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 September 30, 2011

OR

 

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

For the transition period from             to            

Commission File No. 0-5965

 

 

NORTHERN TRUST CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   36-2723087

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

50 South 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):

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨    x

240,996,807 Shares - $1.66 2/3 Par Value

(Shares of Common Stock Outstanding on September 30, 2011)

 

 

 


PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements      
CONSOLIDATED BALANCE SHEET   NORTHERN TRUST CORPORATION  
     September 30
2011
    December  31
2010
 

($ In Millions Except Share Information)

  (Unaudited)        

Assets

   

Cash and Due from Banks

  $ 4,336.6      $ 2,818.0   

Federal Funds Sold and Securities Purchased under Agreements to Resell

    221.8        160.1   

Interest-Bearing Deposits with Banks

    18,944.2        15,351.3   

Federal Reserve Deposits and Other Interest-Bearing

    6,498.2        10,924.6   

Securities

   

Available for Sale

    28,439.3        19,901.9   

Held to Maturity (Fair value of $847.2 and $941.8)

    829.2        922.2   

Trading Account

    6.3        6.8   
 

 

 

   

 

 

 

Total Securities

    29,274.8        20,830.9   
 

 

 

   

 

 

 

Loans and Leases

   

Commercial

    12,219.3        11,613.4   

Personal

    16,472.1        16,518.6   
 

 

 

   

 

 

 

Total Loans and Leases (Net of unearned income of $417.3 and $456.8)

    28,691.4        28,132.0   
 

 

 

   

 

 

 

Allowance for Credit Losses Assigned to Loans and Leases

    (298.3     (319.6

Buildings and Equipment

    492.1        504.5   

Client Security Settlement Receivables

    948.2        701.3   

Goodwill

    534.1        400.9   

Other Assets

    6,455.1        4,339.9   
 

 

 

   

 

 

 

Total Assets

  $ 96,098.2      $ 83,843.9   
 

 

 

   

 

 

 

Liabilities

   

Deposits

   

Demand and Other Noninterest-Bearing

  $ 19,487.6      $ 7,658.9   

Savings and Money Market

    14,538.6        14,208.7   

Savings Certificates and Other Time

    3,529.4        3,913.0   

Non U.S. Offices – Noninterest-Bearing

    3,374.8        2,942.7   

    – Interest-Bearing

    37,583.6        35,472.4   
 

 

 

   

 

 

 

Total Deposits

    78,514.0        64,195.7   

Federal Funds Purchased

    737.8        3,691.7   

Securities Sold Under Agreements to Repurchase

    339.3        954.4   

Other Borrowings

    817.6        347.7   

Senior Notes

    2,133.5        1,896.1   

Long-Term Debt

    2,137.3        2,729.3   

Floating Rate Capital Debt

    276.9        276.9   

Other Liabilities

    3,989.0        2,921.8   
 

 

 

   

 

 

 

Total Liabilities

    88,945.4        77,013.6   
 

 

 

   

 

 

 

Stockholders’ Equity

   

Common Stock, $1.66 2/3 Par Value; Authorized 560,000,000 shares; Outstanding shares of 240,996,807 and 242,268,903

    408.6        408.6   

Additional Paid-In Capital

    962.9        920.0   

Retained Earnings

    6,240.3        5,972.1   

Accumulated Other Comprehensive Loss

    (232.5     (305.3

Treasury Stock (4,174,717 and 2,902,621 shares, at cost)

    (226.5     (165.1
 

 

 

   

 

 

 

Total Stockholders’ Equity

    7,152.8        6,830.3   
 

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

  $ 96,098.2      $ 83,843.9   
 

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

2


CONSOLIDATED STATEMENT OF INCOME    NORTHERN TRUST CORPORATION
(UNAUDITED)     

 

     Three Months
Ended September 30
    Nine Months
Ended September 30
 

($ In Millions Except Per Share Information)

   2011     2010     2011     2010  

Noninterest Income

        

Trust, Investment and Other Servicing Fees

   $ 555.3      $ 518.7      $ 1,628.0      $ 1,577.3   

Foreign Exchange Trading Income

     87.2        88.9        252.8        284.0   

Treasury Management Fees

     17.8        19.3        55.1        59.3   

Security Commissions and Trading Income

     13.9        14.9        44.8        43.5   

Other Operating Income

     42.5        27.7        120.4        104.1   

Investment Security Gains (Losses), net (1)

     (2.0     (13.5     (24.1     (13.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Noninterest Income

     714.7        656.0        2,077.0        2,054.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Interest Income

        

Interest Income

     347.1        330.2        1,053.8        962.4   

Interest Expense

     90.3        96.7        316.5        265.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Interest Income

     256.8        233.5        737.3        696.7   

Provision for Credit Losses

     17.5        30.0        42.5        120.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Interest Income after Provision for Credit Losses

     239.3        203.5        694.8        576.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest Expense

        

Compensation

     311.1        273.3        925.3        826.2   

Employee Benefits

     66.7        60.0        188.7        181.9   

Outside Services

     139.7        110.7        398.6        330.9   

Equipment and Software

     76.3        72.6        232.8        209.0   

Occupancy

     45.4        42.6        131.3        127.2   

Visa Indemnification Benefit

     —          —          (10.1     (12.7

Other Operating Expense

     62.0        62.9        192.9        193.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Noninterest Expense

     701.2        622.1        2,059.5        1,856.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before Income Taxes

     252.8        237.4        712.3        775.4   

Provision for Income Taxes

     82.4        81.8        238.9        263.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

   $ 170.4      $ 155.6      $ 473.4      $ 512.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income Applicable to Common Stock

   $ 170.4      $ 155.6      $ 473.4      $ 512.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Per Common Share

        

Net Income – Basic

   $ .70      $ .64      $ 1.94      $ 2.10   

– Diluted

     .70        .64        1.93        2.10   
  

 

 

   

 

 

   

 

 

   

 

 

 

Average Number of Common Shares Outstanding – Basic

     240,991,491        242,124,461        241,529,793        241,966,279   

   – Diluted

     241,193,993        242,158,427        242,018,750        242,421,661   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

        NORTHERN TRUST CORPORATION   
(UNAUDITED)   

 

     Three Months
Ended September 30
    Nine Months
Ended September 30
 

(In Millions)

   2011     2010     2011     2010  

Net Income

   $ 170.4      $ 155.6      $ 473.4      $ 512.4   

Other Comprehensive Income (Loss) (Net of Tax and Reclassifications)

        

Net Unrealized Gains on Securities Available for Sale

     21.4        14.1        55.2        34.5   

Net Unrealized Gains (Losses) on Cash Flow Hedges

     (16.6     31.8        (9.6     42.2   

Foreign Currency Translation Adjustments

     1.2        .5        10.6        3.5   

Pension and Other Postretirement Benefit Adjustments

     4.8        2.8        16.6        15.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other Comprehensive Income

     10.8        49.2        72.8        95.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive Income

   $ 181.2      $ 204.8      $ 546.2      $ 607.9   
  

 

 

   

 

 

   

 

 

   

 

 

 
        

(1)    Changes in Other-Than-Temporary-Impairment (OTTI) Losses

   $ .5      $ 7.3      $ (1.1   $ 6.6   

Noncredit-related OTTI Losses Recorded in/(Reclassified from) OCI

     (1.8     (21.3     (22.2     (20.7

Other Security Gains (Losses), net

     (.7     .5        (.8     .8   

Investment Security Gains (Losses), net

   $ (2.0   $ (13.5   $ (24.1   $ (13.3

See accompanying notes to the consolidated financial statements.

 

3


CONSOLIDATED STATEMENT OF CHANGES IN

STOCKHOLDERS’ EQUITY

(UNAUDITED)

        NORTHERN TRUST CORPORATION
       
     Nine Months
Ended September 30
 

(In Millions)

   2011     2010  

Common Stock

    

Balance at January 1 and September 30

   $ 408.6      $ 408.6   
  

 

 

   

 

 

 

Additional Paid-in Capital

    

Balance at January 1

     920.0        888.3   

Treasury Stock Transactions – Stock Options and Awards

     (11.9     (19.4

Stock Options and Awards – Amortization

     55.4        41.7   

Stock Options and Awards – Tax Benefits

     (.6     1.1   
  

 

 

   

 

 

 

Balance at September 30

     962.9        911.7   
  

 

 

   

 

 

 

Retained Earnings

    

Balance at January 1

     5,972.1        5,576.0   

Net Income

     473.4        512.4   

Dividends Declared – Common Stock

     (205.2     (204.6
  

 

 

   

 

 

 

Balance at September 30

     6,240.3        5,883.8   
  

 

 

   

 

 

 

Accumulated Other Comprehensive Income (Loss)

    

Balance at January 1

     (305.3     (361.6

Net Unrealized Gains on Securities Available for Sale

     55.2        34.5   

Net Unrealized Gains (Losses) on Cash Flow Hedges

     (9.6     42.2   

Foreign Currency Translation Adjustments

     10.6        3.5   

Pension and Other Postretirement Benefit Adjustments

     16.6        15.3   
  

 

 

   

 

 

 

Balance at September 30

     (232.5     (266.1
  

 

 

   

 

 

 

Treasury Stock

    

Balance at January 1

     (165.1     (199.2

Stock Options and Awards

     16.7        35.7   

Stock Purchased

     (78.1     (5.8
  

 

 

   

 

 

 

Balance at September 30

     (226.5     (169.3
  

 

 

   

 

 

 

Total Stockholders’ Equity at September 30

   $ 7,152.8      $ 6,768.7   
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

4


CONSOLIDATED STATEMENT OF CASH FLOWS

     NORTHERN TRUST CORPORATION   

(UNAUDITED)

  

 

     Nine Months  
     Ended September 30  

(In Millions)

   2011     2010  

Cash Flows from Operating Activities:

    

Net Income

   $ 473.4      $ 512.4   

Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:

    

Investment Security Losses, net

     24.1        13.3   

Amortization and Accretion of Securities and Unearned Income

     (19.2     (40.9

Provision for Credit Losses

     42.5        120.0   

Depreciation on Buildings and Equipment

     67.7        70.3   

Amortization of Computer Software

     117.4        101.2   

Amortization of Intangibles

     11.5        11.0   

Qualified Pension Plan Contribution

     (10.6     (20.0

Visa Indemnification Benefit

     (10.1     (12.7

(Increase) Decrease in Receivables

     104.5        (115.8

Increase (Decrease) in Interest Payable

     1.6        (6.0

Net Change in Derivative Fair Value, Including Required Collateral

     (1,204.2     328.8   

Other Operating Activities, net

     264.4        (42.2
  

 

 

   

 

 

 

Net Cash Provided by (Used In) Operating Activities

     (137.0     919.4   
  

 

 

   

 

 

 

Cash Flows from Investing Activities:

    

Net Increase in Federal Funds Sold and Securities Purchased under Agreements to Resell

     (61.6     (178.7

Net Increase in Interest-Bearing Deposits with Banks

     (3,592.8     (3,195.3

Net Decrease in Federal Reserve Deposits and Other Interest-Bearing Assets

     4,438.0        8,633.0   

Purchases of Securities – Held to Maturity

     (101.5     (382.4

Proceeds from Maturity and Redemption of Securities – Held to Maturity

     195.9        377.2   

Purchases of Securities – Available for Sale

     (24,888.1     (11,429.2

Proceeds from Sale, Maturity and Redemption of Securities – Available for Sale

     16,484.0        8,774.0   

Net Increase in Loans and Leases

     (634.9     (166.6

Purchases of Buildings and Equipment, net

     (55.1     (58.6

Purchases and Development of Computer Software

     (219.8     (152.7

Net (Increase) Decrease in Client Security Settlement Receivables

     (246.9     90.5   

Decrease in Cash Due to Acquisitions, net of Cash Acquired

     (172.6       

Other Investing Activities, net

     (60.9     (6.8
  

 

 

   

 

 

 

Net Cash Provided by (Used in) Investing Activities

     (8,916.3     2,304.4   
  

 

 

   

 

 

 

Cash Flows from Financing Activities:

    

Net Increase in Deposits

     14,318.3        164.6   

Net Decrease in Federal Funds Purchased

     (2,953.9     (1,844.6

Net Decrease in Securities Sold under Agreements to Repurchase

     (615.1     (332.1

Net Increase (Decrease) in Short-Term Other Borrowings

     522.3        (503.9

Proceeds from Term Federal Funds Purchased

     7,959.9        17,208.3   

Repayments of Term Federal Funds Purchased

     (7,979.0     (16,581.3

Proceeds from Senior Notes and Long-Term Debt

     500.0        642.7   

Repayments of Senior Notes and Long-Term Debt

     (879.8     (917.6

Treasury Stock Purchased

     (77.7     (6.0

Net Proceeds from Stock Options

     58.7        57.1   

Cash Dividends Paid on Common Stock

     (205.5     (204.6

Other Financing Activities, net

            1.1   
  

 

 

   

 

 

 

Net Cash Provided by (Used in) Financing Activities

     10,648.2        (2,316.3
  

 

 

   

 

 

 

Effect of Foreign Currency Exchange Rates on Cash

     (76.3     90.2   
  

 

 

   

 

 

 

Increase in Cash and Due from Banks

     1,518.6        997.7   

Cash and Due from Banks at Beginning of Year

     2,818.0        2,491.8   
  

 

 

   

 

 

 

Cash and Due from Banks at End of Period

   $ 4,336.6      $ 3,489.5   
  

 

 

   

 

 

 

Supplemental Disclosures of Cash Flow Information:

    

Interest Paid

   $ 314.9      $ 271.7   

Income Taxes Paid

     123.6        136.7   

Transfers from Loans to OREO

     57.5        24.5   
  

 

 

   

 

 

 

 

See accompanying notes to the consolidated financial statements.

    

 

5


Notes to Consolidated Financial Statements

1. Basis of Presentation The consolidated financial statements include the accounts of Northern Trust Corporation (Corporation) and its subsidiaries (collectively, Northern Trust). Significant intercompany balances and transactions have been eliminated. The consolidated financial statements, as of and for the periods ended September 30, 2011 and 2010, have not been audited by the Corporation’s independent registered public accounting firm. In the opinion of management, all accounting entries and adjustments, including normal recurring accruals, necessary for a fair presentation of the financial position and the results of operations for the interim periods have been made. Certain prior period balances have been reclassified consistent with the current period’s presentations. For a description of Northern Trust’s significant accounting policies, refer to Note 1 of the Notes to Consolidated Financial Statements in the 2010 Annual Report to Shareholders.

2. Recent Accounting Pronouncements In September 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-08, “Testing Goodwill for Impairment”. The ASU provides the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the results of the qualitative analysis indicate it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, the quantitative two-step impairment test, which is required under current U.S. GAAP, would not be necessary. The ASU is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of this ASU by Northern Trust, effective January 1, 2012, is not expected to have an impact on Northern Trust’s consolidated financial position or results of operations.

3. Fair Value Measurements Fair Value Hierarchy. The following describes the hierarchy of valuation inputs (Levels 1, 2, and 3) used to measure fair value and the primary valuation methodologies used by Northern Trust for financial instruments measured at fair value on a recurring basis. Observable inputs reflect market data obtained from sources independent of the reporting entity; unobservable inputs reflect the entity’s own assumptions about how market participants would value an asset or liability based on the best information available. GAAP requires an entity measuring fair value to maximize the use of observable inputs and minimize the use of unobservable inputs and establishes a fair value hierarchy of inputs. Financial instruments are categorized within the hierarchy based on the lowest level input that is significant to their valuation.

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

Northern Trust’s Level 1 assets and liabilities include available for sale investments in U.S. treasury securities and U.S. treasury securities held to fund employee benefit and deferred compensation obligations.

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.

 

6


Notes to Consolidated Financial Statements (continued)

 

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

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

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

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

 

7


Notes to Consolidated Financial Statements (continued)

 

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

The following presents assets and liabilities measured at fair value on a recurring basis as of September 30, 2011 and December 31, 2010, segregated by fair value hierarchy level.

 

(In Millions)

   Level 1      Level 2      Level 3      Netting *     Assets/Liabilities
at Fair Value
 

September 30, 2011

             

Securities

             

Available for Sale

             

U.S. Government

   $ 2,020.9       $ —         $ —         $ —        $ 2,020.9   

Obligations of States and Political Subdivisions

     —           18.4         —           —          18.4   

Government Sponsored Agency

     —           16,120.7         —           —          16,120.7   

Corporate Debt

     —           2,848.6         —           —          2,848.6   

Non-U.S. Government

     —           204.3         —           —          204.3   

Residential Mortgage-Backed

     —           183.4         —           —          183.4   

Other Asset-Backed

     —           1,637.5         —           —          1,637.5   

Certificates of Deposit

     —           3,544.5         —           —          3,544.5   

Auction Rate

     —           —           189.6         —          189.6   

Other

     —           1,671.4         —           —          1,671.4   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

     2,020.9         26,228.8         189.6         —          28,439.3   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Trading Account

     —           6.3         —           —          6.3   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

     2,020.9         26,235.1         189.6         —          28,445.6   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Other Assets

             

Derivatives

             

Foreign Exchange Contracts

     —           5,226.6         —           —          5,226.6   

Interest Rate Swaps

     —           348.0         —           —          348.0   

Interest Rate Options

     —           —           —           —          —     

Credit Default Swaps

     —           —           —           —          —     

Forward Contracts

     —           —           —           —          —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

     —           5,574.6         —           (2,118.1     3,456.5   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

All Other

     75.7         38.9         —           —          114.6   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

     75.7         5,613.5         —           (2,118.1     3,571.1   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Assets at Fair Value

   $ 2,096.6       $ 31,848.6       $ 189.6       $ (2,118.1   $ 32,016.7   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Other Liabilities

             

Derivatives

             

Foreign Exchange Contracts

   $ —         $ 5,216.8       $ —         $ —        $ 5,216.8   

Interest Rate Swaps

     —           232.3         —           —          232.3   

Interest Rate Options

     —           —           —           —          —     

Credit Default Swaps

     —           .4         —           —          .4   

Forward Contracts

     —           —           —           —          —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

     —           5,449.5         —           (3,619.3     1,830.2   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

All Other

     —           —           102.2         —          102.2   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Liabilities at Fair Value

   $ —         $ 5,449.5       $ 102.2       $ (3,619.3   $ 1,932.4   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

* 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 September 30, 2011, derivative assets and liabilities shown above also include reductions of $62.9 million and $1,564.1 million, respectively, as a result of cash collateral received from and deposited with derivative counterparties.

 

8


Notes to Consolidated Financial Statements (continued)

 

 

(In Millions)

   Level 1      Level 2      Level 3      Netting *     Assets/Liabilities
at Fair Value
 

December 31, 2010

             

Securities

             

Available for Sale

             

U.S. Government

   $ 658.4       $ —         $ —         $ —        $ 658.4   

Obligations of States and Political Subdivisions

     —           36.3         —           —          36.3   

Government Sponsored Agency

     —           11,970.7         —           —          11,970.7   

Corporate Debt

     —           2,554.0         —           —          2,554.0   

Non-U.S. Government

     —           440.6         —           —          440.6   

Residential Mortgage-Backed

     —           254.6         —           —          254.6   

Other Asset-Backed

     —           1,605.7         —           —          1,605.7   

Certificates of Deposit

     —           1,402.5         —           —          1,402.5   

Auction Rate

     —           —           367.8         —          367.8   

Other

     —           611.3         —           —          611.3   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

     658.4         18,875.7         367.8         —          19,901.9   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Trading Account

     —           6.8         —           —          6.8   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

     658.4         18,882.5         367.8         —          19,908.7   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Other Assets

             

Derivatives

             

Foreign Exchange Contracts

     —           5,792.8         —           —          5,792.8   

Interest Rate Swaps

     —           285.8         —           —          285.8   

Interest Rate Options

     —           .1         —           —          .1   

Credit Default Swaps

     —           —           —           —          —     

Forward Contracts

     —           .5         —           —          .5   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

     —           6,079.2         —           (4,449.9     1,629.3   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

All Other

     65.9         37.4         —           —          103.3   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

     65.9         6,116.6         —           (4,449.9     1,732.6   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Assets at Fair Value

   $ 724.3       $ 24,999.1       $ 367.8       $ (4,449.9   $ 21,641.3   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Other Liabilities

             

Derivatives

             

Foreign Exchange Contracts

   $ —         $ 5,781.3       $ —         $ —        $ 5,781.3   

Interest Rate Swaps

     —           163.7         —           —          163.7   

Interest Rate Options

     —           .1         —           —          .1   

Credit Default Swaps

     —           2.8         —           —          2.8   

Forward Contracts

     —           .2         —           —          .2   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

     —           5,948.1         —           (4,770.9     1,177.2   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

All Other

     —           —           58.6         —          58.6   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Liabilities at Fair Value

   $ —         $ 5,948.1       $ 58.6       $ (4,770.9   $ 1,235.8   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

* Northern Trust has elected to net derivative assets and liabilities when legally enforceable master netting agreements exist between Northern Trust and the counterparty. As of December 31, 2010, derivative assets and liabilities shown above also include reductions of $2,631.7 million and $2,952.7 million, respectively, as a result of cash collateral received from and deposited with derivative counterparties.

 

9


Notes to Consolidated Financial Statements (continued)

 

The following presents the changes in Level 3 assets for the three and nine months ended September 30, 2011 and 2010.

 

      Auction Rate Securities  

(In Millions)

   2011     2010  

Three Months Ended September 30

    

Fair Value at July 1

   $ 205.1      $ 384.9   

Total Realized and Unrealized

    

(Gains) Losses Included in Earnings

     (.6     (.3

Gains (Losses) Included in Other Comprehensive Income

     (5.2     (1.5

Purchases, Issuances, Sales, and Settlements

    

Sales

     —          —     

Settlements

     (9.7     (3.1
  

 

 

   

 

 

 

Fair Value at September 30

   $ 189.6      $ 380.0   
  

 

 

   

 

 

 

 

      2011     2010  

Nine Months Ended September 30

    

Fair Value at January 1

   $ 367.8      $ 427.7   

Total Realized and Unrealized

    

(Gains) Losses Included in Earnings

     (10.2     (2.9

Gains (Losses) Included in Other Comprehensive Income

     (15.8     (7.4

Purchases, Issuances, Sales, and Settlements

    

Sales

     (1.5     (.3

Settlements

     (150.7     (37.1
  

 

 

   

 

 

 

Fair Value at September 30

   $ 189.6      $ 380.0   
  

 

 

   

 

 

 

Northern Trust purchased certain illiquid auction rate securities from clients in 2008 which were recorded at their purchase date fair values and designated as available for sale securities. Subsequent to their purchase, the securities are reported at fair value and unrealized gains and losses are credited or charged, net of the tax effect, to accumulated other comprehensive income (AOCI). As of September 30, 2011 and December 31, 2010, the net unrealized loss related to these securities was $5.0 million ($3.1 million net of tax) and $10.8 million ($6.8 million net of tax), respectively. Realized gains for the three month period ended September 30, 2011 of $.6 million represent redemptions by issuers. Realized gains for the nine month period ended September 30, 2011 of $10.2 million include $10.1 million from redemptions by issuers and $.1 million from sales of securities. Realized gains for the three and nine month period ended September 30, 2010 of $.3 million and $2.9 million, respectively, represent redemptions by issuers. Gains on redemptions and sales are included in interest income and investment security gains (losses), net, respectively, within the consolidated statement of income.

 

10


Notes to Consolidated Financial Statements (continued)

 

The following presents the changes in Level 3 liabilities for the three and nine months ended September 30, 2011 and 2010.

 

      Other Liabilities *  

(In Millions)

   2011     2010  

Three Months Ended September 30

    

Fair Value at July 1

   $ 55.2      $ 81.0   

Total Realized and Unrealized (Gains) Losses

    

Included in Earnings

     1.4        (1.7

Included in Other Comprehensive Income

     —          —     

Purchases, Issuances, Sales, and Settlements

    

Issuances

     45.7        1.8   

Settlements

     (.1     (.1
  

 

 

   

 

 

 

Fair Value at September 30

   $ 102.2      $ 81.0   
  

 

 

   

 

 

 

Nine Months Ended September 30

    

Fair Value at January 1

   $ 58.6      $ 94.4   

Total Realized and Unrealized (Gains) Losses

    

Included in Earnings

     2.7        (2.4

Included in Other Comprehensive Income

     —          —     

Purchases, Issuances, Sales, and Settlements

    

Issuances

     53.2        3.1   

Settlements

     (12.3     (14.1
  

 

 

   

 

 

 

Fair Value at September 30

   $ 102.2      $ 81.0   
  

 

 

   

 

 

 

Unrealized (Gains) Losses Included in Earnings Related to Financial Instruments Held at September 30

     —          —     
  

 

 

   

 

 

 

 

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

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

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

 

 

11


Notes to Consolidated Financial Statements (continued)

 

The following provides information regarding those assets measured at fair value on a nonrecurring basis at September 30, 2011 and 2010, segregated by fair value hierarchy level.

 

(In Millions)

   Level 1      Level 2      Level 3      Total
Fair Value
 

September 30, 2011

           

Loans (1)

   $ —         $ —         $ 46.6       $ 46.6   

Other Real Estate Owned (2)

     —           —           4.0         4.0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Assets at Fair Value

   $ —         $ —         $ 50.6       $ 50.6   
  

 

 

    

 

 

    

 

 

    

 

 

 

September 30, 2010

           

Loans (1)

   $ —         $ —         $ 74.6       $ 74.6   

Other Real Estate Owned (2)

     —           —           7.4         7.4   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Assets at Fair Value

   $ —         $ —         $ 82.0       $ 82.0   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Northern Trust provided an additional $3.0 million and $1.7 million of specific reserves to reduce the fair value of these loans during the three months ended September 30, 2011 and 2010, respectively. During the nine months ended September 30, 2011 and 2010, these loans were reduced by $10.5 million and $16.1 million, respectively.
(2) Northern Trust charged $1.7 million and $2.6 million through other operating expenses during the three months ended September 30, 2011 and 2010 respectively to reduce the fair values of these Other Real Estate Owned (OREO) properties. During the nine months ended September 30 2011 and 2010, the fair values of these OREO properties were reduced by $1.8 million and $3.8 million, respectively.

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

Fair Value of Financial Instruments. GAAP requires disclosure of the estimated fair value of certain financial instruments and the methods and significant assumptions used to estimate fair value. It excludes from this requirement nonfinancial assets and liabilities, as well as a wide range of franchise, relationship, and intangible values that add value to Northern Trust. Accordingly, the required fair value disclosures provide only a partial estimate of the fair value of Northern Trust. Financial instruments recorded at fair value on Northern Trust’s consolidated balance sheet are discussed above. The following methods and assumptions were used in estimating the fair values of financial instruments that are not carried at fair value.

Held to Maturity Securities. The fair values of held to maturity securities were modeled by external pricing vendors or, in limited cases, modeled internally, using widely accepted models which are based on an income approach that incorporates current market yield curves and assumptions regarding anticipated prepayments and defaults.

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

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

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

 

12


Notes to Consolidated Financial Statements (continued)

 

Savings Certificates, Other Time, and Non-U.S. Offices Interest-Bearing Deposits. The fair values of instruments with stated maturities were estimated using an income approach (discounted cash flow) that incorporates market interest rates. Due to their short maturity, the fair value of instruments without stated maturities approximated their fair values.

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

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

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

 

13


Notes to Consolidated Financial Statements (continued)

 

The following table summarizes the fair values of financial instruments.

 

     September 30, 2011      December 31, 2010  

(In Millions)

   Book Value      Fair Value      Book Value      Fair Value  

Assets

              

Cash and Due from Banks

   $ 4,336.6       $ 4,336.6          $ 2,818.0       $ 2,818.0   

Federal Funds Sold and Resell Agreements

     221.8         221.8            160.1         160.1   

Interest-Bearing Deposits with Banks

     18,944.2         18,944.2            15,351.3         15,351.3   

Federal Reserve Deposits and Other Interest-Bearing

     6,498.2         6,498.2            10,924.6         10,924.6   

Securities

              

Available for Sale

     28,439.3         28,439.3            19,901.9         19,901.9   

Held to Maturity

     829.2         847.2            922.2         941.8   

Trading Account

     6.3         6.3            6.8         6.8   

Loans (excluding Leases)

              

Held for Investment

     27,369.6         27,603.0            26,747.8         26,814.2   

Held for Sale

     10.0         10.0            2.2         2.2   

Client Security Settlement Receivables

     948.2         948.2            701.3         701.3   

Other Assets

              

Federal Reserve and Federal Home Loan Bank Stock

     185.3         185.3            185.5         185.5   

Affordable Housing Investments

     252.3         252.3            265.4         265.4   

Liabilities

              

Deposits

              

Demand, Noninterest-Bearing, and Savings and Money Market

   $ 37,401.0       $ 37,401.0          $ 24,810.3       $ 24,810.3   

Savings Certificates, Other Time and Non U. S. Offices Interest-Bearing

     41,113.0         41,126.0            39,385.4         39,402.1   

Federal Funds Purchased

     737.8         737.8            3,691.7         3,691.7   

Securities Sold under Agreements to Repurchase

     339.3         339.3            954.4         954.4   

Other Borrowings

     817.6         817.6            347.7         347.7   

Senior Notes

     2,133.5         2,196.1            1,896.1         1,936.5   

Long Term Debt (excluding Leases)

              

Subordinated Debt

     1,036.6         1,038.9            1,148.7         1,177.2   

Federal Home Loan Bank Borrowings

     1,055.0         1,101.9            1,532.5         1,613.5   

Floating Rate Capital Debt

     276.9         229.9            276.9         223.2   

Financial Guarantees

     102.2         102.2            58.6         58.6   

Loan Commitments

     32.8         32.8            32.4         32.4   

Derivative Instruments

              

Asset/Liability Management

              

Foreign Exchange Contracts

              

Assets

   $ 23.7       $ 23.7          $ 44.9       $ 44.9   

Liabilities

     26.8         26.8            51.4         51.4   

Interest Rate Swaps

              

Assets

     154.4         154.4            134.6         134.6   

Liabilities

     42.8         42.8            15.3         15.3   

Credit Default Swaps

              

Assets

     —           —              —           —     

Liabilities

     .4         .4            2.8         2.8   

Forward Contracts

              

Assets

     —           —              .5         .5   

Liabilities

     —           —              .2         .2   

Client-Related and Trading

              

Foreign Exchange Contracts

              

Assets

     5,202.9         5,202.9            5,747.9         5,747.9   

Liabilities

     5,190.0         5,190.0            5,729.9         5,729.9   

Interest Rate Swaps

              

Assets

     193.6         193.6            151.2         151.2   

Liabilities

     189.5         189.5            148.4         148.4   

Interest Rate Options

              

Assets

     —           —              .1         .1   

Liabilities

     —           —              .1         .1   

 

14


Notes to Consolidated Financial Statements (continued)

 

4. Securities —  The following tables provide the amortized cost and fair values of securities at September 30, 2011 and December 31, 2010.

 

000000 000000 000000 000000
      September 30, 2011  
Securities Available for Sale    Amortized      Gross Unrealized      Fair  

(In Millions)

   Cost      Gains      Losses      Value  

U.S. Government

   $ 1,967.4       $ 53.5       $ —         $ 2,020.9   

Obligations of States and Political Subdivisions

     17.5         .9         —           18.4   

Government Sponsored Agency

     16,055.4         78.7         13.4         16,120.7   

Corporate Debt

     2,840.8         10.2         2.4         2,848.6   

Non-U.S. Government Debt

     204.3         —           —           204.3   

Residential Mortgage-Backed

     215.8         —           32.4         183.4   

Other Asset-Backed

     1,638.3         1.7         2.5         1,637.5   

Certificates of Deposit

     3,545.2         —           .7         3,544.5   

Auction Rate

     194.6         4.8         9.8         189.6   

Other

     1,653.5         18.5         .6         1,671.4   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 28,332.8       $ 168.3       $ 61.8       $ 28,439.3   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

0000000 0000000 0000000 0000000
      September 30, 2011  
Securities Held to Maturity    Amortized      Gross Unrealized      Fair  

(In Millions)

   Cost      Gains      Losses      Value  

Obligations of States and Political Subdivisions

   $ 553.1       $ 25.3       $ .1       $ 578.3   

Government Sponsored Agency

     163.9         4.9         —           168.8   

Other

     112.2         —           12.1         100.1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 829.2       $ 30.2       $ 12.2       $ 847.2   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

00000000 00000000 00000000 00000000
      December 31, 2010  
Securities Available for Sale    Amortized      Gross Unrealized      Fair  

(In Millions)

   Cost      Gains      Losses      Value  

U.S. Government

   $ 667.2       $ 1.0       $ 9.8       $ 658.4   

Obligations of States and Political Subdivisions

     35.4         .9         —           36.3   

Government Sponsored Agency

     11,937.0         47.0         13.3         11,970.7   

Corporate Debt

     2,547.7         7.8         1.5         2,554.0   

Non-U.S. Government Debt

     440.6         —           —           440.6   

Residential Mortgage-Backed

     308.0         .9         54.3         254.6   

Other Asset-Backed

     1,606.5         1.5         2.3         1,605.7   

Certificates of Deposit

     1,402.5         —           —           1,402.5   

Auction Rate

     357.0         14.2         3.4         367.8   

Other

     610.8         4.2         3.7         611.3   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

 

 

0000000 0000000 0000000 0000000
      December 31, 2010  
Securities Held to Maturity    Amortized      Gross Unrealized      Fair  

(In Millions)

   Cost      Gains      Losses      Value  

Obligations of States and Political Subdivisions

   $ 635.0       $ 26.2       $ .4       $ 660.8   

Government Sponsored Agency

     169.3         4.6         .2         173.7   

Other

     117.9         —           10.6         107.3   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 922.2       $ 30.8       $ 11.2       $ 941.8   
           
  

 

 

    

 

 

    

 

 

    

 

 

 

 

15


Notes to Consolidated Financial Statements (continued)

 

The following table provides the remaining maturity of securities as of September 30, 2011.

 

(In Millions)

   Amortized
Cost
     Fair
Value
 

Available for Sale

     

Due in One Year or Less

   $ 11,153.3       $ 11,155.2   

Due After One Year Through Five Years

     15,578.1         15,670.4   

Due After Five Years Through Ten Years

     851.7         858.7   

Due After Ten Years

     749.7         755.0   
  

 

 

    

 

 

 

Total

     28,332.8         28,439.3   
  

 

 

    

 

 

 

Held to Maturity

     

Due in One Year or Less

     141.6         142.2   

Due After One Year Through Five Years

     284.9         292.9   

Due After Five Years Through Ten Years

     240.7         250.8   

Due After Ten Years

     162.0         161.3   
  

 

 

    

 

 

 

Total

   $ 829.2       $ 847.2   
  

 

 

    

 

 

 

 

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

Investment Security Gains and Losses. Net investment security losses totaling $2.0 million and $24.1 million were recognized for the three and nine months ended September 30, 2011, respectively, and losses totaling $13.5 million and $13.3 million were recognized for the three and nine months ended September 30, 2010, respectively. Included in the net losses were other-than-temporary impairment (OTTI) losses that totaled $1.3 million and $23.3 million for the three and nine months ended September 30, 2011, respectively, and $14.0 million and $14.1 million for the three and nine months ended September 30, 2010, respectively. There were $.7 million and $.8 million other realized net security losses for the three and nine months ended September 30, 2011, respectively, and $.5 million and $.8 million of other realized security gains for the three and nine months ended September 30, 2010, respectively.

Securities with Unrealized Losses. The following tables provide information regarding securities that have been in a continuous unrealized loss position for less than 12 months and for 12 months or longer as of September 30, 2011 and December 31, 2010.

 

Securities with Unrealized

    Losses as of September 30, 2011

   Less than 12 Months      12 Months or Longer      Total  

(In Millions)

   Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 

Obligations of States and Political Subdivisions

   $ 1.0       $ —         $ 3.1       $ .1       $ 4.1       $ .1   

Government Sponsored Agency

     5,335.3         11.4         414.1         2.0         5,749.4         13.4   

Corporate Debt

     408.8         1.3         99.2         1.1         508.0         2.4   

Residential Mortgage-Backed

     5.6         .2         177.4         32.2         183.0         32.4   

Other Asset-Backed

     687.8         2.2         87.4         .3         775.2         2.5   

Certificates of Deposit

     2,034.2         .7         —           —           2,034.2         .7   

Auction Rate

     63.2         4.9         53.9         4.9         117.1         9.8   

Other

     260.6         2.0         44.8         10.7         305.4         12.7   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 8,796.5       $ 22.7       $ 879.9       $ 51.3       $ 9,676.4       $ 74.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

16


Notes to Consolidated Financial Statements (continued)

 

 

Securities with Unrealized Losses

    as of December 31, 2010

   Less than 12 Months      12 Months or Longer      Total  

(In Millions)

   Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 

U.S. Government

   $ 492.9       $ 9.8       $ —         $ —         $ 492.9       $ 9.8   

Obligations of States and Political Subdivisions

     3.0         —           3.2         .4         6.2         .4   

Government Sponsored Agency

     980.7         11.0         328.7         2.5         1,309.4         13.5   

Corporate Debt

     930.6         1.1         475.2         .4         1,405.8         1.5   

Residential Mortgage-Backed

     —           —           248.8         54.3         248.8         54.3   

Other Asset-Backed

     513.5         2.2         27.0         .1         540.5         2.3   

Auction Rate

     77.6         3.3         .7         .1         78.3         3.4   

Other

     482.2         6.8         36.5         7.5         518.7         14.3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As of September 30, 2011, 341 securities with a combined fair value of $9.7 billion were in an unrealized loss position, with their unrealized losses totaling $74.0 million. Unrealized losses on residential mortgage-backed securities totaling $32.4 million reflect the impact of credit and liquidity spreads on the valuations of 25 residential mortgage-backed securities, with $32.2 million having been in an unrealized loss position for more than 12 months. Residential mortgage-backed securities rated below double-A at September 30, 2011 represented 81% of the total fair value of residential mortgage-backed securities, were comprised primarily of sub-prime and Alt-A securities, and had a total amortized cost and fair value of $179.7 million and $149.2 million, respectively. Securities classified as “other asset-backed” at September 30, 2011 were predominantly floating rate with average lives less than 5 years, and 100% were rated triple-A.

Unrealized losses of $13.4 million related to government sponsored agency securities are primarily attributable to changes in market rates since their purchase. The majority of the $12.7 million of unrealized losses in securities classified as “other” at September 30, 2011 relate to securities which Northern Trust purchases for compliance with the Community Reinvestment Act (CRA). Unrealized losses on these CRA related other securities are attributable to their purchase at below market rates for the purpose of supporting institutions and programs that benefit low to moderate income communities within Northern Trust’s market area. Unrealized losses of $9.8 million related to auction rate securities primarily reflect reduced market liquidity as a majority of auctions continue to fail preventing holders from liquidating their investments at par. Unrealized losses of $2.4 million within corporate debt securities primarily reflect widened credit spreads; 74% of the corporate debt portfolio is backed by guarantees provided by U.S. and non-U.S. governmental entities. The remaining unrealized losses on Northern Trust’s securities portfolio as of September 30, 2011 are attributable to changes in overall market interest rates, increased credit spreads, or reduced market liquidity.

 

17


Notes to Consolidated Financial Statements (continued)

 

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

While all securities are considered, the following describes Northern Trust’s process for identifying credit impairment within non-agency residential mortgage-backed securities, the security type for which Northern Trust has previously recognized OTTI. To determine if an unrealized loss on a non-agency residential mortgage-backed security is other-than-temporary, economic models are used to perform cash flow analyses by developing multiple scenarios in order to create reasonable forecasts of the security’s future performance using available data including servicers’ loan charge off patterns, prepayment speeds, annualized default rates, each security’s current delinquency pipeline, the delinquency pipeline’s growth rate, the roll rate from delinquency to default, loan loss severities and historical performance of like collateral, along with Northern Trust’s outlook for the housing market and the overall economy. If the present value of future cash flows projected as a result of this analysis is less than the current amortized cost of the security, a credit related OTTI loss is recorded to earnings equal to the difference between the two amounts.

Expected losses on non-agency residential mortgage-backed securities are influenced by a number of factors, including but not limited to, U.S. economic and housing market performance, security credit enhancement level, insurance coverage, year of origination, and type of collateral. The factors used in developing the expected loss on non-agency residential mortgage-backed securities vary by year of origination and type of collateral. As of September 30, 2011, the expected losses on subprime, Alt-A, prime and 2nd lien portfolios were developed using default roll rates, determined primarily by the stage of delinquency of the underlying instrument, that generally assumed ultimate default rates approximating 5% to 30% for current loans; 30% for loans 30 to 60 days delinquent; 80% for loans 60 to 90 days delinquent; 90% for loans delinquent greater than 90 days; and 100% for OREO properties and loans that are in foreclosure. September 30, 2011 amortized cost, weighted average ultimate default rates, and loss severity rates for the non-agency residential mortgage-backed securities portfolio, by security type, are provided in the following table.

 

18


Notes to Consolidated Financial Statements (continued)

 

 

(In Millions)

   September 30, 2011  
                  Loss Severity Rates  

Security Type

   Amortized
Cost
     Weighted Average
Ultimate Default Rates
    Low     High     Weighted
Average
 

Prime

   $ 24.4         16.1     39.4     66.0     51.8

Alt-A

     35.4         41.9        57.9        71.7        68.5   

Subprime

     120.4         51.1        68.8        86.0        74.4   

2nd Lien

     35.6         33.1        98.8        100.0        99.5   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total Non-Agency Residential Mortgage-Backed Securities

   $ 215.8         42.4     39.4     100.0     75.0
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

During the three and nine months ended September 30, 2011, performance metrics specific to subprime and Alt-A loans remained weak resulting in the recognition of OTTI losses of $1.3 million and $23.3 million, respectively, in connection with residential mortgage-backed securities. OTTI losses totaled $14.0 million and $14.1 million for the three and nine months ended September 30, 2010, respectively.

Credit Losses on Debt Securities. The table below provides information regarding total other-than-temporarily impaired securities, including noncredit-related amounts recognized in other comprehensive income and net impairment losses recognized in earnings, for the three and nine months ended September 30, 2011 and 2010.

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 

(In Millions)

   2011     2010     2011     2010  

Changes in OTTI Losses*

   $ .5      $ 7.3      $ (1.1   $ 6.6   

Noncredit-related Losses Recorded in / (Reclassified from) OCI**

     (1.8     (21.3     (22.2     (20.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Impairment Losses Recognized in Earnings

   $ (1.3   $ (14.0   $ (23.3   $ (14.1
  

 

 

   

 

 

   

 

 

   

 

 

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

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

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 

(In Millions)

   2011     2010      2011     2010  

Cumulative Credit-Related Losses on Securities Held – Beginning of Period

   $ 116.2      $ 73.1       $ 94.2      $ 73.0   

Plus: Losses on Newly Identified Impairements

     —          .1         1.5        .1   

Additional Losses on Previously Identified Impairements

     1.3        13.9         21.8        14.0   

Less: Losses on Securities Sold During the Period

     (49.3     —           (49.3     —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Cumulative Credit-Related Losses on Securities Held – End of Period

   $ 68.2      $ 87.1       $ 68.2      $ 87.1   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

19


Notes to Consolidated Financial Statements (continued)

 

The table below provides information regarding debt securities held as of September 30, 2011 and December 31, 2010, for which an OTTI loss had been recognized in the current period or previously.

 

(In Millions)

   September 30,
2011
    December 31,
2010
 

Fair Value

   $ 77.9      $ 79.9   

Amortized Cost Basis

     99.9        113.3   

Noncredit-related Losses Recognized in OCI

     (22.0     (33.4

Tax Effect

     8.1        12.2   
  

 

 

   

 

 

 

Amount Recorded in OCI

   $ (13.9   $ (21.2
  

 

 

   

 

 

 

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

 

(In Millions)

   September 30,
2011
    December 31,
2010
 

Commercial

    

Commercial and Institutional

   $ 6,458.0      $ 5,914.5   

Commercial Real Estate

     2,958.2        3,242.4   

Lease Financing, net

     1,014.1        1,063.7   

Non-U.S.

     1,315.2        1,046.2   

Other

     473.8        346.6   
  

 

 

   

 

 

 

Total Commercial

     12,219.3        11,613.4   
  

 

 

   

 

 

 

Personal

    

Residential Real Estate

     10,772.4        10,854.9   

Private Client

     5,427.7        5,423.7   

Other

     272.0        240.0   
  

 

 

   

 

 

 

Total Personal

     16,472.1        16,518.6   
  

 

 

   

 

 

 

Total Loans and Leases

     28,691.4        28,132.0   
  

 

 

   

 

 

 

Allowance for Credit Losses Assigned to Loans and Leases

     (298.3     (319.6
  

 

 

   

 

 

 

Net Loans and Leases

   $ 28,393.1      $ 27,812.4   
  

 

 

   

 

 

 

Included within the non-U.S., commercial-other, and personal-other classes are short duration advances primarily related to the processing of custodied client investments that totaled $1.9 billion and $1.4 billion at September 30, 2011 and December 31, 2010, respectively. Loans classified as held for sale totaled $10.0 million at September 30, 2011 and $2.2 million at December 31, 2010.

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

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

 

20


Notes to Consolidated Financial Statements (continued)

 

Risk ratings are used for ranking the credit risk of borrowers and the probability of their default. Each borrower is rated using one of a number of ratings models, which consider both quantitative and qualitative factors. The ratings models vary among classes of loans and leases in order to capture the unique risk characteristics inherent within each particular type of credit exposure. Provided below are the more significant performance indicator attributes considered within Northern Trust’s borrower rating models, by loan and lease class.

 

   

Commercial and Institutional: leverage, profit margin, liquidity, return on assets, asset size, and capital levels;

 

   

Commercial Real Estate: debt service coverage and leasing status for income-producing properties; loan-to-value and loan-to-cost ratios, leasing status, and guarantor support for loans associated with construction and development properties;

 

   

Lease Financing and Commercial-Other: leverage and profit margin levels;

 

   

Non-U.S.: entity type, liquidity, size, and leverage;

 

   

Residential Real Estate: payment history and cash flow-to-debt and net worth ratios;

 

   

Private Client: cash flow-to-debt and net worth ratios, leverage, and profit margin levels; and

 

   

Personal-Other: cash flow-to-debt and net worth ratios.

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

Loan and lease segment and class balances as of September 30, 2011 and December 31, 2010 are provided below, segregated by borrower ratings into below average risk, average risk, and watch list categories.

 

     September 30, 2011      December 31, 2010  

(In Millions)

   Below Average
Risk
     Average
Risk
     Watch
List
     Total      Below Average
Risk
     Average
Risk
     Watch
List
     Total  

Commercial

                       

Commercial and Institutional

   $ 3,273.0       $ 2,974.6       $ 210.4       $ 6,458.0       $ 2,821.5       $ 2,849.8       $ 243.2       $ 5,914.5   

Commercial Real Estate

     1,291.6         1,362.8         303.8         2,958.2         1,232.8         1,594.3         415.3         3,242.4   

Lease Financing, net

     536.6         464.1         13.4         1,014.1         571.6         473.0         19.1         1,063.7   

Non-U.S.

     612.5         687.3         15.4         1,315.2         430.0         596.5         19.7         1,046.2   

Other

     400.4         73.4         —           473.8         209.5         137.1         —           346.6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Commercial

     6,114.1         5,562.2         543.0         12,219.3         5,265.4         5,650.7         697.3         11,613.4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Personal

                       

Residential Real Estate

     2,739.1         7,631.8         401.5         10,772.4         2,896.0         7,586.9         372.0         10,854.9   

Private Client

     3,059.1         2,335.4         33.2         5,427.7         3,326.5         2,064.1         33.1         5,423.7   

Other

     120.1         151.9         —           272.0         78.1         161.9         —           240.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Personal

     5,918.3         10,119.1         434.7         16,472.1         6,300.6         9,812.9         405.1         16,518.6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Loans and Leases

   $ 12,032.4       $ 15,681.3       $ 977.7       $ 28,691.4       $ 11,566.0       $ 15,463.6       $ 1,102.4       $ 28,132.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

21


Notes to Consolidated Financial Statements (continued)

 

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

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

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

Recognition of Income. Interest income on loans is recorded on an accrual basis unless, in the opinion of management, there is a question as to the ability of the debtor to meet the terms of the loan agreement, or interest or principal is more than 90 days contractually past due and the loan is not well-secured and in the process of collection. At the time a loan is determined to be nonperforming, interest accrued but not collected is reversed against interest income of the current period and the loan is classified as nonperforming. Interest collected on nonperforming loans is applied to principal unless, in the opinion of management, collectability of principal is not in doubt. Management’s assessment of the indicators of loan and lease collectability, and its policies relative to the recognition of interest income, including the suspension and subsequent resumption of income recognition, do not meaningfully vary between loan and lease classes.

Nonperforming loans are returned to performing status when factors indicating doubtful collectability no longer exist. Factors considered in returning a loan to performing status are consistent across all classes of loans and leases and, in accordance with regulatory guidance, relate primarily to expected payment performance. Loans are eligible to be returned to performing status when one of the following conditions are met: (i) no principal and interest is due and unpaid and repayment of the remaining contractual principal and interest is expected; (ii) there has been a sustained period of repayment performance (generally a minimum of six months) by the borrower in accordance with the contractual terms, and Northern Trust is reasonably assured of repayment within a reasonable period of time and repayment of the remaining contractual principal and interest is expected; or (iii) the loan has otherwise become well-secured (possessing realizable value sufficient to

 

22


Notes to Consolidated Financial Statements (continued)

 

discharge the debt, including accrued interest, in full) and is in the process of collection (through action reasonably expected to result in debt repayment or restoration to a current status in the near future). Additionally, a loan that has been formally restructured so as to be reasonably assured of repayment and performance according to its modified terms may be returned to accrual status, provided there was a well-documented credit evaluation of the borrower’s financial condition and prospects of repayment under the revised terms and there has been a sustained period of repayment performance (generally a minimum of six months) under the revised terms.

Past due status is based on how long after the contractual due date a principal or interest payment is received. For disclosure purposes, loans that are 29 days past due or less are reported as current. The following tables provide balances and delinquency status of performing and nonperforming loans and leases by segment and class, as well as the total other real estate owned and nonperforming asset balances, as of September 30, 2011 and December 31, 2010.

 

September 30, 2011  

(In Millions)

   30-59 Days
Past Due
     60-89 Days
Past Due
     90 Days or
More Past  Due
     Current      Total
Performing
     Nonperforming      Total Loans
and Leases
 

Commercial

                    

Commercial and Institutional

   $ 8.0       $ 18.4       $ 1.6       $ 6,394.5       $ 6,422.5       $ 35.5       $ 6,458.0   

Commercial Real Estate

     6.3         7.4         5.3         2,855.2         2,874.2         84.0         2,958.2   

Lease Financing, net

     —           —           —           1,014.1         1,014.1         —           1,014.1   

Non-U.S.

     —           —           —           1,315.2         1,315.2         —           1,315.2   

Other

     —           —           —           473.8         473.8         —           473.8   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Commercial

   $ 14.3       $ 25.8       $ 6.9       $ 12,052.8       $ 12,099.8       $ 119.5       $ 12,219.3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Personal

                    

Residential Real Estate

   $ 16.2       $ 31.8       $ 4.7       $ 10,537.8       $ 10,590.5       $ 181.9       $ 10,772.4   

Private Client

     16.5         10.9         .8         5,393.4         5,421.6         6.1         5,427.7   

Other

     —           —           —           272.0         272.0         —           272.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Personal

     32.7         42.7         5.5         16,203.2         16,284.1         188.0         16,472.1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Loans and Leases

   $ 47.0       $ 68.5       $ 12.4       $ 28,256.0       $ 28,383.9       $ 307.5       $ 28,691.4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
           Total Other Real Estate Owned         30.4      
                 

 

 

    
           Total Nonperforming Assets       $ 337.9      
                 

 

 

    

 

December 31, 2010  

(In Millions)

   30-59 Days
Past Due
     60-89 Days
Past Due
     90 Days or More
Past Due
     Current      Total
Performing
     Nonperforming      Total Loans
and Leases
 

Commercial

                    

Commercial and Institutional

   $ 16.3       $ 8.2       $ .8       $ 5,831.2       $ 5,856.5       $ 58.0       $ 5,914.5   

Commercial Real Estate

     24.2         15.7         9.4         3,076.7         3,126.0         116.4         3,242.4   

Lease Financing, net

     —           —           —           1,063.7         1,063.7         —           1,063.7   

Non-U.S.

     —           —           —           1,046.2         1,046.2         —           1,046.2   

Other

     —           —           —           346.6         346.6         —           346.6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Commercial

     40.5         23.9         10.2         11,364.4         11,439.0         174.4         11,613.4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Personal

                    

Residential Real Estate

     76.1         17.2         .9         10,607.4         10,701.6         153.3         10,854.9   

Private Client

     35.7         13.0         1.9         5,367.8         5,418.4         5.3         5,423.7   

Other

     —           —           —           240.0         240.0         —           240.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Personal

     111.8         30.2         2.8         16,215.2         16,360.0         158.6         16,518.6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Loans and Leases

   $ 152.3       $ 54.1       $ 13.0       $ 27,579.6       $ 27,799.0       $ 333.0       $ 28,132.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
           Total Other Real Estate Owned         45.5      
                 

 

 

    
           Total Nonperforming Assets       $ 378.5      
                 

 

 

    

 

23


Notes to Consolidated Financial Statements (continued)

 

Impaired Loans. A loan is considered to be impaired when, based on current information and events, management determines that it is probable that Northern Trust will be unable to collect all amounts due according to the contractual terms of the loan agreement. A loan is also considered to be impaired if its terms have been modified as a concession resulting from the debtor’s financial difficulties, referred to as a troubled debt restructuring (TDR) and discussed in further detail below. Impaired loans are measured based upon the loan’s market price, the present value of expected future cash flows, discounted at the loan’s effective interest rate, or the fair value of the collateral if the loan is collateral dependent. If the loan valuation is less than the recorded value of the loan, based on the certainty of loss, either a specific reserve is established or a charge-off is recorded for the difference. Smaller balance (individually less than $250,000) homogeneous loans are collectively evaluated for impairment and excluded from impaired loan disclosures as allowed under applicable accounting standards. Northern Trust’s accounting policies for impaired loans is consistent across all classes of loans and leases.

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

 

24


Notes to Consolidated Financial Statements (continued)

 

The following tables provide information related to impaired loans by segment and class.

 

     As of September 30, 2011      Three Months Ended
September 30, 2011
     Nine Months Ended
September 30, 2011
 

(In Millions)

   Recorded
Investment
     Unpaid
Principal
Balance
     Specific
Reserve
     Average
Recorded
Investment
     Interest
Income
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With No Related Specific Reserve

                    

Commercial and Institutional

   $ 21.5       $ 27.2          $ 20.1       $ —         $ 21.0       $ —     

Commercial Real Estate

     41.9         53.7            34.2         .3         34.5         .4   

Residential Real Estate

     138.8         178.3            107.9         .5         123.2         1.6   

Private Client

     5.3         5.6            3.2         —           3.5         —     

With a Related Specific Reserve

                    

Commercial and Institutional

     16.0         25.0       $ 11.9         12.7         —           29.1         —     

Commercial Real Estate

     52.6         68.2         17.2         45.2         —           71.0         —     

Residential Real Estate

     11.1         11.6         5.2         7.5         —           8.3         —     

Private Client

     1.7         1.7         .5         1.7         —           2.2         —     

Total

                    

Commercial

     132.0         174.1         29.1         112.2         .3         155.6         .4   

Personal

     156.9         197.2         5.7         120.3         .5         137.2         1.6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 288.9       $ 371.3       $ 34.8       $ 232.5       $ .8       $ 292.8       $ 2.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

  

 

     As of December 31, 2010  

(In Millions)

   Recorded
Investment
     Unpaid
Principal
Balance
     Specific
Reserve
 

With No Related Specific Reserve

        

Commercial and Institutional

   $ 17.9       $ 26.1      

Commercial Real Estate

     43.7         62.4      

Residential Real Estate

     111.9         138.1      

Private Client

     3.7         3.9      

With a Related Specific Reserve

        

Commercial and Institutional

     41.7         47.8       $ 19.8   

Commercial Real Estate

     77.2         88.9         29.5   

Residential Real Estate

     5.1         5.1         2.4   

Total

        

Commercial

     180.5         225.2         49.3   

Personal

     120.7         147.1         2.4   
  

 

 

    

 

 

    

 

 

 

Total

   $ 301.2       $ 372.3       $ 51.7   
  

 

 

    

 

 

    

 

 

 

The following table provides average recorded investments in impaired loans and the interest income that would have been recorded on nonperforming loans in accordance with their original terms, for the three and nine months ended September 30, 2011 and 2010.

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 

(In Millions)

   2011      2010      2011      2010  

Average Recorded Investment in Impaired Loans *

   $ 232.5       $ 257.6       $ 292.8       $ 233.5   

Interest Income That Would Have Been Recorded on Nonperforming Loans in Accordance with Their Original Terms

     3.7         4.2         11.8         11.8   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

* Average recorded investment in impaired loans is calculated as the average of the month-end impaired loan balances for the period.

 

25


Notes to Consolidated Financial Statements (continued)

 

There were $11.8 million and $16.3 million of unfunded loan commitments and standby letters of credit at September 30, 2011 and December 31, 2010, respectively, issued to borrowers whose loans were classified as nonperforming or impaired.

Troubled Debt Restructurings. As of September 30, 2011 and December 31, 2010, there were $76.2 million and $33.4 million of nonperforming TDRs, respectively, and $35.5 million and $22.9 million of performing TDRs, respectively, included within impaired loans. All TDRs are considered impaired loans in the calendar year of their restructuring. In subsequent years, a TDR may cease being classified as impaired if the loan was modified at a market rate and has performed according to the modified terms for at least six months. A loan that has been modified at a below market rate will return to performing status if it satisfies the six month performance requirement; however, it will remain classified as impaired.

The following table provides, by class, the number of loans and leases modified in troubled debt restructurings during the three and nine month periods ended September 30, 2011, and the recorded investments and unpaid principal balances as of September 30, 2011.

 

      Three Months Ended
September 30, 2011
     Nine Months Ended
September 30, 2011
 
     Number of      Recorded      Unpaid Principal      Number of      Recorded      Unpaid Principal  

($ In Millions)

   Loans and Leases      Investment      Balance      Loans and Leases      Investment      Balance  

Commercial

                 

Commercial and Institutional

     2       $ 5.4       $ 6.4         5       $ 8.6       $ 10.1   

Commercial Real Estate

     6         10.6         12.3         14         39.4         46.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Commercial

     8         16.0         18.7         19         48.0         56.1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Personal

                 

Residential Real Estate

     25         7.1         9.1         113         22.0         27.9   

Private Client

     —           —           —           1         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Personal

     25         7.1         9.1         114         22.0         27.9   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Loans and Leases

     33       $ 23.1       $ 27.8         133       $ 70.0       $ 84.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Note: Period end balances reflect all paydowns and charge-offs during the period.

TDR modifications primarily involve interest rate concessions, extensions of term, deferrals of principal, and other modifications. Other modifications typically reflect other nonstandard terms which Northern Trust would not offer in non-troubled situations. During the three and nine-month periods ended September 30, 2011, TDR modifications of loans within the commercial and institutional class were primarily interest rate concessions, deferrals of principal and other modifications; modifications of commercial real estate loans were primarily deferrals of principal, extensions of term and other modifications; and modifications of residential real estate loans were primarily interest rate concessions and deferrals of principal.

 

26


Notes to Consolidated Financial Statements (continued)

 

The following table provides the number of loans and leases modified in troubled debt restructurings during the previous 12 months which subsequently became nonperforming during the three and nine month periods ended September 30, 2011, as well as the recorded investments and unpaid principal balances as of September 30, 2011.

 

      Three Months Ended
September 30, 2011
     Nine Months Ended
September 30, 2011
 
     Number of      Recorded      Unpaid Principal      Number of      Recorded      Unpaid Principal  

($ In Millions)

   Loans and Leases      Investment      Balance      Loans and Leases      Investment      Balance  

Commercial

                 

Commercial and Institutional

     1       $ .2       $ .6         1       $ .2       $ .6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Commercial

     1         .2         .6         1         .2         .6