Edgar Filing: NORTHERN TRUST CORP

10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_____________________________

FORM 10-Q



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

For the Quarterly Period Ended March 31, 2016



¨	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, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “small reporting company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer	x	Accelerated filer	¨

Non-accelerated filer	¨ (Do not check if a smaller reporting company)	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

228,163,712 Shares – $1.66 2/3 Par Value

(Shares of Common Stock Outstanding on March 31, 2016)

Table of Contents

NORTHERN TRUST CORPORATION

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2016

TABLE OF CONTENTS




	Page
Consolidated Financial Highlights (unaudited)	1

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	3
Item 1: Consolidated Financial Statements (unaudited)	22
Consolidated Balance Sheets	22
Consolidated Statements of Income	23
Consolidated Statements of Comprehensive Income	23
Consolidated Statements of Changes in Stockholders’ Equity	24
Consolidated Statements of Cash Flows	25
Notes to Consolidated Financial Statements	26
Item 4: Controls and Procedures	68

Part II – Other Information
Item 1: Legal Proceedings	68
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds	68
Item 6: Exhibits	68

Signatures	69

Table of Contents

CONSOLIDATED FINANCIAL HIGHLIGHTS

(UNAUDITED)



	Three Months Ended March 31,
CONDENSED INCOME STATEMENTS (In Millions)	2016		2015			% Change ⁽¹⁾
Noninterest Income	$	882.2	$	873.9		1	%
Net Interest Income	307.8		260.6			18
Provision for Credit Losses	2.0		(4.5		)	N/M
Noninterest Expense	828.8		789.0			5
Income before Income Taxes	359.2		350.0			3
Provision for Income Taxes	117.4		119.3			(2	)
Net Income	$	241.8	$	230.7		5	%



PER COMMON SHARE
Net Income — Basic	$	1.01	$	0.95	6	%
— Diluted	1.01		0.94		7
Cash Dividends Declared Per Common Share	0.36		0.33		9
Book Value — End of Period (EOP)	37.01		35.22		5
Market Price — EOP	65.17		69.65		(6	)



SELECTED BALANCE SHEET DATA (In Millions)
	March 31, 2016		December 31, 2015		% Change ⁽¹⁾
End of Period:
Assets	$	117,798.8	$	116,749.6	1	%
Earning Assets	107,589.2		106,848.9		1
Deposits	97,659.6		96,868.9		1
Stockholders’ Equity	8,832.8		8,705.9		1



	Three Months Ended March 31,
	2016		2015		% Change ⁽¹⁾
Average Balances:
Assets	$	113,417.1	$	107,513.2	5	%
Earning Assets	104,625.6		98,693.1		6
Deposits	92,476.3		86,526.1		7
Stockholders’ Equity	8,691.2		8,472.7		3



CLIENT ASSETS (In Billions)	March 31, 2016		December 31, 2015		% Change ⁽¹⁾
Assets Under Custody/Administration ⁽²⁾	$	7,926.4	$	7,797.0	2	%
Assets Under Custody	6,211.4		$	6,072.1	2
Assets Under Management	900.0		875.3		3


⁽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.

Table of Contents

SELECTED RATIOS AND METRICS



	Three Months Ended March 31,
	2016		2015		% Change ⁽¹⁾
Financial Ratios:
Return on Average Common Equity	11.43	%	11.28	%	1	%
Return on Average Assets	0.86		0.87		(1	)
Dividend Payout Ratio	35.7		35.1		2
Net Interest Margin ⁽²⁾	1.21		1.10		10



	March 31, 2016				December 31, 2015
	Advanced Approach		Standardized Approach		Advanced Approach		Standardized Approach
Capital Ratios:
Northern Trust Corporation
Common Equity Tier 1	11.6	%	10.6	%	11.9	%	10.8	%
Tier 1	12.1		11.1		12.5		11.4
Total	13.6		12.8		14.2		13.2
Tier 1 Leverage	7.4		7.4		7.5		7.5
Supplementary Leverage ⁽³⁾	6.1		N/A		6.2		N/A

The Northern Trust Company
Common Equity Tier 1	11.5	%	10.4	%	11.6	%	10.4	%
Tier 1	11.5		10.4		11.6		10.4
Total	13.2		12.2		13.1		12.0
Tier 1 Leverage	6.9		6.9		6.7		6.7
Supplementary Leverage ⁽³⁾	6.0		N/A		5.6		N/A


⁽¹⁾	Percentage calculations are based on actual balances rather than the rounded amounts presented in the Consolidated Financial Highlights.


⁽²⁾	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 19.


⁽³⁾	Effective January 1, 2018, Northern Trust will be subject to a minimum supplementary leverage ratio of 3 percent.

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

FIRST 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 $1.01 in the current quarter, up from $0.94 in the first quarter of 2015. Net income was $241.8 million in the current quarter as compared to $230.7 million in the prior-year quarter. Annualized return on average common equity in the current quarter was 11.4%, up from 11.3% in the prior-year quarter. The annualized return on average assets was 0.9% in both the current and prior-year quarters.

Revenue of $1.19 billion was up $55.5 million, or 5%, from $1.13 billion in the prior-year quarter, primarily reflecting higher net interest income and trust, investment and other servicing fees, partially offset by lower foreign exchange trading income. Noninterest income increased $8.3 million, or 1%, to $882.2 million from $873.9 million in the prior-year quarter.

Net interest income increased 18% to $307.8 million in the current quarter as compared to $260.6 million in the prior-year quarter, due to growth in earning assets and a higher net interest margin.

The provision for credit losses was $2.0 million in the current quarter, as compared to a provision credit of $4.5 million in the prior-year quarter.

Noninterest expense totaled $828.8 million, up $39.8 million, or 5%, from $789.0 million in the prior-year quarter, attributable to higher compensation and outside services expenses.

Table of Contents

FIRST 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 March 31,
($ In Millions)	2016		2015		Change
Trust, Investment and Other Servicing Fees	$	748.2	$	727.5	$	20.7		3	%
Foreign Exchange Trading Income	60.5		71.6		(11.1		)	(15	)
Treasury Management Fees	16.2		16.3		(0.1		)	(1	)
Security Commissions and Trading Income	18.9		19.8		(0.9		)	(4	)
Other Operating Income	38.1		38.6		(0.5		)	(1	)
Investment Security Gains, net	0.3		0.1		0.2			134
Total Noninterest Income	$	882.2	$	873.9	$	8.3		1	%

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. At March 31, 2016, AUC/A were $7.93 trillion, up $129.4 billion, or 2%, from $7.80 trillion at December 31, 2015.

The following table presents Northern Trust’s assets under custody, a component of AUC/A, by reporting segment.

Table 2: Assets Under Custody



Assets Under Custody	March 31, 2016		December 31, 2015		March 31, 2015		Change Q1-16/Q4-15		Change Q1-16/Q1-15
($ In Billions)	March 31, 2016		December 31, 2015		March 31, 2015		Change Q1-16/Q4-15		Change Q1-16/Q1-15
Corporate & Institutional	$	5,700.3	$	5,565.8	$	5,566.2	2	%	2	%
Wealth Management	511.1		506.3		524.6		1		(3	)
Total Assets Under Custody	$	6,211.4	$	6,072.1	$	6,090.8	2	%	2	%

The following table presents the allocation of Northern Trust’s custodied assets by reporting segment.

Table 3: Allocations of Assets Under Custody



	March 31, 2016						December 31, 2015						March 31, 2015
Assets Under Custody	C&IS		WM		Total		C&IS		WM		Total		C&IS		WM		Total
Equities	43	%	54	%	43	%	44	%	54	%	44	%	45	%	55	%	46	%
Fixed Income	39		23		38		38		24		37		37		23		35
Cash and Other Assets	18		23		19		18		22		19		18		22		19

The $120.6 billion increase in consolidated assets under custody from $6.09 trillion at March 31, 2015, to $6.21 trillion as of March 31, 2016, primarily reflected new business, partially offset by the unfavorable impact of equity markets and lower securities lending collateral.

Table of Contents

FIRST QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)

Noninterest Income (continued)

The following table presents Northern Trust’s assets under management by reporting segment.

Table 4: Assets Under Management



Assets Under Management	March 31, 2016		December 31, 2015		March 31, 2015		Change Q1-16/Q4-15		Change Q1-16/Q1-15
($ In Billions)	March 31, 2016		December 31, 2015		March 31, 2015		Change Q1-16/Q4-15		Change Q1-16/Q1-15
Corporate & Institutional	$	669.9	$	648.0	$	727.0	3	%	(8	)%
Wealth Management	230.1		227.3		233.1		1		(1	)
Total Assets Under Management	$	900.0	$	875.3	$	960.1	3	%	(6	)%

The following table presents Northern Trust’s assets under management by investment type.

Table 5: Assets Under Management by Investment Type



($ In Billions)	March 31, 2016		December 31, 2015		March 31, 2015
Equities	$	453.5	$	446.6	$	495.8
Fixed Income	148.5		147.1		168.0
Cash and Other Assets	192.0		177.7		173.1
Securities Lending Collateral	106.0		103.9		123.2
Total Assets Under Management	$	900.0	$	875.3	$	960.1

The following table presents the allocation of Northern Trust’s assets under management by reporting segment.

Table 6: Allocations of Assets Under Management



	March 31, 2016						December 31, 2015						March 31, 2015
Assets Under Management	C&IS		WM		Total		C&IS		WM		Total		C&IS		WM		Total
Equities	52	%	46	%	50	%	53	%	46	%	51	%	53	%	46	%	52	%
Fixed Income	12		29		17		13		28		17		14		28		17
Securities Lending Collateral	16		—		12		16		—		12		17		—		13
Cash and Other Assets	20		25		21		18		26		20		16		26		18

The 6% decrease in consolidated assets under management from $960.1 billion at March 31, 2015, to $900.0 billion as of March 31, 2016, primarily reflected lower equity assets due to outflows from certain sovereign wealth fund clients and unfavorable global equity markets, as well as lower fixed income assets due to the loss of one passive mandate from a non-U.S. institutional client.

Changes in assets under custody and under management are in comparison to the twelve-month decrease in the S&P 500 index of 0.4% and in the MSCI EAFE index (USD) of 10.7%.

Table of Contents

FIRST QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)

Noninterest Income (continued)

The following table presents activity in consolidated assets under management by investment type during the three months ended March 31, 2016.

Table 7: Activity in Consolidated Assets Under Management by Investment Type



($ In Billions)
Balance as of December 31, 2015		$	875.3
Inflows by Investment Type
	Equity	29.4
	Fixed Income	11.4
	Cash & Other Assets	94.6
	Securities Lending Collateral	20.4

Total Inflows		155.8

Outflows by Investment Type
	Equity	(28.1		)
	Fixed Income	(10.2		)
	Cash & Other Assets	(80.3		)
	Securities Lending Collateral	(18.2		)

Total Outflows		(136.8		)

Net Inflows		19.0

Market Performance, Currency & Other		5.7

Balance as of March 31, 2016		$	900.0

Foreign exchange trading income totaled $60.5 million in the current quarter, down $11.1 million, or 15%, compared to $71.6 million in the prior-year quarter. The decrease generally reflected lower client volumes as compared to the prior-year quarter.

Security commissions and trading income totaled $18.9 million, down 4% compared with $19.8 million in the prior-year quarter. The decrease was primarily attributable to lower income from transition management, interest rate protection products and core brokerage revenue, partially offset by increased referral fees.

Other operating income totaled $38.1 million, down 1% compared to $38.6 million in the prior-year quarter, reflecting a decrease in loan service fees, partially offset by an increase in bank service fees and other income. Included in current quarter other income is a $2.3 million net gain in the current quarter related to the decision to exit a portion of a non-strategic loan and lease portfolio. The components of other operating income are provided below.

Table 8: Other Operating Income



Other Operating Income	Three Months Ended March 31,
($ In Millions)	2016		2015		Change
Loan Service Fees	$	13.4	$	14.9	$	(1.5	)	(11	)%
Banking Service Fees	12.4		11.9		0.5			5
Other Income	12.3		11.8		0.5			5
Total Other Operating Income	$	38.1	$	38.6	$	(0.5	)	(1	)%

Table of Contents

FIRST 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 9: Average Consolidated Balance Sheets with Analysis of Net Interest Income



	NORTHERN TRUST CORPORATION
(Interest and Rate on a Fully Taxable Equivalent Basis)	First Quarter
(Interest and Rate on a Fully Taxable Equivalent Basis)	2016							2015
($ In Millions)	Interest		Average Balance			Rate (4)		Interest		Average Balance			Rate (4)
Average Earning Assets
Federal Funds Sold and Securities Purchased under
Agreements to Resell	$	3.2	$	1,593.7		0.82	%	$	1.2	$	1,033.7		0.45	%
Interest-Bearing Due from and Deposits with Banks (1)	23.7		14,545.0			0.66		26.6		15,263.1			0.71
Federal Reserve Deposits	19.8		15,690.2			0.51		9.2		14,504.0			0.26
Securities
U.S. Government	19.3		6,500.5			1.19		12.7		4,580.0			1.13
Obligations of States and Political Subdivisions	1.8		189.1			3.77		2.1		121.6			6.75
Government Sponsored Agency	48.8		16,764.2			1.17		37.4		16,511.9			0.92
Other (2)	38.9		15,349.5			1.02		30.4		14,579.0			0.85
Total Securities	108.8		38,803.3			1.13		82.6		35,792.5			0.94
Loans and Leases (3)	202.7		33,993.4			2.40		185.4		32,099.8			2.34
Total Earning Assets	358.2		104,625.6			1.38		305.0		98,693.1			1.25
Allowance for Credit Losses Assigned to Loans and Leases	—		(193.5		)	—		—		(265.9		)	—
Cash and Due from Banks	—		2,184.2			—		—		1,573.4			—
Buildings and Equipment	—		445.9			—		—		446.9			—
Client Security Settlement Receivables	—		1,190.5			—		—		959.7			—
Goodwill	—		523.1			—		—		529.7			—
Other Assets	—		4,641.3			—		—		5,576.3			—
Total Assets	$	—	$	113,417.1		—	%	$	—	$	107,513.2		—	%
Average Source of Funds
Deposits
Savings and Money Market	$	2.9	$	15,367.3		0.07	%	$	2.4	$	15,361.0		0.06	%
Savings Certificates and Other Time	2.0		1,459.6			0.54		1.2		1,741.7			0.28
Non-U.S. Offices — Interest-Bearing	17.3		49,434.9			0.14		13.1		47,399.8			0.11
Total Interest-Bearing Deposits	22.2		66,261.8			0.13		16.7		64,502.5			0.10
Short-Term Borrowings	3.4		5,584.1			0.25		1.5		5,187.4			0.12
Senior Notes	11.7		1,497.4			3.15		11.6		1,497.0			3.17
Long-Term Debt	6.1		1,399.3			1.75		7.8		1,571.9			2.02
Floating Rate Capital Debt	0.8		277.3			1.15		0.6		277.2			0.82
Total Interest-Related Funds	44.2		75,019.9			0.24		38.2		73,036.0			0.21
Interest Rate Spread	—		—			1.14		—		—			1.04
Demand and Other Noninterest-Bearing Deposits	—		26,214.5			—		—		22,023.6			—
Other Liabilities	—		3,491.5			—		—		3,980.9			—
Stockholders’ Equity	—		8,691.2			—		—		8,472.7			—
Total Liabilities and Stockholders’ Equity	$	—	$	113,417.1		—	%	$	—	$	107,513.2		—	%
Net Interest Income/Margin (FTE Adjusted)	$	314.0	$	—		1.21	%	$	266.8	$	—		1.10	%
Net Interest Income/Margin (Unadjusted)	$	307.8	$	—		1.18	%	$	260.6	$	—		1.07	%

Table of Contents

FIRST QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)

Net Interest Income (continued)

ANALYSIS OF NET INTEREST INCOME CHANGES

DUE TO VOLUME AND RATE



	Three Months Ended March 31, 2016/2015
	Change Due To
(In Millions)	Average Balance		Rate		Total
Earning Assets (FTE)	$	19.5	$	33.7	$	53.2
Interest-Related Funds	0.9		5.1		6.0
Net Interest Income (FTE)	$	18.6	$	28.6	$	47.2


(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 March 31, 2016 and 2015.


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


(4)	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) includes adjustments to a fully taxable equivalent basis for loans and securities. Such adjustments are based on a blended federal and state tax rate of 37.7% and 37.4% for the three months ended March 31, 2016 and 2015, respectively. Total taxable equivalent interest adjustments amounted to $6.2 million for the three months ended March 31, 2016 and 2015.

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 $314.0 million, up $47.2 million, or 18%, compared to $266.8 million in the prior-year quarter. The increase was primarily the result of growth in average earning assets and a higher net interest margin. Average earning assets for the current quarter averaged $104.6 billion, up $5.9 billion, or 6%, from $98.7 billion in the prior-year quarter, primarily resulting from higher levels of securities and loans.

The net interest margin on an FTE basis increased to 1.21% in the current quarter from 1.10% in the prior-year quarter, primarily reflecting higher yields on earning assets.

When adjusted to an FTE basis, yields on taxable, nontaxable, and partially taxable assets are comparable; however, the adjustment to an FTE basis has no impact on net income. A reconciliation of net interest income on a GAAP basis to net interest income on an FTE basis (a non-GAAP financial measure) is provided on page 19.

Federal Reserve deposits averaged $15.7 billion, up $1.2 billion, or 8%, from $14.5 billion in the prior-year quarter. Average securities were $38.8 billion, up $3.0 billion, or 8%, from $35.8 billion in the prior-year quarter and include Federal Home Loan Bank, certain community development investments and Federal Reserve stock of $200.0 million, $168.4 million and $53.1 million, respectively, which are recorded in other assets in the consolidated balance sheets.

Loans and leases averaged $34.0 billion, up $1.9 billion, or 6%, from $32.1 billion in the prior-year quarter, primarily reflecting higher levels of private client loans, commercial and institutional loans, and commercial real estate loans, partially offset by reductions in residential real estate loans. Private client loans averaged $9.1 billion, up $1.6 billion, or 22%, from $7.5 billion for the prior-year quarter. Commercial and institutional loans averaged $9.9 billion, up $1.1 billion, or 13%, from $8.8 billion for the prior-year quarter. Commercial real estate loans averaged $3.9 billion, up $470.8 million, or 14%, from $3.4 billion for the prior-year quarter. Residential real estate loans averaged $8.8 billion, down $887.4 million, or 9.2%, from $9.6 billion for the prior-year quarter.

Northern Trust utilizes a diverse mix of funding sources. Total interest-bearing deposits averaged $66.3 billion, compared to $64.5 billion in the prior-year quarter, an increase of $1.8 billion, or 3%. Other interest-bearing funds averaged $8.8 billion, an increase of $224.7 million, from $8.5 billion in the prior-year quarter, attributable to increased short-term borrowings and long-term debt. The balances within short-term borrowing classifications vary based on funding requirements and strategies, interest rate levels, changes in the volume of lower-cost deposit sources, and the availability of collateral to secure these borrowings. Average net

Table of Contents

FIRST QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)

Net Interest Income (continued)

noninterest-related funds utilized to fund earning assets increased $3.9 billion, or 15%, to $29.6 billion from $25.7 billion in the prior-year quarter, primarily resulting from higher levels of demand and other noninterest-bearing deposits.

Provision for Credit Losses

The provision for credit losses was $2.0 million in the current quarter, as compared to a credit provision of $4.5 million in the prior-year quarter. Net charge-offs in the current quarter were $2.7 million, resulting from charge-offs of $5.3 million and recoveries of $2.6 million. The prior-year quarter included $4.6 million of net charge-offs, resulting from $7.5 million of charge-offs and $2.9 million of recoveries. Nonperforming assets of $174.4 million decreased 24% from the prior-year quarter. Residential real estate loans and commercial loans accounted for 66% and 25%, respectively, of total nonperforming loans and leases at March 31, 2016. For additional discussion of the provision and allowance for credit losses, refer to the “Asset Quality” section beginning on page 15.

Noninterest Expense

The components of noninterest expense are provided below.

Table 10: Noninterest Expense



Noninterest Expense	Three Months Ended March 31,
($ In Millions)	2016		2015		Change
Compensation	$	378.8	$	354.3	$	24.5		7	%
Employee Benefits	70.6		72.9		(2.3		)	(3	)
Outside Services	149.9		135.1		14.8			11
Equipment and Software	114.2		110.3		3.9			3
Occupancy	40.9		43.0		(2.1		)	(5	)
Other Operating Expense	74.4		73.4		1.0			1
Total Noninterest Expense	$	828.8	$	789.0	$	39.8		5	%

Compensation expense, the largest component of noninterest expense, totaled $378.8 million in the current quarter, up $24.5 million, or 7%, from $354.3 million in the prior-year quarter. The increase primarily reflects higher staff levels, base pay adjustments, and performance-based compensation. Staff on a full-time equivalent basis at March 31, 2016, totaled approximately 16,300, up 5% from March 31, 2015.

Employee benefit expense totaled $70.6 million in the current quarter, down slightly, from $72.9 million in the prior-year quarter, reflecting lower pension expense.

Expense associated with outside services totaled $149.9 million in the current quarter, up $14.8 million, or 11%, from $135.1 million in the prior-year quarter, primarily reflecting increased technical services expense and higher consulting expense due to regulatory related spend.

Equipment and software expense totaled $114.2 million in the current quarter, up 3% from $110.3 million in the prior-year quarter, primarily reflecting increased software amortization.

Occupancy expense totaled $40.9 million, down $2.1 million, or 5%, from $43.0 million in the prior-year quarter, reflecting lower rent expense.

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FIRST QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)

Noninterest Expense (continued)

Other operating expense totaled $74.4 million in the current quarter, up 1% from $73.4 million in the prior-year quarter. The components of other operating expense are provided below.

Table 11: Other Operating Expense



Other Operating Expense	Three Months Ended March 31,
($ In Millions)	2016		2015		Change
Business Promotion	$	29.6	$	28.3	$	1.3		4	%
Staff Related	5.9		9.8		(3.9		)	(40	)
FDIC Insurance Premiums	6.3		5.8		0.5			9
Other Intangibles Amortization	2.1		4.6		(2.5		)	(54	)
Other Expenses	30.5		24.9		5.6			23
Total Other Operating Expense	$	74.4	$	73.4	$	1.0		1	%

The reduction in staff related expenses was driven by lower employee relocation costs. The reduction in other intangibles amortization expense was due to a reduction in the amount of intangible assets subject to amortization. The increase in other expenses reflected increases in various categories.

Provision for Income Taxes

Income tax expense was $117.4 million in the current quarter, representing an effective tax rate of 32.7%, compared to $119.3 million in the prior-year quarter, representing an effective tax rate of 34.1%.

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.

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REPORTING SEGMENTS (continued)

The following tables reflect the earnings contributions and average assets of Northern Trust’s reporting segments for the three-month periods ended March 31, 2016 and 2015. 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 12: Results of Reporting Segments



Three Months Ended March 31,	Corporate & Institutional Services						Wealth Management						Treasury and Other						Total Consolidated
($ In Millions)	2016			2015			2016			2015			2016			2015			2016			2015
Noninterest Income
Trust, Investment and Other Servicing Fees	$	433.4		$	407.3		$	314.8		$	320.2		$	—		$	—		$	748.2		$	727.5
Foreign Exchange Trading Income	51.7			67.5			4.5			4.1			4.3			—			60.5			71.6
Other Noninterest Income	45.6			41.9			26.8			28.8			1.1			4.1			73.5			74.8
Net Interest Income*	138.4			96.0			158.5			138.3			17.1			32.5			314.0			266.8
Revenue*	669.1			612.7			504.6			491.4			22.5			36.6			1,196.2			1,140.7
Provision for Credit Losses	(3.2		)	(2.2		)	5.2			(2.3		)	—			—			2.0			(4.5		)
Noninterest Expense	475.3			434.9			326.9			321.9			26.6			32.2			828.8			789.0
Income before Income Taxes*	197.0			180.0			172.5			171.8			(4.1		)	4.4			365.4			356.2
Provision for Income Taxes*	62.2			57.3			64.9			64.6			(3.5		)	3.6			123.6			125.5
Net Income	$	134.8		$	122.7		$	107.6		$	107.2		$	(0.6	)	$	0.8		$	241.8		$	230.7
Percentage of Consolidated Net Income	56		%	53		%	44		%	47		%	—		%	—		%	100		%	100		%
Average Assets	$	75,372.9		$	69,224.5		$	26,237.8		$	24,233.7		$	11,806.4		$	14,055.0		$	113,417.1		$	107,513.2

* Stated on a fully taxable equivalent basis (FTE). Total consolidated includes FTE adjustments of $6.2 million for 2016 and 2015.

Corporate & Institutional Services

C&IS net income totaled $134.8 million in the current quarter compared to $122.7 million in the prior-year quarter, an increase of $12.1 million, or 10%. Noninterest income was $530.7 million in the current quarter, up $14.0 million, or 3%, from $516.7 million in the prior-year quarter, reflecting higher net interest income and 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 13: C&IS Trust, Investment and Other Servicing Fees



	Three Months Ended March 31,
($ In Millions)	2016		2015		Change
Custody and Fund Administration	$	286.4	$	277.1	$	9.3	3	%
Investment Management	89.1		76.4		12.7		17
Securities Lending	22.6		21.6		1.0		5
Other	35.3		32.2		3.1		10
Total C&IS Trust, Investment and Other Servicing Fees	$	433.4	$	407.3	$	26.1	6	%

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 $9.3 million, or 3%, driven by new business, partially offset by the unfavorable impact of equity markets and movements in foreign exchange rates. Investment management fees increased $12.7 million, or 17%, primarily due to lower money market mutual fund fee waivers. Money market mutual fund fee waivers in C&IS totaled $1.7

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REPORTING SEGMENTS (continued)

Corporate & Institutional Services (continued)

million in the current quarter compared to $15.2 million in the prior-year quarter. Securities lending increased 5% due to higher spreads, partially offset by lower volumes. Other fees increased 10%, primarily due to new business related to investment risk and analytical services and increased other ancillary services.

Foreign exchange trading income totaled $51.7 million in the current quarter, a decrease of $15.8 million, or 23%, from $67.5 million in the prior-year quarter. The decrease generally reflected lower client volumes as compared to the prior-year quarter.

Other noninterest income in C&IS totaled $45.6 million in the current quarter, up 9%, from $41.9 million in the prior-year quarter, primarily due to increases within various other income categories.

For the current quarter and the prior-year quarter, the presentation of average assets was changed to reflect a modification to the methodology by which assets are allocated among our reporting segments. For C&IS, this change in presentation resulted in an increase to average assets and a reduction in the net interest margin.

Net interest income stated on an FTE basis was $138.4 million in the current quarter, up $42.4 million, or 44%, from $96.0 million in the prior-year quarter. The increase in net interest income was attributable to an increase in the net interest margin and higher levels of average earning assets. The net interest margin increased to 0.81% from 0.63% in the prior-year quarter while average earning assets totaled $68.4 billion, an increase of $6.3 billion, or 10%, from $62.1 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 $43.1 billion in the current quarter, up slightly from $42.6 billion in the prior-year quarter.

The provision for credit losses was a credit of $3.2 million in the current quarter, compared with a credit provision of $2.2 million in the prior-year quarter, reflecting 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 $475.3 million in the current quarter, up $40.4 million, or 9%, from $434.9 million in the prior-year quarter. The increase was primarily attributable to higher indirect expense allocations and compensation expense in the current quarter.

Wealth Management

Wealth Management net income was $107.6 million in the current quarter, up slightly from $107.2 million in the prior-year quarter. Noninterest income was $346.1 million, down $7 million, or 2%, from $353.1 million in the prior-year quarter, primarily reflecting lower trust, investment and other servicing fees and security commissions and trading income. Trust, investment and other servicing fees in Wealth Management totaled $314.8 million in the current quarter, decreasing $5.4 million, or 2%, from $320.2 million in the prior-year quarter. The following table provides a summary of Wealth Management trust, investment and other servicing fees.

Table 14: Wealth Management Trust, Investment and Other Servicing Fees



	Three Months Ended March 31,
($ In Millions)	2016		2015		Change
Central	$	124.4	$	130.8	$	(6.4	)	(5	)%
East	81.0		82.4		(1.4		)	(2	)
West	63.9		66.8		(2.9		)	(4	)
Global Family Office	45.5		40.2		5.3			13
Total Wealth Management Trust, Investment and Other Servicing Fees	$	314.8	$	320.2	$	(5.4	)	(2	)%

Wealth Management fee income is calculated primarily based on market values. The decrease in Wealth Management fees across the regions was primarily attributable to the impact of unfavorable equity markets and lower fee revenue from equity mutual funds, partially offset by lower money market mutual fund fee waivers. The increase in Global Family Office fees was primarily attributable to new business and lower money market mutual fund fee waivers. Money market mutual fund fee waivers in Wealth Management totaled $6.0 million in the current quarter compared to $17.7 million in the prior-year quarter.

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REPORTING SEGMENTS (continued)

Wealth Management (continued)

Other noninterest income totaled $26.8 million in the current quarter, down $2.0 million, or 7%, from $28.8 million in the prior-year quarter, primarily reflecting lower security commissions and trading income.

For the current quarter and the prior-year quarter, the presentation of average assets was changed to reflect a modification to the methodology by which assets are allocated among our reporting segments. This change in presentation did not have a material impact on the Wealth Management reporting segment.

Net interest income stated on an FTE basis was $158.5 million in the current quarter, up $20.2 million, or 15%, from $138.3 million in the prior-year quarter, primarily reflecting an increase in the net interest margin and higher levels of average earning assets. The net interest margin totaled 2.45% in the current quarter, up from 2.34% in the prior-year quarter. Average earning assets increased $2.0 billion, or 8%, to $26.0 billion from the prior-year quarter’s $24.0 billion. Earning assets and funding sources were primarily comprised of loans and domestic retail interest-bearing deposits, respectively.

The provision for credit losses was $5.2 million in the current quarter, compared with a credit provision of $2.3 million in the prior-year quarter, reflecting loan growth.

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 $326.9 million in the current quarter, compared to $321.9 million in the prior-year quarter, an increase of $5.0 million, or 2%. The increase was primarily attributable to higher indirect expense allocations and compensation expense in the current quarter, partially offset by lower outside services and employee benefits expense.

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 totaled $5.4 million in the current quarter, up 32% from $4.1 million in the prior-year quarter, reflecting an increase in foreign exchange trading income, partially offset by decreases within various other income categories

For the current quarter and the prior-year quarter, the presentation of average assets was changed to reflect a modification to the methodology by which assets are allocated among our reporting segments. For Treasury and Other, this change in presentation resulted in a decrease to average assets and an increase in the net interest margin.

Net interest income decreased $15.4 million, or 47%, to $17.1 million in the current quarter, compared to $32.5 million in the prior-year quarter. The decrease reflected a decline in the net interest margin and lower levels of earning assets. Average earning assets decreased $2.3 billion to $10.2 billion from the prior-year quarter’s $12.5 billion.

Noninterest expense totaled $26.6 million in the current quarter, down 17%, from $32.2 million in the prior-year quarter, primarily reflecting higher indirect expense allocations to C&IS and Wealth Management, partially offset by higher general overhead costs, including outside services, compensation and equipment and software expense, as compared to the prior-year quarter.

CONSOLIDATED BALANCE SHEETS

Total assets were $117.8 billion and $116.7 billion at March 31, 2016 and December 31, 2015, respectively, and averaged $113.4 billion in the current quarter compared with $107.5 billion in the quarter ended March 31, 2015. Average balances are considered to be a better measure of balance sheet trends, as period-end balances can be impacted by deposit and withdrawal activity involving large client balances. Loans and leases totaled $34.1 billion and $33.2 billion at March 31, 2016 and December 31, 2015, respectively, and averaged $34.0 billion in the current quarter, up 6% from $32.1 billion in the quarter ended March 31, 2015. Securities, inclusive of Federal Reserve stock, Federal Home Loan Bank stock, and certain community development investments, which are classified in other assets in the consolidated balance sheets, totaled $39.6 billion and $38.0 billion at March 31, 2016 and December 31, 2015, respectively, and averaged $38.8 billion for the current quarter, up 8% from $35.8 billion in the quarter ended March 31, 2015. In aggregate, the categories of federal funds sold and securities purchased under agreements to resell, interest-bearing due from and deposits with banks, and Federal Reserve deposits totaled $33.8 billion and $27.6 billion at March 31, 2016 and December 31, 2015, respectively, and averaged $31.8 billion in the current quarter, down 3% from the quarter ended

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CONSOLIDATED BALANCE SHEETS (continued)

March 31, 2015 balances, primarily reflecting decreased Federal Reserve deposits. Interest-bearing client deposits at March 31, 2016 and December 31, 2015, totaled $67.1 billion and $66.7 billion, respectively, and averaged $66.3 billion in the current quarter, up 3% compared to $64.5 billion in the quarter ended March 31, 2015. Noninterest-bearing client deposits at March 31, 2016 and December 31, 2015 totaled $30.5 billion and $30.2 billion, respectively, and averaged $26.2 billion in the current quarter, up 19% from $22.0 billion in the quarter ended March 31, 2015.

Total stockholders’ equity at March 31, 2016, was $8.8 billion compared to $8.7 billion at December 31, 2015, and averaged $8.7 billion for the current quarter, up 3% from $8.5 billion for the quarter ended March 31, 2015. The increase in average stockholders’ equity compared to the prior-year quarter was primarily attributable to earnings, partially offset by dividend declarations and the repurchase of common stock pursuant to the Corporation’s share repurchase program.

During the three months ended March 31, 2016, the Corporation declared cash dividends totaling $83.9 million to common stockholders, and cash dividends totaling $5.9 million to preferred stockholders, respectively. During the three months ended March 31, 2016, the Corporation repurchased 2,310,617 shares of common stock, including 385,604 shares withheld related to share-based compensation, at a total cost of $140.3 million ($60.71 average price per share).

CAPITAL RATIOS

The capital ratios of Northern Trust and its principal subsidiary bank, The Northern Trust Company, remained strong at March 31, 2016, with all ratios applicable to classification as “well capitalized” under U.S. regulatory requirements having been exceeded.

The table below provides capital ratios for Northern Trust Corporation and The Northern Trust Company determined by Basel III phased in requirements.

Table 15: Regulatory Capital Ratios



Capital Ratios — Northern Trust Corporation	March 31, 2016				December 31, 2015				March 31, 2015
Capital Ratios — Northern Trust Corporation	Advanced Approach		Standardized Approach		Advanced Approach		Standardized Approach		Advanced Approach		Standardized Approach
Common Equity Tier 1	11.6	%	10.6	%	11.9	%	10.8	%	11.8	%	10.5	%
Tier 1	12.1	%	11.1	%	12.5	%	11.4	%	12.4	%	11.1	%
Total	13.6	%	12.8	%	14.2	%	13.2	%	14.2	%	13.1	%
Tier 1 Leverage	7.4	%	7.4	%	7.5	%	7.5	%	7.8	%	7.8	%
Supplementary Leverage ⁽¹⁾	6.1	%	N/A		6.2	%	N/A		6.4	%	N/A



Capital Ratios — The Northern Trust Company	March 31, 2016				December 31, 2015				March 31, 2015
Capital Ratios — The Northern Trust Company	Advanced Approach		Standardized Approach		Advanced Approach		Standardized Approach		Advanced Approach		Standardized Approach
Common Equity Tier 1	11.5	%	10.4	%	11.6	%	10.4	%	11.3	%	10.0	%
Tier 1	11.5	%	10.4	%	11.6	%	10.4	%	11.3	%	10.0	%
Total	13.2	%	12.2	%	13.1	%	12.0	%	13.0	%	11.8	%
Tier 1 Leverage	6.9	%	6.9	%	6.7	%	6.7	%	6.9	%	6.9	%
Supplementary Leverage ⁽¹⁾	6.0	%	N/A		5.6	%	N/A		5.7	%	N/A

⁽¹⁾Effective January 1, 2018, Northern Trust will be subject to a minimum supplementary leverage ratio of 3 percent.

STATEMENTS OF CASH FLOWS

Net cash used in operating activities of $299.1 million for the three months ended March 31, 2016, was primarily attributable to increased other operating activities, due to incentive payments and a decrease in accounts payable, and higher net collateral deposited with counterparties, partially offset by period earnings. For the three months ended March 31, 2015, net cash provided by operating activities totaled $490.8 million, primarily attributable to a reduction of net collateral deposited with derivative counterparties and period earnings, partially offset by increased other operating activities.

Net cash provided by investing activities of $653.2 million for the three months ended March 31, 2016, primarily reflected decreased levels of Federal Reserve deposits and interest-bearing deposits with banks, partially offset by net purchases of securities available for sale and held to maturity and increased loans and leases. For the three months ended March 31, 2015, net cash provided by investing activities was $2.8 billion, primarily reflecting decreased levels of Federal Reserve deposits, partially offset by net

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STATEMENTS OF CASH FLOWS (continued)

purchases of securities held to maturity and available for sale, increased levels of loans and leases and interest-bearing deposits with banks.

Net cash provided by financing activities of $3.4 million for the three months ended March 31, 2016, primarily reflected higher levels of total deposits, partially offset by the repurchase of common stock pursuant to the Corporation’s share repurchase program, federal funds purchased and cash dividends paid to common stockholders. The increase in total deposits was attributable to higher levels of non-U.S. office interest-bearing client deposits and demand and other noninterest-bearing client deposits. For the three months ended March 31, 2015, net cash used in financing activities totaled $2.2 billion, primarily reflecting decreased levels of total deposits, federal funds purchased, securities sold under agreements to repurchase and repayments of senior notes and long-term debt, partially offset by higher levels of short-term other borrowings.

ASSET QUALITY

Securities Portfolio

Northern Trust maintains a high quality securities portfolio, with 87% of the combined available for sale, held to maturity, and trading account portfolios at March 31, 2016, comprised of U.S. Treasury and government sponsored agency securities and triple-A rated corporate notes, asset-backed securities, covered bonds, sub-sovereign, supranational, sovereign and non-U.S. agency bonds, auction rate securities, commercial mortgage-backed securities and obligations of states and political subdivisions. The remaining portfolio was comprised of corporate notes, asset-backed securities, negotiable certificates of deposit, obligations of states and political subdivisions, auction rate securities and other securities, of which as a percentage of the total securities portfolio, 7% was rated double-A, 3% was rated below double-A, and 3% was not rated by Standard and Poor’s or Moody’s Investors Service (primarily negotiable certificates of deposits of banks whose long term ratings are at least A).

Net unrealized gains within the investment securities portfolio totaled $62.2 million at March 31, 2016, comprised of $156.5 million and $94.3 million of gross unrealized gains and losses, respectively. Of the unrealized losses on securities at March 31, 2016, the largest component was $34.0 million of unrealized losses in securities classified as “other,” related to securities primarily purchased at a premium or par by Northern Trust for compliance with the Community Reinvestment Act (CRA). Unrealized losses on these CRA-related securities were attributable to yields that were below market rates for the purpose of supporting institutions and programs that benefit low- to moderate- income communities within Northern Trust’s market area. Unrealized losses of $30.1 million related to government sponsored agency securities were primarily attributable to changes in market rates since their purchase. Also, $17.8 million of the unrealized losses related to corporate debt securities, primarily reflecting higher market rates since purchase; as of March 31, 2016, 33% of the corporate debt portfolio was backed by guarantees provided by U.S. and non-U.S. governmental entities.

There were no other-than-temporary impairment (OTTI) losses for the three months ended March 31, 2016 or 2015. Northern Trust has evaluated all securities with unrealized losses for possible OTTI in accordance with GAAP and Northern Trust’s security impairment review policy.

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

Nonperforming Loans and Leases and Other Real Estate Owned

Nonperforming assets consist of nonperforming loans and leases and other real estate owned (OREO). OREO is comprised of commercial and residential properties acquired in partial or total satisfaction of loans.

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ASSET QUALITY (continued)

Nonperforming Loans and Leases and Other Real Estate Owned (continued)

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

Table 16: Nonperforming Assets



($ In Millions)	March 31, 2016			December 31, 2015			March 31, 2015
Nonperforming Loans and Leases
Commercial
Commercial and Institutional	$	41.7		$	42.9		$	20.9
Commercial Real Estate	13.5			16.7			39.9
Total Commercial	55.2			59.6			60.8
Personal
Residential Real Estate	108.5			120.1			157.7
Private Client	0.3			0.4			1.1
Total Personal	108.8			120.5			158.8
Total Nonperforming Loans and Leases	164.0			180.1			219.6
Other Real Estate Owned	10.4			8.2			8.5
Total Nonperforming Assets	174.4			188.3			228.1
90 Day Past Due Loans Still Accruing	$	10.2		$	7.1		$	9.4
Nonperforming Loans and Leases to Total Loans and Leases	0.48		%	0.54		%	0.67		%
Coverage of Loan and Lease Allowance to Nonperforming Loans and Leases	1.2		x	1.1x			1.2x

Nonperforming assets of $174.4 million as of March 31, 2016, reflected improved credit quality across the portfolio from the prior year. In addition to the negative impact on net interest income and the risk of credit losses, nonperforming assets also increase operating costs due to the expense associated with collection efforts. Changes in the level of nonperforming assets may be indicative of changes in the credit quality of one or more loan classes. Changes in credit quality impact the allowance for credit losses through the resultant adjustment of the specific allowance and of the qualitative factors used in the determination of the inherent allowance levels within the allowance for credit losses.

Northern Trust’s underwriting standards do not allow for the origination of loan types generally considered to be high risk in nature, such as option adjustable rate mortgages, subprime loans, loans with initial “teaser” rates and loans with excessively high loan-to-value ratios. Residential real estate loans consist of first lien mortgages and equity credit lines, which generally require loan-to-collateral values of no more than 65% to 75% at inception. Revaluations of supporting collateral are obtained upon refinancing or default or when otherwise considered warranted. Collateral revaluations for mortgages are performed by independent third parties.

The commercial real estate class consists of commercial mortgages and construction, acquisition and development loans extended to experienced investors well known to Northern Trust. Underwriting standards generally reflect conservative loan-to-value ratios and debt service coverage requirements. Recourse to borrowers through guarantees is also commonly required.

Provision and Allowance for Credit Losses

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

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ASSET QUALITY (continued)

Provision and Allowance for Credit Losses (continued)

The amount of specific allowance is determined through an individual evaluation of loans and lending-related commitments considered impaired that is based on expected future cash flows, collateral value and other factors that may impact the borrower’s ability to pay. The inherent component of the allowance addresses exposure relating to probable but unidentified credit-related losses. The inherent component of the allowance also covers the credit exposure associated with undrawn loan commitments and standby letters of credit. To estimate the allowance for credit losses on these instruments, management uses conversion rates to determine the estimated amount that will be drawn and assigns an allowance factor determined in accordance with the methodology utilized for outstanding loans.

The provision for credit losses was $2.0 million in the current quarter, compared to a credit provision of $4.5 million in the prior-year quarter. Net charge-offs were $2.7 million, resulting from $5.3 million of charge-offs and $2.6 million of recoveries, compared to $4.6 million of net charge-offs in the prior-year quarter, resulting from $7.5 million of charge-offs and $2.9 million of recoveries. Residential real estate loans accounted for 66% and 72% of total nonperforming loans and leases at March 31, 2016 and 2015, respectively.

Note 7 to the consolidated financial statements includes a table that details the changes in the allowance for credit losses during the three months ended March 31, 2016 and 2015 due to charge-offs, recoveries and provisions for credit losses.

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

Table 17: Allocation of the Allowance for Credit Losses



	March 31, 2016					December 31, 2015					March 31, 2015
($ In Millions)	Allowance Amount			Percent of Loans to Total Loans		Allowance Amount			Percent of Loans to Total Loans		Allowance Amount			Percent of Loans to Total Loans
Specific Allowance	$	1.4		—	%	$	3.1		—	%	$	22.9		—	%
Allocated Inherent Allowance
Commercial
Commercial and Institutional	38.6			29		40.4			28		70.3			28
Commercial Real Estate	74.2			12		69.5			12		66.6			11
Lease Financing, net	1.1			1		1.9			2		3.2			3
Non-U.S.	—			5		—			3		2.8			5
Other	—			1		—			1		—			1
Total Commercial	113.9			48		111.8			46		142.9			48
Personal
Residential Real Estate	95.2			25		96.2			27		102.4			29
Private Client	19.5			27		19.7			27		18.5			23
Other	2.6			—		2.5			—		—			—
Total Personal	117.3			52		118.4			54		120.9			52
Total Allocated Inherent Allowance	$	231.2		100	%	$	230.2		100	%	$	263.8		100	%
Total Allowance for Credit Losses	$	232.6				$	233.3				$	286.7
Allowance Assigned to
Loans and Leases	$	195.6				$	193.8				$	259.0
Undrawn Commitments and Standby Letters of Credit	37.0					39.5					27.7
Total Allowance for Credit Losses	$	232.6				$	233.3				$	286.7
Allowance Assigned to Loans and Leases to Total Loans and Leases	0.57		%			0.58		%			0.79		%

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MARKET RISK MANAGEMENT

Northern Trust faces two primary types of market risk through its business operations: interest rate risk, which is the potential for movements in interest rates to cause changes in earnings and the economic value of equity; and trading risk, which is the potential for movements in market variables such as foreign exchange rates and interest rates to cause changes in the value of trading positions.

Northern Trust uses two primary measurement techniques to manage interest rate risk: sensitivity of earnings (SOE) and sensitivity of economic value of equity (SEVE). SOE provides management with a short-term view of the impact of interest rate changes on future earnings. SEVE provides management with a long-term view of interest rate changes on the economic value of equity as of the period-end balance sheet. Both simulation models use the same initial market interest rates and product balances. These two techniques, which are performed monthly, are complementary and are used in concert to provide a comprehensive interest rate risk management capability.

As part of its risk management activities, Northern Trust also regularly measures the risk of loss associated with foreign currency positions using a Value-at-Risk (VaR) model. The following information about Northern Trust’s management of market risk should be read in conjunction with the Annual Report on Form 10-K for the year ended December 31, 2015.

Sensitivity of Earnings — The modeling of SOE incorporates on-balance-sheet positions, as well as derivative financial instruments (principally interest rate swaps) that are used to manage interest rate risk. Northern Trust uses market-implied forward interest rates as the base case and measures the sensitivity (i.e. change) in earnings if future rates are 100 or 200 basis points higher than base case forward rates. The following table shows the estimated impact on the next twelve months of pre-tax earnings of 100 and 200 basis point upward movements in interest rates relative to forward rates. Given the low level of interest rates, the simulation of earnings for rates 100 and 200 basis points lower would not provide meaningful results.

Table 18: Interest Rate Risk Simulation of Pre-Tax Earnings Excluding Fee Waivers



($ In Millions)	Increase/(Decrease) Estimated Impact on Next Twelve Months of Pre-Tax Earnings
Increase in Interest Rates Above Market-Implied Forward Rates
100 Basis Points	$	19
200 Basis Points	(1		)

The simulations of earnings incorporate several assumptions but do not incorporate any management actions that may be used to mitigate negative consequences of actual interest rate movements. For that reason and others, they do not reflect the likely actual results but serve as conservative estimates of interest rate risk. SOE is not directly comparable to actual results disclosed elsewhere or directly predictive of future values of other measures provided.

Sensitivity of Economic Value of Equity — Economic value of equity is defined as the present value of assets minus the present value of liabilities, net of the value of instruments that are used to manage the interest rate risk of balance sheet items. The potential effect of interest rate changes on economic equity is derived from the impact of such changes on projected future cash flows and the present value of these cash flows and is then compared to the established limit. Northern Trust uses current market rates (and the future rates implied by these market rates) as the base case and measures the sensitivity (i.e. change) if current rates are immediately increased by 100 or 200 basis points. The following table shows the estimated impact on economic value of equity of 100 and 200 basis point upward movements from current interest rates. Given the low level of interest rates and assumed interest rate floors as rates approach zero, the simulation of the economic value of equity for rates 100 or 200 basis points lower would not provide meaningful results.

Table 19: Interest Rate Risk Simulation of Economic Value of Equity as of March 31, 2016



($ In Millions)	Increase/(Decrease) Estimated Impact on Economic Value of Equity
Increase in Interest Rates Above Market Rates
100 Basis Points	$	(15	)
200 Basis Points	(260		)

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MARKET RISK MANAGEMENT (continued)

The simulations of economic value of equity incorporate several assumptions but do not incorporate any management actions that may be used to mitigate negative consequences of actual interest rate movements. For that reason and others, they do not reflect the likely actual results but serve as conservative estimates of interest rate risk. SEVE is not directly comparable to actual results disclosed elsewhere or directly predictive of future values of other measures provided.

Foreign Currency Value-At-Risk (VaR) — Northern Trust measures daily the risk of loss associated with all non-U.S. currency positions using a VaR model and applying the historical simulation methodology. This statistical model provides estimates, based on a variety of high confidence levels, of the potential loss in value that might be incurred if an adverse shift in non-U.S. currency exchange rates were to occur over a small number of days. The model incorporates foreign currency and interest rate volatilities and correlations in price movements among the currencies. VaR is computed for each trading desk and for the global portfolio.

Northern Trust monitors several variations of the foreign exchange VaR measures to meet specific regulatory and internal management needs. Variations include different methodologies (historical, variance-covariance and Monte Carlo), equally-weighted and exponentially-weighted volatilities, horizons of one day and ten days, confidence levels ranging from 95% to 99.95% and look-back periods of one year and four years. The table below presents the levels of total regulatory VaR and its subcomponents for global foreign currency as March 31, 2016 and December 31, 2015, based on the historical simulation methodology, a 99% confidence level, a one-day horizon and equally-weighted volatility. The total VaR for foreign currency is typically less than the sum of its two components due to diversification benefits derived from the two subcomponents.

Table 20: Foreign Currency Value-At-Risk



	Total VaR (Spot and Forward)				Foreign Exchange Spot VaR				Foreign Exchange Forward VaR
($ In Millions)	March 31, 2016		December 31, 2015		March 31, 2016		December 31, 2015		March 31, 2016		December 31, 2015
High	$	0.7	$	0.6	$	0.6	$	0.5	$	0.6	$	0.5
Low	0.2		0.1		—		—		0.2		0.1
Average	0.3		0.3		0.2		0.2		0.3		0.3
Quarter-End	0.5		0.3		0.3		0.1		0.4		0.3

RECONCILIATION OF CERTAIN REPORTED ITEMS TO FULLY TAXABLE EQUIVALENTS

The tables below present a reconciliation of interest income, net interest income and net interest margin prepared in accordance with GAAP to interest income, net interest income and net interest margin on an FTE basis, which are non-GAAP financial measures. Management believes an FTE presentation facilitates the analysis of asset yields and provides an additional presentation of net interest margins for comparative purposes that may be helpful to investors.

Table 21: Reconciliation of Reported Net Interest Income to Fully Taxable Equivalent



	Three Months Ended
	March 31, 2016								March 31, 2015
($ In Millions)	Reported			FTE Adj.		FTE			Reported			FTE Adj.		FTE
Interest Income	$	352.0		$	6.2	$	358.2		$	298.8		$	6.2	$	305.0
Interest Expense	44.2			—		44.2			38.2			—		38.2
Net Interest Income	$	307.8		$	6.2	$	314.0		$	260.6		$	6.2	$	266.8
Net Interest Margin	1.18		%			1.21		%	1.07		%			1.10		%

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FORWARD-LOOKING STATEMENTS

This report may include statements which constitute “forward-looking statements” within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are identified typically by words or phrases such as “believe,” “expect,” “anticipate,” “intend,” “estimate,” “project,” “likely,” “plan,” “goal,” “target,” “strategy,” and similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would,” and “could.” Forward-looking statements include statements, other than those related to historical facts, that relate to Northern Trust’s financial results and outlook, capital adequacy, dividend policy, accounting estimates and assumptions, credit quality including allowance levels, future pension plan contributions, anticipated tax benefits, anticipated expense levels, spending related to technology and regulatory initiatives, risk management policies, contingent liabilities, strategic initiatives, industry trends, and expectations regarding the impact of recent legislation and accounting pronouncements. These statements are based on Northern Trust’s current beliefs and expectations of future events or future results, and involve risks and uncertainties that are difficult to predict and subject to change. These statements are also based on assumptions about many important factors, including:


•	financial market disruptions or economic recession, whether in the United States, Europe, the Middle East, Asia or other regions;

•

volatility or changes in financial markets, including debt and equity markets, that impact the value, liquidity, or credit ratings of financial assets in general, or financial assets held in particular investment funds or client portfolios, including those funds, portfolios, and other financial assets with respect to which Northern Trust has taken, or may in the future take, actions to provide asset value stability or additional liquidity;


•	the impact of equity markets on fee revenue;


•	the downgrade of U.S. government-issued and other securities;


•	changes in foreign exchange trading client volumes and volatility in foreign currency exchange rates, changes in the valuation of the U.S. dollar relative to other currencies in which Northern Trust records revenue or accrues expenses, and Northern Trust’s success in assessing and mitigating the risks arising from all such changes and volatility;


•	a decline in the value of securities held in Northern Trust’s investment portfolio, particularly asset-backed securities, the liquidity and pricing of which may be negatively impacted by periods of economic turmoil and financial market disruptions;


•	Northern Trust’s ability to address operating risks, including cyber-security or data security breach risks, human errors or omissions, pricing or valuation of securities, fraud, systems performance or defects, systems interruptions, and breakdowns in processes or internal controls;


•	Northern Trust’s success in responding to and investing in changes and advancements in technology;


•	a significant downgrade of any of Northern Trust’s debt ratings;


•	the health and soundness of the financial institutions and other counterparties with which Northern Trust conducts business;


•	uncertainties inherent in the complex and subjective judgments required to assess credit risk and establish appropriate allowances therefor;


•	the pace and extent of continued globalization of investment activity and growth in worldwide financial assets;


•	changes in interest rates or in the monetary or other policies of various regulatory authorities or central banks;

•

changes in the legal, regulatory and enforcement framework and oversight applicable to financial institutions, including changes that may affect leverage limits and risk-based capital and liquidity requirements, require financial institutions to pay higher assessments, expose financial institutions to certain liabilities of their subsidiary depository institutions, or restrict or increase the regulation of certain activities carried on by financial institutions, including Northern Trust;


•	increased costs of compliance and other risks associated with changes in regulation, the current regulatory environment, and areas of increased regulatory emphasis and oversight in the United States and other countries, such as anti-money laundering, anti-bribery, and client privacy;


•	failure to satisfy regulatory standards or to obtain regulatory approvals when required, including for the use and distribution of capital;


•	changes in tax laws, accounting requirements or interpretations and other legislation in the United States or other countries that could affect Northern Trust or its clients;


•	geopolitical risks and the risks of extraordinary events such as natural disasters, terrorist events and war, and the responses of the United States and other countries to those events;


•	changes in the nature and activities of Northern Trust’s competition;


•	Northern Trust’s success in maintaining existing business and continuing to generate new business in existing and targeted markets and its ability to deploy deposits in a profitable manner consistent with its liquidity requirements;


•	Northern Trust’s ability to address the complex needs of a global client base and manage compliance with legal, tax, regulatory and other requirements;


•	Northern Trust’s ability to maintain a product mix that achieves acceptable margins;


•	Northern Trust’s ability to continue to develop investment products and generate investment results that satisfy clients;


•	Northern Trust’s success in recruiting and retaining the necessary personnel to support business growth and expansion and maintain sufficient expertise to support increasingly complex products and services;

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FORWARD-LOOKING STATEMENTS (continued)


•	Northern Trust’s success in controlling expenses and implementing revenue enhancement initiatives;


•	uncertainties inherent in Northern Trust’s assumptions concerning its pension plan, including discount rates and expected contributions, returns and payouts;


•	Northern Trust’s success in improving risk management practices and controls and managing risks inherent in its businesses, including credit risk, operational risk, market and liquidity risk, fiduciary risk, compliance risk and strategic risk;


•	risks and uncertainties inherent in the litigation and regulatory process, including the adequacy of contingent liability, tax, and other accruals;


•	risks associated with being a holding company, including Northern Trust’s dependence on dividends from its principal subsidiary;


•	the risk of damage to Northern Trust’s reputation which may undermine the confidence of clients, counterparties, rating agencies, and stockholders; and


•	other factors identified elsewhere in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2015, including those factors described in Item 1A, “Risk Factors,” and other filings with the SEC, all of which are available on Northern Trust’s website.

Actual results may differ materially from those expressed or implied by the forward-looking statements. The information contained herein is current only as of the date of that information. All forward-looking statements included in this document are based upon information presently available, and Northern Trust assumes no obligation to update its forward-looking statements.

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Item 1. Consolidated Financial Statements (unaudited)



CONSOLIDATED BALANCE SHEETS	NORTHERN TRUST CORPORATION



(In Millions Except Share Information)	March 31, 2016	December 31, 2015