6   
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)    NORTHERN TRUST CORPORATION
     Six Months Ended
June 30,
 

(In Millions)

   2015     2014  

Cash Flows from Operating Activities:

    

Net Income

   $ 499.9      $ 363.3   

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

    

Investment Security Losses, net

     0.3        3.6   

Amortization and Accretion of Securities and Unearned Income, net

     27.5        17.2   

Provision for Credit Losses

     (14.5     3.0   

Depreciation on Buildings and Equipment

     46.7        46.5   

Amortization of Computer Software

     126.6        113.0   

Amortization of Intangibles

     6.7        9.9   

Pension Plan Contributions

     (16.5     (13.9

Change in Receivables

     (27.7     140.5   

Change in Interest Payable

     (8.8     (10.2

Change in Collateral With Derivative Counterparties, net

     1,152.4        527.9   

Other Operating Activities, net

     (265.4     339.2   
  

 

 

   

 

 

 

Net Cash Provided by Operating Activities

     1,527.2        1,540.0   
  

 

 

   

 

 

 

Cash Flows from Investing Activities:

    

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

     42.7        (49.9

Change in Interest-Bearing Deposits with Banks

     (1,036.1     2,578.7   

Net Change in Federal Reserve Deposits

     (102.4     (427.0

Purchases of Securities — Held to Maturity

     (4,712.9     (3,758.9

Proceeds from Maturity and Redemption of Securities — Held to Maturity

     1,814.5        1,846.0   

Purchases of Securities — Available for Sale

     (5,507.2     (6,442.8

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

     3,237.4        5,185.3   

Change in Loans and Leases

     (1,328.4     (1,318.9

Purchases of Buildings and Equipment

     (42.6     (32.4

Purchases and Development of Computer Software

     (148.8     (159.6

Change in Client Security Settlement Receivables

     (472.8     (234.0

Other Investing Activities, net

     595.9        (271.1
  

 

 

   

 

 

 

Net Cash Used in Investing Activities

     (7,660.7     (3,084.6
  

 

 

   

 

 

 

Cash Flows from Financing Activities:

    

Change in Deposits

     10,491.8        4,468.0   

Change in Federal Funds Purchased

     (581.6     3.4   

Change in Securities Sold under Agreements to Repurchase

     (855.3     2.3   

Change in Short-Term Other Borrowings

     1,545.2        (1,644.8

Repayments of Senior Notes and Long-Term Debt

     (228.4     (602.4

Contingent Consideration Liability Payment

     —          (55.3

Treasury Stock Purchased

     (203.9     (237.9

Net Proceeds from Stock Options

     75.8        69.4   

Cash Dividends Paid on Common Stock

     (154.1     (149.9

Cash Dividends Paid on Preferred Stock

     (15.3     —     

Other Financing Activities, net

     155.7        362.2   
  

 

 

   

 

 

 

Net Cash Provided by Financing Activities

     10,229.9        2,215.0   
  

 

 

   

 

 

 

Effect of Foreign Currency Exchange Rates on Cash

     5.9        112.4   
  

 

 

   

 

 

 

Increase in Cash and Due from Banks

     4,102.3        782.8   

Cash and Due from Banks at Beginning of Year

     3,050.6        3,162.4   
  

 

 

   

 

 

 

Cash and Due from Banks at End of Period

   $ 7,152.9      $ 3,945.2   
  

 

 

   

 

 

 

Supplemental Disclosures of Cash Flow Information:

    

Interest Paid

   $ 85.6      $ 108.4   

Income Taxes Paid

     224.1        74.1   

Transfers from Loans to OREO

     8.6        8.7   
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

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Notes to Consolidated Financial Statements

1. Basis of Presentation — The consolidated financial statements include the accounts of Northern Trust Corporation (Corporation) and its subsidiaries (collectively, Northern Trust). Significant intercompany balances and transactions have been eliminated. The consolidated financial statements, as of and for the periods ended June 30, 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, 2017. 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.

In April 2015, the FASB issued ASU No. 2015-05, “Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement” which clarifies whether fees paid by a customer in a cloud computing arrangement pertain to the acquisition of a software license, services, or both. 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 2015-05.

In May 2015, the FASB issued ASU No. 2015-07, “Fair Value Measurement (Topic 820) — Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (or Its Equivalent)” which removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. Further, the ASU requires entities to provide certain disclosures only for investments for which they elect to use the net asset value practical expedient to determine fair value. The ASU is effective for interim and annual periods beginning after December 15, 2015, and will be applied retrospectively to all periods presented. Early adoption is permitted. Northern Trust is currently assessing the impact of adoption of ASU 2015-07.

 

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Notes to Consolidated Financial Statements (continued)

 

3. Fair Value Measurements — Fair Value Hierarchy. The following describes the hierarchy of valuation inputs (Levels 1, 2, and 3) used to measure fair value and the primary valuation methodologies used by Northern Trust for financial instruments measured at fair value on a recurring basis. Observable inputs reflect market data obtained from sources independent of the reporting entity; unobservable inputs reflect the entity’s own assumptions about how market participants would value an asset or liability based on the best information available. GAAP requires an entity measuring fair value to maximize the use of observable inputs and minimize the use of unobservable inputs and establishes a fair value hierarchy of inputs. Financial instruments are categorized within the hierarchy based on the lowest level input that is significant to their valuation. Northern Trust’s policy is to recognize transfers into and transfers out of fair value levels as of the end of the reporting period in which the transfer occurred. No transfers between fair value levels occurred during the six months ended June 30, 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.

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

Northern Trust’s Level 2 assets include available for sale and trading account securities, the fair values of which are determined predominantly by external pricing vendors. Prices received from vendors are compared to other vendor and third-party prices. If a security price obtained from a pricing vendor is determined to exceed pre-determined tolerance levels that are assigned based on an asset type’s characteristics, the exception is researched and, if the price is not able to be validated, an alternate pricing vendor is utilized, consistent with Northern Trust’s pricing source hierarchy. As of June 30, 2015, Northern Trust’s available for sale securities portfolio included 975 Level 2 securities with an aggregate market value of $26.8 billion. All 975 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 $1.2 million and $4.7 million as of June 30, 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; 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

 

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Notes to Consolidated Financial Statements (continued)

 

and its own credit risk on the valuation of its derivative instruments. Factors considered include the likelihood of default by Northern Trust and its counterparties, the remaining maturities of the instruments, net exposures after giving effect to master netting arrangements or similar agreements, available collateral, and other credit enhancements in determining the appropriate fair value of derivative instruments. The resulting valuation adjustments have not been considered material.

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

Northern Trust’s Level 3 assets consist of auction rate securities purchased in 2008 from Northern Trust clients. To estimate the fair value of auction rate securities, for which trading is limited and market prices are generally unavailable, Northern Trust developed and maintains a pricing model that discounts estimated cash flows over their estimated remaining lives. Significant inputs to the model include the contractual terms of the securities, credit risk ratings, discount rates, forward interest rates, credit/liquidity spreads, and Northern Trust’s own assumptions about the estimated remaining lives of the securities. The significant unobservable inputs used in the fair value measurement are Northern Trust’s own assumptions about the estimated remaining lives of the securities and the applicable discount rates. Significant increases (decreases) in the estimated remaining lives or the discount rates in isolation would result in a significantly lower (higher) fair value measurement.

As of June 30, 2015, Northern Trust’s Level 3 liabilities consisted of a swap that Northern Trust entered into with the purchaser of 1.0 million shares of Visa Inc. Class B common stock (Visa Class B common shares) previously held by Northern Trust. Pursuant to the swap, Northern Trust retains the risks associated with the ultimate conversion of the Visa Class B common shares into shares of Visa Inc. Class A common stock (Visa Class A common shares), such that the counterparty will be compensated for any dilutive adjustments to the conversion ratio and Northern Trust will be compensated for any anti-dilutive adjustments to the ratio. The swap also requires periodic payments from Northern Trust to the counterparty calculated by reference to the market price of Visa Class A common shares and a fixed rate of interest. The fair value of the swap is determined using a discounted cash flow methodology. The significant unobservable inputs used in the fair value measurement are Northern Trust’s own assumptions about estimated changes in the conversion rate of the Visa Class B common shares into Visa Class A common shares, the date on which such conversion is expected to occur and the estimated growth rate of the Visa Class A common share price. See “Visa Shares” under Note 19 — Contingent Liabilities for further information.

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, Corporate & Institutional Services (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.

 

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Notes to Consolidated Financial Statements (continued)

 

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 and liabilities as of June 30, 2015.

Table 28: Level 3 Significant Unobservable Inputs

 

Financial Instrument

   Fair Value      Valuation
Technique
   Unobservable Inputs    Range of Lives
and Rates
Auction Rate Securities    $ 16.6 million       Discounted Cash
Flow
   Remaining lives

Discount rates

   0.9 — 8.6 years

0.1% — 8.1%

Swap Related to Sale of Certain Visa Class B Common Shares    $ 11.3 million       Discounted Cash
Flow
   Visa Class A Appreciation

Conversion Rate

Expected Conversion Rate

   10-15%

1.61x — 1.65x

2-5 years

 

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Notes to Consolidated Financial Statements (continued)

 

The following tables present assets and liabilities measured at fair value on a recurring basis as of June 30, 2015 and December 31, 2014, segregated by fair value hierarchy level.

Table 29: Recurring Basis Hierarchy Leveling

 

(In Millions)

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

June 30, 2015

                                 

Securities

             

Available for Sale

             

U.S. Government

   $ 5,018.8       $ —         $ —         $ —        $ 5,018.8   

Obligations of States and Political Subdivisions

     —           4.5         —           —          4.5   

Government Sponsored Agency

     —           16,765.4         —           —          16,765.4   

Non-U.S. Government

     —           311.0         —           —          311.0   

Corporate Debt

     —           3,734.8         —           —          3,734.8   

Covered Bonds

     —           1,982.2         —           —          1,982.2   

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

     —           560.7         —           —          560.7   

Other Asset-Backed

     —           3,119.2         —           —          3,119.2   

Auction Rate

     —           —           16.6         —          16.6   

Commercial Mortgage-Backed

     —           198.7         —           —          198.7   

Other

     —           123.7         —           —          123.7   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Available for Sale

     5,018.8         26,800.2         16.6         —          31,835.6   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Trading Account

     —           1.2         —           —          1.2   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Available for Sale and Trading Securities

     5,018.8         26,801.4         16.6         —          31,836.8   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Other Assets

             

Derivative Assets

             

Foreign Exchange Contracts

     —           2,482.1         —           —          2,482.1   

Interest Rate Contracts

     —           204.2         —           —          204.2   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Derivative Assets

     —           2,686.3         —           (1,698.0     988.3   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Other Liabilities

             

Derivative Liabilities

             

Foreign Exchange Contracts

     —           2,475.4         —           —          2,475.4   

Interest Rate Contracts

     —           120.5         —           —          120.5   

Other Financial Derivatives (1)

     —           —           11.3         —          11.3   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Derivative Liabilities

   $ —         $ 2,595.9       $ 11.3       $ (1,461.8   $ 1,145.4   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

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 June 30, 2015, derivative assets and liabilities shown above also include reductions of $387.9 million and $151.7 million, respectively, as a result of cash collateral received from and deposited with derivative counterparties.

 

(1) This line includes a swap related to the sale of certain Visa Class B common shares.

 

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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 Contracts

     —           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.

 

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Notes to Consolidated Financial Statements (continued)

 

The following tables present the changes in Level 3 assets and liabilities for the three and six months ended June 30, 2015, and 2014.

Table 30: Changes in Level 3 Assets

 

Level 3 Assets (In Millions)

   Auction Rate Securities  

Three Months Ended June 30,

       2015              2014      

Fair Value at April 1

   $ 17.5       $ 98.5   

Total Gains (Losses):

     

Included in Other Comprehensive Income (1)

     0.5         0.5   

Purchases, Issues, Sales, and Settlements

     

Sales

     (1.2      —     

Settlements

     (0.2      (0.2
  

 

 

    

 

 

 

Fair Value at June 30

   $ 16.6       $ 98.8   
  

 

 

    

 

 

 

Six Months Ended June 30,

   2015      2014  

Fair Value at January 1

   $ 18.1       $ 98.9   

Total Gains (Losses):

     

Included in Other Comprehensive Income (1)

     0.2         0.3   

Purchases, Issues, Sales, and Settlements

     

Sales

     (1.2      0.1   

Settlements

     (0.5      (0.5
  

 

 

    

 

 

 

Fair Value at June 30

   $ 16.6       $ 98.8   
  

 

 

    

 

 

 

 

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

Table 31: Changes in Level 3 Liabilities

 

Level 3 Liabilities (In Millions)

   Contingent
Consideration
     Swap Related to Sale of
Certain Visa Class B
Common Shares
 

Three Months Ended June 30,

       2015              2014              2015              2014      

Fair Value at April 1

   $ —         $ —         $ —         $ —     

Total (Gains) Losses:

           

Included in Earnings (1)

     —           —           11.3         —     

Included in Other Comprehensive Income

     —           —           —           —     

Purchases, Issues, Sales, and Settlements

           

Purchases

     —           —           —           —     

Settlements

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Fair Value at June 30

   $ —         $ —         $ 11.3       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Six Months Ended June 30,

   2015      2014      2015      2014  

Fair Value at January 1

   $ —         $ 55.4       $ —         $ —     

Total (Gains) Losses:

           

Included in Earnings (1)

     —           (0.1      11.3         —     

Included in Other Comprehensive Income

     —           —           —           —     

Purchases, Issues, Sales, and Settlements

           

Purchases

     —           —           —           —     

Settlements

     —           (55.3      —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Fair Value at June 30

   $ —         $ —         $ 11.3       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

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Notes to Consolidated Financial Statements (continued)

 

During the six months ended June 30, 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 June 30, 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.

Collateral-based impaired loans and OREO assets that have been adjusted to fair value totaled $20.9 million and $0.3 million, respectively, at June 30, 2015, and $16.9 million and $1.4 million, respectively, at June 30, 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 June 30, 2015.

Table 32: Level 3 Nonrecurring Basis Significant Unobservable Inputs

 

Financial Instrument

  

Fair Value

  

Valuation
Technique

  

Unobservable Input

  

Range of Discounts
Applied

Loans

   $20.9 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.

 

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Notes to Consolidated Financial Statements (continued)

 

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

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

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

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

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

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

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

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

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

 

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Notes to Consolidated Financial Statements (continued)

 

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

Table 33: Fair Value of Financial Instruments

 

(In Millions)

   June 30, 2015  
     Book
Value
     Total
Fair Value
     Fair Value  
           Level 1      Level 2      Level 3  

Assets

        

Cash and Due from Banks

   $ 7,152.9       $ 7,152.9       $ 7,152.9       $ —         $ —     

Federal Funds Sold and Resell Agreements

     1,020.0         1,020.0         —           1,020.0         —     

Interest-Bearing Deposits with Banks

     15,650.3         15,650.3         —           15,650.3         —     

Federal Reserve Deposits

     17,488.7         17,488.7         —           17,488.7         —     

Securities

        

Available for Sale (1)

     31,835.6         31,835.6         5,018.8         26,800.2         16.6   

Held to Maturity

     6,990.8         6,986.4         —           6,986.4         —     

Trading Account

     1.2         1.2         —           1.2         —     

Loans (excluding Leases)

        

Held for Investment

     31,863.4         32,022.3         —           —           32,022.3   

Held for Sale

     3.9         3.9         —           —           3.9   

Client Security Settlement Receivables

     2,034.2         2,034.2         —           2,034.2         —     

Other Assets

              

Federal Reserve and Federal Home Loan Bank Stock

     178.1         178.1         —           178.1         —     

Community Development Investments

     187.4         186.2         —           186.2         —     

Employee Benefit and Deferred Compensation

     161.3         161.1         109.5         51.6         —     

Liabilities

              

Deposits

        

Demand, Noninterest-Bearing, Savings and Money Market

   $ 46,237.5       $ 46,237.5       $ 46,237.5       $ —         $ —     

Savings Certificates and Other Time

     1,540.5         1,554.4         —           1,554.4         —     

Non U.S. Offices Interest-Bearing

     52,909.9         52,909.9         —           52,909.9         —     

Federal Funds Purchased

     351.3         351.3         —           351.3         —     

Securities Sold under Agreements to Repurchase

     29.8         29.8         —           29.8         —     

Other Borrowings

     3,322.9         3,325.2         —           3,325.2         —     

Senior Notes

     1,497.2         1,534.1         —           1,534.1         —     

Long Term Debt (excluding Leases)

              

Subordinated Debt

     1,330.1         1,338.3         —           1,338.3         —     

Floating Rate Capital Debt

     277.3         244.6         —           244.6         —     

Other Liabilities

              

Standby Letters of Credit

     43.5         43.5         —           —           43.5   

Loan Commitments

     25.6         25.6         —           —           25.6   

Derivative Instruments

              

Asset/Liability Management

              

Foreign Exchange Contracts

              

Assets

   $ 30.8       $ 30.8       $ —         $ 30.8       $ —     

Liabilities

     58.7         58.7         —           58.7         —     

Interest Rate Contracts

              

Assets

     107.7         107.7         —           107.7         —     

Liabilities

     27.4         27.4         —           27.4         —     

Other Financial Derivatives (2)

           

Liabilities

     11.3         11.3         —           —           11.3   

Client-Related and Trading

              

Foreign Exchange Contracts

              

Assets

     2,451.3         2,451.3         —           2,451.3         —     

Liabilities

     2,416.7         2,416.7         —           2,416.7         —     

Interest Rate Contracts

           

Assets

     96.5         96.5         —           96.5         —     

Liabilities

     93.1         93.1         —           93.1         —     

 

(1) Refer to the table located on page 39 for the disaggregation of available for sale securities.
(2) This line includes a swap related to the sale of certain Visa Class B common shares.

 

44


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         1,757.0         —           1,757.0         —     

Non U.S. Offices Interest-Bearing

     47,545.0        <