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Table of Contents




 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2018
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File No. 001-36609
NORTHERN TRUST CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
36-2723087
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
50 South LaSalle Street
Chicago, Illinois
60603
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (312) 630-6000
_____________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
x
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
Smaller reporting company
¨
 
 
 
 
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
224,991,295 Shares – $1.66 2/3 Par Value
(Shares of Common Stock Outstanding on March 31, 2018)
 

Table of Contents




NORTHERN TRUST CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2018
TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
 
 
 

i
Table of Contents
CONSOLIDATED FINANCIAL HIGHLIGHTS
(UNAUDITED)

 
Three Months Ended March 31,
CONDENSED INCOME STATEMENTS (In Millions)
2018
 
2017
 
% Change (1)
Noninterest Income
$
1,092.0

 
$
930.9

 
17
 %
Net Interest Income
384.0

 
353.5

 
9

Provision for Credit Losses
(3.0
)
 
(1.0
)
 
200

Noninterest Expense
995.3

 
894.5

 
11

Income before Income Taxes
483.7

 
390.9

 
24

Provision for Income Taxes
102.1

 
114.8

 
(11
)
Net Income
$
381.6

 
$
276.1

 
38
 %

PER COMMON SHARE
 
 
 
 
 
Net Income — Basic
$
1.59

 
$
1.10

 
45
%
— Diluted
1.58

 
1.09

 
45

Cash Dividends Declared Per Common Share
0.42

 
0.38

 
11

Book Value — End of Period (EOP)
41.66

 
39.62

 
5

Market Price — EOP
103.13

 
86.58

 
19


SELECTED BALANCE SHEET DATA (In Millions)
 
 
 
 
 
 
March 31, 2018
 
December 31, 2017
 
% Change (1)
End of Period:
 
 
 
 
 
Assets
$
129,672.2

 
$
138,590.5

 
(6
)%
Earning Assets
120,384.4

 
129,656.6

 
(7
)
Deposits
105,191.4

 
112,390.8

 
(6
)
Stockholders’ Equity
10,226.0

 
10,216.2

 
—


 
Three Months Ended March 31,
 
2018
 
2017
 
% Change (1)
Average Balances:
 
 
 
 
 
Assets
$
124,493.3

 
$
116,476.4

 
7
%
Earning Assets
115,686.3

 
108,951.8

 
6

Deposits
98,197.5

 
94,933.6

 
3

Stockholders’ Equity
10,137.7

 
9,791.4

 
4


CLIENT ASSETS (In Billions)
March 31, 2018
 
December 31, 2017
 
% Change (1)
Assets Under Custody/Administration (2)
$
10,785.7

 
$
10,722.6

 
1
%
Assets Under Custody
8,111.7

 
8,084.6

 
—

Assets Under Management
1,165.7

 
1,161.0

 
—

(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 March 31,
 
2018
 
2017
Financial Ratios:
 
 
 
Return on Average Common Equity
16.0
%
 
11.6
%
Return on Average Assets
1.24

 
0.96

Dividend Payout Ratio
26.6

 
34.9

Net Interest Margin (1)
1.38

 
1.35


 
March 31, 2018
 
December 31, 2017
 
Advanced
Approach
 
Standardized
Approach
 
Advanced
Approach
 
Standardized
Approach
Capital Ratios:
 
 
 
 
 
 
 
Northern Trust Corporation
 
 
 
 
 
 
 
Common Equity Tier 1
13.0
%
 
12.3
%
 
13.5
%
 
12.6
%
Tier 1
14.3

 
13.6

 
14.8

 
13.8

Total
16.2

 
15.5

 
16.7

 
15.8

Tier 1 Leverage
7.6

 
7.6

 
7.8

 
7.8

Supplementary Leverage
6.6

 
N/A

 
6.8

 
N/A

 
 
 
 
 
 
 
 
The Northern Trust Company
 
 
 
 
 
 
 
Common Equity Tier 1
13.6
%
 
12.6
%
 
13.7
%
 
12.6
%
Tier 1
13.6

 
12.6

 
13.7

 
12.6

Total
15.2

 
14.3

 
15.4

 
14.3

Tier 1 Leverage
7.0

 
7.0

 
7.0

 
7.0

Supplementary Leverage
6.1

 
N/A

 
6.1

 
N/A

(1) 
Net interest margin is presented on a fully taxable equivalent (FTE) basis, a non-generally accepted accounting principle (GAAP) financial measure that facilitates the analysis of asset yields. The net interest margin on a GAAP basis and a reconciliation of net interest income on a GAAP basis to net interest income on an FTE basis are presented on page 22.

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
FIRST QUARTER CONSOLIDATED RESULTS OF OPERATIONS
General
Northern Trust Corporation (the Corporation) is a financial holding company that is a leading provider of asset servicing, fund administration, asset management, fiduciary and banking solutions for corporations, institutions, families and individuals worldwide. The Corporation focuses on managing and servicing client assets through its two client-focused reporting segments: Corporate & Institutional Services (C&IS) and Wealth Management. Asset management and related services are provided to C&IS and Wealth Management clients primarily by the Asset Management business. Except where the context requires otherwise, the term “Northern Trust,” “we,” “us,” “our” or similar terms mean the Corporation and its subsidiaries on a consolidated basis.
The following should be read in conjunction with the consolidated financial statements and related footnotes included in this report. Investors also should read the section entitled “Forward-Looking Statements.”
Overview
Net income per diluted common share was $1.58 in the current quarter, up from $1.09 in the first quarter of 2017. Net income was $381.6 million in the current quarter as compared to $276.1 million in the prior-year quarter. Annualized return on average common equity was 16.0% in the current quarter and 11.6% in the prior-year quarter. The annualized return on average assets was 1.24% in the current quarter as compared to 0.96% in the prior-year quarter.

Revenue of $1.48 billion in the current quarter was up $191.6 million, or 15%, from $1.28 billion in the prior-year quarter.

Noninterest income increased $161.1 million, or 17%, to $1.09 billion from $930.9 million in the prior-year quarter, primarily reflecting higher trust, investment and other servicing fees and foreign exchange trading income.

Net interest income increased $30.5 million, or 9%, to $384.0 million in the current quarter as compared to $353.5 million in the prior-year quarter, primarily the result of a higher net interest margin and an increase in earning assets.

The provision for credit losses was a credit of $3.0 million in the current quarter, as compared to a credit of $1.0 million in the prior-year quarter.

Noninterest expense totaled $995.3 million in the current quarter, up $100.8 million, or 11%, from $894.5 million in the prior-year quarter, primarily attributable to higher compensation, outside services, employee benefits, and equipment and software expense.

The provision for income taxes in the current quarter totaled $102.1 million, representing an effective tax rate of 21.1%. The provision for income taxes in the prior-year quarter totaled $114.8 million, representing an effective tax rate of 29.4%.

3
Table of Contents
FIRST QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)
Noninterest Income

The components of noninterest income are provided below.
Table 1: Noninterest Income
Noninterest Income
Three Months Ended March 31,
 
 
 
 
($ In Millions)
2018
 
2017
 
Change
Trust, Investment and Other Servicing Fees
$
937.7

 
$
808.2

 
$
129.5

 
16
 %
Foreign Exchange Trading Income
78.5

 
48.1

 
30.4

 
63

Treasury Management Fees
14.0

 
14.7

 
(0.7
)
 
(5
)
Security Commissions and Trading Income
27.2

 
20.5

 
6.7

 
33

Other Operating Income
34.8

 
39.7

 
(4.9
)
 
(12
)
Investment Security (Losses) Gains, net
(0.2
)
 
(0.3
)
 
0.1

 
(33
)
Total Noninterest Income
$
1,092.0

 
$
930.9

 
$
161.1

 
17
 %
Trust, investment and other servicing fees are based primarily on the market value of assets held in custody, managed or serviced; the volume of transactions; securities lending volume and spreads; and fees for other services rendered. Certain market value calculations on which fees are based are performed on a monthly or quarterly basis in arrears. For a further discussion of trust, investment and other servicing fees and how they are derived, refer to the “Reporting Segments” section.

When considering the impact of markets on the Corporation’s results, the following tables present selected market indices and the percentage changes year over year.
Table 2: Equity Market Indices
 
Daily Averages
 
Period-End
 
Three Months Ended March 31,
 
As of March 31,
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
 
 
 
 
 
 
 
 
 
 
 
 
S&P 500
2,733

 
2,325

 
18
%
 
2,641

 
2,363

 
12
%
MSCI EAFE (U.S. dollars)
2,072

 
1,749

 
18
%
 
2,002

 
1,793

 
12

MSCI EAFE (local currency)
1,147

 
1,060

 
8
%
 
1,105

 
1,078

 
2

Table 3: Fixed Income Market Indices
 
As of March 31,
 
2018
 
2017
 
Change
 
 
 
 
 
 
Barclays Capital U.S. Aggregate Bond Index
2,016

 
1,993

 
1
%
Barclays Capital Global Aggregate Bond Index
491

 
459

 
7


Assets under custody/administration (AUC/A) and assets under management form the primary drivers of our trust, investment and other servicing fees. For the purposes of disclosing AUC/A, to the extent that both custody and administration services are provided, the value of the assets is included only once. The following table presents AUC/A by reporting segment.
Table 4: Assets Under Custody / Administration
Assets Under Custody / Administration
March 31, 2018
 
December 31, 2017
 
March 31, 2017
 
Change Q1-18/Q4-17
 
Change Q1-18/Q1-17
($ In Billions)
Corporate & Institutional
$
10,131.7

 
$
10,066.8

 
$
8,338.2

 
1
 %
 
22
%
Wealth Management
654.0

 
655.8

 
586.5

 
—

 
12

Total Assets Under Custody / Administration
$
10,785.7

 
$
10,722.6

 
$
8,924.7

 
1
 %
 
21
%

4
Table of Contents
FIRST QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)
Noninterest Income (continued)


The following table presents Northern Trust’s assets under custody, a component of AUC/A, by reporting segment.
Table 5: Assets Under Custody
Assets Under Custody
March 31, 2018
 
December 31, 2017
 
March 31, 2017
 
Change Q1-18/Q4-17
 
Change Q1-18/Q1-17
($ In Billions)
Corporate & Institutional
$
7,466.5

 
$
7,439.1

 
$
6,533.3

 
—
 %
 
14
%
Wealth Management
645.2

 
645.5

 
574.4

 
—

 
12

Total Assets Under Custody
$
8,111.7

 
$
8,084.6

 
$
7,107.7

 
—
 %
 
14
%
The 14% increase in consolidated assets under custody from $7.11 trillion as of March 31, 2017 to $8.11 trillion as of March 31, 2018 primarily reflected the impact of favorable markets, new business, and the favorable impact of movements in foreign exchange rates.
The following table presents the allocation of Northern Trust’s custodied assets by reporting segment.
Table 6: Allocation of Assets Under Custody
 
March 31, 2018
 
December 31, 2017
 
March 31, 2017
Assets Under Custody
C&IS
 
WM
 
Total
 
C&IS
 
WM
 
Total
 
C&IS
 
WM
 
Total
Equities
45
%
 
58
%
 
46
%
 
46
%
 
58
%
 
47
%
 
45
%
 
56
%
 
46
%
Fixed Income
37

 
18

 
36

 
37

 
19

 
35

 
37

 
21

 
36

Cash and Other Assets
15

 
24

 
16

 
15

 
23

 
16

 
16

 
23

 
16

Securities Lending Collateral
3

 
—

 
2

 
2

 
—

 
2

 
2

 
—

 
2

The following table presents Northern Trust’s assets under management by reporting segment.
Table 7: Assets Under Management
Assets Under Management
March 31, 2018
 
December 31, 2017
 
March 31, 2017
 
Change Q1-18/Q4-17
 
Change Q1-18/Q1-17
($ In Billions)
Corporate & Institutional
$
878.3

 
$
871.2

 
$
741.1

 
1
 %
 
19
%
Wealth Management
287.4

 
289.8

 
260.2

 
(1
)
 
10

Total Assets Under Management
$
1,165.7

 
$
1,161.0

 
$
1,001.3

 
—
 %
 
16
%
The 16% increase in consolidated assets under management from $1.00 trillion at March 31, 2017 to $1.17 trillion as of March 31, 2018 was primarily due to net inflows in securities lending collateral and cash, as well as favorable markets.
The following table presents Northern Trust’s assets under management by investment type.
Table 8: Assets Under Management by Investment Type
($ In Billions)
March 31, 2018
 
December 31, 2017
 
March 31, 2017
Equities
$
583.7

 
$
592.3

 
$
516.8

Fixed Income
177.7

 
183.5

 
165.8

Cash and Other Assets
216.8

 
217.5

 
195.1

Securities Lending Collateral
187.5

 
167.7

 
123.6

Total Assets Under Management
$
1,165.7

 
$
1,161.0

 
$
1,001.3


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


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

 
25

 
15

 
13

 
25

 
16

 
13

 
27

 
17

Cash and Other Assets
17

 
23

 
19

 
17

 
24

 
19

 
18

 
24

 
19

Securities Lending Collateral
21

 
—

 
16

 
19

 
—

 
14

 
17

 
—

 
12


The following table presents activity in consolidated assets under management by investment type.
Table 10: Activity in Consolidated Assets Under Management by Investment Type
 
 
Three Months Ended
($ In Billions)
March 31, 2018
December 31, 2017
September 30, 2017
June 30, 2017
March 31, 2017
Beginning Balance of AUM
$
1,161.0

$
1,125.1

$
1,028.8

$
1,001.3

$
942.4

Inflows by Investment Type
 
 
 
 
 
 
Equity
44.2

63.0

51.2

36.3

41.6

 
Fixed Income
17.4

23.0

19.8

11.6

13.7

 
Cash & Other Assets
114.4

116.3

101.6

98.2

91.8

 
Securities Lending Collateral
68.1

32.4

45.5

24.9

29.6

 
 
 
 
 
 
 
Total Inflows
244.1

234.7

218.1

171.0

176.7

 
 
 
 
 
 
 
Outflows by Investment Type
 
 
 
 
 
 
Equity
(47.8
)
(67.7
)
(41.0
)
(38.6
)
(38.4
)
 
Fixed Income
(24.0
)
(20.7
)
(13.0
)
(10.5
)
(13.0
)
 
Cash & Other Assets
(117.4
)
(111.8
)
(83.0
)
(99.5
)
(89.7
)
 
Securities Lending Collateral
(48.3
)
(26.8
)
(14.4
)
(17.5
)
(18.0
)
 
 
 
 
 
 
 
Total Outflows
(237.5
)
(227.0
)
(151.4
)
(166.1
)
(159.1
)
 
 
 
 
 
 
 
Net Inflows / (Outflows)
6.6

7.7

66.7

4.9

17.6

 
 
 
 
 
 
 
Market Performance, Currency & Other
 
 
 
 
 
 
Market Performance & Other
(4.6
)
27.9

26.6

18.2

38.9

 
Currency
2.7

0.3

3.0

4.4

2.4

Total Market Performance, Currency & Other
(1.9
)
28.2

29.6

22.6

41.3

 
 
 
 
 
 
 
Ending Balance of AUM
$
1,165.7

$
1,161.0

$
1,125.1

$
1,028.8

$
1,001.3


Foreign exchange trading income totaled $78.5 million in the current quarter, up $30.4 million, or 63%, compared to $48.1 million in the prior-year quarter. The increase was primarily due to higher client volumes and increased foreign exchange swap activity in Treasury as compared to the prior-year quarter.

Security commissions and trading income totaled $27.2 million, up $6.7 million, or 33%, compared to $20.5 million in the prior-year quarter. The increase was primarily due to higher core brokerage and transition management revenue as compared to the prior-year quarter.


6
Table of Contents
FIRST QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)
Noninterest Income (continued)


Other operating income totaled $34.8 million in the current quarter, down $4.9 million, or 12%, compared to $39.7 million in the prior-year quarter, primarily due to foreign currency adjustments. The components of other operating income are provided below.
Table 11: Other Operating Income
Other Operating Income
Three Months Ended March 31,
 
 
 
 
($ In Millions)
2018
 
2017
 
Change
Loan Service Fees
$
12.5

 
$
12.4

 
$
0.1

 
1
 %
Banking Service Fees
12.5

 
12.4

 
0.1

 
1

Other Income
9.8

 
14.9

 
(5.1
)
 
35

Total Other Operating Income
$
34.8

 
$
39.7

 
$
(4.9
)
 
(12
)%

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

The following table presents an analysis of average balances and interest rate changes affecting net interest income.
Table 12: Average Consolidated Balance Sheets with Analysis of Net Interest Income
 
NORTHERN TRUST CORPORATION
(Interest and Rate on a Fully Taxable Equivalent Basis)
FIRST QUARTER
2018
 
2017
($ In Millions)
Interest
 
Average
Balance
 
Rate (5)
 
Interest
 
Average
Balance
 
Rate (5)
Average Earning Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Federal Reserve and Other Central Bank Deposits
$
47.4

 
$
26,495.1

 
0.72
%
 
$
29.7

 
$
21,806.9

 
0.55
%
Interest-Bearing Due from and Deposits with Banks (1)
19.9

 
6,920.4

 
1.17

 
14.9

 
6,684.3

 
0.91

Federal Funds Sold and Securities Purchased under Agreements to Resell
6.8

 
1,467.1

 
1.89

 
6.5

 
2,011.7

 
1.32

Securities
 
 
 
 
 
 
 
 
 
 
 
U.S. Government
23.8

 
5,735.4

 
1.68

 
25.5

 
7,213.8

 
1.44

Obligations of States and Political Subdivisions
2.4

 
678.2

 
1.42

 
3.6

 
989.7

 
1.47

Government Sponsored Agency
81.4

 
18,848.3

 
1.75

 
68.9

 
17,796.8

 
1.57

Other (2)
79.2

 
23,073.8

 
1.39

 
54.6

 
18,777.4

 
1.18

Total Securities
186.8

 
48,335.7

 
1.57

 
152.6

 
44,777.7

 
1.38

Loans and Leases (3)
253.7

 
32,468.0

 
3.17

 
215.5

 
33,671.2

 
2.59

Total Earning Assets
514.6

 
115,686.3

 
1.80

 
419.2


108,951.8

 
1.56

Allowance for Credit Losses Assigned to Loans and Leases
—

 
(131.0
)
 
—

 
—

 
(160.8
)
 
—

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

 
2,593.2

 
—

 
—

 
2,116.6

 
—

Buildings and Equipment
—

 
457.0

 
—

 
—

 
465.9

 
—

Client Security Settlement Receivables
—

 
1,012.0

 
—

 
—

 
829.6

 
—

Goodwill
—

 
611.0

 
—

 
—

 
519.7

 
—

Other Assets
—

 
4,264.8

 
—

 
—

 
3,753.6

 
—

Total Assets
$
—

 
$
124,493.3

 
—
%
 
$
—

 
$
116,476.4

 
—
%
Average Source of Funds
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
 
 
 
 
 
 
 
 
 
 
Savings, Money Market and Other
$
12.9

 
$
15,916.4

 
0.33
%
 
$
3.2

 
$
15,446.7

 
0.09
%
Savings Certificates and Other Time
2.1

 
1,058.5

 
0.82

 
2.3

 
1,338.5

 
0.70

Non-U.S. Offices — Interest-Bearing
48.1

 
59,199.7

 
0.33

 
22.1

 
52,435.9

 
0.17

Total Interest-Bearing Deposits
63.1

 
76,174.6

 
0.34

 
27.6

 
69,221.1

 
0.16

Short-Term Borrowings
34.5

 
9,405.3

 
1.49

 
9.0

 
5,659.1

 
0.65

Senior Notes
11.8

 
1,497.4

 
3.18

 
11.7

 
1,496.7

 
3.17

Long-Term Debt
11.0

 
1,426.5

 
3.14

 
7.4

 
1,324.9

 
2.26

Floating Rate Capital Debt
1.5

 
277.5

 
2.21

 
1.1

 
277.4

 
1.56

Total Interest-Related Funds
121.9

 
88,781.3

 
0.56

 
56.8

 
77,979.2

 
0.30

Interest Rate Spread
—

 
—

 
1.24

 
—

 
—

 
1.26

Demand and Other Noninterest-Bearing Deposits
—

 
22,022.9

 
—

 
—

 
25,712.5

 
—

Other Liabilities
—

 
3,551.4

 
—

 
—

 
2,993.3

 
—

Stockholders’ Equity
—

 
10,137.7

 
—

 
—

 
9,791.4

 
—

Total Liabilities and Stockholders’ Equity
$
—

 
$
124,493.3

 
—
%
 
$
—

 
$
116,476.4

 
—
%
Net Interest Income/Margin (FTE Adjusted)
$
392.7

 
$
—

 
1.38
%
 
$
362.4

 
$
—

 
1.35
%
Net Interest Income/Margin (Unadjusted)
$
384.0

 
$
—

 
1.35
%
 
$
353.5

 
$
—

 
1.32
%

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


ANALYSIS OF NET INTEREST INCOME CHANGES
DUE TO VOLUME AND RATE
 
Three Months Ended March 31, 2018/2017
 
Change Due To
(In Millions)
Average
Balance
 
Rate
 
Total
Earning Assets (FTE)
$
25.4

 
$
70.0

 
$
95.4

Interest-Related Funds
10.6

 
54.5

 
65.1

Net Interest Income (FTE)
$
14.8

 
$
15.5

 
$
30.3


(1)
Interest-Bearing Due from and Deposits with Banks includes the interest-bearing component of Cash and Due from Banks and Interest-Bearing Deposits with Banks as presented on the consolidated balance sheets.
(2)
Other securities include certain community development investments and Federal Home Loan Bank and Federal Reserve stock, which are classified in other assets in the consolidated balance sheets as of March 31, 2018 and 2017.
(3)
Average balances include nonaccrual loans. Lease financing receivable balances are reduced by deferred income.
(4)
Cash and Due from Banks and Other Central Bank Deposits includes the noninterest-bearing component of Federal Reserve and Other Central Bank Deposits as presented on the consolidated balance sheets.
(5)
Rate calculations are based on actual balances rather than the rounded amounts presented in the Average Consolidated Balance Sheets with Analysis of Net Interest Income.

Notes:
Net Interest Income (FTE Adjusted), a non-generally accepted accounting principle (GAAP) financial measure, includes adjustments to a fully taxable equivalent basis for loans and securities. Such adjustments are based on a blended federal and state tax rate of 24.8% and 37.8% for the three months ended March 31, 2018 and 2017, respectively. Total taxable equivalent interest adjustments amounted to $8.7 million and $8.9 million for the three months ended March 31, 2018 and 2017, respectively. A reconciliation of net interest income and net interest margin on a GAAP basis to net interest income and net interest margin on an FTE basis (each of which is a non-GAAP financial measure) is provided on page 22.
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 $392.7 million in the current quarter, up $30.3 million, or 8%, compared to $362.4 million in the prior-year quarter. The increase was primarily the result of a higher net interest margin and an increase in earning assets. Average earning assets for the current quarter were $115.7 billion, up $6.7 billion, or 6%, from $109.0 billion in the prior-year quarter, primarily resulting from higher levels of short-term interest-bearing deposits and securities, partially offset by reductions in loans and leases. Earning asset growth was funded primarily by higher levels of interest-bearing deposits and borrowed funds, partially offset by lower demand and other noninterest-bearing deposits.
The net interest margin on an FTE basis increased to 1.38% in the current quarter from 1.35% in the prior-year quarter, primarily due to higher short-term interest rates, partially offset by higher premium amortization due to a change in estimation methodology and a balance sheet mix shift.
When adjusted to an FTE basis, yields on taxable, nontaxable, and partially taxable assets are comparable; however, the adjustment to an FTE basis has no impact on net income. A reconciliation of net interest income and net interest margin on a GAAP basis to net interest income and net interest margin on an FTE basis (each of which is a non-GAAP financial measure) is provided on page 22.
Federal Reserve and other central bank deposits averaged $26.5 billion, up $4.7 billion, or 21%, from $21.8 billion in the prior-year quarter. Average securities were $48.3 billion, up $3.5 billion, or 8%, from $44.8 billion in the prior-year quarter and include certain community development investments, Federal Home Loan Bank stock, and Federal Reserve stock of $412.3 million, $203.3 million and $53.1 million, respectively, which are recorded in other assets in the consolidated balance sheets.
Loans and leases averaged $32.5 billion, down $1.2 billion, or 4%, from $33.7 billion in the prior-year quarter, primarily reflecting lower levels of residential real estate, commercial real estate, and commercial and institutional loans, partially offset by increases in private client loans. Residential real estate loans averaged $7.3 billion, down $655.9 million, or 8%, from $7.9 billion for the prior-year quarter. Commercial real estate loans averaged $3.5 billion, down $460.9 million, or 12%, from $4.0 billion for the prior-year quarter. Commercial and institutional loans averaged $9.1 billion, down $409.9 million, or 4%, from $9.6 billion for

9
Table of Contents
FIRST QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)
Net Interest Income (continued)


the prior-year quarter. Private client loans averaged $10.4 billion, up $480.5 million, or 5%, from $10.0 billion for the prior-year quarter.
Northern Trust utilizes a diverse mix of funding sources. Total interest-bearing deposits averaged $76.2 billion in the current quarter, compared to $69.2 billion in the prior-year quarter, an increase of $7.0 billion. Other interest-bearing funds averaged $12.6 billion in the current quarter, compared to $8.8 billion in the prior-year quarter. The balances within short-term borrowing classifications vary based on funding requirements and strategies, interest rate levels, changes in the volume of lower-cost deposit sources, and the availability of collateral to secure these borrowings. Average net noninterest-related funds decreased $4.1 billion, or 13%, to $26.9 billion in the current quarter from $31.0 billion in the prior-year quarter, primarily resulting from lower levels of demand and other noninterest-bearing deposits.
Provision for Credit Losses
The provision for credit losses was a credit of $3.0 million in the current quarter, as compared to a credit of $1.0 million in the prior-year quarter. The credit provision in the current quarter was primarily driven by reductions in outstanding loans and undrawn loan commitments that resulted in a reduction in the inherent allowance ascribed to the commercial real estate, residential real estate, and commercial and institutional portfolios, partially offset by charge-offs in the current quarter. Net charge-offs in the current quarter were $3.0 million, resulting from charge-offs of $4.3 million and recoveries of $1.3 million. The prior-year quarter included $2.0 million of net charge-offs, reflecting $4.7 million of charge-offs and $2.7 million of recoveries. Nonperforming assets of $128.9 million decreased 31% from $186.8 million in the prior-year quarter. Residential real estate, commercial real estate, and commercial and institutional loans accounted for 91%, 5% and 4%, respectively, of total nonperforming loans and leases at March 31, 2018. For additional discussion of the provision and allowance for credit losses, refer to the “Asset Quality” section beginning on page 16.
Noninterest Expense
The components of noninterest expense are provided below.
Table 13: Noninterest Expense
Noninterest Expense
Three Months Ended March 31,
 
 
 
 
($ In Millions)
2018
 
2017
 
Change
Compensation
$
471.7

 
$
425.8

 
$
45.9

 
11
%
Employee Benefits
91.7

 
77.8

 
13.9

 
18

Outside Services
171.4

 
153.1

 
18.3

 
12

Equipment and Software
140.0

 
127.3

 
12.7

 
10

Occupancy
51.5

 
45.4

 
6.1

 
13

Other Operating Expense
69.0

 
65.1

 
3.9

 
6

Total Noninterest Expense
$
995.3

 
$
894.5

 
$
100.8

 
11
%
Compensation expense, the largest component of noninterest expense, totaled $471.7 million in the current quarter, up $45.9 million, or 11%, compared to $425.8 million in the prior-year quarter, primarily reflecting increased salary expense, higher cash-based incentive accruals, and higher severance charges of $6.1 million. The increase in salary expense was driven by the unfavorable impact of movements in foreign exchange rates, staff growth including the acquisition and integration of UBS Asset Management’s fund administration units in Luxembourg and Switzerland (the UBS acquisition), and base pay adjustments.
Employee benefits expense totaled $91.7 million in the current quarter, up $13.9 million, or 18%, compared to $77.8 million in the prior-year quarter, primarily due to higher retirement plan expenses and costs associated with the UBS acquisition.
Outside services expense totaled $171.4 million in the current quarter, up $18.3 million, or 12%, compared to $153.1 million in the prior-year quarter, primarily reflecting a change in presentation of third-party advisor costs resulting from the adoption of the new revenue recognition accounting standard, higher sub-custodian expenses, and increased costs associated with the UBS acquisition, partially offset by lower sub-advisor costs. There is a corresponding increase to trust, investment and other servicing fees as a result of the adoption of the new revenue recognition accounting standard.

10
Table of Contents
FIRST QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)
Noninterest Expense (continued)

Equipment and software expense totaled $140.0 million in the current quarter, up $12.7 million, or 10%, compared to $127.3 million in the prior-year quarter, primarily reflecting increased software amortization.
Occupancy expense totaled $51.5 million in the current quarter, up $6.1 million, or 13%, compared to $45.4 million in the prior-year quarter, primarily reflecting accelerated depreciation expense related to a previously announced facility exit.
Other operating expense totaled $69.0 million in the current quarter up 6% from $65.1 million in the prior-year quarter, primarily reflecting higher costs associated with the UBS acquisition and increases in various other operating expense categories.
The components of other operating expense are provided below.
Table 14: Other Operating Expense
Other Operating Expense
Three Months Ended March 31,
 
 
 
 
($ In Millions)
2018
 
2017
 
Change
Business Promotion
$
16.1

 
$
16.1

 
$
—

 
—
 %
Staff Related
5.4

 
8.7

 
(3.3
)
 
(38
)
FDIC Insurance Premiums
8.9

 
8.4

 
0.5

 
5

Other Intangibles Amortization
4.5

 
2.4

 
2.1

 
91

Other Expenses
34.1

 
29.5

 
4.6

 
16

Total Other Operating Expense
$
69.0

 
$
65.1

 
$
3.9

 
6
 %
Provision for Income Taxes
Income tax expense for the three months ended March 31, 2018 was $102.1 million, representing an effective tax rate of 21.1%, compared to $114.8 million in the prior-year quarter, representing an effective tax rate of 29.4%.
The decrease in the provision for income taxes was primarily attributable to the reduction in the U.S. federal corporate income tax rate from 35% to 21% as a result of the Tax Cuts and Jobs Act (“TCJA”). Also contributing to the decrease in the provision for income taxes compared to the prior-year quarter was a tax benefit resulting from a change in accounting method regarding the timing of tax deductions for software development-related expenses of $22.6 million, partially offset by a $15.8 million net provision recorded in the current period representing adjustments to the initial estimated impact of the TCJA, tax accounting changes in 2018 brought about by the TCJA including the tax accounting associated with non-U.S. branches and subsidiaries, and a reduction in the income tax benefit derived from the vesting of restricted stock units and stock option exercises. The initial estimated impact of the TCJA may continue to be refined in future periods as further information becomes available.
REPORTING SEGMENTS
Northern Trust is organized around its two client-focused reporting segments: C&IS and Wealth Management. Asset management and related services are provided to C&IS and Wealth Management clients primarily by the Asset Management business. The revenue and expenses of Asset Management and certain other support functions are allocated fully to C&IS and Wealth Management. Income and expense associated with the wholesale funding activities and investment portfolios of the Corporation and its principal subsidiary, The Northern Trust Company (the Bank), as well as certain corporate-based expense, executive level compensation and nonrecurring items, are not allocated to C&IS and Wealth Management, and are reported in Northern Trust’s third reporting segment, Treasury and Other, in the following pages.

11
Table of Contents
REPORTING SEGMENTS (continued)


The following tables reflect the earnings contributions and average assets of Northern Trust’s reporting segments for the three month periods ended March 31, 2018 and 2017. Reporting segment financial information, presented on an internal management-reporting basis, is determined by accounting systems that are used to allocate revenue and expense related to each segment and incorporates processes for allocating assets, liabilities, equity and the applicable interest income and expense.
Table 15: Results of Reporting Segments
Three Months Ended March 31,
Corporate &
Institutional Services
 
Wealth
Management
 
Treasury and
Other
 
Total
Consolidated
($ In Millions)
2018
 
2017
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
Noninterest Income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trust, Investment and Other Servicing Fees
$
544.3

 
$
462.9

 
$
393.4

 
$
345.3

 
$
—

 
$
—

 
$
937.7

 
$
808.2

Foreign Exchange Trading Income
62.4

 
49.1

 
1.2

 
0.9

 
14.9

 
(1.9
)
 
78.5

 
48.1

Other Noninterest Income
46.6

 
44.2

 
25.7

 
25.5

 
3.5

 
4.9

 
75.8

 
74.6

Net Interest Income*
229.4

 
166.5

 
198.8

 
177.0

 
(35.5
)
 
18.9

 
392.7

 
362.4

Revenue*
882.7

 
722.7

 
619.1

 
548.7

 
(17.1
)
 
21.9

 
1,484.7

 
1,293.3

Provision for Credit Losses
(3.9
)
 
0.3

 
0.9

 
(1.3
)
 
—

 
—

 
(3.0
)
 
(1.0
)
Noninterest Expense
585.6

 
510.8

 
365.7

 
346.3

 
44.0

 
37.4

 
995.3

 
894.5

Income before Income Taxes*
301.0

 
211.6

 
252.5

 
203.7

 
(61.1
)
 
(15.5
)
 
492.4

 
399.8

Provision for Income Taxes*
66.8

 
66.9

 
62.4

 
76.8

 
(18.4
)
 
(20.0
)
 
110.8

 
123.7

Net Income
$
234.2

 
$
144.7

 
$
190.1

 
$
126.9

 
$
(42.7
)
 
$
4.5

 
$
381.6

 
$
276.1

Percentage of Consolidated Net Income
61
%
 
52
%
 
50
%
 
46
%
 
(11
)%
 
2
%
 
100
%
 
100
%
Average Assets
$
83,637.0

 
$
77,803.5

 
$
26,108.0

 
$
26,661.8

 
$
14,748.3

 
$
12,011.1

 
$
124,493.3

 
$
116,476.4

* Non-GAAP financial measures stated on a fully taxable equivalent basis (FTE). Total consolidated includes FTE adjustments of $8.7 million for 2018 and $8.9 million for 2017. A reconciliation of total consolidated revenue, net interest income and net interest margin on a GAAP basis to revenue, net interest income and net interest margin on an FTE basis (each of which is a non-GAAP financial measure) is provided on page 22.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate & Institutional Services
C&IS net income totaled $234.2 million in the current quarter compared to $144.7 million in the prior-year quarter, an increase of $89.5 million, or 62%. Noninterest income was $653.3 million in the current quarter, up $97.1 million, or 17%, from $556.2 million in the prior-year quarter, reflecting higher trust, investment and other servicing fees, foreign exchange trading income, and security commissions and trading income.
Table 16: C&IS Trust, Investment and Other Servicing Fees
 
Three Months Ended March 31,
 
 
 
 
($ In Millions)
2018
 
2017
 
Change
Custody and Fund Administration
$
373.9

 
$
307.5

 
$
66.4

 
22
 %
Investment Management
109.7

 
93.5

 
16.2

 
17

Securities Lending
26.0

 
23.8

 
2.2

 
9

Other
34.7

 
38.1

 
(3.4
)
 
(9
)
Total C&IS Trust, Investment and Other Servicing Fees
$
544.3

 
$
462.9

 
$
81.4

 
18
 %
Custody and fund administration fees, the largest component of C&IS fees, are driven primarily by values of client AUC/A, transaction volumes and number of accounts. The asset values used to calculate these fees vary depending on the individual fee arrangements negotiated with each client. Custody fees related to asset values are client specific and are priced based on quarter-end or month-end values, values at the beginning of each quarter or average values for a month or quarter. The fund administration fees that are asset-value-related are priced using month-end, quarter-end, or average daily balances. Investment management fees are based generally on market values of client assets under management throughout the period.
Custody and fund administration fees increased $66.4 million, or 22%, from the prior-year quarter, primarily due to new business, the favorable impact of movements in foreign exchange rates, and favorable markets. Investment management fees increased $16.2

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


million, or 17%, primarily due to favorable markets, new business, and the favorable impact of movements in foreign exchange rates. Securities lending fees increased 9%, primarily due to higher loan volumes, partially offset by lower spreads and fee splits. Other fees decreased 9%, primarily due to lower sub-advisor fees. The income associated with sub-advisor fees has an associated expense in outside services.
Foreign exchange trading income totaled $62.4 million in the current quarter, an increase of $13.3 million, or 27%, from $49.1 million in the prior-year quarter. The increase was driven primarily by higher client volumes.
Other noninterest income in C&IS totaled $46.6 million in the current quarter, up 5%, from $44.2 million in the prior-year quarter, primarily due to higher security commissions and trading income, partially offset by decreases in various other operating income categories.
Net interest income stated on an FTE basis was $229.4 million in the current quarter, up $62.9 million, or 38%, from $166.5 million in the prior-year quarter. The increase in net interest income was primarily attributable to an increase in the net interest margin and higher levels of earning assets. The net interest margin increased to 1.20% from 0.93% in the prior-year quarter, primarily due to higher short-term interest rates. The average earning assets totaled $77.7 billion, up from $72.6 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 $55.2 billion in the current quarter, up from $47.3 billion in the prior-year quarter.
The provision for credit losses was a credit of $3.9 million in the current quarter, compared with a provision of $0.3 million in the prior-year quarter. The current quarter provision reflected reductions in outstanding loans and undrawn loan commitments that resulted in a reduction in the inherent allowance. The prior-year quarter provision reflected a specific reserve requirement, partially offset by a reduction in the inherent reserve requirement.
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 $585.6 million in the current quarter, up $74.8 million, or 15%, from $510.8 million in the prior-year quarter, primarily reflecting higher compensation expense, indirect expense allocations, outside services expense, other operating expense, and employee benefits expense.
The provision for income taxes was $66.8 million in the current quarter compared to $66.9 million in the prior-year quarter, primarily attributable to the reduction in the U.S. federal corporate income tax rate from 35% to 21% as a result of the TCJA, partially offset by an increase in income before income taxes.
Wealth Management
Wealth Management net income was $190.1 million in the current quarter, up $63.2 million, or 50%, from $126.9 million in the prior-year quarter. Noninterest income was $420.3 million, up $48.6 million, or 13%, from $371.7 million in the prior-year quarter, primarily reflecting higher trust, investment and other servicing fees. Trust, investment and other servicing fees in Wealth Management totaled $393.4 million in the current quarter, increasing $48.1 million, or 14%, from $345.3 million in the prior-year quarter. The following table provides a summary of Wealth Management trust, investment and other servicing fees.
Table 17: Wealth Management Trust, Investment and Other Servicing Fees
 
Three Months Ended March 31,
 
 
 
 
($ In Millions)
2018
 
2017
 
Change
Central
$
153.9

 
$
137.4

 
$
16.5

 
12
%
East
98.9

 
85.2

 
13.7

 
16

West
78.6

 
69.6

 
9.0

 
13

Global Family Office
62.0

 
53.1

 
8.9

 
17

Total Wealth Management Trust, Investment and Other Servicing Fees
$
393.4

 
$
345.3

 
$
48.1

 
14
%
Wealth Management fee income is calculated primarily based on market values. The increase in Wealth Management fees across all regions was primarily attributable to favorable markets, a change in presentation of certain fees resulting from the adoption of

13
Table of Contents
REPORTING SEGMENTS (continued)
Wealth Management (continued)

the new revenue recognition accounting standard, and new business. The 17% increase in Global Family Office fees was primarily attributable to new business and favorable markets.
Other noninterest income of $25.7 million in the current quarter was up slightly from $25.5 million in the prior-year quarter, primarily reflecting an increase in securities commissions and trading income.
Net interest income stated on an FTE basis was $198.8 million in the current quarter, up $21.8 million, or 12%, from $177.0 million in the prior-year quarter, primarily reflecting an increase in the net interest margin, partially offset by lower levels of earning assets. The net interest margin increased to 3.12% from 2.72% in the prior-year quarter, reflecting higher yields on earning assets. Average earning assets decreased $589.5 million to $25.8 billion from the prior-year quarter’s $26.4 billion. Earning assets and funding sources were primarily comprised of loans and domestic interest-bearing deposits, respectively.
The provision for credit losses was $0.9 million in the current quarter, compared with a credit provision of $1.3 million in the prior-year quarter. The current quarter provision reflected net charge-offs in the current quarter, partially offset by reductions in outstanding loans that resulted in a reduction in the inherent allowance. The prior-year quarter provision reflected reductions in outstanding loans and undrawn loan commitments and standby letters of credit that resulted in a reduction in the inherent allowance requirement, partially offset by an increase in the specific reserve requirement.
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 $365.7 million in the current quarter, compared to $346.3 million in the prior-year quarter, an increase of $19.4 million, or 6%, primarily reflecting higher indirect expense allocations and compensation expense.
The provision for income taxes was $62.4 million in the current quarter compared to $76.8 million in the prior-year quarter, primarily attributable to the reduction in the U.S. federal corporate income tax rate from 35% to 21% as a result of the TCJA, partially offset by an increase in income before income taxes.
Treasury and Other
Treasury and Other includes income and expense associated with the wholesale funding activities and the investment portfolios of the Corporation and the Bank, and certain corporate-based expenses, executive-level compensation and nonrecurring items not allocated to C&IS and Wealth Management.
Treasury and Other noninterest income increased $15.4 million, from $3.0 million in the prior-year quarter to $18.4 million in the current quarter, primarily due to higher foreign exchange trading income due to increased foreign exchange swap activity in treasury, partially offset by lower other noninterest income.
Net interest income decreased $54.4 million from $18.9 million in the prior-year quarter to net interest expense of $35.5 million in the current quarter. The reduction in net interest income in Treasury and Other was driven by higher net funds transfer pricing credits in the C&IS and Wealth Management segments, higher premium amortization in the securities portfolio, and an unfavorable currency mix shift. This was partially offset by the favorable impact of higher rates. Average earning assets increased $2.2 billion to $12.2 billion from $10.0 billion in the prior-year quarter.
Noninterest expense totaled $44.0 million in the current quarter, up $6.6 million, or 18%, from $37.4 million in the prior-year quarter, primarily reflecting higher compensation expense, equipment and software expense, and outside services expense, employee benefit expense, and occupancy expense, partially offset by higher indirect expense allocations to C&IS and Wealth Management as compared to the prior-year quarter.
The provision for income taxes was a benefit of $18.4 million in the current quarter compared to a $20.0 million benefit in the prior-year quarter, impacted by the reduction in the U.S. federal corporate income tax rate from 35% to 21% as a result of the TCJA. Also contributing to the change in the provision for income taxes compared to the prior-year quarter was a tax benefit resulting from a change in accounting method regarding the timing of tax deductions for software development-related expenses of $22.6 million and a decrease in income before income taxes, partially offset by a $15.8 million net provision recorded in the current period representing adjustments to the initial estimated impact of the TCJA and a reduction in the income tax benefit derived from the vesting of restricted stock units and stock option exercises.


14
Table of Contents
CONSOLIDATED BALANCE SHEETS


Total assets were $129.7 billion and $138.6 billion at March 31, 2018 and December 31, 2017, respectively, and averaged $124.5 billion in the current quarter compared with $116.5 billion in the quarter ended March 31, 2017. Average balances are considered to be a better measure of balance sheet trends, as period-end balances can be impacted by the timing of deposit and withdrawal activity involving large client balances. Loans and leases totaled $32.1 billion and $32.6 billion at March 31, 2018 and December 31, 2017, respectively, and averaged $32.5 billion in the current quarter, down 4% from $33.7 billion in the quarter ended March 31, 2017. Securities, inclusive of Federal Reserve stock, Federal Home Loan Bank stock, and certain community development investments, which are classified in other assets in the consolidated balance sheets, totaled $49.6 billion and $47.4 billion at March 31, 2018 and December 31, 2017, respectively, and averaged $48.3 billion for the current quarter, up 8% from $44.8 billion in the quarter ended March 31, 2017. In aggregate, the categories of federal funds sold and securities purchased under agreements to resell, interest-bearing due from and deposits with banks, and Federal Reserve and other central bank deposits totaled $38.7 billion and $49.6 billion at March 31, 2018 and December 31, 2017, respectively, and averaged $34.9 billion in the current quarter, up 14% from $30.5 billion in the quarter ended March 31, 2017, primarily reflecting increased Federal Reserve and other central bank deposits. Interest-bearing client deposits at March 31, 2018 and December 31, 2017, totaled $77.2 billion and $83.8 billion, respectively, and averaged $76.2 billion in the current quarter compared to $69.2 billion in the quarter ended March 31, 2017. Noninterest-bearing client deposits at March 31, 2018 and December 31, 2017 totaled $28.0 billion and $28.6 billion, respectively, and averaged $22.0 billion in the current quarter, down 14% from $25.7 billion in the quarter ended March 31, 2017.
Total stockholders’ equity was $10.2 billion at both March 31, 2018 and December 31, 2017, respectively, and averaged $10.1 billion for the current quarter, up 4% from $9.8 billion for the quarter ended March 31, 2017. The increase in stockholders’ equity was primarily attributable to earnings, partially offset by the repurchase of common stock pursuant to the Corporation’s share repurchase program and dividend declarations.
During the three months ended March 31, 2018, the Corporation declared cash dividends totaling $96.4 million to common stockholders, and cash dividends totaling $17.3 million to preferred stockholders. During the three months ended March 31, 2018, the Corporation repurchased 2,518,409 shares of common stock, including 379,123 shares withheld related to share-based compensation, at a total cost of $263.2 million ($104.51 average price per share).
CAPITAL RATIOS
The capital ratios of Northern Trust and its principal subsidiary, The Northern Trust Company, remained strong at March 31, 2018, exceeding the minimum requirements for classification as “well-capitalized” under applicable U.S. regulatory requirements.
The table below provides capital ratios for Northern Trust Corporation and The Northern Trust Company determined by Basel III phased in requirements.
Table 25: Regulatory Capital Ratios
Capital Ratios — Northern Trust Corporation
March 31, 2018
 
December 31, 2017
 
March 31, 2017
Advanced
Approach
 
Standardized
Approach
 
Advanced
Approach
 
Standardized
Approach
 
Advanced
Approach
 
Standardized
Approach
Common Equity Tier 1
13.0
%
 
12.3
%
 
13.5
%
 
12.6
%
 
12.9
%
 
12.2
%
Tier 1
14.3
%
 
13.6
%
 
14.8
%
 
13.8
%
 
14.2
%
 
13.4
%
Total
16.2
%
 
15.5
%
 
16.7
%
 
15.8
%
 
15.6
%
 
15.0
%
Tier 1 Leverage
7.6
%
 
7.6
%
 
7.8
%
 
7.8
%
 
8.2
%
 
8.2
%
Supplementary Leverage
6.6
%
 
N/A

 
6.8
%
 
N/A

 
6.9
%
 
N/A


Capital Ratios — The Northern Trust Company
March 31, 2018
 
December 31, 2017
 
March 31, 2017
Advanced
Approach
 
Standardized
Approach
 
Advanced
Approach
 
Standardized
Approach
 
Advanced
Approach
 
Standardized
Approach
Common Equity Tier 1
13.6
%
 
12.6
%
 
13.7
%
 
12.6
%
 
12.9
%
 
12.0
%
Tier 1
13.6
%
 
12.6
%
 
13.7
%
 
12.6
%
 
12.9
%
 
12.0
%
Total
15.2
%
 
14.3
%
 
15.4
%
 
14.3
%
 
14.6
%
 
13.8
%
Tier 1 Leverage
7.0
%
 
7.0
%
 
7.0
%
 
7.0
%
 
7.2
%
 
7.2
%
Supplementary Leverage
6.1
%
 
N/A

 
6.1
%
 
N/A

 
6.1
%
 
N/A


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STATEMENTS OF CASH FLOWS


Net cash used in operating activities of $477.8 million for the three months ended March 31, 2018 was primarily attributable to higher net collateral deposited with derivative counterparties and net changes in other operating activities, primarily due to incentive payments, an increase in prepaid expenses, and a decrease in accounts payable, partially offset by period earnings. For the three months ended March 31, 2017, net cash provided by operating activities of $784.7 million was primarily attributable to lower net collateral deposited with counterparties and period earnings, partially offset by net changes in other operating activities due to incentive payments and a decrease in accounts payable.
Net cash provided by investing activities of $11.2 billion for the three months ended March 31, 2018 was primarily attributable to decreased levels of Federal Reserve and other central bank deposits, client security settlement receivables, interest-bearing deposits with banks, and loans and leases, partially offset by net purchases of debt securities held to maturity and available for sale, and higher levels of federal funds sold and securities purchased under agreements to resell. For the three months ended March 31, 2017, net cash provided by investing activities of $1.0 billion was primarily attributable to decreased levels of Federal Reserve and other central bank deposits and net proceeds from sale, maturity and redemption of debt securities available for sale and held to maturity, partially offset by increased client security settlement receivables.
Net cash used in financing activities of $9.2 billion for the three months ended March 31, 2018 was primarily attributable to decreased levels of total deposits and federal funds purchased and the repurchase of common stock pursuant to the Corporation’s share repurchase program, partially offset by higher short-term other borrowings. The decrease in total deposits was primarily attributable to lower levels of interest-bearing non-U.S. office client deposits. For the three months ended March 31, 2017, net cash used in financing activities of $2.7 billion was primarily attributable to decreased levels of total deposits and short-term other borrowings. The decrease in total deposits was attributable to lower levels of interest-bearing non-U.S. office and savings and money market client deposits.
ASSET QUALITY
Securities Portfolio
Northern Trust maintains a high quality debt securities portfolio, with 79% of the combined available for sale, held to maturity, and trading account portfolios at March 31, 2018, composed of U.S. Treasury and government sponsored agency securities and triple-A rated corporate notes, asset-backed securities, covered bonds, sub-sovereign, supranational, sovereign and non-U.S. agency bonds, commercial mortgage-backed securities and obligations of states and political subdivisions. The remaining portfolio was comprised of corporate notes, asset-backed securities, negotiable certificates of deposit, obligations of states and political subdivisions, auction rate securities and other securities, of which as a percentage of the total securities portfolio, 9% was rated double-A, 2% was rated below double-A, and 10% was not rated by Moody’s Investors Service or Standard and Poor’s (primarily negotiable certificates of deposits of banks and non-U.S. sovereign securities whose long term ratings are at least A).
Net unrealized losses within the investment securities portfolio totaled $272.3 million at March 31, 2018, compared to net unrealized losses of $160.8 million as of December 31, 2017. Net unrealized losses as of March 31, 2018 were comprised of $91.7 million and $364.0 million of gross unrealized gains and losses, respectively. Unrealized losses as of March 31, 2018 of $147.9 million and $52.1 million related to government sponsored agency and U.S. government securities, respectively, are primarily attributable to changes in market rates since purchase. $49.1 million of unrealized losses in securities classified as “other” related to securities primarily purchased at a premium or par by Northern Trust to fulfill its obligation under the Community Reinvestment Act (CRA). Unrealized losses on these CRA-related securities were attributable to yields that were below market rates for the purpose of supporting institutions and programs that benefit low- to moderate-income communities within Northern Trust’s market area. Also, $29.6 million of the unrealized losses related to corporate debt securities, primarily reflecting widened credit spreads and higher market rates since purchase. As of March 31, 2018, 38% of the corporate debt portfolio was backed by guarantees provided by U.S. and non-U.S. governmental entities.
For the three months ended March 31, 2018, charges of $0.2 million were recorded relating to the other-than-temporary impairment (OTTI) of certain CRA-eligible securities. There were $0.1 million OTTI losses for the three months ended March 31, 2017. Northern Trust has evaluated all securities with unrealized losses for possible OTTI in accordance with GAAP and Northern Trust’s security impairment review policy.
Northern Trust participates in the repurchase agreement market as a relatively low cost alternative for short-term funding. Securities purchased under agreements to resell and securities sold under agreements to repurchase are accounted for as collateralized financings and recorded at the amounts at which the securities were acquired or sold plus accrued interest. To minimize potential credit risk associated with these transactions, the fair value of the securities purchased or sold is monitored, limits are set on

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ASSET QUALITY (continued)
Securities Portfolio (continued)

exposure with counterparties, and the financial condition of counterparties is regularly assessed. It is Northern Trust’s policy to take possession, either directly or via third-party custodians, of securities purchased under agreements to resell. Securities sold under agreements to repurchase are held by the counterparty until their repurchase.
Nonperforming Loans and Leases and Other Real Estate Owned
Nonperforming assets consist of nonperforming loans and leases and other real estate owned (OREO). OREO is comprised of commercial and residential properties acquired in partial or total satisfaction of loans.
The following table provides the amounts of nonperforming loans and leases, by loan and lease segment and class, and of OREO that were outstanding at the dates shown, as well as the balance of loans that was delinquent 90 days or more and still accruing interest. The balance of loans delinquent 90 days or more and still accruing interest can fluctuate widely based on the timing of cash collections, renegotiations and renewals.
Table 26: Nonperforming Assets
($ In Millions)
March 31, 2018
 
December 31, 2017
 
March 31, 2017
Nonperforming Loans and Leases
 
 
 
 
 
Commercial
 
 
 
 
 
Commercial and Institutional
$
4.4

 
$
26.0

 
$
25.9

Commercial Real Estate
6.2

 
8.3

 
12.1

Total Commercial
10.6

 
34.3

 
38.0

Personal
 
 
 
 
 
Residential Real Estate
$
114.1

 
$
116.4

 
$
141.7

Private Client
—

 
—

 
0.2

Total Personal
114.1

 
116.4

 
141.9

Total Nonperforming Loans and Leases
124.7

 
150.7

 
179.9

Other Real Estate Owned
4.2

 
4.6

 
6.9

Total Nonperforming Assets
$
128.9

 
$
155.3

 
$
186.8

90 Day Past Due Loans Still Accruing
$
6.2

 
$
8.0

 
$
9.9

Nonperforming Loans and Leases to Total Loans and Leases
0.39
%
 
0.46
%
 
0.54
%
Coverage of Loan and Lease Allowance to
Nonperforming Loans and Leases
1.0
x
 
0.9
x
 
0.9
x
Nonperforming assets of $128.9 million as of March 31, 2018, primarily reflected decreases within the residential real estate and commercial and institutional portfolios as a result of payments and charge-offs, partially offset by new nonperforming assets as compared to the prior year. In addition to the negative impact on net interest income and the risk of credit losses, nonperforming assets also increase operating costs due to the expense associated with collection efforts. Changes in the level of nonperforming assets may be indicative of changes in the credit quality of one or more loan classes. Changes in credit quality impact the allowance for credit losses through the resultant adjustment of the specific allowance and of the qualitative factors used in the determination of the inherent allowance levels within the allowance for credit losses.
Northern Trust’s underwriting standards do not allow for the origination of loan types generally considered to be high risk in nature, such as option adjustable rate mortgages, subprime loans, loans with initial “teaser” rates and loans with excessively high loan-to-value ratios. Residential real estate loans consist of first lien mortgages and equity credit lines, which generally require loan-to-collateral values of no more than 65% to 80% at inception. Revaluations of supporting collateral are obtained upon refinancing or default or when otherwise considered warranted. Collateral revaluations for mortgages are performed by independent third parties.
The commercial real estate class consists of commercial mortgages and construction, acquisition and development loans extended to experienced investors well known to Northern Trust. Underwriting standards generally reflect conservative loan-to-value ratios and debt service coverage requirements. Recourse to borrowers through guarantees is also commonly required.

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Table of Contents
ASSET QUALITY (continued)
Provision and Allowance for Credit Losses

The provision for credit losses is the charge to current period earnings that is determined by management, through a disciplined credit review process, to be the amount needed to maintain the allowance for credit losses at an appropriate level to absorb probable credit losses that have been identified with specific borrower relationships (specific loss component) and for probable losses that are believed to be inherent in the loan and lease portfolios, undrawn commitments and standby letters of credit (inherent loss component). Control processes and analyses employed to evaluate the appropriateness of the allowance for credit losses are reviewed on at least an annual basis and modified as necessary.
The amount of specific allowance is determined through an individual evaluation of loans and lending-related commitments considered impaired that is based on expected future cash flows, collateral value and other factors that may impact the borrower’s ability to pay. The inherent component of the allowance addresses exposure relating to probable but unidentified credit-related losses. The inherent component of the allowance also covers the credit exposure associated with undrawn loan commitments and standby letters of credit. To estimate the allowance for credit losses on these instruments, management uses conversion rates to determine the estimated amount that will be drawn and assigns an allowance factor determined in accordance with the methodology utilized for outstanding loans.
The provision for credit losses was a credit of $3.0 million in the current quarter, compared to a credit of $1.0 million in the prior-year quarter. Net charge-offs were $3.0 million, resulting from $4.3 million of charge-offs and $1.3 million of recoveries, compared to $2.0 million of net charge-offs in the prior-year quarter, resulting from $4.7 million of charge-offs and $2.7 million of recoveries. Residential real estate loans accounted for 91% and 79% of total nonperforming loans and leases at March 31, 2018 and 2017, respectively.
Note 7 to the consolidated financial statements includes a table that details the changes in the allowance for credit losses during the three months ended March 31, 2018 and 2017 due to charge-offs, recoveries and provisions for credit losses.

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Table of Contents
ASSET QUALITY (continued)
Provision and Allowance for Credit Losses (continued)


The following table shows the specific portion of the allowance and the inherent portion of the allowance and its components by loan and lease segment and class.
Table 27: Allocation of the Allowance for Credit Losses
 
March 31, 2018
 
December 31, 2017
 
March 31, 2017
($ In Millions)
Allowance
Amount
 
Percent of
Loans to
Total
Loans
 
Allowance
Amount
 
Percent of
Loans to
Total
Loans
 
Allowance
Amount
 
Percent of
Loans to
Total
Loans
Specific Allowance
$
5.0

 
—
%
 
$
5.4

 
—
%
 
$
8.7

 
—
%
Allocated Inherent Allowance
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
 
 
 
 
 
 
 
 
 
 
Commercial and Institutional
33.7

 
28

 
34.7

 
27

 
34.9

 
28

Commercial Real Estate
40.9

 
11

 
43.3

 
11

 
68.1

 
12

Lease Financing, net
0.1

 
1

 
0.2

 
1

 
0.3

 
1

Non-U.S.
—

 
5

 
—

 
5

 
—

 
5

Other
1.5

 
1

 
1.5

 
1

 
0.6

 
1

Total Commercial
76.2

 
46

 
79.7

 
45

 
103.9

 
47

Personal
 
 
 
 
 
 
 
 
 
 
 
Residential Real Estate
55.5

 
22

 
57.3

 
22

 
65.9

 
22

Private Client
9.5

 
32

 
9.5

 
33

 
8.3

 
31

Other
1.6

 
—

 
1.9

 
—

 
2.2

 
—

Total Personal
66.6

 
54

 
68.7

 
55

 
76.4

 
53

Total Allocated Inherent Allowance
$
142.8

 
100
%
 
$
148.4

 
100
%
 
$
180.3

 
100
%
Total Allowance for Credit Losses
$
147.8

 
 
 
$
153.8

 
 
 
$
189.0

 
 
Allowance Assigned to
 
 
 
 
 
 
 
 
 
 
 
Loans and Leases
$
125.4

 
 
 
$
131.2

 
 
 
$
162.0