n o r t h e r n t r u s t
c o r p o r a t i o n
2010
a n n u a l r e p o r t
t o s h a r e h o l d e r s
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N o r t h e rN tr u s t C o r p o r a t i oN
5 0 s o u t h l a sa l l e s t r e e t , c h i c a g o , i l l i n o i s 6 0 6 0 3
n o r t h e r n t r u s t .c oM
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Front Cover
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consoliD ateD financial highlights
for th e ye ar ($ in mi llions)
revenues (taxable-equivalent Basis)
net income
net income applicable to common stock
pe r common share
net income — Basic
— Diluted
Dividends Declared on common stock
Book Value — end of period
market price — end of period
ave r ages ($ in millions)
assets
earning assets
securities
loans and leases
Deposits
stockholders’ equity
preferred stock — series B
common stockholders’ equity
at ye ar- e n d ($ in millions)
assets
earning assets
securities
loans and leases
reserve for credit losses assigned to loans
Deposits
common stockholders’ equity
r atios
return on average assets
return on average common equity
tier 1 capital to risk-Weighted assets
total capital to risk-Weighted assets
risk- adjusted leverage ratio
at ye ar- e n d ($ in B illions)
assets Under management
assets Under custody
global custody assets
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IBC Cover
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2010
20 09
perc ent c hange
$ 3,686.8
669.5
669.5
$
2.74
2.74
1.12
28.19
55.41
$ 76,008.2
67,865.4
19,859.2
27,514.4
55,583.1
6,634.4
—
6,634.4
$ 83,843.9
75,849.9
21,281.9
28,132.0
(319.6)
64,195.7
6,830.3
$ 3,827.1
864.2
753.1
$
3.18
3.16
1.12
26.12
52.40
$ 74,314.2
66,670.8
17,357.8
28,697.2
53,226.0
6,604.1
688.3
5,915.8
$ 82,141.5
74,567.3
18,633.4
27,805.7
(309.2)
58,281.3
6,312.1
(4) %
(23)
(11)
(14) %
(13)
—
8
6
2 %
2
14
(4)
4
—
(100)
12
2 %
2
14
1
3
10
8
0.88 %
10.09
13.6
15.6
8.8
1.16 %
12.73
13.4
15.8
8.8
$
643.6
4,081.3
2,258.4
$
627.2
3,657.0
1,933.0
3 %
12
17
the 2010 northern trust corporation annual report is printed on recycled paper made
from fiber sourced from well-managed forests and other controlled wood sources and is
independently certified to the forest stewardship counciltm (fsc®) standards.
© northern trust corporation
northern trust
a leading provider
Northern Trust Corporation is a leading provider of asset servicing,
fund administration, asset management, fiduciary, and banking
solutions for corporations, institutions, families, and individuals
worldwide. A financial holding company headquartered in Chicago,
Northern Trust serves clients in more than 40 countries from offices in
18 U.S. states and 16 international locations in North America, Europe,
the Middle East, and the Asia-Pacific region.
As of December 31, 2010, Northern Trust had assets under custody
of $4.1 trillion, assets under management of $643.6 billion, and
banking assets of $83.8 billion. Founded in 1889, Northern Trust has
earned distinction as an industry leader combining exceptional service
and expertise with innovative capabilities and technology.
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to our shareholders
In 2010, Northern Trust marked our 23rd consecutive
profitable year despite persistent economic challenges
that continued to test the global financial system.
Frederick h. Waddell
northern trust corporation
chairman, president, and
chief executive officer
We managed our business prudently, maintaining an
exceptionally high-quality balance sheet and high levels of
liquidity. As other U.S. banking firms sought permission
to restore dividend payments, Northern Trust continued
as one of two major U.S. banks not to cut its dividend
during the economic crisis, maintaining our dividend to
shareholders for the 114th consecutive year.
While historically we have outperformed our peer
group and the S&P 500®, our total shareholder return in
2010 was dampened by macroeconomic factors including
pressure from low short-term interest rates on net interest
income as well as trust, investment, and other servicing
fees. Our 2010 net income per common share was $2.74,
a decrease of 13 percent from $3.16 per share in 2009.
Amid this difficult environment, we concentrated on
three priorities critical to our future growth: investing in
our business, focusing on our clients, and building our
leadership around the globe.
In 2010 we continued to add to our strategic mix of
capabilities, locations, and employees. For example, we
acquired Los Angeles-based Waterline Partners, LLC, a
highly regarded investment advisory firm serving affluent
individuals and families.
In China, Northern Trust augmented our presence
with the important regulatory designation of our office
as a branch, enabling us to better serve our Chinese
clients in global custody, performance measurement, and
compliance monitoring.
In the past year, we invested approximately $518 million
in technology, including a broad range of initiatives that
will benefit our clients for years to come.
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lETTEr T o ShArEholDErS
To present clients with a more comprehensive view
of their portfolio risk exposure, we enhanced our
already robust management tools for our institutional
clients. Improvements included advanced reporting
capabilities on counterparty exposure for over-the-
counter derivative investments. We also implemented a
series of enhancements to Hedge Fund Monitor™, a tool
that helps sophisticated investors assess liquidity risk,
counterparty exposure, and performance across hedge
fund portfolios.
Asset managers face ongoing margin pressure,
regulatory change, and demand for increasingly
complex products. To help them effectively drive their
business, we expanded our Investment Operations
Outsourcing (IOO) capability, a service in which
Northern Trust handles middle-office and post-trade
functions, along with custody and other back-office
work. By year-end, our IOO client base doubled across
the North America, Europe, and Asia-Pacific regions.
During times of market uncertainty, clients need
timely and insightful information. We worked hard
in 2010 to keep our clients current on changing
market and economic conditions through hundreds
of unique educational offerings, events, Webinars, and
market update calls. Included were several specialized
programs such as our DreamMakers’ Forum®, a
conference for affluent blacks; a Defined Contribution
Insights Roundtable; and more than 120 educational
events for professional advisors.
We continued to benefit from strong global
leadership. Biff Bowman, the Chief Executive Officer of
our Europe, Middle East, and Africa (EMEA) business,
assumed the role of Head of Americas Region for asset
servicing and banking in Corporate & Institutional
Services (C&IS). Wilson Leech, Head of Global Fund
Services, shifted responsibilities to lead our EMEA
business. Peter Cherecwich, C&IS Chief Operating
Officer, assumed leadership for Global Fund Services.
The ease and confidence with which we can make these
moves is a testament to our deep talent pool.
In the continuing effort to grow our global talent
base, we made significant strides in 2010 with strategic
hires in key markets. Our enduring principles of
service, expertise, and integrity continue to attract
talented individuals who will help us accelerate
our growth.
We also welcomed David H.B. Smith Jr., general
counsel to the Mutual Fund Directors Forum, to our
board of directors. David was nominated to fill one of
two vacancies created when longstanding directors
Harold B. Smith and Arthur L. Kelly stepped down. We
thank Harold and Art once again for their many years
of distinguished service, and for providing invaluable
insight and guidance to our board and management.
Our more than 13,000 employees are working
tirelessly to build upon our world-class services
and to lay the groundwork for future growth –
positioning us for continued success on behalf of
our clients and shareholders.
I am confident the road ahead for Northern Trust
is full of promise.
Frederick h. Waddell
chairman, president, and chief executive officer
february 25, 2011
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consistent leadership
Northern Trust has a long history of rising to meet economic challenges and
capturing growth in hard times. Four short years after our founding, clients
turned to Northern Trust for guidance during the Panic of 1893. During the
Great Depression, we steadfastly earned the confidence of those we served. Now,
more than 75 years later, amid another challenging period, we continue to earn
the confidence of our clients.
While some in the financial services industry approached 2010 as a recovery
period following lengthy market turmoil, Northern Trust made strides by
investing in our business and growing our franchise.
More than 13,000 employees represent Northern Trust the world over
and drive our strategy for growth. Together, we are committed to building
an unparalleled global franchise that empowers some of the largest, most
sophisticated investors in the world – including corporations, sovereign wealth
funds, affluent families, and individuals – to achieve their investment and
related objectives.
Northern Trust’s Personal Financial Services business unit serves successful
individuals, families, foundations, endowments, and privately held businesses.
number 1
in category:
World’s Most
admired
companies
Fortune
Best Global
custodian
AsianInvestor
Best Global
investor services
house
Euromoney
top 10 Wealth
Managers
Barron’s
top 10
institutional
asset Managers
asia pacific
(ex-Australia)
Asia Asset
Management
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CoNSISTENT lEADErShIP
Corporate & Institutional Services serves the complex financial needs
of corporations, governments and public entities, investment managers,
financial institutions, foundations, endowments, insurance companies, and
sovereign wealth funds worldwide. Northern Trust Global Investments, one
of the world’s largest asset managers, offers targeted investment solutions
designed to meet the needs of personal and institutional clients. And our
Operations & Technology team manages a technology platform that helps
define the Northern Trust experience.
We invest continuously to provide our clients with best-in-class technology,
spending approximately $518 million on technology in 2010. These expenditures
funded a variety of initiatives including new capabilities for asset management
and securities and derivatives processing, infrastructure to support increased
regulatory requirements, and enhanced risk management tools.
We opened a new U.S.-based data center, providing increased business
resiliency and safeguarding of client data. To provide our clients with consistent
and reliable access to Northern Trust’s suite of online tools and services, we
made important upgrades in hardware and software applications.
Best
private Bank
north america
Financial Times
Group
Best
private Bank:
trust and
Family office
services
north america
Euromoney
100 Best
companies
for Working
Mothers
Working Mother
Magazine
40 Best
companies
for Diversity
BlACK
ENTErPrISE
Magazine
top 50
companies
for executive
Women
National
Association of
Female Executives
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institutional clients
Northern Trust showed strong new business results from both new
and existing institutional clients in 2010. Institutional assets under custody
at the end of the year totaled $3.7 trillion, up 12 percent from 2009, while
institutional assets under management reached $489 billion at year-end, up
1 percent from a year ago.
Our focused strategy, strong market position, successful business development,
and dedication to exceptional client service have translated into an outstanding
market presence worldwide – a position we are committed to growing in 2011.
In August 2010, Northern Trust received approval from Chinese authorities
to convert our Beijing office to an official branch. A dedicated branch presence
in China will allow us to build out our local infrastructure and strengthen our
service capabilities to better support our clients in the Chinese market.
n o r t h e r n t r u s t G l o B a l i n v e s t M e n t s : institutional client focus
As institutions, family offices, and other large,
sophisticated investors returned to a more active role
in the financial markets in 2010, Northern Trust Global
Investments successfully met the growing demand for
advisory services and investment solutions.
Pension funds and nonprofit organizations turned
to investment program outsourcing through our
manager of managers business, which now has more
than $60 billion in assets under management or
advisement for both institutional and personal clients.
Defined contribution retirement plan sponsors, including
Sprint, chose our target retirement date investment
solutions, designed to provide efficient, globally
diversified portfolios that gradually change over time.
To continue to capture growth in markets outside the
United States, we expanded our sales and relationship
teams in the Nordics and Benelux regions of Europe,
and in our hong Kong and Singapore offices in Asia.
our increasing global reach has led to management of
more than $105 billion in assets for clients domiciled
outside the United States. A significant portion of 2010
growth came from sovereign wealth funds and other
large investors in the Middle East and Asia.
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blue sky group
client experience
Starting in 1999 as one of the first independent all-service pension
fund managers in the Netherlands, Blue Sky Group knew bigger things
were on the horizon. Built on a client-focused culture, the company
sought a strategic financial partner to not only help them grow, but
retain and enhance their service commitment.
They chose Northern Trust. The scale and flexibility of our
asset servicing, compliance monitoring, and reporting enabled Blue Sky
Group to quadruple their client base. our unwavering focus on their
needs helps them continue growing yet stay focused on the changing
needs of their clients — keeping their culture, and peace of mind, intact.
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driehaus capital
management llc
client experience
Maintaining sharp focus is fundamental to Driehaus Capital
Management llC’s investment approach. By continually monitoring
the financial and economic climate, the investment manager works to
anticipate industry trends, instead of reacting to them. To deliver for
their clients, they needed a financial partner who would help keep
them on target.
Enter Northern Trust. Certainly our global custody services,
straight-through processing, and integrated technology relieve Driehaus
from daily administrative details. But it’s our collaborative approach
and dedication to exceptional service that gives them the freedom to
focus on delivering performance for their clients.
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INSTITUTIoNAl ClIENTS
We also launched our Australian investment
and pressure to control costs increases, more firms
accounting platform, providing specialized reporting
are turning to Northern Trust as a leading provider of
to superannuation funds and investment managers
middle- and back-office services.
in Australia, one of a range of new services offered to
In addition, Northern Trust has developed integrated
institutional clients from our Melbourne office.
solutions for custody, investment accounting, and
BroaDenin G service
operations outsourcing specifically customized for
insurance providers. We now provide our services to
A key strategic initiative for Northern Trust in 2010
more than 230 insurance companies worldwide.
was the establishment of our Global Financial
Unlike some larger competitors, we operate with
Institutions Group. This effort will strengthen
an efficiency advantage: an integrated technology
relationships with the world’s largest financial
and operations architecture serves our clients around
institutions to maximize business growth and revenue
the globe, regardless of asset class or location. This
opportunities in the segment.
global platform enables an aggressive pace of product
Northern Trust’s ability to help clients manage risk,
innovation to ensure that our clients have the tools they
deliver information, and reduce their costs continued
need to rapidly capture investment opportunities in
to attract new business throughout 2010. With a
markets worldwide.
disciplined focus on high-potential growth segments,
Given the ongoing need for portfolio transparency,
Northern Trust provides asset servicing and asset
we continued to pursue new reporting and monitoring
management services to some of the world’s largest
capabilities, including tools to track holdings and
sovereign wealth funds.
performance in private equity and hedge funds.
Northern Trust also has a growing franchise
We enhanced collateral management reporting to
dedicated to serving the needs of investment managers
provide a real-time view of the daily over-the-counter
worldwide. At the forefront of our efforts is our
derivative collateral call process, helping provide greater
Investment Operations Outsourcing business. As
transparency around these complex instruments.
industry and client requirements become more complex
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personal clients
Northern Trust’s strong financial position, fiduciary heritage, and
comprehensive wealth management capabilities continued to win new
clients in 2010. Much of this new business was generated by client referrals.
Personal client assets under custody at the end of the year totaled $370.2 billion,
up 12 percent from 2009, while personal client assets under management reached
$154.4 billion at year-end, up 6 percent from a year ago.
Our U.S. offices in 18 states are strategically positioned near approximately
half the nation’s millionaire households. Through this network, we deliver
integrated personal wealth management capabilities to help clients grow, protect,
and transfer their wealth.
Additionally, our growing Foundation and Institutional Advisors group
focuses on private and public foundations with $10 million to $250 million in
investable assets. The segment’s assets under custody at the end of 2009 grew
21 percent to $16.8 billion in 2010. By understanding the complex needs of
n o r t h e r n t r u s t i n v e s t M e n t p r o c e s s : p e r s o n a l c l i e n t f o c u s
At Northern Trust, our priority is to understand each
client’s long-term financial goals in order to create
investment programs based on liquidity needs and
lifetime aspirations. Northern Trust’s asset allocation
model strategy is best summarized as “downside
protection, upside participation.”
are used by more than 200 portfolio managers working
directly with clients around the world.
The IPC is responsible for investment performance,
process, and philosophy across multiple investment
strategies including fixed income, active equity,
commodities, alternatives, and passive investments.
Portfolio management begins with our Investment
Policy Committee (IPC), a group of senior investment
professionals located in Chicago, Stamford, and london,
representing a variety of markets, client groups, and areas
of expertise. The IPC’s asset allocation recommendations
In addition to proprietary strategies, Northern Trust
selects and monitors strategies developed by external
managers. our clients can use these strategies in a variety
of investment vehicles, including separately managed
accounts, registered and unregistered funds, and ETFs.
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paul holland and linda yates
client experience
As a leading clean technology venture capitalist, Paul holland fuels the
sustainable building revolution. But as he and his wife, corporate board
member and eco-activist linda Yates, set out to build the greenest home
in the United States, securing the right financing was a challenge.
Until they found Northern Trust. With our growing expertise in
serving the “sustainability generation,” we designed a flexible loan
structure to suit the innovative project’s unique needs. Impressed by our
creativity, Paul and linda had us apply our custom approach to their
trust and investment strategies — giving the California couple greater
confidence in the foundation of their family’s future.
The above-described services to Paul Holland and Linda Yates are provided by Northern Trust, NA, a national
banking association regulated by the Office of the Comptroller of the Currency.
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schuler fa m ily fo undat io n
client experience
By providing academic programming, college counseling, and
scholarships, the Schuler Family Foundation has enabled hundreds
of bright but under-resourced Illinois high school students to matriculate
at the most selective colleges. requiring passion, commitment, and
hard work of its scholars, the Foundation expected nothing less in its
financial partner.
That’s why the Foundation’s trustees chose Northern Trust. Certainly
our banking, brokerage, and financing services help the Foundation’s
Schuler Scholar Program run smoothly — but it’s our committed
partnership that provides the greatest value. Which helps the Foundation
fulfill its mission to fulfill the promise of the next generation.
The above-described services to the Schuler Family Foundation are provided by The Northern Trust Company,
an Illinois banking corporation regulated by the Board of Governors of the Federal Reserve System.
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PErSoNAl ClIENTS
nonprofits and leveraging our institutional
At Northern Trust, we focus on developing long-
capabilities, we help them fulfill their mission and
term relationships with clients. Over half our clients
achieve long-term financial viability even as the
globally have been with Northern Trust for more than
financial landscape evolves.
10 years. For many of our clients, we act in a fiduciary
Northern Trust’s investment management capabilities,
capacity, and are bound to act in our clients’ best
and our West Coast presence, were bolstered in
interests. Our 121-year heritage of putting clients
November when we acquired Waterline Partners, LLC,
first is deeply ingrained in our company culture, and
a top-ranked Los Angeles investment advisory firm
influences everything we do.
with $807 million in assets under management.
We expect to continue adding high-quality talent
specializeD Focus
while seeking to grow in a manner that fits our business
The Wealth Management Group continues its successful
model, culture, and clients. In summer 2011, we look
focus on the family office segment, complex fiduciary
forward to opening an office in Washington, D.C., a
assignments, and ultra-wealthy individuals. Custody
metropolitan area with the fourth-largest concentration
assets reached $221.9 billion at year-end 2010, up
of U.S. millionaire households.
13 percent from the prior year. Our Wealth Management
oBjective aD vice
clients – more than 390 families in 18 countries – rely
on Northern Trust for expertise in specialized asset
Facing uneven financial markets, clients require
management, investment consulting, global custody,
steady and objective advice. Fundamental to our asset
fiduciary, and private banking services. In the United
management strategy is providing world-class beta
States, these clients include more than 20 percent of the
and alpha solutions combined with access to external
Forbes list of the 400 most affluent Americans.
managers so we can customize our offerings specific
With a distinctive reputation for excellence that was
to each client’s long-term investment goals. This focus
reinforced during the economic crisis, along with a
on objectively fulfilling client needs – not pushing
deep and continued commitment to investing in
proprietary products – has been essential both to
people, technology, and services, we are confident of
driving our financial results and fostering client loyalty.
Northern Trust’s success in 2011 and beyond.
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global citizenship
corporate social responsiBilit y
Since 1889, Northern Trust has considered corporate social responsibility an
integral component to our way of doing business. In 2010, we devoted more
resources to develop and maintain standards on environmental, social, and
governance issues. These include greater transparency and improved reporting
around our more than 120 socially responsible activities company-wide, from
paperless statements and personal computer energy reduction to increased
compliance and ethics training.
In 2010, Northern Trust’s Global Sustainability Index Fund won Standard &
Poor’s Gold Award in its first-ever U.S. Mutual Fund Excellence Awards Program,
reflecting our more than 25 years’ experience in creating socially responsible
investment products and services.
Our “Partners Think Green” initiative improved our recycling rates,
promoted the use of regionally sourced foods, and engaged employees globally
in our environmental efforts. Our Chicago headquarters earned an ENERGy
STAR® designation in 2010, notable for a building built in 1906, and our London
location has led recycling rates in the Canary Wharf district two years straight.
coMMunit y & phil anthropy
Northern Trust focuses on three core areas to strengthen the communities we
serve: education, social welfare, and the arts.
In 2010 we launched our first-ever Global Week of Caring, with employees
assisting organizations from the United States to Australia. Throughout the year,
our employees gave generously of their time and talents. Employee volunteerism
in Europe increased by 75% and worldwide, our employees logged nearly 200,000
volunteer hours.
We continued to expand our global philanthropy efforts in 2010, giving nearly
$14.2 million to local and international civic and charitable organizations. In
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texas scottish rite
hospital for children
corp orate commitment
Being recognized as a leading research and treatment center for
pediatric orthopedic conditions is a significant achievement. But what
makes Texas Scottish rite hospital for Children remarkable is that,
for 90 years, they have provided superior care regardless of a family’s
ability to pay.
That’s one reason why Northern Trust proudly helps raise the
crucial donations for the hospital’s funding. Another is our shared
approach to the people we serve. Just as we customize holistic financial
solutions for our clients, Texas Scottish rite develops multidisciplinary
treatments tailored to each child. We’re happy to help ensure that
philosophy pays dividends well into the future.
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GloBAl CITIzENShIP
Bangalore, India, for example, our donations will go toward building homes and
classrooms, supporting children in need, and creating vocational programs for
the disabled. When the devastating earthquake in Haiti occurred, Northern Trust
and staff gave nearly $586,000 to assist recovery efforts. In the United States, we
completed a successful United Way campaign, providing more than $3.7 million
in support of our communities.
Our Community Reinvestment Act (CRA) initiatives are proof of our
commitment to community development and revitalization. In 2010, Northern
Trust provided more than $172 million in affordable mortgage loans and more
than $65.6 million in community development loans. CRA investments completed
for the year were $112.3 million. Northern Trust’s U.S. banking subsidiaries all
received “Outstanding” CRA ratings from regulatory agencies.
Diversit y & inclusion
Believing a globally diverse and inclusive workforce is of significant value to
our business and our clients, in 2010 Northern Trust focused on developing
global cultural competency, leadership, and business and financial acumen in all
our employees.
Currently, 35 percent of Northern Trust employees are engaged in our nine
Business Resource Council affinity groups, with new chapters established in the
Asia-Pacific and EMEA regions. Further, we embedded human rights standards
in our global procurement policies.
Our efforts continue to be recognized in the industry and around the world.
Among other accolades, Northern Trust was listed in Working Mother magazine
as one of the 100 Best Companies for Working Mothers for the 19th time, and in
Black EntErprisE magazine as one of their 40 Best Companies for Diversity.
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management group
standing left to right
seated left to right
steven l. Fradkin
president
corporate & institutional services
timothy p. Moen
executive vice president
human resources & administration
Frederick h. Waddell
chairman, president, and
chief executive officer
Kelly r. Welsh
executive vice president
general counsel
stephen n. potter
president
northern trust global investments
sherry s. Barrat
president
personal financial services
joyce M. st.clair
executive vice president
head of corporate risk management
jana r. schreuder
president
operations & technology
William l. Morrison
executive vice president
chief financial officer
RR Donnelly
NT Annual Report P17
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02.22.11
CYAN MAG YELL BLK PMS 873 PMS 8760
board of directors
Frederick h. Waddell
Chairman, President, and Chief Executive officer
Northern Trust Corporation and
The Northern Trust Company (6)
linda Walker Bynoe
President and Chief Executive officer
Telemat ltd.
Project management and consulting firm (1, 2, 6)
nicholas D. chabraja
retired Chairman and Chief Executive officer
General Dynamics Corporation
Worldwide defense, aerospace, and other
technology products manufacturer (1, 4)
susan crown
Vice President
henry Crown and Company
Worldwide company with diversified
manufacturing operations,
real estate, and securities (4, 5)
Dipak c. jain
Dean Emeritus
Kellogg School of Management
Northwestern University
Dean Designate
INSEAD
Educational institution (3, 4, 6)
robert W. lane
retired Chairman and Chief Executive officer
Deere & Company
Worldwide provider of agricultural, construction,
and forestry equipment and financial services (1, 3)
robert c. Mccormack
Advisory Director
Trident Capital
Venture capital firm (1, 4)
edward j. Mooney
retired Délégué Général – North America
Suez lyonnaise des Eaux
Worldwide provider of energy, water, waste,
and communications services;
retired Chairman and Chief Executive officer
Nalco Chemical Company
Manufacturer of specialized service chemicals (1, 2, 5, 6)
john W. rowe
Chairman and Chief Executive officer
Exelon Corporation
Producer and wholesale marketer of energy (3, 5, 6)
David h.B. smith jr.
Executive Vice President – Policy & legal Affairs
and General Counsel
Mutual Fund Directors Forum
Nonprofit membership organization
for investment company directors (1, 2)
William D. smithburg
retired Chairman, President, and Chief Executive officer
The Quaker oats Company
Worldwide manufacturer and marketer of
beverages and grain-based products (4, 5, 6)
enrique j. sosa
retired President
BP Amoco Chemicals
Worldwide chemical division of BP p.l.c. (2, 4)
charles a. tribbett iii
Managing Director
russell reynolds Associates
Worldwide executive recruiting firm (2, 3)
advisory director
sir john r.h. Bond
Chairman
Vodafone Group Plc
Worldwide mobile telecommunications company (2, 3)*
* In an advisory capacity
board committees
1. Audit Committee
2. Business risk Committee
3. Business Strategy Committee
4. Compensation and Benefits Committee
5. Corporate Governance Committee
6. Executive Committee
18 | 2010 ANNUAl rEPor T T o ShArEholDErS | northern trust corporation
RR Donnelly
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CYAN MAG YELL BLK PMS 873 PMS 8760
corporate information
annual Meeting
the annual meeting of stockholders will be held on
tuesday, april 19, 2011, at 10:30 a.M. (Central time) at
50 south la salle street, Chicago, Illinois.
stock Listing
the common stock of northern trust Corporation is traded on
the nasdaQ stock Market under the symbol ntrs.
stock transfer agent, registrar, and Dividend
Disbursing agent
Wells Fargo Bank, n.a.
shareowner services
161 north Concord exchange street
south st. paul, Minnesota 55075
General phone number: 1-800-468-9716
Internet site: www.shareowneronline.com
available information
the Corporation’s Internet address is northerntrust.com.
through our Web site, we make available free of charge our
annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and all amendments to those
reports filed or furnished pursuant to section 13(a) or 15(d)
of the exchange act (15 u.s.C. 78m(a) or 78o(d)) as soon as
reasonably practicable after we electronically file such material
with, or furnish such material to, the securities and exchange
Commission. Information contained on the Web site is not
part of the annual report.
10-K report
Copies of the Corporation’s 2010 10-K report filed with the
securities and exchange Commission will be available by the
end of March 2011 and will be mailed to stockholders and
other interested persons upon written request to:
rose a. ellis
Corporate secretary
northern trust Corporation
50 south la salle street, M-9
Chicago, Illinois 60603
Quarterly earnings releases
Copies of the Corporation’s quarterly earnings releases
may be obtained by accessing northern trust’s Web site at
northerntrust.com or by calling the Corporate Communications
department at 312-444-4272.
investor relations
please direct Investor relations inquiries to:
Beverly J. Fleming, director of Investor relations, at
312-444-7811 or beverly_fleming@ntrs.com.
northerntrust.com
Information about the Corporation, including financial
performance and products and services, is available on
northern trust’s Web site at northerntrust.com.
northern trust Global investments
northern trust Corporation uses the name northern trust
Global Investments to identify the investment management
business, including portfolio management, research, and
trading, carried on by several of its affiliates, including the
northern trust Company, northern trust Global advisors,
and northern trust Investments.
northern trust corporation | 2010 annual report to shareholders | 19
RR Donnelly
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02.28.11
RR Donnelly
NT Annual Report P20
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87520
02.28.11
F I N A N C I A L R E V I EW
22
Consolidated Financial Highlights of Financial
Condition and Results of Operations
23
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
66
Management’s Report on Internal Control Over
Financial Reporting
67
Report of Independent Registered Public Accounting Firm
with Respect to Internal Control over Financial Reporting
68
Consolidated Financial Statements
72
Notes to Consolidated Financial Statements
126
Report of Independent Registered Public Accounting Firm
127
Consolidated Financial Statistics
130
Senior Officers
131
Board of Directors
132
Corporate Information
CONSOL IDATED FINANCIAL HIG HL IG HTS OF FINAN CIAL CONDITION A ND RESULTS OF OPERATIONS
S U M M A R Y O F S E L E C T E D C O N S O L I D A T E D F I N A N C I A L D A T A
($ In Millions Except Per Share Information)
2010
2009
2008
2007
2006
FOR THE YEAR ENDED DECEMBER 31
Noninterest Income
Trust, Investment and Other Servicing Fees
Foreign Exchange Trading Income
Security Commissions and Trading Income
Treasury Management Fees
Gain on Visa Share Redemption
Other Operating Income
Investment Security Gains (Losses), net
Total Noninterest Income
Net Interest Income
Provision for Credit Losses
Income before Noninterest Expenses
Noninterest Expenses
Compensation
Employee Benefits
Outside Services
Equipment and Software Expense
Occupancy Expense
Visa Indemnification (Benefits) Charges
Other Operating Expenses
Total Noninterest Expenses
Income before Income Taxes
Provision for Income Taxes
Net Income
Net Income Applicable to Common Stock
Average Total Assets
PER COMMON SHARE
Net Income – Basic
– Diluted
Cash Dividends Declared
Book Value – End of Period (EOP)
Market Price – EOP
AT YEAR END
Senior Notes
Long-Term Debt
Floating Rate Capital Debt
RATIOS
$2,081.9
382.2
60.9
78.1
–
146.3
(20.4)
2,729.0
918.7
160.0
3,487.7
1,108.0
237.6
460.4
287.1
167.8
(33.0)
270.0
2,497.9
989.8
320.3
$ 669.5
$ 669.5
$ 76,008
$
2.74
2.74
1.12
28.19
55.41
$ 1,896
2,729
277
$2,083.8
445.7
62.4
81.8
–
136.8
(23.4)
2,787.1
999.8
215.0
3,571.9
1,099.7
242.1
424.5
261.1
170.8
(17.8)
136.3
2,316.7
1,255.2
391.0
$ 864.2
$ 753.1
$ 74,314
$
3.18
3.16
1.12
26.12
52.40
$ 1,552
2,838
277
$2,134.9
616.2
77.0
72.8
167.9
186.9
(56.3)
3,199.4
1,079.1
115.0
4,163.5
1,133.1
223.4
413.8
241.2
166.1
(76.1)
786.3
2,887.8
1,275.7
480.9
$ 794.8
$ 782.8
$ 73,029
$
3.51
3.47
1.12
21.89
52.14
$ 1,053
3,293
277
$2,077.6
351.3
67.6
65.3
–
95.3
6.5
2,663.6
845.4
18.0
3,491.0
1,038.2
234.9
386.2
219.3
156.5
150.0
245.1
2,430.2
1,060.8
333.9
$ 726.9
$ 726.9
$ 60,588
$
$
3.28
3.23
1.03
20.44
76.58
654
2,682
277
$1,791.6
247.3
62.7
65.4
–
83.0
1.4
2,251.4
744.7
15.0
2,981.1
876.6
217.6
316.2
205.3
145.4
–
195.8
1,956.9
1,024.2
358.8
$ 665.4
$ 665.4
$ 53,106
$
$
3.03
2.99
.94
18.03
60.69
445
2,308
276
Dividend Payout Ratio
Return on Average Assets
Return on Average Common Equity
Tier 1 Capital to Risk-Weighted Assets – EOP
Total Capital to Risk-Weighted Assets – EOP
Risk-Adjusted Leverage Ratio
Average Stockholders’ Equity to Average Assets
40.8%
.88
10.09
13.6
15.6
8.8
8.7
35.2%
1.16
12.73
13.4
15.8
8.8
8.9
32.0%
1.09
15.98
13.1
15.4
8.5
7.0
31.4%
1.20
17.46
9.7
11.9
6.8
6.9
30.8%
1.25
17.57
9.8
11.9
6.7
7.1
O P E R A T I N G R E S U L T S – A N O N - G A A P F I N A N C I A L M E A S U R E W H I C H E X C L U D E S V I S A R E L A T E D A D J U S T M E N T S
($ In Millions Except Per Share Information)
Operating Earnings
Operating Earnings per Common Share – Basic
– Diluted
Operating Return on Average Common Equity
2010
$ 648.6
$
2.66
2.65
9.89%
2009
$ 853.0
$
3.13
3.11
2008
$ 641.3
$
2.82
2.79
2007
$ 821.1
$
3.71
3.65
2006
$ 665.4
$
3.03
2.99
12.68%
12.89%
19.72%
17.57%
Operating results for 2010, 2009, 2008 and 2007 exclude adjustments relating to Visa Inc. (Visa). Excluded for 2010, 2009 and 2008
are Visa indemnification related benefits totaling $33.0 million, $17.8 million and $244.0 million, respectively. Excluded for 2007 are
Visa indemnification related charges totaling $150.0 million. The 2008 benefits included a gain on the mandatory partial redemption
of Northern Trust’s Visa shares totaling $167.9 million and a $76.1 million offset of the Visa indemnification related charges
recorded in 2007. Visa related adjustments are discussed in further detail in Note 19 to the consolidated financial statements.
22 | 2010 ANNUAL REPORT TO SHAREHOLDERS | NORTHERN TRUST CORPORATION
MANAG E MENT’S DISCUSSION AND A NAL Y SIS OF FIN A N C I A L C O N DI T I O N A N D RE S UL T S OF OPE RA T I O N S
O V E R V I E W O F C O R P O R A T I O N
Focused Business Strategy
for
families,
institutions,
corporations,
Northern Trust Corporation (Northern Trust or
the
Corporation) is a leading provider of asset servicing, fund
fiduciary and banking
administration, asset management,
solutions
and
individuals worldwide. Northern Trust focuses on servicing
and managing client assets in two target market segments:
individuals, families, and privately held businesses through its
Personal Financial Services
and
institutional investors worldwide through its Corporate and
Institutional Services (C&IS) business unit. An important
element of
this strategy is to provide an array of asset
management and related services to PFS and C&IS clients,
which are provided primarily by a third business unit,
Northern Trust Global Investments (NTGI). In executing this
strategy, Northern Trust emphasizes quality through a high
level of
service complemented by the effective use of
technology, delivered by a fourth business unit, Operations &
Technology (O&T).
(PFS) business unit;
Business Structure
A financial holding company, Northern Trust conducts
business through various U.S. and non-U.S. subsidiaries,
including The Northern Trust Company (Bank). The
Corporation has 78 offices
states and 16
international locations in North America, Europe, the Asia
Pacific region and the Middle East.
in 18 U.S.
Except where the context otherwise requires, the term
“Northern Trust” refers to Northern Trust Corporation and
its subsidiaries on a consolidated basis.
F I N A N C I A L O V E R V I E W
the
under
custody
prolonged
and management,
uncertain macroeconomic
Amidst
environment, Northern Trust has been focused on growing its
business in our targeted markets throughout 2010. Client
important
assets
components of Northern Trust’s business, both grew during
2010. Client assets under custody experienced double-digit
growth, equaling $4.1 trillion at year end, up 12% from $3.7
trillion in 2009, and included $2.3 trillion of global custody
assets, 17% higher than a year ago. Client assets under
management rose 3% to $643.6 billion from $627.2 billion in
the prior year. Increases in client assets under custody and
management reflect both higher market valuations and new
business won from both existing and new clients. Northern
Trust continues to maintain its strong capital position,
federal bank
capitalized” levels under
exceeding “well
regulatory
total
requirements. At
stockholders’ equity equaled $6.83 billion, up 8%, from $6.31
billion a year earlier.
capital
end,
year
Despite the constraints of the persistent low interest rate
environment and continued difficult business conditions
experienced in 2010, which have negatively impacted net
interest income and trust fee levels, Northern Trust achieved
net income of $669.5 million and earnings per common share
totaled $2.74. These compare with $864.2 million of net
income and earnings per common share of $3.16 in the year
ended December 31, 2009. Per share earnings in 2009 were
reduced by $111.1 million, equal to $.47 per share, from
preferred stock dividends
accretion in
connection with Northern Trust’s participation in the U.S.
(U.S. Treasury) Capital
Department of
Purchase Program (CPP), but benefitted from a net expense
reduction of $109.3 million, equal to $.29 per share, associated
with the final support payments and expiration of support
provided to cash investment funds under the Corporation’s
Capital Support Agreement (CSA) obligations.
the Treasury’s
and discount
Reported results in both 2010 and 2009 were impacted by
various adjustments related to Visa, as further described in
statements. A
Note 19 to the
reconciliation of operating earnings, a non-GAAP financial
measure which excludes Visa related adjustments, to reported
earnings prepared in accordance with U.S. generally accepted
accounting principles (GAAP) is provided on page 63.
consolidated financial
Revenues in 2010 equaled $3.69 billion on a fully taxable
equivalent (FTE) basis, a decrease of 4% from 2009. Revenues
were impacted by an $82.2 million, or 8%, decrease in net
interest income (FTE) due to the effect on the net interest
margin of the persistently low interest rate environment. The
net interest margin for the current year declined to 1.41%
from 1.56% in 2009. Revenues also were affected by a $63.5
million, or 14%, drop in foreign exchange trading income as a
result of reduced currency volatility, partially offset by
increased client volumes from 2009 levels. Trust, investment
servicing fees – the largest component of
and other
consolidated revenues – totaled $2.08 billion, consistent with
2009. The benefits of higher market valuations during the year
and new business were offset by a decrease in securities
lending revenue as a result of lower recoveries of previously
recorded unrealized asset valuation losses in a mark-to-market
investment fund. Trust, investment and other servicing fees
were also impacted by money market mutual fund fee waivers,
which totaled $62.5 million in 2010 compared to $26.2 million
in 2009, due to the persistent low level of short-term interest
rates.
NORTHERN TRUST CORPORATION | 2010 ANNUAL REPORT TO SHAREHOLDERS | 23
MANAG E MENT’S DISCUSSION AND A NAL Y SIS OF FIN A N C I A L C O N DI T I O N A N D RE S UL T S OF OPE RA T I O N S
Operating noninterest expenses, which exclude Visa
indemnification related adjustments of $33.0 million and
$17.8 million in 2010 and 2009, respectively, equaled $2.53
billion, an increase of 8% from 2009, primarily reflecting
increased expenses associated with outside services, equipment
and software as well as other operating expense items.
Credit loss provisions were $160.0 million in 2010 and
$215.0 million in 2009. While the provision declined in 2010,
the current year provision level reflects continued weakness in
residential and commercial
in certain
markets. Loans and leases equaled $28.1 billion at year end, an
increase of 1% from $27.8 billion at the end of 2009.
real estate loans
In 2010, Northern Trust did not achieve its four long-
term, across cycle,
targets, measured
strategic financial
exclusive of Visa related items. Revenue and earnings per
growth were negative 4% and negative 13%,
share
respectively, compared to the target revenue growth of 8-10%
and earnings per share goal of 10-12% growth. In addition, we
did not achieve positive operating leverage and the return on
common equity achieved was 10% compared to the target of
16-18%. We recognize these targets as difficult to achieve in
the current economic environment, but continue to believe
they currently reflect our long-term, across cycle, strategic
objectives.
C O N S O L I D A T E D R E S U L T S O F O P E R A T I O N S
R E V E N U E
Northern Trust generates the majority of its revenue from
noninterest income that primarily consists of trust, investment
and other servicing fees. Net interest income comprises the
income
revenues and consists of
remainder of
generated by earning assets, net of interest expense on deposits
and borrowed funds.
interest
Revenue for 2010 was $3.69 billion on an FTE basis.
Revenue declined 4% from $3.83 billion in 2009, which in
turn was down 12% from 2008 revenues of $4.33 billion.
When adjusted to an FTE basis, yields on taxable, nontaxable,
and partially taxable assets are comparable; the adjustment to
an FTE basis has no impact on net income. Noninterest
income represented 74% of total taxable equivalent revenue in
2010 and totaled $2.73 billion, down 2% from $2.79 billion in
2009. Noninterest income represented 73% of total taxable
equivalent revenue in 2009 and was lower by 13% from $3.20
billion in 2008. Net interest income on an FTE basis for 2010
was $957.8 million, down 8% from $1.04 billion in 2009,
which was down 8% from $1.13 billion in 2008.
The decrease in current year revenues primarily reflects
reduced net interest income attributable to a decrease in the
24 | 2010 ANNUAL REPORT TO SHAREHOLDERS | NORTHERN TRUST CORPORATION
interest margin as a result of
the low interest rate
net
environment. The net interest margin declined to 1.41% in
2010 from 1.56% in 2009. The prolonged low interest rate
environment has resulted in reduced yields on the securities
portfolio as maturing investments have been replaced by lower
yielding assets. In addition, due to continuing weakness in
loan demand, balance sheet growth has been concentrated in
lower yielding assets, while a larger percentage of funding has
come from interest-bearing sources. Partly offsetting this
reduction was a $1.19 billion, or 2%,
increase in average
earning assets. 2010 revenues were also impacted by lower
foreign exchange trading income, which totaled $382.2
million, down 14% compared with $445.7 million in 2009, as
a result of reduced currency volatility, partially offset by
increased client volumes from 2009.
Trust, investment and other servicing fees – the largest
component of noninterest income – totaled $2.08 billion in
both 2010 and 2009. Higher market valuations during the year
and new business were offset by a decrease in securities
lending revenue. Securities lending revenue in 2010 totaled
$195.2 million as compared with $336.7 million in 2009. The
current year decrease was primarily due to a reduction in the
level of recoveries of previously recorded unrealized asset
valuation losses in a mark-to-market investment fund used in
our securities lending activities. Recoveries of previously
valuation
recorded
totaled
losses
approximately
compared with
$114 million in 2010
approximately $204 million recorded in 2009. As of
September 30, 2010, securities in the mark-to-market fund
had been sold with the proceeds reinvested into a short
duration fund, eliminating the mark-to-market impact on
securities lending revenue in future periods. Excluding the
impact of the asset valuation recoveries, securities lending fees
decreased approximately $52 million, reflecting narrower
spreads on the investment of cash collateral, partially offset by
increased average volumes. Additional information regarding
Northern Trust’s revenue by type is provided below.
unrealized
asset
2010 TOTAL REVENUE OF $3.69 BILLION (FTE)
74% Noninterest Income
26% Net Interest Income
MANAG E MENT’S DISCUSSION AND A NAL Y SIS OF FIN A N C I A L C O N DI T I O N A N D RE S UL T S OF OPE RA T I O N S
Noninterest Income
The components of noninterest income, and a discussion of significant changes during 2010 and 2009, are provided below.
N O N I N T E R E S T I N C O M E
(In Millions)
2010
2009
2008
2010 / 2009
2009 / 2008
CHANGE
Trust, Investment and Other Servicing Fees
Foreign Exchange Trading Income
Security Commissions and Trading Income
Treasury Management Fees
Gain on Visa Share Redemption
Other Operating Income
Investment Security Gains (Losses), net
Total Noninterest Income
2010 NONINTEREST INCOME
$2,081.9
382.2
60.9
78.1
–
146.3
(20.4)
$2,729.0
$2,083.8
445.7
62.4
81.8
–
136.8
(23.4 )
$2,787.1
$2,134.9
616.2
77.0
72.8
167.9
186.9
(56.3)
$3,199.4
N/M
(2)%
(14)%
(2)
(5)
–
7
(13)
(2)%
(28)
(19)
12
N/M
(27)
(58)
(13)%
76% Trust, Investment and
Other Servicing Fees
14% Foreign Exchange
Trading Income
10% All Other
Trust, Investment and Other Servicing Fees
Trust, investment and other servicing fees accounted for 56%
of total taxable equivalent revenue in 2010. These fees were
$2.08 billion in both 2010 and 2009. For a more detailed
discussion of 2010 trust, investment and other servicing fees,
refer to the “Business Unit Reporting” section.
Trust,
investment and other servicing fees are based
generally on the market value of assets held in custody,
managed and serviced; the volume of transactions; securities
lending volume and spreads; and fees for other services
rendered. Certain market value calculations on which fees are
based are performed on a monthly or quarterly basis in
arrears. Certain investment management fee arrangements
also may provide for performance fees, based on client
portfolio returns that exceed predetermined levels. Securities
lending revenues have been impacted by Northern Trust’s
share of unrealized investment gains and losses in one
investment fund that is used in our securities lending activities
and is accounted for at fair value. As of September 30, 2010,
securities in the mark-to-market fund had been sold with the
proceeds reinvested into a short duration fund, eliminating
the mark-to-market impact on securities lending revenue in
future periods. Based on an analysis of historical trends and
current asset and product mix, management estimates that a
10% rise or fall
in overall equity markets would cause a
corresponding increase or decrease in Northern Trust’s trust,
investment and other servicing fees of approximately 4% and
in total revenues of approximately 2%.
The following table presents selected average month-end, average quarter-end, and year-end equity market indices and the
percentage changes year over year.
M A R K E T I N D I C E S
AVERAGE OF MONTH-END
AVERAGE OF QUARTER-END
YEAR-END
S&P 500 ®
MSCI EAFE ® (in U.S. dollars)
1,131
1,511
949
1,342
19%
13
1,150
1,538
972
1,369
18%
12
1,258
1,658
1,115
1,581
13%
5
2010
2009
CHANGE
2010
2009
CHANGE
2010
2009
CHANGE
NORTHERN TRUST CORPORATION | 2010 ANNUAL REPORT TO SHAREHOLDERS | 25
MANAG E MENT’S DISCUSSION AND A NAL Y SIS OF FIN A N C I A L C O N DI T I O N A N D RE S UL T S OF OPE RA T I O N S
C&IS client relationships are priced generally to reflect
earnings from such activities as foreign exchange trading and
custody related deposits not included in trust, investment and
other servicing fees. Custody related deposits maintained with
bank subsidiaries and foreign branches are primarily interest-
bearing and averaged $30.0 billion in 2010, $30.4 billion in
2009, and $33.2 billion in 2008. Assets under custody and
assets under management form the primary basis of our trust,
investment and other servicing fees. At December 31, 2010,
assets under custody were $4.08 trillion, up 12% from $3.66
trillion a year ago. Assets under custody included $2.26 trillion
of global custody assets. Managed assets totaled $643.6 billion,
up 3% from $627.2 billion at the end of 2009.
A S S E T S U N D E R C U S T O D Y
DECEMBER 31
CHANGE
($ In Billions)
2010
2009
2008
2007
2006
2010 / 2009
Corporate & Institutional
Personal
$3,711.1
370.2
Total Assets Under Custody
$4,081.3
$3,325.9
331.1
$3,657.0
$2,719.2
288.3
$3,007.5
$3,802.9
332.3
$4,135.2
$3,263.5
281.9
$3,545.4
12%
12
12%
FIVE-YEAR
COMPOUND
GROWTH
RATE
7%
10
7%
C&IS ASSETS UNDER CUSTODY
($ in Billions)
PFS ASSETS UNDER CUSTODY
($ in Billions)
3,802.9
3,263.5
3,711.1
3,325.9
2,719.2
332.3
331.1
281.9
288.3
370.2
2006
2007
2008
2009
2010
2006
2007
2008
2009
2010
A S S E T S U N D E R M A N A G E M E N T
($ In Billions)
Corporate & Institutional
Personal
Total Managed Assets
2010
$489.2
154.4
643.6
2009
$482.0
145.2
$627.2
DECEMBER 31
2008
$426.4
132.4
$558.8
2007
$608.9
148.3
$757.2
CHANGE
2006
2010 /2009
$562.5
134.7
$697.2
1%
6
3%
FIVE-YEAR
COMPOUND
GROWTH
RATE
(1)%
6
1%
C&IS ASSETS UNDER MANAGEMENT
($ in Billions)
608.9
562.5
482.0
489.2
426.4
PFS ASSETS UNDER MANAGEMENT
($ in Billions)
148.3
134.7
132.4
154.4
145.2
2006
2007
2008
2009
2010
2006
2007
2008
2009
2010
26 | 2010 ANNUAL REPORT TO SHAREHOLDERS | NORTHERN TRUST CORPORATION
MANAG E MENT’S DISCUSSION AND A NAL Y SIS OF FIN A N C I A L C O N DI T I O N A N D RE S UL T S OF OPE RA T I O N S
Custodied and managed assets were invested as follows:
A S S E T S U N D E R C U S T O D Y
($ In Billions)
Equities
Fixed Income Securities
Cash and Other Assets
A S S E T S U N D E R M A N A G E M E N T
($ In Billions)
Equities
Fixed Income Securities
Cash and Other Assets
2010
PFS
46%
26
28
2010
PFS
36%
33
31
C&IS
48%
35
17
C&IS
48%
15
37
DECEMBER 31
Consolidated
48%
34
18
DECEMBER 31
Consolidated
45%
19
36
C&IS
48%
34
18
C&IS
45%
14
41
2009
PFS
42%
28
30
2009
PFS
35%
33
32
Consolidated
47%
34
19
Consolidated
42%
19
39
Foreign Exchange Trading Income
Security Commissions and Trading Income
Northern Trust provides foreign exchange services in the
normal course of business as an integral part of its global
custody services. Active management of currency positions,
within conservative limits, also contributes to trading income.
Foreign exchange trading income decreased 14%, or $63.5
million, and totaled $382.2 million in 2010 compared with
$445.7 million last year. The decrease from the prior year
primarily reflects reduced currency volatility, partially offset
by increased client volumes.
Security commissions and trading income is generated
primarily from securities brokerage services provided by
Northern Trust Securities, Inc. The current year decline to
$60.9 million from $62.4 million in 2009 principally reflects
decreased revenue from core brokerage services.
Treasury Management Fees
The fee portion of treasury management revenues decreased
to $78.1 million from $81.8 million in 2009. The 2009 fees
reflect the pass through of a higher level of Federal Deposit
Insurance Corporation (FDIC) premium charges. Treasury
management revenues in 2010 were impacted by lower
transaction volumes.
Other Operating Income
The components of other operating income include:
(In Millions)
Banking Service Fees
Loan Service Fees
Non-Trading Foreign Exchange Gains (Losses)
Credit Default Swap Gains (Losses)
Other Income
Total Other Operating Income
2010
$ 57.3
60.3
(2.8)
(1.7)
33.2
$146.3
2009
$ 53.1
52.1
(1.4)
(4.6)
37.6
$136.8
2008
$ 39.4
30.0
36.1
35.4
46.0
$186.9
CHANGE
2010 / 2009
2009 / 2008
8%
16
100
(63)
(12)
7%
35%
74
N/M
N/M
(18)
(26)%
The increase in banking service fees primarily reflects
higher letter of credit revenue. Growth in commercial loan-
related commitment fees explains the rise in loan service fees.
Non-trading foreign exchange gains (losses) reflect the impact
of foreign exchange rate movements during the period on the
translation to functional currencies of assets and liabilities
denominated in nonfunctional currencies, net of currency-
related hedging activity. Credit default swap gains and losses
reflect the mark-to-market adjustments of credit default swap
contracts used to mitigate credit risk associated with specific
commercial credits. The other income decrease is primarily a
result of a prior year gain on the sale of leases, partially offset
by a current year gain on the sale of a building.
NORTHERN TRUST CORPORATION | 2010 ANNUAL REPORT TO SHAREHOLDERS | 27
MANAG E MENT’S DISCUSSION AND A NAL Y SIS OF FIN A N C I A L C O N DI T I O N A N D RE S UL T S OF OPE RA T I O N S
Investment Security Gains (Losses)
Net investment security losses were $20.4 million in 2010
compared to $23.4 million in 2009. The current and prior year
included $21.2 million and $26.7 million, respectively, of
pre-tax charges for the credit-related other-than-temporary
impairment of residential mortgage backed securities held
within Northern Trust’s balance sheet investment securities
portfolio.
N O N I N T E R E S T I N C O M E — 2 0 0 9 C O M P A R E D W I T H 2 0 0 8
Trust, investment and other servicing fees for 2009 accounted
for 75% of total noninterest income and 54% of total taxable
equivalent revenue. These fees decreased 2% in 2009 to $2.08
billion from $2.13 billion in 2008, attributable primarily to
lower market valuations during the majority of 2009.
Foreign exchange trading income decreased 28% in 2009
to $445.7 million from a record $616.2 million in 2008. The
decrease reflected significantly reduced currency volatility and
client volumes from the record levels in 2008.
Revenues from security commissions and trading income
totaled $62.4 million in 2009, compared with $77.0 million in
Net Interest Income
2008. The decrease primarily reflected decreased revenue from
core brokerage services.
Treasury management fees were $81.8 million in 2009, up
12% from the $72.8 million reported in 2008. More clients
than with
elected to pay for
compensating deposit balances and there was a higher level of
pass through of FDIC premium charges.
in fees
services
rather
Other operating income totaled $136.8 million in 2009, a
decrease of 27% from $186.9 million in 2008. The decrease
primarily reflected credit default
swap and non-trading
foreign exchange losses incurred in 2009 as compared to credit
default swap and non-trading foreign exchange gains in 2008,
partially offset by higher loan and banking service fee revenues
attributable to higher commercial loan-related commitment
fee revenue and letter of credit revenue, respectively.
Net investment security losses of $23.4 million in 2009
and $56.3 million in 2008 included $26.7 million and $61.3
million, respectively, of other-than-temporary impairment
charges. A gain of $4.9 million was recorded in 2008 from the
sale of CME Group Inc. stock.
An analysis of net interest income on an FTE basis, major balance sheet components impacting net interest income, and related
ratios are provided below.
A N A L Y S I S O F N E T I N T E R E S T I N C O M E ( F T E )
($ In Millions)
Interest Income
FTE Adjustment
Interest Income – FTE
Interest Expense
Net Interest Income – FTE Adjusted
2010
$ 1,296.7
39.1
1,335.8
378.0
957.8
2009
$ 1,406.0
40.2
1,446.2
406.2
1,040.0
Net Interest Income – Unadjusted
$
918.7
$
999.8
AVERAGE BALANCE
Earning Assets
Interest-Related Funds
Net Noninterest-Related Funds
$67,865.4
57,179.4
10,686.0
$66,670.8
53,671.6
12,999.2
2008
2010 / 2009
2009 / 2008
CHANGE
$ 2,478.5
49.8
2,528.3
1,399.4
$ 1,128.9
$ 1,079.1
$64,249.9
55,173.9
9,076.0
(7.8)%
(2.7)
(7.6)
(6.9)
(7.9)%
(8.1)%
1.8%
8.0
(23.8)
(43.3)%
(19.3)
(42.8)
(71.0)
(7.9)%
(7.3)%
3.8%
(2.7)
43.2
AVERAGE RATE
Earning Assets
Interest-Related Funds
Interest Rate Spread
Total Source of Funds
Net Interest Margin
Refer to pages 128 and 129 for additional analysis of net interest income.
1.97%
.66
1.31
.56
1.41%
CHANGE IN PERCENTAGE
2.17%
.76
1.41
.61
1.56%
3.94%
2.54
1.40
2.18
1.76%
(.20)
(.10)
(.10)
(.05)
(.15)
(1.77)
(1.78)
.01
(1.57)
(.20)
28 | 2010 ANNUAL REPORT TO SHAREHOLDERS | NORTHERN TRUST CORPORATION
MANAG E MENT’S DISCUSSION AND A NAL Y SIS OF FIN A N C I A L C O N DI T I O N A N D RE S UL T S OF OPE RA T I O N S
deposits,
deposits, wholesale
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. Earning assets –
securities, loans and money market assets – are financed by a
large base of interest-bearing funds that include personal and
institutional
short-term
borrowings, senior notes and long-term debt. Earning assets
also are funded by net noninterest-related funds, which
include demand deposits, the reserve for credit losses and
stockholders’ equity, reduced by nonearning assets such as
cash and due from banks; items in process of collection; and
buildings and equipment. The dominant factors that affect net
interest income are variations in the level and mix of earning
assets; interest-bearing funds; net noninterest-related funds;
and their relative sensitivity to interest rate movements. In
addition,
the levels of nonperforming assets and client
compensating deposit balances used to pay for services impact
net interest income.
Net interest income in 2010 was $918.7 million, down 8%
from $999.8 million in 2009. When adjusted to an FTE basis,
yields on taxable, nontaxable and partially taxable assets are
comparable, although the adjustment to an FTE basis has no
impact on net income. Net interest income on an FTE basis
for 2010 was $957.8 million, a decline of 8% from $1.04
billion in 2009. The net interest margin was 1.41% for 2010,
down from the previous year’s 1.56%. The net interest margin
was negatively impacted by several factors. The prolonged low
interest rate environment resulted in reduced yields on the
securities portfolio as maturing investments were replaced by
lower yielding assets. In addition, due to continuing weakness
in loan demand, balance sheet growth has been concentrated
in lower yielding assets, while a larger percentage of funding
has come from interest-bearing sources.
Earning assets averaged $67.9 billion in 2010, up 2% from
the $66.7 billion reported in the prior year. This growth
reflects a $2.5 billion increase in securities, partially offset by a
$1.2 billion decrease in loans and leases, and a $.1 billion
decrease in money market assets.
Loans and leases averaged $27.5 billion, 4% lower than the
$28.7 billion in 2009. The year-to-year comparison reflects a
19% decrease in average commercial and institutional loans to
$6.2 billion from $7.6 billion in 2009. Residential real estate
loans averaged $10.8 billion in 2010, an increase of 2% from
$10.7 billion in 2009. Average private client loans totaled $5.0
billion, up 7% from $4.7 billion in the prior year, while
commercial real estate loans averaged $3.3 billion, up 2%
from $3.2 billion in 2009.
Securities averaged $19.9 billion, up 14% from 2009, with
the growth primarily in negotiable certificates of deposits, U.S.
government, and other asset-backed securities.
lower
average
The increase in average earning assets of $1.2 billion was
funded primarily by higher levels of interest-related funds.
The growth in interest-related funds was attributable to higher
average client balances in non-U.S. office interest-bearing
deposits, partially offset by
short-term
borrowings. Average noninterest-related funding sources in
2010 declined $2.3 billion from 2009, primarily due to a
decrease in average demand and other noninterest-bearing
deposits. In November 2010, Northern Trust issued $500
million of 3.450% fixed-rate senior notes of the Corporation
due on November 4, 2020. The senior notes are non-callable
and unsecured, and were issued at a discount to yield 3.464%.
Stockholders’ equity averaged $6.6 billion in 2010 and
2009. In April 2009, 17,250,000 common shares were issued in
connection with a public offering for which $834.1 million of
cash proceeds were received.
For additional analysis of average balances and interest
rate changes affecting net interest income, refer to the Average
Statement of Condition with Analysis of Net Interest Income
on pages 128 and 129.
N E T I N T E R E S T I N C O M E – 2 0 0 9 C O M P A R E D W I T H 2 0 0 8
Net interest income decreased in 2009 as compared to 2008
primarily as a result of a significant reduction in the net
interest margin attributable to depressed interest
rates,
partially offset by an increase in average earning assets. The
net interest margin decreased to 1.56% from 1.76% in 2008,
reflecting significant decline in yields on short-term assets and
the diminished value of noninterest-related funding sources
because of the significant decline in interest rates in 2009.
Earning assets averaged $66.7 billion in 2009, up 4% from
$64.2 billion in 2008. The growth reflected a $5.1 billion
increase in average securities balances and a $1.3 billion
increase in average loans and leases, partially offset by a $3.9
billion decrease in money market assets. The increase in
average earning assets of $2.5 billion was funded primarily by
higher levels of noninterest-bearing deposits and an increase in
stockholders’ equity. Interest-related funding sources in 2009
declined $1.5 billion from 2008, primarily due to lower levels
of non-U.S. office time deposits, partially offset by increases in
domestic deposits, short-term borrowings and senior notes.
NORTHERN TRUST CORPORATION | 2010 ANNUAL REPORT TO SHAREHOLDERS | 29
MANAG E MENT’S DISCUSSION AND A NAL Y SIS OF FIN A N C I A L C O N DI T I O N A N D RE S UL T S OF OPE RA T I O N S
Stockholders’ equity for 2009 averaged $6.6 billion, up
$1.5 billion, or 29% from 2008. The increase primarily
reflected cash proceeds of $834.1 million received from the
April 2009 issuance of 17,250,000 common shares
in
the $1.576 billion of
connection with a public offering,
preferred stock issued to the U.S. Treasury in November 2008
in connection with the Corporation’s participation in the U.S.
Treasury’s CPP, and the retention of earnings. The preferred
stock issued under the CPP was repurchased in full in June
2009.
Noninterest Expenses
Provision for Credit Losses
The provision for credit losses was $160.0 million in 2010
compared with $215.0 million in 2009 and a $115.0 million
provision in 2008. The current year provision, though reduced
from the prior year level, reflects the continued weakness in
residential real estate and commercial real estate loans in
certain markets. For a fuller discussion of the reserve and
provision for credit losses for 2010, 2009, and 2008, refer to
pages 58 through 60.
Noninterest expenses for 2010 totaled $2.50 billion, up 8% from $2.32 billion in 2009. The components of noninterest expenses and
a discussion of significant changes during 2010 and 2009 are provided below.
N O N I N T E R E S T E X P E N S E S
(In Millions)
Compensation
Employee Benefits
Outside Services
Equipment and Software Expense
Occupancy Expense
Visa Indemnification Benefits
Other Operating Expense
Total Noninterest Expenses
Compensation and Benefits
Compensation costs, the largest component of noninterest
expenses,
increased $8.3 million from 2009. The increase
reflects the reversal in 2009 of accruals totaling $22.2 million
related to performance stock units granted in 2008 and 2007
which were no longer expected to vest, partially offset by a
decrease in salary expense in the current year. Staff on a full-
time
totaled approximately 12,800 at
December 31, 2010 compared with approximately 12,400 at
December 31, 2009, and averaged 12,600 in 2010, up 2%
compared with 12,300 in 2009. The 2010 increases primarily
reflect additional staff to support international growth. The
decrease in employee benefit costs for 2010 primarily reflects
lower federal and employee insurance benefits.
equivalent basis
Outside Services
Outside services expense of $460.4 million in 2010 increased
$35.9 million from the prior year due to higher expenses
associated with investment manager sub-advisor fees, and
technical services. Investment manager sub-advisor fees are
investment managers for services
those paid to external
provided to certain funds Northern Trust manages and those
relating to custom client programs. Technical services include
30 | 2010 ANNUAL REPORT TO SHAREHOLDERS | NORTHERN TRUST CORPORATION
2010
$1,108.0
237.6
460.4
287.1
167.8
(33.0)
270.0
$2,497.9
2009
$1,099.7
242.1
424.5
261.1
170.8
(17.8)
136.3
$2,316.7
2008
2010 / 2009
2009 / 2008
CHANGE
$1,133.1
223.4
413.8
241.2
166.1
(76.1)
786.3
$2,887.8
1%
(2)
8
10
(2)
85
98
8%
(3)%
8
3
8
3
77
(83)
(20)%
expenses for systems and application support; the provision of
market and research data; and outsourced check processing
and lockbox services, among other services.
Equipment and Software Expense
Equipment and software expense, comprised of depreciation
and amortization; rental; and maintenance costs, increased
$26.0 million in 2010 compared to 2009. The increase
primarily
software
depreciation and amortization from additional investments in
capital assets and an increase in equipment expense from
higher computer maintenance and equipment rental.
reflects higher
computer
levels of
Occupancy Expense
Net occupancy expense totaled $167.8 million in 2010
compared to $170.8 million in 2009, reflecting decreased
building depreciation, rent expense, and real estate taxes,
associated with building
partially offset by
operations.
expenses
Visa Indemnification Charges
In 2010, 2009 and 2008, reductions to Northern Trust’s Visa
indemnification liability and related charges totaled $33.0
MANAG E MENT’S DISCUSSION AND A NAL Y SIS OF FIN A N C I A L C O N DI T I O N A N D RE S UL T S OF OPE RA T I O N S
million, $17.8 million and $76.1 million, respectively. Northern
Trust, as a member bank of Visa U.S.A., and in conjunction with
other member banks, is obligated to share in losses resulting
from certain indemnified litigation involving Visa. The
reductions reflect Northern Trust’s proportionate share of funds
that Visa deposited into its litigation escrow account in those
years. Visa indemnification charges are further discussed in Note
19 to the consolidated financial statements.
Other Operating Expenses
The components of other operating expenses were as follows:
(In Millions)
Business Promotion
FDIC Insurance Premiums
Staff Related
Other Intangibles Amortization
Capital Support Agreements
Securities Lending Client Support
Auction Rate Securities Purchase Program
Other Expenses
Total Other Operating Expenses
2010
$ 81.0
33.9
37.4
14.4
–
–
–
103.3
$270.0
2009
$ 66.6
54.1
31.3
16.2
(109.3)
–
–
77.4
$ 136.3
2008
$ 87.8
5.6
38.1
17.8
314.1
167.6
54.6
100.7
$786.3
CHANGE
2010 /2009
2009 /2008
22%
(37)
19
(11)
N/M
–
–
33
98%
(24)%
N/M
(18)
(9)
N/M
N/M
N/M
(23)
(83)%
Business promotion for the current year increased primarily due
to higher advertising and travel related expenses. The decrease in
FDIC insurance premiums reflects the 2009 special assessment of
$20.2 million. Staff related expenses, which include costs
associated with the hiring and training of staff, employee
similar employee related
relocation assistance, and other
expenses, also increased in the current year. The 2009 capital
support agreements balance is attributable to a net expense
reduction of $109.3 million associated with the final support
payments and expiration of the CSA obligations. The other
expenses component of other operating expenses reflects higher
charges related to account servicing activities and increases in
other miscellaneous expense categories.
N O N I N T E R E S T E X P E N S E — 2 0 0 9 C O M P A R E D W I T H 2 0 0 8
Noninterest expenses for 2009 totaled $2.32 billion, down
20% from $2.89 billion in 2008. On an operating basis, which
excludes the Visa related pre-tax benefits in 2009 and 2008,
noninterest expenses decreased $629.4 million, or 21%. 2008
results were impacted by $536.3 million of client support
related charges, including $314.1 million of support provided
to cash investment funds under CSAs. Noninterest expenses
for 2009 included a net expense reduction of $109.3 million
associated with the final support payments and expiration of
the CSA obligations.
Compensation costs decreased $33.4 million, or 3%, from
2008 and reflected the impact of lower salary expense and
performance-based equity compensation, offset partially by
higher cash-based incentives. 2008 included a $17.0 million
charge in connection with initiatives to reduce staff expense
levels. Staff on a full time equivalent basis averaged 12,300 in
2009, up 5% from 11,700 in 2008. The 2009 increase was
attributable to additional
international
staff
growth. Staff on a full time equivalent basis totaled 12,400 at
December 31, 2009, compared with 12,200 at year-end 2008.
to support
Employee benefit costs for 2009 were $242.1 million, up
$18.7 million, or 8%, from $223.4 million in 2008, reflecting
higher defined benefit and defined contribution plan expenses
and staff levels.
Outside services expense totaled $424.5 million in 2009,
up 3% from $413.8 million in 2008 due to higher technical
services and investment manager sub-advisor expenses.
Equipment and software expense increased 8% to $261.1
million in 2009 from $241.2 million in 2008. The increase
reflected higher levels of computer software depreciation and
amortization from continued investments in information
technology infrastructure.
Net occupancy expense for 2009 was $170.8 million, up
3% from $166.1 million in 2008 due to increased rent expense.
Reductions to Northern Trust’s Visa indemnification
liability and related charges totaled $17.8 million and $76.1
million in 2009 and 2008, respectively.
Other operating expenses totaled $136.3 million in 2009,
down from $786.3 million in 2008 and included a net expense
reduction of $109.3 million associated with the final support
payments and expiration of
the CSA obligations. Other
operating expenses for 2008 included $536.3 million of client
support
related charges comprised of $314.1 million in
connection with support provided to investment vehicles under
the CSAs, $167.6 million of support provided to Northern
NORTHERN TRUST CORPORATION | 2010 ANNUAL REPORT TO SHAREHOLDERS | 31
MANAG E MENT’S DISCUSSION AND A NAL Y SIS OF FIN A N C I A L C O N DI T I O N A N D RE S UL T S OF OPE RA T I O N S
position with respect to certain structured leasing transactions
and a $47.8 million reduction in the tax provision related to
non-U.S. subsidiaries whose earnings are being indefinitely
reinvested.
B U S I N E S S U N I T R E P O R T I N G
Northern Trust, under the leadership of Chairman, President,
is
and Chief Executive Officer Frederick H. Waddell,
organized around its two principal client-focused business
units, C&IS and PFS. Investment management services and
products are provided to the clients of these business units and
to other U.S. and non-U.S. clients by NTGI. Operations
support is provided to each of the business units by O&T.
Mr. Waddell has been identified as the chief operating
decision maker, having final authority over resource allocation
decisions and performance assessment.
of
their
financial
performance.
C&IS and PFS results are presented to promote a greater
understanding
The
information, presented on an internal management-reporting
basis, derives from internal accounting systems that support
Northern Trust’s
and management
strategic objectives
structure. Management has developed accounting systems to
allocate revenue and expenses related to each segment. They
incorporate processes for allocating assets,
liabilities and
equity, and the applicable interest income and expense. Equity
is allocated based on the proportion of economic capital
associated with the business units.
Allocations of capital and certain corporate expenses may
not be representative of levels that would be required if the
segments were independent entities. The accounting policies
used for management reporting are consistent with those
described in Note 1 to the consolidated financial statements.
Transfers of income and expense items are recorded at cost;
there is no consolidated profit or loss on sales or transfers
between business units. Northern Trust’s presentations are not
necessarily consistent with similar information for other
financial institutions.
Trust’s securities lending clients and $54.6 million related to the
establishment of a program to purchase certain illiquid auction
rate securities that were purchased by a limited number of
Northern Trust clients. Other operating expenses also declined
in 2009 due to lower business promotion, staff related expenses
and other miscellaneous expenses, partially offset by a special
assessment of FDIC insurance premiums of $20.2 million and
higher assessment rates and an increase in insured domestic
balances. The 2008 other expenses component included a $20.1
million currency translation related benefit associated with
Lehman Brothers bankruptcy matters.
Provision for Income Taxes
The provision for income tax and effective tax rates are
impacted by levels of pre-tax income, effective state tax rates,
and the impact of certain subsidiaries whose earnings are
indefinitely reinvested, as well as non-recurring items such as
the resolution of tax matters. The 2010 income tax provision
was $320.3 million, representing an effective rate of 32.4%.
This compares with $391.0 million of income tax expense and
an effective rate of 31.2% in 2009. The increase in the effective
rate for 2010 is attributable to a lower level of state income tax
benefits in the current year as compared to 2009 and income
tax benefits recorded in 2009 relating to the resolution of
certain structured leasing tax positions taken in periods prior
to 2009.
The tax provisions for 2010 and 2009 reflect reductions
totaling $20.1 million and $20.9 million, respectively, related
to certain non-U.S. subsidiaries whose earnings are being
indefinitely reinvested. The decrease in the current year
amount reflects an increase in the average effective tax rate of
non-U.S. subsidiaries, partially offset by the Corporation’s
election to indefinitely reinvest the earnings of an additional
non-U.S. subsidiary.
The 2008 income tax provision of $480.9 million
represented an effective rate of 37.7%. The effective tax rate in
2008 reflected a $61.3 million charge related to revised
estimates regarding the outcome of the Corporation’s tax
32 | 2010 ANNUAL REPORT TO SHAREHOLDERS | NORTHERN TRUST CORPORATION
MANAG E MENT’S DISCUSSION AND A NAL Y SIS OF FIN A N C I A L C O N DI T I O N A N D RE S UL T S OF OPE RA T I O N S
C O N S O L I D A T E D F I N A N C I A L I N F O R M A T I O N
(In Millions)
Noninterest Income
Trust, Investment and Other Servicing Fees
Gain on Visa Share Redemption
Other
Net Interest Income (FTE)*
Revenues (FTE)*
Provision for Credit Losses
Visa Indemnification Benefits
Noninterest Expenses
Income before Income Taxes*
Provision for Income Taxes*
Net Income
2010
2009
2008
2010 / 2009
2009 / 2008
CHANGE
$ 2,081.9
–
647.1
957.8
3,686.8
160.0
(33.0)
2,530.9
1,028.9
359.4
$ 2,083.8
–
703.3
1,040.0
3,827.1
215.0
(17.8)
2,334.5
1,295.4
431.2
$ 2,134.9
167.9
896.6
1,128.9
4,328.3
115.0
(76.1)
2,963.9
1,325.5
530.7
N/M%
–
(8)
(8)
(4)
(26)
85
8
(21)
(17)
(2)%
N/M
(22)
(8)
(12)
87
(77)
(21)
(2)
(19)
$
669.5
$
864.2
$
794.8
(23)%
9%
2%
Average Assets
* Stated on an FTE basis. The consolidated figures include $39.1 million, $40.2 million, and $49.8 million of FTE adjustment for 2010, 2009, and 2008, respectively.
$76,008.2
$73,028.5
$74,314.2
2%
Corporate and Institutional Services
The C&IS business unit is a leading global provider of asset
servicing, asset management, securities lending, brokerage,
to corporate and public
banking and related services
retirement funds, foundations, endowments, fund managers,
insurance companies,
sovereign wealth and government
funds. Asset servicing, asset management, and related services
industry leading capabilities
encompass a full
including but not limited to: global master trust and custody,
trade settlement, and reporting; fund administration; cash
range of
management;
investment risk and performance analytical
services; and investment operations outsourcing. Client
relationships are managed through the Bank and the Bank’s
and the Corporation’s other subsidiaries, including support
from international locations in North America, Europe, the
Middle East, and the Asia Pacific region. Asset servicing
relationships managed by C&IS often include investment
and commission
management,
recapture services provided through NTGI. C&IS also
provides related foreign exchange services from offices located
in the U.S., U.K. and Singapore.
transition management,
The following table summarizes the results of operations of C&IS for the years ended December 31, 2010, 2009, and 2008 on a
management-reporting basis.
C O R P O R A T E A N D I N S T I T U T I O N A L S E R V I C E S
R E S U L T S O F O P E R A T I O N S
(In Millions)
Noninterest Income
Trust, Investment and Other Servicing Fees
Other
Net Interest Income (FTE)*
Revenues (FTE)*
Provision for Credit Losses
Noninterest Expenses
Income before Income Taxes*
Provision for Income Taxes*
Net Income
2010
2009
2008
2010 / 2009
2009 / 2008
CHANGE
$ 1,175.1
522.7
271.8
1,969.6
(16.1)
1,328.9
656.8
222.4
$ 1,236.8
571.3
416.0
2,224.1
30.7
1,200.6
992.8
350.8
$ 1,225.9
804.6
571.1
2,601.6
25.2
1,779.5
796.9
308.2
(5)%
(9)
(35)
(11)
N/M
11
(34)
(37)
$
434.4
$
642.0
$
488.7
(32)%
1%
(29)
(27)
(15)
22
(33)
25
14
31%
Percentage of Consolidated Net Income
65%
74%
61%
Average Assets
* Stated on an FTE basis.
$38,749.3
$38,117.1
$49,490.4
2%
(23)%
NORTHERN TRUST CORPORATION | 2010 ANNUAL REPORT TO SHAREHOLDERS | 33
MANAG E MENT’S DISCUSSION AND A NAL Y SIS OF FIN A N C I A L C O N DI T I O N A N D RE S UL T S OF OPE RA T I O N S
The decrease in C&IS net income in 2010 resulted from
reductions in securities lending revenue, a component of trust,
investment and other servicing fees; net interest income; and
foreign exchange trading income; and higher noninterest
expenses; partially offset by a negative provision for credit
losses. Other components of trust,
investment and other
servicing fees increased in 2010 primarily attributable to new
business and improved market valuations. The net income
increase in 2009 as compared to 2008 primarily reflects
reduced noninterest expenses,
increased securities lending
revenue, and new business, partially offset by reduced foreign
exchange trading income and net interest income.
C&IS Trust, Investment and Other Servicing Fees
investment
and other
servicing fees
C&IS trust,
are
attributable to four general product types: Custody and Fund
Administration, Investment Management, Securities Lending,
and Other Services. Custody and fund administration fees are
driven primarily by asset values, transaction volumes and
number of accounts. Custody fees related to asset values are
often priced based on values at the beginning of each quarter;
however, there are custody fees that are based on quarter-end
or month-end values or average values for a month or quarter.
The fund administration fees that are asset value related are
generally priced using average daily balances. Investment
management
fees are based primarily on market values
throughout a period.
Securities lending revenue is affected by market values; the
demand for securities to be lent, which drives volumes; and
the interest rate spread earned on the investment of cash
deposited by investment firms as collateral for securities they
have borrowed. Securities lending revenue has also included
Northern Trust’s share of unrealized gains and losses on one
mark-to-market investment fund used in securities lending
activities. As of September 30, 2010,
in the
mark-to-market
fund had been sold with the proceeds
reinvested into a short duration fund, eliminating the
impact on securities lending revenue in
mark-to-market
future periods. The other services fee category in C&IS
includes such products as benefit payment, performance
analysis, electronic delivery, and other services. Revenues from
these products are based generally on the volume of services
provided or a fixed fee.
securities
Provided below are the components of C&IS trust, investment and other servicing fees and a breakdown of its assets under
custody and under management.
C O R P O R A T E A N D I N S T I T U T I O N A L S E R V I C E S
T R U S T , I N V E S T M E N T A N D O T H E R S E R V I C I N G F E E S
2010 C&IS FEES
(In Millions)
2010
2009
2008
Custody and Fund
Administration
Investment Management
Securities Lending
Other Services
Total Trust, Investment and
Other Servicing Fees
$ 646.1
261.2
195.2
72.6
$ 583.0
247.1
336.7
70.0
$ 661.6
277.4
221.4
65.5
$1,175.1
$1,236.8
$1,225.9
C O R P O R A T E A N D I N S T I T U T I O N A L S E R V I C E S
A S S E T S U N D E R C U S T O D Y
2010 C&IS ASSETS UNDER CUSTODY
DECEMBER 31
(In Billions)
2010
2009
2008
North America
Europe, Middle East, and
Africa
Asia Pacific Region
Securities Lending
$1,999.6
$1,861.9
$1,661.1
1,280.7
331.7
99.1
1,085.9
263.6
114.5
801.7
146.2
110.2
Total Assets Under Custody
$3,711.1
$3,325.9
$2,719.2
55% Custody and Fund Administration
22% Investment Management
17% Securities Lending
6% Other Services
54% North America
34% Europe, Middle East, and Africa
9% Asia-Pacific Region
3% Securities Lending
34 | 2010 ANNUAL REPORT TO SHAREHOLDERS | NORTHERN TRUST CORPORATION
MANAG E MENT’S DISCUSSION AND A NAL Y SIS OF FIN A N C I A L C O N DI T I O N A N D RE S UL T S OF OPE RA T I O N S
C O R P O R A T E A N D I N S T I T U T I O N A L S E R V I C E S
A S S E T S U N D E R M A N A G E M E N T
DECEMBER 31
(In Billions)
2010
2009
2008
North America
Europe, Middle East, and Africa
Asia Pacific Region
Securities Lending
$284.7
69.0
36.4
99.1
$257.6
63.5
46.4
114.5
$232.3
52.8
31.1
110.2
Total Assets Under Management
$489.2
$482.0
$426.4
the
Custody and fund administration fees,
largest
investment and other servicing fees,
component of trust,
increased $63.1 million, or 11%, to $646.1 million from
$583.0 million in 2009, primarily reflecting higher fund
administration and global custody fee revenues. Fees from
totaled $261.2 million, up from
investment management
$247.1 million in the year-ago period. The 6% increase
primarily reflects higher market valuations during the
majority of the year, partially offset by $12.9 million of money
market mutual fund fee waivers due to the persistent low level
of short-term interest rates. Money market mutual fund fee
waivers for 2009 totaled $2.3 million. Securities lending
revenue decreased $141.5 million, or 42%, to $195.2 million
compared with $336.7 million in 2009. The current year
includes the recovery of previously recorded unrealized asset
valuation losses of approximately $114 million related to a
mark-to-market
securities
lending activities, compared to recoveries of approximately
$204 million in 2009. Excluding the impact of asset valuation
recoveries, securities lending fees decreased by approximately
$52 million, reflecting lower spreads on the investment of cash
collateral, partially offset by higher average volumes.
fund used in our
investment
C&IS assets under
custody were $3.7 trillion at
than $3.3 trillion at
December 31, 2010, 12% higher
December 31, 2009. Managed assets totaled $489.2 billion and
$482.0 billion, at December 31, 2010 and 2009, respectively.
Cash and other assets deposited by investment
firms as
collateral for securities borrowed from custody clients are
managed by Northern Trust and are included in assets under
custody and under management. This collateral totaled $99.1
billion and $114.5 billion at December 31, 2010 and 2009,
respectively.
C&IS Other Noninterest Income
Other noninterest income for 2010 decreased $48.6 million, or
9%, to $522.7 million from $571.3 million in 2009. The
2010 C&IS ASSETS UNDER MANAGEMENT
58% North America
20% Securities Lending
14% Europe, Middle East, and Africa
8% Asia-Pacific Region
decrease primarily reflects a $65.3 million, or 15%, decrease in
foreign exchange trading income due to reduced currency
volatility in the current year, partially offset by increased client
volumes as compared to 2009. Other noninterest income for
2009 of $571.3 million decreased $233.3 million, or 29%, from
$804.6 million in 2008. This decrease resulted from lower
foreign exchange trading income compared to 2008’s record
levels, due to significantly reduced currency volatility and
client volumes in 2009. The decrease also reflected the impact
swap
of mark-to-market adjustments on credit default
contracts, which totaled a loss of $4.6 million in 2009 as
compared to a gain of $35.4 million in 2008, and the impact of
non-trading foreign exchange net of hedging activity, which
totaled a loss of $1.4 million in 2009 compared to a gain of
$36.1 million recorded in 2008.
C&IS Net Interest Income
Net interest income decreased $144.2 million, or 35%, in 2010
to $271.8 million from $416.0 million in 2009. The decrease is
attributable to the impact on the net interest margin of the
persistently low interest rate environment. The C&IS net
interest margin in 2010 was .77% compared to 1.25% in 2009
and 1.27% in 2008. The decrease in net interest margin in
2010 is attributable to narrower spreads on money market
assets funded by non-U.S. interest-bearing deposits, a lower
average loan balance, and a larger percentage of funding from
interest-bearing sources. The decline in interest rates also
impacted net interest income in 2009, which was down $155.1
million, or 27%, from $571.1 million in 2008, as did an $11.7
billion, or 26%, decrease in average earning assets in 2009,
primarily short-term money market assets.
C&IS Provision for Credit Losses
The provision for credit losses was negative $16.1 million for
2010 primarily reflecting reduced loan balances and, to a lesser
extent,
in underlying asset quality metrics
within the commercial loan segment. The provision for credit
improvement
NORTHERN TRUST CORPORATION | 2010 ANNUAL REPORT TO SHAREHOLDERS | 35
MANAG E MENT’S DISCUSSION AND A NAL Y SIS OF FIN A N C I A L C O N DI T I O N A N D RE S UL T S OF OPE RA T I O N S
losses was $30.7 million for 2009 compared with $25.2 million
in 2008 and reflected the weakness in the broader economic
environment.
C&IS Noninterest Expenses
C&IS noninterest expenses were up $128.3 million, or 11%, in
2010 and totaled $1.33 billion compared to $1.20 billion in 2009.
The 2009 noninterest expenses included a net expense reduction
of $100.6 million associated with the final support payments and
expiration of the CSA obligations. Excluding the 2009 expense
reduction, noninterest expenses in 2010 increased by $27.7
million as a result of higher indirect expense allocations for
product and operating support and higher compensation and
employee benefit expenses. The increase in compensation
expense reflects the reversal
in 2009 of accruals related to
performance stock units granted in 2008 and 2007 which were
no longer expected to vest. Noninterest expenses in 2008
included $454.9 million of client support related charges.
Excluding client support related charges in both 2009 and 2008,
the $23.2 million decrease in noninterest expenses for 2009
staff
related, outside
services, business
reflected lower
promotion, and other operating expenses, partially offset by
increased indirect expense allocations for product and operating
support.
Personal Financial Services
The PFS business unit provides personal trust, investment
management, custody, and philanthropic services; financial
consulting; guardianship and estate administration; brokerage
services; and private and business banking. PFS focuses on
high net worth individuals and families, business owners,
executives, professionals, retirees, and established privately-
held businesses in its target markets. PFS also includes the
Wealth Management Group, which provides customized
products and services to meet the complex financial needs of
individuals and family offices in the United States and
throughout the world with assets typically exceeding $200
million. PFS services are delivered through 78 offices in 18
U.S. states as well as offices in London and Guernsey.
The following table summarizes the results of operations of PFS for the years ended December 31, 2010, 2009, and 2008 on a
management-reporting basis.
P E R S O N A L F I N A N C I A L S E R V I C E S
R E S U L T S O F O P E R A T I O N S
(In Millions)
Noninterest Income
Trust, Investment and Other Servicing Fees
Other
Net Interest Income (FTE)*
Revenues (FTE)*
Provision for Credit Losses
Noninterest Expenses
Income before Income Taxes*
Provision for Income Taxes*
Net Income
2010
2009
2008
2010 / 2009
2009 / 2008
CHANGE
$
906.8
133.3
591.8
1,631.9
176.1
1,103.0
352.8
132.8
$
847.0
138.7
538.1
1,523.8
184.3
1,044.6
294.9
112.4
$
909.0
132.6
542.7
1,584.3
89.8
1,087.9
406.6
156.1
$
220.0
$
182.5
$
250.5
7%
(4)
10
7
(4)
6
20
18
21%
(7)%
5
(1)
(4)
N/M
(4)
(28)
(27)
(27)%
Percentage of Consolidated Net Income
33%
21%
32%
Average Assets
* Stated on an FTE basis.
$23,564.5
$24,534.8
$22,868.7
(4)%
7%
losses, partially offset by increases
PFS net income increased $37.5 million, or 21%, from
2009 as a result of higher revenues and a lower provision for
credit
in noninterest
expenses and the provision for income taxes. PFS revenue
totaled $1.63 billion in 2010, an increase of $108.1 million, or
7%, from $1.52 billion in 2009 primarily attributable to a 7%
increase in trust, investment and other servicing fees and an
10% increase in net interest income. These increases were
partially offset by higher money market mutual
fund fee
waivers and decreases in security commission and trading
income and in treasury management fees. PFS net income in
2009 decreased $68.0 million, or 27%, from 2008 primarily
reflecting a $94.5 million increase in the provision for credit
losses and a decline in trust, investment and other servicing
fees, partially offset by a reduction in noninterest expenses. Net
income in 2008 of $250.5 million included $81.4 million of
36 | 2010 ANNUAL REPORT TO SHAREHOLDERS | NORTHERN TRUST CORPORATION
MANAG E MENT’S DISCUSSION AND A NAL Y SIS OF FIN A N C I A L C O N DI T I O N A N D RE S UL T S OF OPE RA T I O N S
client support related charges. PFS revenues in 2009 decreased
4% to $1.52 billion from 2008 results of $1.58 billion, primarily
reflecting a $62.0 million, or 7%, reduction in trust, investment
and other servicing fees, and a 1% decrease in net interest
income.
PFS Trust, Investment and Other Servicing Fees
Provided below is a summary of PFS trust, investment and other servicing fees and assets under custody and under management.
P E R S O N A L F I N A N C I A L S E R V I C E S
T R U S T , I N V E S T M E N T A N D O T H E R S E R V I C I N G F E E S
2010 PFS FEES
(In Millions)
Midwest
Southeast
Wealth Management
West
Southwest
Northeast
YEAR ENDED DECEMBER 31
2010
2009
2008
$373.0
200.3
123.2
97.8
88.0
24.5
$327.6
188.6
135.8
91.2
82.5
21.3
$341.5
212.4
142.4
104.1
93.6
15.0
Total Trust, Investment and Other
Servicing Fees
$906.8
$847.0
$909.0
P E R S O N A L F I N A N C I A L S E R V I C E S
A S S E T S U N D E R C U S T O D Y
2010 PFS ASSETS UNDER CUSTODY
(In Billions)
Wealth Management
Midwest
Southeast
West
Southwest
Northeast
DECEMBER 31
2010
2009
2008
$221.9
64.1
36.7
18.8
16.0
12.7
$196.0
58.2
34.0
17.0
14.1
11.8
$168.4
53.3
29.7
15.8
12.7
8.4
Total Assets Under Custody
$370.2
$331.1
$288.3
41% Midwest
22% Southeast
13% Wealth Management
11% West
10% Southwest
3% Northeast
60% Wealth Management
17% Midwest
10% Southeast
5% West
4% Southwest
4% Northeast
P E R S O N A L F I N A N C I A L S E R V I C E S
A S S E T S U N D E R M A N A G E M E N T
2010 PFS ASSETS UNDER MANAGEMENT
(In Billions)
Midwest
Wealth Management
Southeast
West
Southwest
Northeast
DECEMBER 31
2010
2009
2008
$ 60.4
31.5
29.1
14.2
12.4
6.8
$ 57.0
31.4
27.3
12.9
10.8
5.8
$ 53.0
29.0
24.3
11.6
9.9
4.6
Total Assets Under Management
$154.4
$145.2
$132.4
39% Midwest
21% Wealth Management
19% Southeast
9% West
8% Southwest
4% Northeast
The PFS regions shown above are comprised of the following:
Midwest includes Illinois, Michigan, Wisconsin, Missouri, Ohio
and Minnesota; Southeast includes Florida and Georgia; West
includes California, Washington, and Nevada; Southwest includes
Texas, Arizona, and Colorado; Northeast includes New York,
Connecticut, Massachusetts, and Delaware; Wealth Management
includes the results from the focus on the family office segment,
complex fiduciary assignments and ultra-wealthy individuals
specialized asset management,
through the provision of
fiduciary and private
investment consulting, global custody,
NORTHERN TRUST CORPORATION | 2010 ANNUAL REPORT TO SHAREHOLDERS | 37
MANAG E MENT’S DISCUSSION AND A NAL Y SIS OF FIN A N C I A L C O N DI T I O N A N D RE S UL T S OF OPE RA T I O N S
PFS Provision for Credit Losses
The provision for credit losses was $176.1 million for 2010,
compared with $184.3 million in 2009, and $89.8 million in
2008. The current year provision, though reduced from the
prior year level, reflects continued weakness in residential and
commercial real estate loans in certain markets. The increase
from 2008 to 2009 reflected the weakness in the broader
economic environment. For a fuller discussion of the reserve
and provision for credit losses refer to pages 58 through 60.
PFS Noninterest Expenses
Noninterest expenses of PFS increased $58.4 million, or 6%,
to $1.10 billion in 2010 compared to $1.04 billion in 2009,
primarily attributable to higher indirect expense allocations
for product and operating support, higher compensation, and
increased charges associated with account servicing activities.
Noninterest expenses for 2009 were 4% lower than 2008 and
included a net expense reduction totaling $8.7 million
associated with the final support payments and expiration of
the CSA obligations, while 2008 noninterest expenses included
client support related charges totaling $81.4 million, including
the support provided under the CSAs.
Northern Trust Global Investments
funds,
subsidiaries of
through various
registered investment
NTGI,
the Corporation,
provides a broad range of investment management and related
services and other products to U.S. and non-U.S. clients,
including clients of C&IS and PFS. Clients include institutional
and individual separately managed accounts, bank common
and collective
companies,
non-U.S. collective investment funds and unregistered private
investment funds. NTGI offers both active and passive equity
and fixed income portfolio management, as well as alternative
asset classes (such as private equity and hedge funds of funds)
and multi-manager products and advisory services. NTGI’s
activities also include transition management, overlay services,
and other risk management services. NTGI’s business operates
internationally through subsidiaries, joint ventures, alliances,
and distribution arrangements and its revenue and expenses
are fully allocated to C&IS and PFS.
At year-end 2010, Northern Trust managed $643.6 billion
in assets for personal and institutional clients compared with
$627.2 billion at year-end 2009. The increase in assets reflects
higher equity markets in 2010 and new business.
banking services for domestic and international clients.
Fees in the majority of locations in which PFS operates
and all mutual fund-related revenue are calculated based on
market values. PFS trust, investment and other servicing fees
were $906.8 million in 2010, up 7% from $847.0 million in
2009, which in turn was down 7% from $909.0 million in
2008. The current year performance benefitted from higher
market valuations and new business compared to lower
market valuations during the majority of 2009. Impacting the
results in both years were waived fees in money market funds
totaling $49.6 million and $23.9 million in 2010 and 2009,
respectively, due to the low level of short-term interest rates.
Trust, investment and other servicing fees for 2009 was lower
than 2008, reflecting lower market valuations and the $23.9
million of waived fees in money market mutual funds.
At December 31, 2010, assets under custody in PFS were
$370.2 billion, compared with $331.1 billion at December 31,
2009. Managed assets were $154.4 billion at December 31,
2010 compared to $145.2 billion at the previous year end.
PFS Other Noninterest Income
Other noninterest income for the year totaled $133.3 million
compared to $138.7 million in 2009, a decrease of 4%
primarily driven by a decrease in core brokerage fee revenue
and treasury management fees. The other noninterest income
increase of 5% in 2009 compared to 2008 resulted from
growth in treasury management fees and commercial loan-
related commitment fee revenue.
PFS Net Interest Income
Net interest income was $591.8 million for the year, up 10%
from $538.1 million in 2009, which was 1% lower than 2008.
Average loan volume increased $62.4 million in 2010, and the
net interest margin increased to 2.55% from 2.23% in 2009.
The increase in the net interest margin reflects increased yields
funds from interest-bearing
on loans and lower cost of
sources. The net interest margin for 2009 was down from the
2008 margin of 2.43% as 2009 was impacted by a significant
decrease in yields on short-term assets and the diminished
value of noninterest-related funding sources resulting from
the extended period of low interest rates.
38 | 2010 ANNUAL REPORT TO SHAREHOLDERS | NORTHERN TRUST CORPORATION
MANAG E MENT’S DISCUSSION AND A NAL Y SIS OF FIN A N C I A L C O N DI T I O N A N D RE S UL T S OF OPE RA T I O N S
N O R T H E R N T R U S T G L O B A L I N V E S T M E N T S
Operations and Technology
2 0 1 0 A S S E T S U N D E R M A N A G E M E N T O F $ 6 4 3 . 6 B I L L I O N
45% Equities
33% Short Duration
19% Fixed Income
3% Other
ASSET CLASSES
76% Institutional
24% Personal
CLIENT SEGMENTS
50% Active
44% Index
6% Manager of Managers
MANAGEMENT STYLES
The O&T business unit supports all Northern Trust business
activities, including the processing and product management
activities of C&IS, PFS and NTGI. These activities are
conducted principally in the operations and technology
centers in Chicago, London, and Bangalore.
Corporate Financial Management Group
The Corporate Financial Management Group includes the
Chief Financial Officer, Controller, Treasurer, and Investor
Relations functions. The Group is responsible for Northern
infrastructure and for
Trust’s accounting and financial
managing the Corporation’s financial position.
Corporate Risk Management Group
The Corporate Risk Management Group includes the Credit
Policy and other Corporate Risk Management functions. The
Credit Policy function is described in the “Risk Management –
Loans and Other Extensions of Credit” section. The Corporate
Risk Management Group monitors, measures, and facilitates
the management of
the
risks across
Corporation and its subsidiaries.
the businesses of
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. Treasury and
certain corporate-based expenses,
Other
executive level compensation and nonrecurring items not
allocated to the business units.
also includes
The following table summarizes the results of operations
of Treasury and Other for the years ended December 31, 2010,
2009, and 2008 on a management-reporting basis.
T R E A S U R Y A N D O T H E R
R E S U L T S O F O P E R A T I O N S
(In Millions)
Gain on Visa Share Redemption
Other Noninterest Income
Net Interest Income (FTE)*
Revenues (FTE)*
Visa Indemnification Benefits
Noninterest Expenses
Income before Income Taxes*
Provision (Benefit) for Income Taxes*
Net Income
2010
–
(8.9)
94.2
85.3
(33.0)
99.0
19.3
4.2
15.1
$
$
$
2009
–
(6.7)
85.9
79.2
(17.8)
89.3
7.7
(32.0)
2008
2010 / 2009
2009 / 2008
CHANGE
$167.9
(40.6)
15.1
142.4
(76.1)
96.5
122.0
66.4
N/M
33%
10
8
85
11
N/M
N/M
N/M
(84)%
N/M
(44)
77
(8)
(94)
N/M
$
39.7
$ 55.6
(62)%
(29)%
Percentage of Consolidated Net Income
2%
5%
7%
Average Assets
* Stated on an FTE basis.
$13,694.4
$11,662.3
$669.4
17%
N/M
NORTHERN TRUST CORPORATION | 2010 ANNUAL REPORT TO SHAREHOLDERS | 39
MANAG E MENT’S DISCUSSION AND A NAL Y SIS OF FIN A N C I A L C O N DI T I O N A N D RE S UL T S OF OPE RA T I O N S
Reserve for Credit Losses
The reserve for credit losses represents management’s estimate
of probable losses that have occurred as of the date of the
financial statements. The loan and lease portfolio and other
credit exposures are regularly reviewed to evaluate the
adequacy of the reserve for credit losses. In determining the
level of the reserve, Northern Trust evaluates the adequacy of
the reserve related to performing loans and lending-related
lending-related
as well
commitments
commitments that are deemed impaired.
loans
and
as
specific and inherent
The quarterly analysis of
loss
components and the control process maintained by Credit
Policy and the lending staff, as described in the “Risk
Management – Loans and Other Extensions of Credit”
section, are the principal methods relied upon by management
for the timely identification of, and adjustment for, changes in
estimated credit loss levels. In addition to Northern Trust’s
own experience, management also considers the experience of
peer institutions and regulatory guidance. Control processes
and analyses employed to evaluate the adequacy of the reserve
for credit losses are reviewed on at least an annual basis and
modified as considered appropriate.
are
reserve.
charged to the
leases and other extensions of credit deemed
Loans,
Subsequent
uncollectible
recoveries, if any, are credited to the reserve. The provision for
credit losses, which is charged to income,
is the amount
necessary to adjust the reserve to the level determined through
losses may vary from current
the above process. Actual
estimates and the amount of the provision may be either
greater than or less than actual net charge-offs.
evaluates
Management’s
assumption. Management
estimates utilized in establishing an
adequate reserve for credit losses are not dependent on any
single
numerous
variables, many of which are interrelated or dependent on
other assumptions and estimates,
in determining reserve
adequacy. Due to the inherent imprecision in accounting
estimates, other estimates or assumptions could reasonably
have been used in the current period and changes in estimates
from period to period.
are reasonably likely to occur
Additionally, as an integral part of their examination process,
various federal and state regulatory agencies also review the
reserve for credit losses. These agencies may require that
certain loan balances be classified differently or charged off
when their
from those of
management, based on their judgments about information
available to them at the time of their examination. However,
evaluations differ
credit
The Treasury and Other negative other noninterest
income for the years ended 2010, 2009, and 2008 include
losses of $21.2 million, $26.7 million and $61.3 million,
respectively, from the write-down of residential mortgage-
backed securities determined to be other-than-temporarily
impaired. The 2010 increase in net interest income reflects the
benefit of higher average assets and an increase in levels of
capital allocated to Treasury and Other, partially offset by
reduced yields on the securities portfolio, as maturing
investments have been replaced by lower yielding assets. The
increase in average assets reflects higher levels of average
securities balances in 2010 compared to 2009. Noninterest
expenses in 2010 equaled $99.0 million, up 11% from 2009.
Within noninterest expenses, compensation expense increased
compared to 2009, reflecting increased salary expense in 2010
and the reversal in 2009 of accruals related to performance
stock units granted in 2008 and 2007 which were no longer
expected to vest. Noninterest expenses were $89.3 million for
2009, a decrease of 8%, compared to $96.5 million in 2008
and reflected lower performance-based compensation and
salaries. The tax benefit in 2009 primarily reflects the favorable
resolution of certain state tax positions taken in prior years
and other federal and state tax matters not allocated to the
business units for management reporting purposes.
C R I T I C A L A C C O U N T I N G E S T I M A T E S
The use of estimates and assumptions is required in the
preparation of financial statements in conformity with GAAP
and actual results could differ from those estimates. The
Securities and Exchange Commission has issued guidance
relating to the disclosure of critical accounting estimates.
Critical
require
management to make subjective or complex judgments about
the effect of matters that are inherently uncertain and may
change in subsequent periods. Changes that may be required
in the underlying assumptions or estimates in these areas
could have a material
impact on Northern Trust’s future
financial condition and results of operations.
accounting
estimates
those
that
are
For Northern Trust, accounting estimates that are viewed
as critical are those relating to reserving for credit losses,
pension plan accounting, other-than-temporary impairment
for
(OTTI) of
structured leasing transactions. Management has discussed the
development and selection of each critical accounting estimate
with the Audit Committee of the Corporation’s Board of
Directors (Board).
and accounting
investment
securities,
40 | 2010 ANNUAL REPORT TO SHAREHOLDERS | NORTHERN TRUST CORPORATION
MANAG E MENT’S DISCUSSION AND A NAL Y SIS OF FIN A N C I A L C O N DI T I O N A N D RE S UL T S OF OPE RA T I O N S
management believes that the established reserve for credit
losses appropriately addresses
these uncertainties and is
adequate to cover probable losses which have occurred as of
the date of the financial statements.
The reserve for credit losses consists of the following
components:
Specific Reserve: The amount of specific reserves is
determined through an individual evaluation of loans and
lending-related commitments considered impaired that
is
based on expected future cash flows, the value of collateral, and
other factors that may impact the borrower’s ability to pay.
Inherent Reserve: The amount of inherent loss reserves is
based primarily on reserve
factors which incorporate
management’s evaluation of historical charge-off experience
and various qualitative
such as management’s
factors
evaluation of economic and business conditions and changes
in the character and size of the loan portfolio. Reserve factors
are applied to loan and lease credit exposures aggregated by
shared risk characteristics and are reviewed quarterly by
Northern Trust’s Loan Loss Reserve Committee which
includes representatives from Credit Policy, business unit
management, and Corporate Financial Management.
Pension Plan Accounting
As summarized in Note 21 to the consolidated financial
statements, Northern Trust maintains a noncontributory
defined benefit pension plan covering substantially all U.S.
employees
(the Qualified Plan) and a noncontributory
supplemental pension plan (the Nonqualified Plan). Certain
European-based employees also participate in local defined
benefit pension plans that have been closed to new employees
in prior years and have been closed to future benefit accruals,
effective in 2010. Measuring cost and reporting liabilities
resulting from defined benefit pension plans requires the use
of several assumptions regarding future interest rates, asset
returns, compensation increases and other actuarial-based
projections relating to the plans. Due to the long-term nature
of this obligation and the estimates that are required to be
made, the assumptions used in determining the periodic
pension expense and the projected pension obligation are
closely monitored and annually reviewed for adjustments that
may be required. The Financial Accounting Standards Board’s
(FASB) pension accounting guidance requires that differences
between the estimates and actual experience be recognized as
other comprehensive income in the period in which they
occur. The differences are amortized into net periodic pension
expense from accumulated other comprehensive income over
the future working lifetime of eligible participants. As a result,
differences between the estimates made in the calculation of
periodic pension expense and the projected pension obligation
and actual experience affect stockholders’ equity in the period
in which they occur but continue to be recognized as expense
systematically and gradually over subsequent periods.
Northern Trust recognizes the significant impact that these
pension-related assumptions have on the determination of the
pension obligations and related expense and has established
procedures for monitoring and setting these assumptions each
year. These procedures include an annual review of actual
demographic and investment experience with the pension
plan’s actuaries. In addition to actual experience, adjustments
to these assumptions consider observable yields on fixed
income securities, known compensation trends and policies, as
well as economic conditions and investment strategies that may
impact the estimated long-term rate of return on plan assets.
In determining the pension expense for the U.S. plans in
2010, Northern Trust utilized a discount rate of 6.00% for
both the Qualified Plan and the Nonqualified Plan. The rate of
increase in the compensation level is based on a sliding scale
that averaged 4.02%. The expected long-term rate of return on
Qualified Plan assets was 8.00%.
In evaluating possible
to pension-related
assumptions for the U.S. plans as of Northern Trust’s
December 31, 2010 measurement date, the following were
considered:
revisions
Discount Rate: Northern Trust estimates the discount rate
for its U.S. pension plans by applying the projected cash flows
for future benefit payments to several published discount rate
yield curves as of the measurement date. These yield curves are
composed of individual, zero-coupon interest rates for 60
different time periods over a 30-year time horizon. Zero-
coupon rates utilized by the yield curves are mathematically
derived from observable market yields for AA-rated corporate
bonds. The yield curve models referenced by Northern Trust in
establishing the discount rate supported a rate between 5.31%
and 5.73%, with an average decrease of 48 basis points over the
prior year. As such, Northern Trust decreased the discount rate
for the Qualified and Nonqualified plans from 6.00% for
December 31, 2009 to 5.50% for December 31, 2010.
Compensation Level: As long-term compensation policies
remained consistent with prior years, no changes were made
to the compensation scale assumption since its 2007 revision
based on a review of actual salary experience of eligible
employees.
NORTHERN TRUST CORPORATION | 2010 ANNUAL REPORT TO SHAREHOLDERS | 41
MANAG E MENT’S DISCUSSION AND A NAL Y SIS OF FIN A N C I A L C O N DI T I O N A N D RE S UL T S OF OPE RA T I O N S
Rate of Return on Plan Assets: The expected return on
plan assets is based on an estimate of the long-term (30 years)
rate of return on plan assets, which is determined using a
building block approach that considers the current asset mix
and estimates of return by asset class based on historical
experience, giving proper consideration to diversification and
rebalancing. Current market factors such as inflation and
interest rates are also evaluated before long-term capital
market assumptions are determined. Peer data and historical
returns
and
appropriateness. As a result of these analyses, Northern Trust’s
rate of return assumption was maintained at 8.00% for 2010.
reviewed to check for
reasonability
are
Mortality Table: Northern Trust uses the mortality table
proposed by the U.S. Treasury for use in accordance with the
provisions of the Pension Protection Act of 2006 (PPA) for
both pre- and post-retirement mortality assumptions. This
table is based on the RP2000 mortality table with projections
of expected future mortality.
In order to illustrate the sensitivity of these assumptions
on the expected periodic pension expense in 2011 and the
projected benefit obligation, the following table is presented to
show the effect of increasing or decreasing each of these
assumptions by 25 basis points.
(In Millions)
Increase (Decrease) in 2011 Pension Expense
Discount Rate Change
Compensation Level Change
Rate of Return on Asset Change
Increase (Decrease) in Projected Benefit
Obligation
Discount Rate Change
Compensation Level Change
25 BASIS
POINT
INCREASE
25 BASIS
POINT
DECREASE
(4.8)
2.7
(2.5)
5.0
(2.5)
2.5
(33.0)
11.8
34.9
(11.2)
Pension Contributions: The deduction limits specified by
the Internal Revenue Code for contributions made by
sponsors of defined benefit pension plans are based on a
“Target Liability” under the provisions of the PPA. Northern
Trust contributed $68.0 million to the Qualified Plan in 2010
and $175.0 million in 2009. The investment return on these
contributions decreases the U.S. pension expense. This benefit
will be partially offset by the related forgone interest earnings
on the
contributed. The minimum required
contribution is expected to be zero in 2011 and for several
years thereafter. The maximum deductible contribution is
estimated at $160.0 million for 2011.
funds
As a result of the pension-related assumptions currently
utilized, the contributions to the Qualified Plan, and other
42 | 2010 ANNUAL REPORT TO SHAREHOLDERS | NORTHERN TRUST CORPORATION
actuarial experiences of the qualified and nonqualified plans,
the estimated U.S. pension expense is expected to increase by
approximately $9.0 million in 2011 from the 2010 expense of
$23.2 million.
Other-Than-Temporary Impairment of Investment
Securities
available-for-sale
the consolidated statement of
Under GAAP, companies are required to perform periodic
reviews of securities with unrealized losses to determine
whether the declines in value are considered other-than-
temporary. For
and held-to-maturity
securities that management has no intent to sell, and believes
it more-likely-than-not that it will not be required to sell,
prior to recovery,
income
reflects only the credit loss component of an impairment,
while the remainder of the fair value loss is recognized in
accumulated other comprehensive income. The credit loss
component recognized in earnings is identified as the amount
of principal cash flows not expected to be received over the
the security as projected using the
remaining term of
Corporation’s cash flow projections. For debt securities that
Northern Trust intends to sell, or would more-likely-than-not
the
be required to sell, before the expected recovery of
the
is,
the full
amortized cost basis,
difference between the security’s amortized cost basis and fair
value) is recognized in earnings. The application of significant
judgment is required in determining the assumptions used in
assessing whether an OTTI exists and, if so, in the calculation
of the credit loss component of the OTTI. Assumptions used
in this process are inherently subject to change in future
periods. Different
in
estimates could result in materially different impairment loss
recognition. The economic and financial market conditions
experienced since the onset of the economic downturn in 2008
have negatively affected the
and pricing of
investment securities generally and residential mortgage-
backed securities in particular, and have resulted in an
increase in the likelihood and severity of OTTI charges.
subsequent changes
impairment (that
judgments or
liquidity
is other-than-temporary takes
Northern Trust conducts security impairment reviews
quarterly to evaluate those securities within its investment
portfolio that have
indications of possible OTTI. A
determination as to whether a security’s decline in market
into consideration
value
numerous factors and the relative significance of any single
factor can vary by security. Factors considered in determining
whether impairment is other-than-temporary include, but are
not limited to, the length of time which the security has been
impaired; the severity of the impairment; the cause of the
impairment; the financial condition and near-term prospects
MANAG E MENT’S DISCUSSION AND A NAL Y SIS OF FIN A N C I A L C O N DI T I O N A N D RE S UL T S OF OPE RA T I O N S
of the issuer; activity in the market of the issuer which may
indicate adverse credit conditions; and Northern Trust’s
ability and intent not to sell, and the likelihood that it will not
be required to sell, the security for a period of time sufficient
to allow for any expected recovery in its value. The Corporate
Asset and Liability Policy Committee reviews the results of
impairment analyses and concludes on whether OTTI exists.
reviews
Impairment
conducted in 2010 and 2009
identified nine and fourteen residential mortgage-backed
securities,
respectively, determined to be other-than-
temporarily impaired and credit-related losses totaling $21.2
million and $26.7 million, respectively, were recognized in
connection with the write-down of
the securities. The
remaining securities with unrealized losses within Northern
Trust’s portfolio as of December 31, 2010 and 2009 were not
considered to be other-than-temporarily impaired. However,
due to market and economic conditions, additional OTTI may
occur in future periods.
Accounting for Structured Leasing Transactions
investment
Through its leasing subsidiary, Norlease, Inc., Northern Trust
acts as a lessor in leveraged lease transactions primarily for
transportation equipment, including commercial aircraft and
in
railroad equipment. Northern Trust’s net
leveraged leases is reported at the aggregate of lease payments
receivable and estimated residual values, net of non-recourse
debt and unearned income. Unearned income is required to
be recognized in interest income in a manner that yields a
level rate of return on the net investment. Determining the net
investment in a leveraged lease and the interest income to be
recognized requires management
to make assumptions
regarding the amount and timing of cash flows, estimates of
residual values, and the impact of income tax regulations and
rates. Changes in these assumptions in future periods could
affect asset balances and related interest income.
tax
the
IRS
income
returns,
Northern Trust has several leveraged leasing transactions
commonly referred to as Lease-In/Lease-Out (LILO) and Sale-
In/Sale-Out (SILO) transactions. As part of
the Internal
Revenue Service’s (IRS) audit of the Corporation’s 1997-2004
federal
challenged the
Corporation’s tax position for certain structured leasing
transactions and proposed to disallow certain tax deductions
and assess related interest and penalties. In the third quarter of
2009, Northern Trust reached a settlement agreement with the
IRS with respect
these transactions. The
Corporation is in settlement discussions with the IRS Appeals
Office regarding the remaining disputed structured leasing
transactions. The Corporation anticipates that the IRS will
continue to disallow deductions relating to the remaining
to certain of
that
challenged leases and possibly include other lease transactions
with similar characteristics as part of its audit of tax returns
filed after 2004. The Corporation believes
these
transactions are valid leases for U.S. tax purposes and that its
tax treatment of these transactions is appropriate based on its
interpretation of the tax regulations and legal precedents; a
court or other judicial authority, however, could disagree.
Accordingly, management’s estimates of future cash flows
related to leveraged leasing transactions include assumptions
about the eventual resolution of this matter, including the
timing and amount of any potential payments. Due to the
nature of this tax matter, it is difficult to estimate future cash
flows with precision.
For the year ended December 31, 2010, revised cash flow
estimates regarding the timing and amount of leveraged lease
income tax deductions reduced interest income by $.9 million
and reduced the provision for income taxes,
inclusive of
interest and penalties, by $.8 million. Revisions of cash flow
estimates regarding the timing and amount of leveraged lease
income tax deductions increased 2009 interest income by $1.1
million and increased the 2009 provision for income taxes,
inclusive of interest and penalties, by $1.5 million. For the year
ended December 31, 2008,
revised cash flow estimates
regarding the timing of leveraged lease income tax deductions
reduced interest income by $38.9 million and increased the
provision for income taxes, inclusive of interest and penalties,
by $61.3 million. Management does not believe
that
subsequent changes that may be required in these assumptions
would have a material effect on the consolidated financial
position or liquidity of Northern Trust, although they could
have a material effect on operating results for a particular
period.
F A I R V A L U E M E A S U R E M E N T S
The preparation of financial statements in conformity with
GAAP requires certain assets and liabilities to be reported at
fair value. As of December 31, 2010, approximately 26% of
Northern Trust’s total assets and approximately 3% of its total
liabilities were carried on the balance sheet at fair value. As
discussed more fully in Note 30 to the consolidated financial
statements, GAAP requires entities to categorize financial assets
and liabilities carried at fair value according to a three-level
valuation hierarchy. The hierarchy gives the highest priority to
quoted, active market prices for identical assets and liabilities
(Level 1) and the lowest priority to valuation techniques that
require significant management judgment because one or more
of the significant inputs are unobservable in the market place
(Level 3). Approximately 3% of Northern Trust’s assets carried
NORTHERN TRUST CORPORATION | 2010 ANNUAL REPORT TO SHAREHOLDERS | 43
MANAG E MENT’S DISCUSSION AND A NAL Y SIS OF FIN A N C I A L C O N DI T I O N A N D RE S UL T S OF OPE RA T I O N S
at fair value are classified as Level 1; Northern Trust typically
does not hold equity securities or other instruments that would
be actively traded on an exchange.
Approximately 95% of Northern Trust’s assets and 97% of
its liabilities carried at fair value are categorized as Level 2, as
they are valued using models in which all significant inputs are
observable in active markets. Investment securities classified as
available for sale make up 93% of Level 2 assets with the
remaining 7% primarily consisting of derivative financial
instruments. Level 2 liabilities consist of derivative financial
instruments.
Investment securities are principally valued by third party
pricing vendors. Northern Trust has a well established process
to validate all prices received from pricing vendors. Prices are
compared to
such as
non-binding broker quotes and other vendor price feeds to
ensure the fair value determination is consistent with GAAP
and to ensure the proper classification of assets and liabilities
in the fair value hierarchy.
independent
separate
sources
contracts. Derivative
As of December 31, 2010, all derivative assets and
liabilities were classified in Level 2 and approximately 98%,
measured on a notional value basis, related to client-related
and trading activities, predominantly consisting of foreign
valued
instruments
exchange
are
internally using widely accepted models that
incorporate
inputs readily observable in actively quoted markets and do
not require significant management
judgment. Northern
Trust evaluated the impact of counterparty credit risk and its
own credit risk on the valuation of derivative instruments.
Factors considered included the likelihood of default by us
and our counterparties,
the
instruments, our net exposures after giving effect to master
netting agreements, available collateral, and other credit
enhancements in determining the appropriate fair value of our
derivative instruments. The resulting valuation adjustments
are not considered material.
the remaining maturities of
As of December 31, 2010, the fair value of Northern
Trust’s Level 3 assets and liabilities were $367.8 million and
$58.6 million, respectively, and represented approximately 2%
of assets and 3% of liabilities carried at fair value, respectively.
Level 3 assets consist of auction rate securities purchased from
Northern Trust clients. The lack of activity in the auction rate
security market has resulted in a lack of observable market
inputs to use in determining fair value. Therefore, Northern
Trust incorporated its own assumptions about future cash
flows and the appropriate discount rate adjusted for credit and
liquidity factors. In developing these assumptions, Northern
Trust incorporated the contractual terms of the securities, the
type of collateral, any credit enhancements available, and
44 | 2010 ANNUAL REPORT TO SHAREHOLDERS | NORTHERN TRUST CORPORATION
relevant market data, where available. As of December 31,
2010, Level 3 liabilities included financial guarantees relating
to standby letters of credit and a net estimated liability for Visa
related indemnifications. Northern Trust’s recorded liability
for standby letters of credit, reflecting the obligation it has
undertaken, is measured as the amount of unamortized fees
on these instruments. The fair value of the net estimated
liability for Visa related indemnifications is based on available
market data and significant management judgment.
While Northern Trust believes its valuation methods for
its assets and liabilities carried at fair value are appropriate and
consistent with other market participants, 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.
I M P L E M E N T A T I O N O F A C C O U N T I N G
S T A N D A R D S
Information related to recent accounting pronouncements is
contained in Note 2 to the consolidated financial statements.
C A P I T A L E X P E N D I T U R E S
2010
Capital
included
expenditures
Proposed significant capital expenditures are reviewed and
approved by Northern Trust’s senior management and, where
appropriate, by the Board. This process is designed to assure
that the major projects to which Northern Trust commits its
resources produce benefits compatible with its strategic goals.
ongoing
in
enhancements to Northern Trust’s hardware and software
capabilities as well as the build out of new data and resiliency
centers and the expansion or renovation of several existing and
new offices. Capital expenditures for 2010 totaled $311.1 million,
of which $220.6 million was for software, $56.0 million was for
computer hardware and machinery, $19.4 million was for
building and leasehold improvements, and $15.1 million was for
furnishings. These capital expenditures are designed principally
to support and enhance Northern Trust’s transaction processing,
investment management, and asset servicing capabilities, as well
as relationship management and client interaction. Additional
capital expenditures planned for systems technology will result in
and
future
amortization of software. Depreciation on computer hardware
and machinery and software amortization are charged to
equipment and software expense. Depreciation on building and
leasehold improvements and on furnishings is charged to
occupancy expense and equipment expense, respectively. Capital
expenditures for 2009 totaled $299.8 million, of which $181.6
the depreciation of hardware
expenses
for
MANAG E MENT’S DISCUSSION AND A NAL Y SIS OF FIN A N C I A L C O N DI T I O N A N D RE S UL T S OF OPE RA T I O N S
million was for software, $40.2 million was for computer
hardware and machinery, $68.3 million was for building and
leasehold improvements, and $9.7 million was for furnishings.
O F F - B A L A N C E S H E E T A R R A N G E M E N T S
Assets Under Custody and Assets Under Management
Northern Trust, in the normal course of business, holds assets
under custody, management and servicing in a fiduciary or
agency capacity for its clients. In accordance with GAAP, these
assets are not assets of Northern Trust and are not included in
its consolidated balance sheet.
Financial Guarantees and Indemnifications
Northern Trust issues financial guarantees in the form of
standby letters of credit to meet the liquidity and credit
enhancement needs of its clients. Standby letters of credit
obligate Northern Trust to meet certain financial obligations
of its clients, if, under the contractual terms of the agreement,
the clients are unable to do so. These instruments are
primarily issued to support public and private financial
commitments, including commercial paper, bond financing,
initial margin requirements on futures exchanges and similar
transactions.
such activities
Credit risk is the principal risk associated with these
instruments. The contractual amounts of these instruments
represent the credit risk should the instrument be fully drawn
the credit risk
upon and the client default. To control
associated with issuing letters of credit, Northern Trust
subjects
to the same credit quality and
monitoring controls as its lending activities. Certain standby
letters of credit have been secured with cash deposits or
participated to others. Northern Trust is obligated to meet the
entire financial obligation of these agreements and in certain
cases is able to recover the amounts paid through recourse
against cash deposits or other participants.
Standby letters of credit totaled $4.3 billion and $4.8
billion at December 31, 2010 and 2009, respectively. These
amounts include $602.3 million and $618.7 million of standby
letters of credit secured by cash deposits or participated to
others as of December 31, 2010 and 2009, respectively. The
weighted average maturity of standby letters of credit was 20
months at December 31, 2010 and 21 months at December 31,
2009.
As part of the Corporation’s securities custody activities
and at
lends
the direction of clients, Northern Trust
securities owned by clients to borrowers who are reviewed and
approved by Northern Trust’s Senior Credit Committee. The
borrower is required to fully collateralize securities received
with cash or marketable securities. As securities are loaned,
collateral is maintained at a minimum of 100 percent of the
fair value of the securities plus accrued interest, with the
collateral revalued on a daily basis. In connection with these
activities, Northern Trust has issued certain indemnifications
to clients against loss that is a direct result of a borrower’s
failure to return securities when due, should the value of such
securities exceed the value of
the collateral posted. The
amount of securities loaned as of December 31, 2010 and 2009
subject to indemnification was $74.9 billion and $82.3 billion,
respectively. Because of the credit quality of the borrowers and
the requirement to fully collateralize securities borrowed,
management believes that the exposure to credit loss from this
activity is not significant.
Northern Trust, as a member bank of Visa U.S.A., Inc., is
obligated to share in losses resulting from certain indemnified
litigation involving Visa. In the fourth quarter of 2007,
Northern Trust recorded liabilities totaling $150.0 million in
connection with the indemnifications. As anticipated, Visa
placed a portion of the proceeds from its initial public offering
into an escrow account
to fund the settlements of, or
the indemnified litigation. Northern Trust
judgments in,
recorded $76.1 million, its proportionate share of the escrow
account balance, in the first quarter of 2008 as an offset to the
indemnification liabilities and related charges recorded in the
fourth quarter of 2007. In 2009 and 2010, Northern recorded
additional offsets to the indemnification liability totaling $17.8
million and $33.0 million, respectively, as Visa deposited
additional funds into its litigation escrow account. Northern
at
Trust’s net Visa
December 31, 2010 and 2009 totaled $23.1 million and
$56.1 million, respectively. The value of Northern Trust’s
remaining Visa shares is expected to be more than adequate to
offset any remaining indemnification liabilities related to Visa
litigation. Visa indemnifications are further discussed in Note
19 to the consolidated financial statements.
indemnification liability
related
Variable Interests
Variable Interest Entities (VIEs) are defined within GAAP as
entities which either have a total equity investment that is
insufficient to permit the entity to finance its activities without
additional subordinated financial support or whose equity
investors lack the characteristics of a controlling financial
interest. Investors that finance a VIE through debt or equity
interests, or other counterparties that provide other forms of
NORTHERN TRUST CORPORATION | 2010 ANNUAL REPORT TO SHAREHOLDERS | 45
MANAG E MENT’S DISCUSSION AND A NAL Y SIS OF FIN A N C I A L C O N DI T I O N A N D RE S UL T S OF OPE RA T I O N S
support, such as guarantees, subordinated fee arrangements,
or certain types of derivative contracts, are variable interest
holders in the entity and the variable interest holder, if any,
that has both the power to direct the activities that most
significantly impact the entity and a variable interest that
could potentially be significant to the entity is deemed to be
the VIE’s primary beneficiary and is required to consolidate
the VIE.
Northern Trust acts as asset manager for various funds in
which clients of Northern Trust are investors. As an asset
manager of funds, the Corporation earns a competitively
priced fee that is based on assets managed and varies with each
fund’s investment objective. Based on its analysis, Northern
Trust’s interests in funds considered VIEs are not considered
significant variable interests under GAAP.
As discussed in further detail in Note 27 to the consolidated
financial statements, although not obligated to do so, in 2008,
Northern Trust entered into CSAs with certain of these entities
(Funds) which held notes, asset backed securities, and other
instruments whose values had been adversely impacted by
widening risk premiums and liquidity spreads and significant
rating agency downgrades. As of December 31, 2009, all CSAs
had expired in connection with the final settlements of covered
securities. However, under prior accounting standards the Funds
were considered VIEs and the CSAs reflected Northern Trust’s
implicit variable interest in the credit risk of the affected Funds.
The Funds were designed to create and pass to investors interest
rate and credit risk. In determining whether Northern Trust was
the primary beneficiary of the Funds during the period in which
the CSAs were in place, expected loss calculations based on the
characteristics of the underlying investments in the Funds were
used to estimate the expected losses related to interest rate and
credit risk, while also considering the relative rights and
obligations of each of the variable interest holders. These
analyses concluded that interest rate risk was the primary driver
of expected losses within the Funds. As such, Northern Trust
determined that it was not the primary beneficiary of the Funds
and was not required to consolidate them within its consolidated
balance sheet.
As discussed in further detail
in Note 12 to the
consolidated financial statements, in 1997, Northern Trust
issued Floating Rate Capital Securities, Series A and Series B,
trusts wholly-owned by the
through statutory business
Corporation (“NTC Capital
II”,
respectively). The sole assets of the trusts are Subordinated
Debentures of Northern Trust Corporation that have the same
I” and “NTC Capital
46 | 2010 ANNUAL REPORT TO SHAREHOLDERS | NORTHERN TRUST CORPORATION
rates and maturity dates as
the corresponding
interest
distribution rates and redemption dates of the Floating Rate
Capital Securities. NTC Capital I and NTC Capital II are
considered VIEs; however, as the sole asset of each trust is a
receivable from the Corporation and the proceeds to the
Corporation from the receivable exceed the Corporation’s
investment in the VIEs’ equity shares, the Corporation is not
permitted to consolidate
even though the
the
Corporation owns all of the voting equity shares of the trusts,
has fully guaranteed the trusts’ obligations, and has the right
to redeem the preferred securities in certain circumstances.
trusts,
In leveraged leasing transactions, Northern Trust acts as
lessor of the underlying asset subject to the lease, and typically
funds 20% of the asset’s cost via an equity ownership in a trust
with the remaining 80% provided by third party non-recourse
debt holders. In such transactions, the trusts, which are VIEs,
are created to provide the lessee use of the property with
substantially all of the rights and obligations of ownership.
The lessee’s maintenance and operation of the leased property
has a direct effect on the fair value of the underlying property,
and the lessee also has the ability to increase the benefits it can
receive and limit the losses it can suffer by the manner in
which it uses the property. As a result, Northern Trust has
determined that it is not the primary beneficiary of these VIEs
given it lacks the power to direct the activities that most
significantly impact the economic performance of the VIEs.
Northern Trust invests in affordable housing projects that
are designed to generate a return primarily through the
realization of tax credits. The affordable housing projects are
formed as limited partnerships and LLCs, and Northern Trust
typically invests as a limited partner/investor member in the
form of equity contributions. The economic performance of
the affordable housing projects, which are deemed to be VIEs,
is driven by the performance of their underlying investment
projects as well as the VIEs’ ability to operate in compliance
with the rules and regulations necessary for the qualification
of tax credits generated by equity investments. Northern Trust
has determined that it is not the primary beneficiary of these
VIEs as it lacks the power to direct the activities that most
significantly impact
the
underlying project or to affect the VIEs’ ability to operate in
compliance with the rules and regulations necessary for the
qualification of tax credits generated by equity investments.
This power is held by the general partners and managing
members who exercise full and exclusive control of
the
operations of the VIEs.
economic performance of
the
MANAG E MENT’S DISCUSSION AND A NAL Y SIS OF FIN A N C I A L C O N DI T I O N A N D RE S UL T S OF OPE RA T I O N S
L I Q U I D I T Y A N D C A P I T A L R E S O U R C E S
Liquidity Risk Management
The objectives of liquidity risk management are to ensure that
Northern Trust can meet its cash flow obligations under both
normal and adverse economic conditions while maintaining
its ability to capitalize on business opportunities in a timely
and cost effective manner.
only 34% of total assets as of December 31, 2010. Further, at
December 31, 2010 there were significant sources of liquidity
within Northern Trust’s consolidated balance sheet in the form
of securities available for sale and short-term money market
assets, which in aggregate totaled $46.5 billion or 55% of total
assets. At December 31, 2010, Northern Trust had over $14
billion of securities and loans readily available as collateral to
support Federal Reserve discount window borrowings.
Governance and Risk Management Framework
Northern Trust manages its liquidity on a global basis,
utilizing regional management when appropriate. Corporate
liquidity policies,
risk appetite and limits are reviewed
annually by the Business Risk Committee of the Board and
approved by the Board. Management’s Corporate Asset and
for
Liability Policy Committee
recommending liquidity policies to the Board, establishing
internal guidelines, approving contingency plans, assessing
Northern Trust’s overall liquidity status, and reviewing reports
and analyses on a regular basis. The Corporate Treasury
department has the day-to-day responsibility for measuring,
analyzing and managing liquidity risk within the guidelines
and limits established by ALCO and the Board.
responsible
(ALCO)
is
Northern Trust’s Global Liquidity Management framework
focuses on five key areas: Position Management; Modeling and
Analysis; Contingency Planning; Peer Group Comparisons and
Management Reporting; and provides for the review and
management of the liquidity of the Corporation separate from
that of its banking subsidiaries. It is through this framework that
management monitors its sources and uses of liquidity, evaluates
their level of stability under various circumstances, plans for
itself against other banks,
adverse situations, benchmarks
provides information to senior management, and complies with
various U.S. and international regulations.
Position management incorporates daily monitoring of
cash positions and anticipating future funding requirements
given both internal and external events. Liquidity is provided
by a variety of sources, including client deposits (institutional
and personal) from our C&IS and PFS businesses, wholesale
funding from the capital markets, maturities of short-term
investments, and unencumbered liquid assets that can be sold
or pledged to secure additional funds. While management does
not view the Federal Reserve’s discount window as a primary
source of liquidity, the Bank can borrow substantial amounts
from the discount window on a collateralized basis. Liquidity is
used by a variety of activities, including client withdrawals,
loan growth, and draws on
purchases of securities, net
unfunded commitments to extend credit. Northern Trust
maintains a very liquid balance sheet with loans representing
Liquidity modeling and analysis evaluates a bank’s ability
to meet its cash flow obligations given a variety of possible
internal and external events and under different economic
conditions. Northern Trust uses liquidity modeling to support
its contingent liquidity plans, gain insight into its liquidity
position and strengthen its liquidity policies and practices.
Liquidity modeling is performed using multiple independent
consolidated
scenarios,
Corporate level and for various U.S. and international banking
subsidiaries. These scenarios, which include both company
specific and systemic events, analyze their potential impacts on
our domestic and foreign deposits, wholesale funds, financial
market access, external borrowing capacity and off-balance
sheet obligations.
across major
currencies,
at
a
is the development and maintenance of
Another important area of Northern Trust’s liquidity risk
its
management
contingent liquidity plans. A Global Contingent Liquidity
Action Plan covering the Corporation, Bank and major
subsidiaries is approved by ALCO and regularly updated and
tested. This plan, which can be activated in the event of an
actual
liquidity crisis, details organizational responsibilities
and defines specific actions designed to ensure the proper
maintenance of liquidity during periods of stress. In addition,
individual
international
contingency plans, which incorporate the global plan.
subsidiaries
banking
have
Northern Trust also analyzes its liquidity profile against a
peer group of large U.S. bank holding companies, including
other major custody banks. This analysis provides management
with benchmarking information, highlights industry trends
and supports the establishment of new policies and strategies.
Management regularly reviews various reports, analyses
and other information depicting changes in Northern Trust’s
liquidity mix and funding concentrations, overall financial
market conditions and other internal and external liquidity
metrics. Management uses this information to evaluate the
overall status of Northern Trust’s liquidity position and
anticipate potential events that could stress that position in the
future. An overall Liquidity Status Level for Northern Trust,
established and regularly reviewed by ALCO, is monitored on
an ongoing basis by the Corporate Treasury department.
resulting from internal,
Downgrades
in liquidity status
NORTHERN TRUST CORPORATION | 2010 ANNUAL REPORT TO SHAREHOLDERS | 47
MANAG E MENT’S DISCUSSION AND A NAL Y SIS OF FIN A N C I A L C O N DI T I O N A N D RE S UL T S OF OPE RA T I O N S
or
industry-wide
specific
external
pre-determined actions and limits designed to position
Northern Trust to better respond to potential liquidity stresses.
events,
trigger
Regulatory Environment
In recent years, U.S. regulatory agencies took various actions
in order to improve liquidity in the financial markets. One of
those actions was the establishment by the FDIC in October of
2008 of the Temporary Liquidity Guarantee Program. Among
other provisions,
this program guaranteed funds over
$250,000 in noninterest-bearing, and certain interest-bearing,
transaction deposit accounts held at FDIC insured banks. This
additional FDIC protection above $250,000 was extended to
January 1, 2013 by the Dodd-Frank Act.
and Monitoring. This
During 2009 and 2010, many U.S. and international
regulatory agencies proposed certain new rules and finalized
others that address the management of liquidity risk for
financial institutions. In December 2010, the International
Basel Committee on Banking
Supervision issued an
International Framework for Liquidity Risk Measurement,
framework document
Standards
outlines a standardized approach to international
liquidity
management and introduced two new liquidity measures, a
Liquidity Coverage Ratio (LCR) and a Net Stable Funding
Ratio (NSFR). Individual country regulators, including the
Federal Reserve, are now expected to develop specific
regulations for financial institutions under their jurisdiction.
After an observation period beginning in 2011, which could
include revisions to either ratio, the LCR is expected to be
introduced in January 2015 and the NSFR in January 2018.
Also, in March 2010, U.S. regulatory agencies issued a joint
Interagency Policy Statement on Funding and Liquidity Risk
Management. Northern Trust actively follows these regulatory
developments and regularly evaluates
liquidity risk
management framework against these proposals and industry
best practices in order to comply with applicable regulations
and further enhance its liquidity policies.
its
Corporation Liquidity
the Corporation are dividend payments
The liquidity of the Corporation is managed separately from
that of its banking subsidiaries. The primary sources of cash
for
from its
subsidiaries, issuance of debt, issuance of equity (common and
preferred), and interest and dividends earned on investment
securities and money market assets. The Corporation’s uses of
cash consist mainly of dividend payments to the Corporation’s
stockholders, the payment of principal and interest to note
holders,
its
common stock, and acquisitions. The most significant uses of
investments in its subsidiaries, purchases of
48 | 2010 ANNUAL REPORT TO SHAREHOLDERS | NORTHERN TRUST CORPORATION
in its
subsidiaries. On June 17, 2009,
cash by the Corporation during 2010 were $271.2 million of
common dividends paid to stockholders and $213.3 million of
investments
the
Corporation repurchased in full the preferred stock issued
under the U.S. Treasury’s CPP for $1,576.0 million. In
addition, on August 26, 2009, the Corporation repurchased
from the U.S. Treasury the associated warrant for the purchase
of the Corporation’s common stock for $87.0 million. Also
during 2009, the Corporation paid preferred stock dividends
to the U.S. Treasury of $46.6 million. For additional detail, see
Note 13 to the consolidated financial statements.
On November 4, 2010,
the Corporation issued $500
million of 3.450% fixed-rate senior notes due November 4,
2020. These notes are non-callable, unsecured and were issued
at a discount to yield 3.464%.
On May 1, 2009, the Corporation issued 17,250,000 shares
of common stock with a par value of $1.66 2/3 per share. Cash
proceeds from the common stock totaled $834.1 million. Also
on May 1, 2009, the Corporation issued $500 million of
4.625% fixed-rate senior notes due May 1, 2014. These notes
are non-callable and unsecured and were issued at par.
During 2010, the Corporation received $67.2 million of
dividends, all received from nonbank subsidiaries. Bank
subsidiary dividends are subject to certain restrictions, as
discussed in further detail in Note 29 to the consolidated
financial statements. Bank subsidiaries have the ability to pay
dividends during 2011 equal to their 2011 eligible net profits
plus $1.01 billion.
The Corporation’s liquidity, defined as the amount of
highly marketable assets, was strong at $1.57 billion at
year-end 2010 and $1.49 billion at year-end 2009. The cash
the Corporation are shown in Note 33 to the
flows of
consolidated financial statements.
A significant source of liquidity for both the Corporation
and the Bank is the ability to draw funding from capital
markets globally. The availability and cost of these funds are
influenced by our credit rating; as a result, a downgrade could
have an adverse impact on our liquidity. The credit ratings of
the Corporation and the Bank as of December 31, 2010,
provided below, allow Northern Trust
to access capital
markets on favorable terms.
Northern Trust Corporation:
Commercial Paper
Senior Debt
The Northern Trust Company:
Short-Term Deposit / Debt
Long-Term Deposit / Debt
Outlook
Standard &
Poor’s
A-1+
AA-
AA/A-1+
AA/A-1+
Stable
Moody’s
FitchRatings
P-1
A1
P-1
Aa3
Stable
F1+
AA-
F1+
AA-
Stable
MANAG E MENT’S DISCUSSION AND A NAL Y SIS OF FIN A N C I A L C O N DI T I O N A N D RE S UL T S OF OPE RA T I O N S
The following table shows Northern Trust’s contractual obligations at December 31, 2010.
C O N T R A C T U A L O B L I G A T I O N S
(In Millions)
Senior Notes*
Subordinated Debt*
Federal Home Loan Bank Borrowings*
Floating Rate Capital Debt*
Capital Lease Obligations**
Operating Leases**
Purchase Obligations***
TOTAL
$1,896.1
1,148.7
1,532.5
276.9
71.4
723.6
326.7
ONE YEAR
AND LESS
$ 249.9
150.0
426.4
–
7.7
73.7
139.8
PAYMENT DUE BY PERIOD
1-3 YEARS
4-5 YEARS
$ 646.8
200.0
870.0
–
16.0
142.5
144.0
$ 500.0
231.6
135.0
–
16.7
117.9
36.9
OVER 5
YEARS
$ 499.4
567.1
101.1
276.9
31.0
389.5
6.0
Total Contractual Obligations
Note: Obligations as shown do not include deposit liabilities or interest requirements on funding sources.
* Refer to Notes 11 and 12 to the consolidated financial statements for further details.
** Refer to Note 9 to the consolidated financial statements for further details.
*** Purchase obligations consist primarily of ongoing operating costs related to outsourcing arrangements for certain cash management services and the support and
maintenance of the Corporation’s technological requirements. Certain obligations are in the form of variable rate contracts and, in some instances, 2010 activity was
used as a base to project future obligations.
$1,038.1
$2,019.3
$5,975.9
$1,047.5
$1,871.0
Capital Management
clients,
One of Northern Trust’s primary objectives is to maintain a
strong capital position to merit and maintain the confidence
of
and
stockholders. A strong capital position helps Northern Trust
take advantage of profitable investment opportunities and
withstand unforeseen adverse developments.
investing public, bank regulators
the
Northern Trust manages its capital on a total Corporation
basis and on a legal entity basis. The Corporate Treasury
department has the day-to-day responsibility for measuring
and managing capital levels within guidelines established by
the Capital Management Policy and the Capital Committee.
The management
regional
capital
management when appropriate. In establishing the guidelines
for capital, a variety of factors are taken into consideration,
including the overall risk of Northern Trust’s businesses,
regulatory requirements, capital levels relative to our peers,
and the impact on our credit ratings.
involves
also
of
Capital
levels were strengthened as average common
equity in 2010 increased 12% or $.72 billion reaching $6.63
billion. Total
stockholders’ equity was $6.83 billion at
December 31, 2010, as compared to $6.31 billion at
December 31, 2009. The Corporation declared common
dividends totaling $273.4 million in 2010 and the Board
maintained the quarterly dividend at $.28 per common share.
The common dividend has increased 22% from its level five
years ago. The Corporation’s share buyback program is used
for general corporate purposes, including management of the
Corporation’s capital
level. During 2010, the Corporation
purchased 131,261 of its own common shares at an average
price per share of $52.33 in connection with equity based
compensation plans. Under the share buyback program, the
Corporation may purchase up to 7.2 million additional shares
after December 31, 2010.
NORTHERN TRUST CORPORATION | 2010 ANNUAL REPORT TO SHAREHOLDERS | 49
MANAG E MENT’S DISCUSSION AND A NAL Y SIS OF FIN A N C I A L C O N DI T I O N A N D RE S UL T S OF OPE RA T I O N S
C A P I T A L A D E Q U A C Y
($ In Millions)
TIER 1 CAPITAL
Common Stockholders’ Equity
Floating Rate Capital Securities
Goodwill and Other Intangible Assets
Pension and Other Postretirement Benefit Adjustments
Other
Total Tier 1 Capital
TIER 2 CAPITAL
Reserve for Credit Losses Assigned to Loans and Leases
Off-Balance Sheet Credit Loss Reserve
Reserves Against Identified Losses
Long-Term Debt*
Total Tier 2 Capital
Total Risk-Based Capital
Risk-Weighted Assets**
Total Assets – End of Period (EOP)
Average Fourth Quarter Assets**
Total Loans – EOP
RATIOS
Risk-Based Capital Ratios
Tier 1
Total (Tier 1 and Tier 2)
Leverage
Tier 1 Common Equity***
COMMON STOCKHOLDERS’ EQUITY TO
Total Loans EOP
Total Assets EOP
DECEMBER 31
2010
2009
$ 6,830
269
(454)
296
36
6,977
320
38
(64)
766
1,060
$ 8,037
$51,472
$83,844
79,655
28,132
13.6%
15.6
8.8
13.0
24.28%
8.15
$ 6,312
268
(462)
305
99
6,522
309
31
(44)
893
1,189
$ 7,711
$48,784
$82,142
74,537
27,806
13.4%
15.8
8.8
12.8
22.70%
7.68
* Long-Term Debt that qualifies for risk-based capital amortizes for the purpose of inclusion in tier 2 capital during the five years before maturity.
** Assets have been adjusted for goodwill and other intangible assets, net unrealized (gain) loss on securities and excess reserve for credit losses that have been excluded
from tier 1 and tier 2 capital, if any.
*** A reconciliation of tier 1 common equity to tier 1 capital calculated under GAAP is provided below.
The following table provides a reconciliation of tier 1
common equity, a non-GAAP financial measure which
to tier 1 capital
excludes floating rate capital securities,
calculated
regulatory
requirements and GAAP.
accordance with
applicable
in
($ In Millions)
Tier 1 Capital
Less: Floating Rate Capital Securities
Tier 1 Common Equity
Tier 1 Capital Ratio
Tier 1 Common Equity Ratio
DECEMBER 31
2010
$6,977
269
6,708
2009
$6,522
268
6,254
13.6%
13.0%
13.4%
12.8%
Northern Trust is providing the ratio of tier 1 common
equity to risk-weighted assets in addition to its capital ratios
prepared in accordance with regulatory requirements and
GAAP as it is an additional measure that the Corporation and
investors use to assess capital adequacy.
50 | 2010 ANNUAL REPORT TO SHAREHOLDERS | NORTHERN TRUST CORPORATION
that are a requirement
The 2010 capital levels reflect Northern Trust’s ongoing
retention of earnings to allow for strategic expansion while
maintaining a strong balance sheet and a capital
level
commensurate with its risk profile. At December 31, 2010, the
Corporation’s tier 1 capital ratio was 13.6% and its total
capital ratio was 15.6% of risk-weighted assets, both well
above the ratios
for regulatory
classification as “well-capitalized”. The “well-capitalized”
minimum ratios are 6.0% and 10.0%, respectively. The
Corporation’s leverage ratio (tier 1 capital to fourth quarter
average assets) of 8.8% is also well above the “well-capitalized”
minimum requirement of 5.0%. In addition, each of the
Corporation’s U.S. subsidiary banks had a ratio of at least
10.5% for tier 1 capital, 12.6% for total risk-based capital, and
8.0% for the leverage ratio, and each of Corporation’s
non-U.S. banking subsidiaries had capital ratios above their
specified minimum requirements.
MANAG E MENT’S DISCUSSION AND A NAL Y SIS OF FIN A N C I A L C O N DI T I O N A N D RE S UL T S OF OPE RA T I O N S
The current risk-based capital guidelines that apply to the
Corporation and its U.S. subsidiary banks, commonly referred
to as Basel I, are based upon the 1988 capital accord of the
International Basel Committee on Banking Supervision (Basel
Committee), a committee of central banks and bank
supervisors, as implemented by the Federal Reserve Board.
II
II rules,
framework. Under the final Basel
The Corporation also is subject to the Basel II framework for
risk-based capital adequacy. The U.S. bank regulatory agencies
have issued final rules with respect to implementation of the
Basel
the
Corporation is one of a small number of “core” banking
the Corporation and its U.S.
organizations. As a result,
subsidiary banks will be required to use the advanced approaches
under Basel II for calculating risk-based capital related to credit
risk and operational risk, instead of the methodology reflected in
the regulations effective prior to adoption of Basel II. The rules
also require core banking organizations to have rigorous
processes for assessing overall capital adequacy in relation to
their
total risk profiles, and to publicly disclose certain
information about their risk profiles and capital adequacy.
the Basel
The Corporation has for several years been preparing to
comply with the advanced approaches of
II
framework. The Corporation is also addressing issues related
to implementation timing differences between the U.S. and
other jurisdictions, to ensure that the Corporation and the
bank subsidiaries comply with regulatory requirements and
expectations in all jurisdictions where they operate. Current
results from a required parallel run of the Basel II risk-based
capital framework have demonstrated that the use of the
advanced approaches of the Basel II framework have not
resulted in the Corporation’s or its U.S. subsidiary banks’ tier
1 Capital or total risk-based capital ratios falling below the
levels required for categorization as “well capitalized.”
the oversight body of
On September 12, 2010, the Group of Governors and
Heads of Supervision,
the Basel
Committee, announced agreement on the calibration and
phase-in arrangements for a strengthened set of capital
requirements, known as Basel III. Under these standards,
when fully phased-in on January 1, 2019, banking institutions
will be required to satisfy three risk based capital ratios:
‰
A tier 1 common equity ratio of at least 7.0%, inclusive of
4.5% minimum tier 1 common equity ratio, net of
regulatory deductions, and inclusive of the new 2.5%
“capital conservation buffer” of common equity to risk-
weighted assets;
A tier 1 capital ratio of at least 8.5%, inclusive of the 2.5%
capital conservation buffer; and
A total capital ratio of at least 10.5%, inclusive of the 2.5%
capital conservation buffer.
‰
‰
The capital conservation buffer is designed to absorb
losses during periods of economic stress. Banking institutions
with a tier 1 common equity ratio above the minimum but
below the conservation buffer may face constraints on
dividends, equity repurchases and compensation based on the
amount of
such shortfall. The Basel Committee also
announced that a “countercyclical buffer” of 0% to 2.5% of
common equity or other loss-absorbing capital “will be
implemented according to national circumstances” as an
“extension” of the conservation buffer during periods of
excess credit growth.
Basel III also introduces a non-risk adjusted tier 1 leverage
ratio of 3%, based on a measure of total exposure rather than
total assets, and new liquidity standards. The phase-in of the
new rules is to commence on January 1, 2013, with the
the capital conservation buffer commencing
phase-in of
January 1, 2015 and the rules to be fully phased-in by
January 1, 2019.
capital
adequacy
standards
applicable
In November 2010, Basel III was endorsed by the Seoul
to individual
G20 Leaders Summit and will be subject
adoption by member nations, including the United States. The
federal banking agencies will likely implement changes to the
current
to the
Corporation and its U.S. subsidiary banks in light of Basel III.
If adopted by federal banking agencies, Basel III could lead to
significantly higher capital requirements and more restrictive
leverage and liquidity ratios. The ultimate impact of the new
capital and liquidity standards on the Corporation and its U.S.
subsidiary banks is currently being reviewed at this time and
will depend on a number of factors, including the rulemaking
and implementation by the U.S. banking regulators. The
that
Corporation cannot determine the ultimate effect
potential
legislation, or subsequent regulations, if enacted,
would have upon the Corporation’s earnings or financial
position. However, as the Corporation currently understands
Basel III, it believes its capital strength, balance sheet and
business model leave it well positioned for Basel III.
R I S K M A N A G E M E N T
Overview
The Board provides
risk oversight of management
through its Audit, Business Strategy, Compensation and
Benefits,
and Business Risk Committees. The Audit
Committee provides oversight with respect to risks relating to
financial reporting and the legal component of compliance
risk. The Business Strategy Committee provides oversight with
respect to strategic risk for Northern Trust and its subsidiaries.
NORTHERN TRUST CORPORATION | 2010 ANNUAL REPORT TO SHAREHOLDERS | 51
MANAG E MENT’S DISCUSSION AND A NAL Y SIS OF FIN A N C I A L C O N DI T I O N A N D RE S UL T S OF OPE RA T I O N S
The Compensation and Benefits Committee reviews incentive
compensation arrangements and practices to assess the extent
to which such arrangements and practices discourage
inappropriate risk-taking behavior by participants. The
Business Risk Committee provides oversight with respect to
the following risks inherent in Northern Trust’s businesses:
credit
risk,
and liquidity
operational risk and the regulatory component of compliance
risk.
risk, market
fiduciary
risk,
credit,
fiduciary
operational, market,
Statement. Risk tolerances are further detailed in separate
strategic,
and
compliance risk policies and appetite statements. Various
corporate committees and oversight entities have been
established to review and approve risk management strategies,
standards, management practices and tolerance levels. These
committees and entities monitor and provide periodic
reporting to the respective committees of the Board on risk
performance and effectiveness of risk management processes.
The Business Risk Committee has approved a Corporate
Risk Appetite Statement
articulating Northern Trust’s
expectation that risk is consciously considered as part of
strategic decisions and in day-to-day activities. Northern
Trust’s business units are expected to manage business
consistent with the Corporate Risk Appetite
activities
Northern Trust’s assessment of risks is built upon its risk
universe, a foundational component of Northern Trust’s
integrated Enterprise Wide Risk Management Framework.
The risk universe represents the major risk categories and
sub-categories to which Northern Trust may be exposed
through its business activities.
RISK CATEGORY
RISK MEASUREMENT
RISK TO EARNINGS AND/OR CAPITAL RESULTING FROM:
Credit
Operational; Fiduciary;
Compliance
Market and Liquidity
Strategic
Credit Risk
Operational Risk
Failure of a borrower or counterparty to perform on an obligation.
Inadequate or failed internal process, people and systems; or from external events.
Market Risk – Trading Book
Changes in the value of trading positions.
Interest Rate Risk – Banking Book
Changes in interest rates.
Liquidity Risk
Reputation Risk
Strategy Risk
Funding needs during difficult markets.
Damage to the entity’s reputation from negative public opinion.
Adverse effects of business decisions, improper implementation of business
decisions, unexpected external events.
Business Risk
Developments in the markets in which the entity operates.
Asset Quality and Credit Risk Management
Securities Portfolio
Northern Trust maintains a high quality securities portfolio,
with 85% of
the total portfolio at December 31, 2010
composed of U.S. Treasury and government sponsored agency
securities, Federal Home Loan Bank and Federal Reserve
Bank stock, and triple-A rated corporate notes, asset-backed
securities, supranational and sovereign bonds, auction rate
securities and obligations of states and political subdivisions.
The remaining portfolio was composed of corporate notes,
asset-backed securities, negotiable certificates of deposits,
obligations of states and political subdivisions, auction rate
securities and other securities, of which as a percentage of the
total securities portfolio, 4% were rated double-A, 2% were
rated below double-A, and 9% were 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).
Corporate notes are primarily government guaranteed,
such as bonds issued under the FDIC Temporary Liquidity
Guarantee Program, with 88% of corporate notes rated
triple-A, 12% rated double-A, and none rated below
double-A. Residential mortgage-backed securities rated below
residential
double-A, which represented 76% of
mortgage-backed securities, had a total amortized cost and fair
value of $244.9 million and $194.0 million, respectively, and
were comprised primarily of subprime and Alt-A securities.
Securities classified as “other asset-backed” at December 31,
2010 were predominantly floating rate, with average lives less
than 5 years, and 100% were rated triple-A.
total
Total unrealized losses within the investment securities
portfolio at December 31, 2010 were $99.5 million as
compared to $159.7 million at December 31, 2009. The $60.2
million decrease in unrealized losses from the prior year end
primarily reflects the improved valuations of residential
mortgage-backed and other asset-backed securities due
to improving credit markets and the tightening of credit
spreads during 2010. As discussed above in the “Critical
Accounting Estimates – Other-Than-Temporary Impairment
of Investment Securities” section, processes are in place to
52 | 2010 ANNUAL REPORT TO SHAREHOLDERS | NORTHERN TRUST CORPORATION
MANAG E MENT’S DISCUSSION AND A NAL Y SIS OF FIN A N C I A L C O N DI T I O N A N D RE S UL T S OF OPE RA T I O N S
provide for the timely identification of OTTI. Losses totaling
$21.2 million were recognized in 2010 in connection with the
write-down of
securities determined to be other-than-
temporarily impaired, as compared with $26.7 million in 2009
and $61.3 million in 2008. The remaining securities with
unrealized losses within Northern Trust’s portfolio as of
December 31, 2010 are not considered to be other-than-
temporarily impaired. However, due to market and economic
conditions, additional OTTI may occur in future periods.
Northern Trust
in the repurchase
is a participant
agreement market. This market provides 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 any 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 of securities purchased under
agreements to resell. Securities sold under agreements to
repurchase are held by the counterparty until the repurchase.
Loans and Other Extensions of Credit
Credit risk is inherent in many of Northern Trust’s activities.
A significant component of credit risk relates to the loan
in certain
In addition, credit risk is inherent
portfolio.
contractual obligations such as legally binding unfunded
commitments to extend credit, commercial letters of credit,
and standby letters of credit. These contractual obligations
and arrangements are discussed in Note 26 to the consolidated
financial statements and are presented in tables that follow.
Northern Trust focuses its lending efforts on clients who are
looking to utilize a full range of
financial services with
Northern Trust.
Credit risk is managed through the Credit Policy function,
which is designed to assure adherence to a high level of credit
standards. Credit Policy reports to the Corporation’s Head of
Corporate Risk Management. Credit Policy provides a system
of checks and balances for Northern Trust’s diverse credit-
related activities by establishing and monitoring all credit-
related policies and practices throughout Northern Trust and
assuring their uniform application. These activities are
designed to diversify credit exposure on an industry and client
basis and reduce overall credit risk. These credit management
activities also apply to Northern Trust’s use of derivative
financial instruments, including foreign exchange contracts
and interest risk management instruments.
Individual credit authority for commercial and personal
loans is limited to specified amounts and maturities. Credit
decisions involving commitment exposure in excess of the
specified individual limits are submitted to the appropriate
Credit Approval Committee (Committee). Each Committee is
chaired by the executive in charge of the area or their designee
and has a Credit Policy officer as a voting participant. Each
Committee’s credit approval authority is specified, based on
risk ratings and maturities. Credits
commitment
involving commitment exposure in excess of these limits
require the approval of the Senior Credit Committee. All
exposures approved by the Committees and the Senior Credit
Committee
all voting
require unanimous approval of
members.
levels,
The Counterparty Risk Management Committee
established by Credit Policy manages counterparty risk. This
committee has sole credit authority for exposure to all
non-U.S. banks, certain U.S. banks which Credit Policy deems
to be counterparties and which do not have commercial credit
relationships within the Corporation, and certain other
exposures. Under the direction of Credit Policy, country
the
exposure
Counterparty
a
country-by-country basis.
reviewed and approved by
on
Risk Management Committee
limits
are
As part of its credit process, Northern Trust utilizes an
internal borrower risk rating system to support identification,
approval, and monitoring of credit risk. Borrower risk ratings
are used in credit underwriting, management reporting,
setting of loss allowances, and economic capital calculations.
Borrower risk ratings are discussed further in Note 5 to the
consolidated financial statements.
to deal with potential problems.
Credit Policy oversees a range of portfolio reviews that
focus on significant and/or weaker-rated credits. This
approach allows management to take remedial action in an
effort
In addition,
the Loan Review Unit
independent
undertakes both on-site and off-site file reviews that evaluate
effectiveness of management’s
implementation of Credit
Policy’s requirements.
from Credit Policy,
Northern Trust maintains a loan watch list. Borrowers
designated as watch list represent exposures with elevated
credit risk profiles that are monitored through internal watch
lists, and consist of credits with borrower ratings of “6 – 9”.
These credits, which include all nonperforming credits, are
expected to exhibit minimally acceptable probabilities of
default, elevated risk of default or are currently in default.
Loans outstanding to watch list borrowers associated with
these risk profiles that are not currently in default but have
totaled $769.4 million at
limited financial
flexibility
NORTHERN TRUST CORPORATION | 2010 ANNUAL REPORT TO SHAREHOLDERS | 53
MANAG E MENT’S DISCUSSION AND A NAL Y SIS OF FIN A N C I A L C O N DI T I O N A N D RE S UL T S OF OPE RA T I O N S
insufficient
to potentially
December 31, 2010. Cash flows and capital levels range from
acceptable
current
requirements and borrowers typically have minimal cushion
in adverse down cycle scenarios. An integral part of the Credit
Policy function is a formal review of past due and potential
problem loans to determine which credits, if any, need to be
placed on nonperforming status or charged off.
to meet
As more fully described in the “Provision and Reserve For
Credit Losses” section below, the provision for credit losses is
determined through a disciplined credit review process, to be
the amount needed to maintain a reserve that is sufficient 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, unfunded commitments, and standby
letters of credit (inherent loss component).
C O M P O S I T I O N O F L O A N P O R T F O L I O
DECEMBER 31
(In Millions)
Commercial
Commercial and Institutional
Commercial Real Estate
Lease Financing, net
Non-U.S.
Other
Total Commercial
Personal
Residential Real Estate
Private Client
Other
Total Personal
Total Loans and Leases
2010
2009
2008
2007
2006
$ 5,914.5
3,242.4
1,063.7
1,046.2
346.6
$11,613.4
$10,854.9
5,423.7
240.0
$16,518.6
$28,132.0
$ 6,312.1
3,213.2
1,004.4
728.5
457.5
$11,715.7
$10,807.7
5,004.4
277.9
$16,090.0
$27,805.7
$ 8,293.4
3,014.0
1,143.8
1,791.7
909.6
$15,152.5
$10,381.4
4,832.2
389.3
$15,602.9
$30,755.4
$ 5,556.4
2,350.3
1,168.4
2,274.1
438.8
$11,788.0
$ 9,171.0
4,016.6
364.5
$13,552.1
$25,340.1
$ 4,679.1
1,836.3
1,291.6
1,733.3
363.7
$ 9,904.0
$ 8,674.4
3,558.5
472.8
$12,705.7
$22,609.7
S U M M A R Y O F O F F - B A L A N C E S H E E T F I N A N C I A L I N S T R U M E N T S W I T H C O N T R A C T
A M O U N T S T H A T R E P R E S E N T C R E D I T R I S K
(In Millions)
Unfunded Commitments to Extend Credit
One Year and Less
Over One Year
Total
Standby Letters of Credit
Commercial Letters of Credit
Custody Securities Lent with Indemnification
DECEMBER 31
2010
2009
$10,985.6
16,243.9
$27,229.5
$ 4,344.7
32.8
74,884.1
$11,564.7
14,087.1
$25,651.8
$ 4,798.8
31.2
82,306.3
54 | 2010 ANNUAL REPORT TO SHAREHOLDERS | NORTHERN TRUST CORPORATION
MANAG E MENT’S DISCUSSION AND A NAL Y SIS OF FIN A N C I A L C O N DI T I O N A N D RE S UL T S OF OPE RA T I O N S
U N F U N D E D C O M M I T M E N T S T O E X T E N D C R E D I T A T D E C E M B E R 3 1 , 2 0 1 0
B Y I N D U S T R Y S E C T O R
( I n M i l l i o n s )
COMMITMENT EXPIRATION
TOTAL
COMMITMENTS
ONE YEAR
AND LESS
OVER ONE YEAR
OUTSTANDING
LOANS
Commercial and Institutional
Industry Sector
Finance and Insurance
Holding Companies
Manufacturing
Mining
Public Administration
Retail Trade
Services
Transportation and Warehousing
Utilities
Wholesale Trade
Other Commercial
Commercial and Institutional*
Commercial Real Estate
Lease Financing, net
Non-U.S.
Other
Total Commercial
Personal
Residential Real Estate
Private Client
Other
Total Personal
$ 2,935.1
54.1
6,389.6
233.7
76.8
842.2
4,812.5
341.3
974.1
854.9
97.4
$17,611.7
249.0
–
1,263.4
297.0
$ 1,550.0
47.9
1,424.7
15.0
9.0
206.1
2,159.8
50.5
198.2
156.2
55.0
$ 5,872.4
152.6
–
1,040.9
261.0
$19,421.1
$ 7,326.9
2,514.7
5,232.9
60.8
463.5
3,141.8
53.4
$ 1,385.1
6.2
4,964.9
218.7
67.8
636.1
2,652.7
290.8
775.9
698.7
42.4
$11,739.3
96.4
–
222.5
36.0
$12,094.2
2,051.2
2,091.1
7.4
$ 7,808.4
$ 3,658.7
$ 4,149.7
Total
* Commercial and institutional industry sector information is presented on the basis of the North American Industry Classification System (NAICS).
$27,229.5
$10,985.6
$16,243.9
$
847.5
77.1
1,149.2
86.4
261.6
132.1
2,731.2
108.5
80.8
325.4
114.7
$ 5,914.5
3,242.4
1,063.7
1,046.2
346.6
$11,613.4
10,854.9
5,423.7
240.0
$16,518.6
$28,132.0
NON-U.S. OUTSTANDINGS
As used in this discussion, non-U.S. outstandings are cross-
border outstandings as defined by the Securities and Exchange
Commission. They consist of loans, acceptances,
interest-
bearing deposits with financial institutions, accrued interest
and other monetary assets. Not included are letters of credit,
loan commitments, and non-U.S. office local currency claims
on residents funded by local currency liabilities. Non-U.S.
outstandings related to a country are net of guarantees given
by third parties resident outside the country and the value of
tangible, liquid collateral held outside the country. However,
transactions with branches of non-U.S. banks are included in
these outstandings and are classified according to the country
location of the non-U.S. bank’s head office.
Short-term interbank time deposits with non-U.S. banks
represent the largest category of non-U.S. outstandings. Northern
Trust actively participates in the interbank market with U.S. and
non-U.S. banks. International commercial lending activities also
include import and export financing for U.S.-based clients.
places
non-U.S.
counterparties that have strong internal (Northern Trust) risk
deposits with
Northern
Trust
ratings and external credit ratings. These non-U.S. banks are
approved and monitored by Northern Trust’s Counterparty
Risk Management Committee, which has credit authority for
exposure to all non-U.S. banks and employs a review process
that results in credit limits. This process includes financial
analysis of the non-U.S. banks, use of an internal risk rating
system and consideration of external ratings from rating
agencies. Each counterparty is reviewed at least annually and
potentially more frequently based on deteriorating credit
fundamentals or general market conditions. Separate from the
entity-specific review process, the average life to maturity of
deposits with non-U.S. banks is deliberately maintained on a
short-term basis in order to respond quickly to changing
credit conditions. Northern Trust also utilizes certain risk
mitigation tools and agreements that may reduce exposures
through use of cash collateral and/or balance sheet netting.
Additionally,
the Counterparty Risk Management
Committee performs a country-risk analysis and imposes
limits to country exposure. The following table provides
information on non-U.S. outstandings by country that exceed
1.00% of Northern Trust’s assets.
NORTHERN TRUST CORPORATION | 2010 ANNUAL REPORT TO SHAREHOLDERS | 55
MANAG E MENT’S DISCUSSION AND A NAL Y SIS OF FIN A N C I A L C O N DI T I O N A N D RE S UL T S OF OPE RA T I O N S
N O N - U . S . O U T S T A N D I N G S
(In Millions)
At December 31, 2010
Australia
United Kingdom
France
Singapore
Switzerland
Spain
At December 31, 2009
United Kingdom
France
Australia
At December 31, 2008
United Kingdom
France
Belgium
Canada
Netherlands
Channel Islands & Isle of Man
BANKS
$2,114
3,440
3,291
1,313
1,284
894
$ 2,348
2,078
1,310
$ 2,640
2,455
1,382
1,252
1,025
823
COMMERCIAL
AND OTHER
$3,159
30
–
14
17
–
$
$
27
1
364
63
1
–
3
95
11
TOTAL
$5,273
3,470
3,291
1,327
1,301
894
$ 2,375
2,079
1,674
$ 2,703
2,456
1,382
1,255
1,120
834
Countries whose aggregate outstandings totaled between .75% and 1.00% of total assets were as follows: Sweden with aggregate outstandings of $816 million and
Canada with aggregate outstandings of $810 million at December 31,2010; Spain with aggregate outstandings of $807 million, Netherlands with aggregate outstandings
of $787 million and Singapore with aggregate outstandings of $654 million at December 31, 2009; and Ireland with aggregate outstandings of $773 million and Spain
with aggregate outstandings of $752 million at December 31, 2008.
NONPERFORMING ASSETS AND 90 DAY PAST DUE LOANS
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. Loans that are delinquent 90 days or
more and still accruing interest can fluctuate widely at any
reporting period based on the timing of cash collections,
renegotiations and renewals. The following table presents
nonperforming assets and loans that were delinquent 90 days
or more and still accruing for the current and prior four years.
N O N P E R F O R M I N G A S S E T S
(In Millions)
Nonperforming Loans
Commercial
Commercial and Institutional
Commercial Real Estate
Non-U.S.
Total Commercial
Personal
Residential Real Estate
Private Client
Total Personal
Total Nonperforming Loans and Leases
Other Real Estate Owned
Total Nonperforming Assets
90 Day Past Due Loans Still Accruing
Nonperforming Loans to Total Loans and Leases
Reserve for Credit Losses Assigned to Loans and Leases to Nonperforming Loans
2010
2009
2008
2007
2006
DECEMBER 31
$ 58.0
116.4
–
174.4
$153.3
5.3
158.6
333.0
45.5
$378.5
$ 13.0
$ 48.5
109.3
–
157.8
$116.9
3.8
120.7
278.5
29.6
$308.1
$ 15.1
$ 21.3
35.8
–
57.1
$ 32.7
6.9
39.6
96.7
3.5
$100.2
$ 27.8
$10.4
–
–
10.4
$ 5.8
7.0
12.8
23.2
6.1
$29.3
$ 8.6
$18.8
–
1.2
20.0
$ 8.1
7.6
15.7
35.7
1.4
$37.1
$24.6
1.18%
1.0x
1.00%
1.1x
.31%
2.37x
.09%
6.38x
.16%
3.93x
56 | 2010 ANNUAL REPORT TO SHAREHOLDERS | NORTHERN TRUST CORPORATION
MANAG E MENT’S DISCUSSION AND A NAL Y SIS OF FIN A N C I A L C O N DI T I O N A N D RE S UL T S OF OPE RA T I O N S
Of the total loan portfolio of $28.1 billion at December 31,
2010, $333.0 million or 1.18% was nonperforming, compared
with $278.5 million, or 1.00%, at December 31, 2009, and
96.7 million, or .31%, at December 31, 2008. The increases in
nonperforming loans of $54.5 million and $181.8 million in
2010 and 2009, respectively, primarily reflect the deterioration
in overall economic conditions experienced since the onset of
the economic downturn in 2008. The duration and severity of
the economic downturn, together with its impact on equity
and real estate values, had a negative effect on Northern
Trust’s loan portfolio, primarily the residential real estate and
commercial real estate classes, as well as the commercial and
institutional class, resulting in an increase in the number of
loans that were downgraded to nonperforming and of OREO
properties. The deterioration in credit quality, as evidenced by
increased nonperforming loan balances, impacts the level of
the reserve for credit losses through the resultant adjustment
of the specific reserves and of the qualitative factors used in
the determination of the inherent reserve levels within the
losses. The residential real estate and
reserve for credit
commercial real estate nonperforming loan balances as of
December 31, 2010 reflect the continued weakness in those
loan classes within certain markets. Additional information
regarding residential real estate and commercial real estate
loans is provided below.
R E S I D E N T I A L R E A L E S T A T E
real
estate
residential
loan portfolio is primarily
The
composed of mortgages to clients with whom Northern Trust
is seeking to establish a comprehensive financial services
relationship. At December 31, 2010, residential real estate
loans at
loans totaled $10.9 billion or 40% of total U.S.
December 31, 2010, compared with $10.8 billion or 40% at
December 31, 2009. All mortgages were underwritten utilizing
Northern Trust’s credit standards which do not allow for the
origination of loan types generally considered to be of high
risk in nature, such as option ARM loans, subprime loans,
loans with initial “teaser” rates, and loans with excessively high
loan-to-value ratios. Residential real estate loans consist of
conventional home mortgages and equity credit lines, which
generally require a loan to collateral value of no more than
65% to 80% at
supporting
collateral are obtained upon refinancing or default or when
otherwise considered warranted. Collateral revaluations for
mortgages are performed by independent third parties.
inception. Revaluations of
Of the total $10.9 billion in residential real estate loans,
$4.0 billion were in the greater Chicago area, $2.9 billion were
in Florida, and $1.4 billion were in California, with the
the other geographic
remainder distributed throughout
regions within the U.S. served by Northern Trust. Legally
binding commitments to extend residential real estate credit,
which are primarily equity credit lines, totaled $2.5 billion at
December 31, 2010 and 2009.
C O M M E R C I A L R E A L E S T A T E
the business. Unsecured lines of credit
In managing its credit exposure, management has defined a
commercial real estate loan as one where: (1) the borrower’s
principal business activity is the acquisition or the development
of real estate for commercial purposes; (2) the principal
collateral is real estate held for commercial purposes, and loan
repayment is expected to flow from the operation of the
property; or (3) the loan repayment is expected to flow from
the sale or refinance of real estate as a normal and ongoing part
of
to firms or
individuals engaged in commercial real estate endeavors are
included without regard to the use of loan proceeds. The
commercial
real estate portfolio consists of commercial
mortgages and construction, acquisition and development
loans extended primarily to highly experienced developers and/
or investors well known to Northern Trust. Underwriting
standards generally reflect conservative loan-to-value ratios
and debt service coverage requirements. Recourse to borrowers
through guarantees is also commonly required.
Commercial mortgage financing is provided for the
acquisition or refinancing of income producing properties.
Cash flows from the properties generally are sufficient to
amortize the loan. These loans average approximately $1.4
million each and are primarily located in the Illinois, Florida,
California, and Arizona markets. Construction, acquisition
and development loans provide financing for commercial real
income stabilization. The intent is
estate prior to rental
generally that the borrower will sell the project or refinance
the loan through a commercial mortgage with Northern Trust
or another financial institution upon completion.
The table below provides additional detail regarding
commercial real estate loan types:
(In Millions)
Commercial Mortgages:
Office
Apartment/ Multi-family
Retail
Industrial/ Warehouse
Other
Total Commercial Mortgages
Construction, Acquisition and Development
Loans
Single Family Investment
Other Commercial Real Estate Related
2010
2009
$ 605.3
572.4
517.8
383.7
193.7
2,272.9
591.8
246.8
130.9
$ 592.7
521.6
453.1
378.1
119.7
2,065.2
678.2
272.5
197.3
Total Commercial Real Estate Loans
$3,242.4
$3,213.2
NORTHERN TRUST CORPORATION | 2010 ANNUAL REPORT TO SHAREHOLDERS | 57
MANAG E MENT’S DISCUSSION AND A NAL Y SIS OF FIN A N C I A L C O N DI T I O N A N D RE S UL T S OF OPE RA T I O N S
Provision and Reserve for Credit Losses
Changes in the reserve for credit losses were as follows:
(In Millions)
2010
2009
2008
Balance at Beginning of Year
Charge-Offs
Recoveries
Net Charge-Offs
Provision for Credit Losses
Effect of Foreign Exchange Rates
$ 340.6
(150.1)
6.9
(143.2)
160.0
(.1)
$ 251.1
(132.3)
6.5
(125.8)
215.0
.3
$160.2
(25.7)
2.5
(23.2)
115.0
( .9)
Balance at End of Year
$ 357.3
$ 340.6
$251.1
The provision for credit losses is the charge to current
earnings that
through a
is determined by management,
disciplined credit review process, to be the amount needed to
maintain a reserve that is sufficient to absorb probable credit
that have been identified with specific borrower
losses
relationships (specific loss component) and for probable losses
that are believed to be inherent
in the loan and lease
portfolios, unfunded commitments, and standby letters of
loss component). The following table
credit
shows the specific portion of the reserve and the allocated
portion of the inherent reserve and its components by loan
category at December 31, 2010 and at each of the prior four
year-ends, and the unallocated portion of the inherent reserve
at December 31, 2007 and 2006.
(inherent
At December 31, 2010, legally binding commitments to
extend credit and standby letters of credit to commercial real
estate borrowers totaled $249.0 million and $116.1 million,
respectively. At December
binding
commitments and standby letters of credit totaled $475.8
million and $43.2 million, respectively.
legally
2009
31,
IMPAIRED LOANS
A loan is impaired when, based on current information and
events, it is probable that a creditor will be unable to collect all
amounts due according to the contractual terms of the loan
agreement or when its terms have been modified as a
concession resulting from the debtor’s financial difficulties,
referred to as a troubled debt restructuring. All troubled debt
restructurings are considered impaired loans in the calendar
year of their restructuring. In subsequent years, a troubled
debt restructuring may cease being classified as impaired if the
loan was modified at a market rate and has performed
according to the modified terms for at least six months. A loan
that has been modified at a below market rate will return to
performing status if it satisfies the six month performance
requirement; however, it will remain classified as impaired. As
of December 31, 2010, impaired loans totaled $301.2 million
and included $56.3 million of loans deemed troubled debt
restructurings. Impaired loans had $51.7 million of the reserve
for credit
Impaired loans are
measured based upon the loan’s market price, the present
value of expected future cash flows, discounted at the loan’s
effective interest rate, or at the fair value of the collateral if the
loan is collateral dependent. If the loan valuation is less than
the recorded value of the loan, dependent upon the level of
certainty of loss, either a specific reserve is established or a
charge-off
is recorded for the difference. Smaller balance
(individually less than $250,000) homogeneous loans are
collectively evaluated for impairment and excluded from
impaired loan disclosures in accordance with applicable
accounting standards.
losses allocated to them.
58 | 2010 ANNUAL REPORT TO SHAREHOLDERS | NORTHERN TRUST CORPORATION
MANAG E MENT’S DISCUSSION AND A NAL Y SIS OF FIN A N C I A L C O N DI T I O N A N D RE S UL T S OF OPE RA T I O N S
A L L O C A T I O N O F T H E R E S E R V E F O R C R E D I T L O S S E S
2010
2009
DECEMBER 31
2008
2007
2006
PERCENT OF
LOANS TO
TOTAL LOANS
RESERVE
AMOUNT
PERCENT OF
LOANS TO
TOTAL LOANS
RESERVE
AMOUNT
PERCENT OF
LOANS TO
TOTAL LOANS
RESERVE
AMOUNT
PERCENT OF
LOANS TO
TOTAL LOANS
RESERVE
AMOUNT
PERCENT OF
LOANS TO
TOTAL LOANS
–% $ 43.8
–% $ 23.5
–% $ 10.8
–%
$ 19.6
–%
($ In Millions)
Specific Reserve
Allocated Inherent Reserve
Commercial
Commercial and
Institutional
Commercial Real Estate
Lease Financing, net
Non-U.S.
Other
Total Commercial
Personal
Residential Real Estate
Private Client
Other
Total Personal
Total Allocated Inherent
Reserve
RESERVE
AMOUNT
$ 63.7
113.6
76.7
1.3
3.8
–
195.4
81.6
16.6
–
98.2
21
11
4
4
1
41
39
19
1
59
137.6
65.6
1.4
4.9
–
209.5
66.8
20.5
–
87.3
23
11
4
3
1
42
39
18
1
58
114.7
43.8
3.3
7.4
–
169.2
37.0
21.4
–
58.4
27
10
3
6
3
49
34
16
1
51
64.1
28.4
3.6
7.4
–
103.5
13.6
6.2
–
19.8
22
9
5
9
2
47
36
16
1
53
55.0
21.5
3.7
6.6
–
86.8
13.4
5.9
–
19.3
21
8
6
8
1
44
38
16
2
56
100%
–
$293.6
100% $296.8
100% $227.6
100% $123.3
100%
$106.1
Unallocated Inherent Reserve
–
–
–
–
–
–
26.1
–
25.3
Total Reserve for Credit
Losses
Reserve Assigned to:
Loans and Leases
Unfunded Commitments
and Standby Letters
of Credit
Total Reserve for Credit
Losses
Reserve Assigned to Loans
and Leases to Total
Loans and Leases
$357.3
100% $340.6
100% $251.1
100% $160.2
100%
$151.0
100%
$319.6
$309.2
$229.1
$148.1
$140.4
37.7
31.4
22.0
12.1
10.6
$357.3
$340.6
$251.1
$160.2
$151.0
1.14%
1.11%
.74%
.58%
.62%
S P E C I F I C C O M P O N E N T O F T H E R E S E R V E
evaluation
The amount of specific reserves is determined through an
individual
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.
loans
and
of
At December 31, 2010, the specific reserve component
amounted to $63.7 million compared with $43.8 million at the
end of 2009. The $19.9 million increase primarily reflects
additional reserves provided for new and existing impaired
loans, partially offset by principal repayments received and
charge-offs. The increase in impaired loans reflects continued
weakness in the residential real estate and commercial real
estate loans in certain markets.
The increase in the specific loss component of the reserve
from $23.5 million in 2008 to $43.8 million in 2009 primarily
reflected additional reserves provided for new and existing
impaired loans, partially offset by principal repayments
received and charge-offs.
I N H E R E N T C O M P O N E N T O F T H E R E S E R V E
The inherent component of the reserve addresses exposure
relating to probable but unidentified credit-related losses. The
amount of inherent loss reserves is based primarily on reserve
factors which incorporate management’s
evaluation of
historical charge-off experience and various qualitative factors
such as management’s evaluation of economic and business
conditions and changes in the character and size of the loan
portfolio.
The historical charge-off experience for each loan category
is based on data from the current and preceding three years.
Qualitative factors reviewed by management include changes
in asset quality metrics, in the nature and volume of the
in economic and business conditions, and in
portfolio,
NORTHERN TRUST CORPORATION | 2010 ANNUAL REPORT TO SHAREHOLDERS | 59
MANAG E MENT’S DISCUSSION AND A NAL Y SIS OF FIN A N C I A L C O N DI T I O N A N D RE S UL T S OF OPE RA T I O N S
in
information. Changes
collateral valuations, such as property values, as well as other
pertinent
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 reserve factors that are applied in
the determination of inherent reserve requirements.
collateral
The inherent component of the reserve also covers the
credit exposure associated with undrawn loan commitments
and standby letters of credit. To estimate the reserve for credit
losses on these instruments, management uses conversion
rates to determine the amount that will be funded and assigns
a reserve factor based on the methodology utilized for
outstanding loans.
The inherent portion of the reserve decreased $3.2 million
to $293.6 million at December 31, 2010, compared with
$296.8 million at December 31, 2009, which increased $69.2
million from $227.6 million at December 31, 2008. While the
decrease in the commercial and institutional loan class reserve
reflects improvement in the underlying qualitative factors
associated with this loan class, the inherent reserve level at the
end of 2010 reflects continued weakness in residential real
estate and commercial real estate loans in certain markets. The
increase in 2009 was driven by the continued weakness in the
broader economic environment, particularly its impact on the
residential and commercial real estate classes.
O V E R A L L R E S E R V E
The evaluation of the factors above resulted in a total reserve
for credit losses of $357.3 million at December 31, 2010,
compared with $340.6 million at the end of 2009. The reserve
of $319.6 million assigned to loans and leases, as a percentage
of total loans and leases, was 1.14% at December 31, 2010,
compared with 1.11% at December 31, 2009.
Reserves
assigned to unfunded loan commitments
and standby letters of credits totaled $37.7 million and $31.4
million at December 31, 2010 and December 31, 2009,
respectively, and are included in other liabilities in the
consolidated balance sheet.
P R O V I S I O N
The provision for credit losses was $160.0 million for 2010
and net charge-offs totaled $143.2 million. This compares
with a $215.0 million provision for credit losses and net
charge-offs of $125.8 million in 2009, and a $115.0 million
provision for credit losses and net charge-offs of $23.2 million
in 2008.
60 | 2010 ANNUAL REPORT TO SHAREHOLDERS | NORTHERN TRUST CORPORATION
Market Risk Management
Overview
To ensure adherence to Northern Trust’s interest rate and
foreign exchange risk management policies, ALCO establishes
and monitors guidelines designed to control the sensitivity of
earnings to changes in interest rates and foreign currency
exchange rates. The guidelines apply to both on- and
off-balance sheet positions. The goal of the ALCO process is
to maximize earnings while maintaining a high quality
balance sheet and carefully controlling interest rate and
foreign exchange risk.
Asset/Liability Management
include
activities
Asset/liability management
lending,
accepting and placing deposits, investing in securities, issuing
debt, and hedging interest rate and foreign exchange risk with
derivative financial
instruments. The primary market risk
associated with asset/liability management activities is interest
rate risk and, to a lesser degree, foreign exchange risk.
I N T E R E S T R A T E R I S K M A N A G E M E N T
assets,
and off-balance
Interest rate risk is the risk to earnings or capital due to
changes in interest rates. The changes in interest rates can have
a positive or negative impact on earnings depending on the
positioning of
sheet
liabilities
instruments. The impact to earnings will primarily come
through net interest income, but it can also impact certain
types of fees. Changes in interest rates can also impact the
values of assets,
liabilities, and off-balance sheet positions,
which indirectly impact the value of capital. There are four
commonly recognized types of interest rate risk: repricing,
which arises from differences in the maturity and repricing
terms of assets and liabilities; yield curve, which arises from
changes in the shape of the yield curve; basis, which arises
from the changing relationships between rates earned and
paid on different financial instruments with otherwise similar
/
repricing characteristics; and behavioral characteristics
or
embedded
counterparty behavior in response to interest rate changes. To
mitigate interest rate risk, the structure of the balance sheet is
managed so that movements of interest rates on assets and
liabilities (adjusted for the impact of interest-related hedging
activity) are highly correlated which allows Northern Trust’s
interest-bearing assets and liabilities to contribute to earnings
even in periods of volatile interest rates.
optionality, which
from client
arises
MANAG E MENT’S DISCUSSION AND A NAL Y SIS OF FIN A N C I A L C O N DI T I O N A N D RE S UL T S OF OPE RA T I O N S
two
uses
Northern Trust
primary measurement
techniques to manage interest rate risk: simulation of earnings
and simulation of economic value of equity. These two
techniques are complementary and are used in concert to
provide a comprehensive interest rate risk management
capability.
Simulation of earnings measures the sensitivity of earnings
(SOE) under various interest rate scenarios. 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 or lower than
base case rates. Each rate movement is assumed to occur
gradually over the one-year period. The 100 basis point
increase, for example, consists of twelve consecutive monthly
increases of 8.3 basis points. Stress testing of interest rates is
performed to include such scenarios as immediate parallel
shocks to rates and non-parallel (i.e. twist) shocks to yield
curves that result in them becoming steeper or flatter. The
model
following
assumptions:
‰
incorporate
simulations
also
the
the balance sheet size and mix is assumed to remain
constant over the simulation horizon, except for callable
instruments and most
term borrowings, which are
assumed to be replaced with overnight instruments at
maturity;
all other maturing assets and liabilities are replaced with
instruments with similar terms as those maturing;
prepayments on mortgage loans are projected under each
rate scenario using a third-party mortgage analytics
system that incorporates market prepayment assumptions
and that have been adjusted to reflect Northern’s actual
historical experience;
rates are projected based on
non-maturity deposit
Northern’s actual historical pattern of pricing these
products;
some demand deposits are treated as being short-term rate
sensitive because these balances receive an earnings credit
rate that can be applied to fees for services provided by
Northern Trust. These deposits are assumed to begin
in mid 2011 as a result of new
receiving interest
legislation;
new business rates are based on current spreads to market
indices;
currency exchange rates and credit spreads are assumed to
remain constant over the simulation horizon; and
‰
‰
‰
‰
‰
‰
‰
implied floors are assumed as interest rates approach zero
in the declining rate scenarios, resulting in yield curves
flattening, spread compression, and lower earnings.
The following table shows the estimated impact on 2011
pre-tax earnings of 100 and 200 basis point upward and
downward movements in interest rates relative to market
implied forward interest rates.
I N T E R E S T R A T E R I S K S I M U L A T I O N O F P R E - T A X
I N C O M E A S O F D E C E M B E R 3 1 , 2 0 1 0
(In Millions)
INCREASE IN INTEREST RATES ABOVE
MARKET IMPLIED FORWARD RATES
100 Basis Points
200 Basis Points
DECREASE IN INTEREST RATES BELOW
MARKET IMPLIED FORWARD RATES
100 Basis Points
200 Basis Points
ESTIMATED IMPACT ON
2011
PRE-TAX EARNINGS:
INCREASE/(DECREASE)
72
141
(89)
(137)
The earnings increases in the higher interest rate scenarios
reflect a return of rates to more normal levels (from current
historic lows) resulting in spread expansion, especially in
non-U.S. locations. The rates in the lower rate scenarios may
not reflect a full 100 or 200 basis point reduction as implied
interest rate floors of zero are in place resulting in spread
compression.
The simulations of earnings do not
incorporate any
management actions that may be used to mitigate negative
consequences of actual interest rate deviations. For that reason
and others, they do not reflect likely actual results but serve as
conservative estimates of interest rate risk.
A second technique used to measure interest rate risk is
simulation of economic value of equity, which measures the
potential sensitivity of economic value of equity (SEVE) under
different interest rate scenarios. Economic value of equity is
defined as the present value of assets minus the present value
of liabilities net of the value of off-balance sheet instruments
that are used to manage the interest rate risk of balance sheet
items. SEVE is a measure of the long-term interest rate risk as
it takes into account all future cash flows of the current
balance sheet.
NORTHERN TRUST CORPORATION | 2010 ANNUAL REPORT TO SHAREHOLDERS | 61
MANAG E MENT’S DISCUSSION AND A NAL Y SIS OF FIN A N C I A L C O N DI T I O N A N D RE S UL T S OF OPE RA T I O N S
Foreign currency trading positions exist when aggregate
obligations to purchase and sell a currency other than the U.S.
dollar either do not offset each other in amount, or offset each
other over different time periods. Northern Trust mitigates
the risk related to its non-U.S. currency positions by
establishing limits on the amounts and durations of
its
positions. The limits on overnight inventory positions are
generally lower than the limits established for intra-day
trading activity. All overnight positions are monitored by a
risk management function, which is separate from the trading
function, to ensure that the limits are not exceeded. Although
position limits are important in controlling foreign exchange
risk, they are not a substitute for the experience or judgment
of Northern Trust’s senior management and its currency
traders, who have extensive knowledge of
the currency
markets. Non-U.S. currency positions and strategies are
adjusted as needed in response to changing market conditions.
As part of its risk management activities, Northern Trust
measures daily the risk of loss associated with all non-U.S.
currency positions using a Value-at-Risk (VaR) model. This
statistical model provides estimates, at 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,
which is based on a variance/co-variance methodology and
daily historical data over at least the past year, incorporates
foreign exchange and interest rate volatilities and correlations
in price movement among the currencies. VaR is computed
for each trading desk and for the global portfolio.
Northern Trust’s one-day VaR measure, at
the 99%
confidence level, totaled $350 thousand and $697 thousand as
of December 31, 2010 and 2009, respectively. VaR totals
representing the average, high and low for 2010 were $333
thousand, $869 thousand and $93 thousand, respectively, with
the average, high and low for 2009 being $360 thousand, $926
respectively. These totals
thousand and $137 thousand,
indicate the degree of risk inherent in non-U.S. currency
dispositions as of year end and during the year; however, it
is not a prediction of an expected gain or loss. Actual future
gains and losses will vary depending on market conditions
and the size and duration of
future non-U.S. currency
positions. During 2010 and 2009, Northern Trust did not
incur an actual trading loss in excess of the daily value at
risk estimate.
Northern Trust limits aggregate market risk, as measured
by the above techniques, to an acceptable level within the
context of risk-return trade-offs. A variety of actions may be
used to implement risk management strategies to modify
interest rate risk including:
‰
purchases of securities;
‰
sales of securities that are classified as available for sale;
‰
increased allocations of originated loans
designated as held for sale;
issuance of senior notes and subordinated notes;
collateralized borrowings from the Federal Home Loan
Bank;
placing and taking Eurodollar time deposits; and
hedging with various
types of derivative
instruments.
financial
that
are
‰
‰
‰
‰
strives
to use
Northern Trust
effective
instruments for implementing its interest risk management
strategies, considering the costs,
liquidity, collateral and
capital requirements of the various alternatives and the risk-
return tradeoffs.
the most
FOREIGN EXCHANGE RISK MANAGEMENT
Northern Trust is exposed to non-trading foreign exchange
risk as a result of its holdings of non-U.S. dollar denominated
assets and liabilities, investment in non-U.S. subsidiaries, and
future non-U.S. dollar denominated revenue and expense. To
manage currency exposures on the balance sheet, Northern
Trust attempts to match its assets and liabilities by currency. If
those currency offsets do not exist on the balance sheet,
Northern Trust will use foreign exchange derivative contracts
to mitigate its currency exposure. Foreign exchange contracts
are also used to reduce Northern Trust’s currency exposure to
future non-U.S. dollar denominated revenue and expense.
Foreign Exchange Trading. Foreign exchange trading
activities consist principally of providing foreign exchange
services to clients. Most of those services are provided in
connection with Northern Trust’s growing global custody
business. In the normal course of business Northern Trust also
engages in trading of non-U.S. currencies for its own account.
The primary market risk associated with these activities is
foreign exchange risk.
62 | 2010 ANNUAL REPORT TO SHAREHOLDERS | NORTHERN TRUST CORPORATION
MANAG E MENT’S DISCUSSION AND A NAL Y SIS OF FIN A N C I A L C O N DI T I O N A N D RE S UL T S OF OPE RA T I O N S
Other Trading Activities. Market risk associated with
other trading activities is negligible. Northern Trust is a party
to various derivative financial instruments, most of which
consist of interest rate swaps entered into to meet clients’
interest rate risk management needs. When Northern Trust
enters into such derivatives, its practice is to mitigate the
resulting market risk with an exactly offsetting derivative.
Northern Trust carries
trading portfolio a small
inventory of securities that are held for sale to its clients. The
interest
is
rate
insignificant.
associated with these
securities
in its
risk
Operational Risk Management
In providing its services, Northern Trust
is exposed to
operational risk which is the risk of loss from inadequate or
failed internal processes, people, and systems or from external
events. Operational risk reflects the potential for inadequate
information systems, operating problems, product design and
in losses.
delivery difficulties, or catastrophes
Operational risk includes compliance and fiduciary risks,
which under Northern Trust Corporation’s risk structure are
governed and managed explicitly. Northern Trust’s success
depends, in part, upon maintaining its reputation as a well
managed
and
prospective clients, creditors and regulators.
institution with
stockholders,
to result
existing
Northern Trust seeks to minimize the frequency and
severity of operational losses associated with compliance and
fiduciary matters, product, process, and technology failures,
and business continuity.
Operational risk is mitigated through a system of internal
controls and risk management practices that are designed to
keep operational
levels
risk and operational
appropriate to Northern Trust’s overall risk appetite and the
inherent risk in the markets it operates. While operational risk
controls are extensive, operational
losses have and will
continue to occur.
losses at
The Operational Risk Committee of Northern Trust
provides independent oversight and is responsible for setting
the Corporate Operational Risk Management Policy and
developing the operational risk management framework and
programs that support the coordination of operational risk
activities
to identify, monitor, manage and report on
operational risk.
The Corporate Operational Risk function is the focal
point for the operational risk management framework and
works closely with the business units to achieve the goal of
assuring proactive management of operational risk within
Northern Trust. To further limit operational risks, committee
structures have been established to draft, enforce, and monitor
adherence to corporate policies and established procedures.
Each business unit is responsible for complying with corporate
policies and external regulations applicable to the unit,
and is responsible for establishing specific procedures to do
so. Northern Trust’s internal auditors monitor the overall
effectiveness of
internal controls on an
ongoing basis.
the system of
R E C O N C I L I A T I O N O F O P E R A T I N G E A R N I N G S T O R E P O R T E D E A R N I N G S
The following table provides a reconciliation of operating earnings, a non-GAAP financial measure which excludes Visa related
indemnification benefits, to reported earnings prepared in accordance with GAAP. Management believes the presentation of
operating earnings in addition to reported results prepared in accordance with GAAP provides a clearer indication of the results and
trends in Northern Trust’s core businesses.
2010
2009
2008
YEAR ENDED DECEMBER 31
($ In Millions Except Per Share Data)
Reported Earnings
Visa Initial Public Offering (net of $62.3 tax effect)
Visa Indemnification Benefit (net of tax effect of $12.1 for
PER
COMMON
SHARE
$2.74
–
AMOUNT
$669.5
–
2010, $6.6 in 2009 and $28.2 in 2008)
(20.9)
(.09)
Operating Earnings
$648.6
$2.65
PER
COMMON
SHARE
$3.16
–
(.05)
$3.11
AMOUNT
$864.2
–
(11.2)
$853.0
PER
COMMON
SHARE
$3.47
(.47)
(.21)
$2.79
AMOUNT
$ 794.8
(105.6)
(47.9)
$ 641.3
NORTHERN TRUST CORPORATION | 2010 ANNUAL REPORT TO SHAREHOLDERS | 63
MANAG E MENT’S DISCUSSION AND A NAL Y SIS OF FIN A N C I A L C O N DI T I O N A N D RE S UL T S OF OPE RA T I O N S
F A C T O R S A F F E C T I N G F U T U R E R E S U L T S
This report contains statements that may be considered
forward-looking, such as the statements relating to Northern
Trust’s financial goals, capital adequacy, dividend policy,
expansion and business development plans, risk management
policies, anticipated expense levels and projected profit
improvements, business prospects and positioning with
respect to market, demographic and pricing trends, strategic
initiatives, re-engineering and outsourcing activities, new
business results and outlook, changes in securities market
prices, credit quality including reserve levels, planned capital
expenditures
anticipated tax
benefits and expenses, and the effects of any extraordinary
events and various other matters (including developments
with respect to litigation, other contingent liabilities and
obligations, and regulation involving Northern Trust and
changes in accounting policies, standards and interpretations)
on Northern Trust’s business and results.
and technology spending,
Forward-looking statements are typically identified by
words or phrases such as “believe”, “expect”, “anticipate”,
“intend”, “estimate”, “may increase”, “may fluctuate”, “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. Actual results could differ materially from the
results indicated by these statements because the realization of
those results is subject
to many risks and uncertainties
including: the health of the U.S. and international economies
and the health and soundness of the financial institutions and
other counterparties with which Northern Trust conducts
business; changes in financial markets, including debt and
equity markets, that impact the value,
liquidity, or credit
ratings of financial assets in general, or financial assets in
particular investment funds, client portfolios, or securities
lending collateral pools,
including those funds, portfolios,
collateral pools, and other financial assets with respect to
which Northern Trust has taken, or may in the future take,
actions to provide asset value stability or additional liquidity;
the impact of continuing disruption and stress in the financial
markets, the effectiveness of governmental actions taken in
response, and the effect of such governmental actions on
Northern Trust, its competitors and counterparties, financial
markets generally and availability of credit specifically, and the
U.S. and international economies, including special deposit
assessments or potentially higher FDIC premiums; changes in
foreign exchange trading client volumes, fluctuations and
volatility in foreign currency exchange rates, and Northern
64 | 2010 ANNUAL REPORT TO SHAREHOLDERS | NORTHERN TRUST CORPORATION
is
and
risk,
there
interest
in the
turmoil
inherent
financial market
required to assess credit
Trust’s success in assessing and mitigating the risks arising
from such changes, fluctuations and volatility; 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
disruptions;
complex and subjective
uncertainties
judgments
risk and establish
appropriate reserves therefor; difficulties in measuring, or
determining whether
other-than-temporary
impairment in, the value of securities held in Northern Trust’s
investment portfolio; Northern Trust’s success in managing
various risks inherent in its business, including credit risk,
operational
risk and liquidity risk,
rate
particularly during times of economic uncertainty and
volatility in the credit and other markets; geopolitical risks and
the risks of extraordinary events such as natural disasters,
terrorist events, war and the U.S. and other governments’
responses to those events; the pace and extent of continued
globalization of investment activity and growth in worldwide
financial assets; regulatory and monetary policy developments;
failure to obtain regulatory approvals when required; changes
in tax laws, accounting requirements or interpretations and
other legislation in the U.S. or other countries that could affect
Northern Trust or its clients, including changes in accounting
rules
recognizing
value measurements
impairments; changes in the nature and activities of Northern
Trust’s competition, including increased consolidation within
the financial services industry; Northern Trust’s success in
maintaining existing business and continuing to generate new
business in its existing markets; Northern Trust’s success in
through
identifying
acquisition, strategic alliance or otherwise; Northern Trust’s
success
in integrating future acquisitions and strategic
alliances; Northern Trust’s success in addressing the complex
needs of a global client base across multiple time zones and
from multiple locations, and managing compliance with legal,
tax, regulatory and other requirements in areas of faster
growth in its businesses, especially in immature markets;
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 its clients
and continue to develop its array of investment products;
Northern Trust’s
in its
securities lending business for itself and its clients, especially in
periods of economic and financial market uncertainty;
Northern Trust’s success in recruiting and retaining the
necessary personnel
growth and
expansion and maintain sufficient expertise to support
in generating revenues
to support business
targeted markets,
and penetrating
success
and
fair
for
MANAG E MENT’S DISCUSSION AND A NAL Y SIS OF FIN A N C I A L C O N DI T I O N A N D RE S UL T S OF OPE RA T I O N S
as products, methods of delivery,
increasingly complex products and services; Northern Trust’s
ability,
and client
requirements change or become more complex, to continue to
fund and accomplish innovation, improve risk management
practices and controls, and address operating risks, including
human errors or omissions, pricing or valuation of securities,
fraud, systems performance or defects, systems interruptions,
and breakdowns in processes or internal controls; Northern
Trust’s success in controlling expenses, particularly in a
difficult economic environment; uncertainties inherent
in
Northern Trust’s assumptions concerning its pension plan,
including discount rates and expected contributions, returns
and payouts; increased costs of compliance and other risks
associated with changes
in regulation and the current
regulatory environment, including the requirements of the
Basel II capital regime and the Dodd-Frank Wall Street
Reform and Consumer Protection Act (the “Dodd-Frank
Act”), areas of increased regulatory emphasis and oversight in
the U.S. and other countries such as anti-money laundering,
for
anti-bribery, and client privacy and the potential
substantial changes in the legal, regulatory and enforcement
framework and oversight applicable to financial institutions in
reaction to recent adverse financial market events, including
changes pursuant to the Dodd-Frank Act that may, among
other things, affect the leverage limits and risk-based capital
and liquidity requirements for certain financial institutions,
including Northern Trust, require those financial institutions
to pay higher assessments, and restrict or increase the
regulation of certain activities, including foreign exchange,
carried on by financial institutions, including Northern Trust;
risks that evolving regulations, such as Basel II, and potential
legislation and regulations, including Basel III and regulations
that may be promulgated under the Dodd-Frank Act, could
institutions,
affect required regulatory capital for financial
including Northern Trust, potentially resulting in changes to
the cost and composition of capital for Northern Trust; risks
and uncertainties inherent in the litigation and regulatory
process, including the adequacy of contingent liability, tax,
and other reserves; and the risk of events that could harm
Northern Trust’s reputation and so undermine the confidence
of clients, counterparties, rating agencies, and stockholders.
Some of these and other risks and uncertainties that may
affect future results are discussed in more detail in the section
of “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” captioned “Risk
Management” in the 2010 Annual Report to Shareholders
(pages 51-63), in the section of the “Notes to Consolidated
Financial Statements” in the 2010 Annual Report
to
Shareholders captioned “Note 24 – Contingent Liabilities”
(pages 104 and 105), in the sections of “Item 1 – Business” of
the
2010 Annual Report on Form 10-K captioned
“Government Monetary and Fiscal Polices,” “Competition”
and “Regulation and Supervision” (pages 2-13), and in
“Item 1A – Risk Factors” of the 2010 Annual Report on
Form 10-K (pages 27-36). All forward-looking statements
included in this report are based upon information presently
available, and Northern Trust assumes no obligation to update
any forward-looking statements.
NORTHERN TRUST CORPORATION | 2010 ANNUAL REPORT TO SHAREHOLDERS | 65
MANAG E MENT’S DISCUSSION AND A NAL Y SIS OF FIN A N C I A L C O N DI T I O N A N D RE S UL T S OF OPE RA T I O N S
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of Northern Trust Corporation (Northern Trust) is responsible for establishing and maintaining adequate internal
control over financial reporting. This internal control contains monitoring mechanisms, and actions are taken to correct deficiencies
identified.
Management assessed Northern Trust’s internal control over financial reporting as of December 31, 2010. This assessment was
based on criteria for effective internal control over financial reporting described in Internal Control – Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that, as
of December 31, 2010, Northern Trust maintained effective internal control over financial reporting, including maintenance of
records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of Northern Trust, and
policies and procedures that provide reasonable assurance that transactions are recorded as necessary to permit preparation of
consolidated financial statements in accordance with accounting principles generally accepted in the United States and that receipts
and expenditures of Northern Trust are being made only in accordance with authorizations of management and directors of
Northern Trust. Additionally, KPMG LLP, the independent registered public accounting firm that audited Northern Trust’s
consolidated financial statements as of, and for the year ended, December 31, 2010, included in this Annual Report, has issued an
attestation report (included herein on page 67) on the effectiveness of Northern Trust’s internal control over financial reporting.
66 | 2010 ANNUAL REPORT TO SHAREHOLDERS | NORTHERN TRUST CORPORATION
REPORT OF INDEPENDENT REG ISTE RE D PUBL IC A CCOUNTING FIRM
T O T H E S T O C K H O L D E R S A N D B O A R D O F D I R E C T O R S O F N O R T H E R N T R U S T C O R P O R A T I O N :
We have audited Northern Trust Corporation’s internal control over financial reporting as of December 31, 2010, based on criteria
established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Northern Trust Corporation’s management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying
“Management’s Report on Internal Control Over Financial Reporting”. Our responsibility is to express an opinion on Northern
Trust Corporation’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of
the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Northern Trust Corporation maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2010, based on criteria established in Internal Control – Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the consolidated balance sheet of Northern Trust Corporation and subsidiaries as of December 31, 2010 and 2009, and the related
consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in
the three-year period ended December 31, 2010, and our report dated February 25, 2011 expressed an unqualified opinion on those
consolidated financial statements.
chicago, illinois
february 25, 2011
NORTHERN TRUST CORPORATION | 2010 ANNUAL REPORT TO SHAREHOLDERS | 67
C O N S O L I D A T E D F I N A N C I A L ST A T E M E N T S
C O N S O L I D A T E D B A L A N C E S H E E T
($ In Millions Except Share Information)
ASSETS
Cash and Due from Banks
Federal Funds Sold and Securities Purchased under Agreements to Resell
Time Deposits with Banks
Federal Reserve Deposits and Other Interest-Bearing
Securities
Available for Sale
Held to Maturity (Fair value of $1,207.2 and $1,185.7)
Trading Account
Total Securities
Loans and Leases
Commercial
Personal
Total Loans and Leases (Net of unearned income of $456.8 and $486.0)
Reserve for Credit Losses Assigned to Loans and Leases
Buildings and Equipment
Client Security Settlement Receivables
Goodwill
Other Assets
Total Assets
LIABILITIES
Deposits
Demand and Other Noninterest-Bearing
Savings and Money Market
Savings Certificates and Other Time
Non-U.S. Offices – Noninterest-Bearing
– Interest-Bearing
Total Deposits
Federal Funds Purchased
Securities Sold under Agreements to Repurchase
Other Borrowings
Senior Notes
Long-Term Debt
Floating Rate Capital Debt
Other Liabilities
Total Liabilities
STOCKHOLDERS’ EQUITY
Common Stock, $1.66 2⁄ 3 Par Value; Authorized 560,000,000 shares; Outstanding shares of 242,268,903 and
241,679,942
Additional Paid-in Capital
Retained Earnings
Accumulated Other Comprehensive Loss
Treasury Stock (2,902,621 and 3,491,582 shares, at cost)
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
See accompanying notes to consolidated financial statements on pages 72-125.
68 | 2010 ANNUAL REPORT TO SHAREHOLDERS | NORTHERN TRUST CORPORATION
DECEMBER 31
2010
2009
$ 2,818.0
160.1
15,351.3
10,924.6
20,087.5
1,187.6
6.8
21,281.9
11,613.4
16,518.6
28,132.0
(319.6)
504.5
701.3
400.9
3,888.9
$ 2,491.8
250.0
12,905.2
14,973.0
17,462.1
1,161.4
9.9
18,633.4
11,715.7
16,090.0
27,805.7
(309.2)
543.5
794.8
401.6
3,651.7
$83,843.9
$82,141.5
$ 7,658.9
14,208.7
3,913.0
2,942.7
35,472.4
64,195.7
3,691.7
954.4
347.7
1,896.1
2,729.3
276.9
2,921.8
77,013.6
408.6
920.0
5,972.1
(305.3)
(165.1)
6,830.3
$ 9,177.5
15,044.0
4,001.2
2,305.8
27,752.8
58,281.3
6,649.8
1,037.5
2,078.3
1,551.8
2,837.8
276.8
3,116.1
75,829.4
408.6
888.3
5,576.0
(361.6)
(199.2)
6,312.1
$83,843.9
$82,141.5
C O N S O L I D A T E D S T A T E M E N T O F I N C O M E
($ In Millions Except Per Share Information)
Noninterest Income
Trust, Investment and Other Servicing Fees
Foreign Exchange Trading Income
Security Commissions and Trading Income
Treasury Management Fees
Gain on Visa Share Redemption
Other Operating Income
Investment Security Gains (Losses), net (1)
Total Noninterest Income
Net Interest Income
Interest Income
Interest Expense
Net Interest Income
Provision for Credit Losses
Net Interest Income after Provision for Credit Losses
Noninterest Expenses
Compensation
Employee Benefits
Outside Services
Equipment and Software Expense
Occupancy Expense
Visa Indemnification Benefits
Other Operating Expenses
Total Noninterest Expenses
Income before Income Taxes
Provision for Income Taxes
Net Income
Net Income Applicable to Common Stock
Per Common Share
Net Income – Basic
– Diluted
Cash Dividends Declared
C O N S O L I D A T E D F I N A N C I A L ST A T E M E N T S
FOR THE YEAR ENDED DECEMBER 31
2010
2009
2008
$
$
$
$
2,081.9
382.2
60.9
78.1
–
146.3
(20.4)
2,729.0
1,296.7
378.0
918.7
160.0
758.7
1,108.0
237.6
460.4
287.1
167.8
(33.0)
270.0
2,497.9
989.8
320.3
669.5
669.5
2.74
2.74
1.12
$
$
$
$
2,083.8
445.7
62.4
81.8
–
136.8
(23.4)
2,787.1
1,406.0
406.2
999.8
215.0
784.8
1,099.7
242.1
424.5
261.1
170.8
(17.8)
136.3
2,316.7
1,255.2
391.0
864.2
753.1
3.18
3.16
1.12
$2,134.9
616.2
77.0
72.8
167.9
186.9
(56.3)
3,199.4
2,478.5
1,399.4
1,079.1
115.0
964.1
1,133.1
223.4
413.8
241.2
166.1
(76.1)
786.3
2,887.8
1,275.7
480.9
$ 794.8
$ 782.8
$
3.51
3.47
1.12
Average Number of Common Shares Outstanding – Basic
– Diluted
242,028,776
242,502,531
235,511,879
236,416,029
221,446,382
224,053,430
C O N S O L I D A T E D S T A T E M E N T O F C O M P R E H E N S I V E I N C O M E
(In Millions)
Net Income
Cumulative Effect Adjustment from New Accounting Standard
Other Comprehensive Income (Loss) (Net of Tax and Reclassifications)
Net Unrealized Gains (Losses) on Securities Available for Sale
Net Unrealized Gains (Losses) on Cash Flow Hedges
Foreign Currency Translation Adjustments
Pension and Other Postretirement Benefit Adjustments
Other Comprehensive Income (Loss)
Comprehensive Income
(1) Changes in Other-Than-Temporary Impairment (OTTI) Losses
Noncredit-related OTTI Losses Recorded in/ (Reclassified from) OCI
Other Security Gains (Losses), net
Investment Security Gains (Losses), net
See accompanying notes to consolidated financial statements on pages 72-125.
FOR THE YEAR ENDED DECEMBER 31
2010
669.5
–
28.2
37.6
(18.3)
8.8
56.3
725.8
(.8)
(20.4)
.8
(20.4)
$
$
$
$
2009
864.2
(9.5)
180.7
(5.5)
(1.5)
(30.9)
133.3
997.5
(93.4)
66.7
3.3
(23.4)
$
$
$
$
2008
$ 794.8
–
(184.2)
(17.7)
(8.4)
(194.3)
(404.6)
$ 390.2
$
(61.3)
–
5.0
$
(56.3)
NORTHERN TRUST CORPORATION | 2010 ANNUAL REPORT TO SHAREHOLDERS | 69
C O N S O L I D A T E D F I N A N C I A L ST A T E M E N T S
C O N S O L I D A T E D S T A T E M E N T O F C H A N G E S I N S T O C K H O L D E R S ’ E Q U I T Y
(In Millions)
PREFERRED STOCK
Balance at January 1
Preferred Stock Issuance, Series B
Redemption of Preferred Stock, Series B
Discount Accretion – Preferred Stock
Balance at December 31
COMMON STOCK
Balance at January 1
Common Stock Issuance
Balance at December 31
ADDITIONAL PAID-IN CAPITAL
Balance at January 1
Common Stock Issuance
Issuance of Warrant to Purchase Common Stock
Repurchase of Warrant to Purchase Common Stock
Treasury Stock Transactions – Stock Options and Awards
Stock Options and Awards – Amortization
Stock Options and Awards – Tax Benefits
Balance at December 31
RETAINED EARNINGS
Balance at January 1, as Previously Reported
April 1 Cumulative Effect of Applying ASC 320-10 (Formerly, FSP FAS 115-2)
Change in Measurement Date of Postretirement Plans
Balance at January 1, as Adjusted
Net Income
Dividends Declared – Common Stock
Dividends Declared – Preferred Stock
Discount Accretion – Preferred Stock
Balance at December 31
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance at January 1
April 1 Cumulative Effect of Applying ASC 320-10 (Formerly, FSP FAS 115-2)
Other Comprehensive Income (Loss)
Balance at December 31
TREASURY STOCK
Balance at January 1
Stock Options and Awards
Stock Purchased
Balance at December 31
FOR THE YEAR ENDED DECEMBER 31
2010
2009
2008
$
–
–
–
–
–
408.6
–
408.6
888.3
–
–
–
(23.1)
53.6
1.2
920.0
5,576.0
–
–
5,576.0
669.5
(273.4)
–
–
5,972.1
(361.6)
–
56.3
(305.3)
(199.2)
41.0
(6.9)
(165.1)
$ 1,501.3
–
(1,576.0)
74.7
$
–
1,499.6
–
1.7
–
1,501.3
379.8
28.8
408.6
178.5
805.3
–
(87.0)
(39.1)
26.4
4.2
888.3
5,091.2
9.5
–
5,100.7
864.2
(267.6)
(46.6)
(74.7)
5,576.0
(494.9)
(9.5)
142.8
(361.6)
(266.5)
81.1
(13.8)
(199.2)
379.8
–
379.8
69.1
–
76.4
–
(46.1)
44.1
35.0
178.5
4,556.2
–
(7.4)
4,548.8
794.8
(250.7)
–
(1.7)
5,091.2
(90.3)
–
(404.6)
(494.9)
(405.7)
214.3
(75.1)
(266.5)
Total Stockholders’ Equity at December 31
See accompanying notes to consolidated financial statements on pages 72-125.
$6,830.3
$ 6,312.1
$6,389.4
70 | 2010 ANNUAL REPORT TO SHAREHOLDERS | NORTHERN TRUST CORPORATION
C O N S O L I D A T E D S T A T E M E N T O F C A S H F L O W S
(In Millions)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Investment Security (Gains) Losses, net
Amortization and Accretion of Securities and Unearned Income
Provision for Credit Losses
Depreciation on Buildings and Equipment
Amortization of Computer Software
Amortization of Intangibles
Client Support Related Charges (Benefit)
Capital Support Agreement Payments
Increase (Decrease) in Accrued Income Taxes
Qualified Pension Plan Contributions
Visa Indemnification Benefit
Deferred Income Tax Provision
(Increase) Decrease in Receivables
Increase (Decrease) in Interest Payable
Changes in Derivative Instrument (Gains) Losses, net
Other Operating Activities, net
Net Cash Provided by Operating Activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (Increase) Decrease in Federal Funds Sold and Securities Purchased under Agreements to Resell
Net (Increase) Decrease in Time Deposits with Banks
Net (Increase) Decrease in Federal Reserve Deposits and Other Interest-Bearing Assets
Purchases of Securities – Held to Maturity
Proceeds from Maturity and Redemption of Securities – Held to Maturity
Purchases of Securities – Available for Sale
Proceeds from Sale, Maturity and Redemption of Securities – Available for Sale
Net Increase (Decrease) in Loans and Leases
Purchases of Buildings and Equipment, net
Purchases and Development of Computer Software
Net (Increase) Decrease in Client Security Settlement Receivables
Other Investing Activities, net
Net Cash Used in Investing Activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increase (Decrease) in Deposits
Net Increase (Decrease) in Federal Funds Purchased
Net Decrease in Securities Sold under Agreements to Repurchase
Net Increase (Decrease) in Short-Term Other Borrowings
Proceeds from Term Federal Funds Purchased
Repayments of Term Federal Funds Purchased
Proceeds from Senior Notes & Long-Term Debt
Repayments of Senior Notes & Long-Term Debt
Treasury Stock Purchased
Net Proceeds from Stock Options
Cash Dividends Paid on Common Stock
Proceeds from Common Stock Issuance
Cash Dividends Paid on Preferred Stock
Redemption of Preferred Stock – Series B
Repurchase of Warrant to Purchase Common Stock
Proceeds from Preferred Stock – Series B and Warrant to Purchase Common Stock
Other Financing Activities, net
Net Cash Provided by Financing Activities
Effect of Foreign Currency Exchange Rates on Cash
Increase (Decrease) in Cash and Due from Banks
Cash and Due from Banks at Beginning of Year
C O N S O L I D A T E D F I N A N C I A L ST A T E M E N T S
FOR THE YEAR ENDED DECEMBER 31
2010
2009
2008
$
669.5
$
864.2
$ 794.8
20.4
(55.5)
160.0
93.5
141.6
14.4
–
–
153.5
(68.0)
(33.0)
12.1
(90.6)
7.7
(377.8)
142.4
790.2
89.9
(2,446.1)
4,048.4
(448.6)
429.1
(14,697.0)
11,432.5
(479.8)
(90.5)
(220.6)
93.5
521.2
(1,768.0)
5,914.4
(2,958.1)
(83.1)
(573.3)
19,045.6
(20,217.5)
1,142.7
(918.3)
(5.9)
70.6
(273.2)
–
–
–
–
–
1.2
1,145.1
158.9
326.2
2,491.8
23.4
(50.4)
215.0
95.7
131.8
16.2
(109.3)
(204.8)
61.4
(175.0)
(17.8)
183.8
65.3
(13.8)
126.4
(197.4)
1,014.7
(81.0)
3,815.8
(5,569.2)
(220.9)
219.2
(14,053.0)
11,925.9
2,832.7
(132.6)
(181.6)
(85.5)
(148.4)
56.3
(20.3)
115.0
87.6
115.0
17.8
320.3
–
(89.8)
(110.0)
(76.1)
(190.9)
81.5
(1.0)
(178.9)
(66.0)
855.3
3,621.7
4,539.0
(9,382.3)
(194.0)
188.9
(15,324.0)
8,267.1
(5,422.8)
(102.3)
(205.7)
(146.2)
(186.6)
(1,678.6)
(14,347.2)
(4,125.1)
4,866.3
(491.6)
626.3
17,933.4
(17,217.4)
500.0
(422.4)
(10.7)
38.9
(260.3)
834.1
(46.6)
(1,576.0)
(87.0)
–
(140.7)
421.2
86.3
(156.4)
2,648.2
11,193.3
317.7
(234.5)
(1,809.1)
1,989.9
(1,553.9)
1,864.8
(867.0)
(68.3)
161.9
(247.7)
–
–
–
–
1,576.0
53.0
12,376.1
(157.6)
(1,273.4)
3,921.6
Cash and Due from Banks at End of Year
$ 2,818.0
$ 2,491.8
$2,648.2
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest Paid
Income Taxes Paid
Transfers from Loans to OREO
See accompanying notes to consolidated financial statements on pages 72-125.
$
370.3
173.1
52.1
$
420.0
409.6
26.2
$1,400.4
485.1
2.6
NORTHERN TRUST CORPORATION | 2010 ANNUAL REPORT TO SHAREHOLDERS | 71
N O T E S TO C O N S O L I DA T E D FI N A N C I A L S T A T E M E N T S
Note 1 – Summary of Significant Accounting Policies
The consolidated financial statements have been prepared in
conformity with U.S. generally accepted accounting principles
(GAAP) and reporting practices prescribed for the banking
industry. A description of the more significant accounting
policies follows:
the
include
A. Basis of Presentation. The consolidated financial
statements
accounts of Northern Trust
Corporation (Corporation) and its wholly-owned subsidiary,
The Northern Trust Company (Bank), and their wholly-
owned subsidiaries. Throughout
term
“Northern Trust”
to the Corporation and its
subsidiaries. Intercompany balances and transactions have
been eliminated in consolidation. The consolidated statement
of income includes results of acquired subsidiaries from the
dates of acquisition.
the notes,
refers
the
B. Nature of Operations. The Corporation is a financial
holding company under the Gramm-Leach-Bliley Act. The
Bank is an Illinois banking corporation headquartered in
Chicago and the Corporation’s principal subsidiary. The
Corporation conducts business in the United States (U.S.) and
internationally through the Bank, a national bank subsidiary, a
federal savings bank subsidiary, trust companies, and various
other U.S. and non-U.S. subsidiaries.
Northern Trust generates the majority of its revenues
from its
and
two primary business units: Corporate
Institutional Services (C&IS) and Personal Financial Services
(PFS). Investment management services and products are
provided to C&IS and PFS through a third business unit,
Northern Trust Global Investments (NTGI). Operating and
systems support for these business units is provided by a
fourth business unit, Operations and Technology (O&T).
securities
endowments,
The C&IS business unit provides asset servicing, asset
management,
lending, brokerage, banking and
related services to corporate and public retirement funds,
insurance
foundations,
companies, sovereign wealth and government funds. C&IS
client relationships are managed through the Bank and the
Bank’s and the Corporation’s other subsidiaries, including
locations in North America,
support
Europe, the Middle East, and the Asia Pacific region.
from international
fund managers,
The PFS business unit provides personal trust, investment
management, custody, and philanthropic services;
financial
consulting; wealth management and family office services;
guardianship and estate administration; brokerage services; and
private and business banking. PFS focuses on high net worth
72 | 2010 ANNUAL REPORT TO SHAREHOLDERS | NORTHERN TRUST CORPORATION
and
families,
executives,
individuals
professionals, retirees, and established privately-held businesses
in its target markets. PFS services are delivered through 78 offices
in 18 U.S. states as well as offices in London and Guernsey.
business
owners,
financial
statements
C. Use of Estimates in the Preparation of Financial
Statements. The preparation of
in
conformity with GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported
amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
currencies
D. Foreign Currency Translation. Asset and liability
are
accounts denominated in nonfunctional
remeasured into functional currencies at period end rates of
exchange, except
for buildings and equipment which are
remeasured at exchange rates in effect at the date of acquisition.
Results from remeasurement of asset and liability accounts are
reported in other operating income as non-trading foreign
exchange gains and losses. Income and expense accounts are
remeasured at period average rates of exchange.
Asset and liability accounts of entities with functional
currencies that are not the U.S. dollar are translated at period
end rates of exchange. Income and expense accounts are
translated at period average rates of exchange. Translation
adjustments, net of applicable taxes, are reported directly to
accumulated other
a
comprehensive
component of stockholders’ equity.
(AOCI),
income
E. Securities. Securities Available for Sale are reported at
fair value, with unrealized gains and losses credited or charged,
net of the tax effect, to AOCI. Realized gains and losses on
securities available for sale are determined on a specific
identification basis and are reported within other security gains
(losses), net, in the consolidated statement of income. Interest
income is recorded on the accrual basis, adjusted for the
amortization of premium and accretion of discount.
Securities Held to Maturity consist of debt securities that
management intends to, and Northern Trust has the ability to,
hold until maturity. Such securities are reported at cost,
adjusted for amortization of premium and accretion of
discount. Interest income is recorded on the accrual basis
adjusted for the amortization of premium and accretion of
discount.
Securities Held for Trading are stated at fair value. Realized
and unrealized gains and losses on securities held for trading
are reported in the consolidated statement of income within
security commissions and trading income.
Other-Than-Temporary Impairment. In April 2009, the
Financial Accounting Standards Board (FASB) issued a new
accounting standard which amended the recognition guidance
for other-than-temporary impairments
(OTTI) of debt
securities and expanded the financial statement disclosures
required for OTTI of debt and equity securities. Northern
Trust adopted the new standard in the second quarter of 2009.
Under the new standard, a security is considered to be
other-than-temporarily impaired if the present value of cash
flows expected to be collected are less than the security’s
amortized cost basis (the difference being defined as the credit
loss) or if the fair value of the security is less than the security’s
amortized cost basis and the investor intends, or more-likely-
than-not will be required, to sell the security before recovery
of the security’s amortized cost basis. If an OTTI exists, the
charge to earnings is limited to the amount of credit loss if the
investor does not intend to sell the security, and it is more-
likely-than-not that it will not be required to sell the security,
before recovery of the security’s amortized cost basis. Any
remaining difference between fair value and amortized cost is
recognized in AOCI, net of applicable taxes. Otherwise, the
entire difference between fair value and amortized cost is
charged to earnings.
Security impairment reviews are conducted quarterly to
identify and evaluate securities that have indications of
possible OTTI. The determination as to whether a security’s
decline in fair value is other-than-temporary takes into
consideration numerous factors and the relative significance
of any single factor can vary by security. Factors Northern
Trust considers in determining whether impairment is other-
than-temporary include, but are not limited to, the length of
time which the security has been impaired; the severity of the
impairment;
the financial
condition and near-term prospects of the issuer; activity in the
market of
the issuer which may indicate adverse credit
conditions; and Northern Trust’s ability and intent not to sell,
and the likelihood that it will not be required to sell, the
security for a period of time sufficient to allow for the recovery
of the security’s amortized cost basis.
the impairment;
the cause of
F. Derivative Financial Instruments. Northern Trust is a
party to various derivative instruments that are used in the
normal course of business to meet the needs of its clients; as
part of its trading activity for its own account; and as part of
its risk management activities. These instruments include
foreign exchange contracts, interest rate contracts, and credit
default swap contracts. Derivative financial instruments are
N O T E S TO C O N S O L I DA T E D FI N A N C I A L S T A T E M E N T S
recorded on the consolidated balance sheet at fair value within
other assets and liabilities. Derivative asset and liability
positions with the same counterparty are reflected on a net
basis
in cases where legally enforceable master netting
agreements exist. Derivative assets and liabilities are further
reduced by cash collateral received from, and deposited with,
derivative counterparties. The accounting for changes in the
fair value of a derivative in the consolidated statement of
income depends on whether or not the contract has been
designated as a hedge and qualifies for hedge accounting
under GAAP. Derivative financial instruments are recorded
on the consolidated cash flow statement within Changes in
Derivative Instrument Gains/Losses, net.
Changes in the fair value of client and trading derivative
instruments and derivatives entered into for risk management
that have not been designated as hedges are
purposes
recognized currently in either foreign exchange trading or
other operating income. Certain derivative instruments used
by Northern Trust to manage risk are formally designated and
qualify for hedge accounting as fair value, cash flow, or net
investment hedges.
Derivatives designated as fair value hedges are used to
limit Northern Trust’s exposure to changes in the fair value of
assets and liabilities due to movements in interest rates.
Changes in the fair value of fair value hedges are recognized
currently in income. For substantially all fair value hedges,
Northern Trust applies the “shortcut” method of accounting,
is no
available under GAAP, which assumes
ineffectiveness in a hedge. As a result, changes recorded in the
fair value of the hedged item are equal to the offsetting gain or
loss on the derivative and are reflected in the same line item.
For fair value hedges that do not qualify for the “shortcut”
method of accounting, Northern Trust utilizes regression
analysis, a “long-haul” method of accounting, in assessing
whether these hedging relationships are highly effective at
inception and quarterly thereafter.
there
Derivatives designated as cash flow hedges are used to
minimize the variability in cash flows of earning assets or
forecasted transactions caused by movements in interest or
foreign exchange rates. The effective portion of changes in the
fair value of a cash flow hedge is recognized in AOCI. When
the hedged forecasted transaction impacts earnings, balances
in AOCI are reclassified to the same income or expense
classification as the hedged item. Northern Trust applies the
“shortcut” method of accounting for cash flow hedges of
available for sale securities. For cash flow hedges of forecasted
foreign currency denominated revenue and expenditure
transactions, Northern Trust closely matches all terms of the
hedged item and the hedging derivative at inception and on an
NORTHERN TRUST CORPORATION | 2010 ANNUAL REPORT TO SHAREHOLDERS | 73
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ongoing basis which limits hedge ineffectiveness. To the extent
all terms are not perfectly matched, effectiveness is assessed
using the dollar-offset method and any ineffectiveness is
measured using the hypothetical derivative method. Any
ineffectiveness is recognized currently in earnings.
Foreign exchange contracts and qualifying non-derivative
instruments designated as net investment hedges are used to
minimize Northern Trust’s exposure to variability in the
foreign currency translation of net investments in non-U.S.
branches and subsidiaries. The effective portion of changes in
the fair value of the hedging instrument is recognized in AOCI
consistent with the related translation gains and losses. For net
investment hedges, all critical terms of the hedged item and
the hedging instrument are matched at inception and on an
ongoing basis to eliminate hedge ineffectiveness.
as
and
designated
the method for
a description of
formally
the
documented
transaction. The
Fair value, cash flow, and net investment hedge derivatives
such
are
contemporaneous with
formal
documentation describes the hedge relationship and identifies
the hedging instruments and hedged items. Included in the
documentation is a discussion of
the risk management
objectives and strategies for undertaking such hedges, as well
as
assessing hedge
effectiveness at inception and on an ongoing basis. For hedges
that do not qualify for the “shortcut” method of accounting, a
formal assessment is performed on a calendar quarter basis to
verify that derivatives used in hedging transactions continue to
be highly effective in offsetting the changes in fair value or
cash flows of
the hedged item. Hedge accounting is
discontinued if a derivative ceases to be highly effective, is
terminated or sold, or if Northern Trust removes
the
derivative’s hedge designation. Subsequent gains and losses on
these derivatives are included in foreign exchange trading or
other operating income. For discontinued cash flow hedges,
the accumulated gain or loss on the derivative remains in
AOCI and is reclassified to earnings in the period in which the
previously hedged forecasted transaction impacts earnings or
is no longer probable of occurring. For discontinued fair value
hedges, the accumulated gain or loss on the hedged item is
amortized over the remaining life of the hedged item.
G. Loans and Leases. Loans and leases are recognized
assets that represent a contractual right to receive money
either on demand or on fixed or determinable dates. Effective
December 31, 2010, Northern Trust adopted the disclosure
requirements of the FASB’s Accounting Standards Update
(ASU) 2010-20, “Disclosures about the Credit Quality of
Financing Receivables and the Allowance for Credit Losses”
(ASU 2010-20). Consistent with this new standard, loans and
74 | 2010 ANNUAL REPORT TO SHAREHOLDERS | NORTHERN TRUST CORPORATION
leases have been disaggregated for disclosure purposes by
portfolio segment (segment) and by class. Segment is defined
under the standard as the level at which management develops
and documents a systematic methodology to determine the
losses. Northern Trust has defined its
reserve for credit
segments as commercial and personal. Class of loans and
leases is defined as a subset of the segment that has similar risk
characteristics; measurement attributes or risk monitoring
method. The classes within the commercial segment have been
defined as commercial and institutional, commercial real
estate, lease financing, non-US and other. The classes within
the personal segment have been defined as residential real
estate, private client and other.
Loans that are held for investment are reported at the
principal amount outstanding, net of unearned income.
Residential real estate loans classified as held for sale are
reported at the lower of aggregate cost or fair value. Loan
commitments for residential real estate loans that will be
classified as held for sale at the time of funding and which
have an interest-rate lock are recorded on the balance sheet at
fair value with subsequent gains or losses recognized as other
income. Unrealized gains on these loan commitments are
reported as other assets, with unrealized losses reported as
other liabilities. Other unfunded loan commitments that are
not held for sale are carried at the amount of unamortized fees
with a reserve for credit loss liability recognized for any
probable losses.
Interest income on loans is recorded on an accrual basis
unless, in the opinion of management, there is a question as to
the ability of the debtor to meet the terms of the loan agreement,
or interest or principal is more than 90 days contractually past
due and the loan is not well-secured and in the process of
collection. Loans are considered past due if
the required
principal or interest payments have not been received as of the
date such payments are due according to the contractual terms
of the agreement. At the time a loan is determined to be
nonperforming, interest accrued but not collected is reversed
against interest income of the current period and the loan is
classified as nonperforming. Loans are returned to performing
status when factors indicating doubtful collectability no longer
exist. Interest collected on nonperforming loans is applied to
principal unless, in the opinion of management, collectability of
principal is not in doubt.
A loan is considered to be impaired when, based on
current information and events, management determines that
it is probable that Northern Trust will be unable to collect all
amounts due according to the contractual terms of the loan
agreement. A loan is also considered to be impaired if its
terms have been modified as a concession resulting from the
impaired.
remain classified as
debtor’s financial difficulties, referred to as a troubled debt
restructuring. All troubled debt restructurings are considered
impaired loans in the calendar year of their restructuring. In
subsequent years, a troubled debt restructuring may cease
being classified as impaired if the loan was modified at a
market rate and has performed according to the modified
terms for at least six months. A loan that has been modified at
a below market rate will return to performing status if it
satisfies the six month performance requirement; however, it
will
Impaired loans are
measured based upon the loan’s market price, the present
value of expected future cash flows, discounted at the loan’s
effective interest rate, or at the fair value of the collateral if the
loan is collateral dependent. If the loan valuation is less than
the recorded value of the loan, based on the certainty of loss,
either a specific reserve is established, or a charge-off is
recorded, for the difference. Smaller balance (individually less
than $250,000) homogeneous loans are collectively evaluated
for impairment and excluded from impaired loan disclosures
in accordance with applicable accounting standards. Northern
Trust’s accounting policies for impaired loans is consistent
across all classes of loans and leases.
Premiums and discounts on loans are recognized as an
adjustment of yield using the interest method based on the
contractual terms of the loan. Certain direct origination costs
and fees are netted and deferred over the life of the related
loan as an adjustment to the loan’s yield.
Unearned lease income from direct
financing and
leveraged leases is recognized using the interest method. This
method provides a constant rate of return on the unrecovered
investment over the life of the lease. The rate of return and the
allocation of income over the lease term are recalculated from
the inception of the lease if during the lease term assumptions
regarding the amount or timing of estimated cash flows
change. Lease residual values are established at the inception
of the lease based on in-house valuations and market analyses
provided by outside parties. Lease residual values are reviewed
at least annually for other-than-temporary impairment. A
decline in the estimated residual value of a leased asset
determined to be other-than-temporary would be recorded in
the period in which the decline is identified as a reduction of
interest income for leveraged leases and a reduction of other
operating income for direct financing leases.
H. Reserve for Credit Losses. The reserve for credit
losses represents management’s estimate of probable losses
which have occurred as of the date of the consolidated
financial statements. The loan and lease portfolio and other
lending related credit exposures are regularly reviewed to
N O T E S TO C O N S O L I DA T E D FI N A N C I A L S T A T E M E N T S
specific reserves
evaluate the adequacy of the reserve for credit losses. In
determining the level of the reserve, Northern Trust evaluates
the reserve necessary for impaired loans and also estimates
losses inherent in other credit exposures. The result is a
reserve with the following components:
Specific Reserve. The amount of
is
determined through an individual evaluation of loans and
lending-related commitments considered impaired that
is
based on expected future cash flows, the value of collateral,
and other factors that may impact the borrower’s ability
to pay. For impaired loans where the amount of specific
is determined based on the value of the
reserves,
underlying real estate collateral, third-party appraisals are
typically obtained and utilized by management. These
appraisals are generally less than twelve months old and are
subject to adjustments to reflect management’s judgment as to
the realizable value of the collateral.
if any,
Inherent Reserve. The amount of inherent loss reserves is
based primarily on reserve
factors which incorporate
management’s evaluation of historical charge-off experience
and various qualitative
such as management’s
factors
evaluation of economic and business conditions and changes
in the character and size of the loan portfolio. Reserve factors
are applied to loan and lease credit exposures aggregated by
shared risk characteristics and are reviewed quarterly by
Northern Trust’s Loan Loss Reserve Committee which
includes representatives from Credit Policy, business unit
management, and Corporate Financial Management.
Loans,
leases and other extensions of credit deemed
uncollectible are charged to the reserve for credit losses.
Subsequent recoveries, if any, are credited to the reserve. The
provision for credit losses, which is charged to income, is the
amount necessary to adjust the reserve for credit losses to the
level determined through the above process. Actual losses may
vary from current estimates and the amount of the provision
for credit losses may be either greater than or less than actual
net charge-offs.
Northern Trust analyzes its exposure to credit losses from
both on-balance sheet and off-balance sheet activity using a
consistent methodology. In estimating the reserve for credit
losses for undrawn loan commitments and standby letters of
credit, management uses conversion rates to determine the
that will be funded. Reserve factors based on
amount
historical loss experience and specific risk characteristics of the
loan product are utilized to calculate inherent losses related to
unfunded commitments and standby letters of credit as of the
reporting date. The portion of the reserve assigned to loans
and leases is reported as a contra asset, directly following loans
and leases in the consolidated balance sheet. The portion of
NORTHERN TRUST CORPORATION | 2010 ANNUAL REPORT TO SHAREHOLDERS | 75
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the reserve assigned to unfunded commitments and standby
letters of credit
in the
consolidated balance sheet.
reported in other
liabilities
is
I. Standby Letters of Credit. Fees on standby letters of
credit are recognized in other operating income on the
straight-line method over
the underlying
agreements. Northern Trust’s recorded liability for standby
letters of credit, reflecting the obligation it has undertaken, is
measured as the amount of unamortized fees on these
instruments.
the lives of
J. Buildings and Equipment. Buildings and equipment
owned are carried at original cost less accumulated depreciation.
The charge for depreciation is computed on the straight-line
method based on the following range of lives: buildings – 10 to
30 years; equipment – 3 to 10 years; and leasehold improvements
– the shorter of the lease term or 15 years. Leased properties
meeting certain criteria are capitalized and amortized using the
straight-line method over the lease period.
K. Other Real Estate Owned (OREO). OREO is comprised
of commercial and residential real estate properties acquired
in partial or total satisfaction of loans. OREO assets are carried
at the lower of cost or fair value less estimated costs to sell and
are recorded in other assets in the consolidated balance sheet.
Fair value is based on third-party appraisals. Appraisals of
OREO properties are updated on an annual basis and are
subject to adjustments to reflect management’s judgment as to
the realizable value of the properties. Losses identified at the
time of acquisition of such properties are charged against the
losses assigned to loans and leases.
reserve for credit
Subsequent write-downs that may be required to the carrying
value of these assets and gains or losses realized from asset
sales are recorded within other operating expenses.
L. Goodwill and Other Intangible Assets. Goodwill is not
subject
to amortization. Separately identifiable acquired
intangible assets with finite lives are amortized over their
estimated useful
lives, primarily on a straight-line basis.
Purchased software and allowable internal costs, including
compensation relating to software developed for internal use,
are capitalized. Software is amortized using the straight-line
method over the estimated useful lives of the assets, generally
ranging from 3 to 10 years.
Goodwill and other intangible assets are reviewed for
impairment on an annual basis or more frequently if events or
changes in circumstances indicate the carrying amounts may
not be recoverable.
76 | 2010 ANNUAL REPORT TO SHAREHOLDERS | NORTHERN TRUST CORPORATION
M. Assets Under Custody
and Assets Under
Management. Assets held in fiduciary or agency capacities are
not included in the consolidated balance sheet, since such
items are not assets of Northern Trust.
N. Trust, Investment and Other Servicing Fees. Trust,
investment and other servicing fees are recorded on the
accrual basis, over the period in which the service is provided.
Fees are a function of the market value of assets custodied,
managed and serviced, the volume of transactions, securities
lending volume and spreads, and fees for other services
rendered, as set forth in the underlying client agreement. This
revenue recognition involves
the use of estimates and
assumptions, including components that are calculated based
on estimated asset valuations and transaction volumes.
periods. Certain
investment management
Securities lending fees have been impacted by Northern
Trust’s share of unrealized investment gains and losses in one
investment fund that is used in securities lending activities and
accounted for at
fair value. As of September 30, 2010,
securities in the mark-to-market fund had been sold with the
proceeds reinvested into a short duration fund, eliminating
the mark-to-market impact on securities lending revenue in
future
fee
arrangements also may provide performance fees that are
based on client portfolio returns exceeding predetermined
levels. Northern Trust adheres to a policy in which it does not
record any performance-based fee income until the end of the
contract period, thereby eliminating the potential that revenue
will be recognized in one quarter and reversed in a future
quarter. Therefore, Northern Trust does not record any
revenue under incentive fee programs that is at risk due to
future performance contingencies. These arrangements often
contain similar terms for the payment of performance-based
fees to sub-advisors. The accounting for these performance-
based expenses matches
the related
performance-based revenues.
the treatment
for
Client reimbursed out-of-pocket expenses that are an
extension of existing services that are being rendered are
recorded on a gross basis as revenue.
O. Client Security Settlement Receivables. These
receivables represent other collection items presented on
behalf of custody clients and settled through withdrawals from
short term investment funds on a next day basis.
P. Income Taxes. Northern Trust follows an asset and
liability approach to account for income taxes. The objective is
to recognize the amount of taxes payable or refundable for the
current year, and to recognize deferred tax assets and liabilities
resulting from temporary differences between the amounts
reported in the financial statements and the tax bases of assets
and liabilities. The measurement of tax assets and liabilities is
based on enacted tax laws and applicable tax rates.
Tax positions taken or expected to be taken on a tax
return are evaluated based on their likelihood of being
sustained upon examination by tax authorities. Only tax
positions that are considered more-likely-than-not
to be
consolidated financial
recorded in the
sustained are
statements. Northern Trust
recognizes any interest and
penalties related to unrecognized tax benefits in the provision
for income taxes.
Q. Cash Flow Statements. Cash and cash equivalents have
been defined as “Cash and Due from Banks”.
R. Pension and Other Postretirement Benefits. Northern
Trust records the funded status of its defined benefit pension
and other postretirement plans on the consolidated balance
sheet. Prepaid pension benefits are reported in other assets
and unfunded pension and postretirement benefit liabilities
are reported in other liabilities. Plan assets and benefit
obligations are measured annually at December 31. Pension
costs are recognized ratably over the estimated working
lifetime of eligible participants.
S. Share-Based Compensation Plans. Northern Trust
recognizes as compensation expense the grant-date fair value of
stock options and other equity-based compensation granted to
employees within the consolidated income statement using a
fair-value-based method. The fair values of stock and stock unit
awards, including performance stock unit awards and director
awards, are based on the price of the Corporation’s stock on the
date of grant. The fair value of stock options is estimated on the
date of grant using the Black-Scholes option pricing model. The
model utilizes weighted-average assumptions regarding the
period of
time that options granted are expected to be
outstanding (expected term) based primarily on the historical
exercise behavior attributable to previous option grants, the
estimated yield from dividends paid on the Corporation’s stock
over the expected term of the options, the expected volatility of
Northern Trust’s stock price over a period equal to the expected
term of the options, and a risk free interest rate based on the U.S.
Treasury yield curve at the time of grant for a period equal to the
expected term of the options granted.
Compensation expense for share-based award grants with
terms that provide for a graded vesting schedule, whereby
portions of the award vest in increments over the requisite
service period, are recognized on a straight-line basis over the
N O T E S TO C O N S O L I DA T E D FI N A N C I A L S T A T E M E N T S
not
have
requisite service period for the entire award. Northern Trust
does not include an estimate of
future forfeitures in its
share-based compensation as historical
recognition of
forfeitures
Share-based
been
compensation is adjusted based on forfeitures as they occur.
Dividend equivalents are paid on stock units on a current
basis prior to vesting and distribution. Cash flows resulting
from the realization of tax deductions from the exercise of
stock options in excess of the compensation cost recognized
(excess tax benefits) are classified as financing cash flows.
significant.
T. Securities Purchased Under Agreements to Resell and
Securities Sold Under Agreements to Repurchase. 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 any 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 of
securities purchased under agreements to resell.
Note 2 – Recent Accounting Pronouncements
loans
losses,
and modifications of
standard, and requires a greater
In July 2010, the FASB issued ASU 2010-20, “Disclosures
about the Credit Quality of Financing Receivables and the
Allowance for Credit Losses”. ASU 2010-20 requires loans and
leases to be disclosed by segment and class, each as defined
within the
level of
disaggregated information about the credit quality of loans
and leases and the reserves for credit
including
increased disclosure of credit quality indicators, past due
information,
and leases.
Disclosures required by ASU 2010-20 that relate to period end
information are effective for interim and annual reporting
periods ending on or after December 15, 2010 and are
presented in Note 5 – Loans and Leases and Note 6 – Reserve
for Credit Losses. Disclosures regarding activity during a
reporting period are effective for interim and annual reporting
periods beginning on or after December 15, 2010. Disclosure
included within ASU 2010-20 regarding
requirements
troubled debt restructurings were deferred by the FASB. Since
ASU 2010-20 addresses financial statement disclosures only,
adoption of this standard effective December 31, 2010 did not
impact Northern Trust’s consolidated financial position or
results of operations.
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Note 3 – Securities
Securities Available for Sale. The following tables summarize the amortized cost, fair values, and remaining maturities of
securities available for sale.
R E C O N C I L I A T I O N O F A M O R T I Z E D C O S T T O F A I R V A L U E S O F S E C U R I T I E S A V A I L A B L E F O R S A L E
(In Millions)
U.S. Government
Obligations of States and Political Subdivisions
Government Sponsored Agency
Corporate Debt
Non-U.S. Government Debt
Residential Mortgage-Backed
Other Asset-Backed
Certificates of Deposit
Auction Rate
Other
Total
(In Millions)
U.S. Government
Obligations of States and Political Subdivisions
Government Sponsored Agency
Corporate Debt
Non-U.S. Government Debt
Residential Mortgage-Backed
Other Asset-Backed
Auction Rate
Other
Total
AMORTIZED
COST
$
667.2
35.4
11,937.0
2,547.7
440.6
308.0
1,606.5
1,402.5
357.0
796.4
$20,098.3
$
AMORTIZED
COST
74.0
45.6
12,278.9
2,820.2
80.6
439.7
1,183.8
409.7
190.0
DECEMBER 31, 2010
GROSS
UNREALIZED
GAINS
GROSS
UNREALIZED
LOSSES
$ 1.0
.9
47.0
7.8
–
.9
1.5
–
14.2
4.2
$77.5
$ 9.8
–
13.3
1.5
–
54.3
2.3
–
3.4
3.7
$ 88.3
DECEMBER 31, 2009
GROSS
UNREALIZED
GAINS
GROSS
UNREALIZED
LOSSES
$
–
1.4
58.9
7.7
–
–
.5
18.2
–
$
–
–
12.4
5.8
–
125.7
3.0
.2
–
FAIR
VALUE
$
658.4
36.3
11,970.7
2,554.0
440.6
254.6
1,605.7
1,402.5
367.8
796.9
$20,087.5
$
FAIR
VALUE
74.0
47.0
12,325.4
2,822.1
80.6
314.0
1,181.3
427.7
190.0
$ 17,522.5
$ 86.7
$147.1
$ 17,462.1
R E M A I N I N G M A T U R I T Y O F S E C U R I T I E S A V A I L A B L E F O R S A L E
(In Millions)
Due in One Year or Less
Due After One Year Through Five Years
Due After Five Years Through Ten Years
Due After Ten Years
Other Securities Without Stated Maturities
DECEMBER 31, 2010
AMORTIZED
COST
$ 9,113.6
10,047.9
569.4
181.9
185.5
FAIR
VALUE
$ 9,100.9
10,055.2
568.1
177.8
185.5
Total
Asset-backed and government sponsored agency mortgage-backed securities are included in the above table taking into account anticipated future prepayments.
$20,098.3
$20,087.5
Auction Rate Securities Purchase Program. Although not
obligated to do so, in 2008 Northern Trust purchased at par
value certain illiquid auction rate securities held for clients
under investment discretion or that were acquired by clients
from Northern Trust’s affiliated broker/dealer. A $54.6
million charge was recorded in 2008 within other operating
expenses reflecting differences between the securities’ par
values and estimated purchase date fair values. Purchased
securities were designated as available for sale and subsequent
to their purchase are reported at fair value with unrealized
gains and losses credited or charged, net of the tax effect, to
AOCI.
78 | 2010 ANNUAL REPORT TO SHAREHOLDERS | NORTHERN TRUST CORPORATION
N O T E S TO C O N S O L I DA T E D FI N A N C I A L S T A T E M E N T S
Federal Reserve and Federal Home Loan Bank Stock. Stock in Federal Reserve and Federal Home Loan Banks, included at cost
within other securities available for sale above, totaled $42.5 million and $143.0 million, respectively, as of December 31, 2010, and
$42.6 million and $147.0 million, respectively, as of December 31, 2009. Since October 2007, the Federal Home Loan Bank of
Chicago (FHLBC) has been under a consensual cease and desist order with its regulator, the Federal Housing Finance Agency
(FHFA). Under the terms of the order, capital stock repurchases, redemptions of FHLBC stock, and dividend declarations are
subject to prior written approval from the FHFA, and the FHLBC has not declared or paid a dividend since the third quarter of 2007
through December 31, 2010. FHLBC stock totaled $66.6 million and $65.8 million at December 31, 2010 and 2009, respectively, all
of which management believes will ultimately be recovered. On February 1, 2011, the FHLBC announced that its Board of Directors
had declared, and the FHFA had approved, the payment in February 2011 of a nominal cash dividend.
Securities Held to Maturity. The following tables summarize the amortized cost, fair values and remaining maturities of
securities held to maturity.
R E C O N C I L I A T I O N O F A M O R T I Z E D C O S T T O F A I R V A L U E S O F S E C U R I T I E S H E L D T O M A T U R I T Y
(In Millions)
Obligations of States and Political Subdivisions
Government Sponsored Agency
Other
Total
(In Millions)
Obligations of States and Political Subdivisions
Government Sponsored Agency
Other
Total
R E M A I N I N G M A T U R I T Y O F S E C U R I T I E S H E L D T O M A T U R I T Y
(In Millions)
Due in One Year or Less
Due After One Year Through Five Years
Due After Five Years Through Ten Years
Due After Ten Years
AMORTIZED
COST
$ 635.0
169.3
383.3
$1,187.6
AMORTIZED
COST
$
692.6
114.6
354.2
$ 1,161.4
DECEMBER 31, 2010
GROSS
UNREALIZED
GAINS
GROSS
UNREALIZED
LOSSES
$26.2
4.6
–
$30.8
$ .4
.2
10.6
$11.2
DECEMBER 31, 2009
GROSS
UNREALIZED
GAINS
$ 34.5
2.4
–
$ 36.9
GROSS
UNREALIZED
LOSSES
$
.6
.2
11.8
$ 12.6
FAIR
VALUE
$ 660.8
173.7
372.7
$1,207.2
FAIR VALUE
$
726.5
116.8
342.4
$ 1,185.7
DECEMBER 31, 2010
AMORTIZED
COST
$ 204.8
547.7
397.7
37.4
FAIR
VALUE
$ 206.0
560.3
407.2
33.7
$1,207.2
Total
Government sponsored agency mortgage-backed securities are included in the above table taking into account anticipated future prepayments.
$1,187.6
Investment Security Gains and Losses. Losses totaling
$21.2 million, $26.7 million and $61.3 million were
recognized in 2010, 2009 and 2008, respectively, in connection
with the write-down of residential mortgage-backed securities
that were determined to be other-than-temporarily impaired.
Realized security gains totaled $.8 million, $3.3 million, and
$5.0 million in 2010, 2009, and 2008, respectively.
NORTHERN TRUST CORPORATION | 2010 ANNUAL REPORT TO SHAREHOLDERS | 79
N O T E S TO C O N S O L I DA T E D FI N A N C I A L S T A T E M E N T S
Securities with Unrealized Losses. The following tables provide information regarding securities that have been in a continuous
unrealized loss position for less than 12 months, and for 12 months or longer, as of December 31, 2010 and December 31, 2009.
S e c u r i t i e s w i t h U n r e a l i z e d L o s s e s
a s o f D e c e m b e r 3 1 , 2 0 1 0
(In Millions)
U.S. Government
Obligations of States and Political
Subdivisions
Government Sponsored Agency
Corporate Debt
Residential Mortgage-Backed
Other Asset-Backed
Auction Rate
Other
LESS THAN 12 MONTHS
12 MONTHS OR LONGER
TOTAL
FAIR
VALUE
UNREALIZED
LOSSES
FAIR
VALUE
UNREALIZED
LOSSES
FAIR
VALUE
UNREALIZED
LOSSES
$ 492.9
$ 9.8
$
–
$
–
$ 492.9
$ 9.8
3.0
980.7
930.6
–
513.5
77.6
482.2
–
11.0
1.1
–
2.2
3.3
6.8
3.2
328.7
475.2
248.8
27.0
.7
36.5
.4
2.5
.4
54.3
.1
.1
7.5
6.2
1,309.4
1,405.8
248.8
540.5
78.3
518.7
.4
13.5
1.5
54.3
2.3
3.4
14.3
Total
$3,480.5
$34.2
$1,120.1
$ 65.3
$4,600.6
$ 99.5
S e c u r i t i e s w i t h U n r e a l i z e d L o s s e s
a s o f D e c e m b e r 3 1 , 2 0 0 9
LESS THAN 12 MONTHS
12 MONTHS OR LONGER
TOTAL
(In Millions)
Obligations of States and Political
Subdivisions
Government Sponsored Agency
Corporate Debt
Residential Mortgage-Backed
Other Asset-Backed
Auction Rate
Other
FAIR VALUE
$
7.7
810.6
1,220.7
.5
222.1
7.0
4.1
UNREALIZED
LOSSES
FAIR VALUE
UNREALIZED
LOSSES
$
.2
3.0
5.8
1.5
.5
.2
2.7
$
2.6
523.3
–
313.5
570.1
–
34.0
$
.4
9.6
–
124.2
2.5
–
9.1
FAIR VALUE
$
10.3
1,333.9
1,220.7
314.0
792.2
7.0
38.1
Total
$ 2,272.7
$ 13.9
$ 1,443.5
$145.8
$ 3,716.2
UNREALIZED
LOSSES
$
.6
12.6
5.8
125.7
3.0
.2
11.8
$159.7
As of December 31, 2010, 315 securities with a combined
fair value of $4.6 billion were in an unrealized loss position,
with their unrealized losses
totaling $99.5 million. The
majority of the unrealized losses reflect the impact of credit
and liquidity spreads on the valuations of 29 residential
mortgage-backed securities with unrealized losses totaling
$54.3 million, all of which have been in an unrealized loss
position for more than 12 months. Residential mortgage-
backed securities rated below double-A at December 31, 2010
represented 76% of the total fair value of residential mortgage-
backed securities, were comprised primarily of sub-prime and
Alt-A securities, and had a total amortized cost and fair value
of $244.9 million and $194.0 million, respectively. Securities
classified as “other asset-backed” at December 31, 2010 were
predominantly floating rate with average lives less than 5
years, and 100% were rated triple-A.
Unrealized losses of $13.5 million related to government
sponsored agency securities are primarily attributable to
changes in market rates since their purchase. The majority of
the $14.3 million of unrealized losses in securities classified as
“other” at December 31, 2010 relate to securities which
compliance with the
Northern Trust purchases
for
Community Reinvestment Act (CRA). Unrealized losses on
these CRA related other securities are attributable to their
purchase at below market rates for the purpose of supporting
institutions and programs that benefit
low to moderate
income communities within Northern Trust’s market area.
Unrealized losses of $3.4 million related to auction rate
securities primarily reflect reduced market
liquidity as a
majority of auctions continue to fail preventing holders from
liquidating their investments at par. Unrealized losses of $1.5
million within corporate debt securities primarily reflect
widened credit spreads; 88% of the corporate debt portfolio is
backed by guarantees provided by U.S. and non-U.S.
governmental entities. The remaining unrealized losses on
Northern Trust’s securities portfolio as of December 31, 2010
are attributable to changes in overall market interest rates,
increased credit spreads, and reduced market liquidity.
While all securities are considered, the following describes
Northern Trust’s process for identifying credit impairment
within mortgage-backed securities,
including residential
the security type for which
mortgage-backed securities,
Northern Trust has previously
recognized OTTI. To
determine if an unrealized loss on a mortgage-backed security
80 | 2010 ANNUAL REPORT TO SHAREHOLDERS | NORTHERN TRUST CORPORATION
is other-than-temporary, economic models are used to
perform cash flow analyses by developing multiple scenarios
in order to create reasonable forecasts of the security’s future
performance using available data including servicers’
loan
charge off patterns, prepayment speeds, annualized default
the
rates, each security’s current delinquency pipeline,
delinquency pipeline’s growth rate,
rate from
the roll
delinquency to default,
loan loss severities and historical
performance of like collateral, along with Northern Trust’s
outlook for the housing market and the overall economy. If
the present value of future cash flows projected as a result of
this analysis is less than the current amortized cost of the
security, a credit-related OTTI loss is recorded to earnings
equal to the difference between the two amounts.
The factors used in developing the expected loss on
mortgage-backed securities vary by year of origination and
type of collateral. As of December 31, 2010, the expected loss
on subprime and Alt-A portfolios was developed using default
roll rates ranging from 2% to 30% for underlying assets that
are current and ranging from 30% to 100% for underlying
assets that are 30 days or more past due as to principal and
interest payments or in foreclosure. Severities of loss ranging
from 35% to 85% (revised from 45% to 85% as of
December 31, 2009) were assumed for underlying assets that
may ultimately end up in default. During the year ended
December 31, 2010, performance metrics specific to subprime
and Alt-A loans experienced additional deterioration resulting
losses of $21.2 million in
in the recognition of OTTI
connection with 9 residential mortgage-backed securities. This
compares with OTTI losses of $26.7 million recognized in
2009 in connection with 14 residential mortgage-backed
securities.
Credit Losses on Debt Securities. The table below
provides information regarding total other-than-temporarily
including noncredit-related amounts
impaired securities,
recognized in other comprehensive income as well as net
impairment losses recognized in earnings for the years ended
December 31, 2010 and 2009.
(In Millions)
DECEMBER 31,
2010
2009
Changes in Other-Than-Temporary Impairment
Losses*
$ (.8)
$(93.4)
Noncredit-related Losses Recorded in /
(Reclassified from) OCI**
(20.4)
66.7
Net Impairment Losses Recognized in Earnings
* For initial other-than-temporary impairments in the respective period, the
balance includes the excess of the amortized cost over the fair value of the
impaired securities. For subsequent impairments of the same security, the
(21.2)
(26.7)
N O T E S TO C O N S O L I DA T E D FI N A N C I A L S T A T E M E N T S
balance includes any additional changes in fair value of the security subsequent
to its most recently recorded OTTI.
** For initial other-than-temporary impairments in the respective period, the
balance includes the portion of the excess of amortized cost over the fair value of
the impaired securities that was recorded in OCI. For subsequent impairments
of the same security, the balance includes additional changes in OCI for that
security subsequent to its most recently recorded OTTI.
Provided in the table below are the cumulative credit-
related losses recognized in earnings on debt securities other-
than-temporarily impaired.
($ In Millions)
Cumulative Credit-Related Losses on Securities –
Beginning of Period*
Plus: Losses on Newly Identified Impairments
Additional Losses on Previously Identified
PERIOD ENDED DECEMBER 31,
2010
2009
$73.0
3.3
$46.3
20.2
Impairments
17.9
6.5
Cumulative Credit-Related Losses on Securities –
End of Period
$94.2
$73.0
* Beginning of period for 2009 was April 1, 2009, consistent with the effective
date of FSP FAS115-2.
The
table
below provides
information regarding
available-for-sale debt securities held as of December 31, 2010
and 2009, for which an other-than-temporary impairment loss
had been recognized in the year presented or previously.
(In Millions)
Fair Value
Amortized Cost Basis
Noncredit-related (Losses) Recognized in OCI
Tax Effect
DECEMBER 31,
2010
$ 79.9
113.3
(33.4)
12.2
2009
$ 78.7
145.1
(66.4)
24.4
Amount Recorded in OCI
$ (21.2)
$ (42.0)
Note 4 – Securities Purchased Under Agreements
to Resell and Securities Sold Under Agreements to
Repurchase
Securities purchased under agreements to resell and securities
sold under agreements to repurchase are recorded at the
amounts at which the securities were acquired or sold plus
accrued interest. To minimize any potential credit risk
the
associated with these transactions,
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 of securities purchased under
agreements to resell.
the fair value of
NORTHERN TRUST CORPORATION | 2010 ANNUAL REPORT TO SHAREHOLDERS | 81
N O T E S TO C O N S O L I DA T E D FI N A N C I A L S T A T E M E N T S
The following tables summarize information related to
securities purchased under agreements to resell and securities
sold under agreements to repurchase.
S E C U R I T I E S P U R C H A S E D U N D E R
A G R E E M E N T S T O R E S E L L
($ In Millions)
DECEMBER 31
2010
2009
Balance at December 31
Average Balance During the Year
Average Interest Rate Earned During the Year
Maximum Month-End Balance During the Year
$152.1
277.3
$ 227.4
311.5
.17%
578.0
.15%
579.7
The components of the net investment in direct finance
and leveraged leases are as follows:
(In Millions)
Direct Finance Leases:
Lease Receivable
Residual Value
Initial Direct Costs
Unearned Income
DECEMBER 31
2010
2009
$ 148.4
176.1
1.8
(44.9)
$ 133.9
138.7
1.0
(38.9)
Investment in Direct Finance Leases
$ 281.4
$ 234.7
S E C U R I T I E S S O L D U N D E R
A G R E E M E N T S T O R E P U R C H A S E
($ In Millions)
DECEMBER 31
2010
2009
Leveraged Leases:
Net Rental Receivable
Residual Value
Unearned Income
353.0
743.8
(314.5)
356.6
743.4
(330.3)
Balance at December 31
Average Balance During the Year
Average Interest Rate Paid During the Year
Maximum Month-End Balance During the Year
$954.4
626.8
$1,037.5
737.7
.17%
.16%
954.4
1,037.5
Note 5 – Loans and Leases
Amounts outstanding for loans and leases, by segment and
class, are shown below.
(In Millions)
Commercial
Commercial and Institutional
Commercial Real Estate
Lease Financing, net
Non-U.S.
Other
Total Commercial
Personal
Residential Real Estate
Private Client
Other
Total Personal
Total Loans and Leases
Reserve for Credit Losses Assigned to
Loans and Leases
Net Loans and Leases
DECEMBER 31
2010
2009
$ 5,914.5
3,242.4
1,063.7
1,046.2
346.6
$ 6,312.1
3,213.2
1,004.4
728.5
457.5
11,613.4
11,715.7
10,854.9
5,423.7
240.0
10,807.7
5,004.4
277.9
16,518.6
16,090.0
$28,132.0
$27,805.7
(319.6)
(309.2)
$27,812.4
$27,496.5
Included within the non-U.S., commercial-other, and
personal-other classes were short duration advances primarily
related to the processing of custodied client investments that
totaled $1.4 billion and $1.0 billion at December 31, 2010 and
2009, respectively. Residential real estate loans classified as
held for sale totaled $2.2 million at December 31, 2010 and
$4.2 million at December 31, 2009 and are included in the
residential real estate class.
82 | 2010 ANNUAL REPORT TO SHAREHOLDERS | NORTHERN TRUST CORPORATION
Investment in Leveraged Leases
$ 782.3
$ 769.7
Lease Financing, net
$1,063.7
$1,004.4
The following schedule reflects the future minimum lease
payments to be received over the next five years under direct
finance leases:
(In Millions)
2011
2012
2013
2014
2015
FUTURE
MINIMUM
LEASE
PAYMENTS
$34.8
27.2
21.2
17.6
13.8
Credit Quality Indicators
Credit quality indicators are statistics, measurements or other
metrics regarding the relative credit risk of loans and leases.
Northern Trust utilizes a variety of credit quality indicators to
assess the credit risk of loans and leases at the segment, class,
and individual credit exposure levels.
As part of its credit process, Northern Trust utilizes an
internal borrower risk rating system to support identification,
approval, and monitoring of credit risk. Borrower risk ratings
are used in credit underwriting and management reporting,
and in the calculation of loss reserves and economic capital.
Risk ratings are used for ranking the credit risk of
borrowers and the probability of their default. Each borrower
is rated using one of a number of ratings models, which
consider both quantitative and qualitative factors. The ratings
models vary among classes of loans and leases in order to
capture the unique risk characteristics inherent within each
particular type of credit exposure. All rating models are
focused on the financial performance and condition of the
borrower, including cash flows, liquidity, capital levels and
financial flexibility, as applicable. The residential real estate
N O T E S TO C O N S O L I DA T E D FI N A N C I A L S T A T E M E N T S
class has a separate re-rating model focused primarily on
borrower payment performance and delinquency status.
While the criteria vary by model, the objective is for the
borrower ratings to be consistent in both the measurement
and ranking of risk. Each model is calibrated to a master
rating scale to support this consistency. Ratings for borrowers
not in default range from “1” for the strongest credits to “7”
for the weakest non-defaulted credits. Ratings of “8” or “9” are
used for defaulted borrowers. Borrower risk ratings are
monitored and are revised when events or circumstances
indicate a change is required. In all cases, risk ratings are
validated at least annually.
December 31, 2010 loan and lease segment and class
balances are provided below, segregated by borrower ratings
into below average risk, average risk, and watch list categories.
(In Millions)
Commercial
Commercial and Institutional
Commercial Real Estate
Lease Financing, net
Non-U.S.
Other
Total Commercial
Personal
Residential Real Estate
Private Client
Other
Total Personal
Total Loans and Leases
BELOW AVERAGE
RISK
AVERAGE
RISK
WATCH
LIST
TOTAL
$ 2,821.5
1,232.8
571.6
430.0
209.5
$ 2,849.8
1,594.3
473.0
596.5
137.1
$ 243.2
415.3
19.1
19.7
–
$ 5,914.5
3,242.4
1,063.7
1,046.2
346.6
5,265.4
5,650.7
697.3
11,613.4
2,896.0
3,326.5
78.1
7,586.9
2,064.1
161.9
372.0
33.1
–
$10,854.9
5,423.7
240.0
6,300.6
9,812.9
405.1
16,518.6
$11,566.0
$15,463.6
$1,102.4
$28,132.0
that are generally equivalent
Borrowers designated as below average risk represent
exposures
in strength to
investment grade ratings and consist of credits with borrower
ratings from “1 – 3”. These credits are expected to exhibit
and are
to modest probabilities of default
minimal
characterized by borrowers having the strongest financial
qualities, including above average financial flexibility, cash
flows and capital levels. Borrowers assigned these ratings are
anticipated to experience very little to moderate financial
pressure in adverse down cycle scenarios.
Borrowers designated as average risk represent exposures
with borrower ratings of “4” and “5”. These credits are
expected to exhibit moderate to acceptable probabilities of
default and are characterized by borrowers with less financial
flexibility than those in the below average risk category. Cash
flows and capital levels are generally sufficient to allow for
borrowers to meet current requirements, but have reduced
cushion in adverse down cycle scenarios.
Borrowers designated as watch list represent exposures
with elevated credit risk profiles that are monitored through
internal watch lists, and consist of credits with borrower
ratings of “6 – 9”. These credits, which include all
nonperforming credits, are expected to exhibit minimally
acceptable probabilities of default, elevated risk of default or
are currently in default. Borrowers associated with these risk
profiles that are not currently in default have limited financial
flexibility. Cash flows and capital levels range from acceptable
to potentially insufficient
to meet current requirements,
particularly in adverse down cycle scenarios.
NORTHERN TRUST CORPORATION | 2010 ANNUAL REPORT TO SHAREHOLDERS | 83
N O T E S TO C O N S O L I DA T E D FI N A N C I A L S T A T E M E N T S
The following tables provide balances and delinquency status of performing and nonperforming loans and leases by segment
and class, as well as the total other real estate owned and nonperforming asset balances, as of December 31, 2010 and 2009.
(In Millions)
DECEMBER 31, 2010
Commercial
Commercial and Institutional
Commercial Real Estate
Lease Financing, net
Non-U.S.
Other
Total Commercial
Personal
Residential Real Estate
Private Client
Other
Total Personal
30 – 59 DAYS
PAST DUE
60 – 89 DAYS
PAST DUE
90 DAYS OR
MORE PAST DUE
CURRENT
PERFORMING NONPERFORMING
TOTAL
TOTAL LOANS
AND LEASES
$ 16.3
24.2
–
–
–
40.5
76.1
35.7
–
111.8
$ 8.2
15.7
–
–
–
23.9
17.2
13.0
–
30.2
$ .8
9.4
–
–
–
$ 5,831.2
3,076.7
1,063.7
1,046.2
346.6
$ 5,856.5
3,126.0
1,063.7
1,046.2
346.6
$ 58.0
116.4
–
–
–
$ 5,914.5
3,242.4
1,063.7
1,046.2
346.6
10.2
11,364.4
11,439.0
174.4
11,613.4
.9
1.9
–
2.8
10,607.4
5,367.8
240.0
10,701.6
5,418.4
240.0
153.3
5.3
–
10,854.9
5,423.7
240.0
16,215.2
16,360.0
158.6
16,518.6
Total Loans and Leases
$152.3
$54.1
$13.0
$27,579.6
$27,799.0
$333.0
$28,132.0
Total Other Real Estate Owned
Total Nonperforming Assets
$ 45.5
$378.5
(In Millions)
DECEMBER 31, 2009
Commercial
Commercial and Institutional
Commercial Real Estate
Lease Financing, net
Non-U.S.
Other
Total Commercial
Personal
Residential Real Estate
Private Client
Other
Total Personal
30 – 59 DAYS
PAST DUE
60 – 89 DAYS
PAST DUE
90 DAYS OR
MORE PAST DUE
CURRENT
TOTAL
PERFORMING
NONPERFORMING
TOTAL LOANS
AND LEASES
$ 73.3
40.2
–
–
–
113.5
85.5
43.5
–
129.0
$ 50.0
5.2
–
–
–
55.2
23.0
16.3
–
39.3
$ 6.9
3.4
–
–
–
$ 6,133.4
3,055.1
1,004.4
728.5
457.5
$ 6,263.6
3,103.9
1,004.4
728.5
457.5
$ 48.5
109.3
–
–
–
$ 6,312.1
3,213.2
1,004.4
728.5
457.5
10.3
11,378.9
11,557.9
157.8
11,715.7
1.6
3.2
–
4.8
10,580.7
4,937.6
277.9
10,690.8
5,000.6
277.9
116.9
3.8
10,807.7
5,004.4
277.9
15,796.2
15,969.3
120.7
16,090.0
Total Loans and Leases
$ 242.5
$ 94.5
$ 15.1
$ 27,175.1
$ 27,527.2
$ 278.5
$ 27,805.7
Total Other Real Estate Owned
Total Nonperforming Assets
$ 29.6
$ 308.1
84 | 2010 ANNUAL REPORT TO SHAREHOLDERS | NORTHERN TRUST CORPORATION
The following tables provide information related to
impaired loans by segment and class as of December 31, 2010
and 2009.
(In Millions)
DECEMBER 31, 2010
With no related specific
reserve:
Commercial and
Institutional
Commercial Real Estate
Residential Real Estate
Private Client
With a related specific
reserve:
Commercial and
Institutional
Commercial Real Estate
Residential Real Estate
Total:
Commercial
Personal
Total
DECEMBER 31, 2009
With no related specific
reserve:
Commercial and
Institutional
Commercial Real Estate
Residential Real Estate
Private Client
With a related specific
reserve:
Commercial and
Institutional
Commercial Real Estate
Residential Real Estate
Private Client
Total:
Commercial
Personal
Total
RECORDED
INVESTMENT
UNPAID PRINCIPAL
BALANCE
SPECIFIC
RESERVE
$ 17.9
43.7
111.9
3.7
41.7
77.2
5.1
180.5
120.7
$301.2
$ 23.4
41.3
70.4
2.5
24.8
67.2
1.7
.8
156.7
75.4
$
$ 26.1
62.4
138.1
3.9
–
–
–
–
47.8
88.9
5.1
19.8
29.5
2.4
225.2
147.1
49.3
2.4
$372.3
$51.7
$
$ 26.4
58.6
73.3
2.5
–
–
–
–
29.0
79.4
1.9
.8
193.4
78.5
12.1
30.6
.8
.3
42.7
1.1
$ 232.1
$ 271.9
$ 43.8
Impaired loans are identified through ongoing credit
management activities including the formal review of past due
and watch list credits. Payment performance and delinquency
status are critical factors in identifying impairment for all
loans and leases, particularly those within the residential real
estate, private client and personal-other classes. Other factors
considered in the determination of impairment for loans and
leases within the commercial and institutional, non-U.S., lease
financing and commercial-other classes are related to the
borrower’s ability to perform under
the
obligation as measured through the assessment of future cash
the terms of
N O T E S TO C O N S O L I DA T E D FI N A N C I A L S T A T E M E N T S
flows, collateral value, market value, and other factors.
Collateral
in identifying
significant
impairment for loans and leases within the commercial real
estate and residential real estate classes.
factor
value
is
a
Included within impaired loans as of December 31, 2010
and December 31, 2009 were $56.3 million and $24.3 million,
respectively, of loans deemed troubled debt restructurings
(TDRs). As of December 31, 2010, there were $33.4 million
nonperforming TDRs and $22.9 million performing TDRs. As
of December 31, 2009, all TDRs were nonperforming. There
were $16.3 million and $27.4 million of unfunded loan
commitments and standby letters of credit at December 31,
2010 and 2009, respectively, issued to borrowers whose loans
were classified as nonperforming or impaired.
The average recorded investment in impaired loans was
$253.8 million and $193.8 million for the years ended
December 31, 2010 and 2009, respectively. Interest income
that would have been recorded on nonperforming loans in
accordance with their original terms totaled approximately
$16.0 million in 2010, $8.0 million in 2009, and $2.7 million
in 2008.
Note 6 – Reserve for Credit Losses
The reserve for credit losses, which represents management’s
estimate of probable losses related to specific borrower
relationships as well as for probable losses inherent in the
various loan and lease portfolios, unfunded commitments,
and standby letters of credit, is determined by management
through a disciplined credit review process.
and loan review activities. The
Northern Trust’s Loan Loss Reserve Committee assesses a
common set of qualitative factors in establishing loan loss
reserves for both the commercial and personal loan segments.
Factors evaluated include those related to external matters,
such as economic conditions and changes in collateral value,
and those related to internal matters, such as changes in asset
quality metrics
risk
characteristics of both loan segments are also evaluated and
include portfolio delinquencies, percentage of portfolio on the
watch list and on nonperforming status, and average borrower
ratings. Loan-to-value levels are considered for collateral-
secured loans and leases in both the personal and commercial
segments. Borrower debt service coverage is evaluated in the
personal segment, and cash flow coverage is analyzed in the
commercial segment. Similar risk characteristics by type of
exposure are analyzed when determining the reserve for
unfunded commitments and standby letters of credit. These
qualitative factors, together with historical loss rates, serve as
the basis for the reserve for credit losses.
NORTHERN TRUST CORPORATION | 2010 ANNUAL REPORT TO SHAREHOLDERS | 85
N O T E S TO C O N S O L I DA T E D FI N A N C I A L S T A T E M E N T S
Changes in the reserve for credit losses were as follows:
(In Millions)
COMMERCIAL
PERSONAL
TOTAL
(In Millions)
2010
2009
2008
Balance at Beginning of Year
Charge-Offs
Recoveries
Net Charge-Offs
Provision for Credit Losses
Effect of Foreign Exchange Rates
$ 340.6
(150.1)
6.9
(143.2)
160.0
(.1)
$ 251.1
(132.3)
6.5
(125.8)
215.0
.3
$160.2
(25.7)
2.5
(23.2)
115.0
(.9)
Balance at End of Year
$ 357.3
$ 340.6
$251.1
Reserve for Credit Losses
Assigned to:
Loans and Leases
Unfunded Commitments and
Standby Letters of Credit
$ 319.6
$ 309.2
$229.1
37.7
31.4
22.0
Total Reserve for Credit Losses
$ 357.3
$ 340.6
$251.1
The following tables provide information regarding the
balances of
losses and recorded
investments in loans and leases by segment as of December 31,
2010 and 2009.
the reserve for credit
(In Millions)
COMMERCIAL
PERSONAL
TOTAL
DECEMBER 31, 2010
Loans and Leases:
Specifically Evaluated for
Impairment
Evaluated for Inherent
Impairment
$
180.5
$
120.7
$
301.2
11,432.9
16,397.9
27,830.8
Total Loans and Leases
11,613.4
16,518.6
28,132.0
Reserve for Credit
Losses on Credit
Exposures:
Specifically Evaluated for
Impairment
Evaluated for Inherent
Impairment
Reserve assigned to loans
and leases
Reserve assigned to
unfunded commitments
and standby letters of
credit
Total Reserve for Credit
Losses
49.3
2.4
51.7
171.4
96.5
267.9
220.7
98.9
319.6
36.0
1.7
37.7
$
256.7
$
100.6
$
357.3
86 | 2010 ANNUAL REPORT TO SHAREHOLDERS | NORTHERN TRUST CORPORATION
DECEMBER 31, 2009
Loans and Leases:
Specifically Evaluated for
Impairment
Evaluated for Inherent
Impairment
$
156.7
$
75.4
$
232.1
11,559.0
16,014.6
27,573.6
Total Loans and Leases
11,715.7
16,090.0
27,805.7
Reserve for Credit Losses
on Credit Exposures:
Specifically Evaluated for
Impairment
Evaluated for Inherent
Impairment
Reserve assigned to loans and
42.7
1.1
$
43.8
180.2
85.2
265.4
leases
222.9
86.3
309.2
Reserve assigned to unfunded
commitments and standby
letters of credit
29.3
2.1
31.4
Total Reserve for Credit Losses
$
252.2
$
88.4
$
340.6
Note 7 – Concentrations of Credit Risk
Concentrations of credit risk exist if a number of borrowers or
other counterparties are engaged in similar activities and have
similar economic characteristics that would cause their ability
to meet contractual obligations to be similarly affected by
changes in economic or other conditions. The fact that a
credit exposure falls into one of
these groups does not
necessarily indicate that the credit has a higher than normal
degree of credit risk. These groups are: commercial real estate,
residential real estate, and banks and bank holding companies.
of
and
the acquisition or
commercial mortgages
Commercial Real Estate. The commercial real estate portfolio
construction,
consists
acquisition and development loans extended primarily to
highly experienced developers and/or investors well known to
Northern Trust. Underwriting standards generally reflect
conservative loan-to-value ratios and debt service coverage
requirements. Recourse to borrowers through guarantees is
also commonly required. Commercial mortgage financing is
provided for
income
from the properties
producing properties. Cash flows
generally are sufficient to amortize the loan. These loans
average approximately $1.4 million each and are primarily
located in the Illinois, Florida, California, and Arizona
markets. Construction, acquisition and development loans
provide financing for commercial real estate prior to rental
income stabilization. The intent is generally that the borrower
refinance the loan through a
will
commercial mortgage with Northern Trust or another
financial institution upon completion.
the project or
refinancing of
sell
The table below provides additional detail regarding
commercial real estate loan types:
(In Millions)
Commercial Mortgages:
Office
Apartment/ Multi-family
Retail
Industrial/ Warehouse
Other
2010
2009
$ 605.3
572.4
517.8
383.7
193.7
$592.7
521.6
453.1
378.1
119.7
Total Commercial Mortgages
2,272.9
2,065.2
Construction, Acquisition and Development
Loans
Single Family Investment
Other Commercial Real Estate Related
591.8
246.8
130.9
678.2
272.5
197.3
Total Commercial Real Estate Loans
$3,242.4
3,213.2
inception. Revaluations of
Residential Real Estate. At December 31, 2010, residential real
estate loans totaled $10.9 billion or 40% of total U.S. loans at
December 31, 2010, compared with $10.8 billion or 40% at
December 31, 2009. Residential real estate loans consist of
conventional home mortgages and equity credit lines, which
generally require a loan to collateral value of no more than
65% to 80% at
supporting
collateral are obtained upon refinancing or default or when
otherwise considered warranted. Collateral revaluations for
mortgages are performed by independent third parties. Of the
total $10.9 billion in residential real estate loans, $4.0 billion
were in the greater Chicago area, $2.9 billion were in Florida,
and $1.4 billion were in California, with the remainder
distributed throughout the other geographic regions within
the U.S.
served by Northern Trust. Legally binding
commitments to extend residential real estate credit, which are
totaled $2.5 billion at
lines,
equity
primarily
December 31, 2010 and 2009.
credit
N O T E S TO C O N S O L I DA T E D FI N A N C I A L S T A T E M E N T S
that
limits are
and/or the Senior Credit Committee. Credit
established through a review process
includes an
internally prepared financial analysis, use of the internal risk
rating system and consideration of external ratings from
rating agencies. Northern Trust places deposits with banks
that have strong internal and external credit ratings and the
average life to maturity of deposits with banks is maintained
on a short-term basis in order to respond quickly to changing
credit conditions.
Note 8 – Buildings and Equipment
A summary of buildings and equipment is presented below.
(In Millions)
Land and Improvements
Buildings
Equipment
Leasehold Improvements
Buildings Leased under
Capital Leases
Total Buildings and
Equipment
(In Millions)
Land and Improvements
Buildings
Equipment
Leasehold Improvements
Buildings Leased under
Capital Leases
Total Buildings and
Equipment
DECEMBER 31, 2010
ORIGINAL
COST
ACCUMULATED
DEPRECIATION
NET BOOK
VALUE
$ 33.5
201.0
342.0
218.6
$
.6
70.6
160.0
99.4
$ 32.9
130.4
182.0
119.2
83.9
43.9
40.0
$879.0
$374.5
$504.5
DECEMBER 31, 2009
ACCUMULATED
DEPRECIATION
NET BOOK
VALUE
$
.8
87.7
185.6
88.3
$ 40.9
169.1
173.4
117.5
ORIGINAL
COST
$ 41.7
256.8
359.0
205.8
83.9
41.3
42.6
$ 947.2
$ 403.7
$ 543.5
Banks and Bank Holding Companies. On-balance sheet credit
risk to banks and bank holding companies, both U.S. and
non-U.S., consists primarily of short-term money market
assets, which totaled $15.5 billion and $13.2 billion at
December 31, 2010 and 2009, respectively, and noninterest-
bearing demand balances maintained at correspondent banks,
which totaled $2.7 billion and $2.4 billion at December 31,
2010 and 2009, respectively. Credit risk associated with U.S.
and non-U.S. banks and bank holding companies deemed to
be counterparties by Credit Policy is managed by the
Counterparty Risk Management Committee. Credit
risk
associated with other U.S. banks and bank holding companies
that maintain commercial credit relationships with Northern
Trust is managed by the relevant Credit Approval Committee
The charge for depreciation, which includes depreciation of
assets recorded under capital leases, amounted to $93.5 million
in 2010, $95.7 million in 2009, and $87.6 million in 2008.
Note 9 – Lease Commitments
At December 31, 2010, Northern Trust was obligated under a
number of non-cancelable operating leases for buildings and
equipment. Certain leases contain rent escalation clauses
based on market indices or increases in real estate taxes and
other operating expenses and renewal option clauses calling
for increased rentals. There are no restrictions imposed by any
lease agreement regarding the payment of dividends, debt
financing or Northern Trust entering into further lease
NORTHERN TRUST CORPORATION | 2010 ANNUAL REPORT TO SHAREHOLDERS | 87
N O T E S TO C O N S O L I DA T E D FI N A N C I A L S T A T E M E N T S
lease commitments as of
agreements. Minimum annual
December 31, 2010 for all non-cancelable operating leases
with a term of 1 year or more are as follows:
Note 10 – Goodwill and Other Intangibles
The changes in the carrying amount of goodwill for the years
ended December 31, 2010 and 2009 were as follows:
CORPORATE
AND
INSTITUTIONAL
SERVICES
PERSONAL
FINANCIAL
SERVICES
TOTAL
$ 322.6
12.1
$ 66.8
.1
$ 389.4
12.2
$334.7
$66.9
$401.6
–
(5.2)
4.6
(.1)
4.6
(5.3)
(In Millions)
Balance at December 31,
2008
Other Changes *
Balance at December 31,
2009
Goodwill Acquired –
Investment Management
Company
Other Changes *
Balance at December 31,
2010
$329.5
$71.4
$400.9
* Includes the effect of foreign exchange rates on non-U.S. dollar denominated
goodwill.
Other intangible assets are included in other assets in the
consolidated balance sheet. The gross carrying amount and
accumulated amortization of other intangible assets subject to
amortization as of December 31, 2010 and 2009 were as
follows:
O T H E R I N T A N G I B L E A S S E T S - S U B J E C T T O A M O R T I Z A T I O N *
(In Millions)
Gross Carrying Amount
Accumulated Amortization
DECEMBER 31
2010
2009
$164.2
111.0
$157.0
96.3
Net Book Value
* Includes the effect of foreign exchange rates on non-U.S. dollar denominated
intangible assets.
$ 53.2
$ 60.7
Other intangible assets consist primarily of the value of
acquired client relationships. Amortization expense related to
other intangible assets was $14.8 million, $16.2 million, and
$17.8 million for the years ended December 31, 2010, 2009,
and 2008, respectively. Amortization expense for the years
2011, 2012, 2013, 2014 and 2015 is estimated to be $11.8
million, $11.6 million, $11.3 million, $11.2 million, and $3.8
million, respectively.
(In Millions)
2011
2012
2013
2014
2015
Later Years
Total Minimum Lease Payments
FUTURE MINIMUM
LEASE PAYMENTS
$ 73.7
74.0
68.5
62.1
55.8
389.5
$723.6
Net rental expense for operating leases included in
occupancy expense amounted to $68.1 million in 2010, $70.2
million in 2009, and $67.6 million in 2008.
One of the buildings and related land utilized for Chicago
operations has been leased under an agreement that qualifies
as a capital lease. The original long-term financing for the
property was provided by the Corporation and the Bank. In
the event of sale or refinancing, the Bank would anticipate
receiving full repayment of any outstanding loans plus 42% of
any proceeds in excess of the original project costs.
The following table reflects the future minimum lease
payments required under capital leases, net of any payments
received on the long-term financing, and the present value of
net capital lease obligations at December 31, 2010.
(In Millions)
2011
2012
2013
2014
2015
Later Years
Total Minimum Lease Payments, net
Less: Amount Representing Interest
Net Present Value under Capital Lease Obligations
FUTURE MINIMUM
LEASE PAYMENTS, NET
$ 7.7
7.9
8.1
8.4
8.3
31.0
71.4
23.3
$48.1
88 | 2010 ANNUAL REPORT TO SHAREHOLDERS | NORTHERN TRUST CORPORATION
Note 11 – Senior Notes and Long-Term Debt
Senior Notes. A summary of senior notes outstanding at
December 31 is presented below.
($ In Millions)
RATE
2010
2009
Corporation-Senior Notes (a) (d)
Fixed Rate Due Aug. 2011 (f)
Fixed Rate Due
Nov. 2012 (g) (k)
Fixed Rate Due Aug. 2013 (h) (k)
Fixed Rate Due May 2014
Fixed Rate Due Nov. 2020 (j)
5.30% $ 249.9
$ 249.7
5.20
5.50
4.63
3.45
214.6
432.2
500.0
499.4
215.3
425.5
500.0
–
Bank-Senior Note (a) (b) (d)
Floating Rate – Sterling
Denominated Due
March 2010
Total Senior Notes
.71
–
161.3
$1,896.1
$1,551.8
Long-Term Debt. A summary of
outstanding at December 31 is presented below.
long-term debt
($ In Millions)
2010
2009
Bank-Subordinated Debt (a) (d)
6.30% Notes due March 2011 (b)
4.60% Notes due Feb. 2013 (b)
5.85% Notes due Nov. 2017 (b) (k)
6.50% Notes due Aug. 2018 (b) (i) (k)
5.375% Sterling Denominated Notes
due March 2015 (e)
Total Bank-Subordinated Debt
Federal Home Loan Bank Borrowings
One Year or Less (Average Rate at Year
End – 4.18% in 2010; 6.53% in
2009)
One to Three Years (Average Rate at
Year End – 4.46% in 2010 and
2009)
Three to Five Years (Average Rate at
Year End – 4.40% in 2010; 4.08%
in 2009)
Five to Ten Years (Average Rate at Year
$ 150.0
200.0
229.5
337.6
$ 150.0
200.0
219.5
321.7
231.6
241.3
1,148.7
1,132.5
426.4
165.0
870.0
1,096.4
135.0
335.0
End – 6.38% in 2010 and 2009)
101.1
101.1
Total Federal Home Loan Bank Borrowings
Capital Lease Obligations (c)
1,532.5
48.1
1,697.5
7.8
Total Long-Term Debt
$2,729.3
$2,837.8
Long-Term Debt Qualifying as Risk-Based
Capital
$ 765.8
$ 892.0
(a) Not redeemable prior to maturity.
(b) Under the terms of its current Offering Circular dated October 29, 2010, the
Bank has the ability to offer from time to time its senior bank notes in an
aggregate principal amount of up to $4.5 billion at any one time outstanding
and up to an additional $1.0 billion of subordinated notes. Each senior note
will mature from 30 days to fifteen years, and each subordinated note will
mature from five years to fifteen years, following its date of original issuance.
Each note will mature on such date as selected by the initial purchaser and
agreed to by the Bank.
(c) Refer to Note 9.
N O T E S TO C O N S O L I DA T E D FI N A N C I A L S T A T E M E N T S
(d) Debt issue costs are recorded as an asset and amortized on a straight-line
basis over the life of the Note.
(e) Notes issued at a discount of .484%.
(f) Notes issued at a discount of .035%.
(g) Notes issued at a discount of .044%.
(h) Notes issued at a discount of .09%.
(i) Notes issued at a discount of .02%
(j) Notes issued at a discount of .117%
(k) Interest-rate swap contracts were entered into to modify the interest expense
on these senior and subordinated notes from fixed rates to floating rates. The
swaps are recorded as fair value hedges and at December 31, 2010, increases in
the carrying values of the senior and subordinated notes outstanding of $47.8
million and $67.4 million, respectively, were recorded. As of December 31,
2009,
increases in the carrying values of senior and subordinated notes
outstanding of $42.1 million and $41.7 million, respectively, were recorded.
Note 12 – Floating Rate Capital Debt
In January 1997, the Corporation issued $150 million of
Floating Rate Capital Securities, Series A, through a statutory
business trust wholly-owned by the Corporation (“NTC
Capital I”). In April 1997,
the Corporation also issued,
through a separate wholly-owned statutory business trust
(“NTC Capital II”), $120 million of Floating Rate Capital
Securities, Series B. The sole assets of
the trusts are
Subordinated Debentures of Northern Trust Corporation that
have the same interest rates and maturity dates as the
corresponding distribution rates and redemption dates of the
Floating Rate Capital Securities. The Series A Securities were
issued at a discount to yield 60.5 basis points above the three-
month London Interbank Offered Rate (LIBOR) and are due
January 15, 2027. The Series B Securities were issued at a
discount to yield 67.9 basis points above the three-month
LIBOR and are due April 15, 2027. Both Series A and B
Securities currently qualify as tier 1 capital for regulatory
purposes. Under the provisions of The Dodd-Frank Wall
Street Reform and Consumer Protection Act,
the tier 1
regulatory capital treatment of these securities will be phased
out over a three-year period beginning on January 1, 2013.
The specifics of the phaseout of tier 1 capital treatment have
not yet been established by bank regulators.
to
has
The
fully,
receive
entitled
irrevocably
preferential
Corporation
and
unconditionally guaranteed all payments due on the Series A
and B Securities. The holders of the Series A and B Securities
are
cash
distributions quarterly in arrears (based on the liquidation
amount of $1,000 per Security) at an interest rate equal to the
rate on the corresponding Subordinated Debentures. The
interest rate on the Series A and Series B securities is equal to
three-month LIBOR plus .52% and .59%, respectively. Subject
to certain exceptions, the Corporation has the right to defer
interest on the Subordinated Debentures at
payment of
cumulative
NORTHERN TRUST CORPORATION | 2010 ANNUAL REPORT TO SHAREHOLDERS | 89
N O T E S TO C O N S O L I DA T E D FI N A N C I A L S T A T E M E N T S
any time or from time to time for a period not exceeding 20
consecutive quarterly periods provided that no extension
period may extend beyond the stated maturity date. If interest
is deferred on the Subordinated Debentures, distributions on
the Series A and B Securities will also be deferred and the
Corporation will not be permitted,
to certain
exceptions, to pay or declare any cash distributions with
respect to the Corporation’s capital stock or debt securities
to the Subordinated
that
Debentures, until all past due distributions are paid. The
Subordinated Debentures are unsecured and subordinated to
substantially all of the Corporation’s existing indebtedness.
rank the same as or
subject
junior
The Corporation has the right to redeem the Series A and
Series B Subordinated Debentures, in whole or in part, at a
price equal to the principal amount plus accrued and unpaid
interest. The following table summarizes the book values of
the outstanding Subordinated Debentures as of December 31,
2010 and 2009:
(In Millions)
DECEMBER 31
2010
2009
NTC Capital I Subordinated Debentures due
January 15, 2027
$153.8
$153.8
NTC Capital II Subordinated Debentures due
April 15, 2027
Total Subordinated Debentures
123.1
123.0
$276.9
$276.8
Note 13 – Stockholders’ Equity
Preferred Stock. The Corporation is authorized to issue
10,000,000 shares of preferred stock without par value. The
Board of Directors of the Corporation is authorized to fix the
particular preferences, rights, qualifications and restrictions
for each series of preferred stock issued. There was no
preferred stock outstanding at December 31, 2010 and 2009.
Common Stock. On May 1, 2009, Northern Trust issued
17,250,000 shares of common stock of the Corporation with a
par value of $1.66 2⁄ 3 per share. The Corporation’s current
increased to
share buyback program authorization was
12.0 million shares in October 2006. Under this program, the
Corporation may purchase an additional 7.2 million shares
after December 31, 2010. The repurchased shares would be
including
used for general purposes of
management of
level and the
the Corporation’s capital
issuance of shares under stock option and other incentive
plans of the Corporation. The average price paid per share for
common stock repurchased in 2010, 2009, and 2008 was
$52.33, $55.05, and $68.68, respectively.
the Corporation,
90 | 2010 ANNUAL REPORT TO SHAREHOLDERS | NORTHERN TRUST CORPORATION
An analysis of changes in the number of shares of
common stock outstanding follows:
Balance at January 1
Common Stock Issuance
Incentive Plan and
Awards
Stock Options Exercised
Treasury Stock
Purchased
Balance at
2010
2009
2008
241,679,942
–
223,263,132
17,250,000
220,608,834
–
300,376
419,846
479,359
938,249
296,621
3,450,608
(131,261)
(250,798)
(1,092,931)
December 31
242,268,903
241,679,942
223,263,132
U.S.
Purchase
Treasury Capital
Program. On
November 14, 2008,
in connection with the Corporation’s
participation in the U.S. Department of the Treasury’s (U.S.
Treasury) Troubled Asset Relief Program’s Capital Purchase
Program (Capital Purchase Program), the Corporation issued
1,576,000 shares of Series B Preferred Stock and a warrant for the
purchase of the Corporation’s common stock to the U.S.
Treasury for total proceeds of $1,576.0 million. The proceeds
received were allocated between the preferred stock and the
warrant based on their relative fair values, which resulted in the
recording of a discount on the preferred stock upon issuance
that reflected the value allocated to the warrant. On June 17,
2009, Northern Trust repaid in full
the $1,576.0 million
preferred share investment made by the U.S. Treasury under the
Capital Purchase Program. On August 26, 2009, Northern Trust
for $87 million, completing the
repurchased the warrant
Corporation’s participation in the Capital Purchase Program.
incorporated
Series B Preferred Stock. The Series B Preferred Stock was
without par value and had a liquidation preference of $1,000
per share. Cumulative dividends on the Series B Preferred
Stock accrued on the liquidation preference at a rate of 5% per
annum for the first five years, and at a rate of 9% per annum
thereafter. The fair value of the Series B Preferred Stock was
determined through the use of a discounted cash flow model.
The model
over
management’s estimate of a five year life of the preferred stock
at the date of issuance and an assumed market yield of 12%.
The discount was accreted using a constant effective yield of
approximately 6.13% over a five year term, consistent with
management’s estimate of the life of the preferred stock at the
date of issuance. Dividends on the preferred stock and the
related accretion of the discount on preferred stock reduced
net income applicable to common stock by $111.1 million and
$12.0 million in 2009 and 2008, respectively.
cash flows
projected
N O T E S TO C O N S O L I DA T E D FI N A N C I A L S T A T E M E N T S
Common Stock Warrant. The warrant issued in connection
with the Capital Purchase Program entitled the U.S. Treasury
to purchase 3,824,624 shares of the Corporation’s common
stock at an exercise price of $61.81 per share. The warrant had
a 10-year term. The fair value of the common stock warrant at
the date of its issuance was determined through the use of a
Black-Scholes valuation model. In addition to the market
price of Northern Trust’s common stock at the date of the
warrant’s issuance, the model utilized an expected term of ten
years, consistent with the term of the warrant, an estimated
yield of 2.19% from dividends paid on the Corporation’s stock
over the expected term of the warrant, which reflected the
Corporation’s strong capital position and the restrictions on
its ability to increase the dividend rate as a result of the
Corporation’s participation in the Capital Purchase Program,
the historical volatility of Northern Trust’s stock price over the
most recent ten-year term as of the date of issuance of 36.06%,
and a risk free interest rate of 3.98% based on a ten-year swap
rate to maturity at the time of the warrant’s issuance.
NORTHERN TRUST CORPORATION | 2010 ANNUAL REPORT TO SHAREHOLDERS | 91
N O T E S TO C O N S O L I DA T E D FI N A N C I A L S T A T E M E N T S
Note 14 – Accumulated Other Comprehensive Income (Loss)
The following table summarizes the components of accumulated other comprehensive income (loss) at December 31, 2010, 2009,
and 2008, and changes during the years then ended.
(In Millions)
DECEMBER 31, 2010
Noncredit-Related Unrealized Losses on Securities OTTI
Other Unrealized Gains (Losses) on Securities Available for Sale, net
Reclassification Adjustments
Net Unrealized Gains (Losses) on Securities Available for Sale
Unrealized Gains (Losses) on Cash Flow Hedge Designations
Reclassification Adjustments
Net Unrealized Gains (Losses) on Cash Flow Hedge Designations
Foreign Currency Translation Adjustments
Pension and Other Postretirement Benefit Adjustments
Net Actuarial (Loss) Gain
Prior Service (Cost) Benefit
Total Pension and Other Postretirement Benefit Adjustments
PERIOD CHANGE
BEGINNING
BALANCE
(NET OF TAX)
$ (42.0)
.3
–
(41.7)
(26.2)
–
(26.2)
11.3
(310.5)
5.5
(305.0)
BEFORE
TAX
AMOUNT
$ 33.0
(8.8)
20.2
44.4
46.7
12.6
59.3
4.0
12.1
(3.5)
8.6
TAX EFFECT
$ (12.2)
3.4
(7.4)
(16.2)
(17.1)
(4.6)
(21.7)
(22.3)
(1.1)
1.3
.2
ENDING
BALANCE
(NET OF TAX)
$ (21.2)
(5.1)
12.8
(13.5)
3.4
8.0
11.4
(7.0)
(299.5)
3.3
(296.2)
Accumulated Other Comprehensive Income (Loss)
$(361.6)
$116.3
$ (60.0)
$(305.3)
DECEMBER 31, 2009
Cumulative Effect of Applying FSP FAS 115-2 (ASC 320-10)
Noncredit-Related Unrealized Losses on Securities OTTI
Other Unrealized Gains (Losses) on Securities Available for Sale, net
Reclassification Adjustments
Net Unrealized Gains (Losses) on Securities Available for Sale
Unrealized Gains (Losses) on Cash Flow Hedge Designations
Reclassification Adjustments
Net Unrealized Gains (Losses) on Cash Flow Hedge Designations
Foreign Currency Translation Adjustments
Pension and Other Postretirement Benefit Adjustments
Net Actuarial (Loss) Gain
Prior Service (Cost) Benefit
Transition Obligation
Total Pension and Other Postretirement Benefit Adjustments
$
–
–
(212.9)
–
(212.9)
(20.7)
–
(20.7)
12.8
(266.5)
(6.4)
(1.2)
(274.1)
$ (15.0)
(66.4)
374.7
(22.9)
270.4
8.2
(16.9)
(8.7)
(38.1)
(46.1)
18.6
1.9
(25.6)
$
5.5
24.4
(137.5)
8.4
(99.2)
(3.0)
6.2
3.2
36.6
2.1
(6.7)
(.7)
(5.3)
$
(9.5)
(42.0)
24.3
(14.5)
(41.7)
(15.5)
(10.7)
(26.2)
11.3
(310.5)
5.5
–
(305.0)
Accumulated Other Comprehensive Income (Loss)
$ (494.9)
$ 198.0
$ (64.7)
$ (361.6)
DECEMBER 31, 2008
Unrealized Gains (Losses) on Securities Available for Sale
Reclassification Adjustments
Net Unrealized Gains (Losses) on Securities Available for Sale
Unrealized Gains (Losses) on Cash Flow Hedge Designations
Reclassification Adjustments
Net Unrealized Gains (Losses) on Cash Flow Hedge Designations
Foreign Currency Translation Adjustments
Pension and Other Postretirement Benefit Adjustments
Net Actuarial (Loss) Gain
Prior Service Cost
Transition Obligation
Total Pension and Other Postretirement Benefit Adjustments
$ (28.7)
–
$ (348.9)
56.3
$ 129.1
(20.7)
$ (248.5)
35.6
(28.7)
(3.0)
–
(3.0)
21.2
(71.0)
(7.1)
(1.7)
(79.8)
(292.6)
(9.7)
(18.5)
(28.2)
91.9
(310.1)
1.4
.8
(307.9)
108.4
3.6
6.9
10.5
(100.3)
114.6
(.7)
(.3)
113.6
(212.9)
(9.1)
(11.6)
(20.7)
12.8
(266.5)
(6.4)
(1.2)
(274.1)
Accumulated Other Comprehensive Income (Loss)
$ (90.3)
$ (536.8)
$ 132.2
$ (494.9)
92 | 2010 ANNUAL REPORT TO SHAREHOLDERS | NORTHERN TRUST CORPORATION
N O T E S TO C O N S O L I DA T E D FI N A N C I A L S T A T E M E N T S
Note 15 – Net Income Per Common Share
The computations of net income per common share are presented below.
(In Millions Except Share Information)
2010
2009
2008
Basic Net Income Per Common Share
Average Number of Common Shares Outstanding
Net Income
Less: Dividends on Preferred Stock
Net Income Applicable to Common Stock
Less: Earnings Allocated to Participating Securities
Earnings Allocated to Common Shares Outstanding
Basic Net Income Per Common Share
Diluted Net Income Per Common Share
Average Number of Common Shares Outstanding
Plus Stock Option Dilution
Average Common and Potential Common Shares
$
242,028,776
669.5
–
$
235,511,879
864.2
(111.1)
$
221,446,382
794.8
(12.0)
$
669.5
5.6
663.9
2.74
753.1
5.3
747.8
3.18
782.8
6.3
776.5
3.51
242,028,776
473,755
235,511,879
904,150
221,446,382
2,607,048
242,502,531
236,416,029
224,053,430
Earnings Allocated to Common and Potential Common Shares
Diluted Net Income Per Common Share
Note: Common stock equivalents totaling 8,392,686, 7,146,701, and 3,431,701 for the years ended December 31, 2010, 2009, and 2008, respectively, were not included
in the computation of diluted earnings per share because their inclusion would have been antidilutive.
663.9
2.74
747.8
3.16
776.5
3.47
$
$
$
Note 16 – Net Interest Income
The components of net interest income were as follows:
(In Millions)
Interest Income
Loans and Leases
Securities – Taxable
– Non-Taxable
Time Deposits with Banks
Federal Reserve Deposits and Other
Total Interest Income
Interest Expense
Deposits
Federal Funds Purchased
Securities Sold under Agreements to Repurchase
Other Borrowings
Senior Notes
Long-Term Debt
Floating Rate Capital Debt
Total Interest Expense
Net Interest Income
2010
2009
2008
$ 932.6
186.0
29.5
134.6
14.0
$1,296.7
$ 201.0
4.8
1.0
5.4
48.6
114.8
2.4
378.0
$ 942.2
208.4
33.5
209.6
12.3
$1,187.2
320.7
35.9
888.2
46.5
1,406.0
2,478.5
207.0
5.7
1.1
4.2
44.0
139.9
4.3
406.2
1,116.0
32.2
22.7
22.5
44.3
150.1
11.6
1,399.4
$ 918.7
$ 999.8
$1,079.1
NORTHERN TRUST CORPORATION | 2010 ANNUAL REPORT TO SHAREHOLDERS | 93
N O T E S TO C O N S O L I DA T E D FI N A N C I A L S T A T E M E N T S
Note 17 – Other Operating Income
The components of other operating income were as follows:
(In Millions)
2010
2009
2008
Loan Service Fees
Banking Service Fees
Non-Trading Foreign Exchange Gains
$ 60.3
57.3
$ 52.1
53.1
$ 30.0
39.4
(Losses), net
(2.8)
(1.4)
36.1
Credit Default Swap Gains (Losses),
net
Other Income
(1.7)
33.2
(4.6)
37.6
35.4
46.0
Total Other Operating Income
$146.3
$136.8
$186.9
Note 18 – Other Operating Expenses
The components of other operating expenses were as follows:
(In Millions)
2010
2009
2008
Business Promotion
FDIC Insurance Premiums
Staff Related
Other Intangibles Amortization
Capital Support Agreements
Securities Lending Client Support
Auction Rate Securities Purchase
Program
Other Expenses
$ 81.0
33.9
37.4
14.4
–
–
–
103.3
$ 66.6
54.1
31.3
16.2
(109.3)
–
$ 87.8
5.6
38.1
17.8
314.1
167.6
–
77.4
54.6
100.7
Total Other Operating Expenses
$270.0
$ 136.3
$786.3
Note 19 – Visa Membership
In 2007, Northern Trust, as a member of Visa U.S.A. Inc.
(Visa U.S.A.) and in connection with an initial public offering
of Visa, Inc. (Visa), received shares of restricted stock in Visa,
a portion of which was redeemed pursuant to a mandatory
redemption. The proceeds of the redemption totaled $167.9
million and were recorded as a gain in the first quarter of
2008. The remaining Visa shares held by Northern Trust were
recorded at their original cost basis of zero. These shares have
restrictions as to their sale or transfer and the ultimate
realization of their value is subject to future adjustments based
on the resolution of outstanding indemnified litigation.
Northern Trust, in conjunction with other member banks
of Visa U.S.A., is obligated to share in losses resulting from
certain indemnified litigation involving Visa and is also
required to recognize the contingent obligation to indemnify
Visa for potential
losses arising from other indemnified
litigation that has not yet settled at its estimated fair value in
accordance with GAAP. During 2007, Northern Trust
recorded charges and corresponding liabilities of $150 million
relating to Visa indemnified litigation. Visa has established an
94 | 2010 ANNUAL REPORT TO SHAREHOLDERS | NORTHERN TRUST CORPORATION
escrow account to fund the settlements of, or judgments in,
the indemnified litigation. The funding by Visa of its escrow
account has resulted in reductions of Northern Trust’s Visa
related indemnification liability and of the future realization
of the value of outstanding shares of Visa common stock held
by Northern Trust as a member bank of Visa U.S.A.
Reductions of Northern Trust’s
indemnification liability
totaling $33.0 million, $17.8 million, and $76.1 million were
recorded in 2010, 2009, and 2008, respectively. Northern
Trust’s net Visa related indemnification liability,
included
within other liabilities in the consolidated balance sheet,
totaled $23.1 million and $56.1 million at December, 2010 and
2009, respectively.
It is expected that required additional contributions to the
litigation escrow account will result in additional adjustments
to Northern Trust’s Visa related liability and to the future
realization of the value of the outstanding Visa shares. While
the ultimate resolution of outstanding Visa related litigation is
highly uncertain and the estimation of any potential losses is
highly judgmental, Northern Trust anticipates that the value
of its remaining shares of Visa stock will be more than
adequate to offset any remaining indemnification liabilities
related to Visa litigation.
Note 20 – Income Taxes
The following table reconciles the total provision for income
taxes recorded in the consolidated statement of income with
the amounts computed at
tax rate
of 35%.
the statutory federal
(In Millions)
2010
2009
2008
Tax at Statutory Rate
Tax Exempt Income
Leveraged Lease Adjustments
Foreign Tax Rate Differential
State Taxes, net
Other
$346.4
(10.8)
(.8)
(20.1)
17.3
(11.7)
$439.3
(11.9)
(4.8)
(20.9)
9.8
(20.5)
$446.5
(12.4)
61.3
(47.8)
18.3
15.0
Provision for Income Taxes
$320.3
$391.0
$480.9
state,
various
The Corporation files income tax returns in the U.S.
federal,
and foreign jurisdictions. The
Corporation is no longer subject to income tax examinations
by U.S. federal, state, or local, or by non-U.S. tax authorities
for years before 1997.
Included in other liabilities within the consolidated
balance sheet at December 31, 2010 and 2009 were $89.9
million and $88.9 million of unrecognized tax benefits,
respectively. If recognized, 2010 and 2009 net income would
increased by $22.6 million and $20.1 million,
have
respectively, resulting in a decrease of those years’ effective
income tax rates. A reconciliation of the beginning and ending
amount of unrecognized tax benefits is as follows:
(In Millions)
Balance at January 1
Additions for Tax Positions Taken in Current Year
Additions for Tax Positions Taken in Prior Years
Reductions for Tax Positions Taken in Prior Years
Reductions Resulting from Expiration of Statutes
Balance at December 31
2010
2009
$88.9
.2
7.1
(6.0)
(.3)
$ 334.9
–
.6
(246.1)
(.5)
$89.9
$ 88.9
As part of its audit of federal tax returns filed from 1997-
2004,
the Internal Revenue Service (IRS) challenged the
Corporation’s tax position with respect to certain structured
leasing transactions and proposed to disallow certain tax
In
deductions and assess related interest and penalties.
September 2009,
the Corporation reached a settlement
agreement with the IRS with respect to certain of these
transactions, resulting in the acceleration of $88.6 million in
tax payments to the IRS. The acceleration of tax payments did
not affect net income. The Corporation is in settlement
discussions with the IRS Appeals Office regarding the
remaining disputed structured leasing transactions. The
Corporation believes it has appropriate reserves to cover its
tax liabilities, including liabilities related to structured leasing
transactions,
and penalties. The
Corporation anticipates that the IRS will continue to disallow
deductions relating to the remaining challenged leases and
possibly
transactions with similar
characteristics as part of its audit of tax returns filed after
2004. The Corporation believes that these transactions are
valid leases for U.S. tax purposes and that its tax treatment of
these transactions is appropriate based on its interpretation of
the tax regulations and legal precedents; a court or other
judicial authority, however, could disagree.
and related interest
include other
lease
Included in the unrecognized tax benefits at January 1,
2010 were $67.9 million of U.S. federal and state tax positions
related to the leveraged leasing tax deductions. During 2010,
other adjustments reduced this balance by $1.2 million which
resulted in a remaining leveraged lease related uncertain tax
position balance of $66.7 million as of December 31, 2010.
Due to the settlement discussions that have taken place with
the IRS Appeals Office, it is anticipated that these remaining
unrecognized tax benefits related to leasing will be settled in
2011. It is possible that additional changes in the amount of
leveraged lease related uncertain tax positions and related cash
flows could occur in the next twelve months if Northern Trust
terminates some or all of these leases, is not able to resolve this
matter with the IRS, or if management becomes aware of new
N O T E S TO C O N S O L I DA T E D FI N A N C I A L S T A T E M E N T S
information that would lead it to change its assumptions
regarding the timing or amount of any potential payments to
the IRS. Management does not believe that future changes, if
any, would have a material effect on the consolidated financial
position or liquidity of Northern Trust, although they could
have a material effect on operating results for a particular
period. Other unrecognized tax benefits had net increases of
$2.2 million, resulting in a remaining balance of $23.2 million
at December 31, 2010.
Included in unrecognized tax benefits at January 1, 2009
were $292.0 million of U.S. federal and state tax positions
related to leveraged leasing tax deductions. During 2009,
Northern Trust sold certain of the structured leases challenged
by the IRS. In connection with these sales, the amount of
leveraged lease related uncertain tax positions was reduced by
$136.2 million. The acceleration of tax payments relating to
the sold leases did not affect net income. As a result of the
settlement agreement reached in the third quarter of 2009, the
amount of leveraged lease related uncertain tax positions was
reduced by an additional $88.6 million. Other unrecognized
tax benefits had net decreases of $21.9 million, resulting in a
remaining balance of $21.0 million at December 31, 2009.
revisions
GAAP requires a reallocation of lease income from the
inception of a leveraged lease if during its term the expected
timing of lease related income tax deductions is revised. The
impacts of
to management’s assumptions are
recorded through earnings in the period in which the
assumptions change. For the year ended December 31, 2010,
revised cash flow estimates regarding the timing and amount
of leveraged lease income tax deductions reduced interest
income by $.9 million and reduced the provision for income
taxes, inclusive of interest and penalties, by $.8 million. For
the year ended December 31, 2009, revised cash flow estimates
regarding the timing and amount of leveraged lease income
tax deductions increased interest income by $1.1 million and
increased the provision for income taxes, inclusive of interest
and penalties, by $1.5 million. For
ended
December 31, 2008, revised cash flow estimates regarding the
leverage lease income tax deductions reduced
timing of
interest income by $38.9 million and increased the provision
for income taxes, including of interest and penalties, by $61.3
million.
year
the
During the years ended December 31, 2010, 2009, and
2008, $.4 million, $1.9 million, and $46.1 million of interest
and penalties, net of tax, were included in the provision for
income taxes. As of December 31, 2010 and 2009, the liability
for the potential payment of interest and penalties totaled
$27.1 million and $27.8 million, net of tax, respectively.
NORTHERN TRUST CORPORATION | 2010 ANNUAL REPORT TO SHAREHOLDERS | 95
N O T E S TO C O N S O L I DA T E D FI N A N C I A L S T A T E M E N T S
Pre-tax earnings of non-U.S. subsidiaries are subject to
U.S. taxation when effectively repatriated. Northern Trust
provides income taxes on the undistributed earnings of
non-U.S. subsidiaries, except to the extent that those earnings
are indefinitely reinvested outside the U.S. Northern Trust
elected to indefinitely reinvest $102.8 million, $103.5 million,
and $185.8 million of 2010, 2009, and 2008 earnings,
respectively, of certain non-U.S. subsidiaries and, therefore,
no U.S. deferred income taxes were recorded on those
earnings. As of December 31, 2010, the cumulative amount of
undistributed
subsidiaries
earnings
approximated $571.6 million. Based on the current U.S.
federal income tax rate, an additional deferred tax liability of
approximately $132.5 million, would have been required as of
December 31, 2010 if Northern Trust had not elected to
indefinitely reinvest those earnings.
pre-tax
these
in
The components of the consolidated provision for income
taxes for each of the three years ended December 31 are as
follows:
(In Millions)
Current Tax Provision:
Federal
State
Non-U.S.
Total
Deferred Tax Provision:
Federal
State
Non-U.S.
Total
2010
2009
2008
$220.0
21.8
66.4
$124.6
(7.1)
89.7
$ 528.8
43.0
100.0
308.2
207.2
671.8
6.2
5.2
.7
162.9
24.1
(3.2)
(185.2)
(5.7)
–
12.1
183.8
(190.9)
Deferred taxes result from temporary differences between
the amounts reported in the consolidated financial statements
and the tax bases of assets and liabilities. Deferred tax
liabilities and assets have been computed as follows:
(In Millions)
2010
2009
2008
DECEMBER 31
Deferred Tax Liabilities:
Lease Financing
Software Development
Accumulated Depreciation
Compensation and Benefits
State Taxes, net
Other Liabilities
$382.4
197.2
40.7
23.3
41.7
41.1
$404.6
180.8
16.1
9.7
34.2
37.1
$424.1
163.8
14.3
–
19.2
47.1
Gross Deferred Tax Liabilities
726.4
682.5
668.5
Deferred Tax Assets:
Reserve for Credit Losses
Compensation and Benefits
Capital Support Agreements
Visa Indemnification
Other Assets
Gross Deferred Tax Assets
Valuation Reserve
Deferred Tax Assets, net of Valuation
124.7
–
–
8.1
51.3
184.1
–
118.5
–
–
19.7
74.1
212.3
–
86.4
71.0
109.9
25.9
153.6
446.8
–
Reserve
184.1
212.3
446.8
Net Deferred Tax Liabilities
$542.3
$470.2
$221.7
No valuation allowance related to deferred tax assets was
recorded at December 31, 2010, 2009, or 2008,
as
management believes it is more likely than not that the
deferred tax assets will be fully realized. At December 31, 2010,
Northern Trust had no net operating loss carryforwards.
Provision for Income Taxes
$320.3
$391.0
$ 480.9
Note 21 – Employee Benefits
In addition to the amounts shown above, tax charges
(benefits) have been recorded directly to stockholders’ equity
for the following items:
(In Millions)
2010
2009
2008
The Corporation and certain of
its subsidiaries provide
various benefit programs, including defined benefit pension,
postretirement health care, and defined contribution plans. A
description of each major plan and related disclosures are
provided below.
Current Tax Benefit for Employee Stock
Options and Other Stock-Based
Plans
Tax Effect of Other Comprehensive
$ (1.2)
$ (4.2)
$ (35.0)
Income
60.0
64.7
(132.2)
Pension. A noncontributory qualified defined benefit
pension plan covers
substantially all U.S. employees of
Northern Trust. Employees of various European subsidiaries
participate in local defined benefit plans, although those plans
were closed in prior years to new participants and have been
closed to future benefit accruals, effective in 2010.
Northern Trust
a noncontributory
also maintains
supplemental pension plan for participants whose retirement
benefit payments under the U.S. plan are expected to exceed
the limits imposed by federal tax law. Northern Trust has a
96 | 2010 ANNUAL REPORT TO SHAREHOLDERS | NORTHERN TRUST CORPORATION
N O T E S TO C O N S O L I DA T E D FI N A N C I A L S T A T E M E N T S
nonqualified trust, referred to as a “Rabbi” Trust, used to hold
assets designated for the funding of benefits in excess of those
permitted in certain of its qualified retirement plans. This
arrangement offers participants a degree of assurance for
payment of benefits in excess of those permitted in the related
qualified plans. As the “Rabbi” Trust assets remain subject to
the claims of creditors and are not the property of the
employees, they are accounted for as corporate assets and are
included in other assets in the consolidated balance sheet.
Total assets in the “Rabbi” Trust related to the nonqualified
pension plan at December 31, 2010 and 2009 amounted to
$65.9 million and $44.1 million, respectively.
The following tables set forth the status, amounts included in AOCI, and net periodic pension expense of the U.S. plan,
non-U.S. plans, and supplemental plan for 2010 and 2009. Prior service costs are being amortized on a straight-line basis over 9
years for the U.S. plan and 8 years for the supplemental plan.
P L A N S T A T U S
($ In Millions)
Accumulated Benefit Obligation
Projected Benefit
Plan Assets at Fair Value
Funded Status at December 31
Weighted-Average Assumptions:
U.S. PLAN
NON-U.S. PLANS
SUPPLEMENTAL PLAN
2010
2009
2010
2009
2010
2009
$659.0
$554.0
$116.1
$100.9
$ 79.6
$ 74.5
762.9
982.1
642.0
821.9
116.1
122.2
134.4
113.7
86.9
–
85.9
–
$219.2
$179.9
$ 6.1
$ (20.7)
$(86.9)
$(85.9)
Discount Rates
Rate of Increase in Compensation Level
Expected Long-Term Rate of Return on Assets
5.50%
4.02
8.00
6.00%
4.02
8.00
5.58%
N/A
6.27
6.05%
4.31
6.60
5.50%
4.02
N/A
6.00%
4.02
N/A
A M O U N T S I N C L U D E D I N A C C U M U L A T E D O T H E R C O M P R E H E N S I V E I N C O M E
U.S. PLAN
NON-U.S. PLANS
SUPPLEMENTAL PLAN
(In Millions)
Net Actuarial Loss
Prior Service Cost
Gross Amount in Accumulated Other Comprehensive Income
Income Tax Effect
2010
$382.1
6.5
388.6
142.6
2009
$375.0
8.1
383.1
141.6
2010
$16.3
–
16.3
2.8
Net Amount in Accumulated Other Comprehensive Income
$246.0
$241.5
$13.5
2009
$31.8
–
31.8
5.0
$26.8
2010
$56.5
1.3
57.8
21.1
$36.7
2009
$57.3
1.5
58.8
20.1
$38.7
N E T P E R I O D I C P E N S I O N E X P E N S E
U.S. PLAN
NON-U.S. PLANS
SUPPLEMENTAL PLAN
($ In Millions)
2010
2009
2008
2010
2009
2008
2010
2009
2008
Service Cost
Interest Cost
Expected Return on Plan Assets
Gain on Plan Curtailment
Amortization:
Net Loss
Prior Service Cost
$ 37.9
36.9
(73.2)
–
20.0
1.6
$ 33.1
33.4
(59.7)
–
12.2
1.2
$ 29.6
30.9
(57.5)
–
8.2
1.3
$ 1.8
6.9
(8.3)
(2.2)
.5
–
$ 3.8
6.7
(8.1)
–
1.3
–
$ 4.4
6.8
(9.3)
–
.3
–
$ 3.2
4.8
N/A
–
6.0
.1
$ 2.6
3.9
N/A
–
3.9
(.1)
$1.9
3.5
N/A
–
2.5
–
Net Periodic Pension Expense (Benefit)
$ 23.2
$ 20.2
$ 12.5
$ (1.3)
$ 3.7
$ 2.2
$14.1
$10.3
$7.9
Weighted-Average Assumptions:
Discount Rates
Rate of Increase in Compensation Level
Expected Long-Term Rate of Return on
6.00%
4.02
6.25%
4.02
6.25%
4.02
6.05%
4.31
5.80%
4.15
5.71%
4.61
6.00%
4.02
6.25%
4.02
6.25%
4.02
Assets
8.00
8.00
8.25
6.60
6.66
7.25
N/A
N/A
N/A
NORTHERN TRUST CORPORATION | 2010 ANNUAL REPORT TO SHAREHOLDERS | 97
N O T E S TO C O N S O L I DA T E D FI N A N C I A L S T A T E M E N T S
Pension expense for 2011 is expected to include approximately $31.7 million and $1.8 million related to the amortization of net
loss and prior service cost balances, respectively, from AOCI.
C H A N G E I N B E N E F I T O B L I G A T I O N
(In Millions)
Beginning Balance
Service Cost
Interest Cost
Actuarial Loss (Gain)
Plan Curtailment
Benefits Paid
Foreign Exchange Rate Changes
Ending Balance
U.S. PLAN
NON-U.S. PLANS
SUPPLEMENTAL PLAN
2010
$642.0
37.9
36.9
80.7
–
(34.6)
–
$762.9
2009
$558.8
33.1
33.4
68.5
–
(51.8)
–
$642.0
2010
$134.4
1.8
6.9
(2.1)
(11.4)
(5.9)
(7.6)
$116.1
2009
$ 91.0
3.8
6.7
29.4
–
(4.3)
7.8
$134.4
2010
$ 85.9
3.2
4.8
5.0
–
(12.0)
–
$ 86.9
2009
$ 68.5
2.6
3.9
22.4
–
(11.5)
–
$ 85.9
E S T I M A T E D F U T U R E B E N E F I T P A Y M E N T S
(In Millions)
2011
2012
2013
2014
2015
2016-2020
U.S.
PLAN
NON-U.S.
PLANS
SUPPLEMENTAL
PLAN
$ 54.8
58.8
65.3
67.0
72.5
403.7
$ 1.7
2.0
2.4
2.2
2.7
17.5
$15.0
15.2
15.6
8.2
7.4
39.1
C H A N G E I N P L A N A S S E T S
(In Millions)
2010
2009
2010
2009
U.S. PLAN
NON-U.S. PLANS
Fair Value of Assets at
Beginning of Period
Actual Return on Assets
Employer Contributions
Benefits Paid
Foreign Exchange Rate
Changes
Fair Value of Assets at End of
$821.9
126.8
68.0
(34.6)
$586.2
112.5
175.0
(51.8)
$113.7
9.3
10.4
(5.9)
$ 87.9
17.8
4.2
(4.3)
–
–
(5.3)
8.1
Period
$982.1
$821.9
$122.2
$113.7
The minimum required contribution for
the U.S.
qualified plan in 2011 is estimated to be zero and the
maximum deductible contribution is estimated at $160
million.
A total return investment strategy approach is employed
for Northern Trust’s U.S. pension plan whereby a mix of U.S.
and non-U.S. equities, fixed income and alternative asset
investments are used to maximize the long-term return of
plan assets for a prudent level of risk. This is accomplished by
diversifying the portfolio across various asset classes, with the
goal of reducing volatility of return, and among various
issuers of securities to reduce principal risk. Northern Trust
utilizes an asset/liability methodology to determine the
investment policies that will best meet its short and long-term
objectives. The process is performed by modeling current and
98 | 2010 ANNUAL REPORT TO SHAREHOLDERS | NORTHERN TRUST CORPORATION
alternative strategies for asset allocation, funding policy and
actuarial methods and assumptions. The financial modeling
uses projections of expected capital market returns and
expected volatility of those returns to determine alternative
asset mixes having the greatest probability of meeting the
plan’s investment objectives. Risk tolerance is established
through careful consideration of plan liabilities, plan funded
status, and corporate financial condition. The intent of this
strategy is to minimize plan expenses by outperforming
growth in plan liabilities over the long run.
(5%), global
The target allocation of plan assets since November 2008,
by major asset category, is 40% U.S. stocks, 21% non-U.S.
stocks, 21% long duration fixed income securities, and 18%
alternative investments, split between private equity funds
(5%), hedge funds
real estate (5%) and
commodities (3%). Equity investments include common
stocks that are listed on an exchange and investments in
comingled funds that invest primarily in publicly traded
equities. Equity investments are diversified across U.S. and
non-U.S. stocks and divided by investment style and market
capitalization. Fixed income securities held include U.S.
treasury securities and investments in comingled funds that
invest in a diversified blend of longer duration fixed income
securities. Alternative investments, including private equity,
hedge funds, global real estate, and commodities, are used
judiciously to enhance long-term returns while improving
portfolio diversification. Private equity assets consist primarily
of investments in limited partnerships that invest in individual
companies in the form of non-public equity or non-public
debt positions. Direct or co-investment in non-public stock by
the plan is prohibited. The plan’s private equity investments
are limited to 20% of the total limited partnership and the
maximum allowable loss cannot exceed the commitment
amount. The plan holds one investment in a hedge fund of
in a
funds, which invests, either directly or indirectly,
diversified portfolio of funds or other pooled investment
vehicles.
Investment in global real estate is designed to provide
stable income returns and added diversification based upon
the historical low correlation between real estate and equity or
fixed income investments. The plan’s global real estate assets
consist of one collective index fund that invests in a diversified
portfolio of global real estate investments, primarily equity
securities.
than
Commodities also improve portfolio diversification as
to changing economic fundamentals
they tend to react
assets. Because
differently
commodity prices
inflation,
investments in commodities are also likely to provide an offset
against inflation. Commodity assets include an investment in
one mutual fund that invests in commodity-linked derivative
instruments, backed by a portfolio of fixed income securities.
traditional
typically
rise with rising
financial
Though not a primary strategy for meeting the plan’s
objectives, derivatives may be used from time to time,
depending on the nature of the asset class to which they relate,
to gain market exposure in an efficient and timely manner, to
hedge foreign currency exposure or interest rate risk, or to
alter the duration of a portfolio. There were no derivatives
held by the plan at December 31, 2010 or 2009.
Investment risk is measured and monitored on an
ongoing basis through annual liability measurements, periodic
asset/liability studies, and quarterly investment portfolio
reviews. Standards used to evaluate the plan’s investment
manager performance include, but are not limited to, the
achievement of objectives, operation within guidelines and
policy, and comparison against a relative benchmark. In
addition, each manager of the investment funds held by the
plan is ranked against a universe of peers and compared to a
relative benchmark. Total plan performance analysis includes
an analysis of the market environment, asset allocation impact
on performance, risk and return relative to other ERISA plans,
and manager impacts upon plan performance.
The following describes the hierarchy of inputs used to
measure fair value and the primary valuation methodologies
used by Northern Trust for plan assets measured at fair value.
Level 1 – Quoted, active market prices for identical assets or
liabilities. The U.S. pension plan’s Level 1 investments include
foreign and domestic common stocks and mutual and
collective trust funds. Foreign and domestic common stocks
are exchange traded and are valued at the closing price
N O T E S TO C O N S O L I DA T E D FI N A N C I A L S T A T E M E N T S
reported by the respective exchanges on the day of valuation.
Share prices of the funds, referred to as a fund’s Net Asset
Value (NAV), are calculated daily based on the closing market
prices and accruals of securities in the fund’s total portfolio
(total value of the fund) divided by the number of fund shares
currently issued and outstanding. Redemptions of the mutual
and collective trust fund shares occur by contract at the
respective fund’s redemption date NAV.
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. The U.S. pension plan’s Level 2
assets include U.S. government securities and mutual and
collective trust funds. U.S. government securities are valued by
incorporates market
a third party pricing source that
observable data such as reported sales of similar securities,
broker quotes and reference data. The inputs used are based
on observable data in active markets. The NAVs of the funds
are calculated monthly based on the closing market prices and
accruals of securities in the fund’s total portfolio (total value
of the fund) divided by the number of fund shares currently
issued and outstanding. Redemptions of the mutual and
collective trust fund shares occur by contract at the respective
fund’s redemption date NAV.
Level 3 inputs – Valuation techniques in which one or more
significant inputs are unobservable in the marketplace. The U.S.
pension plan’s Level 3 assets are private equity and hedge
funds which invest in underlying groups of investment funds
or other pooled investment vehicles that are selected by the
respective funds’ investment managers. The investment funds
and the underlying investments held by these investment
funds are valued at fair value. In determining the fair value of
the underlying investments of
fund’s
investment manager or general partner takes into account the
estimated value reported by the underlying funds as well as
any other considerations that may, in their judgment, increase
or decrease such estimated value.
each fund,
the
While Northern Trust believes its valuation methods for
plan assets are appropriate and consistent with other market
participants,
or
assumptions, particularly as applied to Level 3 assets described
below, could have a material effect on the computation of
their estimated fair values.
different methodologies
the use
of
NORTHERN TRUST CORPORATION | 2010 ANNUAL REPORT TO SHAREHOLDERS | 99
N O T E S TO C O N S O L I DA T E D FI N A N C I A L S T A T E M E N T S
The following table presents the fair values of Northern Trust’s U.S. pension plan assets, by major asset category, and their level
within the fair value hierarchy defined by GAAP as of December 31, 2010 and 2009.
(In Millions)
Equity Securities
U.S.
Non-U.S.
Fixed Income – U.S. Government
Alternative Investments
Private Equity Funds
Hedge Fund
Global Real Estate Fund
Commodity Linked Fund
Cash and Other
Total Assets at Fair Value
(In Millions)
Equity Securities
U.S.
Non-U.S.
Fixed Income – U.S. Government
Alternative Investments
Private Equity Funds
Hedge Fund
Global Real Estate Fund
Commodity Linked Fund
Cash and Other
Total Assets at Fair Value
Note: Certain 2009 amounts were reclassified to be consistent with the 2010 fair value hierarchy categorization.
DECEMBER 31, 2010
LEVEL 1
LEVEL 2
LEVEL 3
TOTAL
$185.2
169.9
–
$221.7
40.6
207.8
$
–
–
–
$406.9
210.5
207.8
–
–
–
39.3
12.8
–
–
41.6
–
–
33.5
29.7
–
–
–
33.5
29.7
41.6
39.3
12.8
$407.2
$511.7
$63.2
$982.1
DECEMBER 31, 2009
LEVEL 1
LEVEL 2
LEVEL 3
TOTAL
$ 98.6
169.2
–
$ 255.5
34.3
127.8
$
–
–
–
$ 354.1
203.5
127.8
–
–
–
36.5
7.7
–
–
34.8
–
–
28.8
28.7
–
–
–
28.8
28.7
34.8
36.5
7.7
$ 312.0
$ 452.4
$ 57.5
$ 821.9
The following table presents the changes in Level 3 assets
for the year ended December 31, 2010 and 2009.
PRIVATE EQUITY
FUNDS
HEDGE FUND
(In Millions)
2010
2009
2010
2009
Fair Value at January 1,
Actual Return on Plan Assets
Net Purchases, Sales, and
$28.8
2.9
$28.7
(4.6)
$28.7
1.0
$26.8
1.9
Settlements
1.8
4.7
–
–
Fair Value at December 31,
Note: The return on plan assets represents the change in the unrealized gain (or
loss) on assets still held at December 31, 2010.
$33.5
$29.7
$28.8
$28.7
A building block approach is employed for Northern
Trust’s U.S. pension plan in determining the long-term rate of
return for plan assets. Historical markets and long-term
historical relationships between equities, fixed income and
other asset classes are studied using the widely-accepted
capital market principle that assets with higher volatility
generate a greater return over the long-run. Current market
100 | 2010 ANNUAL REPORT TO SHAREHOLDERS | NORTHERN TRUST CORPORATION
factors such as inflation expectations and interest rates are
evaluated before long-term capital market assumptions are
return is
determined. The long-term portfolio rate of
established with consideration given to diversification and
rebalancing. The rate is reviewed against peer data and
historical returns to verify the return is reasonable and
appropriate. Based on this approach and the plan’s target asset
allocation, the expected long-term rate of return on assets as
of the plan’s December 31, 2010 measurement date was set at
8.00%.
Postretirement Health Care. Northern Trust maintains
an unfunded postretirement health care plan. Employees
retiring at age 55 or older under the provisions of the U.S.
defined benefit plan who have attained 15 years of service may
be eligible for subsidized postretirement health care coverage.
Effective January 1, 2003, the cost of this benefit is no longer
subsidized by Northern Trust for new employee hires or
employees who were under age 40 at December 31, 2002, or
those who have not attained 15 years of service by their
N O T E S TO C O N S O L I DA T E D FI N A N C I A L S T A T E M E N T S
is no longer subsidized by Northern Trust
termination date. Effective January 1, 2010, the cost of this
benefit
for
employees who will not be at least age 55 with at least 15 years
of service on December 31, 2011. This plan change reduced
the postretirement benefit obligation by $19.0 million at
December 31, 2009. The reduction in liability due to the plan
change fully offset the existing combined prior service cost
and transition obligation balances recorded in AOCI. No
curtailment gain or loss was recorded as the change in liability
was solely attributed to past service and the transition
obligation and prior service cost balances had already been
fully offset. The provisions of this plan may be changed
further at
the discretion of Northern Trust, which also
reserves the right to terminate these benefits at any time.
The following tables set forth the postretirement health
included in AOCI at
care plan status and amounts
December 31, the net periodic postretirement benefit cost of
the plan for 2010 and 2009, and the change in the
accumulated postretirement benefit obligation during 2010
and 2009.
N E T P E R I O D I C P O S T R E T I R E M E N T B E N E F I T E X P E N S E
(In Millions)
Service Cost
Interest Cost
Amortization
Net Loss
Transition Obligation
Prior Service Benefit
2010
2009
2008
$ .8
2.8
$1.7
3.7
$1.7
3.9
2.0
–
(5.2)
.5
.5
(.1)
1.1
.6
(.1)
Net Periodic Postretirement Benefit Expense
$ .4
$6.3
$7.2
C H A N G E I N A C C U M U L A T E D P O S T R E T I R E M E N T
B E N E F I T O B L I G A T I O N
(In Millions)
Beginning Balance
Service Cost
Interest Cost
Actuarial Loss (Gain)
Gross Benefits Paid
Medicare Subsidy
Plan Change
Ending Balance
E S T I M A T E D F U T U R E B E N E F I T P A Y M E N T S
2010
2009
$49.9
.8
2.8
(.6)
(2.1)
.5
–
$ 60.7
1.7
3.7
5.6
(3.0)
.2
(19.0)
$51.3
$ 49.9
P L A N S T A T U S
(In Millions)
Accumulated Postretirement Benefit
Obligation (APBO) at Measurement Date:
Retirees and Dependents
Actives Eligible for Benefits
Actives Not Yet Eligible
Net Postretirement Benefit Liability
2010
2009
$29.4
14.9
7.0
$25.7
15.0
9.2
$51.3
$49.9
(In Millions)
2011
2012
2013
2014
2015
2016-2020
TOTAL
POSTRETIREMENT
MEDICAL
BENEFITS
EXPECTED
PRESCRIPTION
DRUG
SUBSIDY
AMOUNT
$ 4.0
4.3
4.5
4.7
4.8
23.4
$ (.6)
(.7)
(.8)
(.9)
(.9)
(6.3)
A M O U N T S I N C L U D E D I N A C C U M U L A T E D O T H E R
C O M P R E H E N S I V E I N C O M E
(In Millions)
Net Actuarial Loss
Prior Service Benefit
Gross Amount in Accumulated Other
Comprehensive Income
Income Tax Effect
Net Amount in Accumulated Other
Comprehensive Income
2010
2009
$ 13.0
(13.0)
$ 15.6
(18.1)
–
–
–
(2.5)
(.5)
$ (2.0)
$
The income tax effect shown above for 2009 includes the
expected impact of the non-taxable Medicare prescription
drug subsidy.
Net periodic postretirement benefit expense for 2011 is
expected to include approximately $1.8 million related to the
amortization from AOCI of the net loss, and to be decreased
by $5.0 million related to the amortization from AOCI of the
prior service benefit.
The weighted average discount rate used in determining
the accumulated postretirement benefit obligation was 5.50%
at December 31, 2010 and 6.00% at December 31, 2009. For
measurement purposes, an 8.00% annual increase in the cost
of covered medical benefits and a 9.00% annual increase in the
cost of covered prescription drug benefits were assumed for
2010. These rates are assumed to gradually decrease until they
NORTHERN TRUST CORPORATION | 2010 ANNUAL REPORT TO SHAREHOLDERS | 101
N O T E S TO C O N S O L I DA T E D FI N A N C I A L S T A T E M E N T S
reach 5.00% in 2016 for medical and 2018 for prescription
drugs. The health care cost trend rate assumption has an effect
on the amounts
increasing or
decreasing the assumed health care trend rate by one
percentage point in each year would have the following effect.
reported. For example,
(In Millions)
Effect on Total Service and Interest
Cost Components
Effect on Postretirement Benefit
Obligation
1–PERCENTAGE
POINT INCREASE
1–PERCENTAGE
POINT DECREASE
$ .1
2.4
$ (.1)
(2.0)
Defined Contribution Plans. The Corporation and its
subsidiaries maintain various defined contribution plans
covering substantially all employees. The Corporation’s
contribution includes a matching component and a corporate
performance-based component contingent upon meeting
predetermined
estimated
contribution to defined contribution plans is charged to
employee benefits expense and totaled $46.5 million in 2010,
$47.0 million in 2009, and $42.0 million in 2008.
objectives. The
performance
Note 22 – Share-Based Compensation Plans
Northern Trust recognizes as compensation expense the
grant-date fair value of stock options and other equity based
compensation granted to employees within the income
statement using a fair value-based method.
is
administered by
The Amended and Restated Northern Trust Corporation
2002 Stock Plan (the Plan)
the
Compensation and Benefits Committee (Committee) of the
Board of Directors. All employees of the Corporation and its
subsidiaries and all directors of the Corporation are eligible to
receive awards under the Plan. The Plan provides for the grant
of stock options, stock appreciation rights, stock awards, stock
units and performance shares. As detailed below, grants are
outstanding under both the Plan and The Northern Trust
Corporation Amended 1992 Incentive Stock Plan (1992 Plan),
a predecessor plan. The total number of shares of
the
Corporation’s common stock authorized for issuance under
the Plan is 40,000,000. As of December 31, 2010, shares
available for future grant under the Plan totaled 15,365,279.
The following describes Northern Trust’s share-based
payment arrangements and applies to awards under the Plan
and the 1992 Plan, as applicable.
Stock Options. Stock options consist of options to
purchase common stock at prices not less than 100% of the
fair value thereof on the date the options are granted. Options
have a maximum ten-year life and generally vest and become
exercisable in one to four years after the date of grant. In
addition, all options may become exercisable upon a “change
of control” as defined in the Plan or the 1992 Plan. All options
terminate at such time as determined by the Committee and
as provided in the terms and conditions of the respective
option grants.
Total compensation expense for share-based payment
The weighted-average assumptions used for options
arrangements was as follows:
granted during the years ended December 31 are as follows:
(In Millions)
Stock Options
Stock and Stock Unit Awards
Performance Stock Units
Total Share-Based Compensation
Expense
Tax Benefits Recognized
FOR THE YEAR ENDED
DECEMBER 31,
2010
2009
2008
$27.6
25.1
—
$ 27.9
19.7
(22.2)
$19.3
15.0
8.3
$52.7
$19.3
$ 25.4
$ 9.3
$42.6
$15.8
As of December 31, 2010, there was $109.3 million of
unrecognized compensation cost related to unvested share-
the
based compensation arrangements
Corporation’s stock-based compensation plans. That cost is
expected to be recognized as expense over a weighted-average
period of approximately 3 years. Share-based compensation
expense in 2009 includes the reversal of accruals related to
performance stock units granted in 2008 and 2007 which were
not expected to vest.
granted under
102 | 2010 ANNUAL REPORT TO SHAREHOLDERS | NORTHERN TRUST CORPORATION
Expected Term (in Years)
Dividend Yield
Expected Volatility
Risk Free Interest Rate
2010
2009
2008
6.3
7.4
6.8
4.38% 3.51% 2.48%
41.5
40.7
2.64
2.46
27.1
3.16
The expected term of the options represents the period of
time that options granted are expected to be outstanding
based primarily on the historical exercise behavior attributable
to previous option grants. Dividend yield represents the
estimated yield from dividends paid on the Corporation’s
common stock over the expected term of
the options.
Expected volatility is determined based on the historical daily
volatility of Northern Trust’s stock price over a period equal
to the expected term of the option. The risk free interest rate is
based on the U.S. Treasury yield curve at the time of grant for
a period equal to the expected term of the options granted.
N O T E S TO C O N S O L I DA T E D FI N A N C I A L S T A T E M E N T S
The following is a summary of changes in nonvested stock
options for the year ended December 31, 2010.
The following table provides information about stock
options granted, vested, and exercised in the years ended
December 31.
(In Millions, Except Per Share Information)
2010
2009
2008
WEIGHTED-
AVERAGE
GRANT-DATE
FAIR VALUE
PER SHARE
$16.89
14.45
16.68
15.45
$15.89
Weighted Average Grant-Date Per
Share Fair Value of Stock
Options Granted
Fair Value of Stock Options Vested
Stock Options Exercised
Intrinsic Value
Cash Received
Tax Deduction Benefits Realized
$14.45
26.7
$16.94
18.4
$17.16
20.1
5.0
16.9
1.7
11.3
38.9
3.6
98.5
161.9
27.9
NONVESTED SHARES
Nonvested at December 31, 2009
Granted
Vested
Forfeited or Cancelled
SHARES
4,295,914
2,134,234
(1,600,271)
(94,812)
Nonvested at December 31, 2010
4,735,065
A summary of the status of stock options under the Plan and the 1992 Plan at December 31, 2010, and changes during the year
then ended, are presented in the table below.
($ In Millions Except Per Share Information)
Options Outstanding, December 31, 2009
Granted
Exercised
Forfeited, Expired or Cancelled
Options Outstanding, December 31, 2010
Options Exercisable, December 31, 2010
Stock and Stock Unit Awards. Stock or stock unit awards
may be granted by the Committee to participants which
in the Corporation’s
entitle them to receive a payment
common stock or cash under the terms of the Plan and such
the Committee deems
other
terms and conditions as
appropriate. Each stock unit provides
the
the recipient
opportunity to receive one share of stock for each stock unit
that vests. The stock units granted in 2010 vest at a rate equal
to 50% on the third anniversary date of the grant and 50% on
the fourth anniversary date. Stock and stock unit grants
totaled 1,223,539, 646,549, and 205,435, with weighted
average grant-date fair values of $50.67, $56.07, and $70.44
per share, for the years ended December 31, 2010, 2009, and
2008, respectively. The total fair value of shares vested during
the years ended December 31, 2010, 2009, and 2008, was $19.1
million, $25.6 million, and $17.1 million, respectively.
WEIGHTED
AVERAGE
EXERCISE
PRICE
PER SHARE
$55.47
50.97
42.93
67.38
$53.78
$52.68
SHARES
16,653,682
2,134,234
(419,846)
(1,960,716)
16,407,354
11,672,289
WEIGHTED
AVERAGE
REMAINING
CONTRACTUAL
TERM (YEARS)
AGGREGATE
INTRINSIC
VALUE
4.9
3.4
$78.1
$68.8
A summary of the status of outstanding stock and stock
unit awards under the Plan and the 1992 Plan at December 31,
2010, and changes during the year then ended, is presented in
the table below.
($ In Millions)
Stock and Stock Unit Awards Outstanding,
December 31, 2009
Granted
Distributed
Forfeited
AGGREGATE
INTRINSIC
VALUE
$ 68.2
NUMBER
1,301,442
1,223,539
(330,289)
(50,182)
Stock and Stock Unit Awards Outstanding,
December 31, 2010
2,144,510
$118.8
Units Convertible, December 31, 2010
106,266
5.6
NORTHERN TRUST CORPORATION | 2010 ANNUAL REPORT TO SHAREHOLDERS | 103
N O T E S TO C O N S O L I DA T E D FI N A N C I A L S T A T E M E N T S
The following is a summary of nonvested stock and stock
unit awards at December 31, 2010, and changes during the
year then ended.
NONVESTED STOCK
AND STOCK UNITS
Nonvested at
December 31, 2009
Granted
Vested
Forfeited
Nonvested at
NUMBER
1,209,042
1,223,539
(344,155)
(50,182)
WEIGHTED
AVERAGE
REMAINING
VESTING
TERM
(YEARS)
2.2
WEIGHTED
AVERAGE
GRANT-DATE
FAIR VALUE
PER UNIT
$58.54
50.67
55.37
56.12
December 31, 2010
2,038,244
$54.41
2.7
Performance Stock Units. Each performance stock unit
provides the recipient the opportunity to receive one share of
stock for each stock unit
that vests. The number of
performance stock units granted that will vest can range from
0% to 125% of the original award granted based on the level
of attainment of an average earnings per share goal for a three-
year period. Distribution of the award is then made after
vesting. No performance stock units were granted for the year
ended December 31, 2010 or 2009.
A summary of the status of performance stock units under
the Plan at December 31, 2010, and changes during the year
then ended, is presented in the table below.
($ In Millions)
UNITS
Units Outstanding,
December 31, 2009
Granted
Converted
Forfeited
Cancelled
569,138
–
–
(3,335)
(306,314)
Units Outstanding,
December 31, 2010
259,489
Units Convertible,
December 31, 2010
–
WEIGHTED
AVERAGE
REMAINING
VESTING
TERM (YEARS)
AGGREGATE
INTRINSIC
VALUE
.1
–
14.4
–
On January 18, 2011, the Northern Trust Corporation
Compensation Committee determined that the performance
conditions related to the 2008 performance stock unit grant
were not met. As a result, the 259,489 stock units reflected in
the period end units outstanding balance above were
cancelled. After giving effect to the cancellation of the 2008
performance stock unit grants, no performance stock units
remain outstanding.
104 | 2010 ANNUAL REPORT TO SHAREHOLDERS | NORTHERN TRUST CORPORATION
the 2010 annual meeting of
Director Stock Awards. In 2010, stock units with a total
value of $1.2 million (21,131 stock units) that vest on the date
of the 2011 annual meeting of the Corporation’s stockholders
were granted to non-employee directors. In 2009, stock units
with a total value of $1.1 million (19,248 stock units) that
vested on the date of
the
Corporation’s stockholders were granted to non-employee
directors. Stock units granted to non-employee directors do
not have voting rights. Each stock unit entitles a director to
one share of common stock at vesting, unless a director elects
to defer receipt of the shares. Directors may elect to defer the
payment of their annual stock unit grant and cash-based
compensation until
services as director.
termination of
Amounts deferred are converted into stock units representing
shares of common stock of the Corporation. Distributions of
deferred stock units are made in stock. Distributions of the
stock unit account that relate to cash-based compensation are
made in cash based on the fair value of the stock units at the
time of distribution.
Note 23 – Cash-Based Compensation Plans
Various incentive plans provide for cash incentives and
bonuses to selected employees based upon accomplishment
of corporate net
income objectives, business unit goals,
and individual performance. The estimated contributions to
these plans are charged to compensation expense and totaled
$168.4 million in 2010, $168.9 million in 2009, and $155.8
million in 2008.
Note 24 – Contingent Liabilities
In the normal course of business, the Corporation and its
subsidiaries are routinely defendants in or parties to a number
of pending and threatened legal actions, including, but not
limited to, actions brought on behalf of various claimants or
classes of claimants, regulatory matters, employment matters,
and challenges from tax authorities regarding the amount of
taxes due. In certain of these actions and proceedings, claims
for substantial monetary damages or adjustments to recorded
tax liabilities are asserted.
In view of
the inherent difficulty of predicting the
outcome of such matters, particularly matters that will be
decided by a jury and actions that seek very large damages
based on novel and complex damage and liability legal
theories or that
the
state with confidence the eventual
Corporation cannot
outcome of these pending matters, the timing of their ultimate
involve a large number of parties,
resolution, or what the eventual loss, fines or penalties, if any,
related to each pending matter will be.
and reasonably
In accordance with applicable accounting guidance, the
Corporation records accruals for litigation and regulatory
matters when those matters present loss contingencies that are
both probable
estimable. When loss
contingencies are not both probable and reasonably estimable,
the Corporation does not record accruals. No material
accruals have been recorded for pending litigation or
threatened legal actions or regulatory matters. In certain
matters for which the Corporation has recorded an accrual
and other pending matters, there may be a range of possible
losses (including possible losses in excess of amounts accrued),
which either cannot be estimated or, to the extent a range
could possibly be determined,
the range would be so
imprecise, uncertain or wide, that it would not be meaningful.
Based on current knowledge, after consultation with legal
counsel and after taking into account current accruals,
management does not believe that losses, if any, arising from
pending litigation or threatened legal actions or regulatory
matters will have a material adverse effect on the consolidated
financial position or liquidity of the Corporation, although
such matters could have a material adverse effect on the
for a particular period.
Corporation’s operating results
Following is a description of the nature of certain of these
matters.
As previously disclosed, a number of participants in our
securities lending program, which is associated with the
Corporation’s asset
servicing business, have commenced
either individual lawsuits or putative class actions in which
they claim, among other things, that we failed to exercise
prudence in the investment management of the collateral
received from the borrowers of the securities, resulting in
losses that they seek to recover. The cases assert various
contractual, statutory and common law claims,
including
claims for breach of fiduciary duty under common law and
under ERISA. Based on our review of these matters, we believe
we operated our securities lending program prudently and
appropriately. The Corporation has also been cooperating
fully with an SEC investigation related to our securities
lending program.
As discussed in further detail
in Note 19 – Visa
Membership, Northern Trust, as a member bank of Visa
U.S.A., and in conjunction with other member banks,
is
obligated to share in losses resulting from certain indemnified
litigation involving Visa. The estimated fair value of the net
Visa indemnification liability, recorded within other liabilities
in the consolidated balance sheet, was $23.1 million at
December 31, 2010 and $56.1 million at December 31, 2009.
N O T E S TO C O N S O L I DA T E D FI N A N C I A L S T A T E M E N T S
Note 25 – Derivative Financial Instruments
Northern Trust is a party to various derivative financial
instruments that are used in the normal course of business to
meet the needs of its clients; as part of its trading activity for
its own account; and as part of its risk management activities.
These instruments include foreign exchange contracts, interest
rate contracts, and credit default swap contracts.
Northern Trust’s primary risks associated with these
foreign
interest rates,
instruments is the possibility that
exchange rates, or credit
spreads could change in an
unanticipated manner, resulting in higher costs or a loss in the
underlying value of the instrument. These risks are mitigated
by establishing limits, monitoring the level of actual positions
taken against such established limits, and monitoring the level
of any interest rate sensitivity gaps created by such positions.
When establishing position limits, market
liquidity and
volatility, as well as experience in each market, are all taken
into account.
The estimated credit
risk associated with derivative
instruments relates to the failure of the counterparty and the
failure of Northern Trust to pay based on the contractual
terms of
the agreement, and is generally limited to the
unrealized fair value gains and losses on these instruments,
respectively. The amount of credit risk will
increase or
decrease during the lives of the instruments as interest rates,
foreign exchange rates, or credit spreads fluctuate. This risk is
controlled by limiting such activity to an approved list of
counterparties and by subjecting such activity to the same
credit and quality controls as are followed in lending and
investment activities. Credit Support Annex agreements are
currently in place with several counterparties which mitigate
the aforementioned credit risk associated with derivative
activity conducted with those counterparties by requiring that
significant net unrealized fair value gains be supported by
collateral placed with Northern Trust.
All derivative financial instruments, whether designated as
hedges or not, are recorded on the consolidated balance sheet
at fair value within other assets or other liabilities. The
accounting for changes in the fair value of a derivative in the
consolidated statement of income depends on whether the
contract has been designated as a hedge and qualifies for
hedge accounting under GAAP. Northern Trust has elected to
net derivative assets and liabilities when legally enforceable
master netting agreements exist between Northern Trust and
the counterparty. Derivative assets and liabilities recorded on
the consolidated balance sheet were each reduced by $1,818.2
million and $939.8 million as of December 31, 2010 and 2009,
respectively, as a result of master netting agreements in place.
NORTHERN TRUST CORPORATION | 2010 ANNUAL REPORT TO SHAREHOLDERS | 105
reduce its exposure to changes in foreign exchange rates
relating to certain forecasted non-U.S. dollar denominated
revenue and expenditure transactions,
foreign currency
denominated assets and liabilities, and net investments in
non-U.S. affiliates.
interest payment obligations without
Interest Rate Contracts include swap and option contracts.
Interest rate swap contracts involve the exchange of fixed and
floating rate
the
the underlying principal amounts. Northern
exchange of
Trust enters into interest rate swap contracts on behalf of its
clients and also utilizes such contracts to reduce or eliminate
the exposure to changes in the cash flows or fair value of
hedged assets or liabilities due to changes in interest rates.
Interest rate option contracts consist of caps, floors, and
swaptions, and provide for the transfer or reduction of interest
rate risk in exchange for a fee. Northern Trust enters into
option contracts primarily as a seller of interest rate protection
to clients. Northern Trust receives a fee at the outset of the
agreement for the assumption of the risk of an unfavorable
change in interest rates. This assumed interest rate risk is then
mitigated by entering into an offsetting position with an
outside counterparty. Northern Trust may also purchase
option contracts for risk management purposes.
Credit Default Swap Contracts are agreements to transfer
credit default risk from one party to another in exchange for a
fee. Northern Trust enters into credit default swaps with
outside counterparties where the counterparty agrees to
assume the underlying credit exposure of a specific Northern
Trust commercial loan or loan commitment.
Client-Related and Trading Derivative Instruments. In
excess of 97% of Northern Trust’s derivatives outstanding at
December 31, 2010 and 2009, measured on a notional value
basis, relate to client-related and trading activities. These
activities consist principally of providing foreign exchange
services to clients in connection with Northern Trust’s global
custody business. However, in the normal course of business,
Northern Trust also engages in trading of currencies for its
own account.
N O T E S TO C O N S O L I DA T E D FI N A N C I A L S T A T E M E N T S
and
$193.3 million,
Derivative assets and liabilities recorded at December 31, 2010
also reflect reductions of $2,952.7 million and $2,288.2
million, respectively, as a result of cash collateral received
from and deposited with derivative counterparties. This
compares with reductions of derivative assets and liabilities of
$216.2 million
at
December 31, 2009. Additional cash collateral received from
and deposited with derivative counterparties totaling $9.9
million and $.5 million, respectively, of as of December 31,
2010, and $10.8 million and $21.7 million, respectively, as of
December 31, 2009, were not offset against derivative assets
and liabilities on the consolidated balance sheet as the
amounts exceeded the net derivative positions with those
counterparties.
respectively,
Certain master netting agreements Northern Trust enters
into with derivative counterparties contain credit-risk-related
contingent features in which the counterparty has the option
to declare Northern Trust in default and accelerate cash
settlement of our net derivative
liabilities with the
counterparty in the event Northern Trust’s credit rating falls
below specified levels. The aggregate fair value of all derivative
instruments with credit-risk-related contingent features that
were in a liability position was $3.3 billion and $505.6 million
on December 31, 2010 and 2009, respectively. Cash collateral
amounts deposited with derivative counterparties on those
dates included $2.9 billion and $168.7 million posted against
these liabilities, resulting in a net maximum amount of
termination payments that could have been required at
December 31, 2010 and 2009 of $387.1 million and $336.9
million, respectively. Accelerated settlement of these liabilities
would not have a material effect on the consolidated financial
position or liquidity of Northern Trust.
Foreign Exchange Contracts are agreements to exchange
specific amounts of currencies at a future date, at a specified
rate of exchange. Foreign exchange contracts are entered into
primarily to meet the foreign exchange needs of clients.
Foreign exchange contracts are also used for trading purposes
and risk management. For
risk management purposes,
Northern Trust currently uses foreign exchange contracts to
106 | 2010 ANNUAL REPORT TO SHAREHOLDERS | NORTHERN TRUST CORPORATION
N O T E S TO C O N S O L I DA T E D FI N A N C I A L S T A T E M E N T S
The following table shows the notional amounts of client-related and trading derivative financial instruments. Notional
amounts of derivative financial instruments do not represent credit risk, and are not recorded in the consolidated balance sheet.
They are used merely to express the volume of this activity. Credit risk is limited to the positive fair value of the derivative
instrument, which is significantly less than the notional amount.
(In Millions)
Foreign Exchange Contracts
Interest Rate Option Contracts
Interest Rate Swap Contracts
Futures Contracts
DECEMBER 31, 2010
DECEMBER 31, 2009
NOTIONAL
VALUE
$242,007.1
126.1
4,301.7
–
FAIR VALUE
ASSET
LIABILITY
$5,747.9
.1
151.2
–
$5,729.9
.1
148.4
–
NOTIONAL
VALUE
$173,159.1
178.1
4,195.2
.2
FAIR VALUE
ASSET
LIABILITY
$2,032.2
.4
114.9
–
$2,008.5
.4
113.1
–
Total
$246,434.9
$5,899.2
$5,878.4
$177,532.6
$2,147.5
$2,122.0
Changes in the fair value of client-related and trading derivative instruments are recognized currently in income. The following
table shows the location and amount of gains and losses recorded in the consolidated statement of income for the years ended
December 31, 2010 and 2009.
(In Millions)
Foreign Exchange Contracts
Interest Rate Swap Contracts
Total
LOCATION OF DERIVATIVE GAIN/(LOSS)
RECOGNIZED IN INCOME
Foreign Exchange Trading Income
Security Commissions and Trading Income
AMOUNT OF DERIVATIVE GAIN/(LOSS)
RECOGNIZED IN INCOME
DECEMBER 31, 2010
DECEMBER 31, 2009
$382.2
9.3
$391.5
$445.7
4.9
$450.6
Risk Management Derivative Instruments. Northern
Trust uses derivative instruments to hedge its exposure to
foreign currency, interest rate, and credit risk. Certain hedging
relationships are formally designated and qualify for hedge
accounting under GAAP as fair value, cash flow, or net
investment hedges. Other derivatives that are entered into for
risk management purposes as economic hedges are not
formally designated as hedges and, therefore, are accounted
for as trading instruments.
In order to qualify for hedge accounting, a formal
assessment is performed on a calendar quarter basis to verify
that derivatives used in designated hedging transactions
continue to be highly effective in offsetting the changes in fair
value or cash flows of the hedged item. If a derivative ceases to
be highly effective, or if the hedged item matures, is sold, or is
terminated, or if a hedged forecasted transaction is no longer
expected to occur, hedge accounting is terminated and the
derivative is treated as if it were a trading instrument.
NORTHERN TRUST CORPORATION | 2010 ANNUAL REPORT TO SHAREHOLDERS | 107
N O T E S TO C O N S O L I DA T E D FI N A N C I A L S T A T E M E N T S
The following table identifies the types and classifications of derivative instruments designated as hedges and used by Northern
Trust to manage risk, their notional and fair values, and the respective risks addressed.
(In Millions)
Fair Value Hedges
Available for Sale Investment Securities
Senior Notes and Long-Term Subordinated Debt
DECEMBER 31, 2010
DECEMBER 31, 2009
FAIR VALUE
FAIR VALUE
DERIVATIVE
INSTRUMENT
RISK
CLASSIFICATION
NOTIONAL
VALUE
ASSET
LIABILITY
NOTIONAL
VALUE
ASSET
LIABILITY
Interest Rate
Swap Contracts
Interest Rate
Swap Contracts
Interest Rate
$ 860.0
$ 4.8
$14.9
$ 257.7
$
.7
$ 4.2
Interest Rate
1,100.0
129.8
.4
1,100.0
98.1
–
Cash Flow Hedges
Forecasted Foreign Currency Denominated
Transactions
Foreign Exchange
Contracts
Foreign Currency
935.3
19.3
15.2
1,516.7
40.8
42.8
Net Investment Hedges
Net Investments in Non-U.S. Affiliates
Foreign Exchange
Contracts
Foreign Currency
1,390.1
13.0
18.3
1,177.4
2.9
5.2
Total
$4,285.4
$166.9
$48.5
$4,051.8
$142.5
$52.2
In addition to the above, Sterling denominated debt,
totaling $241.8 million and $413.2 million at December 31,
2010 and 2009, respectively, were designated as hedges of the
foreign exchange risk associated with the net investment in
certain non-U.S. affiliates.
Derivatives are designated as fair value hedges to limit
Northern Trust’s exposure to changes in the fair value of assets
and liabilities due to movements in interest rates. For a fair
the derivative
value hedge, changes in the fair value of
instrument and changes in the fair value of the hedged asset or
liability attributable to the hedged risk are recorded currently
in income. The following tables shows the location and
amount of derivative gains and losses recorded in the
consolidated statement of income related to fair value hedges
for the years ended December 31, 2010 and 2009.
(In Millions)
DERIVATIVE INSTRUMENT
2010
LOCATION OF DERIVATIVE
GAIN/(LOSS) RECOGNIZED
IN INCOME
Available for Sale Investment Securities
Senior Notes and Long-Term Subordinated Debt
Interest Rate Swap Contracts
Interest Rate Swap Contracts
Interest Income
Interest Expense
Total
(In Millions)
DERIVATIVE INSTRUMENT
Available for Sale Investment Securities
Senior Notes and Long-Term Subordinated Debt
Interest Rate Swap Contracts
Interest Rate Swap Contracts
Total
2009
LOCATION OF DERIVATIVE
GAIN/(LOSS) RECOGNIZED
IN INCOME
Interest Income
Interest Expense
AMOUNT OF DERIVATIVE GAIN/
(LOSS) RECOGNIZED IN INCOME
$(13.3)
78.8
$ 65.5
AMOUNT OF DERIVATIVE GAIN/
(LOSS) RECOGNIZED IN INCOME
$
5.7
(43.0)
$ (37.3)
the
applies
Northern Trust
“shortcut” method of
accounting, available under GAAP, to substantially all of its
fair value hedges, which assumes there is no ineffectiveness in
a hedge. As a result, changes recorded in the fair value of the
hedged item are equal to the offsetting gain or loss on the
derivative and are reflected in the same line item. For the fair
value hedges that do not qualify for the “shortcut” method of
accounting, Northern Trust utilizes regression analysis, a
“long-haul” method of accounting, in assessing whether these
hedging relationships are highly effective at inception and on
an ongoing basis. Changes recorded in the fair value of the
hedged items for such “long-haul” hedges totaled $.2 million
for the year ended December 31, 2010. There was $.1 million
ineffectiveness recorded during the year ended December 31,
108 | 2010 ANNUAL REPORT TO SHAREHOLDERS | NORTHERN TRUST CORPORATION
N O T E S TO C O N S O L I DA T E D FI N A N C I A L S T A T E M E N T S
2010 and no ineffectiveness recorded during the year ended
December 31, 2009 or 2008 for available for sale investment
securities, senior notes, or subordinated debt.
Derivatives are also designated as cash flow hedges in
order to minimize the variability in cash flows of earning
assets or forecasted transactions caused by movements in
interest or foreign exchange rates. The effective portion of
changes in the fair value of such derivatives is recognized in
AOCI, a component of stockholders’ equity, and there is no
change to the accounting for the hedged item. When the
hedged forecasted transaction impacts earnings, balances in
AOCI are reclassified to the same income or expense
classification as the hedged item. Northern Trust applies the
“shortcut” method of accounting for cash flow hedges of
available for sale securities. For cash flow hedges of forecasted
foreign currency denominated revenue and expenditure
transactions, Northern Trust closely matches all terms of the
hedged item and the hedging derivative at inception and on an
ongoing basis which limits hedge ineffectiveness. To the extent
all terms are not perfectly matched, effectiveness is assessed
using the dollar-offset method and any ineffectiveness is
measured using the hypothetical derivative method. There was
no ineffectiveness recognized in earnings for cash flow hedges
during the years ended December 31, 2010, 2009 or 2008. As
of December 31, 2010, twenty-three months is the maximum
length of time over which the exposure to variability in future
cash flows of
forecasted foreign currency denominated
transactions is being hedged.
The following table provides cash flow hedge derivative gains and losses recognized in AOCI and the amounts reclassified to
earnings during the years ended December 31, 2010 and 2009.
(In Millions)
FOREIGN EXCHANGE
CONTRACTS
INTEREST RATE
SWAP CONTRACTS
FOREIGN EXCHANGE
CONTRACTS
INTEREST RATE
SWAP CONTRACTS
2010
2009
Net Gain/(Loss) Recognized in AOCI
$46.7
$–
$ 8.2
Net Gain/(Loss) Reclassified from AOCI to Earnings
Trust, Investment and Other Servicing Fees
Other Operating Income
Interest Income
Interest Expense
Compensation
Employee Benefits
Equipment and Software Expense
Occupancy Expense
Other Operating Expense
7.2
.2
1.7
.1
(8.2)
(2.1)
(.1)
(1.1)
(4.0)
–
–
–
–
–
–
–
–
–
20.1
1.5
13.6
.1
(35.8)
(10.2)
(.6)
(5.0)
(.8)
Total
$ (6.3)
$–
$(17.1)
$ –
–
–
.2
–
–
–
–
–
–
$.2
During the year ended December 31, 2010, $6.3 million of
net foreign exchange contract losses were reclassified into
earnings as a result of the discontinuance of cash flow hedges
as it was no longer probable that the original forecasted
transactions would occur. Included in the net derivative losses
of $16.9 million reclassified from AOCI during the year ended
December 31, 2009 is $3.0 million of net foreign exchange
contract losses relating to cash flow hedges of forecasted
foreign currency denominated revenue and expenditure
transactions that were discontinued as the original forecasted
transactions were no longer probable of occurring. It is
estimated that a net gain of $2.3 million will be reclassified
into earnings within the next twelve months relating to cash
flow hedges.
contracts
investments
the hedging instrument
Certain foreign exchange
and qualifying
nonderivative instruments are designated as net investment
hedges to minimize Northern Trust’s exposure to variability in
in
the foreign currency translation of net
non-U.S. branches and subsidiaries. The effective portion of
changes in the fair value of
is
recognized in AOCI consistent with the related translation
investment. For net
the hedged net
gains and losses of
investment hedges, all critical terms of the hedged item and
the hedging instrument are matched at inception and on an
ongoing basis to eliminate hedge ineffectiveness. As a result,
no ineffectiveness was recorded for these hedges during the
year ended December 31, 2010, 2009 or 2008. Amounts
recorded in AOCI are reclassified to earnings only upon the
sale or liquidation of an investment in a non-U.S. branch or
subsidiary.
NORTHERN TRUST CORPORATION | 2010 ANNUAL REPORT TO SHAREHOLDERS | 109
N O T E S TO C O N S O L I DA T E D FI N A N C I A L S T A T E M E N T S
The following table provides net investment hedge gains
and losses recognized in AOCI during the years ended
December 31, 2010 and 2009.
(In Millions)
Foreign Exchange Contracts
Sterling Denominated Subordinated Debt
Sterling Denominated Senior Debt
Total
AMOUNT OF HEDGING
INSTRUMENT GAIN/(LOSS)
RECOGNIZED IN AOCI
(BEFORE TAX)
2010
$40.6
9.8
10.5
$60.9
2009
$ (63.9)
(15.5)
(23.3)
$(102.7)
Derivatives not
risk and interest
formally designated as hedges under
GAAP are entered into to manage the foreign currency risk of
non-U.S. dollar denominated assets and liabilities and the
credit
loans and loan
rate
commitments. The following table identifies the types and
classifications of risk management derivative instruments not
formally designated as hedges, their notional and fair values,
and the respective risks addressed.
risk of
DECEMBER 31, 2010
DECEMBER 31, 2009
FAIR VALUE
FAIR VALUE
(In Millions)
DERIVATIVE INSTRUMENT
RISK
CLASSIFICATION
NOTIONAL
VALUE
ASSET
LIABILITY
NOTIONAL
VALUE
ASSET
LIABILITY
Commercial Loans and Loan Commitments
Loan Commitments
Forcasted Foreign Currency Denominated
Transactions
Commercial Loans
Net Investments in Non-U.S. Affiliates
Total
Credit Default Swap Contracts
Forward Contracts
Credit
Interest Rate
$149.5
14.3
$
–
.5
$ 2.8
.2
$127.0
–
$ –
–
$2.2
–
Foreign Exchange Contracts
Foreign Exchange Contracts
Foreign Exchange Contracts
Foreign Currency
Foreign Currency
Foreign Currency
616.1
60.6
61.3
12.3
.1
.2
16.2
.9
.8
$901.8
13.1
$20.9
–
118.7
66.6
312.3
–
2.3
.1
2.4
–
.7
2.3
5.2
Changes in the fair value of derivative instruments not formally designated as hedges are recognized currently in income. The
following table provides the location and amount of gains and losses recorded in the consolidated statement of income for the years
ended December 31, 2010 and 2009.
(In Millions)
Credit Default Swap Contracts
Forward Contracts
Foreign Exchange Contracts
Total
(In Millions)
Credit Default Swap Contracts
Foreign Exchange Contracts
Total
LOCATION OF DERIVATIVE GAIN/(LOSS)
RECOGNIZED IN INCOME
AMOUNT RECOGNIZED IN INCOME
2010
Other Operating Income
Other Operating Income
Other Operating Income
2009
$ (1.7)
.3
(19.7)
$(21.1)
LOCATION OF DERIVATIVE GAIN/(LOSS)
RECOGNIZED IN INCOME
AMOUNT RECOGNIZED IN INCOME
Other Operating Income
Other Operating Income
$ (4.6)
(6.3)
$ (10.9)
Note 26 – Off-Balance Sheet Financial Instruments
Commitments and Letters of Credit. Northern Trust, in
the normal course of business, enters into various types of
commitments and issues letters of credit to meet the liquidity
and credit enhancement needs of its clients. The contractual
amounts of these instruments represent the potential credit
exposure should the instrument be fully drawn upon and the
client default. To control the credit risk associated with
entering into commitments and issuing letters of credit,
Northern Trust subjects such activities to the same credit
quality and monitoring controls as its lending activities.
Commitments and letters of credit consist of
the
following:
Legally Binding Commitments to Extend Credit generally
have fixed expiration dates or other termination clauses. Since
110 | 2010 ANNUAL REPORT TO SHAREHOLDERS | NORTHERN TRUST CORPORATION
a significant portion of the commitments are expected to
expire without being drawn upon, the total commitment
amount does not necessarily represent future loans or liquidity
requirements.
Commercial Letters of Credit are instruments issued by
Northern Trust on behalf of its clients that authorize a third
party (the beneficiary) to draw drafts up to a stipulated
amount under the specified terms and conditions of the
agreement. Commercial letters of credit are issued primarily
to facilitate international trade.
its clients,
and private
paper,
Standby Letters of Credit obligate Northern Trust to meet
if, under the
certain financial obligations of
contractual terms of the agreement, the clients are unable to
do so. These instruments are primarily issued to support
public
including
initial margin
commercial
requirements on futures exchanges, and similar transactions.
Certain standby letters of credit have been secured with cash
deposits or participated to others. Northern Trust is obligated
to meet the entire financial obligation of these agreements and
in certain cases is able to recover the amounts paid through
recourse against cash deposits or other participants.
financial
bond
commitments,
financing,
The following table shows the contractual amounts of
commitments and letters of credit.
C O M M I T M E N T S A N D L E T T E R S O F C R E D I T
DECEMBER 31
2010
2009
(In Millions)
Legally Binding Commitments to Extend
Credit*
$27,229.5
$ 4,344.7
32.8
$25,651.8
$ 4,798.8
31.2
Standby Letters of Credit**
Commercial Letters of Credit
* These amounts exclude $1.6 billion of commitments participated to others at
December 31, 2010 and 2009.
** These amounts include $602.3 million and $618.7 million of standby letters
of credit secured by cash deposits or participated to others as of December 31,
2010 and 2009, respectively. The weighted average maturity of standby letters
of credit was 20 months at December 31, 2010 and 21 months at December 31,
2009.
Other Off-Balance Sheet Financial Instruments. As part
of securities custody activities and at the direction of clients,
Northern Trust lends securities owned by clients to borrowers
who are reviewed and approved by the Senior Credit
required to fully
Committee. The borrowing party is
collateralize
received with cash, marketable
securities, or irrevocable standby letters of credit. As securities
are loaned, collateral is maintained at a minimum of 100
percent of the fair value of the securities plus accrued interest,
with revaluations of the collateral performed on a daily basis.
In connection with these activities, Northern Trust has issued
securities
N O T E S TO C O N S O L I DA T E D FI N A N C I A L S T A T E M E N T S
certain indemnifications to clients against loss that is a direct
result of a borrower’s failure to return securities when due,
should the value of such securities exceed the value of the
collateral required to be posted. The amount of securities
to
loaned as of December 31, 2010 and 2009 subject
indemnification was
$74.9 billion and $82.3 billion,
respectively. Because of the credit quality of the borrowers and
the requirement to fully collateralize securities borrowed,
management believes that the exposure to credit loss from this
activity is not significant and, therefore, no liability has been
recorded relating to the indemnifications provided.
The Bank is a participating member of various cash,
securities, and foreign exchange clearing and settlement
organizations such as The Depository Trust Company in New
York. It participates in these organizations on behalf of its
clients and on its own behalf as a result of its own investment
and trading activities. A wide variety of cash and securities
transactions are settled through these organizations, including
those involving obligations of states and political subdivisions,
asset-backed securities, commercial paper, dollar placements,
and securities issued by the Government National Mortgage
Association.
is
As a result of its participation in cash, securities, and
foreign exchange clearing and settlement organizations, the
Bank could be responsible for a pro rata share of certain
credit-related losses arising out of the clearing activities. The
method in which such losses would be shared by the clearing
stipulated in each clearing organization’s
members
membership agreement. Credit exposure related to these
agreements varies from day to day, primarily as a result of
fluctuations in the volume of transactions cleared through the
organizations. The estimated credit exposure at December 31,
2010 and 2009 was $68 million and $77 million, respectively,
based on the membership agreements and clearing volume for
those days. Controls related to these clearing transactions are
closely monitored to protect the assets of Northern Trust and
its clients.
Note 27 – Variable Interest Entities
Variable Interest Entities (VIEs) are defined within GAAP as
entities which either have a total equity investment that is
insufficient to permit the entity to finance its activities without
additional subordinated financial support or whose equity
investors lack the characteristics of a controlling financial
interest. Investors that finance a VIE through debt or equity
interests, or other counterparties that provide other forms of
support, such as guarantees, subordinated fee arrangements,
or certain types of derivative contracts, are variable interest
NORTHERN TRUST CORPORATION | 2010 ANNUAL REPORT TO SHAREHOLDERS | 111
N O T E S TO C O N S O L I DA T E D FI N A N C I A L S T A T E M E N T S
holders in the entity and the variable interest holder, if any,
that has both the power to direct the activities that most
significantly impact the entity and a variable interest that
could potentially be significant to the entity is deemed to be
the VIE’s primary beneficiary and is required to consolidate
the VIE.
Investment Funds. Northern Trust acts as asset manager
for various funds in which clients of Northern Trust are
investors. As an asset manager of funds, the Corporation earns
a competitively priced fee that is based on assets managed and
varies with each fund’s investment objective. Based on its
analysis, Northern Trust’s interests in funds considered VIEs
are not considered significant variable interests under GAAP.
Although not obligated to do so, in 2008, Northern Trust
entered into CSAs with certain of these entities (Funds) which
held notes, asset backed securities, and other instruments
whose values had been adversely impacted by widening risk
premiums and liquidity spreads and significant rating agency
downgrades. The Corporation entered into the CSAs to assist
the Funds in maintaining net asset values of $1.00 in order to
provide financial stability to the Funds and investors in the
Funds. The CSAs also allowed the registered funds to hold
assets that had fallen to below investment grade, thus avoiding
a forced sale in an inactive market.
of
such,
and as
covered securities,
In 2009, all CSAs expired in connection with the final
settlements
the
Corporation’s maximum exposure to loss as of December 31,
2009 was zero. During 2009, final cash payments totaling
$204.8 million were made under the CSAs and reductions of
other operating expenses totaling $109.3 million were recorded
to reflect the difference between the actual cash payments
made and the recorded liability as of December 31, 2008.
However, under prior accounting standards the Funds were
considered VIEs and the CSAs reflected Northern Trust’s
implicit variable interest in the credit risk of the affected Funds.
The Funds were designed to create and pass to investors
interest rate and credit risk. In determining whether Northern
Trust was the primary beneficiary of the Funds during the
period in which the CSAs were in place, expected loss
calculations based on the characteristics of the underlying
investments in the Funds were used to estimate the expected
losses related to interest rate and credit risk, while also
considering the relative rights and obligations of each of the
variable interest holders. These analyses concluded that interest
rate risk was the primary driver of expected losses within the
Funds. As such, Northern Trust determined that it was not the
primary beneficiary of the Funds and was not required to
consolidate them within its consolidated balance sheet.
112 | 2010 ANNUAL REPORT TO SHAREHOLDERS | NORTHERN TRUST CORPORATION
I and NTC Capital
through NTC Capital
rates and maturity dates as
Trust Preferred Securities. As discussed in further detail
in Note 12 – Floating Rate Capital Debt, in 1997, Northern
Trust issued Floating Rate Capital Securities, Series A and
Series B,
II,
respectively, statutory business trusts wholly-owned by the
Corporation. The sole assets of the trusts are Subordinated
Debentures of Northern Trust Corporation that have the same
interest
the corresponding
distribution rates and redemption dates of the Floating Rate
Capital Securities. NTC Capital I and NTC Capital II are
considered VIEs; however, as the sole asset of each trust is a
receivable from the Corporation and the proceeds to the
Corporation from the receivable exceed the Corporation’s
investment in the VIEs’ equity shares, the Corporation is not
permitted to consolidate
even though the
the
Corporation owns all of the voting equity shares of the trusts,
has fully guaranteed the trusts’ obligations, and has the right
to redeem the preferred securities in certain circumstances.
Northern Trust recognizes the subordinated debentures on its
consolidated balance sheet as long-term liabilities.
trusts,
Leveraged Leases.
the property with substantially all of
In leveraged leasing transactions,
Northern Trust acts as lessor of the underlying asset subject to
the lease, and typically funds 20% of the asset’s cost via an
equity ownership in a trust with the remaining 80% provided
by third party non-recourse debt holders. In such transactions,
the trusts, which are VIEs, are created to provide the lessee use
the rights and
of
obligations of ownership. The lessee’s maintenance and
operation of the leased property has a direct effect on the fair
value of the underlying property, and the lessee also has the
ability to increase the benefits it can receive and limit the
losses it can suffer by the manner in which it uses the
property. As a result, Northern Trust has determined that it is
not the primary beneficiary of these VIEs given it lacks the
power to direct the activities that most significantly impact the
economic performance of the VIEs.
the
carrying
Northern Trust’s maximum exposure to loss as a result of
its involvement with the VIEs is limited to the carrying
amounts of the investments. As of December 31, 2010 and
December 31, 2009,
these
investments, which are included in loans and leases in the
consolidated balance sheet, were $782.3 million and $769.7
million, respectively. The Corporation’s funding requirements
relative to the VIEs are limited to its invested capital. Northern
Trust has no other liquidity arrangements or obligations to
purchase assets of the VIEs that would expose the Corporation
to a loss.
amounts of
invests
Tax Credit Structures. Northern Trust
in
affordable housing projects that are designed to generate a
return primarily through the realization of tax credits. The
affordable housing projects are formed as limited partnerships
and LLCs, and Northern Trust typically invests as a limited
partner/investor member in the form of equity contributions.
The economic performance of the affordable housing projects,
which are deemed to be VIEs, is driven by the performance of
their underlying investment projects as well as the VIEs’ ability
to operate in compliance with the rules and regulations
necessary for the qualification of tax credits generated by
equity investments. Northern Trust has determined that it is
not the primary beneficiary of these VIEs as it lacks the power
to direct the activities that most significantly impact the
economic performance of the underlying project or to affect
the VIEs’ ability to operate in compliance with the rules and
regulations necessary for the qualification of
tax credits
generated by equity investments. This power is held by the
general partners and managing members who exercise full and
exclusive control of the operations of the VIEs.
the
carrying
amounts of
Northern Trust’s maximum exposure to loss as a result of
its involvement with the affordable housing projects is limited
to the carrying amounts of the investments, including the
unfunded commitments. As of December 31, 2010 and
December 31, 2009,
these
investments, which are included in securities held to maturity
in the consolidated balance sheet, were $270.2 million and
$256.8 million, respectively. Also, as of December 31, 2010
and December 31, 2009, the liabilities related to the unfunded
commitments, which are included in other liabilities in the
consolidated balance sheet, were $35.5 million and $69.3
million, respectively. The Corporation’s funding requirements
are limited to its invested capital and any additional unfunded
commitments for future equity contributions. Northern Trust
has no other liquidity arrangements or obligations to purchase
assets of the affordable housing projects that would expose the
Corporation to a loss.
Note 28 – Pledged and Restricted Assets
Certain of Northern Trust’s subsidiaries, as required or
permitted by law, pledge assets to secure public and trust
deposits, repurchase agreements, FHLB borrowings, and for
other purposes. On December 31, 2010, securities and loans
totaling $23.9 billion ($12.8 billion of government sponsored
agency and other securities, $576.5 million of obligations of
states and political subdivisions, and $10.5 billion of loans),
were pledged. Collateral required for these purposes totaled
$4.5 billion. Included in the total pledged assets are available
N O T E S TO C O N S O L I DA T E D FI N A N C I A L S T A T E M E N T S
for sale securities with a total fair value of $1.1 billion which
were pledged as collateral
for agreements to repurchase
securities sold transactions. The secured parties to these
transactions have the right to repledge or sell these securities.
Northern Trust is permitted to repledge or sell collateral
accepted from agreements
securities purchased
transactions. The total fair value of accepted collateral as of
December 31, 2010 and 2009 was $152.1 million and $227.9
million, respectively. There was no repledged or sold collateral
as of December 31, 2010 or 2009.
to resell
Deposits maintained to meet Federal Reserve Bank reserve
requirements averaged $238.5 million in 2010 and $448.7
million in 2009.
Note 29 – Restrictions on Subsidiary Dividends and
Loans or Advances
Provisions of state and federal banking laws restrict the
amount of dividends that can be paid to the Corporation by
its banking subsidiaries. Under applicable state and federal
laws, no dividends may be paid in an amount greater than the
net or undivided profits (as defined) then on hand, subject to
other applicable provisions of law. In addition, prior approval
from the relevant federal banking regulator is required if
dividends declared by any of
the Corporation’s banking
subsidiaries in any calendar year will exceed its net profits for
that year, combined with its retained net profits for the
the
preceding two years. Based on these
Corporation’s banking
regulatory
approval, could declare dividends during 2011 equal to their
2011 eligible net profits (as defined) plus $1.01 billion. The
ability of each banking subsidiary to pay dividends to the
Corporation may be further restricted as a result of regulatory
policies and guidelines, including regulations issued pursuant
to the Dodd-Frank Act, relating to dividend payments and
capital adequacy.
subsidiaries, without
regulations,
securities
repurchase
agreements,
State and federal laws limit the transfer of funds by a
banking subsidiary to the Corporation and certain of its
loans or extensions of credit,
affiliates in the form of
investments, derivative transactions, repurchase agreements,
reverse
or
borrowing transactions or purchases of assets. Transfers of this
kind to the Corporation or a nonbanking subsidiary by a
banking subsidiary are each limited to 10% of the banking
subsidiary’s capital and surplus with respect to each affiliate
and to 20% in the aggregate, and are also subject to certain
collateral requirements. These transactions, as well as other
transactions
the
its affiliates, must also be on terms
Corporation or
between a
subsidiary
banking
lending
and
NORTHERN TRUST CORPORATION | 2010 ANNUAL REPORT TO SHAREHOLDERS | 113
N O T E S TO C O N S O L I DA T E D FI N A N C I A L S T A T E M E N T S
substantially the same as, or at least as favorable as, those
prevailing at
the time for comparable transactions with
non-affiliated companies or, in the absence of comparable
transactions, on terms, or under circumstances,
including
credit standards, that would be offered to, or would apply to,
non-affiliated companies.
Note 30 – Fair Value Measurements
Fair value under GAAP is defined as the exchange price that
would be received for an asset or paid to transfer a liability (an
exit price) in the principal or most advantageous market for
the asset or liability in an orderly transaction between market
participants on the measurement date. GAAP establishes a
hierarchy of valuation inputs based on the extent to which the
inputs are observable in the marketplace.
the
Fair Value Hierarchy. The following describes
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.
sale investments
Level 1 – Quoted, active market prices for identical assets or
liabilities. Northern Trust’s Level 1 assets and liabilities
include available for
treasury
securities, seed investments for the development of managed
fund products consisting of common stock and securities sold
but not yet purchased, and U.S. treasury securities held to
compensation
and
fund
obligations.
employee
deferred
in U.S.
benefit
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 investments.
Their fair values are determined by external pricing vendors,
or in limited cases internally, using widely accepted income-
incorporate
based (discounted cash flow) models
that
114 | 2010 ANNUAL REPORT TO SHAREHOLDERS | NORTHERN TRUST CORPORATION
observable current market yield curves and assumptions
regarding anticipated prepayments and defaults.
Level 2 assets and liabilities also include derivative
contracts which are valued using widely accepted income-
based models that incorporate inputs readily observable in
actively quoted markets and reflect the contractual terms of
the contracts. Observable inputs include foreign exchange
rates and interest rates for foreign exchange contracts; credit
spreads, default probabilities, and recovery rates for credit
default swap contracts; interest rates for interest rate swap
contracts and forward contracts; and interest rates and
volatility inputs for interest rate option contracts. Northern
Trust evaluates the impact of counterparty credit risk and its
own credit risk on the valuation of its derivative instruments.
Factors considered include the likelihood of default by
remaining
Northern Trust
maturities of the instruments, net exposures after giving effect
to master netting 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 2 other assets
represent investments in mutual and collective trust funds
held to fund employee benefit and deferred compensation
obligations. These investments are valued at the funds’ net
asset values based on a market approach.
counterparties,
and its
the
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 from Northern Trust clients. To estimate their fair
value, Northern Trust developed an internal income-based
model. The lack of activity in the auction rate security market
inputs to
has resulted in a lack of observable market
incorporate within the model. Therefore, significant inputs to
the model include Northern Trust’s own assumptions about
future cash flows and appropriate discount rates, both
adjusted for credit and liquidity factors. In developing these
assumptions, Northern Trust incorporated the contractual
terms of the securities, the types of collateral, any credit
enhancements available, and relevant market data, where
available. Level 3 liabilities
include financial guarantees
relating to standby letters of credit and a net estimated liability
for Visa related indemnifications, discussed in further detail in
Note 25 – Derivative Financial Instruments and Note 19 –
Visa Membership, respectively. Northern Trust’s recorded
liability for standby letters of credit, reflecting the obligation it
has undertaken, is measured as the amount of unamortized
fees on these instruments. The fair value of the net estimated
liability for Visa related indemnifications is based on a market
N O T E S TO C O N S O L I DA T E D FI N A N C I A L S T A T E M E N T S
approach, but requires management to exercise significant
judgment given the limited number of market transactions
involving identical or comparable liabilities.
Northern Trust believes its valuation methods for its assets
and liabilities carried at fair value are appropriate; however,
assumptions,
the use of different methodologies or
particularly as applied to Level 3 assets and liabilities, could
have a material effect on the computation of their estimated
fair values.
The following presents assets and liabilities measured at fair value on a recurring basis as of December 31, 2010 and 2009,
segregated by fair value hierarchy level.
(In Millions)
Securities
Available for Sale
U.S. Government
Obligations of States and Political Subdivisions
Government Sponsored Agency
Corporate Debt
Non-U.S. Government
Residential Mortgage-Backed
Other Asset-Backed
Certificates of Deposit
Auction Rate
Other
Total
Trading Account
Total
Other Assets
Derivatives
Foreign Exchange Contracts
Interest Rate Swap Contracts
Interest Rate Option Contracts
Credit Default Swap Contracts
Forward Contracts
Total
All Other
Total
Total Assets at Fair Value
Other Liabilities
Derivatives
Foreign Exchange Contracts
Interest Rate Swap Contracts
Interest Rate Option Contracts
Credit Default Swap Contracts
Forward Contracts
Total
All Other
DECEMBER 31, 2010
LEVEL 1
LEVEL 2
LEVEL 3
NETTING *
$
$658.4
–
–
–
–
–
–
–
–
–
658.4
–
$
–
36.3
11,970.7
2,554.0
440.6
254.6
1,605.7
1,402.5
796.9
$
–
–
–
–
–
–
–
–
367.8
–
19,061.3
367.8
6.8
–
658.4
19,068.1
367.8
ASSETS/
LIABILITIES
AT FAIR
VALUE
$ 658.4
36.3
11,970.7
2,554.0
440.6
254.6
1,605.7
1,402.5
367.8
796.9
20,087.5
6.8
20,094.3
5,792.8
285.8
.1
–
.5
1,308.3
103.3
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
65.9
65.9
5,792.8
285.8
.1
–
.5
6,079.2
37.4
6,116.6
–
–
–
–
–
–
–
–
(4,770.9)
–
(4,770.9)
1,411.6
724.3
25,184.7
367.8
(4,770.9)
21,505.9
–
–
–
–
–
–
–
5,781.3
163.7
.1
2.8
.2
5,948.1
–
–
–
–
–
–
–
–
–
–
–
(4,106.4)
–
58.6
–
5,781.3
163.7
.1
2.8
.2
1,841.7
58.6
Total Liabilities at Fair Value
* Northern Trust has elected to net derivative assets and liabilities when legally enforceable master netting agreements exist between Northern Trust and the
counterparty. As of December 31, 2010, derivative assets and liabilities shown above also include reductions of $2,952.7 million and $2,288.2 million, respectively, as a
result of cash collateral received from and deposited with derivative counterparties.
$(4,106.4)
$ 5,948.1
$1,900.3
$ 58.6
$
–
NORTHERN TRUST CORPORATION | 2010 ANNUAL REPORT TO SHAREHOLDERS | 115
N O T E S TO C O N S O L I DA T E D FI N A N C I A L S T A T E M E N T S
(In Millions)
Securities
Available for Sale
U.S. Government
Obligations of States and Political Subdivisions
Government Sponsored Agency
Corporate Debt
Non-U.S. Government
Residential Mortgage-Backed
Other Asset-Backed
Auction Rate
Other
Total
Trading Account
Total
Other Assets
Derivatives
Foreign Exchange Contracts
Interest Rate Swap Contracts
Interest Rate Option Contracts
Total
All Other
Total
Total Assets at Fair Value
Other Liabilities
Derivatives
Foreign Exchange Contracts
Interest Rate Swap Contracts
Interest Rate Option Contracts
Credit Default Swap Contracts
Total
All Other
DECEMBER 31, 2009
LEVEL 1
LEVEL 2
LEVEL 3
NETTING *
$ 74.0
–
–
–
–
–
–
–
–
74.0
–
74.0
–
–
–
–
59.9
59.9
$
–
47.0
12,325.4
2,822.1
80.6
314.0
1,181.3
–
190.0
$
–
–
–
–
–
–
–
427.7
–
16,960.4
427.7
9.9
–
16,970.3
427.7
2,078.3
213.7
.4
2,292.4
35.1
2,327.5
–
–
–
–
–
–
$
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(1,156.0)
–
ASSETS/
LIABILITIES
AT FAIR
VALUE
$
74.0
47.0
12,325.4
2,822.1
80.6
314.0
1,181.3
427.7
190.0
17,462.1
9.9
17,472.0
2,078.3
213.7
.4
1,136.4
95.0
(1,156.0)
1,231.4
$133.9
$19,297.8
$427.7
$(1,156.0)
$18,703.4
$
–
–
–
–
–
$ 2,059.5
117.3
.4
2.2
2,179.4
$
–
–
–
–
–
$
–
–
–
–
$ 2,059.5
117.3
.4
2.2
(1,133.1)
1,046.3
3.9
–
94.4
–
98.3
Total Liabilities at Fair Value
* Northern Trust has elected to net derivative assets and liabilities when legally enforceable master netting agreements exist between Northern Trust and the
counterparty. As of December 31, 2009, derivative assets and liabilities shown above also include reductions of $216.2 million and $193.3 million, respectively, as a
result of cash collateral received from and deposited with derivative counterparties.
$ 2,179.4
$(1,133.1)
$ 1,144.6
$ 94.4
$ 3.9
The following presents the changes in Level 3 assets for the
years ended December 31, 2010 and 2009.
(In Millions)
Fair Value at January 1
Total Realized and Unrealized
Losses (Gains) Included in Earnings
Gains (Losses) Included in Other
Comprehensive Income
Purchases, Sales, Issuances, and Settlements, Net
Fair Value at December 31
(1) Balance represents the fair value of auction rate securities.
$367.8
SECURITIES AVAILABLE
FOR SALE (1)
2010
2009
$427.7
$453.1
(3.7)
(10.3)
(7.2)
(49.0)
31.9
(47.0)
$427.7
As discussed in Note 3 – Securities, Auction Rate
Securities Purchase Program, Northern Trust purchased
certain illiquid auction rate securities from clients in 2008
which were recorded at their purchase date fair values and
designated as available for sale securities. Subsequent to their
purchase,
fair value and
unrealized gains and losses are credited or charged, net of the
tax effect, to AOCI. As of December 31, 2010 and 2009, the
net unrealized gain related to these securities was $10.8
million ($6.8 million net of tax) and $18.0 million ($11.4
million net of tax), respectively. Realized gains of $3.7 million
in 2010 include $3.4 million from redemptions by issuers and
the securities are reported at
116 | 2010 ANNUAL REPORT TO SHAREHOLDERS | NORTHERN TRUST CORPORATION
–
–
–
(109.3)
(4.5)
(25.8)
–
–
–
(204.8)
(31.3)
16.0
$–
$
–
$ 58.6
$ 94.4
(1) Northern Trust provided an additional $22.5 million and $33.4 million of
specific reserves to reduce the fair value of these loans during the years ended
December 31, 2010 and 2009, respectively.
(2) Northern Trust charged $4.9 million and $.2 million through other
operating expenses during the years ended December 31, 2010 and 2009,
respectively, to reduce the fair values of Other Real Estate Owned (OREO)
properties.
$.3 million from sales of securities. Realized gains of $10.3
million in 2009 include $7.9 million from redemptions by
issuers and $2.4 million from sales of securities. Gains on
redemptions and sales are included in interest income and
respectively, within the
(losses), net,
securities
consolidated statement of income.
gains
The following presents the changes in Level 3 liabilities for
the years ended December 31, 2010 and 2009.
OTHER LIABILITIES
DERIVATIVES(1)
ALL OTHER(2)
(In Millions)
2010
2009
2010
2009
$–
$ 314.1
$ 94.4
$104.2
Fair Value at January 1
Total Realized and
Unrealized (Gains)
Losses
Included in Earnings
Included in Other
Comprehensive
Income
Purchases, Sales, Issuances,
and Settlements, Net
Fair Value at December 31
Unrealized Gains (Losses)
Included in Earnings
Related to Financial
Instruments Held at
December 31
$–
$
–
$
–
$
–
(1) Balances represent the fair value of Capital Support Agreements (Refer to
Note 27).
(2) Balances represent standby letters of credit and the net estimated liability
for Visa related indemnifications (Refer to Notes 26 and 19).
All realized and unrealized gains and losses related to
Level 3 liabilities are included in other operating income or
other operating expenses with the exception of those related to
the Visa indemnification liability, which have been presented
separately in the consolidated statement of income.
Carrying values of assets and liabilities that are not
measured at fair value on a recurring basis may be adjusted to
fair value in periods subsequent to their initial recognition, for
example, to record an impairment of an asset. GAAP requires
entities to separately disclose these subsequent fair value
measurements and to classify them under the fair value
hierarchy.
N O T E S TO C O N S O L I DA T E D FI N A N C I A L S T A T E M E N T S
The following provides information regarding those assets
measured at
at
December 31, 2010 and 2009, segregated by fair value
hierarchy level.
value on a nonrecurring basis
fair
(In Millions)
LEVEL 1
LEVEL 2
LEVEL 3
TOTAL FAIR
VALUE
DECEMBER 31, 2010
Loans(1)
Other Real Estate
Owned(2)
Total Assets at Fair Value
DECEMBER 31, 2009
Loans(1)
Other Real Estate
Owned(2)
Total Assets at Fair Value
$–
–
$–
$–
–
$–
$–
–
$–
$–
–
$–
$72.4
$72.4
13.5
13.5
$85.9
$85.9
$ 50.8
$ 50.8
.4
.4
$ 51.2
$ 51.2
The fair values of loan collateral and OREO properties
were estimated using a market approach typically supported
by third party appraisals, and were subject to adjustments to
reflect management’s judgment as to their realizable value.
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,
value
disclosures provide only a partial estimate of the fair value of
Northern Trust. Financial instruments recorded at fair value
on Northern Trust’s consolidated balance sheet are discussed
above. The following methods and assumptions were used in
estimating the fair values of financial instruments that are not
carried at fair value.
required fair
the
Held to Maturity Securities. The fair values of held to
maturity securities were modeled by external pricing vendors
or, in limited cases, modeled internally, using widely accepted
models which are based on an income approach that
incorporates current market yield curves and assumptions
regarding anticipated prepayments and defaults.
NORTHERN TRUST CORPORATION | 2010 ANNUAL REPORT TO SHAREHOLDERS | 117
N O T E S TO C O N S O L I DA T E D FI N A N C I A L S T A T E M E N T S
Loans (excluding lease receivables). The fair value of the
loan portfolio was estimated using a discounted cash flow
methodology based on current market rates as of the date of
the consolidated financial statements. The fair values of all
loans were adjusted to reflect current assessments of loan
collectibility.
Savings Certificates, Other Time, and Non-U.S. Offices
Interest-Bearing Deposits. The fair values of these instruments
were estimated using an income approach (discounted cash
flow) that incorporates market interest rates.
Senior Notes, Subordinated Debt, Federal Home Loan Bank
Borrowings, 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.
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; money market
assets (includes federal funds sold and securities purchased
under agreements to resell, time deposits with banks, and
federal reserve deposits and other interest-bearing assets);
client security settlement receivables; federal funds purchased;
securities sold under agreements to repurchase; and other
borrowings (includes term federal funds purchased, and other
short-term borrowings). As required by GAAP, the fair values
required to be disclosed for demand, noninterest-bearing,
savings, and money market deposits must equal the amounts
disclosed in the consolidated balance sheet, even though such
deposits are typically priced at a premium in banking industry
consolidations.
Loan Commitments. The fair values of loan commitments
amount of unamortized fees on these
the
represent
instruments.
118 | 2010 ANNUAL REPORT TO SHAREHOLDERS | NORTHERN TRUST CORPORATION
N O T E S TO C O N S O L I DA T E D FI N A N C I A L S T A T E M E N T S
The following table summarizes the fair values of financial instruments.
(In Millions)
ASSETS
Cash and Due from Banks
Money Market Assets
Securities:
Available for Sale
Held to Maturity
Trading Account
Loans (excluding Leases)
Held for Investment
Held for Sale
Client Security Settlement Receivables
LIABILITIES
Deposits:
Demand, Noninterest-Bearing, Savings and Money Market
Savings Certificates and Other Time and Non-U.S. Offices Interest-Bearing
Federal Funds Purchased
Securities Sold under Agreements to Repurchase
Other Borrowings
Senior Notes
Long Term Debt (excluding Leases):
Subordinated Debt
Federal Home Loan Bank Borrowings
Floating Rate Capital Debt
Financial Guarantees
Loan Commitments
DERIVATIVE INSTRUMENTS
Asset/Liability Management:
Foreign Exchange Contracts
Assets
Liabilities
Interest Rate Swap Contracts
Assets
Liabilities
Credit Default Swaps
Assets
Liabilities
Forward Contracts
Assets
Liabilities
Client-Related and Trading:
Foreign Exchange Contracts
Assets
Liabilities
Interest Rate Swap Contracts
Assets
Liabilities
Interest Rate Option Contracts
Assets
Liabilities
DECEMBER 31
2010
2009
BOOK VALUE
FAIR VALUE
BOOK VALUE
FAIR VALUE
$ 2,818.0
26,436.0
$ 2,818.0
26,436.0
$ 2,491.8
28,128.2
$ 2,491.8
28,128.2
20,087.5
1,187.6
6.8
26,747.8
2.2
701.3
24,810.3
39,385.4
3,691.7
954.4
347.7
1,896.1
1,148.7
1,532.5
276.9
58.6
32.4
44.9
51.4
134.6
15.3
–
2.8
.5
.2
5,747.9
5,729.9
151.2
148.4
.1
.1
20,087.5
1,207.2
6.8
26,814.2
2.2
701.3
24,810.3
39,402.1
3,691.7
954.4
347.7
1,936.5
1,177.2
1,613.5
223.2
58.6
32.4
44.9
51.4
134.6
15.3
–
2.8
.5
.2
5,747.9
5,729.9
151.2
148.4
.1
.1
17,462.1
1,161.4
9.9
26,489.3
4.2
794.8
26,527.3
31,754.0
6,649.8
1,037.5
2,078.3
1,551.8
1,132.5
1,697.5
276.8
94.4
28.4
46.1
51.0
98.8
4.2
–
2.2
–
–
2,032.2
2,008.5
114.9
113.1
.4
.4
17,462.1
1,185.7
9.9
26,539.1
4.2
794.8
26,527.3
31,783.6
6,649.8
1,037.5
2,078.3
1,611.3
1,150.6
1,792.6
159.4
94.4
28.4
46.1
51.0
98.8
4.2
–
2.2
–
–
2,032.2
2,008.5
114.9
113.1
.4
.4
NORTHERN TRUST CORPORATION | 2010 ANNUAL REPORT TO SHAREHOLDERS | 119
N O T E S TO C O N S O L I DA T E D FI N A N C I A L S T A T E M E N T S
Note 31 – Business Units and Related Information
and PFS.
business units, C&IS
Northern Trust is organized around its two principal client-
focused
Investment
management services and products are provided to the clients
of these business units and to other U.S. and non-U.S. clients
by NTGI. Operations support is provided to each of the
business units by the O&T business unit. The revenue and
expenses of NTGI are fully allocated to C&IS and PFS. The
revenue and expenses of O&T are fully allocated to C&IS, PFS,
and Treasury and Other.
of
their
financial
performance.
C&IS and PFS results are presented to promote a greater
understanding
The
information, presented on an internal management-reporting
basis as opposed to GAAP which is used for consolidated
financial reporting purposes, derives from internal accounting
systems that support Northern Trust’s strategic objectives and
management structure. The accounting policies used for
management reporting are consistent with those described in
Note 1 – Summary of Significant Accounting Policies.
The following tables show the earnings contribution of Northern Trust’s business units for the years ended December 31, 2010,
2009 and 2008.
C O R P O R A T E A N D I N S T I T U T I O N A L S E R V I C E S
R E S U L T S O F O P E R A T I O N S
(In Millions)
Noninterest Income
Trust, Investment and Other Servicing Fees
Other
Net Interest Income (FTE)*
Revenues (FTE)*
Provision for Credit Losses
Noninterest Expenses
Income before Income Taxes*
Provision for Income Taxes*
Net Income
Percentage of Consolidated Net Income
Average Assets
P E R S O N A L F I N A N C I A L S E R V I C E S
R E S U L T S O F O P E R A T I O N S
(In Millions)
Noninterest Income
Trust, Investment and Other Servicing Fees
Other
Net Interest Income (FTE)*
Revenues (FTE)*
Provision for Credit Losses
Noninterest Expenses
Income before Income Taxes*
Provision for Income Taxes*
Net Income
Percentage of Consolidated Net Income
Average Assets
120 | 2010 ANNUAL REPORT TO SHAREHOLDERS | NORTHERN TRUST CORPORATION
2010
2009
2008
$ 1,175.1
522.7
271.8
1,969.6
(16.1)
1,328.9
656.8
222.4
$
434.4
$ 1,236.8
571.3
416.0
2,224.1
30.7
1,200.6
$
$
992.8
350.8
642.0
$ 1,225.9
804.6
571.1
2,601.6
25.2
1,779.5
$
$
796.9
308.2
488.7
65%
74%
61%
$38,749.3
$38,117.1
$49,490.4
2010
2009
2008
$
906.8
133.3
591.8
1,631.9
176.1
1,103.0
352.8
132.8
$
847.0
138.7
538.1
1,523.8
184.3
1,044.6
294.9
112.4
$
909.0
132.6
542.7
1,584.3
89.8
1,087.9
406.6
156.1
$
220.0
$
182.5
$
250.5
33%
21%
32%
$23,564.5
$24,534.8
$22,868.7
T R E A S U R Y A N D O T H E R
R E S U L T S O F O P E R A T I O N S
(In Millions)
Gain on Visa Share Redemption
Other Noninterest Income
Net Interest Income (Expense) (FTE)*
Revenues (FTE)*
Visa Indemnification Charges
Noninterest Expenses
Income before Income Taxes*
Provision (Benefit) for Income Taxes*
Net Income
Percentage of Consolidated Net Income (Loss)
Average Assets
C O N S O L I D A T E D F I N A N C I A L I N F O R M A T I O N
(In Millions)
Noninterest Income
Trust, Investment and Other Servicing Fees
Gain on Visa Share Redemption
Other
Net Interest Income (FTE)*
Revenues (FTE)*
Provision for Credit Losses
Visa Indemnification Charges
Noninterest Expenses
Income before Income Taxes*
Provision for Income Taxes*
Net Income
N O T E S TO C O N S O L I DA T E D FI N A N C I A L S T A T E M E N T S
$
2010
–
(8.9)
94.2
85.3
(33.0)
99.0
19.3
4.2
$
2009
–
(6.7)
85.9
79.2
(17.8)
89.3
7.7
(32.0)
2008
$167.9
(40.6)
15.1
142.4
(76.1)
96.5
122.0
66.4
$
15.1
$
39.7
$ 55.6
2%
5%
7%
$13,694.4
$11,662.3
$669.4
2010
2009
2008
$ 2,081.9
–
647.1
957.8
3,686.8
160.0
(33.0)
2,530.9
1,028.9
359.4
$ 2,083.8
–
703.3
1,040.0
3,827.1
215.0
(17.8)
2,334.5
1,295.4
431.2
$ 2,134.9
167.9
896.6
1,128.9
4,328.3
115.0
(76.1)
2,963.9
1,325.5
530.7
$
669.5
$
864.2
$
794.8
Average Assets
* Stated on an FTE basis. The consolidated figures include $39.1 million, $40.2 million, and $49.8 million of FTE adjustment for 2010, 2009, and 2008, respectively.
$76,008.2
$74,314.2
$73,028.5
asset management,
Northern Trust’s international activities are centered in
the global custody, treasury activities, foreign exchange, asset
servicing,
and commercial banking
businesses. The operations of Northern Trust are managed on
a business unit basis and include components of both U.S and
non-U.S. source income and assets. Non-U.S. source income
and assets are not separately identified in Northern Trust’s
internal management reporting system. However, Northern
Trust is required to disclose non-U.S. activities based on the
domicile of the customer. Due to the complex and integrated
nature of Northern Trust’s activities,
is impossible to
segregate with precision revenues, expenses and assets between
it
U.S. and non-U.S. domiciled customers. Therefore, certain
subjective estimates and assumptions have been made to
allocate revenues, expenses and assets between U.S. and
non-U.S. operations.
For purposes of
foreign exchange
trading income has been allocated to non-U.S. operations.
Interest expense is allocated to non-U.S. operations based on
specifically matched or pooled funding. Allocations of indirect
noninterest expenses related to non-U.S. activities are not
significant, but when made, are based on various methods
such as time, space, and number of employees.
this disclosure, all
NORTHERN TRUST CORPORATION | 2010 ANNUAL REPORT TO SHAREHOLDERS | 121
N O T E S TO C O N S O L I DA T E D FI N A N C I A L S T A T E M E N T S
The table below summarizes international performance based on the allocation process described above without regard to
guarantors or the location of collateral. The U.S. performance includes the impacts of benefits totaling $33.0 million and $17.8
million recorded in 2010 and 2009, respectively with regards to a reduction in the Visa indemnification liability, and $244.0 million
recorded in 2008 in connection with Visa’s initial public offering.
D I S T R I B U T I O N O F T O T A L A S S E T S A N D O P E R A T I N G P E R F O R M A N C E
(In Millions)
2010
Non-U.S.
U.S.
Total
2009
Non-U.S.
U.S.
Total
2008
Non-U.S.
U.S.
Total
* Revenue is comprised of net interest income and noninterest income.
Note 32 – Regulatory Capital Requirements
tier 1 capital
Northern Trust and its U.S. subsidiary banks are subject to
various regulatory capital requirements administered by the
federal bank regulatory authorities. Under these requirements,
banks must maintain specific ratios of total and tier 1 capital
to average
to risk-weighted assets and of
quarterly assets in order to be classified as “well capitalized.”
requirements
The
certain
capital
restrictions upon banks
that meet minimum capital
requirements but are not “well capitalized” and obligate the
federal bank regulatory authorities to take “prompt corrective
action” with respect to banks that do not maintain such
minimum ratios. Such prompt corrective action could have a
direct material effect on a bank’s financial statements.
regulatory
impose
TOTAL
ASSETS
TOTAL
REVENUE*
INCOME BEFORE
INCOME TAXES
NET INCOME
$24,472.9
59,371.0
$ 980.9
2,666.8
$83,843.9
$3,647.7
$ 19,253.2
62,888.3
$ 1,086.9
2,700.0
$ 82,141.5
$ 3,786.9
$ 24,433.0
57,620.6
$ 1,598.6
2,679.9
$ 82,053.6
$ 4,278.5
$ 325.1
664.7
$ 989.8
$ 445.4
809.8
$1,255.2
$ 842.2
433.5
$1,275.7
$229.3
440.2
$669.5
$ 305.8
558.4
$ 864.2
$ 534.9
259.9
$ 794.8
As of December 31, 2010 and 2009, each of Northern
Trust’s U.S. subsidiary banks had capital ratios above the level
required for classification as a “well capitalized” institution
and had not received any regulatory notification of a lower
classification. Additionally, Northern Trust’s subsidiary banks
located outside the U.S. are subject to regulatory capital
requirements in the jurisdictions in which they operate. As of
December 31, 2010 and 2009, each of Northern Trust’s
non-U.S. banking subsidiaries had capital ratios above their
specified minimum requirements. There are no conditions or
events since December 31, 2010 that management believes
have adversely affected the capital categorization of any
Northern Trust subsidiary bank.
122 | 2010 ANNUAL REPORT TO SHAREHOLDERS | NORTHERN TRUST CORPORATION
N O T E S TO C O N S O L I DA T E D FI N A N C I A L S T A T E M E N T S
The table below summarizes the risk-based capital amounts and ratios for Northern Trust and for each of its U.S. subsidiary
banks whose net income for 2010 or 2009 exceeded 10% of the consolidated total.
($ In Millions)
AS OF DECEMBER 31, 2010
Total Capital to Risk-Weighted Assets
Consolidated
The Northern Trust Company
Northern Trust, NA
Tier 1 Capital to Risk-Weighted Assets
Consolidated
The Northern Trust Company
Northern Trust, NA
Tier 1 Capital (to Fourth Quarter Average Assets)
Consolidated
The Northern Trust Company
Northern Trust, NA
AS OF DECEMBER 31, 2009
Total Capital to Risk-Weighted Assets
Consolidated
The Northern Trust Company
Northern Trust, NA
Tier 1 Capital to Risk-Weighted Assets
Consolidated
The Northern Trust Company
Northern Trust, NA
Tier 1 Capital (to Fourth Quarter Average Assets)
Consolidated
The Northern Trust Company
Northern Trust, NA
The current risk-based capital guidelines that apply to the
Corporation and its U.S. subsidiary banks, commonly referred
to as Basel I, are based upon the 1988 capital accord of the
International Basel Committee on Banking Supervision (Basel
Committee), a committee of central banks and bank
supervisors, as implemented by the Federal Reserve Board.
have
issued
respect
rules with
The Corporation also is subject to the Basel II framework
for risk-based capital adequacy. The U.S. bank regulatory
agencies
to
final
implementation of the Basel II framework. Under the final
Basel II rules, the Corporation is one of a small number of
“core” banking organizations. As a result, the Corporation and
its U.S. depository institution subsidiaries will be required to
use the advanced approaches under Basel II for calculating
risk-based capital related to credit risk and operational risk,
instead of
the methodology reflected in the regulations
effective prior to adoption of Basel II. The rules also require
core banking organizations to have rigorous processes for
assessing overall capital adequacy in relation to their total risk
profiles, and to publicly disclose certain information about
their risk profiles and capital adequacy.
ACTUAL
MINIMUM TO
QUALIFY AS
WELL CAPITALIZED
AMOUNT
RATIO
AMOUNT
RATIO
$8,036
6,440
1,461
6,977
5,293
1,301
6,977
5,293
1,301
$ 7,711
6,044
1,170
6,522
4,756
1,010
6,522
4,756
1,010
15.6%
16.2
13.9
$5,147
3,978
1,050
10.0%
10.0
10.0
13.6
13.3
12.4
8.8
8.0
10.8
15.8%
16.1
11.0
13.4
12.7
9.5
8.8
7.7
8.2
3,088
2,387
630
3,983
3,323
602
$ 4,878
3,751
1,061
2,927
2,250
637
3,725
3,073
615
6.0
6.0
6.0
5.0
5.0
5.0
10.0%
10.0
10.0
6.0
6.0
6.0
5.0
5.0
5.0
The Corporation has for several years been preparing to
comply with the advanced approaches of
II
framework. The Corporation is also addressing issues related
to implementation timing differences between the U.S. and
other jurisdictions, to ensure that the Corporation and the
bank subsidiaries comply with regulatory requirements and
expectations in all jurisdictions where they operate.
the Basel
the oversight body of
On September 12, 2010, the Group of Governors and
Heads of Supervision,
the Basel
Committee, announced agreement on the calibration and
phase-in arrangements for a strengthened set of capital
requirements, known as Basel III. In November 2010, Basel III
was endorsed by the Seoul G20 Leaders Summit and will be
subject to individual adoption by member nations, including
the United States. The federal banking agencies could
implement changes to the current capital adequacy standards
applicable to the Corporation and its bank subsidiaries in light
of Basel III.
NORTHERN TRUST CORPORATION | 2010 ANNUAL REPORT TO SHAREHOLDERS | 123
N O T E S TO C O N S O L I DA T E D FI N A N C I A L S T A T E M E N T S
Note 33 – Northern Trust Corporation (Corporation only)
Condensed financial information is presented below. Investments in wholly-owned subsidiaries are carried on the equity method of
accounting.
C O N D E N S E D B A L A N C E S H E E T
(In Millions)
ASSETS
Cash on Deposit with Subsidiary Bank
Time Deposits with Subsidiary Banks
Securities
Advances to Wholly-Owned Subsidiaries – Banks
Investments in Wholly-Owned Subsidiaries – Banks
– Nonbank
– Nonbank
Buildings and Equipment
Other Assets
Total Assets
LIABILITIES
Long-Term Debt
Floating Rate Capital Debt
Other Liabilities
Total Liabilities
STOCKHOLDERS’ EQUITY
Common Stock
Additional Paid-in Capital
Retained Earnings
Accumulated Other Comprehensive Loss
Treasury Stock
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
C O N D E N S E D S T A T E M E N T O F I N C O M E
(In Millions)
OPERATING INCOME
Dividends – Bank Subsidiaries
– Nonbank Subsidiaries
Intercompany Interest and Other Charges
Interest and Other Income
Total Operating Income
OPERATING EXPENSES
Interest Expense
Other Operating Expenses
Total Operating Expenses
Income (Loss) before Income Taxes and Equity in Undistributed Net Income of Subsidiaries
Benefit (Expense) for Income Taxes
Income (Loss) before Equity in Undistributed Net Income of Subsidiaries
Equity in Undistributed Net Income of Subsidiaries – Banks
– Nonbank
Net Income
Net Income Applicable to Common Stock
124 | 2010 ANNUAL REPORT TO SHAREHOLDERS | NORTHERN TRUST CORPORATION
DECEMBER 31
2010
2009
$
6.8
1,561.2
118.2
285.0
5.0
6,855.1
121.2
3.4
339.5
$
6.5
1,484.0
10.1
285.0
5.0
5,959.9
128.7
3.4
371.9
$9,295.4
$8,254.5
$1,896.1
276.9
292.1
2,465.1
408.6
920.0
5,972.1
(305.3)
(165.1)
6,830.3
$1,390.5
276.8
275.1
1,942.4
408.6
888.3
5,576.0
(361.6)
(199.2)
6,312.1
$9,295.4
$8,254.5
FOR THE YEAR ENDED
DECEMBER 31
2010
2009
2008
$
–
67.2
11.4
6.9
85.5
50.8
15.4
66.2
19.3
23.0
42.3
636.9
(9.7)
669.5
669.5
$410.0
25.6
10.1
13.7
459.4
45.7
(93.2)
(47.5)
506.9
(25.0)
481.9
364.7
17.6
$864.2
$753.1
$ 30.0
56.4
39.3
(13.2)
112.5
39.1
367.8
406.9
(294.4)
160.2
(134.2)
918.7
10.3
$794.8
$782.8
N O T E S TO C O N S O L I DA T E D FI N A N C I A L S T A T E M E N T S
C O N D E N S E D S T A T E M E N T O F C A S H F L O W S
(In Millions)
OPERATING ACTIVITIES:
Net Income
Adjustments to Reconcile Net Income to Net Cash Provided by (Used in) Operating Activities:
FOR THE YEAR ENDED
DECEMBER 31
2010
2009
2008
$ 669.5
$ 864.2
$794.8
Equity in Undistributed Net Income of Subsidiaries
Decrease in Prepaid Expenses
Client Support-Related Charges (Benefit)
Capital Support Agreement Payments
Increase (Decrease) in Accrued Income Taxes
Other, net
Net Cash Provided by (Used in) Operating Activities
INVESTING ACTIVITIES:
Net Increase in Time Deposits with Banks
Purchases of Securities – Available for Sale
Proceeds from Sale, Maturity and Redemption of Securities – Available for Sale
Net Increase in Capital Investments in Subsidiaries
Advances to Wholly-Owned Subsidiaries
Other, net
Net Cash Provided by (Used in) Investing Activities
FINANCING ACTIVITIES:
Net Increase in Senior Notes
Proceeds from Common Stock Issuance
Proceeds from Preferred Stock – Series B and Warrant to Purchase Common Stock
Redemption of Preferred Stock – Series B
Cash Dividends Paid on Preferred Stock
Repurchase of Warrant to Purchase Common Stock
Treasury Stock Purchased
Cash Dividends Paid on Common Stock
Net Proceeds from Stock Options
Other, net
Net Cash Provided by (Used in) Financing Activities
Net Change in Cash on Deposit with Subsidiary Bank
Cash on Deposit with Subsidiary Bank at Beginning of Year
(620.9)
1.2
–
–
61.8
(13.3)
98.3
(77.2)
(109.7)
4.7
(204.8)
–
(.9)
(387.9)
497.2
–
–
–
–
–
(5.9)
(273.2)
70.6
1.2
289.9
.3
6.5
(382.2)
2.0
(109.3)
(204.8)
283.6
20.4
473.9
(268.0)
–
411.8
(42.0)
–
(7.9)
(929.0)
1.4
320.3
–
(290.5)
77.9
(25.1)
(830.2)
(468.9)
–
(521.3)
(10.0)
11.1
93.9
(1,819.3)
500.0
834.1
–
(1,576.0)
(46.6)
(87.0)
(10.7)
(260.3)
38.9
23.8
(583.8)
(16.0)
22.5
396.9
–
1,576.0
–
–
–
(68.3)
(247.7)
161.9
47.9
1,866.7
22.3
.2
Cash on Deposit with Subsidiary Bank at End of Year
$
6.8
$
6.5
$ 22.5
NORTHERN TRUST CORPORATION | 2010 ANNUAL REPORT TO SHAREHOLDERS | 125
REPORT OF INDEPENDENT REG ISTE RE D PUBL IC A CCOUNTING FIRM
T O T H E S T O C K H O L D E R S A N D B O A R D O F D I R E C T O R S O F N O R T H E R N T R U S T C O R P O R A T I O N :
We have audited the accompanying consolidated balance sheet of Northern Trust Corporation and subsidiaries (Northern Trust) as
of December 31, 2010 and 2009, and the related consolidated statements of income, comprehensive income, changes in
stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2010. These consolidated
financial statements are the responsibility of Northern Trust’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of Northern Trust Corporation and subsidiaries as of December 31, 2010 and 2009, and the results of their operations and
their cash flows for each of the years in the three-year period ended December 31, 2010, in conformity with U.S. generally accepted
accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
Northern Trust Corporation’s internal control over financial reporting as of December 31, 2010, based on criteria established in
Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and
our report dated February 25, 2011 expressed an unqualified opinion on the effectiveness of Northern Trust Corporation’s internal
control over financial reporting.
chicago, illinois
february 25, 2011
126 | 2010 ANNUAL REPORT TO SHAREHOLDERS | NORTHERN TRUST CORPORATION
CO NSO LIDA TE D FINAN CIA L STA TISTI C S
Q U A R T E R L Y F I N A N C I A L D A T A ( U N A U D I T E D )
STATEMENT OF INCOME
2010
2009
($ In Millions Except Per Share Information)
Trust, Investment and Other Servicing Fees
Other Noninterest Income
Net Interest Income
Interest Income
Interest Expense
Net Interest Income
Provision for Credit Losses
Noninterest Expenses
Provision for Income Taxes
Net Income
Net Income Applicable to Common Stock
PER COMMON SHARE
Net Income – Basic
– Diluted
AVERAGE BALANCE SHEET ASSETS
Cash and Due from Banks
Money Market Assets
Securities
Loans and Leases
Reserve for Credit Losses Assigned to
Loans
Other Assets
Total Assets
LIABILITIES AND STOCKHOLDERS’
EQUITY
Deposits
Demand and Other Noninterest-
Bearing
Savings and Other Interest-Bearing
Other Time
Non-U.S. Offices
Total Deposits
Short-Term Borrowings
Senior Notes
Long-Term Debt
Floating Rate Capital Debt
Other Liabilities
Stockholders’ Equity
FOURTH
QUARTER
THIRD
QUARTER
SECOND
QUARTER
FIRST
QUARTER
FOURTH
QUARTER
THIRD
QUARTER
SECOND
QUARTER
FIRST
QUARTER
$
504.6
169.5
$
518.7
137.3
$
543.5
187.9
$
515.1
152.4
$
548.6
157.6
$
523.1
156.3
$
601.4
183.6
$
410.7
205.8
334.3
112.3
222.0
40.0
641.7
57.3
157.1
157.1
.64
.64
330.2
96.7
233.5
30.0
622.1
81.8
155.6
155.6
.64
.64
317.9
85.1
232.8
50.0
614.4
100.2
199.6
199.6
.82
.82
$
$
$
$
$
$
314.3
83.9
230.4
40.0
619.7
81.0
157.2
157.2
.65
.64
324.3
90.1
234.2
40.0
621.3
78.8
200.3
200.3
.82
.82
333.2
94.9
238.3
60.0
599.2
70.6
187.9
187.9
.77
.77
354.7
104.5
250.2
60.0
502.7
158.3
314.2
226.1
.95
.95
393.8
116.7
277.1
55.0
593.5
83.3
161.8
138.8
.62
.61
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$ 3,056.6
21,979.1
21,347.7
27,614.9
$ 2,708.2
19,231.8
20,346.7
27,376.2
$ 2,903.7
19,182.7
19,369.8
27,569.1
$ 2,479.9
21,613.4
18,303.9
27,497.8
$ 2,655.9
22,192.6
17,517.7
27,830.6
$ 2,501.7
18,273.5
17,614.8
28,209.9
$ 2,679.7
19,083.1
17,515.3
29,049.1
$ 2,302.3
22,948.1
16,772.3
29,725.3
(314.7)
6,426.1
(320.6)
5,364.4
(311.0)
5,571.5
(305.4)
5,380.0
(301.1)
5,061.7
(294.7)
4,902.1
(274.5)
5,744.3
(228.8)
5,836.3
$80,109.7
$74,706.7
$74,285.8
$74,969.6
$74,957.4
$71,207.3
$73,797.0
$77,355.5
$ 6,438.5
15,278.2
1,905.8
35,678.5
$ 5,793.5
15,041.2
1,536.7
32,460.3
$ 6,696.1
15,069.9
1,452.4
30,704.2
$ 7,460.0
15,249.4
1,488.3
30,031.3
$ 7,580.4
14,838.4
1,316.8
28,960.6
$ 7,563.6
14,528.8
1,235.0
27,662.4
$ 8,938.5
14,014.8
1,011.2
29,181.2
$ 9,745.9
12,342.7
837.6
33,208.1
59,301.0
5,237.5
1,716.4
2,751.0
276.8
3,980.2
6,846.8
54,831.7
5,222.3
1,403.6
2,792.7
276.8
3,494.8
6,684.8
53,922.6
6,123.6
1,396.6
2,940.7
276.8
3,078.9
6,546.6
54,229.0
6,839.4
1,518.3
2,803.1
276.8
2,848.4
6,454.6
52,696.2
8,577.6
1,560.3
2,860.0
276.8
2,632.1
6,354.4
50,989.8
6,415.6
1,556.2
2,989.9
276.7
2,716.9
6,262.2
53,145.7
5,353.3
1,386.1
3,138.7
276.7
3,365.3
7,131.2
56,134.3
6,630.9
1,044.1
3,250.4
276.7
3,343.2
6,675.9
Total Liabilities and Stockholders’ Equity
$80,109.7
$74,706.7
$74,285.8
$74,969.6
$74,957.4
$71,207.3
$73,797.0
$77,355.5
ANALYSIS OF NET INTEREST INCOME
Earning Assets
Interest-Related Funds
Noninterest-Related Funds
Net Interest Income (Taxable equivalent)
Net Interest Margin (Taxable equivalent)
COMMON STOCK DIVIDEND AND
MARKET PRICE
$70,941.8
60,406.8
10,535.0
232.3
$66,954.7
56,389.8
10,564.9
243.0
$66,121.6
55,733.4
10,388.2
242.4
$67,415.1
56,148.7
11,266.4
240.1
$67,540.9
55,945.3
11,595.6
244.0
$64,098.2
52,497.4
11,600.8
248.2
$65,647.5
51,303.8
14,343.7
260.1
$69,445.7
54,941.8
14,503.9
287.7
1.30%
1.44%
1.47%
1.44%
1.43%
1.54%
1.59%
1.68%
Dividends
Market Price Range – High
– Low
$
.28
56.05
47.02
$
.28
50.85
45.30
$
.28
59.36
46.60
$
.28
56.50
48.89
$
.28
60.84
46.72
$
.28
62.35
52.01
$
.28
66.08
49.78
$
.28
65.64
43.32
Note: The common stock of Northern Trust Corporation is traded on the Nasdaq Stock Market under the symbol NTRS.
NORTHERN TRUST CORPORATION | 2010 ANNUAL REPORT TO SHAREHOLDERS | 127
C ON SOLIDATED FINANCIAL STAT I ST ICS
A V E R A G E S T A T E M E N T O F C O N D I T I O N W I T H A N A L Y S I S O F N E T I N T E R E S T I N C O M E
(INTEREST AND RATE ON A TAXABLE EQUIVALENT BASIS)
($ In Millions)
INTEREST
2010
AVERAGE
BALANCE
RATE
INTEREST
2009
AVERAGE
BALANCE
RATE
AVERAGE EARNING ASSETS
Money Market Assets
Federal Funds Sold and Resell Agreements
Time Deposits with Banks
Federal Reserve Deposits and Other Interest-
Bearing
Total Money Market Assets
Securities
U.S. Government
Obligations of States and Political Subdivisions
Government Sponsored Agency
Other
Total Securities
Loans and Leases
Total Earning Assets
Reserve for Credit Losses Assigned to Loans and Leases
Cash and Due from Banks
Other Assets
Total Assets
AVERAGE SOURCE OF FUNDS
Deposits
Savings and Money Market
Savings Certificates
Other Time
Non-U.S. Offices
Total Interest-Bearing Deposits
Short-Term Borrowings
Senior Notes
Long-Term Debt
Floating Rate Capital Debt
Total Interest-Related Funds
Interest Rate Spread
Noninterest-Bearing Deposits
Other Liabilities
Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
Net Interest Income/Margin (FTE Adjusted)
Net Interest Income/Margin (Unadjusted)
Net Interest Income/Margin Components
U.S.
Non-U.S.
Consolidated
Notes – Average balances include nonaccrual loans.
$
.5
134.6
$
293.9
14,599.7
.18%
.92
$
.7
209.6
$
375.7
15,359.9
.21%
1.36
13.5
148.6
1.1
47.4
116.6
84.7
249.8
937.4
5,598.2
20,491.8
162.0
726.9
11,802.2
7,168.1
19,859.2
27,514.4
.24
.72
.67
6.52
.99
1.18
1.26
3.41
11.6
221.9
.2
53.5
147.7
76.0
277.4
946.9
4,880.2
20,615.8
41.8
817.5
11,900.4
4,598.1
17,357.8
28,697.2
.24
1.08
.50
6.55
1.24
1.65
1.60
3.30
1,335.8
67,865.4
1.97%
1,446.2
66,670.8
2.17%
–
–
–
–
(313.0)
2,788.4
5,667.4
$76,008.2
$
$
34.9
27.7
12.7
125.7
201.0
11.2
48.6
114.8
2.4
378.0
–
–
–
–
–
$ 957.8
$ 918.7
$13,049.5
2,107.8
1,596.8
29,968.4
46,722.5
5,849.5
1,509.0
2,821.6
276.8
57,179.4
–
8,860.6
3,333.8
6,634.4
76,008.2
–
–
$ 863.6
94.2
$49,776.5
18,088.9
$ 957.8
$67,865.4
–
–
–
–%
.27%
1.31
.80
.42
.43
.19
3.22
4.07
.87
.66
1.31
–
–
–
–
1.41%
1.35%
1.73%
.52
1.41%
$
$
–
–
–
–
53.7
56.9
16.3
80.1
207.0
11.0
44.0
139.9
4.3
406.2
–
–
–
–
–
$1,040.0
$ 999.8
(275.0)
2,535.8
5,382.6
$74,314.2
$11,162.4
2,777.3
1,101.8
27,157.6
42,199.1
6,748.7
1,388.6
3,058.5
276.7
53,671.6
–
11,026.9
3,011.6
6,604.1
$74,314.2
–
–
$ 859.8
180.2
$49,270.9
17,399.9
$1,040.0
$66,670.8
–
–
–
–%
.48%
2.05
1.48
.29
.49
.16
3.17
4.57
1.54
.76
1.41
–
–
–
–
1.56%
1.50%
1.75%
1.04
1.56%
– Total interest income includes adjustments on loans and securities to a taxable equivalent basis. Such adjustments are based on the U.S. federal income tax rate
(35%) and State of Illinois income tax rate (7.30%). Lease financing receivable balances are reduced by deferred income. Total taxable equivalent interest
adjustments amounted to $39.1 million in 2010, $40.2 million in 2009, $49.8 million in 2008, $62.5 million in 2007, and $64.8 million in 2006.
128 | 2010 ANNUAL REPORT TO SHAREHOLDERS | NORTHERN TRUST CORPORATION
CO NSO LIDA TE D FINAN CIA L STA TISTI C S
2008
AVERAGE
BALANCE
INTEREST
RATE
INTEREST
2007
AVERAGE
BALANCE
RATE
INTEREST
2006
AVERAGE
BALANCE
RATE
$37.2
888.2
$ 1,569.8
21,451.9
2.37% $
4.14
67.6
776.7
$ 1,330.6
16,797.3
5.08% $
4.62
45.8
481.2
$
916.4
12,716.9
5.00%
3.78
9.3
1,538.5
.60
1.2
21.3
934.7
24,560.2
3.81
845.5
18,149.2
.4
56.0
243.1
95.2
394.7
19.2
838.2
8,655.7
2,773.9
12,287.0
1,198.9
27,402.7
2.08
6.68
2.81
3.43
3.21
4.38
6.8
59.0
525.4
87.7
678.9
124.3
883.7
9,740.2
1,711.2
12,459.4
1,322.3
22,817.8
5.50
4.66
5.46
6.68
5.39
5.13
5.45
5.80
1.4
29.9
4.52
528.4
13,663.2
3.87
9.2
60.4
491.6
57.6
618.8
180.9
900.8
9,612.0
1,109.4
5.07
6.71
5.11
5.20
11,803.1
5.24
1,167.3
20,528.5
5.69
2,528.3
64,249.9
3.94%
2,846.7
53,426.4
5.33%
2,314.5
45,994.8
5.03%
–
–
–
–
(170.0)
3,236.8
5,711.8
$73,028.5
–
–
–
–
–
–
–
–
(140.2)
3,026.9
4,274.9
$60,588.0
–
–
–
–
–
–
–
–
(132.0)
3,667.4
3,575.7
$53,105.9
–
–
–
–
$137.9
72.0
20.2
885.9
1,116.0
77.4
38.6
155.8
11.6
$ 7,786.5
2,124.3
615.3
35,958.2
46,484.3
4,609.0
804.1
2,999.9
276.6
1,399.4
55,173.9
–
–
–
–
–
–
8,814.8
3,933.6
5,106.2
$73,028.5
1.77% $ 236.5
95.6
3.39
24.5
3.28
1,206.8
2.46
1,563.4
191.5
26.7
141.0
16.2
$ 7,016.4
2,019.8
518.1
28,587.8
38,142.1
4,321.5
478.6
2,504.0
276.5
1,938.8
45,722.7
–
–
–
–
–
–
7,648.4
3,052.7
4,164.2
$60,588.0
2.40
1.68
4.80
5.19
4.19
2.54
1.40
–
–
–
–
3.37% $ 188.1
71.4
4.73
17.9
4.74
807.3
4.22
$ 6,602.4
1,693.7
419.8
21,853.1
2.85%
4.21
4.28
3.69
4.10
4.43
5.58
5.63
5.88
4.24
1.09
–
–
–
–
1,084.7
236.3
16.5
152.6
14.9
30,569.0
6,536.4
364.8
2,663.4
276.4
3.55
3.62
4.52
5.73
5.40
1,505.0
40,410.0
3.72
–
–
–
–
–
–
6,389.2
2,520.0
3,786.7
1.31
–
–
–
$53,105.9
–
$1,128.9
$1,079.1
–
–
1.76% $ 907.9
1.68% $ 845.4
–
–
1.70% $ 809.5
1.58% $ 744.7
–
–
1.76%
1.62%
$762.2
366.7
$41,740.7
22,509.2
1.83% $ 749.5
158.4
1.63
$35,472.3
17,954.1
2.11% $ 713.0
96.5
.88
$31,826.3
14,168.5
2.24%
.68
$1,128.9
$64,249.9
1.76% $ 907.9
$53,426.4
1.70% $ 809.5
$45,994.8
1.76%
NORTHERN TRUST CORPORATION | 2010 ANNUAL REPORT TO SHAREHOLDERS | 129
SENIOR OFFICERS
N O R T H E R N T R U S T C O R P O R A T I O N
T H E N O R T H E R N T R U S T C O M P A N Y
N O R T H E R N T R U S T C O R P O R A T I O N
T H E N O R T H E R N T R U S T C O M P A N Y
Management Group
Other Senior Officers
Other Executive Vice Presidents
Frederick H. Waddell
Chairman, President, and
Chief Executive Officer
Sherry S. Barrat
President –
Personal Financial Services
Aileen B. Blake
Executive Vice President
Controller
Robert P. Browne
Executive Vice President
Chief Investment Officer
Steven L. Fradkin
President –
Corporate & Institutional Services
Caroline E. Devlin
Senior Vice President
Head of Corporate Strategy
Timothy P. Moen
Executive Vice President
Human Resources and Administration
Kelly King Dibble
Senior Vice President
Director of Public Affairs
William L. Morrison
Executive Vice President
Chief Financial Officer
Stephen N. Potter
President –
Northern Trust Global Investments
Jana R. Schreuder
President –
Operations & Technology
William R. Dodds, Jr.
Executive Vice President
Treasurer
Rose A. Ellis
Corporate Secretary
Assistant General Counsel
Beverly J. Fleming
Senior Vice President
Director of Investor Relations
Joyce M. St.Clair
Executive Vice President
Head of Corporate Risk Management
Connie L. Lindsey
Executive Vice President
Corporate Social Responsibility
Kelly R. Welsh
Executive Vice President
General Counsel
Saverio Mirarchi
Senior Vice President
Chief Compliance and Ethics Officer
Dan E. Phelps
Executive Vice President
General Auditor
Mark J. Van Grinsven
Executive Vice President
Credit Policy
130 | 2010 ANNUAL REPORT TO SHAREHOLDERS | NORTHERN TRUST CORPORATION
Penelope J. Biggs
S. Biff Bowman
Peter B. Cherecwich
Jeffrey D. Cohodes
Marianne G. Doan
Jennifer L. Driscoll
Arthur J. Fogel
Peter A. Gloyne
Mark C. Gossett
Darrell B. Jackson
Wilson Leech
Lyle L. Logan
R. Hugh Magill
Peter A. Magrini
K. Kelly Mannard
Brian P. Ovaert
Teresa A. Parker
Douglas P. Regan
Alan W. Robertson
Jean E. Sheridan
John D. Skjervem
Michael A. Vardas
Lloyd A. Wennlund
Heads of the U.S. Personal Financial
Services Regions
Sheldon T. Anderson
Chief Executive Officer
Southeast Region
Steven R. Bell
Chief Executive Officer
Western Region
David C. Blowers
Chief Executive Officer
Midwest Region
J. Jeffery Kauffman
Chief Executive Officer
Northeast Region
Steve MacLellan
Chief Executive Officer
Southwest Region
N O R T H E R N T R U S T C O R P O R A T I O N
Board of Directors
Frederick H. Waddell
Chairman, President, and Chief Executive Officer
Northern Trust Corporation and
The Northern Trust Company (6)
Linda Walker Bynoe
President and Chief Executive Officer
Telemat Ltd.
Project management and consulting firm (1, 2, 6)
Nicholas D. Chabraja
Retired Chairman and Chief Executive Officer
General Dynamics Corporation
Worldwide defense, aerospace, and other
technology products manufacturer (1, 4)
Susan Crown
Vice President
Henry Crown and Company
Worldwide company with
diversified manufacturing operations,
real estate, and securities (4, 5)
Dipak C. Jain
Dean Emeritus
Kellogg School of Management
Northwestern University
Dean Designate
INSEAD
Educational institution (3, 4, 6)
Robert W. Lane
Retired Chairman and Chief Executive Officer
Deere & Company
Worldwide provider of agricultural, construction,
and forestry equipment and financial services (1, 3)
Robert C. McCormack
Advisory Director
Trident Capital
Venture capital firm (1, 4)
Edward J. Mooney
Retired Délégué Général–North America
Suez Lyonnaise des Eaux
Worldwide provider of energy, water, waste,
and communications services;
Retired Chairman and Chief Executive Officer
Nalco Chemical Company
Manufacturer of specialized service chemicals (1, 2, 5, 6)
B OA RD OF DIRE C TORS
John W. Rowe
Chairman and Chief Executive Officer
Exelon Corporation
Producer and wholesale marketer of energy (3, 5, 6)
David H. B. Smith
Executive Vice President - Policy & Legal Affairs
and General Counsel
Mutual Fund Directors Forum
Nonprofit membership organization
for investment company directors (1, 2)
William D. Smithburg
Retired Chairman, President, and Chief Executive Officer
The Quaker Oats Company
Worldwide manufacturer and marketer of
beverages and grain-based products (4, 5, 6)
Enrique J. Sosa
Retired President
BP Amoco Chemicals
Worldwide chemical division of BP p.l.c. (2, 4)
Charles A. Tribbett III
Managing Director
Russell Reynolds Associates
Worldwide executive recruiting firm (2, 3)
A d v i s o r y D i r e c t o r
Sir John R.H. Bond
Chairman
Vodafone Group Plc
Worldwide mobile telecommunications
company (2, 3)*
*In an advisory capacity
Board Committees
1. Audit Committee
2. Business Risk Committee
3. Business Strategy Committee
4. Compensation and Benefits Committee
5. Corporate Governance Committee
6. Executive Committee
NORTHERN TRUST CORPORATION | 2010 ANNUAL REPORT TO SHAREHOLDERS | 131
CORPORATE INFORMATION
C o m p a r i s o n o f F i v e - Y e a r C u m u l a t i v e T o t a l R e t u r n
The graph below compares the cumulative total stockholder return on the Corporation’s common stock to the cumulative total
return of the S&P 500 Index and the Keefe, Bruyette & Woods (KBW) Bank Index for the five fiscal years which commenced
January 1, 2006 and ended December 31, 2010. The cumulative total stockholder return assumes the investment of $100 in the
Corporation’s common stock and in each index on December 31, 2005 and assumes reinvestment of dividends. The KBW Bank
Index is a modified-capitalization-weighted index made up of 24 of the largest banking companies in the United States. The
Corporation is included in the S&P 500 Index and the KBW Bank Index.
We caution you not to draw any conclusions from the data in this performance graph, as past results do not necessarily indicate
future performance.
T o t a l R e t u r n A s s u m e s $ 1 0 0 I n v e s t e d o n
D e c e m b e r 3 1 , 2 0 0 5 w i t h R e i n v e s t m e n t o f D i v i d e n d s
Five-Year Cumulative Total Return
180
130
80
30
2005
2006
2007
2008
2009
2010
Northern Trust
S&P 500
KBW Bank Index
Northern Trust
S&P 500
KBW Bank Index
2005
100
100
100
2006
119
116
117
December 31,
2007
153
122
91
2008
106
77
48
2009
108
97
47
2010
117
112
58
132 | 2010 ANNUAL REPORT TO SHAREHOLDERS | NORTHERN TRUST CORPORATION
A N N U A L M E E T I N G
The annual meeting of stockholders will be held on Tuesday,
April 19, 2011, at 10:30 A.M. (Central Time) at 50 South La
Salle Street, Chicago, Illinois.
S T O C K L I S T I N G
The common stock of Northern Trust Corporation is traded
on the NASDAQ Stock Market under the symbol NTRS.
S T O C K T R A N S F E R A G E N T , R E G I S T R A R , A N D D I V I D E N D
D I S B U R S I N G A G E N T
Wells Fargo Bank, N.A.
Shareowner Services
161 North Concord Exchange Street
South St. Paul, Minnesota 55075
General Phone Number: 1-800-468-9716
Internet Site: www.shareowneronline.com
A V A I L A B L E I N F O R M A T I O N
The Corporation’s Internet address is northerntrust.com.
Through our Web site, we make available free of charge our
annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and all amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d)
of the Exchange Act (15 U.S.C. 78m(a) or 78o(d)) as soon as
reasonably practicable after we electronically file such material
with, or furnish such material to, the Securities and Exchange
Commission. Information contained on the Web site is not
part of the Annual Report.
CORPORATE INFORMATION
1 0 - K R E P O R T
Copies of the Corporation’s 2010 10-K Report filed with the
Securities and Exchange Commission will be available by the
end of March 2011 and will be mailed to stockholders and
other interested persons upon written request to:
Rose A. Ellis
Corporate Secretary
Northern Trust Corporation
50 South La Salle Street, M-9
Chicago, Illinois 60603
Q U A R T E R L Y E A R N I N G S R E L E A S E S
Copies of the Corporation’s quarterly earnings releases may be
obtained by accessing Northern Trust’s Web site at
northerntrust.com or by calling the Corporate
Communications department at 312-444-4272.
I N V E S T O R R E L A T I O N S
Please direct Investor Relations inquiries to: Beverly J.
Fleming, Director of Investor Relations, at 312-444-7811 or
beverly_fleming@ntrs.com.
N O R T H E R N T R U S T . C O M
Information about the Corporation, including financial
performance and products and services, is available on
Northern Trust’s Web site at northerntrust.com.
N O R T H E R N T R U S T G L O B A L I N V E S T M E N T S
Northern Trust Corporation uses the name Northern Trust
Global Investments to identify the investment management
business, including portfolio management, research, and
trading, carried on by several of its affiliates, including The
Northern Trust Company, Northern Trust Global Advisors,
and Northern Trust Investments.
NORTHERN TRUST CORPORATION | 2010 ANNUAL REPORT TO SHAREHOLDERS | 133
[ T H I S P A G E I N T E N T I O N A L L Y L E F T B L A N K ]
[ T H I S P A G E I N T E N T I O N A L L Y L E F T B L A N K ]
n o r t h e r n t r u s t . c o m
consoliD ateD financial highlights
for th e ye ar ($ in mi llions)
revenues (taxable-equivalent Basis)
net income
net income applicable to common stock
pe r common share
net income — Basic
— Diluted
Dividends Declared on common stock
Book Value — end of period
market price — end of period
ave r ages ($ in millions)
assets
earning assets
securities
loans and leases
Deposits
stockholders’ equity
preferred stock — series B
common stockholders’ equity
at ye ar- e n d ($ in millions)
assets
earning assets
securities
loans and leases
reserve for credit losses assigned to loans
Deposits
common stockholders’ equity
r atios
return on average assets
return on average common equity
tier 1 capital to risk-Weighted assets
total capital to risk-Weighted assets
risk- adjusted leverage ratio
at ye ar- e n d ($ in B illions)
assets Under management
assets Under custody
global custody assets
RR Donnelly
Annual Report
#87520
IBC Cover
02.21.11
CYAN MAG YELL BLK pms8760
2010
20 09
perc ent c hange
$ 3,686.8
669.5
669.5
$
2.74
2.74
1.12
28.19
55.41
$ 76,008.2
67,865.4
19,859.2
27,514.4
55,583.1
6,634.4
—
6,634.4
$ 83,843.9
75,849.9
21,281.9
28,132.0
(319.6)
64,195.7
6,830.3
$ 3,827.1
864.2
753.1
$
3.18
3.16
1.12
26.12
52.40
$ 74,314.2
66,670.8
17,357.8
28,697.2
53,226.0
6,604.1
688.3
5,915.8
$ 82,141.5
74,567.3
18,633.4
27,805.7
(309.2)
58,281.3
6,312.1
(4) %
(23)
(11)
(14) %
(13)
—
8
6
2 %
2
14
(4)
4
—
(100)
12
2 %
2
14
1
3
10
8
0.88 %
10.09
13.6
15.6
8.8
1.16 %
12.73
13.4
15.8
8.8
$
643.6
4,081.3
2,258.4
$
627.2
3,657.0
1,933.0
3 %
12
17
the 2010 northern trust corporation annual report is printed on recycled paper made
from fiber sourced from well-managed forests and other controlled wood sources and is
independently certified to the forest stewardship counciltm (fsc®) standards.
© northern trust corporation
n o r t h e r n t r u s t
c o r p o r a t i o n
2010
a n n u a l r e p o r t
t o s h a r e h o l d e r s
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5 0 S O U T H L A S A L L E S T R E E T , C H I C A G O , I L L I N O I S 6 0 6 0 3
n o r t h e r n t r u s t . c o M
RR Donnelly
Annual Report
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