UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended March 31, 2009
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
NORTHERN TRUST CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 36-2723087 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) | |
50 South LaSalle Street Chicago, Illinois |
60603 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code: (312) 630-6000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of large accelerated filer, accelerated filer, and small reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
223,669,263 Shares - $1.66 2/3 Par Value
(Shares of Common Stock Outstanding on March 31, 2009)
PART I - FINANCIAL INFORMATION
Item 1. | Financial Statements |
CONSOLIDATED BALANCE SHEET | NORTHERN TRUST CORPORATION |
($ In Millions Except Share Information) |
March 31
2009 |
December 31
2008 |
March 31
2008 |
||||||
(Unaudited) | (Unaudited) | ||||||||
Assets |
|||||||||
Cash and Due from Banks |
2,104.1 | 2,648.2 | 4,061.5 | ||||||
Federal Funds Sold and Securities Purchased under Agreements to Resell |
451.3 | 169.0 | 5,485.2 | ||||||
Time Deposits with Banks |
18,334.9 | 16,721.0 | 24,922.6 | ||||||
Federal Reserve Deposits and Other Interest-Bearing Securities |
2,989.8 | 9,403.8 | 21.5 | ||||||
Available for Sale |
16,671.5 | 14,414.4 | 10,077.1 | ||||||
Held to Maturity (Fair value - $1,148.8 at March 2009, $1,156.1 at December 2008, $1,176.0 at March 2008) |
1,131.7 | 1,154.1 | 1,157.4 | ||||||
Trading Account |
5.1 | 2.3 | 11.4 | ||||||
Total Securities |
17,808.3 | 15,570.8 | 11,245.9 | ||||||
Loans and Leases |
|||||||||
Commercial and Other |
19,822.9 | 20,374.0 | 17,465.5 | ||||||
Residential Mortgages |
10,588.0 | 10,381.4 | 9,295.0 | ||||||
Total Loans and Leases (Net of unearned income - $509.4 at March 2009, $539.5 at
|
30,410.9 | 30,755.4 | 26,760.5 | ||||||
Reserve for Credit Losses Assigned to Loans and Leases |
(286.2 | ) | (229.1 | ) | (165.4 | ) | |||
Buildings and Equipment |
535.2 | 506.6 | 492.8 | ||||||
Client Security Settlement Receivables |
702.3 | 709.3 | 552.7 | ||||||
Goodwill |
387.4 | 389.4 | 424.9 | ||||||
Other Assets |
5,026.6 | 5,409.2 | 3,678.1 | ||||||
Total Assets |
78,464.6 | 82,053.6 | 77,480.3 | ||||||
Liabilities |
|||||||||
Deposits |
|||||||||
Demand and Other Noninterest-Bearing |
9,019.0 | 11,823.6 | 5,832.7 | ||||||
Savings and Money Market |
10,940.8 | 9,079.2 | 8,210.0 | ||||||
Savings Certificates |
2,838.3 | 2,606.8 | 1,999.4 | ||||||
Other Time |
984.0 | 801.6 | 540.2 | ||||||
Non U.S. Offices - Noninterest-Bearing |
1,777.0 | 2,855.7 | 4,547.5 | ||||||
- Interest-Bearing |
27,785.5 | 35,239.5 | 37,262.7 | ||||||
Total Deposits |
53,344.6 | 62,406.4 | 58,392.5 | ||||||
Federal Funds Purchased |
7,735.6 | 1,783.5 | 2,405.0 | ||||||
Securities Sold Under Agreements to Repurchase |
1,021.2 | 1,529.1 | 1,996.9 | ||||||
Other Borrowings |
2,202.6 | 736.7 | 2,127.1 | ||||||
Senior Notes |
1,049.0 | 1,052.6 | 661.3 | ||||||
Long-Term Debt |
3,144.2 | 3,293.4 | 2,680.3 | ||||||
Floating Rate Capital Debt |
276.7 | 276.7 | 276.6 | ||||||
Other Liabilities |
3,166.0 | 4,585.8 | 4,182.2 | ||||||
Total Liabilities |
71,939.9 | 75,664.2 | 72,721.9 | ||||||
Stockholders Equity |
|||||||||
Preferred Stock - Series B (Net of discount- $71.4 at March 2009, $74.7 at December 2008) |
1,504.6 | 1,501.3 | | ||||||
Common Stock, $1.66 2/3 Par Value; Authorized 560,000,000 shares; |
|||||||||
Outstanding 223,669,263 shares at March 2009, 223,263,132 shares at December 2008 and 220,135,659 shares at March 2008 |
379.8 | 379.8 | 379.8 | ||||||
Additional Paid-In Capital |
163.0 | 178.5 | 81.4 | ||||||
Retained Earnings |
5,166.6 | 5,091.2 | 4,879.2 | ||||||
Accumulated Other Comprehensive Income (Loss) |
(446.1 | ) | (494.9 | ) | (136.8 | ) | |||
Treasury Stock - (at cost, 4,252,261 shares at March 2009, 4,658,392 shares at |
|||||||||
December 2008, and 7,785,865 shares at March 2008) |
(243.2 | ) | (266.5 | ) | (445.2 | ) | |||
Total Stockholders Equity |
6,524.7 | 6,389.4 | 4,758.4 | ||||||
Total Liabilities and Stockholders Equity |
78,464.6 | 82,053.6 | 77,480.3 | ||||||
2
CONSOLIDATED STATEMENT OF INCOME | NORTHERN TRUST CORPORATION | |
(UNAUDITED) |
Three Months
Ended March 31 |
|||||||
($ In Millions Except Per Share Information) |
2009 | 2008 | |||||
Noninterest Income |
|||||||
Trust, Investment and Other Servicing Fees |
$ | 410.7 | $ | 526.8 | |||
Foreign Exchange Trading Income |
131.1 | 113.2 | |||||
Security Commissions and Trading Income |
16.8 | 17.8 | |||||
Treasury Management Fees |
20.4 | 17.4 | |||||
Gain on Visa Share Redemption |
| 167.9 | |||||
Other Operating Income |
37.1 | 31.8 | |||||
Investment Security Gains (Losses), net |
.4 | 5.0 | |||||
Total Noninterest Income |
616.5 | 879.9 | |||||
Net Interest Income |
|||||||
Interest Income |
393.8 | 677.1 | |||||
Interest Expense |
116.7 | 423.6 | |||||
Net Interest Income |
277.1 | 253.5 | |||||
Provision for Credit Losses |
55.0 | 20.0 | |||||
Net Interest Income after Provision for Credit Losses |
222.1 | 233.5 | |||||
Noninterest Expenses |
|||||||
Compensation |
258.3 | 286.2 | |||||
Employee Benefits |
65.8 | 57.3 | |||||
Outside Services |
95.7 | 93.9 | |||||
Equipment and Software Expense |
61.7 | 54.2 | |||||
Occupancy Expense |
41.8 | 41.4 | |||||
Visa Indemnification Charges |
| (76.1 | ) | ||||
Other Operating Expenses |
70.2 | 78.4 | |||||
Total Noninterest Expenses |
593.5 | 535.3 | |||||
Income before Income Taxes |
245.1 | 578.1 | |||||
Provision for Income Taxes |
83.3 | 192.9 | |||||
Net Income |
$ | 161.8 | $ | 385.2 | |||
Net Income Applicable to Common Stock |
138.8 | 385.2 | |||||
Per Common Share |
|||||||
Net Income - Basic |
$ | .62 | $ | 1.73 | |||
- Diluted |
.61 | 1.71 | |||||
Cash Dividends Declared |
.28 | .28 | |||||
Average Number of Common Shares Outstanding - Basic |
223,357,446 | 220,320,307 | |||||
- Diluted |
224,401,185 | 223,529,011 | |||||
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME | NORTHERN TRUST CORPORATION | |
(UNAUDITED) |
Three Months
Ended March 31 |
||||||||
(In Millions) |
2009 | 2008 | ||||||
Net Income |
$ | 161.8 | $ | 385.2 | ||||
Other Comprehensive Income (Loss) (net of tax and reclassifications) |
||||||||
Net Unrealized Gains (Losses) on Securities Available for Sale |
42.3 | (58.7 | ) | |||||
Net Unrealized Gains (Losses) on Cash Flow Hedge Designations |
6.8 | (2.8 | ) | |||||
Foreign Currency Translation Adjustments |
(3.5 | ) | 13.2 | |||||
Pension and Other Postretirement Benefit Adjustments |
3.2 | 1.8 | ||||||
Other Comprehensive Income (Loss) |
48.8 | (46.5 | ) | |||||
Comprehensive Income |
$ | 210.6 | $ | 338.7 | ||||
3
CONSOLIDATED STATEMENT OF CHANGES IN | NORTHERN TRUST CORPORATION | |
STOCKHOLDERS EQUITY | ||
(UNAUDITED) |
Three Months Ended
March 31 |
||||||||
(In Millions) |
2009 | 2008 | ||||||
Preferred Stock |
||||||||
Balance at January 1 |
$ | 1,501.3 | $ | | ||||
Discount Accretion - Preferred Stock |
3.3 | | ||||||
Balance at March 31 |
1,504.6 | | ||||||
Common Stock |
||||||||
Balance at January 1 and March 31 |
379.8 | 379.8 | ||||||
Additional Paid-in Capital |
||||||||
Balance at January 1 |
178.5 | 69.1 | ||||||
Treasury Stock Transaction - Stock Options and Awards |
(12.7 | ) | (6.4 | ) | ||||
Stock Options and Awards - Amortization |
(5.1 | ) | 13.0 | |||||
Stock Options and Awards - Tax Benefits |
2.3 | 5.7 | ||||||
Balance at March 31 |
163.0 | 81.4 | ||||||
Retained Earnings |
||||||||
Balance at January 1 |
5,091.2 | 4,556.2 | ||||||
Net Income |
161.8 | 385.2 | ||||||
Dividends Declared - Common Stock |
(63.2 | ) | (62.2 | ) | ||||
Dividends Declared - Preferred Stock |
(19.9 | ) | | |||||
Discount Accretion - Preferred Stock |
(3.3 | ) | | |||||
Balance at March 31 |
5,166.6 | 4,879.2 | ||||||
Accumulated Other Comprehensive Income (Loss) |
||||||||
Balance at January 1 |
(494.9 | ) | (90.3 | ) | ||||
Other Comprehensive Income (Loss) |
48.8 | (46.5 | ) | |||||
Balance at March 31 |
(446.1 | ) | (136.8 | ) | ||||
Treasury Stock |
||||||||
Balance at January 1 |
(266.5 | ) | (405.7 | ) | ||||
Stock Options and Awards |
29.6 | 24.4 | ||||||
Stock Purchased |
(6.3 | ) | (63.9 | ) | ||||
Balance at March 31 |
(243.2 | ) | (445.2 | ) | ||||
Total Stockholders Equity at March 31 |
$ | 6,524.7 | $ | 4,758.4 | ||||
4
CONSOLIDATED STATEMENT OF CASH FLOWS | NORTHERN TRUST CORPORATION |
(UNAUDITED)
Three Months
Ended March 31 |
||||||
(In Millions) |
2009 | 2008 | ||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||
Net Income |
161.8 | 385.2 | ||||
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: |
||||||
Amortization and Accretion of Securities and Unearned Income |
(6.5 | ) | (17.9 | ) | ||
Provision for Credit Losses |
55.0 | 20.0 | ||||
Depreciation on Buildings and Equipment |
21.5 | 20.4 | ||||
Amortization of Computer Software |
29.9 | 25.6 | ||||
Amortization of Intangibles |
3.9 | 4.9 | ||||
Visa Indemnification Charges |
| (76.1 | ) | |||
Excess Tax Benefits from Stock Incentive Plans |
(2.3 | ) | (6.1 | ) | ||
Net Increase in Trading Account Securities |
(2.8 | ) | (8.3 | ) | ||
Decrease in Receivables |
120.6 | 89.8 | ||||
Decrease in Interest Payable |
(31.7 | ) | (16.8 | ) | ||
Other Operating Activities, net |
97.4 | (149.6 | ) | |||
Net Cash Provided by Operating Activities |
446.8 | 271.1 | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||
Net Increase in Federal Funds Sold and Securities Purchased under Agreements to Resell |
(282.3 | ) | (1,694.5 | ) | ||
Net Increase in Time Deposits with Banks |
(1,613.9 | ) | (3,662.6 | ) | ||
Net Decrease in Other Interest-Bearing Assets |
6,414.0 | | ||||
Purchases of Securities-Held to Maturity |
(31.1 | ) | (62.9 | ) | ||
Proceeds from Maturity and Redemption of Securities-Held to Maturity |
54.7 | 52.4 | ||||
Purchases of Securities-Available for Sale |
(4,466.6 | ) | (5,132.3 | ) | ||
Proceeds from Sale, Maturity and Redemption of Securities-Available for Sale |
2,260.2 | 3,384.8 | ||||
Net (Increase) Decrease in Loans and Leases |
349.5 | (1,403.5 | ) | |||
Purchases of Buildings and Equipment, net |
(50.2 | ) | (21.2 | ) | ||
Purchases and Development of Computer Software |
(55.7 | ) | (58.0 | ) | ||
Net Decrease in Client Security Settlement Receivables |
7.0 | 10.4 | ||||
Other Investing Activities, net |
(1,163.2 | ) | 140.7 | |||
Net Cash Provided by (Used in) Investing Activities |
1,422.4 | (8,446.7 | ) | |||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||
Net Increase (Decrease) in Deposits |
(9,061.8 | ) | 7,179.4 | |||
Net Increase in Federal Funds Purchased |
5,952.1 | 939.2 | ||||
Net Increase (Decrease) in Securities Sold under Agreements to Repurchase |
(507.9 | ) | 233.3 | |||
Net Increase in Short-Term Other Borrowings |
1,460.1 | 56.6 | ||||
Proceeds from Term Federal Funds Purchased |
2,881.0 | 36.0 | ||||
Repayments of Term Federal Funds Purchased |
(2,875.0 | ) | (74.0 | ) | ||
Proceeds from Senior Notes & Long-Term Debt |
| 22.5 | ||||
Repayments of Senior Notes & Long-Term Debt |
(132.1 | ) | (33.5 | ) | ||
Treasury Stock Purchased |
(4.2 | ) | (62.5 | ) | ||
Net Proceeds from Stock Options |
14.8 | 13.6 | ||||
Excess Tax Benefits from Stock Incentive Plans |
2.3 | 6.1 | ||||
Cash Dividends Paid on Common Stock |
(62.5 | ) | (61.9 | ) | ||
Cash Dividends Paid on Preferred Stock - Series B |
(19.9 | ) | | |||
Other Financing Activities, net |
(13.6 | ) | (70.2 | ) | ||
Net Cash (Used in) Provided by Financing Activities |
(2,366.7 | ) | 8,184.6 | |||
Effect of Foreign Currency Exchange Rates on Cash |
(46.6 | ) | 130.9 | |||
Increase (Decrease) in Cash and Due from Banks |
(544.1 | ) | 139.9 | |||
Cash and Due from Banks at Beginning of Year |
2,648.2 | 3,921.6 | ||||
Cash and Due from Banks at End of Period |
2,104.1 | 4,061.5 | ||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
||||||
Interest Paid |
148.4 | 440.4 | ||||
Income Taxes Paid (Refunded) |
106.9 | (15.7 | ) |
5
Notes to Consolidated Financial Statements
1. Basis of Presentation - The consolidated financial statements include the accounts of Northern Trust Corporation (Corporation) and its subsidiaries (collectively, Northern Trust), all of which are wholly-owned. Significant intercompany balances and transactions have been eliminated. The consolidated financial statements, as of and for the periods ended March 31, 2009 and 2008, have not been audited by the Corporations independent registered public accounting firm. In the opinion of management, all accounting entries and adjustments, including normal recurring accruals, necessary for a fair presentation of the financial position and the results of operations for the interim periods have been made. For a description of Northern Trusts significant accounting policies, refer to Note 1 of the Notes to Consolidated Financial Statements in the 2008 Annual Report to Shareholders.
2. Recent Accounting Pronouncements - Effective January 1, 2009, Northern Trust adopted the Financial Accounting Standards Board (FASB) Staff Position on the FASBs Emerging Issues Task Force (EITF) Issue No. 03-06-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities, (FSP EITF 03-06-1). Under FSP EITF 03-06-1, unvested share-based awards which include the right to receive nonforfeitable dividends or dividend equivalents are considered to participate with common stock in undistributed earnings. Companies that issue share-based awards considered to be participating securities under FSP EITF 03-06-1 are required to calculate basic and diluted earnings per common share amounts under the two-class method. The two-class method excludes from earnings per common share calculations any dividends paid or owed to participating securities and any undistributed earnings considered to be attributable to participating securities. FSP EITF 03-06-1 requires retrospective application to all prior-period earnings per share data presented. The impact of adoption of this FSP on the calculation of the current quarter diluted earnings per common share was a reduction of $.01. The adoption did not change the prior year quarters calculated diluted earnings per common share amount.
In April 2009, the FASB issued the following Staff Positions:
Staff Position No. 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (FSP FAS 157-4), provides guidance on how to determine the fair value of assets and liabilities in an environment where the volume and level of activity for the asset or liability have significantly decreased and re-emphasizes that the objective of a fair value measurement remains an exit price. The FSP is effective for periods ending after June 15, 2009, with earlier adoption permitted. The adoption of FSP FAS 157-4 in the period ending June 30, 2009 is not expected to have a material effect on Northern Trusts financial position or results of operations.
Staff Position No. 115-2 and 124-2, Recognition and Presentation of Other-than-temporary Impairments (FSP FAS 115-2 and 124-2), modifies the requirements for recognizing other-than-temporary-impairment on debt securities and significantly changes the impairment model for such securities. Under FSP FAS 115-2 and 124-2, a security is
6
Notes to Consolidated Financial Statements (continued)
considered to be other-than-temporarily impaired if the present value of cash flows expected to be collected are less than the securitys amortized cost basis (the difference being defined as the credit loss) or if the fair value of the security is less than the securitys amortized cost basis and the investor intends, or more-likely-than-not will be required, to sell the security before recovery of the securitys amortized cost basis. If an other-than-temporary impairment 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 securitys amortized cost basis. Any remaining difference between fair value and amortized cost is recognized in other comprehensive income, net of applicable taxes. Otherwise, the entire difference between fair value and amortized cost is charged to earnings. Upon adoption of the FSP, an entity reclassifies from retained earnings to other comprehensive income the non-credit portion of an other-than-temporary impairment loss previously recognized on a security it holds if the entity 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 securitys amortized cost basis. The FSP also modifies the presentation of other-than-temporary impairment losses and increases related disclosure requirements. FSP FAS 115-2 and 124-2 is effective for periods ending after June 15, 2009, with earlier adoption permitted. Northern Trust is currently assessing the impact of adoption of the FSP on its financial position and results of operations as of, and for the period ending, June 30, 2009.
Staff Position No. 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Statements (FSP FAS 107-1 and APB 28-1), requires companies to disclose the fair value of financial instruments within interim financial statements, adding to the current requirement to provide those disclosures annually. Since FSP 107-1 and 124-2 addresses financial statement disclosures only, its adoption, effective June 30, 2009, will not impact Northern Trusts consolidated financial position or results of operations.
3. Fair Value - The following describes the hierarchy of inputs 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. The hierarchy of valuation inputs is based on the extent to which the inputs are observable in the marketplace. Observable inputs reflect market data obtained from sources independent of the reporting entity; unobservable inputs reflect the entitys own assumptions about how market participants would value an asset or liability based on the best information available.
Level 1 | Quoted, active market prices for identical assets or liabilities. |
Northern Trusts Level 1 assets and liabilities include available for sale investments in U.S. treasury securities, seed investments for the development of managed fund products consisting of common stock and securities sold but not yet purchased, and U.S. treasury securities held to fund employee benefit and deferred compensation obligations.
7
Notes to Consolidated Financial Statements (continued)
Level 2 | Observable inputs other than Level 1 prices, such as quoted active market prices for similar assets or liabilities, quoted prices for identical or similar assets in inactive markets, and model-derived valuations in which all significant inputs are observable in active markets. |
Northern Trusts Level 2 assets include available for sale and trading account investments in government sponsored agency securities, asset-backed securities, obligations of states and political subdivisions, corporate debt securities, and non-U.S. government securities, the fair values of which are modeled by external pricing vendors or, in limited cases, modeled internally, using a discounted cash flow approach that incorporates current market yield curves and assumptions regarding anticipated prepayments and defaults.
Level 2 assets and liabilities also include derivative contracts such as foreign exchange contracts, interest rate contracts, and credit default swap contracts that are valued using widely accepted models that incorporate inputs readily observable in actively quoted markets and do not require significant judgment. Inputs to these models reflect the contractual terms of the contracts and, based on the type of instrument, can include foreign exchange rates, interest rates, credit spreads, and volatility inputs. Level 2 other assets represent investments in mutual funds held to fund employee benefit and deferred compensation obligations. These investments are valued at the funds net asset values.
Level 3 | Valuation techniques in which one or more significant inputs are unobservable in the marketplace. |
Northern Trusts Level 3 assets consist of auction rate securities purchased from Northern Trust clients. The lack of activity in the auction rate security market has resulted in a lack of observable market inputs to use in determining fair value. Therefore, Northern Trust has incorporated its own assumptions about future cash flows and appropriate discount rates adjusted for credit and liquidity factors. In developing these assumptions, Northern Trust incorporated the contractual terms of the securities, the type of collateral, any credit enhancements available, and relevant market data, where available. Northern Trusts Level 3 liabilities include capital support agreements (Capital Support Agreements) with certain investment funds and investment asset pools for which Northern Trust acts as investment advisor, which are discussed in further detail in Note 17. These agreements are valued using an option pricing model that includes prices for securities not actively traded in the marketplace as a significant input. Level 3 liabilities also include financial guarantees relating to standby letters of credit and a net estimated liability for Visa related indemnifications, discussed in further detail in Notes 18 and 13, the fair values of which are based on available market data and significant management judgment.
8
Notes to Consolidated Financial Statements (continued)
The following table presents Northern Trusts assets and liabilities measured at fair value on a recurring basis at March 31, 2009, segregated by fair value hierarchy level.
(In Millions) |
Level 1 | Level 2 | Level 3 | Netting * |
Assets/Liabilities
At Fair Value |
|||||||||||
Securities |
||||||||||||||||
Available for Sale |
$ | 16.2 | $ | 16,179.0 | $ | 476.3 | $ | | $ | 16,671.5 | ||||||
Trading Account |
| 5.1 | | | 5.1 | |||||||||||
Total |
16.2 | 16,184.1 | 476.3 | | 16,676.6 | |||||||||||
Other Assets |
||||||||||||||||
Derivatives |
| 2,736.1 | | (839.2 | ) | 1,896.9 | ||||||||||
All Other |
66.9 | 28.7 | | | 95.6 | |||||||||||
Total |
66.9 | 2,764.8 | | (839.2 | ) | 1,992.5 | ||||||||||
Total Assets at Fair Value |
$ | 83.1 | $ | 18,948.9 | $ | 476.3 | $ | (839.2 | ) | $ | 18,669.1 | |||||
Other Liabilities |
||||||||||||||||
Derivatives |
$ | | $ | 2,328.1 | $ | 322.4 | $ | (839.2 | ) | $ | 1,811.3 | |||||
All Other |
2.9 | | 108.9 | | 111.8 | |||||||||||
Total Liabilities at Fair Value |
$ | 2.9 | $ | 2,328.1 | $ | 431.3 | $ | (839.2 | ) | $ | 1,923.1 | |||||
* | Amounts represent adjustments for legally enforceable master netting agreements. |
The following table presents the changes in Level 3 liabilities for the three months ended March 31, 2009.
(In Millions) |
Securities
Available for Sale (1) |
Other Liabilities | ||||||||||
Derivatives (2) | All Other (3) | |||||||||||
Three Months Ended March 31, 2009 |
||||||||||||
Fair Value at December 31, 2008 |
$ | 453.1 | $ | (314.1 | ) | $ | (104.2 | ) | ||||
Total realized and unrealized gains (losses) |
||||||||||||
Included in earnings |
2.2 | (8.3 | ) | 1.8 | ||||||||
Included in other comprehensive income |
25.5 | | | |||||||||
Purchases, sales, issuances, and settlements |
(.1 | ) | | (6.5 | ) | |||||||
Fair Value at March 31, 2009 |
$ | 476.3 | $ | (322.4 | ) | $ | (108.9 | ) | ||||
(1) | Balance represents the fair value of auction rate securities. |
(2) | Balance represents the fair value of the Capital Support Agreements. |
(3) | Balance represents standby letters of credit and the net estimated liability for Visa related indemnifications. |
Gains of $2.2 million that were realized on the redemptions of auction rate securities by the issuers during the period are included in investment security gains(losses), net. Realized and unrealized gains and losses in the period related to Level 3 liabilities are included in other operating income or expense. Of the total realized and unrealized gains and losses included in earnings for the three months ended March 31, 2009, losses of $8.3 million relating to the valuation of the Corporations estimated liability under the Capital Support Agreements held at March 31, 2009 were unrealized.
Impaired loans whose valuation was determined based on available collateral are classified as nonrecurring Level 3 assets. During the quarter, Northern Trust provided an additional $17.8 million in specific reserves for credit losses to adjust seven such loans to their total estimated fair value of $18.6 million. Reserves were based on the fair value of the loans collateral as supported by third party appraisals, discounted to reflect managements judgment as to the realizable value of the collateral.
9
Notes to Consolidated Financial Statements (continued)
4. Securities - The following table summarizes the book and fair values of securities.
March 31, 2009 | December 31, 2008 | March 31, 2008 | ||||||||||||||||
(In Millions) |
Book Value | Fair Value | Book Value | Fair Value | Book Value | Fair Value | ||||||||||||
Available for Sale |
||||||||||||||||||
U.S. Government |
$ | 16.2 | $ | 16.2 | $ | 19.9 | $ | 19.9 | $ | 20.3 | $ | 20.3 | ||||||
Obligations of States and Political Subdivisions |
31.5 | 31.5 | 31.6 | 31.6 | 33.0 | 33.0 | ||||||||||||
Government Sponsored Agency |
13,364.9 | 13,364.9 | 11,261.4 | 11,261.4 | 7,856.0 | 7,856.0 | ||||||||||||
Asset-Backed |
1,521.1 | 1,521.1 | 1,572.6 | 1,572.6 | 1,779.3 | 1,779.3 | ||||||||||||
Auction Rate |
476.3 | 476.3 | 453.1 | 453.1 | | | ||||||||||||
Other |
1,261.5 | 1,261.5 | 1,075.8 | 1,075.8 | 388.5 | 388.5 | ||||||||||||
Subtotal |
16,671.5 | 16,671.5 | 14,414.4 | 14,414.4 | 10,077.1 | 10,077.1 | ||||||||||||
Held to Maturity |
||||||||||||||||||
Obligations of States and Political Subdivisions |
768.2 | 801.0 | 791.2 | 819.3 | 818.6 | 852.9 | ||||||||||||
Government Sponsored Agency |
55.9 | 57.6 | 55.0 | 56.1 | 12.6 | 12.8 | ||||||||||||
Other |
307.6 | 290.2 | 307.9 | 280.7 | 326.2 | 310.3 | ||||||||||||
Subtotal |
1,131.7 | 1,148.8 | 1,154.1 | 1,156.1 | 1,157.4 | 1,176.0 | ||||||||||||
Trading Account |
5.1 | 5.1 | 2.3 | 2.3 | 11.4 | 11.4 | ||||||||||||
Total Securities |
$ | 17,808.3 | $ | 17,825.4 | $ | 15,570.8 | $ | 15,572.8 | $ | 11,245.9 | $ | 11,264.5 | ||||||
Reconciliation of Amortized Cost to Fair Values of Securities Available for Sale
March 31, 2009 | ||||||||||||
Amortized
Cost |
Gross Unrealized |
Fair
Value |
||||||||||
(In Millions) |
Gains | Losses | ||||||||||
U.S. Government |
$ | 16.2 | $ | | $ | | $ | 16.2 | ||||
Obligations of States and Political Subdivisions |
30.5 | 1.0 | | 31.5 | ||||||||
Government Sponsored Agency |
13,352.0 | 40.0 | 27.1 | 13,364.9 | ||||||||
Asset-Backed |
1,797.2 | 10.6 | 286.7 | 1,521.1 | ||||||||
Auction Rate |
468.0 | 12.1 | 3.8 | 476.3 | ||||||||
Other |
1,264.9 | 2.6 | 6.0 | 1,261.5 | ||||||||
Total |
$ | 16,928.8 | $ | 66.3 | $ | 323.6 | $ | 16,671.5 | ||||
Reconciliation of Book Values to Fair Values of Securities Held to Maturity
March 31, 2009 | ||||||||||||
Book
Value |
Gross Unrealized |
Fair
Value |
||||||||||
(In Millions) |
Gains | Losses | ||||||||||
Obligations of States and Political Subdivisions |
$ | 768.2 | $ | 33.2 | $ | .4 | $ | 801.0 | ||||
Government Sponsored Agency |
55.9 | 1.7 | | 57.6 | ||||||||
Other |
307.6 | .1 | 17.5 | 290.2 | ||||||||
Total |
$ | 1,131.7 | $ | 35.0 | $ | 17.9 | $ | 1,148.8 | ||||
10
Notes to Consolidated Financial Statements (continued)
Of the total gross unrealized losses on securities of $341.5 million at March 31, 2009, 84% relate to asset-backed securities. Asset-backed securities held at March 31, 2009 were predominantly floating rate, with average lives less than 5 years, and 76% were rated triple-A, 5% were rated double-A, and 19% were rated below double-A. As a result of additional rating downgrades of securities within the portfolio, the percentage of asset-backed securities rated below double-A has increased since December 2008 when this category represented 5% of the total asset-backed securities portfolio. Asset-backed securities rated below double-A had a total amortized cost and fair value at March 31, 2009 of $465.8 million and $287.7 million, respectively, and were comprised primarily of sub-prime and Alt-A residential mortgage-backed securities. Of the $178.1 million of unrealized losses on asset-backed-securities rated below double-A, 18% or $32 million relate to one floating rate, first lien, residential mortgage backed security with an average life of 2.5 years, a rating of triple-C, and an amortized cost basis of $51.8 million. Northern Trust has evaluated asset-backed securities, and all other securities with unrealized losses, for possible other-than-temporary impairment in accordance with its security impairment review policy. Based on the results of those evaluations, which show no projected loss of principal or interest, and Northern Trusts ability and intent to hold all of its securities with unrealized losses until a recovery of fair value, which may be maturity, management does not consider these securities to be other-than-temporarily impaired at March 31, 2009. However, due to market and economic conditions, other-than-temporary impairments may occur in future periods.
5. Loans and Leases - Amounts outstanding in selected loan categories are shown below.
(In Millions) |
March 31,
2009 |
December 31,
2008 |
March 31,
2008 |
|||||||||
U.S. |
||||||||||||
Residential Real Estate |
$ | 10,588.0 | $ | 10,381.4 | $ | 9,295.0 | ||||||
Commercial |
7,826.8 | 8,253.6 | 6,448.5 | |||||||||
Commercial Real Estate |
3,144.8 | 3,014.0 | 2,438.1 | |||||||||
Personal |
4,625.3 | 4,766.7 | 3,781.6 | |||||||||
Other |
1,169.9 | 1,404.2 | 1,555.4 | |||||||||
Lease Financing |
986.3 | 1,143.8 | 1,139.0 | |||||||||
Total U.S. |
28,341.1 | 28,963.7 | 24,657.6 | |||||||||
Non-U.S. |
2,069.8 | 1,791.7 | 2,102.9 | |||||||||
Total Loans and Leases |
$ | 30,410.9 | $ | 30,755.4 | $ | 26,760.5 | ||||||
Reserve for Credit Losses Assigned to Loans and Leases |
(286.2 | ) | (229.1 | ) | (165.4 | ) | ||||||
Net Loans and Leases |
$ | 30,124.7 | $ | 30,526.3 | $ | 26,595.1 | ||||||
Other U.S. loans and non-U.S. loans included $2.6 billion at March 31, 2009, $1.9 billion at December 31, 2008, and $2.6 billion at March 31, 2008 of short duration advances, primarily related to overdrafts associated with the timing of custody clients investments.
11
Notes to Consolidated Financial Statements (continued)
The following table shows outstanding amounts of nonperforming and impaired loans for the quarters ended March 31, 2009 and 2008.
(In Millions) |
March 31,
2009 |
December 31,
2008 |
March 31,
2008 |
||||||
Nonperforming Loans |
$ | 167.8 | $ | 96.7 | $ | 27.7 | |||
Impaired Loans with Reserves |
$ | 85.7 | $ | 31.5 | $ | 17.4 | |||
Impaired Loans without Reserves* |
66.0 | 54.1 | 5.9 | ||||||
Total Impaired Loans |
$ | 151.7 | $ | 85.6 | $ | 23.3 | |||
Reserves for Impaired Loans |
$ | 42.7 | $ | 15.5 | $ | 11.4 | |||
Average Balance of Impaired Loans During the Period |
$ | 116.7 | $ | 31.5 | $ | 19.0 |
* | When an impaired loans discounted cash flows, collateral value, or market price equals or exceeds its carrying value (net of charge-offs), a reserve is not required. |
At March 31, 2009, residential real estate loans totaling $6.7 million were held for sale and carried at the lower of cost or market. Loan commitments for residential real estate loans that will be held for sale when funded are carried at fair value and had a total notional amount of $44.3 million at March 31, 2009. All other loan commitments are carried at the amount of unamortized fees with a reserve for credit loss liability recognized for estimated probable losses. At March 31, 2009, legally binding commitments to extend credit totaled $26.9 billion compared with $25.4 billion at December 31, 2008, and $22.2 billion at March 31, 2008.
6. Reserve for Credit Losses - Changes in the reserve for credit losses were as follows:
Three Months Ended March 31 | ||||||||
(In Millions) |
2009 | 2008 | ||||||
Balance at Beginning of Period |
$ | 251.1 | $ | 160.2 | ||||
Charge-Offs |
(5.4 | ) | (2.7 | ) | ||||
Recoveries |
2.7 | .3 | ||||||
Net Charge-Offs |
(2.7 | ) | (2.4 | ) | ||||
Provision for Credit Losses |
55.0 | 20.0 | ||||||
Effect of Foreign Exchange Rates |
(.1 | ) | | |||||
Balance at End of Period |
$ | 303.3 | $ | 177.8 | ||||
Reserve for Credit Losses Assigned to: |
||||||||
Loans and Leases |
$ | 286.2 | $ | 165.4 | ||||
Unfunded Commitments and Standby Letters of Credit |
17.1 | 12.4 | ||||||
Total Reserve for Credit Losses |
$ | 303.3 | $ | 177.8 | ||||
The reserve for credit losses represents managements estimate of probable inherent losses that have occurred as of the date of the financial statements. The loan and lease portfolio and other credit exposures are regularly reviewed to evaluate the adequacy of the reserve for credit losses. In determining the level of the reserve, Northern Trust evaluates the reserve necessary for specific nonperforming loans and also estimates losses inherent in other credit exposures.
12
Notes to Consolidated Financial Statements (continued)
7. Pledged Assets - Securities and loans pledged to secure public and trust deposits, repurchase agreements, and for other purposes as required or permitted by law were $22.9 billion on March 31, 2009, $23.6 billion on December 31, 2008 and $18.9 billion on March 31, 2008. Included in the March 31, 2009 pledged assets were securities available for sale of $1.0 billion that were pledged as collateral for agreements to repurchase securities sold transactions. The secured parties to these transactions have the right to repledge or sell these securities.
Northern Trust is permitted to repledge or sell collateral from agreements to resell securities purchased transactions. The total fair value of accepted collateral as of March 31, 2009, December 31, 2008, and March 31, 2008 was $48.9 million, $32.4 million, and $356.9 million, respectively. There was no repledged collateral at March 31, 2009, December 31, 2008, or March 31, 2008.
8. Goodwill and Other Intangibles - The following table shows the carrying amounts of goodwill by business unit, which include the effect of foreign exchange rates on non-U.S. dollar denominated goodwill, at March 31, 2009, December 31, 2008, and March 31, 2008.
(In Millions) |
March 31,
2009 |
December 31,
2008 |
March 31,
2008 |
||||||
Corporate and Institutional Services |
$ | 320.7 | $ | 322.6 | $ | 364.1 | |||
Personal Financial Services |
66.7 | 66.8 | 60.8 | ||||||
Total Goodwill |
$ | 387.4 | $ | 389.4 | $ | 424.9 | |||
Other intangible assets are included in other assets in the consolidated balance sheet. The gross carrying amount and accumulated amortization of other intangible assets subject to amortization at March 31, 2009, December 31, 2008, and March 31, 2008, which include the effect of foreign exchange rates on non-U.S. dollar denominated intangible assets, were as follows:
(In Millions) |
March 31,
2009 |
December 31,
2008 |
March 31,
2008 |
||||||
Gross Carrying Amount |
$ | 152.8 | $ | 153.4 | $ | 174.5 | |||
Accumulated Amortization |
84.1 | 80.2 | 76.7 | ||||||
Net Book Value |
$ | 68.7 | $ | 73.2 | $ | 97.8 | |||
Other intangible assets consist primarily of the value of acquired client relationships. Amortization expense related to other intangible assets totaled $3.9 million and $4.9 million for the quarters ended March 31, 2009 and March 31, 2008, respectively. Amortization for the remainder of 2009 and for the years 2010, 2011, 2012, and 2013 is estimated to be $11.7 million, $13.9 million, $10.3 million, $10.1 million and $9.8 million, respectively.
9. Business Units - The tables on page 34, reflecting the earnings contribution of Northern Trusts business units for the three month periods ended March 31, 2009 and 2008, are incorporated by reference.
13
Notes to Consolidated Financial Statements (continued)
10. Accumulated Other Comprehensive Income - The following tables summarize the components of accumulated other comprehensive income at March 31, 2009 and 2008, and changes during the three-month periods then ended.
Beginning
Balance (Net of Tax) |
Period Change |
Ending
Balance (Net of Tax) |
||||||||||||||
(In Millions) |
Pre-Tax
Amount |
Tax
Effect |
||||||||||||||
Three Months Ended March 31, 2009 |
||||||||||||||||
Unrealized Gains (Losses) on Securities Available for Sale |
$ | (212.9 | ) | $ | 67.0 | $ | (24.6 | ) | $ | (170.5 | ) | |||||
Less: Reclassification Adjustments |
| 0.2 | (0.1 | ) | .1 | |||||||||||
Net Unrealized Gains (Losses) on Securities Available for Sale |
(212.9 | ) | 66.8 | (24.5 | ) | (170.6 | ) | |||||||||
Unrealized Gains (Losses) on Cash Flow Hedge Designations |
(20.7 | ) | 19.0 | (7.1 | ) | (4.6 | ) | |||||||||
Less: Reclassification Adjustments |
| 8.1 | (3.0 | ) | 9.3 | |||||||||||
Net Unrealized Gains (Losses) on Cash Flow Hedge Designations |
(20.7 | ) | 10.9 | (4.1 | ) | (13.9 | ) | |||||||||
Foreign Currency Translation Adjustments |
12.8 | 13.2 | (16.7 | ) | 9.3 | |||||||||||
Pension and Other Postretirement Benefit Adjustments |
(274.1 | ) | | | (274.1 | ) | ||||||||||
Less: Reclassification Adjustments |
| 4.9 | (1.7 | ) | 3.2 | |||||||||||
Total Pension and Other Postretirement Benefit Adjustments |
(274.1 | ) | 4.9 | (1.7 | ) | (270.9 | ) | |||||||||
Accumulated Other Comprehensive Income |
$ | (494.9 | ) | $ | 95.8 | $ | (47.0 | ) | $ | (446.1 | ) | |||||
Three Months Ended March 31, 2008 |
||||||||||||||||
Unrealized Gains (Losses) on Securities Available for Sale |
$ | (28.7 | ) | $ | (88.5 | ) | $ | 32.9 | $ | (84.3 | ) | |||||
Less: Reclassification Adjustments |
| 5.0 | (1.9 | ) | 3.1 | |||||||||||
Net Unrealized Gains (Losses) on Securities Available for Sale |
(28.7 | ) | (93.5 | ) | 34.8 | (87.4 | ) | |||||||||
Unrealized Gains (Losses) on Cash Flow Hedge Designations |
(3.0 | ) | (6.7 | ) | 2.5 | (7.2 | ) | |||||||||
Less: Reclassification Adjustments |
| (2.2 | ) | .8 | (1.4 | ) | ||||||||||
Net Unrealized Gains (Losses) on Cash Flow Hedge Designations |
(3.0 | ) | (4.5 | ) | 1.7 | (5.8 | ) | |||||||||
Foreign Currency Translation Adjustments |
21.2 | 2.2 | 11.0 | 34.4 | ||||||||||||
Pension and Other Postretirement Benefit Adjustments |
(79.8 | ) | | | (79.8 | ) | ||||||||||
Less: Reclassification Adjustments |
| 3.4 | (1.6 | ) | 1.8 | |||||||||||
Total Pension and Other Postretirement Benefit Adjustments |
(79.8 | ) | 3.4 | (1.6 | ) | (78.0 | ) | |||||||||
Accumulated Other Comprehensive Income |
$ | (90.3 | ) | $ | (92.4 | ) | $ | 45.9 | $ | (136.8 | ) | |||||
14
Notes to Consolidated Financial Statements (continued)
11. Earnings Per Common Share Computations - The computations of net income per common share are presented in the following table.
Three Months Ended March 31 | ||||||
($ In Millions Except Per Share Information) |
2009 | 2008 | ||||
Basic Earnings Per Common Share |
||||||
Average Number of Common Shares Outstanding |
223,357,446 | 220,320,307 | ||||
Net Income |
$ | 161.8 | $ | 385.2 | ||
Less: Dividends on Preferred Stock |
23.0 | | ||||
Net Income Applicable to Common Stock |
138.8 | 385.2 | ||||
Less: Earnings Allocated to Participating Securities |
1.2 | 3.1 | ||||
Earnings Allocated to Common Shares Outstanding |
$ | 137.6 | $ | 382.1 | ||
Basic Earnings Per Common Share |
$ | .62 | $ | 1.73 | ||
Diluted Earnings Per Common Share |
||||||
Average Number of Common Shares Outstanding |
223,357,446 | 220,320,307 | ||||
Plus Stock Option Dilution |
1,043,739 | 3,208,704 | ||||
Average Common and Potential Common Shares |
224,401,185 | 223,529,011 | ||||
Earnings Allocated to Common and Potential Common Shares |
$ | 137.6 | $ | 382.1 | ||
Diluted Earnings Per Common Share |
$ | .61 | $ | 1.71 |
Note: Common stock equivalents totaling 1,492,631 and 1,540,439 for the three months ended March 31, 2009 and 2008, respectively, were not included in the computation of diluted earnings per share because their inclusion would have been antidilutive.
12. Net Interest Income - The components of net interest income were as follows:
Three Months Ended March 31 | ||||||
(In Millions) |
2009 | 2008 | ||||
Interest Income |
||||||
Loans and Leases |
$ | 243.5 | $ | 320.0 | ||
Securities Taxable |
56.4 | 89.8 | ||||
Non-Taxable |
9.1 | 9.3 | ||||
Time Deposits with Banks |
81.2 | 237.7 | ||||
Federal Funds Sold and Securities Purchased under Agreements to Resell and Other |
3.6 | 20.3 | ||||
Total Interest Income |
393.8 | 677.1 | ||||
Interest Expense |
||||||
Deposits |
65.4 | 346.8 | ||||
Federal Funds Purchased |
1.4 | 11.0 | ||||
Securities Sold Under Agreements to Repurchase |
.4 | 10.0 | ||||
Other Borrowings |
1.0 | 6.5 | ||||
Senior Notes |
8.6 | 9.3 | ||||
Long-Term Debt |
38.4 | 36.6 | ||||
Floating Rate Capital Debt |
1.5 | 3.4 | ||||
Total Interest Expense |
116.7 | 423.6 | ||||
Net Interest Income |
$ | 277.1 | $ | 253.5 | ||
15
Notes to Consolidated Financial Statements (continued)
13. Visa Membership - In connection with Visa, Inc.s (Visa) March 2008 initial public offering, a portion of the shares of Visa common stock held by Northern Trust as a member bank of Visa U.S.A. Inc. (Visa U.S.A.) was redeemed pursuant to a mandatory redemption. The proceeds of the redemption totaled $167.9 million and were recorded as a gain in the first quarter of 2008. The remaining Visa shares held by Northern Trust are recorded at their original cost basis of zero. These shares have restrictions as to their sale or transfer and the ultimate realization of their value is subject to future adjustments based on the resolution of outstanding indemnified litigation. Northern Trust, as a member bank of Visa U.S.A., and in conjunction with other member banks, is obligated to share in losses resulting from certain indemnified litigation involving Visa and is also required to recognize the contingent obligation to indemnify Visa for potential losses arising from the other indemnified litigation that has not yet settled at its estimated fair value in accordance with GAAP.
During 2007, Northern Trust recorded charges and corresponding liabilities of $150 million relating to Visa indemnified litigation. In March 2008, Visa placed a portion of the proceeds from its initial public offering into an escrow account to fund the settlements of, or judgments in, the indemnified litigation. Northern Trust recorded $76.1 million, its proportionate share of the escrow account balance, in the first quarter of 2008 as an offset to the indemnification liabilities and related charges recorded in the fourth quarter of 2007, reducing the net indemnification liability to $73.9 million. In the third quarter of 2008, in consideration of Visas announced settlement of the litigation involving Discover Financial Services, Northern Trust recorded a charge of $30.0 million to increase the Visa indemnification liability. In the fourth quarter of 2008, Northern Trust fully reversed the $30.0 million charge recorded in the third quarter as Visa funded its litigation escrow account to cover the amount of the settlement.
Northern Trusts net Visa related indemnification liability, included within other liabilities in the consolidated balance sheet, totaled $73.9 million at March 31, 2009 and 2008 and December 31, 2008. It is expected that required additional contributions to the litigation escrow account will be funded through subsequent sales of Visa stock with corresponding adjustments to the future realization of the value of the outstanding shares held by Visa U.S.A. member banks. While the ultimate resolution of outstanding Visa related litigation is highly uncertain and the estimation of any potential losses is highly judgmental, Northern Trust anticipates that the value of its remaining shares of Visa stock will be more than adequate to offset any remaining indemnification liabilities related to Visa litigation.
16
Notes to Consolidated Financial Statements (continued)
14. Income Taxes - Total income tax expense for the quarter was $83.3 million, an effective tax rate of 34.0%, compared with $192.9 in the prior year first quarter, an effective rate of $33.4%. The lower tax expense for the current quarter was primarily a result of lower pre-tax earnings.
As part of its audit of federal tax returns filed from 1997-2000, the IRS has challenged the Corporations tax position with respect to certain structured leasing transactions and proposed to disallow certain tax deductions and assess related interest and penalties. The Corporation anticipates that the IRS will continue to disallow deductions relating to these leases and possibly include other lease transactions with similar characteristics as part of its audit of tax returns filed after 2000. The Corporation believes that these transactions are valid leases for U.S. tax purposes and that its tax treatment of these transactions is appropriate based on its interpretation of the tax regulations and legal precedents; a court or other judicial authority, however, could disagree. The Corporation believes it has appropriate reserves to cover its tax liabilities, including liabilities related to structured leasing transactions, and related interest and penalties. The Corporation is currently holding preliminary discussions with the IRS with respect to these transactions that may result in a settlement agreement. Pending an equitable resolution of the tax settlement discussions, the Corporation will continue to defend its position on the tax treatment of the leases vigorously.
Included in unrecognized tax benefits at December 31, 2008 were $292.0 million of U.S. federal and state tax positions related to leveraged leasing tax deductions. During the current quarter, Northern Trust sold certain of the structured leases challenged by the IRS. In connection with these sales, the amount of leveraged lease related uncertain tax positions was reduced by $136.2 million. The acceleration of tax payments relating to the sold leases did not affect net income and does not resolve the IRS challenges with respect to the timing of previous tax deductions taken on these leases or the associated interest and penalties.
It is possible that additional changes in the amount of leveraged lease related uncertain tax positions and related cash flows could occur in the next twelve months if Northern terminates additional leases, is able to resolve this matter with the IRS, or if management becomes aware of new information that would lead it to change its assumptions regarding the timing or amount of any potential payments to the IRS. Management does not believe that future changes, if any, would have a material effect on the consolidated financial position or liquidity of Northern Trust, although they could have a material effect on operating results for a particular period.
17
Notes to Consolidated Financial Statements (continued)
15. Pension and Other Postretirement Plans - The following tables set forth the net periodic pension cost of Northern Trusts U.S. and non-U.S. pension plans, supplemental pension plan, and other postretirement plan for the three months ended March 31, 2009 and 2008.
Net Periodic Pension Expense U.S. Plan |
Three Months Ended
March 31 |
|||||||
(In Millions) |
2009 | 2008 | ||||||
Service Cost |
$ | 8.3 | $ | 7.4 | ||||
Interest Cost |
8.3 | 7.7 | ||||||
Expected Return on Plan Assets |
(14.9 | ) | (14.3 | ) | ||||
Amortization: |
||||||||
Net Loss |
3.0 | 2.0 | ||||||
Prior Service Cost |
.3 | .3 | ||||||
Net Periodic Pension Expense |
$ | 5.0 | $ | 3.1 | ||||
Net Periodic Pension Expense Non-U.S. Plans |
Three Months Ended
March 31 |
|||||||
(In Millions) |
2009 | 2008 | ||||||
Service Cost |
$ | .9 | $ | 1.1 | ||||
Interest Cost |
1.6 | 1.8 | ||||||
Expected Return on Plan Assets |
(1.9 | ) | (2.4 | ) | ||||
Net Loss Amortization |
.3 | .1 | ||||||
Net Periodic Pension Expense |
$ | .9 | $ | .6 | ||||
Net Periodic Pension Expense Supplemental Plan |
Three Months Ended
March 31 |
|||||||
(In Millions) |
2009 | 2008 | ||||||
Service Cost |
$ | .6 | $ | .5 | ||||
Interest Cost |
1.0 | .9 | ||||||
Net Loss Amortization |
1.0 | .6 | ||||||
Net Periodic Pension Expense |
$ | 2.6 | $ | 2.0 | ||||
Net Periodic Benefit Expense Other Postretirement Plan |
Three Months Ended
March 31 |
|||||||
(In Millions) |
2009 | 2008 | ||||||
Service Cost |
$ | .4 | $ | .4 | ||||
Interest Cost |
.9 | 1.0 | ||||||
Amortization: |
||||||||
Transition Obligation |
.2 | .1 | ||||||
Net Loss |
.1 | .3 | ||||||
Net Periodic Benefit Expense |
$ | 1.6 | $ | 1.8 | ||||
18
Notes to Consolidated Financial Statements (continued)
16. Share-Based Compensation Plans - The Amended and Restated Northern Trust Corporation 2002 Stock Plan provides for the grant of nonqualified stock options, incentive stock options, stock appreciation rights, stock awards, stock units, and performance shares.
In the first quarter of 2009, the Corporation granted 1,312,605 nonqualified stock options with a total grant-date fair value of $72.7 million and 450,521 stock unit awards with a total grant-date fair value of $25.0 million. Included in compensation expense recorded in the first quarters of 2009 and 2008 related to stock options was $2.0 million and $4.4 million, respectively, attributable to options granted in those quarters to retirement-eligible employees that were expensed in their entirety on their grant date. The current quarter share-based compensation expense includes the reversal of accruals related to performance stock units which are not expected to vest. Total compensation expense for share-based payment arrangements and the associated tax impacts were as follows:
Three Months Ended
March 31 |
|||||||
($ In Millions) |
2009 | 2008 | |||||
Stock Options |
$ | 5.5 | $ | 8.2 | |||
Stock and Stock Unit Awards |
4.3 | 3.9 | |||||
Performance Stock Units |
(14.9 | ) | 4.2 | ||||
Total Share-Based Compensation Expense |
$ | (5.1 | ) | $ | 16.3 | ||
Tax (Cost) Benefits Recognized |
$ | (1.9 | ) | $ | 6.1 |
17. Variable Interest Entities - Northern Trust acts as investment advisor to Registered Investment Companies, Undertakings for the Collective Investment of Transferable Securities and other unregistered short-term investment pools in which various clients of Northern Trust are investors. Although not obligated to do so, in 2008 the Corporation entered into Capital Support Agreements with certain of these entities (Funds) in order to provide financial stability to the Funds and investors in the Funds. Under the terms of the agreements, which expire on November 6, 2009, the Corporation would be required to contribute capital to the Funds, not to exceed $550 million in the aggregate and for no consideration, should certain asset loss events occur. The estimated fair value of the Corporations contingent liability under the agreements was $322.4 million and $314.1 million at March 31, 2009 and December 31, 2008, respectively, and was recorded within other liabilities in the consolidated balance sheet. As of March 31, 2009, no capital contributions have been made under the agreements.
Under the guidance of FASB Interpretation No. 46-R (FIN 46-R) and related interpretations, the Funds are considered variable interest entities (VIE) and the Capital Support Agreements are considered to reflect Northern Trusts variable interest in the credit risk of the Funds. FIN 46-R requires the disclosure of an entitys maximum exposure to loss where it has a significant variable interest in an unconsolidated VIE. FIN 46-R does not define significant and, as such, judgment is required. The variable interest holder, if any, that will absorb a majority of a VIEs expected losses, receive a majority of the entitys expected residual returns, or both, is deemed to be the primary
19
Notes to Consolidated Financial Statements (continued)
beneficiary of the VIE and is required to consolidate the VIE. Assessments of variable interests under FIN 46-R are based on expected losses and residual returns, which consider various scenarios on a probability-weighted basis.
The Funds were designed to create and pass to investors interest rate and credit risk. In determining whether Northern Trust is the primary beneficiary of the Funds, expected loss calculations based on the characteristics of the underlying investments in the Funds are used to estimate the expected losses related to interest rate and credit risk, while also considering the relative rights and obligations of each of the variable interest holders. These analyses concluded that interest rate risk is the primary driver of expected losses within the Funds. As such, Northern Trust has determined that it is not the primary beneficiary of the Funds and is not required to consolidate them within its balance sheet.
The following table summarizes Northern Trusts significant involvement with unconsolidated VIEs as of March 31, 2009 (in millions):
Fair Value of Assets Held By
the Funds |
Capital Support Agreement
Contingent Liability |
Maximum Exposure
To Loss |
|||||
$ | 55,269.7 | $ | 322.4 | $ | 550.0 |
The valuation of the contingent liability under the Capital Support Agreements as of March 31, 2009 was based on an option pricing model which incorporates agreement-specific assumptions, the value of covered investments and future volatility assumptions of underlying assets in the affected Funds. As Northern Trust has no plans to provide support additional to that which is noted above, the maximum exposure to loss from its implicit interests in the Funds is the contractual exposure under the Capital Support Agreements. Any potential future support would be evaluated by Northern Trust based on specific facts and circumstances and with careful consideration as to potential impacts to Northern Trusts ability to maintain well-capitalized status and meet its operational needs.
18. Contingent Liabilities - 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. Certain standby letters of credit have been secured with cash deposits or participated to others and in certain cases Northern Trust is able to recover the amounts paid through recourse against these cash deposits or other participants. Standby letters of credit outstanding were $4.4 billion on March 31, 2009, $4.0 billion on December 31, 2008 and $2.9 billion on March 31, 2008. Northern Trusts liability included within the consolidated balance sheet for standby letters of credit, measured as the amount of unamortized fees on these instruments, was $35.0 million at March 31, 2009, $30.3 million at December 31, 2008, and $12.5 million at March 31, 2008.
20
Notes to Consolidated Financial Statements (continued)
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 by the Northern Trust Senior Credit Committee. In connection with these activities, Northern Trust has issued indemnifications against certain losses resulting from the bankruptcy of the borrower of the securities. The borrowing party is required to fully collateralize securities received with cash, marketable securities, or irrevocable standby letters of credit. 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 subject to indemnification was $71.9 billion at March 31, 2009, $82.7 billion at December 31, 2008, and $176.0 billion at March 31, 2008. 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 at March 31, 2009, December 31, 2008, or March 31, 2008 related to these indemnifications.
As discussed in further detail in Note 17, the estimated fair value of the Corporations contingent liability under Capital Support Agreements with certain Northern Trust investment vehicles, recorded within other liabilities in the consolidated balance sheet, was $322.4 million at March 31, 2009. As of March 31, 2009, no capital contributions have been made under the agreements.
As discussed in further detail in Note 13, Northern Trust, as a member bank of Visa U.S.A., and in conjunction with other member banks, is obligated to share in losses resulting from certain indemnified litigation involving Visa. The estimated fair value of the net Visa indemnification liability, recorded within other liabilities in the consolidated balance sheet, totaled $73.9 million at March 31, 2009 and 2008.
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 classes of claimants, regulatory matters, employment matters, and challenges from tax authorities regarding the amount of taxes due. In certain of these actions and proceedings, claims for substantial monetary damages or adjustments to recorded tax liabilities are asserted. In view of the inherent difficulty of predicting the outcome of such matters, particularly matters that will be decided by a jury and actions that seek very large damages based on novel and complex damage and liability legal theories or that involve a large number of parties, the Corporation cannot state with confidence the eventual outcome of these matters or the timing of their ultimate resolution, or estimate the possible loss or range of loss associated with them; however, based on current knowledge and after consultation with legal counsel, management does not believe that judgments or settlements in excess of amounts already reserved, if any, arising from pending or threatened legal actions, regulatory matters, employment matters, or challenges from tax authorities, either individually or in the aggregate, would have a material adverse effect on the consolidated financial position or liquidity of the Corporation, although they could have a material adverse effect on operating results for a particular period.
21
Notes to Consolidated Financial Statements (continued)
19. Derivative Financial Instruments - Effective January 1, 2009, Northern Trust adopted FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities - an Amendment of FASB Statement 133, which increased required disclosures regarding derivatives and hedging activities, including disclosures regarding how an entity uses derivative instruments and how derivative instruments and related hedged items are accounted for and affect an entitys financial position, financial performance, and cash flows. 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.
Foreign exchange contracts are agreements to exchange specific amounts of currencies at a future date, at a specified rate of exchange. Foreign exchange contracts are entered into primarily to meet the foreign exchange needs of clients. Foreign exchange contracts are also used for trading purposes and risk management. For risk management purposes, Northern Trust currently uses foreign exchange contracts to reduce or eliminate its exposure to changes in foreign exchange rates relating to certain forecasted non-U.S. dollar denominated revenue and expenditure transactions, non-U.S. dollar denominated assets and liabilities, and net investments in non-U.S. affiliates.
Interest rate contracts include swap and option contracts. Interest rate swap contracts involve the exchange of fixed and floating rate interest payment obligations without the exchange of the underlying principal amounts. Northern Trust enters into interest rate swap contracts on behalf of its clients and also utilizes such contracts to reduce or eliminate the exposure to changes in the cash flows or value of hedged assets or liabilities due to changes in interest rates. Interest rate option contracts consist of caps, floors, and swaptions, and provide for the transfer or reduction of interest rate risk in exchange for a fee. Northern Trust enters into option contracts primarily as a seller of interest rate protection to clients. Northern Trust receives a fee at the outset of the agreement for the assumption of the risk of an unfavorable change in interest rates. This assumed interest rate risk is then mitigated by entering into an offsetting position with an outside counterparty. Northern Trust may also purchase option contracts for risk management purposes.
Credit default swap contracts are agreements to transfer credit default risk from one party to another in exchange for a fee. Northern Trust enters into credit default swaps with outside counterparties where the counterparty agrees to assume the underlying credit exposure of a specific Northern Trust commercial loan or commitment.
22
Notes to Consolidated Financial Statements (continued)
All derivative financial instruments, whether designated as hedges or not, are recorded on the consolidated balance sheet at fair value within other assets or other liabilities. The accounting for changes in the fair value of a derivative in the consolidated statement of income depends on whether the contract has been designated as a hedge and qualifies for hedge accounting in accordance with SFAS No. 133.
Northern Trust enters into master netting agreements with many of our derivative counterparties. Certain of these agreements contain credit-risk-related contingent features in which the counterparty has the option to declare Northern Trust in default and accelerate cash settlement of our net derivative liabilities with the counterparty in the event Northern Trusts credit rating falls below specified levels. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that are in a liability position on March 31, 2009, was $29.4 million. Northern Trust has not posted collateral against these liabilities and therefore the maximum amount of termination payments that could have been required at March 31, 2009 was $29.4 million. Accelerated settlement because of such events would not affect net income and would not have a material effect on the consolidated financial position or liquidity of Northern Trust.
Client-Related and Trading Derivative Instruments . In excess of 95% of Northern Trusts derivatives outstanding at March 31, 2009 and 2008, measured on a notional value basis, related to client-related and trading activities. These activities consist principally of providing foreign exchange services to clients in connection with Northern Trusts global custody business. However, in the normal course of business Northern Trust also engages in proprietary trading of non-U.S. currencies. The following table shows the notional amounts of client-related and trading derivative financial instruments. Notional amounts of derivative financial instruments do not represent credit risk, and are not recorded in the consolidated balance sheet. They are used merely to express the volume of this activity. Credit risk is limited to the positive fair value of the derivative instrument, which is significantly less than the notional amount.
March 31, 2009 | March 31, 2008 | |||||||||||||||||
(In Millions) |
Notional
Value |
Fair Value |
Notional
Value |
Fair Value | ||||||||||||||
Asset | Liability | Asset | Liability | |||||||||||||||
Foreign Exchange Contracts |
$ | 128,678.3 | $ | 3,578.7 | $ | 3,300.1 | $ | 172,681.2 | $ | 3,283.3 | $ | 3,226.7 | ||||||
Interest Rate Option Contracts |
201.7 | .2 | .2 | 569.6 | 2.5 | 2.5 | ||||||||||||
Interest Rate Swap Contracts |
3,514.0 | 175.5 | 172.3 | 2,530.2 | 79.1 | 72.5 | ||||||||||||
Total |
$ | 132,394.0 | $ | 3,754.4 | $ | 3,472.6 | $ | 175,781.0 | $ | 3,364.9 | $ | 3,301.7 | ||||||
23
Notes to Consolidated Financial Statements (continued)
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 three months ended March 31, 2009.
(In Millions) |
Location of Derivative
|
Amount of Derivative
Gain/(Loss) Recognized in Income |
|||
Foreign Exchange Contracts |
Foreign Exchange Trading Income | $ | 131.1 | ||
Interest Rate Option Contracts |
Other Income | | |||
Interest Rate Swap Contracts |
Other Income | 1.0 | |||
Total |
$ | 132.1 | |||
Risk Management Instruments. Northern Trust uses derivative instruments to hedge its exposure to foreign currency, interest rate, and credit risk. Certain hedging relationships are formally designated and qualify for hedge accounting under SFAS No. 133 as fair value, cash flow, or net investment hedges. Other derivatives that are entered into for risk management purposes as economic hedges are not formally designated as hedges and, therefore, are accounted for as if they were trading instruments.
In order to qualify for hedge accounting, a formal assessment is performed on a calendar quarter basis to verify that derivatives used in designated hedging transactions continue to be highly effective as offsets to changes in fair value or cash flows of the hedged item. If a derivative ceases to be highly effective, or if the hedged item matures, is sold, or is terminated, or if a hedged forecasted transaction is no longer expected to occur, hedge accounting is terminated and the derivative is treated as if it were a trading instrument.
The following table identifies the types and classifications of derivative instruments designated as hedges, their notional and fair values, and the respective risks addressed.
March 31, 2009 | March 31, 2008 | |||||||||||||||||||||
(In Millions) |
Derivative
|
Risk
Classification |
Notional
Value |
Fair Value |
Notional
Value |
Fair Value | ||||||||||||||||
Asset | Liability | Asset | Liability | |||||||||||||||||||
Fair Value Hedges |
||||||||||||||||||||||
Available for Sale Investment Securities |
Interest Rate
Swap Contracts |
Interest Rate | $ | 2,134.5 | $ | | $ | 19.4 | $ | 2,951.6 | $ | .1 | $ | 45.6 | ||||||||
Time Deposits with Banks |
Interest Rate
Swap Contracts |
Interest Rate | | | | 845.0 | | 1.2 | ||||||||||||||
Senior Notes and Long-Term Subordinated Debt |
Interest Rate
Swap Contracts |
Interest Rate | 1,100.0 | 154.6 | 1.0 | 400.0 | 37.9 | 1.0 | ||||||||||||||
Cash Flow Hedges |
||||||||||||||||||||||
Available for Sale Investment Securities |
Interest Rate
Swap Contracts |
Interest Rate | | | | 325.0 | 6.6 | .8 | ||||||||||||||
Forecasted Foreign Denominated Transactions |
Foreign Exchange
Contracts |
Foreign
Currency |
857.5 | 67.8 | 91.5 | 727.2 | 13.5 | 21.2 | ||||||||||||||
Net Investment Hedges |
||||||||||||||||||||||
Net Investments in Non-U.S. Affiliates |
Foreign Exchange
Contracts |
Net
Investment |
1,010.2 | 6.6 | 1.1 | 993.2 | 4.2 | .7 | ||||||||||||||
Total |
$ | 5,102.2 | $ | 229.0 | $ | 112.9 | $ | 6,242.0 | $ | 62.3 | $ | 70.5 | ||||||||||
24
Notes to Consolidated Financial Statements (continued)
Derivatives are designated as fair value hedges to limit Northern Trusts exposure to changes in the fair value of assets and liabilities due to movements in interest rates. Changes in fair value of these derivatives are recognized currently in income. 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.
(In Millions) |
Derivative
|
Location of Derivative
Gain/(Loss) Recognized in Income |
Amount of Derivative
Gain/(Loss) Recognized in Income |
|||||
Available for Sale Investment Securities |
Interest Rate Swap
Contracts |
Interest Income | $ | (1.6 | ) | |||
Senior Notes and Long-Term Subordinated Debt |
Interest Rate Swap
Contracts |
Interest Expense | 24.3 | |||||
Total |
$ | 22.7 | ||||||
For fair value hedges, Northern Trust applies the shortcut method of accounting, available under SFAS No. 133, 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.
Derivatives are also designated as cash flow hedges in order to minimize the variability in cash flows of earning assets or forecasted transactions caused by movements in interest or foreign exchange rates. The effective portion of changes in the fair value of such derivatives is recognized in accumulated other comprehensive income, a component of stockholders equity. When the hedged forecasted transaction impacts earnings, balances in other comprehensive income are reclassified to the same income or expense classification as the hedged item. Northern Trust applies the shortcut method of accounting for cash flow hedges of available for sale securities. For cash flow hedges of forecasted foreign currency denominated revenue and expenditure transactions, Northern Trust utilizes the dollar-offset method, a long-haul method of accounting under SFAS No. 133, in assessing whether these hedging relationships are highly effective at inception and on an ongoing basis. Any ineffectiveness is recognized currently in earnings. As of March 31, 2009, fourteen 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.
25
Notes to Consolidated Financial Statements (continued)
The following table provides cash flow hedge derivative gains and losses recognized in accumulated other comprehensive income and the amounts reclassified to earnings during the three months ended March 31, 2009.
(In Millions) |
Amount of Derivative
Gain/(Loss) Recognized in OCI (Effective Portion) |
Amount of Derivative
Gain/(Loss) Reclassified from Accumulated OCI into Income (Effective Portion) |
Location of Gain/(Loss)
|
||||||
Interest Rate Swap Contracts |
$ | | $ | .2 | Interest Income | ||||
Foreign Exchange Contracts |
$ | 19.0 | $ | 13.8 |
Trust, Investment and
Other Servicing Fees |
||||
(.1 | ) | Other Operating Income | |||||||
4.7 | Interest Income | ||||||||
(16.6 | ) | Compensation | |||||||
(4.1 | ) | Employee Benefits | |||||||
(.2 | ) | Equipment and Software Expense | |||||||
(2.3 | ) | Occupancy Expense | |||||||
(3.0 | ) | Other Operating Expense | |||||||
(.5 | ) | Interest Expense | |||||||
Total Foreign Exchange Contracts |
$ | 19.0 | $ | (8.3 | ) | ||||
Total Cash Flow Hedges |
$ | 19.0 | $ | (8.1 | ) | ||||
Included in the $8.1 million of derivative losses reclassified from accumulated comprehensive income during three months ended March 31, 2009, were $1.7 million of foreign exchange contract losses recognized in other operating income relating to cash flow hedges of forecasted foreign currency denominated revenue and expenditure transactions that were discontinued as it was no longer probable that the original forecasted transactions would occur. It is estimated that a net loss of $22.3 million will be reclassified into earnings within the next twelve months relating to cash flow hedges.
Foreign exchange contracts and qualifying nonderivative instruments are designated as net investment hedges to minimize Northern Trusts 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 accumulated other comprehensive income consistent with the related translation gains and losses. For net investment hedges, all critical terms of the hedged item and the hedging instrument are matched at inception and on an ongoing basis to eliminate hedge ineffectiveness. As a result, no ineffectiveness was recorded for these hedges during the three months ended March 31, 2009 or 2008. Amounts recorded in accumulated other comprehensive income would be reclassified to earnings only upon the sale or liquidation
26
Notes to Consolidated Financial Statements (continued)
of an investment in a non-U.S. branch or subsidiary. The following table provides net investment hedge gains and losses recognized in accumulated other comprehensive income during the three months ended March 31, 2009.
(In Millions) |
Amount of Hedging Instrument
Gain/(Loss) Recognized in OCI (Before Tax) |
||
Foreign Exchange Contracts |
$ | 35.4 | |
Sterling Denominated Subordinated Debt |
3.6 | ||
Sterling Denominated Senior Debt |
2.4 | ||
Total |
$ | 41.4 | |
Derivatives not formally designated as hedges under SFAS No. 133 are entered into to manage the foreign currency risk of non-U.S. dollar denominated assets and liabilities and the credit risk of loans and leases. The following table identifies the types and classifications of risk management derivative instruments not formally designated as hedges, their notional and fair values, and the respective risks addressed.
March 31, 2009 | March 31, 2008 | |||||||||||||||||||||
(In Millions) |
Derivative
|
Risk
Classification |
Notional
Value |
Asset
Fair Value |
Liability
Fair Value |
Notional
Value |
Asset
Fair Value |
Liability
Fair Value |
||||||||||||||
Loans and Leases-Commercial and Other |
Credit Default
Swap Contracts |
Credit | $ | 185.5 | $ | 5.9 | $ | .5 | $ | 263.8 | $ | 7.6 | $ | .1 | ||||||||
Loans and Leases-Commercial and Other |
Foreign
Exchange Contracts |
Foreign
Currency |
142.0 | 1.0 | 2.8 | 52.5 | | 1.8 | ||||||||||||||
Net Investments in Non-U.S. Affiliates |
Foreign
Exchange Contracts |
Foreign
Currency |
63.2 | 6.5 | .1 | 54.4 | 1.9 | .1 | ||||||||||||||
Total |
$ | 390.7 | $ | 13.4 | $ | 3.4 | $ | 370.7 | $ | 9.5 | $ | 2.0 | ||||||||||
Changes in the fair value of derivative instruments not formally designated as hedges are recognized currently in income. The following table provides the location and amount of gains and losses recorded in the consolidated statement of income for the three months ended March 31, 2009.
(In Millions) |
Location of Derivative
|
Amount Recognized
in Income |
|||
Credit Default Swap Contracts |
Other Income | $ | 2.8 | ||
Foreign Exchange Contracts |
Foreign Exchange Trading Income | 3.0 | |||
Foreign Exchange Contracts |
Other Income | 2.1 | |||
Total |
$ | 7.9 | |||
27
Item 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
FIRST QUARTER CONSOLIDATED RESULTS OF OPERATIONS
Overview
Net income was $161.8 million compared with reported net income of $385.2 million in the first quarter of last year. Net income per common share on a diluted basis for the first quarter was $.61 compared with net income per common share of $1.71 in the first quarter of 2008. Reported earnings for the prior year included a pre-tax non-operating benefit of $244.0 million ($.68 per common share net of tax) realized in connection with the March 2008 initial public offering of Visa Inc. (Visa) common stock. Operating earnings in the year ago period, which exclude the Visa benefits, were $231.7 million, or $1.03 per common share, as compared with $161.8 million of net income in the current period, or $.61 per common share.
The performance in the current quarter produced an annualized return on average common equity (ROE) of 10.88% versus 33.63% reported for the comparable quarter last year and an annualized return on average assets (ROA) of .85%, down from 2.28% last year.
Northern Trust is providing operating earnings in addition to its reported results prepared in accordance with generally accepted accounting principles in order to provide a clearer indication of the results and trends in Northern Trusts core businesses absent Visa related adjustments.
Three Months Ended
March 31, 2009 |
Three Months Ended
March 31, 2008 |
|||||||||||||
($ In Millions Except Per Share Data) |
Amount |
Per Common
Share |
Amount |
Per Common
Share |
||||||||||
Reported Earnings |
$ | 161.8 | $ | .61 | $ | 385.2 | $ | 1.71 | ||||||
Visa Initial Public Offering (net of $62.3 tax effect in 2008) |
| | (105.6 | ) | (.47 | ) | ||||||||
Visa Indemnification Accrual (net of $28.2 tax effect in 2008) |
| | (47.9 | ) | (.21 | ) | ||||||||
Operating Earnings |
$ | 161.8 | $ | .61 | $ | 231.7 | $ | 1.03 |
Consolidated revenues stated on a fully taxable equivalent (FTE) basis totaled $904.2 million, down $73.9 million or 8% from last years first quarter operating revenues of $978.1 million. Operating revenues for the previous year quarter exclude the $167.9 million gain recorded upon the redemption of Visa shares. Trust, investment and other servicing fees decreased 22% from last year to $410.7 million. Foreign exchange trading income and net interest income were each strong for the quarter, increasing 16% and 8%, respectively. Noninterest expenses totaled $593.5 million for the current quarter, down 3% or $17.9 million from last years first quarter noninterest expenses of $611.4 million on an operating basis. Operating noninterest expenses for the previous year quarter exclude the $76.1 million benefit from the reversal of a Visa related indemnification accrual.
28
Noninterest Income
Noninterest income of $616.5 million for the quarter accounted for 68% of total taxable equivalent revenue. Trust, investment and other servicing fees represented 45% of total taxable equivalent revenue. The decrease in trust, investment and other servicing fees from the prior year quarter primarily reflects negative securities lending fees and significantly lower market valuations, partially offset by new business. Foreign exchange trading income results reflect currency volatility.
The components of noninterest income are provided below.
Noninterest Income |
Three Months Ended
March 31 |
||||||||
(In Millions) |
2009 | 2008 | % Change | ||||||
Trust, Investment and Other Servicing Fees |
$ | 410.7 | $ | 526.8 | (22 | )% | |||
Foreign Exchange Trading Income |
131.1 | 113.2 | 16 | ||||||
Security Commissions and Trading Income |
16.8 | 17.8 | (6 | ) | |||||
Treasury Management Fees |
20.4 | 17.4 | 17 | ||||||
Gain on Visa Share Redemption |
| 167.9 | NM | ||||||
Other Operating Income |
37.1 | 31.8 | 17 | ||||||
Investment Security Gains (Losses), net |
.4 | 5.0 | (93 | ) | |||||
Total Noninterest Income |
$ | 616.5 | $ | 879.9 | (30 | )% | |||
Assets under custody totaled $2.8 trillion at March 31, 2009. This represents a decrease in assets under custody of 6% from December 31, 2008 and 29% from March 31, 2008. Assets under management totaled $522.3 billion, a 7% decrease from $558.8 billion at December 31, 2008 and a 33% decrease from $778.6 billion at March 31, 2008. The above are in comparison to the twelve month declines in the S&P 500 index of 40% and in the EAFE index (USD) of 49%. As of the current quarter-end, managed assets were invested 35% in equities, 19% in fixed-income securities, and 46% in cash and other assets.
Assets Under Custody (In Billions) |
March 31,
2009 |
December 31,
2008 |
March 31,
2008 |
||||||
Corporate & Institutional |
$ | 2,559.3 | $ | 2,719.2 | $ | 3,659.9 | |||
Personal |
281.7 | 288.3 | 322.2 | ||||||
Total Assets Under Custody |
$ | 2,841.0 | $ | 3,007.5 | $ | 3,982.1 | |||
Assets Under Management (In Billions) |
March 31,
2009 |
December 31,
2008 |
March 31,
2008 |
||||||
Corporate & Institutional |
$ | 392.0 | $ | 426.4 | $ | 632.6 | |||
Personal |
130.3 | 132.4 | 146.0 | ||||||
Total Assets Under Management |
$ | 522.3 | $ | 558.8 | $ | 778.6 | |||
Trust, investment and other servicing fees are generally based on the market value of assets managed, custodied, and administered, the volume of transactions, securities lending volume and spreads, and fees for other services rendered. Certain market value calculations are performed on a monthly or quarterly basis in arrears. Certain investment
29
Noninterest Income (continued)
management fee arrangements also may provide for performance fees, which are based on client portfolio returns exceeding predetermined levels. Securities lending fees are also impacted by Northern Trusts share of unrealized investment gains and losses in one investment fund used in our securities lending activities, accounted for at fair value. In addition, Corporate & Institutional Services (C&IS) client relationships are generally priced to reflect earnings from activities such as foreign exchange trading and custody-related deposits that are not included in trust, investment and other servicing fees. Based on 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 trust, investment and other servicing fees of approximately 4% and total revenues of approximately 2%.
Trust, investment and other servicing fees from C&IS in the quarter decreased 31% from the year-ago quarter to $207.0 million, reflecting negative securities lending fees and significantly lower market valuations, partially offset by new business. The largest component of C&IS fees is custody and fund administration fees, which decreased 22% to $136.3 million, driven primarily by declines in the equity markets. Securities lending fees totaled a negative $7.9 million compared with $31.9 million in the first quarter last year, reflecting reduced volumes and lower spreads on the investment of cash collateral. Asset valuation losses in one mark-to-market investment fund used in our securities lending activities also reduced fees by approximately $52 million in the current quarter compared with a reduction of approximately $98 million in the prior year quarter. Fees from asset management in the quarter totaled $60.4 million, down 19%, reflecting lower market valuations.
C&IS assets under custody totaled $2.6 trillion at March 31, 2009, down 30% from a year ago, and included $1.4 trillion of global custody assets, 33% lower than a year ago. C&IS assets under management totaled $392.0 billion, a 38% decrease from the prior year. C&IS assets under management for the quarter included $95.2 billion of securities lending related collateral, a 64% decrease from the prior year quarter. Excluding securities lending collateral, C&IS assets under management totaled $296.8 billion as compared with $365.2 billion in the prior year quarter, a $68.4 billion, or 19%, decrease The above are in comparison to the previously noted twelve month declines in the S&P 500 and EAFE (USD) indices. As of the current quarter-end, C&IS managed assets were invested 37% in equities, 16% in fixed-income securities, and 47% in cash and other assets.
Trust, investment and other servicing fees from Personal Financial Services (PFS) in the quarter decreased 11% and totaled $203.7 million compared with $228.4 million a year ago. The decrease in PFS fees resulted primarily from significantly lower market valuations, offset in part by new business. PFS assets under custody totaled $281.7 billion at March 31, 2009, a 13% decrease from $322.2 billion in the prior year quarter. PFS assets under management totaled $130.3 billion, an 11% decrease from $146.0 billion last year. These are in comparison to the twelve month declines in the S&P 500 and EAFE (USD) indices noted above. As of the current quarter-end, PFS managed assets were invested 28% in equities, 29% in fixed-income securities, and 43% in cash and other assets.
30
Noninterest Income (continued)
The components of other operating income are provided below.
Other Operating Income |
Three Months Ended
March 31 |
||||||||||
(In Millions) |
2009 | 2008 | % Change | ||||||||
Loan Service Fees |
$ | 9.5 | $ | 5.9 | 61 | % | |||||
Banking Service Fees |
11.9 | 9.1 | 31 | ||||||||
Non-Trading Foreign Exchange Gains (Losses), net |
(1.3 | ) | (.8 | ) | 63 | ||||||
Credit Default Swaps Gains (Losses), net |
2.8 | 4.9 | (43 | ) | |||||||
Gains on Sale of Leased Equipment |
7.8 | .3 | NM | ||||||||
Other Income |
6.4 | 12.4 | (48 | ) | |||||||
Total Other Operating Income |
$ | 37.1 | $ | 31.8 | 17 | % | |||||
An investment security gain of $4.9 million was recognized in the previous year quarter from the sale of the CME Group Inc. stock acquired in connection with the demutualization and subsequent merger of the Chicago Mercantile Exchange and the Chicago Board of Trade.
Net Interest Income
Net interest income for the quarter totaled $277.1 million, 9% higher than the $253.5 million reported in the first quarter of 2008. 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 hedging activities. When net interest income is adjusted to an FTE basis, yields on taxable, nontaxable and partially taxable assets are comparable, although the adjustment to an FTE basis has no impact on net income. Net interest income for the quarter, stated on an FTE basis, totaled $287.7 million, up 8% from $266.1 million reported in the prior year first quarter.
The increase in net interest income primarily reflects a higher level of average earning assets, partially offset by a decrease in the net interest margin. Average earning assets of $69.4 billion were 16% higher than a year ago, driven by growth in securities and loans. Loans and leases averaged $29.7 billion, up 20% from the first quarter of last year. The securities portfolio averaged $16.8 billion, up 63% from last year, primarily reflecting an increase in the average balance of government sponsored agency securities. Money market assets averaged $22.9 billion for the quarter, a decrease of 7% from the prior year. The net interest margin equaled 1.68%, down from 1.79% in the prior year quarter, reflecting the diminished value of noninterest-related funding sources resulting from the significant interest rate cuts over the past year.
Average U.S. loans outstanding during the quarter totaled $28.4 billion, 22% higher than the $23.2 billion in last years first quarter. Residential real estate loans averaged $10.5 billion in the quarter, up 14% from the prior years first quarter, and represented 35% of the average loan and lease portfolio. Commercial loans averaged $8.2 billion, up 39% from $5.9 billion last year, while personal loans averaged $4.7 billion, up 27% from last years first quarter. Loans outside the U.S. decreased $242.9 million on average from the prior year quarter to $1.3 billion.
31
Net Interest Income (continued)
Northern Trust utilizes a diverse mix of funding sources. Total interest-bearing deposits averaged $43.7 billion, down slightly from the first quarter of 2008. Higher levels of U.S. office deposits were offset by a $3.5 billion or 10% decline in non-U.S. office deposits from last years first quarter. Domestic retail deposit levels increased $2.8 billion due primarily to higher levels of money market deposit accounts and savings certificates. The decline in non-U.S. office deposits resulted primarily from the strengthening of the U.S. dollar and the resulting impact on the translation of foreign-denominated deposit liabilities in our international business. Other interest-related funds averaged $11.2 billion in the quarter compared with $7.4 billion in last years first quarter. The balances within these classifications vary based on funding requirements and strategies, interest rate levels, changes in the volume of lower-cost deposit sources, and the availability of collateral to secure these borrowings. The increase in this funding category resulted primarily from higher levels of overnight federal funds purchased and long-term debt. Noninterest-related funds utilized to fund earning assets averaged $14.5 billion compared with $8.1 billion in last years first quarter, resulting primarily from higher levels of U.S. office noninterest-bearing deposits and stockholders equity.
Provision for Credit Losses
The provision for credit losses was $55.0 million in the first quarter compared with $20.0 million in the prior year quarter. The current quarter provision primarily reflects the continued weakness in the broader economic environment. The reserve for credit losses at March 31, 2009 was $303.3 million compared with $251.1 million at December 31, 2008 and $177.8 million at March 31, 2008. For a discussion of the provision and reserve for credit losses, refer to the Asset Quality section below.
Noninterest Expense
The components of noninterest expense are provided below.
Noninterest Expenses |
Three Months
Ended March 31 |
|||||||||
(In Millions) |
2009 | 2008 | % Change | |||||||
Compensation |
$ | 258.3 | $ | 286.2 | (10 | )% | ||||
Employee Benefits |
65.8 | 57.3 | 15 | |||||||
Outside Services |
95.7 | 93.9 | 2 | |||||||
Equipment and Software Expense |
61.7 | 54.2 | 14 | |||||||
Occupancy Expense |
41.8 | 41.4 | 1 | |||||||
Visa Indemnification Charges |
| (76.1 | ) | NM | ||||||
Other Operating Expenses |
70.2 | 78.4 | (11 | ) | ||||||
Total Noninterest Expenses |
$ | 593.5 | $ | 535.3 | 11 | % | ||||
32
Noninterest Expense (continued)
The current quarter decrease in compensation and employee benefit expenses reflects reductions in performance-based compensation expense, partially offset by higher staff levels, annual salary increases, and higher defined benefit plan expenses and employment taxes. Staff on a full-time equivalent basis at March 31, 2009 totaled 12,200, up 8% from a year ago.
Expenses associated with outside services for the current quarter includes higher expenses for technical services, offset by lower expenses for investment manager sub-advisor services.
The remaining expense categories totaled $173.7 million, essentially unchanged from $174.0 million in the prior year quarter stated on an operating basis. Higher equipment and software related expenses and increased Federal Deposit Insurance Corporation insurance premiums were offset by lower charges associated with securities processing activities and business promotion.
Other Operating Expenses
The components of other operating expenses are provided below.
Other Operating Expenses |
Three Months
Ended March 31 |
||||||||
(In Millions) |
2009 | 2008 | % Change | ||||||
Business Promotion |
$ | 24.2 | $ | 31.4 | (23 | )% | |||
Other Intangibles Amortization |
3.9 | 4.9 | (20 | ) | |||||
Capital Support Agreements |
8.3 | 8.7 | (5 | ) | |||||
Other Expenses |
33.8 | 33.4 | 1 | ||||||
Total Other Operating Expenses |
$ | 70.2 | $ | 78.4 | (11 | )% | |||
Provision for Income Taxes
The provision for income taxes was $83.3 million in the current quarter resulting in an effective tax rate of 34.0%. The prior year quarter provision for income taxes was $192.9 million, representing an effective tax rate of 33.4%.
33
BUSINESS UNIT REPORTING
The following tables reflect the earnings contribution and average assets of Northern Trusts business units for the three month periods ended March 31, 2009 and 2008. Business unit financial information, presented on an internal management-reporting basis, is determined by accounting systems that are used to allocate revenue and expenses related to each segment, and which incorporate processes for allocating assets, liabilities, and equity, and the applicable interest income and expense.
Three Months Ended
March 31, |
Corporate and
Institutional Services |
Personal Financial
Services |
Treasury and Other | Total Consolidated | ||||||||||||||||||||||||||||
($ In Millions) |
2009 | 2008 | 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | ||||||||||||||||||||||||
Noninterest Income |
||||||||||||||||||||||||||||||||
Trust, Investment and Other Servicing Fees |
$ | 207.0 | $ | 298.4 | $ | 203.7 | $ | 228.4 | $ | | $ | | $ | 410.7 | $ | 526.8 | ||||||||||||||||
Gain on Visa Redemption |
| | | | | 167.9 | | 167.9 | ||||||||||||||||||||||||
Other |
169.7 | 146.6 | 32.5 | 28.6 | 3.6 | 10.0 | 205.8 | 185.2 | ||||||||||||||||||||||||
Net Interest Income (FTE) * |
146.9 | 134.1 | 132.1 | 121.4 | 8.7 | 10.6 | 287.7 | 266.1 | ||||||||||||||||||||||||
Revenues (FTE) * |
523.6 | 579.1 | 368.3 | 378.4 | 12.3 | 188.5 | 904.2 | 1,146.0 | ||||||||||||||||||||||||
Provision for Credit Losses |
13.6 | 5.0 | 41.4 | 15.0 | | | 55.0 | 20.0 | ||||||||||||||||||||||||
Visa Indemnification Charges |
| | | | | (76.1 | ) | | (76.1 | ) | ||||||||||||||||||||||
Noninterest Expenses |
327.6 | 326.1 | 252.6 | 247.8 | 13.3 | 37.5 | 593.5 | 611.4 | ||||||||||||||||||||||||
Income before Income Taxes * |
182.4 | 248.0 | 74.3 | 115.6 | (1.0 | ) | 227.1 | 255.7 | 590.7 | |||||||||||||||||||||||
Provision for Income Taxes * |
63.3 | 75.7 | 28.4 | 44.0 | 2.2 | 85.8 | 93.9 | 205.5 | ||||||||||||||||||||||||
Net Income |
$ | 119.1 | $ | 172.3 | $ | 45.9 | $ | 71.6 | $ | (3.2 | ) | $ | 141.3 | $ | 161.8 | 385.2 | ||||||||||||||||
Percentage of Consolidated Net Income |
74 | % | 45 | % | 28 | % | 18 | % | (2 | )% | 37 | % | 100 | % | 100 | % | ||||||||||||||||
Average Assets |
$ | 46,082.1 | $ | 46,178.9 | $ | 21,347.3 | $ | 20,852.1 | $ | 9,926.1 | $ | 1,061.4 | $ | 77,355.5 | $ | 68,092.4 | ||||||||||||||||
* | Stated on a fully taxable equivalent basis (FTE). Total consolidated includes FTE adjustments of $10.6 million for 2009 and $12.6 million for 2008. |
Corporate and Institutional Services
C&IS net income for the quarter was $119.1 million, down 31% compared with net income of $172.3 million in the first quarter of 2008. Noninterest income was $376.7 million, down 15% from $445.0 million in last years first quarter. Trust, investment and other servicing fees from C&IS in the quarter decreased 31% from the year-ago quarter to $207.0 million, reflecting negative securities lending fees and significantly lower market valuations, partially offset by new business. The largest component of C&IS fees is custody and fund administration fees, which decreased 22% to $136.3 million, driven primarily by declines in the equity markets. Securities lending fees totaled a negative $7.9 million compared with $31.9 million in the first quarter last year, reflecting reduced volumes and lower spreads on the investment of cash collateral. Asset valuation losses in one mark-to-market investment fund used in our securities lending activities also reduced fees by approximately $52 million in the current quarter compared with a reduction of approximately $98 million in the prior year quarter. Fees from asset management in the quarter totaled $60.4 million, down 19%, reflecting lower market
34
Corporate and Institutional Services (continued)
valuations. Other noninterest income was $169.7 million compared with $146.6 million in last years first quarter. Foreign exchange trading income equaled $129.2 million, up 15% from last years first quarter, reflecting currency volatility. The current quarter included $7.8 million in gains from the sale of leased equipment.
Net interest income stated on an FTE basis was $146.9 million, up 10% from $134.1 million in last years first quarter. Earning assets averaged $41.4 billion for the quarter compared with $42.2 billion in the first quarter of last year. Average loans outstanding increased $4.5 billion, offset by lower levels of money market assets. The net interest margin equaled 1.44% compared with 1.28% reported in the prior year quarter.
A provision for credit losses of $13.6 million was recorded in the current quarter compared with a provision of $5.0 million recorded in the prior year first quarter. The provision for the current quarter primarily reflects continued weakness in the broader economic environment. Total noninterest expenses of C&IS, which includes the direct expenses of the business unit, indirect expense allocations from Northern Trust Global Investments (NTGI) and Operations and Technology (O&T) for product and operating support, and indirect expense allocations for certain corporate support services, totaled $327.6 million compared with $326.1 million for the first quarter of last year.
Personal Financial Services
PFS net income for the current quarter was $45.9 million, down 36% from $71.6 million reported a year ago. Noninterest income was $236.2 million, down 8% from $257.0 million in last years first quarter. Trust, investment and other servicing fees in the quarter decreased 11% and totaled $203.7 million compared with $228.4 million a year ago. The decrease in PFS fees resulted primarily from significantly lower market valuations. Other noninterest income totaled $32.5 million compared with $28.6 million in the prior year quarter.
Net interest income stated on an FTE basis was $132.1 million in the current quarter compared with $121.4 million in the prior years first quarter. The change primarily reflects growth in average earning assets, concentrated in the loan portfolio, and an improvement in the net interest margin. The net interest margin increased to 2.55% in the current quarter from 2.41% last year.
35
Personal Financial Services (continued)
A provision for credit losses of $41.4 million was recorded in the current quarter compared with a provision of $15.0 million recorded in the prior year first quarter. The provision for the current quarter primarily reflects the continued weakness in the broader economic environment. Total noninterest expenses of PFS, which includes the direct expenses of the business unit, indirect expense allocations from NTGI and O&T for product and operating support, and indirect expense allocations for certain corporate support services, totaled $252.6 million compared with $247.8 million for the first quarter of last year, an increase of $4.8 million, or 2%. The increase resulted from higher charges for indirect expense allocations, annual salary increases and employee benefit charges, partially offset by decreases in performance-based compensation and business promotion.
Treasury and Other
Treasury and Other includes income and expense associated with the wholesale funding activities and the investment portfolios of the Corporation and its principal subsidiary, The Northern Trust Company (Bank), and certain corporate-based expenses, executive level compensation, and nonrecurring items not allocated to the business units. Treasury and Other Support Services for the prior year quarter included the $167.9 million gain recorded upon the redemption of Visa shares and the $76.1 million reduction of the Visa related indemnification accrual. Net interest income in the current quarter was $8.7 million, as compared to $10.6 million in the prior year quarter. Average assets increased $8.9 billion from the prior quarter. Net interest income for the current quarter declined from the prior year quarter, despite significantly higher asset levels, as a result of the unprecedented low interest rate environment. Treasury and Other assets are invested primarily in short-term securities and money market assets and are funded by short-term borrowings and noninterest-bearing deposits. The results reflect the diminished value of noninterest-bearing funding sources resulting from the significant interest rate cuts over the past year. Other noninterest income for the first quarter was $3.6 million compared with $10.0 million in the year-ago quarter. The prior year quarter included the $4.9 million investment security gain recognized from the sale of the CME Group Inc. stock. The $24.2 million, or 65%, current quarter decrease in other direct expenses, absent the prior year Visa benefit, primarily reflects a reduction in performance-based compensation.
36
BALANCE SHEET
Total assets at March 31, 2009 were $78.5 billion and averaged $77.4 billion for the first quarter, compared with total assets of $77.5 billion at March 31, 2008 and an average balance of $68.1 billion in the prior year first quarter. Average balances are considered to be a better measure of balance sheet trends as period-end balances can be impacted on a short term basis by deposit and withdrawal activity involving large balances of short-term client funds. Loans and leases totaled $30.4 billion at March 31, 2009 and averaged $29.7 billion for the first quarter, compared with $26.8 billion at March 31, 2008 and a $24.8 billion average for the first quarter last year. Securities totaled $17.8 billion at March 31, 2009 and averaged $16.8 billion for the quarter, compared with $11.2 billion at March 31, 2008 and $10.3 billion on average last year. Money market assets totaled $21.8 billion at March 31, 2009 and averaged $22.9 billion in the first quarter, down 7% from the year-ago quarter. The growth in total assets was funded primarily by growth in U.S. office deposits, short-term borrowings, proceeds received from participation in the U.S. Department of the Treasurys Capital Purchase Program, and long-term debt.
Stockholders equity increased to $6.5 billion at March 31, 2009 and averaged $6.7 billion for the quarter, up 45% from last years first quarter. The increase reflects the issuance of senior preferred stock and related warrant to the U.S. Department of the Treasury pursuant to the terms of the Capital Purchase Program and the retention of earnings. During the first quarter of 2009, the Corporation repurchased 110,713 common shares at a cost of $6.3 million ($56.84 average price per share) in connection with equity based compensation plans. An additional 7.5 million shares are authorized for repurchase after March 31, 2009, subject to certain restrictions as part of the Corporations participation in the Capital Purchase Program. The Corporation is continuing its dialogue with the Federal Reserve, in accordance with the prescribed process, to proceed on its objective of redeeming the U.S. Department of the Treasurys Capital Purchase Program preferred stock as quickly as prudently possible.
Northern Trusts risk-based capital ratios remained strong at March 31, 2009 and were well above the minimum regulatory requirements established by U.S. banking regulators of 4% for tier 1 capital, 8% for total risk-based capital, and 3% for leverage (tier 1 capital to period average assets). Each of Northern Trusts U.S. subsidiary banks had capital ratios at March 31, 2009 that were above the level required for classification as a well capitalized institution. Shown below are the March 31, 2009 and 2008 capital ratios of the Corporation and of each of its subsidiary banks whose net income for the three-months ended March 31, 2009 or 2008 exceeded 10% of the consolidated total.
March 31, 2009 | March 31, 2008 | |||||||||||||||||
Tier 1
Capital |
Total
Capital |
Leverage
Ratio |
Tier 1
Capital |
Total
Capital |
Leverage
Ratio |
|||||||||||||
Northern Trust Corporation |
13.0 | % | 15.2 | % | 8.9 | % | 9.5 | % | 11.4 | % | 6.9 | % | ||||||
The Northern Trust Company |
11.0 | % | 14.0 | % | 7.0 | % | 8.5 | % | 11.1 | % | 5.8 | % | ||||||
Northern Trust, NA |
9.9 | % | 11.4 | % | 8.5 | % | 10.2 | % | 11.4 | % | 8.7 | % |
37
BALANCE SHEET (continued)
The ratio of tangible common equity to tangible assets was 5.9% at March 31, 2009, up from 5.5% at March 31, 2008. Tangible common equity is calculated as total stockholders equity less preferred stock, goodwill and identifiable intangible assets, adjusted for related deferred tax liabilities. Tangible assets are total assets less goodwill and identifiable intangible assets. The tangible common equity ratio is a non-GAAP financial measure that is being provided as it is a measure that the Corporation and investors use to assess capital adequacy.
ASSET QUALITY
Securities Portfolio
Northern Trust maintains a high quality securities portfolio, with 90% of the total portfolio at March 31, 2009 composed of U.S. Treasury and government sponsored agency securities, Federal Home Loan Bank and Federal Reserve Bank stock, and triple-A rated asset-backed securities, auction rate securities and obligations of states and political subdivisions. The remaining 10% of the portfolio was composed of asset-backed securities, obligations of states and political subdivisions, auction rate securities and other securities, of which 3% of the total portfolio were rated double-A, 4% of the total portfolio were rated below double-A, and 3% of the total portfolio were not rated by Standard and Poors or Moodys Investors Service.
Auction rate securities were purchased in 2008 in connection with a program to purchase at par value certain illiquid auction rate securities held for clients under investment discretion or that were acquired by clients from Northern Trusts affiliated broker/dealer. At March 31, 2009, 99% of these securities were investment grade. The remaining 1% that were below investment grade had a total amortized cost and fair value of $7.3 million and $5.7 million, respectively.
Total gross unrealized losses within the investment securities portfolio at March 31, 2009 were $341.5 million as compared to $387.9 million at December 31, 2008 and $159.0 million at March 31, 2008. The $182.5 million increase in unrealized losses from March 31, 2008 primarily reflects lower valuations of asset-backed securities due to the widening of credit spreads and deterioration in overall market conditions experienced in the second half of 2008. Of the total gross unrealized losses on securities of $341.5 million at March 31, 2009, 84% relate to asset-backed securities. Asset-backed securities held at March 31, 2009 were predominantly floating rate, with average lives less than 5 years, and 76% were rated triple-A, 5% were rated double-A, and 19% were rated below double-A. As a result of additional rating downgrades of securities within the portfolio, the percentage of asset-backed securities rated below double-A has increased since December 2008 when this category represented 5% of the total asset-backed securities portfolio. Asset-backed securities rated below double-A had a total amortized cost and fair value at March 31, 2009 of $465.8 million and $287.7 million, respectively, and were comprised primarily of sub-prime and Alt-A residential mortgage-backed securities. Of the $178.1 million of unrealized losses on asset-backed-securities rated below double-A, 18% or $32.2 million relate to one floating rate, first lien, residential mortgage backed security with an average life of 2.5 years, a rating of triple-C, and an amortized cost basis of $51.8 million.
38
Securities Portfolio (continued)
Northern Trust has evaluated asset-backed securities, and all other securities with unrealized losses, for possible other-than-temporary impairment in accordance with its security impairment review policy. Based on the results of those evaluations, which show no projected loss of principal or interest, and Northern Trusts ability and intent to hold all of its securities with unrealized losses until a recovery of fair value, which may be maturity, management does not consider these securities to be other-than-temporarily impaired at March 31, 2009. However, due to market and economic conditions, other-than-temporary impairments may occur in future periods.
Northern Trust is an active participant in the repurchase 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 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 continuously monitored, limits are set on exposure with counterparties, and the financial condition of counterparties is regularly assessed. It is Northern Trusts 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 Real Estate Owned
Nonperforming assets consist of nonaccrual loans and Other Real Estate Owned (OREO). Nonperforming assets at March 31, 2009 totaled $172.1 million compared with $100.2 million at December 31, 2008 and $35.7 million at March 31, 2008. Nonaccrual loans and leases totaled $167.8 million or .55% of total loans and leases at March 31, 2009. At December 31, 2008 and March 31, 2008, nonaccrual loans and leases totaled $96.7 million and $27.7 million, respectively. The $71.1 million increase in nonaccrual loans during the current quarter primarily reflects the movement of ten loans to nonperforming status.
The following table presents the outstanding amounts of nonaccrual loans and OREO. Also shown
are loans that have interest or principal payments that are delinquent 90 days or more and are still accruing interest. The balance of loans delinquent 90 days or more and still accruing interest can fluctuate widely based on the timing of cash
Nonperforming Assets
(In Millions) |
March 31,
2009 |
December 31,
2008 |
March 31,
2008 |
||||||
Nonaccrual Loans |
|||||||||
U.S. |
|||||||||
Residential Real Estate |
$ | 60.5 | $ | 32.7 | $ | 8.6 | |||
Commercial |
41.5 | 21.3 | 8.3 | ||||||
Commercial Real Estate |
60.1 | 35.8 | 3.9 | ||||||
Personal |
5.7 | 6.9 | 6.9 | ||||||
Total Nonaccrual Loans |
167.8 | 96.7 | 27.7 | ||||||
Other Real Estate Owned |
4.3 | 3.5 | 8.0 | ||||||
Total Nonperforming Assets |
$ | 172.1 | $ | 100.2 | $ | 35.7 | |||
90 Day Past Due Loans Still Accruing |
$ | 16.6 | $ | 27.8 | $ | 19.9 | |||
39
Provision and Reserve for Credit Losses
The provision for credit losses is the charge to current earnings that is determined by management, through a disciplined credit review process, to be the amount needed to maintain a reserve that is sufficient to absorb probable credit losses that have been identified with specific borrower relationships (specific loss component) and for probable losses that are believed to be inherent in the loan and lease portfolios, unfunded commitments, and standby letters of credit (inherent loss component). Control processes and analyses employed to evaluate the adequacy of the reserve for credit losses are reviewed on at least an annual basis and modified as considered appropriate. A $55.0 million provision for credit losses was recorded in the first quarter of 2009 compared with a $20.0 million provision in the prior year first quarter. The current quarter provision primarily reflects the weakness in the broader economic environment.
Note 6 to the consolidated financial statements includes a table that details the changes in the reserve for credit losses during the three months ended March 31, 2009 and 2008 due to charge-offs, recoveries, and the provision for credit losses during the respective periods. The following table shows the specific portion of the reserve and the allocated portion of the inherent reserve and its components by loan category at March 31, 2009, December 31, 2008 and March 31, 2008, and the unallocated portion of the inherent reserve at March 31, 2009, December 31, 2008 and March 31, 2008.
Allocation of the Reserve for Credit Losses
March 31, 2009 | December 31, 2008 | March 31, 2008 | ||||||||||||||||
($ in Millions) |
Reserve
Amount |
Percent of
of Loans to Total Loans |
Reserve
Amount |
Percent of
Loans to Total Loans |
Reserve
Amount |
Percent of
Loans to Total Loans |
||||||||||||
Specific Reserve |
$ | 42.7 | | % | $ | 23.5 | | % | $ | 11.4 | | % | ||||||
Allocated Inherent Reserve |
||||||||||||||||||
Residential Real Estate |
46.6 | 35 | 37.0 | 34 | 15.8 | 35 | ||||||||||||
Commercial |
129.2 | 26 | 114.7 | 27 | 73.5 | 24 | ||||||||||||
Commercial Real Estate |
50.0 | 10 | 43.8 | 10 | 33.1 | 9 | ||||||||||||
Personal |
24.6 | 15 | 19.7 | 15 | 6.8 | 14 | ||||||||||||
Other |
2.3 | 4 | 1.7 | 4 | | 6 | ||||||||||||
Lease Financing |
2.1 | 3 | 3.3 | 4 | 3.3 | 4 | ||||||||||||
Non-U.S. |
5.8 | 7 | 7.4 | 6 | 8.0 | 8 | ||||||||||||
Total Allocated Inherent Reserve |
$ | 260.6 | 100 | % | $ | 227.6 | 100 | % | $ | 140.5 | 100 | % | ||||||
Unallocated Inherent Reserve |
| | | | 25.9 | | ||||||||||||
Total Reserve |
$ | 303.3 | 100 | % | $ | 251.1 | 100 | % | $ | 177.8 | 100 | % | ||||||
Reserve Assigned to: |
||||||||||||||||||
Loans and Leases |
$ | 286.2 | $ | 229.1 | $ | 165.4 | ||||||||||||
Unfunded Loan Commitments and Standby Letters of Credit |
17.1 | 22.0 | 12.4 | |||||||||||||||
Total Reserve for Credit Losses |
$ | 303.3 | $ | 251.1 | $ | 177.8 | ||||||||||||
The increase in reserve levels from December 31, 2008 primarily reflects weakness in the broader economic environment, including the impact on the level of nonperforming loans.
40
Provision and Reserve for Credit Losses (continued)
Effective June 30, 2008, the methodology used to determine the qualitative element of the inherent reserve was modified to provide for the assignment of reserves to loan and lease credit exposures aggregated by shared risk characteristics to better align the reserves with the related credit risk. Previously, this element of the inherent reserve was associated with the credit portfolio as a whole and was referred to as the unallocated inherent reserve.
The reserve of $286.2 million assigned to loans and leases, as a percentage of total loans and leases, was .94% at March 31, 2009, compared with .75% at December 31, 2008 and .62% at March 31, 2008. At March 31, 2009, the total amount of the two highest risk loan groupings, those rated 7 and 8 (based on Northern Trusts internal rating scale, which closely parallels that of the banking regulators) was $538.5 million of which $151.7 million was classified as impaired, up from $401.0 million at December 31, 2008 when $85.6 million was classified as impaired, and up from $73.7 million at March 31, 2008 when $23.3 million was classified as impaired.
MARKET RISK MANAGEMENT
As described in the 2008 Annual Report to Shareholders, Northern Trust manages its interest rate risk through measurement techniques which include simulation of earnings, simulation of the economic value of equity, and gap analysis. Also, as part of its risk management activities, it regularly measures the risk of loss associated with foreign currency positions using a value at risk model.
Based on this continuing evaluation process, Northern Trusts interest rate risk position and the value at risk associated with the foreign exchange trading portfolio have not changed significantly since December 31, 2008.
41
FACTORS AFFECTING FUTURE RESULTS
This report contains statements that may be considered forward-looking, such as the statements relating to Northern Trusts financial goals, dividend policy, expansion and business development plans, anticipated expense levels and projected profit improvements, business prospects and positioning with respect to market, demographic and pricing trends, strategic initiatives, re-engineering and outsourcing activities, new business results and outlook, changes in securities market prices, credit quality including reserve levels, planned capital expenditures and technology spending, anticipated tax benefits and expenses, and the effects of any extraordinary events and various other matters (including developments with respect to litigation, other contingent liabilities and obligations, and regulation involving Northern Trust and changes in accounting policies, standards and interpretations) on Northern Trusts business and results.
Forward-looking statements are typically identified by words or phrases such as believe, expect, anticipate, intend, estimate, may increase, may fluctuate, plan, goal, target, strategy, and similar expressions or future or conditional verbs such as may, will, should, would, and could. Forward-looking statements are Northern Trusts current estimates or expectations of future events or future results. Actual results could differ materially from the results indicated by these statements because the realization of those results is subject to many risks and uncertainties including: the health of the U.S. and international economies and the health and soundness of the financial institutions and other counterparties with which Northern Trust conducts business; changes in financial markets, including debt and equity markets, that impact the value, liquidity, or credit ratings of financial assets in general, or financial assets in particular investment funds, client portfolios, or securities lending collateral pools, including those funds, portfolios, collateral pools, and other financial assets with respect to which Northern Trust has taken, or may in the future take, actions to provide asset value stability or additional liquidity, such as entry into capital support agreements and other client support actions; the impact of recent upheaval in the financial markets, the effectiveness of domestic and international governmental actions taken in response, such as the U.S. Department of the Treasurys Troubled Asset Relief Program and the FDICs Temporary Liquidity Guarantee Program, and the effect of such governmental actions on Northern Trust, its competitors and counterparties, financial markets generally and availability of credit specifically, and the U.S. and international economies, including potentially higher FDIC premiums arising from participation in the Temporary Liquidity Guarantee Program or from increased payments from FDIC insurance funds as a result of depository institution failures; changes in foreign exchange trading client volumes, fluctuations and volatility in foreign currency exchange rates, and Northern Trusts success in assessing and mitigating the risks arising from such changes, fluctuations and volatility; decline in the value of securities held in Northern Trusts 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 reserves therefor; difficulties in measuring, or determining whether there is other-than-temporary impairment in, the value of securities held in Northern Trusts investment portfolio; Northern Trusts success in managing various risks inherent in its business, including credit risk, interest rate risk and liquidity risk, particularly during times of economic uncertainty and volatility in the credit and other markets; geopolitical risks and
42
FACTORS AFFECTING FUTURE RESULTS (continued)
the risks of extraordinary events such as natural disasters, terrorist events, war and the U.S. governments response to those events; the pace and extent of continued globalization of investment activity and growth in worldwide financial assets; regulatory and monetary policy developments; failure to obtain regulatory approvals when required; changes in tax laws, accounting requirements or interpretations and other legislation in the U.S. or other countries that could affect Northern Trust or its clients, including changes in accounting rules for fair value measurements and recognizing impairments; changes in the nature and activities of Northern Trusts competition, including increased consolidation within the financial services industry; Northern Trusts success in maintaining existing business and continuing to generate new business in its existing markets; Northern Trusts success in identifying and penetrating targeted markets, through acquisition, strategic alliance or otherwise; Northern Trusts success in integrating recent and future acquisitions, strategic alliances, and preferred provider arrangements; Northern Trusts success in addressing the complex needs of a global client base across multiple time zones and from multiple locations, and managing compliance with legal, tax, regulatory and other requirements in areas of faster growth in its businesses, especially in immature markets; Northern Trusts ability to maintain a product mix that achieves acceptable margins; Northern Trusts ability to continue to generate investment results that satisfy its clients and continue to develop its array of investment products; Northern Trusts success in generating revenues in its securities lending business for itself and its clients, especially in periods of economic and financial market uncertainty; Northern Trusts 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 Trusts 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, pricing or valuation of securities, fraud, systems performance or defects, systems interruptions, and breakdowns in processes or internal controls; Northern Trusts success in controlling expenses particularly in a difficult economic environment; uncertainties inherent in Northern Trusts assumptions concerning its pension plan, including discount rates and expected contributions, returns and payouts; increased costs of compliance and other risks associated with changes in regulation and the current regulatory environment, including the requirements of the new Basel II capital regime and areas of increased regulatory emphasis and oversight such as the Bank Secrecy Act and Anti-Money Laundering Act and the potential for substantial changes in the regulatory framework applicable to financial institutions and the rigor of regulatory oversight in reaction to recent economic turmoil; uncertainties arising from Northern Trusts participation in the Troubled Asset Relief Program, including impacts on employee recruitment and retention and other business practices, and uncertainties concerning the potential redemption of the U.S. Department of the Treasurys preferred stock investment under that program, including the timing of, regulatory approvals for, and conditions placed upon, any such redemption; risks and uncertainties inherent in the litigation and regulatory process, including the adequacy of contingent liability, tax, and other reserves; and the risk of events that could harm Northern Trusts reputation and so undermine the confidence of clients, counterparties, rating agencies, and stockholders.
43
FACTORS AFFECTING FUTURE RESULTS (continued)
Some of these and other risks and uncertainties that may affect future results are discussed in more detail in the sections of Managements Discussion and Analysis of Financial Condition and Results of Operations captioned Risk Management, Market Risk Management and Operational Risk Management in the 2008 Annual Report to Shareholders (pages 47 58), in the section of the Notes to Consolidated Financial Statements in the 2008 Annual Report to Shareholders captioned Note 25, Contingent Liabilities (pages 91-92), in the sections of Item 1 Business of the 2008 Annual Report on Form 10-K captioned Government Monetary and Fiscal Polices, Competition and Regulation and Supervision (pages 2 11), and in Item 1A Risk Factors of the 2008 Annual Report on Form 10-K (pages 24 32). All forward-looking statements included in this report are based upon information presently available, and Northern Trust assumes no obligation to update any forward-looking statements.
44
The following schedule should be read in conjunction with the Net Interest Income section of Management's Discussion and Analysis of Financial Condition and Results of Operations.
AVERAGE STATEMENT OF CONDITION | NORTHERN TRUST CORPORATION | |
WITH ANALYSIS OF NET INTEREST INCOME |
(INTEREST AND RATE ON TAXABLE EQUIVALENT BASIS)
First Quarter | ||||||||||||||||||||
2009 | 2008 | |||||||||||||||||||
Average | Average | |||||||||||||||||||
($ in Millions) |
Interest | Balance | Rate | Interest | Balance | Rate | ||||||||||||||
Average Earning Assets |
||||||||||||||||||||
Money Market Assets |
||||||||||||||||||||
Federal Funds Sold and Resell Agreements |
$ | .3 | $ | 439.5 | .28 | % | $ | 20.0 | $ | 2,564.6 | 3.14 | % | ||||||||
Time Deposits with Banks |
81.2 | 16,916.4 | 1.95 | 237.7 | 21,967.5 | 4.35 | ||||||||||||||
Federal Reserve Deposits and Other Interest-Bearing |
3.3 | 5,592.2 | .24 | .3 | 44.1 | 2.89 | ||||||||||||||
Total Money Market Assets |
84.8 | 22,948.1 | 1.50 | 258.0 | 24,576.2 | 4.22 | ||||||||||||||
Securities |
||||||||||||||||||||
U.S. Government |
.1 | 17.8 | 2.28 | .1 | 16.6 | 2.73 | ||||||||||||||
Obligations of States and Political Subdivisions |
14.4 | 861.6 | 6.69 | 14.3 | 862.8 | 6.66 | ||||||||||||||
Government Sponsored Agency |
41.6 | 12,031.2 | 1.40 | 67.7 | 6,817.5 | 3.99 | ||||||||||||||
Other |
18.6 | 3,861.7 | 1.95 | 26.2 | 2,592.5 | 4.06 | ||||||||||||||
Total Securities |
74.7 | 16,772.3 | 1.81 | 108.3 | 10,289.4 | 4.23 | ||||||||||||||
Loans and Leases |
244.9 | 29,725.3 | 3.34 | 323.4 | 24,777.5 | 5.25 | ||||||||||||||
Total Earning Assets |
$ | 404.4 | 69,445.7 | 2.36 | % | $ | 689.7 | 59,643.1 | 4.65 | % | ||||||||||
Reserve for Credit Losses Assigned to Loans and Leases |
| (228.8 | ) | | | (148.2 | ) | | ||||||||||||
Cash and Due from Banks |
| 2,302.3 | | | 3,516.2 | | ||||||||||||||
Other Assets |
| 5,836.3 | | | 5,081.3 | | ||||||||||||||
Total Assets |
| $ | 77,355.5 | | | $ | 68,092.4 | | ||||||||||||
Average Source of Funds |
||||||||||||||||||||
Deposits |
||||||||||||||||||||
Savings and Money Market |
$ | 19.1 | $ | 9,653.7 | .80 | % | $ | 47.6 | $ | 7,543.0 | 2.54 | % | ||||||||
Savings Certificates |
16.8 | 2,689.0 | 2.53 | 21.1 | 2,018.2 | 4.20 | ||||||||||||||
Other Time |
4.5 | 837.6 | 2.18 | 5.6 | 527.8 | 4.23 | ||||||||||||||
Non-U.S. Offices - Interest-Bearing |
25.0 | 30,559.4 | .33 | 272.5 | 34,039.9 | 3.22 | ||||||||||||||
Total - Interest- Bearing Deposits |
65.4 | 43,739.7 | .61 | 346.8 | 44,128.9 | 3.16 | ||||||||||||||
Short-Term Borrowings |
2.8 | 6,630.9 | .17 | 27.5 | 3,748.2 | 2.96 | ||||||||||||||
Senior Notes |
8.6 | 1,044.1 | 3.34 | 9.3 | 657.8 | 5.63 | ||||||||||||||
Long-Term Debt |
38.4 | 3,250.4 | 4.79 | 36.6 | 2,687.6 | 5.46 | ||||||||||||||
Floating Rate Capital Debt |
1.5 | 276.7 | 2.20 | 3.4 | 276.6 | 4.94 | ||||||||||||||
Total Interest-Related Funds |
116.7 | 54,941.8 | .86 | 423.6 | 51,499.1 | 3.31 | ||||||||||||||
Interest Rate Spread |
| | 1.50 | % | | | 1.34 | % | ||||||||||||
Noninterest-Bearing Deposits |
| 12,394.6 | | | 8,643.6 | | ||||||||||||||
Other Liabilities |
| 3,343.2 | | | 3,343.0 | | ||||||||||||||
Stockholders Equity |
| 6,675.9 | | | 4,606.7 | | ||||||||||||||
Total Liabilities and Stockholders Equity |
| $ | 77,355.5 | | | $ | 68,092.4 | | ||||||||||||
Net Interest Income/Margin (FTE Adjusted) |
$ | 287.7 | | 1.68 | % | $ | 266.1 | | 1.79 | % | ||||||||||
Net Interest Income/Margin (Unadjusted) |
$ | 277.1 | | 1.62 | % | $ | 253.5 | | 1.71 | % | ||||||||||
ANALYSIS OF NET INTEREST INCOME CHANGES
DUE TO VOLUME AND RATE
Three Months 2009/2008 | |||||||||||
Change Due To | |||||||||||
(In Millions) |
Average
Balance |
Rate | Total | ||||||||
Earning Assets (FTE) |
$ | 114.7 | $ | (400.0 | ) | $ | (285.3 | ) | |||
Interest-Related Funds |
30.9 | (337.8 | ) | (306.9 | ) | ||||||
Net Interest Income (FTE) |
$ | 83.8 | $ | (62.2 | ) | $ | 21.6 | ||||
45
Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
The information called for by this item is incorporated herein by reference to Managements Discussion and Analysis of Financial Condition and Results of Operations-Market Risk Management on page 41 of this document.
Item 4. | Controls and Procedures |
The Corporations management, with the participation of the Corporations Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of Northern Trusts disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report. Based on such evaluation, such officers have concluded that, as of the end of the period covered by this report, the Corporations disclosure controls and procedures are effective in bringing to their attention on a timely basis material information relating to the Corporation (including its consolidated subsidiaries) required to be included in the Corporations periodic filings under the Exchange Act.
There have been no changes in the Corporations internal control over financial reporting during the last fiscal quarter that have materially affected, or that are reasonably likely to materially affect, the Corporations internal control over financial reporting.
46
PART II - OTHER INFORMATION
Item 1. | Legal Proceedings |
The information called for by this item is incorporated herein by reference to Note 18 titled Contingent Liabilities beginning on page 20 of this Form 10-Q.
On January 16, 2009 an amended complaint was filed in the putative class action lawsuit currently pending in the United States District Court for the Northern District of Illinois against the Corporation and others. The defendants named in the amended complaint are the Corporation, the Bank, the Northern Trust Employee Benefits Administrative Committee and its members, the Northern Trust Employee Benefits Investment Committee and its members, and certain other officers, including the present Chief Executive Officer of the Corporation and the former Chief Executive Officer of the Corporation, purportedly on behalf of participants in and beneficiaries of The Northern Trust Company Thrift-Incentive Plan (the Plan) whose individual accounts held shares of Corporation common stock at any time from October 19, 2007 to January 14, 2009. The complaint purports to allege breaches of fiduciary duty in violation of the Employee Retirement Income Security Act (ERISA) related to the Corporations stock being offered as an investment alternative for participants in the Plan and seeks monetary damages. At this early stage of the suit, it is not possible for management to assess the probability of a material adverse outcome or reasonably estimate the amount of any potential loss.
Item 1A. | Risk Factors |
There are no material changes to the risk factors set forth in Part I, Item 1A in the Corporations Annual Report on Form 10-K for the year ended December 31, 2008.
47
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
(c) The following table shows certain information relating to the Corporations purchases of common stock for the three months ended March 31, 2009:
Period |
Total Number of
Shares Purchased (1) |
Average Price
Paid per Share |
Total Number of
Shares Purchased as Part of a Publicly Announced Plan (2) |
Maximum Number of
Shares That May Yet Be Purchased Under the Plan |
|||||
January 1-31, 2009 |
13,856 | $ | 56.16 | 13,856 | |||||
February 1-28, 2009 |
50,752 | 56.13 | 50,752 | ||||||
March 1-31, 2009 |
46,105 | 57.83 | 46,105 | ||||||
Total (First Quarter) |
110,713 | $ | 56.84 | 110,713 | 7,450,627 | ||||
(1) | Includes shares purchased from employees in connection with equity plan transactions such as the surrender of shares to pay an option exercise price or tax withholding. |
(2) | The Corporations current stock buyback program, announced October 17, 2006, authorizes the purchase of up to 12.0 million shares of the Corporations common stock. The Corporations current stock buyback program has no fixed expiration date. |
48
Item 4. | Submission of Matters to a Vote of Security Holders |
The annual meeting of the stockholders of Northern Trust Corporation was held on April 21, 2009 for the purposes of (i) electing 14 Directors to hold office until the next annual meeting of stockholders, (ii) ratifying the appointment of KPMG LLP as the Corporations independent registered public accounting firm for the 2009 fiscal year, and (iii) considering and acting upon a proposal relating to an advisory (non-binding) vote on executive compensation. Proxies for the meeting were solicited pursuant to Section 14(a) of the Exchange Act, and there was no solicitation in opposition to managements nominees.
All of managements nominees for Director as named in the proxy statement were elected by the votes set forth in the table below. Each nominee received no fewer than 187,071,317 votes, which amounted to 93.41% of the shares voted and more than a majority of the shares present and voting as required for election. There were no broker non-votes with respect to any nominees.
NOMINEES |
FOR |
WITHHELD |
||||
Linda Walker Bynoe |
191,076,051 | 9,183,139 | ||||
Nicholas D. Chabraja |
195,242,552 | 5,016,638 | ||||
Susan Crown |
190,529,318 | 9,729,872 | ||||
Dipak C. Jain |
199,138,576 | 1,120,614 | ||||
Arthur L. Kelly |
195,911,543 | 4,347,647 | ||||
Robert C. McCormack |
196,660,741 | 3,598,449 | ||||
Edward J. Mooney |
187,071,317 | 13,187,873 | ||||
William A. Osborn |
196,528,060 | 3,731,130 | ||||
John W. Rowe |
189,788,975 | 10,470,215 | ||||
Harold B. Smith |
194,462,539 | 5,796,651 | ||||
William D. Smithburg |
190,007,860 | 10,251,330 | ||||
Enrique J. Sosa |
199,267,495 | 991,695 | ||||
Charles A. Tribbett III |
195,160,920 | 5,098,270 | ||||
Frederick H. Waddell |
196,669,051 | 3,590,139 |
The appointment of KPMG LLP as the Corporations independent registered public accounting firm for the 2009 fiscal year (the Appointment) was ratified as follows: 197,213,640 votes were cast FOR ratification of the Appointment, 2,711,950 votes were cast AGAINST ratification of the Appointment, and 333,600 shares abstained from voting on this matter. There were no broker non-votes on this matter.
The proposal relating to an advisory (non-binding) vote on executive compensation (the Say-on-Pay Proposal) was approved as follows: 188,233,885 votes were cast FOR the Say-on-Pay Proposal, 11,004,987 votes were cast AGAINST the Say-on-Pay Proposal, and 1,020,318 shares abstained from voting on this matter. There were no broker non-votes on this matter.
49
Item 6. | Exhibits |
(a) | Exhibits |
(10) | Material Contracts: |
(i) | Form of 2009 Stock Option Terms and Conditions. |
(ii) | Form of 2009 Stock Unit Award Terms and Conditions. |
(iii) | Form of Non-Solicitation Agreement and Confidentiality Agreement. |
(iv) | Northern Trust Corporation Severance Plan, as Amended and Restated effective as of January 1, 2009. |
(31) | Rule 13a-14(a)/15d-14(a) Certifications |
(i) | Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
(ii) | Certification of CFO Pursuant to Section 302 of the Sarbanes- Oxley Act of 2002. |
(32) | Section 1350 Certifications |
(i) | Certifications of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
(99) | Additional Exhibits |
(i) | Edited version of the remarks delivered by Frederick H. Waddell, President and Chief Executive Officer, at the Annual Meeting of Stockholders of Northern Trust Corporation held on April 21, 2009. |
50
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
NORTHERN TRUST CORPORATION | ||||||||
(Registrant) | ||||||||
Date: April 24, 2009 | By: | /s/ Steven L. Fradkin | ||||||
Steven L. Fradkin | ||||||||
Executive Vice President and Chief | ||||||||
Financial Officer | ||||||||
Date: April 24, 2009 | By: | /s/ Aileen B. Blake | ||||||
Aileen B. Blake | ||||||||
Executive Vice President and Controller | ||||||||
(Chief Accounting Officer) |
51
EXHIBIT INDEX
The following exhibits have been filed with the Securities and Exchange Commission with Northern Trust Corporations Quarterly Report on Form 10-Q for the quarter ended March 31, 2009. You may obtain copies of these exhibits from the SECs Internet site at http://www.sec.gov. Stockholders may also obtain copies of such exhibits by writing Rose A. Ellis, Secretary, Northern Trust Corporation, 50 South LaSalle Street, Chicago, Illinois 60603.
Exhibit
|
Description |
|||
(10) |
Material Contracts: | |||
(i) | Form of 2009 Stock Option Terms and Conditions. | |||
(ii) | Form of 2009 Stock Unit Award Terms and Conditions. | |||
(iii) | Form of Non-Solicitation Agreement and Confidentiality Agreement. | |||
(iv) | Northern Trust Corporation Severance Plan, as Amended and Restated effective as of January 1, 2009. | |||
(31) |
Rule 13a-14(a)/15d-14(a) Certifications | |||
(i) | Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||
(ii) | Certification of CFO Pursuant to Section 302 of the Sarbanes- Oxley Act of 2002. | |||
(32) |
Section 1350 Certifications | |||
(i) | Certifications of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |||
(99) |
Additional Exhibits | |||
(i) | Edited version of the remarks delivered by Frederick H. Waddell, President and Chief Executive Officer, at the Annual Meeting of Stockholders of Northern Trust Corporation held on April 21, 2009. |
52
Exhibit 10(i)
TERMS AND CONDITIONS
2009 EXECUTIVE STOCK OPTION
UNDER THE AMENDED AND RESTATED
NORTHERN TRUST CORPORATION 2002 STOCK PLAN
1. | Governing Documents . Your stock option grant is subject to the provisions of the Amended and Restated Northern Trust Corporation 2002 Stock Plan (the Plan), the stock option notice (the Option Notice) and this Terms and Conditions document (Terms and Conditions). The Option Notice and these Terms and Conditions constitute the Stock Option Agreement as defined in the Plan. If there is any conflict between the information in the Stock Option Agreement and the Plan, the Plan will govern. These Terms and Conditions apply to non-qualified stock options and incentive stock options issued under the Plan. Capitalized terms not defined in Stock Option Agreement shall have the meanings assigned to them in the Plan. |
2. | Amendments . The Committee may amend the terms of the Stock Option Agreement at any time, except that any amendment that adversely affects your rights in any material way requires your written consent. Notwithstanding anything in the Stock Option Agreement to the contrary, including without limitation the preceding sentence, in the event that the Committee determines that your stock option grant, or the performance by the Corporation of any of its obligations under the Stock Option Agreement, would violate any applicable law, your stock options shall be forfeited to the Corporation and cancelled, and the Corporation shall have no obligation to honor the exercise of your stock options by you or your Beneficiary. |
3. | Exercise Limitations . Your stock option is exercisable from and after the vesting date(s) set forth on the Option Notice until the ten (10)-year anniversary of the date the option was granted (the Expiration Date), except as provided below: |
|
Change in Control . Your stock option (whether vested or unvested) becomes vested and exercisable from and after the date of a Change in Control of the Corporation. Please see Other Termination of Employment below for additional provisions relating to a Change in Control. |
|
Death . If you die while employed, your stock option (whether vested or unvested) becomes vested and exercisable as of the date of your death and may be exercised by your beneficiary at any time until the earlier of (a) five (5) years following your death and (b) the Expiration Date. If you do not name a beneficiary (or your beneficiary dies before you), your stock option will pass to the following persons in the order indicated: |
|
Your spouse; if none, then, |
-1-
|
Your children (in equal amounts); if none, then, |
|
Your parents (in equal amounts); if none, then, |
|
Your brothers and sisters (in equal amounts); if none, then, |
|
Your estate. |
|
Retirement . If you retire, your stock option continues to vest in accordance with its terms, and, once vested, it may be exercised at any time until the earlier of (a) five (5) years following the effective date of your retirement and (b) the Expiration Date. The terms retire and retirement mean retirement occurring by reason of your having qualified for a Normal, Early, or Postponed Retirement Pension under The Northern Trust Company Pension Plan. You should be aware that an unexercised incentive stock option automatically converts into a non-qualified stock option three (3) months after termination of employment due to retirement pursuant to the applicable provisions of the Internal Revenue Code of 1986, as amended (the Code) relating to incentive stock options. |
|
Special Circumstances . If (a) on the date of grant, you are a Management Group member, and (b) on the date of your termination of employment, you are age 55 or older and have a minimum of 10 years of employment with the Corporation and its Subsidiaries, then your stock option continues to vest in accordance with its terms, and, once vested, it may be exercised at any time until the earlier of (i) five (5) years following the date of your termination of employment and (ii) the Expiration Date. You should be aware that an unexercised incentive stock option automatically converts into a non-qualified stock option three (3) months after termination of employment under the described circumstances pursuant to the applicable provisions of the Code relating to incentive stock options. |
|
Disability . If, while employed, you incur a disability that continues for a period of 12 months in accordance with The Northern Trust Companys Managed Disability Program you are deemed Disabled on the last day of such 12 month period, at which date you are terminated from the Plan. Your stock option (whether vested or unvested) becomes vested and exercisable upon the date you are deemed Disabled and may be exercised at any time until the earlier of (a) five (5) years following the date you are deemed Disabled and (b) the Expiration Date. You should be aware that an unexercised incentive stock option automatically converts into a non-qualified stock option three months after termination from the Plan, pursuant to the applicable provisions of the Code relating to incentive stock options. |
|
Severance . If your employment is terminated under circumstances that entitle you to severance benefits under the Northern Trust Corporation Severance Plan (the Severance Plan), and you have timely executed and not revoked a settlement agreement, waiver and release under the Severance Plan (a Release), your stock option (whether vested or unvested) becomes vested and exercisable as |
-2-
of the date of your termination of employment and may be exercised at any time until the earlier of (a) one-hundred and eighty (180) days following your termination of employment under the Severance Plan and (b) the Expiration Date. If you are eligible for a Normal, Early, or Postponed Retirement Pension upon termination of employment under the Severance Plan, your stock option (whether vested or unvested) becomes vested and exercisable as of the date of your termination of employment and may be exercised at any time until the earlier of (a) five (5) years following the effective date of your retirement and (b) the Expiration Date. You should be aware that an unexercised incentive stock option automatically converts into a non-qualified stock option three (3) months after termination of employment in these circumstances pursuant to the applicable provisions of the Code relating to incentive stock options. |
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Other Termination of Employment . Except as set forth below, if (a) your employment by the Corporation and its Subsidiaries terminates for any reason other than death, retirement or a severance under the Severance Plan for which you have executed and not revoked a Release, (b) you are not terminated from the Plan due to disability pursuant to the Disability provisions described above, and (c) you were not both a Management Group member on the date of grant and age 55 with 10 years of employment with the Corporation and its Subsidiaries on your date of termination, your stock option, if and to the extent vested as of the date of your termination of employment, may be exercised at any time until the earlier of (i) three (3) months following the date of your termination of employment and (ii) the Expiration Date. Your stock option, if and to the extent unvested as of the date of your termination of employment, expires as of the date of your termination of employment. A termination of employment shall not be deemed to occur by reason of your transfer between the Corporation and a Subsidiary of the Corporation or between two Subsidiaries of the Corporation. If you meet the criteria of each of clauses (a), (b), and (c), above, the post-termination exercise provision of this sub-paragraph shall apply to you if you become a consultant to the Corporation or a Subsidiary of the Corporation upon termination of your employment from the Corporation or a Subsidiary of the Corporation. Notwithstanding the foregoing, if, within the two-year period following a Change in Control, you meet the criteria of each of clauses (a), (b), and (c) above, then (except as may otherwise be specified in an Employment Security Agreement between you and the Corporation), your stock option, to the extent vested, may be exercised at any time until the earlier of (I) six (6) months following the date of your termination of employment, and (II) the Expiration Date; provided, however, you should be aware that an unexercised incentive stock option automatically converts into a non-qualified stock option three (3) months after termination of employment in connection with a Change of Control pursuant to the applicable provisions of the Code relating to incentive stock options. |
4. | Re-Employment . If, after your termination of employment, you are re-employed by the Corporation or one of its Subsidiaries, upon your return you will be considered a new hire for purposes of the Plan. Options that previously expired upon your termination of employment remain expired and are not reinstated. |
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5. | Exercise of Options . |
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How to Exercise . You may exercise your stock option, in any manner described in Section 6(e) of the Plan, through the H. R. Service Center at (800) 807-0302 or online through My Place. Inquiry and modeling capabilities are also available online. |
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Black-out Period . Due to federal securities law concerns, the Corporation has a black-out policy which restricts any exercise of your stock option around quarterly corporate earnings announcements. Please refer to the Statement of Confidential Information and Securities Trading for further information about the Corporations black-out policy. You may access this document online through My Passport. From the homepage click on Corporate-wide Services, and then Corporate Policies. |
6. | Nontransferability . Your stock option is not transferable other than as provided in these Terms and Conditions. Your stock option (whether a non-qualified stock option or an incentive stock option) is exercisable, during your lifetime, only by you or your personal representative. |
7. | Withholding/Delivery of Shares . Delivery of shares of Common Stock upon exercise of your stock option is subject to the withholding of all applicable federal, state, and local taxes. At your election, subject to such rules and limitations as may be established by the Committee, such withholding obligations shall be satisfied: (i) by cash payment by you; (ii) through the surrender of shares of Common Stock which you already own that are acceptable to the Committee; or (iii) through surrender of shares of Common Stock to which you are otherwise entitled under the Plan, provided, however, that such shares under this clause (iii) may be used to satisfy not more than the Corporations minimum statutory withholding obligation (based on minimum statutory withholding rates for Federal and state tax purposes, including payroll taxes, that are applicable to such taxable income). Payment of federal income taxes may be accomplished through a combination of withholding of shares and delivery of previously acquired shares. The Corporation may delay the issuance or delivery of shares of Common Stock if the Corporation reasonably anticipates that such issuance or delivery will violate federal securities laws or other applicable law, provided that the issuance or delivery is made at the earliest date at which the Corporation reasonably anticipates that such issuance or delivery will not cause such violation. As an option holder, you have no interest in the shares covered by the option until the shares are actually issued. |
8. | Restricted Activity . Notwithstanding anything to the contrary in these Terms and Conditions, your stock options (whether vested or unvested) shall be forfeited and the Corporation shall have no obligation to honor the exercise of the stock options by you (or your beneficiary), if, without the written consent of the Corporation, you: |
(a) | at any time after the date of these Terms and Conditions, have divulged, directly or indirectly, or used for your own or anothers benefit, any Confidential Information; or |
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(b) | at any time after the date of these Terms and Conditions and through a period of twelve (12) months after you cease to be employed by the Corporation and its Subsidiaries for any reason, have Solicited, or assisted in the Solicitation of, any Client or Prospective Client; provided, however, that this clause (b) shall not prohibit any Solicitation of any Client or Prospective Client with whom you had a business relationship prior to the start of your employment with the Corporation and its Subsidiaries, provided no Confidential Information, directly or indirectly, is used in such Solicitation [ Alternative clause (b) for California employees only: (b) except as authorized by the Corporation in the course of your duties for the Corporation: (i) have used or referred to any Confidential Information in order to provide, or directly assist in the provision of, any Competitive Services or Products to any Client or Prospective Client (as defined below); (ii) have used or referred to any Confidential Information in order to Solicit, or directly assist in the Solicitation of, any Client or Prospective Client] ; or |
(c) | at any time after the date of these Terms and Conditions and through a period of twelve (12) months after you cease to be employed by the Corporation and its Subsidiaries for any reason, have solicited, encouraged, advised, induced or caused any employee of the Corporation or any of its Subsidiaries to terminate his or her employment with the Corporation or any of its Subsidiaries, or have provided any assistance, encouragement, information, or suggestion to any person or entity regarding the solicitation or hiring of any employee of the Corporation or any of its Subsidiaries |
If you shall have so engaged in any such activity described in clauses (a), (b) or (c) above without the written consent of the Corporation, your stock options (whether vested or unvested) shall be forfeited to the Corporation by notice in writing to you within a reasonable period of time after the Corporation acquires knowledge of your violation of this Paragraph 8. In addition, any failure by you to comply with this Paragraph 8 shall entitle the Corporation, as determined by the Committee in its sole discretion, to rescind any exercise, payment or delivery under any stock option occurring within twelve (12) months prior to, or at any time following, the date of your termination of employment for any reason (including but not limited to termination of employment due to retirement or disability). Upon any such rescission, (1) you shall immediately pay to the Corporation the amount of any gain realized or payment received, and (2) you shall immediately forfeit to the Corporation any shares of the Corporations Common Stock received, in each case as a result of the rescinded exercise, payment or delivery under any stock options, in such manner and on such terms and conditions as the Committee shall require, and the Corporation shall be entitled, as permitted by applicable law, to deduct from any amounts the Corporation owes you from time to time the amount of any such gain realized or payment received. Gain realized shall be the excess of the fair market value of the Corporations Common Stock on the date of exercise over the option exercise price, multiplied by the number of shares purchased.
9. | No Contract of Employment . The option grant shall not be deemed to obligate the Corporation or any of its Subsidiaries to continue your employment for any particular period, nor is employment guaranteed for the length of the vesting schedule set forth in the Option Notice. |
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10. | Taxes . Please refer to the Summary Description of the Amended and Restated Northern Trust Corporation 2002 Stock Plan for a description of the U.S. federal income tax consequences affecting non-qualified stock options and incentive stock options. |
11. | Applicable Law . All questions pertaining to the validity, construction and administration of the Plan and the stock option grants to which the Option Notice and these Terms and Conditions apply shall be determined in conformity with the laws of the State of Illinois, without regard to the conflict of law provisions of any state. |
12. | Definitions . As provided above, Capitalized terms not defined in the Stock Option Agreement shall have the meanings assigned to them in the Plan. For purposes of the Stock Option Agreement: |
(a) | Client means any person or entity with which the Corporation, or any of its Subsidiaries, did business and with which you had contact, or about which you had access to Confidential Information, during the last twelve (12) months of your employment. |
(b) | Competitive Service or Product means any service or product: (i) that is substantially similar to or competitive with any service or product that you created or provided, or of which you assisted in the creation or provision, during your employment by the Corporation or any of its Subsidiaries; or (ii) about which you had access to Confidential Information during your employment by the Corporation or any of its Subsidiaries. |
(c) | Confidential Information means any trade secrets or other information, including, but not limited to, any client information (for example, client lists, information about client accounts, borrowings, and current or proposed transactions), any internal analysis of clients, marketing strategies, financial reports or projections, business or other plans, data, procedures, methods, computer data or system program or design, devices, lists, tools, or compilation, which relate to the present or planned business of the Corporation or any of its Subsidiaries and which has not been made generally known to the public by authorized representatives of the Corporation. |
(d) | Prospective Client means any person or entity to which the Corporation, or any of its Subsidiaries or affiliates, provided, or from which the Corporation, or any of its Subsidiaries received, a proposal, bid, or written inquiry (general advertising or promotional materials and mass mailings excepted) and with which you had contact, or about which you had access to Confidential Information, during the last twelve (12) months of your employment. |
(e) |
Solicit and Solicitation (with respect to Clients or Prospective Clients) mean directly or indirectly, and without the Corporations written authorization, to invite, encourage, request, or induce (or to assist another to invite, encourage, |
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request or induce) any Client or Prospective Client of the Corporation, or any of its Subsidiaries, to: (i) surrender, redeem or terminate a product, service or relationship with the Corporation, or any of its Subsidiaries; (ii) obtain any Competitive Service or Product from you or any third party; or (iii) transfer a product, service or relationship from the Corporation, or any of its Subsidiaries, to you or any third party. |
CH1\5384704.4
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Exhibit 10(ii)
TERMS AND CONDITIONS
2009 STOCK UNIT AWARD
UNDER THE AMENDED AND RESTATED
NORTHERN TRUST CORPORATION 2002 STOCK PLAN
Your Stock Unit Award is subject to the provisions of the Amended and Restated Northern Trust Corporation 2002 Stock Plan (the Plan), the Stock Unit award notice (the Award Notice), and this Terms and Conditions document (Terms and Conditions). The Award Notice and these Terms and Condition constitute the Stock Unit Agreement as defined in the Plan. If there is any conflict between the information in the Stock Unit Agreement and the Plan, the Plan will govern. Capitalized terms not defined in the Stock Unit Agreement shall have the meanings assigned to them in the Plan.
1. | Grant . The Corporation hereby grants to the Participant an Award of Stock Units, as set forth in the Award Notice, subject to the terms and conditions of the Plan and the Stock Unit Agreement. A Stock Unit is the right, subject to the terms and conditions of the Plan and the Stock Unit Agreement, to receive a distribution of a share of Common Stock pursuant to Paragraph 8 of these Terms and Conditions. |
2. | Stock Unit Account . The Corporation shall maintain an account (Stock Unit Account) on its books in the name of the Participant which shall reflect the number of Stock Units awarded to the Participant that the Participant is eligible to receive in distribution pursuant to Paragraph 8 of these Terms and Conditions. |
3. | Dividend Equivalents . Upon the payment of any dividend on Common Stock occurring during the period preceding the distribution of the Participants Stock Unit award pursuant to Paragraph 8 of these Terms and Conditions, the Corporation shall promptly (and in any event no later than March 15 of the calendar year following the calendar year in which the dividend is declared) pay to the Participant an amount in cash equal in value to the dividends that the Participant would have received had the Participant been the actual owner of the number of shares of Common Stock represented by the Stock Units in the Participants Stock Unit Account on that date (Dividend Equivalents). |
4. | Forfeiture . The Stock Units granted to the Participant pursuant to the Stock Unit Agreement shall be forfeited and revert to the Corporation if (a) the Participant violates any provision of Paragraph 10 of these Terms and Conditions, or (b) except as described in Paragraphs 5, 6, and 7 and of these Terms and Conditions, the Participants employment with the Corporation or any of its Subsidiaries terminates prior to the expiration of the Vesting Period described in Paragraph 5. |
5. |
Vesting . Subject to Paragraphs 4, 6, 7 and 10, the Participant shall become vested in the Stock Units upon the vesting dates specified, and in accordance with the vesting schedule set forth, in the Award Notice. If the Participants employment with the Corporation and |
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its Subsidiaries terminates for any reason prior to the end of the period ending on the latest vesting date set forth in the Award Notice (Vesting Period), the Stock Units in the Participants Stock Unit Account that have not yet vested and do not become vested under Paragraph 6 or have not become vested under Paragraph 7, shall be forfeited and revert to the Corporation on such termination date, and the Corporation shall have no further obligation after such date to pay Dividend Equivalents pursuant to Paragraph 3 of these Terms and Conditions with respect to such forfeited Stock Units. The Corporation shall have no further obligation to the Participant under these Terms and Conditions following the Participants forfeiture of Stock Units. |
6. | Prorated Vesting . |
(a) | The Participant shall cease to participate in the Plan under these Terms and Conditions as of the date of the Participants death, Disability, Retirement or termination of employment, subject to the following: |
(b) | If the Participants death, Retirement or Disability occurs prior to the end of the Vesting Period, or, if prior to the end of the Vesting Period, the Participants employment with the Corporation and its Subsidiaries is terminated under circumstances that entitle the Participant to severance benefits under the Northern Trust Corporation Severance Plan (the Severance Plan) and the Participant has timely executed and not revoked a settlement agreement, waiver and release under the Severance Plan (a Release), then, on such date of death, Retirement, Disability or termination of employment, the Participant shall have credited and be deemed vested in a pro-rated number of unvested Stock Units, determined by multiplying the number of the Participants Stock Units that were unvested immediately prior to the date of the Participants death, Retirement, Disability, or termination of employment and that would have become vested and distributable to the Participant if the Participant had participated in the Plan for the full Vesting Period, by a fraction, the numerator of which is the number of full calendar months of the Participants actual participation in the Plan under these Terms and Conditions during the Vesting Period, and the denominator of which is the number of full calendar months in the Vesting Period, in all cases as determined by the Committee or the Executive Vice President of Human Resources. |
(c) |
If, prior to the end of the Vesting Period, the Participants employment with the Corporation and its Subsidiaries terminates and (i) the Participant is a Management Group member on the date of the grant of the Stock Units, (ii) the Participant is 55 years or older on the date of such termination of employment, and (iii) the Participant does not violate any provision of Paragraph 10 of these Terms and Conditions during the Vesting Period, then, upon each remaining vesting date in the Vesting Period set forth in the Award Notice, the Participant shall have credited and be deemed vested in a pro-rated number of unvested Stock Units, determined by multiplying the number of Stock Units that would have become vested and distributable to the Participant on such vesting date if the Participant had participated in the Plan for the full Vesting Period, by a fraction, the numerator of which is the number of full calendar months of the Participants |
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actual participation in the Plan under these Terms and Conditions during the Vesting Period, and the denominator of which is the number of full calendar months in the Vesting Period, in all cases as determined by the Committee or the Executive Vice President of Human Resources. |
(d) | For purposes of these Terms and Conditions, Retirement means retirement occurring by reason of the Participant having qualified for a Normal, Early, or Postponed Retirement under The Northern Trust Company Pension Plan. |
For purposes of these Terms and Conditions, Disability means a disability that continues for a period of six (6) months in accordance with The Northern Trust Companys Managed Disability Program. For purposes of determining the date, if any, on which a Participant becomes vested under Paragraph 6(b) on account of Disability, the date of Disability shall be the last day of the six month period described in the preceding sentence.
7. | Vesting Upon a Change in Control . A Participant who is employed by the Corporation or any of its Subsidiaries upon the date of a Change in Control shall become 100% vested in his Stock Units upon the date of such Change in Control. |
8. | Distribution . Except as provided below in Paragraph 9, |
(a) |
In the case of Stock Units that become vested upon a vesting date within the Vesting Period pursuant to Paragraph 5 or Paragraph 6(c), such Stock Units shall be distributed on such vesting date, provided that such Stock Units shall be treated as distributed on such vesting date if they are distributed no later than the last day of the calendar year in which such vesting date occurs, or, if later, by the 15 th day of the third calendar month after such vesting date occurs, subject to and in accordance with the provisions of Treasury Regulation Section 1.409A-3(d), including without limitation the requirement that the employee shall in no event have the right directly or indirectly to designate the taxable year of payment. |
(b) | In the case of Stock Units that become vested prior to the expiration of the Vesting Period upon an individuals Retirement, Disability or termination of employment in the circumstances described in Paragraph 6(b) (distribution event), with the number of unvested Stock Units that become vested on such distribution event determined in accordance with Paragraph 6 of these Terms and Conditions, distribution shall be made, as soon as practicable, but no later than 90 days, after such distribution event, subject to and in accordance with the provisions of, Treasury Regulation Section 1.409A-3(a), including without limitation the requirement that the employee shall in no event have the right directly or indirectly to designate the taxable year of payment, and subject to the provisions of Section 14(d) of the Plan. Notwithstanding anything herein to the contrary, a Participant shall in no event be eligible for a distribution on account of Retirement, Disability, or termination of employment unless the Participant incurs a Separation from Service, as defined in the Plan. |
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(c) | In the case of Stock Units that become vested prior to the expiration of the Vesting Period upon a Participants death pursuant to Paragraph 6(b), with the number of unvested Stock Units that become vested on death determined in accordance with Paragraph 6 of these Terms and Conditions, distribution shall be made to the Participants beneficiary as soon as practicable, but no later than 90 days, after the Participants death, subject to and in accordance with the provisions of Treasury Regulation Section 1.409A-3(a), including without limitation the requirement that the beneficiary shall in no event have the right directly or indirectly to designate the taxable year of payment. Such distribution shall be made to such beneficiary and in such proportions as the Participant may designate in writing, and in the absence of a designation, the Participants beneficiary shall be one of the following persons determined in the order provided below: |
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The Participants spouse; if none, then, |
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The Participants children (in equal amounts); if none, then, |
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The Participants parents (in equal amounts); if none, then, |
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The Participants brothers and sisters (in equal amounts); if none, then, |
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The Participants estate. |
In the event of the Participants death after the expiration of the Vesting Period but prior to full distribution of the Stock Units pursuant to these Terms and Conditions, the Participants Stock Units shall be distributed, within the period described in clause (a) above, to the Participants beneficiary determined in accordance with the foregoing provisions of this clause (c) of Paragraph 8.
(d) | In the case of Stock Units that become vested as a result of a Change in Control, the Participant shall not be entitled to a distribution of such Stock Units upon such Change in Control. Instead, any Stock Units that become vested as a result of a Change in Control shall be distributed only upon the date, or the occurrence of the event upon which, distribution would have been made in the absence of such Change in Control. |
(e) | Stock Units shall be distributed only in shares of Common Stock so that, pursuant to Paragraph 1 of these Terms and Conditions and this Paragraph 8, a Participant shall be entitled to receive one share of Common Stock for each Stock Unit in the Participants Stock Unit Account. |
9. |
Mandatory Deferral . An amount that would otherwise be distributed hereunder in a given calendar year may be delayed, in accordance with Section 14(c) of the Plan, to the extent that the Committee reasonably anticipates that if the payment were made as scheduled the Corporations deduction with respect to such payment would not be permitted due to the application of Section 162(m) of the Internal Revenue Code of 1986, as amended (the Code). Amounts not paid as a result of the above limitation shall be paid in the earlier of (a) the Corporations first taxable year in which the Committee reasonably anticipates that if the payment is made during such year the deduction of such payment will not be barred by Code Section 162(m), or (b) the period beginning with the date of the Participants Separation from Service and ending on the later of the last day of |
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the taxable year of the Corporation in which the Participant incurs a Separation from Service or the 15 th day of the third month following the Participants Separation from Service, subject to such further delay, if any, as required by Section 14(d) of the Plan. |
10. | Restricted Activity . Notwithstanding anything to the contrary in these Terms and Conditions, the Participants Stock Units (whether vested or unvested) shall be forfeited and the Corporation shall have no obligation to distribute the Stock Units to the Participant (or the Participants beneficiary) pursuant to Paragraph 8, or to pay any Dividend Equivalents pursuant to Paragraph 3, if the Participant, without the written consent of the Corporation: |
(a) | at any time after the date of these Terms and Conditions, has divulged, directly or indirectly, or used, for the Participants own or anothers benefit, any Confidential Information; or |
(b) | at any time after the date of these Terms and Conditions and through a period of twelve (12) months after the Participant ceases to be employed by the Corporation and its Subsidiaries for any reason, has Solicited, or assisted in the Solicitation of, any Client or Prospective Client; provided, however, this clause (b) shall not prohibit the Participants Solicitation of any Client or Prospective Client with whom he or she had a business relationship prior to the start of his or her employment with the Corporation and its Subsidiaries, provided no Confidential Information, directly or indirectly, is used in such Solicitation [Alternative clause (b) for California employees only: [(b) except as authorized by the Corporation in the course of the Participants duties for the Corporation: (i) has used or referred to any Confidential Information in order to provide, or directly assist in the provision of, any Competitive Services or Products to any Client or Prospective Client (as defined below); (ii) has used or referred to any Confidential Information in order to Solicit, or directly assist in the Solicitation of, any Client or Prospective Client; or] |
(c) | at any time after the date of these Terms and Conditions and through a period of twelve (12) months after the Participant ceases to be employed by the Corporation and its Subsidiaries for any reason, has solicited, encouraged, advised, induced or caused any employee of the Corporation or any of its Subsidiaries to terminate his or her employment with the Corporation or any of its Subsidiaries, or provided any assistance, encouragement, information, or suggestion to any person or entity regarding the solicitation or hiring of any employee of the Corporation or any of its Subsidiaries; |
If the Participant shall have so engaged in any such activity described in clauses (a), (b), or (c) above without the written consent of the Corporation, the Participants Stock Units (whether vested or unvested) shall be forfeited to the Corporation by notice in writing to the Participant within a reasonable period of time after the Corporation acquires knowledge of the Participants violation of this Paragraph 10. In addition, any failure by the Participant to comply with this Paragraph 10 shall entitle the Corporation, as determined by the Committee in its sole discretion, to rescind any exercise, payment or delivery with respect to any Stock Units occurring within twelve (12) months prior to, or
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at any time following, the date of the Participants termination of employment for any reason (including but not limited to termination of employment due to Retirement or Disability). Upon any such rescission, (1) the Participant shall immediately pay to the Corporation the amount of any gain realized or payment received, and (2) the Participant shall immediately forfeit to the Corporation any shares of the Corporations Common Stock received, in each case as a result of the rescinded exercise, payment or delivery with respect to any Stock Units, in such manner and on such terms and conditions as the Committee shall require, and the Corporation shall be entitled, as permitted by applicable law, to deduct from any amounts the Corporation owes the Participant from time to time the amount of any such gain realized or payment received. Gain realized shall be determined by the Committee in its sole discretion.
11. Delivery of Shares . The Corporation may delay the issuance or delivery of shares of Common Stock if the Corporation reasonably anticipates that such issuance or delivery will violate federal securities laws or other applicable law, provided that the issuance or delivery is made at the earliest date at which the Corporation reasonably anticipates that such issuance or delivery will not cause such violation.
12. Adjustment . The Stock Units provided herein are subject to adjustment in accordance with the provisions of Section 11 of the Plan.
13. No Right to Employment . Nothing in the Plan or the Stock Unit Agreement shall be construed as creating any right in the Participant to continued employment or as altering or amending the existing terms and conditions of employment of the Participant except as otherwise specifically provided in the Stock Unit Agreement.
14. Nontransferability . No interest hereunder of the Participant is transferable except as provided in the Stock Unit Agreement.
15. Withholding/Delivery of Shares . All distributions hereunder are subject to withholding by the Corporation for all applicable federal, state or local taxes. With respect to distributions in shares of Common Stock, subject to such rules and limitations as may be established by the Committee from time to time, such withholding obligations shall be satisfied by one of the following methods elected by the Participant: (i) by cash payment by the Participant; (ii) through the surrender of shares of Common Stock already owned by the Participant that are acceptable to the Committee; or (iii) through surrender of shares of Common Stock to which the Participant is otherwise entitled under the Plan, provided, however, that such shares under this clause (iii) may be used to satisfy not more than the Corporations minimum statutory withholding obligation (based on minimum statutory withholding rates for Federal and state tax purposes, including payroll taxes, that are applicable to such taxable income). Payment of federal income taxes may be accomplished through a combination of withholding of shares and delivery of previously acquired shares.
16. Administration . The Plan is administered by the Committee. The rights of the Participant hereunder are expressly subject to the terms and conditions of the Plan (including continued shareholder approval of the Plan), together with such guidelines as have been or may be adopted from time to time by the Committee. The Participant hereby acknowledges receipt of a copy of the Plan.
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17. No Rights as Shareholder . Except as provided herein, the Participant will have no rights as a shareholder with respect to the Stock Units.
18. Interpretation . Any interpretation by the Committee of the terms and conditions of the Plan, the Stock Unit Agreement or any guidelines shall be final. The Stock Unit Agreement shall be construed under the laws of the State of Illinois without regard to the conflict of law provisions of any state.
19. Sole Agreement . The Stock Unit Agreement, together with the Plan, is the entire Agreement between the parties hereto, all prior oral and written representations being merged herein. No amendment or modification of the terms of the Stock Unit Agreement shall be binding on either party unless reduced to writing and signed by the party to be bound. The Stock Unit Agreement shall be binding upon, inure to the benefit of, and be enforceable by, the parties hereto and their respective successors. Notwithstanding anything in the Stock Unit Agreement to the contrary, including without limitation the foregoing provisions of this Paragraph 19, in the event that the Committee determines that the Stock Unit Award, or the performance by the Corporation of any of its obligations under the Stock Unit Agreement, would violate any applicable law, the Stock Units shall be forfeited to the Corporation and cancelled, and the Corporation shall have no obligation to distribute the Stock Units to the Participant or the Participants Beneficiary or to pay any Dividend Equivalents.
20. Definitions . As provided above, capitalized terms not defined in the Stock Unit Agreement shall have the meanings assigned to them in the Plan. For purposes of the Stock Unit Agreement:
(a) | Client means any person or entity with which the Corporation, or any of its Subsidiaries, did business and with which the Participant had contact, or about which the Participant had access to Confidential Information, during the last twelve (12) months of his or her employment. |
(b) | Competitive Service or Product means any service or product: (i) that is substantially similar to or competitive with any service or product that the Participant created or provided, or of which the Participant assisted in the creation or provision, during his or her employment by the Corporation or any of its Subsidiaries; or (ii) about which the Participant had access to Confidential Information during his or her employment by the Corporation or any of its Subsidiaries. |
(c) |
Confidential Information means any trade secrets or other information, including, but not limited to, any client information (for example, client lists, information about client accounts, borrowings, and current or proposed transactions), any internal analysis of clients, marketing strategies, financial reports or projections, business or other plans, data, procedures, methods, computer data or system program or design, devices, lists, tools, or compilation, |
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which relate to the present or planned business of the Corporation or any of its Subsidiaries and which has not been made generally known to the public by authorized representatives of the Corporation. |
(d) | Prospective Client means any person or entity to which the Corporation, or any of its Subsidiaries, provided, or from which the Corporation, or any of its Subsidiaries received, a proposal, bid, or written inquiry (general advertising or promotional materials and mass mailings excepted) and with which the Participant had contact, or about which the Participant had access to Confidential Information, during the last twelve (12) months of his or her employment. |
(e) | Solicit and Solicitation (with respect to Clients or Prospective Clients) mean directly or indirectly, and without the Corporations written authorization, to invite, encourage, request, or induce (or to assist another to invite, encourage, request or induce) any Client or Prospective Client of the Corporation, or any of its Subsidiaries, to: (i) surrender, redeem or terminate a product, service or relationship with the Corporation, or any of its Subsidiaries; (ii) obtain any Competitive Service or Product from the Participant or any third party; or (iii) transfer a product, service or relationship from the Corporation, or any of its Subsidiaries, to the Participant or any third party. |
Dated: , 2009
CH1\5384378.3
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Exhibit 10(iii)
NON-SOLICITATION AND
CONFIDENTIALITY AGREEMENT
In consideration of my employment and/or continued employment with the Company (as defined below), the Confidential Information to which the Company will afford me access, all payments to me (including all compensation and compensation increases provided to me), all benefits provided to me in connection with my promotion to officer (if I have been notified that I will be formally recommended for a promotion to officer), and the training that the Company will provide to me, as well as other good and valuable consideration, the sufficiency of which I hereby acknowledge, I agree as follows:
A. | Confidential Information: |
1. | I agree and acknowledge: (a) that in the course of and as a consequence of my employment with the Company and because of the nature of my responsibilities I will have access to and will be entrusted with Confidential Information (as defined below) concerning the Companys business; (b) that I will occupy a position of trust and confidence with respect to such Confidential Information; (c) that the Company entrusts me with Confidential Information in reliance on a confidential relationship arising out of my employment with the Company and my execution of this Agreement; and (d) that such Confidential Information that I may acquire or to which I may have access is of great value to the Company. |
2. | I will not, during my employment or thereafter, remove or transfer physically, electronically or in any other way any Confidential Information (or any copy thereof) from premises or property owned, used or leased by the Company, except: (a) as is required in the course of my duties for the Company and as is necessary for me to perform my duties; or (b) if I have received advance written consent from an authorized Executive Vice President of the Company. Upon any termination of my employment, all documents and electronic files containing Confidential Information (including all copies) and all Company property will be turned over immediately to my manager or other designee at the Company, and I shall retain no copies thereof. |
3. | I agree that, during the course of my employment with the Company and after I cease to be employed by the Company for any reason, I will not, directly or indirectly, for my own or anothers benefit, use, make known or divulge any Confidential Information, except: (a) as is required in the course of my duties for the Company and as is necessary for me to perform my duties; or (b) if I have received advance written consent from an authorized Executive Vice President of the Company. |
B. | Competitive Restrictions: |
1. | I agree that, during my employment with the Company, I will not directly or indirectly, nor will I assist anyone else to, engage in any activity that is competitive with the Company or any of its subsidiaries or affiliates. |
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2. | I agree that, during my employment with the Company and for a period of twelve (12) months after I cease to be employed by the Company for any reason, I will not, directly or indirectly, except as authorized by the Company in the course of my duties for the Company: (a) provide, or directly assist in the provision of, any Competitive Services or Products to any Client or Prospective Client (as defined below); (b) Solicit, or directly assist in the Solicitation of, any Client or Prospective Client; or (c) solicit, encourage, advise, induce or cause any Restricted Person (as defined below) to terminate his or her employment or engagement with the Company, nor provide any assistance, encouragement, information, or suggestion to any person or entity regarding the solicitation or hiring of any Restricted Person. |
3. | I acknowledge that my duties for the Company are not confined to any specific geographic area. Rather, my duties pertain to particular clients, and the identities and locations of these particular clients may change from time to time. I therefore agree that the restrictions in this Agreement attach to my conduct in any country where the Company has carried out business in which I have been materially involved or concerned and with respect to Clients and Prospective Clients wherever they may be located during the twelve (12) month period after I cease to be employed by the Company. |
4. | Nothing in this Agreement shall prohibit my Solicitation of or my providing Competitive Services or Products to any Client or Prospective Client with whom I can demonstrate that I had a business relationship prior to the start of my employment with the Company, provided that no Confidential Information is used, directly or indirectly, in connection with that Solicitation or provision of Competitive Services or Products. |
5. | If my employment with the Company lasts for less than twelve (12) months, the time period of the competitive restrictions provided for in this section shall be reduced to be equal to the number of months that I was employed by the Company. |
6. | Nothing in this Agreement is intended to prevent me from seeking or accepting employment with any other financial services institution, bank, trust company, brokerage firm, or other competing entity after the termination of my employment with the Company, so long as such employment does not violate the restrictions of this Section B. |
C. | Work Product: |
1. |
Any work product, inventions, methods, processes, software, procedures, improvements, property, data, documentation, information or materials that are prepared, conceived, discovered, reduced to practice, developed or created by me, either jointly or severally, during, in connection with, for the purpose of, related to, or as a result of any work I performed for the Company, the business of the Company, or the Companys actual or demonstrably anticipated research or |
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development (the Work Product) shall be owned exclusively and perpetually by the Company. I agree to disclose promptly all Work Product to the Company. I hereby unconditionally and irrevocably transfer and assign to the Company all right, title and interest (including all patent, copyright, trade secret and any other intellectual property rights) that I currently have (or in the future may have) by operation of law or otherwise in or to any Work Product. I acknowledge that all Work Product that may be copyrighted shall be deemed, to the extent permitted by law, works made for hire as defined in the U.S. Copyright Act, 17 U.S.C.A. §101 et seq., I agree to waive all rights (including moral rights) in all Work Product, and I further agree to and hereby assign to the Company all of my right, title and interest (including copyright) in the Work Product. Nothing in this Agreement shall be construed to grant the Company any interest in materials that I prepared, conceived, discovered, reduced to practice, developed and created entirely on my own time and for which no equipment, supplies, facilities, resources, or trade secret information of the Company was used, unless those materials relate to the Companys business (including the Companys actual or demonstrably anticipated research or development) or result from any work that I performed for the Company. |
2. | To the extent that any document or other filing can be prepared or filed in order to perfect, evidence or register any transfer as referenced in paragraph C.1 above, then I will, at the cost of the Company, sign and otherwise assist with any such document or filing (and any steps related thereto) as the Company considers desirable. |
D. | Definitions: For purposes of this Agreement: |
1. | Company means The Northern Trust Company, its successors, and any and all subsidiaries or other affiliates (or any of their successors) as to which I perform services, or have access to Confidential Information, during my employment. For purposes of this Agreement, the term affiliate means any entity that owns or controls, is owned or controlled by, or that is owned or under common control with The Northern Trust Company. |
2. | Competitive Service or Product means any service or product that satisfies both of the following criteria: (a) is the same or substantially similar to or competitive with any service or product that the Company provided to its clients during my employment by the Company, and (b) is one as to which I had active involvement or access to Confidential Information during my employment by the Company. |
3. |
Client means any person or entity to which the Company provided Competitive Services or Products, and with which I had contact or about which I had access to Confidential Information, during the last twenty-four (24) months of my employment. Prospective Client means any person or entity to which the Company provided, or from which the Company received, a proposal, bid, or written inquiry (general advertising or promotional materials and mass mailings excepted) for the Company to provide Competitive Services or Products and with |
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which I had contact, or about which I had access to Confidential Information, and with whom the Company has been engaged in negotiations, during the last twelve (12) months of my employment. Client shall not include any person or entity that acted only as a referral source for the Company during the last twelve (12) months of my employment. |
4. | Solicit and Solicitation (with respect to Clients or Prospective Clients) mean directly or indirectly, and without the Companys written authorization, to invite, encourage, request, or induce (or to assist another to invite, encourage, request or induce) any Client or Prospective Client to: (a) surrender, redeem or terminate a product, service or relationship with the Company; (b) obtain any Competitive Service or Product from me or any third party; or (c) transfer a product, service or relationship from the Company to me or any third party. |
5. | Confidential Information means all information regarding the clients of the Company, or regarding the current or planned business of the Company, which has not been made generally known to the public by authorized representatives of the Company, whether created or supplied to me by the Company or compiled by me in the course of my duties for the Company, including but not limited to: (a) client information, such as client lists (in any form) and other non-public personal, business, financial, or other information regarding the clients or prospective clients of the Company, such as the identities of clients and prospective clients (including names, addresses, phone numbers, email addresses, and social security numbers or other government-issued identification numbers), information regarding clients accounts, their borrowings, their financial needs, their current or proposed transactions, their investment preferences and/or history, contract terms, client files, all internal analyses of clients and/or their accounts or investments, and all other information regarding clients that the client or applicable law designates as private or confidential; (b) financial information, such as financial plans, reports, and forecasts; earnings figures; and profitability information; (c) corporate strategies, and business, marketing and/or strategic plans; (d) business procedures and methods, computer data, software, and systems designs of the Company; (e) all personnel files and information and any lists of employees, vendors, or independent contractors of the Company; and (f) all information for which the Company has a legal or contractual obligation to treat as confidential. Confidential Information does not include information that has become available to the public generally (other than as a result of any breach by me of any obligation owed by me to the Company). |
6. | Restricted Person means any person who provided services to the Company (whether as an employee, agent, independent contractor, or otherwise) within the last six (6) months of my employment with the Company, and with whom I had business-related contact, about whom I had access to confidential personnel information, or for whom I had direct or indirect supervisory responsibility, during my employment with the Company. |
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E. | Notice and Other Agreements: |
1. | If for any reason I decide to voluntarily resign from the Company, I acknowledge that the Company requests that I provide at least ten (10) business days (two (2) weeks) written notice of my intention to leave, the date I want to leave, and (as soon as I know it) the name of my next employer, with a description of what my expected position will be. I agree that the Company may contact my new employer regarding my obligations under this Agreement. The Company may, in its sole discretion, remove me from my assigned duties, assign me to other duties, or require me to remain away from its offices, during all or any part of the notice period. Also, the Company may, in its sole discretion, waive all or any part of the applicable notice period and consider my termination effective on any such earlier date as it may determine. This Agreement does not constitute a commitment for any definite period of employment and my employment at all times is and will continue to be for an unspecified duration and constitutes at will employment, unless stated otherwise in a written agreement signed by an Executive Vice President or above. |
2. | I recognize that the restrictions set forth in this Agreement are reasonable in scope, including as to time, geography, and the nature of the activities they prohibit, and that they are necessary in order to protect the legitimate interests of the Company. I further recognize that the Company will suffer immediate and irreparable harm as the result of any breach of such restrictions and that monetary damages will not be adequate to compensate the Company for such breach. I understand that the Company may seek injunctive relief, in addition to monetary damages, to enforce those restrictions. In the event that the Company shall successfully enforce any part of this Agreement through legal proceedings, I agree to pay the Company all costs and attorneys fees reasonably incurred by it in that endeavor. In the event that I am found to have breached any of the restrictions in this Agreement, the twelve (12) month time period provided for shall be deemed tolled (i.e., it will not run) for so long as I was in violation of that restriction. |
3. | If any one or more of the provisions contained in this Agreement shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, it shall be limited, modified and construed in accordance with applicable law as it then shall appear, and if such modification does not or cannot occur, then the provision in question shall be severed, this Agreement shall be construed as if such invalid, illegal, or unenforceable provision had never been contained herein, and the remainder of this Agreement shall be enforceable and binding upon the parties. |
4. | I understand and acknowledge that if I transfer positions or locations between or among Northern Trust Corporation subsidiaries or affiliates, I may be required to sign another, substantially similar Non-Solicitation and Confidentiality Agreement. I agree that the Company may assign this Agreement, and I hereby consent to such assignment and to the enforcement of this Agreement by the Companys successors and assigns. This Agreement and the rights and obligations of the Company and I hereto shall bind and inure to the benefit of any successor or successors of the Company, but neither this Agreement nor any rights or benefits hereunder may be assigned by me. |
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5. | This Agreement is intended to supersede the provisions of any employment agreement or other agreement that I may have previously entered into with the Company regarding the subject matters described in this Agreement, but this Agreement will not supersede the terms and conditions of any agreement pertaining to any equity award that I may previously have received. |
My signature below or my electronic acknowledgment indicates my agreement to the above terms. I hereby acknowledge that I have read, understood, accept, and agree to the above terms.
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Exhibit 10(iv)
NORTHERN TRUST CORPORATION SEVERANCE PLAN
(As Amended and Restated effective as of January 1, 2009)
The Northern Trust Corporation Severance Plan was adopted on April 30, 2002, effective as of March 1, 2002, and has been amended on several occasions since that date, including an amendment and restatement that was generally effective January 1, 2008 (with such other effective dates as were noted therein), as a result of various changes in applicable law, including, the American Jobs Creation Act of 2004, and to make certain other changes. Northern Trust Corporation now hereby further amends and restates the Northern Trust Corporation Severance Plan effective as of January 1, 2009, to make certain further desired changes.
ARTICLE I
Purpose
The purpose of the Northern Trust Corporation Severance Plan (Plan) is to provide severance payments to certain Employees in the event their employment is terminated by their Employer in specified circumstances such as job eliminations, reductions in force and similar situations described in this Plan.
ARTICLE II
Definitions
2.1 | Administrator means the Corporation or such person(s) or committee(s) designated by the Corporation. The Administrator shall be the plan administrator and the named fiduciary of the Plan for purposes of the Employee Retirement Income Security Act of 1974, as amended (ERISA). |
2.2 | Base Pay means: (i) (A) for a salaried Employee, that Employees weekly base salary as determined from the personnel records of an Employer at Termination and (B) for an Employee who is paid on an hourly basis, that Employees hourly rate of pay multiplied by the number of hours the Employee is scheduled to work during a week, as determined from the personnel records of the Employer at Termination, plus (ii) for any Employee, that Employees scheduled weekly shift differential, if any, as determined from the personnel records of the Employer at Termination. In all instances, Base Pay excludes overtime, commissions, bonuses, reimbursements, pay for time worked in excess of hours scheduled and all other forms of compensation. |
2.3 | Committee means the Employee Benefit Administrative Committee of the Company, as constituted from time to time. |
2.4 | Company means The Northern Trust Company, an Illinois state bank, and its successors and assigns. |
2.5 | Corporation means Northern Trust Corporation, a Delaware corporation, and its successors and assigns. |
2.6 | Eligible Employee means an Employee who is determined by the Administrator to be entitled to Severance Benefits under the Plan, subject to Section 4.4. |
2.7 | Employee means an individual employed in the service of an Employer as a regular full-time or part-time common-law employee (i) on the active payroll; (ii) on a leave of absence with a reemployment guarantee; or (iii) receiving disability benefits. An Employee does not include individuals in jobs classified by an Employer as temporary or limited post positions or any other individual in the temporary employ of an Employer. No individual will be considered an Employee nor will such individual be otherwise eligible to receive benefits under the Plan during any period in which such individual is providing services to an Employer under a contract, arrangement, or understanding with such individual, or with an agency or leasing organization that treats the individual as either an independent contractor or an employee of such agency or leasing organization, even if such individual is later determined (by judicial action or otherwise) to have been a common law employee of an Employer rather than an independent contractor or an employee of such agency or leasing organization. |
2.8 | Employer means the Corporation and its U.S. affiliates, including the Company. The term affiliate means any corporation which is a member of the same controlled group of corporations as the Corporation under Section 1563(a) of the Internal Revenue Code of 1986, as amended (the Code) or an unincorporated trade or business under Section 414(c) of the Code. |
2.9 | Severance Benefits means the benefits described in the Severance Schedule to the Plan to which an Eligible Employee may be entitled under the provisions of the Plan. |
2.10 | Termination means, for purposes of determining entitlement to Severance Benefits under the Plan, a complete severance of an Employees employment relationship with Employer. Termination does not include situations involving (i) temporary absence, such as a Family and Medical Leave Act (FMLA) leave or a temporary layoff, in which an Employee retains any entitlement to reinstatement; (ii) the total or partial sale or transfer of ownership of an Employer or a business unit of an Employer (stock or asset sale) if the Employee is offered employment with the purchasing or new entity as part of or at the time of the sale or transfer; (iii) the outsourcing of Employer work to a non-Employer if the Employee is offered employment with such non-Employer as part of or at the time of the outsourcing; or (iv) the elimination of the position or job of an Employee if the Employee is offered comparable employment with an Employer (as determined by the Employer in the Employers sole discretion) in a position which does not require relocation to a non-commutable distance. |
2.11 |
Termination Based on Employer Action means any involuntary Termination of an Eligible Employee at the request of an Employer due to: (i) the elimination of such Employees job, (ii) a reduction in force, (iii) the outsourcing of Employer work to a non-Employer, (iv) the consolidation of positions or functions, (v) the relocation of work to a non-commutable distance as provided in an Employers policies and practices, or (vi) the sale or transfer of all or part of the stock or assets of an Employer or a business unit of Employer; provided, however, that a Termination Based on Employer Action, shall not |
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be considered to have occurred if the Employee is offered (A) comparable employment with an Employer (as determined by the Employer in the Employers sole discretion) in a position which does not require relocation to a non-commutable distance, or (B) employment with a purchaser, transferee or outsourcing non-Employer or an affiliate of a purchaser, transferee, or outsourcing non-Employer, regardless of whether the Employee elects to accept any such offer. |
2.12 | Termination for Unacceptable Performance means the Termination of an Employee for reasons related to his or her performance of job duties and responsibilities, which performance is considered unacceptable to an Employer. |
2.13 | Termination for Cause means the Termination of an Employee for engaging in conduct which violates an Employers policies and/or is harmful to an Employer, including but not limited to excessive unauthorized absenteeism or tardiness, abuse of controlled substances and/or alcohol, reporting to work under the influence of controlled substances and/or alcohol, gambling, possession of firearms on Employer property, theft or unauthorized use of Employer property, conduct which creates a conflict of interest, unauthorized use of insider information and offering or accepting bribes, and all other misconduct, as determined by an Employer in the Employers sole discretion. |
2.14 | Voluntary Termination means an Employees voluntary Termination of his or her employment. |
2.15 | Year of Service means a 12-consecutive month period beginning on the Employees hire date with an Employer and on each anniversary thereof during which he or she continues to be an Employee. |
ARTICLE III
Eligibility for Severance Benefits
3.1 | Termination Based on Employer Action . Subject to Section 4.4, an Employee whose Termination of employment is a Termination Based on Employer Action, as defined in Section 2.11, will be considered an Eligible Employee and entitled to Severance Benefits. |
3.2 | Ineligible Employees . An Employee whose Termination of employment is for any reason other than a Termination Based on Employer Action, including but not limited to Termination for Cause, Termination for Unacceptable Performance, or Voluntary Termination, shall not be entitled to Severance Benefits under this Plan. |
3.3 |
Employees on Leave or Receiving Disability Benefits . (i) (A) Except as otherwise required by applicable law, no Eligible Employee may apply for or commence any leave of absence after the beginning of such Eligible Employees Notification Period described in Section 4.2, even if such leave was previously approved before such Notification Period. (B) If an Eligible Employee commences an authorized leave of absence during the Notification Period pursuant to applicable law as described in Section 3.3(i)(A) or if |
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an Eligible Employee has commenced an authorized leave of absence under an Employers leave policies before such Eligible Employees Notification Period, such Eligible Employee may remain on such leave until the earlier of the authorized end of the leave or the end of such Notification Period. At the end of such Notification Period, such Eligible Employees employment will be terminated, and such Eligible Employee will be entitled to Severance Benefits, subject to Section 4.4. |
(ii) If, before or during the Eligible Employees Notification Period described in Section 4.2, an Eligible Employee begins receiving benefits under an Employers short-term disability plan, the Eligible Employee will continue to receive such disability benefits through the end of the certification period under such short-term disability plan. At the end of the certification period, such Eligible Employees employment will be terminated, and such Eligible Employee will be entitled to Severance Benefits, subject to Section 4.4 and subsection (iii) of this Section 3.3.
(iii) If, before or during the Eligible Employees Notification Period (or immediately following an Eligible Employees receipt of short-term disability benefits pursuant to subsection (ii) of this Section 3.3), an Eligible Employee begins receiving benefits under an Employers long-term disability plan, such Eligible Employee will continue to receive such disability benefits in accordance with such long-term disability plan. If such an Eligible Employee is able to return to active employment within six (6) months from such Eligible Employees first day of absence due to disability, such Eligible Employees employment will be terminated, and such Eligible Employee will be entitled to Severance Benefits, subject to Section 4.4. However, if such an Eligible Employee is absent from employment due to disability for more than six (6) months, such Eligible Employee will no longer be entitled to any Severance Benefits regardless of the reasons for or timing of such Employees Termination of employment.
(iv) Anything in the Plan to the contrary notwithstanding, an Eligible Employee who, during his or her Notification Period, is on an authorized, unpaid personal leave with a medical condition pursuant to his or her Employers leave policies, shall be treated for purposes of this Plan as if he or she were receiving benefits under such Employers short-term disability plan. Such an Eligible Employees employment termination and eligibility for Severance Benefits shall be determined under Section 3.3(ii) of this Plan.
ARTICLE IV
Severance Benefits
4.1 | Severance Benefits . An Eligible Employee shall be entitled to severance benefit payments in accordance with the Severance Schedule attached hereto. In addition, an Eligible Employee shall be entitled to certain welfare benefits and enhanced retirement benefits in accordance with the Severance Schedule. Welfare benefits and enhanced retirement benefits shall only be provided pursuant to the Plan in accordance with the provisions of the applicable welfare and retirement plans sponsored by an Employer. |
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4.2 | Payment . An Eligible Employee will receive Severance Benefits in the form of a lump sum cash payment to be made as soon as practicable following Termination Based on Employer Action. All payments will be made from an Employers general assets. Severance Benefits will commence upon the Eligible Employees Termination Based on Employer Action following a notification period of no less than sixty (60) days (the Notification Period). At the Employers sole discretion, an Eligible Employee may or may not be required to report to his or her usual work location and to continue to perform his or her regular duties during the Notification Period. Payment of Severance Benefits is conditioned upon the execution of a release in accordance with the provisions of Section 4.4. |
4.3 | Withholding . An Employer shall withhold from any Severance Benefits paid hereunder all federal and state income, FICA and other employment taxes, and any other amounts required or permitted to be withheld under any agreement with the Eligible Employee, applicable law or other employee benefit plans of an Employer. |
4.4 |
Payments Conditioned on Release . Except as otherwise provided in this Section 4.4, eligibility for the receipt of any and all Severance Benefits under the Plan is expressly conditioned upon the execution by an Eligible Employee of a comprehensive settlement agreement, waiver and release (Release), in a form and manner to be determined in the sole discretion of the Administrator. An Eligible Employee who does not execute such a Release or who revokes such a Release during the applicable revocation period will receive only (i) one week of Base Pay for Non-Officers and two weeks of Base Pay for Officers as described in the Severance Schedule, (ii) access to the Employers Family Assistance and LifeCare ® Programs for a period of ninety (90) days following such Eligible Employees Termination date and basic outplacement assistance, and (iii) the opportunity to work with a recruiting consultant to perform an internal search for a new position during the Notification Period, and will not be eligible for any other Severance Benefits under the Plan regardless of the reason for Termination. |
4.5 | Right of Offset . By accepting Severance Benefits under the Plan, an Eligible Employee agrees that the Administrator, in its sole discretion, may withhold from any amounts payable under the Plan any amounts owed to the Employer by the Eligible Employee. |
4.6 | Reduction for Other Severance Payments . The amount of Severance Benefits to which an Eligible Employee is otherwise entitled under the Plan upon a Termination Based on Employer Action shall be reduced by the amount, if any, of any other severance payments payable by reason of such Termination to the Eligible Employee by an Employer under any other plan, program or individual contractual arrangement. |
4.7 | Death of Eligible Employee . If an Eligible Employee dies after his or her date of Termination Based on Employer Action under this Plan and prior to the receipt of all Severance Benefits to which he or she is entitled under the Plan, any such remaining Severance Benefits shall be paid on his or her behalf in the form of a single, lump sum cash payment to the Eligible Employees estate or to the court presiding over the deceased Eligible Employees estate, if in the opinion of the Administrator, the administration of the estate is in dispute. |
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If an Eligible Employee dies, after the beginning of his or her Notification Period but before his or her date of Termination Based on Employer Action, no Severance Benefits or other payments of any kind will be made to him or her or on his or her behalf under this Plan at any time. Instead, such pay and/or benefits as are provided upon the death of any other active Employee shall be payable with respect to such deceased Eligible Employee.
4.8 | Reemployed Eligible Employees . If an Eligible Employee has a Termination of employment and he or she is later reemployed by an Employer, his or her prior service with the Employer will be treated as follows for Plan purposes if his or her employment is terminated under the Plan following such reemployment: (i) If such Eligible Employee is reemployed within a year of the prior Termination date, the period of absence and such Eligible Employees prior service as of the prior Termination date will be considered continuous service for purposes of determining eligibility for and the amount of Plan benefits under the Plan. |
(ii) If such Eligible Employee is reemployed more than one year after the prior Termination date, neither such Eligible Employees prior service nor the period of absence will be considered as service for any purpose under the Plan. Instead, such former Eligible Employees date of reemployment with an Employer will determine such Employees subsequent eligibility for and amount of Plan benefits under the Plan, if any.
4.9 | Severance Benefits Limit . Anything in the Plan to the contrary notwithstanding, effective as of January 1, 2005, Severance Benefits payments and any COBRA Subsidy (described in the Severance Schedule) payable under the Plan shall not exceed two times the lesser of: (i) the Eligible Employees annualized Base Pay for the Eligible Employees taxable year preceding the Eligible Employees taxable year in which the Eligible Employees Termination of employment occurs (adjusted for any increase during that year that was expected to continue indefinitely if the Eligible Employee had not experienced a Termination of employment); or (ii) the maximum amount that may be taken into account under a qualified plan pursuant to Code Section 401(a)(17) for the year in which the Eligible Employee has a Termination of employment. . Anything in the Plan to the contrary notwithstanding, effective as of January 1, 2005, Severance Benefits payments and any COBRA Subsidy must be paid no later than the last day of the Eligible Employees second taxable year following the Eligible Employees taxable year in which the Eligible Employees Termination of employment occurs. |
ARTICLE V
Plan Administration
5.1 |
Operation and Administration of Plan by the Administrator . The Administrator shall have the complete authority to control and manage the operation and administration of the Plan. The Administrator (including the Committee with respect to appeals of adverse benefit determinations or denied claims under Section 5.6 and with respect to other |
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responsibilities or duties delegated to the Committee under the Plan and/or by action of the Corporation, the Company, an Employer or the Administrator) has full and exclusive discretionary authority to: |
a. | construe and interpret the provisions of the Plan; |
b. | adopt any rules, procedures and forms necessary for the operation and administration of the Plan; |
c. | determine all questions relating to the eligibility, benefits and other rights of Employees under the Plan; |
d. | keep all records necessary for the operation and administration of the Plan; |
e. | designate or employ agents (who may also be Employees of an Employer) and delegate to such agents the exercise of one or more specific powers of the Administrator; |
f. | delegate any or all of its authority under the Plan to any individual, organization or committee either within an Employer or an unrelated third party; and |
g. | retain any legal, accounting or other expert advisers (who may also be advisers to an Employer) in connection with the Administrators operation and administration of the Plan. |
5.2 | Reliance on Documents, Instruments, etc . The Administrator may rely on any certificate, statement or other representation made on behalf of an Employer or any Employee which it in good faith believes to be genuine, and on any certificate, statement, report or other representation made to it by any agent or any attorney, accountant or other expert retained by it or an Employer in connection with the operation and administration of the Plan. |
5.3 | Administrative Expenses . All expenses of operating and administering the Plan, including, but not limited to, fees of any agents and experts retained by the Administrator under Sections 5.1 and 5.2, will be paid by the Employer. |
5.4 | Bond, Compensation, Indemnification of Administrator . No bond or other security will be required of the Administrator except as provided by law. No compensation will be paid to any person for performing his or her duties as Administrator. If the Administrator is not an Employer, the Administrator will be indemnified by the Corporation for any liabilities (including legal expenses) arising from any act or failure to act which is done in good faith in accordance with the Plans provisions. |
5.5 |
Claims . Any person (a claimant) may make a claim for benefits under the Plan by filing a written request for benefits with the Administrator. If the claim is wholly or partially denied, the Administrator will cause the claimant to receive written or electronic |
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notice of the adverse benefit determination within ninety (90) days after receipt of the claim. Notice of an adverse benefit determination shall be written in a manner calculated to be understood by the claimant and shall contain (1) the specific reason or reasons for the adverse benefit determination, (2) a specific reference to the pertinent Plan provisions upon which the adverse determination is based, (3) a description of any additional material or information necessary for the claimant to perfect the claim, together with an explanation of why such material or information is necessary, and (4) an explanation of the Plans review procedures and the time limits applicable to such procedures including a statement of the claimants right to bring a civil action under Section 502(a) of ERISA following an adverse benefit determination. If the Administrator determines that an extension of time is necessary for processing the claim, the Administrator shall notify the claimant in writing or electronically of such extension, the special circumstances requiring the extension and the date by which the Administrator expects to render the benefit determination. In no event shall the extension exceed a period of ninety (90) days from the end of the initial ninety (90) day period. If notice of the denial of a claim is not furnished within ninety (90) days after the Administrator receives it (or within one hundred and eighty (180) days after such receipt if the Administrator determines an extension is necessary), the claim shall be deemed denied and the claimant shall be permitted to proceed to the review stage described in Section 5.6. |
5.6 | Appeals . Within sixty (60) days after the claimant receives the written or electronic notice of an adverse benefit determination, or the date the claim is deemed denied pursuant to Section 5.5, the claimant may file a written request with the Committee that it conduct a full and fair review of the adverse benefit determination. In connection with the claimants appeal of the adverse benefit determination, the claimant may review pertinent documents and may submit issues and comments in writing. The Committee shall render a decision on the appeal no later than the date of the Committee meeting which immediately follows the Committees receipt of the claimants request for review, unless the request for review is filed within thirty (30) days preceding the date of such meeting. In such case, a decision will be made no later than the date of the second meeting following the Committees receipt of the claimants request for review. The Committee may extend this review until no later than its third meeting following the claimants request for review if special circumstances apply and the Committee notifies the claimant of such extension. The Committee shall notify the claimant in writing or electronically of any such extension, the special circumstances requiring the extension, and the date by which the Committee expects to render the determination on review. The Committee shall notify the claimant of its decision in writing or electronically within a reasonable time (but not later than five (5) business days) after the Committee meeting at which the claimants request for review is considered. In the case of an adverse determination, such notice shall (1) include specific reasons for the adverse determination, (2) be written in a manner calculated to be understood by the claimant, (3) contain specific references to the pertinent Plan provisions upon which the benefit determination is based, (4) contain a statement that the claimant is entitled to receive upon request and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to the claimants claim for benefits, and (5) contain a statement of the claimants right to bring an action under Section 502(a) of ERISA. |
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The Committee has full discretion and authority to construe and interpret all provisions of the Plan. The claimant may not bring a legal action in any court under the Plan until the claim and appeal rights described in this Section have been exercised and exhausted, and the eligibility or benefits requested in the appeal have been denied, in whole or in part.
5.7 | Rules Governing Claim and Appeal Procedures . The Administrator or the Committee may adopt additional rules for implementing the claim and appeal procedures under the Plan, so long as they are consistent with Department of Labor Regulation §2560.503-1 or any applicable successor to such regulation. |
5.8 | Terms Include Authorized Delegates . Where appropriate, the term Company, Corporation, Committee, Employer or Administrator as used in this Plan shall also include any applicable subcommittee or any duly authorized delegate of the Company, the Corporation, the Committee, the Employer or the Administrator, as the case may be. Such duly authorized delegate may be an individual or an organization within the Company, the Corporation, the Committee, the Employer or the Administrator, or may be an unrelated third party individual or organization. |
ARTICLE VI
General Provisions
6.1 | Amendment and Termination . The Corporation may at any time and without prior notice amend or terminate the Plan, provided, that in no event shall any such amendment or termination in any manner affect the entitlement to Severance Benefits of an Eligible Employee who became eligible for such Severance Benefits prior to the date of such amendment or termination. |
(a) | Any termination shall be made by action of the Compensation and Benefits Committee of the Board of Directors of the Corporation (the Board) (or by action of the Board if the Compensation and Benefits Committee is unavailable or unable to act for any reason) and shall be effective as of the date set forth in such resolution. |
(b) | Any amendment shall be made in accordance with the following: |
(i) | material amendments to the Plan (including any extraordinary amendment related to an acquisition or divestiture by the Company or the Corporation) shall be made by action of the Compensation and Benefits Committee of the Board (or by action of the Board, if the Compensation and Benefits Committee is unavailable or unable to act for any reason); and |
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(ii) | (A) non-material or administrative amendments to the Plan (including any amendment pursuant to guidelines established by the Compensation and Benefits Committee of the Board related to an acquisition or divestiture by the Company or the Corporation) or (B) any amendment to the Plan deemed required, authorized or desirable under applicable statutes, regulations or rulings, shall be made by action of either the Chief Executive Officer of the Corporation or the Executive Vice President and Human Resources Department Head of the Corporation (or either of their duly authorized designees). |
6.2 | Governing Law . To the extent not preempted by ERISA or any other federal law, the Plan shall be governed by and construed in accordance with the laws of Illinois, excluding conflicts of laws provisions. |
6.3 | Nonassignability . Severance Benefits under the Plan may not be assigned or alienated by any Employee. |
6.4 | Electronic or Telephonic Notices . Any election, notice, direction or other such action required or permitted to be made in writing under the Plan may also be made electronically, telephonically or otherwise, to the extent then permitted by applicable law and the administrative rules prescribed by the Committee. |
6.5 | Gender and Number . Unless the context clearly indicates otherwise, words in any gender will include any other gender, words in the singular will include the plural and words in the plural will include the singular. |
6.6 | Severance Benefits Not Compensation . The period for which Severance Benefits are paid and the Severance Benefits provided under the Plan shall not constitute employment, compensation or salary for purposes of determining eligibility, entitlement to benefits or the amount of benefits under any other employee benefit plan of an Employer. |
6.7 | Severability . Any provision in the Plan that may be unenforceable will be deemed severed from the remainder hereof, with such remaining provisions being given full force and effect. |
6.8 | Exemption from Code Section 409A . The Plan and all Severance Benefits provided under the Plan are intended to be exempt from the requirements of Code Section 409A, and the Plan shall be construed and administered so as to cause such Severance Benefits to be exempt from such Code section. |
6.9 | Effective Date : This amendment and restatement of the Plan is generally effective January 1, 2009 (with such other effective dates as are noted herein). The original effective date of the Plan was March 1, 2002. |
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IN WITNESS WHEREOF, the Corporation has caused this amendment and restatement of the Northern Trust Corporation Severance Plan to be executed on its behalf by its duly authorized officer this 8th day of January, 2009, effective as of January 1, 2009 (or as of such other dates as are noted herein).
NORTHERN TRUST CORPORATION | ||
By: |
/s/ Timothy P. Moen |
|
Name: | Timothy P. Moen | |
Title: | Executive Vice President and Human Resources Department Head |
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REVISED EFFECTIVE 1/1/09
(With other effective dates as provided)
Severance Schedule for Termination By Employer Action*
SEVERANCE BENEFITS PAYMENTS** | ||||||
Official Status |
Years of Service |
|||||
Less than 3 Years |
Greater than or equal to 3 Years but less than 25 Years |
Greater than or equal to 25 Years |
||||
Officer * |
4 weeks of Base Pay | 2 weeks of Base Pay per completed Year of Service | 52 weeks of Base Pay | |||
Non-Officer * |
2 weeks of Base Pay | 1 week of Base Pay per completed Year of Service | 26 weeks of Base Pay |
** | Minimum Severance Benefits Pay is 2 weeks of Base Pay and Maximum Severance Benefits Pay is 52 weeks of Base Pay, subject to Section 4.9. Severance Benefits Payments and any COBRA Subsidy, described below, will be paid as a lump sum |
WELFARE BENEFITS |
COBRA Continuation Coverage: An Eligible Employee and eligible dependents have the right to continue medical, dental and vision coverage in accordance with the time periods set forth under the provisions of the federal Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA). Medical, dental and vision coverage will automatically cease on the last day of the month in which an Eligible Employees Termination of employment occurs unless an Eligible Employee elects such continuation coverage under the provisions of COBRA. The costs of such coverage shall be payable by the Eligible Employee for the duration of the COBRA coverage, to be paid monthly by personal check, as the premiums become due. |
COBRA Subsidy*: The Employer shall provide a COBRA subsidy payment to assist the Eligible Employee in paying the costs of coverage under applicable employee welfare benefit plans (medical and dental). Subject to Section 4.9, the amount of the COBRA subsidy payment shall, equal the difference between an Eligible Employees active employee medical and/or dental premium(s) as of the first day of the Notification Period (described in Section 4.2) and the rate under COBRA on such date, including the 2% administrative fee, multiplied by the number of weeks to which an Eligible Employee is eligible for Severance Benefits Payments as described above. The COBRA subsidy payment shall be made in the form of a lump sum. |
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ENHANCED RETIREMENT AND OTHER BENEFITS | ||
Pension Plan and TIP* | Enhanced retirement eligibility, vesting and related benefits will be provided in accordance with the applicable retirement plans. | |
Stock Options, Stock Units and other Stock Awards* | Enhanced vesting and other benefits may be provided in accordance with the applicable stock plan and the Eligible Employees stock option, stock unit or other stock award agreements. |
* |
NOTE: Eligibility for receipt of all benefits is conditioned on execution (and non-revocation) of a settlement agreement, waiver and release (Release) in accordance with Section 4.4., provided that an Eligible Employee who does not execute (or who revokes within the revocation period) such a Release shall be entitled to (i) severance benefits, payable in the form of a lump sum, in the amount of one (1) week of Base Pay for non-officers and two (2)weeks of Base Pay for officers, (ii) access to (A) the Employers Family Assistance and LifeCare ® Programs for 90 days following Termination and (B) basic outplacement assistance and (iii) the opportunity to work with a recruiting consultant to perform an internal search for a new position during the Notification Period, subject to Section 4.9. |
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SUPPLEMENT #1
Special Rules for Certain Eligible Employees Participating in Job Change Program
This Supplement #1 to the Northern Trust Corporation Severance Plan, as amended and restated effective as of January 1, 2009, (the Plan) is made a part of the Plan and supersedes any provisions thereof to the extent that they are not consistent with this Supplement. Unless the context clearly implies or indicates to the contrary, a word, term or phrase used or defined in the Plan is similarly used or defined for purposes of this Supplement #1.
1. | Effective Date . February 10, 2006. |
2. | Application . This Supplement #1 shall apply to any Eligible Employee who: |
(a) | becomes an Eligible Employee on or after the Effective Date of this Supplement #1 as a direct result of the Corporations Global Operating Model-India, as determined by an Employer in the Employers sole discretion; and |
(b) | during the Notification Period described in Section 4.2, but prior to Termination of employment, begins employment in another position with an Employer as a result of the Eligible Employees participation in the Corporations Job Change Program (a Job Match Position) |
(Individually, a Job Change Eligible Employee and collectively, the Job Change Eligible Employees).
3. | Special Provision . The following special provision shall apply to the Job Change Eligible Employees: |
If during the 60-day job match assessment period (as described in the Job Change Program), it is determined that a job match did not occur for a Job Change Eligible Employee with respect to the Job Match Position, such Job Change Eligible Employees employment will be terminated (subject to Paragraph 4 of this Supplement #1) on the later of:
(a) | the last day of the Job Change Eligible Employees Notification Period described in Section 4.2, or |
(b) | the date during the 60-day job match assessment period as of which it is determined, by an Employer or such Eligible Employee, that a job match has not occurred, with respect to the Job Match Position; provided, however, that in the event of a conflict between such Eligible Employee and an Employer with respect to whether a job match has or has not occurred, the determination by the Employer, in the Employers sole discretion, shall control for all purposes under the Plan and this Supplement #1. |
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Upon such Termination of employment, such Job Change Eligible Employee will be entitled to Severance Benefits, subject to Section 4.4 and any other applicable provisions of the Plan (including but not limited to Sections 2.11 and 4.9).
4. | Effect of Job Match or Other Employment Offer . Anything in the Plan or this Supplement #1 to the contrary notwithstanding, if, prior to an Eligible Employees Termination of employment: |
(a) | as a result of such Eligible Employees employment in a Job Match Position, it is determined by an Employer, in the Employers sole discretion, that a job match has occurred for such Eligible Employee, or |
(b) | under any other circumstance, the Eligible Employee is offered a comparable position with an Employer or a position with a purchaser, transferee or outsourcing non-Employer or affiliate pursuant to Section 2.11, |
then a Termination Based on Employer Action shall not be considered to have occurred, and such Eligible Employee shall not be entitled to any Severance Benefits under the Plan.
5. | Limitations on Supplement . Nothing in this Supplement #1 shall be construed to provide any Job Change Eligible Employee with any rights or benefits under the Plan other than those described in Paragraph 3 above. |
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Exhibit 31(i)
Certification of CEO Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Frederick H. Waddell, certify that:
1. | I have reviewed this report on Form 10-Q for the quarterly period ending March 31, 2009 of Northern Trust Corporation; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; |
(c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: April 24, 2009 | /s/ Frederick H. Waddell | |||
Frederick H. Waddell | ||||
Chief Executive Officer |
Exhibit 31(ii)
Certification of CFO Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Steven L. Fradkin, certify that:
1. | I have reviewed this report on Form 10-Q for the quarterly period ending March 31, 2009 of Northern Trust Corporation; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; |
(c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: April 24, 2009 | /s/ Steven L. Fradkin | |||
Steven L. Fradkin | ||||
Chief Financial Officer |
Exhibit 32(i)
Certifications of CEO and CFO Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of Northern Trust Corporation (the Corporation) on Form 10-Q for the period ending March 31, 2009 as filed with the Securities and Exchange Commission on the date hereof (the Report), Frederick H. Waddell, as Chief Executive Officer of the Corporation, and Steven L. Fradkin, as Chief Financial Officer of the Corporation, each hereby certifies, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, to the best of his knowledge, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation.
/s/ Frederick H. Waddell |
Frederick H. Waddell |
Chief Executive Officer |
April 24, 2009 |
/s/ Steven L. Fradkin |
Steven L. Fradkin |
Chief Financial Officer |
April 24, 2009 |
This certification accompanies the Report pursuant to section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by Northern Trust Corporation for purposes of section 18 of the Securities Exchange Act of 1934, as amended.
Exhibit 99(i)
EDITED VERSION OF REMARKS DELIVERED BY FREDERICK H.
WADDELL, PRESIDENT AND CHIEF EXECUTIVE OFFICER, AT THE
ANNUAL MEETING OF STOCKHOLDERS
OF NORTHERN TRUST CORPORATION
HELD APRIL 21, 2009
Thank you for participating in Northern Trust Corporations 2009 annual meeting. While the votes are being counted, Id like to give you a brief report on Northern Trusts strategic and financial performance in 2008 and in the first quarter of 2009.
Let me begin by reviewing with you our long-standing, client-centric and highly focused business strategy.
We are a very focused organization. Northern Trust is a global leader in providing asset servicing, asset management, and banking services through two highly targeted distribution channels: Personal Financial Services or PFS for our private clients and Corporate & Institutional Services or C&IS for our institutional clients. Our two client-focused businesses are supported by common technology, common operations and common investment management platforms, a business model that distinguishes Northern Trust from our competitors. This structure allows us to more efficiently and effectively serve our clients needs.
Looking at our focus from another vantage point, there are a wide array of businesses and product lines where we do not operate. We have resisted the temptation over the years to change either our business mix or our risk profile in order to capitalize on short-term trends in the market. Many of the sectors in the financial services industry currently under pressure, such as investment banking and sub-prime mortgage origination and securitization, are businesses we have chosen not to compete in.
Let me briefly review with you the businesses of Northern Trust.
Personal Financial Services is the 120 year heritage of Northern Trust. From our footprint of over 80 financial centers in 18 states, we are in close proximity to over 50% of U.S. millionaire households. And it is from this office network that we deliver a comprehensive array of integrated solutions to assist our clients across their financial life cycle.
Corporate & Institutional Services serves our institutional clients on a global basis and is positioned in three dynamic regions - North America; Europe Middle East & Africa; and the Asia-Pacific region. Our clients are served by local offices across each region, ensuring that we offer expertise that is close to them physically, but underpinned with a global perspective and infrastructure. We serve clients in over 40 countries from 17 locations including our newest offices in Australia and Abu Dhabi and we have settlement capabilities for our clients in over 90 markets worldwide.
Northern Trust Global Investments is our asset management business. We are a significant manager in both the personal and institutional markets. We currently manage $522 billion on behalf of our clients. Our asset management business is well diversified across asset classes, client segments and investment styles, reflecting the investment needs of our clients.
2008 was a remarkable year for the global economy, the securities markets, the banking industry and our company. I want to offer some perspectives on the environment in which we and other financial services institutions have been operating.
In 2008, the world witnessed a monumental shift within the global financial services industry. The credit crisis, which first manifested itself in the sub-prime sector beginning in August of 2007, precipitated significant change in the banking industry. Two fundamental industry dynamics occurred during the year. First, weaker institutions were acquired and/or forced to merge with stronger institutions as bank balance sheets were subjected to massive write-downs of assets. Second, the investment banking model underwent a significant change to a commercial banking model based on lower leverage and more transparency.
Underpinning the shifts in the financial services landscape was the heightened involvement of various government agencies and regulators. Here in the United States, the Department of the Treasury, the Federal Reserve and the Federal Deposit Insurance Corporation took unprecedented actions in an attempt to enhance liquidity and promote stability and confidence in the financial system. The breadth and depth of the various governmental programs, which are expected to total $3 trillion, was remarkable, but understandable given the extraordinary events which occurred.
Given this volatile environment and the economic recession which began in late 2007, global equity markets were very weak last year. The Standard & Poors 500 index declined 38.5% in 2008, in line with the performance of numerous market indices around the world. A sampling of the indices of other developed countries indicates declines ranging from 31% in the United Kingdom to a decline of 48% in Hong Kong. Likewise, a sampling of emerging market indices ranged from a decline of 41% in South Korea to over 65% in China. For nearly all financial firms, including Northern Trust, these dramatic global market declines have had, and will continue to have, a profound impact on our business.
In the face of extremely challenging conditions, I am pleased to report that Northern Trust posted a very solid performance in fiscal year 2008. Total revenue growth was strong, increasing 21% on a reported basis and 16% on an operating basis. Our ability to attain solid revenue growth in a challenging year was due, in part, to a flight to safety and quality, especially in the second half of the year. Expenses were well controlled and resulted in net income for the year of $795 million, a 9% increase over 2007. On an operating basis, that is excluding a number of VISA-related items, net income was $641 million, a 22% decline from the previous year, but the third best operating performance in the companys history.
Turning to the first quarter of 2009, we continued to see strong growth in our client franchise, notwithstanding the ongoing, difficult market and credit environment. Earlier this morning, we reported first quarter 2009 net income of $162 million. Current quarter results were adversely impacted by dramatically lower equity markets, with the S&P 500 and International EAFE indices down 40% and 49%, respectively. These declines impacted our Trust, Investment and Other Servicing Fees, as well as the value of our client assets. Given the negative market environment, our efforts around expense control at all levels of the organization became even more critical. With a 3% year-over-year decline in expenses, we have been successful in managing our resources in this difficult environment. Despite these challenges, we are very pleased with the significant new business we continue to generate, which confirms the fundamental strength of our focused business strategy. Today, we have more clients than we did last month, last quarter and last year. The value proposition Northern Trust provides to our clients is still very attractive in this market.
The level of assets that we custody and manage on behalf of our clients is an important metric for Northern Trust. Because of market pressure on valuations, all three of our major client asset categories, assets under custody, global custody assets and assets under management posted declines in 2008 and in the first quarter. However, client asset levels did not decline to the same degree as overall markets. Whether considered on a quarterly, annual, or 5-year basis, our asset accumulation rates continue to outperform the markets by a considerable margin. As I said, this is a testament to our continued success at winning new clients while we also expand our existing relationships, even in the face of a very challenging environment.
Our balance sheet and capital strength continue to be key points of distinction for Northern Trust. Let me begin with our loan portfolio. In contrast to many of our banking peers and in light of the current economy, the quality of Northern Trusts loan portfolio continues to exhibit strength. While we are not immune from general economic conditions, Northern Trust continues to outperform our banking industry peer group in each of three key loan quality metrics (nonperforming assets to loans, net charge-offs to average loans and loan loss reserves as a percentage of nonperforming assets) and by a significant margin. Our long-standing, conservative, relationship-based lending practices continue to serve us, our clients and our shareholders well during this economic downturn.
Another key aspect of our balance sheet and capital strength is our securities portfolio. Three-quarters of our portfolio is invested in high quality, government agency securities and the rest of the portfolio is also quite strong. Although no firm can escape the pressures of the current environment, we have remained committed to the disciplined and conservative way in which we have managed this portfolio.
Finally, Northern Trust continues to maintain outstanding capital levels, with capital ratios that are well above the regulatory designation of well capitalized. We have steadily built our equity capital, posting a strong compound annual growth rate of 13% since 2000. It is this capital strength and, in particular, our strong level of tangible common equity that has allowed us to support our clients throughout this difficult period.
Let me wrap up with a few comments on the performance of our stock price in 2008 and thus far in 2009. 2008 was an extremely tough year for bank stocks. Compared to the banking industry however, Northern Trust performed relatively well, having declined 32% versus a decline of 48% for our peer group and 39% for the S&P 500. From another vantage point, lets consider the stock price performance of the top 20 U.S. banks since June 30, 2007 just before the market and economic environment began to show the first stresses associated with the sub-prime mortgage meltdown through March 31, 2009. While all the stocks are down, note that Northern Trust has been the best performing bank stock over this period, declining only 7%, compared to an average drop of 69% for the rest of our bank peers and a decline of 47% for the S&P 500.
Another way to look at the strong performance of Northern Trust over this period is to consider market capitalization over the same period. Our total market capitalization has held up better than a number of large financial institutions. Northern Trust has retained 95% of our market value since June 30, 2007, while other firms have lost from 35% to 95% of their value. The market has clearly noted our differentiated business model and strategy.
Let me conclude with two thoughts. First, we continue to have an experienced and extremely dedicated management team, as well as a talented hard working group of employees around the world that works daily to meet the needs of each other, our clients, shareholders and the communities we serve. I am very proud of our people and the leadership they have provided the company throughout this economic and market crisis. There is also one additional individual Id like to acknowledge, and that is Bill Osborn. As you may know, Bill retired as an active employee on November 11, 2008. We are very fortunate to have his continued leadership as Chairman of our Board in this environment. Bill, on behalf of over 12,000 Northern Trust employees around the world, thank you for nearly 39 years of service to Northern Trust.
And finally, when I think about our company, I think of the long standing principles that have served us well. Our company was built over 120 years to withstand the difficult economic conditions we are now experiencing. By basing our success on providing the highest levels of service and expertise, coupled with the utmost in integrity, we will continue to prosper in the years ahead for our clients, our employees and you, our shareholders.
Thank you again for joining us at Northern Trusts 2009 annual meeting.
* * * *
Mr. Waddells above remarks may be deemed to include forward-looking statements such as statements that relate to Northern Trusts financial goals, dividend policy, expansion and business development plans, anticipated expense levels and projected
profit improvements, business prospects and positioning with respect to market, demographic and pricing trends, strategic initiatives, re-engineering and outsourcing activities, new business results and outlook, changes in securities market prices, credit quality including reserve levels, planned capital expenditures and technology spending, anticipated tax benefits and expenses, and the effects of any extraordinary events and various other matters (including developments with respect to litigation, other contingent liabilities and obligations, and regulation involving Northern Trust and changes in accounting policies, standards and interpretations) on Northern Trusts business and results. These statements speak of Northern Trusts plans, goals, targets, strategies, beliefs, and expectations, and refer to estimates or use similar terms. Actual results could differ materially from those indicated by these statements because the realization of those results is subject to many risks and uncertainties. Our 2008 annual report and periodic reports to the SEC contain information about specific factors that could cause actual results to differ, and you are urged to read them. Northern Trust disclaims any continuing accuracy of the information provided in Mr. Waddells above remarks after April 21, 2009.