Edgar Filing: NORTHERN TRUST CORP

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2011

¨	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 LaSalle Street Chicago, Illinois				60603
(Address of principal executive offices)				(Zip Code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer”, and “small reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

241,803,134 Shares - $1.66 2/3 Par Value

(Shares of Common Stock Outstanding on March 31, 2011)

PART I - FINANCIAL INFORMATION

Item 1.

Financial Statements


CONSOLIDATED BALANCE SHEET		NORTHERN TRUST CORPORATION


($ In Millions Except Share Information)	March 31 2011			December 31 2010
	(Unaudited)
Assets
Cash and Due from Banks	$	3,592.8		$	2,818.0
Federal Funds Sold and Securities Purchased under Agreements to Resell		90.2			160.1
Interest Bearing Deposits with Banks		16,891.5			15,351.3
Federal Reserve Deposits and Other Interest-Bearing		15,080.5			10,924.6
Securities
Available for Sale		21,887.3			19,901.9
Held to Maturity (Fair value of $911.8 and $941.8)		896.5			922.2
Trading Account		5.6			6.8

Total Securities		22,789.4			20,830.9

Loans and Leases
Commercial		11,632.5			11,613.4
Personal		16,255.0			16,518.6

Total Loans and Leases (Net of unearned income of $452.2 and $456.8)		27,887.5			28,132.0

Allowance for Credit Losses Assigned to Loans and Leases		(313.5	)		(319.6	)
Buildings and Equipment		494.7			504.5
Client Security Settlement Receivables		1,304.0			701.3
Goodwill		405.8			400.9
Other Assets		4,456.3			4,339.9

Total Assets	$	92,679.2		$	83,843.9

Liabilities
Deposits
Demand and Other Noninterest-Bearing	$	9,115.7		$	7,658.9
Savings and Money Market		14,147.3			14,208.7
Savings Certificates and Other Time		3,765.2			3,913.0
Non U.S. Offices – Noninterest-Bearing		2,969.7			2,942.7
– Interest-Bearing		41,077.5			35,472.4

Total Deposits		71,075.4			64,195.7
Federal Funds Purchased		4,364.3			3,691.7
Securities Sold Under Agreements to Repurchase		798.5			954.4
Other Borrowings		2,135.1			347.7
Senior Notes		1,890.6			1,896.1
Long-Term Debt		2,538.2			2,729.3
Floating Rate Capital Debt		276.9			276.9
Other Liabilities		2,672.0			2,921.8

Total Liabilities		85,751.0			77,013.6

Stockholders’ Equity
Common Stock, $1.66 2/3 Par Value; Authorized 560,000,000 shares; Outstanding shares of 241,803,134 and 242,268,903		408.6			408.6
Additional Paid-In Capital		932.8			920.0
Retained Earnings		6,054.5			5,972.1
Accumulated Other Comprehensive Loss		(279.6	)		(305.3	)
Treasury Stock (3,368,390 and 2,902,621, at cost)		(188.1	)		(165.1	)

Total Stockholders’ Equity		6,928.2			6,830.3

Total Liabilities and Stockholders’ Equity	$	92,679.2		$	83,843.9

See accompanying notes to the consolidated financial statements.


CONSOLIDATED STATEMENT OF INCOME		NORTHERN TRUST CORPORATION
(UNAUDITED)


	Three Months Ended March 31
($ In Millions Except Per Share Information)	2011			2010
Noninterest Income
Trust, Investment and Other Servicing Fees	$	514.9		$	515.1
Foreign Exchange Trading Income		84.8			79.7
Treasury Management Fees		18.6			20.1
Security Commissions and Trading Income		15.0			13.3
Other Operating Income		35.7			39.0
Investment Security Gains (Losses), net (1)		(5.5	)		.3

Total Noninterest Income		663.5			667.5

Net Interest Income
Interest Income		347.1			314.3
Interest Expense		112.7			83.9

Net Interest Income		234.4			230.4
Provision for Credit Losses		15.0			40.0

Net Interest Income after Provision for Credit Losses		219.4			190.4

Noninterest Expense
Compensation		294.0			274.7
Employee Benefits		54.8			63.1
Outside Services		124.0			105.6
Equipment and Software		73.4			66.6
Occupancy		42.6			42.7
Visa Indemnification Benefit		(10.1	)		—
Other Operating Expense		74.2			67.0

Total Noninterest Expense		652.9			619.7

Income before Income Taxes		230.0			238.2
Provision for Income Taxes		79.0			81.0

Net Income	$	151.0		$	157.2

Net Income Applicable to Common Stock	$	151.0		$	157.2

Per Common Share
Net Income – Basic	$	.62		$	.65
– Diluted		.61			.64
Cash Dividends Declared		.28			.28

Average Number of Common Shares Outstanding – Basic		242,126,162			241,724,178
– Diluted		242,969,629			242,513,391

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(UNAUDITED)

NORTHERN TRUST CORPORATION


	Three Months Ended March 31
(In Millions)	2011			2010
Net Income	$	151.0		$	157.2
Other Comprehensive Income (Loss) (Net of Tax and Reclassifications)
Net Unrealized Gains on Securities Available for Sale		3.4			12.7
Net Unrealized Gains on Cash Flow Hedges		9.0			21.6
Foreign Currency Translation Adjustments		7.2			(11.4	)
Pension and Other Postretirement Benefit Adjustments		6.1			6.2

Other Comprehensive Income		25.7			29.1

Comprehensive Income	$	176.7		$	186.3


(1) Changes in Other-Than-Temporary-Impairment (OTTI) Losses	$	.1		$	—
Noncredit-related OTTI Losses Recorded in/(Reclassified from) OCI		(5.2	)		—
Other Security Gains (Losses), net		(.4	)		.3

Investment Security Gains (Losses), net	$	(5.5	)	$	.3

See accompanying notes to the consolidated financial statements.


CONSOLIDATED STATEMENT OF CHANGES IN		NORTHERN TRUST CORPORATION
STOCKHOLDERS’ EQUITY
(UNAUDITED)


	Three Months Ended March 31
(In Millions)	2011			2010
Common Stock
Balance at January 1 and March 31	$	408.6		$	408.6

Additional Paid-in Capital
Balance at January 1		920.0			888.3
Treasury Stock Transactions – Stock Options and Awards		(9.5	)		(10.8	)
Stock Options and Awards – Amortization		22.8			17.5
Stock Options and Awards – Tax Benefits		(.5	)		.2

Balance at March 31		932.8			895.2

Retained Earnings
Balance at January 1		5,972.1			5,576.0
Net Income		151.0			157.2
Dividends Declared – Common Stock		(68.5	)		(68.2	)

Balance at March 31		6,054.6			5,665.0

Accumulated Other Comprehensive Income (Loss)
Balance at January 1		(305.3	)		(361.6	)
Net Unrealized Gains on Securities Available for Sale		3.4			12.7
Net Unrealized Gains on Cash Flow Hedges		9.0			21.6
Foreign Currency Translation Adjustments		7.2			(11.4	)
Pension and Other Postretirement Benefit Adjustments		6.1			6.2

Balance at March 31		(279.6	)		(332.5	)

Treasury Stock
Balance at January 1		(165.1	)		(199.2	)
Stock Options and Awards		13.3			13.8
Stock Purchased		(36.4	)		(3.8	)

Balance at March 31		(188.2	)		(189.2	)

Total Stockholders’ Equity at March 31	$	6,928.2		$	6,447.1

See accompanying notes to the consolidated financial statements.


CONSOLIDATED STATEMENT OF CASH FLOWS				NORTHERN TRUST CORPORATION
(UNAUDITED)


	Three Months
	Ended March 31
(In Millions)	2011			2010
Cash Flows from Operating Activities:
Net Income	$	151.0		$	157.2
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Investment Security (Gains) Losses, net		5.5			(.3	)
Amortization and Accretion of Securities and Unearned Income		(9.0	)		(13.6	)
Provision for Credit Losses		15.0			40.0
Depreciation on Buildings and Equipment		22.2			22.4
Amortization of Computer Software		38.0			32.8
Amortization of Intangibles		3.3			4.0
Qualified Pension Plan Contribution		(10.6	)		(20.0	)
Visa Indemnification Charges		(10.1	)		(56.1	)
(Increase) Decrease in Receivables		(34.9	)		.3
Decrease in Interest Payable		(11.8	)		(18.4	)
Changes in Derivative Instrument (Gains) Losses, net		(53.2	)		(320.0	)
Other Operating Activities, net		(32.5	)		206.5

Net Cash Provided by Operating Activities		72.9			34.8

Cash Flows from Investing Activities:
Net Decrease in Federal Funds Sold and Securities Purchased under Agreements to Resell		70.0			99.6
Net Increase in Interest-Bearing Deposits with Banks		(1,540.2	)		(3,034.1	)
Net (Increase) Decrease in Federal Reserve Deposits and Other Interest-Bearing Assets		(4,155.9	)		8,080.2
Purchases of Securities – Held to Maturity		(48.0	)		(224.1	)
Proceeds from Maturity and Redemption of Securities – Held to Maturity		67.2			215.8
Purchases of Securities – Available for Sale		(6,597.4	)		(4,100.4	)
Proceeds from Sale, Maturity and Redemption of Securities – Available for Sale		4,588.2			4,338.5
Net (Increase) Decrease in Loans and Leases		201.5			(195.5	)
Purchases of Buildings and Equipment, net		(8.9	)		(19.4	)
Purchases and Development of Computer Software		(69.0	)		(61.0	)
Net Increase in Client Security Settlement Receivables		(602.8	)		(175.8	)
Other Investing Activities, net		89.6			582.2

Net Cash Provided (Used in) by Investing Activities		(8,005.7	)		5,506.0

Cash Flows from Financing Activities:
Net Increase (Decrease) in Deposits		6,879.7			(846.1	)
Net Increase (Decrease) in Federal Funds Purchased		672.7			(2,910.4	)
Net Decrease in Securities Sold under Agreements to Repurchase		(156.0	)		(364.5	)
Net Increase (Decrease) in Short-Term Other Borrowings		878.0			(459.6	)
Proceeds from Term Federal Funds Purchased		2,800.0			6,196.0
Repayments of Term Federal Funds Purchased		(2,119.0	)		(6,772.0	)
Proceeds from Senior Notes and Long-Term Debt		16.1			—
Repayments of Senior Notes and Long-Term Debt		(208.0	)		(256.5	)
Treasury Stock Purchased		(36.2	)		(3.8	)
Net Proceeds from Stock Options		26.4			4.0
Cash Dividends Paid on Common Stock		(68.6	)		(67.7	)
Other Financing Activities, net		(.5	)		114.7

Net Cash Provided by (Used in) Financing Activities		8,684.6			(5,365.9	)

Effect of Foreign Currency Exchange Rates on Cash		23.0			(15.0	)

Increase in Cash and Due from Banks		774.8			159.9
Cash and Due from Banks at Beginning of Year		2,818.0			2,491.8

Cash and Due from Banks at End of Period	$	3,592.8		$	2,651.7

Supplemental Disclosures of Cash Flow Information:
Interest Paid	$	124.5		$	102.3
Income Taxes Paid (Refunded)		11.3			(58.5	)
Transfers from Loans to OREO		24.3			20.3

See accompanying notes to the consolidated financial statements.

Notes to Consolidated Financial Statements

1. Basis of Presentation – The consolidated financial statements include the accounts of Northern Trust Corporation (Corporation) and its subsidiaries (collectively, Northern Trust), all of which are wholly-owned. Significant intercompany balances and transactions have been eliminated. The consolidated financial statements, as of and for the periods ended March 31, 2011 and 2010, have not been audited by the Corporation’s independent registered public accounting firm. In the opinion of management, all accounting entries and adjustments, including normal recurring accruals, necessary for a fair presentation of the financial position and the results of operations for the interim periods have been made. Certain prior period balances have been reclassified consistent with the current period’s presentations. For a description of Northern Trust’s significant accounting policies, refer to Note 1 of the Notes to Consolidated Financial Statements in the 2010 Annual Report to Shareholders.

2. Recent Accounting Pronouncements – In April 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-02, “A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring”. The ASU provides clarifying guidance, related to the determination of whether a debtor has granted a concession to a borrower and whether a borrower is experiencing financial difficulty, in an effort to increase the consistency of the application of existing U.S. generally accepted accounting principles (GAAP). The provisions of the ASU are effective for the first interim or annual period beginning on or after June 15, 2011, and are to be applied retrospectively to restructurings occurring on or after the beginning of the fiscal year of adoption. The impact on the allowance for credit losses as a result of the identification of additional troubled debt restructurings, if any, is to be applied prospectively for the first interim or annual period beginning on or after June 15, 2011. Adoption of this ASU is not expected to have a material impact on Northern Trust’s consolidated financial position or results of operations.

3. Fair Value Measurements – 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. GAAP requires an entity measuring fair value to maximize the use of observable inputs and minimize the use of unobservable inputs and establishes a fair value hierarchy of inputs. Financial instruments are categorized within the hierarchy based on the lowest level input that is significant to their valuation.

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 and U.S. treasury securities held to fund employee benefit and deferred compensation obligations.

Notes to Consolidated Financial Statements (continued)

Level 2 – Observable inputs other than Level 1 prices, such as quoted active market prices for similar assets or liabilities, quoted prices for identical or similar assets in inactive markets, and model-derived valuations in which all significant inputs are observable in active markets.

Northern Trust’s Level 2 assets include available for sale and trading account investments. Their fair values are determined by external pricing vendors, or in limited cases internally, using widely accepted income-based (discounted cash flow) models that incorporate observable current market yield curves and assumptions regarding anticipated prepayments and defaults.

Level 2 assets and liabilities also include derivative contracts which are valued using widely accepted income-based models that incorporate inputs readily observable in actively quoted markets and reflect the contractual terms of the contracts. Observable inputs include foreign exchange rates and interest rates for foreign exchange contracts; credit spreads, default probabilities, and recovery rates for credit default swap contracts; interest rates for interest rate swap contracts and forward contracts; and interest rates and volatility inputs for interest rate option contracts. Northern Trust evaluates the impact of counterparty credit risk and its own credit risk on the valuation of its derivative instruments. Factors considered include the likelihood of default by 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 have not been considered material. Level 2 other assets represent investments in mutual and collective trust funds held to fund employee benefit and deferred compensation obligations. These investments are valued at the funds’ net asset values based on a market approach.

Level 3 – Valuation techniques in which one or more significant inputs are unobservable in the marketplace.

Northern Trust’s Level 3 assets consist of auction rate securities purchased from Northern Trust clients. To estimate their fair value, Northern Trust developed an internal income-based model. The lack of activity in the auction rate security market has resulted in a lack of observable market inputs to incorporate within the model. Therefore, significant inputs to the model include Northern Trust’s own assumptions about future cash flows and appropriate discount rates, both adjusted for credit and liquidity factors. In developing these assumptions, Northern Trust incorporated the contractual terms of the securities, the types of collateral, any credit enhancements available, and relevant market data, where available. Level 3 liabilities include financial guarantees relating to standby letters of credit and a net estimated liability for certain indemnification obligations related to litigation involving Visa Inc. (Visa). Northern Trust’s recorded liability for standby letters of credit, reflecting the obligation it has undertaken, is measured as the amount of unamortized fees on these instruments. The fair value of the net estimated liability for Visa related indemnifications is based on a market approach, but requires management to exercise significant judgment given the limited number of market transactions involving identical or comparable liabilities.

Notes to Consolidated Financial Statements (continued)

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

The following presents assets and liabilities measured at fair value on a recurring basis as of March 31, 2011 and December 31, 2010, segregated by fair value hierarchy level.


(In Millions)	Level 1		Level 2		Level 3		Netting*			Assets/Liabilities at Fair Value
March 31, 2011
Securities
Available for Sale
U.S. Government	$	982.0	$	—	$	—	$	—		$	982.0
Obligations of States and Political Subdivisions		—		48.8		—		—			48.8
Government Sponsored Agency		—		13,149.9		—		—			13,149.9
Corporate Debt		—		2,557.1		—		—			2,557.1
Non-U.S. Government		—		552.8		—		—			552.8
Residential Mortgage-Backed		—		233.4		—		—			233.4
Other Asset-Backed		—		1,698.1		—		—			1,698.1
Certificates of Deposit		—		1,585.8		—		—			1,585.8
Auction Rate		—		—		285.3		—			285.3
Other		—		794.1		—		—			794.1

Total		982.0		20,620.0		285.3		—			21,887.3

Trading Account		—		5.6		—		—			5.6

Total		982.0		20,625.6		285.3		—			21,892.9

Other Assets
Derivatives
Foreign Exchange Contracts		—		4,973.8		—		—			4,973.8
Interest Rate Swap Contracts		—		257.1		—		—			257.1
Interest Rate Option Contracts		—		.1		—		—			.1
Credit Default Swap Contracts		—		—		—		—			—
Forward Contracts		—		.1		—		—			.1

Total		—		5,231.1		—		(4,151.2	)		1,079.9

All Other		75.0		41.0		—		—			116.0

Total		75.0		5,272.1		—		(4,151.2	)		1,195.9

Total Assets at Fair Value	$	1,057.0	$	25,897.7	$	285.3	$	(4,151.2	)	$	23,088.8

Other Liabilities
Derivatives
Foreign Exchange Contracts	$	—	$	4,902.2	$	—	$	—		$	4,902.2
Interest Rate Swap Contracts		—		143.8		—		—			143.8
Interest Rate Option Contracts		—		—		—		—			—
Credit Default Swap Contracts		—		2.5		—		—			2.5
Forward Contracts		—		—		—		—			—

Total		—		5,048.5		—		(3,727.8	)		1,320.7

All Other		—		—		49.2		—			49.2

Total Liabilities at Fair Value	$	—	$	5,048.5	$	49.2	$	(3,727.8	)	$	1,369.9

Northern Trust has elected to net derivative assets and liabilities when legally enforceable master netting agreements exist between Northern Trust and the counterparty. As of March 31, 2011, derivative assets and liabilities shown above also include reductions of $2,655.4 million and $2,232.0 million, respectively, as a result of cash collateral received from and deposited with derivative counterparties.

Notes to Consolidated Financial Statements (continued)


										Assets/Liabilities
(In Millions)	Level 1		Level 2		Level 3		Netting*			at Fair Value
December 31, 2010
Securities
Available for Sale
U.S. Government	$	658.4	$	—	$	—	$	—		$	658.4
Obligations of States and Political Subdivisions		—		36.3		—		—			36.3
Government Sponsored Agency		—		11,970.7		—		—			11,970.7
Corporate Debt		—		2,554.0		—		—			2,554.0
Non-U.S. Government		—		440.6		—		—			440.6
Residential Mortgage-Backed		—		254.6		—		—			254.6
Other Asset-Backed		—		1,605.7		—		—			1,605.7
Certificates of Deposit		—		1,402.5		—		—			1,402.5
Auction Rate		—		—		367.8		—			367.8
Other		—		611.3		—		—			611.3

Total		658.4		18,875.7		367.8		—			19,901.9

Trading Account		—		6.8		—		—			6.8

Total		658.4		18,882.5		367.8		—			19,908.7

Other Assets
Derivatives
Foreign Exchange Contracts		—		5,792.8		—		—			5,792.8
Interest Rate Swap Contracts		—		285.8		—		—			285.8
Interest Rate Option Contracts		—		.1		—		—			.1
Credit Default Swap Contracts		—		—		—		—			—
Forward Contracts		—		.5		—		—			.5

Total		—		6,079.2		—		(4,770.9	)		1,308.3

All Other		65.9		37.4		—		—			103.3

Total		65.9		6,116.6		—		(4,770.9	)		1,411.6

Total Assets at Fair Value	$	724.3	$	24,999.1	$	367.8	$	(4,770.9	)	$	21,320.3

Other Liabilities
Derivatives
Foreign Exchange Contracts	$	—	$	5,781.3	$	—	$	—		$	5,781.3
Interest Rate Swap Contracts		—		163.7		—		—			163.7
Interest Rate Option Contracts		—		.1		—		—			.1
Credit Default Swap Contracts		—		2.8		—		—			2.8
Forward Contracts		—		.2		—		—			.2

Total		—		5,948.1		—		(4,106.4	)		1,841.7

All Other		—		—		58.6		—			58.6

Total Liabilities at Fair Value	$	—	$	5,948.1	$	58.6	$	(4,106.4	)	$	1,900.3

Northern Trust has elected to net derivative assets and liabilities when legally enforceable master netting agreements exist between Northern Trust and the counterparty. As of December 31, 2010, derivative assets and liabilities shown above also include reductions of $2,952.7 million and $2,288.2 million, respectively, as a result of cash collateral received from and deposited with derivative counterparties.

Notes to Consolidated Financial Statements (continued)

The following presents the changes in Level 3 assets for the three months ended March 31, 2011 and 2010.


	Securities
(In Millions)	Available for Sale *
Three Months Ended March 31	2011			2010
Fair Value at January 1	$	367.8		$	427.7
Total Realized and Unrealized
Losses (Gains) Included in Earnings		(4.4	)		(.5	)
Gains (Losses) Included in Other Comprehensive Income		(6.4	)		(7.9	)
Purchases, Issuances, Sales, and Settlements
Sales		(1.5	)		(.3	)
Settlements		(70.2	)		(7.3	)

Fair Value at March 31	$	285.3		$	411.7

*	Balances relate to auction rate securities.

Northern Trust purchased certain illiquid auction rate securities from clients in 2008 which were recorded at their purchase date fair values and designated as available for sale securities. Subsequent to their purchase, the securities are reported at fair value and unrealized gains and losses are credited or charged, net of the tax effect, to accumulated other comprehensive income (AOCI). As of March 31, 2011 and December 31, 2010, the net unrealized gain related to these securities was $4.4 million ($2.8 million net of tax) and $10.8 million ($6.8 million net of tax), respectively. Realized gains for the three month period ended March 31, 2011 of $4.4 million include $4.3 million from redemptions by issuers and $.1 million from sales of securities. Realized gains for the three month period ended March 31, 2010 of $.5 million represent redemptions by issuers. Gains on redemptions and sales are included in interest income and securities gains (losses), net, respectively, within the consolidated statement of income.

The following presents the changes in Level 3 liabilities for the three months ended March 31, 2011 and 2010.


(In Millions)	Other Liabilities *
Three Months Ended March 31	2011			2010
Fair Value at January 1	$	58.6		$	94.4
Total Realized and Unrealized (Gains) Losses
Included in Earnings		(1.6	)		(2.2	)
Included in Other Comprehensive Income		—			—
Purchases, Issuances, Sales, and Settlements
Issuances		2.5			.5
Settlements		(10.3	)		(.3	)

Fair Value at March 31	$	49.2		$	92.4

Unrealized (Gains) Losses Included in Earnings Related to Financial Instruments Held at March 31		—			—

*	Balances relate to standby letters of credit and the net estimated liability for Visa related indemnifications.

Notes to Consolidated Financial Statements (continued)

All realized and unrealized gains and losses related to Level 3 liabilities are included in other operating income or other operating expenses with the exception of those related to the Visa indemnification liability, which have been presented separately in the consolidated statement of income.

Carrying values of assets and liabilities that are not measured at fair value on a recurring basis may be adjusted to fair value in periods subsequent to their initial recognition, for example, to record an impairment of an asset. GAAP requires entities to separately disclose these subsequent fair value measurements and to classify them under the fair value hierarchy.

The following provides information regarding those assets measured at fair value on a nonrecurring basis at March 31, 2011 and 2010, segregated by fair value hierarchy level.


(In Millions)	Level 1		Level 2		Level 3		Total Fair Value
March 31, 2011
Loans (1)	$	—	$	—	$	80.7	$	80.7
Other Real Estate Owned (2)		—		—		13.9		13.9

Total Assets at Fair Value	$	—	$	—	$	94.6	$	94.6

March 31, 2010
Loans (1)	$	—	$	—	$	67.8	$	67.8
Other Real Estate Owned (2)		—		—		.4		.4

Total Assets at Fair Value	$	—	$	—	$	68.2	$	68.2

(1)

Northern Trust provided an additional $3.1 million and $13.8 million of specific reserves to reduce the fair value of these loans during the three months ended March 31, 2011 and 2010, respectively.

(2)

Northern Trust charged $.3 million through other operating expenses during the three months ended March 31, 2011 to reduce the fair values of Other Real Estate Owned (OREO) properties. There were no charges recorded through other operating expenses during the three months ended March 31, 2010.

The fair values of loan collateral and OREO properties were estimated using a market approach typically supported by third party appraisals, and were subject to adjustments to reflect management’s judgment as to their realizable value.

Notes to Consolidated Financial Statements (continued)

Fair Value of Financial Instruments. GAAP requires disclosure of the estimated fair value of certain financial instruments and the methods and significant assumptions used to estimate fair value. It excludes from this requirement nonfinancial assets and liabilities, as well as a wide range of franchise, relationship, and intangible values that add value to Northern Trust. Accordingly, the required fair value disclosures provide only a partial estimate of the fair value of Northern Trust. Financial instruments 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 were modeled by external pricing vendors or, in limited cases, modeled internally, using widely accepted models which are based on an income approach that incorporates current market yield curves and assumptions regarding anticipated prepayments and defaults.

Loans (Excluding Lease Receivables). The fair value of the loan portfolio was estimated using a discounted cash flow methodology based on current market rates offered by Northern Trust as of the date of the consolidated financial statements. The fair values of all loans were adjusted to reflect current assessments of loan collectibility.

Federal Reserve and Federal Home Loan Bank Stock. The fair values of Federal Reserve and Federal Home Loan Bank stock are equal to their carrying values which represent redemption value.

Affordable Housing Investments. Affordable housing investments are valued at cost, which approximates fair value.

Savings Certificates, Other Time, and Non-U.S. Offices Interest-Bearing Deposits. The fair values of these instruments were estimated using an income approach (discounted cash flow) that incorporates market interest rates.

Senior Notes, Subordinated Debt, Federal Home Loan Bank Borrowings, and Floating Rate Capital Debt. Fair values were determined using a market approach based on quoted market prices, when available. If quoted market prices were not available, fair values were based on quoted market prices for comparable instruments.

Loan Commitments. The fair values of loan commitments represent the amount of unamortized fees on these instruments.

Financial Instruments Valued at Carrying Value. Due to their short maturity, the carrying values of certain financial instruments approximated their fair values. These financial instruments include cash and due from banks; federal funds sold and securities purchased under agreements to resell, interest-bearing deposits with banks, and federal reserve deposits and other interest-bearing assets; client security settlement receivables; federal funds purchased; securities sold under agreements to repurchase; and other borrowings (includes term federal funds purchased, and other short-term borrowings). As required by GAAP, the fair values required to be disclosed for demand, noninterest-bearing, savings, and money market deposits must equal the amounts disclosed in the consolidated balance sheet, even though such deposits are typically priced at a premium in banking industry consolidations.

Notes to Consolidated Financial Statements (continued)

The following table summarizes the fair values of financial instruments.


	March 31, 2011				December 31, 2010
(In Millions)	Book Value		Fair Value		Book Value		Fair Value
Assets
Cash and Due from Banks	$	3,592.8	$	3,592.8	$	2,818.0	$	2,818.0
Federal Funds Sold and Resell Agreements		90.2		90.2		160.1		160.1
Interest-Bearing Deposits with Banks		16,891.5		16,891.5		15,351.3		15,351.3
Federal Reserve Deposits and Other
Interest-Bearing		15,080.5		15,080.5		10,924.6		10,924.6
Securities
Available for Sale		21,887.3		21,887.3		19,901.9		19,901.9
Held to Maturity		896.5		911.8		922.2		941.8
Trading Account		5.6		5.6		6.8		6.8
Loans (excluding Leases)
Held for Investment		26,523.0		26,536.3		26,747.8		26,814.2
Held for Sale		.8		.8		2.2		2.2
Client Security Settlement Receivables		1,304.0		1,304.0		701.3		701.3
Other Assets
Federal Reserve and Federal Home Loan Bank Stock		184.9		184.9		185.5		185.5
Affordable Housing Investments		272.9		272.9		265.4		265.4
Liabilities
Deposits
Demand, Noninterest-Bearing, and Savings and Money Market	$	26,232.7	$	26,232.7	$	24,810.3	$	24,810.3
Savings Certificates, Other Time and Non U. S. Offices Interest-Bearing		44,842.7		44,504.8		39,385.4		39,402.1
Federal Funds Purchased		4,364.3		4,364.3		3,691.7		3,691.7
Securities Sold under Agreements to Repurchase		798.5		798.5		954.4		954.4
Other Borrowings		2,135.1		2,135.1		347.7		347.7
Senior Notes		1,890.6		1,920.4		1,896.1		1,936.5
Long Term Debt (excluding Leases):
Subordinated Debt		999.5		1,029.3		1,148.7		1,177.2
Federal Home Loan Bank Borrowings		1,491.4		1,539.1		1,532.5		1,613.5
Floating Rate Capital Debt		276.9		228.4		276.9		223.2
Financial Guarantees		49.2		49.2		58.6		58.6
Loan Commitments		31.8		31.8		32.4		32.4

Derivative Instruments
Asset/Liability Management
Foreign Exchange Contracts
Assets		44.7		44.7		44.9		44.9
Liabilities		39.1		39.1		51.4		51.4
Interest Rate Swap Contracts
Assets		122.4		122.4		134.6		134.6
Liabilities		11.8		11.8		15.3		15.3
Credit Default Swaps
Assets		—		—		—		—
Liabilities		2.5		2.5		2.8		2.8
Forward Contracts
Assets		.1		.1		.5		.5
Liabilities		—		—		.2		.2
Client-Related and Trading
Foreign Exchange Contracts
Assets		4,929.1		4,929.1		5,747.9		5,747.9
Liabilities		4,863.1		4,863.1		5,729.9		5,729.9
Interest Rate Swap Contracts
Assets		134.7		134.7		151.2		151.2
Liabilities		132.0		132.0		148.4		148.4
Interest Rate Option Contracts
Assets		.1		.1		.1		.1
Liabilities		—		—		.1		.1

Notes to Consolidated Financial Statements (continued)

4. Securities – The following tables provide the amortized cost and fair values of securities at March 31, 2011 and December 31, 2010.


Securities Available for Sale	March 31, 2011
(In Millions)	Amortized Cost		Gross Unrealized				Fair Value
(In Millions)	Amortized Cost		Gains		Losses		Fair Value
U.S. Government	$	994.5	$	.3	$	12.8	$	982.0
Obligations of States and Political Subdivisions		48.0		.8		—		48.8
Government Sponsored Agency		13,118.3		45.2		13.6		13,149.9
Corporate Debt		2,550.0		8.7		1.6		2,557.1
Non-U.S. Government Debt		552.8		—		—		552.8
Residential Mortgage-Backed		278.7		.5		45.8		233.4
Other Asset-Backed		1,698.6		2.1		2.6		1,698.1
Certificates of Deposit		1,585.8		—		—		1,585.8
Auction Rate		280.9		10.1		5.7		285.3
Other		793.3		4.5		3.7		794.1

Total	$	21,900.9	$	72.2	$	85.8	$	21,887.3


Securities Held to Maturity	March 31, 2011
(In Millions)	Book Value		Gross Unrealized				Fair Value
(In Millions)	Book Value		Gains		Losses		Fair Value
Obligations of States and Political Subdivisions	$	606.5	$	23.4	$	.4	$	629.5
Government Sponsored Agency		167.3		3.6		.3		170.6
Other		122.7		.1		11.1		111.7

Total	$	896.5	$	27.1	$	11.8	$	911.8


Securities Available for Sale	December 31, 2010
	Amortized Cost		Gross Unrealized				Fair Value
(In Millions)	Amortized Cost		Gains		Losses		Fair Value
U.S. Government	$	667.2	$	1.0	$	9.8	$	658.4
Obligations of States and Political Subdivisions		35.4		.9		—		36.3
Government Sponsored Agency		11,937.0		47.0		13.3		11,970.7
Corporate Debt		2,547.7		7.8		1.5		2,554.0
Non-U.S. Government Debt		440.6		—		—		440.6
Residential Mortgage-Backed		308.0		.9		54.3		254.6
Other Asset-Backed		1,606.5		1.5		2.3		1,605.7
Certificates of Deposit		1,402.5		—		—		1,402.5
Auction Rate		357.0		14.2		3.4		367.8
Other		610.8		4.2		3.7		611.3

Total	$	19,912.7	$	77.5	$	88.3	$	19,901.9


Securities Held to Maturity	December 31, 2010
	Book Value		Gross Unrealized				Fair Value
(In Millions)	Book Value		Gains		Losses		Fair Value
Obligations of States and Political Subdivisions	$	635.0	$	26.2	$	.4	$	660.8
Government Sponsored Agency		169.3		4.6		.2		173.7
Other		117.9		—		10.6		107.3

Total	$	922.2	$	30.8	$	11.2	$	941.8

Notes to Consolidated Financial Statements (continued)

The following table provides the remaining maturity of securities as of March 31, 2011.


(In Millions)	Amortized Cost		Fair Value
Available for Sale
Due in One Year or Less	$	8,859.2	$	8,848.5
Due After One Year Through Five Years		11,859.5		11,856.7
Due After Five Years Through Ten Years		760.6		762.1
Due After Ten Years		421.6		420.0

Total		21,900.9		21,887.3

Held to Maturity
Due in One Year or Less		161.7		163.1
Due After One Year Through Five Years		410.6		420.7
Due After Five Years Through Ten Years		293.5		301.2
Due After Ten Years		30.7		26.8

Total	$	896.5	$	911.8

Note: Mortgage-backed and asset-backed securities are included in the above table taking into account anticipated future prepayments.

Investment Security Gains and Losses. Losses totaling $5.5 million were recognized for the three months ended March 31, 2011 and included $5.1 million recorded in connection with the write down of residential mortgage-backed securities that were determined to be other-than-temporarily impaired. There were no investment security losses recognized for the three months ended March 31, 2010. There were no realized security gains for the three months ended March 31, 2011. Realized security gains for the three months ended March 31, 2010 totaled $.3 million.

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 March 31, 2011 and December 31, 2010.

Securities with Unrealized Losses as of March 31, 2011

Less than 12 Months

12 Months or Longer

Total

(In Millions)

Fair
Value

Unrealized
Losses

Fair
Value

Unrealized
Losses

Fair
Value

Unrealized
Losses

U.S. Government

782.5

12.8

—

782.5

12.8

Obligations of States and Political Subdivisions

3.2

—

2.8

6.0

Government Sponsored Agency

2,836.4

11.9

331.5

2.0

3,167.9

13.9

Corporate Debt

271.2

1.4

250.3

521.5

1.6

Residential Mortgage-Backed

—

226.7

45.8

226.7

45.8

Other Asset-Backed

552.9

1.7

78.6

631.5

2.6

Auction Rate

70.5

2.9

55.0

2.8

125.5

5.7

Other

378.7

5.1

44.7

9.7

423.4

14.8

Total

4,895.4

35.8

989.6

61.8

5,885.0

97.6

Notes to Consolidated Financial Statements (continued)


Securities with Unrealized Losses as of December 31, 2010	Less than 12 Months				12 Months or Longer				Total
(In Millions)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. Government	$	492.9	$	9.8	$	—	$	—	$	492.9	$	9.8
Obligations of States and Political Subdivisions		3.0		—		3.2		.4		6.2		.4
Government Sponsored Agency		980.7		11.0		328.7		2.5		1,309.4		13.5
Corporate Debt		930.6		1.1		475.2		.4		1,405.8		1.5
Residential Mortgage-Backed		—		—		248.8		54.3		248.8		54.3
Other Asset-Backed		513.5		2.2		27.0		.1		540.5		2.3
Auction Rate		77.6		3.3		.7		.1		78.3		3.4
Other		482.2		6.8		36.5		7.5		518.7		14.3

Total	$	3,480.5	$	34.2	$	1,120.1	$	65.3	$	4,600.6	$	99.5

As of March 31, 2011, 348 securities with a combined fair value of $5.9 billion were in an unrealized loss position, with their unrealized losses totaling $97.6 million. The majority of the unrealized losses reflect the impact of credit and liquidity spreads on the valuations of 28 residential mortgage-backed securities with unrealized losses totaling $45.8 million, all of which have been in an unrealized loss position for more than 12 months. Residential mortgage-backed securities rated below double-A at March 31, 2011 represented 78% of the total fair value of residential mortgage-backed securities, were comprised primarily of sub-prime and Alt-A securities, and had a total amortized cost and fair value of $225.7 million and $182.7 million, respectively. Securities classified as “other asset-backed” at March 31, 2011 were predominantly floating rate with average lives less than 5 years, and 100% were rated triple-A.

Unrealized losses of $13.9 million related to government sponsored agency securities are primarily attributable to changes in market rates since their purchase. The majority of the $14.8 million of unrealized losses in securities classified as “other” at March 31, 2011 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 $5.7 million related to auction rate securities primarily reflect reduced market liquidity as a majority of auctions continue to fail preventing holders from liquidating their investments at par. Unrealized losses of $1.6 million within corporate debt securities primarily reflect widened credit spreads; 87% 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 March 31, 2011 are attributable to changes in overall market interest rates, increased credit spreads, and reduced market liquidity.

Notes to Consolidated Financial Statements (continued)

Security impairment reviews are conducted quarterly to identify and evaluate securities that have indications of possible other-than-temporary impairment (OTTI). A determination as to whether a security’s decline in market value is other-than-temporary takes into consideration numerous factors and the relative significance of any single factor can vary by security. Factors Northern Trust considers in determining whether impairment is other than temporary include, but are not limited to, the length of time which the security has been impaired; the severity of the impairment; the cause of the impairment and the financial condition and near-term prospects of the issuer; activity in the market of the issuer which may indicate adverse credit conditions; 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. For each security meeting the requirements of Northern Trust’s internal screening process, an extensive review is conducted to determine if OTTI has occurred.

While all securities are considered, the following describes Northern Trust’s process for identifying credit impairment within mortgage-backed securities, including residential mortgage-backed securities, the security type for which Northern Trust has previously 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, a credit related OTTI loss is recorded to earnings equal to the difference between the two amounts.

The factors used in developing the expected loss on mortgage-backed securities vary by year of origination and type of collateral. As of March 31, 2011, the expected loss on subprime and Alt-A portfolios was developed using default roll rates ranging from 2% to 30% for underlying assets that are current and ranging from 30% to 100% for underlying assets that are 30 days or more past due as to principal and interest payments or in foreclosure. Severities of loss ranging from 35% to 85% were assumed for underlying assets that may ultimately end up in default. During the three months ended March 31, 2011, performance metrics specific to subprime and Alt-A loans experienced additional deterioration resulting in the recognition of OTTI losses of $5.1 million in connection with residential mortgage-backed securities. No OTTI losses were recorded in the three months ended March 31, 2010.

Notes to Consolidated Financial Statements (continued)

Credit Losses on Debt Securities. The table below provides information regarding total other-than-temporarily impaired securities, including noncredit-related amounts recognized in other comprehensive income as well as net impairment losses recognized in earnings for the periods ended March 31, 2011 and 2010.


	Three Months Ended March 31,
(In Millions)	2011			2010
Changes in Other-Than-Temporary Impairment Losses*	$	.1		$	—
Noncredit-related Losses Recorded in/ (Reclassified from) OCI**		(5.2	)		—

Net Impairment Losses Recognized in Earnings	$	(5.1	)	$	—

For initial other-than-temporary impairments in the respective period, the balance includes the excess of the amortized cost over the fair value of the impaired securities. For subsequent impairments of the same security, the balance includes any additional changes in fair value of the security subsequent to its most recently recorded OTTI.

For initial other-than-temporary impairments in the respective period, the balance includes the portion of the excess of amortized cost over the fair value of the impaired securities that was recorded in OCI. For subsequent impairments of the same security, the balance includes additional changes in OCI for that security subsequent to its most recently recorded OTTI.

Provided in the table below are the cumulative credit-related losses recognized in earnings on debt securities other-than-temporarily impaired.


	Three Months Ended March 31,
(In Millions)	2011		2010
Cumulative Credit-Related Losses on Securities – Beginning of Period	$	94.2	$	73.0
Plus: Losses on Newly Identified Impairments		—		—
Additional Losses on Previously Identified Impairments		5.1		—

Cumulative Credit-Related Losses on Securities – End of Period	$	99.3	$	73.0

The table below provides information regarding debt securities held as of March 31, 2011 and December 31, 2010, for which an OTTI loss had been recognized in the period presented or previously.


	March 31,			December 31,
(In Millions)	2011			2010
Fair Value	$	77.6		$	79.9
Amortized Cost Basis		105.9			113.3

Noncredit-related (Losses) Recognized in OCI		(28.3	)		(33.4	)
Tax Effect		10.5			12.2

Amount Recorded in OCI	$	(17.8	)	$	(21.2	)

Notes to Consolidated Financial Statements (continued)

5.	Loans and Leases – Amounts outstanding for loans and leases, by segment and class, are shown below.


	March 31,			December 31,
(In Millions)	2011			2010
Commercial
Commercial and Institutional	$	5,971.0		$	5,914.5
Commercial Real Estate		3,193.4			3,242.4
Lease Financing, net		1,051.7			1,063.7
Non-U.S.		965.0			1,046.2
Other		451.4			346.6

Total Commercial		11,632.5			11,613.4

Personal
Residential Real Estate		10,776.5			10,854.9
Private Client		5,175.9			5,423.7
Other		302.6			240.0

Total Personal		16,255.0			16,518.6

Total Loans and Leases		27,887.5			28,132.0
Allowance for Credit Losses Assigned to Loans and Leases		(313.5	)		(319.6	)

Net Loans and Leases	$	27,574.0		$	27,812.4

Included within the non-U.S., commercial-other, and personal-other classes were short duration advances primarily related to the processing of custodied client investments that totaled $1.5 billion and $1.4 billion at March 31, 2011 and December 31, 2010, respectively. Residential real estate loans classified as held for sale totaled $.8 million at March 31, 2011 and $2.2 million at December 31, 2010 and are included in the residential real estate class.

Credit Quality Indicators. Credit quality indicators are statistics, measurements or other metrics regarding the relative credit risk of loans and leases. Northern Trust utilizes a variety of credit quality indicators to assess the credit risk of loans and leases at the segment, class, and individual credit exposure levels.

As part of its credit process, Northern Trust utilizes an internal borrower risk rating system to support identification, approval, and monitoring of credit risk. Borrower risk ratings are used in credit underwriting, management reporting, and the calculation of loss reserves and economic capital.

Risk ratings are used for ranking the credit risk of borrowers and the probability of their default. Each borrower is rated using one of a number of ratings models, which consider both quantitative and qualitative factors. The ratings models vary among classes of loans and leases in order to capture the unique risk characteristics inherent within each particular type of credit exposure. All rating models are focused on the financial performance and condition of the borrower, including cash flows, liquidity, capital levels and financial flexibility, as applicable. The residential real estate class has a separate rating model focused primarily on borrower payment performance and delinquency status.

Notes to Consolidated Financial Statements (continued)

While the criteria vary by model, the objective is for the borrower ratings to be consistent in both the measurement and ranking of risk. Each model is calibrated to a master rating scale to support this consistency. Ratings for borrowers not in default range from “1” for the strongest credits to “7” for the weakest non-defaulted credits. Ratings of “8” or “9” are used for defaulted borrowers. Borrower risk ratings are monitored and are revised when events or circumstances indicate a change is required. Risk ratings are validated at least annually.

Loan and lease segment and class balances for March 31, 2011 and December 31, 2010 are provided below, segregated by borrower ratings into below average risk, average risk, and watch list categories.


	March 31, 2011
	Below Average		Average		Watch
(In Millions)	Risk		Risk		List		Total
Commercial
Commercial and Institutional	$	2,901.2	$	2,834.3	$	235.5	$	5,971.0
Commercial Real Estate		1,266.5		1,507.4		419.5		3,193.4
Lease Financing, net		525.1		503.3		23.3		1,051.7
Non-U.S.		509.4		431.3		24.3		965.0
Other		291.9		159.5		—		451.4

Total Commercial		5,494.1		5,435.8		702.6		11,632.5

Personal
Residential Real Estate		2,643.7		7,737.7		395.1		10,776.5
Private Client		2,977.8		2,175.9		22.2		5,175.9
Other		115.1		187.5		—		302.6

Total Personal		5,736.6		10,101.1		417.3		16,255.0

Total Loans and Leases	$	11,230.7	$	15,536.9	$	1,119.9	$	27,887.5


	December 31, 2010
	Below Average		Average		Watch
(In Millions)	Risk		Risk		List		Total
Commercial
Commercial and Institutional	$	2,821.5	$	2,849.8	$	243.2	$	5,914.5
Commercial Real Estate		1,232.8		1,594.3		415.3		3,242.4
Lease Financing, net		571.6		473.0		19.1		1,063.7
Non-U.S.		430.0		596.5		19.7		1,046.2
Other		209.5		137.1		—		346.6

Total Commercial		5,265.4		5,650.7		697.3		11,613.4

Personal
Residential Real Estate		2,896.0		7,586.9		372.0		10,854.9
Private Client		3,326.5		2,064.1		33.1		5,423.7
Other		78.1		161.9		—		240.0

Total Personal		6,300.6		9,812.9		405.1		16,518.6

Total Loans and Leases	$	11,566.0	$	15,463.6	$	1,102.4	$	28,132.0

Borrowers designated as below average risk represent exposures with borrower ratings from “1 - 3”. These credits are expected to exhibit minimal to modest probabilities of default and are characterized by borrowers having the strongest financial qualities, including above average financial flexibility, cash flows and capital levels. Borrowers assigned these ratings are anticipated to experience very little to moderate financial pressure in adverse down cycle scenarios.

Notes to Consolidated Financial Statements (continued)

Borrowers designated as average risk represent exposures with borrower ratings of “4” and “5”. These credits are expected to exhibit moderate to acceptable probabilities of default and are characterized by borrowers with less financial flexibility than those in the below average risk category. Cash flows and capital levels are generally sufficient to allow for borrowers to meet current requirements, but have reduced cushion in adverse down cycle scenarios.

Borrowers designated as watch list represent exposures with elevated credit risk profiles that are monitored through internal watch lists, and consist of credits with borrower ratings of “6 - 9”. These credits, which include all nonperforming credits, are expected to exhibit minimally acceptable probabilities of default, elevated risk of default or are currently in default. Borrowers associated with these risk profiles that are not currently in default have limited financial flexibility. Cash flows and capital levels range from acceptable to potentially insufficient to meet current requirements, particularly in adverse down cycle scenarios.

Interest income on loans is recorded on an accrual basis unless, in the opinion of management, there is a question as to the ability of the debtor to meet the terms of the loan agreement, or interest or principal is more than 90 days contractually past due and the loan is not well-secured and in the process of collection. Loans are considered past due if the required principal or interest payments have not been received as of the date such payments are due according to the contractual terms of the agreement. At the time a loan is determined to be nonperforming, interest accrued but not collected is reversed against interest income of the current period and the loan is classified as nonperforming. Loans are returned to performing status when factors indicating doubtful collectability no longer exist. Interest collected on nonperforming loans is applied to principal unless, in the opinion of management, collectability of principal is not in doubt.

The following tables provide balances and delinquency status of performing and nonperforming loans and leases by segment and class, as well as the total other real estate owned and nonperforming asset balances, as of March 31, 2011 and December 31, 2010.

March 31, 2011

(In Millions)

30-59 Days
Past Due

60-89 Days
Past Due

90 Days or
More Past Due

Current

Total Performing

Nonperforming

Total Loans
and Leases

Commercial

Commercial and Institutional

31.3

14.5

1.3

5,871.6

5,918.7

52.3

5,971.0

Commercial Real Estate

43.7

9.7

3.6

3,024.5

3,081.5

111.9

3,193.4

Lease Financing, net

—

1,051.5

1,051.7

—

1,051.7

Non-U.S.

—

965.0

—

965.0

Other

—

451.4

—

451.4

Total Commercial

75.0

24.4

4.9

11,364.0

11,468.3

164.2

11,632.5

Personal

Residential Real Estate

82.8

19.4

5.8

10,510.5

10,618.5

158.0

10,776.5

Private Client

48.7

5.5

3.2

5,115.6

5,173.0

2.9

5,175.9

Other

—

302.6

—

302.6

Total Personal

131.5

24.9

9.0

15,928.7

16,094.1

160.9

16,255.0

Total Loans and Leases

206.5

49.3

13.9

27,292.7

27,562.4

325.1

27,887.5

Total Other Real Estate Owned

56.3

Total Nonperforming Assets

381.4

Notes to Consolidated Financial Statements (continued)

December 31, 2010

(In Millions)

30-59 Days
Past Due

60-89 Days
Past Due

90 Days or
More Past Due

Current

Total Performing

Nonperforming

Total Loans
and Leases

Commercial

Commercial and Institutional

16.3

8.2

5,831.2

5,856.5

58.0

5,914.5

Commercial Real Estate

24.2

15.7

9.4

3,076.7

3,126.0

116.4

3,242.4

Lease Financing, net

—

1,063.7

—

1,063.7

Non-U.S.

—

1,046.2

—

1,046.2

Other

—

346.6

—

346.6

Total Commercial

40.5

23.9

10.2

11,364.4

11,439.0

174.4

11,613.4

Personal

Residential Real Estate

76.1

17.2

10,607.4

10,701.6

153.3

10,854.9

Private Client

35.7

13.0

1.9

5,367.8

5,418.4

5.3

5,423.7

Other

—

240.0

—

240.0

Total Personal

111.8

30.2

2.8

16,215.2

16,360.0

158.6

16,518.6

Total Loans and Leases

152.3

54.1

13.0

27,579.6

27,799.0

333.0

28,132.0

Total Other Real Estate Owned

45.5

Total Nonperforming Assets

378.5

The following tables provide information related to impaired loans by segment and class as of March 31, 2011 and December 31, 2010.


	March 31, 2011
(In Millions)	Recorded Investment		Unpaid Principal Balance		Specific Reserve		Average Recorded Investment		Interest Income Recognized
With no related specific reserve:
Commercial and Institutional	$	17.1	$	23.3	$	—	$	17.0	$	—
Commercial Real Estate		26.8		40.8		—		25.4		.1
Residential Real Estate		106.2		122.2		—		113.3		.8
Private Client		2.0		2.2		—		2.1		—

With a related specific reserve:
Commercial and Institutional		37.0		47.5		17.9		35.2		—
Commercial Real Estate		81.7		105.0		26.3		82.6		—
Residential Real Estate		7.3		8.0		3.7		6.7		—
Private Client		3.1		3.3		.5		3.1		—

Total:
Commercial		162.6		216.6		44.2		160.2		.1
Personal		118.6		135.7		4.2		125.2		.8

Total	$	281.2	$	352.3	$	48.4	$	285.4	$	.9

Notes to Consolidated Financial Statements (continued)


	December 31, 2010
(In Millions)	Recorded Investment		Unpaid Principal Balance		Specific Reserve
With no related specific reserve:
Commercial and Institutional	$	17.9	$	26.1	$	—
Commercial Real Estate		43.7		62.4		—
Residential Real Estate		111.9		138.1		—
Private Client		3.7		3.9		—

With a related specific reserve:
Commercial and Institutional		41.7		47.8		19.8
Commercial Real Estate		77.2		88.9		29.5
Residential Real Estate		5.1		5.1		2.4

Total:
Commercial		180.5		225.2		49.3
Personal		120.7		147.1		2.4

Total	$	301.2	$	372.3	$	51.7

A loan is considered to be impaired when, based on current information and events, management determines that it is probable that Northern Trust will be unable to collect all amounts due according to the contractual terms of the loan agreement. A loan is also considered to be impaired if its terms have been modified as a concession resulting from the debtor’s financial difficulties, referred to as a troubled debt restructuring (TDR). All troubled debt restructurings are considered impaired loans in the calendar year of their restructuring. In subsequent years, a TDR may cease being classified as impaired if the loan was modified at a market rate and has performed according to the modified terms for at least six months. A loan that has been modified at a below market rate will return to performing status if it satisfies the six month performance requirement; however, it will remain classified as impaired. Impaired loans are measured based upon the loan’s market price, the present value of expected future cash flows, discounted at the loan’s effective interest rate, or at the fair value of the collateral if the loan is collateral dependent. If the loan valuation is less than the recorded value of the loan, based on the certainty of loss, either a specific reserve is established or a charge-off is recorded for the difference. Smaller balance (individually less than $250,000) homogeneous loans are collectively evaluated for impairment and excluded from impaired loan disclosures in accordance with applicable accounting standards. Northern Trust’s accounting policies for impaired loans is consistent across all classes of loans and leases.

Impaired loans are identified through ongoing credit management activities including the formal review of past due and watch list credits. Payment performance and delinquency status are critical factors in identifying impairment for all loans and leases, particularly those within the residential real estate, private client and personal-other classes. Other factors considered in the determination of impairment for loans and leases within the commercial and institutional, non-U.S., lease financing, and commercial-other classes relate to the borrower’s ability to perform under the terms of the obligation as measured through the assessment of future cash flows, collateral value, market value, and other factors. Collateral value is a significant factor in identifying impairment for loans and leases within the commercial real estate and residential real estate classes.

Notes to Consolidated Financial Statements (continued)

Included within impaired loans as of March 31, 2011 and December 31, 2010 were $52.6 million and $56.3 million, respectively, of loans deemed to be TDRs. As of March 31, 2011 and December 31, 2010, there were $39.1 million and $33.4 million nonperforming TDRs, respectively and $13.5 million and $22.9 million performing TDRs, respectively. There were $8.6 million and $16.3 million of unfunded loan commitments and standby letters of credit at March 31, 2011 and December 31, 2010, respectively, issued to borrowers whose loans were classified as nonperforming or impaired.

The average recorded investment in impaired loans was $285.4 million and $212.5 million for the three months ended March 31, 2011 and 2010, respectively. Interest income that would have been recorded on nonperforming loans in accordance with their original terms totaled approximately $4.2 million and $3.5 million for the three months ended March 31, 2011 and 2010, respectively.

6. Allowance for Credit Losses

Loans, leases and other extensions of credit deemed uncollectible are charged to the allowance for credit losses and subsequent recoveries, if any, are credited to the allowance. The allowance for credit losses, which represents management’s estimate of probable losses related to specific borrower relationships and inherent in the various loan and lease portfolios, unfunded commitments, and standby letters of credit, is determined by management through a disciplined credit review process.

Northern Trust’s Loan Loss Allowance Committee assesses a common set of qualitative factors in establishing loan loss allowances for both the commercial and personal loan segments. Factors evaluated include those related to external matters, such as economic conditions and changes in collateral value, and those related to internal matters, such as changes in asset quality metrics and loan review activities. The risk characteristics of both loan segments are also evaluated and include portfolio delinquencies, percentage of portfolio on the watch list and on nonperforming status, and average borrower ratings. Loan-to-value levels are considered for collateral-secured loans and leases in both the personal and commercial segments. Borrower debt service coverage is evaluated in the personal segment, and cash flow coverage is analyzed in the commercial segment. Similar risk characteristics by type of exposure are analyzed when determining the allowance for unfunded commitments and standby letters of credit. These qualitative factors, together with historical loss rates, serve as the basis for the allowance for credit losses.

Notes to Consolidated Financial Statements (continued)

The following tables provide information regarding the changes in the allowance for credit losses by segment during the three-month periods ended March 31, 2011 and 2010.


	Three Months Ended March 31, 2011
(In Millions)	Commercial			Personal			Total
Balance at Beginning of Period	$	256.7		$	100.6		$	357.3
Charge-Offs		(20.7	)		(14.7	)		(35.4	)
Recoveries		12.8			1.0			13.8

Net Charge-Offs		(7.9	)		(13.7	)		(21.6	)
Provision for Credit Losses		(1.9	)		16.9			15.0
Effect of Foreign Exchange Rates		.1			—			.1

Balance at End of Period	$	247.0		$	103.8		$	350.8

Allowance for Credit Losses Assigned to:
Loans and Leases		211.4			102.1			313.5
Unfunded Commitments and Standby Letters of Credit		35.6			1.7			37.3

Total Allowance for Credit Losses	$	247.0		$	103.8		$	350.8


	Three Months Ended March 31, 2010
(In Millions)	Commercial			Personal			Total
Balance at Beginning of Period	$	252.2		$	88.4		$	340.6
Charge-Offs		(19.0	)		(13.7	)		(32.7	)
Recoveries		.9			1.2			2.1

Net Charge-Offs		(18.1	)		(12.5	)		(30.6	)
Provision for Credit Losses		26.0			14.0			40.0
Effect of Foreign Exchange Rates		—			—			—

Balance at End of Period	$	260.1		$	89.9		$	350.0

Allowance for Credit Losses Assigned to:
Loans and Leases		232.4			88.1			320.5
Unfunded Commitments and Standby Letters of Credit		27.7			1.8			29.5

Total Allowance for Credit Losses	$	260.1		$	89.9		$	350.0

Notes to Consolidated Financial Statements (continued)

The following tables provide information regarding the balances of the allowance for credit losses and recorded investment in loans and leases by segment and class as of March 31, 2011 and December 31, 2010.


March 31, 2011
(In Millions)	Commercial		Personal		Total
Loans and Leases:
Specifically Evaluated for Impairment	$	162.6	$	118.6	$	281.2
Evaluated for Inherent Impairment		11,469.9		16,136.4		27,606.3

Total Loans and Leases		11,632.5		16,255.0		27,887.5

Allowance for Credit Losses on Credit Exposures:
Specifically Evaluated for Impairment		56.2		4.2		60.4
Evaluated for Inherent Impairment		155.2		97.9		253.1

Allowance assigned to loans and leases		211.4		102.1		313.5
Allowance assigned to unfunded
Commitments and standby letters of credit		35.6		1.7		37.3

Total Allowance for Credit Losses	$	247.0	$	103.8	$	350.8


December 31, 2010
(In Millions)	Commercial		Personal		Total
Loans and Leases:
Specifically Evaluated for Impairment	$	180.5	$	120.7	$	301.2
Evaluated for Inherent Impairment		11,432.9		16,397.9		27,830.8

Total Loans and Leases		11,613.4		16,518.6		28,132.0

Allowance for Credit Losses on Credit Exposures:
Specifically Evaluated for Impairment		49.3		2.4		51.7
Evaluated for Inherent Impairment		171.4		96.5		267.9

Allowance assigned to loans and leases		220.7		98.9		319.6
Allowance assigned to unfunded
Commitments and standby letters of credit		36.0		1.7		37.7

Total Allowance for Credit Losses	$	256.7	$	100.6	$	357.3

Notes to Consolidated Financial Statements (continued)

7. Pledged 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. At March 31, 2011, $24.9 billion ($13.5 billion of government sponsored agency and other securities, $523.8 million of obligations of states and political subdivisions, and $10.9 billion of loans) were pledged. This compares to $23.9 billion ($12.8 billion of government sponsored agency and other securities, $576.5 million of obligations of states and political subdivisions, and $10.5 billion of loans) at December 31, 2010. Collateral required for these purposes totaled $5.0 billion on March 31, 2011. 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 from agreements to resell securities purchased transactions. The total fair value of accepted collateral as of March 31, 2011 and December 31, 2010 was $74.2 million and $152.1 million, respectively. There was no repledged or sold collateral at March 31, 2011 or December 31, 2010.

Deposits maintained to meet Federal Reserve Bank reserve requirements averaged $331.5 million and $202.4 million for the three months ended March 31, 2011 and 2010, respectively.

8. Goodwill and Other Intangibles – The carrying amounts of goodwill at March 31, 2011 and December 31, 2010 were as follows:


(In Millions)	March 31, 2011		December 31, 2010
(In Millions)	March 31, 2011		December 31, 2010
Corporate and Institutional Services	$	334.3	$	329.5
Personal Financial Services		71.5		71.4

Total Goodwill	$	405.8	$	400.9

Note: Amounts include the effect of foreign exchange rates on non-U.S. dollar denominated intangible assets.

Other intangible assets are included in other assets in the consolidated balance sheet. The gross carrying amount and accumulated amortization of other intangible assets subject to amortization at March 31, 2011 and December 31, 2010 were as follows:


(In Millions)	March 31, 2011		December 31, 2010
Gross Carrying Amount	$	165.5	$	164.2
Accumulated Amortization		114.3		111.0

Net Book Value	$	51.2	$	53.2

Note: Amounts include the effect of foreign exchange rates on non-U.S. dollar denominated intangible assets.

Notes to Consolidated Financial Statements (continued)

Other intangible assets consist primarily of the value of acquired client relationships. Amortization expense related to other intangible assets totaled $3.3 million and $4.0 million for the quarters ended March 31, 2011 and 2010, respectively. Amortization for the remainder of 2011 and for the years 2012, 2013, 2014, and 2015 is estimated to be $8.7 million, $11.8 million, $11.6 million, $11.5 million and $3.8 million, respectively.

9. Business Units – The following tables show the earnings contribution of Northern Trust’s business units for the three month periods ended March 31, 2011 and 2010.


Three Months Ended March 31,	Corporate and Institutional Services						Personal Financial Services						Treasury and Other						Total Consolidated
($ in Millions)	2011			2010			2011			2010			2011			2010			2011			2010
Noninterest Income
Trust, Investment and Other Servicing Fees	$	271.3		$	297.3		$	243.6		$	217.8		$	—		$	—		$	514.9		$	515.1
Other		124.3			117.8			31.6			32.5			(7.3	)		2.1			148.6			152.4
Net Interest Income (FTE)*		61.7			73.5			149.2			140.3			34.0			26.3			244.9			240.1

Revenues*		457.3			488.6			424.4			390.6			26.7			28.4			908.4			907.6
Provision for Credit Losses		(14.6	)		(5.7	)		29.6			45.7			—			—			15.0			40.0
Noninterest Expenses		339.9			322.7			290.0			266.6			23.0			30.4			652.9			619.7

Income (Loss) before Income Taxes*		132.0			171.6			104.8			78.3			3.7			(2.0	)		240.5			247.9
Provision for Income Taxes*		49.8			60.8			41.7			29.7			(2.0	)		.2			89.5			90.7

Net Income (Loss)	$	82.2		$	110.8		$	63.1		$	48.6		$	5.7		$	(2.2	)	$	151.0		$	157.2

Percentage of Consolidated Net Income		54	%		70	%		42	%		31	%		4	%		(1	)%		100	%		100	%

Average Assets	$	43,710.7		$	37,358.0		$	23,630.3		$	23,508.1		$	15,924.7		$	14,103.5		$	83,265.7		$	74,969.6

*	Stated on a fully taxable equivalent basis (FTE). Total consolidated includes FTE adjustments of $10.5 million for 2011 and $9.7 million for 2010.

Further discussion of business unit results is provided within the “Business Unit Reporting” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Notes to Consolidated Financial Statements (continued)

10. Accumulated Other Comprehensive Income (Loss) – The following tables summarize the components of accumulated other comprehensive income (loss) at March 31, 2011 and 2010, and changes during the three month periods then ended.


	Period Change
(In Millions)	Beginning Balance (Net of Tax)			Before Tax Amount			Tax Effect			Ending Balance (Net of Tax)

Three Months Ended March 31, 2011
Noncredit-Related Unrealized Losses on Securities OTTI	$	(21.2	)	$	5.1		$	(1.9	)	$	(18.0	)
Other Unrealized Gains (Losses) on Securities Available for Sale, net		7.7			(.3	)		.2			7.6
Reclassification Adjustments		—			.5			(.2	)		.3

Net Unrealized Gains (Losses) on Securities Available for Sale		(13.5	)		5.3			(1.9	)		(10.1	)
Unrealized Gains (Losses) on Cash Flow Hedge Designations		11.4			16.8			(6.2	)		22.0
Reclassification Adjustments		—			(2.5	)		.9			(1.6	)

Net Unrealized Gains (Losses) on Cash Flow Hedge Designations		11.4			14.3			(5.3	)		20.4
Foreign Currency Translation Adjustments		(7.0	)		(6.9	)		14.1			.2
Pension and Other Postretirement Benefit Adjustments		(296.2	)		—			—			(296.2	)
Reclassification Adjustments		—			7.5			(1.4	)		6.1

Total Pension and Other Postretirement Benefit Adjustments		(296.2	)		7.5			(1.4	)		(290.1	)

Accumulated Other Comprehensive Income (Loss)	$	(305.3	)	$	20.2		$	5.5