Company Quick10K Filing
Quick10K
Northern Trust
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$96.97 218 $21,110
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-05-03 Other Events, Exhibits
8-K 2019-04-23 Earnings, Exhibits
8-K 2019-04-23 Officers
8-K 2019-04-23 Regulation FD, Exhibits
8-K 2019-04-22 Shareholder Vote, Other Events
8-K 2019-02-19 Amend Bylaw, Exhibits
8-K 2019-01-23 Earnings, Exhibits
8-K 2019-01-22 Officers, Exhibits
8-K 2018-11-13 Officers, Exhibits
8-K 2018-10-17 Earnings, Exhibits
8-K 2018-09-12 Regulation FD, Exhibits
8-K 2018-07-31 Other Events, Exhibits
8-K 2018-07-18 Earnings, Exhibits
8-K 2018-07-10 Officers, Exhibits
8-K 2018-04-17 Shareholder Vote
8-K 2018-01-24 Earnings, Exhibits
VLRS Controladora Vuela Compania De Aviacion 957
ELOX Eloxx Pharmaceuticals 426
SPKE Spark Energy 336
TPHS Trinity Place 132
SRRA Sierra Oncology 105
ATXI Avenue Therapeutics 74
SDT Sandridge Mississippian Trust I 27
SNNY Sunnyside Bancorp 0
AMHI Ameri Holdings 0
WCRS Western Capital Resources 0
NTRS 2019-03-31
Part I - Financial Information
Item 1. Consolidated Financial Statements (Unaudited)
Note 1 - Basis of Presentation
Note 2 - Recent Accounting Pronouncements
Note 3 - Fair Value Measurements
Note 4 - Securities
Note 5 - Securities Sold Under Agreements To Repurchase
Note 6 - Loans and Leases
Note 7 - Allowance for Credit Losses
Note 8 - Lease Commitments
Note 9 - Pledged Assets
Note 10 - Goodwill and Other Intangibles
Note 11 - Reporting Segments
Note 12 - Stockholders' Equity
Note 13 - Accumulated Other Comprehensive Income (Loss)
Note 14 - Net Income per Common Share Computations
Note 15 - Revenue From Contracts with Clients
Note 16 - Net Interest Income
Note 17 - Income Taxes
Note 18 - Pension and Postretirement Health Care
Note 19 - Share-Based Compensation Plans
Note 20 - Variable Interest Entities
Note 21 - Contingent Liabilities
Note 22 - Derivative Financial Instruments
Note 23 - Offsetting of Assets and Liabilities
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
EX-10.1 q12019ex101.htm
EX-10.2 q12019ex102.htm
EX-10.3 q12019ex103.htm
EX-31.1 q12019ex311.htm
EX-31.2 q12019ex312.htm
EX-32 q12019ex32.htm

Northern Trust Earnings 2019-03-31

NTRS 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 q12019form10-q.htm 10-Q Document

 
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, 2019
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 every Interactive Data File required to be submitted 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 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.
Large accelerated filer
x
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
¨
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
217,676,589 Shares – $1.66 2/3 Par Value
(Shares of Common Stock Outstanding on March 31, 2019)
 



NORTHERN TRUST CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2019
TABLE OF CONTENTS

i

CONSOLIDATED FINANCIAL HIGHLIGHTS
(UNAUDITED)

 
Three Months Ended March 31,
CONDENSED INCOME STATEMENTS (In Millions)
2019
 
2018
 
% Change (1)
Noninterest Income
$
1,058.9

 
$
1,092.0

 
(3
)%
Net Interest Income
422.0

 
384.0

 
10

Provision for Credit Losses

 
(3.0
)
 
N/M

Noninterest Expense
1,028.7

 
995.3

 
3

Income before Income Taxes
452.2

 
483.7

 
(7
)
Provision for Income Taxes
105.1

 
102.1

 
3

Net Income
$
347.1

 
$
381.6

 
(9
)%
PER COMMON SHARE
 
 
 
 
 
Net Income — Basic
$
1.49

 
$
1.59

 
(6
)%
— Diluted
1.48

 
1.58

 
(6
)
Cash Dividends Declared Per Common Share
0.60

 
0.42

 
43

Book Value — End of Period (EOP)
44.72

 
41.66

 
7

Market Price — EOP
90.41

 
103.13

 
(12
)

SELECTED BALANCE SHEET DATA (In Millions)
 
 
 
 
 
 
March 31, 2019
 
December 31, 2018
 
% Change (1)
End of Period:
 
 
 
 
 
Assets
$
121,869.4

 
$
132,212.5

 
(8
)%
Earning Assets
111,120.5

 
122,847.3

 
(10
)
Deposits
95,844.2

 
104,496.8

 
(8
)
Stockholders’ Equity
10,616.2

 
10,508.3

 
1

 
Three Months Ended March 31,
 
2019
 
2018
 
% Change (1)
Average Balances:
 
 
 
 
 
Assets
$
119,416.7

 
$
124,493.3

 
(4
)%
Earning Assets
110,672.2

 
115,686.3

 
(4
)
Deposits
91,369.8

 
98,197.5

 
(7
)
Stockholders’ Equity
10,428.8

 
10,137.7

 
3

CLIENT ASSETS (In Billions)
March 31, 2019
 
December 31, 2018
 
% Change (1)
Assets Under Custody/Administration (2)
$
10,927.4

 
$
10,125.3

 
8
%
Assets Under Custody
8,199.7

 
7,593.9

 
8

Assets Under Management
1,162.1

 
1,069.4

 
9

(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

SELECTED RATIOS AND METRICS

 
Three Months Ended March 31,
 
2019
 
2018
Financial Ratios:
 
 
 
Return on Average Common Equity
14.0
%
 
16.0
%
Return on Average Assets
1.18

 
1.24

Dividend Payout Ratio
40.5

 
26.6

Net Interest Margin (1)
1.58

 
1.38

 
March 31, 2019
 
December 31, 2018
 
Advanced
Approach
 
Standardized
Approach
 
Advanced
Approach
 
Standardized
Approach
Capital Ratios:
 
 
 
 
 
 
 
Northern Trust Corporation
 
 
 
 
 
 
 
Common Equity Tier 1
13.5
%
 
13.0
%
 
13.7
%
 
12.9
%
Tier 1
14.8

 
14.3

 
15.0

 
14.1

Total
16.6

 
16.3

 
16.9

 
16.1

Tier 1 Leverage
8.2

 
8.2

 
8.0

 
8.0

Supplementary Leverage
7.2

 
N/A

 
7.0

 
N/A

 
 
 
 
 
 
 
 
The Northern Trust Company
 
 
 
 
 
 
 
Common Equity Tier 1
13.9
%
 
13.2
%
 
14.1
%
 
13.1
%
Tier 1
13.9

 
13.2

 
14.1

 
13.1

Total
15.5

 
14.9

 
15.8

 
14.8

Tier 1 Leverage
7.4

 
7.4

 
7.3

 
7.3

Supplementary Leverage
6.6

 
N/A

 
6.4

 
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 21.

2


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 wealth management, asset servicing, asset management and banking solutions to corporations, institutions, families and individuals. The Corporation focuses on managing and servicing client assets through its two client-focused reporting segments: Corporate & Institutional Services (C&IS) and Wealth Management. Asset management and related services are provided to C&IS and Wealth Management clients primarily by the Asset Management business. Except where the context requires otherwise, the terms “Northern Trust,” “we,” “us,” “our” or similar terms mean the Corporation and its subsidiaries on a consolidated basis.
The following should be read in conjunction with the consolidated financial statements and related footnotes included in this report. Investors also should read the section entitled “Forward-Looking Statements.”
Overview
Net income per diluted common share was $1.48 in the current quarter, down from $1.58 in the first quarter of 2018. Net income was $347.1 million in the current quarter as compared to $381.6 million in the prior-year quarter. Annualized return on average common equity was 14.0% in the current quarter and 16.0% in the prior-year quarter. The annualized return on average assets was 1.18% in the current quarter as compared to 1.24% in the prior-year quarter.

Revenue was relatively unchanged compared to the prior-year quarter, totaling $1.48 billion.

Noninterest income decreased $33.1 million, or 3%, to $1.06 billion from $1.09 billion in the prior-year quarter, primarily reflecting lower foreign exchange trading income, trust, investment and other servicing fees, other operating income, and securities commissions and trading income.

Net interest income increased $38.0 million, or 10%, to $422.0 million in the current quarter as compared to $384.0 million in the prior-year quarter, primarily resulting from a higher net interest margin, partially offset by a decrease in earning assets.

There was no provision for credit losses in the current quarter, as compared to a provision credit of $3.0 million in the prior-year quarter.

Noninterest expense totaled $1.03 billion in the current quarter, up $33.4 million, or 3%, from $995.3 million in the prior-year quarter, primarily attributable to higher outside services, compensation, and equipment and software expense, partially offset by lower employee benefits expense.

The provision for income taxes in the current quarter totaled $105.1 million, representing an effective tax rate of 23.2%. The provision for income taxes in the prior-year quarter totaled $102.1 million, representing an effective tax rate of 21.1%.

3

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)
2019
 
2018
 
Change
Trust, Investment and Other Servicing Fees
$
928.9

 
$
937.7

 
$
(8.8
)
 
(1
)%
Foreign Exchange Trading Income
66.2

 
78.5

 
(12.3
)
 
(16
)
Treasury Management Fees
11.7

 
14.0

 
(2.3
)
 
(17
)
Security Commissions and Trading Income
23.3

 
27.2

 
(3.9
)
 
(14
)
Other Operating Income
29.0

 
34.8

 
(5.8
)
 
(16
)
Investment Security (Losses) Gains, net
(0.2
)
 
(0.2
)
 

 
30

Total Noninterest Income
$
1,058.9

 
$
1,092.0

 
$
(33.1
)
 
(3
)%
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 tables present selected market indices and the percentage changes year over year to provide context regarding equity and fixed income market impacts on the Corporation’s results.
Table 2: Equity Market Indices
 
Daily Averages
 
Period-End
 
Three Months Ended March 31,
 
As of March 31,
 
2019
 
2018
 
Change
 
2019
 
2018
 
Change
 
 
 
 
 
 
 
 
 
 
 
 
S&P 500
2,718

 
2,733

 
(1
)%
 
2,834

 
2,641

 
7
 %
MSCI EAFE (U.S. dollars)
1,833

 
2,072

 
(12
)
 
1,875

 
2,002

 
(6
)
MSCI EAFE (local currency)
1,074

 
1,147

 
(6
)
 
1,105

 
1,105

 

Table 3: Fixed Income Market Indices
 
As of March 31,
 
2019
 
2018
 
Change
 
 
 
 
 
 
Barclays Capital U.S. Aggregate Bond Index
2,107

 
2,016

 
4
 %
Barclays Capital Global Aggregate Bond Index
489

 
491

 


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, 2019
 
December 31, 2018
 
March 31, 2018
 
Change Q1-19/Q4-18
 
Change Q1-19/Q1-18
($ In Billions)
Corporate & Institutional
$
10,238.9

 
$
9,490.5

 
$
10,131.7

 
8
%
 
1
%
Wealth Management
688.5

 
634.8

 
654.0

 
8

 
5

Total Assets Under Custody / Administration
$
10,927.4

 
$
10,125.3

 
$
10,785.7

 
8
%
 
1
%

4

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, 2019
 
December 31, 2018
 
March 31, 2018
 
Change Q1-19/Q4-18
 
Change Q1-19/Q1-18
($ In Billions)
Corporate & Institutional
$
7,529.1

 
$
6,971.0

 
$
7,466.5

 
8
%
 
1
%
Wealth Management
670.6

 
622.9

 
645.2

 
8

 
4

Total Assets Under Custody
$
8,199.7

 
$
7,593.9

 
$
8,111.7

 
8
%
 
1
%
The 1% increase in consolidated assets under custody from $8.11 trillion as of March 31, 2018 to $8.20 trillion as of March 31, 2019 primarily reflects favorable markets, partially offset by the impact of unfavorable movements in foreign exchange rates and net outflows.
The following table presents the allocation of Northern Trust’s custodied assets by reporting segment.
Table 6: Allocation of Assets Under Custody
 
March 31, 2019
 
December 31, 2018
 
March 31, 2018
Assets Under Custody
C&IS
 
WM
 
Total
 
C&IS
 
WM
 
Total
 
C&IS
 
WM
 
Total
Equities
45
%
 
57
%
 
46
%
 
44
%
 
54
%
 
45
%
 
45
%
 
58
%
 
46
%
Fixed Income
38

 
19

 
36

 
39

 
20

 
37

 
37

 
18

 
36

Cash and Other Assets
15

 
24

 
16

 
15

 
26

 
16

 
15

 
24

 
16

Securities Lending Collateral
2

 

 
2

 
2

 

 
2

 
3

 

 
2

The following table presents Northern Trust’s assets under management by reporting segment.
Table 7: Assets Under Management
Assets Under Management
March 31, 2019
 
December 31, 2018
 
March 31, 2018
 
Change Q1-19/Q4-18
 
Change Q1-19/Q1-18
($ In Billions)
Corporate & Institutional
$
867.9

 
$
790.8

 
$
878.3

 
10
%
 
(1
)%
Wealth Management
294.2

 
278.6

 
287.4

 
6

 
2

Total Assets Under Management
$
1,162.1

 
$
1,069.4

 
$
1,165.7

 
9
%
 
 %
Consolidated assets under management were relatively unchanged compared to the prior-year quarter, totaling $1.17 trillion at March 31, 2018 and $1.16 trillion as of March 31, 2019, as net outflows and the unfavorable impact of movements in foreign exchange rates were partially offset by favorable markets.
The following table presents Northern Trust’s assets under management by investment type.
Table 8: Assets Under Management by Investment Type
($ In Billions)
March 31, 2019
 
December 31, 2018
 
March 31, 2018
Equities
$
591.8

 
$
534.2

 
$
583.7

Fixed Income
185.1

 
178.3

 
177.7

Cash and Other Assets
220.1

 
207.0

 
216.8

Securities Lending Collateral
165.1

 
149.9

 
187.5

Total Assets Under Management
$
1,162.1

 
$
1,069.4

 
$
1,165.7


5

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, 2019
 
December 31, 2018
 
March 31, 2018
Assets Under Management
C&IS
 
WM
 
Total
 
C&IS
 
WM
 
Total
 
C&IS
 
WM
 
Total
Equities
51
%
 
50
%
 
51
%
 
51
%
 
47
%
 
50
%
 
50
%
 
52
%
 
50
%
Fixed Income
13

 
25

 
16

 
13

 
26

 
17

 
12

 
25

 
15

Cash and Other Assets
17

 
25

 
19

 
17

 
27

 
19

 
17

 
23

 
19

Securities Lending Collateral
19

 

 
14

 
19

 

 
14

 
21

 

 
16


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, 2019
December 31, 2018
September 30, 2018
June 30, 2018
March 31, 2018
Beginning Balance of AUM
$
1,069.4

$
1,171.5

$
1,148.9

$
1,165.7

$
1,161.0

Inflows by Investment Type
 
 
 
 
 
 
Equity
49.8

43.5

42.3

44.7

44.2

 
Fixed Income
14.5

13.7

15.1

17.5

17.4

 
Cash & Other Assets
133.2

136.4

109.3

124.2

114.4

 
Securities Lending Collateral
74.3

51.8

23.3

22.4

68.1

 
 
 
 
 
 
 
Total Inflows
271.8

245.4

190.0

208.8

244.1

 
 
 
 
 
 
 
Outflows by Investment Type
 
 
 
 
 
 
Equity
(48.8
)
(45.1
)
(43.9
)
(42.4
)
(47.8
)
 
Fixed Income
(14.5
)
(15.3
)
(12.8
)
(20.4
)
(24.0
)
 
Cash & Other Assets
(127.1
)
(135.6
)
(103.8
)
(130.6
)
(117.4
)
 
Securities Lending Collateral
(59.1
)
(68.4
)
(30.5
)
(36.1
)
(48.3
)
 
 
 
 
 
 
 
Total Outflows
(249.5
)
(264.4
)
(191.0
)
(229.5
)
(237.5
)
 
 
 
 
 
 
 
Net Inflows / (Outflows)
22.3

(19.0
)
(1.0
)
(20.7
)
6.6

 
 
 
 
 
 
 
Market Performance, Currency & Other
 
 
 
 
 
 
Market Performance & Other
70.9

(80.8
)
24.6

11.5

(4.6
)
 
Currency
(0.5
)
(2.3
)
(1.0
)
(7.6
)
2.7

Total Market Performance, Currency & Other
70.4

(83.1
)
23.6

3.9

(1.9
)
 
 
 
 
 
 
 
Ending Balance of AUM
$
1,162.1

$
1,069.4

$
1,171.5

$
1,148.9

$
1,165.7


Foreign exchange trading income totaled $66.2 million in the current quarter, down $12.3 million, or 16%, compared to $78.5 million in the prior-year quarter. The decrease was primarily due to lower market volatility and decreased foreign exchange swap activity in Treasury as compared to the prior-year quarter.


6

FIRST QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)
Noninterest Income (continued)


Security commissions and trading income totaled $23.3 million in the current quarter, down $3.9 million, or 14%, compared to $27.2 million in the prior-year quarter, primarily due to lower core brokerage revenue.

Other operating income totaled $29.0 million in the current quarter, down $5.8 million, or 16%, compared to $34.8 million in the prior-year quarter, primarily due to higher expenses associated with existing swap agreements related to Visa Inc. Class B common shares and lower income from miscellaneous other operating income categories. The components of other operating income are provided below.
Table 11: Other Operating Income
Other Operating Income
Three Months Ended March 31,
 
 
 
 
($ In Millions)
2019
 
2018
 
Change
Loan Service Fees
$
12.1

 
$
12.5

 
$
(0.4
)
 
(3
)%
Banking Service Fees
11.2

 
12.5

 
(1.3
)
 
(11
)%
Other Income
5.7

 
9.8

 
(4.1
)
 
(40
)
Total Other Operating Income
$
29.0

 
$
34.8

 
$
(5.8
)
 
(16
)%

7

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
2019
 
2018
($ In Millions)
Interest
 
Average
Balance
 
Rate (6)
 
Interest
 
Average
Balance
 
Rate (6)
Average Earning Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Federal Reserve and Other Central Bank Deposits and Other (1)
$
61.3

 
$
20,163.2

 
1.23
%
 
$
47.4

 
$
26,495.1

 
0.72
%
Interest-Bearing Due from and Deposits with Banks (2)
17.9

 
6,452.2

 
1.13

 
19.9

 
6,920.4

 
1.17

Federal Funds Sold and Securities Purchased under Agreements to Resell
6.8

 
978.1

 
2.84

 
6.8

 
1,467.1

 
1.89

Securities
 
 
 
 
 
 
 
 
 
 
 
U.S. Government
28.7

 
5,238.9

 
2.22

 
23.8

 
5,735.4

 
1.68

Obligations of States and Political Subdivisions
5.0

 
770.5

 
2.57

 
2.4

 
678.2

 
1.42

Government Sponsored Agency
148.5

 
22,439.0

 
2.69

 
81.4

 
18,848.3

 
1.75

Other (3)
102.2

 
23,440.9

 
1.77

 
79.2

 
23,073.8

 
1.39

Total Securities
284.4

 
51,889.3

 
2.22

 
186.8

 
48,335.7

 
1.57

Loans and Leases (4)
300.2

 
31,189.4

 
3.90

 
253.7

 
32,468.0

 
3.17

Total Earning Assets
670.6

 
110,672.2

 
2.46

 
514.6


115,686.3

 
1.80

Allowance for Credit Losses Assigned to Loans and Leases

 
(114.0
)
 

 

 
(131.0
)
 

Cash and Due from Banks and Other Central Bank Deposits (5)

 
1,940.7

 

 

 
2,593.2

 

Buildings and Equipment

 
424.4

 

 

 
457.0

 

Client Security Settlement Receivables

 
981.5

 

 

 
1,012.0

 

Goodwill

 
675.5

 

 

 
611.0

 

Other Assets

 
4,836.4

 

 

 
4,264.8

 

Total Assets
$

 
$
119,416.7

 
%
 
$

 
$
124,493.3

 
%
Average Source of Funds
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
 
 
 
 
 
 
 
 
 
 
Savings, Money Market and Other
$
35.0

 
$
14,372.8

 
0.99
%
 
$
12.9

 
$
15,916.4

 
0.33
%
Savings Certificates and Other Time
2.8

 
761.4

 
1.48

 
2.1

 
1,058.5

 
0.82

Non-U.S. Offices — Interest-Bearing
109.8

 
58,377.2

 
0.76

 
48.1

 
59,199.7

 
0.33

Total Interest-Bearing Deposits
147.6

 
73,511.4

 
0.81

 
63.1

 
76,174.6

 
0.34

Short-Term Borrowings
65.1

 
10,494.0

 
2.52

 
34.5

 
9,405.3

 
1.49

Senior Notes
15.9

 
2,014.1

 
3.19

 
11.8

 
1,497.4

 
3.18

Long-Term Debt
10.0

 
1,112.9

 
3.64

 
11.0

 
1,426.5

 
3.14

Floating Rate Capital Debt
2.2

 
277.6

 
3.27

 
1.5

 
277.5

 
2.21

Total Interest-Related Funds
240.8

 
87,410.0

 
1.12

 
121.9

 
88,781.3

 
0.56

Interest Rate Spread

 

 
1.34

 

 

 
1.24

Demand and Other Noninterest-Bearing Deposits

 
17,858.4

 

 

 
22,022.9

 

Other Liabilities

 
3,719.5

 

 

 
3,551.4

 

Stockholders’ Equity

 
10,428.8

 

 

 
10,137.7

 

Total Liabilities and Stockholders’ Equity
$

 
$
119,416.7

 
%
 
$

 
$
124,493.3

 
%
Net Interest Income/Margin (FTE Adjusted)
$
429.8

 
$

 
1.58
%
 
$
392.7

 
$

 
1.38
%
Net Interest Income/Margin (Unadjusted)
$
422.0

 
$

 
1.55
%
 
$
384.0

 
$

 
1.35
%

8

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, 2019/2018
 
Change Due To
(In Millions)
Average
Balance
 
Rate
 
Total
Earning Assets (FTE)
$
(9.8
)
 
$
165.8

 
$
156.0

Interest-Related Funds
43.2

 
75.7

 
118.9

Net Interest Income (FTE)
$
(53.0
)
 
$
90.1

 
$
37.1


(1)
Federal Reserve and Other Central Bank Deposits and Other includes collateral deposits with certain securities depositories and clearing houses, which are classified in other assets in the consolidated balance sheets as of March 31, 2019.
(2)
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.
(3)
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, 2019 and 2018.
(4)
Average balances include nonaccrual loans. Lease financing receivable balances are reduced by deferred income.
(5)
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.
(6)
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 24.9% and 24.8% for the three months ended March 31, 2019 and 2018, respectively. Total taxable equivalent interest adjustments amounted to $7.8 million and $8.7 million for the three months ended March 31, 2019 and 2018, 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 21.
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 $429.8 million in the current quarter, up $37.1 million, or 9%, compared to $392.7 million in the prior-year quarter. The increase was primarily the result of a higher net interest margin, partially offset by a decrease in earning assets. Average earning assets for the current quarter were $110.7 billion, down from $115.7 billion in the prior-year quarter, primarily reflecting lower levels of short-term interest-bearing deposits with banks and loans and leases, partially offset by higher levels of securities. The decline in earning assets was primarily the result of lower levels of client demand and other noninterest-bearing deposits.
The net interest margin on an FTE basis increased to 1.58% in the current quarter from 1.38% in the prior-year quarter, primarily due to higher short-term interest rates 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 21.
Federal Reserve and other central bank deposits and other averaged $20.2 billion, down $6.3 billion, or 24%, from $26.5 billion in the prior-year quarter. Average securities were $51.9 billion, up $3.6 billion, or 7%, from $48.3 billion in the prior-year quarter and include certain community development investments, Federal Home Loan Bank stock, and Federal Reserve stock of $604.5 million, $246.5 million and $53.9 million, respectively, which are recorded in other assets in the consolidated balance sheets.
Loans and leases averaged $31.2 billion, down $1.3 billion, or 4%, from $32.5 billion in the prior-year quarter, primarily reflecting lower levels of residential real estate, commercial real estate loans, and commercial and institutional loans, partially offset by an increase in private client loans. Residential real estate loans averaged $6.6 billion, down $692.9 million, or 10%, from $7.3 billion for the prior-year quarter. Commercial real estate loans averaged $3.3 billion, down $235.9 million, or 7%, from $3.5 billion for the prior-year quarter. Commercial and institutional loans averaged $8.9 billion, down $205.7 million, or 2%, from $9.1 billion

9

FIRST QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)
Net Interest Income (continued)


for the prior-year quarter. Private client loans averaged $10.9 billion, up $463.8 million, or 4%, from $10.4 billion in the prior-year quarter.
Northern Trust utilizes a diverse mix of funding sources. Total interest-bearing deposits averaged $73.5 billion in the current quarter, compared to $76.2 billion in the prior-year quarter, a decrease of $2.7 billion. Other interest-bearing funds averaged $13.9 billion in the current quarter, compared to $12.6 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 $3.6 billion, or 14%, to $23.3 billion in the current quarter from $26.9 billion in the prior-year quarter, primarily resulting from lower levels of client demand and other noninterest-bearing deposits.
Provision for Credit Losses
There was no provision credit for credit losses in the current quarter, as compared to a provision credit of $3.0 million in the prior-year quarter. The provision in the current quarter was primarily driven by an increase in the specific reserve related to outstanding loans and standby letters of credit in the commercial and institutional portfolio, offset by a net recovery in the period. Net recoveries in the current quarter were $1.2 million, resulting from charge-offs of $1.0 million and recoveries of $2.2 million. The prior-year quarter included $3.0 million of net charge-offs, reflecting $4.3 million of charge-offs and $1.3 million of recoveries. Nonperforming assets of $124.1 million decreased 4% from $128.9 million at the end of the prior-year quarter. Residential real estate, commercial and institutional, and commercial real estate loans accounted for 89%, 7%, and 4%, respectively, of total nonperforming loans and leases at March 31, 2019. 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)
2019
 
2018
 
Change
Compensation
$
482.0

 
$
471.7

 
$
10.3

 
2
 %
Employee Benefits
85.7

 
91.7

 
(6.0
)
 
(7
)
Outside Services
188.4

 
171.4

 
17.0

 
10

Equipment and Software
148.3

 
140.0

 
8.3

 
6

Occupancy
51.6

 
51.5

 
0.1

 

Other Operating Expense
72.7

 
69.0

 
3.7

 
6

Total Noninterest Expense
$
1,028.7

 
$
995.3

 
$
33.4

 
3
 %
Compensation expense, the largest component of noninterest expense, totaled $482.0 million in the current quarter, up $10.3 million, or 2%, compared to $471.7 million in the prior-year quarter, primarily reflecting higher salary expense and severance-related charges in the current quarter, partially offset by lower cash-based incentive accruals. The increase in salary expense was driven by staff growth and base pay adjustments.
Employee benefits expense totaled $85.7 million in the current quarter, down $6.0 million, or 7%, compared to $91.7 million in the prior-year quarter, primarily due to lower medical costs and retirement plan expenses.
Outside services expense totaled $188.4 million in the current quarter, up $17.0 million, or 10%, compared to $171.4 million in the prior-year quarter, primarily reflecting higher technical services costs and legal expense.
Equipment and software expense totaled $148.3 million in the current quarter, up $8.3 million, or 6%, compared to $140.0 million in the prior-year quarter, primarily due to higher software-related expense and amortization.
Other operating expense totaled $72.7 million in the current quarter, up $3.7 million, or 6%, from $69.0 million in the prior-year quarter, primarily driven by higher charges associated with account servicing activities, staff-related expenses, and business promotion expense, partially offset by decreased FDIC insurance premiums.

10

FIRST QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)
Noninterest Expense (continued)

The components of other operating expense are provided below.
Table 14: Other Operating Expense
Other Operating Expense
Three Months Ended March 31,
 
 
 
 
($ In Millions)
2019
 
2018
 
Change
Business Promotion
$
17.7

 
$
16.1

 
$
1.6

 
10
 %
Staff Related
8.6

 
5.4

 
3.2

 
60

FDIC Insurance Premiums
2.9

 
8.9

 
(6.0
)
 
(67
)
Other Intangibles Amortization
4.2

 
4.5

 
(0.3
)
 
(8
)
Other Expenses
39.3

 
34.1

 
5.2

 
16

Total Other Operating Expense
$
72.7

 
$
69.0

 
$
3.7

 
6
 %
Provision for Income Taxes
Income tax expense for the three months ended March 31, 2019 was $105.1 million, representing an effective tax rate of 23.2%, compared to $102.1 million in the prior-year quarter, representing an effective tax rate of 21.1%.
The increase in the provision for income taxes was primarily attributable to a tax benefit recognized in the prior-year quarter resulting from a change in accounting method regarding the timing of tax deductions for software development-related expenses and an adjustment recorded in the current quarter related to the calculation of the Corporation’s U.S. foreign income tax credit with respect to the foreign income tax liabilities of its non-U.S. branches, partially offset by a net tax provision adjustment recorded in the prior-year quarter associated with the implementation of the Tax Cuts and Jobs Act (TCJA) enacted in the fourth quarter of 2017, a decrease in income before income taxes, and income tax benefits realized in the current quarter as a result of the Corporation’s organizational restructuring associated with the pending withdrawal of the United Kingdom from the European Union (Brexit).
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.
Reporting segment financial information, presented on an internal management-reporting basis, is determined by accounting systems used to allocate revenue and expense to each segment, and incorporates processes for allocating assets, liabilities, equity and the applicable interest income and expense utilizing a funds transfer pricing (FTP) methodology. Under the methodology, assets and liabilities receive a funding charge or credit that considers interest rate risk, liquidity risk, and other product characteristics on an instrument level.
Effective January 1, 2019, Northern Trust implemented several enhancements to its FTP methodology, including the allocation of contingent liquidity charges to C&IS and Wealth Management client instruments and products. These methodology enhancements affect the results of each reporting segment. Due to the lack of historical information, prior-period segment results have not been revised to reflect the methodology enhancements.
Also beginning in 2019, all revenues, expenses and average assets are allocated to C&IS and Wealth Management, with the exception of non-recurring activities such as certain costs associated with acquisitions, divestitures, litigation, restructuring, and tax adjustments not directly attributable to a specific reporting segment.
For reporting periods ended prior to January 1, 2019, 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, were not allocated to C&IS and Wealth Management, and were reported in Treasury and Other.
Reporting segment results are subject to reclassification when organizational changes are made. The results are also subject to refinements in revenue and expense allocation methodologies, which are typically reflected on a prospective basis.

11

REPORTING SEGMENTS (continued)


The following table reflects the earnings contributions and average assets of Northern Trust’s reporting segments for the three-month periods ended March 31, 2019 and 2018.
Table 15: Results of Reporting Segments
Three Months Ended March 31,
Corporate &
Institutional Services
 
Wealth
Management
 
Treasury and
Other
 
Total
Consolidated
($ In Millions)
2019
 
2018
 
2019
 
2018
 
2019
 
2018
 
2019
 
2018
Noninterest Income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trust, Investment and Other Servicing Fees
$
535.2

 
$
544.3

 
$
393.7

 
$
393.4

 
$

 
$

 
$
928.9

 
$
937.7

Foreign Exchange Trading Income
59.7

 
62.4

 
6.5

 
1.2

 

 
14.9

 
66.2

 
78.5

Other Noninterest Income
43.4

 
46.6

 
25.5

 
25.7

 
(5.1
)
 
3.5

 
63.8

 
75.8

Net Interest Income*
234.8

 
229.4

 
195.0

 
198.8

 

 
(35.5
)
 
429.8

 
392.7

Revenue*
873.1

 
882.7

 
620.7

 
619.1

 
(5.1
)
 
(17.1
)
 
1,488.7

 
1,484.7

Provision for Credit Losses
(1.1
)
 
(3.9
)
 
1.1

 
0.9

 

 

 

 
(3.0
)
Noninterest Expense
648.0

 
585.6

 
379.9

 
365.7

 
0.8

 
44.0

 
1,028.7

 
995.3

Income before Income Taxes*
226.2

 
301.0

 
239.7

 
252.5

 
(5.9
)
 
(61.1
)
 
460.0

 
492.4

Provision for Income Taxes*
53.6

 
66.8

 
60.8

 
62.4

 
(1.5
)
 
(18.4
)
 
112.9

 
110.8

Net Income
$
172.6

 
$
234.2

 
$
178.9

 
$
190.1

 
$
(4.4
)
 
$
(42.7
)
 
$
347.1

 
$
381.6

Percentage of Consolidated Net Income
50
%
 
61
%
 
51
%
 
50
%
 
(1
)%
 
(11
)%
 
100
%
 
100
%
Average Assets
$
90,351.7

 
$
83,637.0

 
$
29,065.0

 
$
26,108.0

 
$

 
$
14,748.3

 
$
119,416.7

 
$
124,493.3

* Non-GAAP financial measures stated on a fully taxable equivalent basis (FTE). Total consolidated includes FTE adjustments of $7.8 million for 2019 and $8.7 million for 2018. 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 21.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate & Institutional Services
C&IS net income totaled $172.6 million in the current quarter compared to $234.2 million in the prior-year quarter, a decrease of $61.6 million, or 26%. Noninterest income was $638.3 million in the current quarter, down $15.0 million, or 2%, from $653.3 million in the prior-year quarter, primarily reflecting lower trust, investment and other servicing fees and foreign exchange trading income.
Table 16: C&IS Trust, Investment and Other Servicing Fees
 
Three Months Ended March 31,
 
 
 
 
($ In Millions)
2019
 
2018
 
Change
Custody and Fund Administration
$
375.1

 
$
373.9

 
$
1.2

 
 %
Investment Management
104.3

 
109.7

 
(5.4
)
 
(5
)
Securities Lending
22.7

 
26.0

 
(3.3
)
 
(13
)
Other
33.1

 
34.7

 
(1.6
)
 
(5
)
Total C&IS Trust, Investment and Other Servicing Fees
$
535.2

 
$
544.3

 
$
(9.1
)
 
(2
)%
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 month-end market values, quarter-end market values, or the average of month-end market values for the 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 were relatively unchanged from the prior-year quarter, primarily due to new business, partially offset by unfavorable markets and the unfavorable impact of movements in foreign exchange rates. Investment management fees decreased $5.4 million, or 5%, primarily due to unfavorable markets. Securities lending fees decreased 13%, primarily reflecting lower loan volumes.

12

REPORTING SEGMENTS (continued)
Corporate & Institutional Services (continued)

Foreign exchange trading income totaled $59.7 million in the current quarter, a decrease of $2.7 million, or 4%, from $62.4 million in the prior-year quarter. The decrease was driven primarily due to lower market volatility, partially offset by higher income allocations due to the enhanced segment reporting methodology beginning in 2019.
Other noninterest income in C&IS totaled $43.4 million in the current quarter, down 7%, from $46.6 million in the prior-year quarter, primarily due to lower securities commissions and trading income and lower treasury management fees.
Net interest income stated on an FTE basis, inclusive of the FTP methodology enhancements described above, was $234.8 million in the current quarter, up $5.4 million, or 2%, from $229.4 million in the prior-year quarter. The increase in net interest income was primarily attributable to higher short-term interest rates. Average earning assets totaled $82.9 billion, up from $77.7 billion in the prior-year quarter, primarily resulting from allocations due to the enhanced segment reporting methodology beginning in 2019. 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 $58.4 billion in the current quarter, up from $55.2 billion in the prior-year quarter.
The provision for credit losses was a provision credit of $1.1 million in the current quarter, compared with a provision credit of $3.9 million in the prior-year quarter. The current quarter provision credit reflected a net reduction in the inherent allowance driven by a reduction in standby letters of credit, partially offset by increases in the specific reserve related to outstanding loans and standby letters of credit. The prior-year quarter provision reflected reductions in outstanding loans and undrawn loan commitments that resulted in a reduction in the inherent allowance.
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 $648.0 million in the current quarter, up $62.4 million, or 11%, from $585.6 million in the prior-year quarter, primarily reflecting higher expense allocations, including those due to the enhanced segment reporting methodology beginning in 2019, and higher compensation expense.
Wealth Management
Wealth Management net income was $178.9 million in the current quarter, down $11.2 million, or 6%, from $190.1 million in the prior-year quarter. Noninterest income was $425.7 million, up $5.4 million, or 1%, from $420.3 million in the prior-year quarter, primarily reflecting increased foreign exchange trading income. Trust, investment and other servicing fees in Wealth Management totaled $393.7 million in the current quarter, relatively unchanged from $393.4 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)
2019
 
2018
 
Change
Central
$
150.7

 
$
153.9

 
$
(3.2
)
 
(2
)%
East
100.9

 
98.9

 
2.0

 
2

West
79.5

 
78.6

 
0.9

 
1

Global Family Office
62.6

 
62.0

 
0.6

 
1

Total Wealth Management Trust, Investment and Other Servicing Fees
$
393.7

 
$
393.4

 
$
0.3

 
 %
Wealth Management fee income is calculated primarily based on market values. Wealth Management fees were relatively unchanged compared to the prior-year quarter, primarily due to new business, partially offset by unfavorable markets.
Foreign exchange trading income totaled $6.5 million in the current quarter, an increase of $5.3 million from $1.2 million in the prior-year quarter. The increase was driven primarily due to the enhanced segment reporting methodology beginning in 2019.
Other noninterest income was $25.5 million in the current quarter, relatively unchanged from $25.7 million in the prior-year quarter, primarily reflecting a decrease in securities commissions and trading income.

13

REPORTING SEGMENTS (continued)
Wealth Management (continued)

Net interest income stated on an FTE basis was $195.0 million in the current quarter, down 2%, from $198.8 million in the prior-year quarter, primarily reflecting higher charges due to enhancements to the Corporation’s FTP methodology during the current quarter, partially offset by higher yields on earning assets. Average earning assets increased $2.0 billion to $27.8 billion from the prior-year quarter’s $25.8 billion, primarily resulting from allocations due to the enhanced segment reporting methodology beginning in 2019. Earning assets and funding sources were primarily comprised of loans and domestic interest-bearing deposits, respectively.
The provision for credit losses was a provision of $1.1 million in the current quarter, compared with a provision of $0.9 million in the prior-year quarter. The current-quarter provision reflected a net increase in the inherent allowance, which was driven by lower credit quality. The prior-year quarter provision reflected net charge-offs, partially offset by reductions in outstanding loans that resulted in a reduction in the inherent allowance.
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 $379.9 million in the current quarter, up $14.2 million, or 4%, from $365.7 million in the prior-year quarter, primarily reflecting higher expense allocations, including those due to the enhanced segment reporting methodology beginning in 2019, and higher compensation expense, partially offset by lower other operating expenses.
Treasury and Other
Beginning in 2019, Treasury and Other includes income and expenses associated with non-recurring activities such as certain costs associated with acquisitions, divestitures, litigation, restructuring, and tax adjustments. For reporting periods ended prior to January 1, 2019, income and expense associated with the wholesale funding activities and investment portfolios of the Corporation and the Bank, as well as certain corporate-based expense, executive level compensation and nonrecurring items, were not allocated to C&IS and Wealth Management, and are reported in Treasury and Other.
Treasury and Other noninterest income decreased from $18.4 million in the prior-year quarter to an expense of $5.1 million in the current quarter. The decrease in noninterest income in Treasury and Other was driven by the enhanced segment reporting methodology beginning in 2019.
Net interest income increased $35.5 million from net interest expense of $35.5 million in the prior-year quarter to zero in the current quarter due to the enhanced segment reporting methodology. Beginning in 2019, net interest income and average assets are allocated to the C&IS and Wealth Management reporting segments. Average earnings assets were $12.2 billion in the prior-year quarter.
Noninterest expense totaled $0.8 million in the current quarter, down $43.2 million, or 98%, from $44.0 million in the prior-year quarter due to the enhanced segment reporting methodology beginning in 2019.
The provision for income taxes was a benefit of $1.5 million in the current quarter compared to an $18.4 million benefit in the prior-year quarter. The prior-year quarter tax provision included a benefit resulting from a change in accounting method regarding the timing of tax deductions for software development-related expenses and a net tax provision adjustment associated with the implementation of the TCJA enacted in the fourth quarter of 2017.
CONSOLIDATED BALANCE SHEETS
Total assets were $121.9 billion and $132.2 billion at March 31, 2019 and December 31, 2018, respectively, and averaged $119.4 billion in the current quarter compared with $124.5 billion in the quarter ended March 31, 2018. 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 $30.6 billion and $32.5 billion at March 31, 2019 and December 31, 2018, respectively, and averaged $31.2 billion in the current quarter, down 4% from $32.5 billion in the quarter ended March 31, 2018. 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 $50.2 billion and $52.3 billion at March 31, 2019 and December 31, 2018, respectively, and averaged $51.9 billion for the current quarter, up 7% from $48.3 billion in the quarter ended March 31, 2018. 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 and other totaled $30.3 billion and $38.1 billion at March 31, 2019 and December 31, 2018, respectively, and averaged $27.6 billion in the current quarter, down 21% from $34.9 billion in the quarter ended March 31, 2018, primarily reflecting decreased Federal Reserve and

14

CONSOLIDATED BALANCE SHEETS (continued)


other central bank deposits. Interest-bearing client deposits at March 31, 2019 and December 31, 2018, totaled $74.0 billion and $81.8 billion, respectively, and averaged $73.5 billion in the current quarter compared to $76.2 billion in the quarter ended March 31, 2018. Noninterest-bearing client deposits at March 31, 2019 and December 31, 2018 totaled $21.9 billion and $22.7 billion, respectively, and averaged $17.9 billion in the current quarter, down 19% from $22.0 billion in the quarter ended March 31, 2018.
Total stockholders’ equity was $10.6 billion at March 31, 2019 and $10.5 billion at December 31, 2018, and averaged $10.4 billion for the current quarter, up 3% from $10.1 billion for the quarter ended March 31, 2018. 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, 2019, the Corporation declared cash dividends totaling $133.7 million to common stockholders, and cash dividends totaling $17.3 million to preferred stockholders. During the three months ended March 31, 2019, the Corporation repurchased 2,850,152 shares of common stock, including 510,011 shares withheld related to share-based compensation, at a total cost of $257.4 million ($90.31 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, 2019, 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, 2019
 
December 31, 2018
 
March 31, 2018
Advanced
Approach
 
Standardized
Approach
 
Advanced
Approach
 
Standardized
Approach
 
Advanced
Approach
 
Standardized
Approach
Common Equity Tier 1
13.5
%
 
13.0
%
 
13.7
%
 
12.9
%
 
13.0
%
 
12.3
%
Tier 1
14.8
%
 
14.3
%
 
15.0
%
 
14.1
%
 
14.3
%
 
13.6
%
Total
16.6
%
 
16.3
%
 
16.9
%
 
16.1
%
 
16.2
%
 
15.5
%
Tier 1 Leverage
8.2
%
 
8.2
%
 
8.0
%
 
8.0
%
 
7.6
%
 
7.6
%
Supplementary Leverage
7.2
%
 
N/A

 
7.0
%
 
N/A

 
6.6
%
 
N/A


Capital Ratios — The Northern Trust Company
March 31, 2019
 
December 31, 2018
 
March 31, 2018
Advanced
Approach
 
Standardized
Approach
 
Advanced
Approach
 
Standardized
Approach
 
Advanced
Approach
 
Standardized
Approach
Common Equity Tier 1
13.9
%
 
13.2
%
 
14.1
%
 
13.1
%
 
13.6
%
 
12.6
%
Tier 1
13.9
%
 
13.2
%
 
14.1
%
 
13.1
%
 
13.6
%
 
12.6
%
Total
15.5
%
 
14.9
%
 
15.8
%
 
14.8
%
 
15.2
%
 
14.3
%
Tier 1 Leverage
7.4
%
 
7.4
%
 
7.3
%
 
7.3
%
 
7.0
%
 
7.0
%
Supplementary Leverage
6.6
%
 
N/A

 
6.4
%
 
N/A

 
6.1
%
 
N/A

STATEMENTS OF CASH FLOWS
Net cash provided by operating activities of $293.7 million for the three months ended March 31, 2019 was primarily attributable to period earnings, lower net collateral deposited with derivative counterparties, and the impact of non-cash charges such as amortization of computer software, partially offset by an increase in accounts receivable. For the three months ended March 31, 2018, net cash used in operating activities of $477.8 million 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.
Net cash provided by investing activities of $11.6 billion for the three months ended March 31, 2019 was primarily attributable to decreased levels of Federal Reserve and other central bank deposits, net proceeds from sale of debt securities held to maturity, lower levels of loans and leases, and lower levels of federal funds sold and securities purchased under agreements to resell. For the three months ended March 31, 2018, net cash provided by investing activities of $11.2 billion was primarily attributable to

15

STATEMENTS OF CASH FLOWS (continued)


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.
Net cash used in financing activities of $11.4 billion for the three months ended March 31, 2019 was primarily attributable to decreased levels of total deposits, federal funds purchased, and the repurchase of common stock pursuant to the Corporation’s share repurchase program. The decrease in total deposits was primarily attributable to lower levels of interest-bearing and non-interest bearing non-U.S. office client deposits. For the three months ended March 31, 2018, net cash used in financing activities of $9.2 billion 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.
ASSET QUALITY
Securities Portfolio
Northern Trust maintains a high quality debt securities portfolio, with 82% of the combined available for sale, held to maturity, and trading account portfolios at March 31, 2019, 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, negotiable certificates of deposit, obligations of states and political subdivisions and other securities, of which as a percentage of the total securities portfolio, 8% was rated double-A, 2% was rated below double-A, and 8% was not rated by Moody’s Investors Service or Standard and Poor’s (primarily non-U.S. sovereign securities whose long term ratings are at least A).
Net unrealized losses within the investment securities portfolio totaled $82.8 million at March 31, 2019, compared to net unrealized losses of $240.0 million as of December 31, 2018. Net unrealized losses as of March 31, 2019 were comprised of $186.1 million and $268.9 million of gross unrealized gains and losses, respectively. As of March 31, 2019, unrealized losses of $124.6 million and $27.0 million related to government sponsored agency and U.S. government securities, respectively, are primarily attributable to changes in market rates since purchase. Unrealized losses of $64.6 million as of March 31, 2019 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, $14.4 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, 2019, 36% 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, 2019, no charges were recorded relating to the other-than-temporary impairment (OTTI) of CRA-eligible securities. There were $0.2 million OTTI losses for the three months ended March 31, 2018. Northern Trust has evaluated all securities with unrealized losses for possible OTTI in accordance with GAAP and Northern Trust’s security impairment review policy.
Northern Trust participates in the repurchase agreement market as a relatively low cost alternative for short-term funding. Securities purchased under agreements to resell and securities sold under agreements to repurchase are accounted for as collateralized financings and recorded at the amounts at which the securities were acquired or sold plus accrued interest. To minimize potential credit risk associated with these transactions, the fair value of the securities purchased or sold is monitored, limits are set on exposure with counterparties, and the financial condition of counterparties is regularly assessed. It is Northern Trust’s policy to take possession, either directly or via third-party custodians, of securities purchased under agreements to resell. Securities sold under agreements to repurchase are held by the counterparty until their repurchase.
Nonperforming Loans and Leases and Other Real Estate Owned
Nonperforming assets consist of nonperforming loans and leases and other real estate owned (OREO). OREO is comprised of commercial and residential properties acquired in partial or total satisfaction of loans.

16

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

The following table provides the amounts of nonperforming loans and leases, by loan and lease segment and class, and of OREO that were outstanding at the dates shown, as well as the balance of loans that was delinquent 90 days or more and still accruing interest. The balance of loans delinquent 90 days or more and still accruing interest can fluctuate widely based on the timing of cash collections, renegotiations and renewals.
Table 26: Nonperforming Assets
($ In Millions)
March 31, 2019
 
December 31, 2018
 
March 31, 2018
Nonperforming Loans and Leases
 
 
 
 
 
Commercial
 
 
 
 
 
Commercial and Institutional
$
7.6

 
$
6.8

 
$
4.4

Commercial Real Estate
4.2

 
6.9

 
6.2

Non-U.S.
0.6

 
0.4

 

Total Commercial
12.4

 
14.1

 
10.6

Personal
 
 
 
 
 
Residential Real Estate
$
103.5

 
$
95.0

 
$
114.1

Private Client
0.2

 
0.2

 

Total Personal
103.7

 
95.2

 
114.1

Total Nonperforming Loans and Leases
116.1

 
109.3

 
124.7

Other Real Estate Owned
8.0

 
8.4

 
4.2

Total Nonperforming Assets
$
124.1

 
$
117.7

 
$
128.9

90 Day Past Due Loans Still Accruing
$
13.0

 
$
16.4

 
$
6.2

Nonperforming Loans and Leases to Total Loans and Leases
0.38
%
 
0.34
%
 
0.39
%
Coverage of Loan and Lease Allowance to
Nonperforming Loans and Leases
1.0
x
 
1.0
x
 
1.0
x
Nonperforming assets of $124.1 million as of March 31, 2019 primarily reflected increases within the residential real estate portfolio as a result of new nonperforming assets, partially offset by payments and charge-offs. 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.
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.

17

ASSET QUALITY (continued)
Provision and Allowance for Credit Losses (Continued)

The amount of specific allowance is determined through an individual evaluation of loans and lending-related commitments considered impaired that is based on expected future cash flows, collateral value and other factors that may impact the borrower’s ability to pay. The inherent component of the allowance addresses exposure relating to probable but unidentified credit-related losses. The inherent component of the allowance also covers the credit exposure associated with undrawn loan commitments and standby letters of credit. To estimate the allowance for credit losses on these instruments, management uses conversion rates to determine the estimated amount that will be drawn and assigns an allowance factor determined in accordance with the methodology utilized for outstanding loans.
There was no provision for credit losses in the current quarter, compared to a provision credit of $3.0 million in the prior-year quarter. Net recoveries were $1.2 million, resulting from $1.0 million of charge-offs and $2.2 million of recoveries, compared to $3.0 million of net charge-offs in the prior-year quarter, resulting from $4.3 million of charge-offs and $1.3 million of recoveries. Residential real estate loans accounted for 89% and 91% of total nonperforming loans and leases at March 31, 2019 and 2018, 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, 2019 and 2018 due to charge-offs, recoveries and provisions for credit losses.
The following table shows the specific portion of the allowance and the inherent portion of the allowance and its components by loan and lease segment and class.
Table 27: Allocation of the Allowance for Credit Losses
 
March 31, 2019
 
December 31, 2018
 
March 31, 2018
($ 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
$
11.3

 
%
 
$
10.0

 
%
 
$
5.0

 
%
Allocated Inherent Allowance
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
 
 
 
 
 
 
 
 
 
 
Commercial and Institutional
35.2

 
28

 
33.5

 
27

 
33.7

 
28

Commercial Real Estate
34.8

 
10

 
35.5

 
10

 
40.9

 
11

Lease Financing, net
0.1

 

 
0.1

 

 
0.1

 
1