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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 June 30, 2018
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 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
223,281,786 Shares – $1.66 2/3 Par Value
(Shares of Common Stock Outstanding on June 30, 2018)
 


Table of Contents




NORTHERN TRUST CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2018
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)
2018
 
2017
 
% Change (1)
 
2018
 
2017
 
% Change (1)
Noninterest Income
$
1,092.8

 
$
979.7

 
12
 %
 
$
2,184.8

 
$
1,910.6

 
14
 %
Net Interest Income
413.3

 
341.5

 
21

 
797.3

 
695.0

 
15

Provision for Credit Losses
1.5

 
(7.0
)
 
N/M

 
(1.5
)
 
(8.0
)
 
N/M

Noninterest Expense
997.4

 
937.4

 
6

 
1,992.7

 
1,831.9

 
9

Income before Income Taxes
507.2

 
390.8

 
30

 
990.9

 
781.7

 
27

Provision for Income Taxes
116.8

 
122.9

 
(5
)
 
218.9

 
237.7

 
(8
)
Net Income
$
390.4

 
$
267.9

 
46
 %
 
$
772.0

 
$
544.0

 
42
 %
PER COMMON SHARE
 
 
 
 
 
 
 
 
 
 
 
Net Income — Basic
$
1.69

 
$
1.12

 
51
%
 
$
3.28

 
$
2.22

 
48
%
— Diluted
1.68

 
1.12

 
50

 
3.26

 
2.21

 
48

Cash Dividends Declared Per Common Share
0.42

 
0.38

 
11

 
0.84

 
0.76

 
11

Book Value — End of Period (EOP)
42.44

 
40.20

 
6

 
42.44

 
40.20

 
6

Market Price — EOP
102.89

 
97.21

 
6

 
102.89

 
97.21

 
6


SELECTED BALANCE SHEET DATA (In Millions)
 
 
 
 
 
 
June 30, 2018
 
December 31, 2017
 
% Change (1)
End of Period:
 
 
 
 
 
Assets
$
135,106.2

 
$
138,590.5

 
(3
)%
Earning Assets
124,105.2

 
129,656.6

 
(4
)
Deposits
106,524.9

 
112,390.8

 
(5
)
Stockholders’ Equity
10,357.6

 
10,216.2

 
1

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
% Change (1)
 
2018
 
2017
 
% Change (1)
Average Balances:
 
 
 
 
 
 
 
 
 
 
 
Assets
$
123,866.7

 
$
118,400.7

 
5
 %
 
$
124,178.3

 
$
117,443.8

 
6
%
Earning Assets
114,414.6

 
109,906.5

 
4

 
115,046.9

 
109,431.8

 
5

Deposits
95,630.8

 
96,739.2

 
(1
)
 
96,907.1

 
95,841.4

 
1

Stockholders’ Equity
10,202.1

 
9,976.0

 
2

 
10,170.1

 
9,884.2

 
3

CLIENT ASSETS (In Billions)
June 30, 2018
 
December 31, 2017
 
% Change (1)
Assets Under Custody/Administration (2)
$
10,712.5

 
$
10,722.6

 
 %
Assets Under Custody
8,101.9

 
8,084.6

 

Assets Under Management
1,148.9

 
1,161.0

 
(1
)
(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 June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Financial Ratios:
 
 
 
 
 
 
 
Return on Average Common Equity
16.5
%
 
11.6
%
 
16.3
%
 
11.6
%
Return on Average Assets
1.26

 
0.91

 
1.25

 
0.93

Dividend Payout Ratio
25.0

 
33.9

 
25.8

 
34.4

Net Interest Margin (1)
1.48

 
1.28

 
1.43

 
1.31

 
June 30, 2018
 
December 31, 2017
 
Advanced
Approach
 
Standardized
Approach
 
Advanced
Approach
 
Standardized
Approach
Capital Ratios:
 
 
 
 
 
 
 
Northern Trust Corporation
 
 
 
 
 
 
 
Common Equity Tier 1
13.3
%
 
12.4
%
 
13.5
%
 
12.6
%
Tier 1
14.6

 
13.6

 
14.8

 
13.8

Total
16.5

 
15.6

 
16.7

 
15.8

Tier 1 Leverage
7.7

 
7.7

 
7.8

 
7.8

Supplementary Leverage
6.8

 
N/A

 
6.8

 
N/A

 
 
 
 
 
 
 
 
The Northern Trust Company
 
 
 
 
 
 
 
Common Equity Tier 1
13.8
%
 
12.6
%
 
13.7
%
 
12.6
%
Tier 1
13.8

 
12.6

 
13.7

 
12.6

Total
15.4

 
14.3

 
15.4

 
14.3

Tier 1 Leverage
7.1

 
7.1

 
7.0

 
7.0

Supplementary Leverage
6.2

 
N/A

 
6.1

 
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
SECOND QUARTER CONSOLIDATED RESULTS OF OPERATIONS
General
Northern Trust Corporation (the Corporation) is a financial holding company that is a leading provider of wealth management, asset servicing, asset management and banking solutions to corporations, institutions, families and individuals. 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 terms “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 $1.68 in the current quarter, up from $1.12 in the second quarter of 2017. Net income was $390.4 million in the current quarter as compared to $267.9 million in the prior-year quarter. Annualized return on average common equity was 16.5% in the current quarter and 11.6% in the prior-year quarter. The annualized return on average assets was 1.26% in the current quarter as compared to 0.91% in the prior-year quarter.

Revenue of $1.51 billion in the current quarter was up $184.9 million, or 14%, from $1.32 billion in the prior-year quarter.

Noninterest income increased $113.1 million, or 12%, to $1.09 billion from $979.7 million in the prior-year quarter, reflecting higher trust, investment and other servicing fees and foreign exchange trading income, partially offset by lower other operating income.

Net interest income increased $71.8 million, or 21%, to $413.3 million in the current quarter as compared to $341.5 million in the prior-year quarter, primarily resulting from a higher net interest margin and an increase in earning assets.

The provision for credit losses was $1.5 million in the current quarter, as compared to a provision credit of $7.0 million in the prior-year quarter.

Noninterest expense totaled $997.4 million in the current quarter, up $60.0 million, or 6%, from $937.4 million in the prior-year quarter, primarily attributable to higher compensation, outside services, employee benefits, and equipment and software expense, partially offset by lower other operating expense.

The provision for income taxes in the current quarter totaled $116.8 million, representing an effective tax rate of 23.0%. The provision for income taxes in the prior-year quarter totaled $122.9 million, representing an effective tax rate of 31.4%.

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)
2018
 
2017
 
Change
Trust, Investment and Other Servicing Fees
$
942.9

 
$
848.2

 
$
94.7

 
11
 %
Foreign Exchange Trading Income
78.9

 
49.9

 
29.0

 
58

Treasury Management Fees
13.5

 
14.9

 
(1.4
)
 
(10
)
Security Commissions and Trading Income
26.1

 
24.1

 
2.0

 
8

Other Operating Income
31.4

 
43.0

 
(11.6
)
 
(27
)
Investment Security (Losses) Gains, net

 
(0.4
)
 
0.4

 
N/M

Total Noninterest Income
$
1,092.8

 
$
979.7

 
$
113.1

 
12
 %
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 calculations on which fees are based are performed on a monthly or quarterly basis in arrears. For a further discussion of trust, investment and other servicing fees and how they are derived, refer to the “Reporting Segments” section.

When considering the impact of markets on the Corporation’s results, the following tables present selected market indices and the percentage changes year over year.
Table 2: Equity Market Indices
 
Daily Averages
 
Period-End
 
Three Months Ended June 30,
 
As of June 30,
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
 
 
 
 
 
 
 
 
 
 
 
 
S&P 500
2,702

 
2,397

 
13
%
 
2,718

 
2,423

 
12
%
MSCI EAFE (U.S. dollars)
2,018

 
1,856

 
9

 
1,959

 
1,883

 
4

MSCI EAFE (local currency)
1,144

 
1,099

 
4

 
1,132

 
1,096

 
3

Table 3: Fixed Income Market Indices
 
As of June 30,
 
2018
 
2017
 
Change
 
 
 
 
 
 
Barclays Capital U.S. Aggregate Bond Index
2,013

 
2,021

 
 %
Barclays Capital Global Aggregate Bond Index
478

 
471

 
1


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 4: Assets Under Custody / Administration
Assets Under Custody / Administration
June 30, 2018
 
March 31, 2018
 
June 30, 2017
 
Change Q2-18/Q1-18
 
Change Q2-18/Q2-17
($ In Billions)
Corporate & Institutional
$
10,051.9

 
$
10,131.7

 
$
8,690.8

 
(1
)%
 
16
%
Wealth Management
660.6

 
654.0

 
603.4

 
1

 
9

Total Assets Under Custody / Administration
$
10,712.5

 
$
10,785.7

 
$
9,294.2

 
(1
)%
 
15
%

4

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


The following table presents Northern Trust’s assets under custody, a component of AUC/A, by reporting segment.
Table 5: Assets Under Custody
Assets Under Custody
June 30, 2018
 
March 31, 2018
 
June 30, 2017
 
Change Q2-18/Q1-18
 
Change Q2-18/Q2-17
($ In Billions)
Corporate & Institutional
$
7,451.1

 
$
7,466.5

 
$
6,786.3

 
 %
 
10
%
Wealth Management
650.8

 
645.2

 
593.3

 
1

 
10

Total Assets Under Custody
$
8,101.9

 
$
8,111.7

 
$
7,379.6

 
 %
 
10
%
The 10% increase in consolidated assets under custody from $7.38 trillion as of June 30, 2017 to $8.10 trillion as of June 30, 2018 primarily reflected the impact of favorable markets and new business.
The following table presents the allocation of Northern Trust’s custodied assets by reporting segment.
Table 6: Allocation of Assets Under Custody
 
June 30, 2018
 
March 31, 2018
 
June 30, 2017
Assets Under Custody
C&IS
 
WM
 
Total
 
C&IS
 
WM
 
Total
 
C&IS
 
WM
 
Total
Equities
45
%
 
58
%
 
46
%
 
45
%
 
58
%
 
46
%
 
45
%
 
56
%
 
46
%
Fixed Income
38

 
18

 
36

 
37

 
18

 
36

 
38

 
20

 
37

Cash and Other Assets
15

 
24

 
16

 
15

 
24

 
16

 
15

 
24

 
15

Securities Lending Collateral
2

 

 
2

 
3

 

 
2

 
2

 

 
2

The following table presents Northern Trust’s assets under management by reporting segment.
Table 7: Assets Under Management
Assets Under Management
June 30, 2018
 
March 31, 2018
 
June 30, 2017
 
Change Q2-18/Q1-18
 
Change Q2-18/Q2-17
($ In Billions)
Corporate & Institutional
$
862.1

 
$
878.3

 
$
762.7

 
(2
)%
 
13
%
Wealth Management
286.8

 
287.4

 
266.1

 

 
8

Total Assets Under Management
$
1,148.9

 
$
1,165.7

 
$
1,028.8

 
(1
)%
 
12
%
The 12% increase in consolidated assets under management from $1.03 trillion at June 30, 2017 to $1.15 trillion as of June 30, 2018 was primarily due to favorable markets and net inflows in securities lending collateral and cash.
The following table presents Northern Trust’s assets under management by investment type.
Table 8: Assets Under Management by Investment Type
($ In Billions)
June 30, 2018
 
March 31, 2018
 
June 30, 2017
Equities
$
587.8

 
$
583.7

 
$
531.3

Fixed Income
177.4

 
177.7

 
169.5

Cash and Other Assets
209.9

 
216.8

 
197.0

Securities Lending Collateral
173.8

 
187.5

 
131.0

Total Assets Under Management
$
1,148.9

 
$
1,165.7

 
$
1,028.8


5

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


The following table presents the allocation of Northern Trust’s assets under management by reporting segment.
Table 9: Allocation of Assets Under Management
 
June 30, 2018
 
March 31, 2018
 
June 30, 2017
Assets Under Management
C&IS
 
WM
 
Total
 
C&IS
 
WM
 
Total
 
C&IS
 
WM
 
Total
Equities
51
%
 
52
%
 
51
%
 
50
%
 
52
%
 
50
%
 
52
%
 
49
%
 
52
%
Fixed Income
12

 
25

 
16

 
12

 
25

 
15

 
13

 
26

 
16

Cash and Other Assets
17

 
23

 
18

 
17

 
23

 
19

 
18

 
25

 
19

Securities Lending Collateral
20

 

 
15

 
21

 

 
16

 
17

 

 
13


The following table presents activity in consolidated assets under management by investment type.
Table 10: Activity in Consolidated Assets Under Management by Investment Type
 
 
Three Months Ended
($ In Billions)
June 30, 2018
March 31, 2018
December 31, 2017
September 30, 2017
June 30, 2017
Beginning Balance of AUM
$
1,165.7

$
1,161.0

$
1,125.1

$
1,028.8

$
1,001.3

Inflows by Investment Type
 
 
 
 
 
 
Equity
44.7

44.2

63.0

51.2

36.3

 
Fixed Income
17.5

17.4

23.0

19.8

11.6

 
Cash & Other Assets
124.2

114.4

116.3

101.6

98.2

 
Securities Lending Collateral
22.4

68.1

32.4

45.5

24.9

 
 
 
 
 
 
 
Total Inflows
208.8

244.1

234.7

218.1

171.0

 
 
 
 
 
 
 
Outflows by Investment Type
 
 
 
 
 
 
Equity
(42.4
)
(47.8
)
(67.7
)
(41.0
)
(38.6
)
 
Fixed Income
(20.4
)
(24.0
)
(20.7
)
(13.0
)
(10.5
)
 
Cash & Other Assets
(130.6
)
(117.4
)
(111.8
)
(83.0
)
(99.5
)
 
Securities Lending Collateral
(36.1
)
(48.3
)
(26.8
)
(14.4
)
(17.5
)
 
 
 
 
 
 
 
Total Outflows
(229.5
)
(237.5
)
(227.0
)
(151.4
)
(166.1
)
 
 
 
 
 
 
 
Net Inflows / (Outflows)
(20.7
)
6.6

7.7

66.7

4.9

 
 
 
 
 
 
 
Market Performance, Currency & Other
 
 
 
 
 
 
Market Performance & Other
11.5

(4.6
)
27.9

26.6

18.2

 
Currency
(7.6
)
2.7

0.3

3.0

4.4

Total Market Performance, Currency & Other
3.9

(1.9
)
28.2

29.6

22.6

 
 
 
 
 
 
 
Ending Balance of AUM
$
1,148.9

$
1,165.7

$
1,161.0

$
1,125.1

$
1,028.8


Foreign exchange trading income totaled $78.9 million in the current quarter, up $29.0 million, or 58%, compared to $49.9 million in the prior-year quarter. The increase was primarily due to higher client volumes and increased foreign exchange swap activity in Treasury as compared to the prior-year quarter.


6

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


Other operating income totaled $31.4 million in the current quarter, down $11.6 million, or 27%, compared to $43.0 million in the prior-year quarter, primarily due to non-recurring net gains on hedging activity recognized in the prior-year quarter and a valuation adjustment to existing swap agreements related to Visa Inc. Class B common shares recorded in other income in the current quarter. The components of other operating income are provided below.
Table 11: Other Operating Income
Other Operating Income
Three Months Ended June 30,
 
 
 
 
($ In Millions)
2018
 
2017
 
Change
Loan Service Fees
$
12.7

 
$
13.3

 
$
(0.6
)
 
(4
)%
Banking Service Fees
11.7

 
12.6

 
(0.9
)
 
(7
)
Other Income
7.0

 
17.1

 
(10.1
)
 
(59
)
Total Other Operating Income
$
31.4

 
$
43.0

 
$
(11.6
)
 
(27
)%

7

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 12: Average Consolidated Balance Sheets with Analysis of Net Interest Income
 
NORTHERN TRUST CORPORATION
(Interest and Rate on a Fully Taxable Equivalent Basis)
SECOND QUARTER
2018
 
2017
($ In Millions)
Interest
 
Average
Balance
 
Rate (5)
 
Interest
 
Average
Balance
 
Rate (5)
Average Earning Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Federal Reserve and Other Central Bank Deposits
$
48.8

 
$
24,512.8

 
0.80
%
 
$
33.8

 
$
22,570.0

 
0.60
%
Interest-Bearing Due from and Deposits with Banks (1)
18.3

 
6,556.9

 
1.12

 
14.1

 
7,653.9

 
0.74

Federal Funds Sold and Securities Purchased under Agreements to Resell
8.2

 
1,417.1

 
2.33

 
7.4

 
2,059.4

 
1.45

Securities
 
 
 
 
 
 
 
 
 
 
 
U.S. Government
26.7

 
5,718.3

 
1.87

 
22.0

 
6,423.8

 
1.37

Obligations of States and Political Subdivisions
3.6

 
785.4

 
1.83

 
3.4

 
928.8

 
1.46

Government Sponsored Agency
109.3

 
20,215.0

 
2.17

 
61.5

 
17,888.7

 
1.38

Other (2)
88.6

 
22,973.7

 
1.55

 
56.9

 
18,490.5

 
1.23

Total Securities
228.2

 
49,692.4

 
1.84

 
143.8

 
43,731.8

 
1.32

Loans and Leases (3)
273.5

 
32,235.4

 
3.40

 
227.0

 
33,891.4

 
2.69

Total Earning Assets
577.0

 
114,414.6

 
2.02

 
426.1


109,906.5

 
1.56

Allowance for Credit Losses Assigned to Loans and Leases

 
(126.4
)
 

 

 
(162.3
)
 

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

 
2,440.5

 

 

 
2,701.1

 

Buildings and Equipment

 
440.0

 

 

 
465.2

 

Client Security Settlement Receivables

 
942.1

 

 

 
829.0

 

Goodwill

 
615.9

 

 

 
521.6

 

Other Assets

 
5,140.0

 

 

 
4,139.6

 

Total Assets
$

 
$
123,866.7

 
%
 
$

 
$
118,400.7

 
%
Average Source of Funds
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
 
 
 
 
 
 
 
 
 
 
Savings, Money Market and Other
$
17.0

 
$
15,565.0

 
0.44
%
 
$
4.7

 
$
15,236.1

 
0.12
%
Savings Certificates and Other Time
2.0

 
896.6

 
0.87

 
2.4

 
1,312.7

 
0.72

Non-U.S. Offices — Interest-Bearing
58.3

 
57,684.5

 
0.41

 
33.9

 
56,672.3

 
0.24

Total Interest-Bearing Deposits
77.3

 
74,146.1

 
0.42

 
41.0

 
73,221.1

 
0.22

Short-Term Borrowings
51.5

 
11,336.2

 
1.82

 
12.2

 
5,412.0

 
0.91

Senior Notes
11.7

 
1,497.6

 
3.14

 
11.8

 
1,496.9

 
3.14

Long-Term Debt
12.0

 
1,410.8

 
3.41

 
9.6

 
1,536.1

 
2.51

Floating Rate Capital Debt
1.9

 
277.5

 
2.80

 
1.1

 
277.4

 
1.70

Total Interest-Related Funds
154.4

 
88,668.2

 
0.70

 
75.7

 
81,943.5

 
0.37

Interest Rate Spread

 

 
1.32

 

 

 
1.19

Demand and Other Noninterest-Bearing Deposits

 
21,484.7

 

 

 
23,518.1

 

Other Liabilities

 
3,511.7

 

 

 
2,963.1

 

Stockholders’ Equity

 
10,202.1

 

 

 
9,976.0

 

Total Liabilities and Stockholders’ Equity
$

 
$
123,866.7

 
%
 
$

 
$
118,400.7

 
%
Net Interest Income/Margin (FTE Adjusted)
$
422.6

 
$

 
1.48
%
 
$
350.4

 
$

 
1.28
%
Net Interest Income/Margin (Unadjusted)
$
413.3

 
$

 
1.45
%
 
$
341.5

 
$

 
1.25
%

8

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, 2018/2017
 
Change Due To
(In Millions)
Average
Balance
 
Rate
 
Total
Earning Assets (FTE)
$
22.6

 
$
128.3

 
$
150.9

Interest-Related Funds
18.1

 
60.6

 
78.7

Net Interest Income (FTE)
$
4.5

 
$
67.7

 
$
72.2


(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, 2018 and 2017.
(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 noninterest-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 24.8% and 37.8% for the three months ended June 30, 2018 and 2017, respectively. Total taxable equivalent interest adjustments amounted to $9.3 million and $8.9 million for the three months ended June 30, 2018 and 2017, 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 $422.6 million in the current quarter, up $72.2 million, or 21%, compared to $350.4 million in the prior-year quarter. The increase was primarily the result of a higher net interest margin and an increase in earning assets. Average earning assets for the current quarter were $114.4 billion, up $4.5 billion, or 4%, from $109.9 billion in the prior-year quarter, primarily resulting from higher levels of securities, partially offset by reductions in loans and leases. Earning asset growth was funded primarily by higher levels of borrowed funds and interest-bearing deposits, partially offset by lower demand and other noninterest-bearing deposits.
The net interest margin on an FTE basis increased to 1.48% in the current quarter from 1.28% 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 $24.5 billion, up $1.9 billion, or 9%, from $22.6 billion in the prior-year quarter. Average securities were $49.7 billion, up $6.0 billion, or 14%, from $43.7 billion in the prior-year quarter and include certain community development investments, Federal Home Loan Bank stock, and Federal Reserve stock of $426.1 million, $226.0 million and $53.7 million, respectively, which are recorded in other assets in the consolidated balance sheets.
Loans and leases averaged $32.2 billion, down $1.7 billion, or 5%, from $33.9 billion in the prior-year quarter, primarily reflecting lower levels of residential real estate, commercial real estate, and commercial and institutional loans, partially offset by increases in private client loans. Residential real estate loans averaged $7.0 billion, down $1.0 billion, or 13%, from $8.0 billion for the prior-year quarter. Commercial real estate loans averaged $3.4 billion, down $463.9 million, or 12%, from $3.8 billion for the prior-year quarter. Commercial and institutional loans averaged $9.2 billion, down $316.7 million, or 3%, from $9.5 billion for the prior-year quarter. Private client loans averaged $10.4 billion, up $102.6 million, or 1%, from $10.3 billion for the prior-year quarter.

9

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


Northern Trust utilizes a diverse mix of funding sources. Total interest-bearing deposits averaged $74.1 billion in the current quarter, compared to $73.2 billion in the prior-year quarter, an increase of $925.0 million. Other interest-bearing funds averaged $14.5 billion in the current quarter, compared to $8.7 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 decreased $2.3 billion, or 8%, to $25.7 billion in the current quarter from $28.0 billion in the prior-year quarter, primarily resulting from lower levels of demand and other noninterest-bearing deposits.
Provision for Credit Losses
The provision for credit losses was $1.5 million in the current quarter, as compared to a provision credit of $7.0 million in the prior-year quarter. The provision in the current quarter was primarily driven by an increase in the specific reserve attributable to the commercial and institutional and commercial real estate portfolios, partially offset by a reduction in the specific reserve attributable to the residential real estate portfolio. Net charge-offs in the current quarter were $0.1 million, resulting from charge-offs of $2.2 million and recoveries of $2.1 million. The prior-year quarter included $3.2 million of net charge-offs, reflecting $5.0 million of charge-offs and $1.8 million of recoveries. Nonperforming assets of $132.2 million decreased 21% from $166.7 million at the end of the prior-year quarter. Residential real estate, commercial and institutional, and commercial real estate loans accounted for 84%, 11%, and 5%, respectively, of total nonperforming loans and leases at June 30, 2018. For additional discussion of the provision and allowance for credit losses, refer to the “Asset Quality” section beginning on page 23.
Noninterest Expense
The components of noninterest expense are provided below.
Table 13: Noninterest Expense
Noninterest Expense
Three Months Ended June 30,
 
 
 
 
($ In Millions)
2018
 
2017
 
Change
Compensation
$
454.7

 
$
432.5

 
$
22.2

 
5
 %
Employee Benefits
88.8

 
75.6

 
13.2

 
17

Outside Services
185.6

 
167.0

 
18.6

 
11

Equipment and Software
144.2

 
133.7

 
10.5

 
8

Occupancy
48.8

 
46.3

 
2.5

 
6

Other Operating Expense
75.3

 
82.3

 
(7.0
)
 
(8
)
Total Noninterest Expense
$
997.4

 
$
937.4

 
$
60.0

 
6
 %
Compensation expense, the largest component of noninterest expense, totaled $454.7 million in the current quarter, up $22.2 million, or 5%, compared to $432.5 million in the prior-year quarter, primarily reflecting higher cash-based incentive accruals, increased salary expense, and higher long-term performance-based incentive expense, partially offset by lower severance charges. Compensation expense in the current quarter included severance-related and restructuring charges of $3.9 million, as compared to $19.5 million in the prior-year quarter. The increase in salary expense was driven by base pay adjustments and staff growth including the acquisition of UBS Asset Management’s fund administration units in Luxembourg and Switzerland (the UBS acquisition).
Employee benefits expense totaled $88.8 million in the current quarter, up $13.2 million, or 17%, compared to $75.6 million in the prior-year quarter, primarily due to higher medical costs and retirement plan expenses. Employee benefits expense in the current quarter included a benefit of $0.2 million from severance-related charges, as compared to an expense of $2.5 million in the prior-year quarter.
Outside services expense totaled $185.6 million in the current quarter, up $18.6 million, or 11%, compared to $167.0 million in the prior-year quarter, primarily reflecting a change in presentation of third-party advisor costs resulting from the adoption of the new revenue recognition accounting standard as of January 1, 2018, higher technical services costs, increased costs associated with the UBS acquisition, and higher sub-custodian expenses, partially offset by lower sub-advisor costs and consulting services. There is a corresponding increase to trust, investment and other servicing fees as a result of the adoption of the new revenue recognition accounting standard. The current quarter included severance-related and restructuring charges of $2.9 million, as compared to $0.8 million in the prior-year quarter.

10

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

Equipment and software expense totaled $144.2 million in the current quarter, up $10.5 million, or 8%, compared to $133.7 million in the prior-year quarter, primarily reflecting increased software amortization.
Other operating expense totaled $75.3 million in the current quarter, down 8% from $82.3 million in the prior-year quarter, primarily reflecting lower charges associated with account servicing activities, partially offset by higher costs associated with the UBS acquisition.
The components of other operating expense are provided below.
Table 14: Other Operating Expense
Other Operating Expense
Three Months Ended June 30,
 
 
 
 
($ In Millions)
2018
 
2017
 
Change
Business Promotion
$
21.9

 
$
19.8

 
$
2.1

 
10
 %
Staff Related
10.3

 
12.8

 
(2.5
)
 
(19
)
FDIC Insurance Premiums
7.6

 
8.5

 
(0.9
)
 
(11
)
Other Intangibles Amortization
4.3

 
2.3

 
2.0

 
88

Other Expenses
31.2

 
38.9

 
(7.7
)
 
(20
)
Total Other Operating Expense
$
75.3

 
$
82.3

 
$
(7.0
)
 
(8
)%
Provision for Income Taxes
Income tax expense for the three months ended June 30, 2018 was $116.8 million, representing an effective tax rate of 23.0%, compared to $122.9 million in the prior-year quarter, representing an effective tax rate of 31.4%.

The decrease in the provision for income taxes was primarily attributable to the reduction in the U.S. corporate income tax rate from 35% to 21% as a result of the Tax Cuts and Jobs Act (“TCJA) enacted in the fourth quarter of 2017 as well as the tax benefit recognized in the current quarter in conjunction with sales related to a non-strategic lease portfolio. Decreases to the provision for income taxes were partially offset by an increase in income before income taxes, tax accounting changes in 2018 brought about by the TCJA including the tax accounting associated with non-U.S. branches and subsidiaries, and a reduction in the income tax benefit derived from the vesting of restricted stock units and stock option exercises compared to the prior-year quarter. The initial estimated impact of the TCJA may continue to be refined in future periods as further information becomes available.
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.

11

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, 2018 and 2017. 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 15: Results of Reporting Segments
Three Months Ended June 30,
Corporate &
Institutional Services
 
Wealth
Management
 
Treasury and
Other
 
Total
Consolidated
($ In Millions)
2018
 
2017
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
Noninterest Income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trust, Investment and Other Servicing Fees
$
552.2

 
$
487.1

 
$
390.7

 
$
361.1

 
$

 
$

 
$
942.9

 
$
848.2

Foreign Exchange Trading Income
60.1

 
50.6

 
1.0

 
0.8

 
17.8

 
(1.5
)
 
78.9

 
49.9

Other Noninterest Income
45.0

 
44.4

 
26.7

 
26.7

 
(0.7
)
 
10.5

 
71.0

 
81.6

Net Interest Income*
247.9

 
176.0

 
209.6

 
181.8

 
(34.9
)
 
(7.4
)
 
422.6

 
350.4

Revenue*
905.2

 
758.1

 
628.0

 
570.4

 
(17.8
)
 
1.6

 
1,515.4

 
1,330.1

Provision for Credit Losses
3.0

 
(2.7
)
 
(1.5
)
 
(4.3
)
 

 

 
1.5

 
(7.0
)
Noninterest Expense
599.3

 
545.6

 
369.5

 
350.9

 
28.6

 
40.9

 
997.4

 
937.4

Income before Income Taxes*
302.9

 
215.2

 
260.0

 
223.8

 
(46.4
)
 
(39.3
)
 
516.5

 
399.7

Provision for Income Taxes*
63.0

 
67.7

 
64.1

 
84.3

 
(1.0
)
 
(20.2
)
 
126.1

 
131.8

Net Income
$
239.9

 
$
147.5

 
$
195.9

 
$
139.5

 
$
(45.4
)
 
$
(19.1
)
 
$
390.4

 
$
267.9

Percentage of Consolidated Net Income
62
%
 
55
%
 
50
%
 
52
%
 
(12
)%
 
(7
)%
 
100
%
 
100
%
Average Assets
$
82,153.1

 
$
80,584.0

 
$
26,086.3

 
$
26,823.5

 
$
15,627.3

 
$
10,993.2

 
$
123,866.7

 
$
118,400.7

* Non-GAAP financial measures stated on a fully taxable equivalent basis (FTE). Total consolidated includes FTE adjustments of $9.3 million for 2018 and $8.9 million for 2017. 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.
Six Months Ended June 30,
Corporate &
Institutional Services
 
Wealth
Management
 
Treasury and
Other
 
Total
Consolidated
($ In Millions)
2018
 
2017
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
Noninterest Income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trust, Investment and Other Servicing Fees
$
1,096.5

 
$
950.0

 
$
784.1

 
$
706.4

 
$

 
$

 
$
1,880.6

 
$
1,656.4

Foreign Exchange Trading Income
122.5

 
99.7

 
2.2

 
1.7

 
32.7

 
(3.4
)
 
157.4

 
98.0

Other Noninterest Income
91.6

 
88.6

 
52.4

 
52.2

 
2.8

 
15.4

 
146.8

 
156.2

Net Interest Income*
477.3

 
342.5

 
408.4

 
358.8

 
(70.4
)
 
11.5

 
815.3

 
712.8

Revenue*
1,787.9

 
1,480.8

 
1,247.1

 
1,119.1

 
(34.9
)
 
23.5

 
3,000.1

 
2,623.4

Provision for Credit Losses
(0.9
)
 
(2.4
)
 
(0.6
)
 
(5.6
)
 

 

 
(1.5
)
 
(8.0
)
Noninterest Expense
1,184.9

 
1,056.4

 
735.2

 
697.2

 
72.6

 
78.3

 
1,992.7

 
1,831.9

Income before Income Taxes*
603.9

 
426.8

 
512.5

 
427.5

 
(107.5
)
 
(54.8
)
 
1,008.9

 
799.5

Provision for Income Taxes*
129.8

 
134.6

 
126.5

 
161.1

 
(19.4
)
 
(40.2
)
 
236.9

 
255.5

Net Income
$
474.1

 
$
292.2

 
$
386.0

 
$
266.4

 
$
(88.1
)
 
$
(14.6
)
 
$
772.0

 
$
544.0

Percentage of Consolidated Net Income
61
%
 
54
%
 
50
%
 
49
%
 
(11
)%
 
(3
)%
 
100
%
 
100
%
Average Assets
$
82,891.4

 
$
79,201.4

 
$
26,097.1

 
$
26,743.1

 
$
15,189.8

 
$
11,499.3

 
$
124,178.3

 
$
117,443.8

* Non-GAAP financial measures stated on a fully taxable equivalent basis (FTE). Total consolidated includes FTE adjustments of $18.0 million for 2018 and $17.8 million for 2017. 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.


12

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

C&IS net income totaled $239.9 million in the current quarter compared to $147.5 million in the prior-year quarter, an increase of $92.4 million, or 63%. Noninterest income was $657.3 million in the current quarter, up $75.2 million, or 13%, from $582.1 million in the prior-year quarter, reflecting higher trust, investment and other servicing fees and foreign exchange trading income.
Table 16: C&IS Trust, Investment and Other Servicing Fees
 
Three Months Ended June 30,
 
 
 
 
($ In Millions)
2018
 
2017
 
Change
Custody and Fund Administration
$
376.7

 
$
327.5

 
$
49.2

 
15
 %
Investment Management
113.1

 
99.3

 
13.8

 
14

Securities Lending
30.2

 
24.6

 
5.6

 
23

Other
32.2

 
35.7

 
(3.5
)
 
(10
)
Total C&IS Trust, Investment and Other Servicing Fees
$
552.2

 
$
487.1

 
$
65.1

 
13
 %
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 are based generally on market values of client assets under management throughout the period.
Custody and fund administration fees increased $49.2 million, or 15%, from the prior-year quarter, primarily due to revenue associated with the UBS acquisition, new business, and the favorable impact of movements in foreign exchange rates. Investment management fees increased $13.8 million, or 14%, primarily due to new business, favorable markets, and a change to gross revenue presentation for certain clients. There is a corresponding increase to third-party advisor costs in outside services as a result of the change to gross revenue presentation for these clients. Securities lending fees increased 23% primarily due to increased loan volumes. Other fees decreased 10%, primarily due to lower sub-advisor fees. The decrease associated with sub-advisor fees has an associated decrease in outside services expense.
Foreign exchange trading income totaled $60.1 million in the current quarter, an increase of $9.5 million, or 19%, from $50.6 million in the prior-year quarter. The increase was driven primarily by higher client volumes.
Other noninterest income in C&IS totaled $45.0 million in the current quarter, up 1%, from $44.4 million in the prior-year quarter, primarily due to higher security commissions and trading income, partially offset by lower treasury management fees.
Net interest income stated on an FTE basis was $247.9 million in the current quarter, up $71.9 million, or 41%, from $176.0 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 1.31% from 0.94% in the prior-year quarter, primarily due to higher short-term interest rates. Average earning assets totaled $75.6 billion, up from $74.8 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 $54.3 billion in the current quarter, up from $51.7 billion in the prior-year quarter.
The provision for credit losses was $3.0 million in the current quarter, compared with a provision credit of $2.7 million in the prior-year quarter. The current quarter provision reflected an increase in the specific reserve attributable to the commercial and institutional and commercial real estate portfolios. The prior-year quarter provision credit reflected 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 $599.3 million in the current quarter, up $53.7 million, or 10%, from $545.6 million in the prior-year quarter, primarily reflecting higher compensation expense, indirect expense allocations, outside services expense, and employee benefits expense.

13

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


The provision for income taxes was $63.0 million in the current quarter compared to $67.7 million in the prior-year quarter, primarily attributable to the reduction in the U.S. federal corporate income tax rate from 35% to 21% as a result of the TCJA, partially offset by an increase in income before income taxes.
Wealth Management
Wealth Management net income was $195.9 million in the current quarter, up $56.4 million, or 40%, from $139.5 million in the prior-year quarter. Noninterest income was $418.4 million, up $29.8 million, or 8%, from $388.6 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 $390.7 million in the current quarter, increasing $29.6 million, or 8%, from $361.1 million in the prior-year quarter. The following table provides a summary of Wealth Management trust, investment and other servicing fees.
Table 17: Wealth Management Trust, Investment and Other Servicing Fees
 
Three Months Ended June 30,
 
 
 
 
($ In Millions)
2018
 
2017
 
Change
Central
$
150.7

 
$
143.1

 
$
7.6

 
5
%
East
97.0

 
88.3

 
8.7

 
10

West
80.4

 
73.4

 
7.0

 
10

Global Family Office
62.6

 
56.3

 
6.3

 
11

Total Wealth Management Trust, Investment and Other Servicing Fees
$
390.7

 
$
361.1

 
$
29.6

 
8
%
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 markets, a change in presentation of certain fees resulting from the adoption of the new revenue recognition standard, and new business. The 11% increase in Global Family Office fees was primarily attributable to new business and favorable markets.
Other noninterest income was $26.7 million in both the current and prior-year quarters, primarily reflecting an increase in other operating income, offset by a decrease in securities commissions and trading income.
Net interest income stated on an FTE basis was $209.6 million in the current quarter, up $27.8 million, or 15%, from $181.8 million in the prior-year quarter, primarily reflecting an increase in the net interest margin, partially offset by lower levels of earning assets. The net interest margin increased to 3.26% from 2.75% in the prior-year quarter, reflecting higher yields on earning assets. Average earning assets decreased $792.3 million to $25.8 billion from the prior-year quarter’s $26.6 billion. Earning assets and funding sources were primarily comprised of loans and domestic interest-bearing deposits, respectively.
The provision for credit losses was a provision credit of $1.5 million in the current quarter, compared with a provision credit of $4.3 million in the prior-year quarter. The current quarter provision reflected a reduction in the specific reserve attributable to the residential real estate portfolio. The prior-year quarter provision reflected a reduction in the inherent allowance requirement due to 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 $369.5 million in the current quarter, compared to $350.9 million in the prior-year quarter, an increase of $18.6 million, or 5%, primarily reflecting higher indirect expense allocations and compensation expense.
The provision for income taxes was $64.1 million in the current quarter compared to $84.3 million in the prior-year quarter, primarily attributable to the reduction in the U.S. federal corporate income tax rate from 35% to 21% as a result of the TCJA, partially offset by an increase in income before income taxes.
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.

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

Treasury and Other noninterest income increased $8.1 million, from $9.0 million in the prior-year quarter to $17.1 million in the current quarter, primarily due to higher foreign exchange trading income due to increased foreign exchange swap activity in Treasury, partially offset by lower other noninterest income.
Net interest income decreased $27.5 million from net interest expense of $7.4 million in the prior-year quarter to net interest expense of $34.9 million in the current quarter. The reduction in net interest income in Treasury and Other was driven by higher net funds transfer pricing credits in the C&IS and Wealth Management segments, partially offset by higher yields on earning assets. Average earning assets increased $4.4 billion to $13.0 billion from $8.6 billion in the prior-year quarter.
Noninterest expense totaled $28.6 million in the current quarter, down $12.3 million, or 30%, from $40.9 million in the prior-year quarter, primarily reflecting higher indirect expense allocations to C&IS and Wealth Management as compared to the prior-year quarter, lower compensation expense, and lower other operating expense, partially offset by higher outside services expense, equipment and software expense, and employee benefit expense.
The provision for income taxes was a benefit of $1.0 million in the current quarter compared to a $20.2 million benefit in the prior-year quarter, impacted by the reduction in the U.S. federal corporate income tax rate from 35% to 21% as a result of the TCJA, a reduction in the income tax benefit derived from the vesting of restricted stock units and stock option exercises compared to the prior-year quarter, and a decrease in income before income taxes.
SIX-MONTH CONSOLIDATED RESULTS OF OPERATIONS
Overview
Net income per diluted common share was $3.26 for the six months ended June 30, 2018, and $2.21 in the comparable prior-year period. Net income totaled $772.0 million, up $228.0 million, or 42%, compared to $544.0 million in the prior-year period. The performance in the current period produced an annualized return on average common equity of 16.3%, compared to 11.6% in the prior-year period. The annualized return on average assets was 1.25% in the current period compared to 0.93% in the prior-year period.
Revenue for the six months ended June 30, 2018 totaled $2.98 billion, up $376.5 million, or 14%, as compared to $2.61 billion in the prior-year period.
Noninterest income was $2.18 billion, up $274.1 million, or 14%, from $1.91 billion in the prior-year period, primarily driven by increased trust, investment, and other servicing fees, foreign exchange trading income, and security commissions and trading income, partially offset by lower other operating income.

Net interest income totaled $797.3 million, up $102.3 million, or 15%, as compared to $695.0 million in the prior-year period, due to a higher net interest margin and an increase in earning assets.

The provision for credit losses was a provision credit of $1.5 million in the current period, as compared to a provision credit of $8.0 million in the prior-year period.

Noninterest expense totaled $1.99 billion in the current period, up $160.8 million, or 9%, from $1.83 billion in the prior-year period, primarily attributable to higher compensation, outside services, employee benefits, equipment and software and occupancy expense.

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

The components of noninterest income are provided below.
Table 18: Six Months Ended June 30 Noninterest Income
Noninterest Income
Six Months Ended June 30,
 
 
 
 
($ In Millions)
2018
 
2017
 
Change
Trust, Investment and Other Servicing Fees
$
1,880.6

 
$
1,656.4

 
$
224.2

 
14
 %
Foreign Exchange Trading Income
157.4

 
98.0

 
59.4

 
61

Treasury Management Fees
27.5

 
29.6

 
(2.1
)
 
(7
)
Security Commissions and Trading Income
53.3

 
44.6

 
8.7

 
20

Other Operating Income
66.2

 
82.7

 
(16.5
)
 
(20
)
Investment Security Losses, net
(0.2
)
 
(0.7
)
 
0.5

 
N/M

Total Noninterest Income
$
2,184.8

 
$
1,910.6

 
$
274.2

 
14
 %
As illustrated in the following table, trust, investment and other servicing fees from C&IS increased $146.5 million, or 15%, totaling $1.10 billion, compared to $950.0 million a year ago.
Table 19: 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)
2018
 
2017
 
Change
Custody and Fund Administration
$
750.6

 
$
635.0

 
$
115.6

 
18
 %
Investment Management
222.8

 
192.8

 
30.0

 
16

Securities Lending
56.2

 
48.4

 
7.8

 
16

Other
66.9

 
73.8

 
(6.9
)
 
(9
)
Total
$
1,096.5

 
$
950.0

 
$
146.5

 
15
 %
Custody and fund administration fees, the largest component of C&IS fees, increased 18%, primarily driven by revenue associated with the UBS acquisition, new business, the favorable impact of movements in foreign exchange rates, and favorable markets. C&IS investment management fees increased 16%, primarily due to the favorable impact of markets, new business, and a change to gross revenue presentation for certain clients. There is a corresponding increase to third-party advisor costs in outside services as a result of the change to gross revenue presentation for certain clients. Securities lending fees increased 16%, primarily driven by increased loan volumes, partially offset by lower spreads. Other fees in C&IS decreased 9%, primarily due to lower sub-advisor fees, partially offset by new business. The decrease associated with sub-advisor fees has an associated decrease in outside services expense.
As illustrated in the following table, trust, investment and other servicing fees from Wealth Management totaled $784.1 million, up $77.7 million, or 11%, from $706.4 million a year ago.
Table 20: Six Months Ended June 30 Wealth Management Trust, Investment and Other Servicing Fees
 
Six Months Ended June 30,
 
 
 
 
($ In Millions)
2018
 
2017
 
Change
Wealth Management Trust, Investment and Other Servicing Fees
 
 
 
 
 
 
 
Central
$
304.6

 
$
280.5

 
$
24.1

 
9
%
East
195.9

 
173.5

 
22.4

 
13

West
159.0

 
143.0

 
16.0

 
11

Global Family Office
124.6

 
109.4

 
15.2

 
14

Total
$
784.1

 
$
706.4

 
$
77.7