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Northern Trust Corporation
Northern Trust Bank
Cover Front 02.12.2014
#101910
2013 AR
CYAN MAG YELL BLK pms343
.75 Point in sPine Q1 Version
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
2013
2012
percent chAnge
For the year ($ In m IllIons)
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
avera geS ($ In m IllIons)
Assets
earning Assets
securities
loans and leases
deposits
stockholders’ equity
at year end ($ In m IllIons)
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 — end of period
total capital to risk-Weighted Assets — end of period
tier 1 leverage ratio
at year end ($ In BIllIons)
Assets under management
Assets under custody
global custody Assets
5 %
6
4
7 %
6
4
6
23
2 %
2
—
(1)
1
4
6 %
7
(1)
—
(7)
3
5
$ 4,121.8
$ 3,936.9
731.3
299.2
687.3
286.9
$ 3.01
$ 2.82
2.99
1.23
33.34
61.89
$ 94,857.7
85,628.5
30,819.9
28,696.5
75,596.3
7,667.0
2.81
1.18
31.51
50.16
$ 92,975.5
84,168.5
30,893.8
28,975.7
75,219.8
7,358.2
$ 102,947.3
$ 97,463.8
93,367.2
30,720.3
29,385.5
(278.1)
84,098.1
7,912.0
9.54 %
0.77
41.1
13.4
15.8
7.9
87,472.7
31,033.5
29,504.5
(297.9)
81,407.8
7,527.0
9.34 %
0.74
42.0
12.8
14.3
8.2
$ 884.5
$ 758.9
5,575.7
3,248.9
4,804.9
2,686.1
17 %
16
21
the 2013 northern trust corporation Annual report is printed on 20% recycled paper
made from fiber sourced from well-managed forests and is independently certified to the
Forest stewardship counciltm (Fsc®) standards.
© northern trust corporation
Northern Trust Bank
Cover Back 02.14.2014
#101910
2013 AR
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Q1 Version
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 18 international locations in North America, Europe, the Middle
East, and the Asia-Pacific region.
As of December 31, 2013, Northern Trust had assets under custody of $5.6 trillion, assets
under management of $884.5 billion, and banking assets of $102.9 billion. Founded in
1889, Northern Trust has earned distinction as an industry leader combining exceptional
service and expertise with innovative capabilities and technology.
T O O U R S H A R E H O L D E R S
Our Driving Performance philosophy,
instituted two years ago, continued to deliver
meaningful value to our clients, shareholders,
and partners by improving productivity.
Due to those efforts, we were able to manage
expenses while also continuing to invest in
our business and respond to the demands of
the new regulatory environment.
By the end of 2013, Driving Performance
had surpassed our original goal of $250 million.
These efforts contributed to a net income
increase of 6 percent to $731 million, resulting
in a return on equity of 9.5 percent. We
continue to make steady progress toward our
return on equity target range of 10 percent to
15 percent. Further, we increased our quarterly
dividend to $0.31 per share and repurchased
5.5 million shares, returning $609 million
in capital to our shareholders – a 35 percent
increase from $450 million in 2012.
WEALTH MANAGEMENT
Northern Trust has provided asset
management, fiduciary, and banking services
for affluent individuals and families for
nearly 125 years. In 2013, our assets under
management and assets under custody for
Wealth Management clients increased
12 percent and 11 percent, respectively.
For Northern Trust, 2013 was a year
of continued growth and ongoing
investment in our business. We
cultivated many new relationships and
expanded existing relationships across our
The continued rollout of our proprietary Goals
wealth management, asset management, and
Driven Investing methodology contributed
asset servicing businesses. We also enhanced
greatly to these results. This unique approach
our capabilities, geographic presence, and
to discussing our Wealth Management
office network.
clients’ goals and aspirations relative to asset
Trust, investment, and other servicing
productivity led to very strong new business
fees, which represent the single largest
from both existing clients and those new to
source of revenue to the company, rose
Northern Trust. This type of innovation is
8 percent in 2013. Total revenues increased
just one of many reasons we were named
5 percent, reflecting the effects of the
Best Private Bank for the fifth consecutive
ongoing low interest-rate environment.
year by the Financial Times Group.
2 0 1 3 A N NU A L R EP O R T T O S H A R E H O L D E R S | N O R T H E RN T R U S T C O RP O R A TI O N 2
FREDERICK H. WADDELL
chairman and
chief executive officer
WILLIAM L. MORRISON
president and
chief operating officer
Northern Trust Bank
2013 AR
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CYAN MAG YELL BLK pms343
#101910
02.13.2014
letter to shareholders
Ongoing investments in multiple
Kuala Lumpur, Malaysia, and later in the year
capabilities continue to enhance the Wealth
will open a new operations center in Manila,
Management client experience overall. In
Philippines. Northern Trust’s expanding
2013 we expanded our fiduciary, wealth
footprint of 18 offices outside the United
education and planning, and business owner
States reflects our efforts to strategically
consulting services to provide clients a
locate our expertise and talent to best serve
greater breadth and depth of expertise. We
our clients.
also augmented our Global Family Office
In 2013, we worked to bring
offering, increasing resources in London and
creative business ideas to our clients
the Middle East.
and the marketplace, delivering original
The daily experience each client has with
solutions for data analytics, regulatory
Northern Trust is critically important to us,
requirements, and shadow accounting.
and in 2013 we continued to enhance our
Our collaborative approach of working
interactions with them using new channels
alongside clients to develop solutions to
and technology. We expanded our efforts to
their asset servicing needs gives us a strong
engage clients via social media through the
competitive advantage – helping us earn
use of Twitter®, YouTube®, and LinkedIn®.
new relationships such as Danish pension
Technology is part of our everyday client
fund Arbejdsmarkedets Tillægspension,
experience, with our new smart phone and
Emory University, and J O Hambro Capital
tablet-based remote deposit capture and
Management, and deepen our relationship
WealthPath® applications, and redesigned
with Allianz Global Investors.
Private Passport® capabilities providing
more avenues of communication.
ASSET MANAGEMENT
Northern Trust’s asset management expertise
CORPORATE & INSTITUTIONAL SERVICES
is deep, global, and growing. With $884.5
Our Corporate & Institutional Services (C&IS)
billion in assets under management, we
business produced strong growth in our client
bring innovative solutions to our clients’
base as we continued expanding our global
investment needs across numerous asset
footprint and developing broader and deeper
classes and through a variety of vehicles. Our
capabilities to help clients meet their needs.
strong investment culture leverages fiduciary,
New business success around the world,
asset allocation, advisory, and quantitative
coupled with strong financial markets, led
expertise – including more than 300 partners
to an increase in C&IS assets under custody
worldwide with the designation of Chartered
of 17 percent to $5.1 trillion, while our C&IS
Financial Analyst.
trust, investment, and other servicing fees
FlexShares®, our successful family of
rose 8 percent.
exchange traded funds (ETF) that launched
We expanded into new geographies
in September 2011, grew to more than
in 2013, establishing offices in Frankfurt,
$6.7 billion in assets by the end of 2013.
Germany, and Riyadh, Saudi Arabia. In early
FlexShares is now the 15th largest ETF
2014, we opened a representative office in
sponsor in the United States. We also
2 0 1 3 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 3
Northern Trust Bank
2013 AR
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#101910
02.12.2014
letter to shareholders
grew our defined contribution business,
and expense management improvements
which exceeded $100 billion in assets
into 2014 and beyond.
under management by year end, while
our target date funds exceeded $5 billion.
THANKS
Internationally, our assets under
Every day, our partners put into practice the
management exceeded $180 billion.
values of Service, Expertise, and Integrity
OUTLOOK
that have distinguished Northern Trust for
more than a century. This past year was no
Northern Trust’s long-term outlook
exception, as the nearly 15,000 Northern
continues to be very positive. The market
Trust partners around the world worked
for our services continues to expand as the
hard to achieve new milestones. For this, I
wealth of our personal and institutional
thank all of them for their incredible efforts.
clients is created and invested around
Retiring Executive Vice President and
the world.
Chief Administrative Officer Tim Moen
In the near term, however, we face
deserves special thanks for the leadership,
continued challenges from cyclical and
work ethic, and friendship he provided to so
secular trends, such as the continued tepid
many of us. We wish him well as he enters
economic recovery and increasing risk and
this new phase of life.
compliance requirements.
To our clients, our deepest thanks.
Low interest rates dampened our
You provide us with the opportunity to
revenues by narrowing the spread we earned
continually create solutions to meet your
in 2013 and reducing fees received on our
financial needs. We are honored to serve
money market funds, an environment
you and to receive your ongoing trust and
we expect will persist through 2014 and
business. We take that responsibility seriously
beyond. At the same time, increased
and look forward to working with you in
regulation is driving our expenses higher
2014 and the years ahead.
due to the increased resources required
And to our shareholders, thank you
for compliance.
for your continued support. As we enter
The combination of sustainable revenue
Northern Trust’s 125th year, we remain
enhancements and expense reductions
focused on consistently delivering superior
resulting from our Driving Performance
financial performance.
efforts has created capacity essential to our
continued investment for the future. We have
FREDERICK H. WADDELL
developed strong management discipline in
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
this area and will continue to seek revenue
FEBRUARY 25, 2014
2 0 1 3 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 4
Northern Trust Bank
2013 AR
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02.12.2014
C O N S I S T E NT L E AD E R SH I P
ONE OF THE “WORLD’S MOST ADMIRED COMPANIES”
7TH CONSECUTIVE YEAR
FORTUNE MAGAZINE
100 BEST CORPORATE CITIZENS
CORPORATE RESPONSIBILITY MAGAZINE
BEST PRIVATE BANK IN NORTH AMERICA
5TH CONSECUTIVE YEAR
FINANCIAL TIMES GROUP
ONE OF THE BEST PRIVATE WEALTH MANAGERS
PRIVATE ASSET MANAGEMENT
ONE OF THE BEST PLACES TO WORK IN MONEY MANAGEMENT
PENSIONS & INVESTMENTS
U.S. FIXED INCOME MUNICIPAL MANAGER OF THE YEAR
INSTITUTIONAL INVESTOR
HEDGE FUND ADMINISTRATOR OF THE YEAR – AMERICAS
2ND CONSECUTIVE YEAR
CUSTODY RISK
BEST CUSTODY SPECIALIST – INSTITUTIONAL
5TH CONSECUTIVE YEAR
THE ASSET
Northern Trust Bank
2013 AR
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pg 5
#101910
02.12.2014
M A N A G E M E N T G R O U P
Frederick H. Waddell
chairman and
chief executive officer
William L. Morrison
president and
chief operating officer
S. Biff Bowman
executive vice president
human resources
Jeffrey D. Cohodes
executive vice president
chief risk officer
Steven L. Fradkin
president
corporate & institutional services
Michael G. O’Grady
executive vice president
chief financial officer
Stephen N. Potter
president
asset management
Jana R. Schreuder
president
wealth management
Joyce M. St.Clair
president
operations & technology
Kelly R. Welsh
executive vice president
general counsel
2 0 1 3 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 6
Northern Trust Bank
2013 AR
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#101910
02.14.2014
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
Global defense, aerospace, and other
technology products manufacturer (1, 4, 6)
Susan Crown
Vice President
Henry Crown and Company
Global company with diversified investments in banking,
transportation, real estate, and other industries;
Chief Executive Officer
Owl Creek Partners, LLP
Venture capital investment vehicle;
Chairman and Founder
Susan Crown Exchange Inc.
Social investment organization that connects talent and
innovations with market forces to drive social change (4, 5)
Dipak C. Jain
Chaired Professor of Marketing
INSEAD
International graduate business school (3, 4, 6)
Robert W. Lane
Retired Chairman and Chief Executive Officer
Deere & Company
Global provider of agricultural, construction, and
forestry equipment, and financial services (1, 5)
Edward J. Mooney
Retired Délégué Général – North America
Suez Lyonnaise des Eaux
Global 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 Oats North America, a division of PepsiCo, Inc.
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
Global executive recruiting firm (3, 5)
advisory director
Sir John R.H. Bond
Former Chairman
Xstrata plc
Global diversified mining group (2, 3)
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
2 0 1 3 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 7
Northern Trust Bank
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02.12.2014
N O R T H E R N T R U S T . C O M
Northern Trust Bank
2013 AR
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02.12.2014
F I N A N C I A L R E V I E W
10
Consolidated Highlights of Financial
Condition and Results of Operations
11
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
54
Management’s Report on Internal Control Over
Financial Reporting
55
Report of Independent Registered Public Accounting Firm with
Respect to Internal Control over Financial Reporting
56
Consolidated Financial Statements
60
Notes to Consolidated Financial Statements
118
Report of Independent Registered Public Accounting Firm
119
Consolidated Financial Statistics
122
Board of Directors
123
Senior Officers
124
Corporate Information
consolidated highlights of financial condition and results of operations
S U M M A R Y O F S E L E C T E D C O N S O L I D A T E D F I N A N C I A L D A T A
($ In Millions Except Per Common Share Information)
2013
2012
2011
2010
2009
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
Other Operating Income
Investment Security Gains (Losses), net
$ 2,609.8
244.4
69.0
68.0
166.5
(1.5)
$ 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
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
3,156.2
933.1
4,089.3
20.0
1,306.6
257.5
564.1
377.6
173.8
–
314.2
2,993.8
1,075.5
344.2
Net Income
Net Income Applicable to Common Stock
$
$
731.3
731.3
$
$
2,905.8
990.3
3,896.1
25.0
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
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
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
$94,857.7
$92,975.5
$91,947.9
$76,008.2
$
3.01
2.99
1.23
33.34
61.89
$ 1,996.6
1,709.2
277.1
9.54%
0.77
41.1
13.4
15.8
7.9
8.1
$
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
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
12.73%
1.16
35.2
13.4
15.8
8.8
8.9
2 0 1 3 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 10
management’s discussion and analysis of financial condition and results of operations
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
and Corporate &
units, Wealth Management
Institutional Services (C&IS). Asset management and related
services are provided to Wealth Management and C&IS clients
primarily by a third business unit, Asset Management.
Northern Trust emphasizes a high level of client service
complemented by the effective use of technology delivered by
a fourth business unit, Operations & Technology (O&T).
(WM)
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 18
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,
Northern Trust Corporation and its
subsidiaries on a
consolidated basis.
F I N A N C I A L O V E R V I E W
Net income per diluted common share in 2013 was $2.99,
compared to $2.81 in 2012, while net income for 2013 was
$731.3 million, compared to $687.3 million in 2012. Net
income in 2013 was impacted by a $32.6 million pre-tax gain
on the sale of an office building property, partially offset by a
$19.2 million pre-tax charge in connection with an agreement
to resolve certain long-standing class action litigation related
to Northern Trust’s securities lending program. The prior year
included restructuring, acquisition and integration related
pre-tax charges of $18.6 million.
Throughout 2013, Northern Trust focused on serving our
clients and improving the profitability and returns of our
business. Our return on common equity in 2013 was 9.5%,
compared to 9.3% in 2012. Revenue increased 5% to $4.09
billion in 2013 from $3.90 billion in the prior year, driven by
an 8% increase in trust, investment and other servicing fees,
but was dampened by the challenging low interest rate
environment. Noninterest expense increased 4% from $2.88
billion in 2012 to $2.99 billion in 2013, reflecting growth in
our business and continued investment to support technology
initiatives and a growing set of regulatory and compliance
full
year benefit of our Driving
requirements. The
Performance initiatives surpassed our initial target of $250
million. The current year increase in revenue primarily reflects
higher trust, investment and other servicing fees and foreign
exchange trading income, partially offset by lower net interest
income. The increase in noninterest expense in 2013 reflects
higher
and
software and other operating expense as compared to 2012.
compensation, outside
equipment
services,
Trust,
investment and other
servicing fees, which
represent the largest component of consolidated revenue,
increased 8% to $2.61 billion, from $2.41 billion in 2012,
primarily reflecting new business and the favorable impact of
equity markets, partially offset by higher levels of waived fees
in money market mutual funds. Money market mutual fund
fee waivers, attributable to persistent low short-term interest
rates, totaled $108.2 million in 2013 compared to $74.5
million in 2012.
Foreign exchange trading income of $244.4 million
increased 19% from 2012, primarily as a result of higher
trading volumes.
New business and higher equity markets in 2013 drove client
assets under custody and under management up 16% and 17%,
respectively, as compared to the prior year-end levels. Client
assets under custody increased from $4.8 trillion in 2012 to $5.6
trillion, and included $3.2 trillion of global custody assets, up
21% from 2012. Client assets under management increased to
$884.5 billion from $758.9 billion in 2012.
Reported net interest income of $933.1 million decreased
6%, primarily due to a decline in the net interest margin,
partially offset by higher average earning assets.
The provision for credit losses totaled $20.0 million in
2013, down from $25.0 million in 2012. The lower provision
reflects improvement in the credit quality of commercial and
institutional and commercial real estate loans, while weakness
persists in residential real estate loans. Net charge-offs in 2013
increased to $39.7 million from $26.3 million in 2012, while
nonperforming assets were relatively unchanged at $274.7
million as of December 31, 2013. Loans and leases at year-end
totaled $29.4 billion, down slightly from $29.5 billion in 2012.
Total noninterest expense equaled $2.99 billion, up 4%
from 2012. The current year includes higher compensation
and outside services expense, the $19.2 million pre-tax charge
in connection with the legal settlement and higher charges
associated with other account servicing activities, higher
equipment and software expense, and increases in various
other miscellaneous categories of other operating expense.
The prior year included $18.6 million of pre-tax restructuring,
acquisition and integration related charges.
2 0 1 3 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 11
management’s discussion and analysis of financial condition and results of operations
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 13.4% and 12.9%, respectively. At
year-end, total stockholders’ equity equaled $7.9 billion, up
5% from $7.5 billion a year earlier. Northern Trust declared
dividends of $299.2 million in 2013, representing a dividend
payout ratio of 41%, and repurchased 5.5 million shares in
2013 at a cost of $310.0 million. Dividends and share
repurchases combined, Northern Trust’s total payout ratio
was 83% in 2013.
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 2013 was $4.09 billion, an increase of 5%
from $3.90 billion in 2012, which was up 3% from 2011
revenue of $3.77 billion. Noninterest income represented 77%
of total revenue in 2013 and totaled $3.16 billion, up 9% from
$2.91 billion in 2012. Noninterest income represented 75% of
total revenue in 2012 and was higher by 5% from $2.76 billion
in 2011.
2013 TOTAL REVENUE OF $4.09 BILLION
64% Trust, Investment and Other
Servicing Fees
23% Net Interest Income
7% Other Noninterest Income
Foreign Exchange Trading
6%
Income
trading
foreign exchange
The current year increase in noninterest income primarily
reflects increased trust, investment and other servicing fees
and higher
income. Trust,
investment and other servicing fees – the largest component of
noninterest income – totaled $2.61 billion in 2013, up $204.3
million, or 8%, from $2.41 billion in 2012, primarily reflecting
new business and favorable equity markets, partially offset by
higher levels of waived fees in money market mutual funds.
Foreign exchange trading income in 2013 totaled $244.4
million, up $38.3 million, or 19%, compared with $206.1
million in 2012, primarily reflecting higher trading volumes
from 2012 levels.
Net interest income on a fully taxable equivalent (FTE)
basis in 2013 was $965.6 million, a decrease of $65.5 million,
or 6%, from $1.03 billion in 2012, which was down 2% from
$1.05 billion in 2011. The decrease in net interest income is
primarily attributable to a decline in the net interest margin,
partially offset by higher levels of average earning assets. The
net interest margin declined to 1.13% in 2013 from 1.22% in
2012, primarily reflecting lower yields on earning assets,
partially offset by a lower cost of
interest-related funds.
Average earning assets increased $1.5 billion, or 2%, in 2013,
primarily reflecting higher levels of deposits with the Federal
Reserve.
Additional
information regarding Northern Trust’s
revenue by type is provided below.
2 0 1 3 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N 12
management’s discussion and analysis of financial condition and results of operations
Noninterest Income
The components of noninterest income, and a discussion of significant changes during 2013 and 2012, are provided below.
N O N I N T E R E S T I N C O M E
($ 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
Total Noninterest Income
2013
2012
2011
2013 / 2012
2012 / 2011
CHANGE
$2,609.8
244.4
69.0
68.0
166.5
(1.5)
$3,156.2
$2,405.5
206.1
67.4
73.6
154.9
(1.7)
$2,905.8
$2,169.5
324.5
72.1
60.5
158.1
(23.9)
$2,760.8
8%
19
2
(8)
8
(9)
9%
11%
(36)
(6)
22
(2)
(93)
5%
Trust, Investment and Other Servicing Fees
Trust, investment and other servicing fees were $2.61 billion in 2013 compared with $2.41 billion in 2012. For a more detailed
discussion of 2013 trust, investment and other servicing fees, refer to the “Business Unit Reporting” section.
Trust, investment and other servicing fees are based generally on the market value of assets held in custody, managed and serviced;
the volume of transactions; securities lending volume and spreads; and fees for other services rendered. Certain market value calculations
on which fees are based are performed on a monthly or quarterly basis in arrears. 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 equity market indices and the percentage changes year over year.
M A R K E T I N D I C E S
DAILY AVERAGES
YEAR-END
S&P 500 ®
MSCI EAFE ® (in U.S. dollars)
2013
1,643
1,747
2012
1,379
1,489
CHANGE
2013
19% 1,848
1,916
17
2012
1,426
1,604
CHANGE
30%
19
Assets under custody and assets under management form the primary basis of our trust, investment and other servicing fees. At
December 31, 2013, assets under custody were $5.6 trillion, up 16% from $4.8 trillion a year ago, and included $3.2 trillion of global
custody assets, compared to $2.7 trillion at December 31, 2012. Assets under management totaled $884.5 billion, up 17% from
$758.9 billion at the end of 2012.
A S S E T S U N D E R C U S T O D Y
DECEMBER 31,
CHANGE
FIVE-YEAR
COMPOUND
GROWTH
RATE
($ In Billions)
Corporate & Institutional
Wealth Management
2013
2012
2011
2010
2009
2013 / 2012
2012 / 2011
$5,079.7
496.0
$4,358.6
446.3
$3,877.6
385.2
$3,711.1
370.2
$3,325.9
331.1
Total Assets Under Custody
$5,575.7
$4,804.9
$4,262.8
$4,081.3
$3,657.0
17%
11
16%
12%
16
13%
13%
11
13%
C&IS ASSETS UNDER CUSTODY
(In Billions)
5,079.7
3,711.1
3,877.6
3,325.9
4,358.6
WEALTH MANAGEMENT ASSETS UNDER CUSTODY
(In Billions)
496.0
446.3
370.2
385.2
331.1
2009
2010
2011
2012
2013
2009
2010
2011
2012
2013
2 0 1 3 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N 13
management’s discussion and analysis of financial condition and results of operations
A S S E T S U N D E R M A N A G E M E N T
DECEMBER 31,
CHANGE
($ In Billions)
2013
2012
2011
2010
2009
2013 / 2012
2012 / 2011
FIVE-YEAR
COMPOUND
GROWTH
RATE
Corporate & Institutional
Wealth Management
$662.7
221.8
$561.2
197.7
$489.2
173.7
$489.2
154.4
$482.0
145.2
Total Assets Under Management
$884.5
$758.9
$662.9
$643.6
$627.2
18%
12
17%
15%
14
14%
9%
11
10%
C&IS ASSETS UNDER MANAGEMENT
(In Billions)
WEALTH MANAGEMENT ASSETS UNDER MANAGEMENT
(In Billions)
662.7
561.2
482.0
489.2
489.2
221.8
197.7
173.7
145.2
154.4
2009
2010
2011
2012
2013
2009
2010
2011
2012
2013
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
2013
2012
C&IS
WM
CONSOLIDATED
C&IS
WM
CONSOLIDATED
46%
36
18
55%
22
23
47%
34
19
44%
37
19
46%
24
30
44%
36
20
A S S E T S U N D E R M A N A G E M E N T
DECEMBER 31,
Equities
Fixed Income Securities
Cash and Other Assets
2013
2012
C&IS
WM
CONSOLIDATED
C&IS
WM
CONSOLIDATED
56%
13
31
48%
27
25
54%
17
29
51%
16
33
37%
30
33
48%
19
33
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
to foreign
exchange trading income. This
income increased $38.3
million, or 19%, and totaled $244.4 million in 2013 compared
with $206.1 million last year. The increase from the prior year
primarily reflects higher trading volumes in the current year.
limits, also contributes
Treasury management fees, generated from cash and treasury
management products and services provided to clients, totaled
$69.0 million, up slightly from $67.4 million in 2012.
Security Commissions and Trading Income
Security commissions and trading income is generated
primarily from securities brokerage services provided by
Northern Trust Securities, Inc., and totaled $68.0 million in
2013, down $5.6 million, or 8%, from $73.6 million in 2012.
2 0 1 3 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N 14
management’s discussion and analysis of financial condition and results of operations
Other Operating Income
The components of other operating income include:
($ In Millions)
Loan Service Fees
Banking Service Fees
Other Income
Total Other Operating Income
2013
$ 61.9
50.9
53.7
$166.5
2012
$ 64.5
55.0
35.4
$154.9
2011
2013 / 2012
2012 / 2011
CHANGE
$ 68.9
54.9
34.3
$158.1
(4)%
(7)
52
8%
(6)%
–
3
(2)%
The decrease in loan service fees is primarily attributable
to lower loan-related commitment fees in the current year,
while the decline in banking service fees in 2013 primarily
reflects lower income from standby letters of credit. The
“other” component of other operating income in 2013
includes the $32.6 million gain on the sale of an office building
property, partially offset by a $12.4 million write-off of certain
fee receivables resulting from the correction of an accrual
methodology followed in prior years.
Investment Security Gains (Losses), Net
Net investment security losses totaled $1.5 million and $1.7
million in 2013 and 2012, respectively. The prior year
included $3.3 million of pre-tax charges for the credit-related
other-than-temporary impairment
residential
mortgage backed securities and auction rate securities held
within Northern Trust’s balance sheet investment securities
portfolio. There were no OTTI losses in 2013.
(OTTI) of
N O N I N T E R E S T I N C O M E – 2 0 1 2 C O M P A R E D W I T H 2 0 1 1
Trust, investment and other servicing fees were $2.41 billion
in 2012, up 11% from $2.17 billion in 2011. This increase
primarily reflected new business,
including the full year
benefit in 2012 of two acquisitions completed in 2011, as well
as revised client fee structures and lower waived fees in money
funds. Foreign exchange trading income
market mutual
decreased 36% in 2012 to $206.1 million from $324.5 million
in 2011, reflecting reduced currency market volatility and
client volumes from 2011 levels.
Treasury management fees were $67.4 million in 2012,
down 6% from $72.1 million in 2011, primarily due to lower
transaction volumes in 2012.
Other operating income totaled $154.9 million in 2012, a
decrease of 2% from $158.1 million in 2011, primarily
attributable to lower loan service fees in 2012 as compared to
2011.
Net investment security losses of $1.7 million in 2012 and
$23.9 million in 2011 included $3.3 million and $23.3 million,
respectively, of OTTI charges attributable to residential
mortgage backed securities.
2 0 1 3 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N 15
management’s discussion and analysis of financial condition and results of operations
Net Interest Income
Net interest income stated on an FTE basis is a non-generally accepted accounting principle (GAAP) financial measure that
facilitates the analysis of asset yields. When adjusted to an FTE basis, yields on taxable, nontaxable, and partially taxable assets are
comparable; however, the adjustment to an FTE basis has no impact on net income. A reconciliation of net interest income on a
GAAP basis to net interest income on an FTE basis is provided on page 53. An analysis of net interest income on an FTE basis,
major balance sheet components impacting net interest income, and related ratios are provided below.
A N A L Y S I S O F N E T I N T E R E S T I N C O M E ( F T E )
CHANGE
($ 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
2013
2012
2011
2013 / 2012
2012 / 2011
$ 1,155.5
32.5
$ 1,287.7
40.8
$ 1,408.6
40.2
1,188.0
222.4
965.6
933.1
1,328.5
297.4
1,031.1
990.3
1,448.8
399.5
1,049.3
1,009.1
$85,628.3
67,364.2
18,264.1
$84,168.5
62,293.0
21,875.5
$82,748.8
67,049.8
15,699.0
(10)%
(20)
(11)
(25)
(6)
(6)
2%
8
(17)
CHANGE IN PERCENTAGE
1.39%
0.33
1.06
0.26
1.13%
1.58%
0.48
1.10
0.35
1.22%
1.75%
0.60
1.15
0.48
1.27%
(0.19)
(0.15)
(0.04)
(0.09)
(0.09)
(9)%
1
(8)
(26)
(2)
(2)
2%
(7)
39
(0.17)
(0.12)
(0.05)
(0.13)
(0.05)
Refer to pages 120 and 121 for additional analysis of net interest income.
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 subject to variations in the
level and mix of earning assets and interest-bearing funds and
their relative sensitivity to interest rates. In addition, the levels
of nonperforming assets and client compensating deposit
balances used to pay for services impact net interest income.
Net interest income in 2013 was $933.1 million, down
$57.2 million, or 6% from $990.3 million in 2012. Net interest
income on an FTE basis for 2013 was $965.6 million, a
decrease of $65.5 million, or 6% from $1.03 billion in 2012.
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 1.13%, down from 1.22%
in 2012, primarily reflecting lower yields on earning assets,
partially offset by a lower cost of interest-related funds due to
lower
rates. Average earning assets
increased $1.5 billion, or 2%, to $85.6 billion from $84.2
billion in 2012. Growth in average earning assets primarily
reflects a $2.2 billion increase in Federal Reserve Deposits and
Other Interest-Bearing assets, partially offset by a $571.5
million, or 3%, decrease in interest-bearing deposits with
banks.
short-term interest
Loans and leases averaged $28.7 billion, 1% lower than the
$29.0 billion in 2012.
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 $30.8 billion, relatively
unchanged from 2012 levels.
The $1.5 billion increase in average earning assets to $85.6
billion in 2013 from $84.2 billion in 2012 was funded by
2 0 1 3 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 16
management’s discussion and analysis of financial condition and results of operations
higher levels of interest-related funds, which increased $5.1
billion compared to the prior year, primarily attributable to
higher average levels of non-U.S. office interest-bearing
deposits and short-term borrowings. The increase in average
interest-related funds was partially offset by a $3.6 billion
decrease in average net noninterest-related funds in 2013,
primarily attributable to lower average demand and other
noninterest-bearing deposits as compared to the prior year.
Stockholders’ equity averaged $7.7 billion in 2013
compared with $7.4 billion in 2012. The increase of $308.8
million, or 4%, principally reflects the retention of earnings,
partially offset by dividends and the repurchase of common
stock pursuant to Northern Trust’s share buyback program. In
2013 the Corporation returned $609.2 million in capital to
shareholders, including dividend declarations totaling $299.2
million and share repurchases totaling $310.0 million. Under
our capital plan submitted in January 2013, which was
reviewed without objection by the Federal Reserve in March
2013, the Corporation may repurchase up to $164.5 million of
common stock after December 31, 2013 through March 2014.
In January 2014, the Corporation submitted its most recent
capital plan to the Federal Reserve Board. The Corporation is
authorized by its board of directors (Board) to purchase up to
7.9 million additional shares after December 31, 2013.
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 120 and 121.
N E T I N T E R E S T I N C O M E – 2 0 1 2 C O M P A R E D W I T H 2 0 1 1
Net interest income on an FTE basis was $1.03 billion in 2012,
down 2% from $1.05 billion in 2011. The decrease primarily
reflected 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.
funded by higher
Average
Average earning assets increased $1.5 billion, or 2%, to
$84.2 billion from $82.7 billion in 2011. The growth in
levels of
average earning assets was
noninterest-related
noninterest-related
funds.
funding sources in 2012 increased $5.6 billion from 2011,
primarily due to increases in average demand and other
noninterest-bearing deposits. Interest-related funds decreased
7%, primarily attributable to lower average balances in non-
U.S. office interest-bearing deposits, short-term borrowings
and long-term debt.
Stockholders’ equity averaged $7.4 billion in 2012 and
$7.0 billion in 2011. 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 $20.0 million in 2013
compared with $25.0 million in 2012 and $55.0 million in
2011. The current year provision reflects improved credit
quality for the loan and lease portfolio relative to 2012. Within
the portfolio, residential real estate loans continue to reflect
weakness relative to the overall
loan and lease portfolio,
accounting for 72% and 69% of total nonperforming loans at
December 31, 2013 and 2012, respectively. For a fuller
discussion of the allowance and provision for credit losses for
2013, 2012, and 2011, refer to pages 45 – 47.
2 0 1 3 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 17
management’s discussion and analysis of financial condition and results of operations
Noninterest Expense
Noninterest expense for 2013 totaled $2.99 billion, up $115.0 million, or 4%, from $2.88 billion in 2012, primarily reflecting higher
compensation, outside services and equipment and software expense, as well as the $19.2 million legal settlement charge in the
current year. Noninterest expense in 2012 included $18.6 million of charges associated with restructuring, acquisition and
integration related activities.
The components of noninterest expense and a discussion of significant changes during 2013 and 2012 are provided below.
N O N I N T E R E S T E X P E N S E
($ In Millions)
Compensation
Employee Benefits
Outside Services
Equipment and Software
Occupancy
Visa Indemnification Benefit
Other Operating Expense
Total Noninterest Expense
2013
$1,306.6
257.5
564.1
377.6
173.8
–
314.2
$2,993.8
2012
$1,267.4
258.2
529.2
366.7
174.4
–
282.9
$2,878.8
2011
2013 / 2012
2012 / 2011
CHANGE
$1,267.2
258.2
552.8
328.1
180.9
(23.1)
267.1
$2,831.2
3%
–
7
3
–
–
11
4%
–%
–
(4)
12
(4)
(100)
6
2%
Compensation
Compensation expense, the largest component of noninterest
expense, totaled $1.31 billion and $1.27 billion in 2013 and
2012, respectively. The current year increase of $39.2 million,
or 3%, reflects base pay adjustments and higher staff levels.
Staff on a full-time equivalent basis totaled approximately
14,800 at December 31, 2013 compared with approximately
14,200 at December 31, 2012, and averaged 14,400 in 2013, up
2% compared with 14,100 in 2012.
Employee Benefits
Employee benefits expense totaled $257.5 million in 2013,
relatively unchanged from $258.2 million in 2012.
Outside Services
expense
Outside services expense totaled $564.1 million in 2013, up
$34.9 million, or 7%, from $529.2 million in 2012. Outside
services
and
integration related charges of $12.1 million. Excluding the
prior year charges, outside services expense increased $47.0
million, or 9%, from the prior year, primarily reflecting higher
consulting expense, including costs associated with a growing
included restructuring
in 2012
set of regulatory and compliance requirements, as well as
increased technical services and sub-custodian expense in
2013. 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
$10.9 million, or 3%, to $377.6 million in 2013 compared to
$366.7 million in 2012. The current year includes higher
software amortization and support costs from the continued
investment
in technology related assets. The prior year
included software write-offs of $15.1 million.
Occupancy
Occupancy expense totaled $173.8 million in 2013, down
slightly from $174.4 million in 2012. Occupancy expense in
2012 included $3.6 million of restructuring charges related to
reductions in office space.
2 0 1 3 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 18
management’s discussion and analysis of financial condition and results of operations
Other Operating Expense
Other operating expense in 2013 totaled $314.2 million, up $31.3 million, or 11% from $282.9 million in 2012. The components of
other operating expense are as follows:
($ In Millions)
Business Promotion
FDIC Insurance Premiums
Staff Related
Other Intangibles Amortization
Legal Settlement Charge
Other Expenses
Total Other Operating Expense
2013
$ 91.6
23.5
39.1
21.1
19.2
119.7
$314.2
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
CHANGE
2013 / 2012
2012 / 2011
4%
(7)
(7)
4
N/M
11
11%
7%
(13)
11
16
–
7
6%
Other operating expense in 2013 includes the $19.2 million
pre-tax charge in connection with an agreement to resolve
certain long-standing class action litigation related to the
Corporation’s securities lending program. The increase in the
“other” component of other operating expense primarily reflects
higher charges associated with other account servicing activities
and increases within other miscellaneous expense categories.
N O N I N T E R E S T E X P E N S E – 2 0 1 2 C O M P A R E D W I T H 2 0 1 1
Noninterest expense in 2012 totaled $2.88 billion, up 2% from
$2.83 billion in 2011. Noninterest expense in 2012 and 2011
reflected 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 included Visa
indemnification related benefits of $23.1 million.
in
severance
Compensation expense totaled $1.27 billion in both 2012
and 2011. Compensation expense in 2011 included severance
related accruals of $50.2 million related to restructuring,
acquisition and integration activities, while 2012 included net
reductions
$0.3 million.
Compensation expense in 2012 reflected higher annual salary
increases, the full year impact in 2012 of operating costs
attributable to acquisitions completed in 2011, and higher
performance-based compensation as compared to 2011. Staff
on a full-time equivalent basis averaged 14,100 in 2012, up 4%
compared with 13,500 in 2011.
accruals
of
Employee benefits expense totaled $258.2 million in both
2012 and 2011. Employee benefits expense in 2011 included
the reversal of an employee benefit related accrual of $9.7
million for which the 2010 goal was not met.
Outside services expense totaled $529.2 million and
$552.8 million in 2012 and 2011 and included restructuring,
acquisition and integration charges of $12.1 million and $16.8
million, respectively. Excluding these charges, outside services
expense decreased 4% in 2012 as compared to 2011, reflecting
lower 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
in 2012 of services attributable to acquisitions completed in
2011.
Equipment and software expense included $15.1 million
and $10.9 million of restructuring charges related to software
write-offs in 2012 and 2011, respectively. Excluding these
software write-offs, equipment and software expense increased
11%, primarily reflecting higher software amortization and
support costs from the continued investment in technology
related assets.
Occupancy expense for 2012 was $174.4 million, down
4% from $180.9 million in 2011. Occupancy expense in 2012
and 2011 included $3.6 million and $6.4 million, respectively,
of restructuring charges related to reductions in office space.
Other operating expense totaled $282.9 million in 2012,
up from $267.1 million in 2011, primarily due to increases in
business promotion and staff related expense, as well as
increases within various miscellaneous categories of other
operating expense.
Provision for Income Taxes
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.
are
reinvested, as well as non-recurring items
the
resolution of tax matters. The 2013 provision for income taxes
was $344.2 million, representing an effective rate of 32.0%.
This compares with a provision for income taxes of $305.0
million and an effective rate of 30.7% in 2012. The provision
for income tax in 2012 included a $12.4 million tax benefit in
connection with the resolution of certain leveraged lease
related matters.
such as
2 0 1 3 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 19
management’s discussion and analysis of financial condition and results of operations
The tax provisions for 2013 and 2012 reflect reductions totaling $27.6 million and $27.1 million, respectively, related to certain
non-U.S. subsidiaries whose earnings are being indefinitely reinvested. The 2011 income tax provision of $280.1 million represented
an effective tax rate of 31.7% and included a $21.3 million reduction related to non-U.S. subsidiaries whose earnings are being
indefinitely reinvested.
B U S I N E S S U N I T R E P O R T I N G
Northern Trust is organized around its two principal client-focused business units, Corporate & Institutional Services and Wealth
Management. Asset management and related services are provided to C&IS and Wealth Management clients primarily by the Asset
Management business unit. Operations support is provided to each of the business units by Operations & Technology.
C&IS and Wealth Management results are presented to promote a greater understanding of their financial performance. The
information, presented on an internal management-reporting basis, derives from internal accounting systems that support
Northern Trust’s strategic objectives and management structure. Management has developed accounting systems to allocate revenue
and expense related to each segment. These systems incorporate processes for allocating assets, liabilities and equity, and the
applicable interest income and expense. Equity is allocated based on the proportion of economic capital associated with the business
units. Allocations of capital and certain corporate expense may not be representative of levels that would be required if the segments
were independent entities. The accounting policies used for management reporting are consistent with those described in Note 1 to
the consolidated financial statements. Transfers of income and expense items are recorded at cost; there is no consolidated profit or
loss on sales or transfers between business units. Northern Trust’s presentations are not necessarily consistent with similar
information for other financial institutions.
C O N S O L I D A T E D F I N A N C I A L I N F O R M A T I O N
CHANGE
2013
2012
2011
2013 / 2012
2012 / 2011
($ 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)
$ 2,609.8
244.4
302.0
965.6
4,121.8
20.0
–
2,993.8
1,108.0
376.7
$ 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
8%
19
3
(6)
5
(20)
–
4
7
9
6%
2%
11%
(36)
10
(2)
3
(55)
(100)
1
12
8
14%
1%
Net Income
Average Assets
$
731.3
$
687.3
$
603.6
$94,857.7
$92,975.5
$91,947.9
Note: Stated on an FTE basis. The consolidated figures include $32.5 million, $40.8 million, and $40.2 million of FTE adjustments for 2013, 2012, and 2011, respectively.
Corporate & Institutional Services
C&IS is a leading global provider of asset servicing, brokerage,
to corporate and public
banking and related services
retirement funds, foundations, endowments, fund managers,
insurance companies, sovereign wealth funds, and other
institutional investors around the globe. Asset servicing and
of
related
capabilities including but not limited to: global master trust
encompass
services
range
full
a
foreign exchange;
fund administration;
and custody;
investment operations
outsourcing; investment risk and analytical services; securities
treasury
lending;
management; brokerage services; and transition management
services. Client relationships are managed through the Bank
and the Bank’s and the Corporation’s other subsidiaries,
including support from locations in North America, Europe,
the Middle East, and the Asia Pacific region.
cash management;
2 0 1 3 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N 20
management’s discussion and analysis of financial condition and results of operations
The following table summarizes the results of operations of C&IS for the years ended December 31, 2013, 2012, and 2011 on a
management-reporting basis.
C O R P O R A T E & I N S T I T U T I O N A L S E R V I C E S
R E S U L T S O F O P E R A T I O N S
($ 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
Percentage of Consolidated Net Income
Average Assets
Note: Stated on an FTE basis.
2013
2012
2011
2013 / 2012
2012 / 2011
CHANGE
$ 1,443.8
238.8
177.3
275.9
2,135.8
(3.4)
1,657.9
481.3
145.6
$ 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
$
335.7
$
289.2
$
294.1
46%
42%
49%
$53,308.2
$49,904.0
$47,533.7
8%
23
(8)
(1)
7
62
4
19
27
16%
7%
12%
(39)
14
(1)
2
(90)
5
(13)
(32)
(2)%
5%
The 16% increase in C&IS net income in 2013 primarily
resulted from higher trust, investment and other servicing fees
and foreign exchange trading income, partially offset by
higher noninterest expense in the current year. The 2%
decrease in net income in 2012 compared to 2011 primarily
reflected lower foreign exchange trading income, as well as
higher noninterest expense attributable to the full year impact
in 2012 of acquisitions completed in 2011, partially offset by
increased trust, investment and other servicing fees.
C&IS Trust, Investment and Other Servicing Fees
to
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 priced based
related
to
on quarter-end or month-end values, values at the beginning
of each quarter, or average values for a month or quarter. The
fund administration fees that are asset value related are priced
using month-end, quarter-end, or average daily balances.
Investment management fees 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
2013 C&IS FEES
(In Millions)
2013
2012
2011
Custody and Fund Administration
Investment Management
Securities Lending
Other
$ 948.9
295.6
97.9
101.4
$ 863.9
281.0
96.3
92.9
$ 770.1
262.5
87.9
75.9
Total Trust, Investment and Other
Servicing Fees
$1,443.8
$1,334.1
$1,196.4
66% Custody and Fund Administration
20% Investment Management
7%
Securities Lending
7% Other
2 0 1 3 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 21
management’s discussion and analysis of financial condition and results of operations
the
trust,
and fund administration fees,
largest
Custody
component of
investment and other servicing fees,
increased $85.0 million, or 10%, primarily reflecting the
favorable impact of equity markets and new business. Fees from
investment management increased $14.6 million, or 5%, from
the prior year primarily due to new business and favorable equity
markets, partially offset by higher waived fees in money market
mutual funds. Money market mutual fund fee waivers in C&IS
totaled $48.6 million and $29.8 million in 2013 and 2012,
respectively. Securities lending revenue increased 2%, reflecting
higher loan volumes, partially offset by lower spreads in the
current year. C&IS other trust, investment and servicing fees
increased $8.5 million, or 9%, primarily reflecting higher income
from the investment risk and analytical services product.
Provided below is a breakdown of C&IS the assets under
custody and under management.
C & I S A S S E T S U N D E R C U S T O D Y
2013 C&IS ASSETS UNDER CUSTODY
DECEMBER 31,
(In Billions)
2013
2012
2011
North America
Europe, Middle East, and Africa
Asia Pacific
Securities Lending
$2,705.4
1,823.4
448.6
102.3
$2,414.6
1,459.7
396.4
87.9
$2,112.1
1,351.4
319.4
94.7
Total Assets Under Custody
$5,079.7
$4,358.6
$3,877.6
53% North America
36% Europe, Middle East, and Africa
9%
2%
Asia Pacific
Securities Lending
C & I S A S S E T S U N D E R M A N A G E M E N T
2013 C&IS ASSETS UNDER MANAGEMENT
(In Billions)
North America
Europe, Middle East, and Africa
Asia Pacific
Securities Lending
DECEMBER 31,
2013
2012
2011
$382.2
114.0
64.2
102.3
$364.5
60.2
48.6
87.9
$304.0
48.7
41.8
94.7
Total Assets Under Management
$662.7
$561.2
$489.2
C&IS assets under custody were $5.1 trillion at December 31,
2013, 17% higher than $4.4 trillion at December 31, 2012. Assets
under management totaled $662.7 billion and $561.2 billion at
December 31, 2013 and 2012, respectively. Cash and other assets
securities
deposited by investment
borrowed from custody clients are managed by Northern Trust
and are included in assets under custody and under management.
This securities lending collateral totaled $102.3 billion and $87.9
billion at December 31, 2013 and 2012, respectively.
firms as collateral
for
C&IS Foreign Exchange Trading Income
Foreign exchange trading income totaled $238.8 million in
2013, a $45.3 million, or 23%, increase from $193.5 million in
2012. The increase primarily reflects higher trading volumes in
the current year. Foreign exchange trading income in 2012 of
$193.5 million decreased $122.2 million, or 39%, from $315.7
million in 2011, due to reduced currency market volatility and
trading volumes as compared to 2011.
C&IS Other Noninterest Income
Other noninterest income for 2013 decreased $16.3 million, or
8%, to $177.3 million in 2013, from $193.6 million in 2012,
58% North America
17%
15%
10% Asia Pacific
Europe, Middle East, and Africa
Securities Lending
primarily reflecting current year decreases within various
miscellaneous categories of other operating income. Other
noninterest income of $193.6 million in 2012 increased $23.9
million, or 14%,
from $169.7 million in 2011, primarily
reflecting increased other operating income attributable to
higher banking and credit related service fees.
C&IS Net Interest Income
Net interest income decreased 1% in 2013 to $275.9 million from
$280.1 million in 2012. 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 2013 was
0.60% compared to 0.66% in 2012 and 0.70% in 2011. The net
interest margin decreases in 2013 and 2012 are primarily
attributable to lower yields on earning assets, partially offset by
lower deposit rates, both the result of the persistent low interest
rate environment. Average earning assets totaled $45.9 billion in
the current year, an increase of $3.4 billion, or 8%, from $42.5
billion in the prior year. Average earning assets were primarily
comprised of interest-bearing deposits with banks as well as loans
and leases. Funding sources were primarily comprised of non-
U.S. office interest-bearing deposits.
2 0 1 3 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 22
management’s discussion and analysis of financial condition and results of operations
C&IS Provision for Credit Losses
The provision for credit losses was negative $3.4 million for 2013, primarily reflecting continued improvement in loan portfolio
credit quality, partially offset by allowances established as a result of higher commercial and institutional loan balances. The
provision for credit losses was negative $2.1 million for 2012 and negative $20.5 million in 2011, reflecting recoveries of previously
charged off exposures and improvement in underlying asset quality within the commercial and institutional loan class, partially
offset by allowances established as a result of higher commercial and institutional loan and lease financing receivable balances.
C&IS Noninterest Expense
Total C&IS noninterest expense, which includes the direct expense of the business unit, indirect expense allocations from Asset
Management and O&T for product and operating support, and indirect expense allocations for certain corporate support services,
totaled $1.66 billion in 2013, an increase of $58.0 million, or 4%, from $1.60 billion in 2012. The current year includes the $19.2
million legal settlement charge, higher indirect expense allocations, and increased compensation and outside services expense as
compared to 2012. Noninterest expense in 2012 increased $77.5 million, or 5%, from $1.52 billion in 2011, reflecting the full year
impact in 2012 of acquisitions completed in 2011, as well as higher indirect expense allocations for product and operating support.
Wealth Management
trust,
investment management, custody, and philanthropic services;
Wealth Management provides
financial consulting;
guardianship and estate administration; family business consulting; family financial education; brokerage services; and private and
business banking. Wealth Management
focuses on high-net-worth individuals and families, business owners, executives,
professionals, retirees, and established privately-held businesses in its target markets. Wealth Management also includes the Global
Family Office, which provides customized services to meet the complex financial needs of individuals and family offices in the
United States and throughout the world with assets typically exceeding $200 million. Wealth Management services are delivered by
multidisciplinary teams through a network of offices in 18 U.S. states and Washington, D.C., as well as offices in London, Guernsey,
and Abu Dhabi.
The following table summarizes the results of operations of Wealth Management for the years ended December 31, 2013, 2012,
and 2011 on a management-reporting basis.
W E A L T H M A N A G E M E N T
R E S U L T S O F O P E R A T I O N S
($ 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
2013
2012
2011
2013 / 2012
2012 / 2011
CHANGE
$ 1,166.0
5.6
116.7
557.7
1,846.0
23.4
1,215.0
607.6
229.2
$ 1,071.4
12.6
93.6
629.9
1,807.5
27.1
1,182.3
598.1
226.4
$
973.1
8.8
119.7
613.7
1,715.3
75.5
1,214.9
424.9
168.7
$
378.4
$
371.7
$
256.2
9%
(56)
25
(11)
2
(14)
3
2
1
2%
10%
43
(22)
3
5
(64)
(3)
41
34
45%
–%
Percentage of Consolidated Net Income
52%
54%
42%
Average Assets
Note: Stated on an FTE basis.
$22,887.6
$23,917.9
$23,861.5
(4)%
Wealth Management net income increased 2% in 2013 as
a result of
increased revenue, partially offset by higher
noninterest expense. The increase in Wealth Management
revenue of 2% in 2013 is primarily attributable to increases in
trust, investment and other servicing fees and higher other
noninterest income, partially offset by lower net interest
income. The 3% increase in noninterest expense in 2013 is
primarily due to increased indirect expense allocations and
compensation expense as compared to 2012. The 45%
increase in Wealth Management net income in 2012 from
2011 is primarily attributable to higher revenue, a lower
provision for credit losses, and decreased noninterest expense.
2 0 1 3 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 23
management’s discussion and analysis of financial condition and results of operations
Wealth Management Trust, Investment and Other Servicing Fees
Provided below is a summary of Wealth Management trust, investment and other servicing fees and assets under custody and under
management.
W E A L T H M A N A G E M E N T
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,
2013
2012
2011
$ 470.0
303.4
241.5
151.1
$ 435.8
279.8
228.1
127.7
$399.2
248.0
208.5
117.4
Total Trust, Investment and Other
Servicing Fees
$1,166.0
$1,071.4
$973.1
W E A L T H M A N A G E M E N T
A S S E T S U N D E R C U S T O D Y
(In Billions)
Global Family Office
Central
East
West
DECEMBER 31,
2013
2012
2011
$314.9
79.4
57.3
44.4
$270.4
71.9
63.9
40.1
$226.5
67.6
54.6
36.5
Total Assets Under Custody
$496.0
$446.3
$385.2
W E A L T H M A N A G E M E N T
A S S E T S U N D E R M A N A G E M E N T
(In Billions)
Central
Global Family Office
East
West
DECEMBER 31,
2013
2012
2011
$ 86.2
53.9
47.2
34.5
$ 75.0
41.8
49.5
31.4
$ 68.5
34.0
42.1
29.1
Total Assets Under Management
$221.8
$197.7
$173.7
regions
The Wealth Management
shown above are
comprised of the following: Central includes Illinois, Michigan,
includes
Minnesota, Missouri, Ohio and Wisconsin; East
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.
values. Wealth Management
Wealth Management fee income is calculated primarily
trust,
based on market
investment and other servicing fees were $1.17 billion in 2013,
up 9% from $1.07 billion in 2012, which in turn was up 10%
from $973.1 million in 2011. The current year performance
benefitted from new business and the favorable impact of
2013 WEALTH MANAGEMENT FEES
40% Central
26% East
21% West
13% Global Family Office
2013 WEALTH MANAGEMENT ASSETS UNDER CUSTODY
63% Global Family Office
16% Central
12% East
9% West
2013 WEALTH MANAGEMENT ASSETS UNDER MANAGEMENT
39% Central
Global Family Office
24%
East
21%
16% West
equity markets, partially offset by higher waived fees in money
market mutual funds. Wealth Management waived fees in
money market mutual funds, attributable to the persistent low
level of short-term interest rates, totaled $59.6 million and
$44.7 million in 2013 and 2012,
respectively. Trust,
investment and other servicing fees for 2012 were higher than
2011, reflecting new business, revised client fee structures,
lower waived fees in money market mutual funds, and the
favorable impact of markets on fees.
At December 31, 2013, assets under custody in Wealth
Management were $496.0 billion compared with $446.3
billion at December 31, 2012. Assets under management were
$221.8 billion at December 31, 2013 compared to $197.7
billion at the previous year end.
2 0 1 3 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 24
management’s discussion and analysis of financial condition and results of operations
Wealth Management Foreign Exchange Trading Income
Foreign exchange trading income totaled $5.6 million in 2013,
a decrease of $7.0 million, or 56%, from $12.6 million in 2012,
primarily due to decreased client activity in 2013. Foreign
exchange trading income of $12.6 million in 2012 was 43%
higher than $8.8 million in 2011.
Wealth Management Other Noninterest Income
Other noninterest income for 2013 totaled $116.7 million and
included the $32.6 million pre-tax gain on the sale of an office
building property. Excluding the gain, other noninterest
income in 2013 was $84.1 million, down $9.5 million, or 10%,
from $93.6 million in 2012. The other noninterest income
decrease of $26.1 million, or 22%, in 2012 compared to 2011
primarily resulted from a decrease in other operating income
related to lower banking and credit related service fees in 2012.
Wealth Management Net Interest Income
Net interest income was $557.7 million for the year, down
$72.2 million, or 11%, from $629.9 million in 2012. The
decrease primarily reflects a decline in the net interest margin
and lower levels of average earning assets. The Wealth
Management net interest margin in 2013 was 2.46% compared
to 2.67% in 2012. The decrease in the net interest margin is
primarily attributable to lower yields on earning assets,
partially offset by lower deposit rates, each reflecting the
persistent low interest rate environment. Average earning
assets totaled $22.6 billion in the current year, a decrease of
$912.7 million, or 4%, from $23.6 billion in the prior year.
Net interest income in 2012 was $16.2 million, or 3%, higher
than in 2011 and the net interest margin in 2012 of 2.67% was
up from the 2011 margin of 2.61%. The higher net interest
margin in 2012 as compared to 2011 primarily reflected higher
internal yields on certain deposit products, partially offset by
lower yields on loans. Earning assets and funding sources in
both 2012 and 2013 were primarily comprised of loans and
domestic interest-bearing deposits, respectively.
Wealth Management Provision for Credit Losses
in the commercial and institutional and
improvement
commercial real estate loan classes. The 2012 provision
reflected reduced net charge-offs on commercial real estate
loans and residential real estate loans, partially offset by
loan categories, while
continued weakness
commercial and institutional
loans continued to evidence
improvement. For a fuller discussion of the allowance and
provision for credit losses refer to pages 45 – 47.
in these
Wealth Management Noninterest Expense
Total noninterest expense, which includes the direct expense
of the business unit, indirect expense allocations from Asset
Management and O&T for product and operating support,
and indirect expense allocations for certain corporate support
services, totaled $1.22 billion, an increase of $32.7 million, or
3%, from the prior year. The current year increase primarily
reflects higher indirect expense allocations and compensation
expense in 2013. Noninterest expense for 2012 was 3% lower
than 2011, primarily attributable to lower restructuring
related charges recorded in 2012 as compared to 2011.
Asset Management
investment
institutional and individual
Asset Management,
through the Corporation’s various
subsidiaries, provides a broad range of asset management and
related services and other products to clients around the world,
including clients of C&IS and Wealth Management. Clients
include
separately managed
accounts, bank common and collective funds, registered
investment companies, exchange traded funds, non-U.S.
collective
private
investment funds. Asset Management offers both active and
passive equity and fixed income portfolio management, as well
as alternative asset classes (such as private equity and hedge
funds of funds), and multi-manager advisory services and
products. Asset Management’s activities also include overlay
services. Asset
services
Management’s business operates
internationally through
subsidiaries and distribution arrangements and its revenue and
expense are fully allocated to C&IS and Wealth Management.
risk management
and unregistered
funds,
other
and
The provision for credit losses totaled $23.4 million for 2013,
compared with $27.1 million in 2012, and $75.5 million in
2011. The current year provision reflects continued weakness
in the residential real estate loan class, partially offset by
At year-end 2013, Northern Trust managed $884.5 billion
in assets for personal and institutional clients compared with
$758.9 billion at year-end 2012. The increase in assets reflects
higher equity markets and new business in 2013.
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management’s discussion and analysis of financial condition and results of operations
A S S E T M A N A G E M E N T
2 0 1 3 A S S E T S U N D E R M A N A G E M E N T O F $ 8 8 4 . 5 B I L L I O N
ASSET CLASSES
CLIENT SEGMENTS
75% Institutional
25% Personal
MANAGEMENT STYLES
54% Equities
27% Short Duration
17% Fixed Income
2% Other
51% Index
43% Active
4% Multi-Manager
2% Other
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, 2013, 2012,
and 2011 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)
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)
$
2013
8.0
132.0
140.0
–
120.9
19.1
1.9
$
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)
Net Income
$
17.2
$
26.4
$
53.3
Percentage of Consolidated Net Income
2%
4%
9%
CHANGE
2013 / 2012
2012 / 2011
14%
9
9
—
25
(39)
(63)
(35)%
N/M
(21)%
(2)
(100)
(17)
(14)
N/M
(50)%
Average Assets
Note: Stated on an FTE basis.
$18,661.9
$19,153.6
$20,552.7
(3)%
(7)%
Treasury and Other noninterest income of $8.0 million in
2013 compares to $7.0 million in 2012. Noninterest income in
2012 included a $5.3 million hedge-related gain, as well as
credit-related OTTI losses of $3.3 million. Excluding the prior
year items, Treasury and Other noninterest income in the
current year would have increased 60% from 2012, primarily
reflecting higher security commissions and trading income,
partially offset by decreases within various miscellaneous
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management’s discussion and analysis of financial condition and results of operations
income
and Other
noninterest
noninterest income in 2011 included credit-related OTTI
losses of $23.3 million.
categories. Treasury
Treasury and Other net interest income in 2013 was
$132.0 million, compared to $121.1 million in 2012, an
increase of $10.9 million, or 9%. The increase is primarily due
to higher internal yields on funds provided to business units in
the current year.
Treasury and Other noninterest expense in 2013 equaled
$120.9 million, up $24.3 million, or 25%, from $96.6 million
in 2012. The increase is primarily attributable to higher
outside services and compensation expense, partially offset by
lower
indirect expense allocated to C&IS and Wealth
Management in 2013.
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
impact on Northern Trust’s future
could have a material
financial condition and results of operations.
accounting
estimates
those
that
are
For Northern Trust, accounting estimates that are viewed
as critical are those relating to the allowance for credit losses,
other-than-temporary
pension
impairment (OTTI) of investment securities. Management has
discussed the development and selection of each critical
accounting estimate with the Audit Committee of the Board.
accounting,
plan
and
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 level of the allowance for
credit losses. In determining an appropriate allowance level,
Northern Trust evaluates the allowance necessary for impaired
loans and lending-related commitments and also estimates
losses inherent in other lending related credit exposures.
consists of
allowance
credit
losses
The
the
for
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.
Inherent Allowance: The amount of inherent allowance is
based 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. 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, Corporate Financial Management,
and Economic Research.
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
regulatory
own experience, management also considers
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 loan balances for which the
collectability is in question are charged-off or a specific reserve
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management’s discussion and analysis of financial condition and results of operations
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
deemed 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.
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.
and estimates,
assumptions
on other
Additionally, as an integral part of their examination
process, various federal and state regulatory agencies also
review the allowance for credit losses. 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 for credit losses
adequately addresses
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.
Pension Plan Accounting
Northern Trust maintains a noncontributory defined benefit
pension plan covering substantially all U.S. employees (the
Qualified Plan) and a U.S. noncontributory supplemental
pension plan (the Nonqualified Plan). Certain European-
based employees also retain benefits in local defined benefit
pension plans which are closed to new employees and to
future benefit accruals. 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 guidance requires that
differences between estimates and actual experience be
expense
pension
from accumulated
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.
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 plans’ 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.
revisions
In determining the pension expense for the U.S. plans in
2013, Northern Trust utilized a discount rate of 4.25% 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 7.75%.
In evaluating possible
to pension-related
assumptions for the U.S. plans as of Northern Trust’s
December 31, 2013 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 4.91% and
5.18%, with an average increase of 85 basis points over the
prior year. As such, Northern Trust increased the discount
rate for the Qualified and Nonqualified plans from 4.25%
for December 31, 2012 to 5.00% for December 31, 2013.
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management’s discussion and analysis of financial condition and results of operations
‰
‰
Compensation Level: Based on a review of actual and
anticipated salary experience,
the compensation scale
assumption has been revised to a sliding scale that
averages 4.25%.
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
are
determined. Peer data and historical returns are reviewed
to check for reasonability and appropriateness. As a result
return
of
assumption remained unchanged from the prior year at
7.75% for 2014.
these analyses, Northern Trust’s
long-term capital market
assumptions
rate of
‰ Mortality Table: Northern Trust uses the mortality table
proposed by the U.S. Treasury for use in accordance with
the provisions of the Pension Protection Act of 2006
(PPA)
for both pre- and post-retirement mortality
assumptions. This table is based on the RP2000 mortality
table with projections of expected future mortality
improvements. Effective December 31, 2013, Northern
Trust adopted a fully generational projection of mortality
improvements using Scale AA.
In order to illustrate the sensitivity of these assumptions on
the expected Qualified Plan periodic pension expense in 2014
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 2014 Pension Expense
Discount Rate Change
Compensation Level Change
Rate of Return on Plan Assets Change
Increase (Decrease) in 2013 Projected Benefit
Obligation
Discount Rate Change
Compensation Level Change
25 BASIS
POINT
INCREASE
25 BASIS
POINT
DECREASE
(3.7)
1.1
(3.1)
3.9
(1.1)
3.1
(38.1)
3.4
40.2
(3.3)
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
2012. There were no contributions to the Qualified Plan in
2013. 2013 U.S. pension expense reflects the investment return
on the 2012 contributions. This benefit was partially offset by
the related forgone interest earnings on the funds contributed.
The minimum required contribution to the Qualified Plan is
expected to be zero in 2014 and for several years thereafter.
The maximum deductible contribution is estimated at $195
million for 2014.
Other-Than-Temporary Impairment of
Investment Securities
For
and
available-for-sale
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.
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, the consolidated statement of income reflects only
the credit
loss component of an impairment, while the
remainder of the fair value loss is recognized in accumulated
other comprehensive income. The credit
loss component
recognized in earnings is identified as the amount of principal
not expected to be received over the remaining term of the
security as projected. For debt securities that Northern Trust
intends to sell, or would more-likely-than-not be required to
sell, before the expected recovery of the amortized cost basis,
the full
the difference between the
is,
security’s amortized cost basis and fair value) is recognized in
earnings. The application of significant judgment is required in
determining the assumptions used in assessing whether an
OTTI exists and, if so, in the calculation of the credit loss
component of the OTTI. Assumptions used in this process are
inherently subject
to change in future periods. Different
judgments or subsequent changes in estimates could result in
materially different impairment loss recognition.
impairment (that
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
value
into consideration
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;
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management’s discussion and analysis of financial condition and results of operations
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.
Credit-related losses recognized in 2012 and 2011 in
connection with the write-down of securities totaled $3.3
million and $23.3 million, respectively. There were no credit-
related losses recognized in 2013. 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, 2013, approximately 29% 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 techniques that require significant management
judgment 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 93% of Northern Trust’s assets and 95% of
its liabilities carried at fair value are categorized as Level 2, as
they are valued using models in which all significant inputs are
observable in active markets. Investment securities classified as
available for sale make up 93.8% of Level 2 assets with the
remaining 6.2% primarily consisting of derivative financial
instruments. Level 2 liabilities are comprised solely of
derivative financial instruments.
Northern Trust’s Level 2 assets include available for sale
and trading account securities, the fair values of which are
determined predominantly by external pricing vendors.
Northern Trust has a well-established process to validate
prices received from pricing vendors as discussed more fully in
Note 3 to the consolidated financial statements.
are
instruments
contracts. Derivative
As of December 31, 2013, all derivative assets and
liabilities were classified in Level 2 and approximately 97%,
measured on a notional value basis, related to client-related
and trading activities, predominantly consisting of foreign
exchange
valued
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
Northern Trust
remaining
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.
counterparties,
and its
the
As of December 31, 2013, the fair value of Northern
Trust’s Level 3 assets and liabilities were $98.9 million and
$55.4 million, respectively, and represented approximately
0.3% of assets and 4.5% 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, 2013, 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
incorporates Northern Trust’s own
flow) model
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.
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management’s discussion and analysis of financial condition and results of operations
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
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.
2013
Capital
included
expenditures
Proposed significant capital expenditures are reviewed and
approved by Northern Trust’s senior management and, where
appropriate, by the Board. This process is designed to assure
that the major projects to which Northern Trust commits its
resources produce benefits compatible with its strategic goals.
ongoing
in
enhancements to Northern Trust’s software and hardware
capabilities, the opening of new offices, and the expansion and
renovation of several existing offices. Capital expenditures for
2013 totaled $384.9 million, of which $293.0 million was for
software, $53.0 million was for computer hardware, $30.5
million was for building and leasehold improvements, and
$8.4 million was for furnishings. These capital expenditures
principally support and enhance Northern Trust’s investment
management,
asset management
capabilities, as well as relationship management and client
interaction. Additional capital expenditures planned for
in future expense for the
systems technology will result
depreciation of hardware and amortization of
software.
amortization and depreciation on computer
Software
hardware and machinery are charged to equipment and
software expense. Depreciation on building and leasehold
improvements and on furnishings is charged to occupancy
respectively. Capital
expense
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.
and equipment
servicing
expense,
asset
and
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
such activities
Credit risk is the principal risk associated with these
instruments. The contractual amounts of these instruments
represent the credit risk should the instrument be fully drawn
the credit risk
upon and the client default. To control
associated with issuing letters of credit, Northern Trust
subjects
to the same credit quality and
monitoring controls as its lending activities. 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.
Standby
totaled $4.5 billion at
credit
December 31, 2013 and $4.6 billion at 2012. These amounts
include $208.9 million and $557.7 million of standby letters of
credit secured by cash deposits or participated to others as of
December 31, 2013 and 2012, respectively. The weighted
average maturity of standby letters of credit was 25 months
and 27 months at December 31, 2013 and 2012, respectively.
letters of
collateralize
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 Counterparty Risk Management 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
received with cash or
to fully
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
loaned as of
December 31, 2013 and 2012 subject to indemnification was
$82.7 billion and $69.7 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
these
no
indemnifications.
liability was
amount of
securities
securities
recorded
related
to
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management’s discussion and analysis of financial condition and results of operations
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.
Leveraged Leases.
In leveraged leasing transactions,
Northern Trust acts as lessor of the underlying asset subject to
the lease, and typically funds 20-30% of the asset’s cost via an
equity ownership in a trust with the remaining 70-80% provided
by third party non-recourse debt holders. In such transactions,
the trusts, which are VIEs, are created to provide the lessee use of
the property with substantially all of the rights and obligations of
ownership. The lessee’s maintenance and operation of the leased
property has a direct effect on the fair value of the underlying
property, and the lessee also has the ability to increase the
benefits it can receive and limit the losses it can suffer by the
manner in which it uses the property. As a result, Northern Trust
has determined that it is not the primary beneficiary of these
VIEs given it lacks the power to direct the activities that most
significantly impact the economic performance of the VIEs.
invests
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
VIEs,
their underlying
investment projects as well as the VIEs’ ability to operate in
compliance with the rules and regulations necessary for the
qualification of tax credits generated by equity investments.
Northern Trust has determined that it is not the primary
beneficiary of 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
is driven by the performance of
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.
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 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.
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
incorporating regional policies,
limits and management when appropriate. Corporate liquidity
framework,
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management’s discussion and analysis of financial condition and results of operations
is
(ALCO)
responsible
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
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
analyzing and
day-to-day responsibility for measuring,
managing liquidity risk within the guidelines and limits
established by ALCO and the Board.
for
Northern
Trust’s Global
and Management Reporting; while
Liquidity Management
framework focuses on five key areas: Position Management;
Modeling and Analysis; Contingency Planning; Peer Group
Comparisons
also
providing for the review and management of the liquidity 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.
Northern Trust Consolidated Liquidity Management
Position management
includes daily monitoring of cash
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 Wealth
Management businesses, wholesale funding from the capital
markets, maturities of short-term investments, Federal Home
Loan Bank advances, and unencumbered liquid assets that can
funds. While
be sold or pledged to secure additional
management does not view the Federal Reserve’s discount
window as a primary source of liquidity, at December 31, 2013
the Bank had over $20.8 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 commitments
to extend credit.
Northern Trust maintains a very liquid balance sheet with
total assets as of
loans and leases representing 29% of
December 31, 2013. Further, at December 31, 2013 there were
significant sources of liquidity within the Bank’s consolidated
balance sheet in the form of central bank reserves, 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 $26.7 billion at
December 31, 2013.
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 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
provides
management with benchmarking information, highlights
industry trends, and supports the establishment of new
policies and strategies.
banks. This
custody
analysis
Management regularly reviews various reports, analyses
and other information depicting changes in Northern Trust’s
liquidity mix and funding concentrations, overall financial
market conditions and other internal and external liquidity
metrics. Management uses this information to evaluate the
overall status of Northern Trust’s liquidity position and
anticipate potential events that could stress that position in the
future. An overall Liquidity Status Level for Northern Trust,
established and regularly reviewed by ALCO, is monitored on
an ongoing basis by the Corporate Treasury department.
resulting from internal,
Downgrades
in liquidity status
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management’s discussion and analysis of financial condition and results of operations
industry-wide
specific pre-
external or
determined actions and limits designed to position Northern
Trust to better respond to potential liquidity stresses.
events,
trigger
Corporation Liquidity
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, and interest and dividends earned on investment
securities and money market assets. The Corporation’s uses of
cash consist mainly of dividend payments to the Corporation’s
stockholders; the payment of principal and interest to note
holders; purchases of its common stock; investments in, or
loans,
subsidiaries; and acquisitions. The most
significant uses of cash by the Corporation during 2013 were
$221.9 million of common dividends paid to stockholders,
$409.6 million of debt maturities, and $309.7 million of
common share repurchases. Debt maturities during 2013
include the maturity of 5.50% fixed-rate senior notes in
August of 2013.
to its
On October 31, 2013, the Corporation issued $750 million
of 3.950% fixed-rate subordinated notes due October 30,
2025. These notes are non-callable, unsecured and were issued
at a discount to yield 3.962%.
During 2013, the Corporation received $880.0 million of
dividends from the Bank. Dividends from the Bank are subject
to certain restrictions, as discussed in further detail in Note 30
to the consolidated financial statements. During 2014, the
Bank has the ability to pay dividends equal to its 2014 eligible
net profits plus $103.1 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 $956.0 million at
December 31, 2013. 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 $1.6 billion and $1.7 billion at
December 31, 2013 and 2012, respectively. During, and at
year-end, 2013 and 2012, these assets were comprised almost
entirely of cash in a demand deposit account at The Northern
Trust Company or overnight money market placements, both
of which were fully available to the Corporation to support its
its subsidiary
own cash flow requirements or those of
companies, as needed. Average liquidity during 2013 and 2012
was $1.74 billion and $1.59 billion, respectively. The cash
flows of
the Corporation are shown in Note 33 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, 2013,
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
A-1+/A-1+
AA -/AA -
Stable
P-1
A2
Stable
P-1/P-1
A1
Stable
F1+
AA -
Stable
F1+/F1+
AA/AA -
Stable
issuances. The size of
On November 14, 2013, Moody’s
Investors Service
lowered the long-term credit rating of Northern Trust
Corporation by one notch, from A1 to A2. 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
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, 2013 was $60.3 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, 2013 that would be triggered by a significant
downgrade in its debt ratings.
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management’s discussion and analysis of financial condition and results of operations
taken
various
strengthen
Regulatory Environment
In recent years, U.S. and international regulatory agencies
to
actions
have
liquidity
requirements for global
institutions in order to
financial
reduce the potential impacts of future economic events. These
agencies have proposed certain new rules and finalized others
that address the management of liquidity risk. Northern Trust
actively follows
and regularly
regulatory developments
evaluates its liquidity risk management framework against
proposed rulemaking and industry best practices in order to
comply with applicable regulations and further enhance its
liquidity policies.
Statement of Cash Flows
in net
computer
and reflecting non-cash charges
For the year ended December 31, 2013, net cash provided by
operating activities was $839.3 million, primarily the result
of
such as
earnings
amortization of
software, partially offset by
increases
collateral deposited with derivative
counterparties and in receivables. Net cash provided by
operations for the year ended December 31, 2012 was $814.4
million and was primarily the result of earnings and reflected
non-cash charges, partially offset by increased net collateral
deposited with derivative counterparties and pension plan
contributions.
Net cash used in investing activities of $5.7 billion for the
year ended December 31, 2013 is primarily attributable to an
increase in Federal Reserve deposits and other interest-bearing
assets, primarily reflecting increased levels of non-U.S. office
interest-bearing
and short-term other
borrowings.
client deposits
Net cash provided by investing activities of $1.6 billion for
the year ended December 31, 2012 primarily reflects decreases
in Federal Reserve deposits and other interest bearing assets,
partially offset by increased interest-bearing deposits with
banks. The decrease in Federal Reserve deposits and other
interest-bearing assets in the prior year period was primarily
the result of
lower levels of U.S. office client deposits
denominated in U.S. dollars, short-term borrowings and long-
term debt, while the increased interest-bearing deposits with
banks was primarily attributable to an increase in time
deposits of certain non-U.S. dollar currencies due to an
increase in client deposits denominated in those currencies.
For the year ended December 31, 2013, net cash provided
by financing activities totaled $4.4 billion, primarily reflecting
increased levels of
total deposits and short-term other
borrowings. The increase in the level of total deposits was
primarily due to an increase in non-U.S. office interest-
bearing client deposits, partially offset by decreased U.S. office
demand and other noninterest-bearing client deposits from
December 31, 2012 levels. The decrease in U.S. office
noninterest-bearing deposits was
largely driven by the
expiration on December 31, 2012 of the Federal Deposit
Insurance Corporation’s Temporary Liquidity Guarantee
Program which had provided unlimited deposit insurance.
The increase in short-term other borrowings in 2013 reflects
additional short-term borrowings from the Federal Home
Loan Bank.
For the year ended December 31, 2012, net cash used in
financing activities totaled $3.1 billion, primarily reflecting a
decline in the level of deposits from temporarily elevated levels
at December 31, 2011, as well as decreased short-term
borrowings and long-term debt, both primarily the result of
maturities during 2012.
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management’s discussion and analysis of financial condition and results of operations
Contractual Obligations
The following table shows Northern Trust’s contractual obligations at December 31, 2013.
(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
$1,996.6
1,537.3
135.0
277.1
48.3
710.3
317.1
$5,021.7
ONE YEAR
AND LESS
$500.0
–
135.0
–
8.4
82.2
102.8
$828.4
PAYMENT DUE BY PERIOD
1-3
YEARS
$
–
248.3
–
–
16.3
146.2
151.2
4-5 YEARS
$
–
539.9
–
–
16.6
135.1
57.6
OVER 5
YEARS
$1,496.6
749.1
–
277.1
7.0
346.8
5.5
$562.0
$749.2
$2,882.1
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, 2013 activity was used as a base to project future obligations.
Capital Management
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
clients,
the
Northern Trust manages its capital on a total Corporation
basis and on a legal entity basis. The Corporate Finance
department has the day-to-day responsibility for measuring
and managing capital levels within standards established by
the Capital Management Policy and the Board. The
management of capital also involves regional management
when appropriate. In establishing the standards for capital, a
variety of factors are taken into consideration, including the
regulatory
overall
risk of Northern Trust’s businesses,
requirements, capital
impact on our credit ratings.
levels relative to our peers, and the
Capital
levels were strengthened as average common
equity in 2013 increased $308.8 million, or 4%, reaching $7.7
stockholders’ equity was $7.9 billion at
billion. Total
December 31, 2013, as
compared to $7.5 billion at
December 31, 2012. The Corporation declared common
dividends totaling $299.2 million in 2013 and, in March 2013,
the Board increased the quarterly dividend by 3% to $0.31 per
common share. The Corporation’s share buyback program is
used for general corporate purposes, including management
of
the
Corporation purchased 5,545,401 of its own common shares
at an average price per share of $55.90. The Corporation is
authorized by the Board to purchase up to 7.9 million
additional shares after December 31, 2013.
level. During 2013,
the Corporation’s
capital
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management’s discussion and analysis of financial condition and results of operations
C A P I T A L A D E Q U A C Y
($ In Millions)
TIER 1 CAPITAL
Common Stockholders’ Equity
Floating Rate Capital Securities
Net Unrealized Gains on Securities Available for Sale
Net Unrealized (Gains) 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,
2013
2012
$ 7,912.0
268.8
(6.0)
(2.9)
(578.5)
260.3
(0.5)
$ 7,527.0
268.7
(101.0)
1.4
(599.5)
393.1
(0.7)
7,853.2
7,489.0
283.0
1,158.7
1,441.7
295.1
556.7
851.8
$ 9,294.9
$ 8,340.8
$ 58,773.8
$58,316.1
$102,947.3
99,074.9
29,385.5
$97,463.8
90,873.7
29,504.5
13.4%
15.8
7.9
12.9
26.92%
7.69
12.8%
14.3
8.2
12.4
25.51%
7.72
(1) Assets exclude amounts related to goodwill, other intangible assets, and net unrealized gains or losses on securities and reflect adjustments for excess allowances for credit losses that have
been excluded from tier 1 and tier 2 capital, if any.
(2) Assets exclude amounts related to goodwill, other intangible assets, and net unrealized gains or losses on securities.
(3) A reconciliation of tier 1 common equity to tier 1 capital calculated under GAAP is provided below.
tier
The following table provides a reconciliation of
1common equity, a non-GAAP financial measure which
to tier 1 capital
excludes floating rate capital securities,
calculated
regulatory
requirements and GAAP.
accordance with
applicable
in
($ In Millions)
DECEMBER 31,
2013
2012
Tier 1 Capital
Less: Floating Rate Capital Securities
$7,853.2
268.8
$7,489.0
268.7
Tier 1 Common Equity
Tier 1 Capital Ratio
Tier 1 Common Equity Ratio
7,584.4
7,220.3
13.4%
12.9%
12.8%
12.4%
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, 2013, the Corporation’s tier 1 capital
ratio was 13.4% and its total capital ratio was 15.8% 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 7.9% is also well above the
“well-capitalized” minimum requirement of
In
addition, the Bank had a ratio of 11.5% for tier 1 capital,
14.3% for total risk-based capital, and 6.8% 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.
The Corporation is also subject to the Basel II framework
for risk-based capital adequacy. The U.S. bank regulatory
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management’s discussion and analysis of financial condition and results of operations
have
issued
respect
rules with
to
final
agencies
implementation of the Basel II framework. Under the final
Basel II rules, the Corporation is one of a small number of
“core” banking organizations. The rules require core banking
organizations to have rigorous processes for assessing overall
capital adequacy in relation to their total risk profiles, and to
publicly disclose certain information about their risk profiles
and capital adequacy.
the oversight body of
On September 12, 2010, the Group of Governors and
Heads of Supervision,
the Basel
Committee, announced agreement on the calibration and
phase-in arrangements for a strengthened set of capital
requirements, known as Basel III. On July 2, 2013, the Federal
Reserve Board issued final rules implementing Basel III in the
United States. Under these rules, when fully phased-in,
banking organizations will be required to satisfy four risk-
based capital ratios:
‰
‰
‰
‰
A common equity tier 1 capital ratio of at least 4.5%;
A tier 1 capital ratio of at least 6.0%;
A total capital ratio of at least 8.0%; and
A leverage ratio of at least 4.0%. Advanced approaches
institutions, such as the Corporation, will also be subject
to a minimum supplementary leverage ratio of 3.0%.
Under the Federal Reserve Board’s implementation in the
final Basel III rules of a provision of the Dodd-Frank Act, we
are subject to a capital floor that is based on the Basel III
standardized approach. We will therefore be required to
calculate our
ratios under both the
standardized and advanced approaches, and will be subject to
the more stringent of the risk-based capital ratios as calculated
under the standardized approach and the advanced approach
in the assessment of our capital adequacy under the prompt
corrective action framework.
risk-based capital
On February 21, 2014, the Corporation was notified by
the Federal Reserve Board that both the Corporation and the
Bank would be permitted to exit parallel run. Accordingly, the
Corporation and the Bank are required to use the advanced
approaches methodologies to calculate and publicly disclose
their risk-based capital ratios beginning with the second
quarter of 2014. Current results from the parallel run of the
risk-based capital framework have demonstrated that the use
inclusive of
of
commitments we provided to the Federal Reserve regarding
the advanced approaches methodologies,
our approach to the calculation of risk-weighted assets, has
not resulted in common equity tier 1 capital, tier 1 capital or
total risk-based capital ratios falling below the levels required
for categorization as “well-capitalized.” These results show
that, as of December 31, 2013, the Corporation’s common
equity tier 1 capital ratio as calculated under the advanced
approaches methodologies would have been 11.6% on a fully
phased-in basis, while the Corporation’s common equity tier 1
capital ratio under the standardized approach would have
been 11.1% on a fully phased-in basis.
on
dividends,
Basel III also introduces a capital conservation buffer,
requiring banking organizations to hold a buffer of common
equity tier 1 capital above its minimum risk-based capital
requirements in an amount greater than 2.5% of its total risk-
weighted assets. The capital conservation buffer is designed to
absorb losses during periods of economic stress. Banking
organizations with a tier 1 common equity ratio above the
minimum but below the conservation buffer may face
constraints
and
compensation based on the amount of such shortfall. Basel III
also introduces a “countercyclical buffer” of 0% to 2.5% of a
banking organization’s total risk-weighted assets for advanced
approaches banking organizations, such as the Corporation,
which is intended to create a capital buffer for such banking
organizations during expansionary economic phases in order
to protect against declines in asset prices if credit conditions
weaken. In general, the amount of the countercyclical capital
buffer is a weighted average of the countercyclical capital
buffer established in the various jurisdictions in which the
banking organization has credit exposures.
repurchases
equity
The U.S.’s implementation of Basel III has increased the
minimum capital thresholds for banking organizations and
tightened the standards for what qualifies as capital. In
October 2013, the U.S. banking agencies proposed a rule that
would introduce quantitative liquidity requirements in the
U.S. for large banking organizations, such as the Corporation
and the Bank. The ultimate impact of the U.S. implementation
of the new capital and liquidity standards on the Corporation
and its bank subsidiaries is currently being reviewed. At this
point we cannot determine the ultimate effect these final and
proposed regulations would have upon our earnings or
financial position. However, we believe our capital strength,
balance sheet and business model leave us well positioned for
the U.S. implementation of Basel III.
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management’s discussion and analysis of financial condition and results of operations
R I S K M A N A G E M E N T
risk for
to strategic
Overview
The Board provides oversight of risk management directly as
well as through its Audit, Business Strategy, Compensation
and Benefits, and Business Risk Committees. The Audit
Committee provides oversight with respect to risks relating to
financial reporting and the legal component of compliance
risk. The Business Strategy Committee provides oversight with
respect
the Corporation and its
subsidiaries. The Compensation and Benefits Committee
reviews all compensation arrangements and practices and
assesses the extent to which such arrangements and practices
discourage inappropriate risk-taking behavior by participants
and are
safety and
soundness. The Business Risk Committee provides oversight
with respect to the following risks inherent in Northern
Trust’s businesses: credit risk, market and liquidity risk,
fiduciary risk, 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
strategy are understood and
appropriately mitigated.
consistent with Northern Trust’s
in business
inherent
The Board has approved a Corporate Risk Appetite
Statement articulating Northern Trust’s expectation that risk
is consciously considered as part of strategic decisions and in
day-to-day activities.
specific risk appetite
In addition,
guidelines are detailed for strategic, credit, operational, market
and liquidity, fiduciary and compliance risk. Northern Trust
manages its business activities consistent with the Corporate
Risk Appetite Statement.
Northern Trust’s management of risk is built upon the
Enterprise Risk Management framework which includes the
risk universe representing the major risk categories and sub-
categories to which Northern Trust may be exposed through
its business activities.
A Business Unit chief risk officer is assigned to each of
Northern Trust’s business units and each 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 (GERC). GERC is comprised of members of
Northern Trust’s senior management and rolls up to the
Business Risk Committee. 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.
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.
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management’s discussion and analysis of financial condition and results of operations
Asset Quality and Credit Risk Management
Securities Portfolio
Northern Trust maintains a high quality securities portfolio,
with 89% of the combined available for sale, held to maturity,
and trading account portfolios at December 31, 2013 composed
of U.S. Treasury and government sponsored agency securities
and triple-A rated corporate debt, asset-backed securities,
supranational, sovereign & non-U.S. agency bonds, auction rate
securities and obligations of states and political subdivisions. The
remaining portfolio was composed of corporate debt, 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, 3% were rated below double-
A, and 4% 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).
At December 31, 2013, 45% of corporate debt were rated
triple-A, 29% were rated double-A, and 26% were rated below
double-A. Residential mortgage-backed securities had a total
amortized cost and fair value of $52.4 million and $48.1
million,
respectively, and were comprised primarily of
subprime, prime, and Alt-A securities. Securities classified as
“other asset-backed” at December 31, 2013 had average lives
of less than 5 years, and 99% were rated triple-A.
Unrealized losses within the investment securities portfolio
at December 31, 2013 were $180.4 million as compared to $30.2
million at December 31, 2012, primarily reflecting widened
credit spreads and higher market rates of government-sponsored
agency and corporate debt securities since purchase; 51% of the
corporate debt portfolio is backed by guarantees provided by
U.S. and non-U.S. governmental entities. There were no losses
recognized in 2013 in connection with the write-down of
securities determined to be other-than-temporarily impaired, as
compared to $3.3 million and $23.3 million recognized in 2012
and 2011, respectively.
Northern Trust
in the repurchase
is a participant
agreement market. This market provides a relatively low cost
alternative for short-term funding. Securities purchased under
agreements to resell and securities sold under agreements to
repurchase are accounted for as collateralized financings and
recorded at the amounts at which the securities were acquired
or sold plus accrued interest. To minimize any potential credit
risk associated with these transactions, the fair value of the
securities purchased or sold is monitored, limits are set on
exposure with counterparties, and the financial condition of
counterparties is regularly assessed. It is Northern Trust’s
policy to take possession of securities purchased under
agreements to resell. Securities sold under agreements to
repurchase are held by the counterparty until the repurchase.
Loans and Other Extensions of Credit
Credit risk is inherent in many of Northern Trust’s activities. A
significant component of credit risk relates to the loan portfolio.
In addition, credit risk is inherent
in certain contractual
obligations such as legally binding commitments to extend
credit, commercial letters of credit, and standby letters of credit.
These contractual obligations and arrangements are discussed in
Note 27 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.
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
commitment
risk ratings and maturities. Credits
involving commitment exposure in excess of these limits
require the approval of the Senior Credit Committee. All
exposures approved by the Committees and the Senior Credit
Committee
all voting
require unanimous approval of
members.
levels,
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management’s discussion and analysis of financial condition and results of operations
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
As part of its credit process, Northern Trust utilizes an
internal borrower risk rating system to support identification,
approval, and monitoring of credit risk. Borrower risk ratings
are used in credit underwriting, management reporting, setting
of loss allowances, and economic capital calculations. Borrower
risk ratings are discussed further in Note 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
implementation of Credit
effectiveness of management’s
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 $546.7 million at December 31, 2013. Cash flows
range from acceptable to potentially
and capital
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.
levels
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, undrawn 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
2013
2012
2011
2010
2009
$ 7,375.8
2,955.8
975.1
954.7
358.6
$ 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
$12,620.0
$12,897.2
$12,354.3
$11,613.4
$11,715.7
$10,271.3
6,445.6
48.6
$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
$16,765.5
$16,607.3
$16,709.6
$16,518.6
$16,090.0
$29,385.5
$29,504.5
$29,063.9
$28,132.0
$27,805.7
S U M M A R Y O F O F F - B A L A N C E S H E E T F I N A N C I A L I N S T R U M E N T S W I T H C O N T R A C T A M O U N T S T H A T R E P R E S E N T C R E D I T R I S K
(In Millions)
Undrawn 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,
2013
2012
$ 9,336.1
22,838.7
$ 9,092.3
20,953.4
$32,174.8
$30,045.7
$ 4,451.1
24.8
82,673.9
$ 4,573.7
27.9
69,739.2
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management’s discussion and analysis of financial condition and results of operations
U N D R A W N 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 3 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
$ 3,505.4
30.0
7,510.2
612.1
64.6
1,047.0
6,867.2
351.8
1,520.9
652.8
445.6
$22,607.6
448.2
–
1,089.5
189.4
$1,302.8
25.8
482.5
141.8
10.2
124.1
2,175.8
6.8
69.7
109.3
169.2
$4,618.0
70.5
–
622.4
189.4
$ 2,202.6
4.2
7,027.7
470.3
54.4
922.9
4,691.4
345.0
1,451.2
543.5
276.4
$17,989.6
377.7
–
467.1
–
$24,334.7
$5,500.3
$18,834.4
$ 1,744.1
6,070.3
25.7
$ 293.6
3,516.5
25.7
$ 1,450.5
2,553.8
–
$ 7,840.1
$3,835.8
$ 4,004.3
$32,174.8
$9,336.1
$22,838.7
$
721.4
108.6
1,738.0
122.7
326.4
186.0
3,107.9
276.9
43.0
569.9
175.0
$ 7,375.8
2,955.8
975.1
954.7
358.6
$12,620.0
$10,271.3
6,445.6
48.6
$16,765.5
$29,385.5
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
the largest category of non-U.S. outstandings.
represent
Northern Trust actively participates in the interbank market
with U.S. and non-U.S. banks.
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 market indicators. Each counterparty is reviewed at
least annually and potentially more frequently based on
deteriorating
general market
fundamentals
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 collateral and/or balance
sheet netting.
credit
or
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management’s discussion and analysis of financial condition and results of operations
Additionally, the Counterparty Risk Management Committee oversees country-risk analyses 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, 2013
Canada
Australia
Singapore
AT DECEMBER 31, 2012
Canada
United Kingdom
Australia
Singapore
Sweden
France
AT DECEMBER 31, 2011
Australia
United Kingdom
Singapore
Netherlands
France
Switzerland
Canada
Sweden
BANKS
$2,779
1,347
1,992
$ 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
COMMERCIAL
AND OTHER
$322
126
13
$
8
156
636
17
–
125
$ 667
34
2
63
–
26
13
4
TOTAL
$3,101
1,473
2,005
$ 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
Countries whose aggregate outstandings totaled between 0.75% and 1.00% of total assets were as follows: France with aggregate outstandings of $820 million at December 31, 2013, 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.
those
countries
eurozone
experiencing
Northern Trust continues to closely monitor economic
developments in the eurozone. Northern Trust considers
Ireland, Portugal, Italy, Greece, Slovenia, Spain and Cyprus to
be
significant
economic, fiscal and/or political strains. At December 31,
2013, Northern Trust’s aggregate gross exposure to obligors in
those countries totaled approximately $410 million, or less
than 1% of Northern Trust’s total consolidated assets, and
$407 million related to obligors in Ireland. There was minimal
exposure to obligors in Italy and no exposure to obligors in
Portugal, Greece, Slovenia, Spain or Cyprus at December 31,
2013. There was no exposure to sovereign debt securities in
any of these countries as of December 31, 2013. Of the total
exposure to obligors in Ireland, approximately $6 million was
to banks and the remainder was to commercial and other
borrowers, primarily funds domiciled in Ireland whose assets
and investment activities are broadly diversified by investment
strategy, issuer type, country of risk, and/or instrument type.
Exposures to 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,
2013 reflect Northern Trust’s risk management policies and
practices, which operate to limit exposures to higher risk
European financial and sovereign entities.
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management’s discussion and analysis of financial condition and results of operations
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
2013
2012
2011
2010
2009
DECEMBER 31,
$ 23.1
49.2
72.3
$189.1
1.4
190.5
262.8
11.9
$274.7
$ 16.4
$ 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
Nonperforming Loans and Leases to Total Loans and Leases
0.89%
0.86%
1.01%
1.18%
1.00%
Allowance for Credit Losses Assigned to Loans and Leases to Nonperforming
Loans and Leases
1.1x
1.2 x
1.0 x
1.0 x
1.1 x
Nonperforming assets as of December 31, 2013 remain
elevated from historical
levels reflecting the effect of the
economic downturn in 2008 on residential property
valuations and general economic conditions. As a result,
residential real estate loans have exhibited persistent weakness.
Nonperforming loan levels continued to decline within the
commercial real estate loan class, while commercial and
institutional loans remained stable. Changes in credit quality,
including nonperforming loan balances, impact the level of
the allowance
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.
through the
credit
losses
for
real
estate
RESIDENTIAL REAL ESTATE
loan portfolio is primarily
residential
The
composed of mortgages and home equity credit lines provided
as an accommodation to affluent clients and to facilitate the
establishment
services
relationship with Northern Trust. Residential real estate loans
totaled $10.3 billion at December 31, 2013, or 36% of total
comprehensive
financial
of
a
loans,
the origination of
U.S.
compared with $10.4 billion or 37% at
December 31, 2012. All residential real estate loans are
underwritten utilizing Northern Trust’s credit policies, which
do not support
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
estate
considered warranted. Residential
collateral revaluations are performed by independent third
parties.
real
Of the total $10.3 billion in residential real estate loans,
$3.1 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 home equity credit lines, totaled $1.7
billion and $1.2 billion at December 31, 2013 and 2012,
respectively.
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management’s discussion and analysis of financial condition and results of operations
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 $1.8 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
commitments and standby letters of credit
million and $103.7 million, respectively.
totaled $97.4
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. As of December 31,
2013,
impaired loans totaled $293.4 million and included
$162.5 million of loans deemed troubled debt restructurings as
compared to total
impaired loans of $269.8 million at
December 31, 2012 that included $124.5 million of loans
deemed troubled debt restructurings. Impaired loans had $10.4
million and $18.0 million of the allowance for credit losses
allocated to them at December 31, 2013 and December 31,
2012, 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.
Provision and Allowance for Credit Losses
The table below provides additional detail regarding
Changes in the allowance for credit losses were as follows:
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
2013
2012
$ 616.2
686.0
768.0
318.6
110.6
$ 652.9
621.4
614.5
312.5
148.7
2,499.4
2,350.0
254.2
110.0
92.2
289.4
135.0
85.4
Total Commercial Real Estate Loans
$2,955.8
$2,859.8
At December 31, 2013, legally binding commitments to
extend credit and standby letters of credit to commercial real
estate borrowers totaled $448.2 million and $97.1 million,
binding
respectively. At December
legally
2012
31,
(In Millions)
Balance at Beginning of Year
Charge-Offs
Recoveries
Net Charge-Offs
Provision for Credit Losses
2013
$327.6
(59.3)
19.6
(39.7)
20.0
2012
$328.9
(63.0)
36.7
(26.3)
25.0
2011
$ 357.3
(116.3)
32.9
(83.4)
55.0
Balance at End of Year
$307.9
$327.6
$ 328.9
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, undrawn commitments, and standby
letters of credit (inherent loss component).
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management’s discussion and analysis of financial condition and results of operations
The following table shows the specific portion of the allowance and the allocated inherent portion of the allowance and its
components by loan category at December 31, 2013 and at each of the prior four year-ends.
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
2013
2012
DECEMBER 31,
2011
2010
2009
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
$ 24.9
–% $ 32.5
–% $ 47.3
–% $ 63.7
–% $ 43.8
–%
67.5
71.5
4.2
2.1
–
145.3
118.7
19.0
–
137.7
25
10
3
3
2
43
35
22
–
57
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
$283.0
100% $295.1
100% $281.6
100% $293.6
100% $296.8
100%
$307.9
100% $327.6
100% $328.9
100% $357.3
100% $340.6
100%
$278.1
$297.9
$294.8
$319.6
$309.2
29.8
29.7
34.1
37.7
31.4
$307.9
$327.6
$328.9
$357.3
$340.6
0.95%
1.01%
1.01%
1.14%
1.11%
($ 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
Undrawn Commitments
and Standby Letters of
Credit
Total Allowance for Credit
Losses
Allowance Assigned to Loans
and Leases to Total Loans
and Leases
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
reflected a decrease in nonperforming loans attributable to
restructurings and pay offs as a result of improvement in
commercial and institutional and residential real estate loans,
partially offset by additional allowances provided for new and
existing nonperforming loans.
At December 31, 2013, the specific allowance component
amounted to $24.9 million compared with $32.5 million at
the end of 2012. The $7.6 million decrease is primarily
attributable to charge-offs and pay offs, partially offset by
additional
allowances provided for new and existing
nonperforming loans.
The decrease in the specific component of the allowance
from $47.3 million in 2011 to $32.5 million in 2012 primarily
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 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.
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management’s discussion and analysis of financial condition and results of operations
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.
losses on these
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 drawn and assigns an allowance factor determined in
accordance with the methodology utilized for outstanding
loans.
The inherent portion of the allowance decreased $12.0
million to $283.0 million at December 31, 2013, compared
with $295.1 million at December 31, 2012, which increased
$13.5 million from $281.6 million at December 31, 2011. The
current year decrease in the inherent allowance reflects
improvement
in the commercial and institutional and
commercial real estate loans in certain markets. The increase
in 2012 reflected continued weakness in residential real estate
loans in certain markets.
OVERALL ALLOWANCE
the factors above resulted in a total
The evaluation of
allowance for credit losses of $307.9 million at December 31,
2013, compared with $327.6 million at the end of 2012. The
allowance of $278.1 million assigned to loans and leases, as a
and leases, was 0.95% at
percentage of
December 31, 2013, down from 1.01% at December 31, 2012.
Allowances assigned to undrawn loan commitments and
standby letters of credit totaled $29.8 million and $29.7
million at December 31, 2013 and December 31, 2012,
respectively, and are included in other liabilities in the
consolidated balance sheet.
loans
total
PROVISION
The provision for credit losses was $20.0 million for 2013 and
net charge-offs totaled $39.7 million. This compares with a
$25.0 million provision for credit losses and net charge-offs of
$26.3 million in 2012, and a $55.0 million provision for credit
losses and net charge-offs of $83.4 million in 2011.
Market Risk Management
Overview
interest
To ensure adherence to Northern Trust’s
rate
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
Asset/liability management
lending,
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.
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
positioning of
sheet
liabilities
instruments. The impact to earnings will primarily come
through net interest income, but it can also impact certain
types of fees. Changes in interest rates can also impact the
values of assets,
liabilities, and off-balance sheet positions,
which indirectly impact the value of capital. There are four
commonly recognized types of interest rate risk: repricing,
which arises from differences in the maturity and repricing
terms of assets and liabilities; yield curve, which arises from
changes in the shape of the yield curve; basis, which arises from
the changing relationships between rates earned and paid on
different financial instruments with otherwise similar repricing
characteristics,
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
uses
Northern Trust
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
two
2 0 1 3 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 47
management’s discussion and analysis of financial condition and results of operations
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
rates and product balances. These two
techniques, which are performed monthly, are complementary
and are used in concert to provide a comprehensive interest rate
risk management capability.
interest
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.
Simulation of earnings measures the sensitivity of earnings
under various interest rate scenarios. Management compares
the change in earnings resulting from a change in interest rates
to the established limit. Management also regularly reviews
the projected earnings from the SOE model against actual
earnings as a form of back testing.
as well
financial
as derivative
The modeling of SOE incorporates on-balance sheet
positions,
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 a one-year period. The 100
basis point
twelve
consecutive monthly increases of 8.3 basis points. The model
simulations also incorporate the following assumptions:
‰
consists of
example,
increase,
for
the balance sheet size and mix generally remains 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 securities (the assumed reinvestment of
which is determined by management’s
strategies);
nonmaturity deposits, of which some recent increases are
assumed to be temporary in nature; and long-term fixed
rate borrowings that upon maturity are replaced with
overnight wholesale instruments;
‰
‰
‰
‰
‰
prepayments on mortgage loans and securities 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 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 and credit spreads are assumed to
remain the same in each interest rate scenario.
The following table shows the estimated impact on 2014 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 3
(In Millions)
INCREASE IN INTEREST RATES ABOVE
MARKET IMPLIED FORWARD RATES
100 Basis Points
200 Basis Points
ESTIMATED IMPACT ON
2014 PRE-TAX EARNINGS:
INCREASE/(DECREASE)
$35
$24
Stress testing of interest rates is performed to include such
scenarios as immediate parallel shocks to rates, non-parallel
in them
(i.e.
becoming steeper or flatter, and changes to the relationship
among the yield curves (i.e. basis risk).
twist) changes to yield curves that result
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, 2013, 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 change in the economic value of equity resulting from a
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management’s discussion and analysis of financial condition and results of operations
change in interest rates to the established limit. 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
interest rate changes on
items. The potential effect of
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. The
following
model
assumptions:
‰
incorporate
simulations
also
the
and
loans
on mortgage
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. Projected
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 3
(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)
($191)
($573)
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
risk.
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, 2013, 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;
placing and taking Eurodollar time deposits; and
hedges with various
types of derivative
instruments.
from the Federal Home
financial
‰
‰
Northern Trust strives to use the most effective instruments
for implementing its interest risk management strategies,
and capital
liquidity,
considering
requirements of the various alternatives and the risk-return
tradeoffs.
collateral
costs,
the
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.
Foreign Exchange Trading. Foreign exchange trading activities
consist principally of providing foreign exchange services to
clients. Most of those services are provided in connection with
Northern Trust’s growing global custody business. In the
normal course of business Northern Trust also engages in
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management’s discussion and analysis of financial condition and results of operations
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
its
establishing limits on the amounts and durations of
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.
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 $193 thousand and $301 thousand as
of December 31, 2013 and 2012, respectively. VaR totals
representing the average, high, and low for 2013 were $387
thousand, $811 thousand, and $79 thousand, respectively, with
the average, high, and low for 2012 being $421 thousand, $1.1
million, and $97 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 2013
and 2012, 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
in losses.
delivery difficulties, or catastrophes
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
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
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management’s discussion and analysis of financial condition and results of operations
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
F O R W A R D - L O O K I N G S T A T E M E N T S
relating
statements
to Northern Trust’s
This report contains statements that are forward-looking, such
as
financial
goals, capital adequacy, dividend policy, risk management
policies, litigation-related matters and contingent liabilities,
accounting estimates and assumptions,
industry trends,
strategic initiatives, credit quality including allowance levels,
planned capital expenditures and technology spending, future
pension plan contributions, anticipated tax benefits and
expenses, the impact of recent legislation and accounting
pronouncements, and all other statements that do not relate to
historical facts.
Forward-looking statements are typically identified by
words or phrases such as “believe”, “expect”, “anticipate”,
“intend”, “estimate”, “project”, “likely”, “may increase”,
“plan”, “goal”, “target”, “strategy”, and similar expressions or
future or conditional verbs such as “may”, “will”, “should”,
“would”, and “could.”
Forward-looking statements are Northern Trust’s current
estimates or expectations of future events or future results.
These statements are based on assumptions about many
important factors, including:
‰
the health of the U.S. and international economies and
particularly the continuing uncertainty in Europe;
the downgrade of U.S. Government issued and other
securities;
the health and soundness of the financial institutions and
other counterparties with which Northern Trust conducts
business;
changes in financial markets, including debt and equity
markets, that impact the value, liquidity, or credit ratings
of
financial assets in general, or financial assets in
particular investment funds, client portfolios, or securities
lending collateral pools, including those funds, portfolios,
collateral pools, and other financial assets with respect to
which Northern Trust has taken, or may in the future
take, actions to provide asset value stability or additional
liquidity;
the
the impact of
effectiveness of governmental actions taken in response,
and the effect of such governmental actions on Northern
in the financial markets,
stress
‰
‰
‰
‰
its
the
risks
financial
competitors and counterparties,
Trust,
markets generally and availability of credit specifically,
and the U.S. and international economies,
including
special deposit assessments or potentially higher FDIC
premiums;
a significant downgrade of any of our debt ratings;
changes in foreign exchange trading client volumes,
fluctuations and volatility in foreign currency exchange
rates, and Northern Trust’s success in assessing and
mitigating
from such changes,
arising
fluctuations and volatility;
a decline in the value of securities held in Northern Trust’s
investment portfolio, particularly asset-backed securities,
the liquidity and pricing of which may be negatively
impacted by periods of economic turmoil and financial
market disruptions;
uncertainties inherent
in the complex and subjective
judgments required to assess credit risk and establish
appropriate allowances therefor;
difficulties in measuring, or determining whether there is
other-than-temporary
the value of
impairment
securities held in Northern Trust’s investment portfolio;
in,
‰
‰
‰
‰
‰
‰ 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 financial 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;
requirements or
changes
interpretations and other legislation in the U.S. or other
countries that could affect Northern Trust or its clients,
including changes in accounting rules for fair value
measurements and recognizing impairments;
changes in the nature and activities of Northern Trust’s
competition, including increased consolidation within the
financial services industry;
in tax laws,
accounting
‰
‰
‰
‰
‰
‰ Northern Trust’s success in maintaining existing business
and continuing to generate new business in its existing
markets;
the impact of equity markets on fee revenue;
‰
‰ Northern Trust’s success in identifying and penetrating
targeted markets;
2 0 1 3 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 51
management’s discussion and analysis of financial condition and results of operations
‰ Northern Trust’s success in identifying and integrating
acquisitions and strategic alliances;
‰
‰ Northern Trust’s success in addressing the complex needs
of a global client base and managing compliance with
legal, tax, regulatory and other requirements in areas of
faster growth in its businesses, especially in immature
markets;
our ability to maintain a product mix that achieves
acceptable margins;
our ability to continue to generate investment results that
satisfy clients and to develop an array of investment
products;
our success in generating revenue in our securities lending
business, including for our clients, especially in periods of
economic and financial market uncertainty;
‰
‰
‰ Northern Trust’s success in recruiting and retaining the
necessary personnel
to support business growth and
expansion and maintain sufficient expertise to support
increasingly complex products and services;
‰ Northern Trust’s success in controlling expenses and
implementing revenue enhancement initiatives;
‰ 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, and address
operating risks,
including human errors or omissions,
data security breach risks, pricing or valuation of
securities, fraud, systems performance or defects, systems
interruptions, and breakdowns in processes or internal
controls;
uncertainties inherent in Northern Trust’s assumptions
concerning its pension plan, including discount rates and
expected contributions, returns and payouts;
increased costs of compliance and other risks associated
regulatory
with changes
in regulation,
the current
‰
‰
‰
‰
‰
‰
‰
for
for
financial
substantial changes
environment, and areas of increased regulatory emphasis
and oversight in the U.S. and other countries such as anti-
money laundering, anti-bribery, and client privacy;
risks that evolving regulations, such as Basel III and those
promulgated under the Dodd-Frank Act, could affect
required regulatory capital
institutions,
including Northern Trust, potentially resulting in changes
to the cost and composition of capital for Northern Trust;
in the legal,
the potential
regulatory and enforcement
framework and oversight
applicable to financial institutions in reaction to adverse
financial market events, including changes that may affect
leverage limits and risk-based capital and liquidity
requirements for certain financial
institutions, require
financial institutions to pay higher assessments, expose
their
financial
subsidiary depository institutions, and restrict or increase
the regulation of certain activities,
including foreign
exchange, carried on by financial institutions, including
Northern Trust;
risks and uncertainties inherent in the litigation and
regulatory process, including the adequacy of contingent
liability, tax, and other accruals;
the risk of events that could harm Northern Trust’s
reputation and so undermine the confidence of clients,
counterparties, rating agencies, and stockholders; and
other factors identified in this Annual Report on Form
10-K, including those factors described in “Item 1A – Risk
Factors”, and other filings with the U.S. Securities and
Exchange Commission, all of which are available on our
website.
to certain liabilities of
institutions
Actual results may differ materially from those projected in
the forward-looking statements. Northern Trust assumes no
obligation to update its forward-looking statements.
2 0 1 3 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 52
management’s discussion and analysis of financial condition and results of operations
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)
2013
2012
2011
YEAR ENDED DECEMBER 31,
REPORTED
FTE ADJ.
FTE*
REPORTED
FTE ADJ.
FTE*
REPORTED
FTE ADJ.
FTE*
$1,155.5
222.4
$32.5
–
$1,188.0
222.4
$1,287.7
297.4
$ 933.1
$32.5
$ 965.6
$ 990.3
$40.8
–
$40.8
$1,328.5
297.4
$1,408.6
399.5
$1,031.1
$1,009.1
$40.2
–
$40.2
$1,448.8
399.5
$1,049.3
1.09%
1.13%
1.18%
1.22%
1.22%
1.27%
2 0 1 3 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 53
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of Northern Trust Corporation (Northern Trust) is responsible for establishing and maintaining adequate internal
control over financial reporting. This internal control contains monitoring mechanisms, and actions are taken to correct deficiencies
identified.
Management assessed Northern Trust’s internal control over financial reporting as of December 31, 2013. This assessment was
based on criteria for effective internal control over financial reporting described in Internal Control – Integrated Framework
(1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management
believes that, as of December 31, 2013, 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,
2013, included in this Annual Report, has issued an attestation report (included herein on page 55) on the effectiveness of Northern
Trust’s internal control over financial reporting.
2 0 1 3 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 54
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
T H E B O A R D O F D I R E C T O R S A N D S T O C K H O L D E 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, 2013, based on criteria
established in Internal Control – Integrated Framework (1992) 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, 2013, based on criteria established in Internal Control – Integrated Framework (1992) 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 sheets of Northern Trust Corporation and subsidiaries as of December 31, 2013 and 2012, 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, 2013, and our report dated February 26, 2014 expressed an unqualified opinion on those
consolidated financial statements.
chicago, illinois
february 26, 2014
2 0 1 3 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 55
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 $2,321.4 and $2,394.8)
Trading Account
Total Securities
Loans and Leases
Commercial
Personal
Total Loans and Leases (Net of unearned income of $286.2 and $297.9)
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 237,322,035 and
238,914,988
Additional Paid-in Capital
Retained Earnings
Accumulated Other Comprehensive Loss
Treasury Stock (7,849,489 and 6,256,536 shares, at cost)
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
See accompanying notes to consolidated financial statements on pages 60-117.
consolidated financial statements
DECEMBER 31,
2013
2012
$ 3,162.4
529.6
19,397.4
12,911.5
28,392.8
2,325.8
1.7
30,720.3
12,620.0
16,765.5
29,385.5
(278.1)
458.8
1,355.2
540.7
4,764.0
$ 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
$102,947.3
$97,463.8
$ 16,888.7
14,991.5
1,874.4
1,881.8
48,461.7
84,098.1
965.1
917.3
1,558.6
1,996.6
1,709.2
277.1
3,513.3
95,035.3
408.6
1,035.7
7,134.8
(244.3)
(422.8)
7,912.0
$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
$102,947.3
$97,463.8
2 0 1 3 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 56
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
consolidated financial statements
FOR THE YEAR ENDED DECEMBER 31,
2013
2012
2011
$
$
$
$
2,609.8
244.4
69.0
68.0
166.5
(1.5)
3,156.2
1,155.5
222.4
933.1
20.0
913.1
1,306.6
257.5
564.1
377.6
173.8
–
314.2
2,993.8
1,075.5
344.2
731.3
731.3
3.01
2.99
$
$
$
$
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
Average Number of Common Shares Outstanding – Basic
– Diluted
239,265,313
240,554,840
240,417,805
240,881,244
241,401,310
241,811,384
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 (Losses) on Securities Available for Sale
Net Unrealized Gains (Losses) on Cash Flow Hedges
Foreign Currency Translation Adjustments
Pension and Other Postretirement Benefit Adjustments
Other Comprehensive Income (Loss)
Comprehensive Income
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 60-117.
FOR THE YEAR ENDED DECEMBER 31,
2013
2012
2011
$
731.3
$
687.3
$
603.6
(95.0)
4.3
(3.4)
132.8
38.7
770.0
–
–
(1.5)
(1.5)
61.2
5.6
20.0
(24.2)
62.6
749.9
(2.7)
(0.6)
1.6
(1.7)
$
$
$
$
$
$
53.3
(18.4)
(2.5)
(72.7)
(40.3)
563.3
(1.1)
(22.2)
(0.6)
(23.9)
$
$
$
2 0 1 3 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 57
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 INCOME (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
consolidated financial statements
FOR THE YEAR ENDED DECEMBER 31,
2013
2012
2011
$ 408.6
$ 408.6
$ 408.6
1,012.7
(55.0)
75.0
3.0
1,035.7
6,702.7
731.3
(299.2)
7,134.8
(283.0)
(95.0)
4.3
(3.4)
132.8
(244.3)
(314.0)
201.2
(310.0)
(422.8)
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)
Total Stockholders’ Equity at December 31
$7,912.0
$7,527.0
$7,117.3
See accompanying notes to consolidated financial statements on pages 60-117.
2 0 1 3 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 58
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, net
Provision for Credit Losses
Depreciation on Buildings and Equipment
Gains on Sale of Buildings and Equipment
Amortization of Computer Software
Amortization of Intangibles
Change in Accrued Income Taxes
Pension Plan Contributions
Visa Indemnification Benefit
Deferred Income Tax Provision
Change in Receivables
Change in Interest Payable
Change in Collateral With Derivative Counterparties, net
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
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
consolidated financial statements
FOR THE YEAR ENDED DECEMBER 31,
2013
2012
2011
$
731.3
$
687.3
$
603.6
1.5
44.7
20.0
92.3
(32.6)
205.1
21.1
(31.5)
(20.7)
–
66.6
(206.2)
(11.2)
(250.6)
209.5
839.3
(468.8)
(782.1)
(5,292.1)
(5,715.5)
5,853.9
(8,168.0)
8,456.4
17.8
(91.9)
(293.0)
690.6
–
109.4
(5,683.3)
2,938.9
184.9
217.5
1,258.8
–
–
750.0
(804.4)
(309.7)
146.2
(220.6)
226.7
4,388.3
(134.6)
(590.3)
3,752.7
1.7
(11.7)
25.0
88.3
1.2
180.8
20.3
18.5
(112.3)
–
79.7
(41.9)
(10.0)
(127.9)
15.4
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
(0.9)
158.4
17.5
(115.5)
(110.6)
(23.1)
97.2
(179.7)
5.0
172.1
496.4
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
Cash and Due from Banks at End of Year
$ 3,162.4
$ 3,752.7
$ 4,315.3
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 60-117.
$
231.9
262.6
24.7
$
307.4
188.5
48.5
$
394.5
153.3
68.8
2 0 1 3 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 59
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.
A. Basis of Presentation. The consolidated financial
statements include the 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 bank
holding company that has elected to be a financial holding
company under the Bank Holding Company Act of 1956, as
amended. 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 various U.S. and
non-U.S. subsidiaries, including the Bank.
Northern Trust generates the majority of its revenue from
its two primary business units: Corporate & Institutional
Services (C&IS) and Wealth Management. Asset management
and related services are provided to C&IS and Wealth
Management clients primarily by a third business unit, Asset
Management. Northern Trust emphasizes quality through a
high level of service complemented by the effective use of
technology, delivered by a fourth business unit, Operations &
Technology (O&T).
funds,
foundations, endowments,
C&IS is a leading global provider of asset servicing,
brokerage, banking and related services to corporate and
public retirement
fund
managers, insurance companies, sovereign wealth funds, and
other institutional investors around the globe. Asset servicing
and related services encompass a full range of capabilities
including but not limited to: global master trust and custody;
fund administration;
investment operations outsourcing;
investment risk and analytical services; securities lending;
foreign exchange; cash management; treasury management;
notes to consolidated financial statements
trust,
provides
and private
brokerage services; and transition management services. Client
relationships are managed through the Bank and the Bank’s
and the Corporation’s other subsidiaries, including support
from locations in North America, Europe, the Middle East,
and the Asia Pacific region.
Wealth Management
investment
management, custody, and philanthropic services; financial
consulting; guardianship and estate administration; family
family financial education; brokerage
business consulting;
services;
banking. Wealth
Management
focuses on high-net-worth individuals and
families, business owners, executives, professionals, retirees,
and established privately-held businesses in its target markets.
Wealth Management also includes the Global Family Office,
which provides customized services to meet the complex
financial needs of individuals and family offices in the United
States and throughout
typically
exceeding $200 million. Wealth Management services are
delivered by multidisciplinary teams through a network of
offices in 18 U.S. states and Washington, D.C., as well as
offices in London, Guernsey, and Abu Dhabi.
the world with assets
and business
financial
statements
C. Use of Estimates in the Preparation of Financial
in
Statements. The preparation of
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
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accumulated other
component of stockholders’ equity.
comprehensive
income
(AOCI),
a
E. Securities. Securities Available for Sale are reported at
fair value, with unrealized gains and losses credited or charged,
net of the tax effect, to AOCI. Realized gains and losses on
securities available for sale are determined on a specific
identification basis and are reported within other security gains
(losses), net, in the consolidated statement of income. Interest
income is recorded on the accrual basis, adjusted for the
amortization of premium and accretion of discount.
Securities Held to Maturity consist of debt securities that
management intends to, and Northern Trust has the ability to,
hold until maturity. Such securities are reported at cost,
adjusted for amortization of premium and accretion of
discount. Interest income is recorded on the accrual basis
adjusted for the amortization of premium and accretion of
discount.
Securities Held for Trading are stated at fair value. Realized
and unrealized gains and losses on securities held for trading
are reported in the consolidated statement of income within
security commissions and trading income.
Nonmarketable Securities primarily consist of Federal
Reserve and Federal Home Loan Bank stock and community
development investments, each of which are recorded in other
assets on the consolidated balance sheet. Federal Reserve and
Federal Home Loan Bank stock are reported at cost, which
redemption value. Community development
represents
investments, which are discussed in further detail in Note 28,
are reported at amortized 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.
notes to consolidated financial statements
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, either directly or via third
party custodians, of securities purchased under agreements to
resell.
These
activities.
instruments
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 risk
management
include
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 other liabilities. Derivative asset and liability
positions with the same counterparty are reflected on a net basis
on the consolidated balance sheet
in cases where legally
enforceable master netting arrangements or similar agreements
exist. Derivative assets and liabilities are further reduced by cash
received from, and deposited with, derivative
collateral
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, ‘other operating activities, net,’
except for net investment hedges which are recorded within
‘other investing activities, net’.
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.
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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.
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
transaction impacts
assesses
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
hypothetical derivative method. Any
is
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
notes to consolidated financial statements
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.
the critical
Fair value, cash flow, and net
investment hedges are
designated and formally documented as such contemporaneous
with the transaction. The 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 for
the “shortcut” or
terms match methods of
accounting, a formal assessment is performed on a calendar
to verify that derivatives used in hedging
quarter basis
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 previously
hedged asset or liability ceases to be adjusted for changes in its
fair value. Previous adjustments to the hedged item are
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
risk
components of which have
segment,
characteristics, measurement attributes, or risk monitoring
methods. The classes within the commercial segment have
similar
the
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notes to consolidated financial statements
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.
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 undrawn 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
to discharge the debt,
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.
interest
Interest
income on loans
Recognition of Income.
income in the current period.
is
in the opinion of
recorded on an accrual basis unless,
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
as current. At
the time a loan is determined to be
nonperforming, interest accrued but not collected is reversed
Interest
against
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
suspension
income
recognition, do not meaningfully vary between loan and lease
classes. Nonperforming loans are returned to performing
status when factors indicating doubtful collectability no longer
exist. Factors considered in returning a loan to performing
status are consistent across all classes of loans and leases and,
in accordance with regulatory guidance, relate primarily to
expected payment performance. Loans are eligible to be
returned to performing status when: (i) no principal or
interest that is due is unpaid and repayment of the remaining
contractual principal and interest is expected or (ii) the loan
has otherwise become well-secured (possessing realizable
resumption
subsequent
is not
and
of
Impaired Loans. A loan is considered to be impaired when,
information and events, management
based on current
determines that it is probable that Northern Trust will be
unable to collect all amounts due according to the contractual
terms of the loan agreement. Impaired loans are identified
through ongoing credit management and risk rating processes,
including the formal review of past due and watch list credits.
Payment performance and delinquency status are critical
factors in identifying impairment for all
loans and leases,
particularly those within the residential real estate, private
client and personal-other classes. Other key factors considered
in identifying impairment of loans and leases within the
commercial and institutional, non-U.S., lease financing, and
commercial-other classes relate to the borrower’s ability to
the obligation as measured
perform under the terms of
through the assessment of
including
consideration of collateral value, market value, and other
factors. A loan is also considered to be impaired if its terms
have been modified as a concession by Northern Trust or a
bankruptcy court
financial
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
resulting from the debtor’s
future cash flows,
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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.
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
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
the allowance, Northern Trust
determining the level of
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
notes to consolidated financial statements
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.
and Corporate
Inherent Allowance. The amount of inherent allowance is
based 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. 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,
Financial
Management.
Loans,
leases and other extensions of credit deemed
uncollectible are charged to the allowance for credit losses.
if any, are debited to the allowance.
Subsequent recoveries,
to the charging-off of
relative
Northern Trust’s policies
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
undrawn 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 undrawn 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
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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
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
estimated useful
lives, primarily on a straight-line basis.
Purchased software and allowable internal costs, including
compensation relating to software developed for internal use,
are capitalized. Software is amortized using the straight-line
method over the estimated useful lives of the assets, generally
ranging from 3 to 10 years.
Goodwill and other intangible assets are reviewed for
impairment on an annual basis or more frequently if events or
changes in circumstances indicate the carrying amounts may
not be recoverable.
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.
notes to consolidated financial statements
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
revenue recognition involves
the use of estimates and
assumptions, including components that are calculated based
on estimated asset valuations and transaction volumes.
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
consolidated financial
recorded in the
sustained are
statements. Northern Trust
recognizes any interest and
penalties related to unrecognized tax benefits in the provision
for income taxes.
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
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.
assets
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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.
notes to consolidated financial statements
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 are considered participating 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.
Note 2 – Recent Accounting Pronouncements
the FASB issued Accounting Standards
In January 2014,
Update (ASU) No. 2014-01, “Investments – Equity Method
and Joint Ventures (Topic 323): Accounting for Investments
in Qualified Affordable Housing Projects.” The ASU permits
reporting entities to elect to account for investments in
qualified affordable housing projects using the proportional
amortization method if certain conditions are met. The ASU is
effective for interim and annual reporting periods beginning
is currently
after December 15, 2014. Northern Trust
evaluating the potential application of ASU No. 2014-01; an
election to utilize the proportional amortization method is not
expected to materially impact Northern Trust’s consolidated
financial position or results of operations.
In January 2014,
the FASB issued ASU No. 2014-04,
“Receivables – Troubled Debt Restructurings by Creditors
(Subtopic 310-40): Reclassification of Residential Real Estate
Collateralized Consumer Mortgage Loans upon Foreclosure.”
This ASU clarifies
that an insubstance repossession or
foreclosure of a residential real estate property occurs only
upon either the creditor obtaining legal title to the property
upon completion of a foreclosure or through completion of a
deed in lieu of foreclosure, rather than by simply taking
physical possession of the property. This ASU is effective for
reporting periods beginning after
interim and annual
December 15, 2014. Northern Trust is currently assessing the
impact of the adoption of ASU No. 2014-04 and it is not
expected to materially impact Northern Trust’s consolidated
financial position and 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.
2 0 1 3 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 66
the
Fair Value Hierarchy. The following describes
hierarchy of valuation inputs (Levels 1, 2, and 3) used to
measure fair value and the primary valuation methodologies
used by Northern Trust for financial instruments measured at
fair value on a recurring basis. Observable inputs reflect
market data obtained from sources independent of
the
reporting entity; unobservable inputs reflect the entity’s own
assumptions about how market participants would value an
asset or liability based on the best information available.
GAAP requires an entity measuring fair value to maximize the
use of observable inputs and minimize the use of unobservable
inputs.
inputs and establishes a fair value hierarchy of
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, 2013 or 2012.
Level 1 – Quoted, active market prices for identical assets or
liabilities. Northern Trust’s Level 1 assets are comprised of
available for sale investments in U.S. treasury securities.
Level 2 – Observable inputs other than Level 1 prices, such as
quoted active market prices for similar assets or liabilities, quoted
prices for identical or similar assets in inactive markets, and
model-derived valuations in which all significant inputs are
observable in active markets. Northern Trust’s Level 2 assets
include available for sale and trading account securities, the
fair values of which are determined predominantly by external
pricing vendors. Prices received from vendors are compared
to other vendor and third-party prices. If a security price
obtained from a pricing vendor is determined to exceed pre-
determined tolerance levels that are assigned based on an asset
type’s characteristics, the exception is researched and, if the
price is not able to be validated, an alternate pricing vendor is
utilized, consistent with Northern Trust’s pricing source
hierarchy. As of December 31, 2013, Northern Trust’s
available for sale securities portfolio included 831 Level 2
securities with an aggregate market value of $26.4 billion. Of
those, 829 securities, with a market value of $26.3 billion, were
valued by external pricing vendors. The remaining 2 securities,
with an aggregate market value of $57.4 million, were valued
consistent with prices of similar securities as there were no
vended prices
of
for
December 31, 2012, Northern Trust’s available for sale
securities portfolio included 696 Level 2 securities with an
those, 689
aggregate market value of $26.8 billion. Of
securities, with a market value of $26.5 billion, were valued by
external pricing vendors. The remaining 7 securities, with an
securities. As
available
these
notes to consolidated financial statements
aggregate market value of $307.1 million, were valued
consistent with prices of similar securities as there were no
vended prices available for these securities. Trading account
securities, which totaled $1.7 million and $8.0 million as of
December 31, 2013 and December 31, 2012, respectively, were
all valued using external pricing vendors.
level
exceptions
Northern Trust has established processes and procedures
to assess the suitability of valuation methodologies used by
including reviews of valuation
external pricing vendors,
techniques and assumptions used for selected securities. On a
daily basis, periodic quality control reviews of prices received
from vendors are conducted which include comparisons to
prices on similar security types received from multiple pricing
vendors and to the previous day’s reported prices for each
security. Predetermined tolerance
are
researched and may result in additional validation through
available market information or the use of an alternate pricing
vendor. Quarterly, Northern Trust reviews documentation
from third-party pricing vendors regarding the valuation
processes and assumptions used in their valuations and
assesses whether the fair value levels assigned by Northern
Trust to each security classification are appropriate. Annually,
valuation inputs used within third-party pricing vendor
valuations are reviewed for propriety on a sample basis
through a comparison of inputs used to comparable market
data, including security classifications that are less actively
traded and security classifications comprising significant
portions of the portfolio.
inputs
incorporate
Level 2 assets and liabilities also include derivative
contracts which are valued internally using widely accepted
income-based models
readily
that
the
observable in actively quoted markets and reflect
contractual terms of the contracts. Observable inputs include
foreign exchange rates and interest rates for foreign exchange
contracts; credit spreads, default probabilities, and recovery
interest rates for
rates for credit default swap contracts;
interest rate swap contracts and forward contracts; and
interest rates and volatility inputs for interest rate option
of
contracts. Northern Trust
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
to master netting
arrangements or similar agreements, available collateral, and
other credit enhancements in determining the appropriate fair
value of derivative instruments. The resulting valuation
adjustments have not been considered material.
exposures
evaluates
impact
giving
effect
after
the
2 0 1 3 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 67
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)
notes to consolidated financial statements
Northern Trust believes its valuation methods for its assets
and liabilities carried at fair value are appropriate; however,
the use of different methodologies or
assumptions,
particularly as applied to Level 3 assets and liabilities, could
have a material effect on the computation of their estimated
fair values.
Management of various businesses and departments of
Northern Trust (including Corporate Market Risk, Credit
Policy, Corporate Financial Management, and relevant
business unit personnel) determine the valuation policies and
procedures for Level 3 assets and liabilities. Each business and
department represents a component of Northern Trust’s
business units, and reports to management of their respective
business units. Generally, valuation policies are reviewed by
management of each business or department. Fair value
measurements are performed upon acquisitions of an asset or
liability. As necessary, the valuation models are reviewed by
management of the appropriate business or department, and
adjusted for changes in inputs. Management of each business
or department reviews the inputs in order to substantiate the
unobservable inputs used in each fair value measurement.
When appropriate, management reviews forecasts used in the
valuation process
financial
in light of other
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.
relevant
2 0 1 3 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 68
notes to consolidated financial statements
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,
2013.
FINANCIAL INSTRUMENT
Auction Rate Securities
$98.9 million
Discounted Cash Flow
FAIR VALUE
VALUATION TECHNIQUE
UNOBSERVABLE INPUT
RANGE OF LIVES AND RATES
Contingent Consideration
$55.4 million
Discounted Cash Flow
Remaining lives
Discount rates
Discount rate
Business growth rates
2.4 – 8.6 years
0.3% – 7.7%
10.5%
19% – 21%
The following presents assets and liabilities measured at fair value on a recurring basis as of December 31, 2013 and 2012,
segregated by fair value hierarchy level.
(In Millions)
Securities
Available for Sale
DECEMBER 31, 2013
LEVEL 1
LEVEL 2
LEVEL 3
NETTING
U.S. Government
Obligations of States and Political Subdivisions
Government Sponsored Agency
Corporate Debt
Covered Bonds
Supranational, Sovereign and Non-U.S. Agency Bonds
Residential Mortgage-Backed
Other Asset-Backed
Auction Rate
Other
$1,917.9
–
–
–
–
–
–
–
–
–
$
–
4.6
17,528.0
3,524.5
1,943.9
720.6
48.1
2,391.8
–
214.5
Total Available for Sale
Trading Account
1,917.9
26,376.0
–
1.7
Total Available for Sale and Trading Securities
1,917.9
26,377.7
Other Assets
Derivative Assets
Foreign Exchange Contracts
Interest Rate Swaps
Total Derivative Assets
Other Liabilities
Derivative Liabilities
Foreign Exchange Contracts
Interest Rate Swaps
Total Derivative Liabilities
Contingent Consideration
–
–
–
–
–
–
–
$
2,865.7
237.9
3,103.6
2,905.7
195.2
3,100.9
$
–
–
–
–
–
–
–
–
98.9
–
98.9
–
98.9
–
–
–
–
–
–
$
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(1,369.0)
–
–
(1,926.0)
ASSETS/
LIABILITIES
AT FAIR
VALUE
$ 1,917.9
4.6
17,528.0
3,524.5
1,943.9
720.6
48.1
2,391.8
98.9
214.5
28,392.8
1.7
28,394.5
2,865.7
237.9
1,734.6
2,905.7
195.2
1,174.9
$
–
$55.4
$
–
$
55.4
Note: Northern Trust has elected to net derivative assets and liabilities when legally enforceable master netting arrangements or similar agreements exist between Northern Trust and the
counterparty. As of December 31, 2013, derivative assets and liabilities shown above also include reductions of $210.7 million and $767.7 million, respectively, as a result of cash collateral
received from and deposited with derivative counterparties.
2 0 1 3 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 69
notes to consolidated financial statements
DECEMBER 31, 2012
LEVEL 1
LEVEL 2
LEVEL 3
NETTING
$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
1,784.6
26,769.1
–
–
–
–
–
–
–
–
1,756.6
310.3
2,066.9
1,772.7
249.3
1.0
2,023.0
–
50.1
$
–
–
–
–
–
–
–
–
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
(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
Total Available for Sale and Trading Securities
Other Assets
Derivatives
Foreign Exchange Contracts
Interest Rate Swaps
Total Derivatives Assets
Other Liabilities
Derivatives
Foreign Exchange Contracts
Interest Rate Swaps
Credit Default Swaps
Total Derivatives Liabilities
Contingent Consideration
Note: Northern Trust has elected to net derivative assets and liabilities when legally enforceable master netting arrangements or similar agreements exist between Northern Trust and the
counterparty. As of December 31, 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.
2 0 1 3 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 70
notes to consolidated financial statements
The following tables present the changes in Level 3 assets
and liabilities for the years ended December 31, 2013 and
2012.
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
2013
2012
$97.8
$178.3
0.1
3.8
(0.6)
(2.2)
(21.6)
6.4
(54.7)
(10.6)
Fair Value at December 31
$98.9
$ 97.8
(1) Realized gains for the year ended December 31, 2013 of $0.1 million represents gains
from redemptions by issuers. 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.
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
(losses) 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
CONTINGENT CONSIDERATION
(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
2013
$50.1
5.3
–
–
–
2012
$56.8
2.0
(0.5)
–
(8.2)
Fair Value at December 31
Unrealized (Gains) Losses Included in Earnings
Related to Financial Instruments Held at
December 31(1)
$55.4
$50.1
$ 5.3
$ 4.8
(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.
For the years ended December 31, 2013 and 2012, there
were no assets or liabilities transferred into or out of Level 3.
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.
Assets measured at fair value on a nonrecurring basis at
December 31, 2013 and 2012, all of which were categorized as
Level 3 under the fair value hierarchy, were comprised of
impaired loans whose values were based on real-estate and
other available collateral, and of Other Real Estate Owned
(OREO) properties. Fair values of real-estate loan collateral
were estimated using a market approach typically supported
by third party valuations and property specific fees and taxes,
and were subject to adjustments to reflect management’s
judgment as to realizable value. Other loan collateral, which
inventory and
typically consists of accounts
equipment, is valued using a market approach adjusted for
asset specific characteristics and in limited instances third
party valuations are used.
receivable,
Collateral-based impaired loans that have been adjusted to
fair value totaled $34.0 million and $35.0 million at
December 31, 2013 and 2012, respectively, and the level of
specific allowances on these loans was decreased by $14.3
million during the year ended December 31, 2013 and by $8.5
million for the year ended December 31, 2012.
OREO properties that have been adjusted to fair value
totaled $1.4 million and $2.3 million at December 31, 2013
and 2012, respectively, and $1.0 million and $0.8 million were
charged through other operating expense during the years
ended December 31, 2013 and 2012, respectively, to reduce
the fair values of these OREO properties.
2 0 1 3 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 71
notes to consolidated financial statements
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, 2013.
FINANCIAL INSTRUMENT
FAIR VALUE
VALUATION TECHNIQUE
UNOBSERVABLE INPUT
RANGE OF DISCOUNTS APPLIED
Loans
OREO
$34.0 million
Market Approach
$1.4 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
value
Northern Trust. Accordingly,
disclosures provide only a partial estimate of the fair value of
Northern Trust. Financial instruments recorded at fair value
on Northern Trust’s consolidated balance sheet are discussed
above. The following methods and assumptions were used in
estimating the fair values of financial instruments that are not
carried at fair value.
required fair
the
Held to Maturity Securities. The fair values of held to
maturity securities were modeled by external pricing vendors,
or in limited cases 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
stock are equal
to their carrying values which represent
redemption value.
Community Development Investments. The fair values of
these instruments were estimated using an income approach
(discounted cash flow) that incorporates current market rates.
Employee Benefit and Deferred Compensation. These assets
include U.S. treasury securities and investments in mutual and
funds held to fund certain supplemental
collective trust
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
2 0 1 3 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 72
The following tables summarize the fair values of all financial instruments.
notes to consolidated financial statements
DECEMBER 31, 2013
FAIR VALUE
LEVEL 1
LEVEL 2
LEVEL 3
$ 3,162.4
–
–
–
1,917.9
–
–
–
–
–
–
–
79.3
$33,762.0
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
$
–
529.6
19,397.4
12,911.5
26,376.0
2,321.4
1.7
–
–
1,355.2
194.7
227.8
47.6
$
–
1,877.1
48,461.7
965.1
917.3
1,558.6
1,989.3
1,563.5
137.2
230.2
$
–
–
–
–
98.9
–
–
28,147.2
–
–
$
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
59.6
55.4
35.7
$
21.0
59.5
$
115.1
78.2
2,844.7
2,846.2
122.8
117.0
–
–
–
–
–
–
–
–
BOOK VALUE
$ 3,162.4
529.6
19,397.4
12,911.5
28,392.8
2,325.8
1.7
28,136.5
–
1,355.2
194.7
228.1
132.7
$33,762.0
1,874.4
48,461.7
965.1
917.3
1,558.6
1,996.6
1,537.3
135.0
277.1
59.6
55.4
35.7
TOTAL
FAIR VALUE
$ 3,162.4
529.6
19,397.4
12,911.5
28,392.8
2,321.4
1.7
28,147.2
–
1,355.2
194.7
227.8
126.9
$33,762.0
1,877.1
48,461.7
965.1
917.3
1,558.6
1,989.3
1,563.5
137.2
230.2
59.6
55.4
35.7
$
21.0
59.5
$
21.0
59.5
$
115.1
78.2
2,844.7
2,846.2
122.8
117.0
115.1
78.2
2,844.7
2,846.2
122.8
117.0
(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
Client-Related and Trading
Foreign Exchange Contracts
Assets
Liabilities
Interest Rate Contracts
Assets
Liabilities
Note: Refer to the table located on page 69 for the disaggregation of available for sale securities.
2 0 1 3 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 73
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
notes to consolidated financial statements
DECEMBER 31, 2012
FAIR VALUE
LEVEL 1
LEVEL 2
LEVEL 3
$
–
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
–
–
–
$ 3,752.7
–
–
–
1,784.6
–
–
–
–
–
–
–
86.7
$39,221.5
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
$
–
–
–
–
97.8
–
–
28,220.2
11.7
–
$
–
–
–
–
–
–
–
–
–
–
–
–
–
60.5
50.1
38.9
–
–
–
–
–
–
–
–
–
(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 Contracts
Assets
Liabilities
$
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
$
21.3
42.3
$
129.7
75.3
1.0
1,735.3
1,730.4
180.6
174.0
Note: Refer to the table located on page 70 for the disaggregation of available for sale securities.
2 0 1 3 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 74
notes to consolidated financial statements
Note 4 – Securities
Securities Available for Sale. The following tables provide the amortized cost, fair values, and remaining maturities of securities
available for sale.
R E C O N C I L I A T I O N O F A M O R T I Z E D C O S T T O F A I R V A L U E S O F
S E C U R I T I E S A V A I L A B L E F O R S A L E
(In Millions)
U.S. Government
Obligations of States and Political Subdivisions
Government Sponsored Agency
Corporate Debt
Covered Bonds
Supranational, Sovereign and Non-U.S. Agency 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
Supranational Bonds
Residential Mortgage-Backed
Other Asset-Backed
Auction Rate
Other
Total
AMORTIZED
COST
$ 1,896.7
4.5
17,495.2
3,615.2
1,898.9
717.0
52.4
2,390.8
97.5
214.1
$28,382.3
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
$ 28,422.2
DECEMBER 31, 2013
GROSS
UNREALIZED
GAINS
GROSS
UNREALIZED
LOSSES
$ 22.6
0.1
80.7
10.5
50.9
5.3
0.1
1.4
2.2
0.4
$174.2
$ 1.4
–
47.9
101.2
5.9
1.7
4.4
0.4
0.8
–
$163.7
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
$ 242.8
$
–
–
4.0
2.1
0.1
0.2
10.8
0.4
3.9
–
FAIR
VALUE
$ 1,917.9
4.6
17,528.0
3,524.5
1,943.9
720.6
48.1
2,391.8
98.9
214.5
$28,392.8
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
$ 21.5
$ 28,643.5
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, 2013
DECEMBER 31, 2012
(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
$ 9,552.9
15,011.4
2,545.9
1,272.1
FAIR
VALUE
$ 9,565.7
15,067.2
2,494.1
1,265.8
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
$28,382.3
$28,392.8
$28,422.2
$28,643.5
Note: Mortgage-backed and asset-backed securities are included in the above table taking into account anticipated future prepayments.
2 0 1 3 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 75
notes to consolidated financial statements
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
Supranational, Sovereign and Non-U.S. Agency Bonds
Other
Total
(In Millions)
Obligations of States and Political Subdivisions
Government Sponsored Agency
Non-U.S. Government Debt
Certificates of Deposit
Other
Total
AMORTIZED
COST
$ 225.2
35.9
197.3
698.1
1,109.4
59.9
$2,325.8
AMORTIZED
COST
$
329.3
112.9
205.0
1,667.6
67.2
$ 2,382.0
DECEMBER 31, 2013
GROSS
UNREALIZED
GAINS
GROSS
UNREALIZED
LOSSES
FAIR
VALUE
$ 235.5
37.0
197.3
697.9
1,105.9
47.8
$
–
–
–
0.2
4.3
12.2
$16.7
$2,321.4
$10.3
1.1
–
–
0.8
0.1
$12.3
DECEMBER 31, 2012
GROSS
UNREALIZED
GAINS
$ 17.2
3.8
–
0.2
0.3
$ 21.5
GROSS
UNREALIZED
LOSSES
$
–
–
–
0.6
8.1
FAIR
VALUE
$
346.5
116.7
205.0
1,667.2
59.4
$ 8.7
$ 2,394.8
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 H E L D T O M A T U R I T Y
DECEMBER 31, 2013
DECEMBER 31, 2012
(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
$1,009.9
1,254.9
26.1
34.9
FAIR
VALUE
$1,011.2
1,257.0
27.1
26.1
AMORTIZED
COST
$2,029.5
268.1
45.4
39.0
FAIR
VALUE
$2,030.6
280.2
49.8
34.2
$2,325.8
$2,321.4
$2,382.0
$2,394.8
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 $1.5 million, $1.7 million, and $23.9
million were recognized in 2013, 2012, and 2011, respectively.
Losses in 2012 and 2011 included $3.3 million, and $23.3
million of OTTI losses, respectively. There were no OTTI
losses in 2013. Gross proceeds of $0.5 billion from the sale of
securities in 2013 resulted in gross realized gains of $0.8
million and gross realized losses of $2.3 million. Gross
proceeds of $2.7 billion from the sale of securities in 2012
resulted in gross realized gains of $23.5 million and gross
realized losses of $21.9 million. There were $0.6 million of
other realized net security losses in 2011.
2 0 1 3 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 76
notes to consolidated financial statements
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, 2013 and 2012.
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 3
LESS THAN 12 MONTHS
12 MONTHS OR LONGER
TOTAL
(In Millions)
U.S. Government
Government Sponsored Agency
Corporate Debt
Covered Bonds
Supranational Sovereign and Non U.S.
Agency Bonds
Residential Mortgage-Backed
Other Asset-Backed
Certificates of Deposit
Auction Rate
Other
Total
FAIR
VALUE
UNREALIZED
LOSSES
$ 896.4
4,340.8
1,759.5
278.8
789.4
–
677.0
684.2
22.1
25.7
$ 1.4
42.6
85.4
5.7
6.0
–
0.4
0.2
0.1
4.0
$
FAIR
VALUE
–
413.7
267.0
9.9
–
42.0
–
–
14.0
29.5
UNREALIZED
LOSSES
$
–
5.3
15.8
0.2
–
4.4
–
–
0.7
8.2
FAIR
VALUE
UNREALIZED
LOSSES
$
896.4
4,754.5
2,026.5
288.7
789.4
42.0
677.0
684.2
36.1
55.2
$ 1.4
47.9
101.2
5.9
6.0
4.4
0.4
0.2
0.8
12.2
$9,473.9
$145.8
$ 776.1
$34.6
$10,250.0
$180.4
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
(In Millions)
Government Sponsored Agency
Corporate Debt
Covered Bonds
Supranational Bonds
Residential Mortgage-Backed
Other Asset-Backed
Certificates of Deposit
Auction Rate
Other
$
FAIR
VALUE
482.2
441.5
20.1
113.8
–
146.1
1,178.8
2.7
9.3
UNREALIZED
LOSSES
$
1.0
2.0
0.1
0.2
–
0.1
0.6
0.3
1.9
6.2
Total
$ 2,394.5
$
As of December 31, 2013, 444 securities with a combined
fair value of $10.3 billion were in an unrealized loss position,
with their unrealized losses totaling $180.4 million. Unrealized
losses of $101.2 million within corporate debt
securities
primarily reflect widened credit spreads and higher market rates
since purchase; 51% of the corporate debt portfolio is backed by
guarantees provided by U.S. and non-U.S. governmental entities.
Unrealized losses of $47.9 million related to government
sponsored agency securities are primarily attributable to changes
in market rates since their purchase.
on
losses
Unrealized
residential mortgage-backed
securities totaling $4.4 million reflect the impact of wider
credit and liquidity spreads on the valuations of 5 residential
mortgage-backed securities since purchase, with $42.0 million
having been in an unrealized loss position for more than 12
months.
at
December 31, 2013 had a total amortized cost and fair value of
respectively. Securities
$52.4 million and $48.1 million,
classified as “other asset-backed” at December 31, 2013 had
average lives of less than 5 years, and 99% were rated triple-A.
Residential mortgage-backed
securities
FAIR
VALUE
$1,171.8
50.0
–
–
84.7
40.0
–
41.0
43.8
$1,431.3
UNREALIZED
LOSSES
FAIR
VALUE
UNREALIZED
LOSSES
$ 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
$
4.0
2.1
0.1
0.2
10.8
0.4
0.6
3.9
8.1
$ 30.2
The majority of the $12.2 million of unrealized losses in
securities classified as “other” at December 31, 2013 relate to
securities which Northern Trust purchases for 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 $0.8 million related to
reduced market
auction rate securities primarily reflect
liquidity as a majority of auctions continue to fail preventing
holders
investments at par. The
remaining unrealized losses on Northern Trust’s securities
portfolio as of December 31, 2013 are attributable to changes
in overall market interest rates, increased credit spreads, or
reduced market liquidity. As of December 31, 2013, Northern
Trust does not intend to sell any investment in an unrealized
loss position and it is not 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.
from liquidating their
2 0 1 3 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 77
notes to consolidated financial statements
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 previously 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 flow analyses by developing multiple scenarios in order to create reasonable
forecasts of the security’s future performance using available data including servicers’ loan charge off patterns, prepayment speeds,
annualized default rates, each security’s current delinquency pipeline, the delinquency pipeline’s growth rate, the roll rate from
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.
Impairments of non-agency residential mortgage-backed securities are influenced by a number of factors, including but not
limited to, U.S. economic and housing market 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, 2013, loss estimates for subprime, Alt-A, prime and 2nd lien
collateral portfolios were developed using default roll rates, determined primarily by the stage of delinquency of the underlying
instrument, that 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.
December 31, 2013 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, 2013
LOSS SEVERITY RATES
WEIGHTED AVERAGE
ULTIMATE DEFAULT
RATES
LOW
HIGH
WEIGHTED
AVERAGE
21.5%
40.3
48.6
32.8
32.7%
65.5
75.6
98.9
45.0%
65.5
79.3
99.0
39.5%
32.7%
99.0%
41.3%
65.5
76.5
99.0
73.3%
AMORTIZED
COST
$ 7.2
12.1
23.4
9.7
$52.4
for
securities
processes
Northern Trust’s
identifying
are
credit
impairment within auction rate
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. There were no OTTI losses recognized during
the year ended December 31, 2013. There were $3.3 million of
OTTI losses in 2012, of which $1.7 million related to non-
agency residential mortgage-backed securities and $1.6 million
related to auction rate securities, and $23.3 million of OTTI
losses in 2011, all of which related to non-agency residential
mortgage-backed securities.
2 0 1 3 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 78
notes to consolidated financial statements
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, 2013, 2012, and 2011.
(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
2013
$
$
–
–
–
DECEMBER 31,
2012
$(2.7)
(0.6)
$(3.3)
2011
$ (1.1)
(22.2)
$(23.3)
(1) For initial other-than-temporary impairments in the respective period, the balance includes the excess of the amortized cost over the fair value of the impaired securities. For subsequent
impairments of the same security, the 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 period, the balance includes the portion of the excess of amortized cost over the fair value of the impaired securities that was
recorded in OCI. For subsequent impairments of the same security, the balance includes additional changes in OCI for that security subsequent to its most recently recorded OTTI.
Provided in the table below are the cumulative credit-
related losses recognized in earnings on debt securities other-
than-temporarily impaired.
The following tables summarize information related to
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,
2013
2012
$ 42.3
–
$ 68.2
1.6
Impairments
–
1.7
Less: Current and Prior Period Losses on Securities
Sold During the Year
(33.5)
(29.2)
Cumulative Credit-Related Losses on Securities
Held – End of Year
$ 8.8
$ 42.3
The table below provides information regarding debt
securities held as of December 31, 2013 and 2012, for which an
OTTI loss has been recognized in the current year or previously.
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
2013
2012
$500.0
396.3
0.46%
571.5
$ 35.4
241.5
0.16%
537.4
2013
2012
$917.3
594.3
0.07%
917.3
$699.8
448.2
0.08%
699.8
DECEMBER 31,
Note 6 – Loans and Leases
(In Millions)
Fair Value
Amortized Cost Basis
Noncredit-related Losses Recognized in OCI
Tax Effect
2013
$38.3
42.8
(4.5)
1.7
2012
$51.5
59.0
(7.5)
2.8
Amount Recognized in OCI
$ (2.8)
$ (4.7)
Note 5 – Securities Purchased Under Agreements
to Resell and Securities Sold Under Agreements to
Repurchase
Securities purchased under agreements to resell and securities
sold under agreements to repurchase are recorded at
the
amounts at which the securities were acquired or sold plus
accrued interest. To minimize any potential credit risk associated
with these transactions, the fair value of the securities purchased
or
limits are set on exposure with
counterparties, and the financial condition of counterparties is
is Northern Trust’s policy to take
regularly assessed.
possession, either directly or via third party custodians, of
securities purchased under agreements to resell.
sold is monitored,
It
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,
2013
2012
$ 7,375.8
2,955.8
975.1
954.7
358.6
$ 7,468.5
2,859.8
1,035.0
1,192.3
341.6
12,620.0
12,897.2
10,271.3
6,445.6
48.6
10,375.2
6,130.1
102.0
16,765.5
16,607.3
$29,385.5
$29,504.5
(278.1)
(297.9)
$29,107.4
$29,206.6
2 0 1 3 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 79
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 generally have
draw periods of up to 10 years and a balloon payment of any
outstanding balance is due at maturity. Payments are interest
only with variable interest rates. Northern Trust does not offer
equity credit lines that include an option to convert the
outstanding balance to an amortizing payment loan. As of
December 31, 2013 and 2012, equity credit lines totaled $2.0
billion and $2.3 billion, respectively, and equity credit lines for
which first liens were held by Northern Trust represented 87%
and 86%, respectively, of the total equity credit lines as of
those dates.
Included within the non-U.S., commercial-other, and
personal-other classes are short duration advances, primarily
related to the processing of custodied client investments, that
totaled $1.3 billion and $1.5 billion at December 31, 2013 and
2012,
loan
totaled $104.1 million and $224.7 million at
balances
December 31, 2013 and 2012, respectively. There were no loans
classified as held for sale at December 31, 2013. Loans classified
as held for sale totaled $11.7 million at December 31, 2012.
respectively. Demand deposits
reclassified as
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,
2013
2012
$ 189.4
143.1
2.5
(31.1)
$ 239.2
162.2
3.5
(43.5)
Investment in Direct Finance Leases
303.9
361.4
Leveraged Leases:
Net Rental Receivable
Residual Value
Unearned Income
Investment in Leveraged Leases
Lease Financing, net
544.4
295.6
(168.8)
559.9
297.9
(184.2)
671.2
673.6
$ 975.1
$1,035.0
The following schedule reflects the future minimum lease
payments to be received over the next five years under direct
finance leases:
(In Millions)
2014
2015
2016
2017
2018
FUTURE MINIMUM
LEASE PAYMENTS
$44.7
40.5
30.4
27.0
19.1
notes to consolidated financial statements
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
capture the unique risk characteristics inherent within each
particular type of credit exposure. Provided below are the
more significant performance indicator attributes considered
within Northern Trust’s borrower rating models, by loan and
lease class.
‰
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 and
loan-to-cost ratios, leasing status, and guarantor support
for loans associated with construction and development
properties;
Lease Financing and Commercial-Other:
profit margin levels;
leverage and
‰
‰
‰ 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;
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.
2 0 1 3 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 80
notes to consolidated financial statements
Loan and lease segment and class balances at December 31, 2013 and 2012 are provided below, segregated by borrower ratings
into “1 to 3”, “4 to 5”, and “6 to 9” (watch list), categories.
DECEMBER 31, 2013
DECEMBER 31, 2012
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
$ 4,432.5
1,053.7
685.7
442.8
157.7
$ 2,801.5
1,748.7
285.0
511.9
200.9
$141.8
153.4
4.4
–
–
$ 7,375.8
2,955.8
975.1
954.7
358.6
$ 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
6,772.4
5,548.0
299.6
12,620.0
6,537.4
5,954.8
405.0
12,897.2
(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
3,204.6
3,957.6
21.2
6,563.6
2,481.2
27.4
503.1
6.8
–
10,271.3
6,445.6
48.6
3,003.3
3,741.3
50.0
6,868.2
2,365.4
52.0
Total Personal
7,183.4
9,072.2
509.9
16,765.5
6,794.6
9,285.6
503.7
23.4
–
527.1
10,375.2
6,130.1
102.0
16,607.3
Total Loans and Leases
$13,955.8
$14,620.2
$809.5
$29,385.5
$13,332.0
$15,240.4
$932.1
$29,504.5
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
currently in default have limited financial flexibility. Cash
flows and capital levels range from acceptable to potentially
to meet current requirements, particularly in
insufficient
adverse down cycle
these
scenarios. As
characteristics, borrowers in this category exhibit an elevated
to probable likelihood of loss.
result of
a
2 0 1 3 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 81
notes to consolidated financial statements
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, 2013 and 2012.
(In Millions)
DECEMBER 31, 2013
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
$ 7,332.3
2,881.1
975.1
954.7
358.6
$ 5.0
4.1
–
–
–
$12.1
14.6
–
–
–
$ 3.3
6.8
–
–
–
$ 7,352.7
2,906.6
975.1
954.7
358.6
$ 23.1
49.2
–
–
–
$ 7,375.8
2,955.8
975.1
954.7
358.6
12,501.8
9.1
26.7
10.1
12,547.7
72.3
12,620.0
9,934.4
6,404.2
48.6
16,387.2
129.3
29.1
–
158.4
15.6
7.5
–
23.1
2.9
3.4
–
6.3
10,082.2
6,444.2
48.6
16,575.0
189.1
1.4
–
10,271.3
6,445.6
48.6
190.5
16,765.5
Total Loans and Leases
$28,889.0
$167.5
$49.8
$16.4
$29,122.7
$262.8
$29,385.5
(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
Other Real Estate Owned
Total Nonperforming Assets
$ 11.9
$274.7
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
–
–
–
18.6
25.7
16.3
–
42.0
$ 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
3.0
12,819.2
78.0
12,897.2
10.5
5.5
–
16.0
10,200.6
6,127.9
102.0
16,430.5
174.6
2.2
–
10,375.2
6,130.1
102.0
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
Other Real Estate Owned
Total Nonperforming Assets
$ 20.3
$275.1
2 0 1 3 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 82
notes to consolidated financial statements
The following tables provide information related to impaired loans by segment and class.
AS OF DECEMBER 31, 2013
AS OF DECEMBER 31, 2012
(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
Lease Financing, net
Residential Real Estate
Private Client
Total
Commercial
Personal
Total
SPECIFIC
ALLOWANCE
RECORDED
INVESTMENT
RECORDED
INVESTMENT
$ 12.2
46.6
4.4
185.0
0.8
9.6
26.7
8.1
–
UNPAID
PRINCIPAL
BALANCE
$ 18.1
57.1
4.4
227.8
0.8
12.1
31.5
8.7
–
99.5
193.9
123.2
237.3
$
–
–
–
–
–
$ 3.6
4.5
2.3
–
8.1
2.3
UNPAID
PRINCIPAL
BALANCE
$ 19.3
76.9
4.6
165.7
1.0
10.2
33.8
13.0
0.9
$ 15.1
64.9
4.6
131.3
0.8
8.1
32.3
11.8
0.9
125.0
144.8
144.8
180.6
SPECIFIC
ALLOWANCE
$
–
–
–
–
–
2.8
8.2
6.1
0.9
11.0
7.0
$18.0
$293.4
$360.5
$10.4
$269.8
$325.4
YEAR ENDED DECEMBER 31, 2013
YEAR ENDED DECEMBER 31, 2012
AVERAGE
RECORDED
INVESTMENT
INTEREST
INCOME
RECOGNIZED
AVERAGE
RECORDED
INVESTMENT
INTEREST
INCOME
RECOGNIZED
$ 11.7
42.4
4.5
160.2
10.2
12.5
31.0
0.7
5.7
4.0
102.8
180.1
$282.9
$0.2
0.9
0.2
2.5
–
–
–
–
–
–
1.3
2.5
$ 22.7
51.6
3.8
117.3
1.6
6.9
23.3
–
14.3
1.0
108.3
134.2
$3.8
$242.5
$0.1
1.2
–
0.8
–
–
–
–
–
–
1.3
0.8
$2.1
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 $10.6 million in 2013, $11.6 million in
2012, and $15.4 million in 2011.
There were $3.4 million and $2.1 million of aggregate
undrawn loan commitments and standby letters of credit at
December 31, 2013 and 2012, respectively, issued to borrowers
whose loans were classified as nonperforming or impaired.
Troubled Debt Restructurings (TDRs): Included within
impaired loans were $72.7 million and $49.8 million of
nonperforming TDRs and $89.8 million and $74.7 million of
performing TDRs as of December 31, 2013 and 2012,
respectively.
2 0 1 3 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N 83
The following tables provide, by segment and class, the
number of loans and leases modified in TDRs during the years
ended December 31, 2013 and 2012, and the recorded
investments and unpaid principal balances as of December 31,
2013 and 2012.
($ In Millions)
December 31, 2013
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
14
12
26
168
9
177
203
$ 3.4
27.7
$ 4.7
36.2
31.1
40.9
49.1
12.9
62.0
60.0
12.9
72.9
$93.1
$113.8
Note: Period end balances reflect all paydowns and charge-offs during the year.
($ 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.
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, 2013, TDR modifications of loans within the
commercial and institutional, commercial real estate and
private client classes were primarily deferrals of principal,
extensions of term and other modifications. During the year
ended December 31, 2013, TDR modifications of loans within
the residential real estate class were primarily deferrals of
principal, extensions of term, interest rate concessions and
other modifications. During the year ended December 31,
2012, TDR modifications of loans within the commercial and
lease financing, and
institutional, commercial real estate,
notes to consolidated financial statements
term,
private client classes were primarily extensions of
deferral of principal and other modifications; modifications of
residential real estate loans were primarily interest rate
concessions, extensions of term and deferrals of principal.
There were no loans or leases modified in troubled debt
restructurings during
the previous 12 months which
subsequently became nonperforming during the year ended
December 31, 2013.
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.
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
for
credit
allowance
losses, which
represents
The
management’s estimate of probable losses related to specific
borrower relationships and inherent in the various loan and
lease portfolios, undrawn 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 off of loans, leases and other extensions of credit
deemed 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 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.
2 0 1 3 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 84
notes to consolidated financial statements
Loan-to-value levels are considered for collateral-secured
loans and leases in both the personal and commercial
segments. Borrower debt service coverage is evaluated in the
personal segment, and cash flow coverage is analyzed in the
commercial segment.
Similar risk characteristics by type of exposure are
analyzed when determining the allowance for undrawn
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)
COMMERCIAL
PERSONAL
TOTAL
COMMERCIAL
PERSONAL
TOTAL
COMMERCIAL
PERSONAL
TOTAL
2013
2012
2011
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
Undrawn Commitments and Standby
$194.2
(16.7)
8.6
$133.4
(42.6)
11.0
$327.6
(59.3)
19.6
$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
(8.1)
(18.1)
–
(31.6)
38.1
–
(39.7)
20.0
–
0.4
(17.2)
–
(26.7)
42.2
–
(26.3)
25.0
–
(34.8)
(10.9)
–
(48.6)
65.9
–
$357.3
(116.3)
32.9
(83.4)
55.0
–
$168.0
$139.9
$307.9
$194.2
$133.4
$327.6
$211.0
$117.9
$328.9
$140.9
$137.2
$278.1
$166.1
$131.8
$297.9
$178.6
$116.2
$294.8
Letters of Credit
27.1
2.7
29.8
28.1
1.6
29.7
32.4
1.7
34.1
Total Allowance for Credit Losses
$168.0
$139.9
$307.9
$194.2
$133.4
$327.6
$211.0
$117.9
$328.9
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, 2013 and 2012.
(In Millions)
COMMERCIAL
PERSONAL
TOTAL
(In Millions)
COMMERCIAL
PERSONAL
TOTAL
DECEMBER 31, 2013
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 Undrawn
Exposures
Commitments and Standby
Letters of Credit
$
99.5 $
193.9 $
293.4
12,520.5
16,571.6
29,092.1
12,620.0
16,765.5
29,385.5
8.1
2.3
10.4
132.8
134.9
267.7
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
$
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
140.9
137.2
278.1
leases
166.1
131.8
297.9
27.1
2.7
29.8
Allowance for Undrawn
Exposures
Commitments and Standby
Letters of Credit
28.1
1.6
29.7
Total Allowance for Credit Losses
$
168.0 $
139.9 $
307.9
Total Allowance for Credit Losses
$
194.2 $
133.4 $
327.6
2 0 1 3 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 85
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: banks and bank
holding companies, residential real estate, and commercial
real estate.
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 $19.9 billion and $18.9 billion
at December 31, 2013 and 2012, respectively, and noninterest-
bearing demand balances maintained at correspondent banks,
which totaled $3.0 billion and $3.7 billion at December 31, 2013
and 2012, 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.
Residential Real Estate. At December 31, 2013, residential
real estate loans totaled $10.3 billion, or 36% of total U.S. loans
at December 31, 2013, compared with $10.4 billion or 37% at
December 31, 2012. 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 $10.3
billion in residential real estate loans, $3.1 billion were in the
greater Chicago area, $2.5 billion were in Florida, and $1.6
billion were in California, with the remainder distributed
notes to consolidated financial statements
throughout the other geographic regions within the U.S. served
by Northern Trust. Legally binding undrawn commitments to
extend residential real estate credit, which are primarily equity
credit
totaled $1.7 billion and $1.2 billion at
December 31, 2013 and 2012, respectively.
lines,
the acquisition or
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
provided for
income
producing properties. Cash flows
from the properties
generally are sufficient to amortize the loan. These loans
average approximately $1.8 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
will
refinance the loan through a
commercial mortgage with Northern Trust or another
financial institution upon completion.
the project or
refinancing of
sell
The table below provides additional detail regarding
commercial real estate loan types:
(In Millions)
Commercial Mortgages
Apartment/ Multi-family
Office
Retail
Industrial/ Warehouse
Other
Total Commercial Mortgages
Construction, Acquisition and Development
Loans
Single Family Investment
Other Commercial Real Estate Related
2013
2012
$ 616.2
686.0
768.0
318.6
110.6
$ 652.9
621.4
614.5
312.5
148.7
2,499.4
2,350.0
254.2
110.0
92.2
289.4
135.0
85.4
Total Commercial Real Estate Loans
$2,955.8
$2,859.8
2 0 1 3 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 86
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
DECEMBER 31, 2013
ORIGINAL
COST
ACCUMULATED
DEPRECIATION
NET BOOK
VALUE
$
27.1
255.6
488.7
323.4
$ 0.6
134.1
320.8
213.3
$ 26.5
121.5
167.9
110.1
Leases
82.5
49.7
32.8
Total Buildings and Equipment
$1,177.3
$718.5
$458.8
The charge for depreciation, which includes depreciation of
assets recorded under capital
leases and is included within
occupancy expense in the consolidated statement of income,
amounted to $92.3 million in 2013, $88.3 million in 2012, and
$89.2 million in 2011.
Note 10 – Lease Commitments
At December 31, 2013, 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, 2013 for all non-cancelable operating leases
with a term of 1 year or more are as follows:
(In Millions)
2014
2015
2016
2017
2018
Later Years
Total Minimum Lease Payments
Less: Sublease Rentals
Net Minimum Lease Payments
FUTURE MINIMUM
LEASE PAYMENTS
$ 82.2
75.8
70.4
68.8
66.3
346.8
710.3
(26.5)
$683.8
notes to consolidated financial statements
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.
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, 2013.
(In Millions)
2014
2015
2016
2017
2018
Later Years
FUTURE MINIMUM
LEASE PAYMENTS, NET
$ 8.4
8.3
8.0
8.2
8.4
7.0
48.3
11.4
$36.9
Total Minimum Lease Payments, net
Less: Amount Representing Interest
Net Present Value under Capital Lease Obligations
Note 11 – Goodwill and Other Intangibles
Goodwill. Changes by business unit
in the carrying
amount of goodwill for the years ended December 31, 2013
and 2012, including the effect of foreign exchange rates on
non-U.S. dollar denominated balances, were as follows:
(In Millions)
Balance at December 31, 2011
Foreign Exchange Rates
Balance at December 31, 2012
Foreign Exchange Rates
Balance at December 31, 2013
CORPORATE &
INSTITUTIONAL
SERVICES
WEALTH
MANAGEMENT
$ 460.6
5.7
$ 466.3
2.9
$469.2
TOTAL
$ 532.0
5.8
$ 537.8
2.9
$ 71.4
0.1
$ 71.5
–
$71.5 $540.7
Other Intangible Assets Subject to Amortization. The
gross carrying amount and accumulated amortization of other
intangible assets subject to amortization as of December 31,
2013 and 2012 were as follows.
Operating lease rental expense, net of rental income, is
recorded in occupancy expense and amounted to $76.2
million in 2013, $77.9 million in 2012, and $84.2 million in
2011.
(In Millions)
Gross Carrying Amount
Accumulated Amortization
Net Book Value
DECEMBER 31,
2013
2012
$198.2
115.2
$252.1
148.1
$ 83.0
$104.0
2 0 1 3 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 87
Other intangible assets consist primarily of the value of
acquired client relationships and are included within other
assets in the consolidated balance sheet. Amortization expense
related to other intangible assets was $21.1 million, $20.3
million, and $17.5 million for the years ended December 31,
2013, 2012, and 2011, respectively. Amortization for the years
2014, 2015, 2016, 2017, and 2018 is estimated to be $19.7
million, $11.9 million, $9.3 million, $9.3 million, and $8.6
million, respectively.
Note 12 – Senior Notes and Long-Term Debt
Senior Notes. A summary of senior notes outstanding at
December 31 is presented below.
($ In Millions)
RATE
2013
2012
Corporation-Senior Notes(1)(4)
Fixed Rate Due Aug. 2013(5)(11)
Fixed Rate Due May 2014
Fixed Rate Due Nov. 2020(6)
Fixed Rate Due Aug. 2021(7)
Fixed Rate Due Aug. 2022(8)
5.50
4.63
3.45
3.38
2.38
$
–
500.0
499.5
498.3
498.8
$ 409.6
500.0
499.5
498.1
498.6
Total Senior Notes
$1,996.6
$2,405.8
Long-Term Debt. A summary of
outstanding at December 31 is presented below.
long-term debt
($ 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)(9)(12)
5.375% Sterling Denominated Notes due
March 2015(10)
Total Bank-Subordinated Debt
Corporation-Subordinated 3.95% Notes due
Oct. 2025(1)(4)(11)
Federal Home Loan Bank Borrowings
One Year or Less (Average Rate at Year End
– 4.40% in 2013; 3.86% in 2012)
One to Three Years (Average Rate at Year
End – 4.40% in 2012)
Total Federal Home Loan Bank Borrowings
Capital Lease Obligations(3)
2013
2012
$
–
216.3
323.6
$ 200.0
240.8
362.3
248.3
242.3
788.2
1,045.4
749.1
–
135.0
200.0
–
135.0
36.9
135.0
335.0
41.2
Total Long-Term Debt
$1,709.2
$1,421.6
Long-Term Debt Qualifying as Risk-Based Capital
$1,158.7
$ 556.7
(1) Not redeemable prior to maturity.
(2) Under the terms of its current Offering Circular dated November 6, 2013, 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.
notes to consolidated financial statements
(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 0.09%.
(6) Notes issued at a discount of 0.117%.
(7) Notes issued at a discount of 0.437%
(8) Notes issued at a discount of 0.283%
(9) Notes issued at a discount of 0.02%
(10) Notes issued at a discount of 0.484%
(11) Notes issued at a discount of 0.114%
(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, 2013, increases in the carrying values of the senior
and subordinated notes outstanding of none and $40.1 million, respectively, were recorded.
As of December 31, 2012, increases in the carrying values of senior and subordinated notes
outstanding of $9.8 million and $103.3 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
the trusts are
Securities, Series B. The sole assets of
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
the tier 1
Street Reform and Consumer Protection Act,
regulatory capital treatment of these securities is required to
be phased out over a three-year period that began on
January 1, 2013. The phase-out of tier 1 capital treatment as
determined by bank regulators is 50% in 2014, 75% in 2015
and 100% thereafter. As these securities phase out of tier 1
capital, they will be eligible for inclusion in tier 2 capital,
beginning with 80% eligibility in 2014, and thereafter will
phase out of tier 2 at an incremental 10% a year until they are
fully phased out in 2022.
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
preferential
irrevocably
cumulative
entitled
receive
fully,
The
has
to
2 0 1 3 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 88
three-month LIBOR plus 0.52% and 0.59%, respectively.
Subject to certain exceptions, the Corporation has the right to
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
to certain
Corporation will not be permitted,
exceptions, to pay or declare any cash distributions with
respect to the Corporation’s capital stock or debt securities
to the Subordinated
that
Debentures, until all past due distributions are paid. The
Subordinated Debentures are unsecured and subordinated to
substantially all of the Corporation’s existing indebtedness.
rank the same as or
subject
junior
The Corporation has the right to redeem the Series A and
Series B Subordinated Debentures, in whole or in part, at a
price equal to the principal amount plus accrued and unpaid
interest. The following table summarizes the book values of
the outstanding Subordinated Debentures as of December 31,
2013 and 2012:
notes to consolidated financial statements
particular
preferences,
and
the
restrictions for each series of preferred stock issued. There was
no preferred stock outstanding at December 31, 2013 or 2012.
qualifications
rights,
Common Stock. The Corporation’s current common
stock repurchase authorization was approved by the Board in
April of 2013. The stock repurchase authorization remaining
after December 31, 2013 is 7.9 million shares. 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.
Under
the Corporation’s capital plan submitted in
January 2013, which was reviewed without objection by the
Federal Reserve in March 2013,
the Corporation may
repurchase up to $164.5 million of common stock after
December 31, 2013 through March 2014. In January 2014, the
Corporation submitted its most recent capital plan to the
Federal Reserve Board.
The average price paid per share for common stock
repurchased in 2013, 2012, and 2011 was $55.90, $46.32, and
$49.63, respectively.
(In Millions)
2013
2012
common stock outstanding follows:
NTC Capital I Subordinated Debentures due
January 15, 2027
$154.0
$153.9
2013
2012
2011
DECEMBER 31,
An analysis of changes in the number of shares of
NTC Capital II Subordinated Debentures due
April 15, 2027
Total Subordinated Debentures
123.1
123.1
$277.1
$277.0
Note 14 – Stockholders’ Equity
Preferred Stock. The Corporation is authorized to issue
10.0 million shares of preferred stock without par value. The
Corporation’s board of directors (Board) is authorized to fix
Balance at
January 1
Incentive Plan and
Awards
Stock Options
Exercised
Treasury Stock
Purchased
Balance at
238,914,988
241,008,509
242,268,903
863,958
449,463
189,793
3,088,490
973,270
149,385
(5,545,401)
(3,516,254)
(1,599,572)
December 31
237,322,035
238,914,988
241,008,509
2 0 1 3 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 89
notes to consolidated financial statements
Note 15 – Accumulated Other Comprehensive Income (Loss)
The following tables summarize the components of accumulated other comprehensive income (loss) at December 31, 2013, 2012,
and 2011, and changes during the years then ended.
(In Millions)
Net Unrealized Gains (Losses) on Securities
BALANCE AT
DECEMBER 31,
2013
NET
CHANGE
BALANCE AT
DECEMBER 31,
2012
NET
CHANGE
BALANCE AT
DECEMBER 31,
2011
NET
CHANGE
BALANCE AT
DECEMBER 31,
2010
Available for Sale
$
6.0
$ (95.0)
$ 101.0
$ 61.2
$ 39.8
$ 53.3
$ (13.5)
Net Unrealized Gains (Losses) on Cash Flow
Hedges
Net Foreign Currency Adjustments
Net Pension and Other Postretirement Benefit
Adjustments
Total
2.9
7.1
4.3
(3.4)
(1.4)
10.5
5.6
20.0
(7.0)
(9.5)
(18.4)
(2.5)
11.4
(7.0)
(260.3)
132.8
(393.1)
(24.2)
(368.9)
(72.7)
(296.2)
$(244.3)
$ 38.7
$(283.0)
$ 62.6
$(345.6)
$(40.3)
$(305.3)
YEAR ENDED DECEMBER 31,
BEFORE
TAX
2013
TAX
EFFECT
AFTER
TAX
BEFORE
TAX
2012
TAX
EFFECT
AFTER
TAX
BEFORE
TAX
2011
TAX
EFFECT
AFTER
TAX
(In Millions)
Unrealized Gains (Losses) on Securities
Available for Sale
Noncredit-Related Unrealized Losses
on Securities OTTI
$
3.0
$ (1.1)
$ 1.9
$ 15.7
$ (5.9)
$ 9.8
$ 10.2
$ (3.6)
$ 6.6
Other Unrealized Gains (Losses) on
Securities Available for Sale
Reclassification Adjustment for
(Gains) Losses Included in Net
Income
Net Change
Unrealized Gains (Losses) on Cash Flow
Hedges
Unrealized Gains (Losses) on Cash
Flow Hedges
Reclassification Adjustment for
(Gains) Losses Included in Net
Income
Net Change
Foreign Currency Adjustments
Foreign Currency Translation
Adjustments
Net Investment Hedge Gain (Losses)
Net Change
Pension and Other Postretirement Benefit
Adjustments
Net Actuarial Gain (Loss)
Prior Service Benefit
Reclassification Adjustment for Losses
(156.8)
59.0
(97.8)
96.2
(36.1)
60.1
61.6
(23.4)
38.2
1.6
(0.7)
0.9
(13.9)
5.2
(8.7)
13.5
(5.0)
8.5
$(152.2)
$ 57.2
$ (95.0)
$ 98.0
$(36.8)
$ 61.2
$ 85.3
$(32.0)
$ 53.3
$
2.1
$ (0.7)
$ 1.4
$ 3.2
$ (0.6)
$ 2.6
$ (23.6)
$ 8.8
$(14.8)
4.7
6.8
$
(1.8)
2.9
4.8
(1.8)
3.0
(5.6)
2.0
(3.6)
$ (2.5)
$ 4.3
$ 8.0
$ (2.4)
$ 5.6
$ (29.2)
$ 10.8
$(18.4)
$ 91.9
(107.3)
$(29.7)
41.7
$ 62.2
(65.6)
$ 37.9
(33.7)
$ 3.1
12.7
$ 41.0
(21.0)
$ (7.0)
25.7
$
–
(21.2)
$ (7.0)
4.5
$ (15.4)
$ 12.0
$ (3.4)
$ 4.2
$ 15.8
$ 20.0
$ 18.7
$(21.2)
$ (2.5)
$ 157.7
–
$(54.9)
–
$102.8
–
$(62.8)
–
$ 15.8
–
$(47.0)
–
$(158.2)
7.7
$ 61.3
(2.9)
$(96.9)
4.8
Included in Net Income
46.1
(16.1)
30.0
33.9
(11.1)
22.8
30.2
(10.8)
19.4
Net Change
$ 203.8
$(71.0)
$132.8
$(28.9)
$ 4.7
$(24.2)
$(120.3)
$ 47.6
$(72.7)
2 0 1 3 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 90
notes to consolidated financial statements
The following table provides the location and before-tax amounts of reclassifications out of accumulated other comprehensive
income (loss) during the years ended December 31, 2013, 2012 and 2011.
(In Millions)
Securities Available for Sale
Realized (Gains) Losses on Securities Available for Sale
Realized (Gains) Losses on Cash Flow Hedges
Foreign Exchange Contracts
Pension and Other Postretirement Benefit Adjustments
Amortization of Net Actuarial (Gain) Loss
Amortization of Prior Service Cost
Gross Reclassification Adjustment
Note 16 – Net Income Per Common Share
LOCATION OF
RECLASSIFICATION ADJUSTMENTS
RECOGNIZED IN INCOME
AMOUNT OF RECLASSIFICATION
ADJUSTMENTS RECOGNIZED
IN INCOME
YEAR ENDED DECEMBER 31,
2013
2012
2011
Investment Security Gains (Losses), net
$ 1.6
$(13.9)
$13.5
Other Operating Income/ Expense
4.7
4.8
(5.6)
Employee Benefits
Employee Benefits
49.0
(2.9)
38.8
(4.9)
33.4
(3.2)
$46.1
$ 33.9
$30.2
The computations of net income per common share are presented below.
($ 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
2013
2012
2011
$
239,265,313
731.3
11.9
719.4
3.01
$
240,417,805
687.3
10.0
677.3
2.82
$
241,401,310
603.6
7.1
596.5
2.47
239,265,313
1,289,527
240,417,805
463,439
241,401,310
410,074
240,554,840
240,881,244
241,811,384
$
719.5
2.99
$
677.3
2.81
$
596.5
2.47
Note: Common stock equivalents totaling 3,498,894, 12,158,601, and 13,240,787 for the years ended December 31, 2013, 2012, and 2011, 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
2013
2012
2011
$ 743.1
237.2
11.6
142.1
21.5
$1,155.5
$ 103.3
1.5
0.4
3.3
74.4
37.1
2.4
$ 222.4
$ 933.1
$ 828.6
250.6
17.7
176.4
14.4
$1,287.7
$ 156.7
1.2
0.4
4.0
72.0
60.3
2.8
$ 297.4
$ 990.3
$ 938.7
223.6
25.0
192.8
28.5
$1,408.6
$ 230.0
1.9
0.7
5.5
64.4
94.6
2.4
$ 399.5
$1,009.1
2 0 1 3 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 91
Note 18 – Other Operating Income
The components of other operating income were as follows:
(In Millions)
Loan Service Fees
Banking Service Fees
Other Income
2013
2012
2011
$ 61.9
50.9
53.7
$ 64.5
55.0
35.4
$ 68.9
54.9
34.3
Total Other Operating Income
$166.5
$154.9
$158.1
Note 19 – Other Operating Expense
The components of other operating expense were as follows:
notes to consolidated financial statements
Included in other liabilities within the consolidated
balance sheet at December 31, 2013 and 2012 were $15.6
million and $19.4 million of unrecognized tax benefits,
respectively. If recognized, 2013 and 2012 net income would
increased by $12.6 million and $16.3 million,
have
respectively, resulting in a decrease of those years’ effective
income tax rates. A reconciliation of the beginning and ending
amount of unrecognized tax benefits is as follows:
(In Millions)
Balance at January 1
Additions for Tax Positions Taken in Prior Years
Reductions for Tax Positions Taken in Prior Years
Reductions Resulting from Expiration of Statutes
2013
2012
$19.4
2.4
(4.4)
(1.8)
$17.8
4.6
(1.2)
(1.8)
$15.6
$19.4
(In Millions)
2013
2012
2011
Balance at December 31
Business Promotion
FDIC Insurance Premiums
Staff Related
Other Intangibles Amortization
Legal Settlement Charge
Other Expenses
$ 91.6
23.5
39.1
21.1
19.2
119.7
$ 87.8
25.4
41.9
20.3
–
107.5
$ 82.1
29.3
37.6
17.5
–
100.6
Total Other Operating Expense
$314.2
$282.9
$267.1
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)
2013
2012
2011
Tax at Statutory Rate
Tax Exempt Income
Leveraged Lease Adjustments
Foreign Tax Rate Differential
State Taxes, net
Other
$376.4
(6.2)
(2.3)
(27.6)
26.3
(22.4)
$347.3
(8.0)
(12.0)
(27.1)
20.4
(15.6)
$309.3
(9.9)
(4.7)
(21.3)
22.8
(16.1)
Provision for Income Taxes
$344.2
$305.0
$280.1
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 2009, or non-
U.S. tax authorities for years before 2007. The Corporation is
no longer subject to income tax examinations by state or local
tax authorities for years before 2007.
Unrecognized tax benefits had net decreases of $3.8
million, resulting in a remaining balance of $15.6 million at
December 31, 2013, compared to 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
measurement,
authorities, or
settlements with taxing
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.
The provision for income tax in 2012 included a $12.4
million tax benefit in connection with the resolution of certain
leveraged lease related matters.
A benefit for recoveries of interest and penalties of $1.7
million, net of tax, was included in the provision for income
taxes for the year ended December 31, 2013. This compares to
a provision for interest and penalties of $0.4 million, net of
tax,
ended December 31, 2012. As of
December 31, 2013 and 2012, the liability for the potential
payment of interest and penalties totaled $11.0 million and
$9.0 million, net of tax, respectively.
the year
for
2 0 1 3 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 92
notes to consolidated financial statements
Pre-tax earnings of non-U.S. subsidiaries are subject to
U.S. taxation when effectively repatriated. Northern Trust
provides income taxes on the undistributed earnings of non-
U.S. subsidiaries, except to the extent that those earnings are
indefinitely reinvested outside the U.S. Northern Trust elected
to indefinitely reinvest $141.0 million, $137.4 million, and
$105.9 million of 2013, 2012, and 2011 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, 2013, the cumulative amount of undistributed
pre-tax earnings in these subsidiaries approximately $956.0
million. Based on the current U.S. federal income tax rate, an
additional deferred tax liability of approximately $212.0
million would have been required as of December 31, 2013 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:
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)
2013
2012
2011
DECEMBER 31,
Deferred Tax Liabilities:
Lease Financing
Software Development
Accumulated Depreciation
Compensation and Benefits
State Taxes, net
Other Liabilities
$392.0
299.0
22.0
112.2
63.3
104.0
$409.1
277.8
19.7
29.7
54.7
170.9
$398.2
254.9
48.6
7.1
52.4
137.6
Gross Deferred Tax Liabilities
992.5
961.9
898.8
Deferred Tax Assets:
Allowance for Credit Losses
Other Assets
Gross Deferred Tax Assets
Valuation Reserve
Deferred Tax Assets, net of Valuation
107.8
81.1
188.9
–
114.7
114.5
229.2
–
114.5
150.0
264.5
–
2013
2012
2011
Net Deferred Tax Liabilities
$803.6
$732.7
$634.3
Reserve
188.9
229.2
264.5
(In Millions)
Current Tax Provision:
Federal
State
Non-U.S.
Total
Deferred Tax Provision:
Federal
State
Non-U.S.
Total
$185.6
24.6
67.4
$140.5
21.4
63.4
$113.6
15.1
54.2
277.6
$225.3
$182.9
53.9
14.1
(1.4)
66.6
$ 66.0
10.6
3.1
$ 84.0
11.3
1.9
79.7
97.2
Provision for Income Taxes
$344.2
$305.0
$280.1
In addition to the amounts shown above, tax charges
(benefits) have been recorded directly to stockholders’ equity
for the following items:
(In Millions)
2013
2012
2011
Current Tax Benefit for Employee
Stock Options and Other Stock-
Based Plans
Tax Effect of Other Comprehensive
$3.0
$ 2.3
$ 0.6
Income
4.3
18.7
(5.2)
No valuation allowance related to deferred tax assets was
as
recorded at December 31, 2013, 2012, or 2011,
management believes it is more likely that not that the
deferred tax assets will be fully realized. At December 31, 2013,
Northern Trust had no net operating loss carryforwards.
Note 21 – Employee Benefits
The Corporation and certain of
its subsidiaries provide
various benefit programs, including defined benefit pension,
postretirement health care, and defined contribution plans. A
description of each major plan and related disclosures are
provided below.
Pension. A noncontributory qualified defined benefit
pension plan covers
substantially all U.S. employees of
Northern Trust. Employees of various European subsidiaries
retain benefits in local defined benefit plans, although those
plans are closed to new participants and to future benefit
accruals.
2 0 1 3 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 93
notes to consolidated financial statements
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
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, 2013 and 2012 amounted to
$85.1 million and $81.9 million, respectively. Contributions of
$16.4 million and $12.3 million were made to the “Rabbi”
Trust in 2013 and 2012, respectively.
Benefit levels under the U.S. qualified and supplemental
plans have been modified by Plan Amendments effective
April 1, 2012. U.S. qualified and supplemental plan expense in
2013 and 2012 reflect the modified benefit levels, as will future
periods.
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 2013, 2012, and
2011. Prior service costs are being amortized on a straight-line
basis over 11 years for the U.S. plan and 9 years for the
supplemental plan.
Accumulated Benefit Obligation
$ 827.9
$ 918.0
$164.7
U.S. PLAN
NON-U.S. PLANS
SUPPLEMENTAL PLAN
2013
2012
2013
919.7
1,342.1
1,030.4
1,277.7
164.7
148.5
2012
$158.1
158.1
133.9
2013
2012
$ 89.8
$ 98.9
101.5
–
106.4
–
$ 422.4
$ 247.3
$ (16.2)
$ (24.2)
$(101.5)
$(106.4)
P L A N S T A T U S
($ In Millions)
Projected Benefit Obligation
Plan Assets at Fair Value
Funded Status at December 31
Weighted-Average Assumptions:
Discount Rates
Rate of Increase in Compensation Level
Expected Long-Term Rate of Return on Assets
5.00%
4.25
7.75
4.25%
4.02
7.75
4.31%
N/A
4.84
4.42%
N/A
4.76
5.00%
4.25
N/A
4.25%
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
2013
$310.7
(3.5)
307.2
119.5
2012
$507.4
(4.0)
503.4
189.6
2013
$40.9
–
40.9
4.8
Net Amount in Accumulated Other Comprehensive Income
$187.7
$313.8
$36.1
2012
$46.8
–
46.8
5.8
$41.0
2013
$64.2
1.6
65.8
25.6
$40.2
2012
$71.4
2.1
73.5
27.7
$45.8
N E T P E R I O D I C P E N S I O N E X P E N S E
($ In Millions)
Service Cost
Interest Cost
Expected Return on Plan Assets
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
2013
$ 30.3
42.1
(93.3)
42.5
(0.4)
U.S. PLAN
2012
$ 35.3
41.4
(87.0)
34.3
(0.4)
NON-U.S. PLANS
SUPPLEMENTAL PLAN
2011
$ 42.8
40.8
(78.8)
26.0
1.6
2013
$
–
6.6
(6.2)
1.0
–
2012
$
–
6.2
(6.8)
0.7
–
2011
$
–
6.5
(8.3)
0.2
–
2013
$ 1.6
4.4
N/A
6.7
0.5
2012
$ 3.0
4.5
N/A
6.1
0.6
2011
$ 3.2
4.4
N/A
5.6
0.4
$ 21.2
$ 23.6
$ 32.4
$ 1.4
$ 0.1
$ (1.6)
$13.2
$14.2
$13.6
4.25%
4.75%
5.50%
4.42%
5.02%
5.58%
4.25%
4.75%
5.50%
4.02
7.75
4.02
8.00
4.02
8.00
N/A
4.76
N/A
5.28
N/A
6.27
4.02
N/A
4.02
N/A
4.02
N/A
2 0 1 3 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 94
notes to consolidated financial statements
Pension expense for 2014 is expected to include approximately $28.4 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
U.S. PLAN
NON-U.S. PLANS
SUPPLEMENTAL PLAN
2013
2012
2013
$1,030.4
30.3
42.1
(125.4)
(57.7)
–
$ 904.6
35.3
41.4
96.6
(47.5)
–
$158.1
–
6.6
0.4
(5.0)
4.6
$ 919.7
$1,030.4
$164.7
2012
$127.1
–
6.2
24.8
(6.1)
6.1
$158.1
2013
$106.4
1.6
4.4
(0.5)
(10.4)
–
$101.5
2012
$100.3
3.0
4.5
10.9
(12.3)
–
$106.4
(In Millions)
Beginning Balance
Service Cost
Interest Cost
Actuarial (Gain) Loss
Benefits Paid
Foreign Exchange Rate Changes
Ending Balance
E S T I M A T E D F U T U R E B E N E F I T P A Y M E N T S
(In Millions)
2014
2015
2016
2017
2018
2019-2023
U.S.
PLAN
NON-U.S.
PLANS
SUPPLEMENTAL
PLAN
$ 62.7
61.2
66.0
67.5
70.7
377.2
$ 2.2
2.6
2.8
3.1
3.2
21.2
$ 9.0
8.5
9.3
10.7
9.4
50.9
C H A N G E I N P L A N A S S E T S
(In Millions)
2013
2012
2013
2012
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
$1,277.7
122.1
–
(57.7)
$1,094.1
131.1
100.0
(47.5)
$133.9
11.5
4.3
(5.0)
$123.3
11.3
–
(6.1)
–
–
3.8
5.4
$1,342.1
$1,277.7
$148.5
$133.9
The minimum required and maximum deductible
contributions for the U.S. qualified plan in 2014 are estimated
to be zero and $195.0 million, respectively.
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
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.
duration
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 commingled funds that invest in a diversified blend of
longer
securities. Alternative
income
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
two
investments in a hedge fund of funds, which invests, either
directly or indirectly, in a diversified portfolio of funds or other
pooled investment vehicles.
fixed
2 0 1 3 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 95
notes to consolidated financial statements
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.
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.
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, 2013 or 2012.
Investment risk is measured and monitored on an
through quarterly liability measurements,
ongoing basis
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 the U.S. qualified 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
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
the underlying investments of
fund’s
investment manager or general partner takes into account the
estimated value reported by the underlying funds as well as
any other considerations that may, in their judgment, increase
or decrease such estimated value.
each fund,
the
While Northern Trust believes its valuation methods for
plan assets are appropriate and consistent with other market
participants,
or
assumptions, particularly as applied to Level 3 assets, could
have a material effect on the computation of their estimated
fair values.
different methodologies
the use
of
2 0 1 3 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 96
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, 2013 and 2012.
(In Millions)
LEVEL 1
LEVEL 2
LEVEL 3
TOTAL
DECEMBER 31, 2013
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
$116.0 $
52.9
–
3.9
131.7
– $
– $ 116.0
56.8
–
131.7
–
138.4
39.7
–
–
–
–
–
–
–
5.5
–
–
304.6
6.6
65.4
333.7
40.9
–
–
–
–
–
–
–
–
–
–
47.7
55.1
–
138.4
39.7
304.6
6.6
65.4
333.7
40.9
47.7
55.1
5.5
Total Assets at Fair Value
$352.5 $886.8 $102.8 $1,342.1
(In Millions)
Preferred and Common
Stock – U.S.
Stock – 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
DECEMBER 31, 2012
LEVEL 1
LEVEL 2
LEVEL 3
TOTAL
$111.5 $
53.6
–
–
2.3
142.4
$
– $ 111.5
55.9
–
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
The following table presents the changes in Level 3 assets
for the years ended December 31, 2013 and 2012.
PRIVATE EQUITY
FUNDS
HEDGE FUND
(In Millions)
2013
2012
2013
2012
Fair Value at January 1
Actual Return on Plan Assets
Purchases
Sales
$ 47.4
5.5
6.2
(11.4)
$45.5
2.5
4.3
(4.9)
$30.2
4.9
20.0
–
$29.2
1.0
–
–
Fair Value at December 31
$ 47.7
$47.4
$55.1
$30.2
Note: The return on plan assets represents the change in the unrealized gain (loss) on assets
still held at December 31.
notes to consolidated financial statements
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
long-term portfolio rate of
established with
consideration given to diversification and rebalancing. The rate
is reviewed against peer data and historical returns to verify the
return is reasonable and appropriate. Based on this approach
and the plan’s target asset allocation, the expected long-term
rate of return on assets as of the plan’s December 31, 2013
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
coverage. The
the
provisions of
discretion of Northern Trust, which also reserves the right to
terminate these benefits at any time.
this plan may be changed further at
postretirement
health
care
Effective in January 2012 Northern Trust participates in
an Employee Group Waiver Plan which allows Northern Trust
to offer substantially the same postretirement prescription
benefits
to eligible participants while increasing subsidy
reimbursements received by Northern Trust from the U.S.
government. This action served to reduce the January 31, 2012
postretirement health care plan liability by approximately
$26.7 million and increased amortization of the net actuarial
gain for the year ended December 31, 2012 by approximately
$3.3 million.
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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 2013 and 2012, and the change in the
accumulated postretirement benefit obligation during 2013
and 2012.
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
2013
2012
$22.5
8.7
$21.6
9.0
$31.2
$30.6
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
Prior Service Benefit
Gross Amount in Accumulated Other Comprehensive
Income
Income Tax Effect
Net Amount in Accumulated Other
Comprehensive Income
2013
2012
$(6.0)
–
$ (9.1)
(2.9)
(6.0)
(2.3)
(12.0)
(4.5)
$(3.7)
$ (7.5)
N E T P E R I O D I C P O S T R E T I R E M E N T ( B E N E F I T ) E X P E N S E
(In Millions)
Service Cost
Interest Cost
Amortization
Net (Gain) Loss
Prior Service Benefit
2013
2012
2011
$ 0.1
1.2
$ 0.2
1.3
$ 0.4
2.8
(1.2)
(3.0)
(2.3)
(5.1)
1.6
(5.2)
Net Periodic Postretirement (Benefit) Expense
$(2.9)
$(5.9)
$(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
Gross Benefits Paid
Medicare Subsidy
Plan Change
Ending Balance
2013
2012
$30.6
0.1
1.2
1.9
(2.8)
0.2
–
$ 54.5
0.2
1.3
4.5
(4.1)
0.9
(26.7)
$31.2
$ 30.6
notes to consolidated financial statements
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)
2014
2015
2016
2017
2018
2019-2023
TOTAL
POSTRETIREMENT
MEDICAL
BENEFITS
$ 3.0
3.2
3.2
3.2
3.1
12.3
Net periodic postretirement (benefit) expense for 2014 is
expected to include gains of $0.6 million related to the
amortization from AOCI of the net actuarial gain.
The weighted average discount rate used in determining
the accumulated postretirement benefit obligation was 5.0% at
December 31, 2013 and 4.25% at December 31, 2012. For
measurement purposes, an 8.0% annual increase in the cost of
pre-age 65 medical and drug benefits and a 7.5% annual
increase in the cost of post-age 65 medical and drug benefits
were assumed for 2013. These rates are both assumed to
gradually decrease until they reach 5.0% in 2021. The health
care cost trend rate assumption has an effect on the amounts
reported. For example, increasing or decreasing the assumed
health care trend rate by one percentage point in each year
would have the following effect.
(In Millions)
Effect on Postretirement Benefit
Obligation
Effect on Total Service and Interest
Cost Components
1–PERCENTAGE
POINT INCREASE
1–PERCENTAGE
POINT DECREASE
$0.8
–
$(0.7)
–
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 $43.0 million in 2013, $41.0
million in 2012, and $39.3 million in 2011.
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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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,
2013
2012
2011
$48.0
18.4
7.4
$73.8
$27.7
$44.0
27.4
2.5
$73.9
$27.7
$36.2
34.1
–
$70.3
$26.5
As of December 31, 2013, there was $112.0 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. 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.
Grants are outstanding under the 2012 Plan and The
Amended and Restated Northern Trust Corporation 2002
Stock Plan (2002 Plan), a predecessor plan. The total number
of shares of the Corporation’s common stock authorized for
issuance under the 2012 Plan is 30,000,000 plus shares
forfeited under the 2002 Plan. As of December 31, 2013,
shares available for future grant under the 2012 Plan,
including shares
totaled
31,034,922.
forfeited under the 2002 Plan,
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
following a change of control. All options terminate at such
notes to consolidated financial statements
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
2013
2012
2011
7.6
2.38%
29.5
1.43
7.5
2.79%
34.0
1.42
7.7
4.56%
43.2
2.94
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
the options.
common stock over the expected term of
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, 2013, 2012 and 2011.
(In Millions, Except Per Share Information)
2013
2012
2011
Weighted Average Grant-Date Per Share
Fair Value of Stock Options Granted
Grant-Date Fair Value of Stock Options
Vested
Stock Options Exercised
$12.80
$11.54
$15.26
30.0
32.1
27.9
Intrinsic Value as of Exercise Date
Cash Received
Tax Deduction Benefits Realized
26.9
146.2
9.8
12.8
32.3
4.6
1.5
5.4
0.5
The following is a summary of changes in nonvested stock
options for the year ended December 31, 2013.
NONVESTED OPTIONS
Nonvested as December 31, 2012
Granted
Vested
Forfeited or Cancelled
SHARES
4,966,030
446,868
(2,038,108)
(70,964)
WEIGHTED-
AVERAGE
GRANT-
DATE FAIR
VALUE
PER SHARE
$14.00
12.80
14.74
13.43
Nonvested at December 31, 2013
3,303,826
$13.40
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notes to consolidated financial statements
A summary of the status of stock options under the 2012 Plan and the 2002 Plan at December 31, 2013, and changes during the
year then ended, are presented in the table below.
($ In Millions Except Per Share Information)
Options Outstanding, December 31, 2012
Granted
Exercised
Forfeited, Expired or Cancelled
Options Outstanding, December 31, 2013
Options Exercisable, December 31, 2013
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 2013 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 1,181,321, 988,421, and 995,176, with
weighted average grant-date fair values of $52.82, $43.72, and
$50.79 per share, for the years ended December 31, 2013,
2012, and 2011, respectively. The total fair value of stock and
stock units vested during the years ended December 31, 2013,
2012, and 2011, was $47.0 million, $21.6 million, and $7.1
million, respectively.
A summary of the status of outstanding stock and stock
unit awards under the 2012 Plan and the 2002 Plan at
December 31, 2013, and changes during the year then ended,
is presented in the table below.
($ In Millions)
Stock and Stock Unit Awards Outstanding,
December 31, 2012
Granted
Distributed
Forfeited
AGGREGATE
INTRINSIC
VALUE
$165.9
NUMBER
3,306,444
1,181,321
(851,297)
(157,582)
Stock and Stock Unit Awards Outstanding,
December 31, 2013
3,478,886
$215.3
Units Convertible, December 31, 2013
181,059
$ 11.2
WEIGHTED
AVERAGE
EXERCISE
PRICE
PER SHARE
$52.53
52.69
47.43
56.30
$53.64
$55.52
SHARES
15,302,474
446,868
(3,088,490)
(668,041)
11,992,811
8,688,985
WEIGHTED
AVERAGE
REMAINING
CONTRACTUAL
TERM (YEARS)
AGGREGATE
INTRINSIC
VALUE
5.5
4.7
$110.5
$ 66.9
The following is a summary of nonvested stock and stock
unit awards at December 31, 2013, and changes during the
year then ended.
WEIGHTED
AVERAGE
GRANT-
DATE FAIR
VALUE PER
UNIT
NUMBER
3,136,496
1,181,321
(862,408)
(157,582)
$49.20
52.82
52.47
46.67
WEIGHTED
AVERAGE
REMAINING
VESTING
TERM
(YEARS)
2.0
NONVESTED STOCK
AND STOCK UNITS
Nonvested at
December 31, 2012
Granted
Vested
Forfeited
Nonvested at
December 31, 2013
3,297,827
$49.76
2.0
Performance Stock Units. Each performance stock unit
provides the recipient the opportunity to receive one share of
that vests. The number of
stock for each stock unit
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 years ended December 31, 2013 and 2012,
respectively, 296,650 and 198,552 performance stock units
were granted with weighted average grant-date fair values of
$49.07 and $43.65, respectively. Performance stock units
outstanding at December 31, 2013 and 2012, respectively, had
aggregate intrinsic values of $30.6 and $10.0 million and
weighted average remaining vesting terms of 2.7 and 3.1 years,
respectively.
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and $1.1 million in 2013, 2012,
Non-employee Director Stock Awards. Stock units with
total values of $1.1 million (20,599 units), $0.9 million (20,148
units), and $1.1 million (22,188 units) were granted to non-
employee directors in 2013, 2012 and 2011, respectively,
which vest or vested on the date of the annual meeting of the
Corporation’s stockholders in the following years. Total
expense recognized on these grants was $1.1 million, $0.9
million,
and 2011,
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
compensation until
services as director.
termination of
Deferred cash compensation is 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 $192.4 million in
2013, $186.8 million in 2012, and $176.7 million in 2011.
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.
notes to consolidated financial statements
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
“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 matters in which the Corporation
is able to estimate a range of reasonably possible loss mean the
upper end of the range of loss for matters for which the
Corporation believes the risk of loss is more than remote but
less than likely.
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,
(vi) do not specify the amount of damages sought, or
(vii) seek very large damages based on novel and complex
damage
the
Corporation cannot reasonably estimate the eventual outcome
their ultimate
of
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
both probable
estimable. When loss
contingencies are not both probable and reasonably estimable,
the Corporation does not record accruals. No material
accruals have been recorded for pending litigation or
threatened legal actions or regulatory matters.
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, 2013, the Corporation has estimated the upper
end of the range of reasonably possible losses for these matters
to be approximately $115 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
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in excess of amounts accrued) that cannot be reasonably
estimated for the reasons described above. Such matters are
not included in the estimate of reasonably possible losses
identified above.
As previously disclosed, a number of participants in our
securities lending program, which is associated with the
Corporation’s asset
servicing business, have commenced
either individual lawsuits or purported 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).
In the fourth quarter of 2013, Northern Trust recorded a
$19.2 million pre-tax charge in connection with an agreement
to resolve claims related to two of
these lawsuits. The
settlement is not final as it requires further documentation,
signed agreements and court approval. Other lawsuits related
to securities lending are not part of the proposed settlement,
and remain pending.
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, 2013 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
notes to consolidated financial statements
respectively, which
recorded in 2011, 2010, and 2009,
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, which was
approved by a federal judge on December 13, 2013, and is
subject to appeals. While the final settlement and ultimate
resolution of outstanding Visa related litigation and the timing
for removal of selling restrictions on shares owned by
Northern Trust are highly uncertain, based upon the
settlement
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.
terms
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, 2013 and 2012 totaled $55.4
million and $50.1 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
foreign
interest rates,
instruments is the possibility that
exchange rates, or credit
spreads could change in an
unanticipated manner, resulting in higher costs or a loss in the
underlying value of the instrument. These risks are mitigated
by establishing limits, monitoring the level of actual positions
taken against such established limits, and monitoring the level
of any interest rate sensitivity gaps created by such positions.
When establishing position limits, market
liquidity and
volatility, as well as experience in each market, are taken into
account.
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, respectively, on these instruments, net of any cash
collateral received or deposited. The amount of credit risk will
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foreign exchange rates, or credit
increase or decrease during the lives of the instruments as
interest rates,
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 Annexes and
other similar agreements are currently in place with a number
of counterparties which mitigate the aforementioned credit
risk associated with derivative activity conducted with those
counterparties by requiring that significant net unrealized fair
value gains be supported by collateral placed with Northern
Trust.
legally
enforceable master
Northern Trust has elected to net derivative assets and
liabilities when
netting
arrangements or similar agreements exist between Northern
Trust and the counterparty. Derivative assets and liabilities
recorded in the consolidated balance sheet were each reduced
by $1.2 billion and $982.5 million as of December 31, 2013
and 2012,
respectively, as a result of master netting
arrangements and similar agreements in place. Derivative
assets and liabilities recorded at December 31, 2013 also reflect
reductions of $210.7 million and $767.7 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 $118.6 million and $425.0
million, respectively, at December 31, 2012. Additional cash
collateral
received from and deposited with derivative
totaling $36.4 million and $39.3 million,
counterparties
respectively, as of December 31, 2013, and $1.6 million and
$73.3 million, respectively, as of December 31, 2012, were not
offset
and liabilities on the
assets
consolidated balance sheet as the amounts exceeded the net
derivative positions with those counterparties. Effective in the
second quarter of 2013, Northern Trust centrally clears
interest rate derivative instruments that are addressed under
the Dodd-Frank Wall Street Reform and
Title VII of
Consumer Protection Act. Securities posted as collateral for
these transactions totaled $27.6 million, are not offset against
derivative assets and liabilities on the consolidated balance
sheet, and the counterparty receiving the securities as
collateral does not have the right to repledge or sell the
securities.
against derivative
notes to consolidated financial statements
Certain master netting arrangements 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
liabilities with the
cash settlement of net derivative
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 $257.3 million and $178.9
million at December 31, 2013 and 2012, respectively. Cash
collateral amounts deposited with derivative counterparties on
those dates included $197.0 million and $155.4 million,
respectively, posted against these liabilities, resulting in a net
maximum amount of termination payments that could have
been required at December 31, 2013 and 2012 of $60.3 million
and $23.5 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
risk management purposes,
and risk management. For
Northern Trust uses foreign exchange contracts to reduce its
exposure to changes in foreign exchange rates relating to
certain forecasted non-functional currency denominated
foreign currency
revenue and expenditure transactions,
denominated assets and liabilities, and net investments in
non-U.S. affiliates.
interest payment obligations without
Interest rate contracts include swap and option contracts.
Interest rate swap contracts involve the exchange of fixed and
floating rate
the
exchange of
the underlying principal amounts. Northern
Trust enters into interest rate swap contracts on behalf of its
clients and also may utilize such contracts to reduce or
eliminate the exposure to changes in the cash flows or fair
value of hedged assets or liabilities due to changes in interest
rates. Interest rate option contracts may include 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.
2 0 1 3 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 103
notes to consolidated financial statements
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. Approximately 97% of Northern Trust’s derivatives outstanding at
December 31, 2013 and 2012, 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 Contracts
Total
DECEMBER 31, 2013
DECEMBER 31, 2012
FAIR VALUE
FAIR VALUE
NOTIONAL
VALUE
$243,135.0
5,001.7
ASSET
LIABILITY
$2,844.7
122.8
$2,846.2
117.0
NOTIONAL
VALUE
$213,246.7
4,946.6
ASSET
LIABILITY
$1,735.3
180.6
$1,730.4
174.0
$248,136.7
$2,967.5
$2,963.2
$218,193.3
$1,915.9
$1,904.4
Changes in the fair value of client-related and trading derivative instruments are recognized currently in income. The following
table shows the location and amount of gains and losses recorded in the consolidated statement of income for the years ended
December 31, 2013, 2012, and 2011.
(In Millions)
Foreign Exchange Contracts
Interest Rate 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,
2013
$244.4
12.7
$257.1
2012
$206.1
11.6
$217.7
2011
$324.5
5.9
$330.4
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notes to consolidated financial statements
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
DERIVATIVE
INSTRUMENT
RISK
CLASSIFICATION
NOTIONAL
VALUE
ASSET
LIABILITY
NOTIONAL
VALUE
ASSET
LIABILITY
DECEMBER 31, 2013
DECEMBER 31, 2012
FAIR VALUE
FAIR VALUE
Interest Rate Swap Contracts
Interest Rate
$3,296.9
$ 31.5
$ 44.8
$3,617.0
$ 3.4
$ 75.1
Debt
Interest Rate Swap Contracts
Interest Rate
1,250.0
83.6
33.4
900.0
126.3
0.2
CASH FLOW HEDGES
Forecasted Foreign Currency Denominated
Transactions
Foreign Exchange Contracts Foreign Currency
314.0
10.2
5.5
669.0
NET INVESTMENT HEDGES
Net Investments in Non-U.S. Affiliates
Total
Foreign Exchange Contracts Foreign Currency
1,684.9
9.8
52.8
1,451.4
$6,545.8
$135.1
$136.5
$6,637.4
$140.7
$114.6
8.7
2.3
11.5
27.8
In addition to the above, Sterling denominated debt, totaling $259.1 million and $242.3 million at December 31, 2013 and 2012,
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, 2013, 2012, and
2011.
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
2013
$ 26.3
(44.9)
$(18.6)
2012
$(48.4)
54.3
$ 5.9
2011
$ (56.6)
194.4
$137.8
There was $0.9 million of losses, $0.4 million of gains, and
$0.3 million of gains recorded within the fair values of hedged
items
for “long-haul” hedges during the years ended
December 31, 2013, 2012, and 2011, respectively, and $0.8
million of losses, $0.3 million of gains, and $0.9 million of
gains from ineffectiveness recorded during the years ended
December 31, 2013, 2012, and 2011, 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, 2013, 2012, or 2011. As of December 31,
2013, 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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notes to consolidated financial statements
During the year ended December 31, 2012, there was $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 years ended
December 31, 2013 and 2011. 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, 2013, 2012
and 2011. 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 2011,
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;
losses
reclassified during the year ended December 31, 2013. It is
estimated that a net gain of $3.1 million will be reclassified
into earnings within the next twelve months relating to cash
flow hedges.
there were no gains or
contracts
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,
FOREIGN EXCHANGE
CONTRACTS
(BEFORE TAX)
2013
2012
2011
$2.1
$(3.2)
$(23.6)
–
(2.1)
–
–
–
–
–
–
(2.6)
–
(4.6)
–
–
–
–
–
–
–
0.6
(0.1)
(1.2)
–
3.0
0.9
–
0.5
1.9
$ (4.7)
$(4.6)
$ 5.6
there was $5.3 million of gains from ineffectiveness recorded
for these hedges during the year ended December 31, 2012,
and no ineffectiveness recorded for these hedges during the
years ended December 31, 2013 and 2011.
The following table provides net investment hedge gains
and losses recognized in AOCI during the years ended
December 31, 2013 and 2012.
(In Millions)
Foreign Exchange Contracts
Sterling Denominated Subordinated Debt
Total
AMOUNT OF HEDGING
INSTRUMENT GAIN/(LOSS)
RECOGNIZED IN AOCI
(BEFORE TAX)
2013
2012
$(101.6)
(5.7)
$(24.7)
(9.0)
$(107.3)
$(33.7)
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notes to consolidated financial statements
Derivatives that are not formally designated as hedges under GAAP are entered into for risk management purposes. Foreign
exchange contracts 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, commercial loans, and forecasted foreign currency denominated transactions. Credit
default swaps are entered into to manage the credit risk associated with certain loans and loan commitments. Forward contracts are
entered into to manage the interest rate risk associated with loan commitments. The following table identifies the types of risk
management derivative instruments not formally designated as hedges and their notional amounts and fair values.
(In Millions)
Credit Default Swap Contracts
Foreign Exchange Contracts
Total
DECEMBER 31, 2013
DECEMBER 31, 2012
FAIR VALUE
FAIR VALUE
NOTIONAL
VALUE
$
–
168.8
$168.8
ASSET
$ –
1.0
1.0
LIABILITY
$ –
1.2
$1.2
NOTIONAL
VALUE
$
42.5
1,189.8
ASSET
LIABILITY
$
–
10.3
$1.0
3.0
$1,232.3
$10.3
$4.0
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, 2013, 2012, and 2011 for derivative instruments not formally designated as hedges under GAAP.
(In Millions)
Credit Default Swap Contracts
Forward Contracts
Foreign Exchange Contracts
Total
Note 26 – Offsetting of Assets and Liabilities
LOCATION OF DERIVATIVE GAIN/(LOSS)
RECOGNIZED IN INCOME
Other Operating Income
Other Operating Income
Other Operating Income
AMOUNT RECOGNIZED IN INCOME
2013
$(0.1)
–
(4.0)
$(4.1)
2012
$ (2.6)
–
11.3
$ 8.7
2011
$ 0.9
0.2
(7.0)
$(5.9)
The following tables provide information regarding the offsetting of derivative assets and of securities purchased under agreements
to resell within the consolidated balance sheet as of December 31, 2013 and 2012.
DECEMBER 31, 2013
(In Millions)
Derivative Assets(1)
Foreign Exchange Contracts Over the Counter (OTC)
Interest Rate Swaps OTC
Interest Rate Swaps Exchange Cleared
Cross Product Netting Adjustment
Cross Product Collateral Adjustment
GROSS
RECOGNIZED
ASSETS
$2,612.5
228.8
9.1
–
–
GROSS
AMOUNTS
OFFSET
$1,073.3
47.5
9.1
28.4
210.7
NET
AMOUNTS
PRESENTED
$1,539.2
181.3
–
–
–
Total Derivatives Subject to a Master Netting Arrangement
2,850.4
1,369.0
1,481.4
Total Derivatives Not Subject to a Master Netting Arrangement
253.2
253.2
Total Derivatives
3,103.6
1,369.0
1,734.6
GROSS
AMOUNTS
NOT OFFSET
$
–
–
–
–
–
–
–
–
NET
AMOUNT(3)
$1,539.2
181.3
–
–
–
1,481.4
253.2
1,734.6
Securities Purchased under Agreements to Resell(2)
$ 500.0
$
-
$ 500.0
$500.0
$
–
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DECEMBER 31, 2012
(In Millions)
Derivative Assets(1)
Foreign Exchange Contracts OTC
Interest Rate Swaps OTC
Cross Product Netting Adjustment
Cross Product Collateral Adjustment
GROSS
RECOGNIZED
ASSETS
$1,756.6
310.3
–
–
GROSS
AMOUNTS
OFFSET
$ 877.1
68.3
37.1
118.6
Total
Securities Purchased under Agreements to Resell(2)
2,066.9
1,101.1
$
35.4
$
–
notes to consolidated financial statements
NET
AMOUNTS
PRESENTED
GROSS
AMOUNTS
NOT OFFSET
$879.5
242.0
–
–
965.8
$ 35.4
$
–
–
–
–
–
$35.4
NET
AMOUNT(3)
$879.5
242.0
–
–
965.8
$
–
(1) Derivative assets are reported in other assets in the consolidated balance sheet. Other assets (excluding derivative assets) totaled $3,029.4 million and $2,964.4 million as of December 31,
2013 and 2012, respectively.
(2) Securities purchased under agreements to resell are reported in federal funds sold and securities purchased under agreements to resell in the consolidated balance sheet. Federal funds sold
totaled $29.6 million and $25.4 million as of December 31, 2013 and 2012, respectively.
(3) Northern Trust did not possess any cash collateral that was not offset in the consolidated balance sheet that could have been used to offset the net amounts presented in the consolidated
balance sheet as of December 31, 2013 and 2012.
The following tables provide information regarding the offsetting of derivative liabilities and of securities sold under agreements
to repurchase within the consolidated balance sheet as of December 31, 2013 and 2012.
DECEMBER 31, 2013
(In Millions)
Derivative Liabilities(1)
Foreign Exchange Contracts OTC
Interest Rate Swaps OTC
Interest Rate Swaps Exchange Cleared
Cross Product Netting Adjustment
Cross Product Collateral Adjustment
GROSS
RECOGNIZED
LIABILITIES
$2,039.0
163.7
31.5
–
–
GROSS
AMOUNTS
OFFSET
$1,073.3
47.5
9.1
28.4
767.7
Total Derivatives Subject to a Master Netting Arrangement
2,234.2
1,926.0
Total Derivatives Not Subject to a Master Netting Arrangement
866.7
–
NET
AMOUNTS
PRESENTED
$ 965.7
116.2
22.4
–
–
308.2
866.7
Total Derivatives
3,100.9
1,926.0
1,174.9
GROSS
AMOUNTS
NOT OFFSET
$
–
–
–
–
–
–
–
–
NET
AMOUNT(2)
$ 965.7
116.2
22.4
–
–
308.2
866.7
1,174.9
Securities Sold under Agreements to Repurchase
$ 917.3
$
–
$ 917.3
$917.3
$
–
DECEMBER 31, 2012
(In Millions)
Derivative Liabilities(1)
Foreign Exchange Contracts OTC
Interest Rate Swaps OTC
Credit Default Swaps OTC
Cross Product Netting Adjustment
Cross Product Collateral Adjustment
GROSS
RECOGNIZED
LIABILITIES
$1,772.7
249.3
1.0
–
–
GROSS
AMOUNTS
OFFSET
$ 877.1
68.3
–
37.1
425.0
Total
Securities Sold under Agreements to Repurchase
2,023.0
1,407.5
$ 699.8
$
–
NET
AMOUNTS
PRESENTED
GROSS
AMOUNTS
NOT OFFSET
NET
AMOUNT(2)
$895.6
181.0
1.0
–
–
615.5
$699.8
$
–
–
–
–
–
–
$699.8
$895.6
181.0
1.0
–
–
615.5
$
–
(1) Derivative liabilities are reported in other liabilities in the consolidated balance sheet. Other liabilities (excluding derivative liabilities) totaled $2,338.4 million and $1,961.7 million as of
December 31, 2013 and 2012, respectively.
(2) Northern Trust did not place any cash collateral with counterparties that was not offset in the consolidated balance sheet that could have been used to offset the net amounts presented in the
consolidated balance sheet as of December 31, 2013 and 2012.
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(repurchase
agreements)
All of Northern Trust’s securities sold under agreements
to repurchase
and securities
purchased under agreements to resell (reverse repurchase
agreements) involve the transfer of financial assets in exchange
for cash subject to a right and obligation to repurchase those
assets for an agreed upon amount. In the event of a repurchase
failure, the cash or financial assets are available for offset. All
of Northern Trust’s
repurchase agreements and reverse
to a master netting
repurchase agreements are subject
arrangement, which sets forth the rights and obligations for
repurchase and offset. Under the master netting arrangement,
Northern Trust is entitled to set off receivables from and
collateral placed with a single counterparty against obligations
owed to that counterparty. In addition, collateral held by
Northern Trust can be offset against receivables from that
counterparty.
Derivative asset and liability positions with a single
counterparty can be offset against each other in cases where
legally enforceable master netting arrangements or similar
agreements exist. Derivative assets and liabilities can be
further offset by cash collateral received from, and deposited
with, the transacting counterparty. The basis for this view is
that, upon termination of transactions subject to a master
netting arrangement or similar agreement, the individual
derivative receivables do not represent resources to which
general creditors have rights and individual derivative
payables do not represent claims that are equivalent to the
claims of general creditors. Effective in the second quarter of
2013, Northern Trust centrally clears those interest rate
derivative instruments addressed under Title VII of the Dodd-
Frank Act. These transactions are subject to an agreement
similar to a master netting arrangement, which has the same
rights of offset as described above.
Note 27 – Off-Balance Sheet Financial Instruments
Commitments and Letters of Credit. Northern Trust, in
the normal course of business, enters into various types of
commitments and issues letters of credit to meet the liquidity
and credit enhancement needs of its clients. The contractual
amounts of these instruments represent the potential credit
exposure should the instrument be fully drawn upon and the
client default. To control the credit risk associated with
entering into commitments and issuing letters of credit,
Northern Trust subjects such activities to the same credit
quality and monitoring controls as its lending activities.
notes to consolidated financial statements
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
including
public
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.
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,
2013
2012
$32,174.8
4,451.1
24.8
$30,045.7
4,573.7
27.9
(1) These amounts exclude $418.5 million and $406.7 million of commitments
participated to others at December 31, 2013 and 2012, respectively.
(2) These amounts include $208.9 million and $557.7 million of standby letters of credit
secured by cash deposits or participated to others as of December 31, 2013 and 2012,
respectively. The weighted average maturity of standby letters of credit was 25 months at
December 31, 2013 and 27 months at December 31, 2012.
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
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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, 2013 and 2012
subject to indemnification was $82.7 billion and $69.7 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.
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
members
stipulated in each clearing organization’s
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,
2013 and 2012 was approximately $73 million and $81
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 28 – 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
notes to consolidated financial statements
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
the lease and typically funds 20-30% of the asset’s cost via an
equity ownership in a trust with the remaining 70-80%
provided by third party non-recourse debt holders. In such
transactions, the trusts, which are VIEs, are created to provide
the lessee use of the property with substantially all of the rights
and obligations of ownership. The lessee’s maintenance and
operation of the leased property has a direct effect on the fair
value of the underlying property, and the lessee also has the
ability to increase the benefits it can receive and limit the
losses it can suffer by the manner in which it uses the
property. As a result, Northern Trust has determined that it is
not the primary beneficiary of these VIEs given it lacks the
power to direct the activities that most significantly impact the
economic performance of the VIEs.
Northern Trust’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, 2013 and 2012, the carrying amounts of these
investments, which are included in loans and leases in the
consolidated balance sheet, were $671.2 million and $673.6
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
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
is driven by the performance of
2 0 1 3 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 110
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.
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 undrawn commitments. As of December 31, 2013 and
2012,
in
community development projects deemed to be VIEs, which
are included in other assets in the consolidated balance sheet,
were $222.3 million and $248.2 million, respectively.
carrying amounts of
investments
these
the
As of December 31, 2013 and 2012, liabilities related to
in community
undrawn commitments on investments
development projects, which are included in other liabilities in
the consolidated balance sheet, were $19.8 million and $33.1
million, respectively. Northern Trust’s funding requirements
are limited to its invested capital and any additional undrawn
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.
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 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.
notes to consolidated financial statements
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.
Note 29 – 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, 2013, securities and loans
totaling $32.4 billion ($22.6 billion of government sponsored
agency and other securities, $222.7 million of obligations of
states and political subdivisions, and $9.6 billion of loans),
were pledged. Collateral required for these purposes totaled
$5.0 billion. Included in the total pledged assets are available
for sale securities with a total fair value of $915.3 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 not permitted, by contract or custom,
from agreements to resell
to repledge or sell collateral
securities purchased transactions. The total
fair value of
accepted collateral as of December 31, 2013 was $500.0
million. There was no repledged or sold collateral as of
December 31, 2013.
Deposits maintained to meet Federal Reserve Bank reserve
requirements averaged $0.9 billion in 2013.
Note 30 – Restrictions on Subsidiary Dividends and
Loans or Advances
the
Various federal and state statutory provisions limit
amount of dividends the Bank can pay to the Corporation
without regulatory approval. Approval of the Federal Reserve
Board is required for payment of any dividend by a state
chartered bank that is a member of the Federal Reserve System
if the total of all dividends declared by the bank in any
calendar year would exceed the total of its retained net income
(as defined by regulatory agencies) for that year combined
with its retained net income for the preceding two years. In
addition, a state member bank may not pay a dividend in an
2 0 1 3 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 111
amount greater than its “undivided profits,” as defined,
without regulatory and stockholder approval.
the declaration of
Under Illinois law, an Illinois state bank, prior to paying a
dividend, must carry over to surplus at least one-tenth of its
the last
net profits since the date of
preceding dividend, until the bank’s surplus is equal to its
capital. In addition, an Illinois state bank may not pay any
dividend in an amount greater than its net profits then on
hand, after deduction of losses and bad debts (defined as debts
due to a state bank on which interest is past due and unpaid
for a period of 6 months or more, unless the same are well
secured and in the process of collection).
the dividends would cause
The Bank is also prohibited under federal law from paying
any dividends if the Bank is undercapitalized or if the payment
of
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. The Dodd-Frank Act and Basel III, as
applied by the Federal Reserve Board to state member banks
and their holding companies by regulation or otherwise, may
impose additional restrictions on the ability of banking
institutions to pay dividends.
insured
repurchase
subsidiary, with
Under federal law, financial transactions by the Bank, the
Corporation’s
the
banking
Corporation and its affiliates that are in the form of loans or
investments, guarantees, derivative
extensions of credit,
transactions,
lending
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
agreements,
securities
notes to consolidated financial statements
transactions) and other
restrictions on covered
credit
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 31 – Business Units and Related Information
Northern Trust is organized around its two principal client-
focused business units, C&IS and Wealth Management. Asset
management and related services are provided to C&IS and
Wealth Management clients primarily by a third business unit,
Asset Management. Northern Trust emphasizes quality
through a high level of service complemented by the effective
use of technology, delivered by a fourth business unit, O&T.
The revenue and expenses of Asset Management are fully
allocated to C&IS and Wealth Management. The revenue and
expenses of O&T are fully allocated to C&IS, Wealth
Management, and Treasury and Other.
a
of
their
greater understanding
C&IS and Wealth Management results are presented to
financial
promote
performance. 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.
2 0 1 3 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 112
notes to consolidated financial statements
The following tables show the earnings contribution of Northern Trust’s business units for the years ended December 31, 2013,
2012, and 2011.
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
Percentage of Consolidated Net Income
Average Assets
W E A L T H M A N A G E M E N T 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
Percentage of Consolidated Net Income
Average Assets
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)
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)
Net Income
Percentage of Consolidated Net Income
Average Assets
2013
2012
2011
$ 1,443.8
238.8
177.3
275.9
$ 1,334.1
193.5
193.6
280.1
$ 1,196.4
315.7
169.7
282.5
2,135.8
(3.4)
1,657.9
481.3
145.6
2,001.3
(2.1)
1,599.9
403.5
114.3
1,964.3
(20.5)
1,522.4
462.4
168.3
$
335.7
$
289.2
$
294.1
46%
42%
49%
$53,308.2
$49,904.0
$47,533.7
2013
2012
2011
$ 1,166.0
5.6
116.7
557.7
$ 1,071.4
12.6
93.6
629.9
$
1,846.0
23.4
1,215.0
607.6
229.2
1,807.5
27.1
1,182.3
598.1
226.4
973.1
8.8
119.7
613.7
1,715.3
75.5
1,214.9
424.9
168.7
$
378.4
$
371.7
$
256.2
52%
54%
42%
$22,887.6
$23,917.9
$23,861.5
$
$
$
2013
8.0
132.0
140.0
–
120.9
19.1
1.9
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)
$
17.2
$
26.4
$
53.3
2%
4%
9%
$18,661.9
$19,153.6
$20,552.7
2 0 1 3 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 113
C O N S O L I D A T E D F I N A N C I A L I N F O R M A T I O N
(In Millions)
NONINTEREST INCOME
Trust, Investment and Other Servicing Fees
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
notes to consolidated financial statements
2013
2012
2011
$ 2,609.8
244.4
302.0
965.6
$ 2,405.5
206.1
294.2
1,031.1
$ 2,169.5
324.5
266.8
1,049.3
4,121.8
20.0
–
2,993.8
1,108.0
376.7
3,936.9
25.0
–
2,878.8
1,033.1
345.8
3,810.1
55.0
(23.1)
2,854.3
923.9
320.3
$
731.3
$
687.3
$
603.6
$94,857.7
$92,975.5
$91,947.9
Note: Stated on an FTE basis. The consolidated figures include $32.5 million, $40.8 million, and $40.2 million, of FTE adjustments for 2013, 2012, and 2011, respectively.
Northern Trust’s international activities are centered within the asset servicing, asset management, foreign exchange, cash
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, it is
impossible to segregate with precision revenues, expenses and assets between 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 recorded in
2011 from reductions in the Visa indemnification liability. As the Visa indemnification liability was fully eliminated in 2011, there
was no benefit recognized in 2012 or 2013.
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)
2013
Non-U.S.
U.S.
Total
2012
Non-U.S.
U.S.
Total
2011
Non-U.S.
U.S.
Total
Note: Total revenue is comprised of net interest income and noninterest income.
TOTAL ASSETS
TOTAL
REVENUE
INCOME BEFORE
INCOME TAXES
NET INCOME
$ 30,241.3
72,706.0
$1,101.0
2,988.3
$ 272.4
803.1
$201.3
530.0
$102,947.3
$4,089.3
$1,075.5
$731.3
$
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
2 0 1 3 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 114
notes to consolidated financial statements
Note 32 – 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.” The regulatory capital requirements
impose certain restrictions upon banks that meet minimum capital requirements but are not “well-capitalized” and obligate the
federal bank regulatory authorities to take “prompt corrective action” with respect to banks that do not maintain such minimum
ratios. Such prompt corrective action could have a direct material effect on a bank’s financial statements.
As of December 31, 2013 and 2012, 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,
2013 and 2012, Northern Trust’s non-U.S. banking subsidiaries had capital ratios above their specified minimum requirements.
There were no conditions or events since December 31, 2013 that management believes have adversely affected the capital
categorization of any Northern Trust subsidiary bank.
The table below summarizes the risk-based capital amounts and ratios for Northern Trust on a consolidated basis and for the
Bank.
($ In Millions)
AS OF DECEMBER 31, 2013
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, 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
ACTUAL
MINIMUM TO
QUALIFY AS
WELL CAPITALIZED
AMOUNT
RATIO
AMOUNT
RATIO
$9,294.9
8,366.2
15.8%
14.3
$5,877.4
5,858.8
10.0%
10.0
7,853.2
6,765.6
7,853.2
6,765.6
13.4
11.5
7.9
6.8
3,526.4
3,515.2
4,953.7
4,939.9
6.0
6.0
5.0
5.0
$ 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
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 is also 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. The rules 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.
On September 12, 2010, the Group of Governors and Heads
of Supervision, the oversight body of the Basel Committee,
announced agreement on the
calibration and phase-in
arrangements for a strengthened set of capital requirements,
known as Basel III. The U.S.’s implementation of Basel III has
increased the minimum capital
for banking
organizations and tightened the standards for what qualifies as
capital. In October 2013, the U.S. banking agencies proposed a
rule that would introduce quantitative liquidity requirements in
the U.S. for large banking organizations, such as the Corporation
thresholds
2 0 1 3 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 115
notes to consolidated financial statements
and the Bank. The ultimate impact of the U.S. implementation of the new capital and liquidity standards on the Corporation and its bank
subsidiaries is currently being reviewed. At this point we cannot determine the ultimate effect these final and proposed regulations would
have upon our earnings or financial position. However, we believe our capital strength, balance sheet and business model leave us well
positioned for the U.S. implementation of Basel III.
On February 21, 2014, the Corporation was notified by the Federal Reserve Board that both the Corporation and the Bank
would be permitted to exit parallel run. Accordingly, the Corporation and the Bank are required to use the advanced approaches
methodologies to calculate and publicly disclose their risk-based capital ratios beginning with the second quarter of 2014. Current
results from the parallel run of the risk-based capital framework have demonstrated that the use of the advanced approaches
methodologies, inclusive of commitments we provided to the Federal Reserve regarding our approach to the calculation of risk-
weighted assets, has not resulted in common equity tier 1 capital, tier 1 capital or total risk-based capital ratios falling below the
levels required for categorization as “well-capitalized.” These results show that, as of December 31, 2013, the Corporation’s
common equity tier 1 capital ratio as calculated under the advanced approaches methodologies would have been 11.6% on a fully
phased-in basis, while the Corporation’s common equity tier 1 capital ratio under the standardized approach would have been
11.1% on a fully phased-in basis.
Note 33 – Northern Trust Corporation (Corporation only)
Condensed financial information is presented below. Investments in wholly-owned subsidiaries are carried on the equity method
of accounting.
C O N D E N S E D B A L A N C E S H E E T
(In Millions)
ASSETS
Cash on Deposit with Subsidiary Bank
Time Deposits with Subsidiary Banks
Securities
Advances to Wholly-Owned Subsidiaries – Banks
Investments in Wholly-Owned Subsidiaries – Banks
– Nonbank
– Nonbank
Buildings and Equipment
Other Assets
Total Assets
LIABILITIES
Senior Notes
Long Term Debt
Floating Rate Capital Debt
Other Liabilities
Total Liabilities
STOCKHOLDERS’ EQUITY
Common Stock
Additional Paid-in Capital
Retained Earnings
Accumulated Other Comprehensive Loss
Treasury Stock
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
DECEMBER 31,
2013
2012
$ 1,566.4
–
5.3
2,035.0
5.0
7,101.7
168.5
–
608.8
$
6.5
1,691.4
4.9
1,035.0
5.0
7,225.6
142.6
3.4
377.7
$11,490.7
$10,492.1
$ 1,996.6
717.8
277.1
587.2
3,578.7
408.6
1,035.7
7,134.8
(244.3)
(422.8)
7,912.0
$ 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
$11,490.7
$10,492.1
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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
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 and Long-Term Debt
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
notes to consolidated financial statements
FOR THE YEAR ENDED
DECEMBER 31,
2013
2012
2011
$ 880.0
21.7
33.2
9.0
943.9
78.3
20.8
99.1
844.8
24.2
869.0
(152.5)
14.8
$ 731.3
$ 731.3
$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
FOR THE YEAR ENDED
DECEMBER 31,
2013
2012
2011
$
731.3
$ 687.3
$ 603.6
131.0
(1.1)
(18.1)
102.6
945.7
1,691.4
–
0.2
(13.0)
(1,000.0)
1.8
680.4
317.9
(309.7)
146.2
(220.6)
–
(66.2)
1,559.9
6.5
(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
(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
$ 1,566.4
$
6.5
$
6.5
2 0 1 3 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 117
report of independent registered public accounting firm
T H E B O A R D O F D I R E C T O R S A N D S T O C K H O L D E 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 sheets of Northern Trust Corporation and subsidiaries (Northern Trust)
as of December 31, 2013 and 2012, 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, 2013. 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, 2013 and 2012, and the results of their operations and
their cash flows for each of the years in the three-year period ended December 31, 2013, 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, 2013, based on criteria established in
Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway
Commission, and our report dated February 26, 2014 expressed an unqualified opinion on the effectiveness of Northern Trust
Corporation’s internal control over financial reporting.
chicago, illinois
february 26, 2014
2 0 1 3 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 118
consolidated financial statistics
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
2013
2012
($ 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
$
673.8 $
121.5
648.0 $
162.2
657.3 $
143.1
630.7
119.6
$
622.6
112.9
$
601.9
125.0
$
605.8
128.6
$
575.2
133.8
302.4
52.5
249.9
5.0
794.5
76.0
291.1
54.1
237.0
5.0
740.7
95.0
275.3
55.2
220.1
5.0
729.7
94.7
286.7
60.6
226.1
5.0
728.9
78.5
169.7 $
206.5 $
191.1 $
164.0
169.7 $
206.5 $
191.1 $
164.0
0.70 $
0.70
0.85 $
0.84
0.78 $
0.78
0.68
0.67
302.1
67.9
234.2
5.0
741.5
55.5
167.7
167.7
0.69
0.69
$
$
$
323.1
77.5
245.6
10.0
696.4
87.3
178.8
178.8
0.73
0.73
$
$
$
321.5
67.4
254.1
5.0
717.3
86.6
179.6
179.6
0.73
0.73
$
$
$
341.0
84.6
256.4
5.0
723.6
75.6
161.2
161.2
0.66
0.66
$
$
$
$
$
$
$ 2,676.5 $ 2,776.8 $ 2,964.6 $ 3,392.5
$ 4,059.3
$ 3,446.6
$ 3,860.7
$ 4,002.5
549.7
18,264.9
548.2
17,767.6
309.8
18,192.6
249.5
18,099.5
239.3
18,355.2
285.6
19,215.4
260.3
18,788.9
246.6
18,246.4
13,220.9
30,708.1
28,858.1
7,987.5
30,563.4
28,662.4
5,275.5
30,742.0
28,601.8
3,872.0
31,275.1
28,661.9
4,118.7
30,991.6
29,180.8
6,113.7
29,865.1
29,046.0
3,643.4
31,458.1
29,057.5
7,685.3
31,270.4
$28,615.6
(283.8)
5,712.3
(289.6)
7,196.2
(290.2)
7,053.5
(296.1)
6,314.9
(298.1)
5,023.7
(297.8)
5,035.3
(298.1)
5,639.8
(293.0)
5,354.3
$99,706.7 $95,212.5 $92,849.6 $91,569.3
$91,670.5
$92,709.9
$92,410.6
$95,128.1
$16,004.8 $16,134.2 $17,468.1 $16,899.1
14,880.3
2,385.6
39,221.1
14,286.5
1,969.0
43,064.7
14,634.7
2,199.1
39,043.3
14,340.8
1,861.6
47,920.3
$21,280.4
14,023.4
2,728.9
37,461.3
$20,235.8
13,687.1
3,083.6
38,896.8
$19,720.1
14,095.6
3,098.3
36,431.2
$19,467.2
14,606.8
3,071.4
38,980.8
80,127.5
4,989.9
1,996.5
1,485.8
277.1
3,054.2
7,775.7
75,454.4
5,447.2
2,192.5
978.5
277.1
3,165.0
7,697.8
73,345.2
4,750.0
2,400.1
1,105.2
277.1
3,323.7
7,648.3
73,386.1
3,405.5
2,403.9
1,277.7
277.1
3,275.8
7,543.2
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
$99,706.7 $95,212.5 $92,849.6 $91,569.3
$91,670.5
$92,709.9
$92,410.6
$95,128.1
72,872.0
$91,601.7 $85,529.1 $83,121.7 $82,158.0
63,851.2
$18,729.7 $17,313.6 $18,712.2 $18,306.8
233.7
68,215.5
64,409.5
259.1
244.8
228.0
$82,885.6
60,021.1
$22,864.5
243.6
$84,525.8
62,037.7
$22,488.1
256.9
$83,208.2
61,862.1
$21,346.1
264.3
$86,064.3
65,278.8
$20,785.5
266.3
1.12%
1.14%
1.10%
1.15%
1.17%
1.21%
1.28%
1.24%
$
0.31 $
0.31 $
0.31 $
62.00
52.40
62.02
53.92
59.33
51.90
$
0.30
55.50
49.27
0.30
50.46
45.93
$
$
0.30
49.68
43.68
–
48.31
41.11
$
0.58
48.15
39.86
(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, 2013 and 2012.
(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
$0.30 per common share dividend declared March 14, 2012, paid July 2, 2012.
Note: The common stock of Northern Trust Corporation is traded on the NASDAQ Stock Market under the symbol NTRS.
2 0 1 3 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N 119
consolidated financial statistics
A V E R A G E B A L A N C E S H E E T W I T H A N A L Y S I S O F N E T I N T E R E S T I N C O M E
(INTEREST AND RATE ON A FULLY TAXABLE EQUIVALENT BASIS)
($ In Millions)
AVERAGE EARNING ASSETS
2013
AVERAGE
BALANCE
INTEREST
RATE(3)
INTEREST
Federal Funds Sold and Resell Agreements
Interest-Bearing Deposits with Banks
Federal Reserve Deposits and Other Interest-Bearing
$
1.9
142.1
19.6
$
415.5
18,080.7
7,615.7
0.46%
0.79
0.26
$
0.5
176.4
13.9
18.3
18.0
109.7
129.0
275.0
749.4
1,625.8
281.0
17,548.8
11,364.3
30,819.9
28,696.5
1,188.0
85,628.3
(289.9)
2,950.4
459.0
785.8
533.6
4,790.5
1.12
6.40
0.63
1.14
0.89
2.61
1.39
–
–
–
–
–
–
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
$
$
$
–
–
–
–
–
–
–
9.7
12.4
81.2
103.3
5.2
74.4
37.1
2.4
222.4
–
–
–
–
–
$
$
$94,857.7
–%
$14,533.4
2,102.0
42,338.3
58,973.7
4,654.7
2,247.0
1,211.7
277.1
67,364.2
–
16,622.6
3,203.9
7,667.0
0.07%
0.59
0.19
0.18
0.11
3.31
3.06
0.85
0.33
1.06
–
–
–
$94,857.7
–%
$
$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
2012
AVERAGE
BALANCE
$
258.0
18,652.2
5,388.8
2,269.4
421.1
18,381.5
9,821.8
30,893.8
28,975.7
(296.7)
3,841.8
471.0
492.3
535.2
3,763.4
1,328.5
84,168.5
23.8
27.4
124.5
127.7
303.4
834.3
–
–
–
–
–
–
–
18.3
20.1
118.3
156.7
5.6
72.0
60.3
2.8
297.4
–
–
–
–
–
Net Interest Income/Margin (FTE Adjusted)
Net Interest Income/Margin (Unadjusted)
Net Interest Income/Margin Components
U.S.
Non-U.S.
$ 965.6
$ 933.1
$
$
–
–
1.13%
$1,031.1
1.09%
$ 990.3
$
$
–
–
$ 814.9
150.7
$61,223.6
24,404.7
1.33%
0.62
$ 889.3
141.8
$59,907.2
24,261.3
Consolidated
$ 965.6
$85,628.3
1.13%
$1,031.1
$84,168.5
(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, 2013 and 2012.
(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
37.5%. Total taxable equivalent interest adjustments amounted to $32.5 million in 2103, $40.8 million in 2012, $40.2 million in 2011, $39.1 million in 2010, $40.2 million in 2009.
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.
2 0 1 3 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 120
RATE(3)
0.17%
0.95
0.26
1.05
6.52
0.68
1.30
0.98
2.88
1.58
–
–
–
–
–
–
1.10
–
–
–
–%
1.22%
1.18%
1.48%
0.58
1.22%
consolidated financial statistics
2011
AVERAGE
BALANCE
INTEREST
RATE(3)
INTEREST
2010
AVERAGE
BALANCE
RATE(3)
INTEREST
2009
AVERAGE
BALANCE
RATE(3)
$
0.2
192.8
28.3
$
261.0
17,124.5
10,610.2
0.09% $
1.13
0.27
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
23.4
40.4
102.4
117.8
284.0
943.5
1,766.5
605.6
14,290.0
9,744.3
26,406.4
28,346.7
1,448.8
82,748.8
(305.3)
3,845.3
500.7
429.1
466.0
4,263.3
1.32
6.67
0.72
1.21
1.08
3.33
1.75
–
–
–
–
–
–
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
1,335.8
67,865.4
(313.0)
2,788.4
534.7
399.7
396.3
4,336.7
0.67
6.52
0.99
1.18
1.26
3.41
1.97
–
–
–
–
–
–
–
–
–
–
–
–
–
26.0
27.8
176.1
229.9
8.2
64.4
94.6
2.4
399.5
–
–
–
–
–
$
$
$
–
–
–
–
–
–
–
34.9
40.4
125.7
201.0
11.2
48.6
114.8
2.4
378.0
–
–
–
–
–
$91,947.9
–% $
$14,297.6
3,605.4
39,973.5
0.18% $
0.77
0.44
57,876.5
4,466.8
1,983.3
2,446.3
276.9
0.40
0.18
3.25
3.87
0.88
67,049.8
0.60%
–
14,569.9
3,304.0
7,024.2
1.15
–
–
–
$91,947.9
–% $
$76,008.2
–% $
$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
0.43
0.19
3.22
4.07
0.87
0.66
1.31
–
–
–
$76,008.2
–% $
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
1,446.2
66,670.8
0.50
6.55
1.24
1.65
1.60
3.30
2.17
–
–
–
–
–
–
(275.0)
2,535.8
537.3
419.7
398.4
4,027.2
$74,314.2
–%
$11,162.4
3,879.1
27,157.6
0.48%
1.89
0.29
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
0.49
0.16
3.17
4.57
1.54
0.76
1.41
–
–
–
$74,314.2
–%
–
–
–
–
–
–
–
53.7
73.2
80.1
207.0
11.0
44.0
139.9
4.3
406.2
–
–
–
–
–
$1,049.3
$1,009.1
$
$
–
–
1.27% $ 957.8
1.22% $ 918.7
$
$
–
–
1.41% $1,040.0
1.35% $ 999.8
$
$
–
–
1.56%
1.50%
$ 911.2
138.1
$59,053.7
23,695.1
1.54% $ 863.6
94.2
0.58
$49,776.5
18,088.9
1.73% $ 859.8
180.2
0.52
$49,270.9
17,399.9
1.75%
1.04
$1,049.3
$82,748.8
1.27% $ 957.8
$67,865.4
1.41% $1,040.0
$66,670.8
1.56%
2 0 1 3 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 121
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
Global defense, aerospace, and other technology
products manufacturer (1, 4, 6)
Susan Crown
Vice President
Henry Crown and Company
Global company with diversified investments in banking,
transportation, real estate, and other industries;
Chief Executive Officer
Owl Creek Partners, LLP
Venture capital investment vehicle;
Chairman and Founder
Susan Crown Exchange Inc.
Social investment organization that connects talent and
innovations with market forces to drive social change (4, 5)
Dipak C. Jain
Chaired Professor of Marketing
INSEAD
International graduate business school (3, 4, 6)
Robert W. Lane
Retired Chairman and Chief Executive Officer
Deere & Company
Global provider of agricultural, construction, and
forestry equipment, and financial services (1, 5)
Edward J. Mooney
Retired Délégué Général – North America
Suez Lyonnaise des Eaux
Global 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)
board of directors
Jose Luis Prado
President
Quaker Oats North America, a division of PepsiCo, Inc.
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
Global 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
Former Chairman
Xstrata plc
Global diversified mining group (2, 3)
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
2 0 1 3 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 122
senior officers
N O R T H E R N T R U S T C O R P O R A T I O N
T H E N O R T H E R N T R U S T C O M P A N Y
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
Human Resources
Jeffrey D. Cohodes
Executive Vice President
Chief Risk Officer
Steven L. Fradkin
President –
Corporate & Institutional Services
William L. Morrison
President and Chief Operating Officer
Michael G. O’Grady
Executive Vice President
Chief Financial Officer
Stephen N. Potter
President –
Asset Management
Jana R. Schreuder
President –
Wealth Management
Joyce M. St. Clair
President –
Operations & Technology
Kelly R. Welsh
Executive Vice President
General Counsel
Steven R. Bell
President
Wealth Management – West
Aileen B. Blake
Executive Vice President
Enterprise Productivity
David C. Blowers
President
Wealth Management – East
Robert P. Browne
Executive Vice President
Chief Investment Officer
Peter B. Cherecwich
Executive Vice President
Global Fund Services
Corporate & Institutional Services
David W. Fox, Jr.
Executive Vice President
Corporate & Institutional Services –
Americas
J. Jeffery Kauffman
Executive Vice President
Global Family Office
Wealth Management
Wilson Leech
Executive Vice President
Corporate & Institutional Services –
Europe, Middle East, and Africa
Mac MacLellan
Executive Vice President
Wealth Management – Central
Scott S. Murray
Executive Vice President
Chief Technology Officer
Teresa A. Parker
Executive Vice President
Corporate & Institutional Services –
Asia Pacific
Alan W. Robertson
Executive Vice President
Client Solutions Group
Asset Management
Jason J. Tyler
Senior Vice President
Corporate Strategy
2 0 1 3 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 123
corporate information
C O M P A R I S O N O F F I V E - Y E A R C U M U L A T I V E T O T A L R E T U R N
The graph below compares the cumulative total stockholder return on the Corporation’s common stock to the cumulative total
return of the S&P 500 Index and the KBW Bank Index for the five fiscal years which ended December 31, 2013. The cumulative total
stockholder return assumes the investment of $100 in the Corporation’s common stock and in each index on December 31, 2008
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.
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 8 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
$280
$220
$160
$100
$40
2008
2009
2010
2011
2012
2013
Northern Trust
S&P 500
KBW Bank Index
Northern Trust
S&P 500
KBW Bank Index
2008
100
100
100
2009
103
126
98
DECEMBER 31,
2010
111
146
121
2011
81
149
93
2012
106
172
124
2013
133
228
170
2 0 1 3 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 124
corporate information
A N N U A L M E E T I N G
The 2014 Annual Meeting of Stockholders will be held on
Tuesday, April 15, 2014, at 10:30 A.M. (Central Time) at 50
South La Salle Street, Chicago, Illinois. If you plan to attend
the Annual Meeting, please review the information regarding
attendance contained in the 2014 Proxy Statement.
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.
F O R M 1 0 - K R E P O R T
Copies of the Corporation’s Form 10-K for the year ended
December 31, 2013, will be mailed to stockholders and other
interested persons upon written request to:
Stephanie S. Greisch
Corporate Secretary
Northern Trust Corporation
50 South La Salle Street, M-9
Chicago, Illinois 60603
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
1110 Centre Pointe Curve, Suite 101
Mendota Heights, MN 55120
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
Through our website at northerntrust.com, 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 as soon as
reasonably practicable after we file such material with, or
furnish such material to, the Securities and Exchange
Commission.
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.
2 0 1 3 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 125
n o r t h e r n t r u s t . c o m
n o r t h e r n t r u s t . c o m
n o r t h e r n t r u s t . c o m
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
2013
2012
percent chAnge
For the year ($ In m IllIons)
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
avera geS ($ In m IllIons)
Assets
earning Assets
securities
loans and leases
deposits
stockholders’ equity
at year end ($ In m IllIons)
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 — end of period
total capital to risk-Weighted Assets — end of period
tier 1 leverage ratio
at year end ($ In BIllIons)
Assets under management
Assets under custody
global custody Assets
5 %
6
4
7 %
6
4
6
23
2 %
2
—
(1)
1
4
6 %
7
(1)
—
(7)
3
5
$ 4,121.8
$ 3,936.9
731.3
299.2
687.3
286.9
$ 3.01
$ 2.82
2.99
1.23
33.34
61.89
$ 94,857.7
85,628.5
30,819.9
28,696.5
75,596.3
7,667.0
2.81
1.18
31.51
50.16
$ 92,975.5
84,168.5
30,893.8
28,975.7
75,219.8
7,358.2
$ 102,947.3
$ 97,463.8
93,367.2
30,720.3
29,385.5
(278.1)
84,098.1
7,912.0
9.54 %
0.77
41.1
13.4
15.8
7.9
87,472.7
31,033.5
29,504.5
(297.9)
81,407.8
7,527.0
9.34 %
0.74
42.0
12.8
14.3
8.2
$ 884.5
$ 758.9
5,575.7
3,248.9
4,804.9
2,686.1
17 %
16
21
the 2013 northern trust corporation Annual report is printed on 20% recycled paper
made from fiber sourced from well-managed forests and is independently certified to the
Forest stewardship counciltm (Fsc®) standards.
© northern trust corporation
Northern Trust Bank
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Northern Trust Corporation
Northern Trust Bank
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