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 September 30, 2015



¨	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. 0-5965

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

231,220,304 Shares – $1.66 2/3 Par Value

(Shares of Common Stock Outstanding on September 30, 2015)

Table of Contents

NORTHERN TRUST CORPORATION

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2015

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)	28
Consolidated Balance Sheets	28
Consolidated Statements of Income	29
Consolidated Statements of Comprehensive Income	29
Consolidated Statements of Changes in Stockholders’ Equity	30
Consolidated Statements of Cash Flows	31
Notes to Consolidated Financial Statements	32
Item 4: Controls and Procedures	74

Part II – Other Information
Item 1: Legal Proceedings	74
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds	74
Item 6: Exhibits	74

Signatures	75

Table of Contents

CONSOLIDATED FINANCIAL HIGHLIGHTS

(UNAUDITED)



	Three Months Ended September 30,							Nine Months Ended September 30,
CONDENSED INCOME STATEMENTS (In Millions)	2015			2014		% Change (*)		2015			2014		% Change (*)
Noninterest Income	$	886.6		$	829.6	7	%	$	2,765.2		$	2,459.5	12	%
Net Interest Income	268.9			249.3		8		780.7			741.6		5
Provision for Credit Losses	(10.0		)	—		N/M		(24.5		)	3.0		N/M
Noninterest Expense	812.3			774.7		5		2,455.8			2,353.7		4
Income before Income Taxes	353.2			304.2		16		1,114.6			844.4		32
Provision for Income Taxes	118.6			99.7		19		380.1			276.6		37
Net Income	$	234.6		$	204.5	15	%	$	734.5		$	567.8	29	%



PER COMMON SHARE
Net Income — Basic	$	0.97	$	0.85	14	%	$	3.03	$	2.36	28	%
— Diluted	0.96		0.84		14		3.00		2.34		28
Cash Dividends Declared Per Common Share	0.36		0.33		9		1.05		0.97		8
Book Value — End of Period (EOP)	36.31		34.62		5		36.31		34.62		5
Market Price — EOP	68.16		68.03		—		68.16		68.03		—



SELECTED BALANCE SHEET DATA (In Millions)
	September 30, 2015		December 31, 2014		% Change (*)
End of Period:
Assets	$	119,995.2	$	109,946.5	9	%
Earning Assets	110,565.5		100,889.8		10
Deposits	99,935.9		90,757.0		10
Stockholders’ Equity	8,784.5		8,448.9		4



	Three Months Ended September 30,						Nine Months Ended September 30,
	2015		2014		% Change (*)		2015		2014		% Change (*)
Average Balances:
Assets	$	109,924.1	$	105,244.7	4	%	$	109,718.3	$	102,955.8	7	%
Earning Assets	100,809.2		96,967.5		4		101,110.5		94,773.8		7
Deposits	91,027.0		85,717.2		6		89,979.2		83,721.6		7
Stockholders’ Equity	8,710.5		8,285.5		5		8,597.9		8,054.3		7



CLIENT ASSETS (In Billions)	September 30, 2015		December 31, 2014		% Change (*)
Assets Under Custody	$	5,956.4	$	5,968.8	—	%
Assets Under Management	886.8		934.1		(5	)

Table of Contents

SELECTED RATIOS AND METRICS



	Three Months Ended September 30,						Nine Months Ended September 30,
	2015		2014		% Change (*)		2015		2014		% Change (*)
Financial Ratios:
Return on Average Common Equity	10.91	%	10.09	%	8	%	11.68	%	9.52	%	23	%
Return on Average Assets	0.85		0.77		10		0.90		0.74		22
Dividend Payout Ratio	37.5		39.3		(5	)	35.0		41.5		(16	)
Net Interest Margin (**)	1.08		1.05		3		1.06		1.08		(2	)



	September 30, 2015				December 31, 2014
	Advanced Approach		Standardized Approach (a)		Advanced Approach		Standardized Approach (a)
Capital Ratios:
Northern Trust Corporation
Common Equity Tier 1	12.4	%	10.4	%	12.4	%	12.5	%
Tier 1	13.0		11.0		13.2		13.3
Total	14.8		12.8		15.0		15.5
Tier 1 Leverage	7.8		7.8		n/a		7.8
Supplementary Leverage (b)	6.4		n/a		n/a		n/a

The Northern Trust Company
Common Equity Tier 1	12.0	%	9.9	%	12.0	%	11.8	%
Tier 1	12.0		9.9		12.0		11.8
Total	13.6		11.6		13.8		14.0
Tier 1 Leverage	7.0		7.0		n/a		6.9
Supplementary Leverage (b)	5.7		n/a		n/a		n/a


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


(**)	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 25.


(a)	In 2014, Standardized Approach risk-weighted assets were determined by Basel I requirements. Effective with the first quarter of 2015, risk-weighted assets are calculated in accordance with the Basel III Standardized Approach final rules.


(b)	Beginning with the first quarter of 2015, advanced approaches banking organizations must calculate and report their supplementary leverage ratio. Effective January 1, 2018, advanced approaches institutions, such as the Corporation, 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

THIRD QUARTER CONSOLIDATED RESULTS OF OPERATIONS

General

Northern Trust Corporation (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 $0.96 in the current quarter, up from $0.84 in the third quarter of 2014. Net income was $234.6 million in the current quarter as compared to $204.5 million in the prior-year quarter. Annualized return on average common equity in the quarter was 10.9% as compared to 10.1% in the prior-year quarter. The annualized return on average assets was 0.8%, relatively unchanged from the prior-year quarter.

Revenue of $1.16 billion was up $76.6 million, or 7%, from $1.08 billion in the prior-year quarter, primarily reflecting higher trust, investment and other servicing fees, foreign exchange trading income and security commissions and trading income. Noninterest income increased $57.0 million, or 7%, to $886.6 million from $829.6 million in the prior-year quarter.

Net interest income increased 8% to $268.9 million in the current quarter as compared to $249.3 million in the prior-year quarter, due to growth in earning assets and a higher net interest margin.

The provision for credit losses was a credit of $10.0 million in the current quarter, reflecting improved credit quality. There was no provision for credit losses recorded in the prior-year quarter.

Noninterest expense totaled $812.3 million, up $37.6 million, or 5%, from $774.7 million in the prior-year quarter, attributable to higher outside services, compensation and equipment and software expenses.

Table of Contents

THIRD QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)

Noninterest Income

The components of noninterest income are provided below.

Table 1: Noninterest Income



Noninterest Income	Three Months Ended September 30,
($ In Millions)	2015		2014		Change
Trust, Investment and Other Servicing Fees	$	749.1	$	718.2	$	30.9		4	%
Foreign Exchange Trading Income	62.9		46.4		16.5			36
Treasury Management Fees	16.1		16.4		(0.3		)	(2	)
Security Commissions and Trading Income	20.4		14.2		6.2			44
Other Operating Income	38.1		34.1		4.0			12
Investment Security Gains, net	—		0.3		(0.3		)	(100	)
Total Noninterest Income	$	886.6	$	829.6	$	57.0		7	%

Trust, investment and other servicing fees are based primarily on: the market value of assets held in custody, managed or serviced; the volume of transactions; securities lending volume and spreads; and fees for other services rendered. Certain market value calculations on which fees are based are performed on a monthly or quarterly basis in arrears. For a further discussion of trust, investment and other servicing fees and how they are derived, refer to the “Reporting Segments” section.

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

Table 2: Assets Under Custody



Assets Under Custody	September 30, 2015		June 30, 2015		September 30, 2014		Change Q3-15/Q2-15		Change Q3-15/Q3-14
($ In Billions)	September 30, 2015		June 30, 2015		September 30, 2014		Change Q3-15/Q2-15		Change Q3-15/Q3-14
Corporate & Institutional	$	5,460.6	$	5,652.6	$	5,403.1	(3	)%	1	%
Wealth Management	495.8		524.4		507.2		(5	)	(2	)
Total Assets Under Custody	$	5,956.4	$	6,177.0	$	5,910.3	(4	)%	1	%

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

Table 3: Allocations of Assets Under Custody



	September 30, 2015						June 30, 2015						September 30, 2014
Assets Under Custody	C&IS		WM		Total		C&IS		WM		Total		C&IS		WM		Total
Equities	43	%	53	%	44	%	45	%	55	%	46	%	44	%	55	%	45	%
Fixed Income Securities	38		24		37		37		23		35		37		22		36
Cash and Other Assets	19		23		19		18		22		19		19		23		19

The $46.1 billion increase in consolidated assets under custody from $5.9 trillion at September 30, 2014, to $6.0 trillion as of September 30, 2015 primarily reflected increased net new business driven by institutional clients in global funds services.

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

Table 4: Assets Under Management



Assets Under Management	September 30, 2015		June 30, 2015		September 30, 2014		Change Q3-15/Q2-15		Change Q3-15/Q3-14
($ In Billions)	September 30, 2015		June 30, 2015		September 30, 2014		Change Q3-15/Q2-15		Change Q3-15/Q3-14
Corporate & Institutional	$	661.5	$	713.6	$	702.9	(7	)%	(6	)%
Wealth Management	225.3		232.0		220.4		(3	)	2
Total Assets Under Management	$	886.8	$	945.6	$	923.3	(6	)%	(4	)%

The following table presents consolidated assets under management by investment type.

Table of Contents

THIRD QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)

Noninterest Income (continued)

Table 5: Assets Under Management by Investment Type



($ In Billions)	September 30, 2015		June 30, 2015		September 30, 2014
Equities	$	437.8	$	487.7	$	477.1
Fixed Income Securities	150.1		167.7		154.2
Cash and Other Assets	176.9		169.9		170.9
Securities Lending Collateral	122.0		120.3		121.1
Total Assets Under Management	$	886.8	$	945.6	$	923.3

The 4% decrease in consolidated assets under management from $923.3 billion at September 30, 2014, to $886.8 billion as of September 30, 2015 primarily reflected lower equity assets and fixed income securities, partially offset by increases in cash and securities lending collateral.

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

Table 6: Allocations of Assets Under Management



	September 30, 2015						June 30, 2015						September 30, 2014
Assets Under Management	C&IS		WM		Total		C&IS		WM		Total		C&IS		WM		Total
Equities	51	%	44	%	49	%	53	%	47	%	51	%	53	%	48	%	52	%
Fixed Income Securities	13		29		17		14		28		18		13		28		17
Securities Lending Collateral	18		—		14		17		—		13		17		—		13
Cash and Other Assets	18		27		20		16		25		18		17		24		18

Changes in assets under custody and under management are in comparison to the twelve-month decrease in the S&P 500® index of 2.6% and decline in the MSCI EAFE® index (USD) of 10.9%.

Foreign exchange trading income totaled $62.9 million in the current quarter, up $16.5 million, or 36%, compared to $46.4 million in the prior-year quarter. The increase was primarily due to higher currency volatility as compared to the prior-year quarter.

Security commissions and trading income totaled $20.4 million, up $6.2 million, or 44%, compared with $14.2 million in the prior-year quarter. The increase was primarily attributable to higher income from interest rate protection products sold to clients.

Other operating income totaled $38.1 million, up $4.0 million, or 12%, compared to $34.1 million in the prior-year quarter, reflecting increases in various other income categories. The components of other operating income are provided below.

Table 7: Other Operating Income



Other Operating Income	Three Months Ended September 30,
($ In Millions)	2015		2014		Change
Loan Service Fees	$	14.8	$	15.3	$	(0.5	)	(3	)%
Banking Service Fees	11.9		12.3		(0.4		)	(3	)
Other Income	11.4		6.5		4.9			75
Total Other Operating Income	$	38.1	$	34.1	$	4.0		12	%

Table of Contents

THIRD QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)

Net Interest Income

The following table presents an analysis of average balances and interest rate changes affecting net interest income.



Table 8: AVERAGE CONSOLIDATED BALANCE SHEETS WITH ANALYSIS OF NET INTEREST INCOME (INTEREST AND RATE ON A FULLY TAXABLE EQUIVALENT BASIS)	NORTHERN TRUST CORPORATION
	Third Quarter
	2015							2014
($ 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	$	1.3	$	1,080.4		0.49	%	$	1.0	$	923.1		0.44	%
Interest-Bearing Due from and Deposits with Banks (1)	27.0		15,828.1			0.68		30.9		16,288.3			0.75
Federal Reserve Deposits	8.1		12,721.3			0.25		10.4		15,914.3			0.26
Securities
U.S. Government	14.1		5,034.6			1.11		7.9		3,031.9			1.03
Obligations of States and Political Subdivisions	1.8		103.3			6.80		2.5		148.5			6.74
Government Sponsored Agency	34.9		16,198.2			0.86		34.2		17,385.6			0.78
Other (2)	36.4		16,705.0			0.86		27.5		13,019.4			0.84
Total Securities	87.2		38,041.1			0.91		72.1		33,585.4			0.85
Loans and Leases (3)	188.2		33,138.3			2.25		186.3		30,256.4			2.44
Total Earning Assets	311.8		100,809.2			1.23		300.7		96,967.5			1.23
Allowance for Credit Losses Assigned to Loans and Leases	—		(256.0		)	—		—		(273.4		)	—
Cash and Due from Banks	—		2,683.5			—		—		2,783.0			—
Buildings and Equipment	—		435.6			—		—		445.6			—
Client Security Settlement Receivables	—		1,031.8			—		—		820.8			—
Goodwill	—		532.4			—		—		541.9			—
Other Assets	—		4,687.6			—		—		3,959.3			—
Total Assets	$	—	$	109,924.1		—	%	$	—	$	105,244.7		—	%
Average Source of Funds
Deposits
Savings and Money Market	$	2.4	$	15,168.4		0.06	%	$	2.5	$	15,019.0		0.07	%
Savings Certificates and Other Time	2.2		1,487.0			0.57		1.4		1,902.9			0.30
Non-U.S. Offices — Interest-Bearing	13.3		50,107.9			0.11		17.7		48,725.5			0.14
Total Interest-Bearing Deposits	17.9		66,763.3			0.11		21.6		65,647.4			0.13
Short-Term Borrowings	1.1		3,878.5			0.11		1.5		4,860.3			0.12
Senior Notes	11.7		1,497.2			3.10		11.6		1,496.8			3.10
Long-Term Debt	5.5		1,374.3			1.60		9.2		1,636.5			2.23
Floating Rate Capital Debt	0.6		277.3			0.86		0.6		277.2			0.81
Total Interest-Related Funds	36.8		73,790.6			0.20		44.5		73,918.2			0.24
Interest Rate Spread	—		—			1.03		—		—			0.99
Demand and Other Noninterest-Bearing Deposits	—		24,263.7			—		—		20,069.8			—
Other Liabilities	—		3,159.3			—		—		2,971.2			—
Stockholders’ Equity	—		8,710.5			—		—		8,285.5			—
Total Liabilities and Stockholders’ Equity	$	—	$	109,924.1		—	%	$	—	$	105,244.7		—	%
Net Interest Income/Margin (FTE Adjusted)	$	275.0	$	—		1.08	%	$	256.2	$	—		1.05	%
Net Interest Income/Margin (Unadjusted)	$	268.9	$	—		1.06	%	$	249.3	$	—		1.02	%

Table of Contents

THIRD QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)

Net Interest Income (continued)

ANALYSIS OF NET INTEREST INCOME CHANGES

DUE TO VOLUME AND RATE



	Three Months Ended September 30, 2015/2014
	Change Due To
(In Millions)	Average Balance			Rate			Total
Earning Assets (FTE)	$	11.1		$	—		$	11.1
Interest-Related Funds	(0.1		)	(7.6		)	(7.7		)
Net Interest Income (FTE)	$	11.2		$	7.6		$	18.8


(1)	Interest-Bearing Due from and Deposits with Banks includes the interest-bearing component of Cash and Due from Banks and Interest-Bearing Deposits with Banks as presented on the consolidated balance sheets.


(2)	Other securities include certain community development investments and Federal Home Loan Bank and Federal Reserve stock, which are classified in other assets in the consolidated balance sheets as of September 30, 2015 and 2014.


(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 37.6% and 37.8% for the three months ended September 30, 2015 and 2014, respectively. Total taxable equivalent interest adjustments amounted to $6.1 million and $6.9 million for the three months ended September 30, 2015 and 2014, respectively.

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 $275.0 million, up $18.8 million, or 7%, compared to $256.2 million in the prior-year quarter. The increase was primarily the result of growth in earning assets and a higher net interest margin. Earning assets for the current quarter averaged $100.8 billion, up $3.8 billion, or 4%, from $97.0 billion in the prior-year quarter, primarily resulting from higher levels of securities and loans. Earning asset growth was funded by a higher level of demand deposits and other noninterest-bearing deposits.

The net interest margin on an FTE basis, increased to 1.08% in the current quarter from 1.05% in the prior-year quarter, primarily reflecting a lower cost of interest-related funds, partially offset by lower yields on certain categories of 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 25.

Federal Reserve deposits averaged $12.7 billion, down $3.2 billion, or 20%, from $15.9 billion in the prior-year quarter. Average securities were $38.0 billion, up $4.5 billion, or 13%, from $33.6 billion in the prior-year quarter and include certain community development investments and Federal Home Loan Bank and Federal Reserve stock of $183.5 million, $125.8 million and $53.1 million, respectively, which are recorded in other assets in the consolidated balance sheet.

Loans and leases averaged $33.1 billion, up $2.9 billion, or 10%, from $30.3 billion in the prior-year quarter, primarily reflecting higher levels of commercial and institutional loans and commercial real estate loans. Private client loans averaged $8.4 billion, up $1.9 billion, or 29%, from $6.5 billion for the prior-year quarter. Commercial and institutional loans averaged $9.2 billion, up $1.2 billion, or 15%, from $8.0 billion for the prior-year quarter. Commercial real estate loans averaged $3.7 billion, up $648.0 million, or 21%, from $3.1 billion for the prior-year quarter.

Northern Trust utilizes a diverse mix of funding sources. Total interest-bearing deposits averaged $66.8 billion, compared to $65.6 billion in the prior-year quarter, an increase of $1.1 billion, or 2%. Other interest-bearing funds averaged $7.0 billion, a decrease of $1.2 billion, from $8.3 billion in the prior-year quarter, attributable to decreased 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 noninterest-related funds utilized to fund earning assets increased $4.0 billion, or 17%, to $27.0 billion from $23.0 billion in the prior-year quarter, primarily resulting from higher levels of demand and other noninterest-bearing deposits.

Table of Contents

THIRD QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)

Net Interest Income (continued)

Provision for Credit Losses

The provision for credit losses was a credit of $10.0 million in the current quarter, reflecting improved credit quality. There was no provision for credit losses recorded in the prior-year quarter. Net charge-offs in the current quarter were $9.4 million, resulting from charge-offs of $11.9 million and recoveries of $2.5 million. The prior-year quarter included $5.2 million of net charge-offs, resulting from $8.6 million of charge-offs and $3.4 million of recoveries. Nonperforming assets of $207.5 million decreased 10% from the prior-year quarter. Residential real estate loans and commercial real estate loans accounted for 77% and 13%, respectively, of total nonperforming loans and leases at September 30, 2015. For additional discussion of the provision and allowance for credit losses, refer to the “Asset Quality” section beginning on page 21.

Noninterest Expense

The components of noninterest expense are provided below.

Table 9: Noninterest Expense



Noninterest Expense	Three Months Ended September 30,
($ In Millions)	2015		2014		Change
Compensation	$	361.6	$	348.0	$	13.6		4	%
Employee Benefits	69.8		70.6		(0.8		)	(1	)
Outside Services	158.3		142.4		15.9			11
Equipment and Software	113.6		100.5		13.1			13
Occupancy	43.7		43.8		(0.1		)	—
Other Operating Expense	65.3		69.4		(4.1		)	(6	)
Total Noninterest Expense	$	812.3	$	774.7	$	37.6		5	%

Compensation expense, the largest component of noninterest expense, totaled $361.6 million in the current quarter, up $13.6 million, or 4%, from $348.0 million in the prior-year quarter. The increase primarily reflects higher staff levels, base pay adjustments and performance-based compensation, partially offset by the favorable impact of movements in foreign exchange rates. Staff on a full-time equivalent basis at September 30, 2015, totaled approximately 16,000, up 5% from September 30, 2014.

Employee benefit expense totaled $69.8 million in the current quarter, down slightly, from $70.6 million in the prior-year quarter, reflecting lower expense associated with employee medical benefits offset by higher pension expense.

Expense associated with outside services totaled $158.3 million in the current quarter, up $15.9 million, or 11%, from $142.4 million in the prior-year quarter, primarily reflecting higher consulting expense due to regulatory-related spend and increased technical services expense, partially offset by lower third-party advisory and sub-custodian expenses.

Equipment and software expense totaled $113.6 million in the current quarter, up $13.1 million, or 13%, from $100.5 million in the prior-year quarter, reflecting higher software-related costs.

Occupancy expense totaled $43.7 million, relatively unchanged from $43.8 million in the prior-year quarter.

Table of Contents

THIRD QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)

Noninterest Expense (continued)

Other operating expense totaled $65.3 million in the current quarter, down 6% from $69.4 million in the prior-year quarter, reflecting decreases in various categories. The components of other operating expense are provided below.

Table 10: Other Operating Expense



Other Operating Expense	Three Months Ended September 30,
($ In Millions)	2015		2014		Change
Business Promotion	$	20.4	$	19.1	$	1.3		7	%
Staff Related	8.9		10.8		(1.9		)	(18	)
FDIC Insurance Premiums	6.6		5.8		0.8			14
Other Intangibles Amortization	2.1		4.8		(2.7		)	(56	)
Other Expenses	27.3		28.9		(1.6		)	(6	)
Total Other Operating Expense	$	65.3	$	69.4	$	(4.1	)	(6	)%

Provision for Income Taxes

Income tax expense was $118.6 million in the current quarter, representing an effective tax rate of 33.6%, compared to $99.7 million in the prior-year quarter, representing an effective tax rate of 32.8%.

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.

Table of Contents

REPORTING SEGMENTS (continued)

The following tables reflect the earnings contributions and average assets of Northern Trust’s reporting segments for the three- and nine- month periods ended September 30, 2015, and 2014. 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 11: Results of Reporting Segments



Three Months Ended September 30,	Corporate & Institutional Services						Wealth Management						Treasury and Other						Total Consolidated
($ In Millions)	2015			2014			2015			2014			2015			2014			2015			2014
Noninterest Income
Trust, Investment and Other Servicing Fees	$	429.7		$	399.9		$	319.4		$	318.3		$	—		$	—		$	749.1		$	718.2
Foreign Exchange Trading Income	60.0			44.4			2.9			2.0			—			—			62.9			46.4
Other Noninterest Income	45.9			42.8			28.3			20.9			0.4			1.3			74.6			65.0
Net Interest Income (FTE)*	108.6			78.4			142.5			131.2			23.9			46.6			275.0			256.2
Revenue*	644.2			565.5			493.1			472.4			24.3			47.9			1,161.6			1,085.8
Provision for Credit Losses	(2.8		)	0.9			(7.2		)	(0.9		)	—			—			(10.0		)	—
Noninterest Expense	464.6			429.6			316.3			312.1			31.4			33.0			812.3			774.7
Income before Income Taxes*	182.4			135.0			184.0			161.2			(7.1		)	14.9			359.3			311.1
Provision for Income Taxes*	58.3			42.4			69.0			60.7			(2.6		)	3.5			124.7			106.6
Net Income	$	124.1		$	92.6		$	115.0		$	100.5		$	(4.5	)	$	11.4		$	234.6		$	204.5
Percentage of Consolidated Net Income	53		%	45		%	49		%	49		%	(2		)%	6		%	100		%	100		%
Average Assets	$	41,305.7		$	59,907.1		$	25,274.6		$	26,061.8		$	43,343.8		$	19,275.8		$	109,924.1		$	105,244.7

* Stated on a fully taxable equivalent basis (FTE). Total consolidated includes FTE adjustments of $6.1 million for 2015 and $6.9 million for 2014.



Nine Months Ended September 30,	Corporate & Institutional Services						Wealth Management						Treasury and Other						Total Consolidated
($ In Millions)	2015			2014			2015			2014			2015			2014			2015			2014
Noninterest Income
Trust, Investment and Other Servicing Fees	$	1,269.0		$	1,174.5		$	964.4		$	930.1		$	—		$	—		$	2,233.4		$	2,104.6
Foreign Exchange Trading Income	199.3			143.2			10.0			6.2			—			—			209.3			149.4
Other Noninterest Income	131.0			134.3			83.9			66.7			107.6			4.5			322.5			205.5
Net Interest Income (FTE)*	297.3			228.8			421.8			398.8			80.3			136.4			799.4			764.0
Revenue*	1,896.6			1,680.8			1,480.1			1,401.8			187.9			140.9			3,564.6			3,223.5
Provision for Credit Losses	(3.0		)	4.5			(21.5		)	(1.5		)	—			—			(24.5		)	3.0
Noninterest Expense	1,387.7			1,299.5			960.9			960.3			107.2			93.9			2,455.8			2,353.7
Income before Income Taxes*	511.9			376.8			540.7			443.0			80.7			47.0			1,133.3			866.8
Provision for Income Taxes*	160.9			113.3			203.2			166.9			34.7			18.8			398.8			299.0
Net Income	$	351.0		$	263.5		$	337.5		$	276.1		$	46.0		$	28.2		$	734.5		$	567.8
Percentage of Consolidated Net Income	48		%	46		%	46		%	49		%	6		%	5		%	100		%	100		%
Average Assets	$	41,461.6		$	59,061.3		$	24,806.8		$	23,613.4		$	43,449.9		$	20,281.1		$	109,718.3		$	102,955.8

* Stated on a fully taxable equivalent basis (FTE). Total consolidated includes FTE adjustments of $18.7 million for 2015 and $22.4 million for 2014.

Corporate & Institutional Services

C&IS net income totaled $124.1 million in the current quarter compared to $92.6 million in the prior-year quarter, an increase of $31.5 million, or 34%. Noninterest income was $535.6 million in the current quarter, up $48.5 million, or 10%, from $487.1 million in the prior-year quarter, reflecting higher trust, investment and other servicing fees and foreign exchange trading income. The following table provides a summary of C&IS trust, investment and other servicing fees.

Table of Contents

REPORTING SEGMENTS (continued)

Corporate & Institutional Services (continued)

Table 12: C&IS Trust, Investment and Other Servicing Fees



	Three Months Ended September 30,
($ In Millions)	2015		2014		Change
Custody and Fund Administration	$	293.9	$	275.0	$	18.9		7	%
Investment Management	82.6		75.4		7.2			10
Securities Lending	19.8		22.0		(2.2		)	(10	)
Other	33.4		27.5		5.9			21
Total C&IS Trust, Investment and Other Servicing Fees	$	429.7	$	399.9	$	29.8		7	%

Custody and fund administration fees, the largest component of C&IS fees, are driven primarily by values of client assets under custody, 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 7%, driven by new business and higher equity markets, partially offset by the unfavorable impact of movements in foreign exchange rates. Investment management fees increased 10% due to new business and lower money market mutual fund fee waivers. Money market mutual fund fee waivers in C&IS totaled $12.2 million in the current quarter compared to $16.7 million in the prior-year quarter. Securities lending decreased 10% due to changes in fee arrangements.

Foreign exchange trading income totaled $60.0 million in the current quarter, an increase of $15.6 million, or 35%, from $44.4 million in the prior-year quarter. The increase was primarily attributable to higher currency volatility as compared to the prior-year quarter.

Other noninterest income in C&IS totaled $45.9 million in the current quarter, up 7%, from $42.8 million in the prior-year quarter, primarily due to higher security commissions and trading income and increases within various other miscellaneous income categories.

Net interest income stated on an FTE basis was $108.6 million in the current quarter, up $30.2 million, or 39% from $78.4 million in the prior-year quarter. The increase in net interest income was attributable to an increase in the net interest margin, partially offset by lower levels of average earning assets. The changes to both the net interest margin and average earning assets versus prior-year period were primarily due to a change in presentation, as certain assets were transferred to the Treasury and Other segment in the first quarter of 2015 and the related internal funds pricing method was updated. As a result, the net interest margin increased to 1.27% from 0.58% in the prior-year quarter while average earning assets totaled $34.0 billion, a decrease of $19.3 billion, or 36%, from $53.3 billion in the prior-year quarter. The earning assets that remain in C&IS consist primarily of intercompany assets and loans and leases. Funding sources were primarily comprised of non-U.S. custody-related interest-bearing deposits, which averaged $45.7 billion in the current quarter, an increase of 3%, from $44.6 billion in the prior-year quarter.

The provision for credit losses was a credit of $2.8 million in the current quarter, reflecting continued improvement in credit quality. The prior-year quarter included a provision of $0.9 million.

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 $464.6 million in the current quarter, up $35.0 million, or 8%, from $429.6 million in the prior-year quarter. The increase was primarily attributable to higher indirect expense allocations and outside services expense in the current quarter.

Wealth Management

Wealth Management net income was $115.0 million in the current quarter, up $14.5 million, or 14%, from $100.5 million in the prior-year quarter. Noninterest income was $350.6 million, up $9.4 million, or 3%, from $341.2 million in the prior-year quarter, primarily reflecting higher security commissions and trading income and increases within various miscellaneous categories of

Table of Contents

REPORTING SEGMENTS (continued)

Wealth Management

other operating income. Trust, investment and other servicing fees in Wealth Management totaled $319.4 million in the current quarter, up slightly from $318.3 million in the prior-year quarter. The following table provides a summary of Wealth Management trust, investment and other servicing fees.

Table 13: Wealth Management Trust, Investment and Other Servicing Fees



	Three Months Ended September 30,
($ In Millions)	2015		2014		Change
Central	$	126.8	$	129.5	$	(2.7	)	(2	)%
East	82.1		83.2		(1.1		)	(1	)
West	66.8		67.5		(0.7		)	(1	)
Global Family Office	43.7		38.1		5.6			15
Total Wealth Management Trust, Investment and Other Servicing Fees	$	319.4	$	318.3	$	1.1		—	%

Wealth Management fee income is calculated primarily based on market values. Global Family Office fees increased 15%, primarily attributable to new business, while fees across the regions decreased 1% to 2%. Money market mutual fund fee waivers in Wealth Management totaled $15.3 million in the current quarter compared to $16.9 million in the prior-year quarter.

Other noninterest income totaled $28.3 million in the current quarter, up $7.4 million, or 35%, from $20.9 million in the prior-year quarter, primarily reflecting higher security commissions and trading income and increases within various miscellaneous categories of other operating income.

Net interest income stated on an FTE basis was $142.5 million in the current quarter, up $11.3 million, or 9%, from $131.2 million in the prior-year quarter, primarily reflecting higher levels of average earning assets. The net interest margin totaled 2.26% in both the current and prior-year quarters. Earning assets averaged $25.0 billion, up $2.0 billion, or 9%, from $23.0 billion in the prior-year quarter. Earning assets and funding sources were primarily comprised of loans and domestic retail interest-bearing deposits, respectively.

The provision for credit losses was a credit of $7.2 million in the current quarter, reflecting improvement in the credit quality of commercial real estate and private client loans, and a decrease in the level of residential real estate loans, partially offset by an increase in the level of private client and commercial real estate loans. The provision for credit losses was a credit of $0.9 million in the prior-year quarter.

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 $316.3 million in the current quarter, compared to $312.1 million in the prior-year quarter, an increase of 1%. The increase was primarily attributable to higher indirect expense allocations, partially offset by lower expense for outside services and compensation in the current quarter.

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 $0.4 million in the current quarter, compared to $1.3 million in the prior-year quarter.

Net interest income decreased $22.7 million, or 49%, to $23.9 million in the current quarter, compared to $46.6 million in the prior-year quarter. The decrease reflects a decline in the net interest margin, partially offset by higher levels of earning assets. The changes to both the net interest margin and average earning assets versus prior year are primarily due to a change in presentation, as certain assets were transferred to Treasury and Other from C&IS and the related internal funds pricing method was updated in the prior quarter. Average earning assets increased $21.1 billion to $41.7 billion from the prior-year quarter’s $20.6 billion.

Noninterest expense totaled $31.4 million in the current quarter, down 5%, from $33.0 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 equipment and software expense, compensation and outside services as compared to the prior-year quarter.

Table of Contents

NINE-MONTH CONSOLIDATED RESULTS OF OPERATIONS

Overview

Net income per diluted common share was $3.00 for the nine months ended September 30, 2015 and $2.34 in the comparable prior-year period. Net income totaled $734.5 million, up $166.7 million, or 29%, as compared to $567.8 million in the prior-year period. The performance in the current period produced an annualized return on average common equity of 11.7%, compared to 9.5% in the prior-year period. The annualized return on average assets was 0.9%, compared to 0.7% in the prior-year period.

The current period includes a net pre-tax 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 these items, net income per diluted common share, net income, and return on average common equity were $2.91, $712.1 million and 11.3%, respectively.

The prior-year period included pre-tax charges of $32.8 million for severance and related costs and for the realignment of the Corporation’s real estate portfolio and $9.5 million of software write-offs. Excluding these items, net income per diluted common share, net income, and return on average common equity were $2.45, $595.6 million, and 10.0% respectively.

Revenue for the nine months ended September 30, 2015 totaled $3.55 billion, up $344.8 million, or 11%, as compared to $3.20 billion in the prior-year period. Noninterest income was $2.77 billion, up $305.7 million, or 12%, from $2.46 billion in the prior-year period. Trust, investment and other servicing fees increased $128.8 million, or 6%, to $2.23 billion from $2.10 billion in the prior-year period.

Table of Contents

NINE-MONTH CONSOLIDATED RESULTS OF OPERATIONS (continued)

Noninterest Income

The components of noninterest income are provided below.

Table 14: Nine Months Ended September 30 Noninterest Income



Noninterest Income	Nine Months Ended September 30,
($ In Millions)	2015			2014			Change
Trust, Investment and Other Servicing Fees	$	2,233.4		$	2,104.6		$	128.8		6	%
Foreign Exchange Trading Income	209.3			149.4			59.9			40
Treasury Management Fees	48.5			49.8			(1.3		)	(3	)
Security Commissions and Trading Income	60.2			46.7			13.5			29
Other Operating Income	214.1			112.3			101.8			91
Investment Security Losses, net	(0.3		)	(3.3		)	3.0			(91	)
Total Noninterest Income	$	2,765.2		$	2,459.5		$	305.7		12	%

As illustrated in the following table, trust, investment and other servicing fees from C&IS increased $94.5 million, or 8%, totaling $1.27 billion, compared to $1.17 billion a year ago.

Table 15: Nine Months Ended September 30 C&IS Trust, Investment and Other Servicing Fees



C&IS Trust, Investment and Other Servicing Fees	Nine Months Ended September 30,
($ In Millions)	2015		2014		Change
Custody and Fund Administration	$	864.6	$	788.3	$	76.3		10	%
Investment Management	239.6		228.1		11.5			5
Securities Lending	68.2		74.7		(6.5		)	(9	)
Other	96.6		83.4		13.2			16
Total	$	1,269.0	$	1,174.5	$	94.5		8	%

Custody and fund administration fees, the largest component of C&IS fees, increased 10%, primarily driven by new business and higher equity markets, partially offset by the unfavorable impact of movements in foreign exchange rates. C&IS investment management fees increased 5%, primarily reflecting new business, lower money market mutual fund fee waivers and higher equity markets. Money market mutual fund fee waivers in C&IS totaled $41.0 million, compared to waived fees of $46.4 million in the prior-year period. Securities lending revenue decreased 9%, reflecting changes in fee arrangements and lower spreads, partially offset by higher loan volumes in the current period. Other fees in C&IS increased 16%, primarily reflecting increased sub-advisory fees and new business in investment risk and analytical services.

As illustrated in the following table, trust, investment and other servicing fees from Wealth Management increased $34.3 million, or 4%, totaling $964.4 million, compared to $930.1 million a year ago.

Table 16: Nine Months Ended September 30 Wealth Management Trust, Investment and Other Servicing Fees



	Nine Months Ended September 30,
($ In Millions)	2015		2014		Change
Wealth Management Trust, Investment and Other Servicing Fees
Central	$	385.8	$	379.8	$	6.0	2	%
East	250.4		242.9		7.5		3
West	202.1		194.9		7.2		4
Global Family Office	126.1		112.5		13.6		12
Total	$	964.4	$	930.1	$	34.3	4	%

The increase is primarily due to higher equity markets and new business. Money market mutual fund fee waivers in Wealth Management totaled $47.6 million, compared with $50.4 million in the prior-year period.

Table of Contents

NINE-MONTH CONSOLIDATED RESULTS OF OPERATIONS (continued)

Noninterest Income (continued)

Foreign exchange trading income increased $59.9 million, or 40%, and totaled $209.3 million compared with $149.4 million in the prior-year period. The increase was attributable to higher currency volatility and client volumes compared to the prior-year period.

Other operating income totaled $214.1 million, up $101.8 million, compared to $112.3 million in the prior-year period. The components of other operating income are provided below.

Table 17: Nine Months Ended September 30 Other Operating Income



Other Operating Income	Nine Months Ended September 30,
($ In Millions)	2015		2014		Change
Loan Service Fees	$	44.3	$	47.0	$	(2.7	)	(6	)%
Banking Service Fees	35.6		37.2		(1.6		)	(4	)
Other Income	134.2		28.1		106.1			N/M
Total Other Operating Income	$	214.1	$	112.3	$	101.8		91	%

The current-year period other income includes a $99.9 million net gain on the sale of 1.0 million Visa Inc. Class B common shares held by the Corporation. Excluding the gain, other operating income totaled $114.2 million, relatively unchanged from the prior-year period, reflecting increases in various other income categories offset by lower loan service and banking service fees.

Table of Contents

NINE-MONTH CONSOLIDATED RESULTS OF OPERATIONS (continued)

Net Interest Income

The following table presents an analysis of average balances and interest rate changes affecting net interest income.



Table 18: AVERAGE CONSOLIDATED BALANCE SHEETS WITH ANALYSIS OF NET INTEREST INCOME (INTEREST AND RATE ON A FULLY TAXABLE EQUIVALENT BASIS)	NORTHERN TRUST CORPORATION
	Nine Months Ended September 30,
	2015							2014
($ 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	$	3.7	$	1,052.2		0.47	%	$	2.3	$	670.6		0.47	%
Interest-Bearing Due from and Deposits with Banks (1)	82.3		16,006.0			0.69		96.6		16,879.0			0.77
Federal Reserve Deposits	26.8		14,065.9			0.25		26.9		13,967.6			0.26
Securities
U.S. Government	40.2		4,802.9			1.12		21.0		2,574.0			1.09
Obligations of States and Political Subdivisions	5.7		112.3			6.77		8.8		176.4			6.68
Government Sponsored Agency	106.6		16,509.5			0.86		108.3		17,858.3			0.81
Other (2)	100.6		15,838.1			0.85		83.5		12,815.0			0.87
Total Securities	253.1		37,262.8			0.91		221.6		33,423.7			0.89
Loans and Leases (3)	546.1		32,723.6			2.23		558.0		29,832.9			2.50
Total Earning Assets	912.0		101,110.5			1.21		905.4		94,773.8			1.28
Allowance for Credit Losses Assigned to Loans and Leases	—		(260.6		)	—		—		(276.0		)	—
Cash and Due from Banks	—		2,137.3			—		—		2,814.6			—
Buildings and Equipment	—		443.0			—		—		451.3			—
Client Security Settlement Receivables	—		979.1			—		—		835.1			—
Goodwill	—		531.1			—		—		541.9			—
Other Assets	—		4,777.9			—		—		3,815.1			—
Total Assets	$	—	$	109,718.3		—	%	$	—	$	102,955.8		—	%
Average Source of Funds
Deposits
Savings and Money Market	$	7.3	$	15,410.9		0.06	%	$	7.3	$	14,854.9		0.07	%
Savings Certificates and Other Time	5.5		1,668.5			0.44		4.8		1,908.5			0.34
Non-U.S. Offices — Interest-Bearing	40.2		48,943.0			0.11		52.0		48,101.2			0.14
Total Interest-Bearing Deposits	53.0		66,022.4			0.11		64.1		64,864.6			0.13