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, 2013

¨	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

239,239,836 Shares - $1.66 2/3 Par Value

(Shares of Common Stock Outstanding on March 31, 2013)

CONSOLIDATED FINANCIAL HIGHLIGHTS

(UNAUDITED)


	Three Months Ended March 31,
FOR THE PERIOD ($ In Millions)	2013			2012			% Change (**)
Noninterest Income
Trust, Investment and Other Servicing Fees	$	630.7		$	575.2			10	%
Foreign Exchange Trading Income		59.5			61.9			(4	)
Treasury Management Fees		16.8			17.4			(3	)
Security Commissions and Trading Income		18.3			18.3			—
Other Operating Income		24.8			38.6			(36	)
Investment Security Gains (Losses), net		0.2			(2.4	)		N/M

Total Noninterest Income		750.3			709.0			6

Net Interest Income		226.1			256.4			(12	)
Provision for Credit Losses		5.0			5.0			—

Net Interest Income after Provision for Credit Losses		221.1			251.4			(12	)

Noninterest Expense
Compensation		320.3			321.6			—
Employee Benefits		63.3			68.1			(7	)
Outside Services		129.9			128.2			1
Equipment and Software		91.4			90.8			1
Occupancy		43.2			41.8			3
Other Operating Expense		80.8			73.1			10

Total Noninterest Expense		728.9			723.6			1

Income before Income Taxes		242.5			236.8			2
Provision for Income Taxes		78.5			75.6			4

Net Income	$	164.0		$	161.2			2	%

Average Total Assets	$	91,569.3		$	95,128.1			(4	)%

PER COMMON SHARE
Net Income – Basic	$	0.68		$	0.66			3	%
– Diluted		0.67			0.66			2
Cash Dividends Declared Per Common Share (*)		0.30			0.58			N/M
Book Value – End of Period (EOP)		31.82			29.95			6
Market Price – EOP		54.56			47.45			15

RATIOS
Return on Average Common Equity		8.82	%		9.04	%
Return on Average Assets		0.73			0.68
Dividend Payout Ratio		44.8			87.9
Average Stockholders’ Equity to Average Assets		8.2			7.5


PERIOD END ($ In Millions)	March 31, 2013			December 31, 2012			% Change (**)
Assets	$	93,156.8		$	97,463.8			(4	)%
Earning Assets		84,193.6			87,472.7			(4	)
Deposits		75,822.1			81,407.8			(7	)
Stockholders’ Equity		7,612.1			7,527.0			1

PERIOD END CLIENT ASSETS ($ In Billions)
Assets Under Custody	$	5,024.4		$	4,804.9			5	%
Assets Under Management		810.2			758.9			7

RATIOS
Tier 1 Capital to Risk-Weighted Assets – EOP		13.3	%		12.8	%
Total Capital to Risk-Weighted Assets – EOP		14.7			14.3
Tier 1 Leverage Ratio		8.4			8.2

(*)	The 2012 first quarter Cash Dividends Declared per Common Share balance of $0.58 was comprised of a $0.28 per common share dividend declared January 17, 2012, paid April 2, 2012, and a $0.30 per common share dividend declared March 14, 2012, paid July 2, 2012.

(**)	Percentage calculations are based on actual balances rather than the rounded amounts presented in the Consolidated Financial Highlights.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

FIRST QUARTER CONSOLIDATED RESULTS OF OPERATIONS

General

Northern Trust Corporation (the Corporation), together with its subsidiaries, is a leading provider of asset servicing, fund administration, asset management, fiduciary and banking solutions for corporations, institutions, families, and individuals worldwide. Northern Trust focuses on servicing and managing client assets through its two primary business units, Personal Financial Services (PFS) and Corporate & Institutional Services (C&IS). Asset management and related services are provided to PFS and C&IS clients primarily by a third business unit, Northern Trust Global Investments (NTGI). 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). Except where the context otherwise requires, the term “Northern Trust” refers to Northern Trust Corporation and its subsidiaries on a consolidated basis.

The following should be read in conjunction with the consolidated financial statements and related footnotes included in this report. Investors should also read the section entitled “Factors Affecting Future Results.”

Overview

Net income per common share in the first quarter of 2013 was $0.67 compared to $0.66 per common share in the first quarter of 2012. Net income for the current quarter was $164.0 million, up 2% from $161.2 million in the prior year quarter. The current quarter includes a $12.4 million write-off of certain fee receivables resulting from the correction of an accrual methodology followed in prior years, as well as restructuring and integration related charges of $1.8 million. These current quarter items total $14.2 million ($8.9 million after tax, or $0.04 per common share). The prior year quarter included restructuring, acquisition and integration related charges of $3.9 million ($2.6 million after tax, or $0.01 per common share).

The performance in the current quarter produced an annualized return on average common equity of 8.8% as compared to 9.0% in the prior year quarter. The annualized return on average assets was 0.7% in both the current and prior year quarter.

Consolidated revenue of $976.4 million in the current quarter was up $11.0 million, or 1%, from $965.4 million in the prior year quarter. Noninterest income, which represented 77% of revenue, increased $41.3 million, or 6%, to $750.3 million from the prior year quarter’s $709.0 million, primarily reflecting higher trust, investment and other servicing fees.

Net interest income for the quarter decreased $30.3 million, or 12%, to $226.1 million as compared to $256.4 million in the prior year quarter, primarily due to a continued decline in the net interest margin and lower average earning assets.

Overview (continued)

Noninterest expense totaled $728.9 million in the current quarter compared to $723.6 million in the prior year quarter. The increase of 1% primarily reflects an increase in other operating expense, partially offset by a decrease in employee benefit expense.

Noninterest Income

The components of noninterest income are provided below.


Noninterest Income	Three Months Ended March 31,
($ In Millions)	2013		2012			Change
Trust, Investment and Other Servicing Fees	$	630.7	$	575.2		$	55.5		10	%
Foreign Exchange Trading Income		59.5		61.9			(2.4	)	(4	)
Treasury Management Fees		16.8		17.4			(0.6	)	(3	)
Security Commissions and Trading Income		18.3		18.3			—		—
Other Operating Income		24.8		38.6			(13.8	)	(36	)
Investment Security Gains (Losses), net		0.2		(2.4	)		2.6		N/M

Total Noninterest Income	$	750.3	$	709.0		$	41.3		6	%

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 fee calculations are performed on a monthly or quarterly basis and can be based on the beginning, ending or daily average value of the client portfolio. Certain investment management fee arrangements also may provide for performance fees based on client portfolio returns that exceed predetermined levels.

The following tables present Northern Trust’s assets under custody and assets under management by business segment.


							Change			Change
Assets Under Custody	March 31,		December 31,		March 31,		Q1-13/			Q1-13/
($ In Billions)	2013		2012		2012		Q4-12			Q1-12
Corporate and Institutional	$	4,569.1	$	4,358.6	$	4,188.6		5	%		9	%
Personal		455.3		446.3		406.6		2			12

Total Assets Under Custody	$	5,024.4	$	4,804.9	$	4,595.2		5	%		9	%


							Change			Change
Assets Under Management	March 31,		December 31,		March 31,		Q1-13/			Q1-13/
($ In Billions)	2013		2012		2012		Q4-12			Q1-12
Corporate and Institutional	$	604.2	$	561.2	$	537.4		8	%		12	%
Personal		206.0		197.7		179.1		4			15

Total Assets Under Management	$	810.2	$	758.9	$	716.5		7	%		13	%

C&IS assets under custody totaled $4.6 trillion, up 9% from the prior year quarter, and included $2.8 trillion of global custody assets, 10% higher compared to the prior year quarter. C&IS assets under management included $100.9 billion of securities lending collateral, a 5% increase from the prior year quarter.

Noninterest Income (continued)

Changes in assets under custody and under management are in comparison to the twelve month increase in the S&P 500 index and EAFE index (USD) of 11.4% and 7.8%, respectively.

Custodied and managed assets were invested as follows at March 31:


	2013									2012
Assets Under Custody	C&IS			PFS			Consolidated			C&IS			PFS			Consolidated
Equities		46	%		50	%		46	%		45	%		45	%		45	%
Fixed Income Securities		36			24			35			36			26			35
Cash and Other Assets		18			26			19			19			29			20

Assets Under Management
Equities		53	%		41	%		50	%		51	%		37	%		47	%
Fixed Income Securities		14			29			18			14			32			19
Cash and Other Assets		33			30			32			35			31			34

Trust, investment and other servicing fees in C&IS increased $31.7 million, or 10%, to $348.7 million in the current quarter from the prior year quarter’s $317.0 million.


C&IS Trust, Investment and Other Servicing Fees	Three Months Ended March 31,
($ In Millions)	2013		2012		Change
Custody and Fund Administration	$	223.8	$	209.8	$	14.0	7	%
Investment Management		75.5		61.8		13.7	22
Securities Lending		22.3		21.5		0.8	4
Other		27.1		23.9		3.2	13

Total	$	348.7	$	317.0	$	31.7	10	%

Custody and fund administration fees, the largest component of C&IS fees, increased 7%, primarily reflecting the favorable impact of equity markets on fees and new business. C&IS investment management fees increased 22%, reflecting new business, the favorable impact of markets, and lower waived fees in money market mutual funds. Money market mutual fund fee waivers in C&IS, attributable to persistent low short-term interest rates, totaled $8.8 million in the current quarter, compared to waived fees of $10.6 million in the prior year quarter. Securities lending revenue increased 4%, primarily reflecting higher spreads and loan volumes in the current quarter.

Trust, investment and other servicing fees in PFS totaled $282.0 million in the current quarter, increasing $23.8 million, or 9%, from $258.2 million in the prior year quarter. The increased fees in the current quarter are primarily attributable to new business and the favorable impact of equity markets on fees. Money market mutual fund fee waivers in PFS totaled $13.4 million in the current quarter compared with $14.8 million in the prior year quarter.

Foreign exchange trading income totaled $59.5 million, down 4% compared with $61.9 million in the prior year quarter. The current quarter decrease is attributable to lower currency market volatility compared to the prior year quarter.

Noninterest Income (continued)

The components of other operating income are provided below.


Other Operating Income	Three Months Ended March 31,
($ In Millions)	2013			2012		Change
Loan Service Fees	$	14.9		$	16.8	$	(1.9	)	(11	)%
Banking Service Fees		12.4			13.9		(1.5	)	(11	)
Other Income		(2.5	)		7.9		(10.4	)	N/M

Total Other Operating Income	$	24.8		$	38.6	$	(13.8	)	(36	)%

The other income component of other operating income includes the $12.4 million write-off of certain fee receivables resulting from a correction of an accrual methodology followed in prior years.

Net investment security gains totaled $226.6 thousand in the current quarter compared to net losses of $2.4 million in the prior year quarter.

Net Interest Income

Net interest income for the current quarter stated on a fully taxable equivalent (FTE) basis totaled $233.7 million, down $32.6 million, or 12%, from $266.3 million in the prior year quarter. The decrease reflects a continued decline in the net interest margin to 1.15% from 1.24% in the prior year quarter and lower average earning assets. The current quarter decline in the net interest margin primarily reflects lower yields on earning assets and a lower level of demand deposits, partially offset by a lower cost of interest-bearing liabilities. Average earning assets for the quarter were $82.2 billion, down $3.9 billion, or 5%, from $86.1 billion in the prior year quarter, primarily reflecting decreased Federal Reserve deposits. 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. Net interest income stated on an FTE basis is a non-generally accepted accounting principle (GAAP) financial measure that facilitates the analysis of asset yields. When adjusted to an FTE basis, yields on taxable, nontaxable, and partially taxable assets are comparable; however, the adjustment to an FTE basis has no impact on net income. A reconciliation of net interest income on a GAAP basis to net interest income on an FTE basis is provided on page 17.

Average Federal Reserve deposits and other interest-bearing assets totaled $3.9 billion for the current quarter compared to $7.7 billion for the prior year quarter, a decrease of $3.8 billion, or 50%.

Average securities, inclusive of Federal Reserve and Federal Home Loan Bank stock and certain community development investments, which are classified in other assets in the consolidated balance sheet, were $31.3 billion, relatively unchanged from the prior year quarter. Loans and leases averaged $28.7 billion, up slightly from $28.6 billion in the prior year quarter, reflecting growth in commercial and institutional loans, partially offset by a decrease in residential real estate loans. Commercial and institutional loans averaged $7.5 billion in the current quarter, up $0.5 billion, or 7%, from the prior year quarter’s average of $7.0 billion.

Net Interest Income (continued)

Residential real estate loans averaged $10.4 billion in the current quarter, down $0.4 billion, or 3%, from the prior year quarter’s average of $10.8 billion.

Northern Trust utilizes a diverse mix of funding sources. Total interest-bearing deposits averaged $56.5 billion in the current quarter compared to $56.7 billion in the prior year quarter, a decrease of $0.2 billion, or less than 1%. Other interest-bearing funds averaged $7.4 billion in the current quarter, a decrease of $1.2 billion, or 15%, as compared to $8.6 billion in the prior year quarter, primarily due to lower levels of short-term borrowings and long-term debt. The balances within short-term borrowing classifications vary based on funding requirements and strategies, interest rate levels, changes in the volume of lower-cost deposit sources, and the availability of collateral to secure these borrowings. Average net noninterest-related funds utilized to fund earning assets decreased $2.5 billion, or 12%, to $18.3 billion from $20.8 billion in the prior year quarter, resulting primarily from lower levels of demand and other noninterest-bearing deposits.

For additional quantitative analysis of average balances and interest rate changes affecting net interest income, refer to the Average Consolidated Balance Sheet with Analysis of Net Interest Income and the Analysis of Net Interest Income Changes Due To Volume and Rate on page 18.

Provision for Credit Losses

The provision for credit losses was $5.0 million in both the current quarter and prior year quarter. Net charge-offs totaled $8.7 million for the current quarter resulting from $12.6 million of charge-offs and $3.9 million of recoveries, compared to $5.8 million of net charge-offs in the prior year quarter resulting from $14.4 million of charge-offs and $8.6 million of recoveries. Nonperforming loans and leases decreased $10.4 million, or 4%, from the prior year quarter. Residential real estate loans and commercial real estate loans accounted for 69% and 21%, respectively, of total nonperforming loans at March 31, 2013. For additional discussion of the provision and allowance for credit losses, refer to the “Asset Quality” section on page 13.

Noninterest Expense

The components of noninterest expense are provided below.


Noninterest Expense	Three Months Ended March 31,
($ In Millions)	2013		2012		Change
Compensation	$	320.3	$	321.6	$	(1.3	)	—	%
Employee Benefits		63.3		68.1		(4.8	)	(7	)
Outside Services		129.9		128.2		1.7		1
Equipment and Software		91.4		90.8		0.6		1
Occupancy		43.2		41.8		1.4		3
Other Operating Expense		80.8		73.1		7.7		10

Total Noninterest Expense	$	728.9	$	723.6	$	5.3		1	%

Noninterest Expense (continued)

Compensation expense, the largest component of noninterest expense, equaled $320.3 million, down slightly from $321.6 million in the prior year quarter. Staff on a full-time equivalent basis at March 31, 2013 totaled approximately 14,200, up 2% from a year ago.

Employee benefit expense equaled $63.3 million, down 7% compared to $68.1 million in the prior year quarter. The current quarter decrease primarily reflects lower expense associated with employee medical benefits.

Expense associated with outside services totaled $129.9 million, up 1% from $128.2 million in the prior year quarter, primarily reflecting higher technical services expense in the current quarter.

Equipment and software expense totaled $91.4 million, up 1% from $90.8 million in the prior year quarter. The prior year quarter included a $4.6 million software write-off. The current quarter includes higher levels of software amortization and support costs associated with the continued investment in technology related assets.

Occupancy expense equaled $43.2 million, an increase of 3% from $41.8 million in the prior year quarter. The current quarter includes $1.5 million of restructuring charges related to reductions in office space.

The components of other operating expense are provided below.


Other Operating Expense	Three Months Ended March 31,
($ In Millions)	2013		2012		Change
Business Promotion	$	28.6	$	28.3	$	0.3	1	%
FDIC Insurance Premiums		6.6		4.3		2.3	56
Staff Related		10.5		9.7		0.8	8
Other Intangible Amortization		5.2		4.6		0.6	14
Other Expenses		29.9		26.2		3.7	14

Total Other Operating Expense	$	80.8	$	73.1	$	7.7	10	%

The current quarter increase in the other expenses component of other operating expense primarily reflects higher charges associated with account servicing activities.

Provision for Income Taxes

Income tax expense was $78.5 million in the current quarter, representing an effective tax rate of 32.4%, and $75.6 million in the prior year quarter, representing an effective tax rate of 31.9%.

BUSINESS UNIT REPORTING

The following tables reflect the earnings contributions and average assets of Northern Trust’s business units for the three month periods ended March 31, 2013 and 2012. Business unit financial information, presented on an internal management-reporting basis, is determined by accounting systems that are used to allocate revenue and expense related to each segment and incorporates processes for allocating assets, liabilities, and equity, and the applicable interest income and expense.


Three Months Ended March 31,	Corporate and Institutional Services						Personal Financial Services						Treasury and Other						Total Consolidated
($ In Millions)	2013			2012			2013			2012			2013			2012			2013			2012
Noninterest Income
Trust, Investment and Other Servicing Fees	$	348.7		$	317.0		$	282.0		$	258.2		$	—		$	—		$	630.7		$	575.2
Foreign Exchange Trading Income		58.2			57.5			1.3			4.4			—			—			59.5			61.9
Other Noninterest Income		40.2			48.6			17.2			22.7			2.7			0.6			60.1			71.9
Net Interest Income (FTE)*		64.1			77.0			147.8			161.1			21.8			28.2			233.7			266.3

Revenue*		511.2			500.1			448.3			446.4			24.5			28.8			984.0			975.3
Provision for Credit Losses		(2.7	)		0.5			7.7			4.5			—			—			5.0			5.0
Noninterest Expense		398.7			398.0			301.8			303.7			28.4			21.9			728.9			723.6

Income before Income Taxes*		115.2			101.6			138.8			138.2			(3.9	)		6.9			250.1			246.7
Provision for Income Taxes*		35.9			33.6			52.8			52.3			(2.6	)		(0.4	)		86.1			85.5

Net Income	$	79.3		$	68.0		$	86.0		$	85.9		$	(1.3	)	$	7.3		$	164.0		$	161.2

Percentage of Consolidated Net Income		48	%		42	%		52	%		53	%		N/M			5	%		100	%		100	%
Average Assets	$	51,316.8		$	49,662.2		$	22,861.4		$	23,563.9		$	17,391.1		$	21,902.0		$	91,569.3		$	95,128.1

*	Stated on a fully taxable equivalent basis (FTE). Total consolidated includes FTE adjustments of $7.6 million for 2013 and $9.9 million for 2012.

Corporate and Institutional Services

C&IS net income for the quarter was $79.3 million, compared with $68.0 million in the prior year quarter, an increase of $11.3 million, or 17%.


C&IS Trust, Investment and Other Servicing Fees	Three Months Ended March 31,
($ In Millions)	2013		2012		Change
Custody and Fund Administration	$	223.8	$	209.8	$	14.0	7	%
Investment Management		75.5		61.8		13.7	22
Securities Lending		22.3		21.5		0.8	4
Other		27.1		23.9		3.2	13

Total	$	348.7	$	317.0	$	31.7	10	%

Custody and fund administration fees, the largest component of C&IS fees, increased 7%, primarily reflecting the favorable impact of equity markets on fees and new business. Investment management fees increased 22%, reflecting new business, the favorable impact of markets, and lower waived fees in money market mutual funds. Money market mutual fund fee waivers in C&IS, attributable to persistent low short-term interest rates, totaled $8.8 million in the current quarter, compared to $10.6 million in the prior year quarter. Securities lending revenue increased 4%, primarily reflecting higher spreads and loan volumes in the current quarter.

Corporate and Institutional Services (continued)

Foreign exchange trading income totaled $58.2 million in the current quarter, an increase of 1% from $57.5 million in the prior year quarter, attributable to higher client volumes, partially offset by lower market volatility compared to the prior year quarter.

Other noninterest income totaled $40.2 million in the current quarter, a decrease of $8.4 million, or 17%, from $48.6 million in the prior year quarter. The current quarter includes a $6.6 million reduction in connection with the write-off of certain fee receivables.

Net interest income stated on an FTE basis was $64.1 million, down $12.9 million, or 17%, from $77.0 million in the prior year quarter, primarily reflecting a decrease in the net interest margin. The current quarter net interest margin equaled 0.59% as compared with 0.74% reported in the prior year quarter. The lower net interest margin is primarily due to lower yields on earning assets, partially offset by lower deposit rates as a result of the persistently low interest rate environment. Earning assets averaged $43.8 billion for the quarter, an increase of $2.1 billion, or 5%, from $41.7 billion in the prior year quarter. Earning assets were primarily comprised of interest-bearing deposits with banks and loans and leases. Funding sources were primarily comprised of non-U.S. custody related interest-bearing deposits.

A provision for credit losses of negative $2.7 million was recorded in the current quarter as compared to the prior year quarter’s provision of $0.5 million, reflecting continued improvement in loan portfolio credit quality metrics.

Total C&IS noninterest expense, which includes the direct expense of the business unit, indirect expense allocations from NTGI and O&T for product and operating support, and indirect expense allocations for certain corporate support services, totaled $398.7 million, relatively unchanged from the prior year quarter.

Personal Financial Services

PFS net income for the current quarter was $86.0 million, up slightly from the prior year quarter. Noninterest income was $300.5 million, up $15.2 million, or 5%, from $285.3 million in the prior year quarter. Trust, investment and other servicing fees totaled $282.0 million in the current quarter, increasing $23.8 million, or 9%, from $258.2 million in the prior year quarter. The increased fees primarily reflect new business and the favorable impact of markets. PFS waived fees in money market mutual funds, attributable to persistent low short-term interest rates, totaled $13.4 million in the current quarter compared with $14.8 million in the prior year quarter. Other noninterest income totaled $17.2 million, down $5.5 million, or 24%, from $22.7 million in the prior year quarter, reflecting a $5.8 million reduction in connection with the write-off of certain fee receivables.

Net interest income stated on an FTE basis was $147.8 million, down $13.3 million, or 8%, from $161.1 million in the prior year quarter, primarily due to a lower net interest margin. The net interest margin decreased to 2.65% from 2.82% in the prior year quarter as a result of lower yields on loans and leases, partially offset by lower borrowing rates.

Personal Financial Services (continued)

A provision for credit losses of $7.7 million was recorded in the current quarter, compared to $4.5 million in the prior year quarter. While credit quality metrics for the overall portfolio have improved, the current quarter provision reflects continued weakness within the residential real estate class.

Total PFS noninterest expense, which includes the direct expense of the business unit, indirect expense allocations from NTGI and O&T for product and operating support, and indirect expense allocations for certain corporate support services, totaled $301.8 million, down slightly from the prior year quarter.

Treasury and Other

Treasury and Other includes income and expense associated with the wholesale funding activities and the investment portfolios of the Corporation and its principal subsidiary, The Northern Trust Company (Bank), and certain corporate-based expense, executive level compensation, and nonrecurring items not allocated to the business units. Other noninterest income in the current quarter totaled $2.7 million, compared with $0.6 million in the prior year quarter. The prior year quarter included charges of $3.1 million for credit-related other-than-temporary impairment of residential mortgage-backed securities and auction rate securities. Net interest income in the current quarter was $21.8 million, compared to $28.2 million in the prior year quarter, a decrease of $6.4 million, or 23%. The decrease primarily reflects lower yields on securities and a decline in average earning assets of $5.6 billion, or 26%, to $15.7 billion in the current quarter. Noninterest expense for the quarter totaled $28.4 million compared with $21.9 million in the prior year quarter, an increase of $6.5 million, or 30%, reflecting current quarter increases within various miscellaneous expense categories.

BALANCE SHEET

Total assets at March 31, 2013 were $93.2 billion and averaged $91.6 billion for the current quarter, compared with total assets of $91.6 billion at March 31, 2012 and average total assets of $95.1 billion in the prior year first quarter. Average balances are considered to be a better measure of balance sheet trends as period-end balances can be impacted on a short term basis by deposit and withdrawal activity involving large balances of short-term client funds. Loans and leases totaled $28.9 billion at March 31, 2013 and averaged $28.7 billion in the current quarter as compared to $29.2 billion at March 31, 2012 and a $28.6 billion average in the prior year quarter. Securities, including Federal Reserve and Federal Home Loan Bank stock and certain community development investments which are classified in other assets in the consolidated balance sheet, totaled $30.6 billion at March 31, 2013 and averaged $31.3 billion for the quarter, down 5% and unchanged, respectively, compared with $32.1 billion at March 31, 2012 and $31.3 billion on average in the prior year quarter. Federal funds sold and securities purchased under agreements to resell, interest-bearing deposits with banks, and Federal Reserve deposits and other interest-bearing assets in aggregate totaled $24.8 billion at March 31, 2013 and averaged $22.2 billion in the current quarter, up 16% and down 15%, respectively, from the prior year quarter. Interest-bearing deposits at March 31, 2013 totaled $56.9 billion and averaged $56.5 billion, compared to $54.0 billion at March 31, 2012 and a $56.7 billion average in the prior year quarter.

BALANCE SHEET (continued)

Noninterest-bearing deposits at March 31, 2013 totaled $18.9 billion and averaged $16.9 billion, compared to $19.9 billion at March 31, 2012 and a $19.5 billion average in the prior year quarter.

Total stockholders’ equity averaged $7.5 billion, up $0.3 million, or 5%, from the prior year quarter’s average of $7.2 billion. The increase primarily reflects earnings, partially offset by dividend declarations and the repurchase of common stock pursuant to the Corporation’s share buyback program. During the three months ended March 31, 2013, the Corporation repurchased 1,403,366 shares at a cost of $74.5 million ($53.08 average price per share). Under the Corporation’s capital plan, which was reviewed without objection by the Federal Reserve in March of 2013, the Corporation may repurchase up to $400.0 million of common stock after March 31, 2013 through March 31, 2014. As of March 31, 2013, under the Corporation’s previous stock buyback program, the Corporation was authorized by its Board of Directors to purchase up to 5.4 million additional shares. On April 16, 2013, the Board of Directors authorized a new stock buyback program that replaced the previous program and provides for the purchase of up to 12.0 million shares of the Corporation’s common stock. The current stock buyback program has no fixed expiration date.

Northern Trust’s risk-based capital ratios remained strong at March 31, 2013 and exceeded the minimum regulatory requirements established by U.S. banking regulators. The Corporation and the Bank each had capital ratios at March 31, 2013 that were above the level required for classification as a “well capitalized” institution. Shown below are the capital ratios of the Corporation and the Bank as of March 31, 2013 and December 31, 2012.


	March 31, 2013									December 31, 2012
	Tier 1			Total			Leverage			Tier 1			Total			Leverage
	Capital			Capital			Ratio			Capital			Capital			Ratio
Northern Trust Corporation		13.3	%		14.7	%		8.4	%		12.8	%		14.3	%		8.2	%
The Northern Trust Company		12.2	%		14.0	%		7.7	%		11.9	%		13.7	%		7.6	%

Minimum to Qualify as Well Capitalized		6.0	%		10.0	%		5.0	%		6.0	%		10.0	%		5.0	%

The following table provides the Corporation’s ratios of tier 1 capital and tier 1 common equity to risk-weighted assets, as well as a reconciliation of tier 1 capital calculated in accordance with applicable regulatory requirements and GAAP to tier 1 common equity.


($ In Millions)	March 31, 2013			December 31, 2012
Ratios
Tier 1 Capital		13.3	%		12.8	%
Tier 1 Common Equity		12.8	%		12.4	%

Tier 1 Capital	$	7,587.0		$	7,489.0
Less: Floating Rate Capital Securities		268.7			268.7

Tier 1 Common Equity	$	7,318.3		$	7,220.3

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

ASSET QUALITY

Securities Portfolio

Northern Trust maintains a high quality securities portfolio, with 84% of the combined available for sale, held to maturity, and trading account portfolios at March 31, 2013 composed of U.S. Treasury and government sponsored agency securities and triple-A rated corporate notes, asset-backed securities, supranational, sovereign and non-U.S. agency bonds, auction rate securities and obligations of states and political subdivisions. The remaining portfolio was composed of corporate notes, asset-backed securities, negotiable certificates of deposit, obligations of states and political subdivisions, auction rate securities and other securities, of which as a percentage of the total securities portfolio, 4% was rated double-A, 2% was rated below double-A, and 10% was not rated by Standard and Poor’s or Moody’s Investors Service (primarily negotiable certificates of deposits of banks whose long term ratings are at least A).

Total unrealized losses within the investment securities portfolio at March 31, 2013 were $25.5 million as compared to $30.2 million at December 31, 2012. Of the total unrealized losses on securities at March 31, 2013, the largest component, totaling $7.9 million, was non-agency residential mortgage-backed securities. Non-agency residential mortgage-backed securities at March 31, 2013 had a total amortized cost and fair value of $78.7 million and $70.9 million, respectively.

Northern Trust has evaluated non-agency residential mortgage-backed securities, and all other securities with unrealized losses, for possible other-than-temporary impairment in accordance with GAAP and Northern Trust’s security impairment review policy. There were no other-than-temporary impairment losses for the three months ended March 31, 2013. Credit related losses recognized in earnings on other-than-temporarily impaired securities totaled $3.1 million for the three months ended March 31, 2012.

Northern Trust is a participant in the repurchase agreement market. This provides a relatively low cost alternative for short-term funding. Securities purchased under agreements to resell and securities sold under agreements to repurchase are accounted for as collateralized financings and recorded at the amounts at which the securities were acquired or sold plus accrued interest. To minimize potential credit risk associated with these transactions, the fair value of the securities purchased or sold is monitored, limits are set on exposure with counterparties, and the financial condition of counterparties is regularly assessed. It is Northern Trust’s policy to take possession of securities purchased under agreements to resell. Securities sold under agreements to repurchase are held by the counterparty until the repurchase.

Eurozone Exposure

Northern Trust continues to closely monitor developments related to the European debt crisis. Northern Trust considers Ireland, Portugal, Italy, Greece, Spain and Cyprus to be those eurozone countries experiencing significant economic, fiscal and/or political strains. At March 31, 2013, Northern Trust’s gross exposure to obligors in Ireland totaled approximately $885 million, less than 1% of Northern Trust’s total consolidated assets. There was no exposure to obligors in Portugal, Italy, Greece, Spain or Cyprus and no exposure to sovereign debt securities as of March 31, 2013.

ASSET QUALITY (continued)

Of the total exposure to obligors in Ireland, $5 million was to banks and $880 million was to commercial and other borrowers, primarily funds domiciled in Ireland whose assets and investment activities are broadly diversified by investment strategy, issuer type, country of risk, and/or instrument type. Exposures to these borrowers in Ireland may be secured or unsecured, committed or uncommitted, but are typically for short periods of a year or less for foreign exchange, overdraft accommodations, and loans. Exposure levels at March 31, 2013 reflect Northern Trust’s risk management policies and practices, which operate to limit exposures to higher risk European financial and sovereign entities.

Nonperforming Loans and Other Real Estate Owned

Nonperforming assets consist of nonperforming loans and Other Real Estate Owned (OREO). OREO is comprised of commercial and residential properties acquired in partial or total satisfaction of loans.

The following table provides the amounts of nonperforming loans, by segment and class, and of OREO that were outstanding at the dates shown, as well as the balance of loans that were delinquent 90 days or more and still accruing interest. The balance of loans delinquent 90 days or more and still accruing interest can fluctuate widely based on the timing of cash collections, renegotiations and renewals.


($ In Millions)	March 31, 2013			December 31, 2012			March 31, 2012
Nonperforming Loans and Leases
Commercial
Commercial and Institutional	$	21.1		$	21.6		$	28.6
Commercial Real Estate		53.7			56.4			69.8

Total Commercial		74.8			78.0			98.4

Personal
Residential Real Estate		173.6			174.6			160.0
Private Client		3.3			2.2			3.7

Total Personal		176.9			176.8			163.7

Total Nonperforming Loans and Leases		251.7			254.8			262.1
Other Real Estate Owned		10.5			20.3			22.4

Total Nonperforming Assets	$	262.2		$	275.1		$	284.5

90 Day Past Due Loans Still Accruing	$	11.1		$	19.0		$	21.0

Nonperforming Loans and Leases to Total Loans and Leases		0.87	%		0.86	%		0.90	%

Coverage of Loan and Lease Allowance to Nonperforming Loans and Leases		1.2x			1.2x			1.1x

Maintaining a low level of nonperforming assets is important to the ongoing success of a financial institution. In addition to the negative impact on both net interest income and credit losses, nonperforming assets also increase operating costs due to the expense associated with collection efforts. Nonperforming assets as of March 31, 2013, while down $12.9 million from the prior quarter, remain elevated from historical levels and continue to reflect the deterioration in overall economic conditions experienced since the onset of the economic downturn in 2008 and its effect on Northern Trust’s loan portfolio, primarily within the residential real estate and commercial real estate loan classes.

ASSET QUALITY (continued)

Importantly, Northern Trust focuses its lending efforts on clients who are looking to utilize a full range of financial services with Northern Trust. Northern Trust’s underwriting standards 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 65% to 80% at inception. Revaluations of supporting collateral are obtained upon refinancing or default or when otherwise considered warranted. Collateral revaluations for mortgages are performed by independent third parties. The commercial real estate portfolio consists of commercial mortgages and construction, acquisition and development loans extended primarily to highly experienced developers and/or investors well known to Northern Trust. Underwriting standards generally reflect conservative loan-to-value ratios and debt service coverage requirements. Recourse to borrowers through guarantees is also commonly required.

Provision and Allowance for Credit Losses

The provision for credit losses is the charge to current earnings that is determined by management, through a disciplined credit review process, to be the amount needed to maintain the allowance for credit losses at an appropriate level to absorb probable credit losses that have been identified with specific borrower relationships (specific loss component) and probable losses that are believed to be inherent in the loan and lease portfolios, unfunded commitments, and standby letters of credit (inherent loss component). Control processes and analyses employed to evaluate the appropriateness of the allowance for credit losses are reviewed on at least an annual basis and modified as considered necessary.

The amount of specific allowance is determined through an individual evaluation of loans and lending-related commitments considered impaired that is based on expected future cash flows, the value of collateral, and other factors that may impact the borrower’s ability to pay. 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 allowance factors that are applied in the determination of inherent allowance requirements.

ASSET QUALITY (continued)

A $5.0 million provision for credit losses was recorded in both the current and prior year quarters. The current quarter provision reflects continued weakness within the residential real estate loan class, partially offset by improvement within the commercial and institutional and commercial real estate loan classes. Net charge-offs totaled $8.7 million for the current quarter resulting from $12.6 million of charge-offs and $3.9 million of recoveries, compared to $5.8 million of net charge-offs in the prior year quarter resulting from $14.4 million of charge-offs and $8.6 million of recoveries. Nonperforming loans and leases decreased $10.4 million, or 4%, from the prior year quarter.

Note 6 to the consolidated financial statements includes a table that details the changes in the allowance for credit losses during the three months ended March 31, 2013 and 2012 due to charge-offs, recoveries, and the provision for credit losses.

The following table shows the specific portion of the allowance and the inherent portion of the allowance and its components, each by loan and lease segment and class.


	March 31, 2013						December 31, 2012						March 31, 2012
($ In Millions)	Allowance Amount			Percent of Loans to Total Loans			Allowance Amount			Percent of Loans to Total Loans			Allowance Amount			Percent of Loans to Total Loans
Specific Allowance	$	34.8			—	%	$	32.5			—	%	$	36.5			—	%
Allocated Inherent Allowance
Commercial
Commercial and Institutional		74.4			25			79.2			25			88.9			24
Commercial Real Estate		77.0			10			80.6			10			79.0			10
Lease Financing, net		5.0			4			5.5			4			3.1			4
Non-U.S.		2.7			4			3.4			4			3.7			4
Other		—			2			—			1			—			2

Total Commercial		159.1			45			168.7			44			174.7			44

Personal
Residential Real Estate		115.2			35			110.9			35			100.2			36
Private Client		14.7			20			15.5			21			16.7			19
Other		—			—			—			—			—			1

Total Personal		129.9			55			126.4			56			116.9			56

Total Allocated Inherent Allowance	$	289.0			100	%	$	295.1			100	%	$	291.6			100	%

Total Allowance for Credit Losses		323.8						327.6						328.1

Allowance Assigned to
Loans and Leases	$	294.1					$	297.9					$	295.5
Unfunded Commitments and Standby Letters of Credit		29.7						29.7						32.6

Total Allowance for Credit Losses	$	323.8					$	327.6					$	328.1

Allowance Assigned to Loans and Leases to Total Loans and Leases		1.02	%					1.01	%					1.01	%

MARKET RISK MANAGEMENT

As described in the 2012 Annual Report to Shareholders, Northern Trust manages its interest rate risk through two primary measurement techniques: simulation of earnings and simulation of economic value of equity. Also, as part of its risk management activities, it regularly measures the risk of loss associated with foreign currency positions using a Value-at-Risk (VaR) model.

Based on this continuing evaluation process, Northern Trust’s interest rate risk position, as measured by current market implied forward interest rates and sensitivity analyses, and the VaR associated with the foreign exchange trading portfolio, have not changed significantly since December 31, 2012.

RECONCILIATION OF REPORTED NET INTEREST INCOME TO FULLY TAXABLE EQUIVALENT

The tables below present a reconciliation of interest income and net interest income prepared in accordance with GAAP to interest income and net interest income on a fully taxable equivalent (FTE) basis, a non-GAAP financial measure. Management believes an FTE presentation provides a clearer indication of net interest margins for comparative purposes.


	Three Months Ended
	March 31, 2013								March 31, 2012
($ In Millions)	Reported			FTE Adj.		FTE			Reported			FTE Adj.		FTE
Interest Income	$	286.7		$	7.6	$	294.3		$	341.0		$	9.9	$	350.9
Interest Expense		60.6			—		60.6			84.6			—		84.6

Net Interest Income	$	226.1		$	7.6	$	233.7		$	256.4		$	9.9	$	266.3

Net Interest Margin		1.12	%				1.15	%		1.20	%				1.24	%

The following schedule should be read in conjunction with the Net Interest Income section of Management’s Discussion and Analysis of Financial Condition and Results of Operations.


AVERAGE CONSOLIDATED BALANCE SHEET		NORTHERN TRUST CORPORATION
WITH ANALYSIS OF NET INTEREST INCOME


(INTEREST AND RATE ON A FULLY TAXABLE	First Quarter
EQUIVALENT BASIS)	2013								2012
($ In Millions)	Interest		Average Balance			Rate ⁽³⁾			Interest		Average Balance			Rate ⁽³⁾
Average Earning Assets
Federal Funds Sold and Securities Purchased under Agreements to Resell	$	0.1	$	249.5			0.18	%	$	0.1	$	246.6			0.12	%
Interest-Bearing Deposits with Banks		35.0		18,099.5			0.78			50.6		18,246.4			1.11
Federal Reserve Deposits and Other Interest-Bearing		2.5		3,872.0			0.26			5.1		7,685.3			0.27
Securities
U.S. Government		4.6		1,782.8			1.05			7.6		2,969.8			1.03
Obligations of States and Political Subdivisions		5.1		321.1			6.32			8.1		493.0			6.60
Government Sponsored Agency		28.0		18,280.6			0.62			29.7		17,542.9			0.68
Other (1)		29.9		10,890.6			1.11			30.9		10,264.7			1.21

Total Securities		67.6		31,275.1			0.88			76.3		31,270.4			0.98

Loans and Leases (2)		189.1		28,661.9			2.68			218.8		28,615.6			3.08

Total Earning Assets		294.3		82,158.0			1.45			350.9		86,064.3			1.64

Allowance for Credit Losses Assigned to Loans and Leases		—		(296.1	)		—			—		(293.0	)		—
Cash and Due from Banks		—		3,392.5			—			—		4,002.5			—
Buildings and Equipment		—		467.5			—			—		492.3			—
Client Security Settlement Receivables		—		793.3			—			—		421.0			—
Goodwill		—		532.6			—			—		534.1			—
Other Assets		—		4,521.5			—			—		3,906.9			—

Total Assets	$	—	$	91,569.3			—	%	$	—	$	95,128.1			—	%


Average Source of Funds
Deposits
Savings and Money Market	$	2.8	$	14,880.3			0.08	%	$	5.2	$	14,606.8			0.14	%
Savings Certificates and Other Time		3.9		2,385.6			0.67			5.1		3,071.4			0.67
Non-U.S. Offices – Interest-Bearing		22.4		39,221.1			0.23			36.0		38,980.8			0.37

Total Interest-Bearing Deposits		29.1		56,487.0			0.21			46.3		56,659.0			0.33
Short-Term Borrowings		1.1		3,405.5			0.13			1.5		4,228.2			0.14
Senior Notes		19.2		2,403.9			3.24			16.9		2,125.2			3.20
Long-Term Debt		10.6		1,277.7			3.37			19.1		1,989.4			3.86
Floating Rate Capital Debt		0.6		277.1			0.88			0.8		277.0			1.12

Total Interest-Related Funds		60.6		63,851.2			0.39			84.6		65,278.8			0.52

Interest Rate Spread		—		—			1.06			—		—			1.12
Demand and Other Noninterest-Bearing Deposits		—		16,899.1			—			—		19,467.2			—
Other Liabilities		—		3,275.8			—			—		3,214.8			—
Stockholders’ Equity		—		7,543.2			—			—		7,167.3			—

Total Liabilities and Stockholders’ Equity	$	—	$	91,569.3			—	%	$	—	$	95,128.1			—	%

Net Interest Income/Margin (FTE Adjusted)	$	233.7	$	—			1.15	%	$	266.3	$	—			1.24	%

Net Interest Income/Margin (Unadjusted)	$	226.1	$	—			1.12	%	$	256.4	$	—			1.20	%

ANALYSIS OF NET INTEREST INCOME CHANGES

DUE TO VOLUME AND RATE

Three Months 2013/2012

Change Due To

Average

(In Millions)

Balance

Rate

Total

Earning Assets (FTE)

(5.2

)

(51.4

)

(56.6

)

Interest-Related Funds

(5.7

)

(18.3

)

(24.0

)

Net Interest Income (FTE)

0.5

(33.1

)

(32.6

)

(1)	Other securities include Federal Reserve and Federal Home Loan Bank stock and certain community development investments which are classified in other assets in the consolidated balance sheet as of March 31, 2013 and 2012.

(2)	Average balances include nonaccrual loans. Lease financing receivable balances are reduced by deferred income.

(3)	Rate calculations are based on actual balances rather than the rounded amounts presented in the Average Consolidated Balance Sheet with Analysis of Net Interest Income.

Notes:

Net Interest Income (FTE Adjusted) includes adjustments to a fully taxable equivalent basis for loans and securities. Such adjustments are based on a blended federal and state tax rate of 37.7%. Total taxable equivalent interest adjustments amounted to $7.6 million and $9.9 million for the three months ended March 31, 2013 and 2012, respectively.

Interest revenue on cash collateral positions is reported above within interest-bearing deposits with banks and within loans and leases. Interest expense on cash collateral positions is reported above within non-U.S. offices interest-bearing deposits. Related cash collateral received from and deposited with derivative counterparties is recorded net of the associated derivative contract within other assets and other liabilities, respectively.

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, capital adequacy, dividend policy, expansion and business development plans, risk management policies, anticipated expense levels and projected profit improvements, business prospects and positioning with respect to market, demographic and pricing trends, strategic initiatives, reengineering and outsourcing activities, new business results and outlook, changes in securities market prices, credit quality including allowance levels, planned capital expenditures and technology spending, anticipated tax benefits and expenses, and the effects of any extraordinary events and various other matters (including developments with respect to litigation, other contingent liabilities and obligations, and regulation involving Northern Trust and changes in accounting policies, standards and interpretations) on Northern Trust’s business and results.

Forward-looking statements are typically identified by words or phrases such as “believe”, “expect”, “anticipate”, “intend”, “estimate”, “may increase”, “may fluctuate”, “plan”, “goal”, “target”, “strategy”, and similar expressions or future or conditional verbs such as “may”, “will”, “should”, “would”, and “could.” Forward-looking statements are Northern Trust’s current estimates or expectations of future events or future results. Actual results could differ materially from the results indicated by these statements because the realization of those results is subject to many risks and uncertainties including: the health of the U.S. and international economies and particularly the continuing uncertainty in Europe; the downgrade of U.S. Government issued and other securities; the health and soundness of the financial institutions and other counterparties with which Northern Trust conducts business; changes in financial markets, including debt and equity markets, that impact the value, liquidity, or credit ratings of financial assets in general, or financial assets in particular investment funds, client portfolios, or securities lending collateral pools, including those funds, portfolios, collateral pools, and other financial assets with respect to which Northern Trust has taken, or may in the future take, actions to provide asset value stability or additional liquidity; the impact of 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 allowances therefor; difficulties in measuring, or determining whether there is other-than-temporary impairment in, the value of securities held in Northern Trust’s investment portfolio; Northern Trust’s success in managing various risks inherent in its business, including credit risk, operational risk, interest rate risk and liquidity risk, particularly during times of economic uncertainty and volatility in the credit and financial markets; geopolitical risks and the risks of extraordinary events such as natural disasters, terrorist events, war and the U.S. and other governments’ responses to those events; the pace and extent of

FACTORS AFFECTING FUTURE RESULTS (continued)

continued globalization of investment activity and growth in worldwide financial assets; regulatory and monetary policy developments; failure to obtain regulatory approvals when required, including for the use and distribution of capital; changes 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 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 revenue in its securities lending business for itself and its clients, especially in periods of economic and financial market uncertainty; Northern Trust’s success in recruiting and retaining the necessary personnel to support business growth and expansion and maintain sufficient expertise to support increasingly complex products and services; Northern Trust’s success in implementing its revenue enhancement and expense management initiatives; Northern Trust’s ability, as products, methods of delivery, and client requirements change or become more complex, to continue to fund and accomplish innovation, improve risk management practices and controls, and address operating risks, including human errors or omissions, data security breach risks, pricing or valuation of securities, fraud, systems performance or defects, systems interruptions, and breakdowns in processes or internal controls; 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 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 and Basel III capital regime and the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), areas of increased regulatory emphasis and oversight in the U.S. and other countries such as anti-money laundering, anti-bribery, and client privacy and the potential for substantial changes in the legal, regulatory and enforcement framework and oversight applicable to financial institutions in reaction to adverse financial market events, including changes pursuant to the Dodd-Frank Act that may, among other things, affect the leverage limits and risk-based capital and liquidity requirements for certain financial institutions, including Northern Trust, require those financial institutions to pay higher assessments, expose them to certain liabilities of their subsidiary depository institutions, and restrict or increase the regulation of certain activities, including foreign exchange, carried on by financial institutions, including Northern Trust; risks that evolving regulations, such as Basel II and Basel III, and potential legislation and regulations, including regulations that may be promulgated under the Dodd-Frank Act, could affect required regulatory capital for financial institutions, including Northern Trust, potentially

FACTORS AFFECTING FUTURE RESULTS (continued)

resulting in changes to the cost and composition of capital for Northern Trust; risks and uncertainties inherent in the litigation and regulatory process, including the adequacy of contingent liability, tax, and other accruals; and the risk of events that could harm Northern Trust’s reputation and so undermine the confidence of clients, counterparties, rating agencies, and stockholders.

Some of these and other risks and uncertainties that may affect future results are discussed in more detail in the section of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” captioned “Risk Management” in the 2012 Annual Report to Shareholders (pages 47-59), in the section of the “Notes to Consolidated Financial Statements” in the 2012 Annual Report to Shareholders captioned “Note 24 – Contingent Liabilities” (pages 108-110), in the sections of “Item 1 – Business” of the 2012 Annual Report on Form 10-K captioned “Government Monetary and Fiscal Policies,” “Competition” and “Regulation and Supervision” (pages 2-14), and in “Item 1A – Risk Factors” of the 2012 Annual Report on Form 10-K (pages 28-38). All forward-looking statements included in this report are based upon information presently available, and Northern Trust assumes no obligation to update any forward-looking statements.

FINANCIAL STATEMENTS


CONSOLIDATED BALANCE SHEET		NORTHERN TRUST CORPORATION


(In Millions Except Share Information)	March 31, 2013			December 31, 2012
	(Unaudited)
Assets
Cash and Due from Banks	$	3,773.5		$	3,752.7
Federal Funds Sold and Securities Purchased under Agreements to Resell		251.5			60.8
Interest-Bearing Deposits with Banks		18,694.8			18,803.5
Federal Reserve Deposits and Other Interest-Bearing		5,828.6			7,619.7
Securities
Available for Sale		27,171.9			28,643.5
Held to Maturity (Fair value of $2,943.3 and $2,394.8)		2,931.7			2,382.0
Trading Account		6.9			8.0

Total Securities		30,110.5			31,033.5

Loans and Leases
Commercial		12,682.0			12,897.2
Personal		16,180.9			16,607.3

Total Loans and Leases (Net of unearned income of $286.6 and $297.9)		28,862.9			29,504.5

Allowance for Credit Losses Assigned to Loans and Leases		(294.1	)		(297.9	)
Buildings and Equipment		457.2			469.9
Client Security Settlement Receivables		816.5			2,049.1
Goodwill		529.5			537.8
Other Assets		4,125.9			3,930.2

Total Assets	$	93,156.8		$	97,463.8

Liabilities
Deposits
Demand and Other Noninterest-Bearing	$	13,908.9		$	20,519.0
Savings and Money Market		14,819.8			15,189.7
Savings Certificates and Other Time		2,296.1			2,466.1
Non U.S. Offices – Noninterest-Bearing		4,974.9			3,512.8
– Interest-Bearing		39,822.4			39,720.2

Total Deposits		75,822.1			81,407.8
Federal Funds Purchased		1,320.5			780.2
Securities Sold Under Agreements to Repurchase		490.2			699.8
Other Borrowings		1,435.3			367.4
Senior Notes		2,402.0			2,405.8
Long-Term Debt		1,198.4			1,421.6
Floating Rate Capital Debt		277.1			277.0
Other Liabilities		2,599.1			2,577.2

Total Liabilities		85,544.7			89,936.8

Stockholders’ Equity
Common Stock, $1.66 2/3 Par Value; Authorized 560,000,000 shares; Outstanding shares of 239,239,836 and 238,914,988		408.6			408.6
Additional Paid-In Capital		995.2			1,012.7
Retained Earnings		6,793.8			6,702.7
Accumulated Other Comprehensive Loss		(284.1	)		(283.0	)
Treasury Stock (5,931,688 and 6,256,536 shares, at cost)		(301.4	)		(314.0	)

Total Stockholders’ Equity		7,612.1			7,527.0

Total Liabilities and Stockholders’ Equity	$	93,156.8		$	97,463.8

See accompanying notes to the consolidated financial statements.


CONSOLIDATED STATEMENT OF INCOME		NORTHERN TRUST CORPORATION
(UNAUDITED)


		Three Months Ended March 31,
(In Millions Except Share Information)		2013		2012
Noninterest Income
Trust, Investment and Other Servicing Fees		$	630.7	$	575.2
Foreign Exchange Trading Income			59.5		61.9
Treasury Management Fees			16.8		17.4
Security Commissions and Trading Income			18.3		18.3
Other Operating Income			24.8		38.6
Investment Security Gains (Losses), net (Note)			0.2		(2.4	)

Total Noninterest Income			750.3		709.0

Net Interest Income
Interest Income			286.7		341.0
Interest Expense			60.6		84.6

Net Interest Income			226.1		256.4
Provision for Credit Losses			5.0		5.0

Net Interest Income after Provision for Credit Losses			221.1		251.4

Noninterest Expense
Compensation			320.3		321.6
Employee Benefits			63.3		68.1
Outside Services			129.9		128.2
Equipment and Software			91.4		90.8
Occupancy			43.2		41.8
Other Operating Expense			80.8		73.1

Total Noninterest Expense			728.9		723.6

Income before Income Taxes			242.5		236.8
Provision for Income Taxes			78.5		75.6

Net Income		$	164.0	$	161.2

Net Income Applicable to Common Stock		$	164.0	$	161.2

Per Common Share
Net Income – Basic		$	0.68	$	0.66
– Diluted			0.67		0.66

Average Number of Common Shares Outstanding	– Basic		239,167,559		241,090,093
	– Diluted		240,189,215		241,556,096


CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME		NORTHERN TRUST CORPORATION
(UNAUDITED)


		Three Months Ended March 31,
(In Millions)		2013			2012
Net Income		$	164.0		$	161.2
Other Comprehensive Income (Net of Tax and Reclassifications)
Net Unrealized Gains (Losses) on Securities Available for Sale			1.3			20.0
Net Unrealized Gains (Losses) on Cash Flow Hedges			(5.2	)		11.3
Foreign Currency Translation Adjustments			(4.2	)		15.8
Pension and Other Postretirement Benefit Adjustments			7.0			22.2

Other Comprehensive Income			(1.1	)		69.3

Comprehensive Income		$	162.9		$	230.5




Note:	Changes in Other-Than-Temporary-Impairment (OTTI) Losses	$	—		$	(3.1	)
	Noncredit-related OTTI Losses Recorded in/(Reclassified from) OCI		—			—
	Other Security Gains (Losses), net		0.2			0.7

	Investment Security Gains (Losses), net	$	0.2		$	(2.4	)

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)	2013			2012
Common Stock
Balance at January 1 and March 31	$	408.6		$	408.6

Additional Paid-in Capital
Balance at January 1		1,012.7			977.5
Treasury Stock Transactions – Stock Options and Awards		(35.6	)		(18.9	)
Stock Options and Awards – Amortization		20.8			24.1
Stock Options and Awards – Tax Benefits		(2.7	)		(0.8	)

Balance at March 31		995.2			981.9

Retained Earnings
Balance at January 1		6,702.7			6,302.3
Net Income		164.0			161.2
Dividends Declared – Common Stock		(72.9	)		(140.0	)

Balance at March 31		6,793.8			6,323.5

Accumulated Other Comprehensive Income (Loss)
Balance at January 1		(283.0	)		(345.6	)
Net Unrealized Gains (Losses) on Securities Available for Sale		1.3			20.0
Net Unrealized Gains (Losses) on Cash Flow Hedges		(5.2	)		11.3
Foreign Currency Translation Adjustments		(4.2	)		15.8
Pension and Other Postretirement Benefit Adjustments		7.0			22.2

Balance at March 31		(284.1	)		(276.3	)

Treasury Stock
Balance at January 1		(314.0	)		(225.5	)
Stock Options and Awards		87.1			25.4
Stock Purchased		(74.5	)		(14.4	)

Balance at March 31		(301.4	)		(214.5	)

Total Stockholders’ Equity at March 31	$	7,612.1		$	7,223.2

See accompanying notes to the consolidated financial statements.


CONSOLIDATED STATEMENT OF CASH FLOWS		NORTHERN TRUST CORPORATION
(UNAUDITED)


	Three Months Ended March 31,
(In Millions)	2013			2012
Cash Flows from Operating Activities:
Net Income	$	164.0		$	161.2
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Investment Security (Gains) Losses, net		(0.2	)		2.4
Amortization and Accretion of Securities and Unearned Income		1.5			(19.6	)
Provision for Credit Losses		5.0			5.0
Depreciation on Buildings and Equipment		22.4			22.4
Amortization of Computer Software		48.7			44.6
Amortization of Intangibles		5.2			4.6
Pension Plan Contribution		(16.4	)		(12.3	)
Change in Receivables		(32.3	)		(17.4	)
Change in Interest Payable		(18.8	)		(13.8	)
Net Changes in Derivative Fair Value, Including Required Collateral		(55.0	)		173.2
Other Operating Activities, net		188.4			407.3

Net Cash Provided by (Used in) Operating Activities		312.5			757.6

Cash Flows from Investing Activities:
Net Change in Federal Funds Sold and Securities Purchased under Agreements to Resell		(190.7	)		(169.6	)
Change in Interest-Bearing Deposits with Banks		108.7			(2,174.9	)
Net Change in Federal Reserve Deposits and Other Interest-Bearing Assets		1,791.0			11,220.7
Purchases of Securities – Held to Maturity		(2,182.6	)		(53.2	)
Proceeds from Maturity and Redemption of Securities – Held to Maturity		1,633.6			143.9
Purchases of Securities – Available for Sale		(2,276.8	)		(9,107.1	)
Proceeds from Sale, Maturity and Redemption of Securities – Available for Sale		3,728.9			8,448.2
Change in Loans and Leases		637.4			(97.3	)
Purchases of Buildings and Equipment, net		(11.9	)		(9.9	)
Purchases and Development of Computer Software		(60.4	)		(47.4	)
Change in Client Settlement Receivables and Payables		1,232.6			(207.0	)
Other Investing Activities, net		29.1			(43.3	)

Net Cash Provided by (Used in) Investing Activities		4,438.9			7,903.1

Cash Flows from Financing Activities:
Change in Deposits		(5,778.3	)		(8,744.6	)
Change in Federal Funds Purchased		540.3			1,158.4
Change in Securities Sold under Agreements to Repurchase		(209.6	)		(914.8	)
Change in Short-Term Other Borrowings		1,057.3			115.9
Repayments of Senior Notes and Long-Term Debt		(201.0	)		(350.9	)
Treasury Stock Purchased		(74.2	)		(14.4	)
Net Proceeds from Stock Options		51.1			30.6
Cash Dividends Paid on Common Stock		(1.1	)		(67.5	)
Other Financing Activities, net		(52.1	)		—

Net Cash Provided by (Used in) Financing Activities		4,667.6			(8,787.3	)

Effect of Foreign Currency Exchange Rates on Cash		(63.0	)		91.6

Increase (Decrease) in Cash and Due from Banks		20.8			(35.0	)
Cash and Due from Banks at Beginning of Year		3,752.7			4,315.3

Cash and Due from Banks at End of Period	$	3,773.5		$	4,280.3

Supplemental Disclosures of Cash Flow Information:
Interest Paid	$	79.4		$	98.4
Income Taxes Paid		14.5			4.8
Transfers from Loans to OREO		4.4			11.0

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). Significant intercompany balances and transactions have been eliminated. The consolidated financial statements, as of and for the periods ended March 31, 2013 and 2012, 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. For a description of Northern Trust’s significant accounting policies, refer to Note 1 of the Notes to Consolidated Financial Statements in the 2012 Annual Report to Shareholders.

2. Recent Accounting Pronouncements – In January 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-01, “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.” This ASU amends the scope of FASB ASU No. 2011-11, “Disclosures about Offsetting Assets and Liabilities,” which requires additional disclosure regarding offsetting of assets and liabilities to enable users of financial statements to evaluate the effect or potential effect of netting arrangements on an entity’s financial position. The provisions of the ASUs were effective for annual and interim reporting periods beginning on or after January 1, 2013. Northern Trust’s disclosures under the ASUs are provided in Note 19 – Offsetting Assets and Liabilities. As the ASUs address financial statement disclosures only, their retrospective adoption effective January 1, 2013 did not impact Northern Trust’s consolidated financial position or results of operations.

In February 2013, the FASB issued ASU No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” This ASU requires disclosures regarding reclassifications out of accumulated other comprehensive income in a single location in the financial statements. Northern Trust’s components of accumulated other comprehensive income are disclosed in Note 10 – Accumulated Other Comprehensive Income (Loss). Since this ASU addresses prospective financial statement disclosures only, its adoption effective January 1, 2013 did not impact 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. Northern Trust’s policy is to recognize transfers into and transfers out of fair value levels as of the end of the reporting period in which the transfer occurred.

Notes to Consolidated Financial Statements (continued)

No transfers between fair value levels occurred during the three months ended March 31, 2013 or the year ended December 31, 2012.

Level 1 – Quoted, active market prices for identical assets or liabilities.

Northern Trust’s Level 1 assets are comprised of available for sale investments in U.S. treasury securities.

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

Northern Trust’s Level 2 assets include available for sale and trading account securities, the fair values of which are determined by external pricing vendors, or in limited cases internally based on similar securities. Northern Trust reviews the valuation methodology used by external pricing vendors for suitability and performs additional reviews of their valuation techniques and assumptions used for selected securities. Northern Trust also reviews the market values provided by external vendors through a comparison of assigned market values to other third party prices for reasonableness. A price obtained from a vendor may be adjusted if it is found to be sufficiently inconsistent with other market prices.

Level 2 assets and liabilities also include derivative contracts which are valued internally 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 3 – Valuation techniques in which one or more significant inputs are unobservable in the marketplace.

Northern Trust’s Level 3 assets consist of auction rate securities purchased in 2008 from Northern Trust clients. To estimate the fair value of auction rate securities, for which trading is limited and market prices are generally unavailable, Northern Trust developed

Notes to Consolidated Financial Statements (continued)

and maintains a pricing model that discounts estimated cash flows over their estimated remaining lives. Significant inputs to the model include the contractual terms of the securities, credit risk ratings, discount rates, forward interest rates, credit/liquidity spreads, and Northern Trust’s own assumptions about the estimated remaining lives of the securities. The significant unobservable inputs used in the fair value measurement are Northern Trust’s own assumptions about the estimated remaining lives of the securities and the applicable discount rates. Significant increases (decreases) in the estimated remaining lives or the discount rates in isolation would result in a significantly lower (higher) fair value measurement. Level 3 liabilities consist of acquisition related contingent consideration liabilities. The fair values of these contingent consideration liabilities have been determined using an income-based (discounted cash flow) model that incorporates Northern Trust’s own assumptions about business growth rates and applicable discount rates, which represent unobservable inputs to the model. Significant increases (decreases) in projected growth rates in isolation would result in significantly higher (lower) fair value measurements, while significant increases (decreases) in the discount rate in isolation would result in significantly lower (higher) fair value measurements.

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

Management of various businesses and departments of Northern Trust (including Corporate Market Risk, Credit Policy, Corporate Financial Management, and relevant business unit personnel) determine the valuation policies and procedures for Level 3 assets and liabilities. Each business and department represents a component of Northern Trust’s business units, and reports to management of their respective business units. Generally, valuation policies are reviewed by management of each business or department. Fair value measurements are performed upon acquisitions of an asset or liability. As necessary, the valuation models are reviewed by management of the appropriate business or department, and adjusted for changes in inputs. Management of each business or department reviews the inputs in order to substantiate the unobservable inputs used in each fair value measurement. When appropriate, management reviews forecasts used in the valuation process in light of other relevant financial projections to understand any variances between current and previous fair value measurements. In certain circumstances, third party information is used to support the fair value measurements. If certain third party information seems inconsistent with consensus views, a review of the information is performed by management of the respective business or department to conclude as to the appropriate fair value of the asset or liability.

Notes to Consolidated Financial Statements (continued)

The following presents the fair values of, and the valuation techniques, significant unobservable inputs, and quantitative information used to develop significant unobservable inputs for, Northern Trust’s Level 3 assets and liabilities as of March 31, 2013.


Financial Instrument	Fair Value		Valuation Technique	Unobservable Input	Range of Lives and Rates
Auction Rate Securities	$	99.6 million	Discounted Cash Flow	Remaining lives Discount rates	1.3 – 8.6 years 0.3 % – 7.7 %
Contingent Consideration	$	51.4 million	Discounted Cash Flow	Discount rate Business growth rates	10.5% 19% – 35%

Notes to Consolidated Financial Statements (continued)

The following presents assets and liabilities measured at fair value on a recurring basis as of March 31, 2013 and December 31, 2012, segregated by fair value hierarchy level.

(In Millions)

Level 1

Level 2

Level 3

Netting

Assets/Liabilities
at Fair Value

March 31, 2013

Securities

Available for Sale

U.S. Government

1,782.4

—

1,782.4

Obligations of States and Political Subdivisions

—

14.7

—

14.7

Government Sponsored Agency

—

16,859.4

—

16,859.4

Corporate Debt

—

2,941.8

—

2,941.8

Covered Bonds

—

1,868.5

—

1,868.5

Supranational and Non-U.S. Agency Bonds

—

815.7

—

815.7

Residential Mortgage-Backed

—

70.9

—

70.9

Other Asset-Backed

—

2,438.7

—

2,438.7

Auction Rate

—

99.6

—

99.6

Other

—

280.2

—

280.2

Total Available for Sale

1,782.4

25,289.9

99.6

—

27,171.9

Trading Account

—

6.9

—

6.9

Total Available for Sale and Trading

1,782.4

25,296.8

99.6

—

27,178.8

Other Assets

Derivatives

Foreign Exchange Contracts

—

2,390.5

—

2,390.5

Interest Rate Swaps

—

283.5

—

283.5

Total Derivatives

—

2,674.0

—

(1,725.8

)

948.2

Other Liabilities

Derivatives

Foreign Exchange Contracts

—

2,298.4

—

2,298.4

Interest Rate Swaps

—

220.8

—

220.8

Credit Default Swaps

—

0.1

—

0.1

Total Derivatives

—

2,519.3

—

(1,979.9

)

539.4

Contingent Consideration

—

51.4

—

51.4

Note: Northern Trust has elected to net derivative assets and liabilities when legally enforceable master netting agreements exist between Northern Trust and the counterparty. As of March 31, 2013, derivative assets and liabilities shown above also include reductions of $218.1 million and $472.2 million, respectively, as a result of cash collateral received from and deposited with derivative counterparties.

Notes to Consolidated Financial Statements (continued)


(In Millions)	Level 1		Level 2		Level 3		Netting			Assets/Liabilities at Fair Value
December 31, 2012
Securities
Available for Sale
U.S. Government	$	1,784.6	$	—	$	—	$	—		$	1,784.6
Obligations of States and Political Subdivisions		—		14.1		—		—			14.1
Government Sponsored Agency		—		18,638.8		—		—			18,638.8
Corporate Debt		—		2,618.4		—		—			2,618.4
Covered Bonds		—		1,748.0		—		—			1,748.0
Supranational Bonds		—		1,060.7		—		—			1,060.7
Residential Mortgage-Backed		—		92.0		—		—			92.0
Other Asset-Backed		—		2,283.9		—		—			2,283.9
Auction Rate		—		—		97.8		—			97.8
Other		—		305.2		—		—			305.2

Total Available for Sale		1,784.6		26,761.1		97.8		—			28,643.5

Trading Account		—		8.0		—		—			8.0

Total Available for Sale and Trading		1,784.6		26,769.1		97.8		—			28,651.5

Other Assets
Derivatives
Foreign Exchange Contracts		—		1,756.6		—		—			1,756.6
Interest Rate Swaps		—		310.3		—		—			310.3

Total Derivatives		—		2,066.9		—		(1,101.1	)		965.8

Other Liabilities
Derivatives
Foreign Exchange Contracts		—		1,772.7		—		—			1,772.7
Interest Rate Swaps		—		249.3		—		—			249.3
Credit Default Swaps		—		1.0		—		—			1.0

Total Derivatives		—		2,023.0		—		(1,407.5	)		615.5

Contingent Consideration	$	—	$	—	$	50.1	$	—		$	50.1

Note: Northern Trust has elected to net derivative assets and liabilities when legally enforceable master netting agreements exist between Northern Trust and the counterparty. As of December 31, 2012, derivative assets and liabilities shown above also include reductions of $118.6 million and $425.0 million, respectively, as a result of cash collateral received from and deposited with derivative counterparties.

Notes to Consolidated Financial Statements (continued)

The following tables present the changes in Level 3 assets and liabilities for the three months ended March 31, 2013 and 2012.


Level 3 Assets (In Millions)	Auction Rate Securities
Three Months Ended March 31,	2013			2012
Fair Value at January 1	$	97.8		$	178.3
Total Gains and (Losses):
Included in Earnings (1)		0.1			(1.5	)
Included in Other Comprehensive Income (2)		2.7			(0.2	)
Purchases, Issues, Sales, and Settlements
Sales		—			—
Settlements		(1.0	)		(0.3	)

Fair Value at March 31	$	99.6		$	176.3

(1)

Realized gains for the three months ended March 31, 2013 of $0.1 million represent gains from redemptions by issuers. Realized losses for the three months ended March 31, 2012 of $1.5 million include $1.6 million of OTTI losses, partially offset by $0.1 million of gains from redemptions by issuers. Gains on redemptions are recorded in interest income and sales and impairment losses are recorded in investment security gains (losses), net, within the consolidated statement of income.

(2)

Unrealized losses related to auction rate securities are included in net unrealized gains (losses) on securities available for sale, within the consolidated statement of comprehensive income.


Level 3 Liabilities (In Millions)	Contingent Consideration
Three Months Ended March 31,	2013		2012
Fair Value at January 1	$	50.1	$	56.8
Total (Gains) and Losses:
Included in Earnings (1)		1.3		1.4
Included in Other Comprehensive Income (2)		—		0.4
Purchases, Issues, Sales, and Settlements
Issues		—		—
Settlements		—		—

Fair Value at March 31	$	51.4	$	58.6

Unrealized (Gain) Losses Included in Earnings Related to Financial Instruments Held at March 31 (1)	$	1.3	$	1.4

(1)

Gains (losses) are recorded in other operating income (expense) within the consolidated statement of income.

(2)

Unrealized foreign currency related losses are included in foreign currency translation adjustments within the consolidated statement of comprehensive income.

During the three months ended March 31, 2013 and 2012, there were no transfers into or out of Level 3 assets or liabilities.

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.

Notes to Consolidated Financial Statements (continued)

The following provides information regarding those assets measured at fair value on a nonrecurring basis at March 31, 2013 and 2012, segregated by fair value hierarchy level.


(In Millions)	Level 1		Level 2		Level 3		Total Fair Value
March 31, 2013
Loans (1)	$	—	$	—	$	32.4	$	32.4
Other Real Estate Owned (2)		—		—		1.5		1.5

Total Assets at Fair Value	$	—	$	—	$	33.9	$	33.9


March 31, 2012
Loans (1)	$	—	$	—	$	25.5	$	25.5
Other Real Estate Owned (2)		—		—		1.4		1.4

Total Assets at Fair Value	$	—	$	—	$	26.9	$	26.9

(1)

In accordance with Accounting Standard Codification (ASC) Subtopic 310-10, Northern Trust recorded individually impaired loans at fair value and, for the three months ended March 31, 2013 increased by $1.9 million the level of specific allowances on these loans. During the three months ended March 31, 2012, Northern Trust reduced by $9.5 million the level of specific allowances on these loans.

(2)

In accordance with ASC Subtopics 310-40 and 360-10, Northern Trust recorded Other Real Estate Owned (OREO) at fair value and subsequently charged $0.3 million and $0.1 million through other operating expenses during the three months ended March 31, 2013 and March 31, 2012, respectively, to reduce the fair values of these OREO properties.

The fair values of real-estate loan collateral and OREO properties were estimated using a market approach typically supported by third party valuations and property specific fees and taxes, and were subject to adjustments to reflect management’s judgment as to their realizable value. Other loan collateral is valued using a market approach, adjusted for asset specific characteristics, and in limited instances, third party valuations are used. Other loan collateral typically consists of accounts receivable, inventory and equipment.

The following table provides the fair value of, and the valuation technique, significant unobservable inputs, and quantitative information used to develop the significant unobservable inputs for, Northern Trust’s Level 3 assets that were measured at fair value on a nonrecurring basis as of March 31, 2013.


Financial Instrument	Fair Value		Valuation Technique	Unobservable Input	Range of Discounts Applied
Loans	$	32.4 million	Market Approach	Discount to reflect realizable value	15% – 40%
OREO	$	1.5 million	Market Approach	Discount to reflect realizable value	15% – 40%

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 internally, using widely accepted models which are based on an income approach that incorporates current market yield curves.

Loans (excluding lease receivables). The fair value of the loan portfolio was estimated using an income approach (discounted cash flow) that incorporates current market rates offered by Northern Trust as of the date of the consolidated financial statements. The fair values of all loans were adjusted to reflect current assessments of loan collectability.

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

Community Development Investments. The fair values of these instruments were estimated using an income approach (discounted cash flow) that incorporates current market rates.

Employee Benefit and Deferred Compensation. These assets include U.S. treasury securities and investments in mutual and collective trust funds held to fund certain supplemental employee benefit obligations and deferred compensation plans. Fair values of U.S. treasury securities were determined using quoted, active market prices for identical securities. The fair values of investments in mutual and collective trust funds were valued at the funds’ net asset values based on a market approach.

Savings Certificates and Other Time Deposits. The fair values of these instruments were estimated using an income approach (discounted cash flow) that incorporates market interest rates currently offered by Northern Trust for deposits with similar maturities.

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

Federal Home Loan Bank Borrowings. The fair values of these instruments were estimated using an income approach (discounted cash flow) that incorporates market interest rates available to Northern Trust.

Loan Commitments. The fair values of loan commitments represent the estimated costs to terminate or otherwise settle the obligations with a third party adjusted for any related allowance for credit losses.

Notes to Consolidated Financial Statements (continued)

Standby Letters of Credit. The fair values of standby letters of credit are measured as the amount of unamortized fees on these instruments, inclusive of the related allowance for credit losses. Fees are determined by applying basis points to the principal amounts of the letters of credit.

Financial Instruments Valued at Carrying Value. Due to their short maturity, the carrying values of certain financial instruments approximated their fair values. These financial instruments include cash and due from banks; federal funds sold and securities purchased under agreements to resell, interest-bearing deposits with banks, Federal Reserve deposits and other interest-bearing assets; client security settlement receivables; non-U.S. offices interest-bearing deposits; federal funds purchased; 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 tables summarize the fair values of financial instruments.

(In Millions)

March 31, 2013

Book Value

Total Fair
Value

Fair Value

Level 1

Level 2

Level 3

Assets

Cash and Due from Banks

3,773.5

—

Federal Funds Sold and Resell Agreements

251.5

—

251.5

—

Interest-Bearing Deposits with Banks

18,694.8

—

18,694.8

—

Federal Reserve Deposits and Other Interest-Bearing

5,828.6

—

5,828.6

—

Securities

Available for Sale ⁽¹⁾

27,171.9

1,782.4

25,289.9

99.6

Held to Maturity

2,931.7

2,943.3

—

2,943.3

—

Trading Account

6.9

—

6.9

—

Loans (excluding Leases)

Held for Investment

27,567.1

27,588.2

—

27,588.2

Held for Sale

1.1

—

1.1

Client Security Settlement Receivables

816.5

—

816.5

—

Other Assets

Federal Reserve and Federal Home Loan Bank Stock

203.7

—

203.7

—

Community Development Investments

241.5

260.3

—

260.3

—

Employee Benefit and Deferred Compensation

133.4

135.4

92.3

43.1

—

Liabilities

Deposits

Demand, Noninterest-Bearing, Savings and Money Market

33,703.6

—

Savings Certificates and Other Time

2,296.1

2,304.8

—

2,304.8

—

Non U.S. Offices Interest-Bearing

39,822.4

—

39,822.4

—

Federal Funds Purchased

1,320.5

—

1,320.5

—

Securities Sold under Agreements to Repurchase

490.2

—

490.2

—

Other Borrowings

1,435.3

—

1,435.3

—

Senior Notes

2,402.0

2,495.9

—

2,495.9

—

Long Term Debt (excluding Leases)

Subordinated Debt

823.2

850.0

—

850.0

—

Federal Home Loan Bank Borrowings

335.0

342.4

—

342.4

—

Floating Rate Capital Debt

277.1

232.3

—

232.3

—

Other Liabilities

Standby Letters of Credit

60.1

—

60.1

Contingent Consideration

51.4

—

51.4

Loan Commitments

37.7

—

37.7

Derivative Instruments

Asset/Liability Management

Foreign Exchange Contracts

Assets

53.4

—

53.4

—

Liabilities

18.2

—

Interest Rate Swaps

Assets

116.6

—

116.6

—

Liabilities

61.0

—

61.0

—

Credit Default Swaps

Liabilities

0.1

—

0.1

—

Client-Related and Trading

Foreign Exchange Contracts

Assets

2,337.1

—

2,337.1

—

Liabilities

2,280.2

—

2,280.2

—

Interest Rate Swaps

Assets

166.9

—

166.9

—

Liabilities

159.8

—

159.8

—

(1)	Refer to the table located on page 30 for the disaggregation of available for sale securities.

Notes to Consolidated Financial Statements (continued)


(In Millions)	December 31, 2012
	Book Value		Total Fair Value		Fair Value
	Book Value		Total Fair Value		Level 1		Level 2		Level 3
Assets
Cash and Due from Banks	$	3,752.7	$	3,752.7	$	3,752.7	$	—	$	—
Federal Funds Sold and Resell Agreements		60.8		60.8		—		60.8		—
Interest-Bearing Deposits with Banks		18,803.5		18,803.5		—		18,803.5		—
Federal Reserve Deposits and Other Interest-Bearing		7,619.7		7,619.7		—		7,619.7		—
Securities
Available for Sale ⁽¹⁾		28,643.5		28,643.5		1,784.6		26,761.1		97.8
Held to Maturity		2,382.0		2,394.8		—		2,394.8		—
Trading Account		8.0		8.0		—		8.0		—
Loans (excluding Leases)
Held for Investment		28,165.4		28,220.2		—		—		28,220.2
Held for Sale		11.7		11.7		—		—		11.7
Client Security Settlement Receivables		2,049.1		2,049.1		—		2,049.1		—
Other Assets
Federal Reserve and Federal Home Loan Bank Stock		197.6		197.6		—		197.6		—
Community Development Investments		253.2		275.1		—		275.1		—
Employee Benefit and Deferred Compensation		121.3		126.1		86.7		39.4		—
Liabilities
Deposits
Demand, Noninterest-Bearing, Savings and Money Market	$	39,221.5	$	39,221.5	$	39,221.5	$	—	$	—
Savings Certificates and Other Time		2,466.1		2,746.7		—		2,746.7		—
Non U.S. Offices Interest-Bearing		39,720.2		39,720.2		—		39,720.2		—
Federal Funds Purchased		780.2		780.2		—		780.2