2012
A N N U A L R E P O R T
TO SHAREHOLDERS
Northern Trust Corporation
C O N S O L I D A T E D F I N A N C I A L H I G H L I G H T S
2012
2011
PERCENT CHANGE
FOR THE YEAR ($ IN MILLIONS)
Revenues (Taxable-Equivalent Basis)
Net Income
Dividends Declared on Common Stock
PER COMMON SHARE
Net Income — Basic
— Diluted
Dividends Declared
Book Value — End of Period
Market Price — End of Period
AVERAGES ($ IN MILLIONS)
Assets
Earning Assets
Securities
Loans and Leases
Deposits
Stockholders’ Equity
AT YEAR-END ($ IN MILLIONS)
Assets
Earning Assets
Securities
Loans and Leases
Allowance for Credit Losses Assigned to Loans and Leases
Deposits
Stockholders’ Equity
RATIOS
Return on Average Common Equity
Return on Average Assets
Dividend Payout Ratio
Tier 1 Capital to Risk-Weighted Assets
Total Capital to Risk-Weighted Assets
Tier 1 Leverage Ratio
AT YEAR-END ($ IN BILLIONS)
Assets Under Management
Assets Under Custody
Global Custody Assets
3 %
14
5
14 %
14
5
7
26
1 %
2
17
2
4
5
(3) %
(4)
—
2
1
(2)
6
$
3,936.9
$
3,810.1
687.3
286.9
603.6
273.4
$
2.82
$ 2.47
2.81
1.18
31.51
50.16
2.47
1.12
29.53
39.66
$ 92,975.5
$
91,947.9
84,168.5
30,893.8
28,975.7
75,219.8
7,358.2
82,748.8
26,406.4
28,346.7
72,446.4
7,024.2
$
97,463.8
100,223.7
$
87,472.7
31,033.5
29,504.5
(297.9)
81,407.8
7,527.0
90,793.6
30,999.7
29,063.9
(294.8)
82,677.5
7,117.3
9.34 %
8.59 %
0.74
42.0
12.8
14.3
8.2
0.66
45.4
12.5
14.2
7.3
$
758.9
$ 662.9
4,804.9
2,686.1
4,262.8
2,358.7
14 %
13
14
N O R T H E R N T R U S T
A L E A D I N G P R O V I D E R
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, Washington, D.C., and
16 international locations in North America, Europe,
the Middle East, and the Asia-Pacific region.
As of December 31, 2012, Northern Trust had assets
under custody of $4.8 trillion, assets under management
of $758.9 billion, and banking assets of $97.5 billion.
Founded in 1889, Northern Trust has earned distinction
as an industry leader combining exceptional service and
expertise with innovative capabilities and technology.
Frederick H. Waddell
chairman and chief executive officer
William L. Morrison
president and chief operating officer
T O O U R S H A R E H O L D E R S
For Northern Trust, 2012 was another solid year
or 7 percent – decline in other revenue,
marked by continued growth in our client base,
including foreign exchange trading and net
expansion of our global capabilities, and rising
interest income. As a result, our total revenue in
partner engagement in driving company
2012 advanced only 3 percent. As discussed in
performance. We generated our results, bolstered
previous years, these revenue pressures are a
by strong core trust fee growth, in a diffi cult
product of the economic environment and are
operating environment of persistent low interest
expected to persist for several more years.
rates and increased regulatory pressures.
Throughout the year, we focused on
meeting our clients’ needs and on improving the
OUR FIN AN CIAL PE RFORMAN CE
profi tability and returns of our business. Our
Our net income rose 14 percent from 2011
return on equity improved to 9.3 percent from
to $687.3 million, driven by modestly higher
8.6 percent in 2011, and capital actions –
revenue and well-controlled expenses. I am
including increasing the quarterly dividend to
pleased to report trust, investment, and other
$0.30 per share and repurchasing 3.5 million
servicing fees, our largest revenue source, rose
common shares – returned nearly $450 million
$236 million, or 11 percent, to $2.4 billion as
to our shareholders.
we gained new clients and more business from
Northern Trust’s balance sheet has long been,
existing clients. This outstanding performance,
and continues to be, a source of client comfort
however, was signifi cantly offset by a $109 million –
and fi nancial fl exibility for our businesses. On
2 | 2 0 12 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 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 O O U R S H A R E H O L D E R S
the asset side, our loan, securities, and liquidity
economy likely will persist for several more years.
portfolios remain high quality. Likewise,
Loan demand remains weak. Investors remain
deposits have been stable as we continue to
hesitant to commit to longer-term investments
attract new clients who value the soundness of
because of uncertainty around continuing
our balance sheet.
European problems, slowing emerging market
economies, and U.S. regulatory, fiscal, monetary,
GR OWING O UR CL IENT BASE
and political challenges. While the U.S.
Northern Trust’s greatest strength is our clients, and
government avoided the January 1 “fiscal cliff,”
2012 was a record year for building our business.
significant structural fiscal problems remain and
Our wealth management business had a
may slow U.S. growth. Against this uncertain
particularly strong year. Personal assets under
backdrop, the Federal Reserve announced its
custody increased by 16 percent to $446 billion
commitment to a low interest-rate policy for
and assets under management rose by 14 percent
some time to come.
to $198 billion. Client satisfaction and confidence
in our expertise remain high, leading to
DRIVI NG PERFORMANCE
Northern Trust being named Best Private Bank
In light of these continued challenges in our
in the United States by the Financial Times
operating environment and resultant revenue
Group for the fourth consecutive year.
headwinds, we took steps to improve our
In our institutional business, record levels of
productivity. At the conclusion of 2011, we
new business boosted our assets under custody
instituted a new corporate-wide philosophy
by 12 percent to $4.4 trillion and assets under
called Driving Performance, aimed at
management by 15 percent to $561 billion. We
delivering greater value to our clients,
also experienced robust growth in our hedge
shareholders, and partners by improving
fund services business. Prominent among
our profitability. As part of this effort, we
this success is a new relationship with global
committed to increasing our pre-tax income
hedge fund manager Bridgewater Associates,
by $250 million by the end of 2013, with at
announced in January 2013.
least half of that achieved in 2012. I am proud
to say we exceeded our 2012 goal, with the
CHALLENGI NG ENVIRONMENT
benefit of our efforts split roughly 40 percent/
Our industry’s macroeconomic operating
60 percent between revenue and expense
environment continues to be challenging, and
items, and I am confident we will reach
deleveraging in many sectors of the global
our $250 million target in 2013.
N O R T H E R N T R U S T C O R P O R A T I O N 2 0 1 2 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 | 3
T O O U R S H A R E H O L D E R S
Driving Performance is helping
12 and fi ve years, respectively, of service to our
Northern Trust fundamentally improve our
company. Both Bob and Enrique represented
productivity and profi tability while enhancing
Northern Trust with distinction, integrity, and
our capacity to invest in growth in the coming
expertise. We will miss their many contributions
years. Again, I am proud of our early results and
to our success.
believe our efforts have created a strong
In October, we announced the election of
foundation for continued success.
Jose Luis Prado, President of Quaker Oats North
America, a division of PepsiCo, to our board.
S TRON G LEA DERSH IP AND
Jose Luis’ global experience and marketing
DE DIC ATED EMPLOYEES
expertise already have proven valuable.
We announced several changes to our
And fi nally, let me extend a special word of
leadership team in 2012, attracting new talent
thanks to our 14,000-plus partners around the
and transitioning existing leaders into new roles.
globe who make Northern Trust a world-class
Prominent leadership changes included naming
institution. Our 2012 employee engagement
Biff Bowman as head of Human Resources and a
survey garnered a best-in-class response rate.
member of our Management Group and appointing
Our partners are invested in driving Northern
Tim Moen as Chief Administrative Offi cer.
Trust’s performance even higher, and our people
After 22 years with Northern Trust, Vice
continue to be the key to our success.
Chairman Sherry Barrat retired in 2012. Her
Northern Trust is a special place not only
distinguished career with Northern Trust began in
for our clients who entrust their fi nancial futures
Florida, took her to California, and eventually to
to us every day, but also for our Northern Trust
Chicago, where she ran our wealth management
partners and shareholders. Thank you for your
business. We thank Sherry for her many years of
support and confi dence as we continue working to
service to clients and partners alike.
generate long-term value for all our stakeholders.
Our board of directors provides valuable
leadership, insights, and experience to our
Frederick H. Waddell
management team. In April, Robert C. McCormack
chairman and chief executive officer
and Enrique J. Sosa retired from the board after
february 26, 2013
4 | 2 0 12 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 N O R T H E R N T R U S T C O R P O R A T I O N
C O N S I S T E N T L E A D E R S H I P
Top 50 Safest Global Banks
— Global Finance
One of the “World’s Most
Admired Companies”
— Fortune
Best Private Bank in
United States
— Financial Times Group
United Kingdom’s Top 50
Employers for Women
— The Times
Best Client Servicing
in Asia-Pacific Region
— Asia Asset Management
Hedge Fund Administrator
of the Year – Americas
— Custody Risk
Best Private Bank for
Socially Responsible Investing
— Financial Times Group
Top 10 Wealth Managers
— Barron’s
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A S S E T S E R V I C I N G
Throughout 2012, Corporate & Institutional Services (C&IS) focused on driving
execution, providing insight and value for clients, completing the integration of
key acquisitions, and offering innovative products. We made progress across all
these fronts amidst the backdrop of a challenging macroeconomic environment.
One example of this success was our attaining a record level of new business,
as reflected by 12 percent growth in our assets under custody, which rose to
$4.4 trillion from $3.9 trillion in 2011.
Trust, investment, and other servicing fees grew a strong 12 percent in 2012,
better than the 2 percent growth achieved in 2011. Overall fee growth reflected an
influx of new business and the rising global equity markets. These broad-based
inflows offset the adverse impact of persistently low interest rates that pressured
margins, and lower currency market volatility that contributed to a 39 percent
decline in foreign exchange trading income.
BUILDING OUR CLIENT BASE
During the year, we worked to win new clients, finish the onboarding of others,
and complete the integration of our 2011 Bank of Ireland Securities Services
and Omnium LLC acquisitions. Notably, we announced a new relationship to
provide independent replication of middle- and back-office services to
Bridgewater Associates, one of the world’s largest hedge fund managers, for its
$140 billion in assets under management.
This innovative relationship with Bridgewater Associates, which we expect to
implement in 2014, represents a new industry paradigm. It creates independent
controls and a new level of review and checks by two independent administrators,
features we believe other investors will demand in the future.
We also continued our impressive growth in Australia, including completion
of a complex onboarding process for the Queensland Investment Corporation
and the conversion of the Commonwealth Superannuation Corporation – one
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A S S E T S E R V I C I N G
of our largest superannuation fund clients – whose AU$24 billion in assets
place it among the largest funds in Australia.
Our Hedge Fund Services group, created in 2011, experienced robust
growth, doubling the number of clients by the end of 2012. We now serve many
of the world’s largest sovereign wealth funds as well as numerous U.S.-based
hedge funds, in addition to managers in Ireland, the Channel Islands, the
Cayman Islands, Scandinavia, and the Asia-Pacific region.
During 2012, we also provided new and established clients with risk-related
data required under evolving global regulatory changes. Whether in support of
private and public retirement funds around the globe, insurance companies
grappling with Solvency II, asset managers facing a variety of regulatory changes,
or other institutional clients, Northern Trust’s global operating platform provided
flexible data management capabilities for portfolio and risk information.
We will continue our efforts to earn the confidence of similar global clients
who value our industry-leading technology and access to our high-quality,
transparent middle- and back-office services.
DRIVIN G PE RFORMANCE
By supporting Driving Performance, we also delivered greater value to our
clients and shareholders. For example, we worked with clients globally to better
understand the services they most value. We evaluated the most cost-effective
ways and locations to provide certain services and operations around the clock,
spreading work more broadly across Asia and Europe. We also worked to
significantly enhance our fund administration operations in Limerick, Ireland.
Thanks to the exceptional efforts of our partners and support from clients
throughout the world, we executed our strategy well in 2012, increasing our
productivity and deploying capital efficiently. As we enter 2013, our C&IS business
remains focused and committed to outstanding service, expertise, and integrity.
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A S S E T M A N A G E M E N T
Throughout a year marked by uncertain economic and regulatory conditions,
our asset management clients – corporations, institutions, high-net-worth
individuals, and family offices – relied on us not only to listen to their specific
concerns but also provide solutions tailored to their needs. Northern Trust
Global Investments responded with innovative active, quantitative, and
multi-manager solutions and investment advice designed to help clients
navigate their decision-making day to day and in the future.
These efforts encouraged our clients to confidently entrust us with their
assets, resulting in a 14 percent increase in total assets under management (AUM),
which reached $758.9 billion at year-end.
BUILDING OUR CLIENT BASE
Our operational excellence and client-centric focus helped us create new products
and approaches that produced strong current investment returns. In particular,
we saw success in tactical asset allocation solutions through scalable products.
These include our target date funds and investment program outsourced
solutions. In particular, our Northern Global Tactical Asset Allocation Fund
(BBALX) registered strong annual returns for 2012.
Building on our successful 2011 launch, we added six new FlexShares
exchange traded funds (ETFs), bringing our total to 10 funds. By year-end,
FlexShares’ AUM had risen to nearly $2.3 billion, with $1.6 billion originating
from FlexShares Morningstar Global Upstream Natural Resources Index Fund
and FlexShares iBoxx 3-Year Target Duration TIPS Index Fund, our two largest,
fastest-growing funds. We also introduced a suite of dividend-focused equity
index funds – the first ETFs based on proprietary Northern Trust indexes – to
help investors achieve their income needs and still participate in capital growth
through the equity market.
To help clients achieve diversified portfolios during the continued low
interest-rate environment, our Alternatives Group added two new private equity
funds-of-funds to its product roster. In addition, our new single-strategy hedge
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A S S E T M A N A G E M E N T
fund-of-funds and our infrastructure and natural resource fund give clients
access to investment return patterns uncorrelated to traditional listed equity
and fixed-income returns.
In the defined contribution arena, business grew as we focused on efficient,
reliable, low-cost products that incorporate our expert asset allocation skills. Our
team also played a leading role in advising clients on their defined contribution
program design and best practices. As a result, defined contribution AUM
approached $80 billion in 2012, up 22 percent from 2011.
Internationally, we expanded our Hong Kong portfolio management and
trading activity teams and recruited new talent in the Asia-Pacific region. Across
Europe and the Middle East, our business development activity resulted in
significant client wins, efforts that helped boost non-U.S. client AUM to more
than $120 billion, up more than 16 percent from 2011. As an indication of our
strong market presence and expertise, we now manage assets for many of the
top sovereign wealth funds.
DRIVIN G PE RFORMANCE
While successfully supporting clients with their liquidity, income generation,
and capital appreciation needs, we also improved our productivity under
Driving Performance. Our new direct distribution team helped us expand
coverage in the institutional market. We also realigned our sales and servicing
resources to improve new business productivity, consolidated and streamlined
fund structures, and helped implement simplified pricing. All these efforts
promise even more efficiency as we move through 2013.
Our investment professionals are committed to evolving our role as a trusted
advisor and solution provider for our clients. We will continue aligning our
efforts around clients who seek to manage volatility and risk, achieve yield, and
invest with purpose, providing thoughtful advice and innovative solutions to
meet their investment goals.
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W E A L T H M A N A G E M E N T
By focusing squarely on Northern Trust’s greatest strength – providing
exceptional service to our clients – while streamlining our processes and
enhancing our capabilities, the Personal Financial Services (PFS) business
grew significantly in 2012. At year-end, personal client assets under custody
totaled $446.3 billion, up 16 percent from $385.2 billion in 2011, while
personal client assets under management grew 14 percent to $197.7 billion.
BUILDING OUR CLIENT BASE
Our three-pronged approach in 2012 aimed specifically at incorporating new
technology, developing growth markets, and augmenting our expert advisory talent.
These investments in our business address trends caused by shifts in demographics,
increasingly complex client expectations, and intensified competition.
We optimized our technology to better assist clients. A key development
for our clients and their advisors was the introduction of a new tool to facilitate
collaborative conversations that identify life goals and risk preferences. The tool
also enables the matching of assets with a client’s unique goals to provide more
confidence in meeting those goals. We fully converted clients to Private Passport®,
our online service that allows clients to view all their financial accounts in
one place, manage and move money easily, and access their financial reports
electronically anywhere and everywhere. We also added a convenient mobile
smart phone banking application, initiated an iPad®-based paperless client
presentation capability, and unveiled a comprehensive new tool designed to
better document, assess, and respond to prospective client needs. All of these
tools make it easier and more efficient for clients to access the information,
services, and expertise they regularly use.
By keeping a keen watch on our clients’ needs, we cultivated growth in the
most promising markets, investing more in Washington, D.C., increasing activity
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W E A L T H M A N A G E M E N T
in Delaware, updating offices in California and Arizona, as well as making
key hires in Texas to open a new Fort Worth location. Our Global Family Office
division’s deep experience in the ultra-high-net-worth market helped us
continue investing in our ability to serve the approximately 400 ultra-wealthy
individuals, families, and family offices in 25 countries who rely on us for wealth
management. We also hired expert partners to provide targeted investment,
planning, tax, fiduciary, and advisory services to all our clients.
DRIVIN G PE RFORMANCE
Managing the business with a focus on Driving Performance helped us identify
where we could increase operating efficiency while simultaneously creating
greater value for our clients and shareholders. In addition to the introduction of
a more transparent and simplified fee methodology, we enhanced our advisory
services, streamlined our management structure, and optimized our office
network by closing under-utilized locations. In 2012, PFS expenses declined
3 percent while trust, investment, and other servicing fees – our largest revenue
component – grew 10 percent.
As the year came to a close, our leadership devised a target operating model
and identified related technology capital outlays. These efforts helped pinpoint
investment in capability and tool development that will provide considerable
value for clients and partners in 2013 and beyond.
During 2012, we again successfully navigated the persistent headwinds
arising from the economic and financial environment. We expect 2013 to present
us with similar challenges and are prepared to take them on as they arise.
Regardless of the environment, we will continue to showcase our thought
leadership and client-oriented approach by providing clients with the exceptional
service and trusted advice they expect from Northern Trust now and in the future.
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G L O B A L C I T I Z E N S H I P
COMMUNITY & PH ILA NTHROPY
Community involvement remains a deeply rooted part of Northern Trust’s
culture of caring. In 2012, our corporate philanthropy program awarded
approximately $15 million in cash contributions to charities worldwide,
focusing on enriching neighborhoods, preserving the environment,
enhancing education, and sharing in the arts.
Northern Trust partners volunteered nearly 200,000 hours to charitable
causes around the globe. In addition, United Way of Metropolitan Chicago
recognized us as the top corporate citizen for the more than $3 million
Northern Trust and our partners contributed to its 2012-13 campaign. Partners
outside Chicago raised more than $500,000 for regional United Way entities. In
response to Hurricane Sandy’s devastation, Northern Trust and our partners
gave a total of $211,000 to American Red Cross disaster relief efforts.
We continued supporting international organizations, including the
Lord Mayor of London’s Appeal (United Kingdom); the Association of People
with Disability (India); Volunteer Ireland (Ireland); Box of Hope (China);
and Ardoch Youth Foundation (Australia).
Northern Trust remains fully committed to promoting community
development and revitalization. Our U.S. banking subsidiary maintained an
“Outstanding” Community Reinvestment Act (CRA) rating from regulatory
agencies. Our efforts provided more than $59.5 million in affordable mortgage
loans in 2012 and approximately $84.1 million in community development
loans. For the year, completed CRA investments totaled $72.8 million.
CORP ORATE SOCIA L RES PONSI BI L ITY
Northern Trust is focused on integrating our Corporate Social Responsibility
(CSR) practice into our corporate strategy and won recognition again in 2012 as
best-in-class for the financial services industry.
For the second consecutive year, we were included in the World and
North America Dow Jones Sustainability IndexesSM and were listed in their 2012
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G L O B A L C I T I Z E N S H I P
annual yearbook as a financial services Sustainability Leader. The FTSE4Good
Index included Northern Trust for the sixth straight year, making us one of
just 13 U.S. financial firms in that index. GS SUSTAIN ranked our CSR practice
16th out of 50 banks globally. In addition, Sustainalytics rated us third of
158 financial services firms globally for our CSR efforts, and the Global Reporting
Initiative ranked our annual CSR report highly among the North American
financial services industry.
By incorporating research, ratings, and screening tools from leading provider
MSCI, we further enhanced our range of solutions for institutional investors
seeking socially responsible, customizable investment options.
We are proud of this recognition and are committed to working hard to
be the best possible corporate citizen and steward of our environment now and
in the future.
DIVERS ITY & IN CLU SION
At Northern Trust, our ongoing business success arises partly from our
commitment to diversity and inclusion. In 2012, we deepened our understanding
of regional differences through an assessment in Asia Pacific that identified ways
to address partners’ professional interests and career goals. A proprietary series
of programs helped our diversity and affinity groups cultivate leadership abilities.
To recognize our military members and families, we formed a Military Assistance
and Appreciation Resource Council, our 10th affinity group. We also participated
in the United Nations Alliance of Civilizations campaign celebrating World Day
for Cultural Diversity and in a U.S. State Department program on diversity,
inclusion, and foreign policy.
We continued to be recognized for our efforts. Northern Trust was named
to the United Kingdom’s Top 50 Employers for Women by The Times of London
and ranked again among Diversity MBA Magazine’s 50 Out Front for Diversity
Leadership: Best Places for Diverse Managers to Work. We are proud of these efforts
and the recognition they bring to Northern Trust and our partners worldwide.
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M A N A G E M E N T G R O U P
standing
Stephen N. Potter
president
northern trust global investments
seated
Jana R. Schreuder
president
personal financial services
William L. Morrison
president and
chief operating officer
Frederick H. Waddell
chairman and
chief executive officer
S. Biff Bowman
executive vice president
head of human resources
Timothy P. Moen
executive vice president
chief administrative officer
Joyce M. St.Clair
president
operations & technology
Steven L. Fradkin
president
corporate & institutional services
Michael G. O’Grady
executive vice president
chief financial officer
Jeffrey D. Cohodes
executive vice president
chief risk officer
Kelly R. Welsh
executive vice president
general counsel
1 4 | 2 0 12 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 N O R T H E R N T R U S T C O R P O R A T I O N
B O A R D O F D I R E C T O R S
Frederick H. Waddell
Chairman 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, 6)
Susan Crown
Vice President
Henry Crown and Company
Worldwide company with diversified manufacturing
operations, real estate, and securities;
Chief Executive Officer
Owl Creek Partners, LLP
Venture capital investment vehicle;
Chairman and Founder
Susan Crown Exchange Inc. (SCE)
Nonprofit foundation focused on 21st century
skill-building (4, 5)
st century
Dipak C. Jain
Dean (Until March 1, 2013);
Former Dean and Marketing Professor
(Effective March 1, 2013)
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, 5)
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, 4, 6)
Jose Luis Prado
President
Quaker Foods North America
Division of PepsiCo, Inc., a global food and
beverage company (2, 3)
John W. Rowe
Chairman Emeritus
Exelon Corporation
Producer and wholesale marketer of energy (4, 5, 6)
Martin P. Slark
Vice Chairman and Chief Executive Officer
Molex Incorporated
Manufacturer of electronic, electrical, and fiber optic
interconnection products and systems (2, 3)
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)
Charles A. Tribbett III
Managing Director
Russell Reynolds Associates
Worldwide executive recruiting firm (3, 5)
advisory director
Sir John R.H. Bond
Chairman
Xstrata plc
Global diversified mining group (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
N O R T H E R N T R U S T C O R P O R A T I O N 2 0 1 2 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 | 15
N O R T H E R N T R U S T . C O M
F I N A N C I A L R E V I E W
18
Consolidated Highlights of Financial
Condition and Results of Operations
19
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
62
Management’s Report on Internal Control Over
Financial Reporting
63
Report of Independent Registered Public Accounting Firm with
Respect to Internal Control over Financial Reporting
64
Consolidated Financial Statements
68
Notes to Consolidated Financial Statements
123
Report of Independent Registered Public Accounting Firm
124
Consolidated Financial Statistics
128
Senior Officers
127
Board of Directors
129
Corporate Information
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)
2012
2011
2010
2009
2008
C O N S O L I D A T E D H I G H L I G H T S O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S
FOR THE YEAR ENDED DECEMBER 31,
Noninterest Income
Trust, Investment and Other Servicing Fees
Foreign Exchange Trading Income
Treasury Management Fees
Security Commissions and Trading Income
Gain on Visa Share Redemption
Other Operating Income
Investment Security Gains (Losses), net
$ 2,405.5
206.1
67.4
73.6
–
154.9
(1.7)
Total Noninterest Income
Net Interest Income
Total Revenue
Provision for Credit Losses
Income before Noninterest Expense
Noninterest Expense
Compensation
Employee Benefits
Outside Services
Equipment and Software
Occupancy
Visa Indemnification Benefits
Other Operating Expense
Total Noninterest Expense
Income before Income Taxes
Provision for Income Taxes
Net Income
Net Income Applicable to Common Stock
$
$
2,905.8
990.3
3,896.1
25.0
3,871.1
1,267.4
258.2
529.2
366.7
174.4
–
282.9
2,878.8
992.3
305.0
687.3
687.3
$ 2,169.5
324.5
72.1
60.5
–
158.1
(23.9)
2,760.8
1,009.1
3,769.9
55.0
3,714.9
1,267.2
258.2
552.8
328.1
180.9
(23.1)
267.1
2,831.2
883.7
280.1
603.6
603.6
$
$
$ 2,081.9
382.2
78.1
60.9
–
146.3
(20.4)
2,729.0
918.7
3,647.7
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
$
$
Average Total Assets
PER COMMON SHARE
Net Income – Basic
– Diluted
Cash Dividends Declared Per Common Share
Book Value – End of Period (EOP)
Market Price – EOP
AT YEAR END
Senior Notes
Long-Term Debt
Floating Rate Capital Debt
RATIOS
Return on Average Common Equity
Return on Average Assets
Dividend Payout Ratio
Tier 1 Capital to Risk-Weighted Assets – EOP
Total Capital to Risk-Weighted Assets – EOP
Tier 1 Leverage Ratio
Average Stockholders’ Equity to Average Assets
$92,975.5
$91,947.9
$76,008.2
$
2.82
2.81
1.18
31.51
50.16
$ 2,405.8
1,421.6
277.0
9.34%
0.74
42.0
12.8
14.3
8.2
7.9
$
2.47
2.47
1.12
29.53
39.66
$ 2,126.7
2,133.3
276.9
8.59%
0.66
45.4
12.5
14.2
7.3
7.6
$
2.74
2.74
1.12
28.19
55.41
$ 1,896.1
2,729.3
276.9
10.09%
0.88
40.8
13.6
15.6
8.8
8.7
$ 2,083.8
445.7
81.8
62.4
–
136.8
(23.4)
2,787.1
999.8
3,786.9
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
$74,314.2
$
3.18
3.16
1.12
26.12
52.40
$ 1,551.8
2,837.8
276.8
$ 2,134.9
616.2
72.8
77.0
167.9
186.9
(56.3)
3,199.4
1,079.1
4,278.5
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
$73,028.5
$
3.51
3.47
1.12
21.89
52.14
$ 1,052.6
3,293.4
276.7
12.73%
1.16
35.2
13.4
15.8
8.8
8.9
15.98%
1.09
32.0
13.1
15.4
8.5
7.0
18 | 2 0 1 2 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 N O R T H E R N T R U S T C O R P O R A T I O N
M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S
B U S I N E S S O V E R V I E W
for
families,
institutions,
corporations,
Northern Trust Corporation (the Corporation), together with
its subsidiaries, 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 through its two primary business
units, Personal Financial Services (PFS) and Corporate &
Institutional Services (C&IS). Asset management and related
services are provided to PFS and C&IS clients primarily by a
Investments
third business unit, Northern Trust Global
(NTGI). Northern Trust emphasizes a high level of client
technology
service complemented by the effective use of
delivered by a
and
Technology (O&T).
fourth business unit, Operations
subsidiaries,
(U.S.) and non-U.S.
Northern Trust conducts business through various United
States
including The
Northern Trust Company (the Bank). The Corporation has a
network of offices in 18 U.S. states; Washington, D.C.; and 16
international locations in North America, Europe, the Middle
East and the Asia Pacific region. Except where the context
the term “Northern Trust” refers to
otherwise requires,
subsidiaries on a
Northern Trust Corporation and its
consolidated basis.
F I N A N C I A L O V E R V I E W
Net income in 2012 totaled $687.3 million and earnings per
common share totaled $2.81. This compares with net income
of $603.6 million and earnings per common share of $2.47 in
2011. Net income in 2012 and 2011 included restructuring,
acquisition and integration related charges of $18.6 million
($12.0 million after tax, or $0.05 per common share) and
$91.6 million ($59.8 million after tax, or $0.25 per common
share), respectively. In addition, net income in 2011 benefited
from reductions of a liability related to potential losses from
indemnified litigation involving Visa, as further described in
statements. Visa
Note 24 to the consolidated financial
indemnification benefits totaled $23.1 million in 2011 and
fully eliminated the liability as of December 31, 2011.
Our return on common equity in 2012 was 9.3%,
compared to 8.6% in 2011 and our target range of 10-15%.
Throughout 2012, Northern Trust focused on the needs of our
clients and on improving the productivity and profitability of
our business. We successfully executed on the Driving
Performance initiatives announced at the beginning of 2012,
which contributed approximately $160 million in pre-tax
profit improvements in 2012, surpassing the goal for the year
and remaining on track to deliver $250 million of pre-tax
benefits by the end of 2013.
Revenue totaled $3.90 billion in 2012, an increase of 3%
from 2011, primarily reflecting increased trust, investment
and other servicing fees, partially offset by lower foreign
exchange trading income.
Trust,
investment and other
servicing fees, which
represent the largest component of consolidated revenue,
increased by 11% to $2.41 billion, from $2.17 billion in 2011.
This increase primarily reflects new business, revised fee
structures and lower waived fees on money market mutual
funds, which equaled $74.5 million in 2012 compared to
$102.1 million in 2011. The increase also reflects the full year
benefit in 2012 of two acquisitions completed in 2011. In June
of 2011, Northern Trust acquired a fund administration,
investment operations outsourcing and custody business, now
known as Northern Trust Securities Services
(Ireland)
Limited, and in July of 2011, Northern Trust acquired a hedge
fund administrator, now known as Northern Trust Hedge
Fund Services LLC.
Foreign exchange trading income of $206.1 million
decreased $118.4 million, or 36%, from 2011, a result of
reduced currency market volatility and client volumes.
Client assets under custody and under management both
increased during 2012. Client assets under custody increased
13% from $4.3 trillion in 2011 to $4.8 trillion, and included
$2.7 trillion of global custody assets, up 14% from 2011.
Client assets under management increased 14% to $758.9
billion from $662.9 billion in 2011. These increases reflect new
business won from both existing and new clients, and higher
market values.
Net interest income of $990.3 million decreased $18.8
million, or 2%, primarily due to a decline in the net interest
margin, partially offset by higher average earning assets.
The provision for credit losses totaled $25.0 million in
2012, down from $55.0 million in 2011. The lower provision
reflects improvement in the credit quality of commercial and
institutional loans, while weakness persists in residential real
estate loans and commercial real estate loans. Nonperforming
assets decreased $39.8 million, or 13%, and net charge-offs
decreased $57.1 million, or 68%, from 2011. The allowance
for credit losses assigned to loans and leases at December 31,
2012 and 2011 totaled $297.9 million and $294.8 million,
respectively, and represented 1.01% of total year-end loans
and leases. Loans and leases equaled $29.5 billion at year end,
an increase of 2% from $29.1 billion at the end of 2011.
Total noninterest expense equaled $2.88 billion, up 2%
from 2011. Excluding the current and prior year restructuring,
acquisition and integration related charges of $18.6 million
N O R T H E R N T R U S T C O R P O R A T I O N 2 0 1 2 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 | 19
M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S
and $91.6 million, respectively, and the prior year Visa
indemnification benefits, noninterest expense increased $97.5
million, or 4%, primarily reflecting higher equipment and
software expense and the full year impact in 2012 of operating
costs from the 2011 acquisitions. Restructuring, acquisition
and integration related charges recorded in 2012 primarily
reflect outside services expense and reductions in office space,
while charges recorded in 2011 reflected severance expense,
consulting expense, charges related to software write-offs, and
reductions in office space.
Northern Trust continues to maintain a strong capital
position, exceeding “well capitalized” levels under federal
bank regulatory capital requirements, with tier 1 capital and
tier 1 common ratios of 12.8% and 12.4%, respectively. At
year end, total stockholders’ equity equaled $7.5 billion, up
6% from $7.1 billion a year earlier. Northern Trust declared
dividends of $286.9 million in 2012, representing a dividend
payout
and repurchased approximately
3.5 million shares in 2012 at a cost of $162.9 million.
Dividends and share repurchases combined, Northern Trust’s
total payout ratio was 65% in 2012.
ratio of 42%,
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
remainder of
income
revenue and consists of
generated by earning assets, net of interest expense on deposits
and borrowed funds.
interest
Revenue for 2012 was $3.90 billion, an increase of $126.2
million, or 3%, from $3.77 billion in 2011, which was up 3%
from 2010 revenue of $3.65 billion. Noninterest income
represented 75% of total revenue in 2012 and totaled $2.91
billion, up 5% from $2.76 billion in 2011. Noninterest income
represented 73% of total revenue in 2011 and was higher by
1% from $2.73 billion in 2010.
The current year increase in revenue primarily reflects
increased trust, investment and other servicing fees, partially
offset by a decline in foreign exchange trading income. Trust,
investment and other servicing fees – the largest component of
noninterest income – totaled $2.41 billion in 2012 compared
with $2.17 billion in 2011, primarily reflecting new business,
including the full year benefit in 2012 of the acquisitions
completed in 2011, as well as revised client fee structures and
lower waived fees on money market mutual funds. Foreign
exchange trading income in 2012 totaled $206.1 million, down
36% compared with $324.5 million in 2011, reflecting reduced
currency market volatility and client volumes from 2011 levels.
Net interest income on a fully taxable equivalent (FTE)
basis in 2012 was $1.03 billion, down 2% from $1.05 billion in
2011, which was up 10% from $957.8 million in 2010. The
decrease in net interest income is primarily attributable to a
decline in the net interest margin, partially offset by higher
average earning assets. The net interest margin declined to
1.22% from 1.27% in 2011, while average earning assets
increased $1.4 billion, or 2%, in 2012, primarily reflecting
higher levels of investments in securities and interest-bearing
deposits with banks, partially offset by lower levels of deposits
with the Federal Reserve.
Additional
information regarding Northern Trust’s
revenue by type is provided below.
2012 TOTAL REVENUE OF $3.90 BILLION
62% Trust, Investment and Other
Servicing Fees
25% Net Interest Income
8% Other Noninterest Income
5%
Foreign Exchange Trading
Income
20 | 2 0 1 2 A N N U A L R E P O R T T O S H A R E H O L D E R S N O R T H E R N T R U S T C O R P O R A T I O N
M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S
Noninterest Income
The components of noninterest income, and a discussion of significant changes during 2012 and 2011, are provided below.
N O N I N T E R E S T I N C O M E
($ In Millions)
Trust, Investment and Other Servicing Fees
Foreign Exchange Trading Income
Treasury Management Fees
Security Commissions and Trading Income
Other Operating Income
Investment Security Gains (Losses), net
2012
2011
2010
2012 / 2011
2011 / 2010
CHANGE
$2,405.5
206.1
67.4
73.6
154.9
(1.7)
$2,169.5
324.5
72.1
60.5
158.1
(23.9)
$2,081.9
382.2
78.1
60.9
146.3
(20.4)
11%
(36)
(6)
22
(2)
(93)
5%
4%
(15)
(8)
(1)
8
17
1%
Total Noninterest Income
$2,905.8
$2,760.8
$2,729.0
Trust, Investment and Other Servicing Fees
Trust, investment and other servicing fees were $2.41 billion
in 2012 compared with $2.17 billion in 2011. For a more
investment and other
detailed discussion of 2012 trust,
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. 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 3% and in total revenue 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)
1,387
1,499
1,281
1,609
8% 1,409
1,523
(7)
1,259
1,549
12% 1,426
1,604
(2)
1,258
1,413
13%
14
2012
2011
CHANGE
2012
2011
CHANGE
2012
2011
CHANGE
Assets under custody and assets under management form the primary basis of our trust, investment and other servicing fees. At
December 31, 2012, assets under custody were $4.8 trillion, up 13% from $4.3 trillion a year ago, and included $2.7 trillion of global
custody assets. Assets under custody at December 31, 2011 included $2.4 trillion of global custody assets. Assets under management
totaled $758.9 billion, up 14% from $662.9 billion at the end of 2011.
A S S E T S U N D E R C U S T O D Y
DECEMBER 31,
CHANGE
($ In Billions)
2012
2011
2010
2009
2008
2012 / 2011
2011 / 2010
FIVE-YEAR
COMPOUND
GROWTH
RATE
Corporate & Institutional
Personal
$4,358.6
446.3
$3,877.6
385.2
$3,711.1
370.2
$3,325.9
331.1
$2,719.2
288.3
Total Assets Under Custody
$4,804.9
$4,262.8
$4,081.3
$3,657.0
$3,007.5
12%
16
13%
4%
4
4%
3%
6
3%
N O R T H E R N T R U S T C O R P O R A T I O N 2 0 1 2 A N N U A L R E P O R T T O S H A R E H O L D E R S | 21
M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S
C&IS ASSETS UNDER CUSTODY
(In Billions)
PFS ASSETS UNDER CUSTODY
(In Billions)
4,358.6
3,711.1
3,877.6
3,325.9
2,719.2
446.3
370.2
385.2
331.1
288.3
2008
2009
2010
2011
2012
2008
2009
2010
2011
2012
A S S E T S U N D E R M A N A G E M E N T
DECEMBER 31,
CHANGE
($ In Billions)
2012
2011
2010
2009
2008
2012 / 2011
2011 / 2010
FIVE-YEAR
COMPOUND
GROWTH
RATE
Corporate & Institutional
Personal
$561.2
197.7
$489.2
173.7
$489.2
154.4
$482.0
145.2
$426.4
132.4
Total Assets Under Management
$758.9
$662.9
$643.6
$627.2
$558.8
15%
14
14%
–%
13
3%
(2)%
6
–%
C&IS ASSETS UNDER MANAGEMENT
(In Billions)
561.2
482.0
489.2
489.2
426.4
PFS ASSETS UNDER MANAGEMENT
(In Billions)
197.7
173.7
145.2
154.4
132.4
2008
2009
2010
2011
2012
2008
2009
2010
2011
2012
Assets under custody and under management were invested as follows:
A S S E T S U N D E R C U S T O D Y
DECEMBER 31,
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
Equities
Fixed Income Securities
Cash and Other Assets
C&IS
44%
37
19
C&IS
51%
16
33
2012
PFS
46%
24
30
2012
PFS
37%
30
33
CONSOLIDATED
C&IS
44%
36
20
43%
37
20
DECEMBER 31,
CONSOLIDATED
C&IS
48%
19
33
47%
14
39
2011
PFS
43%
28
29
2011
PFS
34%
32
34
CONSOLIDATED
43%
37
20
CONSOLIDATED
44%
19
37
22 | 2 0 1 2 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 N O R T H E R N T R U S T C O R P O R A T I O N
M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S
Foreign Exchange Trading Income
Treasury Management Fees
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 foreign exchange
trading income. This income decreased $118.4 million, or 36%,
and totaled $206.1 million in 2012 compared with $324.5
million last year. The decrease from the prior year primarily
reflects reduced currency market volatility and client volumes.
Treasury management fees decreased 6%, to $67.4 million
from $72.1 million in 2011. The decrease in 2012 is primarily
due to lower transaction volumes.
Security Commissions and Trading Income
Security commissions and trading income is generated
primarily from securities brokerage services provided by
Northern Trust Securities, Inc. The increase of $13.1 million,
or 22%, to $73.6 million in 2012 from $60.5 million in 2011
principally reflects higher revenue from interest rate protection
products and an increase in core brokerage revenue.
Other Operating Income
The components of other operating income include:
($ In Millions)
Loan Service Fees
Banking Service Fees
Other Income
Total Other Operating Income
2012
$ 64.5
55.0
35.4
$154.9
2011
$ 68.9
54.9
34.3
$158.1
2010
2012 / 2011
2011 / 2010
CHANGE
$ 60.3
57.3
28.7
$146.3
(6)%
–
3
(2)%
14%
(4)
19
8%
The decrease in loan service fees is primarily attributable
to lower fees associated with commercial loans, partly due to
reduced refinancing activity in 2012.
Investment Security Gains (Losses), Net
Net investment security losses totaled $1.7 million and $23.9
million in 2012 and 2011, respectively. The current year
includes $3.3 million of pre-tax charges for the credit-related
residential
other-than-temporary impairment
mortgage backed securities and auction rate securities held
within Northern Trust’s balance sheet investment securities
portfolio. The prior year included $23.3 million of OTTI
charges attributable to residential mortgage backed securities.
(OTTI) of
N O N I N T E R E S T I N C O M E – 2 0 1 1 C O M P A R E D W I T H 2 0 1 0
Trust, investment and other servicing fees were $2.17 billion
in 2011 compared with $2.08 billion in 2010. The increase was
primarily due to acquisitions and other new business in 2011
and the favorable impact of equity markets on fees, partially
offset by a decrease in securities lending revenue. Securities
lending revenue decreased $107.3 million, or 55%, to $87.9
million in 2011,
from $195.2 million in 2010, reflecting
recoveries in 2010 of approximately $114 million of previously
recorded unrealized asset valuation losses in a mark-to-market
investment fund used in our securities lending activities. In
September 2010, securities in the mark-to-market fund were
sold with the proceeds reinvested into a short duration fund,
eliminating the mark-to-market impact on securities lending
revenue in periods subsequent to the date of sale. Foreign
exchange trading income decreased 15% in 2011 to $324.5
million from $382.2 million in 2010. The decrease reflected
reduced currency market volatility and client volumes from
2010 levels.
Treasury management fees were $72.1 million in 2011,
down 8% from $78.1 million in 2010, primarily due to lower
transaction volumes in 2011.
Other operating income totaled $158.1 million in 2011, an
increase of 8% from $146.3 million in 2010. The increase
primarily reflected increased loan service fees and higher
miscellaneous other income, partially offset by lower banking
service fees.
Net investment security losses of $23.9 million in 2011
and $20.4 million in 2010 included $23.3 million and $21.2
million,
to
residential mortgage backed securities.
respectively, of OTTI
attributable
charges
N O R T H E R N T R U S T C O R P O R A T I O N 2 0 1 2 A N N U A L R E P O R T T O S H A R E H O L D E R S | 23
M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S
Net Interest Income
Net interest income stated on an FTE basis is a non-GAAP financial measure that facilitates the analysis of asset yields. When
adjusted to an FTE basis, yields on taxable, nontaxable, and partially taxable assets are comparable; however, the adjustment to an
FTE basis has no impact on net income. A reconciliation of net interest income on a GAAP basis to net interest income on an FTE
basis is provided on page 59. An analysis of net interest income on an FTE basis, major balance sheet components impacting net
interest income, and related ratios are provided below.
A N A L Y S I S O F N E T I N T E R E S T I N C O M E ( F T E )
CHANGE
($ In Millions)
Interest Income – GAAP
FTE Adjustment
Interest Income – FTE
Interest Expense
Net Interest Income – FTE Adjusted
Net Interest Income – GAAP
AVERAGE BALANCE
Earning Assets
Interest-Related Funds
Net Noninterest-Related Funds
AVERAGE RATE
Earning Assets
Interest-Related Funds
Interest Rate Spread
Total Source of Funds
Net Interest Margin – FTE
Refer to pages 124 and 125 for additional analysis of net interest income.
2012
2011
2010
2012 / 2011
2011 / 2010
$ 1,287.7
40.8
1,328.5
297.4
1,031.1
$ 1,408.6
40.2
1,448.8
399.5
1,049.3
$ 1,296.7
39.1
1,335.8
378.0
957.8
$
990.3
$ 1,009.1
$
918.7
$84,168.5
62,293.0
21,875.5
$82,748.8
67,049.8
15,699.0
$67,865.4
57,179.4
10,686.0
(9)%
1
(8)
(26)
(2)
(2)%
2%
(7)
39
CHANGE IN PERCENTAGE
1.58%
0.48
1.10
0.35
1.22%
1.75%
0.60
1.15
0.48
1.27%
1.97%
0.66
1.31
0.56
1.41%
(0.17)
(0.12)
(0.05)
(0.13)
(0.05)
9%
3
9
6
10
10%
22%
17
47
(0.22)
(0.06)
(0.16)
(0.08)
(0.14)
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 –
federal funds sold; securities purchased under agreements to
resell; interest-bearing deposits with banks; Federal Reserve
deposits; other interest-bearing deposits; securities; and loans
and leases – are financed by a large base of interest-bearing
funds that include deposits; short-term borrowings; senior
notes and long-term debt. Earning assets also are funded by net
noninterest-related funds, which include demand deposits; the
allowance 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. Net
interest income is determined by variations in the level and mix
of earning assets and interest-bearing funds and their relative
the levels of
sensitivity to interest
nonperforming
compensating deposit
assets
balances used to pay for services impact net interest income.
rates.
and client
In addition,
Net interest income in 2012 was $990.3 million, down 2%
from $1.01 billion in 2011. Net interest income on an FTE
basis for 2012 was $1.03 billion, a decrease of 2% from $1.05
24 | 2 0 1 2 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 N O R T H E R N T R U S T C O R P O R A T I O N
billion in 2011. The decrease primarily reflects a decline in the
net interest margin, partially offset by higher levels of average
earning assets. The net interest margin was 1.22%, down from
1.27% in 2011, primarily reflecting lower yields on earning
assets, partially offset by a lower cost of funding, driven by
lower interest rates and a higher level of noninterest-related
funds. Average earning assets increased $1.4 billion, or 2%, to
$84.2 billion from $82.7 billion in 2011. Growth in average
earning assets primarily reflects a $4.5 billion increase in
securities, a $1.5 billion increase in interest-bearing deposits
with banks, and a $0.6 billion increase in loans and leases,
partially offset by a $5.2 billion decrease in Federal Reserve
and other interest-bearing deposits.
Loans and leases averaged $29.0 billion, 2% higher than the
$28.3 billion in 2011. The increase is primarily due to higher
average balances of personal loans and commercial loans.
Securities, inclusive of Federal Reserve and Federal Home
Loan Bank stock and certain community development
investments which are classified in other assets
in the
consolidated balance sheet, averaged $30.9 billion, up $4.5
billion, or 17% from 2011, with the growth primarily in U.S.
government sponsored agency and U.S. government securities.
M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S
levels
The $1.4 billion increase in average earning assets to $84.2
billion in 2012 from $82.7 billion in 2011 was funded by
higher
funds. Average
noninterest-related funding sources in 2012 increased $5.6
billion from 2011, primarily due to an increase in average
demand and other noninterest-bearing deposits.
noninterest-related
of
lower
average
deposits,
Interest-related funds decreased $4.8 billion, primarily
attributable to lower average balances in non-U.S. office
short-term
interest-bearing
borrowings and lower average long-term debt. The decrease in
average long-term debt reflects the maturity of 5.20% fixed
rate senior notes in November of 2012, as well as the
maturities of certain Federal Home Loan Bank borrowings
during 2012, partially offset by the issuance in August of 2012
of $500 million of 2.375% fixed-rate senior notes of the
Corporation due on August 2, 2022. The senior notes are non-
callable and unsecured, and were issued at a 0.283% discount.
bank
subsidiaries and foreign branches are primarily interest-
bearing and averaged $41.7 billion in 2012, $37.8 billion in
2011, and $30.0 billion in 2010.
deposits maintained with
Custody
related
Stockholders’ equity averaged $7.4 billion in 2012
compared with $7.0 billion in 2011. The increase of $334.0
million, or 5%, principally reflects the retention of earnings,
partially offset by dividends and the repurchase of common
stock pursuant to Northern Trust’s share buyback program.
Under our capital plan, which was reviewed without objection
by the Federal Reserve in March 2012, the Corporation may
repurchase up to $77.1 million of common stock after
December 31, 2012 through March 2013. During 2012,
Northern Trust repurchased 3,516,254 shares at a cost of
share). The
$162.9 million ($46.32 average price per
Corporation’s common stock repurchase authorization was
replaced in March of 2012, pursuant to which the Corporation
is authorized to purchase up to 6.8 million additional shares
after December 31, 2012. The Corporation’s capital actions in
2012, including dividend declarations totaling $286.9 million
and the common stock repurchases totaling $162.9 million,
returned $449.8 million in capital to shareholders. In January
2013, the Corporation submitted its most recent capital plan
to the Federal Reserve Board.
For additional analysis of average balances and interest
rate changes affecting net interest income, refer to the Average
Balance Sheet with Analysis of Net Interest Income on
pages 124 and 125.
N E T I N T E R E S T I N C O M E – 2 0 1 1 C O M P A R E D W I T H 2 0 1 0
Net interest income on an FTE basis was $1.05 billion in 2011, up
10% from $957.8 million in 2010. The increase primarily
reflected higher average earning assets, partially offset by a
decline in the net interest margin. The net interest margin
decreased to 1.27% in 2011 from 1.41% in 2010, limiting the
benefit from higher deposits as yields on high quality investments
declined due to the persistent low interest rate environment.
Earning assets averaged $82.7 billion in 2011, up 22%
from $67.9 billion in 2010. The growth reflected a $6.5 billion
increase in securities, a $5.0 billion increase in Federal Reserve
Deposits and Other Interest-Bearing assets, and a $2.5 billion
increase in interest-bearing deposits with banks. The growth
in average earning assets was funded by higher levels of both
noninterest and interest-related funds. Average noninterest-
related funding sources in 2011 increased $5.7 billion from
2010, primarily due to increases in average demand and other
noninterest-bearing deposits. The growth in interest-related
funds was primarily attributable to higher average client
balances in non-U.S. office interest-bearing deposits and
increased savings and money market deposits, partially offset
by lower average short-term borrowings. In August of 2011,
the
$500 million of 3.375% fixed-rate senior notes of
Corporation were issued that are due on August 23, 2021.
Stockholders’ equity averaged $7.0 billion in 2011 and
$6.6 billion in 2010. The increase reflected the retention of
earnings, partially offset by dividends and the repurchase of
common stock.
Provision for Credit Losses
The provision for credit losses was $25.0 million in 2012
compared with $55.0 million in 2011 and $160.0 million in
2010. The current year provision reflects improved credit
quality metrics for the overall portfolio relative to 2011.
Within the portfolio,
real estate loans and
residential
commercial real estate loans continue to reflect weakness
relative to the overall portfolio accounting for 91% and 88%
of total nonperforming loans at December 31, 2012 and 2011,
respectively. For a fuller discussion of the allowance and
provision for credit losses for 2012, 2011, and 2010, refer to
pages 54 and 55.
N O R T H E R N T R U S T C O R P O R A T I O N 2 0 1 2 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 | 25
M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S
Noninterest Expense
Noninterest expense for 2012 totaled $2.88 billion, up $47.6 million, or 2%, from $2.83 billion in 2011. Noninterest expense in 2012
and 2011 reflect charges of $18.6 million ($12.0 million after tax) and $91.6 million ($59.8 million after tax), respectively, associated
with restructuring, acquisition and integration related activities. Noninterest expense in 2011 also includes Visa indemnification
related benefits of $23.1 million. Excluding the 2012 and 2011 restructuring, acquisition and integration related charges and the
2011 Visa indemnification benefits, noninterest expense increased $97.5 million, or 4%, primarily reflecting higher equipment and
software expense and the full period impact of operating costs attributable to the acquisitions completed in 2011.
The components of noninterest expense and a discussion of significant changes during 2012 and 2011 are provided below.
N O N I N T E R E S T E X P E N S E
($ In Millions)
Compensation
Employee Benefits
Outside Services
Equipment and Software
Occupancy
Visa Indemnification Benefit
Other Operating Expense
Total Noninterest Expense
2012
$1,267.4
258.2
529.2
366.7
174.4
–
282.9
$2,878.8
2011
$1,267.2
258.2
552.8
328.1
180.9
(23.1)
267.1
$2,831.2
2010
2012 / 2011
2011 / 2010
CHANGE
$1,108.0
237.6
460.4
287.1
167.8
(33.0)
270.0
$2,497.9
–%
–
(4)
12
(4)
(100)
6
2%
14%
9
20
14
8
(30)
(1)
13%
The following table presents restructuring, acquisition and integration charges incurred in 2012 and 2011 by component of
noninterest expense.
R E S T R U C T U R I N G , A C Q U I S I T I O N A N D I N T E G R A T I O N C H A R G E S
(In Millions)
Compensation
Employee Benefits
Outside Services
Equipment and Software
Occupancy
Other Operating Expense
Total
Compensation
Compensation expense, the largest component of noninterest
expense,
totaled $1.27 billion in both 2012 and 2011.
Compensation expense in 2011 included $50.2 million of
severance related accruals in connection with restructuring,
acquisition and integration activities, while 2012 includes $0.3
million of net reductions in severance related accruals.
Excluding these charges, the $50.7 million, or 4%, increase
from the prior year primarily reflects annual salary increases,
the full year impact of operating costs attributable to the 2011
acquisitions, and higher performance-based compensation.
Staff on a full-time equivalent basis totaled approximately
14,200 at December 31, 2012 compared with approximately
14,100 at December 31, 2011, and averaged 14,100 in 2012, up
4% compared with 13,500 in 2011.
26 | 2 0 1 2 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 N O R T H E R N T R U S T C O R P O R A T I O N
2012
$ (0.3)
0.8
12.1
0.9
3.6
1.5
$18.6
2011
$50.2
4.3
16.8
10.9
6.4
3.0
$91.6
Employee Benefits
Employee benefits expense totaled $258.2 million in both 2012
and 2011 and included severance related charges of $0.8
million and $4.3 million in 2012 and 2011, respectively.
Employee benefits expense in 2011 also includes the reversal
of an employee benefit related accrual of $9.7 million for
which the 2010 goal was not met. Excluding the current year
and prior year severance related charges and the prior year
employee benefit related accrual reversal, employee benefits
expense decreased $6.2 million, or 2%, primarily reflecting
lower retirement benefits expense in 2012.
Outside Services
Outside services expense totaled $529.2 million in 2012, down
$23.6 million, or 4%, from $552.8 million in 2011. Outside
services expense included restructuring and integration related
charges of $12.1 million in 2012 and restructuring, acquisition
M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S
and integration related charges of $16.8 million in 2011.
Excluding the current year and prior year charges, outside
services expense decreased $18.9 million, or 4%, from the
prior year, primarily reflecting decreases within investment
manager sub-advisor fees, consulting fees, and sub-custodian
expense, partially offset by higher expense associated with
technical services,
including the full year cost of services
attributable to the 2011 acquisitions. Investment manager
investment
fees are those paid to external
sub-advisor
managers for services provided to certain funds Northern
Trust manages and those relating to custom client programs.
Technical services expense includes costs 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
Equipment and software expense, comprised of depreciation
and amortization; rental; and maintenance costs, increased
$38.6 million, or 12%, to $366.7 million in 2012 compared to
$328.1 million in 2011. Equipment and software expense in
2012 includes software write-offs of $15.1 million. Equipment
and software expense in 2011 included $10.9 million of
software write-offs related to restructuring activities. Excluding
Other Operating Expense
these software write-offs, equipment and software expense
increased $34.4 million, or 11%, primarily reflecting higher
software amortization and support costs from the continued
investment in technology related assets.
Occupancy
Occupancy expense totaled $174.4 million in 2012, down $6.5
million, or 4%, from $180.9 million in 2011. Occupancy
expense in 2012 and 2011 included $3.6 million and $6.4
million,
related to
reductions in office space. Excluding the restructuring charges,
occupancy expense decreased $3.7 million, or 2%, in 2012,
due to reductions in office space.
restructuring charges
respectively, of
Visa Indemnification Benefits
In 2011 and 2010, reductions to Northern Trust’s Visa
indemnification liability and related charges totaled $23.1
million and $33.0 million, respectively. Northern Trust 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
years. Visa
indemnification charges are further discussed in Note 24 to
the consolidated financial statements.
escrow account
in those
litigation
Other operating expense in 2012 totaled $282.9 million, up $15.8 million, or 6% from $267.1 million in 2011. Other operating
expense in 2012 and 2011 included $1.5 million and $3.0 million, respectively, of restructuring, acquisition and integration related
charges. The components of other operating expense are as follows:
($ In Millions)
Business Promotion
FDIC Insurance Premiums
Staff Related
Other Intangibles Amortization
Other Expenses
Total Other Operating Expense
2012
$ 87.8
25.4
41.9
20.3
107.5
$282.9
2011
$ 82.1
29.3
37.6
17.5
100.6
$267.1
2010
$ 81.0
33.9
37.4
14.4
103.3
$270.0
CHANGE
2012 / 2011
2011 / 2010
7%
(13)
11
16
7
6%
1%
(14)
1
22
(3)
(1)%
FDIC insurance premiums decreased primarily due to
changes in the FDIC’s assessment methodology in 2011. The
increase in staff related expense primarily reflects higher
relocation costs. Other
intangibles amortization expense
increased primarily due to the amortization of intangible
assets purchased in connection with the 2011 acquisitions.
N O N I N T E R E S T E X P E N S E – 2 0 1 1 C O M P A R E D W I T H 2 0 1 0
Noninterest expense in 2011 totaled $2.83 billion, up 13%
from $2.50 billion in 2010. Noninterest expense in 2011
of
charges
$91.6 million
associated with
included
restructuring, acquisition and integration related activities.
Noninterest expense in 2011 and 2010 included reductions to
Northern Trust’s Visa indemnification liability of $23.1
million and $33.0 million, respectively.
Compensation expense in 2011 included $50.2 million of
severance charges related to restructuring, acquisition and
integration activities. Excluding these charges, compensation
expense increased $109.0 million, or 10% from 2010, reflecting
higher full-time equivalent staff levels, the majority of which
N O R T H E R N T R U S T C O R P O R A T I O N 2 0 1 2 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 | 27
M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S
related matters. The provision for income tax in 2011 reflected
the favorable resolution of certain leveraged leasing matters
with the Internal Revenue Service and certain state tax matters.
The tax provisions for 2012 and 2011 reflect reductions
totaling $27.1 million and $21.3 million, respectively, related
to certain non-U.S. subsidiaries whose earnings are being
indefinitely reinvested.
The 2010 income tax provision of $320.3 million
represented an effective rate of 32.4% and included a $20.1
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 and Chief
Executive Officer Frederick H. Waddell, is organized around
its two principal client-focused business units, C&IS and PFS.
Asset management and related services are provided to C&IS
and PFS clients primarily 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
and management
strategic objectives
Northern Trust’s
structure. Management has developed accounting systems to
allocate revenue and expense related to each segment. These
systems 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
expense 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.
and certain corporate
were attributable to the 2011 acquisitions, as well as annual
salary increases. Staff on a full-time equivalent basis averaged
13,500 in 2011, up 7% compared with 12,600 in 2010.
Employee benefits expense in 2011 was $258.2 million, up
$20.6 million, or 9%, from $237.6 million in 2010. The
increase reflected operating costs associated with the 2011
acquisitions and $4.3 million of severance related accruals in
2011. The remaining increase was primarily due to higher full-
federal and unemployment
time equivalent
insurance, and pension expense, partially offset by the reversal
in 2011 of an employee benefit related accrual of $9.7 million
for which the 2010 goal was not met.
levels,
staff
Outside services expense in 2011 included restructuring,
acquisition and integration charges of $16.8 million.
Excluding these charges, outside services expense increased
$75.6 million, or 16%, primarily reflecting higher expense
associated with technical services and investment manager
sub-advisor fees, partly attributable to the 2011 acquisitions.
Equipment and software expense in 2011 included $10.9
million of restructuring charges related to software write-offs.
Excluding these charges, equipment and software expense
increased $30.1 million, or 10%, primarily reflecting higher
software amortization and support costs attributable to
increased investment in technology related assets.
Occupancy expense for 2011 was $180.9 million, up $13.1
million, or 8%, from $167.8 million in 2010, primarily due to
$6.4 million of restructuring charges as well as operating costs
attributable to the 2011 acquisitions.
Other operating expense totaled $267.1 million in 2011,
down from $270.0 million in 2010, reflecting reduced FDIC
insurance premiums and miscellaneous other expenses,
partially offset by increased amortization costs attributable to
intangible assets purchased in the 2011 acquisitions.
Provision for Income Taxes
are
earnings
subsidiaries whose
Provisions for income tax and effective tax rates are impacted
by levels of pre-tax income, tax rates, and the impact of certain
indefinitely
non-U.S.
the
reinvested, as well as non-recurring items
resolution of tax matters. The 2012 provision for income taxes
was $305.0 million, representing an effective rate of 30.7%.
This compares with a provision for income taxes of $280.1
million and an effective rate of 31.7% in 2011. The provision
for income tax in 2012 includes a $12.4 million tax benefit in
connection with the resolution of certain leveraged lease
such as
28 | 2 0 1 2 A N N U A L R E P O R T T O S H A R E H O L D E R S N O R T H E R N T R U S T C O R P O R A T I O N
M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S
C O N S O L I D A T E D F I N A N C I A L I N F O R M A T I O N
CHANGE
($ In Millions)
Noninterest Income
Trust, Investment and Other Servicing Fees
Foreign Exchange Trading Income
Other Noninterest Income
Net Interest Income (FTE) (Note)
Revenue (FTE) (Note)
Provision for Credit Losses
Visa Indemnification Benefit
Noninterest Expense (Excluding Visa Indemnification
Benefit)
Income before Income Taxes (Note)
Provision for Income Taxes (Note)
Net Income
Average Assets
2012
2011
2010
2012 / 2011
2011 / 2010
$ 2,405.5
206.1
294.2
1,031.1
3,936.9
25.0
–
2,878.8
1,033.1
345.8
$ 2,169.5
324.5
266.8
1,049.3
3,810.1
55.0
(23.1)
2,854.3
923.9
320.3
$ 2,081.9
382.2
264.9
957.8
3,686.8
160.0
(33.0)
2,530.9
1,028.9
359.4
$
687.3
$92,975.5
$
603.6
$91,947.9
$
669.5
$76,008.2
11%
(36)
10
(2)
3
(55)
(100)
1
12
8
14%
1%
4%
(15)
1
10
3
(66)
(30)
13
(10)
(11)
(10)%
21%
Note: Stated on an FTE basis. The consolidated figures include $40.8 million, $40.2 million, and $39.1 million of FTE adjustments for 2012, 2011, and 2010, respectively.
Corporate & Institutional Services
The C&IS business unit is a leading global provider of asset servicing, securities lending, brokerage, banking and related services to
corporate and public retirement funds, foundations, endowments, fund managers, insurance companies, sovereign wealth and
government funds. Asset servicing and related services encompass a full range of industry leading capabilities including but not
limited to: global master trust and custody, trade settlement, and reporting; fund administration; cash management; investment risk
and performance analytical services; investment operations outsourcing; and transition management and commission recapture.
Client relationships are managed through the Bank and the Bank’s and the Corporation’s other subsidiaries, including support from
international locations in North America, Europe, the Middle East, and the Asia Pacific region. C&IS also executes related foreign
exchange transactions from offices located in the United States, United Kingdom, and Singapore.
The following table summarizes the results of operations of C&IS for the years ended December 31, 2012, 2011, and 2010 on a
management-reporting basis.
C O R P O R A T E & I N S T I T U T I O N A L S E R V I C E S
R E S U L T S O F O P E R A T I O N S
($ In Millions)
Noninterest Income
Trust, Investment and Other Servicing Fees
Foreign Exchange Trading Income
Other Noninterest Income
Net Interest Income (FTE) (Note)
Revenue (FTE) (Note)
Provision for Credit Losses
Noninterest Expense
Income before Income Taxes (Note)
Provision for Income Taxes (Note)
Net Income
2012
2011
2010
2012 / 2011
2011 / 2010
CHANGE
$ 1,334.1
193.5
193.6
280.1
2,001.3
(2.1)
1,599.9
403.5
114.3
$ 1,196.4
315.7
169.7
282.5
1,964.3
(20.5)
1,522.4
462.4
168.3
$ 1,175.1
375.3
147.4
271.8
1,969.6
(16.1)
1,328.9
656.8
222.4
$
289.2
$
294.1
$
434.4
12%
(39)
14
(1)
2
(90)
5
(13)
(32)
(2)%
5%
2%
(16)
15
4
–
27
15
(30)
(24)
(32)%
23%
Percentage of Consolidated Net Income
42%
49%
65%
Average Assets
Note: Stated on an FTE basis.
$49,904.0
$47,533.7
$38,749.3
The 2% decrease in C&IS net income in 2012 primarily
resulted from lower foreign exchange trading income and
higher noninterest expense, attributable to the full year impact
in 2012 of the 2011 acquisitions, partially offset by increased
trust,
investment and other servicing fees and a lower
provision for income taxes. The increase in trust, investment
and other servicing fees was primarily attributable to new
the 2011
including the full year benefit of
business,
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income in 2011
acquisitions. The 32% decrease in net
compared to 2010 primarily reflected lower foreign exchange
trading income and higher noninterest expense,
including
operating costs from the 2011 acquisitions and restructuring,
acquisition and integration charges, partially offset by
increased trust, investment and other servicing fees.
C&IS Trust, Investment and Other Servicing Fees
to
to
related
services
C&IS trust, investment and other servicing fees are primarily
custody,
attributable
fund
administration,
and securities
investment management,
lending. 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
priced using month-end, quarter-end, or 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. The other services fee category in C&IS
includes such products as benefit payment, investment risk
and analytical services, electronic delivery, and other services.
Revenue from these products is based generally on the volume
of services provided or a fixed fee.
Provided below are the components of C&IS trust,
investment and other servicing fees.
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
2012 C&IS FEES
(In Millions)
2012
2011
2010
Custody and Fund Administration
Investment Management
Securities Lending
Other
$ 863.9
281.0
96.3
92.9
$ 770.1
262.5
87.9
75.9
$ 646.1
261.2
195.2
72.6
Total Trust, Investment and Other
Servicing Fees
$1,334.1
$1,196.4
$1,175.1
65% Custody and Fund Administration
21% Investment Management
7%
Securities Lending
7% Other
the
Custody and fund administration fees,
largest
component of trust,
investment and other servicing fees,
increased $93.8 million, or 12%, primarily reflecting higher
fund administration revenue due to the full year benefit in
2012 of the acquisitions completed in 2011 and other new
business. Fees from investment management increased $18.5
million, or 7%, from the prior year primarily due to new
business and improved markets. Investment management fees
funds
include waived fees on money market mutual
attributable to the persistent low level of short-term interest
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
DECEMBER 31,
(In Billions)
2012
2011
2010
North America
Europe, Middle East, and Africa
Asia Pacific
Securities Lending
$2,414.6
1,459.7
396.4
87.9
$2,112.1
1,351.4
319.4
94.7
$1,999.6
1,280.7
331.7
99.1
Total Assets Under Custody
$4,358.6
$3,877.6
$3,711.1
30 | 2 0 1 2 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 N O R T H E R N T R U S T C O R P O R A T I O N
rates. Money market mutual fund fee waivers in C&IS totaled
$29.8 million and $34.3 million in 2012 and 2011,
respectively. Securities lending revenue increased $8.4 million,
or 10%, reflecting higher spreads in the current year, partially
offset by lower average volumes. C&IS other trust, investment
and servicing fees increased $17.0 million, or 22%, primarily
reflecting higher income attributable to investment risk and
analytical services.
Provided below is a breakdown of C&IS the assets under
custody and under management.
2012 C&IS ASSETS UNDER CUSTODY
55% North America
34% Europe, Middle East, and Africa
9%
2%
Asia Pacific
Securities Lending
M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A 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)
2012
2011
2010
North America
Europe, Middle East, and Africa
Asia Pacific
Securities Lending
$364.5
60.2
48.6
87.9
$304.0
48.7
41.8
94.7
$284.7
69.0
36.4
99.1
Total Assets Under Management
$561.2
$489.2
$489.2
C&IS assets under
custody were $4.4 trillion at
December 31, 2012, 12% higher than the $3.9 trillion at
December 31, 2011. Assets under management totaled $561.2
billion and $489.2 billion at December 31, 2012 and 2011,
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 securities lending
collateral
totaled $87.9 billion and $94.7 billion at
December 31, 2012 and 2011, respectively.
C&IS Foreign Exchange Trading Income
Foreign exchange trading income totaled $193.5 million in
2012, a $122.2 million, or 39%, decrease from $315.7 million
in 2011, reflecting reduced currency market volatility and
client volumes in the current year. Foreign exchange trading
income in 2011 of $315.7 million decreased $59.6 million, or
16%, from $375.3 million in 2010, due to reduced currency
market volatility and client volumes.
C&IS Other Noninterest Income
reflecting
increased other operating
Other noninterest income for 2012 increased $23.9 million, or
14%, to $193.6 million in 2012, from $169.7 million in 2011,
primarily
income
attributable to higher banking and credit related service fees in
the current year. Other noninterest income in 2011 of $169.7
million increased $22.3 million, or 15%, compared to $147.4
million in 2010, primarily reflecting the benefit of 2011
acquisitions and other new business in 2011.
C&IS Net Interest Income
Net interest income decreased 1% in 2012 to $280.1 million
from $282.5 million in 2011. The decrease primarily reflects a
decline in the net interest margin, partially offset by higher
levels of average earning assets. The C&IS net interest margin
in 2012 was 0.66% compared to 0.70% in 2011 and 0.77% in
2010. The decrease in the net interest margin in 2012 is
2012 C&IS ASSETS UNDER MANAGEMENT
65% North America
16% Securities Lending
11% Europe, Middle East, and Africa
8%
Asia Pacific
primarily attributable to lower yields on earning assets,
including lower spreads on certain currencies, partially offset
by lower funding costs, both the result of the low interest rate
environment. In 2011, higher levels of average earning assets
increased net interest income, which was up $10.7 million, or
4%, from $271.8 million in 2010, but were partially offset by a
lower net interest margin.
C&IS Provision for Credit Losses
The provision for credit losses was negative $2.1 million for
2012 primarily reflecting recoveries of previously charged off
exposures and improvement in underlying asset quality metrics
within the commercial and institutional
loan portfolio,
partially offset by allowances established as a result of higher
commercial and institutional
financing
receivable balances. The provision for credit losses was negative
$20.5 million for 2011 compared to negative $16.1 million in
2010, reflecting recoveries of previously charged off exposures
and improvement in underlying asset quality metrics within
both commercial and institutional loans and commercial real
estate loans segment as compared to 2010.
loan and lease
C&IS Noninterest Expense
C&IS noninterest expense was up $77.5 million, or 5%, in
2012 and totaled $1.60 billion compared to $1.52 billion in
2011. Noninterest expense in 2012 and 2011 included
restructuring, acquisition and integration related charges of
$21.5 million and $60.8 million, respectively. Excluding these
charges, C&IS noninterest expense increased $116.8 million,
or 8%, from 2011, primarily reflecting the full year impact in
2012 of the 2011 acquisitions and higher indirect expense
allocations for product and operating support. Noninterest
expense in 2011 increased $193.5 million, or 15%, from $1.33
billion in 2010, reflecting operating expense attributable to the
2011
acquisition and
and
acquisitions
integration related charges.
restructuring,
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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
to meet
Global Family Office, which provides customized products
and services
the complex financial needs of
individuals and family offices in the United States and
throughout the world with assets typically exceeding $200
million. PFS services are delivered through a network of
offices in 18 U.S. states and Washington, D.C., as well as
offices in London and Guernsey.
The following table summarizes the results of operations of PFS for the years ended December 31, 2012, 2011, and 2010 on a
management-reporting basis.
P E R S O N A L F I N A N C I A L S E R V I C E S
R E S U L T S O F O P E R A T I O N S
($ In Millions)
Noninterest Income
Trust, Investment and Other Servicing Fees
Foreign Exchange Trading Income
Other Noninterest Income
Net Interest Income (FTE) (Note)
Revenue (FTE) (Note)
Provision for Credit Losses
Noninterest Expense
Income before Income Taxes (Note)
Provision for Income Taxes (Note)
Net Income
2012
$ 1,071.4
12.6
93.6
629.9
1,807.5
27.1
1,182.3
598.1
226.4
$
2011
973.1
8.8
119.7
613.7
1,715.3
75.5
1,214.9
424.9
168.7
$
906.8
6.9
126.4
591.8
1,631.9
176.1
1,103.0
352.8
132.8
2010
2012 / 2011
2011 / 2010
CHANGE
10%
43
(22)
3
5
(64)
(3)
41
34
45%
–%
7%
28
(5)
4
5
(57)
10
20
27
16%
1%
Percentage of Consolidated Net Income
54%
42%
33%
Average Assets
Note: Stated on an FTE basis.
$23,917.9
$23,861.5
$23,564.5
$
371.7
$
256.2
$
220.0
PFS net income increased 45% in 2012 primarily as a
result of increased revenue, a lower provision for credit losses,
and decreased noninterest expense. The 5% increase in PFS
revenue in 2012 is primarily attributable to increases in trust,
investment and other servicing fees and in net interest income,
partially offset by lower other noninterest
income. The
decrease in noninterest expense is primarily due to a current
year $4.6 million net reduction of certain restructuring related
accruals and lower full-time equivalent staff levels in 2012.
PFS Trust, Investment and Other Servicing Fees
expense
included $27.4 million of
2011 noninterest
restructuring related charges. The 16% increase in PFS net
income in 2011 from 2010 is primarily attributable to
increased trust, investment and other servicing fees and net
interest income, as well as a lower provision for credit losses.
These were partially offset by increased noninterest expense in
2011, including restructuring related charges totaling $27.4
million, and a higher provision for income tax.
Provided below is a summary of PFS trust, investment and other servicing fees and assets under custody and under management.
2012 PFS FEES
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
(In Millions)
Central
East
West
Global Family Office
YEAR ENDED DECEMBER 31,
2012
2011
2010
$ 435.8
279.8
228.1
127.7
$399.2
248.0
208.5
117.4
$373.0
224.8
185.8
123.2
Total Trust, Investment and Other
Servicing Fees
$1,071.4
$973.1
$906.8
32 | 2 0 1 2 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 N O R T H E R N T R U S T C O R P O R A T I O N
41% Central
26% East
21% West
12% Global Family Office
M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S
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
DECEMBER 31,
2012 PFS ASSETS UNDER CUSTODY
(In Billions)
Global Family Office
Central
East
West
2012
2011
2010
$270.4
71.9
63.9
40.1
$226.5
67.6
54.6
36.5
$221.9
64.1
49.4
34.8
Total Assets Under Custody
$446.3
$385.2
$370.2
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
DECEMBER 31,
2012 PFS ASSETS UNDER MANAGEMENT
(In Billions)
Central
East
Global Family Office
West
2012
2011
2010
$ 75.0
49.5
41.8
31.4
$ 68.5
42.1
34.0
29.1
$ 60.4
35.9
31.5
26.6
Total Assets Under Management
$197.7
$173.7
$154.4
The PFS regions shown above are comprised of the
following: Central
includes Illinois, Michigan, Minnesota,
Missouri, Ohio and Wisconsin; East includes Connecticut,
Delaware, Florida, Georgia, Massachusetts, New York and
Washington, D.C.; West
includes Arizona, California,
Colorado, Nevada, Texas and Washington; Global Family
Office provides specialized asset management,
investment
consulting, global custody, fiduciary, and private banking
services to ultra-wealthy domestic and international clients.
Fees in the majority of locations in which PFS operates
and all mutual fund-related revenue are calculated primarily
based on market values. PFS trust,
investment and other
servicing fees were $1.07 billion in 2012, up 10% from $973.1
million in 2011, which in turn was up 7% from $906.8 million
in 2010. The current year performance benefitted from new
business, revised fee structures, lower waived fees in money
market mutual funds, and the favorable impact of markets on
fees. PFS waived fees
funds,
attributable to the persistent low level of short-term interest
rates, totaled $44.7 million and $67.8 million in 2012 and
2011, respectively. Trust, investment and other servicing fees
for 2011 were higher than 2010, reflecting new business and
the favorable impact of markets on fees.
in money market mutual
61% Global Family Office
16% Central
14% East
9% West
38% Central
25% East
21% Global Family Office
16% West
At December 31, 2012, assets under custody in PFS were
$446.3 billion compared with $385.2 billion at December 31,
2011. Assets under management were $197.7 billion at
December 31, 2012 compared to $173.7 billion at the previous
year end.
PFS Foreign Exchange Trading Income
Foreign exchange trading income totaled $12.6 million in
2012, an increase of 43% from $8.8 million in 2011, primarily
due to increased client activity in 2012. Foreign exchange
trading income of $8.8 million in 2011 was 28% higher than
$6.9 million in 2010.
PFS Other Noninterest Income
Other noninterest income for the year totaled $93.6 million
compared to $119.7 million in 2011. The decrease of $26.1
million, or 22%, is primarily driven by a decrease in other
operating income related to lower banking and credit related
service fees in the current year. The other noninterest income
decrease of $6.7 million, or 5%, in 2011 compared to 2010
resulted from decreases in security commissions and trading
income and treasury management fees.
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funds, and
traded funds, non-U.S. collective investment
funds. NTGI offers both
unregistered private investment
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
advisory services and products. NTGI’s activities also include
overlay services and other risk management services. NTGI’s
business operates internationally through subsidiaries and
distribution arrangements and its revenue and expense are
fully allocated to C&IS and PFS.
At year-end 2012, Northern Trust managed $758.9 billion
in assets for personal and institutional clients compared with
$662.9 billion at year-end 2011. The increase in assets reflects
higher equity markets in 2012 and new business.
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
2 0 1 2 A S S E T S U N D E R M A N A G E M E N T O F $ 7 5 8 . 9 B I L L I O N
ASSET CLASSES
PFS Net Interest Income
Net interest income was $629.9 million for the year, up $16.2
million, or 3%, from $613.7 million in 2011. The increase
primarily reflects an increase in the net interest margin. The
PFS net interest margin in 2012 was 2.67% compared to
2.61% in 2011. The increase in the net interest margin is
primarily attributable to higher internal yields received from
the Treasury & Other business unit on certain deposit
products, partially offset by lower yields on loans and leases.
Net interest income in 2011 was $21.9 million, or 4%, higher
than in 2010 and the net interest margin in 2011 of 2.61% was
up from the 2010 margin of 2.55%. The higher net interest
margin in 2011 primarily reflected a lower cost of funds.
PFS Provision for Credit Losses
The provision for credit losses totaled $27.1 million for 2012,
compared with $75.5 million in 2011, and $176.1 million in
2010. The current year provision reflects reduced net charge-
offs on commercial real estate loans and residential real estate
loans, partially offset by continued weakness in these loan
categories, while commercial and institutional loans continued
to evidence improvement. The 2011 provision reflected
improvement in commercial and institutional and commercial
real estate loans, partially offset by continued weakness in
residential real estate loans. For a fuller discussion of the
allowance and provision for credit losses refer to pages 54
and 55.
48% Equities
30% Short Duration
19% Fixed Income
3% Other
74% Institutional
26% Personal
47% Index
46% Active
5% Manager of Managers
2% Other
PFS Noninterest Expense
CLIENT SEGMENTS
PFS noninterest expense decreased $32.6 million, or 3%, to
$1.18 billion in 2012 compared to $1.21 billion in 2011. 2012
noninterest expense included the $4.6 million net reduction of
restructuring accruals while 2011 noninterest expense included
$27.4 million of restructuring related charges. Excluding the
restructuring related items, PFS noninterest expense decreased
full-time
slightly from 2011, primarily reflecting lower
equivalent staff levels. Noninterest expense for 2011 was 10%
higher than 2010, primarily attributable to restructuring
related charges recorded in 2011 and higher indirect expense
allocations for product and operating support.
Northern Trust Global Investments
through various subsidiaries of
the Corporation,
NTGI,
provides a broad range of asset management and related
services and products to clients around the world, including
clients of C&IS and PFS. Clients include institutional and
individual separately managed accounts, bank common and
collective funds, registered investment companies, exchange
34 | 2 0 1 2 A N N U A L R E P O R T T O S H A R E H O L D E R S N O R T H E R N T R U S T C O R P O R A T I O N
MANAGEMENT STYLES
M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S
Treasury and Other
The Treasury and Other business unit includes income and
expense associated with the wholesale funding activities and
the investment portfolios of the Corporation and the Bank.
Treasury and Other also includes certain corporate-based
expense, executive level compensation and nonrecurring items
not allocated to the business units.
The following table summarizes the results of operations
of Treasury and Other for the years ended December 31, 2012,
2011, and 2010 on a management-reporting basis.
T R E A S U R Y A N D O T H E R
R E S U L T S O F O P E R A T I O N S
($ In Millions)
Other Noninterest Income
Net Interest Income (FTE) (Note)
Revenue (FTE) (Note)
Visa Indemnification Benefit
Noninterest Expense (Excluding Visa
Indemnification Benefit)
Income before Income Taxes (Note)
Provision (Benefit) for Income Taxes (Note)
$
2012
7.0
121.1
128.1
–
96.6
31.5
5.1
$
2011
(22.6)
153.1
130.5
(23.1)
117.0
36.6
(16.7)
$
2010
(8.9)
94.2
85.3
(33.0)
99.0
19.3
4.2
CHANGE
2012 / 2011
2011 / 2010
N/M
(21)%
(2)
(100)
(17)
(14)
N/M
154%
63
53
(30)
18
90
N/M
N/M
Net Income
$
26.4
$
53.3
$
15.1
(50)%
Percentage of Consolidated Net Income
4%
9%
2%
Average Assets
Note: Stated on an FTE basis.
$19,153.6
$20,552.7
$13,694.4
(7)%
50%
Treasury and Other other noninterest income of $7.0
million in 2012 compares to negative $22.6 million of other
noninterest income in 2011. The change in other noninterest
income is primarily due to a reduced level of credit-related
OTTI, a current year $5.3 million gain related to hedges of
in foreign currency denominated
certain investments
subsidiaries, and increases within various miscellaneous
noninterest income categories. OTTI losses in 2012, 2011, and
2010 totaled $3.3 million, $23.3 million, and $21.2 million,
respectively. In 2010, these losses were partially offset by a gain
on the sale of a building. The 21% decrease in net interest
income in 2012 primarily reflects a higher cost of funds
purchased from the business units. Treasury and Other 2011
and 2010 net income benefited from reductions of a liability
related to potential
from indemnified litigation
involving Visa. The benefits recorded in 2011 fully eliminated
the liability as of December 31, 2011. Noninterest expense in
losses
2012 equaled $96.6 million, down $20.4 million, or 17%, from
2011 due to lower indirect expense allocations for product and
operating support and decreased outside service expense,
partially offset by increased equipment and software expense,
compensation and benefits, and other miscellaneous expense.
Noninterest expense was $117.0 million for 2011, an increase
of $18.0 million, or 18%, compared to $99.0 million in 2010
and reflected higher compensation and employee benefits,
including $3.4 million of 2011 restructuring related charges.
The tax benefit in 2011 primarily reflected 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. The tax
benefit in 2011 also reflected adjustments to the Corporation’s
intercompany service allocation methodology not allocated to
the business units for management reporting purposes.
N O R T H E R N T R U S T C O R P O R A T I O N 2 0 1 2 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 | 35
M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S
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 U.S.
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
plan
accounting,
For Northern Trust, accounting estimates that are viewed
as critical are those relating to the allowance for credit losses,
pension
other-than-temporary
impairment (OTTI) of investment securities. Management has
discussed the development and selection of each critical
the
accounting estimate with the Audit Committee of
Corporation’s Board of Directors (Board).
and
Allowance for Credit Losses
and other
losses represents management’s
The allowance for credit
estimate of probable losses which have occurred as of the date
of the consolidated financial statements. The loan and lease
portfolio
exposures
are regularly reviewed to evaluate the adequacy of the allowance
for credit losses. In determining the level of the allowance,
Northern Trust evaluates the allowance necessary for impaired
loans and lending-related commitments and also estimates
losses inherent in other lending related credit exposures.
related credit
lending
The
allowance
for
credit
losses
consists of
the
following components:
Specific Allowance: The amount of specific allowance is
determined through an individual evaluation of loans and
lending-related commitments considered impaired that
is
based on expected future cash flows, the value of collateral,
and other factors that may impact the borrower’s ability
to pay. For impaired loans where the amount of specific
allowance, if any, is determined based on the value of the
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.
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Inherent Allowance: The amount of inherent allowance is
based primarily on factors which incorporate management’s
evaluation of historical charge-off experience and various
qualitative factors
such as management’s evaluation of
in the
economic and business conditions and changes
character and size of the loan portfolio. 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.
The quarterly analysis of
the specific and inherent
allowance 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
regulatory
guidance. Control processes and analyses employed to
determine an appropriate level of allowance for credit losses
are reviewed on at least an annual basis and modified as
considered appropriate.
Loans,
leases and other extensions of credit deemed
uncollectible are charged to the allowance for credit losses.
Subsequent recoveries, if any, are credited to the allowance.
Determinations as to whether an uncollectible loan is charged-
off or a specific reserve is established are based on
management’s assessment as to the level of certainty regarding
the amount of loss. The provision for credit losses, which is
charged to income, is the amount necessary to adjust the
to the level deemed to be
allowance for credit
appropriate 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.
losses
on other
assumptions
Management’s
estimates utilized in establishing an
appropriate level of allowance for credit
losses are not
dependent on any single assumption. Management evaluates
numerous variables, many of which are interrelated or
dependent
in
determining an appropriate allowance level. 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 are reasonably likely
to occur from period to period. Additionally, as an integral
part of their examination process, various federal and state
regulatory agencies also review the allowance for credit losses.
and estimates,
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These agencies may require that certain loan balances be
classified differently or charged off when their credit
evaluations differ from those of management, based on their
judgments about information available to them at the time of
their examination. However, management believes that the
allowance
these
uncertainties and has been established at an appropriate level
to cover probable losses which have occurred as of the date of
the consolidated financial statements.
adequately addresses
credit
losses
for
Pension Plan Accounting
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). Plan amendments, effective
April 1, 2012, have reduced benefit accruals under the
Qualified and Nonqualified Plans. 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 reviewed annually for adjustments that may be
required. Pension accounting
that
differences between estimates and actual experience be
recognized as other comprehensive income in the period in
which they occur. The differences are amortized into net
periodic
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.
from accumulated
guidance
requires
pension
expense
Northern Trust recognizes the significant impact that
these pension-related assumptions have on the determination
the pension obligations and related expense and has
of
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
2012, Northern Trust utilized a discount rate of 4.75% 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 revisions to pension-related assumptions
for the U.S. plans as of Northern Trust’s December 31, 2012
measurement date, the following were considered:
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 3.99%
and 4.74%, with an average decrease of 57 basis points over the
prior year. As such, Northern Trust decreased the discount rate
for the Qualified and Nonqualified plans from 4.75% for
December 31, 2011 to 4.25% for December 31, 2012.
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.
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 reduced to 7.75% for 2013.
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
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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 improvements.
In order to illustrate the sensitivity of these assumptions
on the expected periodic pension expense in 2013 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 2013 Pension Expense
Discount Rate Change
Compensation Level Change
Rate of Return on Plan Assets Change
Increase (Decrease) in Projected Benefit
Obligation
Discount Rate Change
Compensation Level Change
25 BASIS
POINT
INCREASE
25 BASIS
POINT
DECREASE
(4.3)
0.5
(2.9)
4.4
(0.5)
2.9
(45.0)
2.4
47.7
(2.3)
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 $100.0 million to the Qualified Plan in both
2012 and 2011. 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
funds contributed. The minimum required contribution is
expected to be zero in 2013 and for several years thereafter.
The maximum deductible contribution is estimated at $185.0
million for 2013.
The estimated U.S. Qualified Plan pension expense is
expected to decrease by approximately $1.4 million in 2013
from the 2012 expense of $23.6 million. The decrease is due to
the full-year impact of plan amendments and the $100.0
million contribution in 2012, partially offset by the change in
pension-related assumptions and other actuarial experiences.
Other-Than-Temporary Impairment of
Investment Securities
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,
the consolidated statement of
available-for-sale
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securities
impairment (that
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
remaining term of the security as projected using Northern
Trust’s cash flow projections. For debt
that
Northern Trust intends to sell, or would more-likely-than-not
be required to sell, before the expected recovery of
the
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
in
periods. Different
estimates could result in materially different impairment loss
recognition. The economic and financial market conditions
experienced subsequent
the economic
downturn in 2008 negatively affected the liquidity and pricing
of investment securities generally and residential mortgage-
backed securities in particular, and resulted in an increase in
the likelihood and severity of OTTI charges.
subsequent changes
to the onset of
judgments or
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
of the issuer; activity in the market of the issuer which may
indicate adverse credit conditions; Northern Trust’s intent
regarding the sale of the security as of the balance sheet date;
and the likelihood that it will not be required to sell the
security for a period of time sufficient to allow for the recovery
of the security’s amortized cost basis. The Corporate Asset and
Liability Policy Committee reviews the results of impairment
analyses and concludes on whether OTTI exists.
reviews
Impairment
conducted in 2012 and 2011
identified securities that were determined to be other-than-
temporarily impaired. Credit-related losses were recognized
on nonagency residential mortgage-backed securities and
auction rate securities totaling $3.3 million in 2012, and on
nonagency residential mortgage-backed securities totaling
$23.3 million in 2011, in connection with the write-down of
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the securities. The remaining securities with unrealized losses
within Northern Trust’s portfolio as of December 31, 2012
and 2011 were not considered to be other-than-temporarily
impaired. However, additional OTTI may occur in future
periods as a result of market and economic conditions.
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, 2012, approximately 30% of
Northern Trust’s total assets and approximately 1% of its total
liabilities were carried on the consolidated balance sheet at fair
value. As discussed more fully in Note 3 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
judgment
techniques that require significant management
because one or more of the significant inputs are unobservable
in the market place (Level 3). Approximately 6% of Northern
Trust’s assets carried at fair value are classified as Level 1;
Northern Trust typically does not hold equity securities or
other instruments that are actively traded on an exchange.
Approximately 94% of Northern Trust’s assets and 92% 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 96.5% of Level 2 assets with the
remaining 3.5% primarily consisting of derivative financial
instruments. Level 2 liabilities are comprised solely of
derivative financial instruments.
Investment securities are principally valued by external
pricing vendors or in limited cases internally, based on similar
securities. Northern Trust has a well established process to
validate all prices received from pricing vendors as discussed
more fully in Note 3 to the consolidated financial statements.
contracts. Derivative
As of December 31, 2012, all derivative assets and
liabilities were classified in Level 2 and approximately 96%,
measured on a notional value basis, related to client-related
and trading activities, predominantly consisting of foreign
valued
exchange
internally using widely accepted income-based models that
incorporate inputs readily observable in actively quoted
markets and reflect contractual terms of contracts. 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
instruments
are
the
and its
counterparties,
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
are not considered material.
As of December 31, 2012, the fair value of Northern
Trust’s Level 3 assets and liabilities were $97.8 million and
$50.1 million, respectively, and represented approximately
0.3% of assets and 7.5% of liabilities carried at fair value,
respectively. Level 3 assets consist of auction rate securities
purchased from Northern Trust clients. To estimate the fair
value of auction rate securities, for which trading is limited
and market prices are generally unavailable, Northern Trust
developed and maintains a pricing model that discounts
estimated cash flows over their estimated remaining lives.
Significant inputs to the model include the contractual terms
of the securities, credit risk ratings, discount rates, forward
interest rates, credit/liquidity spreads, and Northern Trust’s
own assumptions about the estimated remaining lives of the
securities. As of December 31, 2012, Level 3 liabilities consist
of acquisition related contingent consideration liabilities. The
fair values of these contingent consideration liabilities have
been determined using an income-based (discounted cash
flow) model
incorporates Northern Trust’s own
assumptions about business growth rates and applicable
discount rates.
that
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
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
expenditures
included
Capital
2012
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capabilities, the opening of new offices, and the expansion,
renovation and infrastructure improvements of several existing
offices. Capital expenditures for 2012 totaled $312.5 million, of
which $239.2 million was for software, $45.3 million was for
computer hardware and machinery, $25.7 million was for
building and leasehold improvements, and $2.3 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 2011 totaled $371.1 million, of which $274.2
million was for software, $57.4 million was for computer
hardware and machinery, $27.9 million was for building and
leasehold improvements, and $11.6 million was for furnishings.
the depreciation of hardware
expense
for
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.
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
upon and the client default. To control
the credit risk
associated with issuing letters of credit, Northern Trust subjects
such activities to the same credit quality and monitoring
controls as its lending activities. Northern Trust is obligated to
meet the entire financial obligation of these agreements and in
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certain cases is able to recover the amounts paid through
recourse against collateral received or other participants.
Standby
letters of
totaled $4.6 billion at
credit
December 31, 2012 and $4.3 billion at 2011. These amounts
include $557.7 million and $608.2 million of standby letters of
credit secured by cash deposits or participated to others as of
December 31, 2012 and 2011, respectively. The weighted
average maturity of standby letters of credit was 27 months at
December 31, 2012 and 2011.
As part of its securities custody activities and at the
direction of its clients, Northern Trust lends securities owned
by clients to borrowers who are reviewed and approved by the
Northern Trust Senior Credit Committee. In connection with
these activities, Northern Trust has issued indemnifications to
certain clients against certain losses that are 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. Borrowers are required to fully
collateralize securities
received with cash or marketable
securities. As securities are loaned, collateral is maintained at a
minimum of 100% of the fair value of the securities plus
accrued interest. The collateral is revalued on a daily basis. The
amount of securities loaned as of December 31, 2012 and 2011
subject to indemnification was $69.7 billion and $74.4 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 no liability was recorded related
to these indemnifications.
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
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.
Leveraged Leases.
In leveraged leasing transactions,
Northern Trust acts as lessor of the underlying asset subject to
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the property with substantially all of
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.
invests
is driven by the performance of
Tax Credit Structures. Northern Trust
in
community development projects
that are designed to
generate a return primarily through the realization of tax
credits. The community development 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
community development projects, which are deemed to be
their underlying
VIEs,
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
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.
significantly impact
that most
the
Trust Preferred Securities. As discussed in further detail
in Note 13 to the consolidated financial statements, in 1997,
Northern Trust issued Floating Rate Capital Securities, Series
A and Series B, through statutory business trusts wholly-
owned by the Corporation (“NTC Capital I” and “NTC
Capital II”, respectively). The sole assets of the trusts are
Subordinated Debentures of the Corporation that have the
same interest rates and maturity dates as 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.
trusts,
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 has determined that it is not the
primary beneficiary of these VIEs under GAAP.
in Note 27 to the
As discussed in further detail
in November 2011,
statements,
consolidated financial
Northern Trust purchased $90 million of securities at par
from three investment funds (Funds). The securities were
purchased to avoid the risk of the Funds being downgraded
which could have forced certain holders to liquidate their
investments. Northern Trust incurred a pre-tax charge of $2
million in connection with these actions and, subsequently,
had no further obligations related to these actions. All of the
$90 million of securities purchased from the Funds matured at
par during the year ended December 31, 2012. As Northern
Trust has no plans to provide any support additional to that
which is noted above, there is no exposure to loss from the
implicit interest in the Funds as of December 31, 2012.
Under GAAP,
the above actions reflected Northern
Trust’s implicit interest in the credit risk of the affected Funds.
Implicit
interests are required to be considered when
determining the primary beneficiary of a variable interest
entity. 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 these Funds, an expected
loss calculation based on the characteristics of the underlying
investments in the Funds was 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. This analysis 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.
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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. The liquidity of the Corporation is managed
separately from that of the Bank which encompasses all of
Northern Trust’s U.S. and international banking activities.
Governance and Risk Management Framework
Northern Trust manages its liquidity under a global risk
management framework, incorporating regional policies, limits
and 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 Liability Policy Committee
(ALCO) is responsible for 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.
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; while providing
for the review and management of
the
Corporation separate from that of the Bank. It is through this
framework that management monitors its sources and uses of
liquidity, evaluates their level of stability under various
circumstances, plans for adverse situations, benchmarks itself
against other banks, provides information to management,
and complies with various U.S. and international regulations.
the liquidity of
Northern Trust Consolidated Liquidity Management
includes daily monitoring of cash
Position management
positions and anticipating future funding requirements given
both internal and external events. As the Corporation’s principal
subsidiary encompassing all of Northern Trust’s banking
activities, the Bank centrally manages liquidity for all U.S. and
international banking operations. 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,
Federal Home Loan Bank advances, and unencumbered liquid
assets that can be sold or pledged to secure additional funds.
42 | 2 0 1 2 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 N O R T H E R N T R U S T C O R P O R A T I O N
While management does not view the Federal Reserve’s discount
window as a primary source of liquidity, at December 31, 2012
the Bank had over $20 billion of securities and loans readily
available as collateral to support discount window borrowings.
The Bank is also very active in the U.S. interbank funding
market, providing an important source of additional liquidity
and low-cost funds. Liquidity is used by a variety of activities,
including client withdrawals, purchases of securities, net loan
growth, and draws on unfunded commitments to extend credit.
Northern Trust maintains a very liquid balance sheet with loans
and leases
total assets as of
December 31, 2012. Further, at December 31, 2012 there were
significant sources of liquidity within the Bank’s consolidated
balance sheet in the form of demand balances held in various
currencies, securities available for sale and short-term money
market assets. Unencumbered securities at the Bank, which
include those placed at the Federal Reserve discount window,
totaled $28 billion at December 31, 2012.
representing only 30% of
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 scenarios, across major
currencies, at a consolidated corporate level and for various U.S.
and international banking subsidiaries. These scenarios, which
include both company specific and systemic events, analyze
potential impacts on our domestic and foreign deposit balances,
wholesale funding sources, financial market access, external
borrowing capacity and off-balance sheet obligations. Results are
reviewed by senior management and ALCO on a regular basis.
is the development and maintenance of
Another important area of Northern Trust’s liquidity risk
management
its
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
responsibilities and defines
crisis, details organizational
specific actions designed to ensure the proper maintenance of
liquidity during periods of stress. In addition, international
banking subsidiaries have individual contingent
liquidity
plans, which incorporate the global plan.
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.
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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
specific pre-
external or
determined actions and limits designed to position Northern
Trust to better respond to potential liquidity stresses.
in liquidity status
industry-wide
events,
trigger
Corporation Liquidity
securities
and money market
to note holders; purchases of
The liquidity of the Corporation is managed separately from that
of the Bank. The primary sources of cash for the Corporation are
issuance of debt, dividend payments from its subsidiaries,
issuance of equity, and interest and dividends earned on
investment
assets. The
Corporation’s uses of cash consist mainly of dividend payments
to the Corporation’s stockholders; the payment of principal and
its common stock;
interest
investments in, or loans, to its subsidiaries; and acquisitions. The
most significant uses of cash by the Corporation during 2012
were $354.3 million of common dividends paid to stockholders,
$206.9 million of debt maturities, and $162.4 million of
common share repurchases. Debt maturities during 2012
include the maturity of 5.20% fixed-rate senior notes in
November of 2012 and the maturities of certain Federal Home
Loan Bank borrowings throughout the year.
On August 2, 2012, the Corporation issued $500 million
of 2.38% fixed-rate senior notes due August 2, 2022. These
notes are non-callable, unsecured and were issued at a
discount to yield 2.407%.
During 2012, the Corporation received $440.0 million of
dividends from the Bank. Dividends from the Bank are subject
to certain restrictions, as discussed in further detail in Note 29
to the consolidated financial statements. During 2013, the
Bank has the ability to pay dividends equal to its 2013 eligible
net profits plus $328.8 million. As described in Note 20 to the
consolidated financial statements, Northern Trust has elected
to indefinitely reinvest undistributed earnings of certain non-
US subsidiaries of the Bank approximating $814.9 million at
December 31, 2012. This election, however, does not reduce
the Bank’s ability to pay dividends to the Corporation.
The Corporation’s liquidity, defined as the amount of
highly marketable assets, was $1.70 billion at year-end 2012
and $1.28 billion at year-end 2011. During, and at year-end,
2012 and 2011, these assets were comprised almost entirely of
overnight money market placements which were fully
available to the Corporation to support its own cash flow
requirements or those of its subsidiary companies, as needed.
Average liquidity during 2012 and 2011 was $1.59 billion and
$1.29 billion, respectively. The cash flows of the Corporation
are shown in Note 32 to the 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, 2012,
provided below, allow Northern Trust
to access capital
markets on favorable terms.
Northern Trust Corporation:
Commercial Paper
Senior Debt
Outlook
The Northern Trust Company:
Short-Term Deposit / Debt
Long-Term Deposit / Debt
Outlook
CREDIT RATING
STANDARD &
POOR’S
MOODY’S
FITCHRATINGS
A-1
A+
Stable
P-1
A1
Stable
F1+
AA-
Stable
AA-/A-1+
AA-/A-1+
Stable
P-1/P-1
Aa3/A1
Stable
F1+/F1+
AA/AA-
Stable
A significant downgrade in one or more of these ratings
could limit Northern Trust’s access to capital markets and/or
increase the rates paid for short-term borrowings, including
deposits, and future long-term debt issuances. The size of
these rate increases would depend on multiple factors
including, the extent of the downgrade, Northern Trust’s
relative debt rating compared to other financial institutions,
current market conditions, and other factors. In addition, as
discussed in Note 25 to Consolidated Financial Statements,
Northern Trust enters into certain master netting agreements
with derivative counterparties that contain credit-risk-related
contingent features in which the counterparty has the option
to declare Northern Trust in default and accelerate cash
settlement of any net derivative liability in the event Northern
Trust’s credit rating falls below specified levels. The maximum
amount of these termination payments that Northern Trust
could have been required to pay at December 31, 2012 was
$23.5 million. Other than these credit-risk-related contingent
derivative counterparty payments, Northern Trust had no
long term debt covenants or other credit risk related payments
at December 31, 2012 that would be triggered by a significant
downgrade in its debt ratings.
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The following table shows Northern Trust’s contractual obligations at December 31, 2012.
C O N T R A C T U A L O B L I G A T I O N S
PAYMENT DUE BY PERIOD
(In Millions)
Senior Notes(1)
Subordinated Debt(1)
Federal Home Loan Bank Borrowings(1)
Floating Rate Capital Debt(1)
Capital Lease Obligations(2)
Operating Leases(2)
Purchase Obligations(3)
Total Contractual Obligations
TOTAL
$2,405.8
1,045.4
335.0
277.0
56.4
709.7
412.7
$5,242.0
ONE YEAR
AND LESS
$ 409.6
200.0
200.0
–
8.1
83.9
105.6
$1,007.2
1-3
YEARS
$ 500.0
242.3
135.0
–
16.7
144.6
165.7
$1,204.3
4-5
YEARS
$
–
240.8
–
–
16.2
121.5
96.9
$475.4
OVER 5
YEARS
$1,496.2
362.3
–
277.0
15.4
359.7
44.5
$2,555.1
Note: Obligations as shown do not include deposit liabilities or interest requirements on funding sources.
(1) Refer to Notes 12 and 13 to the consolidated financial statements for further details.
(2) Refer to Note 10 to the consolidated financial statements for further details.
(3) 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, 2012 activity was used as a base to project future obligations.
the
liquidity risk for
In January 2013,
the management of
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 expired on December 31, 2012.
In addition, U.S. and international regulatory agencies
have proposed certain new rules and finalized others that
financial
address
institutions.
International Basel
Committee on Banking Supervision (Basel Committee), a
committee of central banks and bank supervisors,
issued
revised rules for the Liquidity Coverage Ratio (LCR) originally
proposed in December 2010. Individual country regulators,
including the Federal Reserve, are now expected to develop
specific regulations for financial
institutions under their
jurisdiction. The LCR will be phased in for large international
financial
institutions between 2015 and 2019. The Basel
Committee also proposed a Net Stable Funding Ratio in
December 2010 which is scheduled to be implemented in
the Federal Reserve
January 2018.
proposed Enhanced Prudential Standards for large bank
holding companies, including the Corporation. Among other
items, this proposal would implement new liquidity risk
management requirements for bank holding companies, such
as the Corporation, with at least $50 billion of consolidated
assets. 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 its liquidity
In December 2011,
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framework against
these proposals and
risk management
industry best practices in order to comply with applicable
regulations and further enhance its liquidity policies.
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 standards established by
the Capital Management Policy and the Board of Directors.
The management
regional
capital
management when appropriate. In establishing the standards
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 2012 increased 5% or $363.5 million reaching $7.55
billion. Total
stockholders’ equity was $7.53 billion at
December 31, 2012, as compared to $7.12 billion at
December 31, 2011. The Corporation declared common
dividends totaling $286.9 million in 2012 and, in March 2012,
the Board increased the quarterly dividend by 7% to $0.30 per
common share. The Corporation’s share buyback program is
used for general corporate purposes, including management
the
of
Corporation purchased 3,516,254 of its own common shares
level. During 2012,
the Corporation’s
capital
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at an average price per share of $46.32 in connection with
equity based compensation plans. The Corporation’s common
stock repurchase authorization was replaced in March of 2012,
pursuant to which the Corporation is authorized to purchase
up to 6.8 million additional shares after December 31, 2012.
C A P I T A L A D E Q U A C Y
($ In Millions)
TIER 1 CAPITAL
Common Stockholders’ Equity
Floating Rate Capital Securities
Net Unrealized Gains on Securities Available for Sale
Net Unrealized Losses on Cash Flow Hedges
Goodwill and Other Intangible Assets, net of deferred tax liability
Pension and Other Postretirement Benefit Adjustments
Other
Total Tier 1 Capital
TIER 2 CAPITAL
Qualifying Allowance for Credit Losses
Qualifying Subordinated Debt
Total Tier 2 Capital
Total Risk-Based Capital
Risk-Weighted Assets(1)
Total Assets – End of Period (EOP)
Adjusted Average Fourth Quarter Assets(2)
Total Loans and Leases – EOP
RATIOS
Risk-Based Capital Ratios
Tier 1
Total (Tier 1 and Tier 2)
Tier 1 Leverage
Tier 1 Common Equity(3)
COMMON STOCKHOLDERS’ EQUITY TO
Total Loans and Leases EOP
Total Assets EOP
DECEMBER 31,
2012
2011
$ 7,527.0
268.7
(101.0)
1.4
(599.5)
393.1
(0.7)
$ 7,117.3
268.6
(39.8)
7.0
(617.6)
368.9
0.2
7,489.0
7,104.6
295.1
556.7
851.8
$ 8,340.8
$58,316.1
$97,463.8
90,873.7
29,504.5
281.6
679.0
960.6
$ 8,065.2
$ 56,666.6
$100,223.7
97,297.9
29,063.9
12.8%
14.3
8.2
12.4
25.51%
7.72
12.5%
14.2
7.3
12.1
24.49%
7.10
(1) Assets exclude amounts related to goodwill, other intangible assets, and net unrealized gains or losses on securities and reflect adjustments for excess allowances for credit losses that have
been excluded from tier 1 and tier 2 capital, if any.
(2) Assets exclude amounts related to goodwill, other intangible assets, and net unrealized gains or losses on securities.
(3) A reconciliation of tier 1 common equity to tier 1 capital calculated under GAAP is provided below.
The following table provides a reconciliation of tier 1
common equity, a non-GAAP financial measure which excludes
floating rate capital securities, to tier 1 capital calculated in
accordance with applicable regulatory requirements and GAAP.
($ 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,
2012
2011
$7,489.0
268.7
$7,104.6
268.6
7,220.3
6,836.0
12.8%
12.4%
12.5%
12.1%
In addition to its capital ratios prepared in accordance
with regulatory requirements and GAAP, Northern Trust is
providing the ratio of tier 1 common equity to risk-weighted
assets as it is a measure that the Corporation and investors use
to assess capital adequacy.
At December 31, 2012, the Corporation’s tier 1 capital
ratio was 12.8% and its total capital ratio was 14.3% of risk-
weighted assets, both well above the ratios
that are a
requirement 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 8.2% is also well above the
“well-capitalized” minimum requirement of
In
addition, the Bank had a ratio of 11.9% for tier 1 capital,
13.7% for total risk-based capital, and 7.6% for leverage, and
each of the Corporation’s non-U.S. banking subsidiaries had
capital ratios above their specified minimum requirements.
5.0%.
The current risk-based capital guidelines that apply to the
Corporation and the Bank, commonly referred to as Basel I,
are based upon the 1988 capital accord of
the Basel
Committee as implemented by the Federal Reserve Board.
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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 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 the Bank will be
required to use the advanced approaches under Basel II for
calculating risk-based capital
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.
related to credit
The Corporation has for several years been preparing to comply
with the advanced approaches of the Basel 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 its depository institution
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.”
On December 16, 2010, the Basel Committee released its final
framework for strengthening international capital and liquidity
regulation, known as Basel III. The Basel III calibration and phase-in
arrangements were previously endorsed by the Seoul G20 Leaders
Summit in November 2010, and will be subject to individual
adoption by member nations, including the U.S. 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 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
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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 I and Basel II do not include a leverage requirement
as an international standard. However, Basel III 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 increases to the minimum common equity and tier 1
capital ratios were to be phased-in over two years beginning
on January 1, 2013, with the full increases taking effect on
January 1, 2015. However, on November 9, 2012, U.S.
regulators announced that the implementation of Basel III’s
minimum common equity and tier 1 capital ratio increases
will be delayed until an undetermined future date. These
increases will be followed by a three-year phase-in, beginning
on January 1, 2016, of the capital conservation buffer, with the
full 2.5% buffer requirement taking effect on January 1, 2019.
Basel III also provides for the deduction of certain assets from
capital (deferred tax assets, mortgage servicing rights, investments
in financial firms and pension assets, among others, within
prescribed limitations), the inclusion of other comprehensive
income in capital, and increased capital for counterparty credit
risk. The phase-in period for the capital deductions is proposed to
occur in 20 percent increments starting January 1, 2014, with full
implementation by January 1, 2018.
The federal banking agencies will likely implement changes
to the current capital adequacy standards applicable to the
Corporation and the Bank 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 the Bank is currently
being reviewed and will depend on a number of
factors,
including the rulemaking and implementation by the U.S.
banking regulators. The Corporation cannot determine the
ultimate
subsequent
regulations,
if enacted, would have upon the Corporation’s
earnings or financial position. In addition, significant questions
remain as to how the capital and liquidity mandates of the
Dodd-Frank Act will be integrated with the requirements of
Basel III. 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.
legislation, or
that potential
effect
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R I S K M A N A G E M E N T
Overview
and
Benefits Committee
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
to
Strategy Committee provides oversight with respect
strategic risk for the Corporation and its subsidiaries. The
Compensation
all
compensation arrangements and practices and assesses the
extent
practices
appropriately balance risks taken with related incentives. 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. The Chief Risk Officer oversees the management of these
risks, promotes risk awareness, and fosters a proactive risk
management environment wherein risks inherent in business
strategy are understood and appropriately mitigated.
arrangements
risk, market
to which
fiduciary
reviews
such
risk,
and
The Business Risk Committee has approved a Corporate
articulating Northern Trust’s
Risk Appetite Statement
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
activities
consistent with the Corporate Risk Appetite
Statement. A Senior Risk Management Officer (SRMO) is
assigned to each of Northern Trust’s business units. Each
SRMO chairs a risk committee for their respective business
unit on a regular basis and reports directly to the Chief Risk
Officer. Each business unit risk committee rolls up to the
Global Enterprise Risk Committee. The Global Enterprise Risk
Committee is comprised of members of Northern Trust’s
senior management and rolls up to the Business Risk
Committee, a committee of Northern Trust Corporation’s
Board of Directors. Risk tolerances are further detailed in
separate strategic, credit, operational, market, fiduciary 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.
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
Credit
RISK MEASUREMENT
RISK TO EARNINGS AND/OR CAPITAL RESULTING FROM:
Obligor and Counterparty Risk
Failure of a borrower or counterparty to perform on an obligation.
Operational; Fiduciary; Compliance
Operational Risk
Inadequate or failed internal process, people and systems; or from external
events.
Market and Liquidity
Market Risk – Trading Book
Changes in the value of trading positions.
Strategic
Interest Rate Risk – Banking Book
Changes in interest rates.
Liquidity Risk
Strategy Risk
Business Risk
Funding needs during difficult markets.
Adverse effects of business decisions, improper implementation of business
decisions, unexpected external events.
Adverse developments in the general business environment, which impact the
entity’s results.
Reputation Risk
Damage to the entity’s reputation.
Asset Quality and Credit Risk Management
Securities Portfolio
Northern Trust maintains a high quality securities portfolio,
with 86% of the combined available for sale, held to maturity,
and trading account portfolios at December 31, 2012 composed
of U.S. Treasury and government sponsored agency securities
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 deposit, 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 8% 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).
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At December 31, 2012, 44% of corporate notes were rated
triple-A, 36% were rated double-A, and 20% were rated below
double-A. Residential mortgage-backed securities rated below
double-A, which represented 96% of
residential
mortgage-backed securities, had a total amortized cost and fair
value of $98.6 million and $88.2 million, respectively, and
were comprised primarily of subprime, prime, and Alt-A
securities. Securities classified as “other asset-backed” at
December 31, 2012 had average lives of less than 5 years, and
99% were rated triple-A.
total
Investment
Impairment of
Total unrealized losses within the investment securities
portfolio at December 31, 2012 were $30.2 million as compared
to $85.0 million at December 31, 2011. The $54.8 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 2012. As
discussed above in the “Critical Accounting Estimates – Other-
Than-Temporary
Securities”
section, processes are in place to provide for the timely
identification of OTTI. Losses totaling $3.3 million were
recognized in 2012 in connection with the write-down of
securities determined to be other-than-temporarily impaired, as
compared with $23.3 million in 2011 and $21.2 million in 2010.
The remaining securities with unrealized losses within Northern
Trust’s portfolio as of December 31, 2012 are not considered to
be other-than-temporarily impaired. However, additional OTTI
may occur in future periods as a result of market or other
economic conditions.
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.
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 Chief
Risk Officer. 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 promoting 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.
levels,
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 require unanimous approval of all voting members.
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
exposure
the
Counterparty Risk Management Committee on a country-by-
country basis.
reviewed and approved by
limits
are
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.
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,
48 | 2 0 1 2 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 N O R T H E R N T R U S T C O R P O R A T I O N
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setting of loss allowances, and economic capital calculations.
Borrower risk ratings are discussed further in Note 6 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,
independent from Credit Policy, the Credit Review Unit
undertakes both on-site and off-site file reviews that evaluate
effectiveness of management’s
implementation of Credit
Policy’s requirements.
Northern Trust maintains a borrower loan watch list for
credits with borrower ratings of “6 to 9”. These credits, which
include all nonperforming credits, are expected to exhibit
minimally acceptable probabilities of default, elevated risk of
default, or are currently in default. Loans outstanding to watch
list borrowers associated with these risk profiles that are not
currently in default but have limited financial flexibility totaled
$677.3 million at December 31, 2012. Cash flows and capital
levels range from acceptable to potentially insufficient to meet
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.
As more fully described in the “Provision and Allowance for Credit Losses” section below, the provision for credit losses has
been determined, through a disciplined credit review process, to be the amount needed to maintain the allowance for credit losses at
an appropriate level to absorb probable credit losses that have been identified with specific borrower relationships (specific loss
component) and for probable losses that are believed to be inherent in the loan and lease portfolios, 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
2012
2011
2010
2009
2008
$ 7,468.5
2,859.8
1,035.0
1,192.3
341.6
$ 6,918.7
2,981.7
978.8
1,057.5
417.6
$ 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
$ 8,293.4
3,014.0
1,143.8
1,791.7
909.6
$12,897.2
$12,354.3
$11,613.4
$11,715.7
$15,152.5
$10,375.2
6,130.1
102.0
$10,708.9
5,651.4
349.3
$10,854.9
5,423.7
240.0
$10,807.7
5,004.4
277.9
$10,381.4
4,832.2
389.3
$16,607.3
$16,709.6
$16,518.6
$16,090.0
$15,602.9
$29,504.5
$29,063.9
$28,132.0
$27,805.7
$30,755.4
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,
2012
2011
$ 9,092.3
20,953.4
$10,135.1
18,567.1
$30,045.7
$28,702.2
$ 4,573.7
27.9
69,739.2
$ 4,293.4
23.4
74,400.5
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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 2 B Y I N D U S T R Y S E C T O R
(In Millions)
Commercial
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 (Note)
Commercial Real Estate
Lease Financing, net
Non-U.S.
Other
Total Commercial
Personal
Residential Real Estate
Private Client
Other
Total Personal
Total
COMMITMENT EXPIRATION
TOTAL
COMMITMENTS
ONE YEAR
AND LESS
OVER ONE
YEAR
OUTSTANDING
LOANS
$ 3,376.1
29.9
7,130.5
558.1
68.5
960.8
6,001.0
278.0
1,333.5
872.2
285.3
$20,893.9
97.4
–
1,013.0
1,428.1
$1,188.7
29.9
475.6
210.2
13.6
131.5
1,788.9
3.5
25.0
173.8
126.6
$4,167.3
25.6
–
799.5
708.0
$ 2,187.4
–
6,654.9
347.9
54.9
829.3
4,212.1
274.5
1,308.5
698.4
158.7
$16,726.6
71.8
–
213.5
720.1
$23,432.4
$5,700.4
$17,732.0
1,226.4
4,969.1
417.8
154.0
3,030.8
207.1
1,072.4
1,938.3
210.7
$ 6,613.3
$3,391.9
$ 3,221.4
$30,045.7
$9,092.3
$20,953.4
$
906.7
92.5
1,648.9
92.8
267.5
177.9
3,292.4
206.7
57.7
565.9
159.5
$ 7,468.5
2,859.8
1,035.0
1,192.3
341.6
$12,897.2
10,375.2
6,130.1
102.0
$16,607.3
$29,504.5
Note: Commercial and institutional industry sector information is presented on the basis of the North American Industry Classification System (NAICS).
NON-U.S. OUTSTANDINGS
As used in this discussion, non-U.S. outstandings are cross-
border outstandings as defined by the U.S. 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
liabilities. Non-U.S.
claims on residents funded by local
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.
50 | 2 0 1 2 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 N O R T H E R N T R U S T C O R P O R A T I O N
Trust
places
Northern
deposits with
non-U.S.
counterparties that have strong internal (Northern Trust) risk
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 approves 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.
M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S
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.
N O N - U . S . O U T S T A N D I N G S
(In Millions)
AT DECEMBER 31, 2012
Canada
United Kingdom
Australia
Singapore
Sweden
France
AT DECEMBER 31, 2011
Australia
United Kingdom
Singapore
Netherlands
France
Switzerland
Canada
Sweden
AT DECEMBER 31, 2010
Australia
United Kingdom
France
Singapore
Switzerland
Spain
BANKS
$2,447
1,814
998
1,474
1,490
1,311
$ 2,513
2,943
2,604
1,466
1,501
1,225
1,113
1,108
$ 2,114
3,440
3,291
1,313
1,284
894
COMMERCIAL
AND OTHER
$
8
156
636
17
–
125
$ 667
34
2
63
–
26
13
4
$3,159
30
–
14
17
–
TOTAL
$2,455
1,970
1,634
1,491
1,490
1,436
$ 3,180
2,977
2,606
1,529
1,501
1,251
1,126
1,112
$ 5,273
3,470
3,291
1,327
1,301
894
Countries whose aggregate outstandings totaled between 0.75% and 1.00% of total assets were as follows: Japan with aggregate outstandings of $914 million and Luxembourg with aggregate
outstandings of $859 million at December 31, 2012, Finland with aggregate outstandings of $913 million, Hong Kong with aggregate outstandings of $845 million and Norway with aggregate
outstandings of $841 million at December 31, 2011, Sweden with aggregate outstandings of $816 million and Canada with aggregate outstandings of $810 million at December 31, 2010.
to
those
Trust
countries
eurozone
Northern
experiencing
closely monitor
continues
developments related to the European debt crisis. Northern
Trust considers Ireland, Portugal, Italy, Greece and Spain to
significant
be
economic, fiscal and/or political strains. At December 31,
2012, Northern Trust’s gross exposure to obligors in Ireland
totaled approximately $820 million, or less than 1% of
Northern Trust’s total consolidated assets, and there was no
exposure to obligors in Portugal, Italy, Greece or Spain. There
was no exposure to sovereign debt securities at December 31,
2012. Of the total exposure to obligors in Ireland, $5 million
was to banks and $815 million was to commercial and other
borrowers, primarily funds domiciled in Ireland whose assets
and investment activities are broadly diversified by investment
strategy, issuer type, country of risk, and/or instrument type.
Exposures to these borrowers in Ireland may be secured or
unsecured, committed or uncommitted, but are typically for
short periods of a year or less for foreign exchange, overdraft
accommodations, and loans. Exposure levels at December 31,
2012 reflect Northern Trust’s risk management policies and
practices, as discussed in further detail above, which operate to
limit exposures
risk European financial and
sovereign entities.
to higher
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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 and Leases
Commercial
Commercial and Institutional
Commercial Real Estate
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
2012
2011
2010
2009
2008
DECEMBER 31,
$ 21.6
56.4
78.0
$174.6
2.2
176.8
254.8
20.3
$275.1
$ 19.0
$ 31.3
79.5
110.8
$177.6
5.3
182.9
293.7
21.2
$314.9
$ 13.1
$ 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
Nonperforming Loans and Leases to Total Loans and Leases
0.86%
1.01%
1.18%
1.00%
.31%
Allowance for Credit Losses Assigned to Loans and Leases to Nonperforming
Loans and Leases
1.2 x
1.0 x
1.0 x
1.1 x
2.4 x
Nonperforming assets as of December 31, 2012, while
down from the levels in the prior three years, remain elevated
from historical levels and continue to reflect the deterioration
in overall economic conditions experienced since the onset of
the economic downturn in 2008 and its effect on Northern
Trust’s loan portfolio. The decrease in nonperforming loans
from December 31, 2011 primarily reflects improvement
within the commercial and institutional loans, while weakness
persists within residential real estate and commercial real
estate
including
loans. Changes
the
nonperforming loan balances,
allowance for credit losses through the resultant adjustment of
the specific allowance and of the qualitative factors used in the
determination of the inherent allowance levels within the
allowance for credit losses. Additional information regarding
residential real estate and commercial real estate loans is
provided below.
quality,
the level of
credit
impact
in
real
estate
RESIDENTIAL REAL ESTATE
The
loan portfolio is primarily
residential
composed of mortgages and home equity credit lines provided
to clients with whom Northern Trust is seeking to establish a
comprehensive financial services relationship. Residential real
estate loans totaled $10.4 billion at December 31, 2012, or
52 | 2 0 1 2 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 N O R T H E R N T R U S T C O R P O R A T I O N
support
the origination of
37% of total U.S. loans, compared with $10.7 billion or 38% at
December 31, 2011. All residential real estate loans are
underwritten utilizing Northern Trust’s credit policies, which
do not
loan types generally
considered to be of high risk in nature, such as option ARM
loans, subprime loans, loans with initial “teaser” rates, and
loans with excessively high loan-to-value ratios. Residential real
estate loans consist of conventional home mortgages and home
equity credit lines, which generally require a loan to collateral
value of no more than 65% to 80% at inception. Revaluations
of supporting collateral for residential real estate loans are
obtained upon refinancing or default or when otherwise
considered warranted. Residential
collateral
revaluations are performed by independent third parties.
estate
real
Of the total $10.4 billion in residential real estate loans,
$3.2 billion were in the greater Chicago area, $2.5 billion were
in Florida, and $1.6 billion were in California, with the
the other geographic
remainder distributed throughout
regions within the U.S.
served by Northern Trust.
Commitments to extend residential real estate credit, which
are primarily home equity credit lines, totaled $1.2 billion and
$2.2 billion at December 31, 2012 and 2011, respectively.
M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S
is
the
activity
acquisition or
COMMERCIAL REAL ESTATE
In managing its credit exposure, management has defined a
commercial real estate loan as one where: (1) the borrower’s
principal business
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 the business. Unsecured lines of credit 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.
the
Commercial mortgage financing is provided for
acquisition or refinancing of income producing properties. Cash
flows from the properties generally are sufficient to amortize the
loan. These loans average approximately $1.7 million each and
are primarily located in the Illinois, Florida, California, Texas,
and Arizona markets. Construction,
and
development loans provide financing for commercial real estate
prior to rental income stabilization. The intent is 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.
acquisition
The table below provides additional detail regarding
commercial real estate loan types:
(In Millions)
Commercial Mortgages:
Apartment/Multi-family
Office
Retail
Industrial/ Warehouse
Other
Total Commercial Mortgages
Construction, Acquisition and Development
Loans
Single Family Investment
Other Commercial Real Estate Related
2012
2011
$ 652.9
621.4
614.5
312.5
148.7
$ 656.3
615.6
523.1
357.7
133.3
2,350.0
2,286.0
289.4
135.0
85.4
450.1
161.4
84.2
Total Commercial Real Estate Loans
$2,859.8
$2,981.7
At December 31, 2012, legally binding commitments to
extend credit and standby letters of credit to commercial real
estate borrowers totaled $97.4 million and $103.7 million,
respectively. At December
binding
commitments and standby letters of credit totaled $174.3
million and $111.8 million, respectively.
legally
2011
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 reported as impaired loans in the calendar
year of their restructuring. In subsequent years, a troubled
debt restructuring may cease being reported 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 reported as impaired. As
of December 31, 2012, impaired loans totaled $269.8 million
and included $124.5 million of loans deemed troubled debt
restructurings as compared to total impaired loans of $279.4
million at December 31, 2011 that included $113.3 million of
loans deemed troubled debt restructurings. Impaired loans
had $18.0 million and $32.8 million of the allowance for credit
losses allocated to them at December 31, 2012 and
December 31, 2011, respectively. 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 allowance is established or a
charge-off
is recorded for the difference. Smaller balance
(individually less than $250,000) homogeneous loans are
collectively evaluated for impairment and excluded from
impaired loan disclosures as allowed under applicable
accounting standards.
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Provision and Allowance for Credit Losses
Changes in the allowance for credit losses were as follows:
(In Millions)
2012
2011
2010
Balance at Beginning of Year
Charge-Offs
Recoveries
Net Charge-Offs
Provision for Credit Losses
Effect of Foreign Exchange
Rates
$328.9
(63.0)
36.7
(26.3)
25.0
$ 357.3
(116.3)
32.9
(83.4)
55.0
$ 340.6
(150.1)
6.9
(143.2)
160.0
–
–
(0.1)
Balance at End of Year
$327.6
$ 328.9
$ 357.3
A L L O C A T I O N O F T H E A L L O W A N C E F O R C R E D I T L O S S E S
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 the allowance for credit losses at an appropriate level
to absorb probable credit losses that have been identified with
specific borrower relationships (specific loss component) and
for probable losses that are believed to be inherent in the loan
and lease portfolios, unfunded commitments, and standby
letters of credit (inherent loss component). The following
table shows the specific portion of the allowance and the
allocated inherent portion of
and its
components by loan category at December 31, 2012 and at
each of the prior four year-ends.
allowance
the
2012
2011
DECEMBER 31,
2010
2009
2008
ALLOWANCE
AMOUNT
PERCENT OF
LOANS TO
TOTAL LOANS
ALLOWANCE
AMOUNT
PERCENT OF
LOANS TO
TOTAL LOANS
ALLOWANCE
AMOUNT
PERCENT OF
LOANS TO
TOTAL LOANS
ALLOWANCE
AMOUNT
PERCENT OF
LOANS TO
TOTAL LOANS
ALLOWANCE
AMOUNT
PERCENT OF
LOANS TO
TOTAL LOANS
$ 32.5
–% $ 47.3
–% $ 63.7
–% $ 43.8
–% $ 23.5
–%
79.2
80.6
5.5
3.4
–
168.7
110.9
15.5
–
126.4
25
10
4
4
1
44
35
21
–
56
90.0
77.1
1.8
4.7
–
173.6
92.0
16.0
–
108.0
24
10
3
4
1
42
37
20
1
58
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
$295.1
100% $281.6
100% $293.6
100% $296.8
100% $227.6
100%
$327.6
100% $328.9
100% $357.3
100% $340.6
100% $251.1
100%
$297.9
$294.8
$319.6
$309.2
$229.1
29.7
34.1
37.7
31.4
22.0
$327.6
$328.9
$357.3
$340.6
$251.1
1.01%
1.01%
1.14%
1.11%
.74%
($ In Millions)
Specific Allowance
Allocated Inherent Allowance
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
Allowance
Total Allowance for Credit
Losses
Allowance Assigned to:
Loans and Leases
Unfunded Commitments
and Standby Letters of
Credit
Total Allowance for Credit
Losses
Allowance Assigned to Loans
and Leases to Total Loans
and Leases
54 | 2 0 1 2 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 N O R T H E R N T R U S T C O R P O R A T I O N
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SPECIFIC COMPONENT OF THE ALLOWANCE
The amount of specific allowance 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.
evaluation
loans
and
of
At December 31, 2012, the specific allowance component
amounted to $32.5 million compared with $47.3 million at the
end of 2011. The $14.8 million decrease primarily reflects a
decrease in nonperforming loans attributable to restructurings
and pay offs as a result of improvement in commercial and
institutional loans, partially offset by additional allowances
provided for new and existing nonperforming loans.
The decrease in the specific component of the allowance
from $63.7 million in 2010 to $47.3 million in 2011 primarily
reflected charge-offs and principal paydowns, partially offset
by additional allowances provided for new and existing
nonperforming loans.
INHERENT COMPONENT OF THE ALLOWANCE
The inherent component of the allowance addresses exposure
relating to probable but unidentified credit-related losses. The
amount of the inherent loss allowance is based primarily on
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 nature and volume of
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,
the
portfolio, economic and business conditions, and in collateral
valuations, such as property values, as well as other pertinent
information. Changes in collateral values, delinquency ratios,
portfolio volume and concentration, and other asset quality
including management’s subjective evaluation of
metrics,
economic and business conditions, result
in adjustments
of qualitative allowance factors that are applied in the
determination of inherent allowance requirements.
The inherent component of the allowance also covers the
credit exposure associated with undrawn loan commitments
and standby letters of credit. To estimate the allowance for
instruments, management uses
credit
conversion rates to determine the estimated amount that will
be funded and assigns an allowance factor based on the
methodology utilized for outstanding loans.
losses on these
The inherent portion of the allowance increased $13.5
million to $295.1 million at December 31, 2012, compared with
$281.6 million at December 31, 2011, which decreased $12.0
million from $293.6 million at December 31, 2010. The current
year increase in the inherent allowance reflects continued
weakness in residential real estate loans in certain markets. The
decrease in 2011 was driven by improvements in the commercial
and institutional
loan class, partially offset by continued
weakness in residential real estate loans in certain markets.
OVERALL ALLOWANCE
The evaluation of
the factors above resulted in a total
allowance for credit losses of $327.6 million at December 31,
2012, compared with $328.9 million at the end of 2011. The
allowance of $297.9 million assigned to loans and leases, as a
percentage of
and leases, was 1.01% at
December 31, 2012, unchanged from December 31, 2011.
loans
total
Allowances assigned to unfunded loan commitments
and standby letters of credits totaled $29.7 million and $34.1
million at December 31, 2012 and December 31, 2011,
respectively, and are included in other liabilities in the
consolidated balance sheet.
PROVISION
The provision for credit losses was $25.0 million for 2012 and
net charge-offs totaled $26.3 million. This compares with a
$55.0 million provision for credit losses and net charge-offs of
$83.4 million in 2011, and a $160.0 million provision for
credit losses and net charge-offs of $143.2 million in 2010.
Market Risk Management
Overview
interest
rate
To ensure adherence to Northern Trust’s
and foreign currency 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 currency risk.
Asset/Liability Management
include
activities
lending,
Asset/liability management
accepting and placing deposits, investing in securities, issuing
debt, and hedging interest rate and foreign currency 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 currency risk.
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assets,
and off-balance
INTEREST RATE RISK MANAGEMENT
Interest rate risk is the risk to earnings or capital due to
changes in interest rates. Changes in interest rates can have a
positive or negative impact on earnings depending on the
sheet
liabilities
positioning of
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
liabilities, and off-balance sheet positions,
values of assets,
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,
characteristics/embedded
optionality, which arises from client or 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 hedges) are highly correlated which allows Northern Trust’s
interest-bearing assets and liabilities to contribute to earnings
even in periods of volatile interest rates.
behavioral
and
Northern Trust uses two primary measurement techniques
to manage interest rate risk: simulation of earnings and
simulation of economic value of equity. Simulation of earnings
provides management with an ongoing business view of the
impact of interest rate risk on future earnings. Simulation of
economic value of equity provides management with a view of
the impact of interest rate risk on the economic value of equity
(defined as the cash flow present value of assets less the cash flow
present value of liabilities) without any changes from the period
end balance sheet. Both simulation models use the same initial
market interest rates and product balances. These two techniques
are complementary and are used in concert to provide a
comprehensive interest rate risk management capability.
The Asset & Liability Management Policy, which is reviewed
and approved by the Board annually, establishes limits for both
the sensitivity of earnings (SOE) measure and the sensitivity of
economic value of equity (SEVE) measure. Both interest rate risk
measures (SOE and SEVE) are informational and provide
context for understanding Northern Trust’s interest rate risk
profile. In the event that a limit is exceeded, management is
required to communicate the event
to the Business Risk
Committee along with management’s plans.
Because these two measures are projections, they are not
directly comparable to actual results disclosed elsewhere, or
directly predictive of future values of other measures provided.
‰
‰
‰
‰
‰
56 | 2 0 1 2 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 N O R T H E R N T R U S T C O R P O R A T I O N
Simulation of earnings measures the sensitivity of earnings
under various interest rate scenarios. Management compares
the SOE output to anticipated earnings and has set limits for
the change in net interest income as a percentage of estimated
rates.
earnings
Management also regularly reviews the results of the SOE
model against actual earnings as a form of back testing.
in interest
resulting
from a
change
The modeling of SOE incorporates on-balance sheet
positions, as well as derivative financial instruments (principally
interest rate swaps) that are used to manage interest rate risk.
Northern Trust uses market implied forward interest rates as the
base case and measures the sensitivity (i.e. change) in earnings if
future rates are 100 or 200 basis points higher than base case
forward rates. 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,
non-parallel (i.e. twist) changes to yield curves that result in
them becoming steeper or flatter, and changes to some of the
yield curves (i.e. basis risk). The model simulations also
incorporate the following assumptions:
‰
are
and
that
loans
on mortgage
the balance sheet size and mix remains essentially constant
over the simulation horizon with maturing assets and
liabilities replaced with instruments with similar terms as
those that are maturing, with the exception of certain
products (such as term borrowings and recent increases
assumed to be
in nonmaturity deposits
temporary in nature) that are replaced with overnight
wholesale instruments;
prepayments
securities
collateralized by mortgages are projected under each rate
scenario using a third-party mortgage analytics system
that incorporates market prepayment assumptions;
non-maturity deposit
rates are projected based on
Northern’s actual historical pattern of pricing these
products, or based on judgment when there is no
appropriate history or when current pricing strategies
differ from history;
commercial demand deposits are treated as short-term
rate sensitive as these balances may receive an explicit
interest rate or an earnings credit rate that can be applied
to fees for services provided by Northern Trust;
new business rates are based on current spreads to market
indices; and
currency exchange rates, credit spreads, and the initial
relationship among market rates (e.g. Treasury and
Libor) are assumed to remain the same in each interest
rate scenario.
M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S
The following table shows the estimated impact on 2013
pre-tax earnings of 100 and 200 basis point upward
movements in interest rates relative to forward rates. Given
the low level of interest rates and assumed interest rate floors
as rates approach zero, simulation of earnings for 100 or 200
basis points lower rates would provide misleading results.
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 E A R N I N G S A S O F
D E C E M B E R 3 1 , 2 0 1 2
(In Millions)
INCREASE IN INTEREST RATES ABOVE
MARKET IMPLIED FORWARD RATES
100 Basis Points
200 Basis Points
ESTIMATED IMPACT ON
2013 PRE-TAX EARNINGS:
INCREASE/(DECREASE)
$42
37
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. During the year ended
December 31, 2012, Northern Trust did not exceed its SOE limits.
A second technique used to measure interest rate risk is
simulation of the economic value of equity, which measures
the SEVE to changes in interest rates. Management compares
the output of the SEVE model to our common equity and has
set limits for the change in economic value of equity from a
change in interest rates relative to Northern Trust’s common
equity. Economic value of equity is defined as the present
value of assets minus the present value of liabilities net of the
value of instruments that are used to manage the interest rate
risk of balance sheet items. The potential effect of interest rate
changes on economic equity is derived from the impact of
such changes on projected future cash flows and the present
value of these cash flows. Northern Trust uses current market
rates (and the future rates implied by the market for path
dependent items) as the base case and measures SEVE if
current rates are immediately shocked up by 100 or 200 basis
points. Stress testing of interest rates is performed to include
such scenarios as immediate non-parallel (i.e. twist) shocks to
yield curves that result in them becoming steeper or flatter and
basis
simulations also incorporate the
following assumptions:
‰
securities
prepayments
collateralized by mortgages are projected under each rate
scenario using a third-party mortgage analytics system
that incorporates market prepayment assumptions;
rates are projected based on
non-maturity deposit
Northern’s actual historical pattern of pricing. Projected
risk. The model
on mortgage
loans
and
‰
rates may also be based on judgment when there is no
appropriate history or when current pricing strategies
differ from history. The present values of these deposits
are based on estimated remaining lives that are based on
Northern’s actual historical runoff patterns with some
balances assumed to be temporary;
currency exchange rates and credit spreads are assumed to
remain constant over the simulation horizon;
the present values of most noninterest-related balances
(such as receivables, equipment, and payables) are the
same as their book values; and
The initial shock to current rates assumes the relationship
among market curves (e.g. Treasury and Libor) remains
the same in each interest rate scenario.
‰
‰
‰
The following table shows the estimated impact on
economic value of equity of 100 and 200 basis point shocks up
from current interest rates. Given the low level of interest rates
and assumed interest rate floors as rates approach zero
simulation of the economic value of equity for 100 or 200
basis points lower rates would provide misleading results.
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 E C O N O M I C V A L U E O F
E Q U I T Y A S O F D E C E M B E R 3 1 , 2 0 1 2
(In Millions)
INCREASE IN INTEREST RATES ABOVE
MARKET IMPLIED FORWARD RATES
100 Basis Points
200 Basis Points
ESTIMATED IMPACT ON
ECONOMIC VALUE OF EQUITY:
INCREASE/(DECREASE)
$ (2)
(216)
The simulations of economic value of equity do not
incorporate any management actions that might moderate the
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. During
the year ended December 31, 2012, Northern Trust did not
exceed its SEVE limits.
Northern Trust
limits aggregate interest rate 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;
issuance of senior notes and subordinated notes;
collateralized borrowings
Loan Bank;
from the Federal Home
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‰
‰
placing and taking Eurodollar time deposits; and
hedges with various
types of derivative
instruments.
financial
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 CURRENCY RISK MANAGEMENT
Northern Trust is exposed to non-trading foreign currency
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.
trading
Foreign Exchange Trading. Foreign exchange
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 market risks associated with these activities are foreign
currency and interest rate risk.
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 currency
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.
58 | 2 0 1 2 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 N O R T H E R N T R U S T C O R P O R A T I O N
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 currency 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 $301 thousand and $740 thousand as
of December 31, 2012 and 2011, respectively. VaR totals
representing the average, high, and low for 2012 were $421
thousand, $1.1 million, and $97 thousand, respectively, with
the average, high, and low for 2011 being $531 thousand, $1.4
million, and $88 thousand, respectively. These totals 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
2012 and 2011, Northern Trust did not incur an actual trading
loss in excess of the daily value at risk estimate.
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 in its trading portfolio a small inventory of securities
that are held for sale to its clients. The interest rate risk
associated with these securities is insignificant.
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
delivery difficulties, or catastrophes
in losses.
Northern Trust’s success depends, in part, upon maintaining
its reputation as a well-managed institution with stockholders,
existing and prospective clients, creditors and regulators.
to result
M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S
Operational risk includes compliance and fiduciary risks
which are governed and managed explicitly, and is mitigated
through a system of internal controls and risk management
practices that are designed to keep operational risk and
operational losses at levels appropriate to Northern Trust’s
overall risk appetite and the inherent risk within the markets it
operates. While operational
risk controls are extensive,
operational losses have and will continue to occur.
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.
The Global Compliance function guides and assists
Northern Trust’s business units in fulfilling their compliance
related responsibilities relative to legal requirements, sound
banking and fiduciary standards, and ethical conduct, through
the oversight of compliance processes, including compliance
monitoring; interpretation of regulations; development and
evaluation of procedures;
regulatory
compliance training, in order to minimize exposure and loss
to Northern Trust and its clients. Northern Trust’s internal
auditors monitor the overall effectiveness of operational risk
internal controls on an ongoing basis.
and oversight of
R E C O N C I L I A T I O N O F R E P O R T E D N E T I N T E R E S T I N C O M E T O F U L L Y T A X A B L E E Q U I V A L E N T
The table below presents a reconciliation of interest income and net interest income prepared in accordance with GAAP to interest
income and net interest income on a fully taxable equivalent (FTE) basis, which are non-GAAP financial measures. Management
believes this presentation provides a clearer indication of net interest margins for comparative purposes.
(In Millions)
Interest Income
Interest Expense
Net Interest Income
Net Interest Margin
* Fully taxable equivalent (FTE)
2012
2011
2010
YEAR ENDED DECEMBER 31,
REPORTED
FTE ADJ.
FTE*
REPORTED
FTE ADJ.
FTE*
REPORTED
FTE ADJ.
FTE*
$1,287.7
297.4
$40.8
–
$1,328.5
297.4
$1,408.6
399.5
$40.2
–
$1,448.8
399.5
$1,296.7
378.0
$39.1
–
$1,335.8
378.0
$ 990.3
$40.8
$1,031.1
$1,009.1
$40.2
$1,049.3
$ 918.7
$39.1
$ 957.8
1.18%
1.22%
1.22%
1.27%
1.35%
1.41%
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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,
reengineering and outsourcing activities, new
business results and outlook, changes in securities market
prices, credit quality including allowance levels, planned
capital expenditures and technology spending, 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.
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 particularly the continuing uncertainty in Europe; the
recent downgrade of U.S. Government issued securities; the
health and soundness of the financial institutions and other
counterparties with which Northern Trust conducts business;
changes in financial markets,
including debt and equity
markets, that impact the value, liquidity, or credit ratings of
financial assets in general, or financial assets in particular
investment
funds, client portfolios, or securities lending
collateral pools, including those funds, portfolios, collateral
pools, and other financial assets with respect
to which
Northern Trust has taken, or may in the future take, actions to
provide asset value stability or additional liquidity; the impact
of the recent 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
60 | 2 0 1 2 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 N O R T H E R N T R U S T C O R P O R A T I O N
credit
exchange trading client volumes, fluctuations and volatility in
foreign currency exchange rates, and Northern 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
turmoil and financial market disruptions; uncertainties
inherent in the complex and subjective judgments required to
assess
risk and establish appropriate allowances
therefor; difficulties in measuring, or determining whether
there is other-than-temporary impairment in, the value of
securities held in Northern Trust’s investment portfolio;
Northern Trust’s success in managing various risks inherent in
its business, including credit risk, operational risk, interest rate
risk and liquidity risk, 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, including for the use and distribution of capital;
changes
or
interpretations and other legislation in the U.S. or other
countries that could affect Northern Trust or its clients,
fair value
including changes
measurements and recognizing 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 identifying and
penetrating targeted markets, through acquisition, strategic
alliance or otherwise; Northern Trust’s success in integrating
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
in
generating revenue 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
investment products; Northern Trust’s
in accounting rules
requirements
accounting
success
laws,
tax
for
in
M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S
in processes or
in implementing its
retaining the necessary personnel to support business growth
and expansion and maintain sufficient expertise to support
increasingly complex products and services; Northern Trust’s
success
revenue enhancement and
expense management initiatives; Northern Trust’s ability, as
products, methods of delivery, and client requirements change
or become more complex, to continue to fund and accomplish
innovation, improve risk management practices and controls,
including human errors or
and address operating risks,
omissions, data security breach risks, pricing or valuation of
fraud, systems performance or defects, systems
securities,
internal
interruptions, and breakdowns
controls; Northern Trust’s success in controlling expenses,
particularly in a difficult economic environment; uncertainties
in Northern Trust’s assumptions concerning its
inherent
and expected
pension plan,
increased costs of
contributions,
compliance and other
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, anti-bribery, and client privacy and the
potential for 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, expose them
including discount
returns and payouts;
risks associated with changes
rates
carried on by
foreign exchange,
to certain liabilities of their subsidiary depository institutions,
and restrict or increase the regulation of certain activities,
including
financial
institutions,
including Northern Trust; risks that evolving
legislation and
regulations, such as Basel II, and potential
regulations, including Basel III and regulations that may be
promulgated under the Dodd-Frank Act, could affect required
regulatory
including
financial
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
accruals; and the risk of events that could harm Northern
Trust’s reputation and so undermine the confidence of clients,
counterparties, rating agencies, and stockholders.
institutions,
capital
for
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 2012 Annual Report to Shareholders
(pages 47-59), in the section of the “Notes to Consolidated
Financial Statements” in the 2012 Annual Report
to
Shareholders captioned “Note 24 – Contingent Liabilities”
(pages 108-110), in the sections of “Item 1 – Business” of the
2012 Annual Report on Form 10-K captioned “Government
Monetary
and
“Regulation and Supervision” (pages 2-14), and in “Item 1A –
Risk Factors” of the 2012 Annual Report on Form 10-K
(pages 28-38). 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.
“Competition”
Policies,”
Fiscal
and
N O R T H E R N T R U S T C O R P O R A T I O N 2 0 1 2 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 | 61
M A N A G E M E N T ’ S R E P O R T O N I N T E R N A L C O N T R O L O V E R F I N A N C I A L R E P O R T I N G
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, 2012. 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, 2012, 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 (i) transactions are recorded as necessary to permit preparation of
consolidated financial statements in accordance with accounting principles generally accepted in the United States; (ii) receipts and
expenditures of Northern Trust are being made only in accordance with authorizations of management and directors of Northern
Trust; and (iii) unauthorized acquisition, use, or disposition of Northern Trust’s assets that could have a material effect on the
financial statements are prevented or timely detected. 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, 2012, included in this
Annual Report, has issued an attestation report (included herein on page 63) on the effectiveness of Northern Trust’s internal
control over financial reporting.
62 | 2 0 1 2 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 N O R T H E R N T R U S T C O R P O R A T I O N
R E P O R T O F I N D E P E N D E N T R E G I S T E R E D P U B L I C A C C O U N T I N G F I R M
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, 2012, 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, 2012, 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, 2012 and 2011, 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, 2012, and our report dated February 26, 2013 expressed an unqualified opinion on those
consolidated financial statements.
chicago, illinois
february 26, 2013
N O R T H E R N T R U S T C O R P O R A T I O N 2 0 1 2 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 | 63
C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
DECEMBER 31,
2012
2011
$ 3,752.7
60.8
18,803.5
7,619.7
28,643.5
2,382.0
8.0
31,033.5
12,897.2
16,607.3
29,504.5
(297.9)
469.9
2,049.1
537.8
3,930.2
$ 4,315.3
121.3
16,696.4
13,448.6
30,192.5
799.2
8.0
30,999.7
12,354.3
16,709.6
29,063.9
(294.8)
494.5
778.3
532.0
4,068.5
$97,463.8
$100,223.7
$20,519.0
15,189.7
2,466.1
3,512.8
39,720.2
81,407.8
780.2
699.8
367.4
2,405.8
1,421.6
277.0
2,577.2
89,936.8
408.6
1,012.7
6,702.7
(283.0)
(314.0)
7,527.0
$ 22,792.0
17,470.8
3,058.3
3,488.4
35,868.0
82,677.5
815.3
1,198.8
931.5
2,126.7
2,133.3
276.9
2,946.4
93,106.4
408.6
977.5
6,302.3
(345.6)
(225.5)
7,117.3
$97,463.8
$100,223.7
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
Interest-Bearing Deposits with Banks
Federal Reserve Deposits and Other Interest-Bearing
Securities
Available for Sale
Held to Maturity (Fair value of $2,394.8 and $817.1)
Trading Account
Total Securities
Loans and Leases
Commercial
Personal
Total Loans and Leases (Net of unearned income of $297.9 and $374.1)
Allowance 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 238,914,988 and
241,008,509
Additional Paid-in Capital
Retained Earnings
Accumulated Other Comprehensive Loss
Treasury Stock (6,256,536 and 4,163,015 shares, at cost)
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
See accompanying notes to consolidated financial statements on pages 68-122.
64 | 2 0 1 2 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 N O R T H E R N T R U S T C O R P O R A T I O N
C O N S O L I D A T E D F I N A N C I A L S T 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 I N C O M E
(In Millions Except Share Information)
Noninterest Income
Trust, Investment and Other Servicing Fees
Foreign Exchange Trading Income
Treasury Management Fees
Security Commissions and Trading Income
Other Operating Income
Investment Security Gains (Losses), net (Note)
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 Expense
Compensation
Employee Benefits
Outside Services
Equipment and Software
Occupancy
Visa Indemnification Benefit
Other Operating Expense
Total Noninterest Expense
Income before Income Taxes
Provision for Income Taxes
Net Income
Net Income Applicable to Common Stock
PER COMMON SHARE
Net Income – Basic
– Diluted
FOR THE YEAR ENDED DECEMBER 31,
2012
2011
2010
$
$
$
$
2,405.5
206.1
67.4
73.6
154.9
(1.7)
2,905.8
1,287.7
297.4
990.3
25.0
965.3
1,267.4
258.2
529.2
366.7
174.4
–
282.9
2,878.8
992.3
305.0
687.3
687.3
2.82
2.81
$
$
$
$
2,169.5
324.5
72.1
60.5
158.1
(23.9)
2,760.8
1,408.6
399.5
1,009.1
55.0
954.1
1,267.2
258.2
552.8
328.1
180.9
(23.1)
267.1
2,831.2
883.7
280.1
603.6
603.6
2.47
2.47
$
$
$
$
2,081.9
382.2
78.1
60.9
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
Average Number of Common Shares Outstanding – Basic
– Diluted
240,417,805
240,881,244
241,401,310
241,811,384
242,028,776
242,502,531
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
Other Comprehensive Income (Loss) (Net of Tax and Reclassifications)
Net Unrealized Gains 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
Note: 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 68-122.
FOR THE YEAR ENDED DECEMBER 31,
2012
$
687.3
$
61.2
5.6
20.0
(24.2)
62.6
749.9
(2.7)
(0.6)
1.6
(1.7)
$
$
$
$
$
$
2011
603.6
53.3
(18.4)
(2.5)
(72.7)
(40.3)
563.3
(1.1)
(22.2)
(0.6)
(23.9)
2010
669.5
28.2
37.6
(18.3)
8.8
56.3
725.8
(0.8)
(20.4)
0.8
(20.4)
$
$
$
$
N O R T H E R N T R U S T C O R P O R A T I O N 2 0 1 2 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 | 65
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(In Millions)
COMMON STOCK
Balance at January 1 and December 31
ADDITIONAL PAID-IN CAPITAL
Balance at January 1
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
Net Income
Dividends Declared – Common Stock
Balance at December 31
ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance at January 1
Net Unrealized Gains on Securities Available for Sale
Net Unrealized Gains (Losses) on Cash Flow Hedges
Foreign Currency Translation Adjustments
Pension and Other Postretirement Benefit Adjustments
Balance at December 31
TREASURY STOCK
Balance at January 1
Stock Options and Awards
Stock Purchased
Balance at December 31
C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
FOR THE YEAR ENDED DECEMBER 31,
2012
2011
2010
$ 408.6
$ 408.6
$ 408.6
977.5
(41.5)
74.4
2.3
1,012.7
6,302.3
687.3
(286.9)
6,702.7
(345.6)
61.2
5.6
20.0
(24.2)
(283.0)
(225.5)
74.4
(162.9)
(314.0)
920.0
(13.2)
71.3
(0.6)
977.5
5,972.1
603.6
(273.4)
6,302.3
(305.3)
53.3
(18.4)
(2.5)
(72.7)
(345.6)
(165.1)
19.0
(79.4)
(225.5)
888.3
(23.1)
53.6
1.2
920.0
5,576.0
669.5
(273.4)
5,972.1
(361.6)
28.2
37.5
(15.0)
5.6
(305.3)
(199.2)
41.0
(6.9)
(165.1)
Total Stockholders’ Equity at December 31
$7,527.0
$7,117.3
$6,830.3
See accompanying notes to consolidated financial statements on pages 68-122.
66 | 2 0 1 2 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 N O R T H E R N T R U S T C O R P O R A T I O N
C O N S O L I D A T E D F I N A N C I A L S T 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 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 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
Change in Accrued Income Taxes
Qualified Pension Plan Contributions
Visa Indemnification Benefit
Deferred Income Tax Provision
Change in Receivables
Change in Interest Payable
Net Changes in Derivative Fair Value, Including Required Collateral
Other Operating Activities, net
Net Cash Provided by Operating Activities
CASH FLOWS FROM INVESTING ACTIVITIES
Net Change in Federal Funds Sold and Securities Purchased under Agreements to Resell
Change in Interest-Bearing Deposits with Banks
Net Change 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
Change in Loans and Leases
Purchases of Buildings and Equipment, net
Purchases and Development of Computer Software
Change in Client Security Settlement Receivables
Decrease in Cash Due to Acquisitions, net of Cash Acquired
Other Investing Activities, net
Net Cash Provided by (Used in) Investing Activities
CASH FLOWS FROM FINANCING ACTIVITIES
Change in Deposits
Change in Federal Funds Purchased
Change in Securities Sold under Agreements to Repurchase
Change in Short-Term Other Borrowings
Proceeds from Term Federal Funds Purchased
Repayments of Term Federal Funds Purchased
Proceeds from Senior Notes and Long-Term Debt
Repayments of Senior Notes and Long-Term Debt
Treasury Stock Purchased
Net Proceeds from Stock Options
Cash Dividends Paid on Common Stock
Other Financing Activities, net
Net Cash Provided by (Used in) 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
FOR THE YEAR ENDED DECEMBER 31,
2012
2011
2010
$
687.3
$
603.6
$
669.5
1.7
(11.7)
25.0
88.3
180.8
20.3
18.5
(100.0)
–
79.7
(41.9)
(10.0)
(127.9)
4.3
814.4
60.5
(2,107.1)
5,829.0
(3,798.5)
2,220.9
(19,546.4)
21,183.3
(469.6)
(73.3)
(239.2)
(1,270.8)
–
(161.2)
1,627.6
(1,269.7)
(35.1)
(499.0)
(435.5)
–
–
500.0
(923.7)
(162.4)
106.8
(354.3)
–
(3,072.9)
68.3
(562.6)
4,315.3
23.9
(34.2)
55.0
89.2
158.4
17.5
(115.5)
(100.0)
(23.1)
97.2
(179.7)
5.0
172.1
484.9
1,254.3
38.8
(1,345.1)
(2,512.4)
(147.6)
272.9
(33,302.1)
23,082.9
(1,017.9)
(96.9)
(274.2)
(77.0)
(172.6)
162.8
(15,388.4)
18,481.8
(2,876.3)
244.4
630.5
7,962.3
(7,981.3)
500.0
(880.7)
(79.0)
75.6
(273.7)
–
15,803.6
(172.2)
1,497.3
2,818.0
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
Cash and Due from Banks at End of Year
$ 3,752.7
$ 4,315.3
$ 2,818.0
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 68-122.
$
307.4
188.5
48.5
$
394.5
153.3
68.8
$
370.3
173.1
52.1
N O R T H E R N T R U S T C O R P O R A T I O N 2 0 1 2 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 | 67
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 various other
wholly-owned subsidiaries of
the Corporation and Bank.
Throughout the notes, the term “Northern Trust” refers 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 their acquisition. Certain prior
year balances have been reclassified consistent with the current
year’s presentation.
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,
trust companies, and
various other U.S. and non-U.S. subsidiaries.
Northern Trust generates the majority of its revenue from
its two primary business units: Corporate and Institutional
Services
(PFS).
(C&IS) and Personal Financial Services
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).
insurance
The C&IS business unit provides asset servicing, securities
lending, brokerage, banking and related services to corporate
and public retirement funds, foundations, endowments, fund
managers,
sovereign wealth and
companies,
government funds. C&IS 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. C&IS
related foreign exchange
transactions from offices located in the United States, United
Kingdom, and Singapore.
also executes
The PFS business unit provides personal trust, investment
management, custody, and philanthropic services; financial
68 | 2 0 1 2 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 N O R T H E R N T R U S T C O R P O R A T I O N
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
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
Global Family Office, which provides customized products
and services
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 a network of
offices in 18 U.S. states and Washington, D.C., as well as
offices in London and Guernsey.
to meet
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 revenue and expense during the reporting period.
Actual results could differ from those estimates.
D. Foreign Currency Remeasurement and Translation.
Asset and liability accounts denominated in nonfunctional
currencies are remeasured into functional currencies at period
end rates of exchange, except for certain balance sheet items
including buildings and equipment, goodwill and other
intangible assets, which are remeasured at historical exchange
rates. Results from remeasurement of asset and liability
accounts are reported in other operating income as currency
translation gains (losses), net. 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.
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
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.
Nonmarketable Securities primarily consist of Federal
Reserve and Federal Home Loan Bank stock and community
development investments which are recorded in other assets
on the consolidated balance sheet. Federal Reserve and Federal
Home Loan Bank stock are reported at cost, which represents
investments,
redemption value. Community development
which are discussed in further detail in Note 27, are reported
at cost using the effective yield method and amortized over the
lives of the related tax credits.
Other-Than-Temporary Impairment (OTTI). 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 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.
F. 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.
instruments
activities. These
G. 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
include
risk management
foreign exchange contracts, interest rate contracts, and credit
default swap contracts. Derivative financial instruments are
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 the line item, ‘net
changes in derivative fair value, including required collateral.’
Changes in the fair value of client-related and trading
derivative instruments, which are not designated hedges under
GAAP, are recognized currently in either foreign exchange
trading income or security commissions and trading income.
Changes in the fair value of derivative instruments entered
into for risk management purposes but not designated as
hedges are recognized currently in 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 the derivative instrument and
changes in the fair value of the hedged asset or liability
attributable to the hedged risk are recognized currently in
income. For substantially all fair value hedges, Northern Trust
applies the “shortcut” method of accounting, available under
GAAP, 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 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. Ineffectiveness resulting from fair value hedges is
recorded in either interest income or interest expense.
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earnings. Northern Trust
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 such derivatives is recognized in AOCI, a
component of stockholders’ equity, and there is no change to
the accounting for the hedged item. Balances in AOCI are
reclassified to earnings when the hedged forecasted
assesses
transaction impacts
effectiveness using regression analysis for cash flow hedges of
available for sale securities. Ineffectiveness is measured using
the hypothetical derivative method. 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
is measured using the
method and any ineffectiveness
is
hypothetical derivative method. Any
recognized currently in earnings.
ineffectiveness
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 of the
hedged net investment. 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 minimize the
risk of hedge ineffectiveness. To the extent all terms are not
perfectly matched, any ineffectiveness is measured using the
hypothetical derivative method. Ineffectiveness resulting from
net investment hedges is recorded in other operating income.
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.
and
formally
the
documented
as
transaction. The
Fair value, cash flow, and net investment hedges are
such
designated
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, the
nature of the risk being hedged, a description of the method
for assessing hedge effectiveness at inception and on an
ongoing basis, as well as the method that will be used to
measure hedge ineffectiveness. For hedges that do not qualify
70 | 2 0 1 2 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 N O R T H E R N T R U S T C O R P O R A T I O N
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
for the “shortcut” or the critical terms match methods 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, matures, is terminated or sold, if a hedged forecasted
transaction is no longer expected to occur, or if Northern
Trust removes the derivative’s hedge designation. Subsequent
gains and losses on these derivatives are included in foreign
exchange trading income or security commissions and trading
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.
H. 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. Loans
and leases are disaggregated for disclosure purposes by
portfolio segment (segment) and by class. Segment is defined
as the level at which management develops and documents a
systematic methodology to determine the allowance for credit
losses. Northern Trust has defined its segments as commercial
and personal. A class of loans and leases is a subset of a
segment,
risk
components of which have
characteristics, measurement attributes, or risk monitoring
methods. 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.
similar
the
Loan Classification. Loans that are held for investment are
reported at the principal amount outstanding, net of unearned
income. 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
recognized in other operating income.
gains or
Unrealized gains on these loan commitments are reported as
other assets, with unrealized losses reported as other liabilities.
Other unfunded commitments relating to loans that are not
held for sale are recorded in other liabilities and are carried at
the amount of unamortized fees with an allowance for credit
loss liability recognized for any estimated probable losses.
losses
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
of
and
is not
interest
Interest
subsequent
resumption
income on loans
Recognition of Income.
income in the current period.
is
recorded on an accrual basis unless,
in the opinion of
management, there is a question as to the ability of the debtor
to meet the terms of the loan agreement, or interest or
principal is more than 90 days contractually past due and the
loan is not well-secured and in the process of collection. Loans
meeting such criteria are classified as nonperforming and
interest income is recorded on a cash basis. Past due status is
based on how long since the contractual due date a principal
or interest payment has been past due. For disclosure
purposes, loans that are 29 days past due or less are reported
the time a loan is determined to be
as current. At
nonperforming, interest accrued but not collected is reversed
against
Interest
collected on nonperforming loans is applied to principal
in the opinion of management, collectability of
unless,
principal
in doubt. Management’s assessment of
indicators of loan and lease collectability, and its policies
relative to the recognition of interest income, including the
income
suspension
recognition, do not meaningfully vary between loan and lease
classes. Nonperforming loans are returned to performing
status when factors indicating doubtful collectability no longer
exist. Factors considered in returning a loan to performing
status are consistent across all classes of loans and leases and,
in accordance with regulatory guidance, relate primarily to
expected payment performance. Loans are eligible to be
returned to performing status when: (i) no principal or
interest that is due is unpaid and repayment of the remaining
contractual principal and interest is expected or (ii) the loan
has otherwise become well-secured (possessing realizable
including accrued
value sufficient
interest, in full) and is in the process of collection (through
action reasonably expected to result in debt repayment or
restoration to a current status in the near future). A loan that
fully current may be restored to
has not been brought
performing status provided there has been a sustained period
of repayment performance (generally a minimum of six
months) by the borrower in accordance with the contractual
terms, and Northern Trust is reasonably assured of repayment
within a reasonable period of time. Additionally, a loan that
has been formally restructured so as to be reasonably assured
of repayment and performance according to its modified
terms may be returned to accrual status, provided there was a
well-documented credit evaluation of the borrower’s financial
condition and prospects of repayment under the revised
terms, and there has been a sustained period of repayment
performance (generally a minimum of six months) under the
revised terms.
to discharge the debt,
future cash flows,
Impaired Loans. A loan is considered to be impaired when,
based on current
information and events, management
determines that it is probable that Northern Trust will be
unable to collect all amounts due according to the contractual
terms of the loan agreement. Impaired loans are identified
through ongoing credit management and risk rating processes,
including the formal review of past due and watch list credits.
Payment performance and delinquency status are critical
loans and leases,
factors in identifying impairment for all
particularly those within the residential real estate, private
client and personal-other classes. Other key factors considered
in identifying impairment of loans and leases within the
commercial and institutional, non-U.S., lease financing, and
commercial-other classes relate to the borrower’s ability to
the obligation as measured
perform under the terms of
including
through the assessment of
consideration of collateral value, market value, and other
factors. A loan is also considered to be impaired if its terms
have been modified as a concession by Northern Trust or a
financial
bankruptcy court
difficulties, referred to as a troubled debt restructuring (TDR).
All TDRs are reported as impaired loans in the calendar year
of their restructuring. In subsequent years, a TDR may cease
being reported 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 reported as impaired. Impairment is measured
based upon the loan’s market price, the present value of
expected future cash flows, discounted at the loan’s effective
interest rate, or 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 allowance is established, or a charge-off is
recorded, for the difference. Smaller balance (individually less
than $250,000) homogeneous loans are collectively evaluated
for impairment and excluded from impaired loan disclosures
as allowed under applicable accounting standards. Northern
Trust’s accounting policies for impaired loans is consistent
across all classes of loans and leases.
resulting from the debtor’s
Premiums and Discounts. 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, deferred
and amortized over the life of
the related loan as an
adjustment to the loan’s yield.
Direct Financing and Leverage Leases. Unearned lease
income from direct financing and leveraged leases is recognized
N O R T H E R N T R U S T C O R P O R A T I O N 2 0 1 2 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 | 71
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.
I. Allowance for Credit Losses. The allowance 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
evaluate the adequacy of the allowance for credit losses. In
determining the level of
the allowance, Northern Trust
evaluates the allowance necessary for impaired loans and also
estimates losses inherent in other credit exposures. The result
is an allowance with the following components:
Specific Allowance. The amount of specific allowance is
determined through an individual evaluation of loans and
lending-related commitments considered impaired that
is
based on expected future cash flows, the value of collateral,
and other factors that may impact the borrower’s ability
to pay. For impaired loans where the amount of specific
allowance, if any, is determined based on the value of the
underlying real estate collateral, third-party appraisals are
generally 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.
Inherent Allowance. The amount of inherent allowance is
based primarily on factors which incorporate management’s
evaluation of historical charge-off experience and various
such as management’s evaluation of
qualitative factors
economic and business conditions and changes
in the
character and size of the loan portfolio. 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 allowance for credit losses.
72 | 2 0 1 2 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 N O R T H E R N T R U S T C O R P O R A T I O N
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
Subsequent recoveries, if any, are credited to the allowance.
Northern Trust’s policies relative to the charging-off of
uncollectible loans and leases are consistent across both loan
and lease segments. Determinations as
to whether an
uncollectible loan is charged-off or a specific reserve is
established are based on management’s assessment as to the
level of certainty regarding the amount of loss. The provision
for credit losses, which is charged to income, is the amount
necessary to adjust the allowance for credit losses to the level
determined to be appropriate 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 allowance for credit
losses for undrawn loan commitments and standby letters of
credit, management uses conversion rates to determine the
estimated amount that will be funded. Factors based on
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 allowance assigned to loans
and leases is reported as a contra asset, directly following loans
and leases in the consolidated balance sheet. The portion of
the allowance assigned to unfunded loan commitments and
standby letters of credit is reported in other liabilities in the
consolidated balance sheet.
J. Standby Letters of Credit. Fees on standby letters of credit
are recognized in other operating income using the straight-line
method over the lives of 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.
K. Buildings and Equipment. Buildings and equipment
owned are carried at original cost less accumulated depreciation.
The charge for depreciation is computed using 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.
L. 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
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
are recorded in other assets in the consolidated balance sheet.
Fair value is
typically 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 during the 90-day period after the acquisition of
such properties are charged against the allowance for credit
losses assigned to loans and leases. 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 expense.
M. Goodwill and Other Intangible Assets. Goodwill is not
subject
to amortization. Separately identifiable acquired
intangible assets with finite lives are amortized over their
lives, primarily on a straight-line basis.
estimated useful
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.
N. 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.
O. 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
the use of estimates and
revenue recognition involves
assumptions, including components that are calculated based
on estimated asset valuations and transaction volumes.
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. In 2010, securities in the
fund accounted for at fair value 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. Certain investment management 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 treatment for the related performance-based revenue.
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.
P. 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.
Q. 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
sustained are
consolidated financial
recorded in the
statements. Northern Trust
recognizes any interest and
penalties related to unrecognized tax benefits in the provision
for income taxes.
R. Cash Flow Statements. Cash and cash equivalents have
been defined as “Cash and Due from Banks”.
S. 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 and postretirement benefits are reported in other
assets and unfunded pension and postretirement benefits 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.
N O R T H E R N T R U S T C O R P O R A T I O N 2 0 1 2 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 | 73
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
Northern Trust has issued certain restricted stock awards,
which are unvested share-based payment awards that contain
nonforfeitable rights to dividends or dividend equivalents. These
restricted shares
securities.
Accordingly, Northern Trust calculates net income applicable to
common stock using the two-class method, whereby net income
is allocated between common stock and participating securities.
considered participating
are
Note 2 – Recent Accounting Pronouncements
There were no accounting pronouncements issued during the
year ended December 31, 2012 but not yet adopted that are
expected to impact Northern Trust’s consolidated financial
position or results of operations.
Note 3 – Fair Value Measurements
Fair value under GAAP is defined as the price that would be
received to sell an asset or paid to transfer a liability (an exit
price) in an orderly transaction between market participants
on the measurement date.
Fair Value Hierarchy. The following describes
the
hierarchy of valuation inputs (Levels 1, 2, and 3) used to
measure fair value and the primary valuation methodologies
used by Northern Trust for financial instruments measured at
fair value on a recurring basis. Observable inputs reflect
the
market data obtained from sources independent of
reporting entity; unobservable inputs reflect the entity’s own
assumptions about how market participants would value an
asset or liability based on the best information available.
GAAP requires an entity measuring fair value to maximize the
use of observable inputs and minimize the use of unobservable
inputs and establishes a fair value hierarchy of
inputs.
Financial instruments are categorized within the hierarchy
based on the lowest level input that is significant to their
valuation. Northern Trust’s policy is to recognize transfers
into and transfers out of fair value levels as of the end of the
reporting period in which the transfer occurred. No transfers
between fair value levels occurred during the years ended
December 31, 2012 or 2011.
T. Share-Based Compensation Plans. Northern Trust
recognizes as compensation expense the grant-date fair value
of
stock and stock unit awards and other share-based
compensation granted to employees within the consolidated
income statement. 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
historical volatility of Northern Trust’s stock price and the
implied volatility of traded options on Northern Trust stock,
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
requisite service period for the entire award. Northern Trust
does not include an estimate of
future forfeitures in its
recognition of share-based compensation expense as historical
Share-based
been
forfeitures
compensation expense is adjusted based on forfeitures as they
occur. Dividend equivalents are paid on stock units that have
been granted but not yet vested. Cash flows resulting from the
tax deductions from the exercise of stock
realization of
options in excess of the compensation cost recognized (excess
tax benefits) are classified as financing cash flows.
significant.
have
not
U. Net Income Per Common Share. Basic net income per
common share is computed by dividing net income/loss
applicable to common stock by the weighted average number
of common shares outstanding during each period. Diluted
net income per common share is computed by dividing net
income applicable to common stock and potential common
shares by the aggregate of the weighted average number of
common shares outstanding during the period and common
share equivalents calculated for stock options and restricted
stock outstanding using the treasury stock method. In a period
of a net loss, diluted net income per common share is
calculated in the same manner as basic net income per
common share.
74 | 2 0 1 2 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 N O R T H E R N T R U S T C O R P O R A T I O N
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
Level 1 – Quoted, active market prices for identical assets or
liabilities. Northern Trust’s Level 1 assets are comprised of
available for sale investments in U.S. treasury securities.
Level 2 – Observable inputs other than Level 1 prices, such as
quoted active market prices for similar assets or liabilities, quoted
prices for identical or similar assets in inactive markets, and
model-derived valuations in which all significant inputs are
observable in active markets. Northern Trust’s Level 2 assets
include available for sale and trading account securities, the fair
values of which are determined by external pricing vendors, or in
limited cases internally based on similar securities. Northern
Trust reviews the valuation methodology used by external
pricing vendors for suitability and performs additional reviews of
their valuation techniques and assumptions used for selected
securities. Northern Trust also reviews the market values
provided by external vendors through a comparison of assigned
market values to other third party prices for reasonableness. A
price obtained from a vendor may be adjusted if it is found to be
sufficiently inconsistent with other market prices.
inputs
incorporate
Level 2 assets and liabilities also include derivative
contracts which are valued internally using widely accepted
readily
income-based models
that
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
of
counterparty credit risk and its own credit risk on the
valuation of its derivative instruments. Factors considered
include the likelihood of default by Northern Trust and its
counterparties, the remaining maturities of the instruments,
net exposures after giving effect to master netting agreements,
in
enhancements
available
determining
value of derivative
instruments. The resulting valuation adjustments have not
been considered material.
collateral, and other
appropriate
evaluates
impact
credit
fair
the
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 in 2008 from Northern Trust clients. To estimate
the fair value of auction rate securities, for which trading is
limited and market prices are generally unavailable, Northern
Trust developed and maintains a pricing model that discounts
estimated cash flows over their estimated remaining lives.
Significant inputs to the model include the contractual terms
of the securities, credit risk ratings, discount rates, forward
interest rates, credit/liquidity spreads, and Northern Trust’s
own assumptions about the estimated remaining lives of the
securities. The significant unobservable inputs used in the fair
value measurement are Northern Trust’s own assumptions
about the estimated remaining lives of the securities and the
applicable discount rates. Significant increases (decreases) in
the estimated remaining lives or the discount rates in isolation
would result
in a significantly lower (higher) fair value
measurement. Level 3 liabilities consist of acquisition related
contingent consideration liabilities. The fair values of these
contingent consideration liabilities have been determined
using an income-based (discounted cash flow) model that
incorporates Northern Trust’s own assumptions about
business growth rates and applicable discount rates, which
represent unobservable inputs
to the model. Significant
increases (decreases) in projected growth rates in isolation
would result
fair value
measurements, while significant increases (decreases) in the
discount rate in isolation would result in significantly lower
(higher) fair value measurements.
in significantly higher
(lower)
Northern Trust believes its valuation methods for its assets
and liabilities carried at fair value are appropriate; however, the
use of different methodologies or assumptions, particularly as
applied to Level 3 assets and liabilities, could have a material
effect on the computation of their estimated fair values.
Management of various businesses and departments of
Northern Trust (including Corporate Market Risk, Credit
Policy, Corporate Financial Management, and relevant business
unit personnel) determine the valuation policies and procedures
for Level 3 assets and liabilities. Each business and department
represents a component of Northern Trust’s business units, and
their respective business units.
reports to management of
Generally, valuation policies are reviewed by management of
each business or department. Fair value measurements are
performed upon acquisitions of an asset or liability. As necessary,
the valuation models are reviewed by management of the
appropriate business or department, and adjusted for changes in
inputs. Management of each business or department reviews the
inputs in order to substantiate the unobservable inputs used in
each fair value measurement. When appropriate, management
reviews forecasts used in the valuation process in light of other
relevant
financial projections to understand any variances
between current and previous fair value measurements. In
certain circumstances, third party information is used to support
the fair value measurements. If certain third party information
seems inconsistent with consensus views, a review of
the
information is performed by management of the respective
business or department to conclude as to the appropriate fair
value of the asset or liability.
N O R T H E R N T R U S T C O R P O R A T I O N 2 0 1 2 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 | 75
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
The following presents the fair values of, and the valuation techniques, significant unobservable inputs, and quantitative
information used to develop significant unobservable inputs for, Northern Trust’s Level 3 assets and liabilities as of December 31, 2012.
FINANCIAL INSTRUMENT
FAIR VALUE
VALUATION TECHNIQUE
UNOBSERVABLE INPUT
RANGE OF LIVES AND RATES
Auction Rate Securities
$97.8 million
Discounted Cash Flow
Contingent Consideration
$50.1 million
Discounted Cash Flow
Remaining lives
Discount rates
Discount rate
Business growth rates
1.8 – 8.6 years
0.3% – 7.7%
10.5%
19% – 35%
The following presents assets and liabilities measured at fair value on a recurring basis as of December 31, 2012 and 2011,
segregated by fair value hierarchy level.
DECEMBER 31, 2012
LEVEL 1
LEVEL 2
LEVEL 3
NETTING
(In Millions)
Securities
Available for Sale
U.S. Government
Obligations of States and Political Subdivisions
Government Sponsored Agency
Corporate Debt
Covered Bonds
Supranational Bonds
Residential Mortgage-Backed
Other Asset-Backed
Auction Rate
Other
Total Available for Sale
Trading Account
$1,784.6
–
–
–
–
–
–
–
–
–
$
–
14.1
18,638.8
2,618.4
1,748.0
1,060.7
92.0
2,283.9
–
305.2
1,784.6
26,761.1
–
8.0
Total Available for Sale and Trading Securities
1,784.6
26,769.1
Other Assets
Derivatives
Foreign Exchange Contracts
Interest Rate Swaps
Total Derivatives
Other Liabilities
Derivatives
Foreign Exchange Contracts
Interest Rate Swaps
Credit Default Swaps
Total Derivatives
Contingent Consideration
–
–
–
–
–
–
–
–
1,756.6
310.3
2,066.9
1,772.7
249.3
1.0
2,023.0
$
–
–
–
–
–
–
–
–
97.8
–
97.8
–
97.8
–
–
–
–
–
–
–
$
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(1,101.1)
–
–
–
(1,407.5)
ASSETS/
LIABILITIES
AT FAIR
VALUE
$ 1,784.6
14.1
18,638.8
2,618.4
1,748.0
1,060.7
92.0
2,283.9
97.8
305.2
28,643.5
8.0
28,651.5
1,756.6
310.3
965.8
1,772.7
249.3
1.0
615.5
50.1
–
50.1
–
Note: 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, 2012, derivative assets and liabilities shown above also include reductions of $118.6 million and $425.0 million, respectively, as a result of cash collateral received from and
deposited with derivative counterparties.
76 | 2 0 1 2 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 N O R T H E R N T R U S T C O R P O R A T I O N
N O T E S T O C O N S O L I D A T E D F I 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
Covered Bonds
Non-U.S. Government
Supranational Bonds
Residential Mortgage-Backed
Other Asset-Backed
Certificates of Deposit
Auction Rate
Other
DECEMBER 31, 2011
LEVEL 1
LEVEL 2
LEVEL 3
NETTING
$
$4,029.4
–
–
–
–
–
–
–
–
–
–
–
$
–
15.8
16,771.4
2,676.7
754.9
173.7
972.1
163.8
1,604.8
2,418.1
–
433.5
$
–
–
–
–
–
–
–
–
–
–
178.3
–
Total Available for Sale
Trading Account
4,029.4
25,984.8
178.3
–
8.0
–
Total Available for Sale and Trading Securities
4,029.4
25,992.8
178.3
Other Assets
Derivatives
Foreign Exchange Contracts
Interest Rate Swaps
Credit Default Swaps
Total Derivatives
Other Liabilities
Derivatives
Foreign Exchange Contracts
Interest Rate Swaps
Credit Default Swaps
Total Derivatives
Contingent Consideration
–
–
–
–
–
–
–
–
–
3,087.3
338.3
0.7
3,426.3
2,991.6
231.9
0.1
3,223.6
–
–
–
–
–
–
–
–
–
56.8
ASSETS/
LIABILITIES
AT FAIR
VALUE
$ 4,029.4
15.8
16,771.4
2,676.7
754.9
173.7
972.1
163.8
1,604.8
2,418.1
178.3
433.5
30,192.5
8.0
30,200.5
3,087.3
338.3
0.7
1,182.6
2,991.6
231.9
0.1
942.6
56.8
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(2,243.7)
–
–
–
(2,281.0)
–
Note: 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, 2011, derivative assets and liabilities shown above also include reductions of $220.1 million and $257.4 million, respectively, as a result of cash collateral received from and
deposited with derivative counterparties.
N O R T H E R N T R U S T C O R P O R A T I O N 2 0 1 2 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 | 77
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
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.
The following provides information regarding those assets
measured at
at
December 31, 2012 and 2011, 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, 2012
Loans(1)
Other Real Estate
Owned(2)
Total Assets at Fair Value
December 31, 2011
Loans(1)
Other Real Estate
Owned(2)
Total Assets at Fair Value
$
$
$
$
–
–
–
–
–
–
$
$
$
$
–
–
–
–
–
–
$35.0
$35.0
2.3
2.3
$37.3
$37.3
$ 64.3
$ 64.3
3.8
3.8
$ 68.1
$ 68.1
(1) In accordance with Accounting Standard Codification (ASC) Subtopic 310-10,
Northern Trust recorded individually impaired loans at fair value and, for the years ended
December 31, 2012 and 2011, respectively, reduced by $8.5 million and increased by $11.3
million the level of specific allowances on these loans.
(2) In accordance with ASC Subtopics 310-40 and 360-10, Northern Trust recorded Other
Real Estate Owned (OREO) at fair value and subsequently charged $0.8 million and $1.5
million through other operating expenses during the years ended December 31, 2012 and
2011, respectively, to reduce the fair values of these OREO properties.
The fair values of real-estate loan collateral and OREO
properties were estimated using a market approach typically
supported by third party valuations and property specific fees
and taxes, and were subject
to reflect
management’s judgment as to their realizable value. Other
loan collateral, typically consisting of accounts receivable,
inventory and equipment, is valued using a market approach,
adjusted for asset specific characteristics, and in limited
instances, third party valuations are used.
to adjustments
The following tables present the changes in Level 3 assets
and liabilities for the years ended December 31, 2012 and 2011.
L E V E L 3 A S S E T S
(In Millions)
Fair Value at January 1
Total Gains and (Losses):
Included in Earnings(1)
Included in Other Comprehensive Income(2)
Purchases, Issuances, Sales, and Settlements:
Sales
Settlements
AUCTION RATE SECURITIES
2012
2011
$178.3
$ 367.8
(21.6)
6.4
(54.7)
(10.6)
10.7
(19.0)
(1.5)
(179.7)
Fair Value at December 31
$ 97.8
$ 178.3
(1) Realized losses for the year ended December 31, 2012 of $21.6 million include $20.8
million of losses from sales of securities and $1.6 million of impairment losses, partially
offset by $0.8 million of gains from redemptions by issuers. Realized gains for the year
ended December 31, 2011 of $10.7 million include $10.6 million from redemptions by
issuers and $0.1 million from sales of securities. Gains on redemptions are recorded in
interest income and sales and impairment losses are recorded in investment security gains
(losses), net, within the consolidated statement of income.
(2) Unrealized losses related to auction rate securities are included in net unrealized gains
on securities available for sale, within the consolidated statement of comprehensive income.
L E V E L 3 L I A B I L I T I E S
(In Millions)
Fair Value at January 1
Total (Gains) and Losses:
Included in Earnings(1)
Included in Other Comprehensive Income(2)
Purchases, Issuances, Sales, and Settlements:
Purchases
Settlements
OTHER LIABILITIES
2012
$56.8
2.0
(0.5)
–
(8.2)
2011
$ 23.1
(0.1)
–
56.9
(23.1)
Fair Value at December 31
Unrealized (Gains) Losses Included in Earnings
Related to Financial Instruments Held at
December 31(1)
$50.1
$ 56.8
$ 4.8
$ (0.1)
(1) Gains (losses) are recorded in other operating income (expense) within the consolidated
statement of income.
(2) Unrealized foreign currency related losses on contingent consideration liabilities are
included in foreign currency translation adjustments, within the consolidated statement of
comprehensive income.
Note: Other liabilities balances in 2012 and 2011 relate to contingent consideration
liabilities, as well as a Visa indemnification liability within the 2011 opening and
settlement balances. As of December 31, 2011, the Visa indemnification liability had been
eliminated in its entirety.
For the years ended December 31, 2012 and 2011, there
were no transfers into or out of Level 3 assets or liabilities.
78 | 2 0 1 2 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 N O R T H E R N T R U S T C O R P O R A T I O N
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
The following table provides the fair value of, and the valuation technique, significant unobservable inputs, and quantitative
information used to develop the significant unobservable inputs for, Northern Trust’s Level 3 assets that were measured at fair value
on a nonrecurring basis as of December 31, 2012.
FINANCIAL INSTRUMENT
FAIR VALUE
VALUATION TECHNIQUE
UNOBSERVABLE INPUT
RANGE OF DISCOUNTS APPLIED
Loans
OREO
$35.0 million
Market Approach
$2.3 million
Market Approach
Discount to reflect
realizable value
Discount to reflect
realizable value
15% – 40%
15% – 40%
Fair Value of Financial Instruments. GAAP requires
disclosure of
the estimated fair value of certain financial
instruments and the methods and significant assumptions used to
estimate fair value. It excludes from this requirement nonfinancial
assets and liabilities, as well as a wide range of
franchise,
relationship, and intangible values that add value to Northern
Trust. Accordingly, the required fair value disclosures provide only
a partial estimate of the fair value of Northern Trust. Financial
instruments
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.
recorded at
Held to Maturity Securities. The fair values of held to
maturity securities were modeled by external pricing vendors,
or in limited cases internally, using widely accepted models
which are based on an income approach that incorporates
current market yield curves.
Loans (excluding lease receivables). The fair value of the
loan portfolio was estimated using an income approach
(discounted cash flow) that incorporates current market rates
offered by Northern Trust as of the date of the consolidated
financial statements. The fair values of all loans were adjusted
to reflect current assessments of loan collectability.
Federal Reserve and Federal Home Loan Bank Stock. The
fair values of Federal Reserve and Federal Home Loan Bank
to their carrying values which represent
stock are equal
redemption value.
Community Development Investments. The fair values of
these instruments were estimated using an income approach
(discounted cash flow) that incorporates current market rates.
Employee Benefit and Deferred Compensation. These assets
include U.S. treasury securities and investments in mutual and
collective trust
funds held to fund certain supplemental
employee benefit obligations and deferred compensation plans.
Fair values of U.S. treasury securities were determined using
quoted, active market prices for identical securities. The fair
values of investments in mutual and collective trust funds were
valued at the funds’ net asset values based on a market approach.
Savings Certificates and Other Time Deposits. The fair
values of these instruments were estimated using an income
approach (discounted cash flow) that incorporates market
interest rates currently offered by Northern Trust for deposits
with similar maturities.
Senior Notes, Subordinated Debt, and Floating Rate Capital
Debt. Fair values were determined using a market approach
based on quoted market prices, when available. If quoted
market prices were not available, fair values were based on
quoted market prices for comparable instruments.
Federal Home Loan Bank Borrowings. The fair values of
these instruments were estimated using an income approach
(discounted cash flow) that incorporates market interest rates
available to Northern Trust.
Loan Commitments. The fair values of loan commitments
represent the estimated costs to terminate or otherwise settle
the obligations with a third party adjusted for any related
allowance for credit losses.
Standby Letters of Credit. The fair values of standby letters
of credit are measured as the amount of unamortized fees on
these instruments, inclusive of the related allowance for credit
losses. Fees are determined by applying basis points to the
principal amounts of the letters of credit.
Financial Instruments Valued at Carrying Value. Due to
their short maturity, the carrying values of certain financial
instruments approximated their fair values. These financial
instruments include cash and due from banks; federal funds
sold and securities purchased under agreements to resell,
interest-bearing deposits with banks, Federal Reserve deposits
and other interest-bearing assets; client security settlement
receivables; non-U.S. offices interest-bearing deposits; federal
funds purchased;
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.
sold under
agreements
securities
N O R T H E R N T R U S T C O R P O R A T I O N 2 0 1 2 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 | 79
The following tables summarize the fair values of financial instruments.
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
DECEMBER 31, 2012
FAIR VALUE
LEVEL 1
LEVEL 2
LEVEL 3
$ 3,752.7
–
–
–
1,784.6
–
–
–
–
–
–
–
86.7
$39,221.5
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
$
–
60.8
18,803.5
7,619.7
26,761.1
2,394.8
8.0
–
–
2,049.1
197.6
275.1
39.4
$
–
2,476.7
39,720.2
780.2
699.8
367.4
2,513.4
1,065.3
345.4
228.0
$
–
–
–
–
97.8
–
–
28,220.2
11.7
–
$
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
60.5
50.1
38.9
$
21.3
42.3
$
129.7
75.3
1.0
1,735.3
1,730.4
180.6
174.0
–
–
–
–
–
–
–
–
–
BOOK VALUE
$ 3,752.7
60.8
18,803.5
7,619.7
28,643.5
2,382.0
8.0
28,165.4
11.7
2,049.1
197.6
253.2
121.3
$39,221.5
2,466.1
39,720.2
780.2
699.8
367.4
2,405.8
1,045.4
335.0
277.0
60.5
50.1
38.9
TOTAL
FAIR VALUE
$ 3,752.7
60.8
18,803.5
7,619.7
28,643.5
2,394.8
8.0
28,220.2
11.7
2,049.1
197.6
275.1
126.1
$39,221.5
2,476.7
39,720.2
780.2
699.8
367.4
2,513.4
1,065.3
345.4
228.0
60.5
50.1
38.9
$
21.3
42.3
$
21.3
42.3
$
129.7
75.3
1.0
1,735.3
1,730.4
180.6
174.0
129.7
75.3
1.0
1,735.3
1,730.4
180.6
174.0
(In Millions)
ASSETS
Cash and Due from Banks
Federal Funds Sold and Resell Agreements
Interest-Bearing Deposits with Banks
Federal Reserve Deposits and Other Interest-Bearing
Securities
Available for Sale (Note)
Held to Maturity
Trading Account
Loans (excluding Leases)
Held for Investment
Held for Sale
Client Security Settlement Receivables
Other Assets
Federal Reserve and Federal Home Loan Bank Stock
Community Development Investments
Employee Benefit and Deferred Compensation
LIABILITIES
Deposits
Demand, Noninterest-Bearing, Savings and Money
Market
Savings Certificates and Other Time
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
Other Liabilities
Standby Letters of Credit
Contingent Consideration
Loan Commitments
DERIVATIVE INSTRUMENTS
Asset/Liability Management
Foreign Exchange Contracts
Assets
Liabilities
Interest Rate Swaps
Assets
Liabilities
Credit Default Swaps
Liabilities
Client-Related and Trading
Foreign Exchange Contracts
Assets
Liabilities
Interest Rate Swaps
Assets
Liabilities
Note: Refer to the table located on page 76 for the disaggregation of available for sale securities.
80 | 2 0 1 2 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 N O R T H E R N T R U S T C O R P O R A T I O N
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
(In Millions)
ASSETS
Cash and Due from Banks
Federal Funds Sold and Resell Agreements
Interest-Bearing Deposits with Banks
Federal Reserve Deposits and Other Interest-Bearing
Securities
Available for Sale (Note)
Held to Maturity
Trading Account
Loans (excluding Leases)
Held for Investment
Held for Sale
Client Security Settlement Receivables
Other Assets
Federal Reserve and Federal Home Loan Bank Stock
Community Development Investments
Employee Benefit and Deferred Compensation
LIABILITIES
Deposits
Demand, Noninterest-Bearing, Savings and Money Market
Savings Certificates and Other Time
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
Other Liabilities
Standby Letters of Credit
Contingent Consideration
Loan Commitments
DERIVATIVE INSTRUMENTS
Asset/Liability Management
Foreign Exchange Contracts
Assets
Liabilities
Interest Rate Swaps
Assets
Liabilities
Credit Default Swaps
Assets
Liabilities
Client-Related and Trading
Foreign Exchange Contracts
Assets
Liabilities
Interest Rate Swaps
Assets
Liabilities
BOOK VALUE
$ 4,315.3
121.3
16,696.4
13,448.6
30,192.5
799.2
8.0
27,782.7
9.3
778.3
172.9
290.8
106.5
$43,751.2
3,058.3
35,868.0
815.3
1,198.8
931.5
2,126.7
1,033.4
1,055.0
276.9
61.3
56.8
45.5
TOTAL
FAIR VALUE
$ 4,315.3
121.3
16,696.4
13,448.6
30,192.5
817.1
8.0
27,913.7
9.3
778.3
172.9
319.9
117.3
$43,751.2
3,065.5
35,868.0
815.3
1,198.8
931.5
2,197.3
1,040.0
1,082.1
211.6
61.3
56.8
45.5
DECEMBER 31, 2011
FAIR VALUE
LEVEL 1
LEVEL 2
LEVEL 3
$ 4,315.3
–
–
–
4,029.4
–
–
–
–
–
–
–
82.4
$43,751.2
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
$
–
121.3
16,696.4
13,448.6
25,984.8
817.1
8.0
–
–
778.3
172.9
319.9
34.9
$
–
3,065.5
35,868.0
815.3
1,198.8
931.5
2,197.3
1,040.0
1,082.1
211.6
–
–
–
$
–
–
–
–
178.3
–
–
27,913.7
9.3
–
$
–
–
–
–
–
–
–
–
–
–
–
–
–
61.3
56.8
45.5
–
–
–
–
–
–
–
–
–
–
$
25.2
31.8
$
25.2
31.8
$
149.6
47.3
0.7
0.1
3,062.1
2,959.8
188.7
184.6
149.6
47.3
0.7
0.1
3,062.1
2,959.8
188.7
184.6
$
25.2
31.8
$
149.6
47.3
0.7
0.1
3,062.1
2,959.8
188.7
184.6
Note: Refer to the table located on page 77 for the disaggregation of available for sale securities.
N O R T H E R N T R U S T C O R P O R A T I O N 2 0 1 2 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 | 81
Note 4 – Securities
Securities Available for Sale. The following tables provide the amortized cost, fair values, and remaining maturities of securities
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
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
Covered Bonds
Supranational Bonds
Residential Mortgage-Backed
Other Asset-Backed
Auction Rate
Other
Total
(In Millions)
U.S. Government
Obligations of States and Political Subdivisions
Government Sponsored Agency
Corporate Debt
Covered Bonds
Non-U.S. Government Debt
Supranational Bonds
Residential Mortgage-Backed
Other Asset-Backed
Certificates of Deposit
Auction Rate
Other
Total
AMORTIZED
COST
$ 1,747.9
13.9
18,520.6
2,602.4
1,697.1
1,053.9
102.4
2,280.0
99.6
304.4
DECEMBER 31, 2012
GROSS
UNREALIZED
GAINS
GROSS
UNREALIZED
LOSSES
$
36.7
0.2
122.2
18.1
51.0
7.0
0.4
4.3
2.1
0.8
$
–
–
4.0
2.1
0.1
0.2
10.8
0.4
3.9
–
FAIR
VALUE
$ 1,784.6
14.1
18,638.8
2,618.4
1,748.0
1,060.7
92.0
2,283.9
97.8
305.2
$28,422.2
$
242.8
$
21.5
$28,643.5
AMORTIZED
COST
$ 3,965.9
14.9
16,702.6
2,677.7
746.1
173.7
971.0
196.1
1,606.8
2,418.2
186.5
433.1
DECEMBER 31, 2011
GROSS
UNREALIZED
GAINS
GROSS
UNREALIZED
LOSSES
$
$
63.5
0.9
86.1
4.7
9.2
–
3.0
–
1.3
0.2
4.3
0.6
–
–
17.3
5.7
0.4
–
1.9
32.3
3.3
0.3
12.5
0.2
73.9
FAIR
VALUE
$ 4,029.4
15.8
16,771.4
2,676.7
754.9
173.7
972.1
163.8
1,604.8
2,418.1
178.3
433.5
$ 30,192.5
$ 30,092.6
$
173.8
$
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
DECEMBER 31, 2012
DECEMBER 31, 2011
(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
Total
AMORTIZED
COST
$ 7,431.7
18,663.4
1,724.0
603.1
FAIR
VALUE
$ 7,451.2
18,840.4
1,738.0
613.9
AMORTIZED
COST
$ 9,468.8
18,464.6
1,326.7
832.5
FAIR
VALUE
$ 9,469.6
18,555.1
1,333.7
834.1
$28,422.2
$28,643.5
$30,092.6
$ 30,192.5
Note: Mortgage-backed and asset-backed securities are included in the above table taking into account anticipated future prepayments.
82 | 2 0 1 2 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 N O R T H E R N T R U S T C O R P O R A T I O N
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
Securities Held to Maturity. The following tables provide 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
Non-U.S. Government Debt
Certificates of Deposit
Other
Total
(In Millions)
Obligations of States and Political Subdivisions
Government Sponsored Agency
Other
Total
DECEMBER 31, 2012
GROSS
UNREALIZED
GAINS
GROSS
UNREALIZED
LOSSES
$
17.2
3.8
–
0.2
0.3
$
–
–
–
0.6
8.1
AMORTIZED
COST
$ 329.3
112.9
205.0
1,667.6
67.2
FAIR
VALUE
$ 346.5
116.7
205.0
1,667.2
59.4
$2,382.0
$
21.5
$ 8.7
$2,394.8
DECEMBER 31, 2011
GROSS
UNREALIZED
GAINS
$
24.6
4.3
0.1
GROSS
UNREALIZED
LOSSES
$
0.1
0.1
10.9
$
FAIR
VALUE
553.9
161.0
102.2
AMORTIZED
COST
$
529.4
156.8
113.0
$
799.2
$
29.0
$ 11.1
$
817.1
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 H E L D T O M A T U R I T Y
DECEMBER 31, 2012
DECEMBER 31, 2011
(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
Total
AMORTIZED
COST
$2,029.5
268.1
45.4
39.0
FAIR
VALUE
$2,030.6
280.2
49.8
34.2
$2,382.0
$2,394.8
AMORTIZED
COST
$199.5
355.4
215.5
28.8
$799.2
$
FAIR
VALUE
200.9
365.5
226.1
24.6
$
817.1
Note: Mortgage-backed and asset-backed securities are included in the above table taking into account anticipated future prepayments.
Securities held to maturity consist of debt securities that
management intends to, and Northern Trust has the ability to,
hold until maturity.
Investment Security Gains and Losses. Net investment
security losses totaling $1.7 million, $23.9 million, and $20.4
million were recognized in 2012, 2011, and 2010, respectively,
and included OTTI losses of $3.3 million, $23.3 million, and
$21.2 million, respectively. Gross proceeds from the sale of
securities during the year ended December 31, 2012 of $2.7
billion resulted in gross realized gains of $23.5 million and
gross realized losses of $21.9 million. There were $1.6 million
and $0.8 million of other realized net security gains in 2012
and 2010, respectively, and $0.6 million of other realized net
security losses in 2011.
N O R T H E R N T R U S T C O R P O R A T I O N 2 0 1 2 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 | 83
Securities with Unrealized Losses. The following tables provide information regarding securities that had been in a continuous
unrealized loss position for less than 12 months and for 12 months or longer as of December 31, 2012 and 2011.
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 2
LESS THAN 12 MONTHS
12 MONTHS OR LONGER
TOTAL
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
(In Millions)
Government Sponsored Agency
Corporate Debt
Covered Bonds
Supranational Bonds
Residential Mortgage-Backed
Other Asset-Backed
Certificates of Deposit
Auction Rate
Other
Total
FAIR VALUE
$ 482.2
441.5
20.1
113.8
–
146.1
1,178.8
2.7
9.3
$2,394.5
UNREALIZED
LOSSES
$ 1.0
2.0
0.1
0.2
–
0.1
0.6
0.3
1.9
$ 6.2
FAIR VALUE
$1,171.8
50.0
–
–
84.7
40.0
–
41.0
43.8
$1,431.3
$ 3.0
0.1
–
–
10.8
0.3
–
3.6
6.2
$24.0
$ 1,654.0
491.5
20.1
113.8
84.7
186.1
1,178.8
43.7
53.1
$ 3,825.8
UNREALIZED
LOSSES
FAIR
VALUE
UNREALIZED
LOSSES
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 1
(In Millions)
Obligations of States and Political Subdivisions
Government Sponsored Agency
Corporate Debt
Covered Bonds
Supranational Bonds
Residential Mortgage-Backed
Other Asset-Backed
Certificates of Deposit
Auction Rate
Other
Total
LESS THAN 12 MONTHS
12 MONTHS OR LONGER
TOTAL
$
FAIR
VALUE
2.7
5,492.5
1,027.5
50.4
438.2
4.7
824.6
1,019.9
61.0
146.3
$ 9,067.8
UNREALIZED
LOSSES
$ 0.1
14.1
4.1
0.4
1.8
0.9
2.3
0.3
7.3
2.1
$33.4
$
FAIR
VALUE
–
470.1
123.6
–
99.9
158.8
205.7
–
52.6
45.0
UNREALIZED
LOSSES
$
–
3.3
1.6
–
0.1
31.4
1.0
–
5.2
9.0
$
FAIR
VALUE
2.7
5,962.6
1,151.1
50.4
538.1
163.5
1,030.3
1,019.9
113.6
191.3
$ 1,155.7
$ 51.6
$10,223.5
$ 4.0
2.1
0.1
0.2
10.8
0.4
0.6
3.9
8.1
$30.2
UNREALIZED
LOSSES
$ 0.1
17.4
5.7
0.4
1.9
32.3
3.3
0.3
12.5
11.1
$ 85.0
As of December 31, 2012, 233 securities with a combined
fair value of $3.8 billion were in an unrealized loss position,
with their unrealized losses totaling $30.2 million. Unrealized
losses on residential mortgage-backed securities totaling $10.8
million reflect the impact of wider credit and liquidity spreads
on the valuations of 13 residential mortgage-backed securities
since purchase, with $84.7 million having been in an
unrealized loss position for more than 12 months. Residential
mortgage-backed
below double-A at
December 31, 2012 represented 96% of the total fair value of
comprised
residential mortgage-backed securities, were
primarily of subprime, prime, and Alt-A securities, and had a
total amortized cost and fair value of $98.6 million and $88.2
million, respectively. Securities classified as “other asset-
backed” at December 31, 2012 had average lives of less than 5
years, and 99% were rated triple-A.
securities
rated
Unrealized losses of $4.0 million related to government
sponsored agency securities are primarily attributable to
changes in market rates since their purchase. The majority of
the $8.1 million of unrealized losses in securities classified as
84 | 2 0 1 2 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 N O R T H E R N T R U S T C O R P O R A T I O N
for
“other” at December 31, 2012 relate to securities which
Northern Trust purchases
compliance with the
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 $3.9 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 $2.1
million within corporate debt securities primarily reflect
widened credit spreads; 45% 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, 2012
are attributable to changes in overall market interest rates,
increased credit spreads, or reduced market liquidity. As of
December 31, 2012, Northern Trust does not intend to sell
any investment in an unrealized loss position and it is not
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
more likely than not that Northern Trust will be required to
sell any such investment before the recovery of its amortized
cost basis, which may be maturity.
Security impairment reviews are conducted quarterly to
identify and evaluate securities that have indications of
possible OTTI. A determination as to whether a security’s
decline in market value is other-than-temporary takes into
consideration numerous factors and the relative significance
of any single factor can vary by security. Factors Northern
Trust considers in determining whether impairment is other-
than-temporary include, but are not limited to, the length of
time the security has been impaired; the severity of the
impairment; the cause of the impairment and the financial
condition and near-term prospects of the issuer; activity in the
market of
the issuer which may indicate adverse credit
conditions; Northern Trust’s intent regarding the sale of the
security as of the balance sheet date; and the likelihood that it
will not be required to sell the security for a period of time
sufficient to allow for the recovery of the security’s amortized
cost basis. For each security meeting the requirements of
Northern Trust’s internal screening process, an extensive
review is conducted to determine if OTTI has occurred.
While all securities are considered, the following describes
Northern Trust’s process for identifying credit impairment
within non-agency residential mortgage-backed securities, the
security type for which Northern Trust has recognized the
majority of its OTTI. To determine if an unrealized loss on a
non-agency residential mortgage-backed security is other-
than-temporary, economic models are used to perform cash
of
the
forecasts
security’s
reasonable
flow analyses by developing multiple scenarios in order to
future
create
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.
limited to, U.S.
Impairments of non-agency residential mortgage-backed
securities are influenced by a number of factors, including but
and housing market
economic
not
performance, security credit enhancement level,
insurance
coverage, year of origination, and type of collateral. The
factors used in estimating losses on non-agency residential
mortgage-backed securities vary by year of origination and
type of collateral. As of December 31, 2012, loss estimates for
subprime, Alt-A, prime and 2nd lien collateral portfolios were
developed using default roll rates, determined primarily by the
that
stage of delinquency of
generally assumed ultimate default rates approximating 5% to
30% for current loans; 30% for loans 30 to 60 days delinquent;
80% for loans 60 to 90 days delinquent; 90% for loans
delinquent greater than 90 days; and 100% for OREO
properties and loans that are in foreclosure.
the underlying instrument,
December 31, 2012 amortized cost, weighted average ultimate default rates, and impairment severity rates for the non-agency
residential mortgage-backed securities portfolio, by security type, are provided in the following table.
($ In Millions)
Prime
Alt-A
Subprime
2nd Lien
Total Non-Agency Residential Mortgage-Backed Securities
DECEMBER 31, 2012
LOSS SEVERITY RATES
WEIGHTED AVERAGE
ULTIMATE DEFAULT
RATES
LOW
HIGH
21.5%
42.2
49.5
33.6
41.8%
33.0%
68.3
61.8
98.5
33.0%
48.6%
68.3
84.2
100.0
100.0%
WEIGHTED
AVERAGE
34.7%
68.3
76.6
99.2
76.9%
AMORTIZED
COST
$ 9.3
13.1
56.7
23.3
$102.4
During the year ended December 31, 2012, OTTI losses totaling
$3.3 million were recognized, of which $1.7 million related to non-
agency residential mortgage-backed securities and $1.6 million
related to auction rate securities. Northern Trust’s processes for
identifying credit impairment within auction rate securities are
largely consistent with the processes utilized for non-agency
residential mortgage-backed securities and include analyses of loss
severities and default rates adjusted for the type of underlying loan
and the presence of government guarantees, as applicable. OTTI
losses of $23.3 million and $21.2 million were recorded for the years
ended December 31, 2011 and 2010, respectively, related to non-
agency residential mortgage-backed securities.
N O R T H E R N T R U S T C O R P O R A T I O N 2 0 1 2 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 | 85
Credit Losses on Debt Securities. The table below provides information regarding total other-than-temporarily impaired
securities, including noncredit-related amounts recognized in other comprehensive income and net impairment losses recognized in
earnings, for the years ended December 31, 2012, 2011, and 2010.
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
(In Millions)
Changes in Other-Than-Temporary Impairment Losses(1)
Noncredit-related Losses Recorded in / (Reclassified from) OCI(2)
Net Impairment Losses Recognized in Earnings
2012
$(2.7)
(0.6)
$(3.3)
DECEMBER 31,
2011
$ (1.1)
(22.2)
$(23.3)
2010
$ (0.8)
(20.4)
$(21.2)
(1) For initial other-than-temporary impairments in the respective year, the balance includes the excess of the amortized cost over the fair value of the impaired securities. For subsequent
impairments of the same security, the balance includes any additional changes in fair value of the security subsequent to its most recently recorded OTTI.
(2) For initial other-than-temporary impairments in the respective year, 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.
Note 5 – Securities Purchased Under Agreements
to Resell and Securities Sold Under Agreements to
Repurchase
(In Millions)
Cumulative Credit-Related Losses on Securities
Held – Beginning of Year
Plus: Losses on Newly Identified Impairments
Additional Losses on Previously Identified
YEAR ENDED DECEMBER 31,
2012
2011
$ 68.2
1.6
$ 94.2
1.5
Impairments
1.7
21.8
Less: Current and Prior Period Losses on Securities
Sold During the Year
(29.2)
(49.3)
Cumulative Credit-Related Losses on Securities
Held – End of Year
$ 42.3
$ 68.2
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
associated with these transactions,
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.
the fair value of
The table below provides information regarding debt
securities held as of December 31, 2012 and 2011, for which an
OTTI loss has been recognized in the current year or previously.
The following tables summarize information related to
securities purchased under agreements to resell and securities
sold under agreements to repurchase.
(In Millions)
Fair Value
Amortized Cost Basis
Noncredit-related Losses Recognized in OCI
Tax Effect
DECEMBER 31,
2012
$51.5
59.0
(7.5)
2.8
2011
$ 73.6
96.8
(23.2)
8.6
Amount Recognized in OCI
$ (4.7)
$(14.6)
S E C U R I T I E S P U R C H A S E D U N D E R
A G R E E M E N T S T O R E S E L L
($ In Millions)
Balance at December 31
Average Balance During the Year
Average Interest Rate Earned During the Year
Maximum Month-End Balance During the Year
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)
Balance at December 31
Average Balance During the Year
Average Interest Rate Paid During the Year
Maximum Month-End Balance During the Year
2012
2011
$ 35.4
241.5
0.16%
537.4
$ 74.7
246.3
0.07%
424.2
2012
2011
$699.8
448.2
$1,198.8
815.8
0.08%
0.08%
699.8
1,479.3
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N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
Note 6 – 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
Allowance for Credit Losses Assigned to
Loans and Leases
Net Loans and Leases
DECEMBER 31,
2012
2011
$ 7,468.5
2,859.8
1,035.0
1,192.3
341.6
$ 6,918.7
2,981.7
978.8
1,057.5
417.6
12,897.2
12,354.3
10,375.2
6,130.1
102.0
10,708.9
5,651.4
349.3
16,607.3
$29,504.5
16,709.6
$29,063.9
(297.9)
(294.8)
$29,206.6
$28,769.1
Residential real estate loans consist of conventional home
mortgages and equity credit lines that generally require a loan
to collateral value of no more than 65% to 80% at inception.
Northern Trust’s equity credit
line products have draw
periods of up to 10 years and a balloon payment of any
outstanding balance is due at maturity. Payments are interest
only with variable interest rates. Northern Trust does not offer
equity credit lines that include an option to convert the
outstanding balance to an amortizing payment loan. As of
December 31, 2012 and 2011, equity credit lines totaled $2.3
billion and $2.6 billion, respectively, and equity credit lines for
which the first liens were held by Northern Trust at those
dates represented 86% of the respective totals.
Included within the non-U.S., commercial-other, and
personal-other classes are short duration advances, primarily
related to the processing of custodied client investments, that
totaled $1.5 billion and $1.6 billion at December 31, 2012 and
loan
2011, respectively. Demand deposits reclassified as
balances
totaled $224.7 million and $191.6 million at
December 31, 2012 and 2011, respectively. Loans classified as
held for sale totaled $11.7 million at December 31, 2012 and
$9.3 million at December 31, 2011.
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,
2012
2011
$ 239.2
162.2
3.5
(43.5)
$ 156.3
149.2
2.9
(44.1)
Investment in Direct Finance Leases
$ 361.4
$ 264.3
Leveraged Leases:
Net Rental Receivable
Residual Value
Unearned Income
Investment in Leveraged Leases
Lease Financing, net
559.9
297.9
(184.2)
326.0
622.7
(234.2)
$ 673.6
$ 714.5
$1,035.0
$ 978.8
The following schedule reflects the future minimum lease
payments to be received over the next five years under direct
finance leases:
(In Millions)
2013
2014
2015
2016
2017
FUTURE MINIMUM
LEASE PAYMENTS
$48.6
45.7
39.5
29.1
26.7
Credit Quality Indicators. Credit quality indicators are
statistics, measurements or other metrics
that provide
information regarding the relative credit risk of loans and
leases. Northern Trust utilizes a variety of credit quality
indicators to assess the credit risk of loans and leases at the
segment, class, and individual credit exposure levels.
As part of its credit process, Northern Trust utilizes an
internal borrower risk rating system to support identification,
approval, and monitoring of credit risk. Borrower risk ratings
are used in credit underwriting, management reporting, and
the calculation of credit loss allowances and economic capital.
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
N O R T H E R N T R U S T C O R P O R A T I O N 2 0 1 2 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 | 87
capture the unique risk characteristics inherent within each
particular type of credit exposure. Provided below are the
significant performance indicator attributes considered within
Northern Trust’s borrower rating models, by loan and lease class.
‰
leverage, profit margin,
Commercial and Institutional:
liquidity, return on assets, asset size, and capital levels;
Commercial Real Estate: debt service coverage and leasing
status for income-producing properties;
loan-to-value
leasing status, and guarantor
and loan-to-cost ratios,
support
loans associated with construction and
for
development properties;
Lease Financing and Commercial-Other:
profit margin levels;
leverage and
‰
‰
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
‰
‰
Private Client: cash flow-to-debt and net worth ratios,
leverage, and profit margin levels; and
Personal-Other: cash flow-to-debt and net worth ratios.
While the criteria vary by model, the objective is for the
borrower ratings to be consistent in both the measurement and
ranking of risk. Each model is calibrated to a master rating
scale to support this consistency. Ratings for borrowers not in
default range from “1” for the strongest credits to “7” for the
weakest non-defaulted credits. Ratings of “8” or “9” are used
for defaulted borrowers. Borrower risk ratings are monitored
and are revised when events or circumstances indicate a change
is required. Risk ratings are validated at least annually.
‰ Non-U.S.: entity type, liquidity, size, and leverage;
‰
Residential Real Estate: payment history, credit bureau
scores, and cash flow-to-debt and net worth ratios;
Loan and lease segment and class balances at December 31, 2012 and 2011 are provided below, segregated by borrower ratings
into “1 to 3”, “4 to 5”, and “6 to 9” (watch list), categories.
DECEMBER 31, 2012
DECEMBER 31, 2011
1 TO 3
CATEGORY
4 TO 5
CATEGORY
6 TO 9
CATEGORY
(WATCH LIST)
TOTAL
1 TO 3
CATEGORY
4 TO 5
CATEGORY
6 TO 9
CATEGORY
(WATCH LIST)
TOTAL
$ 4,291.8
888.6
647.1
542.7
167.2
$ 3,040.6
1,710.9
382.3
646.6
174.4
$136.1
260.3
5.6
3.0
–
$ 7,468.5
2,859.8
1,035.0
1,192.3
341.6
$ 3,681.8
1,247.1
547.7
519.0
241.4
$ 3,029.1
1,467.2
422.3
527.3
176.2
$207.8
267.4
8.8
11.2
–
$ 6,918.7
2,981.7
978.8
1,057.5
417.6
6,537.4
5,954.8
405.0
12,897.2
6,237.0
5,622.1
495.2
12,354.3
(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
3,003.3
3,741.3
50.0
6,868.2
2,365.4
52.0
503.7
23.4
–
10,375.2
6,130.1
102.0
2,777.1
3,390.6
162.3
7,501.0
2,245.9
187.0
Total Personal
6,794.6
9,285.6
527.1
16,607.3
6,330.0
9,933.9
430.8
14.9
–
445.7
10,708.9
5,651.4
349.3
16,709.6
Total Loans and Leases
$13,332.0
$15,240.4
$932.1
$29,504.5
$12,567.0
$15,556.0
$940.9
$29,063.9
Loans and leases in the “1 to 3” category are expected to
exhibit minimal to modest probabilities of default and are
characterized by borrowers having the strongest financial
qualities, including above average financial flexibility, cash
flows and capital levels. Borrowers assigned these ratings are
anticipated to experience very little to moderate financial
pressure in adverse down cycle scenarios. As a result of these
characteristics, borrowers within this category exhibit a
minimal to modest likelihood of loss.
Loans and leases in the “4 to 5” category are expected to
exhibit moderate to acceptable probabilities of default and are
characterized by borrowers with less financial flexibility than
those in the “1 to 3” category. Cash flows and capital levels are
generally sufficient to allow for borrowers to meet current
requirements, but have reduced cushion in adverse down cycle
scenarios. As a result of these characteristics, borrowers within
this category exhibit a moderate likelihood of loss.
Loans and leases in the watch list category have elevated
credit risk profiles that are monitored through internal watch
lists, and consist of credits with borrower ratings of “6 to 9”.
These credits, which include all nonperforming credits, are
expected to exhibit minimally acceptable probabilities of
default, elevated risk of default, or are currently in default.
Borrowers associated with these risk profiles that are not
88 | 2 0 1 2 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 N O R T H E R N T R U S T C O R P O R A T I O N
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
currently in default have limited financial flexibility. Cash
flows and capital levels range from acceptable to potentially
to meet current requirements, particularly in
insufficient
these
scenarios. As
adverse down cycle
characteristics, borrowers in this category exhibit an elevated
to probable likelihood of loss.
result of
a
The following tables provide balances and delinquency status of performing and nonperforming loans and leases by segment
and class, as well as the other real estate owned and total nonperforming asset balances, as of December 31, 2012 and 2011.
(In Millions)
DECEMBER 31, 2012
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
CURRENT
30 – 59 DAYS
PAST DUE
60 – 89 DAYS
PAST DUE
90 DAYS
OR MORE
PAST DUE
TOTAL
PERFORMING
NONPERFORMING
TOTAL LOANS
AND LEASES
$ 7,433.4
2,782.0
1,035.0
1,192.3
341.6
12,784.3
10,096.3
6,091.3
102.0
16,289.6
$ 6.4
6.9
–
–
–
13.3
68.1
14.8
–
82.9
$ 5.5
13.1
–
–
–
$ 1.6
1.4
–
–
–
$ 7,446.9
2,803.4
1,035.0
1,192.3
341.6
$ 21.6
56.4
–
–
–
$ 7,468.5
2,859.8
1,035.0
1,192.3
341.6
18.6
3.0
12,819.2
78.0
12,897.2
25.7
16.3
–
42.0
10.5
5.5
–
10,200.6
6,127.9
102.0
174.6
2.2
–
10,375.2
6,130.1
102.0
16.0
16,430.5
176.8
16,607.3
Total Loans and Leases
$29,073.9
$96.2
$60.6
$19.0
$29,249.7
$254.8
$29,504.5
(In Millions)
DECEMBER 31, 2011
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
Other Real Estate Owned
Total Nonperforming Assets
$ 20.3
$275.1
CURRENT
30 – 59 DAYS
PAST DUE
60 – 89 DAYS
PAST DUE
90 DAYS
OR MORE
PAST DUE
TOTAL
PERFORMING
NONPERFORMING
TOTAL LOANS
AND LEASES
$ 6,869.2
2,878.2
978.8
1,057.5
417.6
$ 15.0
10.8
–
–
–
12,201.3
25.8
10,428.0
5,623.0
349.3
16,400.3
67.7
15.7
–
83.4
$ 2.7
10.3
–
–
–
13.0
27.6
5.7
–
33.3
$ 0.5
2.9
–
–
–
$ 6,887.4
2,902.2
978.8
1,057.5
417.6
$ 31.3
79.5
–
–
–
$ 6,918.7
2,981.7
978.8
1,057.5
417.6
3.4
12,243.5
110.8
12,354.3
8.0
1.7
–
9.7
10,531.3
5,646.1
349.3
16,526.7
177.6
5.3
–
10,708.9
5,651.4
349.3
182.9
16,709.6
Total Loans and Leases
$28,601.6
$109.2
$46.3
$13.1
$28,770.2
$293.7
$29,063.9
Other Real Estate Owned
Total Nonperforming Assets
$ 21.2
$314.9
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The following tables provide information related to impaired loans by segment and class.
AS OF DECEMBER 31, 2012
AS OF DECEMBER 31, 2011
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
(In Millions)
With no related specific allowance
Commercial and Institutional
Commercial Real Estate
Lease Financing, net
Residential Real Estate
Private Client
With a related specific allowance
Commercial and Institutional
Commercial Real Estate
Residential Real Estate
Private Client
Total
Commercial
Personal
Total
(In Millions)
With no related specific allowance
Commercial and Institutional
Commercial Real Estate
Lease Financing, net
Residential Real Estate
Private Client
With a related specific allowance
Commercial and Institutional
Commercial Real Estate
Residential Real Estate
Private Client
Total
Commercial
Personal
Total
SPECIFIC
ALLOWANCE
RECORDED
INVESTMENT
RECORDED
INVESTMENT
$ 15.1
64.9
4.6
131.3
0.8
8.1
32.3
11.8
0.9
UNPAID
PRINCIPAL
BALANCE
$ 19.3
76.9
4.6
165.7
1.0
10.2
33.8
13.0
0.9
125.0
144.8
144.8
180.6
$
–
–
–
–
–
2.8
8.2
6.1
0.9
11.0
7.0
UNPAID
PRINCIPAL
BALANCE
$ 24.0
68.0
–
162.6
1.9
20.5
50.1
26.2
3.6
$ 21.4
46.5
–
134.4
1.6
11.9
41.4
18.9
3.3
121.2
158.2
162.6
194.3
SPECIFIC
ALLOWANCE
$
–
–
–
–
–
8.8
14.1
8.9
1.0
22.9
9.9
$269.8
$325.4
$18.0
$279.4
$356.9
$32.8
YEAR ENDED DECEMBER 31, 2012
YEAR ENDED DECEMBER 31, 2011
AVERAGE
RECORDED
INVESTMENT
INTEREST
INCOME
RECOGNIZED
AVERAGE
RECORDED
INVESTMENT
INTEREST
INCOME
RECOGNIZED
$ 22.7
51.6
3.8
117.3
1.6
6.9
23.3
14.3
1.0
108.3
134.2
$242.5
$0.1
1.2
–
0.8
–
–
–
–
–
1.3
0.8
$ 18.3
33.0
–
111.8
2.2
23.6
59.8
9.7
2.0
134.7
125.7
$2.1
$260.4
$0.1
0.5
–
2.1
–
–
–
–
–
0.6
2.1
$2.7
Note: Average recorded investments in impaired loans are calculated as the average of the month-end impaired loan balances for the period.
Interest
income that would have been recorded on
nonperforming loans in accordance with their original terms
totaled approximately $11.6 million in 2012, $15.4 million in
2011, and $16.0 million in 2010.
There were $2.1 million and $9.7 million of combined
unfunded loan commitments and standby letters of credit at
December 31, 2012 and 2011, respectively, issued to borrowers
whose loans were classified as nonperforming or impaired.
Troubled Debt Restructurings. As of December 31, 2012
and 2011,
there were $49.8 million and $72.2 million,
respectively, of nonperforming TDRs and $74.7 million and
included
$41.1 million, respectively, of performing TDRs,
within impaired loans.
90 | 2 0 1 2 A N N U A L R E P O R T T O S H A R E H O L D E R S N O R T H E R N T R U S T C O R P O R A T I O N
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
The following tables provide, by segment and class, the
number of loans and leases modified in TDRs during the years
ended December 31, 2012 and 2011, and the recorded
investments and unpaid principal balances as of December 31,
2012 and 2011.
($ In Millions)
December 31, 2012
Commercial
Commercial and Institutional
Commercial Real Estate
Lease Financing, net
Total Commercial
Personal
Residential Real Estate
Private Client
Total Personal
Total Loans and Leases
NUMBER OF
LOANS AND
LEASES
RECORDED
INVESTMENT
UNPAID
PRINCIPAL
BALANCE
3
13
1
17
116
1
117
134
$ 0.6
36.6
4.7
$ 1.2
39.2
4.7
41.9
45.1
15.9
0.8
16.7
22.0
0.8
22.8
$58.6
$67.9
Note: Period end balances reflect all paydowns and charge-offs during the year.
($ In Millions)
December 31, 2011
Commercial
Commercial and Institutional
Commercial Real Estate
Total Commercial
Personal
Residential Real Estate
Private Client
Total Personal
Total Loans and Leases
NUMBER OF
LOANS AND
LEASES
RECORDED
INVESTMENT
UNPAID
PRINCIPAL
BALANCE
6
16
22
148
1
149
171
$10.4
34.0
44.4
32.6
–
32.6
$12.1
42.6
54.7
40.4
–
40.4
$77.0
$95.1
Note: Period end balances reflect all paydowns and charge-offs during the year.
involve
interest
TDR modifications primarily
rate
concessions, extensions of term, deferrals of principal, and
other modifications. Other modifications typically reflect
other nonstandard terms which Northern Trust would not
offer in non-troubled situations. During the year ended
December 31, 2012, TDR modifications of loans within the
commercial and institutional class were primarily extensions
of
term and deferrals of principal; modifications of
commercial real estate loans, leases and private client loans
were primarily deferrals of principal, extensions of term and
other modifications; and modifications of residential real
estate loans were primarily interest rate concessions, deferrals
of principal and extensions of term.
There were 3 residential real estate loans modified in
troubled debt restructurings during the previous 12 months
which subsequently became nonperforming during the year
ended December 31, 2012. The total recorded investment and
unpaid principal balance of these loans were $128.1 thousand
and $129.3 thousand, respectively.
The following table provides, by segment and class, the
number of
loans and leases which had both become
nonperforming during the year ended December 31, 2011,
and been modified in the proceeding 12-month period, as well
as their total recorded investments and unpaid principal
balances as of December 31, 2011.
($ In Millions)
Commercial
Commercial and Institutional
Total Commercial
Personal
Residential Real Estate
Private Client
Total Personal
Total Loans and Leases
NUMBER OF
LOANS AND
LEASES
RECORDED
INVESTMENT
UNPAID
PRINCIPAL
BALANCE
1
1
8
1
9
$ –
–
2.1
0.8
2.9
$0.4
0.4
2.6
1.1
3.7
10
$2.9
$4.1
Note: Period end balances reflect all paydowns and charge-offs during the year.
All loans and leases modified in troubled debt restructurings
are evaluated for impairment. The nature and extent of
impairment of TDRs, including those which have experienced
a subsequent default, is considered in the determination of an
appropriate level of allowance for credit losses.
Note 7 – Allowance for Credit Losses
The allowance for credit losses, which represents management’s
related to specific borrower
estimate of probable losses
relationships and 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. Northern Trust’s accounting policies related to
the estimation of the allowance for credit losses and the charging
leases and other extensions of credit deemed
off of loans,
uncollectible are consistent across both loan and lease segments.
In establishing the inherent portion of the allowance for
credit
losses, Northern Trust’s Loan Loss Allowance
Committee assesses a common set of qualitative factors
applicable to both the commercial and personal loan segments.
The risk characteristics underlying these qualitative factors,
and management’s assessments as to the relative importance of
a qualitative factor, can vary between loan segments and
between classes within loan segments. Factors evaluated
include those related to external matters, such as economic
N O R T H E R N T R U S T C O R P O R A T I O N 2 0 1 2 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 | 91
conditions and changes in collateral value, and those related to
internal matters, such as changes in asset quality metrics and
loan review activities. In addition to the factors noted above,
risk characteristics such as portfolio delinquencies, percentage
of portfolio on the watch list and on nonperforming status,
and average borrower ratings are assessed in the determination
of the inherent allowance.
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
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
exposure are analyzed when determining the allowance for
unfunded commitments and standby letters of credit. These
qualitative factors, together with historical loss rates, serve as
the basis for the allowance for credit losses.
Loans,
leases and other extensions of credit deemed
uncollectible are charged to the allowance for credit losses.
Subsequent recoveries, if any, are credited to the allowance.
Determinations as to whether an uncollectible loan is charged-
off or a specific allowance is established are based on
management’s assessment as to the level of certainty regarding
the amount of loss.
Changes in the allowance for credit losses by segment were as follows:
(In Millions)
Balance at Beginning of Year
Charge-Offs
Recoveries
Net (Charge-Offs) Recoveries
Provision for Credit Losses
Effect of Foreign Exchange Rates
Balance at End of Year
Allowance for Credit Losses Assigned to:
Loans and Leases
Unfunded Commitments and Standby
Letters of Credit
2012
2011
2010
COMMERCIAL
PERSONAL
TOTAL
COMMERCIAL
PERSONAL
TOTAL
COMMERCIAL
PERSONAL
TOTAL
$211.0
(19.9)
20.3
$117.9
(43.1)
16.4
$328.9
(63.0)
36.7
$256.7
(56.3)
21.5
$100.6
(60.0)
11.4
$ 357.3
(116.3)
32.9
$252.2
(76.2)
3.6
$ 88.4
(73.9)
3.3
$ 340.6
(150.1)
6.9
0.4
(17.2)
–
(26.7)
42.2
–
(26.3)
25.0
–
(34.8)
(10.9)
–
(48.6)
65.9
–
(83.4)
55.0
–
(72.6)
77.2
(0.1)
(70.6)
82.8
–
(143.2)
160.0
(0.1)
$194.2
$133.4
$327.6
$211.0
$117.9
$ 328.9
$256.7
$100.6
$ 357.3
$166.1
$131.8
$297.9
$178.6
$116.2
$ 294.8
$220.7
$ 98.9
$ 319.6
28.1
1.6
29.7
32.4
1.7
34.1
36.0
1.7
37.7
Total Allowance for Credit Losses
$194.2
$133.4
$327.6
$211.0
$117.9
$ 328.9
$256.7
$100.6
$ 357.3
The following tables provide information regarding the recorded investments in loans and leases and the allowance for credit
losses by segment as of December 31, 2012 and 2011.
(In Millions)
COMMERCIAL
PERSONAL
TOTAL
(In Millions)
COMMERCIAL
PERSONAL
TOTAL
DECEMBER 31, 2012
Loans and Leases
Specifically Evaluated for
Impairment
Evaluated for Inherent
Impairment
Total Loans and Leases
Allowance for Credit Losses on
Credit Exposures
Specifically Evaluated for
Impairment
Evaluated for Inherent
Impairment
Allowance assigned to loans and
leases
Allowance for Unfunded
Exposures
Commitments and Standby
Letters of Credit
$
125.0 $
144.8 $
269.8
12,772.2
16,462.5
29,234.7
12,897.2
16,607.3
29,504.5
11.0
7.0
18.0
155.1
124.8
279.9
DECEMBER 31, 2011
Loans and Leases
Specifically Evaluated for
Impairment
Evaluated for Inherent
Impairment
Total Loans and Leases
Allowance for Credit Losses on
Credit Exposures
Specifically Evaluated for
Impairment
Evaluated for Inherent
Impairment
Allowance assigned to loans and
$
121.2 $
158.2 $
279.4
12,233.1
16,551.4
28,784.5
12,354.3
16,709.6
29,063.9
22.9
9.9
32.8
155.7
106.3
262.0
166.1
131.8
297.9
leases
178.6
116.2
294.8
28.1
1.6
29.7
Allowance for Unfunded
Exposures
Commitments and Standby
Letters of Credit
32.4
1.7
34.1
Total Allowance for Credit Losses
$
194.2 $
133.4 $
327.6
Total Allowance for Credit Losses
$
211.0 $
117.9 $
328.9
92 | 2 0 1 2 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 N O R T H E R N T R U S T C O R P O R A T I O N
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
Note 8 – 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.
Commercial Real Estate. 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
income
provided for
producing properties. Cash flows
from the properties
generally are sufficient to amortize the loan. These loans
average approximately $1.7 million each and are primarily
located in the Illinois, Florida, California, Texas 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 acquisition or
the project or
refinancing of
sell
The table below provides additional detail regarding
commercial real estate loan types:
(In Millions)
Commercial Mortgages
Apartment/ Multi-family
Office
Retail
Industrial/ Warehouse
Other
Total Commercial Mortgages
Construction, Acquisition and Development
Loans
Single Family Investment
Other Commercial Real Estate Related
2012
2011
$ 652.9
621.4
614.5
312.5
148.7
$ 656.3
615.6
523.1
357.7
133.3
2,350.0
2,286.0
289.4
135.0
85.4
450.1
161.4
84.2
Total Commercial Real Estate Loans
$2,859.8
$2,981.7
Residential Real Estate. At December 31, 2012, residential
real estate loans totaled $10.4 billion, or 37% of total U.S. loans at
December 31, 2012, compared with $10.7 billion or 38% at
December 31, 2011. 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
inception. Revaluations of supporting collateral are
obtained upon refinancing or default or when otherwise
considered warranted. Collateral revaluations for mortgages are
performed by independent third parties. Of the total $10.4 billion
in residential real estate loans, $3.2 billion were in the greater
Chicago area, $2.5 billion were in Florida, and $1.6 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 primarily equity credit lines, totaled $1.2 billion
at December 31, 2012 and $2.2 billion at December 31, 2011.
federal
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 interest bearing deposits with
funds sold, and securities purchased under
banks,
agreements to resell, which totaled $18.9 billion and $16.8 billion
at December 31, 2012 and 2011, respectively, and noninterest-
bearing demand balances maintained at correspondent banks,
which totaled $3.7 billion and $4.2 billion at December 31, 2012
and 2011, 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 and/or the Senior
Credit Committee. Credit limits are established through a review
process that includes an internally prepared financial analysis,
use of an 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 9 – 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
DECEMBER 31, 2012
ORIGINAL
COST
ACCUMULATED
DEPRECIATION
NET BOOK
VALUE
$
31.8
258.0
437.1
320.5
$ 0.6
133.9
268.1
210.1
$ 31.2
124.1
169.0
110.4
82.5
47.3
35.2
Total Buildings and Equipment
$1,129.9
$660.0
$469.9
N O R T H E R N T R U S T C O R P O R A T I O N 2 0 1 2 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 | 93
The charge for depreciation, which includes depreciation of
assets recorded under capital leases, amounted to $88.3 million
in 2012, $89.2 million in 2011, and $93.5 million in 2010.
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, 2012.
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
Note 10 – Lease Commitments
At December 31, 2012, 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
agreements. Minimum annual
lease commitments as of
December 31, 2012 for all non-cancelable operating leases
with a term of 1 year or more are as follows:
(In Millions)
2013
2014
2015
2016
2017
Later Years
Total Minimum Lease Payments, net
Less: Amount Representing Interest
Net Present Value under Capital Lease Obligations
Note 11 – Goodwill and Other Intangibles
FUTURE MINIMUM
LEASE PAYMENTS
Changes in the carrying amount of goodwill by business unit for
the years ended December 31, 2012 and 2011 were as follows:
FUTURE MINIMUM
LEASE PAYMENTS, NET
$ 8.1
8.4
8.3
8.0
8.2
15.4
56.4
15.2
$41.2
(In Millions)
Balance at December 31, 2010
Goodwill Acquired
Other Changes (Note)
Balance at December 31, 2011
Other Changes (Note)
CORPORATE
AND
INSTITUTIONAL
SERVICES
PERSONAL
FINANCIAL
SERVICES
$ 329.5
131.4
(0.3)
$ 460.6
5.7
$ 71.4
–
–
$ 71.4
0.1
TOTAL
$ 400.9
131.4
(0.3)
$ 532.0
5.8
Balance at December 31, 2012
$466.3
$71.5 $537.8
Note: Includes the effect of foreign exchange rates on non-U.S. dollar denominated
goodwill.
Other intangible assets are included within 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, 2012 and 2011 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
Net Book Value
DECEMBER 31,
2012
2011
$252.1
148.1
$251.2
127.8
$104.0
$123.4
Note: Other intangible assets subject to amortization include the effect of foreign exchange
rates on non-U.S. dollar denominated intangible assets.
(In Millions)
2013
2014
2015
2016
2017
Later Years
Total Minimum Lease Payments
Less: Sublease Rentals
Net Minimum Lease Payments
$ 83.9
75.8
68.8
61.7
59.8
359.7
709.7
(24.1)
$685.6
Operating lease rental expense, net of rental income, is
recorded in occupancy expense and amounted to $77.9
million in 2012, $84.2 million in 2011, and $68.1 million in
2010. Net rental expense in 2012 and 2011 includes $3.6
million and $6.4 million,
restructuring,
acquisition and integration related charges attributable to
reductions in office space.
respectively, of
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 Northern Trust. In the event of sale
or refinancing, Northern Trust would anticipate receiving full
repayment of any outstanding loans plus 42% of any proceeds
in excess of the original project costs.
94 | 2 0 1 2 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 N O R T H E R N T R U S T C O R P O R A T I O N
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
Other intangible assets consist primarily of the value of
acquired client relationships. Amortization expense related to
other intangible assets was $20.3 million, $17.5 million, and
$14.4 million for the years ended December 31, 2012, 2011, and
2010, respectively. Amortization for the years 2013, 2014, 2015,
2016, and 2017 is estimated to be $20.9 million, $20.8 million,
$11.8 million, $9.1 million, and $9.1 million, respectively.
Note 12 – Senior Notes and Long-Term Debt
Senior Notes. A summary of senior notes outstanding at
December 31 is presented below.
($ In Millions)
RATE
2012
2011
Corporation-Senior Notes(1)(4)
Fixed Rate Due Nov. 2012(5)(12)
Fixed Rate Due Aug. 2013(6)(12)
Fixed Rate Due May 2014
Fixed Rate Due Nov. 2020(7)
Fixed Rate Due Aug. 2021(8)
Fixed Rate Due Aug. 2022(9)
5.20% $
5.50
4.63
3.45
3.38
2.38
–
409.6
500.0
499.5
498.1
498.6
$ 206.9
422.4
500.0
499.5
497.9
–
Total Senior Notes
$2,405.8
$2,126.7
Long-Term Debt. A summary of
outstanding at December 31 is presented below.
long-term debt
($ In Millions)
Bank-Subordinated Debt(1)(4)
4.60% Notes due Feb. 2013(2)
5.85% Notes due Nov. 2017(2)(12)
6.50% Notes due Aug. 2018(2)(10)(12)
5.375% Sterling Denominated Notes due
March 2015(11)
Total Bank-Subordinated Debt
Federal Home Loan Bank Borrowings
One Year or Less (Average Rate at Year
End – 3.86% in 2012; 4.64% in
2011)
One to Three Years (Average Rate at Year
End – 4.40% in 2012; 4.08% in
2011)
Five to Ten Years (Average Rate at Year
End – None in 2012; 6.29% in
2011)
Total Federal Home Loan Bank Borrowings
Capital Lease Obligations(3)
2012
2011
$ 200.0
240.8
362.3
$ 200.0
241.5
360.8
242.3
231.1
1,045.4
1,033.4
200.0
670.0
135.0
335.0
–
50.0
335.0
41.2
1,055.0
44.9
Total Long-Term Debt
$1,421.6
$2,133.3
Long-Term Debt Qualifying as Risk-Based
Capital
$ 556.7
$ 678.9
(1) Not redeemable prior to maturity.
(2) Under the terms of its current Offering Circular dated August 3, 2012, 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.
(3) Refer to Note 10.
(4) Debt issue costs are recorded as an asset and amortized on a straight-line basis over the
life of the Note.
(5) Notes issued at a discount of 0.044%.
(6) Notes issued at a discount of 0.09%.
(7) Notes issued at a discount of 0.117%.
(8) Notes issued at a discount of 0.437%
(9) Notes issued at a discount of 0.283%
(10) Notes issued at a discount of 0.02%
(11) Notes issued at a discount of 0.484%
(12) 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, 2012, increases in the carrying values of the senior
and subordinated notes outstanding of $9.8 million and $103.3 million, respectively, were
recorded. As of December 31, 2011, increases in the carrying values of senior and
subordinated notes outstanding of $29.9 million and $102.6 million, respectively, were
recorded.
Note 13 – 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
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 0.52% and 0.59%, respectively.
Subject to certain exceptions, the Corporation has the right to
preferential
cumulative
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N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
Common Stock. The Corporation’s current share buyback
program authorization was increased to 10.0 million shares in
March 2012. Under the Corporation’s current share buyback
program,
the Corporation may purchase an additional
6.8 million shares after December 31, 2012. The repurchased
shares would be used for general purposes of the Corporation,
including management of the Corporation’s capital level and
the issuance of shares under stock option and other incentive
plans of the Corporation.
The average price paid per share for common stock
repurchased in 2012, 2011, and 2010 was $46.32, $49.63, and
$52.33, respectively.
Under
the Corporation’s
capital plan, which was
submitted in January 2012 and reviewed without objection by
the Federal Reserve in March 2012, the Corporation may
repurchase up to $77.1 million of common stock after
December 31, 2012 through March 2013. The Corporation
submitted its most recent capital plan to the Federal Reserve
Board in January 2013.
An analysis of changes in the number of shares of
common stock outstanding follows:
2012
2011
2010
241,008,509
242,268,903
241,679,942
449,463
189,793
300,376
973,270
149,385
419,846
(3,516,254)
(1,599,572)
(131,261)
Balance at
January 1
Incentive Plan and
Awards
Stock Options
Exercised
Treasury Stock
Purchased
Balance at
December 31
238,914,988
241,008,509
242,268,903
defer payment of interest on the Subordinated Debentures at
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
that
to the Subordinated
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,
2012 and 2011:
(In Millions)
DECEMBER 31,
2012
2011
NTC Capital I Subordinated Debentures due
January 15, 2027
$153.9
$153.8
NTC Capital II Subordinated Debentures due
April 15, 2027
Total Subordinated Debentures
123.1
123.1
$277.0
$276.9
Note 14 – Stockholders’ Equity
Preferred Stock. The Corporation is authorized to issue
10.0 million 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, 2012 or 2011.
96 | 2 0 1 2 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 N O R T H E R N T R U S T C O R P O R A T I O N
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
Note 15 – Accumulated Other Comprehensive Income (Loss)
The following tables summarize the components of accumulated other comprehensive income (loss) at December 31, 2012, 2011,
and 2010, and changes during the years then ended.
(In Millions)
Net Unrealized Gains (Losses) on Securities Available for Sale
Net Unrealized Gains (Losses) on Cash Flow Hedges
Net Foreign Currency Adjustments
Net Pension and Other Postretirement Benefit Adjustments
BALANCE AT
DECEMBER 31,
2012
$ 101.0
(1.4)
10.5
(393.1)
NET
CHANGE
$ 61.2
5.6
20.0
(24.2)
BALANCE AT
DECEMBER 31,
2011
$ 39.8
(7.0)
(9.5)
(368.9)
NET
CHANGE
$ 53.3
(18.4)
(2.5)
(72.7)
BALANCE AT
DECEMBER 31,
2010
$ (13.5)
11.4
(7.0)
(296.2)
NET
CHANGE
$ 28.2
37.6
(18.3)
8.8
BALANCE AT
DECEMBER 31,
2009
$ (41.7)
(26.2)
11.3
(305.0)
Total
$(283.0) $ 62.6
$(345.6)
$(40.3)
$(305.3)
$ 56.3
$(361.6)
YEAR ENDED DECEMBER 31,
BEFORE
TAX
2012
TAX
EFFECT
AFTER
TAX
BEFORE
TAX
2011
TAX
EFFECT
AFTER
TAX
BEFORE
TAX
2010
TAX
EFFECT
AFTER
TAX
(In Millions)
Unrealized Gains (Losses) on Securities Available for
Sale
Noncredit-Related Unrealized Losses on Securities
OTTI
$ 15.7
$ (5.9)
$ 9.8
$ 10.2
$ (3.6)
$ 6.6
$ 33.0
$(12.2)
$ 20.8
Other Unrealized Gains (Losses) on Securities
Available for Sale
96.2
(36.1)
60.1
61.6
(23.4)
38.2
(8.8)
3.4
(5.4)
Reclassification Adjustment for (Gains) Losses
Included in Net Income
(13.9)
5.2
(8.7)
13.5
(5.0)
8.5
20.2
(7.4)
12.8
Net Change
Unrealized Gains (Losses) on Cash Flow Hedges
Unrealized Gains (Losses) on Cash Flow Hedges
Reclassification Adjustment for (Gains) Losses
$ 98.0
$(36.8)
$ 61.2
$ 85.3
$(32.0)
$ 53.3
$ 44.4
$(16.2)
$ 28.2
$ 3.2
$ (0.6)
$ 2.6
$ (23.6)
$ 8.8
$(14.8)
$ 46.7
$(17.1)
$ 29.6
Included in Net Income
4.8
(1.8)
3.0
(5.6)
2.0
(3.6)
12.6
(4.6)
8.0
Net Change
Foreign Currency Adjustments
$ 8.0
$ (2.4)
$ 5.6
$ (29.2)
$ 10.8
$(18.4)
$ 59.3
$(21.7)
$ 37.6
Foreign Currency Translation Adjustments
Net Investment Hedge Gain (Losses)
$ 37.9
(33.7)
$ 3.1
12.7
$ 41.0
(21.0)
$ (7.0)
25.7
$
–
(21.2)
$ (7.0)
4.5
$(56.9)
60.9
$
–
(22.3)
$(56.9)
38.6
Net Change
Pension and Other Postretirement Benefit Adjustments
Net Actuarial Loss
Prior Service Benefit
Reclassification Adjustment for Losses Included in
Net Income
Net Change
$ 4.2
$ 15.8
$ 20.0
$ 18.7
$(21.2)
$ (2.5)
$ 4.0
$(22.3)
$(18.3)
$(62.8)
–
$ 15.8
–
$(47.0)
–
$(158.2)
7.7
$ 61.3
(2.9)
$(96.9)
4.8
$(16.4)
–
$ 9.3
–
$ (7.1)
–
33.9
(11.1)
22.8
30.2
(10.8)
19.4
25.0
(9.1)
15.9
$(28.9)
$ 4.7
$(24.2)
$(120.3)
$ 47.6
$(72.7)
$ 8.6
$ 0.2
$ 8.8
N O R T H E R N T R U S T C O R P O R A T I O N 2 0 1 2 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 | 97
Note 16 – Net Income Per Common Share
The computations of net income per common share are presented below.
($ In Millions Except Per Common Share Information)
BASIC NET INCOME PER COMMON SHARE
Average Number of Common Shares Outstanding
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 Dilutive Effect of Share-based Compensation
Average Common and Potential Common Shares
Earnings Allocated to Common and Potential Common Shares
Diluted Net Income Per Common Share
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
2012
2011
2010
$
240,417,805
687.3
10.0
677.3
2.82
$
241,401,310
603.6
7.1
596.5
2.47
$
242,028,776
669.5
5.6
663.9
2.74
240,417,805
463,439
241,401,310
410,074
242,028,776
473,755
240,881,244
241,811,384
242,502,531
$
677.3
2.81
$
596.5
2.47
$
663.9
2.74
Note: Common stock equivalents totaling 12,158,601 , 13,240,787, and 8,392,686 for the years ended December 31, 2012, 2011, and 2010, respectively, were not included in the computation of
diluted net income per common share because their inclusion would have been antidilutive.
Note 17 – Net Interest Income
The components of net interest income were as follows:
(In Millions)
Interest Income
Loans and Leases
Securities – Taxable
– Non-Taxable
Interest-Bearing 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
2012
2011
2010
$ 828.6
250.6
17.7
176.4
14.4
$ 938.7
223.6
25.0
192.8
28.5
$ 932.6
186.0
29.5
134.6
14.0
$1,287.7
$1,408.6
$1,296.7
$ 156.7
1.2
0.4
4.0
72.0
60.3
2.8
$ 230.0
1.9
0.7
5.5
64.4
94.6
2.4
$ 201.0
4.8
1.0
5.4
48.6
114.8
2.4
$ 297.4
$ 399.5
$ 378.0
$ 990.3
$1,009.1
$ 918.7
98 | 2 0 1 2 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 N O R T H E R N T R U S T C O R P O R A T I O N
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
Note 18 – Other Operating Income
The components of other operating income were as follows:
income tax rates. A reconciliation of the beginning and ending
amount of unrecognized tax benefits is as follows:
(In Millions)
Loan Service Fees
Banking Service Fees
Other Income
2012
2011
2010
$ 64.5
55.0
35.4
$ 68.9
54.9
34.3
$ 60.3
57.3
28.7
Total Other Operating Income
$154.9
$158.1
$146.3
Note 19 – Other Operating Expense
The components of other operating expense were as follows:
(In Millions)
Business Promotion
FDIC Insurance Premiums
Staff Related
Other Intangibles Amortization
Other Expenses
2012
2011
2010
$ 87.8
25.4
41.9
20.3
107.5
$ 82.1
29.3
37.6
17.5
100.6
$ 81.0
33.9
37.4
14.4
103.3
Total Other Operating Expense
$282.9
$267.1
$270.0
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)
2012
2011
2010
Tax at Statutory Rate
Tax Exempt Income
Leveraged Lease Adjustments
Foreign Tax Rate Differential
State Taxes, net
Other
$347.3
(8.0)
(12.0)
(27.1)
20.4
(15.6)
$309.3
(9.9)
(4.7)
(21.3)
22.8
(16.1)
$346.4
(10.8)
(0.8)
(20.1)
17.3
(11.7)
Provision for Income Taxes
$305.0
$280.1
$320.3
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 tax authorities for years before 2008, or non-
U.S. tax authorities for years before 2006. The Corporation is
no longer subject to income tax examinations by state or local
tax authorities for years before 1997.
Included in other liabilities within the consolidated
balance sheet at December 31, 2012 and 2011 were $19.4
million and $17.8 million of unrecognized tax benefits,
respectively. If recognized, 2012 and 2011 net income would
increased by $16.3 million and $14.5 million,
have
respectively, resulting in a decrease of those years’ effective
(In Millions)
Balance at January 1
Additions for Tax Positions Taken in Prior Years
Reductions for Tax Positions Taken in Prior Years
Reductions Resulting from Expiration of Statutes
Reductions Resulting from Settlements with Taxing
Authorities
Balance at December 31
2012
2011
$17.8
4.6
(1.2)
(1.8)
$ 89.9
2.2
(5.2)
(0.9)
–
(68.2)
$19.4
$ 17.8
Included in unrecognized tax benefits at January 1, 2011
were $66.7 million of U.S. federal and state tax positions
related to leveraged leasing tax deductions. As a result of the
settlement agreement reached in 2011, this balance was fully
eliminated as of December 31, 2011. Other unrecognized tax
benefits had net decreases of $5.4 million, resulting in a
remaining balance of $17.8 million at December 31, 2011.
Other unrecognized tax benefits had net increases of $1.6
million, resulting in a remaining balance of $19.4 million at
December 31, 2012. It is possible that changes in the amount
of unrecognized tax benefits could occur in the next 12
months due to changes in judgment related to recognition or
authorities, or
settlements with taxing
measurement,
expiration of statute of limitations. 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.
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. As a result of the settlement agreement
reached in 2011, revisions were made to cash flow estimates
regarding the timing and amount of leveraged lease income
tax deductions which increased interest
income by $7.0
million and reduced the provision for income taxes, inclusive
of interest and penalties, by $4.7 million for the year ended
December 31, 2011. 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 $0.9 million and reduced the provision for income
taxes, inclusive of interest and penalties, by $0.8 million.
The provision for income tax in 2012 includes a $12.4
million tax benefit realized primarily in connection with the
resolution of certain leveraged lease related matters.
N O R T H E R N T R U S T C O R P O R A T I O N 2 0 1 2 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 | 99
Provisions for interest and penalties of $0.4 million, net of
tax, were included in the provision for income taxes for the
years ended December 31, 2012 and 2010. For the year ended
December 31, 2011, $1.2 million of benefits associated with
interest and penalties, net of tax, were included in the provision
for income taxes. As of December 31, 2012 and 2011, the
liability for the potential payment of interest and penalties
totaled $9.0 million and $9.1 million, net of tax, respectively.
that
to the extent
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.
those earnings are
subsidiaries, except
indefinitely reinvested outside the U.S. Northern Trust elected
to indefinitely reinvest $137.4 million, $105.9 million, and
$102.8 million of 2012, 2011, and 2010 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, 2012, the cumulative amount of undistributed
pre-tax earnings in these subsidiaries approximated $814.9
million. Based on the current U.S. federal income tax rate, an
additional deferred tax liability of approximately $180.2 million
would have been required as of December 31, 2012 if Northern
Trust had not elected to indefinitely reinvest those earnings.
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
2012
2011
2010
$140.5
21.4
63.4
$113.6
15.1
54.2
$220.0
21.8
66.4
$225.3
$182.9
$308.2
$ 66.0
10.6
3.1
$ 84.0
11.3
1.9
$ 6.2
5.2
0.7
79.7
97.2
12.1
Provision for Income Taxes
$305.0
$280.1
$320.3
In addition to the amounts shown above, tax charges
(benefits) have been recorded directly to stockholders’ equity
for the following items:
(In Millions)
2012
2011
2010
Current Tax Benefit for Employee Stock
Options and Other Stock-Based Plans
Tax Effect of Other Comprehensive Income
$ 2.3
18.7
$ 0.6
(5.2)
$ (1.2)
60.0
100 | 2 0 1 2 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 N O R T H E R N T R U S T C O R P O R A T I O N
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
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)
2012
2011
2010
DECEMBER 31,
Deferred Tax Liabilities:
Lease Financing
Software Development
Accumulated Depreciation
Compensation and Benefits
State Taxes, net
Other Liabilities
$409.1
277.8
19.7
29.7
54.7
170.9
$398.2
254.9
48.6
7.1
52.4
137.6
$382.4
197.2
40.7
23.3
41.7
41.1
Gross Deferred Tax Liabilities
961.9
898.8
726.4
Deferred Tax Assets:
Allowance for Credit Losses
Visa Indemnification
Other Assets
Gross Deferred Tax Assets
Valuation Reserve
Deferred Tax Assets, net of Valuation
114.7
–
114.5
229.2
–
114.5
–
150.0
264.5
–
124.7
8.1
51.3
184.1
–
Reserve
229.2
264.5
184.1
Net Deferred Tax Liabilities
$732.7
$634.3
$542.3
No valuation allowance related to deferred tax assets was
recorded at December 31, 2012, 2011, or 2010,
as
management believes it is more likely that not that the
deferred tax assets will be fully realized. At December 31, 2012,
Northern Trust had no net operating loss carryforwards.
Note 21 – Employee Benefits
its subsidiaries provide
The Corporation and certain of
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.
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
nonqualified trust, referred to as a “Rabbi” Trust, used to hold
assets designated for the funding of benefits in excess of those
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
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, 2012 and 2011 amounted to
$81.9 million and $71.4 million, respectively.
Benefit levels under the U.S. qualified and supplemental
plans have been modified by Plan Amendments effective April 1,
2012. The amendments reduced the projected benefit obligations
for these plans by $7.7 million at December 31, 2011. U.S.
qualified and supplemental plan expense in 2012 and future
periods reflect the modified benefit levels.
The following tables set forth the status, amounts included in AOCI, and net periodic pension expense of the U.S. plan, non-
U.S. plans, and supplemental plan for 2012, 2011, and 2010. Prior service costs are being amortized on a straight-line basis over 10
years for the U.S. plan and 9 years for the supplemental plan.
P L A N S T A T U S
($ In Millions)
2012
2011
2012
2011
2012
2011
Accumulated Benefit Obligation
$ 918.0
$ 797.6
$158.1
$127.1
$ 98.9
$ 89.9
U.S. PLAN
NON-U.S. PLANS
SUPPLEMENTAL PLAN
Projected Benefit Obligation
Plan Assets at Fair Value
Funded Status at December 31
Weighted-Average Assumptions:
1,030.4
1,277.7
904.6
1,094.1
158.1
133.9
127.1
123.3
106.4
–
100.3
–
$ 247.3
$ 189.5
$ (24.2)
$ (3.8)
$(106.4)
$(100.3)
Discount Rates
Rate of Increase in Compensation Level
Expected Long-Term Rate of Return on Assets
4.25%
4.02
7.75
4.75%
4.02
8.00
4.42%
N/A
4.76
5.02%
N/A
5.28
4.25%
4.02
N/A
4.75%
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
2012
$507.4
(4.0)
503.4
189.6
2011
$490.4
(4.4)
486.0
183.1
2012
$46.8
–
46.8
5.8
Net Amount in Accumulated Other Comprehensive Income
$313.8
$302.9
$41.0
2011
$24.8
–
24.8
3.7
$21.1
2012
$71.4
2.1
73.5
27.7
$45.8
N E T P E R I O D I C P E N S I O N E X P E N S E
U.S. PLAN
NON-U.S. PLANS
SUPPLEMENTAL PLAN
($ In Millions)
2012
2011
2010
$ 35.3
41.4
(87.0)
–
34.3
(0.4)
$ 42.8
40.8
(78.8)
–
26.0
1.6
$ 37.9
36.9
(73.2)
–
20.0
1.6
$
2012
–
6.2
(6.8)
–
0.7
–
2011
$
–
6.5
(8.3)
–
0.2
–
2010
$ 1.8
6.9
(8.3)
(2.2)
0.5
–
2012
$ 3.0
4.5
N/A
–
6.1
0.6
2011
$ 3.2
4.4
N/A
–
5.6
0.4
2011
$66.4
2.7
69.1
26.0
$43.1
2010
$ 3.2
4.8
N/A
–
6.0
0.1
$ 23.6
$ 32.4
$ 23.2
$ 0.1
$ (1.6)
$ (1.3)
$14.2
$13.6
$14.1
4.75%
5.50%
6.00%
5.02%
5.58%
6.05%
4.75%
5.50%
6.00%
4.02
8.00
4.02
8.00
4.02
8.00
N/A
5.28
N/A
6.27
4.31
6.60
4.02
N/A
4.02
N/A
4.02
N/A
N O R T H E R N T R U S T C O R P O R A T I O N 2 0 1 2 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 | 101
Service Cost
Interest Cost
Expected Return on Plan Assets
Gain on Plan Curtailment
Amortization:
Net Loss
Prior Service Cost
Net Periodic Pension Expense
(Benefit)
Weighted-Average Assumptions:
Discount Rates
Rate of Increase in
Compensation Level
Expected Long-Term Rate of
Return on Assets
Pension expense for 2013 is expected to include approximately $50.1 million and $0.1 million related to the amortization of net
loss and prior service cost balances, respectively, from AOCI.
C H A N G E I N P R O J E C T E D B E N E F I T O B L I G A T I O N
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
(In Millions)
Beginning Balance
Service Cost
Interest Cost
Actuarial Loss
Benefits Paid
Plan Amendment
Foreign Exchange Rate Changes
Ending Balance
U.S. PLAN
NON-U.S. PLANS
SUPPLEMENTAL PLAN
2012
$ 904.6
35.3
41.4
96.6
(47.5)
–
–
$1,030.4
2011
$762.9
42.8
40.8
108.8
(41.3)
(9.4)
–
$904.6
2012
$127.1
–
6.2
24.8
(6.1)
–
6.1
$158.1
2011
$116.1
–
6.5
8.0
(2.5)
–
(1.0)
$127.1
2012
$100.3
3.0
4.5
10.9
(12.3)
–
–
$106.4
2011
$ 86.9
3.2
4.4
15.4
(11.3)
1.7
–
$100.3
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)
2013
2014
2015
2016
2017
2018-2022
U.S.
PLAN
NON-U.S.
PLANS
SUPPLEMENTAL
PLAN
$ 75.2
73.5
76.7
80.4
81.8
411.3
$ 2.1
2.3
2.6
2.9
3.0
19.4
$ 8.1
8.3
9.2
9.5
9.9
49.4
C H A N G E I N P L A N A S S E T S
(In Millions)
2012
2011
2012
2011
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 Period
$1,094.1
131.1
100.0
(47.5)
$ 982.1
53.3
100.0
(41.3)
$123.3
11.3
–
(6.1)
$122.2
4.5
–
(2.5)
–
–
5.4
(0.9)
$1,277.7
$1,094.1
$133.9
$123.3
The minimum required contribution for the U.S. qualified
plan in 2013 is estimated to be zero and the maximum
deductible contribution is estimated at $185.0 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
alternative strategies for asset allocation, funding policy and
102 | 2 0 1 2 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 N O R T H E R N T R U S T C O R P O R A T I O N
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.
The target allocation of plan assets since May 2012, by
major asset category, is 26% U.S. stocks, 21% non-U.S. stocks,
35% long duration fixed income securities, and 18% alternative
investments, split between private equity funds (5%), hedge
funds (5%), global 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
investments in limited
equity assets consist primarily of
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 funds, which invests, either
directly or indirectly, in a diversified portfolio of funds or other
pooled investment vehicles.
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
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, 2012 or 2011.
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, a commodity return
strategy fund, and mutual funds. The U.S. pension plan’s
Level 1 investments are exchange traded and are valued at the
closing price 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 foreign preferred stocks, U.S. government
securities, and collective trust
funds. U.S. government
securities are valued by a third party pricing source that
incorporates market 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
fund’s
the underlying investments of
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
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N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
The following table presents the changes in Level 3 assets
for the year ended December 31, 2012 and 2011.
PRIVATE EQUITY
FUNDS
HEDGE FUND
(In Millions)
2012
2011
2012
2011
Fair Value at January 1
Actual Return on Plan Assets
Purchases
Sales
Settlements
$45.5
2.5
4.3
(4.9)
–
$33.5
7.8
7.0
(2.8)
–
$29.2
1.0
–
–
–
$29.7
(0.5)
–
–
–
Fair Value at December 31
$47.4
$45.5
$30.2
$29.2
Note: The return on plan assets represents the change in the unrealized gain (loss) on assets
still held at December 31.
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 factors such
as inflation expectations and interest rates are evaluated before
long-term capital market assumptions are determined. The
established with
long-term portfolio rate of
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, 2012
measurement date was set at 7.75%.
return is
Postretirement Health Care. Northern Trust maintains an
unfunded postretirement health care plan under which those
employees who retire at age 55 or older under the provisions
of the U.S. defined benefit plan and had attained 15 years of
service as of December 31, 2011 may be eligible for subsidized
postretirement health care coverage. 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 net periodic postretirement benefit for the year ended
December 31, 2012 includes the effect of Northern Trust’s
decision to enroll
in an Employee Group Waiver Plan
(EGWP) beginning in January 2013. Participation in the
EGWP will allow Northern Trust to offer substantially the
same
eligible
participants while increasing subsidy reimbursements received
by Northern Trust from the U.S. government. This action
prescription benefits
postretirement
to
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, could
have a material effect on the computation of their estimated
fair values.
different methodologies
the use
of
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, 2012 and 2011.
(In Millions)
LEVEL 1
LEVEL 2
LEVEL 3
TOTAL
DECEMBER 31, 2012
Preferred and Common Stock
U.S.
Non-U.S.
Fixed Income – U.S.
Government
Other Investments
Mutual Funds
Commodity Linked Fund
Collective Trust Funds
Short-Term Investment Fund
Global Real Estate Fund
Government Agencies Fund
Emerging Market Fund
Private Equity Funds
Hedge Fund
Cash and Other
$111.5 $
53.6
– $
2.3
– $ 111.5
55.9
–
–
142.4
–
142.4
194.7
37.5
–
–
–
–
–
–
–
5.3
–
–
195.6
76.4
49.4
294.2
37.2
–
–
–
–
–
–
–
–
–
–
47.4
30.2
–
194.7
37.5
195.6
76.4
49.4
294.2
37.2
47.4
30.2
5.3
Total Assets at Fair Value
$402.6 $797.5 $77.6 $1,277.7
(In Millions)
LEVEL 1
LEVEL 2
LEVEL 3
TOTAL
DECEMBER 31, 2011
Preferred and Common Stock
U.S.
Non-U.S.
Fixed Income – U.S.
Government
Other Investments
Mutual Funds
Commodity Linked Fund
Collective Trust Funds
Short-Term Investment Fund
Global Real Estate Fund
Emerging Markets Fund
Private Equity Funds
Hedge Fund
Cash and Other
$ 99.4
41.0
$
–
1.9
$
–
292.0
–
–
–
159.5
34.3
–
–
–
–
–
–
1.4
–
–
208.3
110.4
38.1
33.1
–
–
–
–
–
–
–
–
–
45.5
29.2
–
$
99.4
42.9
292.0
159.5
34.3
208.3
110.4
38.1
33.1
45.5
29.2
1.4
Total Assets at Fair Value
$335.6
$683.8
$74.7
$1,094.1
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N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
served to reduce the postretirement health care plan liability
by approximately $26.7 million as of January 31, 2012 and
increased amortization of the net actuarial gain for the year
ended December 31, 2012 by approximately $3.3 million.
The following tables set forth the postretirement health
care plan status and amounts
included in AOCI at
December 31, the net periodic postretirement benefit cost of
the plan for 2012 and 2011, and the change in the
accumulated postretirement benefit obligation during 2012
and 2011.
P L A N S T A T U S
(In Millions)
Accumulated Postretirement Benefit Obligation at
Measurement Date:
Retirees and Dependents
Actives Eligible for Benefits
Net Postretirement Benefit Obligation
2012
2011
$21.6
9.0
$31.8
22.7
$30.6
$54.5
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 Gain Loss
Prior Service Benefit
Gross Amount in Accumulated Other Comprehensive
Income
Income Tax Effect
Net Amount in Accumulated Other
Comprehensive Income
2012
2011
$ (9.1)
(2.9)
$10.9
(8.0)
(12.0)
(4.5)
2.9
1.1
$ (7.5)
$ 1.8
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
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)
2013
2014
2015
2016
2017
2018-2022
TOTAL
POSTRETIREMENT
MEDICAL
BENEFITS
$ 3.3
3.4
3.5
3.5
3.5
13.8
Net periodic postretirement (benefit) expense for 2013 is
expected to include gains of $1.2 million and $3.0 million,
respectively, related to the amortization from AOCI of the net
gain and prior service benefit.
The weighted average discount rate used in determining
the accumulated postretirement benefit obligation was 4.25%
at December 31, 2012 and 4.75% at December 31, 2011. For
measurement purposes, an 8.50% annual increase in the cost of
covered medical benefits and an 8.50% annual increase in the
cost of covered prescription drug benefits were assumed for
2012. These rates are assumed to gradually decrease until they
reach 5.00% in 2018 for medical and 2019 for prescription
drugs. The health care cost trend rate assumption has an effect
increasing or
on the amounts
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 Postretirement Benefit
1–PERCENTAGE
POINT INCREASE
1–PERCENTAGE
POINT DECREASE
(In Millions)
Service Cost
Interest Cost
Amortization
2012
2011
2010
Obligation
$ 0.2
1.3
$ 0.4
2.8
$ 0.8
2.8
Effect on Total Service and Interest
Cost Components
$0.7
–
$(0.7)
–
Net (Gain) Loss
Prior Service Benefit
(2.3)
(5.1)
1.6
(5.2)
2.0
(5.2)
Net Periodic Postretirement (Benefit) Expense
$(5.9)
$(0.4)
$ 0.4
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
2012
2011
$ 54.5
0.2
1.3
4.5
(4.1)
0.9
(26.7)
$51.3
0.4
2.8
(0.2)
(0.4)
0.6
–
$ 30.6
$54.5
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. The expense
associated with defined contribution plans is charged to
employee benefits and totaled $41.0 million in 2012, $39.3
million in 2011, and $46.5 million in 2010.
Note 22 – Share-Based Compensation Plans
Northern Trust recognizes expense for the grant-date fair
value of stock options and other share-based compensation
granted to employees and non-employee directors.
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N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
following a change of control. All options terminate at such
time as determined by the Committee and as provided in the
terms and conditions of the respective option grants.
The weighted-average assumptions used for options
granted during the years ended December 31 are as follows:
Expected Term (in Years)
Dividend Yield
Expected Volatility
Risk Free Interest Rate
2012
2011
2010
7.5
2.79%
34.0
1.42
7.7
4.56%
43.2
2.94
7.4
4.38%
41.5
2.64
The expected term of options represents the period of
time 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 a combination of
the historical volatility of Northern Trust’s stock price and the
implied volatility of traded options on Northern Trust stock.
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.
The following table provides information about stock
options granted, vested, and exercised in the years ended
December 31, 2012 and 2011.
(In Millions, Except Per Share Information)
2012
2011
2010
Weighted Average Grant-Date Per Share
Fair Value of Stock Options Granted
Grant-Date Fair Value of Stock Options
Vested
Stock Options Exercised
Intrinsic Value as of Exercise Date
Cash Received
Tax Deduction Benefits Realized
$11.54
$15.26
$14.45
32.1
27.9
26.7
12.8
32.3
4.6
1.5
5.4
0.5
5.0
16.9
1.7
The following is a summary of changes in nonvested stock
options for the year ended December 31, 2012.
NONVESTED SHARES
Nonvested as December 31, 2011
Granted
Vested
Forfeited or Cancelled
SHARES
5,348,347
1,744,446
(2,027,193)
(99,570)
WEIGHTED-
AVERAGE
GRANT-
DATE FAIR
VALUE
PER SHARE
$15.48
11.54
15.81
13.65
Nonvested at December 31, 2012
4,966,030
$14.00
Total compensation expense for share-based payment
arrangements to employees and the associated tax impacts
were as follows for the periods presented:
(In Millions)
Stock and Stock Unit Awards
Stock Options
Performance Stock Units
Total Share-Based Compensation Expense
Tax Benefits Recognized
FOR THE YEAR ENDED
DECEMBER 31,
2012
2011
2010
$44.0
27.4
2.5
$73.9
$27.7
$36.2
34.1
–
$70.3
$26.5
$25.1
27.6
–
$52.7
$19.3
As of December 31, 2012, there was $110.5 million of
unrecognized compensation cost related to unvested share-
based compensation arrangements
the
Corporation’s share-based compensation plans. That cost is
expected to be recognized as expense over a weighted-average
period of approximately 2 years.
granted under
The Northern Trust Corporation 2012 Stock Plan (the
2012 Plan) is administered by 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 2012 Plan. The 2012 Plan provides for the grant of
nonqualified stock options,
incentive stock options, stock
appreciation rights, stock awards, stock units and performance
stock units. As detailed below, grants are outstanding under
the 2012 Plan and The Amended and Restated Northern Trust
Corporation 2002 Stock Plan, a predecessor plan (2002 Plan).
The total number of shares of the Corporation’s common
stock authorized for
the 2012 Plan is
30,000,000 plus shares forfeited under the 2002 Plan. As of
December 31, 2012, shares available for future grant under the
2012 Plan, including shares forfeited under the 2002 Plan,
totaled 32,093,120.
issuance under
The following describes Northern Trust’s share-based
payment arrangements and applies to awards under the 2012
Plan and the 2002 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 either upon a
“change of control” as defined in the 2012 Plan and the 2002
Plan or, in the case of options issued after September 2012,
employment
upon certain involuntary terminations of
106 | 2 0 1 2 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 N O R T H E R N T R U S T C O R P O R A T I O N
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
A summary of the status of stock options under the 2012 Plan and the 2002 Plan at December 31, 2012, and changes during the
year then ended, are presented in the table below.
($ In Millions Except Per Share Information)
Options Outstanding, December 31, 2011
Granted
Exercised
Forfeited, Expired or Cancelled
Options Outstanding, December 31, 2012
Options Exercisable, December 31, 2012
the recipient
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 2012 Plan and
such other terms and conditions as the Committee deems
appropriate. Each stock unit provides
the
opportunity to receive one share of stock for each stock unit
that vests. The stock units granted in 2012 predominately 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 988,421, 995,176, and 1,223,539, with
weighted average grant-date fair values of $43.72, $50.79, and
$50.67 per share, for the years ended December 31, 2012,
2011, and 2010, respectively. The total fair value of stock and
stock units vested during the years ended December 31, 2012,
2011, and 2010, was $21.6 million, $7.1 million, and $19.1
million, respectively.
A summary of the status of outstanding stock and stock
unit awards under the 2012 Plan and the 2002 Plan at
December 31, 2012, and changes during the year then ended,
is presented in the table below.
($ In Millions)
Stock and Stock Unit Awards Outstanding,
December 31, 2011
Granted
Distributed
Forfeited
AGGREGATE
INTRINSIC
VALUE
$115.6
NUMBER
2,914,565
988,421
(423,530)
(173,012)
Stock and Stock Unit Awards Outstanding,
December 31, 2012
3,306,444
$165.9
Units Convertible, December 31, 2012
169,948
$ 8.5
WEIGHTED
AVERAGE
EXERCISE
PRICE
PER SHARE
$52.39
43.67
33.76
52.65
$52.53
$54.08
SHARES
17,001,415
1,744,446
(973,270)
(2,470,117)
15,302,474
10,336,444
WEIGHTED
AVERAGE
REMAINING
CONTRACTUAL
TERM (YEARS)
AGGREGATE
INTRINSIC
VALUE
5.4
4.1
$29.1
$16.8
The following is a summary of nonvested stock and stock
unit awards at December 31, 2012, and changes during the
year then ended.
WEIGHTED
AVERAGE
GRANT-
DATE FAIR
VALUE PER
UNIT
NUMBER
2,809,067
988,421
(487,980)
(173,012)
$52.33
43.72
52.38
49.13
WEIGHTED
AVERAGE
REMAINING
VESTING
TERM
(YEARS)
2.4
NONVESTED STOCK
AND STOCK UNITS
Nonvested at
December 31, 2011
Granted
Vested
Forfeited
Nonvested at
December 31, 2012
3,136,496
$49.20
2.0
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 may vest ranges from
0% to 125% of the original award granted based on the
attainment of a three-year average return on equity target.
Distribution of the award is then made after vesting.
During the year ended December 31, 2012, 198,552
performance stock units were granted with a weighted average
grant-date fair value of $43.65. Performance stock units
outstanding at December 31, 2012 had an aggregate intrinsic
value of $10.0 million and a weighted average remaining
vesting term of 3.1 years. There were no performance stock
units granted in 2011 or outstanding as of December 31, 2011.
Non-employee Director Stock Awards. Stock units with a
total value of $0.9 million (20,148 units), $1.1 million (22,188
units), and $1.1 million (21,131 units) were granted to non-
employee directors in 2012, 2011 and 2010, respectively,
which vest or vested on the date of the annual meeting of the
N O R T H E R N T R U S T C O R P O R A T I O N 2 0 1 2 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 | 107
and $1.1 million in 2012, 2011,
Corporation’s stockholders in the following years. Total
expense recognized in these grants was $0.9 million, $1.1
million,
and 2010,
respectively. 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
services as director.
termination of
compensation until
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 accounts 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
$186.8 million in 2012, $176.7 million in 2011, and $168.4
million in 2010.
Note 24 – Contingent Liabilities
Legal Proceedings. 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.
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
Corporation’s operating results for a particular period.
Under GAAP, (i) an event is “probable” if the “future
event or events are likely to occur”; (ii) an event is “reasonably
possible” if “the chance of the future event or events occurring
is more than remote but less than likely”; and (iii) an event is
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N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
“remote” if “the chance of the future event or events occurring
is slight.” Thus, references to the upper end of the range of
reasonably possible loss for cases in which the Corporation is
able to estimate a range of reasonably possible loss mean the
loss for cases for which the
upper end of the range of
Corporation believes the risk of loss is more than remote.
For the reasons set out in this paragraph, the outcome of
some matters is inherently difficult to predict and/or the range
of loss cannot be reasonably estimated. This may be the case in
matters that (i) will be decided by a jury, (ii) are in early
stages, (iii) involve uncertainty as to the likelihood of a class
being certified or the ultimate size of the class, (iv) are subject
to appeals or motions, (v) involve significant factual issues to
be resolved, including with respect to the amount of damages,
or (vi) seek very large damages based on novel and complex
the
damage
Corporation cannot reasonably estimate the eventual outcome
of
their ultimate
resolution, or what the eventual loss, fines or penalties, if any,
related to each pending matter will be.
these pending matters,
theories. Accordingly,
the timing of
and liability
legal
In accordance with applicable accounting guidance, the
Corporation records accruals for litigation and regulatory
matters when those matters present loss contingencies that are
estimable. When loss
both probable
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.
and reasonably
For a limited number of the matters for which a loss is
reasonably possible in future periods, whether in excess of an
accrued liability or where there is no accrued liability, the
Corporation is able to estimate a range of possible loss. As of
December 31, 2012, the Corporation has estimated the upper
end of the range of reasonably possible losses for these matters
to be approximately $133 million in the aggregate. This
aggregate amount of reasonably possible loss is based upon
currently available information and is subject to significant
judgment and a variety of assumptions, and known and
unknown uncertainties. The matters underlying the estimated
range will change from time to time, and actual results will
vary significantly from the current estimate.
In certain other pending matters, there may be a range of
reasonably possible losses (including reasonably possible losses
in excess of amounts accrued) that cannot be reasonably
estimated for the reasons described above. The 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
servicing business, have commenced
Corporation’s asset
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
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 the Employee Retirement
Income Security Act (ERISA). Based on our review of these
matters, we believe we operated our securities lending program
prudently and appropriately. At this stage of these proceedings,
however,
it is not possible for management to assess the
probability of a material adverse outcome or reasonably
estimate the amount of any potential loss.
On August 24, 2010, a lawsuit (hereinafter referred to as
the “Securities Class Action”) was filed in federal court in the
Northern District of Illinois against the Corporation and three
of its present or former officers, including the present and
former Chief Executive Officers of the Corporation, on behalf
of a purported class of purchasers of Corporation stock during
the period from October 17, 2007 to October 20, 2009. The
amended complaint alleges that during the purported class
period the defendants violated Sections 10(b) and 20(a) of the
Exchange Act by allegedly taking insufficient provisions for
credit losses with respect to the Corporation’s real estate loan
portfolio and failing to make sufficient disclosures regarding
its securities lending business. Plaintiff seeks compensatory
damages in an unspecified amount. At this stage of the suit, it
is not possible for management to assess the probability of a
material adverse outcome or reasonably estimate the amount
of any potential loss.
On September 7, 2010, a shareholder derivative lawsuit,
purportedly brought on behalf of the Corporation, was filed in
the Circuit Court of Cook County, Illinois against a number
of the Corporation’s current and former officers and directors.
The Corporation is named as a nominal defendant. The
complaint asserts that the individual defendants violated their
fiduciary duties to the Corporation based upon substantially
the same allegations made in the Securities Class Action
complaint. Certain individual defendants are also alleged to
have sold some of
their holdings of Northern Trust
Corporation stock while in possession of material nonpublic
information. Plaintiff seeks compensatory damages in an
unspecified amount from the individual defendants on behalf
of
the
the Corporation. The only relief sought against
Corporation is an order requiring the implementation of
certain corporate governance procedures. On December 20,
2011, the court granted the Corporation’s motion to dismiss
leave to file an
the derivative lawsuit but gave plaintiff
amended complaint. Plaintiff elected, instead, to enter into an
agreed order staying the derivative suit until the judge in the
Securities Class Action rules on the Corporation’s motion to
dismiss that complaint.
Visa Membership. Northern Trust, as a member of Visa
U.S.A. Inc. (Visa U.S.A.) and in connection with the 2007
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 2008. The remaining Visa shares held by Northern Trust are
recorded at
their original cost basis of zero and as of
December 31, 2012 have restrictions as to their sale or transfer.
Northern Trust is obligated to indemnify Visa for losses
resulting from certain indemnified litigation involving Visa
and has been required to recognize, at its estimated fair value
in accordance with GAAP, a guarantee liability arising from
such litigation that has not yet settled.
During 2007, Northern Trust recorded charges and
corresponding liabilities of $150 million relating to Visa
indemnified litigation. Subsequently, Visa established an
escrow account to cover the settlements of, or judgments in,
indemnified litigation. The fundings by Visa of its escrow
account have 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 $23.1 million, $33.0 million, and $17.8 million were
recorded in 2011, 2010, and 2009,
respectively, which
combined with a $76.1 million reduction recorded in 2008,
fully eliminated the recorded indemnification liability as of
December 31, 2011.
On October 19, 2012, Visa signed a settlement agreement
with plaintiff representatives for binding settlement of the
indemnified litigation relating to interchange fees. While the
final settlement and ultimate resolution of outstanding Visa
selling
related litigation and the timing for removal of
restrictions on shares owned by Northern Trust are highly
uncertain, based upon the settlement terms announced by
Visa, Northern Trust anticipates that the value of its remaining
shares of Visa stock will be adequate to offset any remaining
indemnification obligations related to Visa litigation.
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Contingent Purchase Consideration. In connection with
acquisitions consummated in 2011, contingent consideration
was recorded relating to certain performance-related purchase
price
contingent
fair
consideration at December 31, 2012 and 2011 totaled $50.1
million and $56.8 million, respectively.
adjustments. The
value of
the
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
instruments is the possibility that interest rates, foreign 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
liquidity and volatility, as well as
position limits, market
experience in each market, are 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 a number of counterparties which
risk associated with
mitigate the aforementioned credit
derivative activity conducted with those counterparties by
requiring that significant net unrealized fair value gains be
supported by collateral placed with Northern Trust.
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 in the consolidated balance sheet
were each reduced by $982.5 million and $2,023.6 million as
of December 31, 2012 and 2011, respectively, as a result of
master netting agreements in place. Derivative assets and
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N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
recorded at December 31, 2012 also reflect
liabilities
reductions of $118.6 million and $425.0 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 $220.1 million and $257.4
million, respectively, at December 31, 2011. Additional cash
received from and deposited with derivative
collateral
counterparties
totaling $1.6 million and $73.3 million,
respectively, of as of December 31, 2012, and $72.3 million
and $47.8 million, respectively, as of December 31, 2011, were
not offset against derivative assets and liabilities on the
consolidated balance sheet as the amounts exceeded the net
derivative positions with those counterparties.
the net derivative
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
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 $178.9 million and $202.0
million on December 31, 2012 and 2011, respectively. Cash
collateral amounts deposited with derivative counterparties on
those dates
included $155.4 million and $80.5 million,
respectively, posted against these liabilities, resulting in a net
maximum amount of termination payments that could have
been required at December 31, 2012 and 2011 of $23.5 million
and $121.5 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 uses foreign exchange contracts to reduce its
exposure to changes in foreign exchange rates relating to
certain forecasted non-functional currency denominated
revenue and expenditure transactions,
foreign currency
denominated assets and liabilities, and net investments in
non-U.S. affiliates.
Interest rate contracts include swap, option, and forward
contracts. Interest rate swap contracts involve the exchange of
fixed and floating rate interest payment obligations without
the exchange of the underlying principal amounts. Northern
Trust enters into interest rate swap contracts on behalf of its
clients and also utilizes such contracts to reduce or eliminate
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
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. Northern
Trust enters into interest rate forward contracts to lend funds
to a potential borrower at a specified interest rate within a
specified period of
time. These forward contracts are
derivative instruments if the loans that will result from the
exercise of the commitments will be held for sale.
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 96% of Northern Trust’s derivatives outstanding at
December 31, 2012 and 2011, 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.
The following table shows the notional and fair values 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. Northern Trust’s credit related risk of loss 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
Total
DECEMBER 31, 2012
DECEMBER 31, 2011
FAIR VALUE
FAIR VALUE
NOTIONAL
VALUE
$213,246.7
31.4
4,915.2
ASSET
LIABILITY
$1,735.3
–
180.6
$1,730.4
–
174.0
NOTIONAL
VALUE
$239,901.3
100.5
4,570.4
ASSET
LIABILITY
$3,062.1
–
188.7
$2,959.8
–
184.6
$218,193.3
$1,915.9
$1,904.4
$244,572.2
$3,250.8
$3,144.4
The following table shows the location and amount of gains and losses attributable to changes in the fair value of client-related
and trading derivative instruments that were recorded in the consolidated statement of income for the years ended December 31,
2012, 2011, and 2010.
(In Millions)
Foreign Exchange Contracts
Interest Rate Swap and Option 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,
2012
2011
2010
$206.1
11.6
$217.7
$324.5
5.9
$330.4
$382.2
9.3
$391.5
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N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
Risk Management Instruments. Northern Trust uses derivative instruments to hedge its exposure to foreign currency, interest
rate, and credit risk. The following table identifies the types and classifications of derivative instruments formally designated as
hedges under GAAP 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
CASH FLOW HEDGES
Forecasted Foreign Currency Denominated
Transactions
NET INVESTMENT HEDGES
Net Investments in Non-U.S. Affiliates
Total
DERIVATIVE
INSTRUMENT
RISK
CLASSIFICATION
NOTIONAL
VALUE
ASSET
LIABILITY
NOTIONAL
VALUE
ASSET
LIABILITY
DECEMBER 31, 2012
DECEMBER 31, 2011
FAIR VALUE
FAIR VALUE
Interest Rate Swap Contracts
Interest Rate
$3,617.0
$ 3.4
$ 75.1
$2,172.0
$ 2.6
$46.8
Interest Rate Swap Contracts
Interest Rate
900.0
126.3
0.2
1,100.0
147.0
0.5
Foreign Exchange Contracts Foreign Currency
669.0
8.7
11.5
932.9
9.4
27.2
Foreign Exchange Contracts Foreign Currency
1,451.4
2.3
27.8
1,554.7
12.0
1.5
$6,637.4
$140.7
$114.6
$5,759.6
$171.0
$76.0
In addition to the above, Sterling denominated debt,
totaling $242.3 million and $241.2 million at December 31,
2012 and 2011, respectively, was designated as a hedge 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.
The following table 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, 2012, 2011, and 2010.
DERIVATIVE
INSTRUMENT
LOCATION OF DERIVATIVE
GAIN/(LOSS) RECOGNIZED
IN INCOME
AMOUNT OF DERIVATIVE GAIN/
(LOSS) RECOGNIZED IN INCOME
DECEMBER 31,
(In Millions)
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
2012
$(48.4)
54.3
$ 5.9
2011
$ (56.6)
194.4
$137.8
2010
$(13.3)
78.8
$ 65.5
There was $0.4 million, $0.3 million, and $0.2 million of
changes recorded within the fair values of hedged items for
“long-haul” hedges during the years ended December 31, 2012,
2011, and 2010, respectively, and $0.3 million, $0.9 million,
and $0.1 million of ineffectiveness recorded during the years
ended December 31, 2012, 2011, and 2010, respectively.
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. There was no ineffectiveness recognized
in earnings for cash flow hedges during the years ended
December 31, 2012, 2011, or 2010. As of December 31, 2012,
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.
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N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
During the year ended December 31, 2012, there were $0.2 million of net cash flow hedge derivative losses relating to interest
rate swap contracts reclassified from AOCI to interest income; there were no gains or losses reclassified during the year ended
December 31, 2011 or 2010. The following table provides cash flow hedge derivative gains and losses relating to foreign exchange
contracts that were recognized in AOCI and the amounts reclassified to earnings during the years ended December 31, 2012, 2011
and 2010. Beginning in 2012, gains and losses associated with forecasted foreign currency denominated revenue and expenditure
transactions are classified in other operating income or other operating expense.
(In Millions)
Net Gain/(Loss) Recognized in AOCI
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
Occupancy Expense
Other Operating Expense
Total
During the years ended December 31, 2012 and 2010,
there were $0.2 million of gains and $6.3 million of losses,
respectively, relating to net foreign exchange contract amounts
that were reclassified into earnings as a result of
the
discontinuance of forecasted transactions that were no longer
probable of occurring. It is estimated that a net loss of $3.1
million will be reclassified into earnings within the next twelve
months relating to cash flow hedges.
Certain foreign exchange
and qualifying
nonderivative instruments are designated as net investment
hedges to minimize Northern Trust’s exposure to variability in
the foreign currency translation of net investments in non-
U.S. branches and subsidiaries. For net investment hedges,
there was $5.3 million of ineffectiveness recorded for these
contracts
FOREIGN EXCHANGE CONTRACTS
2011
$(23.6)
2010
$46.7
0.6
(0.1)
(1.2)
–
3.0
0.9
–
0.5
1.9
7.2
0.2
1.7
0.1
(8.2)
(2.1)
(0.1)
(1.1)
(4.0)
2012
$(3.2)
–
(4.6)
–
–
–
–
–
–
–
$(4.6)
$ 5.6
$ (6.3)
hedges during the year ended December 31, 2012 and no
ineffectiveness recorded for these hedges during the years
ended December 31, 2011 or 2010.
The following table provides net investment hedge gains
and losses recognized in AOCI during the years ended
December 31, 2012 and 2011.
(In Millions)
Foreign Exchange Contracts
Sterling Denominated Subordinated Debt
Total
AMOUNT OF HEDGING
INSTRUMENT GAIN/(LOSS)
RECOGNIZED IN AOCI
(BEFORE TAX)
2012
$(24.7)
(9.0)
$(33.7)
2011
$25.2
0.5
$25.7
Derivatives not formally designated as hedges under GAAP are entered into to manage the foreign currency risk of non-U.S. dollar
denominated assets and liabilities, the net investment in certain non-U.S. affiliates, forecasted foreign currency denominated transactions,
and the credit risk and interest rate risk of loans and loan 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.
(In Millions)
Commercial Loans and Loan
Commitments
Forecasted Foreign Currency
Denominated Transactions
Commercial Loans
Net Investments in Non-
U.S. Affiliates
Total
DECEMBER 31, 2012
DECEMBER 31, 2011
FAIR VALUE
FAIR VALUE
RISK
CLASSIFICATION
NOTIONAL
VALUE
ASSET
LIABILITY
NOTIONAL
VALUE
ASSET
LIABILITY
Credit
$
42.5
$
–
$1.0
$ 60.5
$0.7
$0.1
DERIVATIVE INSTRUMENT
Credit Default Swap
Contracts
Foreign Exchange Contracts
Foreign Exchange Contracts
Foreign Currency
Foreign Currency
2.2
135.8
Foreign Exchange Contracts
Foreign Currency
1,051.8
0.1
1.3
8.9
–
0.7
2.3
127.3
84.3
63.5
2.1
1.3
0.4
2.6
0.3
0.2
$1,232.3
$10.3
$4.0
$335.6
$4.5
$3.2
N O R T H E R N T R U S T C O R P O R A T I O N 2 0 1 2 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 | 113
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, 2012, 2011, and 2010 for derivative instruments not formally designated as hedges under GAAP.
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
(In Millions)
Credit Default Swap Contracts
Forward Contracts
Foreign Exchange Contracts
Total
LOCATION OF DERIVATIVE GAIN/(LOSS)
RECOGNIZED IN INCOME
Other Operating Income
Other Operating Income
Other Operating Income
AMOUNT RECOGNIZED IN INCOME
2012
$ (2.6)
–
11.3
$ 8.7
2011
$ 0.9
0.2
(7.0)
$(5.9)
2010
$ (1.7)
0.3
(19.7)
$(21.1)
Note 26 – Off-Balance Sheet Financial Instruments
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
(In Millions)
Legally Binding Commitments to Extend
Credit(1)
Standby Letters of Credit(2)
Commercial Letters of Credit
DECEMBER 31,
2012
2011
$30,045.7
4,573.7
27.9
$28,702.2
4,293.4
23.4
(1) These amounts exclude $406.7 million and $479.8 million of commitments
participated to others at December 31, 2012 and 2011, respectively.
(2) These amounts include $557.7 million and $608.2 million of standby letters of credit
secured by cash deposits or participated to others as of December 31, 2012 and 2011,
respectively. The weighted average maturity of standby letters of credit was 27 months at
December 31, 2012 and 2011.
Other Off-Balance Sheet Financial Instruments. As part
of its securities custody activities and at the direction of its
clients, Northern Trust lends securities owned by clients to
borrowers who are reviewed and approved by the Northern
Trust Senior Credit Committee. In connection with these
activities, Northern Trust has issued indemnifications to
certain clients against certain losses that are 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. Borrowers are required to fully
received with cash or marketable
collateralize securities
securities. As securities are loaned, collateral is maintained at a
minimum of 100% of the fair value of the securities plus
accrued interest. The collateral is revalued on a daily basis. The
amount of securities loaned as of December 31, 2012 and 2011
subject to indemnification was $69.7 billion and $74.4 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 no liability was recorded related
to these indemnifications.
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 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.
its clients,
and private
paper,
Standby Letters of Credit obligate Northern Trust to meet
certain financial obligations of
if, under the
contractual terms of the agreement, the clients are unable to
do so. These instruments are primarily issued to support
public
including
commercial
initial margin
requirements on futures exchanges, and similar transactions.
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 collateral
received or other participants.
financial
bond
commitments,
financing,
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.
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N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
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 activities. A
wide variety of cash and securities transactions are settled
through these organizations,
involving
obligations of states and political subdivisions, asset-backed
securities, commercial paper, dollar placements, and securities
issued by the Government National Mortgage Association.
including those
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,
2012 and 2011 was approximately $81 million and $80
million, respectively, based on the membership agreements
and clearing volume for those days. Controls related to these
clearing transactions are closely monitored by management 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
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.
the property with substantially all of
the trusts, which are VIEs, are created to provide the lessee use
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’s maximum exposure to loss as a result of
its involvement with the leveraged lease trust VIEs is limited to
the carrying amounts of its leveraged lease investments. As of
December 31, 2012 and 2011, the carrying amounts of these
investments, which are included in loans and leases in the
consolidated balance sheet, were $673.6 million and $714.5
million, respectively. Northern Trust’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 Northern Trust
to a loss.
invests
is driven by the performance of
Tax Credit Structures. Northern Trust
in
community development projects
that are designed to
generate a return primarily through the realization of tax
credits. The community development 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
community development projects, which are deemed to be
their underlying
VIEs,
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 any community development projects 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.
Leveraged Leases.
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,
Northern Trust’s maximum exposure to loss as a result of
its involvement with community development projects is
limited to the carrying amounts of its investments, including
any unfunded commitments. As of December 31, 2012 and
2011, the carrying amounts of these investments, which are
N O R T H E R N T R U S T C O R P O R A T I O N 2 0 1 2 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 | 115
included in other assets in the consolidated balance sheet,
were $248.2 million and $264.9 million, respectively. As of
December 31, 2012 and 2011, liabilities related to unfunded
commitments on investments in community development
in the
projects, which are included in other
consolidated balance sheet, were $33.1 million and $44.5
million, respectively. Northern Trust’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 community development projects that would
expose it to a loss.
liabilities
I and NTC Capital
through NTC Capital
Trust Preferred Securities. As discussed in further detail
in Note 13 – 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 the Corporation that have the same interest
rates and maturity dates as 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 the trusts, even though 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.
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 has determined that it is not the
primary beneficiary of these VIEs under GAAP.
In November 2011, Northern Trust purchased $90 million
of securities at par from three investment funds (Funds). The
net assets held by the Funds as of December 31, 2011 totaled
$16.5 billion. The securities were purchased to avoid the risk
of the Funds being downgraded which could have forced
certain holders to liquidate their investments. Northern Trust
incurred a pre-tax charge of $2 million in connection with
these actions and, subsequently, had no further obligations
116 | 2 0 1 2 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 N O R T H E R N T R U S T C O R P O R A T I O N
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
related to these actions. All of the $90 million of securities
purchased from the Funds matured at par during the year
ended December 31, 2012. As Northern Trust has no plans to
provide any support additional to that which is noted above,
there is no exposure to loss from the implicit interest in the
Funds as of December 31, 2012.
Under GAAP,
the above actions reflected Northern
Trust’s implicit interest in the credit risk of the affected Funds.
interests are required to be considered when
Implicit
determining the primary beneficiary of a variable interest
entity. 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 these Funds, an expected
loss calculation based on the characteristics of the underlying
investments in the Funds was 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. This analysis 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.
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; Federal Home Loan Bank
borrowings; and for other purposes, including support for
securities settlement, primarily related to client activities, and
for potential Federal Reserve Bank discount window
borrowings. On December 31, 2012, securities and loans
totaling $27.2 billion ($19.0 billion of government sponsored
agency and other securities, $334.0 million of obligations of
states and political subdivisions, and $7.9 billion of loans),
were pledged. Collateral required for these purposes totaled
$3.4 billion. Included in the total pledged assets are available
for sale securities with a total fair value of $690.1 million
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
securities purchased
accepted from agreements
transactions. The total fair value of accepted collateral as of
December 31, 2012 was $35.4 million. There was no repledged
or sold collateral as of December 31, 2012.
to resell
Deposits maintained to meet Federal Reserve Bank reserve
requirements averaged $1.1 billion in 2012.
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
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, at a minimum no dividends may be paid in an amount
greater than the net or undivided profits (as defined by
regulatory agencies) then on hand, subject to other applicable
and potentially more restrictive laws that may vary from state
to state. Federal Reserve Board rules provide that no state
bank that is a Federal Reserve System member may declare or
pay a dividend if the total of all dividends declared during the
calendar year, including the proposed dividend, exceeds its net
profits for that year, combined with its retained net profits for
the preceding two years, unless the dividend has been
approved by the Federal Reserve Board. The Bank is subject to
this requirement. The Bank is also prohibited under federal
law from paying any dividends if the Bank is undercapitalized
or if the payment of the dividends would cause the Bank to
become undercapitalized. In addition, the federal regulatory
agencies are authorized to prohibit a bank or bank holding
company from engaging in an unsafe or unsound banking
practice. The payment of dividends could, depending on the
financial condition of the Bank, be deemed to constitute an
unsafe or unsound practice. In addition, state laws may
restrict to different degrees the amount of dividends that may
be paid without state regulatory approval. Based on these
restrictions, the Corporation’s banking subsidiaries, without
regulatory approval, could declare dividends during 2013
equal
to their 2013 eligible net profits (as defined by
regulatory agencies) plus $328.8 million. The ability of each
banking subsidiary to pay dividends to the Corporation may
be further restricted going forward as a result of regulatory
policies and guidelines, including regulations issued pursuant
to the Dodd-Frank Act, relating to dividend payments and
capital adequacy.
Under federal law, financial transactions by the Bank, the
the
banking
Corporation’s
Corporation and its affiliates that are in the form of loans or
investments, guarantees, derivative
extensions of credit,
subsidiary, with
insured
reverse
repurchase
agreements,
repurchase
transactions,
agreements, securities lending or borrowing transactions or
purchases of assets, are restricted. Transfers of this kind to the
Corporation or a nonbanking subsidiary by the Bank are
limited to 10% of the Bank’s capital and surplus with respect
to any single affiliate, and to 20% of the Bank’s capital and
surplus with all affiliates in the aggregate, and are also subject
to certain collateral requirements (in the case of credit
transactions) and other restrictions on covered transactions.
These transactions, as well as other transactions between the
Bank and the Corporation or its affiliates, also must be on
terms 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. Other state and federal laws may
limit the transfer of funds by the Corporation’s banking
subsidiaries to the Corporation and certain of its affiliates.
Note 30 – Business Units and Related Information
and PFS.
business units, C&IS
Northern Trust is organized around its two principal client-
Investment
focused
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. Operating and systems 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.
N O R T H E R N T R U S T C O R P O R A T I O N 2 0 1 2 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 | 117
The following tables show the earnings contribution of
ended
the years
for
Northern Trust’s business units
December 31, 2012, 2011, and 2010.
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)
2012
2011
2010
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
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)
2012
2011
2010
Other Noninterest Income
Net Interest Income (FTE)
(Note)
Revenue (FTE) (Note)
Visa Indemnification Benefit
Noninterest Expense
(Excluding Visa
Indemnification Benefit)
$
7.0
$
(22.6) $
(8.9)
121.1
128.1
–
153.1
130.5
(23.1)
94.2
85.3
(33.0)
96.6
117.0
99.0
NONINTEREST INCOME
Trust, Investment and
Other Servicing
Fees
Foreign Exchange
Other Noninterest
Income
Net Interest Income (FTE)
(Note)
Revenue (FTE) (Note)
Provision for Credit Losses
Noninterest Expense
Income before Income
Taxes (Note)
Provision for Income Taxes
(Note)
Net Income
Percentage of
Consolidated Net
Income
$ 1,334.1
$ 1,196.4
$ 1,175.1
Income before Income Taxes
(Note)
31.5
36.6
19.3
Trading Income
193.5
315.7
375.3
Provision (Benefit) for Income
193.6
169.7
147.4
280.1
282.5
271.8
2,001.3
(2.1)
1,599.9
1,964.3
(20.5)
1,522.4
1,969.6
(16.1)
1,328.9
Taxes (Note)
Net Income
Percentage of Consolidated
Net Income
Average Assets
5.1
(16.7)
4.2
$
26.4
$
53.3
$
15.1
4%
9%
2%
$19,153.6
$20,552.7
$13,694.4
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
403.5
462.4
656.8
(In Millions)
2012
2011
2010
114.3
168.3
222.4
$
289.2
$
294.1
$
434.4
42%
49%
65%
Average Assets
$49,904.0
$47,533.7
$38,749.3
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)
2012
2011
2010
NONINTEREST INCOME
Trust, Investment and
NONINTEREST INCOME
Trust, Investment and
Other Servicing Fees
Foreign Exchange Trading
Income
Other Noninterest Income
Net Interest Income (FTE) (Note)
Revenue (FTE) (Note)
Provision for Credit Losses
Visa Indemnification Benefit
Noninterest Expense (Excluding
Visa Indemnification
Benefit)
$ 2,405.5
$ 2,169.5
$ 2,081.9
206.1
294.2
1,031.1
3,936.9
25.0
–
324.5
266.8
1,049.3
3,810.1
55.0
(23.1)
382.2
264.9
957.8
3,686.8
160.0
(33.0)
2,878.8
2,854.3
2,530.9
Other Servicing Fees
$ 1,071.4
$
973.1
$
906.8
Income before Income Taxes
(Note)
Provision for Income Taxes
(Note)
Net Income
1,033.1
923.9
1,028.9
345.8
320.3
359.4
$
687.3
$
603.6
$
669.5
Average Assets
$92,975.5
$91,947.9
$76,008.2
Note: Stated on an FTE basis. The consolidated figures include $40.8 million, $40.2
million, and $39.1 million, of FTE adjustments for 2012, 2011, and 2010, respectively.
Foreign Exchange
Trading Income
Other Noninterest Income
Net Interest Income (FTE)
(Note)
Revenue (FTE) (Note)
Provision for Credit Losses
Noninterest Expense
Income before Income Taxes
(Note)
Provision for Income Taxes
(Note)
Net Income
Percentage of Consolidated
Net Income
Average Assets
12.6
93.6
8.8
119.7
6.9
126.4
629.9
613.7
591.8
1,807.5
27.1
1,182.3
1,715.3
75.5
1,214.9
1,631.9
176.1
1,103.0
598.1
424.9
352.8
226.4
168.7
132.8
$
371.7
$
256.2
$
220.0
54%
42%
33%
$23,917.9
$23,861.5
$23,564.5
118 | 2 0 1 2 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 N O R T H E R N T R U S T C O R P O R A T I O N
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
Northern Trust’s international activities are centered in
the global custody, treasury management, foreign exchange,
asset servicing, asset management, 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
this disclosure, all
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.
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 $23.1 million and
$33.0 million recorded in 2011 and 2010, respectively, from reductions in the Visa indemnification liability. As the Visa
indemnification liability was fully eliminated in 2011, there was no benefit recognized in 2012.
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)
2012
Non-U.S.
U.S.
Total
2011
Non-U.S.
U.S.
Total
2010
Non-U.S.
U.S.
Total
Note: Total revenue is comprised of net interest income and noninterest income.
Note 31 – Regulatory Capital Requirements
Northern Trust and the Bank 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 risk-
weighted assets and of tier 1 capital to adjusted average
quarterly assets in order to be classified as “well capitalized.”
certain
capital
The
requirements
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
regulatory
impose
TOTAL ASSETS
TOTAL
REVENUE
INCOME BEFORE
INCOME TAXES
NET INCOME
$ 29,198.4
68,265.4
$ 992.5
2,903.6
$194.9
797.4
$147.6
539.7
$ 97,463.8
$3,896.1
$992.3
$687.3
$ 28,625.2
71,598.5
$ 1,084.8
2,685.1
$ 284.4
599.3
$ 199.3
404.3
$100,223.7
$ 3,769.9
$ 883.7
$ 603.6
$ 24,472.9
59,371.0
$
980.9
2,666.8
$ 325.1
664.7
$ 229.3
440.2
$ 83,843.9
$ 3,647.7
$ 989.8
$ 669.5
minimum ratios. Such prompt corrective action could have a
direct material effect on a bank’s financial statements.
As of December 31, 2012 and 2011, the Bank 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, 2012 and 2011, Northern
Trust’s non-U.S. banking subsidiaries had capital ratios above
specified minimum requirements. There were no
their
conditions or
since December 31, 2012 that
management believes have adversely affected the capital
categorization of any Northern Trust subsidiary bank.
events
N O R T H E R N T R U S T C O R P O R A T I O N 2 0 1 2 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 | 119
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 2012 or 2011 exceeded 10% of the consolidated total.
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
($ In Millions)
AS OF DECEMBER 31, 2012
Total Capital to Risk-Weighted Assets
Consolidated
The Northern Trust Company
Tier 1 Capital to Risk-Weighted Assets
Consolidated
The Northern Trust Company
Tier 1 Capital to Adjusted Average Fourth Quarter Assets
Consolidated
The Northern Trust Company
AS OF DECEMBER 31, 2011
Total Capital to Risk-Weighted Assets
Consolidated
The Northern Trust Company
Tier 1 Capital to Risk-Weighted Assets
Consolidated
The Northern Trust Company
Tier 1 Capital to Adjusted Average Fourth Quarter Assets
Consolidated
The Northern Trust Company
ACTUAL
MINIMUM TO
QUALIFY AS
WELL CAPITALIZED
AMOUNT
RATIO
AMOUNT
RATIO
$8,340.8
7,971.0
14.3%
13.7
$5,831.6
5,803.2
10.0%
10.0
7,489.0
6,904.2
7,489.0
6,904.2
12.8
11.9
8.2
7.6
3,499.0
3,481.9
4,543.7
4,533.9
6.0
6.0
5.0
5.0
$ 8,065.2
7,763.3
14.2%
13.8
$ 5,666.7
5,630.8
10.0%
10.0
7,104.6
6,602.7
7,104.6
6,602.7
12.5
11.7
7.3
6.8
3,400.0
3,378.4
4,864.9
4,852.2
6.0
6.0
5.0
5.0
The current risk-based capital guidelines that apply to the
Corporation and the Bank, 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.
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 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 the Bank will be
required to use the advanced approaches under Basel II for
calculating risk-based capital
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
related to credit
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 Corporation has for several years been preparing to
II
comply with the advanced approaches of
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 its depository
institution subsidiaries comply with regulatory requirements
and expectations in all jurisdictions where they operate.
the Basel
On December 16, 2010, the Basel Committee released its
final framework for strengthening international capital and
III
liquidity regulation, known as Basel
calibration and phase-in arrangements were previously
endorsed by the Seoul G20 Leaders Summit in November
2010, and will be subject to individual adoption by member
nations, including the U.S.
III. The Basel
120 | 2 0 1 2 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 N O R T H E R N T R U S T C O R P O R A T I O N
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
Note 32 – 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
Senior Notes
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 before Income Taxes and Equity in Undistributed Net Income of Subsidiaries
Benefit for Income Taxes
Income 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
DECEMBER 31,
2012
2011
$
6.5
1,691.4
4.9
1,035.0
5.0
7,225.6
142.6
3.4
377.7
$
6.5
1,269.2
97.1
1,035.0
5.0
6,890.6
152.6
3.4
375.5
$10,492.1
$9,834.9
$ 2,405.8
277.0
282.3
2,965.1
408.6
1,012.7
6,702.7
(283.0)
(314.0)
7,527.0
$2,126.7
276.9
314.0
2,717.6
408.6
977.5
6,302.3
(345.6)
(225.5)
7,117.3
$10,492.1
$9,834.9
FOR THE YEAR ENDED
DECEMBER 31,
2012
2011
2010
$440.0
26.2
30.0
10.6
506.8
74.9
13.0
87.9
418.9
21.1
440.0
266.9
(19.6)
$687.3
$687.3
$500.0
5.1
19.8
13.3
538.2
66.9
12.6
79.5
458.7
24.8
483.5
71.0
49.1
$603.6
$603.6
$
–
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
N O R T H E R N T R U S T C O R P O R A T I O N 2 0 1 2 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 | 121
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:
Equity in Undistributed Net Income of Subsidiaries
Change in Prepaid Expenses
Change in Accrued Income Taxes
Other, net
Net Cash Provided by Operating Activities
INVESTING ACTIVITIES:
Change in Time Deposits with Banks
Purchases of Securities – Available for Sale
Proceeds from Sale, Maturity and Redemption of Securities – Available for Sale
Change in Capital Investments in Subsidiaries
Advances to Wholly-Owned Subsidiaries
Other, net
Net Cash Used in Investing Activities
FINANCING ACTIVITIES:
Change in Senior Notes
Treasury Stock Purchased
Net Proceeds from Stock Options
Cash Dividends Paid on Common Stock
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
Cash on Deposit with Subsidiary Bank at End of Year
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
FOR THE YEAR ENDED
DECEMBER 31,
2012
2011
2010
$ 687.3
$ 603.6
$ 669.5
(247.3)
(0.9)
34.7
(36.0)
437.8
(422.2)
(0.4)
94.3
0.3
–
–
(328.0)
300.0
(162.4)
106.8
(354.3)
0.1
(109.8)
–
6.5
6.5
$
(120.1)
0.2
28.5
(41.1)
471.1
292.1
(91.4)
105.4
(0.5)
(750.0)
–
(444.4)
250.0
(79.0)
75.6
(273.7)
0.1
(27.0)
(0.3)
6.8
(620.9)
1.2
61.8
(13.3)
98.3
(77.2)
(109.7)
4.7
(204.8)
–
(0.9)
(387.9)
497.2
(5.9)
70.6
(273.2)
1.2
289.9
0.3
6.5
$
6.5
$
6.8
122 | 2 0 1 2 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 N O R T H E R N T R U S T C O R P O R A T I O N
R E P O R T O F I N D E P E N D E N T R E G I S T E R E D P U B L I C A C C O U N T I N G F I R M
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, 2012 and 2011, 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, 2012. 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, 2012 and 2011, and the results of their operations and
their cash flows for each of the years in the three-year period ended December 31, 2012, 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, 2012, 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 26, 2013 expressed an unqualified opinion on the effectiveness of Northern Trust Corporation’s internal
control over financial reporting.
chicago, illinois
february 26, 2013
N O R T H E R N T R U S T C O R P O R A T I O N 2 0 1 2 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 | 123
C O N S O L I D A T E D F I N A N C I A L S T A T I S T I C S
$1,328.5
$84,168.5
1.58%
$1,448.8
$82,748.8
1.75%
A V E R A G E B A L A N C E S H E E T W I T H A N A L Y S I S O F N E T I N T E R E S T I N C O M E
(INTEREST AND RATE ON A FULLY TAXABLE EQUIVALENT BASIS)
($ In Millions)
AVERAGE EARNING ASSETS
2012
AVERAGE
BALANCE
INTEREST
RATE(3)
INTEREST
Federal Funds Sold and Resell Agreements
Interest-Bearing Deposits with Banks
Federal Reserve Deposits and Other Interest-Bearing
$
0.5
176.4
13.9
$
258.0
18,652.2
5,388.8
0.17%
0.95
0.26
$
0.2
192.8
28.3
Securities
U.S. Government
Obligations of States and Political Subdivisions
Government Sponsored Agency
Other(1)
Total Securities
Loans and Leases(2)
Total Earning Assets
Allowance for Credit Losses Assigned to Loans and Leases
Cash and Due from Banks
Buildings and Equipment
Client Security Settlement Receivables
Goodwill
Other Assets
Total Assets
AVERAGE SOURCE OF FUNDS
Deposits
Savings and Money Market
Savings Certificates and Other Time
Non-U.S. Offices – Interest-Bearing
Total Interest-Bearing Deposits
Short-Term Borrowings
Senior Notes
Long-Term Debt
Floating Rate Capital Debt
Total Interest-Related Funds
Interest Rate Spread
Demand and Other 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
23.8
27.4
124.5
127.7
303.4
834.3
2,269.4
421.1
18,381.5
9,821.8
30,893.8
28,975.7
1.05
6.52
0.68
1.30
0.98
2.88
23.4
40.4
102.4
117.8
284.0
943.5
$
$
–
–
–
–
–
–
–
18.3
20.1
118.3
156.7
5.6
72.0
60.3
2.8
297.4
–
–
–
–
–
$1,031.1
$ 990.3
(296.7)
3,841.8
471.0
492.3
535.2
3,763.4
–
–
–
–
–
–
$92,975.5
–%
$14,101.9
2,995.1
37,943.8
55,040.8
3,045.9
2,295.2
1,634.1
277.0
0.13%
0.67
0.31
0.28
0.18
3.14
3.69
1.04
62,293.0
0.48%
–
20,179.0
3,145.3
7,358.2
$92,975.5
–
–
1.10
–
–
–
–
1.22%
1.18%
1.48%
0.58
1.22%
$
$
–
–
–
–
–
–
–
26.0
27.8
176.1
229.9
8.2
64.4
94.6
2.4
399.5
–
–
–
–
–
$1,049.3
$1,009.1
2011
AVERAGE
BALANCE
$
261.0
17,124.5
10,610.2
1,766.5
605.6
14,290.0
9,744.3
26,406.4
28,346.7
RATE(3)
0.09%
1.13
0.27
1.32
6.67
0.72
1.21
1.08
3.33
(305.3)
3,845.3
500.7
429.1
466.0
4,263.3
–
–
–
–
–
–
$91,947.9
–%
$14,297.6
3,605.4
39,973.5
57,876.5
4,466.8
1,983.3
2,446.3
276.9
0.18%
0.77
0.44
0.40
0.18
3.25
3.87
0.88
67,049.8
0.60%
–
14,569.9
3,304.0
7,024.2
$91,947.9
–
–
1.15
–
–
–
–
1.27%
1.22%
1.54%
0.58
1.27%
$ 889.3
141.8
$59,907.2
24,261.3
$1,031.1
$84,168.5
$ 911.2
138.1
$59,053.7
23,695.1
$1,049.3
$82,748.8
(1) Other securities include Federal Reserve and Federal Home Loan Bank stock and certain community development investments which are classified in other assets on the consolidated balance
sheet as of December 31, 2012 and 2011.
(2) Average balances include nonaccrual loans. Lease financing receivable balances are reduced by deferred income.
(3) Rate calculations are based on actual balances rather than the rounded amounts presented in the Average Consolidated Balance Sheet with Analysis of Net Interest Income.
Notes: Net Interest Income (FTE Adjusted) includes adjustments to a fully taxable equivalent basis for loans and securities. Such adjustments are based on a blended federal and state tax rate of
37.7%. Total taxable equivalent interest adjustments amounted to $40.8 million in 2102, $40.2 million in 2011, $39.1 million in 2010, $40.2 million in 2009, $49.8 million in 2008.
Interest revenue on cash collateral positions is reported above within interest-bearing deposits with banks and within loans and leases. Interest expense on cash collateral positions is
reported above within non-U.S. offices interest-bearing deposits. Related cash collateral received from and deposited with derivative counterparties is recorded net of the associated
derivative contract within other assets and other liabilities, respectively.
124 | 2 0 1 2 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 N O R T H E R N T R U S T C O R P O R A T I O N
C O N S O L I D A T E D F I N A N C I A L S T A T I S T I C S
2010
AVERAGE
BALANCE
INTEREST
RATE(3)
INTEREST
2009
AVERAGE
BALANCE
RATE(3)
INTEREST
2008
AVERAGE
BALANCE
RATE(3)
$
0.5
134.6
13.5
$
293.9
14,599.7
5,598.2
0.18% $
0.92
0.24
0.7
209.6
11.6
$
375.7
15,359.9
4,880.2
0.21% $
1.36
0.24
37.2
888.2
9.3
$ 1,569.8
21,451.9
1,538.5
2.37%
4.14
0.60
1.1
47.4
116.6
84.7
249.8
937.4
162.0
726.9
11,802.2
7,168.1
19,859.2
27,514.4
0.67
6.52
0.99
1.18
1.26
3.41
0.2
53.5
147.7
76.0
277.4
946.9
41.8
817.5
11,900.4
4,598.1
17,357.8
28,697.2
0.50
6.55
1.24
1.65
1.60
3.30
0.4
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
$1,335.8
$67,865.4
1.97% $1,446.2
$66,670.8
2.17% $2,528.3
$64,249.9
3.94%
$
$
–
–
–
–
–
–
–
34.9
40.4
125.7
201.0
11.2
48.6
114.8
2.4
378.0
–
–
–
–
–
(313.0)
2,788.4
534.7
399.7
396.3
4,336.7
–
–
–
–
–
–
$76,008.2
–% $
–
–
–
–
–
–
–
(275.0)
2,535.8
537.3
419.7
398.4
4,027.2
–
–
–
–
–
–
$74,314.2
–%
–
–
–
–
–
–
–
(170.0)
3,236.8
495.0
395.1
414.2
4,407.5
–
–
–
–
–
–
$73,028.5
–%
$13,049.5
3,704.6
29,968.4
0.27% $
1.09
0.42
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
0.43
0.19
3.22
4.07
0.87
0.66
1.31
–
–
–
–
53.7
73.2
80.1
207.0
11.0
44.0
139.9
4.3
406.2
–
–
–
–
–
$11,162.4
3,879.1
27,157.6
0.48% $ 137.9
92.2
1.89
885.9
0.29
$ 7,786.5
2,739.6
35,958.2
1.77%
3.37
2.46
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
0.49
0.16
3.17
4.57
1.54
0.76
1.41
–
–
–
–
1,116.0
77.4
38.6
155.8
11.6
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
2.40
1.68
4.80
5.19
4.19
2.54
1.40
–
–
–
–
$ 957.8
$ 918.7
–
–
1.41% $1,040.0
1.35% $ 999.8
–
–
1.56% $1,128.9
1.50% $1,079.1
–
–
1.76%
1.68%
$ 863.6
94.2
$49,776.5
18,088.9
1.73% $ 859.8
180.2
0.52
$49,270.9
17,399.9
1.75% $ 762.2
366.7
1.04
$41,740.7
22,509.2
1.83%
1.63
$ 957.8
$67,865.4
1.41% $1,040.0
$66,670.8
1.56% $1,128.9
$64,249.9
1.76%
N O R T H E R N T R U S T C O R P O R A T I O N 2 0 1 2 A N N U A L R E P O R T T O S H A R E H O L D E R S | 125
Q U A R T E R L Y F I N A N C I A L D A T A ( U N A U D I T E D )
STATEMENT OF INCOME
2012
2011
C O N S O L I D A T E D F I N A N C I A L S T A T I S T I C S
($ 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 Expense
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
Federal Funds Sold and Securities Purchased
under Agreements to Resell
Interest-Bearing Deposits with Banks
Federal Reserve Deposits and Other Interest-
Bearing
Securities(1)
Loans and Leases
Allowance for Credit Losses Assigned to Loans
and Leases
Other Assets
Total Assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits
Demand and Other Noninterest-Bearing
Savings and Money Market
Savings Certificates and Other Time
Non-U.S. Offices – Interest-Bearing
Total Deposits
Short-Term Borrowings
Senior Notes
Long-Term Debt
Floating Rate Capital Debt
Other Liabilities
Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
ANALYSIS OF NET INTEREST INCOME
Earning Assets
Interest-Related Funds
Noninterest-Related Funds
Net Interest Income (Fully Taxable Equivalent)
Net Interest Margin (Fully Taxable Equivalent)
COMMON STOCK DIVIDEND AND MARKET
PRICE
Dividends(2)
Market Price Range – High
– Low
FOURTH
QUARTER
THIRD
QUARTER
SECOND
QUARTER
FIRST
QUARTER
FOURTH
QUARTER
THIRD
QUARTER
SECOND
QUARTER
FIRST
QUARTER
$
622.6 $
112.9
601.9 $
125.0
605.8 $
128.6
575.2
133.8
$
541.5
142.3
$
555.3
159.5
$
557.8
140.9
$
514.9
148.6
302.1
67.9
234.2
5.0
741.5
55.5
323.1
77.5
245.6
10.0
696.4
87.3
321.5
67.4
254.1
5.0
717.3
86.6
341.0
84.6
256.4
5.0
723.6
75.6
167.7 $
178.8 $
179.6 $
161.2
167.7 $
178.8 $
179.6 $
161.2
0.69 $
0.69
0.73 $
0.73
0.73 $
0.73
0.66
0.66
354.8
83.0
271.8
12.5
771.7
41.2
130.2
130.2
0.53
0.53
$
$
$
347.0
90.2
256.8
17.5
701.3
82.4
170.4
170.4
0.70
0.70
$
$
$
359.7
113.6
246.1
10.0
705.3
77.5
152.0
152.0
0.62
0.62
$
$
$
347.1
112.7
234.4
15.0
652.9
79.0
151.0
151.0
0.62
0.61
$
$
$
$
$
$
$ 4,059.3 $ 3,446.6 $ 3,860.7 $ 4,002.5
$ 3,951.4
$ 4,127.5
$ 3,861.7
$ 3,431.6
239.3
18,355.2
285.6
19,215.4
260.3
18,788.9
246.6
18,246.4
246.8
18,848.1
273.4
17,234.8
272.5
16,230.6
251.1
16,153.8
4,118.7
30,991.6
29,180.8
6,113.7
29,865.1
29,046.0
7,685.3
3,643.4
31,458.1
31,270.4
29,057.5 $28,615.6
7,892.1
31,459.7
28,779.7
10,808.5
27,642.6
28,469.1
14,799.6
24,033.2
28,330.9
8,950.1
22,246.4
27,795.0
(298.1)
5,023.7
(297.8)
5,035.3
(298.1)
5,639.8
(293.0)
5,354.3
(293.2)
7,068.2
(300.9)
5,774.7
(308.2)
5,138.8
(319.2)
4,756.9
$91,670.5 $92,709.9 $92,410.6 $95,128.1
$97,952.8
$94,029.7
$92,359.1
$83,265.7
$21,280.4 $20,235.8 $19,720.1 $19,467.2
14,606.8
3,071.4
38,980.8
14,095.6
3,098.3
36,431.2
13,687.1
3,083.6
38,896.8
14,023.4
2,728.9
37,461.3
$20,518.6
14,919.1
3,283.9
40,494.5
$16,851.3
14,137.3
3,625.3
41,688.4
$11,017.4
14,222.9
3,686.9
41,568.4
$ 9,748.8
13,901.7
3,831.3
36,075.3
75,494.0
1,614.2
2,492.6
1,423.7
277.0
2,817.0
7,552.0
75,903.3
2,200.7
2,439.6
1,452.9
277.0
3,014.5
7,421.9
73,345.2
4,165.6
2,119.5
1,674.9
277.0
3,539.6
7,288.8
76,126.2
4,228.2
2,125.2
1,989.4
277.0
3,214.8
7,167.3
79,216.1
2,661.5
2,129.7
2,134.6
276.9
4,345.5
7,188.5
76,302.3
3,003.8
2,015.3
2,179.8
276.9
3,157.1
7,094.5
70,495.6
7,114.6
1,891.9
2,756.9
276.9
2,866.5
6,956.7
63,557.1
5,130.3
1,893.2
2,723.3
276.9
2,832.1
6,852.8
$91,670.5 $92,709.9 $92,410.6 $95,128.1
$97,952.8
$94,029.7
$92,359.1
$83,265.7
60,021.1
$82,885.6 $84,525.8 $83,208.2 $86,064.3
65,278.8
$22,864.5 $22,488.1 $21,346.1 $20,785.5
266.3
61,862.1
62,037.7
256.9
264.3
243.6
$87,226.4
65,900.2
21,326.2
281.3
$84,428.4
66,926.8
17,501.6
266.6
$83,666.8
71,518.5
12,148.3
256.6
$75,396.4
63,832.0
11,564.4
244.9
1.17%
1.21%
1.28%
1.24%
1.28%
1.25%
1.23%
1.32%
$
0.30 $
0.30 $
– $
50.46
45.93
49.68
43.68
48.31
41.11
$
0.58
48.15
39.86
$
0.28
42.70
33.20
$
0.28
48.53
33.51
0.28
52.57
44.58
$
0.28
56.86
48.93
(1) Securities include Federal Reserve and Federal Home Loan Bank stock and certain community development investments which are classified in other assets in the consolidated balance sheet
as of December 31, 2012 and 2011.
(2) Cash dividends of $0.58 per common share were declared in the first quarter of 2012, comprised of a $0.28 per common share dividend declared January 17, 2012, paid April 2, 2012, and a
$0.30 per common share dividend declared March 14, 2012, paid July 2, 2012.
Note: The common stock of Northern Trust Corporation is traded on the NASDAQ Stock Market under the symbol NTRS.
126 | 2 0 1 2 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 N O R T H E R N T R U S T C O R P O R A T I O N
B O A R D O F D I R E C T O R S
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 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, 6)
Susan Crown
Vice President
Henry Crown and Company
Worldwide company with diversified manufacturing
operations, real estate, and securities;
Chief Executive Officer
Owl Creek Partners, LLP
Venture capital investment vehicle;
Chairman and Founder
Susan Crown Exchange Inc. (SCE)
Nonprofit foundation focused on 21st century skill-building (4, 5)
Dipak C. Jain
Dean (Until March 1, 2013);
Dean Emeritus and Marketing Professor
(Effective March 1, 2013)
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, 5)
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, 4, 6)
Jose Luis Prado
President
Quaker Foods North America
Division of PepsiCo, Inc., a global food and
beverage company (2, 3)
John W. Rowe
Chairman Emeritus
Exelon Corporation
Producer and wholesale marketer of energy (4, 5, 6)
Martin P. Slark
Vice Chairman and Chief Executive Officer
Molex Incorporated
Manufacturer of electronic, electrical, and fiber optic
interconnection products and systems (2, 3)
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)
Charles A. Tribbett III
Managing Director
Russell Reynolds Associates
Worldwide executive recruiting firm (3, 5)
A d v i s o r y D i r e c t o r
Sir John R.H. Bond
Chairman
Xstrata plc
Global diversified mining group (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
N O R T H E R N T R U S T C O R P O R A T I O N 2 0 1 2 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 | 127
S E N I O R O F F I C E R S
Alan W. Robertson
Executive Vice President
Client Solutions Group
Northern Trust Global Investments
David L. Tentinger
Executive Vice President
Chief Operating Executive
Operations & Technology
Jason J. Tyler
Senior Vice President
Head of Corporate Strategy
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
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
Operating Group
Frederick H. Waddell
Chairman and Chief Executive Officer
S. Biff Bowman
Executive Vice President
Head of Human Resources
Jeffrey D. Cohodes
Executive Vice President
Chief Risk Officer
Steven L. Fradkin
President –
Corporate & Institutional Services
Timothy P. Moen
Executive Vice President
Chief Administrative Officer
William L. Morrison
President and Chief Operating Officer
Michael G. O’Grady
Executive Vice President
Chief Financial Officer
Stephen N. Potter
President –
Northern Trust Global Investments
Jana R. Schreuder
President –
Personal Financial Services
Joyce M. St. Clair
President –
Operations & Technology
Kelly R. Welsh
Executive Vice President
General Counsel
Steven R. Bell
President
Personal Financial Services – West
Aileen B. Blake
Executive Vice President
Head of Enterprise Productivity
David C. Blowers
President
Personal Financial Services – East
Robert P. Browne
Executive Vice President
Chief Investment Officer
Northern Trust Global Investments
Peter B. Cherecwich
Executive Vice President
Head of Global Fund Services
Corporate & Institutional Services
David W. Fox, Jr.
Executive Vice President
Head of Americas
Corporate & Institutional Services
J. Jeffery Kauffman
Executive Vice President
Head of Global Family &
Private Investment Offices
Personal Financial Services
Wilson Leech
Executive Vice President
Head of Europe, Middle East, and Africa
Corporate & Institutional Services
Steve “Mac” MacLellan
Executive Vice President
Personal Financial Services – Central
Scott S. Murray
Executive Vice President
Chief Technology Officer
Operations & Technology
Teresa A. Parker
Executive Vice President
Head of Asia Pacific
Corporate & Institutional Services
128 | 2 0 1 2 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 N O R T H E R N T R U S T C O R P O R A T I O N
C O R P O R A T E I N F O R M A T I O N
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, 2008 and ended December 31, 2012. The cumulative total stockholder return assumes the investment of $100 in the
Corporation’s common stock and in each index on December 31, 2007 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 7 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
140
100
60
20
2007
2008
2009
2010
2011
2012
Northern Trust
S&P 500
KBW Bank Index
Northern Trust
S&P 500
KBW Bank Index
DECEMBER 31,
2007
100
100
100
2008
2009
2010
2011
69
63
52
71
80
52
77
92
64
56
94
49
2012
73
109
65
N O R T H E R N T R U S T C O R P O R A T I O N 2 0 1 2 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 | 129
A N N U A L M E E T I N G
The annual meeting of stockholders will be held on Tuesday,
April 16, 2013, 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 website, 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 website is not part
of the Annual Report.
C O R P O R A T E I N F O R M A T I O N
1 0 - K R E P O R T
Copies of the Corporation’s 2012 10-K Report filed with the
Securities and Exchange Commission will be available by the
end of March 2013 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 website
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 website 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.
130 | 2 0 1 2 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 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 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
The 2012 Northern Trust Corporation Annual Report is printed on 20% recycled paper
made from fi ber sourced from well-managed forests and other controlled wood sources
and is independently certifi ed 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
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