Document
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2016
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File No. 001-36609
NORTHERN TRUST CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
36-2723087
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
50 South LaSalle Street
Chicago, Illinois
60603
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (312) 630-6000
_____________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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
226,590,921 Shares – $1.66 2/3 Par Value
(Shares of Common Stock Outstanding on June 30, 2016)
 

Table of Contents

NORTHERN TRUST CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2016
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)
2016
 
2015
 
% Change (1)
 
2016
 
2015
 
% Change (1)
Noninterest Income
$
1,017.0

 
$
1,004.7

 
1
 %
 
$
1,899.2

 
$
1,878.6

 
1
 %
Net Interest Income
299.7

 
251.2

 
19

 
607.5

 
511.8

 
19

Provision for Credit Losses
(3.0
)
 
(10.0
)
 
(70
)
 
(1.0
)
 
(14.5
)
 
(93
)
Noninterest Expense
925.0

 
854.5

 
8

 
1,753.8

 
1,643.5

 
7

Income before Income Taxes
394.7

 
411.4

 
(4
)
 
753.9

 
761.4

 
(1
)
Provision for Income Taxes
134.0

 
142.2

 
(6
)
 
251.4

 
261.5

 
(4
)
Net Income
$
260.7

 
$
269.2

 
(3
)%
 
$
502.5

 
$
499.9

 
1
 %
PER COMMON SHARE
 
 
 
 
 
 
 
 
 
 
 
Net Income — Basic
$
1.10

 
$
1.11

 
(1
)%
 
$
2.11

 
$
2.06

 
3
 %
— Diluted
1.09

 
1.10

 
(1
)
 
2.10

 
2.04

 
3

Cash Dividends Declared Per Common Share
0.36

 
0.36

 
—

 
0.72

 
0.69

 
4

Book Value — End of Period (EOP)
37.79

 
35.91

 
5

 
37.79

 
35.91

 
5

Market Price — EOP
66.26

 
76.46

 
(13
)
 
66.26

 
76.46

 
(13
)
SELECTED BALANCE SHEET DATA (In Millions)
 
 
 
 
 
 
June 30, 2016
 
December 31, 2015
 
% Change (1)
End of Period:
 
 
 
 
 
Assets
$
121,509.6

 
$
116,749.6

 
4
%
Earning Assets
111,214.9

 
106,848.9

 
4

Deposits
99,086.9

 
96,868.9

 
2

Stockholders’ Equity
8,951.5

 
8,705.9

 
3

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
% Change (1)
 
2016
 
2015
 
% Change (1)
Average Balances:
 
 
 
 
 
 
 
 
 
 
 
Assets
$
114,913.8

 
$
111,691.1

 
3
%
 
$
114,165.4

 
$
109,613.7

 
4
%
Earning Assets
106,613.5

 
103,806.0

 
3

 
105,615.5

 
101,263.7

 
4

Deposits
93,608.1

 
92,335.1

 
1

 
93,042.2

 
89,446.7

 
4

Stockholders’ Equity
8,792.7

 
8,607.9

 
2

 
8,741.9

 
8,540.7

 
2

CLIENT ASSETS (In Billions)
June 30, 2016
 
December 31, 2015
 
% Change (1)
Assets Under Custody/Administration (2)
$
8,115.9

 
$
7,797.0

 
4
%
Assets Under Custody
6,352.8

 
6,072.1

 
5

Assets Under Management
906.2

 
875.3

 
4

(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,
 
2016
 
2015
 
2016
 
2015
Financial Ratios:
 
 
 
 
 
 
 
Return on Average Common Equity
12.20
%
 
12.85
%
 
11.82
%
 
12.08
%
Return on Average Assets
0.91

 
0.97

 
0.89

 
0.92

Dividend Payout Ratio
33.0

 
32.7

 
34.3

 
33.8

Net Interest Margin (1)
1.16

 
1.00

 
1.18

 
1.04

 
June 30, 2016
 
December 31, 2015
 
Advanced
Approach
 
Standardized
Approach
 
Advanced
Approach
 
Standardized
Approach
Capital Ratios:
 
 
 
 
 
 
 
Northern Trust Corporation
 
 
 
 
 
 
 
Common Equity Tier 1
11.5
%
 
10.6
%
 
11.9
%
 
10.8
%
Tier 1
12.0

 
11.0

 
12.5

 
11.4

Total
13.5

 
12.7

 
14.2

 
13.2

Tier 1 Leverage
7.4

 
7.4

 
7.5

 
7.5

Supplementary Leverage (2)
6.1

 
N/A

 
6.2

 
N/A

 
 
 
 
 
 
 
 
The Northern Trust Company
 
 
 
 
 
 
 
Common Equity Tier 1
11.6
%
 
10.4
%
 
11.6
%
 
10.4
%
Tier 1
11.6

 
10.4

 
11.6

 
10.4

Total
13.3

 
12.3

 
13.1

 
12.0

Tier 1 Leverage
7.0

 
7.0

 
6.7

 
6.7

Supplementary Leverage (2)
5.8

 
N/A

 
5.6

 
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 26.
(2) 
Effective January 1, 2018, Northern Trust will be subject to a minimum supplementary leverage ratio of 3 percent.

2
Table of Contents

PART I – FINANCIAL INFORMATION
Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Quantitative and Qualitative Disclosures about Market Risk
SECOND QUARTER CONSOLIDATED RESULTS OF OPERATIONS
General
Northern Trust Corporation (the Corporation) is a financial holding company that is a leading provider of asset servicing, fund administration, asset management, fiduciary and banking solutions for corporations, institutions, families and individuals worldwide. The Corporation focuses on managing and servicing client assets through its two client-focused reporting segments: Corporate & Institutional Services (C&IS) and Wealth Management. Asset management and related services are provided to C&IS and Wealth Management clients primarily by the Asset Management business. Except where the context requires otherwise, the term “Northern Trust,” “we,” “us,” “our” or similar terms mean the Corporation and its subsidiaries on a consolidated basis.
The following should be read in conjunction with the consolidated financial statements and related footnotes included in this report. Investors also should read the section entitled “Forward-Looking Statements.”
Overview
Net income per diluted common share was $1.09 in the current quarter, down from $1.10 in the second quarter of 2015. Net income was $260.7 million in the current quarter as compared to $269.2 million in the prior-year quarter. Annualized return on average common equity in the current quarter was 12.2%, down from 12.8% in the prior-year quarter. The annualized return on average assets was 0.9% as compared to 1.0% in the prior-year quarter.

The current quarter included a gain on the sale of 1.1 million Visa Inc. Class B common shares, net of the valuation adjustment to existing swap agreements, totaling $118.2 million ($73.1 million after tax, or $0.31 per diluted common share); a charge in connection with an agreement to settle certain securities lending litigation, which is subject to court approval, of $46.5 million ($28.9 million after tax, or $0.12 per diluted common share); charges related to contractual modifications associated with existing C&IS clients of $18.6 million ($11.6 million after tax, or $0.05 per diluted common share); severance, other personnel and related charges of $17.5 million ($11.2 million after tax or $0.05 per diluted common share); impairment charges and the loss on sale related to the decision to exit a portion of a non-strategic loan and lease portfolio of $14.1 million ($8.8 million after tax, or $0.04 per diluted common share); and impairment charges related to the residual value of certain aircraft and rail cars of $7.5 million ($4.6 million after tax, or $0.02 per diluted common share). Excluding these items, net income per diluted common share, net income and return on average common equity were $1.06, $252.7 million and 11.7%, respectively.

The prior-year quarter included a net gain on the sale of 1.0 million Visa Inc. Class B common shares totaling $99.9 million ($62.1 million after tax, or $0.26 per diluted common share); voluntary cash contributions to certain constant dollar net-asset-value (NAV) funds of $45.8 million ($28.6 million after tax, or $0.12 per diluted common share); and the impairment of the residual value of certain aircraft under leveraged lease agreements of $17.8 million ($11.1 million after tax, or $0.05 per diluted common share). Excluding these items, net income per diluted common share, net income, and return on average common equity were $1.01, $246.7 million and 11.8%, respectively.

Revenue of $1.32 billion was up $60.8 million, or 5%, from $1.26 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 $12.3 million, or 1%, to $1.02 billion from $1.00 billion in the prior-year quarter.

Net interest income increased 19% to $299.7 million in the current quarter as compared to $251.2 million in the prior-year quarter, due to growth in earning assets and a higher net interest margin. Additionally, the current quarter included a charge of $2.7 million related to the residual value of certain aircraft and rail cars. The prior-year quarter included a charge of $17.8 million related to the residual value of certain aircraft under leveraged lease agreements.

The provision for credit losses was a credit of $3.0 million in the current quarter, as compared to a credit provision of $10.0 million in the prior-year quarter.

Noninterest expense totaled $925.0 million, up $70.5 million, or 8%, from $854.5 million in the prior-year quarter. The current quarter included a charge in connection with an agreement to settle certain securities lending litigation, which is subject to court approval, of $46.5 million; charges related to contractual modifications associated with existing C&IS clients of $18.6 million;

3
Table of Contents
SECOND QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)
Overview (continued)

and severance, other personnel and related charges of $17.5 million. The prior-year quarter included the $45.8 million charge related to voluntary cash contributions to certain constant dollar NAV funds. Excluding the current- and prior-year quarter charges, noninterest expense increased $33.7 million, or 4%, primarily attributable to higher compensation and outside services expense.
The components of noninterest income are provided below.
Table 1: Noninterest Income
Noninterest Income
Three Months Ended June 30,
 
 
 
 
($ In Millions)
2016
 
2015
 
Change
Trust, Investment and Other Servicing Fees
$
777.2

 
$
756.8

 
$
20.4

 
3
 %
Foreign Exchange Trading Income
64.4

 
74.8

 
(10.4
)
 
(14
)
Treasury Management Fees
16.0

 
16.1

 
(0.1
)
 
(1
)
Security Commissions and Trading Income
20.6

 
20.0

 
0.6

 
3

Other Operating Income
141.2

 
137.4

 
3.8

 
3

Investment Security Gains (Losses), net
(2.4
)
 
(0.4
)
 
(2.0
)
 
N/M

Total Noninterest Income
$
1,017.0

 
$
1,004.7

 
$
12.3

 
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 June 30, 2016, AUC/A were $8.12 trillion, up $189.5 billion, or 2%, from $7.93 trillion at March 31, 2016.
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
June 30, 2016
 
March 31, 2016
 
June 30, 2015
 
Change Q2-16/Q1-16
 
Change Q2-16/Q2-15
($ In Billions)
Corporate & Institutional
$
5,838.6

 
$
5,700.3

 
$
5,652.6

 
2
%
 
3
 %
Wealth Management
514.2

 
511.1

 
524.4

 
1

 
(2
)
Total Assets Under Custody
$
6,352.8

 
$
6,211.4

 
$
6,177.0

 
2
%
 
3
 %
The following table presents the allocation of Northern Trust’s custodied assets by reporting segment.
Table 3: Allocations of Assets Under Custody
 
June 30, 2016
 
March 31, 2016
 
June 30, 2015
Assets Under Custody
C&IS
 
WM
 
Total
 
C&IS
 
WM
 
Total
 
C&IS
 
WM
 
Total
Equities
42
%
 
54
%
 
43
%
 
43
%
 
54
%
 
43
%
 
45
%
 
55
%
 
46
%
Fixed Income
40

 
24

 
39

 
39

 
23

 
38

 
37

 
23

 
35

Cash and Other Assets
18

 
22

 
18

 
18

 
23

 
19

 
18

 
22

 
19

The 3% increase in consolidated assets under custody from $6.18 trillion at June 30, 2015 to $6.35 trillion as of June 30, 2016 primarily reflected new business and the impact of favorable fixed income markets, partially offset by the unfavorable impact of foreign currency movements.

4
Table of Contents
SECOND 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
June 30, 2016
 
March 31, 2016
 
June 30, 2015
 
Change Q2-16/Q1-16
 
Change Q2-16/Q2-15
($ In Billions)
Corporate & Institutional
$
672.3

 
$
669.9

 
$
713.6

 
—
%
 
(6
)%
Wealth Management
233.9

 
230.1

 
232.0

 
2

 
1

Total Assets Under Management
$
906.2

 
$
900.0

 
$
945.6

 
1
%
 
(4
)%
The following table presents Northern Trust’s assets under management by investment type.
Table 5: Assets Under Management by Investment Type
($ In Billions)
June 30, 2016
 
March 31, 2016
 
June 30, 2015
Equities
$
456.4

 
$
453.5

 
$
487.7

Fixed Income
156.3

 
148.5

 
167.7

Cash and Other Assets
185.2

 
192.0

 
169.9

Securities Lending Collateral
108.3

 
106.0

 
120.3

Total Assets Under Management
$
906.2

 
$
900.0

 
$
945.6

The following table presents the allocation of Northern Trust’s assets under management by reporting segment.
Table 6: Allocations of Assets Under Management
 
June 30, 2016
 
March 31, 2016
 
June 30, 2015
Assets Under Management
C&IS
 
WM
 
Total
 
C&IS
 
WM
 
Total
 
C&IS
 
WM
 
Total
Equities
52
%
 
46
%
 
50
%
 
52
%
 
46
%
 
50
%
 
53
%
 
47
%
 
51
%
Fixed Income
13

 
29

 
17

 
12

 
29

 
17

 
14

 
28

 
18

Cash and Other Assets
19

 
25

 
21

 
20

 
25

 
21

 
16

 
25

 
18

Securities Lending Collateral
16

 
—

 
12

 
16

 
—

 
12

 
17

 
—

 
13

The 4% decrease in consolidated assets under management from $945.6 billion at June 30, 2015 to $906.2 billion as of June 30, 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 increase in the S&P 500 index of 1.7% and decrease in the MSCI EAFE index (USD) of 12.7%.


5
Table of Contents
SECOND QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)
Noninterest Income (continued)

The following table presents activity in consolidated assets under management by investment type.
Table 7: Activity in Consolidated Assets Under Management by Investment Type
 
 
Three Months Ended
($ In Billions)
June 30, 2016
March 31, 2016
Beginning Balance of AUM
$
900.0

$
875.3

Inflows by Investment Type
 
 
 
Equity
34.9

29.4

 
Fixed Income
18.6

11.4

 
Cash & Other Assets
83.6

94.6

 
Securities Lending Collateral
21.5

20.4

 
 
 
 
Total Inflows
158.6

155.8

 
 
 
 
Outflows by Investment Type
 
 
 
Equity
(31.4
)
(28.1
)
 
Fixed Income
(14.9
)
(10.2
)
 
Cash & Other Assets
(84.7
)
(80.3
)
 
Securities Lending Collateral
(19.3
)
(18.2
)
 
 
 
 
Total Outflows
(150.3
)
(136.8
)
 
 
 
 
Net Inflows
8.3

19.0

 
 
 
 
Market Performance, Currency & Other
(2.1
)
5.7

 
 
 
 
Ending Balance of AUM
$
906.2

$
900.0


Foreign exchange trading income totaled $64.4 million in the current quarter, down $10.4 million, or 14%, compared to $74.8 million in the prior-year quarter. The decrease generally reflected lower client volumes as compared to the prior-year quarter.

Other operating income in the current quarter included the gain on the sale of 1.1 million Visa Inc. Class B common shares, net of the valuation adjustment to existing swap agreements, totaling $118.2 million, offset by impairment charges and the loss on sale related to the decision to exit a portion of a non-strategic loan and lease portfolio as well as impairment charges related to the residual value of certain aircraft and rail cars of $18.9 million. The prior-year quarter included a $99.9 million net gain on the sale of 1.0 million Visa Inc. Class B Common Shares. Excluding these items, other operating income totaled $41.9 million, up 12% compared to $37.5 million in the prior-year quarter, primarily due to income associated with supplemental compensation plans.
Table 8: Other Operating Income
Other Operating Income
Three Months Ended June 30,
 
 
 
 
($ In Millions)
2016
 
2015
 
Change
Loan Service Fees
$
14.8

 
$
14.6

 
$
0.2

 
2
%
Banking Service Fees
12.8

 
11.8

 
1.0

 
9

Other Income
113.6

 
111.0

 
2.6

 
2

Total Other Operating Income
$
141.2

 
$
137.4

 
$
3.8

 
3
%

6
Table of Contents
SECOND QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)
Net Interest Income

The following table presents an analysis of average balances and interest rate changes affecting net interest income.
Table 9: Average Consolidated Balance Sheets with Analysis of Net Interest Income
 
NORTHERN TRUST CORPORATION
(Interest and Rate on a Fully Taxable Equivalent Basis)
SECOND QUARTER
2016
 
2015
($ In Millions)
Interest
 
Average
Balance
 
Rate (5)
 
Interest
 
Average
Balance
 
Rate (5)
Average Earning Assets
 
 
 
 
 
 
 
 
 
 
 
Federal Funds Sold and Securities Purchased under
 
 
 
 
 
 
 
 
 
 
 
Agreements to Resell
$
4.8

 
$
1,915.2

 
1.00
%
 
$
1.2

 
$
1,041.9

 
0.46
%
Interest-Bearing Due from and Deposits with Banks (1)
16.5

 
9,827.9

 
0.68

 
22.7

 
12,012.4

 
0.76

Federal Reserve and Other Central Bank Deposits
23.6

 
19,657.8

 
0.48

 
15.5

 
19,900.3

 
0.31

Securities
 
 
 
 
 
 
 
 
 
 
 
U.S. Government
20.9

 
6,875.1

 
1.22

 
13.4

 
4,789.1

 
1.12

Obligations of States and Political Subdivisions
2.5

 
470.2

 
2.09

 
1.9

 
112.2

 
6.75

Government Sponsored Agency
37.0

 
17,347.0

 
0.86

 
34.2

 
16,821.7

 
0.82

Other (2)
42.9

 
16,064.2

 
1.07

 
33.8

 
16,207.0

 
0.84

Total Securities
103.3

 
40,756.5

 
1.02

 
83.3

 
37,930.0

 
0.88

Loans and Leases (3)
203.4

 
34,456.1

 
2.38

 
172.5

 
32,921.4

 
2.10

Total Earning Assets
351.6

 
106,613.5

 
1.33

 
295.2


103,806.0

 
1.14

Allowance for Credit Losses Assigned to Loans and Leases
—

 
(195.4
)
 
—

 
—

 
(260.0
)
 
—

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

 
2,093.9

 
—

 
—

 
2,142.9

 
—

Buildings and Equipment
—

 
439.9

 
—

 
—

 
446.5

 
—

Client Security Settlement Receivables
—

 
1,143.0

 
—

 
—

 
945.0

 
—

Goodwill
—

 
531.2

 
—

 
—

 
531.1

 
—

Other Assets
—

 
4,287.7

 
—

 
—

 
4,079.6

 
—

Total Assets
$
—

 
$
114,913.8

 
—
%
 
$
—

 
$
111,691.1

 
—
%
Average Source of Funds
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
 
 
 
 
 
 
 
 
 
 
Savings and Money Market
$
2.7

 
$
15,041.3

 
0.07
%
 
$
2.4

 
$
15,705.4

 
0.06
%
Savings Certificates and Other Time
1.9

 
1,405.0

 
0.54

 
2.1

 
1,779.5

 
0.48

Non-U.S. Offices — Interest-Bearing
16.6

 
50,443.8

 
0.13

 
13.9

 
49,291.8

 
0.11

Total Interest-Bearing Deposits
21.2

 
66,890.1

 
0.13

 
18.4

 
66,776.7

 
0.11

Short-Term Borrowings
4.9

 
6,195.0

 
0.32

 
1.3

 
4,404.8

 
0.12

Senior Notes
11.7

 
1,496.1

 
3.15

 
11.9

 
1,497.1

 
3.14

Long-Term Debt
6.4

 
1,403.2

 
1.84

 
5.5

 
1,380.2

 
1.59

Floating Rate Capital Debt
0.8

 
277.4

 
1.20

 
0.5

 
277.3

 
0.84

Total Interest-Related Funds
45.0

 
76,261.8

 
0.24

 
37.6

 
74,336.1

 
0.20

Interest Rate Spread
—

 
—

 
1.09

 
—

 
—

 
0.94

Demand and Other Noninterest-Bearing Deposits
—

 
26,718.0

 
—

 
—

 
25,558.4

 
—

Other Liabilities
—

 
3,141.3

 
—

 
—

 
3,188.7

 
—

Stockholders’ Equity
—

 
8,792.7

 
—

 
—

 
8,607.9

 
—

Total Liabilities and Stockholders’ Equity
$
—

 
$
114,913.8

 
—
%
 
$
—

 
$
111,691.1

 
—
%
Net Interest Income/Margin (FTE Adjusted)
$
306.6

 
$
—

 
1.16
%
 
$
257.6

 
$
—

 
1.00
%
Net Interest Income/Margin (Unadjusted)
$
299.7

 
$
—

 
1.13
%
 
$
251.2

 
$
—

 
0.97
%

7
Table of Contents
SECOND QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)
Net Interest Income (continued)


ANALYSIS OF NET INTEREST INCOME CHANGES
DUE TO VOLUME AND RATE
 
Three Months Ended June 30, 2016/2015
 
Change Due To
(In Millions)
Average
Balance
 
Rate
 
Total
Earning Assets (FTE)
$
7.9

 
$
48.5

 
$
56.4

Interest-Related Funds
0.9

 
6.5

 
7.4

Net Interest Income (FTE)
$
7.0

 
$
42.0

 
$
49.0

(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, 2016 and 2015.
(3)
Average balances include nonaccrual loans. Lease financing receivable balances are reduced by deferred income.
(4)
Cash and Due from Banks and Other Central Bank Deposits includes the non-interest-bearing component of Federal Reserve and Other Central Bank Deposits as presented on the consolidated balance sheets on page 29.
(5)
Rate calculations are based on actual balances rather than the rounded amounts presented in the Average Consolidated Balance Sheets with Analysis of Net Interest Income.

Notes:
Net Interest Income (FTE Adjusted), a non-generally accepted accounting principle (GAAP) financial measure, includes adjustments to a fully taxable equivalent basis for loans and securities. Such adjustments are based on a blended federal and state tax rate of 37.8% and 37.7% for the three months ended June 30, 2016 and 2015, respectively. Total taxable equivalent interest adjustments amounted to $6.9 million and $6.4 million for the three months ended June 30, 2016 and 2015, 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 26.
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 $306.6 million, up $49.0 million, or 19%, compared to $257.6 million in the prior-year quarter. The increase was primarily the result of growth in average earning assets and a higher net interest margin. Additionally, the current quarter included a charge of $2.7 million related to the residual value of certain aircraft
and rail cars. The prior-year quarter included a charge of $17.8 million related to the residual value of certain aircraft under leveraged lease agreements. Average earning assets for the current quarter averaged $106.6 billion, up $2.8 billion, or 3%, from $103.8 billion in the prior-year quarter, primarily resulting from higher levels of securities and loans. Earning asset growth was funded primarily by a higher level of borrowed funds and demand deposits.
The net interest margin on an FTE basis increased to 1.16% in the current quarter from 1.00% in the prior-year quarter. Excluding the impairments noted above, the net interest margin was 1.16% and 1.06% for the three months ended June 30, 2016 and 2015, respectively, 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 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 26.
Federal Reserve and other central bank deposits averaged $19.7 billion, down $242.5 million, or 1%, from $19.9 billion in the prior-year quarter. Average securities were $40.8 billion, up $2.8 billion, or 7%, from $37.9 billion in the prior-year quarter and include Federal Home Loan Bank, certain community development investments and Federal Reserve stock of $195.6 million, $188.7 million and $53.1 million, respectively, which are recorded in other assets in the consolidated balance sheets.
Loans and leases averaged $34.5 billion, up $1.5 billion, or 5%, from $32.9 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 $9.3 billion, up $1.3 billion, or 17%, from $8.0 billion for the prior-year quarter. Commercial and institutional loans averaged $10.4 billion, up $1.4 billion, or 16%, from $9.0 billion for the prior-year quarter. Commercial real estate loans averaged $3.9 billion, up $384.2 million, or 11%, from $3.6 billion for the

8
Table of Contents
SECOND QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)
Net Interest Income (continued)


prior-year quarter. Residential real estate loans averaged $8.5 billion, down $956.5 million, or 10.1%, from $9.4 billion for the prior-year quarter.
Northern Trust utilizes a diverse mix of funding sources. Total interest-bearing deposits averaged $66.9 billion, compared to $66.8 billion in the prior-year quarter, an increase of $113.4 million. Other interest-bearing funds averaged $9.4 billion, an increase of $1.8 billion, from $7.6 billion in the prior-year quarter, primarily attributable to increased short-term borrowings. The balances within short-term borrowing classifications vary based on funding requirements and strategies, interest rate levels, changes in the volume of lower-cost deposit sources, and the availability of collateral to secure these borrowings. Average net noninterest-related funds utilized to fund earning assets increased $881.8 million, or 3%, to $30.4 billion from $29.5 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 a credit of $3.0 million in the current quarter, as compared to a credit provision of $10.0 million in the prior-year quarter. Net charge-offs in the current quarter were $2.4 million, resulting from charge-offs of $4.9 million and recoveries of $2.5 million. The prior-year quarter included $2.6 million of net charge-offs, resulting from $6.1 million of charge-offs and $3.5 million of recoveries. Nonperforming assets of $166.4 million decreased 24% from the prior-year quarter. Residential real estate loans and commercial loans accounted for 65% and 25%, respectively, of total nonperforming loans and leases at June 30, 2016. For additional discussion of the provision and allowance for credit losses, refer to the “Asset Quality” section beginning on page 22.
Noninterest Expense
The components of noninterest expense are provided below.
Table 10: Noninterest Expense
Noninterest Expense
Three Months Ended June 30,
 
 
 
 
($ In Millions)
2016
 
2015
 
Change
Compensation
$
389.5

 
$
361.9

 
$
27.6

 
8
 %
Employee Benefits
72.2

 
73.2

 
(1.0
)
 
(1
)
Outside Services
159.0

 
147.2

 
11.8

 
8

Equipment and Software
118.0

 
114.4

 
3.6

 
3

Occupancy
45.3

 
43.0

 
2.3

 
5

Other Operating Expense
141.0

 
114.8

 
26.2

 
23

Total Noninterest Expense
$
925.0

 
$
854.5

 
$
70.5

 
8
 %

Compensation expense, the largest component of noninterest expense, totaled $389.5 million in the current quarter, compared to $361.9 million in the prior-year quarter. Compensation expense in the current quarter included severance and related charges of $13.0 million. Excluding the severance and related charges, compensation expense increased $14.6 million, or 4%, compared to the prior-year quarter, primarily reflecting higher staff levels, partially offset by lower performance-based incentive compensation. Staff on a full-time equivalent basis at June 30, 2016 totaled approximately 16,600, up 5% from June 30, 2015.
Employee benefit expense totaled $72.2 million in the current quarter, compared to $73.2 million in the prior-year quarter. Employee benefits expense in the current quarter included severance and related charges of $1.5 million. Excluding the severance and related charges, employee benefits expense decreased 3% compared to the prior-year quarter, primarily reflecting a decrease in pension expense.
Expense associated with outside services totaled $159.0 million in the current quarter, compared to $147.2 million in the prior-year quarter. Expense for outside services in the current quarter included severance and related charges of $0.7 million. Excluding the severance and related charges, expense for outside services increased $11.1 million, or 8%, compared to the prior-year quarter, primarily reflecting increased technical services and consulting services, partially offset by a reduction in third party advisory fees.
Equipment and software expense totaled $118.0 million in the current quarter, up 3% from $114.4 million in the prior-year quarter, primarily reflecting increased software amortization.

9
Table of Contents
SECOND QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)
Noninterest Expense (continued)

Occupancy expense totaled $45.3 million, up $2.3 million, or 5%, from $43.0 million in the prior-year quarter, reflecting increased rent expense.
Other operating expense totaled $141.0 million in the current quarter compared to $114.8 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 June 30,
 
 
 
 
($ In Millions)
2016
 
2015
 
Change
Business Promotion
$
18.5

 
$
20.8

 
$
(2.3
)
 
(11
)%
Staff Related
15.9

 
9.3

 
6.6

 
73

FDIC Insurance Premiums
7.1

 
5.8

 
1.3

 
22

Other Intangibles Amortization
2.2

 
2.1

 
0.1

 
5

Other Expenses
97.3

 
76.8

 
20.5

 
27

Total Other Operating Expense
$
141.0

 
$
114.8

 
$
26.2

 
23
 %
Other operating expense in the current quarter included a charge in connection with an agreement to settle certain securities lending litigation of $46.5 million, charges related to contractual modifications associated with existing C&IS clients of $18.6 million, and other personnel charges of $2.3 million recorded in the current quarter. The prior-year quarter included a charge related to voluntary cash contributions to certain constant dollar NAV funds totaling $45.8 million. Excluding these charges, other operating expense was $73.6 million, up 7% compared to $69.0 million in the prior-year quarter, primarily due to increases in various other expenses, including higher supplemental compensation plan expense. The supplemental compensation plan expense has associated income in other operating income.
Provision for Income Taxes
Income tax expense was $134.0 million in the current quarter, representing an effective tax rate of 33.9%, compared to $142.2 million in the prior-year quarter, representing an effective tax rate of 34.6%. The decrease in the provision for income taxes compared to the prior-year quarter was based primarily on lower income before income taxes and a lower effective tax rate driven by federal tax-exempted income and an overall reduction in the state income tax provision, which included an increase in state income tax credits.
REPORTING SEGMENTS
Northern Trust is organized around its two client-focused reporting segments: C&IS and Wealth Management. Asset management and related services are provided to C&IS and Wealth Management clients primarily by the Asset Management business. The revenue and expenses of Asset Management and certain other support functions are allocated fully to C&IS and Wealth Management. Income and expense associated with the wholesale funding activities and investment portfolios of the Corporation and its principal subsidiary, The Northern Trust Company (the Bank), as well as certain corporate-based expense, executive level compensation and nonrecurring items, are not allocated to C&IS and Wealth Management, and are reported in Northern Trust’s third reporting segment, Treasury and Other, in the following pages.

10
Table of Contents
REPORTING SEGMENTS (continued)


The following tables reflect the earnings contributions and average assets of Northern Trust’s reporting segments for the three- and six-month periods ended June 30, 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 June 30,
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
$
446.9

 
$
432.0

 
$
330.3

 
$
324.8

 
$
—

 
$
—

 
$
777.2

 
$
756.8

Foreign Exchange Trading Income
62.2

 
71.8

 
1.6

 
3.0

 
0.6

 
—

 
64.4

 
74.8

Other Noninterest Income
25.9

 
43.2

 
26.7

 
26.8

 
122.8

 
103.1

 
175.4

 
173.1

Net Interest Income*
141.2

 
92.7

 
160.2

 
141.0

 
5.2

 
23.9

 
306.6

 
257.6

Revenue*
676.2

 
639.7

 
518.8

 
495.6

 
128.6

 
127.0

 
1,323.6

 
1,262.3

Provision for Credit Losses
(0.8
)
 
2.0

 
(2.2
)
 
(12.0
)
 
—

 
—

 
(3.0
)
 
(10.0
)
Noninterest Expense
556.8

 
488.2

 
330.3

 
322.7

 
37.9

 
43.6

 
925.0

 
854.5

Income before Income Taxes*
120.2

 
149.5

 
190.7

 
184.9

 
90.7

 
83.4

 
401.6

 
417.8

Provision for Income Taxes*
34.0

 
45.3

 
71.9

 
69.6

 
35.0

 
33.7

 
140.9

 
148.6

Net Income
$
86.2

 
$
104.2

 
$
118.8

 
$
115.3

 
$
55.7

 
$
49.7

 
$
260.7

 
$
269.2

Percentage of Consolidated Net Income
33
%
 
39
%
 
46
%
 
43
%
 
21
%
 
18
%
 
100
%
 
100
%
Average Assets
$
75,696.5

 
$
75,765.9

 
$
26,736.6

 
$
24,850.4

 
$
12,480.7

 
$
11,074.8

 
$
114,913.8

 
$
111,691.1

* Non-GAAP financial measures stated on a fully taxable equivalent basis (FTE). Total consolidated includes FTE adjustments of $6.9 million for 2016 and $6.4 million for 2015. A reconciliation of revenue, net interest income and net interest margin on a GAAP basis to revenue, net interest income and net interest margin on an FTE basis (each of which is a non-GAAP financial measure) is provided on page 26.
Six Months Ended June 30,
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
$
880.3

 
$
839.3

 
$
645.1

 
$
645.0

 
$
—

 
$
—

 
$
1,525.4

 
$
1,484.3

Foreign Exchange Trading Income
113.9

 
139.3

 
6.1

 
7.1

 
4.9

 
—

 
124.9

 
146.4

Other Noninterest Income
71.5

 
85.1

 
53.5

 
55.6

 
123.9

 
107.2

 
248.9

 
247.9

Net Interest Income*
279.6

 
188.7

 
318.7

 
279.3

 
22.3

 
56.4

 
620.6

 
524.4

Revenue*
1,345.3

 
1,252.4

 
1,023.4

 
987.0

 
151.1

 
163.6

 
2,519.8

 
2,403.0

Provision for Credit Losses
(4.0
)
 
(0.2
)
 
3.0

 
(14.3
)
 
—

 
—

 
(1.0
)
 
(14.5
)
Noninterest Expense
1,032.1

 
923.1

 
657.2

 
644.6

 
64.5

 
75.8

 
1,753.8

 
1,643.5

Income before Income Taxes*
317.2

 
329.5

 
363.2

 
356.7

 
86.6

 
87.8

 
767.0

 
774.0

Provision for Income Taxes*
96.2

 
102.6

 
136.8

 
134.2

 
31.5

 
37.3

 
264.5

 
274.1

Net Income
$
221.0

 
$
226.9

 
$
226.4

 
$
222.5

 
$
55.1

 
$
50.5

 
$
502.5

 
$
499.9

Percentage of Consolidated Net Income
44
%
 
45
%
 
45
%
 
45
%
 
11
%
 
10
%
 
100
%
 
100
%
Average Assets
$
75,534.7

 
$
72,513.3

 
$
26,487.2

 
$
24,513.4

 
$
12,143.5

 
$
12,587.0

 
$
114,165.4

 
$
109,613.7

* Non-GAAP financial measures stated on a fully taxable equivalent basis (FTE). Total consolidated includes FTE adjustments of $13.1 million for 2016 and $12.6 million for 2015. A reconciliation of revenue, net interest income and net interest margin on a GAAP basis to revenue, net interest income and net interest margin on an FTE basis (each of which is a non-GAAP financial measure) is provided on page 26.
Corporate & Institutional Services
C&IS net income totaled $86.2 million in the current quarter compared to $104.2 million in the prior-year quarter, a decrease of $18.0 million, or 17%. Noninterest income was $535.0 million in the current quarter, down $12.0 million, or 2%, from $547.0 million in the prior-year quarter, reflecting decreased other operating income and foreign exchange trading income, partially offset

11
Table of Contents
REPORTING SEGMENTS (continued)
Corporate & Institutional Services (continued)


by higher trust, investment and other servicing fees. 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 June 30,
 
 
 
 
($ In Millions)
2016
 
2015
 
Change
Custody and Fund Administration
$
293.3

 
$
293.6

 
$
(0.3
)
 
—
 %
Investment Management
94.2

 
80.6

 
13.6

 
17

Securities Lending
26.8

 
26.8

 
—

 
—

Other
32.6

 
31.0

 
1.6

 
5

Total C&IS Trust, Investment and Other Servicing Fees
$
446.9

 
$
432.0

 
$
14.9

 
3
 %
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 were relatively unchanged from the prior-year quarter, as new business was partially offset by the unfavorable impact of equity markets and movements in foreign exchange rates. Investment management fees increased $13.6 million, or 17%, due to lower money market mutual fund fee waivers. Money market mutual fund fee waivers in C&IS totaled $0.1 million in the current quarter compared to $13.6 million in the prior-year quarter.
Foreign exchange trading income totaled $62.2 million in the current quarter, a decrease of $9.6 million, or 13%, from $71.8 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 $25.9 million in the current quarter, down $17.3 million, or 40%, from $43.2 million in the prior-year quarter, primarily reflecting impairment charges and the loss on sale related to the decision to exit a portion of a non-strategic loan and lease portfolio as well as impairment charges related to the residual value of certain aircraft and rail cars totaling $18.9 million.
For 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 $141.2 million in the current quarter, up $48.5 million, or 52%, from $92.7 million in the prior-year quarter. The increase in net interest income was primarily attributable to an increase in the net interest margin to 0.82% from 0.53% in the prior-year quarter, primarily reflecting higher yields on earning assets. Additionally, the current quarter included a charge of $2.7 million related to the residual value of certain aircraft and rail cars. The prior-year quarter included a charge of $17.8 million related to the residual value of certain aircraft under leveraged lease agreements. The average earning assets totaled $69.4 billion, down slightly from $69.9 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 $46.4 billion in the current quarter, up slightly from $45.6 billion in the prior-year quarter.
The provision for credit losses was a credit of $0.8 million in the current quarter, compared with a provision of $2.0 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 $556.8 million in the current quarter, up $68.6 million, or 14%, from $488.2 million in the prior-year quarter. Noninterest expense in the current quarter included severance and related charges of $7.4 million. Other operating expense in the current quarter included a charge in connection with an agreement to settle certain securities lending litigation of $46.5 million, and charges related to contractual modifications associated with existing C&IS clients of $18.6 million. Other operating expense in the prior-year quarter included

12
Table of Contents
REPORTING SEGMENTS (continued)
Corporate & Institutional Services (continued)


$36.6 million of the charge related to voluntary cash contributions to certain constant dollar NAV funds allocated to C&IS. Excluding these charges, the increase in noninterest expense was primarily attributable to higher indirect expense allocations and compensation expense in the current quarter.
Wealth Management net income was $118.8 million in the current quarter, up 3% from $115.3 million in the prior-year quarter. Noninterest income was $358.6 million, up slightly from $354.6 million in the prior-year quarter, primarily reflecting higher trust, investment and other servicing fees, partially offset by lower foreign exchange trading income. Trust, investment and other servicing fees in Wealth Management totaled $330.3 million in the current quarter, increasing $5.5 million, or 2%, from $324.8 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 June 30,
 
 
 
 
($ In Millions)
2016
 
2015
 
Change
Central
$
130.2

 
$
128.2

 
$
2.0

 
2
 %
East
84.5

 
85.9

 
(1.4
)
 
(2
)
West
67.5

 
68.5

 
(1.0
)
 
(1
)
Global Family Office
48.1

 
42.2

 
5.9

 
14

Total Wealth Management Trust, Investment and Other Servicing Fees
$
330.3

 
$
324.8

 
$
5.5

 
2
 %
Wealth Management fee income is calculated primarily based on market values. The increase in Wealth Management fees, driven by Global Family office, was primarily attributable to the impact of lower money market mutual fund fee waivers, partially offset by unfavorable equity markets. Money market mutual fund fee waivers in Wealth Management totaled $0.1 million in the current quarter compared to $14.6 million in the prior-year quarter.
Foreign exchange trading income totaled $1.6 million, down 47% from $3.0 million in the prior-year quarter, primarily reflecting decreased client activity.
Other noninterest income of $26.7 million in the current quarter was relatively unchanged from $26.8 million in the prior-year quarter.
For 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 significant impact on the Wealth Management reporting segment.
Net interest income stated on an FTE basis was $160.2 million in the current quarter, up $19.2 million, or 14%, from $141.0 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 increased to 2.43% from 2.30% in the prior-year quarter. Average earning assets increased $1.9 billion, or 8%, to $26.5 billion from the prior-year quarter’s $24.6 billion. Earning assets and funding sources were primarily comprised of loans and domestic retail interest-bearing deposits, respectively.
The provision for credit losses was a credit provision of $2.2 million in the current quarter, compared with a credit provision of $12.0 million in the prior-year quarter, which reflected continued improvement in credit quality.
Total noninterest expense, which includes the direct expense of the reporting segment, indirect expense allocations for product and operating support and indirect expense allocations for certain corporate support services, totaled $330.3 million in the current quarter, compared to $322.7 million in the prior-year quarter, an increase of $7.6 million, or 2%, primarily attributable to increased indirect expense allocations and higher compensation expense in the current quarter. Noninterest expense in the current quarter included severance, other personnel and related charges of $9.7 million. The prior-year quarter included a $9.2 million of the charge related to voluntary cash contributions to certain constant dollar NAV funds allocated to Wealth Management.


13
Table of Contents
REPORTING SEGMENTS (continued)
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 $123.4 million in the current quarter, up $20.3 million, or 20% ,from $103.1 million in the prior-year quarter, primarily reflecting an increase in other operating income, a component of other noninterest income. Other operating income in the current quarter included the gain on the sale of 1.1 million Visa Inc. Class B common shares, net of the valuation adjustment to existing swap agreements, totaling $118.2 million. The prior-year quarter included a gain on the sale of 1.0 million Visa Inc. Class B common shares totaling $99.9 million.
For 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 $18.7 million, or 78%, to $5.2 million in the current quarter, compared to $23.9 million in the prior-year quarter. The decrease reflected a decline in the net interest margin, partially offset by higher levels of earning assets. Average earning assets increased $1.4 billion to $10.7 billion from the prior-year quarter’s $9.3 billion.
Noninterest expense totaled $37.9 million in the current quarter, down $5.7 million, or 13%, from $43.6 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 and compensation expense, as compared to the prior-year quarter. Noninterest expense in the current quarter included severance and related charges of $0.4 million.
SIX-MONTH CONSOLIDATED RESULTS OF OPERATIONS
Overview
Net income per diluted common share was $2.10 for the six months ended June 30, 2016 and $2.04 in the comparable prior-year period. Net income totaled $502.5 million, up slightly as compared to $499.9 million in the prior-year period. The performance in the current period produced an annualized return on average common equity of 11.8%, compared to 12.1% in the prior-year period. The annualized return on average assets was 0.9% in each of the respective periods.

The current period included a gain on the sale of 1.1 million Visa Inc. Class B common shares, net of the valuation adjustment to existing swap agreements, totaling $118.2 million; a charge in connection with an agreement to settle certain securities lending litigation, which is subject to court approval, of $46.5 million; charges related to contractual modifications associated with existing C&IS clients of $18.6 million; severance, other personnel and related charges of $17.5 million; impairment charges and the loss on sale related to the decision to exit a portion of a non-strategic loan and lease portfolio of $14.1 million; and impairment charges related to the residual value of certain aircraft and rail cars of $7.5 million. Excluding these items, net income per diluted common share, net income and return on average common equity were $2.07, $494.5 million and 11.7%, respectively.
The prior period included a net gain on the sale of 1.0 million Visa Inc. Class B common shares totaling $99.9 million; voluntary cash contributions to certain constant dollar NAV funds of $45.8 million; and the impairment of the residual value of certain aircraft under leveraged lease agreements of $17.8 million. Excluding the gain and charges, net income per diluted common share, net income, and return on average common equity were $1.95, $477.4 million and 11.5%, respectively.
Revenue for the six months ended June 30, 2016 totaled $2.51 billion, up $116.3 million, or 5%, as compared to $2.39 billion in the prior-year period, primarily driven by increased net interest income and trust, investment and other servicing fees, partially offset by lower foreign exchange trading income. Noninterest income was $1.90 billion, up $20.6 million, or 1%, from $1.88 billion in the prior-year period.

Net interest income increased 19% to $607.5 million in the current quarter as compared to $511.8 million in the prior-year quarter, due to growth in earning assets and a higher net interest margin. Additionally, the current period included a charge of $2.7 million related to the residual value of certain aircraft and rail cars. The prior-year period included a charge of $17.8 million related to the residual value of certain aircraft under leveraged lease agreements.


14
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SIX-MONTH CONSOLIDATED RESULTS OF OPERATIONS (continued)
Overview (continued)


The provision for credit losses was a credit of $1.0 million in the current period, as compared to a credit provision of $14.5 million in the prior-year period.

Noninterest expense totaled $1.8 billion, up $110.3 million, or 7%, from $1.6 billion in the prior-year period. The current period included a charge in connection with an agreement to settle certain securities lending litigation, which is subject to court approval, of $46.5 million; charges related to contractual modifications associated with existing C&IS clients of $18.6 million; severance, other personnel and related charges of $17.5 million. The prior-year quarter included the $45.8 million charge related to voluntary cash contributions to certain constant dollar NAV funds. Excluding the current- and prior-year period charges, noninterest expense increased $73.5 million, or 5%, primarily attributable to higher compensation and outside services expense.
Noninterest Income
The components of noninterest income are provided below.
Table 15: Six Months Ended June 30 Noninterest Income
Noninterest Income
Six Months Ended June 30,
 
 
 
 
($ In Millions)
2016
 
2015
 
Change
Trust, Investment and Other Servicing Fees
$
1,525.4

 
$
1,484.3

 
$
41.1

 
3
 %
Foreign Exchange Trading Income
124.9

 
146.4

 
(21.5
)
 
(15
)
Treasury Management Fees
32.2

 
32.4

 
(0.2
)
 
(1
)
Security Commissions and Trading Income
39.5

 
39.8

 
(0.3
)
 
(1
)
Other Operating Income
179.3

 
176.0

 
3.3

 
2

Investment Security Gains (Losses), net
(2.1
)
 
(0.3
)
 
(1.8
)
 
N/M

Total Noninterest Income
$
1,899.2

 
$
1,878.6

 
$
20.6

 
1
 %
As illustrated in the following table, trust, investment and other servicing fees from C&IS increased $41.0 million, or 5%, totaling $880.3 million, compared to $839.3 million a year ago.
Table 16: 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)
2016
 
2015
 
Change
Custody and Fund Administration
$
579.7

 
$
570.7

 
$
9.0

 
2
%
Investment Management
183.3

 
157.0

 
26.3

 
17

Securities Lending
49.4

 
48.4

 
1.0

 
2

Other
67.9

 
63.2

 
4.7

 
7

Total
$
880.3

 
$
839.3

 
$
41.0

 
5
%
Custody and fund administration fees, the largest component of C&IS fees, increased 2%, primarily driven by new business and partially offset by the unfavorable impact of equity markets and movements in foreign exchange rates. C&IS investment management fees increased 17%, primarily due to lower money market mutual fund fee waivers. Money market mutual fund fee waivers in C&IS totaled $1.8 million, compared to waived fees of $28.8 million in the prior-year period. Other fees in C&IS increased 7%, primarily due to new business related to investment risk and analytical services and increased other ancillary services.
As illustrated in the following table, trust, investment and other servicing fees from Wealth Management totaled $645.1 million, relatively unchanged from $645.0 million a year ago.

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

Table 17: Six Months Ended June 30 Wealth Management Trust, Investment and Other Servicing Fees
 
Six Months Ended June 30,
 
 
 
 
($ In Millions)
2016
 
2015
 
Change
Wealth Management Trust, Investment and Other Servicing Fees
 
 
 
 
 
 
 
Central
$
254.6

 
$
259.0

 
$
(4.4
)
 
(2
)%
East
165.5

 
168.3

 
(2.8
)
 
(2
)
West
131.4

 
135.3

 
(3.9
)
 
(3
)
Global Family Office
93.6

 
82.4

 
11.2

 
14

Total
$
645.1

 
$
645.0

 
$
0.1

 
—
 %
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 $6.1 million compared with $32.3 million in the prior-year period.
Foreign exchange trading income decreased $21.5 million, or 15%, and totaled $124.9 million compared with $146.4 million in the prior-year period. The decrease was attributable to lower client volumes compared to the prior-year period.
Other operating income increased 2% to $179.3 million compared with $176.0 million in the prior-year period. The components of other operating income are provided below.
Table 18: Six Months Ended June 30 Other Operating Income
Other Operating Income
Six Months Ended June 30,
 
 
 
 
($ In Millions)
2016
 
2015
 
Change
Loan Service Fees
$
28.2

 
$
29.5

 
$
(1.3
)
 
(4
)%
Banking Service Fees
25.2

 
23.7

 
1.5

 
7

Other Income
125.9

 
122.8

 
3.1

 
3

Total Other Operating Income
$
179.3

 
$
176.0

 
$
3.3

 
2
 %
The current-year period other income included the gain on the sale of 1.1 million Visa Inc. Class B common shares, net of the valuation adjustment to existing swap agreements, totaling $118.2 million, offset by impairment charges and the loss on sale related to the decision to exit a portion of a non-strategic loan and lease portfolio as well as impairment charges related to the residual value of certain aircraft and rail cars of $18.9 million. The prior-year period other income included a $99.9 million net gain on the sale of a portion of the Visa Inc. Class B common shares held by the Corporation. Excluding these items, other operating income increased 5% from the prior-year period, primarily due to income associated with supplemental compensation plans.

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

The following table presents an analysis of average balances and interest rate changes affecting net interest income.
Table 19: Six Months Ended June 30 Average Consolidated Balance Sheets with Analysis of Net Interest Income
 
NORTHERN TRUST CORPORATION
(Interest and Rate on a Fully Taxable Equivalent Basis)
Six Months Ended June 30,
2016
 
2015
($ In Millions)
Interest
 
Average
Balance
 
Rate (5)
 
Interest
 
Average
Balance
 
Rate (5)
Average Earning Assets
 
 
 
 
 
 
 
 
 
 
 
Federal Funds Sold and Securities Purchased under
 
 
 
 
 
 
 
 
 
 
 
Agreements to Resell
$
8.0

 
$
1,754.5

 
0.92
%
 
$
2.4

 
$
1,037.8

 
0.46
%
Interest-Bearing Due from and Deposits with Banks (1)
34.0

 
9,442.4

 
0.72

 
42.8

 
10,970.0

 
0.79

Federal Reserve and Other Central Bank Deposits
49.6

 
20,413.9

 
1.80

 
31.2

 
19,875.8

 
0.32

Securities
 
 
 
 
 
 
 
 
 
 
 
U.S. Government
40.2

 
6,687.8

 
1.21

 
26.1

 
4,685.1

 
1.12

Obligations of States and Political Subdivisions
4.2

 
329.6

 
2.57

 
3.9

 
116.9

 
6.71

Government Sponsored Agency
85.8

 
17,055.6

 
1.01

 
71.6

 
16,667.7

 
0.87

Other (2)
81.8

 
15,707.0

 
1.05

 
64.3

 
15,397.5

 
0.84

Total Securities
212.0

 
39,780.0

 
1.07

 
165.9

 
36,867.2

 
0.91

Loans and Leases (3)
406.2

 
34,224.7

 
2.39

 
357.9

 
32,512.9

 
2.22