Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

 

x     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 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             

Commission File No. 0-5965

 

 

NORTHERN TRUST CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   36-2723087

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

50 South La Salle Street

Chicago, Illinois

  60603
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: (312) 630-6000

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Name of Each Exchange On Which Registered

Common Stock, $1.66  2 / 3 Par Value

Preferred Stock Purchase Rights

 

The Nasdaq Stock Market

The Nasdaq Stock Market

Securities registered pursuant to Section 12(g) of the Act: None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes   x     No   ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes   ¨     No   x

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 website, 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ¨

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 “accelerated filer”, large “accelerated filer” and “smaller 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 Exchange Act Rule 12b-2).    Yes   ¨     No   x

The aggregate market value of the Common Stock as of June 30, 2009 (the last business day of the registrant’s most recently completed second quarter), based upon the last sale price of the Common Stock at June 30, 2009 as reported by The Nasdaq Stock Market, held by non-affiliates was approximately $12,239,497,407. Determination of stock ownership by non-affiliates was made solely for the purpose of responding to this requirement and the registrant is not bound by this determination for any other purpose.

At February 24, 2010, 241,804,518 shares of Common Stock, $1.66 2 / 3 par value, were outstanding.

Portions of the following documents are incorporated by reference:

Annual Report to Stockholders for the Fiscal Year Ended December 31, 2009—Part I and Part II

2010 Notice and Proxy Statement for the Annual Meeting of Stockholders to be held on April 20, 2010—Part III

 

 

 


Table of Contents

Northern Trust Corporation

FORM 10-K

Annual Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

 

            Page
PART I     

Item 1

   Business    1
   Supplemental Item—Executive Officers of the Registrant    25

Item 1A

   Risk Factors    25

Item 1B

   Unresolved Staff Comments    35

Item 2

   Properties    35

Item 3

   Legal Proceedings    35

Item 4

   Submission of Matters to a Vote of Security Holders    36
PART II     

Item 5

   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities    37

Item 6

   Selected Financial Data    37

Item 7

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    37

Item 7A

   Quantitative and Qualitative Disclosures About Market Risk    37

Item 8

   Financial Statements and Supplementary Data    38

Item 9

   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure    38

Item 9A

   Controls and Procedures    38

Item 9B

   Other Information    38
PART III     

Item 10

   Directors, Executive Officers and Corporate Governance    39

Item 11

   Executive Compensation    39

Item 12

   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters    39

Item 13

   Certain Relationships and Related Transactions, and Director Independence    39

Item 14

   Principal Accountant Fees and Services    39
PART IV     

Item 15

   Exhibits and Financial Statement Schedules    40
Signatures    41
Exhibit Index    42


Table of Contents

PART I

Item 1—Business

NORTHERN TRUST CORPORATION

Northern Trust Corporation (Corporation) is a financial holding company that is a leading provider of asset servicing, fund administration, investment management, banking and fiduciary solutions for corporations, institutions and affluent individuals worldwide. The Corporation conducts business through various U.S. and non-U.S. subsidiaries, including The Northern Trust Company (Bank). The Corporation was originally formed as a holding company for the Bank in 1971. The Corporation has 79 offices in 18 U.S. states and 16 international locations outside the U.S. At December 31, 2009, the Corporation had consolidated total assets of $82.1 billion and stockholders’ equity of $6.3 billion.

The Bank is an Illinois banking corporation headquartered in the Chicago financial district and the Corporation’s principal subsidiary. Founded in 1889, the Bank conducts its business through its U.S. operations and its various U.S. and non-U.S. branches and subsidiaries. At December 31, 2009, the Bank had consolidated assets of $68.8 billion and common equity capital of $4.8 billion.

The Corporation expects that, although the operations of other banking and non-banking subsidiaries will continue to be of increasing significance, the Bank will in the foreseeable future continue to be the major source of the Corporation’s consolidated assets, revenues, and net income. Except where the context otherwise requires, the term “Northern Trust” refers to Northern Trust Corporation and its subsidiaries on a consolidated basis. A complete list of the Corporation’s direct and indirect subsidiaries is filed as Exhibit 21 to this Annual Report on Form 10-K and incorporated into this Item by reference.

BUSINESS UNITS

Under the leadership of Frederick H. Waddell, the Chairman of the Board, President, and Chief Executive Officer of the Corporation, Northern Trust organizes its services globally around its two client-focused principal business units: Corporate and Institutional Services (C&IS) and Personal Financial Services (PFS). Two other business units provide services to the two principal business units: Northern Trust Global Investments (NTGI), which provides investment management, and Operations and Technology (O&T), which provides operating and systems support.

Financial information regarding the Corporation and its business units is included in the Corporation’s Annual Report to Stockholders for the year ended December 31, 2009. In particular, for a discussion of significant developments in the business of the Corporation, and the impact on the financial results of the Corporation and its business units for the fiscal year ended December 31, 2009, you are urged to review the section entitled “Consolidated Results of Operations” on pages 24 through 32 of Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Corporation’s Annual Report to Stockholders for the year ended December 31, 2009, which is incorporated herein by reference.

The following is a brief summary of each business unit’s activities and the activities of the Corporate Financial Management Group and the Corporate Risk Management Group.

Corporate and Institutional Services

C&IS is a leading global provider of asset servicing, asset management, and related services to corporate and public retirement funds, foundations, endowments, fund managers, insurance companies, and government funds. C&IS also offers a full range of commercial banking services, placing special emphasis on developing and supporting institutional relationships in two target markets: large and mid-sized corporations and financial institutions. Asset servicing, asset management, and related services encompass a full range of state-of-the-art capabilities including: global master trust and custody, trade settlement, and reporting; fund administration; cash management; investment risk and performance analytical services; and investment operations outsourcing. Client relationships are managed through the Bank and the Bank’s and the Corporation’s subsidiaries, including support from international locations in North America, Europe, the Asia-Pacific region and the Middle East. Asset servicing relationships managed by C&IS often include investment management, securities lending, transition management, and commission recapture services provided through NTGI. C&IS also provides related foreign exchange services in the U.S., U.K., and Singapore. At December 31, 2009, total C&IS assets under custody were $3.3 trillion and assets under management were $482.0 billion.

 

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Personal Financial Services

PFS provides personal trust, investment management, custody, and philanthropic services; financial consulting; guardianship and estate administration; brokerage services; and private and business banking. PFS focuses on high net worth individuals and families, business owners, executives, professionals, retirees, and established privately-held businesses in its target markets. PFS also includes the Wealth Management Group, which provides customized products and services to meet the complex financial needs of individuals and family offices in the United States and throughout the world with assets typically exceeding $200 million.

PFS is one of the largest providers of personal trust services in the United States, with $331.1 billion in assets under custody and $145.2 billion in assets under management at December 31, 2009. PFS services are delivered through a network of 79 offices in 18 U.S. states as well as offices in London and Guernsey.

Northern Trust Global Investments

NTGI, through various subsidiaries of the Corporation, provides a broad range of investment management and related services and other products to U.S. and non-U.S. clients, including clients of C&IS and PFS. Clients include institutional and individual separately managed accounts, bank common and collective funds, registered investment companies, non-U.S. collective investment funds and unregistered private investment funds. NTGI offers both active and passive equity and fixed income portfolio management, as well as alternative asset classes (such as private equity and hedge funds of funds) and multi-manager products and services. NTGI’s activities also include brokerage, securities lending, transition management, and related services. NTGI’s business operates internationally through subsidiaries, joint ventures, alliances, and distribution arrangements.

Operations and Technology

O&T supports all of Northern Trust’s business activities, including the processing and product management activities of C&IS, PFS, and NTGI. These activities are conducted principally in the operations and technology centers in Chicago, London, and Bangalore and fund administration centers in Ireland.

Corporate Financial Management Group

The Corporate Financial Management Group includes the Chief Financial Officer, Controller, Treasurer, Corporate Development, Investor Relations, and Procurement functions. The Group is responsible for Northern Trust’s accounting and financial infrastructure and for managing the Corporation’s financial position.

Corporate Risk Management Group

The Corporate Risk Management Group includes the Credit Policy and other Corporate Risk Management functions. The Credit Policy function is described in the “Loans and Other Extensions of Credit” section of the Annual Report to Stockholders for the year ended December 31, 2009 on pages 52-59. The Corporate Risk Management Group monitors, measures, and facilitates the management of risks across the businesses of the Corporation and its subsidiaries.

GOVERNMENT MONETARY AND FISCAL POLICIES

The earnings of Northern Trust are affected by numerous external influences. Chief among these are general economic conditions, both domestic and international, and actions that governments and their central banks take in managing their economies. These general conditions affect all of Northern Trust’s businesses, as well as the quality, value, and profitability of their loan and investment portfolios.

The Board of Governors of the Federal Reserve System (Federal Reserve Board) is an important regulator of U.S. economic conditions and has the general objective of promoting orderly economic growth in the United States. Implementation of this objective is accomplished by the Federal Reserve Board’s open market operations in United States Government securities, its setting of the discount rate at which member banks may borrow from Federal Reserve Banks and its changes in the reserve requirements for deposits. The policies adopted by the Federal Reserve Board may strongly influence interest rates and hence what banks earn on their loans and investments and what they pay on their savings and time deposits and other purchased funds. Fiscal policies in the United States and abroad also affect the composition and use of Northern Trust’s resources.

 

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COMPETITION

The businesses in which Northern Trust operates are very competitive. Competition is provided by both unregulated and regulated financial services organizations, whose products and services span the local, national, and global markets in which Northern Trust conducts operations.

Northern Trust’s principal business strategy is to provide quality financial services to targeted market segments in which it believes it has a competitive advantage and favorable growth prospects. As part of this strategy, Northern Trust seeks to deliver a level of service to its clients that distinguishes it from its competitors. In addition, Northern Trust emphasizes the development and growth of recurring sources of fee-based income and is one of a select group of major bank holding companies in the United States that generates more revenues from fee-based services than from net interest income. Northern Trust seeks to develop and expand its recurring fee-based revenue by identifying selected markets with good growth characteristics and providing a high level of individualized service to its clients in those markets. Northern Trust also seeks to preserve its asset quality through established credit review procedures and to maintain a conservative balance sheet. Finally, Northern Trust seeks to operate with a strong management team that includes senior officers having broad experience and long tenures.

Commercial banks, savings banks, savings and loan associations, and credit unions actively compete for deposits, and money market funds and investment banking firms offer deposit-like services. These institutions, as well as consumer and commercial finance companies, national retail chains, factors, insurance companies, and pension trusts, are important competitors for various types of loans. Issuers of commercial paper compete actively for funds and reduce demand for bank loans. For personal and corporate trust services and investment counseling services, trust companies, investment banking firms, insurance companies, investment counseling firms, and others offer active competition.

REGULATION AND SUPERVISION

Financial Holding Company Regulation

Under U.S. law, the Corporation is a bank holding company that has elected to be a financial holding company under the Bank Holding Company Act of 1956 (BHCA) as amended by the Gramm-Leach-Bliley Act (GLBA). Consequently, the Corporation and its business activities throughout the world are subject to the supervision, examination, and regulation of the Federal Reserve Board. The BHCA and other federal laws subject bank and financial holding companies to particular restrictions on the types of activities in which they may engage and to a range of supervisory requirements and activities, including regulatory enforcement actions for violations of laws and regulations. Supervision and regulation of bank holding companies, financial holding companies, and their subsidiaries are intended primarily for the protection of depositors and other clients of banking subsidiaries, the deposit insurance fund of the Federal Deposit Insurance Corporation (FDIC), and the banking system as a whole, not for the protection of stockholders or other creditors.

Under the BHCA, bank holding companies and their banking subsidiaries are generally limited to the business of banking and activities closely related or incidental to banking. As a financial holding company, the Corporation is permitted to engage in other activities that the Federal Reserve Board, working with the Secretary of the Treasury, determines to be financial in nature, incidental to an activity that is financial in nature, or complementary to a financial activity and that do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally, or to acquire shares of companies engaged in such activities. Activities defined to be financial in nature include: providing financial or investment advice; securities underwriting and dealing; insurance underwriting; and making merchant banking investments in commercial and financial companies, subject to significant limitations. They also include activities previously determined by the Federal Reserve Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. The Corporation may not, however, directly or indirectly acquire the ownership or control of more than 5% of any class of voting shares, or substantially all of the assets, of a bank holding company or a bank, without the prior approval of the Federal Reserve Board.

In order to maintain the Corporation’s status as a financial holding company, each of the Corporation’s insured depository institution subsidiaries must remain “well capitalized” and “well managed” under applicable regulations, and must have received at least a “satisfactory” rating in its most recent examination under the Community Reinvestment Act. Failure to meet one or more of these requirements would mean, depending on the requirements not met, that the Corporation could not undertake new activities, make acquisitions other than those permitted generally for bank holding companies, or continue certain activities.

 

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Subsidiary Regulation

The Bank is a member of the Federal Reserve System, its deposits are insured by the FDIC up to the maximum authorized limit, and it is subject to regulation by both these entities, as well as by the Division of Banking of the Illinois Department of Financial and Professional Regulation. The Bank is registered as a government securities dealer in accordance with the Government Securities Act of 1986. As a government securities dealer, its activities are subject to the rules and regulations of the Department of the Treasury. The Bank is also registered as a transfer agent with the Federal Reserve Board and is therefore subject to the rules and regulations of the Federal Reserve Board in this area. In addition, the Corporation, the Bank and the Corporation’s New York trust company subsidiary are subject to regulation by the Banking Department of the State of New York.

The Corporation’s national bank subsidiaries are members of the Federal Reserve System and are subject to regulation by the Office of the Comptroller of the Currency (OCC), with deposits insured by the FDIC to the extent provided by the Federal Deposit Insurance Act and FDIC regulations. Northern Trust Bank, FSB is a federal savings bank that is not a member of the Federal Reserve System and is subject to regulation by the Office of Thrift Supervision and the FDIC. Its deposits are insured by the FDIC.

The Corporation’s nonbanking affiliates are all subject to examination by the Federal Reserve Board. Its broker-dealer subsidiary is registered with the Securities and Exchange Commission (SEC) and is a member of the Financial Industry Regulatory Authority, subject to the rules and regulations of both of these bodies. Several subsidiaries of the Corporation are registered with the SEC under the Investment Advisers Act of 1940 and are subject to that act and the rules and regulations promulgated thereunder. Other subsidiaries are regulated by the Connecticut Department of Banking and the Office of the State Bank Commissioner in Delaware. Two families of mutual funds for which the Bank acts as investment adviser and one registered closed-end hedge fund of funds for which another subsidiary serves as investment adviser are subject to regulation by the SEC under the Investment Company Act of 1940.

Functional Regulation

Enacted in late 1999, the GLBA established a system of federal and state regulation based on functional regulation, meaning that primary regulatory oversight for a particular activity generally resides with the federal or state regulator designated as having the principal responsibility for that activity. Banking is supervised by federal and state banking regulators, insurance by state insurance regulators, and securities activities by the SEC and state securities regulators.

A significant component of the functional regulation provided in the GLBA relates to the application of federal securities laws and SEC oversight of some bank securities activities previously exempt from broker-dealer regulation. Among other things, the GLBA amended the definitions of “broker” and “dealer” under the Exchange Act to remove the blanket exemption for banks. Without this blanket exemption, banks may conduct securities activities without broker-dealer registration only if the activities fall within a set of activity-based exemptions designed to allow banks to conduct only those activities traditionally considered to be primarily banking or trust activities. Securities activities outside these exemptions, as a practical matter, need to be conducted by a registered broker-dealer affiliate. The SEC and the Federal Reserve Board in September 2007 adopted a regulation to implement the broker activities exemption of the GLBA that became effective for the Bank beginning January 1, 2009. The GLBA also amended the Investment Advisers Act of 1940 to require the registration of any bank or separately identifiable division of the bank that acts as investment adviser for mutual funds. The Corporation believes that it has taken the necessary actions to comply with these requirements of GLBA and the regulations adopted under them.

Non-U.S. Regulation

The increasingly important activities of the Corporation’s subsidiaries outside the United States are subject to regulation by a number of non-U.S. regulatory agencies. Subsidiaries conducting banking, fund administration and asset servicing businesses in the United Kingdom, for example, are authorized to do so pursuant to the UK Financial Services and Markets Act of 2000 or are otherwise subject to regulation by the Financial Services Authority (FSA). The FSA exercises broad supervisory and disciplinary powers that include the power to temporarily or permanently revoke authorization to conduct a regulated business upon breach of the relevant regulations, suspend registered employees, and impose censures and fines on both regulated businesses and their regulated employees. The non-U.S. subsidiaries of the Corporation and branches of the Bank outside the United States are subject to the laws and regulatory authorities of the jurisdictions in which they operate. Additionally, Northern Trust’s subsidiary banks located outside the U.S. are subject to regulatory capital requirements in the jurisdictions in which they operate. As of December 31, 2009, each of Northern Trust’s non-U.S. banking subsidiaries had capital ratios above their specified minimum requirements.

 

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Emergency Economic Stabilization Act of 2008 and Other Market-Support Measures

In response to the global credit and liquidity crisis impacting financial institutions both domestically and internationally, the United States government, particularly the U.S. Department of the Treasury (U.S. Treasury), the Federal Reserve Board and the FDIC have taken a number of extraordinary measures designed to restore confidence in the financial markets and to strengthen financial institutions, including capital injections, guarantees of bank liabilities, and the creation of special finance facilities. On October 3, 2008, the United States Congress enacted the Emergency Economic Stabilization Act of 2008 (EESA), under which the U.S. Treasury is granted broad authority to take a range of actions for the purpose of stabilizing and providing liquidity to the U.S. financial markets.

The Corporation’s participation in these various programs has been limited to the capital purchase program (CPP) under the Troubled Assets Relief Program (TARP), participation by certain of its subsidiary depository institutions in the FDIC’s Transaction Account Guarantee Program, and by certain funds advised by a subsidiary of the Corporation in the Temporary Guaranty Program for Money Market Funds, each of which is described below. However, the Corporation continues to monitor each of the programs announced to date and the other legislative and regulatory developments that continue to emerge in reaction to the global financial crisis and evaluate the need for, and the relative advantages and disadvantages to, participation by the Corporation in those various programs.

Troubled Assets Relief Program (TARP) — Under TARP, the U.S. Treasury has authorized a voluntary CPP to purchase up to $250 billion of senior preferred shares and warrants of qualifying financial institutions that elect to participate. On November 14, 2008, as part of the CPP, the Corporation issued and sold to the U.S. Treasury (i) 1,576,000 shares of the Corporation’s Fixed Rate Cumulative Perpetual Preferred Stock, Series B, without par value and having a liquidation preference of $1,000 per share, and (ii) a ten-year warrant to purchase up to 3,824,624 shares of the Corporation’s common stock, at an exercise price of $61.81 per share, for an aggregate purchase price of $1.576 billion in cash. On June 17, 2009, the Corporation repurchased all of the preferred stock issued and sold to the U.S. Treasury under the CPP. On August 26, 2009, the Corporation repurchased the warrant to purchase shares of common stock that the Corporation issued and sold to the U.S. Treasury under the CPP, completing the Corporation’s participation in the CPP.

Temporary Guarantee Program for Money Market Mutual Funds — In late September 2008, the U.S. Treasury opened its Temporary Guarantee Program for Money Market Mutual Funds (Temporary Guarantee Program). The U.S. Treasury will guarantee the share price of any publicly–offered eligible money market fund that applies for and pays a fee to participate in the Temporary Guarantee Program. The Temporary Guarantee Program was designed to address temporary dislocations in credit markets. Initially, the program was going to run through April 30, 2009 but it was extended to September 18, 2009, at which point the program expired. Certain funds advised by a subsidiary of the Corporation have participated in this program.

Cross-Guarantees Under the Federal Deposit Insurance Act

Under the Federal Deposit Insurance Act (FDIA), when two or more insured depository institutions are under common control, each of those depository institutions may be liable for any loss incurred, or expected to be incurred, by the FDIC in connection with the default of any of the others. Each also may be liable for any assistance the FDIC provides to the other institutions. “Default” means the appointment of a conservator or receiver for the institution. Thus, any of the Corporation’s banking subsidiaries could be liable to the FDIC if the FDIC were to suffer a loss in connection with any of the Corporation’s other banking subsidiaries. This cross-guarantee liability for a loss at a commonly controlled institution would be subordinated in right of payment to deposit liabilities, secured obligations, any other general or senior liability, and any obligation subordinated to depositors or other general creditors, other than obligations owed to any affiliate of the depository institution (with certain exceptions). Although neither the Corporation nor any of its nonbanking subsidiaries may be assessed for such loss under the FDIA, the Corporation has agreed to indemnify each of its banking subsidiaries, other than the Bank, for any payments a banking subsidiary may be required to make to the FDIC pursuant to these provisions of the FDIA.

Under Federal Reserve Board policy, a bank holding company is expected to act as a source of financial and managerial strength to its banking subsidiaries and commit resources to their support. This support may be required by the Federal Reserve Board at times when, absent this Federal Reserve Board policy, it would not otherwise be provided. The Corporation has source of strength agreements in place with its existing subsidiaries evidencing its commitment to provide such support as needed. In addition, any capital loans by a bank holding company to any of its depository institution subsidiaries are subordinate in right of payment to deposits and to certain other indebtedness of the banks.

 

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Payment of Dividends

The Corporation is a legal entity separate and distinct from its subsidiaries. The principal source of funds for the Corporation is dividends from the Bank. As a result, the Corporation’s ability to pay dividends on its common stock will depend primarily on the ability of the Bank to pay dividends to the Corporation in amounts sufficient to service its obligations. Dividend payments from the Bank are subject to Illinois law and to regulatory limitations, generally based on capital levels and current and retained earnings, imposed by various regulatory agencies with authority over the Bank. The ability of the Bank to pay dividends is also subject to regulatory restrictions if paying dividends would impair its profitability, financial condition or other cash flow requirements.

The Federal Reserve Board has issued a policy statement with regard to the payment of cash dividends by bank holding companies. The policy statement provides that, as a matter of prudent banking, a bank holding company should not maintain a rate of cash dividends unless its net income available to common stockholders has been sufficient to fully fund the dividends, and the prospective rate of earnings retention appears to be consistent with the holding company’s capital needs, asset quality, and overall financial condition. Accordingly, a bank holding company should not pay cash dividends that exceed its net income or can only be funded in ways that weaken the bank holding company’s financial health, such as by borrowing.

Various federal and state statutory provisions limit the amount of dividends the Bank can pay to the Corporation without regulatory approval. Approval of the Federal Reserve Board is required for payment of any dividend by a state chartered bank that is a member of the Federal Reserve System if the total of all dividends declared by the bank in any calendar year would exceed the total of its retained net income (as defined by regulatory agencies) for that year combined with its retained net income for the preceding two years. In addition, a state member bank may not pay a dividend in an amount greater than its undivided profits, as defined, without regulatory and stockholder approval.

The Bank is also prohibited under federal law from paying any dividend that would cause it to become undercapitalized. In addition, the federal regulatory agencies are authorized to prohibit a bank or bank holding company from engaging in an unsafe or unsound banking practice. The payment of dividends could, depending on the financial condition of the Bank, be deemed to constitute an unsafe or unsound practice.

Capital Adequacy Requirements

The Federal Reserve Board has established risk-based and leverage capital guidelines for bank holding companies. The minimum ratio of total capital to risk-weighted assets (which are the credit risk equivalents of balance sheet assets and certain off-balance sheet items such as standby letters of credit) is eight percent. At least half of the total capital must be composed of common stockholders’ equity (including retained earnings), qualifying non-cumulative perpetual preferred stock (and, for bank holding companies only, a limited amount of qualifying cumulative perpetual preferred stock and a limited amount of trust preferred securities), and minority interests in the equity accounts of consolidated subsidiaries, less goodwill, other disallowed intangibles, and disallowed deferred tax assets, among other items (Tier 1 Capital). The Federal Reserve Board also has adopted a minimum leverage ratio for bank holding companies, requiring Tier 1 Capital of at least three percent of average quarterly total consolidated assets.

The federal banking regulators have also established risk-based and leverage capital guidelines that insured banks and thrifts are required to meet. These regulations are generally similar to those established by the Federal Reserve Board for bank holding companies. The risk-based and leverage capital ratios for the Corporation and its U.S. banking subsidiaries, together with the regulatory minimum ratios and the ratios required for classification as “well-capitalized,” are provided in the following chart.

 

     Risk-Based and Leverage Ratios as of
December 31, 2009
 
     Tier 1
Capital
    Total
Capital
    Leverage
Ratio
 

Northern Trust Corporation

   13.4   15.8   8.8

The Northern Trust Company

   12.7      16.1      7.7   

Northern Trust, N.A.

   9.5      11.0      8.2   

Northern Trust Bank, FSB

   9.8      12.3      8.3   
                  

Minimum required ratio

   4.0      8.0      3.0   

“Well capitalized” minimum ratio

   6.0      10.0      5.0   

 

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The Corporation also is subject to the framework for risk-based capital adequacy, sometimes referred to as Basel II, which was developed by the Basel Committee on Banking Supervision and has been endorsed by the central bank governors and heads of bank supervision of the G10 countries. In December 2007, the U.S. bank regulatory agencies published final rules, effective April 1, 2008, with respect to implementation of the Basel II framework, the latest agreed-version of which was released by the Basel Committee in November 2005.

Under the final Basel II rules, the Corporation is one of a small number of “core” banking organizations. As a result, the Corporation and its U.S. depository institution subsidiaries will be required to use the advanced approaches under Basel II for calculating risk-based capital related to credit risk and operational risk, instead of the methodology reflected in the regulations effective prior to adoption of Basel II. The new rules also require core banking organizations to have rigorous processes for assessing overall capital adequacy in relation to their total risk profiles, and to publicly disclose certain information about their risk profiles and capital adequacy.

In order to implement the new rules, a core banking organization such as the Corporation was required to (and the Corporation did) adopt an implementation plan by October 1, 2008 and must satisfactorily complete a four-quarter parallel run, in which it calculates capital requirements under both the Basel II rules and regulations effective prior to the adoption of Basel II. The organization must then progress through three transitional periods of at least four quarters each, commencing no later than April 1, 2011. During these transitional periods, the maximum cumulative reduction in capital requirements from those under the regulations effective prior to adoption of Basel II may not exceed 5% for the first period, 10% for the second period and 15% for the third period. Supervisory approval is required to move through these transitional periods and out of the final transitional period. The agencies also have said they will publish a study after the end of the second transitional year that will examine the new framework for any deficiencies.

Non-core U.S. banking organizations that qualify may elect to use the most advanced approaches under Basel II. The agencies in July 2008 also published a notice of proposed rule-making that would provide all non-core banking organizations with the option to adopt a standardized approach under Basel II, which reflects a simpler methodology than the advanced approaches required of core banking organizations.

The Corporation has for several years been preparing to comply with the advanced approaches of the Basel II framework. The Corporation has established a Program Management Office to oversee the implementation of Basel II across the Corporation and its bank subsidiaries. The Corporation is also addressing issues related to implementation timing differences between the U.S. and other jurisdictions, to ensure that the Corporation and the bank subsidiaries comply with regulatory requirements and expectations in all jurisdictions where they operate. The Corporation’s U.K., Guernsey and Canadian entities subject to Basel II rules have already adopted or plan to adopt the standardized approach for credit risk and the basic indicator approach for operational risk in calculating minimum regulatory capital requirements.

Preliminary analysis of the Basel II risk-based capital framework suggests that the use of the advanced approaches of the Basel II framework will not result in the Corporation’s or the Bank’s Tier 1 Capital or total risk-based capital ratios falling below the levels required for categorization as “well capitalized.”

Prompt Corrective Action

Under the Federal Deposit Insurance Corporation Improvement Act of 1991, the federal banking agencies must take prompt supervisory and regulatory actions against undercapitalized U.S. depository institutions. U.S. depository institutions are assigned one of five capital categories: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized,” and are subjected to differential regulation corresponding to the capital category within which the institution falls. Under certain circumstances, a well capitalized, adequately capitalized or undercapitalized institution may be treated as if the institution were in the next lower capital category. A depository institution is generally prohibited from making capital distributions (including paying dividends) or paying management fees to a holding company if the institution would thereafter be undercapitalized. Adequately capitalized institutions cannot accept, renew or roll over brokered deposits except with a waiver from the FDIC, and are subject to restrictions on the interest rates that can be paid on such deposits. Undercapitalized institutions may not accept, renew or roll over brokered deposits.

 

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The federal banking regulatory agencies are permitted or, in certain cases, required to take certain actions with respect to institutions falling within one of the three undercapitalized categories. Depending on the level of an institution’s capital, the agency’s corrective powers include, among other things:

 

   

prohibiting the payment of principal and interest on subordinated debt;

 

   

prohibiting any distributions without prior regulatory approval;

 

   

placing limits on asset growth and restrictions on activities;

 

   

placing additional restrictions on transactions with affiliates;

 

   

restricting the interest rate the institution may pay on deposits;

 

   

prohibiting the institution from accepting deposits from correspondent banks; and

 

   

in the most severe cases, appointing a conservator or receiver for the institution.

A banking institution that is undercapitalized is required to submit a capital restoration plan, and such a plan will not be accepted unless, among other things, the banking institution’s holding company guarantees the plan up to a certain specified amount. Any such guarantee from a depository institution’s holding company is entitled to a priority of payment in bankruptcy. Failure to meet capital guidelines could subject the bank to a variety of enforcement remedies by federal bank regulatory agencies, including termination of deposit insurance by the FDIC, and restrictions on certain business activities. As of December 31, 2009, the Corporation and all of its U.S. banking subsidiaries exceeded the required capital ratios for classification as “well capitalized.”

In the release adopting final Basel II rules, the federal banking agencies said that these “prompt corrective action” rules will not be affected by the Basel II process and that core banking organizations will be required, during the transitional period, to use the lowest capital calculation in each category that results from the application of both the new and the old rules.

Enforcement Powers of the Federal Banking Agencies

The federal banking agencies have broad enforcement powers, including the power to issue cease and desist orders, impose substantial fines and other civil and criminal penalties, terminate deposit insurance and appoint a conservator or receiver. Failure to comply with applicable laws, regulations, and supervisory agreements could subject the Corporation and its banking subsidiaries, as well as officers, directors, and other institution-affiliated parties of these organizations, to administrative sanctions and potentially substantial civil money penalties. In addition to the grounds discussed under “Prompt Corrective Action,” the appropriate federal banking agency may appoint the FDIC as conservator or receiver for a banking institution (or the FDIC may appoint itself, under certain circumstances) if any one or more of a number of circumstances exist, including, without limitation, the fact that the banking institution:

 

   

is undercapitalized and has no reasonable prospect of becoming adequately capitalized;

 

   

fails to become adequately capitalized when required to do so;

 

   

fails to submit a timely and acceptable capital restoration plan; or

 

   

materially fails to implement an accepted capital restoration plan.

 

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Restrictions on Transactions with Affiliates and Insiders

The Corporation’s bank subsidiaries are subject to restrictions under federal law, including Regulation W of the Federal Reserve Board, which limit certain transactions with the Corporation and its non-banking subsidiaries, including loans, other extensions of credit, investments or asset purchases. Such transactions by a banking subsidiary with any one affiliate are limited in amount to 10 percent of the bank’s capital and surplus and, with all affiliates together, to an aggregate of 20 percent of the bank’s capital and surplus. Furthermore, such loans and extensions of credit, as well as certain other transactions, are required to be secured in specified amounts. These and certain other transactions with the Corporation or any of its subsidiaries, including any payment of money by a banking subsidiary, must be on terms and conditions that are, or in good faith would be, offered to nonaffiliated companies.

The restrictions on loans to directors, executive officers, principal stockholders and their related interests (collectively referred to herein as “insiders”) contained in the Federal Reserve Act and Regulation O apply to all federally insured institutions. These restrictions include limits on loans to one borrower and conditions that must be met before such a loan can be made. There is also an aggregate limitation on all loans to insiders and their related interests. These loans cannot exceed the institution’s total unimpaired capital and surplus, and the FDIC may determine that a lesser amount is appropriate. Insiders are subject to enforcement actions for knowingly accepting loans in violation of applicable restrictions. Regulation O institutions are not subject to the prohibitions of the Sarbanes-Oxley Act of 2002 on certain loans to insiders.

Anti-Money Laundering and Anti-Terrorism Legislation

The USA PATRIOT Act of 2001 includes the International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001, which contains anti-money laundering measures affecting insured depository institutions, broker-dealers and certain other financial institutions. These measures are in addition to requirements contained in the Bank Secrecy Act. The Money Laundering Abatement and Anti-Terrorist Financing Act requires U.S. financial institutions to adopt policies and procedures to combat money laundering and terrorist financing and grants the Secretary of the Treasury and bank regulatory agencies broad authority to establish regulations and to impose requirements and restrictions on financial institutions’ operations as well as sanctions for failure to meet regulatory requirements. The Corporation has established policies and procedures to comply with these laws and the related regulations.

Deposit Insurance

Under the FDIC’s risk-based insurance assessment system, as amended by the Federal Deposit Insurance Reform Act and implementing regulations effective for 2009, each insured bank is required to pay deposit insurance premium assessments to the FDIC. Each insured bank is placed in one of four risk categories based on its level of capital, supervisory ratings and other risk measures, including debt ratings for large institutions, and its insurance assessment rate is determined by its risk category.

On February 27, 2009, the FDIC issued a final rule that revises the way the FDIC calculates federal deposit insurance assessment rates beginning in the second quarter of 2009. Under the new rule, the FDIC first establishes an institution’s initial base assessment rate. This initial base assessment rate will range, depending on the risk category of the institution, from 12 to 45 basis points. The FDIC will then adjust the initial base assessment (higher or lower) to obtain the total base assessment rate. The adjustments to the initial base assessment rate will be based upon an institution’s levels of unsecured debt, secured liabilities, and brokered deposits. The total base assessment rate will range from 7 to 77.5 basis points of the institution’s deposits.

On May 22, 2009, the FDIC adopted a final rule levying a five basis point special assessment on each insured depository institution’s assets minus its Tier 1 capital as of June 30, 2009. We recorded an expense of $20.2 million during the quarter ended June 30, 2009 to reflect the special assessment.

On November 12, 2009, the FDIC issued a final rule pursuant to which all insured depository institutions will be required to prepay their estimated assessments for the fourth quarter of 2009, and for all of 2010, 2011 and 2012 on December 30, 2009. Under the rule, the assessment rate for the fourth quarter of 2009 and for 2010 will be based on each institution’s total base assessment rate for the third quarter of 2009, modified to assume that the assessment rate in effect on September 30, 2009 had been in effect for the entire third quarter, and the assessment rate for 2011 and 2012 will be equal to the modified third quarter assessment rate plus an additional 3 basis points. In addition, each institution’s base assessment rate for each period will be calculated using its third quarter 2009 assessment base, adjusted quarterly for an estimated 5% annual growth rate in the assessment base through the end of 2012. The amount of our prepayment on December 30, 2009 was $104.9 million. This amount is amortized over the three year assessment period and will be adjusted for actual quarterly assessments for that period.

 

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In addition to its insurance assessment, each insured bank is subject in 2010 to quarterly debt service assessments in connection with bonds issued by a government corporation that financed the federal savings and loans bailout. The first quarter 2010 debt service assessment is 0.0106%.

FDIC Temporary Liquidity Guarantee Program

The Bank, Northern Trust, N.A., and Northern Trust Bank, FSB participated in the FDIC’s Transaction Account Guarantee Program under the Temporary Liquidity Guarantee Program. The Transaction Account Guarantee Program provides for a temporary full guarantee by the FDIC for funds held at depository institutions in non-interest bearing transaction accounts (generally demand deposit checking accounts and NOW accounts) above the existing $250,000 deposit insurance limit. This coverage became effective on October 14, 2008 and was scheduled to terminate on December 31, 2009. Depository institutions that elected to participate are subject to an annualized assessment of 10 cents per $100 of deposits in such non-interest bearing transaction accounts (above the existing deposit insurance limit of $250,000) that began on November 13, 2008. This assessment is in addition to the deposit insurance assessments described above under “Deposit Insurance.”

The FDIC issued a final rule on August 27, 2009 that extended the Transaction Account Guarantee Program coverage until June 30, 2010 for depository institutions that did not opt-out prior to November 2, 2009. The final rule also provided for a modified increased fee structure effective after December 31, 2009 for banks that decide to continue to participate in such program during the six month extension period. The Bank, Northern Trust, N.A., and Northern Trust Bank, FSB, elected to continue in the program until June 30, 2010.

Control Acquisitions

The Change in Bank Control Act prohibits a person or group of persons from acquiring “control” of a bank holding company unless the Federal Reserve Board has been notified and has not objected to the transaction. Under a rebuttable presumption established by the Federal Reserve Board, the acquisition of 10% or more of a class of voting stock of a bank holding company with a class of securities registered under Section 12 of the Exchange Act, such as the Corporation, would, under the circumstances set forth in the presumption, constitute acquisition of control of the Corporation. In addition, any company is required to obtain the approval of the Federal Reserve Board under the BHCA before acquiring 25% (5% in the case of an acquirer that is a bank holding company) or more of the outstanding common stock of the Corporation, or otherwise obtaining control or a “controlling influence” over the Corporation or its banking subsidiaries.

Interstate Banking and Branching

The Riegle-Neal Act enacted in 1994 permits an adequately capitalized and adequately managed bank holding company, with Federal Reserve Board approval, to acquire banking institutions located in states other than the bank holding company’s home state without regard to whether the transaction is prohibited under state law. In addition, national banks and state banks with different home states are permitted to merge across state lines, with the approval of the appropriate federal banking agency, unless the home state of a participating banking institution passed legislation prior to June 1, 1997 that expressly prohibits interstate mergers. De novo interstate branching is permitted if the laws of the host state so authorize. Thrift institutions (like Northern Trust Bank, FSB) may freely engage in de novo branching on an interstate basis. Moreover, national banks, such as Northern Trust, NA, may provide trust services in any state to the same extent as a trust company chartered by that state.

Community Reinvestment Act

The Corporation’s banking subsidiaries are subject to the Community Reinvestment Act (CRA). The CRA and the regulations issued thereunder are intended to encourage banks to help meet the credit needs of their service areas, including low and moderate income neighborhoods, consistent with the safe and sound operations of the banks. These regulations also provide for regulatory assessment of a bank’s record in meeting the needs of its service area when considering applications to establish branches, merger applications and applications to acquire the assets and assume the liabilities of another bank. The Financial Institutions Reform, Recovery and Enforcement Act of 1989 requires federal banking agencies to make public a rating of a bank’s performance under the CRA. In the case of a bank holding company, the CRA performance record of its bank subsidiaries is reviewed by federal banking agencies in connection with the filing of an application to acquire ownership or control of shares or assets of a bank or thrift or to merge with any other bank holding company. An unsatisfactory record can substantially delay or block the transaction. Each of the Corporation’s banking subsidiaries, including the Bank, received at least a satisfactory CRA rating from its regulator in its most recent CRA examination.

 

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In addition, the GLBA requires the disclosure of agreements reached with community groups that relate to the CRA, and contains various other provisions designed to improve the delivery of financial services to consumers while maintaining an appropriate level of safety in the financial services industry.

Privacy and Security

The GLBA also establishes a minimum federal standard of financial privacy by, among other provisions, requiring banks to adopt and disclose privacy policies with respect to consumer information and setting forth certain rules with respect to the disclosure to third parties of consumer information. The Corporation has adopted and disseminated its privacy policies pursuant to the GLBA. Regulations adopted under the GLBA set standards for protecting the security, confidentiality and integrity of customer information, and require notice to regulators, and in some cases, to customers, in the event of security breaches. A number of states have adopted their own statutes requiring notification of security breaches.

Consumer Laws and Regulations

In addition to the laws and regulations discussed above, the Corporation’s banking subsidiaries are also subject to certain consumer laws and regulations that are designed to protect consumers in transactions with banks. While the following list is not exhaustive, these laws and regulations include the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Fair Credit Reporting Act, as amended by the Fair and Accurate Credit Transactions Act of 2003, and the Real Estate Settlement Procedures Act, among others. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers and monitor account activity when taking deposits, making loans to or engaging in other types of transactions with such customers. Failure to comply with these laws and regulations could lead to substantial penalties, operating restrictions and reputational damage to the financial institution.

Future Legislation

Various legislation is from time to time introduced in Congress and state legislatures with respect to the regulation of financial institutions, and legislation designed to fundamentally restructure financial regulation has been introduced as one response to the recent global credit and liquidity crisis. For example, the U.S. House of Representatives has passed legislation that would, among other things, create a Consumer Financial Protection Agency that would have broad powers to regulate consumer financial services and products, create a Financial Stability Oversight Council with regulatory authority over certain financial companies and activities, and would give shareholders a “say on pay” regarding executive compensation. The Federal Reserve also issued proposed guidance on incentive compensation to ensure that banking organizations’ incentive compensation policies do not undermine the safety and soundness or their organizations. Such legislation may change the banking statutes and the operating environment of the Corporation and its banking subsidiaries in substantial and unpredictable ways. The Corporation cannot determine the ultimate effect that potential legislation, or implementing regulations, if enacted, would have upon the financial condition or results of operations of the Corporation or its banking subsidiaries.

 

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STAFF

Northern Trust employed 12,400 full-time equivalent officers and staff members as of December 31, 2009.

STATISTICAL DISCLOSURES

The following statistical disclosures, included in the Corporation’s Annual Report to Stockholders for the year ended December 31, 2009, are incorporated herein by reference.

 

Schedule

   2009
Annual
Report
Page(s)

Ratios

   22

Non-U.S. Outstandings

   56-57

Nonperforming Assets and 90 Day Past Due Loans

   57-58

Average Statement of Condition with Analysis of Net Interest Income

   118-119

Additional statistical information on a consolidated basis is set forth below. Certain reclassifications have been made to prior periods’ financial information to conform to the current year’s presentation.

 

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Remaining Maturity and Average Yield of Securities Held to Maturity and Available for Sale

(Yield calculated on amortized cost and presented on a taxable equivalent basis giving effect to the applicable federal and state tax rates)

 

     December 31, 2009
     One Year or Less     One to Five Years     Five to Ten Years     Over Ten Years     Average
Maturity

($ in Millions)

   Book    Yield     Book    Yield     Book    Yield     Book    Yield    

Securities Held to Maturity

                      

Obligations of States and Political Subdivisions

   $ 40.2    6.05   $ 249.7    6.70   $ 381.0    6.84   $ 21.7    7.54   65 mos.

Government Sponsored Agency

     70.2    4.02        29.7    4.12        10.6    4.14        4.1    4.14      35 mos.

Other —Fixed

     74.1    3.04        146.4    5.01        95.0    4.86        37.3    4.20      71 mos.

—Floating

     .1    5.73        1.3    1.47        —      —          —      —        31 mos.
                                                        

Total Securities Held to Maturity

   $ 184.6    4.07   $ 427.1    5.92   $ 486.6    6.40   $ 63.1    5.34   64 mos.
                                                        

Securities Available for Sale

                      

U.S. Government

   $ 74.0    .30   $ —      —     $ —      —     $ —      —     3 mos.

Obligations of States and Political Subdivisions

     11.8    1.25        21.5    5.82        13.1    6.77        .6    7.58      35 mos.

Government Sponsored Agency

     5,610.4    .95        6,178.2    1.11        359.3    2.12        177.5    1.72      19 mos.

Asset-Backed—Fixed

     81.1    4.05        38.0    5.65        11.9    5.62        5.8    5.65      20 mos.

Asset-Backed—Floating

     539.5    .52        797.6    .52        13.8    .39        7.6    .39      18 mos.

Auction Rate Securities

     .2    2.19        427.5    1.31        —      —          —      —        44 mos.

Other —Fixed

     81.0    .44        124.0    2.88        —      —          42.6    6.00      49 mos.

—Floating

     673.0    .74        2,025.1    .71        —      —          147.0    —        29 mos.
                                                        

Total Securities Available for Sale

   $ 7,071.0    .92   $ 9,611.9    1.04   $ 398.1    2.32   $ 381.1    1.58   22 mos.
                                                        
     December 31, 2008
     One Year or Less     One to Five Years     Five to Ten Years     Over Ten Years     Average
Maturity

($ in Millions)

   Book    Yield     Book    Yield     Book    Yield     Book    Yield    

Securities Held to Maturity

                      

Obligations of States and Political Subdivisions

   $ 22.6    6.84   $ 229.3    6.53   $ 462.7    6.89   $ 76.6    7.31   76 mos.

Government Sponsored Agency

     17.0    4.88        35.7    4.87        1.6    5.08        .7    4.91      21 mos.

Other —Fixed

     56.6    4.20        128.2    5.01        87.8    4.80        35.1    3.77      31 mos.

—Floating

     .2    6.18        —      —          —      —          —      —        8 mos.
                                                        

Total Securities Held to Maturity

   $ 96.4    4.94   $ 393.2    5.89   $ 552.1    6.55   $ 112.4    6.19   62 mos.
                                                        

Securities Available for Sale

                      

U.S. Government

   $ 19.9    2.18   $ —      —     $ —      —     $ —      —     1 mo.

Obligations of States and Political Subdivisions

     —      —          17.0    6.57        14.6    6.73        —      —        55 mos.

Government Sponsored Agency

     7,596.5    1.83        3,116.7    2.18        277.0    3.68        271.2    3.48      12 mos.

Asset-Backed—Fixed

     44.5    5.36        54.7    5.49        17.3    5.39        26.4    5.53      20 mos.

Asset-Backed—Floating

     531.9    2.02        743.6    1.55        62.4    .63        91.8    .62      19 mos.

Auction Rate Securities

     —      —          448.1    2.48        —      —          5.0    3.66      45 mos.

Other —Fixed

     164.4    .62        —      —          —      —          27.5    6.00      17 mos.

—Floating

     74.6    3.43        665.2    2.48        —      —          144.1    .59      38 mos.
                                                        

Total Securities Available for Sale

   $ 8,431.8    1.85   $ 5,045.3    2.21   $ 371.3    3.37   $ 566.0    2.50   14 mos.
                                                        

 

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Securities Held to Maturity and Available for Sale

 

     December 31

(In Millions)

   2009    2008    2007    2006    2005

Securities Held to Maturity

              

Obligations of States and Political Subdivisions

   $ 692.6    $ 791.2    $ 848.8    $ 863.8    $ 885.1

Government Sponsored Agency

     114.6      55.0      13.3      14.6      9.9

Other

     354.2      307.9      282.7      228.6      240.5
                                  

Total Securities Held to Maturity

   $ 1,161.4    $ 1,154.1    $ 1,144.8    $ 1,107.0    $ 1,135.5
                                  

Securities Available for Sale

              

U.S. Government

   $ 74.0    $ 19.9    $ 5.1    $ 1.0    $ 17.9

Obligations of States and Political Subdivisions

     47.0      31.6      32.1      31.7      32.4

Government Sponsored Agency

     12,325.4      11,261.4      5,466.5      10,245.1      8,801.0

Asset-Backed

     1,495.3      1,572.6      1,902.9      767.4      950.9

Auction Rate

     427.7      453.1      —        —        —  

Other

     3,092.7      1,075.8      333.7      204.4      168.5
                                  

Total Securities Available for Sale

   $ 17,462.1    $ 14,414.4    $ 7,740.3    $ 11,249.6    $ 9,970.7
                                  

Average Total Securities

   $ 17,357.8    $ 12,287.0    $ 12,459.4    $ 11,803.1    $ 9,898.4
                                  

Total Securities at Year-End

   $ 18,633.4    $ 15,570.8    $ 8,888.2    $ 12,365.2    $ 11,109.0
                                  

 

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Loans and Leases by Type

 

     December 31

(In Millions)

   2009    2008    2007    2006    2005

U.S.

              

Residential Real Estate

   $ 10,807.7    $ 10,381.4    $ 9,171.0    $ 8,674.4    $ 8,340.5

Commercial

     6,312.1      8,253.6      5,556.4      4,679.1      3,545.3

Commercial Real Estate

     3,213.2      3,014.0      2,350.3      1,836.3      1,524.3

Personal

     4,965.8      4,766.7      3,850.8      3,415.8      2,961.3

Other

     774.0      1,404.2      969.1      979.2      797.8

Lease Financing

     1,004.4      1,143.8      1,168.4      1,291.6      1,194.1
                                  

Total U.S.

     27,077.2      28,963.7      23,066.0      20,876.4      18,363.3

Non-U.S.

     728.5      1,791.7      2,274.1      1,733.3      1,605.2
                                  

Total Loans and Leases

   $ 27,805.7    $ 30,755.4    $ 25,340.1    $ 22,609.7    $ 19,968.5
                                  

Remaining Maturity of Selected Loans and Leases

 

     December 31, 2009

(In Millions)

   Total    One Year
or Less
   One to
Five
Years
   Over Five
Years

U.S. (Excluding Residential Real Estate and Personal Loans)

           

Commercial

   $ 6,312.1    $ 4,026.6    $ 1,476.6    $ 808.9

Commercial Real Estate

     3,213.2      1,080.2      1,587.4      545.6

Other

     774.0      756.4      17.6      —  

Lease Financing

     1,004.4      39.0      141.3      824.1
                           

Total U.S.

     11,303.7      5,902.2      3,222.9      2,178.6

Non-U.S.

     728.5      716.4      11.9      .2
                           

Total Selected Loans and Leases

     12,032.2      6,618.6      3,234.8      2,178.8
                           

Interest Rate Sensitivity of Loans and Leases

           

Fixed Rate

   $ 8,217.5    $ 4,844.5    $ 1,929.1    $ 1,443.9

Variable Rate

     3,814.7      1,774.1      1,305.7      734.9
                           

Total

   $ 12,032.2    $ 6,618.6    $ 3,234.8    $ 2,178.8
                           

 

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Average Deposits by Type

 

(In Millions)

   2009    2008    2007    2006    2005

U.S. Offices

              

Demand and Noninterest-Bearing

              

Individuals, Partnerships and Corporations

   $ 778.6    $ 912.5    $ 864.4    $ 899.5    $ 902.3

Correspondent Banks

     80.5      44.2      30.9      29.0      42.0

Other Noninterest-Bearing

     7,589.7      4,493.6      3,789.3      3,682.0      3,764.6
                                  

Total Demand and Noninterest-Bearing

     8,448.8      5,450.3      4,684.6      4,610.5      4,708.9
                                  

Interest-Bearing

              

Savings and Money Market

     11,162.4      7,786.5      7,016.4      6,602.4      7,238.9

Savings Certificates less than $100,000

     478.6      454.8      483.8      486.4      500.0

Savings Certificates $100,000 and more

     2,298.7      1,669.5      1,536.0      1,207.3      1,010.7

Other

     1,101.8      615.3      518.1      419.8      379.5
                                  

Total Interest-Bearing

     15,041.5      10,526.1      9,554.3      8,715.9      9,129.1
                                  

Total U.S. Offices

     23,490.3      15,976.4      14,238.9      13,326.4      13,838.0
                                  

Non-U.S. Offices

              

Non Interest-Bearing

     2,578.1      3,364.5      2,963.8      1,778.7      1,138.4

Interest-Bearing

     27,157.6      35,958.2      28,587.8      21,853.1      17,125.4
                                  

Total Non-U.S. Offices

     29,735.7      39,322.7      31,551.6      23,631.8      18,263.8
                                  

Total Deposits

   $ 53,226.0    $ 55,299.1    $ 45,790.5    $ 36,958.2    $ 32,101.8
                                  

Average Rates Paid on Interest-Related Deposits by Type

 

     2009     2008     2007     2006     2005  

Interest-Related Deposits—U.S. Offices

          

Savings and Money Market

   .48   1.77   3.37   2.85   1.70

Savings Certificates less than $100,000

   2.05      3.21      4.42      3.92      2.91   

Savings Certificates $100,000 and more

   2.05      3.44      4.83      4.33      3.09   

Other Time

   1.48      3.28      4.74      4.28      2.78   
                              

Total U.S. Offices Interest-Related Deposits

   .84      2.19      3.73      3.18      1.96   

Total Non-U.S. Offices Interest-Related Deposits

   .29      2.46      4.22      3.69      2.62   
                              

Total Interest-Related Deposits

   .49   2.40   4.10   3.55   2.39
                              

Remaining Maturity of Time Deposits $100,000 or More

 

     December 31, 2009    December 31, 2008
     U.S. Offices         U.S. Offices     

(In Millions)

   Certificates
of Deposit
   Other
Time
   Non-U.S.
Offices
   Certificates
of Deposit
   Other
Time
   Non-U.S.
Offices

3 Months or Less

   $ 1,393.2    $ 705.9    $ 6,834.2    $ 1,380.9    $ 730.5    $ 8,739.7

Over 3 through 6 Months

     607.3      —        44.6      666.0      —        87.8

Over 6 through 12 Months

     1,073.0      —        42.6      550.8      —        25.2

Over 12 Months

     449.9      —        8.9      314.6      —        11.9
                                         

Total

   $ 3,523.4    $ 705.9    $ 6,930.3    $ 2,912.3    $ 730.5    $ 8,864.6
                                         

 

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Table of Contents

Purchased Funds

Federal Funds Purchased

(Overnight Borrowings)

 

($ in Millions)

   2009     2008     2007  

Balance on December 31

   $ 6,649.8      $ 1,783.5      $ 1,465.8   

Highest Month-End Balance

     7,735.6        8,473.7        2,131.7   

Year – Average Balance

     4,902.0        2,598.1        1,660.6   

         – Average Rate

     .12     1.24     4.81
                        

Average Rate at Year-End

     .02     .03     2.15
                        

Securities Sold under Agreements to Repurchase

 

($ in Millions)

   2009     2008     2007  

Balance on December 31

   $ 1,037.5      $ 1,529.1      $ 1,763.6   

Highest Month-End Balance

     1,037.5        2,635.7        2,845.1   

Year – Average Balance

     737.7        1,271.5        1,620.2   

         – Average Rate

     .16     1.79     4.94
                        

Average Rate at Year-End

     .03     .07     2.48
                        

Other Borrowings

(Includes Treasury Investment Program Balances, Term Federal Funds Purchased and Other Short-Term Borrowings)

 

($ in Millions)

   2009     2008     2007  

Balance on December 31

   $ 2,078.3      $ 736.7      $ 2,108.5   

Highest Month-End Balance

     2,202.6        4,229.6        6,608.6   

Year – Average Balance

     1,109.0        739.4        1,040.7   

         – Average Rate

     .38     3.04     3.03
                        

Average Rate at Year-End

     .09     .06     2.72
                        

Total Purchased Funds

 

($ in Millions)

   2009     2008     2007  

Balance on December 31

   $ 9,765.6      $ 4,049.3      $ 5,337.9   

Year – Average Balance

     6,748.7        4,609.0        4,321.5   

         – Average Rate

     .16     1.68     4.22

 

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Table of Contents

Changes in Net Interest Income

 

     2009/2008
Change Due To
    2008/2007
Change Due To
 

(Interest on a Taxable Equivalent Basis)

(In Millions)

   Average
Balance
    Rate     Total     Average
Balance
    Rate     Total  

Increase (Decrease) in Interest Income

            

Money Market Assets

            

Federal Funds Sold and Resell Agreements

   $ (28.3   $ (8.2   $ (36.5   $ 12.2      $ (42.6   $ (30.4

Time Deposits with Banks

     (252.2     (426.4     (678.6     215.0        (103.5     111.5   

Other Interest-Bearing

     20.0        (17.7     2.3        83.4        (75.3     8.1   

Securities

            

U.S. Government

     .5        (.7     (.2     (5.7     (.7     (6.4

Obligations of States and Political Subdivisions

     (1.4     (1.1     (2.5     (3.0     —          (3.0

Government Sponsored Agency

     91.2        (186.6     (95.4     (58.5     (223.8     (282.3

Other

     62.6        (81.8     (19.2     54.5        (47.0     7.5   

Loans and Leases

     56.7        (308.7     (252.0     265.9        (389.3     (123.4
                                                

Total

   $ (50.9   $ (1,031.2   $ (1,082.1   $ 563.8      $ (882.2   $ (318.4
                                                

Increase (Decrease) in Interest Expense

            

Deposits

            

Savings and Money Market

   $ 59.8      $ (144.0   $ (84.2   $ 26.0      $ (124.6   $ (98.6

Savings Certificates

     22.1        (37.2     (15.1     4.9        (28.5     (23.6

Other Time

     16.0        (19.9     (3.9     4.6        (8.9     (4.3

Non-U.S. Offices Time

     (216.5     (589.3     (805.8     311.0        (631.9     (320.9

Short-Term Borrowings

     35.9        (102.3     (66.4     12.7        (126.8     (114.1

Senior Notes

     28.1        (22.7     5.4        18.2        (6.3     11.9   

Long-Term Debt

     3.0        (18.9     (15.9     27.9        (13.1     14.8   

Floating Rate Capital Debt

     —          (7.3     (7.3     —          (4.6     (4.6
                                                

Total

   $ (51.6   $ (941.6   $ (993.2   $ 405.3      $ (944.7   $ (539.4
                                                

Increase (Decrease) in Net Interest Income

   $ .7      $ (89.6   $ (88.9   $ 158.5      $ 62.5      $ 221.0   
                                                

Note: Changes not due solely to average balance changes or rate changes are included in the change due to rate column.

 

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Table of Contents

Analysis of Reserve for Credit Losses

 

($ in Millions)

   2009     2008     2007     2006     2005  

Balance at Beginning of Year

   $ 251.1      $ 160.2      $ 151.0      $ 136.0      $ 139.3   

Charge-Offs

          

Residential Real Estate

     57.7        8.9        1.1        .2        —     

Commercial

     30.6        7.6        4.5        .9        6.9   

Commercial Real Estate

     22.5        5.1        —          .1        —     

Personal

     20.3        1.8        .9        .5        .6   

Other

     1.2        2.3        3.2        .1        .1   

Lease Financing

     —          —          —          —          —     

Non-U.S.

     —          —          —          —          —     
                                        

Total Charge-Offs

     132.3        25.7        9.7        1.8        7.6   
                                        

Recoveries

          

Residential Real Estate

     1.3        .3        .1        .2        .1   

Commercial

     2.9        1.8        .3        1.3        .5   

Commercial Real Estate

     .2        .1        —          —          —     

Personal

     .8        .3        .1        —          .4   

Other

     1.3        —          .1        .1        .1   

Lease Financing

     —          —          —          —          —     

Non-U.S.

     —          —          .3        —          .7   
                                        

Total Recoveries

     6.5        2.5        .9        1.6        1.8   
                                        

Net Charge-Offs

     125.8        23.2        8.8        .2        5.8   

Provision for Credit Losses

     215.0        115.0        18.0        15.0        2.5   

Effect of Foreign Exchange Rates

     .3        (.9     —          .2        —     
                                        

Net Change in Reserve

     89.5        90.9        9.2        15.0        (3.3
                                        

Balance at End of Year

   $ 340.6      $ 251.1      $ 160.2      $ 151.0      $ 136.0   
                                        

Reserve Assigned To:

          

Loans and Leases

   $ 309.2      $ 229.1      $ 148.1      $ 140.4      $ 125.4   

Unfunded Commitments and Standby Letters of Credit

     31.4        22.0        12.1        10.6        10.6   
                                        

Total Reserve for Credit Losses

   $ 340.6      $ 251.1      $ 160.2      $ 151.0      $ 136.0   
                                        

Loans and Leases at Year-End

   $ 27,805.7      $ 30,755.4      $ 25,340.1      $ 22,609.7      $ 19,968.5   
                                        

Average Total Loans and Leases

   $ 28,697.2      $ 27,402.7      $ 22,817.8      $ 20,528.5      $ 18,754.0   
                                        

As a Percent of Year-End Loans and Leases

          

Net Loan Charge-Offs

     .45     .08     .03     —       .03

Provision for Credit Losses

     .77        .37        .07        .07        .01   

Reserve at Year-End Assigned to Loans and Leases

     1.11        .75        .58        .62        .63   

As a Percent of Average Loans and Leases

          

Net Loan Charge-Offs

     .44     .08     .04     —       .03

Reserve at Year-End Assigned to Loans and Leases

     1.08        .84        .65        .68        .67   

 

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Table of Contents

Non-U.S. Operations (Based on Obligor’s Domicile)

See also Note 30 – Business Units and Related Information in the Notes to Consolidated Financial Statements on page 113 of the Corporation’s Annual Report to Stockholders for the year ended December 31, 2009, which is incorporated herein by reference.

Selected Average Assets and Liabilities Attributable to Non-U.S. Operations

 

(In Millions)

   2009    2008    2007    2006    2005

Total Assets

   $ 21,876.1    $ 27,321.0    $ 21,483.2    $ 17,971.7    $ 14,046.1
                                  

Time Deposits with Banks

     15,357.0      20,547.9      16,028.9      12,715.0      10,662.4

Loans

     951.5      1,641.7      1,709.8      1,377.0      1,046.8

Customers’ Acceptance Liability

     .3      .2      .3      .3      1.0

Non-U.S. Investments

     977.7      205.7      101.8      76.6      64.3
                                  

Total Liabilities

   $ 33,310.6    $ 44,022.1    $ 34,469.5    $ 25,992.9    $ 20,489.6
                                  

Deposits

   $ 30,888.3    $ 40,825.6    $ 32,200.2    $ 24,048.2    $ 18,816.5

Liability on Acceptances

     .3      .2      .3      .3      1.0

Percent of Non-U.S.-Related Average Assets and Liabilities to Total Consolidated Average Assets

 

     2009     2008     2007     2006     2005  

Assets

   29   37   35   34   31
                              

Liabilities

   45   60   57   49   45
                              

Reserve for Credit Losses Relating to Non-U.S. Operations

 

(In Millions)

   2009     2008     2007     2006    2005

Balance at Beginning of Year

   $ 7.4      $ 8.8      $ 9.3      $ 4.9    $ 2.0

Charge-Offs

     —          —          —          —        —  

Recoveries

     —          —          —          —        .7

Provision for Credit Losses

     (2.5     (1.4     (.5     4.4      2.2
                                     

Balance at End of Year

   $ 4.9      $ 7.4      $ 8.8      $ 9.3    $ 4.9
                                     

The SEC requires the disclosure of the reserve for credit losses that is applicable to international operations. The above table has been prepared in compliance with this disclosure requirement and is used in determining non-U.S. operating performance. The amounts shown in the table should not be construed as being the only amounts that are available for non-U.S. loan charge-offs, since the entire reserve for credit losses assigned to loans and leases is available to absorb losses on both U.S. and non-U.S. loans. In addition, these amounts are not intended to be indicative of future charge-off trends.

 

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Table of Contents

Distribution of Non-U.S. Loans and Deposits by Type

 

     December 31

Loans

(In Millions)

   2009    2008    2007    2006    2005

Commercial

   $ 626.3    $ 351.1    $ 482.5    $ 815.0    $ 719.6

Non-U.S. Governments and Official Institutions

     59.7      14.8      17.0      56.2      94.8

Banks

     2.1      32.4      14.9      18.8      57.7

Other *

     40.4      1,393.4      1,759.7      843.3      733.1
                                  

Total

   $ 728.5    $ 1,791.7    $ 2,274.1    $ 1,733.3    $ 1,605.2
                                  

 

* Other loans include short duration advances, primarily related to overdrafts associated with the timing of custody clients’ investments.

 

     December 31

Deposits

(In Millions)

   2009    2008    2007

Commercial

   $ 27,143.7    $ 33,091.6    $ 30,787.2

Non-U.S. Governments and Official Institutions

     2,905.3      4,419.5      3,903.7

Banks

     939.8      667.5      748.8

Other Time

     407.8      642.1      626.8

Other Demand

     149.9      35.1      156.8
                    

Total

   $ 31,546.5    $ 38,855.8    $ 36,223.3
                    

CREDIT RISK MANAGEMENT

For the discussion of Credit Risk Management, see the following information that is incorporated herein by reference to the Corporation’s Annual Report to Stockholders for the year ended December 31, 2009:

 

Notes to Consolidated Financial Statements

   2009
Annual Report
Page(s)

1. Accounting Policies

  
    F. Derivative Financial Instruments    72-73
    G. Loans and Leases    73-74
    H. Reserve for Credit Losses    74
    K. Other Real Estate Owned    74

5. Loans and Leases

   81-82

6. Reserve for Credit Losses

   82

23. Contingent Liabilities

   99-100

24. Derivative Financial Instruments

   100-104

25. Off-Balance Sheet Financial Instruments

   104-105

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Asset Quality and Credit Risk Management

   52-59

In addition, the following schedules on pages 19 through 21 of this Form 10-K should be read in conjunction with the “Credit Risk Management” section:

Analysis of Reserve for Credit Losses

Reserve for Credit Losses Relating to Non-U.S. Operations

Distribution of Non-U.S. Loans and Deposits by Type

 

21


Table of Contents

INTEREST RATE SENSITIVITY ANALYSIS

For the discussion of interest rate sensitivity, see the section entitled “Market Risk Management” on pages 59 through 62 of Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Corporation’s Annual Report to Stockholders for the year ended December 31, 2009, which is incorporated herein by reference.

The following unaudited Consolidated Balance Sheet and Consolidated Statement of Income for The Northern Trust Company were prepared in accordance with generally accepted accounting principles and are provided here for informational purposes. These consolidated financial statements should be read in conjunction with the footnotes accompanying the consolidated financial statements included in the Corporation’s Annual Report to Stockholders for the year ended December 31, 2009 and incorporated herein by reference on page 38 of this Form 10-K.

 

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Table of Contents

The Northern Trust Company

Consolidated Balance Sheet (unaudited)

 

     December 31  

(In Millions)

   2009     2008  

Assets

    

Cash and Due from Banks

   $ 2,385.2      $ 2,604.1   

Federal Funds Sold and Securities Purchased under Agreements to Resell

     250.9        1,489.9   

Time Deposits with Banks

     12,896.3        16,707.5   

Federal Reserve Deposits and Other Interest-Bearing

     14,983.1        9,481.9   

Securities

    

Available for Sale

     17,224.5        13,804.9   

Held to Maturity (Fair Value—$1,144.1 in 2009 and $1,110.9 in 2008)

     1,121.6        1,110.1   
                

Total Securities

     18,346.1        14,915.0   
                

Loans and Leases

    

Commercial and Other

     11,351.6        14,906.7   

Residential Mortgages

     3,981.3        3,931.7   
                

Total Loans and Leases (Net of unearned income—$487.6 in 2009 and $542.2 in 2008)

     15,332.9        18,838.4   
                

Reserve for Credit Losses Assigned to Loans and Leases

     (200.0     (152.9

Buildings and Equipment

     449.5        408.3   

Client Security Settlement Receivables

     794.8        709.3   

Goodwill

     318.4        306.1   

Other Assets

     3,252.1        5,126.0   
                

Total Assets

   $ 68,809.3      $ 70,433.6   
                

Liabilities

    

Deposits

    

Demand and Other Noninterest-Bearing

   $ 7,566.4      $ 10,560.2   

Savings and Money Market

     7,479.4        4,016.3   

Savings Certificates

     1,080.9        1,209.9   

Other Time

     1,113.7        390.2   

Non-U.S. Offices — Noninterest-Bearing

     2,306.5        2,856.4   

         — Interest-Bearing

     29,022.9        36,094.9   
                

Total Deposits

     48,569.8        55,127.9   
                

Federal Funds Purchased

     7,431.8        1,877.6   

Securities Sold under Agreements to Repurchase

     1,029.5        1,599.9   

Other Borrowings

     2,094.7        745.4   

Senior Notes

     161.3        145.8   

Long-Term Debt

     1,789.1        2,209.4   

Other Liabilities

     2,957.2        4,441.1   
                

Total Liabilities

     64,033.4        66,147.1   
                

Stockholder’s Equity

    

Capital Stock—Par Value $1

     3.6        3.6   

Surplus

     1,155.5        1,155.5   

Undivided Profits

     3,942.9        3,590.1   

Accumulated Other Comprehensive Income (Loss)

     (326.1     (462.7
                

Total Stockholder’s Equity

     4,775.9        4,286.5   
                

Total Liabilities and Stockholder’s Equity

   $ 68,809.3      $ 70,433.6   
                

 

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Table of Contents

The Northern Trust Company

Consolidated Statement of Income (unaudited)

 

     For the Year Ended December 31

(In Millions)

   2009     2008     2007

Noninterest Income

      

Trust, Investment and Other Servicing Fees

   $ 1,688.0      $ 1,682.7      $ 1,605.3

Foreign Exchange Trading Income

     445.7        616.2        351.3

Treasury Management Fees

     76.2        69.1        61.5

Security Commissions and Trading Income

     6.2        10.5        11.3

Gain on Visa Share Redemption

     —          167.9        —  

Other Operating Income

     113.2        165.7        70.4

Investment Security Gains (Losses), net

     (23.4     (56.3     6.5
                      

Total Noninterest Income

     2,305.9        2,655.8        2,106.3
                      

Interest Income

      

Loans and Leases

     449.4        617.5        706.8

Securities

      

—Available for Sale

     196.7        308.7        579.0

—Held to Maturity

     36.8        38.6        41.0
                      

Total Securities

     233.5        347.3        620.0
                      

Time Deposits with Banks

     187.8        887.6        776.3

Federal Funds Sold, Securities Purchased under Agreements to Resell and Other

     39.3        90.9        155.3
                      

Total Interest Income

     910.0        1,943.3        2,258.4
                      

Interest Expense

      

Deposits

     132.9        989.2        1,369.8

Federal Funds Purchased

     7.1        32.8        80.3

Securities Sold under Agreements to Repurchase

     1.3        24.3        82.2

Other Borrowings

     4.2        22.6        32.7

Senior Notes

     2.7        11.5        11.6

Long-Term Debt

     86.1        107.6        102.9
                      

Total Interest Expense

     234.3        1,188.0        1,679.5
                      

Net Interest Income

     675.7        755.3        578.9

Provision for Credit Losses

     116.5        65.9        13.3
                      

Net Interest Income after Provision for Credit Losses

     559.2        689.4        565.6
                      

Income before Noninterest Expenses

     2,865.1        3,345.2        2,671.9
                      

Noninterest Expenses

      

Compensation

     867.5        903.7        813.2

Employee Benefits

     195.2        180.4        185.8

Outside Services

     353.7        347.0        317.3

Equipment and Software Expense

     250.7        229.8        207.6

Occupancy Expense

     123.7        120.0        106.3

Visa Indemnification Charges

     (17.8     (76.1     150.0

Other Operating Expenses

     107.6        310.5        128.8
                      

Total Noninterest Expenses

     1,880.6        2,015.3        1,909.0
                      

Income before Income Taxes

     984.5        1,329.9        762.9

Provision for Income Taxes

     289.7        521.6        229.9
                      

Net Income

   $ 694.8      $ 808.3      $ 533.0
                      

Dividends Paid to the Corporation

   $ 350.0      $ —        $ 260.0

 

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AVAILABLE INFORMATION

The Corporation’s Internet address is www.northerntrust.com. We make available free of charge through our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the SEC. Additionally, the Corporation’s corporate governance guidelines, its code of business conduct and ethics applicable to directors, officers and employees, and the charters for its audit, business risk, business strategy, corporate governance, compensation and benefits, and executive committees are all available on the Corporation’s Internet website. Information contained on the Corporation’s website is not part of this report.

Supplemental Item—Executive Officers of the Registrant

The following table sets forth certain information with regard to each executive officer of the Corporation.

 

Name and Age

  

Current Position Held with the Corporation and Effective Date First Elected to Office Indicated

Frederick H. Waddell (56)    Chairman of the Board (11/11/09), President (2/21/06) and Chief Executive Officer (1/1/08)
Sherry S. Barrat (60)    Executive Vice President and President—PFS (1/1/06)
Aileen B. Blake (42)    Executive Vice President and Controller (3/31/05)
Steve L. Fradkin (48)    Executive Vice President (1/21/03) and President—C&IS (9/18/09)
Timothy P. Moen (57)    Executive Vice President and Head of Human Resources and Administration (4/16/02)
William L. Morrison (59)    Executive Vice President (5/21/02) and Chief Financial Officer (9/18/09))
Stephen N. Potter (53)    Executive Vice President (10/17/06) and President—NTGI (3/28/08)
Jana R. Schreuder (51)    Executive Vice President (6/30/05) and President—O&T (10/17/06)
Joyce St. Clair (51)    Executive Vice President and Head of Corporate Risk Management (4/1/07)
Kelly R. Welsh (57)    Executive Vice President, General Counsel and Assistant Secretary (7/18/00)

With the exception of Ms. Blake, all of the executive officers have been officers of the Corporation, or a subsidiary of the Corporation, for more than five years. The prior business experience of Ms. Blake is set forth below:

Aileen B. Blake: November 2004-March 2005—Executive Vice President and Controller-Designate; April 2003-November 2004—Vice President of Financial Planning and Analysis at PepsiCo Beverages and Foods (formerly, The Quaker Oats Company); 1993-April 2003—various financial positions in auditing and financial planning at The Quaker Oats Company and PepsiCo Beverages and Foods.

The positions of Chairman of the Board, Chief Executive Officer and President are elected annually by the Board of Directors at the first meeting of the Board of Directors held after each annual meeting of stockholders. The other officers are appointed annually by the Board. Officers continue to hold office until their successors are duly elected or until their death, resignation or removal by the Board.

Item 1A—Risk Factors

From an investor’s standpoint, public companies in general and financial institutions in particular share many of the same risks. However, each company’s unique combination of strategies, markets served, product and service offerings, processes and systems, and other internal and external factors cause it to have its own set of principal risks. Following is a description of some of the principal risks inherent in Northern Trust’s business.

 

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We explain below that many of the risks we discuss can reduce our earnings, as a result of recognizing losses or otherwise. You should understand that significant reductions in earnings can have further negative effects on us in addition to reducing the price of our common stock and other securities, such as: reducing our capital, which can have regulatory and other consequences; affecting the confidence that clients and counterparties have in us, with a resulting negative effect on our ability to conduct and grow our businesses; and reducing the attractiveness of our securities to rating agencies and potential purchasers and so affecting our ability to raise capital and secure other funding or the prices at which we are able to do so.

This list is not necessarily complete because we may have failed to appreciate the potential impact on us of risks not described here. We identify and manage risk through our business strategies and plans and our risk management practices and controls. If we fail to continue to successfully identify and manage significant risks, we could incur financial loss. We may also suffer damage to our reputation that would restrict our ability to grow or conduct business profitably, or become subject to regulatory penalties or constraints that would limit some of our activities or make them significantly more expensive .

Economic, Market, and Monetary Policy Risks

Northern Trust carries on a global business. Changes in conditions in the global financial markets and general economic conditions both in the U.S. and internationally could adversely affect Northern Trust’s businesses. Factors such as the level and volatility of equity and futures prices, the overall pace of capital markets activities, interest rates, currency exchange rates, investor sentiment and inflation or deflation can affect our results.

 

 

A downturn in economic conditions, such as the current severe global economic downturn, can negatively affect our earnings .

 

  -  

Economic weakness can affect the ability of borrowers to repay loans, causing credit quality to deteriorate and resulting in increased cost of credit, a higher level of charge-offs, and higher provision for credit losses, all of which reduce our earnings.

 

  -  

Economic weakness can also reduce the fees we earn for managing and servicing our customers’ assets. For example, the current downturn in equity markets and the decrease in the value of some debt-related investments as a result of market disruption or illiquidity reduce the valuations of the assets we manage or service for others. This reduces our earnings since a significant part of the fees we earn is based on asset values.

 

  -  

Weak economic conditions also affect wealth creation, investment preferences, trading activities, and savings patterns, which impact demand for our trust and investment products and services. Reduced transaction volumes would also negatively impact our earnings.

 

 

A slowing of the globalization of investment activity or pension reform could limit our revenue growth . We believe we have profited from the increasing globalization of investment activity and from pension reform in many nations that has generated new pools of assets that require management and servicing. Any slowing or reversal of this globalization of financial activity and markets or other such trends would adversely affect factors that have been important in Northern Trust’s recent growth.

 

 

Instability, disruption or a lack of confidence in the political, economic, legal or regulatory systems of the emerging markets in which we operate could expose us to liability or loss . Northern Trust’s expanding business activities in emerging markets, including investments made for clients in those markets, present the risks inherent in conducting these activities in less mature and often less regulated business and investment environments.

 

 

Changes in interest rates can negatively affect our earnings . The direction and level of interest rates are important factors in our earnings. Falling rates or rates that remain low can reduce our net interest margin, which is the difference between what we earn on our assets and the interest rates we pay for deposits and other sources of funding. Rates that remain low can also reduce fees earned on certain of our products. For example, in 2009, we waived certain fees associated with money market mutual funds due to the low level of short-term interest rates. Lower net interest margins and fee waivers negatively impact our earnings.

 

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Fluctuations and volatility in foreign currency exchange rates can negatively affect our earnings . We hold various non-U.S. dollar denominated assets and liabilities and maintain investments in non-U.S. subsidiaries. We also provide foreign exchange services to our clients, primarily in connection with our global custody business, and effect other transactions in non-U.S. dollar currencies. Foreign currency volatility and fluctuations in exchange rates may impact the value of non-U.S. dollar denominated assets, investments, and cash flows and raise the potential for losses resulting from foreign currency trading positions, where aggregate obligations to purchase and sell a currency other than the U.S. dollar do not offset each other, or offset each other in different time periods. If the policies and procedures we have in place to assess and mitigate potential impacts of foreign exchange volatility, including hedging-related strategies, are not followed or are not effective to mitigate such risks, our results and earnings may be negatively affected. In addition, periods of lower foreign currency volatility can result in reduced foreign exchange trading income, as occurred in the second half of 2009. See the section of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” captioned “Risk Management – Market Risk Management – Asset/Liability Management – Foreign Exchange Risk Management” in the 2009 Annual Report to Stockholders (pages 61 – 62).

 

 

Declines in the value of securities held in our investment portfolio can negatively affect our earnings . The value of securities available for sale and held to maturity within our investment portfolio may fluctuate as a result of market volatility and adverse economic or financial market conditions. Generally, the fair value of those securities is determined based upon market values available from third party sources. The current period of economic turmoil and financial market disruption has negatively affected the liquidity and pricing of securities generally and asset-backed securities in particular. To the extent that any portion of the unrealized losses in our portfolio of investment securities results from declines in securities values that management determines to be other-than-temporary, the book value of those securities will be adjusted to their estimated recovery value and we will recognize a charge to earnings in the quarter during which we make that determination. See the section of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” captioned “Risk Management – Asset Quality and Credit Risk Management – Securities Portfolio” in the 2009 Annual Report to Stockholders (page 52) and the section of the “Notes to Consolidated Financial Statements” in the 2009 Annual Report to Stockholders captioned “Note 3 – Securities” (pages 77—80) for additional information.

 

 

Changes in a number of particular market conditions can negatively affect our earnings . In past periods, reductions in the volatility of currency trading markets, the level of cross-border investing activity, or the demand for borrowed securities have negatively affected our earnings from activities such as foreign exchange trading and securities lending. If these conditions occur in the future, our earnings from these activities may be negatively affected. In a few of our businesses, such as securities lending, we are compensated through sharing in our client’s earnings, so that market and other factors that reduce our clients’ earnings from investments or trading activities also reduce our revenues. The current extraordinary market conditions have produced losses in some securities lending programs, which has negatively affected our earnings. These market conditions have led some clients to withdraw from these programs, and a persistence or worsening of these conditions could result in additional withdrawals and negatively affect earnings. See the section of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” captioned “Off-Balance Sheet Arrangements – Variable Interests” in the 2009 Annual Report to Stockholders (page 46) and the section of the “Notes to Consolidated Financial Statements” in the 2009 Annual Report to Stockholders captioned “Note 26 – Variable Interest Entities” (pages 105 – 106) for additional information.

 

 

Changes in the monetary and other policies of the various regulatory authorities or central banks of the United States, non-U.S. governments and international agencies can reduce our earnings and negatively affect our growth prospects . For example, the Board of Governors of the Federal Reserve System regulates the supply of money and credit in the United States, and its policies determine in large part the level of interest rates and our cost of funds for lending and investing. Changes in interest rates and our cost of funds can negatively affect earnings. The actions of the Federal Reserve Board can reduce the value of financial instruments we hold. Its policies also can affect our borrowers by increasing interest rates or making sources of funding less available. This can increase the risk that they may fail to repay their loans from us.

 

 

Failure to develop and implement contingency plans to address market disruptions could adversely affect us. Our success in the area of highly complex asset servicing relationships depends, in part, on our development and successful implementation of contingency plans to address significant market disruptions caused by bankruptcy, insolvency or illiquidity.

 

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Governmental action to combat current economic weakness and financial market disruption may not succeed, with various adverse effects on us. Since mid-2008, there have been unprecedented disruptions in global financial markets, including volatility in asset values and constraints on the availability of credit. In response to these developments, the U.S. and other governments have taken steps designed to stabilize markets generally and strengthen financial institutions in particular. The current upheaval in global financial markets has accentuated each of the risks identified above and magnified their potential effect on Northern Trust. To the extent that these governmental stabilization and mitigation activities are not successful or adversely change the competitive structure of the financial services industry, these developments could have an adverse impact on Northern Trust’s revenues, costs, credit losses, access to capital, and liquidity. They also may impose additional limitations or costs on Northern Trust’s business.

Operational Risks

 

 

Errors, breakdowns in controls or other mistakes in the provision of services to clients or in carrying out transactions for our own account can subject us to liability, result in losses or negatively affect our earnings in other ways . In our asset servicing, investment management, and other business activities, Northern Trust effects or processes transactions for clients and for itself that involve very large amounts of money. Failure to properly manage or mitigate operational risks can have substantial consequences, and increased volatility in the financial markets may increase the magnitude of resulting losses.

 

 

Many types of operational risks can negatively affect our earnings . Many factors can impact operations and expose us to risks that may vary in size, scale and scope, including:

 

  -  

Human errors or omissions, including failures to comply with applicable laws or corporate policies and procedures;

 

  -  

Theft, fraud or misappropriation of assets, whether arising from the intentional actions of internal personnel or external third parties;

 

  -  

Defects or interruptions in computer or communications systems;

 

  -  

Breakdowns in processes, including manual processes, which are inherently more prone to error than automated processes, and over-reliance on manual processes, breakdowns in internal controls or failures of the technology and facilities that support our operations;

 

  -  

Unsuccessful or difficult implementation of computer systems upgrades;

 

  -  

Defects in product design or delivery;

 

  -  

Difficulty in accurately pricing assets, which can be aggravated by increased asset coverage, market volatility and illiquidity, and lack of reliable pricing from vendors;

 

  -  

Negative developments in relationships with key counterparties, vendors, employees, or associates in our day-to-day operations; and

 

  -  

External events that are wholly or partially beyond our control, such as natural disasters, epidemics, computer viruses, geopolitical events, political unrest or terrorist events.

 

 

Our dependence on automation exposes us to risks that can also result in losses . Automated systems to record and process transactions, as well as to monitor positions and price assets, can reduce the risk of human error, but our necessary dependence on such systems also increases the risk that system flaws, human tampering or manipulation of those systems will result in losses. The failure to upgrade systems as necessary to support growth and changing business needs could also have a material adverse effect. Additionally, failure to ensure adequate review and consideration of critical business changes prior to and during introduction and deployment of key technological systems or failure to adequately align evolving client commitments and expectations with operational capabilities can have a negative impact on our operations.

 

 

We may fail to detect errors resulting in losses that continue until the problems are detected and fixed . Given the high volume of transactions we process, errors that affect earnings may be repeated or compounded before they are discovered and corrected.

 

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Our business continuity plans may not work and thus fail to prevent losses from operational failures . Our business continuity plans address many of these risks, but may not operate successfully to mitigate them. If they do not, we could incur losses, liability to clients or others and reduced earnings. In recent years, we have expanded the operational support located in lower-cost areas, where the electricity, communications and other systems necessary to support our activities may not be as strong as in the U.S. This increases the risk that problems with these systems may occur and disrupt our operations, resulting in losses.

These risks are magnified as client requirements become more complex, and as our increasingly international business requires end-to-end management of operational and other processes across multiple time zones and many inter-related products and services.

Investment Performance, Fiduciary and Asset Servicing Risks

Revenues from our investment management, fiduciary, and asset servicing businesses are significant to our earnings.

 

 

Failure to produce adequate and competitive returns can negatively affect our earnings and growth prospects . If we do not generate competitive risk-adjusted returns that satisfy clients in a variety of asset classes, we will have greater difficulty maintaining existing business and attracting new business, which would negatively affect our earnings and prospects.

 

 

If we fail to comply with legal standards, we could incur liability to our clients or lose clients, which would negatively affect our earnings . Managing or servicing assets with reasonable prudence in accordance with the terms of governing documents and applicable laws is important to client satisfaction, which in turn is important to the earnings and growth of our investment businesses. Failure to comply with these standards, adequately manage these risks, or manage the differing interests often involved in the exercise of fiduciary responsibilities could also result in liability.

 

 

We may take actions to maintain client satisfaction that result in losses or reduced earnings . We may find it necessary to take action or incur expenses in order to maintain client satisfaction or preserve the usefulness of investments or investment vehicles we manage in light of changes in security ratings, liquidity or valuation issues or other developments, even though we are not required to do so by law or the terms of governing instruments. For example, we entered into credit support agreements with respect to certain investment funds and we incurred substantial charges to reflect that support in the third quarter of 2008. These credit support agreements expired in 2009. We incurred other significant charges in that quarter to support securities lending clients and clients who had purchased certain illiquid auction rate securities. The risk that we will need to take such action and incur the resulting losses is greater in periods when credit or equity markets are deteriorating in value or are particularly volatile and liquidity in markets is disrupted, as they have been in recent months.

Credit Risks

A number of Northern Trust’s product offerings involve credit risk, which is the risk that other parties will not fulfill their financial obligations to us. These product offerings include loans, leases and other lending commitments.

 

 

Failure to evaluate accurately the prospects for repayment when we extend credit or maintain adequate reserves for credit losses can result in losses or the need to make additional provisions for credit losses, both of which reduce our earnings . We evaluate credit commitments before we make them and then reserve against credit risks based on our assessment of the credit losses inherent in our loan portfolio, including unfunded credit commitments. This process requires us to make difficult and complex judgments. Challenges associated with our credit risk assessments include identifying the proper factors to be used in assessment and accurately estimating the impacts of those factors. Reserves that prove to be inadequate can directly and negatively affect earnings.

 

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Weakened economic conditions can result in losses or the need for additional provisions for credit losses, both of which reduce our earnings . Credit risk levels and our earnings can also be affected by the strength of the economy in general and in the particular locales in which we extend credit, a deterioration in credit quality or a reduced demand for credit and adverse changes in the financial performance or condition of our borrowers which could impact the borrowers’ abilities to repay outstanding loans. In 2009, our provision for credit losses increased significantly. The higher provision for credit losses reflects the continued weak economic environment. For a fuller discussion of the reserve and provision for credit losses for 2009, 2008, and 2007, see the section of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” captioned “Asset Quality and Credit Risk Management” in the 2009 Annual Report to Stockholders (pages 52 – 59).

 

 

The failure or instability of any of our significant counterparties could expose us to loss . The financial markets are characterized by extensive interconnections among financial institutions, including banks, broker/dealers, collective investment funds and insurance companies. As a result of these interconnections, we and many of our customers have significant counterparty exposure to other financial institutions. This counterparty exposure presents significant risks to us and to our customers because the failure or perceived weakness of any of our counterparties (or in some cases of our customers’ counterparties) has the potential to expose us to risk of loss. The recent instability of the financial markets has resulted in many financial institutions becoming significantly less creditworthy, and as a result we are exposed to increased counterparty risks, both as principal and in our capacity as agent for our customers. Changes in market perception of the financial strength of particular financial institutions can occur rapidly, is often based upon a variety of factors and is difficult to predict. In addition, as U.S. and non-U.S. governments have addressed the financial crisis in an evolving manner, the criteria for and manner of governmental support of financial institutions and other economically important sectors remain uncertain. If a significant individual counterparty defaults on an obligation to us, we could incur financial losses that materially adversely affect our business, our financial condition and our results of operations. Given the limited number of strong counterparties in the current market, we are not able to mitigate all of our and our customers’ counterparty credit risk. The current consolidation of financial service firms and the failures of other financial institutions have increased the concentration of our counterparty risk.

Liquidity Risks

Northern Trust depends on access to capital markets to provide sufficient capital resources and other funds to meet our commitments and business needs and to accommodate the transaction and cash management needs of our clients.

 

 

Many events or circumstances could adversely affect our capital costs, our ability to raise capital and, in turn, our ability to meet our commitments . Inadequate capital or the inability to meet our commitments could cause us to incur liability, restrict our ability to grow, or require us to take actions that would negatively affect our earnings. Among the developments that could have this effect are:

 

-  

A loss of confidence of debt purchasers, depositors or counterparties participating in the capital markets generally or in transactions with Northern Trust;

 

-  

Disruption in the market for debt-related securities; and

 

-  

A significant downgrade of our debt rating.

See the section of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” captioned “Liquidity and Capital Resources” in the 2009 Annual Report to Stockholders (pages 46 – 51).

 

 

Our success with large, complex clients can put strains on our balance sheet and impose substantial liquidity requirements. Our failure to successfully manage these balance sheet and liquidity issues would have a negative impact on our ability to meet client needs and grow.

 

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If the Bank or the other subsidiaries of the Corporation were unable to supply the Corporation with funds over time, the Corporation could be unable to meet its various obligations . The Corporation is a legal entity separate and distinct from the Bank and its other subsidiaries. It relies primarily on dividends paid to it by these subsidiaries to meet its obligations and to pay dividends to stockholders of the Corporation. There are various legal limitations on the extent to which the Bank and the other subsidiaries can supply funds to the Corporation by dividend or otherwise. See “Regulation and Supervision” in Item 1 of this report.

Regulation Risks

Virtually every aspect of Northern Trust’s business around the world is regulated, generally by governmental agencies that have broad supervisory powers and the ability to impose sanctions. In the United States, the Corporation, the Bank, and many of the Corporation’s other subsidiaries are heavily regulated by bank regulatory agencies at the federal and state levels. These regulations cover a variety of matters ranging from required capital levels to prohibited activities. They are specifically directed at protecting depositors, the federal deposit insurance fund and the banking system as a whole, not security holders. The Corporation and its nonbanking subsidiaries are also heavily regulated by regulators, including securities regulators, domestically and internationally.

 

 

Failure to comply with regulations can result in penalties and regulatory constraints that restrict our ability to grow or even conduct our business, or that reduce earnings as a result of higher costs . Regulatory violations or failure to meet formal or informal commitments made to regulators could generate penalties, require corrective actions that increase costs of conducting business, result in limitations on our ability to conduct business, restrict our ability to expand, or adversely impact our reputation.

 

 

Changes in laws and regulation could result in reduced earnings . Laws, regulations, and their interpretation by regulatory agencies may change or generate enhanced scrutiny of particular activities. Those changes or enhanced emphasis can impose costs or otherwise affect our ability to compete successfully. The disruption in financial markets may produce regulatory changes in the U.S. and elsewhere, the effects of which are difficult to predict. In addition, evolving regulations, such as the Basel II capital regime and liquidity related regulations, and regulations that generate increased scrutiny of particular activities, such as anti-money laundering procedures, require significant time, effort, and resources on our part to ensure compliance in a rapidly changing environment. We often must meet significant milestones in complying with these regulatory requirements. Failure to meet these requirements and milestones could significantly and negatively affect our business. New or modified regulations and related regulatory guidance may have unforeseen or unintended adverse effects on the financial services industry, including Northern Trust.

 

 

Compliance with evolving regulations applicable to banks and other financial services companies may impact us in ways that are difficult to predict. Although our repurchase of the preferred stock and warrant we issued and sold to the U.S. Treasury under the CPP eliminated restrictions placed upon us under the agreements relating to our participation in that program, in light of current economic conditions, banks and other financial services companies such as us will continue to be subject to enhanced regulatory and enforcement scrutiny and evolving legislation and regulations in the U.S. and other countries. The full scope and impact of existing and new regulations and of new legislation and implementing regulations that may be issued in the future is uncertain and difficult to predict.

 

 

Many of our new activities and expansion plans require regulatory approvals, and failure to obtain them will restrict our growth . Failure to obtain necessary approvals from regulatory agencies on a timely basis could adversely affect proposed acquisitions, other business opportunities and results of operations.

See “Regulation and Supervision” in Item 1 of this report.

 

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Litigation Risks

Our businesses involve the risk that clients or others may sue us, claiming that we have failed to perform under a contract or otherwise failed to carry out a duty owed to them. Our trust, custody and investment management businesses are particularly subject to this risk. This risk may be heightened during periods when credit, equity or other financial markets are deteriorating in value or are particularly volatile, or when clients or investors are experiencing losses. In addition, as a publicly-held company, we are subject to the risk of claims under the federal securities laws, and the recent volatility in the stock prices of Northern Trust and other financial institutions has increased this risk.

 

 

These claims can result in significant liability or damage to our reputation, which could result in a loss. Even where we defend them successfully, these matters are often expensive to defend. These claims may also cause damage to our reputation among existing and prospective clients, or negatively impact the confidence of counterparties, rating agencies, and stockholders, and so negatively affect our earnings.

 

 

We may fail to set aside adequate reserves or otherwise make a mistake in evaluating our liability, with a negative effect on our earnings . We estimate our potential liability for pending and threatened claims, and record reserves when appropriate pursuant to U.S. GAAP, by evaluating the facts of particular claims under current judicial decisions and legislative and regulatory interpretations. This process is subject to the risk that a judge or jury could decide a case contrary to our evaluation of the law or the facts, and to the risk that a court could change or modify existing law on a particular issue important to the case. Earnings will be adversely affected to the extent that our reserves are not adequate.

Tax and Accounting Risks

In the course of its business, Northern Trust is sometimes subject to challenges from U.S. and non-U.S. tax authorities regarding the amount of taxes due.

 

 

These challenges can result in reduced earnings in a number of ways . These challenges may result in adjustments to the timing or amount of taxable income or deductions or the allocation of income among tax jurisdictions, all of which can require a greater provision for taxes or otherwise negatively affect earnings.

 

 

Our provision for structured lease transactions may prove to be inadequate, resulting in additional tax provisions or reduced earnings . In recent years, the U.S. Internal Revenue Service has proposed to disallow tax deductions related to certain types of structured leasing transactions. If our reserves for tax liabilities prove to be inadequate, we would have to make an additional adjustment that would negatively affect earnings.

 

 

Changes in tax laws and interpretations can negatively affect our earnings . Both U.S. and non-U.S. tax authorities from time to time issue new, or modify existing, tax laws and regulations. These authorities may also issue new, or modify existing, interpretations of those laws and regulations. These new laws, regulations or interpretations, and the Corporation’s actions taken in response to, or reliance upon, such changes in the tax laws may impact the Corporation’s tax position in a manner that results in lower earnings.

 

 

Changes in accounting principles can negatively affect our earnings and capital ratios . The Financial Accounting Standards Board and other accounting standards-setting organizations make pronouncements and adjustments to their existing accounting guidance that may impact the manner in which the Corporation accounts for certain of its transactions in a way that results in lower earnings or adjustments to the Corporation’s balance sheet resulting in lower capital ratios.

 

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Strategic and Competitive Risks

We have grown through a combination of internal expansion and the acquisition of selected businesses or capabilities, and we intend to continue to do so. A variety of risks could interfere with these plans.

 

 

Intervention of the U.S. and other governments in the financial services industry may heighten the challenges we face . In response to the continuing disruptions in global financial markets currently being experienced, the U.S government and other governments around the world have taken, and may take further, unprecedented actions designed to stabilize markets generally and strengthen financial institutions in particular. For example, the U.S. House of Representatives has passed legislation that would, among other things, create a Consumer Financial Protection Agency that would have broad powers to regulate consumer financial services and products, create a Financial Stability Oversight Council with regulatory authority over certain financial companies and activities, and would give shareholders a “say on pay” regarding executive compensation. Governments also may take actions to significantly change the way financial institutions are regulated, either through new legislation, new regulations, new applications of existing regulations or a combination of all of these methods. These actions may involve increased intervention by such governments and regulators in the normal operation of our businesses and the businesses of our competitors in the financial services industry. Such intervention may impact the nature and level of competition in the industry in unpredictable ways. The nature, pace and volume of this government intervention, and our ability to react in a timely manner to regulatory developments, may adversely impact our ability to compete successfully and, in turn, negatively affect our earnings.

 

 

If we do not successfully execute expansion plans, we will not grow as we have planned and our earnings growth will be negatively impacted . Failure to integrate a substantial acquisition would have an adverse effect on our business, as would the failure to execute successfully a significant internal expansion. The challenges arising from the integration of an acquired business or significant expansion of an existing business may include preserving valuable relationships with employees, clients, suppliers, and other business partners, as well as combining accounting, data processing and internal control systems.

 

 

Failure to execute our other strategies could also negatively affect our prospects . Our growth also depends upon successful, consistent execution of our business strategies in both PFS and C&IS. Recruiting and maintaining skilled personnel, and deploying such key talent in a manner that allows execution of these strategies is important, particularly in highly complex and rapidly growing areas of our business. A failure to do so, or to otherwise successfully carry out our plans, could negatively impact growth.

 

 

We face a variety of competitive challenges that could negatively affect our ability to maintain satisfactory prices and grow our earnings . We provide a broad range of financial products and services in highly competitive markets, in which pricing can be a key competitive factor. Merger activity in the financial services industry, including mergers resulting from government intervention and the overall disruption in the financial services industry, continues to produce large, in some cases well-capitalized, and geographically-diverse companies that are capable of offering a wide array of financial products and services at competitive prices. In certain businesses, such as foreign exchange trading, electronic networks present a competitive challenge. Additionally, technological advances and the growth of internet-based commerce have made it possible for non-depository institutions to offer a variety of products and services competitive with certain areas of our business. Many of these non-traditional service providers have fewer regulatory constraints, and some have lower cost structures. These competitive pressures can negatively affect earnings and our ability to grow.

 

 

Failure to attract and retain skilled people could negatively affect our prospects. Our success depends, in large part, on our ability to attract and retain key talent. Competition for the best people in most activities engaged in by us can be intense and we may not be able to hire and retain key personnel, including as a result of any restrictions on our compensation practices that may be adopted by governments or regulators. The unexpected loss of services of one or more of our key personnel could have a material adverse impact on our business because of their skills, knowledge of our market, years of industry experience and the difficulty of promptly finding qualified replacement personnel.

 

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We need to constantly invest in innovation, and the inability or failure to do so will negatively affect our businesses and earnings . Our success in this competitive environment requires consistent investment of capital and human resources in innovation. This investment is directed at generating new products and services, and adapting existing products and services to the evolving standards and demands of the marketplace. Among other things, this helps us maintain a mix of products and services that keeps pace with our competitors and achieve acceptable margins. This investment also focuses on enhancing the delivery of our products and services in order to compete successfully for new clients or gain additional business from existing clients, and includes investment in technological innovation as well. Effectively identifying gaps or weaknesses in our product offerings, particularly in the area of securities lending, also is important. Falling behind our competition in any of these areas could adversely affect our business opportunities, our growth and our earnings.

 

 

Failure to understand or fully appreciate the risks associated with development or delivery of new product and service offerings will negatively affect our businesses and earnings . Our success in capitalizing on innovation depends, in part, on successful implementation of new product and service initiatives. Not only must we keep pace with competitors in the development of these new offerings, but we must accurately price them (as well as existing products) on a risk-adjusted basis and effectively deliver them to clients. Our identification of risks arising from new products and services, both in their design and implementation, and effective responses to those identified risks, including pricing, is key to our capitalizing on innovation and investment in new product and service offerings.

 

 

Failure to adequately control our costs could negatively affect our ability to compete and thus reduce our earnings . Our success in controlling the costs and expenses of our business operations also impacts operating results. Another goal of innovation, as a part of our business strategy, is to produce efficiencies in operations that help reduce and control costs and expenses, including the costs of losses associated with operating risks attributable to servicing and managing financial assets.

 

 

Our success with large, complex clients requires understanding of the market and legal, regulatory and accounting standards in new jurisdictions. Any failure to understand and deal with those appropriately could affect our growth prospects or negatively affect our reputation.

Reputation Risks

An important reason that clients bring their business to Northern Trust is that they believe we will serve them with high standards of ethics, performance, accuracy and compliance.

 

 

Damage to our reputation can have a direct and negative effect on our ability to compete, grow and generate revenue . Damage to our reputation for delivery of a high level of service undermines the confidence of clients and prospects in our ability to serve them and so negatively affects our earnings.

 

 

Maintaining our reputation is important in other key relationships that affect our businesses and our earnings . Damage to our reputation also could affect the confidence of the other parties in a wide range of transactions that are important to our business, rating agencies, and stockholders in Northern Trust. Failure to maintain our reputation would ultimately have an adverse effect on our ability to manage our balance sheet or effect transactions.

 

 

Reputation risk has many facets that could negatively affect our businesses and earnings . The maintenance of our reputation depends not only on our success in controlling or mitigating the various risks described above, but also on our success in identifying and appropriately addressing issues that may arise in a broad range of areas. Reputational risk is particularly significant in the current environment resulting from the financial crisis. These include potential conflicts of interest and other ethical issues; anti-money laundering and anti-terrorist financing procedures; customer personal information and privacy issues; effective evaluation of talent and deployment to adequately address complex and rapid growing areas of our businesses, data security; record-keeping; regulatory investigations of Northern Trust or within the banking industry; and any litigation that arises from the failure or perceived failure of Northern Trust to comply with legal and regulatory requirements.

 

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Many of the risks described above are discussed in more detail in the section of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” captioned “Risk Management” in the 2009 Annual Report to Stockholders (pages 51 – 62), in the section of the “Notes to Consolidated Financial Statements” in the 2009 Annual Report to Stockholders captioned “Note 23 – Contingent Liabilities” (pages 99 – 100), and in the sections of “Item 1 – Business” of this Annual Report on Form 10-K captioned “Government Monetary and Fiscal Policies,” “Competition” and “Regulation and Supervision” (pages 2 – 11).

Additionally, the risks described above may cause actual results to differ from the Corporation’s current expectations of future events or future results indicated in what are considered “forward-looking statements” of the Corporation. Forward-looking statements and factors that may affect future results are also discussed in the section of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” captioned “Factors Affecting Future Results” in the 2009 Annual Report to Stockholders (pages 62 – 64).

Item 1B—Unresolved Staff Comments

None.

Item 2—Properties

The executive offices of the Corporation and the Bank are located at 50 South La Salle Street in Chicago. This Bank-owned building is occupied by various divisions of Northern Trust’s business units. Adjacent to this building are two office buildings in which the Bank leases approximately 530,000 square feet of space principally for staff divisions of the business units. Financial services are provided by the Bank and other subsidiaries of the Corporation through offices in 18 U.S. states. The majority of those offices are leased. The Bank’s primary U.S. operations are located in three facilities: a 555,000 square foot leased facility at 801 South Canal Street in Chicago; a Bank-owned computer data center located in a 405,000 square foot facility at 840 South Canal Street in Chicago; and a Bank-owned supplementary operations/data center space of 65,000 square feet located in the western suburbs of Chicago. A majority of the Bank’s London-based staff is located at Canary Wharf in London, where 188,000 square feet of office space is leased. Additional support and operations activity originates from Bangalore, where we lease approximately 200,000 square feet in two facilities. The Bank and the Corporation’s other subsidiaries operate from various other facilities in North America, Europe, the Asia-Pacific region, and the Middle East, most of which are leased. In addition to the above-referenced properties, subsidiaries of the Corporation maintain a number of small operations classified as retirement home/limited access banking locations, back offices, or executive suites.

The Corporation believes that its owned and leased facilities are suitable and adequate for its business needs. For additional information relating to properties and lease commitments, refer to Note 7 – Buildings and Equipment and Note 8 – Lease Commitments on pages 82—83 of the Corporation’s Annual Report to Stockholders for the year ended December 31, 2009, which information is incorporated herein by reference.

Item 3—Legal Proceedings

In the normal course of business, the Corporation and its subsidiaries are routinely defendants in or parties to a number of pending and threatened legal actions, including, but not limited to, actions brought on behalf of various claimants or classes of claimants, regulatory matters, employment matters, and challenges from tax authorities regarding the amount of taxes due. In certain of these actions and proceedings, claims for substantial monetary damages or adjustments to recorded tax liabilities are asserted. 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.

 

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As part of its audit of federal tax returns filed from 1997 – 2004, the Internal Revenue Service (IRS) challenged the Corporation’s tax position with respect to certain structured leasing transactions and proposed to disallow certain tax deductions and assess related interest and penalties. In September 2009, the Corporation reached a settlement agreement with the IRS with respect to certain of these transactions, resulting in the acceleration of $88.6 million in tax payments to the IRS. The Corporation anticipates that the IRS will continue to disallow deductions relating to the remaining challenged leases and possibly include other lease transactions with similar characteristics as part of its audit of tax returns filed after 2004. The Corporation believes 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 will continue to vigorously defend its position on the tax treatment of its structured leasing transactions.

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 Corporation’s 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.

A number of participants in our securities lending program, which is associated with the Corporation’s asset servicing business, have commenced either individual lawsuits or putative class actions in which they claim, among other things, that we failed to exercise prudence in the investment management of the collateral received from the borrowers of the securities, resulting in losses that they seek to recover. The cases assert various contractual, statutory and common law claims, including claims for breach of fiduciary duty under common law and under ERISA.

Item 4—Submission of Matters to a Vote of Security Holders

None.

 

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PART II

Item 5—Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The information called for by Item 5(a) relating to market price, dividend and related stockholder information is incorporated herein by reference to the section of the Consolidated Financial Statistics titled “Common Stock Dividend and Market Price” on page 120 of the Corporation’s Annual Report to Stockholders for the year ended December 31, 2009.

Information regarding dividend restrictions of the Corporation’s banking subsidiaries is incorporated herein by reference to Note 28 – Restrictions on Subsidiary Dividends and Loans or Advances on pages 106 – 107 of the Corporation’s Annual Report to Stockholders for the year ended December 31, 2009.

The following table shows certain information relating to the Corporation’s purchases of common stock for the three months ended December 31, 2009 pursuant to the Corporation’s share buyback program:

 

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

October 1 – 31, 2009

   32,623    $ 53.54    32,623   

November 1 – 30, 2009

   2,662      50.60    2,662   

December 1 – 31, 2009

   3,540      48.27    3,540   
                     

Total (Fourth Quarter)

   38,825    $ 52.86    38,825    7,310,542
                     

 

(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 Corporation’s current stock buyback program, announced October 27, 2006, authorizes the purchase of up to 12.0 million shares of the Corporation’s common stock. The program has no fixed expiration date.

Item 6—Selected Financial Data

The information called for by this item is incorporated herein by reference to the table titled “Summary of Selected Consolidated Financial Data” on page 22 of the Corporation’s Annual Report to Stockholders for the year ended December 31, 2009.

Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations

The information called for by this item is incorporated herein by reference to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on pages 22 through 65 of the Corporation’s Annual Report to Stockholders for the year ended December 31, 2009.

Item 7A—Quantitative and Qualitative Disclosures About Market Risk

The information called for by this item is incorporated herein by reference to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on pages 59 through 62 of the Corporation’s Annual Report to Stockholders for the year ended December 31, 2009.

 

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Item 8—Financial Statements and Supplementary Data

The following financial statements of the Corporation and its subsidiaries included in the Corporation’s Annual Report to Stockholders for the year ended December 31, 2009, are incorporated herein by reference.

 

For Northern Trust Corporation and Subsidiaries:

   2009
Annual Report
Page(s)

Consolidated Balance Sheet—December 31, 2009 and 2008

   67

Consolidated Statement of Income—Years Ended December 31, 2009, 2008, and 2007

   68

Consolidated Statement of Comprehensive Income—Years Ended December 31, 2009, 2008, and 2007

   68

Consolidated Statement of Changes in Stockholders’ Equity—Years Ended December 31, 2009, 2008, and 2007

   69

Consolidated Statement of Cash Flows—Years Ended December 31, 2009, 2008, and 2007

   70

For Northern Trust Corporation (Corporation only):

  

Condensed Balance Sheet—December 31, 2009 and 2008

   115

Condensed Statement of Income—Years Ended December 31, 2009, 2008, and 2007

   115

Consolidated Statement of Comprehensive Income—Years Ended December 31, 2009, 2008, and 2007

   68

Consolidated Statement of Changes in Stockholders’ Equity—Years Ended December 31, 2009, 2008, and 2007

   69

Condensed Statement of Cash Flows—Years Ended December 31, 2009, 2008, and 2007

   116
Notes to Consolidated Financial Statements    71 - 116
Report of Independent Registered Public Accounting Firm    117

The section titled “Quarterly Financial Data” on page 120 of the Corporation’s Annual Report to Stockholders for the year ended December 31, 2009, is incorporated herein by reference.

Item 9—Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A—Controls and Procedures

The Corporation’s management, with the participation of the Corporation’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Corporation’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under 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 Corporation’s 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 Corporation’s periodic filings under the Exchange Act. There have been no changes in the Corporation’s internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15 and 15d-15 under the Exchange Act during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

The information called for by Item 9A relating to the report of management on the Corporation’s internal control over financial reporting and the attestation report of the Corporation’s independent registered public accounting firm is incorporated herein by reference to pages 65 and 66 of the Corporation’s Annual Report to Stockholders for the year ended December 31, 2009.

Item 9B—Other Information

Not applicable.

 

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PART III

Item 10—Directors, Executive Officers and Corporate Governance

The information called for by Item 10 relating to Directors and Nominees for election to the Board of Directors is incorporated herein by reference to the “Election of Directors” and “Information about the Nominees for Director” sections of the Corporation’s definitive 2010 Notice and Proxy Statement for the Annual Meeting of Stockholders to be held April 20, 2010. The information called for by Item 10 relating to Executive Officers is set forth in Part I of this Annual Report on Form 10-K.

The information called for by Item 10 relating to Regulation S-K, Item 405 disclosure of delinquent Form 3, 4 or 5 filers is incorporated by reference to the “Security Ownership of the Board and Management – Section 16(a) Beneficial Ownership Reporting Compliance” section of the Corporation’s definitive 2010 Notice and Proxy Statement for the Annual Meeting of Stockholders to be held April 20, 2010.

The information called for by Item 10 relating to Regulation S-K, Item 406 disclosure regarding the Corporation’s code of ethics applicable to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions is incorporated by reference to the “Corporate Governance – Code of Business Conduct and Ethics” section of the Corporation’s definitive 2010 Notice and Proxy Statement for the Annual Meeting of Stockholders to be held April 20, 2010.

The information called for by Item 10 relating to Regulation S-K, Item 407(c)(3) disclosure of procedures by which security holders may recommend nominees to the Corporation’s board of directors is incorporated by reference to the “Corporate Governance – Director Nominations and Qualifications” section of the Corporation’s definitive 2010 Notice and Proxy Statement for the Annual Meeting of Stockholders to be held April 20, 2010. The information called for by Item 10 relating to Regulation S-K, Item 407(d)(4) and (d)(5) disclosure of the Corporation’s audit committee financial experts and identification of the Corporation’s audit committee is incorporated by reference to the “Board and Board Committee Information – Audit Committee” section of the Corporation’s definitive 2010 Notice and Proxy Statement for the Annual Meeting of Stockholders to be held April 20, 2010.

Item 11—Executive Compensation

The information called for by this item is incorporated herein by reference to the following sections of the Corporation’s definitive 2010 Notice and Proxy Statement for the Annual Meeting of Stockholders to be held April 20, 2010: (a) the “Executive Compensation—Compensation and Benefits Committee Report” section, (b) the “Corporate Governance – Compensation Committee Interlocks and Insider Participation” section, and (c) the “Summary Compensation Table,” “Grants of Plan-Based Awards,” “Outstanding Equity Awards at Fiscal Year-End,” “Option Exercises and Stock Vested,” “Pension Benefits,” “Potential Payments upon Termination of Employment or a Change in Control,” and “Director Compensation” subsections of the “Compensation and Discussion Analysis” section.

Item 12—Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information called for by this item is incorporated herein by reference to the “Security Ownership of the Board and Management,” “Security Ownership of Certain Beneficial Owners,” and “Equity Compensation Plan Information” sections of the Corporation’s definitive 2010 Notice and Proxy Statement for the Annual Meeting of Stockholders to be held April 20, 2010. From time to time members of senior management and other executives of the Corporation may enter into stock trading plans under Rule 10b5-1, including plans that provide for the sale of Corporation stock. The Corporation undertakes no obligation to disclose the existence of any particular plan or any change, termination or expiration of any Rule 10b5-1 plan.

Item 13—Certain Relationships and Related Transactions, and Director Independence

The information called for by this item is incorporated herein by reference to the “Corporate Governance – Director Independence” and the “Corporate Governance – Related Person Transaction Policy” sections of the Corporation’s definitive 2009 Notice and Proxy Statement for the Annual Meeting of Stockholders to be held April 20, 2010.

Item 14—Principal Accountant Fees and Services

The information called for by this item is incorporated herein by reference to the “Ratification of Independent Registered Public Accounting Firm – Fees of Independent Public Accounting Firm” and “Ratification of Independent Registered Public Accounting Firm – Pre-Approval Policies and Procedures of the Audit Committee” sections of the Corporation’s definitive 2010 Notice and Proxy Statement for the Annual Meeting of Stockholders to be held April 20, 2010.

 

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PART IV

Item 15—Exhibits and Financial Statement Schedules

Item 15(a)(1) and (2)—Northern Trust Corporation and Subsidiaries List of Financial Statements and Financial Statement Schedules

The following financial information is set forth in Item 1 for informational purposes only:

Financial Information of The Northern Trust Company (Bank only):

Unaudited Consolidated Balance Sheet—December 31, 2009 and 2008.

Unaudited Consolidated Statement of Income—Years Ended December 31, 2009, 2008, and 2007.

The following consolidated financial statements of the Corporation and its subsidiaries are incorporated by reference into Item 8 from the Corporation’s Annual Report to Stockholders for the year ended December 31, 2009:

Consolidated Financial Statements of Northern Trust Corporation and Subsidiaries:

Consolidated Balance Sheet—December 31, 2009 and 2008.

Consolidated Statement of Income—Years Ended December 31, 2009, 2008, and 2007.

Consolidated Statement of Comprehensive Income—Years Ended December 31, 2009, 2008, and 2007.

Consolidated Statement of Changes in Stockholders’ Equity—Years Ended December 31, 2009, 2008, and 2007.

Consolidated Statement of Cash Flows—Years Ended December 31, 2009, 2008, and 2007.

The following financial information is incorporated by reference into Item 8 from the Corporation’s Annual Report to Stockholders for the year ended December 31, 2009:

Financial Statements of Northern Trust Corporation (Corporation only):

Condensed Balance Sheet—December 31, 2009 and 2008.

Condensed Statement of Income—Years Ended December 31, 2009, 2008, and 2007.

Consolidated Statement of Comprehensive Income—Years Ended December 31, 2009, 2008, and 2007.

Consolidated Statement of Changes in Stockholders’ Equity—Years Ended December 31, 2009, 2008, and 2007.

Condensed Statement of Cash Flows—Years Ended December 31, 2009, 2008, and 2007.

The Notes to Consolidated Financial Statements as of December 31, 2009 incorporated by reference into Item 8 from the Corporation’s Annual Report to Stockholders for the year ended December 31, 2009, pertain to the Bank only information, consolidated financial statements and Corporation only information listed above.

The Report of Independent Registered Public Accounting Firm incorporated by reference into Item 8 from the Corporation’s Annual Report to Stockholders for the year ended December 31, 2009 pertains to the consolidated financial statements and Corporation only information listed above.

Financial statement schedules have been omitted for the reason that they are not required or are not applicable.

Item 15(a)(3)—Exhibits

The exhibits listed on the Exhibit Index beginning on page 42 of this Annual Report on Form 10-K are filed herewith or are incorporated herein by reference to other filings.

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: February 26, 2010

 

Northern Trust Corporation
(Registrant)
By:  

/s/ Frederick H. Waddell

  Frederick H. Waddell
 

Chairman, President and

Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.

 

Signature

     

Title

/s/ Frederick H. Waddell

    Chairman, President and Chief Executive Officer
Frederick H. Waddell    

/s/ William L. Morrison

    Executive Vice President and Chief Financial Officer
William L. Morrison    

/s/ Aileen B. Blake

    Executive Vice President and Controller
Aileen B. Blake     (Chief Accounting Officer)

 

Frederick H. Waddell

   Chairman and Director   )        

Linda Walker Bynoe

   Director   )        

Nicholas D. Chabraja

   Director   )        

Susan Crown

   Director   )        

Dipak C. Jain

   Director   )        

Arthur L. Kelly

   Director   )      By   

/s/ Kelly R. Welsh

Robert W. Lane

   Director   )         Kelly R. Welsh

Robert C. McCormack

   Director   )         Attorney-in-Fact

Edward J. Mooney

   Director   )        

John W. Rowe

   Director   )        

Harold B. Smith

   Director   )        

William D. Smithburg

   Director   )        

Enrique J. Sosa

   Director   )        

Charles A. Tribbett III

   Director   )        
             Date: February 26, 2010

 

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EXHIBIT INDEX

 

Exhibit
Number

 

Description

   Exhibit
Incorporated
by Reference to
Exhibit of Same
Name in Prior
Filing*
or Filed Herewith
(3)   Articles of Incorporation and By-laws   
  (i)    Restated Certificate of Incorporation of Northern Trust Corporation as amended to date    (28)
  (ii)    By-laws as amended to date    (44)
(4)   Instruments Defining the Rights of Security Holders   
  (i)    Form of The Northern Trust Company’s Global Senior Bank Note (Fixed Rate)    (13)
  (ii)    Form of The Northern Trust Company’s Global Senior Bank Note (Floating Rate)    (16)
  (iii)    Form of The Northern Trust Company’s Global Subordinated Bank Note (Fixed Rate)    (15)
  (iv)    Form of The Northern Trust Company’s Global Subordinated Bank Note (Floating Rate)    (16)
  (v)    Junior Subordinated Indenture, dated as of January 1, 1997, between Northern Trust Corporation and The First National Bank of Chicago, as Debenture Trustee    (3)
  (vi)    Amended Certificate of Designations of Series A Junior Participating Preferred Stock dated October 29, 1999    (11)
  (vii)    Fiscal Agency Agreement dated March 11, 2005 by and among The Northern Trust Company as Issuer, Kredietbank S.A. Luxembourgeoise as Fiscal Agent, and Kredietbank S.A. Luxembourgeoise, and Brown Shipley & Co. Limited as Paying Agents    (25)
  (viii)    Indenture dated as of August 15, 2006 between Northern Trust Corporation and JPMorgan Chase Bank, N.A., as Trustee    (30)
  (ix)    Form of 5.30% Note due 2011    (30)
  (x)    Form of 5.20% Note due 2012    (34)
  (xi)    Form of 5.50% Note due 2013    (37)
  (xii)    Form of 4.625% Note due 2014    (41)
(10)   Material Contracts   
  (i)    Northern Trust Employee Stock Ownership Plan as amended and restated effective January 1, 2002    (14)
    

(1)    Amendment Number One dated as of August 21, 2002

   (15)
    

(2)    Amendment Number Two dated as of November 19, 2002

   (16)
    

(3)    Amendment Number Three dated as of November 19, 2002

   (16)
    

(4)    Amendment Number Four dated as of January 21, 2003

   (17)
    

(5)    Amendment Number Five dated as of April 29, 2003

   (18)
    

(6)    Amendment Number Six effective as of June 15, 2003

   (19)
    

(7)    Amendment Number Seven effective as of June 15, 2003

   (19)
    

(8)    Amendment Number Eight dated December 22, 2003

   (20)
    

(9)    Amendment Number Nine dated December 22, 2003

   (20)
    

(10)  Amendment Number Ten dated March 29, 2004

   (21)
  (ii)    Trust Agreement between The Northern Trust Company and Citizens and Southern Trust Company (Georgia), N.A., (predecessor of NationsBank, which, effective January 1, 1998, was succeeded by U.S. Trust Company N.A.) dated January 26, 1989    (1)
    

(1)    Amendment dated February 21, 1995

   (5)
    

(2)    Amendment dated January 2, 1998

   (6)
    

(3)    Amendment dated February 11, 2003

   (17)
  (iii)    Implementation Agreement dated June 26, 1996 between the Registrant, The Northern Trust Company, the ESOP Trust, and NationsBank (South) N.A. as Trustee (effective January 1, 1998, U.S. Trust Company, N.A. as successor Trustee)    (2)
  (iv)    Deferred Compensation Plans Trust Agreement dated May 11, 1998 between Northern Trust Corporation and Harris Trust and Savings Bank as Trustee (which, effective August 31, 1999, was succeeded by U.S. Trust Company, N.A.) regarding the Supplemental Employee Stock Ownership Plan for Employees of The Northern Trust Company, the Supplemental Thrift-Incentive Plan for Employees of The Northern Trust Company, the Supplemental Pension Plan for Employees of The Northern Trust Company, and the Northern Trust Corporation Deferred Compensation Plan**    (7)

 

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Exhibit
Number

 

Description

   Exhibit
Incorporated
by Reference to
Exhibit of Same
Name in Prior
Filing*
or Filed Herewith
    

(1)    Amendment dated August 31, 1999

   (10)
    

(2)    Amendment dated as of May 16, 2000

   (12)
  (v)    Northern Trust Corporation Supplemental Employee Stock Ownership Plan (As Amended and Restated Effective as of January 1, 2008)**    (39)
  (vi)    Northern Trust Corporation Supplemental Thrift-Incentive Plan (As Amended and Restated Effective as of January 1, 2008)**    (39)
    

(1)    Amendment Number One dated October 29, 2009 and effective January 1, 2010

   Filed Herewith
  (vii)    Northern Trust Corporation Supplemental Pension Plan (As Amended and Restated Effective January 1, 2009) **    (39)
  (viii)    Northern Trust Corporation Deferred Compensation Plan (As Amended and Restated Effective as of January 1, 2008)**    (39)
  (ix)    Amended 1992 Incentive Stock Plan**    (4)
    

(1)    Amendment dated January 20, 1998

   (9)
    

(2)    Amendment dated September 15, 1998

   (9)
    

(3)    Amendment dated May 18, 1999

   (9)
    

(4)    Amendment dated September 25, 2001

   (13)
  (x)    Amended and Restated Northern Trust Corporation 2002 Stock Plan (Effective as of
January 1, 2008)**
   (39)
    

(1)    Form of Stock Option Terms and Conditions**

   (40)
    

(2)    Form of Stock Award Agreement**

   (23)
    

(3)    Form of Stock Unit Award Terms and Conditions**

   (40)
    

(4)    Form of Addendum to Award Agreement**

   (23)
    

(5)    Form of Non-Solicitation Agreement and Confidentiality Agreement**

   (40)
    

(6)    Form of Director Stock Agreement**

   (39)
    

(7)    Form of Director Prorated Stock Agreement**

   (39)
    

(8)    Form of Performance Stock Unit Award

   (35)
    

(9)    2010 Form of Stock Option Terms and Conditions**

   Filed Herewith
    

(10)  2010 Form of Restricted Stock Unit Terms and Conditions**

   Filed Herewith
    

(11)  2010 Form of Cash-Settled Stock Unit Award**

   Filed Herewith
    

(12)  2010 Form of Director Stock Agreement**

   Filed Herewith
    

(13)  2010 Form of Prorated Director Stock Agreement**

   Filed Herewith
  (xi)    Northern Trust Corporation Management Performance Plan (as amended and restated effective July 15, 2008)**    (38)
  (xii)    Northern Trust Corporation 1997 Stock Plan for Non-Employee Directors**    (8)
  (xiii)    Northern Trust Corporation 1997 Deferred Compensation Plan for Non-Employee Directors As Amended and Restated (Effective as of January 1, 2008)**    (39)
    

(1)    First Amendment dated October 20, 2009

   Filed Herewith
  (xiv)    Form of Employment Security Agreement (Tier 1)**    (33)
  (xv)    Form of Employment Security Agreement (Tier 2)**    (33)
  (xvi)    Amended and Restated Trust Agreement of NTC Capital I, dated as of January 16, 1997, among Northern Trust Corporation, as Depositor, The First National Bank of Chicago, as Property Trustee, First Chicago Delaware, Inc., as Delaware Trustee, and the Administrative Trustees named therein    (3)
  (xvii)    Guarantee Agreement, dated as of January 16, 1997, relating to NTC Capital I, by and between Northern Trust Corporation, as Guarantor, and The First National Bank of Chicago, as Guarantee Trustee    (3)
  (xviii)    Amended and Restated Trust Agreement of NTC Capital II, dated as of April 25, 1997, among Northern Trust Corporation, as Depositor, The First National Bank of Chicago, as Property Trustee, First Chicago Delaware, Inc., as Delaware Trustee, and the Administrative Trustees named therein    (4)
  (xix)    Guarantee Agreement, dated as of April 25, 1997, relating to NTC Capital II, by and between Northern Trust Corporation, as Guarantor, and The First National Bank of Chicago, as Guarantee Trustee    (4)

 

43


Table of Contents

Exhibit
Number

 

Description

   Exhibit
Incorporated
by Reference to
Exhibit of Same
Name in Prior
Filing*
or Filed Herewith
  (xx)    Item Processing and Lockbox Service Agreement between Fiserv Solutions, Inc. and The Northern Trust Company dated as of October 26, 2007    (35)
  (xxi)    Northern Trust Corporation Severance Plan, As Amended and Restated Effective January 1, 2009**    (40)
  (xxii)    Northern Partners Incentive Plans   
    

(1)    North American Plan (As Amended and Restated Effective as of January 1, 2009)**

   (42)
    

(2)    EMEA Plan (As Amended and Restated Effective as of January 1, 2009)**

   (42)
    

(3)    APAC Plan (As Amended and Restated Effective as of January 1, 2009)**

   (42)
  (xxiii)    Amended and Restated Northern Trust Company Thrift-Incentive Plan effective January 1, 2005**    (22)
    

(1)    Amendment Number One dated August 19, 2005

   (26)
    

(2)    Amendment Number Two dated November 21, 2005

   (27)
    

(3)    Amendment Number Three dated June 6, 2006

   (29)
    

(4)    Amendment Number Four dated November 29, 2006

   (31)
    

(5)    Amendment Number Five dated May 29, 2007

   (32)
    

(6)    Amendment Number Six dated December 18, 2007

   (35)
    

(7)    Amendment Number Seven dated June 2, 2008

   (36)
    

(8)    Amendment Number Eight dated October 28, 2008

   (39)
    

(9)    Amendment Number Nine dated December 16, 2008

   (39)
    

(10)  Amendment Number Ten dated October 29, 2009 and effective January 1, 2010

   Filed Herewith
    

(11)  Amendment Number Eleven dated December 17, 2009

   Filed Herewith
  (xxiv)    Share Purchase Agreement dated November 22, 2004 among Baring Asset Management Holdings Limited, ING Bank NV, The Northern Trust International Banking Corporation, and The Northern Trust Company (portions of this exhibit have been omitted pursuant to a request for confidential treatment)    (24)
    

(1)    Deed of Novation and Amendment dated March 31, 2005

   (25)
  (xxv)    Northern Trust Corporation Executive Financial Consulting and Tax Preparation Services Plan (As Amended and Restated Effective January 1, 2008)    (35)
  (xxvi)    Letter Agreement with William A. Osborn, dated October 20, 2009    Filed Herewith
(13)   2009 Annual Report to Stockholders    Filed Herewith
(14)   Code of Ethics    (43)
(21)   Subsidiaries of the Registrant    Filed Herewith
(23)   Consent of Independent Registered Public Accounting Firm    Filed Herewith
(24)   Powers of Attorney    Filed Herewith
(31)   Rule 13a-14(a)/15d-14(a) Certification of CEO and CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002    Filed Herewith
(32)   Certification 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    Filed Herewith
(99)   Corporate Governance Guidelines    (44)

 

* Prior Filings (File No. 0-5965)
(1) Form 8-K dated January 26, 1989
(2) Quarterly Report on Form 10-Q for the quarter ended June 30, 1996
(3) Form 8-K dated January 16, 1997
(4) Quarterly Report on Form 10-Q for the quarter ended March 31, 1997

 

44


Table of Contents
(5) Annual Report on Form 10-K for the year ended December 31, 1997
(6) Quarterly Report on Form 10-Q for the quarter ended March 31, 1998
(7) Quarterly Report on Form 10-Q for the quarter ended June 30, 1998
(8) Annual Report on Form 10-K for the year ended December 31, 1998
(9) Quarterly Report on Form 10-Q for the quarter ended June 30, 1999
(10) Quarterly Report on Form 10-Q for the quarter ended September 30, 1999
(11) Annual Report on Form 10-K for the year ended December 31, 1999
(12) Quarterly Report on Form 10-Q for the quarter ended June 30, 2000
(13) Quarterly Report on Form 10-Q for the quarter ended September 30, 2001
(14) Annual Report on Form 10-K for the year ended December 31, 2001
(15) Quarterly Report on Form 10-Q for the quarter ended September 30, 2002
(16) Annual Report on Form 10-K for the year ended December 31, 2002
(17) Quarterly Report on Form 10-Q for the quarter ended March 31, 2003
(18) Quarterly Report on Form 10-Q for the quarter ended June 30, 2003
(19) Quarterly Report on Form 10-Q for the quarter ended September 30, 2003
(20) Annual Report on Form 10-K for the year ended December 31, 2003
(21) Quarterly Report on Form 10-Q for the quarter ended March 31, 2004
(22) Form 8-K dated December 22, 2004
(23) Form 8-K dated February 15, 2005
(24) Annual Report on Form 10-K for the year ended December 31, 2004
(25) Quarterly Report on Form 10-Q for the quarter ended March 31, 2005
(26) Quarterly Report on Form 10-Q for the quarter ended September 30, 2005
(27) Annual Report on Form 10-K for the year ended December 31, 2005
(28) Form 8-K dated April 18, 2006
(29) Quarterly Report on Form 10-Q for the quarter ended June 30, 2006
(30) Form 8-K dated August 23, 2006
(31) Annual Report on Form 10-K for the year ended December 31, 2006
(32) Quarterly Report on Form 10-Q for the quarter ended June 30, 2007
(33) Quarterly Report on Form 10-Q for the quarter ended September 30, 2007
(34) Form 8-K dated November 6, 2007
(35) Annual Report on Form 10-K for the year ended December 31, 2007
(36) Quarterly Report on Form 10-Q for the quarter ended June 30, 2008
(37) Form 8-K dated August 6, 2008
(38) Quarterly Report on Form 10-Q for the quarter ended September 30, 2008
(39) Annual Report on Form 10-K for the year ended December 31, 2008
(40) Quarterly Report on Form 10-Q for the quarter ended March 31, 2009
(41) Form 8-K dated April 28, 2009
(42) Quarterly Report on Form 10-Q for the quarter ended September 30, 2009
(43) Form 8-K dated November 10, 2009
(44) Form 8-K dated February 17, 2010

 

** Denotes management contract or compensatory plan or arrangement

 

45


Table of Contents

Upon written request to Rose A. Ellis, Secretary, Northern Trust Corporation, 50 South LaSalle Street, Chicago, Illinois 60603, copies of exhibits listed above are available to Northern Trust Corporation stockholders by specifically identifying each exhibit desired in the request. In addition, prior filings in which the exhibits listed above are included are available free of charge through our website www.northerntrust.com, if the filings were made on or after May 1, 1996. Information contained on the web site is not part of this report.

Pursuant to Item 601(b)(4)(iii) of Regulation S-K, the Corporation hereby agrees to furnish the SEC, upon request, any instrument defining the rights of holders of long-term debt of the Corporation not filed as an exhibit herein. No such instrument authorizes long-term debt securities in excess of 10% of the total assets of the Corporation and its subsidiaries on a consolidated basis.

 

46

Exhibit (10)(vi)(1)

AMENDMENT NUMBER ONE TO THE

NORTHERN TRUST CORPORATION

SUPPLEMENTAL THRIFT-INCENTIVE PLAN

(As Amended and Restated Effective as of January 1, 2008)

WHEREAS, the Northern Trust Corporation (the “Corporation”) maintains the Northern Trust Corporation Supplemental Thrift-Incentive Plan, As Amended and Restated effective as of January 1, 2008 (the “Plan”); and

WHEREAS, amendment of the Plan is now considered desirable;

NOW, THEREFORE, by virtue and in exercise of the amending power reserved to the Corporation under section 7.1 of the Plan, and pursuant to the authority delegated to the undersigned officer by resolutions of the Compensation and Benefits Committee of the Board of Directors of the Corporation dated October 20, 2009, the Plan is hereby amended, effective January 1, 2010, as follows:

 

1. To delete Section 1.17 of the Plan in its entirety and to substitute the following therefor:

 

  “1.17 “Qualified Plan Basic Profit Sharing Contribution” means the basic profit sharing contribution made by the Company with respect to a Participant under and in accordance with the terms of the Qualified Plan for any Plan Year beginning on or after January 1, 2005 and prior to January 1, 2010.”

 

2. To delete Section 1.26 of the Plan in its entirety and to substitute the following therefor:

 

  “1.26 “Supplemental Basic Profit Sharing Contribution” means the basic profit sharing contribution, if any, made by the Company for the benefit of a Participant under and in accordance with the terms of the Plan for any Plan Year beginning on or after January 1, 2005 and prior to January 1, 2010.”

 

3. To delete Section 2.1(a)(ii) of the Plan in its entirety and to substitute the following therefor:

 

  “(ii) An employee of the Company (A) who is eligible to participate in the Qualified Plan in a Plan Year beginning on or after January 1, 2005 and prior to January 1, 2010 and (B) for whom the Company makes a Supplemental Basic Profit Sharing Contribution to his or her Supplemental Basic Profit Sharing Contribution Account pursuant to Section 3.4 of the Plan shall be a Participant in the Plan for purposes of his or her Supplemental Basic Profit Sharing Contribution Account.”

 

4. To delete the period at the end of the first paragraph of Section 3.3 of the Plan, to substitute a comma therefor and to add the following after the comma:

“excluding any contingent Matching Contribution formula and provisions related to any contingent Matching Contribution formula set forth in the Qualified Plan.”


5. To delete Section 3.4 of the Plan in its entirety and to substitute the following therefor:

Supplemental Basic Profit Sharing Contributions . The Company shall make a Supplemental Basic Profit Sharing Contribution on behalf of a Participant for any Plan Year beginning on or after January 1, 2005 and prior to January 1, 2010, based upon the Participant’s Salary that does not exceed the Code Section 401(a)(17) limitation for such Plan Year, and only to the extent that all or part of the Qualified Plan Basic Profit Sharing Contribution cannot be made for such Plan Year due to any limitation imposed by Code Section 415 for such Plan Year. Such Supplemental Basic Profit Sharing Contribution shall be made in accordance with the basic profit sharing contribution formula and provisions set forth in the Qualified Plan. Supplemental Basic Profit Sharing Contributions shall be discontinued for Plan Years beginning on and after January 1, 2010.

The Supplemental Basic Profit Sharing Contribution made for the benefit of a Participant for any Plan Year beginning on or after January 1, 2005 and prior to January 1, 2010 shall be allocated to a Supplemental Basic Profit Sharing Contribution Account maintained under the Plan in the name of such Participant at such time(s) as the Committee shall determine, but in any event as of the last day of any such Plan Year.”

IN WITNESS WHEREOF , the Corporation has caused this amendment to be executed on its behalf this 29th day of October, 2009, effective January 1, 2010.

 

THE NORTHERN TRUST COMPANY

By:  

/s/ Timothy P. Moen

Name:   Timothy P. Moen
Title:   Executive Vice President and
  Human Resources Department Head

 

- 2 -

Exhibit (10)(x)(9)

TERMS AND CONDITIONS

2010 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,

– Your children (in equal amounts); if none, then,

 

-1-


– 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 Company’s 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 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.

 

   

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.


5. Exercise of Options .

 

   

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.

 

   

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 Corporation’s 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 Corporation’s 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 another’s 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 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; 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 Corporation’s 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 Corporation’s 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.

 

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 Corporation’s 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 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.

Exhibit (10)(x)(10)

TERMS AND CONDITIONS

2010 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 Participant’s 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 Participant’s 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 9 of these Terms and Conditions, or (b) except as described in Paragraphs 5, 6, and 7 and of these Terms and Conditions, the Participant’s 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 9, 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 Participant’s employment with the Corporation and 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

 

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the Participant’s 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 Participant’s 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 Participant’s death, Disability, Retirement or termination of employment, subject to the following:

 

  (b) If the Participant’s death, Retirement or Disability occurs prior to the end of the Vesting Period, or, if prior to the end of the Vesting Period, the Participant’s 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 Participant’s Stock Units that were unvested immediately prior to the date of the Participant’s 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 Participant’s 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 Participant’s 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 9 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 Participant’s 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 Company’s 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 .

 

  (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 individual’s 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.

 

  (c)

In the case of Stock Units that become vested prior to the expiration of the Vesting Period upon a Participant’s 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 Participant’s beneficiary as soon as practicable, but no later than 90 days, after the Participant’s 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 Participant’s beneficiary shall be one of the following persons determined in the order provided below:

– The Participant’s spouse; if none, then,

– The Participant’s children (in equal amounts); if none, then,

– The Participant’s parents (in equal amounts); if none, then,

– The Participant’s brothers and sisters (in equal amounts); if none, then,

– The Participant’s estate.

In the event of the Participant’s death after the expiration of the Vesting Period but prior to full distribution of the Stock Units pursuant to these Terms and Conditions, the Participant’s Stock Units shall be distributed, within the period described in clause (a) above, to the Participant’s 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 Participant’s Stock Unit Account.

 

9. Restricted Activity . Notwithstanding anything to the contrary in these Terms and Conditions, the Participant’s 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 Participant’s 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 Participant’s own or another’s 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 Participant’s 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; 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 Participant’s 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 Participant’s violation of this Paragraph 9. In addition, any failure by the Participant to comply with this Paragraph 9 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 at any time following, the date of the Participant’s 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 Corporation’s 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.

10. 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.

11. Adjustment . The Stock Units provided herein are subject to adjustment in accordance with the provisions of Section 11 of the Plan.

12. 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.

13. Nontransferability . No interest hereunder of the Participant is transferable except as provided in the Stock Unit Agreement.

14. 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 Corporation’s 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.

15. 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.

16. No Rights as Shareholder . Except as provided herein, the Participant will have no rights as a shareholder with respect to the Stock Units.

17. 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.

18. 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 18, 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 Participant’s Beneficiary or to pay any Dividend Equivalents.


19. 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, 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 Corporation’s 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.

Exhibit (10)(x)(11)

TERMS AND CONDITIONS

2010 CASH-SETTLED 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 cash 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 Participant’s 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 Participant’s 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 9 of these Terms and Conditions, or (b) except as described in Paragraphs 5, 6, and 7 and of these Terms and Conditions, the Participant’s 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 9, 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 Participant’s employment with the Corporation and 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 Participant’s Stock Unit Account that have not yet vested and do not become vested

 

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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 Participant’s 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 Participant’s death, Disability, Retirement or termination of employment, subject to the following:

 

  (b) If the Participant’s death, Retirement or Disability occurs prior to the end of the Vesting Period, or, if prior to the end of the Vesting Period, the Participant’s 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 Participant’s Stock Units that were unvested immediately prior to the date of the Participant’s 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 Participant’s 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 Participant’s 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 9 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 Participant’s 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

 

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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 Company’s 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 .

 

  (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 individual’s 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.

 

  (c)

In the case of Stock Units that become vested prior to the expiration of the Vesting Period upon a Participant’s death pursuant to Paragraph 6(b), with the number of unvested Stock Units that become vested on death determined in

 

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accordance with Paragraph 6 of these Terms and Conditions, distribution shall be made to the Participant’s beneficiary as soon as practicable, but no later than 90 days, after the Participant’s 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 Participant’s beneficiary shall be one of the following persons determined in the order provided below:

– The Participant’s spouse; if none, then,

– The Participant’s children (in equal amounts); if none, then,

– The Participant’s parents (in equal amounts); if none, then,

– The Participant’s brothers and sisters (in equal amounts); if none, then,

– The Participant’s estate.

In the event of the Participant’s death after the expiration of the Vesting Period but prior to full distribution of the Stock Units pursuant to these Terms and Conditions, the Participant’s Stock Units shall be distributed, within the period described in clause (a) above, to the Participant’s 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 cash so that, pursuant to Paragraph 1 of these Terms and Conditions and this Paragraph 8, a Participant shall be entitled to receive, for each vested Stock Unit in the Participant’s Stock Unit Account to be distributed, cash in an amount equal to the Fair Market Value of one share of Common Stock, determined based on the Fair Market Value of a share of Common Stock as of the applicable vesting date of such Stock Unit.

 

9. Restricted Activity . Notwithstanding anything to the contrary in these Terms and Conditions, the Participant’s 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 Participant’s 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 Participant’s own or another’s 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 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 Participant’s 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; 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 Participant’s 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 Participant’s violation of this Paragraph 9. In addition, any failure by the Participant to comply with this Paragraph 9 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 at any time following, the date of the Participant’s 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 Corporation’s 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.

10. Adjustment . The Stock Units provided herein are subject to adjustment in accordance with the provisions of Section 11 of the Plan.

11. 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.

 

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12. Nontransferability . No interest hereunder of the Participant is transferable except as provided in the Stock Unit Agreement.

13. Withholding/Delivery of Shares . All distributions hereunder are subject to withholding by the Corporation for all applicable federal, state or local taxes.

14. 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.

15. No Rights as Shareholder . Except as provided herein, the Participant will have no rights as a shareholder with respect to the Stock Units.

16. 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.

17. 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 17, 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 Participant’s Beneficiary or to pay any Dividend Equivalents.

18. 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

 

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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, 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 Corporation’s 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.

 

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Exhibit (10)(x)(12)

FORM OF DIRECTOR STOCK AGREEMENT

UNDER THE AMENDED AND RESTATED

NORTHERN TRUST CORPORATION 2002 STOCK PLAN

This Agreement is entered into as of the     day of                     , 20    , between Northern Trust Corporation (“Northern”) and                             (“Participant”).

The Amended and Restated Northern Trust Corporation 2002 Stock Plan (“Plan”) provides in Section 10 of the Plan for the awarding of stock units (“Stock Units”) to participants, who may include directors of Northern who are not employees of the Corporation or its Subsidiaries (collectively, the “Corporation”), as approved by the Compensation and Benefits Committee (“Committee”) of the Board of Directors of Northern. Capitalized terms not defined in this Agreement shall have the meanings assigned to them in the Plan.

In the exercise of its discretion under the Plan, the Committee has determined that the Participant should participate in the Plan and receive an award of Stock Units under Section 10 of the Plan, and, accordingly, Northern and the Participant hereby agree as follows:

 

1. Grant . Northern hereby grants to the Participant an award of Stock Units equal in value to [$            ] as determined by the closing sale price of Northern’s Common Stock (as defined below) on the date of the 20    annual meeting of stockholders, subject to the terms and conditions of the Plan and this Agreement. A Stock Unit is the right, subject to the terms and conditions of the Plan and this Agreement, to receive a distribution of a share of common stock (“Common Stock”), pursuant to Paragraph 6 of this Agreement.

 

2. Stock Unit Account . Northern 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 6 of this Agreement.

 

3. Dividend Equivalents . Except as provided below in Paragraph 7 of this Agreement, upon the payment of any dividend on Common Stock occurring during the period preceding the distribution of the Participant’s Stock Unit award pursuant to Paragraph 6 of this Agreement, Northern 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 on the record date of the number of shares of Common Stock represented by the Stock Units in the Participant’s Stock Unit Account on that date (“Dividend Equivalents”).

 

4. Forfeiture . If the Participant incurs a Separation from Service, as defined in Paragraph 7(c) below prior to the vesting date set forth in Paragraph 5 of this Agreement, the Participant’s Stock Units shall be forfeited and revert to Northern, and Northern shall have no further obligation after such date to pay Dividend Equivalents pursuant to Paragraph 3 of this Agreement. Northern shall have no further obligation to the Participant under this Agreement with respect to such Stock Units.

 

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5. Vesting . The Participant shall become 100% vested in his Stock Units upon the date (the “vesting date”) that is the earliest to occur of (a) the date of the Corporation’s 20     Annual Meeting of Stockholders (the “regular vesting date”), (b) the date of the Participant’s death, or (c) the date of a Change in Control, provided that the Participant has not incurred a Separation from Service prior to the earliest of the foregoing three events.

 

6. Distribution . Except as provided below in Paragraph 7 of this Agreement,

 

  (a) Subject to Paragraph 6(b), if the Participant has become 100% vested in his Stock Units upon the regular vesting date, the Stock Units shall be distributed upon such regular vesting date, provided that the distribution shall be treated as made on such date if made within the period described in Treasury Regulation Section 1.409A-3(d), including without limitation the requirement that the Participant shall in no event have the right directly or indirectly to designate the taxable year of payment. Stock Units shall be distributed only in shares of Common Stock so that, pursuant to Paragraph 1 of this Agreement and this Paragraph 6, a Participant shall be entitled to receive one share of Common Stock for each Stock Unit in the Participant’s Stock Unit Account.

 

  (b) If a Participant’s service on the Board of Directors of Northern shall terminate by reason of death prior to the regular vesting date, all cash (as provided in Paragraph 7) or Common Stock then distributable hereunder with respect to the Participant shall be distributed to such individual, trustee, trust or other entity (“Beneficiary”) as the Participant shall have designated by an instrument in writing last filed with Northern prior to death, or in the absence of a designation, to the following persons in the order indicated below:

– The Participant’s spouse; if none, then,

– The Participant’s children (in equal amounts); if none, then,

– The Participant’s parents (in equal amounts); if none, then,

– The Participant’s brothers and sisters (in equal amounts); if none, then,

– The Participant’s estate.

Except as otherwise provided in Paragraph 7(c), such distribution shall be made on the date of death, provided that the distribution shall be treated as made on such date if made within the period described in Treasury Regulation Section 1.409A-3(d), including without limitation the requirement that neither the Participant (nor the Beneficiary) shall have the right directly or indirectly to designate the taxable year of payment.

 

  (c)

If the Participant dies on or after the regular vesting date, but prior to the distribution of all amounts to which the Participant is entitled hereunder, all cash or Common Stock then distributable hereunder with respect to the Participant shall be distributed to the Beneficiary designated by the Participant, or, if none, to the persons identified in clause (b) of this Paragraph 6, within the period

 

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described in clause (a) of this Paragraph 6, except as otherwise provided in Paragraph 7(c).

 

  (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. For purposes of this Paragraph 6(d) the Annual Meeting in 20    shall be deemed to occur upon the third Tuesday in April in that year.

 

7. Voluntary Deferral .

 

  (a) Subject to applicable law, receipt of the payment of all or any portion of the Stock Units shall be deferred until the date on which the Participant incurs a Separation from Service, as defined in clause (c) below, if the Participant has filed a deferral election, subject to and in accordance with the provisions of Paragraph 7(b), no later than the deadline described in Paragraph 7(b). Any such election shall likewise apply to the Dividend Equivalents payable with respect to such deferred Stock Units. Deferred Dividend Equivalents shall be credited to a cash account with respect to the Stock Units (“Cash Account”) maintained by Northern on its books in the name of the Participant. Until the entire balance of a Cash Account has been paid to the Participant or to the Participant’s Beneficiaries (as defined in Paragraph 6), such balance shall be adjusted on the last day of each calendar quarter to reflect accrued interest on such balance based on the rate of interest determined from time to time by the Committee.

 

  (b) A Participant’s election to defer receipt of the payment of all or any portion of the Stock Units granted hereunder and related Dividend Equivalents to the date of his or her Separation from Service, as defined in clause (c) below, shall be effective if it was made on a deferral election form provided by the Committee and completed and delivered to the Committee no later than the last day of the calendar year preceding the calendar year in which the grant hereunder is made. Such election, if made, became irrevocable upon December 31 of the calendar year completed and delivered to the Committee. Such election shall remain in effect for grants of Stock Units in subsequent calendar years and becomes irrevocable as of each December 31 with respect to Stock Units granted for services performed in the immediately following calendar year, until modified or revoked by the Participant by the completion and delivery to the Committee of a form provided by the Committee for such purpose, setting out such modification or revocation; any such modification or revocation shall be effective only for Stock Units granted to the Participant for services performed in calendar years beginning after the calendar year in which such modification or revocation is completed and delivered to the Committee and shall have no effect on the Stock Units granted hereunder.

 

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  (c)

The entire balance of deferred Stock Units in the Stock Unit Account and deferred Dividend Equivalents in the Cash Account shall be paid to the Participant or to the Beneficiaries of the Participant (i) in a single lump sum on the 10th business day following the date the Participant incurs a Separation from Service, as defined below, or (ii) in up to 10 annual installments beginning on the 10th business day following the date the Participant incurs a Separation from Service, as defined below, as irrevocably designated by the Participant in the applicable form described in clause (b) above. In the absence of a designation, the entire balance of deferred Stock Units in the Stock Unit Account and deferred Dividend Equivalents in the Cash Account shall be paid in a single lump sum on the 10 th business day following the date the Participant incurs a Separation from Service, as defined below. For purposes of this Agreement, the term “Separation from Service” shall mean the date on which the Participant dies or otherwise terminates his or her membership on the Board of Directors of Northern.

 

  (d) Deferred Stock Units in the Stock Unit Account shall be distributed only in shares of Common Stock. In the event of a single lump sum distribution in Common Stock, a certificate (or a non-certificated book entry) representing the number of full shares of Common Stock equal to the number of such Stock Units in the Stock Unit Account, registered in the name of the Participant or the Beneficiaries of the Participant, shall be distributed to the Participant or the Beneficiaries of the Participant, on the distribution date described in Paragraph 7(c) above. In the event of a distribution in Common Stock in up to 10 annual installments, a certificate (or a non-certificated book entry) representing the number of full shares of Common Stock equal to a fraction (the numerator of which shall be the number of Stock Units in the Stock Unit Account, and the denominator of which shall be the number of annual installments designated by the Participant), registered in the name of the Participant or the Beneficiaries of the Participant, shall be distributed to the Participant or the Beneficiaries of the Participant, on the distribution date described in Paragraph 7(c) above in each year of the installment period, provided that the number of shares in each of the installments may be rounded to avoid fractional shares and the effects of any such rounding shall be reflected in the last installment.

 

  (e) Deferred Dividend Equivalents in the Participant’s Cash Account shall be distributed in cash. In the event of a single lump sum distribution in cash, the entire balance of the Participant’s Cash Account shall be distributed to the Participant or the Beneficiaries of the Participant on the distribution date described in Paragraph 7(c) above. In the event of a distribution in cash in up to 10 annual installments, the balance of the Cash Account shall continue to accrue interest and shall be distributed to the Participant or the Beneficiaries of the Participant on the distribution date described in Paragraph 7(c) above in each year of the installment period in an amount equal to the then current balance in the Cash Account multiplied by a fraction, the numerator of which shall be one, and the denominator of which shall be the number of years remaining in the installment period.

 

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8. Delivery of Shares . Northern may delay the issuance or delivery of shares of Common Stock if Northern 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 Northern reasonably anticipates that such issuance or delivery will not cause such violation.

 

9. Adjustment . The Stock Units provided herein are subject to adjustment in accordance with the provisions of Section 11 of the Plan.

 

10. No Obligation to Reelect . Nothing in the Plan or this Agreement shall be deemed to create an obligation on the part of the Board of Directors to nominate the Participant for reelection by Northern’s stockholders or to fill any vacancy upon action of the Board of Directors.

 

11. Nontransferability . No interest hereunder of the Participant or any Beneficiary shall be assignable or transferable by voluntary or involuntary act or by operation of law other than by testamentary bequest or devise or the laws of descent or distribution, all rights hereunder shall be wholly unalienable and beyond the power of any person to anticipate or in any way create a lien or encumbrance thereon; and distribution shall be made only to (i) the Participant, (ii) the Participant’s personal representative in the event of the Participant’s adjudicated disability, or (iii) the Participant’s Beneficiaries in the event of the Participant’s death, upon his, her or their own personal receipts or endorsements. Any effort to exercise the powers herein denied shall be wholly ineffective and shall be grounds for termination by the Committee of all rights hereunder.

 

12. Withholding . In the event that federal, state or local taxes must be withheld from any distribution hereunder, (a) the Corporation shall deduct from any such distribution in cash the amount of such required withholding and, (b) 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, withholding obligations, if any, shall be satisfied from one of the following 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 the 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 Corporation’s minimum statutory withholding obligation, if any (based on minimum statutory withholding rates for Federal and state tax purposes, including payroll taxes, that are applicable to such taxable income).

 

13. 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.

 

14. No Rights as Shareholder . Except as provided herein, the Participant will have no rights as a shareholder with respect to the Stock Units.

 

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15. Interpretation . Any interpretation by the Committee of the terms and conditions of the Plan, this Agreement or any guidelines shall be final. This Agreement shall be construed under the laws of the State of Illinois without regard to the conflict of law provisions of any state. Capitalized terms not defined in this Agreement shall have the meanings assigned to them in the Plan.

 

16. Sole Agreement . This 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 this Agreement shall be binding on either party unless reduced to writing and signed by the party to be bound. This Agreement shall be binding upon, inure to the benefit of, and be enforceable by the parties hereto and their respective successors.

IN WITNESS WHEREOF, the Participant and Northern Trust Corporation by its duly authorized officer have signed this Agreement the day and year first written above.

 

Northern Trust Corporation
By:  

 

 

Participant

 

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Exhibit (10)(x)(13)

FORM OF DIRECTOR PRORATED STOCK AGREEMENT

UNDER THE AMENDED AND RESTATED

NORTHERN TRUST CORPORATION 2002 STOCK PLAN

This Agreement is entered into as of the      day of                     , 20    , between Northern Trust Corporation (“Northern”) and                      (“Participant”).

The Amended and Restated Northern Trust Corporation 2002 Stock Plan (“Plan”) provides in Section 10 of the Plan for the awarding of stock units (“Stock Units”) to participants, who may include directors of Northern who are not employees of the Corporation or its Subsidiaries (collectively, the “Corporation”), as approved by the Compensation and Benefits Committee (“Committee”) of the Board of Directors of Northern. Capitalized terms not defined in this Agreement shall have the meanings assigned to them in the Plan.

In the exercise of its discretion under the Plan, the Committee has determined that the Participant should participate in the Plan and receive an award of Stock Units under Section 10 of the Plan, and, accordingly, Northern and the Participant hereby agree as follows:

 

1. Grant . Northern hereby grants to the Participant an award of Stock Units equal in value to $            , as determined by the closing sale price of Northern’s Common Stock (as defined below) on                     , 20    , (which represents a prorated award based on the Participant’s service on the Board from the date of election on                     , 20     to the regular vesting date set forth in Paragraph 5 below), subject to the terms and conditions of the Plan and this Agreement. A Stock Unit is the right, subject to the terms and conditions of the Plan and this Agreement, to receive a distribution of a share of common stock (“Common Stock”), pursuant to Paragraph 6 of this Agreement.

 

2. Stock Unit Account . Northern 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 6 of this Agreement.

 

3. Dividend Equivalents . Except as provided below in Paragraph 7 of this Agreement, upon the payment of any dividend on Common Stock occurring during the period preceding the distribution of the Participant’s Stock Unit award pursuant to Paragraph 6 of this Agreement, Northern 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 on the record date of the number of shares of Common Stock represented by the Stock Units in the Participant’s Stock Unit Account on that date (“Dividend Equivalents”).

 

4.

Forfeiture . If the Participant incurs a Separation from Service, as defined in Paragraph 7(c) below prior to the vesting date set forth in Paragraph 5 of this Agreement, the Participant’s Stock Units shall be forfeited and revert to Northern, and Northern shall have no further obligation after such date to pay Dividend Equivalents pursuant to

 

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Paragraph 3 of this Agreement. Northern shall have no further obligation to the Participant under this Agreement with respect to such Stock Units.

 

5. Vesting . The Participant shall become 100% vested in his Stock Units upon the date (the “vesting date”) that is the earliest to occur of (a) the date of the Corporation’s 20     Annual Meeting of Stockholders (the “regular vesting date”), (b) the date of the Participant’s death, or (c) the date of a Change in Control, provided that the Participant has not incurred a Separation from Service prior to the earliest of the foregoing three events.

 

6. Distribution . Except as provided below in Paragraph 7 of this Agreement,

 

  (a) Subject to Paragraph 6(b), if the Participant has become 100% vested in his Stock Units upon the regular vesting date, the Stock Units shall be distributed upon such regular vesting date, provided that the distribution shall be treated as made on such date if made within the period described in Treasury Regulation Section 1.409A-3(d), including without limitation the requirement that the Participant shall in no event have the right directly or indirectly to designate the taxable year of payment. Stock Units shall be distributed only in shares of Common Stock so that, pursuant to Paragraph 1 of this Agreement and this Paragraph 6, a Participant shall be entitled to receive one share of Common Stock for each Stock Unit in the Participant’s Stock Unit Account.

 

  (b) If a Participant’s service on the Board of Directors of Northern shall terminate by reason of death prior to the regular vesting date, all cash (as provided in Paragraph 7) or Common Stock then distributable hereunder with respect to the Participant shall be distributed to such individual, trustee, trust or other entity (“Beneficiary”) as the Participant shall have designated by an instrument in writing last filed with Northern prior to death, or in the absence of a designation, to the following persons in the order indicated below:

– The Participant’s spouse; if none, then,

– The Participant’s children (in equal amounts); if none, then,

– The Participant’s parents (in equal amounts); if none, then,

– The Participant’s brothers and sisters (in equal amounts); if none, then,

– The Participant’s estate.

Except as otherwise provided in Paragraph 7(c), such distribution shall be made on the date of death, provided that the distribution shall be treated as made on such date if made within the period described in Treasury Regulation Section 1.409A-3(d), including without limitation the requirement that neither the Participant (nor the Beneficiary) shall have the right directly or indirectly to designate the taxable year of payment.

 

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  (c) If the Participant dies on or after the regular vesting date, but prior to the distribution of all amounts to which the Participant is entitled hereunder, all cash or Common Stock then distributable hereunder with respect to the Participant shall be distributed to the Beneficiary designated by the Participant, or, if none, to the persons identified in clause (b) of this Paragraph 6, within the period described in clause (a) of this Paragraph 6, except as otherwise provided in Paragraph 7(c).

 

  (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. For purposes of this Paragraph 6(d) the Annual Meeting in 20     shall be deemed to occur upon the third Tuesday in April in that year.

 

7. Voluntary Deferral .

 

  (a) Subject to applicable law and the provisions of Paragraph 7(b), the Participant may elect to defer receipt of the payment of all or any portion of the Stock Units until the date on which the Participant incurs a Separation from Service, as defined in clause (c) below. Any such election shall likewise apply to the Dividend Equivalents payable with respect to such deferred Stock Units. Deferred Dividend Equivalents shall be credited to a cash account with respect to the Stock Units (“Cash Account”) maintained by Northern on its books in the name of the Participant. Until the entire balance of a Cash Account has been paid to the Participant or to the Participant’s Beneficiaries (as defined in Paragraph 6), such balance shall be adjusted on the last day of each calendar quarter to reflect accrued interest on such balance based on the rate of interest determined from time to time by the Committee.

 

  (b)

A Participant may elect to defer receipt of the payment of all or any portion of the Stock Units granted hereunder and related Dividend Equivalents to the date of his or her Separation from Service, as defined in clause (c) below only if the grant hereunder is made in the calendar year in which the Participant initially becomes eligible to participate in the Plan, and the election is made on a deferral election form provided by the Committee and completed and delivered to the Committee within 30 days after the date on which the Participant initially becomes eligible to participate in the Plan. Such election shall be effective with respect to Stock Units described in Section 1 that are paid for services to be performed by the Participant after the date such deferral election form is completed and delivered to the Committee and becomes irrevocable with respect to such Stock Units and their related Dividend Equivalents upon completion and delivery of such deferral election form to the Committee. For purposes of applying the foregoing provisions of this clause (b), the plan aggregation rules of Treasury Regulation Section 1.409A-1(c) shall apply. A Participant’s election hereunder shall remain in effect for grants of Stock Units in subsequent calendar years and becomes

 

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irrevocable as of each December 31 with respect to Stock Units granted for services performed in the immediately following calendar year, until modified or revoked by the Participant by the completion and delivery to the Committee of a form provided by the Committee for such purpose, setting out such modification or revocation; any such modification or revocation shall be effective only for Stock Units granted to the Participant for services performed in calendar years beginning after the calendar year in which such modification or revocation is completed and delivered to the Committee and shall have no effect on the Stock Units granted hereunder.

 

  (c)

The entire balance of deferred Stock Units in the Stock Unit Account and deferred Dividend Equivalents in the Cash Account shall be paid to the Participant or to the Beneficiaries of the Participant (i) in a single lump sum on the 10 th business day following the date the Participant incurs a Separation from Service, as defined below, or (ii) in up to 10 annual installments beginning on the 10 th business day following the date the Participant incurs a Separation from Service, as defined below, as irrevocably designated by the Participant in the applicable form described in clause (b) above. In the absence of a designation, the entire balance of deferred Stock Units in the Stock Unit Account and deferred Dividend Equivalents in the Cash Account shall be paid in a single lump sum on the 10 th business day following the date the Participant incurs a Separation from Service, as defined below. For purposes of this Agreement, the term “Separation from Service” shall mean the date on which the Participant dies or otherwise terminates his or her membership on the Board of Directors of Northern.

 

  (d) Deferred Stock Units in the Stock Unit Account shall be distributed only in shares of Common Stock. In the event of a single lump sum distribution in Common Stock, a certificate (or a non-certificated book entry) representing the number of full shares of Common Stock equal to the number of such Stock Units in the Stock Unit Account, registered in the name of the Participant or the Beneficiaries of the Participant, shall be distributed to the Participant or the Beneficiaries of the Participant, on the distribution date described in Paragraph 7(c) above. In the event of a distribution in Common Stock in up to 10 annual installments, a certificate (or a non-certificated book entry) representing the number of full shares of Common Stock equal to a fraction (the numerator of which shall be the number of Stock Units in the Stock Unit Account, and the denominator of which shall be the number of annual installments designated by the Participant), registered in the name of the Participant or the Beneficiaries of the Participant, shall be distributed to the Participant or the Beneficiaries of the Participant, on the distribution date described in Paragraph 7(c) above in each year of the installment period, provided that the number of shares in each of the installments may be rounded to avoid fractional shares and the effects of any such rounding shall be reflected in the last installment.

 

  (e)

Deferred Dividend Equivalents in the Participant’s Cash Account shall be distributed in cash. In the event of a single lump sum distribution in cash, the entire balance of the Participant’s Cash Account shall be distributed to the

 

-4-


 

Participant or the Beneficiaries of the Participant on the distribution date described in Paragraph 7(c) above. In the event of a distribution in cash in up to 10 annual installments, the balance of the Cash Account shall continue to accrue interest and shall be distributed to the Participant or the Beneficiaries of the Participant on the distribution date described in Paragraph 7(c) above in each year of the installment period in an amount equal to the then current balance in the Cash Account multiplied by a fraction, the numerator of which shall be one, and the denominator of which shall be the number of years remaining in the installment period.

 

8. Delivery of Shares . Northern may delay the issuance or delivery of shares of Common Stock if Northern 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 Northern reasonably anticipates that such issuance or delivery will not cause such violation.

 

9. Adjustment . The Stock Units provided herein are subject to adjustment in accordance with the provisions of Section 11 of the Plan.

 

10. No Obligation to Reelect . Nothing in the Plan or this Agreement shall be deemed to create an obligation on the part of the Board of Directors to nominate the Participant for reelection by Northern’s stockholders or to fill any vacancy upon action of the Board of Directors.

 

11. Nontransferability . No interest hereunder of the Participant or any Beneficiary shall be assignable or transferable by voluntary or involuntary act or by operation of law other than by testamentary bequest or devise or the laws of descent or distribution, all rights hereunder shall be wholly unalienable and beyond the power of any person to anticipate or in any way create a lien or encumbrance thereon; and distribution shall be made only to (i) the Participant, (ii) the Participant’s personal representative in the event of the Participant’s adjudicated disability, or (iii) the Participant’s Beneficiaries in the event of the Participant’s death, upon his, her or their own personal receipts or endorsements. Any effort to exercise the powers herein denied shall be wholly ineffective and shall be grounds for termination by the Committee of all rights hereunder.

 

12.

Withholding . In the event that federal, state or local taxes must be withheld from any distribution hereunder, (a) the Corporation shall deduct from any such distribution in cash the amount of such required withholding and, (b) 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, withholding obligations, if any, shall be satisfied from one of the following 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 the 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 Corporation’s minimum statutory withholding obligation, if any (based on minimum

 

-5-


 

statutory withholding rates for Federal and state tax purposes, including payroll taxes, that are applicable to such taxable income).

 

13. 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.

 

14. No Rights as Shareholder . Except as provided herein, the Participant will have no rights as a shareholder with respect to the Stock Units.

 

15. Interpretation . Any interpretation by the Committee of the terms and conditions of the Plan, this Agreement or any guidelines shall be final. This Agreement shall be construed under the laws of the State of Illinois without regard to the conflict of law provisions of any state. Capitalized terms not defined in this Agreement shall have the meanings assigned to them in the Plan.

 

16. Sole Agreement . This 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 this Agreement shall be binding on either party unless reduced to writing and signed by the party to be bound. This Agreement shall be binding upon, inure to the benefit of, and be enforceable by the parties hereto and their respective successors.

IN WITNESS WHEREOF, the Participant and Northern Trust Corporation by its duly authorized officer have signed this Agreement the day and year first written above.

 

Northern Trust Corporation
By:  

 

 

Participant

 

-6-

Exhibit (10)(xiii)(1)

FIRST AMENDMENT

TO THE NORTHERN TRUST CORPORATION

1997 DEFERRED COMPENSATION PLAN FOR NON-EMPLOYEE

DIRECTORS

WHEREAS, Northern Trust Corporation (the “Corporation”) sponsors the Northern Trust Corporation 1997 Deferred Compensation Plan for Non-Employee Directors, as amended and restated effective January 1, 2008 (the “Plan’); and

WHEREAS , the Board of Directors of the Corporation has elected an advisory director to the Board and wishes to amend the Plan to clarify that advisory directors shall be eligible to defer compensation under the Plan;

NOW THEREFORE , in exercise of the amending power reserved to the Corporation under Section 6(a) of the Plan, the Plan is amended as follows, effective October 20, 2009:

1. Section 2(h) is hereby deleted in its entirety and the following new Section 2(h) is substituted therefor:

“(h) the term “Non-Employee Director” shall mean a person who is serving as a member of the Board and is not an employee of the Corporation or any subsidiary or affiliate of the Corporation. The term “Non-Employee Director” shall also include a person who is serving as an advisory director, pursuant to appointment, and designation as such, by the Board, and who is not an employee of the Corporation or any subsidiary or affiliate of the Corporation. References to “Non-Employee Director” and “Director” throughout the Plan shall include all individuals described in the preceding two sentences.”

2. The following sentence is hereby added at the end of the first paragraph of Section 3(a):

“Except as otherwise provided in the following paragraph, a Non-Employee Director shall not be eligible under this Plan to defer all or any portion of his compensation paid in the form of an award designated as an award of “stock units,” even if such award is to be distributed exclusively in cash.”

In all other respects, the Plan is hereby ratified and confirmed.

IN WITNESS WHEREOF , the Corporation has caused this amendment to be executed on its behalf on this 20th day of October 2009.

 

NORTHERN TRUST CORPORATION
By:  

/s/ Timothy P. Moen

Name:   Timothy P. Moen
Title:  

Executive Vice President and Head of

Human Resources and Administration

Exhibit (10)(xxiii)(10)

AMENDMENT NUMBER TEN TO

THE NORTHERN TRUST COMPANY THRIFT-INCENTIVE PLAN

(As Amended and Restated Effective January 1, 2005)

WHEREAS, The Northern Trust Company (the “Company”) maintains The Northern Trust Company Thrift-Incentive Plan, As Amended and Restated Effective January 1, 2005 (the “Plan”); and

WHEREAS, amendment of the Plan is now considered desirable;

NOW, THEREFORE, by virtue and in exercise of the amending power reserved to the Company under section 11.1 of the Plan, and pursuant to the authority delegated to the undersigned officer by resolutions of the Compensation and Benefits Committee of the Board of Directors of the Company dated October 20, 2009, the Plan is hereby amended, effective January 1, 2010, as follows:

 

1. To delete section 2.1(i) of the Plan in its entirety and to substitute the following therefor:

 

  “(i) “Basic Profit Sharing Contribution” means the contribution made by the Company and Participating Employers with respect to all eligible Members for Plan Years beginning on or after January 1, 2005 and prior to January 1, 2010, if any, as provided in sections 5.2(a) and 5.2(c).”

 

2. To delete the title of section 5.1 in its entirety and to substitute the following therefor: “Company Matching Contributions”.

 

3. To delete the first sentence of section 5.1(a) of the Plan in its entirety and to substitute the following therefor:

“A Participant who has Matchable Participant Deposits (as defined below) during a Plan Year is eligible to have the Company or a Participating Employer make a Matching Contribution to the Participant’s Matching Contribution Account for that Plan Year in an amount equal to 50% of his or her Matchable Participant Deposits that do not exceed 6% of the Participant’s Salary for the Plan Year.”

 

4. To add the following as new section 5.1(b) of the Plan and to renumber existing section 5.1(b) as 5.1(c):

 

  “(b) For each Plan Year in which the Northern Trust Corporation attains its earnings goal, a Participant who has Matchable Participant Deposits (as defined below) during that Plan Year is eligible to have the Company or a Participating Employer make a contingent Matching Contribution to the Participant’s Matching Contribution Account for that Plan Year, provided that, on December 31 of that Plan Year, such Participant is either

 

  (i) in the service of the Company or an Affiliate or receiving Salary, or on a Company-approved leave of absence, paid or unpaid; or


  (ii) not in the service of the Company or an Affiliate, but the Participant terminated his or her service with the Company and its Affiliates during the Plan Year by reason of death, normal or early retirement under the Pension Plan, or any other retirement after his or her Normal Retirement Date.

In addition, a Participant who becomes entitled to a disability distribution under section 8.1(c), (d) or (e) is eligible to have the Company or a Participating Employer make a contingent Matching Contribution to the Participant’s Matching Contribution Account for any Plan Year in which the Participant continues to receive Salary, provided that the Participant has Matchable Participant Deposits in that Plan Year.

A Participant’s contingent Matching Contribution for a Plan Year shall be an amount equal to 50% of the Participant’s Matchable Participant Deposits that do not exceed 3% of the Participant’s Salary for the Plan Year. The earnings goal for the Plan Year shall be determined by the Compensation and Benefits Committee of the Company’s Board of Directors in the first quarter of the Plan Year. Northern Trust Corporation’s earnings for the Plan Year for purposes of determining whether the earnings goal has been attained will be determined by the Compensation and Benefits Committee of the Company’s Board of Directors, in its discretion, taking into consideration such factors and circumstances and including or excluding such items of income and expenses as it deems appropriate.”

 

5. To delete section 5.2(a) of the Plan in its entirety and to substitute the following therefor:

Basic Profit Sharing Contributions . For each Plan Year beginning on or after January 1, 2005 and prior to January 1, 2010, in which the Northern Trust Corporation attains its earnings goal, the Company and Participating Employers shall make a Basic Profit Sharing Contribution to the Thrift Trust on behalf of each Eligible Employee in an amount equal to one percent (1%) of such Eligible Employee’s Salary, subject to the rules set forth in paragraph (c) next below. The earnings goal for the Plan Year shall be determined by the Compensation and Benefits Committee of the Company’s Board of Directors in the first quarter of the Plan Year. Northern Trust Corporation’s earnings for the Plan Year for purposes of determining whether the earnings goal has been attained will be determined by the Compensation and Benefits Committee of the Company’s Board of Directors, in its discretion, taking into consideration such factors and circumstances and including or excluding such items of income and expenses as it deems appropriate. Basic Profit Sharing Contributions shall be discontinued for Plan Years beginning on and after January 1, 2010.”

 

6. To delete section 5.9(a) of the Plan in its entirety and to substitute the following therefor:

 

  “(a)

Notwithstanding anything contained herein to the contrary, during any Plan Year beginning on or after January 1, 2010 in which there occurs a Change in

 

- 2 -


 

Control (as hereinafter defined), the Company shall make a contingent Matching Contribution to the Matching Contribution Account of each Participant who is eligible to receive a contingent Matching Contribution pursuant to the terms of section 5.1(b) (or who would be eligible to receive a contingent Matching Contribution under section 5.1(b) if the date of the Change in Control were substituted for December 31 under that section), provided, however, that (i) such contingent Matching Contribution will be made with respect to the Participant’s Matchable Participant Deposits made prior to the date of such Change in Control, (ii) such contingent Matching Contribution shall be calculated assuming that Northern Trust Corporation would attain its earnings goal for the Plan Year in which the Change in Control occurs, and (iii) the amount of any contingent Matching Contribution to which the Participant becomes entitled pursuant to the provisions of this Article 5 (without giving effect to this section 5.9) shall be reduced (but not below zero) by the amount of any contingent Matching Contribution made pursuant to this section 5.9. As of the date of the Change in Control, the Company shall also make a true-up Matching Contribution under section 5.1(a) to the Matching Contribution Account of each eligible Member. Upon the occurrence of a Change in Control, each Participant and Inactive Participant shall become fully vested in the balance of his or her Account. Any amounts credited to any such Account following such Change in Control shall also be fully vested.”

 

7. To delete the first sentence of section 9.4 of the Plan in its entirety and to substitute the following therefor:

“If a Member or his or her Beneficiary could receive a Profit Sharing Contribution, true-up Matching Contribution or contingent Matching Contribution for the Plan Year in which the Member terminates his or her participation in the Plan, then notwithstanding section 9.3, the Member or Beneficiary may elect to defer payment under that section until the Company or a Participating Employer makes the Profit Sharing Contribution, true-up Matching Contribution or contingent Matching Contribution, or if none, until the Company announces that no such contribution will be made.”

IN WITNESS WHEREOF , the Company has caused this amendment to be executed on its behalf this 29th day of October, 2009, effective January 1, 2010.

 

THE NORTHERN TRUST COMPANY
By:  

/s/ Timothy P. Moen

Name:   Timothy P. Moen
Title:  

Executive Vice President and

Human Resources Department Head

 

- 3 -

Exhibit (10)(xxiii)(11)

AMENDMENT NUMBER ELEVEN TO

THE NORTHERN TRUST COMPANY THRIFT-INCENTIVE PLAN

(As Amended and Restated Effective January 1, 2005)

WHEREAS, The Northern Trust Company (the “Company”) maintains The Northern Trust Company Thrift-Incentive Plan, As Amended and Restated Effective January 1, 2005 (the “Plan”); and

WHEREAS, amendment of the Plan is now considered desirable; and

WHEREAS , the Company previously adopted certain changes to the Plan in compliance with the Pension Protection Act of 2006 (the “PPA”) and now wishes to adopt additional changes in good faith compliance with the PPA, as well as certain administrative changes;

NOW, THEREFORE, by virtue and in exercise of the amending power reserved to the undersigned officer under section 11.1 of the Plan, the Plan is hereby amended, effective as of the dates provided herein, as follows:

 

1. Effective as of January 1, 2008, to delete section 5.3(b) of the Plan in its entirety and to substitute the following therefor: “(b) [Deleted effective as of January 1, 2008].”

 

2. Effective as of the date this Amendment is executed, to delete the phrase “as the Participant shall have directed” from the last sentence of section 5.4 of the Plan.

 

3. Effective as of the date this Amendment is executed, to delete the word “Company” from the phrase “Company Matching Contribution Account” in the last sentence of section 8.1 of the Plan.

 

4. Effective January 1, 2010, in section 8.7(a) of the Plan, to delete the word “and” following the phrase “Basic Contribution Account,” to delete the period following the phrase “Before-Tax Deposit Account” and to substitute a comma followed by the word “and” therefor, and to add the following at the end of that section: “(9) Former ESOP Account.”

 

5. Effective as of the date this Amendment is executed, to delete the phrase “paragraph 6” from section 8.7(b)(1) of the Plan and to substitute the following therefor: “subsection (7) of this section 8.7(b).”

 

6. Effective January 1, 2010, to add the following at the end of section 8.7 (d) of the Plan:

“Withdrawals under this section 8.7 shall be made in cash, except that a Participant who withdraws his or her entire vested Account balance under section 8.7(a) may elect to receive his or her interest in the Northern Trust Stock Fund or Former ESOP Northern Trust Stock Fund in kind in full shares of Company Stock, with any balance representing a fraction of a share being paid in cash.


Separate elections may be made by the Participant with respect to his or her interest in the Northern Trust Stock Fund and Former ESOP Northern Trust Stock Fund.”

 

7. Effective January 1, 2010, to add the following as a new section 8.9(i) of the Plan:

 

  (i) The Committee may in its discretion impose upon Participants who obtain loans a reasonable, uniform fee, as determined by the Committee from time to time, to cover the costs of processing and administering the loan. Such fee will be added to the loan amount, unless the Company has established an alternative means for Participants to pay such fees.”

 

8. Effective January 1, 2010, to delete section 9.1 of the Plan in its entirety and to substitute the following therefor:

 

  “9.1 Termination of Service or Retirement

 

  (a) Subject to section 8.5, a benefit payable to a Participant or Inactive Participant upon a Break in Service for reasons other than reaching Early Retirement Age under the Pension Plan or death shall be distributed in one lump sum.

 

  (b) Subject to section 8.5, a Participant or Inactive Participant who incurs a Break in Service after reaching Early Retirement Age (but before reaching Normal Retirement Age) under the Pension Plan may elect:

 

  (1) to receive his or her benefit in one lump sum, or

 

  (2) to defer distribution of his or her benefit. Any Former Participant who has deferred distribution of his or her benefit under this section 9.1(b)(2) may subsequently elect to receive a distribution of all or part of his or her benefit no more than once each calendar month, subject to such rules and procedures as the Committee shall determine. Distributions under this section 9.1(b)(2) shall be subject to section 6.4, and no distribution shall reduce the value of the Former Participant’s Account below zero. Any partial distribution from the Account of any such Former Participant shall be charged against the Account’s investment in the Investment Funds in the order designated in Schedule B.”

 

9. Effective January 1, 2010, to delete the first sentence of section 9.3 of the Plan in its entirety and to substitute the following therefor:

 

- 2 -


“A lump sum payment or other distribution shall be made as soon as reasonably practicable (and under ordinary circumstances in no more than 60 days) after a Member or his or her Beneficiary is entitled to a distribution under section 8.1, 8.2 or 8.3 or after a Former Participant requests a distribution under section 9.1(b)(2), as applicable, subject to the completion of any applicable benefit consent, claim or claim review procedures, and except as otherwise provided in section 9.7.”

 

10. Effective January 1, 2010, to add the following as a new last sentence in section 9.3 of the Plan:

“The Account of a Former Participant who has elected to defer distribution of his or her account under section 9.1(b)(2) shall be treated in all respects as are Accounts of continuing Participants, except that (a) no additions may be made to such Account and (b) the Former Participant may not exercise the rights granted under sections 8.7, 8.8 or 8.9.”

 

11. Effective January 1, 2010, to delete the second sentence of section 9.4 of the Plan in its entirety and to substitute the following therefor:

“Subject to section 8.5, in such case, any lump sum payment shall be made as soon as reasonably practicable (but in no event more than 60 days) after the Valuation Date immediately following that date, and in the case of a Former Participant who has elected to defer distribution of his or her benefit under section 9.1(b)(2), distribution of such Former Participant’s benefit shall be made in accordance with sections 9.1(b)(2) and 9.3.”

 

12. Effective as of January 1, 2007, to delete the last sentence of section 9.6(b)(1) of the Plan in its entirety and to substitute the following therefor:

“A distribution shall not fail to be an eligible rollover distribution merely because of portion of it consists of after tax deposits; provided such portion may be rolled over only to an individual retirement account or annuity described in section 408(a) or (b) of the Code, or to a qualified trust or an annuity contract described in section 403(b) of the Code, and such trust or contract agrees to separately account for the amounts so transferred (and earnings thereon), including separately accounting for the portion of such distribution that is includible in gross income and the portion that is not so includible.”

 

13.

Effective as of January 1, 2008 for Members, their surviving Spouses and a Member’s Spouse or former Spouse who is an alternate payee under a qualified domestic relations order, as defined in section 414(p) of the Code and effective January 1, 2010 for a Member’s Beneficiary who is not the Member’s surviving Spouse or a Member’s Spouse or former Spouse who is an alternate payee under a qualified domestic relations order, to add the following as new clause (iii) of section 9.6(b)(2), of the Plan and to renumber

 

- 3 -


 

clauses (iii) through (vi) as (iv) through (vii) respectively: “(iii) a Roth IRA described in section 408A of the Code.”

 

14. Effective as of January 1, 2008, to add the following as a new last sentence in section 9.6(b)(2) of the Plan:

“In the case of a distribution to a Member’s Beneficiary who is not the Member’s surviving Spouse, or a Spouse or former Spouse who is an alternate payee under a qualified domestic relations order, as defined in section 414(p) of the Code, an eligible retirement plan shall be limited to those individual retirement plans described in clauses (i), (ii) and (iii) of this section 9.6(b)(2).”

IN WITNESS WHEREOF , the Company has caused this amendment to be executed on its behalf this 17th day of December, 2009, effective as of the dates provided herein.

 

THE NORTHERN TRUST COMPANY
By:  

/s/ Timothy P. Moen

Name:   Timothy P. Moen
Title:  

Executive Vice President and

Human Resources Department Head

 

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Exhibit (10)(xxvi)

October 20, 2009

Mr. William A. Osborn

Retired Chairman

Northern Trust Corporation

120 DeWindt Road

Winnetka, IL 60093

 

Re: Office Space and Support

Dear Bill:

This letter agreement 1 sets forth the terms and conditions on which Northern Trust Corporation (the “Corporation”) agrees to provide you with office space and support staff following your retirement as the Corporation’s Chairman effective November 11, 2009.

For the period commencing on November 11, 2009 and ending on November 11, 2014 (which period shall be subject to extension for additional one year periods upon the mutual agreement of the parties hereto), the Corporation will provide you with office space. Such office space may be located at an office of the Corporation (other than 50 South LaSalle Street in Chicago) or in a rental property, provided that such office space may temporarily be located in your current office at 50 South LaSalle for a short period until the new office is selected and agreed to by you and the Corporation and furnished by the Corporation. During the period of this letter agreement, you will be provided with:

 

   

an administrative assistant at such location during normal working hours;

 

   

basic office supplies such as stationary, printer paper, and printer toner; and

 

   

basic office equipment such as personal computers, printers, fax machines, scanners, telephones for you and your administrative assistant, with the Corporation to reimburse you for related telephone and Internet expense.

You should direct any requests for additional office supplies, office equipment, or other materials such as periodical subscriptions to the Corporation’s Head of Human Resources and Administration, who will determine whether such supplies, equipment, or materials are to be provided hereunder.

 

 

1 The benefits provided under this agreement during any calendar year shall not affect the benefits provided in any other calendar year, nor shall the right to these benefits be subject to liquidation or exchange for any other benefit.


Mr. William A. Osborn

October 20, 2009

Page 2

 

From time to time during the term of this letter agreement, the Corporation may request that you make appearances or attend events on behalf of the Corporation. In the event that any such request is agreed to and made, the Corporation will reimburse you, upon the receipt of appropriate documentation, for reasonable business expenses incurred by you in connection with complying with such requests (which expenses shall not include any air, lodging, limousine or other travel expenses unless authorized in advance by the Corporation’s Head of Human Resources and Administration. Any such appearance shall be made by you in your individual capacity and not as an employee of or consultant to the Corporation; you will not be an employee of the Corporation or any subsidiary following your retirement.

You agree that following your retirement you shall not have the authority to incur any liabilities or obligations of any kind in the name of or on behalf of the Corporation or its subsidiaries and that you will have no authority over any employee or officer of the Corporation or its subsidiaries. You shall not at any time, whether during or after the term of this letter agreement, directly or indirectly disclose or use any Confidential Information of the Corporation or its subsidiaries. “Confidential Information” means all information regarding the clients of the Corporation or its subsidiaries, or regarding the current or planned business of the Corporation or its subsidiaries, which has not been made generally known to the public by authorized representatives of the Corporation or its subsidiaries. These confidentiality provisions shall survive any termination of this letter agreement and shall not be construed to limit any other similar obligations you have with respect to the Corporation or its subsidiaries pursuant to contract or applicable law.

During the term of this letter agreement, you shall not be engaged as an employee, owner (other than as holder or owner of less than 10% of the outstanding shares of any corporation the shares of which are publicly traded), consultant, or otherwise, without the written consent of the Corporation, in any line of business which is the same as any line of business then carried on by the Corporation or its subsidiaries. A consent must be requested in advance in writing by you and may be given upon authorization of the Corporation and be subject to such terms and conditions as the Corporation shall deem advisable.

To the extent that the provision to you of the office space or office support described herein results in imputed income to you that is subject to federal, state or local taxes, the Corporation will report such income to you and the appropriate taxation authority, it being understood that you will be solely responsible for the payment of such taxes and that the Corporation shall not be required to withhold or make any arrangements for the payment of such taxes.

In the event of your death or total disability, this letter agreement shall terminate as of the date of your death or total disability.


Mr. William A. Osborn

October 20, 2009

Page 3

 

This letter agreement may not be assigned by either party without the prior written consent of the other party, except that no consent is necessary for the Corporation to assign this letter agreement to a corporation succeeding to substantially all the assets or business of the Corporation, whether by merger, consolidation, acquisition or otherwise. This letter agreement shall be binding upon you, your heirs and permitted assigns and the Corporation, its successors and permitted assigns.

Please reflect your agreement to the terms and conditions set forth above by signing this letter agreement and the enclosed copy. Please return one copy of the letter agreement to the undersigned in the enclosed envelope.

 

Northern Trust Corporation

/s/ Timothy P. Moen

By:   Timothy P. Moen
Its:   Executive Vice President

Acknowledged and Agreed as of

this 20 th day of October 2009

 

/s/ William A. Osborn

William A. Osborn
Table of Contents

 

Exhibit 13

Financial Review

 

22

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

65

Management’s Report on Internal Control Over Financial Reporting

 

66

Report of Independent Registered Public Accounting Firm with Respect to Internal Control over Financial Reporting

 

67

Consolidated Financial Statements

 

71

Notes to Consolidated Financial Statements

 

117

Report of Independent Registered Public Accounting Firm

 

118

Consolidated Financial Statistics

 

121

Senior Officers

 

122

Board of Directors

 

123

Corporate Information


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA

($ In Millions Except Per Share Information)   2009        2008        2007        2006        2005  
 

FOR THE YEAR ENDED DECEMBER 31

                                                   

Noninterest Income

                                                   

Trust, Investment and Other Servicing Fees

  $ 2,083.8         $ 2,134.9         $ 2,077.6         $ 1,791.6         $ 1,559.4   

Foreign Exchange Trading Income

    445.7           616.2           351.3           247.3           180.2   

Security Commissions and Trading Income

    62.4           77.0           67.6           62.7           55.2   

Treasury Management Fees

    81.8           72.8           65.3           65.4           71.2   

Gain on Visa Share Redemption

              167.9                                 

Other Operating Income

    136.8           186.9           95.3           83.0           85.2   

Investment Security Gains (Losses), net

    (23.4        (56.3        6.5           1.4           .3   
                                                     

Total Noninterest Income

    2,787.1           3,199.4           2,663.6           2,251.4           1,951.5   
                                                     

Net Interest Income

    999.8           1,079.1           845.4           744.7           673.7   

Provision for Credit Losses

    215.0           115.0           18.0           15.0           2.5   
                                                     

Income before Noninterest Expenses

    3,571.9           4,163.5           3,491.0           2,981.1           2,622.7   
                                                     

Noninterest Expenses

                                                   

Compensation

    1,099.7           1,133.1           1,038.2           876.6           774.2   

Employee Benefits

    242.1           223.4           234.9           217.6           190.4   

Outside Services

    424.5           413.8           386.2           316.2           268.0   

Equipment and Software Expense

    261.1           241.2           219.3           205.3           196.6   

Occupancy Expense

    170.8           166.1           156.5           145.4           133.7   

Visa Indemnification Charges

    (17.8        (76.1        150.0                       

Other Operating Expenses

    136.3           786.3           245.1           195.8           172.0   
                                                     

Total Noninterest Expenses

    2,316.7           2,887.8           2,430.2           1,956.9           1,734.9   
                                                     

Income before Income Taxes

    1,255.2           1,275.7           1,060.8           1,024.2           887.8   

Provision for Income Taxes

    391.0           480.9           333.9           358.8           303.4   
                                                     

Net Income

  $ 864.2         $ 794.8         $ 726.9         $ 665.4         $ 584.4   

Net Income Applicable to Common Stock

  $ 753.1         $ 782.8         $ 726.9         $ 665.4         $ 584.4   
                                                     

Average Total Assets

  $ 74,314         $ 73,029         $ 60,588         $ 53,106         $ 45,974   
 

PER COMMON SHARE

                                                   

Net Income – Basic

  $ 3.18         $ 3.51         $ 3.28         $ 3.03         $ 2.66   

                    – Diluted

    3.16           3.47           3.23           2.99           2.63   

Cash Dividends Declared

    1.12           1.12           1.03           .94           .86   

Book Value – End of Period (EOP)

    26.12           21.89           20.44           18.03           16.51   

Market Price – EOP

    52.40           52.14           76.58           60.69           51.82   
 

AT YEAR END

                                                   

Senior Notes

    1,552           1,053           654           445           272   

Long-Term Debt

    2,838           3,293           2,682           2,308           2,818   

Floating Rate Capital Debt

    277           277           277           276           276   
                                                     

Stockholders

    2,614           2,799           2,842           3,040           3,239   

Staff (full-time equivalent)

    12,400           12,200           10,900           9,700           9,000   
 

RATIOS

                                                   

Dividend Payout Ratio

    31.0        32.0        31.4        30.8        32.1

Return on Average Assets

    1.16           1.09           1.20           1.25           1.27   

Return on Average Common Equity

    12.73           15.98           17.46           17.57           17.01   

Tier 1 Capital to Risk-Weighted Assets – EOP

    13.4           13.1           9.7           9.8           9.7   

Total Capital to Risk-Weighted Assets – EOP

    15.8           15.4           11.9           11.9           12.3   

Risk-Adjusted Leverage Ratio

    8.8           8.5           6.8           6.7           7.1   

Average Stockholders’ Equity to Average Assets

    8.9           7.0           6.9           7.1           7.5   

 

OPERATING RESULTS – A NON-GAAP FINANCIAL MEASURE WHICH EXCLUDES VISA RELATED ADJUSTMENTS

($ In Millions Except Per Share Information)   2009        2008        2007        2006        2005  

Operating Earnings

  $ 853.0         $ 641.3         $ 821.1         $ 665.4         $ 584.4   
                                                     

Operating Earnings per Common Share – Basic

  $ 3.13         $ 2.82         $ 3.71         $ 3.03         $ 2.66   

                                                                   – Diluted

    3.11           2.79           3.65           2.99           2.63   
                                                     

Operating Return on Average Common Equity

    12.68        12.89        19.72        17.57        17.01

Operating results for 2009, 2008 and 2007 exclude adjustments relating to Visa Inc. (Visa). Excluded in 2009 and 2008 are Visa indemnification related benefits totaling $17.8 million and $244.0 million, respectively. Excluded in 2007 are Visa indemnification related charges totaling $150.0 million. The 2008 benefits included a gain on the mandatory partial redemption of Northern Trust’s Visa shares totaling $167.9 million and a $76.1 million offset of the Visa indemnification related charges recorded in 2007. Visa related adjustments are discussed in further detail in Note 18 to the consolidated financial statements.

 

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Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

OVERVIEW OF CORPORATION

 

Focused Business Strategy

Northern Trust Corporation (Northern Trust or the Corporation) is a leading provider of asset servicing, fund administration, investment management, banking and fiduciary solutions for corporations, institutions and affluent individuals worldwide. Northern Trust focuses on servicing and managing client assets in two target market segments: individuals, families and privately held businesses through its Personal Financial Services (PFS) business unit; and institutional investors worldwide through its Corporate and Institutional Services (C&IS) business unit. An important element of this strategy is to provide an array of asset management and related services to PFS and C&IS clients, which are provided by a third business unit, Northern Trust Global Investments (NTGI). In executing this strategy, Northern Trust emphasizes quality through a high level of service complemented by the effective use of technology, delivered by a fourth business unit, Operations & Technology (O&T).

 

Business Structure

A financial holding company, Northern Trust conducts business through various U.S. and non-U.S. subsidiaries, including The Northern Trust Company (Bank). The Corporation comprises a network of 79 offices in 18 U.S. states and 16 international locations in North America, Europe, the Asia-Pacific region and the Middle East.

Except where the context otherwise requires, the term “Northern Trust” refers to Northern Trust Corporation and its subsidiaries on a consolidated basis.

 

FINANCIAL OVERVIEW

 

Despite difficult 2009 business conditions, Northern Trust achieved record net income of $864.2 million and earnings per common share were $3.16. This compared with $794.8 million of net income and earnings per common share of $3.47 in the year ended December 31, 2008. Per share earnings were reduced by $111.1 million, equal to $.47, in 2009, and by $12.0 million, or $.05, in 2008, from preferred stock dividends and discount accretion in connection with Northern Trust’s participation in the U.S. Department of the Treasury’s (U.S. Treasury) Capital Purchase Program (CPP).

Reported results in both 2009 and 2008 were impacted by various adjustments related to Visa, as further described in Note 18 to the consolidated financial statements. A reconciliation of operating earnings, a non-GAAP financial measure which excludes Visa related adjustments, to reported earnings prepared in accordance with U.S. generally accepted accounting principles (GAAP) is included in the table below.

 

($ In Millions Except Per
Share Data)
  2009      2008  
  Amount      Per Share      Amount      Per Share  

Reported Earnings

  $ 864.2       $ 3.16       $ 794.8       $ 3.47   

Visa Initial Public Offering (net of $62.3 tax effect)

                    (105.6      (.47

Visa Indemnification Accrual (net of tax effects of $6.6 in 2009 and $28.2 in 2008)

    (11.2      (.05      (47.9      (.21
                                    

Operating Earnings

  $ 853.0       $ 3.11       $ 641.3       $ 2.79   

 

Operating earnings in 2008 were impacted by $536.3 million of client support related charges. These charges included $314.1 million for support provided to cash investment funds under Capital Support Agreements (CSAs). The current year includes a net expense reduction of $109.3 million associated with the final support payments and expiration of the CSA obligations.

Operating revenues, which exclude the $167.9 million gain recorded in 2008 in connection with Visa’s public offering, equaled $3.82 billion on a fully taxable equivalent (FTE) basis, a decrease of 8% from 2008. Revenues were impacted by a $170.5 million, or 28%, decrease in foreign exchange trading income due to significantly reduced currency volatility and client volumes from the record 2008 levels. Revenues also were affected by an $88.9 million, or 8%, decrease in net interest income (FTE). This drop reflected a significant reduction in the net interest margin as a result of the low interest rate environment experienced in 2009.

Trust, investment and other servicing fees – the largest component of consolidated revenues – totaled $2.08 billion, down $51.1 million, or 2%, from the prior year. The decrease primarily reflects lower market valuations during the majority of 2009, offset partially by increased securities lending revenue and new business. The securities lending revenue increase is attributable to the recovery of previously recorded unrealized asset valuation losses in a mark-to-market investment fund used in our securities lending activities, partially offset by significantly lower spreads on the investment of cash collateral and reduced average volumes as compared with 2008.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Operating noninterest expenses, which exclude Visa indemnification related adjustments of $17.8 million and $76.1 million in 2009 and 2008, respectively, equaled $2.33 billion, a decrease of 21% from 2008, primarily reflecting the client support related adjustments recorded in 2009 and 2008.

Credit loss provisions were $215.0 million in 2009 compared with $115.0 million in 2008. The higher provision reflects the impact of the prolonged weakness in the broader economic environment. Loans and leases equaled $27.8 billion at year end, a decrease of 10% from $30.8 billion at the end of 2008.

In 2009, Northern Trust achieved two of its four long-term, across cycle, strategic financial targets, measured exclusive of Visa related items. We achieved positive operating leverage and recorded earnings per share growth of 11%, within the goal of 10-12% growth. However, we did not grow revenue 8-10% (revenues decreased by 8%) nor did our return on common equity equal 16-18% (our return on common equity was 12.7%).

Client assets under custody and management, important components of Northern Trust’s business, grew at double-digit rates during 2009. Client assets under custody equaled $3.7 trillion at year end, up 22% from $3.01 trillion in 2008. Client assets under management rose 12% to $627.2 billion from $558.8 billion the prior year. Increases in client assets under custody and management reflect both higher market valuations and new business won from both existing and new clients.

Northern Trust continues to maintain its solid capital position, exceeding “well capitalized” levels under federal bank regulatory capital requirements. At year end, total stockholders’ equity equaled $6.31 billion, down slightly from $6.39 billion a year earlier. On June 17, 2009 and August 26, 2009, respectively, Northern Trust repurchased the preferred stock and the related warrant issued to the U.S. Treasury in November 2008 under the CPP. The repurchases were funded principally by the May 2009 issuance of 17,250,000 common shares in connection with a public offering and the retention of earnings.

 

CONSOLIDATED RESULTS OF OPERATIONS

 

REVENUE

Northern Trust generates the majority of its revenue from noninterest income that primarily consists of trust, investment and other servicing fees. Net interest income comprises the remainder of revenues and consists of interest income generated by earning assets, net of interest expense on deposits and borrowed funds.

Revenue for 2009 was $3.83 billion on an FTE basis. Revenue declined 12% from $4.33 billion in 2008, which in turn was up 21% from 2007 revenues of $3.57 billion. When adjusted to an FTE basis, yields on taxable, nontaxable, and partially taxable assets are comparable; the adjustment to an FTE basis has no impact on net income. Noninterest income totaled $2.79 billion in 2009, down 13% from $3.20 billion in 2008, and represented 73% of total taxable equivalent revenue in 2009. Noninterest income of $3.20 billion in 2008 increased 19% from $2.66 billion in 2007, and represented 74% of total taxable equivalent revenue in 2008. Net interest income for 2009 was $1.04 billion, down 8% from $1.13 billion in 2008, which was up 24% from $907.9 million in 2007.

The decrease in current year revenues primarily reflects reduced foreign exchange trading income, which fell 28% to $445.7 million compared with $616.2 million in 2008. The decrease in net interest income in 2009 denotes the significant reduction in the net interest margin as a result of the low interest rate environment. The net interest margin declined to 1.56% in 2009 from 1.76% in 2008. Partly offsetting this reduction was a $2.42 billion, or 4%, increase in average earning assets.

Trust, investment and other servicing fees – the largest component of noninterest income – decreased 2% to $2.08 billion from $2.13 billion in 2008. This reduction reflected lower market valuations during the majority of 2009, partially offset by an increase in securities lending fees and new business. Securities lending fees in 2009 totaled $336.7 million as compared with $221.4 million in 2008. The current year increase of $115.3 million was due to the recovery of previously recorded unrealized asset valuation losses of approximately $204 million relating to a mark-to-market investment fund used in our securities lending activities. This compares to unrealized asset valuation losses of approximately $213 million recorded in 2008. Excluding the impact of the above adjustments, securities lending fees decreased approximately $302 million, reflecting significantly lower spreads on the investment of cash collateral and reduced volumes. Additional information regarding Northern Trust’s revenue by type is provided below.

 

2009 TOTAL REVENUE OF $3.83 BILLION (FTE)

 

LOGO

 

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

 

Noninterest Income

The components of noninterest income, and a discussion of significant changes during 2009 and 2008, are provided below.

 

NONINTEREST INCOME

 

(In Millions)   2009      2008      2007

Trust, Investment and Other Servicing Fees

  $ 2,083.8       $ 2,134.9       $ 2,077.6

Foreign Exchange Trading Income

    445.7         616.2         351.3

Security Commissions and Trading Income

    62.4         77.0         67.6

Treasury Management Fees

    81.8         72.8         65.3

Gain on Visa Share Redemption

            167.9        

Other Operating Income

    136.8         186.9         95.3

Investment Security Gains (Losses), net

    (23.4      (56.3      6.5
                         

Total Noninterest Income

  $ 2,787.1       $ 3,199.4       $ 2,663.6

 

2009 NONINTEREST INCOME

 

LOGO

 

Trust, Investment and Other Servicing Fees

Trust, investment and other servicing fees accounted for 54% of total taxable equivalent revenue in 2009. These fees for 2009 decreased 2% to $2.08 billion from $2.13 billion in 2008. For a more detailed discussion of 2009 trust, investment and other servicing fees, refer to the “Business Unit Reporting” section.

Trust, investment and other servicing fees are based generally on the market value of assets held in custody, managed and serviced; the volume of transactions; securities lending volume and spreads; and fees for other services rendered. Certain market value calculations on which fees are based are performed on a monthly or quarterly basis in arrears. Certain investment management fee arrangements also may provide for performance fees, based on client portfolio returns that exceed predetermined levels. Securities lending fees also are impacted by Northern Trust’s share of unrealized investment gains and losses in one investment fund that is used in our securities lending activities and is accounted for at fair value. Based on an analysis of historical trends and current asset and product mix, management estimates that a 10% rise or fall in overall equity markets would cause a corresponding increase or decrease in Northern Trust’s trust, investment and other servicing fees of approximately 4% and in total revenues of approximately 2%.

 

The following table presents selected average month-end, average quarter-end, and year-end equity market indices and the percentage changes year over year.

 

MARKET INDICES      AVERAGE OF MONTH-END        AVERAGE OF QUARTER-END        YEAR-END  
       2009        2008      CHANGE        2009        2008      CHANGE        2009        2008      CHANGE  

S&P 500 ®

     949          1,215      (22 )%       972          1,168      (17 )%       1,115          903      23

MSCI EAFE ® *

     1,342         1,777      (24 )%       1,369         1,699      (19 )%       1,581         1,237      28
                                                                            

* In U.S. dollars.

 

In addition, C&IS client relationships are priced generally to reflect earnings from such activities as foreign exchange trading and custody related deposits not included in trust, investment and other servicing fees. Custody related deposits maintained with bank subsidiaries and foreign branches are primarily interest-bearing and averaged $30.4 billion in 2009, $33.2 billion in 2008, and $28.3 billion in 2007. Assets under custody and assets under management form the primary basis of our trust, investment and other servicing fees. At December 31, 2009, assets under custody were $3.66 trillion, up 22% from $3.01 trillion a year ago. Assets under custody included $1.9 trillion of global custody assets. Managed assets totaled $627.2 billion, up 12% from $558.8 billion at the end of 2008.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

ASSETS UNDER CUSTODY        DECEMBER 31        

PERCENT

CHANGE

   

FIVE-YEAR
COMPOUND
GROWTH

RATE

 
($ In Billions)   2009    2008    2007    2006    2005    2009/08    

Corporate & Institutional

  $ 3,325.9    $ 2,719.2    $ 3,802.9    $ 3,263.5    $ 2,699.7    22   7

Personal

    331.1      288.3      332.3      281.9      225.6    15      10   
                                                

Total Assets Under Custody

  $ 3,657.0    $ 3,007.5    $ 4,135.2    $ 3,545.4    $ 2,925.3    22   7

 

C&IS ASSETS UNDER CUSTODY ($ in Billions)

 

  

PFS ASSETS UNDER CUSTODY ($ in Billions)

 

LOGO

   LOGO

 

ASSETS UNDER MANAGEMENT          DECEMBER 31            

PERCENT

CHANGE

    

FIVE-YEAR
COMPOUND
GROWTH

RATE

 
($ In Billions)   2009      2008      2007      2006      2005      2009/08     

Corporate & Institutional

  $ 482.0      $ 426.4      $ 608.9      $ 562.5      $ 500.7      13    1

Personal

    145.2        132.4        148.3        134.7        117.2      10       6   
                                                           

Total Managed Assets

  $ 627.2      $ 558.8      $ 757.2      $ 697.2      $ 617.9      12    2

 

C&IS ASSETS UNDER MANAGEMENT ($ in Billions)

 

  

PFS ASSETS UNDER MANAGEMENT ($ in Billions)

 

LOGO

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Foreign Exchange Trading Income

Northern Trust provides foreign exchange services in the normal course of business as an integral part of its global custody services. Active management of currency positions, within conservative limits, also contributes to trading income. Foreign exchange trading income decreased 28%, or $170.5 million, and totaled $445.7 million in 2009 compared with $616.2 million last year. The decrease primarily reflects significantly reduced currency volatility and client volumes from the prior year’s record levels. Foreign exchange trading income in 2008 benefited from strong client volumes and exceptionally high currency volatility.

 

Security Commissions and Trading Income

Revenues from security commissions and trading income declined to $62.4 million from $77.0 million in 2008. This income is generated primarily from securities brokerage services provided by Northern Trust Securities, Inc. (NTSI). The 2009 decrease principally reflects decreased revenue from core brokerage services.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Treasury Management Fees

The fee portion of treasury management revenues increased 12% in 2009 to $81.8 million from $72.8 million in 2008, reflecting an increase in clients electing to pay for services in fees rather than with compensating deposit balances.

 

Other Operating Income

The components of other operating income include:

 

(In Millions)   2009      2008    2007  

Banking Service Fees

  $ 53.1       $ 39.4    $ 35.7   

Loan Service Fees

    52.1         30.0      16.5   

Non-Trading Foreign Exchange Gains (Losses)

    (1.4      36.1      2.1   

Credit Default Swap Gains (Losses)

    (4.6      35.4      4.8   

Loss on Sale of Non-U.S. Subsidiary

                 (4.1

Other Income

    37.6         46.0      40.3   
                         

Total Other Operating Income

  $ 136.8       $ 186.9    $ 95.3   

 

The 2009 increase in banking service fees primarily reflects higher letter of credit revenue. Growth in commercial loan-related commitment fees explains the rise in loan service fees. Non-trading foreign exchange gains (losses) reflect the impact of foreign exchange rate movements during the period on the translation to functional currencies of assets and liabilities denominated in nonfunctional currencies. Credit default swap gains and losses reflect the mark-to-market adjustments of credit default swap contracts used to mitigate credit risk associated with specific commercial credits. The gain in the prior year reflects the impact on certain credits which were under credit default swap contracts from the uncertain market conditions experienced in 2008. Other income decreased primarily because of lower custody related deposit revenue.

 

Investment Security Gains (Losses)

Net investment security losses were $23.4 million in 2009, a decrease from the $56.3 million loss in 2008. Losses of $26.7 million and $61.3 million were recorded in 2009 and 2008, respectively, to adjust the book values of asset-backed securities to their estimated fair values. Management determined the securities to be other-than-temporarily impaired. A gain of $4.9 million was recorded in 2008 from the sale of CME Group Inc. stock acquired from the demutualization and subsequent merger of the Chicago Mercantile Exchange and the Chicago Board of Trade.

 

NONINTEREST INCOME — 2008 COMPARED WITH 2007

Trust, investment and other servicing fees for 2008 accounted for 67% of total noninterest income and 49% of total taxable equivalent revenue. These fees increased 3% in 2008 to $2.13 billion from $2.08 billion in 2007. Total assets under custody at December 31, 2008, were $3.01 trillion, down 27% from $4.14 trillion in 2007, and included $1.42 trillion of global custody assets. Managed assets totaled $558.8 billion in 2008, down 26% from $757.2 billion a year earlier.

Foreign exchange trading income increased 75% in 2008 to a record $616.2 million from $351.3 million in 2007. The increase reflected strong client volumes as well as exceptionally high currency volatility in 2008.

Revenues from security commissions and trading income totaled $77.0 million in 2008, compared with $67.6 million in 2007. The increase primarily reflected higher revenue from core brokerage services.

Treasury management fees were $72.8 million in 2008, up 11% from the $65.3 million reported in 2007. More clients in 2008 elected to pay for services in fees rather than with compensating deposit balances.

During 2008, a gain of $167.9 million was realized in connection with Visa’s March 2008 initial public offering.

Other operating income totaled $186.9 million in 2008, a 96% rise from $95.3 million the previous year. The increase primarily reflected higher non-trading foreign exchange gains, credit default swap gains and loan service fees. The higher non-trading foreign exchange gains reflected the foreign exchange rate impact of translating non-U.S. dollar denominated assets and liabilities. Higher commercial loan-related commitment fee revenue resulted in increased loan service fees revenue in 2008.

Net investment security losses were $56.3 million in 2008 compared with a $6.5 million gain in 2007. Included in the 2008 loss was a $61.3 million other-than-temporary impairment (OTTI) charge. Gains of $4.9 million and $6.3 million were recorded in 2008 and 2007, respectively, from the sale of CME Group Inc. stock.

 

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Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Net Interest Income

An analysis of net interest income on an FTE basis, major balance sheet components impacting net interest income, and related ratios are provided below.

 

ANALYSIS OF NET INTEREST INCOME (FTE)

 

                               PERCENT CHANGE  
($ In Millions)   2009        2008        2007        2009/08      2008/07  

Interest Income

  $ 1,406.0         $ 2,478.5         $ 2,784.2         (43.3 )%     (11.0 )% 

FTE Adjustment

    40.2           49.8           62.5         (19.3    (20.3
                                               

Interest Income – FTE

    1,446.2           2,528.3           2,846.7         (42.8    (11.2

Interest Expense

    406.2           1,399.4           1,938.8         (71.0    (27.8
                                               

Net Interest Income – FTE Adjusted

    1,040.0         $ 1,128.9         $ 907.9         (7.9 )%     24.3
                                               

Net Interest Income – Unadjusted

  $ 999.8         $ 1,079.1         $ 845.4         (7.3 )%     27.6
                                               

AVERAGE BALANCE

                                             

Earning Assets

  $ 66,670.8         $ 64,249.9         $ 53,426.4         3.8    20.3

Interest-Related Funds

    53,671.6           55,173.9           45,722.7         (2.7    20.7   

Net Noninterest-Related Funds

    12,999.2           9,076.0           7,703.7         43.2       17.8   
                                               
                               CHANGE IN PERCENTAGE  

AVERAGE RATE

                                             

Earning Assets

    2.17        3.94        5.33      (1.77    (1.39

Interest-Related Funds

    .76           2.54           4.24         (1.78    (1.70

Interest Rate Spread

    1.41           1.40           1.09         .01       .31   

Total Source of Funds

    .61           2.18           3.63         (1.57    (1.45

Net Interest Margin

    1.56        1.76        1.70      (.20    .06   

Refer to pages 118 and 119 for additional analysis of net interest income.

 

Net interest income is defined as the total of interest income and amortized fees on earning assets, less interest expense on deposits and borrowed funds, adjusted for the impact of interest-related hedging activity. Earning assets – securities, loans and money market assets – are financed by a large base of interest-bearing funds that include personal and institutional deposits, wholesale deposits, short-term borrowings, senior notes and long-term debt. Earning assets also are funded by net noninterest-related funds, which include demand deposits, the reserve for credit losses and stockholders’ equity, reduced by nonearning assets such as cash and due from banks; items in process of collection; and buildings and equipment. The dominant factors that affect net interest income are variations in the level and mix of earning assets; interest-bearing funds; net noninterest-related funds; and their relative sensitivity to interest rate movements. In addition, the levels of nonperforming assets and client compensating deposit balances used to pay for services impact net interest income.

Net interest income in 2009 was $999.8 million, down 7% from $1.08 billion in 2008. When adjusted to an FTE basis, yields on taxable, nontaxable and partially taxable assets are comparable, although the adjustment to an FTE basis has no impact on net income. Net interest income on an FTE basis for 2009 was $1.04 billion, a decline of 8% from $1.13 billion in 2008. The decrease reflects the significant reduction in the net interest margin from the low interest rate environment. The prior year included leasing related adjustments that reduced net interest income by $38.9 million. The net interest margin was 1.56% for 2009, down from the previous year’s 1.76% (1.82% after excluding the prior year’s leasing adjustment). This drop reflected the significant decline in yields on short-term assets and the diminished value of noninterest-related funding sources because of the extended period of low interest rates in 2009.

Earning assets averaged $66.7 billion, up 4% from the $64.2 billion reported in 2008. This growth reflects a $5.1 billion increase in securities and a $1.3 billion increase in loans partially offset by a $3.9 billion decrease in money market assets.

Loans averaged $28.7 billion, 5% higher than in 2008. The year-to-year comparison reflects a 10% increase in average residential mortgages to $10.7 billion, as well as an 8% increase in both commercial loans and personal loans to $7.5 billion and $4.7 billion on average, respectively, in 2009. Non-U.S. loans decreased 42% to $951.5 million in 2009 from the prior year average of $1.6 billion. Money market assets averaged $20.6 billion in 2009, down 16% from 2008 levels.

 

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Securities averaged $17.4 billion, up 41% from 2008, with the growth primarily in government sponsored agency securities, which averaged $11.9 billion, up 37% from $8.7 billion in 2008.

The increase in average earning assets of $2.4 billion was funded primarily by higher levels of noninterest-bearing deposits and an increase in stockholders’ equity. Interest-related funding sources in 2009 declined $1.5 billion from 2008, primarily due to lower levels of non-U.S. office time deposits, partially offset by increases in domestic deposits, short-term borrowings and senior notes.

Stockholders’ equity for 2009 averaged $6.6 billion, up $1.5 billion or 29% from 2008. The increase primarily reflects cash proceeds of $834.1 million received from the April 2009 issuance of 17,250,000 common shares in connection with a public offering, the $1.576 billion of preferred stock issued to the U.S. Treasury in November 2008 in connection with the Corporation’s participation in the U.S. Treasury’s CPP, and the retention of earnings. The preferred stock issued under the CPP was repurchased in full in June 2009.

For additional analysis of average balances and interest rate changes affecting net interest income, refer to the Average Statement of Condition with Analysis of Net Interest Income on pages 118 and 119.

 

NET INTEREST INCOME — 2008 COMPARED WITH 2007

Net interest income in 2008 increased from 2007 and reflected a $10.8 billion, or 20%, increase in average earning assets. The higher level of average earning assets primarily represented growth in money market assets and loans, and an increase in the net interest margin. The net interest margin increased to 1.76% from 1.70% in 2007, reflecting a widening of the spread between interest rates on short-term investments and overnight funding sources, including the impact of Federal Reserve Bank rate reductions. The results for 2008 and 2007 were impacted by leasing related adjustments that reduced net interest income by $38.9 million and $13.0 million, respectively. Excluding the leasing adjustments, the net interest margin for 2008 and 2007 would have been 1.82% and 1.72%, respectively.

Earning assets averaged $64.2 billion in 2008 compared with $53.4 billion in 2007. The growth reflected a $6.4 billion increase in money market assets and a $4.6 billion increase in loans offset by a $172.4 million decrease in securities.

Loans averaged $27.4 billion, a 20% increase from 2007 that reflected a 39% increase in average commercial loans to $7.0 billion. Residential mortgages rose 9% to an average $9.7 billion and personal loans increased 33% to $4.4 billion. Non-U.S. loans decreased 4% to $1.6 billion from the 2007 average of $1.7 billion. Money market assets averaged $24.6 billion in 2008, up 35% from 2007 levels. Securities averaged $12.3 billion in 2008, down 1% from 2007. Government sponsored agency securities averaged $8.7 billion, down 11% from $9.7 billion in 2007.

The $10.8 billion increase in average earning assets in 2008 was funded primarily through growth in interest-bearing deposits. The deposit growth, primarily in non-U.S. office interest-bearing deposits that were up $7.4 billion, reflected increased global custody activity. Savings and money market deposits increased 11% and savings certificates rose 5%. Other interest-related funds averaged $8.7 billion, up $1.1 billion, due primarily to higher levels of senior and subordinated debt and Federal Home Loan Bank borrowings. Average net noninterest-related funds increased 18% in 2008 and averaged $9.1 billion, primarily reflecting higher levels of noninterest-bearing deposits in both domestic and non-U.S. offices. Stockholders’ equity for 2008 averaged $5.1 billion, an increase of $942.0 million, or 23%, from 2007. This rise primarily reflected the retention of earnings and the issuance of senior preferred stock and related warrant to the U.S. Treasury, offset in part by the repurchase of 1.1 million shares of the Corporation’s common stock at a total cost of $75.1 million ($66.68 average price per share).

 

Provision for Credit Losses

The provision for credit losses was $215.0 million in 2009 compared with a $115.0 million provision in 2008 and a $18.0 million provision in 2007. The current year provision reflects the continued weakness in the broader economic environment. For a fuller discussion of the reserve and provision for credit losses for 2009, 2008, and 2007, refer to pages 58 through 59.

 

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Noninterest Expenses

Noninterest expenses for 2009 totaled $2.32 billion, down 20% from $2.89 billion in 2008. On an operating basis, which excludes the impact of the Visa indemnification related adjustments discussed below, noninterest expenses decreased $629.4 million, or 21%. 2008 results were impacted by $536.3 million of client support related charges, including $314.1 million of support provided to cash investment funds under the CSAs. The current year includes a net expense reduction of $109.3 million associated with the final support payments and expiration of the CSA obligations. The components of noninterest expenses and a discussion of significant changes during 2009 and 2008 are provided below.

 

NONINTEREST EXPENSES

 

(In Millions)   2009      2008      2007

Compensation

  $ 1,099.7       $ 1,133.1       $ 1,038.2

Employee Benefits

    242.1         223.4         234.9

Outside Services

    424.5         413.8         386.2

Equipment and Software Expense

    261.1         241.2         219.3

Occupancy Expense

    170.8         166.1         156.5

Visa Indemnification Charges

    (17.8      (76.1      150.0

Other Operating Expenses

    136.3         786.3         245.1
                         

Total Noninterest Expenses

  $ 2,316.7       $ 2,887.8       $ 2,430.2

 

Compensation and Benefits

Compensation costs, the largest component of noninterest expenses, decreased $33.4 million, or 3%, from 2008, reflecting the impact of lower salary expense and performance-based equity compensation, offset partially by higher cash-based incentives. The previous year included a $17.0 million charge in connection with initiatives to reduce staff expense levels. Staff on a full-time equivalent basis averaged 12,300 in 2009, up 5% compared with 11,700 in 2008. The 2009 increase primarily reflected additional staff to support international growth. Staff on a full-time equivalent basis totaled 12,400 at December 31, 2009 compared with 12,200 at December 31, 2008.

Employee benefit costs for 2009 were $242.1 million, up $18.7 million, or 8%, from $223.4 million in 2008. The current year reflects increases in defined benefit and defined contribution plan expenses as well as higher staff levels.

 

Outside Services

Outside services expense of $424.5 million in 2009 increased 3% from $413.8 million in 2008 due to higher technical services and investment manager sub-advisor expenses. Technical services include expenses for systems and application support; the provision of market and research data; and outsourced check processing and lockbox services, among other services.

 

Equipment and Software Expense

Equipment and software expense, comprised of depreciation and amortization; rental; and maintenance costs, totaled $261.1 million, up 8% from $241.2 million in 2008. The increase primarily reflects higher levels of computer software depreciation and amortization from continued investments in information technology infrastructure.

 

Occupancy Expense

Net occupancy expense totaled $170.8 million, up 3% from $166.1 million in 2008, reflecting increased rent expense.

 

Visa Indemnification Charges

In 2009 and 2008, offsets to Northern Trust’s Visa indemnification liability and related charges totaled $17.8 million and $76.1 million, respectively. Northern Trust, as a member bank of Visa U.S.A., and in conjunction with other member banks, is obligated to share in losses resulting from certain indemnified litigation involving Visa. The reductions reflect Northern Trust’s proportionate share of funds that Visa deposited into its litigation escrow account in 2009 and 2008. In 2007, Northern Trust recorded charges totaling $150.0 million related to its obligation to share in potential losses from certain indemnified litigation involving Visa. Visa indemnification charges are further discussed in Note 18 to the consolidated financial statements.

 

Other Operating Expenses

The components of other operating expenses were as follows:

 

(In Millions)   2009      2008    2007

Business Promotion

  $ 66.6       $ 87.8    $ 77.0

FDIC Insurance Premiums

    54.1         5.6      1.8

Staff Related

    31.3         38.1      35.9

Other Intangibles Amortization

    16.2         17.8      20.9

Capital Support Agreements

    (109.3      314.1     

Securities Lending Client Support

            167.6     

Auction Rate Securities Purchase Program

            54.6     

Other Expenses

    77.4         100.7      109.5
                       

Total Other Operating Expenses

  $ 136.3       $ 786.3    $ 245.1

 

Business promotion for the current year declined primarily because of reduced travel costs and advertising expenses. Staff related expenses, which include costs associated with the

 

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hiring and training of staff, employee relocation assistance, and other similar employee related expenses, decreased in 2009. This primarily reflected reduced hiring costs, partially offset by increased relocation expenses. The increase in Federal Deposit Insurance Corporation (FDIC) insurance premiums reflects a special assessment of $20.2 million recorded in the second quarter of 2009, as well as higher assessment rates and domestic balances. The current year decrease in the other expenses component of other operating expenses reflects lower charges related to account servicing activities and decreases in other miscellaneous expense categories. The 2008 other expenses component included a $20.1 million currency translation related benefit associated with Lehman Brothers bankruptcy matters.

 

NONINTEREST EXPENSE — 2008 COMPARED WITH 2007

Noninterest expenses for 2008 totaled $2.89 billion, up 19% from $2.43 billion in 2007. On an operating basis, which excludes the impact of the Visa indemnification related charges in 2008 and 2007, noninterest expenses increased $683.7 million, or 30%. The 2008 results were impacted by the $536.3 million of client support related charges.

Compensation costs, the largest component of noninterest expenses, increased $94.9 million, or 9%, from 2007 and reflected higher staff levels, annual salary increases and the $17.0 million charge to reduce staff expense levels. Partially offsetting the increase was a $36.4 million decrease in performance-based compensation. Staff on a full time equivalent basis averaged 11,700 in 2008, up 14% from 10,300 in 2007. Compensation costs increased in 2008 primarily due to additional staff to support international growth. Staff on a full time equivalent basis totaled 12,200 at December 31, 2008, compared with 10,900 at year-end 2007.

Employee benefit costs for 2008 were $223.4 million, down $11.5 million, or 5%, from $234.9 million in 2007. The 2008 expense reflected lower defined benefit and defined contribution plan expenses, partially offset by higher expenses related to employment taxes and health care costs.

Outside services expense totaled $413.8 million in 2008, up 7% from $386.2 million in 2007. The increase reflected higher expenses for legal fees, and technical, consulting, and other outsourced services.

Equipment and software expense, comprised of depreciation and amortization, rental, and maintenance costs, were $241.2 million, up 10% from $219.3 million in 2007. Higher computer software expense drove the increase.

Net occupancy expense was $166.1 million, up 6% from $156.5 million in 2007. Occupancy expense in 2008 reflected higher levels of operating expense and building maintenance, partially offset by lower levels of rent expense.

A $76.1 million expense reduction was recorded in 2008 as an offset to the $150.0 million Visa indemnification reserve established in the fourth quarter of 2007.

Other operating expenses for 2008 totaled $786.3 million, up from $245.1 million in 2007. Other operating expenses for 2008 included $536.3 million of client support related charges comprised of $314.1 million in connection with support provided to investment vehicles under the CSAs, $167.6 million of support provided to Northern Trust’s securities lending clients and $54.6 million related to the establishment of a program to purchase certain illiquid auction rate securities that were purchased by a limited number of Northern Trust clients. Also in 2008 were significantly higher charges related to account servicing activities and legal matters and higher business promotion expense as compared to 2007, partially offset by a $20.1 million currency translation related benefit associated with Lehman Brothers bankruptcy matters.

 

Provision for Income Taxes

The 2009 income tax provision was $391.0 million, representing an effective rate of 31.2%. This compares with $480.9 million in income tax expense and an effective rate of 37.7% in 2008. The current year includes $17.0 million of income tax benefits relating to the resolution of certain state and structured leasing tax positions taken in prior periods. The current year effective tax rate also reflects a $20.9 million reduction in the tax provision related to certain non-U.S. subsidiaries whose earnings are being indefinitely reinvested, as compared with $47.8 million in 2008. The 2008 provision reflected a $61.3 million charge related to revised estimates regarding the outcome of the Corporation’s tax position with respect to certain structured leasing transactions. The prior year effective tax rate was 32.8%, excluding the impact of client support, Visa indemnification, and leasing related charges.

 

PROVISION FOR INCOME TAXES — 2008 COMPARED WITH 2007

The 2008 provision for income tax expense of $480.9 million represented an effective rate of 37.7%. This compared with $333.9 million in income tax expense and an effective rate of 31.5% in 2007. The 2008 effective rate excluding the impact of client support, Visa indemnification, and leasing related charges was 32.8%. The effective tax rate in 2008 reflected a $47.8 million reduction in the tax provision related to certain non-U.S. subsidiaries whose earnings are being indefinitely

 

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reinvested, as compared with an $18.4 million reduction in 2007. The 2007 effective tax rate benefited from a reduction in net deferred tax liabilities resulting from new state tax legislation enacted during 2007.

 

BUSINESS UNIT REPORTING

 

Northern Trust, under the leadership of Chairman, President, and Chief Executive Officer Frederick H. Waddell, is organized around its two principal client-focused business units, C&IS and PFS. Investment management services and products are provided to the clients of these business units by NTGI. Operations support is provided to each of the business units by O&T. Mr. Waddell has been identified as the chief operating decision maker, having final authority over resource allocation decisions and performance assessment.

C&IS and PFS results are presented to promote a greater understanding of their financial performance. The information, presented on an internal management-reporting basis, derives from internal accounting systems that support Northern Trust’s strategic objectives and management structure. Management has developed accounting systems to allocate revenue and expenses related to each segment. They incorporate processes for allocating assets, liabilities and equity, and the applicable interest income and expense. Equity is allocated based on the proportion of economic capital associated with the business units.

Allocations of capital and certain corporate expenses may not be representative of levels that would be required if the segments were independent entities. The accounting policies used for management reporting are consistent with those described in Note 1 to the consolidated financial statements. Transfers of income and expense items are recorded at cost; there is no consolidated profit or loss on sales or transfers between business units. Northern Trust’s presentations are not necessarily consistent with similar information for other financial institutions.

 

CONSOLIDATED FINANCIAL INFORMATION

 

(In Millions)   2009        2008        2007

Noninterest Income

                           

Trust, Investment and Other Servicing Fees

  $ 2,083.8         $ 2,134.9         $ 2,077.6

Gain on Visa Share Redemption

              167.9          

Other

    703.3           896.6           586.0

Net Interest Income (FTE)*

    1,040.0           1,128.9           907.9
                             

Revenues (FTE)*

    3,827.1           4,328.3           3,571.5

Provision for Credit Losses

    215.0           115.0           18.0

Visa Indemnification Charges

    (17.8        (76.1        150.0

Noninterest Expenses

    2,334.5           2,963.9           2,280.2
                             

Income before Income Taxes*

    1,295.4           1,325.5           1,123.3

Provision for Income Taxes*

    431.2           530.7           396.4
                             

Net Income

    864.2           794.8           726.9
                             

Average Assets

  $ 74,314.2         $ 73,028.5         $ 60,588.0
                             

* Stated on an FTE basis. The consolidated figures include $40.2 million, $49.8 million, and $62.5 million of FTE adjustment for 2009, 2008, and 2007, respectively.

 

Corporate and Institutional Services

The C&IS business unit is a leading global provider of asset servicing, asset management and related services to corporate and public retirement funds, foundations, endowments, fund managers, insurance companies and government funds. C&IS also offers a full range of commercial banking services, placing special emphasis on developing and supporting institutional relationships in two target markets: large and mid-sized corporations and financial institutions. Asset servicing, asset management and related services encompass a full range of state-of-the-art capabilities. These include global master trust and custody, trade settlement, and reporting; fund administration; cash management; investment risk and performance analytical services; and investment operations outsourcing. Client relationships are managed through the Bank and the Bank’s and the Corporation’s subsidiaries, including support from international locations in North America, Europe, the Asia-Pacific region and the Middle East. Asset servicing relationships managed by C&IS often include investment management, securities lending, transition management and commission recapture services provided through the NTGI business unit. C&IS also provides related foreign exchange services in the U.S., U.K. and Singapore.

 

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The following table summarizes the results of operations of C&IS for the years ended December 31, 2009, 2008, and 2007 on a management-reporting basis.

 

CORPORATE AND INSTITUTIONAL SERVICES

RESULTS OF OPERATIONS

 

(In Millions)   2009        2008        2007  

Noninterest Income

                             

Trust, Investment and Other Servicing Fees

  $ 1,236.8         $ 1,225.9         $ 1,179.8   

Other

    571.3           804.6           462.8   

Net Interest Income (FTE)

    416.0           571.1           423.2   
                               

Revenues (FTE)

    2,224.1           2,601.6           2,065.8   

Provision for Credit Losses

    30.7           25.2           4.5   

Noninterest Expenses

    1,200.6           1,779.5           1,224.3   
                               

Income before Income Taxes

    992.8           796.9           837.0   

Provision for Income Taxes

    350.8           308.2           311.0   
                               

Net Income

  $ 642.0         $ 488.7         $ 526.0   
                               

Percentage of Consolidated Net Income

    74        61        72
                               

Average Assets

  $ 38,117.1         $ 49,490.4         $ 41,510.2   

 

C&IS net income increased 31% in 2009 to $642.0 million from $488.7 million in 2008, which had decreased 7% from $526.0 million in 2007. The rise in 2009 primarily reflects reduced noninterest expenses, increased securities lending revenue, and new business, partially offset by reduced foreign exchange trading income and net interest income. The net income decrease in 2008 as compared to 2007 resulted primarily from client support related charges of $454.9 million, partially offset by record foreign exchange trading results, record net interest income, and a record level of trust, investment and other servicing fees.

 

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C&IS Trust, Investment and Other Servicing Fees

C&IS trust, investment and other servicing fees are attributable to four general product types: Custody and Fund Administration, Investment Management, Securities Lending, and Other Services. Custody and fund administration fees are driven primarily by asset values, transaction volumes and number of accounts. For custody fees related to asset values, most are priced based on values at the beginning of each quarter; however, some are based on quarter-end values. The fund administration fees that are asset value related are priced using average daily balances. Investment management fees are based primarily on market values throughout a period.

Securities lending revenue is affected by market values, the demand for securities to be lent, which drives volumes, and the interest rate spread earned on the investment of cash deposited by investment firms as collateral for securities they have borrowed. Securities lending fees also include Northern Trust’s share of unrealized gains and losses on one mark-to-market investment fund used in securities lending activities. The other services fee category in C&IS includes such products as benefit payment, performance analysis, electronic delivery, and other services. Revenues from these products are based generally on the volume of services provided or a fixed fee.

 

Trust, investment and other servicing fees in C&IS increased 1% in 2009 to $1.24 billion from $1.23 billion in 2008. Provided below are the components of trust, investment and other servicing fees and a breakdown of assets under custody and under management.

 

CORPORATE AND INSTITUTIONAL SERVICES

TRUST, INVESTMENT AND OTHER SERVICING FEES

 

(In Millions)   2009    2008    2007

Custody and Fund Administration

  $ 583.0    $ 661.6    $ 615.2

Investment Management

    247.1      277.4      290.6

Securities Lending

    336.7      221.4      207.1

Other Services

    70.0      65.5      66.9
                     

Total Trust, Investment and Other Servicing Fees

  $ 1,236.8    $ 1,225.9    $ 1,179.8

 

2009 C&IS FEES

 

LOGO

 

CORPORATE AND INSTITUTIONAL SERVICES

ASSETS UNDER CUSTODY

 

    DECEMBER 31
(In Billions)   2009    2008    2007

North America

  $ 1,861.9    $ 1,661.1    $ 2,166.1

Europe, Middle East, and Africa

    1,085.9      801.7      1,139.3

Asia-Pacific Region

    263.6      146.2      228.0

Securities Lending

    114.5      110.2      269.5
                     

Total Assets Under Custody

  $ 3,325.9    $ 2,719.2    $ 3,802.9

 

2009 C&IS ASSETS UNDER CUSTODY

 

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CORPORATE AND INSTITUTIONAL SERVICES

ASSETS UNDER MANAGEMENT

 

    DECEMBER 31
(In Billions)   2009    2008    2007

North America

  $    257.6    $    232.3    $    281.3

Europe, Middle East, and Africa

    63.5      52.8      35.1

Asia-Pacific Region

    46.4      31.1      23.0

Securities Lending

    114.5      110.2      269.5
                     

Total Assets Under Management

  $ 482.0    $ 426.4    $ 608.9

 

2009 C&IS ASSETS UNDER MANAGEMENT

 

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Custody and fund administration fees, the largest component of trust, investment and other servicing fees, decreased 12% to $583.0 million in 2009. This compares with $661.6 million a year ago, primarily reflecting lower fund administration and global custody fee revenues. Fees from investment management totaled $247.1 million, down from $277.4 million in the year-ago period. The 11% decrease primarily reflects lower market valuations during the majority of the year. Securities lending revenue increased 52% to $336.7 million compared with $221.4 million in 2008. The increase was due to a recovery of previously recorded unrealized asset valuation losses of approximately $204 million that related to a mark-to-market investment fund used in our securities lending activities. This compares to unrealized asset valuation losses of approximately $213 million in 2008. Excluding the impact of the unrealized asset valuation losses, securities lending fees decreased by approximately $302 million, reflecting significantly lower spreads on the investment of cash collateral and reduced average volumes.

C&IS assets under custody were $3.3 trillion at December 31, 2009, 22% higher than $2.7 trillion at December 31, 2008. Managed assets totaled $482.0 billion and $426.4 billion, at December 31, 2009 and 2008, respectively, and as of the current year end were invested 45% in equity securities, 14% in fixed income securities and 41% in cash and other assets. Cash and other assets deposited by investment firms as collateral for securities borrowed from custody clients are managed by Northern Trust and are included in assets under custody and under management. This collateral totaled $114.5 billion and $110.2 billion at December 31, 2009 and 2008, respectively.

 

C&IS Other Noninterest Income

Other noninterest income for 2009 decreased $233.3 million, or 29%, to $571.3 million from $804.6 million in 2008. The decrease primarily reflects a $167.2 million, or 28%, decrease in foreign exchange trading income from 2008’s record levels due to significantly reduced currency volatility and client volumes as compared to 2008. The decrease also reflects the impact of mark-to-market adjustments on credit default swap contracts, which totaled a loss of $4.6 million in 2009 as compared to a gain of $35.4 million in 2008, and the impact of non-trading foreign exchange, which totaled a loss of $1.4 million in 2009 as compared to a gain of $36.1 million recorded in 2008. Other 2008 noninterest income increased 74% from 2007, primarily due to a 76% increase in foreign exchange trading income. The increase in 2008 from 2007 also reflects the $35.4 million and $36.1 million of credit default swap valuation and non-trading foreign exchange gains, respectively, recorded in 2008. This compares to gains of $4.8 million and $2.1 million, respectively, recorded in 2007, as well as higher levels of custody related deposit revenue and commercial loan-related commitment fee revenue.

 

C&IS Net Interest Income

Net interest income decreased $155.1 million, or 27%, in 2009, reflecting the significant reduction in the net interest margin as a result of the low interest rate environment and an $11.7 billion or 26% decrease in average earning assets, primarily short-term money market assets. The net interest margin was 1.25% in 2009 and 1.27% in 2008. The prior year net interest margin was impacted by leasing related adjustments that reduced net interest income by $38.9 million. The decline in the net interest margin is attributed to the significant decline in yields on short-term assets and the diminished value of noninterest-related funding sources that resulted from the extended period of low interest rates in 2009. The 35% increase in net interest income for 2008 from 2007 reflected an $8.9 billion, or 25%, increase in average earning assets, primarily short-term money market assets and loans.

 

C&IS Provision for Credit Losses

The provision for credit losses was $30.7 million for 2009, compared with $25.2 million in 2008, and $4.5 million in 2007. The increase in the provision for credit losses in 2009 reflects the continued weakness in the broader economic environment. The provision for credit losses in 2008 reflected growth in the commercial loan portfolio and weakness in the broader economic environment.

 

C&IS Noninterest Expenses

C&IS noninterest expenses in 2009 decreased $578.9 million, or 33%, from 2008. Noninterest expenses in 2008 included $454.9 million of client support related charges, including $289.0 million in connection with the support provided under the CSAs. The current year includes a net expense reduction of $100.6 million associated with the final support payments and expiration of the CSA obligations. Excluding client support related charges, noninterest expenses for 2009 decreased by $23.2 million, or 2%, compared to 2008, reflecting lower staff related, outside services, business promotion expenses, and other operating expenses, partially offset by indirect expense allocations for product and operating support. The growth in noninterest expenses for 2008 as compared to 2007 reflected

 

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the 2008 client support related charges and the impact of higher staff levels, annual salary increases, and other staff related charges. Also affecting noninterest expenses were higher expenses related to account servicing activities, partially offset by a decrease in performance-based compensation and lower expenses for technical and global subcustody services.

 

Personal Financial Services

The PFS business unit provides personal trust, investment management, custody, and philanthropic services; financial consulting; guardianship and estate administration; brokerage services; and private and business banking. PFS primarily focuses on high net worth individuals and families, business owners, executives, professionals, retirees, and established privately-held businesses in its target markets. PFS also includes the Wealth Management Group, which provides customized products and services to meet the complex financial needs of individuals and family offices in the United States and throughout the world with assets typically exceeding $200 million. PFS services are delivered through a network of 79 offices in 18 U.S. states as well as offices in London and Guernsey.

 

The following table summarizes the results of operations of PFS for the years ended December 31, 2009, 2008, and 2007 on a management-reporting basis.

 

PERSONAL FINANCIAL SERVICES

RESULTS OF OPERATIONS

 

(In Millions)   2009        2008        2007  

Noninterest Income

                             

Trust, Investment and Other Servicing Fees

  $ 847.0         $ 909.0         $ 897.8   

Other

    138.7           132.6           99.4   

Net Interest Income (FTE)

    538.1           542.7           518.9   
                               

Revenues (FTE)

    1,523.8           1,584.3           1,516.1   

Provision for Credit Losses

    184.3           89.8           13.5   

Noninterest Expenses

    1,044.6           1,087.9           943.5   
                               

Income before Income Taxes

  $ 294.9         $ 406.6         $ 559.1   

Provision for Income Taxes

    112.4           156.1           216.7   
                               

Net Income

  $ 182.5         $ 250.5         $ 342.4   
                               

Percentage of Consolidated Net Income

    21        32        47
                               

Average Assets

  $ 24,534.8         $ 22,868.7         $ 18,888.6   

 

PFS revenues in 2009 decreased 4% to $1.52 billion from 2008 results of $1.58 billion primarily reflecting a $62.0 million, or 7%, reduction in trust, investment and other servicing fees, and a 1% decrease in net interest income. PFS net income was $182.5 million in 2009, a decrease of $68.0 million, or 27%, from 2008, which was also down 27% from 2007 net income. The 2009 decline primarily reflected a $94.5 million increase in the provision for credit losses and the decline in trust, investment and other servicing fees, partially offset by a reduction in noninterest expenses. Net income in 2008 included $81.4 million of client support related charges, and a $76.3 million increase in the provision for credit losses, partially offset by higher net interest income and record levels of trust, investment and other servicing fees as compared to 2007.

 

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PFS Trust, Investment and Other Servicing Fees

Provided below is a summary of trust, investment and other servicing fees and assets under custody and under management.

 

PERSONAL FINANCIAL SERVICES

TRUST, INVESTMENT AND OTHER SERVICING FEES

 

(In Millions)   2009    2008    2007

Illinois

  $ 289.6    $ 301.6    $ 302.5

Florida

    187.0      205.5      207.3

California

    78.7      90.7      92.2

Arizona

    41.9      47.8      47.9

Texas

    33.5      37.9      36.0

Other

    80.5      83.1      78.3

Wealth Management

    135.8      142.4      133.6
                     

Total Trust, Investment and Other Servicing Fees

  $ 847.0    $ 909.0    $ 897.8

 

2009 PFS FEES

 

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PERSONAL FINANCIAL SERVICES

ASSETS UNDER CUSTODY

 

    DECEMBER 31
(In Billions)   2009    2008    2007

Illinois

  $ 49.7    $ 46.6    $ 54.2

Florida

    32.5      28.6      34.7

California

    15.1      14.3      17.4

Arizona

    6.2      5.7      7.3

Texas

    6.8      6.1      6.6

Other

    24.8      18.6      17.1

Wealth Management

    196.0      168.4      195.0
                     

Total Assets Under Custody

  $ 331.1    $ 288.3    $ 332.3

 

2009 PFS ASSETS UNDER CUSTODY

 

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PERSONAL FINANCIAL SERVICES

ASSETS UNDER MANAGEMENT

 

    DECEMBER 31
(In Billions)   2009    2008    2007

Illinois

  $ 38.7    $ 35.7    $ 41.3

Florida

    26.0      23.3      27.9

California

    11.2      10.2      12.0

Arizona

    4.8      4.5      5.6

Texas

    5.0      4.5      4.7

Other

    28.1      25.2      26.9

Wealth Management

    31.4      29.0      29.9
                     

Total Assets Under Management

  $ 145.2    $ 132.4    $ 148.3

 

2009 PFS ASSETS UNDER MANAGEMENT

 

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Fees in the majority of locations in which PFS operates and all mutual fund-related revenue are calculated based on market values. PFS trust, investment and other servicing fees were $847.0 million for the year, down 7% from $909.0 million in 2008, which in turn was up 1% from $897.8 million in 2007. The current year performance was impacted by lower market valuations during the majority of 2009 and $23.9 million of waived fees in money market funds due to the low level of short-term interest rates, partially offset by new business. The 2008 performance was aided by strong new business, offset in part by lower equity markets when compared with 2007.

At December 31, 2009, assets under custody in PFS were $331.1 billion, compared with $288.3 billion at December 31, 2008. Included in assets under custody are those for which Northern Trust has management responsibility. Managed assets were $145.2 billion at December 31, 2009, 10% higher than the previous year end, and were invested 35% in equity securities, 33% in fixed income securities and 32% in cash and other assets.

 

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PFS Other Income

Other noninterest income for 2009 totaled $138.7 million compared with $132.6 million last year. The increase was primarily driven by growth in treasury management fees and in banking services and commercial loan-related commitment fee revenue. Other noninterest income for 2008 increased 33% from 2007, driven by higher security commissions and trading income and growth in commercial loan-related commitment revenue and treasury management fees.

 

PFS Net Interest Income

Net interest income of $538.1 million in 2009 was 1% lower than the previous year. Average loan volume was lower by $1.4 billion or 6%, while the net interest margin decreased to 2.23% from 2.43% in 2008. The decline in the net interest margin reflects the significant decrease in yields on short-term assets and the diminished value of noninterest-related funding sources resulting from the extended period of low interest rates in 2009. Net interest income for 2008 of $542.7 million was 5% higher than for 2007. Average loan volume grew $3.6 billion, or 20%, while the net interest margin decreased to 2.43% from 2.84% in 2007. The net interest margin in 2008 reflected reduced asset yields as compared to the related total funding sources, and the impact of changes to management accounting system methodologies relating to the application of funds transfer pricing and the allocation of capital.

 

PFS Provision for Credit Losses

The provision for credit losses was $184.3 million for 2009, compared with $89.8 million in 2008, and $13.5 million in 2007. The increase from 2008 reflects the continued weakness in the broader economic environment. The provision for credit losses in 2008 reflected growth in the commercial loan portfolio and weakness in the broader economic environment. For a fuller discussion of the reserve and provision for credit losses refer to pages 58 through 59.

 

PFS Noninterest Expenses

Noninterest expenses of PFS decreased $43.3 million, or 4%, in 2009 to $1.04 billion. In the previous year, noninterest expenses included $54.6 million of client support related charges in connection with the auction rate securities purchase program and $26.8 million in connection with other client support related charges, including the support provided under the CSAs. The current year includes a net expense reduction totaling $8.7 million associated with the final support payments and expiration of the CSA obligations. Excluding the impact of client support related charges, noninterest expenses for 2009 increased by $46.6 million, or 5%, compared to 2008, reflecting increased indirect expense allocations for product and operating support and increased FDIC insurance premiums, salaries and benefits expense, partially offset by lower business promotion and advertising expense. Noninterest expenses in 2008 increased 15% to $1.09 billion, compared to $943.5 million in 2007. The increase reflected the $81.4 million of client support related charges, annual salary increases, higher charges related to account servicing activities and legal matters, and fees for legal services, partially offset by lower performance-based compensation, occupancy costs, and lower business promotion and advertising.

 

Northern Trust Global Investments

Through various subsidiaries of the Corporation, NTGI provides a broad range of investment management and related services and other products to U.S. and non-U.S. clients, including clients of C&IS and PFS. Clients include institutional and individual separately managed accounts, bank common and collective funds, registered investment companies, non-U.S. collective investment funds, and unregistered private investment funds. NTGI offers both active and passive equity and fixed income portfolio management, as well as alternative asset classes (such as private equity and hedge funds of funds) and multi-manager products and services. NTGI’s activities also include brokerage, securities lending, transition management, and related services. Its business operates internationally and its revenue and expenses are fully allocated to C&IS and PFS.

At year-end 2009, Northern Trust managed $627.2 billion in assets for personal and institutional clients compared with $558.8 billion at year-end 2008. The increase in assets reflects improved equity markets in the latter part of 2009 and new business.

 

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NORTHERN TRUST GLOBAL INVESTMENTS

$627.2 BILLION ASSETS UNDER MANAGEMENT

 

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ASSET CLASSES

 

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CLIENT SEGMENTS

 

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MANAGEMENT STYLES

 

Operations and Technology

The O&T business unit supports all Northern Trust business activities, including the processing and product management activities of C&IS, PFS and NTGI. These activities are conducted principally in the operations and technology centers in Chicago, London, and Bangalore and fund administration centers in Ireland.

 

Corporate Financial Management Group

The Corporate Financial Management Group includes the Chief Financial Officer, Controller, Treasurer, Corporate Development, Investor Relations, and Procurement functions. The Group is responsible for Northern Trust’s accounting and financial infrastructure and for managing the Corporation’s financial position.

 

Corporate Risk Management Group

The Corporate Risk Management Group includes the Credit Policy and other Corporate Risk Management functions. The Credit Policy function is described in the “Risk Management – Loans and Other Extensions of Credit” section. The Corporate Risk Management Group monitors, measures, and facilitates the management of risks across the businesses of the Corporation and its subsidiaries.

 

Treasury and Other

Treasury and Other includes income and expense associated with the wholesale funding activities and the investment portfolios of the Corporation and the Bank. Treasury and Other also includes certain corporate-based expenses, executive level compensation and nonrecurring items not allocated to the business units.

The following table summarizes the results of operations of Treasury and Other for the years ended December 31, 2009, 2008, and 2007 on a management-reporting basis.

 

TREASURY AND OTHER

RESULTS OF OPERATIONS

 

(In Millions)   2009      2008     2007  

Gain on Visa Share Redemption

  $       $ 167.9      $   

Other Noninterest Income

    (6.7      (40.6     23.8   

Net Interest Income (Expense) (FTE)

    85.9         15.1        (34.2
                          

Revenues (FTE)

    79.2         142.4        (10.4

Visa Indemnification Charges

    (17.8      (76.1     150.0   

Noninterest Expenses

    89.3         96.5        112.4   
                          

Income (Loss) before Income Taxes

    7.7         122.0        (272.8

Provision (Benefit) for Income Taxes

    (32.0      66.4        (131.3
                          

Net Income

  $ 39.7       $ 55.6      $ (141.5
                          

Percentage of Consolidated Net Income (Loss)

    5      7     (19 )% 
                          

Average Assets

  $ 11,662.3       $ 669.4      $ 189.2   

 

Treasury and Other other noninterest income was a negative $6.7 million compared with negative $40.6 million in the prior year. Other noninterest income was impacted by losses of $26.7 million and $61.3 million recognized in 2009 and 2008, respectively, from the write-down of residential mortgage-backed securities determined to be other-than-temporarily impaired. Net interest income for 2009 was $85.9 million, as compared with $15.1 million in 2008 and a negative $34.2 million in 2007. The increased net interest

 

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income in 2009 reflects the benefit of a significant increase in average asset levels, partially offset by the low interest rate environment. The increase in average assets reflects higher levels of short-term securities and deposits with the Federal Reserve Bank. Noninterest expenses were $89.3 million for 2009 compared with $96.5 million in the prior year. Contributing to the current year decrease are lower performance-based compensation and salaries. Expenses in 2008 decreased compared with 2007 due to lower performance-based compensation, partially offset by higher staff levels, higher levels of consulting and other professional service fees, and increases in software related expense. The tax benefit in 2009 primarily reflects the favorable resolution of certain state tax positions taken in prior years and other federal and state tax matters not allocated to the business units for management reporting purposes.

 

CRITICAL ACCOUNTING ESTIMATES

 

The use of estimates and assumptions is required in the preparation of financial statements in conformity with GAAP and actual results could differ from those estimates. The Securities and Exchange Commission has issued guidance relating to the disclosure of critical accounting estimates. Critical accounting estimates are those that require management to make subjective or complex judgments about the effect of matters that are inherently uncertain and may change in subsequent periods. Changes that may be required in the underlying assumptions or estimates in these areas could have a material impact on Northern Trust’s future financial condition and results of operations.

For Northern Trust, accounting estimates that are viewed as critical are those relating to reserving for credit losses, pension plan accounting, other-than-temporary impairment of investment securities, and accounting for structured leasing transactions. Management has discussed the development and selection of each critical accounting estimate with the Audit Committee of the Board of Directors.

 

Reserve for Credit Losses

The reserve for credit losses represents management’s estimate of probable losses that have occurred as of the date of the financial statements. The loan and lease portfolio and other credit exposures are regularly reviewed to evaluate the adequacy of the reserve for credit losses. In determining the level of the reserve, Northern Trust evaluates the adequacy of the reserve related to performing loans and lending-related commitments as well as loans and lending-related commitments that are deemed impaired.

The quarterly analysis of specific and inherent loss components and the control process maintained by Credit Policy and the lending staff, as described in the “Risk Management – Loans and Other Extensions of Credit” section, are the principal methods relied upon by management for the timely identification of, and adjustment for, changes in estimated credit loss levels. In addition to Northern Trust’s own experience, management also considers the experience of peer institutions and regulatory guidance. Control processes and analyses employed to evaluate the adequacy of the reserve for credit losses are reviewed on at least an annual basis and modified as considered appropriate.

Loans, leases and other extensions of credit deemed uncollectible are charged to the reserve. Subsequent recoveries, if any, are credited to the reserve. The provision for credit losses, which is charged to income, is the amount necessary to adjust the reserve to the level determined through the above process. Actual losses may vary from current estimates and the amount of the provision may be either greater than or less than actual net charge-offs.

Management’s estimates utilized in establishing an adequate reserve for credit losses are not dependent on any single assumption. Management evaluates numerous variables, many of which are interrelated or dependent on other assumptions and estimates, in determining reserve adequacy. Due to the inherent imprecision in accounting estimates, other estimates or assumptions could reasonably have been used in the current period and changes in estimates are reasonably likely to occur from period to period. However, management believes that the established reserve for credit losses appropriately addresses these uncertainties and is adequate to cover probable losses which have occurred as of the date of the financial statements.

The reserve for credit losses consists of the following components:

 

Specific Reserve: The amount of specific reserves is determined through an individual evaluation of loans and lending-related commitments considered impaired that is based on expected future cash flows, the value of collateral, and other factors that may impact the borrower’s ability to pay.

 

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Inherent Reserve: The amount of inherent loss reserves is based primarily on reserve factors which incorporate management’s evaluation of historical charge-off experience and various qualitative factors such as management’s evaluation of economic and business conditions and changes in the character and size of the loan portfolio. Reserve factors are applied to loan and lease credit exposures aggregated by shared risk characteristics and are reviewed quarterly by Northern Trust’s Loan Loss Reserve Committees which include representatives from Credit Policy, business unit management, and Corporate Financial Management.

 

Pension Plan Accounting

As summarized in Note 20 to the consolidated financial statements, Northern Trust maintains a noncontributory defined benefit pension plan covering substantially all U.S. employees (the Qualified Plan) and a noncontributory supplemental pension plan (the Nonqualified Plan). Certain European-based employees also participate in local defined benefit pension plans that have been closed to new employees in prior years. Measuring cost and reporting liabilities resulting from defined benefit pension plans requires the use of several assumptions regarding future interest rates, asset returns, compensation increases and other actuarial-based projections relating to the plans. Due to the long-term nature of this obligation and the estimates that are required to be made, the assumptions used in determining the periodic pension expense and the projected pension obligation are closely monitored and annually reviewed for adjustments that may be required. The Financial Accounting Standards Board’s (FASB) pension accounting guidance requires that differences between the estimates and actual experience be recognized as other comprehensive income in the period in which they occur. The differences are amortized into net periodic pension expense from accumulated other comprehensive income over the future working lifetime of eligible participants. As a result, differences between the estimates made in the calculation of periodic pension expense and the projected pension obligation and actual experience affect stockholders’ equity in the period in which they occur but continue to be recognized as expense systematically and gradually over subsequent periods.

Northern Trust recognizes the significant impact that these pension-related assumptions have on the determination of the pension obligations and related expense and has established procedures for monitoring and setting these assumptions each year. These procedures include an annual review of actual demographic and investment experience with the pension plan’s actuaries. In addition to actual experience, adjustments to these assumptions consider observable yields on fixed income securities, known compensation trends and policies, as well as economic conditions and investment strategies that may impact the estimated long-term rate of return on plan assets.

In determining the pension expense for the U.S. plans in 2009, Northern Trust utilized a discount rate of 6.25% for both the Qualified Plan and the Nonqualified Plan. The rate of increase in the compensation level is based on a sliding scale that averaged 4.02%. The expected long-term rate of return on Qualified Plan assets was 8.00%.

In evaluating possible revisions to pension-related assumptions for the U.S. plans as of Northern Trust’s December 31, 2009 measurement date, the following events were considered:

 

Discount Rate: Northern Trust estimates the discount rate for its U.S. pension plans using the weighted average of market-observed yields for high quality fixed income securities with maturities that closely match the duration of the plans’ liabilities. The yield curve models referenced by Northern Trust in establishing the discount rate supported a rate between 5.98% and 6.18%, with an average decrease of 26 basis points over the prior year. As such, Northern Trust decreased the discount rate for the Qualified and Nonqualified plans from 6.25% for December 31, 2008 to 6.00% for December 31, 2009.

 

Compensation Level: As long-term compensation policies remained consistent with prior years, no changes were made to the compensation scale assumption since its 2007 revision based on a review of actual salary experience of eligible employees.

 

Rate of Return on Plan Assets: The expected return on plan assets is based on an estimate of the long-term rate of return on plan assets, which is determined using a building block approach that considers the current asset mix and estimates of return by asset class based on historical experience, giving proper consideration to diversification and rebalancing. Current market factors such as inflation and interest rates are also evaluated before long-term capital market assumptions are determined. Peer data and historical returns are reviewed to check for reasonability and appropriateness. As a result of these analyses, Northern Trust’s rate of return assumption was maintained at 8.00% for 2009.

 

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Mortality Table: Northern Trust uses the mortality table proposed by the U.S. Treasury for use in accordance with the provisions of the Pension Protection Act of 2006 (PPA) for both pre- and post-retirement mortality assumptions. This table is based on the RP2000 mortality table with projections of expected future mortality.

In order to illustrate the sensitivity of these assumptions on the expected periodic pension expense in 2010 and the projected benefit obligation, the following table is presented to show the effect of increasing or decreasing each of these assumptions by 25 basis points.

 

(In Millions)   25 BASIS
POINT
INCREASE
     25 BASIS
POINT
DECREASE
 

Increase (Decrease) in 2010 Pension Expense

            

Discount Rate Change

  (4.5    4.7   

Compensation Level Change

  2.3       (2.2

Rate of Return on Asset Change

  (2.3    2.3   

Increase (Decrease) in Projected Benefit Obligation

            

Discount Rate Change

  (28.1    29.7   

Compensation Level Change

  9.6       (9.3

 

Pension Contributions: The deduction limits specified by the Internal Revenue Code for contributions made by sponsors of defined benefit pension plans are based on a “Target Liability” under the provisions of the PPA. No contributions were made to the Qualified Plan in 2007. Northern Trust contributed $110.0 million to the Qualified Plan in 2008 and $175.0 million in 2009. Another contribution of $20.0 million was made in January 2010. The investment return on these contributions decreases the U.S. pension expense. This benefit will be partially offset by the related forgone interest earnings on the funds contributed. The minimum required contribution is expected to be zero in 2010 and for several years thereafter. The maximum deductible contribution is estimated at $24.0 million in 2010.

As a result of the pension-related assumptions currently utilized, the contributions to the Qualified Plan, and other actuarial experiences of the qualified and nonqualified plans, the estimated U.S. pension expense is expected to increase by approximately $6.8 million in 2010 from the 2009 expense of $30.5 million.

 

Other-Than-Temporary Impairment of Investment Securities

Under GAAP, companies are required to perform periodic reviews of securities with unrealized losses to determine whether the declines in value are considered other-than-temporary (OTTI). For available-for-sale and held-to-maturity securities that management has no intent to sell, and believes that it is more-likely-than-not will not be required to sell, prior to recovery, the consolidated statement of income reflects only the credit loss component of the impairment, while the remainder of the fair value loss is recognized in accumulated other comprehensive income. The credit loss component recognized in earnings is identified as the amount of principal cash flows not expected to be received over the remaining term of the security as projected using the Corporation’s cash flow projections. For debt securities that Northern Trust intends to sell, or would more-likely-than-not be required to sell, before the expected recovery of the amortized cost basis, the full impairment (that is, the difference between the security’s amortized cost basis and fair value) is recognized in earnings. The application of significant judgment is required in determining the assumptions used in calculating the credit loss component of this analysis. Assumptions used in this process are inherently subject to change in future periods. Different judgments or subsequent changes in estimates could result in materially different impairment loss recognition. The current economic and financial market conditions have negatively affected the liquidity and pricing of investment securities generally and asset-backed securities in particular, and have resulted in an increase in the likelihood and severity of other-than-temporary impairment charges.

Northern Trust conducts security impairment reviews quarterly to evaluate those securities within its investment portfolio that have indications of possible OTTI. A determination as to whether a security’s decline in market value is other-than-temporary takes into consideration numerous factors and the relative significance of any single factor can vary by security. Factors considered in determining whether impairment is other-than-temporary include, but are not limited to, the length of time which the security has been impaired; the severity of the impairment; the cause of the impairment; the financial condition and near-term prospects of the issuer; activity in the market of the issuer which may indicate adverse credit conditions; and Northern Trust’s ability and intent not to sell, and the likelihood that it will not be required to sell, the security for a period of time sufficient to allow for any expected recovery in its value. The Corporate Asset and Liability Policy Committee reviews the results of impairment analyses and concludes on whether OTTI exists.

Impairment reviews conducted in 2009 and 2008 identified fourteen and six residential mortgage-backed securities, respectively, determined to be other-than- temporarily impaired and losses totaling $26.7 million and $61.3 million, respectively, were recognized in connection with the write-down of the securities. The remaining securities

 

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with unrealized losses within Northern Trust’s portfolio as of December 31, 2009 and 2008 were not considered to be other-than-temporarily impaired. However, due to market and economic conditions, additional OTTI may occur in future periods. Unrealized losses on available-for-sale securities as of December 31, 2009 and 2008 were $159.7 million and $387.9 million, respectively.

 

Accounting for Structured Leasing Transactions

Through its leasing subsidiary, Norlease, Inc., Northern Trust acts as a lessor in leveraged lease transactions primarily for transportation equipment, including commercial aircraft and railroad equipment. Northern Trust’s net investment in leveraged leases is reported at the aggregate of lease payments receivable and estimated residual values, net of non-recourse debt and unearned income. Unearned income is required to be recognized in interest income in a manner that yields a level rate of return on the net investment. Determining the net investment in a leveraged lease and the interest income to be recognized requires management to make assumptions regarding the amount and timing of cash flows, estimates of residual values, and the impact of income tax regulations and rates. Changes in these assumptions in future periods could affect asset balances and related interest income.

Northern Trust has entered into certain leveraged leasing transactions commonly referred to as Lease-In/Lease-Out (LILO) and Sale-In/Sale-Out (SILO) transactions. As part of its audit of federal tax returns filed from 1997-2004, the Internal Revenue Service (IRS) challenged the Corporation’s tax position with respect to certain structured leasing transactions and proposed to disallow certain tax deductions and assess related interest and penalties. During the first quarter of 2009, Northern Trust sold certain of the structured leases challenged by the IRS. In the third quarter of 2009, Northern Trust reached a settlement agreement with the IRS with respect to certain of the remaining transactions. The Corporation anticipates that the IRS will continue to disallow deductions relating to the remaining challenged leases and possibly include other lease transactions with similar characteristics as part of its audit of tax returns filed after 2004. The Corporation believes that these remaining transactions are valid leases for U.S. tax purposes and that its tax treatment of these transactions is appropriate based on its interpretation of the tax regulations and legal precedents; a court or other judicial authority, however, could disagree. Accordingly, management’s estimates of future cash flows related to leveraged leasing transactions include assumptions about the eventual resolution of this matter, including the timing and amount of any potential payments. Due to the nature of this tax matter, it is difficult to estimate future cash flows with precision.

In accordance with an accounting standard adopted in 2007, GAAP requires a reallocation of lease income from the inception of a leveraged lease if during its term the expected timing of lease related income tax deductions is revised. Based on estimates relating to the eventual resolution of the leveraged leasing tax matter with the IRS, including the timing and amount of potential payments, Northern Trust’s stockholders’ equity was reduced by $73.4 million upon adoption of the accounting standard as of January 1, 2007. The impacts of revisions to management’s assumptions after January 1, 2007 were recorded through earnings in the period in which the assumptions changed. For the year ended December 31, 2008, revised cash flow estimates regarding the timing of leveraged lease income tax deductions reduced interest income by $38.9 million and increased the provision for income taxes, inclusive of interest and penalties, by $61.3 million. For the year ended December 31, 2009, revised cash flow estimates regarding the timing and amount of leveraged lease income tax deductions increased interest income by $1.1 million and increased the provision for income taxes, inclusive of interest and penalties, by $1.5 million. Management does not believe that subsequent changes that may be required in these assumptions would have a material effect on the consolidated financial position or liquidity of Northern Trust, although they could have a material effect on operating results for a particular period.

 

FAIR VALUE MEASUREMENTS

 

The preparation of financial statements in conformity with GAAP requires certain assets and liabilities to be reported at fair value. As of December 31, 2009, approximately 23% of Northern Trust’s consolidated total assets and approximately 2% of its total liabilities were carried on the balance sheet at fair value. As discussed more fully in Note 29 to the consolidated financial statements, GAAP requires entities to categorize financial assets and liabilities carried at fair value according to a three-level valuation hierarchy. The hierarchy gives the highest priority to quoted, active market prices for identical assets and liabilities (Level 1) and the lowest priority to valuation techniques that require significant management judgment because one or more of the significant inputs are unobservable in the market place (Level 3). Less than one percent of Northern Trust’s assets and liabilities carried at fair value are classified as Level 1 as Northern Trust typically does not hold equity securities or other instruments that would be actively traded on an exchange.

 

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Approximately 97% of Northern Trust’s assets and 91% of its liabilities carried at fair value are categorized as Level 2, as they are valued using models in which all significant inputs are observable in active markets. Investment securities classified as available for sale make up 93% of Level 2 assets with the remaining 7% primarily consisting of derivative financial instruments. Level 2 liabilities consist of derivative financial instruments.

Investment securities are principally valued by third party pricing vendors. Northern Trust has a well established process to validate all prices received from pricing vendors. Prices are compared to separate independent sources such as non-binding broker quotes and other vendor price feeds to ensure the fair value determination is consistent with GAAP and to ensure the proper classification of assets and liabilities in the fair value hierarchy.

As of December 31, 2009, all derivative assets and liabilities were classified in Level 2 and in excess of 97%, measured on a notional value basis, related to client-related and trading activities, predominantly consisting of foreign exchange contracts. Derivative instruments are valued internally using widely accepted models that incorporate inputs readily observable in actively quoted markets and do not require significant management judgment. Northern Trust evaluated the impact of counterparty credit risk and its own credit risk on the valuation of derivative instruments. Factors considered included the likelihood of default by us and our counterparties, the remaining maturities of the instruments, our net exposures after giving effect to master netting agreements, available collateral, and other credit enhancements in determining the appropriate fair value of our derivative instruments. The resulting valuation adjustments are not considered material.

As of December 31, 2009, the fair value of Northern Trust’s Level 3 assets and liabilities were $427.7 million and $94.4 million, respectively, and represented approximately 2% of assets and 8% of liabilities carried at fair value, respectively. Level 3 assets consist of auction rate securities purchased from Northern Trust clients. The lack of activity in the auction rate security market has resulted in a lack of observable market inputs to use in determining fair value. Therefore, Northern Trust incorporated its own assumptions about future cash flows and the appropriate discount rate adjusted for credit and liquidity factors. In developing these assumptions, Northern Trust incorporated the contractual terms of the securities, the type of collateral, any credit enhancements available, and relevant market data, where available. As of December 31, 2009, Level 3 liabilities include financial guarantees relating to standby letters of credit and a net estimated liability for Visa related indemnifications. Northern Trust’s recorded liability for standby letters of credit, reflecting the obligation it has undertaken, is measured as the amount of unamortized fees on these instruments. The fair value of the net estimated liability for Visa related indemnifications is based on available market data and significant management judgment. Prior to December 31, 2009, Level 3 liabilities principally included CSAs with certain investment funds and investment asset pools for which Northern Trust acts as investment advisor. These agreements, all of which expired in 2009 in connection with the final settlement of covered securities, were valued using an option pricing model that included prices for securities not actively traded in the marketplace as a significant input.

While Northern Trust believes its valuation methods for its assets and liabilities carried at fair value are appropriate and consistent with other market participants, the use of different methodologies or assumptions, particularly as applied to Level 3 assets and liabilities, could have a material effect on the computation of their estimated fair values.

 

IMPLEMENTATION OF ACCOUNTING STANDARDS

 

Information related to recent accounting pronouncements is contained in Note 2 to the consolidated financial statements.

 

CAPITAL EXPENDITURES

 

Proposed significant capital expenditures are reviewed and approved by Northern Trust’s senior management and, where appropriate, by the Board of Directors. This process is designed to assure that the major projects to which Northern Trust commits its resources produce benefits compatible with its strategic goals.

Capital expenditures in 2009 included ongoing enhancements to Northern Trust’s hardware and software capabilities as well as the build out of new data and resiliency centers and the expansion or renovation of several existing and new offices. Capital expenditures for 2009 totaled $299.8 million, of which $181.6 million was for software, $40.2 million was for computer hardware and machinery, $68.3 million was for building and leasehold improvements, and $9.7 million was for furnishings. These capital expenditures are designed principally to support and enhance Northern Trust’s transaction processing, investment management, and asset servicing capabilities, as well as relationship management and client interaction. Additional capital expenditures planned for systems technology will result in future expenses

 

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for the depreciation of hardware and amortization of software. Depreciation on computer hardware and machinery and software amortization are charged to equipment and software expense. Depreciation on building and leasehold improvements and on furnishings is charged to occupancy expense and equipment expense, respectively.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

Assets Under Custody and Assets Under Management

Northern Trust, in the normal course of business, holds assets under custody, management and servicing in a fiduciary or agency capacity for its clients. In accordance with GAAP, these assets are not assets of Northern Trust and are not included in its consolidated balance sheet.

 

Financial Guarantees and Indemnifications

Northern Trust issues financial guarantees in the form of standby letters of credit to meet the liquidity and credit enhancement needs of its clients. Standby letters of credit obligate Northern Trust to meet certain financial obligations of its clients, if, under the contractual terms of the agreement, the clients are unable to do so. These instruments are primarily issued to support public and private financial commitments, including commercial paper, bond financing, initial margin requirements on futures exchanges and similar transactions.

Credit risk is the principal risk associated with these instruments. The contractual amounts of these instruments represent the credit risk should the instrument be fully drawn upon and the client default. To control the credit risk associated with issuing letters of credit, Northern Trust subjects such activities to the same credit quality and monitoring controls as its lending activities. Certain standby letters of credit have been secured with cash deposits or participated to others. Northern Trust is obligated to meet the entire financial obligation of these agreements and in certain cases is able to recover the amounts paid through recourse against cash deposits or other participants.

The following table shows the contractual amounts of standby letters of credit.

 

    DECEMBER 31
(In Millions)   2009    2008

Standby Letters of Credit:

            

Corporate

  $ 1,191.9    $ 1,136.2

Industrial Revenue

    2,536.7      2,080.7

Other

    1,070.2      808.1
              

Total Standby Letters of Credit*

  $ 4,798.8    $ 4,025.0

*These amounts include $618.7 million and $378.1 million of standby letters of credit secured by cash deposits or participated to others as of December 31, 2009 and 2008, respectively. The weighted average maturity of standby letters of credit was 21 months at December 31, 2009 and 25 months at December 31, 2008.

 

As part of the Corporation’s securities custody activities and at the direction of clients, Northern Trust lends securities owned by clients to borrowers who are reviewed and approved by the Senior Credit Committee. The borrower 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 percent of the fair value of the securities plus accrued interest, with the collateral revalued on a daily basis. In connection with these activities, Northern Trust has issued certain indemnifications to clients against loss that is a direct result of a borrower’s failure to return securities when due, should the value of such securities exceed the value of the collateral required to be posted. The amount of securities loaned as of December 31, 2009 and 2008 subject to indemnification was $82.3 billion and $82.7 billion, respectively. Because of the credit quality of the borrowers and the requirement to fully collateralize securities borrowed, management believes that the exposure to credit loss from this activity is not significant.

Northern Trust, as a member bank of Visa U.S.A., Inc., is obligated to share in potential losses resulting from certain indemnified litigation involving Visa. In the fourth quarter of 2007, Northern Trust recorded liabilities totaling $150.0 million in connection with the indemnifications. As anticipated, Visa placed a portion of the proceeds from its initial public offering into an escrow account to fund the settlements of, or 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. In the third quarter of 2009, Northern recorded an additional $17.8 million offset to the indemnification liability as Visa deposited additional funds in its litigation escrow account. Northern

 

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Trust’s net Visa related indemnification liability at December 31, 2009 and 2008 totaled $56.1 million and $73.9 million, respectively. The value of Northern Trust’s remaining Visa shares is expected to be more than adequate to offset any remaining indemnification liabilities related to Visa litigation. Visa indemnifications are further discussed in Note 18 to the consolidated financial statements.

 

Variable Interests

Variable Interest Entities (VIEs) are defined within GAAP as entities which either have a total equity investment that is insufficient to permit the entity to finance its activities without additional subordinated financial support or whose equity investors lack the characteristics of a controlling financial interest. Investors that finance a VIE through debt or equity interests, or other counterparties that provide other forms of support, such as guarantees, subordinated fee arrangements, or certain types of derivative contracts, are variable interest holders in the entity and the variable interest holder, if any, that will absorb a majority of the entity’s expected losses, receive a majority of the entity’s expected residual returns, or both, is deemed to be the VIEs primary beneficiary and is required to consolidate the VIE.

In 1997, Northern Trust issued $150 million of Floating Rate Capital Securities, Series A, and $120 million of Floating Rate Capital Securities, Series B, through statutory business trusts wholly-owned by the Corporation (“NTC Capital I” and “NTC Capital II”, respectively). The sole assets of the trusts are Subordinated Debentures of Northern Trust Corporation that have the same interest rates and maturity dates as the corresponding distribution rates and redemption dates of the Floating Rate Capital Securities.

The outstanding principal amount of the Subordinated Debentures, net of discount, held by the trusts totaled $276.8 million as of December 31, 2009. The book value of the Series A and Series B Securities totaled $268.5 million as of December 31, 2009. Both Series A and B Securities qualify as tier 1 capital for regulatory purposes. NTC Capital I and NTC Capital II are considered VIEs. However, as the Corporation has determined that it is not the primary beneficiary of the trusts, they are not consolidated by the Corporation.

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. As discussed in further detail in Note 26 to the consolidated financial statements, although not obligated to do so, in 2008, Northern Trust entered into CSAs with certain of these entities (Funds) which held notes, asset backed securities, and other instruments whose values had been adversely impacted by widening risk premiums and liquidity spreads and significant rating agency downgrades.

As of December 31, 2009, all CSAs had expired in connection with the final settlements of covered securities. However, under GAAP the Funds are considered VIEs and the CSAs reflected Northern Trust’s implicit variable interest in the credit risk of the affected Funds. Implicit interests are required to be considered when determining the primary beneficiary of a VIE. The Funds were designed to create and pass to investors interest rate and credit risk. In determining whether Northern Trust was the primary beneficiary of the Funds during the period in which the CSAs were in place, expected loss calculations based on the characteristics of the underlying investments in the Funds were used to estimate the expected losses related to interest rate and credit risk, while also considering the relative rights and obligations of each of the variable interest holders. These analyses concluded that interest rate risk was the primary driver of expected losses within the Funds. As such, Northern Trust determined that it was not the primary beneficiary of the Funds and was not required to consolidate them within its balance sheet.

Northern Trust has interests in other VIEs which are also not consolidated as Northern Trust is not considered the primary beneficiary of those entities. Northern Trust’s interests in those entities are not considered significant and do not have a material impact on its consolidated financial position or results of operations.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Liquidity Risk Management

The objectives of liquidity risk management are to ensure that Northern Trust can meet its cash flow obligations under both normal and adverse economic conditions while maintaining its ability to capitalize on business opportunities in a timely and cost effective manner.

 

Governance and Risk Management Framework

Northern Trust manages its liquidity on a global basis, utilizing regional management when appropriate. Corporate liquidity policies, risk appetite and limits are reviewed and approved annually by the Business Risk Committee of the Board of Directors. The Corporate Asset and Liability Policy Committee (ALCO) is responsible for recommending liquidity policies to the Board, establishing internal guidelines, approving contingency plans, assessing Northern Trust’s

 

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overall liquidity status, and reviewing reports and analyses on a regular basis. The Corporate Treasury Department has the day-to-day responsibility for measuring, analyzing and managing liquidity risk within the guidelines and limits established by ALCO and the Business Risk Committee.

Northern Trust’s Global Liquidity Management framework focuses on five key areas: Position Management, Modeling and Analysis, Contingency Planning, Peer Group Comparisons and Management Reporting and provides for the review and management of the liquidity of the Corporation separate from that of its banking subsidiaries. It is through this framework that management monitors its sources and uses of liquidity, evaluates their level of stability under various circumstances, plans for adverse situations, benchmarks itself against other banks, provides information to senior management and complies with various U.S. and international regulations.

Position management incorporates daily monitoring of cash positions and anticipating future funding requirements given both internal and external events. Liquidity is provided by a variety of sources, including client deposits (institutional and personal) from our C&IS and PFS businesses, wholesale funding from the capital markets, and unencumbered liquid assets that can be sold or pledged to secure additional funds. While management does not view the Federal Reserve’s discount window as a primary source of funds, the Bank can borrow substantial amounts from the discount window on a collateralized basis. Liquidity is used by a variety of activities, including client withdrawals, purchases of securities, net loan growth, and draws on unfunded commitments to extend credit. Northern Trust maintains a very liquid balance sheet with loans representing only 34% of total assets as of December 31, 2009. Further, at December 31, 2009 there were significant sources of liquidity within Northern Trust’s consolidated balance sheet in the form of securities available for sale and money market assets, which in aggregate totaled $45.6 billion or 56% of total assets. At December 31, 2009, Northern Trust had over $11 billion of securities and loans readily available as collateral to support discount window borrowings.

Liquidity modeling and analysis evaluates a bank’s ability to meet its cash flow obligations given a variety of possible internal and external events and under different economic conditions. Northern Trust uses liquidity modeling to support its contingent liquidity plans, gain insight into its liquidity position and strengthen its liquidity policies and practices. Modeling is performed using multiple independent scenarios and across major currencies. These scenarios, which include both company specific and systemic events, analyze potential impacts on our domestic and foreign deposits, wholesale funds, financial market access, external borrowing capacity and off-balance sheet obligations.

Another important area of Northern Trust’s liquidity risk management is the development and maintenance of its contingent liquidity plans. A Global Contingent Liquidity Action Plan covering the Corporation, Bank and major subsidiaries is approved by ALCO and updated on a regular basis. This plan, which can be activated in the event of an actual liquidity crisis, details responsibilities and defines specific actions designed to ensure the proper maintenance of liquidity during periods of stress. In addition, international banking subsidiaries have individual contingency plans, which incorporate the global plan.

Northern Trust also analyzes the composition of its liquidity against a peer group of large U.S. bank holding companies, including other major trust processing banks. This analysis provides management with benchmarking information, highlights industry trends and supports the establishment of new policies and strategies.

Management regularly reviews various reports, analyses and other information depicting changes in Northern Trust’s liquidity mix and funding concentrations, overall financial market conditions and other internal and external liquidity metrics. Management uses this information to evaluate the overall status of Northern Trust’s liquidity position and anticipate potential events that could stress that position in the future. An overall Liquidity Status Level for Northern Trust, established and regularly reviewed by ALCO, is continuously monitored by Corporate Treasury. Downgrades in liquidity status resulting from internal, external or industry-wide events, trigger specific pre-determined actions and limits designed to position Northern Trust to better respond to potential liquidity stresses.

 

Regulatory Environment

During 2008, U.S. regulatory agencies took various actions in order to improve liquidity in the financial markets. One of those actions was the establishment by the FDIC in October of 2008 of the Temporary Liquidity Guarantee Program (TLGP). This program provides a guarantee of certain newly issued senior unsecured debt issued by eligible entities, including the Bank, and guarantees of funds over $250,000 in noninterest-bearing, and certain interest-bearing, transaction deposit accounts held at FDIC insured banks. The debt guarantee was available, subject to certain limitations, for debt issued through June 30, 2009. Northern Trust did not issue debt under the TLGP. The additional FDIC protection above $250,000 was scheduled to end on December 31, 2009. The

 

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FDIC gave eligible entities the option to extend this coverage to June 30, 2010. Northern Trust elected to extend its deposit coverage for funds over $250,000 through June 30, 2010.

During 2009, many U.S. and international regulatory agencies proposed certain new rules and finalized others that address the management of liquidity risk for financial institutions. These rules are expected to be further developed and implemented over the coming years. Management continuously evaluates its liquidity risk management framework against these proposals and industry best practices in order to comply with applicable regulations and further enhance its liquidity policies.

 

Corporation Liquidity

The liquidity of the Corporation is managed separately from that of its banking subsidiaries. The primary sources of cash for the Corporation are dividend payments from its subsidiaries, issuance of debt, the issuance of equity (common and preferred), and interest and dividends earned on investment securities and money market assets. The Corporation’s uses of cash consist mainly of dividend payments to the Corporation’s stockholders, the payment of principal and interest to note holders, investments in its subsidiaries, purchases of its common stock, and acquisitions.

On November 14, 2008, in connection with the Corporation’s participation in the U.S. Treasury’s CPP, the Corporation issued preferred stock and a warrant for the purchase of the Corporation’s common stock to the U.S. Treasury for total proceeds of $1,576.0 million. On June 17, 2009, the Corporation repurchased in full the preferred stock issued under the CPP for $1,576.0 million. In addition, on August 26, 2009, the Corporation repurchased the warrant for $87.0 million. Also during 2009, the Corporation paid preferred stock dividends to the U.S. Treasury of $46.6 million. For additional detail, see Note 12 to the consolidated financial statements.

Aside from the these transactions, the most significant uses of cash by the Corporation during 2009 were $260.3 million of common dividends paid to stockholders and $204.8 million of payments made under previously announced CSAs for certain client investment funds.

On May 1, 2009, the Corporation issued 17,250,000 shares of common stock with a par value of $1.66 2/3 per share. Cash proceeds from the common stock totaled $834.1 million. Also on May 1, 2009, the Corporation issued $500 million of 4.625% fixed-rate senior notes due May 1, 2014. These notes are non-callable and unsecured and were issued at par.

Bank subsidiary dividends are subject to certain restrictions, as discussed in further detail in Note 28 to the consolidated financial statements. Bank subsidiaries have the ability to pay dividends during 2010 equal to their 2010 eligible net profits plus $1,312.1 million. During 2009, the Corporation received $435.6 million in subsidiary dividends.

The Corporation’s liquidity, defined as the amount of marketable assets in excess of commercial paper, was strong at $1.49 billion at year-end 2009 and $1.24 billion at year-end 2008. The cash flows of the Corporation are shown in Note 32 to the consolidated financial statements.

A significant source of liquidity for both Northern Trust and the holding company is the ability to draw funding from capital markets globally. The availability and cost of these funds are influenced by our credit rating; as a result, a downgrade could have an adverse impact on our liquidity. The credit ratings of the Corporation and the Bank as of December 31, 2009, provided below, allow Northern Trust to access capital markets on favorable terms.

 

   

Standard &

Poor’s

   Moody’s    FitchRatings

Northern Trust Corporation:

             

Commercial Paper

  A-1+    P-1    F1+

Senior Debt

  AA-    A1    AA-

The Northern Trust Company:

             

Short-Term Deposit / Debt

  A-1+    P-1    F1+

Long-Term Deposit / Debt

  AA    Aa3    AA /AA-

Outlook

  Stable    Stable    Negative
               

 

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The following table shows Northern Trust’s contractual obligations at December 31, 2009.

 

CONTRACTUAL OBLIGATIONS

 

    PAYMENT DUE BY PERIOD
(In Millions)   TOTAL    ONE YEAR
AND LESS
     1-3 YEARS    4-5 YEARS    OVER 5
YEARS

Senior Notes*

  $ 1,551.8    $   161.3       $ 465.0    $ 925.5    $

Subordinated Debt*

    1,132.5              150.0      200.0      782.5

Federal Home Loan Bank Borrowings*

    1,697.5      165.0         1,096.4      335.0      101.1

Floating Rate Capital Debt*

    278.3                        278.3

Capital Lease Obligations**

    33.0      (38.3      15.6      16.5      39.2

Operating Leases**

    686.4      69.4         123.3      98.8      394.9

Purchase Obligations***

    318.4      138.8         134.7      44.6      .3
                                     

Total Contractual Obligations

  $ 5,697.9    $ 496.2       $ 1,985.0    $ 1,620.4    $ 1,596.3

Note: Obligations as shown do not include deposit liabilities or interest requirements on funding sources.

* Refer to Notes 10 and 11 to the consolidated financial statements for further details.

** Refer to Note 8 to the consolidated financial statements for further details.

*** Purchase obligations consist primarily of ongoing operating costs related to outsourcing arrangements for certain cash management services and the support and maintenance of the Corporation’s technological requirements. Certain obligations are in the form of variable rate contracts and, in some instances, 2009 activity was used as a base to project future obligations.

 

Capital Management

One of Northern Trust’s primary objectives is to maintain a strong capital position to merit and maintain the confidence of clients, the investing public, bank regulators and stockholders. A strong capital position helps Northern Trust take advantage of profitable investment opportunities and withstand unforeseen adverse developments.

Northern Trust manages its capital on a total Corporation basis and, where appropriate, on a legal entity basis. The Corporate Treasury department has the day-to-day responsibility for measuring and managing capital levels within guidelines and limits established by the Capital Management Policy and the Capital Committee. The management of capital also involves regional management when appropriate. In establishing the guidelines and limits for capital, a variety of factors are taken into consideration, including the overall risk of Northern Trust’s businesses, regulatory requirements, capital levels relative to our peers, and the impact on our credit ratings.

Capital levels were strengthened as average common equity in 2009 increased 21% or $1.02 billion reaching a record $5.92 billion. Total stockholders’ equity was $6.31 billion at December 31, 2009, as compared to $6.39 billion at December 31, 2008, reflecting the redemption of the preferred stock and related warrant from the U.S. Treasury pursuant to the terms of the CPP, the issuance of $834.1 million of common stock, the retention of earnings, and the payment of common and preferred dividends. The Corporation declared common dividends totaling $267.6 million in 2009 and, in October 2009, the Board of Directors maintained the quarterly dividend at $.28 per common share. The common dividend has increased 30% from its level five years ago. The buyback program is used for general corporate purposes, including management of the Corporation’s capital level. During 2009, the Corporation purchased 250,798 of its own common shares at an average price per share of $55.05 in connection with equity based compensation plans. Under the share buyback program, the Corporation may purchase up to 7.6 million additional shares after December 31, 2009.

 

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CAPITAL ADEQUACY   DECEMBER 31  
($ In Millions)   2009      2008  

TIER 1 CAPITAL

                

Common Stockholders’ Equity

  $ 6,312       $ 4,888   

Preferred Stock Series B

            1,501   

Floating Rate Capital Securities

    268         268   

Goodwill and Other Intangible Assets

    (462      (462

Pension and Other Postretirement Benefit Adjustments

    305         274   

Other

    99         234   
                  

Total Tier 1 Capital

    6,522         6,703   
                  

TIER 2 CAPITAL

                

Reserve for Credit Losses Assigned to Loans and Leases

    309         229   

Off-Balance Sheet Credit Loss Reserve

    31         22   

Reserves Against Identified Losses

    (43      (24

Long-Term Debt*

    892         939   
                  

Total Tier 2 Capital

    1,189         1,166   
                  

Total Risk-Based Capital

  $ 7,711       $ 7,869   
                  

Risk-Weighted Assets**

  $ 48,784       $ 51,258   
                  

Total Assets – End of Period (EOP)

  $ 82,142       $ 82,054   

Average Fourth Quarter Assets**

    74,537         78,903   

Total Loans – EOP

    27,806         30,755   
                  

RATIOS

                

Risk-Based Capital Ratios

                

Tier 1

    13.4      13.1

Total (Tier 1 and Tier 2)

    15.8         15.4   

Leverage

    8.8         8.5   

Tier 1 Common Equity***

    12.8         9.6   
                  

COMMON STOCKHOLDERS’ EQUITY TO

                

Total Loans EOP

    22.70      15.89

Total Assets EOP

    7.68         5.96   

* Long-Term Debt that qualifies for risk-based capital amortizes for the purpose of inclusion in tier 2 capital during the five years before maturity.

** Assets have been adjusted for goodwill and other intangible assets, net unrealized (gain) loss on securities and excess reserve for credit losses that have been excluded from tier 1 and tier 2 capital, if any.

*** A reconciliation of tier 1 common equity to tier 1 capital calculated under GAAP is provided below.

 

The following table provides a reconciliation of tier 1 common equity, a non-GAAP financial measure which excludes preferred stock, to tier 1 capital calculated in accordance with applicable regulatory requirements and GAAP.

 

    DECEMBER 31  
($ In Millions)   2009      2008  

Tier 1 Capital

  $ 6,522       $ 6,703   

Preferred Stock Series B

            1,501   

Floating Rate Capital Securities

    268         268   

Tier 1 Common Equity

    6,254         4,934   
 

Tier 1 Capital Ratio

    13.4      13.1

Tier 1 Common Equity Ratio

    12.8      9.6

 

Northern Trust is providing the ratio of tier 1 common equity to risk-weighted assets in addition to its capital ratios prepared in accordance with regulatory requirements and GAAP as it is a measure that the Corporation and investors use to assess capital adequacy.

The 2009 capital levels reflect Northern Trust’s ongoing retention of earnings to allow for strategic expansion while maintaining a strong balance sheet and a capital level commensurate with its risk profile. At December 31, 2009, the Corporation’s tier 1 capital ratio was 13.4% and total capital ratio was 15.8% of risk-weighted assets which are well above the ratios that are a requirement for regulatory classification as “well-capitalized”. The “well-capitalized” minimum ratios are 6.0% and 10.0%, respectively. The Corporation’s leverage ratio (tier 1 capital to fourth quarter average assets) of 8.8% is also well above the “well-capitalized” minimum requirement of 5.0%. In addition, each of the Corporation’s U.S. subsidiary banks had a ratio of at least 9.5% for tier 1 capital, 11.0% for total risk-based capital, and 7.7% for the leverage ratio.

The Corporation is subject to the framework for risk-based capital adequacy, sometimes referred to as Basel II, which was developed by the Basel Committee on Banking Supervision and has been endorsed by the central bank governors and heads of bank supervision of the G10 countries.

 

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In December 2007, the U.S. bank regulatory agencies published final rules, effective April 1, 2008, with respect to implementation of the Basel II framework, the latest agreed-version of which was released by the Basel Committee in November 2005.

Under the final Basel II rules, the Corporation is one of a small number of “core” banking organizations. As a result, the Corporation and its U.S. depository institution subsidiaries will be required to use the advanced approaches under Basel II for calculating risk-based capital related to credit risk and operational risk, instead of the methodology reflected in the regulations effective prior to adoption of Basel II. The new rules also require core banking organizations to have rigorous processes for assessing overall capital adequacy in relation to their total risk profiles, and to publicly disclose certain information about their risk profiles and capital adequacy.

In order to implement the new rules, a core banking organization such as the Corporation was required to adopt an implementation plan by October 1, 2008 and must satisfactorily complete a four-quarter parallel run, in which it calculates capital requirements under both the new Basel II rules and regulations effective prior to the adoption of Basel II. The organization must then progress through three transitional periods of at least four quarters each, commencing no later than April 1, 2011. During these transitional periods, the maximum cumulative reduction in capital requirements from those under the regulations effective prior to adoption of Basel II may not exceed 5% for the first period, 10% for the second period and 15% for the third period. Regulatory approval is required to move through these transitional periods and out of the final transitional period. The U.S. bank regulatory agencies also have said they will publish a study after the end of the second transitional year that will examine the new framework for any deficiencies.

 

RISK MANAGEMENT

 

Overview

The Board of Directors provides risk oversight of management through its Audit, Business Strategy, Compensation and Benefits, and Business Risk Committees. The Audit Committee provides oversight with respect to risks relating to financial reporting and legal compliance components of compliance risk. The Business Strategy Committee provides oversight with respect to strategic risk for Northern Trust and its subsidiaries. The Compensation and Benefits Committee reviews incentive compensation arrangements and practices to assess the extent to which such arrangements and practices encourage risk-taking behavior by participants. The Business Risk Committee provides oversight with respect to the following risks inherent in Northern Trust’s businesses: credit risk, market and liquidity risk, fiduciary risk, operational risk and the regulatory component of compliance risk.

The Business Risk Committee has approved a Corporate Risk Appetite Statement articulating Northern Trust’s expectation that risk is consciously considered as part of strategic decisions and in day-to-day activities. Northern Trust’s business units are expected to manage business activities consistent with the Corporate Risk Appetite Statement. Risk tolerances are further detailed in separate credit, operational, market, fiduciary and compliance risk policies and appetite statements. Various corporate committees and oversight entities have been established to review and approve risk management strategies, standards, management practices and tolerance levels. These committees and entities monitor and provide periodic reporting to the Business Risk Committee on risk performance and effectiveness of risk management processes.

Northern Trust’s assessment of risks is built upon its risk universe, a foundational component of Northern Trust’s integrated Enterprise Wide Risk Management Framework. The risk universe represents the major risk categories and sub-categories to which Northern Trust may be exposed through its business activities.

 

RISK MANAGEMENT    RISK MEASUREMENT    RISK TO EARNINGS AND/OR CAPITAL RESULTING FROM:
Credit    Credit Risk    Failure of a borrower or counterparty to perform on an obligation.
Operations, Fiduciary, Compliance    Operational Risk    Inadequate or failed internal process, people and systems; or from external events.
Market    Market Risk – Trading Book    Changes in the value of trading positions due to movements in foreign exchange or interest rates.
   Interest Rate Risk – Banking Book    Changes in interest rates.
   Liquidity Risk    Funding needs during difficult markets and capital adequacy challenges.
Strategic    Reputation Risk    Damage to the entity’s reputation from negative public opinion.
   Strategy Risk    Adverse effects of business decisions, improper implementation of business decisions, unexpected external events.
   Business Risk    Developments in the markets in which the entity operates.

 

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Asset Quality and Credit Risk Management

 

Securities Portfolio

Northern Trust maintains a high quality securities portfolio, with 91% of the total portfolio at December 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 corporate notes, asset-backed securities, auction rate securities and obligations of states and political subdivisions. The remaining portfolio was composed of corporate notes, asset-backed securities, obligations of states and political subdivisions, auction rate securities and other securities, of which as a percentage of the total securities portfolio, 3% were rated double-A, 3% were rated below double-A, and 3% were not rated by Standard and Poor’s or Moody’s Investors Service.

Corporate notes are primarily government guaranteed, such as bonds issued under the FDIC Temporary Liquidity Guarantee Program, with 96% of corporate notes rated triple-A, 2% rated double-A, and 2% rated below double-A. Residential mortgage-backed securities rated below double-A, which represented 75% of total residential mortgage-backed securities, had a total amortized cost and fair value of $303.6 million and $192.5 million, respectively, and were comprised primarily of subprime and Alt-A securities. Securities classified as “other asset-backed” at December 31, 2009 were predominantly floating rate, with average lives less than 5 years, and 100% were rated triple-A.

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 Trust’s affiliated broker/dealer. A $54.6 million charge was recorded within other operating expenses in 2008 reflecting differences between the securities’ par values and estimated purchase date fair market values. At December 31, 2009, 98% of these securities were investment grade. The remaining 2% that were below investment grade had a total amortized cost and fair value of $7.6 million and $8.1 million, respectively.

Total unrealized losses within the investment securities portfolio at December 31, 2009 were $159.7 million as compared to $387.9 million at December 31, 2008. The $228.2 million decrease in unrealized losses from the prior year end primarily reflects the improved valuations of residential mortgage-backed and other asset-backed securities due to improving credit markets and the tightening of credit spreads during 2009. As discussed above in the “Critical Accounting Estimates – Other-Than-Temporary Impairment of Investment Securities” section, processes are in place to provide for the timely identification of other-than-temporary impairment. Losses totaling $26.7 million were recognized in 2009 in connection with the write-down of securities determined to be other-than-temporarily impaired, as compared with $61.3 million in 2008. The remaining securities with unrealized losses within Northern Trust’s portfolio as of December 31, 2009 are not considered to be other-than-temporarily impaired. However, due to market and economic conditions, additional 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 Trust’s policy to take possession of securities purchased under agreements to resell. Securities sold under agreements to repurchase are held by the counterparty until the repurchase.

 

Loans and Other Extensions of Credit

Credit risk is inherent in Northern Trust’s various lending activities. The largest component of credit risk relates to the loan portfolio. In addition, credit risk is inherent in certain contractual obligations such as legally binding unfunded commitments to extend credit, commercial letters of credit, and standby letters of credit. These contractual obligations and arrangements are discussed in Note 25 to the consolidated financial statements and are presented in tables that follow. Northern Trust focuses its lending efforts on clients who are looking to establish a full range of financial services with Northern Trust.

Credit risk is managed through the Credit Policy function, which is designed to assure adherence to a high level of credit standards. Credit Policy reports to the Corporation’s Head of Corporate Risk Management. Credit Policy provides a system of checks and balances for Northern Trust’s diverse credit-related activities by establishing and monitoring all credit-related policies and practices throughout Northern Trust and assuring their uniform application. These activities are designed to diversify credit exposure on an industry and client

 

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basis and reduce overall credit risk. These credit management activities also apply to Northern Trust’s use of derivative financial instruments, including foreign exchange contracts and interest risk management instruments.

Individual credit authority for commercial and other loans is limited to specified amounts and maturities. Credit decisions involving commitment exposure in excess of the specified individual limits are submitted to the appropriate Credit Approval Committee (Committee). Each Committee is chaired by the executive in charge of the area or their designee and has a Credit Policy officer as a voting participant. Each Committee’s credit approval authority is specified, based on commitment levels, credit ratings and maturities. Credits involving commitment exposure in excess of these limits require the approval of the Senior Credit Committee. All exposures approved by the Committees and the Senior Credit Committee require unanimous approval of all voting members.

The Counterparty Risk Management Committee established by Credit Policy manages counterparty risk. This committee has sole credit authority for exposure to all non-U.S. banks, certain U.S. banks which Credit Policy deems to be counterparties and which do not have commercial credit relationships within the Corporation, and certain other exposures. Under the auspices of Credit Policy, country exposure limits are reviewed and approved on a country-by-country basis.

As part of its credit process, Northern Trust utilizes an internal risk rating system to support identification, approval, and monitoring of credit risk. Risk ratings are used in credit underwriting, management reporting, setting of loss allowances, and economic capital calculation. The process employs a dual ratings system, including a Borrower Rating and a Facility Rating.

The Borrower Rating is used for ranking the credit risk of obligors and the probability of their default. Each obligor is rated using one of a number of ratings models, which consider both quantitative and qualitative factors. While the criteria vary by model, the objective is for Borrower Ratings to be consistent in measurement and ranking of risk. Each model is calibrated to a master rating scale to support this consistency. Ratings for borrowers not in default range from “1” for the strongest credits to “7” for the weakest credits. Ratings of “8” or “9” are used for defaulted borrowers.

The Facility Rating is used to measure the degree of loss in the event of default. Each obligation must be rated using the Facility Rating model which produces loss estimates based on various aspects of collateral supporting the obligation. Facility ratings range from “1” for facilities with the strongest levels of support to “7” for unsecured facilities. The amount and type of collateral held varies but may include deposits held in financial institutions, U.S. Treasury securities, other marketable securities, income-producing commercial properties, accounts receivable, residential real estate, property, plant and equipment, and inventory. Collateral values are monitored on a regular basis to ensure that they are maintained at an appropriate level.

Northern Trust has developed its models to assist in the rating process. Models are subject to limitations in their underlying assumptions and, accordingly, the assignment of Borrower and Facility Ratings remain subject to expert judgment to ensure consistent application of the rating scale.

Credit Policy oversees a range of portfolio reviews that focus on significant and/or weaker-rated credits. This approach allows management to take remedial action in an effort to deal with potential problems. In addition, independent from Credit Policy, the Loan Review Unit undertakes on-site file reviews that evaluate effectiveness of management’s implementation of Credit Policy’s requirements.

An integral part of the Credit Policy function is a formal review of past due and potential problem loans to determine which credits, if any, need to be placed on non-accrual status or charged off. As more fully described in the “Provision and Reserve For Credit Losses” section below, the provision for credit losses is reviewed quarterly to determine the amount necessary to maintain an adequate reserve for credit losses.

 

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COMPOSITION OF LOAN PORTFOLIO   DECEMBER 31
(In Millions)   2009    2008    2007    2006    2005

U.S.

                                 

Residential Real Estate

  $ 10,807.7    $ 10,381.4    $ 9,171.0    $ 8,674.4    $ 8,340.5

Commercial

    6,312.1      8,253.6      5,556.4      4,679.1      3,545.3

Commercial Real Estate

    3,213.2      3,014.0      2,350.3      1,836.3      1,524.3

Personal

    4,965.8      4,766.7      3,850.8      3,415.8      2,961.3

Other

    774.0      1,404.2      969.1      979.2      797.8

Lease Financing

    1,004.4      1,143.8      1,168.4      1,291.6      1,194.1
                                   

Total U.S.

  $ 27,077.2    $ 28,963.7    $ 23,066.0    $ 20,876.4    $ 18,363.3

Non-U.S.

    728.5      1,791.7      2,274.1      1,733.3      1,605.2
                                   

Total Loans and Leases

  $ 27,805.7    $ 30,755.4    $ 25,340.1    $ 22,609.7    $ 19,968.5

 

SUMMARY OF OFF-BALANCE SHEET FINANCIAL INSTRUMENTS WITH CONTRACT

AMOUNTS THAT REPRESENT CREDIT RISK

  DECEMBER 31
(In Millions)   2009    2008

Unfunded Commitments to Extend Credit

            

One Year and Less

  $  11,564.7    $ 9,902.4

Over One Year

    14,087.1      15,453.9
              

Total

  $ 25,651.8    $ 25,356.3
              

Standby Letters of Credit

    4,798.8      4,025.0

Commercial Letters of Credit

    31.2      36.7

Custody Securities Lent with Indemnification

    82,306.3      82,728.2

 

UNFUNDED COMMITMENTS TO EXTEND CREDIT AT DECEMBER 31, 2009

BY INDUSTRY SECTOR

 

(In Millions)   COMMITMENT EXPIRATION
Industry Sector  

TOTAL

COMMITMENTS

         ONE YEAR
AND LESS
         OVER ONE
YEAR
         

OUTSTANDING

LOANS

Finance and Insurance

  $ 2,392.8           $ 1,362.1           $ 1,030.7            $ 728.6

Holding Companies

    212.5              204.3             8.2              90.8

Manufacturing

    5,779.6             1,251.2             4,528.4              1,247.9

Mining

    230.3             84.0             146.3              59.9

Public Administration

    66.0             7.1             58.9              332.1

Retail Trade

    789.5             291.0             498.5              200.6

Security and Commodity Brokers

    21.8             21.8                         

Services

    4,823.3             2,417.6             2,405.7              3,001.5

Transportation and Warehousing

    307.5             47.3             260.2              88.2

Utilities

    824.4             238.4             586.0              108.2

Wholesale Trade

    787.8             179.5             608.3              351.6

Other Commercial

    228.4             79.7             148.7              102.7
                                               

Total Commercial*

  $ 16,463.9           $ 6,184.0            $ 10,279.9             $ 6,312.1

Residential Real Estate

    2,527.8             327.2             2,200.6              10,807.7

Commercial Real Estate

    475.8             176.6             299.2              3,213.2

Personal

    5,146.3             4,077.0             1,069.3              4,965.8

Other

    315.2             294.0             21.2              774.0

Lease Financing

                                         1,004.4

Non-U.S.

    722.8             505.9             216.9              728.5
                                               

Total

  $ 25,651.8           $ 11,564.7           $ 14,087.1            $ 27,805.7

* Commercial industry sector information is presented on the basis of the North American Industry Classification System (NAICS).

 

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Although credit exposure is well diversified, there are certain groups of credits that meet the accounting definition of credit risk concentrations under GAAP. According to GAAP, group concentrations of credit risk exist if a number of borrowers or other counterparties are engaged in similar activities and have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. The fact that a credit exposure falls into one of these groups does not necessarily indicate that the credit has a higher than normal degree of credit risk. These groups are: residential real estate, commercial real estate, and banks and bank holding companies.

 

RESIDENTIAL REAL ESTATE

The residential real estate loan portfolio is primarily composed of mortgages to clients with whom Northern Trust is seeking to establish a comprehensive financial services relationship. At December 31, 2009, residential real estate loans totaled $10.8 billion or 39% of total U.S. loans at December 31, 2009, compared with $10.4 billion or 34% at December 31, 2008. All mortgages were underwritten utilizing Northern Trust’s credit standards which do not allow for the origination of loan types generally considered to be of high risk in nature, such as option ARM loans, subprime loans, loans with initial “teaser” rates, and loans with excessively high loan-to-value ratios. Residential real estate loans consist of conventional home mortgages and equity credit lines, which generally require a loan to collateral value of no more than 75% to 80% at inception. Revaluations of supporting collateral are obtained upon refinancing or default or when otherwise considered warranted. Collateral revaluations for mortgages are performed by independent third parties.

Of the total $10.8 billion in residential real estate loans, $4.0 billion were in the greater Chicago area, $2.9 billion were in Florida, and $1.3 billion were in California, with the remainder distributed throughout the other geographic regions within the U.S. served by Northern Trust. Legally binding commitments to extend residential real estate credit, which are primarily equity credit lines, totaled $2.5 billion and $2.4 billion at December 31, 2009 and 2008, respectively.

 

COMMERCIAL REAL ESTATE

In managing its credit exposure, management has defined a commercial real estate loan as one where: (1) the borrower’s principal business activity is the acquisition or the development of real estate for commercial purposes; (2) the principal collateral is real estate held for commercial purposes, and loan repayment is expected to flow from the operation of the property; or (3) the loan repayment is expected to flow from the sale or refinance of real estate as a normal and ongoing part of the business. Unsecured lines of credit to firms or individuals engaged in commercial real estate endeavors are included without regard to the use of loan proceeds. The commercial real estate portfolio consists of construction, acquisition and development loans and commercial mortgages extended primarily to highly experienced developers and/or investors well known to Northern Trust. Underwriting standards generally reflect conservative loan-to-value ratios and debt service coverage requirements. Recourse to borrowers through guarantees is also commonly required.

Construction, acquisition and development loans provide financing for commercial real estate prior to rental income stabilization. The intent is generally that the borrower will sell the project or refinance the loan through a commercial mortgage with Northern or another financial institution upon completion. Construction, acquisition and development loans totaled $678.2 million and $712.3 million as of December 31, 2009 and 2008, respectively. Commercial mortgage financing, which totaled $2.3 billion and $2.0 billion as of December 31, 2009 and 2008, respectively, is provided for the acquisition or refinancing of income producing properties. Cash flows from the properties generally are sufficient to amortize the loan. These loans average approximately $1 million each and are primarily located in the Illinois, Florida, and California markets. Other commercial real estate loans totaled $197.3 million and $261.1 million as of December 31, 2009 and 2008, respectively.

The table below provides additional detail regarding commercial real estate loan types:

 

(In Millions)   2009      2008

Commercial Mortgages:

              

Office

  $ 592.7       $ 542.7

Apartment/ Multi-family

    521.6         403.2

Retail

    453.1         332.6

Industrial/ Warehouse

    378.1         269.1

Single Family Investment

    272.5         248.4

Other

    119.7         244.6
                

Total Commercial Mortgages

    2,337.7         2,040.6
 

Construction, Acquisition and Development Loans

    678.2         712.3

Other Commercial Real Estate Related

    197.3         261.1
                

Total Commercial Real Estate Loans

  $ 3,213.2       $ 3,014.0

 

At December 31, 2009 legally binding commitments to extend credit and standby letters of credit to commercial real estate borrowers totaled $475.8 million and $43.2 million,

 

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respectively. At December 31, 2008, legally binding commitments were $613.3 million and standby letters of credit were $63.4 million.

 

BANKS AND BANK HOLDING COMPANIES

On-balance sheet credit risk to banks and bank holding companies, both U.S. and non-U.S., consists primarily of short-term money market assets, which totaled $13.2 billion and $16.9 billion at December 31, 2009 and December 31, 2008, respectively, and noninterest-bearing demand balances maintained at correspondent banks, which totaled $2.4 billion and $2.6 billion at December 31, 2009 and December 31, 2008, respectively.

Credit risk associated with U.S. and non-U.S. banks and bank holding companies deemed to be counterparties by Credit Policy is managed by the Counterparty Risk Management Committee. Credit risk associated with other U.S. banks and bank holding companies that maintain commercial credit relationships with Northern Trust is managed by the relevant Credit Approval Committee and/or the Senior Credit Committee. Credit limits are established through a review process that includes an internally prepared financial analysis, use of the internal risk rating system and consideration of external ratings from rating agencies. Northern Trust places deposits with banks that have strong internal and external credit ratings and the average life to maturity of deposits with banks is maintained on a short-term basis in order to respond quickly to changing credit conditions.

 

NON-U.S. OUTSTANDINGS

As used in this discussion, non-U.S. outstandings are cross-border outstandings as defined by the Securities and Exchange Commission. They consist of loans, acceptances, interest-bearing deposits with financial institutions, accrued interest and other monetary assets. Not included are letters of credit, loan commitments, and non-U.S. office local currency claims on residents funded by local currency liabilities. Non-U.S. outstandings related to a country are net of guarantees given by third parties resident outside the country and the value of tangible, liquid collateral held outside the country. However, transactions with branches of non-U.S. banks are included in these outstandings and are classified according to the country location of the non-U.S. banks’ head office.

Short-term interbank time deposits with non-U.S. banks represent the largest category of non-U.S. outstandings. Northern Trust actively participates in the interbank market with U.S. and non-U.S. banks. International commercial lending activities also include import and export financing for U.S.-based clients.

Northern Trust places deposits with non-U.S. counterparties that have high internal (Northern Trust) and external credit ratings. These non-U.S. banks are approved and monitored by Northern Trust’s Counterparty Risk Management Committee, which has credit authority for exposure to all non-U.S. banks and employs a review process that results in credit limits. This process includes financial analysis of the non-U.S. banks, use of an internal risk rating system and consideration of external ratings from rating agencies. Each counterparty is reviewed at least annually and potentially more frequently based on deteriorating credit fundamentals or general market conditions. Separate from the entity-specific review process, the average life to maturity of deposits with non-U.S. banks is deliberately maintained on a short-term basis in order to respond quickly to changing credit conditions. Northern Trust also utilizes certain risk mitigation tools and agreements that may reduce exposures through use of cash collateral and/or balance sheet netting.

Additionally, the Counterparty Risk Management Committee performs a country-risk analysis and imposes limits to country exposure. The following table provides information on non-U.S. outstandings by country that exceed 1.00% of Northern Trust’s assets.

 

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NON-U.S. OUTSTANDINGS

 

(In Millions)   BANKS     

COMMERCIAL

AND OTHER

     TOTAL

At December 31, 2009

                       

United Kingdom

  $ 2,348      $ 27      $ 2,375

France

    2,078        1        2,079

Australia

    1,310        364        1,674
                         

At December 31, 2008

                       

United Kingdom

  $ 2,640      $ 63      $ 2,703

France

    2,455        1        2,456

Belgium

    1,382               1,382

Canada

    1,252        3        1,255

Netherlands

    1,025        95        1,120

Channel Islands & Isle of Man

    823        11        834
                         

At December 31, 2007

                       

France

  $ 2,982      $ 1      $ 2,983

United Kingdom

    2,693        109        2,802

Canada

    1,905        12        1,917

Netherlands

    1,527        188        1,715

Belgium

    1,540        8        1,548

Germany

    1,499        2        1,501

Australia

    1,316        19        1,335

Spain

    1,004        1        1,005

Switzerland

    967        4        971

Sweden

    877        3        880

Ireland

    522        309        831

Singapore

    779        2        781

Channel Islands & Isle of Man

    666        21        687

Countries whose aggregate outstandings totaled between .75% and 1.00% of total assets were as follows: Spain with aggregate outstandings of $807 million, Netherlands with aggregate outstandings of $787 million and Singapore with aggregate outstandings of $654 million at December 31, 2009. Ireland with aggregate outstandings of $773 million and Spain with aggregate outstandings of $752 million at December 31, 2008, and Denmark with aggregate outstandings of $593 million at December 31, 2007.

 

NONPERFORMING ASSETS AND 90 DAY PAST DUE LOANS

Nonperforming assets consist of nonaccrual loans and Other Real Estate Owned (OREO). OREO is comprised of commercial and residential properties acquired in partial or total satisfaction of problem loans. Past due loans are loans that are delinquent 90 days or more and still accruing interest. The level of 90 day past due loans at any reporting period can fluctuate widely based on the timing of cash collections, renegotiations and renewals. The following table presents nonperforming assets and past due loans for the current and prior four years.

 

NONPERFORMING ASSETS   DECEMBER 31
(In Millions)   2009      2008      2007      2006      2005

Nonaccrual Loans

                                         

U.S.

                                         

Residential Real Estate

  $ 116.9      $ 32.7      $ 5.8      $ 8.1      $ 5.0

Commercial

    48.5        21.3        10.4        18.8        16.1

Commercial Real Estate

    109.3        35.8                     

Personal

    1.2        6.9        7.0        7.6        8.7

Other

    2.6                            

Non-U.S.

                         1.2        1.2
                                           

Total Nonaccrual Loans

    278.5        96.7        23.2        35.7        31.0

Other Real Estate Owned

    29.6        3.5        6.1        1.4        .1
                                           

Total Nonperforming Assets

  $ 308.1      $ 100.2      $ 29.3      $ 37.1      $ 31.1
                                           

90 Day Past Due Loans Still Accruing

  $ 15.1      $ 27.8      $ 8.6      $ 24.6      $ 29.9

 

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Of the total loan portfolio of $27.8 billion at December 31, 2009, $278.5 million, or 1.00%, was nonaccrual, compared with $96.7 million, or .31%, at December 31, 2008. The $181.8 million increase in nonaccrual loans in 2009 primarily reflects the deterioration in overall economic conditions experienced over the past year. The duration and severity of the economic downturn, together with its impact on equity and real estate values, has had a negative effect on Northern Trust’s loan portfolio, primarily the residential and commercial real estate segments, as well as the commercial segment, resulting in an increase in the number of loans that have been downgraded to nonperforming. Changes in collateral values, delinquency ratios, portfolio volume and concentration, and other asset quality metrics, including management’s subjective evaluation of economic and business conditions, result in adjustments of qualitative reserve factors that are applied in the determination of inherent reserve requirements.

Included in the portfolio of nonaccrual loans are those loans that meet the criteria of being “impaired.” A loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement or its terms have been modified as a concession resulting from the debtor’s financial difficulties, referred to as a troubled debt restructuring. As of December 31, 2009, impaired loans, all of which have been classified as nonaccrual, totaled $228.1 million and included $24.3 million of loans deemed troubled debt restructurings. These loans had $43.8 million of the reserve for credit losses allocated to them.

 

Provision and Reserve for Credit Losses

Changes in the reserve for credit losses were as follows:

 

(In Millions)   2009      2008      2007  

Balance at Beginning of Year

  $ 251.1       $ 160.2       $ 151.0   

Charge-Offs

    (132.3      (25.7      (9.7

Recoveries

    6.5         2.5         .9   
                           

Net Charge-Offs

    (125.8      (23.2      (8.8

Provision for Credit Losses

    215.0         115.0         18.0   

Effect of Foreign Exchange Rates

    .3         (.9        
                           

Balance at End of Year

  $ 340.6       $ 251.1       $ 160.2   

 

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). 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 December 31, 2009 and each of the prior four year-ends, and the unallocated portion of the reserve at December 31, 2007, 2006 and 2005.

 

ALLOCATION OF THE RESERVE FOR CREDIT LOSSES

 

    DECEMBER 31  
    2009     2008     2007     2006     2005  
($ In Millions)   RESERVE
AMOUNT
  PERCENT OF
LOANS TO
TOTAL LOANS
    RESERVE
AMOUNT
  PERCENT OF
LOANS TO
TOTAL LOANS
    RESERVE
AMOUNT
  PERCENT OF
LOANS TO
TOTAL LOANS
    RESERVE
AMOUNT
  PERCENT OF
LOANS TO
TOTAL LOANS
    RESERVE
AMOUNT
  PERCENT OF
LOANS TO
TOTAL LOANS
 

Specific Reserve

  $ 43.8     $ 23.5     $ 10.8     $ 19.6     $ 20.3  
                                                             

Allocated Inherent Reserve

                                                           

Residential Real Estate

    66.8   39        37.0   34        13.6   36        13.4   38        12.4   42   

Commercial

    137.6   23        114.7   27        64.1   22        55.0   21        48.3   18   

Commercial Real Estate

    65.6   11        43.8   10        28.4   9        21.5   8        17.7   7   

Personal

    18.3   18        19.7   15        6.2   15        5.9   15        6.1   15   

Other

    2.2   3        1.7   4          4          4          4   

Lease Financing

    1.4   4        3.3   4        3.6   5        3.7   6        3.9   6   

Non-U.S.

    4.9   2        7.4   6        7.4   9        6.6   8        2.9   8   
                                                             

Total Allocated Inherent Reserve

  $ 296.8   100   $ 227.6   100   $ 123.3   100   $ 106.1   100   $ 91.3   100
                                                             

Unallocated Inherent Reserve

                      26.1          25.3          24.4     
                                                             

Total Reserve for Credit Losses

  $ 340.6   100   $ 251.1   100   $ 160.2   100   $ 151.0   100   $ 136.0   100
                                                             

Reserve Assigned to:

                                                           

Loans and Leases

  $ 309.2         $ 229.1         $ 148.1         $ 140.4         $ 125.4      

Unfunded Commitments and Standby Letters of Credit

    31.4           22.0           12.1           10.6           10.6      
                                                             

Total Reserve for Credit Losses

  $ 340.6         $ 251.1         $ 160.2         $ 151.0         $ 136.0      

 

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SPECIFIC COMPONENT OF THE RESERVE

The amount of specific reserves is determined through an individual evaluation of loans and lending-related commitments considered impaired based on expected future cash flows, collateral value, market value, and other factors that may impact the borrower’s ability to pay.

At December 31, 2009, the specific reserve component amounted to $43.8 million compared with $23.5 million at the end of 2008. The $20.3 million increase primarily reflects additional reserves provided for new and existing impaired loans, partially offset by principal repayments received and charge-offs. The growth in impaired loans was driven by continued weakness in the residential and commercial real estate segments of the loan portfolio.

The increase in the specific loss component of the reserve from $10.8 million in 2007 to $23.5 million in 2008 primarily reflected additional reserves provided for credit exposures that were determined to be impaired, partially offset by principal repayments received and charge-offs.

 

INHERENT COMPONENT OF THE RESERVE

The inherent component of the reserve addresses exposure relating to probable but unidentified credit-related losses. The amount of inherent loss reserves is based primarily on reserve factors which incorporate management’s evaluation of historical charge-off experience and various qualitative factors such as management’s evaluation of economic and business conditions and changes in the character and size of the loan portfolio. Effective in 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 historical charge-off experience for each loan category is based on data from the current and preceding three years. Qualitative factors reviewed by management include changes in asset quality metrics, in the nature and volume of the portfolio, in economic and business conditions, and in collateral valuations, such as property values, as well as other pertinent information.

The inherent component of the reserve also covers the credit exposure associated with undrawn loan commitments and standby letters of credit. To estimate the reserve for credit losses on these instruments, management uses conversion rates to determine their balance sheet equivalent amount and assigns a reserve factor based on the methodology utilized for outstanding loans.

The inherent portion of the reserve increased $69.2 million to $296.8 million at December 31, 2009, compared with $227.6 million at December 31, 2008, which in turn increased $78.2 million from $149.4 million at December 31, 2007. The increase in 2009 was driven by the continued weakness in the broader economic environment, particularly its impact on the residential and commercial real estate segments. The increase during 2008 was primarily attributable to loan growth and weakness in the broader economic environment.

 

OVERALL RESERVE

The evaluation of the factors above resulted in a reserve for credit losses of $340.6 million at December 31, 2009, compared with $251.1 million at the end of 2008. The reserve of $309.2 million assigned to loans and leases, as a percentage of total loans and leases, was 1.11% at December 31, 2009, compared with .74% at December 31, 2008, The increase in the reserve level reflects weakness in the broader economic environment.

Reserves assigned to unfunded loan commitments and standby letters of credits totaled $31.4 million and $22.0 million at December 31, 2009 and December 31, 2008, respectively, and are included in other liabilities in the consolidated balance sheet.

 

PROVISION

The provision for credit losses was $215.0 million for 2009 and net charge-offs totaled $125.8 million. This compares with a $115.0 million provision for credit losses and net charge-offs of $23.2 million in 2008, and a $18.0 million provision for credit losses and net charge-offs of $8.8 million in 2007.

 

Market Risk Management

 

Overview

To ensure adherence to Northern Trust’s interest rate and foreign exchange risk management policies, ALCO establishes and monitors guidelines designed to control the sensitivity of earnings to changes in interest rates and foreign currency exchange rates. The guidelines apply to both on- and off-balance sheet positions. The goal of the ALCO process is to maximize earnings while maintaining a high quality balance sheet and carefully controlling interest rate and foreign exchange risk.

 

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Asset/Liability Management

Asset/liability management activities include lending, accepting and placing deposits, investing in securities, issuing debt, and hedging interest rate and foreign exchange risk with derivative financial instruments. The primary market risk associated with asset/liability management activities is interest rate risk and, to a lesser degree, foreign exchange risk.

 

INTEREST RATE RISK MANAGEMENT

Interest rate risk is the risk to earnings or capital due to changes in interest rates. The changes in interest rates can have a positive or negative impact on earnings depending on the positioning of assets, liabilities and off-balance sheet instruments. The impact to earnings will primarily come through net interest income, but it can also impact certain types of fees. Changes in interest rates can also impact the values of assets, liabilities, and off-balance sheet positions, which indirectly impact the value of capital. There are four commonly recognized types of interest rate risk: repricing, which arises from differences in the maturity and repricing terms of assets and liabilities; yield curve, which arises from changes in the shape of the yield curve; basis, which arises from the changing relationships between rates earned and paid on different financial instruments with otherwise similar repricing characteristics; and behavioral characteristics / embedded optionality, which arises from client or counterparty behavior in response to interest rate changes. To mitigate interest rate risk, the structure of the balance sheet is managed so that movements of interest rates on assets and liabilities (adjusted for off-balance sheet hedges) are highly correlated which allows Northern Trust’s interest-bearing assets and liabilities to contribute to earnings even in periods of volatile interest rates.

Northern Trust uses two primary measurement techniques to manage interest rate risk: simulation of earnings and simulation of economic value of equity. These two techniques are complementary and are used in concert to provide a comprehensive interest rate risk management capability.

Simulation of earnings measures the sensitivity of earnings (SOE) under various interest rate scenarios. The modeling of SOE incorporates on-balance sheet positions, as well as derivative financial instruments (principally interest rate swaps) that are used to manage interest rate risk. Northern Trust uses management’s most likely interest rate forecast for the next year as the base case and measures the sensitivity (i.e. change) in earnings if future rates are 100 or 200 basis points higher or lower than management’s most likely rate forecast. Each rate movement is assumed to occur gradually over the one-year period. The 100 basis point increase, for example, consists of twelve consecutive monthly increases of 8.3 basis points. Stress testing of interest rates is performed to include such scenarios as immediate parallel shocks to rates, non-parallel (i.e. twist) shocks to yield curves that result in them becoming steeper or flatter, and using forward rates as opposed to forecast rates. The model simulations also incorporate the following assumptions:

Ÿ  

the balance sheet size and mix is assumed to remain constant over the simulation horizon;

Ÿ  

maturing assets and liabilities are replaced with instruments with similar terms as those maturing;

Ÿ  

prepayments on mortgage loans are projected under each rate scenario using a third-party mortgage analytics system that incorporates market prepayment assumptions and that have been adjusted to reflect Northern’s actual historical experience;

Ÿ  

non-maturity deposit rates are projected based on Northern’s actual historical pattern of pricing these products;

Ÿ  

some demand deposits are treated as being short-term rate sensitive because these balances receive an earnings credit rate that can be applied to fees for services provided by Northern Trust;

Ÿ  

new business rates are based on current spreads to market indices;

Ÿ  

currency exchange rates and credit spreads are assumed to remain constant over the simulation horizon; and

Ÿ  

implied floors are assumed as interest rates approach zero in the declining rate scenarios, resulting in yield curves flattening, spread compression, and lower earnings.

 

As of December 31, 2009, management’s most likely interest rate forecast reflects the overnight rate beginning to rise in the third quarter of 2010.

 

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The following table shows the estimated impact on 2010 pre-tax earnings of 100 and 200 basis point upward and downward movements in interest rates relative to management’s most likely interest rate forecast.

 

INTEREST RATE RISK SIMULATION OF PRE-TAX

INCOME AS OF DECEMBER 31, 2009

 

(In Millions)   ESTIMATED IMPACT ON
2010 PRE-TAX EARNINGS:
INCREASE/(DECREASE)
 

INCREASE IN INTEREST RATES ABOVE

MANAGEMENT’S INTEREST RATE FORECAST

     

100 Basis Points

  62   

200 Basis Points

  124   

DECREASE IN INTEREST RATES BELOW

MANAGEMENT’S INTEREST RATE FORECAST

     

100 Basis Points

  (79)   

200 Basis Points

  (110)   

 

The earnings increases in the higher interest rate scenarios reflect a return of rates to more normal levels (from current historic lows) resulting in spread expansion, especially in non-U.S. subsidiaries. The rates in the lower rate scenarios may not reflect a full 100 or 200 basis point reduction as implied interest rate floors of zero are in place resulting in spread compression.

The simulations of earnings do not incorporate any management actions that may be used to mitigate negative consequences of actual interest rate deviations. For that reason and others, they do not reflect likely actual results but serve as conservative estimates of interest rate risk.

A second technique used to measure interest rate risk is simulation of economic value of equity, which measures the potential sensitivity of economic value of equity (SEVE) under different interest rate scenarios. Economic value of equity is defined as the present value of assets minus the present value of liabilities net of the value of instruments that are used to manage the interest rate risk of balance sheet items. SEVE is a measure of the long-term interest rate risk as it takes into account all future cash flows of the current balance sheet.

Northern Trust limits aggregate market risk, as measured by the above techniques, to an acceptable level within the context of risk-return trade-offs. A variety of actions may be used to implement risk management strategies to modify interest rate risk including:

Ÿ  

purchases of securities;

Ÿ  

sales of securities that are classified as available for sale;

Ÿ  

increased allocations of originated loans that are designated as held for sale;

Ÿ  

issuance of senior notes and subordinated notes;

Ÿ  

collateralized borrowings from the Federal Home Loan Bank;

Ÿ  

placing and taking Eurodollar time deposits; and

Ÿ  

hedging with various types of derivative financial instruments.

 

Northern Trust strives to use the most effective instruments for implementing its interest risk management strategies, considering the costs, liquidity, collateral and capital requirements of the various alternatives and the risk-return tradeoffs.

 

FOREIGN EXCHANGE RISK MANAGEMENT

Northern Trust is exposed to non-trading foreign exchange risk as a result of its holdings of non-U.S. dollar denominated assets and liabilities, investment in non-U.S. subsidiaries, and future non-U.S. dollar denominated revenue and expense. To manage currency exposures on the balance sheet, Northern Trust attempts to match its assets and liabilities by currency. If those currency offsets do not exist on the balance sheet, Northern Trust will use foreign exchange derivative contracts to mitigate its currency exposure. Foreign exchange contracts are also used to reduce Northern Trust’s currency exposure to future non-U.S. dollar denominated revenue and expense.

 

Foreign Exchange Trading. Foreign exchange trading activities consist principally of providing foreign exchange services to clients. Most of these services are provided in connection with Northern Trust’s growing global custody business. However, in the normal course of business Northern Trust also engages in proprietary trading of non-U.S. currencies. The primary market risk associated with these activities is foreign exchange risk.

Foreign currency trading positions exist when aggregate obligations to purchase and sell a currency other than the U.S. dollar do not offset each other, or offset each other in different time periods. Northern Trust mitigates the risk related to its non-U.S. currency positions by establishing limits on the amounts and durations of its positions. The limits on overnight inventory positions are generally lower than the limits established for intra-day trading activity. All overnight positions are monitored by a risk management function, which is separate from the trading function, to ensure that the limits are not exceeded. Although position limits are important in controlling foreign exchange risk, they are not a substitute for the experience or judgment of Northern Trust’s senior management and its currency traders, who have extensive knowledge of the currency markets. Non-U.S.

 

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currency positions and strategies are adjusted as needed in response to changing market conditions.

As part of its risk management activities, Northern Trust regularly measures the risk of loss associated with non-U.S. currency positions using a value at risk model. This statistical model provides an estimate, based on a 99% confidence level, of the potential loss in earnings that may be incurred if an adverse one-day shift in non-U.S. currency exchange rates were to occur. The model, which is based on a variance/co-variance methodology, incorporates historical currency price data and historical correlations in price movement among the currencies. All non-U.S. currency trading positions are included in the model.

Northern Trust’s value at risk based on non-U.S. currency positions totaled $697 thousand and $544 thousand as of December 31, 2009 and 2008, respectively. Value at risk totals representing the average, high and low for 2009 were $360 thousand, $926 thousand and $137 thousand, respectively, with the average, high and low for 2008 being $548 thousand, $1.7 million and $132 thousand, respectively. These totals indicate the degree of risk inherent in non-U.S. currency dispositions as of year-end and during the year; however, it is not a prediction of an expected gain or loss. Actual future gains and losses will vary depending on market conditions and the size and duration of future non-U.S. currency positions. During 2009 and 2008, Northern Trust did not incur an actual trading loss in excess of the daily value at risk estimate.

 

Other Trading Activities. Market risk associated with other trading activities is negligible. Northern Trust is a party to various derivative financial instruments, most of which consist of interest rate swaps entered into to meet clients’ interest risk management needs. When Northern Trust enters into such swaps, its policy is to mitigate the resulting market risk with an offsetting swap or with futures contracts. Northern Trust carries in its trading portfolio a small inventory of securities that are held for sale to its clients. The interest rate risk associated with these securities is insignificant.

 

Operational Risk Management

 

In providing its services, Northern Trust is exposed to operational risk which is the risk of loss from inadequate or failed internal processes, people, and systems or from external events. Operational risk reflects the potential for inadequate information systems, operating problems, product design and delivery difficulties, or catastrophes to result in unexpected losses. Operational risk includes compliance, legal, and fiduciary risks, which under Northern Trust Corporation’s risk structure are governed and managed explicitly. Northern Trust’s success depends, in part, upon maintaining its reputation as a well managed institution with shareholders, existing and prospective clients, creditors and regulators.

In order to maintain this reputation, Northern Trust seeks to minimize the frequency and severity of operational losses associated with compliance and fiduciary matters, product, process, and technology failures, and business continuity.

Operational risk is mitigated through a system of internal controls and risk management practices that are designed to keep operational risk and operational losses at levels appropriate to Northern Trust’s overall risk appetite and the inherent risk in the markets it operates. While operational risk controls are extensive, operational losses have and will continue to occur.

The Operational Risk Committee of Northern Trust provides independent oversight and is responsible for setting the Corporate Operational Risk Management Policy and developing the operational risk management framework and programs that support the coordination of operational risk activities to identify, monitor, manage and report on operational risk.

The Corporate Operational Risk function is the focal point for the operational risk management framework and works closely with the business units to achieve the goal of assuring proactive management of operational risk within Northern Trust. To further limit operational risks, committee structures have been established to draft, enforce, and monitor adherence to corporate policies and established procedures. Each business unit is responsible for complying with corporate policies and external regulations applicable to the unit, and is responsible for establishing specific procedures to do so. Northern Trust’s internal auditors monitor the overall effectiveness of the system of internal controls on an ongoing basis.

 

FACTORS AFFECTING FUTURE RESULTS

 

This report contains statements that may be considered forward-looking, such as the statements relating to Northern Trust’s financial goals, dividend policy, expansion and business development plans, risk management policies, anticipated expense levels and projected profit improvements, business prospects and positioning with respect to market, demographic and pricing trends, strategic initiatives, re-engineering and outsourcing activities, new business results and outlook, changes in securities market prices, credit quality including reserve levels, planned capital expenditures and technology spending,

 

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anticipated tax benefits and expenses, and the effects of any extraordinary events and various other matters (including developments with respect to litigation, other contingent liabilities and obligations, and regulation involving Northern Trust and changes in accounting policies, standards and interpretations) on Northern Trust’s business and results.

Forward-looking statements are typically identified by words or phrases such as “believe”, “expect”, “anticipate”, “intend”, “estimate”, “may increase”, “may fluctuate”, “plan”, “goal”, “target”, “strategy”, and similar expressions or future or conditional verbs such as “may”, “will”, “should”, “would”, and “could.” Forward-looking statements are Northern Trust’s current estimates or expectations of future events or future results. Actual results could differ materially from the results indicated by these statements because the realization of those results is subject to many risks and uncertainties including: the health of the U.S. and international economies and 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 continuing disruption and stress in the financial markets, the effectiveness of governmental actions taken in response, and the effect of such governmental actions on Northern Trust, its competitors and counterparties, financial markets generally and availability of credit specifically, and the U.S. and international economies, including special deposit assessments or potentially higher FDIC premiums; changes in foreign exchange trading client volumes, fluctuations and volatility in foreign currency exchange rates, and Northern Trust’s success in assessing and mitigating the risks arising from such changes, fluctuations and volatility; decline in the value of securities held in Northern Trust’s investment portfolio, particularly asset-backed securities, the liquidity and pricing of which may be negatively impacted by periods of economic turmoil and financial market disruptions; uncertainties inherent in the complex and subjective judgments required to assess 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 Trust’s investment portfolio; Northern Trust’s success in managing various risks inherent in its business, including credit risk, operational risk, interest rate risk and liquidity risk, particularly during times of economic uncertainty and volatility in the credit and other markets; geopolitical risks and the risks of extraordinary events such as natural disasters, terrorist events, war and the U.S. and other governments’ responses to those events; the pace and extent of continued globalization of investment activity and growth in worldwide financial assets; regulatory and monetary policy developments; failure to obtain regulatory approvals when required; 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 Trust’s competition, including increased consolidation within the financial services industry; Northern Trust’s success in maintaining existing business and continuing to generate new business in its existing markets; Northern Trust’s success in identifying and penetrating targeted markets, through acquisition, strategic alliance or otherwise; Northern Trust’s success in integrating recent and future acquisitions and strategic alliances; Northern Trust’s success in addressing the complex needs of a global client base across multiple time zones and from multiple locations, and managing compliance with legal, tax, regulatory and other requirements in areas of faster growth in its businesses, especially in immature markets; Northern Trust’s ability to maintain a product mix that achieves acceptable margins; Northern Trust’s ability to continue to generate investment results that satisfy its clients and continue to develop its array of investment products; Northern Trust’s success in generating revenues in its securities lending business for itself and its clients, especially in periods of economic and financial market uncertainty; Northern Trust’s success in recruiting and retaining the necessary personnel to support business growth and expansion and maintain sufficient expertise to support increasingly complex products and services; Northern Trust’s ability, as products, methods of delivery, and client requirements change or become more complex, to continue to fund and accomplish innovation, improve risk management practices and controls, and address operating risks, including human errors or omissions, pricing or valuation of securities, fraud, systems performance or defects, systems interruptions, and breakdowns in processes or internal controls; Northern Trust’s success in controlling expenses, particularly in a difficult economic environment; uncertainties inherent in Northern Trust’s assumptions concerning its pension plan, including discount rates and

 

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expected contributions, returns and payouts; increased costs of compliance and other risks associated with changes in regulation and the current regulatory environment, including the requirements of the Basel II capital regime and areas of increased regulatory emphasis and oversight in the U.S. and other countries such as anti-money laundering, anti-bribery, and client privacy and the potential for substantial changes in the legal, regulatory and enforcement framework and oversight applicable to financial institutions in reaction to recent economic turmoil; risks and uncertainties inherent in the litigation and regulatory process, including the adequacy of contingent liability, tax, and other reserves; and the risk of events that could harm Northern Trust’s reputation and so undermine the confidence of clients, counterparties, rating agencies, and stockholders.

Some of these and other risks and uncertainties that may affect future results are discussed in more detail in the section of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” captioned “Risk Management” in the 2009 Annual Report to Shareholders (pages 51 – 62), in the section of the “Notes to Consolidated Financial Statements” in the 2009 Annual Report to Shareholders captioned “Note 23 – Contingent Liabilities” (page 99 and 100), in the sections of “Item 1 – Business” of the 2009 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 2009 Annual Report on Form 10-K (pages 25– 37). 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.

 

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MANAGEMENT S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

 

Management of Northern Trust Corporation (Northern Trust) is responsible for establishing and maintaining adequate internal control over financial reporting. This internal control contains monitoring mechanisms, and actions are taken to correct deficiencies identified.

Management assessed Northern Trust’s internal control over financial reporting as of December 31, 2009. This assessment was based on criteria for effective internal control over financial reporting described in “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that, as of December 31, 2009, Northern Trust maintained effective internal control over financial reporting, including maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of Northern Trust, and policies and procedures that provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States and that receipts and expenditures of Northern Trust are being made only in accordance with authorizations of management and directors of Northern Trust. Additionally, KPMG LLP, the independent registered public accounting firm that audited Northern Trust’s consolidated financial statements as of, and for the year ended, December 31, 2009, included in this Annual Report, has issued an attestation report (included herein on page 66) on the effectiveness of Northern Trust’s internal control over financial reporting.

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF NORTHERN TRUST CORPORATION:

We have audited Northern Trust Corporation’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Northern Trust Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management’s Report on Internal Control Over Financial Reporting”. Our responsibility is to express an opinion on Northern Trust Corporation’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Northern Trust Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Northern Trust Corporation and subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2009, and our report dated February 26, 2010 expressed an unqualified opinion on those consolidated financial statements.

 

LOGO

 

CHICAGO , ILLINOIS

FEBRUARY 26, 2010

 

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CONSOLIDATED FINANCIAL STATEMENTS

 

CONSOLIDATED BALANCE SHEET

 

    DECEMBER 31  
($ In Millions Except Share Information)   2009      2008  

ASSETS

                

Cash and Due from Banks

  $ 2,491.8       $ 2,648.2   

Federal Funds Sold and Securities Purchased under Agreements to Resell

    250.0         169.0   

Time Deposits with Banks

    12,905.2         16,721.0   

Federal Reserve Deposits and Other Interest-Bearing

    14,973.0         9,403.8   

Securities

                

Available for Sale

    17,462.1         14,414.4   

Held to Maturity (Fair value – $1,185.7 in 2009 and $1,156.1 in 2008)

    1,161.4         1,154.1   

Trading Account

    9.9         2.3   
                  

Total Securities

    18,633.4         15,570.8   
                  

Loans and Leases

                

Commercial and Other

    16,998.0         20,374.0   

Residential Mortgages

    10,807.7         10,381.4   
                  

Total Loans and Leases (Net of unearned income – $486.0 in 2009 and $539.5 in 2008)

    27,805.7         30,755.4   
                  

Reserve for Credit Losses Assigned to Loans and Leases

    (309.2      (229.1

Buildings and Equipment

    543.5         506.6   

Client Security Settlement Receivables

    794.8         709.3   

Goodwill

    401.6         389.4   

Other Assets

    3,651.7         5,409.2   
                  

Total Assets

  $ 82,141.5       $ 82,053.6   
                  

LIABILITIES

                

Deposits

                

Demand and Other Noninterest-Bearing

  $ 9,177.5       $ 11,823.6   

Savings and Money Market

    15,044.0         9,079.2   

Savings Certificates

    2,476.7         2,606.8   

Other Time

    1,524.5         801.6   

Non-U.S. Offices – Noninterest-Bearing

    2,305.8         2,855.7   

– Interest-Bearing

    27,752.8         35,239.5   
                  

Total Deposits

    58,281.3         62,406.4   

Federal Funds Purchased

    6,649.8         1,783.5   

Securities Sold under Agreements to Repurchase

    1,037.5         1,529.1   

Other Borrowings

    2,078.3         736.7   

Senior Notes

    1,551.8         1,052.6   

Long-Term Debt

    2,837.8         3,293.4   

Floating Rate Capital Debt

    276.8         276.7   

Other Liabilities

    3,116.1         4,585.8   
                  

Total Liabilities

    75,829.4         75,664.2   
                  

STOCKHOLDERS’ EQUITY

                

Preferred Stock – Series B (Net of discount – $74.7)

            1,501.3   

Common Stock, $1.66  2 /3 Par Value; Authorized 560,000,000 shares; Outstanding 241,679,942 shares in 2009 and 223,263,132 shares in 2008

    408.6         379.8   

Additional Paid-in Capital

    888.3         178.5   

Retained Earnings

    5,576.0         5,091.2   

Accumulated Other Comprehensive Income

    (361.6      (494.9

Treasury Stock (at cost – 3,491,582 shares in 2009 and 4,658,392 shares in 2008)

    (199.2      (266.5
                  

Total Stockholders’ Equity

    6,312.1         6,389.4   
                  

Total Liabilities and Stockholders’ Equity

  $ 82,141.5       $ 82,053.6   

See accompanying notes to consolidated financial statements on pages 71-116.

 

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CONSOLIDATED FINANCIAL STATEMENTS

 

CONSOLIDATED STATEMENT OF INCOME

 

    FOR THE YEAR ENDED DECEMBER 31  
($ In Millions Except Per Share Information)   2009      2008      2007  

Noninterest Income

                         

Trust, Investment and Other Servicing Fees

  $ 2,083.8       $ 2,134.9       $ 2,077.6   

Foreign Exchange Trading Income

    445.7         616.2         351.3   

Security Commissions and Trading Income

    62.4         77.0         67.6   

Treasury Management Fees

    81.8         72.8         65.3   

Gain on Visa Share Redemption

            167.9           

Other Operating Income

    136.8         186.9         95.3   

Security Gains and (Losses), including Other-Than-Temporary-Impairment (OTTI)
Losses, net

    (90.1      (56.3      6.5   

Less: Noncredit-Related Unrealized Losses on Securities OTTI

    66.7                   
                           

Total Investment Security Gains (Losses), net

    (23.4      (56.3      6.5   
                           

Total Noninterest Income

    2,787.1         3,199.4         2,663.6   
                           

Net Interest Income

                         

Interest Income

    1,406.0         2,478.5         2,784.2   

Interest Expense

    406.2         1,399.4         1,938.8   
                           

Net Interest Income

    999.8         1,079.1         845.4   

Provision for Credit Losses

    215.0         115.0         18.0   
                           

Net Interest Income after Provision for Credit Losses

    784.8         964.1         827.4   
                           

Noninterest Expenses

                         

Compensation

    1,099.7         1,133.1         1,038.2   

Employee Benefits

    242.1         223.4         234.9   

Outside Services

    424.5         413.8         386.2   

Equipment and Software Expense

    261.1         241.2         219.3   

Occupancy Expense

    170.8         166.1         156.5   

Visa Indemnification Charges

    (17.8      (76.1      150.0   

Other Operating Expenses

    136.3         786.3         245.1   
                           

Total Noninterest Expenses

    2,316.7         2,887.8         2,430.2   
                           

Income before Income Taxes

    1,255.2         1,275.7         1,060.8   

Provision for Income Taxes

    391.0         480.9         333.9   
                           

Net Income

  $ 864.2       $ 794.8       $ 726.9   
                           

Net Income Applicable to Common Stock

  $ 753.1       $ 782.8       $ 726.9   
                           

Per Common Share

                         

Net Income – Basic

  $ 3.18       $ 3.51       $ 3.28   

                   – Diluted

    3.16         3.47         3.23   

Cash Dividends Declared

    1.12         1.12         1.03   
                           

Average Number of Common Shares Outstanding – Basic

    235,511,879         221,446,382         219,680,628   

                                                                            – Diluted

    236,416,029         224,053,430         223,079,180   
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME                          
    FOR THE YEAR ENDED DECEMBER 31  
(In Millions)   2009      2008      2007  

Net Income

  $ 864.2       $ 794.8       $ 726.9   

Cumulative Effect Adjustment from New Accounting Standard

    (9.5                

Other Comprehensive Income (Loss) (Net of tax and reclassifications)

                         

Net Unrealized Gains (Losses) on Securities Available for Sale

    180.7         (184.2      (33.2

Net Unrealized Gains (Losses) on Cash Flow Hedge Designations

    (5.5      (17.7      (5.2

Foreign Currency Translation Adjustments

    (1.5      (8.4      2.7   

Pension and Other Postretirement Benefit Adjustments

    (30.9      (194.3      94.0   
                           

Other Comprehensive Income (Loss)

    133.3         (404.6      58.3   
                           

Comprehensive Income

  $ 997.5       $ 390.2       $ 785.2   

See accompanying notes to consolidated financial statements on pages 71-116.

 

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CONSOLIDATED FINANCIAL STATEMENTS

 

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

 

    FOR THE YEAR ENDED DECEMBER 31  
(In Millions)   2009      2008      2007  

PREFERRED STOCK

                         

Balance at January 1

  $ 1,501.3       $       $   

Preferred Stock Issuance, Series B

            1,499.6           

Redemption of Preferred Stock, Series B

    (1,576.0                

Discount Accretion – Preferred Stock

    74.7         1.7           
                           

Balance at December 31

            1,501.3           
                           

COMMON STOCK

                         

Balance at January 1

    379.8         379.8         379.8   

Common Stock Issuance

    28.8                   
                           

Balance at December 31

    408.6         379.8         379.8   
                           

ADDITIONAL PAID-IN CAPITAL

                         

Balance at January 1

    178.5         69.1         30.9   

Common Stock Issuance

    805.3                   

Issuance of Warrant to Purchase Common Stock

            76.4           

Repurchase of Warrant to Purchase Common Stock

    (87.0                

Treasury Stock Transaction – Stock Options and Awards

    (39.1      (46.1      (45.3

Stock-Based Awards – Amortization

    26.4         44.1         38.4   

Stock-Based Awards – Tax Benefits

    4.2         35.0         45.1   
                           

Balance at December 31

    888.3         178.5         69.1   
                           

RETAINED EARNINGS

                         

Balance at January 1, as Previously Reported

    5,091.2         4,556.2         4,131.2   

April 1 Cumulative Effect of Applying FSP FAS 115-2 (ASC 320-10)

    9.5                   

Cumulative Effect of Applying FSP 13-2 (ASC 840-30)

                    (73.4

Change in Measurement Date of Postretirement Plans

            (7.4        
                           

Balance at January 1, as Adjusted

    5,100.7         4,548.8         4,057.8   

Net Income

    864.2         794.8         726.9   

Dividends Declared – Common Stock

    (267.6      (250.7      (228.5

Dividends Declared – Preferred Stock

    (46.6                

Discount Accretion – Preferred Stock

    (74.7      (1.7        
                           

Balance at December 31

    5,576.0         5,091.2         4,556.2   
                           

ACCUMULATED OTHER COMPREHENSIVE INCOME

                         

Balance at January 1

    (494.9      (90.3      (148.6

April 1 Cumulative Effect of Applying FSP FAS 115-2 (ASC 320-10)

    (9.5                

Other Comprehensive Income (Loss)

    142.8         (404.6      58.3   
                           

Balance at December 31

    (361.6      (494.9      (90.3
                           

TREASURY STOCK

                         

Balance at January 1

    (266.5      (405.7      (449.4

Stock Options and Awards

    81.1         214.3         262.6   

Stock Purchased

    (13.8      (75.1      (218.9
                           

Balance at December 31

    (199.2      (266.5      (405.7
                           

Total Stockholders’ Equity At December 31

  $ 6,312.1       $ 6,389.4       $ 4,509.1   

See accompanying notes to consolidated financial statements on pages 71-116.

 

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CONSOLIDATED FINANCIAL STATEMENTS

 

CONSOLIDATED STATEMENT OF CASH FLOWS

 

    FOR THE YEAR ENDED DECEMBER 31  
(In Millions)   2009      2008      2007  

CASH FLOWS FROM OPERATING ACTIVITIES:

                         

Net Income

  $ 864.2       $ 794.8       $ 726.9   

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

                         

Investment Security (Gains) Losses, net

    23.4         56.3         (6.5

Amortization and Accretion of Securities and Unearned Income

    (50.4      (20.3      (256.1

Provision for Credit Losses

    215.0         115.0         18.0   

Depreciation on Buildings and Equipment

    95.7         87.6         84.8   

Amortization of Computer Software

    131.8         115.0         105.7   

Amortization of Intangibles

    16.2         17.8         20.9   

Client Support Related Charges (Benefit)

    (109.3      320.3           

Capital Support Agreement Payments

    (204.8                

Increase (Decrease) in Accrued Income Taxes

    29.4         (220.0      (137.9

Qualified Pension Plan Contributions

    (175.0      (110.0        

Visa Indemnification Charges (Benefit)

    (17.8      (76.1      150.0   

Excess Tax Benefits from Stock Incentive Plans

    (4.2      (35.0      (45.1

Deferred Income Tax Provision

    215.8         (60.7      (70.3

Net (Increase) Decrease in Trading Account Securities

    (7.6      .8         5.5   

(Increase) Decrease in Receivables

    65.3         81.5         (86.1

Increase (Decrease) in Interest Payable

    (13.8      (1.0      3.4   

Other Operating Activities, net

    (59.2      (210.7      367.5   
                           

Net Cash Provided by Operating Activities

    1,014.7         855.3         880.7   
                           

CASH FLOWS FROM INVESTING ACTIVITIES:

                         

Net (Increase) Decrease in Federal Funds Sold and Securities Purchased under Agreements to Resell

    (81.0      3,621.7         (2,491.0

Net (Increase) Decrease in Time Deposits with Banks

    3,815.8         4,539.0         (5,791.3

Net (Increase) Decrease in Federal Reserve Deposits and Other Interest-Bearing Assets

    (5,569.2      (9,382.3      .4   

Purchases of Securities – Held to Maturity

    (220.9      (194.0      (122.0

Proceeds from Maturity and Redemption of Securities – Held to Maturity

    219.2         188.9         93.4   

Purchases of Securities – Available for Sale

    (14,053.0      (15,324.0      (55,043.7

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

    11,925.9         8,267.1         58,718.8   

Net Increase (Decrease) in Loans and Leases

    2,832.7         (5,422.8      (2,787.8

Purchases of Buildings and Equipment, net

    (132.6      (102.3      (89.5

Purchases and Development of Computer Software

    (181.6      (205.7      (164.0

Net Increase in Client Security Settlement Receivables

    (85.5      (146.2      (223.8

Decrease in Cash Due to Acquisitions

            (8.6        

Other Investing Activities, net

    (148.4      (178.0      431.3   
                           

Net Cash Used in Investing Activities

    (1,678.6      (14,347.2      (7,469.2
                           

CASH FLOWS FROM FINANCING ACTIVITIES:

                         

Net Increase (Decrease) in Deposits

    (4,125.1      11,193.3         7,392.9   

Net Increase (Decrease) in Federal Funds Purchased

    4,866.3         317.7         (1,355.8

Net Decrease in Securities Sold under Agreements to Repurchase

    (491.6      (234.5      (187.1

Net Increase (Decrease) in Short-Term Other Borrowings

    626.3         (1,809.1      (894.1

Proceeds from Term Federal Funds Purchased

    17,933.4         1,989.9         247.5   

Repayments of Term Federal Funds Purchased

    (17,217.4      (1,553.9      (221.5

Proceeds from Senior Notes & Long-Term Debt

    500.0         1,864.8         2,034.9   

Repayments of Senior Notes & Long-Term Debt

    (422.4      (867.0      (1,460.7

Treasury Stock Purchased

    (10.7      (68.3      (213.0

Net Proceeds from Stock Options

    38.9         161.9         204.8   

Excess Tax Benefits from Stock Incentive Plans

    4.2         35.0         45.1   

Cash Dividends Paid on Common Stock

    (260.3      (247.7      (219.5

Proceeds from Common Stock Issuance

    834.1                   

Cash Dividends Paid on Preferred Stock

    (46.6                

Redemption of Preferred Stock – Series B

    (1,576.0                

Repurchase of Warrant to Purchase Common Stock

    (87.0                

Proceeds from Preferred Stock – Series B and Warrant to Purchase Common Stock

            1,576.0           

Other Financing Activities, net

    (144.9      18.0         86.9   
                           

Net Cash Provided by Financing Activities

    421.2         12,376.1         5,460.4   
                           

Effect of Foreign Currency Exchange Rates on Cash

    86.3         (157.6      88.7   
                           

Decrease in Cash and Due from Banks

    (156.4      (1,273.4      (1,039.4

Cash and Due from Banks at Beginning of Year

    2,648.2         3,921.6         4,961.0   
                           

Cash and Due from Banks at End of Year

  $ 2,491.8       $ 2,648.2       $ 3,921.6   
                           

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

                         

Interest Paid

  $ 420.0       $ 1,400.4       $ 1,882.7   

Income Taxes Paid

    409.6         485.1         368.0   

See accompanying notes to consolidated financial statements on pages 71-116.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1 – Summary of Significant Accounting Policies

 

The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (GAAP) and reporting practices prescribed for the banking industry. A description of the more significant accounting policies follows:

 

A. Basis of Presentation. The consolidated financial statements include the accounts of Northern Trust Corporation (Corporation) and its wholly-owned subsidiary, The Northern Trust Company (Bank), and their wholly-owned subsidiaries. Throughout the notes, the term “Northern Trust” refers to the Corporation and its subsidiaries. Intercompany balances and transactions have been eliminated in consolidation. The consolidated statement of income includes results of acquired subsidiaries from the dates of acquisition. Events occurring subsequent to the date of the balance sheet have been evaluated for potential recognition or disclosure in the consolidated financial statements through February 26, 2010, the date of the filing of the consolidated financial statements with the Securities and Exchange Commission.

 

B. Nature of Operations. The Corporation is a financial holding company under the Gramm-Leach-Bliley Act. The Bank is an Illinois banking corporation headquartered in Chicago and the Corporation’s principal subsidiary. The Corporation conducts business in the United States (U.S.) and internationally through the Bank, a national bank subsidiary, a federal savings bank subsidiary, trust companies, and various other U.S. and non-U.S. subsidiaries.

Northern Trust generates the majority of its revenues from its two primary business units: Corporate and Institutional Services (C&IS) and Personal Financial Services (PFS). Investment management services and products are provided to C&IS and PFS through a third business unit, Northern Trust Global Investments (NTGI). Operating and systems support for these business units is provided by a fourth business unit, Operations and Technology (O&T).

The C&IS business unit provides asset servicing, asset management, and related services to corporate and public retirement funds, foundations, endowments, fund managers, insurance companies, and government funds; a full range of commercial banking services to large and mid-sized corporations and financial institutions; and foreign exchange services. C&IS client relationships are managed through the Bank and the Bank’s and the Corporation’s subsidiaries, including support from international locations in North America, Europe, the Asia-Pacific region and the Middle East.

The PFS business unit provides personal trust, investment management, custody, and philanthropic services; financial consulting; wealth management and family office services; guardianship and estate administration; brokerage services; and private and business banking. PFS focuses on high net worth individuals and families, business owners, executives, professionals, retirees, and established privately-held businesses in its target markets. PFS services are delivered through a network of 79 offices in 18 U.S. states as well as offices in London and Guernsey.

 

C. Use of Estimates in the Preparation of Financial Statements. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

D. Foreign Currency Translation. Asset and liability accounts denominated in nonfunctional currencies are remeasured into functional currencies at period end rates of exchange, except for buildings and equipment which are remeasured at exchange rates in effect at the date of acquisition. Results from remeasurement of assets and liability accounts are reported in other operating income. Income and expense accounts are remeasured at period average rates of exchange.

Asset and liability accounts of entities with functional currencies that are not the U.S. dollar are translated at period end rates of exchange. Income and expense accounts are translated at period average rates of exchange. Translation adjustments, net of applicable taxes, are reported directly to accumulated other comprehensive income, a component of stockholders’ equity.

 

E. Securities. Securities Available for Sale are reported at fair value, with unrealized gains and losses credited or charged, net of the tax effect, to accumulated other comprehensive income, a component of stockholders’ equity. Realized gains and losses on securities available for sale are determined on a specific identification basis and are reported in the consolidated statement of income as investment security gains (losses), net. Interest income is recorded on the

 

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accrual basis, adjusted for the amortization of premium and accretion of discount.

Securities Held to Maturity consist of debt securities that management intends to, and Northern Trust has the ability to, hold until maturity. Such securities are reported at cost, adjusted for amortization of premium and accretion of discount. Interest income is recorded on the accrual basis adjusted for the amortization of premium and accretion of discount.

Securities Held for Trading are stated at fair value. Realized and unrealized gains and losses on securities held for trading are reported in the consolidated statement of income under security commissions and trading income.

Other-Than-Temporary Impairment. In April 2009, the Financial Accounting Standards Board (FASB) issued a new accounting standard which amended the recognition guidance for other-than-temporary impairments (OTTI) of debt securities and expanded the financial statement disclosures required for OTTI of debt and equity securities. Northern Trust adopted the new standard in the second quarter of 2009.

Under the new standard, a security is considered to be other-than-temporarily impaired if the present value of cash flows expected to be collected are less than the security’s amortized cost basis (the difference being defined as the credit loss) or if the fair value of the security is less than the security’s amortized cost basis and the investor intends, or more-likely-than-not will be required, to sell the security before recovery of the security’s amortized cost basis. If an OTTI exists, the charge to earnings is limited to the amount of credit loss if the investor does not intend to sell the security, and it is more-likely-than-not that it will not be required to sell the security, before recovery of the security’s amortized cost basis. Any remaining difference between fair value and amortized cost is recognized in accumulated other comprehensive income (AOCI), a component of stockholders’ equity, net of applicable taxes. Otherwise, the entire difference between fair value and amortized cost is charged to earnings.

The new standard required an entity to initially apply its provisions to previously recognized OTTI of debt securities held as of the date of adoption (those securities that the entity does not intend to sell, and will not more likely than not be required to sell, before recovery in value), by recording a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The cumulative-effect adjustment reclassified the non-credit component of the previous OTTI to AOCI from retained earnings. The cumulative effect of the non-credit component of Northern Trust’s previously recognized OTTI of applicable debt securities held as of the April 1, 2009 date of adoption was $15.0 million ($9.5 million after-tax).

Security impairment reviews are conducted quarterly to identify and evaluate securities that have indications of possible OTTI. The determination as to whether a security’s decline in market value is other-than-temporary takes into consideration numerous factors and the relative significance of any single factor can vary by security. Factors Northern Trust considers in determining whether impairment is other-than-temporary include, but are not limited to, the length of time which the security has been impaired; the severity of the impairment; the cause of the impairment; the financial condition and near-term prospects of the issuer; activity in the market of the issuer which may indicate adverse credit conditions; and Northern Trust’s ability and intent not to sell, and the likelihood that it will not be required to sell, the security for a period of time sufficient to allow for the recovery of the security’s amortized cost basis.

 

F. Derivative Financial Instruments. Northern Trust is a party to various derivative instruments that are used in the normal course of business to meet the needs of its clients; as part of its trading activity for its own account; and as part of its risk management activities. These instruments include foreign exchange contracts, interest rate contracts, and credit default swap contracts. Derivative financial instruments are recorded on the consolidated balance sheet at fair value within other assets and liabilities. Derivative asset and liability positions with the same counterparty are reflected on a net basis in cases where legally enforceable master netting agreements exist. Derivative assets and liabilities are further reduced by cash collateral received from, and deposited with, derivative counterparties. The accounting for changes in the fair value of a derivative in the consolidated statement of income depends on whether the contract has been designated as a hedge and qualifies for hedge accounting under GAAP.

Changes in the fair value of client and trading derivative instruments and derivatives entered into for risk management purposes that have not been designated as hedges are recognized currently in either foreign exchange trading or other operating income. Certain derivative instruments used by Northern Trust to manage risk are formally designated and qualify for hedge accounting as fair value, cash flow, or net investment hedges.

Derivatives designated as fair value hedges are used to limit Northern Trust’s exposure to changes in the fair value of assets and liabilities due to movements in interest rates. Changes in the fair value of fair value hedges are recognized currently in income. For fair value hedges, Northern Trust applies the “shortcut” method of accounting, available under

 

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GAAP, which assumes there is no ineffectiveness in a hedge. As a result, changes recorded in the fair value of the hedged item are equal to the offsetting gain or loss on the derivative and are reflected in the same line item.

Derivatives designated as cash flow hedges are used to minimize the variability in cash flows of earning assets or forecasted transactions caused by movements in interest or foreign exchange rates. The effective portion of changes in the fair value of a cash flow hedge is recognized in AOCI. When the hedged forecasted transaction impacts earnings, balances in AOCI are reclassified to the same income or expense classification as the hedged item. Northern Trust applies the “shortcut” method of accounting for cash flow hedges of available for sale securities. For cash flow hedges of forecasted foreign currency denominated revenue and expenditure transactions, Northern Trust utilizes the dollar-offset method, a “long-haul” method of accounting under GAAP, in assessing whether these hedging relationships are highly effective at inception and on an ongoing basis. Any ineffectiveness is recognized currently in earnings.

Foreign exchange contracts and qualifying non-derivative instruments designated as net investment hedges are used to minimize Northern Trust’s exposure to variability in the foreign currency translation of net investments in non-U.S. branches and subsidiaries. The effective portion of changes in the fair value of the hedging instrument is recognized in AOCI consistent with the related translation gains and losses. For net investment hedges, all critical terms of the hedged item and the hedging instrument are matched at inception and on an ongoing basis to eliminate hedge ineffectiveness.

Fair value, cash flow, and net investment hedge derivatives are designated and formally documented as such contemporaneous with the transaction. The formal documentation describes the hedge relationship and identifies the hedging instruments and hedged items. Included in the documentation is a discussion of the risk management objectives and strategies for undertaking such hedges, as well as a description of the method for assessing hedge effectiveness at inception and on an ongoing basis. A formal assessment is performed on a calendar quarter basis to verify that derivatives used in hedging transactions continue to be highly effective as offsets to changes in fair value or cash flows of the hedged item. Hedge accounting is discontinued if a derivative ceases to be highly effective, is terminated or sold, or if Northern Trust removes the derivative’s hedge designation. Subsequent gains and losses on these derivatives are included in foreign exchange trading or other operating income. For discontinued cash flow hedges, the accumulated gain or loss on the derivative remains in OCI and is reclassified to earnings in the period in which the previously hedged forecasted transaction impacts earnings or is no longer probable of occurring. For discontinued fair value hedges, the accumulated gain or loss on the hedged item is amortized over the remaining life of the hedged item.

 

G. Loans and Leases. Loans that are held for investment are reported at the principal amount outstanding, net of unearned income. Residential real estate loans classified as held for sale are reported at the lower of aggregate cost or market value. Loan commitments for residential real estate loans that will be classified as held for sale at the time of funding and which have an interest-rate lock are recorded on the balance sheet at fair value with subsequent gains or losses recognized as other operating income. Unrealized gains on these loan commitments are reported as other assets, with unrealized losses reported as other liabilities. Other unfunded loan commitments that are not held for sale are carried at the amount of unamortized fees with a reserve for credit loss liability recognized for any probable losses.

Interest income on loans is recorded on an accrual basis unless, in the opinion of management, there is a question as to the ability of the debtor to meet the terms of the loan agreement, or interest or principal is more than 90 days contractually past due and the loan is not well-secured and in the process of collection. At the time a loan is placed on nonaccrual status, interest accrued but not collected is reversed against interest income of the current period. Loans are returned to accrual status when factors indicating doubtful collectibility no longer exist. Interest collected on nonaccrual loans is applied to principal unless, in the opinion of management, collectibility of principal is not in doubt.

A loan is considered to be impaired when, based on current information and events, management determines that it is probable that Northern Trust will be unable to collect all amounts due according to the contractual terms of the loan agreement. A loan is also impaired if its terms have been modified as a concession resulting from the debtor’s financial difficulties, referred to as a troubled debt restructuring. Impaired loans are measured based upon the loan’s market price, the present value of expected future cash flows, discounted at the loan’s effective interest rate, or at the fair value of the collateral if the loan is collateral dependent. If the loan valuation is less than the recorded value of the loan, a specific reserve is established for the difference.

Premiums and discounts on loans are recognized as an adjustment of yield using the interest method based on the

 

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contractual terms of the loan. Commitment fees that are considered to be an adjustment to the loan yield, loan origination fees and certain direct costs are deferred and accounted for as an adjustment to the yield.

Unearned lease income from direct financing and leveraged leases is recognized using the interest method. This method provides a constant rate of return on the unrecovered investment over the life of the lease. The rate of return and the allocation of income over the lease term are recalculated from the inception of the lease if during the lease term assumptions regarding the amount or timing of estimated cash flows change. Lease residual values are established at the inception of the lease based on in-house valuations and market analyses provided by outside parties. Lease residual values are reviewed at least annually for other than temporary impairment. A decline in the estimated residual value of a leased asset determined to be other than temporary would be recorded in the period in which the decline is identified as a reduction of interest income for leveraged leases and a reduction of other operating income for direct financing leases.

 

H. Reserve for Credit Losses. The reserve for credit losses represents management’s estimate of probable losses which have occurred as of the date of the financial statements. The loan and lease portfolio and other lending related 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. The result is a reserve with the following components:

Specific Reserve. The amount of specific reserves is determined through a loan-by-loan analysis of impaired loans that considers expected future cash flows, the value of collateral and other factors that may impact the borrower’s ability to pay.

Inherent Reserve. The amount of inherent loss reserves is based primarily on reserve factors which incorporate management’s evaluation of historical charge-off experience and various qualitative factors such as management’s evaluation of economic and business conditions and changes in the character and size of the loan portfolio. Reserve factors are applied to loan and lease credit exposures aggregated by shared risk characteristics and are reviewed quarterly by Northern Trust’s Loan Loss Reserve Committees which include representatives from Credit Policy, business unit management, and Corporate Financial Management.

Loans, leases and other extensions of credit deemed uncollectible are charged to the reserve for credit losses. Subsequent recoveries, if any, are credited to the reserve. The provision for credit losses, which is charged to income, is the amount necessary to adjust the reserve for credit losses to the level determined through the above process. Actual losses may vary from current estimates and the amount of the provision for credit losses may be either greater than or less than actual net charge-offs.

Although Northern Trust analyzes its exposure to credit losses from both on- and off-balance sheet activity as one process, the portion of the reserve assigned to loans and leases is reported as a contra asset, directly following loans and leases in the consolidated balance sheet. The portion of the reserve assigned to unfunded commitments and standby letters of credit is reported in other liabilities for financial reporting purposes.

 

I. Standby Letters of Credit. Fees on standby letters of credit are recognized in other operating income on the straight-line method over the lives of the underlying agreements. Northern Trust’s recorded liability for standby letters of credit, reflecting the obligation it has undertaken, is measured as the amount of unamortized fees on these instruments.

 

J. Buildings and Equipment. Buildings and equipment owned are carried at original cost less accumulated depreciation. The charge for depreciation is computed on the straight-line method based on the following range of lives: buildings – 10 to 30 years; equipment – 3 to 10 years; and leasehold improvements – the shorter of the lease term or 15 years. Leased properties meeting certain criteria are capitalized and amortized using the straight-line method over the lease period.

 

K. Other Real Estate Owned (OREO). OREO is comprised of commercial and residential real estate properties acquired in partial or total satisfaction of problem loans. OREO assets are carried at the lower of cost or fair value in other assets in the consolidated balance sheet. Losses identified at the time of acquisition of such properties are charged against the reserve for credit losses assigned to loans and leases. Subsequent write-downs that may be required to the carrying value of these assets and losses realized from asset sales are charged to other operating expenses.

 

L. Intangible Assets. Separately identifiable acquired intangible assets are amortized over their estimated useful lives, primarily on a straight-line basis. Goodwill is not subject to amortization. Purchased software and allowable internal

 

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costs, including compensation relating to software developed for internal use, are capitalized. Software is being amortized using the straight-line method over the estimated useful life of the asset, generally ranging from 3 to 10 years.

Intangible assets are reviewed for impairment on an annual basis or more frequently if events or changes in circumstances indicate the carrying amounts may not be recoverable.

 

M. Assets Under Custody and Assets Under Management. Assets held in fiduciary or agency capacities are not included in the consolidated balance sheet, since such items are not assets of Northern Trust.

 

N. Trust, Investment and Other Servicing Fees. Trust, investment and other servicing fees are recorded on the accrual basis, over the period in which the service is provided. Fees are a function of the market value of assets custodied, managed and serviced, the volume of transactions, securities lending volume and spreads, and fees for other services rendered, as set forth in the underlying client agreement. This revenue recognition involves the use of estimates and assumptions, including components that are calculated based on estimated asset valuations and transaction volumes.

Securities lending fees are also impacted by Northern Trust’s share of unrealized investment gains and losses in one investment fund, used in our securities lending activities, that is accounted for at fair value. Certain investment management fee arrangements also may provide performance fees that are based on client portfolio returns exceeding predetermined levels. Northern Trust adheres to a policy in which it does not record any performance-based fee income until the end of the contract year, thereby eliminating the potential that revenue will be recognized in one quarter and reversed in a future quarter. Therefore, Northern Trust does not record any revenue under incentive fee programs that is at risk due to future performance contingencies. These arrangements often contain similar terms for the payment of performance-based fees to sub-advisors. The accounting for these performance-based expenses matches the treatment for the related performance-based revenues.

Client reimbursed out-of-pocket expenses that are an extension of existing services that are being rendered are recorded on a gross basis as revenue.

 

O. Client Security Settlement Receivables. These receivables represent other collection items presented on behalf of custody clients.

 

P. Income Taxes. Northern Trust follows an asset and liability approach to account for income taxes. The objective is to recognize the amount of taxes payable or refundable for the current year, and to recognize deferred tax assets and liabilities resulting from temporary differences between the amounts reported in the financial statements and the tax bases of assets and liabilities. The measurement of tax assets and liabilities is based on enacted tax laws and applicable tax rates.

Tax positions taken or expected to be taken on a tax return are evaluated based on their likelihood of being sustained upon examination by tax authorities. Only tax positions that are considered more-likely-than-not to be sustained are recorded in the consolidated financial statements. Northern Trust recognizes any interest and penalties related to unrecognized tax benefits in the provision for income taxes.

 

Q. Cash Flow Statements. Cash and cash equivalents have been defined as “Cash and Due from Banks”.

 

R. Pension and Other Postretirement Benefits. Northern Trust records the funded status of its defined benefit pension and other postretirement plans on the consolidated balance sheet. Prepaid pension benefits are reported in other assets and unfunded pension and postretirement benefit liabilities are reported in other liabilities. Plan assets and benefit obligations are measured annually. In accordance with revised accounting requirements under GAAP, Northern Trust moved to a December 31 measurement date in 2008, from the September 30 measurement date used in prior years. Pension costs are recognized ratably over the estimated working lifetime of eligible participants.

 

S. Stock-Based Compensation Plans. Northern Trust recognizes as compensation expense the grant-date fair value of stock options and other equity-based compensation granted to employees within the income statement using a fair-value-based method. The fair values of stock and stock unit awards, including performance stock unit awards and director awards, are based on the price of the Corporation’s stock on the date of grant. The fair value of stock options is estimated on the date of grant using the Black-Scholes option pricing model. The model utilizes weighted-average assumptions regarding the period of time that options granted are expected to be outstanding (expected term) based primarily on the historical exercise behavior attributable to previous option grants, the estimated yield from dividends paid on the Corporation’s stock over the expected term of the options, the

 

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expected volatility of Northern Trust’s stock price over a period equal to the expected term of the options, and a risk free interest rate based on the U.S. Treasury yield curve at the time of grant for a period equal to the expected term of the options granted.

Compensation expense for share-based award grants with terms that provide for a graded vesting schedule, whereby portions of the award vest in increments over the requisite service period, are recognized on a straight-line basis over the requisite service period for the entire award. Northern Trust does not include an estimate of future forfeitures in its recognition of stock-based compensation as historical forfeitures have not been significant. Stock-based compensation is adjusted based on forfeitures as they occur. Dividend equivalents are paid on stock units on a current basis prior to vesting and distribution. Cash flows resulting from the realization of tax deductions from the exercise of stock options in excess of the compensation cost recognized (excess tax benefits) are classified as financing cash flows.

 

Note 2 – Recent Accounting Pronouncements

 

In June 2009, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 166, “Accounting for Transfers of Financial Assets – amendment of FASB Statement No. 140” (FASB Accounting Standards Codification (ASC) Topic 860, “Transfers and Servicing”). SFAS No. 166 amends SFAS No. 140 to improve the relevance and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and the transferor’s continuing involvement, if any, in transferred financial assets. Adoption of SFAS No. 166 as of January 1, 2010 did not impact Northern Trust’s consolidated financial position or results of operations.

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (FASB ASC Topic 810, “Consolidations”). SFAS No. 167 significantly changes the criteria for determining whether the consolidation of a variable interest entity is required. SFAS No. 167 also addresses the effect of changes required by SFAS No. 166 on FASB Interpretation No. 46(R), “Consolidation of Variable Interest Entities” (FASB ASC Topic 860, “Transfers and Servicing”), and concerns regarding the application of certain provisions of Interpretation No. 46(R), including concerns that the accounting and disclosures under the Interpretation do not always provide timely and useful information about an entity’s involvement in a variable interest entity. In February 2010, the FASB finalized a deferral of SFAS 167 for asset managers, allowing asset managers to continue applying existing consolidation accounting guidance to entities that are either money market funds or other funds that prepare financial statements in accordance with the AICPA Investment Company Guide (or having attributes similar to these entities). Adoption of SFAS No. 167 as of January 1, 2010 did not impact Northern Trust’s consolidated financial position or results of operations.

In January 2010, the FASB issued Accounting Standard Update (ASU) 2010-06, “Improving Disclosures about Fair Value Measurements” (ASU 2010-06). ASU 2010-06 requires new disclosures regarding transfers into or out of Level 1 and Level 2 and requires that an entity present separately information about Level 3 purchases, sales, issuances, and settlements. ASU 2010-06 also clarifies existing disclosure requirements regarding the level of disaggregation that an entity should provide in its fair value disclosures and the level of detail an entity should disclose about the valuation techniques and inputs used in its fair value measurements. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements, which are effective for interim and annual reporting periods beginning after December 15, 2010. Since ASU 2010-06 addresses financial statement disclosures only, adoptions of its provisions, effective January 1, 2010 and 2011, will not impact Northern Trust’s consolidated financial position or results of operations.

 

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Note 3 – Securities

 

Securities Available for Sale. The following tables summarize the amortized cost, fair values, and remaining maturities of securities available for sale.

 

RECONCILIATION OF AMORTIZED COST TO FAIR VALUES OF SECURITIES AVAILABLE FOR SALE

 

    DECEMBER 31, 2009
(In Millions)  

AMORTIZED

COST

  

GROSS

UNREALIZED

GAINS

  

GROSS

UNREALIZED

LOSSES

  

FAIR

VALUE

U.S. Government

  $ 74.0    $    $    $ 74.0

Obligations of States and Political Subdivisions

    45.6      1.4           47.0

Government Sponsored Agency

    12,278.9      58.9      12.4      12,325.4

Corporate Debt

    2,820.2      7.7      5.8      2,822.1

Residential Mortgage-Backed

    439.7           125.7      314.0

Other Asset-Backed

    1,183.8      .5      3.0      1,181.3

Auction Rate

    409.7      18.2      .2      427.7

Other

    270.6                270.6
                            

Total

  $ 17,522.5    $ 86.7    $ 147.1    $ 17,462.1

 

    DECEMBER 31, 2008
(In Millions)   AMORTIZED
COST
   GROSS
UNREALIZED
GAINS
   GROSS
UNREALIZED
LOSSES
  

FAIR

VALUE

U.S. Government

  $ 19.8    $ .1    $    $ 19.9

Obligations of States and Political Subdivisions

    30.5      1.1           31.6

Government Sponsored Agency

    11,256.4      37.7      32.7      11,261.4

Corporate Debt

    743.7      .9      5.0      739.6

Residential Mortgage-Backed

    638.3      1.7      200.7      439.3

Other Asset-Backed

    1,241.0           107.7      1,133.3

Auction Rate

    467.0           13.9      453.1

Other

    336.2                336.2
                            

Total

  $ 14,732.9    $ 41.5    $ 360.0    $ 14,414.4

 

REMAINING MATURITY OF SECURITIES AVAILABLE FOR SALE

 

    DECEMBER 31, 2009
(In Millions)   AMORTIZED
COST
   FAIR VALUE

Due in One Year or Less

  $ 7,106.8    $ 7,071.0

Due After One Year Through Five Years

    9,623.1      9,611.9

Due After Five Years Through Ten Years

    406.2      398.1

Due After Ten Years

    386.4      381.1
              

Total

  $ 17,522.5    $ 17,462.1

Asset-backed and government sponsored agency mortgage-backed securities are included in the above table taking into account anticipated future prepayments.

 

Auction Rate Securities Purchase Program. Although not obligated to do so, in 2008 Northern Trust initiated 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 Trust’s affiliated broker/dealer. A $54.6 million charge was recorded in 2008 within other operating expenses reflecting differences between the securities’ par values and estimated purchase date fair market values. Purchased securities were designated as available for sale and subsequent to their purchase are reported at fair value with unrealized gains and losses credited or charged, net of the tax effect, to AOCI.

 

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Federal Reserve and Federal Home Loan Bank Stock. Stock in Federal Reserve and Federal Home Loan Banks, included at cost within other securities available for sale above, totaled $42.6 million and $147.0 million, respectively, as of December 31, 2009, and $27.6 million and $144.1 million, respectively, as of December 31, 2008. Since October 2007, the Federal Home Loan Bank of Chicago (FHLBC) has been under a consensual cease and desist order with its regulator, the Federal Housing Finance Board (Finance Board). Under the terms of the order, capital stock repurchases, redemptions of FHLBC stock, and dividend declarations are subject to prior written approval from the Finance Board, and the FHLBC has not declared or paid a dividend since the third quarter of 2007. FHLBC stock totaled $65.8 million and $64.9 million at December 31, 2009 and 2008, respectively, all of which management believes will ultimately be recovered.

 

Securities Held to Maturity. The following tables summarize the book values, fair values and remaining maturities of securities held to maturity.

 

RECONCILIATION OF BOOK VALUES TO FAIR VALUES OF SECURITIES HELD TO MATURITY

 

    DECEMBER 31, 2009
(In Millions)   BOOK
VALUE
  

GROSS
UNREALIZED

GAINS

  

GROSS

UNREALIZED

LOSSES

   FAIR VALUE

Obligations of States and Political Subdivisions

  $ 692.6    $ 34.5    $ .6    $ 726.5

Government Sponsored Agency

    114.6      2.4      .2      116.8

Other

    354.2           11.8      342.4

Total

  $ 1,161.4    $ 36.9    $ 12.6    $ 1,185.7

 

    DECEMBER 31, 2008
(In Millions)   BOOK
VALUE
   GROSS
UNREALIZED
GAINS
   GROSS
UNREALIZED
LOSSES
   FAIR VALUE

Obligations of States and Political Subdivisions

  $ 791.2    $ 28.6    $ .5    $ 819.3

Government Sponsored Agency

    55.0      1.1           56.1

Other

    307.9      .2      27.4      280.7
                            

Total

  $ 1,154.1    $ 29.9    $ 27.9    $ 1,156.1

 

REMAINING MATURITY OF SECURITIES HELD TO MATURITY

 

    DECEMBER 31, 2009
(In Millions)   BOOK
VALUE
  

FAIR

VALUE

Due in One Year or Less

  $ 184.6    $ 185.7

Due After One Year Through Five Years

    427.1      439.3

Due After Five Years Through Ten Years

    486.6      502.4

Due After Ten Years

    63.1      58.3
              

Total

  $ 1,161.4    $ 1,185.7

Government sponsored agency mortgage-backed securities are included in the above table taking into account anticipated future prepayments.

 

Investment Security Gains and Losses. Losses totaling $26.7 million and $61.3 million were recognized in 2009 and 2008, respectively, in connection with the write-down of residential mortgage-backed securities with a total original amortized cost basis of $214.1 million and $89.3 million, respectively, that were determined to be other-than-temporarily impaired. There were no realized security losses in 2007. Realized security gains totaled $3.3 million, $5.0 million, and $6.5 million in 2009, 2008, and 2007, respectively.

 

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Securities with Unrealized Losses. The following tables provide information regarding securities that have been in a continuous unrealized loss position for less than 12 months and for 12 months or longer as of December 31, 2009 and December 31, 2008.

 

Securities with Unrealized Losses as of
December 31, 2009
  LESS THAN 12 MONTHS    12 MONTHS OR LONGER    TOTAL
(In Millions)   FAIR VALUE   

UNREALIZED

LOSSES

   FAIR VALUE   

UNREALIZED

LOSSES

   FAIR VALUE   

UNREALIZED

LOSSES

Obligations of States and Political Subdivisions

  $ 7.7    $ .2    $ 2.6    $ .4    $ 10.3    $ .6

Government Sponsored Agency

    810.6      3.0      523.3      9.6      1,333.9      12.6

Corporate Debt

    1,220.7      5.8                1,220.7      5.8

Residential Mortgage-Backed

    .5      1.5      313.5      124.2      314.0      125.7

Other Asset-Backed

    222.1      .5      570.1      2.5      792.2      3.0

Auction Rate

    7.0      .2                7.0      .2

Other

    4.1      2.7      34.0      9.1      38.1      11.8
                                          

Total

  $ 2,272.7    $ 13.9    $ 1,443.5    $ 145.8    $ 3,716.2    $ 159.7

 

Securities with Unrealized Losses as of
December 31, 2008
  LESS THAN 12 MONTHS    12 MONTHS OR LONGER    TOTAL
(In Millions)   FAIR VALUE   

UNREALIZED

LOSSES

   FAIR VALUE   

UNREALIZED

LOSSES

   FAIR VALUE   

UNREALIZED

LOSSES

Obligations of States and Political Subdivisions

  $ 13.0    $ .2    $ 3.6    $ .3    $ 16.6    $ .5

Government Sponsored Agency

    4,956.5      26.9      160.9      5.8      5,117.4      32.7

Corporate Debt

    271.3      3.5      23.4      1.5      294.7      5.0

Residential Mortgage-Backed

    56.8      11.6      379.4      189.1      436.2      200.7

Other Asset-Backed

    471.8      35.5      661.5      72.2      1,133.3      107.7

Auction Rate

    445.8      13.9                445.8      13.9

Other

    7.4      7.1      28.3      20.3      35.7      27.4
                                          

Total

  $ 6,222.6    $ 98.7    $ 1,257.1    $ 289.2    $ 7,479.7    $ 387.9

 

As of December 31, 2009, 223 securities with a combined fair value of $3.7 billion were in an unrealized loss position, with their unrealized losses totaling $159.7 million. The majority of the unrealized losses reflect the impact of widened credit and liquidity spreads on the valuations of residential mortgage-backed securities with unrealized losses totaling $125.7 million. Of these, 33 securities with total unrealized losses of $124.2 million have been in an unrealized loss position for more than 12 months. Residential mortgage-backed securities rated below double-A, which represented 75% of total residential mortgage-backed securities, had a total amortized cost and fair value of $303.6 million and $192.5 million, respectively, and were comprised primarily of subprime and Alt-A securities. Securities classified as “other asset-backed” at December 31, 2009 were predominantly floating rate, with average lives less than 5 years, and 100% were rated triple-A.

Unrealized losses of $12.6 million related to government sponsored agency securities are primarily attributable to widened credit spreads since their purchase. The majority of the $11.8 million of unrealized losses in securities classified as “other” at December 31, 2009 relate to securities which Northern Trust purchases for compliance with the Community Reinvestment Act (CRA). Unrealized losses on these CRA related other securities are attributable to their purchase at below market rates for the purpose of supporting institutions and programs that benefit low to moderate income communities within Northern Trust’s market area. Unrealized losses of $.2 million related to auction rate securities primarily reflect reduced market liquidity as a majority of auctions continue to fail preventing holders from liquidating their investments at par. Unrealized losses of $5.8 million within corporate debt securities primarily reflect widened credit spreads; 96% of the corporate debt portfolio is backed by guarantees provided by U.S. and non-U.S. governmental entities. The remaining unrealized losses on Northern Trust’s securities portfolio as of December 31, 2009 are attributable to changes in overall market interest rates, increased credit spreads, and reduced market liquidity.

As described in Note 1 – Significant Accounting Policies, a critical component of Northern Trust’s evaluation for OTTI in debt securities is the identification of credit-impaired securities from which management does not expect to receive cash flows sufficient to recover the entire amortized cost basis of the securities. While all securities are considered, the

 

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following describes Northern Trust’s process for identifying credit impairment within mortgage-backed securities, including residential mortgage-backed securities, the security type for which Northern Trust has recognized OTTI.

To determine if an unrealized loss on a mortgage-backed security is other-than-temporary, economic models are used to perform cash flow analyses by developing multiple scenarios in order to create reasonable forecasts of the security’s future performance using available data including servicers’ loan charge off patterns, prepayment speeds, annualized default rates, each security’s current delinquency pipeline, the delinquency pipeline’s growth rate, the roll rate from delinquency to default, loan loss severities and historical performance of like collateral, along with Northern Trust’s outlook for the housing market and the overall economy. If the present value of future cash flows projected as a result of this analysis is less than the current amortized cost of the security, an OTTI loss is recorded equal to the difference between the two amounts.

The factors used in developing the expected loss on mortgage-backed securities vary by year of origination and type of collateral. As of December 31, 2009, the expected loss on subprime and Alt-A portfolios was developed using default roll rates ranging from 2% to 25% for underlying assets that are current and ranging from 30% to 100% (an increase from 30% to 90% as of December 31, 2008) for underlying assets that are 30 days or more past due as to principal and interest payments or in foreclosure. Severities of loss ranging from 45% to 85% (an increase from 30% to 65% as of December 31, 2008) were assumed for underlying assets that may ultimately end up in default. During the year ended December 31, 2009, performance metrics specific to subprime and Alt-A loans deteriorated resulting in the recognition of OTTI losses of $26.7 million in connection with 14 residential mortgage-backed securities. This compares with OTTI losses of $61.3 million recognized in 2008 in connection with 6 securities.

 

Credit Losses on Debt Securities. The table below provides information regarding credit-related losses recognized in earnings on debt securities other-than-temporarily impaired.

 

($ In Millions)    

Cumulative Credit-Related Losses on Securities – April 1, 2009

  $ 46.3

Plus:  Losses on Newly Identified Impairments

    20.2

         Additional Losses on Previously Identified Impairments

    6.5
       

Cumulative Credit-Related Losses on Securities – December 31, 2009

  $ 73.0

 

Note 4 – Securities Purchased Under Agreements to Resell and Securities Sold Under Agreements to Repurchase

 

Securities purchased under agreements to resell and securities sold under agreements to repurchase are recorded at the amounts at which the securities were acquired or sold plus accrued interest. To minimize any potential credit risk 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 Trust’s policy to take possession of securities purchased under agreements to resell.

The following tables summarize information related to securities purchased under agreements to resell and securities sold under agreements to repurchase.

 

SECURITIES PURCHASED UNDER
AGREEMENTS TO RESELL
  DECEMBER 31  
($ In Millions)   2009      2008  

Balance at December 31

  $ 227.4       $ 32.6   

Average Balance During the Year

    311.5         298.9   

Average Interest Rate Earned
During the Year

    .15      1.69

Maximum Month-End Balance
During the Year

    579.7         590.4   

 

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SECURITIES SOLD UNDER
AGREEMENTS TO REPURCHASE
  DECEMBER 31  
($ In Millions)   2009      2008  

Balance at December 31

  $ 1,037.5       $ 1,529.1   

Average Balance During the Year

    737.7         1,271.5   

Average Interest Rate Paid
During the Year

    .16      1.79

Maximum Month-End Balance
During the Year

    1,037.5         2,635.7   

 

Note 5 – Loans and Leases

 

Amounts outstanding in selected categories are shown below.

 

    DECEMBER 31  
(In Millions)   2009      2008  

U.S.

                

Residential Real Estate

  $ 10,807.7       $ 10,381.4   

Commercial

    6,312.1         8,253.6   

Commercial Real Estate

    3,213.2         3,014.0   

Personal

    4,965.8         4,766.7   

Other

    774.0         1,404.2   

Lease Financing, net

    1,004.4         1,143.8   
                  

Total U.S.

    27,077.2         28,963.7   

Non-U.S.

    728.5         1,791.7   
                  

Total Loans and Leases

    27,805.7         30,755.4   

Reserve for Credit Losses Assigned to
Loans and Leases

    (309.2      (229.1
                  

Net Loans and Leases

  $ 27,496.5       $ 30,526.3   

 

Other U.S. loans and non-U.S. loans at December 31, 2009 and 2008 included $1.0 billion and $1.9 billion of short duration advances, respectively, primarily related to the processing of custodied client investments.

Residential real estate loans classified as held for sale totaled $4.2 million at December 31, 2009 and $7.3 million at December 31, 2008.

The components of the net investment in direct finance and leveraged leases are as follows:

 

    DECEMBER 31  
(In Millions)   2009      2008  

Direct Finance Leases:

                

Lease Receivable

  $ 133.9       $ 134.2   

Residual Value

    138.7         133.2   

Initial Direct Costs

    1.0         .5   

Unearned Income

    (38.9      (43.4
                  

Investment in Direct Finance Leases

  $ 234.7       $ 224.5   
                  

Leveraged Leases:

                

Net Rental Receivable

  $ 356.6       $ 621.4   

Residual Value

    743.4         717.1   

Unearned Income

    (330.3      (419.2
                  

Investment in Leveraged Leases

    769.7         919.3   
                  

Lease Financing, net

  $ 1,004.4       $ 1,143.8   

 

The following schedule reflects the future minimum lease payments to be received over the next five years under direct finance leases:

 

(In Millions)  

FUTURE
MINIMUM

LEASE
PAYMENTS

2010

  $ 29.0

2011

    25.3

2012

    19.8

2013

    14.9

2014

    11.9

 

Concentrations of Credit Risk. The information on pages 55 and 56 in the section titled “Residential Real Estate” through the section titled “Banks and Bank Holding Companies” is incorporated herein by reference.

 

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NONPERFORMING ASSETS

 

    DECEMBER 31
(In Millions)   2009    2008

Nonaccrual Loans

            

U.S.

  $ 278.5    $ 96.7

Non-U.S.

        
              

Total Nonaccrual Loans

    278.5      96.7

Other Real Estate Owned

    29.6      3.5
              

Total Nonperforming Assets

    308.1      100.2
              

90 Day Past Due Loans Still Accruing

    15.1      27.8

Impaired Loans with Reserves

    94.5      31.5

Impaired Loans without Reserves*

    133.6      54.1
              

Total Impaired Loans

    228.1      85.6

Reserves for Impaired Loans

    43.8      15.5

Average Balance of Impaired Loans during the Year

    193.8      31.5

* When an impaired loan’s discounted cash flows, collateral value or market price equals or exceeds its carrying value (net of charge-offs), a reserve is not required.

 

Included within nonaccrual and impaired loans as of December 31, 2009 were $24.3 million of loans deemed troubled debt restructurings. There were $27.4 million and $72.5 million of unfunded loan commitments and standby letters of credit at December 31, 2009 and 2008, respectively, issued to borrowers whose loans were classified as nonaccrual or impaired.

Interest income that would have been recorded on nonaccrual loans in accordance with their original terms amounted to approximately $8.0 million in 2009, $2.7 million in 2008, and $3.2 million in 2007, compared with amounts that were actually recorded of approximately $5.4 million, $382 thousand, and $222 thousand, respectively.

 

Note 6 – Reserve for Credit Losses

 

Changes in the reserve for credit losses were as follows:

 

(In Millions)   2009      2008      2007  

Balance at Beginning of Year

  $ 251.1       $ 160.2       $ 151.0   

Charge-Offs

    (132.3      (25.7      (9.7

Recoveries

    6.5         2.5         .9   
                           

Net Charge-Offs

    (125.8      (23.2      (8.8

Provision for Credit Losses

    215.0         115.0         18.0   

Effect of Foreign Exchange Rates

    .3         (.9        
                           

Balance at End of Year

  $ 340.6       $ 251.1       $ 160.2   
                           

Reserve for Credit Losses Assigned to:

                         

Loans and Leases

  $ 309.2       $ 229.1       $ 148.1   

Unfunded Commitments and Standby Letters of Credit

    31.4         22.0         12.1   
                           

Total Reserve for Credit Losses

  $ 340.6       $ 251.1       $ 160.2   

 

Note 7 – Buildings and Equipment

 

A summary of buildings and equipment is presented below.

 

    DECEMBER 31, 2009
(In Millions)  

ORIGINAL

COST

  

ACCUMULATED

DEPRECIATION

   NET BOOK
VALUE

Land and Improvements

  $ 41.7    $ .8    $ 40.9

Buildings

    256.8      87.7      169.1

Equipment

    359.0      185.6      173.4

Leasehold Improvements

    205.8      88.3      117.5

Buildings Leased under Capital Leases

    83.9      41.3      42.6
                     

Total Buildings and Equipment

  $ 947.2    $ 403.7    $ 543.5

 

    DECEMBER 31, 2008
(In Millions)  

ORIGINAL

COST

  

ACCUMULATED

DEPRECIATION

   NET BOOK
VALUE

Land and Improvements

  $ 40.9    $ .6    $ 40.3

Buildings

    210.0      80.5      129.5

Equipment

    356.6      175.5      181.1

Leasehold Improvements

    186.4      75.8      110.6

Buildings Leased under Capital Leases

    83.9      38.8      45.1
                     

Total Buildings and Equipment

  $ 877.8    $ 371.2    $ 506.6

 

The charge for depreciation, which includes depreciation of assets recorded under capital leases, amounted to $95.7 million in 2009, $87.6 million in 2008, and $84.8 million in 2007.

 

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Note 8 – Lease Commitments

 

At December 31, 2009, Northern Trust was obligated under a number of non-cancelable operating leases for buildings and equipment. Certain leases contain rent escalation clauses based on market indices or increases in real estate taxes and other operating expenses and renewal option clauses calling for increased rentals. There are no restrictions imposed by any lease agreement regarding the payment of dividends, debt financing or Northern Trust entering into further lease agreements. Minimum annual lease commitments as of December 31, 2009 for all non-cancelable operating leases with a term of 1 year or more are as follows:

 

(In Millions)   FUTURE MINIMUM
LEASE PAYMENTS

2010

  $ 69.4

2011

    65.4

2012

    57.9

2013

    52.4

2014

    46.4

Later Years

    394.9
       

Total Minimum Lease Payments

  $ 686.4

 

Net rental expense for operating leases included in occupancy expense amounted to $70.2 million in 2009, $67.6 million in 2008, and $75.3 million in 2007.

One of the buildings and related land utilized for Chicago operations has been leased under an agreement that qualifies as a capital lease. The long-term financing for the property was provided by the Corporation and the Bank. In the event of sale or refinancing, the Bank would anticipate receiving all proceeds except for 58% of any proceeds in excess of the original project costs, which will be paid to the lessor.

The following table reflects the future minimum lease payments required under capital leases, net of any payments received on the long-term financing, and the present value of net capital lease obligations at December 31, 2009.

 

(In Millions)  

FUTURE MINIMUM

LEASE PAYMENTS, NET

 

2010

  $ (38.3

2011

    7.7   

2012

    7.9   

2013

    8.1   

2014

    8.4   

Later Years

    39.2   
         

Total Minimum Lease Payments, net

    33.0   

Less: Amount Representing Interest

    25.2   
         

Net Present Value under Capital Lease Obligations

  $ 7.8   

Note: In 2007, the term of the capital lease for the Chicago operations center was extended. The minimum lease payments shown in the table above include an anticipated principal repayment in 2010 and the revised future minimum lease payments under the terms of the lease extension.

 

Note 9 – Goodwill and Other Intangibles

 

The changes in the carrying amount of goodwill for the years ended December 31, 2009 and 2008 are as follows:

 

(In Millions)  

CORPORATE

AND

INSTITUTIONAL

SERVICES

    

PERSONAL

FINANCIAL

SERVICES

     TOTAL  

Balance at December 31, 2007

  $ 365.0       $ 60.8       $ 425.8   

Goodwill Acquired:

                         

Investment Management Company

            6.6         6.6   

Other Changes *

    (42.4      (.6      (43.0
                           

Balance at December 31, 2008

  $ 322.6       $ 66.8       $ 389.4   

Other Changes *

    12.1         .1         12.2   
                           

Balance at December 31, 2009

  $ 334.7       $ 66.9       $ 401.6   

* Includes the effect of foreign exchange rates on non-U.S. dollar denominated goodwill.

 

Other intangible assets are included in other assets in the consolidated balance sheet. The gross carrying amount and accumulated amortization of other intangible assets as of December 31, 2009 and 2008 are as follows:

 

OTHER INTANGIBLE ASSETS-SUBJECT TO AMORTIZATION *

 

    DECEMBER 31
(In Millions)   2009    2008 **

Gross Carrying Amount

  $ 157.0    $ 153.4

Accumulated Amortization

    96.3      80.2
              

Net Book Value

  $ 60.7    $ 73.2

* Includes the effect of foreign exchange rates on non-U.S. dollar denominated intangible assets.

** 2008 balances include an addition of $2.0 million related to the acquisition of an investment management company.

 

Other intangible assets consist primarily of the value of acquired client relationships. Amortization expense related to other intangible assets was $16.2 million, $17.8 million, and $20.9 million for the years ended December 31, 2009, 2008, and 2007, respectively. Amortization expense for the years 2010, 2011, 2012, 2013 and 2014 is estimated to be $14.6 million, $11.0 million, $10.8 million, $10.5 million, and $10.4 million, respectively.

 

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Note 10 – Senior Notes, Long-Term Debt, and Line of Credit

 

Senior Notes. A summary of senior notes outstanding at December 31 is presented below.

 

($ In Millions)   RATE     2009    2008

Corporation-Senior Notes (a) (d) Fixed Rate Due Aug. 2011 (f)

  5.30   $ 249.7    $ 249.5

Fixed Rate Due Nov. 2012 (g) (j)

  5.20        215.3      220.1

Fixed Rate Due Aug. 2013 (h) (j)

  5.50        425.5      437.2

Fixed Rate Due May 2014 (d)

  4.63        500.0     

Bank-Senior Note (a) (d)

                  

Floating Rate – Sterling Denominated Due March 2010

  .71        161.3      145.8
                    

Total Senior Notes

        $ 1,551.8    $ 1,052.6

 

Long-Term Debt . A summary of long-term debt outstanding at December 31 is presented below.

 

($ In Millions)   2009    2008

Bank-Subordinated Debt (a) (d)

            

7.10% Notes due Aug. 2009 (b)

  $    $ 200.0

6.30% Notes due March 2011 (b)

    150.0      150.0

4.60% Notes due Feb. 2013 (b)

    200.0      200.0

5.85% Notes due Nov. 2017 (b) (j)

    219.5      241.2

6.50% Notes due Aug. 2018 (b) (i) (j)

    321.7      356.6

5.375% Sterling Denominated Notes due March 2015 (e)

    241.3      217.9
              

Total Bank-Subordinated Debt

    1,132.5      1,365.7

Federal Home Loan Bank Borrowings

            

One Year or Less (Average Rate at Year End – 6.53% in 2009; 6.27% in 2008)

    165.0      180.0

One to Three Years (Average Rate at Year End – 4.46% in 2009; 4.73% in 2008)

    1,096.4      629.6

Three to Five Years (Average Rate at Year End – 4.08% in 2009; 4.46% in 2008)

    335.0      872.0

Five to Ten Years (Average Rate at Year End – 6.38% in 2009; 5.25% in 2008)

    101.1      236.1
              

Total Federal Home Loan Bank Borrowings

    1,697.5      1,917.7

Capital Lease Obligations (c)

    7.8      10.0
              

Total Long-Term Debt

  $ 2,837.8    $ 3,293.4
              

Long-Term Debt Qualifying as Risk-Based Capital

  $ 892.0    $ 938.7

(a) Not redeemable prior to maturity.

(b) Under the terms of its current Offering Circular dated August 5, 2008, the Bank has the ability to offer from time to time its senior bank notes in an aggregate principal amount of up to $4.5 billion at any one time outstanding and up to an additional $500 million of subordinated notes. Each senior note will mature from 30 days to fifteen years, and each subordinated note will mature from five years to fifteen years, following its date of original issuance. Each note will mature on such date as selected by the initial purchaser and agreed to by the Bank.

(c) Refer to Note 8.

(d) Debt issue costs are recorded as an asset and amortized on a straight-line basis over the life of the Note.

(e) Notes issued at a discount of .484%.

(f) Notes issued at a discount of .035%.

(g) Notes issued at a discount of .044%.

(h) Notes issued at a discount of .09%.

(i) Notes issued at a discount of .02%.

(j) Interest-rate swap contracts were entered into to modify the interest expense on these senior and subordinated notes from fixed rates to floating rates. The swaps are recorded as fair value hedges and at December 31, 2009, increases in the carrying values of the senior and subordinated notes outstanding of $42.1 million and $41.7 million, respectively, were recorded. As of December 31, 2008, increases in the carrying values of senior and subordinated notes outstanding of $59.0 million and $98.3 million, respectively, were recorded.

 

Line of Credit. In 2009 and 2008, the Corporation maintained an available revolving line of credit totaling $150 million. Commitment fees required under the revolver were based on the long-term senior debt ratings of the Corporation. There were no borrowings under the line of credit during 2009 or 2008, except for discretionary borrowings of minimum amounts to test the draw-down process. The line of credit expired in May 2009 and was not renewed by the Corporation.

 

Note 11 – Floating Rate Capital Debt

 

In January 1997, the Corporation issued $150 million of Floating Rate Capital Securities, Series A, through a statutory business trust wholly-owned by the Corporation (“NTC Capital I”). In April 1997, the Corporation also issued, through a separate wholly-owned statutory business trust (“NTC Capital II”), $120 million of Floating Rate Capital Securities, Series B. The sole assets of the trusts are Subordinated Debentures of Northern Trust Corporation that have the same interest rates and maturity dates as the corresponding distribution rates and redemption dates of the Floating Rate Capital Securities. The Series A Securities were issued at a discount to yield 60.5 basis points above the three-month London Interbank Offered Rate (LIBOR) and are due January 15, 2027. The Series B Securities were issued at a discount to yield 67.9 basis points above the three-month LIBOR and are due April 15, 2027. Both Series A and B Securities qualify as tier 1 capital for regulatory purposes. NTC Capital I and NTC Capital II are considered variable interest entities under GAAP. However, as the Corporation has determined that it is not the primary beneficiary of the trusts, they are not consolidated by the Corporation.

The Corporation has fully, irrevocably and unconditionally guaranteed all payments due on the Series A and B Securities. The holders of the Series A and B Securities

 

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are entitled to receive preferential cumulative cash distributions quarterly in arrears (based on the liquidation amount of $1,000 per Security) at an interest rate equal to the rate on the corresponding Subordinated Debentures. The interest rate on the Series A and Series B securities is equal to three-month LIBOR plus 0.52% and 0.59%, respectively. Subject to certain exceptions, the Corporation has the right to defer payment of interest on the Subordinated Debentures at any time or from time to time for a period not exceeding 20 consecutive quarterly periods provided that no extension period may extend beyond the stated maturity date. If interest is deferred on the Subordinated Debentures, distributions on the Series A and B Securities will also be deferred and the Corporation will not be permitted, subject to certain exceptions, to pay or declare any cash distributions with respect to the Corporation’s capital stock or debt securities that rank the same as or junior to the Subordinated Debentures, until all past due distributions are paid. The Subordinated Debentures are unsecured and subordinated to substantially all of the Corporation’s existing indebtedness.

The Corporation has the right to redeem the Series A and Series B Subordinated Debentures, in whole or in part, at a price equal to the principal amount plus accrued and unpaid interest. The following table summarizes the book values of the outstanding Subordinated Debentures as of December 31, 2009 and 2008:

 

    DECEMBER 31
(In Millions)   2009    2008

NTC Capital I Subordinated Debentures due January 15, 2027

  $ 153.8    $ 153.7

NTC Capital II Subordinated Debentures due April 15, 2027

    123.0      123.0
              

Total Subordinated Debentures

  $ 276.8    $ 276.7

 

Note 12 – Stockholders’ Equity

 

Preferred Stock. The Corporation is authorized to issue 10,000,000 shares of preferred stock without par value. The Board of Directors of the Corporation is authorized to fix the particular preferences, rights, qualifications and restrictions for each series of preferred stock issued. There was no preferred stock outstanding at December 31, 2009. At December 31, 2008, 1,576,000 shares of the Corporation’s Fixed Rate Cumulative Perpetual Preferred Stock, Series B were outstanding.

 

Common Stock. On May 1, 2009, Northern Trust issued 17,250,000 shares of common stock of the Corporation with a par value of $1.66 2/3 per share. The Corporation’s current share buyback program authorization was increased to 12.0 million shares in October 2006. Under this program, the Corporation may purchase an additional 7.3 million shares after December 31, 2009. The repurchased shares would be used for general purposes of the Corporation, including management of the Corporation’s capital level and the issuance of shares under stock option and other incentive plans of the Corporation. The average price paid per share for common stock repurchased in 2009, 2008, and 2007 was $55.05, $68.68, and $67.10, respectively.

An analysis of changes in the number of shares of common stock outstanding follows:

 

    2009      2008      2007  

Balance at January 1

  223,263,132       220,608,834       218,700,956   

Common Stock Issuance

  17,250,000               

Incentive Plan and Awards

  479,359       296,621       128,095   

Stock Options Exercised

  938,249       3,450,608       5,042,322   

Treasury Stock Purchased

  (250,798    (1,092,931    (3,262,539
                     

Balance at December 31

  241,679,942       223,263,132       220,608,834   

 

U.S. Treasury Capital Purchase Program. On November 14, 2008, in connection with the Corporation’s participation in the U.S. Department of the Treasury’s (U.S. Treasury) Troubled Asset Relief Program’s Capital Purchase Program (Capital Purchase Program), the Corporation issued 1,576,000 shares of Series B Preferred Stock and a warrant for the purchase of the Corporation’s common stock to the U.S. Treasury for total proceeds of $1,576.0 million. The proceeds received were allocated between the preferred stock and the warrant based on their relative fair values, which resulted in the recording of a discount on the preferred stock upon issuance that reflected the value allocated to the warrant. On June 17, 2009, Northern Trust repaid in full the $1,576.0 million preferred share investment made by the U.S. Treasury under the Capital Purchase Program. On August 26, 2009, Northern Trust repurchased the warrant for $87 million, completing the Corporation’s participation in the Capital Purchase Program.

Series B Preferred Stock. The Series B Preferred Stock was without par value and had a liquidation preference of $1,000 per share. Cumulative dividends on the Series B Preferred Stock accrued on the liquidation preference at a rate of 5% per annum for the first five years, and at a rate of 9% per annum

 

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thereafter, but would be paid only if, as and when declared by the Corporation’s Board of Directors. The Series B Preferred Stock had no maturity date and ranked senior to the Corporation’s common stock with respect to the payment of dividends and distributions and amounts payable upon liquidation, dissolution and winding up of the Corporation. The fair value of the Series B Preferred Stock was determined through the use of a discounted cash flow model. The model incorporated projected cash flows over management’s estimate of a five year life of the preferred stock at the date of issuance and an assumed market yield of 12%. The discount was accreted using a constant effective yield of approximately 6.13% over a five year term, consistent with management’s estimate of the life of the preferred stock at the date of issuance. Dividends on the preferred stock and the related accretion of the discount on preferred stock reduced net income applicable to common stock by $111.1 million and $12.0 million in 2009 and 2008, respectively. The unamortized discount on the preferred stock was $74.7 million at December 31, 2008.

Common Stock Warrant. The warrant issued in connection with the Capital Purchase Program entitled the U.S. Treasury to purchase 3,824,624 shares of the Corporation’s common stock at an exercise price of $61.81 per share. Both the number of shares underlying the warrant and the exercise price were subject to anti-dilution provisions as stipulated in the warrant. The warrant had a 10-year term. The fair value of the common stock warrant at the date of its issuance was determined through the use of a Black-Scholes valuation model. In addition to the market price of Northern Trust’s common stock at the date of the warrant’s issuance, the model utilized an expected term of ten years, consistent with the term of the warrant, an estimated yield of 2.19% from dividends paid on the Corporation’s stock over the expected term of the warrant, which reflected the Corporation’s strong capital position and the restrictions on its ability to increase the dividend rate as a result of the Corporation’s participation in the Capital Purchase Program, the historical volatility of Northern Trust’s stock price over the most recent ten-year term as of the date of issuance of 36.06%, and a risk free interest rate of 3.98% based on a ten-year swap rate to maturity at the time of the warrant’s issuance.

 

Preferred Stock Purchase Rights. The Corporation had a rights agreement, pursuant to which each outstanding share of the Corporation’s common stock had attached to it one-half of a Preferred Stock Purchase Right entitling its holder to purchase from the Corporation Series A Junior Participating Preferred Stock upon certain triggering events. The rights plan expired on October 31, 2009, and the Preferred Stock Purchase Rights ceased to exist.

 

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Note 13 – Accumulated Other Comprehensive Income

 

The following table summarizes the components of accumulated other comprehensive income at December 31, 2009, 2008, and 2007, and changes during the years then ended.

 

    PERIOD CHANGE  
(In Millions)  

BEGINNING

BALANCE

(NET OF TAX)

    

BEFORE
TAX

AMOUNT

     TAX EFFECT      ENDING
BALANCE
(NET OF TAX)
 

DECEMBER 31, 2009

                                  

Cumulative Effect of Applying FSP FAS 115-2 (ASC 320-10)

  $       $ (15.0    $ 5.5       $ (9.5

Noncredit-Related Unrealized Losses on Securities OTTI

            (66.4      24.4         (42.0

Other Unrealized Gains (Losses) on Securities Available for Sale, net

    (212.9      374.7         (137.5      24.3   

Less: Reclassification Adjustments

            (22.9      8.4         (14.5
                                    

Net Unrealized Gains (Losses) on Securities Available for Sale

    (212.9      285.4         (104.7      (32.2

Unrealized Gains (Losses) on Cash Flow Hedge Designations

    (20.7      8.2         (3.0      (15.5

Less: Reclassification Adjustments

            16.9         (6.2      10.7   
                                    

Net Unrealized Gains (Losses) on Cash Flow Hedge Designations

    (20.7      (8.7      3.2         (26.2

Foreign Currency Translation Adjustments

    12.8         (38.1      36.6         11.3   

Pension and Other Postretirement Benefit Adjustments

                                  

Net Actuarial (Loss) Gain

    (266.5      (46.1      2.1         (310.5

Prior Service (Cost) Benefit

    (6.4      18.6         (6.7      5.5   

Transition Obligation

    (1.2      1.9         (.7        
                                    

Total Pension and Other Postretirement Benefit Adjustments

    (274.1      (25.6      (5.3      (305.0
                                    

Accumulated Other Comprehensive Income

  $ (494.9    $ 198.0       $ (64.7    $ (361.6
                                    
                                    

DECEMBER 31, 2008

                                  

Unrealized Gains (Losses) on Securities Available for Sale

  $ (28.7    $ (348.9    $ 129.1       $ (248.5

Less: Reclassification Adjustments

            (56.3      20.7         (35.6
                                    

Net Unrealized Gains (Losses) on Securities Available for Sale

    (28.7      (292.6      108.4         (212.9

Unrealized Gains (Losses) on Cash Flow Hedge Designations

    (3.0      (9.7      3.6         (9.1

Less: Reclassification Adjustments

            18.5         (6.9      11.6   
                                    

Net Unrealized Gains (Losses) on Cash Flow Hedge Designations

    (3.0      (28.2      10.5         (20.7

Foreign Currency Translation Adjustments

    21.2         91.9         (100.3      12.8   

Pension and Other Postretirement Benefit Adjustments

                                  

Net Actuarial (Loss) Gain

    (71.0      (310.1      114.6         (266.5

Prior Service Cost

    (7.1      1.4         (.7      (6.4

Transition Obligation

    (1.7      .8         (.3      (1.2
                                    

Total Pension and Other Postretirement Benefit Adjustments

    (79.8      (307.9      113.6         (274.1
                                    

Accumulated Other Comprehensive Income

  $ (90.3    $ (536.8    $ 132.2       $ (494.9
                                    

DECEMBER 31, 2007

                                  

Unrealized Gains (Losses) on Securities Available for Sale

  $ 4.5       $ (45.3    $ 17.0       $ (23.8

Less: Reclassification Adjustments

            7.8         (2.9      4.9   
                                    

Net Unrealized Gains (Losses) on Securities Available for Sale

    4.5         (53.1      19.9         (28.7

Unrealized Gains (Losses) on Cash Flow Hedge Designations

    2.2         (18.6      7.0         (9.4

Less: Reclassification Adjustments

            (10.2      3.8         (6.4
                                    

Net Unrealized Gains (Losses) on Cash Flow Hedge Designations

    2.2         (8.4      3.2         (3.0

Foreign Currency Translation Adjustments

    18.5         (9.4      12.1         21.2   

Pension and Other Postretirement Benefit Adjustments

                                  

Net Actuarial Loss

    (165.0      137.4         (43.4      (71.0

Prior Service Cost

    (6.7      (.8      .4         (7.1

Transition Obligation

    (2.1      .6         (.2      (1.7
                                    

Total Pension and Other Postretirement Benefit Adjustments

    (173.8      137.2         (43.2      (79.8
                                    

Accumulated Other Comprehensive Income

  $ (148.6    $ 66.3       $ (8.0    $ (90.3
                                    

 

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Note 14 – Net Income Per Common Share Computations

 

The computation of net income per common share is presented below.

 

(In Millions Except Share Information)   2009      2008      2007

Basic Net Income Per Common Share

                       

Average Number of Common Shares Outstanding

    235,511,879         221,446,382         219,680,628

Net Income

  $ 864.2       $ 794.8       $ 726.9

Less: Dividends on Preferred Stock

    (111.1      (12.0     
                         

Net Income Applicable to Common Stock

    753.1         782.8         726.9

Less: Earnings Allocated to Participating Securities

    5.3         6.3         6.0
                         

Earnings Allocated to Common Shares Outstanding

    747.8         776.5         720.9

Basic Net Income Per Common Share

    3.18         3.51         3.28
                         

Diluted Net Income Per Common Share

                       

Average Number of Common Shares Outstanding

    235,511,879         221,446,382         219,680,628

Plus Stock Option Dilution

    904,150         2,607,048         3,398,552
                         

Average Common and Potential Common Shares

    236,416,029         224,053,430         223,079,180
                         

Earnings Allocated to Common and Potential Common Shares

  $ 747.8       $ 776.5       $ 720.9

Diluted Net Income Per Common Share

    3.16         3.47         3.23

Note: Common stock equivalents totaling 7,146,701, 3,431,701, and 3,748,499 for the years ended December 31, 2009, 2008, and 2007, respectively, were not included in the computation of diluted earnings per share because their inclusion would have been antidilutive.

 

Note 15 – Net Interest Income

 

The components of net interest income were as follows:

 

(In Millions)   2009    2008    2007

Interest Income

                   

Loans and Leases

  $ 942.2    $ 1,187.2    $ 1,308.3

Securities – Taxable

    208.4      320.7      591.5

– Non-Taxable

    33.5      35.9      38.9

Time Deposits with Banks

    209.6      888.2      776.7

Federal Funds Sold and Securities Purchased under Agreements to Resell and Other

    12.3      46.5      68.8
                     

Total Interest Income

    1,406.0      2,478.5      2,784.2
                     

Interest Expense

                   

Deposits

    207.0      1,116.0      1,563.4

Federal Funds Purchased

    5.7      32.2      79.9

Securities Sold under Agreements to Repurchase

    1.1      22.7      80.1

Other Borrowings

    4.2      22.5      31.5

Senior Notes

    44.0      44.3      26.7

Long-Term Debt

    139.9      150.1      141.0

Floating Rate Capital Debt

    4.3      11.6      16.2
                     

Total Interest Expense

    406.2      1,399.4      1,938.8
                     

Net Interest Income

  $ 999.8    $ 1,079.1    $ 845.4

 

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Note 16 – Other Operating Income

 

The components of other operating income were as follows:

 

(In Millions)   2009      2008    2007  

Banking Service Fees

  $ 53.1       $ 39.4    $ 35.7   

Loan Service Fees

    52.1         30.0      16.5   

Non-Trading Foreign Exchange
Gains (Losses)

    (1.4      36.1      2.1   

Credit Default Swap Gains (Losses)

    (4.6      35.4      4.8   

Loss on Sale of Non-U.S. Subsidiary

                 (4.1

Other Income

    37.6         46.0      40.3   
                         

Total Other Operating Income

  $ 136.8       $ 186.9    $ 95.3   

 

Note 17 – Other Operating Expenses

 

The components of other operating expenses were as follows:

 

(In Millions)   2009      2008    2007

Business Promotion

  $ 66.6       $ 87.8    $ 77.0

FDIC Insurance Premiums

    54.1         5.6      1.8

Staff Related

    31.3         38.1      35.9

Other Intangibles Amortization

    16.2         17.8      20.9

Capital Support Agreements

    (109.3      314.1     

Securities Lending Client Support

            167.6     

Auction Rate Securities Purchase Program

            54.6     

Other Expenses

    77.4         100.7      109.5
                       

Total Other Operating Expenses

  $ 136.3       $ 786.3    $ 245.1

 

Note 18 – Visa Membership

 

In October 2007, Northern Trust, as a member of Visa U.S.A. Inc. (Visa U.S.A.), received shares of restricted stock in Visa, Inc. (Visa) as a result of its participation in the global restructuring of Visa U.S.A., Visa Canada Association, and Visa International Service Association in preparation for an initial public offering by Visa. In connection with Visa’s initial public offering in March 2008, a portion of the shares of Visa common stock held by Northern Trust 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. A member bank such as Northern Trust is also required to recognize the contingent obligation to indemnify Visa under Visa’s bylaws (as those bylaws were modified at the time of the Visa restructuring on October 3, 2007), for potential losses arising from the other indemnified litigation that has not yet settled at its estimated fair value in accordance with GAAP. Northern Trust is not a party to this litigation and does not have access to any specific, non-public information concerning the matters that are the subject of the indemnification obligations.

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 Visa’s 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.

In the third quarter of 2009, Visa deposited additional funds in its litigation escrow account and Northern Trust recorded its proportionate share of the deposit, $17.8 million, as a reduction to the Visa related indemnification liability and related charges. The funding by Visa of its escrow account in 2008 and 2009 resulted in reductions of the future realization of the value of the outstanding shares held by Northern Trust and other Visa U.S.A. member banks.

Northern Trust’s net Visa related indemnification liability at December 31, 2009 and 2008, included within other liabilities in the consolidated balance sheet, totaled $56.1 million and $73.9 million, respectively. It is expected that required additional contributions to the litigation escrow account will result in additional 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,

 

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Northern Trust anticipates that the value of its remaining shares of Visa stock will be more than adequate to offset any remaining indemnification liabilities related to Visa litigation.

 

Note 19 – Income Taxes

 

The following table reconciles the total provision for income taxes recorded in the consolidated statement of income with the amounts computed at the statutory federal tax rate of 35%.

 

(In Millions)   2009      2008      2007  

Tax at Statutory Rate

  $ 439.3       $ 446.5       $ 371.3   

Tax Exempt Income

    (11.9      (12.4      (12.3

Leveraged Lease Adjustments

    (4.8      61.3           

Foreign Tax Rate Differential

    (20.9      (47.8      (18.4

State Taxes, net

    9.8         18.3         6.2   

Other

    (20.5      15.0         (12.9
                           

Provision for Income Taxes

  $ 391.0       $ 480.9       $ 333.9   

 

The Corporation files income tax returns in the U.S. federal, various state, and foreign jurisdictions. The Corporation is no longer subject to income tax examinations by U.S. federal, state, or local, or by non-U.S. tax authorities for years before 1997.

Included in other liabilities within the consolidated balance sheet at December 31, 2009 and 2008 were $88.9 million and $334.9 million of unrecognized tax benefits, respectively. If recognized, 2009 and 2008 net income would have increased by $20.1 million and $47.9 million, respectively, resulting in a decrease of those years’ effective income tax rates. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

 

(In Millions)   2009     2008  

Balance at January 1

  $ 334.9      $ 237.0   

Additions for Tax Positions Taken in Current Year

           7.7   

Additions for Tax Positions Taken in Prior Years

    .6        91.3   

Reductions for Tax Positions Taken in Prior Years

    (246.1     (.7

Reductions Resulting from Expiration of Statutes

    (.5     (.4
                 

Balance at December 31

  $ 88.9      $ 334.9   

 

As part of its audit of federal tax returns filed from 1997-2004, the Internal Revenue Service (IRS) challenged the Corporation’s tax position with respect to certain structured leasing transactions and proposed to disallow certain tax deductions and assess related interest and penalties. In September 2009, the Corporation reached a settlement agreement with the IRS with respect to certain of these transactions, resulting in the acceleration of $88.6 million in tax payments to the IRS. The acceleration of tax payments did not affect net income. The Corporation anticipates that the IRS will continue to disallow deductions relating to the remaining challenged leases and possibly include other lease transactions with similar characteristics as part of its audit of tax returns filed after 2004. The Corporation believes 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 will continue to defend its position on the tax treatment of its structured leasing transactions vigorously. Northern Trust has deposits with the IRS to mitigate interest that would become due should the IRS prevail on the remaining tax positions.

Included in unrecognized tax benefits at January 1, 2009 were $292.0 million of U.S. federal and state tax positions related to leveraged leasing tax deductions. During 2009, Northern Trust sold certain of the structured leases challenged by the IRS. In connection with these sales, the amount of leveraged lease related uncertain tax positions was reduced by $136.2 million. The acceleration of tax payments relating to the sold leases did not affect net income. As a result of the settlement agreement reached in the third quarter of 2009, the amount of leveraged lease related uncertain tax positions was reduced by an additional $88.6 million. Other adjustments of $.7 million resulted in a remaining leveraged lease related uncertain tax position balance of $67.9 million as of December 31, 2009. Other unrecognized tax benefits had net decreases of $21.9 million, resulting in a remaining balance of $21.0 million.

In accordance with an accounting standard adopted in 2007, GAAP requires a reallocation of lease income from the inception of a leveraged lease if during its term the expected timing of lease related income tax deductions is revised. Upon adoption of the standard, Northern Trust’s stockholders’ equity was reduced by $73.4 million based on estimates as of the standard’s January 1, 2007 adoption date relating to the eventual resolution of the leveraged leasing tax matter with the IRS, including the timing and amount of potential payments. The impacts of revisions to management’s assumptions after January 1, 2007 were recorded through earnings in the period in which the assumptions changed. For the year ended December 31, 2008, revised cash flow estimates regarding the timing of leveraged lease income tax deductions reduced

 

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interest income by $38.9 million and increased the provision for income taxes, inclusive of interest and penalties, by $61.3 million. For the year ended December 31, 2009, revised cash flow estimates regarding the timing and amount of leveraged lease income tax deductions increased interest income by $1.1 million and increased the provision for income taxes, inclusive of interest and penalties, by $1.5 million.

It is possible that additional changes in the amount of leveraged lease related uncertain tax positions and related cash flows could occur in the next twelve months if Northern Trust terminates 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.

During the years ended December 31, 2009, 2008, and 2007, $1.9 million, $46.1 million, and $7.3 million of interest and penalties, net of tax, were included in the provision for income taxes. As of December 31, 2009 and 2008, the liability for the potential payment of interest and penalties totaled $27.8 million and $83.2 million, net of tax, respectively.

Pre-tax earnings of non-U.S. subsidiaries are subject to U.S. taxation when effectively repatriated. Northern Trust provides income taxes on the undistributed earnings of non-U.S. subsidiaries, except to the extent that those earnings are indefinitely reinvested outside the U.S. Northern Trust elected to indefinitely reinvest $103.5 million, $185.8 million, and $119.5 million of 2009, 2008, and 2007 earnings, respectively, of certain non-U.S. subsidiaries and, therefore, no U.S. deferred income taxes were recorded on those earnings. As of December 31, 2009, the cumulative amount of undistributed pre-tax earnings in these subsidiaries approximated $468.8 million. Based on the current U.S. federal income tax rate, an additional deferred tax liability of approximately $109.1 million, would have been required as of December 31, 2009 if Northern Trust had not elected to indefinitely reinvest those earnings.

The components of the consolidated provision for income taxes for each of the three years ended December 31 are as follows:

 

(In Millions)   2009      2008      2007  

Current Tax Provision:

                         

Federal

  $ 124.6       $ 528.8       $ 286.6   

State

    (7.1      43.0         14.1   

Non-U.S.

    89.7         100.0         103.5   
                           

Total

  $ 207.2       $ 671.8       $ 404.2   
                           

Deferred Tax Provision:

                         

Federal

  $ 162.9       $ (185.2    $ (65.8

State

    24.1         (5.7      (4.5

Non-U.S.

    (3.2                
                           

Total

  $ 183.8       $ (190.9      (70.3
                           

Provision for Income Taxes

  $ 391.0       $ 480.9       $ 333.9   

 

In addition to the amounts shown above, tax charges (benefits) have been recorded directly to stockholders’ equity for the following items:

 

(In Millions)   2009      2008      2007  

Current Tax Benefit for Employee Stock Options and Other Stock-Based Plans

  $ (4.2    $ (35.0    $ (45.1

Tax Effect of Other Comprehensive Income

    64.7         (132.2      8.0   

 

Deferred taxes result from temporary differences between the amounts reported in the consolidated financial statements and the tax bases of assets and liabilities. Deferred tax liabilities and assets have been computed as follows:

 

    DECEMBER 31
(In Millions)   2009    2008    2007

Deferred Tax Liabilities:

                   

Lease Financing

  $ 404.6    $ 424.1    $ 475.1

Software Development

    180.8      163.8      128.6

Accumulated Depreciation

    16.1      14.3      11.0

Compensation and Benefits

    9.7           12.5

State Taxes, net

    34.2      19.2      31.6

Other Liabilities

    37.1      47.1      48.5
                     

Gross Deferred Tax Liabilities

    682.5      668.5      707.3
                     

Deferred Tax Assets:

                   

Reserve for Credit Losses

    118.5      86.4      54.6

Compensation and Benefits

         71.0     

Capital Support Agreements

         109.9     

Visa Indemnification

    19.7      25.9      52.5

Other Assets

    74.1      153.6      55.3
                     

Gross Deferred Tax Assets

    212.3      446.8      162.4
                     

Valuation Reserve

             

Deferred Tax Assets, net of Valuation Reserve

    212.3      446.8      162.4
                     

Net Deferred Tax Liabilities

  $ 470.2    $ 221.7    $ 544.9

 

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No valuation allowance related to deferred tax assets was recorded at December 31, 2009, 2008, or 2007, as management believes it is more likely than not that the deferred tax assets will be fully realized. At December 31, 2009, Northern Trust had no net operating loss carryforwards.

 

Note 20 – Employee Benefits

 

The Corporation and certain of its subsidiaries provide various benefit programs, including defined benefit pension, postretirement health care, and defined contribution plans. A description of each major plan and related disclosures are provided below.

In 2008, Northern Trust adopted revised measurement date provisions under GAAP and has subsequently valued pension and postretirement benefit assets and liabilities at December 31 versus a September 30 measurement date used in 2007 and prior years. An adjustment totaling $7.4 million was made to the January 1, 2008 balance of retained earnings to effect this change. There was no income statement impact. Actuarial gains and losses arising in the 15 month period between September 30, 2007 and December 31, 2008 were recorded in AOCI in 2008.

 

Pension . A noncontributory qualified defined benefit pension plan covers substantially all U.S. employees of Northern Trust. Employees of various European subsidiaries participate in local defined benefit plans, although those plans were closed in prior years to new participants.

Northern Trust also maintains a noncontributory supplemental pension plan for participants whose retirement benefit payments under the U.S. plan are expected to exceed the limits imposed by federal tax law. Northern Trust has a nonqualified trust, referred to as a “Rabbi” Trust, used to hold assets designated for the funding of benefits in excess of those permitted in certain of its qualified retirement plans. This arrangement offers participants a degree of assurance for payment of benefits in excess of those permitted in the related qualified plans. As the “Rabbi” Trust assets remain subject to the claims of creditors and are not the property of the employees, they are accounted for as corporate assets and are included in other assets in the consolidated balance sheet. Total assets in the “Rabbi” Trust related to the nonqualified pension plan at December 31, 2009 and 2008 amounted to $44.1 million and $45.2 million, respectively.

 

The following tables set forth the status, amounts included in AOCI, and the net periodic pension expense of the U.S. plan, non-U.S. plans, and supplemental plan for 2009 and 2008. Prior service costs are being amortized on a straight-line basis over 9 years for the U.S. plan and 8 years for the supplemental plan.

 

PLAN STATUS

 

    U.S. PLAN     NON-U.S. PLANS     SUPPLEMENTAL PLAN  
($ In Millions)   2009      2008     2009      2008     2009      2008  

Accumulated Benefit Obligation

  $ 554.0       $ 484.8      $ 100.9       $ 75.9      $ 74.5       $ 56.8   
                                                    

Projected Benefit

    642.0         558.8        134.4         91.0        85.9         68.5   

Plan Assets at Fair Value

    821.9         586.2        113.7         87.9                  
                                                    

Funded Status at December 31

  $ 179.9       $ 27.4      $ (20.7    $ (3.1   $ (85.9    $ (68.5
                                                    

Weighted-Average Assumptions:

                                                  

Discount Rates

    6.00      6.25     6.05      5.80     6.00      6.25

Rate of Increase in Compensation Level

    4.02         4.02        4.31         4.15        4.02         4.02   

Expected Long-Term Rate of Return on Assets

    8.00         8.00        6.60         6.66        N/A         N/A   

AMOUNTS INCLUDED IN ACCUMULATED OTHER COMPREHENSIVE INCOME

 

  

    U.S. PLAN     NON-U.S. PLANS     SUPPLEMENTAL PLAN  
(In Millions)   2009      2008     2009      2008     2009      2008  

Net Actuarial Loss (Gain)

  $ 375.0       $ 371.5      $ 31.8       $ 12.8      $ 57.3       $ 38.8   

Prior Service Cost

    8.1         9.3                       1.5         1.4   
                                                    

Gross Amount in Accumulated Other Comprehensive Income

    383.1         380.8        31.8         12.8        58.8         40.2   

Income Tax Effect

    141.6         144.3        5.0         2.9        20.1         15.8   
                                                    

Net Amount in Accumulated Other Comprehensive Income

  $ 241.5       $ 236.5      $ 26.8       $ 9.9      $ 38.7       $ 24.4   

 

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NET PERIODIC PENSION EXPENSE

 

    U.S. PLAN     NON-U.S. PLANS     SUPPLEMENTAL PLAN  
($ In Millions)   2009      2008     2007     2009      2008     2007     2009      2008      2007  

Service Cost

  $ 33.1       $ 29.6      $ 31.0      $ 3.8       $ 4.4      $ 5.8      $ 2.6       $ 1.9       $ 2.0   

Interest Cost

    33.4         30.9        28.6        6.7         6.8        6.6        3.9         3.5         3.6   

Expected Return on Plan Assets

    (59.7      (57.5     (48.5     (8.1      (9.3     (8.3     N/A         N/A         N/A   

Amortization:

                                                                           

Net Loss

    12.2         8.2        14.9        1.3         .3        1.2        3.9         2.5         2.9   

Prior Service Cost

    1.2         1.3        1.1                              (.1                
                                                                             

Net Periodic Pension Expense

  $ 20.2       $ 12.5      $ 27.1      $ 3.7       $ 2.2      $ 5.3      $ 10.3       $ 7.9       $ 8.5   
                                                                             

Weighted-Average Assumptions:

                                                                           

Discount Rates

    6.25      6.25     5.75     5.80      5.71     4.97     6.25      6.25      5.75

Rate of Increase in Compensation Level

    4.02         4.02        3.80        4.15         4.61        4.40        4.02         4.02         3.80   

Expected Long-Term Rate of Return on Assets

    8.00         8.25        8.25        6.66         7.25        6.83        N/A         N/A         N/A   

 

Pension expense for 2010 is expected to include approximately $27.5 million and $1.7 million related to the amortization of net loss and prior service cost balances, respectively, from accumulated other comprehensive income.

 

CHANGE IN BENEFIT OBLIGATION

 

    U.S. PLAN     NON-U.S. PLANS     SUPPLEMENTAL PLAN  
(In Millions)   2009      2008     2009      2008     2009      2008  

Beginning Balance

  $ 558.8       $ 518.1      $ 91.0       $ 126.9      $ 68.5       $ 61.3   

Service Cost

    33.1         37.0        3.8         5.3        2.6         2.4   

Interest Cost

    33.4         38.6        6.7         8.2        3.9         4.4   

Actuarial Loss (Gain)

    68.5         17.9        29.4         (14.4     22.4         14.0   

Benefits Paid

    (51.8      (52.8     (4.3      (2.3     (11.5      (13.6

Foreign Exchange Rate Changes

                   7.8         (32.7               
                                                    

Ending Balance

  $ 642.0       $ 558.8      $ 134.4       $ 91.0      $ 85.9       $ 68.5   

Note: Due to the change in measurement date from September 30 to December 31 in 2008, the 2008 change includes 15 months of activity.

 

ESTIMATED FUTURE BENEFIT PAYMENTS

 

(In Millions)   U.S. PLAN    NON-U.S. PLANS    SUPPLEMENTAL PLAN

2010

  $ 57.9    $ 2.0    $ 14.4

2011

    62.3      2.1      13.9

2012

    64.4      2.3      14.2

2013

    69.0      2.7      14.2

2014

    69.3      2.7      7.7

2015-2018

    366.9      19.4      39.1

 

CHANGE IN PLAN ASSETS

 

    U.S. PLAN     NON-U.S. PLANS  
(In Millions)   2009      2008     2009      2008  

Fair Value of Assets at Beginning of Period

  $ 586.2       $ 741.5      $ 87.9       $ 139.7   

Actual Return on Assets

    112.5         (212.5     17.8         (23.8

Employer Contributions

    175.0         110.0        4.2         7.4   

Benefits Paid

    (51.8      (52.8     (4.3      (2.3

Foreign Exchange Rate Changes

                   8.1         (33.1
                                   

Fair Value of Assets at End of Period

  $ 821.9       $ 586.2      $ 113.7       $ 87.9   

Note: Due to the change in measurement date from September 30 to December 31 in 2008, the 2008 change includes 15 months of activity.

 

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Northern Trust made an additional contribution of $20.0 million in January 2010 for the 2009 plan year. The minimum required contribution for the U.S. qualified plan in 2010 is estimated to be zero and the maximum deductible contribution is estimated at $24.0 million.

Effective December 31, 2009, GAAP requires an increase in an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan, including more detailed information about investment allocation decisions, major categories of plan assets, including concentrations of risk and fair-value measurements, and the fair-value techniques and inputs used to measure plan assets.

A total return investment strategy approach is employed to Northern Trust’s U.S. pension plan whereby a mix of U.S. and non- U.S. equities, fixed income and alternative asset investments are used to maximize the long-term return of plan assets for a prudent level of risk. This is accomplished by diversifying the portfolio across various asset classes, with the goal of reducing volatility of return, and among various issuers of securities to reduce principal risk. Northern Trust utilizes an asset/liability methodology to determine the investment policies that will best meet its short and long-term objectives. The process is performed by modeling current and alternative strategies for asset allocation, funding policy and actuarial methods and assumptions. The financial modeling uses projections of expected capital market returns and expected volatility of those returns to determine alternative asset mixes having the greatest probability of meeting the plan’s investment objectives. Risk tolerance is established through careful consideration of plan liabilities, plan funded status, and corporate financial condition. The intent of this strategy is to minimize plan expenses by outperforming growth in plan liabilities over the long run.

The target allocation of plan assets since November 2008, by major asset category, is 40% U.S. stocks, 21% non-U.S. stocks, 21% long duration fixed income securities, and 18% alternative investments, split between private equity funds (5%), hedge funds (5%), global real estate (5%) and commodities (3%). Equity investments include common stocks that are listed on an exchange and investments in comingled funds that invest primarily in publicly traded equities. Equity investments are diversified across U.S. and non-U.S. stocks and divided by investment style and market capitalization. Fixed income securities held include U.S. treasury securities and investments in comingled funds that invest in a diversified blend of longer duration fixed income securities. Alternative investments, including private equity, hedge funds, global real estate, and commodities, are used judiciously to enhance long-term returns while improving portfolio diversification. Private equity assets consist primarily of investments in limited partnerships that invest in individual companies in the form of non-public equity or non-public debt positions. Direct or co-investment in non-public stock by the plan is prohibited. The plan’s private equity investments are limited to 20% of the total limited partnership and the maximum allowable loss cannot exceed the commitment amount. The plan holds one investment in a hedge fund of funds, which invests, either directly or indirectly, in a diversified portfolio of funds or other pooled investment vehicles.

Global real estate and commodities were added to the plan’s strategic allocation in 2008 in order to provide greater diversification. Investment in global real estate is designed to provide stable income returns and added diversification based upon the historical low correlation between real estate and equity or fixed income investments. The plan’s global real estate assets consist of one collective index fund that invests in a diversified portfolio of global real estate investments, primarily equity securities.

Commodities also improve portfolio diversification as they tend to react to changing economic fundamentals differently than traditional financial assets. Because commodity prices typically rise with rising inflation, investments in commodities are also likely to provide an offset against inflation. Commodity assets include an investment in one mutual fund that invests in commodity-linked derivative instruments, backed by a portfolio of fixed income securities.

Though not a primary strategy for meeting the plan’s objectives, derivatives may be used from time to time, depending on the nature of the asset class to which they relate, to gain market exposure in an efficient and timely manner, to hedge foreign currency exposure or interest rate risk, or to alter the duration of a portfolio. There were no derivatives held by the plan at December 31, 2009.

Investment risk is measured and monitored on an ongoing basis through annual liability measurements, periodic asset/liability studies, and quarterly investment portfolio reviews. Standards used to evaluate investment manager performance include, but are not limited to, the achievement of objectives, operation within guidelines and policy, and relative performance standings. Each investment manager is ranked against a universe of peers and compared to a relative benchmark. Total plan performance analysis includes an analysis of the market environment, asset allocation impact on performance, risk and return relative to other ERISA plans, and manager impacts upon plan performance.

 

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The following describes the hierarchy of inputs used to measure fair value and the primary valuation methodologies used by Northern Trust for plan assets measured at fair value.

Level 1 – Quoted, active market prices for identical assets or liabilities. The U.S. pension plan’s Level 1 investments include foreign and domestic common stocks and mutual and collective trust funds. Foreign and domestic common stocks are exchange traded and are valued at the closing price reported by the respective exchanges on the day of valuation. Share prices of the funds, referred to as a fund’s Net Asset Value (NAV), are calculated daily based on the closing market prices and accruals of securities in the fund’s total portfolio (total value of the fund) divided by the number of fund shares currently issued and outstanding. Redemptions of the mutual and collective trust fund shares occur by contract at the respective fund’s redemption date NAV.

Level 2 – Observable inputs other than Level 1 prices, such as quoted active market prices for similar assets or liabilities, quoted prices for identical or similar assets in inactive markets, and model-derived valuations in which all significant inputs are observable in active markets. The U.S. pension plan’s Level 2 assets include U.S. government securities and mutual and collective trust funds. U.S. government securities are valued by a third party pricing source that incorporates market observable data such as reported sales of similar securities, broker quotes and reference data. The inputs used are based on observable data in active markets. The NAVs of the funds are calculated monthly based on the closing market prices and accruals of securities in the fund’s total portfolio (total value of the fund) divided by the number of fund shares currently issued and outstanding. Redemptions of the mutual and collective trust fund shares occur by contract at the respective fund’s redemption date NAV.

Level 3 inputs – Valuation techniques in which one or more significant inputs are unobservable in the marketplace. The U.S. pension plan’s Level 3 assets are private equity and hedge funds which invest in underlying groups of investment funds or other pooled investment vehicles that are selected by the respective funds’ investment managers. The investment funds and the underlying investments held by these investment funds are valued at fair value. In determining the fair value of the underlying investments of each fund, the fund’s investment manager or general partner takes into account the estimated value reported by the underlying funds as well as any other considerations that may, in their judgment, increase or decrease such estimated value.

While Northern Trust believes its valuation methods for plan assets are appropriate and consistent with other market participants, the use of different methodologies or assumptions, particularly as applied to Level 3 assets described below, could have a material effect on the computation of their estimated fair values.

The following table presents the fair values of Northern Trust’s U.S. pension plan assets, by major asset category, and their level within the fair value hierarchy defined by GAAP as of December 31, 2009.

 

(In Millions)   LEVEL 1    LEVEL 2    LEVEL 3    TOTAL

Equity Securities

                          

U.S.

  $ 295.4    $ 58.7    $    $ 354.1

Non-U.S.

    203.5                203.5

Fixed Income – U.S. Government

         127.8           127.8

Alternative Investments

                          

Private Equity Funds

              28.8      28.8

Hedge Fund

              28.7      28.7

Global Real Estate Fund

    34.8                34.8

Commodity Linked Fund

    36.5                36.5

Cash and Other

    7.7                7.7
                            

Total Assets at Fair Value

  $ 577.9    $ 186.5    $ 57.5    $ 821.9

 

The following table presents the changes in Level 3 assets for the year ended December 31, 2009.

 

(In Millions)  

PRIVATE EQUITY

FUNDS

     HEDGE FUND

Fair Value at January 1, 2009

  $ 28.7       $ 26.8

Actual Return on Plan Assets

    (4.6      1.9

Net Purchases, Sales, and Settlements

    4.7        
                

Fair Value at December 31, 2009

  $ 28.8       $ 28.7

Note: The return on plan assets represents the change in the unrealized gain (or loss) on assets still held at December 31, 2009.

 

A building block approach is employed for Northern Trust’s U.S. pension plan in determining the long-term rate of return for plan assets. Historical markets and long-term historical relationships between equities, fixed income and other asset classes are studied using the widely-accepted capital market principle that assets with higher volatility generate a greater return over the long-run. Current market factors such as inflation expectations and interest rates are evaluated before long-term capital market assumptions are determined. The long-term portfolio rate of return is established with consideration given to diversification and rebalancing. The rate is reviewed against peer data and historical returns to verify the return is reasonable and appropriate. Based on this approach and the plan’s target asset allocation, the expected long-term rate of return on assets as of the plan’s December 31, 2009 measurement date was set at 8.00%.

 

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Postretirement Health Care. Northern Trust maintains an unfunded postretirement health care plan. Employees retiring at age 55 or older under the provisions of the U.S. defined benefit plan who have attained 15 years of service may be eligible for subsidized postretirement health care coverage. Effective January 1, 2003, the cost of this benefit is no longer subsidized by Northern Trust for new employee hires or employees who were under age 40 at December 31, 2002, or those who have not attained 15 years of service by their termination date. Effective January 1, 2010, the cost of this benefit will no longer be subsidized by Northern Trust for employees who will not be at least age 55 with at least 15 years of service on December 31, 2011. This plan change reduced the postretirement benefit obligation by $19.0 million at December 31, 2009. The reduction in liability due to the plan change fully offset the existing combined prior service cost and transition obligation balances recorded in AOCI. No curtailment gain or loss was recorded as the change in liability was solely attributed to past service and the transition obligation and prior service cost balances had already been fully offset. The provisions of this plan may be changed further at the discretion of Northern Trust, which also reserves the right to terminate these benefits at any time.

The following tables set forth the postretirement health care plan status and amounts included in AOCI at December 31, the net periodic postretirement benefit cost of the plan for 2009 and 2008, and the change in the accumulated postretirement benefit obligation during 2009 and 2008.

 

PLAN STATUS

 

(In Millions)   2009    2008

Accumulated Postretirement Benefit Obligation (APBO) at Measurement Date:

            

Retirees and Dependents

  $ 25.7    $ 24.1

Actives Eligible for Benefits

    15.0      11.6

Actives Not Yet Eligible

    9.2      25.0
              

Net Postretirement Benefit Liability

  $ 49.9    $ 60.7

 

AMOUNTS INCLUDED IN ACCUMULATED OTHER COMPREHENSIVE INCOME

 

(In Millions)   2009      2008  

Net Actuarial Loss

  $ 15.6       $ 10.5   

Transition Obligation

            1.9   

Prior Service Benefit

    (18.1      (.6
                  

Gross Amount in Accumulated Other Comprehensive Income

    (2.5      11.8   

Income Tax Effect

    (.5      8.5   
                  

Net Amount in Accumulated Other Comprehensive Income

  $ (2.0    $ 3.3   

 

The income tax effect shown above includes the expected impact of the non-taxable Medicare prescription drug subsidy.

 

NET PERIODIC POSTRETIREMENT BENEFIT EXPENSE

 

(In Millions)   2009      2008      2007  

Service Cost

  $ 1.7       $ 1.7       $ 1.9   

Interest Cost

    3.7         3.9         3.5   

Amortization

                         

Net Loss

    .5         1.1         1.3   

Transition Obligation

    .5         .6         .6   

Prior Service Benefit

    (.1      (.1      (.1
                           

Net Periodic Postretirement Benefit Expense

  $ 6.3       $ 7.2       $ 7.2   

 

CHANGE IN ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATION

 

(In Millions)   2009      2008  

Beginning Balance

  $ 60.7       $ 62.7   

Service Cost

    1.7         2.1   

Interest Cost

    3.7         4.9   

Actuarial Loss (Gain)

    5.6         (6.5

Gross Benefits Paid

    (3.0      (3.0

Medicare Subsidy

    .2         .5   

Plan Change

    (19.0        
                  

Ending Balance

  $ 49.9       $ 60.7   

Note: Due to the change in measurement date from September 30 to December 31 in 2008, the 2008 change includes 15 months of activity.

 

 

ESTIMATED FUTURE BENEFIT PAYMENTS

 

(In Millions)  

TOTAL

POSTRETIREMENT

MEDICAL
BENEFITS

  

EXPECTED

PRESCRIPTION

DRUG

SUBSIDY

AMOUNT

 

2010

  $ 4.1    $ (.6

2011

    4.4      (.7

2012

    4.7      (.8

2013

    4.9      (.7

2014

    5.1      (1.0

2015-2018

    25.4      (7.0

 

Net periodic postretirement benefit expense for 2010 is expected to include approximately $2.0 million related to the amortization from accumulated other comprehensive income of the net loss and to be decreased by $5.0 million related to the amortization from AOCI of the prior service benefit.

The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 6.00% at December 31, 2009 and 6.25% at December 31, 2008. For measurement purposes, an 8.00% annual increase in the cost of covered medical benefits and a 9.00% annual increase in the cost of covered prescription drug benefits were assumed for 2009. These rates are assumed to gradually decrease until they reach 5.00% in 2015 for medical and 2017 for prescription

 

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drugs. The health care cost trend rate assumption has an effect on the amounts reported. For example, increasing or decreasing the assumed health care trend rate by one percentage point in each year would have the following effect.

 

(In Millions)  

1–PERCENTAGE

POINT INCREASE

  

1–PERCENTAGE

POINT DECREASE

 

Effect on Total Service and Interest Cost Components

  $ .1    $ (.1

Effect on Postretirement Benefit Obligation

    1.5      (1.4

 

Defined Contribution Plans. The Corporation and its subsidiaries maintain various defined contribution plans covering substantially all employees. The Corporation’s contribution includes a matching component and a corporate performance-based component contingent upon meeting predetermined performance objectives. The estimated contribution to defined contribution plans is charged to employee benefits and totaled $47.0 million in 2009, $42.0 million in 2008, and $44.0 million in 2007.

 

Note 21 – Stock-Based Compensation Plans

 

Northern Trust recognizes as compensation expense the grant-date fair value of stock options and other equity based compensation granted to employees within the income statement using a fair value-based method.

Total compensation expense for share-based payment arrangements was as follows:

 

   

FOR THE YEAR ENDED

DECEMBER 31,

(In Millions)   2009      2008    2007

Stock Options

  $ 27.9       $ 19.3    $ 17.8

Stock and Stock Unit Awards

    19.7         15.0      14.2

Performance Stock Units

    (22.2      8.3      12.1
                       

Total Share-Based Compensation Expense

  $ 25.4       $ 42.6    $ 44.1

Tax Benefits Recognized

  $ 9.3       $ 15.8    $ 16.5

 

As of December 31, 2009, there was $73.4 million of unrecognized compensation cost related to unvested share-based compensation arrangements granted under the Corporation’s stock-based compensation plans. That cost is expected to be recognized as expense over a weighted-average period of approximately 3 years. Share-based compensation expense in 2009 includes the reversal of accruals related to performance stock units granted in 2007 and 2008 which are not expected to vest.

The Amended and Restated Northern Trust Corporation 2002 Stock Plan (the Plan) is administered by the Compensation and Benefits Committee (Committee) of the Board of Directors. All employees of the Corporation and its subsidiaries and all directors of the Corporation are eligible to receive awards under the Plan. The Plan provides for the grant of stock options, stock appreciation rights, stock awards, stock units and performance shares. As detailed below, grants are outstanding under both the Plan and The Northern Trust Corporation Amended 1992 Incentive Stock Plan (1992 Plan), a predecessor plan. The total number of shares of the Corporation’s common stock authorized for issuance under the Plan is 40,000,000. As of December 31, 2009, shares available for future grant under the Plan totaled 18,392,165.

The following describes Northern Trust’s share-based payment arrangements and applies to awards under the Plan and the 1992 Plan, as applicable.

 

Stock Options. Stock options consist of options to purchase common stock at prices not less than 100% of the fair market value thereof on the date the options are granted. Options have a maximum ten-year life and generally vest and become exercisable in one to four years after the date of grant. In addition, all options may become exercisable upon a “change of control” as defined in the Plan or the 1992 Plan. All options terminate at such time as determined by the Committee and as provided in the terms and conditions of the respective option grants.

The weighted-average assumptions used for options granted during the years ended December 31 are as follows:

 

    2009      2008     2007  

Expected Term (in Years)

  6.8       6.3      5.9   

Dividend Yield

  3.51    2.48   2.50

Expected Volatility

  40.7       27.1      28.3   

Risk Free Interest Rate

  2.46       3.16      4.67   

 

The expected term of the options represents the period of time that options granted are expected to be outstanding based primarily on the historical exercise behavior attributable to previous option grants. Dividend yield represents the estimated yield from dividends paid on the Corporation’s common stock over the expected term of the options. Expected volatility is determined based on the historical daily volatility of Northern Trust’s stock price over a period equal to the expected term of the option. The risk free interest rate is based on the U.S. Treasury yield curve at the time of grant for a period equal to the expected term of the options granted.

 

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The following table provides information about stock options granted, vested, and exercised in the years ended December 31.

 

(In Millions, Except Per Share Information)   2009    2008    2007

Weighted Average Grant-Date Per Share Fair Value of Stock Options Granted

  $ 16.94    $ 17.16    $ 17.40

Fair Value of Stock Options Vested

    18.4      20.1      15.3

Stock Options Exercised

                   

Intrinsic Value

    11.3      98.5      130.7

Cash Received

    38.9      161.9      204.8

Tax Deduction Benefits Realized

    3.6      27.9      38.4

 

The following is a summary of changes in nonvested stock options for the year ended December 31, 2009.

 

NONVESTED SHARES   SHARES      WEIGHTED-
AVERAGE
GRANT-DATE
FAIR VALUE
PER SHARE

Nonvested at December 31, 2008

  3,214,503       $ 16.78

Granted

  2,394,357         16.94

Vested

  (1,111,732      16.57

Forfeited or Cancelled

  (201,214      17.42
              

Nonvested at December 31, 2009

  4,295,914       $ 16.89

 

A summary of the status of stock options under the Plan and the 1992 Plan at December 31, 2009, and changes during the year then ended, are presented in the table below.

 

($ In Millions Except Per Share Information)   SHARES     

WEIGHTED

AVERAGE
EXERCISE

PRICE
PER SHARE

  

WEIGHTED

AVERAGE

REMAINING
CONTRACTUAL
TERM (YEARS)

   AGGREGATE
INTRINSIC
VALUE

Options Outstanding, December 31, 2008

  15,822,372       $ 54.99            

Granted

  2,394,357         56.37            

Exercised

  (938,249      44.79            

Forfeited, Expired or Cancelled

  (624,798      62.75            
                          

Options Outstanding, December 31, 2009

  16,653,682       $ 55.47    4.7    $ 49.7
                          

Options Exercisable, December 31, 2009

  12,357,768       $ 53.73    3.4    $ 49.6

 

Stock and Stock Unit Awards. Stock or stock unit awards may be granted by the Committee to participants which entitle them to receive a payment in the Corporation’s common stock or cash under the terms of the Plan and such other terms and conditions as the Committee deems appropriate. Each stock unit provides the recipient the opportunity to receive one share of stock for each stock unit that vests. The stock units granted in 2009 vest at a rate equal to 50% on the third anniversary date of the grant and 50% on the fourth anniversary date. Stock and stock unit grants totaled 646,549, 205,435, and 235,663, with weighted average grant-date fair values of $56.07, $70.44, and $64.68 per share, for the years ended December 31, 2009, 2008, and 2007, respectively. The total fair value of shares vested during the years ended December 31, 2009, 2008, and 2007, was $25.6 million, $17.1 million, and $9.2 million, respectively.

A summary of the status of outstanding stock and stock unit awards under the Plan and the 1992 Plan at December 31, 2009, and changes during the year then ended, is presented in the table below.

 

($ In Millions)   NUMBER      AGGREGATE
INTRINSIC
VALUE

Stock and Stock Unit Awards Outstanding, December 31, 2008

  1,292,933       $ 67.4

Granted

  646,549          

Distributed

  (573,495       

Forfeited

  (64,545       
              

Stock and Stock Unit Awards Outstanding, December 31, 2009

  1,301,442       $ 68.2
              

Units Convertible, December 31, 2009

  92,400         4.8

 

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The following is a summary of nonvested stock and stock unit awards at December 31, 2009, and changes during the year then ended.

 

NONVESTED STOCK

AND STOCK UNITS

  NUMBER      WEIGHTED
AVERAGE
GRANT-DATE
FAIR VALUE
PER UNIT
   WEIGHTED
AVERAGE
REMAINING
VESTING
TERM (YEARS)

Nonvested at December 31, 2008

  1,116,458       $ 56.31    1.4

Granted

  646,549         56.07     

Vested

  (489,420      40.50     

Forfeited

  (64,545      58.19     
                   

Nonvested at December 31, 2009

  1,209,042       $ 58.54    2.2

 

Performance Stock Units. Each performance stock unit provides the recipient the opportunity to receive one share of stock for each stock unit that vests. The number of performance stock units granted that will vest can range from 0% to 125% of the original award granted based on the level of attainment of an average earnings per share goal for a three-year period. Distribution of the award is then made after vesting. Performance stock unit grants totaled 289,409 and 393,518 with a weighted average grant-date fair value of $71.23 and $63.36 for the years ended December 31, 2008, and 2007, respectively. No performance stock units were granted in 2009.

A summary of the status of performance stock units under the Plan at December 31, 2009, and changes during the year then ended, is presented in the table below.

 

($ In Millions)   UNITS     

WEIGHTED

AVERAGE

REMAINING
VESTING
TERM (YEARS)

   AGGREGATE
INTRINSIC
VALUE

Units Outstanding, December 31, 2008

  742,417             

Granted

              

Converted

              

Forfeited

  (39,067          

Cancelled

  (134,212          
                 

Units Outstanding, December 31, 2009

  569,138       0.6    29.7
                 

Units Convertible, December 31, 2009

          

 

On January 19, 2010, the Northern Trust Corporation Compensation Committee determined that the performance conditions related to the 2007 performance stock unit grant were not met. As a result, 306,314 of the stock units reflected in the period end balance in the table above were cancelled. After giving effect to the cancellation of the 2007 performance stock unit grants, 262,824 performance stock units remained outstanding.

 

Director Stock Awards. In 2009, stock units with a total value of $1.1 million (19,248 stock units) that vest on the date of the 2010 annual meeting of the Corporation’s stockholders were granted to non-employee directors. In 2008, stock units with a total value of $1.0 million (14,882 stock units) that vested on the date of the 2009 annual meeting of the Corporation’s stockholders were granted to non-employee directors. Stock units granted to non-employee directors do not have voting rights. Each stock unit entitles a director to one share of common stock at vesting, unless a director elects to defer receipt of the shares. Directors may elect to defer the payment of their annual stock unit grant and cash-based compensation until termination of services as director. Amounts deferred are converted into stock units representing shares of common stock of the Corporation. Distributions of deferred stock units are made in stock. Distributions of the stock unit account that relate to cash-based compensation are made in cash based on the fair value of the stock units at the time of distribution.

 

Note 22 – Cash-Based Compensation Plans

 

Various incentive plans provide for cash incentives and bonuses to selected employees based upon accomplishment of corporate net income objectives, business unit goals, and individual performance. The estimated contributions to these plans are charged to compensation expense and totaled $168.9 million in 2009, $155.8 million in 2008, and $192.5 million in 2007.

 

Note 23 – Contingent Liabilities

 

In the normal course of business, the Corporation and its subsidiaries are routinely defendants in or parties to a number of pending and threatened legal actions, including, but not limited to, actions brought on behalf of various claimants or classes of claimants, regulatory matters, employment matters, and challenges from tax authorities regarding the amount of taxes due. In certain of these actions and proceedings, claims for substantial monetary damages or adjustments to recorded tax liabilities are asserted. In view of the inherent difficulty of predicting the outcome of such matters, particularly matters that will be decided by a jury and actions that seek very large damages based on novel and complex damage and liability

 

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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.

A number of participants in our securities lending program, which is associated with the Corporation’s asset servicing business, have commenced either individual lawsuits or putative class actions in which they claim, among other things, that we failed to exercise prudence in the investment management of the collateral received from the borrowers of the securities, resulting in losses that they seek to recover. The cases assert various contractual, statutory and common law claims, including claims for breach of fiduciary duty under common law and under ERISA.

As discussed in further detail in Note 18 – Visa Membership, Northern Trust, as a member bank of Visa U.S.A., and in conjunction with other member banks, is obligated to share in losses resulting from certain indemnified litigation involving Visa. The estimated fair value of the net Visa indemnification liability, recorded within other liabilities in the consolidated balance sheet, was $56.1 million at December 31, 2009 and $73.9 million at December 31, 2008.

 

Note 24 – Derivative Financial Instruments

 

Northern Trust is a party to various derivative financial instruments that are used in the normal course of business to meet the needs of its clients; as part of its trading activity for its own account; and as part of its risk management activities. These instruments include foreign exchange contracts, interest rate contracts, and credit default swap contracts.

Northern Trust’s primary risks associated with these instruments is the possibility that interest rates, foreign exchange rates, or credit spreads could change in an unanticipated manner, resulting in higher costs or a loss in the underlying value of the instrument. These risks are mitigated by establishing limits, monitoring the level of actual positions taken against such established limits, and monitoring the level of any interest rate sensitivity gaps created by such positions. When establishing position limits, market liquidity and volatility, as well as experience in each market, are all taken into account.

The estimated credit risk associated with these instruments relates to the failure of the counterparty to pay based on the contractual terms of the agreement, and is generally limited to the unrealized market value gains on these instruments. The amount of credit risk will increase or decrease during the lives of the instruments as interest rates, foreign exchange rates, or credit spreads fluctuate. This risk is controlled by limiting such activity to an approved list of counterparties and by subjecting such activity to the same credit and quality controls as are followed in lending and investment activities. Credit Support Annex agreements are currently in place with several counterparties which mitigate the aforementioned credit risk associated with derivative activity conducted with those counterparties by requiring that significant net unrealized market value gains be supported by collateral placed with Northern Trust.

Northern Trust also enters into master netting agreements with many of its 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 net derivative liabilities with the counterparty in the event Northern Trust’s credit rating falls below specified levels. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that are in a liability position on December 31, 2009, was $505.6 million. Northern Trust has posted collateral of $168.7 million against these liabilities resulting in a net maximum amount of termination payments that could have been required at December 31, 2009 of $336.9 million. Accelerated settlement due to such events would not affect net income and would not have a material effect on the consolidated financial position or liquidity of Northern Trust.

Foreign Exchange Contracts are agreements to exchange specific amounts of currencies at a future date, at a specified rate of exchange. Foreign exchange contracts are entered into primarily to meet the foreign exchange needs of clients. Foreign exchange contracts are also used for trading purposes and risk management. For risk management purposes, Northern Trust currently uses foreign exchange contracts to reduce 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

 

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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 loan commitment.

All derivative financial instruments, whether designated as hedges or not, are recorded on the consolidated balance sheet at fair value within other assets or other liabilities. The accounting for changes in the fair value of a derivative in the consolidated statement of income depends on whether the contract has been designated as a hedge and qualifies for hedge accounting under GAAP.

 

Client-Related and Trading Derivative Instruments. In excess of 95% of Northern Trust’s derivatives outstanding at December 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 Trust’s global custody business. However, in the normal course of business Northern Trust also engages in proprietary trading of 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.

 

    DECEMBER 31, 2009      DECEMBER 31, 2008
    NOTIONAL
VALUE
   FAIR VALUE      NOTIONAL
VALUE
   FAIR VALUE
(In Millions)      ASSET    LIABILITY         ASSET    LIABILITY

Foreign Exchange Contracts

  $ 173,159.1    $ 2,032.2    $ 2,008.5       $ 123,755.1    $ 2,931.8    $ 2,591.1

Interest Rate Option Contracts

    178.1      .4      .4          401.8      .3      .3

Interest Rate Swap Contracts

    4,195.2      114.9      113.1         3,351.0      190.7      184.9

Futures Contracts

    .2                   .5          
                                            

Total

  $ 177,532.6    $ 2,147.5    $ 2,122.0       $ 127,508.4    $ 3,122.8    $ 2,776.3

 

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 year ended December 31, 2009.

 

    LOCATION OF DERIVATIVE GAIN/ (LOSS)
RECOGNIZED IN INCOME
  

AMOUNT OF DERIVATIVE
GAIN/ (LOSS)
RECOGNIZED IN INCOME

(In Millions)     

Foreign Exchange Contracts

  Foreign Exchange Trading Income    $445.7

Interest Rate Swap Contracts

  Other Operating Income    4.9
          

Total

       $450.6

 

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Risk Management Derivative Instruments. Northern Trust uses derivative instruments to hedge its exposure to foreign currency, interest rate, and credit risk. Certain hedging relationships are formally designated and qualify for hedge accounting under GAAP as fair value, cash flow, or net investment hedges. Other derivatives that are entered into for risk management purposes as economic hedges are not formally designated as hedges and, therefore, are accounted for as trading instruments.

In order to qualify for hedge accounting, a formal assessment is performed on a calendar quarter basis to verify that derivatives used in designated hedging transactions continue to be highly effective 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 a trading instrument.

 

The following table identifies the types and classifications of derivative instruments designated as hedges and used by Northern Trust to manage risk, their notional and fair values, and the respective risks addressed.

 

(In Millions)

  

DERIVATIVE

INSTRUMENT

  

RISK

CLASSIFICATION

  DECEMBER 31, 2009      DECEMBER 31, 2008
       

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   $ 257.7    $ .7    $ 4.2        $ 2,605.8    $    $ 31.8

Senior Notes and Long-Term Subordinated Debt

  

Interest Rate

Swap Contracts

   Interest Rate     1,100.0      98.1              1,100.0      168.9     
   

Cash Flow Hedges

                                                    

Available for Sale Investment Securities

  

Interest Rate

Swap Contracts

   Interest Rate                       100.0      1.3     

Forecasted Foreign Currency Denominated Transactions

  

Foreign Exchange

Contracts

   Foreign Currency     1,516.7      40.8      42.8         1,008.0      87.9      114.2
   

Net Investment Hedges

                                                    

Net Investments in Non-U.S. Affiliates

  

Foreign Exchange

Contracts

   Foreign Currency     1,177.4      2.9      5.2         1,035.9      7.4      3.9
                                                      

Total

            $ 4,051.8    $ 142.5    $ 52.2       $ 5,849.7    $ 265.5    $ 149.9

 

In addition to the above, Sterling denominated senior and subordinated debt, totaling $413.2 million and $364.5 million at December 31, 2009 and 2008, respectively, were designated as hedges of the foreign exchange risk associated with the net investment in certain non-U.S. affiliates.

Derivatives are designated as fair value hedges to limit Northern Trust’s exposure to changes in the fair value of assets and liabilities due to movements in interest rates. 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 for the year ended December 31, 2009.

 

(In Millions)    DERIVATIVE INSTRUMENT    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    $ 5.7   

Senior Notes and Long-Term Subordinated Debt

   Interest Rate Swap Contracts    Interest Expense      (43.0
                    

Total

             $ (37.3

 

 

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For fair value hedges, Northern Trust applies the “shortcut” method of accounting, available under GAAP, which assumes there is no ineffectiveness in a hedge. As a result, changes recorded in the fair value of the hedged item are equal to the offsetting gain or loss on the derivative and are reflected in the same line item. There was no ineffectiveness recorded for available for sale investment securities, senior notes, or subordinated debt during the years ended December 31, 2009 or 2008.

Derivatives are also designated as cash flow hedges in order to minimize the variability in cash flows of earning assets or forecasted transactions caused by movements in interest or foreign exchange rates. The effective portion of changes in the fair value of such derivatives is recognized in AOCI, a component of stockholders’ equity. When the hedged forecasted transaction impacts earnings, balances in AOCI are reclassified to the same income or expense classification as the hedged item. Northern Trust applies the “shortcut” method of accounting for cash flow hedges of available for sale securities. For cash flow hedges of forecasted foreign currency denominated revenue and expenditure transactions, Northern Trust utilizes the dollar-offset method, a “long-haul” method of accounting under GAAP, 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 December 31, 2009, twenty-three months is the maximum length of time over which the exposure to variability in future cash flows of forecasted foreign currency denominated transactions is being hedged.

 

The following table provides cash flow hedge derivative gains and losses recognized in AOCI and the amounts reclassified to earnings during the year ended December 31, 2009.

 

(In Millions)   FOREIGN EXCHANGE
CONTRACTS
     INTEREST RATE
SWAP CONTRACTS

Net Gain/(Loss) Recognized in AOCI

  $ 8.2       $
                

Net Gain/(Loss) Reclassified from AOCI to Earnings

              

Trust, Investment and Other Servicing Fees

    20.1        

Other Operating Income

    1.5        

Interest Income

    13.6         .2

Interest Expense

    .1        

Compensation

    (35.8     

Employee Benefits

    (10.2     

Equipment and Software Expense

    (.6     

Occupancy Expense

    (5.0     

Other Operating Expense

    (.8     
                

Total

  $ (17.1    $ .2

 

Included in the $16.9 million of net derivative losses reclassified from AOCI during the year ended December 31, 2009 was $3.0 million of net foreign exchange contract losses relating to cash flow hedges of forecasted foreign currency denominated revenue and expenditure transactions that were discontinued as it was no longer considered probable that the original forecasted transactions would occur. It is estimated that a net loss of $1.0 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 Trust’s exposure to variability in the foreign currency translation of net investments in non-U.S. branches and subsidiaries. The effective portion of changes in the fair value of the hedging instrument is recognized in AOCI consistent with the related translation gains and losses. For net investment hedges, all critical terms of the hedged item and the hedging instrument are matched at inception and on an ongoing basis to eliminate hedge ineffectiveness. As a result, no ineffectiveness was recorded for these hedges during the year ended December 31, 2009 or 2008. Amounts recorded in AOCI are reclassified to earnings only upon the sale or liquidation of an investment in a non-U.S. branch or subsidiary.

 

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The following table provides net investment hedge gains and losses recognized in AOCI during the year ended December 31, 2009.

 

(In Millions)   AMOUNT OF HEDGING INSTRUMENT GAIN/(LOSS)
RECOGNIZED IN AOCI (BEFORE TAX)
 

Foreign Exchange Contracts

  $ (63.9

Sterling Denominated Subordinated Debt

    (15.5

Sterling Denominated Senior Debt

    (23.3
         

Total

  $ (102.7

 

Derivatives not formally designated as hedges under GAAP are also entered into to manage the foreign currency risk of non-U.S. dollar denominated assets and liabilities and the credit risk of loans and loan commitments. The following table identifies the types and classifications of risk management derivative instruments not formally designated as hedges, their notional and fair values, and the respective risks addressed.

 

(In Millions)

 

DERIVATIVE INSTRUMENT

 

RISK CLASSIFICATION

  DECEMBER 31, 2009   DECEMBER 31, 2008
     

NOTIONAL
VALUE

  FAIR VALUE  

NOTIONAL
VALUE

  FAIR VALUE
        ASSET   LIABILITY     ASSET   LIABILITY

Commercial Loans and Loan Commitments

                               
  Credit Default Swap Contracts   Credit   $127.0   $   –   $2.2   $235.5   $38.4   $.3

Commercial Loans

  Foreign Exchange Contracts   Foreign Currency   118.7   2.3   .7   129.9   2.4   3.5

Net Investments in
Non-U.S. Affiliates

  Foreign Exchange Contracts   Foreign Currency   66.6   .1   2.3   63.8   5.2   .2
                                 

Total

          312.3   2.4   5.2   429.2   46.0   4.0

 

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 year ended December 31, 2009.

 

(In Millions)   LOCATION OF DERIVATIVE GAIN/(LOSS)
RECOGNIZED IN INCOME
 

AMOUNT RECOGNIZED IN INCOME

 

Credit Default Swap Contracts

  Other Operating Income   $ (4.6

Foreign Exchange Contracts

  Other Operating Income     (6.3
             

Total

      $ (10.9

 

Note 25 – Off-Balance Sheet Financial Instruments

 

Commitments and Letters of Credit. Northern Trust, in the normal course of business, enters into various types of commitments and issues letters of credit to meet the liquidity and credit enhancement needs of its clients. The contractual amounts of these instruments represent the potential credit exposure should the instrument be fully drawn upon and the client default. To control the credit risk associated with entering into commitments and issuing letters of credit, Northern Trust subjects such activities to the same credit quality and monitoring controls as its lending activities.

Commitments and letters of credit consist of the following:

Legally Binding Commitments to Extend Credit generally have fixed expiration dates or other termination clauses. Since a significant portion of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future loans or liquidity requirements.

Commercial Letters of Credit are instruments issued by Northern Trust on behalf of its clients that authorize a third party (the beneficiary) to draw drafts up to a stipulated amount under the specified terms and conditions of the agreement. Commercial letters of credit are issued primarily to facilitate international trade.

 

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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. Northern Trust is obligated to meet the entire financial obligation of these agreements and in certain cases is able to recover the amounts paid through recourse against cash deposits or other participants.

The following table shows the contractual amounts of commitments and letters of credit.

 

COMMITMENTS AND LETTERS OF CREDIT

 

    DECEMBER 31
(In Millions)   2009    2008

Legally Binding Commitments to Extend
Credit*

  $ 25,651.8    $ 25,356.3

Commercial Letters of Credit

    31.2      36.7
              

Standby Letters of Credit:

            

Corporate

    1,191.9      1,136.2

Industrial Revenue

    2,536.7      2,080.7

Other

    1,070.2      808.1
              

Total Standby Letters of Credit**

  $ 4,798.8    $ 4,025.0

* These amounts exclude $1.6 billion and $1.7 billion of commitments participated to others at December 31, 2009 and 2008, respectively.

** These amounts include $618.7 million and $378.1 million of standby letters of credit secured by cash deposits or participated to others as of December 31, 2009 and 2008, respectively. The weighted average maturity of standby letters of credit was 21 months at December 31, 2009 and 25 months at December 31, 2008.

 

Other Off-Balance Sheet Financial Instruments. As part of securities custody activities and at the direction of clients, Northern Trust lends securities owned by clients to borrowers who are reviewed and approved by the Senior Credit Committee. 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 percent of the fair value of the securities plus accrued interest, with revaluation of the collateral on a daily basis. In connection with these activities, Northern Trust has issued certain indemnifications to clients against loss that is a direct result of a borrower’s failure to return securities when due, should the value of such securities exceed the value of the collateral required to be posted. The amount of securities loaned as of December 31, 2009 and 2008 subject to indemnification was $82.3 billion and $82.7 billion, respectively. Because of the credit quality of the borrowers and the requirement to fully collateralize securities borrowed, management believes that the exposure to credit loss from this activity is not significant and, therefore, no liability has been recorded relating to the indemnifications provided.

The Bank is a participating member of various cash, securities, and foreign exchange clearing and settlement organizations such as The Depository Trust Company in New York. It participates in these organizations on behalf of its clients and on its own behalf as a result of its own investment and trading activities. A wide variety of cash and securities transactions are settled through these organizations, including those involving obligations of states and political subdivisions, asset-backed securities, commercial paper, dollar placements, and securities issued by the Government National Mortgage Association.

As a result of its participation in cash, securities, and foreign exchange clearing and settlement organizations, the Bank could be responsible for a pro rata share of certain credit-related losses arising out of the clearing activities. The method in which such losses would be shared by the clearing members is stipulated in each clearing organization’s membership agreement. Credit exposure related to these agreements varies from day to day, primarily as a result of fluctuations in the volume of transactions cleared through the organizations. The estimated credit exposure at December 31, 2009 and 2008 was $77 million and $61 million, respectively, based on the membership agreements and clearing volume for those days. Controls related to these clearing transactions are closely monitored to protect the assets of Northern Trust and its clients.

 

Note 26 – Variable Interest Entities

 

A variable interest entity (VIE) is defined under GAAP as an entity which either has total equity investment that is insufficient to permit the entity to finance its activities without additional subordinated financial support or whose equity investors lack the characteristics of a controlling financial interest (such as the ability to make significant decisions through voting rights or the right to receive the expected residual returns of the entity and the obligation to absorb the expected losses of the entity). Investors that finance a VIE through debt or equity interests, or other counterparties that provide other forms of support, such as guarantees, subordinated fee arrangements, or certain types of derivative contracts, are variable interest holders in the entity.

GAAP requires an entity to disclose its maximum exposure to loss where it has “significant” variable interests in

 

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an unconsolidated VIE. GAAP does not define “significant” and, as such, judgment is required. The variable interest holder, if any, that will absorb a majority of the entity’s expected losses, receive a majority of the entity’s expected residual returns, or both, is deemed to be the primary beneficiary of the VIE and is required to consolidate the VIE. Assessments of variable interests are based on expected losses and residual returns, which consider various scenarios on a probability-weighted basis.

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 (CSAs) with certain of these entities (Funds) which held notes, asset backed securities, and other instruments whose values had been adversely impacted by widening risk premiums and liquidity spreads and significant rating agency downgrades. The Corporation entered into the CSAs to assist the Funds in maintaining net asset values of $1.00 in order to provide financial stability to the Funds and investors in the Funds. The CSAs also allowed the registered funds to hold assets that had fallen to below investment grade, thus avoiding a forced sale in an inactive market.

The estimated fair value of the Corporation’s contingent liability under the agreements as of December 31, 2008 was $314.1 million and was recorded within other liabilities in the consolidated balance sheet. As of December 31, 2009, no liability existed as all CSAs had expired in connection with the final settlements of covered securities. During 2009, final cash payments totaling $204.8 million were made under the CSAs and reductions of other operating expenses totaling $109.3 million were recorded to reflect the difference between the actual cash payments made and the liability as of December 31, 2008.

Under GAAP, the Funds are considered VIEs and the CSAs reflected Northern Trust’s implicit variable interest in the credit risk of the affected Funds. Implicit interests are required to be considered when determining the primary beneficiary of a VIE. The Funds were designed to create and pass to investors interest rate and credit risk. In determining whether Northern Trust was the primary beneficiary of the Funds during the period in which the CSAs were in place, expected loss calculations based on the characteristics of the underlying investments in the Funds were used to estimate the expected losses related to interest rate and credit risk, while also considering the relative rights and obligations of each of the variable interest holders. These analyses concluded that interest rate risk was the primary driver of expected losses within the Funds. As such, Northern Trust determined that it was not the primary beneficiary of the Funds and was not required to consolidate them within its balance sheet.

The fair value of assets held by unconsolidated VIEs where Northern Trust had significant involvement as of December 31, 2008 was $114.2 billion. Northern Trust’s maximum exposure to losses of these entities as a result of its involvement with them via the CSAs was $550.0 million as of December 31, 2008. The Corporation’s significant involvement in these VIEs was discontinued when the CSA agreements expired in November 6, 2009 and as such the Corporation’s maximum exposure to loss as of December 31, 2009 is zero.

 

Note 27 – Pledged and Restricted Assets

 

Certain of Northern Trust’s subsidiaries, as required or permitted by law, pledge assets to secure public and trust deposits, repurchase agreements, FHLB borrowings, and for other purposes. On December 31, 2009, securities and loans totaling $24.1 billion ($13.9 billion of government sponsored agency and other securities, $769.2 million of obligations of states and political subdivisions, and $9.4 billion of loans), were pledged. Collateral required for these purposes totaled $5.1 billion. Included in the total pledged assets are available for sale securities with a total fair value of $1.0 billion which were pledged as collateral for agreements to repurchase securities sold transactions. The secured parties to these transactions have the right to repledge or sell these securities.

Northern Trust is permitted to repledge or sell collateral accepted from agreements to resell securities purchased transactions. The total fair value of accepted collateral as of December 31, 2009 and 2008 was $227.9 million and $32.4 million, respectively. There was no repledged or sold collateral as of December 31, 2009 or 2008.

Deposits maintained to meet Federal Reserve Bank reserve requirements averaged $448.7 million in 2009 and $148.5 million in 2008.

 

Note 28 – Restrictions on Subsidiary Dividends and Loans or Advances

 

Provisions of state and federal banking laws restrict the amount of dividends that can be paid to the Corporation by its banking subsidiaries. Under applicable state and federal laws, no dividends may be paid in an amount greater than the net or undivided profits (as defined) then on hand, subject to

 

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other applicable provisions of law. In addition, prior approval from the relevant federal banking regulator is required if dividends declared by any of the Corporation’s banking subsidiaries in any calendar year will exceed its net profits for that year, combined with its retained net profits for the preceding two years. Based on these regulations, the Corporation’s banking subsidiaries, without regulatory approval, could declare dividends during 2010 equal to their 2010 eligible net profits (as defined) plus $1,312.1 million. The ability of each banking subsidiary to pay dividends to the Corporation may be further restricted as a result of regulatory policies and guidelines relating to dividend payments and capital adequacy.

State and federal laws limit the transfer of funds by a banking subsidiary to the Corporation and certain of its affiliates in the form of loans or extensions of credit, investments or purchases of assets. Transfers of this kind to the Corporation or a nonbanking subsidiary by a banking subsidiary are each limited to 10% of the banking subsidiary’s capital and surplus with respect to each affiliate and to 20% in the aggregate, and are also subject to certain collateral requirements. These transactions, as well as other transactions between a banking subsidiary and the Corporation or its affiliates, must also be on terms substantially the same as, or at least as favorable as, those prevailing at the time for comparable transactions with non-affiliated companies or, in the absence of comparable transactions, on terms, or under circumstances, including credit standards, that would be offered to, or would apply to, non-affiliated companies.

 

Note 29 – Fair Value Measurements

 

Fair value under GAAP is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. GAAP establishes a hierarchy of valuation inputs based on the extent to which the inputs are observable in the marketplace.

 

Fair Value Hierarchy. The following describes the hierarchy of valuation inputs (Levels 1, 2, and 3) used to measure fair value and the primary valuation methodologies used by Northern Trust for financial instruments measured at fair value on a recurring basis. Observable inputs reflect market data obtained from sources independent of the reporting entity; unobservable inputs reflect the entity’s own assumptions about how market participants would value an asset or liability based on the best information available. The standard requires an entity measuring fair value to maximize the use of observable inputs and minimize the use of unobservable inputs and establishes a fair value hierarchy of inputs. Financial instruments are categorized within the hierarchy based on the lowest level input that is significant to their valuation.

Level 1 – Quoted, active market prices for identical assets or liabilities. Northern Trust’s 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.

Level 2 – Observable inputs other than Level 1 prices, such as quoted active market prices for similar assets or liabilities, quoted prices for identical or similar assets in inactive markets, and model-derived valuations in which all significant inputs are observable in active markets. Northern Trust’s Level 2 assets include available for sale and trading account investments 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, interest rate, 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. Northern Trust evaluated the impact of counterparty credit risk and its own credit risk on the valuation of its derivative instruments. Factors considered included the likelihood of default by Northern Trust and its counterparties, the remaining maturities of the instruments, net exposures after giving effect to master netting agreements, available collateral, and other credit enhancements in determining the appropriate fair value of derivative instruments. The resulting valuation adjustments are not considered material. Level 2 other assets represent investments in mutual and collective trust funds held to fund employee benefit and deferred compensation obligations. These investments are valued at the funds’ net asset values.

 

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Level 3 – Valuation techniques in which one or more significant inputs are unobservable in the marketplace. Northern Trust’s Level 3 assets consist of auction rate securities purchased from Northern Trust clients. The lack of activity in the auction rate security market has resulted in a lack of observable market inputs to use in determining fair value. Therefore, Northern Trust incorporated its own assumptions about future cash flows and appropriate discount rates adjusted for credit and liquidity factors. In developing these assumptions, Northern Trust incorporated the contractual terms of the securities, the types of collateral, any credit enhancements available, and relevant market data, where available. Level 3 liabilities include financial guarantees relating to standby letters of credit and a net estimated liability for Visa related indemnifications, discussed further in detail in Notes 25 and 18, respectively. Northern Trust’s recorded liability for standby letters of credit, reflecting the obligation it has undertaken, is measured as the amount of unamortized fees on these instruments. The fair value of the net estimated liability for Visa related indemnifications is based on available market data and significant management judgment. Prior to December 31, 2009, Level 3 liabilities also included CSAs with certain investment funds and asset pools for which Northern Trust acts as investment advisor. These agreements, all of which expired in 2009 in connection with the final settlement of covered securities, were valued using an option pricing model that included prices for securities not actively traded in the marketplace as a significant input.

While Northern Trust believes its valuation methods for its assets and liabilities carried at fair value are appropriate and consistent with other market participants, the use of different methodologies or assumptions, particularly as applied to Level 3 assets and liabilities, could have a material effect on the computation of their estimated fair values.

 

The following presents assets and liabilities measured at fair value on a recurring basis as of December 31, 2009 and 2008, segregated by fair value hierarchy level.

 

   

DECEMBER 31, 2009

(In Millions)   LEVEL 1    LEVEL 2    LEVEL 3    NETTING *     

ASSETS/
LIABILITIES

AT FAIR
VALUE

Securities

                                   

Available for Sale

                                   

U.S. Government

  $ 74.0    $    $    $       $ 74.0

Obligations of States and Political Subdivisions

         47.0                   47.0

Government Sponsored Agency

         12,325.4                   12,325.4

Corporate Debt

         2,822.1                   2,822.1

Residential Mortgage-Backed

         314.0                   314.0

Other Asset-Backed

         1,181.3                   1,181.3

Auction Rate

              427.7              427.7

Other

         270.6                   270.6
                                     

Total

    74.0      16,960.4      427.7              17,462.1
                                     

Trading Account

         9.9                   9.9
                                     

Total

    74.0      16,970.3      427.7              17,472.0
                                     

Other Assets

                                   

Derivatives

         2,292.4           (1,156.0      1,136.4

All Other

    59.9      35.1                   95.0
                                     

Total

    59.9      2,327.5           (1,156.0      1,231.4
                                     

Total Assets at Fair Value

  $ 133.9    $ 19,297.8    $ 427.7    $ (1,156.0    $ 18,703.4
                                     

Other Liabilities

                                   

Derivatives

  $    $ 2,179.4    $    $ (1,133.1    $ 1,046.3

All Other

    3.9           94.4              98.3
                                     

Total Liabilities at Fair Value

  $ 3.9    $ 2,179.4    $ 94.4    $ (1,133.1    $ 1,144.6
                                     

* As permitted under GAAP, Northern Trust has elected to net derivative assets and liabilities when legally enforceable master netting agreements exist. As of December 31, 2009, derivative assets and liabilities have been further reduced by $216.2 million and $193.3 million, respectively, as a result of cash collateral received from and deposited with derivative counterparties.

 

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    DECEMBER 31, 2008
(In Millions)   LEVEL 1    LEVEL 2    LEVEL 3    NETTING *     

ASSETS/
LIABILITIES

AT FAIR
VALUE

Securities

                                   

Available for Sale

                                   

U.S. Government

  $ 19.9    $    $    $       $ 19.9

Obligations of States and Political Subdivisions

         31.6                   31.6

Government Sponsored Agency

         11,261.4                   11,261.4

Corporate Debt

         739.6                   739.6

Residential Mortgage-Backed

         439.3                   439.3

Other Asset-Backed

         1,133.3                   1,133.3

Auction Rate

              453.1              453.1

Other

         336.2                   336.2
                                     

Total

    19.9      13,941.4      453.1              14,414.4
                                     

Trading Account

         2.3                   2.3
                                     

Total

    19.9      13,943.7      453.1              14,416.7
                                     

Other Assets

                                   

Derivatives

         4,968.7           (1,649.0      3,319.7

All Other

    58.5      27.2                   85.7
                                     

Total

    58.5      4,995.9           (1,649.0      3,405.4
                                     

Total Assets at Fair Value

  $ 78.4    $ 18,939.6    $ 453.1    $ (1,649.0    $ 17,822.1
                                     

Other Liabilities

                                   

Derivatives

  $    $ 4,466.5    $ 314.1    $ (1,649.0    $ 3,131.6

All Other

    3.3           104.2              107.5
                                     

Total Liabilities at Fair Value

  $ 3.3    $ 4,466.5    $ 418.3    $ (1,649.0    $ 3,239.1

* As permitted under GAAP, Northern Trust has elected to net derivative assets and liabilities when legally enforceable master netting agreements exist.

 

The following presents the changes in Level 3 assets for the years ended December 31, 2009 and 2008.

 

    SECURITIES AVAILABLE
FOR SALE  (1)
 
(In Millions)   2009      2008  

Fair Value at January 1

  $ 453.1       $   

Total Realized and Unrealized

                

Losses (Gains) Included in Earnings

    (10.3        

Gains (Losses) Included in Other Comprehensive Income

    31.9         (13.9

Purchases, Sales, Issuances, and Settlements, Net

    (47.0      467.0   
                  

Fair Value at December 31

  $  427.7       $ 453.1   

(1) Amounts reflect changes in the fair value of auction rate securities.

 

As discussed in Note 3 – Securities, Auction Rate Securities Purchase Program, Northern Trust purchased certain illiquid auction rate securities from clients which were recorded at their purchase date fair market values and designated as available for sale securities. Subsequent to their purchase, the securities are reported at fair value and unrealized gains and losses are credited or charged, net of the tax effect, to AOCI. As of December 31, 2009 and 2008, the net unrealized gain and loss related to these securities was $18.0 million ($11.4 million net of tax) and $13.9 million ($8.8 million net of tax), respectively. Realized gains of $10.3 million include $7.9 million from redemptions by issuers and $2.4 million from sales of securities. Gains on redemptions and sales are included in interest income and security gains (losses), net, respectively, within the consolidated statement of income.

 

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The following presents the changes in Level 3 liabilities for the years ended December 31, 2009 and 2008.

 

    OTHER LIABILITIES  
    DERIVATIVES  (1)   ALL OTHER  (2)  
(In Millions)   2009      2008   2009      2008  

Fair Value at January 1

  $ 314.1       $   $ 104.2       $ 162.9   

Total Realized and Unrealized (Gains) Losses

                               

Included in Earnings

    (109.3      314.1     (25.8      (83.1

Included in Other Comprehensive Income

                          

Purchases, Sales, Issuances, and Settlements, Net

    (204.8          16.0         24.4   
                                 

Fair Value at December 31

  $       $ 314.1   $ 94.4       $ 104.2   

Unrealized Gains (Losses) Included in Earnings Related to Financial Instruments Held at
December 31

  $       $ 314.1   $       $   

(1) Balance represents the fair value of Capital Support Agreements (Refer to Note 26).

(2) Balance represents standby letters of credit and the net estimated liability for Visa related indemnifications (Refer to Notes 25 and 18).

 

All realized and unrealized gains and losses related to Level 3 liabilities are included in other operating income or other operating expenses with the exception of charges related to the Visa indemnification liability, which have been presented separately in the consolidated statement of income.

Carrying values of assets and liabilities that are not measured at fair value on a recurring basis may be adjusted to fair value in periods subsequent to their initial recognition, for example, to record an impairment of an asset. GAAP requires entities to separately disclose these fair value measurements and to classify them under the fair value hierarchy. During the year ended December 31, 2009, Northern Trust provided an additional $37.3 million in specific reserves to adjust impaired loans held at December 31, 2009 to their total estimated fair value of $50.8 million. Northern Trust also charged $.3 million through other operating expenses to reduce the value of OREO properties held at December 31, 2009 to their total estimated fair value of $.4 million. The fair value of loan collateral and OREO were supported by third party appraisals, discounted to reflect management’s judgment as to the realizable value of the collateral and the real estate. The fair value measurements of these impaired loans and OREO are classified as Level 3.

 

Fair Value of Financial Instruments. GAAP requires disclosure of the estimated fair value of certain financial instruments and the methods and significant assumptions used to estimate fair value. It excludes from its scope nonfinancial assets and liabilities, as well as a wide range of franchise, relationship, and intangible values that add value to Northern Trust. Accordingly, the fair value disclosures presented below provide only a partial estimate of the fair value of Northern Trust. Financial instruments recorded at fair value on Northern Trust’s consolidated balance sheet are discussed above. The following methods and assumptions were used in estimating the fair values of financial instruments that are not carried at fair value.

Held to Maturity Securities. The fair values of held to maturity securities 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.

Loans (excluding lease receivables). The fair values of one-to-four family residential mortgages were based on quoted market prices of similar loans sold, adjusted for differences in loan characteristics. The fair values of the remainder of the loan portfolio were estimated using a discounted cash flow method in which the interest component of the discount rate used was the rate at which Northern Trust would have originated the loan had it been originated as of the date of the consolidated financial statements. The fair values of all loans were adjusted to reflect current assessments of loan collectibility.

Savings Certificates, Other Time, and Non-U.S. Offices Interest-Bearing Deposits. The fair values of these instruments were estimated using a discounted cash flow method that incorporated market interest rates.

Senior Notes, Subordinated Debt, Federal Home Loan Bank Borrowings, and Floating Rate Capital Debt. Fair values were based on quoted market prices, when available. If quoted market prices were not available, fair values were based on quoted market prices for comparable instruments.

Loan Commitments. The fair values of loan commitments represent the amount of unamortized fees on these instruments.

 

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Financial Instruments Valued at Carrying Value. Due to their short maturity, the carrying values of certain financial instruments approximated their fair values. These financial instruments include cash and due from banks; money market assets (includes federal funds sold and securities purchased under agreements to resell, time deposits with banks, and federal reserve deposits and other interest-bearing assets); client security settlement receivables; federal funds purchased; securities sold under agreements to repurchase; and other borrowings (includes Treasury Investment Program balances, term federal funds purchased, and other short-term borrowings). Under GAAP, the fair values required to be disclosed for demand, noninterest-bearing, savings, and money market deposits must equal the amounts disclosed in the consolidated balance sheet, even though such deposits are typically priced at a premium in banking industry consolidations.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The following table summarizes the fair values of financial instruments.

 

    DECEMBER 31
    2009    2008
(In Millions)   BOOK VALUE    FAIR VALUE    BOOK VALUE    FAIR VALUE

ASSETS

                          

Cash and Due from Banks

  $ 2,491.8    $ 2,491.8    $ 2,648.2    $ 2,648.2

Money Market Assets

    28,128.2      28,128.2      26,293.8      26,293.8

Securities:

                          

Available for Sale

    17,462.1      17,462.1      14,414.4      14,414.4

Held to Maturity

    1,161.4      1,185.7      1,154.1      1,156.1

Trading Account

    9.9      9.9      2.3      2.3

Loans (excluding Leases)

                          

Held for Investment

    26,497.0      26,539.1      29,378.4      29,506.0

Held for Sale

    4.2      4.2      7.3      7.3

Client Security Settlement Receivables

    794.8      794.8      709.3      709.3

LIABILITIES

                          

Deposits:

                          

Demand, Noninterest-Bearing, Savings and Money Market

    26,527.3      26,527.3      23,758.5      23,758.5

Savings Certificates, Other Time and Non-U.S. Offices Interest-Bearing

    31,754.0      31,783.6      38,647.9      38,676.4

Federal Funds Purchased

    6,649.8      6,649.8      1,783.5      1,783.5

Securities Sold under Agreements to Repurchase

    1,037.5      1,037.5      1,529.1      1,529.1

Other Borrowings

    2,078.3      2,078.3      736.7      736.7

Senior Notes

    1,551.8      1,611.3      1,052.6      998.4

Long Term Debt:

                          

Subordinated Debt

    1,132.5      1,150.6      1,365.7      1,277.6

Federal Home Loan Bank Borrowings

    1,697.5      1,792.6      1,917.7      1,942.2

Floating Rate Capital Debt

    276.8      159.4      276.7      208.8

Financial Guarantees

    94.4      94.4      418.3      418.3

Loan Commitments

    28.4      28.4      19.9      19.9

DERIVATIVE INSTRUMENTS

                          

Asset/Liability Management:

                          

Foreign Exchange Contracts

                          

Assets

    46.1      46.1      102.9      102.9

Liabilities

    51.0      51.0      121.8      121.8

Interest Rate Swap Contracts

                          

Assets

    98.8      98.8      170.2      170.2

Liabilities

    4.2      4.2      31.8      31.8

Credit Default Swaps

                          

Assets

              38.4      38.4

Liabilities

    2.2      2.2      .3      .3

Client-Related and Trading:

                          

Foreign Exchange Contracts

                          

Assets

    2,032.2      2,032.2      2,931.8      2,931.8

Liabilities

    2,008.5      2,008.5      2,591.1      2,591.1

Interest Rate Swap Contracts

                          

Assets

    114.9      114.9      190.7      190.7

Liabilities

    113.1      113.1      184.9      184.9

Interest Rate Option Contracts

                          

Assets

    .4      .4      .3      .3

Liabilities

    .4      .4      .3      .3

 

 

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Note 30 – Business Units and Related Information

 

Information regarding the Corporation’s major business units is contained in the Results of Operations tables included in the section titled “Business Unit Reporting” beginning on page 32 and is incorporated herein by reference.

Northern Trust’s international activities are centered in the global custody, treasury activities, foreign exchange, asset servicing, asset management, and commercial banking businesses. The operations of Northern Trust are managed on a business unit basis and include components of both U.S and non-U.S. source income and assets. Non-U.S. source income and assets are not separately identified in Northern Trust’s internal management reporting system. However, Northern Trust is required to disclose non-U.S. activities based on the domicile of the customer. Due to the complex and integrated nature of Northern Trust’s activities, it is impossible to segregate with precision revenues, expenses and assets between U.S. and non-U.S. domiciled customers. Therefore, certain subjective estimates and assumptions have been made to allocate revenues, expenses and assets between U.S. and non-U.S. operations.

For purposes of this disclosure, all foreign exchange trading income has been allocated to non-U.S. operations. Interest expense is allocated to non-U.S. operations based on specifically matched or pooled funding. Allocations of indirect noninterest expenses related to non-U.S. activities are not significant, but when made, are based on various methods such as time, space, and number of employees.

 

The table below summarizes international performance based on the allocation process described above without regard to guarantors or the location of collateral. The U.S. performance includes the impacts of benefits totaling $17.8 million recorded in 2009 with regards to a reduction in the Visa indemnification liability, $244.0 million recorded in 2008 in connection with Visa’s initial public offering and $150 million of pre-tax charges recorded in 2007 for accruals related to certain indemnifications of Visa, as discussed in further detail in Note 18 – Visa Membership.

 

DISTRIBUTION OF TOTAL ASSETS AND OPERATING PERFORMANCE

 

(In Millions)   TOTAL
ASSETS
  

TOTAL

REVENUE*

   INCOME BEFORE
INCOME TAXES
   NET INCOME

2009

                          

Non-U.S.

  $ 19,253.2    $ 1,086.9    $ 445.4    $ 305.8

U.S.

    62,888.3      2,700.0      809.8      558.4
                            

Total

  $ 82,141.5    $ 3,786.9    $ 1,255.2    $ 864.2
                            

2008

                          

Non-U.S.

  $ 24,433.0    $ 1,598.6    $ 842.2    $ 534.9

U.S.

    57,620.6      2,679.9      433.5      259.9
                            

Total

  $ 82,053.6    $ 4,278.5    $ 1,275.7    $ 794.8
                            

2007

                          

Non-U.S.

  $ 25,209.9    $ 1,183.5    $ 577.5    $ 378.4

U.S.

    42,401.3      2,325.5      483.3      348.5
                            

Total

  $ 67,611.2    $ 3,509.0    $ 1,060.8    $ 726.9

* Revenue is comprised of net interest income and noninterest income.

 

Note 31 – Regulatory Capital Requirements

 

Northern Trust and its U.S. subsidiary banks are subject to various regulatory capital requirements administered by the federal bank regulatory authorities. Under these requirements, banks must maintain specific ratios of total and tier 1 capital to risk-weighted assets and of tier 1 capital to average quarterly assets in order to be classified as “well capitalized.” The regulatory capital requirements impose certain restrictions upon banks that meet minimum capital requirements but are not “well capitalized” and obligate the federal bank regulatory authorities to take “prompt corrective action” with respect to banks that do not maintain such minimum ratios. Such prompt corrective action could have a direct material effect on a bank’s financial statements.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

As of December 31, 2009, each of Northern Trust’s U.S. subsidiary banks had capital ratios above the level required for classification as a “well capitalized” institution and had not received any regulatory notification of a lower classification. Additionally, Northern Trust’s subsidiary banks located outside the U.S. are subject to regulatory capital requirements in the jurisdictions in which they operate. As of December 31, 2009, each of Northern Trust’s non-U.S. banking subsidiaries had capital ratios above their specified minimum requirements. There are no conditions or events since December 31, 2009 that management believes have adversely affected the capital categorization of any Northern Trust subsidiary bank.

 

The table below summarizes the risk-based capital amounts and ratios for Northern Trust and for each of its U.S. subsidiary banks whose net income for 2009 or 2008 exceeded 10% of the consolidated total.

 

    ACTUAL     MINIMUM TO
QUALIFY AS
WELL CAPITALIZED
 
($ In Millions)   AMOUNT    RATIO     AMOUNT    RATIO  

AS OF DECEMBER 31, 2009

                         

Total Capital to Risk-Weighted Assets

                         

Consolidated

  $ 7,711    15.8   $ 4,878    10.0

The Northern Trust Company

    6,044    16.1        3,751    10.0   

Northern Trust, NA

    1,170    11.0        1,061    10.0   

Tier 1 Capital to Risk-Weighted Assets

                         

Consolidated

    6,522    13.4        2,927    6.0   

The Northern Trust Company

    4,756    12.7        2,250    6.0   

Northern Trust, NA

    1,010    9.5        637    6.0   

Tier 1 Capital (to Fourth Quarter Average Assets)

                         

Consolidated

    6,522    8.8        3,725    5.0   

The Northern Trust Company

    4,756    7.7        3,073    5.0   

Northern Trust, NA

    1,010    8.2        615    5.0   

AS OF DECEMBER 31, 2008

                         

Total Capital to Risk-Weighted Assets

                         

Consolidated

  $ 7,869    15.4   $ 5,125    10.0

The Northern Trust Company

    5,673    14.1        4,034    10.0   

Northern Trust, NA

    1,109    10.9        1,020    10.0   

Tier 1 Capital to Risk-Weighted Assets

                         

Consolidated

    6,703    13.1        3,075    6.0   

The Northern Trust Company

    4,385    10.9        2,421    6.0   

Northern Trust, NA

    976    9.6        612    6.0   

Tier 1 Capital (to Fourth Quarter Average Assets)

                         

Consolidated

    6,703    8.5        3,945    5.0   

The Northern Trust Company

    4,385    6.4        3,403    5.0   

Northern Trust, NA

    976    8.6        568    5.0   

 

The bank regulatory authorities of several nations, individually but in coordination with the Basel Committee on Banking Supervision (Basel Committee), have enacted changes to the risk-based capital adequacy framework that affect the capital guidelines applicable to financial holding companies and banks. The Basel Committee published the latest agreed upon version of the new Basel Capital Accord (BCA) in November 2005. U.S. regulatory agencies have issued final rules related to implementation of the BCA in the United States. The rules became effective April 1, 2008 and require the completion, within thirty-six months of the effective date, of a four-quarter parallel run under both the new and current capital rules. Transitional arrangements are effective for at least three years following the completion of the four-quarter parallel run, during which minimum regulatory capital requirements are subject to floors tied to the current capital rules. Northern Trust has for several years been preparing to comply with the advanced approaches of the BCA framework for calculating risk-based capital related to credit risk and operational risk and has established a program management office to oversee implementation across the Corporation.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 32 – Northern Trust Corporation (Corporation only)

 

Condensed financial information is presented below. Investments in wholly-owned subsidiaries are carried on the equity method of accounting.

 

CONDENSED BALANCE SHEET

 

    DECEMBER 31  
(In Millions)   2009      2008  

ASSETS

                

Cash on Deposit with Subsidiary Bank

  $ 6.5       $ 22.5   

Time Deposits with Subsidiary Banks

    1,484.0         1,216.0   

Securities

    10.1         410.1   

Advances to Wholly-Owned Subsidiaries  – Banks

    285.0         285.0   

                                                                            – Nonbank

    5.0         5.0   

Investments in Wholly-Owned Subsidiaries  – Banks

    5,959.9         5,408.6   

                                                                                – Nonbank

    128.7         111.5   

Buildings and Equipment

    3.4         3.4   

Other Assets

    371.9         658.0   
                  

Total Assets

  $ 8,254.5       $ 8,120.1   
                  

LIABILITIES

                

Long-Term Debt

  $ 1,390.5       $ 906.8   

Floating Rate Capital Debt

    276.8         276.7   

Other Liabilities

    275.1         547.2   
                  

Total Liabilities

    1,942.4         1,730.7   

STOCKHOLDERS’ EQUITY

                

Preferred Stock – Series B (Net of discount of $74.7 in 2008)

            1,501.3   

Common Stock

    408.6         379.8   

Additional Paid-in Capital

    888.3         178.5   

Retained Earnings

    5,576.0         5,091.2   

Accumulated Other Comprehensive Income

    (361.6      (494.9

Treasury Stock

    (199.2      (266.5
                  

Total Stockholders’ Equity

    6,312.1         6,389.4   
                  

Total Liabilities and Stockholders’ Equity

  $ 8,254.5       $ 8,120.1   

 

CONDENSED STATEMENT OF INCOME

 

    FOR THE YEAR ENDED
DECEMBER 31
 
(In Millions)   2009      2008      2007  

OPERATING INCOME

                         

Dividends – Bank Subsidiaries

  $ 410.0       $ 30.0       $ 308.0   

                         – Nonbank Subsidiaries

    25.6         56.4         65.9   

Intercompany Interest and Other Charges

    10.1         39.3         17.2   

Interest and Other Income

    13.7         (13.2      6.5   
                           

Total Operating Income

    459.4         112.5         397.6   

OPERATING EXPENSES

                         

Interest Expense

    45.7         39.1         31.8   

Other Operating Expenses

    (93.2      367.8         13.2   
                           

Total Operating Expenses

    (47.5      406.9         45.0   
                           

Income (Loss) before Income Taxes and Equity in Undistributed Net Income of Subsidiaries

    506.9         (294.4      352.6   

Benefit (Expense) for Income Taxes

    (25.0      160.2         18.3   
                           

Income (Loss) before Equity in Undistributed Net Income of Subsidiaries

    481.9         (134.2      370.9   

Equity in Undistributed Net Income of Subsidiaries – Banks

    364.7         918.7         364.5   

                                                                                             – Nonbank

    17.6         10.3         (8.5
                           

Net Income

  $ 864.2       $ 794.8       $ 726.9   
                           

Net Income Applicable to Common Stock

  $ 753.1       $ 782.8       $ 726.9   

 

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CONDENSED STATEMENT OF CASH FLOWS

 

    FOR THE YEAR ENDED
DECEMBER 31
 
(In Millions)   2009      2008      2007  

OPERATING ACTIVITIES:

                         

Net Income

  $ 864.2       $ 794.8       $ 726.9   

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

                         

Equity in Undistributed Net Income of Subsidiaries

    (382.2      (929.0      (356.0

Decrease in Prepaid Expenses

    2.0         1.4         .3   

Client Support-Related Charges (Benefit)

    (109.3      320.3           

Capital Support Agreement Payments

    (204.8                

Excess Tax Benefits from Stock Incentive Plans

    (4.2      (35.0      (45.1

Increase (Decrease) in Accrued Income Taxes

    283.6         (290.5      (8.8

Other, net

    24.6         112.9         61.1   
                           

Net Cash (Used in) Provided by Operating Activities

    473.9         (25.1      378.4   
                           

INVESTING ACTIVITIES:

                         

Net Increase in Time Deposits with Banks

    (268.0      (830.2      (138.0

Purchases of Securities – Available for Sale

            (468.9        

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

    411.8                 9.8   

Net Increase in Capital Investments in Subsidiaries

    (42.0      (521.3      (3.6

Advances to Wholly-Owned Subsidiaries

            (10.0      (280.0

Other, net

    (7.9      11.1         7.5   
                           

Net Cash Provided by (Used in) Investing Activities

    93.9         (1,819.3      (404.3
                           

FINANCING ACTIVITIES:

                         

Net Increase in Senior Notes

    500.0         396.9         199.6   

Proceeds from Common Stock Issuance

    834.1                   

Proceeds from Preferred Stock – Series B and Warrant to Purchase Common Stock

            1,576.0           

Redemption of Preferred Stock – Series B

    (1,576.0                

Cash Dividends Paid on Preferred Stock

    (46.6                

Repurchase of Warrant to Purchase Common Stock

    (87.0                

Treasury Stock Purchased

    (10.7      (68.3      (213.0

Cash Dividends Paid on Common Stock

    (260.3      (247.7      (219.5

Net Proceeds from Stock Options

    38.9         161.9         204.8   

Excess Tax Benefits from Stock Incentive Plans

    4.2         35.0         45.1   

Other, net

    19.6         12.9         8.8   
                           

Net Cash Provided by (Used in) Financing Activities

    (583.8      1,866.7         25.8   
                           

Net Change in Cash on Deposit with Subsidiary Bank

    (16.0      22.3         (.1

Cash on Deposit with Subsidiary Bank at Beginning of Year

    22.5         .2         .3   
                           

Cash on Deposit with Subsidiary Bank at End of Year

  $ 6.5       $ 22.5       $ .2   

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF NORTHERN TRUST CORPORATION:

We have audited the accompanying consolidated balance sheets of Northern Trust Corporation and subsidiaries (Northern Trust) as of December 31, 2009 and 2008, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2009. These consolidated financial statements are the responsibility of Northern Trust’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Northern Trust Corporation and subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Northern Trust Corporation’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 26, 2010 expressed an unqualified opinion on the effectiveness of Northern Trust Corporation’s internal control over financial reporting.

 

LOGO

 

CHICAGO , ILLINOIS

FEBRUARY 26, 2010

 

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CONSOLIDATED FINANCIAL STATISTICS

 

AVERAGE STATEMENT OF CONDITION WITH ANALYSIS OF NET INTEREST INCOME

 

(INTEREST AND RATE ON A TAXABLE EQUIVALENT BASIS)   2009      2008  
($ In Millions)   INTEREST    AVERAGE
BALANCE
     RATE      INTEREST   

AVERAGE

BALANCE

     RATE  

AVERAGE EARNING ASSETS

                                            

Money Market Assets

                                            

Federal Funds Sold and Resell Agreements

  $ .7    $ 375.7       .21    $ 37.2    $ 1,569.8       2.37

Time Deposits with Banks

    209.6      15,359.9       1.36         888.2      21,451.9       4.14   

Federal Reserve Deposits and Other Interest-Bearing

    11.6      4,880.2       .24         9.3      1,538.5       .60   
                                              

Total Money Market Assets

    221.9      20,615.8       1.08         934.7      24,560.2       3.81   
                                              

Securities

                                            

U.S. Government

    .2      41.8       .50         .4      19.2       2.08   

Obligations of States and Political Subdivisions

    53.5      817.5       6.55         56.0      838.2       6.68   

Government Sponsored Agency

    147.7      11,900.4       1.24         243.1      8,655.7       2.81   

Other

    76.0      4,598.1       1.65         95.2      2,773.9       3.43   
                                              

Total Securities

    277.4      17,357.8       1.60         394.7      12,287.0       3.21   
                                              

Loans and Leases

    946.9      28,697.2       3.30         1,198.9      27,402.7       4.38   
                                              

Total Earning Assets

    1,446.2      66,670.8       2.17      2,528.3      64,249.9       3.94
                                              

Reserve for Credit Losses Assigned to Loans and Leases

         (275.0                 (170.0      

Cash and Due from Banks

         2,535.8                    3,236.8         

Other Assets

         5,382.6                    5,711.8         
                                              

Total Assets

       $ 74,314.2                  $ 73,028.5         
                                              

AVERAGE SOURCE OF FUNDS

                                            

Deposits

                                            

Savings and Money Market

  $ 53.7    $ 11,162.4       .48    $ 137.9    $ 7,786.5       1.77

Savings Certificates

    56.9      2,777.3       2.05         72.0      2,124.3       3.39   

Other Time

    16.3      1,101.8       1.48         20.2      615.3       3.28   

Non-U.S. Offices Time

    80.1      27,157.6       .29         885.9      35,958.2       2.46   
                                              

Total Interest-Bearing Deposits

    207.0      42,199.1       .49         1,116.0      46,484.3       2.40   

Short-Term Borrowings

    11.0      6,748.7       .16         77.4      4,609.0       1.68   

Senior Notes

    44.0      1,388.6       3.17         38.6      804.1       4.80   

Long-Term Debt

    139.9      3,058.5       4.57         155.8      2,999.9       5.19   

Floating Rate Capital Debt

    4.3      276.7       1.54         11.6      276.6       4.19   
                                              

Total Interest-Related Funds

    406.2      53,671.6       .76         1,399.4      55,173.9       2.54   
                                              

Interest Rate Spread

               1.41                    1.40   

Noninterest-Bearing Deposits

         11,026.9                    8,814.8         

Other Liabilities

         3,011.6                    3,933.6         

Stockholders’ Equity

         6,604.1                    5,106.2         
                                              

Total Liabilities and Stockholders’ Equity

       $ 74,314.2                  $ 73,028.5         
                                              

Net Interest Income/Margin (FTE Adjusted)

  $ 1,040.0            1.56    $ 1,128.9            1.76
                                              

Net Interest Income/Margin (Unadjusted)

  $ 999.8            1.50    $ 1,079.1            1.68
                                              

Net Interest Income/Margin Components

                                            

U.S.

  $ 859.8    $ 49,270.9       1.75    $ 762.2    $ 41,740.7       1.83

Non-U.S.

    180.2      17,399.9       1.04         366.7      22,509.2       1.63   
                                              

Consolidated

  $ 1,040.0    $ 66,670.8       1.56    $ 1,128.9    $ 64,249.9       1.76

Notes – Average balance includes nonaccrual loans.

– Total interest income includes adjustments on loans and securities to a taxable equivalent basis. Such adjustments are based on the U.S. federal income tax rate (35%) and State of Illinois income tax rate (7.30%). Lease financing receivable balances are reduced by deferred income. Total taxable equivalent interest adjustments amounted to $40.2 million in 2009, $49.8 million in 2008, $62.5 million in 2007, $64.8 million in 2006, and $60.9 million in 2005.

 

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Table of Contents

CONSOLIDATED FINANCIAL STATISTICS

 

 

2007     2006     2005  
INTEREST    AVERAGE
BALANCE
     RATE     INTEREST    AVERAGE
BALANCE
     RATE     INTEREST    AVERAGE
BALANCE
     RATE  
                                                               
                                                               
$ 67.6    $ 1,330.6       5.08   $ 45.8    $ 916.4       5.00   $ 36.4    $ 1,098.0       3.32
  776.7      16,797.3       4.62        481.2      12,716.9       3.78        341.3      10,664.5       3.20   
  1.2      21.3       5.50        1.4      29.9       4.52        1.0      39.2       2.44   
                                                               
  845.5      18,149.2       4.66        528.4      13,663.2       3.87        378.7      11,801.7       3.21   
                                                               
                                                               
  6.8      124.3       5.46        9.2      180.9       5.07        .8      27.6       2.91   
  59.0      883.7       6.68        60.4      900.8       6.71        63.8      926.3       6.89   
  525.4      9,740.2       5.39        491.6      9,612.0       5.11        256.5      7,522.4       3.41   
  87.7      1,711.2       5.13        57.6      1,109.4       5.20        59.2      1,422.1       4.15   
                                                               
  678.9      12,459.4       5.45        618.8      11,803.1       5.24        380.3      9,898.4       3.84   
                                                               
  1,322.3      22,817.8       5.80        1,167.3      20,528.5       5.69        913.9      18,754.0       4.87   
                                                               
  2,846.7      53,426.4       5.33     2,314.5      45,994.8       5.03     1,672.9      40,454.1       4.14
                                                               
       (140.2                (132.0                (129.4      
       3,026.9                   3,667.4                   2,199.4         
       4,274.9                   3,575.7                   3,450.0         
                                                               
     $ 60,588.0                 $ 53,105.9                 $ 45,974.1         
                                                               
                                                               
                                                               
$ 236.5    $ 7,016.4       3.37   $ 188.1    $ 6,602.4       2.85   $ 122.9    $ 7,238.9       1.70
  95.6      2,019.8       4.73        71.4      1,693.7       4.21        45.7      1,510.7       3.03   
  24.5      518.1       4.74        17.9      419.8       4.28        10.5      379.5       2.78   
  1,206.8      28,587.8       4.22        807.3      21,853.1       3.69        449.4      17,125.4       2.62   
                                                               
  1,563.4      38,142.1       4.10        1,084.7      30,569.0       3.55        628.5      26,254.5       2.39   
  191.5      4,321.5       4.43        236.3      6,536.4       3.62        120.6      4,520.3       2.67   
  26.7      478.6       5.58        16.5      364.8       4.52        11.7      257.9       4.53   
  141.0      2,504.0       5.63        152.6      2,663.4       5.73        166.6      2,889.6       5.77   
  16.2      276.5       5.88        14.9      276.4       5.40        10.9      276.4       3.95   
                                                               
  1,938.8      45,722.7       4.24        1,505.0      40,410.0       3.72        938.3      34,198.7       2.74   
                                                               
             1.09                   1.31                   1.40   
       7,648.4                   6,389.2                   5,847.3         
       3,052.7                   2,520.0                   2,493.3         
       4,164.2                   3,786.7                   3,434.8         
                                                               
     $ 60,588.0                 $ 53,105.9                 $ 45,974.1         
                                                               
$ 907.9            1.70   $ 809.5            1.76   $ 734.6            1.82
                                                               
$ 845.4            1.58   $ 744.7            1.62   $ 673.7            1.67
                                                               
                                                               
$ 749.5    $ 35,472.3       2.11   $ 713.0    $ 31,826.3       2.24   $ 656.7    $ 28,680.6       2.29
  158.4      17,954.1       .88        96.5      14,168.5       .68        77.9      11,773.5       .66   
                                                               
$ 907.9    $ 53,426.4       1.70   $ 809.5    $ 45,994.8       1.76   $ 734.6    $ 40,454.1       1.82

 

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CONSOLIDATED FINANCIAL STATISTICS

 

QUARTERLY FINANCIAL DATA [UNAUDITED]

 

STATEMENT OF INCOME   2009      2008  
($ In Millions Except Per Share Information)  

FOURTH

QUARTER

   

THIRD

QUARTER

    SECOND
QUARTER
    FIRST
QUARTER
     FOURTH
QUARTER
   

THIRD

QUARTER

   

SECOND

QUARTER

   

FIRST

QUARTER

 

Trust, Investment and Other Servicing Fees

  $ 548.6      523.1      601.4      410.7       $ 488.1      474.9      645.1      526.8   

Other Noninterest Income

    157.6      156.3      183.6      205.8         313.3      197.9      200.2      353.1   

Net Interest Income

                                                    

Interest Income

    324.3      333.2      354.7      393.8         571.6      640.9      588.9      677.1   

Interest Expense

    90.1      94.9      104.5      116.7         235.5      387.5      352.8      423.6   
                                                      

Net Interest Income

    234.2      238.3      250.2      277.1         336.1      253.4      236.1      253.5   

Provision for Credit Losses

    40.0      60.0      60.0      55.0         60.0      25.0      10.0      20.0   

Noninterest Expenses

    621.3      599.2      502.7      593.5         555.2      1,154.0      643.3      535.3   

Provision (Benefit) for Income Taxes

    78.8      70.6      158.3      83.3         180.0      (104.5   212.5      192.9   
                                                      

Net Income (Loss)

    200.3      187.9      314.2      161.8         342.3      (148.3   215.6      385.2   
                                                      

Net Income Applicable to Common Stock

    200.3      187.9      226.1      138.8         330.3      (148.3   215.6      385.2   
                                                      
   

PER COMMON SHARE

                                                    

Net Income – Basic

  $ .82      .77      .95      .62       $ 1.47      (.66   .97      1.73   

                        – Diluted

    .82      .77      .95      .61         1.47      (.66   .96      1.71   
   

AVERAGE BALANCE SHEET ASSETS

                                                    

Cash and Due from Banks

  $ 2,655.9      2,501.7      2,679.7      2,302.3       $ 2,076.7      3,010.0      4,080.2      3,516.2   

Money Market Assets

    22,192.6      18,273.5      19,083.1      22,948.1         24,887.3      24,812.0      24,238.5      24,576.2   

Securities

    17,517.7      17,614.8      17,515.3      16,772.3         14,257.9      12,803.0      11,770.2      10,289.4   

Loans and Leases

    27,830.6      28,209.9      29,049.1      29,725.3         30,227.8      27,704.9      26,866.2      24,777.5   

Reserve for Credit Losses Assigned to Loans

    (301.1   (294.7   (274.5   (228.8      (192.8   (173.9   (164.7   (148.2

Other Assets

    5,061.7      4,902.1      5,744.3      5,836.3         8,098.1      5,161.4      4,486.2      5,081.3   
                                                      

Total Assets

  $ 74,957.4      71,207.3      73,797.0      77,355.5       $ 79,355.0      73,317.4      71,276.6      68,092.4   
   

LIABILITIES AND STOCKHOLDERS’ EQUITY

                                                    

Deposits

                                                    

Demand and Other Noninterest-Bearing

  $ 7,580.4      7,563.6      8,938.5      9,745.9       $ 6,996.7      5,048.2      4,826.5      4,917.4   

Savings and Other Interest-Bearing

    14,838.4      14,528.8      14,014.8      12,342.7         10,481.9      9,800.0      9,795.1      9,561.2   

Other Time

    1,316.8      1,235.0      1,011.2      837.6         770.3      604.0      557.3      527.8   

Non-U.S. Offices

    28,960.6      27,662.4      29,181.2      33,208.1         37,913.4      41,537.8      40,064.3      37,766.1   
                                                      

Total Deposits

    52,696.2      50,989.8      53,145.7      56,134.3         56,162.3      56,990.0      55,243.2      52,772.5   

Short-Term Borrowings

    8,577.6      6,415.6      5,353.3      6,630.9         6,659.4      3,337.7      4,682.2      3,748.2   

Senior Notes

    1,560.3      1,556.2      1,386.1      1,044.1         1,037.9      861.9      655.7      657.8   

Long-Term Debt

    2,860.0      2,989.9      3,138.7      3,250.4         3,264.3      3,279.3      2,762.4      2,687.6   

Floating Rate Capital Debt

    276.8      276.7      276.7      276.7         276.7      276.6      276.6      276.6   

Other Liabilities

    2,632.1      2,716.9      3,365.3      3,343.2         6,109.1      3,494.0      2,769.6      3,343.0   

Stockholders’ Equity

    6,354.4      6,262.2      7,131.2      6,675.9         5,845.3      5,077.9      4,886.9      4,606.7   
                                                      

Total Liabilities and Stockholders’ Equity

    74,957.4      71,207.3      73,797.0      77,355.5       $ 79,355.0      73,317.4      71,276.6      68,092.4   
   

ANALYSIS OF NET INTEREST INCOME

                                                    

Earning Assets

  $ 67,540.9      64,098.2      65,647.5      69,445.7       $ 69,373.0      65,319.9      62,874.9      59,643.1   

Interest-Related Funds

    55,945.3      52,497.4      51,303.8      54,941.8         57,663.5      56,865.4      54,621.6      51,499.1   

Noninterest-Related Funds

    11,595.6      11,600.8      14,343.7      14,503.9         11,709.5      8,454.5      8,253.3      8,144.0   

Net Interest Income (Taxable equivalent)

    244.0      248.2      260.1      287.7         348.3      265.7      248.8      266.1   

Net Interest Margin (Taxable equivalent)

    1.43   1.54      1.59      1.68         2.00   1.62      1.59      1.79   
   

COMMON STOCK DIVIDEND AND MARKET PRICE

                                                    

Dividends

    .28      .28      .28      .28         .28      .28      .28      .28   

Market Price Range – High

    60.84      62.35      66.08      65.64         74.34      88.92      78.00      77.13   

                                – Low

    46.72      52.01      49.78      43.32         33.88      47.89      64.90      62.54   

Note: The common stock of Northern Trust Corporation is traded on the Nasdaq Stock Market under the symbol NTRS.

 

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SENIOR OFFICERS

 

NORTHERN TRUST CORPORATION

THE NORTHERN TRUST COMPANY

 

Management Group

 

Frederick H. Waddell

Chairman, President and

Chief Executive Officer

 

Sherry S. Barrat

President –

Personal Financial Services

 

Steven L. Fradkin

President –

Corporate & Institutional Services

 

Timothy P. Moen

Executive Vice President

Human Resources and Administration

 

William L. Morrison

Executive Vice President

Chief Financial Officer

 

Stephen N. Potter

President –

Northern Trust Global Investments

 

Jana R. Schreuder

President –

Operations & Technology

 

Joyce M. St. Clair

Executive Vice President

Head of Corporate Risk Management

 

Kelly R. Welsh

Executive Vice President

General Counsel

NORTHERN TRUST CORPORATION

 

Other Senior Officers

 

Aileen B. Blake

Executive Vice President

Controller

 

Robert P. Browne

Executive Vice President

Chief Investment Officer

 

Caroline E. Devlin

Senior Vice President

Head of Corporate Strategy

 

William R. Dodds, Jr.

Executive Vice President

Treasurer

 

Rose A. Ellis

Corporate Secretary

Assistant General Counsel

 

Beverly J. Fleming

Senior Vice President

Director of Investor Relations

 

Connie L. Lindsey

Executive Vice President

Corporate Social Responsibility

 

Saverio Mirarchi

Senior Vice President

Chief Compliance and Ethics Officer

 

Dan E. Phelps

Executive Vice President

General Auditor

 

Mark J. Van Grinsven

Executive Vice President

Credit Policy

THE NORTHERN TRUST COMPANY

 

Other Executive Vice Presidents

 

Penelope J. Biggs

David C. Blowers

Stephen Bowman

Peter B. Cherecwich

Jeffrey D. Cohodes

Marianne G. Doan

Jennifer L. Driscoll

Arthur J. Fogel

Peter A. Gloyne

Mark C. Gossett

Darrell B. Jackson

Wilson Leech

Lyle L. Logan

R. Hugh Magill

Peter A. Magrini

K. Kelly Mannard

Brian P. Ovaert

Teresa A. Parker

James M. Rauh

Douglas P. Regan

Alan W. Robertson

Lee S. Selander

Jean E. Sheridan

John D. Skjervem

Michael A. Vardas

Lloyd A. Wennlund

 

NORTHERN TRUST CORPORATION 2009 ANNUAL REPORT TO SHAREHOLDERS

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BOARD OF DIRECTORS

 

Frederick H. Waddell

Chairman, President and Chief Executive Officer

Northern Trust Corporation and

The Northern Trust Company (4)

 

Linda Walker Bynoe

President and Chief Executive Officer

Telemat Ltd.

Project management and consulting firm (1, 5)

 

Nicholas D. Chabraja

Chairman

General Dynamics Corporation

Worldwide defense, aerospace and other

technology products manufacturer (1, 2)

 

Susan Crown

Vice President

Henry Crown and Company

Worldwide company with

diversified manufacturing operations,

real estate and securities (2, 3)

 

Dipak C. Jain

Dean Emeritus and Professor of Marketing

Kellogg School of Management

Northwestern University

Educational institution (2, 6)

 

Arthur L. Kelly

Managing Partner

KEL Enterprises L.P.

Holding and investment partnership (3, 4, 6)

 

Robert W. Lane

Retired Chairman

Deere & Company

Worldwide agricultural construction

and forestry equipment manufacturer (6)

 

Robert C. McCormack

Advisory Director

Trident Capital

Venture capital firm (1, 4, 5)

 

Edward J. Mooney

Retired Délégué Général–North America

Suez Lyonnaise des Eaux

Worldwide provider of energy, water, waste

and communications services;

Retired Chairman and Chief Executive Officer

Nalco Chemical Company

Manufacturer of specialized service chemicals (1, 2, 4)

 

John W. Rowe

Chairman and Chief Executive Officer

Exelon Corporation

Producer and wholesale marketer of energy (3, 4, 6)

 

Harold B. Smith

Chairman of the Executive Committee

Illinois Tool Works Inc.

Worldwide manufacturer and marketer

of engineered components and industrial systems

and consumables (3, 5, 6)

 

William D. Smithburg

Retired Chairman, President and Chief Executive Officer

The Quaker Oats Company

Worldwide manufacturer and marketer of

beverages and grain-based products (2, 3, 4)

 

Enrique J. Sosa

Retired President

BP Amoco Chemicals

Worldwide chemical division of BP p.l.c. (1, 6)

 

Charles A. Tribbett III

Managing Director

Russell Reynolds Associates

Worldwide executive recruiting firm (5, 6)

 

Advisory Director

Sir John R.H. Bond

Chairman

Vodafone Group Plc

Worldwide mobile telecommunications

Company (5, 6)*

*In an advisory capacity

 

Board Committees

1. Audit Committee

2. Compensation and Benefits Committee

3. Corporate Governance Committee

4. Executive Committee

5. Business Risk Committee

6. Business Strategy Committee

 

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CORPORATE INFORMATION

 

Comparison of Five-Year Cumulative Total Return

 

The graph below compares the cumulative total stockholder return on the Corporation’s common stock to the cumulative total return of the S&P 500 Index and the Keefe, Bruyette & Woods (KBW) Bank Index for the five fiscal years which commenced January 1, 2005 and ended December 31, 2009. The cumulative total stockholder return assumes the investment of $100 in the Corporation’s common stock and in each index on December 31, 2004 and assumes reinvestment of dividends. The KBW Bank Index is a modified-capitalization-weighted index made up of 24 of the largest banking companies in the United States. The Corporation is included in the S&P 500 Index and the KBW Bank Index.

We caution you not to draw any conclusions from the data in this performance graph, as past results do not necessarily indicate future performance.

 

Total Return Assumes $100 Invested on

December 31, 2004 with Reinvestment of Dividends

 

Five-Year Cumulative Total Return

 

LOGO

 

     December 31,
     2004    2005    2006    2007    2008   2009

Northern Trust

   100    109    129    166    115   118

S&P 500

   100    105    121    128    81   102

KBW Bank Index

   100    103    121    94    49   49

 

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CORPORATE INFORMATION

 

ANNUAL MEETING

The annual meeting of stockholders will be held on Tuesday, April 20, 2010, at 10:30 A.M. (Central Time) at 50 South La Salle Street, Chicago, Illinois.

 

STOCK LISTING

The common stock of Northern Trust Corporation is traded on the NASDAQ Stock Market under the symbol NTRS.

 

STOCK TRANSFER AGENT, REGISTRAR AND DIVIDEND DISBURSING AGENT

Wells Fargo Bank, N.A.

Shareowner Services

161 North Concord Exchange Street

South St. Paul, Minnesota 55075

General Phone Number: 1-800-468-9716

Internet Site: www.wellsfargo.com/shareownerservices

 

AVAILABLE INFORMATION

The Corporation’s Internet address is northerntrust.com. Through our Web site, we make available free of charge our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act (15 U.S.C. 78m(a) or 78o(d)) as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the Securities and Exchange Commission. Information contained on the Web site is not part of the Annual Report.

 

10-K REPORT

Copies of the Corporation’s 2009 10-K Report filed with the Securities and Exchange Commission will be available by the end of March 2010 and will be mailed to stockholders and other interested persons upon written request to:

 

Rose A. Ellis

Corporate Secretary

Northern Trust Corporation

50 South La Salle Street, M-9

Chicago, Illinois 60603

 

QUARTERLY EARNINGS RELEASES

Copies of the Corporation’s quarterly earnings releases may be obtained by accessing Northern Trust’s Web site at northerntrust.com or by calling the Corporate Communications department at (312) 444-4272.

 

INVESTOR RELATIONS

Please direct Investor Relations inquiries to: Beverly J. Fleming, Director of Investor Relations, at (312) 444-7811 or beverly_fleming@ntrs.com.

 

NORTHERNTRUST.COM

Information about the Corporation, including financial performance and products and services, is available on Northern Trust’s Web site at northerntrust.com.

 

NORTHERN TRUST GLOBAL INVESTMENTS

Northern Trust Corporation uses the name Northern Trust Global Investments to identify the investment management business, including portfolio management, research and trading, carried on by several of its affiliates, including The Northern Trust Company, Northern Trust Global Advisors and Northern Trust Investments.

 

NORTHERN TRUST CORPORATION 2009 ANNUAL REPORT TO SHAREHOLDERS

124

Exhibit 21

NORTHERN TRUST CORPORATION SUBSIDIARIES AS OF FEBRUARY 26, 2010.

 

     Percent
Owned
        

Jurisdiction of

Incorporation

The Northern Trust Company

   100      Illinois

Norlease, Inc.

   100      Delaware

TNT-NL Leasing I, Inc.

   100      Delaware

TNT-NL Eurolease I, Ltd.

   100      Bermuda

TNT-NL Eurolease II, Ltd.*

   100      Bermuda

Clenston Ltd.*

   100      Bermuda

MFC Company, Inc.

   100      Delaware

The Northern Trust Company, Canada

   100      Ontario, Canada

Nortrust Nominees, Ltd.

   100      England

The Northern Trust Company U.K. Pension Plan Limited

   100      England

Northern Trust Guernsey Holdings Limited

   99      Guernsey

Northern Trust (Guernsey) Limited

   99      Guernsey

The Northern Trust International Banking Corporation

   100      Edge Act

Northern Trust Cayman International, Ltd.

   100      Cayman Islands, BWI

The Northern Trust Company of Hong Kong Limited

   99.99      Hong Kong

Northern Trust Partners Guernsey Limited

   100      Guernsey

The Nelson Trafalgar Guernsey Limited Partnership

   100      Guernsey

Northern Trust Fund Managers (Ireland) Limited

   100      Ireland

Northern Trust Management Services Limited

   100      England

Northern Trust Global Investments Limited

   100      England

The Northern Trust Scottish Limited Partnership

   99      Scotland

Northern Trust Luxembourg Capital S.A.R.L.

   100      Luxembourg

Northern Trust (Ireland) Limited

   100      Ireland

Northern Trust Investor Services (Ireland) Limited

   100      Ireland (Inactive)

Northern Trust Custodial Services (Ireland) Limited

   100      Ireland (Inactive)

Northern Trust Fund Services (Ireland) Limited

   100      Ireland

Nortrust Nominees (Ireland) Limited

   100      Ireland

Northern Trust Property Services (Ireland) Limited

   100      Ireland

Northern Trust Management Services (Ireland) Limited

   100      Ireland

Northern Trust International Fund Administration Services (Ireland) Limited

   100      Ireland

International Securisation Managers (Ireland) Limited

   100      Ireland

Northern Trust Fiduciary Services (Ireland) Limited

   100      Ireland

BBI Nominees Limited

   100      Ireland (Inactive)

Northern Trust GFS Holdings Limited

   99      Guernsey

Northern Trust Fiduciary Services (Guernsey) Limited

   99      Guernsey

Arnold Limited

   99      Guernsey

Control Nominees Limited

   99      Guernsey

Truchot Limited

   99      Guernsey

Vivian Limited

   99      Guernsey

Doyle Administration Limited

   99      Isle of Man

Barfield Nominees Limited

   99      Isle of Man

NT Director One Limited

   100      Guernsey


NORTHERN TRUST CORPORATION SUBSIDIARIES AS OF FEBRUARY 26, 2010.

(continued)

 

     Percent
Owned
        

State of

Incorporation

NT Director Two Limited

   100      Guernsey

NT Nominee One Limited

   100      Guernsey

NT Nominee Two Limited

   100      Guernsey

NT Secretary Limited

   100      Guernsey

Trafalgar Trust Company (Guernsey) Limited

   100      Guernsey

Northern Trust International Fund Administration Services (Guernsey) Limited

   99      Guernsey

Trafalgar Representatives Limited

   50      Guernsey

Nelson Representatives Limited

   50      Guernsey

Admiral Nominees Limited

   50      Guernsey

Northern Trust Fiduciary Services (Jersey) Limited

   99      Jersey

Saline Nominees Limited

   99      Guernsey

Northern Trust International Fund Administrators (Jersey) Limited

   100      Jersey

Northern Trust Partners Scotland Limited

   100      Scotland

Northern Operating Services Private Limited

   99      India

NTG Services LLC

   100      Delaware LLC

NT Mortgage Holdings LLC

   100      Delaware LLC

Northern Trust Investments, National Association

   100      National

Northern Trust Holdings Limited

   100      England

Northern Trust Global Services Limited

   100      England

Northern Trust European Holdings Limited

   100      England

Northern Trust Luxembourg Management Company S.A.

   99.99      Luxembourg

Northern Trust Directors Services (Guernsey) Limited

   100      Guernsey

Northern Trust, NA

   100      National Bank

Realnor Properties, Inc.

   100      Florida

Realnor Special Properties, Inc.

   100      Florida (Inactive)

Realnor Hallandale, Inc.

   100      Florida (Inactive)

Realnor 1177, Inc.

   100      Florida (Inactive)

Northern Annuity Sales, Inc.

   100      Florida

Fiduciary Services Inc.

   100      Texas (Inactive)

Northern Trust Bank, FSB

   100      Federal Savings Bank

Northern Trust Holdings L.L.C.

   100      Delaware

Northern Investment Corporation

   100      Delaware

Northern Investment Management Company

   100      Delaware (Inactive)

Northern Trust Securities, Inc.

   100      Delaware

Northern Trust Services, Inc.

   100      Illinois

Nortrust Realty Management, Inc.

   100      Illinois


NORTHERN TRUST CORPORATION SUBSIDIARIES AS OF FEBRUARY 26, 2010.

(continued)

 

     Percent
Owned
        

State of

Incorporation

The Northern Trust Company of New York

   100      New York

Northern Trust Global Advisors, Inc.

   100      Delaware

NT Global Advisors, Inc.

   100      Ontario, Canada

The Northern Trust Company of Connecticut

   100      Connecticut

Northern Trust Global Investments Japan, K.K.

   100      Japan

NTC Capital I

   100      Delaware

NTC Capital II

   100      Delaware

Equilend Holdings LLC

   10      Delaware

The Northern Trust Company of Delaware

   100      Delaware

TNT – Comer College Prep, LLC

   100      Illinois

 

* Indirectly owned by Norlease Inc. through Delaware business trusts.

Exhibit 23

Consent of Independent Registered Public Accounting Firm

The Board of Directors

Northern Trust Corporation:

We consent to the incorporation by reference in the registration statements on Form S-3 Nos. 333-152678, 333-152678-01, 333-152678-02, and 333-152678-03 and on Form S-8 Nos. 333-144848, 333-86418, 333-84085, 333-52623, and 333-58784 of Northern Trust Corporation of our reports dated February 26, 2010, with respect to the consolidated balance sheets of Northern Trust Corporation and subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2009, and the effectiveness of internal control over financial reporting as of December 31, 2009, which reports appear in the Form 10-K of Northern Trust Corporation dated February 26, 2010.

/s/  KPMG LLP

Chicago, Illinois

February 26, 2010

   Exhibit 24
  

POWER OF ATTORNEY

 

KNOW ALL MEN BY THESE PRESENTS:

That the undersigned officers and directors of Northern Trust Corporation hereby severally constitute and appoint Frederick H. Waddell, William L. Morrison and Kelly R. Welsh, and each of them singly, our true and lawful attorneys and agents with full power to them and each of them singly, to sign for us in our names, in the capacities indicated below, Form 10-K, annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, for the fiscal year ended December 31, 2009, and to file such Form, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys and agents, and each of them, full power of substitution and revocation in the premises, and generally to do all such things in our name and behalf in our capacities as officers and directors to enable Northern Trust Corporation to comply with the provisions of the Securities Exchange Act of 1934, as amended, and all regulations of the Securities and Exchange Commission thereunder, hereby ratifying and confirming our signatures as they may be signed by our attorneys, or any one of them, to such Form, and all that our attorneys and agents, or any of them, may do or cause to be done by virtue of these presents.

IN WITNESS WHEREOF, the undersigned have hereunto executed this Power of Attorney this 16th day of February, 2010.

 

/s/ Frederick H. Waddell

  
    

Frederick H. Waddell

  

Chairman, President, Chief Executive Officer,

and Director

  

/s/ William L. Morrison

   /s/ Aileen B. Blake
      

William L. Morrison

   Aileen B. Blake

Executive Vice President

and Chief Financial Officer

  

Executive Vice President and Controller

(Chief Accounting Officer)

/s/ Linda Walker Bynoe

   /s/ Nicholas D. Chabraja
      

Linda Walker Bynoe

   Nicholas D. Chabraja

Director

   Director

/s/ Susan Crown

   /s/ Dipak C. Jain
      

Susan Crown

   Dipak C. Jain

Director

   Director

/s/ Arthur L. Kelly

   /s/ Robert W. Lane
      

Arthur L. Kelly

   Robert W. Lane

Director

   Director


-2-

 

/s/ Robert C. McCormack

   /s/ Edward J. Mooney
      

Robert C. McCormack

   Edward J. Mooney

Director

   Director

/s/ John W. Rowe

   /s/ Harold B. Smith
      

John W. Rowe

   Harold B. Smith

Director

   Director

/s/ William D. Smithburg

   /s/ Enrique J. Sosa
      

William D. Smithburg

   Enrique J. Sosa

Director

   Director

/s/ Charles A. Tribbett III

  
    

Charles A. Tribbett III

  

Director

  

 

STATE OF ILLINOIS )

 

     )

 

COUNTY OF COOK )

 

I, Victoria Antoni, a Notary Public, DO HEREBY CERTIFY that the above named directors and officers of Northern Trust Corporation, personally known to me to be the same persons whose names are subscribed to the foregoing instrument, appeared before me this day in person, and severally acknowledged that they signed and delivered the instrument as their free and voluntary act, for the uses and purposes therein set forth.

GIVEN under my hand and notarial seal this 16th day of February, 2010.

 

/s/  Victoria Antoni
 
Victoria Antoni
Notary Public

My Commission Expires: 7/25/11

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-K for the year ending December 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 registrant’s 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 registrant’s 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 registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s 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 registrant’s 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 registrant’s internal control over financial reporting.

 

Date: February 26, 2010

 

/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, William L. Morrison, certify that:

 

1. I have reviewed this report on Form 10-K for the year ending December 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 registrant’s 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 registrant’s 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 registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s 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 registrant’s 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 registrant’s internal control over financial reporting.

 

Date: February 26, 2010

 

/s/ William L. Morrison

  William L. Morrison
  Chief Financial Officer

Exhibit 32

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 Annual Report of Northern Trust Corporation (the “Corporation”) on Form 10-K for the period ending December 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 William L. Morrison, 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
February 26, 2010

/s/ William L. Morrison

William L. Morrison
Chief Financial Officer
February 26, 2010

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.