Document
Table of Contents




 
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 June 30, 2017
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. 001-36609
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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
x
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
Smaller reporting company
¨
 
 
 
 
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
228,485,957 Shares – $1.66 2/3 Par Value
(Shares of Common Stock Outstanding on June 30, 2017)
 


Table of Contents




NORTHERN TRUST CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2017
TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
 
 
 

i

Table of Contents
CONSOLIDATED FINANCIAL HIGHLIGHTS
(UNAUDITED)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
CONDENSED INCOME STATEMENTS (In Millions)
2017
 
2016 ^
 
% Change (1)
 
2017
 
2016 ^
 
% Change (1)
Noninterest Income
$
979.7

 
$
1,017.0

 
(4
)%
 
$
1,910.6

 
$
1,899.2

 
1
 %
Net Interest Income
341.5

 
299.7

 
14

 
695.0

 
607.5

 
14

Provision for Credit Losses
(7.0
)
 
(3.0
)
 
133

 
(8.0
)
 
(1.0
)
 
N/M

Noninterest Expense
937.4

 
925.0

 
1

 
1,831.9

 
1,753.8

 
4

Income before Income Taxes
390.8

 
394.7

 
(1
)
 
781.7

 
753.9

 
4

Provision for Income Taxes
122.9

 
131.7

 
(7
)
 
237.7

 
245.5

 
(3
)
Net Income
$
267.9

 
$
263.0

 
2
 %
 
$
544.0

 
$
508.4

 
7
 %
PER COMMON SHARE
 
 
 
 
 
 
 
 
 
 
 
Net Income — Basic
$
1.12

 
$
1.11

 
1
%
 
$
2.22

 
$
2.14

 
4
%
— Diluted
1.12

 
1.10

 
2

 
2.21

 
2.13

 
4

Cash Dividends Declared Per Common Share
0.38

 
0.36

 
6

 
0.76

 
0.72

 
6

Book Value — End of Period (EOP)
40.20

 
37.79

 
6

 
40.20

 
37.79

 
6

Market Price — EOP
97.21

 
66.26

 
47

 
97.21

 
66.26

 
47



SELECTED BALANCE SHEET DATA (In Millions)
 
 
 
 
 
 
June 30, 2017
 
December 31, 2016
 
% Change (1)
End of Period:
 
 
 
 
 
Assets
$
125,605.7

 
$
123,926.9

 
1
%
Earning Assets
116,324.6

 
115,446.4

 
1

Deposits
104,312.1

 
101,651.7

 
3

Stockholders’ Equity
10,067.9

 
9,770.4

 
3

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
% Change (1)
 
2017
 
2016
 
% Change (1)
Average Balances:
 
 
 
 
 
 
 
 
 
 
 
Assets
$
118,400.7

 
$
114,913.8

 
3
%
 
$
117,443.8

 
$
114,165.4

 
3
%
Earning Assets
109,906.5

 
106,613.5

 
3

 
109,431.8

 
105,615.5

 
4

Deposits
96,739.2

 
93,608.1

 
3

 
95,841.4

 
93,042.2

 
3

Stockholders’ Equity
9,976.0

 
8,792.7

 
13

 
9,884.2

 
8,741.9

 
13

CLIENT ASSETS (In Billions)
June 30, 2017
 
December 31, 2016
 
% Change (1)
Assets Under Custody/Administration (2)
$
9,294.2

 
$
8,541.3

 
9
%
Assets Under Custody
7,379.6

 
6,720.5

 
10

Assets Under Management
1,028.8

 
942.4

 
9

(1)
Percentage calculations are based on actual balances rather than the rounded amounts presented in the Consolidated Financial Highlights.
(2)  
For the purposes of disclosing Assets Under Custody/Administration, to the extent that both custody and administration services are provided, the value of the assets is included only once.
(^)  
The three and six months ended June 30, 2016 results have been adjusted to reflect the adoption of ASU No 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (ASU No. 2016-09). Please refer to Note 1, “Basis of Presentation,” of the Notes to Consolidated Financial Statements for further discussion on the impact to the Corporation’s previously reported quarterly results.


1

Table of Contents
SELECTED RATIOS AND METRICS

 
Three Months Ended June 30,
Six Months Ended June 30,
 
2017
 
2016 ^
2017
 
2016 ^
Financial Ratios:
 
 
 
 
 
 
Return on Average Common Equity
11.6
%
 
12.3
%
11.6
%
 
12.0
%
Return on Average Assets
0.91

 
0.92

0.93

 
0.90

Dividend Payout Ratio
33.9

 
33.0

34.4

 
34.3

Net Interest Margin (1)
1.28

 
1.16

1.31

 
1.18

 
June 30, 2017
 
December 31, 2016
 
Advanced
Approach
 
Standardized
Approach
 
Advanced
Approach
 
Standardized
Approach
Capital Ratios:
 
 
 
 
 
 
 
Northern Trust Corporation
 
 
 
 
 
 
 
Common Equity Tier 1
13.2
%
 
12.3
%
 
12.4
%
 
11.8
%
Tier 1
14.5

 
13.5

 
13.7

 
12.9

Total
16.5

 
15.6

 
15.1

 
14.5

Tier 1 Leverage
8.1

 
8.1

 
8.0

 
8.0

Supplementary Leverage
7.0

 
N/A

 
6.8

 
N/A

 
 
 
 
 
 
 
 
The Northern Trust Company
 
 
 
 
 
 
 
Common Equity Tier 1
13.3
%
 
12.1
%
 
12.4
%
 
11.5
%
Tier 1
13.3

 
12.1

 
12.4

 
11.5

Total
14.9

 
13.9

 
14.0

 
13.3

Tier 1 Leverage
7.2

 
7.2

 
7.0

 
7.0

Supplementary Leverage
6.2

 
N/A

 
6.0

 
N/A

(1) 
Net interest margin is presented on a fully taxable equivalent (FTE) basis, a non-generally accepted accounting principle (GAAP) financial measure that facilitates the analysis of asset yields. The net interest margin on a GAAP basis and a reconciliation of net interest income on a GAAP basis to net interest income on an FTE basis are presented on page 28.
(^)  
The three and six months ended June 30, 2016 results have been adjusted to reflect the adoption of ASU No 2016-09. Please refer to Note 1, “Basis of Presentation,” of the Notes to Consolidated Financial Statements for further discussion on the impact to the Corporation’s previously reported quarterly results.

2

Table of Contents




PART I – FINANCIAL INFORMATION
Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Quantitative and Qualitative Disclosures about Market Risk
SECOND QUARTER CONSOLIDATED RESULTS OF OPERATIONS
General
Northern Trust Corporation (the Corporation) is a financial holding company that is a leading provider of asset servicing, fund administration, asset management, fiduciary and banking solutions for corporations, institutions, families and individuals worldwide. The Corporation focuses on managing and servicing client assets through its two client-focused reporting segments: Corporate & Institutional Services (C&IS) and Wealth Management. Asset management and related services are provided to C&IS and Wealth Management clients primarily by the Asset Management business. Except where the context requires otherwise, the term “Northern Trust,” “we,” “us,” “our” or similar terms mean the 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 also should read the section entitled “Forward-Looking Statements.”
Overview
Net income per diluted common share was $1.12 in the current quarter, up from $1.10 in the second quarter of 2016. Net income was $267.9 million in the current quarter as compared to $263.0 million in the prior-year quarter. Annualized return on average common equity was 11.6% in the current quarter and 12.3% in the prior-year quarter. The annualized return on average assets was 0.91% in the current quarter as compared to 0.92% in the prior-year quarter.

The current quarter included expense charges of $22.8 million ($14.9 million after tax, or $0.06 per diluted common share) associated with severance and related activities.

The prior-year quarter included the pre-tax gain on the sale of 1.1 million Visa Inc. Class B common shares, net of the valuation adjustment to existing swap agreements, totaling $118.2 million ($73.1 million after tax, or $0.31 per diluted common share); a pre-tax charge in connection with an agreement to settle certain securities lending litigation of $46.5 million ($28.9 million after tax, or $0.12 per diluted common share); charges related to contractual modifications associated with existing C&IS clients of $18.6 million ($11.6 million after tax, or $0.05 per diluted common share); severance, other personnel and related charges of $17.5 million ($11.2 million after tax, or $0.05 per diluted common share); impairment charges and the loss on sale related to the decision to exit a portion of a non-strategic loan and lease portfolio of $14.1 million ($8.8 million after tax, or $0.04 per diluted common share); and impairment charges related to the residual value of certain aircraft and rail cars of $7.5 million ($4.6 million after tax, or $0.02 per diluted common share).

Revenue was $1.32 billion in both the current and prior-year quarters. The prior-year quarter included the sale of 1.1 million Visa Inc. Class B common shares, net of the valuation adjustment to existing swap agreements, totaling $118.2 million, partially offset by impairment charges and the loss on sale related to the decision to exit a portion of a non-strategic loan and lease portfolio of $14.1 million and impairment charges related to the residual value of certain aircraft and rail cars of $7.5 million. Excluding these items, revenue increased $101.1 million, or 8%, primarily reflecting higher trust, investment and other servicing fees and net interest income, partially offset by lower foreign exchange trading income.

Net interest income increased 14% to $341.5 million in the current quarter as compared to $299.7 million in the prior-year quarter, primarily due to a higher net interest margin and growth in earning assets. Additionally, the prior-year quarter included a pre-tax charge of $2.7 million related to the residual value of certain aircraft and rail cars.

The provision for credit losses was a credit of $7.0 million in the current quarter, as compared to a credit of $3.0 million in the prior-year quarter.

Noninterest expense totaled $937.4 million in the current quarter, up $12.4 million, or 1%, from $925.0 million in the prior-year quarter. The current quarter included expense charges of $22.8 million associated with severance and related activities. The prior-year quarter included a pre-tax charge in connection with an agreement to settle certain securities lending litigation of $46.5 million, charges related to contractual modifications associated with existing C&IS clients of $18.6 million, and severance, other personnel and related charges of $17.5 million. Excluding these items, noninterest expense increased $72.2 million, or 9%, primarily attributable to higher compensation, equipment and software, other operating, and outside expenses.

3

Table of Contents
SECOND QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)
Noninterest Income

The components of noninterest income are provided below.
Table 1: Noninterest Income
Noninterest Income
Three Months Ended June 30,
 
 
 
 
($ In Millions)
2017
 
2016
 
Change
Trust, Investment and Other Servicing Fees
$
848.2

 
$
777.2

 
$
71.0

 
9
 %
Foreign Exchange Trading Income
49.9

 
64.4

 
(14.5
)
 
(22
)
Treasury Management Fees
14.9

 
16.0

 
(1.1
)
 
(7
)
Security Commissions and Trading Income
24.1

 
20.6

 
3.5

 
17

Other Operating Income
43.0

 
141.2

 
(98.2
)
 
(70
)
Investment Security Gains (Losses), net
(0.4
)
 
(2.4
)
 
2.0

 
(81
)
Total Noninterest Income
$
979.7

 
$
1,017.0

 
$
(37.3
)
 
(4
)%
Trust, investment and other servicing fees are based primarily on: the market value of assets held in custody, managed or serviced; the volume of transactions; securities lending volume and spreads; and fees for other services rendered. Certain market-value-based fees are calculated on asset values that are a month or quarter in arrears. For a further discussion of trust, investment and other servicing fees and how they are derived, refer to the “Reporting Segments” section.

Assets under custody/administration (AUC/A) and assets under management form the primary drivers of our trust, investment and other servicing fees. For the purposes of disclosing AUC/A, to the extent that both custody and administration services are provided, the value of the assets is included only once. The following table presents AUC/A by reporting segment.
Table 2: Assets Under Custody / Administration
Assets Under Custody / Administration
June 30, 2017
 
March 31, 2017
 
June 30, 2016
 
Change Q2-17/Q1-17
 
Change Q2-17/Q2-16
($ In Billions)
Corporate & Institutional
$
8,690.8

 
$
8,338.2

 
$
7,590.8

 
4
%
 
14
%
Wealth Management
603.4

 
586.5

 
525.1

 
3

 
15

Total Assets Under Custody / Administration
$
9,294.2

 
$
8,924.7

 
$
8,115.9

 
4
%
 
15
%
The following table presents Northern Trust’s assets under custody, a component of AUC/A, by reporting segment.
Table 3: Assets Under Custody
Assets Under Custody
June 30, 2017
 
March 31, 2017
 
June 30, 2016
 
Change Q2-17/Q1-17
 
Change Q2-17/Q2-16
($ In Billions)
Corporate & Institutional
$
6,786.3

 
$
6,533.3

 
$
5,838.6

 
4
%
 
16
%
Wealth Management
593.3

 
574.4

 
514.2

 
3

 
15

Total Assets Under Custody
$
7,379.6

 
$
7,107.7

 
$
6,352.8

 
4
%
 
16
%
The 16% increase in consolidated assets under custody from $6.35 trillion as of June 30, 2016 to $7.38 trillion as of June 30, 2017 primarily reflected the impact of favorable markets and new business.


4

Table of Contents
SECOND QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)
Noninterest Income (continued)


The following table presents the allocation of Northern Trust’s custodied assets by reporting segment.
Table 4: Allocations of Assets Under Custody
 
June 30, 2017
 
March 31, 2017
 
June 30, 2016
Assets Under Custody
C&IS
 
WM
 
Total
 
C&IS
 
WM
 
Total
 
C&IS
 
WM
 
Total
Equities
45
%
 
56
%
 
46
%
 
45
%
 
56
%
 
46
%
 
42
%
 
54
%
 
43
%
Fixed Income
38

 
20

 
37

 
37

 
21

 
36

 
40

 
24

 
39

Cash and Other Assets
17

 
24

 
17

 
18

 
23

 
18

 
18

 
22

 
18

The following table presents Northern Trust’s assets under management by reporting segment.
Table 5: Assets Under Management
Assets Under Management
June 30, 2017
 
March 31, 2017
 
June 30, 2016
 
Change Q2-17/Q1-17
 
Change Q2-17/Q2-16
($ In Billions)
Corporate & Institutional
$
762.7

 
$
741.1

 
$
672.3

 
3
%
 
13
%
Wealth Management
266.1

 
260.2

 
233.9

 
2

 
14

Total Assets Under Management
$
1,028.8

 
$
1,001.3

 
$
906.2

 
3
%
 
14
%
The 14% increase in consolidated assets under management from $906.2 billion at June 30, 2016 to $1.03 trillion as of June 30, 2017 was primarily due to favorable global equity markets and net inflows in securities lending collateral, fixed income products, and cash.
The following table presents Northern Trust’s assets under management by investment type.
Table 6: Assets Under Management by Investment Type
($ In Billions)
June 30, 2017
 
March 31, 2017
 
June 30, 2016
Equities
$
531.3

 
$
516.8

 
$
456.4

Fixed Income
169.5

 
165.8

 
156.3

Cash and Other Assets
197.0

 
195.1

 
185.2

Securities Lending Collateral
131.0

 
123.6

 
108.3

Total Assets Under Management
$
1,028.8

 
$
1,001.3

 
$
906.2

The following table presents the allocation of Northern Trust’s assets under management by reporting segment.
Table 7: Allocations of Assets Under Management
 
June 30, 2017
 
March 31, 2017
 
June 30, 2016
Assets Under Management
C&IS
 
WM
 
Total
 
C&IS
 
WM
 
Total
 
C&IS
 
WM
 
Total
Equities
52
%
 
49
%
 
52
%
 
52
%
 
49
%
 
52
%
 
52
%
 
46
%
 
50
%
Fixed Income
13

 
26

 
16

 
13

 
27

 
17

 
13

 
29

 
17

Cash and Other Assets
18

 
25

 
19

 
18

 
24

 
19

 
19

 
25

 
21

Securities Lending Collateral
17

 

 
13

 
17

 

 
12

 
16

 

 
12

For the twelve months ended June 30, 2017, the S&P 500 index increased 15.5%, the MSCI EAFE index (USD) increased 17.1%, and the MSCI EAFE index (local currency) increased 18.9%.


5

Table of Contents
SECOND QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)
Noninterest Income (continued)


The following table presents activity in consolidated assets under management by investment type.
Table 8: Activity in Consolidated Assets Under Management by Investment Type
 
 
Three Months Ended
($ In Billions)
June 30, 2017
March 31, 2017
December 31, 2016
September 30, 2016
June 30, 2016
Beginning Balance of AUM
$
1,001.3

$
942.4

$
945.8

$
906.2

$
900.0

Inflows by Investment Type
 
 
 
 
 
 
Equity
36.3

41.6

44.5

27.2

34.9

 
Fixed Income
11.6

13.7

16.2

13.1

18.6

 
Cash & Other Assets
98.2

91.8

95.7

109.5

83.6

 
Securities Lending Collateral
24.9

29.6

24.8

27.1

21.5

 
 
 
 
 
 
 
Total Inflows
171.0

176.7

181.2

176.9

158.6

 
 
 
 
 
 
 
Outflows by Investment Type
 
 
 
 
 
 
Equity
(38.6
)
(38.4
)
(50.0
)
(26.6
)
(31.4
)
 
Fixed Income
(10.5
)
(13.0
)
(14.1
)
(8.8
)
(14.9
)
 
Cash & Other Assets
(99.5
)
(89.7
)
(98.4
)
(100.2
)
(84.7
)
 
Securities Lending Collateral
(17.5
)
(18.0
)
(26.8
)
(21.4
)
(19.3
)
 
 
 
 
 
 
 
Total Outflows
(166.1
)
(159.1
)
(189.3
)
(157.0
)
(150.3
)
 
 
 
 
 
 
 
Net Inflows / (Outflows)
4.9

17.6

(8.1
)
19.9

8.3

 
 
 
 
 
 
 
Market Performance, Currency & Other
 
 
 
 
 
 
Market Performance & Other
18.2

38.9




 
Currency
4.4

2.4




Total Market Performance, Currency & Other
22.6

41.3

4.7

19.7

(2.1
)
 
 
 
 
 
 
 
Ending Balance of AUM
$
1,028.8

$
1,001.3

$
942.4

$
945.8

$
906.2


Foreign exchange trading income totaled $49.9 million in the current quarter, down $14.5 million, or 22%, compared to $64.4 million in the prior-year quarter. The decrease generally reflected lower currency volatility as compared to the prior-year quarter.

Other operating income in the prior-year quarter included the pre-tax gain on the sale of 1.1 million Visa Inc. Class B common shares, net of the valuation adjustment to existing swap agreements, totaling $118.2 million, partially offset by impairment charges and the loss on sale related to the decision to exit a portion of a non-strategic loan and lease portfolio as well as impairment charges related to the residual value of certain aircraft and rail cars of $18.9 million. Excluding these items, other operating income totaled $43.0 million, up 3%, compared to $41.9 million in the prior-year quarter primarily due to net gains on hedging activity. The components of other operating income are provided below.
Table 9: Other Operating Income
Other Operating Income
Three Months Ended June 30,
 
 
 
 
($ In Millions)
2017
 
2016
 
Change
Loan Service Fees
$
13.3

 
$
14.8

 
$
(1.5
)
 
(11
)%
Banking Service Fees
12.6

 
12.8

 
(0.2
)
 
(2
)
Other Income
17.1

 
113.6

 
(96.5
)
 
(85
)
Total Other Operating Income
$
43.0

 
$
141.2

 
$
(98.2
)
 
(70
)%

6

Table of Contents
SECOND QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)
Net Interest Income

The following table presents an analysis of average balances and interest rate changes affecting net interest income.
Table 10: Average Consolidated Balance Sheets with Analysis of Net Interest Income
 
NORTHERN TRUST CORPORATION
(Interest and Rate on a Fully Taxable Equivalent Basis)
SECOND QUARTER
2017
 
2016
($ In Millions)
Interest
 
Average
Balance
 
Rate (5)
 
Interest
 
Average
Balance
 
Rate (5)
Average Earning Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Federal Reserve and Other Central Bank Deposits
$
33.8

 
$
22,570.0

 
0.60
%
 
$
23.6

 
$
19,657.8

 
0.48
%
Interest-Bearing Due from and Deposits with Banks (1)
14.1

 
7,653.9

 
0.74

 
16.5

 
9,827.9

 
0.68

Federal Funds Sold and Securities Purchased under Agreements to Resell
7.4

 
2,059.4

 
1.45

 
4.8

 
1,915.2

 
1.00

Securities
 
 
 
 
 
 
 
 
 
 
 
U.S. Government
22.0

 
6,423.8

 
1.37

 
20.9

 
6,875.1

 
1.22

Obligations of States and Political Subdivisions
3.4

 
928.8

 
1.46

 
2.5

 
470.2

 
2.09

Government Sponsored Agency
61.5

 
17,888.7

 
1.38

 
37.0

 
17,347.0

 
0.86

Other (2)
56.9

 
18,490.5

 
1.23

 
42.9

 
16,064.2

 
1.07

Total Securities
143.8

 
43,731.8

 
1.32

 
103.3

 
40,756.5

 
1.02

Loans and Leases (3)
227.0

 
33,891.4

 
2.69

 
203.4

 
34,456.1

 
2.38

Total Earning Assets
426.1

 
109,906.5

 
1.56

 
351.6


106,613.5

 
1.33

Allowance for Credit Losses Assigned to Loans and Leases

 
(162.3
)
 

 

 
(195.4
)
 

Cash and Due from Banks and Other Central Bank Deposits (4)

 
2,701.1

 

 

 
2,093.9

 

Buildings and Equipment

 
465.2

 

 

 
439.9

 

Client Security Settlement Receivables

 
829.0

 

 

 
1,143.0

 

Goodwill

 
521.6

 

 

 
531.2

 

Other Assets

 
4,139.6

 

 

 
4,287.7

 

Total Assets
$

 
$
118,400.7

 
%
 
$

 
$
114,913.8

 
%
Average Source of Funds
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
 
 
 
 
 
 
 
 
 
 
Savings, Money Market and Other
$
4.7

 
$
15,236.1

 
0.12
%
 
$
2.7

 
$
15,041.3

 
0.07
%
Savings Certificates and Other Time
2.4

 
1,312.7

 
0.72

 
1.9

 
1,405.0

 
0.54

Non-U.S. Offices — Interest-Bearing
33.9

 
56,672.3

 
0.24

 
16.6

 
50,443.8

 
0.13

Total Interest-Bearing Deposits
41.0

 
73,221.1

 
0.22

 
21.2

 
66,890.1

 
0.13

Short-Term Borrowings
12.2

 
5,412.0

 
0.91

 
4.9

 
6,195.0

 
0.32

Senior Notes
11.8

 
1,496.9

 
3.14

 
11.7

 
1,496.1

 
3.15

Long-Term Debt
9.6

 
1,536.1

 
2.51

 
6.4

 
1,403.2

 
1.84

Floating Rate Capital Debt
1.1

 
277.4

 
1.70

 
0.8

 
277.4

 
1.20

Total Interest-Related Funds
75.7

 
81,943.5

 
0.37

 
45.0

 
76,261.8

 
0.24

Interest Rate Spread

 


 
1.19

 

 

 
1.09

Demand and Other Noninterest-Bearing Deposits

 
23,518.1

 

 

 
26,718.0

 

Other Liabilities

 
2,963.1

 

 

 
3,141.3

 

Stockholders’ Equity

 
9,976.0

 

 

 
8,792.7

 

Total Liabilities and Stockholders’ Equity
$

 
$
118,400.7

 
%
 
$

 
$
114,913.8

 
%
Net Interest Income/Margin (FTE Adjusted)
$
350.4

 
$

 
1.28
%
 
$
306.6

 
$

 
1.16
%
Net Interest Income/Margin (Unadjusted)
$
341.5

 
$

 
1.25
%
 
$
299.7

 
$

 
1.13
%

7

Table of Contents
SECOND QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)
Net Interest Income (continued)


ANALYSIS OF NET INTEREST INCOME CHANGES
DUE TO VOLUME AND RATE
 
Three Months Ended June 30, 2017/2016
 
Change Due To
(In Millions)
Average
Balance
 
Rate
 
Total
Earning Assets (FTE)
$
10.6

 
$
63.9

 
$
74.5

Interest-Related Funds
7.7

 
23.0

 
30.7

Net Interest Income (FTE)
$
2.9

 
$
40.9

 
$
43.8


(1)
Interest-Bearing Due from and Deposits with Banks includes the interest-bearing component of Cash and Due from Banks and Interest-Bearing Deposits with Banks as presented on the consolidated balance sheets.
(2)
Other securities include certain community development investments and Federal Home Loan Bank and Federal Reserve stock, which are classified in other assets in the consolidated balance sheets as of June 30, 2017 and 2016.
(3)
Average balances include nonaccrual loans. Lease financing receivable balances are reduced by deferred income.
(4)
Cash and Due from Banks and Other Central Bank Deposits includes the non-interest-bearing component of Federal Reserve and Other Central Bank Deposits as presented on the consolidated balance sheets on page 32.
(5)
Rate calculations are based on actual balances rather than the rounded amounts presented in the Average Consolidated Balance Sheets with Analysis of Net Interest Income.

Notes:
Net Interest Income (FTE Adjusted), a non-generally accepted accounting principle (GAAP) financial measure, 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 37.8% for both the three months ended June 30, 2017 and 2016, respectively. Total taxable equivalent interest adjustments amounted to $8.9 million and $6.9 million for the three months ended June 30, 2017 and 2016, respectively. A reconciliation of net interest income and net interest margin on a GAAP basis to net interest income and net interest margin on an FTE basis (each of which is a non-GAAP financial measure) is provided on page 28.
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.
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 on a fully taxable equivalent (FTE) basis totaled $350.4 million in the current quarter, up $43.8 million, or 14%, compared to $306.6 million in the prior-year quarter. The increase was primarily the result of a higher net interest margin and growth in average earning assets. Additionally, the prior-year quarter included a pre-tax charge of $2.7 million related to the residual value of certain aircraft and rail cars. Average earning assets for the current quarter were $109.9 billion, up $3.3 billion, or 3%, from $106.6 billion in the prior-year quarter, primarily resulting from higher levels of securities and short-term interest bearing deposits, partially offset by reductions in loans and leases. Earning asset growth was funded primarily by a higher level of interest-bearing deposits.
The net interest margin on an FTE basis increased to 1.28% in the current quarter from 1.16% in the prior-year quarter primarily due to higher short-term interest rates and lower premium amortization, partially offset by an unfavorable mix shift in earning assets. The mix shift in earning assets was driven by a decline in U.S. Dollar deposits, which was more than offset by increases in non-U.S. Dollar deposits.
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 and net interest margin on a GAAP basis to net interest income and net interest margin on an FTE basis (each of which is a non-GAAP financial measure) is provided on page 28.
Federal Reserve and other central bank deposits averaged $22.6 billion, up $2.9 billion, or 15%, from $19.7 billion in the prior-year quarter. Average securities were $43.7 billion, up $2.9 billion, or 7%, from $40.8 billion in the prior-year quarter and include certain community development investments, Federal Home Loan Bank stock, and Federal Reserve stock of $210.1 million, $105.0 million and $53.1 million, respectively, which are recorded in other assets in the consolidated balance sheets.
Loans and leases averaged $33.9 billion, down $564.7 million, or 2%, from $34.5 billion in the prior-year quarter, primarily reflecting lower levels of residential real estate loans and commercial and institutional loans, partially offset by increases in private client loans. Residential real estate loans averaged $8.0 billion, down $794.7 million, or 9%, from $8.8 billion for the prior-year quarter. Commercial and institutional loans averaged $9.5 billion, down $608.6 million, or 6%, from $10.1 billion for the prior-

8

Table of Contents
SECOND QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)
Net Interest Income (continued)


year quarter. Commercial real estate loans averaged $3.8 billion, down $132.0 million, or 3%, from $3.9 billion for the prior-year quarter. Private client loans averaged $10.3 billion, up $966.2 million, or 10%, from $9.3 billion for the prior-year quarter.
Northern Trust utilizes a diverse mix of funding sources. Total interest-bearing deposits averaged $73.2 billion in the current quarter, compared to $66.9 billion in the prior-year quarter, an increase of $6.3 billion. Other interest-bearing funds averaged $8.7 billion in the current quarter, compared to $9.4 billion in the prior-year quarter. 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 $2.4 billion, or 8%, to $28.0 billion in the current quarter from $30.4 billion in the prior-year quarter, primarily resulting from lower levels of demand and noninterest bearing deposits, partially offset by increases in stockholders’ equity attributable to the issuance of Series D Non-Cumulative Perpetual Preferred Stock in August 2016 and earnings.
Provision for Credit Losses
The provision for credit losses was a credit of $7.0 million in the current quarter, as compared to a credit of $3.0 million in the prior-year quarter. The credit provision in the current quarter was primarily driven by improved credit quality as well as reductions in undrawn loan commitments and standby letters of credit that resulted in a reduction in the inherent allowance. Net charge-offs in the current quarter were $3.2 million, resulting from charge-offs of $5.0 million and recoveries of $1.8 million. The prior-year quarter included $2.4 million of net charge-offs, resulting from $4.9 million of charge-offs and $2.5 million of recoveries. Nonperforming assets of $166.7 million was relatively unchanged from $166.4 million in the prior-year quarter. Residential real estate loans and commercial loans accounted for 81% and 14%, respectively, of total nonperforming loans and leases at June 30, 2017. For additional discussion of the provision and allowance for credit losses, refer to the “Asset Quality” section beginning on page 22.
Noninterest Expense
The components of noninterest expense are provided below.
Table 11: Noninterest Expense
Noninterest Expense
Three Months Ended June 30,
 
 
 
 
($ In Millions)
2017
 
2016
 
Change
Compensation
$
432.5

 
$
389.5

 
$
43.0

 
11
 %
Employee Benefits
75.6

 
72.2

 
3.4

 
5

Outside Services
167.0

 
159.0

 
8.0

 
5

Equipment and Software
133.7

 
118.0

 
15.7

 
13

Occupancy
46.3

 
45.3

 
1.0

 
2

Other Operating Expense
82.3

 
141.0

 
(58.7
)
 
(42
)
Total Noninterest Expense
$
937.4

 
$
925.0

 
$
12.4

 
1
 %
Compensation expense, the largest component of noninterest expense, totaled $432.5 million in the current quarter, compared to $389.5 million in the prior-year quarter. Compensation expense in the current quarter included severance and related charges of $19.5 million. The prior-year quarter included severance and related charges of $13.0 million. Excluding these charges, compensation expense increased $36.5 million, or 10%, compared to the prior-year quarter, primarily related to higher salary expense driven by staff growth and base pay adjustments across all business units, higher long-term performance based incentive expense, and higher cash-based incentive accruals. Long-term performance based incentive expense increased $8.5 million due to a change in the vesting provisions associated with long-term incentive grants to retirement-eligible employees in the prior quarter. Staff on a full-time equivalent basis at June 30, 2017 totaled approximately 17,600, up 6% from June 30, 2016.
Employee benefits expense totaled $75.6 million in the current quarter, up 5% compared to $72.2 million in the prior-year quarter. Employee benefits expense in the current quarter included severance and related charges of $2.5 million. The prior-year quarter included severance and related charges of $1.5 million. Excluding the severance and related charges, employee benefits expense increased 3% primarily due to higher payroll taxes and retirement plan expenses, partially offset by lower medical costs.
Outside services expense totaled $167.0 million in the current quarter, up 5% compared to $159.0 million in the prior-year quarter. Expense for outside services in the current quarter included outplacement charges associated with severance activity of $0.8 million.

9

Table of Contents
SECOND QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)
Noninterest Expense (continued)

The prior-year quarter included outplacement charges associated with severance activity of $0.7 million. Excluding these charges, expense for outside services increased $7.9 million, or 5%, compared to the prior-year quarter, primarily due to higher technical services, sub-custodian expenses, and third party advisory fees, partially offset by lower consulting services.
Equipment and software expense totaled $133.7 million in the current quarter, up 13% compared to $118.0 million in the prior-year quarter, primarily reflecting increased software amortization, computer maintenance, and rental costs.
Other operating expense totaled $82.3 million in the current quarter, down 42% from $141.0 million in the prior-year quarter. Other operating expense in the prior-year quarter included a pre-tax charge in connection with an agreement to settle certain securities lending litigation of $46.5 million, charges related to contractual modifications associated with existing Corporate and Institutional Services clients of $18.6 million, and other personnel charges of $2.3 million. Excluding these charges, other operating expense increased $8.7 million, or 12%, compared to the prior-year quarter, primarily due to higher charges associated with account servicing activities, business promotion, and FDIC deposit protection expenses.
The components of other operating expense are provided below.
Table 12: Other Operating Expense
Other Operating Expense
Three Months Ended June 30,
 
 
 
 
($ In Millions)
2017
 
2016
 
Change
Business Promotion
$
19.8

 
$
18.5

 
$
1.3

 
7
 %
Staff Related
12.8

 
15.9

 
(3.1
)
 
(20
)
FDIC Insurance Premiums
8.5

 
7.1

 
1.4

 
21

Other Intangibles Amortization
2.3

 
2.2

 
0.1

 
4

Other Expenses
38.9

 
97.3

 
(58.4
)
 
(60
)
Total Other Operating Expense
$
82.3

 
$
141.0

 
$
(58.7
)
 
(42
)%
Provision for Income Taxes
Income tax expense was $122.9 million in the current quarter, representing an effective tax rate of 31.4%, compared to $131.7 million in the prior-year quarter, representing an effective tax rate of 33.4%. The decrease in the provision for income taxes compared to the prior-year quarter was based primarily on the increased income tax benefit derived from increased stock option exercises in the current quarter compared to the prior-year quarter, decreased income before income taxes, and the earnings mix in tax jurisdictions in which the Corporation operates. The provision for income tax expense for the three months ended June 30, 2017 and June 30, 2016 includes a benefit of $6.4 million and $2.3 million, respectively, related to excess tax benefits resulting from the vesting or exercise of stock-based compensation awards to employees.
On July 6, 2017, the Illinois legislature enacted Illinois Senate Bill 9 which retroactively enacted a permanent increase to the Illinois corporate income tax rate. Effective July 1, 2017, the overall Corporate Income and Replacement tax rate will be 9.5%, an increase of 1.75%. The increased tax rate is expected have an impact on the Corporation’s overall effective tax rate in future quarters and will result in a one-time, non-cash income tax expense charge related to the Corporation’s Illinois deferred tax liability.
Other changes to state tax provisions, including a reinstatement of the Illinois Research and Development credit, are not expected to have a significant impact on the Corporation.
REPORTING SEGMENTS
Northern Trust is organized around its two client-focused reporting segments: C&IS and Wealth Management. Asset management and related services are provided to C&IS and Wealth Management clients primarily by the Asset Management business. The revenue and expenses of Asset Management and certain other support functions are allocated fully to C&IS and Wealth Management. Income and expense associated with the wholesale funding activities and investment portfolios of the Corporation and its principal subsidiary, The Northern Trust Company (the Bank), as well as certain corporate-based expense, executive level compensation and nonrecurring items, are not allocated to C&IS and Wealth Management, and are reported in Northern Trust’s third reporting segment, Treasury and Other, in the following pages.

10

Table of Contents
REPORTING SEGMENTS (continued)


The following tables reflect the earnings contributions and average assets of Northern Trust’s reporting segments for the three- and six-month periods ended June 30, 2017 and 2016. Reporting segment 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, equity and the applicable interest income and expense.
Table 13: Results of Reporting Segments
Three Months Ended June 30,
Corporate &
Institutional Services
 
Wealth
Management
 
Treasury and
Other
 
Total
Consolidated
($ In Millions)
2017
 
2016
 
2017
 
2016
 
2017
 
2016 ^
 
2017
 
2016 ^
Noninterest Income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trust, Investment and Other Servicing Fees
$
487.1

 
$
446.9

 
$
361.1

 
$
330.3

 
$

 
$

 
$
848.2

 
$
777.2

Foreign Exchange Trading Income
50.6

 
62.2

 
0.8

 
1.6

 
(1.5
)
 
0.6

 
49.9

 
64.4

Other Noninterest Income
44.4

 
25.9

 
26.7

 
26.7

 
10.5

 
122.8

 
81.6

 
175.4

Net Interest Income*
176.0

 
141.2

 
181.8

 
160.2

 
(7.4
)
 
5.2

 
350.4

 
306.6

Revenue*
758.1

 
676.2

 
570.4

 
518.8

 
1.6

 
128.6

 
1,330.1

 
1,323.6

Provision for Credit Losses
(2.7
)
 
(0.8
)
 
(4.3
)
 
(2.2
)
 

 

 
(7.0
)
 
(3.0
)
Noninterest Expense
545.6

 
556.8

 
350.9

 
330.3

 
40.9

 
37.9

 
937.4

 
925.0

Income before Income Taxes*
215.2

 
120.2

 
223.8

 
190.7

 
(39.3
)
 
90.7

 
399.7

 
401.6

Provision for Income Taxes*
67.7

 
34.0

 
84.3

 
71.9

 
(20.2
)
 
32.7

 
131.8

 
138.6

Net Income
$
147.5

 
$
86.2

 
$
139.5

 
$
118.8

 
$
(19.1
)
 
$
58.0

 
$
267.9

 
$
263.0

Percentage of Consolidated Net Income
55
%
 
33
%
 
52
%
 
45
%
 
(7
)%
 
22
%
 
100
%
 
100
%
Average Assets
$
80,584.0

 
$
75,696.5

 
$
26,823.5

 
$
26,736.6

 
$
10,993.2

 
$
12,480.7

 
$
118,400.7

 
$
114,913.8

* Non-GAAP financial measures stated on a fully taxable equivalent basis (FTE). Total consolidated includes FTE adjustments of $8.9 million for 2017 and $6.9 million for 2016. A reconciliation of revenue, net interest income and net interest margin on a GAAP basis to revenue, net interest income and net interest margin on an FTE basis (each of which is a non-GAAP financial measure) is provided on page 28.
^ The three months ended June 30, 2016 results have been adjusted to reflect the adoption of ASU No. 2016-09. Please refer to Note 1, “Basis of Presentation,” of the Notes to Consolidated Financial Statements for further discussion on the impact to the Corporation’s previously reported quarterly results.
Six Months Ended June 30,
Corporate &
Institutional Services
 
Wealth
Management
 
Treasury and
Other
 
Total
Consolidated
($ In Millions)
2017
 
2016
 
2017
 
2016
 
2017
 
2016^
 
2017
 
2016^
Noninterest Income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trust, Investment and Other Servicing Fees
$
950.0

 
$
880.3

 
$
706.4

 
$
645.1

 
$

 
$

 
$
1,656.4

 
$
1,525.4

Foreign Exchange Trading Income
99.7

 
113.9

 
1.7

 
6.1

 
(3.4
)
 
4.9

 
98.0

 
124.9

Other Noninterest Income
88.6

 
71.5

 
52.2

 
53.5

 
15.4

 
123.9

 
156.2

 
248.9

Net Interest Income*
342.5

 
279.6

 
358.8

 
318.7

 
11.5

 
22.3

 
712.8

 
620.6

Revenue*
1,480.8

 
1,345.3

 
1,119.1

 
1,023.4

 
23.5

 
151.1

 
2,623.4

 
2,519.8

Provision for Credit Losses
(2.4
)
 
(4.0
)
 
(5.6
)
 
3.0

 

 

 
(8.0
)
 
(1.0
)
Noninterest Expense
1,056.4

 
1,032.1

 
697.2

 
657.2

 
78.3

 
64.5

 
1,831.9

 
1,753.8

Income before Income Taxes*
426.8

 
317.2

 
427.5

 
363.2

 
(54.8
)
 
86.6

 
799.5

 
767.0

Provision for Income Taxes*
134.6

 
96.2

 
161.1

 
136.8

 
(40.2
)
 
25.6

 
255.5

 
258.6

Net Income
$
292.2

 
$
221.0

 
$
266.4

 
$
226.4

 
$
(14.6
)
 
$
61.0

 
$
544.0

 
$
508.4

Percentage of Consolidated Net Income
54
%
 
43
%
 
49
%
 
45
%
 
(3
)%
 
12
%
 
100
%
 
100
%
Average Assets
$
79,201.4

 
$
75,534.7

 
$
26,743.1

 
$
26,487.2

 
$
11,499.3

 
$
12,143.5

 
$
117,443.8

 
$
114,165.4

* Non-GAAP financial measures stated on a fully taxable equivalent basis (FTE). Total consolidated includes FTE adjustments of $17.8 million for 2017 and $13.1 million for 2016. A reconciliation of revenue, net interest income and net interest margin on a GAAP basis to revenue, net interest income and net interest margin on an FTE basis (each of which is a non-GAAP financial measure) is provided on page 28.
^ The six months ended June 30, 2016 results have been adjusted to reflect the adoption of ASU No. 2016-09. Please refer to Note 1, “Basis of Presentation,” of the Notes to Consolidated Financial Statements for further discussion on the impact to the Corporation’s previously reported quarterly results.

11

Table of Contents
REPORTING SEGMENTS (continued)
Corporate & Institutional Services

C&IS net income totaled $147.5 million in the current quarter compared to $86.2 million in the prior-year quarter, an increase of $61.3 million, or 71%. Noninterest income was $582.1 million in the current quarter, up $47.1 million, or 9%, from $535.0 million in the prior-year quarter, reflecting higher trust, investment and other servicing fees and other operating income, partially offset by lower foreign exchange trading income. The following table provides a summary of C&IS trust, investment and other servicing fees.
Table 14: C&IS Trust, Investment and Other Servicing Fees
 
Three Months Ended June 30,
 
 
 
 
($ In Millions)
2017
 
2016
 
Change
Custody and Fund Administration
$
327.5

 
$
293.3

 
$
34.2

 
12
 %
Investment Management
99.3

 
94.2

 
5.1

 
5

Securities Lending
24.6

 
26.8

 
(2.2
)
 
(8
)
Other
35.7

 
32.6

 
3.1

 
10

Total C&IS Trust, Investment and Other Servicing Fees
487.1

 
$
446.9

 
$
40.2

 
9
 %
Custody and fund administration fees, the largest component of C&IS fees, are driven primarily by values of client AUC/A, transaction volumes and number of accounts. The asset values used to calculate these fees vary depending on the individual fee arrangements negotiated with each client. Custody fees related to asset values are client specific and are priced based on quarter-end or month-end values, values at the beginning of each quarter or average values for a month or quarter. The fund administration fees that are asset-value-related are priced using month-end, quarter-end, or average daily balances. Investment management fees, which are based generally on client assets under management, are based primarily on market values throughout a period.
Custody and fund administration fees increased $34.2 million, or 12%, from the prior-year quarter, primarily due to new business and favorable equity markets, partially offset by the unfavorable impact of movements in foreign exchange rates. Investment management fees increased $5.1 million, or 5%, primarily due to the favorable impact of equity markets. Other fees increased 10%, primarily due to new business.
Foreign exchange trading income totaled $50.6 million in the current quarter, a decrease of $11.6 million, or 19%, from $62.2 million in the prior-year quarter. The decrease generally reflected lower currency volatility as compared to the prior-year quarter.
Other noninterest income in C&IS totaled $44.4 million in the current quarter, up $18.5 million, or 71%, from $25.9 million in the prior-year quarter, primarily due to impairment charges recorded in the prior-year quarter associated with the loss on sale related to the decision to exit a portion of a non-strategic loan and lease portfolio as well as impairment charges related to the residual value of certain aircraft and rail cars totaling $18.9 million.
Net interest income stated on an FTE basis was $176.0 million in the current quarter, up $34.8 million, or 25%, from $141.2 million in the prior-year quarter. The increase in net interest income was primarily attributable to an increase in the net interest margin and higher levels of earning assets. The net interest margin increased to 0.94% from 0.82% in the prior-year quarter, primarily reflecting higher short-term interest rates. The average earning assets totaled $74.8 billion, up from $69.4 billion in the prior-year quarter. The earning assets in C&IS consisted primarily of intercompany assets and loans and leases. Funding sources were primarily comprised of non-U.S. custody-related interest-bearing deposits, which averaged $51.7 billion in the current quarter, up from $46.4 billion in the prior-year quarter.
The provision for credit losses was a credit provision of $2.7 million in the current quarter, compared with a credit provision of $0.8 million in the prior-year quarter, reflecting a reduction in the inherent reserve requirement due to continued improvement in credit quality.
Total C&IS noninterest expense, which includes the direct expense of the reporting segment, indirect expense allocations for product and operating support and indirect expense allocations for certain corporate support services, totaled $545.6 million in the current quarter, down $11.2 million, or 2%, from $556.8 million in the prior-year quarter. Noninterest expense in the current quarter included severance and related charges of $15.3 million. Noninterest expense in the prior-year quarter included severance and related charges of $7.4 million. Other operating expense in the prior-year quarter included a charge in connection with an agreement to settle certain securities lending litigation of $46.5 million, and charges related to contractual modifications associated

12

Table of Contents
REPORTING SEGMENTS (continued)
Corporate & Institutional Services (continued)


with existing C&IS clients of $18.6 million. Excluding these charges, C&IS noninterest expense increased $46.0 million, primarily attributable to higher indirect expense allocations and compensation expenses.
Wealth Management
Wealth Management net income was $139.5 million in the current quarter, up 17% from $118.8 million in the prior-year quarter. Noninterest income was $388.6 million, up from $358.6 million in the prior-year quarter, primarily reflecting higher trust, investment and other servicing fees. Trust, investment and other servicing fees in Wealth Management totaled $361.1 million in the current quarter, increasing $30.8 million, or 9%, from $330.3 million in the prior-year quarter. The following table provides a summary of Wealth Management trust, investment and other servicing fees.
Table 15: Wealth Management Trust, Investment and Other Servicing Fees
 
Three Months Ended June 30,
 
 
 
 
($ In Millions)
2017
 
2016
 
Change
Central
$
143.1

 
$
130.2

 
$
12.9

 
10
%
East
88.3

 
84.5

 
3.8

 
5

West
73.4

 
67.5

 
5.9

 
9

Global Family Office
56.3

 
48.1

 
8.2

 
17

Total Wealth Management Trust, Investment and Other Servicing Fees
$
361.1

 
$
330.3

 
$
30.8

 
9
%
Wealth Management fee income is calculated primarily based on market values. The increase in Wealth Management fees across all regions was primarily attributable to favorable equity markets and new business.
Foreign exchange trading income totaled $0.8 million, down 50% from $1.6 million in the prior-year quarter, primarily reflecting lower currency volatility.
Net interest income stated on an FTE basis was $181.8 million in the current quarter, up $21.6 million, or 13%, from $160.2 million in the prior-year quarter, primarily reflecting an increase in the net interest margin. The net interest margin increased to 2.75% from 2.43% in the prior-year quarter. Average earning assets increased $51.8 million to $26.6 billion from the prior-year quarter’s $26.5 billion. Earning assets and funding sources were primarily comprised of loans and domestic retail interest-bearing deposits, respectively.
The provision for credit losses was a credit provision of $4.3 million in the current quarter, compared with a credit provision of $2.2 million in the prior-year quarter, reflecting a reduction in the inherent allowance requirement due to continued improvement in credit quality.
Total noninterest expense, which includes the direct expense of the reporting segment, indirect expense allocations for product and operating support and indirect expense allocations for certain corporate support services, totaled $350.9 million in the current quarter, compared to $330.3 million in the prior-year quarter, an increase of $20.6 million, or 6%. Noninterest expense in the current quarter included severance and related charges of $7.5 million. Noninterest expense in the prior-year quarter included severance and related charges of $9.7 million. Excluding these charges, noninterest expense increased $22.8 million, primarily attributable to higher indirect expense allocations and compensation expenses.
Treasury and Other
Treasury and Other includes income and expense associated with the wholesale funding activities and the investment portfolios of the Corporation and the Bank, and certain corporate-based expenses, executive-level compensation and nonrecurring items not allocated to C&IS and Wealth Management.
Treasury and Other noninterest income was $9.0 million in the current quarter, down $114.4 million from $123.4 million in the prior-year quarter, primarily related to the pre-tax gain on the sale of 1.1 million Visa Inc. Class B common shares, net of the valuation adjustment to existing swap agreements, totaling $118.2 million, recorded in the prior-year quarter.

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REPORTING SEGMENTS (continued)
Treasury and Other (continued)

Net interest income decreased $12.6 million, from $5.2 million in the prior-year quarter to net interest expense of $7.4 million in the current quarter, primarily reflecting higher premium amortization in the securities portfolio and a decline in the net interest margin driven by a mix shift in earning assets. Average earning assets decreased $2.1 billion to $8.6 billion from the prior-year quarter’s $10.7 billion.
Noninterest expense totaled $40.9 million in the current quarter, up $3.0 million, or 8%, from $37.9 million in the prior-year quarter. The prior-year quarter included severance and related charges of $0.4 million. Excluding these charges, noninterest expense increased $3.4 million, primarily reflecting higher general overhead costs, including compensation expense and equipment and software expense, partially offset by higher indirect expense allocations to C&IS and Wealth Management, as compared to the prior-year quarter.
The provision for income taxes was a benefit of $20.2 million in the current quarter compared to a $32.7 million provision in the prior-year quarter, primarily reflecting decreased income before income taxes and increased stock option exercises compared to the prior-year quarter, which resulted in a tax benefit of $6.4 million for the three months ended June 30, 2017 as compared to a tax benefit of $2.3 million for the three months ended June 30, 2016.
SIX-MONTH CONSOLIDATED RESULTS OF OPERATIONS
Overview
Net income per diluted common share was $2.21 for the six months ended June 30, 2017, and $2.13 in the comparable prior-year period. Net income totaled $544.0 million, up $35.6 million, or 7%, compared to $508.4 million in the prior-year period. The performance in the current period produced an annualized return on average common equity of 11.6%, compared to 12.0% in the prior-year period. The annualized return on average assets was 0.93% in the current period compared to 0.90% in the prior-year period.

The current period included expense charges of $22.8 million ($14.9 million after tax, or $0.06 per diluted common share) associated with severance and related activities.
The prior-year period included the pre-tax gain on the sale of 1.1 million Visa Inc. Class B common shares, net of the valuation adjustment to existing swap agreements, totaling $118.2 million ($73.1 million after tax, or $0.31 per diluted common share); a pre-tax charge in connection with an agreement to settle certain securities lending litigation of $46.5 million ($28.9 million after tax, or $0.12 per diluted common share); charges related to contractual modifications associated with existing Corporate and Institutional Services clients of $18.6 million ($11.6 million after tax, or $0.05 per diluted common share); severance, other personnel and related charges of $17.5 million ($11.2 million after tax, or $0.05 per diluted common share); impairment charges and the loss on sale related to the decision to exit a portion of a non-strategic loan and lease portfolio of $14.1 million ($8.8 million after tax, or $0.04 per diluted common share); and impairment charges related to the residual value of certain aircraft and rail cars of $7.5 million ($4.6 million after tax, or $0.02 per diluted common share).
Revenue for the six months ended June 30, 2017 totaled $2.61 billion, up $98.9 million, or 4%, as compared to $2.51 billion in the prior-year period. The prior-year period included the sale of 1.1 million Visa Inc. Class B common shares, net of the valuation adjustment to existing swap agreements, totaling $118.2 million, partially offset by impairment charges and the loss on sale related to the decision to exit a portion of a non-strategic loan and lease portfolio of $14.1 million and impairment charges related to the residual value of certain aircraft and rail cars of $7.5 million. Excluding these items, revenue increased $195.5 million, or 8%, primarily driven by increased trust, investment and other servicing fees and net interest income, partially offset by lower foreign exchange trading income.

Net interest income increased 14% to $695.0 million in the current period as compared to $607.5 million in the prior-year period, due to a higher net interest margin and growth in earning assets. Additionally, the prior-year period included a pre-tax charge of $2.7 million related to the residual value of certain aircraft and rail cars.

The provision for credit losses was a credit of $8.0 million in the current period, as compared to a credit of $1.0 million in the prior-year period.


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SIX-MONTH CONSOLIDATED RESULTS OF OPERATIONS (continued)
Overview (continued)

Noninterest expense was $1.8 billion in both the current and prior-year periods. The current period included expense charges of $22.8 million associated with severance and related activities. The prior-year period included a pre-tax charge in connection with an agreement to settle certain securities lending litigation of $46.5 million, charges related to contractual modifications associated with existing C&IS clients of $18.6 million, and severance, other personnel and related charges of $17.5 million. Excluding the current- and prior-year period charges, noninterest expense increased $137.9 million, or 8%, primarily attributable to higher compensation, equipment and software, outside services, and employee benefits expense.
On February 19, 2017, the Corporation entered into a definitive agreement with UBS AG to acquire UBS Asset Management’s fund administration servicing businesses in Luxembourg and Switzerland, for an initial purchase price of approximately $175 million in cash, subject to adjustment. The transaction is expected to close in the second half of 2017, subject to applicable regulatory and fund board approvals and other customary closing conditions.
Noninterest Income
The components of noninterest income are provided below.
Table 16: Six Months Ended June 30 Noninterest Income
Noninterest Income
Six Months Ended June 30,
 
 
 
 
($ In Millions)
2017
 
2016
 
Change
Trust, Investment and Other Servicing Fees
$
1,656.4

 
$
1,525.4

 
$
131.0

 
9
 %
Foreign Exchange Trading Income
98.0

 
124.9

 
(26.9
)
 
(22
)
Treasury Management Fees
29.6

 
32.2

 
(2.6
)
 
(8
)
Security Commissions and Trading Income
44.6

 
39.5

 
5.1

 
13

Other Operating Income
82.7

 
179.3

 
(96.6
)
 
(54
)
Investment Security Gains (Losses), net
(0.7
)
 
(2.1
)
 
1.4

 
(65
)
Total Noninterest Income
$
1,910.6

 
$
1,899.2

 
$
11.4

 
1
 %
As illustrated in the following table, trust, investment and other servicing fees from C&IS increased $69.7 million, or 8%, totaling $950.0 million, compared to $880.3 million a year ago.
Table 17: Six Months Ended June 30 C&IS Trust, Investment and Other Servicing Fees
C&IS Trust, Investment and Other Servicing Fees
Six Months Ended June 30,
 
 
 
 
($ In Millions)
2017
 
2016
 
Change
Custody and Fund Administration
$
635.0

 
$
579.7

 
$
55.3

 
10
 %
Investment Management
192.8

 
183.3

 
9.5

 
5

Securities Lending
48.4

 
49.4

 
(1.0
)
 
(2
)
Other
73.8

 
67.9

 
5.9

 
9

Total
$
950.0

 
$
880.3

 
$
69.7

 
8
 %
Custody and fund administration fees, the largest component of C&IS fees, increased 10%, primarily driven by new business and favorable equity markets, partially offset by the unfavorable impact of movements in foreign exchange rates. C&IS investment management fees increased 5%, primarily due to the favorable impact of equity markets and lower money market mutual fund fee waivers. There were no C&IS money market mutual fund fee waivers in the current period compared to $1.8 million in the prior-year period. Other fees in C&IS increased 9%, primarily due to new business.

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SIX-MONTH CONSOLIDATED RESULTS OF OPERATIONS (continued)
Noninterest Income (continued)


As illustrated in the following table, trust, investment and other servicing fees from Wealth Management totaled $706.4 million, up from $645.1 million a year ago.
Table 18: Six Months Ended June 30 Wealth Management Trust, Investment and Other Servicing Fees
 
Six Months Ended June 30,
 
 
 
 
($ In Millions)
2017
 
2016
 
Change
Wealth Management Trust, Investment and Other Servicing Fees
 
 
 
 
 
 
 
Central
$
280.5

 
$
254.6

 
$
25.9

 
10
%
East
173.5

 
165.5

 
8.0

 
5

West
143.0

 
131.4

 
11.6

 
9

Global Family Office
109.4

 
93.6

 
15.8

 
17

Total
$
706.4

 
$
645.1

 
$
61.3

 
10
%
The increase in Wealth Management fees across the regions was primarily attributable to favorable equity markets, new business, and lower money market mutual fund fee waivers in the current period. Money market mutual fund fee waivers in Wealth Management totaled $0.5 million compared with $6.1 million in the prior-year period.
Foreign exchange trading income decreased $26.9 million, or 22%, and totaled $98.0 million compared with $124.9 million in the prior-year period. The decrease was attributable to lower currency volatility and client volumes compared to the prior-year period.
Other operating income decreased 54% to $82.7 million compared with $179.3 million in the prior-year period. The components of other operating income are provided below.
Table 19: Six Months Ended June 30 Other Operating Income
Other Operating Income
Six Months Ended June 30,
 
 
 
 
($ In Millions)
2017
 
2016
 
Change
Loan Service Fees
$
25.7

 
$
28.2

 
$
(2.5
)
 
(9
)%
Banking Service Fees
24.9

 
25.2

 
(0.3
)
 
(1
)%
Other Income
32.1

 
125.9

 
(93.8
)
 
(75
)
Total Other Operating Income
$
82.7

 
$
179.3

 
$
(96.6
)
 
(54
)%
The prior-year period other income included the gain on the sale of 1.1 million Visa Inc. Class B common shares, net of the valuation adjustment to existing swap agreements, totaling $118.2 million, offset by impairment charges and the loss on sale related to the decision to exit a portion of a non-strategic loan and lease portfolio as well as impairment charges related to the residual value of certain aircraft and rail cars of $18.9 million. Excluding these items, other operating income increased 3% from the prior-year period, primarily due to net gains on hedging activity.

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SIX-MONTH CONSOLIDATED RESULTS OF OPERATIONS (continued)
Net Interest Income

The following table presents an analysis of average balances and interest ra