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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 September 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
227,421,128 Shares – $1.66 2/3 Par Value
(Shares of Common Stock Outstanding on September 30, 2017)
 


Table of Contents




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

i

Table of Contents
CONSOLIDATED FINANCIAL HIGHLIGHTS
(UNAUDITED)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
CONDENSED INCOME STATEMENTS (In Millions)
2017
 
2016
 
% Change (1)
 
2017
 
2016
 
% Change (1)
Noninterest Income
$
991.0

 
$
910.6

 
9
%
 
$
2,901.6

 
$
2,809.8

 
3
 %
Net Interest Income
354.2

 
303.1

 
17

 
1,049.2

 
910.6

 
15

Provision for Credit Losses
(7.0
)
 
(3.0
)
 
134

 
(15.0
)
 
(4.0
)
 
N/M

Noninterest Expense
935.6

 
843.0

 
11

 
2,767.5

 
2,596.8

 
7

Income before Income Taxes
416.6

 
373.7

 
11

 
1,198.3

 
1,127.6

 
6

Provision for Income Taxes
118.2

 
116.1

 
2

 
355.9

 
361.6

 
(2
)
Net Income
$
298.4

 
$
257.6

 
16
%
 
$
842.4

 
$
766.0

 
10
 %
PER COMMON SHARE
 
 
 
 
 
 
 
 
 
 
 
Net Income — Basic
$
1.21

 
$
1.09

 
11
%
 
$
3.43

 
$
3.23

 
6
%
— Diluted
1.20

 
1.08

 
11

 
3.41

 
3.21

 
6

Cash Dividends Declared Per Common Share
0.42

 
0.38

 
11

 
1.18

 
1.10

 
7

Book Value — End of Period (EOP)
40.82

 
38.41

 
6

 
40.82

 
38.41

 
6

Market Price — EOP
91.93

 
67.99

 
35

 
91.93

 
67.99

 
35



SELECTED BALANCE SHEET DATA (In Millions)
 
 
 
 
 
 
September 30, 2017
 
December 31, 2016
 
% Change (1)
End of Period:
 
 
 
 
 
Assets
$
131,400.2

 
$
123,926.9

 
6
%
Earning Assets
122,565.9

 
115,446.4

 
6

Deposits
105,810.6

 
101,651.7

 
4

Stockholders’ Equity
10,165.2

 
9,770.4

 
4

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
% Change (1)
 
2017
 
2016
 
% Change (1)
Average Balances:
 
 
 
 
 
 
 
 
 
 
 
Assets
$
121,159.4

 
$
116,382.5

 
4
%
 
$
118,696.0

 
$
114,909.9

 
3
%
Earning Assets
112,485.0

 
107,843.8

 
4

 
110,460.7

 
106,363.7

 
4

Deposits
97,112.0

 
93,773.9

 
4

 
96,269.6

 
93,287.9

 
3

Stockholders’ Equity
10,040.2

 
9,230.6

 
9

 
9,936.8

 
8,906.0

 
12

CLIENT ASSETS (In Billions)
September 30, 2017
 
December 31, 2016
 
% Change (1)
Assets Under Custody/Administration (2)
$
9,696.0

 
$
8,541.3

 
14
%
Assets Under Custody
7,753.8

 
6,720.5

 
15

Assets Under Management
1,125.1

 
942.4

 
19

(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.


1

Table of Contents
SELECTED RATIOS AND METRICS

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Financial Ratios:
 
 
 
 
 
 
 
Return on Average Common Equity
12.2
%
 
11.7
%
 
11.8
%
 
11.9
%
Return on Average Assets
0.98

 
0.88

 
0.95

 
0.89

Dividend Payout Ratio
35.0

 
35.2

 
34.6

 
34.3

Net Interest Margin (1)
1.29

 
1.14

 
1.31

 
1.17

 
September 30, 2017
 
December 31, 2016
 
Advanced
Approach
 
Standardized
Approach
 
Advanced
Approach
 
Standardized
Approach
Capital Ratios:
 
 
 
 
 
 
 
Northern Trust Corporation
 
 
 
 
 
 
 
Common Equity Tier 1
13.3
%
 
12.3
%
 
12.4
%
 
11.8
%
Tier 1
14.6

 
13.4

 
13.7

 
12.9

Total
16.4

 
15.4

 
15.1

 
14.5

Tier 1 Leverage
8.0

 
8.0

 
8.0

 
8.0

Supplementary Leverage
6.9

 
N/A

 
6.8

 
N/A

 
 
 
 
 
 
 
 
The Northern Trust Company
 
 
 
 
 
 
 
Common Equity Tier 1
13.5
%
 
12.2
%
 
12.4
%
 
11.5
%
Tier 1
13.5

 
12.2

 
12.4

 
11.5

Total
15.1

 
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.


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
THIRD 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 $1.20 in the current quarter, up from $1.08 in the third quarter of 2016. Net income was $298.4 million in the current quarter as compared to $257.6 million in the prior-year quarter. Annualized return on average common equity was 12.2% in the current quarter and 11.7% in the prior-year quarter. The annualized return on average assets was 0.98% in the current quarter as compared to 0.88% in the prior-year quarter.

Revenue of $1.35 billion in the current quarter was up $131.5 million, or 11%, from $1.21 billion in the prior-year quarter.

Noninterest income increased $80.4 million, or 9%, to $991.0 million from $910.6 million in the prior-year quarter, primarily reflecting higher trust, investment and other servicing fees.

Net interest income increased 17% to $354.2 million in the current quarter as compared to $303.1 million in the prior-year quarter, primarily the result of a higher net interest margin and an increase in average earning assets.

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 $935.6 million in the current quarter, up $92.6 million, or 11%, from $843.0 million in the prior-year quarter, primarily attributable to higher compensation, other operating expense, equipment and software, and outside services expense.

3

Table of Contents
THIRD 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 September 30,
 
 
 
 
($ In Millions)
2017
 
2016
 
Change
Trust, Investment and Other Servicing Fees
$
867.9

 
$
788.3

 
$
79.6

 
10
 %
Foreign Exchange Trading Income
49.1

 
53.6

 
(4.5
)
 
(8
)
Treasury Management Fees
13.2

 
15.0

 
(1.8
)
 
(12
)
Security Commissions and Trading Income
21.2

 
20.4

 
0.8

 
4

Other Operating Income
40.0

 
33.1

 
6.9

 
21

Investment Security (Losses) Gains, net
(0.4
)
 
0.2

 
(0.6
)
 
N/M

Total Noninterest Income
$
991.0

 
$
910.6

 
$
80.4

 
9
 %
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
September 30, 2017
 
June 30, 2017
 
September 30, 2016
 
Change Q3-17/Q2-17
 
Change Q3-17/Q3-16
($ In Billions)
Corporate & Institutional
$
9,062.8

 
$
8,690.8

 
$
7,951.7

 
4
%
 
14
%
Wealth Management
633.2

 
603.4

 
544.0

 
5

 
16

Total Assets Under Custody / Administration
$
9,696.0

 
$
9,294.2

 
$
8,495.7

 
4
%
 
14
%
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
September 30, 2017
 
June 30, 2017
 
September 30, 2016
 
Change Q3-17/Q2-17
 
Change Q3-17/Q3-16
($ In Billions)
Corporate & Institutional
$
7,130.9

 
$
6,786.3

 
$
6,173.6

 
5
%
 
16
%
Wealth Management
622.9

 
593.3

 
533.2

 
5

 
17

Total Assets Under Custody
$
7,753.8

 
$
7,379.6

 
$
6,706.8

 
5
%
 
16
%
The 16% increase in consolidated assets under custody from $6.71 trillion as of September 30, 2016 to $7.75 trillion as of September 30, 2017 primarily reflected the impact of favorable markets and new business.


4

Table of Contents
THIRD 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
 
September 30, 2017
 
June 30, 2017
 
September 30, 2016
Assets Under Custody
C&IS
 
WM
 
Total
 
C&IS
 
WM
 
Total
 
C&IS
 
WM
 
Total
Equities
45
%
 
57
%
 
46
%
 
45
%
 
56
%
 
46
%
 
43
%
 
55
%
 
44
%
Fixed Income
38

 
20

 
36

 
38

 
20

 
37

 
39

 
23

 
38

Cash and Other Assets
17

 
23

 
18

 
17

 
24

 
17

 
18

 
22

 
18

The following table presents Northern Trust’s assets under management by reporting segment.
Table 5: Assets Under Management
Assets Under Management
September 30, 2017
 
June 30, 2017
 
September 30, 2016
 
Change Q3-17/Q2-17
 
Change Q3-17/Q3-16
($ In Billions)
Corporate & Institutional
$
840.7

 
$
762.7

 
$
703.6

 
10
%
 
19
%
Wealth Management
284.4

 
266.1

 
242.2

 
7

 
17

Total Assets Under Management
$
1,125.1

 
$
1,028.8

 
$
945.8

 
9
%
 
19
%
The 19% increase in consolidated assets under management from $945.8 billion at September 30, 2016 to $1.13 trillion as of September 30, 2017 was primarily due to new business and favorable equity markets.
The following table presents Northern Trust’s assets under management by investment type.
Table 6: Assets Under Management by Investment Type
($ In Billions)
September 30, 2017
 
June 30, 2017
 
September 30, 2016
Equities
$
572.5

 
$
531.3

 
$
479.3

Fixed Income
178.3

 
169.5

 
162.8

Cash and Other Assets
212.3

 
197.0

 
189.8

Securities Lending Collateral
162.0

 
131.0

 
113.9

Total Assets Under Management
$
1,125.1

 
$
1,028.8

 
$
945.8

The following table presents the allocation of Northern Trust’s assets under management by reporting segment.
Table 7: Allocations of Assets Under Management
 
September 30, 2017
 
June 30, 2017
 
September 30, 2016
Assets Under Management
C&IS
 
WM
 
Total
 
C&IS
 
WM
 
Total
 
C&IS
 
WM
 
Total
Equities
51
%
 
51
%
 
51
%
 
52
%
 
49
%
 
52
%
 
52
%
 
47
%
 
51
%
Fixed Income
13

 
25

 
16

 
13

 
26

 
16

 
13

 
29

 
17

Cash and Other Assets
17

 
24

 
19

 
18

 
25

 
19

 
19

 
24

 
20

Securities Lending Collateral
19

 

 
14

 
17

 

 
13

 
16

 

 
12

For the twelve months ended September 30, 2017, the S&P 500 index increased 16.2%, the MSCI EAFE index (USD) increased 16.0%, and the MSCI EAFE index (local currency) increased 15.9%.


5

Table of Contents
THIRD 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)
September 30, 2017
June 30, 2017
March 31, 2017
December 31, 2016
September 30, 2016
Beginning Balance of AUM
$
1,028.8

$
1,001.3

$
942.4

$
945.8

$
906.2

Inflows by Investment Type
 
 
 
 
 
 
Equity
51.2

36.3

41.6

44.5

27.2

 
Fixed Income
19.8

11.6

13.7

16.2

13.1

 
Cash & Other Assets
101.6

98.2

91.8

95.7

109.5

 
Securities Lending Collateral
45.5

24.9

29.6

24.8

27.1

 
 
 
 
 
 
 
Total Inflows
218.1

171.0

176.7

181.2

176.9

 
 
 
 
 
 
 
Outflows by Investment Type
 
 
 
 
 
 
Equity
(41.0
)
(38.6
)
(38.4
)
(50.0
)
(26.6
)
 
Fixed Income
(13.0
)
(10.5
)
(13.0
)
(14.1
)
(8.8
)
 
Cash & Other Assets
(83.0
)
(99.5
)
(89.7
)
(98.4
)
(100.2
)
 
Securities Lending Collateral
(14.4
)
(17.5
)
(18.0
)
(26.8
)
(21.4
)
 
 
 
 
 
 
 
Total Outflows
(151.4
)
(166.1
)
(159.1
)
(189.3
)
(157.0
)
 
 
 
 
 
 
 
Net Inflows / (Outflows)
66.7

4.9

17.6

(8.1
)
19.9

 
 
 
 
 
 
 
Market Performance, Currency & Other
 
 
 
 
 
 
Market Performance & Other
26.6

18.2

38.9



 
Currency
3.0

4.4

2.4



Total Market Performance, Currency & Other
29.6

22.6

41.3

4.7

19.7

 
 
 
 
 
 
 
Ending Balance of AUM
$
1,125.1

$
1,028.8

$
1,001.3

$
942.4

$
945.8


Foreign exchange trading income totaled $49.1 million in the current quarter, down $4.5 million, or 8%, compared to $53.6 million in the prior-year quarter. The decrease generally reflected lower currency volatility as compared to the prior-year quarter.

Other operating income totaled $40.0 million in the current quarter, up $6.9 million, or 21%, compared to $33.1 million in the prior-year quarter, reflecting $5.4 million of impairment charges and loss on sales related to a non-strategic loan and lease portfolio in the prior-year quarter as well as increases in other income. The components of other operating income are provided below.
Table 9: Other Operating Income
Other Operating Income
Three Months Ended September 30,
 
 
 
 
($ In Millions)
2017
 
2016
 
Change
Loan Service Fees
$
12.7

 
$
14.0

 
$
(1.3
)
 
(9
)%
Banking Service Fees
12.6

 
13.6

 
(1.0
)
 
(7
)
Other Income
14.7

 
5.5

 
9.2

 
170

Total Other Operating Income
$
40.0

 
$
33.1

 
$
6.9

 
21
 %

6

Table of Contents
THIRD 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)
THIRD 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
$
44.9

 
$
25,182.9

 
0.71
%
 
$
21.8

 
$
20,829.6

 
0.42
%
Interest-Bearing Due from and Deposits with Banks (1)
16.0

 
7,145.8

 
0.88

 
15.4

 
8,232.2

 
0.74

Federal Funds Sold and Securities Purchased under Agreements to Resell
7.8

 
1,945.8

 
1.58

 
4.4

 
1,613.2

 
1.08

Securities
 
 
 
 
 
 
 
 
 
 
 
U.S. Government
22.1

 
6,002.2

 
1.46

 
19.9

 
7,292.5

 
1.08

Obligations of States and Political Subdivisions
3.0

 
845.3

 
1.41

 
3.3

 
734.7

 
1.80

Government Sponsored Agency
65.4

 
17,974.7

 
1.45

 
38.8

 
17,583.7

 
0.88

Other (2)
64.2

 
19,920.1

 
1.28

 
48.5

 
17,647.8

 
1.09

Total Securities
154.7

 
44,742.3

 
1.37

 
110.5

 
43,258.7

 
1.02

Loans and Leases (3)
242.4

 
33,468.2

 
2.87

 
204.1

 
33,910.1

 
2.39

Total Earning Assets
465.8

 
112,485.0

 
1.64

 
356.2


107,843.8

 
1.31

Allowance for Credit Losses Assigned to Loans and Leases

 
(155.1
)
 

 

 
(192.9
)
 

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

 
2,666.8

 

 

 
1,933.8

 

Buildings and Equipment

 
467.3

 

 

 
441.3

 

Client Security Settlement Receivables

 
917.0

 

 

 
1,200.7

 

Goodwill

 
523.9

 

 

 
525.5

 

Other Assets

 
4,254.5

 

 

 
4,630.3

 

Total Assets
$

 
$
121,159.4

 
%
 
$

 
$
116,382.5

 
%
Average Source of Funds
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
 
 
 
 
 
 
 
 
 
 
Savings, Money Market and Other
$
7.3

 
$
15,617.1

 
0.19
%
 
$
3.2

 
$
15,025.7

 
0.08
%
Savings Certificates and Other Time
2.4

 
1,255.1

 
0.75

 
2.1

 
1,450.3

 
0.58

Non-U.S. Offices — Interest-Bearing
45.4

 
58,503.4

 
0.31

 
14.7

 
51,468.6

 
0.11

Total Interest-Bearing Deposits
55.1

 
75,375.6

 
0.29

 
20.0

 
67,944.6

 
0.12

Short-Term Borrowings
20.3

 
7,264.5

 
1.11

 
6.6

 
6,961.0

 
0.38

Senior Notes
11.5

 
1,497.0

 
3.11

 
11.8

 
1,496.3

 
3.11

Long-Term Debt
11.3

 
1,672.5

 
2.68

 
6.8

 
1,406.9

 
1.91

Floating Rate Capital Debt
1.4

 
277.5

 
1.87

 
0.9

 
277.4

 
1.24

Total Interest-Related Funds
99.6

 
86,087.1

 
0.46

 
46.1

 
78,086.2

 
0.23

Interest Rate Spread

 

 
1.18

 

 

 
1.08

Demand and Other Noninterest-Bearing Deposits

 
21,736.4

 

 

 
25,829.3

 

Other Liabilities

 
3,295.7

 

 

 
3,236.4

 

Stockholders’ Equity

 
10,040.2

 

 

 
9,230.6

 

Total Liabilities and Stockholders’ Equity
$

 
$
121,159.4

 
%
 
$

 
$
116,382.5

 
%
Net Interest Income/Margin (FTE Adjusted)
$
366.2

 
$

 
1.29
%
 
$
310.1

 
$

 
1.14
%
Net Interest Income/Margin (Unadjusted)
$
354.2

 
$

 
1.25
%
 
$
303.1

 
$

 
1.12
%

7

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


ANALYSIS OF NET INTEREST INCOME CHANGES
DUE TO VOLUME AND RATE
 
Three Months Ended September 30, 2017/2016
 
Change Due To
(In Millions)
Average
Balance
 
Rate
 
Total
Earning Assets (FTE)
$
19.2

 
$
90.4

 
$
109.6

Interest-Related Funds
5.2

 
48.3

 
53.5

Net Interest Income (FTE)
$
14.0

 
$
42.1

 
$
56.1


(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 September 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.
(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 38.1% and 37.8% for the three months ended September 30, 2017 and 2016, respectively. Total taxable equivalent interest adjustments amounted to $12.0 million and $7.0 million for the three months ended September 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 $366.2 million in the current quarter, up $56.1 million, or 18%, compared to $310.1 million in the prior-year quarter. The increase was primarily the result of a higher net interest margin and an increase in average earning assets. Average earning assets for the current quarter were $112.5 billion, up $4.7 billion, or 4%, from $107.8 billion in the prior-year quarter, primarily resulting from higher levels of short-term interest bearing deposits and securities, partially offset by a reduction in loans and leases. Earning asset growth was funded primarily by higher levels of interest-bearing deposits, partially offset by lower demand and other non-interest-bearing deposits.
The net interest margin on an FTE basis increased to 1.29% in the current quarter from 1.14% in the prior-year quarter primarily due to higher short-term interest rates, partially offset by a balance sheet mix shift.
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 $25.2 billion, up $4.4 billion, or 21%, from $20.8 billion in the prior-year quarter. Average securities were $44.7 billion, up $1.4 billion, or 3%, from $43.3 billion in the prior-year quarter and include certain community development investments, Federal Home Loan Bank stock, and Federal Reserve stock of $276.1 million, $139.7 million and $53.1 million, respectively, which are recorded in other assets in the consolidated balance sheets.
Loans and leases averaged $33.5 billion, down $441.9 million, or 1%, from $33.9 billion in the prior-year quarter, primarily reflecting lower levels of residential real estate loans and commercial real estate loans, partially offset by increases in private client and commercial and institutional loans. Residential real estate loans averaged $7.6 billion, down $1.1 billion, or 13%, from $8.7 billion for the prior-year quarter. Commercial real estate loans averaged $3.6 billion, down $377.0 million, or 9%, from $4.0 billion for the prior-year quarter. Private client loans averaged $10.6 billion, up $651.0 million, or 7%, from $9.9 billion for the prior-year quarter. Commercial and institutional loans averaged $9.8 billion, up $368.6 million, or 4%, from $9.5 billion for the prior-year quarter.

8

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


Northern Trust utilizes a diverse mix of funding sources. Total interest-bearing deposits averaged $75.4 billion in the current quarter, compared to $67.9 billion in the prior-year quarter, an increase of $7.5 billion. Other interest-bearing funds averaged $10.7 billion in the current quarter, compared to $10.1 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 $3.4 billion, or 11%, to $26.4 billion in the current quarter from $29.8 billion in the prior-year quarter, primarily resulting from lower levels of demand and other noninterest bearing deposits and cash and due from banks, 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 reductions in undrawn loan commitments and standby letters of credit as well as improved credit quality in the commercial real estate portfolio each resulting in a reduction in the inherent allowance. Net recoveries in the current quarter of $1.6 million, resulting from recoveries of $5.1 million and charge-offs of $3.5 million, also contributed to the current quarter credit provision. The prior-year quarter included $0.8 million of net recoveries, resulting from $3.8 million of recoveries and $3.0 million of charge-offs. Nonperforming assets of $145.5 million decreased 20% from $181.0 million in the prior-year quarter. Residential real estate, commercial, and commercial real estate loans accounted for 88%, 6%, and 6%, respectively, of total nonperforming loans and leases at September 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 September 30,
 
 
 
 
($ In Millions)
2017
 
2016
 
Change
Compensation
$
418.3

 
$
382.1

 
$
36.2

 
9
%
Employee Benefits
74.8

 
73.2

 
1.6

 
2

Outside Services
172.7

 
157.6

 
15.1

 
10

Equipment and Software
130.5

 
114.5

 
16.0

 
14

Occupancy
47.3

 
44.2

 
3.1

 
7

Other Operating Expense
92.0

 
71.4

 
20.6

 
29

Total Noninterest Expense
$
935.6

 
$
843.0

 
$
92.6

 
11
%
Compensation expense, the largest component of noninterest expense, totaled $418.3 million in the current quarter, up $36.2 million, or 9%, compared to $382.1 million in the prior-year quarter, reflecting severance and related charges of $6.0 million in the current quarter as well as increases due to base pay adjustments, staff growth, and higher cash-based incentive accruals.
Employee benefits expense totaled $74.8 million in the current quarter, up 2% compared to $73.2 million in the prior-year quarter, including severance and related charges of $0.6 million in the current quarter as well as increases in payroll taxes and retirement plan expenses, partially offset by lower medical costs.
Outside services expense totaled $172.7 million in the current quarter, up $15.1 million, or 10%, compared to $157.6 million in the prior-year quarter, reflecting outplacement charges associated with severance activity of $0.4 million as well as higher consulting services, sub-custodian expenses, market data, and sub-advisor costs.
Equipment and software expense totaled $130.5 million in the current quarter, up $16.0 million, or 14%, compared to $114.5 million in the prior-year quarter, primarily reflecting increased software amortization, computer maintenance and rental costs, and software support costs.
Occupancy expense totaled $47.3 million in the current quarter, up 7% compared to $44.2 million in the prior-year quarter, primarily due to accelerated depreciation expense related to a previously announced facility exit.

9

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

Other operating expense totaled $92.0 million in the current quarter, up $20.6 million, or 29%, from $71.4 million in the prior-year quarter, primarily driven by the timing of the Northern Trust-sponsored PGA TOUR golf tournament and increases in various other expenses. Additionally, other operating expense in the prior-year quarter included a $3.5 million charge in connection with the settlement of the remaining securities lending litigation.
The components of other operating expense are provided below.
Table 12: Other Operating Expense
Other Operating Expense
Three Months Ended September 30,
 
 
 
 
($ In Millions)
2017
 
2016
 
Change
Business Promotion
$
36.5

 
$
19.2

 
$
17.3

 
91
 %
Staff Related
10.2

 
11.5

 
(1.3
)
 
(12
)
FDIC Insurance Premiums
9.1

 
9.5

 
(0.4
)
 
(3
)
Other Intangibles Amortization
2.3

 
2.0

 
0.3

 
21

Other Expenses
33.9

 
29.2

 
4.7

 
16

Total Other Operating Expense
$
92.0

 
$
71.4

 
$
20.6

 
29

Provision for Income Taxes
Income tax expense for the three months ended September 30, 2017 was $118.2 million, representing an effective tax rate of 28.4%, compared to $116.1 million in the prior-year quarter, representing an effective tax rate of 31.1%. The increase in the provision for income taxes compared to the prior-year quarter was primarily due to an increase in income before income taxes compared to the prior-year quarter, and an increase of $4.3 million related to an increase in the Illinois state deferred income tax reserve resulting from an increase in the Illinois income tax rate, partially offset by Federal and State research tax credits of $17.6 million recognized in the current quarter due to the completion of a recent study of the Corporation’s technology spend between 2013 and 2016.
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 nine- month periods ended September 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 September 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
$
501.1

 
$
450.8

 
$
366.8

 
$
337.5

 
$

 
$

 
$
867.9

 
$
788.3

Foreign Exchange Trading Income
47.2

 
55.2

 
0.7

 
0.9

 
1.2

 
(2.5
)
 
49.1

 
53.6

Other Noninterest Income
43.8

 
41.5

 
25.2

 
26.3

 
5.0

 
0.9

 
74.0

 
68.7

Net Interest Income*
194.0

 
138.2

 
186.6

 
164.1

 
(14.4
)
 
7.8

 
366.2

 
310.1

Revenue*
786.1

 
685.7

 
579.3

 
528.8

 
(8.2
)
 
6.2

 
1,357.2

 
1,220.7

Provision for Credit Losses
0.8

 
4.0

 
(7.8
)
 
(7.0
)
 

 

 
(7.0
)
 
(3.0
)
Noninterest Expense
542.1

 
487.8

 
348.8

 
318.0

 
44.7

 
37.2

 
935.6

 
843.0

Income before Income Taxes*
243.2

 
193.9

 
238.3

 
217.8

 
(52.9
)
 
(31.0
)
 
428.6

 
380.7

Provision for Income Taxes*
78.4

 
61.8

 
90.3

 
82.3

 
(38.5
)
 
(21.0
)
 
130.2

 
123.1

Net Income
$
164.8

 
$
132.1

 
$
148.0

 
$
135.5

 
$
(14.4
)
 
$
(10.0
)
 
$
298.4

 
$
257.6

Percentage of Consolidated Net Income
55
%
 
51
%
 
50
%
 
53
%
 
(5
)%
 
(4
)%
 
100
%
 
100
%
Average Assets
$
82,250.9

 
$
75,696.5

 
$
26,463.0

 
$
26,601.7

 
$
12,445.5

 
$
14,084.3

 
$
121,159.4

 
$
116,382.5

* Non-GAAP financial measures stated on a fully taxable equivalent basis (FTE). Total consolidated includes FTE adjustments of $12.0 million for 2017 and $7.0 million for 2016. A reconciliation of total consolidated 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.
Nine Months Ended September 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
$
1,451.1

 
$
1,331.1

 
$
1,073.2

 
$
982.6

 
$

 
$

 
$
2,524.3

 
$
2,313.7

Foreign Exchange Trading Income
146.9

 
169.1

 
2.4

 
7.0

 
(2.2
)
 
2.4

 
147.1

 
178.5

Other Noninterest Income
132.4

 
113.0

 
77.4

 
79.8

 
20.4

 
124.8

 
230.2

 
317.6

Net Interest Income*
536.5

 
417.8

 
545.4

 
482.8

 
(2.9
)
 
30.1

 
1,079.0

 
930.7

Revenue*
2,266.9

 
2,031.0

 
1,698.4

 
1,552.2

 
15.3

 
157.3

 
3,980.6

 
3,740.5

Provision for Credit Losses
(1.6
)
 

 
(13.4
)
 
(4.0
)
 

 

 
(15.0
)
 
(4.0
)
Noninterest Expense
1,598.5

 
1,519.9

 
1,046.0

 
975.2

 
123.0

 
101.7

 
2,767.5

 
2,596.8

Income before Income Taxes*
670.0

 
511.1

 
665.8

 
581.0

 
(107.7
)
 
55.6

 
1,228.1

 
1,147.7

Provision for Income Taxes*
213.0

 
158.0

 
251.4

 
219.1

 
(78.7
)
 
4.6

 
385.7

 
381.7

Net Income
$
457.0

 
$
353.1

 
$
414.4

 
$
361.9

 
$
(29.0
)
 
$
51.0

 
$
842.4

 
$
766.0

Percentage of Consolidated Net Income
54
%
 
46
%
 
49
%
 
47
%
 
(3
)%
 
7
%
 
100
%
 
100
%
Average Assets
$
80,229.1

 
$
75,589.0

 
$
26,648.7

 
$
26,525.6

 
$
11,818.2

 
$
12,795.3

 
$
118,696.0

 
$
114,909.9

* Non-GAAP financial measures stated on a fully taxable equivalent basis (FTE). Total consolidated includes FTE adjustments of $29.8 million for 2017 and $20.1 million for 2016. A reconciliation of total consolidated 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.

11

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

C&IS net income totaled $164.8 million in the current quarter compared to $132.1 million in the prior-year quarter, an increase of $32.7 million, or 25%. Noninterest income was $592.1 million in the current quarter, up $44.6 million, or 8%, from $547.5 million in the prior-year quarter, reflecting higher trust, investment and other servicing fees, 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 September 30,
 
 
 
 
($ In Millions)
2017
 
2016
 
Change
Custody and Fund Administration
$
338.1

 
$
299.4

 
$
38.7

 
13
 %
Investment Management
104.3

 
94.4

 
9.9

 
10

Securities Lending
22.8

 
23.1

 
(0.3
)
 
(1
)
Other
35.9

 
33.9

 
2.0

 
6

Total C&IS Trust, Investment and Other Servicing Fees
$
501.1

 
$
450.8

 
$
50.3

 
11
 %
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 $38.7 million, or 13%, from the prior-year quarter, primarily due to new business, favorable equity markets, and the favorable impact of movements in foreign exchange rates. Investment management fees increased $9.9 million, or 10%, primarily due to higher market performance and new business. Securities lending fees were relatively unchanged, as lower spreads and fee splits were partially offset by increased loan volumes in the current quarter. Other fees increased 6%, primarily due to new business.
Foreign exchange trading income totaled $47.2 million in the current quarter, a decrease of $8.0 million, or 14%, from $55.2 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 $43.8 million in the current quarter, up 6%, from $41.5 million in the prior-year quarter, primarily due to impairment charges recorded in the prior-year quarter associated with the loss on sales related to a non-strategic loan and lease portfolio.
Net interest income stated on an FTE basis was $194.0 million in the current quarter, up $55.8 million, or 40%, from $138.2 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 1.01% from 0.79% in the prior-year quarter, primarily reflecting higher short-term interest rates, partially offset by a balance sheet mix shift. The average earning assets totaled $76.4 billion, up from $69.2 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 $54.1 billion in the current quarter, up from $45.2 billion in the prior-year quarter.
The provision for credit losses was a provision of $0.8 million in the current quarter, compared with a provision of $4.0 million in the prior-year quarter. The current quarter provision reflected an increase in the inherent reserve requirement. The prior-year quarter provision reflected a specific reserve requirement, partially offset by 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 $542.1 million in the current quarter, up $54.3 million, or 11%, from $487.8 million in the prior-year quarter, reflecting severance and related charges of $2.0 million, as well as higher indirect expense allocations, compensation expenses, and outside services expenses.

12

Table of Contents
REPORTING SEGMENTS (continued)
Wealth Management

Wealth Management net income was $148.0 million in the current quarter, up $12.5 million, or 9%, from $135.5 million in the prior-year quarter. Noninterest income was $392.7 million, up $28.0 million, or 8%, from $364.7 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 $366.8 million in the current quarter, increasing $29.3 million, or 9%, from $337.5 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 September 30,
 
 
 
 
($ In Millions)
2017
 
2016
 
Change
Central
$
145.4

 
$
135.6

 
$
9.8

 
7
%
East
90.2

 
85.1

 
5.1

 
6

West
73.7

 
68.0

 
5.7

 
8

Global Family Office
57.5

 
48.8

 
8.7

 
18

Total Wealth Management Trust, Investment and Other Servicing Fees
$
366.8

 
$
337.5

 
$
29.3

 
9
%
Wealth Management fee income is calculated primarily based on market values. The increase in Wealth Management fees across the regions was primarily attributable to favorable equity markets and new business. The 18% increase in Global Family Office fees was primarily attributable to new business and favorable equity markets.
Other noninterest income of $25.2 million in the current quarter was down slightly from $26.3 million in the prior-year quarter, primarily reflecting a decrease in various other operating income categories.
Net interest income stated on an FTE basis was $186.6 million in the current quarter, up $22.5 million, or 14%, from $164.1 million in the prior-year quarter, primarily reflecting an increase in the net interest margin. The net interest margin increased to 2.82% from 2.47% in the prior-year quarter. Average earning assets decreased $174.0 million to $26.2 billion from the prior-year quarter’s $26.4 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 of $7.8 million in the current quarter, compared with a credit provision of $7.0 million in the prior-year quarter. The current quarter provision reflected reductions in undrawn loan commitments and standby letters of credit as well as improved credit quality resulting in a reduction in the inherent allowance. The prior-year quarter provision reflected 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 $348.8 million in the current quarter, compared to $318.0 million in the prior-year quarter, an increase of $30.8 million, or 10%, reflecting current quarter severance and related charges of $5.0 million, as well as higher indirect expense allocations, compensation expense, and other operating 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 increased $7.8 million, from negative $1.6 million in the prior-year quarter to $6.2 million in the current quarter, primarily due to higher foreign exchange trading income and other operating income.
Net interest income decreased $22.2 million, from $7.8 million in the prior-year quarter to net interest expense of $14.4 million in the current quarter, primarily due to a decline in the net interest margin driven by higher short-term interest rates. Average earning assets decreased $2.4 billion to $9.9 billion from $12.3 billion in the prior-year quarter.
Noninterest expense totaled $44.7 million in the current quarter, up $7.5 million, or 20%, from $37.2 million in the prior-year quarter, primarily reflecting higher general overhead costs, including compensation expense, equipment and software expense,

13

Table of Contents
REPORTING SEGMENTS (continued)
Treasury and Other (continued)

and business promotion, advertising, and marketing 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 $38.5 million in the current quarter compared to a $21.0 million benefit in the prior-year quarter, primarily due to Federal and State research tax credits of $17.6 million recognized in the current quarter due to the completion of a recent study of the Corporation’s technology spend between 2013 and 2016, partially offset by an increase of $4.3 million related to an increase in the Illinois state deferred income tax reserve resulting from an increase in the Illinois income tax rate and an decrease in income before income taxes compared to the prior quarter.
NINE-MONTH CONSOLIDATED RESULTS OF OPERATIONS
Overview
Net income per diluted common share was $3.41 for the nine months ended September 30, 2017, and $3.21 in the comparable prior-year period. Net income totaled $842.4 million, up $76.4 million, or 10%, compared to $766.0 million in the prior-year period. The performance in the current period produced an annualized return on average common equity of 11.8%, compared to 11.9% in the prior-year period. The annualized return on average assets was 0.95% in the current period compared to 0.89% in the prior-year period.
Revenue for the nine months ended September 30, 2017 totaled $3.95 billion, up $230.4 million, or 6%, as compared to $3.72 billion in the prior-year period.
Noninterest income was $2.90 billion, up $91.8 million, or 3%, from $2.81 billion in the prior-year period, primarily driven by increased trust, investment, and other servicing fees, partially offset by lower other operating income and foreign exchange trading income. 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 of $4.8 million.

Net interest income totaled $1.05 billion, up $138.6 million, or 15%, as compared to $910.6 million in the prior-year period, due to a higher net interest margin and an increase 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 $15.0 million in the current period, as compared to a credit of $4.0 million in the prior-year period.

Noninterest expense totaled $2.77 billion in the current period, up $170.7 million, or 7%, from $2.60 billion in the prior-year period, primarily attributable to higher compensation, equipment and software, outside services, partially offset by lower other operating expense. The current period included expense charges of $29.8 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.

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Table of Contents
NINE-MONTH CONSOLIDATED RESULTS OF OPERATIONS (continued)
Noninterest Income


The components of noninterest income are provided below.
Table 16: Nine Months Ended September 30 Noninterest Income
Noninterest Income
Nine Months Ended September 30,
 
 
 
 
($ In Millions)
2017
 
2016
 
Change
Trust, Investment and Other Servicing Fees
$
2,524.3

 
$
2,313.7

 
$
210.6

 
9
 %
Foreign Exchange Trading Income
147.1

 
178.5

 
(31.4
)
 
(18
)
Treasury Management Fees
42.8

 
47.2

 
(4.4
)
 
(9
)
Security Commissions and Trading Income
65.8

 
59.9

 
5.9

 
10

Other Operating Income
122.7

 
212.4

 
(89.7
)
 
(42
)
Investment Security Losses, net
(1.1
)
 
(1.9
)
 
0.8

 
(41
)
Total Noninterest Income
$
2,901.6

 
$
2,809.8

 
$
91.8

 
3
 %
As illustrated in the following table, trust, investment and other servicing fees from C&IS increased $120.0 million, or 9%, totaling $1.45 billion, compared to $1.33 billion a year ago.
Table 17: Nine Months Ended September 30 C&IS Trust, Investment and Other Servicing Fees
C&IS Trust, Investment and Other Servicing Fees
Nine Months Ended September 30,
 
 
 
 
($ In Millions)
2017
 
2016
 
Change
Custody and Fund Administration
$
973.1

 
$
879.1

 
$
94.0

 
11
 %
Investment Management
297.1

 
277.7

 
19.4

 
7

Securities Lending
71.2

 
72.5

 
(1.3
)
 
(2
)
Other
109.7

 
101.8

 
7.9

 
8

Total
$
1,451.1

 
$
1,331.1

 
$
120.0

 
9
 %
Custody and fund administration fees, the largest component of C&IS fees, increased 11%, 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 7%, 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 $1.9 million in the prior-year period. Other fees in C&IS increased 8%, primarily due to new business.
As illustrated in the following table, trust, investment and other servicing fees from Wealth Management totaled $1.07 billion, up $90.6 million, or 9%, from $982.6 million a year ago.
Table 18: Nine Months Ended September 30 Wealth Management Trust, Investment and Other Servicing Fees
 
Nine Months Ended September 30,
 
 
 
 
($ In Millions)
2017
 
2016
 
Change
Wealth Management Trust, Investment and Other Servicing Fees
 
 
 
 
 
 
 
Central
$
425.9

 
$
390.2

 
$
35.7

 
9
%
East
263.7

 
250.6

 
13.1

 
5

West
216.7

 
199.4

 
17.3

 
9

Global Family Office
166.9

 
142.4

 
24.5

 
17

Total
$
1,073.2

 
$
982.6

 
$
90.6

 
9
%
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. The 17% increase in Global Family Office fees was primarily attributable to new business and favorable equity markets. Money market mutual fund fee waivers in Wealth Management totaled $0.7 million in the current period compared with $6.2 million in the prior-year period.

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Table of Contents
NINE-MONTH CONSOLIDATED RESULTS OF OPERATIONS (continued)
Noninterest Income (continued)


Foreign exchange trading income decreased $31.4 million, or 18%, and totaled $147.1 million compared with $178.5 million in the prior-year period. The decrease was attributable to lower currency volatility compared to the prior-year period.
Other operating income decreased $89.7 million, or 42%, to $122.7 million compared with $212.4 million in the prior-year period. The components of other operating income are provided below.
Table 19: Nine Months Ended September 30 Other Operating Income
Other Operating Income
Nine Months Ended September 30,
 
 
 
 
($ In Millions)
2017
 
2016
 
Change
Loan Service Fees
$
38.4

 
$
42.2

 
$
(3.8
)
 
(9
)%
Banking Service Fees
37.5

 
38.8

 
(1.3
)
 
(3
)%
Other Income
46.8

 
131.4

 
(84.6
)
 
(64
)
Total Other Operating Income
$
122.7

 
$
212.4

 
$
(89.7
)
 
(42
)%
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. The decrease in other income due to these prior-year items was partially offset by net gains on hedging activity and increases in various other income categories.

16

Table of Contents
NINE-MONTH 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 20: Nine Months Ended September 30 Average Consolidated Balance Sheets with Analysis of Net Interest Income
 
NORTHERN TRUST CORPORATION
(Interest and Rate on a Fully Taxable Equivalent Basis)
Nine Months Ended September 30,
2017
 
2016
($ In Millions)
Interest
 
Average
Balance
 
Rate (5)
 
Interest
 
Average
Balance
 
Rate (5)
Average Earning Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Federal Reserve and Other Central Bank Deposits
$
108.4

 
$
23,198.9

 
0.62
%
 
$
71.4